SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended March 31, 2000
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 (Zip Code)
executive offices)
Registrant's telephone number, including area code: (610) 859-3000
--------------
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 period 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
-----
The number of shares of the registrant's common stock outstanding as of May 10,
2000 was 25,059,994.
<PAGE>
<TABLE>
<CAPTION>
FOAMEX INTERNATIONAL INC.
INDEX
Page
Part I. Financial Information
Item 1. Financial Statements.
<S> <C>
Condensed Consolidated Statements of Operations (unaudited) - Quarters Ended
March 31, 2000 and March 31, 1999 3
Condensed Consolidated Balance Sheets (unaudited) as of March 31, 2000
and December 31, 1999 4
Condensed Consolidated Statements of Cash Flows (unaudited) - Quarters Ended
March 31, 2000 and March 31, 1999 5
Notes to Condensed Consolidated Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations. 16
Item 3. Quantitative and Qualitative Disclosures about Market Risk. 20
Part II. Other Information
Item 1. Legal Proceedings. 21
Item 5. Other Information. 21
Item 6. Exhibits and Reports on Form 8-K. 21
Signatures 22
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
<TABLE>
<CAPTION>
Quarters Ended
March 31, March 31,
2000 1999
--------- ---------
(thousands, except per share amounts)
<S> <C> <C>
NET SALES $ 325,862 $ 322,863
COST OF GOODS SOLD 282,526 279,266
--------- ---------
GROSS PROFIT 43,336 43,597
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 18,822 18,828
RESTRUCTURING AND OTHER CHARGES 3,222 3,457
--------- ---------
INCOME FROM OPERATIONS 21,292 21,312
INTEREST AND DEBT ISSUANCE EXPENSE 18,629 17,696
INCOME FROM EQUITY INTEREST IN JOINT VENTURE 292 --
OTHER INCOME (EXPENSE), NET (931) 3,351
--------- ---------
INCOME BEFORE PROVISION FOR INCOME TAXES 2,024 6,967
PROVISION FOR INCOME TAXES 241 954
--------- ---------
NET INCOME $ 1,783 $ 6,013
========= =========
EARNINGS PER SHARE
BASIC $ 0.07 $ 0.24
========= =========
DILUTED $ 0.07 $ 0.24
========= =========
WEIGHTED AVERAGE NUMBER OF SHARES - BASIC 25,058 25,053
========= =========
WEIGHTED AVERAGE NUMBER OF SHARES AND
EQUIVALENTS - DILUTED 25,456 25,263
========= =========
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
3
<PAGE>
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
<TABLE>
<CAPTION>
ASSETS March 31, 2000 December 31, 1999
--------- ---------
CURRENT ASSETS (thousands, except share data)
<S> <C> <C>
Cash and cash equivalents $ 5,048 $ 6,577
Accounts receivable, net of allowances
of $9,088 in 2000 and $9,549 in 1999 192,506 166,571
Inventories 95,074 97,882
Other current assets 19,796 23,662
--------- ---------
Total current assets 312,424 294,692
--------- ---------
Property, plant and equipment 387,770 384,978
Less accumulated depreciation (168,554) (163,145)
--------- ---------
NET PROPERTY, PLANT AND EQUIPMENT 219,216 221,833
COST IN EXCESS OF ASSETS ACQUIRED, net of accumulated
amortization of $24,720 in 2000 and $23,252 in 1999 213,754 215,258
DEBT ISSUANCE COSTS, net of accumulated
amortization of $7,726 in 2000 and $6,791 in 1999 18,031 18,966
OTHER ASSETS 31,349 30,564
--------- ---------
TOTAL ASSETS $ 794,774 $ 781,313
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Short-term borrowings $ 2,226 $ 1,627
Current portion of long-term debt 7,747 7,866
Current portion of long-term debt - related party 10,530 10,530
Accounts payable 108,175 86,576
Accrued employee compensation and benefits 17,833 17,878
Accrued interest 7,831 9,741
Accrued customers rebates 15,894 22,823
Other accrued liabilities 29,146 32,005
--------- ---------
Total current liabilities 199,382 189,046
LONG-TERM DEBT 681,539 646,544
LONG-TERM DEBT - RELATED PARTY 42,120 78,753
OTHER LIABILITIES 36,001 33,351
--------- ---------
Total liabilities 959,042 947,694
--------- ---------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' 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 27,048,994 and 27,045,480 shares, respectively;
Outstanding 25,059,994 and 25,056,480 shares, respectively 270 270
Additional paid-in capital 87,499 87,475
Accumulated deficit (216,162) (217,945)
Accumulated other comprehensive income (loss) (7,452) (7,758)
Other (28,423) (28,423)
--------- ---------
Total stockholders' deficit (164,268) (166,381)
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 794,774 $ 781,313
========= =========
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
4
<PAGE>
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
<TABLE>
<CAPTION>
Quarters Ended
March 31, March 31,
2000 1999
--------- ---------
(thousands)
OPERATING ACTIVITIES
<S> <C> <C>
Net income $ 1,783 $ 6,013
Adjustments to reconcile net income to net cash provided
by (used for) operating activities:
Depreciation and amortization 8,716 8,632
Amortization of debt issuance costs, debt discount,
debt premium and deferred swap adjustment and gain 318 (60)
Loss (gain) on sale of assets 106 (4,217)
Other operating activities 943 128
Changes in operating assets and liabilities, net (6,009) (14,007)
-------- --------
Net cash provided by (used for) operating activities 5,857 (3,511)
-------- --------
INVESTING ACTIVITIES
Capital expenditures (5,140) (6,026)
Proceeds from sale of assets -- 16,313
Other investing activities -- 924
-------- --------
Net cash provided by (used for) investing activities (5,140) 11,211
-------- --------
FINANCING ACTIVITIES
Net proceeds from short-term borrowings 599 536
Net proceeds from revolving loans 36,708 461
Repayment of long-term debt (1,450) (10,222)
Repayment of long-term debt - related party (36,633) (1,755)
Increase (decrease) in cash overdrafts (1,494) 963
Debt issuance cost -- (3,742)
Other financing activities 24 249
-------- --------
Net cash used for financing activities (2,246) (13,510)
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS (1,529) (5,810)
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD 6,577 12,572
-------- --------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 5,048 $ 6,762
======== ========
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
5
<PAGE>
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
1. ORGANIZATION AND BASIS OF PRESENTATION
Basis of Presentation
The condensed consolidated financial statements are unaudited, but in the
opinion of management include all adjustments, consisting only of normal
recurring adjustments, necessary to present fairly Foamex International Inc.'s
(the "Company") financial position and results of operations. These interim
financial statements should be read in conjunction with the financial statements
and related notes included in the 1999 Annual Report on Form 10-K. Results for
interim periods are not necessarily indicative of trends or of results for a
full year.
Change in Control
Trace International Holdings, Inc. ("Trace") is a privately held company,
which owned approximately 29% of the Company's outstanding voting common stock
at May 10, 2000, and whose former Chairman also serves as the Company's
Chairman. The Company's common stock owned by Trace is pledged as collateral
against certain of Trace's obligations. Certain credit agreements and promissory
notes of the Company's subsidiaries, pursuant to which approximately $466.5
million of debt was outstanding as of March 31, 2000, provide that a "change of
control" would be an event of default and could result in the acceleration of
such indebtedness. "Change of control" means, for this purpose, that (i) a
person or related group, other than Trace, beneficially owns more than 25% of
the Company's outstanding voting stock and (ii) such voting stock constitutes a
greater percentage of such voting stock than the amount beneficially owned by
Trace. Additionally, certain indentures of Foamex L.P. and Foamex Capital
Corporation ("FCC") relating to senior subordinated notes of $248.0 million
contain similar "change of control" provisions, which require the issuers to
tender for such notes at a price in cash equal to 101% of the aggregate
principal amount thereof, plus accrued and unpaid interest thereon, if there is
such a "change of control".
On July 21, 1999, the Company was informed by Trace that it filed a
petition for relief under Chapter 11 of the Bankruptcy Code in Federal Court in
New York City. Subsequently, on January 24, 2000, an order was signed converting
the Trace bankruptcy from Chapter 11 to Chapter 7 of the Bankruptcy Code. A
trustee was appointed to oversee the liquidation of Trace's assets. Neither
Trace's bankruptcy filing nor the conversion to Chapter 7 constituted a "change
of control" under the provisions of the debt agreements described above. A
"change of control" could take place however, if the bankruptcy court allows
Trace's creditors to foreclose on and take ownership of the Company's common
stock owned by Trace, or otherwise authorizes a sale or transfer of these
shares, under circumstances in which a person or related group, other than
Trace, acquired more than 25% of the Company's outstanding voting stock and
owned a greater percentage of such voting stock than the amount beneficially
owned by Trace.
Management believes that it is unlikely that a "change of control" will
occur as a result of Trace's bankruptcy proceedings. However, the Company would
seek to resolve the issues that may arise should the "change of control"
provisions be triggered, by requesting waivers of such provisions and/or
refinancing certain debt, if necessary. There can be no assurance that the
Company or its subsidiaries will be able to do so, or that the Company will be
able to obtain waivers of such provisions. Such circumstances raise substantial
doubt about the Company's ability to continue as a going concern. The
accompanying financial statements were prepared on a going-concern basis and do
not include any adjustments that might result from the outcome of the Trace
bankruptcy filing.
2. BUYOUT PROPOSALS
As previously reported in the Annual Report on Form 10-K for 1999, on
February 9, 2000, the Company announced that it was in discussions with respect
to a proposal involving the acquisition of all of the Company's outstanding
common stock for cash. On April 5, 2000, the Company announced that discussions
with the potential buyer were terminated with no agreement having been reached.
The Company subsequently terminated the engagement of J.P. Morgan & Company,
Inc. ("JP Morgan"), which acted as financial advisor in connection with such
transaction and is discussing with JP Morgan the possibility of an additional
engagement.
