Item 1. Business
General
Sealy Corporation (the "Company" or the "Parent"), through its subsidiaries, is the largest bedding manufacturer in the world 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), STEARNS & FOSTER(R) and BASSETT(R) brands and account for approximately 98% of the Company's total net sales for the year ended November 26, 2000. 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 $4.3 billion during calendar year 1999. 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- thirds 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, Stearns & Foster and Bassett. 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, Stearns & Foster brand and Bassett 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. The Bassett brand, licensed from Bassett Furniture Industries beginning in the fourth quarter of 2000, is sold primarily to Bassett Furniture Direct and other furniture store retailers.
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 26, 2000 and no single customer accounted for over 10% of the Company's net sales.
Sales and Marketing. The Company's sales depend primarily on its ability to provide quality products with recognized brand names at competitive prices. Additionally, the Company works to build brand loyalty with its ultimate consumers, principally through targeted national advertising and cooperative advertising with its dealers, 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 28 bedding manufacturing facilities and three component manufacturing facilities in 19 states, three Canadian provinces, Puerto Rico, Mexico, Argentina (acquired in August, 2000) and Brazil (began operations in December, 2000). 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. The Components Division operates three owned manufacturing sites located in Rensselaer, Indiana; Delano, Pennsylvania; and Colorado Springs, Colorado. See Item 2, "Properties," herein.
Over the last several years, the Company has made substantial commitments to ensure that the coil-making equipment at its component plants remains state-of-the-art, installing over 50 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, Mexico, Puerto Rico and Brazil and a majority-owned subsidiary in Argentina acquired in August, 2000 which have marketing and manufacturing responsibilities for those markets. The Company has three manufacturing facilities in Canada and one each in Mexico, Puerto Rico, Argentina and Brazil which comprise all of the company-owned manufacturing operations at November 26, 2000. In 2000, the Company formed a joint venture with its Australian licensee to import, manufacture, distribute and sell Sealy products in South East Asia.
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. Eleven foreign license agreements exist in Thailand, Japan, the United Kingdom, Australia, New Zealand, South Africa, Israel, Jamaica, Saudi Arabia, Bahamas and the Dominican Republic. In addition, the Company uses a Korean contract manufacturer to help service the Korean market, and distributes products directly to many small international markets. An international test market is currently in place in Spain.
Licensing
At November 26, 2000, there are 16 separate license arrangements in effect with five domestic and eleven foreign independent licensees. Sealy New Jersey (a bedding manufacturer), Klaussner Corporation Services ("Klaussner", a furniture 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 years ended November 26, 2000, November 28, 1999 and November 29, 1998, the licensing division
as a whole generated royalties of approximately $10.0 million, $9.9 million and $7.2 million, respectively, 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. In fiscal 2000, the Company amended its warranty policy to no longer require the mattress to be periodically flipped. 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. The Company also licenses the Bassett name under a fifteen year agreement.
Employees
As of November 26, 2000, the Company had 6,077 full-time employees. Approximately 67% of the Company's employees at its 29 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. The Company has only experienced two work stoppages in the last nine years due to labor disputes. Due to the ability to shift production from one plant to another, these lost workdays have not had a material adverse effect on our financial results. The Company has not encountered any significant organizing activity at its 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.
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 2001 to 2008, including renewal options.
The following table sets forth certain information regarding manufacturing facilities operated by the Company at January 28, 2001:
- -------- (a) The Company has granted a mortgage or otherwise encumbered its interest in this facility as collateral for secured indebtedness. (b) Subsequent to year end, the Company announced a plan to close this facility.
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 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.
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 its subsidiaries are parties to an Administrative Consent Order issued by the New Jersey Department of Environmental Protection. Pursuant to that order, the Company and its subsidiary agreed to conduct soil and groundwater remediation at the property. The Company does not believe that its manufacturing processes were the source of contamination. The Company sold the property in 1997. The Company and its subsidiary retained primary responsibility for the required remediation. The Company has completed essentially all soil remediation with the New Jersey Department of Environmental Protection approval, and have concluded a pilot test of groundwater remediation system.
The Company is also remediating soil and groundwater contamination at an inactive facility located in Oakville, Connecticut. Although the Company is conducting the remediation voluntarily, it obtained Connecticut Department of Environmental Protection approval of the remediation plan. The Company has completed essentially all soil remediation under the remediation plan and is currently monitoring groundwater at the site. The Company believes the contamination is attributable to the manufacturing operations of previous unaffiliated occupants of the facility.
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; however, in the event of an adverse decision, these matters could have a material adverse effect.
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 the Company's wastes, the Company believes that liability at each of these sites in unlikely to be material.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holder
None.
PART II
Item 5.
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 January 28, 2001 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.
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 its business. Certain restrictive covenants contained in the Company's Senior Credit Agreements currently limit its ability to make dividend or other payments.
Item 6.
Item 6. Selected Financial Data
The following tables set forth selected consolidated financial and other data of the Company for the years ended November 26, 2000, November 28, 1999, November 29, 1998, November 30, 1997, and December 1, 1996.
