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 September 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 November
5, 1999 was 25,052,991.
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
FOAMEX INTERNATIONAL INC.
INDEX
Page
Part I. Financial Information
Item 1. Financial Statements.
Condensed Consolidated Statements of Operations (unaudited) -
Three and Nine Months Ended September 30, 1999 and 1998 3
Condensed Consolidated Balance Sheets (unaudited) -
as of September 30, 1999 and December 31, 1998 4
Condensed Consolidated Statements of Cash Flows (unaudited) -
Nine Months Ended September 30, 1999 and 1998 5
Notes to Condensed Consolidated Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations. 18
Item 3. Quantitative and Qualitative Disclosures about Market Risk. 27
Part II. Other Information 28
Item 1. Legal Proceedings. 28
Item 6. Exhibits and Reports on Form 8-K. 28
Signatures 29
Exhibits 30
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
(thousands except per share data)
Three Months Ended Nine Months Ended
September 30, September 30, September 30, September 30,
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
NET SALES $ 326,949 $ 332,510 $ 962,841 $ 943,279
COST OF GOODS SOLD 278,136 281,191 826,654 787,424
--------- --------- --------- ---------
GROSS PROFIT 48,813 51,319 136,187 155,855
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 19,484 24,006 56,778 68,855
RESTRUCTURING AND OTHER CHARGES (CREDITS) 2,988 -- 10,112 (700)
--------- --------- --------- ---------
INCOME FROM OPERATIONS 26,341 27,313 69,297 87,700
INTEREST AND DEBT ISSUANCE EXPENSE 18,740 18,402 54,111 53,210
OTHER INCOME (EXPENSE), NET (459) (3,200) 2,605 (4,945)
--------- --------- --------- ---------
INCOME BEFORE PROVISION FOR INCOME TAXES 7,142 5,711 17,791 29,545
PROVISION FOR INCOME TAXES 1,014 2,285 2,473 11,816
--------- --------- --------- ---------
INCOME BEFORE EXTRAORDINARY LOSS 6,128 3,426 15,318 17,729
EXTRAORDINARY LOSS ON EARLY
EXTINGUISHMENT OF DEBT,
NET OF INCOME TAXES -- -- -- (1,917)
--------- --------- --------- ---------
NET INCOME $ 6,128 $ 3,426 $ 15,318 $ 15,812
========= ========= ========= =========
BASIC EARNINGS PER SHARE:
INCOME BEFORE EXTRAORDINARY LOSS $ 0.24 $ 0.14 $ 0.61 $ 0.71
EXTRAORDINARY LOSS -- -- -- (0.08)
--------- --------- --------- ---------
EARNINGS PER SHARE $ 0.24 $ 0.14 $ 0.61 $ 0.63
========= ========= ========= =========
WEIGHTED AVERAGE NUMBER OF SHARES 25,053 25,015 25,053 24,989
========= ========= ========= =========
DILUTED EARNINGS PER SHARE:
INCOME BEFORE EXTRAORDINARY LOSS $ 0.24 $ 0.13 $ 0.61 $ 0.67
EXTRAORDINARY LOSS -- -- -- (0.07)
--------- --------- --------- ---------
EARNINGS PER SHARE $ 0.24 $ 0.13 $ 0.61 $ 0.60
========= ========= ========= =========
WEIGHTED AVERAGE NUMBER OF SHARES
AND EQUIVALENTS 25,342 26,118 25,229 26,146
========= ========= ========= =========
The accompanying notes are an integral part of the condensed
consolidated financial statements.
