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 March 31, 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 May 12,
1999 was 25,052,991.
Page 1 of 23
Exhibit List on Page 22 of 23
<PAGE>
FOAMEX INTERNATIONAL INC.
<TABLE>
<CAPTION>
<S> <C>
INDEX
Page
Part I. Financial Information:
Item 1. Financial Statements
Condensed Consolidated Statements of Operations (unaudited) - Quarterly Periods Ended
March 31, 1999 and March 29, 1998 3
Condensed Consolidated Balance Sheets (unaudited) as of March 31, 1999
and December 31, 1998 4
Condensed Consolidated Statements of Cash Flows (unaudited) - Quarterly Periods Ended
March 31, 1999 and March 29, 1998 5
Notes to Condensed Consolidated Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations 14
Part II. Other Information 22
Item 1. Legal Proceedings 22
Item 6. Exhibits and Reports on Form 8-K 22
Signatures 23
</TABLE>
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
March 31, March 29,
1999 1998
(thousands, except per share amounts)
<S> <C> <C>
NET SALES $ 322,863 $ 312,290
COST OF GOODS SOLD 279,266 262,720
--------- ---------
GROSS PROFIT 43,597 49,570
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 18,828 23,043
RESTRUCTURING AND OTHER CHARGES 3,457 --
--------- ---------
INCOME FROM OPERATIONS 21,312 26,527
INTEREST AND DEBT ISSUANCE EXPENSE 17,696 17,527
OTHER INCOME (EXPENSE), NET 3,351 (699)
--------- ---------
INCOME BEFORE PROVISION FOR INCOME TAXES 6,967 8,301
PROVISION FOR INCOME TAXES 954 3,318
--------- ---------
INCOME BEFORE EXTRAORDINARY LOSS 6,013 4,983
EXTRAORDINARY LOSS ON EARLY EXTINGUISHMENT
OF DEBT, NET OF INCOME TAXES -- (1,874)
--------- ---------
NET INCOME $ 6,013 $ 3,109
========= =========
BASIC EARNINGS (LOSS) PER SHARE:
INCOME BEFORE EXTRAORDINARY LOSS $ 0.24 $ 0.20
EXTRAORDINARY LOSS -- (0.08)
--------- ---------
EARNINGS PER SHARE $ 0.24 $ 0.12
========= =========
WEIGHTED AVERAGE NUMBER OF SHARES 25,053 24,942
========= =========
DILUTED EARNINGS (LOSS) PER SHARE:
INCOME BEFORE EXTRAORDINARY LOSS $ 0.24 $ 0.19
EXTRAORDINARY LOSS -- (0.07)
--------- ---------
EARNINGS PER SHARE $ 0.24 $ 0.12
========= =========
WEIGHTED AVERAGE NUMBER OF SHARES 25,263 25,603
========= =========
</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>
March 31, December 31,
ASSETS 1999 1998
CURRENT ASSETS: (thousands, except number of shares)
<S> <C> <C>
Cash and cash equivalents $ 6,762 $ 12,572
Accounts receivable, net 195,237 185,158
Inventories 117,641 136,658
Other current assets 34,635 38,978
----------- -----------
Total current assets 354,275 373,366
PROPERTY, PLANT AND EQUIPMENT, NET 231,470 242,173
COST IN EXCESS OF ASSETS ACQUIRED, NET 219,678 220,934
DEBT ISSUANCE COSTS, NET 18,064 14,852
OTHER ASSETS 23,556 23,640
----------- -----------
TOTAL ASSETS $ 847,043 $ 874,965
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Short-term borrowings $ 3,493 $ 2,957
Current portion of long-term debt 688,464 690,248
Current portion of long-term debt - related party 97,180 98,935
Accounts payable 127,007 149,268
Accrued interest 8,296 7,851
Other accrued liabilities 77,086 79,178
----------- -----------
Total current liabilities 1,001,526 1,028,437
LONG-TERM DEBT -- 8,240
OTHER LIABILITIES 42,388 42,407
----------- -----------
Total liabilities 1,043,914 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 (231,648) (237,661)
Accumulated other comprehensive income (24,309) (24,721)
Other (28,423) (28,997)
----------- -----------
Total stockholders' deficit (196,871) (204,119)
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 847,043 $ 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>
Quarterly Periods Ended
March 31, March 29,
1999 1998
(thousands)
OPERATING ACTIVITIES:
<S> <C> <C>
Net income $ 6,013 $ 3,109
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 8,632 7,817
Amortization of debt issuance costs, debt discount,
debt premium and deferred swap agreements (60) 261
Gain on sale of assets (4,217) --
Extraordinary loss on early extinguishment of debt -- 1,608
Other operating activities 128 5,114
Changes in operating assets and liabilities, net (14,007) (37,757)
--------- ---------
Net cash used for operating activities (3,511) (19,848)
--------- ---------
INVESTING ACTIVITIES:
Capital expenditures (6,026) (7,201)
Acquisitions, net of cash acquired -- (3,321)
Proceeds from sale of assets 16,313 --
Deposit for defeasance of indebtedness -- (4,809)
Other investing activities 924 (460)
--------- ---------
Net cash provided by (used for) investing activities 11,211 (15,791)
--------- ---------
FINANCING ACTIVITIES:
Net proceeds from short-term borrowings 536 (716)
Net proceeds from revolving loans 461 69,973
Proceeds from long-term debt -- 129,000
Repayment of long-term debt (10,222) (127,083)
Repayment of long-term debt - related party (1,755) --
Dividend paid -- (1,246)
Cash overdrafts 963 --
Transfer of General Felt -- (28,698)
Debt issuance cost (3,742) (1,149)
Other financing activities 249 433
--------- ---------
Net cash provided by (used for) financing activities (13,510) 40,514
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (5,810) 4,875
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD 12,572 12,044
--------- ---------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 6,762 $ 16,919
========= =========
</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 March 31, 1999, the condensed consolidated statements of operations
and cash flows for quarterly periods ended March 31, 1999 and March 29, 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. Fiscal year 1997 was composed of fifty-two weeks and ended on December 28,
1997. As a result, the quarterly financial data for the quarterly period ended
March 29, 1998 represents a thirteen-week period. The first quarter of 1999
ended on March 31, 1999, the end of the third full month of 1999, and included
91 calendar days.