The selected consolidated financial and other data set forth in the following tables has been derived from the Company's audited consolidated financial statements. The report of PricewaterhouseCoopers LLP, independent accountants, covering the Company's Consolidated Financial Statements for the years ended November 26, 2000, November 28, 1999 and November 29, 1998 is 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.
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
- -------- (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) 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 debt. EBITDA does not represent net income or cash flows from operations as those terms are defined by generally accepted accounting principles ("GAAP") and does not necessarily indicate whether cash flows will be sufficient to fund cash needs. (f) Adjusted EBITDA is calculated by adding to or deducting from EBITDA (as described above) certain items of income and expense consisting of: (i) 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 in 1996, (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:
(g) For purposes of calculating the ratio of earnings to fixed charges, earnings represent income before income taxes and extraordinary item plus fixed charges. Fixed charges consist of interest expense, net, including amortization of discount and financing costs and the portion of operating rental expense which management believes is representative of the interest component of rent expense. For the year ended November 29, 1998, earnings were insufficient to cover fixed charges by $22.6 million. (h) Restated from previously published results due to the adoption of Financial Accounting Standards Board Statement No. 128, "Earnings Per Share", in fiscal 1998. (i) Reflects the Recapitalization of the Company as discussed in Note 2 of the Notes to the Consolidated Financial Statements.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Year Ended November 26, 2000 Compared With Year Ended November 28, 1999
Net Sales. Net sales for the year ended November 26, 2000, were $1,101.5 million, an increase of $115.8 million, or 11.8% from the year ended November 28, 1999. This increase is attributable to an 8.4% increase in unit volume, a 2.1% increase in average unit selling price and a 1.3% increase due to acquisitions during the current year. The Company saw continued strong growth in domestic sales for both Sealy and Stearns & Foster brands as well as strong growth in international countries. Average unit selling price increased due mainly to strength in Stearns & Foster and Posturepedic Crown Jewel brands which have higher price points. The Company expects 2001 results to be moderated by the slowing economy, particularly consumer spending and retail sales especially in the first half. Most industry observers are forecasting sales growth of 2.5 to 4.0 percent for the industry in 2001. The Company believes it can continue to exceed the industry growth rate and increase its market share.
Cost of Goods Sold. Cost of goods sold for the year, as a percentage of net sales, decreased 0.4 percentage points to 54.8%. This decrease is primarily attributable to an increase in sales of higher priced units, which have higher gross margins than average, improved plant efficiencies and higher overhead absorption from increased sales volume.
Selling, General, Administrative. Selling, general, and administrative expense increased $30.0 million to $354.6 million, or 32.2% of net sales, compared to $324.6 million, or 32.9% of net sales. This increase is primarily due to increased marketing expenses of $16.6 million associated with sales volume. Delivery costs
increased $6.6 million due to an overall increase in sales volume and higher fuel costs. In addition, other administrative costs have increased $11.5 million due to costs associated with restoring normal staffing levels after the relocation of the corporate headquarters as well as cost increases associated with increases in business activity and integration costs associated with acquisitions. These increases were partially offset by decreases in relocation expenses of $2.0 million as the Company incurred additional costs associated with the move of Corporate Headquarters to High Point, North Carolina during the first two quarters of 1999. Royalty revenue increased $1.4 million as the Company's licensee's expanded their sales of Sealy branded products. In addition, foreign currency losses decreased from 1999 by $1.3 million mainly due to the devaluation of the Brazilian Real in the first quarter of 1999.
Stock Based Compensation. The Company has an obligation to repurchase certain securities of the Company held by an officer at the greater of fair market value or original cost. The Company recorded a $6.8 million and $6.7 million charge during fiscal 2000 and 1999, respectively, to revalue this obligation to reflect an increase in the fair market value of the securities.
Interest Expense. Interest expense, net of interest income, increased $0.8 million. This is primarily due to increased rates on floating rate debt of $2.4 million, which was partially offset by lower debt levels due to current year payments. Additionally, the Company received $1.2 million in interest in the second quarter associated with a favorable conclusion of an IRS examination.
Income Taxes. The Company's effective income tax rates for Fiscal 2000 and 1999 differ from the Federal statutory rate principally because of the application of purchase accounting, the effect of certain foreign tax rate differentials, and state and local taxes. The Company's effective tax rate for Fiscal 2000 was approximately 47.5% compared to 51.1% for Fiscal 1999. The lower effective tax rate in 2000 is primarily due to increased pretax income in 2000 compared to 1999, the tax impact of foreign earnings and lower state taxes.
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 Posturepedic 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 Posturepedic 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 and higher overhead absorption from increased sales, 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 spending rate primarily associated with launch of the new Posturepedic 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.
