As filed with the Securities and Exchange Commission on December 21, 2001
Registration No. 333-67478
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------
PRE-EFFECTIVE
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
-----------------
SEALY MATTRESS COMPANY
(Exact name of registrant as specified in its charter)
OHIO 2510 34-0439410
(State or other (Primary Standard Industrial Classification (I.R.S. Employer Identification No.)
jurisdiction of Code Number)
incorporation or
organization
(see following pages for additional registrants)
-----------------
One Office Parkway
Trinity, North Carolina 27370
(336) 861-3500
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
-----------------
Kenneth L. Walker
One Office Parkway
Trinity, North Carolina 27370
(336) 861-3500
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
-----------------
Copies of all communications, including communications sent to agent for
service, should be sent to:
Andrew E. Nagel
Kirkland & Ellis
153 East 53rd Street
New York, New York 10022-4675
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.
-----------------
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [_]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
The registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until this Registration Statement shall become
effective on such date as the SEC, acting pursuant to said Section 8(a), may
determine.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SEALY CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 2510 36-3284147
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification No.)
incorporation or organization) Classification Code Number)
OHIO-SEALY MATTRESS MANUFACTURING COMPANY, INC.
(Exact name of registrant as specified in its charter)
Massachusetts 2510 04-2511765
(State or other jurisdiction of (Primary Standard Industrial Classification (I.R.S. Employer Identification No.)
incorporation or organization) Code Number)
OHIO-SEALY MATTRESS MANUFACTURING CO.
(Exact name of registrant as specified in its charter)
Georgia 2510 58-1186228
(State or other jurisdiction of (Primary Standard Industrial Classification (I.R.S. Employer Identification No.)
incorporation or organization) Code Number)
SEALY MATTRESS COMPANY OF PUERTO RICO
(Exact name of registrant as specified in its charter)
Ohio 2510 34-6544153
(State or other jurisdiction of (Primary Standard Industrial Classification (I.R.S. Employer Identification No.)
incorporation or organization) Code Number)
SEALY MATTRESS COMPANY OF MICHIGAN, INC.
(Exact name of registrant as specified in its charter)
Michigan 2510 38-1256567
(State or other jurisdiction of (Primary Standard Industrial Classification (I.R.S. Employer Identification No.)
incorporation or organization) Code Number)
SEALY MATTRESS COMPANY OF KANSAS CITY, INC.
(Exact name of registrant as specified in its charter)
Missouri 2510 44-0523533
(State or other jurisdiction of (Primary Standard Industrial Classification (I.R.S. Employer Identification No.)
incorporation or organization) Code Number)
SEALY OF MARYLAND AND VIRGINIA, INC.
(Exact name of registrant as specified in its charter)
Maryland 2510 52-1192669
(State or other jurisdiction of (Primary Standard Industrial Classification (I.R.S. Employer Identification No.)
incorporation or organization) Code Number)
SEALY MATTRESS COMPANY OF ILLINOIS
(Exact name of registrant as specified in its charter)
Illinois 2510 36-1853967
(State or other jurisdiction of (Primary Standard Industrial Classification (I.R.S. Employer Identification No.)
incorporation or organization) Code Number)
A. BRANDWEIN & COMPANY
(Exact name of registrant as specified in its charter)
Illinois 2510 36-2526330
(State or other jurisdiction of (Primary Standard Industrial Classification (I.R.S. Employer Identification No.)
incorporation or organization) Code Number)
SEALY MATTRESS COMPANY OF ALBANY, INC.
(Exact name of registrant as specified in its charter)
New York 2510 14-1325596
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification No.)
incorporation or organization) Classification Code Number)
SEALY OF MINNESOTA, INC.
(Exact name of registrant as specified in its charter)
Minnesota 2510 41-1227650
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification No.)
incorporation or organization) Classification Code Number)
SEALY MATTRESS COMPANY OF MEMPHIS
(Exact name of registrant as specified in its charter)
Tennessee 2510 62-0357534
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification No.)
incorporation or organization) Classification Code Number)
NORTH AMERICAN BEDDING COMPANY
(Exact name of registrant as specified in its charter)
Ohio 2510 34-1449446
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification No.)
incorporation or organization) Classification Code Number)
SEALY, INC.
(Exact name of registrant as specified in its charter)
Ohio 2510 34-1439379
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification No.)
incorporation or organization) Classification Code Number)
THE OHIO MATTRESS COMPANY LICENSING AND COMPONENTS GROUP
(Exact name of registrant as specified in its charter)
Delaware 2510 36-1750335
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification No.)
incorporation or organization) Classification Code Number)
SEALY MATTRESS MANUFACTURING COMPANY, INC.
(Exact name of registrant as specified in its charter)
Delaware 2510 36-3209918
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification No.)
incorporation or organization) Classification Code Number)
SEALY KOREA, INC.
(Exact name of registrant as specified in its charter)
Delaware 2510 56-2112163
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification No.)
incorporation or organization) Classification Code Number)
SEALY TECHNOLOGY LLC
(Exact name of registrant as specified in its charter)
North Carolina 2510 56-2168370
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification No.)
incorporation or organization) Classification Code Number)
SEALY REAL ESTATE, INC.
(Exact name of registrant as specified in its charter)
North Carolina 2510 56-2147751
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification No.)
incorporation or organization) Classification Code Number)
SEALY TEXAS MANAGEMENT, INC.
(Exact name of registrant as specified in its charter)
Texas 2510 75-1491047
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification No.)
incorporation or organization) Classification Code Number)
SEALY TEXAS HOLDINGS LLC
(Exact name of registrant as specified in its charter)
North Carolina 2510 56-2164898
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification No.)
incorporation or organization) Classification Code Number)
SEALY TEXAS L.P.
(Exact name of registrant as specified in its charter)
Texas 2510 62-1799443
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification No.)
incorporation or organization) Classification Code Number)
WESTERN MATTRESS COMPANY
(Exact name of registrant as specified in its charter)
California 2510 95-3388719
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification No.)
incorporation or organization) Classification Code Number)
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an
offer to sell these securities and is soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
Subject to completion, dated December 21, 2001
PROSPECTUS
, 2001
SEALY MATTRESS COMPANY
Exchange Offer for $125,000,000 principal amount of 9.875% Senior
Subordinated Notes due 2007 in exchange for 9.875% Series C Senior Subordinated
Notes due 2007
This exchange offer will expire at 5:00 p.m., New York City Time on ,
2002 unless we extend the date.
If you decide to participate in this exchange offer, you will receive
exchange notes that will be the same as the notes, except the exchange notes
will be registered with the Securities and Exchange Commission and you will be
able to offer and sell them freely to any potential buyer. This is beneficial
to you since your notes are not registered with the Securities and Exchange
Commission and you may not offer or sell the notes without registration or an
exemption from registration under federal securities laws.
There is no public market for the notes or the exchange notes. However, you
may trade the notes and the exchange notes in the PORTAL market.
This investment involves risk. See "Risk Factors" beginning on page 9.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of the exchange notes or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
TABLE OF CONTENTS
Page
----
Prospectus Summary...................................................................... 1
Risk Factors............................................................................ 9
Use of Proceeds......................................................................... 16
Selected Financial Information and Other Data of Sealy Corporation...................... 17
Management's Discussion and Analysis of Financial Condition and Results of Operations of
Sealy Corporation..................................................................... 20
Business................................................................................ 28
Management.............................................................................. 35
Security Ownership of Beneficial Owners and Management.................................. 40
Related Party Transactions.............................................................. 43
Description of Other Indebtedness....................................................... 45
Description of Exchange Notes........................................................... 47
The Exchange Offer...................................................................... 84
United States Federal Income Tax Considerations......................................... 92
Plan of Distribution.................................................................... 92
Legal Matters........................................................................... 93
Experts................................................................................. 93
Additional Information.................................................................. 93
Index to Financial Statements........................................................... F-1
-----------------
Unless the context otherwise requires, references in this prospectus to
"Sealy" or "we" refer collectively to Sealy Corporation and its wholly-owned
subsidiaries, and references to the "Issuer" refer to Sealy Mattress Company,
our wholly owned subsidiary and the issuer of the notes. For purposes of this
prospectus, all financial information herein is that of Sealy Corporation. The
only financial information of the Issuer is included in the guarantor footnote
within the Audited Consolidated Financial Statements included within this
prospectus. All references to our domestic operations include our operations in
Puerto Rico. Fiscal years are identified in this prospectus according to the
calendar year in which they end. For example, fiscal 2000 refers to the year
ended November 26, 2000.
The following items referred to in this document are trademarks which are
federally registered in the United States pursuant to applicable intellectual
property laws and are the property of Sealy Corporation or its subsidiaries:
Sealy, Posturepedic, Stearns & Foster, Crown Jewel, Correct Comfort (stylized),
Back Saver, Ortho-zone (stylized), Posture Premier, Everedge, Edgeguard,
Infinilux, Marvelux, Miracle Edge, Posturesteel, Posturetech, Sense & Respond,
Steelspan, Tru-lok, Ultraedge, Ultrasteel, Dataman, Bassett and University of
Sleep.
The following items referred to in this document are trademarks owned by
Sealy Corporation, or its subsidiaries, for which applications for registration
are pending in the United States pursuant to applicable intellectual property
laws: DSS, Dual Support System, Micro Span, Micro Tek, Resilium, Syner-Flex and
Syner Foam.
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus.
This summary is not complete and may not contain all of the information that
you should consider before investing in our notes. You should read the entire
prospectus carefully. This prospectus contains forward-looking statements,
which involve risks and uncertainties. Our actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including those set forth in "Risk Factors" and
elsewhere in this prospectus.
Sealy
Sealy Corporation is the leading bedding manufacturer and marketer in North
America. Our flagship brands include Sealy, Sealy Posturepedic, Sealy
Posturepedic Crown Jewel, Stearns & Foster and Bassett. We offer a broad line
of conventional bedding options, including mattresses and foundations, in the
promotional, premium and luxury categories, which sell at retail price points
from under $200 to approximately $4,000 per queen-size set. The Sealy brand
name has been in existence for over 100 years, and has been the number one
selling brand in the industry in each of the past 23 years. For the fiscal year
ended November 26, 2000, we generated net sales of $1.1 billion and had
adjusted EBITDA of $157.1 million.
Sealy Corporation is a Delaware corporation organized in 1907. Our principal
offices are located at One Office Parkway, Trinity, North Carolina 27370, and
our telephone number is (336) 861-3500.
1
THE OFFERING
Notes....................... The notes were sold by Sealy Mattress Company on
April 10, 2001 to Goldman, Sachs & Co., Chase
Securities Inc., Deutsche Banc Alex. Brown Inc.
and First Union Securities, Inc. The initial
purchasers subsequently resold the notes to
qualified institutional buyers under Rule 144A
of the Securities Act and to a limited number of
institutional accredited investors that agreed
to comply with certain transfer restrictions and
other conditions.
Registration Rights......... We and the initial purchasers entered into a
registration rights agreement dated April 10,
2001. The Registration Rights Agreement grants
the holder of the notes certain exchange and
registration rights. We intend that the exchange
offer satisfy those exchange and registration
rights which terminate upon the consummation of
the exchange offer.
The Exchange Offer
Securities Offered.......... $125,000,000 in aggregate principal amount of
Series C 9.875% Senior Subordinated Notes due
December 15, 2007.
Exchange Offer.............. $1,000 principal amount of the exchange notes in
exchange for each $1,000 principal amount of
Senior Subordinated Notes. As of the date of
this prospectus, $125.0 million in aggregate
principal amount of Senior Subordinated Notes.
We will issue the exchange notes to holders on
or promptly after the expiration date.
Expiration Date............. 5:00 p.m., New York City time, on , 2002
or a later date and time if we choose to extend
this exchange offer. We have no current plans to
extend the exchange offer.
Accrued Interest on the
Exchange Notes and the
Notes.................... Each exchange note will bear interest from its
issuance date. Holders of notes that are
accepted for exchange will receive, in cash, any
accrued interest, but not including, the
issuance date of the exchange notes. The
interest will be paid with the first interest
payment on the exchange notes. Interest on the
notes accepted for exchange will cease to accrue
upon issuance of the exchange notes.
Conditions to the Exchange
Offer.................... We currently expect that each of the conditions
will be satisfied and no waivers will be
necessary.
Based on an interpretation by the staff of the
SEC in no-action letters issued to third
parties, we believe that you may offer for
resale, resell or otherwise transfer the
exchange notes without complying with the
registration and prospectus delivery provisions
of the Securities Act, provided that:
. you acquire the exchange notes in the
ordinary course of your business;
2
. you do not intend to participate and have no
arrangement or understanding with any person
to participate in the distribution of the
exchange notes; and
. you are not our "affiliate" within the
meaning of Rule 405 under the Securities Act.
Our obligation to accept for exchange or to
issue the exchange notes in exchange for, any
notes is subject to:
. customary conditions relating to compliance
with any applicable law;
. any applicable interpretation by the staff
of the SEC, or
. any order of any governmental agency or
court of law.
We currently expect that each of the conditions
will be satisfied and that no waivers will be
necessary. See "The Exchange Offer--Conditions."
Procedures for Tendering
Notes.................... Each holder of notes wishing to accept the
exchange offer must complete, sign and date the
accompanying Letter of Transmittal, or a
facsimile thereof. The holder must mail or
otherwise deliver the Letter of Transmittal or
facsimile, together with the notes and any other
required documentation, to the exchange agent at
the address in the Section "The Exchange Offer"
under the heading "--Procedures for Tendering
Notes."
Withdrawal Rights........... Tenders may be withdrawn at any time prior to
5:00 p.m., New York City time, on the expiration
date of the exchange offer.
Acceptance of Notes and
Delivery of Exchange Notes.. We will accept for exchange any and all notes
which are properly tendered in the exchange
offer prior to 5:00 p.m., New York City time, on
the expiration of the exchange offer. The
exchange notes issued pursuant to the exchange
offer will be delivered promptly following the
Expiration Date. See "The Exchange Offer--Terms
of the Exchange Offer."
Use of Proceeds............. We will not receive any proceeds from the
exchange of notes according to the terms of our
exchange offer.
Exchange Agent.............. The Bank of New York.
The Exchange Notes
Issuer...................... Sealy Mattress Company.
Securities Offered.......... $125,000,000 in aggregate principal amount of
9.875% Series C Senior Subordinated Notes due
2007.
3
Maturity.................... December 15, 2007.
Interest Rate............... 9.875% per year (calculated using a 360-day
year).
Interest Payment Frequency.. Every six months on June 15 and December 15.
First payment on June 15, 2002.
Optional Redemption......... Except as described below, we cannot redeem the
exchange notes prior to December 15, 2002. After
December 15, 2002, we can redeem the exchange
notes at our option, in whole or in part, at the
redemption prices as defined in the indenture,
plus accrued and unpaid interest, if any,
thereon to the applicable redemption date. See
"Description of Exchange Notes--Optional
Redemption."
Change of Control Offer..... If a change of control, as defined in the
indenture, occurs, we must give holders of the
exchange notes the opportunity to sell us their
exchange notes at 101% of their face amount,
plus accrued interest.
We might not be able to pay you the required
price for exchange notes you present to us at
the time of a change of control, because:
. we might not have enough funds at the time;
or
. the terms of our senior debt may prevent us
from paying.
Guarantees.................. Our payment obligations under the exchange notes
will be fully and unconditionally guaranteed on
a senior subordinated and joint and several
basis by Sealy and by some of the Issuer's
current and all of the Issuer's future U.S.
subsidiaries. The exchange notes will not be
guaranteed by other of the Issuer's U.S.
subsidiaries or by any of its current or future
foreign subsidiaries. For the years ended
November 28, 1999, November 26, 2000 and the
nine months ended August 26, 2001, the Issuer's
non-guarantor subsidiaries accounted for 8.0%,
9.3% and 14.5% of net sales, respectively, and
generated Adjusted EBITDA of $8.0 million, $12.3
million and $11.8 million, respectively. The
guarantees will be subordinated to the
guarantees of senior debt issued by the
guarantors under the senior credit agreements.
See "Description of Exchange Notes--Note
Guarantees."
Basic Covenants of Indenture.. The indenture governing the exchange notes
contains covenants limiting our and our
subsidiary guarantors' ability to:
. incur additional debt;
. pay dividends or distributions on our
capital stock or repurchase our capital
stock;
. make certain investments;
. create liens on our assets to secure debt;
. enter into transactions with affiliates;
4
. enter into agreements, restricting dividends
and other payment restrictions;
. merge or consolidate with another company;
and
. transfer and sell assets.
These covenants are subject to a number of
important limitations and exceptions.
You should refer to the section entitled "Risk Factors" for an explanation
of certain risks of investing in the exchange notes.
5
SUMMARY HISTORICAL CONSOLIDATED FINANCIAL AND OPERATING DATA OF SEALY
CORPORATION
Set forth below is summary historical consolidated financial data of Sealy
Corporation at the dates and for the periods indicated. Our summary historical
consolidated statement of operations data for the fiscal years ended November
27, 1998, November 28, 1999 and November 26, 2000 and the summary historical
balance sheet data as of November 27, 1998, November 28, 1999, and November 26,
2000 were derived from our historical consolidated financial statements that
were audited by PricewaterhouseCoopers LLP, whose report appears elsewhere in
this prospectus. Our summary historical consolidated statement of operations
data for the nine months ended August 27, 2000 and August 26, 2001 are
unaudited and have been prepared on the same basis as our audited financial
statements and, in our opinion, reflect all adjustments (consisting only of
normal recurring adjustments) necessary to present fairly our results of
operations for the periods then ended and our financial position as of such
dates. Please note that the only financial information of the Issuer is
included in the guarantor footnote within the audited consolidated financial
statements included within this prospectus. The summary historical consolidated
financial data set forth below should be read in conjunction with, and is
qualified by reference to "Management's Discussion and Analysis of Financial
Condition and Results of Operations", the audited consolidated financial
statements and accompanying notes thereto and the unaudited consolidated
financial statements and accompanying notes thereto included elsewhere in this
prospectus.
Fiscal Year(1) Nine Months Ended
----------------------- --------------------
August 27, August 26,
1998 1999 2000 2000 2001
------ ------ -------- ---------- ----------
(in millions)
Statement of Operations Data:
Net sales............................. $891.3 $985.7 $1,101.5 $813.4 $869.4
Cost of goods sold.................... 503.5 544.2 603.9 446.5 485.9
Selling, general and administrative
expenses............................ 342.9 344.1 374.2 271.7 306.5
------ ------ -------- ------ ------
Income from operations................ 44.9 97.4 123.4 95.2 77.0
Interest expense...................... 67.5 65.0 65.8 48.7 54.8
Other (income) expense, net(2)........ -- -- 0.2 -- 24.8
------ ------ -------- ------ ------
Income (loss) before income taxes,
extraordinary items and
cumulative effect of change in
accounting principle................ (22.6) 32.4 57.4 46.5 (2.6)
Income tax expense (benefit).......... (3.3) 16.6 27.2 20.9 13.0
------ ------ -------- ------ ------
Income (loss) before extraordinary
items and cumulative effect of
change in accounting principle...... (19.3) 15.8 30.2 25.6 (15.6)
------ ------ -------- ------ ------
Extraordinary loss from early
extinguishment of debt
(net of tax)(3)..................... 14.5 -- -- -- 0.7
Cumulative effect of change in
accounting principle (net of tax)(4) -- -- -- -- (0.2)
------ ------ -------- ------ ------
Net income (loss)..................... $(33.8) $ 15.8 $ 30.2 $ 25.6 $(16.1)
====== ====== ======== ====== ======
6
Fiscal Year(1) Nine Months Ended
---------------------- --------------------
August 27, August 26,
1998 1999 2000 2000 2001
------ ------ ------ ---------- ----------
(in millions)
Other Financial Data:
Cash flows provided by (used in):
Operating activities.......... $ 53.0 $ 56.0 $ 70.2 $ 53.3 $(19.6)
Investing activities.......... (32.9) (43.0) (43.9) (23.6) (45.6)
Financing activities.......... (15.0) (13.4) (19.0) (12.3) 56.7
EBITDA(5)......................... 69.2 123.0 150.3 114.9 75.4
Adjusted EBITDA(6)................ 113.1 138.0 157.1 118.6 106.6
Depreciation & amortization....... 24.3 25.6 27.1 19.7 23.2
Capital expenditures.............. (33.1) (16.1) (24.1) (14.2) (15.1)
Fiscal Year
------------------------ August 27, August 26,
1998 1999 2000 2000 2001
------- ------- ------ ---------- ----------
Balance Sheet Data (at end of period):
Total assets....................... $ 751.1 $ 771.0 $830.0 $823.3 920.9
Long-term debt, net................ 682.3 676.2 651.8 656.9 758.6
Total debt......................... 690.8 690.3 686.2 689.3 780.3
Stockholders' equity (deficit)..... (138.8) (121.4) (93.3) (95.9) (121.8)
Nine Months Nine Months
Fiscal Year Ended Ended
-------------- August 27, August 26,
1998 1999 2000 2000 2001
---- ---- ---- ----------- -----------
Financial Ratios:
Ratio of Earnings to Fixed Charges(7).... -- 1.5x 1.8x 1.9x --
Adjusted EBITDA to Cash Interest Expense. 2.2x 2.9x 3.3x 3.4x 2.7x
Adjusted EBITDA to Total Interest Expense 1.7x 2.1x 2.4x 2.4x 1.9x
Total Debt to Adjusted EBITDA............ 6.1x 5.0x 4.4x 4.5x 5.4x
Fiscal Year Nine Months Ended
2000 August 26, 2001
----------- -----------------
Pro Forma Financial Ratios:
Ratio of Pro Forma Earnings to Pro Forma Fixed Charges(7) 1.6x --
Adjusted EBITDA to Pro Forma Cash Interest Expense....... 2.9x 2.5x
Adjusted EBITDA to Pro Forma Total Interest Expense...... 2.1x 1.9x
- --------
Footnotes to table
(1)We use 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 29, 1998,
November 28, 1999 and November 26, 2000 were 52-week years.
(2)We previously contributed 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
investments in joint ventures, licensees and retailers and is controlled by
our largest stockholder, Bain Capital, LLC. The investment in MHI was made
to fund its activities in order to enhance business relationships and build
incremental sales. Various operating factors combined with weak economic
conditions created during the third quarter of 2001 produced a requirement
to review equity values related to the affiliates. Accordingly, we performed
a review of the carrying value of our investments in affiliates owned by
MHI. We have determined that the decline in the value of such investments is
other than temporary and, as a consequence, have recognized a non-cash
impairment charge of $26.3 million to write-down the investments to their
estimated fair values of $1.4 million as of August 26, 2001.
7
In May 2001, we and one of our licensees terminated the existing contract
that allowed the licensee to manufacture and sell certain products under the
Sealy brand name and entered into a new agreement for the sale of certain
other Sealy branded products. In conjunction with the termination of the
license agreement, we received a $4.6 million termination fee that is
recorded as other income.
Other (income) expense, net also includes the equity in the (earnings) loss
of equity investees and minority interest.
(3)During 1998, we recorded an extraordinary loss of $5.4 million, net of
income tax benefit of $3.6 million. This represented the remaining
unamortized debt issuance costs related to long term obligations repaid as a
result of debt refinancing. Also, during 1998 we recorded an extraordinary
loss of $9.1 million, net of income tax benefits of $6.1 million. This
represented premiums paid to the existing note holders and consent fees paid
in connection with the retirement of the debt. On April 10, 2001, we
completed the private placement of $125 million of 9.875% senior
subordinated notes. The proceeds from the placement were used to repay
existing bank debt. As a result, we recognized an extraordinary loss on the
write-off of a portion of the previous debt issuance costs of $0.7 million
(net of a $0.5 million tax benefit).
(4) We adopted FAS 133, "Accounting for Derivative Instruments and Hedging
Activities" on November 27, 2000 and recorded a $0.2 million gain net of
income tax expense of $0.1, which was recorded as a cumulative effect of a
change in accounting principle.
(5) EBITDA is calculated by adding interest expense, net, income tax expense
(benefit), depreciation and amortization of intangibles to income (loss)
before extraordinary items and cumulative effect of a 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 in generally accepted accounting principles ("GAAP") and does not
necessarily indicate whether cash flows will be sufficient to fund cash
needs.
(6) 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 our
"Year 2000" information systems issue and EITF 97-13 reengineering efforts,
(iii) High Point relocation, (iv) compensation associated with our 1998
recapitalization, (v) loss on net assets held for sale and other
write-downs in 1998 only, (vi) severance costs associated with plant
closure and management reorganization and (vii) other relief
items-including foreign currency losses, gain or loss on certain assets and
investments, etc. We believe 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:
Fiscal Year Nine Months Ended
-------------------- -------------------
August 27, August 26,
1998 1999 2000 2000 2001
------ ------ ------ ---------- ----------
EBITDA....................................................... $ 69.2 $123.0 $150.3 $114.9 $ 75.4
Adjustments:
Stock based compensation................................. -- 6.7 6.8 3.6 --
Loss on net assets held for sale and other write-downs... 10.6 -- -- -- --
High Point relocation.................................... 7.5 2.0 -- -- --
EITF 97-13 reengineering efforts......................... 4.1 5.0 -- -- --
Compensation associated with Recapitalization............ 18.9 -- -- -- --
Plant Closure and Severance Costs........................ -- -- -- -- 1.3
Other relief items--including foreign currency losses,
gain or loss on certain assets and investments, etc..... 2.8 1.3 -- 0.1 29.9(a)
------ ------ ------ ------ ------
Adjusted EBITDA.......................................... $113.1 $138.0 $157.1 $118.6 $106.6
====== ====== ====== ====== ======
(a)Includes the non-cash impairment charge of $26.3 million to write-down
investments in affiliates on discussed in footnote 2.
(7)For purposes of calculating the ratio of earnings to fixed charges, earnings
represent income before income taxes and extraordinary items plus fixed
charges. Fixed charges consists of interest expense, net, including
amortization of discount and financing costs and the portion of operating
rental expense (33%) 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. For the
nine months ended August 26, 2001, earnings were insufficient to cover fixed
charges by $2.6 million. For the nine months ended August 26, 2001, pro
forma earnings were insufficient to cover pro forma charges by $5.2 million.
8
RISK FACTORS
An investment in the exchange notes involves various risks, including those
described below. You should carefully consider these risk factors, together
with the other information in this prospectus, before deciding to exchange any
notes for exchange notes.
Risks Related to the Offering
You may have difficulty selling the notes which you do not exchange, since
outstanding notes will continue to have restrictions on transfer and cannot be
sold without registration under securities laws or exemptions from registration.
If a large number of outstanding notes are exchanged for exchange notes
issued in the exchange offer, it may be difficult for holders of outstanding
notes that are not exchanged in the exchange offer to sell their notes, since
those notes may not be offered or sold unless they are registered or there are
exemptions from registration requirements under the Securities Act or state
laws that apply to them. In addition, if there are only a small number of notes
outstanding, there may not be a very liquid market in those notes. There may be
few investors that will purchase unregistered securities in which there is not
a liquid market. See "The Exchange Offer-Consequences Of Failure to Exchange."
In addition, if you do not tender your outstanding notes or if we do not
accept some outstanding notes, those notes will continue to be subject to the
transfer and exchange provisions of the indenture and the existing transfer
restrictions of the notes that are described in the legend on the notes and in
the prospectus relating to the notes.
Resale Restrictions-If you exchange your notes, you may not be able to resell
the exchange notes you receive in the exchange offer without registering them
and delivering a prospectus.
You may not be able to resell exchange notes you receive in the exchange
offer without registering those exchange notes or delivering a prospectus.
Based on interpretations by the Commission in no-action letters, we believe,
with respect to exchange notes issued in the exchange offer, that:
. holders who are not "affiliates" of Sealy Corporation within the meaning
of Rule 405 of the Securities Act;
. holders who acquire their exchange notes in the ordinary course of
business; and
. holders who do not engage in, intend to engage in, or have arrangements
to participate in a distribution (within the meaning of the Securities
Act) of the exchange notes;
do not have to comply with the registration and prospectus delivery
requirements of the Securities Act.
Holders described in the preceding sentence must tell us in writing at our
request that they meet these criteria. Holders that do not meet these criteria
could not rely on interpretations of the Commission in no-action letters, and
would have to register the exchange notes they receive in the exchange offer
and deliver a prospectus for them. In addition, holders that are broker-dealers
may be deemed "underwriters" within the meaning of the Securities Act in
connection with any resale of exchange notes acquired in the exchange offer.
Holders that are broker-dealers must acknowledge that they acquired their
outstanding exchange notes in market-making activities or other trading
activities and must deliver a prospectus when they resell notes they acquire in
the exchange offer in order not to be deemed an underwriter.
You should review the more detailed discussion in "The Exchange
Offer-Procedures for Tendering and Consequences Of Failure to Exchange."
9
Because we have substantial debt, we may not be able to make payments on the
exchange notes.
After this exchange offer, we have a significant amount of indebtedness. As
of August 26, 2001, we had outstanding indebtedness of $780.3 million. Our
substantial indebtedness could have important consequences to you. For example,
it could:
. make it more difficult for us to meet all our obligations with respect
to the exchange notes.
. limit our ability to borrow additional amounts for working capital,
capital expenditures, acquisitions, debt service requirements, execution
of our growth strategy, research and development costs or other purposes;
. require us to dedicate a substantial portion of our cash flow to make
payments on our debt, thereby reducing the availability of our cash flow
to fund our operations;
. limit our flexibility in planning for, or reacting to, changes in our
business and in the mattress industry generally;
. place us at a disadvantage compared to our competitors that have less
debt;
. prevent us from raising the funds necessary to repurchase all of the
exchange notes tendered to us upon the occurrence of change of control
events, which would constitute an event of default under the exchange
notes; and
. limit, along with the financial and other restrictive covenants in our
indebtedness, among other things, our ability to borrow additional
funds; if we fail to comply with those covenants we could trigger an
event of default under the agreements governing our indebtedness that,
if not cured or waived, could have a material adverse effect on us.
. because our obligations under the bank credit agreement bear interest at
floating rates, we are sensitive to changes in prevailing interest
rates. We use derivative instruments to manage our long-term debt
interest rate exposure, rather than for trading purposes. A 10% increase
or decrease in market interest rates that affect our interest rate
derivative instruments would not have a material impact on earnings
during the next fiscal year as the changes in fair value are recorded in
shareholders' equity. However, if we were required to terminate the
agreements prior to their maturity, it could have a substantial impact
on our earnings and cash flows.
Any of the above listed factors could materially adversely affect our
business and results of operations.
Your right to receive payment on the exchange notes and the guarantees is
junior to all our senior debt and equal in rights to our existing senior
subordinated debt.
The exchange notes will be unsecured and junior in right of payment to all
our existing and future senior debt, including obligations under our current
senior credit agreements. The exchange notes will not be secured by any of our
assets, and therefore they will be subordinated to any secured debt that we may
have now or may incur in the future. Subject to certain limitations, our senior
credit agreements permit us to incur additional senior debt in the future. The
indebtedness under our current senior credit facilities will also become due
prior to the time the principal obligations under the exchange notes become
due. In addition, the exchange notes will be effectively subordinated to all
indebtedness of our subsidiaries, through which our foreign operations are
conducted.
In the event that we are declared bankrupt, become insolvent or are
liquidated or reorganized, our assets and the assets of our subsidiaries will
be available to pay obligations on the exchange notes only after all senior
debt has been paid in full, and there may not be sufficient assets remaining to
pay amounts due on any or all of the exchange notes and our existing senior
subordinated notes then outstanding. The holders of any indebtedness of our
subsidiaries will be entitled to payment of their indebtedness from the assets
of our subsidiaries prior to the holders of any of our general unsecured
obligations, including the exchange notes. In addition, subject to the
restrictions set forth in our senior credit agreement, substantially all of our
assets and our subsidiaries' assets may be pledged in the future to secure
other indebtedness.
The exchange notes will be issued under the senior subordinated note
indenture dated December 11, 1997 and will be pari passu with the existing
senior subordinated notes and the senior subordinated discount notes. These
exchange notes and the senior subordinated notes issued December 18, 1997 will
be treated as a single class under the indenture for all purposes, including
consents and waivers.
10
Our senior credit agreement and our indentures restrict our management's
discretion in operating our business.
Our agreements with senior creditors require us to maintain specified
financial ratios and tests, among other obligations. In addition, our senior
credit agreement restricts, among other things:
. our ability to incur additional indebtedness;
. our ability to make acquisitions; and
. our ability to make capital expenditures.
A failure to comply with the restrictions contained in the senior credit
agreement could lead to an event of default, which could result in an
acceleration of such indebtedness. Such an acceleration would also constitute
an event of default under the indenture governing the exchange notes and the
indenture governing our existing senior subordinated discount notes. The
indenture for the exchange notes and the indenture governing our existing
senior subordinated notes each also restricts, among other things, our ability
to incur additional indebtedness, sell assets, make some types of payments and
dividends or to merge or consolidate our company. A failure to comply with the
restrictions in the indenture and the indenture governing our existing senior
subordinated discount notes could result in an event of default under the
indenture and the indenture governing our senior subordinated discount notes.
We may not have the ability to raise the funds necessary to finance the change
of control offer required by the indenture for the exchange notes.
If a change of control occurs, you will have the right to require us to
repurchase any or all of the exchange notes you own at a price equal to 101% of
the principal amount thereof, together with any interest we owe you. Upon a
change of control, we also may be required immediately to repay the outstanding
principal, any accrued interest on and any other amounts owed by us under our
senior credit facilities, preferred equity interests and any other indebtedness
then outstanding. We cannot assure you that we would be able to repay amounts
outstanding under our senior credit facilities or obtain necessary consents
under the facilities to purchase the exchange notes or our existing notes. Any
requirement to offer to purchase any outstanding exchange notes may result in
our having to refinance our outstanding indebtedness, which we may not be able
to do. In addition, even if we were able to refinance such indebtedness, the
financing may be on terms unfavorable to us. If we fail to repurchase all of
the exchange notes tendered for purchase upon the occurrence of a change of
control, the failure will be an event of default under the indenture governing
the exchange notes. In addition, the change of control covenant does not cover
all corporate reorganizations, mergers or similar transactions and may not
provide you with protection in a highly leveraged transaction.
Fraudulent Conveyance Matters--Federal and state statutes allow courts, under
specific circumstances, to void guarantees, subordinate claims in respect of
the exchange notes and require Issuer's noteholders to return payments received
from guarantors.
Under federal bankruptcy law and comparable provisions of state fraudulent
transfer laws, a guarantee could be voided, or claims in respect of the notes
or a guarantee could be subordinated to all of our other debts or all other
debts of any guarantor if, among other things, we were or the guarantor was
insolvent or rendered insolvent by reason of such incurrence, or we were or the
guarantor was in a business or transaction for which our or the guarantor's
remaining assets constituted unreasonably small capital, or Issuer or the
guarantor intended to incur or believed that we or the guarantor would incur,
debts beyond our or the guarantor's ability to pay those debts as they mature.
In addition, any payment by us or that guarantor in accordance with its
guarantee could be voided and required to be returned to us or the guarantor,
or to a fund for the benefit of our creditors or the creditors of the
guarantors.
11
The measures of insolvency for purposes of these fraudulent transfer laws
will vary depending upon the law applied in any proceeding to determine whether
a fraudulent transfer has occurred. Generally, however, a guarantor would be
considered insolvent if the sum of its debts, including contingent liabilities,
were greater than the fair saleable value of all of its assets, or if the
present fair saleable value of its assets were less than the amount that would
be required to pay its probable liability on its existing debts, including
contingent liabilities, as they become absolute and mature, or it could not pay
its debts as they become due.
On the basis of historical financial information, recent operating history
and other factors, we believe that we and each guarantor, after giving effect
to its guarantee of the exchange notes, will not be insolvent, will not have
unreasonably small capital for the business in which we and they are engaged
and will not have incurred debts beyond our or their ability to pay the debts
as they mature. We cannot assure you, however, as to what standard a court
would apply in making these determinations or that a court would agree without
our conclusions.
Risks Related to the Business
The bedding industry is highly competitive.
The bedding industry is highly competitive, and we encounter competition
from many manufacturers in both domestic and foreign markets. The highly
competitive nature of the bedding industry means we are continually subject to
the risk of loss of our market share, losing significant customers, the
inability for us to gain market share or acquire new customers, and difficulty
in raising our prices. Some of our principal competitors have less debt than we
have and may be better able to withstand changes in market conditions within
the bedding industry. Additionally, we may encounter increased future
competition, which could have a material adverse effect on our financial
condition or results of operations. In addition, there is a risk of further
consolidation in the industry which could magnify the competitive risks
previously outlined. See "Business."
We are dependent on our significant customers.
Our top five customers accounted for 27% of our net sales for the fiscal
year ended November 26, 2000. While we believe our relationships with these
customers are stable, many arrangements are by purchase order or are terminable
at will at the option of either party. A substantial decrease or interruption
in business from our significant customers could result in write-offs or in the
loss of future business and could have a material adverse effect on our
financial condition or results of operations. See "Business--Customers; Sales
and Marketing."
In the future, retailers in the United States may consolidate, undergo
restructurings or reorganizations, or realign their affiliations, any of which
could decrease the number of stores that carry our products or increase the
ownership concentration in the retail industry. Some of these retailers may
decide to carry only one brand of mattress products which could affect our
ability to sell our products on favorable terms, and could have a material
adverse effect on our business, financial condition or results of operations.
We have an investment in Mattress Holdings International LLC ("MHI") which
invests in joint ventures, licensees and retailers and is controlled by our
largest stockholder, Bain Capital, LLC. Due to weak economic conditions which
have created declining equity values, we performed a review of the carrying
value of investments in affiliates owned by MHI and determined that the decline
in the value of such investments is other than temporary. As a consequence, we
recognized a non-cash impairment charge of $26.3 million to write-down the
investments to their estimated fair values of $1.4 million as of August 26,
2001. As of August 26, 2001, we also had receivables outstanding to these
affiliates in the amount of $34.5 million, net of allowance for doubtful
accounts. While we believe the investments and receivables were recoverable at
August 26, 2001, it is reasonably possible that future charges may be possible
due to additional future investments or continued decline of retail economic
conditions.
12
Difficulties in integrating potential acquisitions could adversely affect our
business.
We regularly evaluate potential domestic and international acquisition
opportunities to support and strengthen our business. We cannot be sure that we
will be able to locate suitable acquisition candidates, acquire candidates on
acceptable terms or integrate acquired businesses successfully.
Future acquisitions may require us to incur additional debt and contingent
liabilities, which may materially and adversely affect our business, operating
results and financial condition. In addition, the process of integrating
acquired businesses effectively involves the following risks:
. assimilating operations and products may be unexpectedly difficult;
. management's attention may be diverted from other business concerns;
. we may enter markets in which we have limited or no direct experience;
and
. we may lose key employees of the acquired business.
We do not currently have any material agreements relating to acquisitions or
joint ventures.
We are subject to fluctuations in the cost of raw materials and the possible
loss of suppliers.
The major raw materials that we purchase for production are steel wire,
fabrics and roll goods consisting of foam, insulator pads, and fiber and
non-wovens. The price and availability of these raw materials are subject to
market conditions affecting supply and demand. Our financial condition or
results of operations may be materially and adversely affected by increases in
raw material costs to the extent we are unable to pass on such higher costs to
customers.
We purchase our raw materials and certain components from a variety of
vendors, including Leggett & Platt Inc., Foamex International, Inc., and other
national raw material and component suppliers. We purchase substantially all of
our Stearns & Foster foundation parts and approximately 50% of our Sealy
foundation parts from Leggett & Platt, which has patents on various
interlocking wire configurations. While we attempt to reduce the risks of
dependence on a single external source, we cannot assure you that there would
not be an interruption of production if Leggett & Platt or any other supplier
were to discontinue supplying us for any reason. See "Business."
We have risks associated with our international operations.
We currently conduct international operations and may pursue additional
international opportunities. Our international operations are subject to the
customary risks of operating in an international environment, including the
potential imposition of trade or foreign exchange restrictions, tariff and
other tax increases, fluctuations in exchange rates, inflation and unstable
political situations. The current political and economic environment in
Argentina is increasingly unstable. Although this has not materially affected
our operations in Argentina to date, it could have an adverse effect on those
operations and our investment therein in the future. Currently, we have $9.5
million invested in the Argentina business. We have also limited our ability to
independently expand in certain international markets where we have granted
licenses to manufacture and sell Sealy bedding products. Our licensees in
Australia, Jamaica and the United Kingdom have perpetual licenses, subject to
only limited termination rights. Our licensees in the Dominican Republic,
Israel, Japan, New Zealand, Saudi Arabia (which covers 13 Arabian countries),
South Africa and Thailand hold licenses for fixed terms with limited renewal
rights. Fluctuations in the rate of exchange between the U.S. dollar and other
currencies may affect stockholders' equity and the results of operations. See
"Business--International."
13
Our ability to compete effectively depends on our ability to maintain our
trademarks, patents and other intellectual property.
We hold over 350 trademarks, which we believe have significant value and are
important to the marketing of our products to retailers. We own 30 U.S. patents
and 49 international patents and have 7 domestic patents pending. In addition,
we own U.S. and foreign registered trade names and service marks and have
applications for the registration of trade names and service marks pending
domestically and abroad. We also own several U.S. copyright registrations, and
a wide array of unpatented proprietary technology and know-how. We also license
certain intellectual property rights from third parties.
Our ability to compete effectively with other companies depends, to a
significant extent, on our ability to maintain the proprietary nature of our
owned and licensed intellectual property. Although our trademarks are currently
registered in the United States and registered or pending in 97 foreign
countries, there can be no assurance that our trademarks cannot and will not be
circumvented, or do not or will not violate the proprietary rights of others,
or that we would not be prevented from using our trademarks if challenged. A
challenge to our use of our trademarks could result in a negative ruling
regarding our use of our trademarks, their validity or their enforceability, or
could prove expensive and time consuming in terms of legal costs and time spent
defending against it. Either situation could have a material adverse effect on
our financial condition or results of operations. In addition, there can be no
assurance that we will have the financial resources necessary to enforce or
defend our trademarks. In addition, there can be no assurance as to the degree
of protection offered by the various patents, the likelihood that patents will
be issued for pending patent applications or, with regard to the licensed
intellectual property, that the licenses will not be terminated. If we were
unable to maintain the proprietary nature of our intellectual property and our
significant current or proposed products, our financial condition or results of
operations could be materially adversely affected. See "Business."
Failure to comply with environmental, health and safety requirements could
expose us to a material liability.
We are subject to federal, state and local laws and regulations relating to
pollution, environmental protection and occupational health and safety. There
can be no assurance that we are at all times in complete compliance with all
such requirements. We have made and will continue to make capital and other
expenditures to comply with environmental and health and safety requirements.
As is the case with manufacturers in general, if a release of hazardous
substances occurs on or from our properties or any associated offsite disposal
location, or if contamination from prior activities is discovered at any of our
properties, we may be held liable and the amount of such liability could be
material. We are conducting environmental cleanups at a formerly owned facility
in South Brunswick, New Jersey and at an inactive facility in Oakville,
Connecticut. We have recorded accruals to reflect future costs associated with
these cleanups. However, because of the uncertainties associated with
environmental remediation, it is possible that the costs incurred with respect
to the cleanups could exceed the recorded accruals. See "Business."
We may face exposure to product liability.
We face an inherent business risk of exposure to product liability claims in
the event that the use of any of our products results in personal injury or
property damage. In the event that any of our products prove to be defective,
we may be required to recall or redesign such products. We maintain insurance
against product liability claims, but there can be no assurance that such
coverage will continue to be available on terms acceptable to us or that such
coverage will be adequate for liabilities actually incurred. A successful claim
brought against us in excess of available insurance coverage, or any claim or
product recall that results in significant adverse publicity against us, may
have a material adverse effect on our business.
14
The loss of the services of any members of our senior management team could
adversely affect our business.
We are dependent on the continued services of our senior management team.
Although we believe we could replace key employees in an orderly fashion should
the need arise, the loss of such key personnel could have a material adverse
effect on our financial condition or results of operations. See "Management."
A deterioration in labor relations could have a material effect on our business.
As of November 26, 2000, we had 6,077 full-time employees. Approximately 67%
of our employees at our 29 North American facilities are represented by various
labor unions with separate collective bargaining agreements. Due to the large
number of collective bargaining agreements, we are periodically in negotiations
with certain of the unions representing our employees. There can be no
assurance that we will not at some point be subject to work stoppages by some
of our employees and, if such events were to occur, that there would not be a
material adverse effect on our financial condition or results of operations.
See "Business - Employees."
Our controlling shareholders may have interests that conflict with yours.
Our company is privately owned by funds affiliated with Bain Capital, Inc.,
related investors and members of management. These investors collectively
control our affairs and policies. Circumstances may occur in which the
interests of these shareholders could be in conflict with the interests of the
holders of the exchange notes. In addition, these shareholders may have an
interest in pursuing acquisitions, divestitures or other transactions that, in
their judgment, could enhance their equity investment, even though such
transactions might involve risks to the holders of the exchange notes.
The forward-looking statements contained in this prospectus are based on our
predictions of future performance. As a result, you should not place undue
reliance on these forward-looking statements.
This prospectus contains certain forward-looking statements, including,
without limitation, statements concerning the conditions in the conventional
bedding industry, our operations, economic performance and financial condition,
including in particular statements relating to our business and growth strategy
and product development efforts. The words "believe," "expect," "anticipate,"
"intend" and other similar expressions generally identify forward-looking
statements. Potential investors are cautioned not to place undue reliance on
these forward-looking statements, which speak only as of their dates. These
forward-looking statements are based largely on our current expectations and
are subject to a number of risks and uncertainties, including, without
limitation, those identified under "Risk Factors" and elsewhere in this
prospectus and other risks and uncertainties indicated from time to time in our
filings with the SEC. Actual results could differ materially from these
forward-looking statements. In addition, important factors to consider in
evaluating such forward-looking statements include changes in external market
factors, changes in our business or growth strategy or in our ability to
execute our strategy due to changes in our industry or the economy generally,
the emergence of new or growing competitors and various other competitive
factors. In light of these risks and uncertainties, there can be no assurance
that the matters referred to in the forward-looking statements contained in
this prospectus will in fact occur.
15
USE OF PROCEEDS
We will not receive any proceeds from this exchange offer. The net proceeds
from the $125 million old note offering, after deducting estimated fees and
expenses, was approximately $121.7 million. We used the net proceeds:
. to repay approximately $66.2 million of debt outstanding under the
revolving facility in the senior credit agreement;
. to prepay approximately $41.6 million of Tranche A term loans
outstanding under the senior credit agreement; and
. to prepay, in its entirety, the mortgage on our North Carolina corporate
headquarters complex in the amount of approximately $13.9 million.
We currently intend to borrow under the revolving facility when needed for
general corporate purposes, which may include acquisitions. In addition, as of
August 26, 2001 we had C$5.3 million available for borrowing under a C$25.0
million Canadian facility. At August 26, 2001, we also had approximately $87.1
million available under our Revolving Credit Facility net of Letters of Credit
issued totaling approximately $12.9 million.
16
SELECTED HISTORICAL CONSOLIDATED FINANCIAL
AND OPERATING DATA OF SEALY CORPORATION
Set forth below are our selected historical consolidated financial data at
the dates and for the periods indicated. The selected historical consolidated
statement of operations data and the selected historical balance sheet data
were derived from the historical financial statements. The audited historical
financial statements as of and for the fiscal years ending November 29, 1998,
November 28, 1999 and November 26, 2000 appear elsewhere in this prospectus.