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 March 31, 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
periods ended March 31, 1999 and March 29, 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 loss from continuing operations, a
working capital deficit and certain of the Company's subsidiaries were not in
compliance and do not expect to be in compliance for future periods with certain
debt covenants for which these subsidiaries are seeking amendments. The
Company's subsidiaries received waivers from the lenders under the various
senior debt instruments through May 5, 1999, which were subsequently extended on
May 6, 1999 through June 30, 1999, for the covenants for which the Company's
subsidiaries were not in compliance. Non-compliance under these debt agreements
provides the lenders under the agreements, which have an aggregate outstanding
principal balance of approximately $478.0 million at March 31, 1999, with the
right, upon notice and lapse of time, to declare all of such indebtedness to be
due. Notwithstanding the fact that to date, the lenders have not exercised such
rights and have granted waivers of such covenants through June 30, 1999 to
enable the Company's subsidiaries to negotiate amendments of such covenants;
there can be no assurance that such amendments will be obtained. Were the
lenders under these agreements to accelerate the maturity of their indebtedness,
such acceleration would constitute an event of default and all of the Company's
long-term debt would become due. As a result, the Company has reclassified
approximately $767.2 million and $771.1 million of long-term debt as current in
the accompanying condensed consolidated balance sheets at March 31, 1999 and
December 31, 1998, respectively. These matters raise substantial doubt about the
Company's ability to continue as a going concern.
Trace International Holdings, Inc. ("Trace") is a privately held company
which owned approximately 46.1% of the Company's outstanding stock as of April
1, 1999 and whose Chairman also serves as the Chairman of the Company. In 1998,
Trace informed the Company that Trace had substantial debt obligations that were
due at the end of December 1998 and did not have the financial resources to pay
those obligations. Subsequently, Trace informed the Company that waivers and/or
modifications of such indebtedness had been obtained for at least the near
future;
6
<PAGE>
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
however, there can be no assurance that such waivers and/or modifications will
remain in effect prior to obtaining a permanent resolution. The Company's common
stock owned by Trace is pledged as collateral against certain of Trace's
obligations. If Trace were to default on such indebtedness collateralized by the
Company's common stock or other Trace creditors were to take steps constituting
a default under such indebtedness (such as filing an involuntary bankruptcy
petition), and if the holders of such indebtedness were to foreclose on the
Company's common stock owned by Trace, such event could trigger the "change of
control" provisions and correspondingly the acceleration and put rights
contained in certain of the Company's subsidiaries' debt agreements, as
described below. This could result in the acceleration of all of the Company's
subsidiaries' debt. Although management believes that the Company's
subsidiaries' debt obligations could be refinanced under such circumstances,
there can be no assurance that the Company or its subsidiaries would be able to
do so. The financial statements do not include any adjustments that might result
from the outcome of these uncertainties.
Certain credit agreements and promissory notes of Foamex L.P. and Foamex
Carpet pursuant to which approximately $503.2 million of debt has been issued,
as of March 31, 1999, contain provisions that would result in the acceleration
of such indebtedness if Trace were to cease to own at least 30% of the
outstanding common stock of the Company. Similarly, certain indentures of Foamex
L.P. and Foamex Capital Corporation relating to approximately $248.0 million of
senior subordinated notes contain provisions that provide the holders of such
senior subordinated notes with the right to require the issuers thereof to
repurchase such senior subordinated notes at a price in cash equal to 101% of
the aggregate principal amount thereof, plus accrued and unpaid interest
thereon, if Trace falls below certain specified ownership levels of common stock
and other persons or group owns a greater percentage of common stock than Trace.
2. INVENTORIES
Inventories consist of:
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
(thousands)
<S> <C> <C>
Raw materials and supplies $ 81,273 $ 99,997
Work-in-process 11,857 12,188
Finished goods 24,511 24,473
--------- ---------
Total $117,641 $136,658
======== ========
</TABLE>
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 1999 condensed consolidated statement of
operations.
7
<PAGE>
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
4. CURRENT PORTION OF LONG-TERM DEBT AND LONG-TERM DEBT - RELATED PARTY
The Company reclassified approximately $767.2 million and $771.1 million
of long-term debt as current in the accompanying condensed consolidated balance
sheets at March 31, 1999 and December 31, 1998, respectively, in connection with
waivers granted through June 30, 1999 under certain of the Company's
subsidiaries' debt agreement's for non-compliance with certain debt covenants.
These matters raise substantial doubt about the Company's ability to continue as
a going concern. The Company's subsidiaries are seeking amendments to these debt
agreements. (See Note 1.)
