- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X]Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended: February 25, 2001
OR
[_]Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
Commission file number 1-8738
Sealy Corporation
(Exact name of registrant as specified in its charter)
Delaware 36-3284147
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
Sealy Drive One Office Parkway
Trinity, North Carolina 27230
(Address of principal executive (Zip Code)
offices)
Registrant's telephone number, including area code (336) 861-3500
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities and Exchange Act
of 1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [_]
The number of shares of the registrant's common stock outstanding as of
April 1, 2001 was 30,718,192
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
PART I. FINANCIAL INFORMATION
Item 1--Financial Statements
SEALY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)
Quarter Ended Quarter Ended
February 25, February 27,
2001 2000
------------- -------------
Net sales--Non-Affiliates.......................... $228,257 $223,968
Net sales--Affiliates.............................. 37,581 32,671
-------- --------
Total net sales................................ 265,838 256,639
Costs and expenses:
Cost of goods sold--Non-Affiliates............... 126,359 124,187
Cost of goods sold--Affiliates................... 19,873 17,240
-------- --------
Total cost of goods sold....................... 146,232 141,427
Selling, general and administrative.............. 87,164 83,679
Stock based compensation......................... 500 990
Restructuring charge............................. 1,183 --
Amortization of intangibles...................... 3,426 3,162
-------- --------
Income from operations............................. 27,333 27,381
Interest expense, net............................ 16,992 17,234
Other (income) expense (Note 1).................. 1,283 (144)
-------- --------
Income before income taxes and cumulative effect of
change in
accounting principle.............................. 9,058 10,291
Income tax expense............................... 4,275 4,734
-------- --------
Income before cumulative effect of change in
accounting principle.............................. 4,783 5,557
Cumulative effect of change in accounting principle
(net of income tax
expense of $101).................................. (152) --
-------- --------
Net income......................................... 4,935 5,557
Liquidation preference for common L & M shares... 4,072 3,702
-------- --------
Net income available to common shareholders........ $ 863 $ 1,855
======== ========
Earnings per share--Basic:
Before cumulative effect of change in accounting
principle....................................... $ 0.15 $ 0.18
Cumulative effect of change in accounting
principle....................................... 0.01 --
-------- --------
Net income--Basic............................... 0.16 0.18
Liquidation preference for common L & M shares... (0.13) (0.12)
-------- --------
Net income available to common shareholders.... $ 0.03 $ 0.06
======== ========
Earnings per share--Diluted:
Before cumulative effect of change in accounting
principle....................................... $ 0.14 $ 0.16
Cumulative effect of change in accounting
principle....................................... 0.01 --
-------- --------
Net income--Diluted............................. 0.15 0.16
Liquidation preference for common L & M shares... (0.12) (0.11)
-------- --------
Net income available to common shareholders.... $ 0.03 $ 0.05
======== ========
Weighted average number of common shares
outstanding:
Basic............................................ 30,718 31,485
Diluted ......................................... 33,577 34,120
See accompanying notes to condensed consolidated financial statements.
2
SEALY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
February 25, November 26,
2001 2000*
------------ ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents........................... $ 15,777 $ 18,114
Accounts receivable--Non-Affiliates, net............ 130,986 115,673
Accounts receivable--Affiliates, net................ 37,874 29,816
Inventories......................................... 56,175 51,872
Prepaid expenses and deferred taxes................. 28,552 24,351
--------- ---------
269,364 239,826
Property, plant and equipment--at cost................ 229,893 227,520
Less: accumulated depreciation........................ (74,297) (70,437)
--------- ---------
155,596 157,083
Other assets:
Goodwill and other intangibles, net................. 372,167 375,238
Investment in affiliates............................ 29,134 30,519
Debt issuance costs, net, and other assets.......... 31,147 27,349
--------- ---------
432,448 433,106
--------- ---------
$ 857,408 $ 830,015
========= =========
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
Current liabilities:
Current portion of long-term obligations............ $ 37,069 $ 34,373
Accounts payable.................................... 58,774 57,687
Accrued interest.................................... 9,330 12,664
Accrued incentives and advertising.................. 37,520 38,257
Accrued compensation................................ 15,638 24,128
Stock based compensation............................ -- 10,699
Other accrued expenses.............................. 33,798 30,213
--------- ---------
192,129 208,021
Long-term obligations, net............................ 692,933 651,810
Other noncurrent liabilities.......................... 35,642 38,169
Deferred income taxes................................. 22,994 23,801
Minority interest..................................... 1,402 1,504
Stockholders' (deficit) equity:
Common stock........................................ 316 315
Additional paid-in capital.......................... 146,487 134,547
Retained deficit.................................... (210,937) (215,872)
Foreign currency translation adjustment............. (12,057) (12,195)
Common stock held in treasury, at cost.............. (11,501) (85)
--------- ---------
(87,692) (93,290)
--------- ---------
$ 857,408 $ 830,015
========= =========
- --------
* Condensed from audited financial statements.
