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 quarterly period ended June 30, 1999
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
August 10, 1999 was 25,052,991.
Page 1 of 30
Exhibit List on Page 28 of 30
<PAGE>
FOAMEX INTERNATIONAL INC.
INDEX
Page
Part I. Financial Information:
Item 1. Financial Statements
Condensed Consolidated Statements of Operations
(unaudited) - Quarterly and Year to Date Periods
Ended June 30, 1999 and June 28, 1998 3
Condensed Consolidated Balance Sheets (unaudited) as of
June 30, 1999 and December 31, 1998 4
Condensed Consolidated Statements of Cash Flows
(unaudited) - Year to Date Periods Ended June 30,
1999 and June 28, 1998 5
Notes to Condensed Consolidated Financial Statements
(unaudited) 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 17
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 27
Part II. Other Information 28
Item 1. Legal Proceedings 28
Item 4. Submission of Matters to a Vote of Security Holders 28
Item 6. Exhibits and Reports on Form 8-K 28
Signatures 30
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
<TABLE>
<CAPTION>
Quarterly Periods Ended Year to Date Periods Ended
June 30, June 28, June 30, June 28,
1999 1998 1999 1998
(thousands except per share data)
<S> <C> <C> <C> <C>
NET SALES $ 313,029 $ 298,479 $ 635,892 $ 610,769
COST OF GOODS SOLD 269,252 243,513 548,518 506,233
--------- --------- --------- ---------
GROSS PROFIT 43,777 54,966 87,374 104,536
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 18,466 21,806 37,294 44,849
RESTRUCTURING AND OTHER CHARGES (CREDITS) 3,667 (700) 7,124 (700)
--------- --------- --------- ---------
INCOME FROM OPERATIONS 21,644 33,860 42,956 60,387
INTEREST AND DEBT ISSUANCE EXPENSE 17,675 17,281 35,371 34,808
OTHER INCOME (EXPENSE), NET (287) (1,046) 3,064 (1,745)
--------- --------- --------- ---------
INCOME BEFORE PROVISION FOR INCOME TAXES 3,682 15,533 10,649 23,834
PROVISION FOR INCOME TAXES 505 6,213 1,459 9,531
--------- --------- --------- ---------
INCOME BEFORE EXTRAORDINARY LOSS 3,177 9,320 9,190 14,303
EXTRAORDINARY LOSS ON EARLY
EXTINGUISHMENT OF DEBT,
NET OF INCOME TAXES -- (43) -- (1,917)
--------- --------- --------- ---------
NET INCOME $ 3,177 $ 9,277 $ 9,190 $ 12,386
========= ========= ========= =========
BASIC EARNINGS PER SHARE:
INCOME BEFORE EXTRAORDINARY LOSS $ 0.13 $ 0.37 $ 0.37 $ 0.58
EXTRAORDINARY LOSS -- -- -- (0.08)
--------- --------- --------- ---------
EARNINGS PER SHARE $ 0.13 $ 0.37 $ 0.37 $ 0.50
========= ========= ========= =========
WEIGHTED AVERAGE NUMBER OF SHARES 25,053 25,012 25,053 24,977
========= ========= ========= =========
DILUTED EARNINGS PER SHARE:
INCOME BEFORE EXTRAORDINARY LOSS $ 0.13 $ 0.36 $ 0.37 $ 0.55
EXTRAORDINARY LOSS -- -- -- (0.07)
--------- --------- --------- ---------
EARNINGS PER SHARE $ 0.13 $ 0.36 $ 0.37 $ 0.48
========= ========= ========= =========
WEIGHTED AVERAGE NUMBER OF SHARES 25,083 26,124 25,173 26,090
========= ========= ========= =========
</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>
June 30, December 31,
ASSETS 1999 1998
CURRENT ASSETS: (thousands, except number of shares)
<S> <C> <C>
Cash and cash equivalents $ 3,116 $ 12,572
Accounts receivable, net 190,383 185,158
Inventories 104,992 136,658
Other current assets 32,019 38,978
----------- -----------
Total current assets 330,510 373,366
PROPERTY, PLANT AND EQUIPMENT, NET 222,264 242,173
COST IN EXCESS OF ASSETS ACQUIRED, NET 218,279 220,934
DEBT ISSUANCE COSTS, NET 21,478 14,852
OTHER ASSETS 23,306 23,640
----------- -----------
TOTAL ASSETS $ 815,837 $ 874,965
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Short-term borrowings $ 4,700 $ 2,957
Current portion of long-term debt 13,022 690,248
Current portion of long-term debt - related party 10,830 98,935
Accounts payable 113,092 149,268
Accrued interest 9,908 7,851
Other accrued liabilities 68,266 79,178
----------- -----------
Total current liabilities 219,818 1,028,437
LONG-TERM DEBT 666,040 8,240
LONG-TERM DEBT - RELATED PARTY 83,717 --
OTHER LIABILITIES 39,557 42,407
----------- -----------
Total liabilities 1,009,132 1,079,084
----------- -----------
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 27,041,991 and 27,005,752 shares, respectively;
Outstanding 25,052,991 and 25,016,752 shares, respectively 270 270
Additional paid-in capital 87,239 86,990
Accumulated deficit (228,471) (237,661)
Accumulated other comprehensive income (23,910) (24,721)
Other (28,423) (28,997)
----------- -----------
Total stockholders' deficit (193,295) (204,119)
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 815,837 $ 874,965
=========== ===========
</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>
Year to Date Periods Ended
June 30, June 28,
1999 1998
--------- ---------
(thousands)
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 9,190 $ 12,386
Adjustments to reconcile net income to net cash provided
by (used for) operating activities:
Depreciation and amortization 16,798 16,770
Amortization of debt issuance costs, debt discount,
debt premium and deferred swap adjustments 193 23
Asset writedowns and other charges 2,073 --
Gain on sale of assets (4,217) --
Extraordinary loss on early extinguishment of debt -- 1,579
Other operating activities 6,534 11,481
Changes in operating assets and liabilities, net (12,259) (64,341)
--------- ---------
Net cash provided by (used for) operating activities 18,312 (22,102)
--------- ---------
INVESTING ACTIVITIES:
Capital expenditures (10,820) (15,482)
Acquisitions, net of cash acquired -- (4,399)
Proceeds from sale of assets 16,313 --
Other investing activities 924 (406)
--------- ---------
Net cash provided by (used for) investing activities 6,417 (20,287)
--------- ---------
FINANCING ACTIVITIES:
Net proceeds from short-term borrowings 1,743 722
Net proceeds from (repayments of) revolving loans (4,463) 82,426
Proceeds from long-term debt -- 129,000
Repayment of long-term debt (14,395) (132,767)
Repayment of long-term debt - related party (4,388) (4,800)
Dividend paid -- (1,246)
Cash overdrafts (4,938) --
Transfer of General Felt -- (23,898)
Debt issuance costs (7,993) (1,598)
Other financing activities 249 681
--------- ---------
Net cash provided by (used for) financing activities (34,185) 48,520
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (9,456) 6,131
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD 12,572 12,044
--------- ---------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 3,116 $ 18,175
========= =========
</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. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Foamex International Inc.'s (the "Company") condensed consolidated balance
sheet as of December 31, 1998 has been condensed from the audited consolidated
balance sheet at that date. The condensed consolidated balance sheet as of June
30, 1999, the condensed consolidated statements of operations for the quarterly
and year to date periods ended June 30, 1999 and June 28, 1998 and the condensed
consolidated statements of cash flows for the year to date periods ended June
30, 1999 and June 28, 1998 have been prepared by the Company and have not been
audited by the Company's independent accountants. In the opinion of management,
all adjustments, consisting only of normal recurring adjustments, considered
necessary for a fair presentation of the financial position, results of
operations and cash flows have been included.
Effective September 1998, management of the Company elected to change the
year-end reporting period from a fifty-two or fifty-three week fiscal year
ending on the Sunday closest to the end of the calendar year to a calendar year
ending December 31st to improve the internal reporting requirements. This change
was effective for the third fiscal quarter of 1998, which ended on September 30,
1998. As a result, the financial data for the quarterly and year to date periods
ended June 28, 1998 represent thirteen-week and twenty-six week periods,
respectively. The financial data for the quarterly and year to date periods
ended June 30, 1999 represent three and six month periods, respectively, and
include 91 and 181 calendar days, respectively.
Certain information and note disclosures normally included in the financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted in accordance with the rules and regulations of
the Securities and Exchange Commission. These condensed consolidated financial
statements should be read in conjunction with the Company's 1998 consolidated
financial statements and notes thereto as set forth in the Company's Annual
Report on Form 10-K for the year ended December 31, 1998.