Current portion of long-term debt and long-term debt consists of:
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
-------- --------
Foamex L.P. Credit Facility: (thousands)
<S> <C> <C>
Term Loan B $ 82,504 $ 82,714
Term Loan C 75,003 75,194
Term Loan D 108,625 108,900
Revolving credit facility 134,201 139,438
Foamex Carpet revolving credit facility 5,698 --
9 7/8% Senior subordinated notes due 2007 150,000 150,000
13 1/2% Senior subordinated notes due 2005 (includes
$11,445 and $11,893 of unamortized debt premium) 109,445 109,893
Industrial revenue bonds 7,000 7,000
Subordinated note payable (net of unamortized
debt discount of $431 and $523) 6,583 6,491
Other 9,405 18,858
-------- --------
688,464 698,488
Less current portion 688,464 690,248
-------- --------
Long-term debt-unrelated parties $ -- $ 8,240
======== ========
Current portion of long-term debt - related party consists of:
Foamex/GFI Note $ 34,000 $ 34,000
Note payable to Foam Funding LLC 63,180 64,935
-------- --------
$ 97,180 $ 98,935
======== ========
</TABLE>
Other Long-Term Debt
Approximately $8.9 million of the decrease in other long-term debt at
March 31, 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, credit facilities and other indebtedness agreements
contain certain covenants that will limit, among other things to varying
degrees, the ability of the Company's subsidiaries (i) to pay distributions or
redeem equity interests, (ii) to make certain restrictive payments or
investments, (iii) to incur additional indebtedness or issue Preferred Equity
Interest, as defined, (iv) to merge, consolidate or sell all or substantially
all of its assets or (v) to enter into certain transactions with affiliates or
related persons. In addition, certain agreements contain provisions that, in the
event of a defined change of control or the occurrence of an undefined material
adverse change in the ability of the obligor to perform its obligations, the
indebtedness must be repaid, in certain cases, at the option of the holder (see
Note 1). Also, the Company's subsidiaries are required under certain of these
agreements to maintain
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)
specified financial ratios of which the most restrictive are the maintenance of
net worth and interest, fixed charge and leverage coverage ratios, as defined.
Under the most restrictive of the distribution restrictions, the Company's
subsidiaries are only permitted to pay the Company funds to enable the Company
to meet its operating and debt obligations.
Foamex L.P. amended its credit facility with a group of banks (the
"Foamex L.P. Credit Facility") on March 11, 1999. The amendment adjusted
financial covenants, among other things, as of December 31, 1998 and provided
for future measurement periods taking into account Foamex L.P.'s estimated
operating results and financial condition for 1998 and managements' expectations
regarding future measurement periods. As the Foamex L.P. 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 the Foamex L.P. Credit
Facility and certain events of default arising out of its Mexican operations, in
order to enable Foamex L.P. to negotiate a further amendment of the Foamex L.P.
Credit Facility.
Foamex Carpet amended its credit facility with a group of lenders (the
"Foamex Carpet Credit Facility") and the Note Payable to Foam Funding LLC on
March 12, 1999. The amendments adjusted financial covenants, among other things,
as of December 31, 1998 and provided for future measurement periods taking into
account Foamex Carpet's estimated operating results and financial condition for
1998 and managements' 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 the Foamex Carpet Credit Facility and the note payable to Foam
Funding LLC, in order to enable Foamex Carpet to negotiate further amendments of
the Foamex Carpet Credit Facility and the note payable to Foam Funding LLC.
During the quarterly periods ended March 31, 1999 and March 29, 1998, the
Company paid approximately $1.8 million and $0.7 million, respectively, to Foam
Funding LLC for interest on notes payable to them.
5. LITIGATION
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
compliant 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. To date, no response to the complaint has been made and no discovery or
other proceedings have taken place.
On April 14, 1999, the Company received communications addressed to its
Board of Directors from certain of the Company's stockholders regarding aspects
of the relationship between Trace and the Company. Such stockholders questioned
the propriety of certain relationships and related transactions between Trace
and the Company, which previously have been disclosed in the Company's periodic
filings. The Company's Board of Directors, in consultation with its special
counsel, is in the process of evaluating such communications and what actions,
if any, to take with respect thereto.
The Company's Annual Report on Form 10-K for the year ended December 31,
1998 included the following discussions of other material litigation involving
the Company. There have been no significant developments in such litigation
since the filing of the Company's Annual Report on Form 10-K.
9
<PAGE>
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
5. LITIGATION (continued)
Beginning on or about March 17, 1998, six actions (collectively the
"Stockholder Litigation") were filed in the Court of Chancery of the State of
Delaware, New Castle County (the "Court"), by stockholders of the Company. The
Stockholder Litigation, purportedly brought as class actions on behalf of all
stockholders of the Company, named the Company, certain of its directors,
certain of its officers, Trace and 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 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 have breached
their fiduciary duties to the class, preliminary and permanent injunctions
barring implementation of the proposed transaction, rescission of the
transaction if consummated, unspecified compensatory damages, and costs and
attorneys' fees. A stipulation and order consolidating these six actions under
the caption In re Foamex International Inc. Shareholders Litigation,
Consolidated Civil Action, No. 16259NC was entered by the Court on May 28, 1998.
The parties to the Stockholder Litigation entered into a Memorandum of
Understanding, dated June 25, 1998 (the "Memorandum of Understanding"), to
settle the Stockholder Litigation, subject to, inter alia, execution of a
definitive stipulation of settlement between the parties and approval by the
Court following notice to the class and a hearing. The Memorandum of
Understanding provided that as a result of, among other things, the Stockholder
Litigation and negotiations among counsel for the parties to the Memorandum of
Understanding, a special meeting of stockholders would be held to vote upon and
approve the First Merger Agreement which provided, among other things, for all
of the Company's 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 Stockholders"), the dismissal of the Stockholder Litigation with
prejudice and the release by the plaintiffs and all members of the class of all
claims and causes of action that were or could have been asserted against Trace,
the Company and the individual defendants in the Stockholders Litigation or that
arise out of the matters alleged by plaintiffs. Following the completion of the
confirmatory discovery which was provided for in the Memorandum of
Understanding, on September 9, 1998, the parties entered into a definitive
Stipulation of Settlement and the Court set a hearing to consider whether the
settlement should be approved for October 27, 1998 (the "Settlement Hearing").
