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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended November 28, 1999
[ ] Transition Report Pursuant to Section 13 or 15(d)
Securities Exchange Act of 1934
For the Transition Commission file
Period from to number
1-8738
SEALY CORPORATION
DELAWARE 36-3284147
(State of (I.R.S. ID No.)
incorporation)
Sealy Drive 27370
One Office Parkway (Zip Code)
Trinity, North Carolina
Registrant's telephone number, including area code
(336) 861-3500
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [_]
The aggregate market value of the voting stock held by nonaffiliates of the
registrant as of February 14, 2000: not applicable.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The number of shares of the registrant's common stock outstanding as of
February 14, 2000 is approximately: 31,484,951
DOCUMENTS OR PARTS THEREOF INCORPORATED BY REFERENCE: None
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PART I
Item 1. Business
General
Sealy Corporation (the "Company" or the "Parent"), through its subsidiaries,
is the largest bedding manufacturer in North America and manufactures and
markets a complete line of conventional bedding products including mattresses
and foundations. The Company's conventional bedding products include the
SEALY(R), SEALY POSTUREPEDIC(R), SEALY POSTUREPEDIC CROWN JEWEL(R), SEALY
CORRECT COMFORT(R), and the STEARNS & FOSTER(R) brands and account for
approximately 98% of the Company's total net sales for the year ended November
28, 1999. The Company has a component parts manufacturing subsidiary which
produces substantially all of the Company's mattress innerspring requirements
and approximately 50% of the Company's boxspring component parts requirements.
Another subsidiary, Sealy, Inc., provides corporate and administrative
services for the Company.
Conventional Bedding
Industry and Competition. According to industry sales data compiled by the
International Sleep Products Association ("ISPA"), a bedding industry trade
group, over 700 manufacturers of mattresses and foundations make up the U.S.
conventional bedding industry, generating wholesale revenues of $3.9 billion
during calendar year 1998. According to ISPA, approximately 71% of
conventional bedding is sold to furniture stores and specialty sleep shops.
Most of the remaining conventional bedding is sold to department stores,
national mass merchandisers, membership clubs and contract customers such as
motels, hotels and hospitals. Management estimates that approximately two-
third of conventional bedding is sold for replacement purposes, and the
average time between consumer purchases of conventional mattresses is 7 to 8
years. Factors such as disposable income, sales of homes, a trend toward more
bedrooms per home, growth in the U.S. population, and heightened consumer
awareness of the bedding category also have an effect on bedding purchases.
Management believes that sales by companies with recognized national brands
account for more than half of total conventional bedding sales. The Company
supplies such nationally recognized brands as Sealy, Sealy Posturepedic, Sealy
Posturepedic Crown Jewel, Sealy Correct Comfort, and Stearns & Foster. Sealy
branded products are considered by management to be the most well recognized
in the domestic conventional bedding industry. Competition in conventional
bedding is generally based on quality, brand name recognition, service and
price. The Company's largest competitors include Serta, Inc. and Simmons
Company. Management believes the Company derives a competitive advantage over
its conventional bedding competitors as a result of strong consumer
recognition of Sealy branded products, as well as the high quality and
innovative product offerings.
Products. The Company manufactures a complete line of conventional bedding
options in various sizes ranging in retail price from under $200 to
approximately $4,000 per queen size set. Sealy Posturepedic brand mattress is
the largest selling mattress brand in North America. Approximately 96% of the
Sealy brand and the Stearns & Foster brand conventional bedding products sold
in North America are produced by the Company, with the remainder being
produced by Sealy Mattress Company of New Jersey, Inc. ("Sealy New Jersey"), a
licensee. The Stearns & Foster product line consists of top quality, premium
mattresses sold under the Stearns & Foster brand name.
Customers. The Company serves over 7,400 retail outlets (approximately 3,200
customers), which include furniture stores, national mass merchandisers,
specialty sleep shops, department stores, contract customers and other stores.
The top five conventional bedding customers accounted for approximately 27% of
the Company's net sales for the year ended November 28, 1999 and no single
customer accounted for over 10% of the Company's net sales.
Sales and Marketing. The Company's sales depend primarily on its ability to
provide quality products with recognized brand names at competitive prices.
Additionally, the Company works to build brand loyalty with its
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ultimate consumers, principally through targeted national advertising and
cooperative advertising with its dealers, along with superior "point-of-sale"
materials designed to emphasize the various features and benefits of the
Company's products which differentiate them from other brands.
The Company's sales force structure is generally based on regions of the
country and districts within those regions, and also includes a sales staff
for specific national accounts. The Company believes that it has the most
comprehensive training and development programs for its sales force, including
its University of Sleep curriculum, which provides ongoing training sessions
with programs focusing on advertising, merchandising and sales education,
including techniques to help analyze a dealer's business and profitability.
The Company's sales force emphasizes follow-up service to retail stores and
provides retailers with promotional and merchandising assistance, as well as
extensive specialized professional training and instructional materials.
Training for retail sales personnel focuses on several programs, designed to
assist retailers in maximizing the effectiveness of their own sales personnel,
store operations, and advertising and promotional programs, thereby creating
loyalty to, and enhanced sales of, the Company's products.
Suppliers. The Company purchases raw materials and certain components from a
variety of vendors. The Company purchases approximately 50% of its Sealy
foundation parts from a single third-party source, which has patents on
various interlocking wire configurations (the "Wire Patents"), and
manufactures the remainder of these parts as a licensee under the Wire
Patents. The Company purchases substantially all of its Stearns & Foster
foundation parts from the same single third-party source. In order to reduce
the risks of dependence on external supply sources and to enhance
profitability, the Company has expanded its own internal component parts
manufacturing capacity. See "Components Division." As is the case with all of
the Company's product lines, the Company does not consider itself dependent
upon any single outside vendor as a source of supply to its conventional
bedding business and believes that sufficient alternative sources of supply
for the same, similar or alternative components are available.
Manufacturing and Facilities. The Company manufactures most conventional
bedding to order and has adopted "just-in-time" inventory techniques in its
manufacturing process to more efficiently serve its dealers' needs and to
minimize their inventory carrying costs. Most bedding orders are scheduled,
produced and shipped within five days of receipt. This rapid delivery
capability allows the Company to minimize its inventory of finished products
and better satisfy customer demand for prompt shipments.
The Company operates 25 bedding manufacturing facilities and three component
manufacturing facilities in 19 states, three Canadian provinces, Puerto Rico
and Mexico. Management believes that through the utilization of extra shifts,
it will be able to continue to meet growing demand for its products without a
significant investment in facilities. See Item 2, "Properties," herein. The
Company also operates a Research and Development center in High Point, North
Carolina with a staff which tests new materials and machinery, trains
personnel, compares the quality of the Company's products with those of its
competitors and develops new products and processes. The Company has developed
and patented a computerized model of an adult person, known as Dataman, which
is used in testing the support level of its mattresses. In addition, the
Company has developed very advanced and proprietary methods (Digital Image
Analysis) of dynamically measured spinal morphology on any human subject in
any sleep position. This sophisticated technology is expected to enhance
Sealy's Posturepedic brand leadership and market position.
Components Division
The Company operates a Components Division with headquarters in Rensselaer,
Indiana. The Components Division sells its component parts at current market
prices exclusively to the Company's bedding plants and licensees. The
Components Division currently provides substantially all of the Company's
mattress innerspring unit requirements. The Components Division also supplies
approximately 50% of the Company's Sealy foundation parts requirements under a
license of the Wire Patents. In March 1997, the Company divested the assets of
its mattress insulator pad manufacturing operation in South Brunswick, New
Jersey. The Components
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Division operates three owned manufacturing sites located in Rensselaer,
Indiana; Delano, Pennsylvania; and Colorado Springs, Colorado. See Item 2,
"Properties," herein.
Over the last eight years, the Company has made substantial commitments to
ensure that the coil-making equipment at its component plants remains state-
of-the-art. Since 1989, the Company has installed 40 automated coil-producing
machines. This equipment has resulted in higher capacity at lower per-unit
costs and has increased self-production capacity for the Company's innerspring
requirements over that time period from approximately 60% to substantially
all.
In addition to reducing the risks associated with relying on single sources
of supply for certain essential raw materials, the Company believes the
vertical integration resulting from its component manufacturing capability
provides it with a competitive advantage. The Company believes that it is the
only conventional bedding manufacturer in the United States with substantial
innerspring and formed wire component-making capacity.
International
The Company has wholly-owned subsidiaries in Canada and Mexico which have
marketing and manufacturing responsibilities for those markets. The Company
has three manufacturing facilities in Canada and one in Mexico which comprise
all of the wholly-owned manufacturing operations at November 28, 1999. The
Company also has a manufacturing and sales joint venture in India.
The Company also utilizes licensing agreements in certain international
markets. Licensing agreements allow the Company to reduce exposure to
political and economic risk abroad by minimizing investments in those markets.
Ten foreign license agreements exist in Thailand, Japan, the United Kingdom,
Australia, New Zealand, South Africa, Israel, Jamaica, Saudi Arabia, and the
Dominican Republic. In addition, the Company uses a Korean contract
manufacturer to help service the Korean market, and distributes products
directly in Taiwan, Hong Kong, Malaysia, Singapore and the Philippines.
International test markets are currently in Spain and Brazil.
The Company does not derive a material portion of its sales or revenue from
its foreign operations or customers in any foreign country.
Licensing
At November 28, 1999, there are 16 separate license arrangements in effect
with six domestic and ten foreign independent licensees. Sealy New Jersey (a
bedding manufacturer), Klaussner Corporation Services ("Klaussner", a
furniture manufacturer), Sealy Furniture of Maryland (a sleep sofa
manufacturer), Kolcraft Enterprises, Inc. (a crib mattress manufacturer),
Pacific Coast Feather Company (a pillow, comforter and mattress pad
manufacturer), and Dorel Industries (a futon manufacturer) are the only
domestic manufacturers that are licensed to use the Sealy trademark, subject
to the terms of license agreements. Under license agreements between Sealy New
Jersey and the Company, Sealy New Jersey has the perpetual right to use
certain of the Company's trademarks in the manufacture and sale of Sealy brand
and Stearns & Foster brand products in the United States. Sealy entered into a
long-term license agreement with Klaussner on December 19, 1996 under which
Klaussner will manufacture and market sofas, sleep sofas, chairs, recliners
and other upholstered furniture products in North America, primarily under the
Sealy Furniture(TM) logo. On April 1, 1998, Sealy entered into licensing
arrangements with Pacific Coast Feather Company for the manufacture and sale
of pillows, comforters and mattress pads under the Sealy brand name and Dorel
Industries for the manufacture and sale of futons under the Sealy Furniture
brand name.
The Company's licensing division generates royalties by licensing Sealy
brand technology and trademarks to manufacturers located throughout the world.
The Company also provides its licensees with product specifications, quality
control inspections, research and development, statistical services and
marketing programs. In the fiscal year ended November 28, 1999, the licensing
division as a whole generated royalties of
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approximately $9.9 million, which were accounted for as a reduction of
selling, general and administrative expenses in the Consolidated Financial
Statements included herein.
See the International section for international licensees.
Warranties
Sealy and Stearns & Foster bedding offer limited warranties on their
manufactured products. The periods for "no-charge" warranty service varies
among products. Prior to fiscal year 1995, such warranties ranged from one
year on promotional bedding to 20 years on certain Posturepedic and Stearns &
Foster bedding. All currently manufactured Sealy Posturepedic models, Stearns
& Foster bedding and some other Sealy-brand products offer a 10-year non-
prorated warranty service period. Historically, the Company's warranty costs
have been immaterial for each of its product lines.
Trademarks and Licenses
The Company owns, among others, the Sealy and Stearns & Foster trademarks
and tradenames and also owns the Posturepedic, Posturepedic Crown Jewel,
Correct Comfort, Comfort Series, Dataman and University of Sleep trademarks,
service marks and certain related logos and design marks.
Employees
As of November 28, 1999, the Company had 5,460 full-time employees.
Approximately 68% of the Company's employees at its 28 North American plants
are represented by various labor unions with separate collective bargaining
agreements. Due to the large number of collective bargaining agreements, the
Company is periodically in negotiations with certain of the unions
representing its employees. The Company considers its overall relations with
its work force to be satisfactory. We have only experienced two work stoppages
in the last eight years due to labor disputes. Due to our ability to shift
production from one plant to another, these lost workdays have not had a
material adverse effect on our financial results. We have not encountered any
significant organizing activity at our non-union facilities in that time
frame.
Seasonality/Other
The Company's business is not materially seasonal. See Note 12 to the
Consolidated Financial Statements of the Company included in Part II, Item 8
herein.
Most of the Company's sales are by short term purchase orders. Since the
level of production of products is generally promptly adjusted to meet
customer order demand, the Company has a negligible backlog of orders. Most
finished goods inventories of bedding products are physically stored at
manufacturing locations until shipped (usually within days of manufacture).
Item 2. Properties
The Company's principal executives offices are located on Sealy Drive at One
Office Parkway, Trinity, North Carolina, 27370. Corporate, licensing and
marketing services are provided to the Company by Sealy, Inc. (a wholly owned
subsidiary of the Company), an Ohio Corporation.
The Company administers component operations at its Rensselaer, Indiana
facility. The Company leases an information technology facility in Cleveland,
Ohio. The Company's leased facilities are occupied under leases, which expire
from 2000 to 2008, including renewal options.
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The following table sets forth certain information regarding manufacturing
facilities operated by the Company at February 14, 2000:
<TABLE>
<CAPTION>
Approximate
Location Square Footage Title
-------- -------------- -----
<S> <C> <C> <C>
United States
Arizona Phoenix 76,000 Owned(a)
California Richmond 238,000 Owned(a)
South Gate 185,000 Owned(a)
Colorado Colorado Springs 70,000 Owned(a)
Denver 92,900 Owned(a)
Florida Orlando 97,600 Owned(a)
Georgia Atlanta 292,500 Owned(a)
Illinois Batavia 212,700 Leased(b)
Indiana Rensselaer 131,000 Owned(a)
Rensselaer 124,000 Owned(a)
Kansas Kansas City 102,600 Leased(a)
Maryland Williamsport 144,000 Leased
Massachusetts Randolph 187,000 Owned(a)
Michigan Taylor 156,000 Leased
Minnesota St. Paul 93,600 Owned(a)
New York Albany 102,300 Owned(a)
North Carolina High Point 151,200 Owned(a)
Lexington 97,400 Owned(a)
Ohio Medina 140,000 Owned(a)
Oregon Portland 140,000 Owned(a)
Pennsylvania Clarion 85,000 Owned(a)
Delano 143,000 Owned(a)
Tennessee Memphis 225,000 Owned(a)
Texas Brenham 220,000 Owned(a)
North Richland Hills 124,500 Owned(a)
Canada
Alberta Edmonton 144,500 Owned
Quebec Saint Narcisse 76,000 Owned
Ontario Toronto 80,200 Leased
Puerto Rico Carolina 58,600 Owned(a)
Mexico Toluca 95,200 Owned
---------
4,085,800
=========
</TABLE>
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(a) The Company has granted a mortgage or otherwise encumbered its interest in
this facility as collateral for secured indebtedness.
(b) The Company has subleased 76,000 square feet to an unrelated tenant.
The Company considers its present facilities to be generally well maintained
and in sound operating condition.
Regulatory Matters
The Company's principal wastes are wood, cardboard and other non-hazardous
materials derived from product component supplies and packaging. The Company
also periodically disposes (primarily by recycling) of small amounts of used
machine lubricating oil and air compressor waste oil. The Company, generally,
is subject to the Federal Water Pollution Control Act, the Comprehensive
Environmental Response, Compensation and Liability Act and amendments and
regulations thereunder and corresponding state statutes and regulations. The
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Company believes that it is in material compliance with all applicable federal
and state environmental statutes and regulations. Except as set forth in Item
3. "Legal Proceedings" below, compliance with federal, state or local
provisions which have been enacted or adopted regulating the discharge of
materials into the environment, or otherwise relating to the protection of the
environment, should not have any material effect upon the capital
expenditures, earnings or competitive position of the Company. The Company is
not aware of any pending federal environmental legislation which would have a
material impact on the Company's operations. Except as set forth in Item 3.
"Legal Proceedings," the Company has not been required to make, and during the
next two fiscal years, does not expect to make any material capital
expenditures for environmental control facilities.
The Company's conventional bedding product lines are subject to various
federal and state laws and regulations relating to flammability and other
standards. The Company believes that it is in material compliance with all
such laws and regulations.
Item 3. Legal Proceedings
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 our subsidiaries are
parties to an Administrative Consent Order issued by the New Jersey Department
of Environmental Protection. Pursuant to that order, the Company and our
subsidiary agreed to conduct soil and groundwater remediation at the property.
The Company does not believe that our 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 have concluded a pilot
test of groundwater remediation system.
In 1994, the Company filed claim in U.S. District Court against the former
owner of the site and their lenders seeking contribution for site
investigation and site remedial costs. In 1997, the Company received $1.7
million from a former owner of the site and one of the lenders to the former
owner in final settlement of this litigation. In January 1997, we filed a cost
recovery action in U.S. District Court against several of our past insurers.
In November 1998, the Company settled these cases when the insurers paid the
Company approximately $3.8 million.
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, we 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 previous
unaffiliated occupants of the facility. In 1994, the Company filed a cost
recovery action in U.S. District Court to require these entities to complete
the remediation and reimburse the Company for 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 of the South
Brunswick and Oakville remediation, based on facts currently known, the
Company believes that the accruals recorded 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 is usually allocated among all
financially responsible parties. Based on the
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nature and quantity of our wastes, the Company believes that liability at each
of these sites in unlikely to be material.
Item 4. Submission of Matters to a Vote of Security Holder
None.
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PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
There is no established public trading market for any class of common equity
of the Company.
As of February 14, 2000 there are 20 holders of record of the Company's
Class A shares, 7 holders of record of the Company's Class B shares, 20
holders of record of the Company's Class L shares and 7 holders of record of
the Company's Class M shares. See Note 2 to the Consolidated Financial
Statements, Part II, Item 8 herein for description of change in capital
structure.
No dividend or other distribution with respect to common stock was paid
during the most recent two fiscal years. Any payment of future dividends and
the amounts thereof will be dependent upon the Company's earnings, fiscal
requirements and other factors deemed relevant by the Company's Board of
Directors. The Company currently does not intend to pay any cash dividends in
the foreseeable future; rather, the Company intends to retain earnings to
provide for the operation and expansion of it business. Certain restrictive
covenants contained in the Company's Senior Credit Agreements currently limit
its ability to make dividend or other payments.
Item 6. Selected Financial Data
The following tables set forth selected consolidated financial and other
data of the Company for the years ended November 28, 1999, November 29, 1998,
November 30, 1997, December 1, 1996, and November 30, 1995.
The selected consolidated financial and other data set forth in the
following tables have been derived from the Company's audited consolidated
financial statements. The reports of PricewaterhouseCoopers LLP, independent
accountants, covering the Company's Consolidated Financial Statements for the
years ended November 28, 1999 and November 29, 1998 and KPMG LLP, independent
auditors, covering the Company's Consolidated Financial Statements for the
year ended November 30, 1997, are included elsewhere herein. These tables
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Consolidated Financial
Statements of the Company included elsewhere herein.
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SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended Year Ended Year Ended
November 28, November 29, November 30, December 1, November 30,
1999 1998 1997 1996 1995
------------ ------------ ------------ ----------- ------------
(dollars and shares in millions, except per share data)
<S> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Net Sales............. $ 985.7 $ 891.3 $ 804.8 $ 697.6 $ 653.9
Costs and expenses.... 953.3 913.9 764.2 672.8 610.9
Income (loss) before
income tax,
extraordinary item
and cumulative effect
of change in
accounting principle. 32.4 (22.6) 40.6 24.8 43.0
Extraordinary loss(a). -- 14.5 2.0 -- --
Cumulative effect of
change in accounting
principle(b)......... -- -- 4.3 -- --
Net income(loss)...... 15.8 (33.8) 11.7 (0.5)(c) 19.5
Liquidation preference
for common L & M
shares(d)............ 13.5 11.7 -- -- --
------- ------- ------- ------- -------
Net income(loss)
available to common
shareholders......... $ 2.3 $ (45.5) $ 11.7 $ (0.5) $ 19.5
Other Data:
Depreciation and
amortization of
intangibles.......... $ 25.6 $ 24.3 $ 24.1 $ 26.6 $ 24.2
Income from
operations(e)........ 97.4 44.9 72.0 53.6 74.0
EBITDA(f)............. 123.0 69.2 96.1 80.2 98.2
Adjusted EBITDA(g).... 138.3 113.1 102.7 86.8 85.0
Capital expenditures.. 16.1 33.1 29.1 12.0 11.8
Interest expense, net. 65.0 67.5 31.4 28.8 31.0
Ratio of EBITDA to
interest expense,
net.................. 1.9x 1.0x 3.1x 2.8x 3.2x
Ratio of earnings to
fixed charges(h)..... 1.5x -- 2.2x 1.8x 2.3x
Weighted average
number of shares
outstanding--
diluted(i)........... 32,972 30,472 30,234 29,379 30,169
Net income/(loss) per
common
share--diluted(i):
Income/(loss) before
extraordinary item
and cumulative effect
of change in
accounting principle. $ 0.48 $ (0.63) $ 0.60 $ (0.02) $ 0.65
Extraordinary item.... -- (0.48) (0.07) -- --
Cumulative effect of
change in accounting
principle............ -- -- (0.14) -- --
------- ------- ------- ------- -------
Net income/(loss)..... 0.48 (1.11) 0.39 (0.02) 0.65
Liquidation preference
for common L & M
shares............... (0.41) (0.38) -- -- --
------- ------- ------- ------- -------
Net income(loss)
available to common
shareholders......... $ 0.07 $ (1.49) $ 0.39 $ (0.02) $ 0.65
======= ======= ======= ======= =======
</TABLE>
9
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<TABLE>
<CAPTION>
November 28, November 29, November 30, December 1, November 30,
1999 1998 1997 1996 1995
------------ ------------ ------------ ----------- ------------
(dollars in millions)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Total assets.......... $ 771.0 $ 751.1 $721.1 $739.9 $776.2
Long-term obligations. 676.2 682.3 330.0 269.5 269.4
Total debt............ 690.3 690.8 330.0 288.1 286.9
Stockholders' equity
(deficit)............ (121.4) (138.8) 205.1 293.0 330.9
</TABLE>
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(a) During 1998 and 1997, the Company recorded extraordinary losses of $5.4
million and $2.0 million, net of income tax benefit of $3.6 million and
$1.4 million, respectively, representing the remaining unamortized debt
issuance costs related to long term obligations repaid as a result of the
debt refinancing. Also, during 1998 the Company recorded an extraordinary
loss of $9.1 million, net of income taxes of $6.1 million, representing
premiums paid to existing note holders and consent fees paid in connection
with the retirement of debt.
(b) During the fourth quarter of 1997, the Company changed its accounting
policy to comply with EITF 97-13, "Accounting for Costs Incurred in
Connection with a Consulting Contract That Combines Business Process
Reengineering and Information Technology Transformation," which resulted
in a loss of $4.3 million, net of income tax of $2.9 million, representing
the write-off of previously capitalized costs as described in the EITF.
(c) On January 15, 1997, the Company completed the sale of Woodstuff
Manufacturing, Inc., a wholly owned subsidiary that manufactured and
marketed solid wood bedroom furniture under the "Samuel Lawrence" brand
name. The divestiture resulted in an aggregate book loss of $17.6 million,
which was recorded in the fiscal year ended December 1, 1996. The loss is
comprised of a loss on net assets held for sale of $11.8 million and
income tax expense of $5.8 million arising from the tax gain on the
transaction.
(d) Shares of L and M common are entitled to a preference over class A and B
common with respect to any distribution by the Company to holders of its
capital stock equal to the original costs of such shares ($40.50) plus an
amount which accrues on a daily basis at a rate of 10% per annum,
compounded annually.
(e) Income from operations is calculated by adding interest expense, net to
net sales less costs and expenses.
(f) EBITDA is calculated by adding interest expense, net, income tax expense
(benefit) and depreciation and amortization of intangibles to income
(loss) before extraordinary item and cumulative effect of change in
accounting principle. EBITDA is presented because it is a widely accepted
financial indicator of a company's ability to incur and service. EBITDA
does not represent net income or cash flows from operations as those terms
are defined by generally accepted accounting principles ("GAAP") and does
not necessarily indicate whether cash flows will be sufficient to fund
cash needs.
(g) Adjusted EBITDA is calculated by adding to or deducting from EBITDA (as
described above) certain items of income and expense consisting of: (i)
stock-based compensation plans, (ii) any expenses related to addressing
the Company's "Year 2000" information systems issue and EITF 97-13
reengineering efforts, (iii) High Point relocation, (iv) compensation
associated with the Recapitalization, (v) loss on net assets held for sale
and other write-downs in 1998 only, (vi) loss on write-off of Montgomery
Ward accounts receivable and related factoring expense incurred in
connection with bankruptcy of Montgomery Ward, (vii) executive severance
and transition costs, and (viii) other relief items including, foreign
currency losses, loss on disposal of certain assets, etc. Adjusted EBITDA
is presented because it conforms to the definition of "Consolidated
EBITDA" in the Notes Indenture (see "Description of Exchange Notes" and
"Certain Definitions" within such section). The Company believes that the
adjustment for these items is appropriate for such periods in order to
provide an appropriate analysis of recent historical results. The
following is a reconciliation of EBITDA to Adjusted EBITDA:
10
<PAGE>
<TABLE>
<CAPTION>
Fiscal Year
---------------------------------
1999 1998 1997 1996 1995
------ ------ ------ ----- ------
(dollars in millions)
<S> <C> <C> <C> <C> <C>
EBITDA................................... $123.0 $ 69.2 $ 96.1 $80.2 $ 98.2
------ ------ ------ ----- ------
Adjustments:
Stock-based compensation................ 6.7 -- 1.6 4.7 (13.2)
EITF 97-13 reengineering efforts........ 5.0 4.1 1.0 -- --
High Point relocation................... 2.0 7.5 -- -- --
Compensation associated with
Recapitalization....................... -- 18.9 -- -- --
Loss on net assets held for sale and
other write-downs...................... -- 10.6 -- -- --
Montgomery Ward bad debt and factoring
losses................................. -- -- 4.0 -- --
Executive severance and transition...... -- -- -- 1.9 --
Other relief items--including foreign
currency losses, loss on disposal of
certain assets, etc.................... 1.6 2.8 -- -- --
------ ------ ------ ----- ------
Total adjustments...................... 15.3 43.9 6.6 6.6 (13.2)
------ ------ ------ ----- ------
Adjusted EBITDA......................... $138.3 $113.1 $102.7 $86.8 $ 85.0
====== ====== ====== ===== ======
</TABLE>
(h) For purposes of calculating the ratio of earnings to fixed charges,
earnings represent income before income taxes and extraordinary item plus
fixed charges. Fixed charges consist of interest expense, net, including
amortization of discount and financing costs and the portion of operating
rental expense which management believes is representative of the interest
component of rent expense. For the year ended November 29, 1998, earnings
were insufficient to cover fixed charges by $22.6 million.
(i) Restated from previously published results due to the adoption of
Financial Accounting Standards Board Statement No. 128, "Earnings Per
Share", in fiscal 1998.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Year Ended November 28, 1999 Compared With Year Ended November 29, 1998
Net Sales. Net sales for the year ended November 28, 1999, were $985.7
million, an increase of $94.4 million, or 10.6% from the year ended November
29, 1998. This increase is attributable to a 7.0% increase in unit volume, and
a 3.6% increase in average unit selling price. The increase in unit volume is
due to the successful launches of the Sealy Posturepedic Golden Anniversary
("Golden Anniversary") product at high unit volume price points and the Crown
Jewel Dual Support System ("DSS") premium product line, as well as continued
strong increases in the Stearns & Foster lines. The increase in average unit
selling price is primarily attributable to the introduction of the Crown Jewel
DSS line and a strong increase in the Stearns & Foster brand.
Cost of Goods Sold. Cost of goods sold for the year, as a percentage of net
sales, decreased 1.3 percentage points to 55.2%. This decrease is primarily
attributable to an increase in sales of higher priced units, which have higher
gross margins than average, improved plant efficiencies, higher overhead
absorption from increased sales, and reduced prices for certain raw materials,
partially offset by increased performance based compensation.
Selling, General, Administrative. Selling, general, and administrative
expense increased $24.3 million due to increased operating expense and Year
2000 costs of $27.6 million and $1.3 million respectively, partially offset by
reduced costs associated with Corporate Headquarters and Research &
Development relocation to High Point, North Carolina of $4.6 million. Selling,
general and administrative costs decreased, as a percent of sales, to 33.0% in
1999 from 33.7% in 1998 primarily due to the leverage of fixed costs over the
increased sales. Increased operating costs were primarily due to increases in
marketing spending of $19.9 million, increased performance based compensation
of $2.5 million, increased depreciation of $1.5 million, increased delivery
expenses of $1.5 million, increased bad debt expense of $0.5 million, along
with increased general administrative costs of $1.7 million. Increased
marketing spending was due to increased sales volume, along with increased
11
<PAGE>
spending rate primarily associated with launch of the new Crown Jewel DSS and
Golden Anniversary product lines. Increased depreciation was due to capital
spending on upgraded business systems and new corporate and plant facilities.
Increased delivery expenses were due to increased sales volume.
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 $6.7 million charge
during fiscal 1999 to revalue this obligation to reflect an increase in the
fair market value of the securities.
Interest Expense. Interest expense, net of interest income, decreased $2.5
million primarily due to lower average outstanding debt levels as a result of
increased operating cash flows during the year as well as lower average
interest rates associated with the floating rate debt.
Income Taxes. The Company's effective income tax rates for Fiscal 1999 and
1998 differ from the Federal statutory rate principally because of the
application of purchase accounting, the effect of certain foreign tax rate
differentials, and state and local taxes. The Company's effective tax rate for
Fiscal 1999 was approximately 51.1% compared to 14.7% for Fiscal 1998. The
higher effective tax rate in 1999 is primarily due to the tax impact of
foreign earnings and pretax income in 1999 compared to a pretax loss in 1998.
Year Ended November 29, 1998 Compared With Year Ended November 30, 1997
Net Sales. Net sales for the year ended November 29, 1998, were $891.3
million, an increase of $86.5 million, or 10.7% from the year ended November
30, 1997. This increase is attributable to a $91.8 million increase in
conventional bedding sales offset by a $5.3 million decrease in sales of wood
bedroom furniture.
Conventional bedding sales increased 11.5% over the prior year, driven by a
7.0% or $55.8 million increase in conventional bedding unit shipments and a
4.2% or $36.0 million increase in average unit selling price. These increases
were due to sales growth in Posturepedic, Stearns & Foster and promotional
product lines, in addition to continued positive results from successful
strategic distribution initiatives that included sole source multi-year
arrangements of varying lengths with several retailers. The increase in
average unit selling price is primarily attributable to the introduction of
new or re-engineered higher-end products as well as the increased sales of the
luxury bedding category.
The decrease in sales of wood bedroom furniture, sold under the Samuel
Lawrence brand, is due to the sale of this business in January, 1997. A
description of the disposition of this business unit is provided in Note 15 to
the Consolidated Financial Statements.
Cost of Goods Sold. Cost of goods sold as a percentage of net sales
decreased 0.5% to 56.5%. This improvement is primarily attributable to
production economies from increased volume partially offset by higher start-up
costs associated with the integration of new products into production.
Selling, General, and Administrative. Selling, general, and administrative
expenses increased $41.5 million due to increased operating expenses of $29.9
million, business system and Y2K costs of $4.1 million, and costs associated
with the Corporate Headquarters and Research & Development Center and
Lexington plant relocation to High Point, North Carolina of $7.5 million.
Increased operating costs were primarily due to increases in marketing
spending, $22.0 million, and delivery expenses, $4.8 million, foreign currency
loss $1.6 million and increased general and administrative costs of $1.5
million. Increased marketing spending was due to increased sales volume, along
with an increased spending rate for cooperative advertising and promotions.
Increased delivery expenses were due to increased sales volume, along with
increased spending rate.
Loss on Net Assets Held for Sale and Other Write-Downs. Loss on net assets
increased $10.6 million as a result of rationalization of certain
manufacturing processes, write-down of idled assets, and write-down of
previously capitalized software modules, which will not be implemented.
12
<PAGE>
Compensation Associated with Recapitalization. The Company recorded a charge
of $18.9 million as a result of accelerated vesting of stock options and
restricted stock, other incentive based compensation payments and option
grants to employees in connection with the Recapitalization.
