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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 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)
<TABLE>
<S> <C>
Delaware 36-3284147
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
Sealy Drive One Office Parkway 27370
Trinity, North Carolina (Zip Code)
(Address of principal executive offices)*
</TABLE>
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 11, 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)
<TABLE>
<CAPTION>
Quarter Ended Quarter Ended
August 27, August 29,
2000 1999
--------------- --------------
<S> <C> <C>
Net sales -- Non-Affiliates ............................ $ 253,995 $ 240,284
Net sales -- Affiliates ................................ 38,746 33,049
--------- ---------
Total net sales ..................................... 292,741 273,333
Costs and expenses:
Cost of goods sold -- Non-Affiliates ................. 139,581 132,629
Cost of goods sold -- Affiliates ..................... 20,263 17,065
--------- ---------
Total cost of goods sold ............................ 159,844 149,694
Selling, general and administrative .................. 89,193 82,174
Stock based compensation ............................. 1,600 --
Amortization of intangibles .......................... 3,169 3,302
--------- ---------
Income from operations ................................. 38,935 38,163
Interest expense, net ................................ 16,321 16,415
--------- ---------
Income before income tax expense ....................... 22,614 21,748
Income tax expense ..................................... 10,175 10,123
--------- ---------
Net income ............................................. 12,439 11,625
Liquidation preference for common L&M shares ......... 3,702 3,365
--------- ---------
Net income available to common shareholders ............ $ 8,737 $ 8,260
========= =========
Earnings per share -- basic:
Net income ........................................... $ 0.40 $ 0.37
Liquidation preference for common L&M shares ......... (0.12) (0.11)
--------- ---------
Net income available to common shareholders .......... $ 0.28 $ 0.26
========= =========
Earnings per share -- diluted:
Net income ........................................... $ 0.36 $ 0.35
Liquidation preference for common L&M shares ......... (0.11) (0.10)
--------- ---------
Net income available to common shareholders .......... $ 0.25 $ 0.25
========= =========
Weighted average number of common shares outstanding:
Basic ............................................... 31,485 31,485
Diluted ............................................. 34,228 32,768
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
<PAGE>
SEALY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Nine Months
Ended Ended
August 27, August 29,
2000 1999
------------- ------------
<S> <C> <C>
Net sales -- Non-Affiliates ............................ $ 705,896 $ 694,778
Net sales -- Affiliates ................................ 107,539 33,049
--------- ---------
Total net sales ..................................... 813,435 727,827
Costs and expenses:
Cost of goods sold -- Non-Affiliates ................. 389,825 384,154
Cost of goods sold -- Affiliates ..................... 56,636 17,065
--------- ---------
Total cost of goods sold ............................ 446,461 401,219
Selling, general and administrative .................. 258,702 238,944
Stock based compensation ............................. 3,580 --
Amortization of intangibles .......................... 9,525 9,561
--------- ---------
Income from operations ................................. 95,167 78,103
Interest expense, net ................................ 48,693 48,889
--------- ---------
Income before income tax expense ....................... 46,474 29,214
Income tax expense ..................................... 20,910 14,023
--------- ---------
Net income ............................................. 25,564 15,191
Liquidation preference for common L&M shares ......... 11,106 10,095
--------- ---------
Net income available to common shareholders ............ $ 14,458 $ 5,096
========= =========
Earnings per share -- basic:
Net income ........................................... $ 0.81 $ 0.48
Liquidation preference for common L&M shares ......... (0.35) (0.32)
--------- ---------
Net income available to common shareholders .......... $ 0.46 $ 0.16
========= =========
Earnings per share -- diluted:
Net income ........................................... $ 0.75 $ 0.46
Liquidation preference for common L&M shares ......... (0.33) (0.31)
--------- ---------
Net income available to common shareholders .......... $ 0.42 $ 0.15
========= =========
Weighted average number of common shares outstanding:
Basic ............................................... 31,485 31,469
Diluted ............................................. 34,015 32,755
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
SEALY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
August 27,
2000 November 28,
(Unaudited) 1999*
------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .......................... $ 28,257 $ 10,845
Accounts receivable -- Non-Affiliates, net ......... 124,688 105,200
Accounts receivable -- Affiliates .................. 23,477 14,275
Inventories ........................................ 51,448 44,681
Prepaid expenses and deferred taxes ................ 28,523 20,165
---------- ----------
256,393 195,166
