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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from .......... to ..........
Commission file number: 0-22624
FOAMEX INTERNATIONAL INC.
(Exact Name of registrant as Specified in its Charter)
Delaware 05-0473908
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1000 Columbia Avenue, Linwood, PA 19061
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (610) 859-3000
--------------
Securities registered pursuant to Section 12(b) of the Act: None
----
Securities registered pursuant to Section 12(g) of the Act: Common Stock, par
value $.01 per share, which is
traded through the National
Association of Securities Dealers,
Inc. National Market System.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter periods that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Annual Report on Form
10-K or any amendment to this Annual Report on Form 10-K. [X]
The aggregate market value of the voting stock held by nonaffiliates of
the registrant as of March 2, 2000, was $82.8 million.
The number of shares outstanding of the registrant's common stock as of
March 14, 2000 was 25,059,994.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's definitive proxy statement to be filed within 120 days
pursuant to Reg. 12b-23 of the Securities Exchange Act of 1934, as amended.
FOAMEX INTERNATIONAL INC.
INDEX
Page
Part I
Item 1. Business 3
Item 2. Properties 9
Item 3. Legal Proceedings 9
Item 4. Submission of Matters to a Vote
of Security Holders 14
Part II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters 14
Item 6. Selected Consolidated Financial Data 15
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 16
Item 7a. Quantitative and Qualitative Disclosures about Market Risk 25
Item 8. Financial Statements and Supplementary Data 25
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 26
Part III
Item 10. Directors and Executive Officers of the Registrant 26
Item 11. Executive Compensation 26
Item 12. Security Ownership of Certain Beneficial Owners
and Management 26
Item 13. Certain Relationships and Related Transactions 26
Part IV
Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K 27
Signatures 35
The Registrant will furnish a copy of any exhibit to this Annual Report on Form
10-K upon the payment of a fee equal to the Registrant's reasonable expense in
furnishing such exhibit.
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PART I
ITEM l. BUSINESS
General
Foamex International Inc. (the "Company") is engaged primarily in the
manufacturing and distribution of flexible polyurethane and advanced polymer
foam products. As of December 31, 1999, the Company's operations are conducted
through its wholly owned subsidiaries, Foamex L.P. and Foamex Carpet Cushion,
Inc. ("Foamex Carpet"). The Company was incorporated in 1993 to act as a holding
company for Foamex L.P.
References in this Annual Report on Form 10-K to the "Company" mean
Foamex International Inc. and, where relevant or applicable, its subsidiaries.
Segments
General
The Company operates in the flexible polyurethane and advanced polymer
foam products industry and is one of the largest manufacturers and distributor
of flexible polyurethane and advanced polymer foam products in North America.
The Company has numerous manufacturing facilities dedicated to certain product
lines as well as facilities with the capability to support multiple product
lines. Each business segment has a diverse customer base and the Company's
senior executive's direct sales efforts for each business segment.
Business segments are listed below.
o Foam Products - manufactures and markets foam used by the bedding
industry, the furniture industry and the retail industry.
o Carpet Cushion Products - manufactures and distributes prime,
rebond, sponge rubber and felt carpet cushion.
o Automotive Products - supplies foam primarily for automotive
interior applications to automotive manufacturers and tier one
suppliers.
o Technical Products - manufactures and markets reticulated foams
and other custom polyester and polyether foams for industrial,
specialty and consumer and safety applications.
o Other - primarily consists of certain foreign manufacturing
operations, corporate expenses not allocated to the other
business segments and restructuring and other charges (credits).
Segment financial information is included in Note 16 to the consolidated
financial statements included in this Annual Report on Form 10-K.
Foam Products
Products are distributed directly from manufacturing facilities and
indirectly through independent fabricator distributors. These foams are used by
the bedding industry in quilts, toppers, cores and border rolls for mattresses.
In the furniture industry, they are generally used for upholstered seating
products and in the retail industry, for a broad range of products such as
mattress overlay pads, leisure furniture, futons, and pillows. Foam Products are
generally sold in large volumes on a regional basis because of high shipping
costs.
The Company's bedding products are sold to mattress manufacturers. The
Company also supplies cut-to-size seat cushions, back cushions and other pieces
to the furniture industry. Furniture foams are sold directly to manufacturers as
well as through distributors. The consumer products group sells therapeutic
sleep products such as mattress pads and bed pillows for the health care and
consumer markets and a broad line of home furnishing products to retailers
throughout the United States.
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The development and introduction of value added products continues to be
a priority including viscoelastic or "memory" foams for the bedding industry,
which maintain their resiliency better than other foams and materials, and
products incorporating Reflex(R). Reflex(R) materials include cushion wraps and
cushion cores and are advanced polymer cushioning products designed to improve
comfort, quality and durability in upholstered furniture and bedding products.
Reflex(R) was created using the variable pressure foaming manufacturing process
("VPFSM"). High efficiency thermal management foam products for applications in
work gloves and outerwear have also been introduced.
Carpet Cushion Products
The Company manufactures and distributes Carpet Cushion Products, which
include prime, rebond, sponge rubber and felt carpet cushion. Prime carpet
cushion is made from polyurethane foam buns. Rebond carpet cushion is made from
various types of scrap foam which are shredded into small pieces, processed and
then bonded using a chemical adhesive. Rebond manufacturing requires the
management of a comprehensive recycling business that includes an extensive
collection network for the automotive and foam industries worldwide.
Automotive Products
The Company is one of the largest suppliers of automotive foam products
for the North American operations of original equipment manufacturers ("OEMs").
Depending on the automotive manufacturer and/or the application, automotive foam
products are supplied by the Company either directly to the manufacturers or
indirectly through tier one suppliers. Automotive Products include foam for trim
pads, door panel parts, headliners and acoustical purposes, as well as flame and
adhesive laminates and rolls for tri-lamination. Tri-laminated foam is applied
to automotive fabrics to form a foam/fabric composite that results in cost
savings and aesthetic value for the automotive manufacturer.
Domestic automotive manufacturers have narrowed their supply base during
recent years and increased the percentage and dollar amount of components that
they purchase from outside suppliers. As a result, a smaller number of companies
are supplying an increasing percentage of automotive foam products. Automotive
suppliers are increasingly offering integrated systems which lower the overall
cost and improve quality relative to previous sourcing methods in which
individually sourced components were assembled and installed by the OEMs. A
continuing focus on new product development and flexible manufacturing
capabilities are essential to satisfy changing specifications.
Examples of the Company's ability to react to changing industry
requirements include its development of thermoformable headliners,
tri-laminates, advanced cutting technology and energy absorbing foams. For
example, the Company has introduced surface modification technology ("SMT(R)")
and continuous platform cutting ("CPCSM") used for vehicle flooring systems.
Also, the use of tri-laminates has increased due to the manufacturers' need for
significant cost savings and consumer demand for improved aesthetics. The
Company intends to increase its production and distribution of foam and fabric
components, such as tri-laminated material for automotive seating.
Automotive manufacturers are increasingly requiring the production
facilities of their suppliers to meet certain high quality standards. The
Company has achieved and expects to maintain the highest quality ratings awarded
to foam suppliers by automotive manufacturers. In addition, all tier one and
tier two automotive supplier facilities worldwide will eventually be required to
meet the QS-9000 quality manufacturing standards set by the United States
automotive manufacturers. In 1996, the Company completed QS-9000 and ISO-9001
certification for its eight domestic facilities which supply the automotive
industry. The Company was one of the first polyurethane manufacturers to be
QS-9000 certified which demonstrates its commitment to producing the highest
quality products and meeting the needs of its customers.
Technical Products
The Company believes that it is one of the foam industry's prime
innovators and producers of industrial, specialty, consumer and safety foams
(collectively, "Technical Products"). Technical Products consist of reticulated
foams and other custom polyester and polyether foams, which are sometimes
combined with other materials to yield
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specific properties. Reticulation is the thermal or chemical process used to
remove the membranes from the interconnecting cells within foam. This leaves a
porous, skeletal structure allowing for the free flow of gases and/or liquids.
Felting and lamination with other foams or materials give these composites
specific properties.
Reticulated foams are well suited for filtration, reservoiring, sound
absorption and sound transmission. Industrial applications include carburetors,
computer cabinets, inkpad reservoirs, high-speed inkjet printers and speaker
grills. Medical applications include oxygenators for cardiopulmonary surgery,
instrument holders for sterilization, pre-op scrubbers impregnated with
anti-microbial agents and EKG pads containing conductive gels. Other Technical
Products have unique characteristics such as flame retardancy and fluid
absorption. Additional products sold within this group include foams for
refrigerated supermarket produce counters, mop heads, paint brushes and cosmetic
applications.
The Company uses advertising in trade journals and related media in order
to attract customers and, more generally, to increase an awareness of its
capabilities for Technical Products. In addition, due to the highly specialized
nature of most Technical Products, the Company's research staff works with
customers to design, develop and manufacture each product to specification.
Other
Other consists primarily of certain foreign manufacturing operations,
corporate expenses not allocated to the other business segments and
restructuring and other charges (credits). See Note 16 to the consolidated
financial statements.
Marketing and Sales
Foam Products are sold directly by the Company to major bedding and
furniture manufacturers such as Sealy, Simmons and Berkline and also through
third party independent fabricators. In addition, the Company manufactures and
distributes foam-based consumer products such as futons, pillows, mattress pads
and juvenile furniture to retailers such as Wal-Mart, Kmart and JC Penney. The
Company's foam-based consumer products sales efforts are primarily regionally
based with salespersons selling to local accounts. The key strategic elements
supporting growth in these areas are a focus on marketing and sales efforts,
high quality, cost-competitive products and low freight costs through optimal
plant location. Plant locations are critical in this regionalized line of
business where the transportation cost typically comprises a significant portion
of product cost.
Carpet Cushion Products are sold to distributors and to major floor
covering retailers such as Sears, CarpetMax and Home Depot.
The Company has been a leading supplier of automotive products to OEMs,
including Ford, General Motors and DaimlerChrysler for more than 30 years. The
Company is also the primary supplier of Automotive Products to certain tier one
suppliers, including Lear Corporation and Johnson Controls. The Company competes
for new business both at the beginning of development of new models and upon the
redesign of existing models. Once a foam producer has been designated to supply
parts for a new model program, the foam producer usually produces parts for the
life of the program. Competitive factors in the market include product quality
and reliability, cost and timely service, technical expertise and development
capability, new product innovation and customer service.
The Company's Technical Products are used for filtration and reservoiring
in a wide variety of applications by companies such as Hewlett-Packard and
Briggs & Stratton. The Company markets most of its Technical Products through a
network of independent fabrication and distribution companies in North America,
the United Kingdom and South Korea. Such fabricators or distributors often
further process or finish Technical Products to meet the specific needs of end
users. The Company's specialty and technical foams service unique end user
requirements and are generally sold at relatively high margins. This line of
business is characterized by a diversity and complexity of both customers and
applications.
5
International Operations and Export Sales
The Company's geographical information is included in Note 16 to the
consolidated financial statements.
Major Customers
During 1999, sales to Johnson Controls, which are included in Automotive
Products, accounted for approximately 11.6% of the Company's net sales. During
1998 and 1997, no one customer accounted for more than 10.0% of the Company's
net sales. During the year ended December 31, 1999, net sales to the five
largest customers comprised approximately $360.6 million or 28.2% of the
Company's net sales. The loss of any one of these customers could have a
material adverse effect on the Company.
Manufacturing and Raw Materials
As of December 31, 1999, the Company conducted operations at 67
manufacturing and distribution facilities with a total of approximately 8.6
million square feet of floor space. The Company believes that its manufacturing
and distribution facilities are well suited for their intended purposes and are
in good condition. The manufacturing and distribution facilities are
strategically located to service the Company's major customers because the high
freight cost in relation to the cost of the foam product generally results in
distribution being most cost effective within a 200 to 300 mile radius.
The Company's fabrication process involves cutting foam buns into various
shapes and sizes to meet customer specifications. Fabricated foam is sold to
customers and is utilized by the Company to produce its foam-based consumer
products. Scrap foam, generated in connection with the fabrication of foam
products, is used by the Company to produce rebond carpet cushion.
Raw materials account for a significant portion of the manufacturing
costs of the Company and, historically, the price of raw materials has been
cyclical and volatile. The Company generally has alternative suppliers for each
major raw material and the Company believes that it could find alternative
sources of supply should it cease doing business with any one of its major
suppliers. The Company attempts to offset raw material cost increases through
selling price increases; however, there can be no assurance that the Company
will be successful in implementing selling price increases or that competitive
pricing pressure will not require the Company to adjust selling prices. Results
of operations have been and could be adversely affected by delays in
implementing, or the inability of the Company to implement, selling price
increases to offset raw material cost increases.
The two principal chemicals used in the manufacture of flexible
polyurethane foam are toluene diisocyanate ("TDI") and polyol. Lyondell Chemical
Company (formerly, ARCO Chemical Company), BASF Corporation, Bayer Corporation
and The Dow Chemical Company are the Company's largest suppliers of TDI and
polyol. The price of TDI and polyol is influenced by demand, manufacturing
capacity and oil prices. Significant increases in these raw material prices
could have a material adverse effect on the financial condition or results of
operations of the Company.
A key raw material used in the manufacture of carpet cushion is scrap
foam. The Company internally generates a substantial portion of the scrap foam
used in the production of rebond carpet cushion from its other operations.
Historically, the market price of rebond carpet cushion has fluctuated with the
market price of scrap foam.
Employees
As of December 31, 1999, the Company employed approximately 5,900
persons. Approximately 1,500 of these employees are located outside the United
States and approximately 1,200 of these employees are covered by collective
bargaining agreements with labor unions, which agreements expire on various
dates through 2002. The Company considers relations with its employees to be
good.
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Competition
The flexible polyurethane foam industry is highly competitive with price,
quality and service being significant competitive factors. The Company's
competitors in the polyurethane foam industry include E. R. Carpenter Company,
Hickory Springs Manufacturing Company, Vitafoam, Inc., General Foam Corporation,
Flexible Foam Products, Inc., and Future Foam, Inc. None of these competitors
individually competes in all of the business segments in which the Company does
business.
Patents and Trademarks
The Company owns various patents and trademarks registered in the United
States and in numerous foreign countries. The registered processes and products
were developed through ongoing research and development activities to improve
quality, reduce costs and expand markets through development of new applications
for flexible polyurethane foam products. While the Company considers its patents
and trademarks to be a valuable asset, it does not believe that its competitive
position is dependent on patent protection or that its operations are dependent
upon any individual patent, trademark or tradename.
Research and Development
The Company believes it has a leading research and development capability
in the flexible polyurethane foam industry. The Company's primary research and
development facility is located in Eddystone, Pennsylvania. Expenditures for
research and development amounted to $3.3 million, $3.3 million, and $2.4
million for 1999, 1998 and 1997, respectively, excluding expenditures for
research and development by Crain Industries, Inc. ("Crain") prior to its
acquisition in December 1997 (the "Crain Acquisition").
The Company, Recticel, s.a. ("Recticel"), a European polyurethane foam
manufacturer, whose subsidiary was a former partner of Foamex L.P. and is a
current shareholder of the Company, and Beamech Group Limited, an unaffiliated
third party, have an interest in a Swiss corporation that develops new
manufacturing technology for the production of polyurethane foam including the
VPFSM manufacturing process. The Company, Recticel and their affiliates have a
royalty-free license to use technology developed by the Swiss corporation. The
Company and Recticel, have exchanged know-how, trade secrets, engineering and
other data, designs, specifications, chemical formulations, technical
information, market information and drawings which are necessary or useful for
the manufacture, use or sale of foam products and it is anticipated that they
will continue to do so in the future.
Buyout Proposals
On August 5, 1999, the Company announced that its Board of Directors
signed a letter of intent with Sorgenti Chemical Industries, LLC and Liberty
Partners Holdings 20, LLC (collectively, the "Purchasers") for a business
combination providing for $11.50 per share for all of the Company's outstanding
common stock (the "Sorgenti Transaction"). Under the terms of the letter of
intent, if the Company entered into a business combination with another party,
the Purchasers would be entitled to a break-up fee of $6.0 million plus
reimbursement of certain expenses, subject to certain conditions, including the
willingness of the Purchasers to enter into a definitive merger agreement
providing for a price of at least $11.50 per share prior to the expiration of
the letter of intent. The proposed transaction was subject to a number of
conditions, including the negotiation of definitive documents regarding certain
conditions relating to the bank credit facilities and the public debt of the
Company's subsidiaries. Additional issues considered included minimum
shareholder acceptance, change of board membership, and other provisions
providing for a higher break-up fee and expense reimbursement if the Company
entered into a business combination providing a more favorable transaction. On
December 15, 1999, the Company announced that the letter of intent with the
Purchasers, which had been extended, expired by its terms. The Purchasers had
submitted a revised bid at a price and on terms that were less favorable than
those contained in the letter of intent and the Negotiating Committee of the
Company's Board of Directors rejected the revised bid.
On February 9, 2000, the Company announced that it is in discussions with
respect to a proposal involving the acquisition of all of the Company's
outstanding common stock for cash. The Company stated that the proposal is
subject to a number of conditions, including the buyer's ongoing due diligence
and the execution of definitive agreements. If the proposal from the new group
leads to a transaction, it is anticipated that John G. Johnson, Jr., the
Company's President and Chief Executive Officer, as well as other members of
current management, would
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participate in the management of the Company following such a transaction. The
Company agreed to an exclusive negotiating period ending five business days
after delivery of its audited financial statements included in the Company's
Annual Report on Form 10-K to the prospective buyer. The Company expects such
delivery to be the same day as the filing of its Annual Report on Form 10-K with
the Securities and Exchange Commission.
In 1998, the Company received an unsolicited buyout proposal from Trace
International Holdings, Inc. ("Trace"), the Company's principal stockholder. The
Company entered into two merger agreements, which were subsequently terminated
by Trace.
Change in Control
Trace is a privately held company, which owned approximately 29% of the
Company's outstanding voting common stock at March 10, 2000, and whose former
Chairman also serves as the Company's Chairman. The Company's common stock owned
by Trace is pledged as collateral against certain of Trace's obligations.
Certain credit agreements and promissory notes of the Company's subsidiaries,
pursuant to which approximately $467.1 million of debt was outstanding as of
December 31, 1999, provide that a "change of control" would be an event of
default and could result in the acceleration of such indebtedness. "Change of
control" means, for this purpose, that (i) a person or related group, other than
Trace, beneficially owns more than 25% of the Company's outstanding voting stock
and (ii) such voting stock constitutes a greater percentage of such voting stock
than the amount beneficially owned by Trace. Additionally, certain indentures of
Foamex L.P. and Foamex Capital Corporation relating to senior subordinated notes
of $248.0 million contain similar "change of control" provisions, which require
the issuers to tender for such notes at a price in cash equal to 101% of the
aggregate principal amount thereof, plus accrued and unpaid interest thereon, if
there is such a "change of control".
On July 21, 1999, the Company was informed by Trace that it filed a
petition for relief under Chapter 11 of the Bankruptcy Code in Federal Court in
New York City. Subsequently, on January 24, 2000, an order was signed converting
the Trace bankruptcy from Chapter 11 to Chapter 7 of the Bankruptcy Code. A
trustee was appointed to oversee the liquidation of Trace's assets. Neither
Trace's bankruptcy filing nor the conversion to Chapter 7 constituted a "change
of control" under the provisions of the debt agreements described above. A
"change of control" could take place however, if the bankruptcy court allows
Trace's creditors to foreclose on and take ownership of the Company's common
stock owned by Trace, or otherwise authorizes a sale or transfer of these
shares, under circumstances in which a person or related group, other than
Trace, acquired more than 25% of the Company's outstanding voting stock and
owned a greater percentage of such voting stock than the amount beneficially
owned by Trace. On November 22, 1999, the bankruptcy court allowed two creditors
to take ownership of 11% and 6%, respectively, of the Company's common stock.
Such an event did not constitute a "change of control" under the provisions of
the debt agreements.
Management believes that it is unlikely that a "change of control" will
occur as a result of Trace's bankruptcy proceedings. However, the Company would
seek to resolve the issues that may arise should the "change of control"
provisions be triggered, by requesting waivers of such provisions and/or
refinancing certain debt, if necessary. There can be no assurance that the
Company or its subsidiaries will be able to do so, or that the Company will be
able to obtain waivers of such provisions. Such circumstances raise substantial
doubt about the Company's ability to continue as a going concern. The
accompanying financial statements were prepared on a going-concern basis and do
not include any adjustments that might result from the outcome of the Trace
bankruptcy filing.
Forward-Looking Information
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements so long as those statements are
identified as forward-looking and are accompanied by meaningful cautionary
statements identifying important factors that could cause actual results to
differ materially from those projected in such statements. In connection with
certain forward-looking statements contained in this Annual Report on Form 10-K
and those that may be made in the future by or on behalf of the Company which
are identified as forward-looking, the Company notes that there are various
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factors that could cause actual results to differ materially from those set
forth in any such forward-looking statements, such as raw material price
increases, general economic conditions, the level of automotive production,
carpet cushion production and housing starts, the completion of various
restructuring/consolidation plans, the Company's capital and debt structure,
litigation and changes in environmental legislation and environmental
conditions. The forward-looking statements contained in this Annual Report on
Form 10-K were prepared by management and are qualified by, and subject to,
significant business, economic, competitive, regulatory and other uncertainties
and contingencies, all of which are difficult or impossible to predict and many
of which are beyond the control of the Company.
Accordingly, there can be no assurance that the forward-looking
statements contained in this Annual Report on Form 10-K will be realized or that
actual results will not be significantly higher or lower. The forward-looking
statements have not been audited by, examined by, compiled by or subjected to
agreed-upon procedures by independent accountants, and no third party has
independently verified or reviewed such statements. Readers of this Annual
Report on Form 10-K should consider these facts in evaluating the information
contained herein. In addition, the business and operations of the Company are
subject to substantial risks which increase the uncertainty inherent in the
forward-looking statements contained in this Annual Report on Form 10-K. The
inclusion of the forward-looking statements contained in this Annual Report on
Form 10-K should not be regarded as a representation by the Company or any other
person that any of the forward-looking statements contained in this Annual
Report on Form 10-K will be achieved. In light of the foregoing, readers of this
Annual Report on Form 10-K are cautioned not to place undue reliance on the
forward-looking statements contained herein.
ITEM 2. PROPERTIES
As of December 31, 1999, the Company conducted its operations at 67
manufacturing and distribution facilities. Total floor space in use at the owned
manufacturing and distribution facilities is approximately 3.2 million square
feet and total floor space in use at the leased manufacturing and distribution
facilities is approximately 5.4 million square feet. Fifty-six of these
facilities are located throughout 38 cities in the United States, four
facilities are located in Canada and seven facilities are located in Mexico. The
2000 annual base rental with respect to such leased facilities is approximately
$11.8 million under leases expiring from 2000 to 2025. The Company does not
anticipate any problem in renewing or replacing any such leases expiring in
2000. In addition, the Company has approximately 1.8 million square feet of idle
space of which approximately 0.6 million is leased.
The Company maintains its administrative office in Linwood, Pennsylvania.
Property information by business segment is not reported because many of
the Company's facilities produce products for multiple business segments.
ITEM 3. LEGAL PROCEEDINGS
Litigation - Shareholders
During 1999, the Company received several communications addressed to its
Board of Directors from certain of the Company's stockholders regarding aspects
of the relationship between Trace and the Company. Such stockholders questioned
the propriety of certain relationships and related transactions between Trace
and the Company, which previously had been disclosed in the Company's periodic
filings. On June 14, 1999, the Company received a draft complaint from counsel
of certain stockholders naming the Company and certain current and former
directors, which included allegations similar to those in the Second Amended
Complaint, as defined below. The Company was advised by such counsel that such
stockholders intended to file an action soon thereafter. On August 13, 1999, two
stockholders filed an action on behalf of an alleged class of the Company's
shareholders, entitled Watchung Road Associates, L.P. et al v. Foamex
International Inc., et al., Civil Action No. 17370 (the "Watchung Complaint"),
in the Court of Chancery of the State of Delaware, New Castle County. The suit
names the Company, Mr. Marshall S. Cogan, Mr. Etienne Davignon, Mr. John
Gutfreund, Mr. Robert Hay, Dr. Stuart Hershon, Mr. John G. Johnson, Jr. and Mr.
John Tunney as defendants. The Watchung Complaint alleges that the individual
defendants breached their fiduciary duties by agreeing to the potential buyout
of the Company by Sorgenti Chemical Industries, LLC and Liberty Partners
Holdings 20, LLC.
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The Watchung Complaint alleges that the Sorgenti Transaction's buy-out
price of $11.50 per outstanding share is inadequate and fails to take into
consideration claims the Company allegedly has as a result of the supposed
wrongful diversions of Company assets in the Company's dealings with Trace and
its affiliates. The Watchung Complaint also alleges that the directors breached
their fiduciary duties by agreeing to the proposed Sorgenti Transaction without
conducting an auction or active market check. The suit alleges that the board
placed Mr. Cogan's interest ahead of those of the Company's stockholders, and
alleges that a critical condition of the Sorgenti Transaction is a consulting
agreement for Mr. Cogan. The Watchung suit seeks to enjoin the Sorgenti
Transaction, seeks rescission or damages if the Sorgenti Transaction is
consummated, and seeks an accounting from the directors for plaintiffs alleged
losses. The Sorgenti Transaction was not consummated. Defendants have moved to
consolidate this action with In re Foamex International Inc. Shareholders
Litigation, discussed below, and to dismiss the complaint. Plaintiffs have
agreed to consolidate.
On April 26, 1999, a putative securities class action entitled Molitor v.
Foamex International Inc., et al., 99 Civ. 3004, was filed in the United States
District court for the Southern District of New York naming as defendants the
Company, Trace and certain officers and directors of the Company on behalf of
stockholders who bought shares of the Company's common stock during the period
from May 7, 1998 through and including April 16, 1999. The lawsuit alleges that
the defendants violated Section 10(b) of the Securities Exchange Act of 1934 and
Rule 10b-5 by misrepresenting and/or omitting material information about the
Company's financial situation and operations, with the result of artificially
inflating the price of the Company's stock. The lawsuit also alleges that Trace
and Marshall S. Cogan violated Section 20(a) of the Securities Exchange Act of
1934 as controlling persons of the Company. The complaint seeks class
certification, a declaration that defendants violated the federal securities
laws, an award of money damages, and costs and attorneys', accountants' and
experts' fees. On May 18, 1999, a similar action entitled Thomas W. Riley v.
Foamex International Inc., et al., 99 Civ. 3653 was filed in the same court. The
two actions have been consolidated, and the Consolidated Amended Class Action
Complaint, setting forth the allegations of the two earlier complaints, was
filed on December 6, 1999. The defendants filed motions to dismiss the
consolidated complaint on February 4, 2000. No discovery has taken place to
date.
Beginning on or about March 17, 1998, six actions (collectively the
"Shareholder Litigation") were filed in the Court of Chancery of the State of
Delaware, New Castle County (the "Court"), by stockholders of the Company. The
Shareholder Litigation, purportedly brought as class actions on behalf of all
stockholders of the Company, named the Company, certain of its directors,
certain of its officers, Trace and Trace Merger Sub, Inc. ("Merger Sub") as
defendants alleging that they had breached their fiduciary duties to the
plaintiffs and other stockholders of the Company unaffiliated with Trace in
connection with the original proposal of Trace to acquire the publicly traded
outstanding common stock of the Company for $17.00 per share under an Agreement
and Plan of Merger (the "First Merger Agreement"). The complaints sought, among
other things, class certification, a declaration that the defendants breached
their fiduciary duties to the class, preliminary and permanent injunctions
barring implementation of the proposed transaction, rescission of the
transaction if consummated, unspecified compensatory damages, and costs and
attorneys' fees. A stipulation and order consolidating these six actions under
the caption In re Foamex International Inc. Shareholders Litigation,
Consolidated Civil Action No. 16259NC, was entered by the Court on May 28, 1998.