</TABLE>
3
<PAGE>
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
(thousands, except number of shares)
<TABLE>
<CAPTION>
September 30, December 31,
ASSETS 1999 1998
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 4,240 $ 12,572
Accounts receivable, net of allowance of $8,544 in 1999
and $11,630 in 1998 196,474 185,158
Inventories 104,458 136,658
Other current assets 31,096 38,978
----------- -----------
Total current assets 336,268 373,366
----------- -----------
PROPERTY, PLANT AND EQUIPMENT 382,529 386,873
LESS ACCUMULATED DEPRECIATION (159,741) (144,700)
----------- -----------
NET PROPERTY, PLANT AND EQUIPMENT 222,788 242,173
COST IN EXCESS OF ASSETS ACQUIRED, net of accumulated
amortization of $21,495 in 1999 and $17,131 in 1998 216,882 220,934
DEBT ISSUANCE COSTS, net of accumulated
amortization of $5,538 in 1999 and $3,038 in 1998 20,344 14,852
OTHER ASSETS 23,428 23,640
----------- -----------
TOTAL ASSETS $ 819,710 $ 874,965
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Short-term borrowings $ 3,636 $ 2,957
Current portion of long-term debt 12,543 690,248
Current portion of long-term debt - related party 10,530 98,935
Accounts payable 119,541 149,268
Accrued interest 7,774 7,851
Other accrued liabilities 76,062 79,178
----------- -----------
Total current liabilities 230,086 1,028,437
LONG-TERM DEBT 655,199 8,240
LONG-TERM DEBT - RELATED PARTY 81,385 --
OTHER LIABILITIES 40,667 42,407
----------- -----------
Total liabilities 1,007,337 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 87,243 86,990
Accumulated deficit (222,343) (237,661)
Accumulated other comprehensive income (loss) (24,374) (24,721)
Other (28,423) (28,997)
----------- -----------
Total stockholders' deficit (187,627) (204,119)
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 819,710 $ 874,965
=========== ===========
The accompanying notes are an integral part of the condensed
consolidated financial statements.
</TABLE>
4
<PAGE>
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30, September 30,
1999 1998
OPERATING ACTIVITIES
<S> <C> <C>
Net income $ 15,318 $ 15,812
Adjustments to reconcile net income to net cash provided
by (used for) operating activities:
Depreciation and amortization 25,772 25,624
Amortization of debt issuance costs, debt discount,
debt premium and deferred swap adjustments 696 (16)
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 2,703 15,660
Changes in operating assets and liabilities, net (6,761) (76,353)
--------- ---------
Net cash provided by (used for) operating activities 35,584 (17,694)
--------- ---------
INVESTING ACTIVITIES
Capital expenditures (14,861) (23,173)
Acquisitions, net of cash acquired -- (4,399)
Proceeds from sale of assets 16,313 --
Other investing activities 924 832
--------- ---------
Net cash provided by (used for) investing activities 2,376 (26,740)
--------- ---------
FINANCING ACTIVITIES
Net proceeds from short-term borrowings 679 185
Net proceeds from (repayments of) revolving loans (14,332) 81,489
Proceeds from long-term debt -- 129,000
Repayment of long-term debt (15,862) (134,845)
Repayment of long-term debt - related party (7,020) (3,510)
Dividends paid -- (1,246)
Cash overdrafts (2,017) --
Transfer of General Felt -- (28,698)
Debt issuance costs (7,993) (1,598)
Other financing activities 253 1,657
--------- ---------
Net cash provided by (used for) financing activities (46,292) 42,434
--------- ---------
CASH AND CASH EQUIVALENTS
Net increase (decrease) (8,332) (2,000)
Beginning of year 12,572 12,044
--------- ---------
End of period $ 4,240 $ 10,044
========= =========
</TABLE>
The accompanying notes are an integral part of the condensed
consolidated financial statements.
5
<PAGE>
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
1. ORGANIZATION AND BASIS OF PRESENTATION
Basis of Presentation
The condensed consolidated financial statements are unaudited, but in the
opinion of management include all adjustments necessary to present fairly Foamex
International Inc.'s (the "Company") financial position and results of
operations. These interim financial statements should be read in conjunction
with the financial statements and related notes included in the 1998 Form 10-K.
Results for interim periods are not necessarily indicative of trends or of
results for a full year.
Reporting Period
Effective September 1998, the annual reporting period was changed 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 on December 31. This change
was effective for the third fiscal quarter of 1998, which ended on September 30,
1998.
Potential Business Combinations
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. The transaction is 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, subject to certain conditions.
The transaction is subject to a number of conditions, including the
negotiation of definitive documents that will contain certain conditions
relating to the bank credit facilities and the public debt of the Company's
subsidiaries. Additional issues that will need to be addressed include, minimum
shareholder acceptance, 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 other regulatory agencies.
On November 1, 1999, the Company announced that the letter of intent
expired by its terms. However, the Purchasers requested an extension of the
letter of intent until December 15, 1999. The parties agreed to the extension
and are continuing discussions towards a possible transaction.