Property, plant and equipment, at cost .............. 214,446 198,626
Less: accumulated depreciation ...................... (67,392) (60,525)
---------- ----------
147,054 138,101
Other assets:
Goodwill and other intangibles, net ................ 373,776 378,452
Investment in affiliates ........................... 29,982 30,004
Debt issuance costs, net, and other assets ......... 25,073 29,230
---------- ----------
428,831 437,686
---------- ----------
$ 832,278 $ 770,953
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion of long-term obligations ........... $ 32,401 $ 14,145
Accounts payable ................................... 65,976 43,153
Accrued interest ................................... 9,862 12,733
Accrued incentives and advertising ................. 41,006 32,301
Accrued compensation ............................... 18,934 23,173
Other accrued expenses ............................. 38,796 26,100
---------- ----------
206,975 151,605
Long-term obligations ............................... 656,908 676,197
Other noncurrent liabilities ........................ 42,576 41,185
Deferred income taxes ............................... 20,285 23,355
Minority interest ................................... 1,418 --
Stockholders' equity (deficit):
Common stock ....................................... 315 315
Additional paid-in capital ......................... 134,547 134,547
Retained deficit ................................... (220,448) (246,012)
Foreign currency translation adjustment ............ (10,213) (10,154)
Common stock held in treasury, at cost ............. (85) (85)
---------- ----------
(95,884) (121,389)
---------- ----------
$ 832,278 $ 770,953
========== ==========
</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 27, 2000 August 29, 1999
----------------- ----------------
<S> <C> <C>
Net cash provided by operating activities ........................ $ 53,324 $ 35,275
Investing activities:
Purchase of property, plant and equipment, net ................. (14,198) (8,818)
Investment in affiliates ....................................... -- (27,740)
Purchase of business, net of cash acquired ..................... (9,406) --
--------- ---------
Net cash used in investing activities ....................... (23,604) (36,558)
--------- ---------
Financing activities:
Treasury stock repurchase, including direct expenses ........... -- (85)
(Repayments) Proceeds of long-term obligations, net ............ (12,308) 6,146
Equity issuance ................................................ -- 17
--------- ---------
Net cash (used in) provided by financing activities ......... (12,308) 6,078
--------- ---------
Change in cash and cash equivalents .............................. 17,412 4,795
Cash and cash equivalents:
Beginning of period ............................................ 10,845 11,234
--------- ---------
End of period .................................................. $ 28,257 $ 16,029
========= =========
Selected non-cash items:
Non-cash compensation .......................................... $ 3,580 $ --
Depreciation ................................................... 10,179 10,204
Non-cash interest expense associated with:
Junior Subordinated Notes ..................................... 2,809 2,558
Debt issuance costs ........................................... 3,117 3,123
Discount on Senior Subordinated Notes ......................... 7,690 6,918
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
SEALY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Nine months ended August 27, 2000
NOTE 1 -- BASIS OF PRESENTATION
This report covers Sealy Corporation and its subsidiaries (collectively,
"Sealy" or 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 August 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.
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:
<TABLE>
<CAPTION>
August 27, November 28,
2000 1999
------------ -------------
(In thousands)
<S> <C> <C>
Raw materials ........... $30,714 $25,066
Work in process ......... 14,354 14,298
Finished goods .......... 6,380 5,317
------- -------
$51,448 $44,681
======= =======
</TABLE>
NOTE 3 -- 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 27, August 29, August 27, August 29,
2000 1999 2000 1999
------------ ------------ ------------ -----------
<S> <C> <C> <C> <C>
Numerator:
Net income ................................................. $12,439 $11,625 $25,564 $15,191
Liquidation preference for common L&M shares ............... 3,702 3,365 11,106 10,095
------- ------- ------- -------
Net income available to common shareholders ................ $ 8,737 $ 8,260 $14,458 $ 5,096
======= ======= ======= =======
Denominator:
Denominator for basic earnings per share -- weighted average
shares ................................................... 31,485 31,485 31,485 31,469
Effect of dilutive securities:
Stock options .............................................. 2,743 1,283 2,530 1,286
------- ------- ------- -------
Denominator for diluted earnings per share -- adjusted
weighted-average shares and assumed conversions .......... 34,228 32,768 34,015 32,755
======= ======= ======= =======
</TABLE>
6
<PAGE>
SEALY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
NOTE 4 -- COMPREHENSIVE INCOME
Total comprehensive income for the three and nine months ended August 27,
2000 was $13.3 million and $25.5 million and for the three and nine months
ended August 29, 1999 was $11.1 million and $16.1 million, respectively.