The parties to the Shareholder Litigation entered into a Memorandum of
Understanding, dated June 25, 1998 (the "Memorandum of Understanding"), to
settle the Shareholder Litigation, subject to, inter alia, execution of a
definitive Stipulation of Settlement between the parties and approval by the
Court following notice to the class and a hearing. The Memorandum of
Understanding provided that as a result of, among other things, the Shareholder
Litigation and negotiations among counsel for the parties to the Memorandum of
Understanding, a special meeting of stockholders would be held to vote upon and
approve the First Merger Agreement which provided, among other things, for all
of the Company's outstanding common stock not owned by Trace and its
subsidiaries (the "Public Shares") to be converted into the right to receive
$18.75 in cash, without interest.
The Memorandum of Understanding also provided for certification of a
class, for settlement purposes only, consisting of the Public Shares owned by
stockholders of the Company unaffiliated with Trace and its subsidiaries (the
"Public Shareholders"), the dismissal of the Shareholder Litigation with
prejudice and the release by the plaintiffs and all members of the class of all
claims and causes of action that were or could have been asserted against Trace,
the Company and the individual defendants in the Shareholder Litigation or that
arise out of the
10
matters alleged by plaintiffs. Following the completion of the confirmatory
discovery which was provided for in the Memorandum of Understanding, on
September 9, 1998, the parties entered into a definitive Stipulation of
Settlement and the Court set a hearing for October 27, 1998 to consider whether
the settlement should be approved (the "Settlement Hearing"). In connection with
the proposed settlement, the plaintiffs intended to apply for an award of
attorney's fees and litigation expenses in an amount not to exceed $925,000, and
the defendants agreed not to oppose this application. Additionally, the Company
agreed to pay the cost, if any, of sending notice of the settlement to the
Public Shareholders. On September 24, 1998, a Notice of Pendency of Class
Action, Proposed Settlement of Class Action and Settlement Hearing was mailed to
the members of the settlement class. On October 20, 1998, the parties to the
Shareholder Litigation requested that the Court cancel the Settlement Hearing in
light of the announcement made by Trace on October 16, 1998, that it had been
unable to obtain the necessary financing for the contemplated acquisition by
Trace of the Company's common stock at a price of $18.75 per share which was the
subject matter of the proposed settlement. This request was approved by the
Court on October 21, 1998, and the Company issued a press release on October 21,
1998, announcing that the Court had cancelled the Settlement Hearing.
On November 10, 1998, counsel for certain of the defendants in the
Shareholder Litigation gave notice pursuant to the Stipulation of Settlement
that such defendants were withdrawing from the Stipulation of Settlement in
light of the notice given by Trace to the Company and the special committee of
the Board of Directors on November 5, 1998 whereby Trace terminated the First
Merger Agreement on the grounds that the financing condition in the First Merger
Agreement was incapable of being satisfied.
On November 12, 1998, the plaintiffs in the Shareholder Litigation filed
an Amended Class Action Complaint (the "Amended Complaint"). The Amended
Complaint named the Company, Trace, Merger Sub, Mr. Marshall S. Cogan, Mr.
Andrea Farace, Dr. Stuart Hershon, Mr. John Tunney, and Mr. Etienne Davignon as
defendants, alleging that they breached their fiduciary duties to plaintiffs and
the other Public Shareholders in connection with a second Agreement and Plan of
Merger (the "Second Merger Agreement"), that the proposal to acquire the Public
Shares for $12.00 per share lacked entire fairness, that the individual
defendants violated 8 Del. Code ss. 251 in approving the Second Merger
Agreement, and that Trace and Merger Sub breached the Stipulation of Settlement.
On December 2, 1998, plaintiffs served a motion for a preliminary injunction,
seeking an Order to preliminarily enjoin the defendants from proceeding with,
consummating or otherwise effecting the merger contemplated by the Second Merger
Agreement. In January 1999, Trace advised that it could not finance the offer
reflected in the Second Merger Agreement. As a result, the preliminary
injunction motion did not go forward.
On June 9, 1999, the plaintiffs in the Shareholder Litigation moved for
leave to file a Second Amended and Supplemental Class Action and Derivative
Complaint (the "Second Amended Complaint"). The Second Amended Complaint was
filed on July 14, 1999, and named the Company, Trace, Merger Sub, Mr. Marshall
S. Cogan, Mr. Andrea Farace, Dr. Stuart Hershon, Mr. John Tunney, and Mr.
Etienne Davignon as defendants, alleging that the named individuals breached
their fiduciary duties by causing the Company to waste assets in its
transactions with Trace and by failing to enforce the Company's rights under the
First Merger Agreement, seeking appointment of a receiver for the Company, and
alleging that Trace and Merger Sub breached the Stipulation of Settlement.
On August 26, 1999, the plaintiffs in the Shareholder Litigation moved
for leave to file a Third Amended and Supplemental Class Action and Derivative
Complaint (the "Third Amended Complaint"). The Third Amended Complaint was filed
on October 27, 1999. The Third Amended Complaint alleges both class claims and
derivative claims, and names the Company, Mr. Marshall S. Cogan, Mr. Andrea
Farace, Dr. Stuart Hershon, Mr. John Tunney, Mr. Etienne Davignon, Mr. John
Gutfreund, Mr. Robert Hay and Mr. John Johnson as defendants.
The Third Amended Complaint alleges that the individual defendants
breached their duties to the Company's Public Shareholders by agreeing to the
Sorgenti Transaction at an inadequate price that fails to take into
consideration the Company's allegedly valuable claims arising out of purported
diversions of money from the Company to Trace, and by failing to maximize
shareholder value in a sale of the Company and instead agreeing to a deal with a
buyer who is willing to enter into a consulting deal with Mr. Cogan to get his
and the board's approval. The Third Amended Complaint purports to assert a
derivative claim for waste and breach of fiduciary duty against Mr. Cogan, Mr.
Farace, Dr. Hershon, Mr. Tunney, Mr. Davignon, Mr. Gutfreund, and Mr. Hay. The
Third Amended Complaint seeks the appointment of a receiver for the Company,
alleging that the directors have mismanaged the Company. The Third Amended
Complaint also alleges that Mr. Cogan, Mr. Farace, Dr. Hershon,
11
Mr. Davignon, Mr. Tunney, Mr. Gutfreund, and Mr. Hay breached their fiduciary
duties by failing to enforce the Company's rights under the First Merger
Agreement.
The Third Amended Complaint seeks: a declaration that the individual
defendants have breached their fiduciary duties; damages; the imposition of a
constructive trust on profits and benefits Mr. Cogan, Trace, and the other
individual defendants allegedly received as a result of the alleged wrongdoing;
an injunction against the Sorgenti Transaction under its present terms;
rescission and damages if the deal is consummated; and the appointment of a
receiver for the Company. Defendants have moved to consolidate this action with
Watchung Road Associates, L.P., et ano v. Foamex International Inc., et al.,
discussed above, and to dismiss the complaint. Plaintiffs have agreed to
consolidate and opposed the motion to dismiss.
The defendants intend to vigorously defend these litigations, which if
adversely determined, could have a material adverse effect on the financial
position, results of operations and cash flows of the Company.
Litigation - Breast Implants
As of February 24, 2000, the Company and Trace were two of multiple
defendants in actions filed on behalf of approximately 3,857 recipients of
breast implants in various United States federal and state courts and one
Canadian provincial court, some of which allege substantial damages, but most of
which allege unspecified damages for personal injuries of various types. Three
of these cases seek to allege claims on behalf of all breast implant recipients
or other allegedly affected parties, but no class has been approved or certified
by the court. In addition, three cases have been filed alleging claims on behalf
of approximately 39 residents of Australia, New Zealand, England, and Ireland.
The Company believes that the number of suits and claimants may increase. During
1995, the Company and Trace were granted summary judgments and dismissed as
defendants from all cases in the federal courts of the United States and the
state courts of California. Appeals for these decisions were withdrawn and the
decisions are final.
Although breast implants do not contain foam, certain silicone gel
implants were produced using a polyurethane foam covering fabricated by
independent distributors or fabricators from bulk foam purchased from the
Company or Trace. Neither the Company nor Trace recommended, authorized, or
approved the use of its foam for these purposes. The Company is also indemnified
by Trace for any such liabilities relating to foam manufactured prior to October
1990. Trace's insurance carrier has continued to pay the Company's litigation
expenses after Trace's filing under the Bankruptcy Code. Trace's insurance
policies continue to cover certain liabilities of Trace but if the limits of
those policies are exhausted, it is unlikely that Trace will be able to continue
to provide additional indemnification. While it is not feasible to predict or
determine the outcome of these actions, based on management's present assessment
of the merits of pending claims, after consultation with the general counsel of
the Company, and without taking into account the indemnification provided by
Trace, the coverage provided by Trace's and the Company's liability insurance
and potential indemnity from the manufacturers of polyurethane covered breast
implants, management believes that the disposition of the matters that are
pending or that may reasonably be anticipated to be asserted should not have a
material adverse effect on either the Company's consolidated financial position
or results of operations. If management's assessment of the Company's liability
with respect to these actions is incorrect, such actions could have a material
adverse effect on the financial position, results of operations and cash flows
of the Company.
Litigation - Other
The Company is party to various other lawsuits, both as defendant and
plaintiff, arising in the normal course of business. It is the opinion of
management that the disposition of these lawsuits will not, individually or in
the aggregate, have a material adverse effect on the financial position or
results of operations of the Company. If management's assessment of the
Company's liability with respect to these actions is incorrect, such actions
could have a material adverse effect on the Company's consolidated financial
position.
12
Environmental
The Company is subject to extensive and changing federal, state, local
and foreign environmental laws and regulations, including those relating to the
use, handling, storage, discharge and disposal of hazardous substances and the
remediation of environmental contamination, and as a result, is from time to
time involved in administrative and judicial proceedings and inquiries relating
to environmental matters. As of December 31, 1999, the Company had accruals of
approximately $4.5 million for environmental matters. During 1998, the Company
established an allowance of $1.2 million relating to receivables from Trace for
environmental indemnifications due to the financial difficulties of Trace.
The Clean Air Act Amendments of 1990 (the "1990 CAA Amendments") provide
for the establishment of federal emission standards for hazardous air pollutants
including methylene chloride, propylene oxide and TDI, materials used in the
manufacturing of foam. On December 27, 1996, the United States Environmental
Protection Agency (the "EPA") proposed regulations under the 1990 CAA Amendments
that will require manufacturers of slab stock polyurethane foam and foam
fabrication plants to reduce emissions of methylene chloride. The final National
Emission Standard for Hazardous Air Pollutants ("NESHAP") was promulgated
October 7, 1998. NESHAP requires a reduction of approximately 70% of the
emission of methylene chloride for the slab stock foam industry effective
October 7, 2001. The Company believes that the use of alternative technologies,
including VPFSM, which do not utilize methylene chloride and its ability to
shift current production to the facilities which use these alternative
technologies will minimize the impact of these regulations. The 1990 CAA
Amendments also may result in the imposition of additional standards regulating
air emissions from polyurethane foam manufacturers, but these standards have not
yet been proposed or promulgated.
The Company has reported to appropriate state authorities that it has
found soil and groundwater contamination in excess of state standards at three
facilities and soil contamination in excess of state standards at three other
facilities. The Company has begun remediation and is conducting further
investigations into the extent of the contamination at these facilities and,
accordingly, the extent of the remediation that may ultimately be required. The
actual cost and the timetable of any such remediation cannot be predicted with
any degree of certainty at this time. The Company has accruals of $3.3 million
for the estimated cost of completing remediation at these facilities. The
Company is in the process of addressing potential contamination at its
Morristown, Tennessee facility, and has submitted a sampling plan to the State
of Tennessee. The extent of the contamination and responsible parties, if any,
has not yet been determined. A former owner may be liable for cleanup costs;
nevertheless, the cost of remediation, if any, is not expected to be
significant.
Federal regulations required that by the end of 1998 all underground
storage tanks ("USTs") be removed or upgraded in all states to meet applicable
standards. The Company has upgraded all USTs at its facilities in accordance
with these regulations and recently completed the closure of remaining USTs at
two sites to meet applicable standards. Some petroleum contamination in soils
was found at one of the sites; the extent of the contamination is currently
being investigated. The Company has accrued approximately $0.5 million for the
estimated remediation costs associated with this site. However, the full extent
of contamination, and accordingly, the actual cost of such remediation, cannot
be predicted with any degree of certainty at this time. Based upon the
investigation conducted thus far, the Company believes that its USTs do not pose
a significant risk of environmental liability. However, there can be no
assurances that such USTs will not result in significant environmental liability
in the future.
On April 10, 1997, the Occupational Health and Safety Administration
promulgated new standards governing employee exposure to methylene chloride,
which is used as a blowing agent in some of the Company's manufacturing
processes. The phase-in of the standards was completed in 1999 and the Company
has developed and implemented a compliance program. Capital expenditures
required and changes in operating procedures are not anticipated to
significantly impact the Company's competitive position.
The Company has been designated as a Potentially Responsible Party
("PRP") by the EPA with respect to seven sites. Estimates of total cleanup costs
and fractional allocations of liability are generally provided by the EPA or the
committee of PRP's with respect to the specified site. In each case and in the
aggregate, the liability of the Company is not considered to be significant.
13
In 2000 and 2001, capital expenditures for environmental compliance
projects are anticipated to be approximately $2.0 million per year. Although it
is possible that new information or future developments could require the
Company to reassess its potential exposure relating to all pending environmental
matters, including those described herein, the Company believes that, based upon
all currently available information, the resolution of such environmental
matters will not have a material adverse effect on the Company's operations,
financial position, capital expenditures or competitive position. The
possibility exists, however, that new environmental legislation and/or
environmental regulations may be adopted, or other environmental conditions may
be found to exist, that may require expenditures not currently anticipated and
that may be significant.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The Company's common stock is traded through the National Association of
Securities Dealers, Inc. National Market System (the "NASDAQ") under the symbol
"FMXI".
The Company filed with the Securities and Exchange Commission, on March
31, 1999, for an extension of time for filing its 1998 Annual Report on Form
10-K pursuant to Rule 12b-25 of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"). The Company failed to file such Annual Report on Form 10-K
by April 15, 1999, the date required by the Exchange Act. The Annual Report on
Form 10-K was filed with the Securities and Exchange Commission on April 23,
1999 and an Annual Meeting of Stockholders was held on May 27, 1999.
The following table sets forth the high and low bid prices for the common
stock.
High Low
1999
Quarter Ended December 31, 1999 $ 9 $ 6
Quarter Ended September 30, 1999 $10 1/2 $ 5 3/4
Quarter Ended June 30, 1999 $ 8 9/16 $ 4
Quarter Ended March 31, 1999 $13 3/8 $ 4 13/16
1998
Quarter Ended December 31, 1998 $14 3/8 $ 9 7/8
Quarter Ended September 30, 1998 $17 9/16 $13 3/8
Quarter Ended June 28, 1998 $18 1/8 $14 3/4
Quarter Ended March 29, 1998 $18 3/8 $10 7/8
As of December 31, 1999 there were approximately 162 holders of record of
the common stock.
The Board of Directors approved a dividend of $0.05 per share for holders
of record as of January 9, 1998; and was paid on January 19, 1998. This was the
only cash dividend paid by the Company on its common stock during the past two
fiscal years. The payment of any future dividends will be determined by the
Board of Directors in light of conditions then existing, including the Company's
earnings, financial condition and requirements, restrictions in financing
agreements, business conditions and other factors. The Company is a holding
company whose assets consist primarily of its wholly owned subsidiaries Foamex
L.P. and Foamex Carpet. Consequently, the Company's ability to pay dividends is
dependent upon the earnings of Foamex L.P. and Foamex Carpet and any future
subsidiaries of the Company and the distribution of those earnings to the
Company and loans or advances by Foamex L.P., Foamex Carpet and any such future
subsidiaries of the Company. The ability of Foamex L.P. and Foamex Carpet to
make distributions is restricted by the terms of their respective financing
agreements. Due to such restrictions, the Company is not expected to have access
to the cash flow generated by Foamex L.P. and Foamex Carpet for the foreseeable
future.
14
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table presents selected historical consolidated financial
data of the Company. The financial data should be read in conjunction with the
financial statements and related notes thereto of the Company included elsewhere
in this Annual Report on Form 10-K.
Fiscal Year (1) (3)
1999 1998 1997 (6) 1996 1995 (2)
-------------------------------------------------------------------
(thousands, except for earnings per share)
Statements of Operations Data
Net sales $1,279,993 $1,246,396 $931,095 $926,351 $862,834
Income (loss) from continuing
operations (4) 19,716 (69,853) 4,131 32,492 (50,750)
Basic earnings (loss) per share from
continuing operations 0.79 (2.79) 0.16 1.28 (1.92)
Diluted earnings (loss) per share from
continuing operations 0.78 (2.79) 0.16 1.26 (1.92)
Balance Sheet Data (at period end)
Total assets $781,313 $874,965 $893,623 $619,846 $748,242
Total long-term debt, classified as current(5) - 771,092 - - -
Total long-term debt 725,297 8,240 735,724 483,344 514,954
Stockholders' equity (deficit) (166,381) (204,119) (113,419) (58,103) 29,383
Dividends - 1,245 - - -
(1) The Company changed its fiscal year to the calendar year during 1998. Prior
to the change, the Company had a 52 or 53 week fiscal year ending on the
Sunday closest to the end of the calendar year. Each fiscal year presented
prior to 1998 was comprised of 52 weeks.
(2) Fiscal 1995 was restated for discontinued operations.
(3) Includes net restructuring and other charges (credits), as discussed in
Note 4 to the consolidated financial statements included in this Annual
Report on Form 10-K. Listed below are the pre-tax charges (credits).
1999 - $10.5 million
1998 - $(9.7) million
1997 - $21.1 million
1996 - $(6.5) million
1995 - $41.4 million
(4) The provision for income taxes in 1999 reflected the partial reversal of
the deferred income tax allowance recognized in 1998. The 1998 provision
for income taxes of $58.2 million for continuing operations consisted
primarily of an increase in valuation allowance for deferred income tax
assets.
(5) As of December 31, 1998, the Company classified approximately $771.1
million of long-term debt as current, as discussed in Note 13 to the
consolidated financial statements included in this Annual Report on Form
10-K.
(6) The balance sheet data included the estimated fair value of the net assets
acquired in the Crain Acquisition in December 1997. The income statement
data excludes the results of Crain from the acquisition date of December
23, 1997, since the effect is insignificant.
15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
The Company operates in the flexible polyurethane and advanced polymer
foam products industry. As of December 31, 1999, the Company's operations are
conducted through its wholly owned subsidiaries, Foamex L.P. and Foamex Carpet.
Business segments are listed below. Segment financial information is included in
Note 16 to the consolidated financial statements.
o Foam Products - manufactures and markets foam used by the bedding
industry, the furniture industry and the retail industry.
o Carpet Cushion Products - manufactures and distributes prime,
rebond, sponge rubber and felt carpet cushion.
o Automotive Products - supplies foam primarily for automotive
interior applications to automotive manufacturers and tier one
suppliers.
o Technical Products - manufactures and markets reticulated foams
and other custom polyester and polyether foams for industrial,
specialty and consumer and safety applications.
o Other - primarily consists of certain foreign manufacturing
operations, corporate expenses not allocated to the other
business segments and restructuring and other charges (credits).
The Company's sales are impacted by the sales of new and existing homes,
the overall level of passenger car and light truck production, changes in
personal disposable income and seasonality. The Company typically experiences
two seasonally slow periods during each year, in early July and in late
December, due to scheduled plant shutdowns and holidays.
The following discussion should be read in conjunction with the
consolidated financial statements and related notes included in this Annual
Report on Form 10-K.
RESULTS OF OPERATIONS
Carpet
Foam Cushion Automotive Technical
Products Products Products Products Other Total
1999 (thousands)
Net sales $527,159 $271,200 $361,806 $92,180 $27,648 $1,279,993
Income (loss) from operations 57,028 8,512 22,547 22,588 (17,105) 93,570
Depreciation and amortization 17,432 8,096 4,823 2,724 2,675 35,750
Income (loss ) from operations
as a percentage of net sales 10.8% 3.1% 6.2% 24.5% n.m.* 7.3%
1998
Net sales $559,690 $300,791 $285,190 $79,140 $21,585 $1,246,396
Income (loss) from operations 35,313 12,005 16,788 14,571 (3,645) 75,032
Depreciation and amortization 18,300 5,529 6,424 2,929 2,203 35,385
Income (loss ) from operations
as a percentage of net sales 6.3% 4.0% 5.9% 18.4% n.m.* 6.0%
1997
Net sales $334,900 $273,920 $225,892 $76,254 $20,129 $931,095
Income (loss) from operations 30,665 8,548 24,638 17,886 (26,637) 55,100
Depreciation and amortization 10,539 4,407 3,550 2,470 1,081 22,047
Income (loss ) from operations
as a percentage of net sales 9.2% 3.1% 10.9% 23.5% n.m.* 5.9%
* not meaningful
16
Acquisitions and Dispositions
On December 23, 1997, the Company acquired Crain pursuant to a merger
agreement with Crain Holdings Corp. for a purchase price of approximately $213.7
million, including the assumption of debt with a face value of approximately
$98.6 million (and an estimated fair value of approximately $112.3 million). In
addition, fees and expenses associated with the Crain Acquisition were
approximately $13.2 million. The Crain Acquisition was accounted for as a
purchase and the results of Crain were included from the acquisition date,
except the results from December 24, 1997 to December 28, 1997 were not included
in the consolidated statements of operations or cash flows for 1997 since the
effect would be insignificant.
On October 6, 1997, the Company sold substantially all of its net assets
of its needlepunch carpeting, tufted carpeting and artificial grass products
business located in Dalton, Georgia to Bretlin, Inc., a subsidiary of The Dixie
Group, Inc. The sale price was approximately $41.0 million. The Company realized
an insignificant gain on the sale in 1997.
1999 Compared to 1998
Total net sales for 1999 increased 2.7% to $1,280.0 million from $1,246.4
million in 1998. The increase was primarily the result of stronger volume growth
in the Automotive Products and Technical Products segments partially offset by
sales declines in the Foam Products and Carpet Cushion Products segments.
Income from operations increased 24.7% to $93.6 million in 1999 from
$75.0 million in 1998. Results in 1999 included $10.5 million of restructuring
and other charges. In 1998, a net restructuring credit of previously established
restructuring accruals increased operating income by $9.7 million. These
restructuring and other charges (credits) are discussed further under "Other"
below. Excluding the restructuring and other charges (credits) for comparison
purposes, income from operations increased 59.3% to $104.1 million in 1999 from
$65.3 million in 1998. On this basis, income from operations represented 8.1% of
net sales in 1999, up from 5.2% of net sales in 1998. The improvement was
primarily due to (i) the increase in net sales, (ii) improved gross profit
margins and (iii) lower selling, general and administrative expenses at both the
business unit and corporate levels. Improved gross profit margins resulted
primarily from operating efficiencies, the benefits of the first phase of
implementation of improved operating practices across a number of the Company's
facilities, enhanced raw material utilization and the full year benefits from
the consolidation of former Crain facilities. Lower selling, general and
administrative expenses primarily reflected the integration of the Crain
Acquisition, staffing reductions in January 1999, elimination of the Trace
management fee, the closure the New York office and reduced operating costs as a
result of the sale of the corporate aircraft.
Foam Products
Foam Products net sales for 1999 decreased 5.8% to $527.2 million from
$559.7 million in 1998. The decrease was primarily due to decreased sales
volumes resulting from the Company's decision to exit certain business lines and
the closure of facilities related to the Crain Acquisition. Despite the decline
in sales, income from operations increased 61.5% to $57.0 million in 1999 from
$35.3 million in 1998. Income from operations represented 10.8% of net sales in
1999, up from 6.3% in 1998. The improvement was primarily driven by (i) enhanced
raw material utilization, (ii) the benefits of the first phase of implementation
of improved operating practices across a number of the Company's facilities,
(iii) the benefits of consolidation of facilities in the Southeast region of the
U.S. and in Southern California and (iv) the elimination of operating
inefficiencies incurred in 1998. Income from operations for 1998 was adversely
impacted by a number of factors, the most significant of which were (i) $4.0
million of costs associated with the Crain Acquisition transition including
inventory adjustments for facilities affected by the consolidation of
manufacturing facilities, (ii) operating inefficiencies and logistics costs of
$2.5 million associated with the sales of juvenile and other consumer products
sold through mass merchandisers and discount stores and (iii) operating losses
and inefficiencies of $1.0 million resulting from fires at the Company's
facilities in Orlando, Florida and Cornelius, North Carolina.
17
Carpet Cushion Products
Carpet Cushion Products net sales for 1999 decreased 9.8% to $271.2
million from $300.8 million in 1998 primarily due to lower selling prices and
sales volumes. Competitive pressures in the carpet cushion marketplace
contributed to lower selling prices and lower sales volumes. Sales volumes were
also reduced due to limited production from the Company's Orlando, Florida
facility as a result of the 1998 fire. Income from operations decreased 29.1% to
$8.5 million in 1999 from $12.0 million in 1998. Income from operations
represented 3.1% of net sales in 1999, down from 4.0% in 1998. The decline in
income from operations and the related margin were primarily due to lower
selling prices, lower sales volumes and the Orlando fire, which increased
product transportation costs as the fulfillment process was shifted to less
geographically optimal facilities. The Orlando, Florida carpet cushion line was
brought back on stream and operational in the fourth quarter of 1999. The Pico
Rivera, California rebond operation was consolidated into the other California
rebond operations during 1999. These effects were partially offset by lower
selling expenses as a result primarily of the sales force integration and
rationalization associated with the Crain Acquisition. Results in 1998 were
impacted by a $1.0 million charge associated with the Orlando, Florida fire, and
costs related to the Crain Acquisition transition of $0.9 million.
Automotive Products
Automotive Products net sales for 1999 increased 26.9% to $361.8 million
from $285.2 million in 1998, primarily as a result of higher sales volume of
lamination products. Income from operations increased 34.3% to $22.5 million in
1999 from $16.8 million in 1998. Income from operations represented 6.2% of net
sales in 1999, up from 5.9% in 1998. The improvement was primarily due to (i)
operating efficiencies at the Company's Mexican border facilities that became
fully operational in the fourth quarter of 1998 and (ii) increased sales
volumes. Income from operations for 1998 was reduced by (i) $3.0 million of
costs incurred during the start up phase of new lamination business at the
Mexican border, (ii) contract price reductions of approximately $1.1 million and
(iii) losses of $1.0 million associated with the production of thermoformable
headliners.
Technical Products
Technical Products net sales for 1999 increased 16.5% to $92.2 million
from $79.1 million in 1998. Income from operations increased 55.0% to $22.6
million in 1999 from $14.6 million in 1998. Income from operations represented
24.5% of net sales in 1999, up from 18.4% in 1998. The improvement was primarily
driven by favorable market conditions, strong growth in sales volumes, a
higher-margin product mix and improved manufacturing efficiencies. Plans to
expand capacity for Technical Products were initiated during the second half of
1999.
Other
Other primarily consists of certain foreign manufacturing operations,
corporate expenses not allocated to business segments and restructuring and
other charges (credits). The increase in net sales associated with this segment
primarily resulted from an increase in net sales from the Company's Mexico City
operation. The loss from operations in 1999 was primarily associated with the
$10.5 million of restructuring and other charges discussed below. The loss from
operations in 1998 included $9.7 million of net restructuring credits discussed
below. The loss from operations for 1998 were impacted by accounts receivable
and inventory writedowns of approximately $8.5 million at the Mexico City
facility and start up costs of $2.5 million for the Company's Asian joint
venture.
