<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: February 27, 2000
-----------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________________ to _____________________
Commission file number 1-8738
------
SEALY CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 36-3284147
- ------------------------------- ----------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Sealy Drive One Office Parkway
Trinity, North Carolina 27230
- ------------------------------- ----------------------------
(Address of principal executive offices) (Zip Code)
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 April 1,
2000 was 31,484,951
- --------------------------------------------------------------------------------
<PAGE>
PART I. FINANCIAL INFORMATION
-------------------------------
Item 1 - Financial Statements
SEALY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
QUARTER ENDED QUARTER ENDED
FEBRUARY 27, FEBRUARY 28,
2000 1999
------------ -------------
Net sales - Non Affiliates $223,968 $222,326
Net sales - Affiliates 32,671 --
-------- --------
Total net sales 256,639 222,326
Costs and expenses:
Cost of goods sold - Non Affiliates 124,187 122,575
Cost of goods sold - Affiliates 17,240 --
-------- --------
Total cost of goods sold 141,427 122,575
Selling, general and administrative 83,535 79,186
Stock based compensation 990 --
Amortization of intangibles 3,162 2,962
-------- --------
Income from operations 27,525 17,603
Interest expense, net 17,234 16,521
-------- --------
Income before income tax expense 10,291 1,082
Income tax expense 4,734 669
-------- --------
Net income 5,557 413
Liquidation preference for common L & M shares 3,702 3,365
-------- --------
Net income (loss) available to common shareholders $ 1,855 $ (2,952)
======== ========
Earnings per share - basic:
Net income $ 0.18 $ 0.01
Liquidation preference for common L & M shares (0.12) (0.11)
-------- --------
Net income (loss) available to common shareholders $ 0.06 $ (0.10)
======== ========
Earnings per share - diluted:
Net income $ 0.16 $ 0.01
Liquidation preference for common L & M shares (0.11) (0.11)
-------- --------
Net income (loss) available to common shareholders $ 0.05 $ (0.10)
======== ========
Weighted average number of common shares outstanding:
Basic 31,485 31,438
Diluted 34,120 31,683
See accompanying notes to condensed consolidated financial statements.
2
<PAGE>
SEALY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
FEBRUARY 27, NOVEMBER 28,
2000 1999
ASSETS (UNAUDITED) *
-------- --------
Current assets:
Cash and cash equivalents $ 20,729 $ 10,845
Accounts receivable - Non-Affiliates, net 105,126 105,200
Accounts receivable - Affiliates 17,452 14,275
Inventories 43,985 44,681
Prepaid expenses and deferred taxes 26,377 20,165
-------- --------
213,669 195,166
Property, plant and equipment - at cost 199,966 198,626
Less: accumulated depreciation (61,656) (60,525)
-------- --------
138,310 138,101
Other assets:
Goodwill and other intangibles, net 375,648 378,452
Investment in affiliates 30,182 30,004
Debt issuance costs, net, and other assets 28,407 29,230
-------- --------
434,237 437,686
-------- --------
$786,216 $770,953
======== ========
* Condensed from audited financial statements.