Interest Expense. Interest expense, net of interest income, increased $36.1
million primarily as a result of significantly higher debt levels due to the
Recapitalization.
Income Taxes. The Company's effective income tax rates for Fiscal 1998 and
1997 differ from the Federal statutory rate principally because of the
application of purchase accounting, the effect of certain foreign tax rate
differentials, and state and local income taxes. The Company's effective tax
rate for Fiscal 1998 was approximately 14.7% compared to 55.4% for Fiscal
1997. The higher effective tax rate in 1997 is primarily due to the impact of
State and Local taxes on 1997's pretax income compared to a pretax loss in
1998, permanent differences related to the 1993 Acquisition, and taxes arising
from the sale of the South Brunswick Pad Plant. See Note 9 to the Consolidated
Financial Statements.
Extraordinary Item. The Company recorded a $14.5 million charge, net of
income tax benefit of $9.7 million, representing write-off of the remaining
unamortized debt issue costs related to long-term obligations repaid in
connection with the Recapitalization as well as consent fees and premiums paid
related to the Tender Offer of the Parent Notes in connection with the
Recapitalization and the call for redemption of all remaining outstanding
Parent Notes paid May 1, 1998.
Net Loss. For the reasons set forth above, the Company recorded a net loss
of $33.8 million for Fiscal 1998 versus net income of $11.7 million for Fiscal
year 1997.
Liquidity and Capital Resources
The Company's principal sources of funds are cash flows from operations and
borrowings under its Revolving Credit Facility. The Company's principal use of
funds consists of payments of principal and interest on its Senior Credit
Agreements, capital expenditures and interest payments on its outstanding
Notes. The Company made capital expenditures aggregating $16.1 million and
$33.1 million during Fiscal 1999 and 1998, respectively. The decrease in
capital spending in Fiscal 1999 was primarily attributable to the Company's
acquisition of property, manufacturing facility and office building and
construction of the new headquarters facility in High Point, North Carolina,
during 1998. The Company has funded Fiscal 1999 capital expenditures with cash
generated by operations. Management believes that annual capital expenditure
limitations in the Senior Credit Agreements will not significantly inhibit the
Company from meeting its ongoing capital needs. We expect fiscal 2000 capital
expenditures to be approximately $13 million more than fiscal year 1999. This
increase is primarily due to purchase of more efficient manufacturing
equipment, information technology system upgrades, and expansion of the Mexico
plant.
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. In fiscal 1999, the Company
contributed $29.7 million in cash and other assets to Mattress Holding
International, LLC, a company controlled by our largest shareholder, Bain
Capital, Inc., for such purposes. See Note 16 in the Financial Statements--
"Related Party Transactions".
On June 23, 1998, the Company secured permanent financing for the property,
manufacturing facility and office building in High Point, North Carolina as
purchased on April 13, 1998 and to fund the construction of the new Corporate
headquarters facility at this site. The initial purchase price of $8.4 million
was paid at closing and was financed on a temporary basis with a draw from the
Revolving Credit Facility. The permanent loan agreement provides for
borrowings not to exceed $14.5 million of which the Company has $14.2 million
outstanding at November 28, 1999. In conjunction with the permanent financing,
senior lenders approved an amendment to the senior credit facilities and
related covenants to permit the transaction.
On October 30, 1997, Parent entered into an agreement and plan of merger
(the "Merger Agreement") with Sandman Merger Corporation, a transitory
Delaware merger corporation ("Sandman"), and Zell/Chilmark Fund,
13
<PAGE>
L.P., a Delaware limited partnership ("Zell"). Zell owned approximately 87% of
the issued and outstanding common stock of Parent (the "Existing Common
Stock"). Pursuant to the Merger Agreement, upon the satisfaction of certain
conditions, Sandman was merged with and into Parent with Parent being the
surviving corporation effective on December 18, 1997 (the "Closing Date") and
the Company was recapitalized (the "Recapitalization") whereby certain equity
investors, including members of management, acquired an approximate 90.0%
economic equity stake (85.3% voting equity stake) in the Company. A portion of
the issued and outstanding shares of common stock of the Company was converted
into the right to receive aggregate cash equal to $419.3 million less (i)
certain seller fees and expenses and (ii) certain costs in connection with the
extinguishment of certain outstanding options and warrants of the Company and
the remaining portion was converted into voting preferred stock and then
reconverted into $25.0 million in aggregate principal amount of junior
subordinated notes of the Company and a retained voting common stock interest
in the Company of approximately 14.7%. In March 1999, the Company's non-
management shareholders and ten of the Company's senior executives purchased
all of the Company's common stock held by Zell.
Concurrent with the Recapitalization, the Company refinanced existing
indebtedness (the "Refinancing") by Sealy Mattress Company (the "Issuer"), a
wholly owned subsidiary of the Parent, entering into and borrowing $460
million under the Senior Credit Agreements and by issuing $125 million of
Senior Subordinated Notes and $128 million of Senior Subordinated Discount
Notes.
Upon the consummation of the Recapitalization, Parent and certain of its
stockholders, including the Bain Funds; Harvard Private Capital Holdings, Inc.
("Harvard"); Sealy Investors 1, LLC; Sealy Investors 2, LLC; Sealy Investors
3, LLC (the "LLCs"); and Zell (collectively, the "Stockholders") entered into
a stockholders agreement (the "Stockholders Agreement"). The Stockholders
Agreement (i) required that each of the parties thereto vote all of its voting
securities of Parent and take all other necessary or desirable actions to
cause the size of the Board of Directors of Parent to be established at seven
members and to cause three designees of the Bain Funds and one designee of
Harvard to be elected to the Board of Directors; (ii) granted Parent and the
Bain Funds a right of first offer on any proposed transfer of shares of
capital stock of Parent held by Zell, Harvard or the LLCs; (iii) granted
Harvard a right of first offer on any proposed transfer of shares of capital
stock of Parent held by the Bain Funds; (iv) granted tag-along rights on
certain transfers of shares of capital stock of Parent; (v) required the
Stockholders to consent to a sale of Parent to an independent third party if
such sale is approved by holders of shares constituting a majority of the then
outstanding shares of voting common stock of Parent; and (vi) except in
certain instances, prohibits Zell from transferring any shares of capital
stock of Parent until the tenth anniversary of the date of the consummation of
the Recapitalization. Certain of the foregoing provisions of the Stockholders
Agreement terminate upon the consummation of an Initial Public Offering or an
Approved Sale (as each is defined in the Stockholders Agreement).
Immediately prior to the closing of the Recapitalization (the "Closing"),
Parent contributed (the "Capital Contribution") all of the issued and
outstanding capital stock of Sealy, Inc., an Ohio corporation, The Stearns &
Foster Bedding Company, a Delaware corporation, Advanced Sleep Products, a
California corporation, Sealy Components-Pads, Inc., a Delaware corporation,
and Sealy Mattress Company of San Diego, a California corporation, to the
capital of the Issuer. Immediately after the Capital Contribution, the Issuer
became the only direct subsidiary of Parent and owns 100% of the operations of
Parent. At the Closing, Sandman was merged with and into Parent with Parent
the surviving corporation.
On November 18, 1997, Parent commenced an offer (the "Tender Offer") to
purchase for cash up to all (but not less than a majority in principal amount
outstanding) of its Parent Notes and a related solicitation (the "Consent
Solicitation") of consents to modify certain terms of the Indenture under
which the Parent Notes were issued (the "Parent Note Indenture"). The purchase
price to be paid with respect to validly tendered Parent Notes and related
consents was determined by a formula set forth in the offer to purchase with
respect to the Tender Offer. The Offerings were conditioned upon the
consummation of the Tender Offer for, and the obtaining of consents with
respect to, at least a majority in aggregate principal amount of the Parent
Notes outstanding. Parent's obligation to accept for purchase and to pay for
the Parent Notes validly tendered pursuant to the Tender Offer was conditioned
upon, among other things, consummation of the other elements of the
Recapitalization.
14
<PAGE>
On March 30, 1998, the Company announced a call for redemption of all
remaining outstanding Parent Notes that were not redeemed at December 18,
1997. The redemption price of 106.33%, plus accrued interest, or $2.5 million,
was paid on May 1, 1998, after which time interest ceased to accrue on the
Notes.
The Company's 1997 Credit Agreement was terminated in connection with the
Recapitalization. The 1997 Credit Agreement provided for a $275.0 million
reducing revolving credit facility and a discretionary swing loan facility of
up to $20.0 million. Upon consummation of the Recapitalization, the Issuer
entered into the AXELs credit agreement (the "Senior AXELs Credit Agreement")
and a credit agreement providing for Tranche A Term Loans and revolving
borrowings (the "Senior Revolving Credit Agreement" and, together with the
Senior AXELs Credit Agreement, the "Senior Credit Agreements"). The Senior
Credit Agreements provide for loans of up to $550.0 million, consisting of a
$450.0 million term loan facility (the "Term Loan Facility") and a $100.0
million revolving credit facility (the "Revolving Credit Facility"). The
Issuer distributed the proceeds of the Term Loan Facility and its initial
borrowings under the Revolving Credit Facility to Parent to provide a portion
of the funds necessary to consummate the Transactions. Indebtedness of the
Issuer under the Senior Credit Agreements is secured and guaranteed by Parent
and certain of the Issuer's current and all of the Issuer's future U.S.
subsidiaries and bears interest at a floating rate. See Note 17 to the
Consolidated Financial Statements for further details regarding guarantees
including consolidating condensed financial statements for guarantors and non-
guarantors. The Senior Credit Agreements require the Company to meet certain
financial tests, including minimum levels of adjusted EBITDA as determined in
the agreements, minimum interest coverage and maximum leverage ratio. The
Senior Credit Agreements also contain covenants which, among other things,
limit capital expenditures, indebtedness and/or the incurrence of additional
indebtedness, investments, dividends, transactions with affiliates, asset
sales, mergers and consolidations, prepayments of other indebtedness
(including the Notes), liens and encumbrances and other matters customarily
restricted in such agreements. At November 28, 1999, the Company had
approximately $87.5 million available under its Revolving Credit Facility with
Letters of Credit issued totaling approximately $7.7 million. 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.
Future principal debt payments are expected to be paid out of cash flows
from operations and borrowings on its current Revolving Credit Facility or a
new revolving credit agreement, if the current agreement is not renewed when
it expires in 2002.
Indebtedness under the Senior Credit Agreements bears interest at a floating
rate. Indebtedness under the Revolving Credit Facility and the Term Loans
initially (subject to reduction based on attainment of certain leverage ratio
levels) bears interest at a rate based upon (i) the Base Rate (defined as the
highest of (x) the rate of interest announced publicly by Morgan Guaranty
Trust Company of New York from time to time, as its base rate and (y) the
Federal funds effective rate from time to time plus 0.50%) plus 1.25% in
respect of the Tranche A Term Loans and the loans under the Revolving Credit
Facility (the "Revolving Loans"), 1.50% in respect of the AXELs Series B,
1.75% in respect of the AXELs Series C and 2.00% in respect of the AXELs
Series D, or (ii) the Adjusted Eurodollar Rate (as defined in the Senior
Credit Agreements) for one, two, three or six months (or, subject to general
availability, two weeks or twelve months), in each case plus 2.25% in respect
of Tranche A Term Loans and Revolving Loans, 2.50% in respect of AXELs Series
B, 2.75% in respect of AXELs Series C and 3.00% in respect to AXELs Series D.
The Company's net weighted average borrowing cost was 8.8% and 9.0% for Fiscal
1999 and 1998 respectively.
The Tranche A Term Loans mature in December 2002. The AXELs Series B mature
in December 2004. The AXELs Series C mature in December 2005. The AXELs Series
D mature in December 2006. The Tranche A Term Loans are subject to quarterly
amortization payments commencing in March 1999, the AXELs Series B, the AXELs
Series C and the AXELs Series D are subject to quarterly amortization payments
commencing in March 1998 with the AXELs Series B amortizing in nominal amounts
until the maturity of the Tranche A Term Loans, the AXELs Series C amortizing
in nominal amounts until the maturity of the AXELs Series B and the
15
<PAGE>
AXELs Series D amortizing in nominal amounts until the maturity of the AXELs
Series C. The Revolving Credit Facility matures in December 2002. In addition,
the Senior Credit Agreements provide for mandatory repayments, subject to
certain exceptions, of the Term Loans, and reductions in the Revolving Credit
Facility, based on the net proceeds of certain asset sales outside the
ordinary course of business of the Issuer and its subsidiaries, the net
proceeds of insurance, the net proceeds of certain debt and equity issuances,
and excess cash flow (as defined in the Senior Credit Agreements).
The Notes were issued pursuant to an Indenture (the "Senior Subordinated
Note Indenture") among the Issuer, the Guarantors and The Bank of New York, as
trustee (the "Senior Subordinated Note Trustee"). The Senior Subordinated
Discount Notes were issued pursuant to an Indenture (the "Senior Subordinated
Discount Note Indenture" and, together with the Senior Subordinated Note
Indenture, the "Indentures") among the Company, the Guarantors and The Bank of
New York, as trustee (the "Senior Subordinated Discount Note Trustee" and,
together with the Senior Subordinated Note Trustee, the "Trustees").
The Senior Subordinated Notes, which are guaranteed by the Parent, in
aggregate principal amount of $125.0 million were issued in the Offering and
mature on December 15, 2007. Interest on the Senior Subordinated Notes accrues
at the rate of 9 7/8% per annum and is payable semi-annually in arrears on
June 15 and December 15 of each year, commencing on June 15, 1998, to Holders
of record on the immediately preceding June 1 and December 1.
Except as provided below, the Senior Subordinated Notes are not redeemable
at the Company's option prior to December 15, 2002. Thereafter, the Senior
Subordinated Notes are subject to redemption at any time at the option of the
Company, in whole or in part, upon not less than 30 nor more than 60 days'
notice, at the redemption prices (expressed as percentages of principal
amount) set forth below plus accrued and unpaid interest and Liquidated
Damages thereon to the applicable redemption date, if redeemed during the
twelve-month period beginning on December 15 of the years indicated below:
<TABLE>
<CAPTION>
Percentage of
Year Principal Amount
- ---- ----------------
<S> <C>
2002........................................................... 104.937%
2003........................................................... 103.292%
2004........................................................... 101.646%
2005 and thereafter............................................ 100.000%
</TABLE>
Notwithstanding the foregoing, during the first 36 months after December 11,
1997, the Company may on any one or more occasions redeem up to 35% of the
aggregate principal amount of Senior Subordinated Notes originally issued
under the Senior Subordinated Note Indenture at a redemption price of 109.875%
of the principal amount thereof, plus accrued and unpaid interest and
liquidated damages thereon, if any, to the redemption date, with the net cash
proceeds of any Equity Offerings; (as defined in the Indentures) provided that
at least $80.0 million in aggregate principal amount of Senior Subordinated
Notes remain outstanding immediately after the occurrence of such redemption
(excluding Senior Subordinated Notes held by the Company and its
Subsidiaries); and provided further that such redemption shall occur within
120 days of the date of the closing of any such Equity Offering.
The Senior Subordinated Discount Notes, which are guaranteed by the Parent,
in aggregate principal amount of $128.0 million were issued in the Offering,
and mature on December 15, 2007. The Senior Subordinated Discount Notes were
offered at a substantial discount from their principal amount at maturity.
Until December 15, 2002 (the "Full Accretion Date"), no interest (other than
liquidated damages, if applicable) will accrue or be paid in cash on the
Senior Subordinated Discount Notes, but the Accreted Value will accrete
(representing the amortization of original issue discount) between the
issuance date and the Full Accretion Date, on a semi-annual bond equivalent
basis. Beginning on the Full Accretion Date, interest on the Senior
Subordinated Discount Notes will accrue at the rate of 10 7/8% per annum and
will be payable in cash semi-annually in arrears on June 15 and December 15 of
each year, commencing on June 15, 2003, to Holders of record on the
immediately preceding June 1 and December 1. Interest on the Senior
Subordinated Discount Notes will accrue from the most recent date to which
interest has been paid or, if no interest has been paid, from the Full
Accretion Date.
16
<PAGE>
Except as provided below, the Senior Subordinated Discount Notes will not be
redeemable at the Company's option prior to December 15, 2002. Thereafter, the
Senior Subordinated Discount Notes will be subject to redemption at any time
at the option of the Company, in whole or in part, upon not less than 30 nor
more than 60 days' notice, at the redemption prices (expressed as percentages
of principal amount) set forth below plus accrued and unpaid interest and
liquidated damages thereon to the applicable redemption date, if redeemed
during the twelve-month period beginning on December 15 of the years indicated
below:
<TABLE>
<CAPTION>
Percentage of
Year Principal Amount
- ---- ----------------
<S> <C>
2002........................................................... 105.437%
2003........................................................... 103.625%
2004........................................................... 101.812%
2005 and thereafter............................................ 100.000%
</TABLE>
Notwithstanding the foregoing, during the first 36 months after December 11,
1997, the Company may on any one or more occasions redeem up to 35% of the
Accreted Value of Senior Subordinated Discount Notes originally issued under
the Senior Subordinated Discount Note Indenture at redemption price of
110.875% of the Accreted Value, plus accrued and unpaid Liquidated Damages
thereon, if any, to the redemption date, with the net cash proceeds of any
Equity Offerings; provided that at least $50.0 million in aggregate Accreted
Value of Senior Subordinated Discount Notes remain outstanding immediately
after the occurrence of such redemption (excluding Senior Subordinated
Discount Notes held by the Company and its Subsidiaries); and provided,
further, that such redemption shall occur within 120 days of the date of the
closing of any such Equity Offering.
At November 28, 1999, the Company was in compliance with the financial
covenants of all debt.
Foreign Operations and Export Sales
The Company has three manufacturing facilities in Canada and one in Mexico,
which comprise all of the Company's foreign-owned manufacturing operations at
November 28, 1999. The Company also holds a fifty percent interest in a
manufacturing and sales joint venture in India. The Company uses a Korean
contract manufacturer to help service the Korean market and distribute
products directly in Taiwan, Hong Kong, Malaysia, Singapore and the
Philippines and has license agreements in Thailand, Japan, the United Kingdom,
Australia, New Zealand, South Africa, Israel, Jamaica, Saudi Arabia and the
Dominican Republic. Additional international test markets are currently
operating in Spain and Brazil. The Company does not derive a material portion
of its sales or revenues from its wholly owned foreign operations or from
customers in any foreign country.
New Accounting Pronouncements
In June 1998, the FASB issued FAS 133, "Accounting for Derivative
Instruments and Hedging Activities," effective for years beginning after June
15, 1999, the Company's fiscal year 2000. The effective date has been delayed
to June 15, 2000, the Company's fiscal year 2001, as the result of the FASB's
issuance in August 1999 of FAS 137. "Accounting for Derivative Instruments and
Hedging Activities,"deferral of the effective date of FASB statement 133. FAS
133 requires that all derivatives be recorded on the balance sheet at fair
value. Derivatives that are not hedges must be adjusted to fair value through
income. If the derivative is a hedge, depending on the nature of the hedge,
changes in the fair value of derivatives are either offset against the change
in the fair value of assets, liabilities, or firm commitments through earnings
or recognized in other comprehensive income until the hedged item is
recognized in earnings. The Company has not yet determined what the effect of
FAS 133 will be on the earnings and financial position of the Company.
Fiscal Year
The Company uses a 52-53 week fiscal year ending on the closest Sunday to
November 30. The fiscal years ended November 28, 1999, November 29, 1998 and
November 30, 1997 were 52-week years.
17
<PAGE>
Year 2000 Issue
Until recently, computer programs were generally written using two digits
rather than four to define the applicable year. Accordingly, such programs may
be unable to distinguish properly between the Year 1900 and the Year 2000
("Year 2000 Issue"). This could result in system failures or data corruption
for the Company, and its customers or suppliers. This could cause disruptions
of operations after January 1, 2000, including, among other things, a
temporary inability to process transactions or engage in business activities
or to receive information, services, raw materials and supplies, or payment
from suppliers, customers or business partners or any other companies with
which the Company conducts business.
The Company conducted a comprehensive impact analysis to determine what
computing platforms and date-aware functions with respect to the sting
computer operating systems would be disrupted by the Year 2000 Issue. In
January 1998, the Company completed a prioritization of the impacted areas
identified to date and commenced the detailed program code changes through a
contracted third party vendor which has experience in Year 2000 conversions
for the existing system including the same version of the system. The Company
has received converted source code from the contracted vendor and has
implemented the converted programs. Prior to December 31, 1999, all facilities
were in "production status" with the Y2K compliant business system.
The Company also replaced personal computers and phone systems that were not
Year 2000 compliant, and confirmed that our primary manufacturing equipment
was Year 2000 compliant. Our major suppliers were contacted and we received
confirmation of their Year 2000 compliance.
The Company funded the expenditures related to the Year 2000 plan with cash
flows from operations. The required code changes, testing and implementation
necessary to address the Year 2000 Issue cost approximately $3.3 million.
Although the Company believes that it successfully avoided any significant
disruption from the Year 2000 Issue relating to the century rollover, it will
continue to monitor all critical systems for the appearance of delayed
complications or disruptions, problems relating to the leap year and problems
encountered through suppliers, customers and other third parties with whom the
Company deals. Although these and other unanticipated Year 2000 issues could
have an adverse effect on the results of operations or financial condition of
the Company, it is not possible to anticipate the extent of impact at this
time.
Forward Looking Statements
This document contains forward-looking statements within the meaning of the
safe harbor provisions of the Private Securities Litigation Reform Act of
1995. Although the Company believes its plans are based upon reasonable
assumptions as of the current date, it can give no assurances that such
expectations can be attained. Factors that could cause actual results to
differ materially from the Company's expectations include: general business
and economic conditions, competitive factors, raw materials pricing, and
fluctuations in demand.
Item 7a. Quantitative and Qualitative Disclosures About Market Risk
Foreign Currency Exposures
The Company's earnings are affected by fluctuations in the value of its
subsidiaries' functional currency as compared to the currencies of its foreign
denominated purchases. Foreign currency forward, 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.
The Company enters into forward, swap and option currency exchange contracts
in the regular course of business to manage its exposure against foreign
currency fluctuations, primarily on raw material purchase
18
<PAGE>
transactions denominated in U.S. Dollars. During 1999, the Company amortized
$0.9 million of hedge premiums primarily related to foreign exchange contacts
to exchange Mexican Pesos for U.S. Dollars. During 1999, the Company
recognized losses of ($0.6) million and ($0.4) million related to the Canadian
Dollar and Mexican Peso contracts, respectively. The Company had no contracts
outstanding at November 28, 1999. In December 1999, the Company incurred $0.1
million to purchase an Average Rate Option Canadian Dollar Put in the amount
of Canadian $17.0 million with a strike price of Canadian $1.50. Additionally,
the Company incurred $0.1 million to purchase Mexican Peso Put Options for
57.4 million Mexican Pesos with strike prices ranging between 10.21 and 11.24
Mexican Pesos per U.S. Dollar. These options will settle quarterly and expire
at the end of fiscal 2000.
Interest Rate Risk
Because the Company's obligations under the bank credit agreement bear
interest at floating rates, the Company is sensitive to changes in prevailing
interest rates. The Company uses derivative instruments to manage its long-
term debt interest rate exposure, rather than for trading purposes. A 10%
increase or decrease in market interest rates that effect the Company's
interest rate derivative instruments would not have a material impact on
earnings during the next fiscal year.
The Company has entered into interest rate swap and collar agreements to
reduce the impact of changes in interest rates on all or a portion of its
floating rate debt. The notional amounts of interest rate agreements are used
to measure interest to be paid or received and do not represent the amount of
exposure to credit loss. The net cash paid for the interest rate swap and
collar agreements is recorded as a prepaid expense in the consolidated balance
sheet and charged to interest expense over the life of the agreement.
As of November 28, 1999, the Company had the following interest rate
instruments in effect that provide protection on the three month LIBOR rate
upon which the Company's variable rate debt is based (actual rate paid is
LIBOR plus the respective margin):
<TABLE>
<CAPTION>
Notional Amount Range for
1998 (millions) LIBOR Rate Period
- ---- --------------- ---------- ---------
<S> <C> <C> <C>
Interest Rate Collar...................... $ 200 6.50%-4.93% 1/98-1/01
Interest Rate Swap........................ $ 150 5.89% 9/99-9/01
Interest Rate Swap........................ $ 100 5.775% 9/99-3/00
</TABLE>
19
<PAGE>
Item 8. Financial Statements and Supplementary Data
SEALY CORPORATION
Consolidated Financial Statements
November 28, 1999 and November 29, 1998
(With Independent Accountants' and Auditors' Reports Thereon)
20
<PAGE>
Report of Independent Accountants
To the Board of Directors and
Stockholders of Sealy Corporation:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, stockholders' equity and cash flows
present fairly, in all material respects, the financial position of Sealy
Corporation and its subsidiaries (the "Company") at November 28, 1999 and
November 29, 1998, and the results of their operations and their cash flows
for the years then ended in conformity with accounting principles generally
accepted in the United States. These financial statements are the
responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with auditing standards generally
accepted in the United States, which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above. The financial statements of the Company as of
November 30, 1997 and for the year then ended were audited by other
independent accountants whose report dated January 8, 1998 expressed an
unqualified opinion on those statements.
PricewaterhouseCoopers LLP
Greensboro, North Carolina
January 7, 2000
21
<PAGE>
Report of Independent Auditors
The Board of Directors and Stockholders
Sealy Corporation:
We have audited the accompanying consolidated statements of operations,
stockholders' equity, and cash flows of Sealy Corporation and subsidiaries
(the Company) for the year ended November 30, 1997. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the results of operations and the
cash flows of Sealy Corporation and subsidiaries for the year ended November
30, 1997 in conformity with generally accepted accounting principles.
Cleveland, Ohio KPMG LLP
January 8, 1998
22
<PAGE>
SEALY CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except par value amounts)
<TABLE>
<CAPTION>
November 28, November 29,
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................... $ 10,845 $ 11,234
Accounts receivable--Non-Affiliates (net of
allowance for doubtful accounts, 1999-$10,123;
1998-$8,211)....................................... 105,200 106,761
Accounts receivable--Affiliates (net of allowance
for doubtful accounts, 1999-$-0-).................. 14,275 --
Inventories......................................... 44,681 43,727
Prepaid expenses.................................... 5,968 7,257
Prepaid taxes....................................... -- 1,994
Deferred income taxes............................... 14,197 17,194
-------- --------
195,166 188,167
-------- --------
Property, plant and equipment--at cost:
Land................................................ 11,106 11,091
Buildings and improvements.......................... 69,269 60,029
Machinery and equipment............................. 108,776 94,234
Construction in progress............................ 9,475 23,957
-------- --------
198,626 189,311
Less accumulated depreciation....................... 60,525 53,502
-------- --------
138,101 135,809
-------- --------
Other assets:
Goodwill--net of accumulated amortization (1999-
$80,026; 1998-$68,259)............................. 376,667 387,054
Patents and other intangibles-net of accumulated
amortization (1999-$9,246; 1998-$7,893)............ 1,785 3,138
Investment in affiliates............................ 30,004 --
Debt issuance costs, net, and other assets.......... 29,230 36,912
-------- --------
437,686 427,104
-------- --------
$770,953 $751,080
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
23
<PAGE>
SEALY CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except par value amounts)
<TABLE>
<CAPTION>
November 28, November 29,
1999 1998
------------ ------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion-long-term obligations............... $ 14,145 $ 8,576
Accounts payable.................................... 43,153 46,094
Accrued expenses:
Customer incentives and advertising................ 32,301 32,451
Compensation....................................... 23,173 15,883
Interest........................................... 12,733 13,432
Other.............................................. 26,100 26,390
-------- --------
151,605 142,826
-------- --------
Long-term obligations................................ 676,197 682,271
Other noncurrent liabilities......................... 41,185 36,069
Deferred income taxes................................ 23,355 28,740
Stockholders' equity (deficit):
Preferred stock, $0.01 par value; Authorized 100,000
shares; Issued, none............................... -- --
Class L common stock, $0.01 par value; Authorized,
6,000 shares; Issued (1999-1,486; 1998-2,169)...... 15 22
Class M common stock, $0.01 par value; Authorized,
2,000 shares; Issued (1999-1,549; 1998-866)........ 16 9
Class A common stock, $0.01 par value; Authorized
600,000 shares; Issued (1999-16,535; 1998-20,528) . 164 205
Class B common stock, $0.01 par value; Authorized
200,000 shares; Issued (1999-11,935; 1998-7,791) .. 120 78
Additional paid-in capital.......................... 134,547 134,530
Retained (deficit) earnings......................... (246,012) (261,833)
Common stock held in treasury, at cost.............. (85) --
Foreign currency translation adjustment............. (10,154) (11,837)
-------- --------
(121,389) (138,826)
-------- --------
Commitments and contingencies........................ -- --
-------- --------
$770,953 $751,080
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
24
<PAGE>
SEALY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Year Ended
--------------------------------------
November 28, November 29, November 30,
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Net sales--Non-affiliates............... $940,666 $891,302 $804,834
Net sales--Affiliates................... 45,041 -- --
-------- -------- --------
Total net sales......................... 985,707 891,302 804,834
-------- -------- --------
Cost and expenses:
Cost of goods sold--Non-affiliates..... 520,768 503,500 459,089
Cost of goods sold--Affiliates......... 23,401 -- --
-------- -------- --------
Total cost of goods sold............... 544,169 503,500 459,089
Selling, general and administrative
(including provisions for bad debts of
$2,248, $1,800 and $4,528,
respectively)......................... 324,612 300,356 258,839
Loss on net assets held for sale and
other write-downs..................... -- 10,634 --
Compensation associated with
recapitalization...................... -- 18,886 --
Stock based compensation............... 6,664 -- 1,635
Amortization of intangibles............ 12,881 13,029 13,264
-------- -------- --------
Income from operations................. 97,381 44,897 72,007
Interest expense, net.................. 64,999 67,451 31,396
-------- -------- --------
Income/(loss) before income taxes,
extraordinary item and cumulative
effect of change in accounting
principle............................ 32,382 (22,554) 40,611
Income taxes (benefit).................. 16,561 (3,318) 22,509
-------- -------- --------
Income/(loss) before extraordinary item
and cumulative effect of change in
accounting principle.................. 15,821 (19,236) 18,102
Extraordinary item-loss from early
extinguishment of debt (net of income
tax benefit of $-0-, $9,693 and $1,353,
respectively) (Note 2)................. -- 14,537 2,030
Cumulative effect of change in
accounting principle (net of income tax
benefit of $2,885) (Note 1)............ -- -- 4,329
-------- -------- --------
Net income/(loss)..................... 15,821 (33,773) 11,743
Liquidation preference for common L & M
shares (Note 2)........................ 13,461 11,716 --
-------- -------- --------
Net income/(loss) available to common
shareholders......................... $ 2,360 $(45,489) $ 11,743
======== ======== ========
Earnings/(loss) per common share--Basic:
Before extraordinary item and
cumulative effect of change
in accounting principle............... $ 0.50 $ (0.63) $ 0.61
Extraordinary item..................... -- (0.48) (0.07)
Cumulative effect of change in
accounting principle.................. -- -- (0.15)
-------- -------- --------
Net earnings/(loss)--Basic............ 0.50 (1.11) 0.39
Liquidation preference for common L & M
shares................................. (0.43) (0.38) --
-------- -------- --------
Net earnings/(loss) available to
common shareholders--Basic........... $ 0.07 $ (1.49) $ 0.39
======== ======== ========
Earnings/(loss) per common share--
Diluted:
Before extraordinary item and
cumulative effect of change
in accounting principle............... $ 0.48 $ (0.63) $ 0.60
Extraordinary item..................... -- (0.48) (0.07)
Cumulative effect of change in
accounting principle.................. -- -- (0.14)
-------- -------- --------
Net earnings/(loss)--Diluted.......... 0.48 (1.11) 0.39
Liquidation preference for common L & M
shares................................ (0.41) (0.38) --
-------- -------- --------
Net earnings/(loss) available to
common shareholders--Diluted......... $ 0.07 $ (1.49) $ 0.39
======== ======== ========
Weighted average number of common shares
outstanding:
Basic.................................. 31,473 30,472 29,575
Diluted................................ 32,972 30,472 30,234
</TABLE>
See accompanying notes to consolidated financial statements.
