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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 (Fee Required)
For the fiscal year ended December 31, 1998
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 Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by nonaffiliates of the
registrant as of April 22, 1999 was $66,696,472.
The number of shares outstanding of the registrant's common stock as of
April 22, 1999 was 25,052,991.
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 10
Item 4. Submission of Matters to a Vote
of Security Holders 13
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 17
Item 8. Financial Statements and Supplementary Data 28
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 28
Part III
Item 10. Directors and Executive Officers of the Registrant 28
Item 11. Executive Compensation 28
Item 12. Security Ownership of Certain Beneficial Owners
and Management 28
Item 13. Certain Relationships and Related Transactions 28
Part IV
Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K 29
Signatures 36
The Registrant will furnish a copy of any exhibit to this Form 10-K upon the
payment of a fee equal to the Registrant's reasonable expense in furnishing such
exhibit.
2
PART I
ITEM l. BUSINESS
General
Foamex International Inc. (the "Company") is a holding company which is
engaged primarily in the business of manufacturing and distributing flexible
polyurethane and advanced polymer foam products. As of December 31, 1998, the
Company's operations are conducted through its wholly owned subsidiaries, Foamex
L.P. and Foamex Carpet Cushion, Inc. ("Foamex Carpet") and consist of the
following operating segments: (i) foam products, (ii) carpet cushion products,
(iii) automotive products, (iv) technical products and (v) other, which
primarily consists of certain foreign manufacturing operations in Mexico and
Asia, corporate expenses not allocated to the other operating segments and
restructuring and other charges. The net sales and income (loss) from operations
of these operating segments for each of the last three years are included in
Note 16 to the consolidated financial statements. The Company was incorporated
in 1993 to act as a holding company for Foamex L.P.
On March 16, 1999, the Company announced that it had hired John G.
Johnson, Jr. as President, Chief Executive Officer and director of the Company
following the resignation of Andrea Farace from the positions of Chairman of the
Board, Chief Executive Officer and director of the Company. The Company also
announced that it had hired JP Morgan Securities Inc. as a financial advisor to
explore strategic alternatives to maximize shareholder value.
On March 16, 1998, the Company announced that its Board of Directors
received an unsolicited buyout proposal from Trace International Holdings, Inc.
("Trace"), the Company's principal stockholder. Trace proposed to acquire all of
the outstanding common stock of the Company not owned by Trace and its
subsidiaries (the "Public Shares") for a cash price of $17.00 per share. As of
March 16, 1998, Trace and its subsidiaries beneficially owned approximately
11,475,000 shares or approximately 46% of the outstanding common stock of the
Company. In response to Trace's offer, the Company's Board of Directors
appointed a special committee to determine the advisability and fairness of the
proposed buyout to the Company's stockholders other than Trace and its
subsidiaries.
On June 25, 1998, Trace, Trace Merger Sub, Inc., a wholly owned
subsidiary of Trace ("Merger Sub"), and the Company entered into an Agreement
and Plan of Merger (the "First Merger Agreement"). Pursuant to the terms of the
First Merger Agreement, Merger Sub would have been merged with and into the
Company (the "First Merger") and each outstanding share of common stock, other
than common stock held by Trace and its subsidiaries, treasury shares, and
common stock with respect to which appraisal rights would have been perfected,
would have been converted into the right to receive $18.75 per share in cash. On
November 5, 1998, Trace terminated the First Merger Agreement, pursuant to its
terms, due to the failure of certain financing conditions.
On November 5, 1998, Trace, Merger Sub and the Company entered into a
second Agreement and Plan of Merger (the "Second Merger Agreement"). Pursuant to
the terms of the Second Merger Agreement, Merger Sub would have been merged with
and into the Company (the "Second Merger") and each outstanding share of common
stock, other than common stock held by Trace and its subsidiaries, treasury
shares, and common stock with respect to which appraisal rights would have been
perfected, would have been converted into the right to receive $12.00 per share
in cash. Trace delivered a letter to the Company, dated January 8, 1999 (the
"Notice of Termination"), terminating the Second Merger Agreement, pursuant to
its terms, due to the failure of certain financing conditions.
In connection with the First Merger Agreement and the Second Merger
Agreement, the Company retained and paid for legal counsel to the Special
Committee, a financial advisor to the Special Committee, legal counsel to the
Board of Directors and a financial advisor to the Board of Directors. In
addition, the Company commenced, but did not close, a debt tender offer, a debt
exchange offer, an internal corporate restructuring and refinancing, and the
offer of three different issues of high-yield notes.
On February 27, 1998, the Company and certain of its affiliates completed
a series of transactions designed to simplify the Company's structure and to
provide future operational flexibility (collectively, the "GFI Transaction").
Prior to the consummation of these transactions, Foamex L.P. defeased the $4.5
million outstanding principal amount of its 9 1/2% senior secured notes due
2000. Foamex L.P. settled its intercompany payables to General Felt
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Industries, Inc. ("General Felt") with $4.8 million in cash and a promissory
note in the aggregate principal amount of $34.0 million supported by a $34.5
million letter of credit under the Foamex L.P. credit facility (the "Foamex/GFI
Note"). The initial transaction resulted in the transfer from Foamex L.P. to
Foam Funding LLC, an indirect wholly owned subsidiary of Trace, of all of the
outstanding common stock of General Felt, in exchange for (i) the assumption by
Foam Funding LLC of $129.0 million of Foamex L.P.'s indebtedness and (ii) the
transfer by Foam Funding LLC to Foamex L.P. of a 1% non-managing general
partnership interest in Foamex L.P. As a result, General Felt ceased being a
subsidiary of Foamex L.P. and was relieved from all obligations under Foamex
L.P.'s 9 7/8% senior subordinated notes due 2007 and 13 1/2% senior subordinated
notes due 2005. Upon consummation of the initial transaction, Foamex Carpet, a
newly formed wholly owned subsidiary of the Company, the Company, Foam Funding
LLC, and General Felt entered into an Asset Purchase Agreement dated February
27, 1998, in which General Felt sold substantially all of its assets (other than
cash, the Foamex/GFI Note and its operating facility in Pico Rivera, California)
to Foamex Carpet in exchange for (i) $20.0 million in cash and (ii) a promissory
note issued by Foamex Carpet to Foam Funding LLC in the aggregate principal
amount of $70.2 million. The $20.0 million cash payment was funded with a
distribution by Foamex L.P. Upon consummation of the transactions contemplated
by the Asset Purchase Agreement, Foamex Carpet entered into a credit agreement
with the institutions from time to time party thereto as issuing banks, and
Citicorp USA, Inc. and The Bank of Nova Scotia, as administrative agents, which
provides for up to $20.0 million in revolving credit borrowings. Foamex Carpet
conducts the carpet cushion business previously conducted by General Felt. Also,
Foam Funding LLC retained ownership of one of General Felt's operating
facilities, which is being leased to Foamex Carpet, and the $34.0 million
Foamex/GFI Note.
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
factors that could cause actual results to differ materially from those set
forth in any such forward-looking statements, such as the ability of the Company
to negotiate amendments of its debt agreements, the Company's ability to
continue operations as a viable going concern, 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.
The principal executive offices of the Company are located at 1000
Columbia Avenue, Linwood, Pennsylvania 19061 and its telephone number is (610)
859-3000.
References in this Annual Report on Form 10-K to the "Company" mean
Foamex International Inc. and, where relevant or applicable, its subsidiaries.
