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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR COMMISSION FILE
ENDED NUMBER
NOVEMBER 29, 1998 1-8738
SEALY CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 36-3284147
(STATE OR OTHER (I.R.S. EMPLOYER
JURISDICTION OF IDENTIFICATION NO.)
INCORPORATION OR
ORGANIZATION)
520 PIKE STREET 98101
SEATTLE, WASHINGTON (ZIP CODE)
(ADDRESS OF PRINCIPAL
EXECUTIVE OFFICES)*
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE
(206) 625-1233
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE
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 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 aggregate market value of the voting stock held by nonaffiliates of the
registrant as of February 15, 1999: not applicable.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The number of shares of the registrant's common stock outstanding as of
February 15, 1999: 31,409,665.2711.
DOCUMENTS OR PARTS THEREOF INCORPORATED BY REFERENCE: NONE
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* All Corporate and administrative services are provided by Sealy, Inc., One
Office Parkway, Trinity, NC 27370
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PART I
ITEM 1. BUSINESS
General
Sealy Corporation (the "Company" or the "Parent"), through its subsidiaries,
is the largest bedding manufacturer in North America and manufactures,
distributes and sells a broad line of conventional bedding products including
mattresses and foundations. The Company's conventional bedding products
include the SEALY(R), SEALY POSTUREPEDIC(R), SEALY POSTUREPEDIC CROWN
JEWEL(R), SEALY CORRECT COMFORT(R), and the STEARNS & FOSTER(R) brands and
account for approximately 99% of the Company's total net sales for the year
ended November 29, 1998. In January, 1997, the Company completed the sale of
its Samuel Lawrence subsidiary and no longer manufactures or markets wood
furniture. The Company has a components parts manufacturing subsidiary which
produces substantially all of the Company's mattress innerspring requirements
and approximately 50% of the Company's boxspring component parts requirements.
Another subsidiary, Sealy, Inc., provides corporate and administrative
services for the Company.
History of the Company
The Company was founded in 1907 under the name Ohio Mattress Company. In
1924, the Company was granted its first license to produce Sealy-brand
products. Starting in 1956, the Company began acquiring Sealy-brand licenses
in other geographic areas, and by 1987, had acquired all of the capital stock
of its licensor, then named Sealy, Incorporated (which prior to that time was
independent of the Company), along with all but one of the remaining Sealy
conventional bedding domestic licensees. The Company expanded its bedding
manufacturing operations in 1983 by acquiring Stearns & Foster, a producer of
premium mattresses, boxsprings and convertible sleep sofas. In 1985, the
Company acquired Woodstuff Manufacturing, Inc., a manufacturer of waterbed
furniture, which with a later decline of waterbed sales was converted to
manufacturing solely conventional wood bedroom furniture and doing business as
Samuel Lawrence Furniture Company. In January, 1997, the Company completed the
sale of its Samuel Lawrence subsidiary and no longer manufactures or markets
wood furniture.
In 1989, the Company's common stock was acquired through a leveraged buyout
(the "LBO") which was financed in part by First Boston Securities Corporation
("FBSC"), an affiliate of The First Boston Corporation ("First Boston"). In
April 1990, the Company exchanged certain outstanding debt issued to FBSC for
new debt at lower interest rates plus additional common stock (the
"Exchange"). In December 1990, FBSC transferred its equity and debt interest
in the Company to its affiliate MB L.P. I ("MBLP"). In November 1991, the
Company successfully completed a recapitalization in which the Company's
capital structure was significantly improved, the face amount of its
indebtedness and interest thereon was reduced by approximately $417 million,
the Company's interest expense obligations were substantially reduced and the
principal repayment schedule on a portion of its existing bank term loan
facility was extended. As a result of this recapitalization, MBLP's equity
interest in the Company increased to approximately 94%, consisting of shares
of Class A Common Stock, $0.01 par value (the "Shares").
On February 12, 1993, Zell/Chilmark Fund, L.P., a Delaware limited
partnership ("Zell/Chilmark"), led an investor group which purchased MBLP's
94% equity interest in the Company (the "Acquired Shares") for a cash purchase
price of $250 million (the "Acquisition").
On May 7, 1993, the Company completed a refinancing plan which consisted of
(i) the sale of $200.0 million of 9 1/2% Senior Subordinated Notes Due 2003
(the "Parent Notes") pursuant to a public offering, (ii) the application of
$194.5 million of net proceeds therefrom to redeem all of the then outstanding
12.4% Senior Subordinated Notes of the Company Due 2001 (approximately $139.6
million), and to reduce amounts outstanding under the Company's then existing
credit agreement and (iii) the execution of a new secured credit agreement
(the "1993 Credit Agreement") by and among the Company, certain banks and
other financial
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institutions and Banque Paribas, Citicorp USA, Inc., Bank of America (formerly
Continental Bank N.A.) and General Electric Capital Corporation, as managing
agents.
On May 27, 1994, the Company entered into a restated secured credit
agreement (the "1994 Credit Agreement") with a majority of its then current
group of senior lenders (the "Senior Lenders"), which modified the terms of
the 1993 Credit Agreement by reducing the amounts available under its existing
term loan facilities thereunder from an aggregate of $250 million to a single
facility of $150 million (the "Term Loan Facility") and by increasing the
amount available under its existing revolving credit facility thereunder from
$75 million to $125 million (the "Revolving Credit Facility").
Pursuant to a Solicitation of Consents dated as of January 24, 1997, as
subsequently amended (the "Consent Solicitation"), the Company solicited
consents from the record holders (the "Registered Holders") of its Parent
Notes to certain amendments, consents and waivers under the Indenture (the
"Indenture"), dated as of May 7, 1993, between the Company and Mellon Bank,
F.S.B., as successor trustee (the "Trustee"), under which the Parent Notes
were issued. Following receipt of the requisite consents of the Registered
Holders, on February 21, 1997, the Company and the Trustee executed a
Supplemental Indenture incorporating the amendments to the Indenture. The
Supplemental Indenture provided for (i) an increase in the interest rate on
the Parent Notes to 10 1/4%, (ii) provision to allow for the payment of a
special dividend of up to One Hundred Million Dollars ($100,000,000) (the
"Dividend") to qualifying equity security holders of the Company, (iii) an
increase in the redemption premiums paid to Registered Holders in the event
the Parent Notes are repurchased by the Company, and (iv) the corresponding
waiver of Section 4.05 of the Indenture, such that the Dividend will not
constitute a "Restricted Payment" (as defined in the Indenture). The Company
paid an aggregate of Four Million Dollars ($4,000,000) on a pro rata basis to
those Registered Holders that had timely consented.
Concurrent with the distribution of the Consent Solicitation documentation,
the Company entered into negotiations for a new senior secured financing
facility. On February 25, 1997, the Company entered into the $275,000,000
Second Restated Secured Credit Agreement (the "1997 Credit Agreement") with a
majority of its then current group of senior lenders. The proceeds of the 1997
Credit Agreement were used (a) to refinance approximately $48.7 million of
indebtedness under the Company's 1994 Credit Agreement, (b) to pay a
$99.8 million Dividend, and (c) for general corporate purposes, including,
without limitation, for working capital.
In December 1997, Sealy Mattress Company (the "Issuer"), a wholly owned
subsidiary of Parent, issued $125 million principal amount of 9 7/8% Senior
Subordinated Notes due 2007 (the "Senior Subordinated Notes") and $128 million
principal amount of 10 7/8% Senior Subordinated Discount Notes due 2007 (the
"Senior Subordinated Discount Notes" and, together with the Senior
Subordinated Notes, the "Notes"). The Issuer issued the Notes in a private
placement (the "Offerings") pursuant to separate Indentures, each dated as of
December 18, 1997 (the "Indentures"). The Notes are guaranteed fully and
unconditionally, and jointly and severally on a senior subordinated basis (the
"Note Guarantees"), by Parent and certain of the Issuer's current and all of
the Issuer's future U.S. Subsidiaries ("the Subsidiary Guarantors" and
together with the Parent, the "Guarantors"). The Notes are not guaranteed by
certain of the Issuer's U.S. Subsidiaries or by any of its current or future
foreign subsidiaries.
Pursuant to an agreement entered into in connection with the private
placement of the Notes, the Company filed a registration statement (the
"Exchange Offer Registration Statement") relating to $125 million and $128
million principal amount of the 9 7/8% and 10 7/8% Senior Subordinated Notes
and Senior Subordinated Discount Notes, respectively, due 2007 (the "Exchange
Notes") issued in an exchange offer for the original Notes. The Exchange Notes
have terms substantially identical in all material respects to the Notes and
will be guaranteed by the Guarantors on the same basis as the Notes. The
Company registered the Exchange Notes using Form S-4 which went effective June
23, 1998.
On December 18, 1997, concurrent with the consummation of the Offerings, the
Company consummated (i) a merger and recapitalization whereby, among other
things, funds managed by Bain Capital, Inc., together with other equity
investors, including members of management (the "Management Investors" and
collectively
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with the other investors, the "Investors"), acquired an approximate 90%
economic equity stake and an approximate 85.3% voting stake in Parent, (ii) a
tender offer to purchase for cash all of the Parent Notes and the related
Consent Solicitation to modify certain terms of the Indenture and (iii) a
refinancing whereby the Issuer issued the Notes, entered into and borrowed
under the Senior Credit Agreements as defined herein and repaid Parent
indebtedness outstanding under the 1997 Credit Agreement. Approximately 99% of
the Parent Notes were purchased as a result of the tender offer and the Parent
called and repurchased in May 1998 the remaining outstanding Parent Notes. As
a result of the above transaction, the warrants to purchase Class B Common
Stock of the Company, upon exercise, were now only entitled to receive the
same cash consideration paid to holders of the Company's Class B Common Stock.
In addition, all of the Company's Series A Warrants were redeemed at a
redemption price per Warrant of $0.9411 and Series B Warrants were redeemed at
a redemption price per Warrant of $0.3777. This redemption for all warrants
was completed by February 3, 1998.
Conventional Bedding
Industry and Competition. According to industry sales data compiled by the
International Sleep Products Association ("ISPA"), a bedding industry trade
group, approximately 800 manufacturers of mattresses and foundations make up
the domestic conventional bedding industry, generating wholesale revenues
estimated at $3.6 billion during calendar year 1998. The market for
conventional bedding represents more than 85% of the entire bedding market in
North America. According to ISPA, approximately 75% of conventional bedding is
sold to furniture stores and specialty sleep shops. Most of the remaining
conventional bedding is sold to department stores, national mass
merchandisers, membership clubs and contract customers such as motels, hotels
and hospitals. Management estimates that approximately two-thirds of
conventional bedding is sold for replacement purposes and that the average
time between consumer purchases of conventional mattresses is approximately
10 to 12 years. Factors such as disposable income and sales of homes also have
some effect on bedding purchases.
Management believes that sales by companies with recognized national brands
account for more than half of total conventional bedding sales. The Company
supplies such nationally recognized brands as Sealy, Sealy Posturepedic, Sealy
Posturepedic Crown Jewel, and Stearns & Foster. Sealy branded products are
considered by management to be the most well-recognized in the domestic
conventional bedding industry. Competition in conventional bedding is
generally based on quality, brand name recognition, service and price. The
Company's largest competitors include Simmons Company, Serta, Inc. and Spring
Air Company. Management believes the Company derives a competitive advantage
over its conventional bedding competitors as a result of strong consumer
recognition of Sealy branded products.
Products. The Company manufactures a variety of Sealy and Stearns & Foster
brand conventional bedding in various sizes ranging in retail price from under
$200 to approximately $4,000 per queen size set. Sealy Posturepedic brand
mattress is the largest selling mattress brand in North America. Approximately
96% of the Sealy brand and the Stearns & Foster brand conventional bedding
products sold in North America are produced by the Company, with the remainder
being produced by Sealy Mattress Company of New Jersey, Inc. ("Sealy New
Jersey"), a licensee. The Stearns & Foster product line consists of top
quality, premium mattresses sold under the Stearns & Foster brand name.
Customers. The Company serves over 7,000 retail outlets (approximately 3,200
customers), which include furniture stores, national mass merchandisers,
specialty sleep shops, department stores, contract customers and other stores.
The top five conventional bedding customers accounted for approximately 29% of
the Company's net sales for the year ended November 29, 1998 and no single
customer accounted for over 10% of the Company's net sales.
Sales and Marketing. The Company's sales depend primarily on its ability to
provide quality products with recognized brand names at competitive prices.
Additionally, the Company works to build brand loyalty with its ultimate
consumers, principally through targeted national advertising and cooperative
advertising with its dealers,
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along with superior "point-of-sale" materials designed to emphasize the
various features and benefits of the Company's products which differentiate
them from other brands.
The Company's sales force structure is generally based on regions of the
country and districts within those regions, and also includes a sales staff
for specific national accounts. The Company believes that it has one of the
most comprehensive training and development programs for its sales force,
including its University of Sleep curriculum, which provides ongoing training
sessions with programs focusing on advertising, merchandising and sales
education, including techniques to help analyze a dealer's business and
profitability.
The Company's sales force emphasizes follow-up service to retail stores and
provides retailers with promotional and merchandising assistance as well as
extensive specialized professional training and instructional materials.
Training for retail sales personnel focuses on several programs, designed to
assist retailers in maximizing the effectiveness of their own sales personnel,
store operations, and advertising and promotional programs, thereby creating
loyalty to, and enhanced sales of, the Company's products.
Suppliers. The Company purchases fabric, polyfiber, wire and foam from a
variety of vendors. The Company purchases approximately 50% of its Sealy
foundation parts from a single third-party source, which has patents on
various interlocking wire configurations (the "Wire Patents"), and
manufactures the remainder of these parts as a licensee under the Wire
Patents. The Company purchases substantially all of its Stearns & Foster
foundation parts from the same single third-party source. In order to reduce
the risks of dependence on external supply sources and to enhance
profitability, the Company has expanded its own internal components parts
manufacturing capacity. See "Components Division." As is the case with all of
the Company's product lines, the Company does not consider itself dependent
upon any single outside vendor as a source of supply to its conventional
bedding business and believes that sufficient alternative sources of supply
for the same, similar or alternative components are available.
Manufacturing and Facilities. The Company manufactures most conventional
bedding to order and has adopted "just-in-time" inventory techniques in its
manufacturing process to more efficiently serve its dealers' needs and to
minimize their inventory carrying costs. Most bedding orders are scheduled,
produced and shipped within 5 days of receipt. This rapid delivery capability
allows the Company to minimize its inventory of finished products and better
satisfy customer demand for prompt shipments.
The Company operates 25 bedding manufacturing facilities and three component
manufacturing facilities in 19 states, three Canadian provinces, Puerto Rico
and Mexico. Management believes that through the utilization of extra shifts,
it will be able to continue to meet growing demand for its products without a
significant investment in facilities. See Item 2, "Properties," herein. The
Company also operates a Research and Development center in High Point, North
Carolina with a staff which tests new materials and machinery, trains
personnel, compares the quality of the Company's products with those of its
competitors and develops new processes. The Company has developed and patented
a computerized model of an adult person, known as Dataman, which is used in
testing the support level of its mattresses. In addition, the Company has
developed very advanced and proprietary methods (Digital Image Analysis) of
dynamically measured spinal morphology on any human subject in any sleep
position. This sophisticated technology is expected to enhance Sealy's
Posturepedic brand leadership and market position.
Components Division
The Company operates a Components Division with headquarters in Rensselaer,
Indiana. The Components Division sells its component parts at current market
prices exclusively to the Company's bedding plants and licensees. The
Components Division currently provides substantially all of the Company's
mattress innerspring unit requirements. The Components Division also supplies
approximately 50% of the Company's Sealy foundation parts requirements under a
license of the Wire Patents. In March 1997, the Company divested the assets of
its mattress insulator pad manufacturing operation in South Brunswick, New
Jersey. The Components
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Division operates three owned manufacturing sites located in Rensselaer,
Indiana; Delano, Pennsylvania, and Colorado Springs, Colorado. See Item 2,
"Properties," herein.
Over the last eight years, the Company has made substantial commitments to
ensure that the coil-making equipment at its component plants remains state-
of-the-art. Since 1989, the Company has installed 30 automated coil-producing
machines. This equipment has resulted in higher capacity at lower per-unit
costs and has increased self-production capacity for the Company's innerspring
requirements over that time period from approximately 60% to substantially
all.
In addition to reducing the risks associated with relying on single sources
of supply for certain essential raw materials, the Company believes the
vertical integration resulting from its component manufacturing capability
provides it with a significant competitive advantage. The Company believes
that it is the only conventional bedding manufacturer in the United States
with substantial innerspring and form wire component-making capacity.
Wood Furniture
The Company manufactured and marketed conventional bedroom furniture through
its Samuel Lawrence subsidiary under the Samuel Lawrence label. In 1996,
Samuel Lawrence had approximately 500 customers as one of many manufacturers
of wood bedroom furniture. In January, 1997, the Company completed the sale of
its Samuel Lawrence subsidiary and no longer manufactures wood bedroom
furniture.
Licensing
At November 29, 1998, there are 16 separate license arrangements in effect
with domestic independent and foreign independent licensees. Sealy New Jersey
(a bedding manufacturer), Sealy Furniture of Maryland (a sleep sofa
manufacturer), Kolcraft Enterprises, Inc. (a crib mattress manufacturer),
Pacific Coast Feather Company (a pillow, comforter and mattress pad
manufacturer), and Dorel Industries (a futon manufacturer) are the only
domestic manufacturers that are licensed to use the Sealy trademark, subject
to the terms of license agreements. Under license agreements between Sealy New
Jersey and the Company, Sealy New Jersey has the perpetual right to use
certain of the Company's trademarks in the manufacture and sale of Sealy brand
and Stearns & Foster brand products in the United States. Sealy entered into a
long-term license agreement with Klaussner Corporation Services ("Klaussner")
on December 19, 1996 under which Klaussner will manufacture and market sofas,
sleep sofas, chairs, recliners and other upholstered furniture products in
North America, primarily under the Sealy FurnitureTM logo. During the fiscal
year ended November 29, 1998, Sealy entered into licensing arrangements with
Pacific Coast Feather Company for the manufacture and sale of pillows,
comforters and mattress pads under the Sealy brand name and Dorel Industries
for the manufacture and sale of futons under the Sealy Furniture brand name
each with a commencement date of April 1, 1998.
The Company's licensing division generates royalties by licensing Sealy
brand technology and trademarks to manufacturers located throughout the world.
The Company also provides its licensees with product specifications, quality
control inspections, research and development, statistical services and
marketing programs. In the fiscal year ended November 29, 1998, the licensing
division as a whole generated royalties of approximately $7.2 million, which
were accounted for as a reduction of selling, general and administrative
expenses in the Consolidated Financial Statements included herein.
Warranties
Sealy and Stearns & Foster bedding offer limited warranties on their
manufactured products. The periods for "no-charge" warranty service varies
among products. Prior to fiscal year 1995, such warranties ranged from one
year on promotional bedding to 20 years on certain Posturepedic and Stearns &
Foster bedding. All currently manufactured Sealy Posturepedic models, Stearns
& Foster bedding and some other Sealy-brand products offer a 10-year non-
prorated warranty service period. Historically, the Company's warranty costs
have been immaterial for each of its product lines.
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Trademarks and Licenses
The Company owns, among others, the Sealy and Stearns & Foster trademarks
and tradenames and also owns the Posturepedic, Posturepedic Crown Jewel,
Correct Comfort, Comfort Series, Dataman and University of Sleep trademarks,
service marks and certain related logos and design marks.
Employees
As of November 29, 1998, the Company had 5,193 full-time employees.
Approximately 68% of the Company's employees at its 28 North American plants
are represented by various labor unions with separate collective bargaining
agreements. Due to the large number of collective bargaining agreements, the
Company is periodically in negotiations with certain of the unions
representing its employees. The Company considers its overall relations with
its work force to be satisfactory.
Seasonality/Other
The Company's business is somewhat seasonal, with lower sales usually
experienced during the first quarter of each fiscal year and higher bedding
sales usually experienced in the last three quarters of each fiscal year. See
Note 14 to the Consolidated Financial Statements of the Company included in
Part II, Item 8 herein.
Most of the Company's sales are by short term purchase orders. Since the
level of production of products is generally promptly adjusted to meet
customer order demand, the Company has a negligible backlog of orders. Most
finished goods inventories of bedding products are physically stored at
manufacturing locations until shipped (usually within days of manufacture).
The Company has three manufacturing facilities in Canada and one in Mexico
which comprise all of the Company's foreign-owned manufacturing operations at
November 29, 1998. The Company's licensee for Mexico agreed to terminate its
license permitting Sealy to enter the market directly, and commence production
in May 1996. The Company began marketing its Sealy brand in South Korea
through local distributors during 1995 upon expiration of its Korean license
agreement. In addition the Company has license agreements in Thailand, Japan,
the United Kingdom, Australia, New Zealand, South Africa, Israel and Jamaica.
Additional international test markets are currently operating in Spain and
Brazil. The Company does not derive a material portion of its sales or
revenues from its foreign-owned operations or from customers in any other
foreign country.
ITEM 2. PROPERTIES
The offices of the Company are located at 520 Pike Street, Seattle,
Washington 98101. Corporate, licensing and marketing services are provided to
the Company by Sealy, Inc. (a wholly-owned subsidiary of the Company), an Ohio
Corporation. The principal address of Sealy, Inc. is One Office Parkway,
Trinity, North Carolina 27370.
The Company administers component operations at its Rensselaer, Indiana
facility. The Company leases an information technology facility in Cleveland,
Ohio. The Company's leased facilities are occupied under leases which expire
from 1999 to 2008, including renewal options.
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The following table sets forth certain information regarding manufacturing
facilities operated by the Company at February 15, 1999:
<TABLE>
<CAPTION>
APPROXIMATE
LOCATION SQUARE FOOTAGE TITLE
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<S> <C> <C> <C>
UNITED STATES
Arizona Phoenix 76,000 Owned(a)
California Richmond 238,000 Owned(a)
South Gate 185,000 Owned(a)
Colorado Colorado Springs 70,000 Owned(a)
Denver 92,900 Owned(a)
Florida Orlando 97,600 Owned(a)
Georgia Atlanta 292,500 Owned(a)
Illinois Batavia 212,700 Leased(b)
Indiana Rensselaer 131,000 Owned(a)
Rensselaer 124,000 Owned(a)
Kansas Kansas City 102,600 Leased(a)
Maryland Williamsport 144,000 Leased
Massachusetts Randolph 187,000 Owned(a)
Michigan Taylor 156,000 Leased
Minnesota St. Paul 93,600 Owned(a)
New York Albany 102,300 Owned(a)
North Carolina High Point 151,200 Owned(a)
Lexington 97,400 Owned(a)
Ohio Medina 140,000 Owned(a)
Oregon Portland 140,000 Owned(a)
Pennsylvania Clarion 85,000 Owned(a)
Delano 143,000 Owned(a)
Tennessee Memphis 225,000 Owned(a)
Texas Brenham 220,000 Owned(a)
North Richland Hills 124,500 Owned(a)
CANADA
Alberta Edmonton 144,500 Owned
Quebec Saint Narcisse 76,000 Owned
Ontario Toronto 80,200 Leased
PUERTO RICO Carolina 58,600 Owned(a)
MEXICO Toluca 95,200 Owned
---------
4,085,800
=========
</TABLE>
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(a) The Company has granted a mortgage or otherwise encumbered its interest in
this facility as collateral for secured indebtedness.
(b) The Company has subleased 76,000 square feet to an unrelated tenant.
The Company considers its present facilities to be generally well maintained
and in sound operating condition.
Regulatory Matters
The Company's principal wastes are wood, cardboard and other non-hazardous
materials derived from product component supplies and packaging. The Company
also periodically disposes (primarily by recycling) of small amounts of used
machine lubricating oil and air compressor waste oil. The Company, generally,
is subject to the Federal Water Pollution Control Act, the Comprehensive
Environmental Response, Compensation and Liability Act and amendments and
regulations thereunder and corresponding state statutes and regulations. The
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Company believes that it is in material compliance with all applicable federal
and state environmental statutes and regulations. Except as set forth in Item
3. "Legal Proceedings" below, compliance with federal, state or local
provisions which have been enacted or adopted regulating the discharge of
materials into the environment, or otherwise relating to the protection of the
environment, should not have any material effect upon the capital
expenditures, earnings or competitive position of the Company. The Company is
not aware of any pending federal environmental legislation which would have a
material impact on the Company's operations. Except as set forth in Item 3.
"Legal Proceedings," the Company has not been required to make, and during the
next two fiscal years, does not expect to make any material capital
expenditures for environmental control facilities.
The Company's conventional bedding product lines are subject to various
federal and state laws and regulations relating to flammability and other
standards. The Company believes that it is in material compliance with all
such laws and regulations.
ITEM 3. LEGAL PROCEEDINGS
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.
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.
In March, 1994, the Company filed a claim in the U.S. District Court for the
District of New Jersey against former owners of the site and their lenders
under the Comprehensive Environmental Response, Compensation and Liability Act
seeking contribution for site investigation and remedial costs. In March,
1997, the Company received $1.7 million from a former owner of the site and
one of the lenders to the former owner in final settlement of this litigation.
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. In November, 1998, the Company settled these cases when the
insurers paid the Company approximately $3.8 million.
The Company also has begun to remediate soil and groundwater contamination
at an inactive facility located in Oakville, Connecticut. The Company
submitted a soil and groundwater remediation plan to the Connecticut
Department of Environmental Protection in December 1998. 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 of Connecticut to require these
entities to
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complete the remediation and reimburse the Company for its cleanup costs.
Trial of this matter has been bifurcated with the issue of damages only going
to trial in March, 1999. Based on the facts currently known, management does
not believe that resolution of this matter will have a material adverse effect
on the Company's financial position or future operations.
On May 22, 1997, the Company filed in the United States District Court for
the Northern District of Illinois a motion to terminate certain antitrust
final judgments ("the Judgments") entered on December 30, 1964 and December
26, 1967. These Judgments, among other things, prohibited the Company from
suggesting resale prices to its dealers. During the pendency of the Company's
motion to terminate the Judgments, and based upon allegations received by the
Department of Justice ("the Department") concerning a possible resale price
maintenance agreement with a Stearns & Foster dealer, the Department, on
September 8, 1997, issued to the Company a Civil Investigative Demand seeking
documents relating to, among other things, communications between the Company
and dealers concerning the retail price of mattresses. In response to the
Civil Investigative Demand, the Company produced certain documents and the
deposition of a Company executive was taken. Immediately following such
document production and deposition, the Department consented to the
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDER
None.
9
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
As a result of the Recapitalization (see Note 2) effective on December 18,
1997, Merger Warrant holders, upon exercise of their Merger Warrants at a
conversion rate of 47.98 to 1, were entitled only to receive a cash payment of
$14.2927 which is the spread between the Recapitalization share price of
$14.3027 and the Merger Warrant exercise price of $0.01. As a result of the
Recapitalization, Warrants not exercised prior to such Recapitalization can no
longer be converted to Class B shares and upon subsequent exercise will
receive the same amount in cash without interest. As of December 17, 1997, the
Company forwarded to a third party paying agent the amount necessary to fund
the future cash requirements with respect to the remaining then outstanding
Merger Warrants and Class B Common Stock.
The Company completed its redemption of all of the Company's Series A and
Series B warrants by February 3, 1998.
As of February 23, 1999 there are 17 holders of record of the Company's
Class A shares, 7 holders of record of the Company's Class B shares, 14
holders of record of the Company's Class L shares and 7 holders of record of
the Company's Class M shares. See Note 2 to the Consolidated Financial
Statements, Part II, Item 8 herein for description of change in capital
structure.
On May 17, 1996, a $35.5 million dividend was paid to all holders of record
as of May 7, 1996 of Sealy common stock and to holders of Merger Warrants. In
addition, on February 28, 1997, a $99.8 million dividend was paid to all
holders of record as of February 27, 1997 of Sealy common stock and to holders
of Merger Warrants. Prior to the May 17, 1996 dividend, no dividends had been
paid on any class of common equity of the Company during the prior three
fiscal years of the Company. The Company's Senior Credit Agreements and the
indentures governing the Notes (the "Indentures") limit the Company's ability
to pay cash dividends to its stockholders.
ITEM 6. SELECTED FINANCIAL DATA
The following tables set forth selected consolidated financial and other
data of the Company for the years ended November 29, 1998, November 30, 1997,
December 1, 1996, November 30, 1995 and 1994.
During the period from December 1, 1992 through November 29, 1998, the
Company's capital structure changed significantly, in large part as a result
of the Acquisition in February 1993. Due to required purchase accounting
adjustments relating to such transactions, and the resultant changes in
control, the consolidated financial and other data for each period reflected
in the following tables during this period are not comparable to such data for
the other such periods.
The selected consolidated financial and other data set forth in the
following tables have been derived from the Company's audited consolidated
financial statements. The reports of PricewaterhouseCoopers LLP, independent
accountants, covering the Company's Consolidated Financial Statements for the
year ended November 29, 1998 and KPMG LLP, independent auditors, covering the
Company's Consolidated Financial Statements for the years ended November 30,
1997 and December 1, 1996, are included elsewhere herein. These tables should
be read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Consolidated Financial Statements
of the Company included elsewhere herein.
10
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
NOVEMBER 29, NOVEMBER 30, DECEMBER 1, NOVEMBER 30, NOVEMBER 30,
1998 1997 1996 1995 1994
------------ ------------ ----------- ------------ ------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Net Sales.............. $ 891.3 $ 804.8 $ 697.6 $ 653.9 $ 697.7
Costs and expenses..... 913.9 764.2 672.8 610.9 641.6
Income (loss) before
income tax,
extraordinary item and
cumulative effect of
change in accounting
principle............. (22.6) 40.6 24.8 43.0 56.1
Extraordinary loss(a).. 14.5 2.0 -- -- --
Cumulative effect of
change in accounting
principle(b).......... -- 4.3 -- -- --
Net income (loss)...... $ (33.8) $ 11.7 $ (0.5)(c) 19.5 $ 29.2
Other Data:
Depreciation and
amortization of
intangibles........... $ 24.3 $ 24.1 $ 26.6 $ 24.2 $ 23.6
Operating income(d).... 44.9 72.0 53.6 74.0 89.5
EBITDA(e).............. 69.2 96.1 80.2 98.2 113.1
Adjusted EBITDA(f)..... 113.1 102.7 86.8 85.0 122.8
Capital expenditures... 33.1 29.1 12.0 11.8 12.8
Interest expense, net.. 67.5 31.4 28.8 31.0 33.4
Ratio of EBITDA to
interest expense, net. 1.0x 3.1x 2.8x 3.2x 3.4x
Ratio of earnings to
fixed charges(g)...... -- 2.2x 1.8x 2.3x 2.5x
Weighted average number
of shares
outstanding(h)........ 30,472 30,234 29,379 30,169 30,159
Net income/(loss) per
common share--
diluted(h):
Income/(loss) before
extraordinary item and
cumulative effect of
change in accounting
principle............. $ (0.63) $ 0.60 $ (0.02) $ 0.65 $ 0.97
Extraordinary item..... (0.48) (0.07) -- -- --
Cumulative effect of
change in accounting
principle............. -- (0.14) -- -- --
------- ------- ------- ------- -------
Net income/(loss)..... $ (1.11) $ 0.39 $ (0.02) $ 0.65 $ 0.97
======= ======= ======= ======= =======
<CAPTION>
NOVEMBER 29, NOVEMBER 30, DECEMBER 1, NOVEMBER 30, NOVEMBER 30,
1998 1997 1996 1995 1994
------------ ------------ ----------- ------------ ------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Total assets........... $ 751.1 $ 721.1 $ 739.9 $ 776.2 $ 810.6
Long-term obligations.. 682.3 330.0 269.5 269.4 329.5
Total debt............. 690.8 330.0 288.1 286.9 349.9
Stockholders' equity
(deficit)............. (138.8) 205.1 293.0 330.9 322.2
</TABLE>
- --------
(a) During 1998 and 1997, the Company recorded extraordinary losses of $5.4 and
$2.0, net of income tax benefit of $3.6 million and $1.4 million,
respectively, representing the remaining unamortized debt issuance costs
related to long term obligations repaid as a result of the debt
refinancing. Also, during 1998 the Company recorded an extraordinary loss
of $9.1 million, net of income taxes of $6.1 million, representing premiums
paid to existing note holders and consent fees paid in connection with the
retirement of debt.
11
<PAGE>
(b) During the fourth quarter of 1997, the Company changed its accounting
policy to comply with EITF 97-13, "Accounting for Costs Incurred in
Connection with a Consulting Contract That Combines Business Process
Reengineering and Information Technology Transformation," which resulted
in a loss of $4.3 million, net of income tax of $2.9 million, representing
the write-off of previously capitalized costs as described in the EITF.
(c) On January 15, 1997, the Company completed the sale of Woodstuff
Manufacturing, Inc., a wholly-owned subsidiary that manufactured and
marketed solid wood bedroom furniture under the "Samuel Lawrence" brand
name. The divestiture resulted in an aggregate book loss of $17.6 million,
which was recorded in the fiscal year ended December 1, 1996. The loss is
comprised of a loss on net assets held for sale of $11.8 million and
income tax expense of $5.8 million arising from the tax gain on the
transaction.
(d) Operating income is calculated by adding interest expense, net to net
sales less costs and expenses.
(e) EBITDA is calculated by adding interest expense, net, income tax expense
(benefit) and depreciation and amortization of intangibles to net income
(loss) before extraordinary item and cumulative effect of change in
accounting principle. EBITDA is presented because it is a widely accepted
financial indicator of a company's ability to service and incur debt.
EBITDA does not represent net income or cash flows from operations as
those terms are defined by generally accepted accounting principles
("GAAP") and does not necessarily indicate whether cash flows will be
sufficient to fund cash needs.
(f) Adjusted EBITDA is calculated by adding to or deducting from EBITDA (as
described above) certain items of income and expense consisting of: (i)
discontinued stock-based compensation plans, (ii) executive severance and
transition costs, (iii) loss on write-off of Montgomery Ward accounts
receivable and related factoring expense incurred in connection with
bankruptcy of Montgomery Ward, (iv) any expenses related to addressing the
Company's "Year 2000" information systems issue and EITF 97-13
reengineering efforts, (v) compensation associated with the
Recapitalization, (vi) loss on net assets held for sale and other write-
downs in 1998 only, (vii) High Point relocation and (viii) other relief
items including, foreign currency losses, loss on disposal of certain
assets, etc. Adjusted EBITDA is presented because it conforms to the
definition of "Consolidated EBITDA" in the Notes Indenture (see
"Description of Exchange Notes" and "Certain Definitions" within such
section). The Company believes that the adjustment for these items is
appropriate for such periods in order to provide an appropriate analysis
of recent historical results. The following is a reconciliation of EBITDA
to Adjusted EBITDA:
<TABLE>
<CAPTION>
FISCAL YEAR
----------------------------------
1998 1997 1996 1995 1994
------ ------ ----- ------ ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
EBITDA................................... $ 69.2 $ 96.1 $80.2 $ 98.2 $113.1
Adjustments:
Stock-based compensation................ -- 1.6 4.7 (13.2) 9.7
Executive severance and transition...... -- -- 1.9 -- --
Compensation associated with Recapitali-
zation................................. 18.9 -- -- -- --
Montgomery Ward bad debt and factoring
losses................................. -- 4.0 -- -- --
Loss on net assets held for sale and
other write-downs...................... 10.6 -- -- -- --
High Point relocation................... 7.5 -- -- -- --
EITF 97-13 reengineering efforts........ 4.1 1.0 -- -- --
Other relief items--including foreign
currency losses, loss on disposal of
certain assets, etc. .................. 2.8 -- -- -- --
------ ------ ----- ------ ------
Total adjustments...................... 43.9 6.6 6.6 (13.2) 9.7
------ ------ ----- ------ ------
Adjusted EBITDA......................... $113.1 $102.7 $86.8 $ 85.0 $122.8
====== ====== ===== ====== ======
</TABLE>
(g) For purposes of calculating the ratio of earnings to fixed charges,
earnings represent income before income taxes and extraordinary item plus
fixed charges. Fixed charges consist of interest expense, net, including
amortization of discount and financing costs and the portion of operating
rental expense which management believes is representative of the interest
component of rent expense. For the year ended November 29, 1998, earnings
were insufficient to cover fixed charges by $22.6 million.
