ITEM 1. BUSINESS
GENERAL
Sealy Corporation (the "Company"), through its subsidiaries, is the largest bedding manufacturer in North America and manufactures a diversified line of mattress, boxspring and wood furniture products. The Company's conventional bedding products (mattresses and boxsprings) include the SEALY(R), SEALY POSTUREPEDIC(R), SEALY POSTUREPEDIC CROWN JEWEL(R), and the STEARNS & FOSTER(R) brands and account for approximately 90% of the Company's total net sales for the year ended December 1, 1996. The Company also manufactures and markets its wood furniture under the SAMUEL LAWRENCE(TM) brand name. In January, 1997, the Company completed the sale of its Samuel Lawrence subsidiary and no longer manufactures or markets wood furniture. The Company has a components parts manufacturing subsidiary which produces substantially all of the Company's mattress innerspring requirements and approximately 50% of the Company's boxspring component parts requirements. Another subsidiary, Sealy, Inc., provides corporate and administrative services for the Company.
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, then named 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 Company expanded its bedding manufacturing operations in 1983 by acquiring Stearns & Foster, a producer of premium mattresses, boxsprings and convertible sleep sofas. In 1985, the Company acquired Woodstuff Manufacturing, Inc., a manufacturer of waterbed furniture, which with a later decline of waterbed sales was converted to manufacturing solely conventional wood bedroom furniture and doing business as Samuel Lawrence Furniture Company. In January, 1997, the Company completed the sale of its Samuel Lawrence subsidiary and no longer manufactures or markets wood 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 certain outstanding debt issued to FBSC for new debt at lower interest rates plus additional common stock (the "Exchange"). In December 1990, FBSC transferred its equity and debt interest in the Company to its affiliate MB L.P. I ("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%, consisting of shares of Class A Common Stock, $.01 par value (the "Shares").
On February 12, 1993, Zell/Chilmark Fund, L.P., a Delaware limited partnership ("Zell/Chilmark"), led an investor group which purchased MBLP's 94% equity interest in the Company (the "Acquired Shares") for a cash purchase price of $250 million (the "Acquisition").
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 then existing credit agreement and (iii) the execution of a new secured credit agreement (the "1993 Credit Agreement") by and among the Company, certain banks and other financial institutions and Banque Paribas, Citicorp USA, Inc., Bank of America (formerly Continental Bank N.A.) and General Electric Capital Corporation, as managing agents.
On May 27, 1994, the Company entered into a restated secured credit agreement (the "1994 Credit Agreement") with a majority of its then current group of senior lenders (the "Senior Lenders"), which modified the terms of the 1993 Credit Agreement by reducing the amounts available under its existing term loan facilities thereunder from an aggregate of $250 million to a single facility of $150 million (the "Term Loan Facility") and by increasing the amount available under its existing revolving credit facility thereunder from $75 million to $125 million (the "Revolving Credit Facility").
Pursuant to a Solicitation of Consents dated as of January 24, 1997, as subsequently amended (the "Consent Solicitation"), the Company has solicited consents from the record holders (the "Registered Holders") of its Notes to certain amendments, consents and waivers under the Indenture (the "Indenture"), dated as of May 7, 1993, between the Company and Mellon Bank, F.S.B., as successor trustee (the "Trustee"), under which the Notes were issued. Following receipt of the requisite consents of the Registered Holders, on February 21, 1997, the Company and the Trustee executed a Supplemental Indenture incorporating the amendments to the Indenture. The Supplemental Indenture provides for (i) an increase in the interest rate on the Notes to 10 1/4%, (ii) provision to allow for the payment of a special dividend of up to One Hundred Million Dollars ($100,000,000) (the "Dividend") to qualifying equity security holders of the Company, (iii) an increase in the redemption premiums paid to Registered Holders in the event the Notes are repurchased by the Company, and (iv) the corresponding waiver of Section 4.05 of the Indenture, such that the Dividend will not constitute a "Restricted Payment" (as defined in the Indenture). The Company paid an aggregate of Four Million Dollars ($4,000,000) on a pro rata basis to those Registered Holders that had timely consented.
Concurrent with the distribution of the Consent Solicitation documentation, the Company entered into negotiations for a new senior secured financing facility. On February 25, 1997, the Company entered into the $275,000,000 Second Restated Secured Credit Agreement (the "1997 Credit Agreement") with a majority of its then current group of senior lenders. The proceeds of the 1997 Credit Agreement were used (a) to refinance approximately $48.7 million of indebtedness under the Company's 1994 Credit Agreement, (b) to pay a $99.8 million Dividend, and (c) for general corporate purposes, including, without limitation, for working capital.
CONVENTIONAL BEDDING
INDUSTRY AND COMPETITION. According to industry sales data compiled by the International Sleep Products Association ("ISPA"), a bedding industry trade group, approximately 700 manufacturers of mattresses and boxsprings make up the domestic conventional bedding industry, generating wholesale revenues estimated at $3.3 billion during calendar year 1996. The market for conventional bedding represents more than 85% of the entire bedding market in North America. According to ISPA, approximately 75% of conventional bedding is sold to furniture stores and specialty sleep shops. Most of the remaining conventional bedding is sold to department stores, national mass merchandisers, membership clubs and contract customers such as motels, hotels and hospitals. Management estimates that approximately two-thirds of conventional bedding is sold for replacement purposes and that the average time between consumer purchases of conventional mattresses is approximately 10 to 12 years. Factors such as disposable income and sales of homes also have some effect on bedding purchases.
Management believes that sales by companies with recognized national brands account for more than half of total conventional bedding sales. The Company supplies such nationally recognized brands as Sealy, Sealy Posturepedic and Stearns & Foster. Sealy branded products are considered by management to be the most well-recognized in the domestic conventional bedding industry. Competition in conventional bedding is generally based on quality, brand name recognition, service and price. The Company's largest competitors include Simmons Company, Serta, Inc. and Spring Air Company. Management believes the Company derives a competitive advantage over its conventional bedding competitors as a result of strong consumer recognition of Sealy branded products.
PRODUCTS. The Company manufactures a variety of Sealy and Stearns & Foster brand conventional bedding in various sizes ranging in retail price from under $200 to approximately $3,700. 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 Stearns & Foster brand name.
CUSTOMERS. The Company serves over 7,000 retail outlets (approximately 3,200 customers), which include furniture stores, national mass merchandisers, specialty sleep shops, department stores, contract customers and other stores. The top five conventional bedding customers accounted for approximately 17% of the Company's net sales for the year ended December 1, 1996 and no single customer accounted for over 10% of the Company's net sales.
SALES AND MARKETING. The Company's sales depend primarily on its ability to provide quality products with recognized brand names at competitive prices. The Company's marketing emphasis has been on increasing the brand loyalty of its ultimate consumers, principally through national advertising and cooperative advertising with its dealers, along with superior "point-of-sale" materials designed to emphasize the various features and benefits of the Company's products which differentiate them from other brands.
The Company's sales force structure is generally based on regions of the country and districts within those regions, and also includes a sales staff for specific national accounts. The Company believes that it has one of the most comprehensive training and development programs for its sales force, including its University of Sleep(R) curriculum, which provides ongoing training sessions with programs focusing on advertising, merchandising and sales education, including techniques to help analyze a dealer's business and profitability.
The Company's sales force emphasizes follow-up service to retail stores and provides retailers with promotional and merchandising assistance as well as extensive specialized professional training and instructional materials. Training for retail sales personnel focuses on several programs, designed to assist retailers in maximizing the effectiveness of their own sales personnel, store operations, and advertising and promotional programs, thereby creating loyalty to, and enhanced sales of, the Company's products.
SUPPLIERS. The Company purchases fabric, polyfiber, wire and foam from a variety of vendors. The Company purchases approximately 50% of its Sealy boxspring parts from a single third-party source, which has patents on various interlocking wire configurations (the "Wire Patents"), and manufactures the remainder of these parts as a licensee under the Wire Patents. The Company purchases substantially all of its Stearns & Foster boxspring parts from the same single third-party source. In order to reduce the risks of dependence on external supply sources and to enhance profitability, the Company has expanded its own internal components parts manufacturing capacity and, as a licensee of the Wire Patents, internally produces the remainder of its Sealy boxspring parts. See "Components Division". As is the case with all of the Company's product lines, the Company does not consider itself dependent upon any single outside vendor as a source of supply to its conventional bedding business and believes that sufficient alternative sources of supply for the same, similar or alternative components are available.
MANUFACTURING AND FACILITIES. The Company manufactures most conventional bedding to order and has adopted "just-in-time" inventory techniques in its manufacturing process to more efficiently serve its dealers' needs and to minimize their inventory carrying costs. Most bedding orders are scheduled, produced and shipped within 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 30 plants, which manufacture conventional bedding in 20 states, three Canadian provinces, Puerto Rico and Mexico. See Item 2.

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 1997 to 2015, including renewal options.
The following table sets forth certain information regarding manufacturing facilities operated by the Company at February 28, 1997:
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 (primarily by recycling) of small amounts of used machine lubricating oil and air compressor waste oil. The Company, generally, is subject to the Federal Water Pollution Control Act, the Comprehensive Environmental Response, Compensation and Liability Act and amendments and regulations thereunder and corresponding state statutes and regulations. The Company's Phoenix, Arizona 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 (now known as the Industrial Site Recovery Act), Sealy and one of its subsidiaries are parties to an Administrative Consent Order ("ACO") issued by the New Jersey Department of Environmental Protection ("DEP"). Pursuant to the ACO the Company and such subsidiary agreed to conduct soil and groundwater investigation and remediation at the plant owned by the subsidiary in South Brunswick, New Jersey. The Company does not believe that its manufacturing processes were a source of the contaminants found to exist above regulatorily acceptable levels in the groundwater. As the current owners of the facility, however, the Company and its subsidiary are primarily responsible for the investigation and any necessary clean up plan approved by the DEP under the terms of the ACO.
The DEP previously approved both the Company's soil remediation plans and its initial groundwater remediation plans. Further investigation in 1996 revealed certain additional areas of soil contamination resulting from activities at the South Brunswick facility prior to the Company's acquisition of the site. The Company anticipates that in 1997, subject to DEP approval, it will complete essentially all soil remediation and will conduct a pilot test for a Company-proposed revision to the groundwater remediation program.
While the Company cannot predict the ultimate timing or cost to remediate this facility based on facts currently known, management believes the previously established accrual for site investigation and remediation costs is adequate to cover the Company's reasonably estimable liability and does not believe the resolution of this matter will have a material adverse effect on the Company's financial position or future operations.
In March, 1994, the Company filed a claim in the U.S. District Court for the District of New Jersey against former owners of the site and their lenders under the Comprehensive Environmental Response, Compensation and Liability Act seeking contribution for site investigation and remedial costs. Settlement terms have been tentatively reached in this matter and are projected to be completed in the second quarter of fiscal 1997.
The Company has also voluntarily proceeded to develop a remediation plan for isolated soil and groundwater contamination at its Oakville, Connecticut property that the Company believes is solely attributable to the manufacturing operations of previous unaffiliated occupants. Based on the facts currently known, management does not believe that resolution of this matter will have a material adverse effect on the Company's financial position or future operations.
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 became exercisable subsequent to August 9, 1995) (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 25, 1997, there are 104 holders of record of the Company's Class A shares, 74 holders of record of the Company's Class B shares, 1,143 holders of record of the Merger Warrants and 47 holders of record of the warrants issued in the Recapitalization (the "Restructure Warrants"). See Note 8 to the Consolidated Financial Statements, Part II, Item 8 herein.