In connection with the proposed settlement, the plaintiffs intended to apply for
an award of attorney's fees and litigation expenses in an amount not to exceed
$925,000, and the defendants agreed not to oppose this application.
Additionally, the Company agreed to pay the cost, if any, of sending notice of
the settlement to the Public Stockholders. On September 24, 1998, a Notice of
Pendency of Class Action, Proposed Settlement of Class Action and Settlement
Hearing was mailed to the members of the settlement class. On October 20, 1998,
the parties to the Stockholder Litigation requested that the Court cancel the
Settlement Hearing in light of the announcement made by Trace on October 16,
1998, that it had been unable to obtain the necessary financing for the
contemplated acquisition by Trace of the Company's common stock at a price of
$18.75 per share which was the subject matter of the proposed settlement. This
request was approved by the Court on October 21, 1998, and the Company issued a
press release on October 21, 1998, announcing that the Court had cancelled the
Settlement Hearing.
On November 10, 1998, counsel for certain of the defendants in the
Stockholder Litigation gave notice pursuant to the Stipulation of Settlement
that such defendants were withdrawing from the Stipulation of Settlement in
light of the notice given by Trace to the Company and the special committee of
the Board of Directors on November 5, 1998 whereby Trace terminated the First
Merger Agreement on the grounds that the financing condition in the First Merger
Agreement was incapable of being satisfied.
On November 12, 1998, the plaintiffs in the Stockholder Litigation filed
an Amended Class Action Complaint (the "Amended Complaint"). The Amended
Complaint named the Company, Trace, Merger Sub, Mr. Marshall S. Cogan, Mr.
Andrea Farace, Dr. Stuart Hershon, Mr. John Tunney, and Mr. Etienne Davignon as
defendants, alleging that they breached their fiduciary duties to plaintiffs and
the other Public Stockholders in connection with a second Agreement and Plan of
Merber (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
10
<PAGE>
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
5. LITIGATION (continued)
injunction, seeking an Order to preliminarily enjoin the defendants from
proceeding with, consummating or otherwise effecting the merger contemplated by
the Second Merger Agreement.
The defendants have denied, and continue to deny, that they have
committed or have threatened to commit any violation of law or breaches of duty
to plaintiffs or the purported class or any breach of the stipulation of
settlement. The defendants intend to vigorously defend the Stockholder
Litigation. If the Stockholder Litigation is adversely determined, it could have
a material adverse effect on the financial position, results of operations and
cash flows of the Company.
In addition, on or about November 18, 1998, a putative class action was
filed in the United States District Court for the Eastern District of New York
on behalf of all persons who purchased common stock of the Company between March
16, 1998 and October 19, 1998, naming Trace as defendant and alleging that Trace
breached a contract between the putative class members and Trace. By order dated
January 8, 1999, the Court transferred the action to the United States District
Court for the Southern District of New York. Trace made a motion to dismiss the
action on February 8, 1999, which motion is pending before the Court, and the
Court has stayed all discovery in the action until the motion is decided.
Neither the Company nor any of the individual directors of the Company are named
as defendants in this litigation.
As of May 17, 1999, the Company and Trace were two of multiple defendants
in actions filed on behalf of approximately 4,300 recipients of breast implants
in various United States federal and state courts and one Canadian provincial
court, some of which allege substantial damages, but most of which allege
unspecified damages for personal injuries of various types. Three of these cases
seek to allege claims on behalf of all breast implant recipients or other
allegedly affected parties, but no class has been approved or certified by the
court. In addition, three cases have been filed alleging claims on behalf of
approximately 39 residents of Australia, New Zealand, England, and Ireland. The
Company believes that the number of suits and claimants may increase. During
1995, the Company and Trace were granted summary judgments and dismissed as
defendants from all cases in the federal courts of the United States and the
state courts of California. Appeals for these decisions were withdrawn and the
decisions are final.
Although breast implants do not contain foam, certain silicone gel
implants were produced using a polyurethane foam covering fabricated by
independent distributors or fabricators from bulk foam purchased from the
Company or Trace. Neither the Company nor Trace recommended, authorized, or
approved the use of its foam for these purposes. The Company is also indemnified
by Trace for any such liabilities relating to foam manufactured prior to October
1990. Although Trace has paid the Company's litigation expenses to date from
insurance proceeds Trace received, there can be no assurance that Trace will be
able to continue to provide such indemnification. While it is not feasible to
predict or determine the outcome of these actions, based on management's present
assessment of the merits of pending claims, after consultation with the general
counsel of Trace, and without taking into account indemnification provided by
Trace, the coverage provided by Trace and the Company's liability insurance and
potential indemnity from the manufacturers of polyurethane covered breast
implants, management believes that the disposition of matters that are pending
or that may reasonably be anticipated to be asserted should not have a material
adverse effect on either the Company's or Trace's consolidated financial
position or results of operations. If management's assessment of the Company's
liability with respect to these actions is incorrect, such actions could have a
material adverse effect on the financial position, results of operations and
cash flows of the Company.
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.
