ITEM 1. BUSINESS
GENERAL
Sealy Corporation (the "Company") is the largest bedding manufacturer in North America. The Company manufactures through its subsidiaries a broad range of mattresses and boxsprings, wood furniture and convertible sleep sofas. The Company's conventional bedding products (mattresses and boxsprings) include the SEALY Registered Trade-mark POSTUREPEDIC Registered Trade-mark brand and the STEARNS & FOSTER Registered Trade-mark CORRECT COMFORT Registered Trade-mark brand and account for approximately 90% of the Company's total net sales for the year ended November 30, 1993. The Company also manufactures Sealy and Stearns & Foster brand convertible sleep sofas and markets its wood furniture under the SAMUEL LAWRENCE Trade-mark and WOODSTUFF Registered Trade-mark brands. The Company has a components parts manufacturing subsidiary which produces approximately 75% of the Company's mattress innerspring requirements and a significant portion of the Sealy brand boxspring component parts units. Another subsidiary, Sealy, Inc., provides corporate and administrative services for the Company.
HISTORY OF THE COMPANY
The Company was founded in 1907 under the name Ohio Mattress Company. In 1924, the Company was granted its first license to produce Sealy-brand products. Starting in 1956, the Company began acquiring Sealy-brand licenses in other geographic areas, and by 1987, had acquired all of the capital stock of its licensor Sealy, Incorporated (which prior to that time was independent of the Company), along with all but one of the remaining Sealy conventional bedding domestic licensees (the "Sealy Acquisitions"). The Company expanded its bedding manufacturing operations in 1983 by acquiring Stearns & Foster, a producer of top quality premium mattresses, boxsprings and convertible sleep sofas. In 1985, the Company acquired Woodstuff Manufacturing, Inc., a manufacturer of bedroom furniture.
In 1989, the Company's common stock was acquired through a leveraged buyout (the "LBO") which was financed in part by First Boston Securities Corporation ("FBSC"), an affiliate of The First Boston Corporation ("First Boston"). In April 1990, the Company exchanged (the "Exchange") certain outstanding debt issued to FBSC for new debt at lower interest rates plus additional common stock. In December 1990, FBSC transferred its equity and debt interest in the Company to MB L.P. I, an affiliate of First Boston ("MBLP"). In November 1991, the Company successfully completed a recapitalization (the "Recapitalization") in which the Company's capital structure was significantly improved, the face amount of its indebtedness and interest thereon was reduced by approximately $417 million, the Company's interest expense obligations were substantially reduced and the principal repayment schedule on a portion of its existing bank term loan facility was extended. As a result of the Recapitalization, MBLP's equity interest in the Company increased to approximately 94%.
On February 12, 1993, Zell/Chilmark Fund, L.P., a Delaware limited partnership ("Zell/Chilmark"), led an investor group (the "Zell/Chilmark Purchasers") which purchased Class A Common Stock of the Company (the "Shares") from MBLP, representing approximately 94% of the equity of the Company (the "Acquired Shares") for a cash purchase price of $250 million (the "Acquisition").
On May 7, 1993, the Company consummated a refinancing transaction (the "Refinancing"). The Refinancing consisted of (i) the public offering and sale of $200.0 million aggregate principal amount of 9 1/2% Senior Subordinated Notes Due 2003 (the "Notes"), (ii) the application of the net proceeds therefrom to redeem all of the Company's previously outstanding 12.4% Senior Subordinated Notes Due 2001 (the "Subordinated Notes") and to reduce amounts outstanding under the Company's pre-existing senior secured credit agreement (the "Old Credit Agreement"), and (iii) execution of a new senior secured credit agreement by and among the Company, certain banks and other financial institutions and Banque Paribas, Citicorp USA, Inc., Continental Bank N.A. and General Electric Capital Corporation, as Managing Agents (the "New Credit Agreement") providing for two term loan facilities together aggregating $250.0 million and a $75.0 million revolving credit facility in connection with the refinancing of the Old Credit Agreement.
CONVENTIONAL BEDDING
INDUSTRY AND COMPETITION. According to industry sales data compiled by the International Sleep Products Association ("ISPA"), a bedding industry trade group, more than 750 manufacturers of mattresses and boxsprings make up the domestic conventional bedding industry, generating wholesale revenues of approximately $2.7 billion during calendar year 1993. The market for conventional bedding represents more than 85% of the entire bedding market in North America. Approximately 60% of conventional bedding is sold to furniture stores, national mass merchandisers and department stores. Most of the remaining conventional bedding is sold to specialty sleep shops and contract customers such as motels, hotels and hospitals. Management estimates that approximately two-thirds of conventional bedding is sold for replacement purposes and that the average time between consumer purchases of conventional mattresses is approximately 10 to 12 years. According to ISPA, factors such as sales of existing homes, housing starts and disposable income, as well as birth and marriage rates, affect bedding purchases.
Management believes that sales by companies with recognized national brands account for more than half of total conventional bedding sales. The Company supplies such nationally recognized brands as Sealy, Sealy Posturepedic and Stearns & Foster. Competition in conventional bedding is generally based on quality, brand name recognition, service and price.
The following table sets forth certain information regarding the domestic market shares of major producers of conventional bedding, and is based upon industry executives' estimates as published in the December 27, 1993 edition of HFD, THE WEEKLY HOME FURNISHINGS NEWSPAPER , an industry trade publication:
PRODUCTS. The Company manufactures a variety of Sealy and Stearns & Foster brand and private label conventional bedding in various sizes ranging in retail price from under $200 to $2,400. Sealy Posturepedic brand mattress is the largest selling mattress brand in North America. Approximately 97% of the Sealy brand conventional bedding products sold in North America are produced by the Company, with the remainder being produced by Sealy Mattress Company of New Jersey, Inc. ("Sealy New Jersey"), a licensee. The Stearns & Foster product line consists of top quality, premium mattresses sold under the Correct Comfort trademark, as well as a range of other bedding products sold under the Stearns & Foster brand name.
CUSTOMERS. The Company serves over 7,000 retail outlets (approximately 3,200 customers), which include furniture stores, national mass merchandisers, department stores, specialty sleep shops, contract customers and other stores. The top five conventional bedding customers accounted for approximately 24% of net sales for the year ended November 30, 1993, with sales to Sears accounting for approximately 13% of such net sales. The following table sets forth the customer profile for the Company's conventional bedding sales, the percentage of total net sales made to that group of customers in fiscal year 1993 and the names of representative customers:
SALES AND MARKETING. The Company's sales depend primarily on its ability to provide quality products with recognized brand names at competitive prices. The Company's marketing emphasis has been on increasing the brand loyalty of its ultimate consumers, principally through more extensive national advertising and through cooperative advertising with its dealers along with improved "point-of-sale" materials designed to emphasize the various features and benefits of the Company's products which differentiate them from other brands. The Company engages in extensive national and cooperative advertising to promote the brand names of its products. For fiscal year 1993 the Company spent approximately $20 million on national advertising and approximately $85 million on cooperative advertising and promotional expenses.
The Company's sales force is generally structured based on regions of the country and the plants located within those regions, and also includes a sales staff for specific national accounts operated out of the Company's Chicago, Illinois office. The Company believes that it has one of the most comprehensive training and development programs for its sales force, including its University of Sleep curriculum, which provides on-going training sessions with programs focusing on advertising, merchandising and sales education, including techniques to help analyze a dealer's business and profitability.
The Company's sales force emphasizes follow-up service to retail stores and provides retailers with promotional and merchandising assistance as well as extensive specialized professional training and instructional materials. Training for retail sales personnel focuses on several programs, designed to assist retailers in maximizing the effectiveness of their own sales personnel, store operations, and advertising and promotional programs, thereby creating loyalty to, and enhanced sales of, the Company's products.
At December 31, 1993, the Company had a conventional bedding sales and marketing force of 240 people who receive a base salary, plus expenses, and quarterly and annual sales incentive bonuses. Approximately 25 independent sales representative organizations service the Company's contract customers.
SUPPLIERS. The Company purchases fabric, polyfiber, wire and foam from a variety of vendors. The Company purchases a significant portion of its Sealy boxspring parts from a single source, which has patents on various interlocking wire configurations (the "Wire Patents"), and also purchases 100% of its Stearns & Foster boxspring parts from another single source. In order to eliminate certain of the risks of dependence on external supply sources and to enhance profitability, the Company has expanded its own internal components parts manufacturing capacity and, as a licensee of the Wire Patents, internally produces the remainder of its Sealy boxspring parts. See "-- Components Division." The Company believes that this vertical integration provides it with a significant competitive advantage, as it is the only conventional bedding manufacturer in the United States with substantial innerspring and form wire components making capacity. As is the case with all of the Company's product lines, the Company does not consider itself dependent upon any single outside vendor as a source of supply to its conventional bedding business and believes that sufficient alternative sources of supply for the same or similar components are available.
MANUFACTURING AND FACILITIES. The Company manufactures most conventional bedding to order and has adopted "just-in-time" inventory techniques in its manufacturing process to more efficiently serve its dealers' needs and minimize their inventory carrying costs. Most bedding orders are scheduled, produced and shipped within 24 to 72 hours of receipt. This rapid delivery capability allows the Company to minimize its inventory of finished products and better satisfy customer demand for prompt shipments.
The Company operates 28 plants which manufacture conventional bedding in 21 states, three Canadian provinces and Puerto Rico. See Item 2.


Item 2. "-- Properties," included elsewhere herein.
Over the last three years, the Company has made substantial commitments to ensure that the coil-making equipment at its component plants remains state-of-the-art. Since 1989, the Company has installed 26 automated coil-producing machines. This equipment has resulted in higher capacity at lower per-unit costs and has increased self-production capacity for the Company's innerspring requirements from approximately 60% to 75%.
WOOD FURNITURE
The Company manufactures and markets bedroom furniture through its Woodstuff subsidiary ("Samuel Lawrence") under the Samuel Lawrence and Woodstuff labels. During 1993, conventional bedroom furniture sales accounted for approximately 70% of Samuel Lawrence's total sales. Samuel Lawrence has approximately 500 customers, six in-house sales people, 20 independent sales representatives, and is one of many manufacturers of wood furniture.