The unaudited condensed consolidated historical financial statements for the
nine months ended August 27, 2000 and August 26, 2001 appear elsewhere in this
prospectus and have been prepared on the same basis as our audited financial
statements and, in our opinion, reflect all adjustments (consisting only of
normal recurring adjustments) necessary to present fairly our results of
operations for the periods then ended and our financial positions as of such
dates.
Please note that the only financial information of the Issuer is included in
the guarantor footnote within the audited consolidated financial statements
included within this prospectus. The selected historical consolidated financial
data set forth below should be read in conjunction with, and are qualified by
reference to, "Management's Discussion and Analysis of Financial Condition and
Results of Operations", the audited consolidated financial statements and
accompanying notes thereto and the unaudited condensed consolidated financial
statements and accompanying notes thereto included elsewhere in this prospectus.
Fiscal Year Nine Months Ended
-------------------------------------- --------------------
August 27, August 26,
1996 1997 1998 1999 2000 2000 2001
------ ------ ------ ------ -------- ---------- ----------
Statement of Operations Data:
Net sales............................................ $697.6 $804.8 $891.3 $985.7 $1,101.5 $813.4 $869.4
Cost of goods sold................................... 399.9 459.1 503.5 544.2 603.9 446.5 485.9
Selling, general and administrative expenses......... 244.1 273.7 342.9 344.1 374.2 271.7 306.5
------ ------ ------ ------ -------- ------ ------
Income from operations............................... 53.6 72.0 44.9 97.4 123.4 95.2 77.0
Interest expense..................................... 28.8 31.4 67.5 65.0 65.8 48.7 54.8
Other (income) expense, net(1)....................... -- -- -- -- 0.2 -- 24.8
------ ------ ------ ------ -------- ------ ------
Income (loss) before income taxes, extraordinary items
and cumulative effect of change in accounting principle 24.8 40.6 (22.6) 32.4 57.4 46.5 (2.6)
Income tax expense (benefit)......................... 25.3 22.6 (3.3) 16.6 27.2 20.9 13.0
------ ------ ------ ------ -------- ------ ------
Income (loss) before extraordinary items and cumulative
effect of change in accounting principle............... (0.5) 18.0 (19.3) 15.8 30.2 25.6 (15.6)
Extraordinary loss from early extinguishment of debt
(net of tax)(2)........................................ -- 2.0 14.5 -- -- -- 0.7
Cumulative effect of change in accounting principle
(net of tax)(3)........................................ -- 4.3 -- -- -- -- (0.2)
------ ------ ------ ------ -------- ------ ------
Net income (loss)....................................... $ (0.5) $ 11.7 $(33.8) $ 15.8 $ 30.2 $ 25.6 $(16.1)
====== ====== ====== ====== ======== ====== ======
Fiscal Year Nine Months Ended
-------------------------------------- --------------------
August 27, August 26,
1996 1997 1998 1999 2000 2000 2001
------ ------ ------ ------ ------ ---------- ----------
Other Financial Data:
Depreciation & amortization............ $ 26.6 $ 24.1 $ 24.3 $ 25.6 $ 27.1 $ 19.7 $ 23.2
Capital expenditures................... (12.0) (29.1) (33.1) (16.1) (24.1) (14.2) (15.1)
Cash flows provided by (used in):
Operating activities................ 44.4 42.0 53.0 56.0 70.2 53.3 (19.6)
Investing activities................ (11.0) 11.4 (32.9) (43.0) (43.9) (23.6) (45.6)
Financing activities................ (34.2) (64.0) (15.0) (13.4) (19.0) (12.3) 56.7
EBITDA(4).............................. 80.2 96.1 69.2 123.0 150.3 114.9 75.4
Adjusted EBITDA(5)..................... 86.8 102.7 113.1 138.0 157.1 118.6 106.6
Ratio of earnings to fixed charges(6).. 1.8x 2.2x -- 1.5x 1.8x 1.9x --
17
Fiscal Year At
-------------------------------------- ----------
August 26,
1996 1997 1998 1999 2000 2001
------ ------ ------- ------- ------ ----------
Balance Sheet Data:
Total assets.................... $739.9 $721.1 $ 751.1 $ 771.0 $830.0 $ 920.9
Long-term debt, net............. 269.5 330.0 682.3 676.2 651.8 758.6
Total debt...................... 288.1 330.0 690.8 690.3 686.2 780.3
Stockholders' equity (deficit).. 293.0 205.1 (138.8) (121.4) (93.3) (121.8)
- --------
Footnotes to table
1. We previously contributed 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
investments in joint ventures, licensees and retailers and is controlled by
our largest stockholder, Bain Capital, LLC. The investment in MHI was made
to fund its activities in order to enhance business relationships and build
incremental sales. Various operating factors combined with weak economic
conditions created during the third quarter produced a requirement to review
equity values related to the affiliates. Accordingly, we performed a review
of the carrying value of our investments in affiliates owned by MHI. We have
determined that the decline in the value of such investments is other than
temporary and, as a consequence, have recognized a non-cash impairment
charge of $26.3 million to write-down the investments to their estimated
fair values of $1.4 million as of August 26, 2001. In May 2001, we and one
of our licensees terminated the existing contract that allowed the licensee
to manufacture and sell certain products under the Sealy brand name and
entered into a new agreement for the sale of certain other Sealy branded
products. In conjunction with the termination of the license agreement,
Sealy received a $4.6 million termination fee that is recorded as other
income. Other (income) expense, net also includes the equity in the
(earnings) loss of equity investees and minority interest.
2. During 1997 and 1998, we recorded extraordinary losses of $2.0 million and
$5.4 million, respectively, net of income tax benefits of $1.4 million and
$3.6 million, respectively. These represented the remaining unamortized debt
issuance costs related to long term obligations repaid as a result of debt
refinancing. Also, during 1998 we recorded an extraordinary loss of $9.1
million, net of income tax benefits of $6.1 million. This represented
premiums paid to the existing note holders and consent fees paid in
connection with the retirement of the debt. On April 10, 2001, we completed
the private placement of $125 million of 9.875% senior subordinated notes.
The proceeds from the placement were used to repay existing bank debt. As a
result, we recognized an extraordinary loss on the write-off of a portion of
the previous debt issuance costs of $0.7 million (net of a $0.5 million tax
benefit).
3. During the fourth quarter of 1997, we changed our accounting policy to
comply with EITF 97-13, "Accounting for Costs Incurred in Connection with a
Consulting Contract that Combines Business Process Re-engineering and
Information Technology Transformation." This resulted in a loss of $4.3
million, net of income tax benefits of $2.9 million, and represented the
write-off of previously capitalized costs as described in the EITF. We
adopted FAS 133, "Accounting for Derivative Instruments and Hedging
Activities" on November 27, 2000 and recorded a $0.2 million gain net of
income tax expense of $0.1 million, which was recorded as a cumulative
effect of a change in accounting principle.
4. EBITDA is calculated by adding interest expense, net, income tax expense
(benefit), depreciation and amortization of intangibles to income (loss)
before extraordinary items 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 in generally accepted accounting principles ("GAAP") and does not
necessarily indicate whether cash flows will be sufficient to fund cash
needs.
5. 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 our
"Year 2000" information systems issue and EITF 97-13 reengineering efforts,
(iii) High Point relocation, (iv) compensation associated with our 1998
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,
(viii) severance costs associated with plant closure and management
reorganization; and (ix) other relief items including, foreign currency
losses, gain or loss on certain assets and investments, etc. We believe 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.
18
Fiscal Year Nine Months Ended
--------------------------------- -------------------
August 27, August 26,
1996 1997 1998 1999 2000 2000 2001
----- ------ ------ ------ ------ ---------- ----------
EBITDA $80.2 $ 96.1 $ 69.2 $123.0 $150.3 $114.9 $ 75.4
Adjustments:
Stock based compensation........................... 4.7 1.6 -- 6.7 6.8 3.6 --
Loss on net assets held for sale and other write-
downs............................................. -- -- 10.6 -- -- -- --
High Point relocation.............................. -- -- 7.5 2.0 -- -- --
EITF 97-13 reengineering efforts................... -- 1.0 4.1 5.0 -- -- --
Compensation associated with our 1998
recapitalization.................................. -- -- 18.9 -- -- -- --
Executive severance and transition................. 1.9 -- -- -- -- -- --
Montgomery Ward bad debt expense and factoring..... -- 4.0 -- -- -- -- --
Plant closure and severance costs.................. -- -- -- -- -- -- 1.3
Other relief items--including foreign currency
losses, gain or loss on certain assets and
investments, etc.................................. -- -- 2.8 1.3 -- 0.1 29.9(a)
----- ------ ------ ------ ------ ------ ------
Adjusted EBITDA....................................... $86.8 $102.7 $113.1 $138.0 $157.1 $118.6 $106.6
===== ====== ====== ====== ====== ====== ======
-----
(a)Includes the non-cash impairment charge of $26.3 million to write-down the
investments in affiliates as discussed in footnote 1 above.
6. 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 consists of interest expense, net, including
amortization of discount and financing costs and the portion of operating
rental expense (33%) which management believes is representative of the
interest component of rent expense. For the year ended November 29, 1998 and
nine months ended August 26, 2001, earnings were insufficient to cover fixed
charges by $22.6 million and $2.6 million, respectively.
19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF SEALY CORPORATION
The following discussion and analysis should be read in conjunction with the
section "Selected Financial Information and Other Data of Sealy Corporation",
the audited consolidated financial statements and accompanying notes thereto
and the unaudited consolidated financial statements and accompanying notes
thereto included elsewhere in this prospectus. The forward-looking statements
in this discussion regarding the bedding industry, our expectations regarding
our future performance, liquidity and capital resources and other
non-historical statements in this discussion include numerous risks and
uncertainties, as described under "Risk Factors"and elsewhere in this
Prospectus. Our actual results may differ materially from those contained in
any forward-looking statements.
Results of Operations
Nine Months Ended August 26, 2001 compared with Nine Months Ended August 27,
2000
Net Sales. Net sales increased $56.0 million, or 6.9% for the nine months
ended August 26, 2001, when compared to the nine months ended August 27, 2000.
The $56.0 million increase is comprised of increases in our international
operations of $57.1 million, partially offset by decreases in the domestic
operations of $1.1 million. The increase is attributable to an 13.0% increase
in unit volume, partially offset by a 5.4% decrease in the average unit selling
price. Volume growth was attributable to the acquisitions of Sapsa Bedding S.A.
in Europe in 2001, Rozen S.R.L. in Argentina, acquired in 2000, and the Bassett
brand bedding license, acquired in 2000, and growth in the existing
international business, partially offset by lower unit volume in the domestic
business attributable to the slowdown in the U.S. economy. The lower average
unit selling price is primarily attributable to growth in the international
business as those products typically carry a lower unit selling price.
Cost of Goods Sold. Cost of goods sold for the nine months, as a percentage
of net sales, increased 1.0 percentage point to 55.9%. The increase in cost of
sales includes a $2.9 million physical inventory adjustment recorded in the
quarter ended May 27, 2001 due primarily to understating material usage.
Procedures and controls in this area have been strengthened as part of a
management reorganization previously announced. The cost of goods sold
percentage also increased due to growth in the international business, which
generally carries a lower gross margin rate.
Selling, General and Administrative. Selling, general, and administrative
expenses increased $36.4 million to $295.0 million, or 33.9% of net sales,
compared to $258.6 million or 31.8% of net sales. This increase is primarily
due to $16.0 million in additional costs associated with the businesses
acquired in the international operations. We have incurred increased
promotional expenses of $9.5 million primarily associated with the roll-out of
a new Sealy Posturepedic product line that will benefit us in future periods.
We also recorded a specific bad debt charge of $4.2 million associated with the
bankruptcy of Homelife. In addition to the specific charge for Homelife, we
have increased bad debt expense $1.6 million due to the general slowdown in the
economy. Additionally, Argentina incurred $1.3 million of costs associated with
our retail store operations, which we do not have in our domestic business.
Stock Based Compensation. We have an obligation to repurchase certain of our
securities held by an officer at the greater of estimated fair market value or
original cost. We recorded no charge during the nine months of 2001, compared
to $3.6 million during the nine months ended August 27, of 2000, to revalue
this obligation to reflect the change in the fair market value of the
securities.
Restructuring Charges. During 2001, we shutdown our Memphis facility and
recorded a $0.5 million charge primarily for severance. Additionally, we
recorded a $0.7 million charge for severance due to a management reorganization.
Interest Expense. Interest expense increased $6.1 million primarily due to
increased average debt levels.
20
Other Expense, net. We previously contributed 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 our largest stockholder, Bain Capital, LLC. The investment in MHI
was made to fund our activities in order to enhance business relationships and
build incremental sales. Various operating factors combined with weak economic
conditions created during the third quarter produced a requirement to review
equity values related to the affiliates. Accordingly, we performed a review of
the carrying value of our investments in affiliates owned by MHI. We have
determined that the decline in the value of such investments is other than
temporary and, as a consequence, we have recognized a non-cash impairment
charge of $26.3 million to write-down the investments to their estimated fair
values of $1.4 million as of August 26, 2001.
In May 2001, we and one of our licensees terminated the existing contract
that allowed the licensee to manufacture and sell certain products under the
Sealy brand name and entered into a new agreement for the sale of certain other
Sealy branded products. In conjunction with the termination of the license
agreement, Sealy received a $4.6 million termination fee that is recorded as
other income. Other expense, net also includes the equity in the (earnings)
loss of equity investees and minority interest.
Income Tax. Our effective income tax rates in 2001 and 2000 differ from the
Federal statutory rate principally because of the application of purchase
accounting and state and local income taxes. In addition, no tax benefit was
recorded on the $26.3 million impairment charge due to the uncertainty
concerning the recoverability on such loss. Excluding the effects of the
impairment charge, our effective tax rate for 2001 is approximately 55.4%
compared to 45.0% for 2000. The higher effective tax rate for 2001 is due to
lower projected pretax income for the year compared to 2000 which increases the
impact of non-deductible goodwill.
Net Income (Loss). For the reasons set forth above, we recorded a net loss
of $16.1 million for the nine months ended August 26, 2001 versus net income of
$25.6 million for the nine months ended August 27, 2000.
Fiscal 2000 Compared with Fiscal 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. We 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. We expect 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. We believe we can continue to exceed the
industry growth rate and increase our 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 we incurred additional
costs associated with the move of our corporate headquarters to High Point,
21
North Carolina during the first two quarters of 1999. Royalty revenue increased
$1.4 million as our 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. We have an obligation to repurchase certain of our
securities held by an officer at the greater of fair market value or original
cost. We 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 $2.5
million, which was partially offset by lower debt levels due to current year
payments. Additionally, we received $1.2 million in interest in the second
quarter associated with a favorable conclusion of an IRS examination.
Income Taxes. Our 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. Our 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.
Fiscal 1999 Compared with Fiscal 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. We have an obligation to repurchase certain of our
securities held by an officer at the greater of fair market value or original
cost. We 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.
22
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. Our 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. Our 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
Our principal sources of funds are cash flows from operations and borrowings
under our revolving credit facility. Our principal use of funds consists of
payments of principal and interest on our senior credit agreements, capital
expenditures and interest payments on our outstanding notes. We made capital
expenditures aggregating $24.1 million and $16.1 million during fiscal 2000 and
1999, respectively and $15.1 million in the nine months ended August 26, 2001.
The increase in capital spending in fiscal 2000 was primarily attributable to
our construction of a new plant in Brazil, expansion of the existing plant in
Mexico and the purchase of manufacturing equipment for domestic facilities. We
have funded our capital expenditures with cash generated by operations. We
expect 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. We believe that annual capital expenditure
limitations in our current debt agreements will not significantly inhibit us
from meeting our ongoing capital needs. At August 26, 2001, we had
approximately $87.1 million available under our Revolving Credit Facility net
of Letters of Credit issued totaling approximately $12.9 million. Our net
weighted average borrowing cost was 9.8% for the nine months ended August 26,
2001. The Revolving Credit Facility expires in December 2002. We expect we will
have the ability to renew the existing revolving credit facility or have the
ability to find new financing with comparable terms.
In fiscal 2000 we 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 pro rata lenders approved Amendment Three to the
pro rata credit agreement. The amendment makes adjustments to restrictions on
acquisitions and capital expenditures in our credit agreement which will allow
us to take advantage of potential growth opportunities.
On March 30, 2001 the pro rata lenders approved the Fourth Amendment to the
pro rata credit agreement and the AXEL lenders approved the Third Amendment to
the AXELs credit agreement. The amendments permit us to issue up to $125
million of additional senior subordinated notes and apply those proceeds to
repay, in its entirety, the mortgage on the corporate headquarters complex,
repay all amounts outstanding under the revolving credit facility and repay
certain amounts outstanding under the Tranche A term loan. On April 10, 2001,
we completed the private placement of $125 million of 9.875% senior
subordinated notes. These notes are due and payable on December 15, 2007 and
require semiannual interest payments which commence December 15, 2001.
During the first quarter of 2001, we secured an additional revolving credit
facility with a separate banking group. This facility provides for borrowing in
Canadian currency up to C$25 million. The revolving credit facility expires in
fiscal 2004.
On April 6, 2001, we completed the acquisition of Sapsa Bedding S.A., of
Paris, France. The purchase price for the acquisition was $31.5 million,
including costs associated with the acquisition. The acquisition was funded
through approximately $8.6 million of existing cash, a $12.5 million draw on
the new Canadian facility and a $10.4 million draw on the existing Revolving
Credit Facility.
23
During the first quarter of 2001, we commenced a plan to shut down our
Memphis facility and recorded a $0.5 million charge primarily for severance. We
ceased operations early in the second quarter of 2001. During the first quarter
of 2001, we also recorded a $0.7 million charge for severance related to a
management reorganization. All payments related to these charges are expected
to be made by the end of fiscal 2001.
We 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 us to repurchase
certain of our securities at the greater of fair market value or original cost.
The expense associated with the right was recorded in stock based compensation
expense. During the first quarter of 2001, we satisfied a portion of the
obligation through a draw of our revolving credit facility and the delivery of
a portion of the executive's securities.
Our accounts receivable increased $57.9 million from $145.5 million at
November 26, 2000 to $203.4 million at August 26, 2001. This increase is
primarily due to the acquisition of Sapsa Bedding S.A., increases associated
with the international operations due to increased sales and increases
associated with one affiliate that has negotiated with us to allow them to
defer payment of a portion of its trade receivables (approximately $10 million)
while renegotiating its credit agreement with its lenders due to recent
operating performance. While there can be no assurance, we believe the
affiliate will be successful in renegotiating its credit agreement.
Additionally, as part of this renegotiation, we are considering alternatives
that modify sales terms and conditions and existing trade indebtedness with the
affiliate as well as possible further cash investments with such affiliate.
Further discussions are currently ongoing with our affiliate. We are unable to
predict with certainty when or if negotiations will be completed. We believe
that adequate allowances have been established for any potential losses on
those trade receivables as of August 26, 2001. We are, however, unable to
predict the impact, if any, should the affiliates continue to be impacted by a
weakened economy, be unsuccessful in renegotiating their current credit
agreements or obtaining additional financing.
On July 16, 2001, Homelife Corporation, one of our top ten customers in
terms of revenue in fiscal 2000, filed for federal bankruptcy protection. Our
outstanding receivables in respect of Homelife Corporation total $4.8 million.
In connection with the Homelife bankruptcy, we recorded a specific bad debt
charge of $4.2 million in the third quarter.
Our customers include furniture stores, national mass merchandisers,
specialty sleep shops, department stores, contract customers and other stores.
In the future, these retailers may consolidate, undergo restructurings or
reorganizations, or realign their affiliations, any of which could decrease the
number of stores that carry our products. These retailers are also subject to
changes in consumer spending and the overall state of the economy both
domestically and internationally. During the first half of 2001, several of
these retailers reported lower than expected sales and profits. Any of these
factors could have a material adverse effect on our business, financial
condition or results of operations. In addition, the terrorist attack of
September 11, 2001 will likely further contract consumer confidence and have a
negative impact on the retail environment; however, it is too early to
determine the long-term effects such attacks will have on our business and the
economy.
Our ability to make scheduled payments of principal, or to pay the interest
or liquidated damages, if any, on, or to refinance, our indebtedness (including
the notes), or to fund planned capital expenditures will depend on our future
performance, which, to a certain extent, is subject to general economic,
financial, competitive, legislative, regulatory and other factors that are
beyond our control. Based upon the current level of operations and certain
anticipated improvements, we believe that cash flow from operations and
available cash, together with available borrowings under the senior credit
agreement, will be adequate to meet our future liquidity needs for at least the
next several years. We will, however, need to refinance all or a portion of the
principal of the notes on or prior to maturity. There can be no assurance that
our business will generate sufficient cash flow from operations, that
anticipated revenue growth and operating improvements will be realized or that
future borrowings will be available under the senior credit agreements in an
amount sufficient to enable us to service our indebtedness, including the
notes, or to fund our other liquidity needs. In addition, there can be no
assurance that we will be able to effect any such refinancing on commercially
reasonable terms or at all.
24
We believe that we will have the necessary liquidity through cash flow from
operations, and availability under the Revolving Credit Facility for the next
several years to fund our expected capital expenditures, obligations under our
credit agreement and subordinated note indentures, environmental liabilities,
and other needs required to manage and operate our business.
Foreign Operations and Export Sales
We have three manufacturing facilities in Canada, and one each in Mexico,
Argentina and Brazil. In addition, we have recently completed the acquisition
of Sapsa Bedding S.A., a leading manufacturer of latex bedding products in
Europe, with headquarters and manufacturing operations in France and Italy, as
well as sales organizations in Spain, Germany, Belgium and The Netherlands. In
2000, we formed a joint venture with our Australian licensee to import,
manufacture, distribute and sell Sealy products in South East Asia. We use a
Korean contract manufacturer to help service the Korean market, distribute
products directly in many small international markets, and have license
agreements in Thailand, Japan, the United Kingdom, Australia, New Zealand,
South Africa, Israel, Jamaica, Saudi Arabia, the Bahamas and the Dominican
Republic.
Impact of Recently Issued Accounting Pronouncements
FASB issued FAS 133, "Accounting for Derivative Instruments and Hedging
Activities," as amended, requires that all derivatives be recorded on the
balance sheet at fair value. Derivatives that are not hedges must be adjusted
to fair value through income. If the derivative is a hedge, depending on the
nature of the hedge, changes in the fair value of derivatives are either offset
against the change in the fair value of assets, liabilities, or firm
commitments through earnings or recognized in other comprehensive income until
the hedged item is recognized in earnings. The ineffective portion of a
derivative's change in fair value is immediately recognized in earnings. We
adopted FAS 133 on November 27, 2000 and recorded a $0.2 million gain net of
income tax expense which is recorded in the condensed unaudited statements as a
cumulative effect of a change in accounting principle.
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. We adopted SAB 101 effective November 27, 2000. The adoption
did not have any effect on our revenue recognition policy.
In July 2001, the Financial Accounting Standards Board (the "FASB") issued
FAS 141, "Business Combinations". FAS 141 addresses financial accounting and
reporting for business combinations and supersedes APB Opinion No. 16,
"Business Combinations", and FASB Statement No. 38, "Accounting for
Preacquisition Contingencies of Purchased Enterprises". All business
combinations in the scope of this Statement are to be accounted for using one
method, the purchase method. This statement applies to all business
combinations initiated after June 30, 2001 and all business combinations
accounted for using the purchase method for which the date of acquisition is
July 1, 2001 or later. We will adopt the provisions of this pronouncement for
any business combinations subsequent to June 30, 2001.
In July 2001, the FASB issued FAS 142, "Goodwill and Other Intangible
Assets", effective for years beginning after December 15, 2001, our first
quarter of fiscal year 2003. FAS 142 addresses financial accounting and
reporting for acquired goodwill and other intangible assets and supersedes APB
Opinion No. 17, "Intangible Assets". Goodwill and some intangible assets will
no longer be amortized, but will be reviewed at least annually for impairment.
It also addresses how intangible assets that are acquired individually or with
a group of other assets (but not those acquired in a business combination)
should be accounted for in financial statements upon their acquisition. We will
adopt the non-amortization provision for any acquisitions with a closing date
subsequent to June 30, 2001. We are currently evaluating the effects of the
other provisions of this Statement.
In August 2001, the FASB issued FAS 143, "Accounting for Asset Retirement
Obligations", effective for years beginning after June 15, 2002, our first
quarter of fiscal year 2003. FAS 143 addresses financial accounting
25
and reporting for obligations associated with the retirement of tangible
long-lived assets and the associated asset retirement costs. It applies to
legal obligations associated with the retirement of long-lived assets that
result from the acquisition, construction, development and (or) the normal
operation of a long-lived asset, except for certain obligations of lessees. We
are currently evaluating the effects of this Statement.
In October 2001, the FASB issued FAS 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets", effective for years beginning after December
15, 2001 and interim periods within those years, our second quarter of fiscal
2002. The objectives of FAS 144 are to address significant issues relating to
the implementation of FASB Statement No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", and to develop
a single accounting model, based on the framework established in FAS 121, for
long-lived assets to be disposed of by sale, whether previously held and used
or newly acquired. We are currently evaluating the effects of this Statement.
In April 2001, the Emerging Issues Task Force of the FASB reached consensus
on Issue 00-25, "Vendor Income Statement Characterization of Consideration from
a Vendor to a Retailer". This issue provides guidance primarily on income
statement classification of consideration from a vendor to a purchaser of the
vendor's products, including both customers and consumers. Generally, cash
consideration is to be classified as a reduction of revenue, unless specific
criteria are met regarding goods or services that the vendor may receive in
return for this consideration. We have historically classified certain costs
covered by the provisions of 00-25 as selling expenses. We are currently
evaluating the impact of the new accounting guidance and expect that certain
costs historically recorded as marketing and selling expenses will be
reclassified as a reduction of revenues. The guidance from this issue should be
applied no later than in interim financial statements for periods beginning
after December 15, 2001, our second quarter of fiscal 2002.
Fiscal Year
We use 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 we believe our 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 our
expectations include: general business and economic conditions, competitive
factors, raw materials pricing, and fluctuations in demand.
Foreign Currency Exposures
Our earnings are affected by fluctuations in the value of our 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 we manufacture or sell our 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.
To protect against the reduction in value of forecasted foreign currency
cash flows resulting from purchases in a foreign currency, we have instituted a
forecasted cash flow hedging program. We hedge portions of our purchases
denominated in foreign currencies with forward contracts and currency options
and collars. At August 26, 2001, we had a currency collar on a $3.5 million
payable in Canadian dollars, a forward contract to sell $8.6 million Canadian
dollars and an option to sell 15.2 million Mexican pesos.
Interest Rate Risk
Because our obligations under the bank credit agreement bear interest at
floating rates, we are sensitive to changes in prevailing interest rates. We
use derivative instruments to manage our long-term debt interest rate exposure,
rather than for trading purposes. A 10% increase or decrease in market interest
rates that effect our interest rate derivative instruments would not have a
material impact on earnings during the next fiscal year.
26
We have entered into interest rate swap agreements to reduce the impact of
changes in interest rates on all or a portion of our 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.
As of August 26, 2001, we had the following interest rate instruments in
effect that provide protection on the three month LIBOR rate upon which our
variable rate debt is based (actual rate paid is LIBOR plus the respective
margin):
Notional Amount LIBOR Rate Period
--------------- ---------- -----------
(millions)
Forward Rate Agreement....... $150.0 5.905% 6/01-9/01
Interest Rate Swap........... $236.2 6.080% 12/00-12/06
27
BUSINESS
The market data used throughout this prospectus were obtained from
independent surveys and from industry publications. These industry publications
generally indicate that the information they contain has been obtained from
sources believed to be reliable, but that the accuracy and completeness of the
information is not guaranteed. We have not independently verified these market
data.
Sealy
Sealy Corporation is the leading bedding manufacturer and marketer in North
America. Our flagship brands include Sealy, Sealy Posturepedic, Sealy
Posturepedic Crown Jewel, Stearns & Foster and Bassett. We offer a broad line
of conventional bedding options, including mattresses and foundations, in the
promotional, premium and luxury categories, which sell at retail price points
from under $200 to approximately $4,000 per queen-size set. The Sealy brand
name has been in existence for over 100 years, and has been the number one
selling brand in the industry in each of the past 23 years. Our premium brand,
Stearns & Foster, has been in existence for over 150 years, and has experienced
sales growth of 37.4% per annum over the last 4 years. For the fiscal year
ended November 26, 2000, we generated net sales of $1.1 billion and had
adjusted EBITDA of $157.1 million. Over the past 2 years, we have grown our net
sales at an average rate of 11.2% per annum, and our adjusted EBITDA at an
average rate of 17.9% per annum. However, due to the current slowdown in the
U.S. economy, the growth rate in 2001 is expected to be substantially lower
than that experienced over the past two years.
Market Overview
The U.S. conventional bedding market has grown at an average rate of 6.7%
per year since 1974 and has grown in 24 of the past 25 years. However, the
International Sleep Products Association is forecasting a 1.5% decline in
industry sales for 2001, the first such decline since 1982. Conventional
bedding consists of foam and inner-spring mattresses and wood, steel and
composite foundations, and had total manufacturer sales in 2000 of $4.6 billion.
Conventional bedding is sold through a variety of retail channels, including
specialty retail chains (the fastest growing channel), furniture stores,
department stores, and mass merchandisers. Retailers are increasing floor
allocation and devoting more resources to growing the bedding category within
their stores due to the high profitability of the category, its minimal
inventory requirements, and the high level of involvement offered by
manufacturers.
National manufacturers can offer retailers superior sales and profit than
can regional and local manufacturers, while continuing to inspire confidence in
consumer product selection. They are therefore best able to benefit from the
current consolidation trend in the industry. According to surveys by
independent industry sources, the three largest manufacturers have increased
their share of the market over the past ten years.
We believe that opportunities for market share growth by the leading
national manufacturers will continue, driven by their brand awareness and
credibility, broad product lines, strong logistics support, and strong
advertising and sales support.
Products
We manufacture 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 us, with the remainder being produced by Sealy Mattress Company of
New Jersey, Inc., a licensee. The Stearns & Foster product line consists of top
quality, premium mattresses sold under the Stearns & Foster brand name. The
Bassett brand,
28
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
We serve over 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 our net sales for the year ended November 26, 2000 and no
single customer accounted for over 10% of our net sales.
Sales and Marketing
Our sales depend primarily on our ability to provide quality products with
recognized brand names at competitive prices. Additionally, we work to build
brand loyalty with our ultimate consumers, principally through targeted
national advertising and cooperative advertising with our dealers, along with
superior "point-of-sale" materials designed to emphasize the various features
and benefits of our products which differentiate them from other brands.
Our 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. We believe that we have the most comprehensive training and
development programs for our sales force, including our 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.
Our 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, our products.
Industry and Competition
According to industry sales data compiled by the International Sleep
Products Association, a bedding industry trade group, the U.S. conventional
bedding industry generated wholesale revenues of $4.6 billion during calendar
year 2000. According to ISPA, approximately 80% 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. We supply 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. Our
largest competitors include Serta, Inc. and Simmons Company. Management
believes we derive a competitive advantage over our conventional bedding
competitors as a result of strong consumer recognition of Sealy branded
products, as well as the high quality and innovative product offerings.
29
Suppliers
We purchase raw materials and components from a variety of vendors. We
purchase approximately 50% of our Sealy foundation parts from a single
third-party source, which has patents on various interlocking wire
configurations, and we manufacture or contract with third parties for the
manufacture of the remainder of these parts as a licensee under the wire
patents. We purchase substantially all of our 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, we have
expanded our own internal component parts manufacturing capacity.
See "--Components Division." As is the case with all of our product lines, we
do not consider ourselves dependent upon any single outside vendor as a source
of supply to our conventional bedding business and believe that sufficient
alternative sources of supply for the same, similar or alternative components
are available.
Manufacturing and Facilities
We manufacture most conventional bedding to order and have adopted
"just-in-time" inventory techniques in our manufacturing process to more
efficiently serve our 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 us to minimize our inventory
of finished products and better satisfy customer demand for prompt shipments.
We operate 20 bedding manufacturing facilities and three component
manufacturing facilities in 19 states, plus three facilities in Canadian
provinces, and one each in Puerto Rico, France (acquired in April, 2001), Italy
(acquired in April, 2001), Mexico, Argentina (acquired in August, 2000) and
Brazil (began operations in December, 2000). Management believes that through
the utilization of extra shifts, we will be able to continue to meet growing
demand for our products without a significant investment in facilities. See
"Business--Properties." We also operate a research and development center in
High Point, North Carolina with a staff that tests new materials and machinery,
trains personnel, compares the quality of our products with those of our
competitors and develops new products and processes. We have developed and
patented a computerized model of an adult person, known as Dataman, which is
used in testing the support level of our mattresses. In addition, we have
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
We operate a components division with headquarters in Rensselaer, Indiana.
The components division sells its component parts at current market prices
exclusively to our bedding plants and licensees. The components division
currently provides substantially all of our mattress innerspring unit
requirements. The components division also supplies approximately 50% of our
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
"Business--Properties."
Over the last several years, we have 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 our 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 some essential raw materials, we believe the vertical integration
resulting from its component manufacturing capability provides it with a
competitive advantage. We believe that we are the only conventional bedding
manufacturer in the United States with substantial innerspring and formed wire
component-making capacity.
30
International
We have wholly-owned subsidiaries in Canada, Mexico, Puerto Rico, Brazil,
France (acquired in April, 2001) and Italy (acquired in April 2001) and a
majority-owned subsidiary in Argentina (acquired in August, 2000) which have
marketing and manufacturing responsibilities for those markets. We have three
manufacturing facilities in Canada and one each in Mexico, Puerto Rico,
Argentina, France, Italy and Brazil which comprise all of our owned
manufacturing operations at May 27, 2001. In 2000, we formed a joint venture
with our Australian licensee to import, manufacture, distribute and sell Sealy
products in South East Asia.
We also utilize licensing agreements in some international markets.
Licensing agreements allow us 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, we use a Korean contract manufacturer to help service
the Korean market, and distribute products directly to many small international
markets.
Licensing
At August 26, 2001, there are 16 separate license arrangements in effect
with five domestic and eleven foreign independent licensees. Sealy Mattress
Company of New Jersey (a bedding manufacturer), Klaussner Corporation Services
(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 ourselves, Sealy New Jersey has the perpetual right to use some of
our trademarks in the manufacture and sale of Sealy brand and Stearns & Foster
brand products in the United States. On April 1, 1998, Sealy commenced
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. On May 25, 2001, the previous license agreement with
Klaussner was canceled and replaced with a new agreement to manufacture and
sell sleep sofas under the Sealy name. In conjunction with the termination of
the agreement, Klaussner paid Sealy a $4.6 million fee.
Our licensing division generates royalties by licensing Sealy brand
technology and trademarks to manufacturers located throughout the world. We
also provide our 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 in this prospectus.
See "Business--International" 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 some 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, we amended our warranty policy to no
longer require the mattress to be periodically flipped. Historically, our
warranty costs have been immaterial for each of our product lines.
31
Trademarks and Licenses
We own, among others, the Sealy and Stearns & Foster trademarks and
tradenames and also own the Posturepedic, Posturepedic Crown Jewel, Correct
Comfort, Comfort Series, Dataman and University of Sleep trademarks, service
marks and some related logos and design marks. We also license the Bassett name
under a 15 year agreement.
Employees
As of November 26, 2000, we had 6,077 full-time employees. Approximately 67%
of our employees at our 29 North American plants are represented by various
labor unions with separate collective bargaining agreements. Due to the large
number of collective bargaining agreements, we are periodically in negotiations
with some of the unions representing our employees. We consider our overall
relations with our work force to be satisfactory. We have 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. We have not encountered any
significant organizing activity at our non-union facilities in that time frame.
Properties
Our principal executives offices are located on Sealy Drive at One Office
Parkway, Trinity, North Carolina, 27370. Corporate, licensing and marketing
services are provided to us by Sealy, Inc. (a wholly owned subsidiary of ours),
an Ohio Corporation.
We administer component operations at our Rensselaer, Indiana facility. We
lease an information technology facility in Cleveland, Ohio. Our 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 us at August 26, 2001:
Approximate
Location Square Footage Title
-------- -------------- ---------
United States
Arizona Phoenix 76,000 Owned(a)
California Richmond 238,000 Owned(a)
South Gate 185,000 Owned(a)
Colorado Colorado Springs 70,000 Owned(a)
Denver 92,900 Owned(a)
Florida Orlando 97,600 Owned(a)
Lake Wales 179,700 Owned(a)
Georgia Atlanta 292,500 Owned(a)
Illinois Batavia 212,700 Leased
Indiana Rensselaer 131,000 Owned(a)
Rensselaer 124,000 Owned(a)
Kansas Kansas City 102,600 Leased(a)
Maryland Williamsport 144,000 Leased
Massachusetts Randolph 187,000 Owned(a)
Michigan Taylor 156,000 Leased
Minnesota St. Paul 93,600 Owned(a)
New York Albany 102,300 Owned(a)
North Carolina High Point 151,200 Owned(a)
32
Approximate
Location Square Footage Title
-------- -------------- --------
Ohio Medina 140,000 Owned(a)
Oregon Portland 140,000 Owned(a)
Pennsylvania Clarion 85,000 Owned(a)
Delano 143,000 Owned(a)
Tennessee Memphis(b) 225,000 Owned(a)
Texas Brenham 220,000 Owned(a)
North Richland Hills 124,500 Owned(a)
Canada
Alberta Edmonton 144,500 Owned(a)
Quebec Saint Narcisse 76,000 Owned(a)
Ontario Toronto 80,200 Leased
Argentina Buenos Aires 85,000 Owned
Brazil Sorocaba 92,000 Owned
Puerto Rico Carolina 58,600 Owned(a)
Italy Silvano d'Orba 170,600 Owned(a)
France Saleux 239,400 Owned
Mexico Toluca 157,100 Owned
---------
Total 4,817,000
=========
- --------
(a) We have granted a mortgage or otherwise encumbered our interest in this
facility as collateral for secured indebtedness.
(b) In April 2001, we ceased operations at this facility.
We consider our present facilities to be generally well maintained and in
sound operating condition.
Regulatory Matters
Our principal wastes are wood, cardboard and other non-hazardous materials
derived from product component supplies and packaging. We also periodically
dispose (primarily by recycling) of small amounts of used machine lubricating
oil and air compressor waste oil. We, generally, are 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. We believe that we are in
material compliance with all applicable federal and state environmental
statutes and regulations. Except as set forth in "--Legal Proceedings,"
compliance with federal, state or local provisions which have been enacted or
adopted regulating the discharge of materials into the environment, or
otherwise relating to the protection of the environment, should not have any
material effect upon the capital expenditures, earnings or competitive
position. We are not aware of any pending federal environmental legislation
which would have a material impact on our operations. Except as set forth in
"--Legal Proceedings," we have not been required to make, and during the next
two fiscal years, do not expect to make, any material capital expenditures for
environmental control facilities.
Our conventional bedding product lines are subject to various federal and
state laws and regulations relating to flammability and other standards. We
believe that we are in material compliance with all such laws and regulations.
Legal Proceedings
We are currently conducting an environmental cleanup at a formerly owned
facility in South Brunswick, New Jersey pursuant to the New Jersey Industrial
Site Recovery Act. We and one of our subsidiaries are parties
33
to an Administrative Consent Order issued by the New Jersey Department of
Environmental Protection. Pursuant to that order, we and our subsidiary agreed
to conduct soil and groundwater remediation at the property. We do not believe
that our manufacturing processes were the source of contamination. We sold the
property in 1997. We and our subsidiary retained primary responsibility for the
required remediation. We have completed essentially all soil remediation with
the approval of the New Jersey Department of Environmental Protection, and have
concluded a pilot test of groundwater remediation system.
We are also remediating soil and groundwater contamination at an inactive
facility located in Oakville, Connecticut. Although we are conducting the
remediation voluntarily, we obtained Connecticut Department of Environmental
Protection approval of the remediation plan. We have completed essentially all
soil remediation under the remediation plan and are currently monitoring
groundwater at the site. We believe the contamination is attributable to the
manufacturing operations of previous unaffiliated occupants of the facility.
While we cannot predict the ultimate timing or costs of the South Brunswick
and Oakville remediation, based on facts currently known, we believe that the
accruals recorded are adequate and we do not believe the resolution of these
matters will have a material adverse effect on our financial position or our
future operations; however, in the event of an adverse decision, these matters
could have a material adverse effect.
We have 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, we believe that liability at each of these sites in unlikely to be
material.
34
MANAGEMENT
Directors and Executive Officers
Our executive officers, directors and key employees and their ages as of
August 26, 2001, are as follows:
Name Age Position
---- --- --------
Ronald L. Jones.... 59 Chairman, Chief Executive Officer and
Director
David J. McIlquham. 47 President and Chief Operating Officer
Bruce G. Barman.... 55 Corporate Vice President Research and
Development
Jeffrey C. Claypool 53 Corporate Vice President Human Resources
James Goughenour... 63 Corporate Vice President Information
Technology and StrategicPlanning
Lawrence J. Rogers. 53 President, International Bedding Group
Kenneth L. Walker.. 52 Corporate Vice President, General
Counsel and Secretary
E. Lee Wyatt....... 48 Corporate Vice President Administration
and Chief FinancialOfficer
Josh Bekenstein.... 42 Director
Paul Edgerley...... 44 Director
Andrew S. Janower.. 32 Director
Joe L. Gonzalez.... 45 Director
James W. Johnston.. 55 Director
Steven Barnes...... 42 Director
The present principal occupations and recent employment history of each of
our executive officers, key employees and directors listed above is as follows:
Ronald L. Jones Mr. Jones, age 59, has been our Chairman since March 1998,
our Chief Executive Officer since March 1996 and was our President from March
1996 until January 2001. From October 1988 until joining us, Mr. Jones served
as President of Masco Home Furnishings. From 1983 to 1988, Mr. Jones was with
HON Industries, most recently serving as President.
David J. McIlquham Mr. Mcllquham, age 47, has been our President and Chief
Operating Officer since January 2001. Since joining us in 1990 he has served as
Vice President in both sales and marketing.
Bruce G. Barman Dr. Barman, age 55, has been our Corporate Vice President
Research and Development since January 1995. From 1991 until he joined us, Dr.
Barman was Vice President-Research and Development of Griffith Laboratories
N.A., a custom food products producer for a number of major North American
foodservice and food processing companies.
Jeffrey C. Claypool Mr. Claypool, age 53, has been our Corporate Vice
President Human Resources since September 1991.
James F. Goughenour Mr. Goughenour, age 63, has been our Corporate Vice
President Information Technology and Strategic Planning since January 2001.
Since joining us in 1997 he has served as a Vice President in numerous other
capacities. Mr. Goughenour presently serves on the board of directors of
Catalyst International, Inc. From 1979 until he joined us, Mr. Goughenour was
with the HON Company, serving as Vice President.
Lawrence J. Rogers Mr. Rogers, age 53, has been the President of our
International Bedding Group since January 2001. Prior to that, Mr. Rogers was
our Corporate Vice President and General Manager International since February
1994. Since 1979, Mr. Rogers has served in numerous other capacities within our
operations, including President-Sealy Canada.
35
Kenneth L. Walker Mr. Walker, age 52, has been our Corporate Vice President,
General Counsel and Secretary since 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 our Corporate Vice President
Administration and Chief Financial Officer since September 1999. From October
1998 until September 1999, he was our Corporate Vice President Administration.
From 1983 until he joined us, 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.
Josh Bekenstein Mr. Bekenstein, age 42, is a Managing Director of Bain
Capital, Inc. 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, Shoppers Drug Mart, Mattress
Discounters Corporation and Bright Horizons Children's' 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 since December 1997.
Paul Edgerley Mr. Edgerley, age 44, has been a 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 boards of directors of Anthony Crane Rentals, Inc., GS Industries, Inc.,
AMF Group Inc., Walco International, Inc. and Midwest of Cannarca, LLC. He has
been a director since December 1997.
Andrew S. Janower Mr. Janower, age 32, is 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. in 1996. Mr.
Janower presently serves on the board of directors of several companies,
including Mattress Discounters Corporation. 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 since
December 1998.
Joe L. Gonzalez Mr. Gonzalez, age 45, 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 since December 2000.
James W. Johnston Mr. Johnston, age 55, 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 R. J. Reynolds Tobacco Co. from 1995 to 1996 and Chairman 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. Mr. Johnston presently serves on the board of directors of Greystone
Digital Technologies, Inc. He has been a director since March 1993.
Steven Barnes Mr. Barnes, age 42, is a Managing Director at Bain and has
been affiliated with Bain since 1988. Since 1988 he has been involved with
various leveraged acquisitions and has served in various leadership positions
with Bain Companies, including CEO of Dade Behring, President of Executone
Business solutions and President of The Holson Business Group. Mr. Barnes
presently serves on several boards including Dade Behring, Mattress Discounters
Corporation and the Board of Overseers of Children's Hospital in Boston. Prior
to 1988 Mr. Barnes was with PricewaterhouseCoopers, where he worked in the
Mergers and Acquisitions Support Group. He has been a director of the Company
since March 2001.
36
Compensation of Executive Officers
The following table sets forth information concerning the annual and
long-term compensation for services in all capacities to us 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) our other four most highly compensated executive
officers for fiscal 2000 (collectively, the "Named Executive Officers"):
SUMMARY COMPENSATION TABLE
Annual Compensation Long-Term Corporation
------------------------------ ----------------------------------------
Restricted Securities
Other Annual Stock Underlying All Other
Name and Principal Position Year Salary Bonus Compensation Award($) Options/SARS Compensation(a)
- --------------------------- ---- -------- ---------- ------------ ---------- ------------ ---------------
Ronald L. Jones............. 2000 $641,170 $1,000,399 $ 24,414(b) -- -- $ 22,856
Chairman, Chief Executive 1999 611,666 978,373 72,562(b) -- -- 22,376
Officer and President 1998 571,252 685,394 965,602(b) -- 99,070(c) 1,136,150
1,971,630(c)
Gary T. Fazio(d)............ 2000 252,594 161,796 2,553(b) -- -- 19,687
Corp. VP General Mgr. 1999 241,913 169,317 21,313(b) -- -- 18,901
Domestic Bedding 1998 227,542 110,234 435,318(b) -- 8,365(c) 111,899
255,285(c)
Douglas E. Fellmy(e)........ 2000 240,803 154,253 -- -- -- 18,767
Corp. VP General Mgr. 1999 232,467 162,707 65,926(b) -- -- 18,106
Domestic Bedding 1998 219,067 106,129 336,785(b) -- 8,365(c) 111,267
255,285(c)
David J. McIlquham.......... 2000 249,229 179,587 2,701(b) -- -- 19,424
Corp. VP Sales and 1999 237,188 166,010 48,509(b) -- -- 18,473
Marketing 1998 223,167 108,114 684,175(b) -- 180,000(c) 17,468
Lawrence J. Rogers.......... 2000 229,792 168,593 -- -- -- 17,910
President of International 1999 221,250 144,518 1,357(b) -- -- 17,235
Bedding Group 1998 189,266 101,403 375,855(b) -- 8,365(c) 110,253
255,285(c)
- --------
(a) Represents amounts paid on behalf of each of the Named Executive Officers
for the following four respective categories of compensation: (i) our
premiums for life and accidental death and dismemberment insurance (ii) our
premiums for long-term disability benefits, (iii) our contributions to our
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,
37
$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, we issued to certain of the named Executive Officers,
among others, ten-year fully vested non-qualified stock options to acquire
(i) shares of our 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 our 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, we issued to the Named
Executive Officers, among others, ten-year non-qualified stock options to
acquire shares of our 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 our 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 our employment on January 23, 2001.
