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.
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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.
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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.
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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.
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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.
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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
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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.
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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.
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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.
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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.
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<PAGE>
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
<PAGE>
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
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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
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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.
<TABLE>
<CAPTION>
Fiscal Year (1) (2)
1998 (3)(4) 1997 (6) 1996 (7) 1995 (8) 1994
----------- -------- -------- -------- ----
(thousands, except for earnings per share)
<S> <C> <C> <C> <C> <C>
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
<FN>
(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.
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<PAGE>
(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.
</FN>
</TABLE>
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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).
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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
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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.
<TABLE>
<CAPTION>
Carpet
Foam Cushion Automotive Technical
Products Products Products Products Other Total
-------- -------- -------- -------- ----- -----
<S> <C> <C> <C> <C> <C> <C>
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
</TABLE>
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
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<PAGE>
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.
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<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
$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
<PAGE>
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.
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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. In connection with the Year 2000
Problem, date-sensitive computer software may recognize a date using "00" as the
year 1900 rather than the year 2000. This could result in system failures or
miscalculations which would cause significant operational disruptions.
The Company has a Year 2000 Executive Sponsor Team comprised of
representatives of the Company. The Year 2000 Executive Sponsor Team is
providing direction to and receiving reports from the Year 2000 Steering
Committee (the "Steering Committee") within the organization. The Steering
Committee has completed an assessment of the state of readiness of the
Information Technology ("IT") and non-IT systems of the Company. These
assessments cover desktop computers, environmental systems, manufacturing
systems (including laboratory information systems) field instrumentation, and
significant third party vendor and supplier systems, which include employee
compensation and benefit plan maintenance systems. The Steering Committee is
also in the process of assessing the readiness of the Company's significant
customers and suppliers.
The Year 2000 assessment process for each facility consists of an
inventory of Year 2000 sensitive equipment, an assessment of the impact of
possible failures, determination of required remediation actions, if any, and
testing and implementation of these solutions. The inventory, assessment,
remediation and testing phases were completed at the end of 1998, with fail safe
testing and final implementation currently taking place in 1999. The progress of
these phases as of March 31, 1999 is summarized as follows.
The Company completed the inventory and assessment phases of the project
by December 31, 1998. These phases consisted of a visit to each critical
location by team members to promote awareness of the project and verify the
initial inventory provided by the contact at each facility. Testing plans were
developed which included correspondence with suppliers regarding date-sensitive
devices. In addition, local management was advised of their roles and
responsibilities in connection with the Year 2000 Problem.
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The Company completed the remediation and testing of critical business
information computer systems as of December 31, 1998. The completion of these
phases included the modification of several million lines of system code, the
conversion of the systems acquired from Crain to standard business information
computer systems, upgrading system hardware and operating system software,
testing of the applicable systems in a development testing area, and the
migration of the remediated systems into the production environment.
The Company estimates it will spend $2.0 million in connection with the
Year 2000 Problem. The spending estimate will be refined as phases of the
project are completed. Spending on the Year 2000 Problem is funded by cash
generated from operations.
Management believes that all significant systems controlled by the
Company will be Year 2000 ready in the latter half of 1999. While the Steering
Committee is communicating readiness to third party customers, as requested, and
is assessing the readiness of critical suppliers, there can be no assurance that
third parties with a significant business relationship will successfully test,
reprogram, and replace all of their IT and non-IT systems on a timely basis. As
part of the overall response to the Year 2000 Problem, the Company is in the
process of developing contingency plans in the event of Year 2000 non-compliance
of certain systems or third parties. Details of such contingency plans will be
determined after the Steering Committee has completed its assessment of its
supply chain, other third parties and the potential for possible failures.
There is inherent uncertainty in connection with the Year 2000 Problem
due to the possibility of unanticipated failures by third party customers and
suppliers. Accordingly, the Company is unable, at this time, to assess the
extent and resulting materiality of the impact of possible Year 2000 failures on
its operations, liquidity or financial position. The Year 2000 assessment,
remediation, and testing process continues to provide information in order to
reduce the level of uncertainty regarding the impact of the Year 2000 Problem.
Management believes that if the Company's solutions to the Year 2000 Problem are
completed as scheduled such solutions may help minimize the possibility of
significant disruptions to the Company's operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
An index to the financial statements and the required financial statement
schedules is set forth in Item 14.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
The information required by this Part III (Items 10, 11, 12 and 13) is
hereby incorporated by reference pursuant to Reg. 12b-23 of the Exchange Act to
the Company's definitive proxy statement which is expected to be filed pursuant
to Regulation 14A of the Exchange Act no later than 120 days after the end of
the fiscal year covered by this Annual Report on Form 10-K.
28
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial statements
Foamex International Inc. and Subsidiaries:
Report of Independent Accountants F-2
Consolidated Balance Sheets as of December 31, 1998
and December 28, 1997 F-3
Consolidated Statements of Operations for the years
ended 1998, 1997, and 1996 F-5
Consolidated Statements of Cash Flows for the years
ended 1998, 1997, and 1996 F-6
Consolidated Statements of Stockholders' Equity
(Deficit) for the years ended 1998, 1997, and 1996 F-7
Notes to Consolidated Financial Statements F-8
Foamex International Inc. and Subsidiaries
Financial Statement Schedules:
Schedule I - Condensed Financial Information of Registrant S-2
Schedule II - Valuation and Qualifying Account S-5
(b) Reports on Form 8-K.
Form 8-K, dated September 2, 1998 announcing commencement of
tender offer for $248.0 million of public debt. Form 8-K, dated
October 16, 1998 reporting the termination of the First Merger
Agreement.
Form 8-K, dated November 4, 1998 reporting the change in fiscal
year from 52-53 week to calendar year for the Company, Foamex
L.P., and Foamex Capital Corporation.
Form 8-K, dated November 5, 1998 reporting the signing of the
Second Merger Agreement.
Form 8-K, dated January 8, 1999 reporting the termination of the
Second Merger Agreement.
Form 8-K, dated March 11, 1999 reporting press release involving
preliminary earnings, appointment of John G. Johnson, Jr. and
amendments to credit agreements, guarantee and promissory notes.
Form 8-K, dated April 20, 1999 reporting update to preliminary
earnings.
(c) Exhibits
2.1(x) - Transfer Agreement, dated as of February 27, 1998, by and
between Foam Funding LLC and Foamex L.P.
2.2(x) - Asset Purchase Agreement, dated as of February 27, 1998, by and
among Foamex Carpet Cushion, Inc. ("Foamex Carpet"), Foamex
International Inc. ("Foamex International"), Foam Funding LLC and
General Felt Industries, Inc. ("General Felt").
2.3(z) - Agreement and Plan of Merger, dated as of November 5, 1998, by
and among Foamex International, Trace International Holdings, Inc.
and Trace Merger Sub Corp.
2.4(aa) - Agreement and Plan of Merger, dated as of June 25, 1998, by and
among Trace International Holdings, Inc., Trace Merger Sub, Inc.
and Foamex International Inc.
2.5(z) - Notice of termination of Agreement and Plan of Merger, dated as
of November 5, 1998, from Trace International Holdings, Inc. to
Foamex International Inc.
3.1(a) - Certificate of Limited Partnership of Foamex L.P.
3.2.1(a) - Fourth Amended and Restated Agreement of Limited Partnership of
Foamex L.P., dated as of December 14, 1993, by and among FMXI,
Inc. ("FMXI") and Trace Foam Company, Inc. ("Trace Foam"), as
general partners, and Foamex International, as a limited partner
(the "Partnership Agreement").
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3.2.2(b) - First Amendment to the Partnership Agreement, dated June 28,
1994.
3.2.3(c) - Second Amendment to the Partnership Agreement, dated June 12,
1997.
3.2.4(v) - Third Amendment to the Partnership Agreement, dated December 23,
1997. 3.2.5(x) - Fourth Amendment to the Partnership Agreement,
dated February 27, 1998.
3.3(y) - Certificate of Incorporation of FMXI.
3.4(y) - By-laws of FMXI.
3.5(k) - Certificate of Incorporation of Foamex Capital Corporation
("FCC").
3.6(k) - By-laws of FCC.
3.7.1(a) - Certificate of Incorporation of Foamex International.
3.7.1 - Amendment to Certificate of Incorporation of Foamex
International.
3.7.2(cc) - Certificate of Incorporation of Foamex Carpet Cushion, Inc.
("Foamex Carpet")
3.8(a) - By-laws of Foamex International.
3.8.1(cc) - By-laws of Foamex Carpet.
4.1.1(d) - Indenture, dated as of June 12, 1997, by and among Foamex L.P.,
FCC, the Subsidiary Guarantors and The Bank of New York, as
trustee, relating to $150,000,000 principal amount of 9 7/8%
Senior Subordinated Notes due 2007 (the "9 7/8% Notes"), including
the form of Senior Subordinated Note and Subsidiary Guarantee.
4.1.2(v) - First Supplemental Indenture, dated as of December 23, 1997,
between Foamex LLC ("FLLC") and The Bank of New York, as trustee,
relating to the 9 7/8% Notes.
4.1.3(x) - Second Supplemental Indenture, dated as of February 27, 1998,
among Foamex L.P. and FCC, as joint and several obligors, General
Felt, Foamex Fibers, Inc. (`Foamex Fibers"), and FLLC, as
withdrawing guarantors, and The Bank of New York, as trustee,
relating to the 9 7/8% Notes.
4.1.4(d) - Registration Rights Agreement, dated as of June 12, 1997, by and
among Foamex L.P., FCC, General Felt, Foamex Fibers, and all
future direct or indirect domestic subsidiaries of Foamex L.P. or
FCC, and Donaldson, Lufkin & Jenrette Securities Corporation,
Salomon Brothers Inc. and Scotia Capital Markets, as Initial
Purchasers.
4.2.1(v) - Indenture, dated as of December 23, 1997, by and among Foamex
L.P., FCC, the Subsidiary Guarantors, Crain Holdings Corp., as
Intermediate obligator, and The Bank of New York, as trustee,
relating to $98,000,000 principal amount of 13 1/2% Senior
Subordinated Notes due 2005 (the "13 1/2% Notes"), including the
form of Senior Subordinated Note and Subsidiary Guarantee.
4.2.2(x) - First Supplemental Indenture, dated as of February 27, 1998,
among Foamex L.P. and FCC, as joint and several obligors, General
Felt, Foamex Fibers and FLLC, as withdrawing guarantors, Crain
Industries, Inc., as withdrawing intermediate obligor, and The
Bank of New York, as trustee, relating to the 13 1/2% Notes.
4.3(x) - Discharge of Indenture, dated as of February 27, 1998, by and
among Foamex L.P., General Felt, Foamex International and State
Street Bank and Trust Company, as trustee, relating to the 9 1/2%
Senior Secured Notes due 2000.
4.4.1(x) - Credit Agreement, dated as of June 12, 1997, as amended and
restated as of February 27, 1998, by and among Foamex L.P., and
FMXI, the institutions from time to time party thereto as lenders,
the institutions from time to time party thereto as issuing banks,
and Citicorp USA, Inc. and The Bank of Nova Scotia, as
Administrative Agents.
4.4.1.2(bb) - Amendment No. 2 to Foamex L.P. Credit Agreement, dated March 11,
1999.
4.4.2(x) - Second Amended and Restated Foamex International Guaranty, dated
as of February 27, 1998, made by Foamex International in favor of
Citicorp USA, Inc., as Collateral Agent.
4.4.3(x) - Amended and Restated Partnership Guaranty, dated as of February
27, 1998, made by FMXI in favor of Citicorp USA, Inc., as
Collateral Agent.
4.4.4(p) - Foamex Guaranty, dated as of June 12, 1997, made by Foamex L.P.
in favor of Citicorp USA, Inc., as Collateral Agent.
4.4.5(p) - Subsidiary Guaranty, dated as of June 12, 1997, made by Foamex
Latin America, Inc. in favor of Citicorp USA, Inc., as Collateral
Agent.
4.4.6(p) - Subsidiary Guaranty, dated as of June 12, 1997, made by Foamex
Mexico, Inc. in favor of Citicorp USA, Inc., as Collateral Agent.
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4.4.7(p) - Subsidiary Guaranty, dated as of June 12, 1997, made by FCC in
favor of Citicorp USA, Inc., as Collateral Agent. 4.4.8(p) -
Subsidiary Guaranty, dated as of June 12, 1997, made by Foamex
Mexico II, Inc. in favor of Citicorp USA, Inc., as Collateral
Agent.
4.4.9(p) - Subsidiary Guaranty, dated as of June 12, 1997, made by Foamex
Asia, Inc. in favor of Citicorp USA, Inc., as Collateral Agent.
4.4.10(p) - Subsidiary Pledge Agreement, dated as of June 12, 1997, made by
FCC in favor of Citicorp USA, Inc., as Collateral Agent.
4.4.11(p) - Subsidiary Pledge Agreement, dated as of June 12, 1997, made by
Foamex Latin America, Inc. in favor of Citicorp USA, Inc., as
Collateral Agent.
4.4.12(p) - Subsidiary Pledge Agreement, dated as of June 12, 1997, made by
Foamex Asia, Inc. in favor of Citicorp USA, Inc., as Collateral
Agent.
4.4.13(p) - Subsidiary Pledge Agreement, dated as of June 12, 1997, made by
Foamex Mexico, Inc. in favor of Citicorp USA, Inc., as Collateral
Agent.
4.4.14(p) - Subsidiary Pledge Agreement, dated as of June 12, 1997, made by
Foamex Mexico II, Inc. in favor of Citicorp USA, Inc., as
Collateral Agent.
4.4.15(p) - Foamex Security Agreement, dated as of June 12, 1997, made by
Foamex L.P. in favor of Citicorp USA, Inc., as Collateral Agent.
4.4.16(p) - Subsidiary Security Agreement, dated as of June 12, 1997, made
by Foamex Latin America, Inc. in favor of Citicorp USA, Inc., as
Collateral Agent.
4.4.17(p) - Subsidiary Security Agreement, dated as of June 12, 1997, made
by Foamex Mexico, Inc. in favor of Citicorp USA, Inc., as
Collateral Agent.
4.4.18(p) - Subsidiary Security Agreement, dated as of June 12, 1997, made
by Foamex Mexico II, Inc. in favor of Citicorp USA, Inc., as
Collateral Agent.
4.4.19(p) - Subsidiary Security Agreement, dated as of June 12, 1997, made
by Foamex Asia, Inc. in favor of Citicorp USA, Inc., as Collateral
Agent.
4.4.20(p) - Subsidiary Security Agreement, dated as of June 12, 1997, made
by FCC in favor of Citicorp USA, Inc., as Collateral Agent.
4.4.21(r) - Foamex Pledge Agreement, dated as of June 12, 1997, made by
Foamex L.P. in favor of Citicorp USA, Inc., as Collateral Agent.
4.4.22(w) - First Amendment to Foamex Pledge Agreement, dated as of December
23, 1997, by Foamex L.P. in favor of Citicorp USA, Inc., as
Collateral Agent.
4.4.23(w) - First Amendment to Foamex Security Agreement, dated as of
December 23, 1997, by Foamex L.P. in favor of Citicorp USA, Inc.,
as Collateral Agent.
4.4.24(w) - First Amendment to Foamex Patent Agreement, dated as of December
23, 1997, by Foamex L.P. in favor of Citicorp USA, Inc., as
Collateral Agent.
4.4.25(w) - First Amendment to Trademark Security Agreement, dated as of
December 23, 1997, by Foamex L.P. in favor of Citicorp USA, Inc.,
as Collateral Agent.
4.4.26(w) - Acknowledgment of Guaranty by each of the guarantors to a
Guaranty dated June 12, 1997 in favor of Citicorp USA, Inc.
4.4.27(w) - First Amendment to Pledge Agreement, dated as of December 23,
1997, by pledgors in favor of Citicorp USA, Inc.
4.4.28(w) - Crain Industries Guaranty, dated as of December 23, 1997, made
by Crain in favor of Citicorp USA, Inc.
4.4.29(x) - Partnership Pledge Agreement, dated as of February 27, 1998,
made by Foamex International and FMXI in favor of Citicorp USA,
Inc., as Collateral Agent.
4.4.30(bb) - Amendment No. 1 to Second Amended and Restated Foamex
International Guaranty, dated March 11, 1999.
4.4.31(bb) - Amendment No. 1 to Foamex International Guaranty, dated March
12, 1999.
4.4.32 - Foamex Patent Agreement, dated as of June 12, 1997, by Foamex
L.P. in favor of Citicorp USA, Inc., as Collateral Agent.
4.4.33 - Trademark Security Agreement, dated as of June 12, 1997, by
Foamex L.P. in favor of Citicorp USA, Inc., as Collateral Agent.
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4.5(u) - Commitment letter, dated July 17, 1997, from The Bank of Nova
Scotia to Foamex Canada Inc.
4.6(a) - Subordinated Promissory Note, dated as of May 6, 1993, in the
original principal amount of $7,014,864 executed by Foamex L.P. to
John Rallis ("Rallis").
4.7(a) - Marely Loan Commitment Agreement, dated as of December 14, 1993,
by and between Foamex L.P. and Marely s.a. ("Marely").
4.8(a) - DLJ Loan Commitment Agreement, dated as of December 14, 1993, by
and between Foamex L.P. and DLJ Funding, Inc. ("DLJ Funding").
4.9.1(p) - Promissory Note, dated June 12, 1997, in the aggregate principal
amount of $5,000,000, executed by Trace Holdings to Foamex L.P.
4.9.2(p) - Promissory Note, dated June 12, 1997, in the aggregate principal
amount of $4,794,828, executed by Trace Holdings to Foamex L.P.
4.10.1(x) - Credit Agreement, dated as of February 27, 1998, by and among
Foamex Carpet, the institutions from time to time party thereto as
lenders, the institutions from time to time party thereto as
issuing banks and Citicorp USA, Inc. and The Bank of Nova Scotia,
as administrative agents.
4.10.2(x) - Foamex International Guaranty, dated as of February 27, 1998,
made by Foamex International in favor of Citicorp USA, Inc., as
Collateral Agent.
4.10.3(x) - Foamex International Pledge Agreement, dated as of February 27,
1998, made by Foamex International in favor of Citicorp USA, Inc.,
as Collateral Agent.
4.10.4(x) - New GFI Security Agreement, dated as of February 27, 1998, made
by Foamex Carpet in favor of Citicorp USA, Inc., as Collateral
Agent.
4.10.5(x) - New GFI Intercreditor Agreement, dated as of February 27, 1998,
by and among Foamex Carpet, The Bank of Nova Scotia, as
Administrative Agent, and Citicorp USA, Inc., as Administrative
Agent and Collateral Agent.
4.10.6(x) - FII Intercreditor Agreement, dated as of February 27, 1998, by
and between Foamex International and Citicorp USA, Inc., as
Collateral Agent.
4.10.7 - Amendment No. 1 to Foamex L.P. Credit Agreement, dated as of
October 30, 1998.
4.10.8(bb) - Amendment No. 2 to Foamex L.P. Credit Agreement, dated March 12,
1999.
4.10.9 - Amendment No. 1 to Foamex Carpet Cushion, Inc. Credit Agreement,
dated October 30, 1998.
4.10.10(bb) - Amendment No. 2 to Foamex Carpet Cushion, Inc. Credit Agreement,
dated March 12, 1999.
4.11.1(x) - Promissory Note of Foamex L.P. in favor of Foam Funding LLC in
the principal amount of $34 million, dated February 27, 1998.
4.12.1(x) - Promissory Note of Foamex Carpet in favor of Foam Funding LLC in
the principal amount of $70.2 million, dated February 27, 1998.
4.12.2(bb) - Amendment to Promissory Note, dated March 15, 1999.
4.13 -Waiver, dated as of April 15, 1999 to the Credit Agreement, dated
as of February 27, 1998, among Foamex Carpet Cushion, Inc., the
institutions party thereto as Lenders, the institutions party
thereto as Issuing Banks, and Citicorp USA, Inc. and The Bank of
Nova Scotia as Administrative Agents.
10.1.1(p) - Amendment to Master Agreement, dated as of June 5, 1997, between
Citibank, N.A. and Foamex L.P.
10.1.2(p) - Amended Confirmation, dated as of June 13, 1997, between
Citibank, N.A. and Foamex L.P.
10.1.3(w) - Amended Confirmation, dated as of February 2, 1998, between
Citibank, N.A. and Foamex L.P.
10.2(h) - Reimbursement Agreement, dated as of March 23, 1993, between
Trace Holdings and General Felt.
10.3(h) - Shareholder Agreement, dated December 31, 1992, among, s.a.
("Recticel"), Recticel Holding Noord B.V., Foamex L.P., Beamech
Group Limited, LME-Beamech, Inc., James Brian Blackwell, and
Prefoam AG relating to foam technology sharing arrangement.
10.4.1(k) - Asset Transfer Agreement, dated as of October 2, 1990, between
Trace Holdings and Foamex L.P. (the "Trace Holdings Asset Transfer
Agreement").
10.4.2(k) - First Amendment, dated as of December 19, 1991, to the Trace
Holdings Asset Transfer Agreement.
10.4.3(k) - Amended and Restated Guaranty, dated as of December 19, 1991,
made by Trace Foam in favor of Foamex L.P.
10.5.1(k) - Asset Transfer Agreement, dated as of October 2, 1990, between
Recticel Foam Corporation ("RFC") and Foamex L.P. (the "RFC Asset
Transfer Agreement").
10.5.2(k) - First Amendment, dated as of December 19, 1991, to the RFC Asset
Transfer Agreement.
10.5.3(k) - Schedule 5.03 to the RFC Asset Transfer Agreement (the "5.03
Protocol").
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10.5.4(h) - The 5.03 Protocol Assumption Agreement, dated as of October 13,
1992, between RFC and Foamex L.P. 10.5.5(h) - Letter Agreement
between Trace Holdings and Recticel regarding the Recticel
Guaranty, dated as of July 22, 1992.
10.6(l) - Supply Agreement, dated June 28, 1994, between Foamex L.P. and
Foamex International.
10.7.1(l) - First Amended and Restated Tax Sharing Agreement, dated as of
December 14, 1993, among Foamex L.P., Trace Foam, FMXI and Foamex
International.
10.7.2(d) - First Amendment to First Amended and Restated Tax Sharing
Agreement, dated as of June 12, 1997, by and among Foamex L.P.,
Foamex International, FMXI and Trace Foam.
10.7.3(w) - Second Amendment to First Amended and Restated Tax Sharing
Agreement, dated as of December 23, 1997, by and among Foamex
L.P., Foamex International, FMXI, and Trace Foam.
10.7.4(y) - Third Amendment to First Amended and Restated Tax Sharing
Agreement, dated as of February 27, 1998, by and between Foamex
L.P., Foamex International and FMXI.
10.8.1(m) - Tax Distribution Advance Agreement, dated as of December 11,
1996, by and between Foamex L.P. and Foamex-JPS Automotive.
10.8.2(d) - Amendment No. 1 to Tax Distribution Advance Agreement, dated as
of June 12, 1997, by and between Foamex L.P. and Foamex
International.
10.9.1(h) - Trace Foam Management Agreement between Foamex L.P. and Trace
Foam, dated as of October 13, 1992.
10.9.2(l) - Affirmation Agreement re: Management Agreement, dated as of
December 14, 1993, between Foamex L.P. and Trace Foam.
10.9.3(d) - First Amendment to Management Agreement, dated as of June 12,
1997, by and between Foamex L.P. and Trace Foam.
10.10.1(k) - Salaried Incentive Plan of Foamex L.P. and Subsidiaries.
10.10.2(k) - Trace Holdings 1987 Nonqualified Stock Option Plan.
10.10.3(k) - Equity Growth Participation Program.
10.10.4(o) - The Foamex L.P. Salaried Pension Plan (formerly the General Felt
Industries, Inc. Retirement Plan for Salaried Employees),
effective as of January 1, 1995.
10.10.5(u) - The Foamex L.P. Hourly Pension Plan (formerly "The Foamex
Products Inc. Hourly Employee Retirement Plan), as amended
December 31, 1995.
10.10.6(u) - Foamex L.P. 401(k) Savings Plan effective October 1, 1997.
10.10.7(a) - Foamex L.P.'s 1993 Stock Option Plan.
10.10.8(a) - Foamex L.P.'s Non-Employee Director Compensation Plan.
10.11.1(o) - Employment Agreement, dated as of February 1, 1994, by and
between Foamex L.P. and William H. Bundy.