On May 17, 1996, a $35.5 million dividend was paid to all holders of record as of May 7, 1996 of Sealy common stock and to holders of Merger Warrants. In addition, on February 28, 1997, a $99.8 million dividend was paid to all holders of record as of February 27, 1997 of Sealy common stock and to holders of Merger Warrants. See Note 15 to Consolidated Financial Statements. Prior to the May 17, 1996 dividend, no dividends had been paid on any class of common equity of the Company during the prior three fiscal years of the Company. The Company's 1997 Credit Agreement provides that the Company may pay cash dividends, subject to certain limitations, in an amount of up to 50% of future consolidated net income on such capital stock. The Company's 10 1/4% (formerly, 9 1/2%) Senior Subordinated Notes contain other provisions which provide certain similar limitations on the payment of dividends.
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 years ended December 1, 1996, November 30, 1995 and 1994, for the ten months ended November 30, 1993, for the two months ended January 31, 1993 and for the year ended November 30, 1992.
During the period from December 1, 1991 through December 1, 1996, the Company's capital structure changed significantly, in large part as a result of 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 LLP, independent auditors, covering the Company's Consolidated Financial Statements for the years ended December 1, 1996, November 30, 1995 and November 30, 1994, is included elsewhere herein. These tables should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements of the Company included elsewhere herein.
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
(c) On January 15, 1997, the Company completed the sale of Woodstuff Manufacturing, Inc., a wholly-owned subsidiary that manufactured and marketed solid wood bedroom furniture under the "Samuel Lawrence" brand name. The divestiture resulted in an aggregate book loss of $17.6 million, which was recorded in the fiscal year ended December 1, 1996. The loss is comprised of a loss on net assets held for sale of $11.8 million and income tax expense of $5.8 million arising from the tax gain on the transaction.
(d) Operating income is calculated by adding interest expense, net to net sales less costs and expenses.
(e) 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.
(f) 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.
ITEM 7.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 1, 1996 COMPARED WITH YEAR ENDED NOVEMBER 30, 1995
Net sales for the year ended December 1, 1996 ("Fiscal 1996"), were $697.6 million, an increase of $43.7 million, or 6.7% from the year ended November 30, 1995 ("Fiscal 1995"). This increase is primarily attributable to a $37.0 million increase in conventional bedding sales and a $10.0 million increase in wood bedroom furniture sales. These increases were partially offset by the elimination of sleep sofa sales as a result of the closing of this business unit in March, 1995.
The strong bedding sales performance represents an 8.2%, or $48.6 million increase in conventional bedding unit shipments, offset partially by a 1.8%, or $11.6 million decrease in the average unit selling price. Increased unit volume is attributed to increased distribution and same store sales of Stearns & Foster luxury bedding, along with incremental placements of new Sealy Posturepedic products. The decrease in average unit selling price is primarily attributed to pricing initiatives and increased volume of lower priced Sealy Posturepedic products.
Sales of wood bedroom furniture increased due to increased product distribution and same store sales, primarily due to favorable results from new furniture collections.
Cost of goods sold for Fiscal 1996, as a percentage of net sales, increased 1.5 percentage points to 56.9%. This increase is primarily attributed to the previously mentioned decrease in average unit selling price, the start-up costs associated with the new insulator pad facility and inflationary bedding raw material increases.
Selling, general and administrative expenses increased $0.3 million, but decreased as a percent of net sales by 2.0 percentage points to 31.1%. Increased operating expenses of $17.1 million were partially offset by a decrease in marketing spending of $14.1 million and a prior year $2.7 million charge associated with closing the sleep sofa business. The increase in operating expenses is due primarily to increases in incentive bonus, administrative and sales salaries, and executive severance and transition expenses. Marketing spending declined from $117.8 million in Fiscal 1995 to $103.7 million in Fiscal 1996 as a result of adjustments in the Company's marketing strategies.
Loss on net assets held for sale of $11.8 million relates to the divestiture of Woodstuff Manufacturing, Inc., which sold wood bedroom furniture under the Samuel Lawrence brand name, and is comprised of excess of net assets sold over the proceeds received, as well as transaction costs related to the sale. See Note 14 to Consolidated Financial Statements.
The Company recorded a non-cash charge of $4.5 million, representing final year vesting in the Company's Performance Share Plan (the "Plan"). During Fiscal 1995, the Company recorded a non-cash credit of $13.3 million for the estimated reduction in the value of the benefits issuable under the Plan. See Note 10 to Consolidated Financial Statements.
Interest expense, net for Fiscal 1996 decreased $2.2 million primarily due to a $27.8 million decrease in average outstanding debt, along with lower debt issuance cost amortization.
The Company's effective income tax rates for Fiscal 1996 and 1995 differ from the Federal statutory rate because of the application of purchase accounting, effect of certain foreign tax rate differentials and state and local income taxes. The Company's effective tax rate for Fiscal 1996 versus Fiscal 1995 was approximately 102% compared to 55% for Fiscal 1995. The higher effective tax rate for Fiscal 1996 is due primarily to taxes arising from the sale of the Company's Samuel Lawrence subsidiary and the impact of permanent differences related to the February, 1993 Acquisition. See Note 6 to the Consolidated Financial Statements.
For the reasons set forth above, net income for Fiscal 1996 declined $20.0 million to a loss of $0.5 million.
YEAR ENDED NOVEMBER 30, 1995 COMPARED WITH YEAR ENDED NOVEMBER 30, 1994
Net sales for Fiscal 1995 were $653.9 million, a decrease of $43.7 million, or 6.3%. This decrease is attributable to a $34.6 million decrease in conventional bedding sales and a $9.1 million net decrease in upholstered and wood furniture sales.
The bedding sales decrease represents an 11.5%, or $72.3 million decline in conventional bedding unit shipments, offset partially by a 6.8%, or $37.7 million increase in the average unit selling price. Bedding shipments declined due to lower volume of promotional and private label bedding units, primarily attributable to the loss of Sears, Roebuck & Co. ("Sears") private label business in the year ended November 30, 1994 ("Fiscal 1994"). In addition, sales decreased due to the loss of Sealy brand product placements at lower retail price points in the second and third quarters. The loss of placements occurred as a result of certain changes associated with new bedding lines introduced in March, 1995. Management believes that the Company has since recaptured a significant number of the lost product placements through improved product assortment and pricing strategies.
The decrease in sales of wood and upholstered furniture sales is due primarily to the Company's decision in March, 1995 to close its unprofitable sleep sofa business, resulting in decreased sales of $10.0 million. Sales of wood bedroom furniture products increased $0.9 million due to expanded retail distribution.
Cost of goods sold for Fiscal 1995, as a percentage of net sales, increased 1.6 percentage points to 55.4%. This increase is primarily attributable to increased bedding raw material costs and the impact of lower sales volume on fixed manufacturing expenses.
Selling, general and administrative expenses increased $7.8 million, primarily due to a $9.4 million increase in marketing spending from $108.4 million to $117.8 million. The Company continued to focus its marketing emphasis on building brand preference through national advertising, cooperative advertising and promotions.
During Fiscal 1995, the Company recorded a non-cash credit of $13.3 million for the estimated reduction in the value of the Company's Performance Share Plan, compared to a non-cash charge of $9.7 million in Fiscal 1994. See Note 10 to Consolidated Financial Statements.
Interest expense, net for Fiscal 1995 decreased $2.4 million primarily due to a net reduction of approximately $63 million in Senior Debt. Although the Company did experience increased interest rates in Fiscal 1995, the impact was not significant as the majority of the Company's debt, $200 million in Senior Subordinated Notes, is fixed at a rate of 9.5%.
The Company's effective income tax rate for Fiscal 1995 and 1994 differ from the Federal statutory rate because of the application of purchase accounting, certain foreign tax rate differentials and state and local income taxes. The Company's effective tax rate for Fiscal 1995 versus Fiscal 1994 was approximately 55% compared to 48% for Fiscal 1994. The higher effective tax rate for Fiscal 1995 reflects the impact of permanent differences related to the February, 1993 Acquisition and effects of foreign earnings repatriation during 1995. See Note 6 to the Consolidated Financial Statements.
For the reasons set forth above, net income for Fiscal 1995 declined $9.7 million to $19.5 million.
LIQUIDITY AND CAPITAL RESOURCES
During Fiscal 1996, the Company's principal sources of funds consisted of cash flow from operations and borrowings under the Revolving Credit Facility. Its principal uses of funds consisted of payments of principal and interest on its secured indebtedness, the dividend described below, capital expenditures and interest payments on its outstanding Notes.
During May, 1994, the Company entered into the 1994 Credit Agreement. The 1994 Credit Agreement provided the Company with a $150 million Term Loan Facility and a $125 million Revolving Credit Facility. At December 1, 1996, $63 million was outstanding under the Term Loan Facility. The Company made regularly scheduled principal payments on the Term Loan Facility of $20 million in each of Fiscal 1995 and 1994. During Fiscal 1996, the Company made scheduled principal payments aggregating $16 million. During Fiscal 1996 and 1995, the Company made voluntary prepayments aggregating $6 million and $25 million. These prepayments were applied pro rata against the remaining mandatory payments. The Term Loan Facility amortizes according to the following revised schedule: $19 million in fiscal year 1997, $13 million in fiscal year 1998, $22 million in fiscal year 1999 and $9 million in fiscal year 2000. At December 1, 1996, approximately $87 million was available under the Revolving Credit Facility. The 1994 Credit Agreement provides that amounts outstanding under the Revolving Credit Facility may not exceed $75 million for 30 consecutive calendar days in the period beginning September 1 and ending December 31 in each year. During Fiscal 1996 and 1995, the maximum amount outstanding under the Revolving Credit Facility, excluding letters of credit, was $52 million and $21 million, respectively. Amounts outstanding under the 1994 Credit Agreement are secured by substantially all of the Company's assets, and bear interest at a variable rate based on an applicable margin over the greater of a corporate base rate or federal funds rate, or Eurodollar rate, at the Company's option. The applicable margin fluctuates depending on the Company's performance, as measured by certain financial ratios. The 1994 Credit Agreement requires that interest rate protection be maintained on an aggregate notional amount equal to at least 50% of the amount outstanding from time to time under the Term Loan Facility from inception through at least May 7, 1996.
The Notes are unsecured, subordinated obligations of the Company. Interest on the Notes is payable in semi-annual installments, currently at the rate of 9.5% per annum (see below). The outstanding principal amount of the Notes is payable on May 1, 2003. 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 specified in the Indenture, under which the Notes were issued.
On May 17, 1996, the Company paid a special dividend to all stockholders and holders of Merger Warrants of record as of May 7, 1996. The dividend amounted to $35.5 million, or $1.20 per share, and was financed primarily through borrowings under the Revolving Credit Facility.
On January 15, 1997, the Company sold its subsidiary that manufactured wood bedroom furniture under the Samuel Lawrence brand name. Gross proceeds from the sale amounted to $35.0 million. See Note 14 of Notes to Consolidated Financial Statements.
The 1994 Credit Agreement and the Note Indenture contain certain negative and affirmative covenants including, without limitation, requirements and restrictions relating to capital expenditures, dividends, working capital, net worth and other financial ratios. At December 1, 1996, the Company was in compliance with the financial covenants contained in these agreements. Similar types of covenants are contained in the 1997 Credit Agreement described below.