(h) Restated from previously published results due to the adoption of
Financial Accounting Standards Board Statement No. 128, "Earnings Per
Share", in fiscal 1998.
12
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Year Ended November 29, 1998 Compared With Year Ended November 30, 1997
Net Sales. Net sales for the year ended November 29, 1998 ("Fiscal 1998")
were $891.3 million, an increase of $86.5 million, or 10.7% from the year
ended November 30, 1997 ("Fiscal 1997"). This increase is attributable to a
$91.8 million increase in conventional bedding sales offset by a $5.3 million
decrease in sales of wood bedroom furniture.
Conventional bedding sales increased 11.5% over the prior year, driven by a
7.0% or $55.8 million increase in conventional bedding unit shipments and a
4.2% or $36.0 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 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 as well as the increased sales of the
luxury bedding category.
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 17 to
the Consolidated Financial Statements.
Cost of Goods Sold. Cost of goods sold as a percentage of net sales
decreased 0.1% to 56.5%. This improvement is primarily attributable to
production economies from increased volume partially offset by higher start-up
costs associated with the integration of new products into production.
Selling, General, and Administrative. Selling, general, and administrative
expenses increased $38.3 million due to increased operating expenses of $26.7
million, business system and Y2K costs of $4.1 million, and costs associated
with the Corporate Headquarters and Research & Development Center and
Lexington plant relocation to High Point, North Carolina of $7.5 million.
Increased operating costs were primarily due to increases in marketing
spending, $23.9 million, and delivery expenses, $4.8 million offset by lower
administration costs of $2.0 million. Increased marketing spending was due to
increased sales volume, along with an increased spending rate for cooperative
advertising and promotions. Administration costs were lower primarily due to
the Wards bankruptcy filing experienced in 1997. Increased delivery expenses
were due to increased sales volume, along with increased spending rate.
Loss on Net Assets Held for Sale and Other Write-Downs. Loss on net assets
increased $10.6 million as a result of rationalization of certain
manufacturing processes, write-down of idled assets, and write-down of
previously capitalized software modules which will not be implemented.
Compensation Associated with Recapitalization. The Company recorded a charge
of $18.9 million as a result of accelerated vesting of stock options and
restricted stock, other incentive based compensation payments and option
grants to employees in connection with the Recapitalization.
Interest Expense. Interest expense, net of interest income, increased $36.1
million primarily as a result of significantly higher debt levels due to the
Recapitalization.
Income Taxes. The Company's effective income tax rates for Fiscal 1998 and
1997 differ from the Federal statutory rate principally because of the
application of purchase accounting, the effect of certain foreign tax rate
differentials, and state and local income taxes. The Company's effective tax
rate for Fiscal 1998 was approximately 27.7% compared to 60.6% for Fiscal
1997. The higher effective tax rate in 1997 is primarily due to the impact of
State and Local taxes on 1997's pretax income compared to a pretax loss in
1998, permanent differences related to the 1993 Acquisition, and taxes arising
from the sale of the South Brunswick Pad Plant. See Note 9 to the Consolidated
Financial Statements.
13
<PAGE>
Extraordinary Item. The Company recorded a $14.5 million charge, net of
income tax benefit of $9.7 million, representing write-off 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 and the call for redemption of all remaining outstanding
Parent Notes paid May 1, 1998.
Net Loss. For the reasons set forth above, the Company recorded a net loss
of $33.8 million for Fiscal 1998 versus net income of $11.7 million for Fiscal
year 1997.
Year Ended November 30, 1997 Compared With Year Ended December 1, 1996
Net Sales. Net sales for the year ended November 30, 1997 ("Fiscal 1997"),
were $804.8 million, an increase of $107.2 million, or 15.4% from the year
ended December 1, 1996 ("Fiscal 1996"). This increase is attributable to a
$168.3 million increase in conventional bedding sales offset by a $61.1
million decrease in sales of wood bedroom furniture. Conventional bedding
sales increased 26.7% over the prior year, driven by a 24.1% increase in
conventional bedding unit shipments and a 2.1% increase in average unit
selling price. These increases were due to sales growth in the Posturepedic,
Stearns & Foster and promotional product lines, in addition to successful
strategic distribution initiatives. The increase in average unit selling price
is primarily attributable to the introduction of new or reengineered higher-
end products.
The decrease in sales of wood bedroom furniture, sold under the Samuel
Lawrence brand, is due to the sale of this business on January 15, 1997. A
description of this business unit is provided in Note 17 to the Consolidated
Financial Statements.
Cost of Goods Sold. Cost of goods sold as a percentage of net sales
decreased 0.3% to 56.6%. This improvement is primarily attributable to the
impact of lower sales of the lower margin wood bedroom furniture, partially
offset by an increase in bedding cost of goods sold. The increase in bedding
cost of goods sold as a percentage of net sales is primarily attributable to
the introduction of lower price point Posturepedic products, along with
selective pricing initiatives, partially offset by economies of scale from
increased sales volume.
Selling, General and Administrative. Selling, general and administrative
expenses increased by $45.3 million, and increased as a percent of net sales
from 31.1% to 32.6%. This increase was primarily attributable to increases in
bedding marketing spending of $35.1 million, delivery expenses of $5.7 million
and incentive compensation of $3.5 million. Increased marketing spending was
due to increased sales volume, along with an increased spending rate for
cooperative advertising and promotions. The increase in delivery expense was
due to the increase in sales volume. The Company also experienced a $4.9
million increase in bad debt and other financing expenses, of which $4.0
million related to the bankruptcy filing of Montgomery Ward.
Interest Expense. Interest expense, net for Fiscal 1997 increased $2.6
million primarily as a result of increased average debt levels resulting from
the February 1997 dividend and increased rate related to the February 1997
restructuring of the Parent Notes.
Income Taxes. The Company's effective income tax rates for Fiscal 1997 and
1996 differ from the Federal statutory rate because of the application of
purchase accounting, the effect of certain foreign tax rate differentials and
state and local income taxes. The Company's effective tax rate for Fiscal 1997
was approximately 60.6% compared to 102.0% for Fiscal 1996. The higher
effective tax rate for Fiscal 1996 was due primarily to taxes arising from the
Samuel Lawrence Divestiture and the impact of the permanent differences
related to the 1993 Acquisition. See Note 9 to the Consolidated Financial
Statements.
Extraordinary Item. The Company recorded a $2.0 million charge, net of
income tax benefit of $1.4 million, representing the write-off of the
remaining unamortized debt issuance costs related to long-term obligations
repaid as a result of the February 25, 1997 refinancing.
14
<PAGE>
Cumulative Effect of Change in Accounting Policy. During the fourth quarter
of 1997, the Company changed its accounting policy to comply with EITF 97-13,
"Accounting for Costs Incurred in Connection with a Consulting Contract that
Combines Business Process Reengineering and Information Technology
Transformation," which resulted in a loss of $4.3 million, net of income tax
benefit of $2.9 million, representing the write-off of previously capitalized
costs primarily related to the Company's new Business Systems project.
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. The Company made capital expenditures aggregating $33.1 million and
$29.1 million during Fiscal 1998 and 1997, respectively. The increase in
capital spending in Fiscal 1998 was primarily attributable to the Company's
acquisition of property, manufacturing facility and office building and
construction of the new headquarters facility in High Point, North Carolina,
offset by lower spending on the Company's computer systems. The Company has
funded Fiscal 1998 capital expenditures with cash generated by operations and
the financing associated with the acquisition and construction of the High
Point corporate complex. Management believes that annual capital expenditure
limitations in the Senior Credit 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 of which the Company has drawn
$12.7 million at November 29, 1998. 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 of
which $7.5 million was recognized in 1998 with the balance in Fiscal 1999. At
November 29, 1998, the Company had approximately $85.5 million available under
its Revolving Credit Facility with Letters of Credit issued totaling
approximately $11.7 million. The Company's net weighted average borrowing cost
was 9.0% for Fiscal 1998 and 1997.
On October 30, 1997, Parent entered into an agreement and plan of merger
(the "Merger Agreement") with Sandman Merger Corporation, a transitory
Delaware merger corporation ("Sandman"), and Zell/Chilmark Fund, L.P., a
Delaware limited partnership ("Zell"). Zell owned approximately 87% of the
issued and outstanding common stock of Parent (the "Existing Common Stock").
Pursuant to the Merger Agreement, upon the satisfaction of certain conditions,
Sandman was merged with and into Parent with Parent being the surviving
corporation effective on December 18, 1997 (the "Closing Date") and the
Company was recapitalized (the "Recapitalization") whereby certain equity
investors, including members of management, acquired an approximate 90.0%
economic equity stake (85.3% voting equity stake) in the Company. A portion of
the issued and outstanding shares of common stock of the Company was converted
into the right to receive aggregate cash equal to $419.3 million less (i)
certain seller fees and expenses and (ii) certain costs in connection with the
extinguishment of certain outstanding options and warrants of the Company and
the remaining portion was converted into voting preferred stock and then
reconverted into $25.0 million in aggregate principal amount of junior
subordinated notes of the Company and a retained voting common stock interest
in the Company of approximately 14.7%. Concurrent with the Recapitalization,
the Company refinanced existing indebtedness (the "Refinancing") by Sealy
Mattress Company (the "Issuer"), a wholly owned subsidiary of the Parent,
entering into and borrowing $460 million under the Senior Credit Agreements
and by issuing $125 million of Senior Subordinated Notes and $128 million of
Senior Subordinated Discount Notes.
15
<PAGE>
Upon the consummation of the Recapitalization, Parent and certain of its
stockholders, including the Bain Funds, Harvard Private Capital Holdings, Inc.
("Harvard"), Sealy Investors 1 LLC, Sealy Investors 2, LLC, Sealy Investors 3,
LLC (the "LLCs") and Zell (collectively, the "Stockholders") entered into a
stockholders agreement (the "Stockholders Agreement"). The Stockholders
Agreement (i) required that each of the parties thereto vote all of its voting
securities of Parent and take all other necessary or desirable actions to
cause the size of the Board of Directors of Parent to be established at seven
members and to cause three designees of the Bain Funds and one designee of
Harvard to be elected to the Board of Directors; (ii) granted Parent and the
Bain Funds a right of first offer on any proposed transfer of shares of
capital stock of Parent held by Zell, Harvard or the LLCs; (iii) granted
Harvard a right of first offer on any proposed transfer of shares of capital
stock of Parent held by the Bain Funds; (iv) granted tag-along rights on
certain transfers of shares of capital stock of Parent; (v) required the
Stockholders to consent to a sale of Parent to an independent third party if
such sale is approved by holders of shares constituting a majority of the then
outstanding shares of voting common stock of Parent; and (vi) except in
certain instances, prohibits Zell from transferring any shares of capital
stock of Parent until the tenth anniversary of the date of the consummation of
the Recapitalization. Certain of the foregoing provisions of the Stockholders
Agreement terminate upon the consummation of an initial Public Offering or an
Approved Sale (as each is defined in the Stockholders Agreement).
Immediately prior to the closing of the Recapitalization (the "Closing"),
Parent contributed (the "Capital Contribution") all of the issued and
outstanding capital stock of Sealy, Inc., an Ohio corporation, The Stearns &
Foster Bedding Company, a Delaware corporation, Advanced Sleep Products, a
California corporation, Sealy Components-Pads, Inc., a Delaware corporation,
and Sealy Mattress Company of San Diego, a California corporation, to the
capital of the Issuer. Immediately after the Capital Contribution, the Issuer
became the only direct subsidiary of Parent and owns 100% of the operations of
Parent. At the Closing, Sandman was merged with and into Parent with Parent
the surviving corporation.
On November 18, 1997, Parent commenced an offer (the "Tender Offer") to
purchase for cash up to all (but not less than a majority in principal amount
outstanding) of its 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 was 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
remaining outstanding Parent Notes that were not redeemed at December 18,
1997. 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 and a discretionary swing loan facility of
up to $20.0 million. Upon consummation of the Recapitalization, 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 Transactions. Indebtedness of the
Issuer under the Senior Credit Agreements is secured and guaranteed by Parent
and certain of the Issuer's current and all of the Issuer's future U.S.
subsidiaries and bears interest at a floating rate. See Note 18 to the
Consolidated Financial Statements for further details regarding guarantees
including consolidating condensed financial statements for guarantors and
16
<PAGE>
non-guarantors. The Senior Credit Agreements 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 (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 issuance's,
and excess cash flow (as defined in the Senior Credit Agreements).
The Notes were issued pursuant to an Indenture (the "Senior Subordinated
Note Indenture") among the Issuer, the Guarantors and The Bank of New York, as
trustee (the "Senior Subordinated Note Trustee"). The Senior Subordinated
Discount Notes were issued pursuant to an Indenture (the "Senior Subordinated
Discount Note Indenture" and, together with the Senior Subordinated Note
Indenture, the "Indentures") among the Company, the Guarantors and The Bank of
New York, as trustee (the "Senior Subordinated Discount Note Trustee" and,
together with the Senior Subordinated Note Trustee, the "Trustees").
The Senior Subordinated Notes in aggregate principal amount of
$125.0 million were issued in the Offering, and mature 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.
17
<PAGE>
Except as provided below, the Senior Subordinated Notes are not redeemable
at the Company's option prior to December 15, 2002. Thereafter, the Senior
Subordinated Notes are subject to redemption at any time at the option of the
Company, in whole or in part, upon not less than 30 nor more than 60 days'
notice, at the redemption prices (expressed as percentages of principal
amount) set forth below plus accrued and unpaid interest and Liquidated
Damages thereon to the applicable redemption date, if redeemed during the
twelve-month period beginning on December 15 of the years indicated below:
<TABLE>
<CAPTION>
PERCENTAGE OF
YEAR PRINCIPAL AMOUNT
- ---- ----------------
<S> <C>
2002........................................................... 104.937%
2003........................................................... 103.292%
2004........................................................... 101.646%
2005 and thereafter............................................ 100.000%
</TABLE>
Notwithstanding the foregoing, during the first 36 months after December 11,
1997, the Company may on any one or more occasions redeem up to 35% of the
aggregate principal amount of Senior Subordinated Notes originally issued
under the Senior Subordinated Note Indenture at a redemption price of 109.875%
of the principal amount thereof, plus accrued and unpaid interest and
liquidated damages thereon, if any, to the redemption date, with the net cash
proceeds of any Equity Offerings; (as defined in the Indentures) provided that
at least $80.0 million in aggregate principal amount of Senior Subordinated
Notes remain outstanding immediately after the occurrence of such redemption
(excluding Senior Subordinated Notes held by the Company and its
Subsidiaries); and provided further that such redemption shall occur within
120 days of the date of the closing of any such Equity Offering.
The Senior Subordinated Discount Notes in aggregate principal amount of
$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. Interest on the
Senior Subordinated Discount Notes will accrue from the most recent date to
which interest has been paid or, if no interest has been paid, from the Full
Accretion Date.
Except as provided below, the Senior Subordinated Discount Notes will not be
redeemable at the Company's option prior to December 15, 2002. Thereafter, the
Senior Subordinated Discount Notes will be subject to redemption at any time
at the option of the Company, in whole or in part, upon not less than 30 nor
more than 60 days' notice, at the redemption prices (expressed as percentages
of principal amount) set forth below plus accrued and unpaid interest and
liquidated damages thereon to the applicable redemption date, if redeemed
during the twelve-month period beginning on December 15 of the years indicated
below:
<TABLE>
<CAPTION>
PERCENTAGE OF
YEAR PRINCIPAL AMOUNT
- ---- ----------------
<S> <C>
2002........................................................... 105.437%
2003........................................................... 103.625%
2004........................................................... 101.812%
2005 and thereafter............................................ 100.000%
</TABLE>
18
<PAGE>
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 redemption price of
110.875% of the Accreted Value, plus accrued and unpaid Liquidated Damages
thereon, if any, to the redemption date, with the net cash proceeds of any
Equity Offerings; provided that at least $50.0 million in aggregate Accreted
Value of Senior Subordinated Discount 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.
At November 29, 1998, the Company was in compliance with the financial
covenants of all debt.
Foreign Operations and Export Sales
The Company has three manufacturing facilities in Canada and one in Mexico
which comprise all of the Company's foreign-owned manufacturing operations at
November 29, 1998. The Company's licensee for Mexico agreed to terminate its
license permitting Sealy to enter the market directly, and commence production
in May 1996. The Company began marketing its Sealy brand in South Korea
through local distributors during 1995 upon expiration of its Korean license
agreement. In addition the Company has license agreements in Thailand, Japan,
the United Kingdom, Australia, New Zealand, South Africa, Israel and Jamaica.
Additional international test markets are currently operating in Spain and
Brazil. The Company does not derive a material portion of its sales or
revenues from its foreign-owned operations or from customers in any other
foreign country.
New Accounting Pronouncements
On November 20, 1997 the Emerging Issues Task Force (EITF) reached a final
consensus that business process reengineering costs incurred in connection
with an overall information technology transformation project should be
expensed as incurred (EITF 97-13). The transition provisions require companies
that had previously capitalized such business process reengineering costs to
identify these costs and quantify the unamortized amounts remaining on the
balance sheet as of the beginning of the quarter which includes November 20,
1997. These unamortized amounts are required to be written off as a cumulative
effect of a change in accounting principle in such quarter. The Company has
adopted EITF 97-13 resulting in a loss of $4.3 million, net of income tax
benefit of $2.9 million, representing the cumulative write-off of previously
capitalized costs as of August 31, 1997 primarily relating to the Company's
new business systems project. All business process reengineering costs
subsequent to August 31, 1997 have been expensed.
In June 1997, the Financial Accounting Standards Board ("FASB) issued
Statement of Financial Accounting Standards ("FAS") No. 130, "Reporting
Comprehensive Income", effective for the fiscal years beginning after December
15, 1997, the Company's fiscal year 1999. FAS 130 requires that the Company
report comprehensive income and its components in a full set of general-
purpose financial statements. Comprehensive income represents the change in
stockholders' equity during the period from nonowner sources. Currently, other
comprehensive income consists of foreign translation adjustments. The adoption
of FAS 130 will have no impact on the Company's net income or stockholders'
equity.
In June 1997, the FASB issued FAS 131, "Disclosures about Segments of an
Enterprise and Related Information", effective for the years beginning after
December 15, 1997, the Company's fiscal year end 1999. FAS 131 establishes
standards for public companies for the reporting of financial information from
operating segments in annual and interim financial statements as well as
establishes standards for related disclosures about products and services,
geographic areas and major customers. The Company has not completed its
analysis of the effect of adoption on its financial statement disclosure,
however, the adoption of FAS 131 will not affect results of operation or
financial position, but may affect the disclosure of segment information.
19
<PAGE>
In June 1998, the FASB issued FAS 133, "Accounting for Derivative
Instruments and Hedging Activities," effective for years beginning after June
15, 1999, the Company's fiscal year 2000. FAS 133 requires that all
derivatives be recorded on the balance sheet at fair value. Derivatives that
are not hedges must be adjusted to fair value through income. If the
derivative is a hedge, depending on the nature of the hedge, changes in the
fair value of derivatives are either offset against the change in the fair
value of assets, liabilities, or firm commitments through earnings or
recognized in other comprehensive income until the hedged item is recognized
in earnings. The Company has not yet determined what the effect of FAS 133
will be on the earnings and financial position of the Company.
Fiscal Year
Effective December 1, 1995, the Company changed its fiscal year from
November 30 to a 52-or-53-week year ending the closest Sunday to November 30.
Accordingly, the years ended November 29, 1998 and November 30, 1997 were 52-
week years. Fiscal year 1996 ended on December 1, 1996.
Year 2000 Issue
Until recently, computer programs were generally written using two digits
rather than four to define the applicable year. Accordingly, such programs may
be unable to distinguish properly between the Year 1900 and the Year 2000.
This could result in system failures or data corruption for the Company, its
customers or suppliers which could cause disruptions of operations, including,
among other things, a temporary inability to process transactions or engage in
business activities or to receive information, services, raw materials and
supplies, or payment from suppliers, customers or business partners or any
other companies with which the Company conducts business.
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 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 has received converted source code, from the contracted vendor and
is currently testing the converted programs. The Company's current timetable
anticipates rollout and implementation to all locations by August, 1999. At
this time, the Company has not deemed it necessary to develop contingency
plans for any of the applications being converted, however, the Company will
continue to assess this and will develop contingency plans for any
applications not converted and operating by August, 1999. Senior management
regularly reviews the status of the Year 2000 program and the Company has
hired an independent third party to review and report on the Company's status
and preparedness.
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. Contingency plans will be developed for any
significant suppliers or customers that are not Year 2000 compliant by August
1999 or earlier if the Company becomes aware that such entities may not be
Year 2000 compliant in a timely manner.
20
<PAGE>
The Company is funding the expenditures related to the Year 2000 plan with
cash flows from operations The required code changes, testing and
implementation necessary to address the Year 2000 Issue are expected to cost
approximately $3.25 million and the Company has incurred $1.0 million through
November, 1998, the end of the Company's fiscal year. The Company estimates
that it is approximately 40% complete with the efforts required to be Year
2000 compliant.
Even though the Company's Year 2000 plan should adequately address the Year
2000 Issue, there can be no assurance that unforeseen difficulties will not
arise. If the Company does not identify and fix all Year 2000 problems, or if
a major supplier or customer is unable to adequately address its Year 2000
Issue, the Company's results of operations or financial condition could be
materially impacted. A possible worst case scenario might include one or more
of the Company's significant manufacturing or information technology systems
being interrupted causing a delay or curtailment in the production and/or
distribution of goods, a delay or curtailment in the billing and collection of
revenues, an inability to maintain accounting records accurately, and/or an
inability to manage its financial resources, potentially causing a material
impact on the Company's results of operations and financial position. The
Company is engaged in extensive efforts to provide a continuous, uninterrupted
flow of goods and services to customers.
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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign Currency Exposures
The Company's earnings are affected by fluctuations in the value of its
subsidiaries' functional currency as compared to the currencies of its foreign
denominated purchases. Foreign currency forward contracts are used to hedge
against the earnings effects of such fluctuations. The result of a uniform 10%
change in the value of the U.S. dollar relative to currencies of countries in
which the Company manufactures or sells its products would not be material to
earnings or financial position. This calculation assumes that each exchange
rate would change in the same direction relative to the U.S. dollar.
During 1998, the Company incurred a $1.3 million premium for forward foreign
exchange contracts to exchange 24.5 million Canadian Dollars and 77.0 million
Mexican Pesos for U.S. Dollars. These contracts will settle on a quarterly
basis beginning in February, 1999 and ending in November, 1999 at exchange
rates ranging between 1.5488 to 1.5493 per U.S. Dollar for the Canadian
contracts and 10.915 to 13.165 per U.S. Dollar for the Mexican contracts.
During 1998, there was no significant gain or loss recognized on these
contracts.
Interest Rate Risk
Because the Company's obligations under the bank credit agreement bear
interest at floating rates, the Company is sensitive to changes in prevailing
interest rates. The Company uses derivative instruments to manage its long-
term debt interest rate exposure, rather than for trading purposes. A 10%
increase or decrease in market interest rates that effect the Company's
interest rate derivative instruments would not have a material impact on
earnings during the next fiscal year.
The Company has entered into interest rate cap and collar agreements to
reduce the impact of changes in interest rates on all or a portion of its
floating rate debt. The notional amounts of interest rate agreements are used
to measure interest to be paid or received and do not represent the amount of
exposure to credit loss. The net cash paid for the interest rate cap and
collar agreements is recorded in prepaid expenses in the consolidated balance
sheet and charged to interest expense over the life of the agreement.
21
<PAGE>
As of November 29, 1998, the Company had the following interest rate
instruments in effect that provide protection on the three month LIBOR rate
upon which the Company's variable rate debt is based (actual rate paid is
LIBOR plus the respective margin):
<TABLE>
<CAPTION>
NOTIONAL AMOUNT RANGE FOR
1998 (MILLIONS) LIBOR RATE PERIOD
- ---- --------------- ----------- ---------
<S> <C> <C> <C>
Interest Rate Cap......................... $150 8.00 1/98-1/03
Interest rate Collar...................... $200 6.50%-4.93% 1/98-1/01
</TABLE>
22
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
SEALY CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 29, 1998 AND NOVEMBER 30, 1997
(WITH INDEPENDENT ACCOUNTANTS' AND AUDITORS' REPORTS THEREON)
23
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Sealy Corporation
In our opinion, the accompanying consolidated balance sheet as of November
29, 1998 and the related consolidated statements of operations, stockholders'
equity and cash flows present fairly, in all material respects, the financial
position of Sealy Corporation and its subsidiaries (the "Company") at November
29, 1998, and the results of their operations and their cash flows for the
year then ended in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements
based on our audit. We conducted our audit of these statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for the
opinion expressed above. The financial statements of the Company as of
November 30, 1997 and for each of the two years in the period then ended were
audited by other independent accountants whose report dated January 7, 1998
expressed an unqualified opinion on those statements.
PricewaterhouseCoopers LLP
Greensboro, North Carolina
January 19, 1999
24
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Sealy Corporation:
We have audited the accompanying consolidated balance sheet of Sealy
Corporation and subsidiaries as of November 30, 1997 and the related
consolidated statements of operations, stockholders' equity, and cash flows
for each of the years in the two-year period ended November 30, 1997. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Sealy
Corporation and subsidiaries as of November 30, 1997 and the results of their
operations and their cash flows for each of the years in the two-year period
ended November 30, 1997 in conformity with generally accepted accounting
principles.
Cleveland, Ohio KPMG LLP
January 7, 1998
25
<PAGE>
SEALY CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PAR VALUE AMOUNTS)
<TABLE>
<CAPTION>
NOVEMBER 29, NOVEMBER 30,
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................... $ 11,234 $ 6,057
Accounts receivable, net of allowance for doubtful
accounts
(1998-$8,211; 1997-$7,696)......................... 106,761 93,918
Inventories......................................... 43,727 46,007
Prepaid expenses.................................... 7,257 7,935
Prepaid taxes....................................... 1,994 14,594
Deferred income taxes............................... 17,194 --
-------- --------
188,167 168,511
Property, plant and equipment--at cost:
Land................................................ 11,091 9,760
Buildings and improvements.......................... 60,029 53,890
Machinery and equipment............................. 94,234 86,248
Construction in progress............................ 23,957 19,705
-------- --------
189,311 169,603
Less accumulated depreciation....................... 53,502 43,995
-------- --------
135,809 125,608
Other assets:
Goodwill--net of accumulated amortization (1998-
$68,259; 1997-$57,261)............................. 387,054 406,778
Patents and other intangibles-net of accumulated
amortization
(1998-$7,893; 1997-$6,540)......................... 3,138 4,491
Debt issuance costs, net, and other assets.......... 36,912 15,679
-------- --------
427,104 426,948
-------- --------
$751,080 $721,067
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
26
<PAGE>
SEALY CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PAR VALUE AMOUNTS)
<TABLE>
<CAPTION>
NOVEMBER 29, NOVEMBER 30,
1998 1997
------------ ------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion-long-term obligations............... $ 8,576 $ --
Accounts payable.................................... 46,094 49,676
Accrued expenses:
Customer incentives and advertising................ 32,451 30,704
Compensation....................................... 15,883 17,771
Interest........................................... 13,432 2,038
Other.............................................. 26,390 18,162
Deferred income taxes.............................. -- 1,936
-------- --------
142,826 120,287
-------- --------
Long-term obligations................................ 682,271 330,000
Other noncurrent liabilities......................... 36,069 35,713
Deferred income taxes................................ 28,740 30,001
Stockholders' equity (deficit):
Preferred stock, $0.01 par value; Authorized (1998-
100,000; 1997-10,000) shares; Issued, none......... -- --
Class L common stock, $0.01 par value; Authorized,
6,000 shares; Issued
(1998-2,169; 1997-0)............................... 22 --
Class M common stock, $0.01 par value; Authorized,
2,000 shares; Issued
(1998-866;1997-0).................................. 9 --
Class A common stock, $0.01 par value; Authorized
(1998-600,000;
1997-49,500) shares; Issued (1998-20,528; 1997-
29,932)............................................ 205 299
Class B common stock, $0.01 par value; Authorized
(1998-200,000; 1997-500) shares; Issued (1998-
7,791; 1997-11).................................... 78 --
Additional paid-in capital.......................... 134,530 257,320
Retained (deficit) earnings......................... (261,833) (50,614)
Foreign currency translation adjustment............. (11,837) (1,939)
-------- --------
(138,826) 205,066
-------- --------
Commitment and contingencies......................... -- --
-------- --------
$751,080 $721,067
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
27
<PAGE>
SEALY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED
-------------------------------------
NOVEMBER 29, NOVEMBER 30, DECEMBER 1,
1998 1997 1996
------------ ------------ -----------
<S> <C> <C> <C>
Net sales................................ $891,302 $804,834 $697,638
-------- -------- --------
Cost and expenses:
Cost of goods sold...................... 503,500 455,905 397,259
Selling, general and administrative
(including provisions for bad debts of
$1,800, $4,528 and $918, respectively). 300,356 262,023 216,674
Loss on net assets held for sale and
other write-downs...................... 10,634 -- 11,762
Compensation associated with
recapitalization....................... 18,886 -- --
Stock based compensation................ -- 1,635 4,779
Amortization of intangibles............. 13,029 13,264 13,594
Interest expense, net................... 67,451 31,396 28,797
-------- -------- --------
Income/(loss) before income taxes, ex-
traordinary item and cumulative effect
of change in accounting principle..... (22,554) 40,611 24,773
Income taxes (benefit)................... (3,318) 22,509 25,279
-------- -------- --------
Income/(loss) before extraordinary item
and cumulative effect of change in
accounting principle................... (19,236) 18,102 (506)
Extraordinary item-loss from early
extinguishment of debt (net of income
tax benefit of $9,693 and $1,353,
respectively)(Note 2)................... 14,537 2,030 --
Cumulative effect of change in accounting
principle (net of income tax benefit of
$2,885) (Note 1)........................ -- 4,329 --
-------- -------- --------
Net income/(loss)...................... $(33,773) $ 11,743 $ (506)
======== ======== ========
Earnings/(loss) per common share--Basic:
Before extraordinary item and cumulative
effect of change in accounting
principle.............................. $ (0.63) $ 0.61 $ (0.02)
Extraordinary item...................... (0.48) (0.07) --
Cumulative effect of change in
accounting principle................... -- (0.15) --
-------- -------- --------
Net earnings/(loss) per common share--
Basic................................. $ (1.11) $ 0.39 $ (0.02)
======== ======== ========
Earnings/(loss) per common share--
Diluted:
Before extraordinary item and cumulative
effect of change in accounting
principle.............................. $ (0.63) $ 0.60 $ (0.02)
Extraordinary item....................... (0.48) (0.07) --
Cumulative effect of change in
accounting principle................... -- (0.14) --
-------- -------- --------
Net earnings/(loss) per common share--
Diluted............................... $ (1.11) $ 0.39 $ (0.02)
======== ======== ========
Weighted average number of common shares
outstanding:
Basic.................................. 30,472 29,575 29,379
Diluted................................ 30,472 30,234 29,379
</TABLE>
See accompanying notes to consolidated financial statements.
28
<PAGE>
SEALY CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
CLASS L CLASS M CLASS A CLASS B
------------- ------------- --------------- --------------
FOREIGN
ADDITIONAL RETAINED CURRENCY
COMMON STOCK COMMON STOCK COMMON STOCK COMMON STOCK PAID-IN EARNINGS TRANSLATION
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL (DEFICIT) ADJUSTMENT TOTAL
------ ------ ------ ------ ------- ------ ------ ------ ---------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
November 30,
1995............ -- $-- -- $-- 29,451 $ 295 9 $-- $258,336 $ 73,387 $ (1,137) $ 330,881
Net loss........ -- -- -- -- -- -- -- -- -- (506) -- (506)
Performance
share plan...... -- -- -- -- -- -- -- -- 4,510 -- -- 4,510
Management stock
award........... -- -- -- -- 68 -- -- -- 269 -- -- 269
Valuation
adjustment on
common stock and
warrants subject
to repurchase... -- -- -- -- -- -- -- -- (308) -- -- (308)
Warrants
exercised....... -- -- -- -- -- -- 2 -- -- -- -- --
Repurchase of
management
stock........... -- -- -- -- (110) (1) -- -- -- -- -- (1)
Dividend........ -- -- -- -- -- -- -- -- -- (35,463) -- (35,463)
Withdrawals from
performance
share plan...... -- -- -- -- -- -- -- -- (3,498) -- -- (3,498)
Shares tendered
under
performance
share plan...... -- -- -- -- -- -- -- -- (2,820) -- -- (2,820)
Foreign currency
translation..... -- -- -- -- -- -- -- -- -- -- (70) (70)
----- --- --- --- ------- ----- ----- --- -------- --------- -------- ---------
December 1,
1996............ -- -- -- -- 29,409 294 11 -- 256,489 37,418 (1,207) 292,994
Net income...... -- -- -- -- -- -- -- -- -- 11,743 -- 11,743
Management stock
award........... -- -- -- -- 285 3 -- -- 1,299 -- -- 1,302
Performance
share plan...... -- -- -- -- 233 2 -- -- (134) -- -- (132)
Exercised stock
options......... -- -- -- -- 5 -- -- -- 29 -- -- 29
Valuation
adjustment on
common stock and
warrants subject
to repurchase... -- -- -- -- -- -- -- -- (363) -- -- (363)
Dividend........ -- -- -- -- -- -- -- -- -- (99,775) -- (99,775)
Foreign currency
translation..... -- -- -- -- -- -- -- -- -- -- (732) (732)
----- --- --- --- ------- ----- ----- --- -------- --------- -------- ---------
November 30,
1997............ -- -- -- -- 29,932 299 11 -- 257,320 (50,614) (1,939) 205,066
Net Income...... -- -- -- -- -- -- -- -- -- (33,773) -- (33,773)
Stock
compensation
related to
Recapitalization. -- -- -- -- -- -- -- -- 16,413 -- -- 16,413
Treasury stock
repurchase...... 339 4 -- -- (26,885) (269) (11) -- (260,367) (177,446) -- (438,078)
Equity
issuances....... 1,830 18 866 9 16,472 164 7,791 78 121,048 -- -- 121,317
Exercised stock
options......... -- -- -- -- 1,009 11 -- -- 116 -- -- 127
Foreign currency
translation..... -- -- -- -- -- -- -- -- -- -- (9,898) (9,898)
----- --- --- --- ------- ----- ----- --- -------- --------- -------- ---------
November 29,
1998............ 2,169 $22 866 $ 9 20,528 $ 205 7,791 $78 $134,530 $(261,833) $(11,837) $(138,826)
===== === === === ======= ===== ===== === ======== ========= ======== =========
</TABLE>
See accompanying notes to consolidated financial statements.