Activity in Stockholders' Equity is as follows (dollar amounts in
thousands):
<TABLE>
<CAPTION>
Current Year Additional
Comprehensive Common Paid-in
Income Stock Capital
--------------- -------- ------------
<S> <C> <C> <C>
Balance at November 28, 1999 ......... $315 $134,547
Comprehensive Income:
Net income for the nine months
ended August 27, 2000 ............... $25,564
Foreign currency translation
adjustment .......................... (59) -- --
------- ---- --------
Balance at August 27, 2000 ........... $25,505 $315 $134,547
======= ==== ========
<CAPTION>
Accumulated
Other
Retained Treasury Comprehensive
Deficit Stock Income Total
-------------- ---------- -------------- --------------
<S> <C> <C> <C> <C>
Balance at November 28, 1999 ......... $ (246,012) $ (85) $ (10,154) $ (121,389)
Comprehensive Income:
Net income for the nine months
ended August 27, 2000 ............... 25,564 25,564
Foreign currency translation
adjustment .......................... -- -- (59) (59)
---------- ----- --------- ----------
Balance at August 27, 2000 ........... $ (220,448) $ (85) $ (10,213) $ (95,884)
========== ===== ========= ==========
</TABLE>
NOTE 5 -- BUSINESS ACQUISITIONS
On August 10, 2000, the Company acquired 70% of the outstanding capital
stock of Rozen S.R.L. for $9.5 million, including costs associated with the
acquisition. Rozen, located in Buenos Aires, Argentina, manufactures and sells
bedding to retailers located in Argentina. Rozen also owns and operates several
retail sleep shops in the Buenos Aires area. As part of the purchase price,
$1.0 million is being held in escrow pursuant to the Purchase Agreement. The
Company recorded the acquisition using the purchase method of accounting and,
accordingly, the purchase price has been preliminarily allocated to the assets
acquired and liabilities assumed based on the estimated fair market values. As
a result of the preliminary purchase price allocation, the Company has recorded
$5.1 million in goodwill to be amortized over a 20 year period.
On September 1, 2000, the Company acquired certain operating assets of
Premier Bedding Group, LLC for $10.8 million. The business acquired
manufactures and sells bedding to retailers primarily in the United States
under the Bassett and Carrington Chase brand names. As part of the acquisition,
the Company acquired the exclusive right to manufacture, market and sell
bedding under the previously mentioned brand names through April 2014.
Due to the immateriality of the acquisitions to the Company's balance
sheet and operations, no pro forma disclosures are considered necessary.
NOTE 6 -- 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 its
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
7
<PAGE>
SEALY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
NOTE 6 -- CONTINGENCIES -- (Continued)
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. In August 2000,
the Company settled this action, with the defendants paying the Company $2.3
million
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 other waste disposal sites and under analogous state legislation
with regard to a third site. Although liability under these statutes is
generally joint and several, as a practical matter, liability 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 7 -- RELATED PARTY TRANSACTIONS
As of August 27, 2000, the Company has made year-to-date sales of $101.5
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 an arm's-length
basis from a person that is not an affiliate or related party.
NOTE 8 -- 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 net 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 9 -- 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.
8
<PAGE>
SEALY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
NOTE 9 -- GUARANTOR/NON-GUARANTOR FINANCIAL INFORMATION -- (Continued)
The following supplemental consolidating condensed financial statements
present:
1. Consolidating condensed balance sheets as of August 27, 2000 and
November 28, 1999 and consolidating condensed statements of operations
and cash flows for the nine months ended August 27, 2000 and August 29,
1999 and the consolidated condensed statements of operations for the
three months ended August 27, 2000 and August 29, 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.
9
<PAGE>
SEALY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENTS OF OPERATIONS
Three Months Ended August 27, 2000
(In Thousands)
<TABLE>
<CAPTION>
Sealy Combined Combined
Sealy Mattress Guarantor Non-Guarantor
Corporation Company Subsidiaries Subsidiaries Eliminations Consolidated
------------- -------------- -------------- -------------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Net sales -- Non-Affiliates ........ $ -- $ 11,904 $221,008 $24,915 $ (3,832) $253,995
Net sales -- Affiliates ............ -- -- 38,746 -- -- 38,746
--------- -------- -------- ------- --------- --------
Total net sales ................. -- 11,904 259,754 24,915 (3,832) 292,741
Costs and expenses:
Cost of goods sold --
Non-Affiliates .................. -- 7,498 121,003 14,912 (3,832) 139,581
Cost of goods sold --
Affiliates ...................... -- -- 20,263 -- -- 20,263
--------- -------- -------- ------- --------- --------