Pursuant to a Solicitation of Consents dated as of January 24, 1997, as subsequently amended (the "Consent Solicitation"), the Company has solicited consents from the Registered Holders of its Notes to certain amendments, consents and waivers under the Indenture, dated as of May 7, 1993, between the Company and the Trustee. Following receipt of the requisite consents of the Registered Holders, on February 21, 1997, the Company and the Trustee executed a Supplemental Indenture incorporating the amendments to the Indenture. The Supplemental Indenture provides for (i) an increase in the interest rate on the Notes to 10 1/4%, (ii) provision to allow for the payment of a special Dividend of up to One Hundred Million Dollars ($100,000,000) to qualifying equity security holders of the Company, (iii) an increase in the redemption premiums paid to Registered Holders in the event the Notes are repurchased by the Company, and (iv) the corresponding waiver of Section 4.05 of the Indenture, such that the Dividend will not constitute a "Restricted Payment" (as defined in the Indenture). The Company paid an aggregate of Four Million Dollars ($4,000,000) on a pro rata basis to those Registered Holders that had timely consented.
Concurrent with the distribution of the Consent Solicitation documentation, the Company entered into negotiations for a new senior secured financing facility. On February 25, 1997, the Company entered into the 1997 Credit Agreement with a majority of its then current group of senior lenders, which modified the terms of the 1994 Credit Agreement by increasing the amounts available under the revolving credit portion of the facility from $125 million to $275 million, and eliminating the term loan portion of the 1994 Credit Agreement. The 1997 Credit Agreement provides for a reducing revolving credit facility with a $25 million discretionary letter of credit facility and a discretionary swing loan facility of up to $20 million.
On February 28, 1997, the Company made an initial borrowing under the 1997 Credit Agreement of $156.4 million. Letters of credit of $13.1 million also were outstanding, leaving approximately $105.5 million of undrawn availability under the 1997 Credit Agreement. The proceeds of the 1997 Credit Agreement were used (a) to refinance approximately $48.7 million of indebtedness under the Company's 1994 Credit Agreement, (b) to pay a $99.8 million Dividend, and (c) for general corporate purposes, including, without limitation, for working capital.
The 1997 Credit Agreement has a final maturity date of January 15, 2003, and provides for periodic reductions in the amounts of available credit in accordance with the following schedule:
Additional mandatory commitment reductions will occur equal to 100% of net after-tax cash proceeds from the sale of assets in excess of $15 million in each fiscal year, and equal to 50% of net proceeds from the issuance of permitted subordinated debt.
Base rate loans and Eurodollar rate loans are based on a pricing grid which provides for an interest rate plus a margin. The margin is adjustable based on the Company's total senior debt to adjusted EBITDA ratio. For the first six months of the 1997 Credit Agreement, the margin on Eurodollar rate borrowings will be the greater of 1.25% or the applicable level of the pricing grid. The initial commitment fee, which is also subject to a pricing grid is 0.375%.
The 1997 Credit Agreement is secured in substantially the same fashion as the 1994 Credit Agreement (See Note 3 to Consolidated Financial Statements), however such security is subject to release upon the Company attaining specified senior unsecured (either actual or implied) credit ratings. The Company is also subject to certain affirmative and negative covenants under both the 1997 Credit Agreement and the Indenture including requirements and restrictions with respect to capital expenditures, dividends, maximum leverage and other financial ratios.
In addition, the 1997 Credit Agreement amended other provisions of the 1994 Credit Agreement to provide for greater flexibility to the Company with respect to, among other things, investments and reporting provisions.
The Company made capital expenditures aggregating $12.0 million and $11.8 million during Fiscal 1996 and 1995, respectively. Management expects to exceed the historical level of capital expenditures in fiscal year 1997 with additional expenditures for enhanced management information systems, the automation of manufacturing processes, and machinery and equipment for the new Sealy Posturepedic Crown Jewel line of bedding. The Company intends to fund Fiscal 1997 capital expenditures with cash generated by operations. Management believes that the annual capital expenditure limitations contained in the 1997 Credit Agreement will not significantly inhibit the Company's ability to meet its ongoing operating needs. Based upon its results of operations during periods subsequent to the execution of the 1994 Credit Agreement and its current financial condition, management believes that cash flow from operations, together with amounts available under the 1997 Credit Agreement, will provide the Company with the resources necessary to meet its anticipated capital requirements. As part of the Company's routine analysis of its capital structure, management continues to review financing alternatives. The Company's net weighted average borrowing cost was 9.0% for Fiscal 1996 and 1995.
FOREIGN OPERATIONS AND EXPORT SALES
The Company has foreign manufacturing operations in Canada and Mexico with three manufacturing facilities in Canada and one in Mexico. The Company's licensee for Mexico agreed to terminate its license, thus permitting Sealy to enter the market directly during Fiscal 1995 and production commenced in May, 1996. The Company began marketing its Sealy brand in South Korea during 1995 upon expiration of its Korean license agreement.
NEW ACCOUNTING PRONOUNCEMENTS
During 1995, the Financial Accounting Standards Board issued two pronouncements effective for financial statements for year beginning after December 15, 1995 that would apply to the Company. The Company has considered the requirements of Statement No. 121, "Accounting for the Impairment of Long- Lived Assets and for Long-Lived Assets to Be Disposed Of" and has determined that it will not require recognition of any impairment losses. The Company has also determined to remain within the accounting prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees", and accordingly the implementation of Statement No. 123, "Accounting for Stock-Based Compensation" will result in additional disclosures without any impact on the statements of operations or financial condition.
CHANGE IN FISCAL YEAR
A Form 8-K was filed October 11, 1995 reporting that the Board of Directors of the Company approved the change of the Company's fiscal year from one ending on November 30 in each year to a 52-53 week fiscal year. The first such fiscal year commenced on Friday, December 1, 1995 and ended on the 53rd Sunday thereafter or Sunday, December 1, 1996. Subsequent fiscal years will end on the Sunday nearest the last day of November.
ITEM 8.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Sealy Corporation
Consolidated Financial Statements
December 1, 1996 and November 30, 1995
(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 as of December 1, 1996 and November 30, 1995, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the years in the three-year period ended December 1, 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Sealy Corporation and subsidiaries as of December 1, 1996 and November 30, 1995, and the results of their operations and their cash flows for each of the years in the three-year period ended December 1, 1996 in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Cleveland, Ohio January 22, 1997 Except for Note 15, as to which the date is February 28, 1997
SEALY CORPORATION CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT PAR VALUE AMOUNTS)
See accompanying notes to consolidated financial statements.
SEALY CORPORATION CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT PAR VALUE AMOUNTS)
See accompanying notes to consolidated financial statements.
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SEALY CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
See accompanying notes to consolidated financial statements.
SEALY CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS)
See accompanying notes to consolidated financial statements.
SEALY CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
See accompanying notes to consolidated financial statements.
SEALY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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 and bedroom furniture. Substantially all of the Company's trade accounts receivable are from retail businesses. The Company recognizes revenue upon shipment of goods to customers.
(b) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.
(c) CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flows, the Company considers all highly liquid debt instruments with a maturity at the time of purchase of three months or less to be cash equivalents. Cash equivalents are stated at cost which approximates market value.
(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 a forty year period. 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.
The costs related to the issuance of debt are capitalized and amortized to interest expense using the effective-interest method over the lives of the related debt.
(f) EARNINGS PER COMMON SHARE
Net earnings 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.
SEALY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(g) INCOME TAXES
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
(h) ADVERTISING COSTS
The Company expenses all advertising costs as incurred. Advertising expenses for the years ended December 1, 1996, November 30, 1995 and November 30, 1994 amounted to $74,649, $92,726 and $83,726, respectively.
(i) USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
(j) RECLASSIFICATION
Certain reclassifications of previously reported financial information were made to conform to the 1996 presentation.
(k) FISCAL YEAR
Effective December 1, 1995, the Company changed its fiscal year end from November 30 to a 52- or 53-week year ending on the Sunday closest to November 30. Accordingly, the 1996 fiscal year ended on December 1, whereas the previous two fiscal years ended on November 30. All general references to years relate to fiscal years unless otherwise noted.
(2) 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 December 1, 1996 and November 30, 1995 were as follows:
SEALY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(3) LONG-TERM OBLIGATIONS
Long-term debt as of December 1, 1996 and November 30, 1995 consisted of the following:
On May 27, 1994, the Company entered into a restated secured credit agreement (the "1994 Credit Agreement") with a majority of its then current group of senior lenders (the "Senior Lenders"), which modified the terms of the 1993 Credit Agreement by reducing the amounts under its existing term loan facilities thereunder from an aggregate of $250 million to a single facility of $150 million (the "Term Loan Facility") and by increasing the amount available under its existing revolving credit facility thereunder from $75 million to $125 million (the "Revolving Credit Facility"). The 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. The Revolving Credit Facility terminates and is due and payable on November 30, 1999.
Under the terms of the 1994 Restated Credit Agreement, the Company is required to make certain mandatory principal payments of the Term Loan Facility in the event of the sale of any of the Company's principal operating subsidiaries, certain sales of assets, 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 each of the years ended November 30, 1995 and 1994, the Company made scheduled principal payments aggregating $20 million. During the year ended December 1, 1996, the Company made scheduled principal payments aggregating $16 million. During the years ended December 1, 1996 and November 30, 1995, the Company made voluntary prepayments aggregating $6 million and $25 million, respectively. These prepayments were applied pro rata against the remaining mandatory payments. The Term Loan Facility amortizes according to the following revised schedule:
In addition, the outstanding principal amount of the Revolving Credit Facility must not exceed $75 million for thirty consecutive calendar days in the period beginning September 1 and ending December 31 during each year. The Company has met this requirement for calendar years 1996, 1995 and 1994. The Company
SEALY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
is also subject to certain affirmative and negative covenants under both the 1994 Credit Agreement and the 1993 indenture, including, without limitation, requirements and restrictions with respect to capital expenditures, dividends, working capital, net worth and other financial ratios.
At December 1, 1996, the Company had approximately $87 million available under the Revolving Credit Facility, with Letters of Credit issued totaling approximately $13 million. Under the terms of the 1994 Restated Credit Agreement, the Company is initially obligated to pay a commitment fee rate of 0.375% per annum on the unused portion of the Revolving Credit Facility. The fee, which is payable quarterly in arrears, is reduced or increased depending on certain financial ratios.
The May 27, 1994 refinancing lowered the Company's contractual interest rates and debt service obligations. Two separate interest rate options exist under the 1994 Credit Agreement and are available to the Company at its option as follows:
(a) A Floating Rate which is the greater of (i) A Corporate Base Rate plus a margin, if applicable, or (ii) A Federal Funds Rate plus 0.25% plus a margin, if applicable, or (b) A Eurodollar Rate plus an applicable margin.
The applicable margin is zero for the Floating Rate option and 1.25% for the Eurodollar Rate option. The applicable margin is reduced or increased depending on certain financial ratios. At December 1, 1996, the weighted average interest rate on the Term Loan and Revolving Credit Facilities was 7.0%.
In addition, certain other provisions of the 1994 Credit Agreement were amended to provide more flexibility to the Company relating to, among other things, investments, capital expenditures and incurrence of debt.
The 1994 Credit Agreement required that interest rate protection be maintained on an aggregate notional amount at least equal to 50% of outstanding Term Loan Facility from inception through at least May 7, 1996.
All obligations of the Company under the 1994 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.
The 9 1/2% Senior Subordinated Notes (the "Notes") sold pursuant to a public offering on May 7, 1993 mature on May 1, 2003 with interest payable semiannually in cash on May 1 and November 1 of each year. 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.