10.11.2 - Employment Agreement, dated as of March 16, 1999, by and between
Foamex International and John G. Johnson, Jr.
10.12.1(a) - Warrant Exchange Agreement, dated as of December 14, 1993, by
and between Foamex L.P. and Marely.
10.12.2(a) - Warrant Exchange Agreement, dated as of December 14, 1993, by
and between Foamex L.P. and DLJ Funding.
10.13(t) - Warrant Agreement, dated as of June 28, 1994, by and between
Foamex International and Shawmut Bank.
10.14(o) - Stock Purchase Agreement, dated as of December 23, 1993, by and
between Transformacion de Espumas u Fieltros, S.A., the
stockholders which are parties thereto, and Foamex L.P.
10.15.1(r) - Asset Purchase Agreement, dated as of August 29, 1997, by and
among General Felt, Foamex L.P., Bretlin, Inc. and The Dixie
Group.
10.15.2(s) - Addendum to Asset Purchase Agreement, dated as of October 1,
1997, by and among General Felt, Foamex L.P., Bretlin, Inc. and
The Dixie Group.
10.16.1(x) - Supply Agreement, dated as of February 27, 1998, by and between
Foamex L.P. and General Felt (as assigned to Foamex Carpet).
10.16.2(x) - Administrative Services Agreement, dated as of February 27,
1998, by and between Foamex L.P. and General Felt (as assigned to
Foamex Carpet).
33
<PAGE>
10.17(y) - Tax Sharing Agreement, dated as of February 27, 1998, between
Foamex International and Foamex Carpet.
10.18.1(w) - Joint Venture Agreement between Hua Kee Company Limited and
Foamex Asia, Inc., dated as of July 8, 1997.
10.18.2(w) - Loan Agreement between Hua Kee Company Limited and Foamex Asia,
Inc., dated as of July 8, 1997.
27 - Financial Data Schedule for the year ended December 31, 1998.
- ----------------------------
(a) Incorporated herein by reference to the Exhibit to Foamex L.P.'s
Registration Statement on Form S-1, Registration No. 33-69606.
(b) Incorporated herein by reference to the Exhibit to the Form 10-K of
Foamex International for the fiscal year ended January 1, 1995.
(c) Incorporated herein by reference to the Exhibit to the Current Report on
Form 8-K of Foamex International reporting an event that occurred May 28,
1997.
(d) Incorporated herein by reference to the Exhibit to the Current Report on
Form 8-K of Foamex International reporting an event that occurred June
12, 1997.
(e) Incorporated herein by reference to the Exhibit to the Registration
Statement of Foamex L.P. and FCC on Form S-4, Registration No. 33-65158.
(f) Incorporated herein by reference to the Exhibit to the Form 10-Q of
Foamex International for the quarterly period ended June 30, 1996.
(g) Incorporated herein by reference to the Exhibit to the Registration
Statement of Foamex L.P., FCC and General Felt on Form S-1, Registration
Nos. 33-60888, 33-60888-01, and 33-60888-02.
(h) Incorporated herein by reference to the Exhibit to the Form 10-K
Statement of Foamex L.P. and FCC for fiscal 1992.
(i) Incorporated herein by reference to the Exhibit to the Form 10-K of
Foamex L.P. for fiscal 1994.
(j) Incorporated herein by reference to the Exhibit to the Form 10-Q of
Foamex for the quarterly period ended September 30, 1996.
(k) Incorporated herein by reference to the Exhibit to the Registration
Statement of Foamex L.P. and FCC on Form S-1, Registration Nos. 33-49976
and 33-49976-01.
(l) Incorporated herein by reference to the Exhibit to the Registration
Statement of FJPS, FJCC and Foamex L.P. on Form S-4, Registration No.
33-82028.
(m) Incorporated herein by reference to the Exhibit to the Annual Report on
Form 10-K of Foamex International for the fiscal year ended December 29,
1996.
(n) Incorporated herein by reference to the Exhibit to the Form 10-Q of
Foamex International for the quarterly period ended July 2, 1995.
(o) Incorporated herein by reference to the Exhibit to the Form 10-K of
Foamex L.P. for fiscal 1993.
(p) Incorporated herein by reference to the Exhibit in the Registration
Statement of Foamex International on Form S-4, Registration No.
333-30291.
34
<PAGE>
(q) Incorporated herein by reference to the Exhibit to the Form 10-K of
Foamex L.P. for the fiscal year ended December 31, 1995.
(r) Incorporated herein by reference to the Current Report on Form 8-K of
Foamex L.P. reporting an event that occurred on August 29, 1997.
(s) Incorporated herein by reference to the Current Report on Form 8-K of
Foamex L.P. reporting an event that occurred on October 6, 1997.
(t) Incorporated by reference to the Exhibit to the Form 10-Q of Foamex
International for the quarterly period ended July 3, 1994.
(u) Incorporated by reference to the Exhibit to the Form 10-Q of Foamex L.P.
for the quarterly period ended September 28, 1997.
(v) Incorporated herein by reference to the Exhibit to the Current Report on
Form 8-K of Foamex L.P., Foamex Capital Corporation and Foamex
International reporting an event that occurred December 23, 1997.
(w) Incorporated herein by reference to the Exhibit in the Registration
Statement of Foamex L.P. and FCC on Form S-4, Registration No. 333-45733,
filed February 6, 1998.
(x) Incorporated herein by reference to the Current Report on Form 8-K of
Foamex International reporting an event that occurred on February 27,
1998.
(y) Incorporated herein by reference to the Exhibit to the Form 10-K of
Foamex International for the fiscal year ended December 28, 1997.
(z) Incorporated herein by reference to the Current Report on Form 8-K of
Foamex International reporting an event that occurred on November 5,
1998.
(aa) Incorporated herein by reference to the Exhibit to the Current Report on
Form 8-K of Foamex International reporting an event that occurred on June
25, 1998.
(bb) Incorporated herein by reference to the Exhibit to the Current Report on
Form 8-K of Foamex International reporting an event that occurred on
March 11, 1999.
(cc) Incorporated herein by reference to the Exhibit in the Registration
Statement of Foamex L.P. and FCC on Form S-4/A, Registration No.
333-45733, filed May 11, 1998.
Certain instruments defining the rights of security holders have been
excluded herefrom in accordance with Item 601(b)(4)(iii) of Regulation S-K. The
registrant hereby agrees to furnish a copy of any such instrument to the
Commission upon request.
35
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on the 23rd day of
April 1999.
FOAMEX INTERNATIONAL INC.
By: /s/ John G. Johnson, Jr.
Name: John G. Johnson, Jr.
Title: President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on its behalf by the
registrant and in the capacities and on the dates indicated:
Signature Title Date
/s/ Marshall S. Cogan Chairman of the Board April 23, 1999
- ------------------------
Marshall S. Cogan
/s/ Robert J. Hay Chairman Emeritus April 23, 1999
- --------------------------- and Director
Robert J. Hay
/s/ John G. Johnson, Jr. President, Chief Executive April 23, 1999
- ------------------------ Officer and Director
John G. Johnson, Jr.
/s/ John A. Feenan Executive Vice President April 23, 1999
- ------------------------- and Chief Financial Officer
John A. Feenan
/s/ Etienne Davignon Director April 23, 1999
- -------------------------
Etienne Davignon
/s/ John H. Gutfreund Director April 23, 1999
- --------------------------
John H. Gutfreund
/s/ Stuart J. Hershon Director April 23, 1999
- --------------------------
Stuart J. Hershon
/s/ John V. Tunney Director April 23, 1999
- -------------------------
John V. Tunney
36
<PAGE>
FOAMEX INTERNATIONAL INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Foamex International Inc.
Index to Consolidated Financial Statements F-1
Report of Independent Accountants F-2
Consolidated Balance Sheets as of December 31, 1998
and December 28, 1997 F-3
Consolidated Statements of Operations for the years
ended 1998, 1997, and 1996 F-5
Consolidated Statements of Cash Flows for the years
ended 1998, 1997, and 1996 F-6
Consolidated Statements of Stockholders' Equity
(Deficit) for the years ended 1998, 1997, and 1996 F-7
Notes to Consolidated Financial Statements F-8
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of Foamex International Inc.:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of stockholders' equity (deficit) and of
cash flows present fairly, in all material respects, the financial position of
Foamex International Inc. and its subsidiaries (the "Company") at December 31,
1998 and December 28, 1997, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles. In addition, in our
opinion, the financial statement schedules as of and for each of the three years
in the period ended December 31, 1998 when considered in relation to the basic
consolidated financial statements taken as a whole, present fairly, in all
material respects, the information required to be included therein. These
financial statements and financial statement schedules are the responsibility of
the Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
The selected quarterly financial data in Note 22 contains information that we
did not audit, and, accordingly, we do not express an opinion on that data. We
attempted but were unable to review the quarterly data in accordance with
standards established by the American Institute of Certified Public Accountants
because we believe that the Company's internal control for the preparation of
interim financial information does not provide an adequate basis to enable us to
complete such a review.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As discussed in Note 1 to the accompanying
financial statements, during 1998 the Company had a significant loss from
continuing operations, net cash used by operating activities and a working
capital deficit since it violated certain debt covenants for which it is seeking
amendments; however, there can be no assurance that such amendments will be
obtained and therefore substantially all long-term debt is classified as
current. These matters raise substantial doubt about the Company's ability to
continue as a going concern. In addition, the Company has been informed by Trace
International Holdings, Inc. ("Trace"), the Company's principal stockholder,
that Trace has substantial debt obligations and that it 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 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 accompanying financial statements. The financial statements do not
include any adjustments that might result from the outcome of these
uncertainties.
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
April 22, 1999
F-2
<PAGE>
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, December 28,
ASSETS 1998 1997
----------- -----------
(thousands)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 12,572 $ 12,044
Accounts receivable, net of allowance for
doubtful accounts of $11,630 and $8,082 185,158 175,684
Inventories 136,658 120,299
Deferred income taxes -- 22,853
Due from related parties -- 1,755
Other current assets 38,978 38,293
--------- ---------
Total current assets 373,366 370,928
--------- ---------
PROPERTY, PLANT AND EQUIPMENT:
Land and land improvements 7,142 9,054
Buildings and leasehold improvements 98,670 79,876
Machinery, equipment and furnishings 256,061 234,229
Construction in progress 25,000 23,331
--------- ---------
Total 386,873 346,490
Less accumulated depreciation and amortization (144,700) (113,055)
--------- ---------
Property, plant and equipment, net 242,173 233,435
COST IN EXCESS OF ASSETS ACQUIRED, NET 220,934 218,219
DEBT ISSUANCE COSTS, NET 14,852 18,889
DEFERRED INCOME TAXES -- 26,960
OTHER ASSETS 23,640 25,192
--------- ---------
TOTAL ASSETS $ 874,965 $ 893,623
========= =========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
F-3
<PAGE>
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, December 28,
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) 1998 1997
----------- -----------
(thousands except share data)
<S> <C> <C>
CURRENT LIABILITIES:
Short-term borrowings $ 2,957 $ 6,598
Current portion of long-term debt 690,248 12,931
Current portion of long-term debt - related party 98,935 --
Accounts payable 149,268 131,689
Accrued employee compensation 7,643 10,827
Accrued interest 7,851 10,716
Accrued restructuring and plant consolidation 2,947 15,644
Deferred income taxes 2,074 --
Other accrued liabilities 66,514 44,042
----------- -----------
Total current liabilities 1,028,437 232,447
LONG-TERM DEBT 8,240 735,724
DEFERRED INCOME TAXES 991 2,529
ACCRUED RESTRUCTURING AND
PLANT CONSOLIDATION 9,003 11,252
OTHER LIABILITIES 32,413 25,090
----------- -----------
Total liabilities 1,079,084 1,007,042
----------- -----------
COMMITMENTS AND CONTINGENCIES -- --
----------- -----------
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred Stock, par value $1.00 per share:
Authorized 5,000,000 shares - none issued -- --
Common Stock, par value $.01 per share:
Authorized 50,000,000 shares
Issued 27,005,752 and 26,908,680 shares, respectively;
Outstanding 25,016,752 and 24,919,680 shares, respectively 270 269
Additional paid-in capital 86,990 86,025
Retained earnings (accumulated deficit) (237,661) (164,118)
Accumulated other comprehensive income (loss) (24,721) (6,598)
Other:
Common Stock held in treasury, at cost:
1,989,000 shares (19,202) (19,202)
Shareholder note receivable (9,795) (9,795)
----------- -----------
Total stockholders' equity (deficit) (204,119) (113,419)
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 874,965 $ 893,623
=========== ===========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
F-4
<PAGE>
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years 1998, 1997, and 1996
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
(thousands except per share amounts)
<S> <C> <C> <C>
NET SALES $ 1,246,396 $ 931,095 $ 926,351
COST OF GOODS SOLD 1,091,891 787,756 773,119
----------- ----------- -----------
GROSS PROFIT 154,505 143,339 153,232
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 89,171 67,139 58,329
RESTRUCTURING AND OTHER CHARGES (CREDITS) (9,698) 21,100 (6,541)
----------- ----------- -----------
INCOME FROM OPERATIONS 75,032 55,100 101,444
INTEREST AND DEBT ISSUANCE EXPENSE 72,295 50,570 53,900
OTHER INCOME (EXPENSE), NET (14,348) 2,126 1,617
----------- ----------- -----------
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE PROVISION (BENEFIT) FOR
INCOME TAXES (11,611) 6,656 49,161
PROVISION FOR INCOME TAXES 58,242 2,525 16,669
----------- ----------- -----------
INCOME (LOSS) FROM CONTINUING OPERATIONS (69,853) 4,131 32,492
----------- ----------- -----------
DISCONTINUED OPERATIONS:
LOSS FROM DISCONTINUED OPERATIONS,
NET OF INCOME TAXES -- (1,994) (584)
LOSS ON DISPOSAL OF DISCONTINUED OPERATIONS,
INCLUDING PROVISION FOR OPERATING LOSSES
DURING THE PHASE-OUT PERIOD, NET OF
INCOME TAXES -- -- (113,896)
----------- ----------- -----------
LOSS FROM DISCONTINUED OPERATIONS,
NET OF INCOME TAXES -- (1,994) (114,480)
----------- ----------- -----------
INCOME (LOSS) BEFORE EXTRAORDINARY LOSS (69,853) 2,137 (81,988)
EXTRAORDINARY LOSS ON EARLY EXTINGUISHMENT
OF DEBT, NET OF INCOME TAXES (1,917) (44,482) (1,147)
----------- ----------- -----------
NET INCOME (LOSS) $ (71,770) $ (42,345) $ (83,135)
=========== =========== ===========
BASIC EARNINGS (LOSS) PER SHARE:
CONTINUING OPERATIONS $ (2.79) $ 0.16 $ 1.28
=========== =========== ===========
NET EARNINGS (LOSS) PER SHARE $ (2.87) $ (1.68) $ (3.28)
=========== =========== ===========
DILUTED EARNINGS (LOSS) PER SHARE:
CONTINUING OPERATIONS $ (2.79) $ 0.16 $ 1.26
=========== =========== ===========
NET EARNINGS (LOSS) PER SHARE $ (2.87) $ (1.65) $ (3.23)
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
F-5
<PAGE>
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years 1998, 1997, and 1996
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
OPERATING ACTIVITIES: (thousands)
<S> <C> <C> <C>
Net income (loss) $ (71,770) $ (42,345) $ (83,135)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 35,385 22,047 22,353
Amortization of debt issuance costs, debt premium, deferred
swap adjustment and gain, and debt discount (100) 7,783 13,903
Net loss on disposal of discontinued operations -- 1,994 110,137
Net loss (income) from discontinued operations -- -- 4,343
Asset writedowns and other charges (credits) (7,972) 12,041 (7,364)
Provision for uncollectible accounts 2,611 2,295 704
Deferred income taxes 54,178 (1,179) 14,903
Other, net (4,056) (5,195) (3,642)
Changes in operating assets and liabilities,
net of acquisitions and discontinued operations:
Accounts receivable (12,085) (4,037) (13,723)
Inventories (20,809) 12,882 (11,688)
Accounts payable 17,579 12,733 4,306
Accrued restructuring and plant consolidation charges (14,946) 5,701 (7,405)
Other assets and liabilities 8,059 (24,342) (2,438)
--------- --------- ---------
Net cash provided by (used for) continuing operations (13,926) 378 41,254
Net cash provided by discontinued operations -- -- 16,491
--------- --------- ---------
Net cash provided by (used for) operating activities (13,926) 378 57,745
--------- --------- ---------
INVESTING ACTIVITIES:
Capital expenditures (33,701) (33,537) (23,344)
Acquisitions, net of cash acquired -- (119,065) (841)
Proceeds from sale (settlement) of discontinued operations -- (13,556) 59,452
Proceeds from sale of assets 2,230 40,169 --
Purchase of note from related party -- (5,000) --
Decrease (increase) in restricted cash -- 12,143 (12,143)
Discontinued operations investing activities -- -- (5,490)
Other investing activities (1,290) (1,888) (1,276)
--------- --------- ---------
Net cash provided by (used for) investing activities (32,761) (120,734) 16,358
--------- --------- ---------
FINANCING ACTIVITIES:
Net proceeds from (repayments of) short-term borrowings (3,641) 2,894 1,493
Net proceeds from (repayments of) revolving loans 84,511 54,928 --
Proceeds from long-term debt 138,810 594,499 1,500
Cash overdraft 7,300 -- --
Repayments of long-term debt (143,047) (517,549) (38,887)
Repayments of long-term debt-related parties (5,265) -- --
Debt issuance costs (2,029) (18,410) --
GFI transaction costs (5,229) -- --
GFI transaction payments of accounts payable (4,800) -- --
GFI transaction purchase of assets (20,000) -- --
Purchase of treasury stock -- (5,739) (6,296)
Payment of dividends (1,245) -- --
Discontinued operations financing activities -- -- (12,406)
Other financing activities 1,850 (426) (626)
--------- --------- ---------
Net cash provided by (used for) financing activities 47,215 110,197 (55,222)
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents 528 (10,159) 18,881
Cash and cash equivalents at beginning of period 12,044 22,203 3,322
--------- --------- ---------
Cash and cash equivalents at end of period $ 12,572 $ 12,044 $ 22,203
========= ========= =========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
F-6
<PAGE>
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
For the Years 1998, 1997, and 1996
<TABLE>
<CAPTION>
Accumulated
Retained Other
Additional Earnings Compre-
Common Stock Paid-in (Accumulated hensive
Shares Amount Capital Deficit) Income (Loss) Other Total
------ ------ ------- -------- ------------- ----- -----
(thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1995 26,716 $267 $84,015 $(37,039) $(6,320) $(11,540) $ 29,383
Net loss (83,135) (83,135)
Additional pension liability 1,427 1,427
Foreign currency translation adjustment (46) (46)
---------
Comprehensive income (loss) (81,754)
Issuance of common stock 22 - 165 165
Stock option compensation 297 297
Stock options exercised 15 - 102 102
Purchase of treasury stock (6,296) (6,296)
------ ---- ------- --------- -------- -------- ---------
Balances at December 29, 1996 26,753 267 84,579 (120,174) (4,939) (17,836) (58,103)
Net loss (42,345) (42,345)
Additional pension liability (786) (786)
Foreign currency translation adjustment (873) (873)
---------
Comprehensive income (loss) (44,004)
Issuance of common stock 10 - 161 161
Stock option compensation 282 282
Stock options exercised 145 2 1,003 1,005
Purchase of treasury stock (5,739) (5,739)
Increase in note receivable from
principal stockholder (5,422) (5,422)
Distribution to principal stockholder (1,599) (1,599)
------ ---- ------- --------- -------- -------- ---------
Balances at December 28, 1997 26,908 269 86,025 (164,118) (6,598) (28,997) (113,419)
Net loss (71,770) (71,770)
Additional pension liability (11,525) (11,525)
Foreign currency translation adjustment (6,598) (6,598)
---------
Comprehensive income (loss) (89,893)
Issuance of common stock 15 163 163
Stock option compensation 208 208
Stock options exercised 83 1 594 595
Cash dividend (1,245) (1,245)
Other (528) (528)
------ ---- ------- --------- -------- -------- ---------
Balances at December 31, 1998 27,006 $270 $86,990 $(237,661) $(24,721) $(28,997) $(204,119)
====== ==== ======= ========= ======== ======== =========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
F-7
<PAGE>
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION
Foamex International Inc. (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 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,
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.
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. For the year ended December 31, 1998,
the Company had a loss from continuing operations, a working capital deficit and
was not in compliance with certain debt covenants for which it is seeking
amendments. Such non-compliance provides the lenders under those agreements,
which have an aggregate outstanding principal amount of approximately $480.4
million, with the right, upon 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 in the Company's financial statements. Were the
lenders under those agreements to accelerate the maturity of their indebtedness,
such acceleration would constitute an event of default and substantially all of
the Company's long-term debt. Therefore, the Company has reclassified
approximately $771.1 million of long-term debt as current. 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 International
Holdings, Inc. ("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 below.
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. The financial
statements do not include any further adjustments that might result from the
outcome of these uncertainties.
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.
On March 16, 1998, the Company announced that its Board of Directors
received an unsolicited buyout proposal from 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.
F-8
<PAGE>
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION (continued)
On June 25, 1998, Trace, Trace Merger Sub, Inc. ("Merger Sub"), a
Delaware corporation and wholly owned subsidiary of Trace, 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 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
contained in the First Merger Agreement.
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 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.
On December 23, 1997, the Company acquired Crain Industries, Inc.
("Crain") pursuant to a merger agreement with Crain Holdings Corp. for a
purchase price of approximately $213.7 million, which was primarily funded with
$118.0 million of bank borrowings under a Foamex L.P. credit facility (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) (the
"Crain Acquisition"). In addition, fees and expenses associated with the Crain
Acquisition were approximately $13.2 million.
F-9
<PAGE>
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation
The consolidated financial statements include the accounts of the Company
and all subsidiaries that the Company directly or indirectly controls, either
through majority ownership or otherwise. Intercompany accounts and transactions
for continuing operations have been eliminated in consolidation.
Fiscal Year
Effective September 1998, management of the Company decided to change the
year-end reporting requirement of the Company from a fifty-two or fifty-three
week fiscal year ending on the Sunday closest to the end of the calendar year to
a calendar year ending December 31st to improve the internal reporting
requirements of the Company. This change was effective for the third fiscal
quarter of 1998 which ended on September 30, 1998 and resulted in a 1998 fiscal
year end of December 31, 1998 as compared to January 3, 1999. Fiscal years 1997
and 1996 were composed of fifty-two weeks and ended on December 28, 1997 and
December 29, 1996, respectively.
Accounting Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
contingent assets and contingent liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
Revenue Recognition
Revenue from sales is recognized when products are shipped at which time
title passes to the customer.
Sales Discounts
A reduction in sales revenue is recognized for sales discounts when
product is invoiced.
Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less when purchased to be cash equivalents. On
December 31, 1998 and December 28, 1997, cash and cash equivalents included $9.3
million and $2.7 million, respectively, of repurchase agreements collateralized
by U.S. Government securities.
Inventories
Inventories are stated at the lower of cost or market. The cost of the
inventories is determined on a first-in, first-out basis.
Property, Plant and Equipment
Property, plant and equipment are stated at cost and are depreciated
using the straight-line method over the estimated useful lives of the assets.
The range of useful lives estimated for buildings is generally twenty to
thirty-five years, and the range for machinery, equipment and furnishings is
five to twelve years. Leasehold improvements are amortized over the shorter of
the terms of the respective leases or the estimated useful lives of the
leasehold improvements. Depreciation expense for the years ended 1998, 1997 and
1996 was $27.3 million, $18.8 million and $19.1 million, respectively. For
income tax purposes, the Company uses accelerated depreciation methods.
F-10
<PAGE>
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Cost of maintenance and repairs is charged to expense as incurred.
Renewals and improvements are capitalized. Upon retirement or other disposition
of items of plant and equipment, the cost and related accumulated depreciation
are removed from the accounts and any gain or loss is included in operations.
Debt Issuance Costs
Debt issuance costs consist of amounts incurred in obtaining long-term
financing. These costs are being amortized over the term of the related debt
using the effective interest method. Accumulated amortization as of December 31,
1998 and December 28, 1997 was approximately $2.9 million and $1.4 million,
respectively.