4
Flexible Polyurethane Foam and Advanced Polymer Foam Products
The Company is one of the largest manufacturers and distributors of
flexible polyurethane and advanced polymer foam products in North America. The
Company's operating segments include: (i) foam products, consisting of (a)
cushioning foams for bedding, furniture, packaging and health care applications
and (b) foam-based consumer products such as futons, pillows, mattress pads and
juvenile furniture, (ii) carpet cushion products, consisting of carpet padding
and related products, (iii) automotive products, consisting of automotive trim,
laminates and other products, (iv) technical products, consisting of reticulated
and other specialty foams used for reservoiring, filtration, gasketing and
sealing applications and (v) other, which primarily consists of certain foreign
manufacturing operations in Mexico and Asia, corporate expenses not allocated to
the other operating segments and restructuring and other charges. See Note 16 to
the consolidated financial statements for further discussion of operating
segments.
The Company has a diverse customer base in each of its principal
operating segments. Foam products such as cushioning foams are sold to major
bedding and furniture manufacturers such as Sealy, Simmons and Berkline. In
addition, foam-based consumer products such as futons, pillows, mattress pads
and juvenile furniture are sold to retailers such as Wal-Mart, Kmart and JC
Penney. Carpet cushion products such as carpet underlay are sold to distributors
and major floor covering retailers such as Sears, CarpetMax and Home Depot.
Automotive products such as automotive foam products and laminates are sold to
original equipment manufacturers ("OEMs"), including Ford, General Motors and
DaimlerChrysler, and major tier one suppliers such as Lear Corporation and
Johnson Controls. Technical products such as specialty and technical foams which
consist of reticulated foams and other customized polyester and polyether foams
used for filtration and reservoiring in a wide variety of applications are sold
by companies such as Hewlett-Packard and Briggs & Stratton.
Foam Products
The Company distributes foam products both directly and indirectly
through independent fabrication operations. These foams are used by the bedding
industry in quilts, toppers, cores and border rolls for mattresses, the
furniture industry for seating products and the retail industry for a broad
range of products such as leisure furniture, futons, bean bag chairs, floor
pillows and pet beds. The 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 such as
Sealy, Simmons, Serta, and Spring Air, both directly and indirectly, through
independent fabrication operations. The Company also supplies cut-to-size seat
cushions, back cushions and other pieces to the furniture industry, including to
Berkline, Action, and Schnadig. The consumer products group, acquired as part of
the acquisition of Crain Industries, Inc. ("Crain") in 1997 (the "Crain
Acquisition"), 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.
The development and introduction of value added products continues to be
a priority of the Company 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), one of the Company's
most recent product introductions was created using the VPF(R) manufacturing
process. Reflex(R) materials, which include cushion wraps and cushion cores, are
advanced polymer cushioning products designed to improve comfort, quality and
durability in upholstered furniture and bedding products. The Company has also
introduced high efficiency thermal management foam products for applications
such as work gloves and outerwear.
Carpet Cushion Products
The Company manufactures and distributes carpet cushion products which
include prime, bonded, sponge rubber and felt carpet cushion. Prime carpet
cushion is made from polyurethane foam buns, whereas bonded carpet cushion is
made from various types of scrap foam which are shredded into small pieces,
processed and then bonded using a chemical adhesive. In February 1997, the
Company introduced Plushlife(TM), a proprietary bonded carpet cushion product,
which combines two cushions into a single structure to absorb the energy of foot
traffic and enhance comfort. The Company's carpet cushion products are marketed
through floor covering retailers such as Sears, Carpet Max and Home Depot.
5
Automotive Products
The Company is one of the largest suppliers of automotive foam products
for the North American operations of 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
sub-suppliers. Automotive products are used for trim pads, door panel parts,
headliners, acoustical purposes, 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 since
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.
The Company's new product development and flexible manufacturing
capabilities allow it to produce quality automotive foam products to satisfy
such 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 is one of the first suppliers to introduce a
thermoformable headliner, Customfit(R), made from rigid polyurethane foam. In
addition, the Company recently introduced Isoguard(TM), which is a rubber gasket
material for the automotive and household appliance industries. Also, the use of
tri-laminates has increased due 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 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, ink pad 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, diapers and
cosmetic applications.
6
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. The
Company's Technical Products customers include Hewlett-Packard and Briggs &
Stratton.
Other
Other consists primarily of certain foreign manufacturing operations in
Mexico and Asia, corporate expenses not allocated to the other operating
segments and restructuring and other charges. See Note 16 to the consolidated
financial statements.
Marketing and Sales
As of December 31, 1998, the Company has a marketing and sales force of
approximately 185 employees. The Company's executive vice presidents direct
sales efforts for each operating segment.
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 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 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 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 Technical Products or finish such 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.
International Operations and Export Sales
The Company's net sales for its foreign based operations, primarily in
Canada and Mexico, for 1998, 1997, and 1996 were $122.4 million (9.8% of net
sales), $85.0 million (9.1% of net sales), and $76.0 million (8.2% of net
sales), respectively. The Company's remaining net sales are primarily from
customers located in the United States.
Customers
During the past three years, no one customer accounted for more than
10.0% of the Company's net sales. Customers that represent more than 10% of an
operating segment's net sales are Sealy in foam products and Lear Corporation
and Johnson Controls in automotive products. The loss of any one of these
customers would have a
7
material adverse effect on the Company. During the year ended December 31, 1998,
net sales to the five largest customers comprised approximately $272.0 million
or 21.8% of the Company's net sales.
Manufacturing and Raw Materials
As of December 31, 1998, the Company conducted operations at 72
manufacturing and distribution facilities with a total of approximately 8.9
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. Fabrication 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. For example, the Company's
results of operations in 1998, 1997 and 1996 were adversely affected by net
unrecovered raw material costs. Furthermore, there can be no assurance that
chemical or other suppliers will not increase raw material costs in the future
or that the Company will be able to implement selling price increases to offset
any such raw material cost increases.
The two principal chemicals used in the manufacture of flexible
polyurethane foam are 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 and natural
gas prices. Since September 1994, suppliers of TDI and polyol have increased the
price of these raw materials several times. 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. Thus, while the Company's gross margins with respect
to the portion of rebond carpet cushion produced with scrap foam purchased on
the open market are fairly constant, the Company's gross margins with respect to
the portion of rebond carpet cushion produced with internally generated scrap
foam are subject to significant variation based on the market price of rebond
carpet cushion.
Employees
As of December 31, 1998, the Company employed approximately 6,100
persons, with 5,500 of such employees involved in manufacturing, 415 in
administration and 185 involved in sales and marketing (these numbers include
approximately 245 employees terminated during the first quarter of 1999).
Approximately 1,200 of these employees are located outside the United States.
Also, approximately 1,200 of these employees are covered by collective
bargaining agreements with labor unions, which agreements expire on various
dates from 1999 through 2002. The Company considers relations with its employees
to be good.
8
Competition
The flexible polyurethane foam industry is highly competitive. With
respect to flexible polyurethane foam, competition is based primarily on price,
quality of products and service. 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 such competitors compete in all of the operating
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. The Company employs
approximately 41 full-time research and development employees. Expenditures for
research and development amounted to $3.3 million, $2.4 million, and $2.5
million for 1998, 1997, and 1996, respectively, excluding expenditures by Crain
for research and development prior to its acquisition.
The Company and Recticel, s.a. ("Recticel"), a European polyurethane foam
manufacturer and former partner of Foamex L.P., 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. The Company,
Recticel 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 VPF(R) manufacturing process.
The Company, Recticel and their affiliates have a royalty-free license to use
technology developed by the Swiss corporation.
ITEM 2. PROPERTIES
As of December 31, 1998, the Company conducted its operations at 72
manufacturing and distribution facilities, including five facilities which the
Company intends to close as part of its restructuring/consolidation activities
primarily associated with the Crain Acquisition, of which 18 were owned and 54
were leased. Total floor space in use at the owned manufacturing and
distribution facilities is approximately 3.3 million square feet and total floor
space in use at the leased manufacturing and distribution facilities is
approximately 5.6 million square feet. Sixty-four of these facilities are
located throughout 40 cities in the United States, four facilities are located
throughout two cities in Canada and four facilities are located throughout three
cities in Mexico. The 1999 annual base rental with respect to such leased
facilities is approximately $11.1 million under leases expiring from 1999 to
2007. The Company does not anticipate any problem in renewing or replacing any
of such leases expiring in 1999. In addition, the Company has approximately 1.4
million square feet of idle space of which approximately 0.8 million is leased.
The Company maintains administrative and sales offices in Linwood,
Pennsylvania; Fort Smith, Arkansas; Atlanta, Georgia; Chicago, Illinois; St.
Louis, Missouri, Southfield, Michigan; and New York, New York.
9
ITEM 3. LEGAL PROCEEDINGS
Environmental Matters
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. During 1998, expenditures in connection with the
Company's compliance with federal, state, local and foreign environmental laws
and regulations did not have a material adverse effect on the Company's
operations, financial position, capital expenditures or competitive position. As
of December 31, 1998, the Company had accruals of approximately $4.8 million for
environmental matters. During 1998, the Company established an allowance of $1.2
million relating to receivables from Trace for environmental indemnification due
to the financial difficulties of Trace (see Note 1 to consolidated financial
statements).
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 does not believe implementation of the regulation
will require it to make material expenditures due to the Company's use of
alternative technologies which do not utilize methylene chloride and its ability
to shift current production to the facilities which use such alternative
technologies. 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.
In addition to federal regulatory requirements, state laws have resulted
or could result in more stringent regulations regarding the use and emission of
certain chemicals. For example, in California, methylene chloride usage was
phased out at the end of 1995, while in Kent, Washington, a former Crain
facility, pursuant to consent decrees as well as applicable laws, must over a
period of time phase out methylene chloride usage. The Company believes that use
of methylene chloride in certain applications can be reduced to be in compliance
with certain state and federal laws. Specifically, through the development of
the Enviro-Cure(R) process, which uses ambient or refrigerated air to remove the
heat of reaction during the foam curing process and various carbon dioxide
processes, the Company believes that it can reduce its methylene chloride usage.
The Company has installed the Enviro-Cure(R) process at its manufacturing
facilities in Compton, California; San Leandro, California; Elkhart, Indiana;
Tupelo, Mississippi; and Conover, North Carolina and carbon dioxide systems at
its Compton, California; Eddystone, Pennsylvania; Kent, Washington; Corry,
Pennsylvania; and Orlando, Florida plants. There can be no assurance; however,
that the Enviro-Cure(R) process will successfully reduce methylene chloride
usage to be in compliance with applicable state and federal laws or that the use
of Enviro-Cure(R) will not lead to violations of other applicable environmental
laws emissions.
The Company has reported to appropriate state authorities that it has
found soil contamination in excess of state standards at facilities in Orlando,
Florida; La Porte, Indiana; Conover, North Carolina; Cornelius, North Carolina;
Fort Wayne, Indiana; and at a former facility in Dallas, Texas and groundwater
contamination in excess of state standards at the Orlando, Conover, and
Cornelius 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 the
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 material.
10
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 operating tanks 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 Company does not believe that it will be required to make any
material expenditures to comply with these new standards.
The Company has been designated as a Potentially Responsible Party
("PRP") by the EPA with respect to nine sites with an estimated total liability
to the Company for the nine sites of less than $1.0 million. 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, the liability of the Company is not considered to be material.
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 material.
Legal Proceedings
Stockholder Litigation
Beginning on or about March 17, 1998, six actions (collectively the
"Stockholder Litigation") were filed in the Court of Chancery of the State of
Delaware, New Castle County (the "Court"), by stockholders of the Company. The
Stockholder 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 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. The complaints sought, among other things, class
certification, a declaration that the defendants have 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 Stockholder Litigation entered into a Memorandum of
Understanding, dated June 25, 1998 (the "Memorandum of Understanding"), to
settle the Stockholder 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 Stockholder
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 the
Public Shares owned by stockholders of the Company unaffiliated with Trace and
its subsidiaries (the "Public Stockholders") to be converted into the right to
receive $18.75 in cash, without interest.
11
The Memorandum of Understanding also provided for certification of a
class, for settlement purposes only, consisting of the Public Stockholders, the
dismissal of the Stockholder 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 Stockholders Litigation or that arise out of the matters
alleged by plaintiffs. Following the completion of the confirmatory discovery
which was provided for in the Memorandum of Understanding, on September 9, 1998,
the parties entered into a definitive Stipulation of Settlement and the Court
set a hearing to consider whether the settlement should be approved for October
27, 1998 (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 Stockholders. 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 Stockholder 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
Stockholder 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 Stockholder 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 Stockholders in connection with the Second Merger, 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.
The defendants have denied, and continue to deny, that they have
committed or have threatened to commit any violation of law or breaches of duty
to plaintiffs or the purported class or any breach of the Stipulation of
Settlement. The defendants intend to vigorously defend the Stockholder
Litigation. If the Stockholder Litigation is adversely determined, it could have
a material adverse effect on the financial position, results of operations and
cash flows of the Company.
In addition, on or about November 18, 1998, a putative class action was
filed in the United States District Court for the Eastern District of New York
on behalf of all persons who purchased common stock of the Company between March
16, 1998 and October 19, 1998, naming Trace as defendant and alleging that Trace
breached a contract between the putative class members and Trace. By order dated
January 8, 1999, the Court transferred the action to the United States District
Court for the Southern District of New York. Trace made a motion to dismiss the
action on February 8, 1999, which motion is pending before the Court, and the
Court has stayed all discovery in the action until the motion is decided.
Neither the Company nor any of the individual directors of the Company are named
as defendants in this litigation.
Breast Implant Litigation
As of April 16, 1999, the Company and Trace were two of multiple
defendants in actions filed on behalf of approximately 4,321 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,
12
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. Although Trace has paid the Company's litigation expenses to date from
insurance proceeds Trace received, there can be no assurance that Trace will be
able to continue to provide such 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 Trace, and without taking into account the indemnification provided
by Trace, the coverage provided by Trace and the Company's liability insurance
and potential indemnity from the manufacturers of polyurethane covered breast
implants, management believes that the disposition of 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 or Trace'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.
Other Litigation
On April 14, 1999, the Company received 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 have been disclosed in the Company's periodic
filings. The Company's Board of Directors, in consultation with its special
counsel, is in the process of evaluating such communications and what actions,
if any, to take with respect thereto.
In November 1997, a complaint was filed in the United States District
Court for the Southern District of Texas alleging that various defendants,
including Crain through the use of the CARDIO(R) process licensed from a third
party, infringed on a patent held by plaintiff. The Company is negotiating with
the licensor of the process for the assumption of the defense of the action by
the licensor, however, the action is in the preliminary stages, and there can be
no assurance as to the ultimate outcome of the action. Such action could have a
material adverse effect on the financial position, results of operations and
cash flows of the Company.
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 the
Company 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
13
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". As of April 21, 1999, NASDAQ required the Company to use the symbol
"FMXIE" to indicate that the Company was delinquent in its obligation to file
its Annual Report on Form 10-K for the year ended December 31, 1998. As the Form
10-K was filed with the Securities and Exchange Commission on April 23, 1999,
the Company anticipates that the symbol will revert to "FMXI" on April 27, 1999.
On April 15, 1999, NASDAQ advised the Company, in writing, that a timely
filing of its Annual Report on Form 10-K is a condition for the Company's
continuing listing on the NASDAQ pursuant to NASDAQ's Rule 4310(c)(14) and that
in order to avoid delisting, the Company must file its Annual Report on Form
10-K by April 26, 1999.
After the Company filed with the Securities and Exchange Commission, on
March 31, 1999, for an extension of time for filing its 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. Such failure to file
in a timely fashion will affect the Company's ability to file registration
statements on Form S-3, could subject the Company to enforcement action by the
Securities and Exchange Commission and, as noted above, could have affected the
Company's ability to list its stock through the NASDAQ.
NASDAQ advised the Company in February 1999 that it was reviewing its
qualification for continued listing on NASDAQ because the Company did not hold
an Annual Meeting of Stockholders for 1997. The Company advised NASDAQ of the
reasons why no meeting was held, which related to the proposed going private
transactions that were the subject of merger agreements in 1998, and that a
meeting would be held in May 1999.
The following table sets forth the high and low bid prices for the common
stock on the NMS based on information supplied by NASDAQ.
High Low
1999
Quarter Ended March 31, 1999 $13 3/8 $ 4 26/32
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
1997
Quarter Ended December 28, 1997 $14 3/4 $ 9 3/8
Quarter Ended September 28, 1997 $15 1/4 $ 9 1/2
Quarter Ended June 29, 1997 $15 7/8 $12
Quarter Ended March 30, 1997 $22 1/8 $15
As of April 9, 1999, there were approximately 150 holders of record of
the common stock.
In December 1997, 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
14
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.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table presents selected historical consolidated financial
data of the Company. The results of operations of acquired businesses (as noted
below) are included from the dates of their respective acquisitions. 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) (2)
1998 (3)(4) 1997 (6) 1996 (7) 1995 (8) 1994
----------- -------- -------- -------- ----
(thousands, except for earnings per share)
Statements of Operations Data:
Net sales $ 1,246,396 $ 931,095 $ 926,351 $ 862,834 $ 833,660
Income (loss) from continuing
operations (69,853) 4,131 32,492 (50,750) 22,211
Basic earnings (loss) per share from
continuing operations (2.79) 0.16 1.28 (1.92) 0.83
Diluted earnings (loss) per share from
continuing operations (2.79) 0.16 1.26 (1.92) 0.83
Balance Sheet Data (at period end):
Total assets $ 874,965 $ 893,623 $ 619,846 $ 748,242 $ 786,895
Long-term debt, classified as current (5) 771,092 -- -- -- --
Long-term debt 8,240 735,724 483,344 514,954 502,980
Stockholders' equity (deficit) (204,119) (113,419) (58,103) 29,383 92,145
(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 years 1994 through 1995 were restated for discontinued operations.
(3) Includes net restructuring and other credits of $9.7 million (see Note 4
to the consolidated financial statements), and the increase in the
valuation allowance for deferred tax assets.
(4) The 1998 financial statements have been prepared assuming the Company
will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company has violated certain debt
covenants and is seeking amendments; however, there can be no assurance
that such amendments will be obtained and therefore the Company has
reclassified the majority of its long-term debt as current, which raises
substantial concern about the Company's ability to continue as a going
concern. In addition, the Company has been informed by Trace that Trace
has substantial debt obligations and may not have the financial resources
to pay these obligations when due within the near future. As a result,
Trace creditors could foreclose or otherwise attach the Company's stock.
Such an event could result in the acceleration of substantially all of
the Company's debt. Management's plans in regard to these matters are
described in Note 1 to the consolidated financial statements. The
financial statements do not include any adjustments that might result
from the outcome of these uncertainties.
Based on the realization of the deferred tax assets not being more likely
than not, the Company has provided a valuation allowance of approximately
$56.8 million relating to net deferred tax assets as of December 31,
1998.
15
(5) As of December 31, 1998, the Company has classified approximately $771.1
million of long-term debt as current. The Company is in the process of
negotiating amendments to the debt covenants described in (4) above to
become compliant with its debt agreements. There can be no assurance,
however, that the covenants will be amended. See Note 1 to the consolidated
financial statements.
(6) The Statements of Operations Data includes restructuring and other charges
of $21.1 million (see Note 4 to the consolidated financial statements), but
does not include the results of operations of Crain which was acquired
December 23, 1997 since the effect is insignificant. The Balance Sheet Data
included the estimated fair value of the net assets acquired in the Crain
Acquisition.
(7) Includes restructuring credits of $6.5 million (see Note 4 to the
consolidated financial statements).
(8) Includes restructuring and other charges of $41.4 million.
16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The Company operates in the flexible polyurethane and advanced polymer
foam products industry. As of December 31, 1998, the Company's operations are
conducted through its wholly owned subsidiaries, Foamex L.P. and Foamex Carpet
and consist of the following operating segments (i) foam products, (ii) carpet
cushion products, (iii) automotive products, (iv) technical products and (v)
other, which primarily consists of certain foreign manufacturing operations,
corporate expenses not allocated to the other operating segments and
restructuring and other charges. The net sales and income (loss) from operations
of these operating segments for each of the last three years are included in
Note 16 of the consolidated financial statements. The following discussion
should be read in conjunction with the consolidated financial statements and
related notes thereto of the Company included in this Annual Report on Form
10-K.
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements and under "Liquidity and Capital Resources"
below, the Company's subsidiaries are not in compliance with certain financial
covenants contained in the agreements governing approximately $480.4 million
principal amount of indebtedness. As a result, the Company has reclassified
approximately $771.1 million of long-term debt as current. Such non-compliance
provides that the lenders under those agreements upon notice and lapse of time
can declare all of such indebtedness to be due. Notwithstanding the fact that to
date the lenders have not executed such rights and have granted waivers of such
covenants through May 5, 1999 to enable the subsidiaries to negotiate amendments
of such covenants; there can be no assurance that such amendments will be
obtained and therefore such indebtedness has been classified as current on the
Company's financial statements. Such classification raises substantial concern
about the Company's ability to continue as a going concern. In addition, the
Company has been informed by Trace that Trace had substantial debt obligations
that were due at the end of December 1998 and did not have the financial
resources to pay those obligations. Subsequently, Trace informed the Company
that waivers and/or modifications of such indebtedness had been obtained for at
least the near future; however, there can be no assurance that such waivers
and/or modifications will remain in effect prior to obtaining a permanent
resolution. If Trace were to default on its indebtedness secured by the
Company's common stock or other Trace creditors were to take steps constituting
a default under such indebtedness (such as filing an involuntary bankruptcy
petition), and if the holders of such secured indebtedness were to foreclose on
the Company's common stock held by Trace, such event could trigger the
acceleration and put rights of substantially all of the debt of the Company as
described above. Although management believes that all such debt obligations
would be refinanced under such circumstances, there can be no assurance that the
Company or its subsidiaries would be able to do so. As a result, Trace creditors
could foreclose or otherwise attach the Company's stock. Such an event may
result in the acceleration of substantially all of the Company's debt.
Management's plans in regard to these matters are described in Note 1 to the
consolidated financial statements. In December 1998, the Company established a
reserve of $3.0 million against net operating receivables due from Trace. The
financial statements do not include any further adjustments that might result
from the outcome of these uncertainties.
On March 16, 1999, the Company announced that it had hired John G.
Johnson, Jr. as President, Chief Executive Officer and director of the Company
following the resignation of Andrea Farace from the positions of Chairman of the
Board, Chief Executive Officer and director of the Company. The Company also
announced that it had hired JP Morgan Securities Inc. as a financial advisor to
explore strategic alternatives to maximize shareholder value.
In 1998, the Company received an unsolicited buyout proposal from Trace,
the Company's principal stockholder. The Company entered into the First Merger
Agreement and the Second Merger Agreement which were subsequently terminated by
Trace. See "Business General". The Company incurred $6.5 million in fees
associated with the proposed transaction.
On February 27, 1998, the Company and certain of its affiliates completed
the GFI Transaction. See "Business - General". As a result of the GFI
Transaction the Company recorded transaction expenses of approximately $1.6
million as other expense and an extraordinary loss on the early extinguishment
of debt in the amount of approximately $1.9 million (net of income taxes).
17
Acquisitions and Disposition
On December 23, 1997, the Company acquired Crain pursuant to a merger
agreement with Crain Holdings Corp. ("Crain Holdings") 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. In connection with the Crain
Acquisition, the Company approved a restructuring/consolidation plan for the two
entities. The Company recorded restructuring charges of $21.1 million relating
to the restructuring of the Company's operations in connection with the Crain
Acquisition and related transactions. In addition, the Company recorded
approximately $1.5 million of severance and related costs and $8.5 million for
costs associated with the shut down and consolidation of certain facilities
acquired in the Crain Acquisition.
On October 6, 1997, the Company sold 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, net of post-closing adjustments which were
finalized in December 1997. The Company used the net proceeds of the sale to
reduce borrowings under an existing Foamex L.P. credit facility by approximately
$38.8 million. The Company incurred an extraordinary loss on early
extinguishment of debt of approximately $0.6 million (net of income taxes).
On June 12, 1997, the Company substantially completed a refinancing plan
(the "1997 Refinancing Plan") designed to reduce the Company's interest expense
and increase its financing flexibility. The 1997 Refinancing Plan included a
tender offer to purchase $489.7 million of the Company's public debt, the
payment of $5.2 million of Foamex L.P.'s term loan borrowings under an existing
credit facility and the payment of related fees and expenses. In addition, the
tender offer included amending the existing indentures to remove substantially
all of the restrictive covenants. The Company purchased $459.0 million of public
debt under the tender offer and incurred an extraordinary loss on the early
extinguishment of debt of approximately $42.0 million (net of income tax
benefits of $25.7 million). The 1997 Refinancing Plan was funded by $347.0
million of borrowings under a new credit facility (the "Credit Facility") and
the net proceeds from the issuance of $150.0 million principal amount of senior
subordinated notes. As a result of the 1997 Refinancing Plan, the Company's
total long-term debt increased by $63.9 million. The 1997 Refinancing Plan was
designed to reduce the Company's interest expense even after giving effect to
the additional borrowings. The Company's future interest expense will vary based
on a variety of factors, including fluctuations in interest rates in general. As
a result of the 1997 Refinancing Plan, variable rate debt comprised a larger
percentage of the Company's overall indebtedness than in the past, and as a
result, future fluctuations in interest rates will have a greater impact on the
Company's interest expense than in the past.
On October 1, 1997, the Company redeemed approximately $26.2 million of
the approximately $30.7 million of the Company's outstanding public debt that
was not tendered as part of the 1997 Refinancing Plan. These redemptions were
funded with borrowings under the Credit Facility. In connection with these
redemptions, the Company incurred an extraordinary loss on the early
extinguishment of debt of approximately $1.3 million (net of income taxes). The
remaining outstanding public debt of approximately $4.5 million that was not
tendered as part of the 1997 Refinancing Plan was defeased in February 1998 and
redeemed in June 1998.
During 1996, the Company sold Perfect Fit Industries, Inc. ("Perfect
Fit") and JPS Automotive L.P. ("JPS Automotive") which comprised the home
comfort products and automotive textile business segments, respectively, of the
Company. The consolidated financial statements of the Company were restated for
discontinued operations and include a net loss of $113.9 million (net of $34.9
million income tax benefit) on the disposal of these business segments, which
includes provisions for operating losses during the phase-out period. (See Note
9 to the consolidated financial statements).
General
The Company's automotive foam customers are predominantly OEMs or other
automotive suppliers. As such, the sales of these product lines are directly
related to the overall level of passenger car and light truck production in
North America. Also, the Company's sales are sensitive to sales of new and
existing homes, changes in personal disposable income and seasonality. The
18
Company typically experiences two seasonally slow periods during each year, in
early July and in late December, due to scheduled plant shutdowns and holidays.
Operating results for 1999 are expected to be influenced by various
internal and external factors. These factors include, among other things, (i)
the Company's debt structure and the Company's ability to successfully to amend
its Credit Facility and certain other indebtedness, (ii) the Company's capital
structure, (iii) continued implementation of the consolidation plan with Crain,
(iv) additional raw material cost increases, if any, by the Company's chemical
suppliers, (v) the Company's success in passing on to its customers selling
price increases to recover such raw material cost increases and (vi)
fluctuations in interest rates.
RESULTS OF OPERATIONS
In the fourth quarter of 1998 the Company adopted SFAS 131. This rule
required companies to report information about their business segments on the
basis of how they are managed and evaluated by the chief operating
decision-makers. Each of the operating segments is headed by an executive vice
president who is responsible for developing plans and directing the operations
of the segment.
The Company's reportable business segments are foam products, carpet
cushion products, automotive products and technical products. The foam products
segment manufactures and markets foam used by the bedding industry, furniture
industry and the retail industry. The carpet cushion products segment
distributes prime, rebond, sponge rubber and felt carpet cushion. The automotive
products segment supplies foam primarily for automotive interior applications to
automotive manufacturers and to industry sub suppliers. The Technical Products
segment manufactures and markets reticulated foams and other custom polyester
and polyether foams for industrial, specialty and consumer and safety
applications.
The "other" column in the table below represents certain foreign
manufacturing operations in Mexico and Asia that do not meet the quantitative
threshold for determining reportable segments, corporate expenses not allocated
to the other operating segments and restructuring and other charges. Total asset
information by operating segment is not reported because many of the Company's
facilities produce products for multiple operating segments. Data for 1997 and
1996 has been restated to reflect the implementation of SFAS 131.