CONVERTIBLE SLEEP SOFAS
The Company manufactures and sells primarily convertible sleep sofas under the Sealy and Stearns & Foster brand names in one facility with six sales employees and 18 commissioned, self-employed sales representatives. The sleep sofa industry is fragmented, and management believes that no single manufacturer comprises more than 10% of that market.
LICENSING
The Company's licensing division generates royalties by licensing Sealy brand technology and trademarks to manufacturers located throughout the world. The Company also provides its licensees with product specifications, quality control inspections, research and development, statistical services and marketing programs. There are currently 14 separate license arrangements in effect with independent licensees, international bedding licensees and upholstered furniture licensees. In fiscal year 1993, the licensing division as a whole generated royalties of approximately $5 million, which were accounted for as a reduction of selling, general and administrative expenses in the Consolidated Financial Statements included herein.
Sealy New Jersey and a crib mattress licensee are the only domestic bedding manufacturers that are licensed to use the Sealy trademark subject to the terms of license agreements. Subject to the terms of a license agreement between Sealy New Jersey and the Company, Sealy New Jersey has the perpetual right to use certain Sealy trademarks, including the Sealy "Butterfly" logo, in the manufacture and sale of Sealy brand products in the United States. In return, Sealy New Jersey pays the Company royalties, which vary by product, on all of its Sealy brand net dollar sales and such royalties can be changed over time upon the occurrence of certain events and subject to limitations contained in the license agreement. The Company sells component parts to Sealy New Jersey and provides it with various research and development, advertising, marketing, and other services, for which Sealy New Jersey may be required to pay additional compensation to the Company under varying circumstances. In accordance with a currently effective waiver provided by the Company, the license agreement no longer restricts Sealy New Jersey's manufacturing territory to any defined areas of primary responsibility in New Jersey. To date, Sealy New Jersey has not engaged in manufacturing outside such area and its sales efforts outside such area have been limited to specific situations. The license precludes the Company from manufacturing its Sealy brand products in the licensee's area of primary responsibility in New Jersey. Subject to certain conditions and limitations, as specified in the license agreement, the Company has a right of first refusal with respect to any sale of Sealy New Jersey.
WARRANTIES
Sealy and Stearns & Foster bedding offer limited warranties on their currently manufactured products. Such warranties range from one year on promotional bedding to 15 years on Posturepedic and Stearns & Foster Correct Comfort bedding. The periods for "no- charge" warranty service varies among products. All currently manufactured Posturepedic and Correct Comfort products offer a 15 year non-prorated warranty service period. Sealy and Stearns & Foster convertible sleep sofas offer a 10-year limited warranty on mattresses, mechanisms and frames, with no warranty on upholstery fabric. Historically, the Company's warranty costs have been immaterial for each of its product lines.
TRADEMARKS AND LICENSES
The Company owns, among others, the Sealy, Stearns & Foster and Samuel Lawrence trademarks and tradenames and also owns the Posturepedic, Correct Comfort, Dataman and University of Sleep trademarks, service marks and certain related logos and design marks.
EMPLOYEES
As of December 31, 1993, the Company had 4,844 full-time employees. Approximately 2,553 employees at 25 plants are represented by various labor unions, generally with separate collective bargaining agreements. Due to the large number of collective bargaining agreements, the Company is periodically in negotiations with certain of its employees. The Company considers its overall relations with its work force to be satisfactory. The following table sets forth certain information regarding employees in each division of the Company as of December 31, 1993:
SEASONALITY
The Company's business is somewhat seasonal, with lower sales usually experienced during the first quarter of each fiscal year. See Note 12 to the Consolidated Financial Statements of the Company included in Part II, Item 8 herein.
ITEM 2. PROPERTIES
The offices of the Company are located at 520 Pike Street, Seattle, Washington 98101. Corporate, licensing and marketing services are provided to the Company by Sealy, Inc. (a wholly-owned subsidiary of the Company), located in Cleveland, Ohio. The principal address of Sealy, Inc. is Halle Building, 10th Floor, 1228 Euclid Avenue, Cleveland, Ohio 44115.
The Company services certain national account customers in offices located in Chicago, Illinois, and also administers component operations at its Rensselaer, Indiana facility. The Company leases a research and development facility in Cleveland, Ohio. The Company's leased facilities are occupied under leases which expire from 1994 to 2015, including renewal options.
The following table sets forth certain information regarding manufacturing facilities operated by the Company at February 1, 1994:
(a) The Company has granted a mortgage or otherwise encumbered its interest in this facility as collateral for secured indebtedness. (b) The Company has leased 154,800 square feet to an unrelated tenant. (c) The Company has subleased 76,000 square feet to an unrelated tenant. (d) The Company has the option to purchase the property for specified costs at certain intervals during the lease term.
The Company considers its present facilities to be generally well maintained, in sound operating condition and adequate for its needs. When viewed as a whole, the Company has excess capacity available in its facilities and the necessary equipment (as owner or lessee) to carry on its business.
REGULATORY MATTERS
The Company's principal wastes are wood, cardboard and other nonhazardous materials derived from product component supplies and packaging. The Company also periodically disposes of small amounts of used machine lubricating oil and waste glue used in connection with product components. The furniture operations of the Company in Phoenix, Arizona use some volatile solvent-based wood stains, although non-volatile solvent and/or water-based wood stains are used whenever possible. The Company, generally, is subject to the Federal Water Pollution Control Act, the Comprehensive Environmental Response, Compensation and Liability Act and amendments and regulations thereunder and corresponding state statutes and regulations. The Company's furniture operations are also subject to the Resource Conservation and Recovery Act, the Clean Air Act and amendments and regulations thereunder and corresponding state statutes and regulations. The Company believes that it is in material compliance with all applicable federal and state environmental statutes and regulations. Except as set forth in Item 3.
ITEM 3. LEGAL PROCEEDINGS
In accordance with procedures established under the Environmental Cleanup Responsibility Act ("ECRA"), Sealy Corporation and one of its subsidiaries are parties to an Administrative Consent Order (the "ACO") issued by the New Jersey Department of Environmental Protection and Energy (the "Department"), pursuant to which the Company and such subsidiary agreed to conduct soil and groundwater sampling to determine the extent of environmental contamination found at the plant owned by the subsidiary in South Brunswick, New Jersey. The Company does not believe that any of its manufacturing processes was a source of any of the contaminants found to exist above regulatorily acceptable levels in the groundwater, and the Company is exploring other possible sources of the contamination, including former owners of the facility. As the current owners of the facility, however, the Company and its subsidiary are primarily responsible for site investigation and any necessary clean-up plan approved by the Department under the terms of the ACO.
The Company and its environmental consultant have been conducting investigation and remediation activities since preliminary evidence of contamination was first discovered in August, 1991. On November 15, 1993, the Company received a letter from the Department approving the findings and substantially all of the recommendations of the Company's consultant contained in a June 4, 1993 report submitted to the Department, but also requiring the Company to undertake additional remedial and investigative activities, including the installation of shallow groundwater monitoring wells off-site.
On December 1, 1993, the Company's consultant submitted to the Department a report updating and supplementing the June, 1993 report with regard to activities completed prior to receipt of the Department's November 15, 1993 letter. On December 23, 1993, the Company submitted to the Department a Remedial Investigation Schedule of activities to be conducted within the next six (6) months in accordance with the Department's November 15, 1993 letter.
In its November 15, 1993 letter, the Department postponed any required activity by the Company to delineate and/or remediate contaminants in the fractured bedrock, which it had previously requested the Company to undertake. The Company, however, still has reservations regarding any such required activities which the Department may attempt to impose in the future. Because of the nature of certain of the contaminants and their geological location in fractured bedrock, the Company and its consultant remain unaware of any accepted technology for successfully remediating the contamination either in the shallow groundwater or the fractured bedrock.
The Company has established an accrual for further site investigation and remediation. Based on the facts currently known by the Company, management believes that the accrual is adequate to cover the Company's probable liability and does not believe that resolution of this matter will have a material adverse effect on the Company's financial position or future operations. However, because of many factors, including the uncertainties surrounding the nature and application of environmental regulations, the practical and technical difficulties in obtaining complete delineation of the contamination, the level of clean-up that may be required, if any, or the technology that could be involved, and the possible involvement of other potentially responsible parties, the Company cannot presently predict the ultimate cost to remediate this facility, and there can be no assurance that the Company will not incur material liability with respect to this matter.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's merger warrants to acquire shares of Class B common stock (which warrants were issued in conjunction with the LBO, and which do not become exercisable until August 9, 1995, except under certain limited circumstances) (the "Merger Warrants") are registered for trading in the over-the-counter market; however, because of the extremely limited and sporadic nature of quotations for such Merger Warrants, there is no established public trading market for the Merger Warrants. There is no established public trading market for any other class of common equity of the Company.
As of February 20, 1994, there are 57 holders of record of the Company's shares, 1,281 holders of record of the Merger Warrants and 45 holders of record of the Restructure Warrants.
No dividends have been paid on any class of common equity of the Company during the last three fiscal years. The Company's New Credit Agreement prohibits the paying of cash dividends on any of its classes of common equity.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following tables set forth selected consolidated financial and other data of the Company (some periods of which are less than one year due to accounting requirements for acquisition transactions) for the ten months ended November 30, 1993, for the two months ended January 31, 1993, for the year ended November 30, 1992, for the one month ended November 30, 1991, for the eleven months ended October 31, 1991, for the year ended November 30, 1990, for the seven months ended November 30, 1989, and for the five months ended April 30, 1989.
During the period from December 1, 1988 through November 30, 1993, the Company's capital structure and business changed significantly, in large part as a result of (i) the LBO, (ii) the Recapitalization, and (iii) the Acquisition in February 1993. Due to required purchase accounting adjustments relating to such transactions, and the resultant changes in control, the consolidated financial and other data for each period reflected in the following tables during this period are not comparable to such data for the other such periods.