Cost in Excess of Net Assets Acquired
The excess of the acquisition cost over the fair value of net assets
acquired in business combinations accounted for as purchases is amortized using
the straight-line method over a forty year period. At each balance sheet date
the Company evaluates the recoverability of cost in excess of net assets
acquired using certain financial indicators such as historical and future
ability to generate income and cash flows from operations based on a going
concern basis. Accumulated amortization as of December 31, 1998 and December 28,
1997 was approximately $17.1 million and $12.0 million, respectively. During
1998, the Company recorded approximately $2.3 million associated with the
impairment of cost in excess of net assets acquired associated with a Montreal
Canada facility.
Environmental Matters
Environmental expenditures that relate to current operations are expensed
or capitalized as appropriate. Expenditures that relate to an existing condition
caused by past operations, and which do not contribute to current or future
revenue generation, are expensed. Liabilities are recorded when environmental
assessments and/or remedial efforts are probable and the costs can be reasonably
estimated.
Postretirement and Postemployment Benefits
The Company accrues postretirement benefits throughout the employees'
active service periods until they attain full eligibility for those benefits.
Also, the Company accrues postemployment benefits when it becomes probable that
such benefits will be paid and when sufficient information exists to make
reasonable estimates of the amounts to be paid.
Comprehensive Income
As of December 28, 1997, we adopted Statement of Financial Accounting
Standards No. 130, Reporting Comprehensive Income ("SFAS No. 130"), issued in
June 1997. SFAS No. 130 requires the reporting and display of comprehensive
income, which is composed of net income and other comprehensive income or loss
items, in a full set of general purpose financial statements. Other
comprehensive income or loss items are revenues, expenses, gains and losses that
under generally accepted accounting principles are excluded from net income and
reflected as a component of equity, such as currency translation and minimum
pension liability adjustments.
Foreign Currency Accounting
The financial statements of foreign subsidiaries, except in countries
treated as highly inflationary (Mexico), have been translated into U.S. dollars
by using the year end exchange rates for the assets and liabilities and average
exchange rates for the statements of operations. Currency translation
adjustments are included in other stockholders' equity (deficit) until the
entity is substantially sold or liquidated. For operations in countries treated
as highly inflationary, such as Mexico for 1998 and 1997, certain financial
statement amounts are translated at historical exchange rates, with all other
assets and liabilities translated at year-end exchange rates. These translation
adjustments are reflected in the results of operations and were insignificant
for all periods presented. Also, foreign currency transaction gains and losses
are insignificant for all periods presented. The effect of foreign currency
F-11
<PAGE>
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
exchange rates on cash flows is not material. Effective in the first quarter of
1999, the financial results of the Mexican operations will not be accounted for
as highly inflationary.
Interest Rate Swap Agreement
The differential to be paid or received under an interest rate swap
agreement is recognized as an adjustment to interest and debt issuance expense
in the current period as interest rates change.
Income Taxes
Income taxes are accounted for under the asset and liability method, in
which deferred income taxes are provided for temporary differences between the
financial reporting and income tax basis of assets and liabilities using the
income tax rates, under existing legislation, expected to be in effect at the
date such temporary differences are expected to reverse.
Reclassifications
Certain amounts in the 1997 and 1996 consolidated financial statements
have been reclassified to conform with the current year's presentation.
3. ACQUISITIONS
On December 23, 1997, the Company acquired Crain pursuant to a merger
agreement with Crain Holdings Corp. for a purchase price of approximately $213.7
million, including the assumption of debt with a face value of approximately
$98.6 million (with 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. (See Note 4.)
The Crain Acquisition was accounted for as a purchase and the operations
of Crain have been included in the consolidated statements of operations and
cash flows from its date of acquisition. However, Crain's operations for the
period from December 24, 1997 to December 28, 1997 have not been included in the
consolidated statements of operations or cash flows since the affect would be
insignificant. The cost of the Crain Acquisition has been allocated on the basis
of the fair value of the assets acquired and the liabilities assumed. During
1998, the Company increased the cost in excess of the net assets acquired by
approximately $11.2 million as a result of the finalization of the fixed asset
appraisal and updated estimates of certain former Crain facilities. The excess
of the purchase price over the estimated fair value of the net assets acquired
of $164.2 million is being amortized using the straight-line method over forty
years.
4. RESTRUCTURING AND OTHER CHARGES (CREDITS)
In 1995, the Company approved a restructuring plan (the "1995
restructuring plan") to consolidate thirteen foam production, fabrication or
branch locations to concentrate resources as a result of industry conditions and
better position itself to achieve its strategic growth objectives. The Company
recorded restructuring and other charges of $41.4 million which was comprised of
$35.6 million associated with the consolidation of the foam production,
fabrication or branch locations, $2.2 million associated with the completion of
a 1993 restructuring plan and $3.6 million associated with merger and
acquisition activities of the Company. The components of the $35.6 million
restructuring charge include: $16.7 million for fixed asset writedowns (net of
estimated sale proceeds), $15.1 million for plant closure and operating lease
obligations and $3.8 million for personnel reductions. The $3.8 million
F-12
<PAGE>
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. RESTRUCTURING AND OTHER CHARGES (CREDITS) (continued)
cost for personnel reductions primarily represents severance and employee
benefit costs associated with the elimination of manufacturing and
administrative personnel.
In 1996, the Company determined to continue to operate one of the
facilities originally identified for closure in a 1995 restructuring plan
because of improved economics and the lack of synergy to be achieved from
relocating the manufacturing process. In addition, the Company approved a plan
to close two facilities that were not originally identified in a 1995
restructuring plan. As a result of these changes to the 1995 restructuring plan
and the favorable termination of certain lease agreements and other matters, the
Company recorded a $6.5 million net restructuring credit which included a
restructuring credit of $11.3 million associated with the Company's decision not
to close the facility identified as part of the 1995 restructuring plan and $1.8
million of restructuring credits relating primarily to the favorable termination
of certain lease agreements and other matters relating to the 1995 restructuring
plan, offset by $6.6 million of restructuring charges relating to the closure of
the two facilities during 1997 (the "1996 restructuring plan").
During December 1997, the Company approved a restructuring plan (the
"1997 restructuring plan") to consolidate nine foam production, fabrication or
branch locations in connection with the Crain Acquisition. (See Note 3.) The
Company recorded restructuring and other charges of $21.1 million which was
comprised of $23.0 million associated with the consolidation of the foam
production, fabrication or branch locations offset by $1.9 million of
restructuring credits due primarily to the favorable termination of certain
lease agreements and other matters associated with the 1996 and 1995
restructuring plans. The components of the $23.0 million restructuring charge
include: $12.1 million for fixed assets writedowns (net of estimated sale
proceeds), $9.8 million for plant closure and operating lease obligations and
$1.1 million for personnel reductions.
In addition, during 1997, the Company approved a consolidation plan to
integrate the acquired Crain facilities into the Company's existing facilities.
The Company recorded approximately $1.5 million of severance and related costs
and $8.5 million for costs associated with the shut down of certain acquired
facilities.
During 1998, the Company determined to continue to operate two facilities
originally identified for closure in the 1997 restructuring plan. One facility
remained open to fill lost capacity resulting from a fire in April 1998 at the
Orlando facility, which is expected to be at full production during the second
quarter of 1999. The other facility remained open during 1998 due to improved
demand on the West Coast. The 1997 restructuring plan also included the closure
of two facilities associated with the packaging business. The Company intends to
sell the packaging business during 1999 and does not expect to incur the asset
write-down and lease costs as originally planned. As a result, the Company
recorded a $15.1 million restructuring credit associated with the 1997
restructuring plan. The components of the $15.1 million restructuring credit
include: $10.2 million for fixed asset write-downs, $3.8 million for plant
closure and operating lease obligations and $1.1 million for personnel
reductions.
In addition, the Company recorded restructuring and other charges of $5.4
million during 1998 to reserve for approximately $3.1 million of net receivables
due from Trace and to write-down approximately $2.3 million of impaired goodwill
associated with a foreign facility. Also, during 1998, the Company incurred
additional plant closure costs of $5.2 million and personnel reduction costs of
$1.2 million associated with the closure of the former Crain facilities. The
additional costs associated with the closure of the former Crain facilities
resulted in an increase to goodwill.
Except as discussed above, the 1997 and 1996 restructuring plans have
been generally implemented as originally contemplated. The following table sets
forth the components of the Company's restructuring and other charges:
F-13
<PAGE>
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. RESTRUCTURING AND OTHER CHARGES (CREDITS) (continued)
<TABLE>
<CAPTION>
Asset Plant Closure Personnel
Total Writedowns and Leases Reductions Other
(millions)
<S> <C> <C> <C> <C> <C>
Balances at December 31, 1995 $15.9 $(4.2) $14.8 $ 3.7 $ 1.6
Cash spending (9.9) - (6.6) (2.0) (1.3)
Cash proceeds 1.0 1.0 - - -
1996 restructuring charge 6.6 2.4 4.1 0.1 -
Restructuring credits (13.1) (9.7) (2.8) (0.4) (0.2)
Asset adjustment for
restructuring credits 8.0 8.7 (0.6) - (0.1)
----- ------ ----- ------ -----
Balances at December 29, 1996 8.5 (1.8) 8.9 1.4 -
Cash spending (2.3) - (1.4) (0.9) -
1997 restructuring charge 23.0 12.1 9.8 1.1 -
Restructuring credits (1.9) 0.1 (2.3) 0.3 -
Asset write-off/writedowns (16.1) (16.1) - - -
Plant consolidation costs 10.0 - 8.5 1.5 -
----- ------ ------ ----- -----
Balance at December 28, 1997 21.2 (5.7) 23.5 3.4 -
Cash spending (15.7) - (12.2) (3.5) -
Cash proceeds 2.1 2.1 - - -
1998 restructuring charge 5.4 5.4 - - -
1998 restructuring credit (15.1) (10.2) (3.8) (1.1) -
Asset write-off/writedowns (6.3) (5.5) (0.8) - -
Reclassified fixed asset basis
for restructuring credit 8.2 8.2 - - -
Plant consolidation costs 6.4 - 5.2 1.2 -
----- ------ ----- ------ -----
Balance at December 31, 1998 $ 6.2 $ (5.7) $11.9 $ - $ -
===== ====== ===== ======= =====
</TABLE>
As indicated in the table above, the accrued restructuring and plant
consolidation balance at December 31, 1998 will be used for payments relating to
plant closure and leases including rundown costs at the facilities. The $5.7
million of asset writedowns relates to estimated proceeds and is included in
noncurrent assets. The Company expects to incur approximately $2.9 million of
charges during 1999 with the remaining $9.0 million to be incurred through 2006.
5. INVENTORIES
Inventories consists of (thousands):
December 31, December 28,
1998 1997
-------- --------
Raw materials and supplies $ 99,997 $ 75,487
Work-in process 12,188 15,620
Finished goods 24,473 29,192
-------- --------
Total $136,658 $120,299
======== ========
6. SHORT-TERM BORROWINGS
Short-term borrowings include borrowings outstanding under a line of
credit facility for Foamex Canada Inc. ("Foamex Canada") bearing interest at the
bank's prime rate (6.75% at December 31, 1998) plus 1/2%. The weighted average
interest rates on Foamex Canada's short-term borrowings outstanding for 1998,
1997 and 1996 were 7.3%, 5.4% and 5.9%, respectively. Borrowings under Foamex
Canada's credit facility are due on demand and are collateralized by accounts
receivable, property and inventories of Foamex Canada having an approximate net
F-14
<PAGE>
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. SHORT-TERM BORROWINGS (continued)
carrying value of $17.7 million as of December 31, 1998. The unused amount under
this line of credit totaled approximately $2.3 million as of December 31, 1998.
7. CURRENT PORTION OF LONG-TERM DEBT, LONG-TERM DEBT AND EXTRAORDINARY LOSS
For the year ended December 31, 1998, the Company had a loss from
continuing operations, a working capital deficit and was not in compliance with
certain debt covenants for which it is seeking amendments. Such non-compliance
provides the lenders under those agreements, which have an aggregate outstanding
principal amount of approximately $480.4 million, with the right, upon notice
and lapse of time to declare all of such indebtedness to be due. Notwithstanding
the fact that 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 in the Company's financial statements. Were the lenders under those
agreements to accelerate the maturity of their indebtedness, such acceleration
would constitute an event of default and substantially all of the Company's
long-term debt. Therefore, the Company has reclassified approximately $771.1
million of long-term debt as current. Such classification raises substantial
concern about the Company's ability to continue as a going concern.
Current portion of long-term debt and long-term consists of:
<TABLE>
<CAPTION>
December 31, December 28,
1998 1997
-------- --------
<S> <C> <C>
Credit Facility: (thousands)
Term Loan A (1) $ -- $ 76,700
Term Loan B (1) 82,714 109,725
Term Loan C (1) 75,194 99,750
Term Loan D (1) 108,900 110,000
Revolving credit facility (1) 139,438 54,928
9 7/8% Senior subordinated notes due 2007 (2) 150,000 150,000
13 1/2% Senior subordinated notes due 2005 (includes
$11,893 and $13,720 of unamortized debt premium) (2) 109,893 111,720
9 1/2% Senior secured notes due 2000 (3) -- 4,523
Industrial revenue bonds (4) 7,000 7,000
Subordinated note payable (net of unamortized
debt discount of $523 and $1,198) (4) 6,491 6,129
Other 18,858 18,180
-------- --------
698,488 748,655
Less current portion 690,248 12,931
-------- --------
Long-term debt-unrelated parties $ 8,240 $735,724
======== ========
Current portion of long-term debt - related party consists of:
Foamex/GFI Note (4) $ 34,000 $ --
Note payable to Foam Funding LLC (5) 64,935 --
-------- --------
Long-term debt - related party (classified as current) $ 98,935 $ --
======== ========
</TABLE>
F-15
<PAGE>
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. CURRENT PORTION OF LONG-TERM DEBT, LONG-TERM DEBT AND EXTRAORDINARY LOSS
(continued)
(1) Subsidiary debt of Foamex L.P., guaranteed by the Company and
Foamex Capital Corporation ("FCC").
(2) Subsidiary debt of Foamex L.P. and FCC.
(3) Subsidiary debt of Foamex L.P. and FCC, guaranteed by the Company.
(4) Subsidiary debt of Foamex L.P.
(5) Subsidiary debt of Foamex Carpet.
Credit Facility
On June 12, 1997, Foamex L.P. entered into the Credit Facility with a
group of banks that provides for term loans of up to $440.0 million which expire
from June 2003 to December 2006 and borrowings of up to $150.0 million under a
revolving line of credit which expires in June 2003. The term loans are
comprised of (i) term A loan ("Term A") which provides up to $120.0 million of
borrowings, (ii) term B loan ("Term B") of $110.0 million, (iii) term C loan
("Term C") of $100.0 million and (iv) term D loan ("Term D") of $110.0 million.
In connection with the GFI Transaction (see Note 1), Foamex L.P. amended
its agreements with the lenders under the Credit Facility, which included
additional borrowings of $129.0 million under new term loan agreements that were
assumed by Foam Funding LLC and borrowings of $32.7 million under the existing
revolving credit facility. These funds were used to (i) repay approximately
$125.1 million of existing term loans and accrued interest thereon of
approximately $0.9 million, (ii) deposit $4.8 million into an escrow account in
order to redeem the senior secured notes during June 1998, (iii) repay $4.8
million of indebtedness owed to General Felt which was retained by Trace, (iv)
fund the $20.0 million to acquire the net assets of General Felt after the
transfer of the General Felt stock to Foam Funding LLC and (v) pay fees and
expenses of approximately $5.4 million. Also, this amendment increased the
availability under the revolving credit facility from $150.0 million to $200.0
million, subject to a $2.5 million quarterly reduction of the availability under
the revolving credit facility effective September 30, 1998, with $34.5 million
of the increased availability used for a letter of credit to support the
Foamex/GFI Note (described below).
Borrowings under the Credit Facility are collateralized by substantially
all of the assets of Foamex L.P. on a pari passu basis with the IRBs (described
below); however, the rights of the holders of the applicable issue of the IRBs
to receive payment upon the disposition of the collateral securing such issue of
the IRBs has been preserved.
Pursuant to the terms of the Credit Facility, borrowed funds will bear
interest at a floating rate equal to an applicable margin, as defined, plus the
higher of (i) the base rate of The Bank of Nova Scotia, in effect from time to
time, or (ii) a rate that is equal to 0.5% per annum plus the federal funds rate
in effect from time to time. The applicable margin is determined based on the
total net debt to EBDAIT ratio, as defined, and can range from no margin up to
1.125% per annum for Term A and revolving loans, from 0.875% per annum to 1.375%
per annum for Term B, from 1.125% per annum to 1.625% per annum for Term C and
from 1.250% per annum to 1.750% per annum for Term D ("Base Rate Interest
Loans"). At the option of Foamex L.P., portions of the outstanding loans under
the Credit Facility are convertible into LIBOR based loans which bear interest
at a floating rate equal to an applicable margin for LIBOR based loans, as
defined, plus the average LIBOR, as defined. The applicable margin for LIBOR
based loans is a rate that will generally equal the applicable margin (discussed
above) plus 1.0% per annum. Pursuant to a March 11, 1999 amendment to the Credit
Facility, the applicable margin for revolving loans as Base Rate Interest Loans
as determined based on the total net debt to EBDAIT ratio will range from 1.50%
per annum to 2.25% per annum and the applicable margins for Term B, Term C and
Term D as Base Rate Interest Loans will be fixed at 2.50% per annum, 2.75% per
annum and 2.875% per annum, respectively. The applicable margin for LIBOR based
loans will equal the applicable margin for Base Rate Interest Loans plus 1.0%
per annum. As of December 31, 1998, the interest rates for revolver borrowings,
Term B, Term C and Term D were 7.80%, 8.00%. 8.25% and 8.4375%, respectively.
F-16
<PAGE>
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. CURRENT PORTION OF LONG-TERM DEBT, LONG-TERM DEBT AND EXTRAORDINARY LOSS
(continued)
Foamex L.P. had a credit agreement (the "Foamex L.P. Old Credit
Facility") with a group of banks that provided for loans of up to $85.0 million
of which up to $40.0 million was available as a term loan and $45.0 million was
available under a revolving line of credit. During 1997, $3.8 million of net
proceeds from the Perfect Fit Industries, Inc. sale was used to repay term loan
borrowings. The term loan was repaid in connection with the Refinancing Plan
(described below).
9 7/8% Senior Subordinated Notes due 2007 ("Senior Subordinated Notes")
The Senior Subordinated Notes were issued by Foamex L.P. and FCC in
connection with the Refinancing Plan. The Senior Subordinated Notes represent
uncollateralized general obligations of Foamex L.P. and are subordinated to all
Senior Debt (as defined in the Indenture). The Senior Subordinated Notes bear
interest at the rate of 9 7/8% per annum payable semiannually on each June 15
and December 15, commencing December 15, 1997. The Senior Subordinated Notes
mature on June 15, 2007. The Senior Subordinated Notes may be redeemed at the
option of Foamex L.P., in whole or in part, at any time on or after June 15,
2002, initially at 104.938% of their principal amount, plus accrued interest and
liquidated damages, as defined, if any, thereon to the date of redemption and
declining to 100.0% on or after June 15, 2005. In addition, at any time prior to
June 15, 2000, Foamex L.P. may on one or more occasions redeem up to 35.0% of
the initially outstanding principal amount of the Senior Subordinated Notes at a
redemption price equal to 109.875% of the principal amount, plus accrued
interest and liquidated damages, if any, thereon to the date of redemption with
the cash proceeds of one or more Public Equity Offerings, as defined. Upon the
occurrence of a change of control, as defined, each holder of Senior
Subordinated Notes will have the right to require Foamex L.P. to repurchase the
Senior Subordinated Notes at a price equal to 101.0% of the principal amount,
plus accrued interest and liquidated damages, if any, to the date of repurchase.
The Senior Subordinated Notes are subordinated in right of payment to all senior
indebtedness and are pari passu in right of payment to the 13 1/2% Senior
Subordinated Notes and the Subordinated Note Payable (described below).
13 1/2% Senior Subordinated Notes due 2005, Series B ("13 1/2% Senior
Subordinated Notes")
The 13 1/2% Senior Subordinated Notes were issued by Foamex L.P. and FCC
in connection with the Crain Acquisition. The 13 1/2% Senior Subordinated Notes
represent uncollateralized general obligations of Foamex L.P. and are
subordinated to all Senior Debt (as defined in the Indenture). The 13 1/2%
Senior Subordinated Notes bear interest at the rate of 13 1/2% per annum payable
semiannually on each February 15 and August 15. The 13 1/2% Senior Subordinated
Notes mature on August 15, 2005. The 13 1/2% Senior Subordinated Notes may be
redeemed at the option of Foamex L.P., in whole or in part, at any time on or
after August 15, 2000, initially at 106.75% of their principal amount, plus
accrued interest, if any, thereon to the date of redemption and declining to
100.0% on or after August 15, 2004. Upon the occurrence of a change of control,
as defined, each holder of the 13 1/2% Senior Subordinated Notes will have the
right to require Foamex L.P. to repurchase the 13 1/2% Senior Subordinated Notes
at a price equal to 101.0% of the principal amount, plus accrued interest and
liquidated damages, if any, to the date of repurchase. The 13 1/2% Senior
Subordinated Notes are subordinated in right of the payment of all senior
indebtedness and are pari passu in right of payment to the Senior Subordinated
Notes and to the Subordinated Note Payable (described below).
9 1/2% Senior Secured Notes due 2000 ("Senior Secured Notes")
The Senior Secured Notes were issued on June 3, 1993 with interest at the
rate of 9 1/2% payable semiannually on each June 1 and December 1. The Senior
Secured Notes had a maturity date of June 1, 2000. The Senior Secured Notes were
collateralized by a first-priority lien on substantially all of the assets of
Foamex L.P. except for receivables, real estate and fixtures. The Senior Secured
Notes were defeased in February 1998 and redeemed in June 1998.
F-17
<PAGE>
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. CURRENT PORTION OF LONG-TERM DEBT, LONG-TERM DEBT AND EXTRAORDINARY
LOSS (continued)
Industrial Revenue Bonds ("IRBs")
Two bond issues in the principal amount of $1.0 million and $6.0 million,
maturing in 2005 and 2013, respectively, are collateralized by certain
properties, which have an approximate net carrying value of $11.1 million at
December 31, 1998 and letters of credit approximating $7.3 million. The IRBs
bear interest at a variable rate with options available to Foamex L.P. to
convert to a fixed rate. The interest rates on the IRBs were 4.0% and 3.4% at
December 31, 1998 for the $6.0 million and $1.0 million bond issues,
respectively. The interest rate on the $6.0 million bond issue varies weekly
based on an interest rate that is indicative of current bidside yields on high
quality short-term, tax-exempt obligations, or if such interest rate is not
available, 70.0% of the interest rate for thirteen week United States Treasury
Bills. The maximum interest rate for either of the IRBs is 15.0% per annum. At
the time of a conversion to a fixed interest rate and upon appropriate notice,
the IRBs are redeemable at the option of the bondholders.
Subordinated Note Payable
This note payable was issued to John Rallis, a former Chief Operating
Officer of the Company, on May 6, 1993 by Foamex L.P. in connection with the
acquisition of Great Western Foam Products Corporation and certain related
entities and assets. The note bears interest at a maximum rate of 6% per annum
and the principal amount is payable in three equal annual installments beginning
May 6, 1999.
Other
As of December 31, 1998, other debt is comprised primarily of capital
lease obligations, equipment financing associated with an aircraft (see Note 23)
and borrowings by the Mexican subsidiaries.
Foamex Carpet Credit Facility ("Foamex Carpet Credit Facility")
In February 1998, Foamex Carpet entered into a credit agreement with the
institutions from time to time party thereto, as issuing banks and lenders, 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 and expires in
February 2004. Borrowing under the Foamex Carpet Credit Facility are
collateralized by all of the assets of Foamex Carpet on a pari passu basis with
the Note Payable to Foam Funding LLC (described below). At December 31, 1998,
there were no outstanding borrowings under the Foamex Carpet Credit Facility;
however, there was a letter of credit outstanding in the amount of approximately
$0.7 million. On March 12, 1999, Foamex Carpet elected to reduce availability
under the Foamex Carpet Credit Facility to $15.0 million.