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
SEALY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
FEBRUARY 27, November 28,
LIABILITIES AND STOCKHOLDERS' 2000 1999
(DEFICIT) EQUITY (UNAUDITED) *
---------------- ------------
Current liabilities:
Current portion of long-term obligations $ 20,339 $ 14,145
Accounts payable 54,723 43,153
Accrued interest 4,020 12,733
Accrued incentives and advertising 36,023 32,301
Accrued compensation 13,353 23,173
Other accrued expenses 30,690 26,100
--------- ---------
159,148 151,605
Long-term obligations 678,221 676,197
Other noncurrent liabilities 40,103 41,185
Deferred income taxes 23,976 23,355
Stockholders' (deficit) equity:
Common stock 315 315
Additional paid-in capital 134,547 134,547
Retained deficit (240,455) (246,012)
Foreign currency translation adjustment (9,554) (10,154)
Common stock held in treasury, at cost (85) (85)
--------- ---------
(115,232) (121,389)
--------- ---------
$ 786,216 $ 770,953
========= =========
* 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>
QUARTER ENDED QUARTER ENDED
FEBRUARY 27, FEBRUARY 28,
2000 1999
----------- -----------
<S> <C> <C>
Net cash provided by (used in) operating activities $ 8,966 $(1,313)
------- -------
Investing activities:
Purchase of property and equipment, net (3,836) (3,240)
------- -------
Net cash used in investing activities (3,836) (3,240)
------- -------
Financing activities:
Treasury stock repurchase, including direct expenses -- (85)
Proceeds from long-term obligations, net 4,754 3,107
Equity issuances -- 8
------- -------
Net cash provided by financing activities 4,754 3,030
------- -------
Change in cash and cash equivalents 9,884 (1,523)
Cash and cash equivalents:
Beginning of period 10,845 11,234
------- -------
End of period $20,729 $ 9,711
======= =======
Supplemental disclosures:
- ------------------------
Selected noncash items:
Non-cash compensation $ 990 $ --
Depreciation 3,627 3,355
Non-cash interest expense associated with:
Junior Subordinated Notes 945 856
Debt issuance costs 1,049 1,044
Discount on Senior Subordinated Notes 2,518 2,265
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
SEALY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
THREE MONTHS ENDED FEBRUARY 27, 2000
NOTE 1 -- BASIS OF PRESENTATION
This report covers Sealy Corporation and its subsidiaries (collectively, the
"Company").
The accompanying unaudited condensed consolidated financial statements should be
read together with the Company's Annual Report on Form 10-K for the year ended
November 28, 1999.
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 February 27, 2000, and its
results of operations and cash flows for the periods presented herein. All
adjustments in the periods presented herein are normal and recurring in nature.
During fiscal 2000, the Company modified its year-end such that the fiscal year
will end on the Sunday closest to November 30, but not later than December 2.
Certain reclassifications of previously reported financial information were made
to conform to the 2000 presentation.
NOTE 2 -- INVENTORIES
The major components of inventories were as follows:
FEBRUARY 27, NOVEMBER 28,
2000 1999
------------ ------------
(IN THOUSANDS)
Raw materials $24,676 $25,066
Work in process 14,075 14,298
Finished goods 5,234 5,317
------- -------
$43,985 $44,681
======= =======
NOTE 3 - EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share (in thousands) for the quarter ended:
FEBRUARY 27, FEBRUARY 28,
2000 1999
------- -------
Numerator:
Net income $ 5,557 $ 413
Liquidation preference for L & M shares 3,702 3,365
------- -------
Net income (loss) available to common shareholders $ 1,855 $(2,952)
======= =======
Denominator:
Denominator for basic earnings per share--weighted
average shares 31,485 31,438
Effect of dilutive securities:
Stock options 2,635 245
------- -------
Denominator for diluted earnings per share--adjusted
weighted-average shares and assumed conversions 34,120 31,683
======= =======
6
<PAGE>
SEALY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
THREE MONTHS ENDED FEBRUARY 27, 2000
NOTE 4 - COMPREHENSIVE INCOME
Total comprehensive income for the quarters ended February 27, 2000 and February
28, 1999 was $6.2 million and $1.3 million, respectively.