11
<PAGE>
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
5. LITIGATION (continued)
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 Period Ended
March 31, March 29,
1999 1998
(thousands, except per share amounts)
Basic earnings per share:
<S> <C> <C>
Net income $ 6,013 $ 3,109
======= =======
Average common stock outstanding 25,053 24,942
======= =======
Basic earnings per share $ 0.24 $ 0.12
======= =======
Diluted earnings per share:
Net income available for common stock
and dilutive securities $ 6,013 $ 3,109
======= =======
Average common stock outstanding 25,053 24,942
Additional common shares resulting from stock options 210 661
------- -------
Average common stock and dilutive stock outstanding 25,263 25,603
======= =======
Diluted earnings per share $ 0.24 $ 0.12
======= =======
</TABLE>
7. COMPREHENSIVE INCOME
Comprehensive income for the quarterly periods noted below is comprised
of the following:
Quarterly Period Ended
March 31, March 29,
1999 1998
------ ------
(thousands)
Net income $6,013 $3,109
Foreign current translation adjustments 412 227
------ ------
Total comprehensive income $6,425 $3,336
====== ======
12
<PAGE>
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
8. RESTRUCTURING AND OTHER CHARGES
As announced previously by the Company in its March 16, 1999 press
release, 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 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. Approximately $2.0 million of these severance costs will be paid
by June 30, 1999. Approximately $1.5 million, which relates to contractual
severance costs payable to the Company's former Chairman and Chief Executive
Officer, will be paid through March 2001. The Company expects to record
additional restructuring charges in the future as it fully implements 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 industry, furniture
industry and the retail industry. The carpet cushion products segment
distributes prime, rebond, sponge rubber and felt carpet cushion. The automotive
products segment supplies foam primarily for automotive interior applications to
automotive manufacturers and to industry sub suppliers. The technical products
segment manufactures and markets reticulated foams and other custom polyester
and polyether foams for industrial, specialty and consumer and safety
applications.
The "other" column in the table below represents certain foreign
manufacturing operations 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.
The accounting policies of the operating segments are the same as
described in the "Summary of Significant Accounting Policies" (see Note 2 to the
Company's 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
Quarterly period ended March 31, 1999:
<S> <C> <C> <C> <C> <C> <C>
Net sales $140,869 $64,799 $88,771 $22,248 $ 6,176 $322,863
Income (loss) from operations 13,039 1,733 6,566 4,853 (4,879) 21,312
Depreciation and amortization 4,462 1,563 1,345 716 546 8,632
Quarterly period ended March 29, 1998:
Net sales $149,615 $69,059 $65,681 $21,116 $ 6,819 $312,290
Income (loss) from operations 11,875 4,689 7,282 4,440 (1,759) 26,527
Depreciation and amortization 3,995 1,392 1,210 652 568 7,817
</TABLE>
13
<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 March 31, 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. As discussed in
Note 1 to the accompanying condensed consolidated financial statements and under
"Liquidity and Capital Resources" below, at December 31, 1998 the Company's
subsidiaries were not in compliance and do not expect to be in compliance for
future periods with certain financial covenants contained in certain of their
debt agreements. These debt agreements had outstanding principal balances
aggregating approximately $478.0 million at March 31, 1999. Were the lenders
under these agreements to accelerate the maturity of their indebtedness, such
acceleration would constitute an event of default and all of the Company's
subsidiaries' long-term debt would become due. Additionally, as discussed in
Note 1 to the accompanying condensed consolidated financial statements and under
"Liquidity and Capital Resources" below, 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, substantially all of the
Company's subsidiaries indebtedness may be accelerated. As a result, the Company
reclassified approximately $767.2 million and $771.1 million of long-term debt
as current in the accompanying condensed consolidated balance sheets at March
31, 1999 and December 31, 1998, respectively. These matters raise substantial
doubt about the Company's ability to continue as a going concern. The financial
statements do not include any adjustments that might result from the outcome of
these uncertainties.
On March 16, 1999, the Company announced that it had hired John G.
Johnson, Jr. as President, Chief Executive Officer and director of the Company
following the resignation of Andrea Farace from the positions of Chairman of the
Board, Chief Executive Officer and director of the Company. The Company also
announced that it had hired JP Morgan Securities Inc. as a financial advisor to
explore strategic alternatives to maximize shareholder value.
Restructuring Plan
As announced previously by the Company in its March 16, 1999 press
release, 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 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. Approximately $2.0 million of these severance costs will be paid
by June 30, 1999. Approximately $1.5 million, which relates to contractual
severance costs payable to the Company's former Chairman and Chief Executive
Officer, will be paid through March 2001. The Company expects to record
additional restructuring charges in the future as it fully implements its
restructuring plan. Such amounts cannot be estimated at this time but are
expected to relate primarily to severance costs.
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 1999 condensed consolidated statement of
operations.
14
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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.
Operating results for 1999 are expected to be influenced by various
internal and external factors. These factors include, among other things, (a)
the Company's debt structure and the ability of the Company's subsidiaries to
successfully amend the terms of their bank credit agreements and certain other
indebtedness, (b) the Company's capital structure, (c) continued implementation
of the consolidation plan with Crain Industries, Inc. (the "Crain
Consolidation"), (d) raw material cost increases, if any, by the Company's
chemical suppliers, (e) the Company's success in passing on to its customers
selling price increases to recover any such raw material cost increases and (f)
fluctuations in interest rates.
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 industry, furniture
industry and the retail industry. The carpet cushion products segment
distributes prime, rebond, sponge rubber and felt carpet cushion. The automotive
products segment supplies foam primarily for automotive interior applications to
automotive manufacturers and to industry sub suppliers. The technical products
segment manufactures and markets reticulated foams and other custom polyester
and polyether foams for industrial, specialty and consumer and safety
applications.