Pursuant to the terms of the Foamex Carpet Credit Facility, borrowed
funds will bear interest at a floating rate equal to the sum of 2.0% per annum
plus the higher of (i) the base rate of The Bank of Nova Scotia, in effect from
time to time or (ii) a rate that is equal to 0.5% per annum plus the federal
funds rate in effect from time to time. At the option of Foamex Carpet, portions
of outstanding loans under the Foamex Carpet Credit Facility are convertible
into LIBOR based loans which bear interest at a floating rate equal to the sum
of 3.0% per annum plus the average LIBOR, as defined.
Foamex/GFI Note
In connection with the transfer of General Felt's common stock, in the
GFI Transaction, Foamex L.P. entered into the $34.0 million Foamex/GFI Note to
settle an existing intercompany note payable to General Felt, which was retained
by Foam Funding LLC in connection with the asset purchase agreement for the GFI
Transaction (see Note 13). The principal and current interest payable under the
Foamex/GFI Note are secured by a $34.5 million letter of credit issued under the
Credit Facility. The principal amount is due upon maturity in March 2000.
F-18
<PAGE>
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. CURRENT PORTION OF LONG-TERM DEBT, LONG-TERM DEBT AND EXTRAORDINARY
LOSS (continued)
Pursuant to the terms of the Foamex/GFI Note, the note will bear interest
at a floating rate equal to the higher of (i) the base rate of the Holder, as
defined, in effect from time to time, or (ii) a rate that is equal to 0.5% per
annum plus the federal funds rate in effect from time to time. At the option of
Foamex L.P., interest payable under the note is converted into a LIBOR based
interest rate at a floating rate equal to the sum of 0.75% per annum plus the
average LIBOR, as defined. As of December 31, 1998, the interest rate for
borrowings was 6.3125%.
Note Payable to Foam Funding LLC
In connection with the asset purchase agreement for the GFI Transaction
(see Note 13), Foamex Carpet entered into a $70.2 million promissory note with
Foam Funding LLC. Amounts outstanding under the Note Payable to Foam Funding LLC
are collateralized by all the assets of Foamex Carpet on a pari passu basis with
the Foamex Carpet Revolving Credit and subject to quarterly payments commencing
June 30, 1998 through March 31, 1999 in the amount of approximately $1.8
million, June 30, 1999 through March 31, 2000 in the amount of approximately
$2.6 million and June 30, 2001 through December 31, 2003 and at the final
maturity on February 25, 2004 in the amount of approximately $3.5 million.
Pursuant to the terms of the Note Payable to Foam Funding LLC, the note
will bear interest at a floating rate equal to the sum of 2.0% per annum plus
the higher of (i) the base rate of the Holder, as defined, in effect from time
to time, or (ii) a rate that is equal to 0.5% per annum plus the federal funds
rate in effect from time to time. At the option of Foamex Carpet, interest
payable under the note is convertible into a LIBOR based interest rate at a
floating rate equal to the sum of 3.0% per annum plus the average LIBOR, as
defined. As of December 31, 1998, the interest rate for borrowings was 8.5625%.
Refinancing Plan
On June 12, 1997, the Company substantially completed a refinancing plan
(the "Refinancing Plan") that included the refinancing of certain long-term
indebtedness to reduce the Company's interest expense and improve financing
flexibility. In connection with the Refinancing Plan, Foamex L.P. purchased
approximately $342.3 million of aggregate principal amount of its public debt
and approximately $116.7 million of aggregate principal amount of Foamex-JPS
Automotive L.P.'s ("FJPS") senior secured discount debentures due 2004 (the
"Discount Debentures") and repaid $5.2 million of term loan borrowings under an
existing credit facility. The Refinancing Plan was funded by $347.0 million of
borrowings under a new $480.0 million credit facility (the "Credit Facility")
and the net proceeds from the issuance of $150.0 million of Senior Subordinated
Notes.
In connection with the Refinancing Plan, the Company 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 extraordinary loss is
comprised of approximately $39.0 million for premium and consent fee payments,
approximately $16.2 million for the write-off of debt issuance costs and debt
discount, approximately $8.2 million for the loss associated with the effective
termination and amendment of interest rate swap agreements and approximately
$4.3 million of professional fees and other costs. In connection with the
Refinancing Plan, the Company repaid $5.2 million in term loan borrowings under
the Credit Facility and purchased approximately $459.0 million of aggregate
principal amount of public debt comprised of:
o $99.8 million of aggregate principal amount of its 9 1/2% senior secured
notes due 2000 for an aggregate consideration of 104.193% of principal
plus accrued interest, comprised of a tender price of 102.193% and a
consent fee of 2.0%;
o $130.1 million of aggregate principal amount of its 11 1/4% senior notes
due 2002 for an aggregate consideration of 105.709% of principal plus
accrued interest, comprised of a tender price of 103.709% and a consent
fee of 2.0%;
F-19
<PAGE>
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. CURRENT PORTION OF LONG-TERM DEBT, LONG-TERM DEBT AND EXTRAORDINARY
LOSS (continued)
o $105.5 million of aggregate principal amount of its 11 7/8% senior
subordinated debentures due 2004 for an aggregate consideration of
107.586% of principal plus accrued interest, comprised of a tender price
of 105.586% and a consent fee of 2.0%;
o $6.9 million of aggregate principal amount of its 11 7/8% senior
subordinated debentures, series B, due 2004 for an aggregate
consideration of 107.586% of principal plus accrued interest, comprised
of a tender price of 105.586% and a consent fee of 2.0%; and
o $116.7 million of aggregate principal amount of the Discount Debentures
for an aggregate consideration of 90.0% of principal amount, which
represents approximately 116.2% of the accreted book value as of June 12,
1997, comprised of a tender price of 88.0% of principal amount and a
consent fee of 2.0%.
In addition, on October 1, 1997, Foamex L.P. redeemed all of the
outstanding: (i) 11 1/4% senior notes due 2002, (ii) 11 7/8% senior subordinated
debentures due 2004 and (iii) the 11 7/8% senior subordinated debentures due
2004, Series B, constituting approximately $26.2 million of the approximately
$30.7 million of outstanding public debt that was not tendered as part of the
Refinancing Plan. These redemptions were funded from 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).
Early Extinguishment of Debt - Other
In connection with the GFI Transaction, the Company incurred
extraordinary losses of approximately $1.9 million (net of income tax benefits
of $1.3 million) associated with the early extinguishment of approximately
$125.1 million of term loans under the Foamex L.P. Credit Facility funded with
$129.0 million of new term loan agreements assumed by Foam Funding LLC (see Note
13). The extraordinary loss was generated entirely from the write-off of debt
issuance costs.
On October 6, 1997, the Company sold substantially all of the net assets
of its needlepunch carpeting, tufted carpeting and artificial grass products
business located at its facilities in Dalton, Georgia to Bretlin, Inc. for an
aggregate sale price of approximately $41.0 million. The Company realized an
insignificant gain on the sale in 1997. The Company used $38.8 million of the
net sale proceeds to repay outstanding term loan borrowings under the Credit
Facility. In connection with this repayment, the Company incurred an
extraordinary loss on the early extinguishment of debt of approximately $0.6
million (net of income tax benefits) during 1997.
In addition, during 1997, the Company incurred extraordinary losses of
approximately $0.6 million (net of income tax benefits of $0.4 million)
associated with the early extinguishment of approximately $11.8 million of
long-term debt funded with approximately $12.1 million of the remaining net
proceeds from the sale of Perfect Fit. The extraordinary loss is comprised of
approximately $0.4 million of premium payments and approximately $0.6 million
for the write-off of debt issuance costs. The long-term debt was comprised of:
o $2.5 million of aggregate principal amount of its 9 1/2% senior secured
notes due 2000.
o $5.5 million of aggregate principal amount of its 11 1/4% senior notes
due 2002.
o Bank term loan borrowings of $3.8 million under the Foamex L.P. Old
Credit Facility.
During 1996, $31.3 million of the net proceeds from the sale of Perfect
Fit was used to extinguish debt of $30.6 million and to pay redemption premiums
of $0.6 million. The Company wrote-off $1.2 million of debt issuance costs
associated with the early extinguishment of debt and incurred transaction costs
of $0.1 million. The early extinguishment of debt resulted in an extraordinary
loss of $1.1 million (net of $0.8 million income tax benefit).
F-20
<PAGE>
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. CURRENT PORTION OF LONG-TERM DEBT, LONG-TERM DEBT AND EXTRAORDINARY LOSS
(continued)
Interest Rate Swap Agreements
The Company enters into interest rate swaps to lower funding costs and/or
to manage interest costs and exposure to changing interest rates. The Company
does not hold or issue financial instruments for trading purposes.
In connection with the Refinancing Plan, the Company's then existing
interest rate swap agreements with a notional amount of $300.0 million were
considered to be effectively terminated since the underlying debt was
extinguished. These interest rate swap agreements had an estimated fair value
liability of $8.2 million at the date of the Refinancing Plan which is included
in the extraordinary loss on the early extinguishment of debt. In lieu of a cash
payment for the estimated fair value of the then existing interest rate swap
agreements, the Company entered into an amendment of the then existing interest
rate swap agreements resulting in one interest rate swap agreement with a
notional amount of $150.0 million through June 2007. Accordingly, the $8.2
million fair value liability has been recorded as a deferred credit which will
be amortized as a reduction in interest and debt issuance expense on a
straight-line basis through June 2007. On January 8, 1998, the Company entered
into a new amendment to its interest rate swap agreement. The new amendment
provided for an interest rate swap agreement with a notional amount of $150.0
million through June 2002. In September 1998, the Company sold its existing
interest rate swap agreement for a net gain of approximately $1.0 million.
Accordingly, the $1.0 million gain has been recorded as a deferred credit which
will be amortized through June 2007, which is the maturity date of the
underlying debt.
The effect of the interest rate swaps was a favorable adjustment to
interest and debt issuance expense of $0.7 million, $2.2 million and $3.7
million for 1998, 1997 and 1996, respectively.
Debt Restrictions and Covenants
The indentures, credit facilities and other indebtedness agreements
contain certain covenants that will limit, among other things to varying
degrees, the ability of the Company's subsidiaries (i) to pay distributions or
redeem equity interests, (ii) to make certain restrictive payments or
investments, (iii) to incur additional indebtedness or issue Preferred Equity
Interest, as defined, (iv) to merge, consolidate or sell all or substantially
all of its assets or (v) to enter into certain transactions with affiliates or
related persons. In addition, certain agreements contain provisions that, in the
event of a defined change of control or the occurrence of an undefined material
adverse change in the ability of the obligor to perform its obligations, the
indebtedness must be repaid, in certain cases, at the option of the holder (see
Note 1). Also, the Company's subsidiaries are required under certain of these
agreements to maintain specified financial ratios of which the most restrictive
are the maintenance of net worth and interest, fixed charge and leverage
coverage ratios, as defined. Under the most restrictive of the distribution
restrictions, the Company was available to be paid by its subsidiaries as of
December 31, 1998, funds only to the extent to enable the Company to meet its
operating and debt obligations.
Foamex L.P. amended the Credit Facility on March 11, 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 Foamex L.P. to negotiate a further amendment of
the Credit Facility.
Foamex Carpet amended the Foamex Carpet Credit Facility and the Note
Payable to Foam Funding LLC on March 12, 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 condition for 1998 and management expectations regarding
future measurement periods. As the Foamex Carpet actual 1998 performance 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 the
F-21
<PAGE>
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. CURRENT PORTION OF LONG-TERM DEBT, LONG-TERM DEBT AND EXTRAORDINARY
LOSS (continued)
Note Payable to Foam Funding LLC, in order to enable Foamex Carpet to negotiate
further amendments of the Foamex Carpet Credit Facility and the Note Payable to
Foam Funding LLC.
Future Obligations on Debt
Scheduled maturities of debt prior to reclassification as current are
shown below (thousands):
Year End Debt
-------- --------
1999 $ 18,091
2000 19,244
2001 21,877
2002 18,932
2003 206,749
Thereafter 501,160
--------
Total 786,053
Unamortized debt premium, net 11,370
--------
Total $797,423
========
8. EMPLOYEE BENEFIT PLANS
The Company adopted during the fourth quarter of 1998, Statement of
Financial Accounting Standards No. 132, Employees Disclosure about Pension and
Other Postretirement Benefits" ("SFAS No. 132") which revised the required
disclosures about pension and other postretirement benefit plans.
Defined Benefit Pension Plans
The Company maintains noncontributory defined benefit pension plans for
salaried and certain hourly employees. The salaried plan provides benefits that
are based principally on years of credited service and level of compensation.
The hourly plans provide benefits that are based principally on stated amounts
for each year of credited service.
Net periodic pension cost included the following components:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
(thousands)
<S> <C> <C> <C>
Service cost $ 2,833 $ 2,229 $ 2,471
Interest cost 4,517 4,273 3,997
Expected return on plan assets (5,758) (5,357) (4,205)
Amortization of:
Transition (asset/obligation) (75) (75) (75)
Prior service cost (245) (245) (245)
(Gain)/Losses and other 104 72 327
------- ------- -------
Total $ 1,376 $ 897 $ 2,270
======= ======= =======
</TABLE>
The Company's funding policy is to contribute annually an amount that
both satisfies the minimum funding requirements of the Employee Retirement
Income Security Act of 1974 and does not exceed the full funding limitations of
the Internal Revenue Code of 1986, as amended (the "Code"). The Plan purchased
250,000 shares of the Company's stock in 1994 for $2.5 million and 150,000
shares in 1995 for $1.5 million. The value of the Plan's investment in the
Company's stock is approximately $5.2 million and $4.6 million at December 31,
1998 and 1997, respectively. The Plan purchased approximately $2.5 million of
shares of Trace Global Opportunities Fund during 1995 and 1997. The value of the
Plan's investment in Trace Global Opportunities Fund, which primarily invests in
companies organized or operating outside the G-7 markets and is a related party
to Trace, was approximately $4.3
F-22
<PAGE>
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. EMPLOYEE BENEFIT PLANS (continued)
million and $8.7 million at December 31, 1998 and 1997, respectively. During
1998, the Plan purchased 250,000 shares of United Auto Group ("UAG") stock for
approximately $4.8 million. The value of the Plan's investment in UAG, which is
a related party to Trace, was $2.3 million at December 31, 1998. Plan
investments consist primarily of corporate equity and debt securities, mutual
life insurance funds and cash equivalents.
During 1998, the discount rate was adjusted to 6.5%. The following table
sets forth the funded status of the Company's underfunded plans and the amounts
recognized in the accompanying consolidated balance sheets as of December 31,
1998 and December 28, 1997:
<TABLE>
<CAPTION>
December 31, December 28,
1998 1997
-------- ---------
(thousands)
<S> <C> <C>
Change in Benefit Obligation:
Benefit obligations at end of prior year $ 65,948 $ 58,775
Service cost 2,833 2,229
Interest cost 4,517 4,273
Benefits paid (annuities and lump sums) (4,043) (3,636)
Actuarial Loss/(Gain) 5,334 4,307
-------- --------
Projected benefit obligation $ 74,589 $ 65,948
======== ========
Change in Plan Assets:
Fair value of plan assets at end of prior year $ 58,952 $ 53,734
Actual return on plan assets 439 6,308
Company contributions 200 2,546
Benefits paid (4,043) (3,636)
Other (2) --
-------- --------
Fair value of plan assets $ 55,546 $ 58,952
======== ========
Funded Status of the Plan:
Plan assets in excess of/(less than) benefit obligation $(19,042) $ (6,996)
Unamortized transition (asset) obligation (740) (815)
Unamortized prior service cost (2,397) (2,642)
Unamortized net (gains)/losses 18,711 8,160
-------- --------
Net prepaid assets/(accrued liabilities) $ (3,468) $ (2,293)
======== ========
Total Recognized Amounts in the Statement of Financial Position:
Prepaid benefit costs $ 1,200 $ 1,749
Accrued benefit liability (20,150) (6,274)
Intangible assets 239 262
Accumulated other comprehensive income 15,243 1,970
-------- --------
Net amount recognized $ (3,468) $ (2,293)
======== ========
</TABLE>
Significant assumptions used in determining the plans' funded status are
as follows:
<TABLE>
<CAPTION>
December 31, December 28,
1998 1997
-------- -------
<S> <C> <C>
Expected long-term rates of return on plan assets 10.00% 10.00%
Discount rates on projected benefit obligations 6.50% 7.00%
</TABLE>
F-23
<PAGE>
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. EMPLOYEE BENEFIT PLANS (continued)
Defined Contribution Plan
The Company maintains a defined contribution plan which is qualified
under Section 401(k) of the Code and is available for eligible employees who
elect to participate in the plan. Employee contributions are voluntary and
subject to certain limitations as imposed by the Code. The Company provides
contributions amounting to a 25% match of employees' contributions up to 4% of
eligible compensation. The Company also provides an additional 25% match of
employees' contributions up to 4% of eligible compensation made to a fund which
invests in the Company's common stock. In addition, the Company may make
discretionary contributions amounting to a 25% match of employees' contributions
up to 4% of eligible compensation. The expense for these contributions for 1998,
1997 and 1996 was approximately $0.9 million, $0.9 million and $0.8 million,
respectively.
Postretirement Benefits
In addition to providing pension benefits, the Company provides
postretirement health care and life insurance for eligible employees. These
plans are unfunded and the Company retains the right, subject to existing
agreements, to modify or eliminate these benefits.
The components of 1998, 1997 and 1996 expense for postretirement benefits
are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
----- ----- -----
(thousands)
<S> <C> <C> <C>
Service costs $ 10 $ 9 $ 12
Interest cost 46 71 67
Amortization of:
Prior service costs (35) (35) (27)
(Gains)/losses and other (29) (21) (26)
Special termination/curtailment loss -- 74 576
----- ----- -----
Net periodic postretirement benefit cost $ (8) $ 98 $ 602
===== ===== =====
</TABLE>
During 1996, certain employees accepted an early retirement program
resulting in a special termination loss of $0.6 million.
The following table sets forth the funded status of the Company's
postretirement plans and the amounts recognized in the accompanying consolidated
balance sheets as of December 31, 1998 and December 28, 1997:
<TABLE>
<CAPTION>
December 31, December 28,
1998 1997
------- -------
(thousands)
Change in Benefit Obligation:
<S> <C> <C>
Benefit obligations at end of prior year $ 927 $ 1,012
Service cost 10 9
Interest cost 46 71
Employee contributions 27 28
Benefits paid (annuities and lump sums) (312) (220)
Actuarial Loss/(Gain) (47) (47)
Special termination benefits -- 74
------- -------
Projected benefit obligation $ 651 $ 927
======= =======
</TABLE>
F-24
<PAGE>
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. EMPLOYEE BENEFIT PLANS (continued)
<TABLE>
<CAPTION>
December 31, December 28,
1998 1997
------- -------
(thousands)
Change in Plan Assets:
<S> <C> <C>
Fair value of plan assets at end of prior year $ -- $ --
Company contributions 285 192
Employee contributions 27 28
Benefits paid (annuities and lump sums) (312) (220)
------- -------
Fair value of plan assets $ -- $ --
======= =======
Funded Status of the Plan:
Plan assets in excess of/(less than) benefit obligation $ (651) $ (927)
Unamortized prior service cost (442) (477)
Unamortized net (gains)/losses (573) (555)
------- -------
Net prepaid assets/(accrued liabilities) $(1,666) $(1,959)
======= =======
</TABLE>
The net accrued benefit liability recognized at December 31, 1998 and
December 28, 1997 resulted in an unfunded obligation of $1.7 million and $2.0
million, respectively.
A 6% and 8% annual rate of increase in the per capita costs of covered
health care benefits was assumed for each of 1998 and 1997, respectively. This
rate was assumed to gradually decrease to 5% by the year 2000. Increasing the
weighted average assumed health care cost trend rates by one percentage point
would have an insignificant impact on the accumulated postretirement benefit
obligation and service and interest cost. The discount rate used was 6.5% and
7.0% as of December 31, 1998 and December 28, 1997, respectively.
Postemployment Benefits
The Company provides certain postemployment benefits to former or
inactive employees and their dependents during the time period following
employment but before retirement. At December 31, 1998 and December 28, 1997,
the Company's liability for postemployment benefits was insignificant for each
period.
9. DISCONTINUED OPERATIONS
On December 11, 1996, the Company sold its partnership interests in JPS
Automotive for a sale price of approximately $220.1 million including the
assumption of $200.1 million of JPS Automotive's indebtedness. The sale included
substantially all of the net assets of the automotive textiles business segment.
Transaction expenses related to the sale amounted to approximately $8.9 million.
During 1996, the Company recorded a net loss on the sale of JPS
Automotive of approximately $70.9 million (net of $34.2 million income tax
benefit), which includes the loss on disposal and a net loss of $1.3 million
(net of $0.7 million income tax benefit) relating to operating losses during the
phase-out period. In December 1997, the Company recorded a loss from
discontinued operations of approximately $2.0 million (net of income taxes)
which relates to the final post-closing settlement regarding the December 1996
sale of JPS Automotive.
During 1996, the Company finalized the sale of the outstanding common
stock of Perfect Fit, a wholly owned subsidiary, for an adjusted sale price of
approximately $44.2 million. The sale included substantially all of the net
assets of the home comfort products segment. Actual and estimated transaction
expenses related to the sale totaled approximately $1.5 million. The Company
recorded a loss on the sale of Perfect Fit of approximately $43.0 million, which
includes the loss on disposal and a loss of $2.4 million relating to operating
losses during the phase-out period.
F-25
<PAGE>
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. DISCONTINUED OPERATIONS (continued)
The Company's financial statements were restated to reflect the
discontinuation of the home comfort products and automotive textile business
segments. In addition to the interest and debt issuance expense of JPS
Automotive, interest and debt issuance expense was allocated to discontinued
operations based on the estimated debt to be retired from the net proceeds from
the sale of Perfect Fit and JPS Automotive.
10. OTHER INCOME (EXPENSE), NET
Other income (expense), net for 1998 primarily consists, among other
things, of: $6.5 million of costs associated with the proposed buyout
transaction, $3.1 million of fees and costs related to the GFI Transaction, $3.0
million of foreign currency translation and transaction losses, $1.0 million
impairment write down of an investment deemed to be other than temporary, and
other expenses offset by approximately $1.9 million of interest income.
11. INCOME TAXES
Income (loss) from continuing operations before provision for income
taxes consists of the following:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
(thousands)
<S> <C> <C> <C>
United States $ (1,318) $ 7,572 $ 46,075
Foreign (10,293) (916) 3,086
-------- -------- --------
Income (loss) from continuing operations
before provision (benefit) for income taxes $(11,611) $ 6,656 $ 49,161
======== ======== ========
</TABLE>
The components of the total consolidated provision (benefit) for income
taxes are summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
(thousands)
<S> <C> <C> <C>
Continuing operations $ 58,242 $ 2,525 $ 16,669
Discontinued operations -- (1,330) (35,129)
Extraordinary loss on early extinguishment
of debt (1,278) (27,400) (765)
-------- -------- --------
Total consolidated provision (benefit) for
income taxes $ 56,964 $(26,205) $(19,225)
======== ======== ========
</TABLE>
The total consolidated provision (benefit) for income taxes is summarized
as follows:
1998 1997 1996
------ ------ ------
Current: (thousands)
Federal $3,391 $1,958 $ 220
State -- 1,248 760
Foreign 673 498 786
------ ------ ------
Total current 4,064 3,704 1,766
------ ------ ------
F-26
<PAGE>
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. INCOME TAXES (continued)
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
Deferred: (thousands)
<S> <C> <C> <C>
Federal 52,951 (27,013) (24,211)
State -- (2,662) 2,729
Foreign (51) (234) 491
-------- -------- --------
Total deferred 52,900 (29,909) (20,991)
-------- -------- --------
Total consolidated provision (benefit)
for income taxes $ 56,964 $(26,205) $(19,225)
======== ======== ========
</TABLE>
The tax effect of the temporary differences that give rise to significant
deferred tax assets and liabilities are:
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
-------- --------
Deferred tax assets: (thousands)
<S> <C> <C>
Inventory basis differences $ 1,366 $ 1,252
Employee benefit accruals 12,592 5,405
Allowances and contingent liabilities 9,270 3,600
Restructuring and plant closing accruals 4,541 14,436
Other 7,729 4,827
Net operating loss carryforwards 45,600 49,795
Capital loss carryforwards 2,105 11,202
Valuation allowance for deferred tax assets (56,880) (13,407)
-------- --------
Deferred tax assets 26,323 77,110
-------- --------
Deferred tax liabilities:
Basis difference in property, plant and equipment 26,509 27,544
Other 2,879 2,282
-------- --------
Deferred tax liabilities 29,388 29,826
-------- --------
Net deferred tax assets (liabilities) $ (3,065) $ 47,284
======== ========
</TABLE>
The 1998 provision for income taxes of $57.0 million includes an increase
in valuation allowance of $52.6 million for deferred tax assets as the Company
has determined that 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. The Company will continually review the adequacy of the valuation
allowance and recognize benefits only as reassessment indicates that it is more
likely than not that the benefits will be realized. In addition, the Company did
not recognize the tax benefits associated with losses in Mexico since it appears
likely that the net operating losses will not be able to be realized in the near
future.