(e)Mr. Fellmy left our employment on October 23, 2001.
Employment Agreements
Ronald Jones has entered into an employment agreement with us 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 our Board of Directors, plus a performance bonus and grants Mr. Jones the
right to require us to repurchase some of our securities held by Mr. Jones. In
addition, eight employees of ours, including 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 salaries of at least U.S. $204,500, U.S. $198,000, U.S. $200,000,
and U.S. $200,000, respectively 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 our Board of Directors
determined that the bonuses to be paid pursuant to those employment agreements
were to be based 75% on our achievement of an Adjusted EBITDA target and 25% on
our achievement of a Return on Net Tangible Assets target. Each such target
represented an improvement over our prior year performance.
Remuneration of Directors
We reimburse 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.
Deferred Compensation Agreements
On December 18, 1997, Mr. Jones entered into a deferred compensation
agreement with us pursuant to which Mr. Jones elected to defer $1,114,538 of
his 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 other employees, including Gary T. Fazio, Douglas
Fellmy and Lawrence J. Rogers, entered into
38
deferred compensation agreements with us pursuant to which such employees
elected to defer an aggregate $522,518 of compensation until either December
18, 2007 or, in certain instances, such earlier date as provided in such
deferred compensation agreements. In conjunction with Gary T. Fazio and Richard
F. Sowerby leaving our employment, they were paid $94,106 and $51,986,
respectively, pursuant to their deferred compensation agreements.
Severance Benefit Plans
In addition, certain executives and other employees are eligible for
benefits under our severance benefit plans and other agreements, which provide
for cash severance payments equal to their base salary and, in some instances,
bonuses (for periods ranging from two weeks to two years) and for the
continuation of some benefits.
Management Incentive Plan
We provide performance-based compensation awards to executive officers and
key employees for achievement each year as part of a bonus plan. These
compensation awards are a function of individual performance and corporate
results. The qualitative and quantitative criteria of these bonuses are
determined from time to time by our board of directors and currently include
factors such as EBITDA, return on net tangible assets and return on selected
investments.
Sealy Corporation 1998 Stock Option Plan
In order to provide additional financial incentives for some of our
employees, subsequent to the consummation of the December 18, 1997
transactions, the management investors and some other of our employees were
granted and are expected to periodically be granted options to purchase
additional shares of our common stock 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. Upon an employee's
termination of employment with us, 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 60 days after such employee's
termination, and if such termination occurs prior to a qualified initial public
offering of our common stock, then we shall have the right to repurchase our
common stock held by such employee after a minimum holding period of six months
and one day.
39
SECURITY OWNERSHIP OF BENEFICIAL OWNERS AND MANAGEMENT
As of August 26, 2001, our outstanding capital stock consisted of 14,119,730
shares of Class A common stock, par value $0.01 per share ("Class A common"),
13,481,930 shares of Class B Common stock, par value $0.01 per share ("Class B
Common"), 1,595,647 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 our stockholders, 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 us 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 us to
holders of our 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.
Our Board of Directors 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 our
directors and executive officers) known to us to own more than 5% of our
outstanding voting common stock. To our knowledge, 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.
Shares Beneficially Owned
------------------------------------------------------------------------------
Class A Common Class B Common Class L Common Class M Common
------------------- ------------------- ----------------- -----------------
Number Percentage Number Percentage Number Percentage Number Percentage
Shares of Class Shares of Class Shares of Class Shares of Class
--------- ---------- --------- ---------- ------- ---------- ------- ----------
Principal Stockholders:
Bain Funds(1)(2)........................ 6,814,140 48.2% 4,366,179 32.4% 718,206 45.0% 524,051 33.8%
c/o Bain Capital, Inc. Two Copley Place
Boston, MA 02116
Harvard Private Capital Holdings, Inc... 4,444,446 31.4% -- -- 493,827 30.9% -- --
c/o Harvard Management Company, Inc.
600 Atlantic Avenue Boston, MA 02210
Sealy Investors 1, LLC(2)............... 702,532 5.0% 6,031,476 44.7% 74,031 4.6% 674,192 43.5%
c/o Bain Capital, Inc. Two Copley Place
Boston, MA 02116
Sealy Investors 2, LLC(2)............... 702,532 5.0% 2,664,472 19.8% 74,031 4.6% 300,081 19.4%
c/o Bain Capital, Inc. Two Copley Place
Boston, MA 02116
Sealy Investors 3, LLC(2)............... 702,532 5.0% 419,803 3.1% 74,031 4.6% 50,673 3.3%
c/o Bain Capital, Inc. Two Copley Place
Boston, MA 02116
- --------
(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 Capital
Fund 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.
40
(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, each Named
Executive Officer, the Management Investors, and our directors and executive
officers as group. To our knowledge, 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.
Shares Beneficially Owed
------------------------------------------------------------------------------
Class A Common Class B Common Class L Common Class M Common
-------------------- ----------------- ------------------- -----------------
Number Percentage Number Percentage Number Percentage Number Percentage
Shares of Class Shares of Class Shares of Class Shares of Class
---------- ---------- ------ ---------- --------- ---------- ------ ----------
Directors & Executive Officers:
Josh Bekenstein(1)(2).................... 6,814,140 48.2% -- -- 718,206 45.0% -- --
c/o Bain Capital, Inc.
Two Copley Place
Boston, MA 02116
Paul Edgerley(1)(2)...................... 6,814,140 48.2% -- -- 718,206 45.0% -- --
c/o Bain Capital, Inc.
Two Copley Place
Boston, MA 02116
Steve Barnes(1)(2)....................... 6,814,140 48.2% -- -- 718,206 45.0% -- --
c/o Bain Capital, Inc.
Two Copley Place
Boston, MA 02116
Andrew S. Janower(3)..................... 4,444,446 31.4% -- -- 493,827 30.9% -- --
c/o Charlesbank Capital
Partners LLC 600
Atlantic Avenue
Boston, MA 02210
Ronald L. Jones(4)....................... 701,402 4.8% -- -- 115,670 7.2% -- --
c/o Sealy Corporation
1228 One Office Parkway,
Trinity, NC 27230
Douglas E. Fellmy(5)..................... 191,646 1.3% -- -- 9,294 * -- --
c/o Sealy Corporation
1228 One Office Parkway
Trinity, NC 27230
David J. McIlquham(5).................... 158,355 1.1% -- -- 5,595 * -- --
c/o Sealy Corporation
One Office Parkway,
1228 Trinity, NC 27230
Lawrence J. Rogers(5).................... 191,646 1.3% -- -- 9,294 * -- --
c/o Sealy Corporation
1228 One Office Parkway
Trinity, NC 27230
All directors and executive officers as a
group (14 persons)...................... 13,116,812 84.5% -- -- 1,380,239 84.7% -- --
- --------
* 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 Capital
Fund V-B, L.P., BCIP Trust Associates, L.P. ("BCIP
41
Trust") and BCIP Associates ("BCIP") (collectively, the "Bain Funds"), for
the Bain Funds and Messrs. Bekenstein, Edgerley and Barnes.
(2) Messrs. Bekenstein, Edgerley and Barnes 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 Barnes may be deemed to
beneficially own shares owned by Fund V and Fund V-B. In addition, Messrs.
Bekenstein, Edgerley and Barnes 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.
42
RELATED PARTY TRANSACTIONS
Stockholders Agreement
In December 1997, we and certain of our stockholders, including the funds
associated with Bain Capital, Zell/Chilmark Fund, L.P., Harvard Private Capital
Holdings, Inc. and the Sealy Investor LLCs entered into a stockholders
agreement. The stockholders agreement:
. requires that each of the parties thereto vote all of its voting
securities of us 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;
. grants us and the Bain Funds a right of first offer on any proposed
transfer of shares of our capital stock held by Harvard, Zell or the
LLCs;
. grants Harvard a right of first offer on any proposed transfer of shares
of our capital stock held by the Bain Funds;
. 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
our capital stock;
. requires the stockholders who are parties to the agreement to consent to
a sale of us to an independent third party if such sale is approved by
holders constituting a majority of the then outstanding shares of our
voting common stock.
Some provisions of the stockholders agreement will terminate upon the
consummation of our initial public offering or a sale of the company.
Registration Rights Agreement
In December 1997, we and some of our stockholders, including the Bain Funds,
Harvard and the LLCs entered into a 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 us to register
any or all of our shares of our common stock under the Securities Act at our
expense. In addition, all holders of registrable securities are entitled to
request the inclusion of any share of our common stock subject to the
registration rights agreement in any registration statement at our expense
whenever we proposes to register any of our common stock under the Securities
Act. In connection with all such registrations, we have agreed to indemnify all
holders of registrable securities against certain liabilities, including
liabilities under the Securities Act.
Our Related Party Transactions
In December 1997, we entered into a management services agreement with Bain
Capital, Inc. pursuant to which Bain Capital has agreed to provide:
. general management services;
. identification, support, negotiation and analysis of acquisitions and
dispositions;
. support, negotiation and analysis of financial alternatives; and
. other services agreed upon by ourselves and Bain Capital.
In exchange for such services, Bain Capital will receive:
. an annual management fee of $2.0 million, plus reasonable out-of-pocket
expenses (payable quarterly); and
. 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 us and of each financing or refinancing.
43
Bain received a fee in the amount of $1,250,000 in connection with the
issuance of the notes.
The management services agreement has an initial term of five years, subject
to automatic one-year extensions unless either we or Bain Capital provide
written notice of termination.
During fiscal 2000, we paid $558,000 to a company that employs Ronald L.
Jones' son for web site development services. We believe 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 us 891,630 shares of our Class A common stock in
exchange for a payment of $10.7 million.
We previously contributed 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 investments in
joint ventures, licensees and retailers and is controlled by our largest
stockholder Bain Capital, LLC. The investment in MHI was made to fund its
activities in order to enhance business relationships and build incremental
sales. As of August 26, 2001 and August 27, 2000, respectively, we have made
year-to-date sales of $110.7 million and $101.5 million of finished mattress
products pursuant to multi-year supply contracts to affiliated and related
parties of Bain Capital. We believe 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 on an arm's-length
basis from a person that is not an affiliate or related party.
Various operating factors combined with weak economic conditions created
during the third quarter of 2001 produced a requirement to review equity values
related to the affiliates. Accordingly, we have performed a review of the
carrying value of our investments in affiliates owned by MHI. We have
determined that the decline in the value of such investments is other than
temporary and, as a consequence, have recognized a non-cash impairment charge
of $26.3 million to write-down the investments to their estimated fair values
of $1.4 million as of August 26, 2001. Although continuing to evaluate our tax
strategies related to the impairment loss, we did not recognize a tax benefit
related to the impairment charge due to uncertainty concerning the
recoverability of such benefit for financial statements purposes as of August
26, 2001.
Our affiliates discussed above are currently renegotiating their credit
agreements due to recent operating performance. We believe the affiliates will
be successful in renegotiating their credit agreements. Negotiations are
continuing between the affiliates, lenders and us. There can be no assurance
that agreements can be finalized. We are considering various and changing
alternatives including, among others, making investments in the affiliates and
converting a portion of the affiliates trade receivables into a convertible
note receivable, as well as, modifying terms and conditions of its sales and
accounts receivable. We are not however obligated to enter into any agreement
or fund any additional investments. We believe that adequate allowances have
been established as of August 26, 2001 for any potential losses on affiliate
trade receivables. We are, however, unable to predict the impact, if any,
should the affiliates continue to be impacted by a weakened economy, be
unsuccessful in renegotiating their current credit agreements or obtaining
alternate additional financing.
44
DESCRIPTION OF OTHER INDEBTEDNESS
Senior Credit Facilities
Our subsidiary, Sealy Mattress Company is a party to two senior credit
agreements. We guarantee Sealy Mattress' Company's obligations under those
agreements.
The senior credit agreements originally provided for loans of up to $550
million, consisting of:
. a $100 million revolving credit facility;
. $120 million of Tranche A term loans;
. $125 million in amortization extended term loans ("AXELs") Series B;
. $90 million in AXELs Series C; and
. $115 million in AXELs Series D.
After giving effect to the application of the net proceeds of the old note
offering, as of August 26, 2001, the aggregate proceeds outstanding under the
credit agreements were $350.5 million and we have approximately $87.1 million
available for borrowing under these senior credit agreements, after giving
effect to approximately $12.9 million in letters of credit outstanding.
The senior credit agreements are secured by a first priority security
interest over all of the assets of ourselves and our domestic subsidiaries. Our
borrowings under the senior credit agreements bear interest at a floating base
rate, plus certain additional interest rates which differ for the various loans
under the senior credit agreements, up to a maximum of 3% for AXELs Series D.
In addition, the senior credit agreements provide for mandatory repayments,
based on a percentage of the net proceeds of asset sales, the proceeds of
insurance, the proceeds of the issue by us of debt and equity, and excess cash
flow, subject to certain exceptions (including an ability to reinvest net
proceeds in our business) in each case.
The senior credit agreements also require us to meet certain financial
tests, including minimum levels of EBITDA, a minimum interest coverage ratio
and a maximum leverage ratio. The senior credit agreements also contain
covenants which, among other things, limit our indebtedness and/or the
incurrence of additional indebtedness, investments, contingent obligations,
dividends, transactions with affiliates, asset sales, mergers and
consolidations, prepayments of other indebtedness (including on our senior
subordinated notes and our senior subordinated discount notes), liens and
encumbrances and other matters customarily restricted in such agreements.
The senior credit agreements contain customary events of default, including
payment defaults, breach of representations and warranties, covenant defaults,
cross-defaults to certain other indebtedness, certain events of bankruptcy and
insolvency, events relating to ERISA plans, judgment defaults, the failure of
any guaranty or security document supporting the senior credit agreements to be
in full force and effect, and a change of control of either ourselves or
Mattress.
In addition, Sealy Canada Limited is a party to a credit facility providing
for borrowings in Canadian currency up to C$25 million.
Senior Subordinated Notes and Senior Subordinated Discount Notes
Sealy Mattress Company has two outstanding series of publicly traded notes,
its 10.875% Senior Subordinated Discount Notes due 2007 and its 9.875% Senior
Subordinated Notes due 2007. We and our subsidiaries guarantee Sealy Mattress
Company's obligations under both series of notes.
45
The Senior Subordinated Notes were issued pursuant to an indenture, dated
December 18, 1997, among Sealy Mattress Company, the guarantors of the Senior
Subordinated Notes and The Bank of York, as Trustee. The indenture is limited
in aggregate principal amount to $300.0 million, of which $125.0 million was
issued on December 18, 1997. The exchange notes will also be issued pursuant to
the December 18, 1997 indenture, will have terms identical to the outstanding
9.875% Senior Subordinated Notes and, upon consummation of this exchange offer,
it is anticipated that they will trade as a single class of notes in an
aggregate principal amount of $250.0 million. A description of the terms of the
notes can be found below under the heading "Description of Notes."
The Senior Subordinated Discount Notes were issued pursuant to a separate
indenture, dated December 18, 1997, among Sealy Mattress Company, the
guarantors of the Senior Subordinated Discount Notes and The Bank of New York,
as Trustee. The discount notes indenture is limited in aggregate principal
amount to $275.0 million of which $128.0 million was issued in December 1997.
The discount notes were offered at a substantial discount from their
principal amount at maturity. Until December 15, 2002, no interest, other than
liquidated damages, if applicable, will accrue or be paid in cash on the
discount notes. However, a value representing the amortization of the original
issue discount between the issuance date and December 15, 2002 (referred to as
the accreted value), will accrete on the discount notes on a semi-annual bond
equivalent basis.
Beginning on December 15, 2002, interest on the discount notes will accrue
at the rate of 10.875% 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 the discount notes on the immediately preceding June 1 and
December 1. Interest on the discount notes will accrue from the most recent
date to which interest has been paid or, if no interest has been paid, from
December 15, 2002.
Except as provided below, Sealy Mattress Company may redeem the discount
notes at its option at any time, in whole or in part, upon not less than 30 nor
more than 60 days' notice. However, if Sealy Mattress Company chooses to
redeem, it must do so at the redemption prices, expressed as percentages of the
principal amount of the discount notes, set forth in the table below. Sealy
Mattress Company must also pay the accrued and unpaid interest and liquidated
damages attaching to the discount notes to the applicable redemption date, if
redeemed during the twelve-month period beginning on December 15 of the years
indicated below:
Percentage of
Year Principal Amount
---- ----------------
2002.................... 105.437%
2003.................... 103.625%
2004.................... 101.812%
2005 and thereafter..... 100.000%
Junior Subordinated Notes
As of November 26, 2000, we had issued junior subordinated notes in the
principal amount of $35.5 million. These notes were issued as part of a
recapitalization we underwent in December 1997. The junior subordinated notes
bear interest at a rate of 10% per annum, payable on the last day of each
quarter. If we elect not to pay accrued interest, the principal amount of the
notes is increased at a rate of 12% per annum. Unless we are in default under
our senior subordinated notes or our senior subordinated discount notes, or
under our senior credit agreements, we are required to prepay the junior
subordinated notes (including accrued interest) upon the consummation of an
initial public offering of our stock, where the aggregate proceeds exceed
$100,000,000.
46
DESCRIPTION OF EXCHANGE NOTES
You can find the definitions of certain items used in this description under
the subheading "--Definitions." In this description, the "Company" refers only
to Sealy Mattress Company and not to any of its subsidiaries and "Parent"
refers to Sealy Corporation.
The Company will issue the exchange notes under an indenture, dated December
18, 1997, among the Company, the Guarantors and The Bank of New York, as
trustee in a private transaction that is not subject to the registration
requirements of the Securities Act. See "Notice to Investors." The terms of the
exchange notes include those stated in the indenture and those made part of the
indenture by reference to the Trust Indenture Act of 1939.
The following description is a summary of the material provisions of the
indenture and the registration rights agreement. It does not restate those
agreements in their entirety. We urge you to read the Indenture and the
registration rights agreement because they, and not this description, define
your rights as holders of the exchange notes. Copies of the indenture and the
registration rights agreement are available as set forth below under the
subheading "--Additional Information."
The registered holder of a note will be treated as the owner of it for all
purposes. Only registered holders will have rights under the indenture.
Brief Description of the Exchange Notes
The exchange notes:
. are general unsecured obligations of the Company;
. are subordinated in right of payment to all current and future Senior
Debt; and
. are equal in right of payment to all of our to all current future Senior
Subordinated Debt.
As of August 26, 2001, the Company had Senior Debt of approximately $363.3
million and, through its Subsidiaries, had additional liabilities, including
trade payables and lease obligations, aggregating approximately $679.5 million.
The Indenture will permit the incurrence of additional Senior Debt in the
future.
The operations of the Company are primarily conducted through its
Subsidiaries and, therefore, the Company is primarily dependent upon the cash
flow of its Subsidiaries to meet its obligations, including its obligations
under the exchange notes. As a result, the exchange notes will be effectively
subordinated to all Indebtedness and other liabilities and commitments
(including trade payables and lease obligations) of the Company's Subsidiaries
except to the extent of the Note Guarantees. Only certain of the Company's U.S.
Subsidiaries will be Subsidiary Guarantors of the exchange notes. Any right of
the Company to receive assets of any of its Non-Guarantor Subsidiaries upon the
latter's liquidation or reorganization (and the consequent right of the Holders
of the exchange notes to participate in those assets) will be effectively
subordinated to the claims of that Subsidiary's creditors (including trade
creditors), except to the extent that the Company is itself recognized as a
creditor of such Subsidiary, in which case the claims of the Company would
still be subordinate to any security in the assets of such Subsidiary and any
Indebtedness of such Subsidiary senior to that held by the Company. As of
August 26, 2001, the Company's Non-Guarantor Subsidiaries have, in the
aggregate, approximately $126.0 million of liabilities after giving pro forma
effect to the Transactions, of which $44.9 million represent intercompany
liabilities. See "Risk Factors--Your right to receive payment on the exchange
notes and the guarantees is junior to all of our senior debt and equal in
rights to our existing senior subordinated debt."
As of the date of the indenture, all of the Company's Subsidiaries are
Restricted Subsidiaries. However, under certain circumstances, the Company will
be able to designate current or future Subsidiaries as Unrestricted
Subsidiaries. Unrestricted Subsidiaries are not be subject to many of the
restrictive covenants set forth in the Indenture. See "--Covenants--Restricted
Payments."
47
Subordination
The payment of the Company's Obligations with respect to the exchange notes
are subordinated in right of payment, as set forth in the indenture, to the
prior payment in full in cash or Cash Equivalents of all Senior Debt, whether
outstanding on the date of the Indenture or thereafter incurred.
Upon any distributions to creditors of the Company in a liquidation or
dissolution of the Company or in a bankruptcy, reorganization, insolvency,
receivership or similar proceeding relating to the Company or its property, an
assignment for the benefit of creditors or any marshalling of the Company's
assets and liabilities, the holders of Senior Debt will be entitled to receive
payment in full in cash or Cash Equivalents of all Obligations due in respect
of such Senior Debt, including interest after the commencement of any such
proceeding at the rate specified in the applicable Senior Debt, before the
Holders of exchange notes will be entitled to receive any payment with respect
to the exchange notes, and until all Obligations with respect to Senior Debt
are paid in full in cash or Cash Equivalents, any distribution to which the
Holders of exchange notes would be entitled shall be made to the holders of
Senior Debt, except that Holders of exchange notes may receive and retain
Permitted Junior Securities and payments made from the trust described under
"--Legal Defeasance and Covenant Defeasance."
The Company also may not make any payment upon or in respect of the exchange
notes, except in Permitted Junior Securities or from the trust described under
"--Legal Defeasance and Covenant Defeasance," if:
(1) a default in the payment of the principal of, premium, if any, interest
or Liquidated Damages, if any, on Designated Senior Debt occurs and is
continuing beyond any applicable period of grace or;
(2) any other default occurs and is continuing with respect to Designated
Senior Debt that permits holders of the Designated Senior Debt as to
which such default relates to accelerate its maturity and the Trustee
receives a notice of such default (a "Payment Blockage Notice") from the
Company or the holders of any Designated Senior Debt. Payments on the
exchange notes may and shall be resumed (a) in the case of a payment
default, upon the date on which such default is cured or waived and (b)
in case of a nonpayment default, the earlier of the date on which such
nonpayment default is cured or waived or 179 days after the date on
which the applicable Payment Blockage Notice is received, unless the
maturity of any Designated Senior Debt has been accelerated.
No new period of payment blockage may be commenced unless and until:
(1) 360 days have elapsed since the effectiveness of the immediately prior
Payment Blockage Notice; and
(2) all scheduled payments of principal, premium, if any, interest and
Liquidated Damages on the exchange notes that have come due have been
paid in full in cash. No nonpayment default that existed or was
continuing on the date of delivery of any Payment Blockage Notice to the
Trustee shall be, or be made, the basis for a subsequent Payment
Blockage Notice unless such default shall have been waived for a period
of not less than 180 days.
The indenture requires that the Company promptly notify holders of Senior
Debt if payment of the exchange notes is accelerated because of an Event of
Default.
"Designated Senior Debt" means:
(1) any Indebtedness outstanding under the Senior Credit Agreements; and
(2) after payment in full of all Indebtedness outstanding under the Senior
Credit Agreements, any other Senior Debt permitted under the Indenture,
the principal amount of which is $25.0 million or more, and that has
been designated by the Company as "Designated Senior Debt."
48
"Permitted Junior Securities" means Equity Interests in the Company or any
Guarantor or debt securities that are unsecured and are subordinated to all
Senior Debt (and any debt securities issued in exchange for Senior Debt) to
substantially the same extent as, or to a greater extent than, the exchange
notes are subordinated to Senior Debt pursuant to Article 10 of the Indenture
without limiting the foregoing, such securities shall have no required
principal payments until after the final maturity of all Senior Debt.
"Senior Debt" means:
(1) all Indebtedness of the Company or any of the Guarantors outstanding
under Credit Facilities and all Hedging Obligations with respect thereto;
(2) any other Indebtedness permitted to be incurred by the Company under the
terms of the indenture, unless the instrument under which such
Indebtedness is incurred expressly provides that it is on a parity with
or subordinated in right of payment to the exchange notes; and
(3) all Obligations with respect to the foregoing.
Notwithstanding anything to the contrary in the foregoing, Senior Debt will
not include:
(1) any liability for Federal, state, local or other taxes owed or owing by
the Company;
(2) any Indebtedness of the Company to any of its Subsidiaries or other
Affiliates;
(3) any trade payables; or
(4) any Indebtedness that is incurred in violation of the Indenture.
Note Guarantees
The Company's payment obligations under the exchange notes are jointly and
severally guaranteed (the "Note Guarantees") by the Subsidiary Guarantors and
Parent (together with the Subsidiary Guarantors, the "Guarantors"). Note
Guarantees will not be provided by the Non-Guarantor Subsidiaries. The Note
Guarantee of each Guarantor will be subordinated to the prior payment in full
in cash or cash equivalents of all Senior Debt of such Guarantor, which would
include approximately $350.5 million of Senior Debt outstanding as of August
26, 2001, and the amounts for which the Guarantors will be liable under the
Guarantees issued from time to time with respect to Senior Debt. The
obligations of each Guarantor under its Note Guarantees will be limited so as
not to constitute a fraudulent conveyance under applicable law. Please see,
"Risk Factors--Risk of Fraudulent Transfer."
Subject to the provisions of the following paragraph, the indenture provides
that no Subsidiary Guarantor may consolidate with or merge with or into
(whether or not such Subsidiary Guarantor is the surviving Person) another
corporation, Person or entity whether or not affiliated with such Subsidiary
Guarantor unless:
(1) subject to the provisions of the following paragraph, the Person formed
by or surviving any such consolidation or merger (if other than such
Subsidiary Guarantor) assumes all the obligations of such Subsidiary
Guarantor pursuant to a supplemental indenture in form and substance
reasonably satisfactory to the Trustee, under the exchange notes, the
Indenture and the registration rights agreement;
(2) immediately after giving effect to such transaction, no Default or Event
of Default exists; and
(3) the Company would be permitted by virtue of the Company's pro forma
Consolidated Fixed Charge Coverage Ratio, immediately after giving
effect to such transaction to incur at least $1.00 of additional
Indebtedness pursuant to the Consolidated Fixed Charge Coverage Ratio
test set forth in the covenant described below under the caption
"--Incurrence of Indebtedness and Issuance of Preferred Stock."
Except as set forth in this paragraph, the indenture does not prohibit the
merger of two of the Company's Restricted Subsidiaries or the merger of a
Restricted Subsidiary into the Company.
49
The indenture provides that in the event of a sale or other disposition of
all of the assets of any Subsidiary Guarantor, by way of merger, consolidation
or otherwise, or a sale or other disposition of all of the capital stock of any
Subsidiary Guarantor, then such Subsidiary Guarantor (in the event of a sale or
other disposition, by way of such a merger, consolidation or otherwise, of all
of the capital stock of such Subsidiary Guarantor) or the corporation acquiring
the property (in the event of a sale or other disposition of all of the assets
of such Subsidiary Guarantor) will be released and relieved of any obligations
under its Note Guarantees; provided that the Net Proceeds of such sale or other
disposition are applied in accordance with the provisions of the Indenture. See
"Redemption or Repurchase at Option of Holders--Asset Sales." The limitations
and restrictions in the Indenture do not apply to, limit or restrict the
operations of Parent.
Principal, Maturity and Interest
The exchange notes are limited in aggregate principal amount to $300.0
million, of which $125.0 million have already been issued and an additional
$125.0 million will be issued pursuant to this exchange offer, and will mature
on December 15, 2007. Interest on the exchange notes will accrue at the rate of
9.875% per annum and will be payable semi-annually in arrears on June 15 and
December 15 of each year, commencing on June 15, 2002, to Holders of record on
the immediately preceding June 1 and December 1. Additional exchange notes may
be issued from time to time after the date of the indenture, subject to the
provisions of the indenture, including those described below under the caption
"--Covenants--Incurrence of Indebtedness and Issuance of Preferred Stock."
Interest on the exchange notes will accrue from the most recent date to which
interest has been paid or, if no interest has been paid, from the date of
original issuance. Interest will be computed on the basis of a 360-day year
comprised of twelve 30-day months. Principal, premium, if any, interest and
Liquidated Damages, if any, on the exchange notes will be payable at the office
or agency of the Company maintained for such purpose within the City and State
of New York or, at the option of the Company, payment of interest and
Liquidated Damages, if any, may be made by check mailed to the Holders of the
exchange notes at their respective addresses set forth in the register of
Holders of exchange notes; provided that all payments of principal, premium,
interest and Liquidated Damages with respect to exchange notes the Holders of
which have given wire transfer instructions to the Company will be required to
be made by wire transfer of immediately available funds to the accounts
specified by the Holders thereof. Until otherwise designated by the Company,
the Company's office or agency in New York will be the office of the Trustee
maintained for such purpose. The exchange notes will be issued in denominations
of $1,000 and integral multiples thereof.
Optional Redemption
Except as provided below, the exchange notes will not be redeemable at the
Company's option prior to December 15, 2002. Thereafter, the exchange 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:
Percentage of
Year Principal Amount
---- ----------------
2002......................... 104.937%
2003......................... 103.292%
2004......................... 101.646%
2005 and thereafter.......... 100.000%
At any time prior to December 15, 2002, the exchange notes may also be
redeemed, as a whole but not in part, at the option of the Company upon the
occurrence of a Change of Control, upon not less than 30 nor more than 60 days'
prior notice (but in no event may any such redemption occur more than 90 days
after the occurrence of such Change of Control) mailed by first-class mail to
each Holder's registered address, at a
50
redemption price equal to 100% of the principal amount thereof plus the
Applicable Premium as of, and accrued and unpaid interest and Liquidated
Damages, if any, to, the date of redemption (the "Exchange Note Redemption
Date").
"Applicable Premium" means, with respect to any exchange note on any
Exchange Note Redemption Date, the greater of (i) 1.0% of the principal amount
of such exchange note or (ii) the excess of (A) the present value at such
Exchange Note Redemption Date of (1) the redemption price of such exchange note
at December 15, 2002 (such redemption price being set forth in the table above)
plus (2) all required interest payments due on such exchange note through
December 15, 2002 (excluding accrued but unpaid interest), computed using a
discount rate equal to the Treasury Rate at such Exchange Note Redemption Date
plus 75 basis points over (B) the principal amount of such exchange note, if
greater.
Selection and Notice
If less than all of the exchange notes are to be redeemed at any time,
selection of exchange notes for redemption will be made by the Trustee from
among the exchange notes that are then outstanding in compliance with the
requirements of the principal national securities exchange, if any, on which
the exchange notes are listed, or, if the exchange notes are not so listed, on
a pro rata basis, by lot or by such method as the Trustee shall deem fair and
appropriate; provided that no exchange notes of $1,000 or less shall be
redeemed in part. Notices of redemption shall be mailed by first class mail at
least 30 but not more than 60 days before the redemption date to each Holder of
exchange notes to be redeemed at its registered address. Notices of redemption
may not be conditional. If any note is to be redeemed in part only, the notice
of redemption that relates to such note shall state the portion of the
principal amount thereof to be redeemed. A new note in principal amount equal
to the unredeemed portion thereof will be issued in the name of the Holder
thereof upon cancellation of the original note. Exchange notes called for
redemption become due on the date fixed for redemption. On and after the
redemption date, interest ceases to accrue on exchange notes or portions of
them called for redemption.
Mandatory Redemption
The Company is not required to make mandatory redemption or sinking fund
payments with respect to the exchange notes.
Repurchase at the Option of Holders
Change of Control
Upon the occurrence of a Change of Control, each Holder of exchange notes
will have the right to require the Company to repurchase all or any part (equal
to $1,000 or an integral multiple thereof) of such Holder's exchange notes
pursuant to the offer described below (the "Change of Control Offer") at an
offer price in cash (the "Change of Control Payment") equal to 101% of the
aggregate principal amount thereof plus accrued and unpaid interest and
Liquidated Damages thereon, if any, to the date of purchase. Within ten days
following any Change of Control, the Company will mail a notice to each Holder
describing the transaction or transactions that constitute the Change of
Control and offering to repurchase exchange notes on the date specified in such
notice, which date shall be no earlier than 30 days and no later than 60 days
from the date such notice is mailed (the "Change of Control Payment Date"),
pursuant to the procedures required by the Indenture and described in such
notice. The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of the exchange notes as a result of a Change of Control.
On the Change of Control Payment Date, the Company will, to the extent
lawful:
(1) accept for payment all exchange notes or portions thereof properly
tendered pursuant to the Change of Control Offer;
51
(2) deposit with the Paying Agent an amount equal to the Change of Control
Payment in respect of all exchange notes or portions thereof so
tendered; and
(3) deliver or cause to be delivered to the Trustee the exchange notes so
accepted together with an Officers' Certificate stating the aggregate
principal amount of exchange notes or portions thereof being purchased
by the Company. The Paying Agent will promptly mail to each Holder of
exchange notes so tendered the Change of Control Payment for such
exchange notes, and the Trustee will promptly authenticate and mail (or
cause to be transferred by book entry) to each Holder a new Note equal
in principal amount to any unpurchased portion of the exchange notes
surrendered, if any; provided that each such new Note will be in a
principal amount of $1,000 or an integral multiple thereof.
The Company will publicly announce the results of the Change of Control
Offer on or as soon as practicable after the Change of Control Payment Date.
The indenture provides that, prior to the mailing of any notice required by
the Indenture, but in any event within 30 days following any Change of Control,
the Company will:
(1) repay in full in cash and terminate all commitments under Indebtedness
under the Senior Credit Agreements and all other Senior Debt the terms
of which require repayment upon a Change of Control or offer to repay in
full in cash and terminate all commitments under all Indebtedness under
the Senior Credit Agreements and all other such Senior Debt and to repay
the Indebtedness owed to each lender under the Senior Credit Agreements
that has accepted such offer or;
(2) obtain the requisite consents under the Senior Credit Agreements and all
such other Senior Debt to permit the repurchase of the exchange notes as
provided above. The Company shall first comply with this covenant before
it shall be required to repurchase exchange notes pursuant to the
provisions described in the indenture. The Company's failure to comply
with the immediately preceding sentence shall constitute an Event of
Default described in clause and not in clause (ii) under "Events of
Default" below.
The Senior Credit Agreements restrict the Company's ability to prepay debt,
including the exchange notes, and also provide that certain change of control
events with respect to the Company would constitute a default thereunder. Any
future credit agreements or other agreements relating to Senior Debt to which
the Company becomes a party may contain similar restrictions and provisions. In
the event a Change of Control occurs at a time when the Company is prohibited
from purchasing exchange notes, the Company could seek the consent of its
lenders to the purchase of exchange notes or could attempt to refinance the
borrowings that contain such prohibition. If the Company does not obtain such a
consent or repay such borrowings, the Company will remain prohibited from
purchasing exchange notes. In such case, the Company's failure to purchase
tendered exchange notes would constitute an Event of Default under the
Indenture which would, in turn, constitute a default under the Senior Credit
Agreements. In such circumstances, the subordination provisions in the
Indenture would likely restrict payments to the Holders of exchange notes.
The Change of Control provisions described above will be applicable whether
or not any other provisions of the Indenture are applicable. Except as
described above with respect to a Change of Control the Indenture does not
contain provisions that permit the Holders of the exchange notes to require
that the Company repurchase or redeem the exchange notes in the event of a
takeover, recapitalization or similar transaction.
The Company will not be required to make a Change of Control Offer upon a
Change of Control if:
(1) a third party makes the Change of Control Offer in the manner, at the
times and otherwise in compliance with the requirements set forth in the
Indenture applicable to a Change of Control Offer made by the Company
and purchases all exchange notes validly tendered and not withdrawn
under such Change of Control Offer or;
52
(2) the Company exercises its option to purchase all the exchange notes upon
a Change of Control as described above under the caption "Optional
Redemption."
"Change of Control" means the occurrence of one or more of the following
events:
(1) any sale, lease, exchange or other transfer (in one transaction or a
series of related transactions) of all or substantially all of the
assets of the Company to any Person or group of related Persons, as
defined in Section 13(d) of the Exchange Act (a "Group"), whether or not
otherwise in compliance with the provisions of the Indenture, other than
Bain Capital, Inc. and its Related Parties;
(2) the approval by the holders of Capital Stock of the Company of any plan
or proposal for the liquidation or dissolution of the Company (whether
or not otherwise in compliance with the provisions of the Indenture);
(3) any Person or Group (other than Bain Capital, Inc. and its Related
Parties) shall become the owner, directly or indirectly, beneficially or
of record, of shares representing more than 50% of the aggregate
ordinary voting power represented by the issued and outstanding Voting
Stock of Parent or any successor to all or substantially all of its
assets;
(4) the first day on which a majority of the members of the Board of
Directors of the Company or Parent are not Continuing Directors; or
(5) the first day on which Parent ceases to hold 100% of the outstanding
Equity Interests of the Company, other than as a result of a Merger of
the Company and Parent permitted by the indenture.
The definition of Change of Control includes a phrase relating to the sale,
lease, transfer, conveyance or other disposition of "all or substantially all"
of the assets of the Company and its Subsidiaries taken as a whole. Although
there is a developing body of case law interpreting the phrase "substantially
all", there is no precise established definition of the phrase under applicable
law. Accordingly, the ability of a Holder of exchange notes to require the
Company to repurchase such exchange notes as a result of a sale, lease,
transfer, conveyance or other disposition of less than all of the assets of the
Company and its Subsidiaries taken as a whole to another Person or group may be
uncertain.
"Continuing Directors" means:, as of any date of determination, any member
of the Board of Directors of the Company who:
(1) was a member of such Board of Directors on the date of the Indenture; or
(2) was nominated for election or elected to such Board of Directors by any
of the Principals or with the approval of a majority of the Continuing
Directors who were members of such Board at the time of such nomination
or election.
"Principals" means the Parent, Bain Capital, Inc. and any other stockholder
of Parent that owns at least 10% of the outstanding Equity Interests of Parent
as of the date of issuance of the exchange notes.
"Related Party" with respect to any Principal means:
(1) any controlling stockholder, 80% (or more) owned Subsidiary, or spouse
or immediate family member (in the case of an individual) of such
Principal or;
(2) any trust, corporation, partnership or other entity, the beneficiaries,
stockholders, partners, owners or Persons beneficially holding an 80% or
more controlling interest of which consist of such Principal and/or such
other Persons referred to in the immediately preceding clause (1).
53
Asset Sales
The Indenture provides that the Company will not, and will not permit any of
its Restricted Subsidiaries to, consummate an Asset Sale unless:
(1) the Company or the applicable Restricted Subsidiary, as the case may be,
receives consideration at the time of such Asset Sale at least equal to
the fair market value of the assets sold or otherwise disposed of (as
determined in good faith by the Company's Board of Directors);
(2) at least 75% of the consideration received by the Company or the
Restricted Subsidiary, as the case may be, from such Asset Sale shall be
cash or Cash Equivalents; provided that the amount of
(a) any liabilities (as shown on the Company's or such Restricted
Subsidiary's most recent balance sheet) of the Company or any such
Restricted Subsidiary (other than liabilities that are by their terms
subordinated to the exchange notes) that are assumed by the
transferee of any such assets,
(b) any exchange notes or other obligations received by the Company or
any such Restricted Subsidiary from such transferee that are
immediately converted by the Company or such Restricted Subsidiary
into cash (to the extent of the cash received) and
(c) any Designated Noncash Consideration received by the Company or any
of its Restricted Subsidiaries in such Asset Sale having an aggregate
fair market value, taken together with all other Designated Noncash
Consideration received pursuant to this clause (c) that is at that
time outstanding, not to exceed 10% of Total Assets at the time of
the receipt of such Designated Noncash Consideration (with the fair
market value of each item of Designated Noncash Consideration being
measured at the time received and without giving effect to subsequent
changes in value), shall be deemed to be cash for the purposes of
this provision; and
(3) upon the consummation of an Asset Sale, the Company shall apply, or
cause such Restricted Subsidiary to apply, the Net Cash Proceeds
relating to such Asset Sale within 365 days of receipt thereof either
(a) to repay any Senior Debt and, in the case of any Senior Debt under
any revolving credit facility, effect a commitment reduction under
such revolving credit facility,
(b) to reinvest in Productive Assets, or
(c) a combination of prepayment, repurchase and investment permitted by
the foregoing clauses (3)(a) and (3)(b).
Pending the final application of any such Net Cash Proceeds, the Company or
such Restricted Subsidiary may temporarily reduce Indebtedness under a
revolving credit facility, if any, or otherwise invest such Net Cash Proceeds
in Cash Equivalents. On the 366th day after an Asset Sale or such earlier date,
if any, as the Board of Directors of the Company or of such Restricted
Subsidiary determines not to apply the Net Cash Proceeds relating to such Asset
Sale as set forth in clause (3)(a), (3)(b) or (3)(c) of the next preceding
sentence (each, a "Net Proceeds Offer Trigger Date"), the aggregate amount of
Net Cash Proceeds that have not been applied on or before such Net Proceeds
Offer Trigger Date as permitted in clause (3)(a), (3)(b) and (3)(c) of the next
preceding sentence (each a "Net Proceeds Offer Amount") shall be applied by the
Company or such Restricted Subsidiary to make an offer to purchase (the "Net
Proceeds Offer") on a date (the "Net Proceeds Offer Payment Date") not less
than 30 nor more than 45 days following the applicable Net Proceeds Offer
Trigger Date, from all Holders on a pro rata basis that amount of exchange
notes equal to the Net Proceeds Offer Amount at a price equal to 100% of the
principal amount of the exchange notes to be purchased, plus accrued and unpaid
interest and Liquidated Damages thereon, if any, to the date of purchase;
provided, however, that if at any time any non-cash consideration (including
any Designated Noncash Consideration) received by the Company or any Restricted
Subsidiary of the Company, as the case may be, in connection with any Asset
Sale is converted into or sold or otherwise disposed of for cash (other than
interest received with respect to any such non-cash consideration), then such
conversion or disposition shall be deemed to constitute an Asset Sale hereunder
and the Net Cash Proceeds thereof shall be applied in accordance with this
covenant.
54
Notwithstanding the foregoing, if a Net Proceeds Offer Amount is less than
$10.0 million, the application of the Net Cash Proceeds constituting such Net
Proceeds Offer Amount to a Net Proceeds Offer may be deferred until such time
as such Net Proceeds Offer Amount plus the aggregate amount of all Net Proceeds
Offer Amounts arising subsequent to the Net Proceeds Offer Trigger Date
relating to such initial Net Proceeds Offer Amount from all Asset Sales by the
Company and its Restricted Subsidiaries aggregates at least $10.0 million, at
which time the Company or such Restricted Subsidiary shall apply all Net Cash
Proceeds constituting all Net Proceeds Offer Amounts that have been so deferred
to make a Net Proceeds Offer (the first date the aggregate of all such deferred
Net Proceeds Offer Amounts is equal to $10.0 million or more shall be deemed to
be a "Net Proceeds Offer Trigger Date").
Notwithstanding the two immediately preceding paragraphs, the Company and
its Restricted Subsidiaries will be permitted to consummate an Asset Sale
without complying with such paragraphs to the extent (1) at least 75% of the
consideration for such Asset Sale constitutes Productive Assets, cash, Cash
Equivalents and/or Marketable Securities and (2) such Asset Sale is for fair
market value (as determined in good faith by the Company's Board of Directors);
provided that any consideration not constituting Productive Assets received by
the Company or any of its Restricted Subsidiaries in connection with any Asset
Sale permitted to be consummated under this paragraph shall be subject to the
provisions of the two preceding paragraphs.
Each Net Proceeds Offer will be mailed to the record Holders as shown on the
register of Holders within 25 days following the Net Proceeds Offer Trigger
Date, with a copy to the Trustee, and shall comply with the procedures set
forth in the Indenture. Upon receiving notice of the Net Proceeds Offer,
Holders may elect to tender their exchange notes in whole or in part in
integral multiples of $1,000 in exchange for cash. To the extent Holders
properly tender exchange notes in an amount exceeding the Net Proceeds Offer
Amount, exchange notes of tendering Holders will be purchased on a pro rata
basis (based on amounts tendered). A Net Proceeds Offer shall remain open for a
period of 20 business days or such longer period as may be required by law. To
the extent that the aggregate amount of exchange notes tendered pursuant to a
Net Proceeds Offer is less than the Net Proceeds Offer Amount, the Company may
use any remaining Net Proceeds Offer Amount for general corporate purposes.
Upon completion of any such Net Proceeds Offer, the Net Proceeds Offer Amount
shall be reset at zero.
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of exchange notes pursuant to a Net Proceeds Offer. To the extent
that the provisions of any securities laws or regulations conflict with the
Asset Sale provisions of the Indenture, the Company shall comply with the
applicable securities laws and regulations and shall not be deemed to have
breached its obligations under the Asset Sale provisions of the Indenture by
virtue thereof.
Covenants
Restricted Payments
The Indenture provides that the Company will not, and will not permit any of
its Restricted Subsidiaries to, directly or indirectly:
(1) declare or pay any dividend or make any other payment or distribution on
account of the Company's Equity Interests, including, without
limitation, any payment in connection with any merger or consolidation
involving the Company, or to the direct or indirect holders of the
Company's Equity Interests in their capacity as such (other than
dividends or distributions payable in Qualified Capital Stock of the
Company);
(2) purchase, redeem or otherwise acquire or retire for value, including,
without limitation, in connection with any merger or consolidation
involving the Company, any Equity Interests of the Company or any direct
or indirect parent of the Company; or
55
(3) make any Restricted Investment (all such payments and other actions set
forth in clauses (1) through (3) above being collectively referred to as
"Restricted Payments"), unless, at the time of and after giving effect
to such Restricted Payment:
(a) no Default or Event of Default shall have occurred and be continuing
or would occur as a consequence thereof; and
(b) the Company would, at the time of such Restricted Payment and after
giving pro forma effect thereto as if such Restricted Payment had
been made at the beginning of the applicable Four-Quarter Period,
have been permitted to incur at least $1.00 of additional
Indebtedness pursuant to the Consolidated Fixed Charge Coverage Ratio
test set forth in the first paragraph of the covenant described below
under caption "--Incurrence of Indebtedness and Issuance of Preferred
Stock"; and
(c) such Restricted Payment, together with the aggregate amount of all
other Restricted Payments made by the Company and its Restricted
Subsidiaries after the date of the indenture (excluding Restricted
Payments permitted by clauses (3), (5), (6), (8) and (9) of the next
succeeding paragraph), is less than the sum, without duplication, of:
(i) 50% of the Consolidated Net Income of the Company for the period
(taken as one accounting period) from the beginning of the first
fiscal quarter commencing after the date of the indenture to the
end of the Company's most recently ended fiscal quarter for which
internal financial statements are available at the time of such
Restricted Payment (or, if such Consolidated Net Income for such
period is a deficit, less 100% of such deficit), plus
(ii) 100% of the aggregate net cash proceeds (including the fair
market value of property other than cash that would constitute
Marketable Securities or a Permitted Business) received by the
Company since the date of the Indenture as a contribution to its
common equity capital (other than from a Subsidiary or that were
financed with loans from the Company or any Restricted
Subsidiary) or from the issue or sale of Qualified Capital Stock
(including Capital Stock issued upon the conversion of
convertible Indebtedness or in exchange for outstanding
Indebtedness) of the Company (excluding any net proceeds from an
Equity Offering or capital contribution to the extent used to
redeem exchange notes in accordance with the optional redemption
provisions of the exchange notes) or from the issue or sale of
Disqualified Stock or debt securities of the Company that have
been converted into Qualified Capital Stock (other than Qualified
Capital Stock (or Disqualified Stock or convertible debt
securities) sold to a Subsidiary of the Company), plus
(iii) 100% of the aggregate net proceeds (including the fair market
value of property other than cash that would constitute
Marketable Securities or a Permitted Business) of any (A) sale or
other disposition of Restricted Investments made by the Company
and its Restricted Subsidiaries or (B) dividend from, or the sale
of the stock of, an Unrestricted Subsidiary.