In January, 1997, the Company initiated a consent solicitation related to the Notes and a refinancing of its 1994 Restated Credit Agreement. See Note 15, Subsequent Events.
SEALY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(4) 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 December 1, 1996.
At December 1, 1996, property, plant and equipment included approximately $0.4 million of aggregate cost and net book value 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.
(5) STOCK OPTION AND RESTRICTED STOCK PLANS
The Company adopted the 1989 Stock Option Plan ("1989 Plan") in 1989, the 1992 Stock Option Plan ("1992 Plan") in 1992 and reserved 100,000 shares and 600,000 shares, respectively, of Class A Common Stock of the Company (the "Shares") 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.
SEALY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Prior to fiscal year 1995, the Company issued options under the 1989 Plan totaling 5,400 Shares (net of subsequent forfeitures), all of which are exercisable on or after November 30, 1994. 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 as of December 1, 1996 is $50.00 per Share. No 1989 Plan options have been exercised since the date of grant.
Outstanding options (net of subsequent forfeitures) under the 1992 Plan are as follows: 49,000 granted in June, 1992 with an exercise price of $7.52 per Share; 56,500 granted in June, 1993 with an exercise price of $9.05 per Share; 64,500 granted in June, 1994 with an exercise price of $13.48 per Share; 83,000 granted in June, 1995 with an exercise price of $15.95 per Share and 104,000 granted in June, 1996 with an exercise price of $10.63 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 totaling 10,600 shares were exercised during the Reporting Periods. At December 1, 1996, options for 221,375 Shares issued under the 1992 Plan are exercisable.
During Fiscal 1993, the Company adopted the 1993 Non-Employee Director Stock Option Plan (the "1993 Plan"), which was subsequently amended on April 6, 1994 and June 27, 1995. The 1993 Plan provides 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 Plan vest immediately and are initially exercisable at a price equal to the fair market value of the Shares on the date of grant. For options granted prior to March 1, 1994, the exercise price of options granted pursuant to this Plan increased on the first anniversary date of such grant by 4%, which became the fixed exercise price for all such options. Options issued thereafter, if any, will be exercisable over their term at the fair market value on the date of grant. Pursuant to the 1993 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. No options under the 1993 Plan have been exercised. The 1993 Plan was amended on June 27, 1995 to provide for the grant of an additional option to purchase 5,000 Shares to each eligible director and thereafter providing for the automatic annual grant of an option to each eligible director to purchase an additional 5,000 Shares at fair market value on the date of grant. Pursuant to the 1993 Plan, the Company granted options to acquire up to 5,000 Shares to each eligible director in fiscal 1995 and 1996 with a fixed exercise price of $15.95 and $10.63, per Share, respectively. The options outstanding (net of forfeitures) and their related strike prices at December 1, 1996 adjusted for the dividend declared on May 17, 1996 are 45,078 Shares and $8.35, 22,544 Shares and $14.15, 20,000 Shares and $9.43 for the 1993, 1995 and 1996 grants, respectively.
In 1996, pursuant to an employment agreement with the Company's current President and Chief Executive Officer, the Company granted him an aggregate of 67,635 shares of restricted stock. The restricted stock vests at a rate of approximately 25% at each anniversary date of the grant. The Company also awarded a grant of ten-year stock options to acquire up to an aggregate of 400,000 Shares of an exercise price of $10.63 per Share (representing fair market value at the time of grant). The stock options vest at a rate of 25% at each anniversary date of the grant.
In 1996, the Company adopted the 1996 Transitional Restricted Stock Plan (the "Plan") effective December 1, 1996 which terminates on January 3, 2000, and no grants shall thereafter be awarded under the Plan. All grants awarded under the Plan prior to such date shall remain in effect until they have been exercised or terminated in accordance with the terms and provisions of the Plan. On January 6, 1997, 281,400 shares, which vest on January 3, 2000, were granted under the Plan. The Plan provides for partial vesting at a rate of 50% if a grantee incurs a "termination" (as defined in the Plan) from January 3, 1999 to January 2, 2000.
In 1996, the Company adopted the 1997 Stock Option Plan ("1997 Plan"). Options under the Plan may be granted either as Incentive Stock Options as defined in Section 422A of the Internal Revenue Code or
SEALY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Nonqualified Stock Options subject to the provisions of Section 83 of the Internal Revenue Code. No options have been granted under the 1997 Plan.
(6) INCOME TAXES
The Company and its domestic subsidiaries file a consolidated U.S. Federal income tax return. Income tax expense attributable to income from continuing operations consists of:
Income before income taxes from Canadian operations amounted to $7,042, $7,247 and $8,720, for the years ended December 1, 1996, November 30, 1995 and November 30, 1994.
The differences between the effective tax rate and the statutory U.S. Federal income tax rate are explained as follows:
At December 1, 1996 and November 30, 1995, the total deferred tax assets and deferred tax liabilities were $19,265 and $23,689, $42,674 and $41,052, respectively. The significant components of the deferred tax assets were accrued salaries and benefits of $7,447 and $9,462, respectively and net operating loss carryforwards of $3,577 and $4,796, and the deferred tax liabilities relating to property, plant and equipment were $23,601 and $26,929 and intangible assets of $13,204 and $13,913, respectively.
The future usage of net operating losses generated prior to November 6, 1991 will be substantially limited as to annual usage due to a recapitalization that occurred on that date. The Company has net operating loss carryforwards of approximately $10 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.
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.
SEALY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(7) RETIREMENT PLANS
Substantially all employees are covered by profit sharing plans, where specific amounts are set aside in trust for retirement benefits. The total profit sharing expense was $5.0 million, $5.4 million and $5.3 million for the years ended December 1, 1996, November 30, 1995 and November 30, 1994, respectively.
(8) WARRANTS
SERIES A AND SERIES B WARRANTS
Series A and Series B Warrants (collectively, "Restructure Warrants") were issued under a Warrant Agreement (the "Agreement") dated as of November 6, 1991 between the Company and its subsidiary, Sealy, Inc., as warrant agent. The Restructure Warrants, when exercised, will entitle the Holder thereof to receive one Share in exchange for the exercise price per Share for Series A warrants and Series B warrants, subject to adjustment under certain circumstances. As of December 1, 1996, the Series A and Series B Warrants are exercisable into 4,337,959 and 1,668,446 Shares, respectively.
Under the Agreement, adjustments are to be made to the exercise ratio and exercise price of the Restructure Warrants in the event the Company issues shares of its capital stock at less than Current Market Value (including under employee benefit plans). The Company has issued shares under its Performance Share Plan, Restricted Stock Plan and certain employee issuances, triggering the anti-dilution adjustments, and these adjustments have been made pursuant to the Warrant Agreement. The Series A and Series B Warrants conversion ratio and exercise price at December 1, 1996 have been adjusted to 1.0115 and $15.8182 per share and 1.0115 and $22.2444 per share, respectively, from 1.0000 and $16.0000 per share and 1.0000 and $22.50 per share at November 30, 1995. On January 6, 1997, the Company issued additional shares under the 1996 Transitional Restricted Stock Plan resulting in further adjustments to the Series A and Series B Warrants conversion ratio and exercise price of 1.0207 and $15.6751 per share and 1.0207 and $22.0431 per share, respectively. As of January 6, 1997, the Series A and Series B Warrants are exercisable into 4,377,571 and 1,683,682 Shares, 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 by the Company pursuant to its right to redeem the Restructure Warrants on any date after November 6, 1996 at a redemption price per Share as defined in the Warrant Agreement.
MERGER WARRANTS
Merger Warrants were issued under a Warrant Agreement ("Warrant Agreement") dated as of August 1, 1989 between the Company and KeyCorp Shareholder Services, Inc., as successor warrant agent. Each Merger Warrant, when exercised, will entitle the holder thereof to receive one fiftieth of one share of Class B Common Stock ("Warrant Shares") of the Company (50 to 1 ratio) in exchange for the exercise price of $.01 per share, subject to adjustment under certain circumstances. The Company has issued shares under its Performance Share Plan, Restricted Stock Plan and certain employee issuances, triggering the anti-dilution adjustment provision, and these adjustments have been made pursuant to the Warrant Agreement resulting in a revised conversion ratio of 48.64 to 1. On January 6, 1997, the Company issued additional shares under the 1996 Transitional Restricted Stock Plan resulting in a revised conversion ratio of 47.98 to 1.
The Merger Warrants became exercisable subsequent to August 9, 1995. As a result of exercised Merger Warrants, 2,085 and 8,590 shares of Class B Common Stock were issued in Fiscal 1996 and 1995, respectively.
SEALY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The Company is required to offer to repurchase the Merger Warrants and Warrant Shares upon the removal of any limitations to repurchase or upon the occurrence of certain other events. Merger Warrants and Warrant Shares are, therefore, not considered to be a part of the Company's stockholders' equity but, are included in other noncurrent liabilities in the accompanying consolidated balance sheets. Authorized Merger Warrants at December 1, 1996 and January 6, 1997 are exercisable into an aggregate of 207,747 and 210,754 shares of Class B Common Stock, respectively.
(9) 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.
(10) 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 if the Company meets specified cumulative operating cash flow targets over the five-year period ending December 1, 1996. During fiscal 1996, two participants withdrew from the Plan resulting in an adjustment to additional paid-in capital. As of December 1, 1996, the conclusion of the Plan, 451,740 Shares were awarded under the Plan of which 207,549 Shares were tendered to the Company by Plan participants to cover their estimated tax liability, resulting in the issuance of 244,191 Shares subsequent to fiscal year end.
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 December 1, 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. Performance Share Plan expense for the year ended December 1, 1996 amounted to $4.5 million. The Company recorded a $13.3 million credit to non-cash compensation expense under the Plan for the year ended November 30, 1995. For the year ended November 30, 1994, the Company recorded $9.7 million of non-cash compensation expense under the Plan.
(11) SUMMARY OF INTERIM FINANCIAL INFORMATION (UNAUDITED)
SEALY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
During the fourth quarter of Fiscal 1996, the Company recorded an after-tax loss on the pending sale of subsidiary of $17.6 million and a noncash charge of $3.2 million in connection with the Company's Performance Share Plan. During the second, third and fourth quarters of Fiscal 1995, the Company recorded noncash credits of $4.6 million, $2.7 million and $7.4 million, respectively, in connection with the Company's Performance Share Plan.
(12) CONTINGENCIES
In accordance with procedures established under the Environmental Cleanup Responsibility Act (now known as the Industrial Site Recovery Act), Sealy and one of its subsidiaries are parties to an Administrative Consent Order ("ACO") issued by the New Jersey Department of Environmental Protection ("DEP"). Pursuant to the ACO the Company and such subsidiary agreed to conduct soil and groundwater investigation and remediation at the plant owned by the subsidiary in South Brunswick, New Jersey. The Company does not believe that its manufacturing processes were a source of the contaminants found to exist above regulatorily acceptable levels in the groundwater. As the current owners of the facility, however, the Company and its subsidiary are primarily responsible for the investigation and any necessary clean up plan approved by the DEP under the terms of the ACO.
The DEP previously approved both the Company's soil remediation plans and its initial groundwater remediation plans. Further investigation in 1996 revealed certain additional areas of soil contamination resulting from activities at the South Brunswick facility prior to the Company's acquisition of the site. The Company anticipates that in 1997, subject to DEP approval, it will complete essentially all soil remediation and will conduct a pilot test for a Company-proposed revision to the groundwater remediation program.