Also on November 1, 1999, the Company announced that it has authorized a
due diligence review for a possible business combination led by John G. Johnson,
Jr., President and Chief Executive Officer of the Company. Mr. Johnson has
informed the Board of Directors that he is working with various possible sources
of equity funding, but that he has no firm commitments for the financing of a
transaction. No formal proposal has been made to the Company by Mr. Johnson.
The accompanying financial statements and notes have been prepared
assuming a going-concern basis and do not recognize the impact of the potential
business combinations.
Going Concern Issue - Financial Condition
As of December 31, 1998, certain subsidiaries were not in compliance with
various debt covenants included in agreements totaling $480.4 million. Had the
lenders under these debt agreements accelerated the maturity of their
indebtedness as a result of the subsidiaries' noncompliance, the acceleration
would have constituted an event of default and 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, approximately $771.1 million of
long-term debt at December 31, 1998 was classified as a current liability in the
consolidated balance sheet, which produced a working capital deficit. These
issues raised substantial doubt at year-end 1998 about the Company's ability to
continue as a going concern.
6
<PAGE>
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
1. ORGANIZATION AND BASIS OF PRESENTATION (continued)
In response to these financial conditions, amendments to debt agreements
were executed during the first half of 1999, as discussed in Note 8.
Additionally, the Company generated net income, provided over $35.0 million of
cash flow from operations and reduced total debt by 5% from the beginning of the
year. The combination of debt amendments, year to date results and management's
expectations regarding compliance with debt covenants in future measurement
periods represented an improved financial position relative to year-end 1998.
Accordingly, $749.8 million of debt at the end of the second quarter 1999 and
approximately $736.6 million of debt at the end of the third quarter 1999 were
classified as long term.
Going Concern Issue - Change In Control
Trace International Holdings, Inc. ("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 $481.8 million of debt was
outstanding as of September 30, 1999, contain provisions that would result in
the acceleration of such indebtedness if a person or group other than Trace were
to beneficially own more than 25% of the Company's outstanding voting stock and
a greater percentage of such voting stock than the amount beneficially owned by
Trace. Additionally, certain indentures of Foamex L.P. and Foamex Capital
Corporation relating to senior subordinated notes of $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
a person or group other than Trace were to beneficially own more than 25% of the
Company's outstanding voting stock and a greater percentage of such voting stock
than the amount beneficially owned by 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
to a person or group other than Trace which would acquire more than 25% of the
Company's outstanding voting stock and a greater percentage of such voting stock
than the amount beneficially owned by Trace. According to a filing made with the
bankruptcy court on November 2, 1999, two of Trace's creditors have petitioned
the bankruptcy court to permit such creditors to foreclose on and take ownership
of the shares of common stock pledged to them, representing approximately 17% of
the Company's outstanding voting stock.
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, 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
financial statements were prepared on a going-concern basis and do not include
any adjustments that might result from the outcome of the Trace bankruptcy
filing.
2. ASSET SALE
On March 31, 1999, the Company sold its corporate airplane for $16.3
million and recorded a gain of approximately $4.2 million. The gain was
recognized in other income (expense) in the condensed consolidated statements of
operations. Debt associated with the airplane of $8.9 million was repaid with a
portion of the proceeds.
The sale of the airplane triggered an obligation to Trace of
approximately $0.6 million. Under the terms of the airplane acquisition
agreement, the Company was obligated to share the net proceeds in excess of a
specified amount defined in the agreement. The obligation was offset against
Trace's two promissory notes payable to Foamex L.P.
7
<PAGE>
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
3. INCOME TAXES
The provision for income taxes in 1999 was based on year to date results.
The 1999 effective tax rate was reduced by the partial reversal of the deferred
tax asset valuation allowance recognized in 1998. The valuation allowance was
reduced to reflect the utilization of Federal loss carryforwards that reduced
the current tax component of the Federal tax provision. Additionally, the
valuation allowance was reduced to offset the net deferred Federal tax liability
generated in 1999.