Restructuring and other charges for 1999 amounted to $10.5 million and
were comprised of restructuring charges of approximately $9.5 million for four
restructuring plans, approximately $0.7 million of restructuring adjustments
related to changes in estimates primarily to the 1998 restructuring plans and
$0.3 million of other charges for additional reserves for Trace receivables. The
$9.5 million 1999 restructuring charge was comprised of $7.0 million for
personnel reductions, $1.0 million for plant closure and lease costs relating to
the closure of one facility and certain product line rationalizations during the
year and $1.5 million for asset writedowns associated with the plant closure and
consolidations. See Note 4 to the consolidated financial statements for further
discussion.
18
In 1998, net restructuring credits were approximately $9.7 million, which
reflect a $15.1 million reversal of prior year's restructuring plans, offset by
other charges of $5.4 million. The $5.4 million was comprised of a $3.1 million
reserve for net receivables due from Trace and a $2.3 million of impaired cost
in excess of assets acquired associated with a foreign facility. However, these
charges were offset by a $15.1 million restructuring credit associated with
modifications to the 1997 restructuring plan. The $15.1 million credit reflected
the reversal of $10.2 million of fixed asset writedowns, $3.8 million of plant
closure and lease costs and $1.1 million of personnel reductions.
As of December 31, 1999, all personnel affected by restructuring had been
terminated. Cash spending during 1999 for implementation of restructuring plans
approximated $8.9 million. Future cash spending for the restructuring plans
approximates $12.8 million. The Company expects to spend approximately $5.3
million during 2000 and the remaining $7.5 million (related principally to lease
runout payments) is expected to be spent through 2006.
Interest and Debt Issuance Expense
Interest and debt issuance expense totaled $72.9 million in 1999,
slightly higher than the 1998 expense of $72.3 million. The benefit of lower
average debt levels was offset by higher effective interest rates and increased
amortization expense related to additional debt issuance costs paid during 1999.
Other Income (Expense), Net
During the first quarter of 1999, a $4.2 million gain was recorded on the
sale of the corporate aircraft. Interest income totaled $0.5 million in 1999.
Losses on the disposal of fixed assets and letter of credit fees related to the
GFI Transaction (see Note 13 to the consolidated financial statements) partially
offset these income items.
Other income (expense), net in 1998 primarily consisted of: $6.5 million
of costs associated with the proposed Trace buyout transaction; $3.1 million of
fees and costs related to the GFI Transaction; $3.0 million of foreign currency
losses in Mexico; and a $1.1 million reduction in the value of the Company's
investment in the Trace Global Opportunities Fund (see Note 18 to the
consolidated financial statements). These expenses in 1998 were partially offset
by approximately $1.9 million of interest income.
Income Tax Expense
The 1999 effective tax rate was 11.1% and reflected the partial reversal
of the deferred income tax asset valuation allowance recognized in 1998. The
valuation allowance reduction primarily reflected realization of Federal loss
carryforwards that reduced the current tax component of the Federal tax
provision. Additionally, the valuation allowance was reduced to offset the net
deferred Federal tax liability generated in 1999.
In 1998, the provision for income taxes of $58.2 million for continuing
operations consisted primarily of an increase in the valuation allowance of
deferred income tax assets. The Company has determined that it was more likely
than not that the Company would not have sufficient future income to utilize its
net operating loss carryforwards and realize other deferred income tax assets.
In addition, the Company did not recognize the tax benefits associated with
losses in Mexico because it appeared likely that the net operating loss
carryforwards would not be able to be realized in the near future. At December
31, 1999, the Company had approximately $171.0 million of tax net operating loss
carryforwards for Federal income tax purposes, expiring from 2010 to 2018. See
Note 8 to the consolidated financial statements.
Income (Loss) from Continuing Operations
Income (loss) from continuing operations increased to $19.7 million for
1999 as compared to a loss of $69.9 million in 1998. The increase is primarily
due to improved operating results during 1999 as compared to 1998, as discussed
above, and the impact of the 1998 increase to the valuation allowance related to
deferred income tax assets.
19
Extraordinary Loss
The extraordinary loss on the early extinguishment of debt in 1998 was
$1.9 million (net of $1.3 million income tax benefit). The charge primarily
reflected the write-off of debt issuance costs in connection with the GFI
Transaction.
1998 Compared to 1997
Net sales for 1998 were $1,246.4 million as compared to $931.1 million in
1997, an increase of $315.3 million or 33.9%. Income from operations increased
$19.9 million or 36.2% to $75.0 million for 1998 from $55.1 million in 1997. The
increase in net sales and income from operations was primarily associated with
the Crain Acquisition in December 1997, reduced restructuring and other charges
and the increase in automotive lamination products during the latter part of
1998 which were offset by the sale of the Dalton, Georgia facility in October
1997. During 1998, selling, general and administrative expenses increased $22.0
million primarily due to costs associated with the integration of Crain (the
"Transition"). Also during 1998, the Company recorded income of $15.1 million
for the reversal of 1997 restructuring charges, offset by $5.4 million of other
charges associated with the impairment of goodwill on the Montreal, Canada
operations ($2.3 million) and an allowance for receivables due from Trace ($3.1
million).
Foam Products
Foam Products net sales for 1998 increased 67.1% to $559.7 million from
$334.9 million in 1997 and income from operations increased 15.2% to $35.3
million (6.3% of net sales) from $30.7 million (9.2% of net sales). The
increases in net sales and income from operations were primarily associated with
the Crain Acquisition in December 1997. The decrease in income from operations
as a percentage of net sales was primarily the result of (i) costs of $4.0
million associated with the Transition, including inventory adjustments for
facilities affected by the consolidation of manufacturing facilities, (ii)
operating inefficiencies and logistics costs of $2.5 million associated with the
sales of juvenile and other consumer products sold through mass merchandisers
and discount stores; (iii) operating losses and inefficiencies of $1.0 million
resulting from the fires at Orlando, Florida and Cornelius, North Carolina, (iv)
selling price decreases of $0.5 million resulting from competitive pricing
pressures due to market share challenges from competitors and (v) the inherently
lower margins of Crain when compared with the Company's historical margins. In
addition, operating margins decreased in 1998 since the Company carried the
operating costs of both companies during the Transition.
Carpet Cushion Products
Carpet Cushion Products net sales for 1998 increased 9.8% to $300.8
million from $273.9 million in 1997 primarily due to an increase in net sales
associated with the Crain Acquisition in December 1997 offset by the sale of the
Dalton, Georgia facility in October 1997. Income from operations increased 40.4%
to $12.0 million (4.0% of net sales) from $8.5 million (3.1% of net sales). The
increase was primarily associated with the Crain Acquisition in December 1997
and was offset by increased costs of $1.0 million associated with the Orlando
fire, costs related to the Transition of $0.9 million and the sale of the
Dalton, Georgia facility. In addition, Crain's carpet cushion products provided
slightly higher margins than the Company's products.
Automotive Products
Automotive Products net sales for 1998 increased 26.3% to $285.2 million
from $225.9 million in 1997 and income from operations decreased 31.9% to $16.8
million (5.9% of net sales) from $24.6 million (10.9% of net sales). The
increase in net sales was primarily associated with increased volume of
lamination products. Income from operations decreased principally as a result of
(i) higher costs of $3.0 million incurred during the start up phase of new
lamination business at the Mexican border, (ii) contract price reductions of
approximately $1.1 million and (iii) losses of $1.0 million associated with the
production of thermoformable headliners.
20
Technical Products
Technical Products net sales for 1998 increased 3.8% to $79.1 million
from $76.3 million in 1997 and income from operations decreased 18.5% to $14.6
million (18.4% of net sales) from $17.9 million (23.5% of net sales). The
increased net sales were primarily associated with the Company's industrial
gasketing and sealing products. The decrease in income from operations was
primarily associated with a higher mix of lower margin industrial products and
production inefficiencies on certain products.
Other
Other primarily consists of certain foreign manufacturing operations,
corporate expenses not allocated to the other operating segments and
restructuring and other charges. The increase in net sales associated with this
segment was associated with the facility in Mexico City that began operations in
the second half of 1997. The increase in income from operations was primarily
associated with a reversal of $15.1 million of restructuring charges set up in
1997, offset by accounts receivable and inventory writedowns of $8.5 million at
the Mexico City facility, start up costs of $2.5 million for the Company's Asian
joint venture and duplicate administrative costs incurred during the Transition.
Interest and Debt Issuance Expense
Interest and debt issuance expense totaled $72.3 million in 1998 compared
to $50.6 million in 1997. The increase was primarily due to the debt incurred in
connection with the Crain Acquisition partially offset by the favorable effect
of a debt refinancing in June 1997.
Other Income (Expense), Net
Other income (expense), net in 1998 primarily consisted of: $6.5 million
of costs associated with the proposed Trace buyout transaction; $3.1 million of
fees and costs related to the GFI Transaction; $3.0 million of foreign currency
losses in Mexico; and a $1.1 million reduction in the value of the Company's
investment in the Trace Global Opportunities Fund. Interest income in 1998 and
1997 was $1.9 million and $1.5 million, respectively.
Income Tax Expense
In 1998, the provision for income taxes of $58.2 million for continuing
operations consisted primarily of an increase in the valuation allowance of
deferred income tax assets. The Company determined that it was more likely than
not that the Company would not have sufficient future income to utilize its net
operating loss carryforwards and realize other deferred income tax assets. In
addition, the Company did not recognize the tax benefits associated with net
operating loss carryforwards in Mexico because it appeared likely that the net
operating loss carryforwards would not be able to be realized in the near
future. See Note 8 to the consolidated financial statements.
Income (Loss) from Continuing Operations
Income (loss) from continuing operations decreased to a loss of $69.9
million for 1998 as compared to income of $4.1 million in 1997. The decrease is
primarily due to an increase of approximately $21.7 million in interest and debt
issuance expense, a decrease of $16.5 million in other income (expense), net and
an increase of $55.7 million in the provision for income taxes, offset by an
increase in income from operations, as previously discussed.
Extraordinary Loss
The extraordinary loss on early extinguishment of debt in 1998 of $1.9
million (net of $1.3 million income tax benefit) was primarily associated with
the write-off of debt issuance costs in connection with the GFI Transaction. The
extraordinary loss on early extinguishment of debt in 1997 of $44.5 million (net
of $27.3 million income tax benefit) primarily relates to the write-off of debt
issuance costs and redemption premiums associated with the early extinguishment
of long-term debt in June 1997.
21
Liquidity and Capital Resources
The Company's operations are conducted through its wholly owned
subsidiaries, Foamex L.P. and Foamex Carpet. The liquidity requirements of the
Company consist primarily of the operating cash requirements of its two
principal subsidiaries.
Foamex L.P.'s operating cash requirements consist principally of working
capital requirements, scheduled payments of principal and interest on
outstanding indebtedness and capital expenditures. The Company believes that
cash flow from Foamex L.P.'s operating activities, cash on hand and periodic
borrowings under its credit facility will be adequate to meet its liquidity
requirements. All principal and interest payments were made as scheduled in
1999. The ability of Foamex L.P. to make distributions to the Company is
restricted by the terms of its financing agreements; therefore, neither the
Company nor Foamex Carpet is expected to have access to the cash flow generated
by Foamex L.P. for the foreseeable future.
Foamex Carpet's operating cash requirements consist principally of
working capital requirements, scheduled payments of principal and interest on
outstanding indebtedness and capital expenditures. The Company believes that
cash flow from Foamex Carpet's operating activities, cash on hand and periodic
borrowings under its credit facility will be adequate to meet its liquidity
requirements. The ability of Foamex Carpet to make distributions to the Company
is restricted by the terms of its financing agreements; therefore, neither the
Company nor Foamex L.P. is expected to have access to the cash flow generated by
Foamex Carpet for the foreseeable future.
Cash and cash equivalents totaled $6.6 million at year-end 1999 compared
to $12.6 million at the end of 1998. Working capital at the end of 1999 was
$105.6 million and the current ratio was 1.6 to 1. Excluding the $771.1 million
of long-term debt that was classified as a current liability at year-end
December 31, 1998 for comparative purposes, working capital at the end of 1998
was $113.5 million and the current ratio was 1.5 to 1. Improved accounts
receivable and inventory management contributed to a $62.7 million reduction in
accounts payable. Total debt at year-end 1999 was $745.3 million, down $55.1
million, or 6.9% from the end of 1998.
Cash Flow from Operating Activities
Cash provided by operating activities was $58.7 million for 1999 as
compared to cash used of $13.9 million in 1998. The improvement was driven by
the increase in income from operations and improved accounts receivable and
inventory management.
Cash Flow from Investing Activities
Cash used for investing activities was $1.7 million for 1999 compared to
cash used of $32.8 million in 1998. The decrease was primarily driven by the
sale of certain assets and lower capital spending. Cash provided by the sale of
assets primarily represented the proceeds from the sale of the corporate
airplane ($16.3 million), discussed in Note 3 to the consolidated financial
statements, and the sale of the Company's packaging business ($1.5 million) in
October 1999 which was part of a 1998 restructuring plan. Additionally, capital
expenditures in 1999 of $20.1 million were down from prior years. The Company
expects capital expenditures for 2000 to return to prior year levels and be in
excess of $30.0 million primarily as a result of the construction of two new
VPFSM machines. In addition, the Company is exploring the possible
implementation of a new ERP software system.
Cash Flow from Financing Activities
Cash used for financing activities was $63.1 million for 1999 compared to
cash provided of $47.2 million in 1998. Requirements in 1999 primarily reflected
net debt repayments and costs related to amending the debt agreements.
22
Financial Condition
As of December 31, 1998, certain subsidiaries were not in compliance with
various debt covenants included in agreements relating to debt totaling $480.4
million. Had the lenders under these debt agreements accelerated the maturity of
their indebtedness as a result of the subsidiaries' noncompliance, the
acceleration would have constituted an event of default and given the holders
the right to require the repurchase of substantially all of the Company's
subsidiaries' long-term debt. As a result of these factors, approximately $771.1
million of long-term debt at December 31, 1998 was classified as a current
liability in the consolidated balance sheet, which produced a working capital
deficit. As discussed below, amendments were executed to modify certain
financial covenants. As of December 31, 1999, the Company's subsidiaries were in
compliance with their respective financial covenants and long-term debt was
classified based on its maturity schedule as of December 31, 1999.
Foamex L.P. Credit Facility
In response to financial conditions at year-end 1998, amendments to debt
agreements were executed during the first half of 1999. As a result the Foamex
L.P. credit facility, which was amended and restated in February 1998, was
further amended and restated in June 1999 (the "Foamex L.P. Credit Facility") to
modify financial covenants for net worth, interest coverage, fixed charge
coverage and leverage ratios through December 2006. The agreement was also
amended to no longer permit Foamex L.P. to make certain cash payments, including
the payment of an annual management fee of $3.0 million to a subsidiary of Trace
and distributions to the Company, and to limit future investments in foreign
subsidiaries and joint ventures. The "change of control" definition under the
agreement was also modified to conform to the definition discussed in "change of
control" in Note 1 to the consolidated financial statements. Changes in the
interest rate structure, effective in 2000, were also made and are discussed
below. Foamex L.P. was in compliance with this agreement at year-end 1999.
At year-end 1999, interest was based on the combination of a variable
rate consisting of the higher of (i) the base rate of The Bank of Nova Scotia or
(ii) the Federal Funds rate plus 0.5% plus a margin. The margins for revolving,
Term B, Term C and Term D loans were 2.25%, 2.50%, 2.75% and 2.875%,
respectively. At the option of Foamex L.P., portions of the outstanding loans
are convertible into LIBOR based loans plus 1.0% added to the margins
identified. The effective interest rates for the Foamex L.P. Credit Facility at
the end of 1999 ranged between 9.69% and 10.06%.
Available borrowings under the revolving credit facility totaled $24.2
million at year-end 1999. Letters of credit outstanding at December 31, 1999
totaled $47.1 million. Borrowings under the Foamex L.P. Credit Facility are
collateralized by substantially all of the assets of Foamex L.P. on a pari passu
basis with the IRBs (see Note 13 to the consolidated financial statements).
As part of the Foamex L.P. Credit Facility, excess cash flow generated
annually, as defined, is required to prepay portions of Term B, C and D loans.
The prepayment amount determined for 1999 was $13.3 million and will be financed
through revolving loans under the facility. The required payment is expected to
be made during the second quarter of 2000. The repayment schedules for the Term
B, C and D loans have been adjusted, as of year-end 1999, to reflect the
prepayment required.
Effective January 1, 2000, the interest rate on outstanding borrowings
under the Foamex L.P. Credit Facility will increase by 25 basis points each
quarter that Foamex L.P.'s leverage ratio, as defined, exceeds 5.00 to 1.00.
Once the leverage ratio is reduced below this level, the cumulative amount of
any 25 basis point adjustments to the interest rate on borrowings would be
eliminated. At December 31, 1999, the calculated leverage ratio was 5.48 to
1.00. Consequently, the basis point adjustment will be applicable for the
calculation of interest in the first quarter of 2000.
23
Foamex Carpet Credit Facility
During 1999, Foamex Carpet amended its revolving credit facility (the
"Foamex Carpet Credit Facility"), which provides up to $15.0 million of
available borrowings through February 2004, to modify the financial covenants
for net worth, interest coverage, fixed charge coverage and leverage ratios.
Also, effective June 30, 1999, the interest rate on outstanding borrowings under
the Foamex Carpet Credit Facility increased by 25 basis points.
At year-end 1999, the interest rate was based on the combination of a
variable rate plus a margin. The variable rate is the same as the one defined in
the Foamex L.P. Credit Facility, discussed above, and the margin is 2.25%. At
the option of Foamex Carpet, portions of the outstanding loans are convertible
into LIBOR based loans plus 3.25%.
Borrowings under the Foamex Carpet Credit Facility are collateralized by
substantially all of the assets of Foamex Carpet on a pari passu basis with the
Note Payable to Foam Funding LLC (see Note 13 to the consolidated financial
statements).
There were no borrowings outstanding under the credit facility at
year-end 1999. Borrowings availability totaled $14.7 million at December 31,
1999 after a reduction of $0.3 million for a letter of credit.
Buyout Proposals
On February 9, 2000, the Company announced that it is in discussions with
respect to a proposal involving the acquisition of all of the Company's
outstanding common stock for cash. The Company stated that the proposal is
subject to a number of conditions, including the buyer's ongoing due diligence
and the execution of definitive agreements. The Company agreed to an exclusive
negotiating period ending five business days after delivery of its audited
financial statements to the prospective buyer. See "Business - Buyout
Proposals".
On August 5, 1999, the Company announced that its Board of Directors
signed a letter of intent with Sorgenti Chemical Industries, LLC and Liberty
Partners Holdings 20, LLC (collectively, the "Purchasers") for a business
combination. On December 15, 1999, the Company announced that the letter of
intent with the Purchasers, which had been extended, expired by its terms.
In 1998, the Company received an unsolicited buyout proposal from Trace,
the Company's principal stockholder. The Company entered into two merger
agreements, which were subsequently terminated by Trace. The Company incurred
$6.5 million in fees associated with the proposed transactions.
Change in Control
Trace is a privately held company, which owned approximately 29% of the
Company's outstanding voting common stock at March 10, 2000, and whose former
Chairman also serves as the Company's Chairman. The Company's common stock owned
by Trace is pledged as collateral against certain of Trace's obligations.
Certain credit agreements and promissory notes of the Company's subsidiaries
provide that a "change of control" would be an event of default and could result
in the acceleration of substantially all of the Company's long-term debt.
Trace is presently in bankruptcy proceedings under Chapter 7 of the
Bankruptcy Code in Federal Court in New York City. Trace's bankruptcy filing
does not constitute a "change of control" under the provisions of the debt
agreements. A "change of control" could take place however, if the bankruptcy
court allows Trace's creditors to foreclose on and take ownership of the
Company's common stock owned by Trace, or otherwise authorizes a sale or
transfer of these shares, under circumstances in which a person or related
group, other than Trace, acquired more than 25% of the Company's outstanding
voting stock and owned a greater percentage of such voting stock than the amount
beneficially owned by Trace.
Management believes that it is unlikely that a "change of control" will
occur as a result of Trace's bankruptcy proceedings. However, the Company would
seek to resolve the issues that may arise should the "change of control"
provisions be triggered, by requesting waivers of such provisions and/or
refinancing certain debt, if necessary. There
24
can be no assurance that the Company or its subsidiaries will be able to do so,
or that the Company will be able to obtain waivers of such provisions. Such
circumstances raise substantial doubt about the Company's ability to continue as
a going concern. The accompanying financial statements were prepared on a
going-concern basis and do not include any adjustments that might result from
the outcome of the Trace bankruptcy filing.
Environmental Matters
The Company is subject to extensive and changing environmental laws and
regulations. Expenditures to date in connection with the Company's compliance
with such laws and regulations did not have a material adverse effect on
operations, financial position, capital expenditures or competitive position.
Liabilities recorded by the Company in connection with environmental matters as
of December 31, 1999 totaled $4.5 million. Although it is possible that new
information or future developments could require the Company to reassess its
potential exposure to all pending environmental matters, including those
described in the consolidated financial statements, the Company believes that,
based upon all currently available information, the resolution of all such
pending environmental matters will not have a significant adverse effect on the
Company's operations, financial position, capital expenditures or competitive
position.
Inflation and Other Matters
On average, inflation rates for the domestic economy continue to be
relatively low. Although long-term inflation rates are difficult to predict, the
Company believes it has the flexibility in operations and capital structure to
maintain a competitive position. In recent years, results of operations were
adversely affected by raw material cost increases. The price of the two
principal chemicals used, TDI and polyol, is influenced by demand, manufacturing
capacity and oil prices. The recent increase in oil prices did not significantly
impact raw material costs in 1999. Any sustained increase in oil prices will
likely result in higher raw material costs and also increase the cost of
operations. Results for the first quarter of 2000 are anticipated to be
negatively impacted by higher transportation costs related to oil price
increases and higher costs for raw materials. The Company attempts to offset raw
material cost increases through selling price increases; however, there can be
no assurance that the Company will be successful in implementing selling price
increases or that competitive pricing pressure will not require the Company to
adjust selling prices. Results of operations have been and could be adversely
affected by delays in implementing, or the inability of the Company to
implement, selling price increases to offset raw material cost increases.
Year 2000 Compliance
The Company's program to address potential disruptions to operations and
relationships with our business partners related to the Year 2000 software
problem was successful and there were no significant disruptions to operations
or administration.
The cost to prevent the Year 2000 problem was approximately $2.0 million.
The majority of this total project cost was incurred during 1998 and 1999. The
project cost primarily represented the cost for various consultants and system
upgrades. Project cost included internal Company cost for information technology
employees that worked directly on software programming modifications.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's debt securities with variable interest rates are subject to
market risk for changes in interest rates. On December 31, 1999, indebtedness
with variable interest rates totaled $482.2 million. On an annualized basis, if
the interest rates on these debt instruments increased by 1.0%, interest expense
would increase by approximately $4.8 million.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
An index to the financial statements and financial statement schedules is
included in Item 14(a).
25
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
The information required by this Part III (Items 10, 11, 12 and 13) is
hereby incorporated by reference pursuant to Reg. 12b-23 of the Exchange Act to
the Company's definitive proxy statement which is expected to be filed pursuant
to Regulation 14A of the Exchange Act no later than 120 days after the end of
the fiscal year covered by this Annual Report on Form 10-K.
26
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial statements.
Foamex International Inc. and Subsidiaries:
Report of Independent Accountants F-2
Consolidated Balance Sheets as of
December 31, 1999 and 1998 F-3
Consolidated Statements of Operations for the
years 1999, 1998 and 1997 F-5
Consolidated Statements of Cash Flows for the
years 1999, 1998 and 1997 F-6
Consolidated Statements of Stockholders' Equity (Deficit)
for the years 1999, 1998 and 1997 F-7
Notes to Consolidated Financial Statements F-8
Foamex International Inc. and Subsidiaries Financial
Statement Schedules:
Schedule I - Condensed Financial Information of Registrant S-2
Schedule II - Valuation and Qualifying Account S-5
(b) Reports on Form 8-K.
A report, dated December 15, 1999, was filed for Item 5. Other Events,
concerning the termination of a letter of intent for the acquisition of
the Company.
A report, dated February 9, 2000, was filed for Item 5. Other Events,
concerning preliminary merger discussions.
A report, dated March 2, 2000, was filed for Item 5. Other Events,
concerning a press release announcing its financial results for the
year ended December 31, 1999.
(c) Exhibits.
2.1(x) - Transfer Agreement, dated as of February 27, 1998, by and between
Foam Funding LLC and Foamex L.P.
2.2(x) - Asset Purchase Agreement, dated as of February 27, 1998, by and
among Foamex Carpet Cushion, Inc. ("Foamex Carpet"), Foamex
International Inc. ("Foamex International"), Foam Funding LLC and
General Felt Industries, Inc. ("General Felt").
2.3(z) - Agreement and Plan of Merger, dated as of November 5, 1998, by and
among Foamex International, Trace International Holdings, Inc.
("Trace Holdings") and Trace Merger Sub, Inc. ("Trace Sub").
2.4(aa) - Agreement and Plan of Merger, dated as of June 25, 1998, by and
among Trace Holdings, Trace Sub and Foamex International.
2.5(z) - Notice of termination of Agreement and Plan of Merger, dated as of
November 5, 1998, from Trace International Holdings, Inc. to Foamex
International Inc.
3.1(a) - Certificate of Limited Partnership of Foamex L.P.
3.2.1(a) - Fourth Amended and Restated Agreement of Limited Partnership of
Foamex L.P., dated as of December 14, 1993, by and among FMXI, Inc.
("FMXI") and Trace Foam Company, Inc. ("Trace Foam"), as general
partners, and Foamex International, as a limited partner (the
"Partnership Agreement").
3.2.2(b) - First Amendment to the Partnership Agreement, dated June 28, 1994.
3.2.3(c) - Second Amendment to the Partnership Agreement, dated June 12,
1997.
3.2.4(v) - Third Amendment to the Partnership Agreement, dated December 23,
1997.
3.2.5(x) - Fourth Amendment to the Partnership Agreement, dated February 27,
1998.
3.3(y) - Certificate of Incorporation of FMXI.
3.4(y) - By-laws of FMXI.
27
3.5(k) - Certificate of Incorporation of Foamex Capital Corporation
("FCC").
3.6(k) - By-laws of FCC.
3.7.1(a) - Certificate of Incorporation of Foamex International.
3.7.1(dd) - Amendment to Certificate of Incorporation of Foamex International.
3.7.2(cc) - Certificate of Incorporation of Foamex Carpet Cushion, Inc.
("Foamex Carpet")
3.8(a) - By-laws of Foamex International.
3.8.1(cc) - By-laws of Foamex Carpet.
4.1.1(d) - Indenture, dated as of June 12, 1997, by and among Foamex L.P.,
FCC, the Subsidiary Guarantors and The Bank of New York, as trustee,
relating to $150,000,000 principal amount of 9 7/8% Senior
Subordinated Notes due 2007 (the "9 7/8% Notes"), including the form
of Senior Subordinated Note and Subsidiary Guarantee.
4.1.2(v) - First Supplemental Indenture, dated as of December 23, 1997,
between Foamex LLC ("FLLC") and The Bank of New York, as trustee,
relating to the 9 7/8% Notes.
4.1.3(x) - Second Supplemental Indenture, dated as of February 27, 1998,
among Foamex L.P. and FCC, as joint and several obligors, General
Felt, Foamex Fibers, Inc. ("Foamex Fibers"), and FLLC, as
withdrawing guarantors, and The Bank of New York, as trustee,
relating to the 9 7/8% Notes.
4.1.4(d) - Registration Rights Agreement, dated as of June 12, 1997, by and
among Foamex L.P., FCC, General Felt, Foamex Fibers, and all future
direct or indirect domestic subsidiaries of Foamex L.P. or FCC, and
Donaldson, Lufkin & Jenrette Securities Corporation, Salomon
Brothers Inc. and Scotia Capital Markets, as Initial Purchasers.