6
<PAGE>
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
3. INCOME TAXES
The effective tax rates in 2000 and 1999 reflected the partial reversal
of the deferred income tax asset valuation allowance recognized in 1998. The
valuation allowance was reduced to reflect the utilization of Federal loss
carryforwards that reduced the current tax component of the Federal tax
provision. Additionally, the valuation allowance was reduced to offset the net
deferred Federal tax liability generated in 2000 and 1999.
4. EARNINGS PER SHARE
The following table shows the amounts used in computing earnings per
share.
<TABLE>
<CAPTION>
Quarters Ended
March 31, March 31,
2000 1999
------- -------
(thousands, except per share amounts)
Basic earnings per share
<S> <C> <C>
Net income $ 1,783 $ 6,013
======= =======
Average common stock outstanding 25,058 25,053
======= =======
Basic earnings per share $ 0.07 $ 0.24
======= =======
Diluted earnings per share
Net income available for common stock
and dilutive securities $ 1,783 $ 6,013
======= =======
Average common stock outstanding 25,058 25,053
Common stock equivalents resulting from stock options (a) 398 210
------- -------
Average common stock and dilutive equivalents 25,456 25,263
======= =======
Diluted earnings per share $ 0.07 $ 0.24
======= =======
</TABLE>
(a) The number of stock options that were not included in the diluted
earnings per share calculation because the exercise price was greater
than the average market price totaled 676,100 in 2000 and 1,048,100
in 1999.
5. COMPREHENSIVE INCOME
The components of comprehensive income are listed below.
Quarters Ended
March 31, March 31,
2000 1999
(thousands)
Net income $1,783 $6,013
Foreign currency translation adjustments 306 412
-------- --------
Total comprehensive income $2,089 $6,425
======== ========
6. RESTRUCTURING AND OTHER CHARGES
During the first quarter of 2000, restructuring and other charges of
approximately $3.2 million were recorded. The provision included $2.1 million in
work force reduction costs for 30 employees, including certain executives and
employees impacted by the closure of certain operations related to increase the
VPF(SM) capacity in North Carolina. Additionally, facility closure costs totaled
$0.3 million and related equipment writedowns were $0.4 million. The first
quarter 2000 provision included $0.4 million related to changes in estimates to
prior year plans.
7
<PAGE>
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
6. RESTRUCTURING AND OTHER CHARGES (continued)
The Company paid $1.4 million during the first quarter of 2000 for the
various restructuring plans recorded as of December 31, 1999 and during the
first quarter of 2000. As of March 31, 2000, the components of the net accrued
restructuring and plant consolidation balance included, $9.8 million for plant
closures and leases and $4.2 million for personnel reductions. Included in
current assets was $1.5 million and in noncurrent assets was $3.8 million of
estimated proceeds for facilities actively being marketed for sale.
Substantially all employees impacted by the first quarter 2000 work force
reduction will be terminated by the end of the second quarter 2000.
Approximately $5.0 million is expected to be spent during the remainder of 2000.
7. INVENTORIES
The components of inventory are listed below.
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
----------------- -----------
(thousands)
<S> <C> <C>
Raw materials and supplies $60,597 $67,520
Work-in-process 11,540 11,574
Finished goods 22,937 18,788
-------- --------
Total $95,074 $97,882
======= =======
8. LONG-TERM DEBT
The components of long-term debt are listed below.
March 31, December 31,
2000 1999
----------------- ------------
Foamex L.P. Credit Facility (thousands)
Term Loan B (a) (e) $ 81,664 $ 81,874
Term Loan C (a) (e) 74,240 74,431
Term Loan D (a) (e) 107,525 107,800
Revolving credit facility (a) (b) (c) (e) 150,394 113,685
Foamex Carpet Credit Facility (d) - -
9 7/8% Senior subordinated notes due 2007 150,000 150,000
13 1/2% Senior subordinated notes due 2005 (includes
$9,652 and $10,100 of unamortized debt premium) 107,652 108,100
Industrial revenue bonds 7,000 7,000
Subordinated note payable (net of unamortized
debt discount of $164 and $232 4,512 4,444
Other 6,299 7,076
---------- -----------
689,286 654,410
Less current portion 7,747 7,866
----------- -----------
Long-term debt-unrelated parties $681,539 $646,544
======== ========
The components of related party long-term debt are listed below.
Foamex/GFI Note (c) $ - $ 34,000
Note payable to Foam Funding LLC 52,650 55,283
---------- ----------
52,650 89,283
Less current portion 10,530 10,530
---------- ----------
Long-term debt - related party $ 42,120 $ 78,753
========= =========
</TABLE>
8
<PAGE>
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
8. LONG-TERM DEBT (continued)
(a) Effective January 1, 2000, the interest rate on outstanding borrowings
under the Foamex L.P. credit facility will increase by 25 basis points
each quarter that Foamex L.P.'s leverage ratio, as defined, exceeds
5.00 to 1.00. Once the leverage ratio is reduced below this level, the
cumulative amount of the 25 basis point adjustments to the interest
rate on borrowings will be eliminated. At December 31, 1999, the
calculated leverage ratio was 5.48 to 1.00. Consequently, the basis
point adjustment was applicable for the calculation of interest in the
first quarter of 2000. At March 31, 2000, the calculated leverage
ratio was 5.51 to 1.00. Accordingly, an additional 25 basis point
adjustment is applicable in the second quarter of 2000.
(b) At March 31, 2000, the revolving credit facility commitment was $182.5
million, the weighted average interest rate was 9.95%, available
borrowings totaled $19.6 million and letters of credit outstanding
totaled $12.5 million. The commitment under the revolving credit
facility is reduced $2.5 million each quarter during the remaining
term of the agreement, which expires in June 2003.
(c) During the first quarter of 2000, the Foamex/GFI Note was repaid with
borrowings under the Foamex L.P. revolving credit facility. The $34.5
million letter of credit that was outstanding at year-end 1999 to
collateralize principal and interest payable under the Foamex/GFI Note
was also terminated.
(d) At March 31, 2000, available borrowings totaled $14.8 million after a
reduction of $0.2 million for a letter of credit.
(e) As previously reported in the Annual Report on Form 10-K for 1999,
excess cash flow generated annually, as defined, is required to prepay
portions of Term B, C and D loans. The prepayment amount determined
for 1999 was $13.3 million. Subsequent to March 31, 2000, the payment
was made as scheduled and was financed through borrowings under the
Foamex L.P. revolving credit facility.
Debt Covenants
The indentures, credit facilities and other indebtedness agreements
contain certain covenants that will limit, among other things to varying
degrees, the ability of the Company's subsidiaries (i) to pay distributions or
redeem equity interests, (ii) to make certain restrictive payments or
investments, (iii) to incur additional indebtedness or issue Preferred Equity
Interest, as defined, (iv) to merge, consolidate or sell all or substantially
all of its assets or (v) to enter into certain transactions with affiliates or
related persons. In addition, certain agreements contain provisions that, in the
event of a defined change of control or the occurrence of an undefined material
adverse change in the ability of the obligor to perform its obligations, the
indebtedness must be repaid, in certain cases, at the option of the holder.
Also, the Company's subsidiaries are required under certain of these agreements
to maintain specified financial ratios of which the most restrictive are the
maintenance of net worth, interest coverage, fixed charge coverage and leverage
ratios, as defined. Under the most restrictive of the distribution restrictions,
the Company was available to be paid by its subsidiaries as of March 31, 2000,
funds only to the extent to enable the Company to meet its tax payment
liabilities.
Foamex L.P. and Foamex Carpet Cushion, Inc. ("Foamex Carpet"), the
principal subsidiaries of the Company, were in compliance with the various
financial covenants of their loan agreements as of March 31, 2000.
9. SEGMENT RESULTS
Foam Products manufactures and markets foam used by the bedding industry,
the furniture industry and the retail industry. Carpet Cushion Products
manufactures and distributes prime, rebond, sponge rubber and felt carpet
cushion. Automotive Products supplies foam primarily for automotive interior
applications. Technical Products manufactures and markets reticulated foams 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, corporate
expenses not allocated to other business segments and restructuring and other
charges.
9
<PAGE>
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
9. SEGMENT RESULTS (continued)
Segment results are presented below.
<TABLE>
<CAPTION>
Carpet
Foam Cushion Automotive Technical
Products Products Products Products Other Total
(thousands)
Quarter ended March 31, 2000
<S> <C> <C> <C> <C> <C> <C>
Net sales $130,094 $60,046 $97,311 $27,454 $10,957 $325,862
Income (loss) from operations 12,778 (1,919) 7,166 7,504 (4,237) 21,292
Depreciation and amortization 3,928 2,175 1,203 643 767 8,716
Quarter ended March 31, 1999
Net sales $140,869 $64,799 $88,771 $22,248 $ 6,176 $322,863
Income (loss) from operations 13,039 1,733 6,566 4,853 (4,879) 21,312
Depreciation and amortization 4,462 1,563 1,345 716 546 8,632
</TABLE>
10. RELATED PARTY TRANSACTIONS AND BALANCES
The Company regularly enters into transactions with its affiliates in the
ordinary course of business.
Foam Funding LLC Debt
In the first quarter of 2000, subsidiaries of the Company paid $2.0
million of interest and $36.6 million of principal on notes payable to Foam
Funding LLC. Included in the principal payments was the repayment of the
Foamex/GFI Note discussed in Note 8.
In the first quarter of 1999, subsidiaries of the Company paid $1.8
million of interest on notes payable to Foam Funding LLC.