During 1998, the valuation allowance for deferred tax assets and net
deferred tax assets decreased by $9.1 million primarily due to the reduction of
capital loss carryforwards associated with the transfer of General Felt's common
stock in connection with the GFI Transaction (see Note 13). In addition, during
1998, deferred tax assets were increased by $8.7 million associated with a
change in the income tax basis of Foamex Carpet. 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.
F-27
<PAGE>
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. INCOME TAXES (continued)
A reconciliation of the statutory federal income tax rate to the
effective income tax rate on continuing operations is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
(thousands)
<S> <C> <C> <C>
Statutory income taxes $ (4,064) $ 2,330 $ 17,206
State income taxes, net of federal -- 260 1,864
Limitation on the utilization of foreign tax benefits 3,800 -- --
Valuation allowance 52,573 -- (3,621)
Cost in excess of assets acquired 1,505 553 644
Write-off excess cost 770 4,305 --
Utilization of capital loss carryforwards -- (5,028) --
Costs associated with buyout proposal 1,750 -- --
Other 1,908 105 576
-------- -------- --------
Total $ 58,242 $ 2,525 $ 16,669
======== ======== ========
</TABLE>
12. COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company is obligated under various noncancelable lease agreements for
rental of facilities, vehicles and other equipment. Many of the leases contain
renewal options with varying terms and escalation clauses that provide for
increased rentals based upon increases in the Consumer Price Index, real estate
taxes and lessors' operating expenses. Total minimum rental commitments
(excluding commitments accrued as part of the Company's various
restructuring/consolidation plans) required under operating leases at December
31, 1998 are:
Operating
Leases
(thousands)
1999 $13,130
2000 10,306
2001 8,708
2002 7,694
2003 6,586
Thereafter 6,156
-------
Total $52,580
=======
Rental expense charged to operations under operating leases approximated
$11.1 million, $10.1 million and $9.6 million for 1998, 1997 and 1996,
respectively. Substantially all such rental expense represented the minimum
rental payments under operating leases. In addition, the Company incurred rental
expense of approximately $1.7 million for 1996 under leases with related
parties.
13. RELATED PARTY TRANSACTIONS AND BALANCES
The Company regularly enters into transactions with its affiliates in the
ordinary course of business.
On July 1, 1997, Trace borrowed $5.0 million pursuant to a promissory
note with an aggregate principal amount of $5.0 million issued to Foamex L.P. on
June 12, 1997. The promissory note is due and payable on demand or, if no demand
is made, on July 7, 2001, and bears interest at 2 3/8% plus three-month LIBOR,
as defined, per annum payable quarterly in arrears commencing October 1, 1997.
On June 12, 1997, another promissory note issued to Foamex L.P. by Trace in July
1996 was amended. The amended promissory note is an extension of a promissory
note of Trace that was due in July 1997. The aggregate principal amount of the
amended promissory note was increased to approximately $4.8 million and the
maturity of the promissory note was extended. The promissory note
F-28
<PAGE>
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. RELATED PARTY TRANSACTIONS AND BALANCES (continued)
is due and payable on demand or, if no demand is made, on July 7, 2001,
and bears interest at 2 3/8% plus three-month LIBOR, as defined, per annum
payable quarterly in arrears. The promissory note is included in the other
components of stockholders' equity (deficit). Based on Trace's financial
position, Trace may not be able to pay the aggregate amount of $9.8 million.
The Company has current operating receivables from Trace at December 31,
1998 of approximately $3.0 million, for which an allowance has been provided for
in operations as restructuring and other charges due to the financial
difficulties of Trace (see Note 1). Additionally, as described above, the
Company continues to include in the other components of stockholders' equity
(deficit), notes receivable from Trace. During 1998, the Company also recorded
charges in other income and expense, net of $6.5 million associated with the
terminated Trace buyout and related refinancing (see Note 1).
During 1997, the Company purchased a $2.0 million investment in Trace
Global Opportunities Fund, which primarily invests in companies organized or
operating outside the G-7 markets and is a related party to Trace. The value of
the Company's investment in Trace Global Opportunities Fund is $0.9 million and
$2.0 million at December 31, 1998 and December 28, 1997, respectively. The
change in value of this investment is recorded as a charge to other income and
expense.
In connection with the Refinancing Plan in 1997, Foamex L.P. made a cash
distribution of approximately $1.5 million to Trace Foam as a result of Foamex
L.P.'s distribution to FJPS and FMXI, Inc. of the Discount Debentures, a note
with a principal amount of approximately $56.2 million (net of approximately
$20.6 million of original issue discount) due from FJPS and a promissory note in
the aggregate principal amount of $2.0 million due from the Company. The
distribution to Trace Foam reduced retained earnings (accumulated deficit) of
the Company.
Foamex L.P. has a management service agreement with Trace Foam Company,
Inc. ("Trace Foam"), a wholly-owned subsidiary of Trace, pursuant to which Trace
Foam provides general managerial services of a financial, technical, legal,
commercial, administrative and/or advisory nature to Foamex L.P. During June
1997, the management services agreement was amended to increase the annual fee
from $1.75 million to $3.0 million, plus reimbursement of expenses incurred.
Trace rents approximately 5,900 square feet of general, executive and
administrative office space in New York, New York from Foamex L.P. on
substantially the same terms as Foamex L.P. leases such space from a third party
lessor. Also, certain employees of Trace are also employees of the Company.
Additionally, certain employees of Trace and its affiliates provide services to
the Company. The Company pays a portion of the salaries of such employees based
on the amount of time devoted to the Company's matters by such employees. Such
payments totaled approximately $2.0 million per year.
The Company and Trace are parties to an Aircraft Sale, Lease and
Operating Agreement concerning an aircraft owned by the Company. See Note 23.
During 1997, the Company purchased approximately $1.9 million of scrap
material from Recticel Foam Corporation ("RFC"), a former partner of Foamex L.P.
and whose chairman is a director of the Company, under various agreements, the
latest of which expired in March 1998.
14. STOCK OPTION PLAN
The Company's 1993 Stock Option Plan provides for the granting of
nonqualified ("NQSOs") and incentive stock options for up to 3.0 million shares
of common stock to officers and executive employees of the Company and its
subsidiaries and affiliates, the price and terms of each such option is at the
discretion of the Company, except that the term cannot exceed ten years. As of
December 28, 1997, the stock options issued under the 1993 Stock Option Plan
vest equally over a five year period with a term of ten years.
F-29
<PAGE>
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. STOCK OPTION PLAN (continued)
In accordance with Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("FAS No. 123"), which was effective
as of January 1, 1996, the fair value of option grants is estimated on the date
of grant using the Black-Scholes option pricing model for pro forma footnote
purposes with the following assumptions used for grants in all years; no
dividend yield, risk-free interest rates of 5.40%, 5.69% to 6.39% and expected
option life of three years. Expected volatility was assumed to be 45% in 1998
and 40% in 1997 and 1996.
A summary of stock option activity is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------------------ ----------------------- ------------------------
Weighted Weighed Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 1,439,049 $ 7.08 967,476 $ 6.97 951,343 $ 7.64
Granted 132,750 13.22 625,833 11.52 202,240 7.06
Exercised (82,440) 7.03 (145,195) 6.88 (14,914) 6.88
Forfeited (100,443) 9.84 (9,065) 6.88 (171,193) 10.80
---------- --------- ---------- --------- ---------- ---------
Outstanding at end of year 1,388,916 $ 9.41 1,439,049 $ 7.08 967,476 $ 6.97
========== ========= ========== ========== ========== =========
Exercisable at end of year 549,124 $ 7.02 467,460 $ 7.04 431,863 $ 6.94
========== ========= ========== ========== ========== =========
</TABLE>
The options outstanding at December 31, 1998 have an exercise price range
of $6.875 to $14.00. During 1998, the Company granted 132,750 options with a
weighted average market price on the date of grant of $13.22. During 1997, the
Company granted 625,833 options with a weighted average market price on the date
of grant of $13.91. During 1996, the Company granted 202,240 options with a
weighted average market price on the date of grant of $6.52. The 1996 aggregate
difference of $1.1 million between the fair market value ("FMV") of the options
at the date of grant and the option price is being charged to expense over the
vesting period (five years) of the options. Total compensation expense relating
to options amounted to approximately $0.2 million, $0.3 million and $0.3
million, respectively, in each of 1998, 1997 and 1996, respectively.
The weighted average remaining contractual lives of outstanding options
at December 31, 1998 was approximately 6.0 years.
The Company applies the provisions of Accounting Principles Board Opinion
No. 25 ("Accounting for Stock Issued to Employees") and related interpretations
("APB 25") in accounting for its stock-based compensation plans. Accordingly,
compensation expense has been recognized in the consolidated financial
statements with respect to the above plans in accordance with APB 25. Had
compensation costs for the above plans been determined based on the fair value
of the options at the grant dates under those plans consistent with the methods
under Statement of Financial Accounting Standards No. 123 ("Accounting for Stock
Based Compensation"), the Company's income from continuing operations and
earnings (loss) per share would have the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1998 1997 1996
(thousands, except per share data)
Income (loss) from continuing operations:
<S> <C> <C> <C>
As reported $ (69,853) $ 4,131 $ 32,492
Pro forma (70,270) 3,935 32,404
Basic earnings (loss) per share:
As reported (2.79) 0.16 1.28
Pro forma (2.81) 0.16 1.28
</TABLE>
F-30
<PAGE>
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. STOCK OPTION PLAN (continued)
1998 1997 1996
(thousands, except per share data)
Diluted earnings (loss) per share:
As reported (2.79) 0.16 1.26
Pro forma (2.81) 0.15 1.26
15. STOCKHOLDERS' EQUITY (DEFICIT)
Preferred Stock
The Company is authorized to issue 5.0 million shares of preferred stock
with a par value of $1.00 per share, none of which has been issued. The Board of
Directors has the power to establish the powers, preferences, and rights of each
series which may afford the holders of any preferred stock preferences, powers
and rights (including voting rights) senior to the rights of the holders of
common stock.
Common Stock
At December 31, 1998, the Company had an aggregate of 3.0 million of
common stock shares reserved for issuance in connection with its stock option
plan (1.2 million) and outstanding warrants (1.8 million).
Warrants
In June 1994, in connection with the issuance of the Discount Debentures,
the Company issued 116,745 warrants to purchase 0.6 million shares of common
stock. Each warrant is exercisable on or before July 1, 1999 for 5.1394 shares
at a cash price of $11.52 per share upon exercise. The warrants were valued by
projecting the Company's financial results for five years. These financial
results were discounted at a rate of 18% to 20% and, with a projected price
earnings ratio of 10-11x after five years, yielded a value of approximately
$25.70 per warrant or $3.0 million in total. Accordingly, additional paid in
capital was increased for the cash received attributable to the warrants and the
associated debt reduced, with such reduction to be amortized over the life of
the debt.
In addition, the Company has outstanding warrants to purchase
approximately 1.2 million shares of common stock at an exercise price of
approximately $12.30 per share at any time prior to October 1999.
Treasury Stock
During 1997 and 1996, the Company purchased 434,600 and 624,700 shares of
its common stock, respectively, 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.
Accumulated Other Comprehensive Income (Loss)
The accumulated other comprehensive income (loss) consists of the
following:
<TABLE>
<CAPTION>
December 31, December 28, December 26,
1998 1997 1996
-------- -------- --------
(thousands)
<S> <C> <C> <C>
Foreign currency translation adjustment $(10,965) $ (4,367) $ (3,494)
Additional pension liability,
net of income taxes in 1997 and 1996 (13,756) (2,231) (1,445)
-------- -------- --------
$(24,721) $ (6,598) $ (4,939)
======== ======== ========
</TABLE>
F-31
<PAGE>
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. OPERATING SEGMENT AND RELATED DATA
In the fourth quarter of 1998 the Company adopted Statement of Financial
Accounting Standards No. 131 "Disclosure about Segments of an Enterprise and
Restatement Information" ("SFAS No. 131"). SFAS No. 131 requires companies to
report information about their business segments on the basis of how they are
managed and evaluated by the chief operating decision-makers. 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 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 No. 131.
The accounting policies of the operating segments are the same as
described in the "Summary of Significant Accounting Policies" (see Note 2).
Revenues and costs have been included in operating segments where specifically
identified. Costs shared by operating segments have been allocated on the basis
of the amount utilized.
<TABLE>
<CAPTION>
Carpet
Foam Cushion Automotive Technical
Products Products Products Products Other Total
-------- -------- -------- -------- ----- -----
1998
<S> <C> <C> <C> <C> <C> <C>
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
</TABLE>
17. 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.
F-32
<PAGE>
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17. ENVIRONMENTAL MATTERS (continued)
The Clean Air Act Amendments of 1990 (the "1990 CAA Amendments") provide
for the establishment of federal emission standards for hazardous air pollutants
including methylene chloride, propylene oxide and TDI, materials used in the
manufacturing of foam. On December 27, 1996, the United States Environmental
Protection Agency (the "EPA") proposed regulations under the 1990 CAA Amendments
that will require manufacturers of slab stock polyurethane foam and foam
fabrication plants to reduce emissions of methylene chloride. The final National
Emission Standard for Hazardous Air Pollutants ("NESHAP") was promulgated
October 7, 1998. NESHAP requires a reduction of approximately 70% of the
emission of methylene chloride for the slab stock foam industry effective
October 7, 2001. The Company 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 these 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.
The Company has reported to appropriate state authorities that it has
found soil and groundwater contamination in excess of state standards at three
facilities and soil contamination in excess of state standards at three other
facilities. The Company has begun remediation and is conducting further
investigations into the extent of the contamination at these facilities and,
accordingly, the extent of the remediation that may ultimately be required. The
actual cost and the timetable of any such remediation cannot be predicted with
any degree of certainty at this time. The Company has accruals of $3.3 million
for the estimated cost of completing remediation at these facilities. The
Company is in the process of addressing potential contamination at 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.
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.
F-33
<PAGE>
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
18. 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.
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
F-34
<PAGE>
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
18. LITIGATION (continued)
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.
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, 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 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.
On April 14, 1999, the Company received communications addressed to its
Board of Directors from certain of the Company's stockholders regarding aspects
of relationships 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.
F-35
<PAGE>
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
18. LITIGATION (continued)
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
management that the disposition of these lawsuits will not, individually or in
the aggregate, have a material adverse effect on the financial position or
results of operations of the Company. If management's assessment of the
Company's liability with respect to these actions is incorrect, such actions
could have a material adverse effect on the Company's consolidated financial
position.
19. FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK
Concentration of Credit Risk
Financial instruments which potentially subject the Company to
significant concentrations of credit risk consist primarily of cash and cash
equivalents and trade accounts receivable. The Company maintains cash and cash
equivalents and certain other financial instruments with various large financial
institutions. The Company's periodic evaluation of these financial institutions
are considered in the Company's investment strategy.
The Company sells foam products to the automotive, carpet, cushioning and
other industries. The Company performs ongoing credit evaluations of its
customers and generally does not require collateral. The Company maintains
allowance accounts for potential credit losses and such losses have been within
management's expectations.
Disclosure about Fair Value of Financial Instruments
The following disclosures of the estimated fair value amounts have been
determined based on the Company's assessment of available market information and
appropriate valuation methodologies.
The estimated fair values of the Company's financial instruments as of
December 31, 1998 are as follows:
Carrying Amount Fair Value
--------------- ----------
(thousands)
Liabilities:
Debt and debt related party $797,423 $798,943
======== ========
As of April 22, 1999, the estimated fair value of the Company's financial
instrument is approximately $655.7 million.
Carrying amounts reported in the consolidated balance sheet for cash and
cash equivalents, accounts receivable, accounts payable, accrued liabilities and
short-term borrowings approximates fair value due to the short- term nature of
these instruments.
The fair value of long-term debt is estimated using quoted market prices,
where available, or discounted cash flows.
The fair value of any interest rate swap is based on the amount at which
the Company would pay if any such swap was settled, as determined by an estimate
obtained from dealers.
Fair value estimates are made at a specific point in time, based on
relevant market information about the financial instruments. These estimates are
subjective in nature and involve uncertainties and matters of significant
judgment and therefore, cannot be determined with precision. Changes in
assumptions could significantly affect the estimates.
F-36
<PAGE>
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
20. EARNINGS (LOSS) PER SHARE
The following table shows the amounts used in computing earnings per
share and the effect on income and the weighted average number of shares of
dilutive potential common stock.
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
(thousands, except per share amounts)
Basic earnings (loss) per share:
<S> <C> <C> <C>
Net income (loss) $ (71,770) $(42,345) $(83,135)
=========== ======== ========
Average common stock outstanding 24,996 25,189 25,389
=========== ======== ========
Basic earnings (loss) per share $ (2.87) $ (1.68) $ (3.28)
=========== ======== ========
Diluted earnings (loss) per share:
Net income (loss) available for common stock
and dilutive securities $ (71,770) $(42,345) $(83,135)
=========== ======== ========
Average common stock outstanding 24,996 25,189 25,389
Additional common shares resulting
from stock options * -- 511 351
----------- -------- --------
Average common stock and dilutive
stock outstanding 24,996 25,700 25,740
=========== ======== ========
Diluted earnings (loss) per share $ (2.87) $ (1.65) $ (3.23)
=========== ======== ========
</TABLE>
* Dilutive stock options and warrants have not been included since they
would result in anti-dilutive earnings from continuing operations.
Earnings (loss) per share attributable to continuing operations and
discontinued operations and extraordinary loss on early extinguishment of debt
are:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
Earnings (loss) per common share - basic:
<S> <C> <C> <C>
Continuing operations $ (2.79) $ 0.16 $ 1.28
Discontinued operations -- (0.08) (4.51)
Extraordinary loss (0.08) (1.76) (0.05)
-------- -------- --------
Net loss $ (2.87) $ (1.68) $ (3.28)
======== ======== ========
Earnings (loss) per common share - assuming dilution:
Continuing operations $ (2.79) $ 0.16 $ 1.26
Discontinued operations -- (0.08) (4.45)
Extraordinary loss (0.08) (1.73) (0.04)
-------- -------- --------
Net loss $ (2.87) $ (1.65) $ (3.23)
======== ======== ========
</TABLE>
F-37
<PAGE>
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
21. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
(thousands)
<S> <C> <C> <C>
Cash paid for interest $ 75,260 $ 46,323 $ 44,472
======== ======== ========
Cash paid (received) for income taxes, net $ 2,134 $ 3,579 $ (2,855)
======== ======== ========
</TABLE>
22. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
First Second Third
Quarter Quarter Quarter
------- ------- -------
1998 as reported: (thousands, except per share amounts)
<S> <C> <C> <C>
Net sales $313,790 $298,479 $332,710
Gross profit 51,196 56,922 56,740
Income from continuing operations 6,208 10,491 9,640
Net income (loss) 4,334 10,448 9,640
Basic earning (loss) per share from
continuing operations 0.25 0.42 0.39
Diluted earnings (loss) per share from
continuing operations 0.24 0.40 0.37
</TABLE>
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
1998 as adjusted: (thousands, except per share amounts)
<S> <C> <C> <C> <C>
Net sales $ 312,290 $ 298,479 $ 332,210 $ 303,417
Gross profit 49,570 57,396 52,059 (4,520)
Income (loss) from continuing operations 4,983 10,358 4,050 (89,244)
Net income (loss) 3,109 10,315 4,050 (89,244)
Basic earning (loss) per share from
continuing operations 0.20 0.41 0.16 (3.57)
Diluted earnings (loss) per share from
continuing operations 0.19 0.40 0.16 (3.57)
</TABLE>
In 1998, the Company reported a loss from continuing operations of $69.8
million. The Company has reviewed year-end adjustments and has restated the
first, second and third quarters for amounts related to those quarters for all
line items where detailed information and recently completed studies provided a
basis to correctly position the major items in the correct quarter. The majority
of the one-time charges still fall in quarter four, including categories that do
not have a basis for allocating by quarter.
In the fourth quarter of 1998, the Company reported a loss from
operations of $89.2 million. Items that negatively impacted the fourth quarter
included: (i) additional costs of $4.5 million associated with the integration
of Crain and Foamex L.P., including inventory adjustments for facilities
affected by the consolidation of manufacturing and/or distribution facilities;
(ii) operating losses and inefficiencies of $1.0 million resulting from fires at
Orlando, Florida and Cornelius, North Carolina plants; (iii) operating
inefficiencies and logistics costs of $2.5 million associated with the sales of
juvenile and other consumer products sold through mass merchandisers and
discount stores; (iv) start up costs and inefficiencies of $3.0 million
associated with new automotive lamination contracts at Mexican border
facilities; (v) increased provisions for bad debts of $3.0 million for United
States and Mexican customers; and (vi) competitive pricing measures due to
market share challenges from competitors for its foam and automotive products.
In addition, the Company provided a valuation allowance of $52.6 million on its
deferred tax assets (see Note 11).
F-38
<PAGE>
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
22. QUARTERLY FINANCIAL DATA (UNAUDITED) (continued)
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
1997 (thousands, except per share amounts)
<S> <C> <C> <C> <C>
Net sales $ 229,120 $ 239,887 $ 233,434 $ 228,654
Gross profit 42,797 44,780 38,039 17,723
Income (loss) from continuing operations 8,136 9,470 6,515 (19,990)
Net income (loss) 7,726 (32,719) 6,515 (23,867)
Basic earnings (loss) per share from
continuing operations 0.32 0.37 0.26 (0.80)
Diluted earnings (loss) per share from
continuing operations 0.31 0.37 0.26 (0.80)
</TABLE>
During 1997, the Company recorded an extraordinary loss on the early
extinguishment of debt of approximately $42.2 million relating to the 1997
Refinancing Plan (see Note 7) which is reflected in the second quarter of 1997.
During the fourth quarter of 1997, the Company recorded a $21.1 million
restructuring charge which is described in Note 4 and recorded approximately
$20.0 million of special charges and changes in estimates relating to inventory
writedowns, customer deductions, start-up of operations and other items. These
charges decreased gross profit by $15.6 million and increased selling, general
and administrative expenses by $4.4 million.
23. SUBSEQUENT EVENTS
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 31, 1999, the Company sold its corporate airplane for $16.3
million in gross proceeds of which $8.9 million was used to repay debt
associated with the airplane. As specified by the terms of the Aircraft Sale,
Lease and Operating Agreement, pursuant to which the Company purchased the
airplane, Trace agreed to reimburse the Company to the extent the net proceeds
from the sale of the airplane were less than a specified amount, and the Company
was obligated to share the net proceeds in excess of such specified amount with
Trace. Pursuant to the terms of such agreement, the Company was obligated to pay
Trace approximately $0.6 million or approximately 50% of the "Excess Proceeds",
as defined, which was offset against Trace's obligation to pay interest on two
promissory notes in favor of the Company.
Effective January 25, 1999, employees of Trace and its affiliates
referred to in Note 13, entered into employment agreements with the Company
totaling $2.0 million annually. The agreements have continuous terms of two
years.
F-39
<PAGE>
FOAMEX INTERNATIONAL INC.
INDEX TO FINANCIAL STATEMENT SCHEDULES
Index to Financial Statement Schedules
Schedule I - Condensed Financial Information of Registrant
Schedule II - Valuation and Qualifying Accounts
All other schedules are omitted since the required information is not
present or is not present in amounts sufficient to require submission of the
schedule, or because the information required is included in the consolidated
financial statements and notes thereto.