25
<PAGE>
SEALY CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
<TABLE>
<CAPTION>
Class L Class M Class A Class B
------------- -------------- ------------- --------------- -------------- Additional Retained
Comprehensive Common Stock Common Stock Common Stock Common Stock Paid-in Earnings Treasury
Income Shares Amount Shares Amount Shares Amount Shares Amount Capital (Deficit) Stock
------------- ------ ------ ------ ------ ------- ------ ------ ------ ---------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
December 1,
1996............ -- $-- -- $-- 29,409 $294 11 $ -- $256,489 $ 37,418 $ --
Net income...... $11,743 -- -- -- -- -- -- -- -- -- 11,743 --
Management stock
award........... -- -- -- -- 285 3 -- -- 1,299 -- --
Performance
share plan...... -- -- -- -- 233 2 -- -- (134) -- --
Exercised stock
options......... -- -- -- -- 5 -- -- -- 29 -- --
Valuation
adjustment on
common stock and
warrants subject
to repurchase... -- -- -- -- -- -- -- -- (363) -- --
Dividend........ -- -- -- -- -- -- -- -- -- (99,775) --
Foreign currency
translation..... (732) -- -- -- -- -- -- -- -- -- -- --
-------
Total
comprehensive
income.......... 11,011 -- -- -- -- -- -- -- -- -- -- --
------- ----- --- ----- --- ------- ---- ------ ---- -------- --------- ----
November 30,
1997............ -- -- -- -- 29,932 299 11 -- 257,320 (50,614) --
Net loss before
liquidation
preference...... (33,773) -- -- -- -- -- -- -- -- -- (33,773) --
Stock
compensation
related to
Recapitalization. -- -- -- -- -- -- -- -- 16,413 -- --
Treasury stock
repurchase...... 339 4 -- -- (26,885) (269) (11) -- (260,367) (177,446) --
Equity
issuances....... 1,830 18 866 9 16,472 164 7,791 78 121,048 -- --
Exercised stock
options......... -- -- -- -- 1,009 11 -- -- 116 -- --
Foreign currency
translation..... (9,898) -- -- -- -- -- -- -- -- -- -- --
-------
Total
comprehensive
income.......... (43,671) -- -- -- -- -- -- -- -- -- -- --
------- ----- --- ----- --- ------- ---- ------ ---- -------- --------- ----
November 29,
1998............ 2,169 22 866 9 20,528 205 7,791 78 134,530 (261,833) --
Net Income...... 15,821 -- -- -- -- -- -- -- -- -- 15,821 --
Exercised stock
options......... -- -- -- -- 151 1 -- -- 17 -- --
Cancellation and
issuance of
common stock.... (683) (7) 683 7 (4,144) (42) 4,144 42 -- -- --
Common stock
held in
treasury, at
cost............ -- -- -- -- -- -- -- -- -- -- (85)
Foreign currency
translation..... 1,683 -- -- -- -- -- -- -- -- -- -- --
-------
Total
comprehensive
income.......... $17,504 -- -- -- -- -- -- -- -- -- -- --
======= ----- --- ----- --- ------- ---- ------ ---- -------- --------- ----
November 28,
1999............ 1,486 $15 1,549 $16 16,535 $164 11,935 $120 $134,547 $(246,012) $(85)
===== === ===== === ======= ==== ====== ==== ======== ========= ====
<CAPTION>
Foreign
Currency
Translation
Adjustment Total
----------- ----------
<S> <C> <C>
December 1,
1996............ $ (1,207) $ 292,994
Net income...... -- 11,743
Management stock
award........... -- 1,302
Performance
share plan...... -- (132)
Exercised stock
options......... -- 29
Valuation
adjustment on
common stock and
warrants subject
to repurchase... -- (363)
Dividend........ -- (99,775)
Foreign currency
translation..... (732) (732)
Total
comprehensive
income.......... -- --
----------- ----------
November 30,
1997............ (1,939) 205,066
Net loss before
liquidation
preference...... -- (33,773)
Stock
compensation
related to
Recapitalization. -- 16,413
Treasury stock
repurchase...... -- (438,078)
Equity
issuances....... -- 121,317
Exercised stock
options......... -- 127
Foreign currency
translation..... (9,898) (9,898)
Total
comprehensive
income.......... -- --
----------- ----------
November 29,
1998............ (11,837) (138,826)
Net Income...... -- 15,821
Exercised stock
options......... -- 18
Cancellation and
issuance of
common stock.... -- --
Common stock
held in
treasury, at
cost............ -- (85)
Foreign currency
translation..... 1,683 1,683
Total
comprehensive
income.......... -- --
----------- ----------
November 28,
1999............ $(10,154) $(121,389)
=========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
26
<PAGE>
SEALY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Year Ended
--------------------------------------
November 28, November 29, November 30,
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income/(loss)...................... $ 15,821 $ (33,773) $ 11,743
Adjustments to reconcile net
income/(loss) before liquidation
preference to net cash provided by
operating activities:
Depreciation........................... 12,772 11,290 10,851
Cumulative effect of change in
accounting principle.................. -- -- 7,214
Extraordinary item-early extinguishment
of debt............................... -- 24,230 3,383
Loss on net assets held for sale and
other write-downs..................... -- 10,634 --
Loss on disposal of assets............. 12 1,545 1,061
Non-cash compensation associated with
Recapitalization...................... -- 16,413 --
Non-cash compensation.................. 6,664 -- 1,165
Non-cash interest on Junior
Subordinated Note..................... 3,475 3,022 --
Deferred income taxes.................. (487) (19,265) 8,528
Amortization of:
Intangibles............................ 12,881 13,029 13,264
Debt issuance costs.................... 4,205 4,056 1,841
Discount on Senior Subordinated Notes.. 9,306 8,050 --
Other, net............................. 77 (5,171) (4,449)
Changes in operating assets and
liabilities:
Accounts receivable.................... (12,714) (12,843) (16,739)
Inventories............................ (954) 2,280 (12,015)
Prepaid expenses....................... 1,289 678 (5,348)
Prepaid taxes.......................... 1,994 12,600 (3,119)
Accounts payable/accrued expenses/other
noncurrent liabilities................ 1,662 16,255 24,669
-------- --------- --------
Net cash provided by operating
activities........................... 56,003 53,030 42,049
-------- --------- --------
Cash flows from investing activities:
Purchase of property, plant and
equipment............................. (16,084) (33,112) (29,140)
Investment in affiliate................ (27,794) -- --
Proceeds from sale of subsidiary....... -- -- 35,000
Proceeds from sale of property, plant
and equipment......................... 840 216 5,561
-------- --------- --------
Net cash provided by (used in)
investing activities................. (43,038) (32,896) 11,421
-------- --------- --------
Cash flows from financing activities:
Treasury stock repurchase, including
direct expenses....................... (85) (413,078) --
Proceeds from long-term debt........... -- 462,653 --
Proceeds from issuance of long-term
public notes.......................... -- 200,447 --
Repayment of long-term obligations..... (15,286) (211,125) (63,127)
Net borrowings from current Revolving
Credit Facility....................... 2,000 2,800 --
Net borrowings from prior Revolving
Credit Facility....................... -- (130,000) 105,000
Dividend............................... -- -- (99,775)
Equity issuances....................... 17 121,444 --
Costs associated with tender offer of
prior debt............................ -- (15,361) --
Debt issuance costs.................... -- (32,737) (6,130)
-------- --------- --------
Net cash used in financing activities. (13,354) (14,957) (64,032)
-------- --------- --------
Change in cash and cash equivalents..... (389) 5,177 (10,562)
Cash and cash equivalents:
Beginning of period.................... 11,234 6,057 16,619
-------- --------- --------
End of period.......................... $ 10,845 $ 11,234 $ 6,057
======== ========= ========
Supplemental disclosures:
Taxes paid (received), net............. $ 18,042 $ (7,171) $ 12,432
Interest paid, net..................... $ 48,710 $ 40,929 $ 29,523
Other non-cash activity:
Goodwill reduction resulting from pre-
acquisition net operating loss
utilization.......................... $ -- $ -- $ 9,953
Issuance of Junior Subordinated Notes
as part of Recapitalization proceeds. $ -- $ 25,000 $ --
</TABLE>
See accompanying notes to consolidated financial statements.
27
<PAGE>
SEALY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1: Significant Accounting Policies
Significant accounting policies used in the preparation of the consolidated
financial statements are summarized below.
Business and Basis of Presentation
Sealy Corporation (the "Company" or the "Parent"), is engaged in the
consumer products business and manufactures, distributes and sells
conventional bedding products including mattresses and foundations.
Substantially all of the Company's trade accounts receivable are from retail
businesses. As described in Note 2, the Company incurred substantial debt and
issued new equity to certain equity investors in connection with a leveraged
recapitalization transaction effective December 18, 1997. The consolidated
financial statements of the Company reflect the Company's historical basis of
accounting with the leveraged recapitalization transaction presented as a
repurchase of stock and issuance of new equity.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation. Investments in 50% or less
owned companies are accounted for using the equity method.
Fiscal Year
The Company uses a 52-53 week fiscal year ending on the closest Sunday to
November 30. The fiscal years ended November 28, 1999, November 29, 1998 and
November 30, 1997 were 52-week years.
Revenue Recognition
The Company recognizes all revenue at the time shipments are made.
Concentrations of Credit Risk
Cash and cash equivalents are, for the most part, maintained with several
major financial institutions in the United States. Deposits held with banks
may exceed the amount of insurance provided on such deposits. Generally, these
deposits may be redeemed upon demand and therefore, bear minimal risk.
The Company purchases raw materials and certain components from a variety of
vendors. The Company purchases approximately 50% of its Sealy foundation parts
from a single third-party source, which has patents on various interlocking
wire configurations (the "Wire Patents"), and manufactures the remainder of
these parts as a licensee under the Wire Patents. The Company purchases
substantially all of its Stearns & Foster foundation parts from the same
single third-party source. In order to reduce the risks of dependence on
external supply sources and to enhance profitability, the Company has expanded
its own internal component parts manufacturing capacity. As is the case with
all of the Company's product lines, the Company does not consider itself
dependent upon any single outside vendor as a source of supply to its
conventional bedding business and believes that sufficient alternative sources
of supply for the same, similar or alternative components are available.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amount of assets and liabilities and disclosures
on contingent assets and liabilities at year end and the reported amounts of
revenue and expenses during the reporting period. Actual results could differ
from these estimates.
28
<PAGE>
SEALY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Reclassification
Certain reclassifications of the 1998 and 1997 financial statements and
related footnotes have been made to conform with the 1999 presentation.
Foreign Currency
Subsidiaries located outside the U.S. generally use the local currency as
the functional currency. Assets and liabilities are translated at exchange
rates in effect at the balance sheet date and income and expense accounts at
average exchange rates during the year. Resulting translation adjustments are
recorded directly to a separate component of shareholders' equity and are not
tax-effected since they relate to investments which are permanent in nature.
Cash and Cash Equivalents
For purposes of the statements of cash flows, the Company considers all
highly liquid debt instruments with a maturity at the time of purchase of
three months or less to be cash equivalents. Cash equivalents are stated at
cost, which approximates market value.
Inventory
The cost of inventories is determined by the "first-in, first-out" (FIFO)
method, which approximates current cost. The cost of inventories includes raw
materials, direct labor and manufacturing overhead costs. The Company provides
inventory reserves for excess, obsolete or slow moving inventory based on
changes in customer demand, technology developments or other economic factors.
These reserves are not material at November 28, 1999 or November 29, 1998.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost reduced by accumulated
depreciation. Depreciation expense is provided based on historical cost and
estimated useful lives ranging from approximately twenty to forty years for
buildings and building improvements and five to fifteen years for machinery
and equipment. The Company generally uses the straight-line method for
calculating the provision for depreciation.
Investments
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. These investments are included in
"Other Assets" in the Company's balance sheet.
Amortization of Intangibles
The excess of the purchase cost over the fair value of assets acquired is
being amortized on a straight-line basis over 20 to 40 years. The Company
regularly assesses all of its long-lived assets for impairment when events or
circumstances indicate their carrying value may not be recoverable. The
Company believes that no impairment of goodwill existed at November 28, 1999.
Other intangibles include patents and trademarks, which are amortized on the
straight-line method over periods ranging from 5 to 20 years.
The costs related to the issuance of debt (gross costs of $32.7 million at
November 28, 1999, net of accumulated amortization of $8.3 million) are
capitalized and amortized to interest expense over the lives of the related
debt.
29
<PAGE>
SEALY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Earnings Per Common Share
Basic net income per common share is computed using the weighted average
number of common shares outstanding during the period. Diluted net income per
common share is computed using the weighted average number of common and
diluted common equivalent shares outstanding during the period. Dilutive
common equivalent shares consist of stock options (see Note 11).
Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for future tax consequences
attributable to differences between the financial statement carrying amounts
of existing assets and liabilities and their respective tax bases and
operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
Advertising Costs
The Company expenses all advertising costs as incurred. Advertising expenses
for the years ended November 28, 1999, November 29, 1998, and November 30,
1997 amounted to $127.7 million, $114.5 million and $97.3 million,
respectively.
Research and Development
Product development costs are charged to operations during the period
incurred.
Environmental Costs
Environmental expenditures that relate to current operations are expensed or
capitalized, as appropriate, in accordance with American Institute of
Certified Public Accountants (AICPA) Statement of Position (SOP) 96-1,
"Environmental Remediation Liabilities". Remediation costs that relate to an
existing condition caused by past operations are accrued when it is probable
that the costs will be incurred and can be reasonably estimated.
Cumulative Effect of Change in Accounting Principle
On November 20, 1997, the Emerging Issues Task Force (EITF) reached a final
consensus that business process reengineering costs incurred in connection
with an overall information technology transformation project should be
expensed as incurred (EITF 97-13). The transition provisions required
companies that had previously capitalized such business process reengineering
costs to identify those costs and quantify the unamortized amounts remaining
on the balance sheet as of the beginning of the quarter which included
November 20, 1997. Those unamortized amounts were required to be written off
as a cumulative effect of a change in accounting principle in such quarter.
The Company adopted EITF 97-13 in fiscal 1997 resulting in a charge of $4.3
million, net of income tax benefit of $2.9 million, representing the
cumulative write-off of previously capitalized costs as of August 31, 1997,
primarily relating to the Company's new business systems project. All business
process reengineering costs subsequent to August 31, 1997, have been expensed.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Financial Accounting Standard ("FAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities," effective for years
30
<PAGE>
SEALY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
beginning after June 15, 1999, the Company's fiscal year 2000. The effective
date has been delayed to June 15, 2000, the Company's fiscal year 2001, as the
result of the FASB's issuance in August, 1999 of FAS 137, "Accounting for
Derivative Instruments and Hedging Activities--Deferral of the Effective date
of FASB Statement No. 133". FAS 133 requires that all derivatives be recorded
on the balance sheet at fair value. Derivatives that are not hedges must be
adjusted to fair value through income. If the derivative is a hedge, depending
on the nature of the hedge, changes in the fair value of derivatives are
either offset against the change in the fair value of assets, liabilities, or
firm commitments through earnings or recognized in other comprehensive income
until the hedged item is recognized in earnings. The Company has not yet
determined what the effect of FAS 133 will be on the earnings and financial
position of the Company.
Note 2: Recapitalization
On October 30, 1997, Sealy Corporation entered into an agreement and plan of
merger (the "Merger Agreement") with Sandman Merger Corporation, a transitory
Delaware merger corporation ("Sandman"), and Zell/Chillmark, Fund, L.P., a
Delaware limited partnership ("Zell"). Zell owned approximately 87% of the
issued and outstanding common stock of Parent (the "Existing Common Stock").
Pursuant to the Merger Agreement, upon the satisfaction of certain conditions,
Sandman was merged with and into Parent with Parent being the surviving
corporation effective on December 18, 1997 (the "Closing Date") and the
Company was recapitalized (the "Recapitalization") whereby certain equity
investors, including members of management, acquired an approximate 90.0%
economic equity stake (85.3% voting equity stake) in the Company. A portion of
the issued and outstanding shares of common stock of the Company was converted
into the right to receive aggregate cash equal to $419.3 million less (i)
certain seller fees and expenses and (ii) certain costs in connection with the
extinguishment of certain outstanding options and warrants of the Company and
the remaining portion was converted into voting preferred stock and then
reconverted into $25.0 million in aggregate principal amount of a junior
subordinated note of the Company ("Junior Note") and a retained voting common
stock interest in the Company of approximately 14.7%. Concurrent with the
Recapitalization, the Company refinanced existing indebtedness (the
"Refinancing") by Sealy Mattress Company, a wholly owned subsidiary of the
Parent, issuing $125 million principal amount of 9 7/8% Senior Subordinated
Notes due 2007 (the "Senior Subordinated Notes") and $128 million principal
amount of 10 7/8% Senior Subordinated Discount Notes due 2007 (the "Senior
Subordinated Discount Notes", and, together with the Senior Subordinated
Notes, the "Notes"), with net proceeds to the Company of $75.4 million, and by
entering into and borrowing $460 million under the Senior Credit Agreements.
After the Recapitalization, the issued and outstanding capital stock of the
Company consists of Class A common stock, par value $0.01 per share ("Class A
Common"), Class B common stock, par value $0.01 per share ("Class B Common"),
Class L common stock, par value $0.01 per share ("Class L Common"), and Class
M common stock, par value $0.01 per share ("Class M Common and collectively
with the Class A Common, Class B Common and Class L Common, Common Stock").
The Class L Common and the Class M Common are senior in right of payment to
the Class A Common and Class B Common. Holders of Class B Common and Class M
Common have no voting rights except as required by law. The holders of Class A
Common and Class L Common are entitled to one vote per share on all matters to
be voted upon by the stockholders of the Company, including the election of
directors. Class A Common and Class L Common are otherwise identical, except
that the shares of Class L Common are entitled to a preference over Class A
Common with respect to any distribution by the Company to holders of its
capital stock equal to the original cost of such share ($40.50) plus an amount
which accrues on a daily basis at a rate of 10% per annum, compounded
annually. Class B Common and Class M Common are otherwise identical, except
that the shares of Class M Common are entitled to a preference over Class B
Common with respect to any distribution by the Company to holders of its
capital stock equal to the original cost of such share ($40.50) plus an amount
which accrues on a daily basis at a rate of 10% per annum, compounded
annually. The Class B Common and the Class M Common are convertible into Class
A Common
31
<PAGE>
SEALY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
and Class L Common, respectively, automatically upon consummation of an
initial public offering by the Company. As of November 28, 1999 and November
29, 1998, the aggregate liquidation preference of Class L and Class M Common,
including the preferred yield of 10% compounded annually, amounted to $148.1
million and $134.6 million, respectively. The Board of Directors of the
Company is authorized to issue preferred stock, par value $0.01 per share,
with such designations and other terms as may be stated in the resolutions
providing for the issue of any such preferred stock adopted from time to time
by the Board of Directors.
After the Recapitalization, the outstanding stock options of the Company
("Recapitalization Stock Options") consist of fully-vested ten-year stock
options to acquire 1,309,644 shares of Class A Common Stock at an exercise
price of $0.125 per share and 145,516 shares of Class L Common Stock at an
exercise price of $10.125 per share.
Upon the consummation of the Recapitalization, Parent and certain of its
stockholders, including the Bain Funds; Harvard Private Capital, Inc.
("Harvard"); Sealy Investors 1, LLC; Sealy Investors 2, LLC; Sealy Investors
3, LLC (the "LLCs"); and Zell (collectively, the "Stockholders") entered into
a stockholders agreement (the "Stockholders Agreement"). The Stockholders
Agreement (i) required that each of the parties thereto vote all of its voting
securities of Parent and take all other necessary or desirable actions to
cause the size of the Board of Directors of Parent to be established at seven
members and to cause three designees of the Bain Funds and one designee of
Harvard to be elected to the Board of Directors; (ii) granted Parent and the
Bain Funds a right of first offer on any proposed transfer of shares of
capital stock of Parent held by Zell, Harvard or the LLCs, (iii) granted
Harvard a right of first offer on any proposed transfer of shares of capital
stock of Parent held by the Bain Funds; (iv) granted tag-along rights on
certain transfers of shares of capital stock of Parent; (v) required the
Stockholders to consent to a sale of Parent to an independent third party if
such sale is approved by holders constituting a majority of the then
outstanding shares of voting common stock of Parent; and (vi) except in
certain instances, prohibits Zell from transferring any shares of capital
stock of Parent until the tenth anniversary of the date of the consummation of
the Recapitalization. Certain of the foregoing provisions of the Stockholders
Agreement terminate upon the consummation of an Initial Public Offering or an
approved Sale (as each is defined in the Stockholders Agreement).
Immediately prior to the closing of the Recapitalization (the "Closing"),
Parent contributed (the "Capital Contribution") all of the issued and
outstanding stock of Sealy, Inc., an Ohio corporation, the Stearns & Foster
Bedding Company, a Delaware corporation, Advanced Sleep Products, a California
corporation, Sealy Components-Pad, Inc., a Delaware corporation and Sealy
Mattress Company of San Diego, a California corporation, to the capital of
Sealy Mattress Company (the "Issuer"). Immediately after the Capital
Contribution, the Issuer became the only direct subsidiary of Parent and owns
100% of the operations of Parent. At the Closing, Sandman was merged with and
into Parent with Parent the surviving corporation.
The Recapitalization transaction resulted in an aggregate direct net charge
to APIC and retained deficit totaling $438.1 million primarily comprised of
the costs associated with the purchase of the then outstanding Class A and
Class B Common Stock, the repurchase of Merger Warrants and the repurchase of
Series A and Series B Restructure Warrants. The Recapitalization transaction
also resulted in a pretax charge of $18.9 million, of which $16.4 million was
non-cash and credited directly to APIC, comprised of accelerated vesting of
stock options and restricted stock and other incentive based compensation
payments to employees in connection with the transaction. The Company recorded
a $14.5 million charge, net of income tax benefit of $9.6 million,
representing the write-off of the remaining unamortized debt issue costs
related to long-term obligations repaid in connection with the
Recapitalization as well as consent fees and premiums paid related to the
Tender Offer of the Parent Notes (each of which as defined in Note 4) in
connection with the Recapitalization.
Note 3: Inventories
The major components of inventory as of November 28, 1999 and November 29,
1998 were as follows:
<TABLE>
<CAPTION>
1999 1998
------- -------
(in thousands)
<S> <C> <C>
Raw materials................................................... $25,066 $25,511
Work in process................................................. 14,298 14,140
Finished goods.................................................. 5,317 4,076
------- -------
$44,681 $43,727
======= =======
</TABLE>
32
<PAGE>
SEALY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 4: Long-Term Obligations
Long-term debt as of November 28, 1999 and November 29, 1998 consisted of
the following:
<TABLE>
<CAPTION>
1999 1998
-------- --------
(in thousands)
<S> <C> <C>
Senior AXELs Credit Agreement............................. $327,375 $328,875
Senior Revolving Credit Agreement:
Tranche A Term Loan....................................... 94,625 110,000
Revolving Credit Facility................................. 4,800 2,800
High Point Corporate Complex Mortgage..................... 14,242 12,653
Senior Subordinated Notes................................. 125,000 125,000
Senior Subordinated Discount Notes (net of discount:
1999--$35,197 and 1998--$44,503)......................... 92,803 83,497
Junior Subordinated Note.................................. 31,497 28,022
-------- --------
690,342 690,847
Less current portion...................................... 14,145 8,576
-------- --------
$676,197 $682,271
======== ========
</TABLE>
The Senior Credit Agreements provide for loans of up to $550.0 million,
consisting of a $450.0 million term loan facility (the "Term Loan Facility")
and a $100.0 million revolving credit facility (the "Revolving Credit
Facility"). The Issuer distributed the proceeds of the Term Loan Facility and
its initial borrowings under the Revolving Credit Facility to Parent to
provide a portion of the funds necessary to consummate the Recapitalization.
Indebtedness of the Issuer under the Senior Credit Agreements is secured and
guaranteed by Parent and certain of the Issuer's current and all of the
Issuer's future U.S. subsidiaries and will bear interest at a floating rate.
See Note 17 for further details regarding guarantees including consolidating
condensed financial statements for guarantors and non-guarantors. The Senior
Credit Agreements require the Company to meet certain financial tests,
including minimum levels of adjusted EBITDA as determined in the agreements,
minimum interest coverage and maximum leverage ratio. The Senior Credit
Agreements also contain covenants which, among other things, limit capital
expenditures, indebtedness and/or the incurrence of additional indebtedness,
investments, dividends, transactions with affiliates, asset sales, mergers and
consolidations, prepayments of other indebtedness (including the Notes), liens
and encumbrances and other matters customarily restricted in such agreements.
At November 28, 1999, the Company had approximately $87.5 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 8.8% and 9.0% for Fiscal 1999 and 1998 respectively.
Indebtedness under the Senior Credit Agreements bears interest at a floating
rate. Indebtedness under the Revolving Credit Facility and the Term Loans
initially bears interest at a rate (subject to reduction based on attainment
of certain leverage ratio levels) based upon (i) the Base Rate (defined as the
highest of (x) the rate of interest announced publicly by Morgan Guaranty
Trust Company of New York from time to time, as its base rate or (y) the
Federal funds effective rate from time to time plus 0.50%) plus 1.25% in
respect of the Tranche A Term Loans and the loans under the Revolving Credit
Facility (the "Revolving Loans"), 1.50% in respect of the AXELs Series B,
1.75% in respect of the AXELs Series C and 2.00% in respect of the AXELs
Series D, or (ii) the Adjusted Eurodollar Rate (as defined in the Senior
Credit Agreements) for one, two, three or six months (or, subject to general
availability, two weeks to twelve months), in each case plus 2.25% in respect
of Tranche A Term Loans and Revolving Loans, 2.50% in respect of AXELs Series
B, 2.75% in respect of AXELs Series C and 3.00% in respect to AXELs Series D.
The Tranche A Term Loans mature in December 2002. The AXELs Series B mature
in December 2004. The AXELs Series C mature in December 2005. The AXELs Series
D mature in December 2006. The Tranche
33
<PAGE>
SEALY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A Term Loans are subject to quarterly amortization payments commencing in
March 1999, the AXELs Series B, the AXELs Series C and the AXELs Series D are
subject to quarterly amortization payments commencing in March 1998 with the
AXELs Series B amortizing in nominal amounts until the maturity of the Tranche
A Term Loans, the AXELs Series C amortizing in nominal amounts until the
maturity of the AXELs Series B and the AXELs Series D amortizing in nominal
amounts until the maturity of the AXELs Series C. The Revolving Credit
Facility matures in December 2002. In addition, the Senior Credit Agreements
provide for mandatory repayments, subject to certain exceptions, of the Term
Loans, and reductions in the Revolving Credit Facility, based on the net
proceeds of certain asset sales outside the ordinary course of business of the
Issuer and its subsidiaries, the net proceeds of insurance, the net proceeds
of certain debt and equity issuances, and excess cash flow (as defined in the
Senior Credit Agreements).
On June 23, 1998, the Company secured permanent financing for the property,
manufacturing facility and office building in High Point, North Carolina
("High Point Corporate Complex") purchased on April 13, 1998 and to fund the
construction of the new Corporate headquarters facility at this site. The loan
arrangement requires monthly principal payments based on a twenty year
amortization commencing March, 1999, with a balloon payment at the end of year
seven of all then outstanding principal and interest. Interest accrues at
LIBOR plus 3.25% and is payable monthly.
The Senior Subordinated Notes, which are guaranteed by the Parent, were
issued pursuant to an Indenture (the "Senior Subordinated Note Indenture")
among the Issuer, the Guarantors and The Bank of New York, as trustee (the
"Senior Subordinated Note Trustee"). Notes in aggregate principal amount of
$125.0 million were issued in the Offering and mature on December 15, 2007.
Interest on the Notes accrues at the rate of 9 7/8% per annum and is payable
semi-annually in arrears on June 15 and December 15 of each year, commencing
on June 15, 1998, to Holders of record on the immediately preceding June 1 and
December 1.
Except as provided below, the Notes are not redeemable at the Company's
option prior to December 15, 2002. Thereafter, the Notes are subject to
redemption at any time at the option of the Company, in whole or in part, upon
not less than 30 nor more than 60 days' notice, at the redemption prices
(expressed as percentages of principal amount) set forth below plus accrued
and unpaid interest and Liquidated Damages thereon to the applicable
redemption date, if redeemed during the twelve-month period beginning on
December 15 of the years indicated below:
<TABLE>
<CAPTION>
Percentage of
Year Principal Amount
---- ----------------
<S> <C>
2002........................ 104.937%
2003........................ 103.292%
2004........................ 101.646%
2005 and thereafter......... 100.000%
</TABLE>
Notwithstanding the foregoing, during the first 36 months after December 11,
1997, the Company may on any one or more occasions redeem up to 35% of the
aggregate principal amount of Senior Subordinated Notes originally issued
under the Senior Subordinated Note Indenture at a redemption price of 109.875%
of the principal amount thereof, plus accrued and unpaid interest and
liquidated damages thereon, if any, to the redemption date, with the net cash
proceeds of any Equity Offerings; (as defined in the Indentures) provided that
at least $80.0 million in aggregate principal amount of Senior Subordinated
Notes remain outstanding immediately after the occurrence of such redemption
(excluding Senior Subordinated Notes held by the Company and its
Subsidiaries); and provided further that such redemption shall occur within
120 days of the date of closing of any such Equity Offering.
34
<PAGE>
SEALY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Senior Subordinated Discount Notes, which are guaranteed by the Parent,
in aggregate principal amount of $128.0 million were issued in the Offering,
and mature on December 15, 2007. The Senior Subordinated Discount Notes were
offered at a substantial discount from their principal amount at maturity.
Until December 15, 2002 (the "Full Accretion Date"), no interest (other than
liquidated damages, if applicable) will accrue or be paid in cash on the
Senior Subordinated Discount Notes, but the Accreted Value will accrete
(representing the amortization of original issue discount) between the
issuance date and the Full Accretion Date, on a semi-annual bond equivalent
basis. Beginning on the Full Accretion Date, interest on the Senior
Subordinated Discount Notes will accrue at the rate of 10 7/8% per annum and
will be payable in cash semi-annually in arrears on June 15 and December 15 of
each year, commencing on June 15, 2003, to Holders of record on the
immediately preceding June 1 and December 1. Interest on the Senior
Subordinated Discount Notes will accrue from the most recent date to which
interest has been paid or, if no interest has been paid, from the Full
Accretion Date.
Except as provided below, the Senior Subordinated Discount Notes will not be
redeemable at the Company's option prior to December 15, 2002. Thereafter, the
Senior Subordinated Discount Notes will be subject to redemption at any time
at the option of the Company, in whole or in part, upon not less than 30 nor
more than 60 days' notice, at the redemption prices (expressed as percentages
of principal amount) set forth below plus accrued and unpaid interest and
liquidated damages thereon to the applicable redemption date, if redeemed
during the twelve-month period beginning on December 15 of the years indicated
below:
<TABLE>
<CAPTION>
Percentage of
Principal Amount
----------------
<S> <C>
2002........................ 105.437%
2003........................ 103.625%
2004........................ 101.812%
2005 and hereafter.......... 100.000%
</TABLE>
Notwithstanding the foregoing, during the first 36 months after December 11,
1997, the Company may on any one or more occasions redeem up to 35% of the
Accreted Value of Senior Subordinated Discount Notes originally issued under
the Senior Subordinated Discount Note Indenture at a redemption price of
110.875% of the Accreted Value, plus accrued and unpaid liquidated damages
thereon, if any, to the redemption date, with the net cash proceeds of any
Equity Offerings; (as defined in the Indentures) provided that at least $50.0
million in aggregate Accreted Value of Senior Subordinated Discount Notes
remain outstanding immediately after the occurrence of such redemption
(excluding Senior Subordinated Discount Notes held by the Company and its
Subsidiaries); and provided, further, that such redemption shall occur within
120 days of the date of the closing of any such Equity Offering.
The Junior Note had an initial principal balance outstanding of $25.0
million and matures on December 18, 2008. Interest on the Junior Note accrues
at 10% per annum if paid within ten days of the end of each calendar quarter
or at 12% if the Company elects to add accrued interest for such quarter to
the then outstanding principal balance. The Company has the option, at each
quarter end, to elect to pay the interest due for the quarter or add such
interest to the principal balance through the term of the Note. From
inception, the Company has elected to add accrued interest to the principal
balance increasing the total outstanding balance to $31.5 million at November
28, 1999.