4.2.1(v) - Indenture, dated as of December 23, 1997, by and among Foamex
L.P., FCC, the Subsidiary Guarantors, Crain Holdings Corp., as
Intermediate Obligator, and The Bank of New York, as trustee,
relating to $98,000,000 principal amount of 13 1/2% Senior
Subordinated Notes due 2005 (the "13 1/2% Notes"), including the
form of Senior Subordinated Note and Subsidiary Guarantee.
4.2.2(x) - First Supplemental Indenture, dated as of February 27, 1998, among
Foamex L.P. and FCC, as joint and several obligors, General Felt,
Foamex Fibers and FLLC, as withdrawing guarantors, Crain Industries,
Inc., as withdrawing Intermediate Obligor, and The Bank of New York,
as trustee, relating to the 13 1/2% Notes.
4.3(x) - Discharge of Indenture, dated as of February 27, 1998, by and
among Foamex L.P., General Felt, Foamex International and State
Street Bank and Trust Company, as trustee, relating to the 9 1/2%
Senior Secured Notes due 2000.
4.4.2(x) - Second Amended and Restated Foamex International Guaranty, dated
as of February 27, 1998, made by Foamex International in favor of
Citicorp USA, Inc., as Collateral Agent.
4.4.3(x) - Amended and Restated Partnership Guaranty, dated as of February
27, 1998, made by FMXI in favor of Citicorp USA, Inc., as Collateral
Agent.
4.4.4(p) - Foamex Guaranty, dated as of June 12, 1997, made by Foamex L.P. in
favor of Citicorp USA, Inc., as Collateral Agent.
4.4.5(p) - Subsidiary Guaranty, dated as of June 12, 1997, made by Foamex
Latin America, Inc. in favor of Citicorp USA, Inc., as Collateral
Agent.
4.4.6(p) - Subsidiary Guaranty, dated as of June 12, 1997, made by Foamex
Mexico, Inc. in favor of Citicorp USA, Inc., as Collateral Agent.
4.4.7(p) - Subsidiary Guaranty, dated as of June 12, 1997, made by FCC in
favor of Citicorp USA, Inc., as Collateral Agent.
4.4.8(p) - Subsidiary Guaranty, dated as of June 12, 1997, made by Foamex
Mexico II, Inc. in favor of Citicorp USA, Inc., as Collateral Agent.
4.4.9(p) - Subsidiary Guaranty, dated as of June 12, 1997, made by Foamex
Asia, Inc. in favor of Citicorp USA, Inc., as Collateral Agent.
4.4.10(p) - Subsidiary Pledge Agreement, dated as of June 12, 1997, made by
FCC in favor of Citicorp USA, Inc., as Collateral Agent.
4.4.11(p) - Subsidiary Pledge Agreement, dated as of June 12, 1997, made by
Foamex Latin America, Inc. in favor of Citicorp USA, Inc., as
Collateral Agent.
4.4.12(p) - Subsidiary Pledge Agreement, dated as of June 12, 1997, made by
Foamex Asia, Inc. in favor of Citicorp USA, Inc., as Collateral
Agent.
28
4.4.13(p) - Subsidiary Pledge Agreement, dated as of June 12, 1997, made by
Foamex Mexico, Inc. in favor of Citicorp USA, Inc., as Collateral
Agent.
4.4.14(p) - Subsidiary Pledge Agreement, dated as of June 12, 1997, made by
Foamex Mexico II, Inc. in favor of Citicorp USA, Inc., as Collateral
Agent.
4.4.15(p) - Foamex Security Agreement, dated as of June 12, 1997, made by
Foamex L.P. in favor of Citicorp USA, Inc., as Collateral Agent.
4.4.16(p) - Subsidiary Security Agreement, dated as of June 12, 1997, made by
Foamex Latin America, Inc. in favor of Citicorp USA, Inc., as
Collateral Agent.
4.4.17(p) - Subsidiary Security Agreement, dated as of June 12, 1997, made by
Foamex Mexico, Inc. in favor of Citicorp USA, Inc., as Collateral
Agent.
4.4.18(p) - Subsidiary Security Agreement, dated as of June 12, 1997, made by
Foamex Mexico II, Inc. in favor of Citicorp USA, Inc., as Collateral
Agent.
4.4.19(p) - Subsidiary Security Agreement, dated as of June 12, 1997, made by
Foamex Asia, Inc. in favor of Citicorp USA, Inc., as Collateral
Agent.
4.4.20(p) - Subsidiary Security Agreement, dated as of June 12, 1997, made by
FCC in favor of Citicorp USA, Inc., as Collateral Agent.
4.4.21(r) - Foamex Pledge Agreement, dated as of June 12, 1997, made by Foamex
L.P. in favor of Citicorp USA, Inc., as Collateral Agent.
4.4.22(w) - First Amendment to Foamex Pledge Agreement, dated as of December
23, 1997, by Foamex L.P. in favor of Citicorp USA, Inc., as
Collateral Agent.
4.4.23(w) - First Amendment to Foamex Security Agreement, dated as of December
23, 1997, by Foamex L.P. in favor of Citicorp USA, Inc., as
Collateral Agent.
4.4.24(w) - First Amendment to Foamex Patent Agreement, dated as of December
23, 1997, by Foamex L.P. in favor of Citicorp USA, Inc., as
Collateral Agent.
4.4.25(w) - First Amendment to Trademark Security Agreement, dated as of
December 23, 1997, by Foamex L.P. in favor of Citicorp USA, Inc., as
Collateral Agent.
4.4.26(w) - Acknowledgment of Guaranty by each of the guarantors to a Guaranty
dated June 12, 1997 in favor of Citicorp USA, Inc.
4.4.27(w) - First Amendment to Pledge Agreement, dated as of December 23,
1997, by pledgors in favor of Citicorp USA, Inc.
4.4.28(w) - Crain Industries, Inc. ("Crain") Guaranty, dated as of December
23, 1997, made by Crain in favor of Citicorp USA, Inc.
4.4.29(x) - Partnership Pledge Agreement, dated as of February 27, 1998, made
by Foamex International and FMXI in favor of Citicorp USA, Inc., as
Collateral Agent.
4.4.30(bb) - Amendment No. 1 to Second Amended and Restated Foamex
International Guaranty, dated March 11, 1999.
4.4.31(bb) - Amendment No. 1 to Foamex International Guaranty, dated March 12,
1999.
4.4.32(dd) - Foamex Patent Agreement, dated as of June 12, 1997, by Foamex L.P.
in favor of Citicorp USA, Inc., as Collateral Agent.
4.4.33(dd) - Trademark Security Agreement, dated as of June 12, 1997, by Foamex
L.P. in favor of Citicorp USA, Inc., as Collateral Agent.
4.4.34(ee) - Amended and Restated Foamex Pledge Agreement, dated as of June 30,
1999 made by Foamex L.P. in favor of Citicorp U.S.A. Inc. as
Collateral Agent.
4.4.35(ee) - Amended and Restated Partnership Pledge Agreement, dated as of
June 30, 1999 by FMXI, Inc. and Foamex International Inc. in favor
of Citicorp USA Inc. as FII Intercreditor Collateral Agent.
4.5(ff) - Commitment letter, dated August 9, 1999, from The Bank of Nova
Scotia to Foamex Canada Inc.
4.6(a) - Subordinated Promissory Note, dated as of May 6, 1993, in the
original principal amount of $7,014,864 executed by Foamex L.P. to
John Rallis ("Rallis").
4.7(a) - Marely Loan Commitment Agreement, dated as of December 14, 1993,
by and between Foamex L.P. and Marely s.a. ("Marely").
4.8(a) - DLJ Loan Commitment Agreement, dated as of December 14, 1993, by
and between Foamex L.P. and DLJ Funding, Inc. ("DLJ Funding").
29
4.9.1(p) - Promissory Note, dated June 12, 1997, in the aggregate principal
amount of $5,000,000, executed by Trace Holdings to Foamex L.P.
4.9.2(p) - Promissory Note, dated June 12, 1997, in the aggregate principal
amount of $4,794,828, executed by Trace Holdings to Foamex L.P.
4.10.1(x) - Credit Agreement, dated as of February 27, 1998, by and among
Foamex Carpet, the institutions from time to time party thereto as
lenders, the institutions from time to time party thereto as issuing
banks and Citicorp USA, Inc. and The Bank of Nova Scotia, as
administrative agents.
4.10.2(x) - Foamex International Guaranty, dated as of February 27, 1998, made
by Foamex International in favor of Citicorp USA, Inc., as
Collateral Agent.
4.10.3(x) - Foamex International Pledge Agreement, dated as of February 27,
1998, made by Foamex International in favor of Citicorp USA, Inc.,
as Collateral Agent.
4.10.4(x) - New GFI Security Agreement, dated as of February 27, 1998, made by
Foamex Carpet in favor of Citicorp USA, Inc., as Collateral Agent.
4.10.5(x) - New GFI Intercreditor Agreement, dated as of February 27, 1998, by
and among Foamex Carpet, The Bank of Nova Scotia, as Administrative
Agent, and Citicorp USA, Inc., as Administrative Agent and
Collateral Agent.
4.10.6(x) - FII Intercreditor Agreement, dated as of February 27, 1998, by and
between Foamex International and Citicorp USA, Inc., as Collateral
Agent.
4.10.9(dd) - Amendment No. 1 to Foamex Carpet Credit Agreement, dated October
30, 1998.
4.10.10(bb) - Amendment No. 2 to Foamex Carpet Credit Agreement, dated March 12,
1999.
4.10.11(ee) - Foamex L.P. Credit Agreement, dated June 12, 1997, as amended and
restated as of February 27, 1998 as further amended and restated as
of June 29, 1999 among Foamex L.P., FMXI, the institutions from time
to time party thereto as lenders, the institutions from time to time
party thereto as issuing banks and Citicorp USA, Inc. and the Bank
of Nova Scotia as Administrative Agents.
4.10.12(ee) - Amendment No. 3 to Foamex Carpet Credit Agreement, dated June 30,
1999.
4.10.13(ee) - Foamex International Pledge Agreement, dated June 30, 1999, made
by Foamex International in favor of Citicorp U.S.A. Inc. as FII
Intercreditor Collateral Agent.
4.10.14 - Amendment No. 1 to Foamex L.P. Credit Agreement, dated December
23, 1999, as amended and restated as of February 27, 1998 as further
amended and restated as of June 29, 1999 among Foamex L.P., FMXI,
the institutions from time to time party thereto as lenders, the
institutions from time to time party thereto as issuing banks and
Citicorp USA, Inc. and the Bank of Nova Scotia as Administrative
Agents.
4.11.1(x) - Promissory Note of Foamex L.P. in favor of Foam Funding LLC in the
principal amount of $34 million, dated February 27, 1998.
4.12.1(x) - Promissory Note of Foamex Carpet in favor of Foam Funding LLC in
the principal amount of $70.2 million, dated February 27, 1998.
4.12.2(bb) - Amendment to Promissory Note of Foamex Carpet in favor of Foam
Funding LLC dated March 15, 1999.
4.12.3(ee) - Amendment to Promissory Note of Foamex L.P. in favor of Foam
Funding LLC dated as of June 30, 1999.
4.12.4(ee) - Amendment to Promissory Note of Foamex Carpet in favor of Foam
Funding LLC dated as of June 30, 1999.
4.13(dd) - Waiver, dated as of April 15, 1999 to the Credit Agreement, dated
as of February 27, 1998, among Foamex Carpet, the institutions party
thereto as Lenders, the institutions party thereto as Issuing Banks,
and Citicorp USA, Inc. and The Bank of Nova Scotia as Administrative
Agents.
4.13.1 - Waiver, dated as of April 15, 1999 to the Promissory Note, dated
as of February 27, 1998, payable by Foamex Carpet to Foam Funding
LLC.
4.13.2 - Waiver, dated as of May 6, 1999 to the Promissory Note, dated as
of February 27, 1998, payable by Foamex Carpet to Foam Funding LLC.
10.1.1(p) - Amendment to Master Agreement, dated as of June 5, 1997, between
Citibank, N.A. and Foamex L.P.
10.1.2(p) - Amended Confirmation, dated as of June 13, 1997, between Citibank,
N.A. and Foamex L.P.
30
10.1.3(w) - Amended Confirmation, dated as of February 2, 1998, between
Citibank, N.A. and Foamex L.P.
10.2(h) - Reimbursement Agreement, dated as of March 23, 1993, between Trace
Holdings and General Felt.
10.3(h) - Shareholder Agreement, dated December 31, 1992, among Recticel,
s.a. ("Recticel"), Recticel Holding Noord B.V., Foamex L.P., Beamech
Group Limited, LME-Beamech, Inc., James Brian Blackwell, and Prefoam
AG relating to a foam technology-sharing arrangement.
10.4.1(k) - Asset Transfer Agreement, dated as of October 2, 1990, between
Trace Holdings and Foamex L.P. (the "Trace Holdings Asset Transfer
Agreement").
10.4.2(k) - First Amendment, dated as of December 19, 1991, to the Trace
Holdings Asset Transfer Agreement.
10.4.3(k) - Amended and Restated Guaranty, dated as of December 19, 1991, made
by Trace Foam in favor of Foamex L.P.
10.5.1(k) - Asset Transfer Agreement, dated as of October 2, 1990, between
Recticel Foam Corporation ("RFC") and Foamex L.P. (the "RFC Asset
Transfer Agreement").
10.5.2(k) - First Amendment, dated as of December 19, 1991, to the RFC Asset
Transfer Agreement.
10.5.3(k) - Schedule 5.03 to the RFC Asset Transfer Agreement (the "5.03
Protocol").
10.5.4(h) - The 5.03 Protocol Assumption Agreement, dated as of October 13,
1992, between RFC and Foamex L.P.
10.5.5(h) - Letter Agreement between Trace Holdings and Recticel regarding the
Recticel Guaranty, dated as of July 22, 1992.
10.6(l) - Supply Agreement, dated June 28, 1994, between Foamex L.P. and
Foamex International.
10.7.1(l) - First Amended and Restated Tax Sharing Agreement, dated as of
December 14, 1993, among Foamex L.P., Trace Foam, FMXI and Foamex
International.
10.7.2(d) - First Amendment to First Amended and Restated Tax Sharing
Agreement, dated as of June 12, 1997, by and among Foamex L.P.,
Foamex International, FMXI and Trace Foam.
10.7.3(w) - Second Amendment to First Amended and Restated Tax Sharing
Agreement, dated as of December 23, 1997, by and among Foamex L.P.,
Foamex International, FMXI, and Trace Foam.
10.7.4(y) - Third Amendment to First Amended and Restated Tax Sharing
Agreement, dated as of February 27, 1998, by and between Foamex
L.P., Foamex International and FMXI.
10.8.1(m) - Tax Distribution Advance Agreement, dated as of December 11, 1996,
by and between Foamex L.P. and Foamex-JPS Automotive L.P.
10.8.2(d) - Amendment No. 1 to Tax Distribution Advance Agreement, dated as of
June 12, 1997, by and between Foamex L.P. and Foamex International.
10.9.1(h) - Trace Foam Management Agreement between Foamex L.P. and Trace
Foam, dated as of October 13, 1992.
10.9.2(l) - Affirmation Agreement re: Management Agreement, dated as of
December 14, 1993, between Foamex L.P. and Trace Foam.
10.9.3(d) - First Amendment to Management Agreement, dated as of June 12,
1997, by and between Foamex L.P. and Trace Foam.
10.10.1(k) - Salaried Incentive Plan of Foamex L.P. and Subsidiaries.
10.10.2(k) - Trace Holdings 1987 Nonqualified Stock Option Plan.
10.10.3(k) - Equity Growth Participation Program.
10.10.4(o) - The Foamex L.P. Salaried Pension Plan (formerly, "The General Felt
Industries, Inc. Retirement Plan for Salaried Employees"), effective
as of January 1, 1995.
10.10.5(u) - The Foamex L.P. Hourly Pension Plan (formerly "The Foamex Products
Inc. Hourly Employee Retirement Plan"), as amended December 31,
1995.
10.10.6(u) - Foamex L.P. 401(k) Savings Plan effective October 1, 1997.
10.10.7(a) - Foamex International's 1993 Stock Option Plan.
10.10.8(a) - Foamex International's Non-Employee Director Compensation Plan.
10.11.1(o) - Employment Agreement, dated as of February 1, 1994, by and between
Foamex L.P. and William H. Bundy.
10.11.2(dd) - Employment Agreement, dated as of March 16, 1999, by and between
Foamex International and John G. Johnson, Jr.
31
10.11.3 - Employment Agreement, dated as of March 16, 1999, by and between
Foamex International and John Televantos.
10.12.1(a) - Warrant Exchange Agreement, dated as of December 14, 1993, by and
between Foamex L.P. and Marely.
10.12.2(a) - Warrant Exchange Agreement, dated as of December 14, 1993, by and
between Foamex L.P. and DLJ Funding.
10.13(t) - Warrant Agreement, dated as of June 28, 1994, by and between
Foamex International and Shawmut Bank.
10.14(o) - Stock Purchase Agreement, dated as of December 23, 1993, by and
between Transformacion de Espumas u Fieltros, S.A., the stockholders
which are parties thereto, and Foamex L.P.
10.15.1(r) - Asset Purchase Agreement, dated as of August 29, 1997, by and
among General Felt, Foamex L.P., Bretlin, Inc. and The Dixie Group.
10.15.2(s) - Addendum to Asset Purchase Agreement, dated as of October 1, 1997,
by and among General Felt, Foamex L.P., Bretlin, Inc. and The Dixie
Group.
10.16.1(x) - Supply Agreement, dated as of February 27, 1998, by and between
Foamex L.P. and General Felt (as assigned to Foamex Carpet).
10.16.2(x) - Administrative Services Agreement, dated as of February 27, 1998,
by and between Foamex L.P. and General Felt (as assigned to Foamex
Carpet).
10.17(y) - Tax Sharing Agreement, dated as of February 27, 1998, between
Foamex International and Foamex Carpet.
10.18.1(w) - Joint Venture Agreement between Hua Kee Company Limited and Foamex
Asia, Inc., dated as of July 8, 1997.
10.18.2(w) - Loan Agreement between Hua Kee Company Limited and Foamex Asia,
Inc., dated as of July 8, 1997.
21 - Subsidiaries of registrant.
23 - Consent of Independent Accountants, PricewaterhouseCoopers LLP.
27 - Financial Data Schedule for the year ended December 31, 1999.
- ----------------------------
(a) Incorporated herein by reference to the Exhibit to Foamex L.P.'s
Registration Statement on Form S-1, Registration No. 33-69606.
(b) Incorporated herein by reference to the Exhibit to the Annual Report on
Form 10-K of Foamex International for the fiscal year ended January 1,
1995.
(c) Incorporated herein by reference to the Exhibit to the Current Report on
Form 8-K of Foamex International reporting an event that occurred May 28,
1997.
(d) Incorporated herein by reference to the Exhibit to the Current Report on
Form 8-K of Foamex International reporting an event that occurred June 12,
1997.
(e) Incorporated herein by reference to the Exhibit to the Registration
Statement of Foamex L.P. and FCC on Form S-4, Registration No. 33-65158.
(f) Incorporated herein by reference to the Exhibit to the Form 10-Q of Foamex
International for the quarterly period ended June 30, 1996.
(g) Incorporated herein by reference to the Exhibit to the Registration
Statement of Foamex L.P., FCC and General Felt on Form S-1, Registration
Nos. 33-60888, 33-60888-01, and 33-60888-02.
(h) Incorporated herein by reference to the Exhibit to the Annual Report on
Form 10-K Statement of Foamex L.P. and FCC for fiscal 1992.
32
(i) Incorporated herein by reference to the Exhibit to the Annual Report on
Form 10-K of Foamex L.P. for fiscal 1994.
(j) Incorporated herein by reference to the Exhibit to the Form 10-Q of Foamex
for the quarterly period ended September 30, 1996.
(k) Incorporated herein by reference to the Exhibit to the Registration
Statement of Foamex L.P. and FCC on Form S-1, Registration Nos. 33-49976
and 33-49976-01.
(l) Incorporated herein by reference to the Exhibit to the Registration
Statement of FJPS, FJCC and Foamex L.P. on Form S-4, Registration No.
33-82028.
(m) Incorporated herein by reference to the Exhibit to the Annual Report on
Form 10-K of Foamex International for the fiscal year ended December 29,
1996.
(n) Incorporated herein by reference to the Exhibit to the Form 10-Q of Foamex
International for the quarterly period ended July 2, 1995.
(o) Incorporated herein by reference to the Exhibit to the Annual Report on
Form 10-K of Foamex L.P. for fiscal 1993.
(p) Incorporated herein by reference to the Exhibit in the Registration
Statement of Foamex International on Form S-4, Registration No. 333-30291.
(q) Incorporated herein by reference to the Exhibit to the Annual Report on
Form 10-K of Foamex L.P. for the fiscal year ended December 31, 1995.
(r) Incorporated herein by reference to the Current Report on Form 8-K of
Foamex L.P. reporting an event that occurred on August 29, 1997.
(s) Incorporated herein by reference to the Current Report on Form 8-K of
Foamex L.P. reporting an event that occurred on October 6, 1997.
(t) Incorporated by reference to the Exhibit to the Form 10-Q of Foamex
International for the quarterly period ended July 3, 1994.
(u) Incorporated by reference to the Exhibit to the Form 10-Q of Foamex L.P.
for the quarterly period ended September 28, 1997.
(v) Incorporated herein by reference to the Exhibit to the Current Report on
Form 8-K of Foamex L.P., FCC and Foamex International reporting an event
that occurred December 23, 1997.
(w) Incorporated herein by reference to the Exhibit in the Registration
Statement of Foamex L.P. and FCC on Form S-4, Registration No. 333-45733,
filed February 6, 1998.
(x) Incorporated herein by reference to the Current Report on Form 8-K of
Foamex International reporting an event that occurred on February 27, 1998.
(y) Incorporated herein by reference to the Exhibit to the Annual Report on
Form 10-K of Foamex International for the fiscal year ended December 28,
1997.
(z) Incorporated herein by reference to the Current Report on Form 8-K of
Foamex International reporting an event that occurred on November 5, 1998.
33
(aa) Incorporated herein by reference to the Exhibit to the Current Report on
Form 8-K of Foamex International reporting an event that occurred on June
25, 1998.
(bb) Incorporated herein by reference to the Exhibit to the Current Report on
Form 8-K of Foamex International reporting an event that occurred on March
11, 1999.
(cc) Incorporated herein by reference to the Exhibit in the Registration
Statement of Foamex L.P. and FCC on Form S-4/A, Registration No. 333-45733,
filed May 11, 1998.
(dd) Incorporated herein by reference to the Exhibit to the Annual Report on
Form 10-K of Foamex International Inc. for the fiscal year ended December
31, 1998.
(ee) Incorporated herein by reference to the Exhibit to the Current Report on
Form 8-K of Foamex International Inc. reporting an event that occurred on
June 30, 1999.
(ff) Incorporated herein by reference to the Exhibit to the Form 10-Q of Foamex
International for the quarterly period ended September 30, 1999.
Certain instruments defining the rights of security holders have been
excluded herefrom in accordance with Item 601(b)(4)(iii) of Regulation S-K. The
registrant hereby agrees to furnish a copy of any such instrument to the
Commission upon request.
34
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized as of the 17th day of
March 2000.
FOAMEX INTERNATIONAL INC.
By: /s/ John G. Johnson, Jr.
------------------------
Name: John G. Johnson, Jr.
Title: President and Chief Executive Officer
By: /s/ David J. Prilutski
Name: David J. Prilutski
Title: Senior Vice President, Planning
and Acting Chief Financial Officer
By: /s/ Robert S. Graham, Jr.
-------------------------
Name: Robert S. Graham, Jr.
Title: Senior Vice President, Corporate
Controller and Chief Accounting
Officer
35
SIGNATURES
(continued)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on its behalf by the
registrant and in the capacities and on the dates indicated:
Signature Title Date
/s/ Marshall S. Cogan Chairman of the Board March 17, 2000
- -------------------------
Marshall S. Cogan
/s/ Robert J. Hay Chairman Emeritus March 17, 2000
- ---------------------------- and Director
Robert J. Hay
/s/ John G. Johnson, Jr. President, Chief Executive March 17, 2000
- ------------------------- Officer and Director
John G. Johnson, Jr.
/s/ Etienne Davignon Director March 17, 2000
- --------------------------
Etienne Davignon
/s/ John H. Gutfreund Director March 17, 2000
- --------------------------
John H. Gutfreund
/s/ Stuart J. Hershon Director March 17, 2000
- ----------------------------
Stuart J. Hershon
/s/ John V. Tunney Director March 17, 2000
- ---------------------------
John V. Tunney
36
FOAMEX INTERNATIONAL INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Foamex International Inc.
Index to Consolidated Financial Statements F-1
Report of Independent Accountants F-2
Consolidated Balance Sheets as of December 31, 1999 and 1998 F-3
Consolidated Statements of Operations for the years 1999, 1998 and 1997 F-5
Consolidated Statements of Cash Flows for the years 1999, 1998 and 1997 F-6
Consolidated Statements of Stockholders' Equity (Deficit) for the years 1999,
1998 and 1997 F-7
Notes to Consolidated Financial Statements F-8
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of Foamex International Inc.:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of stockholders' equity (deficit) and of
cash flows present fairly, in all material respects, the financial position of
Foamex International Inc. and its subsidiaries (the "Company") at December 31,
1999 and 1998 and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 1999 in conformity with
accounting principles generally accepted in the United States. In addition, in
our opinion, the financial statement schedules as of and for each of the three
years in the period ended December 31, 1999 when considered in relation to the
basic consolidated financial statements taken as a whole, present fairly, in all
material respects, the information required to be included therein. These
financial statements and financial statement schedules are the responsibility of
the Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As discussed in Note 1 to the accompanying
financial statements, on July 21, 1999, Trace International Holdings, Inc.
("Trace"), a major stockholder of the Company, filed a petition for relief under
Chapter 11 of the Bankruptcy Code. On January 24, 2000, an order was signed
converting the Trace case from Chapter 11 to Chapter 7 of the Bankruptcy Code. A
trustee was appointed to oversee the liquidation of Trace's assets. The outcome
of the Trace bankruptcy could result in the acceleration of substantially all of
the Company's debt. This matter raises substantial doubt about the Company's
ability to continue as a going concern. Management's plans in regard to this
matter are described in Note 1 to the accompanying financial statements. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
The selected quarterly financial data in Note 21 contains information that we
did not audit, and accordingly, we do not express an opinion on that data. We
attempted but were unable to review the quarterly data within the year ended
December 31, 1998 in accordance with standards established by the American
Institute of Certified Public Accountants because we believe that the Company's
internal control for the preparation of interim financial information did not
provide an adequate basis to enable us to complete such reviews.
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
March 10, 2000
F-2
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, December 31,
ASSETS 1999 1998
(thousands)
CURRENT ASSETS
Cash and cash equivalents $ 6,577 $ 12,572
Accounts receivable, net of allowance for doubtful
accounts and discounts of $9,549 and $11,630 166,571 185,158
Inventories 97,882 136,658
Deferred income taxes 60 --
Other current assets 23,602 29,446
--------- ---------
Total current assets 294,692 363,834
--------- ---------
PROPERTY, PLANT AND EQUIPMENT
Land and land improvements 6,947 7,142
Buildings and leasehold improvements 98,939 98,670
Machinery, equipment and furnishings 264,241 256,061
Construction in progress 14,851 25,000
--------- ---------
Total 384,978 386,873
Less accumulated depreciation and amortization (163,145) (144,700)
--------- ---------
Property, plant and equipment, net 221,833 242,173
COST IN EXCESS OF ASSETS ACQUIRED, net of
accumulated amortization of $23,252 in 1999 and
$17,131 in 1998 215,258 220,934
DEBT ISSUANCE COSTS, net of
accumulated amortization of $6,791 in 1999 and
$3,038 in 1998 18,966 14,852
DEFERRED INCOME TAXES 285 --
OTHER ASSETS 30,279 33,172
--------- ---------
TOTAL ASSETS $ 781,313 $ 874,965
========= =========
The accompanying notes are an integral part of the
consolidated financial statements.