The selected consolidated financial and other data set forth in the following tables have been derived from the Company's audited consolidated financial statements. The report of KPMG Peat Marwick, independent auditors, covering the Company's Consolidated Financial Statements for the ten months ended November 30, 1993 (Successor period), for the two months ended January 31, 1993, the year ended November 30, 1992, and the one month ended November 30, 1991 (Pre-Successor Periods); and for the eleven months ended October 31, 1991 (Predecessor Period), is included elsewhere herein. These tables should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements of the Company included elsewhere herein.
(a) The Company employed the purchase method of accounting for the February, 1993 Acquisition, the April 1990 Exchange and the November 1991 Recapitalization, and the LBO. Accordingly, historical financial and other data for the Successor, Pre- Successor, Predecessor and Pre-Predecessor periods are not comparable.
(b) During 1993, the Company recorded an extraordinary loss of $2.9 million, net of income tax of $1.5 million, representing the remaining unamortized debt issuance costs related to long term obligations repaid as a result of the Refinancing.
(c) Operating income is calculated by adding interest expense, net to net sales less costs and expenses.
(d) EBITDA is calculated by adding interest expense, net, income tax (benefit) and depreciation and amortization of intangibles to net income (loss) before extraordinary item. EBITDA is presented because it is a widely accepted financial indicator of a company's ability to service and incur debt. EBITDA does not represent net income or cash flows from operations as those terms are defined by generally accepted accounting principles ("GAAP") and does not necessarily indicate whether cash flows will be sufficient to fund cash needs.
(e) For purposes of calculating the ratio of earnings to fixed charges, earnings represent income before income tax and extraordinary item plus fixed charges. Fixed charges consist of interest expense, net, including amortization of discount and financing costs and the portion of operating rental expense which management believes is representative of the interest component of rent expense.
(f) Amounts reflected for long-term obligations and total debt at November 30, 1990 are net of debt discount of $74.9 million.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
The Company employed the purchase method of accounting for both the Acquisition in February 1993 and the Recapitalization in November 1991. As a result of the required purchase accounting adjustments, the post-Acquisition financials for the ten months ended November 30, 1993 (the "Successor Financials") are not comparable to the pre-Acquisition financials for the two months ended January 31, 1993, the year ended November 30, 1992 and the one month ended November 30, 1991 (collectively, the "Pre-Successor Financials"), which were prepared on the Recapitalization basis of accounting, and are not comparable to the pre-Recapitalization financials for the eleven months ended October 31, 1991 (the "Predecessor Financials"), which were prepared on the basis of accounting resulting from a 1989 acquisition of the Company (see Note 2 to the Consolidated Financial Statements, Part II, Item 8

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
SEALY CORPORATION
Consolidated Financial Statements
November 30, 1993 and 1992
(With Independent Auditors' Report Thereon)
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders Sealy Corporation:
We have audited the accompanying consolidated balance sheets of Sealy Corporation and subsidiaries (Company) as of November 30, 1993 (Successor) and 1992 (Pre-Successor), and the related consolidated statements of operations, stockholders' equity, and cash flows for the ten months ended November 30, 1993 (Successor period); for the two months ended January 31, 1993, the year ended November 30, 1992 and the one month ended November 30, 1991 (Pre-Successor periods); and for the eleven months ended October 31, 1991 (Predecessor period). In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedules for the Successor period, Pre-Successor periods, and Predecessor period, as listed in Item 14(a)(2) of Form 10-K of Sealy Corporation for the year ended November 30, 1993. These consolidated financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the aforementioned consolidated financial statements present fairly, in all material respects, the financial position of Sealy Corporation and subsidiaries at November 30, 1993 and 1992, and the results of their operations and their cash flows for the Successor period, Pre-Successor periods, and Predecessor period, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedules for the Successor period, Pre-Successor periods, and Predecessor period, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.
As discussed in Note 2 to the consolidated financial statements, on February 12, 1993 a majority of the outstanding common stock of the Company was acquired in a business combination accounted for as a purchase. Further, on November 6, 1991, the Company completed a recapitalization which resulted in a change in control of the Company. These transactions have been accounted for under the purchase method and accordingly the consolidated financial statements of the Company for the Successor period, Pre-Successor periods, and Predecessor period are presented on a different cost basis and therefore, are not comparable.
As discussed in Notes 1 and 7 to the consolidated financial statements, in connection with the application of purchase accounting, effective February 1, 1993 the Company changed its method of accounting for income taxes to adopt the provisions of the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes".
KPMG Peat Marwick
Cleveland, Ohio January 28, 1994
SEALY CORPORATION CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT PAR VALUE AMOUNTS)
SEALY CORPORATION CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT PAR VALUE AMOUNTS)
See accompanying notes to consolidated financial statements.
SEALY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
See accompanying notes to consolidated financial statements.
SEALY CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS)
See accompanying notes to consolidated financial statements.
SEALY CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
In November 1991, the Company completed a Recapitalization under which approximately $534 million in face amount of, and interest on, its outstanding subordinated indebtedness to an affiliate ("MBLP") of First Boston Securities Corporation was exchanged for 26.3 million additional shares of common stock of the Company and a $116.7 million 12.4% Senior Subordinated Note.
See accompanying notes to consolidated financial statements.
SEALY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Significant accounting policies used in the preparation of the consolidated financial statements are summarized below.
(a) BUSINESS
Sealy Corporation (the "Company"), is engaged in the home furnishings business and produces mattresses, boxsprings, bedroom furniture and convertible sleep sofas. Substantially all of the Company's trade accounts receivable are from retail businesses. Sales to Sears, Roebuck & Co., the Company's largest customer, were approximately 12%, 17%, 13%, 15% and 12% of total net sales for the ten months ended November 30, 1993, the two months ended January 31, 1993, the year ended November 30, 1992, the one month ended November 30, 1991 and the eleven months ended October 31, 1991 (the "Reporting Periods"). The Company recognizes revenue upon shipment of goods to customers.
(b) PRINCIPLES OF OF SOLIDATION
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.
(c) CASH EQUIVALENTS
For purposes of the statement of cash flows, the Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents. Cash equivalents are stated at cost which approximates market value.
(d) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are depreciated over their expected useful lives principally by the straight-line method for financial reporting purposes and by both accelerated and straight-line methods for tax reporting purposes.
(e) AMORTIZATION OF INTANGIBLES
Goodwill represents the excess of the purchase price paid over the fair value of net assets acquired and is amortized on a straight-line basis over the expected periods to be benefitted. The Company assesses the recoverability of this intangible asset by determining whether the amortization of the goodwill balance over its remaining life can be recovered through projected undiscounted future earnings. The amount of goodwill impairment, if any, would be measured based on projected discounted future results using a discount rate reflecting the Company's average cost of funds.
Other intangibles include patents and trademarks which are amortized on the straight-line method over periods ranging from 5 to 17 years.
(f) NET EARNINGS (LOSS) PER COMMON SHARE
Net earnings (loss) per common share is based upon weighted average number of shares of the Company's common stock and common stock equivalents outstanding for the periods presented. Common stock equivalents included in the computation, using the treasury stock method, represent shares issuable upon the assumed exercise of warrants, stock options and performance shares that would have a dilutive effect in periods in which there were earnings. Common stock equivalents had no material effect on the computation of earnings (loss) per common share in the Reporting Periods.
SEALY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(g) INCOME TAXES
In February 1992, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard No. 109, "Accounting For Income Taxes" ("Statement 109"). Under the asset and liability method of Statement 109, deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under Statement 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
The Company adopted Statement 109 effective February 1, 1993, in connection with the Acquisition of the Company disclosed in Note 2. The adoption of Statement 109 had no material effect on the amount of income tax expense reported in the ten months ended November 30, 1993. Prior to February 1, 1993, the Company followed Statement of Financial Accounting Standard No. 96 ("Statement 96") to account for income taxes.
(h) RECLASSIFICATION
Certain items in the consolidated financial statements for 1992 and 1991 have been reclassified to conform to the 1993 presentation.
(2) BASIS OF ACCOUNTING
On February 12, 1993, Zell/Chilmark Fund, L.P. ("Zell/Chilmark") led an investor group (the "Zell/Chilmark Purchasers") which purchased the 93.6% equity interest in the Company (the "Acquired Shares") held by MB L.P. I, an affiliate of The First Boston Corporation ("MBLP"), for a cash purchase price of $250 million (the "Acquisition").
The Company employed the purchase method of accounting for the Acquisition. The consolidated financial statements as of November 30, 1993 and for the ten months then ended reflect an allocation of the sum of the total consideration paid in the Acquisition for the approximately 94% equity interest and the remaining 6% equity interest valued at historical book value (collectively, the "New Basis"). A summary of the New Basis follows:
The New Basis has been allocated to the tangible and identifiable intangible assets and liabilities of the Company as of February 1, 1993 based, in large part, upon independent appraisals of their fair values, with the remainder of the New Basis allocated to goodwill.
The New Basis in excess of historical book value of the identifiable net assets acquired is as follows:
SEALY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The excess New Basis has been allocated as follows:
Increase (decrease) in net assets:
A favorable ruling with respect to certain tax contingencies and the recognition of available net operating loss carryforwards has been reflected as purchase accounting adjustments in the allocation of the New Basis.
On November 6, 1991, the Company completed a recapitalization (the "Recapitalization") in which the Company's capital structure was significantly improved, the face amount of its indebtedness and interest thereon held by MBLP was reduced by approximately $417 million, the Company's interest expense obligations were substantially reduced and the principal repayment schedule on a portion of the Company's existing bank term loan facility was extended. As a result of an exchange in April 1990 of certain outstanding debt issued to First Boston Securities Corporation ("FBSC") for new debt at lower interest rates plus additional common stock (the "Exchange"), and subsequent Recapitalization in November 1991, MBLP (as successor transferee by FBSC) obtained a controlling interest in the Company. These transactions have been accounted for under the purchase method of accounting as a step acquisition.
As a result of the required purchase accounting adjustments, the post-Acquisition financials as of and for the ten months ended November 30, 1993, (the "Successor Financials") are not comparable to the pre-Acquisition financials for the two months ended January 31, 1993, the year ended November 30, 1992 and the one month ended November 30, 1991 (collectively, the "Pre-Successor Financials", which were prepared on the Recapitalization basis of accounting), and are not comparable to the pre-Recapitalization financials for the eleven months ended October 31, 1991 (the "Predecessor Financials").