Total cost of goods sold ........ -- 7,498 141,266 14,912 (3,832) 159,844
Selling, general and
administrative ................. 59 3,502 79,135 6,497 -- 89,193
Stock based compensation ........ 1,600 -- -- -- -- 1,600
Amortization of intangibles ..... -- 99 2,879 191 -- 3,169
Interest expense, net ........... 812 15,748 (138) (101) -- 16,321
Loss (income) from equity
investees ...................... (13,319) (14,588) -- -- 27,907 --
Loss (income) from
nonguarantor equity
investees ...................... -- 1,262 (3,019) -- 1,757 --
Capital charge and
intercompany interest
allocation ..................... (871) (14,927) 15,576 222 -- --
--------- -------- -------- ------- --------- --------
Income (loss) before income
taxes ............................ 11,719 13,310 24,055 3,194 (29,664) 22,614
Income tax expense (benefit) ....... (720) (9) 9,467 1,437 -- 10,175
--------- ----------- -------- ------- --------- --------
Net income (loss) .................. $ 12,439 $ 13,319 $ 14,588 $ 1,757 $ (29,664) $ 12,439
========= ========== ======== ======= ========= ========
</TABLE>
10
<PAGE>
SEALY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENTS OF OPERATIONS
Three Months Ended August 29, 1999
(In Thousands)
<TABLE>
<CAPTION>
Sealy Combined Combined
Sealy Mattress Guarantor Non-Guarantor
Corporation Company Subsidiaries Subsidiaries Eliminations Consolidated
------------- ------------ -------------- -------------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Net sales -- Non-Affiliates ............... $ -- $ 11,059 $216,313 $21,355 $ (8,443) $240,284
Net sales -- Affiliates ................... -- -- 33,049 -- -- 33,049
--------- --------- -------- ------- --------- --------
Total net sales ........................ -- 11,059 249,362 21,355 (8,443) 273,333
Costs and expenses:
Cost of goods sold --
Non-Affiliates ......................... -- 6,882 120,884 13,306 (8,443) 132,629
Cost of goods sold --
Affiliates ............................. -- -- 17,065 -- -- 17,065
--------- --------- -------- ------- --------- --------
Total 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 --
Capital charge and 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
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENTS OF OPERATIONS
Nine Months Ended August 27, 2000
(In Thousands)
<TABLE>
<CAPTION>
Sealy Combined Combined
Sealy Mattress Guarantor Non-Guarantor
Corporation Company Subsidiaries Subsidiaries Eliminations Consolidated
------------- ------------ -------------- -------------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Net sales -- Non-Affiliates ............... $ -- $ 33,269 $615,244 $68,359 $ (10,976) $705,896
Net sales -- Affiliates ................... -- -- 107,539 -- -- 107,539
--------- --------- -------- ------- --------- --------
Total net sales ........................ -- 33,269 722,783 68,359 (10,976) 813,435
Costs and expenses:
Cost of goods sold --
Non-Affiliates ......................... -- 21,005 338,288 41,508 (10,976) 389,825
Cost of goods sold --
Affiliates ............................. -- -- 56,636 -- -- 56,636
--------- --------- -------- ------- --------- --------
Total cost of goods sold ............... -- 21,005 394,924 41,508 (10,976) 446,461
Selling, general and
administrative ........................ 135 9,893 230,016 18,658 -- 258,702
Stock based compensation ............... 3,580 -- -- -- -- 3,580
Amortization of intangibles ............ -- 298 8,650 577 -- 9,525
Interest expense, net .................. 2,707 47,113 (843) (284) -- 48,693
Loss (income) from equity
investees ............................. (27,533) (31,466) -- -- 58,999 --
Loss (income) from
nonguarantor equity investees -- 3,707 (7,670) -- 3,963 --
Capital charge and intercompany
interest allocation ................... (2,842) (44,629) 46,776 695 -- --
--------- --------- -------- ------- --------- --------
Income (loss) before income taxes ......... 23,953 27,348 50,930 7,205 (62,962) 46,474
Income tax expense (benefit) .............. (1,611) (185) 19,464 3,242 -- 20,910
--------- --------- -------- ------- --------- --------
Net income (loss) ......................... $ 25,564 $ 27,533 $ 31,466 $ 3,963 $ (62,962) $ 25,564
========= ========= ======== ======= ========= ========
</TABLE>
12
<PAGE>
SEALY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENTS OF OPERATIONS
Nine Months Ended August 29, 1999
(In Thousands)
<TABLE>
<CAPTION>
Sealy Combined Combined
Sealy Mattress Guarantor Non-Guarantor
Corporation Company Subsidiaries Subsidiaries Eliminations Consolidated
------------- ------------ -------------- -------------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Net sales -- Non-Affiliates ............... $ -- $ 28,754 $621,997 $55,278 $ (11,251) $694,778
Net sales -- Affiliates ................... -- -- 33,049 -- -- 33,049
--------- --------- -------- ------- --------- --------
Total net sales ........................ -- 28,754 655,046 55,278 (11,251) 727,827
Costs and expenses:
Cost of goods sold --
Non-Affiliates ......................... -- 17,995 342,439 34,971 (11,251) 384,154
Cost of goods sold --
Affiliates ............................. -- -- 17,065 -- -- 17,065
--------- --------- -------- ------- --------- --------