While the Company cannot predict the ultimate timing or cost to remediate this facility based on facts currently known, management believes the previously established accrual for site investigation and remediation costs is adequate to cover the Company's reasonably estimable liability and does not believe the resolution of this matter will have a material adverse effect on the Company's financial position or future operations.
In March, 1994, the Company filed a claim in the U.S. District Court for the District of New Jersey against former owners of the site and their lenders under the Comprehensive Environmental Response, Compensation and Liability Act seeking contribution for site investigation and remedial costs. Settlement terms have been tentatively reached in this matter and are projected to be completed in the second quarter of fiscal 1997.
The Company has also voluntarily proceeded to develop a remediation plan for isolated soil and groundwater contamination at its Oakville, Connecticut property that the Company believes is solely attributable to the manufacturing operations of previous unaffiliated occupants. Based on the facts currently known, management does not believe that resolution of this matter will have a material adverse effect on the Company's financial position or future operations.
SEALY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(13) FINANCIAL INSTRUMENTS
Due to the short maturity of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses, their carrying values approximate fair value. The carrying amount of long-term debt under the Term Loan Facility and Revolving Credit Facility approximate fair value because the interest rate adjusts to market interest rates. The fair value of long-term debt under the 9 1/2% Senior Subordinated Notes, based on a quoted market price, was $201 million and $198 million at December 1, 1996 and November 30, 1995, respectively.
(14) DISPOSITION
On January 15, 1997, the Company completed the sale of Woodstuff Manufacturing, Inc., a wholly owned subsidiary that manufactured and marketed solid wood bedroom furniture under the "Samuel Lawrence" brand name. The divestiture produced cash proceeds of $35.0 million and resulted in a book loss of $17.6 million. The loss on sale of this subsidiary includes income tax expense of $5.8 million arising from the tax gain on the transaction, as well as transaction costs related to the sale. A summary of the net assets held for sale at December 1, 1996 is as follows (amounts in thousands):
(15) SUBSEQUENT EVENTS
Pursuant to a Solicitation of Consents dated as of January 24, 1997, as subsequently amended (the "Consent Solicitation"), the Company has solicited consents from the record holders (the "Registered Holders") of its 9 1/2% Senior Subordinated Notes due 2003 (the "Notes") to certain amendments, consents and waivers under the Indenture (the "Indenture"), dated as of May 7, 1993, between the Company and Mellon Bank, F.S.B., as successor trustee (the "Trustee"), under which the notes were issued. Following receipt of the requisite consents of the Registered Holders, on February 21, 1997, the Company and the Trustee executed a Supplemental Indenture incorporating the amendments to the Indenture. The
SEALY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Supplemental Indenture provides for (i) an increase in the interest rate on the Notes to 10 1/4%, (ii) provision to allow for the payment of a special dividend of up to One Hundred Million Dollars ($100,000,000) (the "Dividend") to qualifying equity security holders of the Company, (iii) an increase in the redemption premiums paid to Registered Holders in the event the Notes are repurchased by the Company, and (iv) the corresponding waiver of Section 4.05 of the Indenture, such that the Dividend will not constitute a "Restricted Payment" (as defined in the Indenture). The Company paid an aggregate of Four Million Dollars ($4,000,000) on a pro rata basis to those Registered Holders that had timely consented.
Concurrent with the distribution of the Consent Solicitation documentation, the Company entered into negotiations for a new senior secured financing facility. On February 25, 1997, the Company entered into the $275,000,000 Second Restated Secured Credit Agreement (the "1997 Credit Agreement) with a majority of its then current group of senior lenders, which modified the terms of the 1994 Credit Agreement by increasing the amounts available under the revolving credit portion of the facility from $125 million to $275 million, and eliminating the term loan portion of the 1994 Credit Agreement. The 1997 Credit Agreement provides for reducing revolving credit facility with a $25 million discretionary letter of credit facility and a discretionary swing loan facility of up to $20 million.
On February 28, 1997, the Company made an initial borrowing under the 1997 Credit Agreement of $156.4 million. Letters of credit of $13.1 million also were outstanding, leaving approximately $105.5 million of undrawn availability under the 1997 Credit Agreement. The proceeds of the 1997 Credit Agreement were used (a) to refinance approximately $48.7 million of indebtedness under the Company's 1994 Credit Agreement, (b) to pay a $99.8 million Dividend, and (c) for general corporate purposes, including, without limitation, for working capital.
The 1997 Credit Agreement has a final maturity date of January 15, 2003, and provides for periodic reductions in the amounts of available credit in accordance with the following schedule:
Remaining Reduction Date Commitment Reduction Revolver Commitment -------------- -------------------- ------------------- November 29, 1988 $15 million $260 million November 28, 1999 $20 million $240 million December 3, 2000 $30 million $210 million December 2, 2001 $30 million $180 million June 2, 2002 $30 million $150 million
Additional mandatory commitment reductions will occur equal to 100% of net after-tax cash proceeds from the sale of assets in excess of $15 million in each fiscal year, and equal to 50% of net proceeds from the issuance of permitted subordinated debt.
Base rate loans and Eurodollar rate loans are based on a pricing grid which provides for an interest rate plus a margin. The margin is adjustable based on the Company's total senior debt to adjusted EBITDA ratio. For the first six months of the 1997 Credit Agreement the margin on Eurodollar rate borrowings will be the greater of 1.25% or the applicable level of the pricing grid. The initial commitment fee, which is also subject to a pricing grid, is 0.375%.
The 1997 Credit Agreement is secured in substantially the same fashion as the 1994 Credit Agreement (See Note 3 to Consolidated Financial Statements), however such security is subject to release upon the Company attaining specified senior unsecured (either actual or implied) credit ratings. The Company is also subject to certain affirmative and negative covenants under both the 1997 Credit Agreement and the Indenture including requirements and restrictions with respect to capital expenditures, dividends, maximum leverage and other financial ratios.
In addition, the 1997 Credit Agreement amended other provisions of the 1994 Credit Agreement to provide for greater flexibility to the Company with respect to among other things, investments and reporting provisions.
(16) NEW ACCOUNTING PRONOUNCEMENTS
During 1995, the Financial Accounting Standards Board issued two pronouncements effective for financial statements for years beginning after December 15, 1995 that would apply to the Company. The Company has considered the requirements of Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" and has determined that it will not require recognition of any impairment losses. The Company has also determined to remain within the accounting prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees," and accordingly the implementation of Statement No. 123, "Accounting for Stock-Based Compensation" will result in additional disclosures without any impact on the statements of operations or financial condition.
SEALY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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ITEM 9.

ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None. PART III
ITEM 10.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS
The following sets forth the name, age, principal occupation and employment and business experience during at least the last five years of each of the Company's directors:
ROD F. DAMMEYER
Mr. Dammeyer, age 56, has been a director of the Company since December, 1995. Mr. Dammeyer is the managing director of EGI-Corporate Investments, which has among other things, a controlling interest in approximately 30 companies, several of which are public entities. Mr. Dammeyer is also the Chief Executive Officer and a director of Anixter International, Inc. Since 1985, Mr. Dammeyer has held the positions of President and Chief Executive Officer of Anixter International, Inc. From 1983 to 1985, Mr. Dammeyer was Senior Vice President and Chief Financial Officer of Household International, Inc. Prior to Household International, Mr. Dammeyer was Executive Vice President and Chief Financial Officer of Northwest Industries, Inc. from 1979 to 1983. Mr. Dammeyer is a director of Antec Corporation, Capsure Holdings Corporation, Falcon Building Products, Inc., IMC Global, Inc., Jacor Communications, Inc., Lukens, Inc., Revco D.S., Inc. and TeleTech Holdings, Inc. He is also a trustee of Van Kampen American Capital, Inc. closed end funds and a member of the Chase Manhattan Corporation National Advisory Board.
GEORGE L. DAVIS
Mr. Davis, age 63, has been a director of the Company since February 12, 1993 . Mr. Davis is, and since October 1990 has been, President and Chief Executive Officer of Scarborough Partners, Inc., consultants to the financial services industry. From November, 1993 to December, 1995, Mr. Davis was Chairman and Chief Executive Officer of Banco de Venezuela, Inc., Miami, Florida. From December, 1991 to November, 1992, Mr. Davis was also President of First American Bankshares Inc. Previously, since 1987, Mr. Davis was Group Executive, North America, for Citibank, N.A., a subsidiary of Citicorp.
CHRISTIE A. HEFNER
Ms. Hefner, age 44, has been a director of the Company since June 23, 1993. Ms. Hefner is, and since November 1988 has been, Chairman and Chief Executive Officer of Playboy Enterprises, Inc. Ms. Hefner also serves on the Board of Directors of the Magazine Publishers Association and is on Advisory Boards of the American Civil Liberties Union of Illinois and the National Council on Crime and Delinquency.
JAMES W. JOHNSTON
Mr. Johnston, age 50, is President and Chief Executive Officer of Stonemarker Enterprises, Inc., a consulting and investment company. He has been a director of Sealy, Inc. since March 4,1993. Mr. Johnston was Vice Chairman RJR Nabisco, Inc. from 1995 to 1996. He also served as Chairman and CEO of R. J. Reynolds Tobacco Co. from 1989 to 1995, Chairman R. J. Reynolds Tobacco Co. from 1995 to 1996 and Chairman R.J. Reynolds Tobacco International from 1993 to 1996. Mr. Johnston served on the board of RJR Nabisco, Inc. and RJR Nabisco Holdings Corp. from 1992 to 1996. From 1984 until joining Reynolds, Mr. Johnston was Division Executive, Northeast Division, of Citibank, N.A., a subsidiary of Citicorp, where he was responsible for Citibank's New York Banking Division, its banking activities in upstate New York, Maine and Mid-Atlantic regions, and its national student loan business. Mr. Johnston is also a director of The Wachovia Corporation.
RONALD L. JONES
Mr. Jones, age 54, since March 2, 1996 has been President and Chief Executive Officer of the Company. From October, 1988 until joining the Company, Mr. Jones served as President of Masco Home Furnishings. From 1983 to 1988, Mr. Jones was President of HON Industries.
SHELI Z. ROSENBERG
Ms. Rosenberg, age 55, has been a director of the Company since December, 1995 . Ms. Rosenberg is and since 1990 has been a director of Anixter International, Inc. (formerly known as Itel Corporation until August 31, 1995), and is a Principal of the law firm Rosenberg & Liebentritt P.C., and since 1994 has been President and Chief Executive Officer of Equity Group Investments, Inc. and its subsidiary Equity Financial and Management Company. Ms. Rosenberg is Board Chair of Jacor Communications, Inc. and a director of Capsure Holdings Corp., Quality Food Centers, Inc., Falcon Building Products, Inc., American Classic Voyages Co., Revco D.S., Inc.; trustee of Equity Residential Properties Trust and Manufactured Home Communities, Inc.; was an Executive officer and director until October 4, 1991 of Madison Management Group, Inc., which filed a petition under the Federal bankruptcy laws in November 1991; and was Vice President of First Capital Benefit Administrators, Inc. which filed a petition under the Federal bankruptcy laws in January 1995.
ROLF H. TOWE
Mr. Towe, age 58, since July 10, 1991 has been a director of the Company. Mr. Towe is, and since April 1991 has been Vice President of Clipper Asset Management Corporation, the sole general partner of The Clipper Group L.P., a Delaware limited partnership, which managed the investments of MBLP in the Company until the Acquisition; and, since 1989, has been Chairman of Executive Partner Limited, a management advisory firm. Mr. Towe is also a director of The American Heritage Life Insurance Company, Long John Silver's Restaurants, Inc., G.S. Blodgett Corporation, Travel Centers of America, Inc. and the Jack Morton Company.