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 $24.1 million and $16.1 million during Fiscal 2000 and 1999, respectively. The increase in capital spending in Fiscal 2000 was primarily attributable to the Company's construction of a new plant in Brazil, expansion of the existing plant in Mexico and the purchase of manufacturing equipment for domestic facilities. The Company has funded Fiscal 2000 capital expenditures with cash generated by operations. The Company expects fiscal 2001 capital expenditures to be approximately $10.9 million more than fiscal year 2000. This increase is primarily due to projected spending on the expansion of domestic bedding plants and the corporate headquarters facility, the purchase of more efficient manufacturing equipment and upgrades to information technology systems.
The Company has acquired 70% of the outstanding capital stock of Rozen S.R.L. (located in Argentina) and certain operating assets of Premier Bedding Group, LLC. These acquisitions totaled $19.9 million in cash and were funded through operating cash flow.
On September 6, 2000 the Revolving Credit Facility and Tranche A Term Loan lenders approved Amendment Three to the Credit Agreement. The amendment makes adjustments to restrictions on acquisitions and capital expenditures in the Company's Credit Agreement which will allow the Company to take advantage of potential growth opportunities.
Subsequent to year end, the Company commenced a plan to shutdown its Memphis facility. The Company plans to cease operations early in the second quarter of 2001 and take a restructuring charge in the first quarter of 2001. The Company believes this charge will not be material.
Subsequent to year end, the Company entered into an agreement to secure an additional revolving credit facility with a separate banking group. This facility will provide for borrowing in Canadian currency up to C$25 million. The Company expects to close on the facility late in the first quarter of 2001.
The Company is currently negotiating the purchase of an international bedding manufacturer. If these negotiations are successful, the Company expects to close that transaction in the second quarter of 2001.
The Company recorded charges of $6.8 million and $6.7 million in fiscal 2000 and 1999 respectively, 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. The expense associated with the right was recorded in stock based compensation expense. Subsequent to year end, the Company satisfied the obligation through a draw of the Company's Revolving Credit Facility and the delivery of a portion of the executive's securities.
From time to time the Company makes investments in debt, preferred stock, or other securities of manufacturers, retailers, and distributors of bedding and related products both domestically and internationally to enhance business relationships and build incremental sales. As of November 26, 2000, the Company had $30.5 million in such investments.
Management believes that the Company will have the necessary liquidity through cash flows from operations, and availability under the Revolving Credit Facility for the next several years to fund its expected capital expenditures, obligations under its credit agreement and subordinated note indentures, environmental liabilities, and other needs required to manage and operate its business.
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 26, 2000, the Company had approximately $93.3 million available under its Revolving Credit Facility with Letters of Credit issued totaling approximately $6.7 million. The Company's principal payments in fiscal 2001 under the Senior Credit Agreement amount to $33.8 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 December, 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 0.25% 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, 1.25% in respect of the AXELs Series C and 1.50% 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 1.25% in respect of Tranche A Term Loans and Revolving Loans, 2.00% in respect of AXELs Series B, 2.25% in respect of AXELs Series C and 2.50% in respect to AXELs Series D. The Company's net weighted average borrowing cost was 9.7% and 9.3% for Fiscal 2000 and 1999 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 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 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.
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:
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.
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:
At November 26, 2000, the Company was in compliance with the financial covenants of all debt agreements.
Foreign Operations and Export Sales
The Company has three manufacturing facilities in Canada, and one each in Mexico, Argentina and Brazil, which comprise all of the Company's foreign- owned manufacturing operations at November 26, 2000. In 2000, the Company formed a joint venture with its Australian licensee to import, manufacture, distribute and sell Sealy products in South East Asia. The Company uses a Korean contract manufacturer to help service the Korean market, distributes products directly in many small international markets, and has license agreements in Thailand, Japan, the United Kingdom, Australia, New Zealand, South Africa, Israel, Jamaica, Saudi Arabia, the Bahamas and the Dominican Republic. An international test market is currently in place in Spain.
Impact of Recently Issued 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 standard's effective date was delayed to June 15, 2000, the Company's fiscal year 2001. In June 2000, the FASB issued FAS 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities--An Amendment of FASB Statement 133". The Company is required to adopt FAS 133 and FAS 138, effective November 27, 2000. These standards require 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 ineffective portion of a derivative's change in fair value will be immediately recognized in earnings.
Based on the Company's derivative positions at November 26, 2000, the Company has determined that the initial adoption will result in an immaterial gain that will be accounted for as a cumulative effect of an accounting change.
In December 1999, the Securities and Exchange Commission staff issued Staff Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in Financial Statements", which, among other guidance, clarifies certain conditions to be met in order to recognize revenue. SAB 101 is required to be adopted no later than the fourth quarter of fiscal years beginning after December 15, 1999. The Company will adopt SAB 101 in fiscal 2001 and does not expect any material effect on its revenue recognition policy.
Fiscal Year
The Company uses a 52-53 week fiscal year ending on the closest Sunday to November 30, but no later than December 2. The fiscal years ended November 26, 2000, November 28, 1999 and November 29, 1998 were 52-week years.
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.