Total 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 --
Capital charge and 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 tax 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
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
SUPPLEMENTAL CONSOLIDATING CONDENSED BALANCE SHEET
August 27, 2000
(In Thousands)
<TABLE>
<CAPTION>
Sealy Combined
Sealy Mattress Guarantor
Corporation Company Subsidiaries
------------- ------------ --------------
<S> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents ................... $ -- $ 31 $ 22,026
Accounts receivable -- Non-Affiliates,
net ........................................ 24 3,976 100,512
Accounts receivable -- Affiliates ........... -- -- 23,477
Inventories ................................. -- 1,302 41,473
Prepaid expenses and deferred taxes ......... 781 298 22,011
--------- --------- -----------
805 5,607 209,499
Property, plant and equipment, at cost ........ -- 4,634 190,898
Less: accumulated depreciation ................ -- (1,804) (62,115)
--------- --------- -----------
-- 2,830 128,783
Other assets:
Goodwill and other intangibles, net ......... -- 13,355 330,061
Net investment in and advances to
(from) subsidiaries and affiliates ......... (52,901) 534,292 (322,829)
Investment in affiliates .................... -- -- --
Debt issuance costs, net and other
assets ..................................... 814 21,330 2,878
--------- --------- -----------
(52,087) 568,977 10,110
--------- --------- -----------
Total assets ............................... $ (51,282) $ 577,414 $ 348,392
========= ========= ===========
Liabilities and Stockholders' Equity
(Deficit)
Current liabilities:
Current portion -- long-term
obligations ................................ $ -- $ 31,291 $ 335
Accounts payable ............................ -- 231 56,056
Accrued interest ............................ -- 441 9,346
Accrued incentives and advertising .......... -- 1,392 35,826
Accrued compensation ........................ -- 465 17,504
Other accrued expenses ...................... 68 341 38,002
--------- --------- -----------
68 34,161 157,069
Long-term obligations ......................... 34,306 608,913 13,689
Other noncurrent liabilities .................. 15,484 -- 26,036
Deferred income taxes ......................... (5,256) 747 20,304
Minority interest ............................. -- -- --
Stockholders' equity (deficit) ................ (95,884) (66,407) 131,294
--------- --------- -----------
Total liabilities and stockholders'
equity (deficit) .......................... $ (51,282) $ 577,414 $ 348,392
========= ========= ===========
<CAPTION>
Combined
Non-Guarantor
Subsidiaries Eliminations Consolidated
-------------- -------------- -------------
<S> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents ................... $ 6,200 $ -- $ 28,257
Accounts receivable -- Non-Affiliates,
net ........................................ 20,176 -- 124,688
Accounts receivable -- Affiliates ........... -- -- 23,477
Inventories ................................. 8,673 -- 51,448
Prepaid expenses and deferred taxes ......... 5,433 -- 28,523
---------- --------- ---------
40,482 -- 256,393
Property, plant and equipment, at cost ........ 18,914 -- 214,446
Less: accumulated depreciation ................ (3,473) -- (67,392)
---------- --------- ---------
15,441 -- 147,054
Other assets:
Goodwill and other intangibles, net ......... 30,360 -- 373,776
Net investment in and advances to
(from) subsidiaries and affiliates ......... (70,177) (88,385) --
Investment in affiliates .................... 29,982 -- 29,982
Debt issuance costs, net and other
assets ..................................... 51 -- 25,073
---------- --------- ---------
(9,784) (88,385) 428,831
---------- --------- ---------
Total assets ............................... $ 46,139 $ (88,385) $ 832,278
========== ========= =========
Liabilities and Stockholders' Equity
(Deficit)
Current liabilities:
Current portion -- long-term
obligations ................................ $ 775 $ -- $ 32,401
Accounts payable ............................ 9,689 -- 65,976
Accrued interest ............................ 75 -- 9,862
Accrued incentives and advertising .......... 3,788 -- 41,006
Accrued compensation ........................ 965 -- 18,934
Other accrued expenses ...................... 385 -- 38,796
---------- --------- ---------
15,677 -- 206,975
Long-term obligations ......................... -- -- 656,908
Other noncurrent liabilities .................. 1,056 -- 42,576
Deferred income taxes ......................... 4,490 -- 20,285
Minority interest ............................. 1,418 -- 1,418
Stockholders' equity (deficit) ................ 23,498 (88,385) (95,884)
---------- --------- ---------
Total liabilities and stockholders'
equity (deficit) .......................... $ 46,139 $ (88,385) $ 832,278
========== ========= =========
</TABLE>
14
<PAGE>
SEALY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
SUPPLEMENTAL CONSOLIDATING CONDENSED BALANCE SHEET
November 28, 1999
(In Thousands)
<TABLE>
<CAPTION>
Sealy Combined
Sealy Mattress Guarantor
Corporation Company Subsidiaries
------------- ------------ --------------
<S> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents ..................... $ -- $ 13 $ 6,220