29
<PAGE>
SEALY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
-------------------------------------
NOVEMBER 29, NOVEMBER 30, DECEMBER 1,
1998 1997 1996
------------ ------------ -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income/(loss)....................... $ (33,773) $ 11,743 $ (506)
Adjustments to reconcile net
income/(loss) to net cash provided by
operating activities:
Depreciation............................ 11,290 10,851 13,037
Cumulative effect of change in
accounting principle................... -- 7,214 --
Extraordinary item-early extinguishment
of debt................................ 24,230 3,383 --
Loss on net assets held for sale and
other write-downs...................... 10,634 -- 11,762
Loss on disposal of assets.............. 1,545 1,061 178
Non-cash compensation associated with
Recapitalization....................... 16,413 -- --
Non-cash compensation................... -- 1,165 4,779
Non-cash interest on Junior Subordinated
Note.................................... 3,022 -- --
Deferred income taxes................... (19,265) 8,528 5,781
Amortization of:
Intangibles............................. 13,029 13,264 13,594
Debt issuance costs..................... 4,056 1,841 2,683
Discount on Senior Subordinated Notes... 8,050 -- --
Other, net.............................. (5,171) (4,449) 922
Changes in operating assets and
liabilities:
Accounts receivable..................... (12,843) (16,739) (4,119)
Inventories............................. 2,280 (12,015) (5,543)
Prepaid expenses........................ 678 (5,348) (821)
Prepaid taxes........................... 12,600 (3,119) (1,522)
Accounts payable/accrued expenses/other
noncurrent liabilities................. 16,255 24,669 4,192
--------- -------- --------
Net cash provided by operating
activities........................... 53,030 42,049 44,417
--------- -------- --------
Cash flows from investing activities:
Purchase of property, plant and
equipment.............................. (33,112) (29,140) (12,045)
Proceeds from sale of subsidiary........ -- 35,000 --
Proceeds from sale of property, plant
and equipment.......................... 216 5,561 1,089
--------- -------- --------
Net cash provided by (used in)
investing activities................. (32,896) 11,421 (10,956)
--------- -------- --------
Cash flows from financing activities:
Treasury stock repurchase, including
direct expenses........................ (413,078) -- --
Proceeds from long-term debt............ 462,653 -- --
Proceeds from issuance of long-term
public notes........................... 200,447 -- --
Repayment of long-term obligations...... (211,125) (63,127) (23,727)
Net borrowings from current Revolving
Credit Facility........................ 2,800 -- --
Net borrowings from prior Revolving
Credit Facility........................ (130,000) 105,000 25,000
Dividend................................ -- (99,775) (35,463)
Equity issuances........................ 121,444 -- --
Costs associated with tender offer of
prior debt............................. (15,361) -- --
Debt issuance costs..................... (32,737) (6,130) --
--------- -------- --------
Net cash used in financing activities. (14,957) (64,032) (34,190)
--------- -------- --------
Change in cash and cash equivalents...... 5,177 (10,562) (729)
Cash and cash equivalents:
Beginning of period..................... 6,057 16,619 17,348
--------- -------- --------
End of period........................... $ 11,234 $ 6,057 $ 16,619
========= ======== ========
Supplemental disclosures:
Taxes paid (received), net.............. $ (7,171) $ 12,432 $ 14,334
Interest paid, net...................... $ 40,929 $ 29,523 $ 26,487
Other non-cash activity:
Goodwill reduction resulting from pre-
acquisition net operating loss
utilization............................ $ -- $ 9,953 $ --
Issuance of Junior Subordinated Notes
as part of Recapitalization proceeds... $ 25,000 $ -- $ --
</TABLE>
See accompanying notes to consolidated financial statements.
30
<PAGE>
SEALY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Significant accounting policies used in the preparation of the consolidated
financial statements are summarized below.
(a) Business and Basis of Presentation
Sealy Corporation (the "Company" or the "Parent"), is engaged in the home
furnishings business and manufactures, distributes and sells conventional
bedding products including mattresses and foundations. Substantially all of
the Company's trade accounts receivable are from retail businesses. As
described in Note 2, the Company incurred substantial debt and issued new
equity to certain equity investors in connection with a leveraged
recapitalization transaction effective December 18, 1997. The consolidated
financial statements of the Company reflect the Company's historical basis of
accounting with the leveraged recapitalization transaction presented as a
repurchase of stock and issuance of new equity.
(b) Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
(c) Fiscal Year
Effective December 1, 1995, the Company changed its fiscal year from
November 30 to a 52-or-53-week year ending on the closest Sunday to November
30. Accordingly, the years ended November 29, 1998 and November 30, 1997 were
52-week years. Fiscal year 1996 ended on December 1, 1996.
(d) Reclassification
The Company has reclassified the presentation of certain prior year
information to conform with the current year presentation.
(e) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
(f) Revenue Recognition
The Company recognizes all revenue at the time shipments are made.
(g) Cash and Cash Equivalents
For purposes of the statements of cash flows, the Company considers all
highly liquid debt instruments with a maturity at the time of purchase of
three months or less to be cash equivalents. Cash equivalents are stated at
cost which approximates market value.
(h) Property, Plant and Equipment
Property, plant and equipment are depreciated over their expected useful
lives principally by the straight-line method for financial reporting purposes
and by both accelerated and straight-line methods for tax reporting purposes.
31
<PAGE>
SEALY CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(i) Amortization of Intangibles
The excess of the purchase cost over the fair value of assets acquired is
being amortized on a straight-line basis over 40 years. The Company evaluates
whether events and circumstances have occurred that indicate that the
remaining estimated useful life of goodwill may warrant revision or that the
remaining balance of goodwill may not be recoverable. When factors indicate
that goodwill should be evaluated for possible impairment, the Company uses an
estimate of the undiscounted future cash flows over the remaining life to
determine whether goodwill is recoverable. The Company believes that no
impairment of goodwill existed at November 29, 1998.
Other intangibles include patents and trademarks which are amortized on the
straight-line method over periods ranging from 5 to 20 years.
The costs related to the issuance of debt (gross costs of $32,737 at
November 29, 1998, net of accumulated amortization of $4,056) are capitalized
and amortized to interest expense over the lives of the related debt.
(j) Earnings Per Common Share
Net earnings per common share data is computed based on the average number
of shares of Common Stock and Common Stock equivalents outstanding during the
period. In February 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("FAS") No. 128, "Earnings
Per Share", which was adopted by the Company on December 1, 1997. At the time,
the Company was required to change the method currently used to compute
earnings per share and to restate all prior periods. Under the requirement for
calculating basic earnings per share, the dilutive effect of stock options is
excluded. Diluted earnings per share continues to reflect the assumed
conversion of all potentially diluted securities. Net earnings per common
share is based upon the weighted average number of shares of the Company's
common stock and common stock equivalents outstanding for the periods
presented. Common stock equivalents included in the computation, using the
treasury stock method, represent shares issuable upon the assumed exercise of
warrants, stock options and performance shares that would have a dilutive
effect in periods in which there were earnings.
(k) Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for future tax consequences
attributable to differences between the financial statement carrying amounts
of existing assets and liabilities and their respective tax bases and
operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
(l) Advertising Costs
The Company expenses all advertising costs as incurred. Advertising expenses
for the years ended November 29, 1998, November 30, 1997, and December 1, 1996
amounted to $114,492, $97,314 and $74,649, respectively.
(m) Recent Accounting Pronouncements
On November 20, 1997 the Emerging Issues Task Force (EITF) reached a final
consensus that business process reengineering costs incurred in connection
with an overall information technology transformation project should
32
<PAGE>
SEALY CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
be expensed as incurred (EITF 97-13). The transition provisions require
companies that had previously capitalized such business process reengineering
costs to identify these costs and quantify the unamortized amounts remaining
on the balance sheet as of the beginning of the quarter which includes
November 20, 1997. These unamortized amounts are required to be written off as
a cumulative effect of a change in accounting principle in such quarter. The
Company adopted EITF 97-13 in fiscal 1997 resulting in a loss of $4.3 million,
net of income tax benefit of $2.9 million, representing the cumulative write-
off of previously capitalized costs as of August 31, 1997 primarily relating
to the Company's new business systems project. All business process
reengineering costs subsequent to August 31, 1997 have been expensed.
In June 1997, the FASB issued FAS 130, "Reporting Comprehensive Income",
effective for the fiscal years beginning after December 15, 1997, the
Company's fiscal year 1999. FAS 130 requires that the Company report
comprehensive income and its components in a full set of general-purpose
financial statements. Comprehensive income represents the change in
stockholders' equity during the period from nonowner sources. Currently, other
comprehensive income consists of foreign currency translation adjustments. The
adoption of FAS 130 will have no impact on the Company's net income or
stockholders' equity.
In June 1997, the FASB issued FAS 131, "Disclosures about Segments of an
Enterprise and Related Information", effective for years beginning after
December 15, 1997, the Company's fiscal year end 1999. FAS 131 establishes
standards for public companies for the reporting of financial information from
operating segments in annual and interim financial statements as well as
establishes standards for related disclosures about products and services,
geographic areas and major customers. The Company has not completed its
analysis of the effect of adoption on its financial statement disclosure,
however, the adoption of FAS 131 will not affect results of operations or
financial position, but may affect the disclosure of segment information.
In June 1998, the FASB issued FAS 133, "Accounting for Derivative
Instruments and Hedging Activities," effective for years beginning after June
15, 1999, the Company's fiscal year 2000. FAS 133 requires that all
derivatives be recorded on the balance sheet at fair value. Derivatives that
are not hedges must be adjusted to fair value through income. If the
derivative is a hedge, depending on the nature of the hedge, changes in the
fair value of derivatives are either offset against the change in the fair
value of assets, liabilities, or firm commitments through earnings or
recognized in other comprehensive income until the hedged item is recognized
in earnings. The Company has not yet determined what the effect of FAS 133
will be on the earnings and financial position of the Company.
(2) RECAPITALIZATION
On October 30, 1997, Sealy Corporation entered into an agreement and plan of
merger (the "Merger Agreement") with Sandman Merger Corporation, a transitory
Delaware merger corporation ("Sandman"), and Zell/Chillmark, 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, a wholly owned subsidiary of the
Parent, issuing
33
<PAGE>
SEALY CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
$125 million principal amount of 9 7/8% Senior Subordinated Notes due 2007
(the "Senior Subordinated Notes") and $128 million principal amount of 10 7/8%
Senior Subordinated Discount Notes due 2007 (the "Senior Subordinated Discount
Notes", and, together with the Senior Subordinated Notes, the "Notes"), with
net proceeds to the Company of $75.4 million, 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.
After the Recapitalization, the outstanding stock options of the Company
("Recapitalization Stock Options") consist of fully-vested ten-year stock
options to acquire 1,309,644 shares of Class A Common Stock at an exercise
price of $0.125 per share and 145,516 shares of Class L Common Stock at an
exercise price of $10.125 per share.
Upon the consummation of the Recapitalization, Parent and certain of its
stockholders, including the Bain Funds, Harvard Private Capital, Inc."
(Harvard"), Sealy Investors 1, LLC, Sealy Investors 2, LLC, Sealy Investors 3,
LLC (the "LLCs") and Zell (collectively, the "Stockholders") entered into a
stockholders agreement (the "Stockholders Agreement"). The Stockholders
Agreement (i) required that each of the parties thereto vote all of its voting
securities of Parent and take all other necessary or desirable actions to
cause the size of the Board of Directors of Parent to be established at seven
members and to cause three designees of the Bain Funds and one designee of
Harvard to be elected to the Board of Directors; (ii) granted Parent and the
Bain Funds a right of first offer on any proposed transfer of shares of
capital stock of Parent held by Zell, Harvard or the LLCs, (iii) granted
Harvard a right of first offer on any proposed transfer of shares of capital
stock of Parent held by the Bain Funds; (iv) granted tag-along rights on
certain transfers of shares of capital stock of Parent; (v) required the
Stockholders to consent to a sale of Parent to an independent third party if
such sale is approved by holders constituting a majority of the then
outstanding shares of voting common stock of Parent; and (vi) except in
certain instances, prohibits Zell from transferring any shares of capital
stock of Parent until the tenth anniversary of the date of the consummation of
the Recapitalization. Certain of the foregoing provisions of the Stockholders
Agreement terminate upon the consummation of an Initial Public Offering or an
approved Sale (as each is defined in the Stockholders Agreement).
Immediately prior to the closing of the Recapitalization (the "Closing"),
Parent contributed (the "Capital Contribution") all of the issued and
outstanding 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
Sealy Mattress Company (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 $438.1 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 of $18.9 million, of which
34
<PAGE>
SEALY CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
$16.4 million was non-cash and charged directly to APIC, 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 write-off 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 4) in
connection with the Recapitalization.
(3) INVENTORIES
Inventories are valued at cost not in excess of market, using the first-in,
first-out (FIFO) method. The major components of inventory as of November 29,
1998 and November 30,1997 were as follows:
<TABLE>
<CAPTION>
1998 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
Raw materials................................................... $25,511 $26,251
Work in process................................................. 14,140 12,594
Finished goods.................................................. 4,076 7,162
------- -------
$43,727 $46,007
======= =======
</TABLE>
(4) LONG-TERM OBLIGATIONS
Long-term debt as of November 29, 1998 and November 30, 1997 consisted of
the following:
<TABLE>
<CAPTION>
1998 1997
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Senior AXELs Credit Agreement................................ $328,875 $ --
Senior Revolving Credit Agreement:
Tranche A................................................... 110,000 --
Revolving Credit Facility 2,800 --
High Point Corporate Complex Mortgage........................ 12,653 --
Senior Subordinated Notes.................................... 125,000 --
Senior Subordinated Discount Notes (net of discount of
$44,503).................................................... 83,497 --
Junior Subordinated Note..................................... 28,022 --
$275,000,000 Second Restated Secured Credit Agreement
Revolving Credit Facility................................... -- 130,000
10 1/4% Senior Subordinated Notes............................ -- 200,000
-------- --------
690,847 330,000
Less current portion........................................ 8,576 --
-------- --------
$682,271 $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 was 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.
35
<PAGE>
SEALY CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
On March 30, 1998, the Company announced a call for redemption of all
remaining outstanding Parent Notes that were not tendered on December 17,
1998. 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
Parent 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 and will bear interest at a floating rate. See Note 18 for
further details regarding guarantees including consolidating condensed
financial statements for guarantors and non-guarantors. The Senior Credit
Agreements 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.
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 issuance's,
and excess cash flow (as defined in the Senior Credit Agreements).
36
<PAGE>
SEALY CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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").
Notes in aggregate principal amount of $125.0 million were issued in the
Offering, and mature on December 15, 2007. Interest on the 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.
Except as provided below, the Notes are not redeemable at the Company's
option prior to December 15, 2002. Thereafter, the Notes are subject to
redemption at any time at the option of the Company, in whole or in part, upon
not less than 30 nor more than 60 days' notice, at the redemption prices
(expressed as percentages of principal amount) set forth below plus accrued
and unpaid interest and Liquidated Damages thereon to the applicable
redemption date, if redeemed during the twelve-month period beginning on
December 15 of the years indicated below:
<TABLE>
<CAPTION>
PERCENTAGE OF
YEAR PRINCIPAL AMOUNT
---- ----------------
<S> <C>
2002 104.937%
2003........................ 103.292%
2004........................ 101.646%
2005 and thereafter......... 100.000%
</TABLE>
Notwithstanding the foregoing, during the first 36 months after December 11,
1997, the Company may on any one or more occasions redeem up to 35% of the
aggregate principal amount of Senior Subordinated Notes originally issued
under the Senior Subordinated Note Indenture at a redemption price of 109.875%
of the principal amount thereof, plus accrued and unpaid interest and
liquidated damages thereon, if any, to the redemption date, with the net cash
proceeds of any Equity Offerings; (as defined in the Indentures) provided that
at least $80.0 million in aggregate principal amount of Senior Subordinated
Notes remain outstanding immediately after the occurrence of such redemption
(excluding Senior Subordinated Notes held by the Company and its
Subsidiaries); and provided further that such redemption shall occur within
120 days of the date of closing of any such Equity Offering.
The Senior Subordinated Discount Notes in aggregate principal amount of
$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. 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.
37
<PAGE>
SEALY CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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 AMOUNT
----------------
<S> <C>
2002........................ 105.437%
2003........................ 103.625%
2004........................ 101.812%
2005 and hereafter.......... 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.
On June 23, 1998, the Company secured permanent financing for the property,
manufacturing facility and office building in High Point, North Carolina
("High Point Corporate Complex") 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 arrangement provides for borrowings not to exceed $14.5
million. The loan arrangement requires monthly principal payments based on a
twenty year amortization commencing three months after the completion of
construction, with a balloon payment at the end of year seven of all then
outstanding principal and interest. Interest accrues at LIBOR plus 3.25% and
is payable monthly.
The Junior Note had 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. From inception
to November 29, 1998, the Company has elected to add accrued interest to the
principal balance increasing the total outstanding balance to $28.0 million at
November 29, 1998.
38
<PAGE>
SEALY CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(5) LEASE COMMITMENTS
The Company leases certain operating facilities, offices and equipment. The
following is a schedule of future minimum annual lease commitments and
sublease rentals at November 29, 1998.
<TABLE>
<CAPTION>
COMMITMENTS UNDER
-----------------------
OPERATING SUBLEASE
FISCAL YEAR LEASES RENTAL INCOME
- ----------- --------- -------------
(IN THOUSANDS)
<S> <C> <C>
1999.................................................... $8,456 $266
2000.................................................... 6,882 266
2001.................................................... 5,475 44
2002.................................................... 4,102 --
2003.................................................... 2,737 --
Later years............................................. 7,975 --
------- ----
$35,627 $576
======= ====
</TABLE>
Rental expense charged to operations is as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
NOV. 29, 1998 NOV. 30, 1997 DEC. 1, 1996
------------- ------------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Minimum rentals....................... $10,214 $ 9,153 $ 9,096
Contingent rentals (based upon
delivery equipment mileage).......... 1,430 1,361 1,067
------- ------- -------
$11,644 $10,514 $10,163
======= ======= =======
</TABLE>
The Company has the option to renew certain plant operating leases, with the
longest renewal period extending through 2008. Most of the operating leases
provide for increased rent through increases in general price levels.
(6) LOSS ON NET ASSETS HELD FOR SALE AND OTHER WRITE-DOWNS
During 1998, the Company recorded a loss on certain manufacturing assets of
$8,453 as a result of the Company's on-going strategy to improve operational
efficiencies. This loss resulted from the rationalization of certain
manufacturing processes and the write-down of other idled assets. These assets
were written-down to their fair values and production from these assets
primarily will be phased-out over the first two quarters of 1999. The
estimated fair values of these assets are not material. The Company plans to
dispose of such assets by end of 1999.
During 1998, the Company also recorded a loss of $2,181 for the write-down
of previously capitalized software development costs. Such costs were
originally capitalized as a result of the Companies on-going project to
upgrade its management information systems to improve manufacturing operations
and profitability analysis. As a result of a change in the direction of the
project, certain software modules for which costs of $2,181 were incurred will
not be implemented.
Also, see Note 17 related to the disposition of Woodstuff Manufacturing,
Inc. in 1996.
39
<PAGE>
SEALY CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(7) FINANCIAL INSTRUMENTS
The Company utilizes interest rate agreements and foreign exchange contracts
to manage interest rate and foreign currency exposures. The principal
objective of such contracts is to minimize the risks and/or costs associated
with financial and global operating activities. The Company does not utilize
financial instruments for trading or other speculative purposes. The
counterparties to these contractual arrangements are a diverse group of major
financial institutions with which the Company also has other financial
relationships. These counterparties expose the Company to the risk of credit
loss in the event of nonperformance. However, the Company does not anticipate
nonperformance by the other parties, and no material loss would be expected
from their nonperformance.
Interest Rate Instruments: The Company has entered into interest rate cap
and collar agreements to reduce the impact of changes in interest rates on all
or a portion of its floating rate debt. The notional amounts of interest rate
agreements are used to measure interest to be paid or received and do not
represent the amount of exposure to credit loss. The net cash paid for the
interest rate cap and collar agreements ($0.6 million) is recorded in prepaid
expenses in the consolidated balance sheet and charged to interest expense
over the life of the agreement.
As of November 29, 1998, the Company had the following interest rate
instruments in effect that provide protection on the three month LIBOR rate
upon which the Company's variable rate debt is based (actual rate paid is
LIBOR plus the respective margin):
<TABLE>
<CAPTION>
NOTIONAL AMOUNT RANGE FOR
1998 (MILLIONS) LIBOR RATE PERIOD
- ---- --------------- ----------- ---------
<S> <C> <C> <C>
Interest Rate Cap......................... $150 8.00% 1/98-1/03
Interest rate Collar...................... $200 6.50%-4.93% 1/98-1/01
</TABLE>
The Company had no interest rate instruments at November 30, 1997.
Foreign Exchange Instruments: The Company enters into forward currency
exchange contracts in the regular course of business to manage its exposure
against foreign currency fluctuations primarily on raw material purchase
transactions denominated in U.S. Dollars and originated in other countries.
During 1998, the Company incurred a $1.3 million premium for forward foreign
exchange contracts to exchange 24.5 million Canadian Dollars and 77.0 million
Mexican Pesos for U.S. Dollars. These contracts will settle on a quarterly
basis beginning in February, 1999 and ending in November, 1999 at exchange
rates ranging between 1.5488 to 1.5493 per U.S. Dollar for the Canadian
contracts and 10.915 to 13.165 per U.S. Dollar for the Mexican contracts.
During 1998, there was no significant gain or loss recognized on these
contracts. The Company had no significant contracts outstanding at November
30, 1997.
(8) STOCK OPTION AND RESTRICTED STOCK PLANS
Post-Recapitalization: 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.
During the year the Company granted ten-year stock options under the 1998 plan
to acquire 2,243,750 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
1,185,000 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, 214,250
and 50,000 of the options with exercise prices of $0.50 and $4.18 per share,
respectively, were cancelled subsequent to issuance.
40
<PAGE>
SEALY CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Effective Date of Recapitalization: As a result of the Recapitalization
effective on December 18, 1997, the Human Resources Committee of the Company's
Board of Directors removed all restrictions on the then outstanding restricted
stock issued under the 1996 Transitional Plan and those shares were paid out
as a result of the Recapitalization at the Recapitalization share price of
$14.3027. In addition, a special transaction bonus was approved for key
members of management. Furthermore, as of December 18, 1997, the Human
Resources Committee accelerated vesting of the Company issued and then
outstanding stock options under the 1989 Plan, 1992 Plan, 1993 Plan and 1997
Plan (collectively the "Terminated Stock Option Plans"); terminated the
Terminated Stock Option Plans; and paid each holder of options under the
Terminated Stock Option Plans compensation for such terminations which
compensation was equal to the spread between the Merger share price of
$14.3027 and the respective per share exercise price for the terminated stock
options. Prior to December 18, 1997, certain members of senior management were
offered and elected to cancel their options under the Terminated Stock Option
Plans and their restricted stock under the 1996 Transitional Plan. Those
senior executives received nonqualified stock options which were subsequently
cancelled and exchanged on December 18, 1997 for fully-vested ten-year stock
options to acquire 145,516 shares of the Company's Class L Common Stock at an
exercise price of $10.125 per share and ten-year stock options to acquire
1,309,644 shares of the Company's Class A Common Stock at an exercise price of
$0.125 per share ("Recapitalization Stock Options"). One executive has the
right to require the Company to repurchase certain securities of the Company
at the greater of fair market value or original cost, as defined. As a result
of all recapitalization date activity, the Company recorded an aggregate $18.9
million in compensation expense, and $3.6 million in other non-current
liabilities.
Recapitalization stock options to purchase 1,008,504 Class A Common shares
were exercised during the year ended November 29, 1998.
Pre-Recapitalization: The Company adopted the 1989 Stock Option Plan ("1989
Plan") in 1989, the 1992 Stock Option Plan ("1992 Plan") in 1992 and the 1997
Stock Option Plan ("1997 Plan") in 1997 and reserved 100,000 shares, 600,000
shares and 2,400,000 shares, respectively, of Class A Common Stock of the
Company (the "Shares") for future issuance. Options under the 1989 Plan, the
1992 Plan and the 1997 Plan could have been 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. There were no options outstanding relating to the 1989,
1992, or 1997 Plans as of November 29, 1998.
During Fiscal 1993, the Company adopted the 1993 Non-Employee Director Stock
Option Plan (the "1993 Plan"), which was subsequently amended on April 6, 1994
and June 27, 1995. The 1993 Plan provides for the one-time automatic grant of
ten-year options to acquire up to 10,000 shares to all current and future
directors who are not employed by the Company, by Zell or by their respective
affiliates ("Non-Employee Directors"). Options granted under the 1993 Plan
vest immediately and were initially exercisable at a price equal to the fair
market value of the shares on the date of grant. For options granted prior to
March 1, 1994, the exercise price of options granted pursuant to this Plan
increased on the first anniversary date of such grant by 4%, which became the
fixed exercise price for all such options. Options issued thereafter, were
exercisable over their term at the fair market value on the date of grant.
Pursuant to the 1993 Plan, the Company granted options to acquire up to 50,000
shares to Non-Employee Directors in fiscal year 1993 at an initial exercise
price of $9.05 per share. The 1993 Plan was amended on June 27, 1995 to
provide for the grant of an additional option to purchase 5,000 shares to each
eligible director and thereafter providing for the automatic annual grant of
an option to each eligible director to purchase an additional 5,000 shares at
fair market value on the date of grant. Pursuant to the 1993 Plan, the Company
granted options to acquire up to 5,000 shares to each eligible director in
fiscal 1995, 1996 and 1997 with a fixed exercise price of $15.95, $10.63 and
$9.60 per share, respectively. All options under the 1993 Plan were exercised
on December 18, 1997.
41
<PAGE>
SEALY CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
In 1996, pursuant to an employment agreement with the Company's CEO, the
Company granted him an aggregate of 67,635 shares of restricted stock with a
fair value of $637,800 at date of grant. The restricted stock was to vest at a
rate of approximately 25% at each anniversary date of the grant. The Company
also awarded a grant of ten-year stock options to acquire up to an aggregate
of 587,342 shares at an exercise price of $7.23 per share (representing fair
market value at the time of grant) adjusted for the dividends paid on May 17,
1997 and February 28, 1997. The stock options were to vest at a rate of 25% at
each anniversary date of the grant. On May 31, 1997 the Human Resources
Committee, under the 1997 Plan, granted the CEO a ten-year stock option to
acquire up to 75,000 shares at an exercise price of $9.60 per Share
(representing fair market value at the time of grant).
In 1996, the Company adopted the 1996 Transitional Restricted Stock Plan
(the "1996 Transitional Plan") effective December 1, 1996 which terminates on
January 3, 2000, and no grants shall thereafter be awarded under the Plan. All
grants awarded under the Plan prior to such date shall remain in effect until
they have been exercised or terminated in accordance with the terms and
provisions of the Plan. On January 6, 1997, 281,400 shares, which vest on
January 3, 2000, were granted under the Plan with a fair value of $3,632,874
at date of grant. The Plan provides for partial vesting at a rate of 50% if a
grantee incurs a "termination" (as defined in the Plan) from January 3, 1999
to January 2, 2000. During Fiscal 1997, 35,800 shares were forfeited and
39,700 additional shares were issued. All options under the 1996 Transitional
Plan were exercised on December 18, 1997.
In May 1997, the Company granted ten-year stock options to acquire 921,400
shares at an exercise price of $9.60 per share (representing fair market value
at the time of grant). The options were to vest 50% on the third anniversary
date of the grant and 50% on the fourth anniversary date of the grant.
SFAS No. 123 Disclosures: As permitted by SFAS No. 123, Accounting for
Stock-Based Compensation, the Company continues to account for its stock
option and stock incentive plans in accordance with Accounting Principles
Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees, and
makes no charges (except to the extent required by APB Opinion No. 25) against
earnings with respect to options granted. SFAS No. 123 does however require
the disclosure of pro forma information regarding net income and earnings per
share determined as if the Company had accounted for its stock options under
the fair value method.
For purposes of this pro forma disclosure the estimated fair value of the
options is amortized to expense over the options' vesting period.
<TABLE>
<CAPTION>
1998 1997 1996
-------- ------- ------
<S> <C> <C> <C> <C>
Net income (loss) (in thousands)......... As reported $(33,773) $11,743 $ (506)
Pro forma $(31,468) $10,814 $ (892)
Net earnings (loss) per share............ As reported $ (1.11) $ 0.39 $(0.02)
Pro forma $ (1.03) $ 0.35 $(0.03)
</TABLE>
Because the SFAS No. 123 method of accounting has not been applied to
options granted prior to Fiscal 1996 and all related Plans were terminated
effective December 18, 1997, the above pro forma effect may not be
representative of that to be expected in future years.
The fair value for all options granted in Fiscal 1998 and 1997 were
estimated at the date of grant using a Black-Scholes option pricing model with
the following weighted-average assumptions: the expected life for all options
is seven years; the expected dividend yield for all stock is zero percent and
the expected volatility of all stock is zero percent. Adjustments were made to
the then outstanding options and related stock prices as a result of the
dividends paid on May 17, 1996 and February 28, 1997 relating to all the
option plans in effect as of November 30, 1997. Such adjustments were treated
as modifications of outstanding awards in accordance with
42
<PAGE>
SEALY CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
SFAS No. 123. The risk free interest rates utilized for the grants made during
fiscal 1998 and 1997 and for the May 1996 and February 1997 modification of
all then outstanding grants are as follows:
<TABLE>
<CAPTION>
RISK FREE INTEREST RATE
-----------------------------------
ORIGINAL MODIFICATION MODIFICATION
OPTION GRANT DATE GRANT MAY 1996 FEBRUARY 1997
- ----------------- -------- ------------ -------------
<S> <C> <C> <C>
1989 Plan:
December 1989.............................. -- -- 5.15%
1992 Plan:
June 1992.................................. -- -- 6.06%
June 1993.................................. -- -- 6.22%
June 1994.................................. -- -- 6.31%
June 1995.................................. -- -- 6.38%
June 1996.................................. 6.77% -- 6.46%
1993 Plan:
March 1993................................. -- 6.26% 6.46%
June 1995.................................. -- 6.51% 6.46%
June 1996.................................. 6.77% -- 6.46%
May 1997................................... 6.64% -- --
CEO Award:
March 1996................................. 5.82% -- 6.46%
1997 Plan:
June 1997.................................. 6.64% -- --
1998 Plan:
Fiscal 1998................................ 5.55% -- --
</TABLE>
A summary of the status and changes of shares subject to options and the
related average price per share is as follows:
<TABLE>
<CAPTION>
SHARES SUBJECT AVERAGE OPTION
TO OPTIONS PRICE PER SHARE
-------------- ---------------
<S> <C> <C>
Outstanding December 1, 1996..................... 848,072 $11.19
----------
Granted......................................... 941,400 9.40
Adjustment...................................... 341,478 --
Exercised....................................... (4,958) 5.82
Canceled........................................ (41,700) 10.81
----------
Outstanding November 30, 1997.................... 2,084,292 8.52
----------
Granted......................................... 4,883,910 1.58
Adjustment...................................... -- --
Exercised....................................... (3,092,796) 5.78
Canceled........................................ (264,250) 1.20
----------
Outstanding November 29, 1998.................... 3,611,156 $ 2.01
==========
</TABLE>
Options exercisable and shares available for future grant were:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
---------------------------
1998 1997 1996
--------- --------- -------
<S> <C> <C> <C>
Options exercisable................................ 446,656 641,895 312,447
Weighted-average option price per share of options
exercisable....................................... $ 3.38 $ 7.91 $ 11.29
Weighted-average fair value of options granted
during the year................................... $ 1.69 $ 9.60 $ 10.63
Shares available for grant......................... 1,835,500 1,741,086 339,550
</TABLE>
43
<PAGE>
SEALY CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The ranges of exercise prices and the remaining contractual life of options
as of November 29, 1998 were:
<TABLE>
<CAPTION>
CLASS A CLASS L
---------------------------- --------
EXERCISE PRICES $ 0.125 $ 0.50 $ 4.18 $ 10.125
- --------------- -------- --------- --------- --------
<S> <C> <C> <C> <C>
Options outstanding:
Outstanding as of November 29, 1998..... 301,140 2,029,500 1,135,000 145,516
Weighted-average remaining contractual
life................................... 9.0 Yrs. 9.3 Yrs 9.7 Yrs. 9.0 Yrs.
Weighted-average exercise price......... $0.125 $ 0.50 $ 4.18 $ 10.125
Options exercisable:
Outstanding as of November 29, 1998..... 301,140 -- -- 145,516
Weighted-average remaining contractual
life................................... 9.0 Yrs. -- -- 9.0 Yrs.
Weighted-average exercise price......... $0.125 -- -- $ 10.125
</TABLE>
(9) INCOME TAXES
The Company and its domestic subsidiaries file a consolidated U.S. Federal
income tax return. Income tax expense (benefit) consists of:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
NOV. 29, 1998 NOV. 30, 1997 DEC. 1, 1996
------------- ------------- ------------
<S> <C> <C> <C>
Current:
Federal............................... $ 1,737 $ 6,913 $15,494
State and local....................... 948 2,197 1,196
Foreign............................... 3,569 3,963 2,808
-------- ------- -------
6,254 13,073 19,498
Deferred:
Federal............................... (16,541) 4,507 5,092
State and local....................... (2,363) 644 727
Foreign............................... (361) 47 (38)
-------- ------- -------
(19,265) 5,198 5,781
-------- ------- -------
Total................................. (13,011) 18,271 25,279
Allocated to loss from early extin-
guishment of debt.................... (9,693) (1,353) --
Allocated to effect of change in ac-
counting principle................... -- (2,885) --
-------- ------- -------
Income tax expense (benefit) before
extraordinary item and cumulative ef-
fect of change in accounting princi-
ple.................................. $ (3,318) $22,509 $25,279
======== ======= =======
</TABLE>
Net income before taxes from foreign operations amounted to $6,355, $8,785,
and $5,955 for the years ended November 29, 1998, November 30, 1997, and
December 1, 1996, respectively.
44
<PAGE>
SEALY CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The differences between the effective tax rate and the statutory U.S.