11. COMMITMENTS AND CONTINGENCIES
Litigation - Shareholders
During 1999, the Company received several communications addressed to its
Board of Directors from certain of the Company's stockholders regarding aspects
of the relationship between Trace and the Company. Such stockholders questioned
the propriety of certain relationships and related transactions between Trace
and the Company, which previously had been disclosed in the Company's periodic
filings. On June 14, 1999, the Company received a draft complaint from counsel
of certain stockholders naming the Company and certain current and former
directors, which included allegations similar to those in the Second Amended
Complaint, as defined below. The Company was advised by such counsel that such
stockholders intended to file an action soon thereafter. On August 13, 1999, two
stockholders filed an action on behalf of an alleged class of the Company's
shareholders, entitled Watchung Road Associates, L.P. et al v. Foamex
International Inc., et al., Civil Action No. 17370 (the "Watchung Complaint"),
in the Court of Chancery of the State of Delaware, New Castle County. The suit
names the Company, Mr. Marshall S. Cogan, Mr. Etienne Davignon, Mr. John
Gutfreund, Mr. Robert Hay, Dr. Stuart Hershon, Mr. John G. Johnson, Jr. and Mr.
John Tunney as defendants. The Watchung Complaint alleges that the individual
defendants breached their fiduciary duties by agreeing to the potential buyout
of the Company by Sorgenti Chemical Industries, LLC and Liberty Partners
Holdings 20, LLC ("Sorgenti Transaction").
The Watchung Complaint alleges that the Sorgenti Transaction's buy-out
price of $11.50 per outstanding share is inadequate and fails to take into
consideration claims the Company allegedly has as a result of the supposed
wrongful diversions of Company assets in the Company's dealings with Trace and
its affiliates. The Watchung Complaint also alleges that the directors breached
their fiduciary duties by agreeing to the proposed Sorgenti Transaction without
conducting an auction or active market check. The suit alleges that the board
placed Mr.
10
<PAGE>
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
11. COMMITMENTS AND CONTINGENCIES (continued)
Cogan's interest ahead of those of the Company's stockholders, and alleges that
a critical condition of the Sorgenti Transaction is a consulting agreement for
Mr. Cogan. The Watchung suit seeks to enjoin the Sorgenti Transaction, seeks
rescission or damages if the Sorgenti Transaction is consummated, and seeks an
accounting from the directors for plaintiffs alleged losses. The Sorgenti
Transaction was not consummated. Defendants have moved to consolidate this
action with In re Foamex International Inc. Shareholders Litigation, discussed
below, and to dismiss the complaint. Plaintiffs have agreed to consolidate.
On April 26, 1999, a putative securities class action entitled Molitor v.
Foamex International Inc., et al., 99 Civ. 3004, was filed in the United States
District court for the Southern District of New York naming as defendants the
Company, Trace and certain officers and directors of the Company on behalf of
stockholders who bought shares of the Company's common stock during the period
from May 7, 1998 through and including April 16, 1999. The lawsuit alleges that
the defendants violated Section 10(b) of the Securities Exchange Act of 1934 and
Rule 10b-5 by misrepresenting and/or omitting material information about the
Company's financial situation and operations, with the result of artificially
inflating the price of the Company's stock. The lawsuit also alleges that Trace
and Marshall S. Cogan violated Section 20(a) of the Securities Exchange Act of
1934 as controlling persons of the Company. The complaint seeks class
certification, a declaration that defendants violated the federal securities
laws, an award of money damages, and costs and attorneys', accountants' and
experts' fees. On May 18, 1999, a similar action entitled Thomas W. Riley v.
Foamex International Inc., et al., 99 Civ. 3653 was filed in the same court. The
two actions have been consolidated, and the Consolidated Amended Class Action
Complaint setting forth the allegations of the two earlier complaints, was filed
on December 6, 1999. The defendants filed motions to dismiss the consolidated
complaint on February 4, 2000. No discovery has taken place to date.
Beginning on or about March 17, 1998, six actions (collectively the
"Shareholder Litigation") were filed in the Court of Chancery of the State of
Delaware, New Castle County (the "Court"), by stockholders of the Company. The
Shareholder Litigation, purportedly brought as class actions on behalf of all
stockholders of the Company, named the Company, certain of its directors,
certain of its officers, Trace and Trace Merger Sub, Inc. ("Merger Sub") as
defendants alleging that they had breached their fiduciary duties to the
plaintiffs and other stockholders of the Company unaffiliated with Trace in
connection with the original proposal of Trace to acquire the publicly traded
outstanding common stock of the Company for $17.00 per share under an Agreement
and Plan of Merger (the "First Merger Agreement"). The complaints sought, among
other things, class certification, a declaration that the defendants breached
their fiduciary duties to the class, preliminary and permanent injunctions
barring implementation of the proposed transaction, rescission of the
transaction if consummated, unspecified compensatory damages, and costs and
attorneys' fees. A stipulation and order consolidating these six actions under
the caption In re Foamex International Inc. Shareholders Litigation,
Consolidated Civil Action No. 16259NC, was entered by the Court on May 28, 1998.
The parties to the Shareholder Litigation entered into a Memorandum of
Understanding, dated June 25, 1998 (the "Memorandum of Understanding"), to
settle the Shareholder Litigation, subject to, inter alia, execution of a
definitive Stipulation of Settlement between the parties and approval by the
Court following notice to the class and a hearing. The Memorandum of
Understanding provided that as a result of, among other things, the Shareholder
Litigation and negotiations among counsel for the parties to the Memorandum of
Understanding, a special meeting of stockholders would be held to vote upon and
approve the First Merger Agreement which provided, among other things, for all
of the Company's outstanding common stock not owned by Trace and its
subsidiaries (the "Public Shares") to be converted into the right to receive
$18.75 in cash, without interest.
The Memorandum of Understanding also provided for certification of a
class, for settlement purposes only, consisting of the Public Shares owned by
stockholders of the Company unaffiliated with Trace and its subsidiaries (the
"Public Shareholders"), the dismissal of the Shareholder Litigation with
prejudice and the release by the plaintiffs and all members of the class of all
claims and causes of action that were or could have been asserted against Trace,
the Company and the individual defendants in the Shareholder Litigation or that
arise out of the matters alleged by plaintiffs. Following the completion of the
confirmatory discovery which was provided for in the Memorandum of
Understanding, on September 9, 1998, the parties entered into a definitive
Stipulation of Settlement and the Court set a hearing for October 27, 1998 to
consider whether the settlement should be approved (the
11
<PAGE>
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
11. COMMITMENTS AND CONTINGENCIES (continued)
"Settlement Hearing"). In connection with the proposed settlement, the
plaintiffs intended to apply for an award of attorney's fees and litigation
expenses in an amount not to exceed $925,000, and the defendants agreed not to
oppose this application. Additionally, the Company agreed to pay the cost, if
any, of sending notice of the settlement to the Public Shareholders. On
September 24, 1998, a Notice of Pendency of Class Action, Proposed Settlement of
Class Action and Settlement Hearing was mailed to the members of the settlement
class. On October 20, 1998, the parties to the Shareholder Litigation requested
that the Court cancel the Settlement Hearing in light of the announcement made
by Trace on October 16, 1998, that it had been unable to obtain the necessary
financing for the contemplated acquisition by Trace of the Company's common
stock at a price of $18.75 per share, which was the subject matter of the
proposed settlement. This request was approved by the Court on October 21, 1998,
and the Company issued a press release on October 21, 1998, announcing that the
Court had cancelled the Settlement Hearing.
On November 10, 1998, counsel for certain of the defendants in the
Shareholder Litigation gave notice pursuant to the Stipulation of Settlement
that such defendants were withdrawing from the Stipulation of Settlement in
light of the notice given by Trace to the Company and the special committee of
the Board of Directors on November 5, 1998 whereby Trace terminated the First
Merger Agreement on the grounds that the financing condition in the First Merger
Agreement was incapable of being satisfied.
On November 12, 1998, the plaintiffs in the Shareholder Litigation filed
an Amended Class Action Complaint (the "Amended Complaint"). The Amended
Complaint named the Company, Trace, Merger Sub, Mr. Marshall S. Cogan, Mr.
Andrea Farace, Dr. Stuart Hershon, Mr. John Tunney, and Mr. Etienne Davignon as
defendants, alleging that they breached their fiduciary duties to plaintiffs and
the other Public Shareholders in connection with a second Agreement and Plan of
Merger (the "Second Merger Agreement"), that the proposal to acquire the Public
Shares for $12.00 per share lacked entire fairness, that the individual
defendants violated 8 Del. Code ss. 251 in approving the Second Merger
Agreement, and that Trace and Merger Sub breached the Stipulation of Settlement.
On December 2, 1998, plaintiffs served a motion for a preliminary injunction,
seeking an Order to preliminarily enjoin the defendants from proceeding with,
consummating or otherwise effecting the merger contemplated by the Second Merger
Agreement. In January 1999, Trace advised that it could not finance the offer
reflected in the Second Merger Agreement. As a result, the preliminary
injunction motion did not go forward.
On June 9, 1999, the plaintiffs in the Shareholder Litigation moved for
leave to file a Second Amended and Supplemental Class Action and Derivative
Complaint (the "Second Amended Complaint"). The Second Amended Complaint was
filed on July 14, 1999, and named the Company, Trace, Merger Sub, Mr. Marshall
S. Cogan, Mr. Andrea Farace, Dr. Stuart Hershon, Mr. John Tunney, and Mr.
Etienne Davignon as defendants, alleging that the named individuals breached
their fiduciary duties by causing the Company to waste assets in its
transactions with Trace and by failing to enforce the Company's rights under the
First Merger Agreement, seeking appointment of a receiver for the Company, and
alleging that Trace and Merger Sub breached the Stipulation of Settlement.
On August 26, 1999, the plaintiffs in the Shareholder Litigation moved
for leave to file a Third Amended and Supplemental Class Action and Derivative
Complaint (the "Third Amended Complaint"). The Third Amended Complaint was filed
on October 27, 1999. The Third Amended Complaint alleges both class claims and
derivative claims, and names the Company, Mr. Marshall S. Cogan, Mr. Andrea
Farace, Dr. Stuart Hershon, Mr. John Tunney, Mr. Etienne Davignon, Mr. John
Gutfreund, Mr. Robert Hay and Mr. John Johnson as defendants.