SAMUEL ZELL
Mr. Zell, age 55, has been a director of the Company since February 12, 1993. Mr. Zell is, and since 1981 has been Chairman of the Board of Equity Financial and Management Company and, since 1986 has been Chairman of the Board of Equity Group Investments, Inc., two privately owned affiliated investment and management companies; is, and since mid-1990 has been, one of two individuals (the other being Mr. David Schulte) who act as general partners of the general partnership of Zell/Chilmark Fund, L.P., is, and since 1985 has been, Chairman of the Board of Anixter International, Inc. (formerly known as Itel Corporation until August 31, 1995), a company engaged in the distribution of wiring systems products; from 1987 has served as Chairman of the Board of Capsure Holdings Corp. (formerly called Nucorp, Inc.), a company engaged in the business of specialty property and casualty insurance; is, and since 1992 has been, Co-Chairman of Revco D.S., Inc., a company that operates a chain of retail drugstores; is, and since 1993 has been, Chairman of the Board of Equity Residential Properties Trust, a self-administered, self-managed equity real estate investment trust; and is, and from 1993 to January 1994 has been Co-Chairman, and from January 1994, Chairman of the Board and Chief Executive Officer of Manufactured Home Communities, Inc., a self-administered and self-managed equity real estate investment trust which owns and operates properties in 16 states. Mr. Zell is a member of the board of directors of American Classic Voyages Co., Quality Food Centers, Inc., and Revco D.S., Inc. Prior to October 4, 1991, Mr. Zell was President of Madison Management Group, Inc., which filed a petition under Chapter 11 of the Bankruptcy Code on November 8, 1991.
EXECUTIVE OFFICERS
The following sets forth the name, age, title and certain other information with respect to the executive and certain other appointed officers of the Company:
BRUCE G. BARMAN
Dr. Barman, age 48, since January, 1995 has been Vice President Research and Development of the Company. From 1991 until he joined the Company, Dr. Barman was Vice President-Research and
Development of Griffith Laboratories N.A., a custom food products producer for a customer base of major North American food service and food processing companies.
JOHN G. BARTIK
Mr. Bartik, age 45, since March, 1995 has been Vice President Tax and Assistant Treasurer of the Company. From 1990 to 1995, he was Treasurer of the Company and from 1985 has served as the Company's Director of Taxation.
JEFFREY C. CLAYPOOL
Mr. Claypool, age 49, since September, 1991 has been Vice President Human Resources of the Company.
GARY T. FAZIO
Mr. Fazio, age 46, since 1990 has been Vice President Sales of the Company. Mr. Fazio joined the Company as a general manager in 1981. From 1987 to 1990, he was Regional Vice President of the Company.
DOUGLAS E. FELLMY
Mr. Fellmy, age 47, since July, 1992 has been Vice President Operations of the Company. Previously, Mr. Fellmy served as Regional Vice President-Operations since April 1990 and also as President of the Components Division since December 1989. Mr. Fellmy has served, since 1971, in numerous other capacities with the Company's Components Division.
THOMAS M. FORMAN
Mr. Forman, age 51, since June, 1994 has been Vice President General Counsel of the Company. Previously, Mr. Forman was President of Forman Venture Capital, Inc. and from 1981 to 1990 held various executive positions with Bridgestone/Firestone, Inc., an international tire manufacturer, most recently as an Executive Vice President and member of the board of directors. Mr. Forman is a director of Olympic Steel, Inc., a NASDAQ-listed steel distribution company.
JESSE E. HOGAN
Mr. Hogan, age 50, since June, 1994 has been Senior Vice President and Chief Financial Officer of the Company. Previously, from 1992, Mr. Hogan served as President, Columbo Fresh Products, a division of Bongrain, S.A., a worldwide dairy company and from 1991 to 1992 as General Manager of Alta Dena Certified Dairy.
DAVID J. MCILQUHAM
Mr. McIlquham, age 42, since April, 1990 has been Vice President-Marketing of the Company.
LAWRENCE J. ROGERS
Mr. Rogers, age 48, since February, 1994 has been Vice President International of the Company. Previously, Mr. Rogers has served, since 1979, in numerous other capacities within the Company's operations, including President-Sealy Canada.
RICHARD F. SOWERBY
Mr. Sowerby, age 42, since April, 1995 has been Vice President Controller of the Company. Previously, from 1991, Mr. Sowerby served as Corporate Controller of Elliott Company, a manufacturer and servicer of turbo machinery equipment.
RONALD H. STOLLE
Mr. Stolle, age 48, since March, 1995 has been Vice President and Treasurer of the Company. Previously, from 1987, Mr. Stolle served as Director, Treasury Operations for Reliance Electric Company, a manufacturer of industrial and telecommunication products.
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 1996 and Form 5, and amendments thereto, furnished to the Company with respect to Fiscal 1996, 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 1996 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 December 1, 1996, November 30, 1995 and November 30, 1994, of those persons who served as (i) the chief executive officer during Fiscal 1996, and (ii) the other four most highly compensated executive officers of the Company for Fiscal 1996 (collectively, the "Named Executive Officers"):
SUMMARY COMPENSATION TABLE
[FN]
(d) Such amount reflects the Company's determination of the fair value at the date of grant of 10,000 shares issued to Mr. Beggs as of November 30, 1995 pursuant to his Employment Agreement. These Shares were repurchased by the Company in connection with Mr. Beggs' termination of employment. The Employment Agreement also provided for the issuance to Mr. Beggs of an additional 90,000 Shares, which were forfeited upon his termination. See "Compensation Pursuant to Plans and Other Arrangements--Executive Employment Agreements." Hence, Mr. Beggs no longer had any restricted stock holdings at the end of Fiscal 1996.
(e) The amount paid to Mr. Hogan represents reimbursement for moving expenses and the tax liabilities thereon.
(f) On January 6, 1997, the Company issued restricted stock, pursuant to the Company's 1996 Transitional Restricted Stock Plan to, among others, certain Named Executive Officers as follows: Jesse E. Hogan: 20,000 shares; Gary T. Fazio: 15,800 shares; David J. McIlquham: 15,800 shares; and Lawrence J. Rogers: 15,800 shares.
(g) Such amount reflects the Company's determination of the fair value at the date of grant of 67,635 shares issued to Mr. Jones, pursuant to his Employment Agreement. Although the 1997 Credit Agreement and Note Indenture contain restrictions on the Company's ability to pay dividends, if declared and paid on the Company's Shares, such dividends would be paid on such Shares issued to Mr. Jones. The February 28, 1997 Dividend was paid on such shares. As of December 1, 1996, the value of Mr. Jones' restricted stock holdings was $873,168.
(h) Pursuant to his Employment Agreement, the Company granted Mr. Jones ten-year options to acquire up to 400,000 Shares at an exercise price of $10.63 per Share as further described in "Compensation Pursuant to Plans and Other Arrangements - Executive Employment Agreements."
(i) Such amount reflects the value of Shares earned under the Performance Share Plan which concluded on December 1, 1996.
(j) Mr. Beggs' employment with the Company terminated on March 15, 1996. Mr. Beggs was awarded $2,578,902 in connection with his withdrawal from the Performance Share Plan in addition to receiving $394,236 in salary continuation. Mr. Beggs' remaining equity loan balance (see footnote (c) above) was forgiven in addition to a gross up payment to cover his tax liability, together totaling $80,890. His Employment Agreement and the terms of his termination and certain payments made in connection therewith are described more fully in "Compensation Pursuant to Plans and Other Arrangements -- Executive Employment Agreements."
OPTION/SAR GRANTS IN LAST FISCAL YEAR
(a) Includes options exercisable within 60 days after December, 1, 1996.
(b) Options are in-the-money if the fair market value of the Common Stock exceeds the exercise price.
(c) Represents the total gain which would be realized if all in-the-money options beneficially held at December 1, 1996 were exercised, determined by multiplying the number of Shares underlying the options by the difference between the per share option exercise price and the estimated fair market value as of December 1, 1996.
LONG-TERM INCENTIVE PLAN AWARDS IN LAST FISCAL YEAR
COMPENSATION PURSUANT TO PLANS AND OTHER ARRANGEMENTS
SEVERANCE BENEFIT PLANS. Effective December 1, 1992, the Company established the Sealy Executive Severance Benefit Plan (the "Executive Severance Plan") for employees in certain salary grades. Benefit eligibility includes, with certain exceptions, termination as a result of a permanent reduction in work force or the closing of a plant or other facility, termination for inadequate job performance, termination of employment by the participant following a reduction in base compensation, reduction in salary grade which would result in the reduction in potential plan benefits or involuntary transfer to another location. Benefits include cash severance payments calculated using various multipliers varying by salary grade, subject to specified minimums and maximums depending on such salary grades. Such cash severance payments are made in equal semi-monthly installments calculated in accordance with the Executive Severance Plan until paid in full. Certain executive-level officers would be entitled to a minimum of one-year's salary and a maximum of two-year's salary under the Executive Severance Plan. However, if a Participant becomes employed prior to completion of the payment of benefits, such semi-monthly installments shall be reduced by the Participant's base compensation for the corresponding period from the Participant's new employer. Participants receiving cash severance payments under the Executive Severance Plan also would receive six months of contributory health and dental coverage and six months of group term life insurance coverage.
The Company currently follows the terminal accrual approach to accounting for severance benefits under the Executive Severance Plan and records the estimated cost of these benefits as expense at the date of the event giving rise to payment of the benefits.
EXECUTIVE EMPLOYMENT AGREEMENTS. Effective February 27, 1996, the Company entered into an employment agreement and related reimbursement letter agreement (collectively, the "Jones Agreement") with Mr. Jones, pursuant to which Mr. Jones became employed as President and Chief Executive Officer of the Company for an initial term ending March 31, 1999 and continuing on a year-to-year basis thereafter until retirement or 90 days prior written notice of either party of intent to terminate at the end of such renewal period. Pursuant to the Jones Agreement, Mr. Jones' minimum base salary is $500,000 annually and he is eligible to receive a cash bonus in an amount to be determined by the Board of Directors or a committee thereof, with a guaranteed minimum bonus of 40% of salary payments for the fiscal year ending December 1, 1996 and he received a $250,000 payment upon commencing employment.
Pursuant to the terms of the Jones Agreement and a related Restricted Stock Agreement and Stock Option Agreement, Mr. Jones received an aggregate of 67,635 Shares based on the following vesting schedule: March 4, 1997 - 16,900 Shares; March 4, 1998 - 16,900 Shares; March 4, 1999 - 16,900 Shares; March 4, 2000 - 16,935 Shares. Mr. Jones also received ten-year options to acquire up to 400,000 Shares at an exercise price of $10.63 per Share, the number and exercise price of which will be equitably adjusted for special large and non-recurring dividends and which options will vest on the following basis: March 4, 1997 - 100,000 options; March 4, 1998 - 100,000 options; March 4, 1999 - 100,000 options; and March 4, 2000 - 100,000 options.