Federal tax rate are explained as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
NOV. 29, 1998 NOV. 30, 1997 DEC. 1, 1996
------------- ------------- ------------
<S> <C> <C> <C>
Income tax expense (benefit) computed
at statutory
U.S. Federal income tax rate......... (35.0%) 35.0% 35.0%
State and local income taxes, net of
federal tax benefit.................. (2.9%) 7.9% 6.1%
Foreign tax rate differential and ef-
fects of foreign earnings repatria-
tion................................. 1.0% 0.5% 6.5%
Sale of subsidiary.................... 0.0% 2.4% 37.3%
Other items, net...................... 0.2% 1.9% 1.0%
----- ---- -----
Effective income tax rate before per-
manent differences resulting from
purchase accounting.................. (36.7%) 47.7% 85.9%
Permanent differences resulting from
purchase accounting.................. 9.0% 12.9% 16.1%
----- ---- -----
Effective income tax rate............. (27.7%) 60.6% 102.0%
===== ==== =====
</TABLE>
Deferred income taxes reflect the tax effect of temporary differences
between carrying amounts of assets and liabilities for financial reporting
purposes and the amounts for income tax purposes. The Company's total deferred
tax assets and liabilities and their significant components are as follows:
<TABLE>
<CAPTION>
1998 1997
----------------------- -----------------------
CURRENT NONCURRENT CURRENT NONCURRENT
ASSET ASSET ASSET ASSET
(LIABILITY) (LIABILITY) (LIABILITY) (LIABILITY)
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Accrued salaries and benefits.. $ 5,320 $ 3,123 $ 5,249 $ 1,748
Allowance for doubtful ac-
counts........................ 3,185 -- 3,028 --
Plant shutdown, idle facili-
ties, and environmental costs. 1,398 1,322 6,777 (4,171)
Alternative minimum tax credit
carryforward.................. 2,743 -- -- --
Accrued warranty reserve....... 1,745 -- 1,691 1,691
Book versus tax differences re-
lated to property, plant, and
equipment..................... -- (18,270) -- (21,419)
Book versus tax differences re-
lated to intangible assets.... -- (11,454) -- (12,262)
Book versus tax differences re-
lated to recapitalization ex-
penses and related financing
costs......................... -- (311) (13,467) --
All other...................... 2,803 (3,150) (5,214) 4,412
------- -------- ------- --------
$17,194 $(28,740) $(1,936) $(30,001)
======= ======== ======= ========
</TABLE>
A provision has not been made for U.S. or foreign taxes on undistributed
earnings of subsidiaries which operate in Canada and Puerto Rico. Upon
repatriation of such earnings, withholding taxes might be imposed that are
then available for use as credits against a U.S. Federal income tax liability,
subject to certain limitations. The amount of taxes that would be payable on
repatriation of the entire amount of undistributed earnings is immaterial.
The Company reduced goodwill by $0, $9,953 and $0 for the utilization of
previously unrecognized pre-acquisition net operating loss carryforwards in
1998, 1997 and 1996, respectively.
45
<PAGE>
SEALY CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(10) RETIREMENT PLANS
Substantially all employees are covered by defined contribution profit
sharing plans, where specific amounts are set aside in trust for retirement
benefits. The total profit sharing expense was $6.6 million, $5.9 million, and
$5.0 million for the years ended November 29, 1998, November 30, 1997, and
December 1, 1996, respectively.
(11) COMMON STOCK
Prior to the Recapitalization, holders of Class A Common Stock were entitled
to one vote per share on all matters submitted to a vote of stockholders while
the holders of Class B Common Stock were entitled to one-half vote per share.
Except with respect to voting rights, the terms of the Class A Common Stock
and the Class B Common Stock were identical. Shares of Class B Common Stock,
under certain circumstances, were convertible into shares of Class A Common
Stock. In connection with the Recapitalization (see Note 2), the terms of
Class A and B Common Stock were amended and new classes of Class L and M
Common Stock were issued.
(12) PERFORMANCE SHARE PLAN
Effective April 1, 1992, the Company adopted a Performance Share Plan
("Plan") for certain employees of the Company. Under the Plan, the Board of
Directors could have approved the issuance of up to 3.0 million performance
share units each representing the right to receive up to one share if the
Company met specified cumulative operating cash flow targets over the five-
year period ending December 1, 1996. During Fiscal 1996, two participants
withdrew from the Plan resulting in an adjustment to additional paid-in
capital. As of December 1, 1996, the conclusion of the Plan, 451,740 Shares
were awarded under the Plan of which 218,368 Shares were tendered to the
Company by Plan participants to cover their estimated tax liability, resulting
in the issuance of 233,372 Shares in January 1997.
The Plan was a variable stock compensation plan pursuant to which the fair
value of shares issuable under the Plan was recorded as compensation expense
over the Plan's five-year term ending December 1, 1996. In addition to the
annual amount of compensation expense under the Plan, such amounts were
adjusted to give cumulative effect to any change in the amount of non-cash
compensation expense previously recorded in prior reporting periods, resulting
from subsequent increases or decreases in the fair value of the shares or the
number of performance share units outstanding since such reporting period and
to any change in management's estimate of its ability to achieve the
cumulative operating cash flow targets as defined in the Plan. Performance
Share Plan expense for the year ended December 1, 1996 amounted to $4.5
million. The plan was not renewed after its termination in December 1, 1996.
46
<PAGE>
SEALY CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(13) EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings
per share (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
-------- ------- ------
<S> <C> <C> <C>
Numerator:
Income (loss) before extraordinary item and cumula-
tive effect of change
in accounting principle............................. $(19,236) $18,102 $ (506)
Extraordinary item, net.............................. 14,537 2,030 --
Cumulative effect of change in accounting principle,
net................................................. -- 4,329 --
-------- ------- ------
Net income (loss).................................... $(33,773) $11,743 $ (506)
======== ======= ======
Denominator:
Denominator for basic earnings per share--weighted
average shares...................................... 30,472 29,575 23,379
Effect of dilutive securities:
Stock options........................................ -- 124 --
Merger warrants...................................... -- 204 --
Restricted stock..................................... -- 311 --
Other................................................ -- 20 --
-------- ------- ------
Denominator for diluted earnings per share--adjusted
weighted-average shares and assumed conversions..... 30,472 30,234 23,379
======== ======= ======
</TABLE>
Due to loss from continuing operations in 1998 and 1996, the dilutive
securities would have been antidilutive. Accordingly, they were excluded from
the calculation in dilutive earnings per share.
47
<PAGE>
SEALY CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(14) SUMMARY OF INTERIM FINANCIAL INFORMATION (UNAUDITED)
Quarterly financial data for the years ended November 29, 1998 and November
30, 1997, is presented below:
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
(AMOUNTS IN THOUSANDS, EXCEPT FOR
SHARE DATA)
<S> <C> <C> <C> <C>
1998:
Net sales.............................. $209,259 $213,572 $242,603 $225,868
Gross profit........................... 87,775 92,405 108,595 99,027
Income (loss) before extraordinary
item.................................. (17,765) (1,650) 4,363 (4,184)
Extraordinary item--loss from early ex-
tinguishment of debt, net of tax...... 14,455 82 -- --
Net income (loss)...................... (32,220) (1,732) 4,363 (4,184)
Income/(loss) before extraordinary
item--basic........................... (0.59) (0.06) 0.14 (0.12)
Income/(loss) before extraordinary
item--diluted......................... (0.59) (0.06) 0.14 (0.12)
Net income/(loss)--basic............... (1.06) (0.06) 0.14 (0.13)
Net income/(loss)--diluted............. (1.06) (0.06) 0.14 (0.13)
1997:
Net sales.............................. $168,904 $180,625 $229,919 $225,386
Gross profit........................... 72,890 80,951 101,864 93,224
Income before extraordinary item and
cumulative effect of change in ac-
counting principle.................... 3,188 3,282 7,917 3,715
Extraordinary item--loss from early ex-
tinguishment of debt, net of tax...... 2,030 -- -- --
Cumulative effect of change in account-
ing principle, net of tax............. -- -- -- 4,329
Net income (loss)...................... 1,158 3,282 7,917 (614)
Income/(loss) before extraordinary item
and cumulative effect of change in ac-
counting principle--basic............. 0.11 0.11 0.26 0.13
Income/(loss) before extraordinary item
and cumulative effect of change in ac-
counting principle--diluted........... 0.11 0.11 0.26 0.12
Net income/(loss)--basic............... 0.04 0.11 0.26 (0.02)
Net income/(loss)--diluted............. 0.04 0.11 0.26 (0.02)
</TABLE>
During the first quarter of Fiscal 1998, the Company recorded an after tax
charge of $14.5 million ($0.47 per share), representing the write-off of the
remaining unamortized debt issuance 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. Also, during the first quarter the Company recorded
an after tax charge of $11.1 million ($0.37 per share), related to costs
associated with the Recapitalization. The Recapitalization costs were
primarily comprised of accelerated vesting of stock and restricted stock and
other incentives based on compensation payments to employees in connection
with the transaction. During the fourth quarter of Fiscal 1998, the Company
recorded an after tax loss of $5.1 million ($0.17 per share), for the loss on
net assets available for sale and other write-downs. Such assets are primarily
related to the rationalization of certain manufacturing processes and the
write-down of other underperforming assets (See Note 6). In addition, the
Company recorded an after tax loss of $1.3 million ($0.04 per share) due to
the write-down of capitalized software development costs (See Note 6). During
the first and fourth quarters of Fiscal 1997, the Company recorded an after-
tax loss of $2.0 million ($0.07 per share), from early extinguishment of debt
in connection with the Refinancing, and $4.3 million ($0.14 per share), from
write-offs in connection with EITF 97-13, respectively.
48
<PAGE>
SEALY CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(15) 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.
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.
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. In November, 1998, the Company settled these cases when the
insurers paid the Company approximately $3.8 million which was recorded as an
increase to other noncurrent liabilities.
The Company also has begun to remediate soil and groundwater contamination
at an inactive facility located in Oakville, Connecticut. The Company
submitted a soil and groundwater remediation plan to the Connecticut
Department of Environmental Protection in December 1998. 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 of Connecticut to require these
entities to complete the remediation and reimburse the Company for its cleanup
costs. Trial of this matter has been bifurcated with the issue of damages only
going to trial in March, 1999. 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
49
<PAGE>
SEALY CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
("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 has produced additional documents in response
to the CID, and is cooperating with the Department in its investigation.
(16) FAIR VALUE OF FINANCIAL INSTRUMENTS
Due to the short maturity of cash and cash equivalents, accounts receivable,
accounts payable and accrued expenses, their carrying values approximate fair
value. The carrying amount of long-term debt under the Senior AXELs Credit
Agreement and the Senior Revolving Credit Agreement approximates fair value
because the interest rate adjusts to market interest rates. The fair value of
long-term debt under the Senior Subordinated Notes and Senior Subordinated
Discount Notes, based on a quoted market price, was $120.6 million and $76.8
million at November 29, 1998 and November 30, 1997, respectively.
(17) DISPOSITION
On January 15, 1997, the Company completed the sale of Woodstuff
Manufacturing, Inc., a wholly owned subsidiary that manufactured and marketed
solid wood bedroom furniture under the "Samuel Lawrence" brand name. The
divestiture produced cash proceeds of $35.0 million and resulted in a net of
tax book loss of $17.6 million. The loss on sale of this subsidiary includes
income tax expense of $5.8 million arising from the tax gain on the
transaction, as well as transaction costs related to the sale. A summary of
the net assets held for sale at December 1, 1996 is as follows (amounts in
thousands):
<TABLE>
<S> <C>
Accounts receivable................................................... $ 9,228
Inventory............................................................. 6,907
Other current assets.................................................. 480
Property, plant and equipment, net.................................... 10,329
Other assets.......................................................... 26,246
Accounts payable and accrued expenses................................. (4,939)
Other liabilities..................................................... (1,998)
Excess of net assets over proceeds from sale.......................... (10,761)
--------
Net assets held for sale.............................................. $ 35,492
========
</TABLE>
(18) GUARANTOR/NON-GUARANTOR FINANCIAL INFORMATION
As discussed in Note 4, 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.
50
<PAGE>
The following supplemental consolidating condensed financial statements
present:
1. Consolidating condensed balance sheets as of November 29, 1998 and
November 30, 1997, consolidating condensed statements of operations and
cash flows for each of the years in the three-year period ended November
29, 1998.
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.
51
<PAGE>
SEALY CORPORATION
SUPPLEMENTAL CONSOLIDATING CONDENSED BALANCE SHEET
NOVEMBER 29, 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>
ASSETS
Current assets:
Cash and cash
equivalents............ $ -- $ 22 $ 9,162 $ 2,050 $ -- $ 11,234
Accounts receivable,
net.................... -- 3,404 92,644 10,713 -- 106,761
Inventories............. -- 1,216 38,123 4,388 -- 43,727
Prepaid expenses and
other assets........... 714 341 22,190 3,200 -- 26,445
--------- ---------- --------- -------- ------ ---------
714 4,983 162,119 20,351 -- 188,167
Property, plant and
equipment, at cost..... -- 4,796 172,375 12,140 -- 189,311
Less accumulated
depreciation........... -- 1,730 49,189 2,583 -- 53,502
--------- ---------- --------- -------- ------ ---------
-- 3,066 123,186 9,557 -- 135,809
Other assets:
Goodwill and other
intangibles, net....... -- 14,050 350,291 25,851 -- 390,192
Net investment in and
advances to (from)
subsidiaries and
affiliates............. (108,153) 493,268 (364,090) (26,614) 5,589 --
Debt issuance costs, net
and other assets....... -- 28,929 7,959 24 -- 36,912
--------- ---------- --------- -------- ------ ---------
(108,153) 536,247 (5,840) (739) 5,589 427,104
--------- ---------- --------- -------- ------ ---------
Total assets............ $(107,439) $ 544,296 $ 279,465 $ 29,169 $5,589 $ 751,080
========= ========== ========= ======== ====== =========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities:
Current portion-long-
term obligations....... $ -- $ 8,375 $ 201 $ -- $ -- $ 8,576
Accounts payable........ -- 93 41,067 4,934 -- 46,094
Accrued incentives and
advertising............ -- 1,626 28,685 2,140 -- 32,451
Accrued compensation.... -- 357 14,576 950 -- 15,883
Other accrued expenses.. 1,985 391 36,598 848 -- 39,822
--------- ---------- --------- -------- ------ ---------
1,985 10,842 121,127 8,872 -- 142,826
Long-term obligations... 28,023 641,796 12,452 -- -- 682,271
Other noncurrent
liabilities............ 3,585 -- 32,484 -- -- 36,069
Deferred income taxes... (2,206) 755 26,467 3,724 -- 28,740
Stockholders' equity.... (138,826) (109,097) 86,935 16,573 5,589 (138,826)
--------- ---------- --------- -------- ------ ---------
Total liabilities and
stockholders' equity... $(107,439) $ 544,296 $ 279,465 $ 29,169 $5,589 $ 751,080
========= ========== ========= ======== ====== =========
</TABLE>
52
<PAGE>
SEALY CORPORATION
SUPPLEMENTAL CONSOLIDATING CONDENSED BALANCE SHEET
NOVEMBER 30, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEALY COMBINED COMBINED
SEALY MATTRESS GUARANTOR NON-GUARANTOR
CORPORATION COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- -------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equiva-
lents.................. $ -- $ 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 depre-
ciation................ -- 1,254 40,603 2,138 -- 43,995
-------- ------- -------- ------- --------- --------
-- 3,410 111,442 10,756 -- 125,608
Other assets:
Goodwill and other in-
tangibles, 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 STOCK
HOLDERS' EQUITY
Current liabilities:
Current portion--long-
term obligations....... $ -- $ -- $ -- $ -- $ -- $ --
Accounts payable........ -- 2,086 40,743 6,847 -- 49,676
Accrued incentives and
advertising............ -- 1,473 26,782 2,449 -- 30,704
Accrued compensation.... -- 246 16,244 1,281 -- 17,771
Other accrued expenses.. 2,287 222 18,172 1,573 (118) 22,136
-------- ------- -------- ------- --------- --------
2,287 4,027 101,941 12,150 (118) 120,287
Long-term obligations... 330,000 -- -- -- -- 330,000
Other noncurrent liabil-
ities.................. 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>
53
<PAGE>
SEALY CORPORATION
SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENTS OF OPERATIONS
YEAR ENDED NOVEMBER 29, 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............... $ -- $ 42,472 $792,878 $73,265 $(17,313) $891,302
Costs and expenses:
Cost of goods sold...... -- 26,973 448,186 45,538 (17,197) 503,500
Selling, general and
administrative......... 717 13,434 265,859 20,346 -- 300,356
Loss on net assets held
for sale and other
write-downs............ -- 229 10,158 247 -- 10,634
Compensation associated
with recapitalization.. 17,114 332 -- 1,440 -- 18,886
Amortization of
intangibles............ -- 411 11,684 934 -- 13,029
Interest expense, net... 4,967 62,504 245 (265) -- 67,451
Loss (income) from
equity
investees.............. 3,136 1,894 -- -- (5,030) --
Loss (income) from non-
guarantor equity
investees.............. -- (27) (2,417) -- 2,444 --
Capital charge and
intercompany interest
allocation............. (10,279) (59,656) 69,935 -- -- --
-------- -------- -------- ------- -------- --------
Income/(loss) before
income taxes,
extraordinary item and
cumulative effect of a
change in accounting
principle.............. (15,655) (3,622) (10,772) 5,025 2,470 (22,554)
Income taxes............ 3,581 (486) (8,878) 2,581 (116) (3,318)
-------- -------- -------- ------- -------- --------
Income/(loss) before
extraordinary item and
cumulative effect of
change in accounting
principle.............. (19,236) (3,136) (1,894) 2,444 2,586 (19,236)
Extraordinary item...... 14,537 -- -- -- -- 14,537
-------- -------- -------- ------- -------- --------
Net income/(loss)....... $(33,773) $ (3,136) $ (1,894) $ 2,444 $ 2,586 $(33,773)
======== ======== ======== ======= ======== ========
</TABLE>
54
<PAGE>
SEALY CORPORATION
SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENTS OF OPERATIONS
YEAR ENDED NOVEMBER 30, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEALY COMBINED COMBINED
SEALY MATTRESS GUARANTOR NON-GUARANTOR
CORPORATION COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- -------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net sales............... $ -- $37,973 $708,914 $75,042 $(17,095) $804,834
Costs and expenses:
Cost of goods sold..... -- 23,256 400,785 48,878 (17,014) 455,905
Selling, general and
administrative........ 1,336 11,464 231,877 17,346 -- 262,023
Stock based Compensa-
tion.................. -- -- 1,635 -- -- 1,635
Amortization of intan-
gibles................ -- 411 11,764 1,089 -- 13,264
Interest expense, net.. 32,114 -- (75) (643) -- 31,396
Loss (income) from
equity Investees...... 8,969 8,258 -- -- (17,227) --
Income from non-
guarantor equity
investees............. -- 20 (4,104) -- 4,084 --
Capital charge and
intercompany interest
allocation............ (69,376) 3,689 64,821 866 -- --
------- ------- -------- ------- -------- --------
Income/(loss) before
income taxes,
extraordinary item and
cumulative effect of a
change in accounting
principle.............. 26,957 (9,125) 2,211 7,506 13,062 40,611
Income taxes............ 13,103 (156) 6,140 3,422 -- 22,509
------- ------- -------- ------- -------- --------
Income/(loss) before
extraordinary item and
cumulative effect of
change in accounting
principle.............. 13,854 (8,969) (3,929) 4,084 13,062 18,102
Extraordinary item...... 2,030 -- -- -- -- 2,030
Cumulative effect of a
change in accounting
principle.............. -- -- 4,329 -- -- 4,329
------- ------- -------- ------- -------- --------
Net income/(loss)....... $11,824 $(8,969) $ (8,258) $ 4,084 $ 13,062 $ 11,743
======= ======= ======== ======= ======== ========
</TABLE>
55
<PAGE>
SEALY CORPORATION
SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 1, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMBINED
SEALY COMBINED NON-
SEALY MATTRESS GUARANTOR GUARANTOR
CORPORATION COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- -------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net sales............... $ -- $33,296 $560,540 $120,223 $(16,421) $697,638
Costs and expenses:
Cost of goods sold..... -- 19,867 305,100 88,592 (16,300) 397,259
Selling, general and
administrative........ 150 9,082 185,849 21,593 -- 216,674
Loss on net assets held
for sale.............. -- 11,762 -- -- -- 11,762
Stock based
Compensation.......... -- -- 4,779 -- -- 4,779
Amortization of
intangibles........... -- 411 11,450 1,733 -- 13,594
Interest expense, net.. 30,364 -- 91 (1,658) -- 28,797
Loss (income) from
equity investees...... (2,608) 1,796 -- -- 812 --
Income from non-
guarantor equity
investees............. -- (15,829) (2,920) -- 18,749 --
Capital charge and
intercompany Interest
allocation............ (35,043) 3,209 41,595 (9,761) -- --
------- ------- -------- -------- -------- --------
Income/(loss) before in-
come taxes............. 7,137 2,998 14,596 19,724 (19,682) 24,773
Income taxes............ 7,522 390 16,392 975 -- 25,279
------- ------- -------- -------- -------- --------
Net income/(loss)....... $ (385) $ 2,608 $ (1,796) $ 18,749 $(19,682) $ (506)
======= ======= ======== ======== ======== ========
</TABLE>
56
<PAGE>
SEALY CORPORATION
SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENTS OF CASH FLOWS
YEAR ENDED NOVEMBER 29, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMBINED
SEALY COMBINED NON-
SEALY MATTRESS GUARANTOR GUARANTOR
CORPORATION COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- --------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net cash provided by
(used in) operating
activities............. $ (478) $ (1,923) $56,210 $ (176) $(603) $ 53,030
--------- --------- ------- ------ ----- --------
Cash flows from
investing activities:
Purchase of property,
plant and equipment... -- (203) (32,909) -- -- (33,112)
Proceeds from sale of
property, plant and
equipment............. -- -- 216 -- -- 216
Net activity in
investment in and
advances to (from)
subsidiaries and
affiliates............ 637,473 (607,445) (28,882) (1,749) 603 --
--------- --------- ------- ------ ----- --------
Net proceeds provided
by (used in) investing
activities............ 637,473 (607,648) (61,575) (1,749) 603 (32,896)
Cash flows from
financing activities:
Treasury stock
repurchase............ (413,078) -- -- -- -- (413,078)
Proceeds (repayment) of
long-term obligations,
net................... (330,000) 642,122 12,653 -- -- 324,775
Equity issuances ...... 121,444 -- -- -- -- 121,444
Costs associated with
tender offer of prior
debt.................. (15,361) -- -- -- -- (15,361)
Debt issuance costs.... -- (32,549) (188) -- -- (32,737)
--------- --------- ------- ------ ----- --------
Net cash provided by
(used in) financing
activities............. (636,995) 609,573 12,465 -- -- (14,957)
--------- --------- ------- ------ ----- --------
Change in cash and cash
equivalents............ -- 2 7,100 (1,925) -- 5,177
Cash and cash equiva-
lents:
Beginning of period.... -- 20 2,062 3,975 -- 6,057
--------- --------- ------- ------ ----- --------
End of period.......... $ -- $ 22 $ 9,162 $2,050 $ -- $ 11,234
========= ========= ======= ====== ===== ========
</TABLE>
57
<PAGE>
SEALY CORPORATION
SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENTS OF CASH FLOWS
YEAR ENDED NOVEMBER 30, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMBINED
SEALY COMBINED NON-
SEALY MATTRESS GUARANTOR GUARANTOR
CORPORATION COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- -------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net cash provided by
(used in) operating
activities............ $29,901 $(40,205) $ 7,532 $44,782 $39 $42,049
------- -------- ------- ------- --- -------
Cash flows from
investing activities:
Purchase of property,
plant and equipment. -- (450) (27,109) (1,581) -- (29,140)
Proceeds from sale of
subsidiary.......... -- 35,000 -- -- -- 35,000
Proceeds from sale of
property, plant and
equipment........... -- 5,150 410 1 -- 5,561
Net activity in
investment in and
advances to (from)
subsidiaries and
affiliates.......... 34,131 471 18,111 (52,674) (39) --
------- -------- ------- ------- --- -------
Net proceeds
provided by (used
in) investing
activities........ 34,131 40,171 (8,588) (54,254) (39) 11,421
Cash flows from
financing activities:
Repayment of long-
term obligations,
net................. (63,127) -- -- -- -- (63,127)
Net borrowing-
revolving credit
facility............ 105,000 -- -- -- -- 105,000
Dividend............. (99,775) -- -- -- -- (99,775)
Debt issuance costs.. (6,130) -- -- -- -- (6,130)
------- -------- ------- ------- --- -------
Net cash provided by
(used in) financing
activities............ (64,032) -- -- -- -- (64,032)
------- -------- ------- ------- --- -------
Change in cash and cash
equivalents........... -- (34) (1,056) (9,472) -- (10,562)
Cash and cash
equivalents:
Beginning of period.. -- 54 3,118 13,447 -- 16,619
------- -------- ------- ------- --- -------
End of period........ $ -- $ 20 $ 2,062 $ 3,975 $-- $ 6,057
======= ======== ======= ======= === =======
</TABLE>
58
<PAGE>
SEALY CORPORATION
SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 1, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEALY COMBINED COMBINED
SEALY MATTRESS GUARANTOR NON-GUARANTOR
CORPORATION COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- -------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net cash provided by
(used in) operating
activities............. $ 15,398 $16,923 $ 32,242 $ 19,105 $(39,251) $ 44,417
-------- ------- -------- -------- -------- --------
Cash flows from
investing activities:
Purchase of property,
plant and equipment.. -- (134) (11,581) (870) 540 (12,045)
Proceeds from sale of
property, plant and
equipment............ -- -- 1,579 50 (540) 1,089
Net activity in
investment in and
advances to (from)
subsidiaries and
affiliates........... 17,267 (8,175) (26,695) 1,888 15,715 --
-------- ------- -------- -------- -------- --------
Net proceeds
provided by (used
in) investing
activities......... 17,267 (8,309) (36,697) 1,068 15,715 (10,956)
Cash flows from
financing activities:
Repayment of long-term
obligations, net..... (22,202) -- (1,608) 83 -- (23,727)
Net borrowing-
revolving credit
facility............. 25,000 -- -- -- -- 25,000
Dividend.............. (35,463) -- -- -- -- (35,463)
Net equity activity
with Parent.......... -- (8,569) (4,830) (10,137) 23,536 --
-------- ------- -------- -------- -------- --------
Net cash provided by
(used in) financing
activities......... (32,665) (8,569) (6,438) (10,054) 23,536 (34,190)
-------- ------- -------- -------- -------- --------
Change in cash and cash
equivalents............ -- 45 (10,893) 10,119 -- (729)
Cash and cash
equivalents:
Beginning of period... -- 9 14,011 3,328 -- 17,348
-------- ------- -------- -------- -------- --------
End of period......... $ -- $ 54 $ 3,118 $ 13,447 $ -- $ 16,619
======== ======= ======== ======== ======== ========
</TABLE>
59
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT DIRECTORS
The following sets forth the name, age, principal occupation and employment
and business experience during the last five years of each of the Company's
directors:
Josh Bekenstein. Mr. Bekenstein, age 40, is a Managing Director of Bain
Capital, Inc. ("Bain"). Mr. Bekenstein helped start Bain in 1984 and has been
involved in numerous venture capital and leveraged acquisitions over the past
thirteen years. Mr. Bekenstein presently serves on the Board of Directors of a
number of public and private companies, including Waters Corporation, Bright
Horizons Childrens Centers, Inc. and Small Fry Snack Foods. Prior to Bain, Mr.
Bekenstein was a consultant at Bain & Company, where he worked on strategy
consulting projects for a number of Fortune 500 clients.
Paul Edgerley. Mr. Edgerley, age 42, has been Managing Director of Bain
since 1993. From 1990 to 1993 he was a General Partner of Bain Venture
Capital, and from 1988 to 1990 he was a Principal of Bain Capital Partners. He
serves on the Boards of Directors of Steel Dynamics, Inc. and GS Industries,
Inc.
Andrew S. Janower. Mr. Janower, age 30, since 1996 has been a Vice President
of Charlesbank Capital Partners LLC, since its formation in July, 1998.
Previously, he had been employed as an Associate by Harvard Private Capital
Group, Inc. ("HPCG"), Charlesbank's predecessor organization. Prior to joining
HPCG, Mr. Janower was a Consultant at Bain & Company and a research associate
at Harvard Business School.
James W. Johnston. Mr. Johnston, age 52, is President and Chief Executive
Officer of Stonemarker Enterprises, Inc., a consulting and investment company.
He has been a director of Sealy, Inc. since March 4, 1993. Mr. Johnston was
Vice Chairman RJR Nabisco, Inc. from 1995 to 1996. He also served as Chairman
and CEO of R. J. Reynolds Tobacco Co. from 1989 to 1995, Chairman R. J.
Reynolds Tobacco Co. from 1995 to 1996 and Chairman R. J. Reynolds Tobacco
International from 1993 to 1996. Mr. Johnston served on the board of RJR
Nabisco, Inc. and RJR Nabisco Holdings Corp. from 1992 to 1996. From 1984
until joining Reynolds, Mr. Johnston was Division Executive, Northeast
Division, of Citibank, N.A., a subsidiary of Citicorp, where he was
responsible for Citibank's New York Banking Division, its banking activities
in upstate New York, Maine and Mid-Atlantic regions, and its national student
loan business. Mr. Johnston is also a director of The Wachovia Corporation.
Ronald L. Jones. Mr. Jones, age 56, since March 17, 1998 has been Chairman,
Chief Executive Officer and President of the Company. From March 2, 1996 until
March 17, 1998 Mr. Jones was President and Chief Executive Officer of the
Company. From October, 1988 until joining the Company, Mr. Jones served as
President of Masco Home Furnishings. From 1983 to 1988, Mr. Jones was
President of HON Industries.
Michael Krupka. Mr. Krupka, age 33, joined Bain in 1991 and became a
Managing Director in 1997. Prior to joining Bain, Mr. Krupka spent several
years as a consultant at Bain & Company where he focused on technology and
technology-related companies. In addition, he has served in several senior
operating roles at Bain portfolio companies. He serves on the Board of
Directors of Jostens Learning Corp. and J Tech, Inc.
Jonas Steinman. Mr. Steinman, age 33, since June, 1995 has been a Principal
at Chase Capital Partners. Previously he was employed as an Associate by Chase
Capital Partners and its predecessor, Chemical Venture Partners.
60
<PAGE>
EXECUTIVE OFFICERS
The following sets forth the name, age, title and certain other information
with respect to the executive and certain other appointed officers of the
Company:
Bruce G. Barman. Dr. Barman, age 53, since March, 1998 has been Corporate
Vice President Research and Development of the Company. From January, 1995
until March, 1998 he was Vice President of Research and Development of the
Company. From 1991 until he joined the Company, Dr. Barman was Vice President
- -- Research and Development of Griffith Laboratories N.A., a custom food
products producer.
Jeffrey C. Claypool. Mr. Claypool, age 51, since March 1998 has been
Corporate Vice President Human Resources of the Company. From September, 1991
until March, 1998 he was Vice President Human Resources of the Company.
Gary T. Fazio. Mr. Fazio, age 48, since March 1998 has been Corporate Vice
President/General Manager Domestic Bedding Group of the Company. From 1990
until, March 1998 he was Vice President Sales.
Douglas E. Fellmy. Mr. Fellmy, age 49, since March, 1998 has been Corporate
Vice President/General Manager Domestic Bedding of the Company. From July,
1992 until March, 1998 he was Vice President Operations of the Company.
Previously, Mr. Fellmy served as Regional Vice President-Operations since
April 1990 and also as President of the Components Division since December
1989. Mr. Fellmy has served, since 1971, in numerous other capacities with the
Company's Components Division.
James F. Goughenour. Mr. Goughenour, age 61, since March 1998 has been
Corporate Vice President Technology, Planning and Operations Support of the
Company. From June, 1997 until March, 1998 he was Vice President Technology
and Strategic Planning of the Company. From 1979 until he joined the Company,
Mr. Goughenour had been with the HON Company, serving as Vice President.
David J. McIlquham. Mr. McIlquham, age 44, since March, 1998 has been
Corporate Vice President Sales and Marketing of the Company. From April, 1990
until March, 1998 he was Vice President-Marketing of the Company.
Lawrence J. Rogers. Mr. Rogers, age 50, since March, 1998 has been Corporate
Vice President/General Manager International Group of the Company. From
February, 1994 until March, 1998 he was Vice President International of the
Company. Previously, Mr. Rogers has served, since 1979, in numerous other
capacities within the Company's operations, including President-Sealy Canada.
Richard F. Sowerby. Mr. Sowerby, age 44, since March, 1998 has been
Corporate Vice President Finance of the Company. From April, 1995 until March,
1998 he was Vice President Controller of the Company. Previously, from 1991,
Mr. Sowerby served as Corporate Controller of Elliott Company, a manufacturer
and servicer of turbo machinery equipment.
Kenneth L. Walker. Mr. Walker, age 50, since March, 1998 has been Corporate
Vice President, General Counsel and Secretary of the Company. From May, 1997
until March, 1998 he was Vice President, General Counsel and Secretary of the
Company. Previously, from 1991, Mr. Walker served as Vice President, General
Counsel and Secretary of Varity Corporation, a manufacturer of automotive
components, diesel engines and farm machinery.
E. Lee Wyatt. Mr. Wyatt, age 46, since October 1998 has been Corporate Vice
President Administration of the Company. From 1983 until he joined the
Company, Mr. Wyatt was with Brown Group Inc., a wholesaler and retailer of
footwear, in numerous positions, most recently as Senior Vice President
Finance and Administration of its Brown Shoe Company subsidiary.
61
<PAGE>
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The Company is not aware of any person that is subject to section 16 of the
Securities Exchange Act of 1934 (The "Exchange Act") with respect to the
Company, that has failed to file on a timely basis reports required by Section
16(a) of the Exchange Act during Fiscal 1998.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth information concerning the annual and long-
term compensation for services in all capacities to the Company for each of
the years ended November 29, 1998, November 30, 1997, and December 1, 1996, of
those persons who served as (i) the chief executive officer during Fiscal 1998
and 1997, and (ii) the other four most highly compensated executive officers
of the Company for Fiscal 1998 (collectively, the "Named Executive Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
------------------------------ -----------------------------------------------------
RESTRICTED SECURITIES
NAME AND PRINCIPAL OTHER ANNUAL STOCK UNDERLYING LTIP ALL OTHER
POSITION YEAR SALARY BONUS COMPENSATION AWARD($) OPTIONS/SARS PAYOUTS(A) COMPENSATION(B)
- ------------------ ---- -------- -------- ------------ ---------- ------------ --------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Ronald L. Jones(c)...... 1998 $571,252 $632,458 $965,602(i) -- 99,070(c) -- $1,136,150
Chairman, Chief 1,971,630(c)
Executive Officer 1997 527,516 633,052 1,168 -- 75,000(d) -- 21,583
and President 1996 381,262 423,584 456,168(e) $637,800(f) 400,000(g) -- 2,476
Gary T. Fazio........... 1998 227,542 110,234 435,318(i) -- 8,365(c) -- 111,899
VP General Mgr. 180,000(c)
Bedding 1997 203,833 182,289 248 203,978(h) 32,000(d) -- 16,524
1996 196,226 86,559 -- -- -- 426,030 15,864
Douglas Fellmy.......... 1998 219,067 106,129 336,785(i) -- 8,365(c) -- 111,267
VP General Mgr. of 180,000(c)
Bedding 1997 197,333 177,739 -- 203,978(h) 32,000(d) -- 16,016
1996 188,134 83,135 -- -- -- 426,030 15,237
David J. McIlquham...... 1998 223,167 108,114 684,175(i) -- 180,000(c) -- 111,573
VP of Sales and 1997 199,167 179,023 242 203,978(h) 32,000(d) -- 16,165
Marketing............... 1996 188,505 83,302 -- -- -- 426,030 15,268
Lawrence J. Rogers...... 1998 189,266 101,403 375,855(i) -- 8,365(c) -- 110,253
VP General Mgr. of 180,000(c)
International Ops. 1997 180,305 158,953 -- 203,978(h) 32,000(d) -- 14,271
1996 175,812 100,385 -- -- -- 295,046 13,884
</TABLE>
- --------
(a) Such amount reflects the value of Shares earned under the Performance
Share Plan which concluded on December 1, 1996.