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 transactions denominated in U.S. Dollars. 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 settled quarterly and expired 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 26, 2000, 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):
Item 8.
Item 8. Financial Statements and Supplementary Data
SEALY CORPORATION
Consolidated Financial Statements
November 26, 2000 and November 28, 1999 (With Independent Accountants' Report Thereon)
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 26, 2000 and November 28, 1999, and the results of their operations and their cash flows for each of the three years in the period ended November 26, 2000 in conformity with accounting principles generally accepted in the United States of America. 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 of America, 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.
PricewaterhouseCoopers LLP
Greensboro, North Carolina January 9, 2001
SEALY CORPORATION
CONSOLIDATED BALANCE SHEETS (in thousands, except par value amounts)
See accompanying notes to consolidated financial statements.
SEALY CORPORATION
CONSOLIDATED BALANCE SHEETS (in thousands, except par value amounts)
See accompanying notes to consolidated financial statements.
SEALY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts)
See accompanying notes to consolidated financial statements.
SEALY CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (in thousands)
See accompanying notes to consolidated financial statements.
SEALY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
See accompanying notes to consolidated financial statements.
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. Investments in 50% or greater owned affiliates are accounted for by the consolidation method of accounting whereby the portion not owned by the Company is shown as "Minority interest" in the financial statements.
Fiscal Year
The Company uses a 52-53 week fiscal year ending on the closest Sunday to November 30, but no later than December 2. The fiscal years ended November 26, 2000, November 28, 1999 and November 29, 1998 were 52-week years.
Recently Issued 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 standard's effective date was delayed to June 15, 2000, the Company's fiscal year 2001. In June 2000, the FASB issued FAS 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities--An Amendment of FASB Statement 133". The Company is required to adopt FAS 133 and FAS 138, effective November 27, 2000. These standards require 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 ineffective portion of a derivative's change in fair value will be immediately recognized in earnings. Based on the Company's derivative positions at November 26, 2000, the Company has determined that the initial adoption will result in an immaterial gain that will be accounted for as a cumulative effect of an accounting change.
In December 1999, the Securities and Exchange Commission staff issued Staff Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in Financial Statements", which, among other guidance, clarifies certain conditions to be met in order to recognize revenue. SAB 101 is required to be adopted no later than the fourth quarter of fiscal years beginning after December 15, 1999. The Company will adopt SAB 101 in fiscal 2001 and does not expect any material effect on its revenue recognition policy.
SEALY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Revenue Recognition
The Company recognizes revenue, net of estimated returns, when title passes which is generally upon delivery of shipments.
Concentrations of Credit Risk
Cash and cash equivalents are, for the most part, maintained with several major financial institutions in North America. 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.
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 may differ from these estimates.
Reclassification
Certain reclassifications of the 1999 and 1998 financial statements and related footnotes have been made to conform with the 2000 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
SEALY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) customer demand, technology developments or other economic factors. These reserves were not material at November 26, 2000 or November 28, 1999.
Supply Agreements
The Company from time to time enters into long-term supply agreements with its customers. Any initial cash outlay by the Company is capitalized and amortized to expense over the life of the contract and is ratably recoverable upon contract termination. Such capitalized amounts are included in "Prepaid expenses" and "Debt issuance costs, net, and other assets" in the Company's balance sheet.
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 "Investment in affiliates" 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 26, 2000 or November 28, 1999.
Other intangibles include patents, trademarks and licenses 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 26, 2000, net of accumulated amortization of $12.4 million) are capitalized and amortized to interest expense over the lives of the related debt.
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 dilutive 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
SEALY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 26, 2000, November 28, 1999, and November 29, 1998 amounted to $141.0 million, $127.7 million and $114.5 million, respectively. Accrued customer incentives and advertising at November 26, 2000 and November 28, 1999 was $38.3 million and $32.3 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.
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
SEALY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 and Class L Common, respectively, automatically upon consummation of an initial public offering by the Company. As of November 26, 2000 and November 28, 1999, the aggregate liquidation preference of Class L and Class M Common, including the preferred yield of 10% compounded annually, amounted to $162.9 million and $148.1 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.
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 components of inventory as of November 26, 2000 and November 28, 1999 were as follows:
SEALY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 4: Long-Term Obligations
Long-term debt as of November 26, 2000 and November 28, 1999 consisted of the following:
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 bears interest at a floating rate. See Note 18 for further details regarding guarantees including consolidating condensed financial statements for guarantors and non-guarantors. The Senior Credit Agreements require the Company to meet certain financial tests, including minimum levels of adjusted EBITDA as determined in the agreements, minimum interest coverage and maximum leverage ratio. The Senior Credit Agreements also contain covenants which, among other things, limit capital expenditures, indebtedness and/or the incurrence of additional indebtedness, investments, dividends, transactions with affiliates, asset sales, mergers and consolidations, prepayments of other indebtedness (including the Notes), liens and encumbrances and other matters customarily restricted in such agreements. At November 26, 2000 the Company had approximately $93.3 million available under its Revolving Credit Facility with Letters of Credit issued totaling approximately $6.7 million. The Company's net weighted average borrowing cost was 9.7% and 9.3% for Fiscal 2000 and 1999 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 0.25% in respect of the Tranche A Term Loans and the loans under the Revolving Credit Facility (the "Revolving Loans"), 1.00% in respect of the AXELs Series B, 1.25% in respect of the AXELs Series C and 1.50% 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 1.25% in respect of Tranche A Term Loans and Revolving Loans, 2.00% in respect of AXELs Series B, 2.25% in respect of AXELs Series C and 2.50% in respect to AXELs Series D.