Mr. Jones also entered into a Stockholder's Agreement with the Company (the "Jones Stockholder's Agreement") in connection with the Employment Agreement, which provided that, prior to March 4, 2001, Mr. Jones could sell any Company Stock (as defined) that he owns, including the Restricted Stock referenced above, only after the Company's first registered public offering of its common stock ("Initial IPO") or approval by the Board of Directors. After March 4, 2001, the Company shall have certain rights of first refusal with respect to any proposed transfers of Mr. Jones' Company Stock (other than to certain permitted transferees) if no Initial IPO has occurred. In addition, if Mr. Jones' employment is terminated prior to an Initial IPO other than by reason of his resignation, then the Jones Stockholder's Agreement grants to Mr. Jones or his representative the right to cause the Company to repurchase all of Mr. Jones' Company Stock at the "fair market value" (determined in accordance with the Jones Stockholder's Agreement). In the event that Mr. Jones' employment is terminated by reason of his resignation prior to an Initial IPO, then the Company shall have the option to repurchase Mr. Jones' Company Stock for the "fair market value."
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 was 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 received a minimum base salary of $500,000 annually.
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 subject to certain forfeiture provisions which lapsed as of November 30, 1995 and 10,000 issued at November 30, 1995. In addition, the following number of additional Shares were issuable had he remained employed by the Company through the dates indicated: 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 provided that, prior to the Expiration Date, Mr. Beggs could 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). 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 Plan. Mr. Beggs subsequently withdrew from the Performance Share Plan in connection with his termination of employment with the Company.
Pursuant to the Employment Agreement, Mr. Beggs received relocation expenses and was entitled to health and life insurance and certain other benefits. 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 was 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 of the Equity Loan was forgiven on each of November 30, 1995, 1994 and 1993. In addition, $2,442, $3,256 and $4,070 in interest related to such Equity Loan was also forgiven on November 30, 1995, 1994 and 1993, respectively, and the Company paid Mr. Beggs an additional $45,383, $47,029 and $44,034, 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 two equal annual payments of principal due on November 30, 1996 and 1997.
The Employment Agreement provided that if, prior to the Expiration Date, Mr. Beggs' employment was terminated by the Company other than for cause (as defined in the Employment Agreement), death or disability or if Mr. Beggs terminated his employment for good reason, he would continue to receive his base salary until the later of November 30, 1997 or one year, and he would also receive 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, it provided that if Mr. Beggs' employment terminated prior to the Expiration Date under certain circumstances, 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 Stockholder's Agreement). It further provided that in the event that Mr. Beggs' employment terminated prior to the Expiration Date for "cause" or if he voluntarily terminates his employment other than for "good reason," then the Company had the option to repurchase Mr. Beggs' Shares for their "fair market value."
Mr. Beggs' last day of employment was March 15, 1996. Mr. Beggs and the Company entered into a settlement agreement dated March 1, 1996, which provided that it superseded all previous agreements. Pursuant to its terms, Mr. Beggs will continue to receive his base salary through November 30, 1997 and, in January, 1997, received a bonus equal to 60% of the salary payments for the period December 1, 1995 to March 15, 1996. The remaining Equity Loan balance of $40,000 has been forgiven 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. In exchange for Mr. Beggs' transferring the 110,000 Shares which had been issued to him and relinquishing any rights to the remaining 90,000 shares that would have been issued to him had Mr. Beggs remained employed, the Company paid Mr. Beggs $2,126,000.
Mr. Beggs withdrew from the Performance Share Plan and in exchange was deemed to have been vested in 800,000 Performance Share Units. Instead of remaining as a participant and converting his Units into Shares within the Plan at the conclusion of the fiscal year ending December 1, 1996, the Company agreed to pay Mr. Beggs an amount determined by multiplying the number of Shares into which Performance Share Units would have been converted in accordance with the formula then set forth in the Performance Share Plan by the higher of (a) the per Share value as of November 30, 1996 as determined pursuant to the Plan or (b) $10.63 per Share plus interest at the rate of 6% per annum from March 15, 1996 to date of payment. As a result, the Company owes Mr. Beggs $2,578,902.
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, Dammeyer, Rosenberg, Davis, Towe, Johnston and Hefner are eligible for such remuneration.
During Fiscal 1993, the Company adopted the 1993 Non-Employee Director Stock Option Plan (the "1993 Plan"), which was subsequently amended on April 6, 1994, June 27, 1995 and as of May 1, 1996. The 1993 Plan provides 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 Plan vest immediately and are initially exercisable at a price equal to the fair market value of the Shares on the date of grant. For options granted prior to March 1, 1994, the exercise price of options granted pursuant to this Plan increased on the first anniversary date of such grant by 4%, which became the fixed exercise price for all such options. Options issued thereafter, are exercisable over their term at the fair market value on the date of grant. Pursuant to the 1993 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, which therefore have a fixed exercise price of $9.41 per Share. No options under the 1993 Plan have been exercised. The 1993 Plan was amended on June 27, 1995 to provide for the grant of an additional option to purchase 5,000 Shares to each eligible director and thereafter providing for the automatic annual grant of an option to each eligible director to purchase an additional 5,000 Shares at fair market value on the date of grant. Pursuant to the 1993 Plan, the Company granted options to acquire up to 5,000 Shares to each eligible director in Fiscal 1995 with a fixed exercise price of $15.95 per Share. The 1993 Plan was amended effective May 1, 1996 to provide that as of the record date of any special, large and non-recurring cash dividend to be paid on common shares, the option price per share will be automatically decreased and the number of options automatically increased to the maximum extent allowable without the Company having to account for additional expense.
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 25, 1997:
The following table sets forth certain information with respect to the beneficial ownership of the Shares by each of the directors and Named Executive Officers of the Company and by all directors and executive officers of the Company as a group, as of February 25, 1997:
(a) The percent of class calculation for each of the listed individuals assumes that the stockholder for whom the percent of class is being calculated has exercised all Merger and Restructure Warrants owned by such stockholder and that no other stockholder has exercised any other Merger and Restructure Warrants. Accordingly, the total of the percentages for each of the listed individuals exceeds 100%. However, the total percent of class for all executive officers and directors as a group assumes that each of the executive officers and directors have exercised any Merger and Restructure Warrants beneficially owned by them and that no other stockholder has exercised any other Merger and Restructure Warrants.
(b) The securities reported herein are beneficially owned by the Zell/Chilmark Fund, L.P., a Delaware limited partnership ("Zell/Chilmark"). The sole general partner of Zell/Chilmark is ZC Limited Partnership, an Illinois limited partnership ("ZC Limited"). The sole general partner of ZC Limited is ZC Partnership, a Delaware general partnership. The sole partners of ZC Partnership are CZ Inc., a Delaware corporation, and ZC, Inc., an Illinois corporation. The Samuel Zell Revocable Trust under trust agreement dated January 17, 1990 ("Trust") is the sole shareholder of ZC, Inc. Samuel Zell is the trustee and beneficiary of the Trust and may be deemed to be the beneficial owner of the shares reported herein. One of the limited partners of ZC Limited is COP General Partnership, an Illinois general partnership ("COP"). One of the general partners of COP is COP Seniors General Partnership, an Illinois general partnership ("COP Seniors"). Two of the general partners of COP Seniors are Rod F. Dammeyer and Sheli Z. Rosenberg. As a result, Mr. Dammeyer and Ms. Rosenberg may be deemed to be beneficial owners of the securities reported herein.
The management of ZC Limited, the sole general partner of Zell/Chilmark is conducted through an executive committee. Mr. Dammeyer, Ms. Rosenberg and Mr. Zell are members of the executive committee and as such may share the right to vote or direct the vote and may share the right to dispose or direct the disposition of the securities reported herein and as such may be deemed to be a beneficial owner of the securities reported herein. Mr. Dammeyer, Ms. Rosenberg and Mr. Zell each disclaims beneficial ownership of the securities reported herein.
(c) The Shares listed for certain of the executive officers include Shares of Restricted Stock issued by the Company. On January 6, 1997, the Company issued an aggregate of 241,800 Shares of the Company's Restricted Stock , pursuant to the Company's 1996 Transitional Restricted Stock Plan adopted August 27, 1996. These Shares were issued to the following executive officers of the Company: Bruce G. Barman: 7,700 Shares; John G. Bartik: 7,000 shares; Jeffrey C. Claypool: 15,800 shares; Gary T. Fazio: 15,800 Shares; Douglas E. Fellmy: 15,800 Shares; Thomas M. Forman: 15,800 Shares; Jesse E. Hogan; 20,000 Shares; David J. McIlquham: 15,800 Shares; Lawrence J. Rogers: 15,800 shares; and Ronald H. Stolle: 7,000 Shares.
ITEM 13.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
In Fiscal 1995, the Human Resources Committee (which functions as the Compensation Committee) of the Board of Directors consisted of Ms. Hefner and Messrs. Zell, Johnston, Towe and Joel Friedland. Effective December 5, 1995, the Committee consisted of Ms. Hefner, Ms. Rosenberg, Mr. Johnston, Mr. Dammeyer, Mr. Towe and Mr. Zell.
As part of the Acquisition and pursuant to the Stock Purchase Agreement (defined below), 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 the 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 of 1933 as amended. 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.
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 certain former employees of the Company (collectively, the "Management Investors") are the beneficial owners of 63,830 Shares, (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 were 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, prior to January 1, 994, 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 in connection with the put options, such Management Investors' Shares were not considered to be part of the Company's stockholders' equity for periods prior to January 1, 1994. 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 3,532,684 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 December 1, 1996 and November 30, 1995
Consolidated Statements of Operations for the years ended December 1, 1996, November 30, 1995 and November 30, 1994
Consolidated Statements of Stockholders' Equity for the years ended December 1, 1996, November 30, 1995 and November 30,
Consolidated Statements of Cash Flows for the years ended December 1, 1996, November 30, 1995 and November 30, 1994
Notes to consolidated financial statements
(a)(2) The exhibits to this report are listed in section (c) of Item 14 below.
(b) A Form 8-K was filed January 27, 1997 to report the issuance of two press releases describing the Company's sale of its wood furniture subsidiary and describing the Consent Solicitation and certain financial results for the Company's fiscal year ended December 1, 1996.
A Form 8-K was filed February 24, 1997 to report the issuance of two press releases describing the Company's declaration of the Dividend and describing the Company's successful completion of the Consent Solicitation.
(c) Exhibits
EXHIBIT NUMBER EXHIBIT DESCRIPTION ------ -------------------
3.1 Restated Certificate of Incorporation of Sealy Corporation dated as of November 5, 1991. (Incorporated herein by reference to the appropriate exhibit to Sealy Corporation's Annual Report on Form 10-K for the fiscal year ended November 30, 1991 (File No. 1-8738)).
3.2 By-Laws of Sealy Corporation adopted as of November 4, 1991. (Incorporated herein by reference to the appropriate exhibit to Sealy Corporation's Annual Report on Form 10-K for the fiscal year ended November 30, 1991 (File No. 1-8738)).
4.1 Warrant Agreement, dated as of November 6, 1991 between Sealy Corporation and Sealy, Inc., Warrant Agent, including the form of Series A and Series B Warrant. (Incorporated herein by reference to the appropriate exhibit to Sealy Corporation's Annual Report on Form 10-K for the fiscal year ended November 30, 1991 (File No. 1-8738)).
4.2 Form of Series A and Series B Warrant (included as Exhibit A to the Warrant Agreement filed as Exhibit 4.1). (Incorporated herein by reference to the appropriate exhibit to Sealy Corporation's Annual Report on Form 10-K for the fiscal year ended November 30, 1991 (File No. 1-8738)).