Notwithstanding the foregoing, the provisions set forth in the immediately
preceding paragraph will not prohibit:
(1) the payment of any dividend or the consummation of any irrevocable
redemption within 60 days after the date of declaration of such dividend
or notice of such redemption if the dividend or payment of the
redemption price, as the case may be, would have been permitted on the
date of declaration or notice;
(2) if no Event of Default shall have occurred and be continuing or shall
occur as a consequence thereof, the acquisition of any shares of Capital
Stock of the Company (the "Retired Capital Stock"), either (a) solely in
exchange for shares of Qualified Capital Stock of the Company (the
"Refunding Capital Stock"), or (b) through the application of the net
proceeds of a substantially concurrent sale for cash (other than to a
Subsidiary of the Company) of shares of Qualified Capital Stock of the
Company, and, in the case of subclause (a) of this clause (2), if
immediately prior to the retirement of the Retired Capital Stock the
declaration and payment of dividends thereon was permitted under clause
(3) of this
56
paragraph, the declaration and payment of dividends on the Refunding
Capital Stock in an aggregate amount per year no greater than the
aggregate amount of dividends per annum that was declarable and payable
on such Retired Capital Stock immediately prior to such retirement;
provided that at the time of the declaration of any such dividends on
the Refunding Capital Stock, no Default or Event of Default shall have
occurred and be continuing or would occur as a consequence thereof;
(3) if no Default or Event of Default shall have occurred and be continuing
or would occur as a consequence thereof, the declaration and payment of
dividends to holders of any class or series of Designated Preferred
Stock (other than Disqualified Stock) issued after the date of the
indenture (including, without limitation, the declaration and payment of
dividends on Refunding Capital Stock in excess of the dividends
declarable and payable thereon pursuant to clause (2) of this
paragraph); provided that, at the time of such issuance, the Company,
after giving effect to such issuance on a pro forma basis, would have
had a Consolidated Fixed Charge Coverage Ratio of at least 2.0 to 1.0
for the most recent Four-Quarter Period;
(4) payments to Parent for the purpose of permitting, and in an amount equal
to the amount required to permit, Parent to redeem or repurchase
Parent's common equity or options in respect thereof, in each case in
connection with the repurchase provisions of employee stock option or
stock purchase agreements or other agreements to compensate management
employees; provided that all such redemptions or repurchases pursuant to
this clause (4) shall not exceed $12.5 million (which amount shall be
increased by the amount of any net cash proceeds received from the sale
since the date of the Indenture of Equity Interests (other than
Disqualified Stock) to members of the Company's management team that
have not otherwise been applied to the payment of Restricted Payments
pursuant to the terms of the preceding paragraph (c) and by the cash
proceeds of any "key-man" life insurance policies which are used to make
such redemptions or repurchases) in the aggregate since the date of the
Indenture; provided, further, that the cancellation of Indebtedness
owing to the Company from members of management of the Company or any of
its Restricted Subsidiaries in connection with such a repurchase of
Capital Stock of Parent will not be deemed to constitute a Restricted
Payment under the Indenture;
(5) the making of distributions, loans or advances to Parent in an amount
not to exceed $1.5 million per annum in order to permit Parent to pay
the ordinary operating expenses of Parent (including, without
limitation, directors' fees, indemnification obligations, professional
fees and expenses, but excluding any payments on or repurchases of the
Seller Note);
(6) payments to Parent in respect of taxes pursuant to the terms of the Tax
Allocation Agreement as in effect on the date of the Indenture and as
amended from time to time pursuant to amendments that do not increase
the amounts payable by the Company or any of its Restricted Subsidiaries
thereunder;
(7) if no Default or Event of Default shall have occurred and be continuing
or would occur as a consequence thereof and the Company would be
permitted to incur at least $1.00 of additional Indebtedness (other than
Permitted Indebtedness) in compliance with the covenant described below
under the caption "--Incurrence of Indebtedness and Issuance of
Preferred Stock", other Restricted Payments in an aggregate amount not
to exceed $12.5 million since the date of the Indenture;
(8) repurchases of Capital Stock deemed to occur upon the exercise of stock
options if such Capital Stock represents a portion of the exercise price
thereof; and
(9) distributions to Parent to fund the Transactions (as described under
"Use of Proceeds") and payments with respect to Parent exchange notes
whether made at or subsequent to the Closing.
In determining the aggregate amount of Restricted Payments made subsequent
to the date of the Indenture in accordance with clause (c) of the immediately
preceding paragraph, (a) amounts expended pursuant to clauses (1), (2), (4),
and (7) shall be included in such calculation; provided such expenditures
pursuant to clause (4) shall not be included to the extent of the cash proceeds
received by the Company from any "key man" life insurance policies and (b)
amounts expended pursuant to clause (3), (5), (6), (8) or (9) shall be excluded
from such calculation.
57
The Board of Directors may designate any Restricted Subsidiary to be an
Unrestricted Subsidiary if such designation would not cause a Default. For
purposes of making such determination, all outstanding Investments by the
Company and its Restricted Subsidiaries (except to the extent repaid in cash)
in the Subsidiary so designated will be deemed to be Restricted Payments at the
time of such designation and will reduce the amount available for Restricted
Payments under the first paragraph of this covenant. All such outstanding
Investments will be deemed to constitute Investments in an amount equal to the
fair market value of such Investments at the time of such designation. Such
designation will only be permitted if such Restricted Payment would be
permitted at such time and if such Restricted Subsidiary otherwise meets the
definition of an Unrestricted Subsidiary.
The amount of all Restricted Payments, other than cash, shall be the fair
market value on the date of the Restricted Payment of the asset(s) or
securities proposed to be transferred or issued by the Company or such
Restricted Subsidiary, as the case may be, pursuant to the Restricted Payment.
Incurrence of Indebtedness and Issuance of Preferred Stock
The indenture provides that the Company will not, and will not permit any of
its Restricted Subsidiaries to, directly or indirectly, create, incur, issue,
assume, guarantee or otherwise become directly or indirectly liable,
contingently or otherwise, with respect to (collectively, "incur") any
Indebtedness and that the Company will not issue any Disqualified Stock and
will not permit any of its Restricted Subsidiaries to issue any shares of
preferred stock; provided, however, that the Company may incur Indebtedness or
issue shares of Disqualified Stock if:
(1) no Default or Event of Default shall have occurred and be continuing at
the time or as a consequence of the incurrence of any such Indebtedness
or the issuance of any such Disqualified Stock and
(2) the Consolidated Fixed Charge Coverage Ratio for the Company's most
recently ended Four-Quarter Period would have been at least 2.0 to 1.0,
determined on a pro forma basis, including a pro forma application of
the net proceeds therefrom, as if the additional Indebtedness had been
incurred, or the Disqualified Stock had been issued, at the beginning of
such Four-Quarter Period.
The provisions of the first paragraph of this covenant will not apply to the
incurrence of any of the following items of Indebtedness (collectively,
"Permitted Indebtedness"):
(1) the exchange notes and the Note Guarantees thereof;
(2) Indebtedness incurred pursuant to one or more Credit Facilities in an
aggregate principal amount at any time outstanding (with letters of
credit being deemed to have a principal amount equal to the maximum
potential liability of the Company and its Subsidiaries thereunder) not
to exceed $550.0 million less:
(a) the aggregate amount of Indebtedness of Securitization Entities at
the time outstanding less;
(b) the amount of all optional or mandatory principal payments actually
made by the Company or any of its Restricted Subsidiaries since the
date of the Indenture in respect of term loans under Credit
Facilities (excluding any such payments to the extent refinanced at
the time of payment under a Credit Facility); and
(c) further reduced by any repayments of revolving credit borrowings
under Credit Facilities that are accompanied by a corresponding
commitment reduction thereunder
provided, that the amount of Indebtedness permitted to be incurred
pursuant to the Senior Credit Agreements in accordance with this clause
(2) shall be in addition to any Indebtedness permitted to be incurred
pursuant to the Senior Credit Agreements in reliance on, and in
accordance with, clauses (10) and (16) below;
(3) the incurrence of Indebtedness and/or the issuance of Permitted Foreign
Subsidiary Preferred Stock by Foreign Subsidiaries of the Company,
which together with the aggregate principal amount of
58
Indebtedness incurred pursuant to this clause (3) and the aggregate
liquidation value of all Permitted Foreign Subsidiary Preferred Stock
issued pursuant to this clause (3), does not exceed $15.0 million at
any one time outstanding; provided, that such amount shall increase to
$30.0 million upon the consummation of an Initial Public Offering;
(4) other Indebtedness of the Company and its Subsidiaries outstanding on
the date of the Indenture for so long as such Indebtedness remains
outstanding;
(5) Interest Swap Obligations of the Company covering Indebtedness of the
Company; provided, that any Indebtedness to which any such Interest
Swap Obligations correspond is otherwise permitted to be incurred under
the Indenture; and provided, further, that such Interest Swap
Obligations are entered into, in the judgment of the Company, to
protect the Company from fluctuation in interest rates on its
outstanding Indebtedness;
(6) Indebtedness of the Company under Currency Agreements;
(7) the incurrence by the Company or any of its Restricted Subsidiaries of
intercompany Indebtedness between or among the Company and any of its
Restricted Subsidiaries; provided, however, that (i) if the Company is
the obligor on such Indebtedness, such Indebtedness is expressly
subordinated to the prior payment in full in cash of all Obligations
with respect to the exchange notes and (ii)(A) any subsequent issuance
or transfer of Equity Interests that results in any such Indebtedness
being held by a Person other than the Company or a Subsidiary thereof
and (B) any sale or other transfer of any such Indebtedness to a Person
that is not either the Company or a Restricted Subsidiary thereof shall
be deemed, in each case, to constitute an incurrence of such
Indebtedness by the Company or such Restricted Subsidiary, as the case
may be, that was not permitted by this clause (7);
(8) the incurrence of Acquired Indebtedness of Restricted Subsidiaries of
the Company to the extent the Company could have incurred such
Indebtedness in accordance with the first paragraph of this covenant on
the date such Indebtedness became Acquired Indebtedness;
(9) Guarantees by the Company and the Guarantors of each other's
Indebtedness; provided that such Indebtedness is permitted to be
incurred under the indenture;
(10)Indebtedness, including Capitalized Lease Obligations, incurred by the
Company or any of its Restricted Subsidiaries to finance the purchase,
lease or improvement of property, real or personal, or equipment
(whether through the direct purchase of assets or the Capital Stock of
any Person owning such assets) in an aggregate principal amount
outstanding not to exceed 5% of Total Assets at the time of any
incurrence thereof (including any Refinancing Indebtedness with respect
thereto) (which amount may, but need not, be incurred in whole or in
part under the Senior Credit Agreements);
(11)Indebtedness incurred by the Company or any of its Restricted
Subsidiaries constituting reimbursement obligations with respect to
letters of credit issued in the ordinary course of business, including,
without limitation, letters of credit in respect of workers'
compensation claims or self-insurance, or other Indebtedness with
respect to reimbursement type obligations regarding workers'
compensation claims;
(12)Indebtedness arising from agreements of the Company or a Restricted
Subsidiary of the Company providing for indemnification, adjustment of
purchase price, earn out or other similar obligations, in each case,
incurred or assumed in connection with the disposition of any business,
assets or a Restricted Subsidiary of the Company, other than guarantees
of Indebtedness incurred by any Person acquiring all or any portion of
such business, assets or Restricted Subsidiary for the purpose of
financing such acquisition; provided, that the maximum assumable
liability in respect of all such Indebtedness shall at no time exceed
the gross proceeds actually received by the Company and its Restricted
Subsidiaries in connection with such disposition;
(13)obligations in respect of performance and surety bonds and completion
guarantees provided by the Company or any Restricted Subsidiary of the
Company in the ordinary course of business;
59
(14) any refinancing, modification, replacement, renewal, restatement,
refunding, deferral, extension, substitution, supplement, reissuance or
resale of existing or future Indebtedness (other than intercompany
Indebtedness), including any additional Indebtedness incurred to pay
interest or premiums required by the instruments governing such
existing or future Indebtedness as in effect at the time of issuance
thereof ("Required Premiums") and fees in connection therewith
("Refinancing Indebtedness"); provided that any such event shall not:
(a) directly or indirectly result in an increase in the aggregate
principal amount of Permitted Indebtedness (except to the extent
such increase is a result of a simultaneous incurrence of additional
Indebtedness:
. to pay Required Premiums and related fees; or
. otherwise permitted to be incurred under the Indenture of the
Company and its Restricted Subsidiaries; and
(b) create Indebtedness with a Weighted Average Life to Maturity at the
time such Indebtedness is incurred that is less than the Weighted
Average Life to Maturity at such time of the Indebtedness being
refinanced, modified, replaced, renewed, restated, refunded,
deferred, extended, substituted, supplemented, reissued or resold
(except that this subclause (b) will not apply in the event the
Indebtedness being refinanced, modified, replaced, renewed,
restated, refunded, deferred, extended, substituted, supplemented,
reissued or resold was originally incurred in reliance upon clause
(16) of this paragraph);
(15) the incurrence by a Securitization Entity of Indebtedness in a
Qualified Securitization Transaction that is Non-Recourse Debt with
respect to the Company and its other Restricted Subsidiaries, except
for Standard Securitization Undertakings;
(16) the incurrence of additional Indebtedness by the Company or any of its
Restricted Subsidiaries and/or the issuance of Permitted Domestic
Subsidiary Preferred Stock by the Company's U.S. Subsidiaries, which
together with the aggregate principal amount of other Indebtedness
incurred pursuant to this clause (16) and the aggregate liquidation
value of all other Permitted Domestic Subsidiary Preferred Stock issued
pursuant to this clause (16), does not exceed $30.0 million at any one
time outstanding (which amount, in the case of Indebtedness, may, but
need not, be incurred in whole or in part under the Senior Credit
Agreements); provided, that such amount shall increase to $50.0 million
upon the consummation of an Initial Public Offering.
For purposes of determining compliance with this covenant, in the event that
an item of Indebtedness meets the criteria of more than one of the categories
of Permitted Indebtedness described in clauses (1) through (16) above or is
entitled to be incurred pursuant to the first paragraph of this covenant, the
Company shall, in its sole discretion, classify such item of Indebtedness in
any manner that complies with this covenant. Accrual of interest, accretion or
amortization of original issue discount, the payment of interest on any
Indebtedness in the form of additional Indebtedness with the same terms, and
the payment of dividends on Disqualified Stock in the form of additional shares
of the same class of Disqualified Stock will not be deemed to be an incurrence
of Indebtedness or an issuance of Disqualified Stock for purposes of this
covenant; provided, in each such case, that the amount thereof is included in
Consolidated Fixed Charges of the Company as accrued.
No Senior Subordinated Debt
The indenture provides that:
(1) the Company will not incur, create, issue, assume, Guarantee or
otherwise become liable for any Indebtedness that is subordinate or
junior in right of payment to any Senior Debt and senior in any respect
in right of payment to the exchange notes, and
60
(2) no Subsidiary Guarantor will incur, create, issue, assume, guarantee or
otherwise become liable for any Indebtedness that is subordinate or
junior in right of payment to any Senior Debt of any Subsidiary
Guarantor and senior in any respect in right of payment to the Note
Guarantees.
Liens
The Company will not, and will not permit any of its Restricted Subsidiaries
to, create, incur, assume or suffer to exist any Liens of any kind against or
upon any of its property or assets, or any proceeds therefrom, unless:
(1) in the case of Liens securing Indebtedness that is expressly subordinate
or junior in right of payment to the exchange notes, the exchange notes
are secured by a Lien on such property, assets or proceeds that is
senior in priority to such Liens, and
(2) in all other cases, the exchange notes are equally and ratably secured,
except for:
(a) Liens existing as of the date of the Indenture and any extensions,
renewals or replacements thereof,
(b) Liens securing Senior Debt,
(c) Liens securing the exchange notes,
(d) Liens securing intercompany Indebtedness of the Company or a
Restricted Subsidiary of the Company on assets of any Subsidiary of
the Company,
(e) Liens securing Indebtedness that is incurred to refinance
Indebtedness that was secured by a Lien permitted under the Indenture
that was incurred in accordance with the provisions of the Indenture;
provided, however, that such Liens do not extend to or cover any
property or assets of the Company or any of its Restricted
Subsidiaries not securing the Indebtedness so refinanced, and
(f) Permitted Liens.
Dividend and Other Payment Restrictions Affecting Restricted Subsidiaries
The Company will not, and will not permit any of its Restricted Subsidiaries
to, directly or indirectly, create or otherwise cause or permit to exist or
become effective any consensual encumbrance or consensual restriction on the
ability of any Restricted Subsidiary to (a) pay dividends or make any other
distributions on or in respect of its Capital Stock, (b) make loans or advances
or to pay any Indebtedness or other obligation owed to the Company or any other
Restricted Subsidiary of the Company or (c) transfer any of its property or
assets to the Company or any other Restricted Subsidiary of the Company, except
for such encumbrances or restrictions existing under or by reason of:
(1) applicable law;
(2) the indenture;
(3) non-assignment provisions of any contract or any lease entered into in
the ordinary course of business;
(4) any instrument governing Acquired Indebtedness, which encumbrance or
restriction is not applicable to any Person, or the properties or
assets of any Person, other than the Person or the properties or assets
of the Person so acquired;
(5) agreements existing on the date of the indenture (including, without
limitation, the Senior Credit Agreements and the Parent Note Indenture);
(6) restrictions on the transfer of assets subject to any Lien permitted
under the indenture imposed by the holder of such Lien;
(7) restrictions imposed by any agreement to sell assets or Capital Stock
permitted under the indenture to any Person pending the closing of such
sale;
61
(8) any agreement or instrument governing Capital Stock of any Person that
is in effect on the date such Person is acquired by the Company or a
Restricted Subsidiary of the Company;
(9) any Purchase Money Note, or other Indebtedness or other contractual
requirements of a Securitization Entity in connection with a Qualified
Securitization Transaction; provided that such restrictions apply only
to such Securitization Entity;
(10) any agreement or instrument governing Indebtedness or Permitted Foreign
Subsidiary Preferred Stock (whether or not outstanding) of Foreign
Subsidiaries of the Company that was permitted by the Indenture to be
incurred;
(11) other Indebtedness or Domestic Subsidiary Preferred Stock permitted to
be incurred subsequent to the date of the Indenture pursuant to the
provisions of the covenant described above under the caption
"--Incurrence of Additional Indebtedness and Issuance of Preferred
Stock"; provided that any such restrictions are ordinary and customary
with respect to the type of Indebtedness or preferred stock being
incurred or issued (under the relevant circumstances);
(12) restrictions on cash or other deposits or net worth imposed by
customers under contracts entered into in the ordinary course of
business; and
(13) any encumbrances or restrictions imposed by any amendments,
modifications, restatements, renewals, increases, supplements,
refundings, replacements or refinancings of the contracts, instruments
or obligations referred to in clauses (1) through (12) above; provided,
that such amendments, modifications, restatements, renewals, increases,
supplements, refundings, replacements or refinancings are, in the good
faith judgment of the Company's Board of Directors, no more restrictive
with respect to such dividend and other payment restrictions than those
contained in the dividend or other payment restrictions prior to such
amendment, modification, restatement, renewal, increase, supplement,
refunding, replacement or refinancing.
Merger, Consolidation, or Sale of Assets
The indenture provides that the Company may not consolidate or merge with or
into (whether or not the Company is the surviving corporation), or sell,
assign, transfer, lease, convey or otherwise dispose of all or substantially
all of its properties or assets in one or more related transactions, to another
corporation, Person or entity unless:
(1) the Company is the surviving corporation or the entity or the Person
formed by or surviving any such consolidation or merger (if other than
the Company) or to which such sale, assignment, transfer, lease,
conveyance or other disposition shall have been made is a corporation
organized or existing under the laws of the United States, any state
thereof or the District of Columbia;
(2) the entity or Person formed by or surviving any such consolidation or
merger (if other than the Company) or the entity or Person to which such
sale, assignment, transfer, lease, conveyance or other disposition shall
have been made assumes all the obligations of the Company under the
registration rights agreement, the exchange notes and the indenture
pursuant to a supplemental indenture in a form reasonably satisfactory
to the Trustee;
(3) immediately after such transaction no Default or Event of Default
exists; and
(4) except in the case of a merger of the Company with or into a Wholly
Owned Subsidiary of the Company and except in the case of a merger
entered into solely for the purpose of reincorporating the Company in
another jurisdiction, the Company or the entity or Person formed by or
surviving any such consolidation or merger (if other than the Company),
or to which such sale, assignment, transfer, lease, conveyance or other
disposition shall have been made will, at the time of such transaction
and after giving pro forma effect thereto as if such transaction had
occurred at the beginning of the applicable Four-Quarter Period, be
permitted to incur at least $1.00 of additional Indebtedness pursuant to
the
62
Consolidated Fixed Charge Coverage Ratio test set forth in the first
paragraph of the covenant described above under the caption
"--Incurrence of Indebtedness and Issuance of Preferred Stock."
Transactions with Affiliates
The Company will not, and will not permit any of its Restricted Subsidiaries
to, directly or indirectly, enter into or permit to occur any transaction or
series or related transactions (including, without limitation, the purchase,
sale, lease or exchange of any property or the rendering of any service) with,
or for the benefit of, any of its Affiliates involving aggregate consideration
in excess of $2.5 million (an "Affiliate Transaction"), other than:
(1) Affiliate Transactions permitted under the paragraph below; and
(2) Affiliate Transactions on terms that are not materially less favorable
than those that might reasonably have been obtained in a comparable
transaction at such time on an arm's-length basis from a Person that is
not an Affiliate of the Company; provided, however, that for a
transaction or series of related transactions with an aggregate value of
$7.5 million or more, at the Company's option, either:
(a) a majority of the disinterested members of the Board of Directors of
the Company shall determine in good faith that such Affiliate
Transaction is on terms that are not materially less favorable than
those that might reasonably have been obtained in a comparable
transaction at such time on an arm's-length basis from a Person that
is not an Affiliate of the Company; or
(b) the Board of Directors of the Company or any such Restricted
Subsidiary party to such Affiliate Transaction shall have received an
opinion from a nationally recognized investment banking firm that
such Affiliate Transaction is on terms not materially less favorable
than those that might reasonably have been obtained in a comparable
transaction at such time on an arm's-length basis from a Person that
is not an Affiliate of the Company; and provided, further, that for
an Affiliate Transaction with an aggregate value of $10.0 million or
more the Board of Directors of the Company or any such Restricted
Subsidiary party to such Affiliate Transaction shall have received an
opinion from a nationally recognized investment banking firm that
such Affiliate Transaction is on terms not materially less favorable
than those that might reasonably have been obtained in a comparable
transaction at such time on an arm's-length basis from a Person that
is not an Affiliate of the Company.
The foregoing restrictions shall not apply to:
(1) reasonable fees and compensation paid to and indemnity provided on
behalf of, officers, directors, employees or consultants of the Company
or any Subsidiary as determined in good faith by the Company's Board of
Directors or senior management;
(2) transactions exclusively between or among the Company and any of its
Restricted Subsidiaries or exclusively between or among such Restricted
Subsidiaries, provided such transactions are not otherwise prohibited
by the Indenture;
(3) transactions effected as part of a Qualified Securitization Transaction;
(4) any agreement as in effect as of the date of the Indenture or any
amendment or replacement thereto or any transaction contemplated
thereby, including pursuant to any amendment or replacement thereto, so
long as any such amendment or replacement agreement is not more
disadvantageous to the Holders in any material respect than the
original agreement as in effect on the date of the Indenture;
(5) Restricted Payments permitted by the Indenture;
(6) the payment of customary annual management, consulting and advisory
fees and related expenses to the Principals and their Affiliates made
pursuant to any financial advisory, financing, underwriting or
placement agreement or in respect of other investment banking
activities, including, without limitation, in connection with
acquisitions or divestitures which are approved by the Board of
Directors of the Company or such Restricted Subsidiary in good faith;
63
(7) payments or loans to employees or consultants that are approved by the
Board of Directors of the Company in good faith;
(8) the existence of, or the performance by the Company or any of its
Restricted Subsidiaries of its obligations under the terms of, any
stockholders agreement (including any registration rights agreement or
purchase agreement related thereto) to which it is a party as of the
date of the indenture and any similar agreements which it may enter
into thereafter; provided, however, that the existence of, or the
performance by the Company or any of its Restricted Subsidiaries of
obligations under, any future amendment to any such existing agreement
or under any similar agreement entered into after the date of the
Indenture shall only be permitted by this clause (8) to the extent that
the terms of any such amendment or new agreement are not
disadvantageous to the Holders of the applicable series of exchange
notes in any material respect;
(9) transactions permitted by, and complying with, the provisions of the
covenant described under "--Merger, Consolidation, or Sale of Assets";
and
(10) transactions with customers, clients, suppliers, joint venture partners
or purchasers or sellers of goods or services, in each case in the
ordinary course of business (including, without limitation, pursuant to
joint venture agreements) and otherwise in compliance with the terms of
the indenture which are fair to the Company or its Restricted
Subsidiaries, in the reasonable determination of the Board of Directors
of the Company or the senior management thereof, or are on terms at
least as favorable as might reasonably have been obtained at such time
from an unaffiliated party.
Additional Note Guarantees
The indenture provides that if the Company or any of its Restricted
Subsidiaries shall acquire or create another U.S. Subsidiary after the date of
the indenture, or if any Subsidiary becomes a U.S. Subsidiary after the date of
the Indenture, then such newly acquired or created Subsidiary shall execute a
Note Guarantee and deliver an Opinion of Counsel, in accordance with the terms
of the Indenture; provided, that all Subsidiaries that have properly been
designated as Unrestricted Subsidiaries in accordance with the Indenture shall
not be subject to the requirements of this covenant for so long as they
continue to constitute Unrestricted Subsidiaries.
Conduct of Business
The indenture provides that the Company will not, and will not permit any of
its Restricted Subsidiaries to, engage in any businesses a majority of whose
revenues are not derived from the same or reasonably similar, ancillary or
related to, or a reasonable extension, development or expansion of, the
businesses in which the Company and its Restricted Subsidiaries are engaged on
the date of the Indenture.
Reports
The indenture provides that, whether or not required by the rules and
regulations of the SEC, so long as any exchange notes are outstanding, the
Company will furnish to the Holders of exchange notes:
(1) all quarterly and annual financial information that would be required to
be contained in a filing with the SEC on Forms 10-Q and 10-K if the
Company were required to file such Forms, including a "Management's
Discussion and Analysis of Financial Condition and Results of
Operations" that describes the financial condition and results of
operations of the Company and its consolidated Subsidiaries (showing in
reasonable detail, either on the face of the financial statements or in
the footexchange notes thereto and in Management's Discussion and
Analysis of Financial Condition and Results of Operations, the financial
condition and results of operations of the Company and its Restricted
Subsidiaries separate from the financial condition and results of
operations of the Unrestricted Subsidiaries of the Company) and, with
respect to the annual information only, a report thereon by the
Company's certified independent accountants; and
64
(2) all current reports that would be required to be filed with the SEC on
Form 8-K if the Company were required to file such reports, in each case
within the time periods specified in the SEC's rules and regulations.
For so long as Parent is a Guarantor of the exchange notes, the indenture
will permit the Company to satisfy its obligations in this covenant with
respect to financial information relating to the Company by furnishing
financial information relating to Parent; provided that the same is accompanied
by consolidating information that explains in reasonable detail the differences
between the information relating to Parent, on the one hand, and the
information relating to the Company and its Restricted Subsidiaries on a
stand-alone basis, on the other hand. In addition, following the consummation
of the exchange offer contemplated by the registration rights agreement,
whether or not required by the rules and regulations of the SEC, the Company
will file a copy of all such information and reports with the SEC for public
availability within the time periods specified in the SEC's rules and
regulations (unless the SEC will not accept such a filing) and make such
information available to securities analysts and prospective investors upon
request. In addition, the Company and the Subsidiary Guarantors have agreed
that, for so long as any exchange notes remain outstanding, they will furnish
to the Holders and to securities analysts and prospective investors, upon their
request, the information required to be delivered pursuant to Rule 144A(d)(4)
under the Securities Act.
Events of Default and Remedies
The following events will be defined in the indenture as "Events of Default":
(1) the failure to pay interest on any exchange notes when the same becomes
due and payable if the default continues for a period of 30 days,
whether or not such payment shall be prohibited by the subordination
provisions of the Indenture;
(2) the failure to pay the principal on any exchange notes when such
principal becomes due and payable, at maturity, upon redemption or
otherwise (including the failure to make a payment to purchase exchange
notes tendered pursuant to a Change of Control Offer or a Net Proceeds
Offer), whether or not such payment shall be prohibited by the
subordination provisions of the Indenture;
(3 )a default in the observance or performance of any other covenant or
agreement contained in the Indenture if the default continues for a
period of 30 days after the Company receives written notice specifying
the default (and demanding that such default be remedied) from the
Trustee or the Holders of at least 25% of the outstanding principal
amount of the exchange notes;
(4) the failure to pay at final stated maturity (giving effect to any
extensions thereof) the principal amount of any Indebtedness of the
Company or any Restricted Subsidiary (other than a Securitization
Entity), which failure continues for at least 10 days, or the
acceleration of the maturity of any such Indebtedness, which
acceleration remains uncured and unrescinded for at least 10 days, if
the aggregate principal amount of such Indebtedness, together with the
principal amount of any other such Indebtedness in default for failure
to pay principal at final maturity or which has been accelerated,
aggregates $20.0 million or more at any time;
(5) one or more judgments in an aggregate amount in excess of $20.0 million
shall have been rendered against the Company or any of its Significant
Subsidiaries and such judgments remain undischarged, unpaid or unstayed
for a period of 60 days after such judgment or judgments become final
and non-appealable;
(6) except as permitted by the Indenture, any Subsidiary Guarantee shall be
held in any judicial proceeding to be unenforceable or invalid or shall
cease for any reason to be in full force and effect or any Guarantor, or
any Person acting on behalf of any Guarantor shall deny or disaffirm its
obligations under its Subsidiary Guarantee; and
(7) certain events of bankruptcy affecting the Company or any of its
Significant Subsidiaries.
65
Upon the happening of any Event of Default, the Trustee or the Holders of at
least 25% in principal amount of outstanding exchange notes may declare the
principal of and accrued interest on all the exchange notes to be due and
payable by notice in writing to the Company and the Trustee specifying the
Event of Default and that such notice is a "notice of acceleration" (the
"Acceleration Notice"), and the same (1) shall become immediately due and
payable or (2) if there are any amounts outstanding under either of the Senior
Credit Agreements, shall become immediately due and payable upon the first to
occur of an acceleration under either of the Senior Credit Agreements or five
Business Days after receipt by the Company and the Representative under the
applicable Senior Credit Agreement of such Acceleration Notice but only if such
Event of Default is then continuing. If an Event of Default with respect to
bankruptcy proceedings of the Company occurs and is continuing, then such
amount shall ipso facto become and be immediately due and payable without any
declaration or other act on the part of the Trustee or any Holder of notes.
The indenture provides that, at any time after a declaration of acceleration
with respect to the exchange notes as described in the preceding paragraph, the
Holders of a majority in principal amount of exchange notes may rescind and
cancel such declaration and its consequences as to such series if:
(1) the rescission would not conflict with any judgment or decree;
(2) if all existing Events of Default have been cured or waived except
nonpayment of principal or interest that has become due solely because
of the acceleration;
(3) to the extent the payment of such interest is lawful, interest on
overdue installments of interest and overdue principal, which has become
due otherwise than by such declaration of acceleration, has been paid;
(4) if the Company has paid the Trustee its compensation and reimbursed the
Trustee for its reasonable expenses, disbursements and advances; and
(5) in the event of the cure or waiver of an Event of Default of the type
described in clause (6) of the description above of Events of Default,
the Trustee shall have received an Officers' Certificate and an Opinion
of Counsel that such Event of Default has been cured or waived. The
holders of a majority in principal amount of exchange notes may waive
any existing Default or Event of Default under the Indenture, and its
consequences, except a default in the payment of the principal of or
interest on any exchange notes.
No Personal Liability of Directors, Officers, Employees and Stockholders
No director, officer, employee, incorporator or stockholder of the Company,
as such, shall have any liability for any obligations of the Company under the
exchange notes or the indenture or for any claim based on, in respect of, or by
reason of, such obligations or their creation. Each Holder of exchange notes by
accepting a exchange note waives and releases all such liability. The waiver
and release are part of the consideration for issuance of the exchange notes.
Such waiver may not be effective to waive liabilities under the federal
securities laws and it is the view of the SEC that such a waiver is against
public policy.
Legal Defeasance and Covenant Defeasance
The Company may, at its option and at any time, elect to have all of its
obligations discharged with respect either series of exchange notes ("Legal
Defeasance") except for:
(1) the rights of Holders of outstanding exchange notes to receive payments
in respect of the principal of, premium, if any, and interest and
Liquidated Damages on such exchange notes when such payments are due
from the trust referred to below;
(2) the Company's obligations with respect to such exchange notes concerning
issuing temporary exchange notes, registration of exchange notes,
mutilated, destroyed, lost or stolen exchange notes and the maintenance
of an office or agency for payment and money for security payments held
in trust;
66
(3) the rights, powers, trusts, duties and immunities of the Trustee, and
the Company's obligations in connection therewith; and
(4) the Legal Defeasance provisions of the Indenture.
In addition, the Company may, at its option and at any time, elect to have
the obligations of the Company released with respect to certain covenants that
are described in the Indenture ("Covenant Defeasance") and thereafter any
omission to comply with such obligations shall not constitute a Default or
Event of Default with respect to such exchange notes. In the event Covenant
Defeasance occurs, certain events (not including non-payment, bankruptcy,
receivership, rehabilitation and insolvency events) described under "Events of
Default" will no longer constitute an Event of Default with respect to such
exchange notes.
In order to exercise either Legal Defeasance or Covenant Defeasance:
(1) the Company must irrevocably deposit with the Trustee, in trust, for the
benefit of the Holders of the exchange notes, cash in U.S. dollars,
non-callable Government Securities, or a combination thereof, in such
amounts as will be sufficient, in the opinion of a nationally recognized
firm of independent public accountants, to pay the principal of,
premium, if any, interest and Liquidated Damages, if any, on all
outstanding exchange notes on the stated maturity or on the applicable
redemption date, as the case may be, and the Company must specify
whether such series of exchange notes are being defeased to maturity or
to a particular redemption date;
(2) in the case of Legal Defeasance, the Company shall have delivered to the
Trustee an Opinion of Counsel in the United States reasonably acceptable
to the Trustee confirming that:
(a) the Company has received from, or there has been published by, the
Internal Revenue Service a ruling; or
(b) since the date of the Indenture, there has been a change in the
applicable federal income tax law, in either case to the effect that,
and based thereon such Opinion of Counsel shall confirm that, the
Holders of the outstanding exchange notes of such series will not
recognize income, gain or loss for federal income tax purposes as a
result of such Legal Defeasance and will be subject to federal income
tax on the same amounts, in the same manner and at the same times as
would have been the case if such Legal Defeasance had not occurred;
(3) in the case of Covenant Defeasance, the Company shall have delivered to
the Trustee an Opinion of Counsel in the United States reasonably
acceptable to the Trustee confirming that the Holders of the outstanding
exchange notes will not recognize income, gain or loss for federal
income tax purposes as a result of such Covenant Defeasance and will be
subject to federal income tax on the same amounts, in the same manner
and at the same times as would have been the case if such Covenant
Defeasance had not occurred;
(4) no Default or Event of Default shall have occurred and be continuing on
the date of such deposit, other than a Default or Event of Default
resulting from the borrowing of funds to be applied to such deposit, or
insofar as Events of Default from bankruptcy or insolvency events are
concerned, at any time in the period ending on the 91st day after the
date of deposit;
(5) such Legal Defeasance or Covenant Defeasance will not result in a breach
or violation of, or constitute a default under, any material agreement
or instrument, including the Indenture and the Senior Credit Agreements,
(other than a default resulting from the borrowing of funds to be
applied to such deposit) to which the Company or any of its Subsidiaries
is a party or by which the Company or any of its Subsidiaries is bound;
(6) the Company must have delivered to the Trustee an Opinion of Counsel to
the effect that after the 91st day following the deposit, the trust
funds will not be subject to the effect of any applicable bankruptcy,
insolvency, reorganization or similar laws affecting creditors' rights
generally;
67
(7) the Company must deliver to the Trustee an Officers' Certificate stating
that the deposit was not made by the Company with the intent of
preferring the Holders of such series of exchange notes over the other
creditors of the Company with the intent of defeating, hindering,
delaying or defrauding creditors of the Company or others; and
(8) the Company must deliver to the Trustee an Officers' Certificate and an
Opinion of Counsel, each stating that all conditions precedent provided
for relating to the Legal Defeasance or the Covenant Defeasance have
been complied with.
Transfer and Exchange
A Holder may transfer or exchange notes in accordance with the indenture.
The Registrar and the Trustee may require a Holder, among other things, to
furnish appropriate endorsements and transfer documents and the Company may
require a Holder to pay any taxes and fees required by law or permitted by the
indenture. The Company is not required to transfer or exchange any exchange
note selected for redemption. Also, the Company is not required to transfer or
exchange any exchange note for a period of 15 days before a selection of
exchange notes to be redeemed.
The registered Holder of an exchange note will be treated as the owner of it
for all purposes.
Amendment, Supplement and Waiver
Except as provided in the next two succeeding paragraphs, the indenture and
the exchange notes may be amended or supplemented with the consent of the
Holders of at least a majority in principal amount of the exchange notes then
outstanding (including, without limitation, consents obtained in connection
with a purchase of, or tender offer or exchange offer for, exchange notes), and
any existing default or compliance with any provision of the Indenture or the
exchange notes may be waived with the consent of the Holders of a majority in
principal amount of the then outstanding exchange notes (including, without
limitation, consents obtained in connection with a purchase of, or tender offer
or exchange offer for, exchange notes).
Without the consent of each Holder affected, an amendment or waiver may not
(with respect to any exchange notes held by a non-consenting Holder):
(1) reduce the principal amount of exchange notes whose Holders must consent
to an amendment, supplement or waiver;
(2) reduce the principal of or change the fixed maturity of any exchange
note or alter the provisions with respect to the redemption of the
exchange notes (other than provisions relating to the covenants
described above under the caption "--Repurchase at the Option of
Holders");
(3) reduce the rate of or change the time for payment of interest on any
exchange note;
(4) waive a Default or Event of Default in the payment of principal of or
premium, if any, or interest on the exchange notes (except a rescission
of acceleration of the exchange notes by the Holders of at least a
majority in aggregate principal amount of the exchange notes and a
waiver of the payment default that resulted from such acceleration);
(5) make any exchange note payable in money other than that stated in the
exchange notes;
(6) make any change in the provisions of the indenture relating to waivers
of past Defaults or the rights of Holders of exchange notes to receive
payments of principal of or premium, if any, or interest on the exchange
notes;
(7) waive a redemption payment with respect to any exchange note (other than
a payment required by one of the covenants described above under the
caption "--Repurchase at the Option of Holders"); or
(8) make any change in the foregoing amendment and waiver provisions.
68
In addition, any amendment to the provisions of Article 10 of the indenture
(which relate to subordination) will require the consent of the Holders of at
least 75% in aggregate principal amount of the exchange notes then outstanding
if such amendment would adversely affect the rights of Holders of exchange
notes. Any amendment to the provisions of Article 10 of the indenture or the
related definitions will also require the consent of the majority of the
lenders under each of the Senior Credit Agreements.
Notwithstanding the foregoing, without the consent of any Holder of exchange
notes, the Company and the Trustee may amend or supplement the indenture or the
exchange notes to cure any ambiguity, defect or inconsistency, to provide for
uncertificated exchange notes in addition to or in place of certificated
exchange notes, to provide for the assumption of the Company's obligations to
Holders of exchange notes in the case of a merger or consolidation or sale of
all or substantially all of the Company's assets, to make any change that would
provide any additional rights or benefits to the Holders of exchange notes or
that does not adversely affect the legal rights under the indenture of any such
Holder, or to comply with requirements of the SEC in order to effect or
maintain the qualification of the Indenture under the Trust Indenture Act.
Concerning the Trustees
The indenture contains certain limitations on the rights of the Trustee,
should the Trustee become a creditor of the Company, to obtain payment of
claims in certain cases, or to realize on certain property received in respect
of any such claim as security or otherwise. The Trustee will be permitted to
engage in other transactions; however, if the Trustee acquires any conflicting
interest, the Trustee must eliminate such conflict within 90 days, apply to the
SEC for permission to continue or resign.
The Holders of a majority in principal amount of the then outstanding
exchange notes will have the right to direct the time, method and place of
conducting any proceeding for exercising any remedy available to the Trustee,
subject to certain exceptions. The indenture provides that in case an Event of
Default shall occur (which shall not be cured), the Trustee will be required,
in the exercise of its power, to use the degree of care of a prudent man in the
conduct of his own affairs. Subject to such provisions, the Trustee will be
under no obligation to exercise any of its rights or powers under the indenture
at the request of any Holder of exchange notes, unless such Holder shall have
offered to the Trustee security and indemnity satisfactory to it against any
loss, liability or expense.
Additional Information
Anyone who receives this prospectus may obtain copies of the indenture and
registration rights agreement, without charge, by writing to Sealy Mattress
Company, One Office Parkway, Trinity, North Carolina 27370, Attention: General
Counsel.
Definitions
Set forth below are some defined terms used in the indenture. Reference is
made to the indenture for a full disclosure of all such terms, as well as any
other capitalized terms used herein for which no definition is provided.
"Acquired Indebtedness" means Indebtedness of a Person or any of its
Subsidiaries existing at the time such Person becomes a Restricted Subsidiary
of the Company or that is assumed by the Company or any of its Restricted
Subsidiaries in connection with the acquisition of assets from such Person, in
each case excluding any Indebtedness incurred by such Person in connection
with, or in anticipation or contemplation of, such Person becoming a Restricted
Subsidiary of the Company or such acquisition.
"Affiliate" means a Person who directly or indirectly through one or more
intermediaries controls, or controlled by, or is under common control with, the
Company. The term "control" means the possession directly or indirectly, of the
power to direct or cause the direction of the management and policies of a
Person whether through the ownership of voting securities, by contract or
otherwise. Notwithstanding the foregoing, no Person (other than the Company or
any Subsidiary of the Company) in whom a Securitization Entity makes an
69
Investment in connection with a Qualified Securitization Transaction shall be
deemed to be an Affiliate of the Company or any of its Subsidiaries solely by
reason of such Investment.
"all or substantially all" shall have the meaning given such phrase in the
Revised Model Business Corporation Act.
"Asset Acquisition" means:
(1) an Investment by the Company or any Restricted Subsidiary of the Company
in any other Person if, as a result of such Investment, such Person
shall become a Restricted Subsidiary of the Company, or shall be merged
with or into the Company or any Restricted Subsidiary of the Company; or
(2) the acquisition by the Company or any Restricted Subsidiary of the
Company of all or substantially all of the assets of any other Person or
any division or line of business of any other Person.
"Asset Sale" means any direct or indirect sale, issuance, conveyance,
transfer, lease (other than operating leases entered into in the ordinary
course of business), assignment or other transfer for value by the Company or
any of its Restricted Subsidiaries to any Person other than the Company or a
Restricted Subsidiary of the Company of:
(1) any Capital Stock of any Restricted Subsidiary of the Company; or
(2) any other property or assets of the Company or any Restricted Subsidiary
of the Company other than in the ordinary course of business; provided,
however, that Asset Sales shall not include:
(a) a transaction or series of related transactions for which the Company
or its Restricted Subsidiaries receive aggregate consideration of
less than $1.0 million,
(b) the sale, lease, conveyance, disposition or other transfer of all or
substantially all of the assets of the Company as permitted under the
provisions described above under the caption "--Covenants--Merger,
Consolidation and Sale of Assets" or any disposition that constitutes
a Change of Control,
(c) the sale or discount, in each case without recourse, of accounts
receivable arising in the ordinary course of business, but only in
connection with the compromise or collection thereof,
(d) the factoring of accounts receivable arising in the ordinary course
of business pursuant to arrangements customary in the industry,
(e) the licensing of intellectual property,
(f) disposals or replacements of obsolete, uneconomical, negligible, worn
out or surplus property in the ordinary course of business,
(g) the sale, lease conveyance, disposition or other transfer by the
Company or any Restricted Subsidiary of assets or property to one or
more Restricted Subsidiaries in connection with Investments permitted
by the covenant described under the caption "--Restricted Payments",
(h) sales of accounts receivable, equipment and related assets (including
contract rights) of the type specified in the definition of
"Qualified Securitization Transaction" to a Securitization Entity for
the fair market value thereof, including cash in an amount at least
equal to 75% of the fair market value thereof.
For the purposes of clause (h), Purchase Money Notes shall be deemed to be
cash.
"Capital Lease Obligation" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that
would at such time be required to be capitalized on a balance sheet in
accordance with GAAP.
"Capital Stock" means:
(1) in the case of a corporation, corporate stock;
(2) in the case of an association or business entity, any and all shares,
interests, participations, rights or other equivalents, however
designated, of corporate stock;
70
(3) in the case of a partnership or limited liability company, partnership
or membership interests, whether general or limited; and
(4) any other interest or participation that confers on a Person the right
to receive a share of the profits and losses of, or distributions of
assets of, the issuing Person.
"Cash Equivalents" means:
(1) marketable direct obligations issued by, or unconditionally guaranteed
by, the United States Government or issued by any agency thereof and
backed by the full faith and credit of the United States, in each case
maturing within one year from the date of acquisition thereof;
(2) marketable direct obligations issued by any state of the United States
of America or any political subdivision of any such state or any public
instrumentality thereof maturing within one year from the date of
acquisition thereof and, at the time of acquisition, having one of the
two highest ratings obtainable from either S&P or Moody's;
(3) commercial paper maturity no more than one year from the date of
creation thereof and at the time of acquisition, having a rating of at
least A-1 from S&P or at least P-1 from Moody's;
(4) certificates of deposit or bankers' acceptances (or, with respect to
foreign banks, similar instruments) maturing within one year from the
date of acquisition thereof issued by any bank organized under the laws
of the United States of America or any state thereof or the District of
Columbia, Japan or any member of the European Economic Community or any
U.S. branch of a foreign bank having at the date of acquisition thereof
combined capital and surplus of not less than $200.0 million; provided,
that instruments issued by banks not having one for the two highest
ratings obtainable from either S&P or Moody's or by banks organized
under the laws of Japan or any member of the European Economic Community
shall not constitute Cash Equivalents for purposes of the subordination
provisions of the
Indenture;
(5) repurchase obligations with a term of not more than seven days for
underlying securities of the types described in clause (1) above entered
into with any bank meeting the qualifications specified in clause (4)
above; and
(6) investments in money market funds which invest substantially all their
assets in securities of the types described in clauses (1) through (5)
above.