F-3
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) 1999 1998
(thousands except share data)
CURRENT LIABILITIES
Short-term borrowings $ 1,627 $ 2,957
Current portion of long-term debt 7,866 690,248
Current portion of long-term debt - related party 10,530 98,935
Accounts payable 86,576 149,268
Accrued employee compensation and benefits 17,878 13,886
Accrued interest 9,741 7,851
Accrued restructuring and plant consolidation 5,266 2,947
Accrued customer rebates 22,823 15,993
Other accrued liabilities 23,519 37,270
Deferred income taxes 3,220 2,074
----------- -----------
Total current liabilities 189,046 1,021,429
LONG-TERM DEBT 646,544 8,240
LONG-TERM DEBT - RELATED PARTY 78,753 --
ACCRUED EMPLOYEE BENEFITS 14,901 28,189
DEFERRED INCOME TAXES 997 991
ACCRUED RESTRUCTURING AND
PLANT CONSOLIDATION 7,533 9,003
OTHER LIABILITIES 9,920 11,232
----------- -----------
Total liabilities 947,694 1,079,084
----------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT) Preferred Stock, par value $1.00 per share:
Authorized 5,000,000 shares - none issued -- --
Common Stock, par value $.01 per share:
Authorized 50,000,000 shares
Issued 27,045,480 and 27,005,752 shares, respectively;
Outstanding 25,056,480 and 25,016,752 shares, respectively 270 270
Additional paid-in capital 87,475 86,990
Accumulated deficit (217,945) (237,661)
Accumulated other comprehensive income (loss) (7,758) (24,721)
Other:
Common Stock held in treasury, at cost:
1,989,000 shares (19,202) (19,202)
Shareholder note receivable (9,221) (9,795)
----------- -----------
Total stockholders' equity (deficit) (166,381) (204,119)
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 781,313 $ 874,965
=========== ===========
The accompanying notes are an integral part of the consolidated
financial statements.
F-4
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years 1999, 1998 and 1997
1999 1998 1997
----------- ----------- -----------
(thousands except per share amounts)
NET SALES $ 1,279,993 $ 1,246,396 $ 931,095
COST OF GOODS SOLD 1,099,685 1,091,891 787,756
----------- ----------- -----------
GROSS PROFIT 180,308 154,505 143,339
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 76,247 89,171 67,139
RESTRUCTURING AND OTHER CHARGES (CREDITS) 10,491 (9,698) 21,100
----------- ----------- -----------
INCOME FROM OPERATIONS 93,570 75,032 55,100
INTEREST AND DEBT ISSUANCE EXPENSE 72,908 72,295 50,570
OTHER INCOME (EXPENSE), NET 1,516 (14,348) 2,126
----------- ----------- -----------
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE PROVISION FOR INCOME TAXES 22,178 (11,611) 6,656
PROVISION FOR INCOME TAXES 2,462 58,242 2,525
----------- ----------- -----------
INCOME (LOSS) FROM CONTINUING OPERATIONS 19,716 (69,853) 4,131
----------- ----------- -----------
LOSS ON DISPOSAL OF DISCONTINUED OPERATIONS,
NET OF INCOME TAXES -- -- (1,994)
----------- ----------- -----------
INCOME (LOSS) BEFORE EXTRAORDINARY LOSS 19,716 (69,853) 2,137
EXTRAORDINARY LOSS ON EARLY EXTINGUISHMENT
OF DEBT, NET OF INCOME TAXES -- (1,917) (44,482)
----------- ----------- -----------
NET INCOME (LOSS) $ 19,716 $ (71,770) $ (42,345)
=========== =========== ===========
BASIC EARNINGS (LOSS) PER SHARE
CONTINUING OPERATIONS $ 0.79 $ (2.79) $ 0.16
=========== =========== ===========
NET EARNINGS (LOSS) $ 0.79 $ (2.87) $ (1.68)
=========== =========== ===========
DILUTED EARNINGS (LOSS) PER SHARE
CONTINUING OPERATIONS $ 0.78 $ (2.79) $ 0.16
=========== =========== ===========
NET EARNINGS (LOSS) $ 0.78 $ (2.87) $ (1.65)
=========== =========== ===========
The accompanying notes are an integral part of the consolidated
financial statements.
F-5
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years 1999, 1998 and 1997
1999 1998 1997
--------- --------- ---------
OPERATING ACTIVITIES (thousands)
Net income (loss) $ 19,716 $ (71,770) $ (42,345)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 35,750 35,385 22,047
Amortization of debt issuance costs, debt premium, deferred
swap adjustment and gain, and debt discount 1,315 (100) 7,783
Asset writedowns and other charges (credits) 314 (7,972) 12,041
Provision for uncollectible accounts 2,758 2,611 2,295
Deferred income taxes 807 54,178 (1,179)
Net loss on disposal of discontinued operations -- -- 1,994
Other, net (3,407) (4,056) (5,195)
Changes in operating assets and liabilities,
net of acquisitions and discontinued operations:
Accounts receivable 15,829 (12,085) (4,037)
Inventories 38,776 (20,809) 12,882
Accounts payable (62,692) 17,579 12,733
Accrued restructuring and plant consolidation charges 849 (14,946) 5,701
Other assets and liabilities 8,704 8,059 (24,342)
--------- --------- ---------
Net cash provided by (used for) operating activities 58,719 (13,926) 378
--------- --------- ---------
INVESTING ACTIVITIES
Capital expenditures (20,080) (33,701) (33,537)
Proceeds from sale of assets 17,823 2,230 40,169
Acquisitions, net of cash acquired -- -- (119,065)
Settlement of discontinued operations -- -- (13,556)
Purchase of note from related party -- -- (5,000)
Decrease in restricted cash -- -- 12,143
Other investing activities 599 (1,290) (1,888)
--------- --------- ---------
Net cash used for investing activities (1,658) (32,761) (120,734)
--------- --------- ---------
FINANCING ACTIVITIES
Net proceeds from (repayments of) short-term borrowings (1,330) (3,641) 2,894
Net proceeds from (repayments of) revolving loans (25,753) 84,511 54,928
Proceeds from long-term debt -- 138,810 594,499
Repayments of long-term debt (17,281) (143,047) (517,549)
Repayments of long-term debt-related party (9,652) (5,265) --
Increase (decrease) in cash overdrafts (1,444) 7,300 --
Debt issuance costs (7,866) (2,029) (18,410)
GFI transaction costs -- (5,229) --
GFI transaction payments of accounts payable -- (4,800) --
GFI transaction purchase of assets -- (20,000) --
Purchase of treasury stock -- -- (5,739)
Payment of dividends -- (1,245) --
Other financing activities 270 1,850 (426)
--------- --------- ---------
Net cash provided by (used for) financing activities (63,056) 47,215 110,197
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents (5,995) 528 (10,159)
Cash and cash equivalents at beginning of period 12,572 12,044 22,203
--------- --------- ---------
Cash and cash equivalents at end of period $ 6,577 $ 12,572 $ 12,044
========= ========= =========
The accompanying notes are an integral part of the consolidated
financial statements.
F-6
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
For the Years 1999, 1998 and 1997
Accumulated
Additional Other
Common Stock Paid-in (Accumulated Comprehensive
Shares Amount Capital Deficit) Income (Loss) Other Total
(thousands)
Balances at December 29, 1996 26,753 $267 $84,579 $(120,174) $(4,939) $(17,836) $(58,103)
Net loss (42,345) (42,345)
Minimum pension liability adjustment (786) (786)
Foreign currency translation adjustment (873) (873)
----------
Comprehensive income (loss) (44,004)
Issuance of common stock 10 - 161 161
Stock option compensation 282 282
Stock options exercised 145 2 1,003 1,005
Purchase of treasury stock (5,739) (5,739)
Increase in note receivable from
principal stockholder (5,422) (5,422)
Distribution to principal stockholder (1,599) (1,599)
------ ---- ------- --------- --------- -------- ---------
Balances at December 28, 1997 26,908 269 86,025 (164,118) (6,598) (28,997) (113,419)
Net loss (71,770) (71,770)
Minimum pension liability adjustment (11,525) (11,525)
Foreign currency translation adjustment (6,598) (6,598)
---------
Comprehensive income (loss) (89,893)
Issuance of common stock 15 163 163
Stock option compensation 208 208
Stock options exercised 83 1 594 595
Cash dividend (1,245) (1,245)
Other (528) (528)
------ ---- ------- --------- --------- -------- ---------
Balances at December 31, 1998 27,006 270 86,990 (237,661) (24,721) (28,997) (204,119)
Net income 19,716 19,716
Minimum pension liability adjustment 12,009 12,009
Foreign currency translation adjustment 4,954 4,954
----------
Comprehensive income (loss) 36,679
Stock option compensation 215 215
Stock options exercised 39 - 270 270
Other 574 574
------ ---- ------- --------- --------- -------- ---------
Balances at December 31, 1999 27,045 $270 $87,475 $(217,945) $ (7,758) $(28,423) $(166,381)
====== ==== ======= ========= ========= ======== =========
The accompanying notes are an integral part of the consolidated
financial statements.
F-7
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION
Organization
Foamex International Inc. (the "Company") operates in the flexible
polyurethane and advanced polymer foam products industry. As of December 31,
1999, the Company's operations are primarily conducted through its wholly owned
subsidiaries, Foamex L.P. and Foamex Carpet Cushion, Inc. ("Foamex Carpet").
Financial information concerning the business segments of the Company is
included in Note 16.
Change in Control
Trace International Holdings, Inc. ("Trace") is a privately held company,
which owned approximately 29% of the Company's outstanding voting common stock
at March 10, 2000, and whose former Chairman also serves as the Company's
Chairman. The Company's common stock owned by Trace is pledged as collateral
against certain of Trace's obligations. Certain credit agreements and promissory
notes of the Company's subsidiaries, pursuant to which approximately $467.1
million of debt was outstanding as of December 31, 1999, provide that a "change
of control" would be an event of default and could result in the acceleration of
such indebtedness. "Change of control" means, for this purpose, that (i) a
person or related group, other than Trace, beneficially owns more than 25% of
the Company's outstanding voting stock and (ii) such voting stock constitutes a
greater percentage of such voting stock than the amount beneficially owned by
Trace. Additionally, certain indentures of Foamex L.P. and Foamex Capital
Corporation ("FCC") relating to senior subordinated notes of $248.0 million
contain similar "change of control" provisions, which require the issuers to
tender for such notes at a price in cash equal to 101% of the aggregate
principal amount thereof, plus accrued and unpaid interest thereon, if there is
such a "change of control".
On July 21, 1999, the Company was informed by Trace that it filed a
petition for relief under Chapter 11 of the Bankruptcy Code in Federal Court in
New York City. Subsequently, on January 24, 2000, an order was signed converting
the Trace bankruptcy from Chapter 11 to Chapter 7 of the Bankruptcy Code. A
trustee was appointed to oversee the liquidation of Trace's assets. Neither
Trace's bankruptcy filing nor the conversion to Chapter 7 constituted a "change
of control" under the provisions of the debt agreements described above. A
"change of control" could take place however, if the bankruptcy court allows
Trace's creditors to foreclose on and take ownership of the Company's common
stock owned by Trace, or otherwise authorizes a sale or transfer of these
shares, under circumstances in which a person or related group, other than
Trace, acquired more than 25% of the Company's outstanding voting stock and
owned a greater percentage of such voting stock than the amount beneficially
owned by Trace. On November 22, 1999, the bankruptcy court allowed two creditors
to take ownership of 11% and 6%, respectively, of the Company's common stock.
Such an event did not constitute a "change of control" under the provisions of
the debt agreements.
Management believes that it is unlikely that a "change of control" will
occur as a result of Trace's bankruptcy proceedings. However, the Company would
seek to resolve the issues that may arise should the "change of control"
provisions be triggered, by requesting waivers of such provisions and/or
refinancing certain debt, if necessary. There can be no assurance that the
Company or its subsidiaries will be able to do so, or that the Company will be
able to obtain waivers of such provisions. Such circumstances raise substantial
doubt about the Company's ability to continue as a going concern. The
accompanying financial statements were prepared on a going-concern basis and do
not include any adjustments that might result from the outcome of the Trace
bankruptcy filing.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation
The consolidated financial statements include the accounts of the Company
and all majority-owned subsidiaries where control exists. Investments in
affiliates with 20% or greater ownership are accounted for using the equity
method. All significant intercompany accounts and transactions have been
eliminated in consolidation.
F-8
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Reporting Period
Effective September 1998, the annual reporting period was changed from a
52 or 53 week fiscal year ending on the Sunday closest to the end of the
calendar year to a calendar year ending on December 31. This change was
effective for the third fiscal quarter of 1998, which ended on September 30,
1998. Fiscal year 1997 was a 52 week period that ended on December 28, 1997.
Accounting 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 and contingency disclosures. Actual
results could differ from those estimates.
Revenue Recognition, Discounts and Rebates
Revenue from sales, net of discounts and estimated returns, allowances
and rebates, is recognized when products are shipped at which time title passes
to the customer.
Cash Equivalents
Highly liquid investments with an original maturity of three months or
less when purchased are recognized as cash equivalents. On December 31, 1998,
cash and cash equivalents included $9.3 million of repurchase agreements
collateralized by U.S. Government securities. There were no investments in
repurchase agreements at December 31, 1999.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined
on a first-in, first-out basis.
Property, Plant and Equipment
Property, plant and equipment are stated at cost and are depreciated
using the straight-line method over the estimated useful lives of the assets.
The range of useful lives estimated for buildings is generally 20 to 35 years,
and the range for machinery, equipment and furnishings is 5 to 12 years.
Leasehold improvements are amortized over the shorter of the terms of the
respective leases or the estimated useful lives of the leasehold improvements.
Depreciation expense for 1999, 1998 and 1997 was $27.9 million, $27.3 million
and $18.8 million, respectively.
Maintenance and repairs are charged to expense as incurred. Renewals and
major improvements are capitalized. When assets are retired or otherwise
disposed of, the asset and related accumulated depreciation are removed from the
accounts and any gain or loss is recognized in operations.
Debt Issuance Costs
Debt issuance costs consist of amounts incurred in obtaining long-term
financing and are disclosed in the financing activities section of the
consolidated statements of cash flows. These costs are being amortized over the
term of the related debt using the effective interest method.
Cost in Excess of Net Assets Acquired
The excess of the acquisition cost over the fair value of net assets
acquired in business combinations accounted for as purchases is amortized using
the straight-line method over 40 years. At each balance sheet date, the Company
evaluates the recoverability of cost in excess of net assets acquired using
certain financial indicators such
F-9
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
as historical and future ability to generate income and cash flows from
operations based on a going concern basis. If an impairment loss has occurred,
based on expected future (undiscounted) cash flows, the loss is recognized in
the income statement. During 1998, a $2.3 million impairment charge was recorded
associated with the cost in excess of net assets acquired related with a foreign
facility.
Environmental Remediation
Environmental expenditures that relate to current operations are expensed
or capitalized as appropriate. Expenditures that relate to an existing condition
caused by past operations, and which do not contribute to current or future
revenue generation, are expensed. Liabilities are recorded when environmental
assessments and/or remedial efforts are probable and the costs can be reasonably
estimated.
Comprehensive Income
Other comprehensive income or loss items are revenues, expenses, gains
and losses that under generally accepted accounting principles are excluded from
net income and reflected as a component of equity, such as currency translation
and minimum pension liability adjustments.
Foreign Currency Translation
The financial statements of foreign subsidiaries, except in countries
that are considered as highly inflationary as discussed below, have been
translated into U.S. dollars by using the year-end exchange rates for the assets
and liabilities and the average exchange rates for the statements of operations.
Currency translation adjustments are included in other stockholders' equity
(deficit). In 1998 and 1997, Mexico was considered a highly inflationary
economy. Accordingly, certain financial statement amounts for the Mexican
operations were translated at either current or historical exchange rates, as
appropriate. These translation adjustments were reflected in the results of
operations. Transaction gains (losses) are reflected in operations and are
insignificant. The effect of foreign currency exchange rates on cash flows is
insignificant.
Start-Up Costs
Costs incurred in the start-up of a facility, including training and
production testing, are expensed as incurred.
Interest Rate Swap Agreement
The differential to be paid or received under an interest rate swap
agreement is recognized as an adjustment to interest and debt issuance expense
in the current period as interest rates change.
Income Taxes
Income taxes are accounted for under the asset and liability method.
Under this method, deferred income taxes are provided for temporary differences
between the financial reporting and income tax basis of assets and liabilities
using the income tax rates, under existing legislation, expected to be in effect
at the date such temporary differences are expected to reverse. Deferred income
tax assets are reduced by a valuation allowance when it is considered more
likely than not that a portion of the deferred income tax assets will not be
realized in a future period. The estimates utilized in the recognition of
deferred income tax assets are subject to revision in future periods.
Reclassifications
Certain amounts have been reclassified to conform with the current year's
presentation.
F-10
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Future Accounting Changes
Statement of Financial Accounting Standards No. 133, Accounting for
Derivative Instruments and Hedging Activities ("SFAS No. 133") will require the
fair value of derivatives be recognized in the consolidated balance sheets.
Changes in the fair value of derivatives will be recognized in earnings or in
other comprehensive income, essentially depending on the structure and purpose
of the derivatives. The statement will be effective (as amended by SFAS No. 137)
for all quarters of all fiscal years beginning after June 15, 2000. The Company
has not determined the impact, if any, that the adoption of SFAS No. 133 will
have on results of operations or financial position.
3. ACQUISITIONS, ASSET SALES AND DISCONTINUED OPERATIONS
Acquisitions
On December 23, 1997, the Company acquired Crain Industries, Inc.
("Crain") pursuant to a merger agreement with Crain Holdings Corp. (the "Crain
Acquisition") for a purchase price of approximately $213.7 million. The Crain
Acquisition was primarily funded with borrowings under a Foamex L.P. credit
facility and the assumption of debt with a face value of approximately $98.6
million and an estimated fair value of approximately $112.3 million. In
addition, fees and expenses associated with the Crain Acquisition were
approximately $13.2 million.
The Crain Acquisition was accounted for as a purchase and the results of
Crain were included from the acquisition date, except the results from December
24, 1997 to December 28, 1997 were not included in the consolidated statements
of operations or cash flows for 1997 since the effect would be insignificant.
The cost of the Crain Acquisition has been allocated on the basis of the fair
value of the assets acquired and the liabilities assumed. During 1998, the
Company increased the cost in excess of the net assets acquired by approximately
$11.2 million as a result of the finalization of the fixed asset appraisal and
updated estimates of closing certain former Crain facilities. The excess of the
purchase price over the estimated fair value of the net assets acquired of
$164.2 million is being amortized using the straight-line method over 40 years.
In connection with the Crain Acquisition, the Company approved a
consolidation plan to integrate the acquired Crain facilities into the Company's
existing facilities. The Company recorded, after changes in estimates,
approximately $2.7 million of severance and related costs and $13.7 million for
costs associated with the shut down of certain acquired facilities. These
liabilities were established in purchase accounting (see Note 4).
Asset Sales
On March 31, 1999, the Company sold its corporate airplane for $16.3
million and recorded a gain of approximately $4.2 million. The gain was recorded
in other income (expense) in the consolidated statements of operations. Debt
associated with the airplane of $8.9 million was repaid with a portion of the
proceeds.
The sale of the airplane resulted in an obligation to Trace of
approximately $0.6 million. Under the terms of the aircraft acquisition
agreement with Trace, the Company was obligated to share the net proceeds in
excess of a specified amount defined in the agreement. The obligation was offset
against Trace's two promissory notes payable to Foamex L.P., discussed in Note
18, at Trace's request.
On October 6, 1997, the Company sold substantially all of the net assets
of its needlepunch carpeting, tufted carpeting and artificial grass products
business located at its facilities in Dalton, Georgia to Bretlin, Inc. for an
aggregate sale price of approximately $41.0 million. The Company realized an
insignificant gain on the sale in 1997. The Company used $38.8 million of the
net sale proceeds to repay term loan borrowings under a credit facility. In
connection with this repayment, an extraordinary loss was recognized as
discussed in Note 9.
F-9
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. ACQUISITIONS, ASSET SALES AND DISCONTINUED OPERATIONS (continued)
Discontinued Operations
In 1997, a loss of $2.0 million was recorded (net of income taxes) that
related to the post-closing settlement regarding discontinued operations
recognized in 1996.
4. RESTRUCTURING AND OTHER CHARGES (CREDITS)
1997
During 1997, net restructuring and other charges (credits) of $21.1
million were recorded. In connection with the Crain Acquisition discussed in
Note 3, a restructuring plan (the "1997 restructuring plan") to consolidate nine
foam production, fabrication or branch locations was approved in December 1997.
The consolidation of foam production, fabrication or branch locations resulted
in a restructuring provision that totaled $23.0 million. Included in the
provision was $12.1 million for fixed assets write downs (net of estimated sale
proceeds), $9.8 million for plant closure and operating lease obligations and
$1.1 million for personnel reductions. A $1.9 million favorable adjustment to
prior year restructuring plans was also recorded in 1997.
1998
Based on business developments during 1998, the Company decided not to
close two facilities originally identified for closure in the 1997 restructuring
plan. One facility remained open to fill lost capacity resulting from a fire in
April 1998 at the Orlando, Florida facility, which returned to full operations
during 1999. The other facility remained open during 1998 due to improved demand
on the West Coast. The 1997 restructuring plan also included the closure of two
facilities associated with the Company's packaging business. During 1998, the
Company modified the plan, and decided to sell the packaging business and did
not expect to incur the asset write-down and lease costs as originally planned.
As a result, the Company recorded a $15.1 million restructuring adjustment
associated with the 1997 restructuring plan. The components of the $15.1 million
restructuring adjustment included: $10.2 million for fixed asset write-downs,
$3.8 million for plant closure and operating lease obligations and $1.1 million
for personnel reductions.
In addition, the Company recorded restructuring and other charges
(credits) of $5.4 million during 1998 to reserve for approximately $3.1 million
of net receivables due from Trace and to write-down approximately $2.3 million
of impaired cost in excess of net assets acquired associated with a foreign
facility. Also during 1998, the Company incurred additional plant closure costs
of $5.2 million and personnel reduction costs of $1.2 million associated with
the closure of the former Crain facilities. The additional costs associated with
the closure of the former Crain facilities resulted in an increase in cost in
excess of net assets acquired.
1999
During 1999, the Company approved and implemented four restructuring
plans to reduce selling, general and administrative costs and to further
rationalize plant operations.
The Company recorded restructuring charges of approximately $2.4 million
relating to severance costs in connection with the first restructuring plan.
This plan reduced the Company's salaried work force by 82 employees.
The Company recorded restructuring charges of approximately $2.9 million
relating to severance costs in connection with the second restructuring plan for
replacing three of the Company's former executives, including its former Chief
Executive Officer.
F-12
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. RESTRUCTURING AND OTHER CHARGES (CREDITS) (continued)
In connection with the third restructuring plan, the Company recorded
restructuring charges of approximately $1.7 million relating to the closure of
one facility and certain product line rationalizations. The $1.7 million charge
was comprised of approximately $0.1 million of severance costs in connection
with the work force reductions of 117 employees, $0.1 million of plant closure
and carrying costs and $1.5 million of asset write-downs.
In connection with the fourth restructuring plan, the Company closed its
New York office (see Note 18). The Company recorded approximately $2.5 million
of restructuring charges comprised of $1.6 million of severance costs for eight
employees and $0.9 million of costs primarily relating to future lease
obligations, net of sublease proceeds.
In addition, the Company recorded restructuring charges of approximately
$0.7 million relating to changes in estimates to prior years' plans, primarily
for the sale of the packaging business in 1999. The $0.7 million charge is
comprised of $0.2 million of severance, $1.3 million of lease and closure costs,
offset by $0.8 million of adjustments for asset write-downs. The Company also
recorded $0.3 million of other charges relating to rent due from Trace for the
New York office prior to its closure.
The following table sets forth the components of the Company's
restructuring and other charges (credits):
Asset Plant Closure Personnel
Total Writedowns and Leases Reductions Other
--------------------- ------------- ---------- --------
(millions)
Balances at December 29, 1996 $ 8.5 $(1.8) $ 8.9 $ 1.4 $ -
Cash spending (2.3) - (1.4) (0.9) -
1997 restructuring charge 23.0 12.1 9.8 1.1 -
Restructuring adjustments (1.9) 0.1 (2.3) 0.3 -
Asset write-off/writedowns (16.1) (16.1) - - -
Plant consolidation costs 10.0 - 8.5 1.5 -
---- ----- ----- ---- -----
Balance at December 28, 1997 21.2 (5.7) 23.5 3.4 -
Cash spending (15.7) - (12.2) (3.5) -
Cash proceeds 2.1 2.1 - - -
1998 restructuring charge 5.4 5.4 - - -
Restructuring adjustments (15.1) (10.2) (3.8) (1.1) -
Asset write-off/writedowns (6.3) (5.5) (0.8) - -
Reclassified fixed asset basis
for restructuring credit 8.2 8.2 - - -
Plant consolidation costs 6.4 - 5.2 1.2 -
---- ----- ----- ---- -----
Balance at December 31, 1998 6.2 (5.7) 11.9 - -
Cash spending (8.9) - (4.1) (4.5) (0.3)
Cash proceeds 1.5 1.5 - - -
1999 restructuring charge 9.8 1.5 1.0 7.0 0.3
Restructuring adjustments 0.7 (0.8) 1.3 0.2 -
Asset write-off/writedowns (0.3) (0.3) - - -
---- ----- ----- ---- -----
Balance at December 31, 1999 $9.0 $(3.8) $10.1 $2.7 $ -
==== ===== ===== ==== =====
As indicated in the table above, the accrued restructuring and plant
consolidation balance at December 31, 1999 will be used for payments relating to
severance, plant closure and leases including runout costs at the facilities. As
of December 31, 1999, all employees subject to the plans have been terminated.
The $3.8 million of asset writedowns relates to estimated proceeds and is
included in noncurrent assets. The Company expects to spend approximately $5.3
million during 2000 with the remaining $7.5 million to be spent through 2006,
principally for lease runout costs.
F-13
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. RETIREE BENEFIT PLANS
Pensions
The Company provides pension and survivor benefits for salaried and
certain hourly employees in the United States. Salaried employees are provided
benefits that are based principally on the combination of years of credited
service and compensation. Hourly employees are provided benefits that are based
principally on stated amounts for each year of credited service.
Effective at the end of 1999, the two defined benefit plans for the
salaried and hourly employees were merged into a single plan. Benefits provided
to salary and hourly employees did not change as a result of the plan merger.
The components of pension expense are listed below.
1999 1998 1997
------ ------ -------
(thousands)
Service cost $3,469 $2,833 $2,229
Interest cost 4,887 4,517 4,273
Expected return on plan assets (5,484) (5,758) (5,357)
Amortization
Transition asset (75) (75) (75)
Prior service cost (240) (245) (245)
(Gains) losses and other 819 104 72
------ ------ -------
Total $3,376 $1,376 $ 897
====== ====== =======
The following table sets forth the changes in obligations and assets, and
outlines the development of the funded status and amounts recognized in the
accompanying consolidated balance sheets.