The Third Amended Complaint alleges that the individual defendants
breached their duties to the Company's Public Shareholders by agreeing to the
Sorgenti Transaction at an inadequate price that fails to take into
consideration the Company's allegedly valuable claims arising out of purported
diversions of money from the Company to Trace, and by failing to maximize
shareholder value in a sale of the Company and instead agreeing to a deal with a
buyer who is willing to enter into a consulting deal with Mr. Cogan to get his
and the board's approval. The Third Amended Complaint purports to assert a
derivative claim for waste and breach of fiduciary duty against Mr. Cogan, Mr.
Farace, Dr. Hershon, Mr. Tunney, Mr. Davignon, Mr. Gutfreund, and Mr. Hay. The
Third Amended Complaint seeks the appointment of a receiver for the Company,
alleging that the directors have mismanaged the Company. The Third Amended
Complaint also alleges that Mr. Cogan, Mr. Farace, Dr. Hershon,
12
<PAGE>
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
11. COMMITMENTS AND CONTINGENCIES (continued)
Mr. Davignon, Mr. Tunney, Mr. Gutfreund, and Mr. Hay breached their fiduciary
duties by failing to enforce the Company's rights under the First Merger
Agreement.
The Third Amended Complaint seeks: a declaration that the individual
defendants have breached their fiduciary duties; damages; the imposition of a
constructive trust on profits and benefits Mr. Cogan, Trace, and the other
individual defendants allegedly received as a result of the alleged wrongdoing;
an injunction against the Sorgenti Transaction under its present terms;
rescission and damages if the deal is consummated; and the appointment of a
receiver for the Company. Defendants have moved to consolidate this action with
Watchung Road Associates, L.P., et ano v. Foamex International Inc., et al.,
discussed above, and to dismiss the complaint. Plaintiffs have agreed to
consolidation and opposed the motion to dismiss.
The defendants intend to vigorously defend these litigations, which if
adversely determined, could have a material adverse effect on the financial
position, results of operations and cash flows of the Company.
Litigation - Breast Implants
As of May 12, 2000, the Company and Trace were two of multiple defendants
in actions filed on behalf of approximately 3,871 recipients of breast implants
in various United States federal and state courts and one Canadian provincial
court, some of which allege substantial damages, but most of which allege
unspecified damages for personal injuries of various types. Three of these cases
seek to allege claims on behalf of all breast implant recipients or other
allegedly affected parties, but no class has been approved or certified by the
court. In addition, three cases have been filed alleging claims on behalf of
approximately 39 residents of Australia, New Zealand, England, and Ireland. The
Company believes that the number of suits and claimants may increase. During
1995, the Company and Trace were granted summary judgments and dismissed as
defendants from all cases in the federal courts of the United States and the
state courts of California. Appeals for these decisions were withdrawn and the
decisions are final.
Although breast implants do not contain foam, certain silicone gel
implants were produced using a polyurethane foam covering fabricated by
independent distributors or fabricators from bulk foam purchased from the
Company or Trace. Neither the Company nor Trace recommended, authorized, or
approved the use of its foam for these purposes. The Company is also indemnified
by Trace for any such liabilities relating to foam manufactured prior to October
1990. Trace's insurance carrier has continued to pay the Company's litigation
expenses after Trace's filing under the Bankruptcy Code. Trace's insurance
policies continue to cover certain liabilities of Trace but if the limits of
those policies are exhausted, it is unlikely that Trace will be able to continue
to provide additional indemnification. While it is not feasible to predict or
determine the outcome of these actions, based on management's present assessment
of the merits of pending claims, after consultation with the general counsel of
the Company, and without taking into account the indemnification provided by
Trace, the coverage provided by Trace's and the Company's liability insurance
and potential indemnity from the manufacturers of polyurethane covered breast
implants, management believes that the disposition of the matters that are
pending or that may reasonably be anticipated to be asserted should not have a
material adverse effect on either the Company's consolidated financial position
or results of operations. If management's assessment of the Company's liability
with respect to these actions is incorrect, such actions could have a material
adverse effect on the financial position, results of operations and cash flows
of the Company.
Litigation - Other
The Company is party to various other lawsuits, both as defendant and
plaintiff, arising in the normal course of business. It is the opinion of
management that the disposition of these lawsuits will not, individually or in
the aggregate, have a material adverse effect on the financial position or
results of operations of the Company. If management's assessment of the
Company's liability with respect to these actions is incorrect, such actions
could have a material adverse effect on the Company's consolidated financial
position.
13
<PAGE>
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
11. COMMITMENTS AND CONTINGENCIES (continued)
Environmental
The Company is subject to extensive and changing federal, state, local
and foreign environmental laws and regulations, including those relating to the
use, handling, storage, discharge and disposal of hazardous substances and the
remediation of environmental contamination, and as a result, is from time to
time involved in administrative and judicial proceedings and inquiries relating
to environmental matters. As of March 31, 2000, the Company had accruals of
approximately $4.5 million for environmental matters. During 1998, the Company
established an allowance of $1.2 million relating to receivables from Trace for
environmental indemnifications due to the financial difficulties of Trace.
The Clean Air Act Amendments of 1990 (the "1990 CAA Amendments") provide
for the establishment of federal emission standards for hazardous air pollutants
including methylene chloride, propylene oxide and TDI, materials used in the
manufacturing of foam. On December 27, 1996, the United States Environmental
Protection Agency (the "EPA") proposed regulations under the 1990 CAA Amendments
that will require manufacturers of slab stock polyurethane foam and foam
fabrication plants to reduce emissions of methylene chloride. The final National
Emission Standard for Hazardous Air Pollutants ("NESHAP") was promulgated
October 7, 1998. NESHAP requires a reduction of approximately 70% of the
emission of methylene chloride for the slab stock foam industry effective
October 7, 2001. The Company believes that the use of alternative technologies,
including VPFSM, which do not utilize methylene chloride and its ability to
shift current production to the facilities which use these alternative
technologies will minimize the impact of these regulations. The 1990 CAA
Amendments also may result in the imposition of additional standards regulating
air emissions from polyurethane foam manufacturers, but these standards have not
yet been proposed or promulgated.
The Company has reported to appropriate state authorities that it has
found soil and groundwater contamination in excess of state standards at three
facilities and soil contamination in excess of state standards at three other
facilities. The Company has begun remediation and is conducting further
investigations into the extent of the contamination at these facilities and,
accordingly, the extent of the remediation that may ultimately be required. The
actual cost and the timetable of any such remediation cannot be predicted with
any degree of certainty at this time. The Company has accruals of $3.3 million
for the estimated cost of completing remediation at these facilities. The
Company is in the process of addressing potential contamination at its
Morristown, Tennessee facility, and has submitted a sampling plan to the State
of Tennessee. The extent of the contamination and responsible parties, if any,
has not yet been determined. A former owner may be liable for cleanup costs;
nevertheless, the cost of remediation, if any, is not expected to be
significant.
Federal regulations required that by the end of 1998 all underground
storage tanks ("USTs") be removed or upgraded in all states to meet applicable
standards. The Company has upgraded all USTs at its facilities in accordance
with these regulations and recently completed the closure of remaining USTs at
two sites to meet applicable standards. Some petroleum contamination in soils
was found at one of the sites; the extent of the contamination is currently
being investigated. The Company has accrued approximately $0.5 million for the
estimated remediation costs associated with this site. However, the full extent
of contamination, and accordingly, the actual cost of such remediation, cannot
be predicted with any degree of certainty at this time. Based upon the
investigation conducted thus far, the Company believes that its USTs do not pose
a significant risk of environmental liability. However, there can be no
assurances that such USTs will not result in significant environmental liability
in the future.
On April 10, 1997, the Occupational Health and Safety Administration
promulgated new standards governing employee exposure to methylene chloride,
which is used as a blowing agent in some of the Company's manufacturing
processes. The phase-in of the standards was completed in 1999 and the Company
has developed and implemented a compliance program. Capital expenditures
required and changes in operating procedures are not anticipated to
significantly impact the Company's competitive position.
14
<PAGE>
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
11. COMMITMENTS AND CONTINGENCIES (continued)
The Company has been designated as a Potentially Responsible Party
("PRP") by the EPA with respect to seven sites. Estimates of total cleanup costs
and fractional allocations of liability are generally provided by the EPA or the
committee of PRP's with respect to the specified site. In each case and in the
aggregate, the liability of the Company is not considered to be significant.
Although it is possible that new information or future developments could
require the Company to reassess its potential exposure relating to all pending
environmental matters, including those described herein, the Company believes
that, based upon all currently available information, the resolution of such
environmental matters will not have a material adverse effect on the Company's
operations, financial position, capital expenditures or competitive position.
The possibility exists, however, that new environmental legislation and/or
environmental regulations may be adopted, or other environmental conditions may
be found to exist, that may require expenditures not currently anticipated and
that may be significant.
15
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Change in Control
Trace is a privately held company, which owned approximately 29% of the
Company's outstanding voting common stock at May 10, 2000, and whose former
Chairman also serves as the Company's Chairman. The Company's common stock owned
by Trace is pledged as collateral against certain of Trace's obligations.
Certain credit agreements and promissory notes of the Company's subsidiaries,
pursuant to which approximately $466.5 million of debt was outstanding as of
March 31, 2000, provide that a "change of control" would be an event of default
and could result in the acceleration of such indebtedness. "Change of control"
means, for this purpose, that (i) a person or related group, other than Trace,
beneficially owns more than 25% of the Company's outstanding voting stock and
(ii) such voting stock constitutes a greater percentage of such voting stock
than the amount beneficially owned by Trace. Additionally, certain indentures of
Foamex L.P. and FCC relating to senior subordinated notes of $248.0 million
contain similar "change of control" provisions, which require the issuers to
tender for such notes at a price in cash equal to 101% of the aggregate
principal amount thereof, plus accrued and unpaid interest thereon, if there is
such a "change of control".