"Consolidated EBITDA" means, with respect to any Person, for any period, the
sum (without duplication) of such Person's:
(1) Consolidated Net Income; and
(2) to the extent Consolidated Net Income has been reduced thereby:
(a) all income taxes and foreign withholding taxes of such Person and its
Restricted Subsidiaries paid or accrued in accordance with GAAP for
such period;
(b) Consolidated Interest Expense;
(c) Consolidated Noncash Charges;
(d) all one-time cash compensation payments made in connection with the
Transactions;
(e) any payments related to addressing the Company's or any of its
Restricted Subsidiary's "Year 2000" information systems issue and
EITF 97-13 "reengineering" efforts; and
(f) all bad debt and factoring losses incurred specifically with respect
to the bankruptcy of Montgomery Ward.
71
"Consolidated Fixed Charge Coverage Ratio" means, with respect to any
Person, the ratio of Consolidated EBITDA of such Person during the most recent
four full fiscal quarters for which internal financial statements are available
(the "Four-Quarter Period") ending on or prior to the date of the transaction
giving rise to the need to calculate the Consolidated Fixed Charge Coverage
Ratio (the "Transaction Date") to Consolidated Fixed Charges of such Person for
the Four-Quarter Period.
In addition to and without limitation of the foregoing, for purposes of this
definition, Consolidated EBITDA and Consolidated Fixed Charges shall be
calculated after giving effect on a pro forma basis for the period of such
calculation to:
(1) the incurrence of any Indebtedness or the issuance of any preferred
stock of such Person or any of its Restricted Subsidiaries (and the
application of the proceeds thereof) and any repayment of other
Indebtedness or redemption of other preferred stock occurring during the
Four-Quarter Period or at any time subsequent to the last day of the
Four-Quarter Period and on or prior to the Transaction Date, as if such
incurrence, repayment, issuance or redemption, as the case may be (and
the application of the proceeds thereof), occurred on the first day of
the Four-Quarter Period; and
(2) any Asset Sale or Asset Acquisition (including, without limitation, any
Asset Acquisition giving rise to the need to make such calculation as a
result of such Person or one of its Restricted Subsidiaries (including
any Person who becomes a Restricted Subsidiary as a result of the Asset
Acquisition) incurring, assuming or otherwise being liable for Acquired
Indebtedness and also including any Consolidated EBITDA (including any
Pro Forma Cost Savings) associated with any such Asset Acquisition)
occurring during the Four-Quarter Period or at any time subsequent to
the last day of the Four-Quarter Period and on or prior to the
Transaction Date, as if such Asset Sale or Asset Acquisition (including
the incurrence of, or assumption or liability for any such Indebtedness
or Acquired Indebtedness) occurred on the first day of the Four-Quarter
Period.
If such Person or any of its Restricted Subsidiaries directly or indirectly
Guarantees Indebtedness of a third Person, the preceding sentence shall give
effect to the incurrence of such guaranteed Indebtedness as if such Person or
any Restricted Subsidiary of such Person had directly incurred or otherwise
assumed such guaranteed Indebtedness.
In calculating Consolidated Fixed Charges for purposes of determining the
denominator (but not the numerator) of this Consolidated Fixed Charge Coverage
Ratio:
(1) interest on outstanding Indebtedness determined on a fluctuating basis
as of the Transaction Date and which will continue to be so determined
thereafter shall be deemed to have accrued at a fixed rate per annum
equal to the rate of interest on such Indebtedness in effect on the
Transaction Date;
(2) if interest on any Indebtedness actually incurred on the Transaction
Date may optionally be determined at an interest rate based upon a
factor of a prime or similar rate, a eurocurrency interbank offered
rate, or other rates, then the interest rate in effect on the
Transaction Date will be deemed to have been in effect during the
Four-Quarter Period; and
(3) notwithstanding clause (1) above, interest on Indebtedness determined on
a fluctuating basis, to the extent such interest is covered by
agreements relating to Interest Swap Obligations, shall be deemed to
accrue at the rate per annum resulting after giving effect to the
operation of such agreements.
"Consolidated Fixed Charges" means, with respect to any Person for any
period, the sum of, without duplication:
(1) Consolidated Interest Expense, before amortization or write-off of debt
issuance costs, plus
(2) the amount of all cash dividend payments on any series of preferred
stock of such Person, plus
72
(3) the amount of all dividend payments on any series of Permitted Foreign
Subsidiary Preferred Stock or Permitted Domestic Subsidiary Preferred
Stock; provided that, with respect to any series of preferred stock that
was not paid cash dividends during such period but that is eligible to
be paid cash dividends during any period prior to the maturity date of
the exchange notes, cash dividends shall be deemed to have been paid
with respect to such series of preferred stock during such period for
purposes of clause (2) of this definition.
"Consolidated Interest Expense" means, with respect to any Person for any
period, the sum of, without duplication:
(1) the aggregate of all cash and non-cash interest expense with respect to
all outstanding Indebtedness of such Person and its Restricted
Subsidiaries, including the net costs associated with Interest Swap
Obligations, for such period determined on a consolidated basis in
conformity with GAAP,
(2) the consolidated interest expense of such Person and its Restricted
Subsidiaries that was capitalized during such period, and
(3) the interest component of Capitalized Lease Obligations paid, accrued
and/or scheduled to be paid or accrued by such Person and its Restricted
Subsidiaries during such period as determined on a consolidated basis in
accordance with GAAP.
"Consolidated Net Income" of the Company means, for any period, the
aggregate net income or loss of the Company and its Restricted Subsidiaries for
such period on a consolidated basis, determined in accordance with GAAP,
provided that there shall be excluded therefrom:
(1) gains and losses from Asset Sales (without regard to the $1.0 million
limitation set forth in the definition thereof) or abandonments or
reserves relating thereto and the related tax effects according to GAAP;
(2) gains and losses due solely to fluctuations in currency values and the
related tax effects according to GAAP;
(3) items classified as a cumulative effect accounting change or as
extraordinary, unusual or nonrecurring gains and losses (including,
without limitation, severance, relocation and other restructuring
costs), and the related tax effects according to GAAP;
(4) the net income (or loss) of any Person acquired in a pooling of
interests transaction accrued prior to the date it becomes a Restricted
Subsidiary of the Company or is merged or consolidated with the Company
or any Restricted Subsidiary of the Company;
(5) the net income of any Restricted Subsidiary of the Company to the extent
that the declaration of dividends or similar distributions by that
Restricted Subsidiary of the Company of that income is restricted by
contract, operation, operation of law or otherwise;
(6) the net loss of any Person, other than a Restricted Subsidiary of the
Company;
(7) the net income of any Person, other than a Restricted Subsidiary of the
Company, except to the extent of cash dividends or distributions paid to
the Company or a Restricted Subsidiary of the Company by such Person;
(8) only for purposes of clause (3)(c)(i) of the first paragraph of the
covenant described under the caption "--Restricted Payments", any
amounts included pursuant to clause (3)(c)(iii) of the first paragraph
of such covenant; and
(9) one time non-cash compensation charges, including any arising from
existing stock options resulting from any merger or recapitalization
transaction. For purposes of clause (3)(c)(i) of the first paragraph of
the covenant described under the caption "--Restricted Payments",
Consolidated Net Income shall be reduced by any cash dividends paid with
respect to any series of Designated Preferred Stock.
73
"Consolidated Noncash Charges" means, with respect to any Person for any
period, the aggregate depreciation, amortization and other non-cash expenses of
such Person and its Restricted Subsidiaries reducing Consolidated Net Income of
such Person for such period, determined on a consolidated basis in accordance
with GAAP excluding any such non-cash charge constituting an extraordinary item
or loss or any such non-cash charge which requires an accrual of or a reserve
for cash charges for any future period.
"Credit Facilities" means one or more debt facilities, including, without
limitation, the Senior Credit Agreements, or commercial paper facilities with
banks or other institutional lenders providing for revolving credit loans, term
loans, receivables financing, including through the sale of receivables to such
lenders or to special purpose entities formed to borrow from such lenders
against such receivables, and/or letters of credit.
"Currency Agreement" means any foreign exchange contract, currency swap
agreement or other similar agreement or arrangement designed to protect the
Company or any Restricted Subsidiary of the Company against fluctuations in
currency values.
"Default" means any event that is or with the passage of time or the giving
of notice or both would be an Event of Default.
"Designated Noncash Consideration" means any non-cash consideration received
by the Company or one of its Restricted Subsidiaries in connection with an
Asset Sale that is so designated as Designated Noncash Consideration pursuant
to an Officers' Certificate executed by the principal executive officer and the
principal financial officer of the Company or such Restricted Subsidiary. Such
Officers' Certificate shall state the basis of such valuation, which shall be a
report of a nationally recognized investment banking firm with respect to the
receipt in one or a series of related transactions of Designated Noncash
Consideration with a fair market value in excess of $10.0 million.
"Designated Preferred Stock" means Preferred Stock that is so designated as
Designated Preferred Stock, pursuant to an Officers, Certificate executed by
the principal executive officer and the principal financial officer of the
Company, on the issuance date thereof, the cash proceeds of which are excluded
from the calculation set forth in clause (iii) of the first paragraph of the
covenant described under the caption "--Restricted Payments."
"Disqualified Stock" means any Capital Stock that, by its terms (or by the
terms of any security into which it is convertible, or for which it is
exchangeable, at the option of the holder thereof), or upon the happening of
any event, matures or is mandatorily redeemable, pursuant to a sinking fund
obligation or otherwise, or redeemable at the option of the Holder thereof, in
whole or in part, on or prior to the date that is 91 days after the date on
which the exchange notes mature; provided, however, that any Capital Stock that
would constitute Disqualified Stock solely because the holders thereof have the
right to require the Company to repurchase such Capital Stock upon the
occurrence of a Change of Control or an Asset Sale shall not constitute
Disqualified Stock if the terms of such Capital Stock provide that the Company
may not repurchase or redeem any such Capital Stock pursuant to such provisions
unless such repurchase or redemption complies with the covenant described above
under the caption "--Restricted Payments."
"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock.
"Equity Offering" means any offering of Qualified Capital Stock of Parent or
the Company; provided that, in the event of any Equity Offering by Parent,
Parent contributes to the common equity capital of the Company, other than as
Disqualified Stock, the portion of the net cash proceeds of such Equity
Offering necessary to pay the aggregate redemption price, plus accrued interest
to the redemption date, of the exchange notes to be redeemed pursuant to the
preceding paragraph.
"Existing Indebtedness" means Indebtedness of the Company and its
Subsidiaries, other than Indebtedness under the Senior Credit Agreements, in
existence on the date of the indenture, until such amounts are repaid.
74
"Foreign Subsidiaries" means the Company's current and future non-U.S.
Subsidiaries.
"Four-Quarter Period" has the meaning specified in the definition of
Consolidated Fixed Charge Coverage Ratio.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, which are in effect on the date of the Indenture.
"Guarantee" means a guarantee, other than by endorsement of negotiable
instruments for collection in the ordinary course of business, direct or
indirect, in any manner (including, without limitation, by way of a pledge of
assets or through letters of credit or reimbursement agreements in respect
thereof), of all or any part of any Indebtedness.
"Hedging Obligations" means, with respect to any Person, the obligations of
such Person under:
(1) interest rate swap agreements, interest rate cap agreements and interest
rate collar agreements, including Interest Swap Obligations; and
(2) other agreements or arrangements designed to protect such Person against
fluctuations in interest rates, including Currency Agreements.
"Indebtedness" means, with respect to any Person, any indebtedness of such
Person, whether or not contingent, in respect of borrowed money or evidenced by
bonds, exchange notes, debentures or similar instruments or letters of credit
(or reimbursement agreements in respect thereof) or banker's acceptances or
representing Capital Lease Obligations or the balance deferred and unpaid of
the purchase price of any property or representing any Hedging Obligations,
except any such balance that constitutes an accrued expense or trade payable,
if and to the extent any of the foregoing (other than letters of credit and
Hedging Obligations) would appear as a liability upon a balance sheet of such
Person prepared in accordance with GAAP, as well as all Indebtedness of others
secured by a Lien on any asset of such Person (whether or not such Indebtedness
is assumed by such Person) and, to the extent not otherwise included, the
Guarantee by such Person of any indebtedness of any other Person. The amount of
any Indebtedness outstanding as of any date shall be:
(1) the accreted value thereof, in the case of any Indebtedness issued with
original issue discount; and
(2) the principal amount thereof, together with any interest thereon that is
more than 30 days past due, in the case of any other Indebtedness.
For purposes of calculating the amount of Indebtedness of a Securitization
Entity outstanding as of any date, the face or notional amount of any interest
in receivables or equipment that is outstanding as of such date shall be deemed
to be Indebtedness but any such interests held by Affiliates of such
Securitization Entity shall be excluded for purposes of such calculation.
"Initial Public Offering" means the first underwritten public offering of
Qualified Capital Stock by either Parent or by the Company pursuant to a
registration statement filed with the SEC in accordance with the Securities Act
for aggregate net cash proceeds of a least $50.0 million; provided that, in the
event the Initial Public Offering is consummated by Parent, Parent contributes
to the common equity capital of the Company at least $50.0 million of the net
cash proceeds of the Initial Public Offering.
"Interest Swap Obligations" means the obligations of any Person, pursuant to
any arrangement with any other Person, whereby, directly or indirectly, such
Person is entitled to receive from time to time periodic payments calculated by
applying either a floating or a fixed rate of interest on a stated notional
amount in
75
exchange for periodic payments made by such other Persons calculated by
applying a fixed or a floating rate of interest on the same notional amount.
"Investments" means, with respect to any Person, all investments by such
Person in other Persons, including Affiliates, in the forms of direct or
indirect loans, including guarantees of Indebtedness or other obligations,
advances or capital contributions (excluding commission, travel and similar
advances to officers and employees made in the ordinary course of business),
purchases or other acquisitions for consideration of Indebtedness, Equity
Interests or other securities, together with all items that are or would be
classified as investments on a balance sheet prepared in accordance with GAAP.
If the Company or any Subsidiary of the Company sells or otherwise disposes of
any Equity Interests of any direct or indirect Subsidiary of the Company such
that, after giving effect to any such sale or disposition, such Person is no
longer a Subsidiary of the Company, the Company shall be deemed to have made an
Investment on the date of any such sale or disposition equal to the fair market
value of the Equity Interests of such Subsidiary not sold or disposed of in an
amount determined as provided in the final paragraph of the covenant described
above under the caption "--Restricted Payments."
"Lien" means, with respect to any asset, any mortgage, lien, pledge, charge,
security interest or encumbrance of any kind in respect of such asset, whether
or not filed, recorded or otherwise perfected under applicable law, including
any conditional sale or other title retention agreement, any lease in the
nature thereof, any option or other agreement to sell or give a security
interest in and any filing of or agreement to give any financing statement
under the Uniform Commercial Code (or equivalent statutes) of any jurisdiction.
"Marketable Securities" means publicly traded debt or equity securities that
are listed for trading on a national securities exchange and that were issued
by a corporation whose debt securities are rated in one of the three highest
rating categories by either S&P or Moody's.
"Moody's" means Moody's Investors Service, Inc.
"Net Proceeds" means the aggregate cash proceeds received by the Company or
any of its Restricted Subsidiaries in respect of any Asset Sale (including,
without limitation, any cash received upon the sale or other disposition of any
non-cash consideration received in any Asset Sale), net of the direct costs
relating to such Asset Sale (including, without limitation, legal, accounting
and investment banking fees, and sales commissions) and any relocation expenses
incurred as a result thereof, taxes paid or payable as a result thereof (after
taking into account any available tax credits or deductions and any tax sharing
arrangements) and any reserve for adjustment in respect of the sale price of
such asset or assets established in accordance with GAAP.
"Non-Recourse Debt" means Indebtedness:
(1) as to which neither the Company nor any of its Restricted Subsidiaries:
. provides credit support of any kind (including any undertaking,
agreement or instrument that would constitute Indebtedness);
. is directly or indirectly liable (as a guarantor or otherwise); or
. constitutes the lender; and
(2) no default with respect to which (including any rights that the holders
thereof may have to take enforcement action against an Unrestricted
Subsidiary) would permit (upon notice, lapse of time or both) any holder
of any other Indebtedness of the Company or any of its Restricted
Subsidiaries to declare a default on such other Indebtedness or cause
the payment thereof to be accelerated or payable prior to its stated
maturity; and
(3) as to which the lenders have been notified in writing that they will not
have any recourse to the stock or assets of the Company or any of its
Restricted Subsidiaries.
76
"Non-Guarantor Subsidiaries" means:
(1) the Foreign Subsidiaries and
(2) Advanced Sleep Products, a California corporation, Sealy
Components-Pads, Inc., a Delaware corporation, Sealy Mattress Company of
San Diego, a California corporation, Sealy Connecticut, Inc., a
Connecticut corporation, and Sealy Mattress Company of S.W. Virginia, a
Virginia corporation.
"Obligations" means any principal, interest (including, without limitation,
interest that, but for the filing of a petition in bankruptcy with respect to
an obligor, would accrue on such obligations), penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"Parent" means Sealy Corporation, a Delaware corporation.
"Parent Note indenture" means the indenture governing the Existing exchange
notes between The Bank of New York (as successor trustee to Mellon Bank, F.S.B.
(as successor trustee to KeyBank National Association)) and Parent.
"Parent Notes" means the existing 10.25% Senior Subordinated Notes due 2003
of Parent.
"Permitted Business" means any business, including stock or assets, that
derives a majority of its revenues from the manufacture, distribution and sale
of mattresses, foundation and other bedding products and activities that are
reasonably similar, ancillary or related to, or a reasonable extension,
development or expansion of, the businesses in which the Company and its
Restricted Subsidiaries are engaged on the date of the indenture.
"Permitted Domestic Subsidiary Preferred Stock" means any series of
Preferred Stock of a domestic restricted Subsidiary of the Company that
constitutes Qualified Capital Stock and has a fixed dividend rate, the
liquidation value of all series of which, when combined with the aggregate
amount of Indebtedness of the Company and its Restricted Subsidiaries incurred
pursuant to clause (16) of the definition of Permitted Indebtedness, does not
exceed $30.0 million; provided, that such amount shall increase to $50.0
million upon consummation of an Initial Public Offering.
"Permitted Foreign Subsidiary Preferred Stock" means any series of Preferred
Stock of a foreign Restricted Subsidiary of the Company that constitutes
Qualified Capital Stock and has a fixed dividend rate, the liquidation value of
all series of which, when combined with the aggregate amount of Indebtedness of
foreign Restricted Subsidiaries of the Company incurred pursuant to clause
(iii) of the definition of Permitted Indebtedness, does not exceed $15.0
million; provided that such amount shall increase to $30.0 million upon
consummation of an Initial Public Offering.
"Permitted Investments" means:
(1) investments by the Company or any Restricted Subsidiary of the Company
in any Restricted Subsidiary of the Company that is a Guarantor or a
Foreign Subsidiary (whether existing on the date of the indenture or
created thereafter) or in any other Person (including by means of any
transfer of cash or other property) if as a result of such Investment
such Person shall become a Restricted Subsidiary of the Company that is
a Guarantor or a Foreign Subsidiary and Investments in the Company by
any Restricted Subsidiary of the Company;
(2) cash and Cash Equivalents;
(3) Investments existing on the date of the indenture;
(4) loans and advances to employees and officers of the Company and its
Restricted Subsidiaries in the ordinary course of Business;
77
(5) accounts receivable created or acquired in the ordinary course of
Business;
(6) Currency Agreements and Interest Swap Obligations entered into in the
ordinary course of the Company's businesses and otherwise in compliance
with the indenture;
(7) Investments in Unrestricted Subsidiaries in an amount at any one time
outstanding not to exceed $20.0 million;
(8) Investments in securities of trade creditors or customers received
pursuant to any plan of reorganization or similar arrangement upon the
bankruptcy or insolvency of such trade creditors or customers;
(9) guarantees by the Company of Indebtedness otherwise permitted to be
incurred by Restricted Subsidiaries of the Company that are either
Guarantors or Foreign Subsidiaries under the indenture;
(10)additional Investments having an aggregate fair market value, taken
together with all other Investments made pursuant to this clause (10)
that are at that time outstanding, not to exceed 5% of Total Assets at
the time of such Investment (with the fair market value of each
Investment being measured at the time made and without giving effect to
subsequent changes in value);
(11)any Investment by the Company or a Subsidiary of the Company in a
Securitization Entity or any Investment by a Securitization Entity in
any other Person in connection with a Qualified Securitization
Transaction; provided that any Investment in a Securitization Entity is
in the form of a Purchase Money Note or an equity interest;
(12)any transaction to the extent it constitutes an Investment that is
permitted by, and made in accordance with, clause (b) of the
"Limitations on Transactions with Affiliates" covenant (other than
transactions described in clause (5) of such clause (b));
(13)Investments the payment for which consists exclusively of Qualified
Capital Stock of the Company; and
(14)Investments received by the Company or its Restricted Subsidiaries as
consideration for asset sales, including Asset Sales; provided that, in
the case of an Asset Sale, such Asset Sale is effected in compliance
with the covenant described under the caption "--Redemption or
Repurchase at Option of Holders--Asset Sales."
"Permitted Liens" means the following types of Liens:
(1) Liens for taxes, assessments or governmental charges or claims either:
(a)not delinquent; or
(b)contested in good faith by appropriate proceedings and as to which
the Company or its Restricted Subsidiaries shall have set aside on
its books such reserves as may be required pursuant to GAAP;
(2) statutory Liens of landlords and Liens of carriers, warehousemen,
mechanics, suppliers, materialmen, repairmen and other Liens imposed by
law incurred in the ordinary course of business for sums not yet
delinquent or being contested in good faith, if such reserve or other
appropriate provision, if any, as shall be required by GAAP shall have
been made in respect thereof;
(3) Liens incurred or deposits made in the ordinary course of business in
connection with workers' compensation, unemployment insurance and other
types of social security, including any Lien securing letters of credit
issued in the ordinary course of business consistent with past practice
in connection therewith, or to secure the performance of tenders,
statutory obligations, surety and appeal bonds, bids, leases,
government contracts, performance and return-of-money bonds and other
similar obligations (exclusive of obligations for the payment of
borrowed money);
(4) judgment Liens not giving rise to an Event of Default;
(5) easements, rights-of-way, zoning restrictions and other similar charges
or encumbrances in respect of real property not interfering in any
material respect with the ordinary conduct of the business of the
Company or any of its Restricted Subsidiaries;
78
(6) any interest or title of a lessor under any Capitalized Lease
Obligation;
(7) purchase money Liens to finance property or assets of the Company or
any Restricted Subsidiary of the Company acquired in the ordinary
course of business; provided, however, that (A) the related purchase
money Indebtedness shall not exceed the cost of such property or assets
and shall not be secured by any property or assets of the Company or
any Restricted Subsidiary of the Company other than the property and
assets so acquired and (B) the Lien securing such Indebtedness shall be
created with 90 days of such acquisition;
(8) Liens upon specific items of inventory or other goods and proceeds of
any Person securing such Person's obligations in respect of bankers'
acceptances issued or created for the account of such Person to
facilitate the purchase, shipment, or storage of such inventory or
other goods;
(9) Liens securing reimbursement obligations with respect to commercial
letters of credit which encumber documents and other property relating
to such letters of credit and products and proceeds thereof;
(10)Liens encumbering deposits made to secure obligations arising from
statutory, regulatory, contractual, or warranty requirements of the
Company or any of its Restricted Subsidiaries, including rights of
offset and set-off;
(11)Liens securing Interest Swap Obligations which Interest Swap
Obligations relate to Indebtedness that is otherwise permitted under
the indenture;
(12)Liens securing Indebtedness under Currency Agreements;
(13)Liens securing Indebtedness of foreign Restricted Subsidiaries of the
Company incurred in reliance on clause (3) of the second paragraph of
the covenant described above under the caption "--Incurrence of
Indebtedness and Issuance of Preferred Stock";
(14)Liens securing Acquired Indebtedness incurred in reliance on clause (8)
of the second paragraph of the covenant described above under the
caption "--Incurrence of Indebtedness and Issuance of Preferred Stock";
(15)Liens incurred in the ordinary course of business of the Company or any
Restricted Subsidiary with respect to obligations that do not in the
aggregate exceed $10.0 million at any one time outstanding;
(16)Liens on assets transferred to a Securitization Entity or on assets of
a Securitization Entity, in either case incurred in connection with a
Qualified Securitization Transaction;
(17)Leases or subleases granted to others that do not materially interfere
with the ordinary course of business of the Company and its Restricted
Subsidiaries;
(18)Liens arising from filing Uniform Commercial Code financing statements
regarding leases;
(19)Liens in favor of customs and revenue authorities arising as a matter
of law to secure payment of customer duties in connection with the
importation of goods;
(20)Liens on assets of Unrestricted Subsidiaries that secure Non-Recourse
Debt of Unrestricted Subsidiaries; and
(21)Liens existing on the date of the indenture, together with any Liens
securing Indebtedness incurred in reliance on clause (14) of the
definition of Permitted Indebtedness in order to refinance the
Indebtedness secured by Liens existing on the date of the indenture;
provided that the Liens securing the refinancing Indebtedness shall not
extend to property other than that pledged under the Liens securing the
Indebtedness being refinanced.
"Pro Forma Cost Savings" means, with respect to any period, the reduction in
costs that occurred during the Four-Quarter Period or after the end of the
Four-Quarter Period and on or prior to the Transaction Date that were:
(1)directly attributable to an Asset Acquisition and calculated on a basis
that is consistent with Regulation S-X under the Securities Act as in
effect and applied as of January1, 1997, or
79
(2) implemented by the business that was the subject of any such Asset
Acquisition within six months of the date of the Asset Acquisition and
that are supportable and quantifiable by the underlying accounting
records of such business, as if, in the case of each of clause (1) and
(2), all such reductions in costs had been effected as of the beginning
of such period.
"Productive Assets" means assets, including Capital Stock, that are used or
usable by the Company and its Restricted Subsidiaries in Permitted Businesses.
"Purchase Money Note" means a promissory note of a Securitization Entity
evidencing a line of credit, which may be irrevocable, from the Company or any
Restricted Subsidiary of the Company in connection with a Qualified
Securitization Transaction, which note shall be repaid from cash available to
the Securitization Entity, other than amounts required to be established as
reserves pursuant to agreements, amounts paid to investors in respect of
interest, principal and other amounts owing to such investors and amounts paid
in connection with the purchase of newly generated receivables or newly
acquired equipment.
"Qualified Capital Stock" means any Capital Stock that is not Disqualified
Stock.
"Qualified Securitization Transaction" means any transaction or series of
transactions pursuant to which the Company or any of its Restricted
Subsidiaries may sell, convey or otherwise transfer to:
(1) a Securitization Entity (in the case of a transfer by the Company or any
of its Restricted Subsidiaries); and
(2) any other Person (in case of a transfer by a Securitization Entity), or
may grant a security interest in, any accounts receivable or equipment
(whether now existing or arising or acquired in the future) of the
Company or any of its Restricted Subsidiaries, and any assets related
thereto including, without limitation, all collateral securing such
accounts receivable and equipment, all contracts and contract rights and
all Guarantees or other obligations in respect such accounts receivable
and equipment, proceeds of such accounts receivable and equipment and
other assets (including contract rights) which are customarily
transferred or in respect of which security interests are customarily
granted in connection with asset securitization transactions involving
accounts receivable and equipment.
"Restricted Investment" means an Investment other than a Permitted
Investment.
"Restricted Subsidiary" of a Person means any Subsidiary of the referent
Person that is not an Unrestricted Subsidiary.
"S&P" means Standard & Poor's.
"Securitization Entity" means a Wholly Owned Subsidiary of the Company (or
another Person in which the Company or any Subsidiary of the Company makes an
Investment and to which the Company or any Subsidiary of the Company transfers
accounts receivable or equipment and related assets) that engages in no
activities other than in connection with the financing of accounts receivable
or equipment and that is designated by the Board of Directors of the Company,
as provided below, as a Securitization Entity:
(1) no portion of the Indebtedness or any other Obligations (contingent or
otherwise) of which:
(a) is guaranteed by the Company or any Restricted Subsidiary of the
Company (excluding guarantees of Obligations (other than the
principal of, and interest on, Indebtedness)) pursuant to Standard
Securitization Undertakings;
(b) is recourse to or obligates the Company or any Restricted Subsidiary
of the Company in any way other than pursuant to Standard
Securitization Undertakings; or
(c) subjects any property or asset of the Company or any Restricted
Subsidiary of the Company, directly or indirectly, contingently or
otherwise, to the satisfaction thereof, other than pursuant to
Standard Securitization Undertakings;
80
(2) with which neither the Company nor any Restricted Subsidiary of the
Company has any material contract, agreement, arrangement or
understanding other than on terms no less favorable to the Company or
such Restricted Subsidiary than those that might be obtained at the time
from Persons that are not Affiliates of the Company, other than fees
payable in the ordinary course of business in connection with servicing
receivables of such entity, and
(3) to which neither the Company nor any Restricted Subsidiary of the
Company has any obligation to maintain or preserve such entity's
financial condition or cause such entity to achieve certain levels of
operating results. Any such designation by the Board of Directors of the
Company shall be evidenced to each of the Trustees by filing with the
Trustees a certified copy of the resolution of the Board of Directors of
the Company giving effect to such designation and an Officers'
Certificate certifying that such designation complied with the foregoing
conditions.
"Senior Credit Agreements" mean, collectively:
(1) that Credit Agreement, dated as of December18, 1997; and
(2) that certain AXELs Credit Agreement, dated as of December18, 1997, in
each case by and among the Company, Goldman Sachs Credit Partners L.P.,
as arranging agent and syndication agent, Morgan Guaranty and Trust
Company of New York, as administrative agent, Bankers Trust Company, as
documentation agent, and the financial institutions party thereto,
initially providing for up to $550.0 million of revolving and term
credit borrowings, including any related exchange notes, guarantees,
collateral documents, instruments and agreements executed in connection
therewith, and in each case as amended (including any amendment and
restatement thereof), modified, renewed, refunded, replaced, refinanced
or restructured (including, without limitation, any amendment increasing
the amount of available borrowing thereunder) from time to time and
whether with the same or any other agent, lender or group of lenders.
"Significant Subsidiary" means any Subsidiary that would be a "significant
subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X, promulgated
pursuant to the Act, as such Regulation is in effect on the date hereof.
"Standard Securitization Undertakings" means representations, warranties,
covenants and indemnities entered into by the Company or any Subsidiary of the
Company that are reasonably customary in an accounts receivable or equipment
transactions.
"Stated Maturity" means, with respect to any installment of interest or
principal on any series of Indebtedness, the date on which such payment of
interest or principal was scheduled to be paid in the original documentation
governing such Indebtedness, and shall not include any contingent obligations
to repay, redeem or repurchase any such interest or principal prior to the date
originally scheduled for the payment thereof.
"Subsidiary" means, with respect to any Person:
(1) any corporation, association or other business entity of which more than
50% of the total voting power of shares of Capital Stock entitled,
without regard to the occurrence of any contingency, to vote in the
election of directors, managers or trustees thereof is at the time owned
or controlled, directly or indirectly, by such Person or one or more of
the other Subsidiaries of that Person (or a combination thereof); and
(2) any partnership
(a) the sole general partner or the managing general partner of which is
such Person or a Subsidiary of such Person; or
(b) the only general partners of which are such Person or of one or more
Subsidiaries of such Person (or any combination thereof), but shall
not include any Unrestricted Subsidiary.
81
"Subsidiary Guarantors" means each of:
(1) all Restricted Subsidiaries (but excluding the Non-Guarantor
Subsidiaries); and
(2) any other subsidiary that executes a Note Guarantee in accordance with
the provisions of the indenture, and their respective successors and
assigns.
"Total Assets" means the total consolidated assets of the Company and its
Restricted Subsidiaries, as set forth on the Company's most recent consolidated
balance sheet.
"Treasury Rate" means, as of any Redemption Date, the yield to maturity as
of such Redemption Date of United States Treasury securities with a constant
maturity (as compiled and published in the most recent Federal Reserve
Statistical Release H.15 (519) that has become publicly available at least two
Business Days prior to such Redemption Date (or, if such Statistical Release is
no longer published, any publicly available source of similar market data))
most nearly equal to the period from such Redemption Date to December 15, 2002;
provided, however, that if the period from such Redemption Date to December 15,
2002 is less than one year, the weekly average yield on actually traded United
States Treasury securities adjusted to a constant maturity of one year shall be
used.
"Unrestricted Subsidiary" means any Subsidiary that is designated by the
Board of Directors as an Unrestricted Subsidiary pursuant to a Board
Resolution, but only to the extent that such Subsidiary:
(1) has no Indebtedness other than Non-Recourse Debt;
(2) is not party to any agreement, contract, arrangement or understanding
with the Company or any Restricted Subsidiary of the Company unless the
terms of any such agreement, contract, arrangement or understanding are
no less favorable to the Company or such Restricted Subsidiary than
those that might be obtained at the time from Persons who are not
Affiliates of the Company;
(3) is a Person with respect to which neither the Company nor any of its
Restricted Subsidiaries has any direct or indirect obligation (a) to
subscribe for additional Equity Interests or (b) to maintain or preserve
such Person's financial condition or to cause such Person to achieve any
specified levels of operating results;
(4) has not guaranteed or otherwise directly or indirectly provided credit
support for any Indebtedness of the Company or any of its Restricted
Subsidiaries; and
(5) has at least one director on its board of directors that is not a
director or executive officer of the Company or any of its Restricted
Subsidiaries and has at least one executive officer that is not a
director or executive officer of the Company or any of its Restricted
Subsidiaries.
Any such designation by the Board of Directors shall be evidenced to the
Trustee by filing with the Trustee a certified copy of the Board Resolution
giving effect to such designation and an Officers' Certificate certifying that
such designation complied with the foregoing conditions and was permitted by
the covenant described above under the caption "Covenants--Restricted
Payments." If, at any time, any Unrestricted Subsidiary would fail to meet the
foregoing requirements as an Unrestricted Subsidiary, it shall thereafter cease
to be an Unrestricted Subsidiary for purposes of the indenture and any
Indebtedness of such Subsidiary shall be deemed to be incurred by a Restricted
Subsidiary of the Company as of such date (and, if such Indebtedness is not
permitted to be incurred as of such date under the covenant described under the
caption "--Incurrence of Indebtedness and Issuance of Preferred Stock", the
Company shall be in default of such covenant). The Board of Directors of the
Company may at any time designate any Unrestricted Subsidiary to be a
Restricted Subsidiary; provided that such designation shall be deemed to be an
incurrence of Indebtedness by a Restricted Subsidiary of the Company of any
outstanding Indebtedness of such Unrestricted Subsidiary and such designation
shall only be permitted if:
(1) such Indebtedness is permitted under the covenant described under the
caption "--Incurrence of Indebtedness and Issuance of Preferred Stock",
calculated on a pro forma basis as if such designation had occurred at
the beginning of the four-quarter reference period;
82
(2) such Subsidiary shall execute a Note Guarantee and deliver an Opinion of
Counsel, in accordance with the terms of the indenture; and
(3) no Default or Event of Default would be in existence following such
designation.
"U.S. Subsidiary" means any Subsidiary of the Company that is incorporated
in a State in the United States or the District of Columbia or that Guarantees
or otherwise becomes an obligor with respect to any Indebtedness of the Company
or another Guarantor.
"Voting Stock" of any Person as of any date means the Capital Stock of such
Person that is at the time entitled to vote in the election of the Board of
Directors of such Person.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing:
(1) the sum of the products obtained by multiplying:
(a) the amount of each then remaining installment, sinking fund, serial
maturity or other required payments of principal, including payment
at final maturity, in respect thereof, by
(b) the number of years (calculated to the nearest one-twelfth) that will
elapse between such date and the making of such payment, by
(2) the then outstanding principal amount of such Indebtedness.
"Wholly Owned Subsidiary" of any Person means a Subsidiary of such Person
all of the outstanding Capital Stock or other ownership interests of which
(other than directors' qualifying shares) shall at the time be owned by such
Person or by one or more Wholly Owned Subsidiaries of such Person and one or
more Wholly Owned Subsidiaries of such Person.
"Wholly Owned Restricted Subsidiary" of any Person means a Restricted
Subsidiary of such Person all of the outstanding Capital Stock or other
ownership interests of which (other than directors' qualifying shares) shall at
the time be owned by such Person or by one or more Wholly Owned Restricted
Subsidiaries of such Person and one or more Wholly Owned Restricted
Subsidiaries of such Person.
83
THE EXCHANGE OFFER
Purpose and Effect of the Exchange Offer
The notes were originally sold by us on April 10, 2001 to the initial
purchasers pursuant to a purchase agreement. The initial purchasers
subsequently resold the notes to qualified institutional buyers in reliance on
Rule 144A under the Securities Act and to a limited number of institutional
accredited investors that agreed to comply with certain transfer restrictions
and other conditions. As a condition to the purchase agreement, we entered into
the registration rights agreement with the initial purchasers pursuant to which
we have agreed to: (i) file an exchange offer registration statement with the
SEC on or prior to 90 days after the Closing Date, (ii) use its best efforts to
have the exchange offer registration statement declared effective by the SEC on
or prior to 150 days after the Closing Date, (iii) unless the exchange offer
would not be permitted by applicable law or SEC policy, commence the exchange
offer and use its best efforts to issue on or prior to 30 business days after
the date on which the exchange offer registration statement was declared
effective by the SEC, new notes in exchange for all notes tendered prior
thereto in the exchange offer and (iv) if obligated to file the shelf
registration statement, use its best efforts to file the shelf registration
statement with the SEC on or prior to 45 days after such filing obligation
arises and to cause the shelf Registration to be declared effective by the SEC
on or prior to 90 days after such obligation arises. For each note surrendered
to us pursuant to the exchange offer, the holder of such note will receive an
exchange note having a principal amount equal to that of the surrendered note.
Interest on each exchange note will accrue from the date of its original issue.
Under existing interpretations of the staff of the SEC contained in several
no-action letters to third parties, the exchange notes would in general be
freely tradeable after the exchange offer without further registration under
the Securities Act. However, any purchaser of notes who is an "affiliate" of
ours, a broker-dealer who owns notes acquired directly from us or an affiliate
of ours or who intends to participate in the exchange offer for the purpose of
distributing the exchange notes (i) will not be able to rely on the
interpretation of the staff of the SEC, (ii) will not be able to tender its
notes in the exchange offer and (iii) must comply with the registration and
prospectus delivery requirements of the Securities Act in connection with any
sale or transfer of the notes, unless such sale or transfer is made pursuant to
an exemption from such requirements.
If (i) we are not required to file the exchange offer registration statement
or permitted to consummate the exchange offer because the exchange offer is not
permitted by applicable law or SEC policy or (ii) any Holder of Transfer
Restricted Securities notifies us prior to the 20th day following consummation
of the exchange offer that (A) it is prohibited by law or SEC policy from
participating in the exchange offer or (B) that it may not resell the new notes
acquired by it in the exchange offer to the public without delivering a
prospectus and the prospectus contained in the exchange offer registration
statement is not appropriate or available for such resales or (C) that it is a
broker-dealer and owns notes acquired directly from us or an affiliate of ours,
we will file with the SEC a shelf registration statement to cover resales of
the notes by the Holders thereof who satisfy certain conditions relating to the
provision of information in connection with the shelf registration statement.
We will use its best efforts to cause the applicable registration statement to
be declared effective as promptly as possible by the SEC. For purposes of the
foregoing, "Transfer Restricted Securities" means each note until (i) the date
on which such note has been exchanged by a person other than a broker-dealer
for a new note in the exchange offer, (ii) following the exchange by a
broker-dealer in the exchange offer of a note for a new note, the date on which
such new note is sold to a purchaser who receives from such broker-dealer on or
prior to the date of such sale a copy of the prospectus contained in the
exchange offer registration statement, (iii) the date on which such note has
been effectively registered under the Securities Act and disposed of in
accordance with the shelf registration statement or (iv) the date on which such
note is distributed to the public pursuant to Rule 144 under the Act.
If (a) we fail to file any of the registration statements required by the
registration rights agreement on or before the date specified for such filing,
(b) any of such registration statements is not declared effective by the SEC on
or prior to the date specified for such effectiveness (the "Effectiveness
Target Date"), or (c) we fail to consummate the exchange offer within 30
business days of the Effectiveness Target Date with respect to the
84
exchange offer registration statement, or (d) the shelf registration statement
or the exchange offer registration statement is declared effective but
thereafter ceases to be effective or usable in connection with resales of
Transfer Restricted Securities during the periods specified in the registration
rights agreement (each such event referred to in clauses (a) through (d) above
a "Registration Default"), then we will pay Liquidated Damages to each Holder
of notes, with respect to the first 90-day period immediately following the
occurrence of the first Registration Default in an amount equal to $.05 per
week per $1,000 principal amount of notes held by such Holder. The amount of
the Liquidated Damages will increase by an additional $.05 per week per $1,000
principal amount of notes with respect to each subsequent 90-day period until
all Registration Defaults have been cured, up to a maximum amount of Liquidated
Damages for all Registration Defaults of $.50 per week per $1,000 principal
amount of notes. All accrued Liquidated Damages will be paid by us on each
Damages Payment Date to the Global Note Holder by wire transfer of immediately
available funds or by federal funds check and to Holders of Certificated
Securities by wire transfer to the accounts specified by them or by mailing
checks to their registered addresses if no such accounts have been specified.
Following the cure of all Registration Defaults, the accrual of Liquidated
Damages will cease.
Holders of notes will be required to make certain representations to us (as
described in the registration rights agreement) in order to participate in the
exchange offer and will be required to deliver certain information to be used
in connection with the shelf registration statement and to provide comments on
the shelf registration statement within the time periods set forth in the
registration rights agreement in order to have their notes included in the
shelf registration statement and benefit from the provisions regarding
Liquidated Damages set forth above.
The SEC has taken the position that Participating Broker-Dealers may fulfill
their prospectus delivery requirements with respect to the exchange notes
(other than a resale of an unsold allotment from the original sale of the
notes) with the prospectus contained in the exchange offer registration
statement. Under the registration rights agreement, we are required to allow
Participating Broker-Dealers and other persons, if any, subject to similar
prospectus delivery requirements to use the prospectus contained in the
exchange offer registration statement in connection with the resale of such
exchange notes.
Terms Of The Exchange Offer
Upon the terms and subject to the conditions set forth in this prospectus
and in the Letter of Transmittal, we will accept any and all notes validly
tendered and not withdrawn prior to 5:00 p.m., New York City time, on the
Expiration Date. We will issue $1,000 principal amount of exchange notes in
exchange for each $1,000 principal amount of outstanding notes accepted in the
exchange offer. Holders may tender some or all of their notes pursuant to the
exchange offer. However, notes may be tendered only in integral multiples of
$1,000.
The form and terms of the exchange notes are the same as the form and terms
of the notes except that (i) the exchange notes bear a Series B designation and
a different CUSIP Number from the notes, (ii) the exchange notes have been
registered under the Securities Act and hence will not bear legends restricting
the transfer thereof and (iii) the holders of the exchange notes will not be
entitled to certain rights under the registration rights agreement, including
the provisions providing for an increase in the interest rate on the notes in
certain circumstances relating to the timing of the exchange offer, all of
which rights will terminate when the exchange offer is terminated. The exchange
notes will evidence the same debt as the notes and will be entitled to the
benefits of the indenture.
As of the date of this prospectus, $125,000,000 aggregate principal amount
of Senior Subordinated Notes were outstanding. We have fixed the close of
business on , 2002 as the record date for the exchange offer for purposes of
determining the persons to whom this prospectus and the Letter of Transmittal
will be mailed initially.
85
Holders of notes do not have any appraisal or dissenters' rights under the
General Corporation Law of Delaware or the indenture in connection with the
exchange offer. We intend to conduct the exchange offer in accordance with the
applicable requirements of the exchange Act and the rules and regulations of
the SEC thereunder.
We shall be deemed to have accepted validly tendered notes when, as and if
we have given oral or written notice thereof to the Exchange Agent. The
Exchange Agent will act as agent for the tendering holders for the purpose of
receiving the exchange notes from the Company.
If any tendered notes are not accepted for exchange because of an invalid
tender, the occurrence of other events set forth herein or otherwise, the
certificates for any such unaccepted notes will be returned, without expense,
to the tendering holder thereof as promptly as practicable after the Expiration
Date.
Holders who tender notes in the exchange offer will not be required to pay
brokerage commissions or fees or, subject to the instructions in the Letter of
Transmittal, transfer taxes with respect to the exchange of notes pursuant to
the exchange offer. We will pay all charges and expenses, other than transfer
taxes in certain circumstances, in connection with the exchange offer. See
"--Fees and Expenses."
Expiration Date; Extensions; Amendments
The term "Expiration Date" shall mean 5:00 p.m., New York City time, on ,
2002, unless we, in our sole discretion, extends the exchange offer, in which
case the term "Expiration Date" shall mean the latest date and time to which
the exchange offer is extended. Notwithstanding the foregoing, we will not
extend the Expiration Date beyond , 2002.
We have no current plans to extend the exchange offer. In order to extend
the exchange offer, we will notify the Exchange Agent of any extension by oral
(promptly confirmed by writing) or written notice and will mail to the
registered holders an announcement thereof, each prior to 9:00 a.m., New York
City time, on the next business day after the previously scheduled expiration
date.
We reserve the right, in our sole discretion, (i) to delay accepting any
notes, to extend the exchange offer or to terminate the exchange offer if any
of the conditions set forth below under "--Conditions" shall not have been
satisfied, by giving oral (promptly confirmed by writing) or written notice of
such delay, extension or termination to the Exchange Agent or (ii) to amend the
terms of the exchange offer in any manner. Any such delay in acceptance,
extension, termination or amendment will be followed as promptly as practicable
by oral (promptly confirmed by writing) or written notice thereof to the
registered holders.
Interest On The Exchange Notes
The senior subordinated exchange notes will bear interest from their date of
issuance. Holders of senior subordinated notes that are accepted for exchange
will receive, in cash, accrued interest thereon to, but not including, the date
of issuance of the exchange notes. Such interest will be paid with the first
interest payment on the senior subordinated exchange notes on December 15,
2001. Interest on the notes accepted for exchange will cease to accrue upon
issuance of the exchange notes. Interest on the senior subordinated exchange
notes is payable semi-annually on each June 15 and December 15, commencing on
June 15, 2002.
Procedures For Tendering
Only a holder of notes may tender such notes in the exchange offer. To
tender in the exchange offer, a holder must complete, sign and date the Letter
of Transmittal, or a facsimile thereof, have the signatures thereon guaranteed
if required by the Letter of Transmittal, and mail or otherwise deliver such
Letter of Transmittal or such facsimile, together with the notes and any other
required documents, to the Exchange Agent prior to
86
5:00 p.m., New York City time, on the Expiration Date. To be tendered
effectively, the notes, Letter of Transmittal and other required documents must
be completed and received by the Exchange Agent at the address set forth below
under "Exchange Agent" prior to 5:00 p.m., New York City time, on the
Expiration Date. Delivery of the notes may be made by book-entry transfer in
accordance with the procedures described below. Confirmation of such book-entry
transfer must be received by the Exchange Agent prior to the Expiration Date.
By executing the Letter of Transmittal, each holder will make to us the
representations set forth above in the third paragraph under the heading
"--Purpose and Effect of the exchange offer."
The tender by a holder and the acceptance thereof by us will constitute
agreement between such holder and us in accordance with the terms and subject
to the conditions set forth herein and in the Letter of Transmittal.