Activity in Stockholders' (Deficit) Equity is as follows (dollar amounts in
thousands):
<TABLE>
<CAPTION>
ACCUMULATED
CURRENT ADDITIONAL OTHER
COMPREHENSIVE COMMON PAID-IN RETAINED TREASURY COMPREHENSIVE
INCOME STOCK CAPITAL DEFICIT STOCK INCOME TOTAL
------------ -------- --------- --------- -------- ------------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at November 28, 1999 $315 $134,547 $(246,012) $ (85) $(10,154) $(121,389)
Comprehensive Income:
Net income for the three
months ended February 27, 2000 $5,557 5,557 5,557
Foreign currency
translation adjustment 600 600 600
------ -------- --------- -------- -------- --------- ---------
Balance at February 27, 2000 $6,157 $315 $134,547 $(240,455) $ (85) $(9,554) $(115,232)
====== ======== ========= ======== ======== ========= =========
</TABLE>
NOTE 5 -- CONTINGENCIES
The Company is currently conducting an environmental cleanup at a formerly owned
facility in South Brunswick, New Jersey pursuant to the New Jersey Industrial
Site Recovery Act. The Company and one of its subsidiaries are parties to an
Administrative Consent Order issued by the New Jersey Department of
Environmental Protection. Pursuant to that order, the Company and its
subsidiary agreed to conduct soil and groundwater remediation at the property.
The Company does not believe that its manufacturing processes were the source of
contamination. The Company sold the property in 1997. The Company and
subsidiary retained primary responsibility for the required remediation. The
Company has completed essentially all soil remediation with the New Jersey
Department of Environmental Protection approval, and has concluded a pilot test
of a groundwater remediation system.
The Company is also remediating soil and groundwater contamination at an
inactive facility located in Oakville, Connecticut. Although the Company is
conducting the remediation voluntarily, it obtained Connecticut Department of
Environmental Protection approval of the remediation plan. The Company has
completed essentially all soil remediation under the remediation plan and is
currently monitoring groundwater at the site. The Company believes the
contamination is attributable to the manufacturing operations of previously
unaffiliated occupants of the facility. In 1994, the Company filed a cost
recovery action in U.S. District Court to require these entities to complete the
remediation and reimburse the Company for cleanup costs. Trial on this matter
has been bifurcated with only the issue of damages going to trial in May 1999.
In February 2000, the trial court judge found that approximately $0.5 million
expended by the Company up to trial and up to $2.4 million in future costs are
recoverable as reasonable remediation costs in this matter. The issues of
liability and apportionment between the parties will be addressed in the second
half of the trial.
While the Company cannot predict the ultimate timing or costs to the South
Brunswick and Oakville remediation, based on facts currently known, the Company
believes that the accruals are adequate and does not believe the resolution of
these matters will have a material adverse effect on the financial position or
future operations of the Company.
The Company has been identified as a potential responsible party pursuant to the
Comprehensive Environmental Response Compensation and Liability Act with regard
to two waste disposal sites and under analogous state legislation with regard to
a third. Although liability under these statutes is generally joint and
several, as a practical matter, liability
7
<PAGE>
SEALY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
THREE MONTHS ENDED FEBRUARY 27, 2000
is usually allocated among all financially responsible parties. Based on the
nature and quantity of our wastes, the Company believes that liability at each
of these sites is unlikely to be material.
NOTE 6 - RELATED PARTY TRANSACTIONS
As of February 27, 2000, the Company has made year-to-date sales of $30.8
million of finished mattress products pursuant to multi-year supply contracts to
affiliated and related parties of Bain Capital, Inc., the Company's largest
stockholder. The Company believes that the terms on which mattresses are
supplied to related parties are not materially less favorable than those that
might reasonably be obtained in a comparable transaction at such time in an
arm's-length basis from a person that is not an affiliate or related party.
NOTE 7 - SEGMENT INFORMATION
The Company operates predominately in one industry segment, that being the
manufacture and marketing of conventional bedding. No one customer represented
10% or more of total net sales. Sales outside the United States were less than
10% of total sales. Also, long-lived assets (principally property, plant and
equipment, goodwill, patents and other investments) outside of the United States
were less than 10% of total long-lived assets.
NOTE 8 -- 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 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.
The following supplemental consolidating condensed financial statements present:
1. Consolidating condensed balance sheets as of February 27, 2000 and
November 28, 1999, consolidating condensed statements of operations and
cash flows for the three-month periods ended February 27, 2000 and
February 28, 1999.
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.