(3) INVENTORIES
Inventories are valued at cost not in excess of market, using the first-in, first-out (FIFO) method. The major components of inventory as of November 30, 1993 and 1992 were as follows:
SEALY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(4) LONG-TERM OBLIGATIONS
On May 7, 1993, the Company completed a refinancing plan (the "Refinancing"), which consisted of (i) the sale of $200.0 million of 9 1/2% Senior Subordinated Notes Due 2003 (the "Notes") pursuant to a public offering, (ii) the application of $194.5 million of net proceeds therefrom to redeem all of the then outstanding 12.4% Senior Subordinated Notes of the Company Due 2001 (approximately $139.6 million), and to reduce amounts outstanding under the Company's existing credit agreement prior thereto (the "Old Credit Agreement") and (iii) the execution of a new secured credit agreement (the "New Credit Agreement") with a new group of senior lenders providing for two term loan facilities (together, the "New Term Loan Facility") and a revolving credit facility (the "New Revolving Credit Facility") in connection with the refinancing of the Old Credit Agreement. During May 1993, the Company recorded a $2.9 million extraordinary loss, net of income tax of $1.5 million, representing the remaining unamortized debt issuance costs related to the long term obligations repaid as a result of the Refinancing.
The Notes mature on May 1, 2003 and bear interest at the rate of 9 1/2% per annum from May 7, 1993, payable semiannually in cash on May 1 and November 1 of each year, commencing November 1, 1993. The Notes may be redeemed at the option of the Company on or after May 1, 1998, under the conditions and at the redemption prices as specified in the note indenture, dated as of May 7, 1993, under which the Notes were issued (the "Note Indenture"). Notwithstanding the foregoing, at any time prior to May 1, 1996, the Company may redeem with the net proceeds of one or more Public Equity Offerings as defined in the Note Indenture, up to $60.0 million aggregate principal amount of the Notes at the redemption prices as specified in the Note Indenture. The Notes are subordinated to all existing and future Senior Debt of the Company as defined in the Note Indenture.
The New Credit Agreement provides for loans of up to $325 million and consists of the $75 million New Revolving Credit Facility and the $250 million New Term Loan Facility. The New Revolving Credit Facility provides sublimits for a $30 million discretionary letter of credit facility ("Letters of Credit") and a discretionary swing loan facility of up to $5 million ("Swing Loans"). The New Revolving Credit Facility terminates and is due and payable on November 30, 1998 unless extended as provided for in the New Credit Agreement.
SEALY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The New Term Loan Facility consists of a $175 million term loan (the "Tranche A Term Loan") and a $75 million term loan (the "Tranche B Term Loan") (collectively, the "Term Loans"). Under the terms of the New Credit Agreement, the Company is required to make certain mandatory principal prepayments of the Term Loans in the event of the sale of any of the Company's principal operating subsidiaries, certain sales of assets, excess cash flow, sales of stock and issuances of new debt securities and in certain other circumstances. In addition, the Company is permitted to make voluntary prepayments. During the year ended November 30, 1993, the Company made prepayments of $33.2 million under these provisions. Such prepayments will reduce pro rata future annual amounts to be amortized under the New Credit Agreement. In addition, the Company made the scheduled principal payments aggregating $20 million in 1993. After application of the 1993 prepayments, the Term Loans amortize according to the following schedule:
In addition, the outstanding principal amount under the New Revolving Credit Facility must not exceed a certain amount for a thirty day period during each fiscal year of the Company. The Company is also subject to certain affirmative and negative covenants under both the New Credit Agreement and the Note Indenture, including, without limitation, requirements and restrictions with respect to capital expenditures, dividends, working capital, cash flow, net worth and other financial ratios.
At November 30, 1993, the Company had approximately $53 million available under the Revolving Credit Facility, with $3 million outstanding and letters of credit issued totalling approximately $19 million. A commitment fee of 0.50% per annum on the unused portion of the New Revolving Credit Facility is payable quarterly in arrears. Two separate interest rate options exist and are available to the Company at its option as follows:
(a) A Base Rate plus a Base Rate Applicable Margin; or (b) A Eurodollar Rate plus a Eurodollar Applicable Margin.
Borrowings under the Revolving Credit Facility and the Tranche A Term Loan initially have a Base Rate Applicable Margin of 1.25% and a Eurodollar Applicable Margin of 2.50%. The Tranche B Term Loan initially has a Base Rate Applicable Margin of 1.75% and a Eurodollar Applicable Margin of 3.00%. The initial Base Rate Applicable Margin and Eurodollar Applicable Margin are in effect until May 6, 1994, and thereafter are subject to decreases or increases (not in excess of initial applicable margins) based on the Company's leverage ratio as defined in the New Credit Agreement.
The Secured Credit Agreement requires that interest rate protection be maintained on an aggregate notional amount at least equal to 50% of outstanding Term Loans during the period from August 5, 1993 through at least May 7, 1996.
SEALY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
All obligations of the Company under the Credit Agreement are jointly and severally guaranteed by each direct and indirect domestic subsidiary of the Company and secured by first priority liens on and security interests in substantially all of the assets of the Company and its domestic subsidiaries and by first priority pledges of substantially all of the capital stock of most of the subsidiaries of the Company.
(5) LEASE COMMITMENTS
The Company leases certain operating facilities, offices and equipment. The following is a schedule of future minimum annual lease commitments and sublease rentals at November 30, 1993.
At November 30, 1993, property, plant and equipment included approximately $2.2 million of aggregate cost and $0.1 million of accumulated depreciation related to assets under capitalized leases.
Rental expense charged to operations is as follows:
The Company has the option to renew certain plant operating leases, with the longest renewal period extending through 2015. Most of the operating leases provide for increased rent through increases in general price levels.
SEALY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(6) STOCK OPTION PLAN
The Company adopted the 1989 Stock Option Plan ("1989 Plan") in 1989 and the 1992 Stock Option Plan ("1992 Plan") in 1992 and reserved 100,000 shares and 600,000 shares, respectively, of Class A Common Stock for future issuance. Options under the 1989 Plan and the 1992 Plan may be granted either as Incentive Stock Options as defined in Section 422A of the Internal Revenue Code or Nonqualified Stock Options subject to the provisions of Section 83 of the Internal Revenue Code.
During fiscal years 1990 and 1991, the Company issued options under the 1989 Plan totalling 8,250 shares (net of subsequent forfeitures) of which 7,937 are exercisable at November 30, 1993. The remaining 1989 Plan options are cumulatively exercisable as to one quarter of the underlying shares on each of the first through fourth anniversaries of date of grant. Any unexercised options terminate on the tenth anniversary of the date of grant or earlier, in connection with termination of employment. The exercise price for all 1989 Plan options exercisable or outstanding as of November 30, 1993 is $50.00 per share. No 1989 Plan options have been exercised since the date of grant.
During fiscal years 1992 and 1993, the Company granted nonqualified options totalling 198,000 shares (net of subsequent forfeitures) under the 1992 Plan. The options granted in 1992 totalled 92,000 with an exercise price of $7.52 per share, and the options granted in June, 1993 totalled 106,000 and have an exercise price of $9.05 per share. The 1992 Plan options are exercisable 25% upon grant and 25% per year thereafter. The exercise price is equal to the estimated fair value of the Company's stock at the date of grant. 1992 Plan options totalling 750 shares were exercised during 1993. At November 30, 1993, options for 72,500 shares issued under the 1992 Plan are exercisable.
During fiscal year 1993 the Company adopted the 1993 Non-Employee Director Stock Option Plan, providing for the one-time automatic grant of ten-year options to acquire up to 10,000 shares of Class A Common Stock of the Company (the "Shares") to all current and future directors who are not employed by the Company, by Zell/Chilmark or by their respective affiliates ("Non-Employee Directors"). Options granted under the 1993 Non-Employee Director Stock Option Plan vest immediately and are initially exercisable at a price equal to the fair market value of the Shares on the date of grant. The exercise price of options granted pursuant to this Plan increases on each anniversary date of such grant by 4% compounded annually. Pursuant to this Plan, the Company granted options to acquire up to 50,000 Shares to Non-Employee Directors in fiscal year 1993 at an initial exercise price of $9.05 per Share.
(7) INCOME TAXES
As discussed in Note 1(g), the Company adopted Statement 109 effective February 1, 1993. Prior years' financial statements have not been restated to apply the provisions of Statement 109.
SEALY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The Company and its domestic subsidiaries file a consolidated U.S. Federal income tax return. Income tax expense (benefit) attributable to income from continuing operations consists of:
Income before income taxes from Canadian operations amount to $7,255, $1,140, $7,972, $25 and $8,933 for the Reporting Periods.
The differences between the effective tax rate and the statutory U.S. Federal income tax rate are explained as follows:
As required by Statement 109, the significant components of deferred income tax expense attributable to income from continuing operations for the ten months ended November 30, 1993 include adjustments to deferred tax assets and liabilities for enacted changes in tax rates of $216, and the recognition of the benefit of Successor net operating losses of $1,936.
SEALY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
As required under Statement 96, deferred income taxes are provided for temporary differences between the financial reporting bases and the tax bases of the Company's assets and liabilities. The sources of these differences and the effects of changes from these differences on the deferred tax expense (benefit) are as follows:
At November 30, 1993, the total deferred tax assets are $44,464, the total deferred tax liabilities are $33,257, and the valuation allowance is $13,123. The significant components of the deferred tax assets are accrued salaries and benefits of $11,699 and the net operating loss carryforwards of $19,579, and of the deferred tax liabilities are property, plant and equipment of $26,439 and intangible assets of $7,154.
As a result of the Recapitalization, the future usage of net operating losses created prior to November 6, 1991 will be substantially limited. The Company has net operating loss carryforwards of approximately $43 million for U.S. Federal income tax purposes. These losses cannot be carried back against income of prior periods, and will expire, if not utilized, by the year 2008. The entire amount of the valuation allowance, the amount which has not changed since the adoption of Statement 109, shall be allocated to goodwill should the tax benefit for deferred tax assets, to which the valuation allowance relates, be subsequently realized.