(b) Represents amounts paid on behalf of each of the Named Executive Officers
for the following four respective categories of compensation: (i) Company
premiums for life and accidental death and dismemberment insurance (ii)
Company premiums for long-term disability benefits, (iii) Company
contributions to the Company's defined contribution plans and (iv) in
fiscal 1998 deferred compensation agreements with respective officers.
Amounts for each of the Named Executive Officers for each of the four
respective preceding categories is as follows: Mr. Jones: (1998-$2,364,
$1,049, $18,200, $1,114,537; 1997-$3,083, $1,000, $17,500; 1996-$1,943,
$533, $0); Mr. Fazio: (1998-$883, $983, $15,928, $94,105; 1997-$1,257,
$999, $14,268; 1996-$1,305, $849, $13,710); Mr. McIlquham: (1998-$866,
$980, $15,622, $94,105; 1997-$1,227, $996, $13,942; 1996-$1,255, $817,
$13,195; Mr. Fellmy: 1998-$850, $976, $15,336, $94,105; 1997-$1,216, $987,
$13,813; 1996-$1,252, $816, $13,169; Mr. Rogers (1998-$368, $385, $15,395,
$94,105; 1997-$622, $1,027, $12,621; 1996-$747, $763, $12,374.
62
<PAGE>
(c) On December 18, 1997, the Company issued to certain of the named Executive
Officers, among others, ten-year fully vested non-qualified stock options
to acquire (i) shares of the Company's Class A Common Stock at the then
current fair market value of $0.50, with an exercise price of $.125 per
share; and (ii) shares of the Company's Class L Common stock at the then
current fair market value of $40.50, with an exercise price of $10.125 per
share. In the December 1997, the indicated Named Executive Officers
received options for the following A and L shares: Mr. Jones 891,630 A
Shares and 99,070 L Shares; Mr. Fazio 75,285 A Shares and 8,365 L Shares;
Mr. Fellmy 75,285 A Shares and 8,365 L Shares; and Mr. Rogers 75,285 A
Shares and 8,365 L Shares. On March 17, 1998, pursuant to the 1998 Stock
Option Plan, the Company issued to the Named Executive Officers, among
others, ten-year non-qualified stock options to acquire shares of the
Company's Class A Common Stock at the then current fair market value
exercise price of $.50 per share and also additional options to acquire
shares of Company's Class A Common Stock at an exercise price of $4.18 per
share. In March, 1998, the Named Executive Officers received the following
stock options: Mr. Jones 600,000 options at $.50 and 480,000 options at
$4.18; Mr. Fazio 100,000 options at $.50 and 80,000 options at $4.18; Mr.
McIlquham 100,000 options at $.50 and 80,000 options at $4.18; Mr. Fellmy
100,000 options at $.50 and 80,000 options at $4.18; and Mr. Rogers
100,000 options at $.50 and 80,000 options at $4.18.
(d) On May 31, 1997, the Company issued ten-year non-qualified stock options
at an exercise price of $9.60, pursuant to the Company's 1997 Stock Option
Plan to the Named Executive Officers, among others, as follows: Ronald L.
Jones: 75,000 shares; Gary T. Fazio: 32,000 shares; David J. McIlquham:
32,000 shares; Douglas Fellmy: 32,000 shares; and Lawrence J. Rogers:
32,000 shares. As of November 29, 1998, none of these stock options
remained outstanding.
(e) Pursuant to his Employment Agreement, Mr. Jones commenced employment with
the Company as of February 27, 1996. The terms of the Employment Agreement
are described more fully in "Compensation Pursuant to Plans and Other
Arrangements--Executive Employment Agreements." Such amount primarily
consists of a $250,000 payment upon commencement of employment and
$205,000 in relocation and other transitional matters.
(f) Such amount reflects the Company's determination of the fair value at the
date of grant of 67,635 restricted shares issued to Mr. Jones, pursuant to
his Employment Agreement. Although the 1997 Credit Agreement and Note
Indenture contain restrictions on the Company's ability to pay dividends,
if declared and paid on the Company's Shares, such dividends would be paid
on such Shares issued to Mr. Jones. The February 28,1997 Dividend was paid
on such shares. Prior to December 18, 1997 Mr. Jones waived all his rights
to such restricted stock. As of November 30 1998, none of these restricted
shares remained outstanding.
(g) Pursuant to his Employment Agreement, the Company granted Mr. Jones ten-
year options to acquire up to 400,000 Shares at an exercise price of
$10.63 per Share as further described in "Compensation Pursuant to Plans
and Other Arrangements--Executive Employment Agreements."
(h) Such amount reflects the Company's determination of the fair value at the
date of grant of restricted stock issued, on January 6, 1997, pursuant to
the Company's 1996 Transitional Restricted Stock Plan to, among others,
certain Named Executive Officers as follows: Gary T. Fazio: 15,800 shares;
David J. McIlquham: 15,800 shares; Douglas Fellmy: 15,800 shares; and
Lawrence J. Rogers: 15,800 shares. On December 16, 1997 Mrssrs Fazio,
Fellmy, and Rogers waived all of their right to such restricted stock. On
December 18, 1997, as part of the Refinancing of the Company, Mr.
McIlquham's restricted shares vested and he received the Merger Price of
approximately $14.30 per share for each restricted share for a total of
$225,900. As of November 29, 1998, none of these shares of restricted
stock remained outstanding.
(i) Represents amounts paid on behalf of each of the Named Executive Officers
for the following seven respective categories of other annual
compensation: (i) transaction bonus associated with the Recapitalization,
(ii) vesting of restricted stock associated with the Recapitalization,
(iii) compensation associated with vested stock options paid out in
connection with the Recapitalization, (iv) compensation recorded
associated with the exercise of stock options, (v) relocation expenses
incurred, (vi) car and financial planning allowances paid on behalf of the
Named executives and (vii) special bonuses. Amounts for each of the Named
Executive Officers for each of the seven respective preceeding categories
is as follows: Mr. Jones: ($385,000, $162,326, $0, $334,361, $6,801,
$67,139, $9,975); Mr. Fazio ($306,750, $0, $0, $28,232, $100,336, $0, $0);
Mr. Fellmy ($297,000, $0, $0, $0, $39,785, $0, $0); Mr. McIlquham
($300,000, $150,486, $225,983, $0, $7,706, $0, $0); Mr. Rogers ($254,115,
$0, $0, $28,232, $81,508, $0, $12,000).
63
<PAGE>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
POTENTIAL REALIZABLE VALUE
<TABLE>
<CAPTION>
AT ASSUMED ANNUAL RATES
OF STOCK PRICE APPRECIATION
INDIVIDUAL GRANTS FOR OPTION TERM (A)
------------------------------------------------- ----------------------------
NUMBER OF % OF TOTAL
SECURITIES OPTIONS/SARS
UNDERLYING GRANTED TO EXERCISE OR
OPTIONS/SARS EMPLOYEES IN BASE PRICE EXPIRATION
NAME GRANTED (#) FISCAL YEAR ($/SH) DATE 5% ($) 10% ($)
- ---- ------------ ------------ ----------- ---------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Ronald L. Jones......... 891,630(b) 18.3% $ 0.125 12/17/07 $ 614,300 $ 1,045,000
Chairman, Chief
Executive 600,000(c) 12.3% $ 0.50 3/17/08 $ 188,400 $ 478,200
Officer and President 480,000(d) 9.8% $ 4.18 3/17/08
99,070(e) 2.0% $10.125 12/17/07 $ 5,532,600 $ 9,403,900
Gary T. Fazio........... 75,285(b) 1.5% $ 0.125 12/17/07 $ 51,900 $ 88,200
VP General Mgr. of
Bedding 100,000(c) 2.0% $ 0.50 3/17/08 $ 31,400 $ 79,700
80,000(d) 1.6% $ 4.18 3/17/08
8,365(e) .2% $10.125 12/17/07 $ 467,100 $ 794,000
Douglas Fellmy.......... 75,285(b) 1.5% $ 0.125 12/17/07 $ 51,900 $ 88,200
VP General Mgr. of
Bedding 100,000(c) 2.0% $ 0.50 3/17/08 $ 31,400 $ 79,700
80,000(d) 1.6% $ 4.18 3/17/08
8,365(e) .2% $10.125 12/17/07 $ 467,100 $ 794,000
David McIlquham......... 100,000(c) 2.0% $ 0.50 3/17/08 $ 31,400 $ 79,700
VP of Sales and
Marketing 80,000(d) 1.6% $ 4.18 3/17/08
Lawrence J. Rogers...... 75,285(b) 1.5% $ 0.125 12/17/07 $ 51,900 $ 88,200
VP General Mgr. of 100,000(c) 2.0% $ 0.50 3/17/08 $ 31,400 $ 79,700
International Ops. 80,000(d) 1.6% $ 4.18 3/17/08
8,365(e) .2% $10.125 12/17/07 $ 467,100 $ 794,000
</TABLE>
- --------
(a) Potential Realizable Value is based on certain assumed rates of
appreciation pursuant to rules prescribed by the Securities and Exchange
Commission and are not intended to be a forecast of the Company's stock
price. Actual gains, if any, on stock option exercises are dependent on
the future performance of the stock. There can be no assurance that the
amounts reflected in this table will be achieved. In accordance with rules
promulgated by the Securities and Exchange Commission, Potential
Realizable Value is based upon the exercise price of the options.
(b) Represent options issued to senior management on December 18, 1997 to
acquire Class A Common Stock of the Company. These options were
immediately vested and are exercisable at $0.125 per share. The fair
market value of the Class A Common Stock at the date of grant was $0.50
per share.
(c) Represent options issued on March 18, 1998 to acquire Class A Common Stock
of the Company. These options vest 40% on the second anniversary date and
20% each year for the next three years. The fair market value of the Class
A Common Stock and option exercise price on the date of grant were each
$0.50 per share.
(d) Represents options issued on March 18, 1998 to acquire Class A Common
Stock of the Company. These options vest 40% on the second anniversary
date and 20% each year for the next three years. The fair market value of
the Class A Common Stock and option exercise price on the date of grant
were $0.50 and $4.18, respectively. The annual increase in the fair market
value of the options over the options ten year life at both 5% and 10%
would not exceed the exercise price.
(e) Represents options issued to senior management on December 18, 1997 to
acquire Class L Common Stock of the Company. These options were
immediately vested and are exercisable at $10.125 per share. The fair
market value of the options at the grant date was $40.125 per share.
64
<PAGE>
AGGREGATED OPTION/SAR EXERCISED IN LAST FISCAL YEAR AND FY-END OPTION/SAR
VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED
SHARES UNEXERCISED OPTIONS/SARS IN-THE-MONEY OPTIONS/SARS
ACQUIRED AT FY-END (#) AT FY-END ($)
ON EXERCISE VALUE EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
NAME (#) REALIZED (A) (B) (C)
- ---- ----------- -------- ------------------------------- -------------------------
<S> <C> <C> <C> <C>
Ronald L. Jones.........
Chairman, Chief
Executive Officer and
President 891,630 334,361 99,070/1,080,000 $3,009,250/0
Gary T. Fazio...........
VP General Mgr.
Domestic Bedding 75,285 28,232 8,365/180,000 $ 254,087/0
Douglas Fellmy..........
VP General Mgr.
Domestic Bedding -- -- 8,365/180,000 $ 254,087/0
David McIlquham.........
VP of Sales and
Marketing -- -- --/180,000 --/0
Lawrence J. Rogers......
VP General Mgr. of
International Ops. 75,285 28,232 8,365/180,000 $ 254,087/0
</TABLE>
- --------
(a) Includes options exercisable within 60 days after November 29, 1998.
(b) Options are in-the-money if the fair market value of the Common Stock
exceeds the exercise price.
(c) Represents the total gain which would be realized if all in-the-money
options beneficially held at November 29, 1998 were exercised, determined
by multiplying the number of Shares underlying the options by the
difference between the per share option exercise price and the estimated
fair market value as of November 29, 1998.
COMPENSATION PURSUANT TO PLANS AND OTHER ARRANGEMENTS
Severance Benefit Plans. Effective December 1, 1992, the Company established
the Sealy Executive Severance Benefit Plan (the "Executive Severance Plan")
for employees in certain salary grades. Benefit eligibility includes, with
certain exceptions, termination as a result of a permanent reduction in work
force or the closing of a plant or other facility, termination for inadequate
job performance, termination of employment by the participant following a
reduction in base compensation, reduction in salary grade which would result
in the reduction in potential plan benefits or involuntary transfer to another
location. Benefits include cash severance payments calculated using various
multipliers varying by salary grade, subject to specified minimums and
maximums depending on such salary grades. Such cash severance payments are
made in equal semi-monthly installments calculated in accordance with the
Executive Severance Plan until paid in full. Certain executive-level officers
would be entitled to a minimum of one-year's salary and a maximum of two-
year's salary under the Executive Severance Plan. However, if a Participant
becomes employed prior to completion of the payment of benefits, such semi-
monthly installments shall be reduced by the Participant's base compensation
for the corresponding period from the Participant's new employer. Participants
receiving cash severance payments under the Executive Severance Plan also
would receive six months of contributory health and dental coverage and six
months of group term life insurance coverage.
The Company currently follows the terminal accrual approach to accounting
for severance benefits under the Executive Severance Plan and records the
estimated cost of these benefits as expense at the date of the event giving
rise to payment of the benefits.
Executive Employment Agreements. Ronald Jones has entered into an employment
agreement with Parent providing for his employment as Chief Executive Officer
and President. The agreement has an initial term of
65
<PAGE>
three years and a perpetual two-year term thereafter. The agreement currently
provides for an annual base salary of US $530,000, subject to annual increase
by Parent's Board of Directors, plus a performance bonus and grants Mr. Jones
the right to require Parent to repurchase certain securities of Parent held by
Mr. Jones. In addition, nine employees of the Company, including Gary T.
Fazio, Douglas Fellmy, Lawrence J. Rogers, and David J. McIlquham, have
entered into employment agreements that provide, among other things, for an
initial employment term of two years and a perpetual one-year employment term
thereafter, during which such employees will received base salary
(respectively of at least US$204,500, US$198,000, Canadian$249,500, and
US$200,000) and a performance bonus between zero and seventy percent of their
base salary and substantially the same benefits as they received as of the
date of such agreements. For the fiscal year ending November 29, 1998, the
compensation committee of the Company's Board of Directors determined that the
bonuses to be paid pursuant to those employment agreements were to be based
75% on the Company's achievement of an Adjusted EBITDA target and 25% on the
Company's achievement of a Return on Net Tangible Assets target. Each such
target represented an improvement over the Company's prior year performance.
Several members of management were parties to agreements that provide, for a
period of one year following consummation of the Transactions, that their
annual base salary and benefits could not be reduced. Each of those one year
agreements expired on December 18, 1998.
Deferred Compensation Agreements. On December 18, 1997, Mr. Jones entered
into a deferred compensation agreement with Parent pursuant to which Mr. Jones
elected to defer $1,114,538 of compensation until either December 18, 2007 or,
in certain instances, such earlier date as provided in such deferred
compensation agreement. In addition, on December 18, 1997, six employees,
including Gary T. Fazio, Douglas Fellmy, and Lawrence J. Rogers, entered into
deferred compensation agreements with Parent pursuant to which such employees
elected to defer an aggregate $522,518 of compensation, in each case, until
either December 18, 2007 or, in certain instances, such earlier date as
provided in such deferred compensation agreements.
Management Incentive Plan. The Company provides performance-based
compensation awards to executive officers and key employees for achievement
each year as part of a bonus plan. Such compensation awards are a function of
individual performance and corporate results. The qualitative and quantitative
criteria will be determined from time to time by Parent's Board of Directors.
Management Equity Participation in the Transactions. In connection with the
Transactions, in order to provide financial incentives for certain of the
Company's employees, the Management Investors acquired common stock of Parent
and/or fully vested options to acquire common stock of Parent in exchange for
either (i) cash or (ii) preferred stock and/or options held by such Management
Investors prior to the Merger. Upon a Management Investor's termination of
employment with the Company, the exercise period of such options held by such
Management Investor will be reduced to a period ending no later than six
months after such Management Investor's termination. If such termination
occurs prior to a qualified initial public offering of Parent's common stock,
then Parent shall have the right to repurchase the common stock of Parent held
by such Management Investor and only if the Management Investor is terminated
without "cause" (as defined in their employment agreements), such Management
Investor shall have the right to require Parent to repurchase the common stock
of Parent held by such Management Investor.
Sealy Corporation 1998 Stock Option Plan. In order to provide additional
financial incentives for certain of the Company's employees, subsequent to the
consummation of the December 18, 1997 transaction the Management Investors and
certain other employees of the Company were granted and are expected to
periodically be granted options to purchase additional common stock of Parent
pursuant to the Sealy Corporation 1998 Stock Option Plan. Such options vest
and become exercisable upon (i) certain threshold dates or (ii) a change of
control or sale of Parent. Upon an employee's termination of employment with
the Company, all of such employee's unvested options will expire, the exercise
period of all such employee's vested options will be reduced to a period
ending no later than six months after such employee's termination, and if such
termination occurs prior to a qualified initial public offering of the
Parent's common stock, then Parent shall have the right to repurchase the
common stock of Parent held by such employee.
66
<PAGE>
Remuneration of Directors. Mr. Johnston is being compensated on the same
basis as he was for being a Company director prior to December 18, 1997. For
his services as a director he received a retainer at the rate of $30,000 on an
annual basis, reduced by $1,000 for each Board meeting not attended, plus
$1,000 ($1,250 if he is Committee Chairman) for each Board of Directors
committee meeting attended if such meeting is on a date other than a Board
meeting date. The Company reimburses all director for any out-of-pocket
expenses incurred by them in connection with services provided in such
capacity.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of February 15, 1999, the issued and outstanding capital stock of the
Company consists of 20,585,750 shares of Class A common stock, par value $0.01
per share ("Class A common"), 7,791,327.6440 shares of Class B Common stock,
par value $0.01 per share ("Class B Common"), 2,168,772.5555 shares of Class L
common stock, par value $0.01 per share ("Class L Common"), and 863,815.0716
shares of Class M common stock, par value $0.01 per share ("Class M Common"
and collectively with the Class A Common, Class B Common and Class L Common,
"Common Stock"). The shares of Class A Common and Class L Common each entitle
the holder thereof to one vote per share on all matters to be voted upon by
the stockholders of the Company, including the election of directors, and are
otherwise identical, except that the shares of Class L Common are entitled to
a preference over Class A Common with respect to any distribution by the
Company to holders of its capital stock equal to the original cost of such
share ($40.50) plus an amount which accrues on a daily basis at a rate of 10%
per annum, compounded annually. The Class B Common is identical to the Class A
Common and the Class M Common is identical to the Class L Common except that
the Class B Common and the Class M Common are nonvoting. The Class B Common
and the Class M Common are convertible into Class A Common and Class L Common,
respectively, automatically upon consummation of an initial public offering by
the Company. The Board of Directors of the Company is authorized to issue
preferred stock, par value $0.01 per share, with such designations and other
terms as may be stated in the resolutions providing for the issue of any such
preferred stock adopted from time to time by the Board of Directors.
67
<PAGE>
The following table sets forth certain information regarding the beneficial
ownership of each class of common stock held by each person (other than
directors and executive officers of the company) known to the Company to own
more than 5% of the outstanding voting common stock of the Company. To the
knowledge of the Company, each of such stockholders has sole voting and
investment power as to the shares shown unless otherwise noted. Beneficial
ownership of the securities listed in the table has been determined in
accordance with the applicable rules and regulations promulgated under the
Exchange Act.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED
-----------------------
CLASS A COMMON CLASS B COMMON CLASS L COMMON CLASS M COMMON
-------------------- ----------------------- ----------------------- -------------------------
NUMBER PERCENTAGE NUMBER PERCENTAGE NUMBER PERCENTAGE NUMBER PERCENTAGE
SHARES OF CLASS SHARES OF CLASS SHARES OF CLASS SHARES OF CLASS
--------- ---------- ------------ ---------- ------------ ---------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Principal Stockholders:
Bain Funds(1)(2)........ 9,450,000 45.9% 612,284.54 7.9% 1,050,000 48.5% 68,031.62 7.9%
c/o Bain Capital, Inc.
Two Copley Place
Boston, MA 02116
Harvard Private Capital
Holdings, Inc.......... 4,000,000 19.4 -- -- 444,444.4444 20.5 -- --
c/o Harvard Management
Company, Inc.
600 Atlantic Avenue
Boston, MA 02210
Sealy Investors 1,
LLC(2)................. 973,989 4.7 5,086,617.06 65.3 108,221 5.0 565,179.6733 65.3
c/o Bain Capital, Inc.
Two Copley Place
Boston, MA 02116
Sealy Investors 2,
LLC(2)................. 973,989 4.7 2,056,314.03 26.4 108,221 5.0 228,479.3367 26.4
c/o Bain Capital, Inc.
Two Copley Place
Boston, MA 02116
Sealy Investors 3,
LLC(2)................. 973,989 4.7 36,112.01 * 108,221 5.0 4,012.4456 *
c/o Bain Capital, Inc.
Two Copley Place
Boston, MA 02116
Zell/Chilmark Fund, L.P.
....................... 2,862,000 13.9 -- -- 318,000 14.7 -- --
Two North Riverside
Drive
Suite 1500
Chicago, IL 60606
</TABLE>
- --------
* Less than one percent
(1) Amounts shown reflect the aggregate number of shares of Class A Common
and Class L Common held by Bain Capital Fund V, L.P. ("Fund V"), Bain
CapitalFund V-B, L.P., BCIP Trust Associates, L.P. ("BCIP Trust") and BCIP
Associates ("BCIP") (collectively, the "Bain Funds"), for the Bain Funds and
Messrs. Bekenstein, Edgerley and Krupka.
(2) The members of Sealy Investors 1, LLC ("SI1") are Chase Equity
Associates, L.P. and Bain Capital Partners V, L.P. ("BCPV"). The members of
Sealy Investors 2, LLC ("SI2") are CIBC WG Argosy Merchant Fund 2, L.L.C. and
BCPV. The members of Sealy Investors 3, LLC ("SI3" and, collectively with SI1
and SI2, the "LLCs") are BancBoston Investments, Inc. and BCPV. BCPV is the
administrative member of each LLC and beneficially owns 1% of the equity of
each LLC. Accordingly, BCPV may be deemed to beneficially own certain shares
owned by the LLCs, although BCPV disclaims such beneficial ownership.
68
<PAGE>
The following table sets forth certain information regarding the beneficial
ownership of each class of common stock held by each director of the Company,
each Named Executive Officer, the Management Investors, and the Company's
directors and executive officers as group. To the knowledge of the Company,
each of such stockholders has sole voting and investment power as to the
shares shown unless otherwise noted. Beneficial ownership of the securities
listed in the table has been determined in accordance with the applicable
rules and regulations promulgated under the Exchange Act.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED
-----------------------------------------------------------------------------------
CLASS A COMMON CLASS B COMMON CLASS L COMMON CLASS M COMMON
--------------------- ----------------- ------------------------- -----------------
NUMBER PERCENTAGE NUMBER PERCENTAGE PERCENTAGE NUMBER PERCENTAGE
SHARES OF CLASS SHARES OF CLASS NUMBER SHARES OF CLASS SHARES OF CLASS
---------- ---------- ------ ---------- -------------- ---------- ------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Directors & Executive
Officers:
Josh Bekenstein(1)(2)... 9,450,000 45.9% -- -- 1,050,000 48.5% -- --
c/o Bain Capital, Inc.
Two Copley Place Boston,
MA 02116
Paul Edgerley(1)(2)..... 9,450,000 45.9 -- -- 1,050,000 48.5 -- --
c/o Bain Capital, Inc.
Two Copley Place Boston,
MA 02116
Michael Krupka(1)(2).... 9,450,000 45.9 -- -- 1,050,000 48.5 -- --
c/o Bain Capital, Inc.
Two Copley Place Boston,
MA 02116
Andrew S. Janower (3)... 4,000,000 19.4 -- -- 444,444.4444 20.5 -- --
c/o Charlesbank Capital
Partners LLC
600 Atlantic Avenue
Boston, MA 02210
Ronald Jones(4)......... 939,996 4.6 -- -- 104,444 4.6 -- --
c/o Sealy Corporation
1228
One Office Parkway,
Trinity, NC 27230
Gary T. Fazio(5)........ 75,285 * -- -- 8,365 * -- --
c/o Sealy Corporation
1228
One Office Parkway,
Trinity, NC 27230
Douglas Fellmy (5)...... 75,285 * -- -- 8,365 * -- --
c/o Sealy Corporation
1228
One Office Parkway,
Trinity, NC 27230
David McIlquham (5)..... 41,994 * -- -- 4,666 * -- --
c/o Sealy Corporation
1228
One Office Parkway,
Trinity, NC 27230
Lawrence J. Rogers (5).. 75,285 * -- -- 8,365 * -- --
c/o Sealy Corporation
1228
One Office Parkway,
Trinity, NC 27230
Management investors 1,447,638 7.2 -- -- 164,182 7.1 -- --
(6).....................
as a group (11 persons)
All directors and
executive officers as a
group (15 persons)...... 14,944,630 71.7% -- -- 1,658,626.4444 71.7% -- --
</TABLE>
- --------
*Less than one percent
(1) Amounts shown reflect the aggregate number of shares of Class A Common and
Class L Common held by Bain Capital Fund V, L.P. ("Fund V"), Bain
CapitalFund V-B, L.P., BCIP Trust Associates, L.P. ("BCIP Trust") and BCIP
Associates ("BCIP") (collectively, the "Bain Funds"), for the Bain Funds
and Messrs. Bekenstein, Edgerley and Krupka.
(2) Messrs. Bekenstein, Edgerley and Krupka are each Managing Directors of
Bain Capital Investors V., Inc., the sole general partner of BCPV, and are
limited partners of BCPV, the sole general partner of Fund V and Fund V-B.
Accordingly, Messrs. Bekenstein, Edgerley and Krupka may be deemed to
beneficially own shares owned by Fund V and Fund V-B. In addition, Messrs.
Bekenstein, Edgerley and Krupka are each
69
<PAGE>
general partners of BCIP and BCIP Trust and, accordingly, may be deemed to
beneficially own shares owned by such funds. Each such person disclaims
beneficial ownership of any such shares in which he does not have a
pecuniary interest.
(3) Mr. Janower is a Vice President of Charlesbank Capital Partners LLC, an
affiliate of Harvard Private Capital Holdings, Inc. ("Harvard").
Accordingly, Mr. Janower may be deemed to beneficially own shares owned by
Harvard. Mr. Janower disclaims beneficial ownership of any such shares in
which he does not have a pecuniary interest.
(4) Includes 99,070 shares of Class L Common issuable upon exercise of
outstanding and currently exercisable options.
(5) Amounts shown reflect shares issuable upon exercise of outstanding and
currently exercisable options.
(6) The Management Investors consists of Messrs. Jones, Fazio, Fellmy,
McIlquham, and Rogers and Bruce Barman, Jeffrey Claypool, James
Goughenour, Richard Sowerby, and Kenneth Walker. Includes 1,309,644 shares
of Class A Common and 145,516 shares of Class L Common issuable upon
exercise of currently exercisable options.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
From March 17, 1998 through December 9, 1998 the Compensation Committee of
the Company's Board of Directors consisted of Messrs. Johnston, Bekenstein and
former director John Sallay. Mr. Sallay has not yet been replaced on the
committee since his resignation as a director. From December 18, 1997 through
March 17, 1998 two compensation matters were considered by a temporary
compensation committee made up of all the Company's directors other than Mr.
Jones.
In Fiscal 1997, the Human Resources Committee (which functioned as the
Compensation Committee) of the Board of Directors consisted of Mr. Johnston
and former directors Mr. Rod Dammeyer (an officer of Zell/Chilmark) and Mr.
Rolf H. Towe.
Pursuant to the stock purchase agreement (defined below), Zell/Chilmark,
MBLP and the Company in 1993 entered into a registration rights agreement
relating to the Acquired Shares, including the 27,630 Shares purchased by Mr.
Towe. Pursuant to the Stock Purchase Agreement, prior to December 18, 1997,
the holders of a majority of such Acquired Shares had the right to demand, up
to five times but no more than once every six months, registration of their
Acquired Shares under the Securities Act of 1933 as amended. In addition,
under certain conditions, the holders of the Acquired Shares had a right to
include some or all of their Acquired Shares in any subsequent registration
statement filed by the Company with respect to the sale of Shares. The Company
agreed to bear all expenses associated with any registration statement
relating to the Acquired Shares other than any underwriting discounts or
commissions, brokerage commissions and fees.
Stockholders Agreement. In December 1997, the Company and certain of its
stockholders, including the Bain Funds, Harvard, the LLCs and Zell
(collectively, the "Stockholders") entered into a stockholders agreement (the
"Stockholders Agreement"). The Stockholders Agreement: (i) requires that each
of the parties thereto vote all of its voting securities of the Company to be
established at seven members and to cause three designees of the Bain Funds
and one designee of Harvard to be elected to the Board of Directors; (ii)
grants the Company and the Bain Funds a right of first offer on any proposed
transfer of shares of capital stock of the Company held by Zell, Harvard or
the LLCs; (iii) grants Harvard a right of first offer on any proposed transfer
of shares of capital stock of the Company held by the Bain Funds; (iv) grants
tag-along rights (rights to participate on a pro rata basis in sales of stock
by other shareholders) on certain transfers of shares of capital stock of the
Company; (v) requires the Stockholders to consent to a sale of the Company 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 the Company,
and (vi) except in certain instances, prohibits Zell from transferring any
shares of capital stock of the Company until the tenth anniversary of the date
of the consummation of the Transactions. Certain of the foregoing provision of
the Stockholders Agreement will terminate upon the consummation of an initial
Public
70
<PAGE>
Offering or an Approved Sale (as each is defined in the Stockholders
Agreement). Certain of the Stockholders, including Bain, received one-time
transaction fees aggregating $8.9 million upon consummation of the
Transactions.
Management Services Agreement. In December 1997, the Company entered into a
Management Services Agreement with Bain pursuant to which Bain has agreed to
provide: (i) general management services; (ii) identification, support,
negotiation and analysis of acquisitions and dispositions; (iii) support,
negotiation and analysis of financial alternatives; and (iv) other services
agreed upon by the Company and Bain. In exchange for such services, Bain will
receive: (i) an annual management fee of $2.0 million, plus reasonable out-of-
pocket expenses (payable quarterly); and (ii) a transaction fee in an amount
equal to 1.0% of the aggregate transaction value in connection with the
consummation of any additional acquisition or divestiture by the Company and
of each financing or refinancing. The Management Services Agreement has an
initial term of five years, subject to automatic one-year extensions unless
the Company or Bain provides written notice of termination.
Registration Rights Agreement. In December 1997, the Company and certain of
its stockholders, including the Bain Funds, Harvard, the LLCs and Zell entered
into a registration rights agreement (the "Registration Rights Agreement").
Under the Registration Rights Agreement, the holders of a majority of the
Registrable Securities (as defined in the Registration Rights Agreement) owned
by the Bain Funds have the right, subject to certain conditions, to require
the Company to register any or all of their shares of common stock of the
Company under the Securities Act at the Company's expense. In addition, all
holders of Registrable Securities are entitled to request the inclusion of any
share of common stock of the Company subject to the Registration Rights
Agreement in any registration statement at the Company's expense whenever the
Company proposes to register any of its common stock under the Securities Act.
In connection with all such registrations, the Company has agreed to indemnify
all holders of Registrable Securities against certain liabilities, including
liabilities under the Securities Act.
71
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) The following consolidated financial statements of Sealy Corporation
and its subsidiaries are included in Part II, Item 8:
Sealy Corporation
Report of Independent Accountants (PricewaterhouseCoopers LLP) and Report
of Independent Auditors (KPMG LLP)
Consolidated Balance Sheets at November 29, 1998 and November 30, 1997
Consolidated Statements of Operations for the years ended November 29,
1998, November 30, 1997 and, December 1, 1996.
Consolidated Statements of Stockholders' Equity for the years ended
November 29, 1998, November 30, 1997 and, December 1, 1996.
Consolidated Statements of Cash Flows for the years ended November 29,
1998, November 30, 1997 and, December 1, 1996.
Notes to Consolidated Financial Statements
(a)(2) The exhibits to this report are listed in section (c) of Item 14
below.
(b) A Form 8-K was filed December 30, 1997 to report merger of the Company
with Sandman Merger Corporation, the Company's tender for all of its 10 1/4%
Senior Subordinated Notes due in 2003, a related solicitation of consents to
modify certain terms of those notes, as well as to report actions by Sealy
Mattress Company, a wholly owned subsidiary of the Company, entering into
senior credit agreements providing for loans of up to $550 million, and
issuing $253 million in notes due December 15, 2007.
(c) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
------- -------------------
<C> <S>
2.1 Agreement and Plan of Merger, dated as of October 30, 1997, by and
among the Registrant, Sandman Merger Corporation and Zell/Chilmark
Fund, L.P. (Incorporated herein by reference to the appropriate
exhibit to the Form 8-K filed December 30, 1997 (File No. 1-8738)).
2.2 First Amendment to the Agreement and Plan of Merger, dated as of
December 18, 1997, by and among the Registrant, Sandman Merger
Corporation and Zell/Chilmark Fund, L.P. (Incorporated herein by
reference to the appropriate exhibit to the Form 8-K filed December
30, 1997 (File No. 1-8738)).
3.1 Restated Certificate of Incorporation of Sealy Corporation dated as of
November 5, 1991. (Incorporated herein by reference to the appropriate
exhibit to Sealy Corporation's Annual Report on Form 10-K for the
fiscal year ended November 30, 1991 (File No. 1-8738)).
3.2 By-Laws of Sealy Corporation adopted as of November 4, 1991.
(Incorporated herein by reference to the appropriate exhibit to Sealy
Corporation's Annual Report on Form 10-K for the fiscal year ended
November 30, 1991 (File No. 1-8738)).
4.1 Warrant Agreement, dated as of November 6, 1991 between Sealy
Corporation and Sealy, Inc., Warrant Agent, including the form of
Series A and Series B Warrant. (Incorporated herein by reference to
the appropriate exhibit to Sealy Corporation's Annual Report on Form
10-K for the fiscal year ended November 30, 1991 (File No. 1-8738)).