At November 28, 1999, the annual maturities of the principal amounts of
long-term obligations were (in thousands):
<TABLE>
<S> <C>
2000................................ $ 14,145
2001................................ 34,130
2002................................ 46,293
2003................................ 34,243
2004................................ 77,816
Thereafter.......................... 483,715
</TABLE>
35
<PAGE>
SEALY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
On November 18, 1997 Parent commenced an offer (the "Tender Offer") to
purchase for cash up to all (but not less than a majority in principal amount
outstanding) of its 10 1/4% Senior Subordinated Notes due 2003 (the "Parent
Notes") and a related solicitation (the "Consent Solicitation") of consents to
modify certain terms of the Indenture under which the Parent Notes were issued
(the "Parent Note Indenture"). The purchase price to be paid with respect to
validly tendered Parent Notes and related consents was determined by a formula
set forth in the offer to purchase with respect to the Tender Offer. The
Offerings were conditioned upon the consummation of the Tender Offer for, and
the obtaining of consents with respect to, at least a majority in aggregate
principal amount of the Parent Notes outstanding. Parent's obligation to
accept for purchase and to pay for the Parent Notes validly tendered pursuant
to the Tender Offer was conditioned upon, among other things, consummation of
the other elements of the Recapitalization.
On March 30, 1998, the Company announced a call for redemption of all
remaining outstanding Parent Notes that were not tendered on December 17,
1998. The redemption price of 106.33%, plus accrued interest, or $2.5 million,
was paid on May 1, 1998, after which time interest ceased to accrue on the
Parent Notes.
The Company's 1997 Credit Agreement was terminated in connection with the
Recapitalization. The 1997 Credit Agreement provided for a $275.0 million
reducing revolving credit facility inclusive of a discretionary swing loan
facility of up to $20.0 million.
Note 5: Lease Commitments
The Company leases certain operating facilities, offices and equipment. The
following is a schedule of future minimum annual lease commitments and
sublease rentals at November 28, 1999.
<TABLE>
<CAPTION>
Commitments Under
-----------------------
Operating Sublease
Fiscal Year Leases Rental Income
- ----------- --------- -------------
(in thousands)
<S> <C> <C>
2000.................................................... $ 8,874 $ 266
2001.................................................... 7,368 44
2002.................................................... 6,575 --
2003.................................................... 4,345 --
2004.................................................... 3,568 --
Later years............................................. 6,530 --
-------- -----
$ 37,260 $ 310
======== =====
</TABLE>
Rental expense charged to operations is as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
Nov. 28, 1999 Nov. 29, 1998 Nov. 30, 1997
------------- ------------- -------------
(in thousands)
<S> <C> <C> <C>
Minimum rentals...................... $ 8,381 $ 10,214 $ 9,153
Contingent rentals (based upon
delivery equipment mileage)......... 1,376 1,430 1,361
------- -------- --------
$ 9,757 $ 11,644 $ 10,514
======= ======== ========
</TABLE>
The Company has the option to renew certain plant operating leases, with the
longest renewal period extending through 2008. Most of the operating leases
provide for increased rent through increases in general price levels.
36
<PAGE>
SEALY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 6: Fair Value of Financial Instruments
Due to the short maturity of cash and cash equivalents, accounts receivable,
accounts payable and accrued expenses, their carrying values approximate fair
value. The carrying amount of long-term debt under the Senior AXELs Credit
Agreement and the Senior Revolving Credit Agreement approximates fair value
because the interest rate adjusts to market interest rates. The fair value of
long-term debt under the Senior Subordinated Notes and Senior Subordinated
Discount Notes, based on a quoted market price, was $124.4 million and $89.0
million at November 28, 1999, respectively.
Note 7: Derivative Financial Instruments
The Company, as a result of its operating and financing activities, is
exposed to changes in interest and foreign currency exchange rates which may
adversely affect its results of operations and financial position. In seeking
to minimize the risks and/or costs associated with such activities, the
Company manages exposure to changes in interest rate and foreign currency
exchange rates through its regular operating and financing activities and
through the use of derivative financial instruments. Foreign currency forward,
swap and option contracts are used to hedge certain currency risks inherent in
the activities of the Company. Derivative instruments are also used to adjust
the Company's interest rate risk profile. The Company does not utilize
financial instruments for trading or other speculative purposes, nor does it
utilize leveraged financial instruments.
The Company's financial investment counterparties are high quality
investment or commercial banks with significant experience with such
instruments. The Company manages exposure to counterparty credit risk through
specific minimum credit standards and diversification of counterparties. These
counterparties expose the Company to the risk of nonperformance. However, the
Company does not anticipate nonperformance by other parties, and no material
loss would be expected from their nonperformance.
Interest Rate Instruments: The Company has entered into interest rate swap
and collar agreements to reduce the impact of changes in interest rates on all
or a portion of its floating rate debt. The notional amounts of interest rate
agreements are used to measure interest to be paid or received and do not
represent the amount of exposure to credit loss. The net cash paid for the
interest rate swap and collar agreements ($0.6 million) is recorded in prepaid
expenses in the consolidated balance sheet and charged to interest expense
over the life of the agreement.
As of November 28, 1999, the Company had the following interest rate
instruments in effect that provide protection on the three month LIBOR rate
upon which the Company's variable rate debt is based (actual rate paid is
LIBOR plus the respective margin):
<TABLE>
<CAPTION>
Notional Amount Range for
1999 (millions) LIBOR Rate Period
- ---- --------------- ---------- ---------
<S> <C> <C> <C>
Interest Rate Collar...................... $ 200 6.50%-4.93% 1/98-1/01
Interest Rate Swap........................ $ 150 5.89% 9/99-9/01
Interest Rate Swap........................ $ 100 5.775% 9/99-3/00
</TABLE>
Foreign Exchange Instruments: The Company enters into forward currency
exchange contracts in the regular course of business to manage its exposure
against foreign currency fluctuations primarily on raw material purchase
transactions denominated in U.S. Dollars. During 1999, the Company amortized
$0.9 million of hedge premiums primarily related to foreign exchange contacts
to exchange Mexican Pesos for U.S. Dollars. During 1999, the Company
recognized losses of ($0.6) million and ($0.4) million related to the Canadian
Dollar and Mexican Peso contracts, respectively. The Company had no contracts
outstanding at November 28, 1999. In December 1999, the Company incurred $0.1
million to purchase an Average Rate Option Canadian Put in the amount of
Canadian Dollar $17.0 million with a strike price of Canadian $1.50.
Additionally, the Company
37
<PAGE>
SEALY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
incurred $0.1 million to purchase Mexican Peso Put Options for 57.4 million
Mexican Pesos with strike prices ranging between 10.21 and 11.24 Mexican Pesos
per U.S. Dollar. These options will settle quarterly and expire at the end of
fiscal 2000.
Note 8: Stock Option and Restricted Stock Plans
Post-Recapitalization: On December 18, 1997, the Company's Board of
Directors adopted the 1998 Stock Option Plan ("1998 Plan") and reserved
5,000,000 shares of Class A Common Stock of the Company for issuance. Options
under the 1998 Plan may be granted either as Incentive Stock Options as
defined in Section 422 of the Internal Revenue Code or Nonqualified Stock
Options subject to the provisions of Section 83 of the Internal Revenue Code.
The options vest 40% upon the second anniversary, and 20% on the third,
fourth and fifth anniversary dates of the grant.
Effective Date of Recapitalization: As a result of the Recapitalization
effective on December 18, 1997, the Human Resources Committee of the Company's
Board of Directors removed all restrictions on the then outstanding restricted
stock issued under the 1996 Transitional Plan and those shares were paid out
as a result of the Recapitalization at the Recapitalization share price of
$14.3027. In addition, a special transaction bonus was approved for key
members of management. Furthermore, as of December 18, 1997, the Human
Resources Committee accelerated vesting of the Company issued and then
outstanding stock options under the 1989 Plan, 1992 Plan, 1993 Plan and 1997
Plan (collectively the "Terminated Stock Option Plans"); terminated the
Terminated Stock Option Plans; and paid each holder of options under the
Terminated Stock Option Plans compensation for such terminations which
compensation was equal to the spread between the Merger share price of
$14.3027 and the respective per share exercise price for the terminated stock
options. Prior to December 18, 1997, certain members of senior management were
offered and elected to cancel their options under the Terminated Stock Option
Plans and their restricted stock under the 1996 Transitional Plan. Those
senior executives received nonqualified stock options which were subsequently
cancelled and exchanged on December 18, 1997 for fully-vested ten-year stock
options to acquire 145,516 shares of the Company's Class L Common Stock at an
exercise price of $10.125 per share and ten-year stock options to acquire
1,309,644 shares of the Company's Class A Common Stock at an exercise price of
$0.125 per share ("Recapitalization Stock Options"). One executive has the
right to require the Company to repurchase certain securities of the Company
at the greater of fair market value or original cost. As a result of all
recapitalization date activity, the Company recorded an aggregate $18.9
million in compensation expense, and $3.6 million in other non-current
liabilities.
The company recorded a $4.0 million charge (net of taxes of $2.7 million) in
fiscal 1999 to revalue the right of one executive to require the Company to
repurchase certain securities of the Company at the greater of fair market
value or original cost. That revaluation was recorded in stock based
compensation expense and other non-current liabilities.
Pre-Recapitalization: The Company adopted the 1989 Stock Option Plan ("1989
Plan") in 1989, the 1992 Stock Option Plan ("1992 Plan") in 1992 and the 1997
Stock Option Plan ("1997 Plan") in 1997 and reserved 100,000 shares, 600,000
shares and 2,400,000 shares, respectively, of Class A Common Stock of the
Company (the "Shares") for future issuance. Options under the 1989 Plan, the
1992 Plan and the 1997 Plan could have been granted either as Incentive Stock
Options as defined in Section 422 of the Internal Revenue Code or Nonqualified
Stock Options subject to the provisions of Section 83 of the Internal Revenue
Code. There were no options outstanding relating to the 1989, 1992, or 1997
Plans as of November 29, 1998.
During Fiscal 1993, the Company adopted the 1993 Non-Employee Director Stock
Option Plan (the "1993 Plan"), which was subsequently amended on April 6, 1994
and June 27, 1995. The 1993 Plan provides for the
38
<PAGE>
SEALY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
one-time automatic grant of ten-year options to acquire up to 10,000 shares to
all current and future directors who are not employed by the Company, by Zell
or by their respective affiliates ("Non-Employee Directors"). Options granted
under the 1993 Plan vest immediately and were initially exercisable at a price
equal to the fair market value of the shares on the date of grant. For options
granted prior to March 1, 1994, the exercise price of options granted pursuant
to this Plan increased on the first anniversary date of such grant by 4%,
which became the fixed exercise price for all such options. Options issued
thereafter, were exercisable over their term at the fair market value on the
date of grant. The 1993 Plan was amended on June 27, 1995 to provide for the
grant of an additional option to purchase 5,000 shares to each eligible
director and thereafter providing for the automatic annual grant of an option
to each eligible director to purchase an additional 5,000 shares at fair
market value on the date of grant. All options under the 1993 Plan were
exercised on December 18, 1997.
In 1996, pursuant to an employment agreement with the Company's CEO, the
Company granted him an aggregate of 67,635 shares of restricted stock with a
fair value of $637,800 at date of grant. The restricted stock was to vest at a
rate of approximately 25% at each anniversary date of the grant. The Company
also awarded a grant of ten-year stock options to acquire up to an aggregate
of 587,342 shares at an exercise price of $7.23 per share (representing fair
market value at the time of grant). The stock options were to vest at a rate
of 25% at each anniversary date of the grant. On May 31, 1997 the Human
Resources Committee, under the 1997 Plan, granted the CEO a ten-year stock
option to acquire up to 75,000 shares at an exercise price of $9.60 per Share
(representing fair market value at the time of grant).
In 1996, the Company adopted the 1996 Transitional Restricted Stock Plan
(the "1996 Transitional Plan") effective December 1, 1996, which terminates on
January 3, 2000, and no grants shall thereafter be awarded under the Plan. All
grants awarded under the Plan prior to such date shall remain in effect until
they have been exercised or terminated in accordance with the terms and
provisions of the Plan. The Plan provides for partial vesting at a rate of 50%
if a grantee incurs a "termination" (as defined in the Plan) from January 3,
1999 to January 2, 2000. All options under the 1996 Transitional Plan were
exercised on December 18, 1997.
In May 1997, the Company granted ten-year stock options to acquire 921,400
shares at an exercise price of $9.60 per share (representing fair market value
at the time of grant). The options were to vest 50% on the third anniversary
date of the grant and 50% on the fourth anniversary date of the grant.
FAS No. 123 Disclosures: As permitted by FAS No. 123, Accounting for Stock-
Based Compensation, the Company continues to account for its stock option and
stock incentive plans in accordance with Accounting Principles Board ("APB")
Opinion No. 25, Accounting for Stock Issued to Employees, and makes no charges
(except to the extent required by APB Opinion No. 25) against earnings with
respect to options granted. FAS No. 123 does however require the disclosure of
pro forma information regarding net income and earnings per share determined
as if the Company had accounted for its stock options under the fair value
method.
For purposes of this pro forma disclosure the estimated fair value of the
options is amortized to expense over the options' vesting period.
<TABLE>
<CAPTION>
1999 1998 1997
------- -------- -------
<S> <C> <C> <C> <C>
Net income (loss) (in thousands).......... As reported $15,821 $(33,773) $11,743
Pro forma $14,592 $(31,468) $10,814
Net earnings (loss) per share-Diluted..... As reported $ 0.48 $ (1.11) $ 0.39
Pro forma $ 0.44 $ (1.03) $ 0.35
</TABLE>
Because the FAS No. 123 method of accounting has not been applied to options
granted prior to Fiscal 1996 and all related Plans were terminated effective
December 18, 1997, the above pro forma effect may not be representative of
that to be expected in future years.
39
<PAGE>
SEALY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The fair value for all options granted were estimated at the date of grant
or revaluation using a Black-Scholes option pricing model with the following
weighted-average assumptions: the expected life for all options is seven
years; the expected dividend yield for all stock is zero percent and the
expected volatility of all stock is zero percent. Adjustments were made to the
then outstanding options and related stock prices as a result of the dividend
paid on February 28, 1997 relating to all the option plans in effect as of
November 30, 1997. Such adjustments were treated as modifications of
outstanding awards in accordance with FAS No. 123.
The risk free interest rates utilized for the grants are as follows:
<TABLE>
<CAPTION>
Risk Free
Interest
Option Grant Date Rate
- ----------------- ----------
<S> <C>
1989 Plan:
December 1989..................................................... 5.15%
1992 Plan:
June 1992......................................................... 6.06%
June 1993......................................................... 6.22%
June 1994......................................................... 6.31%
June 1995......................................................... 6.38%
June 1996......................................................... 6.46%
1993 Plan:
March 1993........................................................ 6.46%
June 1995......................................................... 6.46%
June 1996......................................................... 6.46%
May 1997.......................................................... 6.64%
CEO Award:
March 1996........................................................ 6.46%
1997 Plan:
June 1997......................................................... 6.64%
1998 Plan:
Fiscal 1998....................................................... 5.55%
Fiscal 1999....................................................... 4.57%-6.17%
</TABLE>
A summary of the status and changes of shares subject to options and the
related average price per share is as follows:
<TABLE>
<CAPTION>
Shares Subject Average Option
to Options Price Per Share
-------------- ---------------
<S> <C> <C>
Outstanding November 30, 1997.................... 2,084,292 $8.52
Granted........................................ 4,883,910 1.58
Exercised...................................... (3,092,796) 5.78
Canceled....................................... (264,250) 1.20
----------
Outstanding November 29, 1998.................... 3,611,156 2.01
----------
Granted........................................ 171,500 0.72
Exercised...................................... (150,570) 0.13
Canceled....................................... (69,000) 1.83
----------
Outstanding November 28, 1999.................... 3,563,086 $2.02
==========
</TABLE>
40
<PAGE>
SEALY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Options exercisable and shares available for future grant were:
<TABLE>
<CAPTION>
Fiscal Year Ended
-----------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Options exercisable.............................. 296,086 446,656 641,895
Weighted-average option price per share of
options exercisable............................. $ 5.04 $ 3.38 $ 7.91
Weighted-average fair value of options granted
during the year................................. -- $ 1.69 $ 9.60
Shares available for grant....................... 1,733,000 1,835,500 1,741,086
</TABLE>
The ranges of exercise prices and the remaining contractual life of options
as of November 28, 1999 were:
<TABLE>
<CAPTION>
Class A
------------------------------ Class L
Exercise prices $0.125 $0.50-$1.00 $4.18 $10.125
- --------------- -------- ----------- --------- --------
<S> <C> <C> <C> <C>
Options outstanding:
Outstanding as of November 28, 1999.. 150,570 2,157,000 1,110,000 145,516
Weighted-average remaining
contractual life.................... 8.0 Yrs. 8.3 Yrs 8.7 Yrs. 8.0 Yrs.
Weighted-average exercise price...... $ 0.125 $ 0.52 $ 4.18 $ 10.125
Options exercisable:
Outstanding as of November 28, 1999.. 150,570 -- -- 145,516
Weighted-average remaining
contractual life.................... 8.0 Yrs. -- -- 8.0 Yrs.
Weighted-average exercise price...... $ 0.125 -- -- $ 10.125
</TABLE>
Note 9: Income Taxes
The Company and its domestic subsidiaries file a consolidated U.S. Federal
income tax return. Income tax expense (benefit) consists of:
<TABLE>
<CAPTION>
Year ended Year ended Year ended
Nov. 28, 1999 Nov. 29, 1998 Nov. 30, 1997
------------- ------------- -------------
(in thousands)
<S> <C> <C> <C>
Current:
Federal.............................. $ 11,058 $ 1,737 $ 6,913
State and local...................... 2,250 948 2,197
Foreign.............................. 3,740 3,569 3,963
-------- -------- --------
17,048 6,254 13,073
Deferred:
Federal.............................. (471) (16,541) 4,507
State and local...................... (473) (2,363) 644
Foreign.............................. 457 (361) 47
-------- -------- --------
(487) (19,265) 5,198
-------- -------- --------
Total................................ 16,561 (13,011) 18,271
Allocated to loss from early
extinguishment of debt.............. -- (9,693) (1,353)
Allocated to effect of change in
accounting principle................ -- -- (2,885)
-------- -------- --------
Income tax expense (benefit) before
extraordinary item and cumulative
effect of change in accounting
principle........................... $ 16,561 $ (3,318) $ 22,509
======== ======== ========
</TABLE>
Income before taxes from foreign operations amounted to $9.0 million, $6.4
million, and $8.8 million for the years ended November 28, 1999, November 29,
1998, and November 30, 1997, respectively.
41
<PAGE>
SEALY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The differences between the effective tax rate and the statutory U.S. Federal
tax rate are explained as follows:
<TABLE>
<CAPTION>
Year ended Year ended Year ended
Nov. 28, 1999 Nov. 29, 1998 Nov. 30, 1997
------------- ------------- -------------
<S> <C> <C> <C>
Income tax expense (benefit) computed
at statutory U.S. Federal income tax
rate................................ 35.0% (35.0%) 35.0%
State and local income taxes, net of
federal tax benefit................. 4.2% (0.8%) 6.2%
Foreign tax rate differential and
effects of foreign earnings
repatriation........................ 1.0% 0.8% 3.5%
Sale of subsidiary................... 0.0% 0.0% 1.8%
Other items, net..................... (0.8%) 0.3% (0.5%)
---- ----- ----
Effective income tax rate before
permanent differences resulting from
purchase accounting................. 39.4% (34.7%) 46.0%
Permanent differences resulting from
purchase accounting................. 11.7% 20.0% 9.4%
---- ----- ----
Effective income tax rate............ 51.1% (14.7%) 55.4%
==== ===== ====
</TABLE>
Deferred income taxes reflect the tax effect of temporary differences
between carrying amounts of assets and liabilities for financial reporting
purposes and the amounts for income tax purposes. The Company's total deferred
tax assets and liabilities and their significant components are as follows:
<TABLE>
<CAPTION>
1999 1998
-------------------------- -----------------------
Current Noncurrent Current Noncurrent
Asset Asset Asset Asset
(Liability) (Liability) (Liability) (Liability)
-------------- ----------- ----------- -----------
(in thousands)
<S> <C> <C> <C> <C>
Accrued salaries and
benefits................... $ 5,238 $ 5,516 $ 5,320 $ 3,123
Allowance for doubtful
accounts................... 3,636 -- 3,185 --
Plant shutdown, idle
facilities, and
environmental costs........ 1,515 1,322 1,398 1,322
Alternative minimum tax
credit carryforward........ 178 -- 2,743 --
Accrued warranty reserve.... 2,598 -- 1,745 --
Book versus tax differences
related to property, plant,
and equipment.............. -- (19,613) -- (18,270)
Book versus tax differences
related to intangible
assets..................... -- (10,464) -- (11,454)
Book versus tax differences
related to recapitalization
expenses and related
financing costs............ (266) -- -- (311)
All other................... 1,298 (116) 2,803 (3,150)
------- -------- ------- --------
$14,197 $(23,355) $17,194 $(28,740)
======= ======== ======= ========
</TABLE>
A provision has not been made for U.S. or foreign taxes on undistributed
earnings of subsidiaries, which operate in Canada and Puerto Rico. Upon
repatriation of such earnings, withholding taxes might be imposed that are
then available for use as credits against a U.S. Federal income tax liability,
subject to certain limitations. The amount of taxes that would be payable on
repatriation of the entire amount of undistributed earnings is immaterial.
The Company reduced goodwill by $0, $0 and $10.0 million for the utilization
of previously unrecognized pre-acquisition net operating loss carryforwards in
1999, 1998 and 1997, respectively.
Note 10: Retirement Plans
Substantially all employees are covered by defined contribution profit
sharing plans, where specific amounts (as annually established by the
Company's board of directors) are set aside in trust for retirement benefits.
The
42
<PAGE>
SEALY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
total profit sharing expense was $7.4 million, $6.6 million, and $5.9 million
for the years ended November 28, 1999, November 29, 1998, and November 30,
1997, respectively.
Note 11: Earnings Per Share
The following table sets forth the computation of basic and diluted earnings
per share:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- -------
(in thousands)
<S> <C> <C> <C>
Numerator:
- ----------
Income (loss) before extraordinary item and
cumulative effect of change in accounting
principle.......................................... $ 15,821 $(19,236) $18,102
Extraordinary item, net............................. -- 14,537 2,030
Cumulative effect of change in accounting principle,
net................................................ -- -- 4,329
-------- -------- -------
Net income (loss)................................... 15,821 (33,773) 11,743
Liquidation preference for common L & M shares...... 13,461 11,716 --
-------- -------- -------
Net income (loss) available to common shareholders.. $ 2,360 $(45,489) $11,743
======== ======== =======
Denominator:
- ------------
Denominator for basic earnings per share--weighted
average shares..................................... 31,473 30,472 29,575
Effect of dilutive securities:
- ------------------------------
Stock options....................................... 1,499 -- 124
Merger warrants..................................... -- -- 204
Restricted stock.................................... -- -- 311
Other............................................... -- -- 20
-------- -------- -------
Denominator for diluted earnings per share--adjusted
weighted-average shares and assumed conversions.... 32,972 30,472 30,234
======== ======== =======
</TABLE>
Due to loss from continuing operations in 1998, the dilutive securities
would have been antidilutive. Accordingly, they were excluded from the
calculation in dilutive earnings per share.
43
<PAGE>
SEALY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 12: Summary of Interim Financial Information (Unaudited)
Quarterly financial data for the years ended November 28, 1999 and November
29, 1998, is presented below:
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
----------- ----------- ----------- -----------
(Amounts in thousands, except for share data)
<S> <C> <C> <C> <C>
1999:
Net sales................. $ 222,326 $ 232,168 $ 273,333 $ 257,880
Gross profit.............. 99,751 103,218 123,639 114,930
Net income................ 413 3,153 11,625 630
Earnings per share--Basic. 0.01 0.10 0.37 0.02
Earnings per share--
Diluted.................. 0.01 0.10 0.35 0.02
1998:
Net sales................. $ 209,259 $ 213,572 $ 242,603 $ 225,868
Gross profit.............. 87,775 92,405 108,595 99,027
Income(loss) before
extraordinary item....... (17,765) (1,650) 4,363 (4,184)
Extraordinary item--loss
from early extinguishment
of debt, net of tax...... 14,455 82 -- --
Net income(loss).......... (32,220) (1,732) 4,363 (4,184)
Earnings per share before
extraordinary item--
Basic.................... (0.59) (0.06) 0.14 (0.12)
Earnings per share before
extraordinary item--
Diluted.................. (0.59) (0.06) 0.14 (0.12)
Earnings per share--Basic. (1.06) (0.06) 0.14 (0.13)
Earnings per share--
Diluted.................. (1.06) (0.06) 0.14 (0.13)
</TABLE>
During the fourth quarter of Fiscal 1999, the company recorded an after tax
charge of $4.0 million ($0.12 per share) to revalue the right of one executive
to require the Company to repurchase certain securities of the Company at the
greater of fair market value or original cost. That revaluation was recorded
as non-cash stock compensation expense. During the first quarter of Fiscal
1998, the Company recorded an after tax charge of $14.5 million ($0.47 per
share), representing the write-off of the remaining unamortized debt issuance
costs related to long-term obligations repaid in connection with the
Recapitalization as well as consent fees and premiums paid related to the
Tender Offer of the Parent Notes in connection with the Recapitalization.
Also, during the first quarter the Company recorded an after tax charge of
$11.1 million ($0.37 per share), related to costs associated with the
Recapitalization. The Recapitalization costs were primarily comprised of
accelerated vesting of stock and restricted stock and other incentives based
on compensation payments to employees in connection with the transaction.
During the fourth quarter of Fiscal 1998, the Company recorded an after tax
loss of $5.1 million ($0.17 per share), for the loss on net assets available
for sale and other write-downs. Such assets are primarily related to the
rationalization of certain manufacturing processes and the write-down of other
underperforming assets (See Note 15). In addition during the fourth quarter of
fiscal 1998, the Company recorded an after tax loss of $1.3 million ($0.04 per
share) due to the write-down of capitalized software development costs (See
Note 15).
Note 13: 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 our subsidiaries are
parties to an Administrative Consent Order issued by the New Jersey Department
of Environmental Protection. Pursuant to that order, the Company and our
subsidiary agreed to conduct soil and groundwater remediation at the property.
The Company does not believe that our manufacturing processes were the source
of contamination. The Company sold the property in 1997. The Company and
subsidiary retained
44
<PAGE>
SEALY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
primary responsibility for the required remediation. The Company has completed
essentially all soil remediation with the New Jersey Department of
Environmental Protection approval, and have concluded a pilot test of
groundwater remediation system.
In 1994, the Company filed claim in U.S. District Court against the former
owner of the site and their lenders seeking contribution for site
investigation and site remedial costs. In 1997, the Company received $1.7
million from a former owner of the site and one of the lenders to the former
owner in final settlement of this litigation. In January 1997, we filed a cost
recovery action in U.S. District Court against several of our past insurers.
In November 1998, the Company settled these cases when the insurers paid the
Company approximately $3.8 million.
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, we 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 previous
unaffiliated occupants of the facility. In 1994, the Company filed a cost
recovery action in U.S. District Court to require these entities to complete
the remediation and reimburse the Company for 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 of the South
Brunswick and Oakville remediation, based on facts currently known, the
Company believes that the accruals recorded 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 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 in unlikely
to be material.
Note 14: Segment Information
In 1999, the Company adopted FAS 131 "Disclosures about Segments of an
Enterprise and Related Information". FAS 131 supercedes FAS 14 "Financial
Reporting Segments of a Business Enterprise". Under the new standard the
Company is required to use the "management" approach to reporting segments.
The management approach designates that the internal organization that is used
by management for making operating decisions and assessing performance as the
source of the Company's segments. The adoption of FAS 131 had no impact on the
Company's net income, balance sheet, or shareholders' equity.
The Company operates predominately in one industry segment, that being the
manufacture and marketing of conventional bedding. During 1999, 1998 and 1997
no one customer represented 10% or more of total net sales. Additionally,
during 1999, 1998 and 1997 sales outside the United States were less than 10%
of total sales. During 1999 and 1998 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.
45
<PAGE>
SEALY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 15: Gain/Loss on Net Assets Held for Sale and other Write-Downs
During 1998, the Company recorded a loss on certain manufacturing assets of
$8.4 million as a result of the Company's on-going strategy to improve
operational efficiencies. This loss resulted from the rationalization of
certain manufacturing processes and the write-down of other idled assets.
These assets were written-down to their fair values and production was phased-
out over the first two quarters of 1999. The estimated fair values of these
assets are not material. The Company disposed of a majority of these assets
during 1999. The Company plans to dispose of the remaining asset during the
first quarter of fiscal 2000.
During 1998, the Company also recorded a loss of $2.2 million for the write-
down of previously capitalized software development costs. Such costs were
originally capitalized as a result of the Company's on-going project to
upgrade its management information systems to improve manufacturing operations
and profitability analysis. As a result of a change in the direction of the
project, certain software modules for which costs of $2.2 million were
incurred will not be implemented.
On January 15, 1997, the Company completed the sale of Woodstuff
Manufacturing, Inc., a wholly owned subsidiary that manufactured and marketed
solid wood bedroom furniture under the "Samuel Lawrence" brand name. The
divestiture produced cash proceeds of $35.0 million and resulted in a book
loss of $17.6 million. The loss on sale of this subsidiary includes income tax
expense of $5.8 million arising from the tax gain on the transaction, as well
as transaction costs related to the sale
Note 16: Related Party Transactions
During 1999, the Company contributed $29.7 million in cash and other assets
to Mattress Holdings International LLC ("MHI"), a company controlled by the
Company's largest stockholder, Bain Capital, Inc. in exchange for a non-voting
interest in MHI. The investment in MHI was made to fund domestic and
international loans, advances, and investments in joint ventures, licensees,
retailers, and others in order to enhance business relationships and build
incremental sales. In addition, the Company has guaranteed the obligations of
MHI under investment documents governing MHI's investments and has indemnified
MHI with respect to such investments. For financial reporting purposes, the
financial statements of MHI have been consolidated into those of the Company.
In fiscal 1999, the Company had sales of $117.6 million of finished mattress
products pursuant to multi-year supply contracts to affiliated and related
parties of Bain Capital, Inc. The Company believes that the terms on which
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 17: Guarantor/Non-Guarantor Financial Information
As discussed in Note 4, the Parent and each of the Guarantor Subsidiaries
has fully and unconditionally guaranteed, on a joint and several basis, the
obligation to pay principal and interest with respect to the Notes.
Substantially all of the Issuer's operating income and cashflow is generated
by its subsidiaries. As a result, funds necessary to meet the Issuer's debt
service obligations are provided in part by distributions or advances from its
subsidiaries. Under certain circumstances, contractual and legal restrictions,
as well as the financial condition and operating requirements of the Issuer's
subsidiaries, could limit the Issuer's ability to obtain cash from its
subsidiaries for the purpose of meeting its debt service obligations,
including the payment of principal and interest on the Notes. Although holders
of the Notes will be direct creditors of the Issuer's principal direct
subsidiaries by virtue of the guarantees, the Issuer has subsidiaries ("Non-
Guarantor Subsidiaries") that are not included among the Guarantor
Subsidiaries, and such subsidiaries will not be obligated with respect to the
Notes.
46
<PAGE>
SEALY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 November 28, 1999 and
November 29, 1998, consolidating condensed statements of operations and
cash flows for each of the years in the three-year period ended November
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.