The Company operates in the flexible polyurethane and advanced polymer foam
products industry. As of June 30, 1999, the Company's operations are conducted
through its wholly owned subsidiaries, Foamex L.P. and Foamex Carpet Cushion,
Inc. ("Foamex Carpet"), and consist of the following operating segments: (i)
foam products, (ii) carpet cushion products, (iii) automotive products, (iv)
technical products and (v) other, which primarily consists of certain foreign
manufacturing operations, corporate expenses not allocated to the other
operating segments and restructuring and other charges. The net sales and income
(loss) from operations of these operating segments for the quarterly and year to
date periods ended June 30, 1999 and June 28, 1998 are included in Note 9.
The accompanying condensed consolidated financial statements have been
prepared assuming the Company will continue as a going concern. For the year
ended December 31, 1998, the Company had a consolidated loss from continuing
operations and certain of its subsidiaries were not in compliance with certain
covenants contained in agreements governing approximately $480.4 million
principal amount of indebtedness. Had the lenders under these debt agreements
accelerated the maturity of their indebtedness as a result of the subsidiaries'
noncompliance, such acceleration would have constituted an event of default
under or given the holders the right to require the repurchase of substantially
all of the Company's subsidiaries' long-term debt. As a result of these factors,
the Company classified approximately $771.1 million of long-term debt at
December 31, 1998 as current in the accompanying condensed consolidated balance
sheet, which resulted in a working capital deficit. These matters raised
substantial doubt as of December 31, 1998 about the Company's ability to
continue as a going concern.
On June 30, 1999, certain of the Company's subsidiaries amended certain of
their debt agreements to, among other things, modify financial covenants and
provide for future measurement periods taking into account the subsidiaries
estimated future operating results and financial condition and management's
expectations regarding compliance with these covenants in future measurement
periods (see Note 4). For the year to date period ended June 30, 1999, the
Company had consolidated income from continuing operations and Foamex L.P. and
Foamex Carpet were in compliance with their debt covenants. As a result of these
factors and management's expectations regarding compliance with these covenants
in future measurement periods, the Company classified approximately $749.8
million of debt as long-term in the accompanying condensed consolidated balance
sheet at June 30, 1999 which resulted in positive working capital. The Company's
subsidiaries continue to be subject to certain "change of
6
<PAGE>
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
control" provisions under their debt agreements, which could result in an
acceleration of the related debt, as discussed below.
Trace International Holdings, Inc. ("Trace"), a privately held company,
owns approximately 46.1% of the Company's outstanding voting common stock.
Trace's 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. If Trace defaults on its indebtedness collateralized by the
Company's common stock and such creditors exercise their rights and remedies
under the related debt agreements, the "change of control" provisions of the
Company's subsidiaries' debt agreements may be triggered and substantially all
of the Company's subsidiaries' indebtedness may be accelerated. 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 on July 21, 1999. Trace's
bankruptcy filing does not automatically constitute a change of control under
the provisions of the debt agreements. See "Change of Control Provisions" in
Note 4.
2. INVENTORIES
Inventories consist of:
June 30, December 31,
1999 1998
-------- --------
(thousands)
Raw materials and supplies $ 69,701 $ 99,997
Work-in-process 12,879 12,188
Finished goods 22,412 24,473
-------- --------
Total $104,992 $136,658
======== ========
3. SALE OF ASSETS
On March 31, 1999, the Company sold its corporate airplane for $16.3
million in gross proceeds of which $8.9 million was used to repay debt
associated with the airplane. As specified by the terms of the Aircraft Sale,
Lease and Operating Agreement, pursuant to which the Company purchased the
airplane, Trace agreed to reimburse the Company to the extent the net proceeds
from the sale of the airplane were less than a specified amount, and the Company
was obligated to share the net proceeds in excess of such specified amount with
Trace. Pursuant to the terms of such agreement, the Company was obligated to pay
Trace approximately $0.6 million or approximately 50% of the "Excess Proceeds",
as defined, which was offset against Trace's obligation on two promissory notes
in favor of the Company. The Company recorded a net gain resulting from the sale
of the airplane of approximately $4.2 million, which is reflected in other
income (expense) in the accompanying condensed consolidated statement of
operations for the year to date period ended June 30, 1999.
4. LONG-TERM DEBT AND LONG-TERM DEBT - RELATED PARTY
The Company classified approximately $771.1 million of long-term debt as
current in the accompanying condensed consolidated balance sheet at December 31,
1998 as a result of various factors, including the fact that certain of the
Company's subsidiaries had received waivers for noncompliance with certain debt
covenants, which were only granted through June 30, 1999. On June 30, 1999,
certain of the Company's subsidiaries amended certain of their debt agreements
to, among other things, modify financial covenants as of June 30, 1999 and
provide for future measurement periods taking into account estimated future
operating results and financial condition and management's expectations
regarding these future measurement periods. For the year to date period ended
June 30, 1999, the Company had consolidated income from continuing operations
and Foamex L.P. and Foamex Carpet were in compliance with their debt covenants.
As a result of these factors and management's expectations regarding compliance
with these covenants in future measurement periods, the Company has classified
approximately $749.8 million of debt as long-term in the accompanying condensed
consolidated balance sheet at June 30, 1999. The Company's subsidiaries continue
to be subject to certain "change of control" provisions under their debt
agreements
7
<PAGE>
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
4. LONG-TERM DEBT AND LONG-TERM DEBT - RELATED PARTY (continued)
which could result in an acceleration of the related debt. See "Debt
Restrictions and Covenants" and "Change of Control Provisions" below.
Long-term debt consists of:
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
-------- --------
Foamex L.P. Amended Credit Facility: (thousands)
<S> <C> <C>
Term Loan B $ 82,294 $ 82,714
Term Loan C 74,812 75,194
Term Loan D 108,350 108,900
Revolving credit facility 130,384 139,438
Foamex Carpet revolving credit facility 4,591 --
9 7/8% Senior subordinated notes due 2007 150,000 150,000
13 1/2% Senior subordinated notes due 2005 (includes
$10,997 and $11,893 of unamortized debt premium) 108,997 109,893
Industrial revenue bonds 7,000 7,000
Subordinated note payable (net of unamortized
debt discount of $356 and $523) 4,320 6,491
Other 8,314 18,858
-------- --------
679,062 698,488
Less current portion 13,022 690,248
-------- --------
Long-term debt-unrelated parties $666,040 $ 8,240
======== ========
Long-term debt - related party consists of:
Foamex/GFI Note $ 34,000 $ 34,000
Note payable to Foam Funding LLC 60,547 64,935
-------- --------
94,547 98,935
Less current portion 10,830 98,935
-------- --------
Long-term debt - related party $ 83,717 $ --
======== ========
</TABLE>
During the quarterly periods ended June 30, 1999 and June 28, 1998, the
Company paid approximately $1.9 million and $1.6 million, respectively, to Foam
Funding LLC for interest on notes payable. During the year to date periods ended
June 30, 1999 and June 28, 1998, the Company paid approximately $3.7 million and
$2.3 million, respectively, for interest on the notes payable to Foam Funding
L.L.C.
Other Long-Term Debt
Approximately $8.9 million of the decrease in other long-term debt at June
30, 1999 from December 31, 1998 was due to the repayment of debt associated with
the Company's corporate airplane with a portion of the proceeds from the sale of
the airplane. (See Note 3.)
Debt Restrictions and Covenants
The indentures for the senior subordinated notes, the Foamex L.P. Credit
Agreement as amended on June 30, 1999 (the "Foamex L.P. Amended Credit
Facility"), the Foamex Carpet Credit Agreement as amended on June 30, 1999 (the
"Foamex Carpet Amended Credit Facility") and other indebtedness agreements
contain certain covenants that limit, among other things to varying degrees, the
ability of the Company's subsidiaries (a) to pay distributions or
8
<PAGE>
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
4. LONG-TERM DEBT AND LONG-TERM DEBT - RELATED PARTY (continued)
redeem partnership interests, (b) to make certain restrictive payments or
investments, (c) to incur additional indebtedness or issue Preferred Equity
Interest, as defined, (d) to merge, consolidate or sell all or substantially all
of its assets or (e) 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 (see "Change of Control Provisions" below)
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 and
interest, fixed charge and leverage coverage ratios, as defined.
The Foamex L.P. Amended Credit Facility modified the required limits for
the net worth and interest, fixed charge and leverage coverage ratios through
December 2006 and added an earnings before interest, taxes, depreciation and
amortization ("EBITDA") covenant requirement through September 30, 1999. Also,
effective January 1, 2000, the interest rate on outstanding borrowings under the
Foamex L.P. Amended Credit Facility will increase by 25 basis points each
quarter that Foamex L.P.'s leverage ratio exceeds 5.00 to 1.00. Once the
leverage ratio is reduced below this level, the cumulative amount of any 25
basis point adjustments to the interest rate on borrowings would be eliminated.
The weighted average interest rate on such borrowings was approximately 8.6% at
June 30, 1999. The Foamex L.P. Amended Credit Facility was also modified to no
longer permit Foamex L.P. to make certain cash payments, including the payment
of an annual management fee to a subsidiary of Trace (which aggregated $3.0
million for the year ended December 31, 1998) and distributions to the Company,
and to limit future investments in foreign subsidiaries and joint ventures. In
addition, the Foamex L.P. Amended Credit Facility modified the "change of
control" definition under the agreement (see "Change of Control Provisions"
below).