Accounts receivable -- Non-Affiliate,
net ......................................... 27 3,941 84,365
Accounts receivable -- Affiliate .............. -- -- 14,275
Inventories ................................... -- 1,297 38,673
Prepaid expenses and deferred taxes ........... 3,412 314 12,799
---------- --------- -----------
3,439 5,565 156,332
Property, plant and equipment, at cost ......... -- 4,584 181,881
Less: accumulated depreciation ................. -- (1,571) (55,709)
---------- --------- -----------
-- 3,013 126,172
Other assets:
Goodwill and other intangibles, net ........... -- 13,653 338,711
Net investment in and advances to
(from) subsidiaries and affiliates .......... (84,313) 507,742 (338,993)
Investment in affiliates ...................... -- -- --
Debt issuance costs, net and other assets 813 24,422 3,904
---------- --------- -----------
(83,500) 545,817 3,622
---------- --------- -----------
Total assets ................................ $ (80,061) $ 554,395 $ 286,126
========== ========= ===========
Liabilities and Stockholders' (Deficit)
Equity
Current liabilities:
Current portion -- long-term
obligations ................................. $ -- $ 13,854 $ 291
Accounts payable .............................. -- 318 36,493
Accrued interest .............................. -- 671 11,967
Accrued incentives and advertising ............ -- 1,200 28,507
Accrued compensation .......................... -- 417 21,646
Other accrued expenses ........................ 534 313 24,342
---------- --------- -----------
534 16,773 123,246
Long-term obligations .......................... 31,497 630,749 13,951
Other noncurrent liabilities ................... 11,491 -- 27,629
Deferred income taxes .......................... (2,194) 736 21,644
Stockholders' (deficit) equity ................. (121,389) (93,863) 99,656
---------- --------- -----------
Total liabilities and stockholders'
(deficit) equity ........................... $ (80,061) $ 554,395 $ 286,126
========== ========= ===========
<CAPTION>
Combined
Non-Guarantor
Subsidiaries Eliminations Consolidated
-------------- -------------- -------------
<S> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents ..................... $ 4,612 $ -- $ 10,845
Accounts receivable -- Non-Affiliate,
net ......................................... 16,867 -- 105,200
Accounts receivable -- Affiliate .............. -- 14,275
Inventories ................................... 4,711 -- 44,681
Prepaid expenses and deferred taxes ........... 3,640 -- 20,165
---------- --------- -----------
29,830 -- 195,166
Property, plant and equipment, at cost ......... 12,161 -- 198,626
Less: accumulated depreciation ................. (3,245) -- (60,525)
---------- --------- -----------
8,916 -- 138,101
Other assets:
Goodwill and other intangibles, net ........... 26,088 -- 378,452
Net investment in and advances to
(from) subsidiaries and affiliates .......... (56,359) (28,077) --
Investment in affiliates ...................... 30,004 -- 30,004
Debt issuance costs, net and other assets 91 -- 29,230
---------- --------- -----------
(176) (28,077) 437,686
---------- --------- -----------
Total assets ................................ $ 38,570 $ (28,077) $ 770,953
========== ========= ===========
Liabilities and Stockholders' (Deficit)
Equity
Current liabilities:
Current portion -- long-term
obligations ................................. $ -- $ -- $ 14,145
Accounts payable .............................. 6,342 -- 43,153
Accrued interest .............................. 95 -- 12,733
Accrued incentives and advertising ............ 2,594 -- 32,301
Accrued compensation .......................... 1,110 -- 23,173
Other accrued expenses ........................ 911 -- 26,100
---------- --------- -----------
11,052 -- 151,605
Long-term obligations .......................... -- -- 676,197
Other noncurrent liabilities ................... 2,065 -- 41,185
Deferred income taxes .......................... 3,169 -- 23,355
Stockholders' (deficit) equity ................. 22,284 (28,077) (121,389)
---------- --------- -----------
Total liabilities and stockholders'
(deficit) equity ........................... $ 38,570 $ (28,077) $ 770,953
========== ========= ===========
</TABLE>
15
<PAGE>
SEALY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENTS OF CASH FLOWS
Nine Months Ended August 27, 2000
(In Thousands)
<TABLE>
<CAPTION>
Sealy Combined
Sealy Mattress Guarantor
Corporation Company Subsidiaries
------------- ------------ --------------
<S> <C> <C> <C>
Net cash provided by operating
activities ................................ $-- $ 695 $ 51,286
--- ---------- ----------
Cash flows from investing activities:
Purchase of property, plant and
equipment, net ........................... -- (43) (12,126)
Acquisition of business, net of
cash acquired ............................ -- -- --
Net activity in investment in and
advances to (from) subsidiaries
and affiliates ........................... -- 11,456 (23,136)
--- ---------- ----------
Net cash provided by (used in)
investing activities ...................... -- 11,413 (35,262)
Cash flows from financing activities:
Repayments of long-term
obligations, net ......................... -- (12,090) (218)