S-1
<PAGE>
Schedule I
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, December 28,
1998 1997
--------- ---------
ASSETS (thousands)
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 187 $ 2,639
Intercompany receivables 4,623 14,542
Deferred income taxes -- 15,975
Other current assets 584 181
--------- ---------
Total current assets 5,394 33,337
DEFERRED TAXES -- 26,960
OTHER ASSETS 1,078 2,252
--------- ---------
TOTAL ASSETS $ 6,472 $ 62,549
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable $ -- $ 10,542
Other accrued liabilities 6,486 5,056
--------- ---------
Total current liabilities 6,486 15,598
LONG-TERM LIABILITIES:
Notes payable to consolidated subsidiaries 4,990 2,500
Tax distribution advance payable 13,618 13,618
Deficit in consolidated subsidiaries 183,082 142,772
Deferred income taxes 976 --
Other liabilities 1,439 1,480
--------- ---------
Total liabilities 210,591 175,968
--------- ---------
COMMITMENTS AND CONTINGENCIES -- --
--------- ---------
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred Stock, par value $1.00 per share:
Authorized 5,000,000 shares - none issued -- --
Common Stock, par value $.01 per share:
Authorized 50,000,000 shares
Issued 27,005,752 and 26,908,680 shares, respectively
Outstanding 25,016,752 and 24,919,680 shares, respectively 270 269
Additional paid-in capital 86,990 86,025
Retained earnings (accumulated deficit) (237,661) (164,118)
Accumulated other comprehensive income (loss) (24,721) (6,598)
Other:
Common Stock held in Treasury, at cost:
1,989,000 shares (19,202) (19,202)
Shareholder note receivable (9,795) (9,795)
--------- ---------
Total stockholders' equity (deficit) (204,119) (113,419)
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 6,472 $ 62,549
========= =========
</TABLE>
During 1997, FJGP, Inc., a wholly owned subsidiary of Foamex International,
effectively distributed its assets and liabilities to Foamex International.
FJGP Inc.'s assets primarily consisted of its 1% partnership interest in
FJPS and a $6.0 million demand note due from Foamex International.
See notes to consolidated financial statements.
(continued)
S-2
<PAGE>
Schedule I
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
(amounts in thousands except per share amounts)
<S> <C> <C> <C>
INTERCOMPANY SALES $ 12,619 $ 123,355 $ 179,791
COST OF GOODS SOLD 12,619 123,355 179,791
--------- --------- ---------
GROSS PROFIT -- -- --
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES (183) 486 709
RESTRUCTURING AND OTHER CHARGES -- -- (126)
--------- --------- ---------
INCOME (LOSS) FROM OPERATIONS 183 (486) (583)
EQUITY IN EARNINGS (LOSS) OF
CONSOLIDATED SUBSIDIARIES (18,260) 4,954 42,097
INTEREST EXPENSE 2,237 153 196
OTHER INCOME (EXPENSE) (7,326) 204 78
--------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAX
AND EXTRAORDINARY LOSS (27,640) 4,519 41,396
INCOME TAX PROVISION (BENEFIT) 42,213 388 8,904
--------- --------- ---------
INCOME (LOSS) FROM CONTINUING
OPERATIONS (69,853) 4,131 32,492
EQUITY IN DISCONTINUED OPERATIONS -- (1,994) (114,480)
--------- --------- ---------
INCOME (LOSS) BEFORE EXTRAORDINARY LOSS (69,853) 2,137 (81,988)
EQUITY IN EXTRAORDINARY LOSS (1,917) (44,482) (1,147)
--------- --------- ---------
NET INCOME (LOSS) $ (71,770) $ (42,345) $ (83,135)
========= ========= =========
BASIC EARNINGS (LOSS) PER SHARE:
CONTINUING OPERATIONS $ (2.79) $ 0.16 $ 1.28
========= ========= =========
EARNINGS (LOSS) PER SHARE $ (2.87) $ (1.68) $ (3.28)
========= ========= =========
DILUTED EARNINGS (LOSS) PER SHARE:
CONTINUING OPERATIONS $ (2.79) $ 0.16 $ 1.26
========= ========= =========
EARNINGS (LOSS) PER SHARE $ (2.87) $ (1.65) $ (3.23)
========= ========= =========
</TABLE>
Equity in discontinued operation includes allocated income tax benefits
of Foamex International of $1.3 million and $32.5 million for 1997 and
1996, respectively.
Equity in extraordinary loss includes allocated income tax benefits of
$1.9 million, $27.3 million and $0.8 million for 1998, 1997 and 1996,
respectively.
See notes to consolidated financial statements.
(continued)
S-3
<PAGE>
Schedule I
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
OPERATING ACTIVITIES: (thousands)
<S> <C> <C> <C>
Net income (loss) $ (71,770) $ (42,345) $ (83,135)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Deferred income taxes 45,189 (387) 8,904
Equity in discontinued operations -- 1,994 114,480
Equity in extraordinary loss 1,917 44,482 1,147
Equity in (earnings)/losses of consolidated subsidiaries 18,260 (4,954) (42,097)
Other 1,253 61 357
Changes in operating assets and liabilities,
net of acquisitions:
Intercompany receivables 9,919 (4,026) 2,702
Accounts payable (10,542) 1,233 (3,844)
Other assets and liabilities 1,189 764 4,346
--------- --------- ---------
Net cash provided by (used for) operating activities (4,585) (3,178) 2,860
--------- --------- ---------
INVESTING ACTIVITIES:
Investment in consolidated subsidiaries (20,000) -- --
Proceeds from (settlement of) sale of discontinued operations -- (13,556) 179
Distribution from subsidiaries 20,293 8,757 1,707
Other -- (2,000) --
--------- --------- ---------
Net cash provided by (used for) investing activities 293 (6,799) 1,886
--------- --------- ---------
FINANCING ACTIVITIES:
Note payable to consolidated subsidiary 2,490 2,500 --
Dividend payments (1,245) -- --
Tax advance distribution -- 13,618 --
Purchase of treasury stock -- (5,739) (6,296)
Proceeds from exercise of stock options 595 1,005 102
--------- --------- ---------
Net cash provided by (used for) financing activities 1,840 11,384 (6,194)
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (2,452) 1,407 (1,448)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 2,639 1,232 2,680
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 187 $ 2,639 $ 1,232
========= ========= =========
</TABLE>
Note: During 1998, 1997 and 1996, the Company received distributions from its
consolidated subsidiaries of $0.3 million, $8.8 million and $1.7 million,
respectively, in accordance with tax sharing agreements.
See notes to consolidated financial statements.
(continued)
S-4
<PAGE>
Schedule II
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(thousands)
<TABLE>
<CAPTION>
Balance at Charged to Charged to Balance at
Beginning of Costs and other End of
Period Expenses Accounts Deductions Period
YEAR ENDED DECEMBER 31, 1998
<S> <C> <C> <C> <C> <C>
Allowance for Uncollectible Accounts $ 6,844 $ 2,611 $ 2,500(1) $ 2,165 $ 9,790
======= ============= ========== ========= =======
Reserve for Discounts $ 1,238 $ -- $ 12,516(1) $ 11,914 $ 1,840
======= ============= ========== ========= =======
Deferred Tax Asset Valuation Allowance $13,407 $ 52,573 $ (9,100) $ -- $56,880
======= ============= ========== ========= =======
YEAR ENDED DECEMBER 28, 1997
Allowance for Uncollectible Accounts $ 3,060 $ 2,295 $ 2,898 $ 1,409 $ 6,844
======= ============= ========== ========= =======
Reserve for Discounts $ 3,268 $ -- $ 10,182(1) $ 12,212 $ 1,238
======= ============= ========== ========= =======
Deferred Tax Asset Valuation Allowance $23,064 $ (5,028) $ (1,863)(3) $ 2,766 $13,407
======= ============= ========== ========= =======
YEAR ENDED DECEMBER 29, 1996
Allowance for Uncollectible Accounts $ 4,839 $ 704 $ 292 $ 2,775 $ 3,060
======= ============= ========== ========= =======
Reserve for Discounts $ 4,299 $ -- $ 12,190 $ 13,221 $ 3,268
======= ============= ========== ========= =======
Deferred Tax Asset Valuation Allowance $16,979 $ 12,940 $ (6,855)(3) $ -- $23,064
======= ============= ========== ========= =======
</TABLE>
(1) Adjustments reflect a reduction in net sales.
(2) Represents an adjustment to reflect the distribution of valuation
reserves for deferred tax assets to Trace in connection with the GFI
Transaction (see Note 1).
(3) Represents an adjustment to cost in excess of net assets relating to the
utilization of preacquisition deferred tax assets of General Felt.
S-5
CERTIFICATE OF AMENDMENT
TO THE
RESTATED CERTIFICATE OF INCORPORATION
OF
FOAMEX INTERNATIONAL INC.
----------------------------------------------------
Under Section 242 of the General
Corporation Law of the State of Delaware
----------------------------------------------------
The undersigned, Philip N. Smith, Jr. and Tambra S. King, Vice President
and Assistant Secretary, respectively, of Foamex International Inc., a Delaware
corporation (the "Company"), do hereby certify as follows:
FIRST: That the name of the Company is Foamex International Inc.
SECOND: That the following resolutions were duly adopted by the Board of
Directors of the Company, by means of a written consent, in accordance with the
provisions of Sections 141(f) and 242(b) of the General Corporation Law of the
State of Delaware (the "Delaware Law"):
RESOLVED, that Paragraph A of Article IV of the Restated Certificate of
Incorporation of the Company be amended and restated as follows:
"ARTICLE IV.
AUTHORIZED CAPITAL STOCK
A. The Corporation shall be authorized to issue two classes of
shares of stock to be designated respectively, "Common Stock," and
"Preferred Stock." The total number of shares of Common Stock that the
Corporation shall have authority to issue shall be Fifty Million
(50,000,000), par value $0.01 per share and the total number of shares of
Preferred Stock that the Corporation shall have the authority to issue
shall be Five Million (5,000,000), par value of $1.00 per share.
RESOLVED FURTHER, that paragraph B of Article IV be deleted, and
that paragraph C be redesignated paragraph B and that paragraph D be
redesignated paragraph C.
<PAGE>
RESOLVED FURTHER, that Article VI of the Restated Certificate of
Incorporation of the Company be amended and restated as follows:
ARTICLE VI.
ELECTION OF DIRECTORS
A. The business and affairs of the Corporation shall be conducted
and managed by, or under the direction of, the Board. Except as otherwise
provided for or fixed pursuant to the provisions of Article IV of this
Restated Certificate of Incorporation relating to the rights of the
holders of any series of Preferred Stock to elect additional directors,
the total number of directors constituting the entire Board shall be
fixed from time to time by or pursuant to a resolution passed by the
Board.
B. Except as otherwise provided for or fixed pursuant to the
provisions of Article IV of this Restated Certificate of Incorporation
relating to the rights of the holders of any series of Preferred Stock to
elect additional directors, and subject to the provisions hereof, newly
created directorships resulting from any increase in the authorized
number of directors, and any vacancies on the board resulting from death,
resignation, disqualification, removal, or other cause, may be filled
only by the affirmative vote of a majority of the remaining directors
then in office, even though less than a quorum of the Board.
C. During any period when the holders of any series of Preferred
Stock have the right to elect additional directors as provided for or
fixed pursuant to the provisions of Article IV of the Restated
Certificate of Incorporation, then upon commencement and for the duration
of the period during which such right continues (i) the then otherwise
total authorized number of directors of the Corporation shall
automatically be increased by such specified number of directors, and the
holders of such Preferred Stock shall be entitled to elect the additional
directors so provided for or fixed pursuant to said provisions, and (ii)
each such additional director shall serve until such director's successor
shall have been duly elected and qualified, or until such director's
right to hold such office terminated pursuant to said provisions,
whichever occurs earlier, subject to his death, disqualification,
resignation or removal. Except as otherwise provided by the Board in the
resolution or resolutions establishing such series, whenever the holders
of any series of Preferred Stock having such right to elect
-2-
<PAGE>
additional directors are divested of such right pursuant to the
provisions of such stock, the terms of office of all such additional
directors elected by the holders of such stock, or elected to fill any
vacancies resulting from death, resignation, disqualification or removal
of such additional directors, shall forthwith terminate and the total and
authorized number of directors of the Corporation shall be reduced
accordingly. Notwithstanding the foregoing, whenever, pursuant to the
provisions of Article VI of this Restated Certificate of Incorporation,
the holders of any one or more series of Preferred Stock shall have the
right, voting separately as a series or together with holders of other
such series, to elect directors at an annual or special meeting of
stockholders, the election, term of office, filling of vacancies and
other features of such directorships shall be governed by the terms of
the Restated Certificate of Incorporation and the Certificate of
Designations applicable thereto.
D. Except for such additional directors, if any, as are elected by
the holders of any series of Preferred Stock as provided for or fixed
pursuant to the provisions of Article IV of this Restated Certificate of
Incorporation, any director may be removed from office only for cause and
only by the affirmative vote of the holders of 66-2/3% or more of the
combined voting power of the then-outstanding shares of Voting Stock at a
meeting of stockholders called for that purpose, voting together as a
single class.
FOURTH: That the foregoing amendment was approved by at least two-thirds
of the issued and outstanding shares of stock of the Company at a duly called
meeting of the Company in accordance with the provisions of Section 242(b) of
the Delaware Law.
IN WITNESS WHEREOF, said Company has caused this Certificate of Amendment
to the Restated Certificate of Incorporation of the Company to be signed by the
undersigned, this the 23rd day of May, 1996.
FOAMEX INTERNATIONAL INC.
By:/s/Philip N. Smith, Jr.
---------------------------
Philip N. Smith, Jr.
Vice President
ATTEST:
By:/s/Tambra S. King
-------------------------
Tambra S. King
Assistant Secretary
-3-
[EXECUTION COPY]
PATENT SECURITY AGREEMENT
This PATENT SECURITY AGREEMENT (this "Agreement"), dated as of June 12,
1997, is made between Foamex L.P., a Delaware limited partnership (the "Grantor"
or a "Borrower"), and Citicorp USA, Inc., as collateral agent (together with any
successor(s) thereto in such capacity, the "Collateral Agent") for each of the
Secured Parties;
W I T N E S S E T H :
WHEREAS, pursuant to a Credit Agreement, dated as of June 12, 1997 (as
amended, supplemented, amended and restated or modified from time to time, the
"Credit Agreement"), among the Grantor, General Felt Industries, Inc., a
Delaware corporation (a "Borrower"; and, if together with the Grantor, the
"Borrowers"), Trace Foam Company, Inc., a Delaware corporation and general
partner of the Grantor, FMXI, Inc., a Delaware corporation and managing general
partner of the Grantor, the Lenders, the Issuing Banks and Citicorp USA, Inc.,
as Collateral Agent for the Lenders and the Issuing Banks and The Bank of Nova
Scotia, as Funding Agent for the Lenders and the Issuing Banks, the Lenders and
the Issuing Banks have extended Commitments to make Credit Extensions to the
Borrowers;
WHEREAS, in connection with the Credit Agreement, the Grantor has
executed and delivered the Foamex Security Agreement, dated as of June 12, 1997
(as amended, supplemented, amended and restated or otherwise modified from time
to time, the "Security Agreement");
WHEREAS, as a condition precedent to the making of the Credit
Extensions (including the initial Credit Extension) under the Credit Agreement,
the Grantor is required to execute and deliver this Agreement and to grant to
the Collateral Agent a continuing security interest in all of the Patent
Collateral (as defined below) to secure all Secured Obligations; and
WHEREAS, the Grantor has duly authorized the execution, delivery and
performance of this Agreement;
NOW, THEREFORE, for good and valuable consideration, the receipt of
which is hereby acknowledged, and in order to induce the Lenders and the Issuer
to make Credit Extensions (including the initial Credit Extension) to the
Borrowers pursuant to the
<PAGE>
Credit Agreement, the Grantor agrees, for the benefit of each Secured Party, as
follows:
SECTION 1. Definitions. Unless otherwise defined herein or the context
otherwise requires, terms used in this Agreement, including its preamble and
recitals, have the meanings provided (or incorporated by reference) in the
Security Agreement.
SECTION 2. Grant of Security Interest. For good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, to
secure all of the Secured Obligations, the Grantor does hereby mortgage, pledge
and hypothecate to the Collateral Agent, and grant to the Collateral Agent a
security interest in, for its benefit and the benefit of each Secured Party, all
of the following property (the "Patent Collateral"), whether now owned or
hereafter acquired or existing by it:
(a) all letters patent and applications for letters patent
throughout the world, including all patent applications in preparation
for filing anywhere in the world and including each patent and patent
application referred to in Item A of Attachment 1 attached hereto;
(b) all reissues, divisions, continuations,
continuations-in-part, extensions, renewals and reexaminations of any
of the items described in clause (a);
(c) all patent licenses, including each patent license
referred to in Item B of Attachment 1 attached hereto; and
(d) all proceeds of, and rights associated with, the foregoing
(including license royalties and proceeds of infringement suits), the
right to sue third parties for past, present or future infringements of
any patent or patent application, including any patent or patent
application referred to in Item A of Attachment 1 attached hereto, and
for breach or enforcement of any patent license, including any patent
license referred to in Item B of Attachment 1 attached hereto, and all
rights corresponding thereto throughout the world.
SECTION 3. Security Agreement. This Agreement has been executed and
delivered by the Grantor for the purpose of registering the security interest of
the Collateral Agent in the Patent Collateral with the United States Patent and
Trademark Office and corresponding offices in other countries of the world. The
security interest granted hereby has been granted as a supplement to, and not in
limitation of, the security interest granted to the Collateral Agent for its
benefit and the benefit of each Secured Party under the Security Agreement. The
Security
<PAGE>
Agreement (and all rights and remedies of the Collateral Agent and each Secured
Party thereunder) shall remain in full force and effect in accordance with its
terms.
SECTION 4. Release of Security Interest. Upon payment in full in cash
of all Secured Obligations, the termination or expiry of all Letters of Credit
and the termination of all Commitments, the Collateral Agent shall, at the
Grantor's expense, execute and deliver to the Grantor all instruments and other
documents as may be necessary or proper to release the lien on and security
interest in the Patent Collateral which has been granted hereunder.
SECTION 5. Acknowledgment. The Grantor does hereby further acknowledge
and affirm that the rights and remedies of the Collateral Agent with respect to
the security interest in the Patent Collateral granted hereby are more fully set
forth in the Security Agreement, the terms and provisions of which (including
the remedies provided for therein) are incorporated by reference herein as if
fully set forth herein.
SECTION 6. Loan Document, etc. This Agreement is a Loan Document
executed pursuant to the Credit Agreement and shall (unless otherwise expressly
indicated herein) be construed, administered and applied in accordance with the
terms and provisions of the Credit Agreement.
SECTION 7. Counterparts. This Agreement may be executed by the parties
hereto in several counterparts, each of which shall be deemed to be an original
and all of which shall constitute together but one and the same agreement.
<PAGE>
Foamex Patent Agreement
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and delivered by their respective officers thereunto duly
authorized as of the day and year first above written.
FOAMEX L.P.
By: FMXI, Inc., the Managing
General Partner
By______________________________
Name: George L. Karpinski
Title: Vice President
<PAGE>
Foamex Patent Agreement
CITICORP USA, INC., as Collateral Agent
By __________________________
Name: Timothy L. Freeman
Title: Attorney-in-Fact
<PAGE>
ATTACHMENT 1
Item A. Patents
Issued Patents
*Country Patent No. Issue Date Inventor(s) Title
See attached list.
[EXECUTION COPY]
TRADEMARK SECURITY AGREEMENT
This TRADEMARK SECURITY AGREEMENT (this "Agreement"), dated as of June
12, 1997, is made between Foamex L.P., a Delaware limited partnership (the
"Grantor" or a "Borrower"), and Citicorp USA, Inc., as collateral agent
(together with any successor(s) thereto in such capacity, the "Collateral
Agent") for each of the Secured Parties;
W I T N E S S E T H :
WHEREAS, pursuant to a Credit Agreement, dated as of June 12, 1997 (as
amended, supplemented, amended and restated or modified from time to time, the
"Credit Agreement"), among the Grantor, General Felt Industries, Inc., a
Delaware corporation (a "Borrower"; and, if together with the Grantor, the
"Borrowers"), Trace Foam Company, Inc., a Delaware corporation and general
partner of the Grantor, FMXI, Inc., a Delaware corporation and managing general
partner of the Grantor, the Lenders, the Issuing Banks and Citicorp USA, Inc.,
as Collateral Agent for the Lenders and the Issuing Banks and The Bank of Nova
Scotia, as Funding Agent for the Lenders and the Issuing Banks, the Lenders and
the Issuing Banks have extended Commitments to make Credit Extensions to the
Borrowers;
WHEREAS, in connection with the Credit Agreement, the Grantor has
executed and delivered the Foamex Security Agreement, dated as of June 12, 1997
(as amended, supplemented, amended and restated or otherwise modified from time
to time, the "Security Agreement");
WHEREAS, as a condition precedent to the making of the Credit
Extensions (including the initial Credit Extension) under the Credit Agreement,
the Grantor is required to execute and deliver this Agreement and to grant to
the Collateral Agent a continuing security interest in all of the Trademark
Collateral (as defined below) to secure all Secured Obligations; and
WHEREAS, the Grantor has duly authorized the execution, delivery and
performance of this Agreement;
NOW, THEREFORE, for good and valuable consideration, the receipt of
which is hereby acknowledged, and in order to induce
<PAGE>
the Lenders and the Issuer to make Credit Extensions (including the initial
Credit Extension) to the Borrowers pursuant to the Credit Agreement, the Grantor
agrees, for the benefit of each Secured Party, as follows:
SECTION 1. Definitions. Unless otherwise defined herein or the context
otherwise requires, terms used in this Agreement, including its preamble and
recitals, have the meanings provided (or incorporated by reference) in the
Security Agreement.
SECTION 2. Grant of Security Interest. For good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, to
secure all of the Secured Obligations, the Grantor does hereby mortgage, pledge
and hypothecate to the Collateral Agent, and grant to the Collateral Agent a
security interest in, for its benefit and the benefit of each Secured Party, all
of the following property (the "Trademark Collateral"), whether now owned or
hereafter acquired or existing by it:
(a) all trademarks, trade names, corporate names, company
names, business names, fictitious business names, trade styles, service
marks, certification marks, collective marks, logos, other source of
business identifiers, prints and labels on which any of the foregoing
have appeared or appear, designs and general intangibles of a like
nature (all of the foregoing items in this clause (a) being
collectively called a "Trademark"), now existing anywhere in the world
or hereafter adopted or acquired, whether currently in use or not, all
registrations and recordings thereof and all applications in connection
therewith, whether pending or in preparation for filing, including
registrations, recordings and applications in the United States Patent
and Trademark Office or in any office or agency of the United States of
America or any State thereof or any foreign country, including those
referred to in Item A of Attachment 1 attached hereto;
(b) all Trademark licenses, including each Trademark license
referred to in Item B of Attachment 1 attached hereto;
(c) all reissues, extensions or renewals of any of the items
described in clauses (a) and (b);
<PAGE>
(d) all of the goodwill of the business connected with the use
of, and symbolized by the items described in, clauses (a) and (b); and
(e) all proceeds of, and rights associated with, the
foregoing, including any claim by the Grantor against third parties for
past, present or future infringement or dilution of any Trademark,
Trademark registration or Trademark license, including any Trademark,
Trademark registration or Trademark license referred to in Item A and
Item B of Attachment 1 attached hereto, or for any injury to the
goodwill associated with the use of any such Trademark or for breach or
enforcement of any Trademark license.
SECTION 3. Security Agreement. This Agreement has been executed and
delivered by the Grantor for the purpose of registering the security interest of
the Collateral Agent in the Trademark Collateral with the United States Patent
and Trademark Office and corresponding offices in other countries of the world.
The security interest granted hereby has been granted as a supplement to, and
not in limitation of, the security interest granted to the Collateral Agent for
its benefit and the benefit of each Secured Party under the Security Agreement.
The Security Agreement (and all rights and remedies of the Collateral Agent and
each Secured Party thereunder) shall remain in full force and effect in
accordance with its terms.
SECTION 4. Release of Security Interest. Upon payment in full in cash
of all Secured Obligations, the termination or expiry of all Letters of Credit
and the termination of all Commitments, the Collateral Agent shall, at the
Grantor's expense, execute and deliver to the Grantor all instruments and other
documents as may be necessary or proper to release the lien on and security
interest in the Trademark Collateral which has been granted hereunder.
SECTION 5. Acknowledgment. The Grantor does hereby further acknowledge
and affirm that the rights and remedies of the Collateral Agent with respect to
the security interest in the Trademark Collateral granted hereby are more fully
set forth in the Security Agreement, the terms and provisions of which
(including the remedies provided for therein) are incorporated by reference
herein as if fully set forth herein.