THE METHOD OF DELIVERY OF NOTES AND THE LETTER OF TRANSMITTAL AND ALL OTHER
REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND SOLE RISK OF
THE HOLDER. AS AN ALTERNATIVE TO DELIVERY BY MAIL, HOLDERS MAY WISH TO CONSIDER
OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT TIME SHOULD BE
ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT BEFORE THE EXPIRATION DATE. NO
LETTER OF TRANSMITTAL OR NOTES SHOULD BE SENT TO US. HOLDERS MAY REQUEST THEIR
RESPECTIVE BROKERS, DEALERS, COMMERCIAL BANKS, TRUST COMPANIES OR NOMINEES TO
EFFECT THE ABOVE TRANSACTIONS FOR SUCH HOLDERS.
Any beneficial owner whose notes are registered in the name of a broker,
dealer, commercial bank, trust company or other nominee and who wishes to
tender should contact the registered holder promptly and instruct such
registered holder to tender on such beneficial owner's behalf. See "Instruction
to Registered Holder and/or Book-Entry Transfer Facility Participant from
Owner" included with the Letter of Transmittal.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the case
may be, must be guaranteed by an Eligible Institution (as defined below) unless
the notes tendered pursuant thereto are tendered (i) by a registered holder who
has not completed the box entitled "Special Registration Instructions" or
"Special Delivery Instructions" on the Letter of Transmittal or (ii) for the
account of an Eligible Institution. In the event that signatures on a Letter of
Transmittal or a notice of withdrawal, as the case may be, are required to be
guaranteed, such guarantee must be by a member firm of the Medallion System (an
"Eligible Institution").
If the Letter of Transmittal is signed by a person other than the registered
holder of any notes listed therein, such notes must be endorsed or accompanied
by a properly completed bond power, signed by such registered holder as such
registered holder's name appears on such notes with the signature thereon
guaranteed by an Eligible Institution.
If the Letter of Transmittal or any notes or bond powers are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, offices of
corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and evidence satisfactory to us of
their authority to so act must be submitted with the Letter of Transmittal.
We understand that the Exchange Agent will make a request promptly after the
date of this prospectus to establish accounts with respect to the notes at the
book-entry transfer facility, The Depository Trust Company (the "Book-Entry
Transfer Facility"), for the purpose of facilitating the exchange offer, and
subject to the establishment thereof, any financial institution that is a
participant in the Book-Entry Transfer Facility's system may make book-entry
delivery of notes by causing such Book-Entry Transfer Facility to transfer such
notes into the Exchange Agent's account with respect to the notes in accordance
with the Book-Entry Transfer Facility's procedures for such transfer. Although
delivery of the notes may be effected through book-entry transfer into the
87
Exchange Agent's account at the Book-Entry Transfer Facility, an appropriate
Letter of Transmittal properly completed and duly executed with any required
signature guarantee and all other required documents must in each case be
transmitted to and received or confirmed by the Exchange Agent at its address
set forth below on or prior to the Expiration Date, or, if the guaranteed
delivery procedures described below are complied with, within the time period
provided under such procedures. Delivery of documents to the Book-Entry
Transfer Facility does not constitute delivery to the Exchange Agent.
The Depositary and DTC have confirmed that the exchange offer is eligible
for the DTC Automated Tender offer Program ("ATOP"). Accordingly, DTC
participants may electronically transmit their acceptance of the exchange offer
by causing DTC to transfer notes to the Depositary in accordance with DTC's
ATOP procedures for transfer. DTC will then send an Agent's Message to the
Depositary. The term "Agent's Message" means a message transmitted by DTC,
received by the Depositary and forming part of the confirmation of a book-entry
transfer, which states that DTC has received an express acknowledgment from the
participant in DTC tendering notes which are the subject of such book-entry
confirmation, that such participant has received and agrees to be bound by the
terms of the Letter of Transmittal and that we may enforce such agreement
against such participant. In the case of an Agent's Message relating to
guaranteed delivery, the term means a message transmitted by DTC and received
by the Depositary, which states that DTC has received an express acknowledgment
from the participant in DTC tendering notes that such participant has received
and agrees to be bound by the Notice of Guaranteed Delivery.
Notwithstanding the foregoing, in order to validly tender in the exchange
offer with respect to Securities transferred pursuant to ATOP, a DTC
participant using ATOP must also properly complete and duly execute the
applicable Letter of Transmittal and deliver it to the Depositary. Pursuant to
authority granted by DTC, any DTC participant which has notes credited to its
DTC account at any time (and thereby held of record by DTC's nominee) may
directly provide a tender as though it were the registered holder by so
completing, executing and delivering the applicable Letter of Transmittal to
the Depositary. DELIVERY OF DOCUMENTS TO DTC DOES NOT CONSTITUTE DELIVERY TO
THE DEPOSITARY.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance of tendered notes and withdrawal of tendered notes will be
determined by us in our sole discretion, which determination will be final and
binding. We reserve the absolute right to reject any and all notes not properly
tendered or any notes our acceptance of which would, in the opinion of our
counsel, be unlawful. We also reserve the right in our sole discretion to waive
any defects, irregularities or conditions of tender as to particular notes. Our
interpretation of the terms and conditions of the exchange offer (including the
instructions in the Letter of Transmittal) will be final and binding on all
parties. Unless waived, any defects or irregularities in connection with
tenders of notes must be cured within such time as we shall determine. Although
we intend to notify holders of defects or irregularities with respect to
tenders of notes, neither we, the Exchange Agent nor any other person shall
incur any liability for failure to give such notification. Tenders of notes
will not be deemed to have been made until such defects or irregularities have
been cured or waived. Any notes received by the Exchange Agent that are not
properly tendered and as to which the defects or irregularities have not been
cured or waived will be returned by the Exchange Agent to the tendering
holders, unless otherwise provided in the Letter of Transmittal, as soon as
practicable following the Expiration Date.
Guaranteed Delivery Procedures
Holders who wish to tender their notes and (i) whose notes are not
immediately available, (ii) who cannot deliver their notes, the Letter of
Transmittal or any other required documents to the Exchange Agent or (iii) who
cannot complete the procedures for book-entry transfer, prior to the Expiration
Date, may effect a tender if: (a) the tender is made through an Eligible
Institution; (b) prior to the Expiration Date, the Exchange Agent receives from
such Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery (by facsimile transmission, mail or hand delivery) setting
forth the name and address of the holder, the certificate number(s) of such
notes and the principal amount of notes tendered, stating that the tender is
being made thereby
88
and guaranteeing that, within five New York Stock exchange trading days after
the Expiration Date, the Letter of Transmittal (or facsimile thereof) together
with the certificate(s) representing the notes (or a confirmation of book-entry
transfer of such notes into the Exchange Agent's account at the Book-Entry
Transfer Facility), and any other documents required by the Letter of
Transmittal will be deposited by the Eligible Institution with the Exchange
Agent; and (c) such properly completed and executed Letter of Transmittal (of
facsimile thereof), as well as the certificate(s) representing all tendered
notes in proper form for transfer (or a confirmation of book-entry transfer of
such notes into the Exchange Agent's account at the Book-Entry Transfer
Facility), and all other documents required by the Letter of Transmittal are
received by the Exchange Agent upon three New York Stock exchange trading days
after the Expiration Date.
Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be
sent to holders who wish to tender their notes according to the guaranteed
delivery procedures set forth above.
Withdrawal Of Tenders
Except as otherwise provided herein, tenders of notes may be withdrawn at
any time prior to 5:00 p.m., New York City time, on the Expiration Date.
To withdraw a tender of notes in the exchange offer, a telegram, telex,
letter or facsimile transmission notice of withdrawal must be received by the
Exchange Agent at its address set forth herein prior to 5:00 p.m., New York
City time, on the Expiration Date. Any such notice of withdrawal must (i)
specify the name of the person having deposited the notes to be withdrawn (the
"Depositor"), (ii) identify the notes to be withdrawn (including the
certificate number(s) and principal amount of such notes, or, in the case of
notes transferred by book-entry transfer, the name and number of the account at
the Book-Entry Transfer Facility to be credited), (iii) be signed by the holder
in the same manner as the original signature on the Letter of Transmittal by
which such notes were tendered (including any required signature guarantees) or
be accompanied by documents of transfer sufficient to have the Trustee with
respect to the notes register the transfer of such notes into the name of the
person withdrawing the tender and (iv) specify the name in which any such notes
are to be registered, if different from that of the Depositor. All questions as
to the validity, form and eligibility (including time of receipt) of such
notices will be determined by the Company, whose determination shall be final
and binding on all parties. Any notes so withdrawn will be deemed not to have
been validly tendered for purposes of the exchange offer and no exchange notes
will be issued with respect thereto unless the notes so withdrawn are validly
retendered. Any notes which have been tendered but which are not accepted for
exchange will be returned to the holder thereof without cost to such holder as
soon as practicable after withdrawal, rejection of tender or termination of the
exchange offer. Properly withdrawn notes may be retendered by following one of
the procedures described above under "--Procedures for Tendering" at any time
prior to the Expiration Date.
Conditions
Notwithstanding any other term of the exchange offer, we shall not be
required to accept for exchange, or exchange notes for, any notes, and may
terminate or amend the exchange offer as provided herein before the acceptance
of such notes, if:
(a) any action or proceeding is instituted or threatened in any court or by
or before any governmental agency with respect to the exchange offer
which, in our sole judgment, might materially impair our ability to
proceed with the exchange offer or any material adverse development has
occurred in any existing action or proceeding with respect to us or any
of our subsidiaries; or
(b) any law, statute, rule, regulation or interpretation by the staff of the
SEC is proposed, adopted or enacted, which, in our sole judgment, might
materially impair our ability to proceed with the exchange offer or
materially impair the contemplated benefits of the exchange offer to us;
or
(c) any governmental approval has not been obtained, which approval we
shall, in our sole discretion, deem necessary for the consummation of
the exchange offer as contemplated by this prospectus.
89
If we determine in our sole discretion that any of the conditions are not
satisfied, we may (i) refuse to accept any notes and return all tendered notes
to the tendering holders, (ii) extend the exchange offer and retain all notes
tendered prior to the expiration of the exchange offer, subject, however, to
the rights of holders to withdraw such notes (see "--Withdrawal of Tenders") or
(iii) waive such unsatisfied conditions with respect to the exchange offer and
accept all properly tendered notes which have not been withdrawn.
Exchange Agent
The Bank of New York has been appointed as Exchange Agent for the exchange
offer. Questions and requests for assistance, requests for additional copies of
this prospectus or of the Letter of Transmittal and requests for Notice of
Guaranteed Delivery should be directed to the Exchange Agent addressed as
follows:
The Bank of New York
20 Broad Street
New York, New York 10286
Attn: Ms. Diane Amoroso, Reorganization Section
Delivery to an address other than as set forth above will not constitute a
valid delivery.
Fees And Expenses
The expenses of soliciting tenders will be borne by us. The principal
solicitation is being made by mail; however, additional solicitation may be
made by telegraph, telecopy, telephone or in person by our officers and regular
employees and our affiliates.
We have not retained any dealer-manager in connection with the exchange
offer and will not make any payments to brokers, dealers, or others soliciting
acceptances of the exchange offer. We, however, will pay the Exchange Agent
reasonable and customary fees for its services and will reimburse it for its
reasonable out-of-pocket expenses in connection therewith.
The cash expenses to be incurred in connection with the exchange offer will
be paid by us. Such expenses include fees and expenses of the Exchange Agent
and Trustee, accounting and legal fees and printing costs, among others.
Accounting Treatment
The exchange notes will be recorded at the same carrying value as the notes,
which is face value, as reflected in our accounting records on the date of
exchange. Accordingly, no gain or loss for accounting purposes will be
recognized by us. The expenses of the exchange offer will be expensed over the
term of the exchange notes.
Consequences Of Failure To Exchange
The notes that are not exchanged for exchange notes pursuant to the exchange
offer will remain restricted securities. Accordingly, such notes may be resold
only (i) to us (upon redemption thereof or otherwise), (ii) so long as the
notes are eligible for resale pursuant to Rule 144A, to a person inside the
United States whom the seller reasonably believes is a qualified institutional
buyer within the meaning of Rule 144A under the Securities Act in a transaction
meeting the requirements of Rule 144A, in accordance with Rule 144 under the
Securities Act, or pursuant to another exemption from the registration
requirements of the Securities Act (and based upon an opinion of counsel
reasonably acceptable to the Company), (iii) outside the United States to a
foreign person in a transaction meeting the requirements of Rule 904 under the
Securities Act, or (iv) pursuant to an effective registration statement under
the Securities Act, in each case in accordance with any applicable securities
laws of any state of the United States.
90
Resale Of The Exchange Notes
With respect to resales of exchange notes, based on interpretations by the
staff of the SEC set forth in no-action letters issued to third parties, we
believe that a holder or other person who receives exchange notes, whether or
not such person is the holder (other than a person that is an "affiliate" of
ours within the meaning of Rule 405 under the Securities Act) who receives
exchange notes in exchange for notes in the ordinary course of business and who
is not participating, does not intend to participate, and has no arrangement or
understanding with person to participate, in the distribution of the exchange
notes, will be allowed to resell the exchange notes to the public without
further registration under the Securities Act and without delivering to the
purchasers of the exchange notes a prospectus that satisfies the requirements
of Section 10 of the Securities Act. However, if any holder acquires exchange
notes in the exchange offer for the purpose of distributing or participating in
a distribution of the exchange notes, such holder cannot rely on the position
of the staff of the SEC enunciated in such no-action letters or any similar
interpretive letters, and must comply with the registration and prospectus
delivery requirements of the Securities Act in connection with any resale
transaction, unless an exemption from registration is otherwise available.
Further, each Participating Broker-Dealer that receives exchange notes for its
own account in exchange for notes, where such notes were acquired by such
Participating Broker-Dealer as a result of market-making activities or other
trading activities, must acknowledge that it will deliver a prospectus in
connection with any resale of such exchange notes.
As contemplated by these no-action letters and the registration rights
agreement, each holder accepting the exchange offer is required to represent to
us in the Letter of Transmittal that (i) the exchange notes are to be acquired
by the holder or the person receiving such exchange notes, whether or not such
person is the holder, in the ordinary course of business, (ii) the holder or
any such other person (other than a broker-dealer referred to in the next
sentence) is not engaging and does not intend to engage, in the distribution of
the exchange notes, (iii) the holder or any such other person has no
arrangement or understanding with any person to participate in the distribution
of the exchange notes, (iv) neither the holder nor any such other person is an
"affiliate" of ours within the meaning of Rule 405 under the Securities Act,
and (v) the holder or any such other person acknowledges that if such holder or
other person participates in the exchange offer for the purpose of distributing
the exchange notes it must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any resale of the
exchange notes and cannot rely on those no-action letters. As indicated above,
each Participating Broker-Dealer that receives an exchange note for its own
account in exchange for notes must acknowledge that it will deliver a
prospectus in connection with any resale of such exchange notes. For a
description of the procedures for such resales by Participating Broker-Dealers,
see "Plan of Distribution."
91
UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
The following discussion (including the opinion of special counsel described
below) is based upon current provisions of the Internal Revenue Code of 1986,
as amended, applicable Treasury regulations, judicial authority and
administrative rulings and practice. There can be no assurance that the
Internal Revenue Service will not take a contrary view, and no ruling from the
IRS has been or will be sought. Legislative, judicial or administrative changes
or interpretations may be forthcoming that could alter or modify the statements
and conditions set forth herein. Any such changes or interpretations may or may
not be retroactive and could affect the tax consequences to holders. Certain
holders (including insurance companies, tax-exempt organizations, financial
institutions, broker-dealers, foreign corporations and persons who are not
citizens or residents of the United States) may be subject to special rules not
discussed below. We recommend that each holder consult such holder's own tax
advisor as to the particular tax consequences of exchanging such holder's notes
for exchange notes, including the applicability and effect of any state, local
or foreign tax laws.
Kirkland & Ellis, special counsel to us, has advised us that in its opinion,
the exchange of the notes for exchange notes pursuant to the exchange offer
will not be treated as an "exchange" for federal income tax purposes because
the exchange notes will not be considered to be a "significant modification" of
the notes. Rather, the exchange notes received by a holder will be treated as a
continuation of the notes in the hands of such holder. As a result, there will
be no federal income tax consequences to holders exchanging notes for exchange
notes pursuant to the exchange offer.
PLAN OF DISTRIBUTION
Each participating broker-dealer that receives exchange notes for its own
account pursuant to the exchange offer must acknowledge that it will deliver a
prospectus in connection with any resale of such exchange notes. This
prospectus, as it may be amended or supplemented from time to time, may be used
by a participating broker-dealer in connection with resales of exchange notes
received in exchange for notes where such notes were acquired as a result of
market-making activities or other trading activities. We have agreed that for a
period of 180 days after the expiration date of the exchange offer, we will
make this prospectus, as amended or supplemented, available to any
participating broker-dealer for use in connection with any such resale. In
addition, until , 2002, all dealers effecting transactions in the exchange
notes may be required to deliver a prospectus.
We will not receive any proceeds from any sales of the exchange notes by
participating broker-dealers. Exchange notes received by participating
broker-dealers for their own account pursuant to the exchange offer may be sold
from time to time in one or more transactions in the over- the-counter market,
in negotiated transactions, through the writing of options on the exchange
notes or a combination of such methods of resale, at market prices prevailing
at the time of resale, at prices related to such prevailing market prices or
negotiated prices. Any such resale may be made directly to purchaser or to or
through brokers or dealers who may receive compensation in the form of
commissions or concessions from any such participating broker-dealer and/or the
purchasers of any such exchange notes. Any participating broker-dealer that
resells the exchange notes that were received by it for its own account
pursuant to the exchange offer and any broker or dealer that participates in a
distribution of such exchange notes may be deemed to be an "underwriter" within
the meaning of the Securities Act and any profit on any such resale of exchange
notes and any commissions or concessions received by any such persons may be
deemed to be underwriting compensation under the Securities Act. The letter of
transmittal for the exchange offer states that by acknowledging that it will
deliver and by delivering a prospectus, a participating broker-dealer will not
be deemed to admit that it is an "underwriter" within the meaning of the
Securities Act.
For a period of 180 days after the expiration date of the exchange offer, we
will promptly send additional copies of this prospectus and any amendment or
supplement to this prospectus to any Participating Broker-Dealer that requests
such documents in the letter of transmittal.
92
LEGAL MATTERS
Kirkland & Ellis, New York, New York will issue an opinion with respect to
the issuance of the exchange notes offered hereby, including:
(1) our existence and good standing under our jurisdiction of incorporation;
(2) our authorization of the sale and issuance of the exchange notes; and
(3) the enforceability of the exchange notes.
EXPERTS
The consolidated financial statements as of November 26, 2000 and November
28, 1999 and for each of the three years in the period ended November 26, 2000
included in this prospectus have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in accounting and auditing.
AVAILABLE INFORMATION
We are subject to the informational requirements of the Securities Exchange
Act of 1934. In accordance with the Exchange Act, we file reports and other
information with the SEC. The reports and other information can be inspected
and copied at the public reference facilities that the SEC maintains at Room
1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the SEC's regional
offices located at 7 World Trade Center, 13th Floor, New York, New York 10048,
and Suite 1400, Northwestern Atrium Center, 500 West Madison Street, Chicago,
Illinois 60661. Copies of these materials can be obtained at prescribed rates
from the Public Reference Section of the SEC at the principal offices of the
SEC, 450 Fifth Street, N.W., Washington, D.C. 20549. The SEC maintains a
website that contains reports, proxy and information statements and other
information regarding registrations that file electronically with the SEC. The
address of such site is http://www.sec.gov. We have agreed that, if we are not
subject to the informational requirements of the Exchange Act at any time while
the exchange notes constitute "restricted securities" within the meaning of the
Securities Act, we will furnish to holders and beneficial owners of the
exchange notes and to prospective purchasers designated by such holders the
information required to be delivered pursuant to Rule 144A(d)(4) under the
Securities Act to permit compliance with Rule 144A in connection with resales
of the exchange notes.
93
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
SEALY CORPORATION
Page
Number
------
Audited Consolidated Financial Statements
Report of Independent Accountants.............................................................. F-2
Consolidated Balance Sheets at November 26, 2000 and November 28, 1999......................... F-3
Consolidated Statements of Operations for the years ended November 26, 2000, November 28, 1999
and November 29, 1998........................................................................ F-5
Consolidated Statements of Stockholders' Equity for the years ended November 26, 2000, November
28, 1999 and November 29, 1998............................................................... F-6
Consolidated Statements of Cash Flows for the years ended November 26, 2000, November 28, 1999
and November 29, 1998........................................................................ F-7
Notes to Consolidated Financial Statements..................................................... F-8
Unaudited Consolidated Financial Statements
Unaudited Condensed Consolidated Statements of Income for Nine Months Ended August 26, 2001 and
August 27, 2000.............................................................................. F-34
Unaudited Condensed Consolidated Balance Sheets as of August 26, 2001 and November 26, 2000.... F-35
Unaudited Condensed Consolidated Statements of Cash Flows for Nine Months ended August 26, 2001
and August 27, 2000.......................................................................... F-36
Notes to Unaudited Condensed Consolidated Financial Statements................................. F-37
F-1
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
F-2
SEALY CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except par value amounts)
November 26, November 28,
2000 1999
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents.................................................... $ 18,114 $ 10,845
Accounts receivable--Non-Affiliates (net of allowance for doubtful accounts,
2000-$11,585; 1999-$10,036)................................................ 115,673 105,287
Accounts receivable--Affiliates (net of allowance for doubtful accounts,
2000-$180; 1999-$87)....................................................... 29,816 14,188
Inventories.................................................................. 51,872 44,681
Prepaid expenses............................................................. 10,000 5,968
Deferred income taxes........................................................ 14,351 14,197
-------- --------
239,826 195,166
-------- --------
Property, plant and equipment--at cost:
Land......................................................................... 12,509 11,106
Buildings and improvements................................................... 75,964 69,269
Machinery and equipment...................................................... 118,885 108,776
Construction in progress..................................................... 20,162 9,475
-------- --------
227,520 198,626
Less accumulated depreciation................................................ 70,437 60,525
-------- --------
157,083 138,101
-------- --------
Other assets:
Goodwill, patents and other intangibles--net of accumulated amortization
(2000-$101,835; 1999-$89,272).............................................. 375,238 378,452
Investment in affiliates..................................................... 30,519 30,004
Debt issuance costs, net, and other assets................................... 27,349 29,230
-------- --------
433,106 437,686
-------- --------
$830,015 $770,953
======== ========
See accompanying notes to consolidated financial statements.
F-3
SEALY CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except par value amounts)
November 26, November 28,
2000 1999
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion-long-term obligations..................................... $ 34,373 $ 14,145
Accounts payable.......................................................... 57,687 43,153
Accrued expenses:
Customer incentives and advertising................................... 38,257 32,301
Compensation.......................................................... 24,128 23,173
Interest.............................................................. 12,664 12,733
Stock based compensation (Note 8)..................................... 10,699 --
Other................................................................. 30,213 26,100
--------- ---------
208,021 151,605
--------- ---------
Long-term obligations, net of current portion................................ 651,810 676,197
Other noncurrent liabilities................................................. 38,169 41,185
Deferred income taxes........................................................ 23,801 23,355
Minority interest............................................................ 1,504 --
Commitments and contingencies................................................ -- --
Stockholders' equity (deficit):
Preferred stock, $0.01 par value; Authorized 100,000 shares; Issued, none. -- --
Class L common stock, $0.01 par value; Authorized, 6,000 shares; Issued
(2000-1,486; 1999-1,486)................................................ 15 15
Class M common stock, $0.01 par value; Authorized, 2,000 shares; Issued
(2000-1,549; 1999-1,549)................................................ 16 16
Class A common stock, $0.01 par value; Authorized 600,000 shares; Issued
(2000-16,535; 1999-16,535).............................................. 164 164
Class B common stock, $0.01 par value; Authorized 200,000 shares; Issued
(2000-11,935; 1999-11,935).............................................. 120 120
Additional paid-in capital................................................ 134,547 134,547
Accumulated deficit....................................................... (215,872) (246,012)
Common stock held in treasury, at cost.................................... (85) (85)
Accumulated other comprehensive loss, foreign currency translation
adjustment.............................................................. (12,195) (10,154)
--------- ---------
(93,290) (121,389)
--------- ---------
$ 830,015 $ 770,953
========= =========
See accompanying notes to consolidated financial statements.
F-4
SEALY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
Year Ended
-------------------------------------
November 26, November 28, November 29,
2000 1999 1998
------------ ------------ ------------
Net sales--Non-affiliates............................................ $ 951,926 $940,666 $891,302
Net sales--Affiliates................................................ 149,616 45,041 --
---------- -------- --------
Total net sales................................................... 1,101,542 985,707 891,302
---------- -------- --------
Cost and expenses:
Cost of goods sold--Non-affiliates................................ 524,973 520,768 503,500
Cost of goods sold--Affiliates.................................... 78,881 23,401 --
---------- -------- --------
Total cost of goods sold.......................................... 603,854 544,169 503,500
Selling, general and administrative (including provisions for bad
debts of $3,634, $2,248 and $1,800, respectively)............... 354,592 324,612 300,356
Stock based compensation.......................................... 6,797 6,664 --
Amortization of intangibles....................................... 12,865 12,881 13,029
Loss on net assets held for sale and other write-downs............ -- -- 10,634
Compensation associated with recapitalization..................... -- -- 18,886
---------- -------- --------
Income from operations............................................ 123,434 97,381 44,897
Interest expense, net............................................. 65,843 64,999 67,451
Minority interest................................................. 219 -- --
---------- -------- --------
Income (loss) before income taxes and extraordinary item............. 57,372 32,382 (22,554)
Income taxes (benefit)............................................... 27,232 16,561 (3,318)
---------- -------- --------
Income (loss) before extraordinary item.............................. 30,140 15,821 (19,236)
Extraordinary item--loss from early extinguishment of debt (net of
income tax benefit of $9,693 in 1998) (Note 2)..................... -- -- 14,537
---------- -------- --------
Net income (loss)............................................. 30,140 15,821 (33,773)
Liquidation preference for common L & M shares (Note 2).............. 14,808 13,461 11,716
---------- -------- --------
Net income (loss) available to common shareholders............ $ 15,332 $ 2,360 $(45,489)
========== ======== ========
Earnings (loss) per common share--Basic:
Before extraordinary item......................................... $ 0.96 $ 0.50 $ (0.63)
Extraordinary item................................................ -- -- (0.48)
---------- -------- --------
Net earnings (loss)--Basic.................................... 0.96 0.50 (1.11)
Liquidation preference for common L & M shares....................... (0.47) (0.43) (0.38)
---------- -------- --------
Net earnings (loss) available to common shareholders--
Basic....................................................... $ 0.49 $ 0.07 $ (1.49)
========== ======== ========
Earnings (loss) per common share--Diluted:
Before extraordinary item......................................... $ 0.88 $ 0.48 $ (0.63)
Extraordinary item................................................ -- -- (0.48)
---------- -------- --------
Net earnings (loss)--Diluted.................................. 0.88 0.48 (1.11)
Liquidation preference for common L & M shares.................... (0.43) (0.41) (0.38)
---------- -------- --------
Net earnings (loss) available to common shareholders--
Diluted..................................................... $ 0.45 $ 0.07 $ (1.49)
========== ======== ========
Weighted average number of common shares outstanding:
Basic............................................................. 31,485 31,473 30,472
Diluted........................................................... 34,235 32,972 30,472
See accompanying notes to consolidated financial statements.
F-5
SEALY CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
Class L Clas M Class A Class B
------------ ------------- -------------- -------------- Additional
Comprehensive Common Stock Common Stock Common Stock Common Stock Paid-In Accumulated
Income Shares Amount Shares Amount Shares Amount Shares Amount Capital Deficit
------------- ------ ------ ------ ------ ------- ------ ------ ------ ---------- -----------
Balance at November 30, 1997..... -- $-- -- $-- 29,932 $ 299 11 -- $ 257,320 $ (50,614)
Net loss......................... $(33,773) -- -- -- -- -- -- -- -- -- (33,773)
Stock compensation related to
Recapitalization................ -- -- -- -- -- -- -- -- 16,413 --
Treasury stock repurchase........ 339 4 -- -- (26,885) (269) (11) -- (260,367) (177,446)
Equity issuances................. 1,830 18 866 9 16,472 164 7,791 78 121,048 --
Exercised stock options.......... -- -- -- -- 1,009 11 -- -- 116 --
Foreign currency translation..... (9,898) -- -- -- -- -- -- -- -- -- --
-------- ----- --- ----- --- ------- ----- ------ ---- --------- ---------
Balance at November 29, 1998..... (43,671) 2,169 22 866 9 20,528 205 7,791 78 134,530 (261,833)
========
Net Income....................... 15,821 -- -- -- -- -- -- -- -- -- 15,821
Exercised stock options.......... -- -- -- -- 151 1 -- -- 17 --
Cancellation and issuance of
common stock.................... (683) (7) 683 7 (4,144) (42) 4,144 42 -- --
Common stock held in treasury, at
cost............................ -- -- -- -- -- -- -- -- -- --
Foreign currency translation..... 1,683 -- -- -- -- -- -- -- -- -- --
-------- ----- --- ----- --- ------- ----- ------ ---- --------- ---------
Balance at November 28, 1999..... 17,504 1,486 15 1,549 16 16,535 164 11,935 120 134,547 (246,012)
========
Net Income....................... 30,140 -- -- -- -- -- -- -- -- -- 30,140
Foreign currency translation..... (2,041) -- -- -- -- -- -- -- -- -- --
-------- ----- --- ----- --- ------- ----- ------ ---- --------- ---------
Balance at November 26, 2000..... $ 28,099 1,486 $15 1,549 $16 16,535 $ 164 11,935 $120 $ 134,547 $(215,872)
======== ===== === ===== === ======= ===== ====== ==== ========= =========
Accumulated
Other
Comprehen-
sive Loss,
Foreign
Currency
Treasury Translation
Stock Adjustment Total
-------- ----------- ---------
Balance at November 30, 1997..... $ -- $ (1,939) $ 205,066
Net loss......................... -- -- (33,773)
Stock compensation related to
Recapitalization................ -- -- 16,413
Treasury stock repurchase........ -- -- (438,078)
Equity issuances................. -- -- 121,317
Exercised stock options.......... -- -- 127
Foreign currency translation..... -- (9,898) (9,898)
---- -------- ---------
Balance at November 29, 1998..... -- (11,837) (138,826)
=========
Net Income....................... -- -- 15,821
Exercised stock options.......... -- -- 18
Cancellation and issuance of
common stock.................... -- -- --
Common stock held in treasury, at
cost............................ (85) -- (85)
Foreign currency translation..... -- 1,683 1,683
---- -------- ---------
Balance at November 28, 1999..... (85) (10,154) (121,389)
=========
Net Income....................... -- -- 30,140
Foreign currency translation..... -- (2,041) (2,041)
---- -------- ---------
Balance at November 26, 2000..... $(85) $(12,195) $ (93,290)
==== ======== =========
See accompanying notes to consolidated financial statements.
F-6
SEALY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended
-------------------------------------
November 26, November 28, November 29,
2000 1999 1998
------------ ------------ ------------
Cash flows from operating activities:
Net income (loss)................................................................. $ 30,140 $ 15,821 $ (33,773)
Adjustments to reconcile net income(loss) to net cash provided by operating
activities:
Depreciation...................................................................... 14,201 12,772 11,290
Amortization of intangibles....................................................... 12,865 12,881 13,029
Non-cash compensation............................................................. 6,797 6,664 --
Loss on disposal of assets and other asset write-downs............................ 959 12 12,179
Minority interest................................................................. 219 -- --
Extraordinary item--early extinguishment of debt.................................. -- -- 24,230
Non-cash compensation associated with Recapitalization............................ -- -- 16,413
Deferred income taxes............................................................. (866) (487) (19,265)
Non-cash interest expense:
Discount on Senior Subordinated Notes.......................................... 10,345 9,306 8,050
Debt issuance costs............................................................ 4,167 4,205 4,056
Junior Subordinated Note....................................................... 4,008 3,475 3,022
Other, net........................................................................ (2,803) 77 (5,171)
Changes in operating assets and liabilities:
Accounts receivable............................................................... (22,362) (12,714) (12,843)
Inventories....................................................................... (3,562) (954) 2,280
Prepaid expenses.................................................................. (4,032) 3,283 13,278
Accounts payable/accrued expenses/other noncurrent liabilities.................... 20,104 1,662 16,255
-------- -------- ---------
Net cash provided by operating activities................................... 70,180 56,003 53,030
-------- -------- ---------
Cash flows from investing activities:
Purchase of property, plant and equipment......................................... (24,089) (16,084) (33,112)
Investment in affiliates.......................................................... -- (27,794) --
Purchase of business, net of cash acquired........................................ (19,947) -- --
Proceeds from sale of property, plant and equipment............................... 95 840 216
-------- -------- ---------
Net cash used in investing activities....................................... (43,941) (43,038) (32,896)
-------- -------- ---------
Cash flows from financing activities:
Treasury stock repurchase, including direct expenses.............................. -- (85) (413,078)
Proceeds from long-term debt...................................................... -- -- 462,653
Proceeds from issuance of long-term public notes.................................. -- -- 200,447
Repayment of long-term obligations................................................ (14,170) (15,286) (211,125)
Net borrowings (repayments) from current Revolving Credit Facility................ (4,800) 2,000 2,800
Net borrowings (repayments) from prior Revolving Credit Facility.................. -- -- (130,000)
Equity issuances.................................................................. -- 17 121,444
Costs associated with tender offer of prior debt.................................. -- -- (15,361)
Debt issuance costs............................................................... -- -- (32,737)
-------- -------- ---------
Net cash used in financing activities....................................... (18,970) (13,354) (14,957)
-------- -------- ---------
Change in cash and cash equivalents 7,269 (389) 5,177
Cash and cash equivalents:
Beginning of period............................................................... 10,845 11,234 6,057
-------- -------- ---------
End of period..................................................................... $ 18,114 $ 10,845 $ 11,234
======== ======== =========
Supplemental disclosures:
Taxes paid (received), net........................................................ $ 28,719 $ 18,042 $ (7,171)
Interest paid, net................................................................ $ 47,302 $ 48,710 $ 40,929
Other non-cash activity:
Issuance of Junior Subordinated Notes as part of Recapitalization proceeds..... $ -- $ -- $ 25,000
See accompanying notes to consolidated financial statements.
F-7
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
greater than 50% 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 was
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 conditions to be met in
order to recognize revenue. SAB 101 was 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.
F-8
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
F-9
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
F-10
SEALY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
carryforwards. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
Advertising Costs
The Company expenses all advertising costs as incurred. Advertising expenses
for the years ended November 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 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 some 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
some 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 9.875% Senior Subordinated Notes due 2007 (the "Senior
Subordinated Notes") and $128 million principal amount of 10.875% 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
F-11
SEALY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
common stock, par value $0.01 per share ("Class M Common" and collectively with
the Class A Common, Class B Common and Class L Common, "Common Stock"). The
Class L Common and the Class M Common are senior in right of payment to the
Class A Common and Class B Common. Holders of Class B Common and Class M Common
have no voting rights except as required by law. The holders of Class A Common
and Class L Common are entitled to one vote per share on all matters to be
voted upon by the stockholders of the Company, including the election of
directors. Class A Common and Class L Common are otherwise identical, except
that the shares of Class L Common are entitled to a preference over Class A
Common with respect to any distribution by the Company to holders of its
capital stock equal to the original cost of such share ($40.50) plus an amount
which accrues on a daily basis at a rate of 10% per annum, compounded annually.
Class B Common and Class M Common are otherwise identical, except that the
shares of Class M Common are entitled to a preference over Class B Common with
respect to any distribution by the Company to holders of its capital stock
equal to the original cost of such share ($40.50) plus an amount which accrues
on a daily basis at a rate of 10% per annum, compounded annually. The Class B
Common and the Class M Common are convertible into Class A Common 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:
2000 1999
------- -------
(in thousands)
Raw materials......... $29,360 $25,066
Work in process....... 15,665 14,298
Finished goods........ 6,847 5,317
------- -------
$51,872 $44,681
======= =======
F-12
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:
2000 1999
-------- --------
(in thousands)
Senior AXELs Credit Agreement..................................... $325,875 $327,375
Senior Revolving Credit Agreement:
Tranche A Term Loan............................................ 82,271 94,625
Revolving Credit Facility...................................... -- 4,800
Senior Subordinated Notes......................................... 125,000 125,000
Senior Subordinated Discount Notes (net of discount: 2000--$24,852
and 1999--$35,197).............................................. 103,148 92,803
Junior Subordinated Notes......................................... 35,505 31,497
High Point Corporate Complex Mortgage............................. 13,874 14,242
Other............................................................. 510 --
-------- --------
686,183 690,342
Less current portion.............................................. 34,373 14,145
-------- --------
$651,810 $676,197
======== ========
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 some 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 some 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.
F-13
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 9.875% 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:
Percentage of
Year Principal Amount
---- ----------------
2002......................... 104.937%
2003......................... 103.292%
2004......................... 101.646%
2005 and thereafter.......... 100.000%
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 10.875% 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
F-14
SEALY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
damages thereon to the applicable redemption date, if redeemed during the
twelve-month period beginning on December 15 of the years indicated below:
Percentage of
Principal Amount
----------------
2002.................... 105.437%
2003.................... 103.625%
2004.................... 101.812%
2005 and hereafter...... 100.000%
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):
2001.......................... $ 34,373
2002.......................... 41,691
2003.......................... 34,295
2004.......................... 77,874
2005.......................... 89,161
Thereafter.................... 408,789
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 10.25% 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.
F-15
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.
Commitments
Under
Fiscal Year Operating Leases
- ----------- ----------------
(in thousands)
2001.......................... $ 8,168
2002.......................... 6,673
2003.......................... 5,101
2004.......................... 3,694
2005.......................... 3,138
Thereafter.................... 5,891
-------
$32,665
=======
Rental expense charged to operations is as follows:
Year Ended Year Ended Year Ended
Nov. 26, Nov. 28, Nov. 29,
2000 1999 1998
---------- ---------- ----------
(in thousands)
Minimum rentals.................................. $10,014 $ 9,053 $10,214
Contingent rentals (based upon delivery equipment
mileage)....................................... 1,924 1,376 1,430
------- ------- -------
$11,938 $10,429 $11,644
======= ======= =======
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 some 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.
F-16
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):
Notional Amount Range for
2000 (millions) LIBOR Rate Period
- ---- --------------- ----------- ---------
Interest Rate Collar.......... $200 6.50%-4.93% 1/98-1/01
Interest Rate Swap............ $150 5.96% 9/99-9/02
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, some members of senior
management were offered and elected to cancel their options under the
Terminated Stock Option Plans and their restricted stock under the 1996
Transitional Plan. Those senior executives received nonqualified stock options
which were subsequently
F-17
SEALY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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"). As a result of all
recapitalization date activity, the Company recorded an aggregate $18.9 million
in compensation expense.
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 some 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.
2000 1999 1998
------- ------- --------
Net income (loss) (in thousands)...... As reported $30,140 $15,821 $(33,773)
Pro forma $29,552 $14,592 $(31,468)
Net earnings (loss) per share--Diluted As reported $ 0.88 $ 0.48 $ (1.11)
Pro forma $ 0.86 $ 0.44 $ (1.03)
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:
Risk Free
Option Grant Date Interest Rate
- ----------------- -------------
Fiscal 1998... 5.55%
Fiscal 1999... 4.57%-6.17%
Fiscal 2000... 5.77%-6.09%
F-18
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:
Shares Subject Average Option
to Options Price Per Share
-------------- ---------------
Outstanding November 29, 1998 3,611,156 $2.01
Granted................... 171,500 0.72
Exercised................. (150,570) 0.13
Canceled.................. (69,000) 1.83
---------
Outstanding November 28, 1999 3,563,086 2.02
Granted................... 151,500 7.80
Exercised................. -- --
Canceled.................. (39,000) 0.56
---------
Outstanding November 26, 2000 3,675,586 $2.27
========= =====
For various price ranges, weighted average characteristics of outstanding
stock options at November 26, 2000 were as follows:
Outstanding Options Exercisable Options
---------------------------- -------------------
Remaining Weighted Weighted
Life Average Average
Range of Exercise prices Shares (Years) Price Shares Price
------------------------ --------- --------- -------- ------- --------
Class A
$0.00-$0.13....... 150,570 7.1 $ 0.13 150,570 $ 0.13
$0.50-$1.00....... 2,126,000 7.4 0.52 799,000 0.50
$4.18-$5.98....... 1,134,000 7.3 4.22 444,000 4.18
$6.93-$9.60....... 119,500 9.6 8.17 -- --
Class L
$0.00-$10.13...... 145,516 7.1 $10.13 145,516 $10.13
F-19
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:
Year ended Year ended Year ended
Nov. 26, 2000 Nov. 28, 1999 Nov. 29, 1998
------------- ------------- -------------
(in thousands)
Current:
Federal............................................ $20,444 $11,058 $ 1,737
State and local.................................... 2,455 2,250 948
Foreign............................................ 5,199 3,740 3,569
------- ------- --------
28,098 17,048 6,254
Deferred:
Federal............................................ (450) (471) (16,541)
State and local.................................... (64) (473) (2,363)
Foreign............................................ (352) 457 (361)
------- ------- --------
(866) (487) (19,265)
------- ------- --------
Total.............................................. 27,232 16,561 (13,011)
Allocated to loss from early extinguishment of debt -- -- (9,693)
------- ------- --------
Income tax expense (benefit) before extraordinary
item............................................. $27,232 $16,561 $ (3,318)
======= ======= ========
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:
Year ended Year ended Year ended
Nov. 26, 2000 Nov. 28, 1999 Nov. 29, 1998
------------- ------------- -------------
Income tax expense (benefit) computed at statutory U.S.
Federal income tax rate....................................... 35.0% 35.0% (35.0%)
State and local income taxes, net of federal tax benefit........ 3.2% 4.2% (0.8%)
Foreign tax rate differential and effects of foreign earnings
repatriation.................................................. (0.1%) 1.0% 0.8%
Other items, net................................................ 2.9% (0.8%) 0.3%
----- ----- ------
Effective income tax rate before permanent differences resulting
from purchase accounting...................................... 41.0% 39.4% (34.7%)
Permanent differences resulting from purchase accounting,
principally goodwill.......................................... 6.5% 11.7% 20.0%
----- ----- ------
Effective income tax rate....................................... 47.5% 51.1% (14.7%)
===== ===== ======
F-20
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:
2000 1999
---------------------- ----------------------
Current Noncurrent Current Noncurrent
Asset Asset Asset Asset
(Liability) (Liability) (Liability) (Liability)
----------- ----------- ----------- -----------
Accrued salaries and benefits.......................... $ 4,311 $ 6,804 $ 5,238 $ 5,516
Allowance for doubtful accounts........................ 4,238 -- 3,636 --
Plant shutdown, idle facilities, and environmental
costs................................................ 1,105 1,322 1,515 1,322
Tax credit carryforward................................ 476 -- 178 --
Accrued warranty reserve............................... 2,997 -- 2,598 --
Book versus tax differences related to property, plant,
and equipment........................................ -- (21,868) -- (19,613)
Book versus tax differences related to intangible
assets............................................... -- (10,217) -- (10,464)
All other.............................................. 1,224 158 1,032 (116)
------- -------- ------- --------
$14,351 $(23,801) $14,197 $(23,355)
======= ======== ======= ========
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 some 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.
F-21
SEALY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 11--EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings
per share:
2000 1999 1998
------- ------- --------
(in thousands)
Numerator:
Income (loss) before extraordinary item................... $30,140 $15,821 $(19,236)
Extraordinary item, net................................... -- -- 14,537
------- ------- --------
Net income (loss)......................................... 30,140 15,821 (33,773)
Liquidation preference for common L & M shares............ 14,808 13,461 11,716
------- ------- --------
Net income (loss) available to common shareholders........ $15,332 $ 2,360 $(45,489)
------- ------- --------
Denominator:
Denominator for basic earnings per share--weighted average
shares................................................... 31,485 31,473 30,472
Effect of dilutive securities:
Stock options............................................. 2,750 1,499 --
------- ------- --------
Denominator for diluted earnings per share--adjusted
weighted-average shares and assumed conversions.......... 34,235 32,972 30,472
======= ======= ========
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:
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------- -------- -------- --------
(Amounts in thousands, except for share data)
2000:
Net sale.................... $256,639 $264,055 $292,741 $288,107
Gross profit................ 115,212 118,864 132,897 130,715
Net income.................. 5,557 7,568 12,439 4,576
Earnings per share--Basic... 0.18 0.24 0.40 0.14
Earnings per share--Diluted. 0.16 0.22 0.36 0.14
1999:
Net sales................... $222,326 $232,168 $273,333 $257,880
Gross profit................ 99,751 103,218 123,639 114,930
Net income.................. 413 3,153 11,625 630
Earnings per share--Basic... 0.01 0.10 0.37 0.02
Earnings per share--Diluted. 0.01 0.10 0.35 0.02
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 some securities of the Company at the
greater of fair market value or original cost. That revaluation was recorded as
stock based compensation expense.
F-22
SEALY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
Cash paid............................... $ 9.5
Fair value of liabilities assumed....... 9.4
-----
Purchase price.......................... 18.9
Fair value of assets acquired........... 14.2
-----
Goodwill................................ $ 4.7
=====
On September 1, 2000, the Company acquired some 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 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 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.
F-23
SEALY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
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.
NOTE 16--LOSS ON NET ASSETS HELD FOR SALE, OTHER WRITE-DOWNS AND RESTRUCTURINGS
During 1998, the Company recorded a loss on some 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 some
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 some 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
F-24
SEALY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 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.