47
<PAGE>
SEALY CORPORATION
SUPPLEMENTAL CONSOLIDATING CONDENSED BALANCE SHEET
November 28, 1999
(in thousands)
<TABLE>
<CAPTION>
Consolidated
Sealy Combined Non-
Sealy Mattress Guarantor Guarantor
Corporation Company Subsidiaries Subsidiaries Eliminations Consolidated
----------- -------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash
equivalents............ $ -- $ 13 $ 6,220 $ 4,612 $ -- $ 10,845
Accounts receivable--
Non Affiliates, net.... 27 3,941 84,365 16,867 -- 105,200
Accounts receivable--
Affiliates, net........ -- -- 14,275 -- -- 14,275
Inventories............. -- 1,297 38,673 4,711 -- 44,681
Prepaid expenses and
other assets........... 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
--------- -------- --------- -------- -------- ---------
-- 3,013 126,172 8,916 -- 138,101
Other assets:
Goodwill and other
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' EQUITY
Current liabilities:
Current portion--long-
term obligations....... $ -- $ 13,854 $ 291 $ -- $ -- $ 14,145
Accounts payable........ -- 318 36,493 6,342 -- 43,153
Accrued incentives and
advertising............ -- 1,200 28,507 2,594 -- 32,301
Accrued compensation.... -- 417 21,464 1,110 -- 23,173
Other accrued expenses.. 534 984 36,309 1,006 -- 38,833
--------- -------- --------- -------- -------- ---------
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' equity.... (121,389) (93,863) 99,656 22,284 (28,077) (121,389)
--------- -------- --------- -------- -------- ---------
Total liabilities and
stockholders' equity... $ (80,061) $554,395 $ 286,126 $ 38,570 $(28,077) $ 770,953
========= ======== ========= ======== ======== =========
</TABLE>
48
<PAGE>
SEALY CORPORATION
SUPPLEMENTAL CONSOLIDATING CONDENSED BALANCE SHEET
November 29, 1998
(in thousands)
<TABLE>
<CAPTION>
Sealy Combined Combined
Sealy Mattress Guarantor Non-Guarantor
Corporation Company Subsidiaries Subsidiaries Eliminations Consolidated
----------- --------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash
equivalents............ $ -- $ 22 $ 9,162 $ 2,050 $ -- $ 11,234
Accounts receivable,
net.................... -- 3,404 92,644 10,713 -- 106,761
Inventories............. -- 1,216 38,123 4,388 -- 43,727
Prepaid expenses and
other assets........... 714 341 22,190 3,200 -- 26,445
--------- --------- --------- -------- ------ ---------
714 4,983 162,119 20,351 -- 188,167
Property, plant and
equipment, at cost..... -- 4,796 172,375 12,140 -- 189,311
Less accumulated
depreciation........... -- 1,730 49,189 2,583 -- 53,502
--------- --------- --------- -------- ------ ---------
-- 3,066 123,186 9,557 -- 135,809
Other assets:
Goodwill and other
intangibles, net....... -- 14,050 350,291 25,851 -- 390,192
Net investment in and
advances to (from)
subsidiaries and
affiliates............. (108,153) 493,268 (364,090) (26,614) 5,589 --
Debt issuance costs, net
and other assets....... -- 28,929 7,959 24 -- 36,912
--------- --------- --------- -------- ------ ---------
(108,153) 536,247 (5,840) (739) 5,589 427,104
--------- --------- --------- -------- ------ ---------
Total assets............ $(107,439) $ 544,296 $ 279,465 $ 29,169 $5,589 $ 751,080
========= ========= ========= ======== ====== =========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities:
Current portion--long-
term obligations....... $ -- $ 8,375 $ 201 $ -- $ -- $ 8,576
Accounts payable........ -- 93 41,067 4,934 -- 46,094
Accrued incentives and
advertising............ -- 1,626 28,685 2,140 -- 32,451
Accrued compensation.... -- 357 14,576 950 -- 15,883
Other accrued expenses.. 1,985 391 36,598 848 -- 39,822
--------- --------- --------- -------- ------ ---------
1,985 10,842 121,127 8,872 -- 142,826
Long-term obligations... 28,023 641,796 12,452 -- -- 682,271
Other noncurrent
liabilities............ 3,585 -- 32,484 -- -- 36,069
Deferred income taxes... (2,206) 755 26,467 3,724 -- 28,740
Stockholders' equity.... (138,826) (109,097) 86,935 16,573 5,589 (138,826)
--------- --------- --------- -------- ------ ---------
Total liabilities and
stockholders' equity... $(107,439) $ 544,296 $ 279,465 $ 29,169 $5,589 $ 751,080
========= ========= ========= ======== ====== =========
</TABLE>
49
<PAGE>
SEALY CORPORATION
SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENTS OF OPERATIONS
YEAR ENDED NOVEMBER 28, 1999
(in thousands)
<TABLE>
<CAPTION>
Combined
Sealy Combined Non-
Sealy Mattress Guarantor Guarantor
Corporation Company Subsidiaries Subsidiaries Eliminations Consolidated
----------- -------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net sales............... $ -- $ 39,454 $882,515 $78,387 $(14,649) $985,707
Costs and expenses:
Cost of goods sold..... -- 24,400 485,095 49,323 (14,649) 544,169
Selling, general and
administrative........ 184 11,000 294,728 18,700 -- 324,612
Stock based
compensation.......... 6,664 -- -- -- -- 6,664
Amortization of
intangibles........... -- 398 11,578 905 -- 12,881
Interest expense, net.. 3,648 60,730 1,166 (545) -- 64,999
Loss (income) from
equity investees...... (13,551) (12,721) -- -- 26,272 --
Loss (income) from
non-guarantor equity
investees............. -- (1,592) (2,735) -- 4,327 --
Capital charge and
intercompany interest
allocation............ (13,169) (56,332) 67,492 2,009 -- --
-------- -------- -------- ------- -------- --------
Income/(loss) before
income taxes........... 16,224 13,571 25,191 7,995 (30,599) 32,382
Income taxes............ 403 20 12,470 3,668 -- 16,561
-------- -------- -------- ------- -------- --------
Net income/(loss)....... $ 15,821 $ 13,551 $ 12,721 $ 4,327 $(30,599) $ 15,821
======== ======== ======== ======= ======== ========
</TABLE>
50
<PAGE>
SEALY CORPORATION
SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENTS OF OPERATIONS
YEAR ENDED NOVEMBER 29, 1998
(in thousands)
<TABLE>
<CAPTION>
Sealy Combined Combined
Sealy Mattress Guarantor Non-Guarantor
Corporation Company Subsidiaries Subsidiaries Eliminations Consolidated
----------- -------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net sales............... $ -- $ 42,472 $792,878 $73,265 $(17,313) $891,302
Costs and expenses:
Cost of goods sold..... -- 26,973 448,186 45,538 (17,197) 503,500
Selling, general and
administrative........ 717 13,434 265,859 20,346 -- 300,356
Loss on net assets held
for sale and other
write-downs........... -- 229 10,158 247 -- 10,634
Compensation associated
with recapitalization. 17,114 332 -- 1,440 -- 18,886
Amortization of
intangibles........... -- 411 11,684 934 -- 13,029
Interest expense, net.. 4,967 62,504 245 (265) -- 67,451
Loss (income) from
equity investees...... 3,136 1,894 -- -- (5,030) --
Loss (income) from non-
guarantor equity
investees............. -- (27) (2,417) -- 2,444 --
Capital charge and
intercompany interest
allocation............ (10,279) (59,656) 69,935 -- -- --
-------- -------- -------- ------- -------- --------
Income/(loss) before
income taxes,
extraordinary item and
cumulative effect of a
change in accounting
principle.............. (15,655) (3,622) (10,772) 5,025 2,470 (22,554)
Income taxes............ 3,581 (486) (8,878) 2,581 (116) (3,318)
-------- -------- -------- ------- -------- --------
Income/(loss) before
extraordinary item and
cumulative effect of
change in accounting
principle.............. (19,236) (3,136) (1,894) 2,444 2,586 (19,236)
Extraordinary item...... 14,537 -- -- -- -- 14,537
-------- -------- -------- ------- -------- --------
Net income/(loss)....... $(33,773) $ (3,136) $ (1,894) $ 2,444 $ 2,586 $(33,773)
======== ======== ======== ======= ======== ========
</TABLE>
51
<PAGE>
SEALY CORPORATION
SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENTS OF OPERATIONS
YEAR ENDED NOVEMBER 30, 1997
(in thousands)
<TABLE>
<CAPTION>
Combined
Sealy Combined Non-
Sealy Mattress Guarantor Guarantor
Corporation Company Subsidiaries Subsidiaries Eliminations Consolidated
----------- -------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net sales............... $ -- $37,973 $708,914 $75,042 $(17,095) $804,834
Costs and expenses:
Cost of goods sold..... -- 23,256 403,969 48,878 (17,014) 459,089
Selling, general and
administrative........ 1,336 11,464 228,693 17,346 -- 258,839
Stock based
compensation.......... -- -- 1,635 -- -- 1,635
Amortization of
intangibles........... -- 411 11,764 1,089 -- 13,264
Interest expense, net.. 32,114 -- (75) (643) -- 31,396
Loss (income) from
equity investees...... 8,969 8,258 -- -- (17,227) --
Income from non-
guarantor equity
investees............. -- 20 (4,104) -- 4,084 --
Capital charge and
intercompany interest
allocation............ (69,376) 3,689 64,821 866 -- --
-------- ------- -------- ------- -------- --------
Income/(loss) before
income taxes,
extraordinary item and
cumulative effect of a
change in accounting
principle.............. 26,957 (9,125) 2,211 7,506 13,062 40,611
Income taxes............ 13,103 (156) 6,140 3,422 -- 22,509
-------- ------- -------- ------- -------- --------
Income/(loss) before
extraordinary item and
cumulative effect of
change in accounting
principle.............. 13,854 (8,969) (3,929) 4,084 13,062 18,102
Extraordinary item...... 2,030 -- -- -- -- 2,030
Cumulative effect of a
change in accounting
principle.............. -- -- 4,329 -- -- 4,329
-------- ------- -------- ------- -------- --------
Net income/(loss)....... $ 11,824 $(8,969) $ (8,258) $ 4,084 $ 13,062 $ 11,743
======== ======= ======== ======= ======== ========
</TABLE>
52
<PAGE>
SEALY CORPORATION
SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENTS OF CASH FLOWS
YEAR ENDED NOVEMBER 28, 1999
(in thousands)
<TABLE>
<CAPTION>
Combined
Sealy Combined Non-
Sealy Mattress Guarantor Guarantor
Corporation Company Subsidiaries Subsidiaries Eliminations Consolidated
----------- -------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net cash provided by
(used in) operating
activities............. $ -- $ 543 $54,810 $ 650 $-- $56,003
---- ------- ------- ------- --- -------
Cash flows from
investing activities:
Purchase of property,
plant and equipment... -- (250) (15,795) (39) -- (16,084)
Proceeds from sale of
property, plant and
equipment............. -- -- 840 -- -- 840
Investment in
Affiliate............. -- -- -- (27,794) -- (27,794)
Net activity in
investment in and
advances to (from)
subsidiaries and
affiliates............ 68 14,573 (44,386) 29,745 -- --
---- ------- ------- ------- --- -------
Net proceeds provided
by (used in) investing
activities............ 68 14,323 (59,341) 1,912 -- (43,038)
Cash flows from
financing activities:
Treasury stock
repurchase............ (85) -- -- -- -- (85)
Proceeds (repayment) of
long-term obligations,
net................... -- (14,875) 1,589 -- -- (13,286)
Equity issuances....... 17 -- -- -- -- 17
---- ------- ------- ------- --- -------
Net cash provided by
(used in) financing
activities............. (68) (14,875) 1,589 -- -- (13,354)
---- ------- ------- ------- --- -------
Change in cash and cash
equivalents............ -- (9) (2,942) 2,562 -- (389)
Cash and cash
equivalents:
Beginning of period... -- 22 9,162 2,050 -- 11,234
---- ------- ------- ------- --- -------
End of period......... $ -- $ 13 $ 6,220 $ 4,612 $-- $10,845
==== ======= ======= ======= === =======
</TABLE>
53
<PAGE>
SEALY CORPORATION
SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENTS OF CASH FLOWS
YEAR ENDED NOVEMBER 29, 1998
(in thousands)
<TABLE>
<CAPTION>
Combined
Sealy Combined Non-
Sealy Mattress Guarantor Guarantor
Corporation Company Subsidiaries Subsidiaries Eliminations Consolidated
----------- --------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net cash provided by
(used in) operating
activities............. $ (478) $ (1,923) $ 56,210 $ (176) $(603) $ 53,030
--------- --------- -------- ------- ----- ---------
Cash flows from
investing activities:
Purchase of property,
plant and equipment... -- (203) (32,909) -- -- (33,112)
Proceeds from sale of
property, plant and
equipment............. -- -- 216 -- -- 216
Net activity in
investment in and
advances to (from)
subsidiaries and
affiliates............ 637,473 (607,445) (28,882) (1,749) 603 --
--------- --------- -------- ------- ----- ---------
Net proceeds provided
by (used in) investing
activities............ 637,473 (607,648) (61,575) (1,749) 603 (32,896)
Cash flows from
financing activities:
Treasury stock
repurchase............ (413,078) -- -- -- -- (413,078)
Proceeds (repayment) of
long-term obligations,
net................... (330,000) 642,122 12,653 -- -- 324,775
Equity issuances....... 121,444 -- -- -- -- 121,444
Costs associated with
tender offer of prior
debt.................. (15,361) -- -- -- -- (15,361)
Debt issuance costs.... -- (32,549) (188) -- -- (32,737)
--------- --------- -------- ------- ----- ---------
Net cash provided by
(used in) financing
activities............. (636,995) 609,573 12,465 -- -- (14,957)
--------- --------- -------- ------- ----- ---------
Change in cash and cash
equivalents............ -- 2 7,100 (1,925) -- 5,177
Cash and cash
equivalents:
Beginning of period... -- 20 2,062 3,975 -- 6,057
--------- --------- -------- ------- ----- ---------
End of period......... $ -- $ 22 $ 9,162 $ 2,050 $ -- $ 11,234
========= ========= ======== ======= ===== =========
</TABLE>
54
<PAGE>
SEALY CORPORATION
SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENTS OF CASH FLOWS
YEAR ENDED NOVEMBER 30, 1997
(in thousands)
<TABLE>
<CAPTION>
Combined
Sealy Combined Non-
Sealy Mattress Guarantor Guarantor
Corporation Company Subsidiaries Subsidiaries Eliminations Consolidated
----------- -------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net cash provided by
(used in) operating
activities............ $ 29,901 $(40,205) $ 7,532 $ 44,782 $ 39 $ 42,049
-------- -------- -------- -------- ---- --------
Cash flows from
investing activities:
Purchase of property,
plant and equipment.. -- (450) (27,109) (1,581) -- (29,140)
Proceeds from sale of
subsidiary........... -- 35,000 -- -- -- 35,000
Proceeds from sale of
property, plant and
equipment............ -- 5,150 410 1 -- 5,561
Net activity in
investment in and
advances to (from)
subsidiaries and
affiliates........... 34,131 471 18,111 (52,674) (39) --
-------- -------- -------- -------- ---- --------
Net proceeds provided
by (used in)
investing
activities.......... 34,131 40,171 (8,588) (54,254) (39) 11,421
Cash flows from
financing activities:
Repayment of long-term
obligations, net..... (63,127) -- -- -- -- (63,127)
Net borrowing--
revolving credit
facility............. 105,000 -- -- -- -- 105,000
Dividend.............. (99,775) -- -- -- -- (99,775)
Debt issuance costs... (6,130) -- -- -- -- (6,130)
-------- -------- -------- -------- ---- --------
Net cash provided by
(used in) financing
activities............ (64,032) -- -- -- -- (64,032)
-------- -------- -------- -------- ---- --------
Change in cash and cash
equivalents........... -- (34) (1,056) (9,472) -- (10,562)
Cash and cash
equivalents:
Beginning of period... -- 54 3,118 13,447 -- 16,619
-------- -------- -------- -------- ---- --------
End of period......... $ -- $ 20 $ 2,062 $ 3,975 $ -- $ 6,057
======== ======== ======== ======== ==== ========
</TABLE>
55
<PAGE>
Item 9. Changes in and Disagreements on Accounting and Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant Directors
The following sets forth the name, age, principal occupation and employment
and business experience during the last five years of each of the Company's
directors:
Josh Bekenstein. Mr. Bekenstein, age 41, is a Managing Director of Bain
Capital, Inc. ("Bain"). Mr. Bekenstein helped start Bain in 1984 and has been
involved in numerous venture capital and leveraged acquisitions since 1984.
Mr. Bekenstein presently serves on the Board of Directors of a number of
public and private companies, including Waters Corporation and Bright Horizons
Childrens Centers, Inc. Prior to Bain, Mr. Bekenstein was a consultant at Bain
& Company, where he worked on strategy consulting projects for a number of
Fortune 500 clients. He has been a director of the Company since December
1997.
Paul Edgerley. Mr. Edgerley, age 43, has been Managing Director of Bain
since 1993. From 1990 to 1993 he was a General Partner of Bain Venture
Capital, and from 1988 to 1990 he was a Principal of Bain Capital Partners. He
serves on the Board of Directors of Anthony Crane Rental, LP, GS Industries,
Inc. and AMF Group, Inc. He has been a director of the Company since December
1997.
Andrew S. Janower. Mr. Janower, age 31, since 1998 has been a Vice President
of Charlesbank Capital Partners LLC, since its formation in July, 1998.
Previously, he had been employed as an Associate by Harvard Private Capital
Group, Inc. Prior to joining Harvard Private Capital Group, Inc., Mr. Janower
was a Consultant at Bain & Company and a research associate at Harvard
Business School. He has been a director of the Company since December 1998.
James W. Johnston. Mr. Johnston, age 53, is President and Chief Executive
Officer of Stonemarker Enterprises, Inc., a consulting and investment company.
Mr. Johnston was Vice Chairman RJR Nabisco, Inc. from 1995 to 1996. He also
served as Chairman and CEO of R. J. Reynolds Tobacco Co. from 1989 to 1995,
Chairman of R. J. Reynolds Tobacco Co. from 1995 to 1996 and Chairman of R. J.
Reynolds Tobacco International from 1993 to 1996. Mr. Johnston served on the
board of RJR Nabisco, Inc. and RJR Nabisco Holdings Corp. from 1992 to 1996.
From 1984 until joining Reynolds, Mr. Johnston was Division Executive,
Northeast Division, of Citibank, N.A., a subsidiary of Citicorp, where he was
responsible for Citibank's New York Banking Division, its banking activities
in upstate New York, Maine and Mid-Atlantic regions, and its national student
loan business. He has been a director of the Company since March 1993.
Ronald L. Jones. Mr. Jones, age 57, has been our Chairman since March 1998
and our Chief Executive Officer and President since March 1996. From October,
1988 until joining the Company, Mr. Jones served as President of Masco Home
Furnishings. From 1983 to 1988, Mr. Jones was with HON Industries, most
recently serving as president. He has been a director of the Company since
March 1996.
Michael Krupka. Mr. Krupka, age 34, joined Bain in 1991 and became a
Managing Director in 1997. Prior to joining Bain, Mr. Krupka spent several
years as a consultant at Bain & Company where he focused on technology and
technology-related companies. In addition, he has served in several senior
operating roles at Bain portfolio companies. He serves on the Board of
Directors of Integrated Circuit Systems, Advanced Telecom, Inc. and Mattress
Discounters Corporation. He has been a director of the Company since December
1997.
56
<PAGE>
Executive Officers
The following sets forth the name, age, title and certain other information
with respect to the executive and certain other appointed officers of the
Company:
Bruce G. Barman. Dr. Barman, age 54, has been Corporate Vice President
Research and Development since joining the Company in March 1995. From 1991
until he joined the Company, Dr. Barman was Vice President--Research and
Development of Griffith Laboratories N.A., a custom food products producer.
Jeffrey C. Claypool. Mr. Claypool, age 52, has been Corporate Vice President
Human Resources since joining the Company in September 1991.
Gary T. Fazio. Mr. Fazio, age 49, has been Corporate Vice President and
General Manager Domestic Bedding Group since April 1998. Mr. Fazio joined us
as a General Manager in 1981. From 1987 to 1990, he was one of our Regional
Vice Presidents, and from 1990 to 1998 our Vice President Sales.
Douglas E. Fellmy. Mr. Fellmy, age 50, has been Corporate Vice President and
General Manager Domestic Bedding since April 1998. Mr. Fellmy joined the
Company in 1971 and served in numerous capacities with the Company's
Components Division and from 1990 to 1998 was our Vice President Operations.
James F. Goughenour. Mr. Goughenour, age 62, has been Corporate Vice
President Technology, Quality and Manufacturing Engineering since joining the
Company in July 1997. From 1979 until he joined the Company, Mr. Goughenour
had been with the HON Company, serving as Vice President.
David J. McIlquham. Mr. McIlquham, age 45, has been Corporate Vice President
Sales and Marketing since April 1998 and was our Corporate Vice President
Marketing from joining the Company in 1990 until 1998.
Lawrence J. Rogers. Mr. Rogers, age 51, has been Corporate Vice President
and General Manager International since February 1994. Since joining the
Company in 1979, Mr. Rogers has served in numerous other capacities within the
Company's operations, including President Sealy of Canada.
Richard F. Sowerby. Mr. Sowerby, age 45, has been Corporate Vice President
Finance since 1997. From joining the Company in 1995 until 1997 he was our
Vice President Controller. Previously, Mr. Sowerby served as Corporate
Controller of Elliott Company, a manufacturer and servicer of turbo machinery
equipment.
Kenneth L. Walker. Mr. Walker, age 51, has been Corporate Vice President,
General Counsel and Secretary since joining the Company in May 1997.
Previously, Mr. Walker served as Vice President, General Counsel and Secretary
of Varity Corporation, a manufacturer of automotive components, diesel engines
and farm machinery.
E. Lee Wyatt. Mr. Wyatt, age 47, has been Corporate Vice President
Administration and Chief Financial Officer since September 1999. From joining
the Company in October 1998 until September 1999, he was our Corporate Vice
President Administration. From 1983 until he joined the Company, Mr. Wyatt was
with Brown Group Inc., a wholesaler and retailer of footwear, in numerous
positions, most recently as Senior Vice President Finance and Administration
of its Brown Shoe Company subsidiary.
Compliance With Section 16(a) Of The Exchange Act
The Company is not aware of any person that is subject to Section 16 of the
Securities Exchange Act of 1934 (The "Exchange Act") with respect to the
Company, that has failed to file on a timely basis reports required by Section
16(a) of the Exchange Act during Fiscal 1999.
57
<PAGE>
Item 11. Executive Compensation
The following table sets forth information concerning the annual and long-
term compensation for services in all capacities to the Company for each of
the years ended November 28, 1999, November 29, 1998, and November 30, 1997,
of those persons who served as (i) the chief executive officer during Fiscal
1999, 1998, and 1997, and (ii) the other four most highly compensated
executive officers of the Company for Fiscal 1999 (collectively, the "Named
Executive Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
------------------------------ -------------------------------------------
Restricted Securities
Name and Principal Other Annual Stock Underlying All Other
Position Year Salary Bonus Compensation Award($) Options/SARS Compensation(a)
- ------------------ ---- -------- -------- ------------ ---------- ------------ ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Ronald L. Jones......... 1999 $611,666 $978,373 $72,562(b) -- -- $ 23,408
Chairman, Chief 1998 571,252 632,458 965,602(b) -- 99,070(c) 1,136,150
Executive Officer 1,971,630(c)
and President 1997 527,516 633,052 1,168 -- 75,000(d) 21,583
Gary T. Fazio........... 1999 241,913 169,317 21,313(b) -- -- 18,901
Corp. VP General Mgr. 1998 227,542 110,234 435,318(b) -- 8,365(c) 111,899
Domestic Bedding 180,000(c)
1997 203,833 182,289 248 203,978(e) 32,000(d) 16,524
Douglas E. Fellmy....... 1999 232,467 162,707 65,926(b) -- -- 18,106
Corp. VP General Mgr. 1998 219,067 106,129 336,785(b) -- 8,365(c) 111,267
Domestic Bedding 180,000(c)
1997 197,333 177,739 -- 203,978(e) 32,000(d) 16,016
David J. McIlquham...... 1999 237,188 166,010 48,509(b) -- -- 18,473
Corp. VP Sales and 1998 223,167 108,114 684,175(b) -- 180,000(c) 17,468
Marketing 1997 199,167 179,023 242 203,978(e) 32,000(d) 16,165
Lawrence J. Rogers...... 1999 221,250 144,518 1,357(b) -- -- 17,235
Corp. VP General Mgr. 1998 189,266 101,403 375,855(b) -- 8,365(c) 110,253
International 180,000(c)
1997 180,305 158,953 -- 203,978(e) 32,000(d) 14,271
</TABLE>
- --------
(a) Represents amounts paid on behalf of each of the Named Executive Officers
for the following four respective categories of compensation: (i) Company
premiums for life and accidental death and dismemberment insurance (ii)
Company premiums for long-term disability benefits, (iii) Company
contributions to the Company's defined contribution plans and (iv) in
fiscal 1998 deferred compensation agreements with respective officers.
Amounts for each of the Named Executive Officers for each of the four
respective preceding categories is as follows: Mr. Jones: (1999-$2,534,
$2,324, $18,550, $0;1998-$2,364, $1,049, $18,200, $1,114,537; 1997-$3,083,
$1,000, $17,500, $0); Mr. Fazio: (1999-$995, $912, $16,994, $0;1998-$883,
$983, $15,928, $94,105; 1997-$1,257, $999, $14,268, $0); Mr. McIlquham:
(1999-$976, $895, $16,602, $0;1998-$866, $980, $15,622, $0; 1997-$1,227,
$996, $13,942, $0); Mr. Fellmy: (1999-$957, $877, $16,272, $0;1998-$850,
$976, $15,336, $94,105; 1997-$1,216, $987, $13,813, $0); Mr. Rogers (1999-
$916, $841, $15,478, $0;1998-$368, $385, $15,395, $94,105; 1997-$622,
$1,027, $12,621, $0)
(b) Represents amounts paid on behalf of each of the Named Executive Officers
for the following seven respective categories of other annual
compensation: (i) transaction bonus associated with the Recapitalization,
(ii) vesting of restricted stock associated with the Recapitalization,
(iii) compensation associated with vested stock options paid out in
connection with the Recapitalization, (iv) compensation recorded
associated with the exercise of stock options, (v) relocation expenses
incurred, (vi) car and
58
<PAGE>
financial planning allowances paid on behalf of the Named executives and
(vii) special bonuses. Amounts for each of the Named Executive Officers for
each of the seven respective preceding categories is as follows: Mr. Jones:
(1999-$0, $0, $0, $0, $48,148, $24,414, $0; 1998-$385,000, $162,326, $0,
$334,361, $6,801, $67,139, $9,975); Mr. Fazio (1999-$0, $0, $0, $0,
$21,313, $0, $0;1998-$306,750, $0, $0, $28,232, $100,336, $0, $0); Mr.
Fellmy (1999-$0, $0, $0, $28,232, $37,694, $0, $0;1998-$297,000, $0, $0,
$0, $39,785, $0, $0); Mr. McIlquham (1999-$0, $0, $0, $0, $28,509, $0,
$0;1998-$300,000, $150,486, $225,983, $0, $7,706, $0, $0); Mr. Rogers
(1999-$0, $0, $0, $0, $1,357, $0, $0;1998-$254,115, $0, $0, $28,232,
$81,508, $0, $12,000).
(c) On December 18, 1997, the Company issued to certain of the named Executive
Officers, among others, ten-year fully vested non-qualified stock options
to acquire (i) shares of the Company's Class A Common Stock at the then
current fair market value of $0.50, with an exercise price of $0.125 per
share; and (ii) shares of the Company's Class L Common stock at the then
current fair market value of $40.50, with an exercise price of $10.125 per
share. In the December 1997, the indicated Named Executive Officers
received options for the following A and L shares: Mr. Jones 891,630 A
Shares and 99,070 L Shares; Mr. Fazio 75,285 A Shares and 8,365 L Shares;
Mr. Fellmy 75,285 A Shares and 8,365 L Shares; and Mr. Rogers 75,285 A
Shares and 8,365 L Shares. On March 17, 1998, pursuant to the 1998 Stock
Option Plan, the Company issued to the Named Executive Officers, among
others, ten-year non-qualified stock options to acquire shares of the
Company's Class A Common Stock at the then current fair market value
exercise price of $0.50 per share and also additional options to acquire
shares of Company's Class A Common Stock at an exercise price of $4.18 per
share. In March, 1998, the Named Executive Officers received the following
stock options: Mr. Jones 600,000 options at $0.50 and 480,000 options at
$4.18; Mr. Fazio 100,000 options at $0.50 and 80,000 options at $4.18; Mr.
McIlquham 100,000 options at $0.50 and 80,000 options at $4.18; Mr. Fellmy
100,000 options at $0.50 and 80,000 options at $4.18; and Mr. Rogers
100,000 options at $0.50 and 80,000 options at $4.18.
(d) On May 31, 1997, the Company issued ten-year non-qualified stock options
at an exercise price of $9.60, pursuant to the Company's 1997 Stock Option
Plan to the Named Executive Officers, among others, as follows: Ronald L.
Jones: 75,000 shares; Gary T. Fazio: 32,000 shares; David J. McIlquham:
32,000 shares; Douglas Fellmy: 32,000 shares; and Lawrence J. Rogers:
32,000 shares. As of November 29, 1998, none of these stock options
remained outstanding.
(e) Such amount reflects the Company's determination of the fair value at the
date of grant of restricted stock issued, on January 6, 1997, pursuant to
the Company's 1996 Transitional Restricted Stock Plan to, among others,
certain Named Executive Officers as follows: Gary T. Fazio: 15,800 shares;
David J. McIlquham: 15,800 shares; Douglas Fellmy: 15,800 shares; and
Lawrence J. Rogers: 15,800 shares. On December 16, 1997 Mrssrs Fazio,
Fellmy, and Rogers waived all of their right to such restricted stock. On
December 18, 1997, as part of the Refinancing of the Company, Mr.
McIlquham's restricted shares vested and he received the Merger Price of
approximately $14.30 per share for each restricted share for a total of
$225,900. As of November 29, 1998, none of these shares of restricted
stock remained outstanding.
59
<PAGE>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
During fiscal 1999, no stock options or stock appreciation rights were
granted to the Chief Executive Officer or the four most highly compensated
executives.
AGGREGATED OPTION/SAR EXERCISED IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
Number Of Securities Value Of Unexercised
Shares Underlying Unexercised In-the- money Options/sars At FY-
Acquired On Value Options/sars At FY-End (#) End ($)
Name Exercise (#) Realized Exercisable/unexercisable (a) Exercisable/unexercisable (b) (c)
---- ------------ -------- ----------------------------- ---------------------------------
<S> <C> <C> <C> <C>
Ronald L. Jones........ -- -- 99,070/1,080,000 $4,444,776/4,152,000
Chairman, Chief
Executive
Officer and President
Gary T. Fazio.......... -- -- 8,365/180,000 $ 375,296/692,000
VP General Mgr.
Domestic Bedding
Douglas E. Fellmy...... 75,285 28,232 8,365/180,000 $ 375,296/692,000
VP General Mgr.
Domestic Bedding
David J. McIlquham..... -- -- --/180,000 --/692,000
VP of Sales and
Marketing
Lawrence J. Rogers..... -- -- 8,365/180,000 $ 375,296/692,000
VP General Mgr. of
International Ops.
</TABLE>
- --------
(a) Includes options exercisable within 60 days after November 28, 1999.
(b) Options are in-the-money if the fair market value of the Common Stock
exceeds the exercise price.
(c) Represents the total gain which would be realized if all in-the-money
options beneficially held at November 28, 1999 were exercised, determined
by multiplying the number of Shares underlying the options by the
difference between the per share option exercise price and the estimated
fair market value as of November 28, 1999.
Compensation Pursuant To Plans And Other Arrangements
Severance Benefit Plans. Effective December 1, 1992, the Company established
the Sealy Executive Severance Benefit Plan (the "Executive Severance Plan")
for employees in certain salary grades. Benefit eligibility includes, with
certain exceptions, termination as a result of a permanent reduction in work
force or the closing of a plant or other facility, termination for inadequate
job performance, termination of employment by the participant following a
reduction in base compensation, reduction in salary grade which would result
in the reduction in potential plan benefits or involuntary transfer to another
location. Benefits include cash severance payments calculated using various
multipliers varying by salary grade, subject to specified minimums and
maximums depending on such salary grades. Such cash severance payments are
made in equal semi-monthly installments calculated in accordance with the
Executive Severance Plan until paid in full. Certain executive-level officers
would be entitled to a minimum of one-year's salary and a maximum of two-
year's salary under the Executive Severance Plan. However, if a Participant
becomes employed prior to completion of the payment of benefits, such semi-
monthly installments shall be reduced by the Participant's base compensation
for the corresponding period from the Participant's new employer. Participants
receiving cash severance payments under the Executive Severance Plan also
would receive six months of contributory health and dental coverage and six
months of group term life insurance coverage.
60
<PAGE>
The Company currently follows the terminal accrual approach to accounting
for severance benefits under the Executive Severance Plan and records the
estimated cost of these benefits as expense at the date of the event giving
rise to payment of the benefits.
Executive Employment Agreements. Ronald Jones has entered into an employment
agreement with Parent providing for his employment as Chief Executive Officer
and President. The agreement has an initial term of three years and a
perpetual two-year term thereafter. The agreement currently provides for an
annual base salary of U.S. $530,000, subject to annual increase by Parent's
Board of Directors, plus a performance bonus and grants Mr. Jones the right to
require Parent to repurchase certain securities of Parent held by Mr. Jones.