SECTION 6. Loan Document, etc. This Agreement is a Loan Document
executed pursuant to the Credit Agreement and shall (unless otherwise expressly
indicated herein) be construed,
<PAGE>
administered and applied in accordance with the terms and provisions of the
Credit Agreement.
SECTION 7. Counterparts. This Agreement may be executed by the parties
hereto in several counterparts, each of which shall be deemed to be an original
and all of which shall constitute together but one and the same agreement.
<PAGE>
Foamex Trademark Security Agreement
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and delivered by their respective officers thereunto duly
authorized as of the day and year first above written.
FOAMEX L.P.
By: FMXI, Inc., the Managing
General Partner
By: _______________________
Name: George L. Karpinski
Title: Vice President
<PAGE>
Foamex Trademark Security Agreement
CITICORP USA, INC., as Collateral Agent
By _________________________
Name: Timothy L. Freeman
Title: Attorney-in-Fact
<PAGE>
ATTACHMENT 1
Item A. Trademarks
Registered Trademarks
*Country Trademark Registration No. Registration Date
See attached list.
AMENDMENT NO. 1 TO CREDIT AGREEMENT
This AMENDMENT NO. 1 TO CREDIT AGREEMENT, dated as of October 30, 1998
(the "Amendment"), amends in certain respects the Credit Agreement dated as of
June 12, 1997, as amended and restated as of February 27, 1998 (as amended,
amended and restated, supplemented or otherwise modified from time to time, the
"Credit Agreement"), among Foamex L.P. ("Foamex" or the "Borrower"), FMXI, Inc.
("FMXI"), the institutions from time to time party thereto as Lenders, the
institutions from time to time party thereto as Issuing Banks, Citicorp USA,
Inc. ("Citicorp") as collateral agent (the "Collateral Agent") and The Bank of
Nova Scotia, as funding agent (the "Funding Agent", and together with the
Collateral Agent, the "Administrative Agents").
W I T N E S S E T H:
WHEREAS, the Borrower has requested the undersigned, which constitute
the Requisite Lenders, to amend the Credit Agreement as set forth herein. The
Lenders party hereto have agreed to amend the Credit Agreement to accommodate
the request of the Borrower contained herein, subject to the terms set forth
herein.
NOW, THEREFORE, in consideration of the above recital of the Borrower,
FMXI, the Lenders party hereto and the Administrative Agents agree as follows:
SECTION 1. Defined Terms. Terms defined in the Credit Agreement and not
otherwise defined herein have the meanings given such terms in the Credit
Agreement.
SECTION 2. Amendments to the Credit Agreement. The Credit Agreement is
hereby amended as follows:
2.1. Amendment to "Fiscal Month" Definition. The definition of "Fiscal
Month" in Section 1.01 of the Credit Agreement is hereby amended in its entirety
by inserting the following in lieu thereof:
"Fiscal Month" means the fiscal month of the Borrower, which
shall be any calendar month within the Fiscal Year.
2.2. Amendment to "Fiscal Quarter" Definition. The definition of
"Fiscal Quarter" in Section 1.01 of the Credit Agreement is hereby amended in
its entirety by inserting the following in lieu thereof:
-1-
<PAGE>
"Fiscal Quarter" means the fiscal quarter of the Borrower,
which shall be any of the consecutive three month intervals ending on
March 31, June 30, September 30 and December 31, respectively.
2.3. Amendment to "Fiscal Year" Definition. The definition of "Fiscal
Year" in Section 1.01 of the Credit Agreement is hereby amended in its entirety
by inserting the following in lieu thereof:
"Fiscal Year" means the fiscal year of the Borrower, which
shall be any twelve-month period ending on December 31 of any calendar
year.
SECTION 3. Conditions to Effectiveness. This Amendment shall become
effective on the date hereof (the "Effective Date"), and shall be effective
retroactively to the extent that the third Fiscal Quarter may end on September
30, 1998, provided, that the following conditions precedent have been satisfied
(unless waived by the Requisite Lenders or unless the deadline for delivery has
been extended by the Administrative Agents):
(i) Documents. The Administrative Agents shall have received
on or before the Effective Date all of the following in form and
substance satisfactory to the Requisite Lenders:
(a) this Agreement duly executed and in form and
substance satisfactory to the Requisite Lenders; and
(b) such additional documentation as the
Administrative Agents or any of the Requisite Lenders may
reasonably request.
(ii) Consents. The Borrower shall have received all material
consents and authorizations required pursuant to any material
Contractual Obligation with any other Person and shall have obtained
all material consents and authorizations of, and effected all notices
to and filings with, any Governmental Authority, in each case, as may
be necessary to allow the Borrower to lawfully and without risk of
rescission, execute, deliver and perform, in all material respects, its
obligations under this Amendment and the Transaction Documents to which
it is, or is to be, a party and each other agreement or instrument to
be executed and delivered by it pursuant thereto or in connection
therewith.
(iii) No Legal Impediments. No law, regulation, order,
judgment or decree of any Governmental Authority shall, and neither
Administrative Agent shall have received any notice that litigation is
pending or threatened which is likely to, impose or result in the
imposition of a Material Adverse Effect.
(iv) No Change in Condition. No change in the condition
(financial or otherwise), business, performance, properties, assets,
operations or prospects of either
-2-
<PAGE>
Borrower or any of its Subsidiaries and its subsidiaries shall have
occurred since December 29, 1997, which change, in the judgment of the
Lenders, will have or is reasonably likely to have a Material Adverse
Effect.
(v) No Default. No Event of Default or Potential Event of
Default shall have occurred.
(vi) Representations and Warranties. All of the
representations and warranties contained in Section 6.01 of the Credit
Agreement and in any of the other Loan Documents shall be true and
correct in all material respects on and as of the Effective Date.
SECTION 4. Representations and Warranties. The Borrower hereby
represents and warrants to the Lenders party hereto that (i) the execution,
delivery and performance of this Amendment by the Borrower are within the
Borrower's partnership powers and have been duly authorized by all necessary
partnership action, and (ii) this Amendment constitutes the legal, valid and
binding obligation of the Borrower, enforceable against the Borrower, in
accordance with its terms, except as such enforcement may be limited by
bankruptcy, insolvency, reorganization, moratorium or other laws relating to or
limiting creditors' rights generally or by equitable principles generally.
SECTION 5. Reference to and Effect on the Loan Documents.
5.1. Upon the effectiveness of this Amendment, on and after the date
hereof each reference in the Credit Agreement to "this Agreement", "hereunder",
"hereof", "herein" or words of like import, and each reference in the other Loan
Documents to the Credit Agreement, shall mean and be a reference to the Credit
Agreement as amended hereby.
5.2. Except as specifically amended above, all of the terms of the
Credit Agreement and all other Loan Documents shall remain unchanged and in full
force and effect.
5.3. The execution, delivery and effectiveness of this Amendment shall
not, except as expressly provided herein, operate as a waiver of any right,
power or remedy of any Lender or the Administrative Agents under the Credit
Agreement or any of the Loan Documents, nor constitute a waiver of any provision
of the Credit Agreement or any of the Loan Documents.
5.4. As of the Effective Date of this Amendment, and before and after
giving effect to this Amendment, the Borrower is, and has been, in compliance in
all material respects with all applicable terms, conditions and covenants of the
Credit Agreement and other Loan Documents.
SECTION 6. Execution in Counterparts. This Amendment may be executed in
any number of counterparts and by different parties hereto in separate
counterparts, each of which
-3-
<PAGE>
when so executed and delivered shall be deemed to be an original and all of
which taken together shall constitute one and the same agreement.
SECTION 7. Governing Law. THIS AMENDMENT SHALL BE GOVERNED BY, AND
SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW
YORK.
SECTION 8. Guarantor Consent. By its signature below, Foamex
International consents to this Amendment in its capacity as a guarantor under
the Foamex International Guaranty, and hereby affirms its obligations under such
guaranty.
SECTION 9. Headings. Section headings in this Amendment are included
herein for convenience of reference only and shall not constitute a part of this
Amendment or be given any substantive effect.
SECTION 10. Successors and Assigns. This Amendment shall be binding
upon and inure to the benefit of the parties hereto and their respective
successors and assigns.
-4-
<PAGE>
IN WITNESS WHEREOF, this Amendment has been duly executed as of the
date first above written.
FOAMEX L.P.
By: FMXI, Inc., Its Managing General Partner
By_______________________________________
Name:
Title:
-5-
<PAGE>
FMXI, INC.
By_______________________________________
Name:
Title:
-6-
<PAGE>
FOAMEX INTERNATIONAL INC., as Guarantor
By_______________________________________
Name:
Title:
-7-
<PAGE>
CITICORP USA, INC., as Administrative
Agent, Collateral Agent, individually as a
Lender, and as Intercreditor Collateral
Agent
By_______________________________________
Name:
Title:
-8-
<PAGE>
CITIBANK, N.A., as Issuing Bank
By_______________________________________
Name:
Title:
-9-
<PAGE>
THE BANK OF NOVA SCOTIA, as Administrative
Agent, Funding Agent, Issuing Bank,
individually as a Lender, and as
Intercreditor Agent
By_______________________________________
Name:
Title:
-10-
<PAGE>
AERIES FINANCE LTD.
By_______________________________________
Name:
Title:
-11-
<PAGE>
ALLSTATE INSURANCE COMPANY
By_______________________________________
Name:
Title:
-12-
<PAGE>
ARCHIMEDES FUNDING, L.L.C. By: ING Capital
Advisors, Inc., as Collateral Manager
By_______________________________________
Name:
Title:
-13-
<PAGE>
BALANCED HIGH-YIELD FUND I LTD. By:
BHF-Bank Aktiengesellschaft acting through
its New York Branch as Attorney-In-Fact
By_______________________________________
Name:
Title:
By_______________________________________
Name:
Title:
-14-
<PAGE>
BANKBOSTON, N.A.
By_______________________________________
Name:
Title:
-15-
<PAGE>
THE BANK OF NEW YORK
By_______________________________________
Name:
Title:
-16-
<PAGE>
BHF-BANK AKTIENGESELLSCHAFT
By_______________________________________
Name:
Title:
By_______________________________________
Name:
Title:
-17-
<PAGE>
CANADIAN IMPERIAL BANK OF COMMERCE
By_______________________________________
Name:
Title:
-18-
<PAGE>
CAPTIVA FINANCE LTD.
By_______________________________________
Name:
Title:
-19-
<PAGE>
CERES FINANCE LTD.
By_______________________________________
Name:
Title:
-20-
<PAGE>
COMMERCIAL LOAN FUNDING TRUST I By:
Wilmington Trust Company solely in its
capacity as owner trustee and not in its
individual capacity
By_______________________________________
Name:
Title:
By_______________________________________
Name:
Title:
-21-
<PAGE>
COMPAGNIE FINANCIERE DE CIC ET DE L'UNION
EUROPEENNE
By_______________________________________
Name:
Title:
By_______________________________________
Name:
Title:
-22-
<PAGE>
CORESTATES BANK, N.A.
By_______________________________________
Name:
Title:
By_______________________________________
Name:
Title:
-23-
<PAGE>
CREDIT LYONNAIS NEW YORK BRANCH
By_______________________________________
Name:
Title:
-24-
<PAGE>
CRESCENT/MACH I PARTNERS, L.P.
By: TCW Asset Management Company Its
Investment Manager
By_______________________________________
Name:
Title:
-25-
<PAGE>
CYPRESS TREE INVESTMENT
MANAGEMENT COMPANY, INC.
As: Attorney-in-Fact and on behalf of
First Allmerica Life Insurance Company
By_______________________________________
Name:
Title:
-26-
<PAGE>
DEBT STRATEGIES FUND, INC.
By_______________________________________
Name:
Title:
-27-
<PAGE>
DEEPROCK & COMPANY
By_______________________________________
Name:
Title:
-28-
<PAGE>
DLJ CAPITAL FUNDING, INC.
By_______________________________________
Name:
Title:
-29-
<PAGE>
FLEET NATIONAL BANK
By_______________________________________
Name:
Title:
-30-
<PAGE>
THE FUJI BANK, LIMITED, NEW YORK BRANCH
By_______________________________________
Name:
Title:
-31-
<PAGE>
GENERAL ELECTRIC CAPITAL CORPORATION
By_______________________________________
Name:
Title:
-32-
<PAGE>
HELLER FINANCIAL, INC.
By_______________________________________
Name:
Title:
-33-
<PAGE>
KZH CRESCENT LLC
By_______________________________________
Name:
Title:
-34-
<PAGE>
KZH CRESCENT-2 LLC
By______________________________________
Name:
Title:
-35-
<PAGE>
KZH III LLC
By_______________________________________
Name:
Title:
-36-
<PAGE>
KZH ING-1 LLC
By_______________________________________
Name:
Title:
-37-
<PAGE>
KZH SOLEIL LLC
By_______________________________________
Name:
Title:
-38-
<PAGE>
MASSACHUSETTS MUTUAL LIFE INSURANCE COMPANY
By_______________________________________
Name:
Title:
-39-
<PAGE>
MERRILL LYNCH GLOBAL INVESTMENT SERIES:
INCOME STRATEGIES PORTFOLIO
By: Merrill Lynch Asset Management, L.P.,
as Investment Advisor
By_____________________________________
Name:
Title:
-41-
<PAGE>
METROPOLITAN LIFE INSURANCE COMPANY
By_______________________________________
Name:
Title:
-42-
<PAGE>
THE MITSUBISHI TRUST AND BANKING
CORPORATION
By_______________________________________
Name:
Title:
-43-
<PAGE>
ML CBO IV (CAYMAN) LTD.
By: Protective Asset Management Company,
as Collateral Manager
By_______________________________________
Name:
Title:
-44-
<PAGE>
MORGAN GUARANTY TRUST COMPANY OF NEW YORK
By_______________________________________
Name:
Title:
-45-
<PAGE>
MORGAN STANLEY SENIOR FUNDING, INC.
By_______________________________________
Name:
Title:
-46-
<PAGE>
NATEXIS BANQUE (formerly Banque Francaise
du Commerce Exterieur)
By_______________________________________
Name:
Title:
-47-
<PAGE>
NATIONSBANK, N.A.
By_______________________________________
Name:
Title:
-48-
<PAGE>
THE NORTHWESTERN MUTUAL LIFE INSURANCE
COMPANY
By_______________________________________
Name:
Title:
-49-
<PAGE>
OCTAGON CREDIT INVESTORS LOAN PORTFOLIO (a
unit of The Chase Manhattan Bank)
By_______________________________________
Name:
Title:
-50-
<PAGE>
ORIX USA CORPORATION
By_______________________________________
Name:
Title:
-51-
<PAGE>
PAMCO CAYMAN LTD.
By: Protective Asset Management, L.L.C., as
Collateral Manager
By_______________________________________
Name:
Title:
-52-
<PAGE>
PILGRIM AMERICA PRIME RATE TRUST
By_______________________________________
Name:
Title:
-53-
<PAGE>
ROYALTON COMPANY
By: Pacific Investment Management Company,
as its Investment Advisor
By_______________________________________
Name:
Title:
-54-
<PAGE>
SENIOR FLOATING RATE FUND, INC.
By_______________________________________
Name:
Title:
-55-
<PAGE>
SENIOR HIGH INCOME PORTFOLIO, INC.
By_______________________________________
Name:
Title:
-56-
<PAGE>
SENIOR DEBT PORTFOLIO
By: Boston Management and Research, as
Investment Advisor
By_______________________________________
Name:
Title:
-57-
<PAGE>
STRATA FUNDING LTD.
By_______________________________________
Name:
Title:
-58-
<PAGE>
TCW LEVERAGED INCOME TRUST, L.P.
By: TCW Advisers (Bermuda), Ltd., as
General Partner
By_______________________________________
Name:
Title:
By: TCW Investment Management Company, as
Investment Adviser
By_______________________________________
Name:
Title:
-59-
<PAGE>
VAN KAMPEN AMERICAN CAPITAL PRIME RATE
INCOME TRUST
By_______________________________________
Name:
Title:
-60-
<PAGE>
VAN KAMPEN CLO I, LIMITED
By: Van Kampen American Capital Management
Inc., as Collateral Manager
By_______________________________________
Name:
Title:
-61-
AMENDMENT NO. 1 TO CREDIT AGREEMENT
This AMENDMENT NO. 1 TO CREDIT AGREEMENT, dated as of October 30, 1998
(the "Amendment"), amends in certain respects the Credit Agreement dated as of
February 27, 1998 (as amended, amended and restated, supplemented or otherwise
modified from time to time, the "Credit Agreement"), among Foamex Carpet
Cushion, Inc. ("New GFI" or the "Borrower"), the institutions from time to time
party thereto as Lenders, the institutions from time to time party thereto as
Issuing Banks, Citicorp USA, Inc. ("Citicorp") as collateral agent (the
"Collateral Agent") and The Bank of Nova Scotia, as funding agent (the "Funding
Agent", and together with the Collateral Agent, the "Administrative Agents").
W I T N E S S E T H:
WHEREAS, in connection with the change of the Borrower's fiscal year,
the Borrower has requested the undersigned, which constitute the Requisite
Lenders, to amend the Credit Agreement as set forth herein. The Lenders party
hereto have agreed to amend the Credit Agreement to accommodate the request of
the Borrower contained herein, subject to the terms set forth herein.
NOW, THEREFORE, in consideration of the above recital of the Borrower,
the Lenders party hereto and the Administrative Agents agree as follows:
SECTION 1. Defined Terms. Terms defined in the Credit Agreement and not
otherwise defined herein have the meanings given such terms in the Credit
Agreement.
SECTION 2. Amendments to the Credit Agreement. The Credit Agreement is
hereby amended as follows:
2.1. Amendment to "Fiscal Month" Definition. The definition of "Fiscal
Month" in Section 1.01 of the Credit Agreement is hereby amended in its entirety
by inserting the following in lieu thereof:
"Fiscal Month" means the fiscal month of the Borrower, which
shall be any calendar month within the Fiscal Year.
2.2. Amendment to "Fiscal Quarter" Definition. The definition of
"Fiscal Quarter" in Section 1.01 of the Credit Agreement is hereby amended in
its entirety by inserting the following in lieu thereof:
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<PAGE>
"Fiscal Quarter" means the fiscal quarter of the Borrower,
which shall be any of the consecutive three month intervals ending on
March 31, June 30, September 30 and December 31, respectively.
2.3. Amendment to "Fiscal Year" Definition. The definition of "Fiscal
Year" in Section 1.01 of the Credit Agreement is hereby amended in its entirety
by inserting the following in lieu thereof:
"Fiscal Year" means the fiscal year of the Borrower, which
shall be any twelve-month period ending on December 31 of any calendar
year.
SECTION 3. Conditions to Effectiveness. This Amendment shall become
effective on the date hereof (the "Effective Date"), and shall be effective
retroactively to the extent that the third Fiscal Quarter may end on September
30, 1998, provided, that the following conditions precedent have been satisfied
(unless waived by the Requisite Lenders or unless the deadline for delivery has
been extended by the Administrative Agents):
(i) Documents. The Administrative Agents shall have received
on or before the Effective Date all of the following in form and
substance satisfactory to the Requisite Lenders:
(a) this Agreement duly executed and in form and
substance satisfactory to the Requisite Lenders; and
(b) such additional documentation as the
Administrative Agents or any of the Requisite Lenders
may reasonably request.
(ii) Consents. The Borrower shall have received all material
consents and authorizations required pursuant to any material
Contractual Obligation with any other Person and shall have obtained
all material consents and authorizations of, and effected all notices
to and filings with, any Governmental Authority, in each case, as may
be necessary to allow the Borrower to lawfully and without risk of
rescission, execute, deliver and perform, in all material respects, its
obligations under this Amendment and the Transaction Documents to which
it is, or is to be, a party and each other agreement or instrument to
be executed and delivered by it pursuant thereto or in connection
therewith.
(iii) No Legal Impediments. No law, regulation, order,
judgment or decree of any Governmental Authority shall, and neither
Administrative Agent shall have received any notice that litigation is
pending or threatened which is likely to, impose or result in the
imposition of a Material Adverse Effect.
(iv) No Change in Condition. No change in the condition
(financial or otherwise), business, performance, properties, assets,
operations or prospects of either
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<PAGE>
Borrower or any of its Subsidiaries and its subsidiaries shall have
occurred since December 29, 1997, which change, in the judgment of the
Lenders, will have or is reasonably likely to have a Material Adverse
Effect.
(v) No Default. No Event of Default or Potential Event of
Default shall have occurred.
(vi) Representations and Warranties. All of the
representations and warranties contained in Section 6.01 of the Credit
Agreement and in any of the other Loan Documents shall be true and
correct in all material respects on and as of the Effective Date.
SECTION 4. Representations and Warranties. The Borrower hereby
represents and warrants to the Lenders party hereto that (i) the execution,
delivery and performance of this Amendment by the Borrower are within the
Borrower's corporate powers and have been duly authorized by all necessary
corporate action, and (ii) this Amendment constitutes the legal, valid and
binding obligation of each Borrower, enforceable against the Borrower, in
accordance with its terms, except as such enforcement may be limited by
bankruptcy, insolvency, reorganization, moratorium or other laws relating to or
limiting creditors' rights generally or by equitable principles generally.
SECTION 5. Reference to and Effect on the Loan Documents.
5.1. Upon the effectiveness of this Amendment, on and after the date
hereof each reference in the Credit Agreement to "this Agreement", "hereunder",
"hereof", "herein" or words of like import, and each reference in the other Loan
Documents to the Credit Agreement, shall mean and be a reference to the Credit
Agreement as amended hereby.
5.2. Except as specifically amended above, all of the terms of the
Credit Agreement and all other Loan Documents shall remain unchanged and in full
force and effect.
5.3. The execution, delivery and effectiveness of this Amendment shall
not, except as expressly provided herein, operate as a waiver of any right,
power or remedy of any Lender or the Administrative Agents under the Credit
Agreement or any of the Loan Documents, nor constitute a waiver of any provision
of the Credit Agreement or any of the Loan Documents.
5.4. As of the Effective Date of this Amendment and, before and after
giving effect to this Amendment, the Borrower is, and has been, in compliance in
all material respects with all applicable terms, conditions and covenants of the
Credit Agreement and other Loan Documents.
SECTION 6. Execution in Counterparts. This Amendment may be executed in
any number of counterparts and by different parties hereto in separate
counterparts, each of which
-3-
<PAGE>
when so executed and delivered shall be deemed to be an original and all of
which taken together shall constitute one and the same agreement.
SECTION 7. Governing Law. THIS AMENDMENT SHALL BE GOVERNED BY, AND
SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW
YORK.
SECTION 8. Guarantor Consent. By its signature below, Foamex
International consents to this Amendment in its capacity as a guarantor under
the Foamex International Guaranty, and hereby affirms its obligations under such
guaranty.
SECTION 9. Headings. Section headings in this Amendment are included
herein for convenience of reference only and shall not constitute a part of this
Amendment or be given any substantive effect.
SECTION 10. Successors and Assigns. This Amendment shall be binding
upon and inure to the benefit of the parties hereto and their respective
successors and assigns.
-4-
<PAGE>
IN WITNESS WHEREOF, this Amendment has been duly executed as of the
date first above written.
FOAMEX CARPET CUSHION, INC.
By_______________________________________
Name:
Title:
-5-
<PAGE>
FOAMEX INTERNATIONAL INC.
By_______________________________________
Name:
Title:
-6-
<PAGE>
CITICORP USA, INC., as Administrative Agent,
Collateral Agent, Intercreditor Agent and
individually as a Lender
By_______________________________________
Name:
Title:
-7-
<PAGE>
CITIBANK, N.A. as Issuing Bank
By_______________________________________
Name:
Title:
-8-
<PAGE>
THE BANK OF NOVA SCOTIA, as
Administrative Agent, Funding Agent, Issuing
Bank, individually as a Lender, and as
Intercreditor Agent
By_______________________________________
Name:
Title:
-9-
WAIVER
WAIVER, dated as of April 15, 1999, (the "Effective Date") to the Credit
Agreement, dated as of February 27, 1998 (as amended, modified or supplemented
from time to time, the "Credit Agreement"), among Foamex Carpet Cushion, Inc.
("Foamex Carpet"), the institutions party thereto as Lenders (the "Lenders"),
the institutions party thereto as Issuing Banks, and Citicorp USA, Inc. and The
Bank of Nova Scotia as Administrative Agents.