Foamex L.P. had previously amended its credit facility on March 11, 1999.
This amendment adjusted financial covenants, among other things, as of December
31, 1998 and provided for future measurement periods taking into account Foamex
L.P.'s estimated operating results and financial condition for 1998 and
management's expectations regarding future measurement periods. As Foamex L.P.'s
actual 1998 net loss was greater than originally estimated, on April 15, 1999
Foamex L.P. obtained a waiver through May 5, 1999, which was further extended on
May 6, 1999 through June 30, 1999, of the financial covenants contained in its
credit facility and certain events of default arising out of its Mexican
operations, in order to enable Foamex L.P. to negotiate a further amendment to
this agreement.
The Foamex Carpet Amended Credit Facility and the amendment to the note
payable to Foam Funding LLC modified the required limits for the net worth and
interest, fixed charge and leverage coverage ratios through February 2004 and
added an EBITDA covenant requirement through September 30, 1999. Also, effective
June 30, 1999, the interest rate on outstanding borrowings under the Foamex
Carpet Amended Credit Facility increased by 25 basis points. The weighted
average interest rate on such borrowings was approximately 9.24% at June 30,
1999. The Foamex Carpet Amended Credit Facility and the amendment to the note
payable to Foam Funding LLC also modified the "change of control" definition
under the agreements (see "Change of Control Provisions" below).
Foamex Carpet had previously amended its credit facility and the note
payable to Foam Funding LLC on March 12, 1999. These amendments adjusted
financial covenants, among other things, as of December 31, 1998 and provided
for future measurement periods taking into account Foamex Carpet's estimated
operating results and financial condition for 1998 and management's expectations
regarding future measurement periods. As the Foamex Carpet actual 1998 results
were lower than originally projected, on April 15, 1999 Foamex Carpet obtained
waivers through May 5, 1999, which were further extended on May 6, 1999 through
June 30, 1999, of the financial covenants contained in its credit facility and
the note payable to Foam Funding LLC, in order to enable Foamex Carpet to
negotiate further amendments to these agreements.
Certain of the Company's Mexican subsidiaries are in default of financial
covenant provisions contained in loan agreements with a Mexican bank as
negotiations continue to finalize amendments to the loan agreements to cure the
defaults. The defaults under the Mexican loan agreements do not have any cross
default consequences for the Company's domestic subsidiaries' debt agreements.
9
<PAGE>
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
4. LONG-TERM DEBT AND LONG-TERM DEBT - RELATED PARTY (continued)
Change of Control Provisions
Trace is a privately held company which owns approximately 46.1% of the
Company's outstanding voting common stock and whose 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
$495.0 million of debt was issued as of June 30, 1999, contain provisions that
would result in the acceleration of such indebtedness if Trace were to cease to
beneficially own at least 25% of the Company's outstanding voting common stock
and other persons or groups were to own a greater percentage of such voting
common stock than Trace. Additionally, certain indentures of Foamex L.P. and
Foamex Capital Corporation relating to senior subordinated notes of
approximately $248.0 million contain provisions that provide the holders of such
notes with the right to require the issuers to repurchase such notes at a price
in cash equal to 101% of the aggregate principal amount thereof, plus accrued
and unpaid interest thereon, if Trace were to cease to beneficially own at least
25% of the Company's outstanding voting common stock and other persons or groups
were to own a greater percentage of such voting common stock than Trace.
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 on July 21,
1999. Trace's bankruptcy filing does not constitute a change of control under
the provisions of the debt agreements unless 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, and Trace,
its affiliates and subsidiaries cease to own at least 25% of the Company's
outstanding voting common stock and other persons or groups own a greater
percentage of voting common stock than Trace.
The Company will seek to resolve the issues that may arise if the "change
of control" provisions are triggered in the future, including waivers of such
provisions and/or refinancing certain debt, if necessary. Although management
believes that its subsidiaries' debt obligations could be refinanced if
accelerated as a result of the "change of control" provisions under related debt
agreements, 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. The accompanying condensed consolidated financial statements do not
include any adjustments that might result from the outcome of these
uncertainties.
5. LITIGATION
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 compliant from counsel
of certain stockholders naming the Company and certain current and former
directors, which include allegations similar to those in the Second Amended
Complaint, as defined below. The Company has been advised by such counsel that
such stockholders intend to file an action shortly. The Company's Board of
Directors, in consultation with its special counsel, is in the process of
evaluating such communications and what actions, if any, to take with respect
thereto.
On April 26, 1999, a putative securities class action entitled Molitor v.
Foamex International Inc., et al., 99 Civ. 3004 (DC), 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. The defendants intend to vigorously defend the
action. On May 18, 1999, a similar action entitled Thomas W. Riley v. Foamex
10
<PAGE>
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
5. LITIGATION (continued)
International Inc., et al., 99 Civ. 3653 (DC) was filed in the same court. The
two actions have been consolidated. To date, no response to the complaint has
been made and no discovery or other proceedings has taken place.
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 Shareholders Litigation or that
arise out of the matters alleged by plaintiffs. Following the completion of the
confirmatory discovery which was provided for in the Memorandum of
Understanding, on September 9, 1998, the parties entered into a definitive
Stipulation of Settlement and the Court set a hearing for October 27, 1998 to
consider whether the settlement should be approved (the "Settlement Hearing").
In connection with the proposed settlement, the plaintiffs intended to apply for
an award of attorney's fees and litigation expenses in an amount not to exceed
$925,000, and the defendants agreed not to oppose this application.
Additionally, the Company agreed to pay the cost, if any, of sending notice of
the settlement to the Public Shareholders. On September 24, 1998, a Notice of
Pendency of Class Action, Proposed Settlement of Class Action and Settlement
Hearing was mailed to the members of the settlement class. On October 20, 1998,
the parties to the Shareholder Litigation requested that the Court cancel the
Settlement Hearing in light of the announcement made by Trace on October 16,
1998, that it had been unable to obtain the necessary financing for the
contemplated acquisition by Trace of the Company's common stock at a price of
$18.75 per share which was the subject matter of the proposed settlement. This
request was approved by the Court on October 21, 1998, and the Company issued a
press release on October 21, 1998, announcing that the Court had cancelled the
Settlement Hearing.
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.
11
<PAGE>
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
5. LITIGATION (continued)
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.
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.
The defendants have denied, and continue to deny, that they have committed
or have threatened to commit any violation of law or breaches of duty to
plaintiffs or the purported class or any breach of the Stipulation of
Settlement. The defendants intend to vigorously defend the Shareholder
Litigation. If the Shareholder Litigation is adversely determined, it could have
a material adverse effect on the financial position, results of operations and
cash flows of the Company.
In addition, on or about November 18, 1998, a putative class action was
filed in the United States District Court for the Eastern District of New York
on behalf of all persons who purchased common stock of the Company between March
16, 1998 and October 19, 1998, naming Trace as defendant and alleging that Trace
breached a contract between the putative class members and Trace. By order dated
January 8, 1999, the Court transferred the action to the United States District
Court for the Southern District of New York. Trace made a motion to dismiss the
action on February 8, 1999, which was granted during August 1999. Neither the
Company nor any of the individual directors of the Company are named as
defendants in this litigation.
As of August 9, 1999, the Company and Trace were two of multiple defendants
in actions filed on behalf of approximately 4,209 recipients of breast implants
in various United States federal and state courts and one Canadian provincial
court, some of which allege substantial damages, but most of which allege
unspecified damages for personal injuries of various types. Three of these cases
seek to allege claims on behalf of all breast implant recipients or other
allegedly affected parties, but no class has been approved or certified by the
court. In addition, three cases have been filed alleging claims on behalf of
approximately 39 residents of Australia, New Zealand, England, and Ireland. The
Company believes that the number of suits and claimants may increase. During
1995, the Company and Trace were granted summary judgments and dismissed as
defendants from all cases in the federal courts of the United States and the
state courts of California. Appeals for these decisions were withdrawn and the
decisions are final.
Although breast implants do not contain foam, certain silicone gel implants
were produced using a polyurethane foam covering fabricated by independent
distributors or fabricators from bulk foam purchased from the Company or Trace.
Neither the Company nor Trace recommended, authorized, or approved the use of
its foam for these purposes. The Company is also indemnified by Trace for any
such liabilities relating to foam manufactured prior to October 1990. Although
Trace has paid the Company's litigation expenses to date from insurance proceeds
Trace received, in light of Trace's recent filing under Chapter 11 of the
Bankruptcy Code, there can be no assurance that Trace will be able to continue
to provide such indemnification. While it is not feasible to predict or
determine the outcome of these actions, based on management's present assessment
of the merits of pending claims, after consultation with the general counsel of
Trace, and without taking into account indemnification provided by Trace,
12
<PAGE>
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
5. LITIGATION (continued)
the coverage provided by Trace and the Company's liability insurance and
potential indemnity from the manufacturers of polyurethane covered breast
implants, management believes that the disposition of matters that are pending
or that may reasonably be anticipated to be asserted should not have a material
adverse effect on either the Company's 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.