4. 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>
Three Months Ended Nine Months Ended
September 30, September 30, September 30, September 30,
1999 1998 1999 1998
------- ------- ------- -------
(thousands, except per share amounts)
Basic earnings per share:
<S> <C> <C> <C> <C>
Net income $ 6,128 $ 3,426 $15,318 $15,812
======= ======= ======= =======
Average common stock outstanding 25,053 25,015 25,053 24,989
======= ======= ======= =======
Basic earnings per share $ 0.24 $ 0.14 $ 0.61 $ 0.63
======= ======= ======= =======
Diluted earnings per share:
Net income available for common stock
and dilutive securities $ 6,128 $ 3,426 $15,318 $15,812
======= ======= ======= =======
Average common stock outstanding 25,053 25,015 25,053 24,989
Common stock equivalents resulting
from stock options and warrants 289 1,103 176 1,157
------- ------- ------- -------
Average common stock and dilutive
equivalents 25,342 26,118 25,229 26,146
======= ======= ======= =======
Diluted earnings per share $ 0.24 $ 0.13 $ 0.61 $ 0.60
======= ======= ======= =======
</TABLE>
5. COMPREHENSIVE INCOME
The components of comprehensive income are listed below.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30, September 30, September 30,
1999 1998 1999 1998
-------- -------- ---------- ---------
(thousands)
<S> <C> <C> <C> <C>
Net income $ 6,128 $ 3,426 $15,318 $15,812
Foreign currency translation adjustments (464) (1,130) 347 (900)
-------- -------- ---------- ---------
Total comprehensive income $ 5,664 $ 2,296 $15,665 $14,912
======= ======= ======= =======
</TABLE>
6. RESTRUCTURING AND OTHER CHARGES (CREDITS)
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, restructuring and
other charges of approximately $3.5 million were recognized related primarily to
severance in
8
<PAGE>
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
6. RESTRUCTURING AND OTHER CHARGES (CREDITS) (continued)
connection with replacing the Company's former Chief Executive Officer and work
force reductions of approximately 81 employees.
During the second quarter of 1999, restructuring and other charges of
approximately $3.7 million were recognized. The provision included $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.
In the third quarter of 1999, restructuring and other charges of
approximately $3.0 million were recognized. The third quarter provision is
comprised of $1.6 million of severance costs in connection with additional work
force reductions of approximately 8 employees, $0.9 million of costs associated
with the closure of Foamex L.P.'s New York office and $0.5 million of other
charges.
Approximately $4.3 million of severance costs incurred in 1999 have been
paid as of September 30, 1999. Approximately $1.5 million of the total 1999
severance costs primarily relate to contractual severance costs payable to the
Company's former Chief Executive Officer, which will be paid through March 2001.
The Company may record additional restructuring charges as it finalizes
implementation of its restructuring plan.
7. INVENTORIES
The components of inventory are listed below.
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
(thousands)
<S> <C> <C>
Raw materials and supplies $ 69,278 $ 99,997
Work-in-process 12,354 12,188
Finished goods 22,826 24,473
-------- --------
Total $104,458 $136,658
======== ========
</TABLE>
8. LONG-TERM DEBT
Long-term debt consists of:
<TABLE>
<CAPTION>
<S> <C> <C>
September 30, December 31,
1999 1998
----------- ----------
Foamex L.P. Amended Credit Facility: (thousands)
Term Loan B $ 82,084 $ 82,714
Term Loan C 74,622 75,194
Term Loan D 108,075 108,900
Revolving credit facility 122,414 139,438
Foamex Carpet Amended Credit Facility 2,692 -
9 7/8% Senior subordinated notes due 2007 150,000 150,000
13 1/2% Senior subordinated notes due 2005 (includes
$10,549 and $11,893 of unamortized debt premium) 108,549 109,893
Industrial revenue bonds 7,000 7,000
Subordinated note payable (net of unamortized
debt discount of $280 and $523) 4,396 6,491
Other 7,910 18,858
----------- ---------
667,742 698,488
</TABLE>
9
<PAGE>
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
8. LONG-TERM DEBT (continued)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
-------- --------
(thousands)
<S> <C> <C>
Less current portion 12,543 690,248
-------- --------
Long-term debt-unrelated parties $655,199 $ 8,240
======== ========
Long-term debt - related party consists of:
Foamex/GFI Note $ 34,000 $ 34,000
Note payable to Foam Funding LLC 57,915 64,935
-------- --------
91,915 98,935
Less current portion 10,530 98,935
-------- --------
Long-term debt - related party $ 81,385 $ --
======== ========
</TABLE>
Foamex L.P. amended its credit facility (the "Foamex L.P. Amended Credit
Facility"), as of June 30, 1999, and modified the financial covenants for net
worth and interest, fixed charge coverage and leverage ratios through December
2006. An earnings requirement, as defined in the debt agreement, was added
through September 30, 1999. Foamex L.P. was in compliance with the interim
requirement at the end of the third quarter 1999. 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 agreement was also amended
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 (totaling $3.0
million in 1998) and distributions to the Company, and to limit future
investments in foreign subsidiaries and joint ventures. The "change of control"
definition under the agreement was also modified. Revolver borrowings under the
credit facility totaled $122.4 million at the end of the third quarter of 1999.