Separate financial statements of each of the Guarantor Subsidiaries are not
presented because Management believes that these financial statements would not
be material to investors.
8
<PAGE>
SEALY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
THREE MONTHS ENDED FEBRUARY 27, 2000
<TABLE>
<CAPTION>
SEALY CORPORATION
SUPPLEMENTAL CONSOLIDATING CONDENSED BALANCE SHEET
FEBRUARY 27, 2000
(in thousands)
Sealy Combined Combined
Sealy Mattress Guarantor Non-Guarantor
Corporation Company Subsidiaries Subsidiaries Eliminations Consolidated
- ----------------------------------------------------------------------------------------------------------------------
ASSETS
<S> <C> <C> <C> <C> <C> <C>
Current assets:
Cash and cash $ -- $ 9 $ 14,552 $ 6,168 $ -- $ 20,729
equivalents
Accounts receivable -
Non-Affiliates, net 5 3,463 85,338 16,320 -- 105,126
Accounts receivable -
Affiliates -- -- 17,452 -- -- 17,452
Inventories -- 1,173 37,921 4,891 -- 43,985
Prepaids and deferred
taxes 3,412 304 16,942 5,719 -- 26,377
- ----------------------------------------------------------------------------------------------------------------------
3,417 4,949 172,205 33,098 -- 213,669
Property, plant and -- 4,588 182,291 13,087 -- 199,966
equipment, at cost
Less: accumulated -- (1,636) (56,579) (3,441) -- (61,656)
depreciation
- ----------------------------------------------------------------------------------------------------------------------
-- 2,952 125,712 9,646 -- 138,310
Other assets:
Goodwill and other -- 13,553 335,843 26,252 -- 375,648
intangibles, net
Net investment in and (76,254) 522,791 (342,195) (59,838) (44,504) --
advances to (from)
subsidiaries and
affiliates
Investment in affiliates -- -- -- 30,182 -- 30,182
Debt issuance costs, net
and other assets 813 23,380 4,148 66 -- 28,407
- ----------------------------------------------------------------------------------------------------------------------
(75,441) 559,724 (2,204) (3,338) (44,504) 434,237
- ----------------------------------------------------------------------------------------------------------------------
Total assets $ (72,024) $567,625 $ 295,713 $ 39,406 $(44,504) $ 786,216
======================================================================================================================
LIABILITIES AND
STOCKHOLDER'S (DEFICIT)
EQUITY
- ----------------------------------------------------------------------------------------------------------------------
Current liabilities:
Current portion $ -- $ 20,042 $ 297 $ -- $ -- $ 20,339
-long-term obligations
Accounts payable -- 226 47,559 6,938 -- 54,723
Accrued interest -- 176 3,814 30 -- 4,020
Accrued incentives and
advertising -- 957 32,036 3,030 -- 36,023
Accrued compensation -- 230 12,202 921 -- 13,353
Other accrued expenses 480 524 29,475 211 -- 30,690
- ----------------------------------------------------------------------------------------------------------------------
480 22,155 125,383 11,130 -- 159,148
Long-term obligations 32,442 631,905 13,874 -- -- 678,221
Other noncurrent
liabilities 12,480 -- 26,567 1,056 -- 40,103
Deferred income taxes (2,194) 736 22,146 3,288 -- 23,976
Stockholders' (deficit)
equity (115,232) (87,171) 107,743 23,932 (44,504) (115,232)
- ----------------------------------------------------------------------------------------------------------------------
Total liabilities and
stockholders' (deficit) $ (72,024) $567,625 $ 295,713 $ 39,406 $(44,504) $ 786,216
equity
======================================================================================================================
</TABLE>
9
<PAGE>
SEALY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
THREE MONTHS ENDED FEBRUARY 27, 2000
<TABLE>
<CAPTION>
SEALY CORPORATION
SUPPLEMENTAL CONSOLIDATING CONDENSED BALANCE SHEET
NOVEMBER 28, 1999
(in thousands)
- -----------------------------------------------------------------------------------------------------------------------
Sealy Combined Combined
Sealy Mattress Guarantor Non-Guarantor
Corporation Company Subsidiaries Subsidiaries Eliminations Consolidated
- -----------------------------------------------------------------------------------------------------------------------