In November 1997, a complaint was filed in the United States District Court
for the Southern District of Texas alleging that various defendants, including
Crain, through the use of the CARDIO(R) process licensed from a third party,
infringed on a patent held by plaintiff. The Company is negotiating with the
licensor of the process for the assumption of the defense of the action by the
licensor, however, the action is in the preliminary stages, and there can be no
assurance as to the ultimate outcome of the action. Such action could have a
material adverse effect on the financial position, results of operations and
cash flows of the Company.
Other Litigation
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.
6. EARNINGS PER SHARE
The following table shows the amounts used in computing earnings per share
and the effect on income and the weighted average number of shares of dilutive
potential common stock.
<TABLE>
<CAPTION>
Quarterly Periods Ended Year to Date Periods Ended
June 30, June 28, June 30, June 28,
1999 1998 1999 1998
(thousands, except per share amounts)
<S> <C> <C> <C> <C>
Basic earnings per share:
Net income $ 3,177 $ 9,277 $ 9,190 $12,386
======= ======= ======= =======
Average common stock outstanding 25,053 25,012 25,053 24,977
======= ======= ======= =======
Basic earnings per share $ 0.13 $ 0.37 $ 0.37 $ 0.50
======= ======= ======= =======
Diluted earnings per share:
Net income available for common stock
and dilutive securities $ 3,177 $ 9,277 $ 9,190 $12,386
======= ======= ======= =======
Average common stock outstanding 25,053 25,012 25,053 24,977
Additional common shares resulting
from stock options and warrants 30 1,112 120 1,113
------- ------- ------- -------
Average common stock and dilutive
stock outstanding 25,083 26,124 25,173 26,090
======= ======= ======= =======
Diluted earnings per share $ 0.13 $ 0.36 $ 0.37 $ 0.48
======= ======= ======= =======
</TABLE>
13
<PAGE>
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
6. EARNINGS PER SHARE (continued)
On July 1, 1999, 116,745 warrants for an aggregate of 600,000 shares of
common stock expired without having been exercised.
7. COMPREHENSIVE INCOME
Comprehensive income for the periods noted below is comprised of the
following:
<TABLE>
<CAPTION>
Quarterly Periods Ended Year to Date Periods Ended
June 30, June 28, June 30, June 28,
1999 1998 1999 1998
(thousands)
<S> <C> <C> <C> <C>
Net income $ 3,177 $ 9,277 $ 9,190 $12,386
Foreign currency translation adjustments 399 3 811 230
------- ------- ------- -------
Total comprehensive income $ 3,576 $ 9,280 $10,001 $12,616
======= ======= ======= =======
</TABLE>
8. RESTRUCTURING AND OTHER CHARGES
The Company approved and began implementing a restructuring plan during the
first quarter of 1999 to reduce selling, general and administrative expenses and
other overhead costs. During the first quarter of 1999, the Company recorded
restructuring and other charges of approximately $3.5 million in connection with
this plan related primarily to severance in connection with replacing the
Company's former Chairman and Chief Executive Officer and work force reductions
of approximately 81 employees. During the second quarter of 1999, the Company
recorded additional restructuring and other charges of approximately $3.7
million. The $3.7 million of restructuring and other charges is comprised of
$1.3 million of severance costs in connection with additional work force
reductions of approximately 64 employees, $2.3 million of costs associated with
the closure of two additional manufacturing operations and facilities and $0.1
million of other charges. Approximately $2.5 million of severance costs incurred
in 1999 have been paid as of June 30, 1999. Approximately $1.5 million of the
total 1999 severance costs primarily relate to contractual severance costs
payable to the Company's former Chairman and Chief Executive Officer, which will
be paid through March 2001. The Company may record additional restructuring
charges in the future as it finalizes implementation of its restructuring plan.
9. OPERATING SEGMENT AND RELATED DATA
The Company reports information about its business segments on the basis of
how they are managed and evaluated by the chief operating decision-makers. Each
of the operating segments is headed by one or more executive vice presidents who
are responsible for developing plans and directing the operations of the
segment.
The Company's reportable business segments are foam products, carpet
cushion products, automotive products and technical products. The foam products
segment manufactures and markets foam used by the bedding, furniture and retail
industries. The carpet cushion products segment distributes prime, rebond,
sponge rubber and felt carpet cushion. The automotive products segment supplies
foam primarily for automotive interior applications to automotive manufacturers
and to industry sub suppliers. The technical products segment manufactures and
markets reticulated foams and other custom polyester and polyether foams for
industrial, specialty and consumer and safety applications.
The "other" column in the table below represents certain foreign
manufacturing operations that do not meet the quantitative threshold for
determining reportable segments, corporate expenses not allocated to other
operating segments and restructuring and other charges. Total asset information
by operating segment is not reported because many of the Company's facilities
produce products for multiple operating segments.
14
<PAGE>
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
9. OPERATING SEGMENT AND RELATED DATA (continued)
The accounting policies of the operating segments are the same as described
in the "Summary of Significant Accounting Policies" in Note 2 to the Company's
consolidated financial statements in its Annual Report on Form 10-K for the year
ended December 31, 1998. Revenues and costs have been included in operating
segments where specifically identified. Costs shared by operating segments have
been allocated on the basis of the amount utilized.
<TABLE>
<CAPTION>
Carpet
Foam Cushion Automotive Technical
Products Products Products Products Other Total
<S> <C> <C> <C> <C> <C> <C>
Quarterly period ended June 30, 1999:
Net sales $126,315 $ 66,081 $ 90,810 $ 23,028 $ 6,795 $313,029
Income (loss) from operations 12,831 1,234 5,789 6,017 (4,227) 21,644
Depreciation and amortization 4,381 1,497 1,280 667 341 8,166
Quarterly period ended June 28, 1998:
Net sales $133,422 $ 79,947 $ 61,923 $ 20,156 $ 3,031 $298,479
Income (loss) from operations 22,974 3,720 5,747 4,001 (2,582) 33,860
Depreciation and amortization 4,625 1,599 1,378 737 614 8,953
Year to date period ended June 30, 1999:
Net sales $267,184 $130,880 $179,581 $ 45,276 $ 12,971 $635,892
Income (loss) from operations 25,870 2,967 12,355 10,870 (9,106) 42,956
Depreciation and amortization 8,843 3,060 2,625 1,383 887 16,798
Year to date period ended June 28, 1998:
Net sales $283,037 $149,006 $127,604 $ 41,272 $ 9,850 $610,769
Income (loss) from operations 34,849 8,409 13,029 8,441 (4,341) 60,387
Depreciation and amortization 8,620 2,991 2,588 1,389 1,182 16,770
</TABLE>
10. RELATED PARTY TRANSACTIONS
Effective June 30, 1999, the Foamex L.P. Amended Credit Facility no longer
permits Foamex L.P. to pay a management fee to a subsidiary of Trace in
connection with a management agreement with the Trace subsidiary (the
"Management Agreement"). Such management fee was $3.0 million for the year ended
December 31, 1998. On July 29, 1999, Foamex L.P. submitted to the Trace
subsidiary formal notice of the termination of the Management Agreement, which
Foamex L.P. believes took place by informal action on June 29, 1999.
Foamex L.P. subleases certain space in its New York office to Trace (the
"New York Sublease"). Foamex L.P. gave notice on June 30, 1999 that if prior
unpaid rent under the New York Sublease was not paid, Foamex L.P. intended to
give notice pursuant to Article 7 of the New York Real Property Actions and
Proceedings Law (the "Notice") that the space be vacated by September 30, 1999.
However, as a result of Trace's bankruptcy filing and the imposition of the
automatic stay under Section 362 of the Bankruptcy Code, Foamex L.P. is not
permitted to give the Notice or otherwise pursue state law remedies for breach
of the New York Sublease without relief from the automatic stay. Under the
Bankruptcy Code, Trace has 60 days (which period may be extended for cause) to
determine whether to assume or reject the New York Sublease. Pending assumption
or rejection, Trace is required under the Bankruptcy Code to timely perform its
post-bankruptcy obligations under the New York Sublease.
11. SUBSEQUENT EVENT
On August 5, 1999, the Company announced that its Board of Directors signed
a letter of intent with Sorgenti Chemical Industries, LLC and Liberty Partners
Holdings 20, LLC (collectively, the "Purchasers") for a business combination
providing for $11.50 per share for all of the Company's outstanding common
stock, subject to due diligence, the execution of definitive agreements and
other conditions. Under the terms of the letter of intent, if the Company enters
into a business combination with another party, the Purchasers will be entitled
to a break-up fee of
15
<PAGE>
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
11. SUBSEQUENT EVENT (continued)
$6.0 million plus reimbursement of certain expenses. The buyout offer is subject
to a number of conditions, including the negotiation of definitive documents,
which will contain certain conditions relating to the bank credit facilities and
public debt of the Company's subsidiaries, as well as certain other conditions
relating to minimum shareholder acceptance and change of board membership, and
other provisions providing for a higher break-up fee and expense reimbursement
if the Company enters into a business combination providing a more favorable
transaction. The definitive buyout agreement will require appropriate filings
with the Securities and Exchange Commission and regulatory agencies.