In addition, nine employees of the Company, including Gary T. Fazio, Douglas
Fellmy, Lawrence J. Rogers, and David J. McIlquham, have entered into
employment agreements that provide, among other things, for an initial
employment term of two years and a perpetual one-year employment term
thereafter, during which such employees will received base salary
(respectively of at least U.S. $204,500, U.S. $198,000, U.S. $200,000, and
U.S. $200,000) and a performance bonus between zero and seventy percent of
their base salary and substantially the same benefits as they received as of
the date of such agreements. For the fiscal year ending November 28, 1999, the
compensation committee of the Company's Board of Directors determined that the
bonuses to be paid pursuant to those employment agreements were to be based
75% on the Company's achievement of an Adjusted EBITDA target and 25% on the
Company's achievement of a Return on Net Tangible Assets target. Each such
target represented an improvement over the Company's prior year performance.
Deferred Compensation Agreements. On December 18, 1997, Mr. Jones entered
into a deferred compensation agreement with Parent pursuant to which Mr. Jones
elected to defer $1,114,538 of compensation until either December 18, 2007 or,
in certain instances, such earlier date as provided in such deferred
compensation agreement. In addition, on December 18, 1997, six employees,
including Gary T. Fazio, Douglas Fellmy, and Lawrence J. Rogers, entered into
deferred compensation agreements with Parent pursuant to which such employees
elected to defer an aggregate $522,518 of compensation, in each case, until
either December 18, 2007 or, in certain instances, such earlier date as
provided in such deferred compensation agreements.
Severance Benefit Plans. In addition, certain executives and other employees
are eligible for benefits under our severance benefit plans and certain other
agreements, which provide for cash severance payments equal to their base
salary and, in some instances, bonuses (from periods ranging from two weeks to
two years) and for the continuation of certain benefits.
Management Incentive Plan. The Company provides performance-based
compensation awards to executive officers and key employees for achievement
each year as part of a bonus plan. Such compensation awards are a function of
individual performance and corporate results. The qualitative and quantitative
criteria will be determined from time to time by Parent's Board of Directors
and currently include such factors as EBITDA, return on net assets and return
on selected Company investments.
Management Equity Participation in the Transactions. In connection with the
Transactions, in order to provide financial incentives for certain of the
Company's employees, the Management Investors acquired common stock of Parent
and/or fully vested options to acquire common stock of Parent in exchange for
either (i) cash or (ii) preferred stock and/or options held by such Management
Investors prior to the Merger. Upon a Management Investor's termination of
employment with the Company, the exercise period of such options held by such
Management Investor will be reduced to a period ending no later than six
months after such Management Investor's termination. If such termination
occurs prior to a qualified initial public offering of Parent's common stock,
then Parent shall have the right to repurchase the common stock of Parent held
by such Management Investor and only if the Management Investor is terminated
without "cause" (as defined in his employment agreement), such Managements
Investor shall have the right to require Parent to repurchase the common stock
of Parent held by such Management Investor.
61
<PAGE>
Sealy Corporation 1998 Stock Option Plan. In order to provide additional
financial incentives for certain of the Company's employees, subsequent to the
consummation of the December 18, 1997 transaction the Management Investors and
certain other employees of the Company were granted and are expected to
periodically be granted options to purchase additional common stock of Parent
pursuant to the Sealy Corporation 1998 Stock Option Plan. Such options vest
and become exercisable upon (i) certain threshold dates or (ii) a change of
control or sale of Parent. Upon an employee's termination of employment with
the Company, all of such employee's unvested options will expire, the exercise
period of all such employee's vested options will be reduced to a period
ending no later than six months after such employee's termination, and if such
termination occurs prior to a qualified initial public offering of the
Parent's common stock, then Parent shall have the right to repurchase the
common stock of Parent held by such employee.
Remuneration of Directors. The Company reimburses all directors for any out-
of-pocket expenses incurred by them in connection with services provided in
such capacity. Mr. Johnston receives an annual retainer of $30,000, reduced by
$1,000 for each Board meeting not attended, plus $1,000 ($1,250 if he is
Committee Chairman) for each Board of Directors committee meeting attended if
such meeting is on a date other than a Board meeting date.
Item 12. Security Ownership of Certain Beneficial Owners and Management
As of February 14, 2000, the outstanding capital stock of the Company
consists of 16,517,463 shares of Class A common stock, par value $0.01 per
share ("Class A common"), 11,934,900 shares of Class B Common stock, par value
$0.01 per share ("Class B Common"), 1,483,591 shares of Class L common stock,
par value $0.01 per share ("Class L Common"), and 1,548,997 shares of Class M
common stock, par value $0.01 per share ("Class M Common" and collectively
with the Class A Common, Class B Common and Class L Common, "Common Stock").
The shares of Class A Common and Class L Common each entitle the holder
thereof to one vote per share on all matters to be voted upon by the
stockholders of the Company, including the election of directors, and are
otherwise identical, except that the shares of Class L Common are entitled to
a preference over Class A Common with respect to any distribution by the
Company to holders of its capital stock equal to the original cost of such
share ($40.50) plus an amount which accrues on a daily basis at a rate of 10%
per annum, compounded annually. Class B Common and Class M Common are
otherwise identical, except that the shares of Class M Common are entitled to
a preference over Class B Common with respect to any distribution by the
Company to holders of its capital stock equal to the original cost of such
share ($40.50) plus an amount which accrues on a daily basis at a rate of 10%
per annum, compounded annually. The Class B Common is identical to the Class A
Common and the Class M Common is identical to the Class L Common except that
the Class B Common and the Class M Common are nonvoting. The Class B Common
and the Class M Common are convertible into Class A Common and Class L Common,
respectively, automatically upon consummation of an initial public offering by
the Company. The Board of Directors of the Company is authorized to issue
preferred stock, par value $0.01 per share, with such designations and other
terms as may be stated in the resolutions providing for the issue of any such
preferred stock adopted from time to time by the Board of Directors.
62
<PAGE>
The following table sets forth certain information regarding the beneficial
ownership of each class of common stock held by each person (other than
directors and executive officers of the company) known to the Company to own
more than 5% of the outstanding voting common stock of the Company. To the
knowledge of the Company, each of such stockholders has sole voting and
investment power as to the shares shown unless otherwise noted. Beneficial
ownership of the securities listed in the table has been determined in
accordance with the applicable rules and regulations promulgated under the
Exchange Act.
<TABLE>
<CAPTION>
Shares Beneficially Owed
------------------------
Class A Common Class B Common Class L Common Class M Common
-------------------- -------------------- ------------------ ------------------
Number Percentage Number Percentage Number Percentage Number Percentage
Shares of Class Shares of Class Shares of Class Shares of Class
--------- ---------- --------- ---------- ------- ---------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Principal Stockholders:
Bain Funds(1)(2)........ 7,996,104 48.4% 3,184,215 26.7% 718,206 48.4% 524,051 33.8%
c/o Bain Capital, Inc.
Two Copley Place
Boston, MA 02116
Harvard Private Capital
Holdings, Inc.......... 4,444,446 26.9% -- -- 493,827 33.3% -- --
c/o Harvard Management
Company, Inc.
600 Atlantic Avenue
Boston, MA 02210
Sealy Investors 1,
LLC(2)................. 824,221 5.0% 5,909,788 49.5% 74,031 5.0 674,192 43.5%
c/o Bain Capital, Inc.
Two Copley Place
Boston, MA 02116
Sealy Investors 2,
LLC(2)................. 824,221 5.0% 2,542,783 21.3% 74,031 5.0 300,081 19.4%
c/o Bain Capital, Inc.
Two Copley Place
Boston, MA 02116
Sealy Investors 3,
LLC(2)................. 824,221 5.0% 298,114 2.5% 74,031 5.0 50,673 3.3%
c/o Bain Capital, Inc.
Two Copley Place
Boston, MA 02116
</TABLE>
- --------
(1) Amounts shown reflect the aggregate number of shares of Class A Common and
Class L Common held by Bain Capital Fund V, L.P. ("Fund V"), Bain
CapitalFund V-B, L.P., BCIP Trust Associates, L.P. ("BCIP Trust") and BCIP
Associates ("BCIP") (collectively, the "Bain Funds"), for the Bain Funds
and Messrs. Bekenstein, Edgerley and Krupka.
(2) The members of Sealy Investors 1, LLC ("SI1") are Chase Equity Associates,
L.P. and Bain Capital Partners V, L.P. ("BCPV"). The members of Sealy
Investors 2, LLC ("SI2") are CIBC WG Argosy Merchant Fund 2, L.L.C. and
BCPV. The members of Sealy Investors 3, LLC ("SI3" and, collectively with
SI1 and SI2, the "LLCs") are BancBoston Investments, Inc. and BCPV. BCPV
is the administrative member of each LLC and beneficially owns 1% of the
equity of each LLC. Accordingly, BCPV may be deemed to beneficially own
certain shares owned by the LLCs, although BCPV disclaims such beneficial
ownership.
63
<PAGE>
The following table sets forth certain information regarding the beneficial
ownership of each class of common stock held by each director of the Company,
each Named Executive Officer, the Management Investors, and the Company's
directors and executive officers as group. To the knowledge of the Company,
each of such stockholders has sole voting and investment power as to the
shares shown unless otherwise noted. Beneficial ownership of the securities
listed in the table has been determined in accordance with the applicable
rules and regulations promulgated under the Exchange Act.
<TABLE>
<CAPTION>
Shares Beneficially Owned
------------------------------------------------------------------------------
Class A Common Class B Common Class L Common Class M Common
--------------------- ----------------- -------------------- -----------------
Number Percentage Number Percentage Number Percentage Number Percentage
Shares of Class Shares of Class Shares of Class Shares of Class
---------- ---------- ------ ---------- --------- ---------- ------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Directors & Executive
Officers:
Josh Bekenstein(1)(2)... 7,996,104 48.4% -- -- 718,206 48.4% -- --
c/o Bain Capital, Inc.
Two Copley Place
Boston, MA 02116
Paul Edgerley(1)(2)..... 7,996,104 48.4% -- -- 718,206 48.4% -- --
c/o Bain Capital, Inc.
Two Copley Place
Boston, MA 02116
Michael Krupka(1)(2).... 7,996,104 48.4% -- -- 718,206 48.4% -- --
c/o Bain Capital, Inc.
Two Copley Place
Boston, MA 02116
Andrew S. Janower(3).... 4,444,446 26.9% -- -- 493,827 33.3% -- --
c/o Charlesbank Capital
Partners LLC
600 Atlantic Avenue
Boston, MA 02210
Ronald L. Jones(4)...... 1,041,032 6.3% -- -- 115,670 7.3% -- --
c/o Sealy Corporation
1228 One Office
Parkway,
Trinity, NC 27230
Gary T. Fazio(5)........ 83,646 * -- -- 9,294 * -- --
c/o Sealy Corporation
1228 One Office Parkway
Trinity, NC 27230
Douglas E. Fellmy(5).... 83,646 * -- -- 9,294 * -- --
c/o Sealy Corporation
1228 One Office Parkway
Trinity, NC 27230
David J. McIlquham(5)... 50,355 * -- -- 5,595 * -- --
c/o Sealy Corporation
One Office Parkway,
1228 Trinity, NC 27230
Lawrence J. Rogers(5)... 83,646 * -- -- 9,294 * -- --
c/o Sealy Corporation
1228 One Office Parkway
Trinity, NC 27230
Management investors(6)
as a group (11
persons)............... 1,643,708 9.9% -- -- 182,634 11.2% -- --
All directors and
executive officers as a
group (15 persons)..... 14,084,258 84.5% -- -- 1,394,667 85.6% -- --
</TABLE>
- --------
* Less than one percent
(1) Amounts shown reflect the aggregate number of shares of Class A Common and
Class L Common held by Bain Capital Fund V, L.P. ("Fund V"), Bain
CapitalFund V-B, L.P., BCIP Trust Associates, L.P. ("BCIP
64
<PAGE>
Trust") and BCIP Associates ("BCIP") (collectively, the "Bain Funds"), for
the Bain Funds and Messrs. Bekenstein, Edgerley and Krupka.
(2) Messrs. Bekenstein, Edgerley and Krupka are each Managing Directors of
Bain Capital Investors V., Inc., the sole general partner of BCPV, and are
limited partners of BCPV, the sole general partner of Fund V and Fund V-B.
Accordingly, Messrs. Bekenstein, Edgerley and Krupka may be deemed to
beneficially own shares owned by Fund V and Fund V-B. In addition, Messrs.
Bekenstein, Edgerley and Krupka are each general partners of BCIP and BCIP
Trust and, accordingly, may be deemed to beneficially own shares owned by
such funds. Each such person disclaims beneficial ownership of any such
shares in which he does not have a pecuniary interest.
(3) Mr. Janower is a Vice President of Charlesbank Capital Partners LLC, an
affiliate of Harvard Private Capital Holdings, Inc. ("Harvard").
Accordingly, Mr. Janower may be deemed to beneficially own shares owned by
Harvard. Mr. Janower disclaims beneficial ownership of any such shares in
which he does not have a pecuniary interest.
(4) Includes 99,070 shares of Class L Common issuable upon exercise of
outstanding and currently exercisable options.
(5) Amounts shown reflect shares issuable upon exercise of outstanding and
currently exercisable options.
(6) The Management Investors consists of Messrs. Jones, Fazio, Fellmy,
McIlquham, and Rogers and Bruce Barman, Jeffrey C. Claypool, James F.
Goughenour, Richard F. Sowerby, Kenneth L. Walker, and E. Lee Wyatt.
Includes 150,570 shares of Class A Common and 145,516 shares of Class L
Common issuable upon exercise of currently exercisable options.
Item 13. Certain Relationships And Related Transactions
Compensation Committee Interlocks And Insider Participation
The Compensation Committee of the Company's Board of Directors currently
consists of Messrs. Johnston, Bekenstein and Krupka. From March 17, 1998,
through December 9, 1998, the Compensation Committee of the Company's Board of
Directors consisted of Messrs. Johnston, Bekenstein and former director John
Sallay.
Stockholders Agreement. In December 1997, the Company and certain of its
stockholders, including the Bain Funds, Harvard, the LLCs and Zell
(collectively, the "Stockholders") entered into a stockholders agreement (the
"Stockholders Agreement"). The Stockholders Agreement: (i) requires that each
of the parties thereto vote all of its voting securities of the Company to be
established at seven members and to cause three designees of the Bain Funds
and one designee of Harvard to be elected to the Board of Directors; (ii)
grants the Company and the Bain Funds a right of first offer on any proposed
transfer of shares of capital stock of the Company held by Zell, Harvard or
the LLCs; (iii) grants Harvard a right of first offer on any proposed transfer
of shares of capital stock of the Company held by the Bain Funds; (iv) grants
tag-along rights (rights to participate on a pro rata basis in sales of stock
by other shareholders) on certain transfers of shares of capital stock of the
Company; (v) requires the Stockholders to consent to a sale of the Company to
an independent third party if such sale is approved by holders constituting a
majority of the then outstanding shares of voting common stock of the Company
and (vi) except in certain instances, prohibits Zell from transferring any
shares of capital stock of the Company until the tenth anniversary of the date
of the consummation of the Transactions. Certain of the foregoing provision of
the Stockholders Agreement will terminate upon the consummation of an initial
Public Offering or an Approved Sale (as each is defined in the Stockholders
Agreement). Certain of the Stockholders, including Bain, received one-time
transaction fees aggregating $8.9 million upon consummation of the
Transactions.
Management Services Agreement. In December 1997, the Company entered into a
Management Services Agreement with Bain pursuant to which Bain has agreed to
provide: (i) general management services; (ii) identification, support,
negotiation and analysis of acquisitions and dispositions; (iii) support,
negotiation and analysis of financial alternatives; and (iv) other services
agreed upon by the Company and Bain. In exchange for such services, Bain will
receive: (i) an annual management fee of $2.0 million, plus reasonable out-of-
pocket
65
<PAGE>
expenses (payable quarterly); and (ii) a transaction fee in an amount equal to
1.0% of the aggregate transaction value in connection with the consummation of
any additional acquisition or divestiture by the Company and of each financing
or refinancing. The Management Services Agreement has an initial term of five
years, subject to automatic one-year extensions unless the Company or Bain
provides written notice of termination.
Registration Rights Agreement. In December 1997, the Company and certain of
its stockholders, including the Bain Funds, Harvard, the LLCs and Zell entered
into a registration rights agreement (the "Registration Rights Agreement").
Under the Registration Rights Agreement, the holders of a majority of the
Registrable Securities (as defined in the Registration Rights Agreement) owned
by the Bain Funds have the right, subject to certain conditions, to require
the Company to register any or all of their shares of common stock of the
Company under the Securities Act at the Company's expense. In addition, all
holders of Registrable Securities are entitled to request the inclusion of any
share of common stock of the Company subject to the Registration Rights
Agreement in any registration statement at the Company's expense whenever the
Company proposes to register any of its common stock under the Securities Act.
In connection with all such registrations, the Company has agreed to indemnify
all holders of Registrable Securities against certain liabilities, including
liabilities under the Securities Act.
66
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) 1. Financial Statements
Sealy Corporation
Report of Independent Accountants (PricewaterhouseCoopers LLP) and
Report of Independent Auditors (KPMG LLP)
Consolidated Balance Sheets at November 28, 1999 and November 29, 1998
Consolidated Statements of Operations for the years ended November 28,
1999, November 29, 1998 and, November 30, 1997.
Consolidated Statements of Stockholders' Equity for the years ended
November 28, 1999, November 29, 1998 and, November 30, 1997.
Consolidated Statements of Cash Flows for the years ended November 28,
1999, November 29, 1998 and, November 30, 1997
Notes to Consolidated Financial Statements
2. Financial Statement Schedules
All schedules have been omitted because they are not applicable or are
not required or because the required information is included in the
consolidated financial statements or notes thereto.
3. Exhibits
The exhibits listed in the accompanying Exhibit Index are filed as a
part of this Report.
(b) 1. Reports on Form 8-K Filed During the Last Quarter
None
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Description
------- -------------------
<C> <S>
2.1 Agreement and Plan of Merger, dated as of October 30, 1997, by and
among the Registrant, Sandman Merger Corporation and Zell/Chilmark
Fund, L.P. (Incorporated herein by reference to the appropriate
exhibit to the Form 8-K filed December 30, 1997 (File No. 1-8738)).
2.2 First Amendment to the Agreement and Plan of Merger, dated as of
December 18, 1997, by and among the Registrant, Sandman Merger
Corporation and Zell/Chilmark Fund, L.P. (Incorporated herein by
reference to the appropriate exhibit to the Form 8-K filed December
30, 1997 (File No. 1-8738)).
3.1 Restated Certificate of Incorporation of Sealy Corporation dated as of
November 5, 1991. (Incorporated herein by reference to the appropriate
exhibit to Sealy Corporation's Annual Report on Form 10-K for the
fiscal year ended November 30, 1991 (File No. 1-8738)).
3.2 By-Laws of Sealy Corporation adopted as of November 4, 1991.
(Incorporated herein by reference to the appropriate exhibit to Sealy
Corporation's Annual Report on Form 10-K for the fiscal year ended
November 30, 1991 (File No. 1-8738)).
4.1 Indenture, dated as of December 18, 1997, by and among Sealy Mattress
Company, the Guarantors named therein and The Bank of New York, as
trustee, with respect to the Series A and Series B 9 7/8% Senior
Subordinated Notes due 2007. (Incorporated herein by reference,
Exhibit 4.1, to the Form 8-K filed December 30, 1997 (File No. 1-
8738)).
</TABLE>
67
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Description
------- -------------------
<C> <S>
4.2 Indenture, dated as of December 18, 1997, by and among Sealy Mattress
Company, the Guarantors named therein and The Bank of New York, as
trustee, with respect to the Series A and Series B 10 7/8% Senior
Subordinated Discount Notes due 2007. (Incorporated herein by
reference, Exhibit 4.2, to the Form 8-K filed December 30, 1997 (File
No. 1-8738)).
4.3 Second Supplemental Indenture, dated as of December 5, 1997, by and
between the Registrant and The Bank of New York, as trustee.
(Incorporated herein by reference, Exhibit 4.3, to the Form 8-K filed
December 30, 1997 (File No. 1-8738)).
*10.1 Sealy Profit Sharing Plan, Amended and Restated Date: December 1,
1989. (Incorporated herein by reference to the appropriate exhibit to
the Form 10-K for the fiscal year ended November 30, 1995 (File No. 1-
8738)).
*10.2 Sealy Corporation Bonus Program. (Incorporated herein by reference to
the appropriate exhibit to the Form 10-K for the fiscal year ended
November 30, 1995 (File No. 1-8738)).
*10.3 Amendment No. 1 to Sealy Bonus Plan. (Incorporated herein by reference
to the appropriate exhibit to Sealy Corporation's Annual Report on
Form 10-K for the fiscal year ended December 1, 1996 (File No. 1-
8738)).
*10.4 Amendment No. 1 to Sealy Profit Sharing Plan. (Incorporated herein by
reference to the appropriate exhibit to Sealy Corporation's Annual
Report on Form 10-K for the fiscal year ended December 1, 1996 (File
No. 1-8738)).
*10.5 Amendment No. 2 to Sealy Profit Sharing Plan. (Incorporated herein by
reference to the appropriate exhibit to Sealy Corporation's Annual
Report on Form 10-K for the fiscal year ended December 1, 1996 (File
No. 1-8738)).
*10.6 Stock Option Agreement dated March 4, 1996 by and between Sealy
Corporation and Ronald L. Jones. (Incorporated herein by reference to
the appropriate exhibit to Sealy Corporation's Annual Report on Form
10-K for the fiscal year ended December 1, 1996 (File No. 1-8738)).
*10.7 Stockholder Agreement dated March 4, 1996 by and among Sealy
Corporation and Ronald L. Jones. (Incorporated herein by reference to
the appropriate exhibit to Sealy Corporation's Annual Report on Form
10-K for the fiscal year ended December 1, 1996 (File No. 1-8738)).
*10.8 Restricted Stock Agreement dated March 4, 1996 by and between Sealy
Corporation and Ronald L. Jones. (Incorporated herein by reference to
the appropriate exhibit to Sealy Corporation's Annual Report on Form
10-K for the fiscal year ended December 1, 1996 (File No. 1-8738)).
10.9 Purchase Agreement, dated as of December 11, 1997, by and among Sealy
Mattress Company, the Guarantors named therein, Goldman, Sachs & Co.
(Incorporated herein by reference, Exhibit 10.2, to the Form 8-K filed
December 30, 1997 (File No. 1-8738)).
10.10 Credit Agreement, dated as of December 18, 1997, among Sealy Mattress
Company, the Guarantors named therein, Goldman Sachs Credit Partners
L.P., as arranger and syndication agent, Morgan Guaranty Trust Company
of New York, as administrative agent, Bankers Trust Company, as
Documentation agent, and the other institutions named therein.
(Incorporated herein by reference, Exhibit 10.4, to the Form 8-K filed
December 30, 1997 (File No. 1-8738)).
10.11 AXEL Credit Agreement, dated as of December 18, 1997, among Sealy
Mattress Company, the Guarantors named therein, Goldman Sachs Credit
Partners L.P., as arranger and syndication agent, Morgan Guaranty
Trust Company of New York, as administrative agent, Bankers Trust
Company, as documentation agent and the other institutions named
therein. (Incorporated herein by reference, Exhibit 10.5, to the Form
8-K filed December 30, 1997 (File No. 1-8738)).
</TABLE>
68
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Description
------- -------------------
<C> <S>
*10.12 Amended and Restated Employment Agreement, dated as of August 1, 1997,
by and between Sealy Corporation and Ronald L. Jones. (Incorporated
herein by reference, Exhibit 10.6, to the Form 8-K filed December 30,
1997 (File No. 1-8738)).
*10.13 Employment Agreement, dated as of August 25, 1997, by and between
Sealy Corporation and Bruce G. Barman. (Incorporated herein by
reference, Exhibit 10.7, to the Form 8-K filed December 30, 1997 (File
No. 1-8738)).
*10.14 Employment Agreement, dated as of August 25, 1997, by and between
Sealy Corporation and Jeffrey C. Claypool. (Incorporated herein by
reference, Exhibit 10.8, to the Form 8-K filed December 30, 1997 (File
No. 1-8738)).
*10.15 Employment Agreement, dated as of August 25, 1997, by and between
Sealy Corporation and Gary T. Fazio. (Incorporated herein by
reference, Exhibit 10.9, to the Form 8-K filed December 30, 1997 (File
No. 1-8738)).
*10.16 Employment Agreement, dated as of August 25, 1997, by and between
Sealy Corporation and Douglas E. Fellmy. (Incorporated herein by
reference, Exhibit 10.10, to the Form 8-K filed December 30, 1997
(File No. 1-8738)).
*10.17 Employment Agreement dated as of August 25, 1997, by and between Sealy
Corporation and David J. McIlquham. (Incorporated herein by reference,
Exhibit 10.11, to the Form 8-K filed December 30, 1997 (File No. 1-
8738)).
*10.18 Employment Agreement, dated as of August 25, 1997, by and between
Sealy Corporation and Lawrence J. Rogers. (Incorporated herein by
reference, Exhibit 10.12, to the Form 8-K filed December 30, 1997
(File No. 1-8738)).
*10.19 Amendment to Amended and Restated Employment Agreement and Termination
of Stockholders Agreement dated as of December 17, 1997, between
Ronald L. Jones and the Registrant. (Incorporated herein by reference,
Exhibit 10.18, to the Form 8-K filed December 30, 1997 (File No. 1-
8738)).
*10.20 Amendment to Employment Agreements, dated as of December 17, 1997,
between the employees named therein and the Registrant. (Incorporated
herein by reference, Exhibit 10.19, to the Form 8-K filed December 30,
1997 (File No. 1-8738)).
10.21 Change in Registrants Certified Accountant, dated March 23, 1998 (File
No. 1-8738).
10.22 Stockholders Agreement dated as of December 18, 1997 by and among
Sealy Corporation and the Stockholders named therein. (Incorporated
herein by reference to Exhibit 10.27 to Sealy Mattress Company's--Form
S-4 Registration Statement filed May 5, 1998 (File No. 1-8738)).
10.23 Registration Rights Agreement dated as of December 18, 1997 by and
among Sealy Corporation and the Stockholders named therein.
(Incorporated herein by reference to Exhibit 10. To Sealy Mattress
Company's Form S-4 Registration Statement filed May 5, 1998 (File No.
1-8738)).
10.24 Management Services Agreement dated as of December 18, 1997 by and
between Sealy Corporation, Sealy Mattress and Bain Capital, Inc.
(Incorporated herein by reference to Exhibit 10.50 to Sealy Mattress
Company's Form S-4 Registration Statement filed May 5, 1998 (File No.
1-8738)).
10.25 First Amendment to Credit Agreement (Incorporated herein by reference,
Exhibit 10.1, to the Form 8-K filed October 14, 1998 (File No. 1-
8738)).
*10.26 Employment Agreement, dated as of October 15, 1998 by and between
Sealy Corporation and E. Lee Wyatt. (Incorporated herein by reference
to the appropriate exhibit to Sealy Corporation's Annual Report on
Form 10-K for the fiscal year ended November 29, 1998 (File No. 1-
8738)).
</TABLE>
69
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Description
------- -------------------
<C> <S>
*10.27 Employment Agreement, dated as of October 15, 1998 by and between
Sealy Corporation and James Goughenour. (Incorporated herein by
reference to the appropriate exhibit to Sealy Corporation's Annual
Report on Form 10-K for the fiscal year ended November 29, 1998 (File
No. 1-8738)).
*10.28 Employment Agreement, dated as of October 15, 1998 by and between
Sealy Corporation and Richard Sowerby. (Incorporated herein by
reference to the appropriate exhibit to Sealy Corporation's Annual
Report on Form 10-K for the fiscal year ended November 29, 1998 (File
No. 1-8738)).
*10.29 Employment Agreement, dated as of December 18, 1998 by and between
Sealy Corporation and Kenneth L. Walker. (Incorporated herein by
reference to the appropriate exhibit to Sealy Corporation's Annual
Report on Form 10-K for the fiscal year ended November 29, 1998 (File
No. 1-8738)).
*10.30 Sealy Corporation 1998 Stock Option Plan. (Incorporated herein by
reference to Exhibit 10.48, to the Form 10-Q Quarterly Report of Sealy
Corporation dated April 15, 1998 (File No. 1-8738).
*10.31 Form of Stock option grant agreement under Sealy Corporation 1998
Stock Option Plan with a table of stock options granted to Sealy
Corporation's executive officers under Sealy's 1998 Stock Option Plan.
*10.32 Amendment to Employment Agreement dated January 20, 2000 by and
between Sealy Corporation and Lawrence J. Rogers.
10.33 Limited Liability Company Agreement dated June 30, 1999 by and between
Sealy, Inc. and Bain Capital, Inc., forming Mattress Holdings
International, LLC.
21.1 List of Subsidiaries of Sealy Corporation.
27.1 Financial Data Schedule.
99.1 Certificate of Ownership and Merger merging Sealy Holdings, Inc. with
and into Sealy Corporation dated as of November 5, 1991. (Incorporated
herein by reference to the appropriate exhibit to Sealy Corporation's
Annual Report on Form 10-K for the fiscal year ended November 30, 1991
(File No. 1-8738)).
99.2 Sealy Corporation Executive Severance Benefit Plan dated January 25,
1993. (Incorporated herein by reference to the appropriate exhibit to
Sealy Corporation's Annual Report on Form 10-K for the fiscal year
ended November 30, 1992 (File No. 1-8738)).
</TABLE>
70
<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
Ronald L. Jones
By: _________________________________
Ronald L. Jones
Chairman, President and Chief
Executive Officer
(Principal Executive Officer)
Date: February 28, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ E. Lee Wyatt Corporate Vice President-- February 28, 2000
______________________________________ Administration and Chief
E. Lee Wyatt Financial Officer
(Principal Accounting
Officer)
/s/ Josh Bekenstein Director February 28, 2000
______________________________________
Josh Bekenstein
/s/ Paul Edgerley Director February 28, 2000
______________________________________
Paul Edgerley
/s/ Andrew S. Janower Director February 28, 2000
______________________________________
Andrew S. Janower
/s/ James W. Johnston Director February 28, 2000
______________________________________
James W. Johnston
/s/ Ronald L. Jones Director February 28, 2000
______________________________________
Ronald L. Jones
/s/ Michael Krupka Director February 28, 2000
______________________________________
Michael Krupka
</TABLE>
71
<PAGE>
SEALY CORPORATION
AGREEMENT EVIDENCING A GRANT OF A
NONQUALIFIED STOCK OPTION UNDER
1998 STOCK OPTION PLAN
Agreement made as of _______________ , between Sealy Corporation, a
Delaware corporation (the "Company"), and ________________________ ("Grantee").
------- -------
Capitalized terms used but not defined herein shall have the meanings assigned
to such terms in the Plan (as defined below).
1. GRANT OF OPTION. Pursuant to the Sealy Corporation 1998 Stock Option
Plan (the "Plan"), the Company hereby grants to Grantee, as of the date hereof,
----
a nonqualified stock option (the "Option") to purchase up to ___________ shares
------
(the "Shares") of the Company's Class A Common Stock, $.01 par value per share
(the "Class A Common"), at the exercise price per share of ____________ (the
--------------
"Exercise Price"), subject to the terms and conditions set forth herein and in
--------------
the Plan. Upon certain events, the number of Shares and/or the Exercise Price
may be adjusted as provided in the Plan.
2. GRANTEE BOUND BY PLAN. Attached hereto as Annex A is a copy of the Plan
which is incorporated herein by reference and made a part hereof. Grantee hereby
acknowledges receipt of a copy of the Plan and agrees to be bound by all the
terms and provisions thereof. The Plan should be carefully examined before any
decision is made to exercise the Option.
3. EXERCISE OF OPTION. Subject to the earlier termination of the Option as
provided herein and in the Plan and subject to Section 5 hereof, the Option may
be exercised, in whole or in part, to the extent it has become vested, by
written notice to the Company at any time and from time to time after the date
of grant. The Option shall not be exercisable in any event after the tenth
anniversary of the date hereof. An Option may not be exercised for a fraction of
a share of Class A Common. Options are subject to cancellation as provided in
the Plan. Any part of the Option that is not vested on the date that
Grantee's employment with the Company or any of its Subsidiaries terminates
("Grantee Termination Date") shall expire and be forfeited on such date, and any
------------------------
part of the Option that is vested on the Grantee Termination Date shall also
expire and be forfeited to the extent not exercised on or before the sixtieth
(60th) day following the Grantee Termination Date (180 days if the Grantee
Termination Date occurs as a result of the death of Grantee), but in no event
after the tenth anniversary of the date hereof.