EXHIBIT NUMBER EXHIBIT DESCRIPTION ------ -------------------
4.3 Warrant Agreement, dated as of August 1, 1989 between GGvA Holding Corp. (renamed Sealy Holdings, Inc. and merged with and into Sealy Corporation) and First Chicago Trust Company of New York, Warrant Agent, including the form of Merger Warrant (Incorporated herein by reference to Exhibit 4.1 to Annual Report on Form 10-K of The Ohio Mattress Holding Company and The Ohio Mattress Company for the year ended November 30, 1989, File No. 33-29246, filed March 2, 1990.)
4.4 Form of Merger Warrant (included as Exhibit A to the Warrant Agreement filed as Exhibit 4.3) (Incorporated herein by reference to Exhibit 4.2 to Annual Report on Form 10-K of Sealy Holdings, Inc. and Sealy Holdings, Inc. (merged with and into Sealy Corporation) for the year ended November 30, 1990, File No. 33-29246, filed February 28, 1991.)
4.5 Indenture dated as of November 1, 1991, among Sealy Corporation, certain subsidiaries of Sealy Corporation listed on the signature pages thereto and Ameritrust company National Association. (Incorporated herein by reference to the appropriate exhibit to Sealy Corporation's Annual Report on Form 10-K for the fiscal year ended November 30, 1991 (File No. 1-8738.)
4.6 Stock Subscription Agreement, dated as of March 30, 1989 by and among GGvA Holding Corp. (renamed Sealy Holdings, Inc. and merged with and into Sealy Corporation) and the purchasers listed therein. (Incorporated herein by reference to Exhibit 4.4 to Registration Statement of The Ohio Mattress Holding Company and The Ohio Mattress Company of Form S-4, File no. 33-29246, filed June 13, 1989.)
4.7 Management Stock Subscription Agreement, dated as of March 30, 1989 by and among GGvA Holding Corp. (renamed Sealy Holdings, and merged with and into Sealy Corporation) and the management purchasers listed therein. (Incorporated herein by reference to Exhibit 4.5 to Registration Statement of The Ohio Mattress Holding Company on form S-4, File No. 33-29246, filed June 13, 1989.)
4.8 First Supplemental Indenture, dated as of February 12, 1993, by and among Sealy Corporation, certain subsidiaries of Sealy Corporation listed on the signature pages thereto as Ameritrust Company National Association (n.k.a. Society National Bank). (Incorporated herein by reference to the appropriate exhibit to the Form 10-K for the fiscal year ended November 30, 1992, File No. 1-8738.)
4.9 Indenture, dated as of May 7, 1993, by and between Sealy Corporation and Society National Bank relating to the Sealy Corporation's 9 1/2% Senior Subordinated Notes. (Incorporated herein by reference to the appropriate exhibit to the Form 8-K Current Report of Sealy Corporation dated May 7, 1993.)
4.10 Form of 9 1/2% Senior Subordinated Note Due 2003. (Incorporated herein by reference to the appropriate exhibit to the Form 8-K Current Report of Sealy Corporation dated May 7, 1993.)
4.11 Restated Secured Credit Agreement, dated as of May 27, 1994, by and among Sealy Corporation, Certain Banks and Other Financial Institutions and Banque Paribas, Citicorp USA, Inc., Bank of America (formerly Continental Bank N.A.) and General Electric Capital Corporation, as Managing Agents. (Incorporated herein by reference to the appropriate exhibit to the Form 10-Q Quarterly Report of Sealy Corporation dated May 31, 1994 (File No. 1-8738)).
4.12 Amendment No. 1 to Warrant Agreement between Sealy Corporation and Society National Bank as Warrant Agent, dated April 1, 1995. (Incorporated herein by reference to the appropriate exhibit to the Form 10-Q Quarterly Report of Sealy Corporation dated August 31, 1995 (File No. 1-8738)).
EXHIBIT NUMBER EXHIBIT DESCRIPTION ------ -------------------
4.13 First Amendment and consent to Restated Secured Credit Agreement, dated May 27, 1994 by and among Sealy Corporation, Certain Banks and Other Financial Institutions and Banque Paribas, Citicorp USA, Inc., Bank of America and General Electric Capital Corporation, as Managing Agents. (Incorporated herein by reference to the appropriate exhibit to the Form 10-K for the fiscal year ended November 30, 1995 (File No. 1-8738)).
4.14 Second Amendment to Restated Secured Credit Agreement, dated May 27, 1994 by and among Sealy Corporation, Certain Banks and Other Financial Institutions and Banque Paribas, Citicorp USA, Inc., Bank of America and General Electric Capital Corporation, as Managing Agents. (Incorporated herein by reference to the appropriate exhibit to the Form 10-K for the fiscal year ended November 30, 1995 (File No. 1-8738)).
4.15 Third Amendment to the Restated Secured Credit Agreement, dated as of May 27, 1994, by and among Sealy Corporation, Certain Banks and Other Financial Institutions and Banque Paribas, Citicorp USA, Inc., Bank of America and General Electric Capital Corporation, as Managing Agents. (Incorporated herein by reference to the appropriate exhibit to the Form 10-Q Quarterly Report of Sealy Corporation dated June 2, 1996 (File No. 1-8738)).
4.16 Supplemental Indenture dated as of February 21, 1997, by and between Sealy Corporation and Mellon Bank, F.S.B. (as successor trustee to Key Bank National Association, formerly known as Society National Bank).
4.17 $275,000,000 Second Restated Secured Credit Agreement dated as of February 25, 1997 among Sealy Corporation, as Borrower, Various Financial Institutions, as Banks, Banque Paribas, as Documentation Agent, Nationsbank, N.A., as Syndication Agent, and Bank OF America Illinois, as Administrative Agent.
*10.1 Sealy Profit Sharing Plan, Amended and Restated Date: December 1, 1989. (Incorporated herein by reference to the appropriate exhibit to the Form 10-K for the fiscal year ended November 30, 1995 (File No. 1-8738)).
*10.2 Sealy Benefit Equalization Plan, dated December 1, 1994. (Incorporated herein by reference to the appropriate exhibit to the Form 10-K for the fiscal year ended November 30, 1995 (File No. 1-8738)).
*10.3 Sealy Trust Agreement dated June 1, 1990. (Incorporated herein by reference to the appropriate exhibit to Sealy Corporation's Annual Report on Form 10-K for the fiscal year ended November 30, 1991 (File No. 1-8738)).
*10.4 The Ohio Mattress Holding Company 1989 Stock Option Plan. (Incorporated herein by reference to Exhibit 10.16 to Annual Report on Form 10-K of The Ohio Mattress Holding Company and The Ohio Mattress Company for the year ended November 30, 1989, File No. 33-29246, filed March 2, 1990).
*10.5 Sealy Corporation Bonus Program. (Incorporated herein by reference to the appropriate exhibit to the Form 10-K for the fiscal year ended November 30, 1995 (File No. 1-8738)).
10.6 Severance Agreement dated March 1, 1996 by and between Sealy Corporation and Lyman M. Beggs. (Incorporated herein by reference to the appropriate exhibit to the Form 10-Q Quarterly Report of Sealy Corporation dated March 3, 1996 (File No. 1-8738)).
*10.7 Sealy Corporation 1992 Stock Option Plan. (Incorporated herein by reference to the appropriate exhibit to Sealy Corporation's Annual Report on Form 10-K for the fiscal year ended November 30, 1992 (File No. 1-8738)).
EXHIBIT NUMBER EXHIBIT DESCRIPTION ------ -------------------
*10.8 Sealy Corporation Performance Share Plan. (Incorporated herein by reference to the appropriate exhibit to Sealy Corporation's Annual Report on Form 10-K for the fiscal year ended November 30, 1992 (File No. 1-8738)).
*10.9 Employment Agreement dated as of October 31, 1992, by and between Sealy Corporation and Lyman M. Beggs. (Incorporated herein by reference to the appropriate exhibit to Sealy Corporation's Annual Report on Form 10-K for the fiscal year ended November 30, 1992 (File No. 1-8738)).
*10.10 Letter Agreement, dated as of October 31, 1992 by and between Sealy Corporation and Lyman M. Beggs. (Incorporated herein by reference to the appropriate exhibit to Sealy Corporation's Annual Report on Form 10-K for the fiscal year ended November 30, 1992 (File No. 1-8738)).
*10.11 Stockholder Agreement, dated as of October 31, 1992 by and between Sealy Corporation and Lyman M. Beggs. (Incorporated herein by reference to the appropriate exhibit to Sealy Corporation's Annual Report on Form 10-K for the fiscal year ended November 30, 1992 (File No. 1-8738)).
EXHIBIT NUMBER EXHIBIT DESCRIPTION ------ -------------------
*10.12 Letter Agreement, dated June 5, 1991 by and between Sealy Corporation and Sam F. Smith, Jr. (Incorporated herein by reference to the appropriate exhibit to Sealy Corporation's Annual Report on Form 10-K for the fiscal year ended November 30, 1992 (File No. 1-8738)).
10.13 Sealy Corporation 1993 Non-Employee Director Stock Option Plan. (Incorporated herein by reference to the appropriate exhibit to the Form S-1 Registration Statement of Sealy Corporation (File No. 33-59134)). (As amended by Amendment No. 1 dated April 6, 1994.)
10.14 Amendment No. 2 to Sealy Corporation 1993 Non-Employee Director Stock Option Plan, dated June 27, 1995.
10.15 Amendment No. 3 to Sealy Corporation 1993 Non-Employee Director Stock Option Plan dated as of May 1, 1996.
*10.16 Employment Agreement dated March 4, 1996 by and between Sealy Corporation and Ronald L. Jones. (Incorporated herein by reference to the appropriate exhibit to the Form 10-Q Quarterly Report of Sealy Corporation dated March 3, 1996.)
*10.17 Amendment No. 1 to Sealy Bonus Plan.
*10.18 Sealy Corporation Bonus Plan.
*10.19 Amendment No. 1 to Sealy Corporation 1992 Stock Option Plan.
*10.20 Amendment No. 1 to Sealy Corporation Performance Share Plan.
*10.21 Amendment No. 1 to Sealy Profit Sharing Plan.
*10.22 Amendment No. 2 to Sealy Profit Sharing Plan.
*10.23 1996 Transitional Restricted Stock Plan.
*10.24 Sealy Corporation 1997 Stock Option Plan.
*10.25 Stock Option Agreement dated March 4, 1996 by and between Sealy Corporation and Ronald L. Jones.
*10.26 Stockholder Agreement dated March 4, 1996 by and among Sealy Corporation and Ronald L. Jones.
*10.27 Restricted Stock Agreement dated March 4, 1996 by and between Sealy Corporation and Ronald L. Jones.
21.1 List of subsidiaries of Sealy Corporation (Incorporated herein by reference to the appropriate exhibit to Sealy Corporation's Annual Report on Form 10-K for the fiscal year ended November 30, 1992 (File No. 1-8738)).
27.1 Financial Data Schedule
99.1 Certificate of Ownership and Merger merging Sealy Holdings, Inc. with and into Sealy Corporation dated as of November 5, 1991. (Incorporated herein by reference to the appropriate exhibit to Sealy Corporation's Annual Report on Form 10-K for the fiscal year ended November 30, 1991 (File No. 1-8738)).
99.2 Sealy Corporation Executive Severance Benefit Plan dated January 25, 1993. (Incorporated herein by reference to the appropriate exhibit to Sealy Corporation's Annual Report on Form 10-K for the fiscal year ended November 30, 1992 (File No. 1-8738)).
- -------------
* 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
SIGNATURE TITLE --------- -----
By: /s/ Ronald L. Jones President and Chief Executive Officer ----------------------------- (Principal Executive Officer) Ronald L. Jones
Date: February 28, 1997
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: