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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.
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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