ASSETS
<S> <C> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents $ -- $ 13 $ 6,220 $ 4,612 $ -- $ 10,845
Accounts receivable -
Non-Affiliates, net 27 3,941 84,365 16,867 -- 105,200
Accounts receivable -
Affiliates -- -- 14,275 -- 14,275
Inventories -- 1,297 38,673 4,711 -- 44,681
Prepaid expenses and
deferred taxes 3,412 314 12,799 3,640 -- 20,165
- -----------------------------------------------------------------------------------------------------------------------
3,439 5,565 156,332 29,830 -- 195,166
Property, plant and
equipment, at cost -- 4,584 181,881 12,161 -- 198,626
Less: accumulated
depreciation -- (1,571) (55,709) (3,245) -- (60,525)
- -----------------------------------------------------------------------------------------------------------------------
Other assets:
Goodwill and other -- 3,013 126,172 8,916 -- 138,101
intangibles, net -- 13,653 338,711 26,088 -- 378,452
Net investment in and
advances to (from)
subsidiaries and affiliates (84,313) 507,742 (338,993) (56,359) (28,077) --
Investment in affiliates -- -- -- 30,004 -- 30,004
Debt issuance costs, net
and other assets 813 24,422 3,904 91 -- 29,230
- -----------------------------------------------------------------------------------------------------------------------
(83,500) 545,817 3,622 (176) (28,077) 437,686
- -----------------------------------------------------------------------------------------------------------------------
Total assets $ (80,061) $554,395 $ 286,126 $ 38,570 $(28,077) $ 770,953
=======================================================================================================================
LIABILITIES AND
STOCKHOLDERS' (DEFICIT)
EQUITY
Current liabilities:
Current portion -
long-term obligations $ -- $ 13,854 $ 291 $ -- $ -- $ 14,145
Accounts payable -- 318 36,493 6,342 -- 43,153
Accrued interest -- 671 11,967 95 -- 12,733
Accrued incentives and
advertising -- 1,200 28,507 2,594 -- 32,301
Accrued compensation -- 417 21,646 1,110 -- 23,173
Other accrued expenses 534 313 24,342 911 -- 26,100
- -----------------------------------------------------------------------------------------------------------------------
534 16,773 123,246 11,052 -- 151,605
Long-term obligations 31,497 630,749 13,951 -- -- 676,197
Other noncurrent liabilities 11,491 -- 27,629 2,065 -- 41,185
Deferred income taxes (2,194) 736 21,644 3,169 -- 23,355
Stockholders' (deficit) (121,389) (93,863) 99,656 22,284 (28,077) (121,389)
equity
- -----------------------------------------------------------------------------------------------------------------------
Total liabilities and
stockholders' (deficit) $ (80,061) $554,395 $ 286,126 $ 38,570 $(28,077) $ 770,953
equity
=======================================================================================================================
</TABLE>
10
<PAGE>
SEALY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
THREE MONTHS ENDED FEBRUARY 27, 2000
<TABLE>
<CAPTION>
SEALY CORPORATION
SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED FEBRUARY 27, 2000
(in thousands)
- ------------------------------------------------------------------------------------------------------------------
Sealy Combined Combined
Sealy Mattress Guarantor Non-Guarantor
Corporation Company Subsidiaries Subsidiaries Eliminations Consolidated
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net sales - Non Affiliates $ -- $ 10,250 $196,410 $20,870 $ (3,562) $223,968
Net sales - Affiliates -- -- 32,671 -- -- 32,671
------- -------- -------- ------- -------- --------
Total net sales -- 10,250 229,081 20,870 (3,562) 256,639
Costs and expenses:
Cost of goods sold -
Non Affiliates -- 6,536 108,324 12,889 (3,562) 124,187
Cost of goods sold -
Affiliates -- -- 17,240 -- -- 17,240
------- -------- -------- ------- -------- --------
Total cost of goods sold -- 6,536 125,564 12,889 (3,562) 141,427
Selling, general and
administrative 45 3,150 74,649 5,691 -- 83,535
Stock based compensation 990 -- -- -- -- 990
Amortization of
intangibles -- 99 2,869 194 -- 3,162
Interest expense, net 979 16,069 274 (88) -- 17,234
Loss (income) from