Carpet
Foam Cushion Automotive Technical
Products Products Products Products Other Total
-------- -------- -------- -------- ----- -----
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
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
1996
Net sales 325,067 291,338 227,151 70,325 12,470 926,351
Income (loss) from operations 32,120 18,503 28,397 17,897 4,527 101,444
Depreciation and amortization 10,935 4,450 3,127 2,484 1,357 22,353
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
19
1997. During 1998, selling, general and administrative expenses increased $22.0
million primarily due to costs associated with the integration of Crain and the
Company (the "Transition"). Also during 1998, the Company recorded income of
$15.1 million for the reversal of 1997 restructuring charges and $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 the (v) 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 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.
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 problems of $8.5 million at
the Mexico City facility, start up costs of $2.5 million for the Company's Asian
subsidiary and duplicate administrative costs incurred during the Transition.
20
Income (Loss) from Continuing Operations
Income (loss) from continuing operations decreased to a loss of $69.8
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, discussed below,
offset by an increase in income from operations, as previously discussed. The
increase in interest and debt issuance expense is primarily due to the debt
incurred in connection with the Crain Acquisition offset by the favorable effect
of the 1997 Refinancing Plan. The decrease in other income (expense), net is due
to primarily associated with (i) costs of $2.1 million related to the GFI
Transaction, (ii) foreign currency losses of $3.0 million in Mexico and Canada,
(iii) fees of $6.5 million associated with financial and legal advisors used by
the Company in the buy-out proposal (as discussed previously) and (iv) a
writedown of $1.1 million in the investment in Trace Global Fund.
Income Taxes
The 1998 provision for income taxes of $58.2 million represents an
increase in valuation allowance of $56.2 million for deferred tax assets as the
Company has determined that as of December 31, 1998, it will be more likely than
not to have insufficient future income to utilize its net operating losses and
realize other deferred income tax assets. See Note 11 to the consolidated
financial statements. In addition, the Company did not recognize the tax
benefits associated with losses in Mexico since it appears likely that such net
operating losses will not be able to be realized in the near future. At December
31, 1998, the Company had approximately $120.0 million of regular tax net
operating loss carryforwards for federal income tax purposes expiring from 2010
to 2012.
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 connection with the 1997 Refinancing Plan.
1997 Compared to 1996
Net sales for 1997 were $931.1 million as compared to $926.4 million in
1996, an increase of $4.7 million or 0.5%. The increase in net sales was
primarily associated with the foam products segment due to higher sales volume
of bedding related products and expansion of facilities in Mexico City. Income
from operations was $55.1 million for 1997 as compared to $101.4 million in
1996. The decrease was primarily due to unrecovered raw material cost increases,
product mix change to lower margin products, 1997 restructuring and other
charges of $21.1 million as compared to a restructuring credit of $6.5 million
in 1996, and an increase in selling, general and administrative expenses of $8.8
million for 1997 as compared to 1996. The 1997 restructuring and other charges
are related to the restructuring of the Company's operations in connection with
the Crain Acquisition. The increase in selling, general and administrative
expenses is the result of increases in the provision for uncollectible accounts,
employee compensation and incentives, research and development costs, and travel
and promotion costs associated with the launching of new products and
international expansion.
Foam Products
Foam products net sales for 1997 increased 3.0% to $334.9 million from
$325.1 million in 1996 primarily due to increased net sales volume from both new
and existing customers of bedding related products. Income from operations
decreased 4.5% to $30.7 million (9.2% of net sales) from $32.1 million (9.9% of
net sales). The decreases were primarily associated with unrecovered material
cost increases offset by an increase in net sales.
21
Carpet Cushion Products
Carpet cushion products net sales for 1997 decreased 6.0% to $273.9
million from $291.3 million in 1996. Income from operations decreased 53.8% to
$8.5 million (3.1% of net sales) from $18.5 million (6.4% of net sales). The
decrease was primarily associated with (i) the sale in October 1997 of the
Dalton, Georgia facility which manufactured needlepunch carpeting, tufted
carpeting, and artificial grass products and had net sales of approximately $8.3
million in the fourth quarter of 1996, (ii) reduction in rebond carpet cushion
selling prices due to lower trim material costs, and (iii) a shift in product
mix from higher price carpet cushion to lower price carpet cushion.
Automotive Products
Automotive products net sales for 1997 decreased 0.6% to $225.9 million
from $227.2 million in 1996. Income from operations decreased 13.2% to $24.6
million (10.9% of net sales) from $28.4 million (12.5% of net sales). The
decrease in operating margin was associated with a shift in product mix to
increased volume of lower margin lamination products from higher margin roll
goods.
Technical Products
Technical Products net sales for 1997 increased 8.5% to $76.3 million
from $70.3 million in 1996 primarily due to increased net sales volume of
commercial and industrial products. Income from operations was unchanged at
$17.9 million (23.5% of net sales) in 1997 compared to $17.9 million (25.4% of
net sales) in 1996. The decrease in percentage of income from operations to net
sales was primarily associated with a higher mix of lower margin industrial
products in 1997 as compared to higher margin commercial products in 1996.
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 was primarily
associated with the expansion of facilities in Mexico City. The decrease in
income from operations was primarily associated with the start up in Mexico City
and $21.1 million of restructuring and other charges in 1997 as compared to $6.5
million of income in 1996.
Income from Continuing Operations
Income from continuing operations was $4.1 million for 1997 as compared
to $32.5 million in 1996. The decrease is primarily due to the reasons cited
above offset by a decrease in interest and debt issuance expense of $3.3
million. The decrease in interest and debt issuance expense is primarily due to
the favorable impact of the 1997 Refinancing Plan.
Income Taxes
The 1997 effective income tax rate for continuing operations was
approximately 38.0% as compared to 33.9% for 1996. The 1996 income taxes
included a net benefit of approximately $3.0 million associated with the
reversal of valuation allowances offset by the impact of permanent differences
and other matters. The reversal of the valuation allowances resulted from a
determination in 1996 that a subsidiary that files separate federal income tax
returns would more likely than not have sufficient taxable income to utilize its
net operating loss carryforwards and other deferred income tax assets as a
result of improved continuing operations and divestiture of a subsidiary that
historically incurred taxable losses.
Discontinued Operations
The loss from discontinued operations of $2.0 million (net of income
taxes) in 1997 relates to the final post-closing settlement regarding the
December 1996 sale of JPS Automotive. The loss from discontinued operations of
$114.5 million in 1996 relates to the net loss on the 1996 sale of the home
comfort products and automotive textile business segments which consisted
22
primarily of the net assets of Perfect Fit and JPS Automotive, respectively, and
the operating income (loss) of both entities through their respective closing
dates. See Note 9 to the consolidated financial statements for further
discussion.
Extraordinary Loss
The extraordinary loss on early extinguishment of debt of $44.5 million
(net of income taxes) primarily relates to the write-off of debt issuance costs
and redemption premiums associated with the early extinguishment of long-term
debt in connection with the 1997 Refinancing Plan.