F-25
SEALY CORPORATION
SUPPLEMENTAL CONSOLIDATING CONDENSED BALANCE SHEET
November 26, 2000
(in thousands)
Consolidated
Sealy Combined Non-
Sealy Mattress Guarantor Guarantor
Corporation Company Subsidiaries Subsidiaries Eliminations Consolidated
----------- -------- ------------ ------------ ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents................. $ -- $ 354 $ 6,672 $ 11,088 $ -- $ 18,114
Accounts receivable--Non-Affiliates, net.. 34 5,603 87,155 22,881 -- 115,673
Accounts receivable--Affiliates, net...... -- -- 29,816 -- -- 29,816
Inventories............................... -- 1,744 42,643 7,485 -- 51,872
Prepaid expenses and other assets......... 1,477 411 17,069 5,394 -- 24,351
-------- -------- --------- -------- ---------- --------
1,511 8,112 183,355 46,848 -- 239,826
Property, plant and equipment, at cost.... -- 9,547 198,203 19,770 -- 227,520
Less accumulated depreciation............. -- 1,938 64,762 3,737 -- 70,437
-------- -------- --------- -------- ---------- --------
-- 7,609 133,441 16,033 -- 157,083
Other assets:
Goodwill and other intangibles, net....... -- 13,256 333,167 28,815 -- 375,238
Net investment in and advances to (from)
subsidiaries and affiliates.............. (44,613) 529,908 (316,056) (39,788) (129,451) --
Investment in affiliates.................. -- -- -- 30,519 -- 30,519
Debt issuance costs, net and other assets. 813 20,193 6,163 180 -- 27,349
-------- -------- --------- -------- ---------- --------
(43,800) 563,357 23,274 19,726 (129,451) 433,106
-------- -------- --------- -------- ---------- --------
Total assets.............................. $(42,289) $579,078 $ 340,070 $ 82,607 $(129,451) $830,015
======== ======== ========= ======== ========== ========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities:
Current portion--long-term obligations.... $ -- $ 33,813 $ 359 $ 201 $ -- $ 34,373
Accounts payable.......................... -- 634 45,567 11,486 -- 57,687
Accrued incentives and advertising........ -- 1,451 33,482 3,324 -- 38,257
Accrued compensation...................... -- 571 21,493 2,064 -- 24,128
Accrued interest.......................... -- 633 12,117 (86) -- 12,664
Stock based compensation.................. 10,699 -- -- -- -- 10,699
Other accrued expenses.................... 82 915 25,028 4,188 -- 30,213
-------- -------- --------- -------- ---------- --------
10,781 38,017 138,046 21,177 -- 208,021
Long-term obligations..................... 35,505 602,481 13,673 151 -- 651,810
Other noncurrent liabilities.............. 8,002 -- 28,798 1,369 -- 38,169
Deferred income taxes..................... (3,287) 732 21,333 5,023 -- 23,801
Minority interest......................... -- -- -- 1,504 -- 1,504
Stockholders' equity...................... (93,290) (62,152) 138,220 53,383 (129,451) (93,290)
-------- -------- --------- -------- ---------- --------
Total liabilities and stockholders' equity $(42,289) $579,078 $ 340,070 $ 82,607 $(129,451) $830,015
======== ======== ========= ======== ========== ========
F-26
SEALY CORPORATION
SUPPLEMENTAL CONSOLIDATING CONDENSED BALANCE SHEET
November 28, 1999
(in thousands)
Combined
Sealy Combined Non-
Sealy Mattress Guarantor Guarantor
Corporation Company Subsidiaries Subsidiaries Eliminations Consolidated
----------- -------- ------------ ------------ ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents................. $ -- $ 13 $ 6,220 $ 4,612 $ -- $ 10,845
Accounts receivable--Non-Affiliates, net.. 27 3,941 84,452 16,867 -- 105,287
Accounts receivable--Affiliates, net...... -- -- 14,188 -- -- 14,188
Inventories............................... -- 1,297 38,673 4,711 -- 44,681
Prepaid expenses and other assets......... 3,412 314 12,799 3,640 -- 20,165
--------- -------- --------- -------- -------- ---------
3,439 5,565 156,332 29,830 -- 195,166
Property, plant and equipment, at cost.... -- 4,584 181,881 12,161 -- 198,626
Less accumulated depreciation............. -- 1,571 55,709 3,245 -- 60,525
--------- -------- --------- -------- -------- ---------
-- 3,013 126,172 8,916 -- 138,101
Other assets:
Goodwill and other intangibles, net....... -- 13,653 338,711 26,088 -- 378,452
Net investment in and advances to (from)
subsidiaries and affiliates.............. (84,313) 507,742 (338,993) (56,359) (28,077) --
Investment in affiliates.................. -- -- -- 30,004 -- 30,004
Debt issuance costs, net and other assets. 813 24,422 3,904 91 -- 29,230
--------- -------- --------- -------- -------- ---------
(83,500) 545,817 3,622 (176) (28,077) 437,686
--------- -------- --------- -------- -------- ---------
Total assets.............................. $ (80,061) $554,395 $ 286,126 $ 38,570 $(28,077) $ 770,953
========= ======== ========= ======== ======== =========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities:
Current portion--long-term obligations.... $ -- $ 13,854 $ 291 $ -- $ -- $ 14,145
Accounts payable.......................... -- 318 36,493 6,342 -- 43,153
Accrued incentives and advertising........ -- 1,200 28,507 2,594 -- 32,301
Accrued compensation...................... -- 417 21,646 1,110 -- 23,173
Accrued interest.......................... -- 564 12,074 95 -- 12,733
Other accrued expenses.................... 534 420 24,235 911 -- 26,100
--------- -------- --------- -------- -------- ---------
534 16,773 123,246 11,052 -- 151,605
Long-term obligations..................... 31,497 630,749 13,951 -- -- 676,197
Other noncurrent liabilities.............. 11,491 -- 27,629 2,065 -- 41,185
Deferred income taxes..................... (2,194) 736 21,644 3,169 -- 23,355
Stockholders' equity...................... (121,389) (93,863) 99,656 22,284 (28,077) (121,389)
--------- -------- --------- -------- -------- ---------
Total liabilities and stockholders' equity $ (80,061) $554,395 $ 286,126 $ 38,570 $(28,077) $ 770,953
========= ======== ========= ======== ======== =========
F-27
SEALY CORPORATION
SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENTS OF OPERATIONS
YEAR ENDED NOVEMBER 26, 2000
(in thousands)
Combined
Sealy Combined Non-
Sealy Mattress Guarantor Guarantor
Corporation Company Subsidiaries Subsidiaries Eliminations Consolidated
----------- -------- ------------ ------------ ------------ ------------
Net sales--Non-Affiliates.................... $ -- $ 48,330 $816,037 $102,073 $(14,514) $ 951,926
Net sales--Affiliates........................ -- -- 149,616 -- -- 149,616
-------- -------- -------- -------- -------- ----------
Total net sales........................ -- 48,330 965,653 102,073 (14,514) 1,101,542
Costs and expenses:
Cost of goods sold--Non-Affiliates........ -- 30,674 446,768 62,045 (14,514) 524,973
Cost of goods sold--Affiliates............ -- -- 78,881 -- -- 78,881
-------- -------- -------- -------- -------- ----------
Total cost of goods sold............... -- 30,674 525,649 62,045 (14,514) 603,854
Selling, general and administrative....... 180 14,570 311,617 28,225 -- 354,592
Stock based compensation.................. 6,797 -- -- -- -- 6,797
Amortization of intangibles............... -- 397 11,624 844 -- 12,865
Interest expense, net..................... 3,841 62,897 (646) (249) -- 65,843
Minority interest......................... -- -- -- 219 -- 219
Loss (income) from equity investees....... (33,751) (34,641) -- -- 68,392 --
Loss (income) from non-guarantor
equity investees......................... -- 636 (6,761) -- 6,125 --
Capital charge and intercompany interest
allocation............................... (3,939) (59,727) 64,124 (458) -- --
-------- -------- -------- -------- -------- ----------
Income (loss) before income taxes............ 26,872 33,524 60,046 11,447 (74,517) 57,372
Income taxes................................. (3,268) (227) 25,186 5,541 -- 27,232
-------- -------- -------- -------- -------- ----------
Net income (loss)............................ $ 30,140 $ 33,751 $ 34,860 $ 5,906 $(74,517) $ 30,140
======== ======== ======== ======== ======== ==========
F-28
SEALY CORPORATION
SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENTS OF OPERATIONS
YEAR ENDED NOVEMBER 28, 1999
(in thousands)
Combined
Sealy Combined Non-
Sealy Mattress Guarantor Guarantor
Corporation Company Subsidiaries Subsidiaries Eliminations Consolidated
----------- -------- ------------ ------------ ------------ ------------
Net sales--Non-Affiliates.................... $ -- $ 39,454 $837,474 $78,387 $(14,649) $940,666
Net sales--Affiliates........................ -- -- 45,041 -- -- 45,041
-------- -------- -------- ------- -------- --------
Total net sales........................ -- 39,454 882,515 78,387 (14,649) 985,707
Costs and expenses:
Cost of goods sold--Non-Affiliates........ -- 24,400 461,694 49,323 (14,649) 520,768
Cost of goods sold--Affiliates............ -- -- 23,401 -- -- 23,401
-------- -------- -------- ------- -------- --------
Total cost of goods sold............... -- 24,400 485,095 49,323 (14,649) 544,169
Selling, general and administrative....... 184 11,000 294,728 18,700 -- 324,612
Stock based compensation.................. 6,664 -- -- -- -- 6,664
Amortization of intangibles............... -- 398 11,578 905 -- 12,881
Interest expense, net..................... 3,648 60,730 1,166 (545) -- 64,999
Loss (income) from equity investees....... (13,551) (12,721) -- -- 26,272 --
Loss (income) from non-guarantor
equity investees......................... -- (1,592) (2,735) -- 4,327 --
Capital charge and intercompany interest
allocation............................... (13,169) (56,332) 67,492 2,009 -- --
-------- -------- -------- ------- -------- --------
Income (loss) before income taxes............ 16,224 13,571 25,191 7,995 (30,599) 32,382
Income taxes................................. 403 20 12,470 3,668 -- 16,561
-------- -------- -------- ------- -------- --------
Net income (loss)............................ $ 15,821 $ 13,551 $ 12,721 $ 4,327 $(30,599) $ 15,821
======== ======== ======== ======= ======== ========
F-29
SEALY CORPORATION
SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENTS OF OPERATIONS
YEAR ENDED NOVEMBER 29, 1998
(in thousands)
Combined
Sealy Combined Non-
Sealy Mattress Guarantor Guarantor
Corporation Company Subsidiaries Subsidiaries Eliminations Consolidated
----------- -------- ------------ ------------ ------------ ------------
Net sales...................................... $ -- $ 42,472 $792,878 $73,265 $(17,313) $891,302
Costs and expenses:
Cost of goods sold.......................... -- 26,973 448,186 45,538 (17,197) 503,500
Selling, general and administrative......... 717 13,434 265,859 20,346 -- 300,356
Loss on net assets held for sale and other
write-downs................................ -- 229 10,158 247 -- 10,634
Compensation associated with
recapitalization........................... 17,114 332 -- 1,440 -- 18,886
Amortization of intangibles................. -- 411 11,684 934 -- 13,029
Interest expense, net....................... 4,967 62,504 245 (265) -- 67,451
Loss (income) from equity investees......... 3,136 1,894 -- -- (5,030) --
Loss (income) from non-guarantor
equity investees........................... -- (27) (2,417) -- 2,444 --
Capital charge and intercompany interest
allocation................................. (10,279) (59,656) 69,935 -- -- --
-------- -------- -------- ------- -------- --------
Income (loss) before income taxes,
extraordinary item and cumulative effect of
a change in accounting principle.............. (15,655) (3,622) (10,772) 5,025 2,470 (22,554)
Income taxes................................... 3,581 (486) (8,878) 2,581 (116) (3,318)
-------- -------- -------- ------- -------- --------
Income (loss) before extraordinary item........ (19,236) (3,136) (1,894) 2,444 2,586 (19,236)
Extraordinary item............................. 14,537 -- -- -- -- 14,537
-------- -------- -------- ------- -------- --------
Net income (loss).............................. $(33,773) $ (3,136) $ (1,894) $ 2,444 $ 2,586 $(33,773)
======== ======== ======== ======= ======== ========
F-30
SEALY CORPORATION
SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENTS OF CASH FLOWS
YEAR ENDED NOVEMBER 26, 2000
(in thousands)
Combined
Sealy Combined Non-
Sealy Mattress Guarantor Guarantor
Corporation Company Subsidiaries Subsidiaries Eliminations Consolidated
----------- -------- ------------ ------------ ------------ ------------
Net cash provided by operating activities..... $ -- $ 485 $ 59,223 $10,472 $ -- $ 70,180
---- -------- -------- ------- ---- --------
Cash flows from investing activities:
Purchase of property, plant and
equipment................................. -- (80) (21,709) (2,300) -- (24,089)
Proceeds from sale of property, plant and
equipment................................. -- -- 95 -- -- 95
Acquisition of business, net of cash
acquired.................................. -- (10,834) -- (9,113) -- (19,947)
Net activity in investment in and
advances to (from) subsidiaries and
affiliates................................ -- 29,424 (36,841) 7,417 -- --
---- -------- -------- ------- ---- --------
Net proceeds provided by (used in)
investing activities...................... -- 18,510 (58,455) (3,996) -- (43,941)
Cash flows from financing activities:
Repayment of long-term
obligations, net.......................... -- (18,654) (316) -- -- (18,970)
---- -------- -------- ------- ---- --------
Net cash used in financing activities......... -- (18,654) (316) -- -- (18,970)
---- -------- -------- ------- ---- --------
Change in cash and cash equivalents........... -- 341 452 6,476 -- 7,269
Cash and cash equivalents:
Beginning of period........................ -- 13 6,220 4,612 -- 10,845
---- -------- -------- ------- ---- --------
End of period.............................. $ -- $ 354 $ 6,672 $11,088 $ -- $ 18,114
==== ======== ======== ======= ==== ========
F-31
SEALY CORPORATION
SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENTS OF CASH FLOWS
YEAR ENDED NOVEMBER 28, 1999
(in thousands)
Combined
Sealy Combined Non-
Sealy Mattress Guarantor Guarantor
Corporation Company Subsidiaries Subsidiaries Eliminations Consolidated
----------- -------- ------------ ------------ ------------ ------------
Net cash provided by operating activities $ -- $ 543 $ 54,810 $ 650 $-- $ 56,003
---- -------- -------- -------- --- --------
Cash flows from investing activities:
Purchase of property, plant and
equipment............................ -- (250) (15,795) (39) -- (16,084)
Proceeds from sale of property,
plant and equipment.................. -- -- 840 -- -- 840
Investment in affiliates.............. -- -- -- (27,794) -- (27,794)
Net activity in investment in and
advances to (from) subsidiaries
and affiliates....................... 68 14,573 (44,386) 29,745 -- --
---- -------- -------- -------- --- --------
Net proceeds provided by (used in)
investing activities................. 68 14,323 (59,341) 1,912 -- (43,038)
Cash flows from financing activities:
Treasury stock repurchase............. (85) -- -- -- -- (85)
Proceeds (repayment) of long-term
obligations, net..................... -- (14,875) 1,589 -- -- (13,286)
Equity issuances...................... 17 -- -- -- -- 17
---- -------- -------- -------- --- --------
Net cash provided by (used in) financing
activities.............................. (68) (14,875) 1,589 -- -- (13,354)
---- -------- -------- -------- --- --------
Change in cash and cash equivalents...... -- (9) (2,942) 2,562 -- (389)
Cash and cash equivalents:
Beginning of period................... -- 22 9,162 2,050 -- 11,234
---- -------- -------- -------- --- --------
End of period......................... $ -- $ 13 $ 6,220 $ 4,612 -- $ 10,845
==== ======== ======== ======== === ========
F-32
SEALY CORPORATION
SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENTS OF CASH FLOWS
YEAR ENDED NOVEMBER 29, 1998
(in thousands)
Combined
Sealy Combined Non-
Sealy Mattress Guarantor Guarantor
Corporation Company Subsidiaries Subsidiaries Eliminations Consolidated
----------- --------- ------------ ------------ ------------ ------------
Net cash provided by (used in) operating
activities.................................. $ (478) $ (1,923) $ 56,210 $ (176) $(603) $ 53,030
--------- --------- -------- ------- ----- ---------
Cash flows from investing activities:
Purchase of property, plant and
equipment.............................. -- (203) (32,909) -- -- (33,112)
Proceeds from sale of property,
plant and equipment...................... -- -- 216 -- -- 216
Net activity in investment in and
advances to (from) subsidiaries
and affiliates........................... 637,473 (607,445) (28,882) (1,749) 603 --
--------- --------- -------- ------- ----- ---------
Net proceeds provided by (used in)
investing activities.................. 637,473 (607,648) (61,575) (1,749) 603 (32,896)
Cash flows from financing activities:
Treasury stock............................ (413,078) -- -- -- -- (413,078)
Repayment of long-term obligations,
net...................................... (330,000) 642,122 12,653 -- -- 324,775
Equity issuances.......................... 121,444 -- -- -- -- 121,444
Costs associated with tender offer of
prior debt............................... (15,361) -- -- -- -- (15,361)
Debt issuance costs....................... -- (32,549) (188) -- -- (32,737)
--------- --------- -------- ------- ----- ---------
Net cash provided by (used in) financing
activities.................................. (636,995) 609,573 12,465 -- -- (14,957)
--------- --------- -------- ------- ----- ---------
Change in cash and cash equivalents.......... -- 2 7,100 (1,925) -- 5,177
Cash and cash equivalents:
Beginning of period....................... -- 20 2,062 3,975 -- 6,057
--------- --------- -------- ------- ----- ---------
End of period............................. $ -- $ 22 $ 9,162 $ 2,050 $ -- $ 11,234
========= ========= ======== ======= ===== =========
F-33
SEALY CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
Nine Months Nine Months
Ended Ended
August 26, August 27,
2001 2000
----------- -----------
Net sales--Non-Affiliates.............................................................. $750,878 $705,896
Net sales--Affiliates.................................................................. 118,556 107,539
-------- --------
Total net sales................................................................. 869,434 813,435
Costs and expenses:
Cost of goods sold--Non-Affiliates.................................................. 422,983 389,825
Cost of goods sold--Affiliates...................................................... 62,908 56,636
-------- --------
Total cost of goods sold........................................................ 485,891 446,461
Selling, general and administrative................................................. 295,026 258,646
Stock based compensation............................................................ -- 3,580
Restructuring charge (Note 6)....................................................... 1,183 --
Amortization of intangibles......................................................... 10,367 9,525
-------- --------
Income from operations................................................................. 76,967 95,223
Interest expense.................................................................... 54,774 48,693
Other (income) expense, net (Notes 5 and 12)........................................ 24,798 56
-------- --------
Income (loss) before income tax expense, extraordinary item and cumulative effect of
change in accounting principle....................................................... (2,605) 46,474
Income tax expense..................................................................... 12,963 20,910
-------- --------
Income (loss) before extraordinary item and cumulative effect of change in accounting
principle............................................................................ (15,568) 25,564
Extraordinary item--loss from early extinguishment of debt (net of income tax benefit
of $452) (Note 4).................................................................... 679 --
Cumulative effect of change in accounting principle (net of income tax expense of $101)
(Note 7)............................................................................. (152) --
-------- --------
Net income (loss)...................................................................... (16,095) 25,564
Liquidation preference for common L&M shares........................................... 12,216 11,106
-------- --------
Net income (loss) available to common shareholders..................................... $(28,311) $ 14,458
======== ========
Earnings per share--basic:
Income (loss) before extraordinary item and cumulative effect of change in
accounting principle.............................................................. $ (0.50) $ 0.81
Extraordinary item.................................................................. (0.02) --
Cumulative effect of change in accounting principle................................. -- --
-------- --------
Net income (loss)................................................................... (0.52) 0.81
Liquidation preference for common L & M shares...................................... (0.40) (0.35)
-------- --------
Net income (loss) available to common shareholders.................................. $ (0.92) $ 0.46
======== ========
Earnings per share--diluted:
Income (loss) before extraordinary item and cumulative effect of change in
accounting principle.............................................................. $ (0.50) $ 0.75
Extraordinary item.................................................................. (0.02) --
Cumulative effect of change in accounting principle................................. -- --
-------- --------
Net income (loss)................................................................... (0.52) 0.75
Liquidation preference for common L & M shares...................................... (0.40) (0.33)
-------- --------
Net income (loss) available to common shareholders.................................. $ (0.92) $ 0.42
======== ========
Weighted average number of common shares outstanding:
Basic............................................................................... 30,865 31,485
Diluted............................................................................. 30,865 34,015
See accompanying notes to condensed consolidated financial statements.
F-34
SEALY CORPORATION
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
August 26, November 26,
2001 2000*
---------- ------------
ASSETS
Current assets:
Cash and cash equivalents.................. $ 9,540 $ 18,114
Accounts receivable--Non-Affiliates, net... 166,879 115,673
Accounts receivable--Affiliates, net....... 36,541 29,816
Inventories................................ 63,119 51,872
Prepaid expenses and deferred taxes........ 34,596 24,351
--------- ---------
310,675 239,826
Property, plant and equipment, at cost........ 269,495 227,520
Less: accumulated depreciation................ (82,955) (70,437)
--------- ---------
186,540 157,083
Other assets:
Goodwill and other intangibles, net........ 382,560 375,238
Investment in affiliates (Note 12)......... 1,382 30,519
Debt issuance costs, net, and other assets. 39,792 27,349
--------- ---------
423,734 433,106
--------- ---------
$ 920,949 $ 830,015
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion of long-term obligations... $ 21,674 $ 34,373
Accounts payable........................... 80,965 57,687
Accrued interest........................... 7,078 12,664
Accrued incentives and advertising......... 43,311 38,257
Accrued compensation....................... 16,483 24,128
Stock based compensation................... -- 10,699
Other accrued expenses..................... 42,947 30,213
--------- ---------
212,458 208,021
Long-term obligations......................... 758,581 651,810
Other noncurrent liabilities.................. 47,477 38,169
Deferred income taxes......................... 22,690 23,801
Minority interest............................. 1,569 1,504
Stockholders' equity (deficit):
Common stock............................... 317 315
Additional paid-in capital................. 146,710 134,547
Accumulated deficit........................ (231,967) (215,872)
Accumulated other comprehensive loss....... (24,623) (12,195)
Common stock held in treasury, at cost..... (12,263) (85)
--------- ---------
(121,826) (93,290)
--------- ---------
$ 920,949 $ 830,015
========= =========
- --------
* Condensed from audited financial statements.
See accompanying notes to condensed consolidated financial statements.
F-35
SEALY CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Nine Months Nine Months
Ended Ended
August 26, August 27,
2001 2000
----------- -----------
Net cash (used in) provided by operating activities............ $(19,618) $ 53,324
Investing activities:
Purchase of property and equipment, net..................... (15,131) (14,198)
Purchase of business, net of cash acquired.................. (30,475) (9,406)
-------- --------
Net cash used in investing activities................... (45,606) (23,604)
-------- --------
Financing activities:
Treasury stock repurchase................................... (12,178) --
Proceeds from issuance of long-term notes................... 127,500 --
Repayments of long-term obligations, net.................... (54,215) (12,308)
Equity issuance............................................. 1,466 --
Debt issuance costs......................................... (5,923) --
-------- --------
Net cash provided by (used in) financing activities..... 56,650 (12,308)
-------- --------
Change in cash and cash equivalents............................ (8,574) 17,412
Cash and cash equivalents:
Beginning of period......................................... 18,114 10,845
-------- --------
End of period............................................... $ 9,540 $ 28,257
======== ========
Selected noncash items:
Non-cash compensation....................................... $ -- $ 3,580
Depreciation................................................ 12,822 10,179
Impairment charge........................................... 26,250 --
Non-cash interest expense associated with:
Junior Subordinated Notes................................... 3,292 2,809
Debt issuance costs......................................... 3,247 3,117
Discount on Senior Subordinated Notes....................... 8,391 7,690
See accompanying notes to condensed consolidated financial statements.
F-36
SEALY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Nine months ended August 26, 2001
NOTE 1--BASIS OF PRESENTATION
This report covers Sealy Corporation and its subsidiaries (collectively,
"Sealy" or the "Company").
The accompanying unaudited condensed consolidated financial statements
should be read together with the Company's Annual Report on Form 10-K for the
year ended November 26, 2000.
The accompanying unaudited condensed consolidated financial statements
contain all adjustments which, in the opinion of management, are necessary to
present fairly the financial position of the Company at August 26, 2001, and
its results of operations and cash flows for the periods presented herein. All
adjustments in the periods presented herein are normal and recurring in nature.
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 of
contingent assets and liabilities at the end of the quarter and the reported
amounts of revenue and expenses during the reporting period. Actual results
could differ from those estimates.
The Company regularly assesses all of its long-lived assets and investments
for impairment when events or circumstances indicate their carrying value may
not be recoverable. Refer to Notes 5 and 12 for an impairment charge taken with
respect to investments during the quarter ended August 26, 2001.
Certain reclassifications of previously reported financial information were
made to conform to the 2001 presentation.
NOTE 2--INVENTORIES
The major components of inventories were as follows:
August 26, November 26,
2001 2000
---------- ------------
(In thousands)
Raw materials..................... $31,977 $29,360
Work in process................... 20,807 15,665
Finished goods.................... 10,335 6,847
------- -------
$63,119 $51,872
======= =======
NOTE 3--ACQUISITION OF SAPSA BEDDING S.A.
On April 6, 2001, the Company acquired the outstanding capital stock of
Sapsa Bedding, S.A., of Paris France for $31.5 million, including costs
associated with the acquisition. Sapsa, with primary locations in Paris, France
and Milan, Italy, manufactures and sells latex bedding and bedding products to
retailers and wholesalers in Europe. Sapsa also sells latex mattress cores and
pillows to other manufacturers which sell the finished products under their own
trademark. As part of the purchase price, EUR 3.0 million (approximately $2.8
million) is being held in escrow pursuant to the Share Sale 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
$16.4 million in goodwill and other intangibles to be amortized primarily over
a 20 year period.
F-37
SEALY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Nine months ended August 26, 2001
Cash paid........................ $31.5
Fair value of liabilities assumed 40.8
-----
Purchase price................... 72.3
Fair value of assets acquired.... 55.9
-----
Goodwill and other intangibles... $16.4
=====
Due to the immateriality of the acquisition to the Company's balance sheet
and statement of operations, no pro forma disclosures are considered necessary.
NOTE 4--LONG-TERM OBLIGATIONS
On April 10, 2001, the Company completed a private placement of $125 million
of 9.875% senior subordinated notes. These notes, which are due and payable on
December 15, 2007 require semi-annual interest payments commencing June 15,
2001. The proceeds from the placement were used to repay existing bank debt. As
a result, the Company recognized an extraordinary loss on the write-off of a
portion of the previous debt issuance costs of $0.7 million (net of a $0.5
million tax benefit).
NOTE 5--OTHER EXPENSE, NET
The Company previously contributed 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
investments in joint ventures, licensees and retailers and is controlled by the
Company's largest stockholder, Bain Capital, LLC. The investment in MHI was
made to fund its activities in order to enhance business relationships and
build incremental sales. Various operating factors combined with weak economic
conditions created during the third quarter produced a requirement to review
equity values related to the affiliates. Accordingly, the Company performed a
review of the carrying value of its investments in affiliates owned by MHI. The
Company has determined that the decline in the value of such investments is
other than temporary and, as a consequence, has recognized a non-cash
impairment charge of $26.3 million to write-down the investments to their
estimated fair values of $1.4 million as of August 26, 2001. See Note 12 for
further discussion.
In May 2001, the Company and one of its licensees terminated its existing
contract that allowed the licensee to manufacture and sell certain products
under the Sealy brand name and entered into a new agreement for the sale of
certain other Sealy branded products. In conjunction with the termination of
the license agreement, Sealy received a $4.6 million termination fee that is
recorded as other income.
Other expense, net also includes the equity in the (earnings) loss of equity
investees and minority interest.
NOTE 6--RESTRUCTURING CHARGE
During the first quarter of 2001, the Company commenced a plan to shutdown
its Memphis facility and recorded a $0.5 million charge primarily for
severance. The Company ceased operations in the second quarter of 2001 and is
actively pursuing the sale of the facility. During the first quarter of 2001,
the Company also recorded a $0.7 million charge for severance related to a
management reorganization. All payments related to these charges are expected
to be made by the end of fiscal 2001.
F-38
SEALY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Nine months ended August 26, 2001
NOTE 7--RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
FAS 133, "Accounting for Derivative Instruments and Hedging Activities," as
amended, requires that all derivatives be recorded on the balance sheet at fair
value. Derivatives that are not hedges must be adjusted to fair value through
income. If the derivative is a hedge, depending on the nature of the hedge,
changes in the fair value of derivatives are either offset against the change
in the fair value of assets, liabilities, or firm commitments through earnings
or recognized in other comprehensive income until the hedged item is recognized
in earnings. The ineffective portion of a derivative's change in fair value is
immediately recognized in earnings. The Company adopted FAS 133 on November 27,
2000 and recorded a $0.2 million gain net of income tax expense which is
recorded in the condensed consolidated unaudited statements of income as a
cumulative effect of change in accounting principle.
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. The Company adopted SAB 101 effective November 27, 2000. The
adoption did not have any effect on the Company's revenue recognition policy.
In July, 2001, the Financial Accounting Standards Board (the "FASB") issued
FAS 141, "Business Combinations." FAS 141 addressed financial accounting and
reporting for business combinations and supersedes APB Opinion No. 16,
"Business Combinations", and FASB Statement No. 38, "Accounting for
Preacquisition Contingencies of Purchased Enterprises". All business
combinations in the scope of this Statement are to be accounted for using one
method, the purchase method. This statement applies to all business
combinations initiated after June 30, 2001 and all business combinations
accounted for using the purchase method for which the date of acquisition is
July 1, 2001 or later. The Company will adopt the provisions of this
pronouncement for any business combinations subsequent to June 30, 2001.
In July 2001, the FASB issued FAS 142, "Goodwill and Other Intangible
Assets", effective for years beginning after December 15, 2001, the Company's
first quarter of fiscal year 2003. FAS 142 addresses financial accounting and
reporting for acquired goodwill and other intangible assets and supersedes APB
Opinion No. 17, "Intangible Assets". Goodwill and some intangible assets will
no longer be amortized, but will be reviewed at least annually for impairment.
It also addresses how intangible assets that are acquired individually or with
a group of other assets (but not those acquired in a business combination)
should be accounted for in financial statements upon their acquisition. The
Company will adopt the non-amortization provision for any acquisitions with a
closing date subsequent to June 30, 2001. Management is currently evaluating
the effects of the other provisions of this Statement.
In August 2001, the FASB issued FAS 143, "Accounting for Asset Retirement
Obligations", effective for years beginning after June 15, 2002, the Company's
first quarter of fiscal year 2003. FAS 143 addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. It applies to legal
obligations associated with the retirement of long-lived assets that result
from the acquisition, construction, development and (or) the normal operation
of a long-lived asset, except for certain obligations of lessees. Management is
currently evaluating the effects of this Statement.
In April 2001, the Emerging Issues Task Force of the FASB reached consensus
on Issue 00-25, "Vendor Income Statement Characterization of Consideration from
a Vendor to a Retailer". This issue provides guidance primarily on income
statement classification of consideration from a vendor to a purchaser of the
vendor's products, including both customers and consumers. Generally, cash
consideration is to be classified as a
F-39
SEALY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Nine months ended August 26, 2001
reduction of revenue, unless specific criteria are met regarding goods or
services that the vendor may receive in return for this consideration. The
Company has historically classified certain costs covered by the provisions of
00-25 as selling expenses. The Company is currently evaluating the impact of
the new accounting guidance and expects that certain costs historically
recorded as marketing and selling expenses will be reclassified as a reduction
of revenues. The guidance from this issue should be applied no later than in
interim financial statements for periods beginning after December 15, 2001, the
Company's second quarter of fiscal 2002.
NOTE 8--HEDGING STRATEGY
The Company has entered into interest rate swap agreements that effectively
convert a portion of its floating-rate debt to a fixed-rate basis through
December 2006, thereby hedging against the impact of interest rate changes on
future interest expense (forecasted cash flows). Use of hedging contracts
allows the Company to reduce its overall exposure to interest rate changes,
since gains and losses on these contracts will offset losses and gains on the
transactions being hedged. The Company formally documents all hedged
transactions and hedging instruments, and assesses, both at inception of the
contract and on an ongoing basis, whether the hedging instruments are effective
in offsetting changes in cash flows of the hedged transaction. At August 26,
2001, interest expense on $350.5 million of the Company's outstanding long-term
debt was designated as the hedged items to the interest rate swap agreements.
The fair values of the interest rate agreements are estimated by obtaining
quotes from brokers and are the estimated amounts that the Company would
receive or pay to terminate the agreements at the reporting date, taking into
consideration current interest rates and the current creditworthiness of the
counterparties. At August 26, 2001, the fair value carrying amounts of these
instruments, which is included in other noncurrent liabilities, was a liability
of $13.0 million. In addition, $13.0 million was recorded as a loss in
accumulated other comprehensive loss.
To protect against the reduction in value of forecasted foreign currency
cash flows resulting from purchases in a foreign currency, the Company has
instituted a forecasted cash flow hedging program. The Company hedges portions
of its purchases denominated in foreign currencies with forward contracts and
currency options and collars. At August 26, 2001, the Company had a currency
collar on $3.5 million payable in Canadian dollars, a forward contract to sell
$8.6 million Canadian dollars and an option to sell 15.2 million Mexican pesos.
The value of those positions was not material.
F-40
SEALY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Nine months ended August 26, 2001
NOTE 9--NET INCOME (LOSS) PER COMMON SHARE
The following table sets forth the computation of basic and diluted earnings
per share (in thousands):
Three months Nine months
ended ended
--------------------- ---------------------
August 26, August 27, August 26, August 27,
2001 2000 2001 2000
---------- ---------- ---------- ----------
Numerator:
Income (loss) before extraordinary item and cumulative effect
of change in accounting principle........................... $(21,746) $12,439 $(15,568) $25,564
Extraordinary item............................................ -- -- 679 --
Cumulative effect of change in accounting principle........... -- -- (152) --
-------- ------- -------- -------
Net income (loss)............................................. (21,746) 12,439 (16,095) 25,564
Liquidation preference for common L&M shares..................... 4,072 3,702 12,216 11,106
-------- ------- -------- -------
Net income (loss) available to common shareholders............... $(25,818) $ 8,737 $(28,311) $14,458
======== ======= ======== =======
Denominator:
Denominator for basic earnings per share--weighted average
shares...................................................... 30,750 31,485 30,865 31,485
Effect of dilutive securities:
Stock options................................................. * 2,743 * 2,530
-------- ------- -------- -------
Denominator for diluted earnings per share--adjusted weighted-
average shares and assumed conversions......................... 30,750 34,228 30,865 34,015
======== ======= ======== =======
- --------
* Due to the loss for the three and nine months ended August 26, 2001, the
dilutive securities are antidilutive and, accordingly, are excluded from the
calculation in dilutive earnings per share.
NOTE 10--COMPREHENSIVE INCOME (LOSS)
Total comprehensive income (loss) for the three and nine months ended August
26, 2001 was ($24.6) million and ($28.5) million and for the three and nine
months ended August 27, 2000 was $13.3 million and $25.5 million, respectively.
Activity in Stockholders' Equity (Deficit) is as follows (dollar amounts in
thousands):
Accumulated
Current Year Additional Other
Comprehensive Common Paid-in Accumulated Treasury Comprehensive
Income(Loss) Stock Capital Deficit Stock Loss Total
------------- ------ ---------- ----------- -------- ------------- ---------
Balances at November 26, 2000........... -- $315 $134,547 $(215,872) $ (85) $(12,195) $ (93,290)
Net loss for the nine months ended
August 26, 2001..................... $(16,095) -- -- (16,095) -- -- (16,095)
Purchase of stock held by executive
subject to mandatory repurchase
provisions ......................... -- -- 10,699 -- (10,699) -- --
Exercise of stock options............ -- 2 1,464 -- -- -- 1,466
Purchase of treasury stock........... -- -- -- -- (1,479) -- (1,479)
Change in fair value of cash flow
hedges.............................. (12,999) -- -- -- -- (12,999) (12,999)
Foreign currency translation
adjustment.......................... 571 -- -- -- -- 571 571
-------- ---- -------- --------- -------- -------- ---------
Balances at August 26, 2001............. $(28,523) $317 $146,710 $(231,967) $(12,263) $(24,623) $(121,826)
======== ==== ======== ========= ======== ======== =========
F-41
SEALY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Nine months ended August 26, 2001
NOTE 11--CONTINGENCIES
The Company is currently conducting an environmental cleanup at a formerly
owned facility in South Brunswick, New Jersey pursuant to the New Jersey
Industrial Site Recovery Act. The Company and one of its subsidiaries are
parties to an Administrative Consent Order issued by the New Jersey Department
of Environmental Protection. Pursuant to that order, the Company and its
subsidiary agreed to conduct soil and groundwater remediation at the property.
The Company does not believe that its manufacturing processes were the source
of contamination. The Company sold the property in 1997. The Company and its
subsidiary retained primary responsibility for the required remediation. The
Company has completed essentially all soil remediation with the New Jersey
Department of Environmental Protection approval, and 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.
NOTE 12--RELATED PARTY TRANSACTIONS
The Company previously contributed 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
investments in joint ventures, licensees and retailers and is controlled by the
Company's largest stockholder, Bain Capital, LLC. The investment in MHI was
made to fund its activities in order to enhance business relationships and
build incremental sales. As of August 26, 2001 and August 27, 2000,
respectively, the Company has made year-to-date sales of $110.7 million and
$101.5 million of finished mattress products pursuant to multi-year supply
contracts to affiliated and related parties of Bain Capital. 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 on an arm's-length basis from a person that is not an
affiliate or related party.
Various operating factors combined with weak economic conditions created
during the third quarter produced a requirement to review equity values related
to the affiliates. Accordingly, the Company performed a review of the carrying
value of its investments in affiliates owned by MHI. The Company has determined
that the
F-42
SEALY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Nine months ended August 26, 2001
decline in the value of such investments is other than temporary and, as a
consequence, has recognized a non-cash impairment charge of $26.3 million to
write-down the investments to their estimated fair values of $1.4 million as of
August 26, 2001. Although continuing to evaluate its tax strategies related to
the impairment loss, the Company did not recognize a tax benefit related to the
impairment charge due to uncertainty concerning the recoverability of such
benefit for financial statement purposes as of August 26, 2001.
The Company's affiliates discussed above are currently renegotiating their
credit agreements due to recent operating performance. The Company believes the
affiliates will be successful in renegotiating their credit agreements.
Negotiations are continuing between the affiliates, lenders and the Company.
There can be no assurance that agreements can be finalized. The Company is
considering various and changing alternatives including, among others, making
investments in the affiliates and converting a portion of the affiliates trade
receivables into a convertible note receivable, as well as, modifying terms and
conditions of its sales and accounts receivable. The Company is not however
obligated to enter into any agreement or fund any additional investments. The
Company believes that adequate allowances have been established as of August
26, 2001 for any potential losses on affiliate trade receivables. The Company
is, however, unable to predict the impact, if any, should the affiliates
continue to be impacted by a weakened economy, be unsuccessful in renegotiating
their current credit agreements or obtaining alternate additional financing.
In January 2001, pursuant to an employment agreement, an executive of the
Company transferred 891,630 shares of the Company's Class A common stock for
$10.7 million to the Company. Separately and in connection with the management
reorganization discussed in Note 6, the Company acquired 118,072 shares of
Class A common stock for $1.5 million from two executives of the Company upon
separation from the Company.
NOTE 13--SEGMENT INFORMATION
The Company operates predominately in one industry segment, that being the
manufacture and marketing of conventional bedding.
NOTE 14--GUARANTOR/NON-GUARANTOR FINANCIAL INFORMATION
The Parent and each of the Guarantor Subsidiaries has fully and
unconditionally guaranteed, on a joint and several basis, the obligation to pay
principal and interest with respect to the Senior Subordinated and Senior
Subordinated Discount Notes (collectively, the ''Notes'') of Sealy Mattress
Company (the ''Issuer''). Substantially all of the Issuer's operating income
and cash flow is generated by its subsidiaries. As a result, funds necessary to
meet the Issuer's debt service obligations are provided in part by
distributions or advances from its subsidiaries. Under certain circumstances,
contractual and legal restrictions, as well as the financial condition and
operating requirements of the Issuer's subsidiaries, could limit the Issuer's
ability to obtain cash from its subsidiaries for the purpose of meeting its
debt service obligations, including the payment of principal and interest on
the Notes. Although holders of the Notes will be direct creditors of the
Issuer's principal direct subsidiaries by virtue of the guarantees, the Issuer
has subsidiaries (''Non-Guarantor Subsidiaries'') that are not included among
the Guarantor Subsidiaries, and such subsidiaries will not be obligated with
respect to the Notes. As a result, the claims of creditors of the Non-Guarantor
Subsidiaries will effectively have priority with respect to the assets and
earnings of such companies over the claims of creditors of the Issuer,
including the holders of the Notes.
The following supplemental consolidating condensed financial statements
present:
1. Consolidating condensed balance sheets as of August 26, 2001 and
November 26, 2000 and consolidating condensed statements of operations
and cash flows for the nine months ended August 26,
F-43
SEALY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Six months ended May 27, 2001
2001 and August 27, 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.
F-44
SEALY CORPORATION
SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED AUGUST 26, 2001
(in thousands)
Sealy Combined Combined
Sealy Mattress Guarantor Non-Guarantor
Corporation Company Subsidiary Subsidiaries Eliminations Consolidated
----------- -------- ---------- ------------- ------------ ------------
Net sales--Non-Affiliates.............. $ -- $ 40,462 $595,583 $125,983 $(11,150) $750,878
Net sales--Affiliates.................. -- -- 118,556 -- -- 118,556
-------- -------- -------- -------- -------- --------
Total net sales................. -- 40,462 714,139 125,983 (11,150) 869,434
Costs and expenses:
Cost of goods sold--Non-Affiliates.. -- 26,809 329,446 77,878 (11,150) 422,983
Cost of goods sold--Affiliates...... -- -- 62,908 -- -- 62,908
-------- -------- -------- -------- -------- --------
Total cost of goods sold........ -- 26,809 392,354 77,878 (11,150) 485,891
Selling, general and administrative. 135 12,292 245,228 37,371 -- 295,026
Restructuring charges............... -- -- 1,183 -- -- 1,183
Amortization of intangibles......... -- 276 8,736 1,355 -- 10,367
-------- -------- -------- -------- -------- --------
Income (loss) from operations.......... (135) 1,085 66,638 9,379 -- 76,967
Interest expense.................... 3,508 50,600 (40) 706 -- 54,774
Other (income) expense, net......... -- -- (4,625) 29,423 -- 24,798
Loss (income) from equity
investees......................... 16,095 16,213 -- -- (32,308) --
Loss (income) from nonguarantor
equity investees.................. -- (1,219) 24,855 -- (23,636) --
Capital charge and intercompany
interest allocation............... (3,643) (48,070) 52,075 (362) -- --
-------- -------- -------- -------- -------- --------
Income (loss) before income Taxes,
extraordinary item and cumulative
effect of change in accounting
principle............................ (16,095) (16,439) (5,627) (20,388) 55,944 (2,605)
Income tax expense (benefit)........... -- (800) 10,515 3,248 -- 12,963
-------- -------- -------- -------- -------- --------
Income (loss) before extraordinary item
and cumulative effect of change in
accounting principle................. (16,095) (15,639) (16,142) (23,636) 55,944 (15,568)
Extraordinary item--loss from early
extinguishment of debt............... -- 608 71 -- -- 679
Cumulative effect of change in
accounting principle................. -- (152) -- -- -- (152)
-------- -------- -------- -------- -------- --------
Net income (loss)...................... $(16,095) $(16,095) $(16,213) $(23,636) $ 55,944 $(16,095)
======== ======== ======== ======== ======== ========
F-45
SEALY CORPORATION
SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED AUGUST 27, 2000
(in thousands)
Combined
Sealy Combined Non-
Sealy Mattress Guarantor Guarantor
Corporation Company Subsidiary Subsidiaries Eliminations Consolidated
----------- -------- ---------- ------------ ------------ ------------
Net sales--Non-Affiliates.............. $ -- $ 33,269 $615,244 $68,359 $(10,976) $705,896
Net sales--Affiliates.................. -- -- 107,539 -- -- 107,539
-------- -------- -------- ------- -------- --------
Total net sales................. -- 33,269 722,783 68,359 (10,976) 813,435
Costs and expenses:
Cost of goods sold--
Non-Affiliates.................... -- 21,005 338,288 41,508 (10,976) 389,825
Cost of goods sold--Affiliates...... -- -- 56,636 -- -- 56,636
-------- -------- -------- ------- -------- --------
Total cost of goods sold........ -- 21,005 394,924 41,508 (10,976) 446,461
Selling, general and administrative. 135 9,893 229,960 18,658 -- 258,646
Stock based compensation............ 3,580 -- -- -- -- 3,580
Amortization of intangibles......... -- 298 8,650 577 -- 9,525
-------- -------- -------- ------- -------- --------
Income (loss) from operations.......... (3,715) 2,073 89,249 7,616 -- 95,223
Interest expense.................... 2,707 47,113 (843) (284) -- 48,693
Other expense, net.................. -- -- -- 56 -- 56
Loss (income) from equity
investees......................... (27,533) (31,466) -- -- 58,999 --
Loss (income) from nonguarantor
equity investees.................. -- 3,707 (7,614) -- 3,907 --
Capital charge and intercompany
interest allocation............... (2,842) (44,629) 46,776 695 -- --
-------- -------- -------- ------- -------- --------
Income (loss) before income taxes...... 23,953 27,348 50,930 7,149 (62,906) 46,474
Income tax expense (benefit)........... (1,611) (185) 19,464 3,242 -- 20,910
-------- -------- -------- ------- -------- --------
Net income (loss)...................... $ 25,564 $ 27,533 $ 31,466 $ 3,907 $(62,906) $ 25,564
======== ======== ======== ======= ======== ========
F-46
SEALY CORPORATION
SUPPLEMENTAL CONSOLIDATING CONDENSED BALANCE SHEET
August 26, 2001
(in thousands)
Combined
Sealy Combined Non-
Sealy Mattress Guarantor Guarantor
Corporation Company Subsidiaries Subsidiaries Eliminations Consolidated
----------- -------- ------------ ------------ ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents................... $ -- $ 448 $ 6,221 $ 2,871 $ -- $ 9,540
Accounts receivable--Non-
Affiliates, net........................... 5 7,972 113,912 44,990 -- 166,879
Accounts receivable--Affiliates, net........ -- -- 36,541 -- -- 36,541
Inventories................................. -- 2,650 42,245 18,224 -- 63,119
Prepaids and deferred taxes................. 2,093 424 22,820 9,259 -- 34,596
--------- -------- --------- -------- -------- ---------
2,098 11,494 221,739 75,344 -- 310,675
Property, plant and equipment, at cost......... -- 9,948 212,062 47,485 -- 269,495
Less: accumulated depreciation................. -- (2,377) (75,006) (5,572) -- (82,955)
--------- -------- --------- -------- -------- ---------
-- 7,571 137,056 41,913 -- 186,540
Other assets:
Goodwill and other intangibles, net......... -- 12,980 325,083 44,497 -- 382,560
Net investment in and advances to
(from) subsidiaries and affiliates........ (80,620) 590,802 (418,167) (44,900) (47,115) --
Investment in affiliates.................... -- -- -- 1,382 -- 1,382
Debt issuance costs, net and other
assets.................................... 156 21,801 15,144 2,691 -- 39,792
--------- -------- --------- -------- -------- ---------
(80,464) 625,583 (77,940) 3,670 (47,115) 423,734
--------- -------- --------- -------- -------- ---------
Total assets............................ $ (78,366) $644,648 $ 280,855 $120,927 $(47,115) $ 920,949
========= ======== ========= ======== ======== =========
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT)
Current liabilities:
Current portion--long-term
obligation................................ $ -- $ 10,079 $ -- $ 11,595 $ -- $ 21,674
Accounts payable............................ -- 473 53,534 26,958 -- 80,965
Accrued interest............................ -- 344 6,578 156 -- 7,078
Accrued incentives and advertising.......... -- 1,474 37,013 4,824 -- 43,311
Accrued compensation........................ -- 731 12,168 3,584 -- 16,483
Other accrued expenses...................... 96 1,659 34,236 6,956 -- 42,947
--------- -------- --------- -------- -------- ---------
96 14,760 143,529 54,073 -- 212,458
Long-term debt................................. 38,798 704,448 112 15,223 -- 758,581
Other noncurrent liabilities................... 7,854 12,999 21,200 5,424 -- 47,477
Deferred income taxes.......................... (3,288) 732 20,444 4,802 -- 22,690
Minority interest.............................. -- -- -- 1,569 -- 1,569
Stockholders' equity (deficit)................. (121,826) (88,291) 95,570 39,836 (47,115) (121,826)
--------- -------- --------- -------- -------- ---------
Total liabilities and stockholders'
equity (deficit)...................... $ (78,366) $644,648 $ 280,855 $120,927 $(47,115) $ 920,949
========= ======== ========= ======== ======== =========
F-47
SEALY CORPORATION
SUPPLEMENTAL CONSOLIDATING CONDENSED BALANCE SHEET
November 26, 2000
(in thousands)
Combined
Sealy Combined Non-
Sealy Mattress Guarantor Guarantor
Corporation Company Subsidiaries Subsidiaries Eliminations Consolidated
----------- -------- ------------ ------------ ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents............ $ -- $ 354 $ 6,672 $ 11,088 $ -- $ 18,114
Accounts receivable--Non-
Affiliates, net.................... 34 5,603 87,155 22,881 -- 115,673
Accounts receivable--Affiliates, net. -- -- 29,816 -- -- 29,816
Inventories.......................... -- 1,744 42,643 7,485 -- 51,872
Prepaid expenses and other assets.... 1,477 411 17,069 5,394 -- 24,351
-------- -------- --------- -------- --------- --------
1,511 8,112 183,355 46,848 -- 239,826
Property, plant and equipment, at cost.. -- 9,547 198,203 19,770 -- 227,520
Less accumulated depreciation........... -- 1,938 64,762 3,737 -- 70,437
-------- -------- --------- -------- --------- --------
-- 7,609 133,441 16,033 -- 157,083
Other assets:
Goodwill and other intangibles, net.. -- 13,256 333,167 28,815 -- 375,238
Net investment in and advances to
(from) subsidiaries and affiliates. (44,613) 529,908 (316,056) (39,788) (129,451) --
Investment in affiliates............. -- -- -- 30,519 -- 30,519
Debt issuance costs, net and
other assets....................... 813 20,193 6,163 180 -- 27,349
-------- -------- --------- -------- --------- --------
(43,800) 563,357 23,274 19,726 (129,451) 433,106
-------- -------- --------- -------- --------- --------
Total assets..................... $(42,289) $579,078 $ 340,070 $ 82,607 $(129,451) $830,015
======== ======== ========= ======== ========= ========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities:
Current portion--long-term
obligations........................ $ -- $ 33,813 $ 359 $ 201 $ -- $ 34,373
Accounts payable..................... -- 634 45,567 11,486 -- 57,687
Accrued incentives and advertising... -- 1,451 33,482 3,324 -- 38,257
Accrued compensation................. -- 571 21,493 2,064 -- 24,128
Accrued interest..................... -- 633 12,117 (86) -- 12,664
Stock based compensation............. 10,699 -- -- -- -- 10,699
Other accrued expenses............... 82 915 25,028 4,188 -- 30,213
-------- -------- --------- -------- --------- --------
10,781 38,017 138,046 21,177 -- 208,021
Long-term obligations................... 35,505 602,481 13,673 151 -- 651,810
Other noncurrent liabilities............ 8,002 -- 28,798 1,369 -- 38,169
Deferred income taxes................... (3,287) 732 21,333 5,023 -- 23,801
Minority interest....................... -- -- -- 1,504 -- 1,504
Stockholders' equity.................... (93,290) (62,152) 138,220 53,383 (129,451) (93,290)
-------- -------- --------- -------- --------- --------
Total liabilities and
stockholders' equity........... $(42,289) $579,078 $ 340,070 $ 82,607 $(129,451) $830,015
======== ======== ========= ======== ========= ========
F-48
SEALY CORPORATION
SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENTS OF CASH FLOWS
Nine Months Ended August 26, 2001
(in thousands)
Combined
Sealy Combined Non-
Sealy Mattress Guarantor Guarantor
Corporation Company Subsidiaries Subsidiaries Eliminations Consolidated
----------- -------- ------------ ------------ ------------ ------------
Net cash used in operating activities. $ -- $ (303) $ (6,847) $(12,468) $-- $(19,618)
-------- -------- -------- -------- --- --------
Cash flows from investing activities:
Purchase of property and
equipment, net................... -- (357) (12,643) (2,131) -- (15,131)
Purchase of business, net of cash
acquired......................... -- -- -- (30,475) -- (30,475)
Net activity in investment in and
advances to (from) subsidiaries
and affiliates................... 10,712 (67,334) 32,974 23,648 -- --
-------- -------- -------- -------- --- --------
Net cash provided by (used in)
investing activities................ 10,712 (67,691) 20,331 (8,958) -- (45,606)
Cash flows from financing activities:
Treasury stock repurchase.......... (12,178) -- -- -- -- (12,178)
Proceeds from repayment of long-
term notes....................... -- 127,500 -- -- -- 127,500
Repayment of long-term
obligations, net................. -- (53,716) (13,935) 13,436 -- (54,215)
Equity issuances................... 1,466 -- -- -- -- 1,466
Debt issuance costs................ -- (5,696) -- (227) -- (5,923)
-------- -------- -------- -------- --- --------
Net cash provided by (used
in) financing activities..... (10,712) 68,088 (13,935) 13,209 -- 56,650
-------- -------- -------- -------- --- --------
Change in cash and cash equivalents... -- 94 (451) (8,217) -- (8,574)
Cash and cash equivalents:
Beginning of period................ -- 354 6,672 11,088 -- 18,114
-------- -------- -------- -------- --- --------
End of period...................... $ -- $ 448 $ 6,221 $ 2,871 $-- $ 9,540
-------- -------- -------- -------- --- --------
F-49
SEALY CORPORATION
SUPPLEMENTAL UNAUDITED CONSOLIDATING CONDENSED STATEMENTS OF CASH FLOWS
Nine Months Ended August 27, 2000
(in thousands)
Combined
Sealy Combined Non-
Sealy Mattress Guarantor Guarantor
Corporation Company Subsidiaries Subsidiaries Eliminations Consolidated
----------- -------- ------------ ------------ ------------ ------------
Net cash provided by operating
activities............................ $-- $ 695 $ 51,286 $ 1,343 $-- $ 53,324
--- -------- -------- ------- --- --------
Cash flows from investing activities:
Purchase of property and
equipment, net..................... -- (43) (12,126) (2,029) -- (14,198)
Purchase of business, net of cash
acquired........................... -- -- -- (9,406) -- (9,406)
Net activity in investment in and
advances to (from) subsidiaries
and affiliates..................... -- 11,456 (23,136) 11,680 -- --
--- -------- -------- ------- --- --------
Net cash provided by (used in) investing
activities............................ -- 11,413 (35,262) 245 -- (23,604)
Cash flows from financing activities:
Repayments of long-term notes........ -- (12,090) (218) -- -- (12,308)
--- -------- -------- ------- --- --------
Net cash provided by (used
in) financing activities....... -- (12,090) (218) -- -- (12,308)
--- -------- -------- ------- --- --------
Change in cash and cash equivalents..... -- 18 15,806 1,588 -- 17,412
Cash and cash equivalents:..............