Following the execution of the letter of intent, the Purchasers will
commence their due diligence investigation of the Company. The parties are
discussing the process by which waivers and/or consents from the holders of the
bank and public indebtedness of the Company will be sought in connection with
the buyout and will seek such to negotiate the terms of a definitive buyout
agreement prior to October 31, 1999.
16
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The Company operates in the flexible polyurethane and advanced polymer foam
products industry. As of June 30, 1999, the Company's operations are conducted
through its wholly owned subsidiaries, Foamex L.P. and Foamex Carpet and consist
of the following operating segments: (i) foam products, (ii) carpet cushion
products, (iii) automotive products, (iv) technical products and (v) other,
which primarily consists of certain foreign manufacturing operations, corporate
expenses not allocated to the other operating segments and restructuring and
other charges. Certain information in this report contains forward-looking
statements and should be read in conjunction with the discussion regarding
forward-looking statements set forth on page 4 of the Company's Annual Report on
Form 10-K for the year ended December 31, 1998.
The accompanying condensed consolidated financial statements have been
prepared assuming the Company will continue as a going concern. See Note 1 to
the accompanying condensed consolidated financial statements and "Liquidity and
Capital Resources" below.
On March 16, 1999, the Company announced that it hired John G. Johnson, Jr.
as President, Chief Executive Officer and director of the Company following the
resignation of Andrea Farace from the positions of Chairman of the Board, Chief
Executive Officer and director of the Company. The Company also announced that
it had hired JP Morgan Securities Inc. as a financial advisor to explore
strategic alternatives to maximize shareholder value. On May 26, 1999, the
Company announced major executive changes in connection with its ongoing
restructuring initiatives, which included the appointment of John Televantos, an
ARCO Chemical Company veteran, as President of the Foam Business Group.
On August 5, 1999, the Company announced that its Board of Directors signed
a letter of intent with the Purchasers for a business combination providing for
$11.50 per share for all of the Company's outstanding common stock, subject to
due diligence, the execution of definitive agreements and other conditions.
Under the terms of the letter of intent, if the Company enters into a business
combination with another party, the Purchasers will be entitled to a break-up
fee of $6.0 million plus reimbursement of certain expenses. The buyout offer is
subject to a number of conditions, including the negotiation of definitive
documents, which will contain certain conditions relating to the bank credit
facilities and public debt of the Company's subsidiaries, as well as certain
other conditions relating to minimum shareholder acceptance and change of board
membership, and other provisions providing for a higher break-up fee and expense
reimbursement if the Company enters into a business combination providing a more
favorable transaction. The definitive buyout agreement will require appropriate
filings with the Securities and Exchange Commission and regulatory agencies.
Following the execution of the letter of intent, the Purchasers will
commence their due diligence investigation of the Company. The parties are
discussing the process by which waivers and/or consents from the holders of the
bank and public indebtedness of the Company will be sought in connection with
the buyout and will seek such to negotiate the terms of a definitive buyout
agreement prior to October 31, 1999.
Restructuring Plan
The Company approved and began implementing a restructuring plan during the
first quarter of 1999 to reduce selling, general and administrative expenses and
other overhead costs. During the first quarter of 1999, the Company recorded
restructuring and other charges of approximately $3.5 million in connection with
this plan related primarily to severance in connection with replacing the
Company's former Chairman and Chief Executive Officer and work force reductions
of approximately 81 employees. During the second quarter of 1999, the Company
recorded additional restructuring and other charges of approximately $3.7
million. The $3.7 million of restructuring and other charges is comprised of
$1.3 million of severance costs in connection with additional work force
reductions of approximately 64 employees, $2.3 million of costs associated with
the closure of two additional manufacturing operations and facilities and $0.1
million of other charges. Approximately $2.5 million of severance costs incurred
in 1999 have been paid as of June 30, 1999. Approximately $1.5 million of the
total 1999 severance costs primarily relate to contractual severance costs
payable to the Company's former Chairman and Chief Executive Officer, which will
be paid through March 2001. The Company may record additional restructuring
charges in the future as it finalizes implementation of its restructuring plan.
17
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Acquisitions and Dispositions
On March 31, 1999, the Company sold its corporate airplane for $16.3
million in gross proceeds of which $8.9 million was used to repay debt
associated with the airplane. As specified by the terms of the Aircraft Sale,
Lease and Operating Agreement, pursuant to which the Company purchased the
airplane, Trace agreed to reimburse the Company to the extent the net proceeds
from the sale of the airplane were less than a specified amount, and the Company
was obligated to share the net proceeds in excess of such specified amount with
Trace. Pursuant to the terms of such agreement, the Company was obligated to pay
Trace approximately $0.6 million or approximately 50% of the "Excess Proceeds",
as defined, which was offset against Trace's obligation on two promissory notes
in favor of the Company. The Company recorded a net gain resulting from the sale
of the airplane of approximately $4.2 million, which is reflected in other
income (expense) in the accompanying condensed consolidated statement of
operations for the year to date period ended June 30, 1999.
General
The Company's automotive foam customers are predominantly original
equipment manufacturers or other automotive suppliers. As such, the sales of
these product lines are directly related to the overall level of passenger car
and light truck production in North America. Also, the Company's sales are
sensitive to sales of new and existing homes, changes in personal disposable
income and seasonality. The Company typically experiences two seasonally slow
periods during each year, in early July and in late December, due to scheduled
plant shutdowns and holidays.
The Company is subject to various internal and external factors which could
significantly impact its business, including, among other things, (a) the
Company's debt and capital structures, (b) the Crain Consolidation, (c)
additional raw material cost increases, if any, by the Company's chemical
suppliers, (d) the Company's success in passing on to its customers selling
price increases to recover such raw material cost increases, (e) fluctuations in
interest rates, and (f) Trace's financial condition, including the potential of
triggering the "change of control" provisions of the Company's subsidiaries'
debt agreements, and other such factors which may be beyond the Company's
control. Refer to page 4 of the Company's Annual Report on Form 10-K for the
year ended December 31, 1998 for a discussion of these and additional factors
which management believes may impact the Company. These factors could cause
future results to differ materially from historical trends and management's
current expectations and could impact the Company's ability to continue as a
going concern. Although the Company believes its subsidiaries can meet the debt
covenant requirements under their financing agreements, there can be no
assurance such covenants will be met and the related indebtedness will continue
to be classified as long term. Although management believes that its
subsidiaries' debt obligations could be refinanced if accelerated as a result of
the "change of control" provisions under related debt agreements, 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. Additionally,
although the Company believes that consolidated cash flow from its operating
activities, cash on hand and periodic borrowings under the Foamex L.P. Amended
Credit Facility and the Foamex Carpet Amended Credit Facility, if necessary,
will be adequate to meet the Company's liquidity requirements, there can be no
assurance that the Company's internally generated funds and funds from any
borrowings will prove to be sufficient to fund the Company's operations and
permit it to continue as a going concern.
RESULTS OF OPERATIONS
The Company reports information about its business segments on the basis of
how they are managed and evaluated by the chief operating decision-makers. Each
of the operating segments is headed by one or more executive vice presidents who
are responsible for developing plans and directing the operations of the
segment.
The Company's reportable business segments are foam products, carpet
cushion products, automotive products and technical products. The foam products
segment manufactures and markets foam used by the bedding, furniture and retail
industries. The carpet cushion products segment distributes prime, rebond,
sponge rubber and felt carpet cushion. The automotive products segment supplies
foam primarily for automotive interior applications to automotive manufacturers
and to industry sub suppliers. The technical products segment manufactures and
markets
18
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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 that do not meet the quantitative threshold for
determining reportable segments, corporate expenses not allocated to the other
operating segments and restructuring and other charges. Total asset information
by operating segment is not reported because many of the Company's facilities
produce products for multiple operating segments.