The Lenders hereby temporarily waive compliance by Foamex Carpet of the
financial covenants contained in Article X of the Credit Agreement to the
extent, but only to the extent, of the period of time commencing on the
Effective Date and extending through and including May 5, 1999. As of May 6,
1999 all such financial covenants shall be in full force and effect as though
they had never been waived.
This Waiver shall be governed by and construed in accordance with the
laws of the State of New York. This Waiver may be signed in any number of
counterparts, each of which shall be an original, with the same effect as if the
signatures thereto and hereto were upon the same instrument. Capitalized terms
not defined herein shall have the meanings ascribed to them in the Credit
Agreement.
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this Waiver as of the
date first written above.
FOAMEX CARPET CUSHION, INC.
By: /s/ George L. Karpinski
---------------------------------
Name: George L. Karpinski
Title: Senior Vice President
CITICORP USA, INC.
By: /s/
---------------------------------
Name:
Title:
THE BANK OF NOVA SCOTIA
By: /s/ Brian Allen
---------------------------------
Name: Brian Allen
Title: Senior Relationship Manager
EMPLOYMENT AGREEMENT
This Employment Agreement is dated as of March 16, 1999, and
is entered into between Foamex International, Inc., a Delaware corporation
("Company"), and John Johnson ("Executive").
WHEREAS, Executive and the Company desire to embody in this
Agreement the terms and conditions of Executive's employment by the Company.
NOW, THEREFORE, the parties hereby agree:
ARTICLE I.
Employment, Duties and Responsibilities
1.1. Employment. Executive shall be employed as President and
Chief Executive Officer of the Company. Executive hereby accepts such
employment. Executive agrees to devote his full business time and efforts to
promote the interests of the Company; provided, however, the foregoing shall not
prevent the Executive from devoting a portion of his time and efforts to his
personal affairs or serving on the boards of other for profit and not for profit
entities so long as such activities do not materially interfere with the
performance of his duties hereunder and provided that, with respect to serving
on the board of any for profit entity, the Executive has obtained the prior
consent of the Board of Directors of the Company (the "Board"). Executive
currently serves as a member of the Board of Directors of McWhorter
Technologies, Inc. and as a Trustee of Drexel University, and the Company hereby
consents to his so serving. The Executive shall perform his duties at the
principal executive offices of the Company in Linwood, Pennsylvania, except for
required travel on the Company's business. During the Term the Executive also
shall be nominated for appointment to the Board of Directors of the Company as a
voting Director. Provided Executive satisfies the Performance Criteria described
in Section 3.1(c) for fiscal year 1999, the Board will consider him for
appointment as Chairman thereof.
1.2. Duties and Responsibilities. Executive shall have such
duties and responsibilities as are consistent with his positions including, but
not limited to, full authority for operating, personnel (including officer
positions, subject to approval by the Board), and capital expenditures
decisions, subject to the supervision of the Board.
<PAGE>
ARTICLE II.
Term
2.1. Term. (a) The term of Executive's employment under this
Agreement (the "Term") shall commence on March 16, 1999 (the "Effective Date")
and shall have an initial term of two years; provided, however, that on each
anniversary of the Effective Date commencing March 16, 2000, the Term shall be
automatically extended for one additional year, unless either party hereto gives
written notice of its election not to so extend the Term at least 30 days prior
to the applicable anniversary date.
(a)(b) Executive represents and warrants to the Company that
(i) neither the execution and delivery of this Agreement nor the performance of
his duties hereunder violates or will violate the provisions of any other
agreement to which he is a party or by which he is bound; and (ii) except for
obligations to maintain confidentiality of certain information relating to
previous employers which will not unreasonably interfere with the performance of
his duties hereunder, there are no agreements by which he is currently bound
relating to employment or which contain any post-employment restrictions
whatsoever.
ARTICLE III.
Compensation and Expenses
3.1. Salary, Bonuses and Benefits. As compensation and
consideration for the performance by Executive of his obligations under this
Agreement, Executive shall be entitled to the following (subject, in each case,
to the provisions of ARTICLE V hereof):
(a) Salary. The Company shall pay Executive on a biweekly
basis a base salary during the Term ("Base Salary"), payable in accordance with
the normal payment procedures of the Company and subject to such withholdings
and other normal employee deductions as may be required by law, at the rate of
at least $500,000 per annum. The Base Salary will be reviewed annually by the
Compensation Committee of the Board of Directors.
(b) Benefits. Executive shall participate during the Term in
such pension, life insurance, health, disability and major medical insurance
plans, and in such other senior executive officer benefit plans and programs, as
may be maintained from time to time during the Term, in each case to the extent
and in
-2-
<PAGE>
the manner available to other senior executive officers of the Company
and subject to the terms and provisions of such plans or programs. Executive
shall be entitled to an automobile lease allowance of up to $875 per month and
shall be reimbursed for all related expenses such as repair, insurance, and
gasoline. The Company shall pay the annual dues, assessments and
business-related expenses incurred during the Term for the Executive's
membership in one country club selected by the Executive and approved by the
Company.
(c) Bonus. (i) The Executive shall be eligible to earn a
fiscal year bonus of up to $500,000 during the Term ("Annual Bonus"), which
shall be based upon the attainment of Company performance targets for that
fiscal year, as measured against a written set of reasonable performance
criteria for such fiscal year established by the Board following its review with
the Executive of the Company's operating budget, financial position and business
prospects for such fiscal year (the "Performance Criteria").
(ii) It is expressly agreed by the parties that with
respect to fiscal year 1999 the Annual Bonus shall not be less than $250,000
(the "Guaranteed Bonus") and shall be $500,000 if the Performance Criteria for
the last half of the Company's 1999 fiscal year (which shall be established by
the Board and Executive before the end of June 1999) is attained. The bonus for
fiscal year 1999 and all subsequent years shall be paid within thirty (30) days
after final determination by the Board of the amount payable, but in no event
later than 100 days after the end of the fiscal year to which the bonus relates.
(iii) In the event the Executive dies or becomes
Disabled (as hereinafter defined) or the Executive's employment is terminated by
the Executive for Good Reason (as hereinafter defined) or by the Company without
Cause (as hereinafter defined), the Executive shall be eligible to receive and
shall be awarded a pro rata portion of the Annual Bonus otherwise payable with
respect to the fiscal year in which such event occurs.
(iv) The Annual Bonus may be awarded as part of a
bonus plan or other incentive compensation plan established by the Board for the
Company's senior executive officers.
(d) Vacation. Executive shall be entitled to a paid vacation
of no less than four (4) weeks per year, in accordance with Company policy (but
not necessarily consecutive vacation weeks) for senior executive officers during
the Term.
(e) Options. (i) Executive shall be granted options (the
"Options") to purchase 750,450 shares of common stock of the
-3-
<PAGE>
Company (the "Common Stock"), of which 50% shall be granted five days after the
Effective Date at a price per share equal to the fair market value of a share of
the Common Stock five days after the Effective Date, and the remaining 50% shall
be granted 35 days after the Effective Date at a price per share equal to the
fair market value of a share of Common Stock 35 days after the Effective Date.
Such Options shall be granted under the Company's existing stock option plan to
the extent shares are available for issuance thereunder, and shall be granted
outside such plan to the extent of any excess. The Options shall be "incentive
stock options" to fullest extent permissible under Section 422 of the Internal
Revenue Code. The Options shall vest in equal installments on each of the first,
second and third anniversaries after the Effective Date, provided, however, that
in the event (i) a Change in Control (as hereinafter defined) occurs after six
months following the Effective Date, (ii) the Executive's employment is
terminated by the Company without Cause (as hereinafter defined), or by the
Executive for Good Reason (as hereinafter defined, but except as a result of a
Change in Control or a Going Private Transaction (as hereinafter defined) which
occurs within six months after the Effective Date), or by reason of his death or
Disability, the Options shall become immediately and fully exercisable. In the
event that a Going Private Transaction occurs more than six months but less than
12 months after the Effective Date, one-third of the Options shall become
immediately and fully exercisable. In the event that the Executive's employment
is terminated for any reason other than a reason referenced in the second
preceding sentence, all unvested Options shall lapse and be canceled. Upon any
termination of employment, all Options which were vested or which vest as of the
date of such termination shall continue to be exercisable for a period of (A)
one year, if such termination is for a reason described in the third preceding
sentence, and (B) 90 days from such date if such termination occurs for any
other reason, and in any event shall thereafter lapse and be canceled. The
preceding provisions of this Section 3.1(e) nothwithstanding, in the event that,
within six months following the Effective Date, either (x) a Change in Control
occurs, or (y) a transaction occurs which is not a Change in Control but as a
result of which all of the Company's Common Stock ceases to be registered under
the Securities Act of 1933 (a "Going Private Transaction"), all of the Options
shall immediately terminate and be canceled. The Options shall be evidenced by a
Stock Option Agreement substantially in the form attached hereto as Exhibit A.
3.2. Expenses. The Company will reimburse Executive for
reasonable business-related expenses incurred by him in connection with the
performance of his duties hereunder during the Term, subject, however, to the
Company's policies
-4-
<PAGE>
relating to business-related expenses as in effect from time to time during the
Term.
ARTICLE IV.
Exclusivity, Etc.
4.1. Exclusivity. Executive agrees to perform his duties,
responsibilities and obligations hereunder efficiently and to the best of his
ability. Except as set forth in Section 1.1, Executive agrees that he will
devote his entire working time, care and attention and best efforts to such
duties, responsibilities and obligations throughout the Term. Executive also
agrees that during the Term he will not engage in any other business activities,
pursued for gain, profit or other pecuniary advantage, that are competitive with
the activities of the Company, except as permitted in Section 4.2 and Section
1.1. Executive agrees that all of his activities as an employee of the Company
shall be in substantial conformity with all policies, rules and regulations and
directions of the Company not inconsistent with this Agreement.
4.2. Other Business Ventures. Executive agrees that, so long
as he is employed by the Company, he will not own, directly or indirectly, any
controlling or substantial stock or other beneficial interest in any business
enterprise which is engaged in, or competitive with, any business engaged in by
the Company. Notwithstanding the foregoing, Executive may own, directly or
indirectly, up to 1% of the outstanding capital stock of any business having a
class of capital stock which is traded on any national stock exchange or in the
over-the-counter market.
4.3. Confidentiality; Non-competition. (a) Executive agrees
that he will not, at any time during or after the Term, make use of or divulge
to any other person, firm or corporation any trade or business secret, process,
method or means, or any other confidential information concerning the business
or policies of the Company, which he may have learned in connection with his
employment. For purposes of this Agreement, a "trade or business secret,
process, method or means, or any other confidential information" shall mean and
include written information reasonably treated as confidential or as a trade
secret by the Company. Executive's obligation under this Section 4.3(a) shall
not apply to any information which (i) is known publicly; (ii) is in the public
domain or hereafter enters the public domain without the fault of Executive;
(iii) is known to Executive prior to his receipt of such information from the
Company, as evidenced by written records of Executive or (iv) is hereafter
disclosed to Executive by a third party not under an obligation of confidence to
the Company. Executive agrees not to
-5-
<PAGE>
remove from the premises of the Company, except as an employee of the Company in
pursuit of the business of the Company or except as specifically permitted in
writing by the Company, any document or other object containing or reflecting
any such confidential information. Executive recognizes that all such documents
and objects, whether developed by him or by someone else, will be the sole
exclusive property of the Company. Upon termination of his employment hereunder,
Executive shall forthwith deliver to the Company all such confidential
information, including without limitation all lists of customers,
correspondence, accounts, records and any other documents or property made or
held by him or under his control in relation to the business or affairs of the
Company, and no copy of any such confidential information shall be retained by
him.
(b) If Executive's employment is terminated (i) by the
Company for Cause, (ii) by the Executive other than for Good Reason, or (iii) by
the Company without Cause or by the Executive for Good Reason within six months
after the Effective Date, the Executive shall not for a period of two years from
the date of such termination, directly or indirectly, whether as an employee,
consultant, independent contractor, partner, or joint venturer, (i) perform any
services for any entity which has material operations which directly compete
with the Company in the sale of any products sold by the Company at the time of
the termination of Executive's employment; (ii) solicit or induce, or in any
manner attempt to solicit or induce, any person employed by, or as agent of, the
Company to terminate such person's contract of employment or agency, as the case
may be, with the Company or (iii) divert, or attempt to divert, any person,
concern, or entity from doing business with the Company, nor will he attempt to
induce any such person, concern or entity to cease being a customer or supplier
of the Company. If Executive's employment is terminated by the Company without
Cause or by the Executive for Good Reason more than six months after the
Effective Date, the Executive shall be subject to the restrictions described in
the preceding sentence for a period of one year from the date of such
termination. In the event of a termination by the Company without Cause or by
the Executive for Good Reason, the restrictions described in the two preceding
sentences shall apply only if Executive is paid the severance described in
Section 5.5(b) hereof. Notwithstanding anything herein to the contrary, this
Section 4.3(b) shall not prevent the Executive from acquiring securities
representing not more than 5% of the outstanding voting securities of any
publicly held corporation.
(c) Executive agrees that, at any time and from time to time
during and for two years after the Term, he will execute any and all documents
which the Company may deem reasonably
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<PAGE>
necessary or appropriate to effectuate the provisions of this Section 4.3.
ARTICLE V.
Termination
5.1. Termination by the Company. The Company shall have the
right to terminate the Executive's employment at any time, with or without
"Cause", subject to the specific contractual obligations of the Company to
Executive described herein. For purposes of this Agreement, "Cause" shall mean
(i) substantial and continued failure by the Executive to perform his duties
hereunder which results, or could reasonably be expected to result, in material
harm to the business or reputation of the Company, which failure is not cured
(if curable) by Executive within 15 days after written notice of such failure is
delivered to Executive by the Company, (ii) gross misconduct including, without
limitation, embezzlement, fraud, or misappropriation, or (iii) the commission of
a felony.
5.2. Death. In the event Executive dies during the Term, this
Agreement shall automatically terminate, such termination to be effective on the
date of Executive's death.
5.3. Disability. In the event that Executive shall suffer a
disability which shall have prevented him from performing satisfactorily his
obligations hereunder for a period of at least 90 consecutive days, or 120
non-consecutive days within any 365 day period, the Company shall have the right
to terminate this Agreement, such termination to be effective upon the giving of
notice thereof to Executive in accordance with Section 6.5 hereof.
5.4. Termination by the Executive for Good Reason. This
Agreement may be terminated by the Executive upon thirty (30) days prior written
notice to the Company at any time within ninety (90) days after the occurrence
of any of the following events, each of which shall constitute "Good Reason" for
termination, unless otherwise agreed to in writing by the Executive: (i) there
is a Change in Control of the Company (as hereinafter defined); (ii) the Company
(including any subsidiaries in the aggregate) sell, lease or otherwise transfer
all or substantially all of their assets to an entity which has not either
assumed the Company's obligations under this Agreement or entered into a new
employment contract which is mutually satisfactory to the Executive and such
entity; (iii) a material diminution occurs in the duties or responsibilities of
the Executive (e.g., the Executive is placed in a reporting relationship to
anyone other than the Board) and such diminution
-7-
<PAGE>
is not cured within 15 days after written notice of the same is received by the
Company; (iv) the Company's failure to pay compensation or grant Options as
required hereunder and such failure is not cured within 15 days after written
notice of the same is received by the Company; (v) the Executive is removed from
the position of President or Chief Executive Officer; (vi) the principal
executive offices of the Company are moved to a location more than fifty (50)
miles from its current location; (vii) a liquidation or dissolution of the
Company occurs; or (viii) a Going Private Transaction occurs within six months
after the Effective Date.
5.5. Effect of Termination. (a) In the event of termination
of Executive's employment for any reason, the Company shall pay to Executive (or
his beneficiary in the event of his death) any Base Salary or other compensation
earned but not paid to Executive prior to the effective date of such
termination.
(b) In the event of termination of Executive's employment
by the Company for reasons other than for Cause or Disability or by the
Executive for Good Reason within six months after the Effective Date, the
Company shall pay Executive, in a lump sum within 30 days after such
termination, an amount equal to two times the sum of (x) the Executive's Base
Salary plus (y) the Guaranteed Bonus. If the Executive's employment is
terminated by the Company for reasons other than Cause or Disability or by the
Executive for Good Reason more than six months after the Effective Date, the
Company shall pay the Executive, in a lump sum within 30 days after such
termination, the sum of (x) the Executive's Base Salary plus (y) the Guaranteed
Bonus or, if higher, the Annual Bonus paid or payable to the Executive for the
preceding fiscal year.
(c) In the event of a termination of Executive's employment by
the Company for reasons other than Cause or Disability or by the Executive for
Good Reason, the Company shall pay all premiums required for Executive to
maintain medical continuation coverage under the provisions of the Consolidated
Omnibus Budget Reconciliation Act of 1986 ("COBRA") for a period of up to 18
months, or for such shorter period as Executive is eligible for medical
continuation coverage under COBRA.
5.6. Other Awards. The Executive's rights upon termination of
employment with respect to stock options or other incentive awards not covered
by this Agreement shall be governed by the terms and conditions in the
respective stock option agreements or awards.
-8-
<PAGE>
5.7. Full Settlement. Except as specifically provided in this
Agreement, the Executive shall have no rights to compensation or benefits upon
or after termination of employment except as may be specifically provided under
the Company's employee benefit plans.
5.8. Change in Control. For purposes of this Agreement, a
"Change in Control" shall be deemed to have occurred if: (i) (A) any "person,"
as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act
of 1934 (the "Exchange Act") (a "Person"), other than (1) the Company, (2) any
trustee or other fiduciary holding securities under an employee benefit plan of
the Company or any of its subsidiaries, (3) any corporation owned, directly or
indirectly, by the stockholders of the Company as of the Effective Date, in
substantially the same proportions as their ownership of common stock of the
Company as of the Effective Date, (4) Trace International Holdings, Inc.
("Trace"), (5) the officers, directors or employees of the Company
(collectively, the "Permitted Holders"), is or becomes the "beneficial owner"
(as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of
securities of the Company representing more than 35% of the combined voting
power of the Company's then outstanding voting securities and (B) the percentage
of the combined voting power of the Company's voting securities beneficially
owned by such Person is greater than the percentage of the combined voting power
of the Company's voting securities beneficially owned collectively, by Trace,
Marshall Cogan or any other entities directly or indirectly controlled by Trace
or Marshall Cogan; or (ii) Individuals who, as of the date hereof, constitute
the Board (the "Incumbent Board") cease for any reason to constitute at least a
majority of the Board; provided, however, that any individual becoming a
director subsequent to the date hereof whose election, or nomination for
election by the Company's shareholders, was approved by a vote of at least a
majority of the directors then comprising the Incumbent Board shall be
considered as though such individual were a member of the Incumbent Board, but
excluding, for this purpose, any such individual whose initial assumption of
office occurs as a result of an actual or threatened election contest with
respect to the election or removal of directors or other actual or threatened
solicitation of proxies or consents by or on behalf of a Person other than the
Board.
5.9. Obligations Absolute; Withholding.
(a) The obligations of the Company under this Agreement shall
be absolute and unconditional and shall not be affected by any circumstances,
including without limitation (i) the Executive's receipt of compensation and
benefits from another employer in the event that the Executive accepts new
employment
-9-
<PAGE>
following the termination of his employment under this Agreement, or
(ii) any set-off, counterclaim, recoupment, defense or other right which the
Company may have against the Executive or anyone else.
(b) All payments to the Executive under this Agreement may be
reduced by applicable withholding by federal, state or local law.
ARTICLE VI.
Miscellaneous
6.1. No Mitigation. Executive shall not be required to
mitigate damages resulting from his termination of employment.
6.2. Indemnification. In addition to all other rights the
Executive may have under the Company's and any subsidiary's articles and bylaws,
under any director and officer liability policy or as a matter of law, the
Company, for itself and on behalf of all subsidiaries, shall defend, indemnify
and hold Executive harmless from and against any and all claims, demands,
actions, proceedings, losses, damages, and expenses (including reasonable
attorneys' fees and court costs) arising out of the Executive's services as a
director, officer and employee of the Company and its subsidiaries, to the
fullest extent permitted under Delaware law. This Section 6.2 shall survive
termination of this Agreement and Executive's employment with the Company for
any reason whatsoever.
6.3. Benefit of Agreement; Assignment; Beneficiary. (a) This
Agreement shall inure to the benefit of and be binding upon the Company and its
successors and assigns, including, without limitation, any corporation or person
which may acquire all or substantially all of the Company's assets or business,
or with or into which the Company may be consolidated or merged. This Agreement
shall also inure to the benefit of, and be enforceable by, the Executive and his
personal or legal representatives, executors, administrators, successors, heirs,
distributees, devisees and legatees. If the Executive should die while any
amount would still be payable to the Executive hereunder if he had continued to
live, all such amounts shall be paid in accordance with the terms of this
Agreement to the Executive's beneficiary, devisee, legatee or other designee, or
if there is no such designee, to the Executive's estate.
(b) The Company shall require any successor (whether direct
or indirect, by operation of law, by purchase, merger/ consolidation or
otherwise) to all or substantially all of the
-10-
<PAGE>
business and/or assets of the Company to expressly assume and agree to perform
this Agreement in the same manner and to the same extent that the Company would
be required to perform it if no such succession had taken place.
6.4. Legal Fees. The Company shall reimburse Executive for
all reasonable legal fees and expenses incurred in connection with the
negotiation of this Agreement.
6.5. Notices. Any notice required or permitted hereunder
shall be in writing and shall be sufficiently given if personally delivered or
if sent by telegram or telex or by registered or certified mail, postage
prepaid, with return receipt requested, addressed: (a) in the case of the
Company to Foamex International, Inc., 375 Park Avenue, 11th Floor, New York, NY
10152, Attention: Philip N. Smith, Jr., or to such other address and/or to the
attention of such other person as the Company shall designate by written notice
to Executive; and (b) in the case of Executive, to John Johnson, at his then
current home address as shown on the Company's records, or to such other address
as Executive shall designate by written notice to the Company. Any notice given
hereunder shall be deemed to have been given at the time of receipt thereof by
the person to whom such notice is given.
6.6. Entire Agreement; Amendment. This Agreement contains the
entire agreement of the parties hereto with respect to the terms and conditions
of Executive's employment during the term and supersedes any and all prior
agreements and understandings, whether written or oral, between the parties
hereto with respect to compensation due for services rendered hereunder. This
Agreement may not be changed or modified except by an instrument in writing
signed by both of the parties hereto.
6.7. Waiver. The waiver by either party of a breach of any
provision of this Agreement shall not operate or be construed as a continuing
waiver or as a consent to or waiver of any subsequent breach hereof.
6.8. Headings. The Article and Section headings herein are
for convenience of reference only, do not constitute a part of this Agreement
and shall not be deemed to limit or affect any of the provisions hereof.
6.9. Governing Law. This Agreement shall be governed by, and
construed and interpreted in accordance with, the internal laws of the State of
New York without reference to the principles of conflict of laws.
-11-
<PAGE>
6.10. Agreement to Take Actions. Each party hereto shall
execute and deliver such documents, certificates, agreements and other
instruments, and shall take such other actions, as may be reasonably necessary
or desirable in order to perform his or its obligations under this Agreement or
to effectuate the purposes hereof.
6.11. Arbitration. Except for disputes with respect to
Article IV hereof, any dispute between the parties hereto respecting the meaning
and intent of this Agreement or any of its terms and provisions shall be
submitted to arbitration in New York, New York, in accordance with the
Commercial Rules of the American Arbitration Association then in effect, and the
arbitration determination resulting from any such submission shall be final and
binding upon the parties hereto. Judgment upon any arbitration award may be
entered in any court of competent jurisdiction.
6.12. Survivorship. The respective rights and obligations of
the parties hereunder shall survive any termination of this Agreement to the
extent necessary to the intended preservation of such rights and obligations.
6.13. Validity. The invalidity or unenforceability of any
provision or provisions of this Agreement shall not affect the validity or
enforceability of any other provision or provisions of this Agreement, which
shall remain in full force and effect.
6.14. Counterparts. This Agreement may be executed in one or
more counterparts, each of which shall be deemed to be an original but all of
which together will constitute one and the same instrument.
IN WITNESS WHEREOF, each of the parties hereto has duly
executed this Agreement effective as of the date first above written.
FOAMEX INTERNATIONAL, INC.
By: ___________________________
Name:
Title:
-------------------------------
John Johnson
-12-
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