SEALY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Tranche A Term Loans mature in December 2002. The AXELs Series B mature in December 2004. The AXELs Series C mature in December 2005. The AXELs Series D mature in December 2006. The Tranche A Term Loans are subject to quarterly amortization payments commencing in March 1999, the AXELs Series B, the AXELs Series C and the AXELs Series D are subject to quarterly amortization payments commencing in March 1998 with the AXELs Series B amortizing in nominal amounts until the maturity of the Tranche A Term Loans, the AXELs Series C amortizing in nominal amounts until the maturity of the AXELs Series B and the AXELs Series D amortizing in nominal amounts until the maturity of the AXELs Series C. The Revolving Credit Facility matures in December 2002. In addition, the Senior Credit Agreements provide for mandatory repayments, subject to certain exceptions, of the Term Loans, and reductions in the Revolving Credit Facility, based on the net proceeds of certain asset sales outside the ordinary course of business of the Issuer and its subsidiaries, the net proceeds of insurance, the net proceeds of certain debt and equity issuances, and excess cash flow (as defined in the Senior Credit Agreements).
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 to Holders of record on the immediately preceding June 1 and December 1.
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:
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.
SEALY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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:
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 $35.5 million at November 26, 2000.
At November 26, 2000, the annual maturities of the principal amounts of long-term obligations were (in thousands):
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, 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 Parent Notes.
Subsequent to year end, the Company entered into an agreement to secure an additional revolving credit facility with a separate banking group. This facility will provide for borrowing in Canadian currency up to C$25 million. The Company expects to close on the facility late in the first quarter of 2001.
SEALY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 26, 2000.
Rental expense charged to operations is as follows:
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.
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 $116.0 million and $99.7 million, respectively, at November 26, 2000.
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.
SEALY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 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) was recorded in prepaid expenses in the consolidated balance sheet and charged to interest expense over the life of the agreement.
As of November 26, 2000, 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):
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. 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 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. Both of these options settled quarterly and expired at the end of fiscal 2000.
Note 8: Stock Option and Restricted Stock Plans
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.
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
SEALY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 charges of $6.8 million and $6.7 million in fiscal 2000 and 1999 respectively, 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. The expense associated with the right was recorded in stock based compensation expense. Subsequent to year end, the Company satisfied the obligation through a draw of the Company's Revolving Credit Facility and the delivery of a portion of the executive's securities. Accordingly, $10.7 million was included in current liabilities and $6.3 million is included in "Other noncurrent liabilities".
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.
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.
The risk free interest rates utilized for the grants are as follows:
SEALY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A summary of the status and changes of shares subject to options and the related average price per share is as follows:
For various price ranges, weighted average characteristics of outstanding stock options at November 26, 2000 were as follows:
SEALY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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:
Income before taxes from foreign operations amounted to $12.2 million, $9.0 million, and $6.4 million for the years ended November 26, 2000, November 28, 1999, and November 29, 1998, respectively.
The differences between the effective tax rate and the statutory U.S. Federal tax rate are explained as follows:
SEALY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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:
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 at November 26, 2000 and November 28, 1999.
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. Profit sharing expense was $8.4 million, $7.4 million, and $6.6 million for the years ended November 26, 2000, November 28, 1999, and November 29, 1998, respectively.
Note 11: Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per share:
SEALY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Due to the loss from continuing operations in 1998, the potentially dilutive securities would have been antidilutive. Accordingly, they are excluded from the calculation in dilutive earnings per share.
Note 12: Summary of Interim Financial Information (Unaudited)
Quarterly financial data for the years ended November 26, 2000 and November 28, 1999, is presented below:
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 stock based compensation expense.
Note 13: Business Acquisitions
On August 10, 2000, the Company acquired 70% of the outstanding capital stock of Rozen S.R.L. for $9.5 million, including costs associated with the acquisition. Rozen, located in Buenos Aires, Argentina, manufactures and sells bedding to retailers located in Argentina. Rozen also owns and operates several retail sleep shops in the Buenos Aires area. As part of the purchase price, $1.0 million is being held in escrow pursuant to the Purchase Agreement. The Company recorded the acquisition using the purchase method of accounting and, accordingly, the purchase price has been preliminarily allocated to the assets acquired and liabilities assumed based on the estimated fair market values. As a result of the preliminary purchase price allocation, the Company recorded $4.7 million in goodwill to be amortized over a 20 year period.