On July 21, 1999, the Company was informed by Trace that it filed a
petition for relief under Chapter 11 of the Bankruptcy Code in Federal Court in
New York City. Subsequently, on January 24, 2000, an order was signed converting
the Trace bankruptcy from Chapter 11 to Chapter 7 of the Bankruptcy Code. A
trustee was appointed to oversee the liquidation of Trace's assets. Neither
Trace's bankruptcy filing nor the conversion to Chapter 7 constituted a "change
of control" under the provisions of the debt agreements described above. A
"change of control" could take place however, if the bankruptcy court allows
Trace's creditors to foreclose on and take ownership of the Company's common
stock owned by Trace, or otherwise authorizes a sale or transfer of these
shares, under circumstances in which a person or related group, other than
Trace, acquired more than 25% of the Company's outstanding voting stock and
owned a greater percentage of such voting stock than the amount beneficially
owned by Trace.
Management believes that it is unlikely that a "change of control" will
occur as a result of Trace's bankruptcy proceedings. However, the Company would
seek to resolve the issues that may arise should the "change of control"
provisions be triggered, by requesting waivers of such provisions and/or
refinancing certain debt, if necessary. There can be no assurance that the
Company or its subsidiaries will be able to do so, or that the Company will be
able to obtain waivers of such provisions. Such circumstances raise substantial
doubt about the Company's ability to continue as a going concern. The
accompanying financial statements were prepared on a going-concern basis and do
not include any adjustments that might result from the outcome of the Trace
bankruptcy filing.
Buyout Proposals
As previously reported in the Annual Report on Form 10-K for 1999, on
February 9, 2000, the Company announced that it was in discussions with respect
to a proposal involving the acquisition of all of the Company's outstanding
common stock for cash. On April 5, 2000, the Company announced that discussions
with the potential buyer were terminated with no agreement having been reached.
The Company subsequently terminated the engagement of J.P. Morgan, which acted
as financial advisor in connection with such transaction and is discussing with
JP Morgan the possibility of an additional engagement.
RESULTS OF OPERATIONS FOR THE QUARTER ENDED MARCH 31, 2000 COMPARED TO THE
QUARTER ENDED MARCH 31, 1999
<TABLE>
<CAPTION>
Carpet
Foam Cushion Automotive Technical
Products Products Products Products Other Total
(thousands)
Quarter ended March 31, 2000
<S> <C> <C> <C> <C> <C> <C>
Net sales $130,094 $60,046 $97,311 $27,454 $10,957 $325,862
Income (loss) from operations 12,778 (1,919) 7,166 7,504 (4,237) 21,292
Depreciation and amortization 3,928 2,175 1,203 643 767 8,716
Income (loss) from operations
as a percentage of net sales 9.8% (3.2%) 7.4% 27.3% n.m.* 6.5%
16
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Carpet
Foam Cushion Automotive Technical
Products Products Products Products Other Total
(thousands)
Quarter ended March 31, 1999
Net sales $140,869 $64,799 $88,771 $22,248 $ 6,176 $322,863
Income (loss) from operations 13,039 1,733 6,566 4,853 (4,879) 21,312
Depreciation and amortization 4,462 1,563 1,345 716 546 8,632
Income (loss) from operations
as a percentage of net sales 9.3% 2.7% 7.4% 21.8% n.m.* 6.6%
</TABLE>
* not meaningful
Income from Operations
Net sales for the first quarter of 2000 increased approximately 1.0% to
$325.9 million from $322.9 million in the first quarter of 1999. The increase
primarily reflected higher sales in the Automotive Products and Technical
Products segments and higher sales from certain of the Company's foreign
operations reported in the "Other" segment. Sales declines were recorded in the
Foam Products and Carpet Cushion Products segments.
Income from operations was $21.3 million in both the first quarter of
2000 and the first quarter of 1999. Results included restructuring and other
charges of $3.2 million in 2000 and $3.5 million in 1999. Restructuring and
other charges for the first quarter of 2000 are discussed further under "Other"
below. Excluding the restructuring and other charges for comparison purposes,
income from operations was $24.5 million for the first quarter of 2000 and $24.8
million in the first quarter of 1999. On this basis, income from operations was
7.5% of net sales in 2000 compared to 7.7% of net sales in 1999. The favorable
impact of cost savings initiatives implemented during 1999 was essentially
offset by higher raw material costs, increases to the allowance for
uncollectible accounts receivables and higher incentive compensation accruals.
Higher raw material costs reduced gross profit margins compared to the first
quarter of 1999 as the impact of higher oil costs began to filter through the
domestic economy. In response to the impact of higher oil costs, selling price
increases in certain product lines have been announced during the second quarter
of 2000.
Foam Products
Foam Products net sales for the first quarter of 2000 decreased 7.6% to
$130.1 million from $140.9 million in the first quarter of 1999. Lower sales
primarily reflected a volume decline in the consumer products market. The sales
decline translated in to a 2.0% decline in income from operations, from $13.0
million in the first quarter of 1999 to $12.8 million in the first quarter of
2000. Income from operations was 9.8% of net sales in 2000, up from 9.3% in
1999. The improvement largely reflected operating efficiencies, partially offset
by higher raw material costs.
Carpet Cushion Products
Carpet Cushion Products net sales for the first quarter of 2000 decreased
7.3% to $60.0 million from $64.8 million in the first quarter of 1999.
Competitive pressures continued in the first quarter of 2000, which resulted in
lower selling prices and lower sales volumes. As a result, a loss from
operations of $1.9 million was recorded in the first quarter of 2000 compared to
income from operations of $1.7 million in the first quarter of 1999. Improved
results in Carpet Cushion Products will depend on increased sales volume
anticipated during the seasonally stronger second and third quarters combined
with operating efficiencies.
Automotive Products
Automotive Products net sales for the first quarter of 2000 increased
9.6% to $97.3 million from $88.8 million in the first quarter of 1999. The
strong automotive market continues to fuel sales gains for lamination products.
Income from operations increased 9.1% to $7.2 million in the first quarter of
2000 from $6.6 million in the first quarter of 1999. Income from operations
represented 7.4% of net sales in 2000 and 1999.
17
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Technical Products
Technical Products net sales for the first quarter of 2000 increased
23.4% to $27.5 million from $22.2 million in the first quarter of 1999. Income
from operations increased 54.6% to $7.5 million in the first quarter of 2000
from $4.9 million in the first quarter of 1999. Income from operations
represented 27.3% of net sales in 2000, up from 21.8% in 1999. The improvement
was primarily driven by favorable market conditions that resulted in sales
volume growth, a higher-margin product mix and improved operating efficiencies.
Other
Other primarily consists of certain foreign manufacturing operations,
corporate expenses not allocated to business segments and restructuring and
other charges. The increase in net sales associated with this segment primarily
resulted from an increase in net sales from the Company's Mexico City operation.
The loss from operations of $4.2 million in the first quarter of 2000 was
primarily associated with the $3.2 million of restructuring and other charges
discussed below. The loss from operations in the first quarter of 1999 included
$3.5 million of restructuring and other charges.
During the first quarter of 2000, restructuring and other charges of
approximately $3.2 million were recorded. The provision included $2.1 million in
work force reduction costs for 30 employees, including certain executives and
employees impacted by the closure of certain operations related to increase the
VPF(SM) capacity in North Carolina. Additionally, facility closure cost totaled
$0.3 million and related equipment writedowns were $0.4 million. The first
quarter 2000 provision included $0.4 million related to changes in estimates to
prior year plans.
The Company paid $1.4 million during the first quarter of 2000 for the
various restructuring plans recorded as of December 31, 1999 and during the
first quarter of 2000. As of March 31, 2000, the components of the net accrued
restructuring and plant consolidation balance included, $9.8 million for plant
closures and leases and $4.2 million for personnel reductions. Included in
current assets was $1.5 million and in noncurrent assets was $3.8 million of
estimated proceeds for facilities actively being marketed for sale.
Substantially all employees impacted by the first quarter 2000 work force
reduction will be terminated by the end of the second quarter 2000.
Approximately $5.0 million is expected to be spent during the remainder of 2000.
Interest and Debt Issuance Expense
Interest and debt issuance expense totaled $18.6 million in the first
quarter of 2000, which represented a 5.3% increase from the first quarter 1999
expense of $17.7 million. The benefit of lower average debt levels was offset by
higher effective interest rates and increased amortization expense related to
additional debt issuance costs that were incurred during the first half of 1999.
Higher effective interest rates reflect market conditions as well as the impact
of certain provisions of the Foamex L.P. credit facility that resulted in a 25
basis point increase for the first quarter of 2000, as discussed in Note 8 to
the condensed consolidated financial statements.
Income from Equity Interest in Joint Venture
Income from an equity interest in an Asian joint venture totaled $0.3
million for the first quarter of 2000.
Other Income (Expense), Net
Other net expense recorded for the first quarter of 2000 totaled $0.9
million and primarily included costs incurred related to the buyout transaction,
discussed in Note 2 to the condensed consolidated financial statements. Included
in other net income in the first quarter of 1999 was a $4.2 million gain
recorded on the sale of the corporate aircraft.
Income Tax Expense
The effective tax rates in 2000 and 1999 reflected the partial reversal
of the deferred income tax asset valuation allowance recognized in 1998. The
valuation allowance was reduced to reflect the utilization of Federal
18
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
loss carryforwards that reduced the current tax component of the Federal tax
provision. Additionally, the valuation allowance was reduced to offset the net
deferred Federal tax liability generated in 2000 and 1999.
Net Income
Net income for the first quarter of 2000 was down 70.3% to $1.8 million
compared to $6.0 million in the first quarter of 1999. The decrease was largely
due to a $4.2 million gain recorded in 1999 from the sale of the corporate
aircraft.