4.2 Form of Series A and Series B Warrant (included as Exhibit A to the
Warrant Agreement filed as Exhibit 4.1). (Incorporated herein by
reference to the appropriate exhibit to Sealy Corporation's Annual
Report on Form 10-K for the fiscal year ended November 30, 1991 (File
No. 1-8738)).
</TABLE>
72
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
------- -------------------
<C> <S>
4.3 Warrant Agreement, dated as of August 1, 1989 between GGvA Holding
Corp. (renamed Sealy Holdings, Inc. and merged with and into Sealy
Corporation) and First Chicago Trust Company of New York, Warrant
Agent, including the form of Merger Warrant (Incorporated herein by
reference to Exhibit 4.1 to Annual Report on Form 10-K of The Ohio
Mattress Holding Company and The Ohio Mattress Company for the year
ended November 30, 1989, File No. 33-29246, filed March 2, 1990.)
4.4 Form of Merger Warrant (included as Exhibit A to the Warrant Agreement
filed as Exhibit 4.3) (Incorporated herein by reference to Exhibit 4.2
to Annual Report on Form 10-K of Sealy Holdings, Inc. and Sealy
Holdings, Inc. (merged with and into Sealy Corporation) for the year
ended November 30, 1990, File No. 33-29246, filed February 28, 1991.)
4.5 Indenture dated as of November 1, 1991, among Sealy Corporation,
certain subsidiaries of Sealy Corporation listed on the signature
pages thereto and Ameritrust Company National Association.
(Incorporated herein by reference to the appropriate exhibit to Sealy
Corporation's Annual Report on Form 10-K for the fiscal year ended
November 30, 1991 (File No. 1-8738.)
4.6 Stock Subscription Agreement, dated as of March 30, 1989 by and among
GGvA Holding Corp. (renamed Sealy Holdings, Inc. and merged with and
into Sealy Corporation) and the purchasers listed therein.
(Incorporated herein by reference to Exhibit 4.4 to Registration
Statement of The Ohio Mattress Holding Company and The Ohio Mattress
Company of Form S-4, File no. 33-29246, filed June 13, 1989.)
4.7 Management Stock Subscription Agreement, dated as of March 30, 1989 by
and among GGvA Holding Corp. (renamed Sealy Holdings, and merged with
and into Sealy Corporation) and the management purchasers listed
therein. (Incorporated herein by reference to Exhibit 4.5 to
Registration Statement of The Ohio Mattress Holding Company on Form S-
4, File No. 33-29246, filed June 13, 1989.)
4.8 First Supplemental Indenture, dated as of February 12, 1993, by and
among Sealy Corporation, certain subsidiaries of Sealy Corporation
listed on the signature pages thereto as Ameritrust Company National
Association (n.k.a. Society National Bank). (Incorporated herein by
reference to the appropriate exhibit to the Form 10-K for the fiscal
year ended November 30, 1992, File No. 1-8738.)
4.9 Indenture, dated as of May 7, 1993, by and between Sealy Corporation
and Society National Bank relating to the Sealy Corporation's 9 1/2%
Senior Subordinated Notes. (Incorporated herein by reference to the
appropriate exhibit to the Form 8-K Current Report of Sealy
Corporation dated May 7, 1993).
4.10 Form of 9 1/2% Senior Subordinated Note Due 2003. (Incorporated herein
by reference to the appropriate exhibit to the Form 8-K Current Report
of Sealy Corporation dated May 7, 1993.)
4.11 Restated Secured Credit Agreement, dated as of May 27, 1994, by and
among Sealy Corporation, Certain Banks and Other Financial
Institutions and Banque Paribas, Citicorp USA, Inc., Bank of America
(formerly Continental Bank N.A.) and General Electric Capital
Corporation, as Managing Agents. (Incorporated herein by reference to
the appropriate exhibit to the Form 10-Q Quarterly Report of Sealy
Corporation dated May 31, 1994, File No. 1-8738.)
4.12 Amendment No. 1 to Warrant Agreement between Sealy Corporation and
Society National Bank as Warrant Agent, dated April 1, 1995.
(Incorporated herein by reference to the appropriate exhibit to the
Form 10-Q, Quarterly Report of Sealy Corporation dated August 31, 1995
(File No. 1-8738)).
</TABLE>
73
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
------- -------------------
<C> <S>
4.13 First Amendment and consent to Restated Secured Credit Agreement,
dated May 27, 1994 by and among Sealy Corporation, Certain Banks and
Other Financial Institutions and Banque Paribas, Citicorp USA, Inc.,
Bank of America and General Electric Capital Corporation, as Managing
Agents. (Incorporated herein by reference to the appropriate exhibit
to the Form 10-K for the fiscal year ended November 30, 1995 (File No.
1-8738)).
4.14 Second Amendment to Restated Secured Credit Agreement, dated May 27,
1994 by and among Sealy Corporation, Certain Banks and Other Financial
Institutions and Banque Paribas, Citicorp USA, Inc., Bank of America
and General Electric Capital Corporation, as Managing Agents.
(Incorporated herein by reference to the appropriate exhibit to the
Form 10-K for the fiscal year ended November 30, 1995 (File No. 1-
8738)).
4.15 Third Amendment to the Restated Secured Credit Agreement, dated as of
May 27, 1994, by and among Sealy Corporation, Certain Banks and Other
Financial Institutions and Banque Paribas, Citicorp USA, Inc., Bank of
America and General Electric Capital Corporation, as Managing Agents.
(Incorporated herein by reference to the appropriate exhibit to the
Form 10-Q Quarterly Report of Sealy Corporation dated June 2, 1996
(File No. 1-8738)).
4.16 Supplemental Indenture dated as of February 21, 1997, by and between
Sealy Corporation and Mellon Bank, F.S.B. (as successor trustee to Key
Bank National Association, formerly known as Society National Bank).
(Incorporated herein by reference to the appropriate exhibit to Sealy
Corporation's Annual Report on Form 10-K for the fiscal year ended
December 1, 1996 (File No. 1-8738)).
4.17 $275,000,000 Second Restated Credit Agreement dated as of February 25,
1997 among Sealy Corporation, as Borrower, Various Financial
Institutions, as Banks, Banque Paribas, as Documentation Agent,
Nationsbank, N.A., as Syndication Agent, and Bank of America Illinois,
as Administrative Agent. (Incorporated herein by reference to the
appropriate exhibit to Sealy Corporation's Annual Report on Form 10-K
for the fiscal year ended December 1, 1996 (File No. 1-8738)).
4.18 Indenture, dated as of December 18, 1997, by and among Sealy Mattress
Company, the Guarantors named therein and The Bank of New York, as
trustee, with respect to the Series A and Series B 9 7/8% Senior
Subordinated Notes due 2007. (Incorporated herein by reference,
Exhibit 4.1, to the Form 8-K filed December 30, 1997 (File No. 1-
8738)).
4.19 Indenture, dated as of December 18, 1997, by and among Sealy Mattress
Company, the Guarantors named therein and The Bank of New York, as
trustee, with respect to the Series A and Series B 10 7/8% Senior
Subordinated Discount Notes due 2007. (Incorporated herein by
reference, Exhibit 4.2, to the Form 8-K filed December 30, 1997 (File
No. 1- 8738)).
4.20 Second Supplemental Indenture, dated as of December 5, 1997, by and
between the Registrant and The Bank of New York, as trustee.
(Incorporated herein by reference, Exhibit 4.3, to the Form 8-K filed
December 30, 1997 (File No. 1-8738)).
*10.1 Sealy Profit Sharing Plan, Amended and Restated Date: December 1,
1989. (Incorporated herein by reference to the appropriate exhibit to
the Form 10-K for the fiscal year ended November 30, 1995 (File No. 1-
8738)).
*10.2 Sealy Benefit Equalization Plan, dated December 1, 1994. (Incorporated
herein by reference to the appropriate exhibit to the Form 10-K for
the fiscal year ended November 30, 1995 (File No. 1-8738)).
*10.3 Sealy Trust Agreement dated June 1, 1990. (Incorporated herein by
reference to the appropriate Exhibit to Sealy Corporation's Annual
Report on Form 10-K for the fiscal year ended November 30, 1991 (File
No. 1-8738)).
</TABLE>
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<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
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<C> <S>
*10.4 The Ohio Mattress Holding Company 1989 Stock Option Plan.
(Incorporated herein by reference to Exhibit 10.16 to Annual Report on
Form 10-K of The Ohio Mattress Holding Company and The Ohio Mattress
Company for the year ended November 30, 1989, File No. 33-29246, filed
March 2, 1990).
*10.5 Sealy Corporation Bonus Program. (Incorporated herein by reference to
the appropriate exhibit to the Form 10-K for the fiscal year ended
November 30, 1995 (File No. 1-8738)).
10.6 Severance Agreement dated March 1, 1996 by and between Sealy
Corporation and Lyman M. Beggs. (Incorporated herein by reference to
the appropriate exhibit to the Form 10-Q Quarterly Report of Sealy
Corporation dated March 3, 1996 (File No. 1-8738)).
*10.7 Sealy Corporation 1992 Stock Option Plan. (Incorporated herein by
reference to the appropriate Exhibit to Sealy Corporation's Annual
Report on Form 10-K for the fiscal year ended November 30, 1992 (File
No. 1-8738)).
*10.8 Sealy Corporation Performance Share Plan. (Incorporated herein by
reference to the appropriate Exhibit to Sealy Corporation's Annual
Report on Form 10-K for the fiscal year ended November 30, 1992 (File
No. 1-8738)).
*10.9 Employment Agreement dated as of October 31, 1992, by and between
Sealy Corporation and Lyman M. Beggs. (Incorporated herein by
reference to the appropriate exhibit to Sealy Corporation's Annual
Report on Form 10-K for the fiscal year ended November 30, 1992 (File
No. 1-8738)) .
*10.10 Letter Agreement, dated as of October 31, 1992 by and between Sealy
Corporation and Lyman M. Beggs. (Incorporated herein by reference to
the appropriate exhibit to Sealy Corporation's Annual Report on Form
10-K for the fiscal year ended November 30, 1992 (File No. 1-8738)).
*10.11 Stockholder Agreement, dated as of October 31, 1992 by and between
Sealy Corporation and Lyman M. Beggs. (Incorporated herein by
reference to the appropriate exhibit to Sealy Corporation's Annual
Report on Form 10-K for the fiscal year ended November 30, 1992 (File
No. 1-8738)).
*10.12 Letter Agreement, dated June 5, 1991 by and between Sealy Corporation
and Sam F. Smith, Jr. (Incorporated herein by reference to the
appropriate exhibit to Sealy Corporation's Annual Report on Form 10-K
for the fiscal year ended November 30, 1992 (File No. 1-8738)).
10.13 Sealy Corporation 1993 Non-Employee Director Stock Option Plan.
(Incorporated herein by reference to the appropriate exhibit to the
Form S-1 Registration Statement of Sealy Corporation (File No. 33-
59134)). (As amended by Amendment No. 1 dated April 6, 1994.)
10.14 Amendment No. 2 to Sealy Corporation 1993 Non-Employee Director Stock
Option Plan, dated June 27, 1995. (Incorporated herein by reference to
the appropriate exhibit to Sealy Corporation's Annual Report on Form
10-K for the fiscal year ended December 1, 1996 (File No. 1-8738)).
10.15 Amendment No. 3 to Sealy Corporation 1993 Non-Employee Director Stock
Option Plan dated as of May 1, 1996. (Incorporated herein by reference
to the appropriate exhibit to Sealy Corporation's Annual Report on
Form 10-K for the fiscal year ended December 1, 1996 (File No. 1-
8738)).
*10.16 Employment Agreement dated March 4, 1996 by and between Sealy
Corporation and Ronald L. Jones. (Incorporated herein by reference to
the appropriate exhibit to the Form 10-Q Quarterly Report of Sealy
Corporation dated March 3, 1996 (File No. 1-8738)).
*10.17 Amendment No. 1 to Sealy Bonus Plan. (Incorporated herein by reference
to the appropriate exhibit to Sealy Corporation's Annual Report on
Form 10-K for the fiscal year ended December 1, 1996 (File No. 1-
8738)).
*10.18 Sealy Corporation Bonus Plan. (Incorporated herein by reference to the
appropriate exhibit to Sealy Corporation's Annual Report on Form 10-K
for the fiscal year ended December 1, 1996 (File No. 1-8738)).
</TABLE>
75
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
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<C> <S>
*10.19 Amendment No. 1 to Sealy Corporation 1992 Stock Option Plan.
(Incorporated herein by reference to the appropriate exhibit to Sealy
Corporation's Annual Report on Form 10-K for the fiscal year ended
December 1, 1996 (File No. 1-8738)).
*10.20 Amendment No. 1 to Sealy Corporation Performance Share Plan.
(Incorporated herein by reference to the appropriate exhibit to Sealy
Corporation's Annual Report on Form 10-K for the fiscal year ended
December 1, 1996 (File No. 1-8738)).
*10.21 Amendment No. 1 to Sealy Profit Sharing Plan. (Incorporated herein by
reference to the appropriate exhibit to Sealy Corporation's Annual
Report on Form 10-K for the fiscal year ended December 1, 1996 (File
No. 1-8738)).
*10.22 Amendment No. 2 to Sealy Profit Sharing Plan. (Incorporated herein by
reference to the appropriate exhibit to Sealy Corporation's Annual
Report on Form 10-K for the fiscal year ended December 1, 1996 (File
No. 1-8738)).
*10.23 1996 Transitional Restricted Stock Plan. (Incorporated herein by
reference to the appropriate exhibit to Sealy Corporation's Annual
Report on Form 10-K for the fiscal year ended December 1, 1996 (File
No. 1-8738)).
*10.24 Sealy Corporation 1997 Stock Option Plan. (Incorporated herein by
reference to the appropriate exhibit to Sealy Corporation's Annual
Report on Form 10-K for the fiscal year ended December 1, 1996 (File
No. 1-8738)).
*10.25 Stock Option Agreement dated March 4, 1996 by and between Sealy
Corporation and Ronald L. Jones. (Incorporated herein by reference to
the appropriate exhibit to Sealy Corporation's Annual Report on Form
10-K for the fiscal year ended December 1, 1996 (File No. 1-8738)).
*10.26 Stockholder Agreement dated March 4, 1996 by and among Sealy
Corporation and Ronald L. Jones. (Incorporated herein by reference to
the appropriate exhibit to Sealy Corporation's Annual Report on Form
10-K for the fiscal year ended December 1, 1996 (File No. 1-8738)).
*10.27 Restricted Stock Agreement dated March 4, 1996 by and between Sealy
Corporation and Ronald L. Jones. (Incorporated herein by reference to
the appropriate exhibit to Sealy Corporation's Annual Report on Form
10-K for the fiscal year ended December 1, 1996 (File No. 1-8738)).
10.28 Dealer Manager Agreement, dated as of November 18, 1997, among Sandman
Merger Corporation, the Registrant and Goldman, Sachs & Co.
(Incorporated herein by reference, Exhibit 10.1, to the Form 8-K filed
December 30, 1997 (File No. 1-8738)).
10.29 Purchase Agreement, dated as of December 11, 1997, by and among Sealy
Mattress Company, the Guarantors named therein, Goldman, Sachs & Co.
(Incorporated herein by reference, Exhibit 10.2, to the Form 8-K filed
December 30, 1997 (File No. 1-8738)).
10.30 Registration Rights Agreement, dated as of December 18, 1997, by and
among Sealy Mattress Company, the Guarantors named therein, Goldman,
Sachs & Co., J.P. Morgan Securities Inc. and BT Alex. Brown
Incorporated. (Incorporated herein by reference, Exhibit 10.3, to the
Form 8-K filed December 30, 1997 (File No. 1-8738)).
10.31 Credit Agreement, dated as of December 18, 1997, among Sealy Mattress
Company, the Guarantors named therein, Goldman Sachs Credit Partners
L.P., as arranger and syndication agent, Morgan Guaranty Trust Company
of New York, as administrative agent, Bankers Trust Company, as
Documentation agent, and the other institutions named therein.
(Incorporated herein by reference, Exhibit 10.4, to the Form 8-K filed
December 30, 1997 (File No. 1-8738)).
</TABLE>
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<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
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<C> <S>
10.32 AXEL Credit Agreement, dated as of December 18, 1997, among Sealy
Mattress Company, the Guarantors named therein, Goldman Sachs Credit
Partners L.P., as arranger and syndication agent, Morgan Guaranty
Trust Company of New York, as administrative agent, Bankers Trust
Company, as documentation agent, and the other institutions named
therein. (Incorporated herein by reference, Exhibit 10.5, to the Form
8-K filed December 30, 1997 (File No. 1-8738)).
*10.33 Amended and Restated Employment Agreement, dated as of August 1, 1997,
by and between Sealy Corporation and Ronald L. Jones. (Incorporated
herein by reference, Exhibit 10.6, to the Form 8-K filed December 30,
1997 (File No. 1-8738)).
*10.34 Employment Agreement, dated as of August 25, 1997, by and between
Sealy Corporation and Bruce G. Barman. (Incorporated herein by
reference, Exhibit 10.7, to the Form 8-K filed December 30, 1997 (File
No. 1-8738)).
*10.35 Employment Agreement, dated as of August 25, 1997, by and between
Sealy Corporation and Jeffrey C. Claypool. (Incorporated herein by
reference, Exhibit 10.8, to the Form 8-K filed December 30, 1997 (File
No. 1-8738)).
*10.36 Employment Agreement, dated as of August 25, 1997, by and between
Sealy Corporation and Gary T. Fazio. (Incorporated herein by
reference, Exhibit 10.9, to the Form 8-K filed December 30, 1997 (File
No. 1-8738)).
*10.37 Employment Agreement, dated as of August 25, 1997, by and between
Sealy Corporation and Douglas E. Fellmy. (Incorporated herein by
reference, Exhibit 10.10, to the Form 8-K filed December 30, 1997
(File No. 1-8738)).
*10.38 Employment Agreement, dated as of August 25, 1997, by and between
Sealy Corporation and David J. McIlquham. (Incorporated herein by
reference, Exhibit 10.11, to the Form 8-K filed December 30, 1997
(File No. 1-8738)).
*10.39 Employment Agreement, dated as of August 25, 1997, by and between
Sealy Corporation and Lawrence J. Rogers. (Incorporated herein by
reference, Exhibit 10.12, to the Form 8-K filed December 30, 1997
(File No. 1-8738)).
*10.40 Change of Control Agreement, dated as of September 3, 1997 by and
between Sealy Corporation and John G. Bartik. (Incorporated herein by
reference, Exhibit 10.13, to the Form 8-K filed December 30, 1997
(File No. 1-8738)).
*10.41 Change of Control Agreement, dated as of September 3, 1997 by and
between Sealy Corporation and James F. Goughenour. (Incorporated
herein by reference, Exhibit 10.14, to the Form 8-K filed December 30,
1997 (File No. 1- 8738)).
*10.42 Change of Control Agreement, dated as of September 3, 1997 by and
between Sealy Corporation and Richard F. Sowerby. (Incorporated herein
by reference, Exhibit 10.15, to the Form 8-K filed December 30, 1997
(File No. 1- 8738)).
*10.43 Change of Control Agreement, dated as of September 3, 1997 by and
between Sealy Corporation and Ronald H. Stolle. (Incorporated herein
by reference, Exhibit 10.16, to the Form 8-K filed December 30, 1997
(File No. 1-8738)).
*10.44 Change of Control Agreement, dated as of September 3, 1997 by and
between Sealy Corporation and Kenneth L. Walker. (Incorporated herein
by reference, Exhibit 10.17, to the Form 8-K filed December 30, 1997
(File No. 1-8738)).
</TABLE>
77
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<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
------- -------------------
<C> <S>
*10.45 Amendment to Amended and Restated Employment Agreement and Termination
of Stockholders Agreement, dated as of December 17, 1997, between
Ronald L. Jones and the Registrant. (Incorporated herein by reference,
Exhibit 10.18, to the Form 8-K filed December 30, 1997 (File No. 1-
8738)).
*10.46 Amendment to Employment Agreements, dated as of December 17, 1997,
between the employees named therein and the Registrant. (Incorporated
herein by reference, Exhibit 10.19, to the Form 8-K filed December 30,
1997 (File No. 1- 8738)).
*10.47 Form of Amendment to Change of Control Agreements, dated as of
December 17, 1997. (Incorporated herein by reference, Exhibit 10.20,
to the Form 8-K filed December 30, 1997 (File No. 1-8738)).
10.48 Change in Registrants Certified Accountant, dated March 23, 1998 (File
No. 1-8738).
10.49 Stockholders Agreement dated as of December 18, 1997 by and among
Sealy Corporation and the Stockholders named therein. (Incorporated
herein by reference to Exhibit 10.27 to Sealy Mattress Company's -
Form S-4 Registration Statement filed May 5, 1998 (File No. 1-8738)).
10.50 Registration Rights Agreement dated as of December 18, 1997 by and
among Sealy Corporation and the Stockholders named therein.
(Incorporated herein by reference to Exhibit 10. To Sealy Mattress
Company's Form S-4 Registration Statement filed May 5, 1998 (File No.
1-8738)).
10.51 Management Services Agreement dated as of December 18, 1997 by and
between Sealy Corporation, Sealy Mattress and Bain Capital, Inc.
(Incorporated herein by reference to Exhibit 10.50 to Sealy Mattress
Company's Form S-4 Registration Statement filed May 5, 1998 (File No.
1-8738)).
10.52 First Amendment to Credit Agreement (Incorporated herein by reference,
Exhibit 10.1, to the Form 8-K filed October 14, 1998 (File No. 1-
8738)).
*10.53 Employment Agreement, dated as of October 15, 1998 by and between
Sealy Corporation and E. Lee Wyatt.
*10.54 Employment Agreement, dated as of October 15, 1998 by and between
Sealy Corporation and James Goughenour.
*10.55 Employment Agreement, dated as of October 15, 1998 by and between
Sealy Corporation and Richard Sowerby.
*10.56 Employment Agreement, dated as of December 18, 1998 by and between
Sealy Corporation and Kenneth L. Walker.
27.1 Financial Data Schedule.
99.1 Certificate of Ownership and Merger merging Sealy Holdings, Inc. with
and into Sealy Corporation dated as of November 5, 1991. (Incorporated
herein by reference to the appropriate exhibit to Sealy Corporation's
Annual Report on Form 10-K for the fiscal year ended November 30, 1991
(File No. 1-8738)).
99.2 Sealy Corporation Executive Severance Benefit Plan dated January 25,
1993. (Incorporated herein by reference to the appropriate exhibit to
Sealy Corporation's Annual Report on Form 10-K for the fiscal year
ended November 30, 1992 (File No. 1-8738)).
</TABLE>
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<PAGE>
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
By: Ronald L. Jones
RONALD L. JONES CHAIRMAN,
PRESIDENT AND CHIEF EXECUTIVE
OFFICER (PRINCIPAL EXECUTIVE
OFFICER)
Date: March 1, 1999
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED:
<TABLE>
<S> <C>
SIGNATURE TITLE
DATE
/s/ E. Lee Wyatt Corporate Vice President-- March 1, 1999
- --------------------------- Administration (Principal
E. LEE WYATT Accounting Officer)
/s/ Josh Bekenstein Director March 1, 1999
- ---------------------------
JOSH BEKENSTEIN
/s/ Paul Edgerley Director March 1, 1999
- ---------------------------
PAUL EDGERLEY
/s/ Andrew S. Janower Director March 1, 1999
- ---------------------------
ANDREW S. JANOWER
/s/ James W. Johnston Director March 1, 1999
- ---------------------------
JAMES W. JOHNSTON
/s/ Ronald L. Jones Director March 1, 1999
- ---------------------------
RONALD L. JONES
/s/ Michael Krupka Director March 1, 1999
- ---------------------------
MICHAEL KRUPKA
/s/ Jonas Steinman Director March 1, 1999
- ---------------------------
JONAS STEINMAN
</TABLE>
79
<PAGE>
EXHIBIT 10.53
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT is entered into as of the 15th day of October,
1998, by and between SEALY CORPORATION, a Delaware corporation (the "Company"),
and E. LEE WYATT, JR., (the "Employee").
W I T N E S S E T H:
WHEREAS, the Company and the Employee (collectively "the Parties") desire
to enter into this Employment Agreement (the "Agreement") as hereinafter set
forth;
NOW, THEREFORE, the Company and Employee agree as follows:
1. EMPLOYMENT TERM.
---------------
(a) During the period specified in Subsection l(b) hereof (the
"Employment Term"), the Company shall employ the Employee, and the
Employee shall serve the Company, as Corporate Vice President,
Administration based on the terms and subject to the conditions
set forth herein.
(b) The Employment Term shall:
(i) be for a rolling one (1) year term commencing on the date of
this Agreement, which term shall automatically be extended
one calendar day for each calendar day that the Employee is
employed by the Company after the date of this Agreement so
that the remaining Employment Term shall always be one (1)
year;
(ii) provided that the Employment Term may terminate as provided
in Section 4 hereof prior to the date specified above in this
Subsection 1(b).
2. POSITION, DUTIES, AND RESPONSIBILITIES. At all times during the
--------------------------------------
Employment Term, the Employee shall:
(a) Hold the position of Corporate Vice President, Administration
reporting to the Chief Executive Officer of the Company (the
"Chief Executive Officer");
(b) Have those duties and responsibilities, and the authority,
customarily possessed by the Corporate Vice President,
Administration of a major corporation and such additional duties
as may be assigned to the Employee from time to time by the Board
of Directors of the Company (the "Board") or the Chief Executive
Officer which are consistent with the position of Corporate Vice
President, Administration of a major corporation;
<PAGE>
(c) Adhere to such reasonable written policies and directives, and
such reasonable unwritten policies and directives as are of
common knowledge to executive officers of the Company, as may be
promulgated from time to time by the Board or the Chief Executive
Officer and which are applicable to executive officers of the
Company;
(d) Invest in the Company only in accordance with any insider trading
policy of the Company in effect at the time of the investment;
and
(e) Devote the Employee's entire business time, energy, and talent to
the business, and to the furtherance of the purposes and
objectives, of the Company, and neither directly nor indirectly
act as an employee of or render any business, commercial, or
professional services to any other person, firm or organization
for compensation, without the prior written approval of the Board
or the Chief Executive Officer.
Nothing in this Agreement shall preclude the Employee from devoting
reasonable periods of time to charitable and community activities or the
management of the Employee's investment assets, provided such activities do not
interfere with the performance by the Employee of the Employee's duties
hereunder.
3. SALARY, BONUS AND BENEFITS. For services rendered by the Employee on
--------------------------
behalf of the Company during the Employment Term, the following salary, bonus
and benefits shall be provided to the Employee by the Company:
(a) The Company shall pay to the Employee, in equal installments,
according to the Company's then current practice for paying its
executive officers in effect from time to time during the
Employment Term, an annual base salary at the initial rate of Two
Hundred Thousand Dollars ($200,000). This salary shall be subject
to annual review by the Human Resources Committee of the Board
(the "Committee") and may be increased, but not decreased, to the
extent, if any, that the Committee may determine.
(b) The Employee shall participate in the Sealy Corporation Annual
Bonus Plan (the "Bonus Plan") in accordance with the provisions
of that Plan as in effect as of the date of this Agreement. The
Employee's Target annual bonus, as established by the Committee
under the Bonus Plan as of the date of this Agreement, is thirty-
five percent (35%) (his "Target Annual Bonus Percentage") of
annual base salary, with a range of zero percent (0%) to seventy
percent (70%) of annual base salary.
(c) The Employee shall be eligible for participation in such other
benefit plans, including, but not limited to, the Company's
Profit Sharing Plan and Trust, Executive Severance Benefit Plan,
Benefit Equalization Plan, Short-Term and Long Term Disability
Plans, Group Term Life Insurance Plan, Medical Plan or PPO,
Dental Plan, the 401(k) feature of the Profit Sharing Plan and
the 1998 Stock Option Plan, as the Board may adopt from time to
time and in
2
<PAGE>
which the Company's executive officers are eligible to
participate. Such participation shall be subject to the terms and
conditions set forth in the applicable plan documents. As is more
fully set forth in Section 7 hereof, the Employee shall not be
entitled to duplicative payments under this Agreement and the
Executive Severance Benefit Plan.
(d) Without limiting the generality of Subsection 3(c) above, for so
long as such coverage shall be available to the executive
officers of the Company, the Employee shall be eligible to
participate in the Company's Group Term Life Insurance Plan with
a death benefit to be provided at the level of one and one half
(1 1/2) times annual base salary at Company expense, plus
extended coverage with a death benefit to be provided of at least
the level in effect on the date of this Agreement for the
Employee under such Plan at the Employee's discretion and
expense.
(e) The Employee shall be entitled to take, during each calendar year
period of the Employment Term, commencing on the 1st of January
after execution of this Agreement, vacation time equal to at
least the greater of (i) the amount of vacation time to which the
Employee is entitled per year as of the date of this Agreement,
or (ii) the amount of vacation time to which the Employee would
have become entitled if the Company's vacation policy in effect
as of the date of this Agreement and which is applicable to its
executive officers remained in effect throughout the Employment
Term.
(f) In addition, the Parties do hereby further confirm that any stock
agreements, stock option agreements, or Stockholder Agreement
previously entered into between the Parties (such agreements
being hereinafter referred to collectively as the "Pre-existing
Agreements"), all remain in full force and effect except as
otherwise provided herein. Notwithstanding the foregoing, to the
extent that any provision contained herein is inconsistent with
the terms of any of the Pre-existing Agreements, the terms of
this Agreement shall be controlling.
4. TERMINATION OF EMPLOYMENT. As indicated in Subsection 1(b)(ii), the
-------------------------
Employment Term may terminate prior to the date specified in Subsection 1(b)(i)
as follows:
(a) The Employee's employment hereunder will terminate without
further notice upon the death of the Employee.
(b) The Company may terminate the Employee's employment hereunder
effective immediately upon giving written notice of such
termination for "Cause". For these purposes, "Cause"
shall mean the following:
(i) Commission by the Employee (evidenced by a conviction or
written, voluntary and freely given confession) of a
criminal act constituting a felony;
3
<PAGE>
(ii) Commission by the Employee of a material breach or material
default of any of the Employee's agreements or
obligations under any provision of this Agreement,
including, without limitation, the Employee's agreements
and obligations under Subsections 2(a) through 2(e) and
Sections 8 and 9 of this Agreement, which is not cured in
all material respects within thirty (30) days after the
Chief Executive Officer or the designee thereof gives
written notice thereof to the Employee; or
(iii) Commission by the Employee, when carrying out the
Employee's duties under this Agreement, of acts or the
omission of any act, which both: (A) constitutes gross
negligence or willful misconduct and (B) results in
material economic harm to the Company or has a materially
adverse effect on the Company's operations, properties or
business relationships.
(c) The Employee's employment hereunder may be terminated by the
Company upon the Employee's disability, if the Employee is
prevented from performing the Employee's duties hereunder by
reason of physical or mental incapacity for a period of one
hundred eighty (180) consecutive days in any period of two
consecutive fiscal years of the Company, but the Employee shall
be entitled to full compensation and benefits hereunder until the
close of such one hundred and eighty (180) day period.
(d) The Company may terminate the Employee's employment hereunder
without Cause at any time upon thirty (30) days written notice.
(e) The Employee may terminate employment hereunder effective
immediately upon giving written notice of such termination for
"Good Reason", as defined in Subsection 4(g) below.
(f) The Employee may terminate employment hereunder without Good
Reason at any time upon thirty (30) days written notice.
(g) For purposes of this Agreement, "Good Reason" means the
occurrence of (i) any reduction in either the annual base salary
of the Employee or the Target Annual Bonus Percentage or maximum
annual bonus percentage applicable to the Employee under the
Bonus Plan, (ii) any material reduction in the position,
authority or office of the Employee, (iii) any material reduction
in the Employee's responsibilities or duties for the Company,
(iv) any material adverse change or reduction in the aggregate
"Minimum Benefits," as hereinafter defined, provided to the
Employee as of the date of this Agreement (provided that any
material reduction in such aggregate Minimum Benefits that is
required by law or applies generally to all employees of the
Company shall not constitute "Good Reason" as defined
hereunder), (v) any relocation of the Employee's principal
place of work with the Company to a place more than twenty-five
(25) miles from the
4
<PAGE>
geographical center of Greensboro, North Carolina, or (vi) the
material breach or material default by the Company of any of its
agreements or obligations under any provision of this Agreement.
As used in this Subsection 4(g), an "adverse change or material
reduction" in the aggregate Minimum Benefits shall be deemed to
result from any reduction or any series of reductions which, in
the aggregate, exceeds five percent (5%) of the value of such
aggregate Minimum Benefits determined as of the date of this
Agreement. As used in this Subsection 4(g), Minimum Benefits are
life insurance, accidental death, long term disability, short
term disability, medical, dental, and vision benefits and the
Company's expense reimbursement policy. The Employee shall give
written notice to the Company on or before the date of
termination of employment for Good Reason stating that the
Employee is terminating employment with the Company and
specifying in detail the reasons for such termination. If the
Company does not object to such notice by notifying the Employee
in writing within five (5) days following the date of the
Company's receipt of the Employee's notice of termination,
the Company shall be deemed to have agreed that such termination
was for Good Reason. The parties agree that "Good Reason"
will not be deemed to have occurred merely because the Company
becomes a subsidiary or division of another entity provided the
Employee continues to serve in the position set forth in Section
2 above of such subsidiary or division and such subsidiary or
division is comparable in size to the organization consisting of
the Company and its subsidiaries. The parties further agree that
"Good Reason" will be deemed to have occurred if the
purchaser, in connection with the sale or transfer of all or
substantially all of the assets of the Company, does not assume
this Agreement in accordance with Section 11 hereof.