The weighted average interest rate on these obligations was 8.8% and $17.5
million was available for additional borrowings.
During 1999, the Foamex/GFI Note was amended to incorporate the same
change in control provisions that are included in the Foamex L.P. Amended Credit
Facility.
Foamex Carpet Cushion, Inc. (Foamex Carpet") amended is credit facility
(the "Foamex Carpet Amended Credit Facility") and note payable to Foam Funding
LLC, as of June 30, 1999, and modified the financial covenants for net worth and
interest, fixed charge coverage and leverage ratios through February 2004. An
earnings requirement, as defined in the debt agreement, was added through
September 30, 1999. Foamex Carpet was in compliance with the interim requirement
at the end of the third quarter 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 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. Borrowings under the credit
facility totaled $2.7 million at the end of the third quarter of 1999. The
weighted average interest rate on these obligations was 9.2% and $11.9 million
was available for additional borrowings.
The Company continues to be subject to covenants contained in various
debt agreements that limit, among other things to varying degrees, the ability
of the Company's subsidiaries (a) to pay distributions or 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 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.
10
<PAGE>
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
8. LONG-TERM DEBT (continued)
Certain of the Company's Mexican subsidiaries were in default of
financial covenant provisions contained in loan agreements with a Mexican bank.
Amendments to the loan agreements were finalized to modify the financial
covenant provisions. As of September 30, 1999, these Mexican subsidiaries were
in compliance with the financial covenant provisions under the loan agreements.
9. SEGMENT RESULTS
Segment results are presented below.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Carpet
Foam Cushion Automotive Technical
Products Products Products Products Other Total
---------- --------- ------------ ---------- -------- ---------
(thousands)
Third Quarter 1999
- --------------------
Net sales $139,111 $70,160 $83,355 $24,322 $10,001 $326,949
Income (loss) from operations 16,228 2,497 6,832 6,438 (5,654) 26,341
Depreciation and amortization 4,512 1,587 1,370 736 769 8,974
Third Quarter 1998
- --------------------
Net sales $159,954 $76,890 $69,843 $19,891 $5,932 $332,510
Income (loss) from operations 20,944 5,159 3,775 3,662 (6,227) 27,313
Depreciation and amortization 4,572 1,582 1,360 730 610 8,854
Year to Date 1999
- --------------------
Net sales $406,295 $201,040 $262,936 $69,598 $22,972 $962,841
Income (loss) from operations 42,098 5,464 19,187 17,308 (14,760) 69,297
Depreciation and amortization 13,355 4,647 3,995 2,119 1,656 25,772
Year to Date 1998
- --------------------
Net sales $442,991 $225,896 $197,447 $61,163 $15,782 $943,279
Income (loss) from operations 55,793 13,568 16,804 12,103 (10,568) 87,700
Depreciation and amortization 13,193 4,574 3,948 2,118 1,791 25,624
</TABLE>
10. STOCKHOLDERS' EQUITY (DEFICIT)
Warrants
On July 1, 1999, 116,745 warrants for an aggregate of 600,000 shares of
common stock expired without having been exercised. In addition, all remaining
warrants outstanding to purchase approximately 1.2 million shares of common
stock expired on October 12, 1999.
11. RELATED PARTY TRANSACTIONS
Foam Funding LLC Debt
In the third quarter of 1999, the subsidiaries of the Company paid $1.9
million of interest and $2.6 million of principal on notes payable to Foam
Funding LLC. For the first three quarters of 1999, interest and principal
payments totaled $5.6 million and $7.0 million, respectively.
In the third quarter of 1998, subsidiaries of the Company paid $1.5
million of interest and $1.7 million of principal on notes payable to Foam
Funding LLC. For the first three quarters of 1998, interest and principal
payments totaled $3.6 million and $3.5 million, respectively.