See accompanying notes to condensed consolidated financial statements.
3
SEALY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Quarter Ended Quarter Ended
February 25, February 27,
2001 2000
------------- -------------
Net cash provided by (used in) operating
activities........................................ $(29,276) $ 8,966
-------- -------
Investing activities:
Purchase of property and equipment, net.......... (2,457) (3,836)
-------- -------
Net cash used in investing activities.......... (2,457) (3,836)
-------- -------
Financing activities:
Treasury stock repurchase, including direct
expenses........................................ (11,416) --
Proceeds from long-term obligations, net......... 39,570 4,754
Equity issuances................................. 1,242 --
-------- -------
Net cash provided by financing activities...... 29,396 4,754
-------- -------
Change in cash and cash equivalents................ (2,337) 9,884
Cash and cash equivalents:
Beginning of period.............................. 18,114 10,845
-------- -------
End of period.................................... $ 15,777 $20,729
======== =======
Supplemental disclosures:
Selected noncash items:
Non-cash compensation............................ $ 500 $ 990
Depreciation and amortization.................... 7,378 6,789
Non-cash interest expense associated with:
Junior Subordinated Notes...................... 1,065 945
Debt issuance costs............................ 1,066 1,049
Discount on Senior Subordinated Notes.......... 2,798 2,518
See accompanying notes to condensed consolidated financial statements.
4
SEALY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Three Months Ended February 25, 2001
Note 1--Basis of Presentation
This report covers Sealy Corporation and its subsidiaries (collectively,
the "Company").
The accompanying unaudited condensed consolidated financial statements
should be read together with the Company's Annual Report on Form 10-K for the
year ended November 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 February 25, 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.
Other (income) expense as presented in the condensed consolidated unaudited
statements of income primarily consists of the equity in the (earnings) loss
of equity investees and minority interest.
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:
February 25, November 26,
2001 2000
------------ ------------
(In thousands)
Raw materials................................... $31,796 $29,360
Work in process................................. 16,964 15,665
Finished goods.................................. 7,415 6,847
------- -------
$56,175 $51,872
======= =======
Note 3--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 plans to cease operations early in the second quarter
of 2001. 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.
Note 4--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.
5
SEALY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 4--Recently Issued Accounting Pronouncements--(Continued)
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.
Note 5--Earnings Per Share
The following table sets forth the computation of basic and diluted
earnings per share (in thousands) for the quarter ended:
February 25, February 27,
2001 2000
------------ ------------
Numerator:
Income before cumulative effect of change in
accounting principle.......................... $ 4,783 $ 5,557
Cumulative effect of change in accounting
principle..................................... (152) --
------- -------
Net income..................................... 4,935 5,557
Liquidation preference for L & M shares........ 4,072 3,702
------- -------
Net income available to common shareholders.. $ 863 $ 1,855
======= =======
Denominator:
Denominator for basic earnings per share--
weighted average shares....................... 30,718 31,485
Effect of dilutive securities:
Stock options.................................. 2,859 2,635
------- -------
Denominator for diluted earnings per share--
adjusted weighted-average shares and assumed
conversions................................... $33,577 $34,120
======= =======
Note 6--Comprehensive Income
Total comprehensive income for the quarters ended February 25, 2001 and
February 27, 2000 was $5.1 million and $6.2 million, respectively.
Activity in Stockholders' (deficit) equity is as follows (dollar amounts in
thousands):
Accumulated
Other
Comprehensive
Loss, Foreign
Additional Currency
Comprehensive Common Paid-in Accumulated Treasury Translation
Income Stock Capital Deficit Stock Adjustment Total
------------- ------ ---------- ----------- -------- ------------- --------
Balance at November 26,
2000................... $315 $134,547 $(215,872) $ (85) $(12,195) $(93,290)
Comprehensive Income:
Net income for the three
months ended February
25, 2001............... $4,935 4,935 4,935
Purchase of stock held
by executive subject to
mandatory repurchase
provisions............. 10,699 (10,699) --
Exercise of stock
options................ 1 1,241 1,242
Purchase of treasury
stock.................. (717) (717)
Foreign currency
translation
adjustment............. 138 138 138
------ ---- -------- --------- -------- -------- --------
Balance at February 25,
2001................... $5,073 $316 $146,487 $(210,937) $(11,501) $(12,057) $(87,692)
====== ==== ======== ========= ======== ======== ========
6
SEALY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 7--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 8--Related Party Transactions
The Company made sales of $35.5 million and $30.8 million of finished
mattress products for the quarters ended February 25, 2001 and February 27,
2000, respectively, pursuant to multi-year supply contracts, to affiliated and
related parties of Bain Capital, Inc., the Company's largest stockholder. The
Company believes that the terms on which mattresses are supplied to related
parties are not materially less favorable than those that might reasonably be
obtained in a comparable transaction at such time in an arm's-length basis
from a person that is not an affiliate or related party.
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. In addition, the Company acquired 54,563 shares of Class A
common stock for $655,000 from an executive of the Company upon separation
from the Company.
Note 9--Subsequent Events
On April 6, 2001, the Company completed an acquisition of Sapsa Bedding
S.A., of Paris, France. The purchase price for the acquisition was EUR 45.8
million (approximately $41.3 million), less estimated assumed debt of EUR 11.8
million (approximately $10.6 million). The acquisition will be accounted for
under the purchase method.
7
SEALY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 9--Subsequent Events--(Continued)
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.
Note 10--Segment Information
The Company operates predominately in one industry segment, that being the
manufacture and marketing of conventional bedding.
Note 11--Guarantor/Non-Guarantor Financial Information
The Parent and each of the Guarantor Subsidiaries has fully and
unconditionally guaranteed, on a joint and several basis, the obligation to
pay principal and interest with respect to the Senior Subordinated and Senior
Subordinated Discount Notes of Sealy Mattress Company (the "Issuer").
Substantially all of the Issuer's operating income and cash flow is generated
by its subsidiaries. As a result, funds necessary to meet the Issuer's debt
service obligations are provided in part by distributions or advances from its
subsidiaries. Under certain circumstances, contractual and legal restrictions,
as well as the financial condition and operating requirements of the Issuer's
subsidiaries, could limit the Issuer's ability to obtain cash from its
subsidiaries for the purpose of meeting its debt service obligations,
including the payment of principal and interest on the Notes. Although holders
of the Notes will be direct creditors of the Issuer's principal direct
subsidiaries by virtue of the guarantees, the Issuer has subsidiaries ("Non-
Guarantor Subsidiaries") that are not included among the Guarantor
Subsidiaries, and such subsidiaries will not be obligated with respect to the
Notes. As a result, the claims of creditors of the Non-Guarantor Subsidiaries
will effectively have priority with respect to the assets and earnings of such
companies over the claims of creditors of the Issuer, including the holders of
the Notes.
The following supplemental consolidating condensed financial statements
present:
1. Consolidating condensed balance sheets as of February 25, 2001 and
November 26, 2000, consolidating condensed statements of operations and
cash flows for the three-month periods ended February 25, 2001 and
February 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.
8
SEALY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Separate financial statements of each of the Guarantor Subsidiaries are not
presented because Management believes that these financial statements would not
be material to investors.
SEALY CORPORATION
SUPPLEMENTAL CONSOLIDATING CONDENSED BALANCE SHEET
February 25, 2001
(in thousands)
Sealy Combined Combined
Sealy Mattress Guarantor Non-Guarantor
Corporation Company Subsidiaries Subsidiaries Eliminations Consolidated
----------- -------- ------------ ------------- ------------ ------------
ASSETS
Current assets:
Cash and cash
equivalents.......... $ -- $ 533 $ 7,303 $ 7,941 $ -- $ 15,777
Accounts receivable--
Non-Affiliates, net.. 5 5,913 102,510 22,558 -- 130,986
Accounts receivable--
Affiliates, net...... -- -- 37,874 -- -- 37,874
Inventories........... -- 3,231 44,678 8,266 -- 56,175
Prepaids and deferred
taxes................ 2,093 455 18,077 7,927 -- 28,552
-------- -------- --------- -------- --------- --------
2,098 10,132 210,442 46,692 -- 269,364
Property, plant and
equipment, at cost..... -- 9,766 199,762 20,365 -- 229,893
Less: accumulated
depreciation........... -- (2,086) (68,250) (3,961) -- (74,297)
-------- -------- --------- -------- --------- --------
-- 7,680 131,512 16,404 -- 155,596
Other assets:
Goodwill and other
intangibles, net..... -- 12,485 330,790 28,892 -- 372,167
Net investment in and
advances to (from)
subsidiaries and
affiliates........... (48,185) 578,670 (379,027) (41,788) (109,670) --
Investment in
affiliates........... -- -- -- 29,134 -- 29,134
Debt issuance costs,
net and other
assets............... 182 19,157 11,631 177 -- 31,147
-------- -------- --------- -------- --------- --------
(48,003) 610,312 (36,606) 16,415 (109,670) 432,448
-------- -------- --------- -------- --------- --------
Total assets........ $(45,905) $628,124 $ 305,348 $ 79,511 $(109,670) $857,408
======== ======== ========= ======== ========= ========
LIABILITIES AND
STOCKHOLDERS' (DEFICIT)
EQUITY
Current liabilities:
Current portion--long-
term obligations..... $ -- $ 36,333 $ 361 $ 375 $ -- $ 37,069
Accounts payable...... -- 318 48,990 9,466 -- 58,774
Accrued interest...... -- 461 8,930 (61) -- 9,330
Accrued incentives and
advertising.......... -- 1,152 33,295 3,073 -- 37,520
Accrued compensation.. -- 306 13,692 1,640 -- 15,638
Other accrued
expenses............. 97 723 30,023 2,955 -- 33,798
-------- -------- --------- -------- --------- --------
97 39,293 135,291 17,448 -- 192,129
Long-term obligations... 36,571 642,397 13,591 374 -- 692,933
Other noncurrent
liabilities............ 8,407 -- 26,065 1,170 -- 35,642
Deferred income taxes... (3,288) 732 20,518 5,032 -- 22,994
Minority interest....... -- -- -- 1,402 -- 1,402
Stockholders' (deficit)
equity................. (87,692) (54,298) 109,883 54,085 (109,670) (87,692)
-------- -------- --------- -------- --------- --------
Total liabilities
and stockholders'
(deficit) equity... $(45,905) $628,124 $ 305,348 $79,511 $(109,670) $857,408
======== ======== ========= ======== ========= ========
9
SEALY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
SUPPLEMENTAL CONSOLIDATING CONDENSED BALANCE SHEET
November 26, 2000
(in thousands)
Sealy Combined Combined
Sealy Mattress Guarantor Non-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' (DEFICIT)
EQUITY
Current liabilities:
Current portion--long-
term obligations..... $ -- $ 33,813 $ 359 $ 201 $ -- $ 34,373
Accounts payable...... -- 634 45,567 11,486 -- 57,687
Accrued interest...... -- 633 12,117 (86) -- 12,664
Accrued incentives and
advertising.......... -- 1,451 33,482 3,324 -- 38,257
Accrued compensation.. -- 571 21,493 2,064 -- 24,128
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' (deficit)
equity................. (93,290) (62,152) 138,220 53,383 (129,451) (93,290)
-------- -------- -------- ------- --------- --------
Total liabilities and
stockholders'(deficit)
equity............... $(42,289) $579,078 $340,070 $82,607 $(129,451) $830,015
======== ======== ======== ======= ========= ========
10
SEALY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENTS OF OPERATIONS
Three Months Ended February 25, 2001
(in thousands)
Sealy Combined Combined
Sealy Mattress Guarantor Non-Guarantor
Corporation Company Subsidiaries Subsidiaries Eliminations Consolidated
----------- -------- ------------ ------------- ------------ ------------
Net sales--Non
Affiliates............. $ -- $11,915 $191,901 $27,535 $ (3,094) $228,257
Net sales--Affiliates... -- -- 37,581 -- -- 37,581
------ ------- -------- ------- -------- --------
Total net sales....... -- 11,915 229,482 27,535 (3,094) 265,838
Costs and expenses:
Cost of goods sold--
Non-Affiliates........ -- 7,890 105,183 16,380 (3,094) 126,359
Cost of goods sold--
Affiliates............ -- -- 19,873 -- -- 19,873
------ ------- -------- ------- -------- --------
Total cost of goods
sold................. 7,890 125,056 16,380 (3,094) 146,232
Selling, general and
administrative......... 45 3,480 74,773 8,866 -- 87,164
Stock based
compensation........... 500 -- -- -- -- 500
Restructuring charges... -- -- 1,183 -- -- 1,183
Amortization of
intangibles............ -- 90 3,080 256 -- 3,426
Interest expense, net... 1,116 15,661 354 (139) -- 16,992
Other (income) expense.. -- -- -- 1,283 -- 1,283
Loss (income) from
equity investees....... (5,200) (4,349) -- -- 9,549 --
Loss (income) from
nonguarantor equity
investees.............. -- (873) 342 -- 531 --
Capital charge and
intercompany interest
allocation............. (1,161) (14,878) 16,151 (112) -- --
------ ------- -------- ------- -------- --------
Income (loss) before
income taxes and
cumulative effect of
change in accounting
principle.............. 4,700 4,894 8,543 1,001 (10,080) 9,058
Income tax expense
(benefit).............. (235) (154) 4,194 470 -- 4,275
------ ------- -------- ------- -------- --------
Income (loss) before
cumulative change in
accounting principle... 4,935 5,048 4,349 531 (10,080) 4,783
Cumulative effect of
change in accounting
principle.............. -- (152) -- -- -- (152)
------ ------- -------- ------- -------- --------
Net income (loss)....... $4,935 $ 5,200 $ 4,349 $ 531 $(10,080) $ 4,935
====== ======= ======== ======= ======== ========
11
SEALY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENTS OF OPERATIONS
Three Months Ended February 27, 2000
(in thousands)
Combined
Sealy Combined Non-
Sealy Mattress Guarantor Guarantor
Corporation Company Subsidiaries Subsidiaries Eliminations Consolidated
----------- -------- ------------ ------------ ------------ ------------
Net sales--Non-
Affiliates............. $ -- $10,250 $196,410 $20,870 $ (3,562) $223,968
Net sales--Affiliates... -- -- 32,671 -- -- 32,671
------- ------- -------- ------- -------- --------
Total net sales....... -- 10,250 229,081 20,870 (3,562) 256,639
Costs and expenses:
Cost of goods sold--
Non-Affiliates........ -- 6,536 108,324 12,889 (3,562) 124,187
Cost of goods sold--
Affiliates............ -- -- 17,240 -- -- 17,240
------- ------- -------- ------- -------- --------
Total cost of goods
sold................. -- 6,536 125,564 12,889 (3,562) 141,427
Selling, general and
administrative......... 45 3,150 74,649 5,835 -- 83,679
Stock based
compensation........... 990 -- -- -- -- 990
Amortization of
intangibles............ -- 99 2,869 194 -- 3,162
Interest expense, net... 979 16,069 274 (88) -- 17,234
Other (income) expense.. -- -- -- (144) -- (144)
Loss (income) from
equity investees....... (6,092) (7,487) -- -- 13,579 --
Loss (income) from
nonguarantor equity
investees.............. -- 1,185 (2,233) -- 1,048 --
Capital charge and
intercompany interest
allocation............. (1,024) (15,215) 15,995 244 -- --
------- ------- -------- ------- -------- --------
Income (loss) before
income taxes........... 5,102 5,913 11,963 1,940 (14,627) 10,291
Income tax expense
(benefit).............. (455) (179) 4,476 892 -- 4,734
------- ------- -------- ------- -------- --------
Net income (loss)....... $ 5,557 $ 6,092 $ 7,487 $ 1,048 $(14,627) $ 5,557
======= ======= ======== ======= ======== ========
12
SEALY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENTS OF CASH FLOWS
Three Months Ended February 25, 2001
(in thousands)
Combined
Sealy Combined Non-
Sealy Mattress Guarantor Guarantor
Corporation Company Subsidiaries Subsidiaries Eliminations Consolidated
----------- -------- ------------ ------------ ------------ ------------
Net cash used in
operating activities.. $ -- $ (1,946) $(21,434) $(5,896) $-- $(29,276)
Cash flows from
investing activities:
Purchase of property
and equipment, net... -- (218) (1,569) (670) -- (2,457)
Net activity in
investment in and
advances to (from)
subsidiaries and
affiliates........... 10,174 (37,307) 23,714 3,419 -- --
-------- -------- -------- ------- ---- --------
Net proceeds provided
by (used in)
investing
activities.......... 10,174 (37,525) 22,145 2,749 -- (2,457)
Cash flows from
financing activities:
Treasury stock
repurchase, including
direct expenses...... (11,416) -- -- -- -- (11,416)
Proceeds from
(payments on) long-
term obligations,
net.................. -- 39,650 (80) -- -- 39,570
Equity issuances.... . 1,242 -- -- -- -- 1,242
-------- -------- -------- ------- ---- --------
Net cash provided by
(used in) financing
activities.......... (10,174) 39,650 (80) -- -- 29,396
Change in cash and cash
equivalents........... -- 179 631 (3,147) -- (2,337)
Cash and cash
equivalents:
Beginning of period... -- 354 6,672 11,088 -- 18,114
-------- -------- -------- ------- ---- --------
End of period......... $ -- $ 533 $ 7,303 $ 7,941 $-- $ 15,777
======== ======== ======== ======= ==== ========
13
SEALY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENTS OF CASH FLOWS
Three Months Ended February 27, 2000
(in thousands)
Combined
Sealy Combined Non-
Sealy Mattress Guarantor Guarantor
Corporation Company Subsidiaries Subsidiaries Eliminations Consolidated
----------- -------- ------------ ------------ ------------ ------------
Net cash provided by
(used in)
operating
activities............ $-- $ (80) $ 9,717 $ (671) $-- $ 8,966
Cash flows from
investing activities:
Purchase of property
and equipment, net... -- (11) (2,933) (892) -- (3,836)
Net activity in
investment in and
advances to (from)
subsidiaries and
affiliates........... -- (4,739) 1,620 3,119 -- --
---- ------ ------- ------ ---- -------
Net proceeds provided
by (used in)
investing
activities.......... -- (4,750) (1,313) 2,227 -- (3,836)
Cash flows from
financing activities:
Proceeds from
(payments on) long-
term obligations,
net.................. -- 4,826 (72) -- -- 4,754
---- ------ ------- ------ ---- -------
Net cash provided by
(used in) financing
activities.......... -- 4,826 (72) -- -- 4,754
Change in cash and cash
equivalents........... -- (4) 8,332 1,556 -- 9,884
Cash and cash
equivalents:
Beginning of period... -- 13 6,220 4,612 -- 10,845
---- ------ ------- ------ ---- -------
End of period......... $-- $ 9 $14,552 $6,168 $-- $20,729
==== ====== ======= ====== ==== =======
14
SEALY CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Item 2--Quarter Ended February 25, 2001 Compared with Quarter Ended February
27, 2000
Net Sales. Net sales increased $9.2 million, or 3.6% for the quarter ended
February 25, 2001, when compared to the quarter ended February 27, 2000. The
increase is attributable to an increase in volume of 5.0%, and a decrease in
average unit selling price of 1.4%. Volume growth was primarily attributable
to the acquisitions of the Bassett brand bedding products and the Argentina
operation. 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 quarter, as a percentage of
net sales, decreased to 55.0% from 55.1%, primarily due to lower material
costs.
Selling, General, and Administrative. Selling, general, and administrative
expenses increased $3.5 million to $87.2 million, or 32.8% of net sales,
compared to $83.7 million, or 32.6% of net sales. This increase is
attributable to additional costs associated with the acquired business in
Argentina. In addition, Argentina incurs costs associated with its retail
store operations. The Company also incurred increased delivery costs of $1.0
million primarily associated with increased fuel costs.
Stock Based Compensation. The Company has an obligation to repurchase
certain securities of the Company held by an officer at the greater of fair
market value or original cost. The Company recorded a $0.5 million and $1.0
million charge during the quarter ended February 25, 2001 and February 27,
2000, respectively, to revalue this obligation to reflect an increase in the
fair market value of the securities.
Restructuring Charges. During the quarter of 2001, the Company commenced a
plan to shutdown its Memphis facility and recorded a $0.5 million charge
primarily for severance. Additionally, the Company recorded a $0.7 million
charge for severance due to a management reorganization.
Interest Expense. Interest expense, net of interest income, decreased $0.2
million as a result of lower effective interest rates, partially offset by
higher average debt balances.
Income Tax. The Company's effective income tax rates in 2001 and 2000
differ from the Federal statutory rate principally because of the application
of purchase accounting, the effect of certain foreign tax rate differentials,
and state and local income taxes. The Company's effective tax rate for 2001 is
approximately 47.0% compared to 46.0% for 2000.