<TABLE>
<CAPTION>
Carpet
Foam Cushion Automotive Technical
Products Products Products Products Other Total
<S> <C> <C> <C> <C> <C> <C>
Quarterly period ended June 30, 1999:
Net sales $126,315 $ 66,081 $ 90,810 $ 23,028 $ 6,795 $313,029
Income (loss) from operations 12,831 1,234 5,789 6,017 (4,227) 21,644
Depreciation and amortization 4,381 1,497 1,280 667 341 8,166
Quarterly period ended June 28, 1998:
Net sales $133,422 $ 79,947 $ 61,923 $ 20,156 $ 3,031 $298,479
Income (loss) from operations 22,974 3,720 5,747 4,001 (2,582) 33,860
Depreciation and amortization 4,625 1,599 1,378 737 614 8,953
Year to date period ended June 30, 1999:
Net sales $267,184 $130,880 $179,581 $ 45,276 $ 12,971 $635,892
Income (loss) from operations 25,870 2,967 12,355 10,870 (9,106) 42,956
Depreciation and amortization 8,843 3,060 2,625 1,383 887 16,798
Year to date period ended June 28, 1998:
Net sales $283,037 $149,006 $127,604 $ 41,272 $ 9,850 $610,769
Income (loss) from operations 34,849 8,409 13,029 8,441 (4,341) 60,387
Depreciation and amortization 8,620 2,991 2,588 1,389 1,182 16,770
</TABLE>
Quarterly Period Ended June 30, 1999 Compared to Quarterly Period Ended June 28,
1998
Net sales for the second quarter of 1999 were $313.0 million as compared to
$298.5 million in the second quarter of 1998, an increase of $14.5 million or
4.9%. The increase in net sales was primarily associated with an increase in
automotive lamination products, which was offset by decreased sales due to the
closure of several plants in connection with the Crain Consolidation and reduced
carpet cushion selling prices. Income from operations decreased $12.2 million or
36.1% to $21.6 million for the second quarter of 1999 from $33.9 million in the
second quarter of 1998. The decrease in income from operations resulted
primarily from (a) restructuring costs of $4.4 million recorded during the
second quarter of 1999 and (b) a decrease in gross profit of $11.2 million
resulting primarily from increased raw material costs, reductions in carpet
cushion selling prices and a shift in product mix resulting from lower sales of
foam products offset by an increase in lower margin automotive lamination sales,
offset in part by a decrease in selling, general and administrative expenses of
$3.3 million. The decrease in selling, general and administrative costs was
primarily due to the elimination of duplicative costs from the Crain
Consolidation and cost reductions implemented during the first and second
quarters of 1999.
Foam Products
Foam products net sales for the second quarter of 1999 decreased 5.3% to
$126.3 million from $133.4 million in the second quarter of 1998. The decrease
in net sales was primarily associated with the closure of several plants as part
of the Crain Consolidation. Income from operations decreased 44.1% to $12.8
million (10.2% of net sales) for the second quarter of 1999 from $22.9 million
(17.2% of net sales) in the second quarter of 1998. The decrease in income from
operations was primarily the result of increased raw material costs and the
decrease in net sales, offset in part by improved operating efficiencies and
cost reductions as part of the Crain Consolidation.
19
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Carpet Cushion Products
Carpet cushion products net sales for the second quarter of 1999 decreased
17.3% to $66.1 million from $80.0 million in the second quarter of 1998
primarily due to reductions in carpet cushion selling prices and decreased units
sold. Income from operations decreased 66.8% to $1.2 million (1.9% of net sales)
for the second quarter of 1999 from $3.7 million (4.7% of net sales) in the
second quarter of 1998. The decrease was primarily the result of increased raw
material costs and the decrease in net sales.
Automotive Products
Automotive products net sales for the second quarter of 1999 increased
46.6% to $90.8 million from $61.9 million in the second quarter of 1998. The
increase in net sales was associated with increased volume of lamination
products. Income from operations increased 0.7% to $5.8 million (6.4% of net
sales) for the second quarter of 1999 from $5.7 million (9.3% of net sales) in
the second quarter of 1998. This increase was primarily a result of the increase
in net sales offset in part by contract price reductions and the change in
product mix to more laminated products which have lower margins than other
automotive products.
Technical Products
Technical products net sales for the second quarter of 1999 increased 14.2%
to $23.0 million from $20.2 million in the second quarter of 1998. Income from
operations increased 50.4% to $6.0 million (26.1% of net sales) for the second
quarter of 1999 from $4.0 million (19.9% of net sales) in the second quarter of
1998. The increase in net sales and income from operations was primarily
associated with increased sales of foam for ink jet printers.
Other
Other primarily consists of certain foreign manufacturing operations,
corporate expenses not allocated to the other operating segments and
restructuring and other charges. The increase in net sales associated with this
segment primarily resulted from an increase in net sales from the Company's
Mexican operations. The decrease in income (loss) from operations was primarily
associated with the $3.7 million of restructuring and other charges recorded in
the second quarter of 1999 discussed previously.
Income Before Provision for Income Taxes
Income before provision for income taxes decreased to $3.7 million for the
second quarter of 1999 as compared to $15.5 million in the second quarter of
1998. This decrease is primarily due to the decrease in income from operations
of $12.2 million discussed above.
Income Taxes
The second quarter 1999 effective tax rate was 13.7% compared to 40.0% in
the second quarter of 1998. Included in the 1999 effective rate was recognition
of taxes on foreign operations and state income taxes for those states with no
or limited provisions for net operations loss carryforwards.
The lower rate in 1999 reflected the utilization of Federal net operating
loss carryforwards that offset the Federal tax expense on 1999 income.
Utilization of net operating loss carryforwards was recognized as a reduction in
the deferred tax asset valuation allowance established at year-end 1998.
Year to Date Period Ended June 30, 1999 Compared to Year to Date Period Ended
June 28, 1998
Net sales for the year to date period ended June 30, 1999 were $635.9
million as compared to $610.8 million in the year to date period ended June 28,
1998, an increase of $25.1 million or 4.1%. The increase in net sales was
primarily associated with the increase in automotive lamination products, which
was offset by decreased sales due to the closure of several plants in connection
with the Crain Consolidation. Income from operations decreased $17.4 million, or
28.9%, to $43.0 million for the year to date period ended June 30, 1999 from
$60.4 million in the year to
20
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
date period ended June 28, 1998. The decrease in income from operations resulted
primarily from (a) restructuring costs recorded during the year to date period
ended June 30, 1999 of $7.1 million and (b) a decrease in gross profit of $17.2
million resulting primarily from increased raw material costs, reductions in
carpet cushion selling prices and a shift in product mix resulting from lower
sales of foam products offset by an increase in lower margin automotive
lamination sales, offset in part by a decrease in selling, general and
administrative expenses of $7.6 million. The decrease in selling, general and
administrative costs was primarily due to the elimination of duplicative costs
from the Crain Consolidation and cost reductions implemented during the first
and second quarters of 1999. The Company recorded a net gain of approximately
$4.2 million on the sale of its airplane during the first quarter of 1999, which
is reflected in other income (expense). See "Acquisitions and Dispositions."
Foam Products
Foam products net sales for the year to date period ended June 30, 1999
decreased 5.6% to $267.2 million from $283.0 million in the year to date period
ended June 28, 1998. The decrease in net sales was primarily associated with the
closure of several plants as part of the Crain Consolidation. Income from
operations decreased 25.8% to $25.9 million (9.7% of net sales) for the year to
date period ended June 30, 1999 from $34.8 million (12.3% of net sales) in the
year to date period ended June 28, 1998. The decrease in income from operations
was primarily the result of increased raw material costs and the decrease in net
sales, offset in part by improved operating efficiencies and cost reductions as
part of the Crain Consolidation.
Carpet Cushion Products
Carpet cushion products net sales for the year to date period ended June
30, 1999 decreased 12.2% to $130.9 million from $149.0 million in the year to
date period ended June 28, 1998 primarily due to reductions in carpet cushion
selling prices and decreased units sold. Income from operations decreased 64.7%
to $3.0 million (2.3% of net sales) for the year to date period ended June 30,
1999 from $8.4 million (5.6% of net sales) in the year to date period ended June
28, 1998. The decrease was primarily the result of increased raw material costs
and the decrease in net sales.
Automotive Products
Automotive products net sales for the year to date period ended June 30,
1999 increased 40.7% to $179.6 million from $127.6 million in the year to date
period ended June 28, 1998. The increase in net sales was associated with
increased volume of lamination products. Income from operations decreased 5.2%
to $12.4 million (6.9% of net sales) for the year to date period ended June 30,
1999 from $13.0 million (10.2% of net sales) in the year to date period ended
June 28, 1998. This decrease was primarily a result of contract price reductions
and the change in product mix to more laminated products which have lower
margins than other automotive products.
Technical Products
Technical products net sales for the year to date period ended June 30,
1999 increased 9.7% to $45.3 million from $41.3 million in the year to date
period ended June 28, 1998. Income from operations increased 28.8% to $10.9
million (24.0% of net sales) for the year to date period ended June 30, 1999
from $8.4 million (20.5% of net sales) in the year to date period ended June 28,
1998. The increase in net sales and income from operations was primarily
associated with increased sales of foam for ink jet printers.
Other
Other primarily consists of certain foreign manufacturing operations,
corporate expenses not allocated to the other operating segments and
restructuring and other charges. The increase in net sales associated with this
segment primarily resulted from an increase in net sales from the Company's
Mexican operations. The decrease in income (loss) from operations was primarily
associated with the $7.1 million of restructuring and other charges recorded in
the year to date period ended June 30, 1999 discussed previously.