5. SEVERANCE COMPENSATION. If the Employee's employment is terminated,
----------------------
the following severance provisions will apply:
(a) If the Employee's employment is terminated by the Company other
than for Cause or is terminated by the Employee for Good Reason,
then, through the remaining Employment Term as specified in
Subsection 1(b) hereof, determined without regard to Subsection
1(b)(ii) hereof, (such remaining Employment Term calculated
without regard to Subsection 1(b)(ii), and without regard to
whether the Employee elects accelerated payments of the
Employee's annual base salary and bonus in accordance with
Subsection 5(a)(v), is hereinafter referred to as the "Payment
Term") the Company shall:
(i) continue to pay the Employee's annual base salary in the
then prevailing amount and at the times specified in
Subsection 3(a) hereof, or if such annual base salary has
decreased during the one year period ending on the
Employee's termination of employment, at the highest rate
in effect during such one year period;
5
<PAGE>
(ii) continue the Employee's participation in the Bonus Plan
as provided in Subsection 3(b) hereof provided that the
Company will:
(A) pay the Employee a bonus under the Bonus Plan for the
partial year period ending on the date of the
Employee's termination of employment calculated as
if the Employee had continued to be employed for the
entire year except that the Employee's bonus
percentage (calculated at the time and in the manner
customary as of the date of this Agreement, but
disregarding the termination of employment of the
Employee) shall be applied to the Employee's annual
base salary payable in accordance with Subsection 3(a)
hereof for the partial year period ending on the
Employee's termination of employment; and
(B) thereafter, during the remainder of the Payment Term,
a bonus equal to the Employee's Target Annual Bonus
Percentage, multiplied by the Employee's annual base
salary in the amount specified in Subsection 5(a)(i)
payable during the year (or portion thereof) for which
the bonus is being calculated; with such amounts being
payable when bonuses under the Bonus Plan are
customarily payable, except that the final bonus shall
be payable with the final payment of the annual base
salary under Subsection 5(a)(i) hereof;
(iii) continue in effect the medical and dental coverage, long
and short-term disability protection, and any life
insurance protection (including life insurance protection
being paid for by the Employee), being provided to the
Employee immediately prior to the Employee's termination
of employment, or if any of such benefits have decreased
during the one year period ending on the Employee's
termination of employment, at the highest level in effect
during such one year period;
(iv) pay for executive outplacement services for the Employee
from a nationally recognized executive outplacement firm at
the level provided for vice-presidents of major
corporations, provided that such outplacement services will
be provided for a one year period commencing on the date of
termination of employment regardless of the Payment Term;
and
(v) In lieu of the payments described in Subsections 5(a)(i)
and 5(a)(ii) hereof, at the Employee's request, submitted
in writing to the Company within five (5) business days
after the date of the Employee's termination of
employment:
6
<PAGE>
(A) the Company will pay the total of the Employee's annual
base salary payments described in Subsection 5(a)(i) in a
single sum within thirty (30) days following the
Employee's termination of employment; and
(B) his Bonus Plan payments described in Subsection 5(a)(ii)
shall be made at the same time as the Employee's payment
under Subsection 5(a)(vi)(A) but shall be calculated using
the Employee's Target Annual Bonus Percentage for all
calculation purposes.
(b) If the Employee's employment hereunder terminates due to the
Employee's death, disability, termination by the Company for
Cause or termination by the Employee other than for Good Reason,
then no further compensation or benefits will be provided to the
Employee by the Company under this Agreement following the date
of such termination of employment other than payment of
compensation earned to the date of termination of employment but
not yet paid. As more fully and generally provided in Section
15 hereof, this Subsection 5(b) shall not be interpreted to deny
the Employee any benefits to which he may be entitled under any
plan or arrangement of the Company applicable to the Employee.
Likewise, this Subsection 5(b) shall not be interpreted to
entitle the Employee to a bonus under the Bonus Plan following
his termination of employment except as provided in the Bonus
Plan which requires employment on the last day of the Company's
taxable year as a condition to receipt of a bonus thereunder for
such year except in the cases of death, disability or retirement
at or after either age 62 with ten years of service or age 65.
(c) Notwithstanding anything contained in this Agreement to the
contrary, other than Section 15 hereof, if the Employee breaches
any of the Employee's obligations under Section 8 or 9 hereof,
no further severance payments or other benefits will be payable
to the Employee under this Section 5.
6. SEVERANCE PLAN. It is the intention of the Parties that this Agreement
--------------
provide special benefits to the Employee. If at any time the Company's
Executive Severance Benefit Plan would provide better cash severance benefits to
the Employee than this Agreement, the Employee may elect to receive such better
cash severance benefits in lieu of the cash severance benefits provided under
Subsections 5(a)(i) and 5(a)(ii), or Subsection 5(a)(v), of this Agreement,
whichever is applicable, while continuing to receive any other benefits or
coverages available under this Agreement. If this Agreement would provide
better cash severance benefits to the Employee than the Company's Executive
Severance Benefit Plan, the Employee shall receive the cash severance benefits
under this Agreement, as well as any other benefits or coverages available under
this Agreement. In such case, the cash severance benefits under this Agreement
shall be in lieu of the cash severance benefits payable under the Company's
Executive Severance Benefit Plan.
7
<PAGE>
7. PLAN AMENDMENTS. To the extent any provisions of this Agreement modify
---------------
the terms of any existing plan, policy or arrangement affecting the compensation
or benefits of the Employee, as appropriate, (a) such modification as set forth
herein shall be deemed an amendment to such plan, policy or arrangement as to
the Employee, and both the Company and the Employee hereby consent to such
amendment, (b) the Company will appropriately modify such plan, policy or
arrangement to correspond to this Agreement with respect to the Employee, or (c)
the Company will provide an "Alternative Benefit," as defined in Section 13
hereof, to or on behalf of the Employee in accordance with the provisions of
such Section 13.
8. CONFIDENTIAL INFORMATION. The Employee agrees that the Employee will
------------------------
not, during the Employment Term or at any time thereafter, either directly or
indirectly, disclose or make known to any other person, firm, or corporation any
confidential information, trade secret or proprietary information of the Company
that the Employee may acquire in the performance of the Employee's duties
hereunder (except in good faith in the ordinary course of business for the
Company to a person who will be advised by the Employee to keep such information
confidential) or make use of any of such confidential information except in the
performance of the Employee's duties or when required to do so by legal
process, by any governmental agency having supervisory authority over the
business of the Company or by any administrative or legislative body (including
a committee thereof) that requires the Employee to divulge, disclose or make
accessible such information. In the event that the Employee is so ordered, the
Employee shall so advise the Company in order to allow the Company the
opportunity to object to or otherwise resist such order. Upon the termination of
the Employee's employment with the Company, the Employee agrees to deliver
forthwith to the Company any and all proprietary literature, documents,
correspondence, and other proprietary materials and records furnished to or
acquired by the Employee during the course of such employment. In the event of a
breach or threatened breach of this Section 8 by the Employee, the Company will
be entitled to preliminary and permanent injunctive relief, without bond or
security, sufficient to enforce the provisions hereof and the Company will be
entitled to pursue such other remedies at law or in equity which it deems
appropriate.
9. NON-COMPETITION. In consideration of this Agreement, the Employee
---------------
agrees that, during the Employment Term, and for one year thereafter, the
Employee shall not act as a proprietor, investor, director, officer, employee,
substantial stockholder, consultant, or partner in any business engaged to a
material extent in the manufacture or sale of (a) mattresses or other bedding
products or (b) any other products which constitute more than ten percent (10%)
of the Company's revenues at the time in direct competition with the Company
in any market. The Employee understands that the foregoing restrictions may
limit the Employee's ability to engage in certain business pursuits during the
period provided for above, but acknowledges that the Employee will receive
sufficiently higher remuneration and other benefits from the Company hereunder
than the Employee would otherwise receive to justify such restriction. The
Employee acknowledges that the Employee understands the effect of the provisions
of this Section 9, and that the Employee has had reasonable time to consider the
effect of these provisions, and that the Employee was encouraged to and had an
opportunity to consult an attorney with respect to these provisions. The Company
and the Employee consider the restrictions contained in this Section 9 to be
reasonable and necessary. Nevertheless, if any aspect of these restrictions is
found to be unreasonable or otherwise unenforceable by a court of competent
jurisdiction, the Parties intend for such restrictions to be modified by such
court so as to be reasonable and enforceable and, as so modified by the court,
to
8
<PAGE>
be fully enforced. In the event of a breach or threatened breach of this Section
9 by the Employee, the Company will be entitled to preliminary and permanent
injunctive relief, without bond or security, sufficient to enforce the
provisions hereof and the Company will be entitled to pursue such other remedies
at law or in equity which it deems appropriate.
10. NOTICES. For purposes of this Agreement, all communications provided
-------
for herein shall be in writing and shall be deemed to have been duly given when
hand delivered or mailed by United States registered or certified mail, return
receipt requested, postage prepaid, addressed as follows:
(a) If the notice is to the Company:
Mr. Ronald L. Jones
Chief Executive Officer
Sealy Corporation
P.O. Box 2806
High Point, NC 27261
With a copy to:
Kenneth Walker, Esq.
Vice President and General Counsel
Sealy Corporation
P.O. Box 2806
High Point, NC 27261
(b) If the notice is to the Employee:
______________________________
______________________________
______________________________
or to such other address as either party may have furnished to the other in
writing and in accordance herewith; except that notices of change of address
shall be effective only upon receipt.
11. ASSIGNMENT; BINDING EFFECT. This Agreement shall be binding upon and
--------------------------
inure to the benefit of the parties to this Agreement and their respective
successors, heirs (in the case of the Employee) and permitted assigns. No
rights or obligations of the Company under this Agreement may be assigned or
transferred by the Company except that such rights or obligations may be
assigned or transferred in connection with the sale or transfer of all or
substantially all of the assets of the Company, provided that the assignee or
transferee is the successor to all or substantially all of the assets of the
Company and such assignee or transferee expressly assumes the liabilities,
obligations and duties of the Company, as contained in this Agreement, either
contractually or as a matter of law. The Company further agrees that, in the
event of a sale or transfer of assets as described in the preceding sentence, it
shall be a condition precedent to the consummation of any
9
<PAGE>
such transaction that the assignee or transferee expressly assumes the
liabilities, obligations and duties of the Company hereunder. No rights or
obligations of the Employee under this Agreement may be assigned or transferred
by the Employee other than the Employee's rights to compensation and benefits,
which may be transferred only by will or operation of law, except as provided in
this Section 11.
The Employee shall be entitled, to the extent permitted under any
applicable law, to select and change a beneficiary or beneficiaries to receive
any compensation or benefits payable hereunder following the Employee's death
by giving the Company written notice thereof. In the absence of such a
selection, any compensation or benefit payable under this Agreement following
the death of the Employee shall be payable to the Employee's spouse, or if
such spouse shall not survive the Employee, to the Employee's estate. In the
event of the Employee's death or a judicial determination of his incompetence,
reference in this Agreement to the Employee shall be deemed, where appropriate,
to refer to the Employee's beneficiary, estate or other legal representative.
12. INVALID PROVISIONS. Any provision of this Agreement that is
------------------
prohibited or unenforceable shall be ineffective to the extent, but only to the
extent, of such prohibition or unenforceability without invalidating the
remaining portions hereof and such remaining portions of this Agreement shall
continue to be in full force and effect. In the event that any provision of
this Agreement shall be determined to be invalid or unenforceable, the Parties
will negotiate in good faith to replace such provision with another provision
that will be valid or enforceable and that is as close as practicable to the
provisions held invalid or unenforceable.
13. ALTERNATIVE SATISFACTION OF COMPANY'S OBLIGATIONS. In the event
-------------------------------------------------
this Agreement provides for payments or benefits to or on behalf of the Employee
which cannot be provided under the Company's benefit plans, policies or
arrangements either because such plans, policies or arrangements no longer exist
or no longer provide such benefits or because provision of such benefits to the
Employee would adversely affect the tax qualified or tax advantaged status of
such plans, policies or arrangements for the Employee or other participants
therein, the Company may provide the Employee with an "Alternative Benefit,"
as defined in this Section 13, in lieu thereof. The Alternative Benefit is a
benefit or payment which places the Employee and the Employee's dependents in
at least as good of an economic position as if the benefit promised by this
Agreement (a) were provided exactly as called for by this Agreement, and (b) had
the favorable economic, tax and legal characteristics customary for plans,
policies or arrangements of that type. Furthermore, if such adverse consequence
would affect the Employee or the Employee's dependents, the Employee shall
have the right to require that the Company provide such an Alternative Benefit.
14. ENTIRE AGREEMENT, MODIFICATION. Subject to the provisions of Section
------------------------------
15 hereof, this Agreement contains the entire agreement between the Parties with
respect to the employment of the Employee by the Company and supersedes all
prior and contemporaneous agreements, representations, and understandings of the
Parties, whether oral or written. No modification, amendment, or waiver of any
of the provisions of this Agreement shall be effective unless in writing,
specifically referring hereto, and signed by both Parties.
10
<PAGE>
15. NON-EXCLUSIVITY OF RIGHTS. Notwithstanding the foregoing provisions
-------------------------
of Section 14, nothing in this Agreement shall prevent or limit the Employee's
continuing or future participation in any benefit, bonus, incentive or other
plan, program, policy or practice provided by the Company for its executive
officers, nor shall anything herein limit or otherwise affect such rights as the
Employee has or may have under any stock option, restricted stock or other
agreements with the Company or any of its subsidiaries. Amounts which the
Employee or the Employee's dependents or beneficiaries are otherwise entitled
to receive under any such plan, policy, practice or program shall not be reduced
by this Agreement except as provided in Section 6 hereof with respect to
payments under the Executive Severance Benefit Plan if cash payments of annual
base salary are made hereunder.
16. WAIVER OF BREACH. The failure at any time to enforce any of the
----------------
provisions of this Agreement or to require performance by the other party of any
of the provisions of this Agreement shall in no way be construed to be a waiver
of such provisions or to affect either the validity of this Agreement or any
part of this Agreement or the right of either party thereafter to enforce each
and every provision of this Agreement in accordance with the terms of this
Agreement.
17. GOVERNING LAW. This Agreement has been made in, and shall be governed
-------------
and construed in accordance with the laws of, the State of Ohio. The Parties
agree that this Agreement is not an "employee benefit plan" or part of an
"employee benefit plan" which is subject to the provisions of the Employee
Retirement Income Security Act of 1974, as amended.
18. TAX WITHHOLDING. The Company may withhold from any amounts payable
---------------
under this Agreement such federal, state or local taxes as shall be required to
be withheld pursuant to any applicable law or regulation. Where withholding
applies to Class A Shares, the Company shall make cashless withholding available
to the Employee.
19. EXPENSE OF ENFORCEMENT. The Company shall reimburse reasonable
----------------------
attorney fees and expenses incurred by the Employee to enforce the provisions of
this Agreement, even if his claims are not successful, provided they are not
ultimately determined by the court to be frivolous.
20. REPRESENTATION. The Company represents and warrants that it is fully
--------------
authorized and empowered to enter into this Agreement and that the performance
of its obligations under this Agreement will not violate any agreement between
it and any other person, firm or organization.
21. SUBSIDIARIES AND AFFILIATES. Notwithstanding any contrary provision
---------------------------
of this Agreement, to the extent it does not adversely affect the Employee, the
Company may provide the compensation and benefits to which the Employee is
entitled hereunder through one or more subsidiaries or affiliates, including,
without limitation, Sealy, Inc.
22. NO MITIGATION OR OFFSET. In the event of any termination of
-----------------------
employment, the Employee shall be under no obligation to seek other employment.
Amounts due the Employee
11
<PAGE>
under this Agreement shall not be offset by any remuneration attributable to any
subsequent employment he may obtain.
23. SOLE REMEDY. The Parties agree that the remedies of each against the
-----------
other for breach of this Agreement shall be limited to enforcement of this
Agreement and recovery of the amounts and remedies provided for herein. The
Parties, however, further agree that such limitation shall not prevent either
Party from proceeding against the other to recover for a claim other than under
this Agreement.
IN WITNESS WHEREOF, the Company and the Employee have executed this
Agreement as of the day and year first above written.
SEALY CORPORATION
By: /s/ Ronald L. Jones
------------------------------------
_______________________________________
EMPLOYEE:
/s/ E. Lee Wyatt, Jr.
---------------------------------------
_______________________________________
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<PAGE>
EXHIBIT 10.54
EMPLOYMENT AGREEMENT
--------------------
THIS EMPLOYMENT AGREEMENT is entered into as of the 15th day of October,
1998, by and between SEALY CORPORATION, a Delaware corporation (the "Company"),
and JAMES GOUGHENOUR (the "Employee"), an individual residing at 379 Armour
Road, Avon Lake, Ohio 44012.
W I T N E S S E T H:
WHEREAS, the Company and the Employee (collectively "the Parties") desire
to enter into this Employment Agreement (the "Agreement") as hereinafter set
forth;
NOW, THEREFORE, the Company and Employee agree as follows:
1. EMPLOYMENT TERM.
---------------
(a) During the period specified in Subsection l(b) hereof (the
"Employment Term"), the Company shall employ the Employee, and
the Employee shall serve the Company based on the terms and
subject to the conditions set forth herein.
(b) The Employment Term shall:
(i) be for a rolling one (1) year term commencing on the date
of this Agreement, which term shall automatically be
extended one calendar day for each calendar day that the
Employee is employed by the Company after the date of this
Agreement so that the remaining Employment Term shall always
be one (1) year;
(ii) provided that the Employment Term may terminate as
provided in Section 4 hereof prior to the date specified
above in this Subsection 1(b).
2. POSITION, DUTIES, AND RESPONSIBILITIES. At all times during the
--------------------------------------
Employment Term, the Employee shall:
(a) Hold the position of Corporate Vice President, Technology and
Manufacturing Engineering;
(b) Have the current job grade and generally the duties and
responsibilities listed on the Company's current position
description for the position indicated in Section 2(a) above, and
such reduced or additional duties as may be assigned to the
Employee from time to time by the Board of Directors of the
Company (the "Board") or the Chief Executive Officer of the
Company (the "Chief Executive Officer") which are generally
consistent with the position indicated in Section 2(a) above;
<PAGE>
(c) Adhere to such reasonable written policies and directives, and
such reasonable unwritten policies and directives as are of
common knowledge to executive officers of the Company, as may be
promulgated from time to time by the Board or the Chief Executive
Officer and which are applicable to executive officers of the
Company;
(d) Invest in the Company only in accordance with any insider trading
policy of the Company in effect at the time of the investment;
and
(e) Devote the Employee's entire business time, energy, and talent to
the business, and to the furtherance of the purposes and
objectives, of the Company, and neither directly nor indirectly
act as an employee of or render any business, commercial, or
professional services to any other person, firm or organization
for compensation, without the prior written approval of the Board
or the Chief Executive Officer.
Nothing in this Agreement shall preclude the Employee from devoting
reasonable periods of time to charitable and community activities or the
management of the Employee's investment assets, provided such activities do not
interfere with the performance by the Employee of the Employee's duties
hereunder.
3. SALARY, BONUS AND BENEFITS. For services rendered by the Employee on
--------------------------
behalf of the Company during the Employment Term, the following salary, bonus
and benefits shall be provided to the Employee by the Company:
(a) The Company shall pay to the Employee, in equal installments,
according to the Company's then current practice for paying its
executive officers in effect from time to time during the
Employment Term, an annual base salary at the initial rate of One
Hundred Ninety Thousand Dollars ($190,000). This salary shall be
subject to annual review by the Human Resources Committee of the
Board (the "Committee") and may be increased, but not decreased,
to the extent, if any, that the Committee may determine.
(b) The Employee shall participate in the Sealy Corporation Annual
Bonus Plan (the "Bonus Plan") in accordance with the provisions
of that Plan as in effect as of the date of this Agreement. The
Employee's Target annual bonus, as established by the Committee
under the Bonus Plan as of the date of this Agreement, is thirty-
five percent (35%) (his "Target Annual Bonus Percentage") of
annual base salary, with a range of zero percent (0%) to seventy
percent (70%) of annual base salary.
(c) The Employee shall be eligible for participation in such other
benefit plans, including, but not limited to, the Company's
Profit Sharing Plan and Trust, Executive Severance Benefit Plan,
Benefit Equalization Plan, Short-Term and Long Term Disability
Plans, Group Term Life Insurance Plan, Medical Plan or PPO,
Dental Plan, the 401(k) feature of the Profit Sharing Plan and
the 1998 Stock Option Plan, as the Board may adopt from time to
time and in
2
<PAGE>
which the Company's executive officers are eligible to
participate. Such participation shall be subject to the terms and
conditions set forth in the applicable plan documents. As is more
fully set forth in Section 7 hereof, the Employee shall not be
entitled to duplicative payments under this Agreement and the
Executive Severance Benefit Plan.
(d) Without limiting the generality of Subsection 3(c) above, for so
long as such coverage shall be available to the executive
officers of the Company, the Employee shall be eligible to
participate in the Company's Group Term Life Insurance Plan with
a death benefit to be provided at the level of one and one half
(1 1/2) times annual base salary at Company expense, plus
extended coverage with a death benefit to be provided of at least
the level in effect on the date of this Agreement for the
Employee under such Plan at the Employee's discretion and
expense.
(e) The Employee shall be entitled to take, during each calendar year
period of the Employment Term, commencing on the 1st of January
after execution of this Agreement, vacation time equal to at
least the greater of (i) the amount of vacation time to which the
Employee is entitled per year as of the date of this Agreement,
or (ii) the amount of vacation time to which the Employee would
have become entitled if the Company's vacation policy in effect
as of the date of this Agreement and which is applicable to its
executive officers remained in effect throughout the Employment
Term.
(f) In addition, the Parties do hereby further confirm that any stock
agreements, stock option agreements, or Stockholder Agreement
previously entered into between the Parties (such agreements
being hereinafter referred to collectively as the "Pre-existing
Agreements"), all remain in full force and effect except as
otherwise provided herein. Notwithstanding the foregoing, to the
extent that any provision contained herein is inconsistent with
the terms of any of the Pre-existing Agreements, the terms of
this Agreement shall be controlling.
4. TERMINATION OF EMPLOYMENT. As indicated in Subsection 1(b)(ii), the
-------------------------
Employment Term may terminate prior to the date specified in Subsection 1(b)(i)
as follows:
(a) The Employee's employment hereunder will terminate without
further notice upon the death of the Employee.
(b) The Company may terminate the Employee's employment hereunder
effective immediately upon giving written notice of such
termination for "Cause". For these purposes, "Cause" shall mean
the following:
(i) Commission by the Employee (evidenced by a conviction or
written, voluntary and freely given confession) of a
criminal act constituting a felony;
3
<PAGE>
(ii) Commission by the Employee of a material breach or
material default of any of the Employee's agreements or
obligations under any provision of this Agreement,
including, without limitation, the Employee's agreements
and obligations under Subsections 2(a) through 2(e) and
Sections 8 and 9 of this Agreement, which is not cured in
all material respects within thirty (30) days after the
Chief Executive Officer or the designee thereof gives
written notice thereof to the Employee; or
(iii) Commission by the Employee, when carrying out the
Employee's duties under this Agreement, of acts or the
omission of any act, which both: (A) constitutes gross
negligence or willful misconduct and (B) results in
material economic harm to the Company or has a materially
adverse effect on the Company's operations, properties or
business relationships.
(c) The Employee's employment hereunder may be terminated by the
Company upon the Employee's disability, if the Employee is
prevented from performing the Employee's duties hereunder by
reason of physical or mental incapacity for a period of one
hundred eighty (180) consecutive days in any period of two
consecutive fiscal years of the Company, but the Employee shall
be entitled to full compensation and benefits hereunder until the
close of such one hundred and eighty (180) day period.
(d) The Company may terminate the Employee's employment hereunder
without Cause at any time upon thirty (30) days written notice.
(e) The Employee may terminate employment hereunder effective
immediately upon giving written notice of such termination for
"Good Reason", as defined in Subsection 4(g) below.
(f) The Employee may terminate employment hereunder without Good
Reason at any time upon thirty (30) days written notice.
(g) For purposes of this Agreement, "Good Reason" means the
occurrence of (i) any reduction in either the annual base salary
of the Employee or the Target Annual Bonus Percentage or maximum
annual bonus percentage applicable to the Employee under the
Bonus Plan, (ii) any material reduction in the position,
authority or office of the Employee, (iii) any material reduction
in the Employee's responsibilities or duties for the Company,
(iv) any material adverse change or reduction in the aggregate
"Minimum Benefits," as hereinafter defined, provided to the
Employee as of the date of this Agreement (provided that any
material reduction in such aggregate Minimum Benefits that is
required by law or applies generally to all employees of the
Company shall not constitute "Good Reason" as defined hereunder),
(v) any relocation of the Employee's principal place of work with
the Company to a place more than twenty-five (25) miles from the
4
<PAGE>
geographical center of Greensboro, North Carolina, or (vi) the
material breach or material default by the Company of any of its
agreements or obligations under any provision of this Agreement.
As used in this Subsection 4(g), an "adverse change or material
reduction" in the aggregate Minimum Benefits shall be deemed to
result from any reduction or any series of reductions which, in
the aggregate, exceeds five percent (5%) of the value of such
aggregate Minimum Benefits determined as of the date of this
Agreement. As used in this Subsection 4(g), Minimum Benefits are
life insurance, accidental death, long term disability, short
term disability, medical, dental, and vision benefits and the
Company's expense reimbursement policy. The Employee shall give
written notice to the Company on or before the date of
termination of employment for Good Reason stating that the
Employee is terminating employment with the Company and
specifying in detail the reasons for such termination. If the
Company does not object to such notice by notifying the Employee
in writing within five (5) days following the date of the
Company's receipt of the Employee's notice of termination, the
Company shall be deemed to have agreed that such termination was
for Good Reason. The parties agree that "Good Reason" will not
be deemed to have occurred merely because the Company becomes a
subsidiary or division of another entity provided the Employee
continues to serve in the position set forth in Section 2 above
of such subsidiary or division and such subsidiary or division is
comparable in size to the organization consisting of the Company
and its subsidiaries. The parties further agree that "Good
Reason" will be deemed to have occurred if the purchaser, in
connection with the sale or transfer of all or substantially all
of the assets of the Company, does not assume this Agreement in
accordance with Section 11 hereof.
5. SEVERANCE COMPENSATION. If the Employee's employment is terminated,
----------------------
the following severance provisions will apply:
(a) If the Employee's employment is terminated by the Company other
than for Cause or is terminated by the Employee for Good Reason,
then, through the remaining Employment Term as specified in
Subsection 1(b) hereof, determined without regard to Subsection
1(b)(ii) hereof, (such remaining Employment Term calculated
without regard to Subsection 1(b)(ii), and without regard to
whether the Employee elects accelerated payments of the
Employee's annual base salary and bonus in accordance with
Subsection 5(a)(v), is hereinafter referred to as the "Payment
Term") the Company shall:
(i) continue to pay the Employee's annual base salary in the
then prevailing amount and at the times specified in
Subsection 3(a) hereof, or if such annual base salary has
decreased during the one year period ending on the
Employee's termination of employment, at the highest rate in
effect during such one year period;
5
<PAGE>
(ii) continue the Employee's participation in the Bonus Plan
as provided in Subsection 3(b) hereof provided that the
Company will:
(A) pay the Employee a bonus under the Bonus Plan for the
partial year period ending on the date of the
Employee's termination of employment calculated as if
the Employee had continued to be employed for the
entire year except that the Employee's bonus percentage
(calculated at the time and in the manner customary as
of the date of this Agreement, but disregarding the
termination of employment of the Employee) shall be
applied to the Employee's annual base salary payable in
accordance with Subsection 3(a) hereof for the partial
year period ending on the Employee's termination of
employment; and
(B) thereafter, during the remainder of the Payment Term, a
bonus equal to the Employee's Target Annual Bonus
Percentage, multiplied by the Employee's annual base
salary in the amount specified in Subsection 5(a)(i)
payable during the year (or portion thereof) for which
the bonus is being calculated; with such amounts being
payable when bonuses under the Bonus Plan are
customarily payable, except that the final bonus shall
be payable with the final payment of the annual base
salary under Subsection 5(a)(i) hereof;
(iii) continue in effect the medical and dental coverage,
long and short-term disability protection, and any life
insurance protection (including life insurance protection
being paid for by the Employee), being provided to the
Employee immediately prior to the Employee's termination of
employment, or if any of such benefits have decreased during
the one year period ending on the Employee's termination of
employment, at the highest level in effect during such one
year period;
(iv) pay for executive outplacement services for the Employee
from a nationally recognized executive outplacement firm at
the level provided for vice-presidents of major
corporations, provided that such outplacement services will
be provided for a one year period commencing on the date of
termination of employment regardless of the Payment Term;
and
(v) In lieu of the payments described in Subsections 5(a)(i)
and 5(a)(ii) hereof, at the Employee's request, submitted in
writing to the Company within five (5) business days after
the date of the Employee's termination of employment:
6
<PAGE>
(A) the Company will pay the total of the Employee's annual
base salary payments described in Subsection 5(a)(i) in
a single sum within thirty (30) days following the
Employee's termination of employment; and
(B) his Bonus Plan payments described in Subsection
5(a)(ii) shall be made at the same time as the
Employee's payment under Subsection 5(a)(vi)(A) but
shall be calculated using the Employee's Target Annual
Bonus Percentage for all calculation purposes.
(b) If the Employee's employment hereunder terminates due to the
Employee's death, disability, termination by the Company for
Cause or termination by the Employee other than for Good Reason,
then no further compensation or benefits will be provided to the
Employee by the Company under this Agreement following the date
of such termination of employment other than payment of
compensation earned to the date of termination of employment but
not yet paid. As more fully and generally provided in Section
15 hereof, this Subsection 5(b) shall not be interpreted to deny
the Employee any benefits to which he may be entitled under any
plan or arrangement of the Company applicable to the Employee.
Likewise, this Subsection 5(b) shall not be interpreted to
entitle the Employee to a bonus under the Bonus Plan following
his termination of employment except as provided in the Bonus
Plan which requires employment on the last day of the Company's
taxable year as a condition to receipt of a bonus thereunder for
such year except in the cases of death, disability or retirement
at or after either age 62 with ten years of service or age 65.
(c) Notwithstanding anything contained in this Agreement to the
contrary, other than Section 15 hereof, if the Employee breaches
any of the Employee's obligations under Section 8 or 9 hereof, no
further severance payments or other benefits will be payable to
the Employee under this Section 5.
6. SEVERANCE PLAN. It is the intention of the Parties that this Agreement
--------------
provide special benefits to the Employee. If at any time the Company's
Executive Severance Benefit Plan would provide better cash severance benefits to
the Employee than this Agreement, the Employee may elect to receive such better
cash severance benefits in lieu of the cash severance benefits provided under
Subsections 5(a)(i) and 5(a)(ii), or Subsection 5(a)(v), of this Agreement,
whichever is applicable, while continuing to receive any other benefits or
coverages available under this Agreement. If this Agreement would provide
better cash severance benefits to the Employee than the Company's Executive
Severance Benefit Plan, the Employee shall receive the cash severance benefits
under this Agreement, as well as any other benefits or coverages available under
this Agreement. In such case, the cash severance benefits under this Agreement
shall be in lieu of the cash severance benefits payable under the Company's
Executive Severance Benefit Plan.
7
<PAGE>
7. PLAN AMENDMENTS. To the extent any provisions of this Agreement modify
---------------
the terms of any existing plan, policy or arrangement affecting the compensation
or benefits of the Employee, as appropriate, (a) such modification as set forth
herein shall be deemed an amendment to such plan, policy or arrangement as to
the Employee, and both the Company and the Employee hereby consent to such
amendment, (b) the Company will appropriately modify such plan, policy or
arrangement to correspond to this Agreement with respect to the Employee, or (c)
the Company will provide an "Alternative Benefit," as defined in Section 13
hereof, to or on behalf of the Employee in accordance with the provisions of
such Section 13.
8. CONFIDENTIAL INFORMATION. The Employee agrees that the Employee will
------------------------
not, during the Employment Term or at any time thereafter, either directly or
indirectly, disclose or make known to any other person, firm, or corporation any
confidential information, trade secret or proprietary information of the Company
that the Employee may acquire in the performance of the Employee's duties
hereunder (except in good faith in the ordinary course of business for the
Company to a person who will be advised by the Employee to keep such information
confidential) or make use of any of such confidential information except in the
performance of the Employee's duties or when required to do so by legal process,
by any governmental agency having supervisory authority over the business of the
Company or by any administrative or legislative body (including a committee
thereof) that requires the Employee to divulge, disclose or make accessible such
information. In the event that the Employee is so ordered, the Employee shall
so advise the Company in order to allow the Company the opportunity to object to
or otherwise resist such order. Upon the termination of the Employee's
employment with the Company, the Employee agrees to deliver forthwith to the
Company any and all proprietary literature, documents, correspondence, and other
proprietary materials and records furnished to or acquired by the Employee
during the course of such employment. In the event of a breach or threatened
breach of this Section 8 by the Employee, the Company will be entitled to
preliminary and permanent injunctive relief, without bond or security,
sufficient to enforce the provisions hereof and the Company will be entitled to
pursue such other remedies at law or in equity which it deems appropriate.
9. NON-COMPETITION. In consideration of this Agreement, the Employee
---------------
agrees that, during the Employment Term, and for one year thereafter, the
Employee shall not act as a proprietor, investor, director, officer, employee,
substantial stockholder, consultant, or partner in any business engaged to a
material extent in the manufacture or sale of (a) mattresses or other bedding
products or (b) any other products which constitute more than ten percent (10%)
of the Company's revenues at the time in direct competition with the Company in
any market. The Employee understands that the foregoing restrictions may limit
the Employee's ability to engage in certain business pursuits during the period
provided for above, but acknowledges that the Employee will receive sufficiently
higher remuneration and other benefits from the Company hereunder than the
Employee would otherwise receive to justify such restriction. The Employee
acknowledges that the Employee understands the effect of the provisions of this
Section 9, and that the Employee has had reasonable time to consider the effect
of these provisions, and that the Employee was encouraged to and had an
opportunity to consult an attorney with respect to these provisions. The
Company and the Employee consider the restrictions contained in this Section 9
to be reasonable and necessary. Nevertheless, if any aspect of these
restrictions is found to be unreasonable or otherwise unenforceable by a court
of competent jurisdiction, the Parties intend for such restrictions to be
modified by such court so as to be reasonable and enforceable and, as so
modified by the court, to
8
<PAGE>
be fully enforced. In the event of a breach or threatened breach of this Section
9 by the Employee, the Company will be entitled to preliminary and permanent
injunctive relief, without bond or security, sufficient to enforce the
provisions hereof and the Company will be entitled to pursue such other remedies
at law or in equity which it deems appropriate.
10. NOTICES. For purposes of this Agreement, all communications provided
-------
for herein shall be in writing and shall be deemed to have been duly given when
hand delivered or mailed by United States registered or certified mail, return
receipt requested, postage prepaid, addressed as follows:
(a) If the notice is to the Company:
Mr. Ronald L. Jones
Chief Executive Officer
Sealy Corporation
P.O. Box 2806
High Point, NC 27261
With a copy to:
Kenneth Walker, Esq.
Vice President and General Counsel
Sealy Corporation
P.O. Box 2806
High Point, NC 27261
(b) If the notice is to the Employee at the Employee's residence
address as listed in the first paragraph above
or to such other address as either party may have furnished to the other in
writing and in accordance herewith; except that notices of change of address
shall be effective only upon receipt.
11. ASSIGNMENT; BINDING EFFECT. This Agreement shall be binding upon and
--------------------------
inure to the benefit of the parties to this Agreement and their respective
successors, heirs (in the case of the Employee) and permitted assigns. No
rights or obligations of the Company under this Agreement may be assigned or
transferred by the Company except that such rights or obligations may be
assigned or transferred in connection with the sale or transfer of all or
substantially all of the assets of the Company, provided that the assignee or
transferee is the successor to all or substantially all of the assets of the
Company and such assignee or transferee expressly assumes the liabilities,
obligations and duties of the Company, as contained in this Agreement, either
contractually or as a matter of law. The Company further agrees that, in the
event of a sale or transfer of assets as described in the preceding sentence, it
shall be a condition precedent to the consummation of any such transaction that
the assignee or transferee expressly assumes the liabilities, obligations and
duties of the Company hereunder. No rights or obligations of the Employee under
this Agreement may be assigned or transferred by the Employee other than the
Employee's rights to compensation and benefits, which may be transferred only by
will or operation of law, except as provided in this Section 11.