11
<PAGE>
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
11. RELATED PARTY TRANSACTIONS (continued)
Trace Management Fee
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 a Trace subsidiary. The 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.
New York Sublease
Prior to September 30, 1999, Foamex L.P. subleased 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 that the space be vacated by September
30, 1999. Trace complied with such request, and Foamex L.P. has closed its New
York office and subleased the premises to a third party.
Trace Promissory Notes
Note 2 includes disclosures regarding 1999 activity concerning Trace
promissory notes payable to Foamex L.P. The Trace notes are included in the
other component of stockholders' deficit, which is consistent with the
recognition in prior years.
12. COMMITMENTS AND CONTINGENCIES
Litigation - Shareholders
During 1999, the Company received several communications addressed to its
Board of Directors from certain of the Company's stockholders regarding aspects
of the relationship between Trace and the Company. Such stockholders questioned
the propriety of certain relationships and related transactions between Trace
and the Company, which previously had been disclosed in the Company's periodic
filings. On June 14, 1999, the Company received a draft complaint from counsel
of certain stockholders naming the Company and certain current and former
directors, which included allegations similar to those in the Second Amended
Complaint, as defined below. The Company was advised by such counsel that such
stockholders intended to file an action soon thereafter. On August 13, 1999, two
stockholders filed an action on behalf of an alleged class of the Company's
shareholders, entitled Watchung Road Associates, L.P. et al v. Foamex
International Inc., et al., Civil Action No. 17370 (the "Watchung Complaint"),
in the Court of Chancery of the State of Delaware, New Castle County. The suit
names the Company, Mr. Marshall S. Cogan, Mr. Etienne Davignon, Mr. John
Gutfreund, Mr. Robert Hay, Dr. Stuart Hershon, Mr. Jack Johnson, and Mr. John
Tunney as defendants. The Watchung Complaint alleges that the individual
defendants breached their fiduciary duties by agreeing to the potential buyout
of the Company by Sorgenti Chemical Industries LLC and Liberty Partners L.P.
(the "Sorgenti Transaction").
The Watchung Complaint alleges that the Sorgenti Transaction's buy-out
price of $11.50 per outstanding share is inadequate and fails to take into
consideration claims the Company allegedly has a result of the supposed wrongful
diversions of Company assets in the Company's dealings with Trace and its
affiliates. The Watchung Complaint also alleges that the directors breached
their fiduciary duties agreeing to the proposed Sorgenti Transaction without
conducting an auction or active market check. The suit alleges that the board
placed Mr. Cogan's interest ahead of those of the Company's stockholders, and
alleges that a critical condition of the Sorgenti Transaction is a consulting
agreement for Mr. Cogan. The Watchung suit seeks to enjoin the Sorgenti
Transaction, seeks rescission or damages if the Sorgenti Transaction is
consummated, and seeks an accounting from the directors for plaintiffs alleged
losses. To date, no response to the Watchung Complaint has been made.
12
<PAGE>
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
12. COMMITMENTS AND CONTINGENCIES (continued)
On April 26, 1999, a putative securities class action entitled Molitor v.
Foamex International Inc., et al., 99 Civ. 3004, was filed in the United States
District court for the Southern District of New York naming as defendants the
Company, Trace and certain officers and directors of the Company on behalf of
stockholders who bought shares of the Company's common stock during the period
from May 7, 1998 through and including April 16, 1999. The lawsuit alleges that
the defendants violated Section 10(b) of the Securities Exchange Act of 1934 and
Rule 10b-5 by misrepresenting and/or omitting material information about the
Company's financial situation and operations, with the result of artificially
inflating the price of the Company's stock. The lawsuit also alleges that Trace
and Marshall S. Cogan violated Section 20(a) of the Securities Exchange Act of
1934 as controlling persons of the Company. The complaint seeks class
certification, a declaration that defendants violated the federal securities
laws, an award of money damages, and costs and attorneys', accountants' and
experts' fees. On May 18, 1999, a similar action entitled Thomas W. Riley v.
Foamex International Inc., et al., 99 Civ. 3653 was filed in the same court. The
two actions have been consolidated. To date, no response to the complaint has
been made and no discovery or other proceedings has taken place. Plaintiffs have
advised the Company that they plan to file a consolidated complaint within 45
days of October 7, 1999. After service, defendants will have 45 days to respond
to the consolidated complaint.