Liquidity and Capital Resources
Liquidity
The Company is a holding company whose 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 the Credit Facility, if necessary, (provided that such Credit
Facility is successfully amended, as described below) will be adequate to meet
Foamex L.P.'s liquidity requirements. The ability to meet such liquidity
requirements could be impaired if Foamex L.P. were to fail to comply with any
covenants contained in the Credit Facility and such noncompliance was not cured
by Foamex L.P. or waived by the lenders. Foamex L.P. amended its Credit Facility
in March 1999. The amendment adjusted financial covenants, among other things,
as of December 31, 1998 and provided for future measurement periods taking into
account Foamex L.P.'s estimated operating results and financial condition for
1998 and management expectations regarding future measurement periods. As the
Foamex L.P. actual 1998 net loss was worse than originally estimated, on April
15, 1999, Foamex L.P. obtained a waiver through May 5, 1999, of the financial
covenants contained in the Credit Facility and certain events of default arising
out of its Mexican operations, in order to enable it to negotiate a further
amendment of the Credit Facility. There can be no assurance that such an
amendment will be obtained, and the failure to obtain such an amendment would
have a material adverse effect on Foamex L.P. and the Company. 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 Foamex Carpet's credit facility (the "Foamex Carpet Credit
Facility"), if necessary, (provided that such Foamex Carpet Credit Facility is
successfully amended, as described below) will be adequate to meet Foamex
Carpet's liquidity requirements. The ability to meet such liquidity requirements
could be impaired if Foamex Carpet were to fail to comply with any covenants
contained in the Foamex Carpet Credit Facility and other financing arrangements
and such noncompliance was not cured by Foamex Carpet or waived by the lenders.
Foamex Carpet amended the Foamex Carpet Credit Facility and other financing
arrangements in March 1999. The amendments adjusted financial covenants, among
other things, as of December 31, 1998 and provided for future measurement
periods taking into account Foamex Carpet's estimated operating results and
financial conditions for 1998 and management expectations regarding future
measurement periods. As the Foamex Carpet actual 1998 earnings was worse than
originally projected, on April 15, 1999, Foamex Carpet obtained waivers through
May 5, 1999, of the financial covenants contained in the Foamex Carpet Credit
Facility and other financial arrangements, in order to enable it to negotiate
further amendments of the Foamex Carpet Credit Facility and the other financial
arrangements. There can be no assurance that such amendments will be obtained,
and the failure to obtain such amendments would have a material adverse effect
on Foamex Carpet and the Company. 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.
23
Certain credit agreements and promissory notes of Foamex L.P. and Foamex
Carpet pursuant to which approximately $505.2 million of debt has been issued
contain provisions that would result in the acceleration of such indebtedness if
Trace were to cease to own at least 30% of the outstanding common stock of the
Company. Similarly, certain indentures of Foamex L.P. and Foamex Capital
Corporation relating to approximately $248.0 million of senior subordinated
notes contain provisions that provide the holders of such senior subordinated
notes with the right to require the issuers thereof to repurchase such senior
subordinated notes at a price in cash equal to 101% of the aggregate principal
amount thereof, plus accrued and unpaid interest thereon, if Trace falls below
certain specified ownership levels of common stock and other persons or group
owns a greater percentage of common stock than Trace. Trace has previously
informed the Company that it had substantial debt obligations that were due at
the end of December 1998 and did not have the financial resources to pay those
obligations. Subsequently, Trace informed the Company that waivers and/or
modifications of such indebtedness had been obtained for at least the near
future; however, there can be no assurance that such waivers and/or
modifications will remain in effect prior to obtaining a permanent resolution.
If Trace were to default on its indebtedness secured by the Company's common
stock or other Trace creditors were to take steps constituting a default under
such indebtedness (such as filing an involuntary bankruptcy petition), and if
the holders of such secured indebtedness were to foreclose on the Company's
common stock held by Trace, such event could trigger the acceleration and put
rights of substantially all of the debt of the Company as described above.
Although management believes that all such debt obligations would be refinanced
under such circumstances, there can be no assurance that the Company or its
subsidiaries would be able to do so.
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company's subsidiaries are not in
compliance with certain financial covenants contained in the agreements
governing approximately $480.4 million principal amount of indebtedness. As a
result, the Company has reclassified approximately $771.1 million of long-term
debt as current. Such non-compliance provides the lenders under those
agreements, with the right, upon the notice and lapse of time to declare all of
such indebtedness to be due. To date the lenders have not executed such rights
and have granted the Company a waiver of such covenants through May 5, 1999 to
enable the Company to negotiate an amendment of such covenants; there can be no
assurance that such amendments will be obtained and therefore such indebtedness
has been classified as current on the Company's financial statements. Such
classification raises substantial doubt about the Company's ability to continue
as a going concern. In addition, the Company has been informed by Trace that
Trace had substantial debt obligations that were due at the end of December 1998
and did not have the financial resources to pay those obligations. Subsequently,
Trace informed the Company that waivers and/or modifications of such
indebtedness had been obtained for at least the near future; however, there can
be no assurance that such waivers and/or modifications will remain in effect
prior to obtaining a permanent resolution. If Trace were to default on its
indebtedness secured by the Company's common stock or other Trace creditors were
to take steps constituting a default under such indebtedness (such as filing an
involuntary bankruptcy petition), and if the holders of such secured
indebtedness were to foreclose on the Company's common stock held by Trace, such
event could trigger the acceleration and put rights of substantially all of the
debt of the Company as described above. Although management believes that all
such debt obligations would be refinanced under such circumstances, there can be
no assurance that the Company or its subsidiaries would be able to do so. As a
result, Trace creditors could foreclose or otherwise attach the Company's stock.
Such an event may result in the acceleration of substantially all of the
Company's debt. In December 1998, the Company established a reserve of $3.0
million against net operating receivables due from Trace. The financial
statements do not include any further adjustments that might result from the
outcome of these uncertainties.
The Company has reclassified substantially all of its debt from long-term
debt to reflect such debt as current liabilities. If, however, the Company's
subsidiaries are able to amend the relevant covenants in their credit agreements
and other financial arrangements, the Company may be able to reclassify the
liabilities as long-term debt. However, there can be no assurance that the
Company's subsidiaries will be able to obtain the necessary amendments, or if
obtained, that it will once again be able to classify such liabilities as
long-term.
Cash and cash equivalents remained fairly constant during 1998 with $12.6
million at December 31, 1998 as compared to $12.0 million at December 28, 1997.
Cash and cash equivalents decreased $10.2 million during 1997 to $12.0 million
at December 28, 1997 from $22.2 million at December 29, 1996 primarily due to
the decrease in net cash provided by operating activities. Excluding the
reclassification of other long-term debt to current, working capital decreased
24
$4.4 million during 1998 to $134.1 million at December 31, 1998 from $138.5
million at December 28, 1997 primarily due to a $8.2 million increase in net
operating assets and liabilities and a $12.7 million decrease in accrued
restructuring and plant consolidation offset by a $22.5 million increase in
accrued liabilities. Net operating assets and liabilities (comprised of accounts
receivable, inventories and accounts payable) increased $8.2 million to $172.5
million at December 31, 1998 as compared to $164.3 million at December 28, 1997.
The increase was primarily due to increases in accounts receivable and
inventories offset by an increase in accounts payable. The increase in accounts
receivable was primarily associated with the timing of cash receipts from major
customers. The increase in inventories was primarily due to year-end purchases
of raw materials to maintain favorable pricing with chemical suppliers and
projected net sales during the first quarter of 1999. In addition, inventories
increased because of lower than anticipated sales during the month of December
1998. The increase in accounts payable is primarily associated with the year-end
purchase of raw material inventories. The decrease in accrued restructuring and
plant consolidation was primarily associated with the payment of costs for
closure of facilities during 1998. The increase in other accrued liabilities is
primarily associated with an increase in workers compensation liabilities, $7.3
million for checks issued to be funded under the Credit Facility and other
general increases. Working capital increased $1.9 million during 1997 to $138.5
million at December 28, 1997 from $136.6 million at December 29, 1996 primarily
due to the increase in operating assets. Net operating assets and liabilities
(comprised of accounts receivable, inventories and accounts payable) increased
$21.4 million during 1997 to $164.3 million at December 28, 1997 from $142.9
million at December 29, 1996 primarily due to increases in accounts receivable
and inventories offset by an increase in accounts payable. These increases are
primarily associated with the Crain Acquisition. The Company's
restructuring/consolidation plan includes accruals of approximately $16.7
million of cash charges of which $4.7 million is expected to be paid during
1999.
As of December 31, 1998, there were $139.4 million of revolving credit
borrowings, at an average interest rate of 7.89%, under the Credit Facility with
$6.5 million available for borrowing and approximately $49.1 million of letters
of credit outstanding which are supported by the Credit Facility. Borrowings by
Foamex Canada Inc. as of December 31, 1998 were approximately $2.9 million, at
an interest rate of 7.25%, under Foamex Canada Inc.'s revolving credit agreement
with unused availability of approximately $2.3 million. Foamex Carpet had no
outstanding borrowings under the Foamex Carpet Credit Facility at December 31,
1998 with unused availability of $19.3 million and including approximately $0.7
million of letters of credit outstanding which are supported by the Foamex
Carpet Credit Facility.
Cash Flow from Operating Activities
Cash flow from continuing operations was a negative $13.9 million and a
positive $0.4 million and $41.3 million in 1998, 1997, and 1996, respectively.
Cash flow from continuing operations decreased in 1998 as compared to 1997
primarily as a result of the loss from continuing operations, as described
above, and an increased use of cash by the operating assets and liabilities.
Cash flow from continuing operations decreased in 1997 as compared to 1996
primarily as a result of the use of approximately $44.0 million of cash for
premiums and costs associated with the 1997 Refinancing Plan offset by decreased
cash used for operating assets and liabilities.
Cash Flow from Investing Activities
From the beginning of 1996 through 1998, the Company spent approximately
$90.5 million on capital improvements. The expenditures included: (i) the
construction of a facility in Mexico City, Mexico to improve manufacturing
efficiencies and to meet the growing local demand for foam products; (ii) the
expansion and modernization of a facility in Orlando, Florida to improve
manufacturing efficiencies, (iii) installation of more efficient foam production
line systems and fabricating equipment in a number of manufacturing facilities
and (iv) installation of flame laminators to support the increased volume of
automotive laminated products. The Company expects to reduce capital
expenditures from historical levels for the foreseeable future.
On December 23, 1997, the Company acquired Crain pursuant to a merger
agreement with Crain Holdings for a purchase price of approximately $213.7
million, which was primarily funded with $118.0 million of bank borrowings under
the Credit Facility and the assumption of debt with a face value of
approximately $98.6 million (and an estimated fair value of approximately $112.3
million). Fees and expenses associated with the Crain Acquisition were
approximately $13.2 million.
25
On October 6, 1997, the Company sold 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 sales price was
approximately $41.0 million, net of post-closing adjustments which were
finalized in December 1997.
During 1996, the Company received net sale proceeds of approximately
$59.5 million in connection with the sale of Perfect Fit ($42.7 million) and the
sale of JPS Automotive ($16.8 million). The Perfect Fit sale was finalized in
1996 and the net sale proceeds were used to repurchase long-term debt and for
the payment of certain retained liabilities. The JPS Automotive sale price was
finalized in December 1997.
Cash Flow from Financing Activities
In connection with the GFI Transaction in March 1998, the Company
extinguished approximately $125.1 million of term loans under the Credit
Facility funded with $129.0 million of new term loan agreements by Foam Funding
LLC. See Note 13 to the consolidated financial statements. In addition, during
March 1998, Foamex L.P. defeased the outstanding $4.5 million of senior secured
notes due 2000.
On June 12, 1997, the Company substantially completed the 1997
Refinancing Plan designed to reduce the Company's interest expense and increase
its financing flexibility. The 1997 Refinancing Plan included a tender offer to
purchase $489.7 million of the Company's public debt, the payment of $5.2
million of Foamex L.P.'s term loan borrowings under an existing credit facility
and the payment of related fees and expenses. In addition, the tender offer
included amending the existing indentures to remove substantially all of the
restrictive covenants. The Company purchased $459.0 million of public debt under
the tender offer and incurred an extraordinary loss on the early extinguishment
of debt of approximately $42.0 million (net of income tax benefit of $25.7
million). The 1997 Refinancing Plan was funded by $347.0 million of borrowings
under the Credit Facility and the net proceeds from the issuance of $150.0
million principal amount of senior subordinated notes. As a result of the 1997
Refinancing Plan, the Company's total long-term debt increased by $63.9 million.
The 1997 Refinancing Plan was designed to reduce the Company's interest expense
even after giving effect to the additional borrowings. The Company's future
interest expense will vary based on a variety of factors, including fluctuations
in interest rates in general. As a result of the 1997 Refinancing Plan, variable
rate debt comprised a larger percentage of the Company's overall indebtedness
than in the past, and as a result, future fluctuations in interest rates will
have a greater impact on the Company's interest expense than in the past.
On October 1, 1997, the Company redeemed approximately $26.2 million of
the approximately $30.7 million of the Company's outstanding public debt that
was not tendered as part of the 1997 Refinancing Plan. These redemptions were
funded with borrowings under the Credit Facility. In connection with these
redemptions, the Company incurred an extraordinary loss on the early
extinguishment of debt of approximately $1.3 million (net of income taxes). The
remaining outstanding public debt of approximately $4.5 million that was not
tendered as part of the 1997 Refinancing Plan was defeased in February 1998 and
redeemed in June 1998.
On October 6, 1997, the Company sold 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 Company used the net
proceeds of the sale to reduce borrowings under the Credit Facility by
approximately $38.8 million.
During 1997 and 1996, the Company repurchased long-term debt of
approximately $42.4 million with the net proceeds from the sale of Perfect Fit.
During 1997 and 1996, the Company purchased shares of its common stock
for an aggregate cost of $5.7 million and $6.3 million, respectively, under
programs authorized by the Board of Directors to purchase up to 3.0 million
shares of the Company's common stock.
26
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.
The amount of liabilities recorded by the Company in connection with
environmental matters as of December 31, 1998 was $4.8 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 footnotes to the Company's 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 material adverse effect on the Company's operations, financial
position, capital expenditures or competitive position. See "Legal Proceedings -
Environmental Matters."
Inflation and Other Matters
There was no significant impact on the Company's operations as a result
of inflation during the prior three year period; however, during 1998, 1997 and
1996, the Company's results of operations were adversely affected by raw
material cost increases. 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. For example, the
Company's results of operations in 1998, 1997 and 1996 were adversely affected
by net unrecovered raw material costs. See "Results of Operations" for a
discussion of the impact of raw material price increases. In some circumstances,
market conditions or customer expectations may prevent the Company from
increasing the price of its products to offset the inflationary pressures that
may increase its costs in the future.
Year 2000 Compliance
The Company uses numerous business information systems as well as
manufacturing support systems that could be impacted by the "Year 2000 Problem".
The Year 2000 Problem arises from computer programs that were written using two
digits rather than four to designate the year.