December 31, December 31,
1999 1998
(thousands)
Change in Benefit Obligation
Benefit obligations at beginning of year $74,589 $65,948
Service cost 3,469 2,833
Interest cost 4,887 4,517
Amendments 85 -
Benefits paid (3,809) (4,043)
Actuarial loss (gain) (7,249) 5,334
---------- ---------
Projected benefit obligation at end of year $71,972 $74,589
========= =========
Change in Plan Assets
Fair value of plan assets at beginning of year $55,546 $58,952
Actual return on plan assets 9,011 439
Company contributions 1,440 200
Benefits paid (3,809) (4,043)
Other (690) (2)
---------- ---------
Fair value of plan assets at end of year $61,498 $55,546
========= =========
Funded Status
Plan assets in excess of (less than) benefit obligation $(10,474) $(19,043)
Unamortized transition (asset) obligation (665) (740)
Unamortized prior service cost (2,072) (2,397)
Unamortized net (gains) losses 7,807 18,712
---------- ---------
Net prepaid assets (accrued liabilities) $ (5,404) $ (3,468)
========= =========
F-14
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. RETIREE BENEFIT PLANS (continued)
December 31, December 31,
1999 1998
(thousands)
Amounts Recognized in the Consolidated Balance Sheets
Prepaid benefit costs $ - $ 1,200
Accrued benefit liability (8,613) (20,150)
Intangible assets 296 239
Accumulated other comprehensive income 2,913 15,243
---------- ---------
Net amount recognized $ (5,404) $ (3,468)
========= =========
Significant assumptions used in the calculation of pension expense and
obligations are listed below.
1999 1998 1997
---------- ---------- -------
Expected long-term rate of return on plan assets 10.0% 10.0% 10.0%
Discount rate on projected benefit obligations 7.5% 6.5% 7.0%
Rate of compensation increase 4.0% 4.0% 4.0%
The Company's funding policy is to contribute annually an amount that
both satisfies the minimum funding requirements of the Employee Retirement
Income Security Act of 1974 and does not exceed the full funding limitations of
the Internal Revenue Code of 1986, as amended (the "Code").
In addition, the Company also provides for retirement benefits for its
Canadian employees. Net periodic pension expense for these plans approximated
$0.2 million, $0.2 million and $0.3 million for 1999, 1998 and 1997,
respectively. Plan assets for these approximated $3.6 million and $2.8 million;
and plan liabilities approximated $3.4 million and $2.8 million at December 31,
1999 and 1998, respectively.
At December 31, 1999 and 1998, included in plan assets were 420,000
shares of the Company's stock. In 1994, 250,000 shares were purchased for $2.5
million, and in 1995, 170,000 shares were purchased for $1.6 million. The value
of the plan's investment in the Company's stock was approximately $3.5 million
and $5.2 million at December 31, 1999 and 1998, respectively. Plan assets at the
end of 1998 included shares of Trace Global Opportunities Fund, which was a
related party to Trace. The shares were purchased during 1995 and 1997, at an
aggregate cost of $5.0 million. The value of the plan's investment in Trace
Global Opportunities Fund, was approximately $4.3 million at December 31, 1998.
In 1999, Trace divested its interest in the Trace Global Opportunities Fund. The
fund changed its name to the GLS Global Opportunities Fund, which is not a
related party to the Company. During 1998, 250,000 shares of United Auto Group
("UAG"), which is a related party to Trace, were purchased for approximately
$4.8 million. The value of the UAG shares was $2.2 million and $2.3 million at
December 31, 1999 and 1998, respectively.
Retiree Medical and Life Insurance Benefits
The Company provides postretirement health care and life insurance for
eligible employees, limited primarily to one manufacturing facility in the
United States. These plans are unfunded and benefits are paid as the claims are
submitted. The Company retains the right, subject to existing agreements, to
modify or eliminate these benefits.
F-15
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. RETIREE BENEFIT PLANS (continued)
The components of retiree medical and life insurance benefits expense are
listed below.
1999 1998 1997
---- ---- ----
(thousands)
Service cost $20 $10 $ 9
Interest cost 62 46 71
Amortization
Prior service costs (6) (35) (35)
(Gains) losses and other (21) (29) (21)
Special termination benefits - - 74
---- ---- ----
Total $ 55 $ (8) $ 98
==== ==== ====
The following table outlines the changes in obligations and benefit
payments, and outlines the development of the funded status and amounts
recognized in the accompanying consolidated balance sheets.
December 31, December 31,
1999 1998
(thousands)
Change in Benefit Obligation
Benefit obligations at beginning of year $ 651 $ 927
Service cost 20 10
Interest cost 62 46
Employee contributions 28 27
Benefits paid (164) (312)
Amendments 363 --
Actuarial losses (gains) (92) (47)
------- -------
Projected benefit obligation at end of year $ 868 $ 651
======= =======
Change in Plan Assets
Fair value of plan assets at beginning of year $ -- $ --
Company contributions 136 285
Employee contributions 28 27
Benefits paid (164) (312)
------- -------
Fair value of plan assets at end of year $ -- $ --
======= =======
Funded Status of the Plan
Plan assets in excess of (less than) benefit obligation $ (868) $ (651)
Unamortized prior service cost (73) (442)
Unamortized net (gains) losses (644) (573)
------- -------
Net prepaid assets (accrued liabilities) $(1,585) $(1,666)
======= =======
Significant assumptions used in the calculation of retiree and life
insurance benefit expense and obligations are listed below.
1999 1998 1997
---------- ---------- -------
Discount rates on projected benefit obligations 7.5% 6.5% 7.0%
Health care cost increase 7.5% 6.0% 8.0%
F-16
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. RETIREE BENEFIT PLANS (continued)
The health care cost increase assumption was revised during 1999. The
rate will gradually be reduced to 5.0% by 2005. Increasing or decreasing the
weighted average assumed health care cost trend rates by one percentage point
would not have a significant impact on the accumulated postretirement benefit
obligation or on service and interest costs.
6. COMPENSATION PLANS
Stock Options
The 1993 stock option plan provides for the issuance of nonqualified and
incentive stock options for up to 3.0 million shares of common stock to officers
and executive employees of the Company, its subsidiaries and affiliates. The
price and terms of each such option is at the discretion of the Company, except
that the term cannot exceed ten years. During 1999, 750,450 options were granted
with a three-year vesting period. All other options outstanding at year-end 1999
were granted with a five-year vesting period and a ten-year term.
A summary of stock option activity is presented below.
1999 1998 1997
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
Outstanding at beginning of year 1,388,916 $ 7.02 1,439,049 $ 7.08 967,476 $ 6.97
Granted 1,067,950 6.11 132,750 13.22 625,833 11.52
Exercised (39,728) 6.88 (82,440) 7.03 (145,195) 6.88
Forfeited (117,489) 9.08 (100,443) 9.84 (9,065) 6.88
---------- ------ ---------- ------- ----------- -------
Outstanding at end of year 2,299,649 $ 7.94 1,388,916 $ 9.41 1,439,049 $ 7.08
========= ====== ========= ====== ========= ======
Exercisable at end of year 803,303 $ 8.36 549,124 $ 7.02 467,460 $ 7.04
========== ====== ========== ====== ========= ======
Listed below is a summary of the stock options outstanding and
exercisable at year-end 1999.
Outstanding
Weighted Weighted
Exercise Average Average
Price Exercise Remaining
Range Options Price Life
$ 5.44 - 6.88 1,621,816 $ 6.37 8.31
9.00 - 11.75 486,833 10.95 8.00
13.25 - 14.00 191,000 13.64 7.73
Exercisable
Weighted Weighted
Exercise Average Average
Price Exercise Remaining
Range Options Price Life
$ 6.88 552,170 $ 6.88 6.50
9.50 - 11.75 192,933 10.99 7.95
13.25 - 14.00 58,200 13.77 7.63
F-17
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. COMPENSATION PLANS (continued)
Options granted were issued with an exercise price equal to the fair
market value at the date of the grant. During 1996, the Company granted 202,240
options with a weighted average market price on the date of grant of $6.52. The
1996 aggregate difference of $1.1 million between the fair market value of the
options at the date of grant and the option price is being charged to expense
over the five-year vesting period. Total compensation expense relating to
options amounted to approximately $0.2 million in 1999 and 1998 and $0.3 million
in 1997.
The Company applies the provisions of Accounting Principles Board Opinion
No. 25 ("Accounting for Stock Issued to Employees") and related interpretations
("APB 25") in accounting for its stock-based compensation plans. Accordingly,
compensation expense has been recognized in the consolidated financial
statements with respect to the above plans in accordance with APB 25. Had
compensation costs for the above plans been determined based on the fair value
of the options at the grant dates under those plans consistent with the methods
under Statement of Financial Accounting Standards No. 123 ("Accounting for Stock
Based Compensation"), the Company's income from continuing operations and
earnings (loss) per share would have the pro forma amounts indicated below:
1999 1998 1997
(thousands, except per share data)
Income (loss) from continuing operations
As reported $19,716 $(69,853) $4,131
======= ======== ======
Pro forma $18,719 $(70,270) $3,935
======= ======== ======
Basic earnings (loss) per share-continuing operations
As reported $ 0.79 $ (2.79) $ 0.16
========= ========= =======
Pro forma $ 0.75 $ (2.81) $ 0.16
========= ========= =======
Diluted earnings (loss) per share-continuing operations
As reported $ 0.78 $ (2.79) $ 0.16
========= ========= =======
Pro forma $ 0.74 $ (2.81) $ 0.15
========= ========= =======
The fair value of each option was estimated on the grant date using the
Black-Scholes option pricing model. Based on the assumptions listed below, the
weighted average fair value of options granted was $2.30 per option in 1999,
$4.74 per option in 1998, and $3.90 per option in 1997.
1999 1998 1997
---------- ---------- -------
Expected life in years 3 3 3
Risk-free interest rate 5.21% 5.40% 5.69%
Volatility 48.00% 45.00% 40.00%
Dividend yield 0.00% 0.00% 0.00%
Incentive Compensation
Most of the Company's salaried employees participate in incentive
compensation programs. These programs are based on the consolidated results of
the Company and on the results of business segments. Incentive compensation
expense was approximately $3.0 million in 1999, $0.3 million in 1998 and $3.9
million in 1997.
Defined Contribution Plan
The Company maintains a defined contribution plan which is qualified
under Section 401(k) of the Code ("401(k) Plan") and is available for eligible
employees who elect to participate. Under the terms of the 401(k) Plan, the
Company partially matches certain employee contributions. Expense for these
contributions for 1999, 1998 and 1997 was approximately $1.0 million, $0.9
million and $0.9 million, respectively.
F-18
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. OTHER INCOME (EXPENSE), NET
As discussed in Note 3, during the first quarter of 1999 a $4.2 million
gain was recognized on the sale of the corporate aircraft. Interest income
totaled $0.5 million in 1999. Losses on the disposal of fixed assets and letter
of credit fees related to the GFI Transaction (see Note 13) partially offset
these income items.
Other income (expense), net in 1998 primarily consisted of: $6.5 million
of costs associated with the proposed buyout transaction (see Note 19); $3.1
million of fees and costs related to the GFI Transaction; $3.0 million of
foreign currency losses in Mexico; and a $1.1 million reduction in the value of
the Company's investment in the Trace Global Opportunities Fund. These expenses
in 1998 were partially offset by approximately $1.9 million of interest income.
8. INCOME TAXES
The sources of income (loss) from continuing operations before provision
for income taxes are listed below.
1999 1998 1997
(thousands)
United States $19,243 $ (1,318) $ 7,572
Foreign 2,935 (10,293) (916)
------- -------- ---------
Income (loss) from continuing operations
before provision (benefit) for income taxes $22,178 $(11,611) $ 6,656
======= ======== =========
Listed below are the components of the provision (benefit) for income
taxes included in the statements of operations.
1999 1998 1997
(thousands)
Continuing operations $ 2,462 $ 58,242 $ 2,525
Discontinued operations - - (1,330)
Extraordinary loss on early extinguishment
of debt - (1,278) (27,400)
-------- -------- --------
Total consolidated provision (benefit) for
income taxes $ 2,462 $ 56,964 $(26,205)
======== ======== ========
A reconciliation of the statutory federal income tax to the income tax on
continuing operations is listed below.
1999 1998 1997
(thousands)
Statutory income taxes $ 7,762 $(4,064) $ 2,330
State income taxes, net of federal benefit 1,060 - 260
Limitation on the utilization of foreign tax benefits - 3,800 -
Increase (decrease) in valuation allowance (7,300) 52,573 -
Amortization of cost in excess of assets acquired 1,385 1,505 553
Write-off excess cost - 770 4,305
Utilization of capital loss carryforwards - - (5,028)
Costs associated with buyout proposal - 1,750 -
Other, net (445) 1,908 105
------- ------- ----------
Total $ 2,462 $58,242 $ 2,525
======= ======= ==========
F-19
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. INCOME TAXES (continued)
The provision (benefit) for income taxes is summarized as follows:
1999 1998 1997
Current (thousands)
Federal $ 300 $ 3,391 $ 1,958
State 238 - 1,248
Foreign 1,117 673 498
-------- ------- --------
Total current 1,655 4,064 3,704
-------- ------- --------
1999 1998 1997
Deferred (thousands)
Federal 8,247 378 (27,013)
State 837 - (2,662)
Foreign (977) (51) (234)
-------- ------- --------
Total deferred 8,107 327 (29,909)
-------- ------- --------
Change in valuation allowance (7,300) 52,573 -
-------- ------- --------
Total provision (benefit)
for income taxes $ 2,462 $56,964 $(26,205)
======== ======= ========
The tax effect of the temporary differences that give rise to deferred
income tax assets and liabilities are listed below.
December 31, December 31,
1999 1998
Deferred income tax assets (thousands)
Inventory basis differences $ 781 $ 1,366
Employee benefit accruals 7,126 12,592
Allowances and contingent liabilities 8,987 9,270
Restructuring and plant closing accruals 4,894 4,541
Other 10,977 7,729
Net operating loss carryforwards 67,264 73,970
Capital loss carryforwards 2,105 2,105
Valuation allowance for deferred income tax assets (73,826) (85,250)
------- -------
Deferred income tax assets 28,308 26,323
-------- --------
Deferred income tax liabilities
Basis difference in property, plant and equipment (23,587) (26,509)
Other (8,593) (2,879)
--------- ---------
Deferred income tax liabilities (32,180) (29,388)
-------- --------
Net deferred income tax assets (liabilities) $ (3,872) $ (3,065)
======== ========
The 1999 effective tax rate was reduced by the partial reversal of the
deferred income tax asset valuation allowance recognized in 1998. The valuation
allowance was reduced to reflect the realization of Federal loss carryforwards
that offset the current tax component of the Federal tax provision.
Additionally, the valuation allowance was reduced to offset the net deferred
Federal tax liability generated in 1999 and to recognize changes in the minimum
pension liability.
F-20
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. INCOME TAXES (continued)
The 1998 provision for income taxes consisted primarily of an increase in
valuation allowance for deferred income tax assets.
The Company has determined that it will be more likely than not to have
insufficient future income to utilize its net operating loss carryforwards and
realize other deferred income tax assets. In addition, the Company did not
recognize the tax benefits associated with net operating loss carryforwards in
Mexico since it appears likely that the net operating loss carryforwards will
not be able to be realized in the near future.
During 1998, the valuation allowance for deferred income tax assets and
net deferred income tax assets decreased by $9.1 million primarily due to the
reduction of capital loss carryforwards associated with the transfer of General
Felt's common stock in connection with the GFI Transaction. In addition, during
1998, deferred income tax assets were increased by $8.7 million associated with
a change in the income tax basis of Foamex Carpet.
The Company will continually review the adequacy of the valuation
allowance and recognize benefits only as reassessment indicates that it is more
likely than not that the benefits will be realized. At December 31, 1999, the
Company had approximately $171.0 million of net operating loss carryforwards for
federal income tax purposes expiring from 2010 to 2018. Also at year-end 1999,
there were $0.3 million of alternative minimum tax credits carryforwards.
9. EXTRAORDINARY LOSSES
In 1998, extraordinary losses of $1.9 million (net of income tax benefits
of $1.3 million), or $.08 per common share - basic, were recorded. The loss was
in connection with the GFI Transaction, and related to the early extinguishment
of approximately $125.1 million of term loans under a Foamex L.P. credit
facility. The extraordinary loss was generated entirely from the write-off of
debt issuance costs.
In 1997, extraordinary losses of $44.5 million (net of income tax
benefits of $27.4 million), or $1.76 per common share - basic, were recorded
related to the early extinguishment of debt. Listed below are the components of
the loss.
o In connection with a refinancing plan, an extraordinary loss of
approximately $42.0 million (net of income tax benefits of $25.7
million) was incurred. The extraordinary loss was comprised of
approximately $39.0 million for premium and consent fee payments,
approximately $16.2 million for the write-off of debt issuance
costs and debt discount, approximately $8.2 million for the loss
associated with the effective termination and amendment of
interest rate swap agreements and approximately $4.3 million of
professional fees and other costs.
o Foamex L.P. redeemed substantially all of the outstanding public
debt that was not tendered as part of the refinancing plan
referenced above. In connection with these redemptions an
extraordinary loss on the early extinguishment of debt of
approximately $1.3 million (net of income tax benefits of $0.9
million) was recognized.
o In connection with the sale of assets discussed in Note 3,
proceeds from the sale were used to repay outstanding term loan
borrowings under the Foamex L.P. Credit Facility. As a result, an
extraordinary loss on the early extinguishment of debt of
approximately $0.6 million (net of income tax benefits of $0.4
million) was recognized.
o Net proceeds remaining from a 1996 divestiture were used for the
early extinguishment of debt. As a result, an extraordinary loss
of approximately $0.6 million (net of income tax benefits of $0.4
million) was recorded. The extraordinary loss was comprised of
approximately $0.4 million of premium payments and approximately
$0.6 million for the write-off of debt issuance costs.
F-21
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. EARNINGS (LOSS) PER SHARE
The calculation of earnings (loss) per share from income (loss) from
continuing operations is presented in the table below.
1999 1998 1997
(thousands, except per share amounts)
Basic earnings (loss) per share
Income (loss) from continuing operations $19,716 $ (69,853) $ 4,131
======= =========== =======
Average common stock outstanding 25,053 24,996 25,189
======= =========== =======
Basic earnings (loss) per share - continuing operations $ 0.79 $ (2.79) $ 0.16
======= =========== =======
Diluted earnings (loss) per share
Income (loss) from continuing operations available
for common stock and dilutive securities $19,716 $ (69,853) $ 4,131
======= =========== =======
Average common stock outstanding 25,053 24,996 25,189
Common stock equivalents resulting
from stock options and warrants (a) (b) 203 -- 511
------- ----------- -------
Average common stock and dilutive
equivalents 25,256 24,996 25,700
======= =========== =======
Diluted earnings (loss) per share - continuing operations $ 0.78 $ (2.79) $ 0.16
======= =========== =======
(a) In periods with a loss from continuing operations, dilutive stock options
and warrants were not included because they were anti-dilutive.
(b) In 1999, the average number of stock options that were not included in the
diluted earnings per share calculation because the exercise price was
greater than the average market price, totaled 849,000.
Earnings (loss) per share attributable to continuing operations,
discontinued operations and to extraordinary losses are listed below.
1999 1998 1997
Basic earnings (loss) per common share
Continuing operations $ 0.79 $ (2.79) $ 0.16
Discontinued operations -- -- (0.08)
Extraordinary loss -- (0.08) (1.76)
-------- -------- --------
Net income (loss) $ 0.79 $ (2.87) $ (1.68)
======== ======== ========
Diluted earnings (loss) per common share
Continuing operations $ 0.78 $ (2.79) $ 0.16
Discontinued operations -- -- (0.08)
Extraordinary loss -- (0.08) (1.73)
-------- -------- --------
Net income (loss) $ 0.78 $ (2.87) $ (1.65)
======== ======== ========
F-22
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. INVENTORIES
The components of inventory are listed below.
December 31, December 31,
1999 1998
(thousands)
Raw materials and supplies $ 67,520 $ 99,997
Work-in-process 11,574 12,188
Finished goods 18,788 24,473
--------- ----------
Total $ 97,882 $136,658
======== ========
12. SHORT-TERM BORROWINGS
Foamex Canada Inc., a wholly owned subsidiary of Foamex L.P., has a
short-term credit facility that provides for $8.0 million of Canadian dollar
loans (U.S. dollar equivalent of $5.5 million) of which up to $2.0 million are
available in U.S. dollar loans. The amount of borrowings available is based on a
combination of accounts receivable and inventory, as defined in the credit
facility. Interest on Canadian dollar borrowings is based on the bank's prime
lending rate plus 3/4%. On U.S. dollar loans, interest is based on the bank's
U.S. dollar base rate in Canada plus 3/4%. The weighted average interest rates
on short-term borrowings outstanding at year-end 1999, 1998 and 1997 were 7.3%,
7.3% and 5.4%, respectively. The unused amount under this line of credit was
$3.9 million as of December 31, 1999.
13. LONG-TERM DEBT
The components of long-term debt are listed below.
December 31, December 31,
1999 1998
-------- ---------
Foamex L.P. Credit Facility (thousands)
Term Loan B (1) $ 81,874 $ 82,714
Term Loan C (1) 74,431 75,194
Term Loan D (1) 107,800 108,900
Revolving credit facility (1) 113,685 139,438
Foamex Carpet Credit Facility (2) - -
9 7/8% Senior subordinated notes due 2007 (3) 150,000 150,000
13 1/2% Senior subordinated notes due 2005 (includes
$10,100 and $11,893 of unamortized debt premium) (3) 108,100 109,893
Industrial revenue bonds (4) 7,000 7,000
Subordinated note payable (net of unamortized
debt discount of $232 and $523) (4) 4,444 6,491
Other 7,076 18,858
-------- ---------
654,410 698,488
Less current portion 7,866 690,248
-------- ---------
Long-term debt-unrelated parties $646,544 $ 8,240
======== =========
F-23
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. LONG-TERM DEBT (continued)
The components of related party long-term debt are listed below.
December 31, December 31,
1999 1998
--------- ---------
(thousands)
Foamex/GFI Note (4) $ 34,000 $ 34,000
Note payable to Foam Funding LLC (5) 55,283 64,935
--------- ---------
89,283 98,935
Less current portion 10,530 98,935
--------- ---------
Long-term debt - related party $ 78,753 $ -
========= =========
(1) Subsidiary debt of Foamex L.P., guaranteed by the Company and Foamex
Capital Corporation ("FCC").
(2) Subsidiary debt of Foamex Carpet, guaranteed by the Company
(3) Subsidiary debt of Foamex L.P. and FCC.
(4) Subsidiary debt of Foamex L.P.
(5) Subsidiary debt of Foamex Carpet.
As of December 31, 1998, certain of the Company's subsidiaries were not
in compliance with various debt covenants included in agreements totaling $480.4
million. Had the lenders under these debt agreements accelerated the maturity of
their indebtedness as a result of the subsidiaries' noncompliance, the
acceleration would have constituted an event of default and given the holders
the right to require the repurchase of substantially all of the Company's
subsidiaries' long-term debt. As a result of these factors, approximately $771.1
million of long-term debt at December 31, 1998 was classified as a current
liability in the consolidated balance sheet, which produced a working capital
deficit.
Foamex L.P. Credit Facility
At December 31, 1999, Foamex L.P. had a credit facility (the "Foamex L.P.
Credit Facility") with a group of banks which provided for a revolving credit
facility commitment of $185.0 million and three term loans totaling $264.1
million outstanding at December 31, 1999. Amendments in 1998 provided for a $2.5
million quarterly reduction of the availability under the revolving credit
facility, which extends through June 2003.
Borrowings under the Foamex L.P. Credit Facility are collateralized by
substantially all of the assets of Foamex L.P. on a pari passu basis with the
IRBs (described below); however, the rights of the holders of the applicable
issue of the IRBs to receive payment upon the disposition of the collateral
securing such issue of the IRBs has been preserved.
In response to financial conditions at year-end 1998, amendments to debt
agreements were executed during the first half of 1999. As a result the Foamex
L.P. Credit Facility, which was amended and restated in February 1998, was
further amended and restated in June 1999 to modify financial covenants for net
worth, interest coverage, fixed charge coverage and leverage ratios through
December 2006. The agreement was also amended to no longer permit Foamex L.P. to
make certain cash payments, including the payment of an annual management fee of
$3.0 million to a subsidiary of Trace and distributions to the Company, and to
limit future investments in foreign subsidiaries and joint ventures. The "change
of control" definition under the agreement was also modified to conform to the
definition discussed in "change of control" in Note 1. Changes in the interest
rate structure, effective in 2000, were also made and are discussed below.
Foamex L.P. was in compliance with this agreement at year-end 1999.
F-24
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. LONG-TERM DEBT (continued)
At year-end 1999, interest was based on the combination of a variable
rate consisting of the higher of (i) the base rate of The Bank of Nova Scotia or
(ii) the Federal Funds rate plus 0.5% plus a margin. The margins for revolving,
Term B, Term C and Term D loans were 2.25%, 2.50%, 2.75% and 2.875%,
respectively. At the option of Foamex L.P., portions of the outstanding loans
are convertible into LIBOR based loans plus 1.0% added to the margins identified
above. The effective interest rates for the credit facility at the end of 1999
ranged between 9.69% and 10.06%.
Available borrowings under the revolving credit facility totaled $24.2
million at year-end 1999. Letters of credit outstanding at December 31, 1999
totaled $47.1 million.
As part of the Foamex L.P. Credit Facility, excess cash flow generated
annually, as defined, is required to prepay portions of Term B, C and D loans.
The prepayment amount determined for 1999 was $13.3 million and will be financed
through revolving loans under the facility. The required payment is expected to
be made during the second quarter of 2000. The repayment schedules for the Term
B, C and D loans have been adjusted, as of year-end 1999, to reflect the
prepayment required.
Effective January 1, 2000, the interest rate on outstanding borrowings
under the Foamex L.P. Credit Facility will increase by 25 basis points each
quarter that Foamex L.P.'s leverage ratio, as defined, exceeds 5.00 to 1.00.
Once the leverage ratio is reduced below this level, the cumulative amount of
any 25 basis point adjustments to the interest rate on borrowings would be
eliminated. At December 31, 1999, the calculated leverage ratio was 5.48 to
1.00. Consequently, the basis point adjustment will be applicable for the
calculation of interest in the first quarter of 2000.
Foamex Carpet Credit Facility
During 1999, Foamex Carpet amended its revolving credit facility (the
"Foamex Carpet Credit Facility"), which provides up to $15.0 million of
available borrowings through February 2004, to modify the financial covenants
for net worth, interest coverage, fixed charge coverage and leverage ratios.
Also, effective June 30, 1999, the interest rate on outstanding borrowings under
the Foamex Carpet Credit Facility increased by 25 basis points.
At year-end 1999, the interest rate was based on the combination of a
variable rate plus a margin. The variable rate is the same as the one defined in
the Foamex L.P. Credit Facility, discussed above, and the margin is 2.25%. At
the option of Foamex Carpet, portions of the outstanding loans are convertible
into LIBOR based loans plus 3.25%.
Borrowings under the Foamex Carpet Credit Facility are collateralized by
substantially all of the assets of Foamex Carpet on a pari passu basis with the
Note Payable to Foam Funding LLC (described below).
There were no borrowings outstanding under the credit facility at
year-end 1999. Available borrowings totaled $14.7 million at December 31, 1999
after a reduction of $0.3 million for a letter of credit.
9 7/8% Senior Subordinated Notes
The 9 7/8% Senior Subordinated Notes were issued by Foamex L.P. and FCC
and are due on June 15, 2007. The notes represent uncollateralized general
obligations of Foamex L.P. and are subordinated to all Senior Debt, as defined
in the Indenture. Interest is payable June 15 and December 15. The notes may be
redeemed at the option of Foamex L.P., in whole or in part, at any time on or
after June 15, 2002. The initial redemption is at 104.938% of their principal
amount, plus accrued and unpaid interest, as defined, if any, thereon to the
date of redemption and declining to 100.0% on or after June 15, 2005. In
addition, at any time prior to June 15, 2000, Foamex L.P.
F-25
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. LONG-TERM DEBT (continued)
may on one or more occasions redeem up to 35.0% of the initially outstanding
principal amount of the 9 7/8% Senior Subordinated Notes at a redemption price
equal to 109.875% of the principal amount, plus accrued interest and liquidated
damages, if any, thereon to the date of redemption with the cash proceeds of one
or more Public Equity Offerings, as defined.
Upon the occurrence of a change of control, as defined, each holder will
have the right to require Foamex L.P. to tender for such notes at a price in
cash equal to 101% of the aggregate principal amount thereof, plus accrued and
unpaid interest thereon, if there is such a "change of control". The notes are
subordinated in right of payment to all senior indebtedness and are pari passu
in right of payment to the 13 1/2% Senior Subordinated Notes and the
Subordinated Note Payable (described below).
13 1/2% Senior Subordinated Notes
The 13 1/2% Senior Subordinated Notes were issued by Foamex L.P. and FCC
and are due on August 15, 2005. The notes represent uncollateralized general
obligations of Foamex L.P. and are subordinated to all Senior Debt, as defined
in the Indenture. Interest is payable semiannually on February 15 and August 15.
The notes may be redeemed at the option of Foamex L.P., in whole or in part, at
any time on or after August 15, 2000. The initial redemption is at 106.75% of
their principal amount, plus accrued and unpaid interest, if any, thereon to the
date of redemption and declining to 100.0% on or after August 15, 2004.
Upon the occurrence of a change of control, as defined, each holder will
have the right to require Foamex L.P. to tender for such notes at a price in
cash equal to 101% of the aggregate principal amount thereof, plus accrued and
unpaid interest, if any, thereon, if there is such a "change of control". The
notes are subordinated in right of the payment of all senior indebtedness and
are pari passu in right of payment to the 9 7/8% Senior Subordinated Notes and
to the Subordinated Note Payable (described below).
Industrial Revenue Bonds ("IRBs")
IRB debt includes a $1.0 million bond that matures in 2005 and a $6.0
million bond that matures in 2013. Interest is based on a variable rate, as
defined, with options available to Foamex L.P. to convert to a fixed rate. At
the end of 1999, the interest rate was 5.5% on the $6.0 million bond and 4.05%
on the $1.0 million bond. The maximum interest rate for either of the IRBs is
15.0% per annum.
If Foamex L.P exercises its option to convert the bonds to a fixed
interest rate structure the IRBs are redeemable at the option of the
bondholders. The obligations are collateralized by certain properties, which
have an approximate net carrying value of $10.8 million at December 31, 1999 and
letters of credit approximating $7.3 million.
Subordinated Note Payable
This note payable was issued during 1993 to John Rallis, a former
President and Chief Operating Officer of the Company. The note was issued by
Foamex L.P. in connection with the acquisition of Great Western Foam Products
Corporation and certain related entities and assets. The note carries a maximum
interest rate of 6.0% and the principal is payable in three equal annual
installments that began in May 1999.
Other
At year-end 1999, other debt primarily included a term loan held by a
majority owned Mexican subsidiary. Quarterly principal payments are due on the
term loan through its maturity in May 2002. The interest rate at year-end 1999
was 11.11%. Included in year-end 1998 debt was financing for a corporate
aircraft. During 1999, the aircraft was sold and the financing was repaid with
the proceeds, as discussed in Note 3.
F-26
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. LONG-TERM DEBT (continued)
Related Party - Foamex/GFI Note
As a result of the GFI Transaction, discussed below, Foamex L.P. owes a
$34.0 million promissory note payable to Foam Funding LLC, due in March 2000.
Interest is based on a variable rate equal to the higher of (i) the base rate of
The Bank of Nova Scotia or (ii) the Federal Funds rate plus 0.5%. At the option
of Foamex L.P., the note is convertible to a LIBOR-based interest rate plus
0.75%. As of December 31, 1999, the interest rate for borrowings was 7.25%.
The principal and current interest payable under the Foamex/GFI Note are
collateralized by a $34.5 million letter of credit issued under the Foamex L.P.
Credit Facility. At year-end 1999, the note was recognized as long-term in the
consolidated balance sheet because of the ability and intent, evidenced by the
letter of credit, to refinance the debt on a long-term basis.
Related Party - Note Payable to Foam Funding LLC
As part of the GFI Transaction, discussed below, Foamex Carpet entered
into a $70.2 million promissory note payable to Foam Funding LLC. Principal is
payable in quarterly installments that began in June 1998 with a final
installment in February 2004. Interest is based on a variable rate equal to the
sum of 2.25% plus the higher of: (i) the base rate of The Bank of Nova Scotia or
(ii) the Federal Funds rate plus 0.5%. At the option of Foamex Carpet, interest
payable under the note is convertible into LIBOR based loans plus 3.25%. As of
December 31, 1999, the interest rate for borrowings was 9.75%.
Amounts outstanding under the Note Payable to Foam Funding LLC are
collateralized by all of the assets of Foamex Carpet on a pari passu basis with
the Foamex Carpet Credit Facility.
GFI Transaction
On February 27, 1998, the Company and certain of its affiliates completed
a series of transactions which changed the Company's structure (collectively,
the "GFI Transaction"). Prior to the consummation of these transactions, Foamex
L.P. defeased the $4.5 million outstanding principal amount of its 9 1/2% senior
secured notes due 2000. Foamex L.P. settled its intercompany payables to General
Felt Industries, Inc. ("General Felt") with $4.8 million in cash and a
promissory note in the aggregate principal amount of $34.0 million supported by
a $34.5 million letter of credit under the Foamex L.P. Credit Facility (the
"Foamex/GFI Note"). The initial transaction resulted in the transfer from Foamex
L.P. to Foam Funding LLC, an indirect wholly owned subsidiary of Trace, of all
of the outstanding common stock of General Felt, in exchange for (i) the
assumption by Foam Funding LLC of $129.0 million of Foamex L.P.'s indebtedness
and (ii) the transfer by Foam Funding LLC to Foamex L.P. of a 1% non-managing
general partnership interest in Foamex L.P. As a result, General Felt ceased
being a subsidiary of Foamex L.P. and was relieved from all obligations under
Foamex L.P.'s 9 7/8% senior subordinated notes due 2007 and 13 1/2% senior
subordinated notes due 2005. Upon consummation of the initial transaction,
Foamex Carpet, a newly formed wholly owned subsidiary of the Company, the
Company, Foam Funding LLC, and General Felt entered into an Asset Purchase
Agreement dated February 27, 1998, in which General Felt sold substantially all
of its assets (other than cash, the Foamex/GFI Note and its operating facility
in Pico Rivera, California) to Foamex Carpet in exchange for (i) $20.0 million
in cash and (ii) a promissory note issued by Foamex Carpet to Foam Funding LLC
in the aggregate principal amount of $70.2 million. The $20.0 million cash
payment was funded with a distribution by Foamex L.P. Upon consummation of the
transactions contemplated by the Asset Purchase Agreement, Foamex Carpet entered
into a credit agreement with the institutions from time to time party thereto as
issuing banks, and Citicorp USA, Inc. and The Bank of Nova Scotia, as
administrative agents, which provided for up to $20.0 million in revolving
credit borrowings. Foamex Carpet conducts the carpet cushion business previously
conducted by General Felt. Also, Foam Funding LLC retained ownership of one of
General Felt's operating facilities, which is being leased to Foamex Carpet, and
the $34.0 million Foamex/GFI Note.
F-27
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. LONG-TERM DEBT (continued)
No gain was recognized on the GFI Transaction. The Company will continue
to account for these net assets using the carryover basis of Foamex L.P. The
$129.0 million of debt assumed by Foam Funding LLC in the GFI Transaction was
accounted for as an extinguishment of debt, which resulted in an extraordinary
loss of approximately $1.9 million, net of income taxes. The 1% non-managing
general partnership interest acquired in connection with the GFI Transaction was
accounted for as a redemption of equity. By virtue of the transfer of General
Felt stock and the subsequent merger of General Felt into Foam Funding LLC, the
Pico Rivera, California facility was transferred to Foam Funding LLC; no gain
was recognized on the transfer since the Company leased-back the facility. The
net effect resulted in a charge to stockholders' equity (deficit) of
approximately $0.5 million.
Interest Rate Swap Agreements
The Company entered into interest rate swaps to lower funding costs
and/or to manage interest costs and exposure to changing interest rates. The
Company did not hold or issue financial instruments for trading purposes.
In connection with a refinancing plan in 1997, the Company's then
existing interest rate swap agreements with a notional amount of $300.0 million
were considered to be effectively terminated since the underlying debt was
extinguished. These interest rate swap agreements had an estimated fair value
liability of $8.2 million at the date of the refinancing plan which is included
in the extraordinary loss on the early extinguishment of debt. In lieu of a cash
payment for the estimated fair value of the then existing interest rate swap
agreements, the Company entered into an amendment of the then existing interest
rate swap agreements resulting in one interest rate swap agreement with a
notional amount of $150.0 million through June 2007. Accordingly, the $8.2
million fair value liability has been recorded as a deferred credit which will
be amortized as a reduction in interest and debt issuance expense on a
straight-line basis through June 2007. On January 8, 1998, the Company entered
into a new amendment to its interest rate swap agreement. The new amendment
provided for an interest rate swap agreement with a notional amount of $150.0
million through June 2002. In September 1998, the Company sold its existing
interest rate swap agreement for a net gain of approximately $1.0 million.
Accordingly, the $1.0 million gain has been recorded as a deferred credit which
will be amortized through June 2007, which is the maturity date of the
underlying debt.
The effect of the interest rate swaps was a favorable adjustment to
interest and debt issuance expense of $0.7 million and $2.2 million for 1998 and
1997, respectively.
Debt Covenants
The indentures, credit facilities and other indebtedness agreements
contain certain covenants that will limit, among other things to varying
degrees, the ability of the Company's subsidiaries (i) to pay distributions or
redeem equity interests, (ii) to make certain restrictive payments or
investments, (iii) to incur additional indebtedness or issue Preferred Equity
Interest, as defined, (iv) to merge, consolidate or sell all or substantially
all of its assets or (v) to enter into certain transactions with affiliates or
related persons. In addition, certain agreements contain provisions that, in the
event of a defined change of control or the occurrence of an undefined material
adverse change in the ability of the obligor to perform its obligations, the
indebtedness must be repaid, in certain cases, at the option of the holder.
Also, the Company's subsidiaries are required under certain of these agreements
to maintain specified financial ratios of which the most restrictive are the
maintenance of net worth, interest coverage, fixed charge coverage and leverage
ratios, as defined. Under the most restrictive of the distribution restrictions,
the Company was available to be paid by its subsidiaries as of December 31,
1999, funds only to the extent to enable the Company to meet its tax payment
liabilities.
Foamex L.P. and Foamex Carpet were in compliance with the various
financial covenants of their loan agreements as of December 31, 1999.
F-28
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. LONG-TERM DEBT (continued)
Future Obligations on Debt
Scheduled maturities of long-term debt and long-term debt - related party
are shown below (thousands):
2000 $ 18,396
2001 20,828
2002 17,975
2003 193,172
2004 54,354
Balance 429,100
---------
Total 733,825
Unamortized debt premium, net 9,868
---------
Total $743,693
=========
14. FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK
Concentration of Credit Risk
Financial instruments which potentially subject the Company to
significant concentrations of credit risk consist primarily of cash and cash
equivalents and trade accounts receivable. The Company maintains cash and cash
equivalents and certain other financial instruments with various large financial
institutions. The Company's periodic evaluation of these financial institutions
are considered in the Company's investment strategy.
The Company sells foam products to the automotive, carpet, cushioning and
other industries. The Company performs ongoing credit evaluations of its
customers and generally does not require collateral. The Company maintains
allowance accounts for potential credit losses and such losses have been within
management's expectations.
Fair Value of Financial Instruments
The following disclosures of the estimated fair value amounts have been
determined based on the Company's assessment of available market information and
appropriate valuation methodologies.
The estimated fair values of the Company's financial instruments are
listed below.
Carrying Amount Fair Value
Liabilities: (thousands)
Total debt - December 31, 1999 $745,320 $705,340
======== ========
Total debt - December 31, 1998 $800,380 $801,900
======== ========
Carrying amounts reported in the consolidated balance sheet for cash and
cash equivalents, accounts receivable, accounts payable, accrued liabilities and
short-term borrowings approximates fair value due to the short-term nature of
these instruments.
The fair value of long-term debt is estimated using quoted market prices,
where available, or discounted cash flows. Fair value estimates are made at a
specific point in time, based on relevant market information about the financial
instruments. These estimates are subjective in nature and involve uncertainties
and matters of significant judgment and therefore, cannot be determined with
precision. Changes in assumptions could significantly affect the estimates.
F-29
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
1999 1998 1997
(thousands)
Cash paid for interest $71,182 $75,260 $46,323
======= ======= =======
Cash paid for income taxes, net $ 1,032 $ 2,134 $ 3,579
======= ======= =======
Non cash - capital leases $ 456 $ 24 $ 167
======= ======= =======
16. BUSINESS SEGMENTS
In the fourth quarter of 1998, the Company adopted SFAS No. 131,
"Disclosure about Segments of an Enterprise and Restatement Information". SFAS
No. 131 requires companies to report information about their business segments
on the basis of how they are managed and evaluated by the chief operating
decision-makers. The Company's reportable business segments are Foam Products,
Carpet Cushion Products, Automotive Products and Technical Products. Each of the
business segments is headed by an executive vice president who is responsible
for developing plans and directing the operations of the segment.
Foam Products manufactures and markets foam used by the bedding industry,
the furniture industry and the retail industry. Carpet Cushion Products
manufactures and distributes prime, rebond, sponge rubber and felt carpet
cushion. Automotive Products supplies foam primarily for automotive interior
applications. Technical Products manufactures and markets reticulated foams
(foams that are well suited for filtration, reservoiring, sound absorption and
sound transmissions) and other custom polyester and polyether foams for
industrial, specialty and consumer and safety applications.
The "other" column in the table below represents foreign manufacturing
operations in Mexico and Asia, corporate expenses not allocated to other
business segments and restructuring and other charges (credits). Asset and
capital expenditure information by business segment is not reported because many
of the Company's facilities produce products for multiple business segments.
The accounting policies of the business segments are the same as
described in Note 2. Revenues and costs have been included in business segments
where specifically identified. Costs shared by business segments have been
allocated on the basis of the amount utilized. Geographic sales are determined
based on the location in which the sale originated.
During 1999, sales to a customer which is included in Automotive
Products, accounted for approximately 11.6% of the Company's net sales. No
customer accounted for more than 10.0% of the Company's net sales in 1998 and
1997.
Carpet
Foam Cushion Automotive Technical
Products Products Products Products Other Total
1999 (thousands)
Net sales $527,159 $271,200 $361,806 $92,180 $27,648 $1,279,993
Income (loss) from operations 57,028 8,512 22,547 22,588 (17,105) 93,570
Depreciation and amortization 17,432 8,096 4,823 2,724 2,675 35,750
1998
Net sales $559,690 $300,791 $285,190 $79,140 $21,585 $1,246,396
Income (loss) from operations 35,313 12,005 16,788 14,571 (3,645) 75,032
Depreciation and amortization 18,300 5,529 6,424 2,929 2,203 35,385
F-30
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. BUSINESS SEGMENTS
Carpet
Foam Cushion Automotive Technical
Products Products Products Products Other Total
1997 (thousands)
Net sales $334,900 $273,920 $225,892 $76,254 $20,129 $931,095
Income (loss) from operations 30,665 8,548 24,638 17,886 (26,637) 55,100
Depreciation and amortization 10,539 4,407 3,550 2,470 1,081 22,047
United
States Canada Mexico Consolidated
1999 (thousands)
Net sales $1,067,363 $61,486 $151,144 $1,279,993
Property, plant and equipment, net 193,051 5,406 23,376 221,833
1998
Net sales $1,049,166 $62,529 $134,701 $1,246,396
Property, plant and equipment, net 212,658 4,998 24,517 242,173
1997
Net sales $841,618 $58,005 $31,472 $931,095
Property, plant and equipment, net 208,713 5,662 19,060 233,435
17. STOCKHOLDERS' EQUITY (DEFICIT)
Preferred Stock
There are 5.0 million shares of preferred stock, par value of $1.00 per
share, authorized for issuance. No preferred shares have been issued.
Common Stock
At year-end 1999, there were 3.0 million shares of common stock reserved
for issuance in connection with the stock option plan discussed in Note 6.
Warrants
On July 1, 1999, 116,745 warrants for an aggregate of 0.6 million of
common stock expired without having been exercised. All remaining warrants
outstanding to purchase 1.2 million shares of common stock expired on October
12, 1999, without being exercised.
Treasury Stock
During 1997, the Company purchased 434,600 of its common stock for an
aggregate cost of $5.7 million. The purchase was part of programs authorized by
the Board of Directors to purchase up to 3.0 million shares of the Company's
common stock. At the end of 1999, 1,989,000 shares have been purchased.
F-31
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17. STOCKHOLDERS' EQUITY (DEFICIT) (continued)
Accumulated Other Comprehensive Income (Loss)
The accumulated other comprehensive income (loss) consists of the
following:
December 31, December 31, December 28,
1999 1998 1997
(thousands)
Foreign currency translation adjustment $ (6,011) $(10,965) $ (4,367)
Minimum pension liability (a) (1,747) (13,756) (2,231)
--------- --------- ---------
$ (7,758) $(24,721) $ (6,598)
======== ======== ========
(a) The minimum pension liability adjustment was recognized net of the
related tax benefit in 1997. As discussed in Note 8, a valuation allowance was
established in 1998 for essentially all deferred income tax assets. Accordingly,
the minimum pension liability amounts do not include their related tax benefit
at year-end 1999 and 1998.
18. RELATED PARTY TRANSACTIONS AND BALANCES
The Company regularly enters into transactions with its affiliates in the
ordinary course of business.
Trace Promissory Notes
On July 1, 1997, Trace borrowed $5.0 million pursuant to a promissory
note with an aggregate principal amount of $5.0 million issued to Foamex L.P. on
June 12, 1997. The promissory note is due and payable on demand or, if no demand
is made, on July 7, 2001, and bears interest at 2 3/8% plus three-month LIBOR,
as defined, per annum payable quarterly in arrears commencing October 1, 1997.
On June 12, 1997, another promissory note issued to Foamex L.P. by Trace in July
1996 was amended. The amended promissory note is an extension of a promissory
note of Trace that was due in July 1997. The aggregate principal amount of the
amended promissory note was increased to approximately $4.8 million and the
maturity of the promissory note was extended. The promissory note is due and
payable on demand or, if no demand is made, on July 7, 2001, and bears interest
at 2 3/8% plus three-month LIBOR, as defined, per annum payable quarterly in
arrears.
Note 3 includes disclosures regarding 1999 activity concerning Trace
promissory notes payable to Foamex L.P. The Trace notes are included in the
other component of stockholders' deficit, which is consistent with the
recognition in prior years. Based on Trace's financial position discussed in
Note 1, Trace may not be able to pay the aggregate amount of $9.2 million.
Trace Accounts Receivables
At year-end 1999 and 1998, operating accounts receivables from Trace were
approximately $3.4 million and $3.1 million, respectively. During 1998, an
allowance of $3.1 million was recorded as a restructuring and other charges
(credits) due to the financial difficulties of Trace. The Company established an
allowance of $0.3 million during 1999 for additional operating accounts
receivable from Trace. The allowance was recorded as a restructuring and other
charges (credits).
Trace Buyout Negotiations and Related Financing
During 1998, $6.5 million was recorded in other income and expense
associated with negotiations related to a proposed Trace buyout and related
refinancing that was subsequently terminated.
F-32
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
18. RELATED PARTY TRANSACTIONS AND BALANCES (continued)
Trace Global Opportunities Fund
During 1997, the Company purchased a $2.0 million investment in Trace
Global Opportunities Fund, which primarily invests in companies organized or
operating outside the G-7 markets and was a related party to Trace. The value of
the Company's investment in Trace Global Opportunities Fund was $0.9 million at
December 31, 1998. The change in value of this investment was recorded as a
charge to other income and expense. In 1999, the investment was sold for $0.9
million.
Trace Foam Distribution
In connection with the refinancing plan in 1997, Foamex L.P. made a cash
distribution of approximately $1.5 million to Trace Foam Company, Inc. ("Trace
Foam"), a wholly owned subsidiary of Trace, as a result of Foamex L.P.'s
distribution to Foamex-JPS Automotive L.P. ("FJPS") and FMXI, Inc. of certain
debentures of FJPS, a note with a principal amount of approximately $56.2
million (net of approximately $20.6 million of original issue discount) due from
FJPS and a promissory note in the aggregate principal amount of $2.0 million due
from the Company. The distribution to Trace Foam reduced retained earnings
(accumulated deficit) of the Company.
Trace Management Agreement
Foamex L.P. had a management service agreement with Trace Foam pursuant
to which Trace Foam provided general managerial services of a financial,
technical, legal, commercial, administrative and/or advisory nature to Foamex
L.P. During June 1997, the management services agreement was amended to increase
the annual fee from $1.75 million to $3.0 million, plus reimbursement of
expenses incurred. An amendment to the Foamex L.P. Credit Facility on June 30,
1999 no longer permits Foamex L.P. to pay the management fee. On July 29, 1999,
Foamex L.P. submitted formal notice of the termination of the management
agreement.
Trace New York Sublease
Prior to September 30, 1999, Foamex L.P. subleased to Trace approximately
5,900 square feet of general, executive and administrative office space in New
York, New York. The terms of the lease were substantially the same terms as
Foamex L.P. leased such space from a third party lessor. The Company has closed
the New York office and Foamex L.P. subleased the premises to a third party at
an amount in excess of Foamex L.P.'s lease commitment.
Foam Funding LLC Debt
During 1999, the subsidiaries of the Company paid $7.4 million of
interest and $9.7 million of principal on notes payable to Foam Funding LLC.
In 1998, subsidiaries of the Company paid $6.4 million of interest and
$5.3 million of principal on notes payable to Foam Funding LLC.
Other
The general director of Foamex de Mexico S.A. de C.V. ("Foamex de
Mexico") which is the Company's operating subsidiary in Mexico has a 5% stock
interest in Foamex de Mexico. A member of the board provides consulting services
to the Company for which fees paid to him in 1999 were $0.2 million and were
$0.1 million in 1998.
F-33
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
18. RELATED PARTY TRANSACTIONS AND BALANCES (continued)
During 1999, certain employees of the Company were also employed by
Trace. The Company paid a portion of the total compensation of such employees
based on the amount of time devoted to the Company's matters by such employees
in the aggregate. All such dual employment relationships have been terminated.
Such payments totaled $1.8 million, $2.2 million and $2.5 million in 1999, 1998
and 1997, respectively.
The Company, Recticel, s.a. ("Recticel"), a European polyurethane foam
manufacturer, whose subsidiary was a former partner of Foamex L.P. and is a
current shareholder of the Company, and Beamech Group Limited, an unaffiliated
third party, have an interest in a Swiss corporation that develops new
manufacturing technology for the production of polyurethane foam including the
VPFSM manufacturing process. During 1997, the Company purchased approximately
$1.9 million of scrap material from Recticel under various agreements, the
latest of which expired in March 1998.
19. BUYOUT PROPOSALS
On August 5, 1999, the Company announced that its Board of Directors
signed a letter of intent with Sorgenti Chemical Industries, LLC and Liberty
Partners Holdings 20, LLC (collectively, the "Purchasers") for a business
combination providing for $11.50 per share for all of the Company's outstanding
common stock (the "Sorgenti Transaction"). Under the terms of the letter of
intent, if the Company entered into a business combination with another party,
the Purchasers would be entitled to a break-up fee of $6.0 million plus
reimbursement of certain expenses, subject to certain conditions, including the
willingness of the Purchasers to enter into a definitive agreement providing for
a price of at least $11.50 per share prior to the expiration of the letter of
intent. The proposed transaction was subject to a number of conditions,
including the negotiation of definitive documents regarding certain conditions
relating to the bank credit facilities and the public debt of the Company's
subsidiaries. Additional issues considered included minimum shareholder
acceptance, change of board membership, and other provisions providing for a
higher break-up fee and expense reimbursement if the Company entered into a
business combination providing a more favorable transaction. On December 15,
1999, the Company announced that the letter of intent with the Purchasers, which
had been extended, expired by its terms. The Purchasers had submitted a revised
bid at a price and on terms that were less favorable than those contained in the
letter of intent and the Negotiating Committee of the Company's Board of
Directors rejected the revised bid.
On February 9, 2000, the Company announced that it is in discussions with
respect to a proposal involving the acquisition of all of the Company's
outstanding common stock for cash. The Company stated that the proposal is
subject to a number of conditions, including the buyer's ongoing due diligence
and the execution of definitive agreements. If the proposal from the new group
leads to a transaction, it is anticipated that John G. Johnson, Jr., the
Company's President and Chief Executive Officer, as well as other members of
current management, would participate in the management of the Company following
such a transaction. The Company agreed to an exclusive negotiating period ending
five business days after delivery of its audited financial statements included
in the Company's Annual Report on Form 10-K to the prospective buyer. The
Company expects such delivery to be the same day as the filing of its Annual
Report on Form 10-K with the Securities and Exchange Commission.
In 1998, the Company received an unsolicited buyout proposal from Trace,
the Company's principal stockholder. The Company entered into two merger
agreements, which were subsequently terminated by Trace.
20. COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company is obligated under various noncancelable lease agreements for
rental of facilities, vehicles and other equipment. Many of the leases contain
renewal options with varying terms and escalation clauses that provide for
increased rentals based upon increases in the Consumer Price Index, real estate
taxes and lessors' operating expenses. Total minimum rental commitments
(excluding commitments accrued as part of the Company's various
restructuring/consolidation plans) required under operating leases at December
31, 1999 are:
F-34
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
20. COMMITMENTS AND CONTINGENCIES (continued)
Operating
Leases
----------
(thousands)
2000 $14,804
2001 12,777
2002 11,223
2003 9,034
2004 5,801
Balance 13,311
--------
Total $66,950
=======
Rental expense charged to operations under operating leases approximated
$16.9 million, $18.9 million and $10.1 million for 1999, 1998 and 1997,
respectively. Substantially all such rental expense represented the minimum
rental payments under operating leases.
Litigation - Shareholders
During 1999, the Company received several communications addressed to its
Board of Directors from certain of the Company's stockholders regarding aspects
of the relationship between Trace and the Company. Such stockholders questioned
the propriety of certain relationships and related transactions between Trace
and the Company, which previously had been disclosed in the Company's periodic
filings. On June 14, 1999, the Company received a draft complaint from counsel
of certain stockholders naming the Company and certain current and former
directors, which included allegations similar to those in the Second Amended
Complaint, as defined below. The Company was advised by such counsel that such
stockholders intended to file an action soon thereafter. On August 13, 1999, two
stockholders filed an action on behalf of an alleged class of the Company's
shareholders, entitled Watchung Road Associates, L.P. et al v. Foamex
International Inc., et al., Civil Action No. 17370 (the "Watchung Complaint"),
in the Court of Chancery of the State of Delaware, New Castle County. The suit
names the Company, Mr. Marshall S. Cogan, Mr. Etienne Davignon, Mr. John
Gutfreund, Mr. Robert Hay, Dr. Stuart Hershon, Mr. John G. Johnson, Jr. and Mr.
John Tunney as defendants. The Watchung Complaint alleges that the individual
defendants breached their fiduciary duties by agreeing to the potential buyout
of the Company by Sorgenti Chemical Industries, LLC and Liberty Partners
Holdings 20, LLC.
The Watchung Complaint alleges that the Sorgenti Transaction's buy-out
price of $11.50 per outstanding share is inadequate and fails to take into
consideration claims the Company allegedly has as a result of the supposed
wrongful diversions of Company assets in the Company's dealings with Trace and
its affiliates. The Watchung Complaint also alleges that the directors breached
their fiduciary duties by agreeing to the proposed Sorgenti Transaction without
conducting an auction or active market check. The suit alleges that the board
placed Mr. Cogan's interest ahead of those of the Company's stockholders, and
alleges that a critical condition of the Sorgenti Transaction is a consulting
agreement for Mr. Cogan. The Watchung suit seeks to enjoin the Sorgenti
Transaction, seeks rescission or damages if the Sorgenti Transaction is
consummated, and seeks an accounting from the directors for plaintiffs alleged
losses. The Sorgenti Transaction was not consummated. Defendants have moved to
consolidate this action with In re Foamex International Inc. Shareholders
Litigation, discussed below, and to dismiss the complaint. Plaintiffs have
agreed to consolidate.
