UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: August 26, 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
(State or other jurisdiction of
incorporation or organization)
Sealy Drive One Office Parkway
Trinity, North Carolina
(Address of principal executive offices)*
36-3284147
(I.R.S. Employer Identification No.)
27370
(Zip Code)
(336) 861-3500
Registrant's telephone number, including area code
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities and Exchange Act
of 1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [_]
The number of shares of the registrant's common stock outstanding as of
October 9, 2001 was 30,748,304.
PART I. FINANCIAL INFORMATION
Item 1--Financial Statements
SEALY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)
Quarter Quarter
Ended Ended
August 26, August 27,
2001 2000
Net sales--Non-Affiliates....................................................... $ 285,450 $ 253,995
Net sales--Affiliates........................................................... 45,175 38,746
----------- ----------
Total net sales........................................................ 330,625 292,741
Costs and expenses:
Cost of goods sold--Non-Affiliates......................................... 158,646 139,581
Cost of goods sold--Affiliates............................................. 24,020 20,263
----------- ----------
Total cost of goods sold............................................... 182,666 159,844
Selling, general and administrative ....................................... 113,139 88,993
Stock based compensation................................................... (500) 1,600
Amortization of intangibles................................................ 3,344 3,169
---------- ----------
Income from operations.......................................................... 31,976 39,135
Interest expense........................................................... 19,684 16,321
Other expense, net (Notes 5 and 12) ....................................... 26,932 200
---------- ----------
Income (loss) before income tax expense ........................................ (14,640) 22,614
Income tax expense.............................................................. 7,106 10,175
---------- ----------
Net income (loss)............................................................... (21,746) 12,439
Liquidation preference for common L&M shares ................................... 4,072 3,702
---------- ----------
Net income (loss) available to common shares ................................... $ (25,818) $ 8,737
========== =========
Earnings per share--basic:
Net income (loss).......................................................... $ (0.71) $ 0.40
Liquidation preference for common L & M shares............................. (0.13) (0.12)
---------- ----------
Net income (loss) available to common shareholders......................... $ (0.84) $ 0.28
========== =========
Earnings per share--diluted:
Net income (loss).......................................................... $ (0.71) $ 0.36
Liquidation preference for common L & M shares............................. (0.13) (0.11)
---------- ----------
Net income (loss) available to common shareholders......................... $ (0.84) $ 0.25
========== =========
Weighted average number of common shares outstanding:
Basic...................................................................... 30,750 31,485
Diluted.................................................................... 30,750 34,228
See accompanying notes to condensed consolidated financial statements.
2
SEALY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)
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 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.
3
SEALY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
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.
4
SEALY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
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
5
SEALY CORPORATION
NOTES TO 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 on
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.
6
SEALY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Cash paid ............................. $31.5
Fair value of liabilities assumed ..... 40.8
-----
Purchase price ........................ 72.3
Fair value of assets acquired ......... 55.9
-----
Goodwill .............................. $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.
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.
7
SEALY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(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.
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. 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 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, $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.
8
SEALY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
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 ended Nine months 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 Income (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)
========= ========= ========= ========= ========= ========= =========
9
SEALY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 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 statements 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.
10
SEALY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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
reoganization 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, 2001 and August 27, 2000
and the consolidated condensed statements of operations for the three
months ended August 26, 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.
11
SEALY CORPORATION
SUPPLEMENTAL CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED AUGUST 26, 2001
(in thousands)
Combined
--------
Sealy Combined Non-
----- -------- ---
Sealy Mattress Guarantor Guarantor
----- -------- --------- ---------
Corporation Company Subsidiaries Subsidiaries Eliminations Consolidated
----------- ------- ------------ ------------ ------------ -----------
Net sales--Non-Affiliates ............ $ -- $ 15,636 $ 219,695 $ 54,209 $ (4,090) $ 285,450
Net sales--Affiliates ................ -- -- 45,175 -- -- 45,175
--------- --------- --------- --------- --------- ---------
Total net sales ............ -- 15,636 264,870 54,209 (4,090) 330,625
Costs and expenses:
Cost of goods sold--Non-
Affiliates ................... -- 10,200 119,353 33,183 (4,090) 158,646
Cost of goods sold--
Affiliates ................... -- -- 24,020 -- -- 24,020
--------- --------- --------- --------- --------- ---------
Total cost of goods
sold .................... -- 10,200 143,373 33,183 (4,090) 182,666
Selling, general and
administrative ............... 45 4,624 91,899 16,571 -- 113,139
Stock based compensation ........ (500) -- -- -- -- (500)
Amortization of intangibles ..... -- 95 2,662 587 -- 3,344
--------- --------- --------- --------- --------- ---------
Income from operations ............... 455 717 26,936 3,868 -- 31,976
Interest expense ................ 1,228 18,006 (69) 519 -- 19,684
Other expense,
net .......................... -- -- -- 26,932 -- 26,932
Loss (income) from equity
investees .................... 22,003 22,202 -- -- (44,205) --
Loss (income) from
nonguarantor equity
investees .................... -- 26 25,301 -- (25,327) --
Capital charge and
intercompany interest
allocation ................... (1,273) (17,106) 18,507 (128) -- --
--------- --------- --------- --------- --------- ---------
Income (loss) before income taxes .... (21,503) (22,411) (16,803) (23,455) 69,532 (14,640)
Income tax expense (benefit) ......... 243 (408) 5,399 1,872 -- 7,106
--------- --------- --------- --------- --------- ---------
Net income (loss) .................... $ (21,746) $ (22,003) $ (22,202) $ (25,327) $ 69,532 $ (21,746)
========= ========= ========= ========= ========= =========
12
SEALY CORPORATION
SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED AUGUST 27, 2000
(in thousands)
Combined
--------
Sealy Combined Non-
----- -------- ----
Sealy Mattress Guarantor Guarantor
----- -------- --------- ---------
Corporation Company Subsidiaries Subsidiaries Eliminations Consolidated
----------- ------- ------------ ------------ ------------ ------------
Net sales--Non-Affiliates .......... $ -- $ 11,904 $ 221,008 $ 24,915 $ (3,832) $ 253,995
Net sales--Affiliates .............. -- -- 38,746 -- -- 38,746
--------- --------- --------- --------- --------- ---------
Total net sales .......... -- 11,904 259,754 24,915 (3,832) 292,741
Costs and expenses:
Cost of goods sold--Non-
Affiliates ................. -- 7,498 121,003 14,912 (3,832) 139,581
Cost of goods sold--
Affiliates ................. -- -- 20,263 -- -- 20,263
--------- --------- --------- --------- --------- ---------
Total cost of goods
sold .................. -- 7,498 141,266 14,912 (3,832) 159,844
Selling, general and
administrative ............. 59 3,502 78,935 6,497 -- 88,993
Stock based compensation ...... 1,600 -- -- -- -- 1,600
Amortization of intangibles ... -- 99 2,879 191 -- 3,169
--------- --------- --------- --------- --------- ---------
Income (loss) from operations ...... (1,659) 805 36,674 3,315 -- 39,135
Interest expense .............. 812 15,748 (138) (101) -- 16,321
Other expense,
net ........................ -- -- -- 200 -- 200
Loss (income) from equity
investees .................. (13,319) (14,588) -- -- 27,907 --
Loss (income) from
nonguarantor equity
investees .................. -- 1,262 (2,819) -- 1,557 --
Capital charge and
intercompany interest
allocation ................. (871) (14,927) 15,576 222 -- --
--------- --------- --------- --------- --------- ---------
Income (loss) before income
taxes ......................... 11,719 13,310 24,055 2,994 (29,464) 22,614
Income tax expense
(benefit) ..................... (720) (9) 9,467 1,437 -- 10,175
--------- --------- --------- --------- --------- ---------
Net income (loss) .................. $ 12,439 $ 13,319 $ 14,588 $ 1,557 $ (29,464) $ 12,439
========= ========= ========= ========= ========= =========
13
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 Subsidiaries 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)
============ ======== ============ ============= ============ ============
14
SEALY CORPORATION
SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED AUGUST 27, 2000
(in thousands)
Sealy Combined Combined
Sealy Mattress Guarantor Non-Guarantor
Corporation Company Subsidiaries 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
========= ========= ========= ========= ========= =========
15
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
obligations .................... $ -- $ 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 obligations ................. 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
========= ========= ========= ========= ========= =========
16
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 (DEFICIT)
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 (deficit) ................. (93,290) (62,152) 138,220 53,383 (129,451) (93,290)
--------- --------- --------- --------- --------- ---------
Total liabilities and
stockholders' equity
(deficit) ....................... $ (42,289) $ 579,078 $ 340,070 $ 82,607 $(129,451) $ 830,015
========= ========= ========= ========= ========= =========
17
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 issuance 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
========= ========= ========= ========= ======= =========
18
SEALY CORPORATION
SUPPLEMENTAL 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 (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
===== ======== ======== ======== ===== ========
19
SEALY CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Item 2--Quarter Ended August 26, 2001 compared with Quarter Ended August 27,
2000
Net Sales. Net sales increased $37.9 million, or 12.9% for the quarter
ended August 26, 2001, when compared to the quarter ended August 27, 2000. The
$37.9 million increase is comprised of increases in the Company's international
operations of $29.4 million and increases in the Company's domestic operations
of $8.5 million. The increase is attributable to a 21.9% increase in unit
volume, partially offset by a 7.4% decrease in 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 and domestic businesses. 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, increased 0.6 percentage points to 55.2%. The cost of goods sold
percentage increased primarily due to the growth in the international business
as those products typically carry a lower gross margin.
Selling, General, and Administrative. Selling, general, and administrative
expenses increased $24.1 million to $113.1 million, or 34.2% of net sales,
compared to $89.0 million, or 30.4% of net sales. This increase is primarily due
to $8.1 million of additional costs associated with the businesses acquired in
the international operations. The Company incurred increased promotional
expenses of $6.2 million primarily associated with the roll-out of a new Sealy
Posturepedic product line that will benefit the Company in future periods. As a
result of the general slowdown in the economy, the Company also recorded
additional bad debt expense of $3.6 million, including a specific bad debt
charge of $3.2 million associated with the bankruptcy of Homelife. Additionally,
Argentina incurred $0.5 of costs associated with its retail store operations,
which the Company does not have in its domestic business.
Stock Based Compensation. The Company has an obligation to repurchase
certain securities of the Company held by an officer at the greater of estimated
fair market value or original cost. The Company recorded a $0.5 million
reduction in that liability during the third quarter. The Company recorded a
$1.6 million charge in the quarter ended August 27, 2000.
Interest Expense. Interest expense increased $3.4 million primarily due to
increased average debt levels.
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.
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 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 of such loss. Excluding the effects
of the impairment charge, the Company's effective tax rate for 2001 is
approximately 61.2% compared to 45% 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, the Company recorded a
net loss of $21.7 million for the quarter ended August 26, 2001 versus net
income $12.4 million for the quarter ended August 27, 2000.
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 the Company's
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
20
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. The Company incurred increased promotional
expenses of $9.5 million primarily associated with the roll-out of a new Sealy
Posturepedic product line that will benefit the Company in future periods. The
Company 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, the
Company has 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 its retail store operations, which the Company does not have in
its domestic business.
Stock Based Compensation. The Company has an obligation to repurchase
certain securities of the Company held by an officer at the greater of estimated
fair market value or original cost. The Company recorded no charge during the
nine months of 2001, compared to $3.6 million during the nine months end August
27, 2000, to revalue this obligation to reflect the change in the fair market
value of the securities.
Restructuring Charges. During 2001, the Company 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 increased $6.1 million primarily due to
increased average debt levels.
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 investment 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.
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.
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 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 of such loss. Excluding the effects of
the impairment charge, the Company's 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, the Company 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.
Liquidity and Capital Resources
21
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 $15.1 million for the nine months ended August 26,
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 August 26, 2001, the Company had approximately
$87.1 million available under its Revolving Credit Facility with Letters of
Credit issued totaling approximately $12.9 million. The weighted average
effective interest rate on the Company's debt for the nine months ended August
26, 2001 was 9.8%. The Revolving Credit Facility expires in December 2002. The
Company expects it will have the ability to renew the existing revolving credit
facility or have the ability to find new financing with comparable terms. If the
Company is unable to renew its existing arrangement or obtain new financing,
this could have an adverse affect on the Company's ability to fund its
operations.
The Company's 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 the Company 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. The Company believes the affiliate will be successful in
renegotiating its credit agreement. 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 trade
receivables. The Company is, however, unable to predict the impact, if any,
should the affiliate continue to be impacted by a weakened economy, be
unsuccessful in renegotiating its current credit agreement or obtaining
alternate additional financing.
The Company's 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 the Company's 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 nine
months 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 attacks of September 11, 2001 will likely further contract consumer
confidence and have a negative impact on the retail environment. However, it is
still too early to determine the long-term effects on the economy and on Sealy's
business.
The Company's inventory increased $11.2 million from $51.9 million at
November 26, 2000 to $63.1 million at August 26, 2001. This increase is
primarily attributable to the acquisition of Sapsa Bedding S.A.
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. At August 26, 2001, the Company had approximately C$5.3
million available under this facility.
On April 6, 2001, the Company 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.
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 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.
22
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 contracts are used to hedge
against the earnings effects of such fluctuations. The result of a uniform 10%
change in the value of the U.S. dollar relative to currencies of countries in
which the Company manufactures or sells its products would not be material to
earnings or financial position. This calculation assumes that each exchange rate
would change in the same direction relative to the U.S. dollar.
Interest Rate Risk
Because the Company's obligations under the bank credit agreement bear
interest at floating rates, the Company is sensitive to changes in prevailing
interest rates. The Company uses derivative instruments to manage its long-term
debt interest rate exposure, rather than for trading purposes. A 10% increase or
decrease in market interest rates that affect the Company's interest rate
derivative instruments would not have a material impact on earnings during the
next fiscal year.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
See Note 11 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
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Sealy Corporation has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
SEALY CORPORATION
By: /s/ RONALD L. JONES
-----------------------
Ronald L. Jones
Chairman and Chief Executive Officer
(Principal Executive Officer)
By: /s/ E. LEE WYATT
----------------------
E. Lee Wyatt
Corporate Vice President--Administration
and Chief Financial Officer
(Principal Accounting Officer)
Date: October 11, 2001
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