The "other" column in the table below represents certain foreign
manufacturing operations 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
Quarterly period ended March 31, 1999:
<S> <C> <C> <C> <C> <C> <C>
Net sales $140,869 $64,799 $88,771 $22,248 $ 6,176 $322,863
Income (loss) from operations 13,039 1,733 6,566 4,853 (4,879) 21,312
Depreciation and amortization 4,462 1,563 1,345 716 546 8,632
Quarterly period ended March 29, 1998:
Net sales $149,615 $69,059 $65,681 $21,116 $ 6,819 $312,290
Income (loss) from operations 11,875 4,689 7,282 4,440 (1,759) 26,527
Depreciation and amortization 3,995 1,392 1,210 652 568 7,817
</TABLE>
Quarterly Period Ended March 31, 1999 Compared to Quarterly Period Ended March
27, 1998
Net sales for the first quarter of 1999 were $322.9 million as compared
to $312.3 million in the first quarter of 1998, an increase of $10.6 million or
3.4%. The increase in net sales was primarily associated with the increase in
15
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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 $5.2 million or 19.7% to $21.3 million for the first
quarter of 1999 from $26.5 million in the first quarter of 1998. The decrease in
income from operations resulted primarily from (a) restructuring costs recorded
during the first quarter of 1999 of $3.4 million and (b) a decrease in gross
profit of $6.0 million resulting primarily from increased raw material costs and
reductions in carpet cushion selling prices, offset in part by a decrease in
selling, general and administrative expenses of $4.2 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 quarter of 1999. The Company recorded a net gain of
approximately $4.2 million on the sale of its corporate 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 first quarter of 1999 decreased 5.8% to
$140.9 million from $149.6 million in the first quarter of 1998. Income from
operations increased 9.8% to $13.0 million (9.3% of net sales) for the first
quarter of 1999 from $11.9 million (7.9% of net sales) in the first quarter of
1998. The decrease in net sales was primarily associated with the closure of
several plants as part of the Crain Consolidation. The increase in income from
operations was primarily the result of improved operating efficiencies resulting
from the Crain Consolidation.
Carpet Cushion Products
Carpet cushion products net sales for the first quarter of 1999 decreased
6.2% to $64.8 million from $69.1 million in the first quarter of 1998 primarily
due to reductions in carpet cushion selling prices and decreased units sold.
Income from operations decreased 63.0% to $1.7 million (2.7% of net sales) for
the first quarter of 1999 from $4.7 million (6.8% of net sales) in the first
quarter of 1998. The decrease was primarily associated with the factors that
caused the decrease in net sales.
Automotive Products
Automotive products net sales for the first quarter of 1999 increased
35.2% to $88.8 million from $65.7 million in the first quarter of 1998. The
increase in net sales was associated with increased volume of lamination
products. Income from operations decreased 9.8% to $6.6 million (7.4% of net
sales) for the first quarter of 1999 from $7.3 million (11.1% of net sales) in
the first quarter of 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 first quarter of 1999 increased 5.4%
to $22.2 million from $21.1 million in the first quarter of 1998. Income from
operations increased 9.3% to $4.9 million (21.8% of net sales) for the first
quarter of 1999 from $4.4 million (21.0% of net sales) in the first 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 decrease in net sales associated with this
segment primarily resulted from a decrease in net sales from the Company's
Mexican operations. The decrease in income from operations was primarily
associated with the $3.4 million of restructuring charges recorded in the first
quarter of 1999 discussed previously.
16
<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 $7.0 million for
the first quarter of 1999 as compared to $8.3 million in the first quarter of
1998. This decrease is primarily due to an increase of approximately $4.1
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, offset by a decrease in income from operations discussed
above.
Income Taxes
The first quarter of 1999 provision for income taxes of $1.0 million
represents statutory income taxes on operations in Mexico and Canada and state
income taxes for those states that do not permit use of net operating loss
carryforwards.
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. Credit Facility, if necessary, (provided that
the Foamex L.P. Credit Facility is successfully amended, as described below)
will be adequate to meet Foamex L.P.'s liquidity requirements. The ability to
meet such liquidity requirements could be impaired if Foamex L.P. were to fail
to comply with any covenants contained in the Foamex L.P. Credit Facility and
such noncompliance was not cured by Foamex L.P. or waived by the lenders. Foamex
L.P. amended its credit facility in March 1999. Foamex L.P. paid approximately
$1.2 million in financing fees and interest rates were increased in connection
with this amendment. The amendment adjusted financial covenants, among other
things, as of December 31, 1998 and provided for future measurement periods
taking into account Foamex L.P.'s estimated operating results and financial
condition for 1998 and management expectations regarding future measurement
periods. As the Foamex L.P. actual 1998 net loss was 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 the Foamex L.P. Credit Facility and certain
events of default arising out of its Mexican operations, in order to enable
Foamex L.P. to negotiate a further amendment of the Foamex L.P. Credit Facility.
There can be no assurance that such an amendment will be obtained. The failure
to obtain such an amendment would have a material adverse effect on Foamex L.P.
and the Company. The ability of Foamex L.P. to make distributions to the Company
is restricted by the terms of its financing agreements; therefore, neither the
Company nor Foamex Carpet is expected to have access to the cash flow generated
by Foamex L.P. for the foreseeable future.
Foamex Carpet's operating cash requirements consist principally of
working capital requirements, scheduled payments of principal and interest on
outstanding indebtedness and capital expenditures. The Company believes that
cash flow from Foamex Carpet's operating activities, cash on hand and periodic
borrowings under the Foamex Carpet Credit Facility, if necessary, (provided that
such Foamex Carpet Credit Facility is successfully amended, as described below)
17
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
will be adequate to meet Foamex Carpet's liquidity requirements. The ability to
meet such liquidity requirements could be impaired if Foamex Carpet were to fail
to comply with any covenants contained in the Foamex Carpet Credit Facility and
other financing arrangements and such noncompliance was not cured by Foamex
Carpet or waived by the lenders. Foamex Carpet amended its credit facility and
other financing arrangements in March 1999. Foamex Carpet paid approximately
$2.6 million in financing fees and voluntarily reduced the commitment by $5.0
million in connection with the amendment to the Foamex Carpet Credit Facility.