On September 1, 2000, the Company acquired certain operating assets of Premier Bedding Group, LLC for $10.9 million. The business acquired manufactures and sells bedding to retailers primarily in the United States under the Bassett and Carrington Chase brand names. As part of the acquisition, the Company acquired the
SEALY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
exclusive right to manufacture, market and sell bedding under the previously mentioned brand names through October, 2015. The Company recorded the acquisition using the purchase method of accounting and, accordingly, the purchase price has been preliminary allocated to the assets acquired based on the estimated fair value. As a result of the preliminary purchase price allocation, the Company has recorded $6.1 million of other intangibles associated with a license agreement acquired. This intangible is being amortized over a 15 year period.
Due to the immateriality of the acquisitions to the Company's balance sheet and statement of operations, no pro forma disclosures are considered necessary.
Note 14: Contingencies
The Company is currently conducting an environmental cleanup at a formerly owned facility in South Brunswick, New Jersey pursuant to the New Jersey Industrial Site Recovery Act. The Company and one of its subsidiaries are parties to an Administrative Consent Order issued by the New Jersey Department of Environmental Protection. Pursuant to that order, the Company and its subsidiary agreed to conduct soil and groundwater remediation at the property. The Company does not believe that its manufacturing processes were the source of contamination. The Company sold the property in 1997. The Company and subsidiary retained primary responsibility for the required remediation. The Company has completed essentially all soil remediation with the New Jersey Department of Environmental Protection approval, and have concluded a pilot test of groundwater remediation system.
The Company is also remediating soil and groundwater contamination at an inactive facility located in Oakville, Connecticut. Although the Company is conducting the remediation voluntarily, it obtained Connecticut Department of Environmental Protection approval of the remediation plan. The Company has completed essentially all soil remediation under the remediation plan and is currently monitoring groundwater at the site. The Company believes the contamination is attributable to the manufacturing operations of previous unaffiliated occupants of the facility.
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; however, in the event of an adverse decision, these matters could have a material adverse effect.
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 15: Segment Information
The Company operates predominately in one industry segment, that being the manufacture and marketing of conventional bedding. During 2000, 1999 and 1998 no one customer represented 10% or more of total net sales. Sales outside the United States were $114,547, $92,059 and $87,322 for 2000, 1999 and 1998, respectively. Additionally, long-lived assets (principally property, plant and equipment, goodwill, patents and other investments) outside the United States were $51,363 and $38,203 as of November 26, 2000 and November 28, 1999.
SEALY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 16: Loss on Net Assets Held for Sale, Other Write-Downs and Restructurings
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.
During 1998, the Company 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, it was determined that certain software modules would not be implemented.
Subsequent to year end, the Company commenced a plan to shutdown its Memphis facility. The Company plans to cease operations early in the second quarter of 2001 and take a restructuring charge in the first quarter of 2001. The Company believes this charge will not be material.
Note 17: Related Party Transactions
During 1999, the Company contributed $29.7 million in cash and other assets to Mattress Holdings International LLC ("MHI") in exchange for a non-voting interest. MHI was formed to invest in domestic and international loans, advances and investment in joint ventures, licensees and retailers and is controlled by the Company's largest stockholder, Bain Capital, Inc. The investment in MHI was made to fund its activities 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.
During fiscal 2000 and 1999, the Company had sales of $140.8 and $117.6 million, respectively, 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.
The Company paid Bain Capital, Inc. $2.0 million in management fees in 2000, 1999 and 1998 pursuant to a five year management services agreement.
Note 18: Guarantor/Non-Guarantor Financial Information
As discussed in Note 4, the Parent and each of the Guarantor Subsidiaries has fully and unconditionally guaranteed, on a joint and several basis, the obligation to pay principal and interest with respect to the Notes. Substantially all of the Issuer's operating income and cashflow is generated by its subsidiaries. As a result, funds necessary to meet the Issuer's debt service obligations are provided in part by distributions or advances from its subsidiaries. Under certain circumstances, contractual and legal restrictions, as well as the financial condition and operating requirements of the Issuer's subsidiaries, could limit the Issuer's ability to obtain cash from its subsidiaries for the purpose of meeting its debt service obligations, including the payment of principal and interest on the Notes. Although holders of the Notes will be direct creditors of the Issuer's principal direct subsidiaries by virtue of the guarantees, the Issuer has subsidiaries ("Non- Guarantor Subsidiaries") that are not included among the Guarantor Subsidiaries, and such subsidiaries will not be obligated with respect to the Notes. As a result, the claims of creditors of the Non-Guarantor Subsidiaries will effectively have priority with
SEALY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 26, 2000 and November 28, 1999, consolidating condensed statements of operations and cash flows for each of the years in the three-year period ended November 26, 2000.
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.