21
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Income before Provision for Income Taxes
Income before provision for income taxes decreased to $10.6 million for the
year to date period ended June 30, 1999 as compared to $23.8 million in the year
to date period ended June 28, 1998. This decrease is primarily due to the
decrease in income from operations of $17.4 million discussed above, offset by
an increase of approximately $4.8 million in other income (expense), net,
primarily resulting from a net gain of $4.2 million in connection with the sale
of the corporate airplane during the first quarter of 1999.
Income Taxes
The year to date 1999 effective tax rate was 13.7% compared to 40.0% in the
second quarter of 1998. Included in the 1999 effective rate was recognition of
taxes on foreign operations and state income taxes for those states with no or
limited provisions for net operating loss carryforwards.
The lower rate in 1999 reflected the utilization of Federal net operating
loss carryforwards that offset the Federal tax expense on 1999 income.
Utilization of net operating loss carryforwards was recognized as a reduction in
the deferred tax asset valuation allowance established at year-end 1998.
Extraordinary Loss
The extraordinary loss on early extinguishment of debt in 1998 of $1.9
million (net of $1.3 million income tax benefit) was primarily associated with
the write-off of debt issuance costs in connection with a series of transactions
designed to simplify the Company's structure and to provide future operational
flexibility.
Liquidity and Capital Resources
Liquidity
The Company is a holding company whose operations are conducted through its
wholly owned subsidiaries, Foamex L.P. and Foamex Carpet. The liquidity
requirements of the Company consist primarily of the operating cash requirements
of its two principal subsidiaries.
Foamex L.P.'s operating cash requirements consist principally of working
capital requirements, scheduled payments of principal and interest on
outstanding indebtedness and capital expenditures. The Company believes that
cash flow from Foamex L.P.'s operating activities, cash on hand and periodic
borrowings under the Foamex L.P. Amended Credit Facility, if necessary, will be
adequate to meet Foamex L.P.'s liquidity requirements. The ability to meet such
liquidity requirements could be impaired if Foamex L.P. were to fail to comply
with covenants contained in the Foamex L.P. Amended Credit Facility and such
noncompliance was not cured by Foamex L.P. or waived by the lenders. Foamex L.P.
obtained various waivers and amendments under its credit facility in March, May
and June 1999 and was in compliance with the covenants under the Foamex L.P.
Amended Credit Facility as of June 30, 1999. See Note 4 to the accompanying
condensed consolidated financial statements. Foamex L.P. incurred aggregate
financing fees of approximately $3.5 million in connection with the March and
June 1999 amendments. These financing fees will be amortized along with
previously paid financing fees through December 2006, the remaining term of the
Foamex L.P. Amended Credit Facility. 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 the Foamex Carpet Amended Credit Facility, if necessary, will
be adequate to meet Foamex Carpet's liquidity requirements. The ability to meet
such liquidity requirements could be impaired if Foamex Carpet were to fail to
comply with covenants contained in the Foamex Carpet Amended Credit Facility and
other financing arrangements and such noncompliance was not cured by Foamex
Carpet or waived by the lenders. Foamex Carpet obtained various waivers and
amendments under its credit facility and other financing arrangements in March,
May and June 1999 and was in compliance with the covenants under the Foamex
Carpet Amended Credit Facility and other financing arrangements
22
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
as of June 30, 1999. See Note 4 to the accompanying condensed consolidated
financial statements. Foamex Carpet incurred aggregate financing fees of
approximately $4.5 million in connection with the March and June 1999
amendments. These financing fees will be amortized along with previously paid
financing fees through February 2004, the remaining term of the Foamex Carpet
Amended Credit Facility. 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.
The accompanying condensed consolidated financial statements have been
prepared assuming the Company will continue as a going concern. For the year
ended December 31, 1998, the Company had a consolidated loss from continuing
operations and certain of its subsidiaries were not in compliance with certain
covenants contained in agreements governing approximately $480.4 million
principal amount of indebtedness. Had the lenders under these debt agreements
accelerated the maturity of their indebtedness as a result of the subsidiaries'
noncompliance, such acceleration would have constituted an event of default
under or given the holders the right to require the repurchase of substantially
all of the Company's subsidiaries' long-term debt. As a result of these factors,
the Company classified approximately $771.1 million of long-term debt at
December 31, 1998 as current in the accompanying condensed consolidated balance
sheet, which resulted in a working capital deficit. These matters raised
substantial doubt as of December 31, 1998 about the Company's ability to
continue as a going concern.
On June 30, 1999, certain of the Company's subsidiaries amended certain of
their debt agreements to, among other things, modify financial covenants and
provides for future measurement periods taking into account estimated future
operating results and financial condition and management's expectations
regarding these future measurement periods. See Note 4 to the accompanying
condensed consolidated financial statements. For the year to date period ended
June 30, 1999, the Company had consolidated income from continuing operations
and Foamex L.P. and Foamex Carpet were in compliance with their debt covenants.
As a result of these factors and management's expectations regarding compliance
with these covenants in future measurement periods, the Company has classified
approximately $749.8 million of debt as long-term in the accompanying condensed
consolidated balance sheet at June 30, 1999, which resulted in positive working
capital. The Company's subsidiaries continue to be subject to certain "change of
control" provisions under their debt agreements which could result in an
acceleration of the related debt.
Certain of the Company's Mexican subsidiaries are in default of financial
covenant provisions contained in loan agreements with a Mexican bank as
negotiations continue to finalize amendments to the loan agreements to cure the
defaults. The defaults under the Mexican loan agreements do not have any cross
default consequences for the Company's domestic subsidiaries' debt agreements.
Trace is a privately held company which owns approximately 46.1% of the
Company's outstanding voting common stock and whose 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
$495.0 million of debt was issued as of June 30, 1999, contain provisions that
would result in the acceleration of such indebtedness if Trace were to cease to
beneficially own at least 25% of the Company's outstanding voting common stock
and other persons or groups were to own a greater percentage of such voting
common stock than Trace. Additionally, certain indentures of the Foamex L.P. and
Foamex Capital Corporation relating to senior subordinated notes of
approximately $248.0 million contain provisions that provide the holders of such
notes with the right to require the issuers to repurchase such notes at a price
in cash equal to 101% of the aggregate principal amount thereof, plus accrued
and unpaid interest thereon, if Trace were to cease to beneficially own at least
25% of the Company's outstanding voting common stock and other persons or groups
were to own a greater percentage of such voting common stock than Trace.
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 on July 21,
1999. Trace's bankruptcy filing does not constitute a change of control under
the provisions of the debt agreements unless 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, and Trace,
its affiliates and subsidiaries cease to own at least 25% of the Company's
outstanding voting common stock and other persons or groups own a greater
percentage of voting common stock than Trace.
23
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The Company will seek to resolve the issues that may arise if the "change
of control" provisions are triggered in the future, including waivers of such
provisions and/or refinancing certain debt, if necessary. Although management
believes that its subsidiaries' debt obligations could be refinanced if
accelerated as a result of the "change of control" provisions under related debt
agreements, 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. The accompanying condensed consolidated financial statements do not
include any adjustments that might result from the outcome of these
uncertainties.
As of June 30, 1999, there were $130.4 million of revolving credit
borrowings, at an average interest rate of 8.34%, under the Foamex L.P. Amended
Credit Facility with $12.0 million available for additional borrowings and
approximately $47.6 million of letters of credit outstanding which are supported
by the Foamex L.P. Amended Credit Facility. Borrowings by Foamex Canada Inc. as
of June 30, 1999 were approximately $4.7 million, at an interest rate of 6.75%,
under Foamex Canada Inc.'s revolving credit agreement with unused availability
of approximately $0.7 million. Foamex Carpet had approximately $4.6 million of
outstanding borrowings under the Foamex Carpet Amended Credit Facility at June
30, 1999, at an interest rate of 9.24%, with unused availability of $9.9 million
and approximately $0.5 million of letters of credit outstanding which are
supported by the Foamex Carpet Amended Credit Facility.
Cash and cash equivalents decreased to $3.1 million at June 30, 1999 from
$12.6 million at December 31, 1998 due primarily to cash used for financing
activities primarily for the repayment of debt and for debt issuance costs and
cash used for capital expenditures, offset by cash generated from operating
activities and from the sale of the corporate airplane. Excluding the
reclassification of long-term debt to current at December 31, 1998, working
capital decreased $5.3 million to $110.7 million at June 30, 1999 from $116.0
million at December 31, 1998 primarily due to the decrease in cash offset by the
increase in net operating assets and liabilities, as discussed below. Net
operating assets and liabilities (comprised of accounts receivable, inventories
and accounts payable) increased $9.7 million to $182.3 million at June 30, 1999
as compared to $172.6 million at December 31, 1998. The increase was primarily
due to a $5.2 million increase in accounts receivable and a $36.2 million
decrease in accounts payable offset by a $31.7 million decrease in inventories.