The amendments adjusted financial covenants, among other things, as of December
31, 1998 and provided for future measurement periods taking into account Foamex
Carpet's estimated operating results and financial conditions for 1998 and
management expectations regarding future measurement periods. As the Foamex
Carpet actual 1998 net loss was greater 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 the Foamex Carpet Credit Facility and other financing arrangements,
in order to enable Foamex Carpet to negotiate further amendments of the Foamex
Carpet Credit Facility and the other financing arrangements. There can be no
assurance that such amendments will be obtained. The failure to obtain such
amendments would have a material adverse effect on Foamex Carpet and the
Company. The ability of Foamex Carpet to make distributions to the Company is
restricted by the terms of its financing agreements; therefore, neither the
Company nor Foamex L.P. is expected to have access to the cash flow generated by
Foamex Carpet for the foreseeable future.
Certain credit agreements and promissory notes of Foamex L.P. and Foamex
Carpet pursuant to which approximately $503.2 million of debt has been issued,
as of March 31, 1999, contain provisions that would result in the acceleration
of such indebtedness if Trace were to cease to own at least 30% of the
outstanding common stock of the Company. Similarly, certain indentures of Foamex
L.P. and Foamex Capital Corporation relating to approximately $248.0 million of
senior subordinated notes contain provisions that provide the holders of such
senior subordinated notes with the right to require the issuers thereof to
repurchase such senior subordinated notes at a price in cash equal to 101% of
the aggregate principal amount thereof, plus accrued and unpaid interest
thereon, if Trace falls below certain specified ownership levels of common stock
and other persons or group owns a greater percentage of common stock than Trace.
Trace is a privately held company which owned approximately 46.1% of the
Company's common stock as of April 1, 1999 and whose Chairman also serves as the
Chairman of the Company. In 1998, Trace informed the Company that Trace had
substantial debt obligations that were due at the end of December 1998 and did
not have the financial resources to pay those obligations. Subsequently, Trace
informed the Company that waivers and/or modifications of such indebtedness had
been obtained for at least the near future; however, there can be no assurance
that such waivers and/or modifications will remain in effect prior to obtaining
a permanent resolution. The Company's common stock owned by Trace is pledged as
collateral against certain of Trace's debt obligations. If Trace were to default
on such indebtedness collateralized by the Company's common stock or other Trace
creditors were to take steps constituting a default under such indebtedness
(such as filing an involuntary bankruptcy petition), and if the holders of such
secured indebtedness were to foreclose on the Company's common stock owned by
Trace, such event could trigger the "change of control" provisions and
correspondingly the acceleration and put rights contained in certain of the
Company's subsidiaries' debt agreements, as described above. This could result
in the acceleration of all of the Company's subsidiaries' debt. Although
management believes that the Company's subsidiaries' debt obligations could be
refinanced under such circumstances, there can be no assurance that the Company
`s subsidiaries' would be able to do so.
The accompanying condensed consolidated financial statements have been
prepared assuming the Company will continue as a going concern. As discussed in
Note 1 to the condensed consolidated financial statements, at December 31, 1998
certain of the Company's subsidiaries were not in compliance and do not expect
to be in compliance in the future with certain financial covenants contained in
debt agreements. These agreements had outstanding principal balances aggregating
approximately $478.0 million at March 31, 1999. The Company's subsidiaries
received waivers from the lenders under the various senior debt instruments
through May 5, 1999, which were subsequently extended on May 5, 1999 through
June 30, 1999, for the covenants for which the Company's subsidiaries' were not
in compliance. Non-compliance under these debt agreements provides the lenders
under these agreements, with the right, upon the notice and lapse of time, to
declare all of such indebtedness to be due. Notwithstanding the fact that to
date the lenders have not exercised such rights and have granted waivers of such
covenants through June 30, 1999 to enable the Company's subsidiaries to
negotiate amendments of such covenants; there can be no assurance that such
18
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
amendments will be obtained. Were the lenders under those agreements to
accelerate the maturity of their indebtedness, such acceleration would
constitute an event of default and all of the Company's long-term debt would
become due. Additionally, as discussed above, 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,
substantially all of the Company's indebtedness may be accelerated. As a result,
the Company reclassified approximately $767.2 million and $771.1 million of
long-term debt as current in the accompanying condensed consolidated balance
sheets at March 31, 1999 and December 31, 1998, respectively. These matters
raise substantial doubt about the Company's ability to continue as a going
concern. The financial statements do not include any adjustments that might
result from the outcome of these uncertainties.
If the Company's subsidiaries are able to amend the relevant covenants in
their credit agreements and other financial arrangements; the Company may be
able to reclassify its long-term debt included in current liabilities as
long-term. However, there can be no assurance that the Company's subsidiaries
will be able to obtain the necessary amendments, or if obtained, that it will
once again be able to classify such liabilities as long-term.
