<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10-Q
[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: August 29, 1999
OR
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
------------ ------------
Commission file number 1-8738
----------------
SEALY CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 36-3284147
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
One Office Parkway, Trinity, North 27370
Carolina (Zip Code)
(Address of principal executive
offices)
Registrant's telephone number, including area code (336) 861-3500
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities and Exchange Act
of 1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [_]
The number of shares of the registrant's common stock outstanding as of
October 12, 1999 was 31,484,950.2711.
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<PAGE>
PART I. FINANCIAL INFORMATION
Item 1--Financial Statements
SEALY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Quarter Ended Quarter Ended
August 29,1999 August 30, 1998
-------------- ---------------
<S> <C> <C>
Net sales...................................... $273,333 $242,603
-------- --------
Costs and expenses:
Cost of goods sold........................... 149,694 134,008
Selling, general and administrative.......... 82,174 82,044
Compensation associated with
Recapitalization............................ -- 181
Amortization of intangibles.................. 3,302 3,207
Interest expense, net........................ 16,415 17,344
-------- --------
251,585 236,784
-------- --------
Income before income tax....................... 21,748 5,819
Income tax expense............................. 10,123 1,456
-------- --------
Net income................................. 11,625 4,363
======== ========
Earnings per common share--basic:
Net income................................... $ 0.37 $ 0.14
======== ========
Earnings per common share--diluted:
Net income................................... $ 0.35 $ 0.14
======== ========
Weighted average number of common shares
outstanding:
Basic...................................... 31,485 30,363
Diluted.................................... 32,768 31,441
</TABLE>
See accompanying notes to condensed consolidated financial statements.
1
<PAGE>
SEALY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Nine Nine
Months Months
Ended Ended
August August
29, 1999 30, 1998
-------- --------
<S> <C> <C>
Net sales................................................... $727,827 $665,434
-------- --------
Costs and expenses:
Cost of goods sold........................................ 401,219 376,659
Selling, general and administrative....................... 238,944 225,120
Compensation associated with Recapitalization............. -- 18,735
Amortization of intangibles............................... 9,561 9,705
Interest expense, net..................................... 48,889 50,389
-------- --------
698,613 680,608
-------- --------
Income (loss) before income tax and extraordinary item...... 29,214 (15,174)
Income tax expense (benefit)................................ 14,023 (122)
-------- --------
Income (loss) before extraordinary item................. 15,191 (15,052)
Extraordinary item--loss from early extinguishment of debt
(net of income tax benefit of $0 and $9,693,
respectively).............................................. -- 14,537
-------- --------
Net income (loss)....................................... $ 15,191 $(29,589)
======== ========
Earnings/(loss) per common share--basic:
Income (loss) before extraordinary item................... $ 0.48 $ (0.49)
Extraordinary item........................................ -- (0.48)
-------- --------
Net income (loss)......................................... $ 0.48 $ (0.97)
======== ========
Earnings/(loss) per common share--diluted:
Income (loss) before extraordinary item................... $ 0.46 $ (0.49)
Extraordinary item........................................ -- (0.48)
-------- --------
Net income (loss)......................................... $ 0.46 $ (0.97)
======== ========
Weighted average number of common shares outstanding:
Basic................................................... 31,469 30,351
Diluted................................................. 32,755 30,351
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
<PAGE>
SEALY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
August 29, November 29
1999 1998
(unaudited) *
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................. $ 16,029 $ 11,234
Accounts receivable, net.............................. 113,799 106,761
Accounts receivable from affiliates................... 16,552 --
Inventories........................................... 47,695 43,727
Prepaid expenses and deferred taxes................... 20,048 26,445
-------- --------
214,123 188,167
Property, plant and equipment, at cost.................. 196,499 189,311
Less: accumulated depreciation.......................... (61,539) (53,502)
-------- --------
134,960 135,809
Other assets:
Goodwill and other intangibles, net................... 381,414 390,192
Investment in affiliates.............................. 29,842 --
Debt issuance costs, net, and other assets............ 33,674 36,912
-------- --------
444,930 427,104
-------- --------
$794,013 $751,080
======== ========
</TABLE>
- --------
* Condensed from audited financial statements.