A provision has not been made for U.S. or foreign taxes on undistributed earnings of subsidiaries which operate in Canada and Puerto Rico. Upon repatriation of such earnings, withholding taxes might be imposed that are then available for use as credits against a U.S. Federal income tax liability, subject to certain limitations. The amount of taxes that would be payable on repatriation of the entire amount of undistributed earnings is immaterial.
(8) RETIREMENT PLANS
Substantially all employees are covered by profit sharing plans, where specific amounts are set aside in trust for retirement benefits. The Company has defined benefit pension plans covering a limited number of employees pursuant to negotiated labor contracts. The funded status of the defined benefit pension plans, as well as the amounts expensed for the Reporting Periods, are considered immaterial. The total profit sharing and pension expense was $4.0 million, $0.8 million, $4.1 million, $0.3 million and $4.5 million for the Reporting Periods, respectively.
SEALY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(9) WARRANTS
SERIES A AND SERIES B WARRANTS
As part of the Recapitalization, the Series A and Series B Warrants (collectively, "Restructure Warrants") were issued under a Warrant Agreement ("Agreement I") dated as of November 6, 1991 between the Company and its subsidiary, Sealy, Inc., as warrant agent. Each holder (other than MBLP) of the Company's common stock immediately prior to the Recapitalization received warrants entitling all such holders to future ownership (when added to their then existing holdings) of up to 21.6% of the fully diluted common stock of the Company upon exercise. The Restructure Warrants, when exercised, will entitle the Holder thereof to receive one share of Class A Common Stock of the Company in exchange for the exercise price of $16.00 per share for Series A warrants and $22.50 per share for Series B warrants, subject to adjustment under certain circumstances. The Series A and Series B Warrants are exercisable into 4,288,700 and 1,649,500 shares of Class A Common Stock of the Company, respectively.
The Restructure Warrants are exercisable at any time and from time to time on or prior to November 6, 2001 ("Expiration Date"). The Restructure Warrants may terminate and become void prior to the Expiration Date in the event that such warrants are redeemed as described below or if, prior to November 6, 1996 (after notice to Restructure Warrant holders, who may then exercise such warrants), the Company merges or consolidates with another entity with the other entity as the survivor.
The Company has the right to redeem the Restructure Warrants on any date after November 6, 1996 at a redemption price per share as defined in Agreement I.
MERGER WARRANTS
Merger Warrants were issued under a Warrant Agreement ("Agreement II") dated as of August 1, 1989 between the Company and First Chicago Trust Company of New York, as warrant agent. Each Merger Warrant, when exercised, will entitle the holder thereof to receive one fiftieth of one share of Class B Common Stock of the Company in exchange for the exercise price of $.01 per share, subject to adjustment under certain circumstances.
The Merger Warrants are exercisable after August 9, 1995 or upon the occurrence of certain other events as described in Agreement II.
Within 90 days after August 9, 1994 (or sooner, under certain circumstances), the Company will offer to repurchase for cash all outstanding Merger Warrants and shares issued under such Agreement II ("Warrant Shares") in a single transaction ("Repurchase Offer") at a purchase price as defined in Agreement II, provided certain conditions are met. At the present time, the Company's debt Agreements restrict its ability to repurchase such Merger Warrants or Warrant Shares. Due to the possible occurrence of the Repurchase Offer, the Merger Warrants are not considered to be a part of the Company's stockholders' equity and therefore, are included in other noncurrent liabilities in the accompanying consolidated balance sheets. The Merger Warrants, subject to certain conditions, are exercisable into an aggregate of 212,500 shares of Class B Common Stock.
SEALY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(10) COMMON STOCK
Holders of Class A Common Stock are entitled to one vote per share on all matters submitted to a vote of stockholders while the holders of Class B Common Stock are entitled to one-half vote per share. Except with respect to voting rights, the terms of the Class A Common Stock and the Class B Common Stock are identical. Shares of Class B Common Stock, under certain circumstances, are convertible into shares of Class A Common Stock.
(11) PERFORMANCE SHARE PLAN
Effective April 1, 1992, the Company adopted a Performance Share Plan ("Plan") for certain employees of the Company. Under the Plan, the Board of Directors may approve the issuance of up to 3.0 million performance share units each representing the right to receive up to one share of Class A Common Stock of the Company ("Shares") if the Company meets specified cumulative operating cash flow targets over the five-year period ended November 30, 1996. As of November 30, 1993, there are 2.4 million performance share units outstanding under the Plan which represent the right to receive Shares having an estimated fair value of $19.7 million. The performance share units vest over the five years ending November 30, 1996 and, as of November 30, 1993, none of the units were convertible into Shares.
The Plan is a variable stock compensation plan pursuant to which the fair value of Shares issuable under the Plan will be recorded as compensation expense over the Plan's five-year term ending November 30, 1996. In addition to the annual amount of compensation expense under the Plan, such amount will be adjusted to give cumulative effect to any change in the amount of non-cash compensation expense previously recorded in prior reporting periods, resulting from subsequent increases or decreases in the fair value of the Shares or the number of performance share units outstanding since such reporting period and to any change in management's estimate of its ability to achieve the cumulative operating cash flow targets as defined in the Plan. During the ten months ended November 30, 1993, the two months ended January 31, 1993 and the year ended November 30, 1992, the Company recorded $2.2 million, $0.9 million and $5.4 million, respectively, of non-cash compensation expense under the Plan. Based on the value of the Shares at November 30, 1993, and giving consideration to management's estimate of the expected cumulative operating cash flow target to be achieved over the five year period ended November 30, 1996, the Company expects to record future non-cash charges totalling approximately $11 million. To the extent that the fair value of the Shares or the number of performance share units outstanding increases or decreases, such non-cash expense will also increase or decrease in future reporting periods.
(12) SUMMARY OF INTERIM FINANCIAL INFORMATION (UNAUDITED)
SEALY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
During the second quarter of fiscal year 1993, the Company recorded an extraordinary loss of $2.9 million, net of income taxes ($.10 per share), from early extinguishment of debt in connection with the Refinancing. During the fourth quarter of fiscal year 1993, the Company recorded a $3.0 million charge for estimated costs of closing certain manufacturing facilities which is expected to be completed during fiscal year 1994.
(13) CONTINGENCIES
Sealy Corporation and one of its subsidiaries are parties to an Administrative Consent Order (the "ACO") issued by the New Jersey Department of Environmental Protection and Energy (the "Department"), pursuant to which the Company and such subsidiary agreed to conduct soil and groundwater sampling to determine the extent of environmental contamination found at the plant owned by the subsidiary in South Brunswick, New Jersey. The Company does not believe that any of its manufacturing processes was a source of any of the contaminants found to exist above regulatorily acceptable levels in the groundwater, and the Company is exploring other possible sources of the contamination, including former owners of the facility. As the current owners of the facility, however, the Company and its subsidiary are primarily responsible for site investigation and any necessary clean-up plan approved by the Department under the terms of the ACO.
The Company and its environmental consultant have been conducting investigation and remediation activities since preliminary evidence of contamination was first discovered in August, 1991. On November 15, 1993, the Company received a letter from the Department approving the findings and substantially all of the recommendations of the Company's consultant contained in a June 4, 1993 report submitted to the Department, but also requiring the Company to undertake additional remedial and investigative activities, including the installation of shallow groundwater monitoring wells off-site.
On December 1, 1993, the Company's consultant submitted to the Department a report updating and supplementing the June, 1993 report with regard to activities completed prior to receipt of the Department's November 15, 1993 letter. On December 23, 1993, the Company submitted to the Department a Remedial Investigation Schedule of activities to be conducted within the next six (6) months in accordance with the Department's November 15, 1993 letter.
In its November 15, 1993 letter, the Department postponed any required activity by the Company to delineate and/or remediate contaminants in the fractured bedrock, which it had previously requested the Company to undertake. The Company, however, still has reservations regarding any such required activities which the Department may attempt to impose in the future. Because of the nature of certain of the contaminants and their geological location in fractured bedrock, the Company and its consultant remain unaware of any accepted technology for successfully remediating the contamination either in the shallow groundwater or the fractured bedrock.
SEALY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The Company has established an accrual for further site investigation and remediation. Based on the facts currently known by the Company, management believes that the accrual is adequate to cover the Company's probable liability and does not believe that resolution of this matter will have a material adverse effect on the Company's financial position or future operations. However, because of many factors, including the uncertainties surrounding the nature and application of environmental regulations, the practical and technical difficulties in obtaining complete delineation of the contamination, the level of clean-up that may be required, if any, or the technology that could be involved, and the possible involvement of other potentially responsible parties, the Company cannot presently predict the ultimate cost to remediate this facility, and there can be no assurance that the Company will not incur material liability with respect to this matter.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None. PART III
ITEM 10.


ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS
The following table sets forth the name, age, principal occupation and employment and business experience during the last five years of each of the Company's directors:
Mr. Zell is a director of Revco D.S., Inc., Carter Hawley Hale Stores, Inc., The Delta Queen Steamboat Co., The Vigoro Corporation and Jacor Communications, Inc. Mr. Schulte is a director of Revco D.S., Inc., Carter Hawley Hale Stores, Inc. and Jacor Communications, Inc. Mr. Fenster serves on the board of American Management Systems, Inc. Ms. Hefner is a director of Playboy Enterprises, Inc. Mr. Johnston serves as a director of The Wachovia Corporation, RJR Nabisco, Inc., RJR Nabisco Holdings Corp, R.J. Reynolds Tobacco Co. and R.J. Reynolds Tobacco International, Inc. Mr. Towe is a director of The American Heritage Life Insurance Company and Long John Silver's Restaurants, Inc.