SEALY CORPORATION
SUPPLEMENTAL CONSOLIDATING CONDENSED BALANCE SHEET
November 26, 2000 (in thousands)
SEALY CORPORATION
SUPPLEMENTAL CONSOLIDATING CONDENSED BALANCE SHEET
November 28, 1999 (in thousands)
SEALY CORPORATION
SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENTS OF OPERATIONS
YEAR ENDED NOVEMBER 26, 2000 (in thousands)
SEALY CORPORATION
SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENTS OF OPERATIONS
YEAR ENDED NOVEMBER 28, 1999 (in thousands)
SEALY CORPORATION
SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENTS OF OPERATIONS
YEAR ENDED NOVEMBER 29, 1998 (in thousands)
SEALY CORPORATION
SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENTS OF CASH FLOWS
YEAR ENDED NOVEMBER 26, 2000 (in thousands)
SEALY CORPORATION
SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENTS OF CASH FLOWS
YEAR ENDED NOVEMBER 28, 1999 (in thousands)
SEALY CORPORATION
SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENTS OF CASH FLOWS
YEAR ENDED NOVEMBER 29, 1998 (in thousands)
Item 9.
Item 9. Changes in and Disagreements on Accounting and Financial Disclosure
None.
PART III
Item 10.
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 42, 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 44, 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.
Joe L. Gonzalez. Mr. Gonzalez, age 44, has been a Limited Partner of J.P. Morgan Partners since 1998. Previously, he was with KPMG from 1978 to 1998. He serves on the Board of Directors of M2 Automotive, Inc., Airbase Services, Inc., Quivox Systems and Mattress Discounters Corporation. He has been a director of the Company since December 2000.
Andrew S. Janower. Mr. Janower, age 32, 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 54, 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 58, has been Chairman since March 1998 and Chief Executive Officer 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 35, 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.
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:
David J. McIlquham. Mr. McIlquham, age 46, became President and Chief Operating Officer in January, 2001. He had been Corporate Vice President Sales and Marketing since April 1998 and was Corporate Vice President Marketing since joining the Company in 1990 until 1998.
Bruce G. Barman. Dr. Barman, age 55, 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 53, has been Corporate Vice President Human Resources since joining the Company in September 1991.
Douglas E. Fellmy. Mr. Fellmy, age 51, 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 Vice President Operations.
James F. Goughenour. Mr. Goughenour, age 63, 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.
Lawrence J. Rogers. Mr. Rogers, age 52, 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 of Sealy of Canada.
Kenneth L. Walker. Mr. Walker, age 52, 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 48, 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 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 2000.
Item 11.
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 26, 2000, November 28, 1999, and November 29, 1998, of those persons who served as (i) the chief executive officer during fiscal 2000, 1999, and 1998, and (ii) the other four most highly compensated executive officers of the Company for fiscal 2000 (collectively, the "Named Executive Officers"):
SUMMARY COMPENSATION 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: (2000-$2,664, $1,292, $18,900, $0; 1999-$2,534, $1,292, $18,550, $0;1998-$2,364, $1,049, $18,200, $1,114,537); Mr. Fazio: (2000-$1,045, $960, $17,682, $0; 1999- $995, $912, $16,994, $0;1998-$883, $983, $15,928, $94,105); Mr. McIlquham: (2000-$1,031, $947, $17,446, $0; 1999-$976, $895, $16,602, $0;1998-$866, $980, $15,622, $0); Mr. Fellmy: (2000-$996, $915, $16,856, $0; 1999-$957, $877, $16,272, $0;1998-$850, $976, $15,336, $94,105); Mr. Rogers (2000- $952, $873, $16,085, $0; 1999-$916, $841, $15,478, $0;1998-$368, $385, $15,395, $94,105) (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 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: (2000- $0,$0,$0,$0,$0,$24,414,$0;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 (2000- $0,$0,$0,$0,2,553,$0,$0;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 (2000-$0,$0,$0,$0,$2,701,$0,$0;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) Mr. Fazio left the employment of the Company on January 23, 2001.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
During fiscal 2000, 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
- -------- (a) Includes options exercisable within 60 days after November 26, 2000. (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 26, 2000 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 26, 2000. (d) Mr. Fazio left the employment of the Company on January 23, 2001.
Compensation Pursuant To Plans And Other Arrangements
Severance Benefit Plans. Effective December 1, 1992, the Company established the Sealy Executive Severance Benefit Plan (the "Executive Severance Plan") for employees in certain salary grades. Benefit eligibility includes, with certain exceptions, termination as a result of a permanent reduction in work force or the closing of a plant or other facility, termination for inadequate job performance, termination of employment by the participant following a reduction in base compensation, reduction in salary grade which would result in the reduction in potential plan benefits or involuntary transfer to another location. Benefits include cash severance payments calculated using various multipliers varying by salary grade, subject to specified minimums and maximums depending on such salary grades. Such cash severance payments are made in equal semi-monthly installments calculated in accordance with the Executive Severance Plan until paid in full. Certain executive-level officers would be entitled to a minimum of one-year's salary and a maximum of two-year's salary under the Executive Severance Plan. However, if a Participant becomes employed prior to completion of the payment of benefits, such semi-monthly installments shall be reduced by the Participant's base compensation for the corresponding period from the Participant's new employer. Participants receiving cash severance payments under the Executive Severance Plan also would receive six months of contributory health and dental coverage and six months of group term life insurance coverage.