Beginning on or about March 17, 1998, six actions (collectively the
"Shareholder Litigation") were filed in the Court of Chancery of the State of
Delaware, New Castle County (the "Court"), by stockholders of the Company. The
Shareholder Litigation, purportedly brought as class actions on behalf of all
stockholders of the Company, named the Company, certain of its directors,
certain of its officers, Trace and Trace Merger Sub, Inc. ("Merger Sub") as
defendants alleging that they had breached their fiduciary duties to the
plaintiffs and other stockholders of the Company unaffiliated with Trace in
connection with the original proposal of Trace to acquire the publicly traded
outstanding common stock of the Company for $17.00 per share under an Agreement
and Plan of Merger (the "First Merger Agreement"). The complaints sought, among
other things, class certification, a declaration that the defendants breached
their fiduciary duties to the class, preliminary and permanent injunctions
barring implementation of the proposed transaction, rescission of the
transaction if consummated, unspecified compensatory damages, and costs and
attorneys' fees. A stipulation and order consolidating these six actions under
the caption In re Foamex International Inc. Shareholders Litigation,
Consolidated Civil Action No. 16259NC, was entered by the Court on May 28, 1998.
The parties to the Shareholder Litigation entered into a Memorandum of
Understanding, dated June 25, 1998 (the "Memorandum of Understanding"), to
settle the Shareholder Litigation, subject to, inter alia, execution of a
definitive Stipulation of Settlement between the parties and approval by the
Court following notice to the class and a hearing. The Memorandum of
Understanding provided that as a result of, among other things, the Shareholder
Litigation and negotiations among counsel for the parties to the Memorandum of
Understanding, a special meeting of stockholders would be held to vote upon and
approve the First Merger Agreement which provided, among other things, for all
of the Company's outstanding common stock not owned by Trace and its
subsidiaries (the "Public Shares") to be converted into the right to receive
$18.75 in cash, without interest.
The Memorandum of Understanding also provided for certification of a
class, for settlement purposes only, consisting of the Public Shares owned by
stockholders of the Company unaffiliated with Trace and its subsidiaries (the
"Public Shareholders"), the dismissal of the Shareholder Litigation with
prejudice and the release by the plaintiffs and all members of the class of all
claims and causes of action that were or could have been asserted against Trace,
the Company and the individual defendants in the Shareholder Litigation or that
arise out of the matters alleged by plaintiffs. Following the completion of the
confirmatory discovery which was provided for in the Memorandum of
Understanding, on September 9, 1998, the parties entered into a definitive
Stipulation of Settlement and the Court set a hearing for October 27, 1998 to
consider whether the settlement should be approved (the "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
13
<PAGE>
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
12. COMMITMENTS AND CONTINGENCIES (continued)
made by Trace on October 16, 1998, that it had been unable to obtain the
necessary financing for the contemplated acquisition by Trace of the Company's
common stock at a price of $18.75 per share which was the subject matter of the
proposed settlement. This request was approved by the Court on October 21, 1998,
and the Company issued a press release on October 21, 1998, announcing that the
Court had cancelled the Settlement Hearing.
On November 10, 1998, counsel for certain of the defendants in the
Shareholder Litigation gave notice pursuant to the Stipulation of Settlement
that such defendants were withdrawing from the Stipulation of Settlement in
light of the notice given by Trace to the Company and the special committee of
the Board of Directors on November 5, 1998 whereby Trace terminated the First
Merger Agreement on the grounds that the financing condition in the First Merger
Agreement was incapable of being satisfied.
On November 12, 1998, the plaintiffs in the Shareholder Litigation filed
an Amended Class Action Complaint (the "Amended Complaint"). The Amended
Complaint named the Company, Trace, Merger Sub, Mr. Marshall S. Cogan, Mr.
Andrea Farace, Dr. Stuart Hershon, Mr. John Tunney, and Mr. Etienne Davignon as
defendants, alleging that they breached their fiduciary duties to plaintiffs and
the other Public Shareholders in connection with a second Agreement and Plan of
Merger (the "Second Merger Agreement"), that the proposal to acquire the Public
Shares for $12.00 per share lacked entire fairness, that the individual
defendants violated 8 Del. Code ss. 251 in approving the Second Merger
Agreement, and that Trace and Merger Sub breached the Stipulation of Settlement.