EXECUTIVE OFFICERS
The following table sets forth the name, title, age, and certain other information with respect to the executive and certain other appointed officers of the Company:
COMPLIANCE WITH SECTION 16 (A) OF THE EXCHANGE ACT
Based solely upon a review of Forms 3 and 4, and amendments thereto, furnished to the Company pursuant to Rule 16a-3(e) during Fiscal 1993 and Form 5, and amendments thereto, furnished to the Company with respect to Fiscal 1993, the Company is not aware of any person that is subject to Section 16 of the Securities Exchange Act of 1934 (the "Exchange Act") with respect to the Company, that has failed to file, on a timely basis, (as disclosed in the aforementioned Forms) reports required by Section 16 (a) of the Exchange Act during Fiscal 1993 or prior fiscal years.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth information concerning the annual and long-term compensation for services in all capacities to the Company for each of the years ended November 30, 1993, 1992 and 1991, of those persons who were, at November 30, 1993 (i) the chief executive officer and (ii) the other four most highly compensated executive officers of the Company for the year ended November 30, 1993 (collectively, the "Named Executive Officers"):
SUMMARY COMPENSATION TABLE
(a) Pursuant to his Employment Agreement (as hereinafter defined), Mr. Beggs commenced employment with the Company as of August 24, 1992. Under the terms of his Employment Agreement, Mr. Beggs received $117,045 and $180,850 in 1993 and 1992, respectively, as the result of: (i) the forgiveness of a portion of an equity loan from the Company to Mr. Beggs, reflecting the loss of equity in his previous residence (1993-$44,034; 1992-$91,751); (ii) closing costs on a new home, moving expenses, temporary living expenses and costs relating to the termination of a contract to purchase another residence (1993-$44,000; 1992-$89,099); (iii) professional fees, travel and entertainment expenses; and (iv) payments to cover Mr. Beggs' tax liabilities on the foregoing items, all as described more fully in "--Compensation Pursuant to Plans and Other Arrangements -- Executive Employment Agreements."
(b) Such amount reflects the Company's determination of the fair value at the date of grant of 100,000 Shares issued to Mr. Beggs in 1992 pursuant to his Employment Agreement, certain of which are subject to forfeiture under certain circumstances. Although the New Credit Agreement and the indenture relating to the Notes contain restrictions on the Company's ability to pay dividends, if dividends were declared and paid on the Company's Shares, such dividends would be paid on such Shares issued to Mr. Beggs. The Employment Agreement also provides for the future issuance to Mr. Beggs of an additional 100,000 Shares, subject to certain conditions. See "-- Compensation Pursuant to Plans and Other Arrangements -- Executive Employment Agreements." Hence, Mr. Beggs' aggregate stock holdings consist of 200,000 Shares with an estimated fair market value of $2,696,000 at the end of fiscal year 1993. No other Named Executive Officer had any holdings of stock which were subject to forfeiture at the end of fiscal year 1993.
(c) Represents amounts paid in fiscal year 1993 on behalf of each of the Named Executive Officers for the following three respective categories of compensation: (i) Company premiums for life and accidental death and dismemberment insurance, (ii) Company premiums for long-term disability benefits, and (iii) Company contributions to the Company's defined contribution plans. Amounts for each of the Named Executive Officers for each of the three respective preceding categories is as follows: Mr. Beggs: (1993- $2,220, $1,000, $16,020; 1992- $510, $0, $0); Mr. Fazio: (1993- $1,159, $870, $12,180; 1992- $1,040, $850, $11,900); Mr. McIlquham: (1993- $1,026, $770, $10,780; 1992- $887, $725, $10,150); Mr. Fellmy: (1993- $999, $750, $10,500; 1992- $765, $625, $9,042); and Mr. Claypool: (1993- $1,039, $780, $10,920; 1992- $918, $750, $0).
(d) The bonus amounts reflected for such persons include a portion of such bonus paid in Shares, valued at $7.52 per Share, which the Company determined was the fair value of such Shares on the date of the bonus award.
(e) All of Mr. McIlquham's amount and $33,331 of such amount for Mr. Fellmy represent payments made by the Company to cover their respective tax liabilities relating to the portion of their bonuses paid in Shares in fiscal year 1992. The balance of such amount for Mr. Fellmy represents payment made by the Company to reimburse moving expenses and cover the tax liability thereon.
LONG-TERM INCENTIVE PLAN AWARDS IN LAST FISCAL YEAR
(a) The Company's Performance Share Plan (the "Plan") effective in 1992 provides for the issuance to key employees of the Company and its subsidiaries (the "Participants") of performance share units ("Performance Shares"), each of which represents the right to receive, without any additional consideration, up to one Share, based on the extent to which the Company achieves specified cumulative operating cash flow ("COCF") targets over the five-year period ending November 30, 1996 (the "Measurement Period"). An aggregate of 2,366,000 Performance Shares, net of forfeitures, have been granted to Participants, and up to 247,100 Performance Shares have been granted and reserved for individuals who will occupy certain open positions effective, in each case, upon the hire date of any such individual, under the Plan. The maximum number of Performance Shares authorized to be granted is 3,000,000.
Generally, the Plan provides that if the Company's COCF for the Measurement Period is $500 million, then each vested Performance Share shall convert into .10 Shares (the "Threshold"); if COCF is $575 million, then each vested Performance Share shall convert into .417 Shares (the "Target"), and if COCF equals or exceeds $650 million, then each vested Performance Share shall convert into one Share (the "Maximum"). If COCF for such period is between $500 million and $650 million, then the conversion ratio will be interpolated on a straight-line basis between the two closest of the three aforementioned target ratios. If COCF is less than $500 million, then all Performance Shares shall be forfeited without conversion. The estimated fair value of one Share on November 30, 1993 was $13.48. In the event that the Company is a party to an acquisition, merger or other significant corporate event or makes an in-kind distribution on any equity security, the COCF targets or ratios may be equitably adjusted to reflect an equivalent value.
The Performance Shares generally vest over a five-year period. If a Participant incurs a termination of employment during the periods indicated, the following percentages of Initial Performance Shares become vested: from December 1, 1992 through November 30, 1993 -- 30%; from December 1, 1993 through November 30, 1994 -- 45%; from December 1, 1994 through November 30, 1995 -- 60%; from December 1, 1995 through November 29, 1996 -- 80%; and on or after November 30, 1996 -- 100%. In the event that a Participant incurs a termination of employment for cause (as defined in the Plan) or engages in a breach of certain noncompetition covenants following a voluntary termination, the Participant shall forfeit all Performance Shares, whether or not vested.
The Human Resources Committee of the Board (the "Human Resources Committee") may, in its sole discretion, terminate the Plan at any time without the consent of any Participant. The Plan shall terminate automatically on the date upon which the Performance Shares are converted into Shares (or are forfeited) following the Measurement Period (the "Payment Date") or, if earlier, upon
a Change in Control (as defined in the Plan) unless the person(s) who purchased 50% or more of the common stock or substantially all of the assets of the Company in effecting such a Change in Control (a "Third Party Purchaser") agrees to continue the Plan or a replacement plan in a manner that is fair and equitable to the Participants. As part of the Acquisition, Zell/Chilmark consented to the continuation of the Plan. In the event that the Plan is terminated because of changes in the laws or accounting rules which frustrate the intent of the Plan or because of the inability to preserve the integrity of the COCF formula by reason of material changes to the business or operations of the Company, then the disinterested members of the Board may replace the Plan with an alternative plan that is comparable in scope and effect or the Board may have the Company distribute that number of Shares as would be arrived at by multiplying the unforfeited Performance Shares by a fraction (which may not be greater than one) the numerator of which is the COCF through the date of termination and the denominator of which is $650 million. In all other cases of termination of the Plan, all Performance Shares awarded to a Participant, which have not previously been forfeited, shall become vested Performance Shares and the Participant shall receive that number of Shares equal to the number of that Participant's vested Performance Shares on the date of termination of the Plan. Notwithstanding any of the foregoing, upon the termination of the Plan because of a Change in Control where the Third Party Purchaser did not offer the same or a replacement plan, the Company shall, unless the common stock of the Company is publicly traded on the termination date of the Change in Control, make a lump-sum cash payment to the Participant equal to the fair market value of the applicable number of Shares, less applicable withholdings, in satisfaction of all rights of such Participant under the Plan.
Upon the conversion of the Performance Shares into Shares following the Payment Date, the Company will, at the discretion of the Participant, lend to those Participants that are still employees a sum (bearing interest at the prime rate) sufficient to cover his or her estimated tax liability (a "Tax Loan") or, alternatively, the Participant can elect to have the Company withhold a sufficient number of Shares as necessary to cover such estimated tax liability, and pay such withholding tax liability, in cash, on behalf of the Participants. The holders of Shares issued under the Plan also will have certain registration rights which will apply after an initial public offering of Shares (the "Initial IPO"), for a period of five years following the Payment Date. The Tax Loans, if any, would be due and payable 30 days following the Initial IPO or such other time as designated by the Human Resources Committee.
Mr. Beggs was granted his Performance Shares in connection with his execution of the Employment Agreement. See "-- Compensation Pursuant to Plans and Other Arrangements -- Executive Employment Agreements."
COMPENSATION PURSUANT TO PLANS AND OTHER ARRANGEMENTS
SEVERANCE BENEFIT PLANS. Effective December 1, 1992, the Company established the Sealy Executive Severance Benefit Plan (the "Executive Severance Plan") for employees in certain salary grades. Benefit eligibility includes, with certain exceptions, termination as a result of a permanent reduction in work force or the closing of a plant or other facility, termination for inadequate job performance, termination of employment by the participant following a reduction in base compensation, reduction in salary grade which would result in the reduction in potential plan benefits or involuntary transfer to another location. Benefits include cash severance payments calculated using various multipliers varying by salary grade, subject to specified minimums and maximums depending on such salary grades. Such cash severance payments are made in equal semi-monthly installments calculated in accordance with the Executive Severance Plan until paid in full. Certain executive-level officers would be entitled to a minimum of one-year's salary and a maximum of two-year's salary under the Executive Severance Plan. However, if a Participant becomes employed prior to completion of the payment of benefits, such semi-monthly installments shall be reduced by the Participant's base compensation for the corresponding period from the Participant's new employer. Participants receiving cash severance payments under the Executive Severance Plan also would receive six months of contributory health and dental coverage and six months of group term life insurance coverage.
The Company currently follows the terminal accrual approach to accounting for severance benefits under the Executive Severance Plan and records the estimated cost of these benefits as expense at the date of the event giving rise to payment of the benefits.