Net Income. For the reasons set forth above, the Company recorded net
income of $4.9 million for the quarter ended February 25, 2001 versus net
income of $5.6 million for the quarter ended February 27, 2000.
Liquidity and Capital Resources
The Company's principal sources of funds are cash flows from operations and
borrowings under its Revolving Credit Facility. The Company's principal use of
funds consists of payments of principal and interest on its Senior Credit
Agreements, capital expenditures and interest payments on its outstanding
Notes. Capital expenditures totaled $2.5 million for the quarter ended
February 25, 2001. Management believes that annual capital expenditure
limitations in its current debt agreements will not significantly inhibit the
Company from meeting its ongoing capital needs. At February 25, 2001, the
Company had approximately $44.6 million available under its Revolving Credit
Facility including Letters of Credit issued totaling approximately $9.2
million. The Company's net weighted average borrowing cost was 9.6% for the
three months ended February 25, 2001. The Revolving Credit Facility expires in
December 2002. The Company expects it will have the ability to renew the
15
existing revolving credit facility or have the ability to find new financing
with comparable terms. 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.
During the first quarter, the Company 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, the Company completed an acquisition of Sapsa Bedding
S.A., of Paris, France. The purchase price for the acquisition was EUR 45.8
million (approximately $41.3 million), less estimated assumed debt of EUR 11.8
million (approximately $10.6 million). Funding of the EUR 34 million
(approximately $30.7 million) net purchase price was provided through
approximately $8.6 million of existing cash, a $12.5 million draw on the new
Canadian facility and a $9.6 million draw on the existing Revolving Credit
Facility.
Management believes that the Company will have the necessary liquidity
through cash flow from operations, and availability under the Revolving Credit
Facility for the next several years to fund its expected capital expenditures,
obligations under its credit agreement and subordinated note indentures,
environmental liabilities, and for other needs required to manage and operate
its business.
Forward Looking Statements
This document contains forward-looking statements within the meaning of the
safe harbor provisions of the Private Securities Litigation Report Act of
1995. Although the Company believes its plans are based upon reasonable
assumptions as of the current date, it can give no assurances that such
expectations can be attained. Factors that could cause actual results to
differ materially from the Company's expectations include: general business
and economic conditions, competitive factors, raw materials pricing, and
fluctuations in demand.
Item 3--Quantitative and Qualitative Disclosures About Market Risk
Information relative to the Company's market risk sensitive instruments by
major category at November 26, 2000 is presented under Item 7a of the
registrant's Annual Report on Form 10-K for the fiscal year ended November 26,
2000.
Foreign Currency Exposures
The Company's earnings are affected by fluctuations in the value of its
subsidiaries' functional currency as compared to the currencies of its foreign
denominated purchases. Foreign currency forward, swap and option contracts are
used to hedge against the earnings effects of such fluctuations. The result of
a uniform 10% change in the value of the U.S. dollar relative to currencies of
countries in which the Company manufactures or sells its products would not be
material to earnings or financial position. This calculation assumes that each
exchange rate would change in the same direction relative to the U.S. dollar.
Interest Rate Risk
Because the Company's obligations under the bank credit agreement bear
interest at floating rates, the Company is sensitive to changes in prevailing
interest rates. The Company uses derivative instruments to manage its long-
term debt interest rate exposure, rather than for trading purposes. A 10%
increase or decrease in market interest rates that effect the Company's
interest rate derivative instruments would not have a material impact on
earnings during the next fiscal year.
16
PART II. OTHER INFORMATION
Item 1--Legal Proceedings
See Note 7 to the Condensed Consolidated Financial Statements, Part I, Item 1
included herein.
Item 4--Submission of Matters to a Vote of Security Holders
None
Item 6--Exhibits and Reports on Form 8-K
(a) Exhibits:
(b) Reports on Form 8-K:
None
17
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Sealy Corporation has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Sealy Corporation
Signature Title
--------- -----
/s/ Ronald L. Jones Chairman and Chief Executive
____________________________________ Officer (Principal
Ronald L. Jones Executive Officer)
/s/ E. Lee Wyatt Corporate Vice President--
____________________________________ Administration and Chief
E. Lee Wyatt Financial Officer
(Principal Accounting
Officer)
Date: April 11, 2001
18