9
<PAGE>
The Employee shall be entitled, to the extent permitted under any
applicable law, to select and change a beneficiary or beneficiaries to receive
any compensation or benefits payable hereunder following the Employee's death by
giving the Company written notice thereof. In the absence of such a selection,
any compensation or benefit payable under this Agreement following the death of
the Employee shall be payable to the Employee's spouse, or if such spouse shall
not survive the Employee, to the Employee's estate. In the event of the
Employee's death or a judicial determination of his incompetence, reference in
this Agreement to the Employee shall be deemed, where appropriate, to refer to
the Employee's beneficiary, estate or other legal representative.
12. INVALID PROVISIONS. Any provision of this Agreement that is
------------------
prohibited or unenforceable shall be ineffective to the extent, but only to the
extent, of such prohibition or unenforceability without invalidating the
remaining portions hereof and such remaining portions of this Agreement shall
continue to be in full force and effect. In the event that any provision of
this Agreement shall be determined to be invalid or unenforceable, the Parties
will negotiate in good faith to replace such provision with another provision
that will be valid or enforceable and that is as close as practicable to the
provisions held invalid or unenforceable.
13. ALTERNATIVE SATISFACTION OF COMPANY'S OBLIGATIONS. In the event this
-------------------------------------------------
Agreement provides for payments or benefits to or on behalf of the Employee
which cannot be provided under the Company's benefit plans, policies or
arrangements either because such plans, policies or arrangements no longer exist
or no longer provide such benefits or because provision of such benefits to the
Employee would adversely affect the tax qualified or tax advantaged status of
such plans, policies or arrangements for the Employee or other participants
herein, the Company may provide the Employee with an "Alternative Benefit," as
defined in this Section 13, in lieu thereof. The Alternative Benefit is a
benefit or payment which places the Employee and the Employee's dependents in at
least as good of an economic position as if the benefit promised by this
Agreement (a) were provided exactly as called for by this Agreement, and (b) had
the favorable economic, tax and legal characteristics customary for plans,
policies or arrangements of that type. Furthermore, if such adverse consequence
would affect the Employee or the Employee's dependents, the Employee shall have
the right to require that the Company provide such an Alternative Benefit.
14. ENTIRE AGREEMENT, MODIFICATION. Subject to the provisions of Section
------------------------------
15 hereof, this Agreement contains the entire agreement between the Parties with
respect to the employment of the Employee by the Company and supersedes all
prior and contemporaneous agreements, representations, and understandings of the
Parties, whether oral or written. No modification, amendment, or waiver of any
of the provisions of this Agreement shall be effective unless in writing,
specifically referring hereto, and signed by both Parties.
15. NON-EXCLUSIVITY OF RIGHTS. Notwithstanding the foregoing provisions
-------------------------
of Section 14, nothing in this Agreement shall prevent or limit the Employee's
continuing or future participation in any benefit, bonus, incentive or other
plan, program, policy or practice provided by the Company for its executive
officers, nor shall anything herein limit or otherwise affect such rights as the
Employee has or may have under any stock option, restricted stock or other
agreements with the Company or any of its subsidiaries. Amounts which the
Employee or the Employee's dependents or beneficiaries are otherwise entitled to
receive under any such plan, policy, practice
10
<PAGE>
or program shall not be reduced by this Agreement except as provided in Section
6 hereof with respect to payments under the Executive Severance Benefit Plan if
cash payments of annual base salary are made hereunder.
16. WAIVER OF BREACH. The failure at any time to enforce any of the
----------------
provisions of this Agreement or to require performance by the other party of any
of the provisions of this Agreement shall in no way be construed to be a waiver
of such provisions or to affect either the validity of this Agreement or any
part of this Agreement or the right of either party thereafter to enforce each
and every provision of this Agreement in accordance with the terms of this
Agreement.
17. GOVERNING LAW. This Agreement has been made in, and shall be governed
-------------
and construed in accordance with the laws of, the State of Ohio. The Parties
agree that this Agreement is not an "employee benefit plan" or part of an
"employee benefit plan" which is subject to the provisions of the Employee
Retirement Income Security Act of 1974, as amended.
18. TAX WITHHOLDING. The Company may withhold from any amounts payable
---------------
under this Agreement such federal, state or local taxes as shall be required to
be withheld pursuant to any applicable law or regulation. Where withholding
applies to Class A Shares, the Company shall make cashless withholding available
to the Employee.
19. EXPENSE OF ENFORCEMENT. The Company shall reimburse reasonable
----------------------
attorney fees and expenses incurred by the Employee to enforce the provisions of
this Agreement, even if his claims are not successful, provided they are not
ultimately determined by the court to be frivolous.
20. REPRESENTATION. The Company represents and warrants that it is fully
--------------
authorized and empowered to enter into this Agreement and that the performance
of its obligations under this Agreement will not violate any agreement between
it and any other person, firm or organization.
21. SUBSIDIARIES AND AFFILIATES. Notwithstanding any contrary provision
---------------------------
of this Agreement, to the extent it does not adversely affect the Employee, the
Company may provide the compensation and benefits to which the Employee is
entitled hereunder through one or more subsidiaries or affiliates, including,
without limitation, Sealy, Inc.
22. NO MITIGATION OR OFFSET. In the event of any termination of
-----------------------
employment, the Employee shall be under no obligation to seek other employment.
Amounts due the Employee under this Agreement shall not be offset by any
remuneration attributable to any subsequent employment he may obtain.
23. SOLE REMEDY. The Parties agree that the remedies of each against the
-----------
other for breach of this Agreement shall be limited to enforcement of this
Agreement and recovery of the amounts and remedies provided for herein. The
Parties, however, further agree that such limitation shall not prevent either
Party from proceeding against the other to recover for a claim other than under
this Agreement.
11
<PAGE>
IN WITNESS WHEREOF, the Company and the Employee have executed this
Agreement as of the day and year first above written.
SEALY CORPORATION
By: /s/ James Goughenour
-----------------------------------
______________________________________
EMPLOYEE:
/s/ Kenneth L. Walker
--------------------------------------
______________________________________
12
<PAGE>
EXHIBIT 10.55
EMPLOYMENT AGREEMENT
--------------------
THIS EMPLOYMENT AGREEMENT is entered into as of the 15th day of October,
1998, by and between SEALY CORPORATION, a Delaware corporation (the "Company"),
and RICHARD SOWERBY (the "Employee"), an individual residing at 3400 Downington
Court, Greensboro, NC 27307.
W I T N E S S E T H:
WHEREAS, the Company and the Employee (collectively "the Parties") desire
to enter into this Employment Agreement (the "Agreement") as hereinafter set
forth;
NOW, THEREFORE, the Company and Employee agree as follows:
1. EMPLOYMENT TERM.
---------------
(a) During the period specified in Subsection l(b) hereof (the
"Employment Term"), the Company shall employ the Employee, and the
Employee shall serve the Company based on the terms and subject to
the conditions set forth herein.
(b) The Employment Term shall:
(i) be for a rolling one (1) year term commencing on the date of
this Agreement, which term shall automatically be extended
one calendar day for each calendar day that the Employee is
employed by the Company after the date of this Agreement so
that the remaining Employment Term shall always be one (1)
year;
(ii) provided that the Employment Term may terminate as provided
in Section 4 hereof prior to the date specified above in this
Subsection 1(b).
2. POSITION, DUTIES, AND RESPONSIBILITIES. At all times during the
--------------------------------------
Employment Term, the Employee shall:
(a) Hold the position of Corporate Vice President, Finance;
(b) Have the current job grade and generally the duties and
responsibilities listed on the Company's current position
description for the position indicated in Section 2(a) above, and
such reduced or additional duties as may be assigned to the
Employee from time to time by the Board of Directors of the
Company (the "Board") or the Chief Executive Officer of the
Company (the "Chief Executive Officer") which are generally
consistent with the position indicated in Section 2(a) above;
(c) Adhere to such reasonable written policies and directives, and
such reasonable unwritten policies and directives as are of common
knowledge to
<PAGE>
executive officers of the Company, as may be promulgated from time
to time by the Board or the Chief Executive Officer and which are
applicable to executive officers of the Company;
(d) Invest in the Company only in accordance with any insider trading
policy of the Company in effect at the time of the investment;
and
(e) Devote the Employee's entire business time, energy, and talent to
the business, and to the furtherance of the purposes and
objectives, of the Company, and neither directly nor indirectly
act as an employee of or render any business, commercial, or
professional services to any other person, firm or organization
for compensation, without the prior written approval of the Board
or the Chief Executive Officer.
Nothing in this Agreement shall preclude the Employee from devoting
reasonable periods of time to charitable and community activities or the
management of the Employee's investment assets, provided such activities do not
interfere with the performance by the Employee of the Employee's duties
hereunder.
3. SALARY, BONUS AND BENEFITS. For services rendered by the Employee on
--------------------------
behalf of the Company during the Employment Term, the following salary, bonus
and benefits shall be provided to the Employee by the Company:
(a) The Company shall pay to the Employee, in equal installments,
according to the Company's then current practice for paying its
executive officers in effect from time to time during the
Employment Term, an annual base salary at the initial rate of One
Hundred Fifty Eight Thousand Dollars ($158,000). This salary
shall be subject to annual review by the Human Resources
Committee of the Board (the "Committee") and may be increased,
but not decreased, to the extent, if any, that the Committee may
determine.
(b) The Employee shall participate in the Sealy Corporation Annual
Bonus Plan (the "Bonus Plan") in accordance with the provisions
of that Plan as in effect as of the date of this Agreement. The
Employee's Target annual bonus, as established by the Committee
under the Bonus Plan as of the date of this Agreement, is thirty-
five percent (35%) (his "Target Annual Bonus Percentage") of
annual base salary, with a range of zero percent (0%) to seventy
percent (70%) of annual base salary.
(c) The Employee shall be eligible for participation in such other
benefit plans, including, but not limited to, the Company's
Profit Sharing Plan and Trust, Executive Severance Benefit Plan,
Benefit Equalization Plan, Short-Term and Long Term Disability
Plans, Group Term Life Insurance Plan, Medical Plan or PPO,
Dental Plan, the 401(k) feature of the Profit Sharing Plan and
the 1998 Stock Option Plan, as the Board may adopt from time to
time and in which the Company's executive officers are eligible
to participate. Such participation shall be subject to the terms
and conditions set forth in the
2
<PAGE>
applicable plan documents. As is more fully set forth in Section
7 hereof, the Employee shall not be entitled to duplicative
payments under this Agreement and the Executive Severance Benefit
Plan.
(d) Without limiting the generality of Subsection 3(c) above, for so
long as such coverage shall be available to the executive
officers of the Company, the Employee shall be eligible to
participate in the Company's Group Term Life Insurance Plan with
a death benefit to be provided at the level of one and one half
(1 1/2) times annual base salary at Company expense, plus
extended coverage with a death benefit to be provided of at least
the level in effect on the date of this Agreement for the
Employee under such Plan at the Employee's discretion and
expense.
(e) The Employee shall be entitled to take, during each calendar year
period of the Employment Term, commencing on the 1st of January
after execution of this Agreement, vacation time equal to at
least the greater of (i) the amount of vacation time to which the
Employee is entitled per year as of the date of this Agreement,
or (ii) the amount of vacation time to which the Employee would
have become entitled if the Company's vacation policy in effect
as of the date of this Agreement and which is applicable to its
executive officers remained in effect throughout the Employment
Term.
(f) In addition, the Parties do hereby further confirm that any stock
agreements, stock option agreements, or Stockholder Agreement
previously entered into between the Parties (such agreements
being hereinafter referred to collectively as the "Pre-existing
Agreements"), all remain in full force and effect except as
otherwise provided herein. Notwithstanding the foregoing, to the
extent that any provision contained herein is inconsistent with
the terms of any of the Pre-existing Agreements, the terms of
this Agreement shall be controlling.
4. TERMINATION OF EMPLOYMENT. As indicated in Subsection 1(b)(ii), the
-------------------------
Employment Term may terminate prior to the date specified in Subsection 1(b)(i)
as follows:
(a) The Employee's employment hereunder will terminate without
further notice upon the death of the Employee.
(b) The Company may terminate the Employee's employment hereunder
effective immediately upon giving written notice of such
termination for "Cause". For these purposes, "Cause" shall mean
the following:
(i) Commission by the Employee (evidenced by a conviction or
written, voluntary and freely given confession) of a
criminal act constituting a felony;
(ii) Commission by the Employee of a material breach or material
default of any of the Employee's agreements or obligations
under any
3
<PAGE>
provision of this Agreement, including, without limitation,
the Employee's agreements and obligations under Subsections
2(a) through 2(e) and Sections 8 and 9 of this Agreement,
which is not cured in all material respects within thirty
(30) days after the Chief Executive Officer or the designee
thereof gives written notice thereof to the Employee; or
(iii) Commission by the Employee, when carrying out the
Employee's duties under this Agreement, of acts or the
omission of any act, which both: (A) constitutes gross
negligence or willful misconduct and (B) results in
material economic harm to the Company or has a materially
adverse effect on the Company's operations, properties or
business relationships.
(c) The Employee's employment hereunder may be terminated by the
Company upon the Employee's disability, if the Employee is
prevented from performing the Employee's duties hereunder by
reason of physical or mental incapacity for a period of one
hundred eighty (180) consecutive days in any period of two
consecutive fiscal years of the Company, but the Employee shall
be entitled to full compensation and benefits hereunder until the
close of such one hundred and eighty (180) day period.
(d) The Company may terminate the Employee's employment hereunder
without Cause at any time upon thirty (30) days written notice.
(e) The Employee may terminate employment hereunder effective
immediately upon giving written notice of such termination for
"Good Reason", as defined in Subsection 4(g) below.
(f) The Employee may terminate employment hereunder without Good
Reason at any time upon thirty (30) days written notice.
(g) For purposes of this Agreement, "Good Reason" means the
occurrence of (i) any reduction in either the annual base salary
of the Employee or the Target Annual Bonus Percentage or maximum
annual bonus percentage applicable to the Employee under the
Bonus Plan, (ii) any material reduction in the position,
authority or office of the Employee, (iii) any material reduction
in the Employee's responsibilities or duties for the Company,
(iv) any material adverse change or reduction in the aggregate
"Minimum Benefits," as hereinafter defined, provided to the
Employee as of the date of this Agreement (provided that any
material reduction in such aggregate Minimum Benefits that is
required by law or applies generally to all employees of the
Company shall not constitute "Good Reason" as defined hereunder),
(v) any relocation of the Employee's principal place of work with
the Company to a place more than twenty-five (25) miles from the
geographical center of Greensboro, North Carolina, or (vi) the
material breach or material default by the Company of any of its
agreements or
4
<PAGE>
obligations under any provision of this Agreement. As used in
this Subsection 4(g), an "adverse change or material reduction"
in the aggregate Minimum Benefits shall be deemed to result from
any reduction or any series of reductions which, in the
aggregate, exceeds five percent (5%) of the value of such
aggregate Minimum Benefits determined as of the date of this
Agreement. As used in this Subsection 4(g), Minimum Benefits are
life insurance, accidental death, long term disability, short
term disability, medical, dental, and vision benefits and the
Company's expense reimbursement policy. The Employee shall give
written notice to the Company on or before the date of
termination of employment for Good Reason stating that the
Employee is terminating employment with the Company and
specifying in detail the reasons for such termination. If the
Company does not object to such notice by notifying the Employee
in writing within five (5) days following the date of the
Company's receipt of the Employee's notice of termination, the
Company shall be deemed to have agreed that such termination was
for Good Reason. The parties agree that "Good Reason" will not be
deemed to have occurred merely because the Company becomes a
subsidiary or division of another entity provided the Employee
continues to serve in the position set forth in Section 2 above
of such subsidiary or division and such subsidiary or division is
comparable in size to the organization consisting of the Company
and its subsidiaries. The parties further agree that "Good
Reason" will be deemed to have occurred if the purchaser, in
connection with the sale or transfer of all or substantially all
of the assets of the Company, does not assume this Agreement in
accordance with Section 11 hereof.
5. SEVERANCE COMPENSATION. If the Employee's employment is terminated,
----------------------
the following severance provisions will apply:
(a) If the Employee's employment is terminated by the Company other
than for Cause or is terminated by the Employee for Good Reason,
then, through the remaining Employment Term as specified in
Subsection 1(b) hereof, determined without regard to Subsection
1(b)(ii) hereof, (such remaining Employment Term calculated
without regard to Subsection 1(b)(ii), and without regard to
whether the Employee elects accelerated payments of the Employee's
annual base salary and bonus in accordance with Subsection
5(a)(v), is hereinafter referred to as the "Payment Term") the
Company shall:
(i) continue to pay the Employee's annual base salary in the then
prevailing amount and at the times specified in Subsection
3(a) hereof, or if such annual base salary has decreased
during the one year period ending on the Employee's
termination of employment, at the highest rate in effect
during such one year period;
5
<PAGE>
(ii) continue the Employee's participation in the Bonus Plan
as provided in Subsection 3(b) hereof provided that the
Company will:
(A) pay the Employee a bonus under the Bonus Plan for the
partial year period ending on the date of the
Employee's termination of employment calculated as if
the Employee had continued to be employed for the
entire year except that the Employee's bonus percentage
(calculated at the time and in the manner customary as
of the date of this Agreement, but disregarding the
termination of employment of the Employee) shall be
applied to the Employee's annual base salary payable in
accordance with Subsection 3(a) hereof for the partial
year period ending on the Employee's termination of
employment; and
(B) thereafter, during the remainder of the Payment Term, a
bonus equal to the Employee's Target Annual Bonus
Percentage, multiplied by the Employee's annual base
salary in the amount specified in Subsection 5(a)(i)
payable during the year (or portion thereof) for which
the bonus is being calculated; with such amounts being
payable when bonuses under the Bonus Plan are
customarily payable, except that the final bonus shall
be payable with the final payment of the annual base
salary under Subsection 5(a)(i) hereof;
(iii) continue in effect the medical and dental coverage, long and
short-term disability protection, and any life insurance
protection (including life insurance protection being paid
for by the Employee), being provided to the Employee
immediately prior to the Employee's termination of
employment, or if any of such benefits have decreased during
the one year period ending on the Employee's termination of
employment, at the highest level in effect during such one
year period;
(iv) pay for executive outplacement services for the Employee
from a nationally recognized executive outplacement firm at
the level provided for vice-presidents of major
corporations, provided that such outplacement services will
be provided for a one year period commencing on the date of
termination of employment regardless of the Payment Term;
and
(v) In lieu of the payments described in Subsections 5(a)(i)
and 5(a)(ii) hereof, at the Employee's request, submitted in
writing to the Company within five (5) business days after
the date of the Employee's termination of employment:
6
<PAGE>
(A) the Company will pay the total of the Employee's annual
base salary payments described in Subsection 5(a)(i) in
a single sum within thirty (30) days following the
Employee's termination of employment; and
(B) his Bonus Plan payments described in Subsection
5(a)(ii) shall be made at the same time as the
Employee's payment under Subsection 5(a)(vi)(A) but
shall be calculated using the Employee's Target Annual
Bonus Percentage for all calculation purposes.
(b) If the Employee's employment hereunder terminates due to the
Employee's death, disability, termination by the Company for
Cause or termination by the Employee other than for Good Reason,
then no further compensation or benefits will be provided to the
Employee by the Company under this Agreement following the date
of such termination of employment other than payment of
compensation earned to the date of termination of employment but
not yet paid. As more fully and generally provided in Section
15 hereof, this Subsection 5(b) shall not be interpreted to deny
the Employee any benefits to which he may be entitled under any
plan or arrangement of the Company applicable to the Employee.
Likewise, this Subsection 5(b) shall not be interpreted to
entitle the Employee to a bonus under the Bonus Plan following
his termination of employment except as provided in the Bonus
Plan which requires employment on the last day of the Company's
taxable year as a condition to receipt of a bonus thereunder for
such year except in the cases of death, disability or retirement
at or after either age 62 with ten years of service or age 65.
(c) Notwithstanding anything contained in this Agreement to the
contrary, other than Section 15 hereof, if the Employee breaches
any of the Employee's obligations under Section 8 or 9 hereof, no
further severance payments or other benefits will be payable to
the Employee under this Section 5.
6. SEVERANCE PLAN. It is the intention of the Parties that this Agreement
--------------
provide special benefits to the Employee. If at any time the Company's
Executive Severance Benefit Plan would provide better cash severance benefits to
the Employee than this Agreement, the Employee may elect to receive such better
cash severance benefits in lieu of the cash severance benefits provided under
Subsections 5(a)(i) and 5(a)(ii), or Subsection 5(a)(v), of this Agreement,
whichever is applicable, while continuing to receive any other benefits or
coverages available under this Agreement. If this Agreement would provide
better cash severance benefits to the Employee than the Company's Executive
Severance Benefit Plan, the Employee shall receive the cash severance benefits
under this Agreement, as well as any other benefits or coverages available under
this Agreement. In such case, the cash severance benefits under this Agreement
shall be in lieu of the cash severance benefits payable under the Company's
Executive Severance Benefit Plan.
7
<PAGE>
7. PLAN AMENDMENTS. To the extent any provisions of this Agreement modify
---------------
the terms of any existing plan, policy or arrangement affecting the compensation
or benefits of the Employee, as appropriate, (a) such modification as set forth
herein shall be deemed an amendment to such plan, policy or arrangement as to
the Employee, and both the Company and the Employee hereby consent to such
amendment, (b) the Company will appropriately modify such plan, policy or
arrangement to correspond to this Agreement with respect to the Employee, or (c)
the Company will provide an "Alternative Benefit," as defined in Section 13
hereof, to or on behalf of the Employee in accordance with the provisions of
such Section 13.
8. CONFIDENTIAL INFORMATION. The Employee agrees that the Employee will
------------------------
not, during the Employment Term or at any time thereafter, either directly or
indirectly, disclose or make known to any other person, firm, or corporation any
confidential information, trade secret or proprietary information of the Company
that the Employee may acquire in the performance of the Employee's duties
hereunder (except in good faith in the ordinary course of business for the
Company to a person who will be advised by the Employee to keep such information
confidential) or make use of any of such confidential information except in the
performance of the Employee's duties or when required to do so by legal process,
by any governmental agency having supervisory authority over the business of the
Company or by any administrative or legislative body (including a committee
thereof) that requires the Employee to divulge, disclose or make accessible such
information. In the event that the Employee is so ordered, the Employee shall
so advise the Company in order to allow the Company the opportunity to object to
or otherwise resist such order. Upon the termination of the Employee's
employment with the Company, the Employee agrees to deliver forthwith to the
Company any and all proprietary literature, documents, correspondence, and other
proprietary materials and records furnished to or acquired by the Employee
during the course of such employment. In the event of a breach or threatened
breach of this Section 8 by the Employee, the Company will be entitled to
preliminary and permanent injunctive relief, without bond or security,
sufficient to enforce the provisions hereof and the Company will be entitled to
pursue such other remedies at law or in equity which it deems appropriate.
9. NON-COMPETITION. In consideration of this Agreement, the Employee
---------------
agrees that, during the Employment Term, and for one year thereafter, the
Employee shall not act as a proprietor, investor, director, officer, employee,
substantial stockholder, consultant, or partner in any business engaged to a
material extent in the manufacture or sale of (a) mattresses or other bedding
products or (b) any other products which constitute more than ten percent (10%)
of the Company's revenues at the time in direct competition with the Company in
any market. The Employee understands that the foregoing restrictions may limit
the Employee's ability to engage in certain business pursuits during the period
provided for above, but acknowledges that the Employee will receive sufficiently
higher remuneration and other benefits from the Company hereunder than the
Employee would otherwise receive to justify such restriction. The Employee
acknowledges that the Employee understands the effect of the provisions of this
Section 9, and that the Employee has had reasonable time to consider the effect
of these provisions, and that the Employee was encouraged to and had an
opportunity to consult an attorney with respect to these provisions. The
Company and the Employee consider the restrictions contained in this Section 9
to be reasonable and necessary. Nevertheless, if any aspect of these
restrictions is found to be unreasonable or otherwise unenforceable by a court
of competent jurisdiction, the Parties intend for such restrictions to be
modified by such court so as to be reasonable and enforceable and, as so
modified by the court, to
8
<PAGE>
be fully enforced. In the event of a breach or threatened breach of this Section
9 by the Employee, the Company will be entitled to preliminary and permanent
injunctive relief, without bond or security, sufficient to enforce the
provisions hereof and the Company will be entitled to pursue such other remedies
at law or in equity which it deems appropriate.
10. NOTICES. For purposes of this Agreement, all communications provided
-------
for herein shall be in writing and shall be deemed to have been duly given when
hand delivered or mailed by United States registered or certified mail, return
receipt requested, postage prepaid, addressed as follows:
(a) If the notice is to the Company:
Mr. Ronald L. Jones
Chief Executive Officer
Sealy Corporation
P.O. Box 2806
High Point, NC 27261
With a copy to:
Kenneth Walker, Esq.
Vice President and General Counsel
Sealy Corporation
P.O. Box 2806
High Point, NC 27261
(b) If the notice is to the Employee at the Employee's residence
address as listed in the first paragraph above
or to such other address as either party may have furnished to the other in
writing and in accordance herewith; except that notices of change of address
shall be effective only upon receipt.
11. ASSIGNMENT; BINDING EFFECT. This Agreement shall be binding upon and
--------------------------
inure to the benefit of the parties to this Agreement and their respective
successors, heirs (in the case of the Employee) and permitted assigns. No
rights or obligations of the Company under this Agreement may be assigned or
transferred by the Company except that such rights or obligations may be
assigned or transferred in connection with the sale or transfer of all or
substantially all of the assets of the Company, provided that the assignee or
transferee is the successor to all or substantially all of the assets of the
Company and such assignee or transferee expressly assumes the liabilities,
obligations and duties of the Company, as contained in this Agreement, either
contractually or as a matter of law. The Company further agrees that, in the
event of a sale or transfer of assets as described in the preceding sentence, it
shall be a condition precedent to the consummation of any such transaction that
the assignee or transferee expressly assumes the liabilities, obligations and
duties of the Company hereunder. No rights or obligations of the Employee under
this Agreement may be assigned or transferred by the Employee other than the
Employee's rights to compensation and benefits, which may be transferred only by
will or operation of law, except as provided in this Section 11.
9
<PAGE>
The Employee shall be entitled, to the extent permitted under any
applicable law, to select and change a beneficiary or beneficiaries to receive
any compensation or benefits payable hereunder following the Employee's death by
giving the Company written notice thereof. In the absence of such a selection,
any compensation or benefit payable under this Agreement following the death of
the Employee shall be payable to the Employee's spouse, or if such spouse shall
not survive the Employee, to the Employee's estate. In the event of the
Employee's death or a judicial determination of his incompetence, reference in
this Agreement to the Employee shall be deemed, where appropriate, to refer to
the Employee's beneficiary, estate or other legal representative.
12. INVALID PROVISIONS. Any provision of this Agreement that is
------------------
prohibited or unenforceable shall be ineffective to the extent, but only to the
extent, of such prohibition or unenforceability without invalidating the
remaining portions hereof and such remaining portions of this Agreement shall
continue to be in full force and effect. In the event that any provision of
this Agreement shall be determined to be invalid or unenforceable, the Parties
will negotiate in good faith to replace such provision with another provision
that will be valid or enforceable and that is as close as practicable to the
provisions held invalid or unenforceable.
13. ALTERNATIVE SATISFACTION OF COMPANY'S OBLIGATIONS. In the event this
-------------------------------------------------
Agreement provides for payments or benefits to or on behalf of the Employee
which cannot be provided under the Company's benefit plans, policies or
arrangements either because such plans, policies or arrangements no longer exist
or no longer provide such benefits or because provision of such benefits to the
Employee would adversely affect the tax qualified or tax advantaged status of
such plans, policies or arrangements for the Employee or other participants
therein, the Company may provide the Employee with an "Alternative Benefit," as
defined in this Section 13, in lieu thereof. The Alternative Benefit is a
benefit or payment which places the Employee and the Employee's dependents in at
least as good of an economic position as if the benefit promised by this
Agreement (a) were provided exactly as called for by this Agreement, and (b) had
the favorable economic, tax and legal characteristics customary for plans,
policies or arrangements of that type. Furthermore, if such adverse consequence
would affect the Employee or the Employee's dependents, the Employee shall have
the right to require that the Company provide such an Alternative Benefit.
14. ENTIRE AGREEMENT, MODIFICATION. Subject to the provisions of Section
------------------------------
15 hereof, this Agreement contains the entire agreement between the Parties with
respect to the employment of the Employee by the Company and supersedes all
prior and contemporaneous agreements, representations, and understandings of the
Parties, whether oral or written. No modification, amendment, or waiver of any
of the provisions of this Agreement shall be effective unless in writing,
specifically referring hereto, and signed by both Parties.
15. NON-EXCLUSIVITY OF RIGHTS. Notwithstanding the foregoing provisions
-------------------------
of Section 14, nothing in this Agreement shall prevent or limit the Employee's
continuing or future participation in any benefit, bonus, incentive or other
plan, program, policy or practice provided by the Company for its executive
officers, nor shall anything herein limit or otherwise affect such rights as the
Employee has or may have under any stock option, restricted stock or other
agreements with the Company or any of its subsidiaries. Amounts which the
Employee or the Employee's dependents or beneficiaries are otherwise entitled to
receive under any such plan, policy, practice
10
<PAGE>
or program shall not be reduced by this Agreement except as provided in Section
6 hereof with respect to payments under the Executive Severance Benefit Plan if
cash payments of annual base salary are made hereunder.
16. WAIVER OF BREACH. The failure at any time to enforce any of the
----------------
provisions of this Agreement or to require performance by the other party of any
of the provisions of this Agreement shall in no way be construed to be a waiver
of such provisions or to affect either the validity of this Agreement or any
part of this Agreement or the right of either party thereafter to enforce each
and every provision of this Agreement in accordance with the terms of this
Agreement.
17. GOVERNING LAW. This Agreement has been made in, and shall be governed
-------------
and construed in accordance with the laws of, the State of Ohio. The Parties
agree that this Agreement is not an "employee benefit plan" or part of an
"employee benefit plan" which is subject to the provisions of the Employee
Retirement Income Security Act of 1974, as amended.
18. TAX WITHHOLDING. The Company may withhold from any amounts payable
---------------
under this Agreement such federal, state or local taxes as shall be required to
be withheld pursuant to any applicable law or regulation. Where withholding
applies to Class A Shares, the Company shall make cashless withholding available
to the Employee.
19. EXPENSE OF ENFORCEMENT. The Company shall reimburse reasonable
----------------------
attorney fees and expenses incurred by the Employee to enforce the provisions of
this Agreement, even if his claims are not successful, provided they are not
ultimately determined by the court to be frivolous.
20. REPRESENTATION. The Company represents and warrants that it is fully
--------------
authorized and empowered to enter into this Agreement and that the performance
of its obligations under this Agreement will not violate any agreement between
it and any other person, firm or organization.
21. SUBSIDIARIES AND AFFILIATES. Notwithstanding any contrary provision
---------------------------
of this Agreement, to the extent it does not adversely affect the Employee, the
Company may provide the compensation and benefits to which the Employee is
entitled hereunder through one or more subsidiaries or affiliates, including,
without limitation, Sealy, Inc.
22. NO MITIGATION OR OFFSET. In the event of any termination of
-----------------------
employment, the Employee shall be under no obligation to seek other employment.
Amounts due the Employee under this Agreement shall not be offset by any
remuneration attributable to any subsequent employment he may obtain.
23. SOLE REMEDY. The Parties agree that the remedies of each against the
-----------
other for breach of this Agreement shall be limited to enforcement of this
Agreement and recovery of the amounts and remedies provided for herein. The
Parties, however, further agree that such limitation shall not prevent either
Party from proceeding against the other to recover for a claim other than under
this Agreement.
11
<PAGE>
IN WITNESS WHEREOF, the Company and the Employee have executed this
Agreement as of the day and year first above written.
SEALY CORPORATION
By: /s/ Richard Sowerby
----------------------------------
_____________________________________
EMPLOYEE:
/s/ Kenneth L. Walker
-------------------------------------
_____________________________________
12
<PAGE>
EXHIBIT 10.56
[LOGO OF SEALY] MEMORANDUM
TO: Ron Jones
FROM: Ken Walker
DATE: December 18, 1998
RE: Continuing Employment in North Carolina
- --------------------------------------------------------------------------------
This is to confirm the understanding between Kenneth L. Walker ("Employee"),
and Sealy, Inc. ("Sealy") relating to Employee's continued employment with
Sealy upon the relocation of Sealy's Headquarters to North Carolina.
Employee and Sealy agree as follows:
1. Employee hereby accepts Sealy's offer of continued employment with Sealy
as Sealy's Corporate Vice President, General Counsel and Secretary.
2. Once Employee's office is relocated to North Carolina on January 1, 1999,
Employee shall be responsible for his cost of commuting and temporary
living expense until he permanently moves his residence to North Carolina
("Move"). The expenses of the Move shall be paid for by Sealy in
accordance with Sealy's relocation policy for employees at his level. If
Employee resigns within one year of the Move, Employee shall reimburse
Sealy for any relocation expenses incurred by Sealy in the Move.
3. By this acceptance of continuing employment with Sealy in North Carolina,
Employee hereby agrees that this relocation of his place of employment to
North Carolina does not constitute "Good Reason" for his resignation
under his August 11, 1997 Change of Control Agreement with Sealy ("CIC
Agreement").
4. If prior to the earlier of the Move or August 31, 2000 (such earlier date
being the "Expiration Date") Employee's employment is terminated by
Sealy other than for Cause (as defined in the CIC Agreement), or if prior
to the Expiration Date Employee resigned with at least six (6) months
notice, then Sealy shall provide the following severance benefits to
Employee:
a. Pay to Employee within thirty (30) days:
1. One (1) year's salary (at the highest salary to Employee during
his last year of employment with Sealy);
<PAGE>
RE: Continuing Employment in North Carolina
December 18, 1998
Page 2
2. One (1) year's bonus at target; and
3. A prorated target bonus based on the Employee's period of
employment with Sealy prior to termination as a portion of the
then current bonus year.
b. Provide Employee with six (6) months of outplacement services from a
nationally recognized executive outplacement firm selected by Sealy at
the level provided for Vice Presidents.
c. Provide Employee with six (6) months of continuing life and medical
insurance, plus COBRA benefits.
5. If Employee receives the severance benefits set forth in Section 4 above,
Employee will not be entitled to any other severance compensation or
severance benefits from Sealy.
6. After the Expiration Date, the severance benefits set forth in Section 4
above shall no longer be provided and Employee may only qualify for
severance benefits in accordance with Company policy for his level and
years of service.
If the foregoing reflects Sealy's understanding concerning this matter, please
execute the acceptance on the attached copy of this memorandum and return it to
me.
rb
/s/ Kenneth L. Walker
---------------------------------
Kenneth L. Walker
Acceptance
- ----------
Sealy Corporation hereby accepts and agrees to the foregoing terms relating to
its continuing employment of Kenneth L. Walker in North Carolina.
Sealy Corporation
By: /s/ Ronald L. Jones
-----------------------------------
Name: Ronald L. Jones
---------------------------------
Title: Chief Executive Officer
--------------------------------
Date: December 18, 1998
---------------------------------
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<PAGE>
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<PERIOD-START> DEC-01-1997
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