equity investees (6,092) (7,487) -- -- 13,579 --
Loss (income) from
nonguarantor
equity investees -- 1,185 (2,233) -- 1,048 --
Capital charge and
intercompany
interest allocation (1,024) (15,215) 15,995 244 -- --
- ------------------------------------------------------------------------------------------------------------------
Income (loss) before 5,102 5,913 11,963 1,940 (14,627) 10,291
income taxes
Income tax expense (benefit) (455) (179) 4,476 892 -- 4,734
- ------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 5,557 $ 6,092 $ 7,487 $ 1,048 $(14,627) $ 5,557
==================================================================================================================
</TABLE>
11
<PAGE>
SEALY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
THREE MONTHS ENDED FEBRUARY 27, 2000
<TABLE>
<CAPTION>
SEALY CORPORATION
SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED FEBRUARY 28, 1999
(in thousands)
- -----------------------------------------------------------------------------------------------------------------
Sealy Combined Combined
Sealy Mattress Guarantor Non-Guarantor
Corporation Company Subsidiaries Subsidiaries Eliminations Consolidated
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net sales $ -- $ 8,735 $201,460 $15,540 $(3,409) $222,326
Costs and expenses:
Cost of goods sold -- 5,604 110,387 10,006 (3,422) 122,575
Selling, general and
administrative 53 2,822 71,915 4,383 13 79,186
Amortization of
intangibles -- 99 2,638 225 -- 2,962
Interest expense, net 949 15,453 247 (128) -- 16,521
Loss (income) from
equity investees (413) (663) -- -- 1,076 --
Loss (income) from
nonguarantor
equity investees -- 60 (310) -- 250 --
Capital charge and
intercompany
interest allocation (1,002) (14,743) 15,347 398 -- --
- -----------------------------------------------------------------------------------------------------------------
Income (loss) before
income taxes 413 103 1,236 656 (1,326) 1,082
Income tax expense (benefit) -- (310) 573 406 -- 669
- -----------------------------------------------------------------------------------------------------------------
Net income (loss) $ 413 $ 413 $ 663 $ 250 $(1,326) $ 413
=================================================================================================================
</TABLE>
12
<PAGE>
SEALY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
THREE MONTHS ENDED FEBRUARY 27, 2000
<TABLE>
<CAPTION>
SEALY CORPORATION
SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED FEBRUARY 27, 2000
(in thousands)
- -----------------------------------------------------------------------------------------------------------------
Sealy Combined Combined
Sealy Mattress Guarantor Non-Guarantor
Corporation Company Subsidiaries Subsidiaries Eliminations Consolidated
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net cash provided by
(used in)
operating activities $-- $ (80) $ 9,717 $ (671) $-- $ 8,966
Cash flows from
investing activities:
Purchase of property
and equipment, net -- (11) (2,933) (892) -- (3,836)
Net activity in
investment in and
advances to (from)
subsidiaries and
affiliates -- (4,739) 1,620 3,119 -- --
- -----------------------------------------------------------------------------------------------------------------
Net proceeds
provided by (used
in) investing
activities -- (4,750) (1,313) 2,227 -- (3,836)
Cash flows from
financing activities:
Proceeds from
(payments on) long-term
obligations, net -- 4,826 (72) -- -- 4,754
- -----------------------------------------------------------------------------------------------------------------
Net cash provided
by (used in) financing
activities -- 4,826 (72) -- -- 4,754
Change in cash and cash
equivalents -- (4) 8,332 1,556 -- 9,884
Cash and cash
equivalents:
Beginning of period -- 13 6,220 4,612 -- 10,845
- -----------------------------------------------------------------------------------------------------------------
End of period $-- $ 9 $14,552 $6,168 -- $20,729
=================================================================================================================
</TABLE>
13
<PAGE>
SEALY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
THREE MONTHS ENDED FEBRUARY 27, 2000