The Company currently follows the terminal accrual approach to accounting for severance benefits under the Executive Severance Plan and records the estimated cost of these benefits as expense at the date of the event giving rise to payment of the benefits.
Executive Employment Agreements. Ronald Jones has entered into an employment agreement with Parent providing for his employment as Chief Executive Officer. 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 receive 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 26, 2000, 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 the Company's 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 Management Investor shall have the right to require Parent to repurchase the common stock of Parent held by such Management Investor.
Sealy Corporation 1998 Stock Option Plan. In order to provide additional financial incentives for certain of the Company's employees, subsequent to the consummation of the December 18, 1997 transaction the Management Investors and certain other employees of the Company were granted and are expected to periodically be granted options to purchase additional common stock of Parent pursuant to the Sealy Corporation 1998 Stock Option Plan. Such options vest and become exercisable upon (i) certain threshold dates or (ii) a change of control or sale of Parent. Upon an employee's termination of employment with the Company, all of such employee's unvested options will expire, the exercise period of all such employee's vested options will be reduced to a period ending no later than six months after such employee's termination, and if such termination occurs prior to a qualified initial public offering of the Parent's common stock, then Parent shall have the right to repurchase the common stock of Parent held by such employee.
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.
Item 12. Security Ownership of Certain Beneficial Owners and Management
As of January 28, 2001, the outstanding capital stock of the Company consists of 14,078,803 shares of Class A common stock, par value $0.01 per share ("Class A common"), 13,481,919 shares of Class B Common stock, par value $0.01 per share ("Class B Common"), 1,582,661 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.
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.
- -------- (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.
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.
- -------- * Less than one percent (1) Amounts shown reflect the aggregate number of shares of Class A Common and Class L Common held by Bain Capital Fund V, L.P. ("Fund V"), Bain CapitalFund V-B, L.P., BCIP Trust Associates, L.P. ("BCIP Trust") and BCIP Associates ("BCIP") (collectively, the "Bain Funds"), for the Bain Funds and Messrs. Bekenstein, Edgerley and Krupka. (2) Messrs. Bekenstein, Edgerley and Krupka are each Managing Directors of Bain Capital Investors V., Inc., the sole general partner of BCPV, and are limited partners of BCPV, the sole general partner of Fund V and Fund V-B. Accordingly, Messrs. Bekenstein, Edgerley and Krupka may be deemed to beneficially own shares owned by Fund V and Fund V-B. In addition, Messrs. Bekenstein, Edgerley and Krupka are each 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 552,000 shares of Class A 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) Mr. Fazio left the employment of the Company on January 23, 2001. (7) 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 1,575,570 shares of Class A Common and 46,446 shares of Class L Common issuable upon exercise of currently exercisable options.
Item 13.
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 and the LLCs (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 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; and (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. Certain of the foregoing provisions 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.
Related Party Transactions. In December 1997, the Company entered into a Management Services Agreement with Bain pursuant to which Bain has agreed to provide: (i) general management services;
(ii) identification, support, negotiation and analysis of acquisitions and dispositions; (iii) support, negotiation and analysis of financial alternatives; and (iv) other services agreed upon by the Company and Bain. In exchange for such services, Bain will receive: (i) an annual management fee of $2.0 million, plus reasonable out-of-pocket expenses (payable quarterly); and (ii) a transaction fee in an amount equal to 1.0% of the aggregate transaction value in connection with the consummation of any additional acquisition or divestiture by the Company and of each financing or refinancing. The Management Services Agreement has an initial term of five years, subject to automatic one-year extensions unless the Company or Bain provides written notice of termination. During fiscal 2000, the Company paid $558,000 to a company that employs Ronald L. Jones' son for web site development services. The Company believes that the amounts paid are comparable to that which would be paid to an unaffiliated party in an arm's length transaction. In January 2001, pursuant to his employment agreement, Ronald L. Jones transferred to the Company 891,630 shares of the Company's Class A common stock for $10.7 million.
Registration Rights Agreement. In December 1997, the Company and certain of its stockholders, including the Bain Funds, Harvard and the LLCs 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.
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) 1. Financial Statements
Sealy Corporation
Report of Independent Accountants (PricewaterhouseCoopers LLP).
Consolidated Balance Sheets at November 26, 2000 and November 28, 1999.
Consolidated Statements of Operations for the years ended November 26, 2000, November 28, 1999 and, November 29, 1998
Consolidated Statements of Stockholders' Equity for the years ended November 26, 2000, November 28, 1999 and, November 29, 1998
Consolidated Statements of Cash Flows for the years ended November 26, 2000, November 28, 1999 and, November 29, 1998
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