--- ---------- ----------
Net cash used in financing
activities .............................. -- (12,090) (218)
--- ---------- ----------
Change in cash and cash equivalents ......... -- 18 15,806
Cash and cash equivalents:
Beginning of period ....................... -- 13 6,220
--- ---------- ----------
End of period ............................. $-- $ 31 $ 22,026
=== ========== ==========
<CAPTION>
Combined
Non-Guarantor
Subsidiaries Eliminations Consolidated
-------------- -------------- -------------
<S> <C> <C> <C>
Net cash provided by operating
activities ................................ $ 1,343 $-- $ 53,324
--------- --- ----------
Cash flows from investing activities:
Purchase of property, plant and
equipment, net ........................... (2,029) -- (14,198)
Acquisition of business, net of
cash acquired ............................ (9,406) -- (9,406)
Net activity in investment in and
advances to (from) subsidiaries
and affiliates ........................... 11,680 -- --
--------- --- ----------
Net cash provided by (used in)
investing activities ...................... 245 -- (23,604)
Cash flows from financing activities:
Repayments of long-term
obligations, net ......................... -- -- (12,308)
--------- --- ----------
Net cash used in financing
activities .............................. -- -- (12,308)
--------- --- ----------
Change in cash and cash equivalents ......... 1,588 -- 17,412
Cash and cash equivalents:
Beginning of period ....................... 4,612 -- 10,845
--------- --- ----------
End of period ............................. $ 6,200 $-- $ 28,257
========= === ==========
</TABLE>
16
<PAGE>
SEALY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENTS OF CASH FLOWS
Nine Months Ended August 29, 1999
(In Thousands)
<TABLE>
<CAPTION>
Sealy Combined Combined
Sealy Mattress Guarantor Non-Guarantor
Corporation Company Subsidiaries Subsidiaries Eliminations Consolidated
------------- ---------- -------------- -------------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Net cash provided by (used in)
operating activities ...................... $ 7 $ 1,482 $ 34,598 $ (812) $-- $ 35,275
----- -------- --------- --------- --- ---------
Cash flows from investing activities:
Purchase of property, plant 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 cash provided by (used in)
investing activities ...................... 61 (5,991) (39,168) 8,540 -- (36,558)
Cash flows from financing activities:
Treasury stock repurchase ................. (85) -- -- -- -- (85)
Proceeds from borrowings on 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>
Item 2 -- Management's Discussion and Analysis of Financial Condition and
Results of Operations
Quarter Ended August 27, 2000 compared with Quarter Ended August 29, 1999
Net Sales. The Company reported record sales of $292.7 million for the
third quarter of 2000, $19.4 million or 7.1% above the comparable period of
1999. The increase is attributable to a 2.0% increase in average unit selling
price and a 5.1% increase in unit volume. Average unit selling price growth was
realized through continued strong increases in Stearns & Foster as well as
Crown Jewel Dual Support System ("DSS"). The increase in unit volume was
attributable to increases throughout the Sealy and Stearns & Foster product
lines. Stearns & Foster continued to exhibit strong increases.
Cost of Goods Sold. Cost of goods sold for the quarter, as a percent of
net sales, decreased 0.2 percentage points to 54.6%. The reduction in cost of
sales is primarily attributable to increased absorption of fixed costs through
higher sales volume, as well as reductions in overhead spending. These
improvements were partially offset by close-out pricing on selected products.
Selling, General, and Administrative. Selling, general, and administrative
expense increased $7.0 million to $89.2 million, or 30.5% of net sales,
compared to $82.2 million, or 30.1% of net sales. This increase is primarily
due to increased marketing expense of $3.2 associated with increased sales
volume. Delivery costs increased $1.4 million due to an overall increase in
sales volume and higher fuel costs. In addition, other administrative costs
have increased $2.4 million due to costs associated with restoring normal
staffing levels after the relocation of the corporate headquarters as well as
cost increases associated with increases in business activity and new business
initiatives.
Stock Based Compensation. The Company has an obligation to purchase
securities of the Company held by an officer at the greater of estimated fair
market value or original cost. The Company recorded a $1.6 million charge
during the third quarter ended August 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, is essentially
unchanged from prior year. Lower debt balances than prior year have been offset
by increased interest rates associated with 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 and state and local income taxes. The Company's
effective rate for 2000 is approximately 45% compared to 46.5% 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 $12.4 million for the quarter ended August 27, 2000 versus $11.6
million for the quarter ended August 29, 1999.