On April 26, 1999, a putative securities class action entitled Molitor v.
Foamex International Inc., et al., 99 Civ. 3004, was filed in the United States
District court for the Southern District of New York naming as defendants the
Company, Trace and certain officers and directors of the Company on behalf of
stockholders who bought shares of the Company's common stock during the period
from May 7, 1998 through and including April 16, 1999. The lawsuit alleges that
the defendants violated Section 10(b) of the Securities Exchange Act of 1934 and
Rule 10b-5 by misrepresenting and/or omitting material information about the
Company's financial situation and operations, with the result of artificially
inflating the price of the Company's stock. The lawsuit also alleges that Trace
and Marshall S. Cogan violated Section 20(a) of the Securities Exchange Act of
1934 as controlling persons of the Company. The
F-35
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
20. COMMITMENTS AND CONTINGENCIES (continued)
complaint seeks class certification, a declaration that defendants violated the
federal securities laws, an award of money damages, and costs and attorneys',
accountants' and experts' fees. On May 18, 1999, a similar action entitled
Thomas W. Riley v. Foamex International Inc., et al., 99 Civ. 3653 was filed in
the same court. The two actions have been consolidated, and the Consolidated
Amended Class Action Complain, setting forth the allegations of the two earlier
complaints, was filed on December 6, 1999. The defendants filed motions to
dismiss the consolidated complaint on February 4, 2000. No discovery has taken
place to date.
Beginning on or about March 17, 1998, six actions (collectively the
"Shareholder Litigation") were filed in the Court of Chancery of the State of
Delaware, New Castle County (the "Court"), by stockholders of the Company. The
Shareholder Litigation, purportedly brought as class actions on behalf of all
stockholders of the Company, named the Company, certain of its directors,
certain of its officers, Trace and Trace Merger Sub, Inc. ("Merger Sub") as
defendants alleging that they had breached their fiduciary duties to the
plaintiffs and other stockholders of the Company unaffiliated with Trace in
connection with the original proposal of Trace to acquire the publicly traded
outstanding common stock of the Company for $17.00 per share under an Agreement
and Plan of Merger (the "First Merger Agreement"). The complaints sought, among
other things, class certification, a declaration that the defendants breached
their fiduciary duties to the class, preliminary and permanent injunctions
barring implementation of the proposed transaction, rescission of the
transaction if consummated, unspecified compensatory damages, and costs and
attorneys' fees. A stipulation and order consolidating these six actions under
the caption In re Foamex International Inc. Shareholders Litigation,
Consolidated Civil Action No. 16259NC, was entered by the Court on May 28, 1998.
The parties to the Shareholder Litigation entered into a Memorandum of
Understanding, dated June 25, 1998 (the "Memorandum of Understanding"), to
settle the Shareholder Litigation, subject to, inter alia, execution of a
definitive Stipulation of Settlement between the parties and approval by the
Court following notice to the class and a hearing. The Memorandum of
Understanding provided that as a result of, among other things, the Shareholder
Litigation and negotiations among counsel for the parties to the Memorandum of
Understanding, a special meeting of stockholders would be held to vote upon and
approve the First Merger Agreement which provided, among other things, for all
of the Company's outstanding common stock not owned by Trace and its
subsidiaries (the "Public Shares") to be converted into the right to receive
$18.75 in cash, without interest.
The Memorandum of Understanding also provided for certification of a
class, for settlement purposes only, consisting of the Public Shares owned by
stockholders of the Company unaffiliated with Trace and its subsidiaries (the
"Public Shareholders"), the dismissal of the Shareholder Litigation with
prejudice and the release by the plaintiffs and all members of the class of all
claims and causes of action that were or could have been asserted against Trace,
the Company and the individual defendants in the Shareholder Litigation or that
arise out of the matters alleged by plaintiffs. Following the completion of the
confirmatory discovery which was provided for in the Memorandum of
Understanding, on September 9, 1998, the parties entered into a definitive
Stipulation of Settlement and the Court set a hearing for October 27, 1998 to
consider whether the settlement should be approved (the "Settlement Hearing").
In connection with the proposed settlement, the plaintiffs intended to apply for
an award of attorney's fees and litigation expenses in an amount not to exceed
$925,000, and the defendants agreed not to oppose this application.
Additionally, the Company agreed to pay the cost, if any, of sending notice of
the settlement to the Public Shareholders. On September 24, 1998, a Notice of
Pendency of Class Action, Proposed Settlement of Class Action and Settlement
Hearing was mailed to the members of the settlement class. On October 20, 1998,
the parties to the Shareholder Litigation requested that the Court cancel the
Settlement Hearing in light of the announcement made by Trace on October 16,
1998, that it had been unable to obtain the necessary financing for the
contemplated acquisition by Trace of the Company's common stock at a price of
$18.75 per share, which was the subject matter of the proposed settlement. This
request was approved by the Court on October 21, 1998, and the Company issued a
press release on October 21, 1998, announcing that the Court had cancelled the
Settlement Hearing.
F-36
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
20. COMMITMENTS AND CONTINGENCIES (continued)
On November 10, 1998, counsel for certain of the defendants in the
Shareholder Litigation gave notice pursuant to the Stipulation of Settlement
that such defendants were withdrawing from the Stipulation of Settlement in
light of the notice given by Trace to the Company and the special committee of
the Board of Directors on November 5, 1998 whereby Trace terminated the First
Merger Agreement on the grounds that the financing condition in the First Merger
Agreement was incapable of being satisfied.
On November 12, 1998, the plaintiffs in the Shareholder Litigation filed
an Amended Class Action Complaint (the "Amended Complaint"). The Amended
Complaint named the Company, Trace, Merger Sub, Mr. Marshall S. Cogan, Mr.
Andrea Farace, Dr. Stuart Hershon, Mr. John Tunney, and Mr. Etienne Davignon as
defendants, alleging that they breached their fiduciary duties to plaintiffs and
the other Public Shareholders in connection with a second Agreement and Plan of
Merger (the "Second Merger Agreement"), that the proposal to acquire the Public
Shares for $12.00 per share lacked entire fairness, that the individual
defendants violated 8 Del. Code ss. 251 in approving the Second Merger
Agreement, and that Trace and Merger Sub breached the Stipulation of Settlement.
On December 2, 1998, plaintiffs served a motion for a preliminary injunction,
seeking an Order to preliminarily enjoin the defendants from proceeding with,
consummating or otherwise effecting the merger contemplated by the Second Merger
Agreement. In January 1999, Trace advised that it could not finance the offer
reflected in the Second Merger Agreement. As a result, the preliminary
injunction motion did not go forward.
On June 9, 1999, the plaintiffs in the Shareholder Litigation moved for
leave to file a Second Amended and Supplemental Class Action and Derivative
Complaint (the "Second Amended Complaint"). The Second Amended Complaint was
filed on July 14, 1999, and named the Company, Trace, Merger Sub, Mr. Marshall
S. Cogan, Mr. Andrea Farace, Dr. Stuart Hershon, Mr. John Tunney, and Mr.
Etienne Davignon as defendants, alleging that the named individuals breached
their fiduciary duties by causing the Company to waste assets in its
transactions with Trace and by failing to enforce the Company's rights under the
First Merger Agreement, seeking appointment of a receiver for the Company, and
alleging that Trace and Merger Sub breached the Stipulation of Settlement.
On August 26, 1999, the plaintiffs in the Shareholder Litigation moved
for leave to file a Third Amended and Supplemental Class Action and Derivative
Complaint (the "Third Amended Complaint"). The Third Amended Complaint was filed
on October 27, 1999. The Third Amended Complaint alleges both class claims and
derivative claims, and names the Company, Mr. Marshall S. Cogan, Mr. Andrea
Farace, Dr. Stuart Hershon, Mr. John Tunney, Mr. Etienne Davignon, Mr. John
Gutfreund, Mr. Robert Hay and Mr. John Johnson as defendants.
The Third Amended Complaint alleges that the individual defendants
breached their duties to the Company's Public Shareholders by agreeing to the
Sorgenti Transaction at an inadequate price that fails to take into
consideration the Company's allegedly valuable claims arising out of purported
diversions of money from the Company to Trace, and by failing to maximize
shareholder value in a sale of the Company and instead agreeing to a deal with a
buyer who is willing to enter into a consulting deal with Mr. Cogan to get his
and the board's approval. The Third Amended Complaint purports to assert a
derivative claim for waste and breach of fiduciary duty against Mr. Cogan, Mr.
Farace, Dr. Hershon, Mr. Tunney, Mr. Davignon, Mr. Gutfreund, and Mr. Hay. The
Third Amended Complaint seeks the appointment of a receiver for the Company,
alleging that the directors have mismanaged the Company. The Third Amended
Complaint also alleges that Mr. Cogan, Mr. Farace, Dr. Hershon, Mr. Davignon,
Mr. Tunney, Mr. Gutfreund, and Mr. Hay breached their fiduciary duties by
failing to enforce the Company's rights under the First Merger Agreement.
The Third Amended Complaint seeks: a declaration that the individual
defendants have breached their fiduciary duties; damages; the imposition of a
constructive trust on profits and benefits Mr. Cogan, Trace, and the other
individual defendants allegedly received as a result of the alleged wrongdoing;
an injunction against the Sorgenti Transaction under its present terms;
rescission and damages if the deal is consummated; and the appointment of a
receiver for the Company. Defendants have moved to consolidate this action with
Watchung Road Associates, L.P., et ano v. Foamex International Inc., et al.,
discussed above, and to dismiss the complaint. Plaintiffs have agreed to
consolidation and opposed the motion to dismiss.
F-37
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
20. COMMITMENTS AND CONTINGENCIES (continued)
The defendants intend to vigorously defend these litigations, which if
adversely determined, could have a material adverse effect on the financial
position, results of operations and cash flows of the Company.
Litigation - Breast Implants
As of February 24, 2000, the Company and Trace were two of multiple
defendants in actions filed on behalf of approximately 3,857 recipients of
breast implants in various United States federal and state courts and one
Canadian provincial court, some of which allege substantial damages, but most of
which allege unspecified damages for personal injuries of various types. Three
of these cases seek to allege claims on behalf of all breast implant recipients
or other allegedly affected parties, but no class has been approved or certified
by the court. In addition, three cases have been filed alleging claims on behalf
of approximately 39 residents of Australia, New Zealand, England, and Ireland.
The Company believes that the number of suits and claimants may increase. During
1995, the Company and Trace were granted summary judgments and dismissed as
defendants from all cases in the federal courts of the United States and the
state courts of California. Appeals for these decisions were withdrawn and the
decisions are final.
Although breast implants do not contain foam, certain silicone gel
implants were produced using a polyurethane foam covering fabricated by
independent distributors or fabricators from bulk foam purchased from the
Company or Trace. Neither the Company nor Trace recommended, authorized, or
approved the use of its foam for these purposes. The Company is also indemnified
by Trace for any such liabilities relating to foam manufactured prior to October
1990. Trace's insurance carrier has continued to pay the Company's litigation
expenses after Trace's filing under the Bankruptcy Code. Trace's insurance
policies continue to cover certain liabilities of Trace but if the limits of
those policies are exhausted, it is unlikely that Trace will be able to continue
to provide additional indemnification. While it is not feasible to predict or
determine the outcome of these actions, based on management's present assessment
of the merits of pending claims, after consultation with the general counsel of
the Company, and without taking into account the indemnification provided by
Trace, the coverage provided by Trace's and the Company's liability insurance
and potential indemnity from the manufacturers of polyurethane covered breast
implants, management believes that the disposition of the matters that are
pending or that may reasonably be anticipated to be asserted should not have a
material adverse effect on either the Company's consolidated financial position
or results of operations. If management's assessment of the Company's liability
with respect to these actions is incorrect, such actions could have a material
adverse effect on the financial position, results of operations and cash flows
of the Company.
Litigation - Other
The Company is party to various other lawsuits, both as defendant and
plaintiff, arising in the normal course of business. It is the opinion of
management that the disposition of these lawsuits will not, individually or in
the aggregate, have a material adverse effect on the financial position or
results of operations of the Company. If management's assessment of the
Company's liability with respect to these actions is incorrect, such actions
could have a material adverse effect on the Company's consolidated financial
position.
Environmental
The Company is subject to extensive and changing federal, state, local
and foreign environmental laws and regulations, including those relating to the
use, handling, storage, discharge and disposal of hazardous substances and the
remediation of environmental contamination, and as a result, is from time to
time involved in administrative and judicial proceedings and inquiries relating
to environmental matters. As of September 30, 1999, the Company had accruals of
approximately $4.5 million for environmental matters. During 1998, the Company
established an allowance of $1.2 million relating to receivables from Trace for
environmental indemnifications due to the financial difficulties of Trace.
F-38
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
20. COMMITMENTS AND CONTINGENCIES (continued)
The Clean Air Act Amendments of 1990 (the "1990 CAA Amendments") provide
for the establishment of federal emission standards for hazardous air pollutants
including methylene chloride, propylene oxide and TDI, materials used in the
manufacturing of foam. On December 27, 1996, the United States Environmental
Protection Agency (the "EPA") proposed regulations under the 1990 CAA Amendments
that will require manufacturers of slab stock polyurethane foam and foam
fabrication plants to reduce emissions of methylene chloride. The final National
Emission Standard for Hazardous Air Pollutants ("NESHAP") was promulgated
October 7, 1998. NESHAP requires a reduction of approximately 70% of the
emission of methylene chloride for the slab stock foam industry effective
October 7, 2001. The Company believes that the use of alternative technologies,
including VPFSM, which do not utilize methylene chloride and its ability to
shift current production to the facilities which use these alternative
technologies will minimize the impact of these regulations. The 1990 CAA
Amendments also may result in the imposition of additional standards regulating
air emissions from polyurethane foam manufacturers, but these standards have not
yet been proposed or promulgated.
The Company has reported to appropriate state authorities that it has
found soil and groundwater contamination in excess of state standards at three
facilities and soil contamination in excess of state standards at three other
facilities. The Company has begun remediation and is conducting further
investigations into the extent of the contamination at these facilities and,
accordingly, the extent of the remediation that may ultimately be required. The
actual cost and the timetable of any such remediation cannot be predicted with
any degree of certainty at this time. The Company has accruals of $3.3 million
for the estimated cost of completing remediation at these facilities. The
Company is in the process of addressing potential contamination at its
Morristown, Tennessee facility, and has submitted a sampling plan to the State
of Tennessee. The extent of the contamination and responsible parties, if any,
has not yet been determined. A former owner may be liable for cleanup costs;
nevertheless, the cost of remediation, if any, is not expected to be
significant.
Federal regulations required that by the end of 1998 all underground
storage tanks ("USTs") be removed or upgraded in all states to meet applicable
standards. The Company has upgraded all USTs at its facilities in accordance
with these regulations and recently completed the closure of remaining USTs at
two sites to meet applicable standards. Some petroleum contamination in soils
was found at one of the sites; the extent of the contamination is currently
being investigated. The Company has accrued approximately $0.5 million for the
estimated remediation costs associated with this site. However, the full extent
of contamination, and accordingly, the actual cost of such remediation, cannot
be predicted with any degree of certainty at this time. Based upon the
investigation conducted thus far, the Company believes that its USTs do not pose
a significant risk of environmental liability. However, there can be no
assurances that such USTs will not result in significant environmental liability
in the future.
On April 10, 1997, the Occupational Health and Safety Administration
promulgated new standards governing employee exposure to methylene chloride,
which is used as a blowing agent in some of the Company's manufacturing
processes. The phase-in of the standards was completed in 1999 and the Company
has developed and implemented a compliance program. Capital expenditures
required and changes in operating procedures are not anticipated to
significantly impact the Company's competitive position.
The Company has been designated as a Potentially Responsible Party
("PRP") by the EPA with respect to seven sites. Estimates of total cleanup costs
and fractional allocations of liability are generally provided by the EPA or the
committee of PRP's with respect to the specified site. In each case and in the
aggregate, the liability of the Company is not considered to be significant.
Although it is possible that new information or future developments could
require the Company to reassess its potential exposure relating to all pending
environmental matters, including those described herein, the Company believes
that, based upon all currently available information, the resolution of such
environmental matters will not have a material adverse effect on the Company's
operations, financial position, capital expenditures or competitive position.
The possibility exists, however, that new environmental legislation and/or
environmental regulations may
F-39
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
20. COMMITMENTS AND CONTINGENCIES (continued)
be adopted, or other environmental conditions may be found to exist, that may
require expenditures not currently anticipated and that may be significant.
21. QUARTERLY FINANCIAL DATA (UNAUDITED)
First Second Third Fourth
Quarter Quarter Quarter Quarter (a)
------- ------- ------- -----------
(thousands, except per share amounts)
1999
Net sales $322,863 $313,029 $326,949 $317,152
Gross profit 43,597 43,777 48,813 44,121
Income from continuing operations 6,013 3,177 6,128 4,398
Net income 6,013 3,177 6,128 4,398
Basic earning per share from
continuing operations 0.24 0.13 0.24 0.18
Diluted earnings per share from
continuing operations 0.24 0.13 0.24 0.17
1998 (b)
Net sales $312,290 $298,479 $332,510 $303,117
Gross profit 49,570 54,966 51,319 (1,350)
Income (loss) from continuing operations 4,983 9,320 3,426 (87,582)
Net income (loss) 3,109 9,277 3,426 (87,582)
Basic earning (loss) per share from
continuing operations 0.20 0.37 0.14 (3.50)
Diluted earnings (loss) per share from
continuing operations 0.19 0.36 0.13 (3.50)
(a) Fourth quarter 1999 results were favorably impacted by $1.8 million from
the realization of a business interruption insurance claim partially offset
by fourth quarter adjustments related principally to previously recorded
1999 severance costs. Items that negatively impacted the 1998 fourth
quarter included: (i) additional costs of $4.5 million associated with the
integration of Crain and Foamex L.P., including inventory adjustments for
facilities affected by the consolidation of manufacturing and/or
distribution facilities; (ii) operating losses and inefficiencies of $1.0
million resulting from fires at Orlando, Florida and Cornelius, North
Carolina plants; (iii) operating inefficiencies and logistics costs of $2.5
million associated with the sales of juvenile and other consumer products
sold through mass merchandisers and discount stores; (iv) start up costs
and inefficiencies of $3.0 million associated with new automotive
lamination contracts at Mexican border facilities; (v) increased provisions
for bad debts of $3.0 million for United States and Mexican customers; and
(vi) competitive pricing measures due to market share challenges from
competitors for its foam and automotive products. In addition, the Company
provided a provision allowance on its deferred income tax assets, as
discussed in Note 8.
(b) The 1998 quarterly results have been restated from the amounts reported in
the 1998 Annual Report on Form 10-K. The restated Form 10-Q's reflected a
review of year-end adjustments and restated amounts as filed with the
Securities and Exchange Commission.
F-40
FOAMEX INTERNATIONAL INC.
INDEX TO FINANCIAL STATEMENT SCHEDULES
Index to Financial Statement Schedules
Schedule I - Condensed Financial Information of Registrant
Schedule II - Valuation and Qualifying Accounts
All other schedules are omitted since the required information is not
present or is not present in amounts sufficient to require submission of the
schedule, or because the information required is included in the consolidated
financial statements and notes thereto.
S-1
Schedule I
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS
December 31, December 31,
1999 1998
ASSETS (thousands)
CURRENT ASSETS
Cash and cash equivalents $ 13 $ 187
Intercompany receivables 382 4,623
Other current assets 161 584
--------- ---------
Total current assets 556 5,394
OTHER ASSETS 1 1,078
--------- ---------
TOTAL ASSETS $ 557 $ 6,472
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable $ 40 $ --
Deferred income taxes 1,140 --
Other accrued liabilities 3,061 6,486
--------- ---------
Total current liabilities 4,241 6,486
LONG-TERM LIABILITIES
Revolving loan with consolidated subsidiary 676 --
Notes payable to consolidated subsidiary 2,500 4,990
Tax distribution advance payable -- 13,618
Deficit in consolidated subsidiaries 158,122 183,082
Deferred income taxes -- 976
Other liabilities 1,399 1,439
--------- ---------
Total liabilities 166,938 210,591
--------- ---------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred Stock, par value $1.00 per share:
Authorized 5,000,000 shares - none issued -- --
Common Stock, par value $.01 per share:
Authorized 50,000,000 shares
Issued 27,045,480 and 27,005,752 shares, respectively
Outstanding 25,056,480 and 25,016,752 shares, respectively 270 270
Additional paid-in capital 87,475 86,990
Retained earnings (accumulated deficit) (217,945) (237,661)
Accumulated other comprehensive income (loss) (7,758) (24,721)
Other:
Common Stock held in Treasury, at cost:
1,989,000 shares (19,202) (19,202)
Shareholder note receivable (9,221) (9,795)
--------- ---------
Total stockholders' equity (deficit) (166,381) (204,119)
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 557 $ 6,472
========= =========
See notes to consolidated financial statements.
(continued)
S-2
Schedule I
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF OPERATIONS
1999 1998 1997
--------- --------- ---------
(amounts in thousands except per share amounts)
INTERCOMPANY SALES $ -- $ 12,619 $ 123,355
COST OF GOODS SOLD -- 12,619 123,355
--------- --------- ---------
GROSS PROFIT -- -- --
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 1,417 (183) 486
--------- --------- ---------
INCOME (LOSS) FROM OPERATIONS (1,417) 183 (486)
EQUITY IN EARNINGS (LOSS) OF
CONSOLIDATED SUBSIDIARIES 24,091 (18,260) 4,954
INTEREST EXPENSE 2,042 2,237 153
OTHER INCOME (EXPENSE) 2 (7,326) 204
--------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAX
AND EXTRAORDINARY LOSS 20,634 (27,640) 4,519
INCOME TAX PROVISION 918 42,213 388
--------- --------- ---------
INCOME (LOSS) FROM CONTINUING
OPERATIONS 19,716 (69,853) 4,131
EQUITY IN DISCONTINUED OPERATIONS -- -- (1,994)
--------- --------- ---------
INCOME (LOSS) BEFORE EXTRAORDINARY LOSS 19,716 (69,853) 2,137
EQUITY IN EXTRAORDINARY LOSS -- (1,917) (44,482)
--------- --------- ---------
NET INCOME (LOSS) $ 19,716 $ (71,770) $ (42,345)
========= ========= =========
BASIC EARNINGS (LOSS) PER SHARE:
CONTINUING OPERATIONS $ 0.79 $ (2.79) $ 0.16
========= ========= =========
EARNINGS (LOSS) PER SHARE $ 0.79 $ (2.87) $ (1.68)
========= ========= =========
DILUTED EARNINGS (LOSS) PER SHARE:
CONTINUING OPERATIONS $ 0.78 $ (2.79) $ 0.16
========= ========= =========
EARNINGS (LOSS) PER SHARE $ 0.78 $ (2.87) $ (1.65)
========= ========= =========
Equity in discontinued operations includes allocated income tax benefits of
Foamex International of $1.3 million for 1997.
Equity in extraordinary loss includes allocated income tax benefits of $1.9
million and $27.3 million for 1998 and 1997, respectively.
See notes to consolidated financial statements.
(continued)
S-3
Schedule I
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF CASH FLOWS
1999 1998 1997
-------- -------- --------
OPERATING ACTIVITIES (thousands)
Net income (loss) $ 19,716 $(71,770) $(42,345)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Deferred income taxes 164 45,189 (387)
Equity in discontinued operations -- -- 1,994
Equity in extraordinary loss -- 1,917 44,482
Equity in (earnings) losses of consolidated subsidiaries (24,091) 18,260 (4,954)
Other (34) 1,253 61
Changes in operating assets and liabilities,
net of acquisitions:
Intercompany receivables 4,241 9,919 (4,026)
Accounts payable 40 (10,542) 1,233
Other assets and liabilities (3,176) 1,189 764
-------- -------- --------
Net cash used for operating activities (3,140) (4,585) (3,178)
-------- -------- --------
INVESTING ACTIVITIES
Investment in consolidated subsidiaries -- (20,000) --
Settlement of discontinued operations -- -- (13,556)
Distribution from subsidiaries 17,204 20,293 8,757
Other 924 -- (2,000)
-------- -------- --------
Net cash provided by (used for) investing activities 18,128 293 (6,799)
-------- -------- --------
FINANCING ACTIVITIES
Proceeds from revolving loan with consolidated subsidiary 676 -- --
Proceeds from (repayments of) note payable to consolidated
subsidiary (2,490) 2,490 2,500
Dividend payments -- (1,245) --
Proceeds from (repayments of) tax distribution advance (13,618) -- 13,618
Purchase of treasury stock -- -- (5,739)
Proceeds from exercise of stock options 270 595 1,005
-------- -------- --------
Net cash provided by (used for) financing activities (15,162) 1,840 11,384
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (174) (2,452) 1,407
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 187 2,639 1,232
-------- -------- --------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 13 $ 187 $ 2,639
======== ======== ========
Note: During 1999, 1998 and 1997, the Company received from (paid to) its
consolidated subsidiaries distributions of $(0.1) million, $0.3 million
and $8.8 million, respectively, in accordance with tax sharing
agreements. Also, during 1999, the Company received a special
distribution from its subsidiaries of $17.3 million. The proceeds were
used to repay the tax distribution advance and accrued interest to Foamex
L.P.
See notes to consolidated financial statements.
(continued)
S-4
Schedule II
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(thousands)
Balance at Charged to Charged to Balance at
Beginning of Costs and other End of
Period Expenses Accounts Deductions Period
YEAR ENDED DECEMBER 31, 1999
Allowance for Uncollectible Accounts $ 9,790 $ 2,758 $ - $ 5,074 $ 7,474
======== ======= ======= ======== ========
Reserve for Discounts $ 1,840 $ - $16,846 (1) $ 16,611 $ 2,075
======== ======= ======= ======== ========
Deferred Income Tax Asset
Valuation Allowance $ 85,250 $(7,300) $(4,124) (2) $ - $ 73,826
======== ======= ======= ======== ========
YEAR ENDED DECEMBER 31, 1998
Allowance for Uncollectible Accounts $ 6,844 $ 2,611 $ 2,500 (1) $ 2,165 $ 9,790
======== ======= ======= ======== ========
Reserve for Discounts $ 1,238 $ - $12,516 (1) $ 11,914 $ 1,840
======== ======= ======= ======== ========
Deferred Income Tax Asset
Valuation Allowance $ 13,407 $52,573 $19,270 (3) $ - $ 85,250
======== ======= ======= ======== ========
YEAR ENDED DECEMBER 28, 1997
Allowance for Uncollectible Accounts $ 3,060 $ 2,295 $ 2,898 $ 1,409 $ 6,844
======== ======= ======= ======== ========
Reserve for Discounts $ 3,268 $ - $10,182 (1) $12,212 $ 1,238
======== ======= ======= ======== ========
Deferred Income Tax Asset
Valuation Allowance $ 23,064 $(5,028) $(1,863) (4) $ 2,766 $ 13,407
======== ======= ======= ======== ========
(1) Adjustments reflect a reduction in net sales.
(2) Represents reversal on valuation allowance established on deferred income
tax assets related to minimum pension liability recognized in stockholders'
deficit.
(3) Includes an adjustment to reflect the distribution of valuation reserves
for deferred income tax assets to Trace in connection with the GFI
Transaction (see Note 13 to the consolidated financial statements).
(4) Represents an adjustment to cost in excess of net assets acquired relating
to the utilization of preacquisition deferred income tax assets of General
Felt.
S-5