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
SEALY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
August 29, November 29,
1999 1998
(unaudited) *
----------- ------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion of long-term obligations............. $ 18,853 $ 8,576
Accounts payable..................................... 58,419 46,094
Accrued interest..................................... 10,014 13,432
Accrued incentives and advertising................... 34,308 32,451
Accrued compensation................................. 20,007 15,883
Other accrued expenses............................... 31,038 26,390
--------- ---------
172,639 142,826
Long-term obligations.................................. 687,616 682,271
Other noncurrent liabilities........................... 33,367 36,069
Deferred income taxes.................................. 23,228 28,740
Stockholders' equity (deficit):
Common stock......................................... 315 314
Additional paid-in capital........................... 134,547 134,530
Retained deficit..................................... (246,642) (261,833)
Foreign currency translation adjustment.............. (10,972) (11,837)
Common stock held in treasury, at cost............... (85) --
--------- ---------
(122,837) (138,826)
--------- ---------
$ 794,013 $ 751,080
========= =========
</TABLE>
- --------
* Condensed from audited financial statements.
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
SEALY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Nine Months
Ended Ended
August 29, 1999 August 30, 1998
--------------- ---------------
<S> <C> <C>
Net cash provided by operating activities...... $ 35,275 $ 16,754
Investing activities:
Purchase of property and equipment, net...... (8,818) (21,002)
Investment in affiliates..................... (27,740) --
-------- ---------
Net cash used in investing activities...... (36,558) (21,002)
-------- ---------
Financing activities:
Treasury stock repurchase, including direct
expenses.................................... (85) (413,078)
Proceeds from long-term obligations, net..... 6,146 344,785
Equity issuance.............................. 17 121,317
Costs associated with tender offer of prior
debt........................................ -- (15,361)
Debt issuance costs.......................... -- (31,989)
-------- ---------
Net cash provided by financing activities.. 6,078 5,674
-------- ---------
Change in cash and cash equivalents............ 4,795 1,426
Cash and cash equivalents:
Beginning of period.......................... 11,234 6,057
-------- ---------
End of period................................ $ 16,029 $ 7,483
======== =========
Selected noncash items:
Issuance of Junior Subordinated Notes........ $ -- $ 25,000
Depreciation expense......................... 10,204 8,156
Non-cash interest expense associated with:
Junior Subordinated Notes.................. 2,558 2,197
Debt issuance costs........................ 3,123 3,021
Discount on Senior Subordinated Notes...... 6,918 5,901
</TABLE>
See accompanying notes to condensed consolidated financial statements
5
<PAGE>
SEALY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Nine months ended August 29, 1999
Note A--Basis of Presentation
This report covers Sealy Corporation and its subsidiaries (collectively,
"Sealy" or the "Company"). References to the "Parent" are to Sealy
Corporation.
The accompanying unaudited condensed consolidated financial statements
should be read together with the Company's Annual Report on Form 10-K for the
year ended November 29, 1998.
The accompanying unaudited condensed consolidated financial statements
contain all adjustments which, in the opinion of management, are necessary to
present fairly the financial position of the Company at August 29, 1999, and
the results of its operations and cash flows for the periods presented herein.
All adjustments in the periods presented herein are normal and recurring in
nature.
Certain reclassifications of previously reported financial information were
made to conform to the 1999 presentation.
Note B--Inventories
The major components of inventories were as follows:
<TABLE>
<CAPTION>
August 29, November 29,
1999 1998
---------- ------------
(In thousands)
<S> <C> <C>
Raw materials........................................ $27,296 $25,511
Work in process...................................... 15,677 14,140
Finished goods....................................... 4,722 4,076
------- -------
$47,695 $43,727
======= =======
</TABLE>
Note C--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 the Company. Pursuant to the Merger
Agreement, upon the satisfaction of certain conditions, Sandman was merged
with and into the Company with the Company 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 $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%. In March, 1999,
the Company's non-management shareholders and ten of the Company's senior
executives purchased all of the Company's common stock then held by Zell.
6
<PAGE>
SEALY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Nine months ended August 29, 1999
Concurrent with the Recapitalization, the Company refinanced its then
existing indebtedness by Sealy Mattress Company, a wholly owned subsidiary of
the Company, issuing $125 million principal amount of 9 7/8 Senior
Subordinated Notes, due 2007 and $128 million principal amount (net proceeds
of $75.4 million) of 10 7/8 Senior Subordinated Discount Notes due 2007 and by
entering into and borrowing $460 million under the Senior Credit Agreements.
Net proceeds from these borrowings were $660.4 million.
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 ($18.7 million recognized in
the first three quarters of 1998), of which $16.4 million was non-cash and
resulted in a credit directly to APIC, comprised of accelerated vesting of
stock options and restricted stock and other incentive based compensation
payments to employees. The Company recorded a $14.5 million extraordinary
charge, net of income tax benefit of $9.7 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 a tender offer for Subordinated Notes of the Parent.