Beginning of period.................. -- 13 6,220 4,612 -- 10,845
--- -------- -------- ------- --- --------
End of period........................ $-- $ 31 $ 22,026 $ 6,200 $-- $ 28,257
=== ======== ======== ======= === ========
F-50
--------------------------------------
--------------------------------------
We have not authorized any dealer, salesperson or other person to give any
information or to represent anything to you other an the information contained
in this prospectus. You must not rely on any unauthorized information or
representations.
This prospectus does not offer to sell or ask for offers to buy any of the
securities in any jurisdiction where it is unlawful, where the person making
the offer is not qualified to do so, or to any person who can not legally be
offered the securities.
The information in this prospectus is current only as of the date on its
cover, and may change after that date. For any time after the cover date of
this prospectus, we do not represent that our affairs are the same as described
or that the information in this prospectus is correct, nor do we imply those
things by delivering this prospectus or selling securities to you.
Until , 2002, all dealers that buy, sell or trade the exchange notes
may be required to deliver a prospectus, regardless of whether they are
participating in the offering. This is in addition to the dealers' obligation
to deliver a prospectus when acting as underwriters and with respect to their
unsold allotments or subscriptions.
--------------------------------------
--------------------------------------
--------------------------------------
--------------------------------------
$125,000,000
Sealy Mattress Company
9.875% Series C
Senior Subordinated Notes
due December 15, 2007
-----------------
PROSPECTUS
-----------------
--------------------------------------
--------------------------------------
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers.
Sealy Mattress Company is a corporation organized under the laws of the
State of Ohio.
The Company's Certificate of Incorporation provides for the indemnification
of directors and officers of the Company to the fullest extent permitted by the
General Corporation Law of the State of Ohio, as it currently exists or may
hereafter be amended.
The Company is incorporated under the laws of the State of Ohio. Section
1701.13 of the General Corporation Law of the State of Ohio, inter alia,
("Section 1701.13") provides that an Ohio corporation may indemnify any person
who was or is a party, or is threatened to be made a party, to any threatened,
pending or completed action, suit, or proceeding, whether civil, criminal,
administrative or investigative, other than an action by or in the right of the
corporation, by reason of the fact he is or was a director, officer, employee,
or agent of the corporation, or is or was serving at the request of the
corporation as a director, trustee, officer, employee, member, manager, or
agent of another corporation, domestic or foreign, nonprofit or for profit, a
limited liability company, or a partnership, joint venture, trust, or other
enterprise. The indemnity may include expenses, including attorneys' fees,
judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding, if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation, and, with respect to any criminal action
or proceeding, if he had no reasonable cause to believe that his conduct was
unlawful. An Ohio corporation may indemnify or agree to indemnify any person
who was or is a party, or is threatened to be made a party, to any threatened,
pending or completed action or suit by or in the right of the corporation to
procure a judgment in its favor, by reason of the fact that he is or was a
director, officer, employee or agent of the corporation, or is or was serving
at the request of the corporation as a director, trustee, officer, employee,
member, manager, or agent of another corporation, domestic or foreign,
nonprofit or for profit, a limited liability company, or a partnership, joint
venture, trust, or other enterprise. The indemnity may include expenses,
including attorneys' fees, actually and reasonably incurred by him in
connection with the defense or settlement of such action or suit, if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation, except that no indemnification is
permitted (i) without judicial approval if the person is adjudged to be liable
for negligence or misconduct in the performance of his duty to the corporation
or (ii) with respect to any action or suit in which the only liability asserted
against a director is pursuant to unlawful loans, dividends, or distribution of
assets (Section 1701.95). Where an officer, director, employee or agent is
successful on the merits or otherwise in the defense of any action referred to
above, the corporation must indemnify him against the expenses, including
attorney's fees, which such officer or director has actually and reasonably
incurred.
Section 1701.13 further authorizes a corporation to purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee
or agent of the corporation, or is or was serving at the request of the
corporation as a director, trustee, officer, employee or agent of another
corporation or enterprise, against any liability asserted against him and
incurred by him in any such capacity, arising out of his status as such,
whether or not the corporation would have the power to indemnify him under
Section 1701.13.
The Company maintains and has in effect insurance policies covering all of
the Company's directors and officers against some liabilities for actions taken
in such capacities, including liabilities under the Securities Act of 1933.
Item 21. Exhibits and Financial Statements Schedules.
(a) Exhibits.
See Exhibit Index.
II-1
(b) Financial Statement Schedules.
All schedules have been omitted because they are not applicable or because
the required information is shown in the financial statements or notes thereto.
Item 22. Undertakings.
The undersigned registrant hereby undertakes:
(a) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement; (i) To include any
prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii)
To reflect in the prospectus any facts or events arising after the effective
date of the registration statement (or the most recent post-effective
amendment thereof) which individually or in the aggregate, represent a
fundamental change in the information set forth in the registration
statement; (iii) To include any material information with respect to the
plan of distribution not previously disclosed in the registration statement
or any material change to such information in the registration statement;
(b) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at the time shall be deemed to
be the initial bona fide offering thereof;
(c) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering; and
(d) If the registrant is a foreign private issuer, to file a
post-effective amendment to the registration statement to include any
financial statements required by Rule 3-19 of the chapter at the start of
any delayed offering or throughout a continuous offering. Financial
statements and information otherwise required by Section 10(a)(3) of the Act
need not be furnished, provided, that the registrant includes in the
prospectus, by means of a post-effective amendment, financial statements
required pursuant to this paragraph (a)(4) and other information necessary
to ensure that all other information in the prospectus is at least as
current as the date of those financial statements. Notwithstanding the
foregoing, with respect to registration statements on Form F-3, a
post-effective amendment need not be filed to include financial statements
and information required by Section 10(a)(3) of the Act or Rule 3-19 of this
chapter if such financial statements and information are contained in
periodic reports filed with or furnished to the SEC by the registrant
pursuant to section 13 or section 15(d) of the Securities Exchange Act of
1934 that are incorporated by reference in the Form F-3.
(e) That prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this registration
statement, by any person or party who is deemed to be an underwriter within
the meaning of Rule 145(c), the issuer undertakes that such reoffering
prospectus will contain the information called for by the applicable
registration form with respect to reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other items
of the applicable form.
(f) (i) that is filed pursuant to paragraph (e) immediately preceding,
or (ii) that purports to meet the requirements of Section 10(a)(3) of the
Act and is used in connection with an offering of securities subject to Rule
415, will be filed as a part of an amendment to the registration statement
and will not be used until such amendment is effective, and that, for
purposes of determining any liability under the Securities Act of 1933, each
such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of
such securities at that time shall be deemed to be the initial bona fide
offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Securities Act") may be permitted to directors, officers and
controlling persons of the registrant pursuant to the provisions described
under Item 20 or otherwise, the registrant has been advised that in the opinion
of the Securities and Exchange Commission such indemnification is against
public policy as expressed in the Securities Act and is, therefore,
II-2
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(a) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4)
or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(b) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11, or 13 of this form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through
the date of responding to the request.
The undersigned registrant hereby undertakes to supply by means of a post-
effective amendment all information concerning a transaction, and the company
being acquired involved therein, that was not the subject of and included in
the registration statement when it became effective.
II-3
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Sealy Mattress
Company has duly caused this Amendment No. 1 to the Registration Statement on
Form S-4 to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Trinity, North Carolina on December 20, 2001.
SEALY MATTRESS COMPANY
By: /S/ RONALD L. JONES
-----------------------
Ronald L. Jones
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement on Form S-4 has been signed by the
following persons in the capacities and on December 20, 2001.
Signatures Capacity
---------- --------
* Chief Executive Officer and Director
-----------------------
(Ronald L. Jones)
* Chief Financial Officer
-----------------------
(E. Lee Wyatt)
/S/ KENNETH L. WALKER Secretary
-----------------------
(Kenneth L. Walker)
* Director
-----------------------
(Josh Bekenstein)
* Director
-----------------------
(Paul Edgerley)
* Director
-----------------------
(Andrew S. Janower)
* Director
-----------------------
(Joe L. Gonzalez)
* Director
-----------------------
(James W. Johnston)
* Director
-----------------------
(Steven Barnes)
*by: KENNETH L. WALKER
Attorney-in-fact
II-4
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Sealy
Corporation has duly caused this Amendment No.1 to the Registration Statement
on Form S-4 to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Trinity, North Carolina on December 20, 2001.
SEALY CORPORATION
By: /S/ KENNETH L. WALKER
-----------------------------------------
Kenneth L. Walker
Corporate Vice President, General Counsel
and Secretary
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No.1 to the Registration Statement on Form S-4 has been signed by the following
persons in the capacities and on December 20, 2001.
Signatures Capacity
---------- --------
/S/ KENNETH L. WALKER Corporate Vice President, General
----------------------- Counsel and Secretary
(Kenneth L. Walker)
* Vice President and Treasurer
-----------------------
(Richard D. Moss)
* Director
-----------------------
(Ronald L. Jones)
* Director
-----------------------
(Josh Bekenstein)
* Director
-----------------------
(Paul Edgerley)
* Director
-----------------------
(Andrew S. Janower)
* Director
-----------------------
(Joe L. Gonzalez)
* Director
-----------------------
(James W. Johnston)
* Director
-----------------------
(Steven Barnes)
*by: KENNETH L. WALKER
Attorney-in-fact
II-5
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Ohio-Sealy
Mattress Manufacturing Company, Inc. has duly caused this Amendment No. 1 to
the Registration Statement on Form S-4 to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Trinity, North Carolina
on December 20, 2001.
OHIO-SEALY MATTRESS
MANUFACTURING COMPANY, INC.
By: /S/ KENNETH L. WALKER
--------------------------------
Kenneth L. Walker
Vice President, General Counsel,
Secretary and Director
Pursuant to the requirements of the Securities Act of 1933, this Amendement
No. 1 to the Registration Statement on Form S-4 has been signed by the
following persons in the capacities and on December 20, 2001.
Signatures Capacity
---------- --------
/S/ KENNETH L. WALKER Vice President, General Counsel,
----------------------- Secretary and Director
(Kenneth L. Walker)
* Vice President, Treasurer
-----------------------
(Richard D. Moss)
* Director
-----------------------
(Ronald L. Jones)
* Director
-----------------------
(E. Lee Wyatt)
*by: KENNETH L. WALKER
Attorney-in-fact
II-6
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Ohio-Sealy
Mattress Manufacturing Co. has duly caused this Amendment No. 1 to the
Registration Statement on Form S-4 to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Trinity, North Carolina
on December 20, 2001.
OHIO-SEALY MATTRESS
MANUFACTURING CO.
By: /S/ KENNETH L. WALKER
--------------------------------
Kenneth L. Walker
Vice President, General Counsel,
Secretary and Director
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement on Form S-4 has been signed by the
following persons in the capacities and on December 20, 2001.
Signatures Capacity
---------- --------
/S/ KENNETH L. WALKER Vice President, General Counsel,
----------------------- Secretary and Director
(Kenneth L. Walker)
* Vice President, Treasurer
-----------------------
(Richard D. Moss)
* Director
-----------------------
(Ronald L. Jones)
* Director
-----------------------
(E. Lee Wyatt)
*by: KENNETH L. WALKER
Attorney-in-fact
II-7
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Sealy Mattress
Company of Puerto Rico has duly caused this Amendment No. 1 to the Registration
Statement on Form S-4 to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Trinity, North Carolina on December 20, 2001.
SEALY MATTRESS COMPANY OF
PUERTO RICO
By: /S/ KENNETH L. WALKER
--------------------------------
Kenneth L. Walker
Vice President, General Counsel,
Secretary and Director
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement on Form S-4 has been signed by the
following persons in the capacities and on December 20, 2001.
Signatures Capacity
---------- --------
/S/ KENNETH L. WALKER Vice President, General Counsel,
----------------------- Secretary and Director
(Kenneth L. Walker)
* Vice President, Treasurer
-----------------------
(Richard D. Moss)
* Director
-----------------------
(Ronald L. Jones)
* Director
-----------------------
(E. Lee Wyatt)
*by: KENNETH L. WALKER
Attorney-in-fact
II-8
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Sealy Mattress
Company of Michigan, Inc. has duly caused this Amendment No. 1 to the
Registration Statement on Form S-4 to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Trinity, North Carolina
on December 20, 2001.
SEALY MATTRESS COMPANY OF
MICHIGAN, INC.
By: /S/ KENNETH L. WALKER
--------------------------------
Kenneth L. Walker
Vice President, General Counsel,
Secretary and Director
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement on Form S-4 has been signed by the
following persons in the capacities and on December 20, 2001.
Signatures Capacity
---------- --------
/S/ KENNETH L. WALKER Vice President, General Counsel,
----------------------- Secretary and Director
(Kenneth L. Walker)
* Vice President, Treasurer
-----------------------
(Richard D. Moss)
* Director
-----------------------
(Ronald L. Jones)
* Director
-----------------------
(E. Lee Wyatt)
*by: KENNETH L. WALKER
Attorney-in-fact
II-9
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Sealy Mattress
Company of Kansas City, Inc. has duly caused this Amendment No. 1 to the
Registration Statement on Form S-4 to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Trinity, North Carolina
on December 20, 2001.
SEALY MATTRESS COMPANY OF
KANSAS CITY, INC.
By: /S/ KENNETH L. WALKER
--------------------------------
Kenneth L. Walker
Vice President, General Counsel,
Secretary and Director
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement on Form S-4 has been signed by the
following persons in the capacities and on December 20, 2001.
Signatures Capacity
---------- --------
/S/ KENNETH L. WALKER Vice President, General Counsel,
----------------------- Secretary and Director
(Kenneth L. Walker)
* Vice President, Treasurer
-----------------------
(Richard D. Moss)
* Director
-----------------------
(Ronald L. Jones)
* Director
-----------------------
(E. Lee Wyatt)
*by: KENNETH L. WALKER
Attorney-in-fact
II-10
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Sealy of
Maryland and Virginia has duly caused this Amendment No. 1 to the Registration
Statement on Form S-4 to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Trinity, North Carolina on December 20, 2001.
SEALY OF MARYLAND AND VIRGINIA, INC.
By: /S/ KENNETH L. WALKER
--------------------------------
Kenneth L. Walker
Vice President, General Counsel,
Secretary and Director
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement on Form S-4 has been signed by the
following persons in the capacities and on December 20, 2001.
Signatures Capacity
---------- --------
/S/ KENNETH L. WALKER Vice President, General Counsel,
----------------------- Secretary and Director
(Kenneth L. Walker)
* Vice President, Treasurer
-----------------------
(Richard D. Moss)
* Director
-----------------------
(Ronald L. Jones)
* Director
-----------------------
(E. Lee Wyatt)
*by: KENNETH L. WALKER
Attorney-in-fact
II-11
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Sealy Mattress
Company of Illinois has duly caused this Amendment No. 1 to the Registration
Statement on Form S-4 to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Trinity, North Carolina on December 20, 2001.
SEALY MATTRESS COMPANY OF ILLINOIS
By: /S/ KENNETH L. WALKER
--------------------------------
Kenneth L. Walker
Vice President, General Counsel,
Secretary and Director
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement on Form S-4 has been signed by the
following persons in the capacities and on December 20, 2001.
Signatures Capacity
---------- --------
/S/ KENNETH L. WALKER Vice President, General Counsel,
----------------------- Secretary and Director
(Kenneth L. Walker)
* Vice President, Treasurer
-----------------------
(Richard D. Moss)
* Director
-----------------------
(Ronald L. Jones)
* Director
-----------------------
(E. Lee Wyatt)
*by: KENNETH L. WALKER
Attorney-in-fact
II-12
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, A. Brandwein &
Company has duly caused this Amendment No. 1 to the Registration Statement on
Form S-4 to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Trinity, North Carolina on December 20, 2001.
A. BRANDWEIN & COMPANY
/S/ KENNETH L. WALKER
By: _________________________________
Kenneth L. Walker
Vice President, General Counsel,
Secretary and Director
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement on Form S-4 has been signed by the
following persons in the capacities and on December 20, 2001.
Signatures Capacity
---------- --------
/S/ KENNETH L. WALKER Vice President, General Counsel,
----------------------- Secretary and Director
(Kenneth L. Walker)
* Vice President, Treasurer
-----------------------
(Richard D. Moss)
* Director
-----------------------
(Ronald L. Jones)
* Director
-----------------------
(E. Lee Wyatt)
*by: KENNETH L. WALKER
Attorney-in-fact
II-13
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Sealy Mattress
Company of Albany, Inc. has duly caused this Amendment No. 1 to the
Registration Statement on Form S-4 to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Trinity, North Carolina
on December 20, 2001.
SEALY MATTRESS COMPANY OF ALBANY, INC.
/S/ KENNETH L. WALKER
By: _________________________________
Kenneth L. Walker
Vice President, General Counsel,
Secretary and Director
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement on Form S-4 has been signed by the
following persons in the capacities and on December 20, 2001.
Signatures Capacity
---------- --------
/S/ KENNETH L. WALKER Vice President, General Counsel,
----------------------- Secretary and Director
(Kenneth L. Walker)
* Vice President, Treasurer
-----------------------
(Richard D. Moss)
* Director
-----------------------
(Ronald L. Jones)
* Director
-----------------------
(E. Lee Wyatt)
*by: KENNETH L. WALKER
Attorney-in-fact
II-14
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Sealy of
Minnesota, Inc. has duly caused this Amendment No. 1 to the Registration
Statement on Form S-4 to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Trinity, North Carolina on December 20, 2001.
SEALY OF MINNESOTA, INC.
/S/ KENNETH L. WALKER
By: _________________________________
Kenneth L. Walker
Vice President, General Counsel,
Secretary and Director
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement on Form S-4 has been signed by the
following persons in the capacities and on December 20, 2001.
Signatures Capacity
---------- --------
/S/ KENNETH L. WALKER Vice President, General Counsel,
----------------------- Secretary and Director
(Kenneth L. Walker)
* Vice President, Treasurer
-----------------------
(Richard D. Moss)
* Director
-----------------------
(Ronald L. Jones)
* Director
-----------------------
(E. Lee Wyatt)
*by: KENNETH L. WALKER
Attorney-in-fact
II-15
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Sealy Mattress
Company of Memphis has duly caused this Amendment No. 1 to the Registration
Statement on Form S-4 to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Trinity, North Carolina on December 20, 2001.
SEALY MATTRESS COMPANY OF MEMPHIS
/S/ KENNETH L. WALKER
By: _________________________________
Kenneth L. Walker
Vice President, General Counsel,
Secretary and Director
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement on Form S-4 has been signed by the
following persons in the capacities and on December 20, 2001.
Signatures Capacity
---------- --------
/S/ KENNETH L. WALKER Vice President, General Counsel,
----------------------- Secretary and Director
(Kenneth L. Walker)
* Vice President, Treasurer
-----------------------
(Richard D. Moss)
* Director
-----------------------
(Ronald L. Jones)
* Director
-----------------------
(E. Lee Wyatt)
*by: KENNETH L. WALKER
Attorney-in-fact
II-16
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, The Stearns &
Foster Upholstery Furniture Company has duly caused this Amendment No. 1 to the
Registration Statement on Form S-4 to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Trinity, North Carolina
on December 20, 2001.
NORTH AMERICAN BEDDING COMPANY
By: /S/ KENNETH L. WALKER
--------------------------------
Kenneth L. Walker
Vice President, General Counsel,
Secretary and Director
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement on Form S-4 has been signed by the
following persons in the capacities and on December 20, 2001.
Signatures Capacity
---------- --------
/S/ KENNETH L. WALKER Vice President, General Counsel,
----------------------- Secretary and Director
(Kenneth L. Walker)
* Vice President, Treasurer
-----------------------
(Richard D. Moss)
* Director
-----------------------
(Ronald L. Jones)
* Director
-----------------------
(E. Lee Wyatt)
*by: KENNETH L. WALKER
Attorney-in-fact
II-17
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Sealy, Inc. has
duly caused this Amendment No. 1 to the Registration Statement on Form S-4 to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Trinity, North Carolina on December 20, 2001.
SEALY, INC.
By: /S/ KENNETH L. WALKER
--------------------------------
Kenneth L. Walker
Vice President, General Counsel,
Secretary and Director
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement on Form S-4 has been signed by the
following persons in the capacities and on December 20, 2001.
Signatures Capacity
---------- --------
/S/ KENNETH L. WALKER Vice President, General Counsel,
----------------------- Secretary and Director
(Kenneth L. Walker)
* Vice President, Treasurer
-----------------------
(Richard D. Moss)
* Director
-----------------------
(Ronald L. Jones)
* Director
-----------------------
(E. Lee Wyatt)
*by: KENNETH L. WALKER
Attorney-in-fact
II-18
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, The Ohio
Mattress Company Licensing and Components Group has duly caused this Amendment
No. 1 to the Registration Statement on Form S-4 to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of Trinity, North
Carolina on December 20, 2001.
THE OHIO MATTRESS COMPANY LICENSING
AND COMPONENTS GROUP
By: /S/ KENNETH L. WALKER
--------------------------------
Kenneth L. Walker
Vice President, General Counsel,
Secretary and Director
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement on Form S-4 has been signed by the
following persons in the capacities and on December 20, 2001.
Signatures Capacity
---------- --------
/S/ KENNETH L. WALKER Vice President, General Counsel,
----------------------- Secretary and Director
(Kenneth L. Walker)
* Vice President, Treasurer
-----------------------
(Richard D. Moss)
* Director
-----------------------
(Ronald L. Jones)
* Director
-----------------------
(E. Lee Wyatt)
*by: KENNETH L. WALKER
Attorney-in-fact
II-19
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Sealy Mattress
Manufacturing Company, Inc. has duly caused this Amendment No. 1 to the
Registration Statement on Form S-4 to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Trinity, North Carolina
on December 20, 2001.
SEALY MATTRESS MANUFACTURING
COMPANY, INC.
By: /S/ KENNETH L. WALKER
--------------------------------
Kenneth L. Walker
Vice President, General Counsel,
Secretary and Director
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement on Form S-4 has been signed by the
following persons in the capacities and on December 20, 2001.
Signatures Capacity
---------- --------
/S/ KENNETH L. WALKER Vice President, General Counsel,
----------------------- Secretary and Director
(Kenneth L. Walker)
* Vice President, Treasurer
-----------------------
(Richard D. Moss)
* Director
-----------------------
(Ronald L. Jones)
* Director
-----------------------
(E. Lee Wyatt)
*by: KENNETH L. WALKER
Attorney-in-fact
II-20
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Sealy Korea,
Inc. has duly caused this Amendment No. 1 to the Registration Statement on Form
S-4 to be signed on its behalf by the undersigned, thereunto duly authorized,
in the City of Trinity, North Carolina on December 20, 2001.
SEALY KOREA, INC.
By: /S/ KENNETH L. WALKER
--------------------------------
Kenneth L. Walker
Vice President, General Counsel,
Secretary and Director
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement on Form S-4 has been signed by the
following persons in the capacities and on December 20, 2001.
Signatures Capacity
---------- --------
/S/ KENNETH L. WALKER Vice President, General Counsel,
----------------------- Secretary and Director
(Kenneth L. Walker)
* Vice President, Treasurer
-----------------------
(Richard D. Moss)
* Director
-----------------------
(Ronald L. Jones)
* Director
-----------------------
(Lawrence J. Rogers)
*by: KENNETH L. WALKER
Attorney-in-fact
II-21
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Sealy Technology
LLC has duly caused this Amendment No. 1 to the Registration Statement on Form
S-4 to be signed on its behalf by the undersigned, thereunto duly authorized,
in the City of Trinity, North Carolina on December 20, 2001.
SEALY TECHNOLOGY LLC
By: The Ohio Mattress Company Licensing and
Components Group
Its: Sole Member
By: /S/ KENNETH L. WALKER
---------------------------------------
Kenneth L. Walker
Vice President, General Counsel and
Secretary
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement on Form S-4 has been signed by the
following persons in the capacities and on December 20, 2001.
Signatures Capacity
---------- --------
/S/ KENNETH L. WALKER Vice President, General Counsel and
--------------------- Secretary
(Kenneth L. Walker)
II-22
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Sealy Real
Estate, Inc. has duly caused this Amendment No. 1 to the Registration Statement
on Form S-4 to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Trinity, North Carolina on December 20, 2001.
SEALY REAL ESTATE, INC.
By: /S/ KENNETH L. WALKER
--------------------------------
Kenneth L. Walker
Vice President, General Counsel,
Secretary and Director
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement on Form S-4 has been signed by the
following persons in the capacities and on December 20, 2001.
Signatures Capacity
---------- --------
/S/ KENNETH L. WALKER Vice President, General Counsel,
----------------------- Secretary and Director
(Kenneth L. Walker)
* Vice President, Treasurer
-----------------------
(Richard D. Moss)
* Director
-----------------------
(Ronald L. Jones)
* Director
-----------------------
(E. Lee Wyatt)
*by: KENNETH L. WALKER
Attorney-in-fact
II-23
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Sealy Texas
Management, Inc. has duly caused this Amendment No. 1 to the Registration
Statement on Form S-4 to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Trinity, North Carolina on December 20, 2001.
SEALY TEXAS MANAGEMENT, INC.
By: /S/ KENNETH L. WALKER
--------------------------------
Kenneth L. Walker
Vice President, General Counsel,
Secretary and Director
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement on Form S-4 has been signed by the
following persons in the capacities and on December 20, 2001.
Signatures Capacity
---------- --------
/S/ KENNETH L. WALKER Vice President, General Counsel,
----------------------- Secretary and Director
(Kenneth L. Walker)
* Vice President, Treasurer
-----------------------
(Richard D. Moss)
* Director
-----------------------
(Ronald L. Jones)
* Director
-----------------------
(E. Lee Wyatt)
*by: KENNETH L. WALKER
Attorney-in-fact
II-24
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Sealy Texas
Holdings LLC has duly caused this Amendment No. 1 to the Registration Statement
on Form S-4 to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Trinity, North Carolina on December 20, 2001.
SEALY TEXAS HOLDINGS LLC
By: Sealy Texas Management, Inc.
Its: Sole Member
By: /S/ KENNETH L. WALKER
-----------------------------------
Kenneth L. Walker
Vice President, General Counsel and
Secretary
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement on Form S-4 has been signed by the
following persons in the capacities and on December 20, 2001.
Signatures Capacity
---------- --------
/S/ KENNETH L. WALKER Vice President, General Counsel and
--------------------- Secretary
(Kenneth L. Walker)
II-25
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Sealy Texas L.P.
has duly caused this Amendment No. 1 to the Registration Statement on Form S-4
to be signed on its behalf by the undersigned, thereunto duly authorized, in
the City of Trinity, North Carolina on December 20, 2001.
SEALY TEXAS L.P.
By: Sealy Texas Management, Inc.
Its: General Partner
By: /S/ KENNETH L. WALKER
-----------------------------------
Kenneth L. Walker
Vice President, General Counsel and
Secretary
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement on Form S-4 has been signed by the
following persons in the capacities and on December 20, 2001.
Signatures Capacity
---------- --------
/S/ KENNETH L. WALKER Vice President, General Counsel and
--------------------- Secretary
(Kenneth L. Walker)
II-26
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Western Mattress
Company has duly caused this Amendment No. 1 to the Registration Statement on
Form S-4 to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Trinity, North Carolina on December 20, 2001.
WESTERN MATTRESS COMPANY
By: /S/ KENNETH L. WALKER
--------------------------------
Kenneth L. Walker
Vice President, General Counsel,
Secretary and Director
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement on Form S-4 has been signed by the
following persons in the capacities and on December 20, 2001.
Signatures Capacity
---------- --------
/S/ KENNETH L. WALKER Vice President, General Counsel,
----------------------- Secretary and Director
(Kenneth L. Walker)
* Vice President, Treasurer and Director
-----------------------
(Richard D. Moss)
* Director
-----------------------
(Mark Wozniak)
*by: KENNETH L. WALKER
Attorney-in-fact
II-27
EXHIBIT INDEX
Exhibit
Number Exhibit Description
- ------ -------------------
2.1 Agreement and Plan of Merger, dated as of October 30, 1997, by and among the Registrant,
Sandman Merger Corporation and Zell/Chilmark Fund, L.P. (Incorporated herein by reference,
Exhibit 2.1, to the Form 8-K filed December 30, 1997 (File No. 1-8738)).*
2.2 First Amendment to the Agreement and Plan of Merger, dated as of December 18, 1997, by and
among the Registrant, Sandman Merger Corporation and Zell/Chilmark Fund, L.P. (Incorporated
herein by reference to, Exhibit 2.2, to the Form 8-K filed December 30, 1997 (File No. 1-8738)).*
3.1 Amended and Restated Certificate of Incorporation of Sealy Mattress Company dated as of June 3,
1998. (Incorporated herein by reference to, Exhibit 3.1, to Sealy Mattress Company's S-4 (File
No. 333-48187)).*
3.2 By-Laws of Sealy Mattress Company. (Incorporated herein by reference to, Exhibit 3.2 to Sealy
Mattress Company's S-4 (File No. 333-48187)).*
3.3 Certificate of Ownership and Merger merging Sealy Holdings, Inc. with and into Sealy Corporation
dated as of November 5, 1991. (Incorporated herein by reference to, Exhibit 28.1, to Sealy
Corporation's Annual Report on Form 10-K for the fiscal year ended November 30, 1991 (File
No. 1-8738)).*
4.1 Supplemental Indenture by and among Sealy Mattress Company, the Guarantors named therein,
Goldman, Sachs & Co., Chase Securities Inc., First Union Securities, Inc. and Deutsche Banc Alex.
Brown Inc.*
4.2 Indenture, dated as of December 18, 1997, by and among Sealy Mattress Company, the Guarantors
named therein and The Bank of New York, as trustee, with respect to the Series A and Series B
9.875% Senior Subordinated Notes due 2007. (Incorporated herein by reference, Exhibit 4.1, to the
Form 8-K Filed December 30, 1997 (File No. 1-8738)).*
4.3 Indenture, dated as of December 18, 1997, by and among Sealy Mattress Company, the Guarantors
named therein and The Bank of New York, as trustee, with respect to the Series A and Series B
10.875% Senior Subordinated Discount Notes due 2007. (Incorporated herein by reference,
Exhibit 4.2, to the Form 8-K filed December 30, 1997 (File No. 1-8738)).*
4.4 Second Supplemental Indenture, dated as of December 5, 1997, by and between the Registrant and
The Bank of New York, as trustee. (Incorporated herein by reference, Exhibit 4.3, to the Form 8-K
filed December 30, 1997 (File No. 1-8738)).*
5.1 Opinion of Kirkland & Ellis.
8.1 Opinion of Kirkland & Ellis as to federal income tax consequences.*
10.1 Purchase Agreement by and among Sealy Mattress Company, Goldman, Sachs & Co., Chase
Securities Inc., First Union Securities, Inc. Deutsche Banc Alex. Brown Inc. and the Guarantors
named therein dated April 9, 2001.*
10.2 Registration Rights Agreement by and among Sealy Mattress Company, the Gurantors named
therein, Goldman, Sachs & Co., Chase Securities Inc., First Union Securities, Inc. and Deutsche
Banc Alex. Brown Inc.*
10.3 Sealy Profit Sharing Plan, Amended and Restated Date: December 1, 1989. (Incorporated herein by
reference to, Exhibit 10.1, to the Form 10-K for the fiscal year ended November 30, 1995 (File
No. 1-8738)).*
10.4 Sealy Corporation Bonus Program. (Incorporated herein by reference to, Exhibit 10.5, to the
Form 10-K for the fiscal year ended November 30, 1995 (File No. 1-8738)).*
10.5 Amendment No. 1 to Sealy Bonus Plan. (Incorporated herein by reference to, Exhibit 10.17 to Sealy
Corporation's Annual Report on Form 10-K for the fiscal year ended December 1, 1996 (File
No. 1-8738)).*
Exhibit
Number Exhibit Description
- ------ -------------------
10.6 Amendment No. 1 to Sealy Profit Sharing Plan. (Incorporated herein by reference to, Exhibit 10.21,
to Sealy Corporation's Annual Report on Form 10-K for the fiscal year ended December 1, 1996
(File No. 1-8738)).*
10.7 Amendment No. 2 to Sealy Profit Sharing Plan. (Incorporated herein by reference to, Exhibit 10.22,
to Sealy Corporation's Annual Report on Form 10-K for the fiscal year ended December 1, 1996
(File No. 1-8738)).*
10.8 Stock Option Agreement dated March 4, 1996 by and between Sealy Corporation and Ronald L.
Jones. (Incorporated herein by reference to, Exhibit 10.23, to Sealy Corporation's Annual Report on
Form 10-K for the fiscal year ended December 1, 1996 (File No. 1-8738)).*
10.9 Stockholder Agreement dated March 4, 1996 by and among Sealy Corporation and Ronald L. Jones
(Incorporated herein by reference to, Exhibit 10.26, to Sealy Corporation's Annual Report on
Form 10-K for the fiscal year ended December 1, 1996 (File No. 1-8738)).*
10.10. Restricted Stock Agreement dated March 4, 1996 by and between Sealy Corporation and Ronald L.
Jones. (Incorporated herein by reference to, Exhibit 10.27, to Sealy Corporation's Annual Report on
Form 10-K for the fiscal year ended December 1, 1996 (File No. 1-8738)).*
10.11. Purchase Agreement, dated as of December 11, 1997, by and among Sealy Mattress Company, the
Guarantors named therein, Goldman, Sachs & Co. (Incorporated herein by reference, Exhibit 10.2, to
the Form 8-K filed December 30, 1997 (File No. 1-8738)).*
10.12. Credit Agreement, dated as of December 18, 1997, among Sealy Mattress Company, the Guarantors
named therein, Goldman Sachs Credit Partners L.P., as arranger and syndication agent, Morgan
Guaranty Trust Company of New York, as administrative agent, Bankers Trust Company, as
Documentation agent, and the other institutions named therein. (Incorporated herein by reference,
Exhibit 10.4, to the Form 8-K filed December 30, 1997 (File No. 1-8738)).*
10.13. AXEL Credit Agreement, dated as of December 18, 1997, among Sealy Mattress Company, the
Guarantors named therein, Goldman Sachs Credit Partners L.P., as arranger and syndication agent,
Morgan Guaranty Trust Company of New York, as administrative agent, Bankers Trust Company, as
documentation agent and the other institutions named therein. (Incorporated herein by reference,
Exhibit 10.5, to the Form 8-K filed December 30, 1997 (File No. 1-8738)).*
10.14. Amended and Restated Employment Agreement, dated as of August 1, 1997, by and between Sealy
Corporation and Ronald L. Jones. (Incorporated herein by reference, Exhibit 10.6, to the Form 8-K
filed December 30, 1997 (File No. 1-8738)).*
10.15. Employment Agreement, dated as of August 25, 1997, by and between Sealy Corporation and Bruce
G. Barman. (Incorporated herein by reference, Exhibit 10.7, to the Form 8-K filed December 30,
1997 (File No. 1-8738)).*
10.16. Employment Agreement, dated as of August 25, 1997, by and between Sealy Corporation and
Jeffrey C. Claypool. (Incorporated herein by reference, Exhibit 10.8, to the Form 8-K filed
December 30, 1997 (File No. 1-8738)).*
10.17. Employment Agreement, dated as of August 25, 1997, by and between Sealy Corporation and
Gary T. Fazio. (Incorporated herein by reference, Exhibit 10.9, to the Form 8-K filed December 30,
1997 (File No. 1-8738)).*
10.18. Employment Agreement, dated as of August 25, 1997, by and between Sealy Corporation and
Douglas E. Fellmy. (Incorporated herein by reference, Exhibit 10.10, to the Form 8-K filed
December 30, 1997 (File No. 1-8738)).*
10.19. Employment Agreement dated as of August 25, 1997, by and between Sealy Corporation and
David J. McIlquham. (Incorporated herein by reference, Exhibit 10.11, to the Form 8-K filed
December 30, 1997 (File No. 1-8738)).*
2
Exhibit
Number Exhibit Description
- ------ -------------------
10.20. Employment Agreement, dated as of August 25, 1997, by and between Sealy Corporation and
Lawrence J. Rogers. (Incorporated herein by reference, Exhibit 10.12, to the Form 8-K filed
December 30, 1997 (File No. 1-8738)).*
10.21. Amendment to Amended and Restated Employment Agreement and Termination of Stockholders
Agreement dated as of December 17, 1997, between Ronald L. Jones and the Registrant.
(Incorporated herein by reference, Exhibit 10.18, to the Form 8-K filed December 30, 1997 (File
No. 1-8738)).*
10.22. Amendment to Employment Agreements, dated as of December 17, 1997, between the employees
named therein and the Registrant. (Incorporated herein by reference, Exhibit 10.19, to the Form 8-K
filed December 30, 1997 (File No. 1-8738)).*
10.23. Change in Registrants Certified Accountant, dated March 23, 1998 (File No. 1-8738).*
10.24. Stockholders Agreement dated as of December 18, 1997 by and among Sealy Corporation and the
Stockholders named therein. (Incorporated herein by reference to Exhibit 10.27 to Sealy Mattress
Company's Form S-4 Registration Statement filed May 5, 1998 (File No. 1-8738)).*
10.25. Registration Rights Agreement dated as of December 18, 1997 by and among Sealy Corporation and
the Stockholders named therein. (Incorporated herein by reference to Exhibit 10. To Sealy Mattress
Company's Form S-4 Registration Statement filed May 5, 1998 (File No. 1-8738)).*
10.26. Management Services Agreement dated as of December 18, 1997 by and between Sealy Corporation,
Sealy Mattress and Bain Capital, Inc. (Incorporated herein by reference to Exhibit 10.50 to Sealy
Mattress Company's Form S-4 Registration Statement filed May 5, 1998 (File No. 1-8738)).*
10.27. First Amendment to Credit Agreement (Incorporated herein by reference, Exhibit 10.1, to the
Form 8-K filed October 14, 1998 (File No. 1-8738)).*
10.28. Employment Agreement, dated as of October 15, 1998 by and between Sealy Corporation and E. Lee
Wyatt. (Incorporated herein by reference to, Exhibit 10.53, to Sealy Corporation's Annual Report on
Form 10-K for the fiscal year ended November 29, 1998 (File No. 1-8738)).*
10.29. Employment Agreement, dated as of October 15, 1998 by and between Sealy Corporation and James
Goughenour. (Incorporated herein by reference to, Exhibit 10.54, to Sealy Corporation's Annual
Report on Form 10-K for the fiscal year ended November 29, 1998 (File No. 1-8738)).*
10.30. Employment Agreement, dated as of October 15, 1998 by and between Sealy Corporation and
Richard Sowerby. (Incorporated herein by reference to, Exhibit 10.55, to Sealy Corporation's Annual
Report on Form 10-K for the fiscal year ended November 29, 1998 (File No. 1-8738)).*
10.31. Employment Agreement, dated as of December 18, 1998 by and between Sealy Corporation and
Kenneth L. Walker. (Incorporated herein by reference to, Exhibit 10.56, to Sealy Corporation's
Annual Report on Form 10-K for the fiscal year ended November 29, 1998 (File No. 1-8738)).*
10.32. Sealy Corporation 1998 Stock Option Plan. (Incorporated herein by reference to Exhibit 10.48, to the
Form 10-Q Quarterly Report of Sealy Corporation dated April 15, 1998 (File No. 1-8738).*
10.33. Amendment to Employment Agreement dated January 20, 2000 by and between Sealy Corporation
and Lawrence J. Rogers.**
10.34. Limited Liability Company Agreement dated June 30, 1999 by and between Sealy, Inc. and Bain
Capital, Inc., forming Mattress Holdings International, LLC.**
10.35. Amendment No. 2 to Amended and Restated Employment Agreement, dated as of January 30, 2001
by and between Sealy Corporation and Ronald L. Jones.**
10.36. Form of Second Amendment to Credit Agreement.*
10.37. Form of Third Amendment to Credit Agreement.*
3
Exhibit
Number Exhibit Description
- ------ -------------------
10.38. Form of Fourth Amendment to the Credit Agreement and Third Amendment to the AXEL Credit
Agreement*
10.39. Sealy Corporation Executive Severance Benefit Plan dated January 25, 1993. (Incorporated herein by
reference to, Exhibit 28.6, to Sealy Corporation's Annual Report on Form 10-K for the fiscal year
ended November 30, 1992 (File No. 1-8738)).*
11.1 Statement of Computation Ratios.*
21.1 List of Subsidiaries of Sealy Mattress Company.*
23.1 Consent of PricewaterhouseCoopers LLP.***
23.2 Consent of Kirkland & Ellis (included in Exhibit 5.1).*
24.1 Powers of Attorney (included on signature page hereto).*
25.1 Statement of Eligibility of Trustee on Form T-1.*
99.1 Form of Letter of Transmittal.*
99.2 Form of Notice of Guaranteed Delivery.*
99.3 Form of Tender Instructions.*
- --------
* Previously filed.
** Filed herewith.
*** Refiled herewith.
4