EXECUTIVE EMPLOYMENT AGREEMENT. Effective October 31, 1992, the Company entered into an employment agreement and related reimbursement letter agreement (collectively, the "Employment Agreement") with Mr. Beggs, pursuant to which Mr. Beggs became employed as Chairman, President and Chief Executive Officer of the Company for a period (the "Employment Period") commencing on August 24, 1992 and continuing through November 30, 1997 (the "Expiration Date"). Pursuant to the Employment Agreement, Mr. Beggs' base salary was $500,000 for Fiscal 1993. Such salary may be increased but not decreased in an annual review, and Mr. Beggs is entitled to receive an annual cash bonus in an amount to be determined on the basis of certain corporate and individual performance targets determined by the Board of Directors, or a committee thereof.
Pursuant to the Employment Agreement, Mr. Beggs was granted an aggregate of 200,000 Shares, 100,000 of which were issued as of October 31, 1992 (the "Issued Shares"). If Mr. Beggs is terminated for cause or voluntarily terminates his employment with the Company, other than for "good reason" (as such terms are defined in the Employment Agreement), 55,000 or 35,000 of such Issued Shares are forfeitable through November 30, 1994, and November 30, 1995, respectively. In addition, the following number of additional Shares will be issued if he remains employed by the Company on the dates indicated: November 30, 1995 -- 10,000 shares; November 30, 1996 --40,000 shares; and November 30, 1997 -- 50,000 shares. Mr. Beggs also entered into a Stockholder's Agreement with the Company (the "Stockholder's Agreement") in connection with the Employment Agreement, which provides that, prior to the Expiration Date, Mr. Beggs may sell his Shares only after an Initial IPO or approval by the Board of Directors and, after the Expiration Date, the Company shall have certain rights of first refusal with respect to any proposed transfers of Mr. Beggs' Shares (other than to certain permitted transferees). The Stockholder's Agreement also provides that the holders of the Shares issued to Mr. Beggs under the Employment Agreement shall have certain ""piggyback'' registration rights with respect to such Shares. Mr. Beggs recognized taxable income in 1992 in connection with the Issued Shares and borrowed $279,300 from the Company (the "Stock Loan") to be used in payment of the required withholding taxes. The Stock Loan bears interest at the applicable federal rate in effect on the date of the loan, with all unpaid and outstanding principal and interest due and payable on November 30, 1995. In addition, Mr. Beggs was granted an award of 1,000,000 Performance Shares, representing the right to receive up to 1,000,000 Shares pursuant to, and subject to the terms of, the Performance Share Plan. See Note (a) to "--Long-Term Incentive Plan Awards in Last Fiscal Year."
Pursuant to the Employment Agreement, Mr. Beggs is entitled to health and life insurance and certain other benefits and he also received relocation expenses. The relocation expenses included closing costs on a new home, moving expenses, temporary living expenses, and costs relating to the termination of a contract to purchase another residence (collectively, "Relocation Expenses"). The Company increased its payments to Mr. Beggs for Relocation Expenses by the resulting income tax liability created by such reimbursements. Mr. Beggs has agreed to reimburse the Company for any Relocation Expenses received by him if he voluntarily terminates his employment within two years after his relocation is completed unless such termination is for good reason (as defined in the Employment Agreement). The Company purchased Mr. Beggs' previous residence from him for $712,500 and sold such residence for $690,000 in February 1993. Mr. Beggs borrowed $157,673 from the Company (the "Equity Loan") upon the purchase of a new home in the Cleveland area, reflecting the loss of equity in his previous residence. Such Equity Loan is interest free to the extent allowed under applicable tax laws and otherwise bears interest at the applicable federal rate. In accordance with the terms of the Employment Agreement, $20,000 and $57,673 of such Equity Loan was forgiven on November 30, 1993 and December 31, 1992, respectively. In addition, $4,070 in interest related to such equity loan was also forgiven on November 30, 1993, and the Company paid Mr. Beggs an additional $44,034 and $34,077, as additional compensation for his tax liability as a result of such forgiveness of indebtedness in each period, respectively. The balance of the Equity Loan has four
equal annual payments of principal due on November 30, 1994 and each November 30 thereafter for three years. If Mr. Beggs remains employed by the Company through the date when a payment is due, such indebtedness will be forgiven by the Company and the Company will pay Mr. Beggs an amount necessary to offset any tax liability to him as a result of such forgiveness of indebtedness. If Mr. Beggs voluntarily terminates his employment with the Company, other than for good reason, the remaining balance of the Equity Loan and any accrued interest will become immediately due and payable.
If Mr. Beggs' employment is terminated prior to the Expiration Date other than for cause, (as defined in the Employment Agreement), death or disability or if Mr. Beggs terminates his employment for good reason, he will continue to receive his base salary until the later of November 30, 1997 or one year, plus the forgiveness of the Equity Loan, the payment of a portion of any then-applicable bonus on a pro-rata basis and the issuance of the remainder of the unissued Shares noted above. In addition, if Mr. Beggs' employment is terminated prior to the Expiration Date under such circumstances or because of his death or disability, then the Stockholder's Agreement grants to Mr. Beggs or his representative the right to cause the Company to repurchase all of Mr. Beggs' Shares at their "fair market value" (determined in accordance with the Shareholders' Agreement). In the event that Mr. Beggs' employment is terminated prior to the Expiration Date for "cause" or if he voluntarily terminates his employment other than for "good reason," then the Company shall have the option to repurchase Mr. Beggs' Shares for their "fair market value."
REMUNERATION OF DIRECTORS. Effective upon the Acquisition, the Company began compensating its directors who are not employees with a retainer at the rate of $30,000 on an annual basis, reduced by $1,000 for each Board meeting not attended, plus $1,000 ($1,250 for Committee Chairmen, if any) for each Committee meeting attended if such meeting is on a date other than a Board meeting date, and incidental expenses in connection with traveling to or attending such meetings. Directors Zell, Schulte, Friedland, Davis, Fenster, Towe, Johnston and Hefner are eligible for such remuneration.
During 1993, the Company adopted the 1993 Non-Employee Director Stock Option Plan, providing for the one-time automatic grant of ten-year options to acquire up to 10,000 Shares to all current and future directors who are not employed by the Company, by Zell/Chilmark or by their respective affiliates ("Non-Employee Directors"). Options granted under the 1993 Non-Employee Director Stock Option Plan vest immediately and are initially exercisable at a price equal to the fair market value of the Shares on the date of grant. The exercise price of options granted pursuant to this Plan increases on each anniversary date of such grant by 4% compounded annually. Pursuant to this Plan, during 1993, the Company granted options to acquire up to 10,000 Shares to each of Messrs. Davis, Fenster, Towe and Johnston and Ms. Hefner at an initial exercise price of $9.05 per Share.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
At the end of fiscal year 1992, Messrs. Robert B. Calhoun, Jr. and John F. Maypole, former directors of the Company, and Rolf H. Towe were the directors who served as the members of the Human Resources Committee at that time (which functions as the Compensation Committee of the Board of Directors). For information regarding certain relationships or transactions that Messrs. Towe and Calhoun, or entities with which they are affiliated, have with the Company, see "Certain Relationships and Related Transactions - Compensation Committee Interlocks and Insider Participation."
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information with respect to those holders which, according to the records of the Company, beneficially own more than 5% of the outstanding Shares as of February 20, 1994:
(a) The percent of class calculation assumes that the stockholder for whom the percent of class is being calculated has exercised all Restructure Warrants (as described in Note 9 of the Notes to the Consolidated Financial Statements) owned by such stockholder and that no other stockholder has exercised any other Restructure Warrants. Accordingly, the total of the percentages for all the stockholders listed exceeds 100%.
(b) For further information with respect to Zell/Chilmark, see Item 10. "Directors and Executive Officers" and Item 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
At the end of fiscal year 1992, Messrs. Robert B. Calhoun, Jr. and John F. Maypole, former directors of the Company, and Rolf H. Towe were the directors who served as the members of the Human Resources Committee at that time (which functions as the Compensation Committee of the Board of Directors)(the "Committee"). Effective March 4, 1993, the Committee consisted of Messrs. Zell, Towe, Fenster and Johnston.
FBSC, an affiliate of First Boston, owns, directly and through its subsidiaries, all of the common stock of FBMB I, Inc., a Delaware corporation and a general partner of MBLP. Messrs. Calhoun and Towe each own 50% of the common stock of, and are executive officers of, CIG, Inc., the sole general partner of The Clipper Group L.P. ("Clipper"), which had managed the investments of MBLP in the Company, including the 12.4% Senior Subordinated Notes (the "Subordinated Notes").
During the period between the Recapitalization and the Acquisition, MBLP owned 27,630,000 Shares and all of the Subordinated Notes, and, following the Acquisition, and until the Refinancing, owned a warrant to purchase up to 4,000,000 million shares of the stock acquired by Zell/Chilmark in the Acquisition (the "MBLP Warrant") and the Subordinated Notes. Through the repayment of the Subordinated Notes on May 7, 1993, MBLP received, or had accrued, interest payments on the Subordinated Notes aggregating approximately $23 million. In connection with the Acquisition, MBLP waived its right, as holder of the Subordinated Notes, to require the Company to repurchase the Subordinated Notes upon the change in control of the Company effected by the Acquisition. In addition, MBLP consented to and caused the Company and the Trustee under the Subordinated Note Indenture to enter into a supplemental indenture which (i) granted the Company the option to redeem the Subordinated Notes at any time at a redemption price of 100% of the principal amount, plus accrued interest thereon to the redemption date, (ii) provided that the Subordinated Notes would no longer be convertible into Preferred Stock of the Company and (iii) modified certain ratios relating to the issuance of certain debt obligations of the Company. In consideration of MBLP executing the supplemental indenture, Zell/Chilmark agreed to pay, or to cause the Company to pay, all out-of-pocket costs and expenses (including reasonable fees and expenses) incurred by MBLP in connection with the sale or redemption of the Subordinated Notes. As part of the Refinancing, the MBLP Warrant was cancelled and all of the outstanding Subordinated Notes were repaid and redeemed.