Liquidity and Capital Resources
The Company's operations are conducted through its wholly owned
subsidiaries, Foamex L.P. and Foamex Carpet. The liquidity requirements of the
Company consist primarily of the operating cash requirements of its two
principal subsidiaries.
Foamex L.P.'s operating cash requirements consist principally of working
capital requirements, scheduled payments of principal and interest on
outstanding indebtedness and capital expenditures. The Company believes that
cash flow from Foamex L.P.'s operating activities, cash on hand and periodic
borrowings under its credit facility will be adequate to meet its liquidity
requirements. All principal and interest payments were made as scheduled in the
first quarter of 2000. The ability of Foamex L.P. to make distributions to the
Company is restricted by the terms of its financing agreements; therefore,
neither the Company nor Foamex Carpet is expected to have access to the cash
flow generated by Foamex L.P. for the foreseeable future.
Foamex Carpet's operating cash requirements consist principally of
working capital requirements, scheduled payments of principal and interest on
outstanding indebtedness and capital expenditures. The Company believes that
cash flow from Foamex Carpet's operating activities, cash on hand and periodic
borrowings under its credit facility will be adequate to meet its liquidity
requirements. The ability of Foamex Carpet to make distributions to the Company
is restricted by the terms of its financing agreements; therefore, neither the
Company nor Foamex L.P. is expected to have access to the cash flow generated by
Foamex Carpet for the foreseeable future.
Cash and cash equivalents totaled $5.0 million at the end of the first
quarter of 2000 compared to $6.6 million at the end of 1999. Working capital at
the end of the first quarter of 2000 was $113.0 million and the current ratio
was 1.6 to 1 compared to working capital at the end of 1999 of $105.6 million
and a current ratio of 1.6 to 1. Significant changes to the components of
working capital included an increase of $25.9 million in accounts receivable
that was partially offset by a $21.6 million increase in accounts payable.
Total debt at the end of the first quarter of 2000 was $744.2 million,
down $1.2 million from year-end 1999. During the first quarter of 2000, the
Foamex/GFI Note was repaid with borrowings under the Foamex L.P. revolving
credit facility. The $34.5 million letter of credit that was outstanding at
year-end 1999 to collateralize principal and interest payable under the
Foamex/GFI Note was also terminated.
As of March 31, 2000, there were $150.4 million of revolving credit
borrowings, at a weighted average interest rate of 9.95%, under the Foamex L.P.
credit facility with $19.6 million available for additional borrowings and $12.5
million of letters of credit outstanding. Borrowings by Foamex Canada Inc.
("Foamex Canada") as of March 31, 2000 were approximately $2.2 million, at an
interest rate of 7.75%, under Foamex Canada's revolving credit agreement with
unused availability of approximately $3.3 million. Foamex Carpet did not have
any outstanding borrowings under the Foamex Carpet credit facility at March 31,
2000, with unused availability of $14.8 million and approximately $0.2 million
in a letter of credit outstanding. As of March 31, 2000, the Company's
subsidiaries were in compliance with financial covenants of their loan
agreements.
Cash Flow from Operating Activities
Cash provided by operating activities was $5.9 million for the first
quarter of 2000 compared to cash used of $3.5 million in the first quarter of
1999. The improvement primarily reflected higher working capital requirements
during the first quarter of 1999.
19
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Cash Flow from Investing Activities
Capital expenditures during the first quarter of 2000 accounted for cash
used for investing activities of $5.1 million. In the first quarter of 1999,
cash flow provided by investing activities totaled $11.2 million primarily from
$16.3 million of proceeds from the sale of assets, partially offset by $6.0
million of capital expenditures. The Company expects capital expenditures for
2000 to be in excess of $30.0 million primarily as a result of the construction
of two new VPFSM machines. In addition, the Company is continuing to explore the
possible implementation of a new ERP software system.
Cash Flow from Financing Activities
Cash used for financing activities was $2.2 million for the first quarter
of 2000 compared to cash used of $13.5 million in the first quarter of 1999. As
discussed previously, the $34.0 million Foamex/GFI Note was repaid during the
quarter with borrowings under the Foamex L.P. revolving credit facility.
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 the
Company's operations, financial position, capital expenditures or competitive
position. The amount of liabilities recorded by the Company in connection with
environmental matters as of March 31, 2000 was $4.5 million. Although it is
possible that new information or future developments could require the Company
to reassess its potential exposure to all pending environmental matters,
including those described in Note 11 to the Company's condensed consolidated
financial statements for the quarter ended March 31, 2000, 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.
Market Risk
The Company's debt securities with variable interest rates are subject to
market risk for changes in interest rates. On March 31, 2000, indebtedness with
variable interest rates totaled $481.6 million. On an annualized basis, if the
interest rates on these debt instruments increased by 1.0%, interest expense
would increase by approximately $4.8 million.
Forward-Looking Statements
This report contains forward-looking statements and should be read in
conjunction with the discussion regarding forward-looking statements set forth
in the Company's Annual Report on Form 10-K for the year ended December 31,
1999.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
See the "Market Risk" section under Item 2, Management's Discussion and
Analysis of Financial Condition and Results of Operations.
20
<PAGE>
Part II - Other Information.
Item 1. Legal Proceedings.
Reference is made to the description of the legal proceedings
contained in the Company's Annual Report on Form 10-K for the year
ended December 31, 1999.
The information from Note 11 of the condensed consolidated financial
statements incorporated herein by reference.
Item 5. Other Information.
On April 10, 2000, John Televantos was named Chief Operating Officer
of the Company and was elected to the Board of Directors. Mr.
Televantos retained his responsibilities as President, Foam Business
Group.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
4.10.15- Amendment No. 2 dated February 18, 2000 to the Foamex
L.P. Credit Agreement as amended and restated as of
February 27, 1998 as further amended and restated as of
June 29, 1999 among Foamex L.P., FMXI, the institutions
from time to time party thereto as lenders, the
institutions from time to time party thereto as issuing
banks and Citicorp USA, Inc. and The Bank of Nova Scotia
as Administrative Agents.
4.10.16 - Amendment No. 4 to Foamex Carpet Credit Agreement, dated
February 18, 2000.
4.12.5 - Amendment to Promissory Note of Foamex Carpet in favor
of Foam Funding LLC dated as of February 18, 2000.
27 - Financial Data Schedule for the quarter ended
March 31, 2000.
(b) The Company filed the following Current Reports on Form 8-K for the
quarter ended March 31, 2000:
A report, dated February 9, 2000, was filed for Item 5. Other
Events, concerning preliminary merger discussions.
A report, dated March 2, 2000, was filed for Item 5. Other Events,
concerning a press release announcing its financial results for
the year ended December 31, 1999.
Subsequent to the end of the first quarter of 2000, a report dated
April 5, 2000, was filed for Item 5. Other Events, concerning the
termination of discussions involving a proposed buyout.
21
<PAGE>
SIGNATURES
Pursuant to the requirements 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.
FOAMEX INTERNATIONAL INC.
Date: May 12, 2000 By: /s/ Robert S. Graham, Jr.
-----------------------------
Robert S. Graham, Jr.
Senior Vice President,
Corporate Controller and Chief
Accounting Officer
[EXECUTION COPY]
AMENDMENT NO. 2 TO FOAMEX CREDIT AGREEMENT
This AMENDMENT TO FOAMEX CREDIT AGREEMENT, dated as of February 18, 2000
(this "Amendment"), amends in certain respects that certain Credit Agreement
dated as of June 12, 1997, as amended and restated as of February 27, 1998 as
further amended and restated as of June 29, 1999 (as amended, amended and
restated, supplemented or otherwise modified from time to time, the "Credit
Agreement") among Foamex L.P., a Delaware limited partnership ("Foamex" or the
"Borrower"), FMXI, Inc., a Delaware corporation and managing, general partner of
Foamex ("FMXI"), the institutions from time to time a party thereto as Lenders,
whether by execution of the Credit Agreement or an Assignment and Acceptance,
the institutions from time to time a party thereto as Issuing Banks, whether by
execution of the Credit Agreement or an Assignment and Acceptance, Citicorp USA,
Inc., a Delaware corporation ("Citicorp"), in its capacity as the collateral
agent for the Lenders and the Issuing Banks thereunder (in such capacity, the
"Collateral Agent") and The Bank of Nova Scotia ("Scotiabank"), in its capacity
as funding agent for the Lenders and Issuing Banks (in such capacity, the
"Funding Agent"; together with the Collateral Agent, the "Administrative
Agents").
W I T N E S S E T H:
WHEREAS, the Borrower (which has executed this Amendment) 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
Requisite Lenders and the Administrative Agents agree as follows:
SECTION 1. Defined Terms. Capitalized terms used herein and not otherwise
defined herein shall have the meanings provided to such terms in the Credit
Agreement.
SECTION 2. Amendments to the Credit Agreement. The Credit Agreement is
hereby amended as follows:
SECTION 2. 1. Amendment to Section 7.01 of the Credit Agreement. Clause (c)
of Section 7.01 of the Credit Agreement is hereby amended by inserting in the
penultimate line thereof, immediately after the language "for the fiscal year
ended December 31, 1999" the following:
", contain a going concern qualification,".
SECTION 3. Conditions to Effectiveness. This Amendment shall become
effective on the date (the "Effective Date") on which the following conditions
precedent have been satisfied (unless waived by the Requisite Lenders):
<PAGE>
(i) Documents. The Administrative Agents shall have received on or
before the Effective Date (A) this Amendment (x) duly executed by the
Borrower and the Lenders which constitute the Requisite Lenders and (y) in
form and substance satisfactory to the Requisite Lenders and (B) copies of
the draft PricewaterhouseCoopers audit opinion with respect to Foamex and
its Subsidiaries for the period ended December 31, 1999 (the "Audit
Opinion"), substantially in form and substance of Annex I attached hereto.