4. VESTING OF OPTIONS. The Option may be exercised only to the extent it
has become vested. The Option shall fully vest and become exercisable with
respect to all of the Shares if and only if the Grantee remains continuously
employed with the Company or any of its
<PAGE>
Subsidiaries during the period beginning on the date hereof and ending on the
fifth anniversary of the date hereof. Notwithstanding the foregoing, the Option
shall (i) cumulatively vest and become exercisable with respect to (x) 40% of
the Shares (rounded to the nearest whole share) upon the second anniversary of
the date hereof, and (y) 20% of the Shares (rounded to the nearest whole share)
upon each of the third anniversary of the date hereof, the fourth anniversary of
the date hereof and the fifth anniversary of the date hereof and (ii) vest and
become exercisable with respect to all of the then unvested Shares upon a Sale
of the Company, in each case, if and only if the Grantee remains continuously
employed by the Company or any of its Subsidiaries during the period beginning
on the date hereof and ending on the applicable vesting date referred to above.
5. CONDITIONS TO EXERCISE. The Option may not be exercised by Grantee
unless the following conditions are met:
(a) The Option has become vested with respect to the Shares to be
acquired pursuant to such exercise;
(b) legal counsel for the Company must be satisfied at the time of
exercise that the issuance of shares of Class A Common upon exercise will
be in compliance with the Securities Act and applicable United States
federal, state, local and foreign laws; and
(c) Grantee must pay at the time of exercise the full purchase price
for the shares of Class A Common being acquired hereunder plus any
withholding tax required in connection with such exercise, in each case, in
accordance with the terms of the Plan.
6. TRANSFERABILITY. The Option (including the right to receive the Shares)
may not be Transferred or assigned by Grantee, other than by will or the laws of
descent and distribution and, during the lifetime of Grantee, the Option may be
exercised only by Grantee (or, if Grantee is incapacitated, by Grantee's legal
guardian or legal representative). In the event of the death of Grantee, Options
which are not vested on the date of death shall terminate; and the exercise of
Options which are vested as of the date of death, may be made only by the
executor or administrator of Grantee's estate or the Person or Persons to whom
Grantee's rights under the Options pass by will or the laws of descent and
distribution. If Grantee or anyone claiming under or through Grantee attempts to
violate this Section 6, such attempted violation shall be null and void and
without effect, and the Company's obligation hereunder shall terminate. Any
Issued Stock received upon exercise of this Option is subject to the repurchase
right, restrictions on Transfer and other rights and obligations set forth in
the Plan.
7. ADMINISTRATION. Any action taken or decision made by the Company, the
Board, or the Committee or its delegates arising out of or in connection with
the construction, administration, interpretation or effect of the Plan or this
Agreement shall lie within its sole and absolute discretion, as the case may be,
and shall be final, conclusive and binding on Grantee and all persons claiming
under or through Grantee. By accepting this grant or other benefit under the
Plan, Grantee and each person claiming under or through Grantee shall be
conclusively deemed to
2
<PAGE>
have indicated acceptance and ratification of, and consent to, any action taken
under the Plan by the Company, the Board or the Committee or its delegates.
8. NO RIGHTS AS STOCKHOLDER. Unless and until a certificate or certificates
representing such shares of Class A Common shall have been issued to Grantee (or
any person acting under Section 6 above), Grantee shall not be or have any of
the rights or privileges of a stockholder of the Company with respect to shares
of Class A Common acquirable upon exercise of the Option.
9. INVESTMENT REPRESENTATION. Grantee hereby acknowledges that the shares
of Class A Common which Grantee may acquire by exercising the Option shall be
acquired for investment without a view to distribution, within the meaning of
the Securities Act, and shall not be Transferred in the absence of an effective
registration statement for the shares of Class A Common under the Securities Act
and applicable state securities laws or an applicable exemption from the
registration requirements of the Securities Act and any applicable state
securities laws. Grantee also agrees that the shares of Class A Common which
Grantee may acquire by exercising the Option will not be sold or otherwise
disposed of in any manner which would constitute a violation of any applicable
federal or state securities laws.
10. RIGHTS OF PARTICIPANTS. Neither this Agreement nor the Plan creates any
employment rights in Grantee and neither the Company nor any of its Subsidiaries
shall have any liability arising out of the Plan or this Agreement for
terminating Grantee's employment or reducing Grantee's responsibilities.
11. NOTICES. Any notice hereunder to the Company shall be addressed to the
Company's principal executive office, Attention: Board of Directors, and any
notice hereunder to Grantee shall be addressed to Grantee at Grantee's last
address on the records of the Company, subject to the right of either party to
designate at any time hereafter in writing some other address. Any notice shall
be deemed to have been duly given when delivered personally, one day following
dispatch if sent by reputable overnight courier, fees prepaid, or three days
following mailing if sent by registered mail, return receipt requested, postage
prepaid and addressed as set forth above.
12. BINDING EFFECT. This Agreement shall be binding upon and inure to the
benefit of any successors and assigns to the Company and all persons lawfully
claiming under Grantee.
13. GOVERNING LAW. THE VALIDITY, CONSTRUCTION, INTERPRETATION,
ADMINISTRATION AND EFFECT OF THE PLAN, AND OF ITS RULES AND REGULATIONS, AND
RIGHTS RELATING TO THE PLAN AND TO THIS AGREEMENT, SHALL BE GOVERNED BY THE
SUBSTANTIVE LAWS, BUT NOT THE CHOICE OF LAW RULES, OF WHICHEVER STATE IN THE
UNITED STATES IN WHICH THE COMPANY IS INCORPORATED FROM TIME TO TIME.
14. NON-COMPETITION. In consideration of the Company's grant of the Option
hereunder, the Grantee agrees that, during the Grantee's employment by the
Company, and for one year thereafter, Grantee shall not act as a proprietor,
investor, director, officer, employee, substantial
3
<PAGE>
stockholder, consultant, or partner in any business engaged to a material extent
in the manufacture or sale of (a) mattresses or other bedding products or (b)
any other products which constitute more than ten percent (10%) of the Company's
consolidated revenues at the time in direct competition with the Company or any
of its Subsidiaries in any market. Grantee understands that the foregoing
restrictions may limit his or her ability to engage in certain business pursuits
during the period provided for above, but acknowledges that the Grantee has no
right to a grant of Options under the Plan and this grant is adequate
consideration for Grantee's agreeing to this non-competition limitation.
* * * * *
4
<PAGE>
IN WITNESS WHEREOF, the Company and Grantee have executed this Agreement as
of the date first above written.
SEALY CORPORATION
--------------------------------
Jeffrey C. Claypool
Vice President - Human Resources
GRANTEE:
--------------------------------
5
<PAGE>
1998 STOCK OPTION PLAN
----------------------
NAMED EXECUTIVE OFFICERS GRANTS
-------------------------------
GRANT DATE GRANTEE SHARES EXERCISE PRICE
---------- ------- ------ --------------
3/18/98 Bruce G. Barman 75,000 $ .50
3/18/98 Jeffrey C. Claypool 75,000 $ .50
3/18/98 Gary Fazio 100,000 $ .50
3/18/98 Douglas Fellmy 100,000 $ .50
3/18/98 James F. Goughenour 75,000 $ .50
3/18/98 Ronald L. Jones 600,000 $ .50
3/18/98 David J. McIlquham 100,000 $ .50
3/18/98 Lawrence J. Rogers 100,000 $ .50
3/18/98 Richard Sowerby 75,000 $ .50
3/18/98 Kenneth L. Walker 75,000 $ .50
9/23/98 E. Lee Wyatt, Jr. 80,000 $ .50
3/18/98 Bruce G. Barman 60,000 $4.18
3/18/98 Jeffrey C. Claypool 60,000 $4.18
3/18/98 Gary Fazio 80,000 $4.18
3/18/98 Douglas Fellmy 80,000 $4.18
3/18/98 James F. Goughenour 60,000 $4.18
3/18/98 Ronald L. Jones 480,000 $4.18
3/18/98 David J. McIlquham 80,000 $4.18
3/18/98 Lawrence J. Rogers 80,000 $4.18
3/18/98 Richard Sowerby 60,000 $4.18
3/18/98 Kenneth L. Walker 60,000 $4.18
9/23/98 E. Lee Wyatt, Jr. 10,000 $4.18
<PAGE>
EXHIBIT 10.31
EMPLOYMENT AGREEMENT AMENDMENT
This Employment Agreement Amendment ("Amendment") is entered into as of this
20th day of January, 2000 by and between SEALY CORPORATION, a Delaware
corporation (the "Company"), and Larry J. Rogers (the "Employee").
WHEREAS, the Company and Employee have previously entered into an Employment
Agreement (the "Agreement") dated August 1, 1997;
WHEREAS, since the date of the Agreement, the Employee has moved from Canada to
the United States and is now paid in U.S. Dollars;
WHEREAS, both the Company and the Employee now desire to amend the Agreement as
set forth below;
NOW, THEREFORE, the Company and the Employee hereby agree as follows:
Subsection 3 (a) of the Agreement is hereby is amended by deleting the
words "at the rate of Two Hundred Forty Thousand Five Hundred Canadian
Dollars (CDN $249,500.00)" and inserting in their place the following
words "of at least Two Hundred Thousand U.S. Dollars (US $200,000.00)".
IN WITNESS WHEREOF, the Company and the Employee have executed this Agreement as
of the day and year first written above.
SEALY CORPORATION EMPLOYEE
By
-------------------------- ------------------------------
Larry J. Rogers
Name
------------------------
Title
-----------------------
<PAGE>
================================================================================
----------------------------
MATTRESS HOLDINGS INTERNATIONAL, LLC
LIMITED LIABILITY COMPANY AGREEMENT
----------------------------
DATED AS OF JUNE 30, 1999
THE MEMBERSHIP INTERESTS REPRESENTED BY THIS AGREEMENT HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), AND MAY NOT BE SOLD OR
TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT
OR AN EXEMPTION FROM REGISTRATION THEREUNDER.
THE MEMBERSHIP INTERESTS REPRESENTED BY THIS INSTRUMENT ARE ALSO SUBJECT TO
ADDITIONAL RESTRICTIONS ON TRANSFERABILITY AS SET FORTH IN THIS AGREEMENT.
===============================================================================
<PAGE>
Table of Contents
Page
----
ARTICLE 1 GENERAL 1
1.1 Definitions............................................ 1
1.2 Construction........................................... 5
ARTICLE 2 ORGANIZATION 5
2.1 Formation.............................................. 5
2.2 Name 5
2.3 Registered Office; Agent............................... 5
2.4 Term 6
2.5 Purpose; Powers........................................ 6
2.6 Execution of Documents................................. 6
ARTICLE 3 MEMBERSHIP 6
3.1 Units Generally; Membership Interests.................. 6
3.2 Authorization and Issuance of Units.................... 6
3.3 Issuance of Units...................................... 7
3.4 New Members from the Issuance of Membership Interests.. 7
ARTICLE 4 CAPITAL CONTRIBUTIONS AND CAPITAL ACCOUNTS 7
4.1 Capital Contributions................................. 7
4.2 Capital Accounts...................................... 8
4.3 Negative Capital Accounts............................. 9
4.4 No Withdrawal......................................... 10
4.5 Loans From Members.................................... 10
4.6 Status of Capital Contributions....................... 10
ARTICLE 5 ALLOCATIONS OF PROFITS AND LOSSES 10
5.1 Allocation of Profits and Losses...................... 10
5.2 Regulatory and Special Allocations.................... 10
5.3 Curative Allocations.................................. 11
5.4 Tax Allocations....................................... 12
ARTICLE 6 DISTRIBUTIONS 13
6.1 Generally............................................. 13
6.2 Distributions......................................... 13
ARTICLE 7 MANAGEMENT OF THE COMPANY 13
7.1 Officers of the Company............................... 13
7.2 Performance of Duties; Liability of Officers.......... 14
7.3 Indemnification....................................... 15
ARTICLE 8 MEMBERS; VOTING RIGHTS 15
8.1 Voting Rights......................................... 15
i
<PAGE>
8.2 Withdrawal; Resignation............................... 15
8.3 Authority............................................. 15
8.4 Limitation of Liability............................... 15
ARTICLE 9 TRANSFER OF MEMBERSHIP INTERESTS 16
9.1 Restrictions.......................................... 16
9.2 General Restrictions on Transfer...................... 16
9.3 Procedure for Transfers............................... 16
9.4 Limitations........................................... 17
ARTICLE 10 DISSOLUTION AND LIQUIDATION 17
10.1 Dissolution........................................... 17
10.2 Liquidation........................................... 18
ARTICLE 11 GENERAL/MISCELLANEOUS PROVISIONS 19
11.1 Notices............................................... 19
11.2 Governing Law......................................... 19
11.3 Entire Agreement...................................... 19
11.4 Amendment or Modification............................. 19
11.5 Binding Effect........................................ 20
11.6 Counterparts.......................................... 20
11.7 Severability.......................................... 20
11.8 Headings.............................................. 20
11.9 Parties in Interest................................... 20
11.10 Further Assurances.................................... 20
11.11 No Strict Construction................................ 20
11.12 Time of the Essence; Computation of Time.............. 20
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MATTRESS HOLDINGS INTERNATIONAL, LLC
LIMITED LIABILITY COMPANY AGREEMENT
-----------------------------------
This LIMITED LIABILITY COMPANY AGREEMENT of MATTRESS HOLDINGS
INTERNATIONAL, LLC (the "Company") is made as of June 30, 1999, by and among
each of the Persons executing this Agreement and listed on the Members Schedule
(as herein defined).
WHEREAS, the Members wish to form a limited liability company pursuant
to the Delaware Limited Liability Company Act, Delaware Code, Title 6, Sections
18-101, et seq., as amended from time to time (the "Delaware Act"), by having a
Certificate of Formation of the Company (the "Certificate of Formation") filed
with the Secretary of State of the State of Delaware and entering into this
Agreement.
NOW, THEREFORE, in consideration of the mutual covenants and
agreements herein made and other good and valuable consideration, the Members
hereby agree as follows:
ARTICLE 1
GENERAL
1.1 Definitions. For purposes of this Agreement, the following terms
shall have the following meanings:
"Adjusted Capital Account Deficit" means, with respect to any Member,
the deficit balance, if any, in such Member's Capital Account as of the end of
the relevant Taxable Year, after giving effect to the following adjustments:
(i) Crediting to such Capital Account any amount which such Member is
obligated to restore or is deemed to be obligated to restore pursuant to
Treasury Regulation Sections 1.704-1(b)(2)(ii)(c), 1.704-2 (g)(1), and
1.704-2(i); and
(ii) Debiting to such Capital Account the items described in Treasury
Regulation Sections 1.704-1(b)(2)(ii)(d)(4), (5) and (6).
"Agreement" means this Limited Liability Company Agreement, as
originally executed and as may be amended, modified, supplemented or restated
from time to time.
"Bain" means Bain Capital, Inc., a Delaware corporation.
"Bain Securities Purchase Agreement" means the Securities Purchase
Agreement, dated as of the date hereof, between the Company and Bain.
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"Bankruptcy" means, with respect to a Member, (i) that such Member has
(A) made an assignment for the benefit of creditors, (B) filed a voluntary
petition in bankruptcy, (C) been adjudged bankrupt or insolvent, or had entered
against such Member an order of relief in any bankruptcy or insolvency
proceeding, (D) filed a petition or an answer seeking for such Member any
reorganization, arrangement, composition, readjustment, liquidation, dissolution
or similar relief under any statute, law or regulation or filed an answer or
other pleading admitting or failing to contest the material allegations of a
petition filed against such Member in any proceeding of such nature, or (E)
sought, consented to, or acquiesced in the appointment of a trustee, receiver or
liquidator of such Member or of all or any substantial part of such Member's
properties; (ii) 120 days have elapsed after the commencement of any proceeding
against such Member seeking reorganization, arrangement, composition,
readjustment, liquidation, dissolution or similar relief under any statute, law
or regulation and such proceeding has not been dismissed; or (iii) 90 days have
elapsed since the appointment without such Member's consent or acquiescence of a
trustee, receiver or liquidator of such Member or of all or any substantial part
of such Member's properties and such appointment has not been vacated or stayed
or the appointment is not vacated within 90 days after the expiration of such
stay.
"Book Value" means, with respect to any Company property, the
Company's adjusted basis for federal income tax purposes, adjusted from time to
time to reflect the adjustments required or permitted by Treasury Regulation
Section 1.704-1(b)(2)(iv)(d)--(g); provided that the Book Value of each asset of
the Company shall be adjusted as of the date of any Capital Contribution
pursuant to Treasury Regulation Section 1.704-1(b)(2)(iv)(f) in a manner
determined by the President or Secretary of the Company so that the aggregate
Book Value of the Company's assets (net of the Company's liabilities) as of such
date is equal to the aggregate initial Capital Account balances of the Members
(immediately after the Member's Capital Contribution is made).
"Capital Account" means the capital account maintained for a Member
pursuant to Section 4.2.
"Capital Contribution" means the cash and/or agreed fair market value
of any asset or property of any nature contributed by a Member to the Company
with respect to the Membership Interests held by such Member.
"Certificate" means the Certificate of Formation, as such Certificate
of Formation may be amended, supplemented or restated from time to time.
"Class A Common Unit" means a Unit having the rights and obligations
specified with respect to Class A Common Units in this Agreement.
"Class B Common Unit" means a Unit having the rights and obligations
specified with respect to Class B Common Units in this Agreement.
"Code" means the Internal Revenue Code of 1986, as amended from time
to time.
"Common Units" means collectively the Class A Common Units and the
Class B Common Units.
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"Company Minimum Gain" has the meaning set forth for "partnership
minimum gain" in Treasury Regulation Section 1.704-2(d).
"Contributed Capital Account" means, with respect to any Member at any
time, the aggregate amount of Capital Contributions that such Member has
theretofore contributed to the Company pursuant to Section 4.1.
"Liquidating Distribution" means any distribution pursuant to Section
10.2 hereof.
"Majority in Interest" means, as applied to all of the Members,
Members whose Pro Rata Voting Percentages, in the aggregate, constitute more
than 50% of the Pro Rata Voting Percentages of all of the Members.
"Member Minimum Gain" with respect to each Member Nonrecourse Debt,
means the amount of Company Minimum Gain (as determined according to Treasury
Regulation Section 1.704-2(d)(1)) that would result if such Member Nonrecourse
Debt were treated as a nonrecourse liability, determined in accordance with
Treasury Regulation Section 1.704-2(i)(3).
"Member Nonrecourse Debt" has the meaning set forth in Treasury
Regulation Section 1.704-2(b)(4), substituting the term "Company" for the term
"partnership" and the term "Member" for the term "partner" as the context
requires.
"Member Nonrecourse Deduction" has the meaning set forth in Treasury
Regulation Section 1.704-2(i), substituting the term "Member" for the term
"partner" as the context requires.
"Members" means each Person identified on the Members Schedule as of
the date hereof who has executed this Agreement or a counterpart hereof and each
Person who may hereafter be admitted as a Member in accordance with the terms of
this Agreement. The Members shall constitute the "members" (as that term is
defined in the Delaware Act) of the Company.
"Membership Interest" means the entire interest of a Member (a) to a
distributive share of Profits, Losses, and other items of income, gain, loss,
deduction and credits of the Company, (b) to a distributive share of the assets
of the Company, (c) to vote on, consent to or otherwise participate in any
decision of the Members, and (d) to any and all other benefits to which such
Member may be entitled as provided in this Agreement or the Delaware Act.
"Nonrecourse Deductions" has the meaning set forth in Treasury
Regulation Section 1.704-2(b) (substituting the term "Company" for the term
"partnership" as the context requires).
"Nonvoting Units" means the Class B Common Units.
"Person" means an individual, a partnership, a corporation, a limited
liability company, an association, a joint stock company, a trust, a joint
venture, an unincorporated organization, a governmental entity or any
department, agency or political subdivision thereof or any other entity or
organization.
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"Pro Rata Percentage" means, with respect to any Member, the
percentage determined by dividing the number of Common Units held by that Member
by the aggregate number of Common Units held by all Members.
"Pro Rata Voting Percentage" means, with respect to any Member, the
percentage determined by dividing the number of Class A Common Units held by
that Member by the aggregate number of Class A Common Units held by all Members.
"Sealy" means Sealy, Inc., an Ohio corporation.
"Sealy Credit Agreement" means credit agreement and/or other agreement
or document pursuant to which debt financing is provided to Sealy and/or any of
its subsidiaries, as well as any pledge agreement executed in connection
therewith.
"Sealy Securities Purchase Agreement" means the Securities Purchase
Agreement, dated as of the date hereof, between the Company and Sealy.
"Securities Act" means the Securities Act of 1933, as amended from
time to time.
"Taxable Year" means the Company's taxable year ending on the Sunday
closest to November 30 (or part thereof in the case of the Company's first and
last taxable year), or such other year as is (i) required by Section 706 of the
Code or (ii) determined by the President or Secretary of the Company (if no year
is so required by Section 706 of the Code).
"Transfer" means any direct or indirect sale, transfer, conveyance,
assignment, pledge, hypothecation, gift, delivery or other disposition; provided
that, notwithstanding anything contained herein to the contrary, the pledge by
Sealy of Units owned by Sealy pursuant to the terms of the Sealy Credit
Agreement shall not be in a "Transfer" for purposes of this Agreement, but any
actual transfer of title pursuant to such pledge shall be a "Transfer" for
purposes of this Agreement.
"Treasury Regulations" shall mean, except where the context indicates
otherwise, the final, temporary, proposed, or proposed and temporary regulations
of the Department of the Treasury under the Code as such regulations may be
lawfully changed from time to time.
"Unit" means a fractional part of a Membership Interest, as provided
in this Agreement.
"Voting Units" means the Class A Common Units.
1.2 Construction. Whenever the context requires, the gender of all words
used in this Agreement includes the masculine, feminine and neuter and the
singular number includes the plural number and vice versa. All references to
Articles and Sections refer to articles and sections of this Agreement, and all
references to Schedules are to Schedules attached hereto, each of which is made
a part hereof for all purposes.
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ARTICLE 2
ORGANIZATION
2.1 Formation.
(a) The Certificate of Formation was prepared, executed and filed with
the Secretary of State of the State of Delaware on June 21, 1999, by Cindy
Rashed, as an "authorized person" for such purpose within the meaning of the
Delaware Act, all of which is hereby authorized and ratified in all respects.
The Members hereby constitute the existence of the Company under this Agreement
and the Delaware Act. The rights, powers, duties, obligations and liabilities
of the Members shall be determined pursuant to the Delaware Act and this
Agreement. To the extent that the rights, powers, duties, obligations and
liabilities of any Member are different by reason of any provision of this
Agreement than they would be in the absence of such provision, this Agreement
shall, to the extent permitted by the Delaware Act, control.
(b) Any officer of the Company as an "authorized person" within the
meaning of the Delaware Act, shall, at any time he becomes aware that any
statement in the Certificate was false when made, or that any matter described
therein has changed making the Certificate false in any material respect,
promptly execute, deliver and file any and all amendments thereto and
restatements thereof in accordance with the Delaware Act.
(c) At the time the Company has more than one Member, the Company
shall be treated as a partnership for federal, foreign and, if applicable, state
and local income tax purposes, and each Member and the Company shall file all
tax returns and shall otherwise take all tax and financial reporting positions
in a manner consistent with such treatment. The Company shall not be deemed a
partnership or joint venture for any other purpose.
2.2 Name. The name of the limited liability company constituted by this
Agreement is Mattress Holdings International, LLC or such other name or names as
the President or Secretary of the Company may from time to time designate;
provided, that the name shall always contain the words "Limited Liability
Company", "LLC" or "L.L.C."
2.3 Registered Office; Agent. The Company shall maintain a registered
office in the State of Delaware at c/o Corporation Service Company, 1013 Centre
Road, Wilmington, New Castle County, Delaware 19805 or at such other place
within Delaware as the President or Secretary of the Company may designate. The
name and address of the Company's registered agent for service of process on the
Company in the State of Delaware is Corporation Service Company, 1013 Centre
Road, Wilmington, New Castle County, Delaware 19805 or such other agent as the
President or Secretary of the Company may from time to time designate.
2.4 Term. The term of the Company shall continue perpetually unless
terminated in accordance with the provisions of this Agreement.
2.5 Purpose; Powers. The purposes and character of the business of the
Company shall be to transact any or all lawful business for which limited
liability companies may be organized under the Delaware Act. The Company shall
have any and all powers which are necessary or desirable to carry out the
purposes and business of the Company, to the extent the same may be legally
exercised by limited liability companies under the Delaware Act. The Company
shall carry
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out the foregoing activities pursuant to the arrangements set forth in this
Agreement. Notwithstanding anything herein to the contrary, nothing set forth
herein shall be construed as authorizing the Company to possess any purpose or
power, or to do any act or thing, forbidden by law to a limited liability
company organized under the laws of the State of Delaware.
2.6 Execution of Documents. On June 22, 1999, E. Lee Wyatt, as an
"authorized person" of the Company, executed, on behalf of the Company, that
certain Stock Purchase Agreement ("Purchase Agreement"), between the Company and
Malachi Mattress America, Inc., a Delaware corporation ("MMA"), pursuant to
which the Company agreed to purchase common stock and preferred stock of MMA,
all of which is hereby authorized and ratified in all respects. On June 28,
1999, Kenneth L. Walker, as an "authorized person" of the Company, executed, on
behalf of the Company, that certain the Stockholders Agreement, between MMA, the
Company and the other stockholders of MMA, and other documents contemplated by
the Purchase Agreement, all of which is hereby authorized and ratified in all
respects.
ARTICLE 3
MEMBERSHIP
3.1 Units Generally; Membership Interests. The Membership Interests of
the Members shall be represented by issued and outstanding Units, which may be
divided into one or more types of classes, with each type or class having the
rights and privileges, including voting rights, if any, set forth in this
Agreement. As of the date hereof, the Members of the Company are the Persons
whose names are set forth on the signature pages hereto and listed on the
Members Schedule (as herein defined) as in effect on the date hereof. The
Secretary of the Company shall maintain a schedule of all Members from time to
time, their respective mailing addresses, the Contributed Capital Account, the
number and class of Common Units, and the Pro Rata Percentages for each such
Member (as the same may be amended, modified or supplemented from time to time,
the "Members Schedule"), a copy of which as of the date hereof is attached
hereto as Schedule A. The Members shall have no interest in the Company other
than the interests conferred by this Agreement.
3.2 Authorization and Issuance of Units.
(a) Class A Common Units. The Company hereby authorizes the issuance
of Class A Common Units; 10 of which are outstanding as of the date hereof as
set forth on the Members Schedule (as in effect on the date hereof).
(b) Class B Common Units. The Company hereby authorizes the issuance
of Class B Common Units; 273,900 of which are outstanding as of the date hereof
as set forth on the Members Schedule (as in effect on the date hereof).
(c) Additional Units. Except as expressly provided by this Agreement,
the Company shall not authorize, issue or sell, or cause to be authorized,
issued or sold, any Units.
3.3 Issuance of Units. Subject to the limitations contained in Section
9.4 hereof, the Company (with the approval of the Board) shall have the right to
issue any authorized but unissued
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Units; provided, that the Company shall not issue any Units to any Person who is
not then a Member unless such Person has executed and delivered to the Secretary
of the Company the documents described in Section 3.4 hereof. Upon the issuance
of Units, the Board shall adjust the Capital Accounts of the Members as
necessary in accordance with Section 4.2.
3.4 New Members from the Issuance of Membership Interests. After the
date hereof, in order for a Person to be admitted as a Member of the Company
pursuant to the issuance of Membership Interests to such Person such Person
shall have executed and delivered to the Secretary of the Company a written
undertaking to be bound by the terms and conditions of this Agreement
substantially in the form of Exhibit A hereto. Upon the amendment of the
Members Schedule by the Secretary of the Company and the satisfaction of any
other applicable conditions, including the receipt by the Company of payment for
the issuance of the applicable Membership Interests, such Person shall be
admitted as a Member and deemed listed as such on the books and records of the
Company and thereupon shall be issued his or its Membership Interests. The
Board shall also adjust the Capital Accounts of the Members as necessary in
accordance with Section 4.2.
ARTICLE 4
CAPITAL CONTRIBUTIONS AND CAPITAL ACCOUNTS
4.1 Capital Contributions.
(a) Contemporaneously with the execution of this Agreement:
(i) Bain, a Member of the Company, has made a Capital
Contribution to the Company in the amount of $1,000, which is such
Member's Contributed Capital Account as of the date hereof, and Bain
has received in exchange for such Capital Contribution 10 Class A
Common Units which represents an initial Pro Rata Percentage of
0.00365%, all of which is set forth on the Members Schedule as of the
date hereof. As set forth in the Bain Securities Purchase Agreement,
such Capital Contribution consists of cash in the amount of $1,000.
(ii) Sealy, a Member of the Company, has made a Capital
Contribution to the Company in the amount of $27,390,000, which is
such Member's Contributed Capital Account as of the date hereof, and
Sealy has received in exchange for such Capital Contribution 273,900
Class B Common Units which represents an initial Pro Rata Percentage
of 99.99635%, all of which is set forth on the Members Schedule as of
the date hereof. As set forth in the Sealy Securities Purchase
Agreement, such Capital Contribution consists of cash in the amount of
$27,390,000.
(b) No Member shall make or be required to make any additional Capital
Contributions to the Company with respect to such Member's Units. Except as
expressly provided herein, no Member, in its capacity as a Member, shall have
the right to receive any other cash or any property of the Company.
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4.2 Capital Accounts.
(a) Maintenance Rules. The Company shall maintain for each Member a
separate capital account (a "Capital Account") in accordance with this Section
4.2(a). Each Capital Account shall be maintained in accordance with the
following provisions:
(i) Such Capital Account shall be increased by the cash amount or
Book Value of any property contributed by such Member to the Company
pursuant to this Agreement, such Member's allocable share of Profits
and any items in the nature of income or gains which are specially
allocated to such Member pursuant to Section 5.2 or Section 5.3, and
the amount of any liabilities of the Company assumed by such Member or
which are secured by any property distributed to such Member.
(ii) Such Capital Account shall be decreased by the cash amount
or Book Value of any property distributed to such Member pursuant to
this Agreement, such Member's allocable share of Losses and any items
of in the nature of deductions or losses which are specially allocated
to such Member pursuant to Section 5.2 or Section 5.3, and the amount
of any liabilities of such Member assumed by the Company or which are
secured by any property contributed by such Member to the Company.
(iii) If all or any portion of a Membership Interest is
Transferred in accordance with the terms of this Agreement, the
transferee shall succeed to the Capital Account, the Contributed
Capital Account and the Pro Rata Percentages of the transferor to the
extent it relates to the transferred Membership Interest.
(iv) If a new or existing Member contributed money or property to
the Company (other than a de minimis amount as determined by the
Board) as consideration for the issuance by the Company of any Units
after the date hereof, the Capital Accounts of the Members shall be
adjusted in accordance with Treasury Regulation Section 1.704-
1(b)(2)(iv)(f).
The foregoing provisions and the other provisions of this Agreement relating to
the maintenance of Capital Accounts are intended to comply with Section 1.704-
1(b) of the Treasury Regulations and shall be interpreted and applied in a
manner consistent with such Treasury Regulations. If the President or Secretary
of the Company determines that it is prudent to modify the manner in which the
Capital Accounts, or any increases or decreases to the Capital Accounts, are
computed in order to comply with such Treasury Regulations, the President or
Secretary of the Company may authorize such modifications.
(b) Definition of Profits and Losses. "Profits" and "Losses" mean,
for each Taxable Year or other period, an amount equal to the Company's taxable
income or loss for such Taxable Year or other period, determined in accordance
with Code Section 703(a) (for this purpose, all items of income, gain, loss or
deduction required to be stated separately pursuant to Code Section 703(a)(1)
shall be included in taxable income or loss), with the following adjustments:
(i) The computation of all items of income, gain, loss and
deduction shall include tax-exempt income and those items described in
Treasury Regulation
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Section 1.704-1(b)(2)(iv)(i), without regard to the fact that such
items are not includable in gross income or are not deductible for
federal income tax purposes.
(ii) If the Book Value of any Company property is adjusted
pursuant to Treasury Regulation Section 1.704-1(b)(2)(iv)(e) or (f),
the amount of such adjustment shall be taken into account as gain or
loss from the disposition of such property.