Zell/Chilmark assigned a portion of its rights and obligations under the Stock Purchase Agreement to Mr. Towe, pursuant to which he acquired 27,630 Shares from MBLP at the same cash price per Share as paid by the other Zell/Chilmark Purchasers. As part of the Acquisition and pursuant to the Stock Purchase Agreement, Zell/Chilmark, MBLP and the Company entered into a Registration Rights Agreement relating to the Acquired Shares, including the 27,630 Shares purchased by Mr. Towe. Pursuant to such Stock Purchase Agreement, the holders of a majority of such Acquired Shares have the right to demand, up to five times but no more than once every six months, registration of their Acquired Shares under the Securities Act. In addition, under certain conditions, the holders of the Acquired Shares have a right to include some or all of their Acquired Shares in any subsequent registration statement filed by the Company with respect to the sale of Shares. The Company has agreed to bear all expenses associated with any registration statement relating to the Acquired Shares other than any underwriting discounts or commissions, brokerage commissions and fees.
In connection with the Acquisition, the Company and Zell/Chilmark executed a release (the "Release") dated February 12, 1993 of MBLP and its affiliates, subsidiaries, stockholders, partners, controlling persons and their respective directors, officers, employees and certain other related persons (collectively, the "Related Persons"), which would include, among others, First Boston, FBSC, Robert B. Calhoun, Jr. (a director of the Company prior to the Acquisition) and Rolf H. Towe (collectively, MBLP and MBLP's Related Persons shall be referred to collectively as the "MBLP Released Parties") from any obligation or liability in any way relating to (i) the acquisition, ownership or operation of the Company or (ii) the negotiation, execution and closing of the Stock Purchase Agreement and related documents (the "Stock Purchase Documents"). The Release does not release the MBLP Released Parties from any obligation or liability in connection with (i) covenants contained in the Stock Purchase Documents required to be performed following the Acquisition, (ii) breaches of certain representations made by MBLP in the Stock Purchase Agreement, or (iii) actions taken by any MBLP Released Party after February 12, 1993. MBLP executed a similar release of Zell/Chilmark and the Company and their respective Related Persons which was substantially equivalent in scope and coverage (except that such release did not cover any obligations in respect of the Subordinated Notes).
Pursuant to the Stock Purchase Agreement, Zell/Chilmark and the Company have agreed that, so long as MBLP (or any of its affiliates) held any Subordinated Notes, First Boston would have the exclusive right (for competitive fees and terms) to act (i) as the Company's exclusive financial advisor with respect to any acquisitions or divestitures in which the Company engaged a financial advisor (other than Zell/Chilmark or its affiliates) and (ii) as lead underwriter or placement agent with respect to any transactions in which the Company employed the services of an underwriter or placement agent. Pursuant to such agreed terms, First Boston served as the lead underwriter in connection the issuance of the Notes as part of the Refinancing. Zell/Chilmark and the Company agreed that for three years following the date of the Refinancing, First Boston will have the right to act (for competitive fees and terms) as a co-manager or co-placement agent in any transaction in which the Company employs the services of an underwriter or placement agent.
In addition, the Stock Purchase Agreement provides that, until three years following the Refinancing, MBLP and First Boston will not (i) directly or indirectly participate, anywhere in the United States, in the business in which the Company is currently engaged; (ii) induce or influence any employee of the Company or Zell/Chilmark to terminate such employee's employment or become an employee of MBLP or First Boston; or (iii) disclose or furnish to any other person any of the Company's confidential business information, trade secrets or manner of conducting its business. MBLP and First Boston further agreed not to use certain trademarks owned by the Company and, for a period of time, not to serve as underwriter or placement agent with respect to the sale of securities by certain entities that use such trademarks.
THE ACQUISITION. On January 27, 1993, Zell/Chilmark, MBLP and the Company entered into the Stock Purchase Agreement pursuant to which MBLP agreed to sell to Zell/Chilmark up to 27,630,000 Shares (representing a 93.6% equity interest in the Company). In accordance with the terms of the Stock Purchase Agreement, Zell/Chilmark acquired 88.7% of the outstanding common stock of the Company (26,143,506 Shares) and assigned a portion of its rights and obligations under the Stock Purchase Agreement to Bankers Trust New York Corporation ("BT") and Rolf H. Towe, a director of the Company. In the Acquisition, BT acquired 1,458,864 Shares and Mr. Towe acquired 27,630 Shares. Zell/Chilmark has informed the Company that the monies used to fund the cash purchase price that it paid for its portion of the Acquired Shares were obtained from partnership capital contributions. All of the Zell/Chilmark Purchasers paid the same $9.05 cash price per Share for their Acquired Shares. The Acquisition was completed on February 12, 1993.
As part of the Acquisition, Zell/Chilmark granted to MBLP a warrant, exercisable on or after November 30, 1993, to purchase up to 4,000,000 Acquired Shares (the "MBLP Warrant") held by Zell/Chilmark, which Warrant expired upon repayment of the Subordinated Notes.
As part of the Acquisition and pursuant to the Stock Purchase Agreement, Zell/Chilmark and the Company entered into the Capital Contribution Agreement whereby Zell/Chilmark agreed to purchase or cause to be purchased, and the Company agreed to issue, Shares having an aggregate purchase price of $50.0 million (subject to adjustment), computed at a price of $9.05 per Share on or before November 30, 1993. The Capital Contribution Agreement terminated with the Refinancing. See "-- Compensation Committee Interlocks and Insider Participation," above for certain additional information regarding the Acquisition.
MANAGEMENT SUBSCRIPTION AND BENEFIT ARRANGEMENTS. See "Management -- Compensation Pursuant to Plans and Other Arrangements -- Severance Arrangements" for a description of the Company's severance arrangements with certain executive officers. See "Management -- Compensation Pursuant to Plans and Other Arrangements -- Executive Employment Agreements" for a description of the Company's employment arrangements with Mr. Beggs.
STOCK REPURCHASE AGREEMENTS. Certain officers, key employees of the Company and a former employee of the Company (collectively, the "Management Investors") are the beneficial owners of 90,426 Shares, not including 100,000 Shares held by Mr. Beggs pursuant to his Employment Agreement (the "Management Investors' Shares"). Such Shares were acquired in connection with the LBO pursuant to subscription agreements between the Company and such individuals (the "Subscription Agreements") or subsequently acquired as stock bonuses pursuant to the same Subscription Agreements. The Subscription Agreements provide that the Management Investors' Shares are subject to "put" options whereby the Company may be required to redeem such Shares at fair market value in the event of a Management Investor's death, disability, or termination of employment under certain circumstances, at the option of the Management Investor or his estate. Under certain circumstances, such Shares also are subject to "call" options whereby the Company, at its option, may purchase such Shares from a Management Investor at fair market value, so long as the Company has not effected a public offering of its common stock, in the event of either (i) a Management Investor's voluntary termination of employment on or before January 1, 1994, or (ii) a Management Investor's termination for cause (as defined). Due to the possibility of repurchase, such Management Investors' Shares were not considered to be part of the Company's stockholders' equity for periods prior to Fiscal 1993. The Subscription Agreements also grant to the Management Investors certain registration rights in the event that the Company (or, in certain circumstances, other investors in the Company) registers any common stock under the Securities Act.
FULCRUM. In connection with the LBO, The Fulcrum III Limited Partnership and The Second Fulcrum III Limited Partnership (together, the "Fulcrum Partnerships"), purchased, after giving effect to the reverse stock split, 961,400 Shares pursuant to a stock subscription agreement with the Company (the "Fulcrum Stock Subscription Agreement") which provides that, under certain circumstances, the Company has a right of first refusal in the event of a proposed sale of such Shares by the Fulcrum Partnerships. The Fulcrum Subscription Agreement also grants to the Fulcrum Partnerships certain rights to demand the registration of their Shares and certain registration rights in the event that the Company (or, in certain circumstances, other investors in the Company) registers any common stock under the Securities Act. In addition, in connection with the Recapitalization, the Fulcrum Partnerships were issued Restructure Warrants to acquire up to an aggregate of 3,461,040 Shares.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) The following consolidated financial statements of Sealy Corporation and its subsidiaries are included in Part II, Item 8:
Sealy Corporation
Report of Independent Auditors
Consolidated Balance Sheets at November 30, 1993 and 1992
Consolidated Statements of Operations for the ten months ended November 30, 1993 (Successor), the two months ended January 31, 1993, year ended November 30, 1992, one month ended November 30, 1991 (Pre-Successor), and the eleven months ended October 31, 1991 (Predecessor).
Consolidated Statements of Stockholders' Equity for the ten months ended November 30, 1993 (Successor), the two months ended January 31, 1993, year ended November 30, 1992, one month ended November 30, 1991 (Pre-Successor), and the eleven months ended October 31, 1991 (Predecessor).
Consolidated Statements of Cash Flows for the ten months ended November 30, 1993 (Successor), the two months ended January 31, 1993, year ended November 30, 1992, one month ended November 30, 1991 (Pre-Successor), and the eleven months ended October 31, 1991 (Predecessor).
Notes to consolidated financial statements
(a)(2) Financial Statement Schedules
Schedule VIII -- Valuation Accounts
Schedule X -- Supplementary Income Statement Information
(b) The Company filed no reports on Form 8-K during the fourth quarter of its fiscal year ended November 30, 1993.
(c) Exhibits:
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* Management contract or compensatory plan or arrangement identified pursuant to Item 14(a) of this Form 10-K.
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
Date: February 28, 1994
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED:
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
SCHEDULES
TEN MONTHS ENDED NOVEMBER 30, 1993, TWO MONTHS ENDED JANUARY 31, 1993, YEAR ENDED NOVEMBER 30, 1992, ONE MONTH ENDED NOVEMBER 30, 1991, ELEVEN MONTHS ENDED OCTOBER 31, 1991
FORMING A PART OF ANNUAL REPORT PURSUANT TO THE SECURITIES EXCHANGE ACT OF 1934
FORM 10-K
OF
SEALY CORPORATION
SEALY CORPORATION
SCHEDULE VIII -- VALUATION ACCOUNTS
SEALY CORPORATION
SCHEDULE X -- SUPPLEMENTARY INCOME STATEMENT INFORMATION