The increase in accounts receivable was primarily associated with an increase in
sales during June 1999 as compared to December 1998. The decrease in inventories
was primarily due to increased second quarter 1999 sales and due to the December
31, 1998 inventory balance including significant purchases of raw materials at
year-end. The decrease in accounts payable is primarily associated with the
timing of payments to vendors and the decrease in inventories from December 31,
1998 to June 30, 1999.
Cash Flow from Operating Activities
Cash flow provided by operating activities was $18.3 million for the year
to date period ended June 30, 1999 as compared to cash used of $22.1 million for
the year to date period ended June 28, 1998. The improvement is primarily due to
a decrease in cash used for operating assets and liabilities for the year to
date period ended June 30, 1999 as compared to the corresponding period in 1998.
Cash Flow from Investing Activities
Cash flow provided by investing activities was $6.4 million for the year to
date period ended June 30, 1999 as compared to cash used of $20.3 million for
the year to date period ended June 28, 1998. This increase was due primarily to
(i) a decrease in capital expenditures of $4.7 million in 1999, (ii) gross
proceeds in 1999 of $16.3 million from the sale of the Company's corporate
airplane and (iii) cash used in 1998 of $4.4 million for certain acquisition
payments.
During 1999, the Company spent approximately $10.8 million on capital
improvements as compared to $15.5 million for 1998. The 1999 expenditures were
primarily for recurring capital replacement additions. The 1998 expenditures
included: (i) finalization of the expansion and modernization of a facility in
Orlando, Florida to improve manufacturing efficiencies, (ii) installation of
more efficient foam production line systems and fabricating equipment in a
number of manufacturing facilities and (iii) installation of flame laminators to
support the increased volume of automotive laminated products. The Company
expects to continue to reduce capital expenditures from historical levels for
the foreseeable future.
24
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Cash Flow from Financing Activities
Financing activity required $34.2 million for the first half of 1999.
Financing requirements primarily included debt repayments. Additionally, $8.0
million of debt issuance costs was incurred and $4.9 million of cash overdrafts
were outstanding on June 30, 1999.
During the first half of 1998, financing activity provided $48.5 million
that was primarily attributable to a series of transactions associated with the
transfer of certain assets of General Felt Industries, Inc.
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 June 30, 1999 was $4.7 million. Although it is
possible that new information or future developments could require the Company
to reassess its potential exposure to all pending environmental matters,
including those described in the footnotes to the Company's consolidated
financial statements for the year ended December 31, 1998, the Company believes
that, based upon all currently available information, the resolution of all such
pending environmental matters will not have a material adverse effect on the
Company's operations, financial position, capital expenditures or competitive
position. See Note 17 to the Company's consolidated financial statements
included in the Company's Annual Report on Form 10-K for the year ended December
31, 1998.
Market Risk
The Company's debt securities with variable interest rates are subject to
market risk for changes in interest rates. On June 30, 1999, long-term debt with
variable interest rates totaled $514.5 million. On an annualized basis, if the
interest rates on these debt instruments increased by 1%, interest expense would
increase by approximately $5.1 million.
Inflation
There was no significant impact on the Company's operations as a result of
inflation during the periods presented. In some circumstances, market conditions
or customer expectations may prevent the Company from increasing the price of
its products to offset the inflationary pressures that may increase its costs in
the future.
Year 2000 Compliance
The Company uses numerous business information systems as well as
manufacturing support systems that could be impacted by the "Year 2000 Problem."
The Year 2000 Problem arises from computer programs that were written using two
digits rather than four to designate the year. In connection with the Year 2000
Problem, date-sensitive computer software may recognize a date using "00" as the
year 1900 rather than the year 2000. This could result in system failures or
miscalculations, which would cause significant operational disruptions.
The Company has a Year 2000 Executive Sponsor Team comprised of
representatives of the Company. The Year 2000 Executive Sponsor Team is
providing direction to and receiving reports from the Year 2000 Steering
Committee (the "Steering Committee") within the organization. The Steering
Committee has completed an assessment of the state of readiness of the
Information Technology ("IT") and non-IT systems of the Company. These
assessments cover desktop computers, environmental systems, manufacturing
systems (including laboratory information systems) field instrumentation, and
significant third party vendor and supplier systems, which include employee
compensation and benefit plan maintenance systems. The Steering Committee is
also in the process of assessing the readiness of the Company's significant
customers and suppliers.
The Year 2000 assessment process for each facility consists of an inventory
of Year 2000 sensitive equipment, an assessment of the impact of possible
failures, determination of required remediation actions, if any, and testing and
implementation of these solutions. The inventory, assessment, remediation and
testing phases were
25
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
completed at the end of 1998, with fail safe testing and final implementation
currently taking place in 1999. The progress of these phases as of June 30, 1999
is summarized below.
The Company completed the inventory and assessment phases of the project by
December 31, 1998. These phases consisted of a visit to each critical location
by team members to promote awareness of the project and verify the initial
inventory provided by the contact at each facility. Testing plans were developed
which included correspondence with suppliers regarding date-sensitive devices.
In addition, local management was advised of their roles and responsibilities in
connection with the Year 2000 Problem.
The Company completed the remediation and testing of critical business
information computer systems as of December 31, 1998. The completion of these
phases included the modification of several million lines of system code, the
conversion of the systems acquired from Crain to standard business information
computer systems, upgrading system hardware and operating system software,
testing of the applicable systems in a development testing area, and the
migration of the remediated systems into the production environment.
The Company estimates it will spend $2.0 million in connection with the
Year 2000 Problem. The spending estimate will be refined as phases of the
project are completed. Spending on the Year 2000 Problem is funded by cash
generated from operations.
Management believes that all significant systems controlled by the Company
will be Year 2000 ready in the latter half of 1999. While the Steering Committee
is communicating readiness to third party customers, as requested, and is
assessing the readiness of critical suppliers, there can be no assurance that
third parties with a significant business relationship will successfully test,
reprogram, and replace all of their IT and non-IT systems on a timely basis. As
part of the overall response to the Year 2000 Problem, the Company is in the
process of developing contingency plans in the event of Year 2000 non-compliance
of certain systems or third parties. Details of such contingency plans will be
determined after the Steering Committee has completed its assessment of its
supply chain, other third parties and the potential for possible failures.
There is inherent uncertainty in connection with the Year 2000 Problem due
to the possibility of unanticipated failures by third party customers and
suppliers. Accordingly, the Company is unable, at this time, to assess the
extent and resulting materiality of the impact of possible Year 2000 failures on
its operations, liquidity or financial position. The Year 2000 assessment,
remediation, and testing process continues to provide information in order to
reduce the level of uncertainty regarding the impact of the Year 2000 Problem.
Management believes that if the Company's solutions to the Year 2000 Problem are
completed as scheduled; such solutions may help minimize the possibility of
significant disruptions to the Company's operations.
26
<PAGE>
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.
27
<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, 1998.
The information from Note 5 of the condensed consolidated financial
statements of the Company as of June 30, 1999 (unaudited) is
incorporated herein by reference.
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its Annual Meeting of Shareholders on May 27, 1999. At the
meeting, shareholders elected seven directors and ratified the selection of
PricewaterhouseCoopers LLP as the Company's independent accountant for the year
ending December 31, 1999.
All seven of the Company's directors had terms that expired during 1999 and
stood for re-election this year. Each of the directors received a majority of
the votes necessary for re-election, as noted below, and thus were each
re-elected to serve for one-year terms and until their successors have been duly
elected and qualified:
Director For Withhold Authority
------------------- ---------- ------------------
Marshall S. Cogan 21,142,645 1,707,197
Etienne Davignon 21,420,383 1,429,459
John H. Gutfreund 21,811,020 1,038,822
Robert J. Hay 21,811,177 1,038,665
Stuart J. Hershon 21,790,605 1,059,237
John G. Johnson, Jr 22,177,508 672,334
John V. Tunney 21,798,440 1,051,402
As a result of the elections, the term of office of each of the directors
listed above continued after the meeting.
PricewaterhouseCoopers LLP received a majority of the votes necessary for
ratification as the Company's independent accountant for the year ending
December 31, 1999, as noted below:
For Against Abstentions Broker Non-Votes
22,392,125 451,882 5,835 2,166,910
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule for the year to date period ended
June 30, 1999.
(b) The Company filed the following Current Reports on Form 8-K since
December 31, 1998 through the date of this report:
Form 8-K, dated as of January 8, 1999 reporting the termination
of the Second Merger Agreement.
Form 8-K, dated as of March 11, 1999 reporting press release
involving preliminary earnings, appointment of John G. Johnson,
Jr. and amendments to credit agreements, guarantee and promissory
notes.
28
<PAGE>
Form 8-K, dated as of April 16, 1999 reporting update to
preliminary earnings.
Form 8-K, dated as of June 30, 1999 reporting amendments to
aspects of the Company's subsidiaries' credit agreements.
Form 8-K, dated August 5, 1999 reporting press release of
proposed buyout.
29
<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: August 13, 1999 By: /s/ George L. Karpinski
---------------------------------
George L. Karpinski
Senior Vice President, Treasurer
and Assistant Secretary
30
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