(iii) Items of income, gain, loss or deduction attributable
to the disposition of Company property having a Book Value that
differs from its adjusted basis for tax purposes shall be computed by
reference to the Book Value of such property.
(iv) Items of depreciation, amortization and other cost
recovery deductions with respect to Company property having a Book
Value that differs from its adjusted basis for tax purposes shall be
computed by reference to the property's Book Value in accordance with
Treasury Regulation Section 1.704-1(b)(2)(iv)(g).
(v) To the extent an adjustment to the adjusted tax basis of
any Company property pursuant to Code Sections 732(d), 734(b) or
743(b) is required, pursuant to Treasury Regulation Section 1.704-
1(b)(2)(iv)(m), to be taken into account in determining Capital
Accounts, the amount of such adjustment to the Capital Accounts shall
be treated as an item of gain (if the adjustment increases the basis
of the asset) or loss (if the adjustment decreases such basis).
4.3 Negative Capital Accounts. If any Member has a deficit balance in
its Capital Account, such Member shall have no obligation to restore such
negative balance or to make any Capital Contributions to the Company by reason
thereof, and such negative balance shall not be considered an asset of the
Company or of any Member.
4.4 No Withdrawal. No Member shall be entitled to withdraw any part of
its Capital Contribution or Capital Account or to receive any distribution from
the Company, except as expressly provided herein.
4.5 Loans From Members. Loans by Members to the Company shall not be
considered Capital Contributions.
4.6 Status of Capital Contributions.
(a) No Member shall receive any interest, salary or drawing with
respect to its Capital Contributions or its Capital Account, except as otherwise
specifically provided in this Agreement.
(b) Except as otherwise provided herein and by applicable state law,
the Members shall be liable only to make their Capital Contributions pursuant to
Section 4.1(a) hereof, and no Member shall be required to lend any funds to the
Company or, after a Member's Capital Contributions have been fully paid pursuant
to Section 4.1(a) hereof, to make any additional Capital
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Contributions to the Company. No Member shall have any personal liability for
the repayment of any Capital Contribution of any other Member.
ARTICLE 5
ALLOCATIONS OF PROFITS AND LOSSES
5.1 Allocation of Profits and Losses.
(a) Allocation of Profits. After giving effect to the allocations set
forth in Section 5.2 and Section 5.3, Profits for any Taxable Year (or other
period) shall be allocated to holders of Common Units pro rata according to
their Pro Rata Percentages.
(b) Allocation of Losses. After giving effect to the allocations set
forth in Section 5.2 and Section 5.3, Losses for any Taxable Year (or other
period) shall be allocated to the holders of Common Units pro rata according to
their Pro Rata Percentages.
5.2 Regulatory and Special Allocations. Notwithstanding the provisions
of Section 5.1:
(a) To the extent an adjustment to the adjusted tax basis of any
Company asset pursuant to Code Section 734(b) or 743(b) is required to be taken
into account in determining Capital Accounts, the amount of such adjustment to
the Capital Accounts shall be treated, as provided in Treasury Regulation
Section 1.704-1(b)(2)(iv)(m), as an item of Profits (if the adjustment increases
the basis of the asset) or Losses (if the adjustment decreases such basis) and
such Profits or Losses shall be specially allocated to the Members in a manner
consistent with the manner in which their Capital Accounts are required to be
adjusted pursuant to such Section of the Treasury Regulations.
(b) If there is a net decrease in Company Minimum Gain (determined
according to Treasury Regulation Section 1.704-2(d)(1)) during any Taxable Year,
each Member shall be specially allocated Profits for such Taxable Year (and, if
necessary, subsequent Taxable Years) in an amount equal to such Member's share
of the net decrease in Company Minimum Gain, determined in accordance with
Treasury Regulation Section 1.704-2(g). The items to be so allocated shall be
determined in accordance with Treasury Regulation Sections 1.704-2(f)(6) and
1.704-2(j)(2). This paragraph is intended to comply with the minimum gain
chargeback requirement in Treasury Regulation Section 1.704-2(f) and shall be
interpreted consistently therewith.
(c) Member Nonrecourse Deductions shall be allocated in the manner
required by Treasury Regulation Section 1.704-2(i). Except as otherwise
provided in Treasury Regulation Section 1.704-2(i)(4), if there is a net
decrease in Member Minimum Gain during any Taxable Year, each Member that has a
share of such Member Minimum Gain shall be specially allocated Profits for such
Taxable Year (and, if necessary, subsequent Taxable Years) in an amount equal to
that Member's share of the net decrease in Member Minimum Gain. Items to be
allocated pursuant to this paragraph shall be determined in accordance with
Treasury Regulation Sections 1.704-2(i)(4) and 1.704-2(j)(2). This paragraph is
intended to comply with the minimum gain chargeback requirements in Treasury
Regulation Section 1.704-2(i)(4) and shall be interpreted consistently
therewith.
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(d) In the event any Member unexpectedly receives any adjustments,
allocations or distributions described in Treasury Regulation Section 1.704-
1(b)(2)(ii)(d)(4), (5) or (6), Profits shall be specially allocated to such
Member in an amount and manner sufficient to eliminate the Adjusted Capital
Account Deficit created by such adjustments, allocations or distributions as
quickly as possible. This paragraph is intended to comply with the qualified
income offset requirement in Treasury Regulation Section 1.704-1(b)(2)(ii)(d)
and shall be interpreted consistently therewith.
(e) The allocations set forth in paragraphs (a), (b), (c) and (d)
above (the "Regulatory Allocations") are intended to comply with certain
requirements of the Treasury Regulations under Code Section 704.
Notwithstanding any other provisions of this Article 5 (other than the
Regulatory Allocations), the Regulatory Allocations shall be taken into account
in allocating Profits and Losses among Members so that, to the extent possible,
the net amount of such allocations of Profits and Losses and other items and the
Regulatory Allocations to each Member shall be equal to the net amount that
would have been allocated to such Member if the Regulatory Allocations had not
occurred.
5.3 Curative Allocations. If the President or Secretary of the Company
determines, after consultation with counsel experienced in income tax matters,
that the allocation of any item of Company income, gain, loss, deduction or
credit is not specified in this Article 5 (an "unallocated item"), or that the
allocation of any item of Company income, gain, loss, deduction or credit
hereunder is clearly inconsistent with the Members' economic interests in the
Company (determined by reference to the general principles of Treasury
Regulation Section 1.704-1(b) and the factors set forth in Treasury Regulation
Section 1.704-1(b)(3)(ii)) (a "misallocated item"), then the President or
Secretary of the Company may allocate such unallocated items, or reallocate such
misallocated items, to reflect such economic interests; provided that no such
allocation will be made without the prior consent of each Member that would be
affected thereby (which consent no such Member may unreasonably withhold) and
provided further that no such allocation shall have any material effect on the
amounts distributable to any Member, including the amounts to be distributed
upon the complete liquidation of the Company.
5.4 Tax Allocations.
(a) All income, gains, losses, deductions and credits of the Company
shall be allocated, for federal, state and local income tax purposes, among the
Members in accordance with the allocation of such income, gains, losses,
deductions and credits among the Members for computing their Capital Accounts,
except that if any such allocation for tax purposes is not permitted by the Code
or other applicable law, the Company's subsequent income, gains, losses,
deductions and credits shall be allocated among the Members for tax purposes, to
the extent permitted by the Code and other applicable law, so as to reflect as
nearly as possible the allocation set forth herein in computing their Capital
Accounts.
(b) Items of Company taxable income, gain, loss and deduction with
respect to any property contributed to the capital of the Company shall be
allocated among the Members in accordance with Code Section 704(c) and the
traditional method of Treasury Regulation Section 1.704-3(b) so as to take
account of any variation between the adjusted basis of such property to the
Company for federal income tax purposes and its Book Value.
-11-
<PAGE>
(c) If the Book Value of any Company property is adjusted pursuant to
Section 4.2, subsequent allocations of items of taxable income, gain, loss and
deduction with respect to such property shall take account of any variation
between the adjusted basis of such property for federal income tax purposes and
its Book Value in the same manner as under Code Section 704(c).
(d) Allocations of tax credit, tax credit recapture, and any items
related thereto shall be allocated to the Members according to their interests
in such items as determined by the President or Secretary of the Company taking
into account the principles of Treasury Regulation Section 1.704-1(b)(4)(ii).
(e) Allocations pursuant to this Section 5.4 are solely for purposes
of federal, state and local taxes and shall not affect, or in any way be taken
into account in computing, any Member's Capital Account or share of Profits,
Losses, distributions or other items pursuant to any provisions of this
Agreement.
ARTICLE 6
DISTRIBUTIONS
6.1 Generally.
(a) Subject to Section 6.2, the President of the Company shall have
sole discretion regarding the amounts and timing of distributions to Members, in
each case subject to the retention and establishment of reserves of, or payment
to third parties of, such funds as it deems necessary with respect to the
reasonable business needs of the Company which shall include the payment or the
making of provision for the payment when due of the Company's obligations,
including the payment of any management or administrative fees and expenses or
any other obligations.
(b) Notwithstanding any provision to the contrary contained in this
Agreement, the Company shall not make any distribution to Members if such
distribution would violate Section 18-607 of the Delaware Act or other
applicable law.
6.2 Distributions. Distributions to be made by the Company on any date
shall be made to the holders of Common Units pro rata according to their Pro
Rata Percentages.
ARTICLE 7
MANAGEMENT OF THE COMPANY
7.1 Officers of the Company.
(a) Establishment. A Majority in Interest of the Members shall
appoint individuals as officers ("officers") of the Company, which shall include
(i) a President, (ii) a
-12-
<PAGE>
Secretary and (iii) such other officers (such as any number of Vice Presidents)
as a Majority in Interest of the Members deems advisable. Management and control
of the Company is hereby delegated to the officers, who shall conduct, direct,
and exercise full control over all activities of the Company as provided herein;
provided that all officers other than the President shall report to and shall be
under the direction of the President. An individual can be appointed to more
than one office. Each officer shall be a "manager" (as that term is defined in
the Delaware Act) of the Company.
(b) Appointment. Effective as of the date hereof, the Majority in
Interest of the Members hereby appoint (i) Michael Krupka as President of the
Company and (ii) Michael Krupka as Secretary of the Company, in each case, until
their successors have been duly appointed and qualified, or until their earlier
death, resignation or removal in accordance with the terms of this Agreement.
(c) Powers. The business and affairs of the Company shall be managed
by or under the direction of the President of the Company and the other
officers.
(d) Authority of Officers. Any officer of the Company shall have the
right, power and authority to transact business in the name of the Company or to
act for or on behalf of or to bind the Company. Third parties dealing with the
Company may rely conclusively upon any certificate of any officer to the effect
that such officer is acting on behalf of the Company.
(e) Removal, Resignation and Filling of Vacancy of Officers. A
Majority in Interest of the Members may remove any officer, for any reason or
for no reason, at any time. Any officer may resign at any time by giving
written notice to the Members, and such resignation shall take effect at the
date of the receipt of that notice or any later time specified in that notice;
provided, that unless otherwise specified in that notice, the acceptance of the
resignation shall not be necessary to make it effective. Any such resignation
shall be without prejudice to the rights, if any, of the Company or such officer
under this Agreement. A vacancy in any office because of death, resignation,
removal or otherwise shall be filled in the manner prescribed in this Agreement
for regular appointments to that office.
(f) Compensation of Officers. No officer shall be entitled to receive
compensation from the Company for performing its duties as an officer under this
Agreement.
(g) President. The President shall manage the business and affairs of
the Company.
(h) Secretary. The Secretary shall (i) be custodian of the company
records; (ii) keep a register of the addresses of each Member which shall be
furnished to the Secretary by such Member; (iii) have general charge of the
Members Schedule; and (iv) in general perform all duties incident to the office
of a secretary of a company. The Secretary shall have such other powers and
perform such other duties as are provided in this Agreement and as may from time
to time be prescribed by the President.
7.2 Performance of Duties; Liability of Officers. In performing his or
her duties, each of the officers shall be entitled to rely in good faith on the
provisions of this Agreement and on
-13-
<PAGE>
information, opinions, reports, or statements (including financial statements
and information, opinions, reports or statements as to the value or amount of
the assets, liabilities, profits or losses of the Company or any facts pertinent
to the existence and amount of assets from which distributions to Members might
properly be paid), of the following other Persons or groups: (a) one or more of
the other officers or employees of the Company; (b) any attorney, independent
accountant, or other Person employed or engaged by the Company; or (c) any other
Person who has been selected with reasonable care by or on behalf of the
Company, in each case as to matters which such relying Person reasonably
believes to be within such other Person's professional or expert competence. The
preceding sentence shall in no way limit any Person's right to rely on
information to the extent provided in Section 18-406 of the Delaware Act. No
individual who is an officer of the Company shall be personally liable under any
judgment of a court, or in any other manner, for any debt, obligation, or
liability of the Company, whether that liability or obligation arises in
contract, tort, or otherwise, solely by reason of being an officer of the
Company.
7.3 Indemnification. The officers shall not be liable, responsible or
accountable for damages or otherwise to the Company, or to the Members, and, to
the fullest extent allowed by law, each officer shall be indemnified and held
harmless by the Company, including advancement of reasonable attorneys' fees and
other expenses, but only to the extent that the Company's assets are sufficient
therefor, from and against all claims, liabilities, and expenses arising out of
any management of Company affairs; provided that (a) such officer's course of
conduct was pursued in good faith and believed by him to be in the best
interests of the Company and (b) such course of conduct did not constitute gross
negligence or willful misconduct on the part of such officer and otherwise was
in accordance with the terms of this Agreement. The rights of indemnification
provided in this Section 7.3 are intended to provide indemnification of the
officers to the fullest extent permitted by Delaware General Corporation Law
regarding a corporation's indemnification of its directors and officers and will
be in addition to any rights to which the officer may otherwise be entitled by
contract or as a matter of law and shall extend to his heirs, personal
representatives and assigns. The absence of any express provision for
indemnification herein shall not limit any right of indemnification existing
independently of this Section 7.3. Each officer's right to indemnification
pursuant to this Section 7.3 may be conditioned upon the delivery by such
officer of a written undertaking to repay such amount if such individual is
determined pursuant to this Section 7.3 or adjudicated to be ineligible for
indemnification, which undertaking shall be an unlimited general obligation.
ARTICLE 8
MEMBERS; VOTING RIGHTS
8.1 Voting Rights. Except as specifically provided herein or otherwise
required by applicable law, each Member shall be entitled to (x) one vote per
Voting Unit held by such Member and (y) no votes for any Nonvoting Units held by
such Member.
8.2 Withdrawal; Resignation. A Member shall not cease to be a Member as
a result of the Bankruptcy of such Member. So long as a Member continues to own
or hold any Membership Interests, such Member shall not have the ability to
resign as a Member prior to the dissolution and
-14-
<PAGE>
winding up of the Company and any such resignation or attempted resignation by a
Member prior to the dissolution or winding up of the Company shall be null and
void.
8.3 Authority. No Member, in his or its capacity as a Member, shall
have the power to act for or on behalf of, or to bind the Company.
8.4 Limitation of Liability. No Member, in his or its capacity as
Member, shall have any liability for the debts, obligations and liabilities of
the Company, whether arising in contract, tort or otherwise.
ARTICLE 9
TRANSFER OF MEMBERSHIP INTERESTS
9.1 Restrictions. Each Member acknowledges and agrees that such Member
shall not Transfer any Membership Interest(s) except in accordance with the
provisions of this Article 9. Any attempted Transfer in violation of the
preceding sentence shall be deemed null and void for all purposes, and the
Company will not record any such Transfer on its books or treat any purported
transferee as the owner of such Membership Interest(s) for any purpose.
9.2 General Restrictions on Transfer.
(a) Notwithstanding anything to the contrary in this Agreement, no
transferee of any Membership Interest(s) received pursuant to a Transfer (but
excluding transferees that were Members immediately prior to such a Transfer)
shall become a Member in respect of or be deemed to have any ownership rights in
the Membership Interest(s) so Transferred unless a Person is admitted as a
Member as set forth in Section 9.3(a).
(b) Following a Transfer of any Membership Interest(s) that is
permitted under this Article 9, the transferee of such Membership Interest(s)
shall succeed to the Capital Account, Contributed Capital Account and the Pro
Rata Percentages associated with such Membership Interest(s) and shall receive
allocations and distributions under Articles 4, 5, 6 and 10 in respect of such
Membership Interest(s).
(c) Any Member who Transfers all of his or its Membership Interests
(i) shall cease to be a Member upon such Transfer, and (ii) shall no longer
possess or have the power to exercise any rights or powers of a Member of the
Company.
(d) Notwithstanding anything contained herein to the contrary, no
Member may Transfer any Membership Interest(s) without the prior written consent
of the President of the Company (provided that the President of the Company
shall be deemed to have given his prior written consent to any Transfer of
Membership Interest(s) by any Member pursuant to the Sealy Credit Agreement).
9.3 Procedure for Transfers. Subject in all events to the general
restrictions on Transfers contained in Sections 9.1 and 9.2, a Member may
Transfer all or any part of his or its Membership Interests in accordance with
this Section 9.3.
-15-
<PAGE>
(a) No Transfer of Membership Interest(s) may be completed until the
prospective transferee is admitted as a Member of the Company by executing and
delivering to the Secretary of the Company a written undertaking to be bound by
the terms and conditions of this Agreement substantially in the form of Exhibit
A hereto. Upon the amendment of the Members Schedule by the Secretary of the
Company and the satisfaction of any other applicable conditions, such
prospective transferee shall be admitted as a Member and deemed listed as such
on the books and records of the Company.
(b) Unless waived by the President or Secretary of the Company, no
Member may Transfer any Membership Interests (except pursuant to an effective
registration statement under the Securities Act) without first delivering to the
Company an opinion of counsel reasonably acceptable in form and substance to the
Company (which counsel will be reasonably acceptable to the Company) that
registration under the Securities Act is not required in connection with such
Transfer.
9.4 Limitations.
(a) Notwithstanding anything to the contrary in this Agreement, no
Membership Interest may be Transferred if such Transfer would result in the
Company having more than 100 "beneficial owners" as defined and determined by
the Investment Company Act of 1940, as amended from time to time.
(b) In order to permit the Company to qualify for the benefit of a
"safe harbor" under Code Section 7704, notwithstanding anything to the contrary
in this Agreement, no Transfer of any Membership Interest shall be permitted or
recognized by the Company (within the meaning of Treasury Regulation Section
1.7704-1(d)) if and to the extent that such Transfer would cause the Company to
have more than 100 partners (within the meaning of Treasury Regulation Section
1.7704-1(h), including the look-through rule in Treasury Regulation Section
1.7704-1(h)(3)).
ARTICLE 10
DISSOLUTION AND LIQUIDATION
10.1 Dissolution. The Company shall be dissolved and its affairs wound
up only upon the happening of any of the following events:
(a) the sale or other disposition by the Company of all or
substantially all of the assets it then owns;
(b) the written consent of a Majority in Interest of the Members;
(c) the entry of a decree of judicial dissolution under (S) 18-802 of
the Delaware Act.
Dissolution of the Company shall be effective on the day on which the event
occurs giving rise to the dissolution, but the Company shall not terminate until
the winding up of the Company has been
-16-
<PAGE>
completed, the assets of the Company have been distributed as provided in
Section 10.2 and the Certificate shall have been canceled.
10.2 Liquidation.
(a) Upon dissolution of the Company, a liquidator or liquidating
committee appointed by a Majority in Interest of the Members shall be the
liquidator (the "Liquidator"). The Liquidator shall be entitled to receive such
compensation for its services as may be approved by a Majority in Interest of
the Members. The Liquidator shall agree not to resign at any time without 30
days prior written notice. Except as expressly provided in this Article 10, the
Liquidator appointed in the manner provided herein shall have and may exercise,
without further authorization or consent of any of the parties hereto, all of
the powers conferred upon the officer of the Company under the terms of this
Agreement (but subject to all of the applicable limitations, contractual and
otherwise, upon the exercise of such powers) to the extent necessary or
desirable in the good faith judgment of the Liquidator to carry out the duties
and functions of the Liquidator hereunder for and during such period of time as
shall be reasonably required in the good faith judgment of the Liquidator to
complete the winding up and liquidation of the Company as provided for herein.
(b) The Liquidator shall liquidate the assets of the Company, and
apply and distribute the proceeds of such liquidation, in the following order of
priority, unless otherwise required by mandatory provisions of applicable law:
(i) the payment to the creditors of the Company, including
Members, in order of priority as provided by law;
(ii) to establish or add to such reserves as the Liquidator
may deem necessary or appropriate; and
(iii) to the Members as provided in Section 6.2.
The reserves established pursuant to subparagraph (ii) shall be paid over by the
Liquidator to a bank or other financial institution, to be held in escrow for
the purpose of paying any contingent or unforeseen liabilities or obligations
and, at the expiration of such period as the Liquidator deems advisable, such
reserves shall be distributed to the Members in the priorities set forth in this
Section 10.2(b).
(c) The Members shall not be responsible for restoring any negative
balance in their Capital Accounts upon termination or dissolution of the
Company.
(d) In any termination or dissolution of the Company, the Company may
distribute the assets of the Company to Members in cash, ratably in kind or any
combination thereof. Each distribution in kind of property pursuant to Section
10.2(b)(iii) shall be distributed based upon the fair market value of such
property. If a Liquidating Distribution is made both in cash and in kind, such
Liquidating Distribution shall be made so that, to the fullest extent
practicable, the percentage of cash and any other assets distributed to each
Member is identical.
-17-
<PAGE>
(e) Distributions upon liquidation of the Company (or any Member's
interest in the Company) and related adjustments shall be made by the end of the
Taxable Year of the liquidation (or, if later, within ninety (90) days after the
date of such liquidation) or as otherwise permitted by Treasury Regulation
Section 1.704-1(b)(2)(ii)(b), including requirements (2) and (3) thereof.
(f) Upon completion of the distribution of the assets of the Company
as provided in Section 10.2(b) hereof, the Company shall be terminated and the
Liquidator shall cause the cancellation of the Certificate in the State of
Delaware and of all qualifications and registrations of the Company as a foreign
limited liability company in jurisdictions other than the State of Delaware and
shall take such other actions as may be necessary to terminate the Company.
(g) Each Member hereby waives any rights to partition of the assets of
the Company.
ARTICLE 11
GENERAL/MISCELLANEOUS PROVISIONS
11.1 Notices. Except as expressly set forth to the contrary in this
Agreement, all notices, requests or consents provided for or permitted to be
given under this Agreement must be in writing and must be given either by
depositing that writing in the United States mail, addressed to the recipient,
postage paid, and registered or certified with return receipt requested or by
delivering that writing to the recipient in person, by courier, or by facsimile
transmission; and a notice, request, or consent given under this Agreement is
effective on receipt by the Person who receives it. All notices, requests and
consents to be sent to a Member must be sent to or made at the address (or
facsimile number) given for that Member on the Members Schedule or such other
address (or facsimile number) as that Member may specify by notice to the
Secretary of the Company. Any notice, request or consent to the Company must be
given to the Secretary of the Company. Whenever any notice is required to be
given by law or this Agreement, a written waiver thereof, signed by the Person
entitled to notice, whether before or after the time stated therein, shall be
deemed equivalent to the giving of such notice.
11.2 Governing Law. THIS AGREEMENT AND THE RIGHTS OF THE PARTIES
HEREUNDER SHALL BE INTERPRETED IN ACCORDANCE WITH THE LAWS OF THE STATE OF
DELAWARE, AND ALL RIGHTS AND REMEDIES SHALL BE GOVERNED BY SUCH LAWS WITHOUT
REGARD TO PRINCIPLES OF CONFLICTS OF LAWS.
11.3 Entire Agreement. This Agreement, the Bain Securities Purchase
Agreement and the Sealy Securities Purchase Agreement constitutes the entire
agreement of the parties thereto relating to the Company and supersede all prior
contracts or agreements with respect to the Company, whether oral or written.
11.4 Amendment or Modification. This Agreement and any provision hereof
may be amended or modified from time to time, only by the prior approval of a
Majority in Interest of the Members.
-18-
<PAGE>
11.5 Binding Effect. Subject to the restrictions on Transfers set forth
in this Agreement, this Agreement is binding on and shall inure to the benefit
of the Members and their respective heirs, legal representatives, successors and
permitted assigns.
11.6 Counterparts. This Agreement may be signed in any number of
counterparts, each of which shall be an original for all purposes, but all of
which taken together shall constitute only one agreement.
11.7 Severability. Each provision of this Agreement shall be considered
severable and if for any reason any provision or provisions herein (a) are
determined to be invalid or contrary to any existing or future law, such
invalidity shall not impair the operation of or affect those portions of this
Agreement which are valid or (b) would cause any Member to be bound by the
obligations of the Company under the laws of any state or locale as the same may
now or hereafter exist, such provision or provisions shall be deemed void and of
no effect.
11.8 Headings. All section headings or captions contained in this
Agreement are for convenience only and shall not be deemed part of the text of
this Agreement.
11.9 Parties in Interest. Nothing herein shall be construed to be to
the benefit of or enforceable by any third party including, but not limited to,
any creditor of the Company.
11.10 Further Assurances. The Members will execute and deliver such
further instruments and do such further acts and things as may be required to
carry out the intent and purposes of this Agreement.
11.11 No Strict Construction. The parties to this Agreement have
participated jointly in the negotiation and drafting of this Agreement. In the
event an ambiguity or question of intent or interpretation arises, this
Agreement shall be construed as if drafted jointly by the parties to this
Agreement, and no presumption or burden of proof shall arise favoring or
disfavoring any party by virtue of the authorship of any of the provisions of
this Agreement.
11.12 Time of the Essence; Computation of Time. Time is of the essence
for each and every provision of this Agreement. Whenever the last day for the
exercise of any privilege or the discharge or any duty hereunder shall fall upon
a Saturday, Sunday, or any date on which commercial banks in the State of
Delaware are authorized to be closed, the party having such privilege or duty
may exercise such privilege or discharge such duty on the next succeeding day
which is a regular business day.
* * * * *
-19-
<PAGE>
IN WITNESS WHEREOF, this Limited Liability Company Agreement has been duly
executed on the day and year first above written.
SEALY, INC.
By:
----------------------------
Name:
Title:
BAIN CAPITAL, INC.
By:
----------------------------
Name:
Title:
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<PAGE>
SCHEDULE A
----------
Page 1 of 2
Mattress Holdings International, LLC
Members Schedule
(as of June 30, 1999)
<TABLE>
<CAPTION>
Contributed Common Units
Capital ----------------------------- Pro Rata
Name of Member Account Class A Class B Total Percentages
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Bain Capital, Inc. $ 1,000 10 - 10 0.00365%
Sealy, Inc. $27,390,000 - 273,900 273,900 99.99635%
Totals $27,391,000 10 273,900 273,910 100.0%
</TABLE>
-A-1-
<PAGE>
SCHEDULE A
----------
Page 2 of 2
Mattress Holdings International, LLC
Members Schedule
(as of June 30, 1999)
Addresses of Members
- --------------------
1. Bain Capital, Inc.
Two Copley Plaza
Boston, Massachusetts 02116
Attention: Michael Krupka
2. Sealy, Inc.
One Office Parkway
Trinity, North Carolina 27370
Attention: Ron Jones
-A-2-
<PAGE>
EXHIBIT A
---------
FORM OF JOINDER TO
LIMITED LIABILITY COMPANY AGREEMENT
-----------------------------------
THIS JOINDER to the Limited Liability Company Agreement of Mattress
Holdings International, LLC, a Delaware limited liability company (the
"Company"), dated as of June 30, 1999, as amended or restated from time to time,
by and among the Members of the Company (the "Agreement"), is made and entered
into as of _________ by and between the Company and ________________ ("Holder").
Capitalized terms used herein but not otherwise defined shall have the meanings
set forth in the Agreement.
WHEREAS, on the date hereof, Holder has acquired [CLASS A/CLASS B]
Common Units from _____________ and the Agreement and the Company require
Holder, as a holder of such [CLASS A/CLASS B] Common Units, to become a party to
the Agreement, and Holder agrees to do so in accordance with the terms hereof.
NOW, THEREFORE, in consideration of the mutual covenants contained
herein and other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties to this Joinder hereby agree as
follows:
1. Agreement to be Bound. Holder hereby agrees that upon execution of
this Joinder, it shall become a party to the Agreement and shall be fully bound
by, and subject to, all of the covenants, terms and conditions of the Agreement
as though an original party thereto and shall be deemed, and is hereby admitted
as, a Member for all purposes thereof.
2. Members Schedule. For purposes of the Members Schedule, the address of
the Holder is as follows:
[NAME]
[ADDRESS]
3. GOVERNING LAW. THIS AGREEMENT AND THE RIGHTS OF THE PARTIES HEREUNDER
SHALL BE INTERPRETED IN ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE, AND
ALL RIGHTS AND REMEDIES SHALL BE GOVERNED BY SUCH LAWS WITHOUT REGARD TO
PRINCIPLES OF CONFLICTS OF LAWS.
4. Descriptive Headings. The descriptive headings of this Joinder are
inserted for convenience only and do not constitute a part of this Joinder.
* * * * *
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Joinder as
of the date first above written.
MATTRESS HOLDINGS INTERNATIONAL, LLC
By: _________________________________
Name:
Title:
[HOLDER]
By: _________________________________
Name:
Title:
-2-
<PAGE>
Exhibit 21.1
SEALY CORPORATION SUBSIDIARIES
I. Sealy Corporation (Delaware)
A. Sealy Mattress Company (Ohio)
1. Sealy Mattress Company of Puerto Rico (Ohio)
2. Ohio-Sealy Mattress Manufacturing Co., Inc. (Massachusetts)
3. Ohio-Sealy Mattress Manufacturing Co. (Georgia)
4. Sealy Mattress Company of Michigan, Inc. (Michigan)
5. Sealy Mattress Company of Kansas City, Inc. (Missouri)
6. Sealy of Maryland and Virginia, Inc. (Maryland)
7. Sealy Mattress Company of Illinois (Illinois)
a. A. Brandwein & Company (Illinois)
8. Sealy Mattress Company of Albany, Inc. (New York)
9. Sealy of Minnesota, Inc. (Minnesota)
10. Sealy Mattress Company of Memphis (Tennessee)
11. The Sterns & Foster Bedding Company (Delaware)
a. The Stearns & Foster Upholstery
Furniture Company (Ohio)
12. Sealy, Inc. (Ohio)
a. Sealy Mattress Company Mexico S. de
R.L. de C.V. (Mexico)
b. Sealy Servicios de Mexico S. de
R.L. de C.V. (Mexico)
c. Sealy Colchones de Mexico S. de R.L
de C.V. (Mexico)
d. Mattress Holdings International LLC (Delaware)
13. The Ohio Mattress Company Licensing and
Components Group (Delaware)
a. Sealy Mattress Manufacturing
Company, Inc. (Delaware)
b. Sealy Canada, Ltd. (Alberta)
1. Gestion Centurion, Inc. (Quebec)
c. Sealy Descanso S.A. (Spain)
d. Sealy Kurlon Ltd. (India)
e. Sealy Korea, Inc. (Delaware)
14. Sealy Real Estate, Inc. (North Carolina)
15. Sealy Texas Management, Inc. (Texas)
a. Sealy Texas Holdings LLC (North Carolina)
1. Sealy Texas L.P. (Texas)
16. Sealy Technology LLC (North Carolina)
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> NOV-28-1999
<PERIOD-START> NOV-30-1998
<PERIOD-END> NOV-28-1999
<CASH> 10,845
<SECURITIES> 0
<RECEIVABLES> 129,598
<ALLOWANCES> 10,123
<INVENTORY> 44,681
<CURRENT-ASSETS> 195,166
<PP&E> 198,626
<DEPRECIATION> 60,525
<TOTAL-ASSETS> 770,953
<CURRENT-LIABILITIES> 151,605
<BONDS> 676,197
0
0
<COMMON> 315
<OTHER-SE> (121,704)
<TOTAL-LIABILITY-AND-EQUITY> 770,953
<SALES> 985,707
<TOTAL-REVENUES> 985,707
<CGS> 544,169
<TOTAL-COSTS> 544,169
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 2,248
<INTEREST-EXPENSE> 64,999
<INCOME-PRETAX> 32,382
<INCOME-TAX> 16,561
<INCOME-CONTINUING> 15,821
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,821
<EPS-BASIC> $0.07
<EPS-DILUTED> $0.07
</TABLE>