<TABLE>
<CAPTION>
SEALY CORPORATION
SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED FEBRUARY 28, 1999
(in thousands)
- --------------------------------------------------------------------------------------------------------------------
Sealy Combined Combined
Sealy Mattress Guarantor Non-Guarantor
Corporation Company Subsidiaries Subsidiaries Eliminations Consolidated
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net cash provided by
(used in)
operating activities $ 30 $ 500 $(3,078) $1,235 --$ $(1,313)
Cash flows from investing
activities:
Purchase of property
and equipment, net -- (210) (3,613) 583 -- (3,240)
Net activity in
investment in and
advances to (from)
subsidiaries and
affiliates 47 (2,444) 2,767 (370) -- --
- --------------------------------------------------------------------------------------------------------------------
Net proceeds provided
by (used in)
investing activities 47 (2,654) (846) 213 -- (3,240)
Cash flows from financing
activities:
Treasury stock
repurchase costs (85) -- -- -- -- (85)
Proceeds from long-term
obligations, net -- 2,143 964 -- -- 3,107
Equity issuances 8 -- -- -- -- 8
Net cash provided
by (used in)
financing
activities (77) 2,143 964 -- -- 3,030
- --------------------------------------------------------------------------------------------------------------------
Change in cash and cash
equivalents -- (11) (2,960) 1,448 -- (1,523)
Cash and cash equivalents:
Beginning of period -- 22 9,162 2,050 -- 11,234
- --------------------------------------------------------------------------------------------------------------------
End of period $ -- $ 11 $ 6,202 $3,498 -- $ 9,711
====================================================================================================================
</TABLE>
14
<PAGE>
SEALY CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 2 -
QUARTER ENDED FEBRUARY 27, 2000 COMPARED WITH QUARTER ENDED FEBRUARY 28, 1999
Net Sales Net sales increased $34.3 million, or 15.4% for the quarter ended
February 27, 2000, when compared to the quarter ended February 28, 1999. The
increase is attributable to an increase in volume of 13.4%, and an increase in
average unit selling price of 2.0%. Volume growth was attributable to increases
throughout the product offerings. Average unit selling price growth was
realized through continued strong increases in Stearns & Foster, Crown Jewel
Dual Support System, and Posturepedic brands.
Cost of Goods Sold Cost of goods sold for the quarter, as a percentage of net
sales, has remained flat at 55.1%. Increased absorption of fixed costs through
higher sales volume and improved sales mix of higher margin products were
generally offset by close-out pricing on select discontinued products.
Selling, General, and Administrative Selling, general, and administrative
expenses increased $4.3 million. This increase is primarily due to the increased
marketing expenses, of $3.4 million, associated with increased sales volume.
Employment costs increased $1.7 million due to restoring normal staffing levels
after the relocation of the corporate headquarters and increased information
technology. Delivery expenses increased $1.4 million over 1999 due to the
overall increase in sales and higher fuel costs. In addition, other
administrative expenses have increased over 1999 by $1.2 million due to general
increase in business activities. These increases were partially offset by
decreases in relocation expense of $1.4 million as the Company incurred
additional costs associated with the move of Corporate Headquarters to High
Point, North Carolina during the first quarter of 1999. In addition, foreign
currency losses decreased from 1999 by $2.0 million mainly due to devaluation of
the Brazilian Real in the first quarter of 1999.
Stock Based Compensation The Company has an obligation to repurchase
certain securities of the Company held by an officer at the greater of fair
market value or original cost. The Company recorded a $1.0 million charge
during the quarter ended February 27, 2000 to revalue this obligation to reflect
an increase in the fair market value of the securities.