(ii) Contracts; 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.
(iii) No Legal Impediments. No law, regulation, order, judgment or
decree of any Governmental Authority shall, and neither Administrative
Agent shall have received, on or prior to the Effective Date, 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 Default. Both immediately before and after giving effect to
this Amendment, no Potential Event of Default or Event of Default shall
have occurred.
(v) Representations and Warranties. All of the representations and
warranties contained in Article VI 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.
SECTION 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.
SECTION 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.
SECTION 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 either Administrative Agent 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.
<PAGE>
SECTION 5.4. As of the Effective Date (after giving effect to this
Amendment), the Borrower is in compliance in all material respects with all
applicable terms, conditions and covenants of the Credit Agreement and other
Loan Documents.
SECTION 5.5. Upon delivery to Foamex by PricewaterhouseCoopers of the
originally executed Audit Opinion, if such Audit Opinion shall not be
substantially in the form and substance of Annex I hereto, such occurrence shall
constitute an Event of Default under the Credit Agreement, unless waived by the
Administrative Agents in their sole discretion.
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 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
WITHOUT REGARD TO NEW YORK CONFLICTS OF LAWS PRINCIPLES.
SECTION 8. Guarantor Consent. By its signature below, Foamex International
hereby (i) consents to this Amendment in its capacity as a guarantor under the
Foamex International Guaranty and (ii) 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.
[REMAFNDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
IN WITNESS WHEREOF, this Amendment has been duly executed as of the date
first above written.
BORROWER
FOAMEX L.P.
By: FMXI, Inc., Its Managing General
Partner
By /s/ George L. Karpinski
-----------------------
Name: George L. Karpinski
Title: Vice President
<PAGE>
FMXI, INC.
By /s/ George L. Karpinski
-----------------------
Name: George L. Karpinski
Title: Vice President
<PAGE>
FOAMEX INTERNATIONAL INC., as a guarantor
By /s/ George L. Karpinski
-----------------------
Name: George L. Karpinski
Title: Senior Vice President
<PAGE>
CITICORP USA, INC., as
Administrative Agent, Collateral
Agent, individually as a Lender,
and as Intercreditor Collateral Agent
By /s/ James R. Williams
---------------------
Name: James R. Williams
Title: Vice President
<PAGE>
CITIBANK, N.A., as Issuing Bank
By /s/ James R. Williams
---------------------
Name: James R. Williams
Title: Vice President
<PAGE>
THE BANK OF NOVA SCOTIA, as
Administrative Agent, Funding
Agent, Issuing Bank, individually
as a Lender, and as Intercreditor
Agent
By /s/ Brian S. Allen
------------------
Name: Brian S. Allen
Title: Managing Director
<PAGE>
AG CAPITAL FUNDING PARTNERS, L.P.
By /s/ Michael Gordon
-----------------
Name: Michael Gordon
Title: Authorized Signatory
<PAGE>
BALANCED HIGH-YIELD FUND I LTD.
By: BHF (USA) Capital Corporation
acting as Attorney-In-Fact
By
-----------------
Name:
Title:
By /s/ Perry Forman
-----------------
Name: Perry Forman
Title: Vice President
<PAGE>
BHF (USA) CAPITAL CORPORATION
By
-----------------
Name:
Title:
By /s/ Perry Forman
-----------------
Name: Perry Forman
Title: Vice President
<PAGE>
CERBERUS PARTNERS, L.P.
By /s/ Mark A. Neporent
--------------------
Name: Mark A. Newporent
Title: Managing Director
<PAGE>
COMMERCIAL LOAN FUNDING TRUST I
By: Lehman Commercial Paper Inc.,
not in its individual capacity, but
solely as Administrative Agent
By /s/ Michele Swanson
-------------------
Name: Michele Swanson
Title: Authorized Signatory
By
-------------------
Name:
Title:
<PAGE>
CREDIT INDUSTRIEL ET COMMERCIAL
By /s/ Brian O'Leary
------------------
Name: Brian O'Leary
Title: Vice President
By /s/ Sean Mounier
-----------------
Name: Sean Mounier
Title: First Vice President
<PAGE>
CREDIT LYONNAIS NEW YORK BRANCH
By /s/ Linda D. Tulloch
---------------------
Name: Linda D. Tulloch
Title: Vice President
<PAGE>
CYPRESSTREE INVESTMENT MANAGEMENT
COMPANY, INC.
As: Attorney-in-Fact and on behalf of
First Allmerica Financial Life
Insurance Company as Portfolio
Manager
By /s/ Philip C. Robbins
----------------------
Name: Philip C. Robbins
Title: Principal
<PAGE>
DELANO COMPANY
By: Pacific Investment Management
Company, as its Investment Advisor
By /s/ Raymond Kennedy
--------------------
Name: Raymond Kennedy
Title: Senior Vice President
By: PIMCO Management Inc., a general
partner
By /s/ Raymond Kennedy
--------------------
Name: Raymond Kennedy
Title: Senior Vice President
<PAGE>
GENERAL ELECTRIC CAPITAL CORPORATION
By /s/ Robert M. Kadlick
----------------------
Name: Robert M. Kadlick
Title: Duly Authorized Signatory
<PAGE>
IMPERIAL BANK
By: /s/ Ray Vadalma
---------------
Name: Ray Vadalma
Title: Senior Managing Director
<PAGE>
ING HIGH INCOME PRINCIPAL
PRESERVATIONS FUND HOLDINGS, INC.
By: ING Captial Advisors LLC, as
Investment Advisor
By: /s/ Michael J. Campbell
-----------------------
Name: Michael J. Campbell
Title: Senior Vice President and
Portfolio Manager
ARCHIMEDES FUNDING, L.L.C.
By: ING Captial Advisors LLC, as
Collateral Manager
By: /s/ Michael J. Campbell
-----------------------
Name: Michael J. Campbell
Title: Senior Vice President and
Portfolio Manager
<PAGE>
KZH CRESCENT LLC
By /s/ Peter Chin
---------------
Name: Peter Chin
Title: Authorized Agent
<PAGE>
KZH CRESCENT-2 LLC
By /s/ Peter Chin
---------------
Name: Peter Chin
Title: Authorized Agent
<PAGE>
KZH CYPRESSTREE-1 LLC
By /s/ Peter Chin
---------------
Name: Peter Chin
Title: Authorized Agent
<PAGE>
KZH LANGDALE LLC
By /s/ Peter Chin
---------------
Name: Peter Chin
Title: Authorized Agent
<PAGE>
KZH ING-1 LLC
By /s/ Peter Chin
---------------
Name: Peter Chin
Title: Authorized Agent
<PAGE>
KZH ING-2 LLC
By /s/ Peter Chin
---------------
Name: Peter Chin
Title: Authorized Agent
<PAGE>
KZH SOLEIL LLC
By /s/ Peter Chin
---------------
Name: Peter Chin
Title: Authorized Agent
<PAGE>
MASSACHUSETTS MUTUAL LIFE INSURANCE
COMPANY
By /s/ Steven J. Katz
-------------------
Name: Steven J. Katz
Title: Second Vice President
<PAGE>
MASSMUTUAL HIGH YIELD PARTNERS II, LLC
By: HYP MANAGEMENT INC. AS MANAGING
MEMBER
By /s/ Walter T. Dwyer
--------------------
Name: Walter T. Dwyer
Title: Vice President
<PAGE>
MERRILL LYNCH PIERCE FENNER & SMITH
By /s/ Keith Horn
---------------
Name: Keith Horn
Title: Managing Director
<PAGE>
THE MITSUBISHI TRUST AND BANKING
CORPORATION
By /s/ Toshihiro Hayashi
----------------------
Name: Toshihiro Hayashi
Title: Senior Vice President
<PAGE>
NATEXIS BANQUE, BFCE (formerly Banque
Francaise du Commerce Exterieur)
By /s/ Frank H. Madden, Jr.
-------------------------
Name: Frank H. Madden, Jr.
Title: Vice President and Group Manager
By /s/ Jordan Sadler
------------------
Name: Jordon Sadler
Title: Associate
<PAGE>
THE NORTHWESTERN MUTUAL LIFE
INSURANCE COMPANY
By /s/ Jerome R. Baier
-------------------
Name: Jerome R. Baier
Title: Its Authorized Representative
<PAGE>
NORTHWOODS CAPITAL LIMITED
By: Angelo, Gordon & Co.,
as Collateral Manager
By /s/ Michael Gordon
---------------
Name: Michael Gordon
Title: Authorized Signatory
<PAGE>
PILGRIM PRIME RATE TRUST
By: Pilgrim Investments, Inc., as
its Investment Manager
By /s/ Jason T. Groom
-------------------
Name: Jason T. Groom
Title: Assistant Vice President
<PAGE>
ROYALTON COMPANY
By: Pacific Investment Management
Company, as its Investment Advisor
By /s/ Raymond Kennedy
--------------------
Name: Raymond Kennedy
Title: Senior Vice President
By: PIMCO Management Inc., a general
partner
By /s/ Raymond Kennedy
--------------------
Name: Raymond Kennedy
Title: Senior Vice President
<PAGE>
VAN KAMPEN
PRIME RATE INCOME TRUST
By: Van Kampen Investment Advisory Corp.
By /s/ Darvin D. Pierce
---------------------
Name: Darvin D. Pierce
Title: Vice President
<PAGE>
VAN KAMPEN CLO I, LIMITED
By: Van Kampen AmericanManagement Inc.,
as Collateral Manager
By /s/ Darvin D. Pierce
---------------------
Name: Darvin D. Pierce
Title: Vice President
[EXECUTION COPY]
AMENDMENT NO. 4 TO CREDIT AGREEMENT
This AMENDMENT NO. 4 TO CREDIT AGREEMENT, dated as of February 18, 2000
(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
"Collatera1 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 (which has executed this Amendment) 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:
SECTION2.1. Amendment to Section 7.0l of the Credit Agreement. Clause (c)
of Section 7.01 of the Credit Agreement is hereby amended by (x) deleting clause
(iii) therein and (y) inserting in lieu thereof, the following:
"(iii) an opinion on such financial statements by
PricewaterhouseCoopers or such other independent certified public
accountants acceptable to the Administrative Agents, which opinion shall,
for the fiscal year ended December 31, 1999, contain a going concern
qualification, and for each fiscal year thereafter, be unqualified."