Note D--Net Income Per Common Share
The following table sets forth the computation of basic and diluted
earnings per share (in thousands):
<TABLE>
<CAPTION>
Three months ended Nine months ended
--------------------- ---------------------
August 29, August 30, August 29, August 30,
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Numerator:
Income (loss) before
extraordinary item.............. $11,625 $4,363 $15,191 $(15,052)
Extraordinary item, net of tax... -- -- -- 14,537
------- ------ ------- --------
Net income (loss)................ $11,625 $4,363 $15,191 $(29,589)
======= ====== ======= ========
Denominator:
Denominator for basic earnings
per share--weighted average
shares.......................... 31,485 30,363 31,469 30,351
Effect of dilutive securities:
Stock options.................... 1,283 1,078 1,286 --
------- ------ ------- --------
Denominator for diluted earnings
per share--adjusted weighted-
average shares and assumed
conversions..................... 32,768 31,441 32,755 30,351
======= ====== ======= ========
</TABLE>
Due to a loss from operations for the nine months ended August 30, 1998,
the dilutive securities would have been antidilutive. Accordingly, they were
excluded from the calculation of diluted earnings per share.
Note E--Comprehensive Income
In June 1997, the Financial Accounting Standards Board (the "FASB") issued
Financial Accounting Standard ("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 only of foreign currency translation
adjustments. The Company adopted FAS 130 on November 30, 1998 and it had no
impact on the Company's net income or stockholders' equity.
7
<PAGE>
SEALY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Nine months ended August 29, 1999
Total comprehensive income (loss) for the three and nine months ended
August 29, 1999 was $11.1 million and $16.1 million and for the three and nine
months ended August 30, 1998 was $3.0 million and ($31.7) million,
respectively.
Activity in Stockholders' Equity is as follows (dollar amounts in
thousands):
<TABLE>
<CAPTION>
Accumulated
Current Year Additional Other
Comprehensive Common Paid-in Retained Treasury Comprehensive
Income Stock Capital Earnings Stock Income Total
------------- ------ ---------- --------- -------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at November 29,
1998.................. $314 $134,530 $(261,833) $(11,837) $(138,826)
Exercise of Options.... 1 17 18
Purchase of Treasury
Stock................. $(85) (85)
Comprehensive Income:
Net income for the
nine months ended
August 29, 1999..... $15,191 15,191 15,191
Foreign currency
translation
adjustment.......... 865 865 865
------- ---- -------- --------- ---- -------- ---------
Balance at August 29,
1999.................. $16,056 $315 $134,547 $(246,642) $(85) $(10,972) $(122,837)
======= ==== ======== ========= ==== ======== =========
</TABLE>
Note F--Contingencies
In accordance with procedures established under the Environmental Cleanup
Responsibility Act (now known as the Industrial Site Recovery Act), Sealy
Corporation 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 a
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. In February, 1999 the Company agreed to conduct an
additional investigation at the site, which is now being undertaken. 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,
8
<PAGE>
SEALY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Nine months ended August 29, 1999
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. In November, 1998, the Company
settled this claim 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's soil
and groundwater remediation plan was approved by the Connecticut Department of
Environmental Protection in April, 1999. 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. The issue of damages was
tried in May, 1999 and the Company is currently awaiting the judge's decision
from that trial. 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.
Note G--Related Party Transactions
During the third quarter of 1999, the Company contributed $29.8 million in
cash and other assets to Mattress Holdings International, LLC ("MHI"), a
company controlled by Sealy's largest stockholder, Bain Capital, Inc., in
exchange for a non-voting interest in MHI. The Company's investment in MHI was
made to fund domestic and international loans, advances, and investments by
MHI in joint ventures, licensees, retailers, and others in order to enhance
business relationships and build incremental sales. In addition, the Company
has guaranteed the obligations of MHI under investment documents governing
MHI's investments and has indemnified MHI with respect to such investments.
As of August 29, 1999, the Company has made year-to-date sales of $82.2
million of finished mattress products pursuant to multi-year supply contracts
to affiliated and related parties of Bain Capital, Inc. The Company believes
that the terms on which it supplies mattresses to related parties are not
materially less favorable than those that might reasonably be obtained in a
comparable transaction at such time on an arm's-length basis from a person
that is not an affiliate or related party.
Note H--Guarantor/Non-Guarantor Financial Information
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 Senior Subordinated and Senior
Subordinated Discount Notes (collectively, the "Notes") of Sealy Mattress
Company (the "Issuer"). Substantially all of the Issuer's operating income and
cash flow is generated by its subsidiaries. As a result, funds necessary to
meet the Issuer's debt service obligations are provided in part by
distributions or advances from its subsidiaries. Under certain circumstances,
contractual and legal restrictions, as well as the financial condition and
operating requirements of the Issuer's subsidiaries, could limit the Issuer's
ability to obtain cash from its subsidiaries for the purpose of meeting its
debt service obligations, including the payment of principal and interest on
the Notes. 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.
9
<PAGE>
SEALY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Nine months ended August 29, 1999
The following supplemental consolidating condensed financial statements
present:
1. Consolidating condensed balance sheets as of August 29, 1999 and
November 29, 1998 and consolidating condensed statements of operations
and cash flows for the nine months ended August 29, 1999 and August 30,
1998 and the consolidated condensed statements of operations for the
three months ended August 29, 1999 and August 30, 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.
Management does not believe that separate financial statements of the
Guarantor Subsidiaries are material to investors in the Notes.
10
<PAGE>
SEALY CORPORATION
SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED AUGUST 29, 1999
(in thousands)
<TABLE>
<CAPTION>
Sealy Combined Combined Non-
Sealy Mattress Guarantor Guarantor
Corporation Company Subsidiaries Subsidiaries Eliminations Consolidated
----------- -------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net sales............... $ -- $ 11,059 $249,362 $21,355 $ (8,443) $273,333
Costs and expenses:
Cost of goods sold..... -- 6,882 137,949 13,306 (8,443) 149,694
Selling, general and
administrative........ 72 3,043 73,824 5,235 -- 82,174
Amortization of
intangibles........... -- 99 2,975 228 -- 3,302
Interest expense, net.. 804 15,505 163 (57) -- 16,415
Loss (income) from
equity investees...... (12,164) (10,897) -- -- 23,061 --
Loss (income) from
nonguarantor equity
investees............. -- (1,331) -- -- 1,331 --
Intercompany interest
allocation............ -- (14,350) 14,063 287 -- --
-------- -------- -------- ------- -------- --------
Income (loss) before
income taxes........... 11,288 12,108 20,388 2,356 (24,392) 21,748
Income tax expense
(benefit).............. (337) (56) 9,491 1,025 -- 10,123
-------- -------- -------- ------- -------- --------
Net income (loss)....... $ 11,625 $ 12,164 $ 10,897 $ 1,331 $(24,392) $ 11,625
======== ======== ======== ======= ======== ========
</TABLE>
11
<PAGE>
SEALY CORPORATION
SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED AUGUST 30, 1998
(in thousands)
<TABLE>
<CAPTION>
Sealy Combined Combined Non-
Sealy Mattress Guarantor Guarantor
Corporation Company Subsidiaries Subsidiaries Eliminations Consolidated
----------- -------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net sales............... $ -- $ 11,743 $215,319 $19,524 $ (3,983) $242,603
Costs and expenses:
Cost of goods sold..... -- 7,321 119,182 11,488 (3,983) 134,008
Selling, general and
administrative........ 37 3,613 73,151 5,243 -- 82,044
Compensation associated
with
Recapitalization...... -- -- 181 -- -- 181
Amortization of
intangibles........... -- 99 2,877 231 -- 3,207
Interest expense, net.. 917 16,387 109 (69) -- 17,344
Loss (income) from
equity investees...... (5,429) (8,894) -- -- 14,323 --
Loss (income) from
nonguarantor equity
investees............. -- 165 (1,192) -- 1,027 --
Intercompany interest
allocation............ -- (15,049) 14,309 740 -- --
------- -------- -------- ------- -------- --------
Income (loss) before
income taxes........... 4,475 8,101 6,702 1,891 (15,350) 5,819
Income tax expense
(benefit).............. 112 2,672 (2,192) 864 -- 1,456
------- -------- -------- ------- -------- --------
Net income (loss)....... $ 4,363 $ 5,429 $ 8,894 $ 1,027 $(15,350) $ 4,363
======= ======== ======== ======= ======== ========
</TABLE>
12
<PAGE>
SEALY CORPORATION
SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED AUGUST 29, 1999
(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............... $ -- $ 28,754 $655,046 $55,278 $(11,251) $727,827
Costs and expenses:
Cost of goods sold..... -- 17,995 359,504 34,971 (11,251) 401,219
Selling, general and
administrative........ 147 8,317 216,218 14,262 -- 238,944
Amortization of
intangibles........... -- 298 8,584 679 -- 9,561
Interest expense, net.. 2,709 45,862 652 (334) -- 48,889
Loss (income) from
equity investees...... (16,676) (16,978) -- -- 33,654 --
Loss (income) from
nonguarantor equity
investees............. -- 224 (2,735) -- 2,511 --
Intercompany interest
allocation............ -- (43,569) 42,698 871 -- --
-------- -------- -------- ------- -------- --------
Income (loss) before
income taxes........... 13,820 16,605 30,125 4,829 (36,165) 29,214
Income expense
(benefit).............. (1,371) (71) 13,147 2,318 -- 14,023
-------- -------- -------- ------- -------- --------
Net income (loss)....... $ 15,191 $ 16,676 $ 16,978 $ 2,511 $(36,165) $ 15,191
======== ======== ======== ======= ======== ========
</TABLE>
13
<PAGE>
SEALY CORPORATION
SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED AUGUST 30, 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 sales............... $ -- $ 31,631 $591,335 $54,968 $(12,500) $665,434
Costs and expenses:
Cost of goods sold..... -- 20,172 335,255 33,732 (12,500) 376,659
Selling, general and
administrative........ 675 9,636 199,430 15,379 -- 225,120
Compensation associated
with
Recapitalization...... 17,114 -- 1,621 -- -- 18,735
Amortization of
intangibles........... -- 298 8,699 708 -- 9,705
Interest expense, net.. 4,005 46,504 25 (145) -- 50,389
Loss (income) from
equity investees...... (4,899) (6,494) -- -- 11,393 --
Loss (income) from
nonguarantor equity
investees............. -- 480 (2,174) -- 1,694 --
Intercompany interest
allocation............ -- (43,761) 41,586 2,175 -- --
-------- -------- -------- ------- -------- --------
Income (loss) before
income taxes and
extraordinary item..... (16,895) 4,796 6,893 3,119 (13,087) (15,174)
Income tax expense
(benefit).............. (1,843) (103) 399 1,425 -- (122)
-------- -------- -------- ------- -------- --------
Income (loss) before
extraordinary item..... (15,052) 4,899 6,494 1,694 (13,087) (15,052)
Extraordinary item...... 14,537 -- -- -- -- 14,537
-------- -------- -------- ------- -------- --------
Net income (loss)....... $(29,589) $ 4,899 $ 6,494 $ 1,694 $(13,087) $(29,589)
======== ======== ======== ======= ======== ========
</TABLE>
14
<PAGE>
SEALY CORPORATION
SUPPLEMENTAL CONSOLIDATING CONDENSED BALANCE SHEET
August 29, 1999
(in thousands)
<TABLE>
<CAPTION>
Combined
Sealy Combined Non-
Sealy Mattress Guarantor Guarantor
Corporation Company Subsidiaries Subsidiaries Eliminations Consolidated
----------- -------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Assets
Current assets:
Cash and cash
equivalents........... $ -- $ 4 $ 6,247 $ 9,778 $ -- $ 16,029
Accounts receivable,
net................... 17 (173) 99,675 14,280 -- 113,799
Accounts receivable
from affiliates....... 16,552 16,552
Inventories............ -- 1,245 41,448 5,002 -- 47,695
Prepaids and deferred
taxes................. 733 332 16,583 2,400 -- 20,048
--------- -------- --------- -------- -------- ---------
750 1,408 180,505 31,460 -- 214,123
Property, plant and
equipment, at cost..... -- 4,577 179,745 12,177 -- 196,499
Less: accumulated
depreciation........... -- (1,549) (56,913) (3,077) -- (61,539)
--------- -------- --------- -------- -------- ---------
-- 3,028 122,832 9,100 -- 134,960
Other assets:
Goodwill and other
intangibles, net...... -- 13,752 341,707 25,955 -- 381,414
Net investment in and
advances to (from)
subsidiaries and
affiliates............ (90,672) 530,157 (325,040) (63,992) (50,453) --
Investment in
affiliates............ 29,842 29,842
Debt issuance costs,
net and other assets.. 813 25,498 7,349 14 -- 33,674
--------- -------- --------- -------- -------- ---------
(89,859) 569,407 24,016 (8,181) (50,453) 444,930
--------- -------- --------- -------- -------- ---------
Total assets........... $ (89,109) $573,843 $ 327,353 $ 32,379 $(50,453) $ 794,013
========= ======== ========= ======== ======== =========
Liabilities and
Stockholders' Equity
(Deficit)
Current liabilities:
Current portion--long-
term obligation....... $ -- $ 18,458 $ 395 $ -- $ -- $ 18,853
Accounts payable....... -- 294 52,103 6,022 -- 58,419
Accrued interest....... -- 501 9,323 190 -- 10,014
Accrued incentives and
advertising........... -- 1,343 30,469 2,496 -- 34,308
Accrued compensation... -- 486 18,559 962 -- 20,007
Other accrued
expenses.............. 1,768 437 28,740 93 -- 31,038
--------- -------- --------- -------- -------- ---------
1,768 21,519 139,589 9,763 -- 172,639
Long-term debt.......... 30,580 643,124 13,912 -- -- 687,616
Other noncurrent
liabilities............ 3,586 -- 29,937 (156) -- 33,367
Deferred income taxes... (2,206) 755 22,272 2,407 -- 23,228
Stockholders' equity
(deficit).............. (122,837) (91,555) 121,643 20,365 (50,453) (122,837)
--------- -------- --------- -------- -------- ---------
Total liabilities and
stockholders' equity
(deficit)............. $ (89,109) $573,843 $ 327,353 $ 32,379 $(50,453) $ 794,013
========= ======== ========= ======== ======== =========
</TABLE>
15
<PAGE>
SEALY CORPORATION
SUPPLEMENTAL CONSOLIDATING CONDENSED BALANCE SHEET
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>
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
deferred taxes........ 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
(Deficit)
Current liabilities:
Current portion--long-
term obligations...... $ -- $ 8,375 $ 201 $ -- $ -- $ 8,576
Accounts payable....... -- 93 41,067 4,934 -- 46,094
Accrued interest....... -- -- 13,432 -- -- 13,432
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 23,166 848 -- 26,390
--------- --------- -------- ------- ------ ---------
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
(deficit).............. (138,826) (109,097) 86,935 16,573 5,589 (138,826)
--------- --------- -------- ------- ------ ---------
Total liabilities and
stockholders' equity
(deficit)............. $(107,439) $ 544,296 $279,465 $29,169 $5,589 $ 751,080
========= ========= ======== ======= ====== =========
</TABLE>
16
<PAGE>
SEALY CORPORATION
SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED AUGUST 29, 1999
(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............. $ 7 $1,482 $34,598 $ (812) $-- $35,275
---- ------ ------- ------- ---- -------
Cash flows from
investing activities:
Purchase of property
and equipment, net.... -- (118) (8,773) 73 -- (8,818)
Investment in
affiliates............ (27,740) (27,740)
Net activity in
investment in and
advances to (from)
subsidiaries and
affiliates............ 61 (5,873) (30,395) 36,207 -- --
---- ------ ------- ------- ---- -------
Net proceeds provided by
(used in) investing
activities............. 61 (5,991) (39,168) 8,540 -- (36,558)
Cash flows from
financing activities:
Treasury stock
repurchase costs, net
of direct expenses.... (85) -- -- -- -- (85)
Proceeds from repayment
of long-term
obligations, net...... -- 4,491 1,655 -- -- 6,146
Equity issuance........ 17 -- -- -- -- 17
---- ------ ------- ------- ---- -------
Net cash provided by
(used in) financing
activities............ (68) 4,491 1,655 -- -- 6,078
---- ------ ------- ------- ---- -------
Change in cash and cash
equivalents............ -- (18) (2,915) 7,728 -- 4,795
Cash and cash
equivalents:
Beginning of period..... -- 22 9,162 2,050 -- 11,234
---- ------ ------- ------- ---- -------
End of period........... $-- $ 4 $ 6,247 $ 9,778 -- $16,029
==== ====== ======= ======= ==== =======
</TABLE>
17
<PAGE>
SEALY CORPORATION
SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED AUGUST 30 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............. $ (153) $ (1,672) $ 19,631 $(1,051) -- $ 16,755
Cash flows from
investing activities:
Purchase of property
and equipment, net.... -- (172) (20,830) -- -- (21,002)
Net activity in
investment in and
advances to (from)
subsidiaries and
affiliates............ 637,275 (630,884) (7,068) 677 -- --
--------- --------- -------- ------- ---- ---------
Net proceeds provided by
(used in) investing
activities............. 637,275 (631,056) (27,898) 677 -- (21,002)
Cash flows from
financing activities:
Treasury stock
repurchase costs, net
of direct expenses.... (413,078) -- -- -- -- (413,078)
Proceeds from
(repayment of) long-
term obligations,
net................... (330,000) 664,697 10,088 -- -- 344,785
Equity issuances....... 121,317 -- -- -- -- 121,317
Debt issuance costs.... -- (31,989) -- -- -- (31,989)
Costs associated with
tender offer of prior
debt.................. (15,361) -- -- -- -- (15,361)
--------- --------- -------- ------- ---- ---------
Net cash provided by
(used in) financing
activities............ (637,122) 632,708 10,088 -- -- 5,674
--------- --------- -------- ------- ---- ---------
Change in cash and cash
equivalents............ -- (20) 1,821 (374) -- 1,427
Cash and cash
equivalents:
Beginning of period..... -- 20 2,062 3,975 -- 6,057
--------- --------- -------- ------- ---- ---------
End of period........... $ -- $ -- $ 3,883 $ 3,601 $-- $ 7,484
========= ========= ======== ======= ==== =========
</TABLE>
18
<PAGE>
SEALY CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Item 2--Quarter Ended August 29, 1999 compared with Quarter Ended August 30,
1998
Net Sales. Net sales increased $30.7 million, or 12.7% for the quarter
ended August 29, 1999, when compared to the quarter ended August 30, 1998. The
increase is attributable to a 2.8% increase in average unit selling price and
a 9.9% increase in unit volume. The increase in unit volume is due to the
successful launch of the Sealy Posturepedic Golden Anniversary at high
velocity price points as well as continued strong increases in Crown Jewel
Dual Support System ("DSS") and Stearns & Foster lines. The increase in
average unit selling price is primarily attributable to the introduction of
the Crown Jewel DSS line and a strong increase in the Stearns & Foster brand.
Cost of Goods Sold. Cost of goods sold for the quarter, as a percentage of
net sales, decreased 0.4 percentage points to 54.8%. This decrease is
primarily attributable to an increase in sales of higher end units, such as
the Crown Jewel DSS and Stearns & Foster brands with higher gross margins than
average; improved plant efficiencies; a reduction in manufacturing overhead
and reduced prices for certain raw materials, partially offset by increased
performance based compensation.
Selling, General, and Administrative. Selling, general, and administrative
expenses increased $0.1 million. This increase is primarily due to increased
marketing expenses of $2.4 million associated with increased sales volume, as
well as higher cooperative advertising and promotions associated with the
Golden Anniversary product launch. The Company also incurred an additional
$0.6 million of depreciation expense associated with capital spending and $1.8
million for performance based compensation, partially offset by ($3.1) million
decrease in Corporate Headquarters and Research and Development Center
relocation expenses; ($0.8) lower legal expenses primarily due to timing;
($0.2) million in Year 2000 and other system upgrades and ($0.6) million in
other various corporate expenses.
Interest Expense. Interest expense, net of interest income, decreased $0.9
million primarily due to lower average interest rates associated with the
floating rate debt and lower average debt levels.
Income Tax. The Company's effective income tax rates in 1999 and 1998
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 was 46.5%
for the quarter ended August 29, 1999 as compared to 25.0% for the quarter
ended August 30, 1998. The relatively low effective tax rate for 1998 was due
to low full year projected pretax income resulting from increased leverage and
compensation charges associated with the Recapitalization, as well as the
charges related to the Corporate Headquarters, Research and Development Center
and Lexington plant relocation to High Point, North Carolina.
Net Income (Loss). For the reasons set forth above, the Company recorded
net income of $11.6 million for the quarter ended August 29, 1999 versus net
income of $4.4 million for the quarter ended August 30, 1998.
Nine months Ended August 29, 1999 compared with Nine months Ended August 30,
1998
Net Sales. Net sales increased $62.4 million, or 9.4% for the nine months
ended August 29, 1999, when compared to the nine months ended August 30, 1998.
The increase is attributable to a 4.1% increase in average unit selling price
and a 5.3% increase in unit volume. The increase in average unit selling price
is primarily attributable to the introduction of the Crown Jewel DSS line and
a strong increase in the Stearns & Foster brand.
Cost of Goods Sold. Cost of goods sold for the nine months, as a percentage
of net sales, decreased 1.5 percentage points to 55.1%. This decrease is
primarily attributable to an increase in sales of higher end units,
19
<PAGE>
SEALY CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued)
such as the Crown Jewel DSS and Stearns & Foster brands with higher margins
than average, improved plant efficiencies, a reduction in manufacturing
overhead and reduced prices for certain raw materials.
Selling, General, and Administrative. Selling, general, and administrative
expenses increased $13.8 million. This increase is primarily due to increased
marketing expenses of $10.5 million, associated with increased sales volume,
as well as higher cooperative advertising and promotions associated with the
new Crown Jewel DSS and Golden Anniversary product launch. The Company also
incurred an additional $2.0 million of depreciation expense associated with
capital spending, additional performance based compensation $3.0 million,
increased foreign currency losses of $0.8 million associated with its foreign
operations (primarily associated with test market activities in Brazil) and
$0.8 million of expenses associated with increased business activity.
Increases in selling, general, and administrative expenses were partially
offset by a reduction of expenses associated with the relocation of the
Corporate Headquarters and Research and Development Center to High Point,
North Carolina ($3.3) million.
Compensation Associated with Recapitalization. During the first nine months
of 1998, the Company recorded a charge of $18.7 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, decreased $1.5
million primarily due to lower average interest rates associated with the
floating rate debt and lower average debt levels.
Income Tax. The Company's effective income tax rates in 1999 and 1998
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 1999 is
expected to be approximately 48.0% compared to 7.5% for 1998. The relatively
low effective tax rate for 1998 was due to low full year projected pretax
income resulting from increased leverage and compensation charges associated
with the Recapitalization, as well as the charges related to the Corporate
Headquarters, Research and Development Center and Lexington plant relocation
to High Point, North Carolina.
Extraordinary Item. During the first nine months of 1998, the Company
recorded a $14.5 million charge, net of income tax benefit of $9.7 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 for the Parent notes in connection with the Recapitalization.
Net Income (Loss). For the reasons set forth above, the Company recorded
net income of $15.2 million for the nine months ended August 29, 1999 versus a
net loss of ($29.6) million for the nine months ended August 30, 1998.
Liquidity and Capital Resources
The Company's principal sources of funds are cash flows from operations and
borrowings under its Revolving Credit Facility. The Company's principal use of
funds consists of payments of principal and interest on its Senior Credit
Agreements, capital expenditures and interest payments on its outstanding
Notes. Capital expenditures totaled $9.5 million for the nine months ended
August 29, 1999. Management believes that annual capital expenditure
limitations in its current debt agreements will not significantly inhibit the
Company from meeting its ongoing capital needs. At August 29, 1999, the
Company had approximately $79.3 million available under its Revolving Credit
Facility with Letters of Credit issued totaling approximately $7.7 million
outstanding.
20
<PAGE>
SEALY CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued)
The weighted average effective interest rate on the Company's debt for the
nine months ended August 29, 1999 was 9.3%.
From time to time the Company makes investments in debt, preferred stock,
or other securities of manufacturers, retailers, and distributors of bedding
and related products both domestically and internationally to enhance business
relationships and build incremental sales.
During the third quarter of 1999, using cash from continuing operations and
borrowings under its credit facility, the Company contributed $29.8 million in
cash and other assets to Mattress Holdings International, LLC ("MHI"), a
company controlled by Sealy's largest stockholder, Bain Capital, Inc., in
exchange for a non-voting interest in MHI. The Company's investment in MHI was
made to fund domestic and international loans, advances, and investments by
MHI in joint ventures, licensees, retailers, and others in order to enhance
business relationships and build incremental sales. In addition, the Company
has guaranteed the obligations of MHI under investment documents governing
MHI's investments and has indemnified MHI with respect to such investments.
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
("Year 2000 Issue"). 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 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, has
validated the code, and is currently implementing the converted programs. As
of September 26, 1999, 25 of 26 locations are in "production status" with the
Y2K compliant business system. The remaining location is scheduled for
October, 1999 implementation. Due to the level of completion of its plan, the
Company has not deemed it necessary to develop contingency plans for any of
the applications being converted. 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 has replaced 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.
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 $3.5 million and the Company has incurred $3.2 million through
September, 1999, with approximately $0.7 incurred during the current quarter.
The Company estimates that it is approximately 95% 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
21
<PAGE>
SEALY CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued)
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.
Forward Looking Statements
This document contains forward-looking statements within the meaning of the
safe harbor provisions of the Private Securities Litigation Report 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 3--Quantitative and Qualitative Disclosures About Market Risk
Information relative to the Company's market risk sensitive instruments by
major category at November 29, 1998 is presented under Item 7a of the
registrant's Annual Report on Form 10-K for the fiscal year ended November 29,
1998.
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.
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.
22
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
See Note F to the Condensed Consolidated Financial Statements, Part I, Item
1 included herein.
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
None
(b) Reports on Form 8-K:
None
23
<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
Title
Signature
/s/ Ronald L. Jones Chairman, President and Chief
By: _________________________________ Executive Officer Ronald L. Jones
Ronald L. Jones (Principal Executive Officer)
/s/ E. Lee Wyatt Corporate Vice President--
By: _________________________________ Administration and Chief Financial
E. Lee Wyatt Officer E. Lee Wyatt (Principal
Accounting Officer)
Date: October 13, 1999
24
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> NOV-28-1999
<PERIOD-START> NOV-30-1998
<PERIOD-END> AUG-29-1999
<CASH> 16,029
<SECURITIES> 0
<RECEIVABLES> 130,351
<ALLOWANCES> 9,830
<INVENTORY> 47,695
<CURRENT-ASSETS> 214,123
<PP&E> 196,499
<DEPRECIATION> 61,539
<TOTAL-ASSETS> 794,013
<CURRENT-LIABILITIES> 172,639
<BONDS> 706,469
0
0
<COMMON> 315
<OTHER-SE> (123,152)
<TOTAL-LIABILITY-AND-EQUITY> 794,013
<SALES> 727,827
<TOTAL-REVENUES> 727,827
<CGS> 401,219
<TOTAL-COSTS> 401,219
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 2,033
<INTEREST-EXPENSE> 48,889
<INCOME-PRETAX> 29,214
<INCOME-TAX> 14,023
<INCOME-CONTINUING> 15,191
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,191
<EPS-BASIC> 0.48
<EPS-DILUTED> 0.48
</TABLE>