As of March 31, 1999, there were $134.2 million of revolving credit
borrowings, at an average interest rate of 8.30%, under the Foamex L.P. Credit
Facility with $10.7 million available for additional borrowings and
approximately $47.6 million of letters of credit outstanding which are supported
by the Foamex L.P. Credit Facility. Borrowings by Foamex Canada Inc. as of March
31, 1999 were approximately $3.5 million, at an interest rate of 7.25%, under
Foamex Canada Inc.'s revolving credit agreement with unused availability of
approximately $1.9 million. Foamex Carpet had approximately $5.7 million of
outstanding borrowings under the Foamex Carpet Credit Facility at March 31,
1999, at an interest rate of 8.82%, with unused availability of $8.7 million and
approximately $0.6 million of letters of credit outstanding which are supported
by the Foamex Carpet Credit Facility.
The Company's subsidiaries paid an aggregate $3.8 million in financing
fees associated with the March 1999 amendments to their credit facilities. The
Company's subsidiaries have capitalized these costs and are currently amortizing
them along with previously paid deferred financing costs over the remaining life
of the related debt agreements as the Company's subsidiaries expect to
successfully amend these agreements during the current waiver period. The
Company's subsidiaries are in the process of negotiating further amendments to
these agreements as discussed previously. Generally, amendments to financing
agreements may result in changes to terms and conditions under the existing
agreements, including, but not limited to, changes to interest rates and
financial and non-financial covenants. Additionally, there may be additional
financing fees associated with obtaining such amendments. The Company cannot
determine the changes which may occur to its existing financing agreements at
this time, or the amount of any financing fees which may be required in
connection with these future amendments.
Cash and cash equivalents decreased to $6.8 million at March 31, 1999
from $12.6 million at December 31, 1998 due primarily to the decrease in net
cash provided by operating activities. Excluding the reclassification of other
long-term debt to current, working capital increased $3.9 million to $119.9
million at March 31, 1999 from $116.0 million at December 31, 1998 primarily due
to the increase in net operating assets and liabilities, as discussed below
offset by the decrease in cash. Net operating assets and liabilities (comprised
of accounts receivable, inventories and accounts payable) increased $13.4
million to $185.9 million at March 31, 1999 as compared to $172.5 million at
December 31, 1998. The increase was primarily due to a $10.1 million increase in
accounts receivable and a $22.3 million decrease in accounts payable offset by a
$19.0 million decrease in inventories. The increase in accounts receivable was
primarily associated with increased sales during March 1999 as compared to
December 1998. The decrease in inventories was primarily due to increased first
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 March 31, 1999.
Cash Flow from Operating Activities
Cash flow used for operating activities was $3.5 million for the
quarterly period ended March 31, 1999 as compared to cash used of $19.8 million
19
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
for the quarterly period ended March 29, 1998. The improvement is primarily due
to a decrease in cash used for operating assets and liabilities for the first
quarter of 1999 as compared to the first quarter of 1998.
Cash Flow from Investing Activities
During 1999, the Company spent approximately $6.0 million on capital
improvements as compared to $7.2 million for 1998. The 1999 expenditures were
primarily for recurring capital replacement. 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.
On March 31, 1999, the Company sold its corporate aircraft for $16.3
million of gross proceeds of which $8.9 million was used to repay debt
associated with the aircraft.
Cash Flow from Financing Activities
In connection with a series of transactions in connection with the
transfer of certain assets of General Felt Industries, Inc. during February
1998, the Company extinguished approximately $125.1 million of term loans under
the Foamex L.P. Credit Facility funded with $129.0 million of new term loan
agreements which were subsequently assumed by Foam Funding LLC. In addition,
during February 1998, Foamex L.P. defeased the outstanding $4.5 million of
senior secured notes due 2000.
Environmental Matters
The Company is subject to extensive and changing environmental laws and
regulations. Expenditures to date in connection with the Company's compliance
with such laws and regulations did not have a material adverse effect on the
Company's operations, financial position, capital expenditures or competitive
position. The amount of liabilities recorded by the Company in connection with
environmental matters as of March 31, 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.
Inflation and Other Matters
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.
The Company's automotive products customers are predominantly automotive
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.
20
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Year 2000 Compliance
The Company uses numerous business information systems as well as
manufacturing support systems that could be impacted by the "Year 2000 Problem".
The Year 2000 Problem arises from computer programs that were written using two
digits rather than four to designate the year. In connection with the Year 2000
Problem, date-sensitive computer software may recognize a date using "00" as the
year 1900 rather than the year 2000. This could result in system failures or
miscalculations which would cause significant operational disruptions.
The Company has a Year 2000 Executive Sponsor Team comprised of
representatives of the Company. The Year 2000 Executive Sponsor Team is
providing direction to and receiving reports from the Year 2000 Steering
Committee (the "Steering Committee") within the organization. The Steering
Committee has completed an assessment of the state of readiness of the
Information Technology ("IT") and non-IT systems of the Company. These
assessments cover desktop computers, environmental systems, manufacturing
systems (including laboratory information systems) field instrumentation, and
significant third party vendor and supplier systems, which include employee
compensation and benefit plan maintenance systems. The Steering Committee is
also in the process of assessing the readiness of the Company's significant
customers and suppliers.
The Year 2000 assessment process for each facility consists of an
inventory of Year 2000 sensitive equipment, an assessment of the impact of
possible failures, determination of required remediation actions, if any, and
testing and implementation of these solutions. The inventory, assessment,
remediation and testing phases were completed at the end of 1998, with fail safe
testing and final implementation currently taking place in 1999. The progress of
these phases as of March 31, 1999 is summarized 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.
21
<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 March 31, 1999 (unaudited) is
incorporated herein by reference.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule for the quarterly period ended March
31, 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.
Form 8-K, dated as of April 16, 1999 reporting update to
preliminary earnings.
22
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FOAMEX INTERNATIONAL INC.
Date: May 17, 1999 By: /s/ John A. Feenan
-------------------------------
John A. Feenan
Executive Vice President and
and Chief Financial Officer
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