SECTION 3. Conditions to Effectiveness. This Amendment shall become
effective on the date hereof (the "Amendment Effective Date"), 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 Amendment Effective Date all of the following in form and
substance satisfactory to the Requisite Lenders:
<PAGE>
(a) this Agreement duly executed and in form and substance
satisfactory to the Requisite Lenders;
(b) such additional documentation as the Administrative Agents or any
of the Requisite Lenders may reasonably request; and
(c) copies of the draft PricewaterhouseCoopers audit opinion with
respect to New GFI for the period ended December 31, 1999, (the
"Audit Opinion"), substantially in form and substance of Annex I
attached hereto.
(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 i 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 the Borrower or any of its Subsidiaries and its subsidiaries
shall have occurred since December 31, 1998, which change, in the judgment
of the Lenders, will have or is reasonably likely to have a Material
Adverse Effect.
(v) No Default. After giving effect to this Amendment, 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 Amendment 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 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.
<PAGE>
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 Amendment Effective Date of, and after giving effect to, this
Amendment, the Borrower is in compliance in all material respects with all
applicable terms, conditions and covenants of the Credit Agreement and other
Loan Documents.
5.5 Upon delivery to New GFI by PricewaterhouseCoopers of the originally
executed Audit Opinion, if such Audit Opinion shall not be substantially in the
form and substance of Annex I hereto, such occurrence shall constitute an Event
of Default under the Credit Agreement.
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 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
(WITHOUT REGARD TO NEW YORK CONFLICT OF LAWS PRINCIPLES).
SECTION 8. Guarantor Consent. By its signature below, Foamex International
consents to this Amendment in its individual capacity, and as a guarantor under
the Foamex International Guaranty, and as a guarantor 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.
<PAGE>
IN WITNESS WHEREOF, this Amendment has been duly executed as of the date
first above written.
FOAMEX CARPET CUSHION, INC.
By /s/ George L. Karpinski
---------------------------
Name: George L. Karpinski
Title: Vice President
<PAGE>
FOAMEX INTERNATIONAL INC.
By /s/ George L. Karpinski
---------------------------
Name: George L. Karpinski
Title: Sr. Vice President
<PAGE>
CITICORP USA, INC., as Administrative
Agent, Collateral Agent, Intercreditor
Agent and individually as a Lender
By /s/ James R. Williams
-------------------------
Name: James R. Williams
Title: Vice President
<PAGE>
CITIBANK, N.A., as Issuing Bank
By /s/ James R. Williams
-------------------------
Name: James R. Williams
Title: Vice President
<PAGE>
THE BANK OF NOVA SCOTIA, as
Administrative Agent, Funding
Agent, Issuing Bank, individually
as a Lender, and as Intercreditor
Agent
By /s/ Brian S. Allen
----------------------
Name: Brian S. Allen
Title: Managing Director
[EXECUTION COPY]
AMENDMENT TO PROMISSORY NOTE
This AMENDMENT TO PROMISSORY NOTE dated as of February 18, 2000 (the
"Amendment"), amends in certain respects the Promissory Note dated as of
February 27, 1998 (as amended, amended and restated, supplemented or otherwise
modified from time to time, the "Promissory Note"), made by Foamex Carpet
Cushion, Inc. ("New GFI" or the "Promissor"), in favor of Foam Funding LLC
(f/k/a Trace Foam LLC, the "Promisee").
W I T N E S S E T H:
WHEREAS, the Promissor (which has executed the Promissory Note) has
requested of the Promisee, and the Promisee has agreed, to amend the Promissory
Note as set forth herein.
NOW, THEREFORE, in consideration of the above recitals, the Promissor and
the Promisee agree as follows:
SECTION 1. Defined Terms. Terms used herein and not otherwise defined
herein have the meanings given such terms in the Promissory Note.
SECTION 2. Amendments to the Promissory Note. The Promissory Note is hereby
amended as follows:
2.1. Amendment to Section 6.01(c). Clause (c) of Section 6.01 of the
Promissory Note is hereby amended by (x) deleting clause (iii) therein and (y)
inserting in lieu thereof, the following:
"(iii) an opinion on such financial statements by
PricewaterhouseCoopers or such other independent certified public
accountants acceptable to the Promissee, which opinion shall, for the
fiscal year ended December 31, 1999, contain a going concern qualification,
and for each fiscal year thereafter, be unqualified."
SECTION 3. Conditions to Effectiveness. This Amendment shall become
effective on the date hereof (the "Amendment Effective Date"), provided, that
the following conditions precedent have been satisfied (unless waived by the
Promisee or unless the deadline for delivery has been extended by the Promisee):
(i) Documents. The Promisee and the Collateral Agent (as defined
below) shall have received on or before the Effective Date all of the
following in form and substance satisfactory to the Promisee and Citicorp
USA, Inc., as collateral agent (the "Collateral Agent") under that certain
TFLLC Note Assignment and Security Agreement, dated as of February 27, 1998
(as amended, amended and restated, supplemented or otherwise modified from
time to time) made by the Promisee in favor of the Collateral Agent:
<PAGE>
(a) this Amendment duly executed and in form and substance
satisfactory to the Promisee;
(b) such additional documentation as the Promisee may reasonably
request; and
(c) copies of the draft PricewaterhouseCoopers audit opinion
with respect to New GFI for the period ended December 31,
1999, (the "Audit Opinion"), substantially in form and
substance of Annex I attached hereto.
(ii) Consents. The Promissor 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
Promissor 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 the Promisee shall not 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 the Promissor or any of its Subsidiaries and its subsidiaries
shall have occurred since December 31, 1998, which change, in the judgment
of the Promisee will have or is reasonably likely to have a Material
Adverse Effect.
(v) No Default. After giving effect to this Amendment, 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 5.01 of the Promissory Note and in any of
the Transaction Documents shall be true and correct in all material
respects on and as of the Amendment Effective Date.
SECTION 4. Representations and Warranties. The Promissor hereby represents
and warrants to the Promisee that (i) the execution, delivery and performance of
this Amendment by the Promissor are within the Promissor'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 the Promissor,
enforceable against the Promissor, 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.
<PAGE>
SECTION 5. Reference to and Effect on the Transaction Documents.
5.1. Upon the effectiveness of this Amendment, on and after the date hereof
each reference in the Promissory Note to "this Note", "this Agreement",
"hereunder", "hereof", "herein" or words of like import, and each reference in
any Transaction Documents, shall mean and be a reference to the Promissory Note
as amended hereby.
5.2. Except as specifically amended above, all of the terms of the
Promissory Note and all Transaction 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 the Promissor under the Promissory Note or any Transaction Document,
nor constitute a waiver of any provision of the Promissory Note or any
Transaction Document.
5.4. As of the Amendment Effective Date, after giving effect to this
Amendment, the Promissor is in compliance in all material respects with all
applicable terms, conditions and covenants of the Promissory Note and all
Transaction Documents.
5.5. Upon delivery to New GFI by PricewaterhouseCoopers of the originally
executed Audit Opinion, if such Audit Opinion shall not be substantially in the
form and substance of Annex I hereto, such occurrence shall constitute an Event
of Default under the Promissory Note.
SECTION 6. Miscellaneous. This Amendment is to be delivered to the
Collateral Agent and attached as an allonge to the Promissory Note.
SECTION 7. Execution in Counterparts. This Amendment may be executed in any
number of counterparts and by different parties hereto in separate counterparts,
each of which 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 8. 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
(WITHOUT REGARD TO NEW YORK CONFLICT OF LAWS PRINCIPLES).
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.
<PAGE>
IN WITNESS WHEREOF, this Amendment has been duly executed as of the date
first above written.
FOAMEX CARPET CUSHION, INC.
By /s/ George L. Karpinski
--------------------------
Name: George L. Karpinski
Title: Vice President
<PAGE>
FOAM FUNDING LLC
By /s/ Philip N. Smith, Jr.
----------------------------
Name: Philip N. Smith, Jr.
Title: Vice President
<PAGE>
CITICORP USA, INC., as Collateral Agent
By /s/ James R. Williams
-------------------------
Name: James R. Williams
Title: Vice President
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000912908
<NAME> FOAMEX INTERNATIONAL INC.
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-mos
<FISCAL-YEAR-END> Dec-31-2000
<PERIOD-START> Jan-01-2000
<PERIOD-END> Mar-31-2000
<EXCHANGE-RATE> 1
<CASH> 5,048
<SECURITIES> 0
<RECEIVABLES> 201,594
<ALLOWANCES> 9,088
<INVENTORY> 95,074
<CURRENT-ASSETS> 312,424
<PP&E> 387,770
<DEPRECIATION> 168,554
<TOTAL-ASSETS> 794,774
<CURRENT-LIABILITIES> 199,382
<BONDS> 723,659
0
0
<COMMON> 270
<OTHER-SE> (164,538)
<TOTAL-LIABILITY-AND-EQUITY> 794,774
<SALES> 325,862
<TOTAL-REVENUES> 325,862
<CGS> 282,526
<TOTAL-COSTS> 282,526
<OTHER-EXPENSES> 18,822
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 18,629
<INCOME-PRETAX> 2,024
<INCOME-TAX> 241
<INCOME-CONTINUING> 1,783
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,783
<EPS-BASIC> 0.07
<EPS-DILUTED> 0.07
</TABLE>