Interest Expense Interest expense, net of interest income, increased $0.7
million primarily due to increased interest rates on the Company's floating rate
debt.
Income Tax The Company's effective income tax rates in 2000 and 1999 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 2000 is
approximately 46.0% compared to 61.8% for 1999. The lower effective tax rate
for 2000 is due to higher projected pretax income for the year, compared to
1999.
Net Income For the reasons set forth above, the Company recorded net income
of $5.6 million for the quarter ended February 27, 2000 versus net income of
$0.4 million for the quarter ended February 28, 1999.
15
<PAGE>
SEALY CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of funds are cash flows from operations and
borrowings under its Revolving Credit Facility. The Company's principal use of
funds consists of payments of principal and interest on its Senior Credit
Agreements, capital expenditures and interest payments on its outstanding Notes.
Capital expenditures totaled $3.8 million for the quarter ended February 27,
2000. 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 February 27, 2000, the Company had approximately
$82.3 million available under its Revolving Credit Facility with Letters of
Credit issued totaling approximately $7.7 million. The Company's net weighted
average borrowing cost was 9.9% for the three months ended February 27, 2000.
The Revolving Credit Facility expires in fiscal 2002. The Company expects it
will have the ability to renew the existing revolving credit facility or have
the ability to find new financing with comparable terms. If the Company is
unable to renew its existing arrangement or obtain new financing, this could
have an adverse affect on the Company's ability to fund its operations.
From time to time the Company makes investments in debt, preferred stock, or
other securities of manufacturer's, retailers, and distributors of bedding and
related products both domestically and internationally to enhance business
relationships and build incremental sales. As of February 27, 2000, the Company
had $30.2 million in such investments.
Management believes that the Company will have the necessary liquidity through
cash flow from operations, and availability under the Revolving Credit Facility
for the next several years to fund its expected capital expenditures,
obligations under its credit agreement and subordinated note indentures,
environmental liabilities, and for other needs required to manage and operate
its business.
YEAR 2000 ISSUE
To date, the Company has not experienced any significant business disruptions
related to the Year 2000 Issue. The Company incurred approximately $3.3 million
addressing the issue and funded the expenditures through cash flows from
operations. Although the Company believes that it successfully avoided any
significant disruption from the Year 2000 Issue, it will continue to monitor all
critical systems for the appearance of delayed complications or disruptions,
problems encountered through suppliers, customers and other third parties with
whom the Company deals.
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 28, 1999 is presented under Item 7a of the registrant's
Annual Report on Form 10-K for the fiscal year ended November 28, 1999.
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, swap and option 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.
16
<PAGE>
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.
17
<PAGE>
PART II. OTHER INFORMATION
-----------------------------
Item 1. Legal Proceedings.
See Note 5 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:
27.1 Financial Data Schedule.
(b) Reports on Form 8-K:
None
18
<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
Signature Title
--------- -----
By: /s/ Ronald L. Jones Chairman, President and
------------------------- Chief Executive Officer
Ronald L. Jones (Principal Executive Officer)
By: /s/ Lee Wyatt Corporate Vice President - AdministratioN
------------------------- and Chief Financial Officer
E. Lee Wyatt (Principal Accounting Officer)
Date: April 12, 2000
19
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<PAGE>
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<PERIOD-START> NOV-29-1999
<PERIOD-END> FEB-27-2000
<CASH> 20,729
<SECURITIES> 0
<RECEIVABLES> 122,578
<ALLOWANCES> 10,442
<INVENTORY> 43,985
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<PP&E> 199,966
<DEPRECIATION> 61,656
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<CURRENT-LIABILITIES> 159,148
<BONDS> 698,560
0
0
<COMMON> 315
<OTHER-SE> (115,547)
<TOTAL-LIABILITY-AND-EQUITY> 786,216
<SALES> 256,639
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