Nine Months Ended August 27, 2000 compared with Nine Months Ended August 29,
1999
Net Sales. The Company reported record sales of $813.4 million for the
first nine months of 2000, $85.6 million or 11.8% above the comparable period
of 1999. The increase is attributable to a 1.9% increase in average unit
selling price and a 9.9% increase in unit volume. Average unit selling price
growth was realized through continued strong increases in Stearns & Foster as
well as Crown Jewel Dual Support System ("DSS"). The increase in unit volume
was attributable to increases throughout the Sealy and Stearns & Foster product
line offerings. Stearns & Foster continued to exhibit strong increases.
Cost of Goods Sold. Cost of goods sold for the nine months ended August
27, 2000, as a percent of net sales, decreased 0.2 percentage points to 54.9%.
The reduction in cost of sales is primarily attributable to increased
absorption of fixed costs through higher sales volume. These improvements were
partially offset by close-out pricing on selected products.
Selling, General, and Administrative. Selling, general, and administrative
expense increased $19.8 million to $258.7 million, or 31.8% of net sales,
compared to $238.9 million, or 32.8% of net sales. This increase is primarily
due to increased marketing expense of $12.2 associated with increased sales
volume. Delivery costs
18
<PAGE>
increased $4.6 million due to an overall increase in sales volume and higher
fuel costs. In addition, other administrative costs have increased $6.6 million
due to costs associated with restoring normal staffing levels after the
relocation of the corporate headquarters as well as cost increases associated
with increases in business activity and new business initiatives. These
increases were partially offset by decreases in relocation expense of $2.0
million as the Company incurred additional costs associated with the move of
Corporate Headquarters to High Point, North Carolina during the first two
quarters of 1999. In addition, foreign currency losses decreased from 1999 by
$1.6 million mainly due to the devaluation of the Brazilian Real in the first
quarter of 1999.
Stock Based Compensation. The Company has an obligation to purchase
securities of the Company held by an officer at the greater of estimated fair
market value or original cost. The Company recorded a $3.6 million charge
during the nine months ended August 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, is essentially
unchanged from prior year. Lower debt balances than prior year have been offset
by increased interest rates associated with the Company's floating rate debt.
Additionally, the Company received $1.2 million in interest in the second
quarter associated with a favorable conclusion of an IRS examination.
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 and state and local income taxes. The Company's
effective rate for 2000 is approximately 45% compared to 48% 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 $25.6 million for the nine months ended August 27, 2000 versus $15.2
million for the nine months ended August 29, 1999.
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 $14.2 million for the nine months ended
August 27, 2000. We expect fiscal 2000 capital expenditures to be approximately
$23.8 million. 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 27, 2000, the Company had
approximately $93.3 million available under its Revolving Credit Facility with
Letters of Credit issued totaling approximately $6.7 million outstanding. The
weighted average effective interest rate on the Company's debt for the nine
months ended August 27, 2000 was 9.6%. 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.
The Company has acquired 70% of the outstanding capital stock of Rozen
S.R.L. and certain operating assets of Premier Bedding Group, LLC. These
acquisitions totalled $20.3 million in cash and were funded through operating
cash flow. The operations and net assets of Rozen S.R.L. were not material to
the Company.
On September 6, 2000 the Revolving Credit Facility and Tranche A Term Loan
lenders approved Amendment Three to the Credit Agreement. The amendment makes
adjustments to restrictions on acquisitions and capital expenditures in the
Company's Credit Agreement which will allow the Company to take advantage of
potential growth opportunities.
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. As of August 27, 2000, the Company
had $30.0 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,
19
<PAGE>
obligations under its credit agreement and subordinated note indentures,
environmental liabilities, and other needs required to manage and operate its
business.
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 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 affect the Company's interest rate
derivative instruments would not have a material impact on earnings during the
next fiscal year.
20
<PAGE>
PART II. OTHER INFORMATION
Item 1 -- Legal Proceedings
See Note 6 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:
10.1 Third Amendment to Credit Agreement entered into as of September 6,
2000 by and among Sealy Mattress Company, Sealy Corporation, certain
financial institutions as listed, Goldman Sachs Credit Partners L.P.,
Morgan Guaranty Trust Company, Bankers Trust Company and the Credit
Support Parties, as defined.
27.1 Financial Data Schedule
(b) Reports on Form 8-K:
None
21
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Sealy Corporation has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
SEALY CORPORATION
By: /S/ RONALD L. JONES
------------------------------------
Ronald L. Jones
Chairman, President and
Chief Executive Officer
(Principal Executive Officer)
By: /S/ LEE WYATT
------------------------------------
E. Lee Wyatt
Corporate Vice President -- Administration
and Chief Financial Officer
(Principal Accounting Officer)
Date: October 11, 2000
22