On December 2, 1998, plaintiffs served a motion for a preliminary injunction,
seeking an Order to preliminarily enjoin the defendants from proceeding with,
consummating or otherwise effecting the merger contemplated by the Second Merger
Agreement. In January 1999, Trace advised that it could not finance the offer
reflected in the Second Merger Agreement. As a result, the preliminary
injunction motion did not go forward.
On June 9, 1999, the plaintiffs in the Shareholder Litigation moved for
leave to file a Second Amended and Supplemental Class Action and Derivative
Complaint (the "Second Amended Complaint"). The Second Amended Complaint was
filed on July 14, 1999, and named the Company, Trace, Merger Sub, Mr. Marshall
S. Cogan, Mr. Andrea Farace, Dr. Stuart Hershon, Mr. John Tunney, and Mr.
Etienne Davignon as defendants, alleging that the named individuals breached
their fiduciary duties by causing the Company to waste assets in its
transactions with Trace and by failing to enforce the Company's rights under the
First Merger Agreement, seeking appointment of a receiver for the Company, and
alleging that Trace and Merger Sub breached the Stipulation of Settlement.
On August 26, 1999, the plaintiffs in the Shareholder Litigation moved
for leave to file a Third Amended and Supplemental Class Action and Derivative
Complaint (the "Third Amended Complaint"). The Third Amended Complaint was filed
on October 27, 1999. The Third Amended Complaint alleges both class claims and
derivative claims, and names the Company, Mr. Marshall S. Cogan, Mr. Andrea
Farace, Dr. Stuart Hershon, Mr. John Tunney, Mr. Etienne Davignon, Mr. John
Gutfreund, Mr. Robert Hay and Mr. John Johnson as defendants.
The Third Amended Complaint alleges that the individual defendants
breached their duties to the Company's Public Shareholders by agreeing to the
Sorgenti Transaction at an inadequate price that fails to take into
consideration the Company's allegedly valuable claims arising out of purported
diversions of money from the Company to Trace, and by failing to maximize
shareholder value in a sale of the Company and instead agreeing to a deal with a
buyer who is willing to enter into a consulting deal with Mr. Cogan to get his
and the board's approval. The Third Amended Complaint purports to assert a
derivative claim for waste and breach of fiduciary duty against Mr. Cogan, Mr.
Farace, Dr. Hershon, Mr. Tunney, Mr. Davignon, Mr. Gutfreund, and Mr. Hay. The
Third Amended Complaint seeks the appointment of a receiver for the Company,
alleging that the directors have mismanaged the Company. The Third Amended
Complaint also alleges that Mr. Cogan, Mr. Farace, Dr. Hershon, Mr. Davignon,
Mr. Tunney, Mr. Gutfreund, and Mr. Hay breached their fiduciary duties by
failing to enforce the Company's rights under the First Merger Agreement.
The Third Amended Complaint seeks: a declaration that the individual
defendants have breached their fiduciary duties; damages; the imposition of a
constructive trust on profits and benefits Mr. Cogan, Trace, and the other
individual defendants allegedly received as a result of the alleged wrongdoing;
an injunction against the
14
<PAGE>
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
12. COMMITMENTS AND CONTINGENCIES (continued)
Sorgenti Transaction under its present terms; rescission and damages if the deal
is consummated; and the appointment of a receiver for the Company. To date, no
response to the Third Amended Complaint has been made.
The defendants intend to vigorously defend these litigations, which if
adversely determined, could have a material adverse effect on the financial
position, results of operations and cash flows of the Company.
Litigation - Breast Implants
As of November 8, 1999, the Company and Trace were two of multiple
defendants in actions filed on behalf of approximately 4,157 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's insurance carrier has paid the Company's litigation
expenses to date, 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, 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.
Litigation - Other
The Company is party to various other lawsuits, both as defendant and
plaintiff, arising in the normal course of business. It is the opinion of
management that the disposition of these lawsuits will not, individually or in
the aggregate, have a material adverse effect on the financial position or
results of operations of the Company. If management's assessment of the
Company's liability with respect to these actions is incorrect, such actions
could have a material adverse effect on the Company's consolidated financial
position.
Environmental
The Company is subject to extensive and changing federal, state, local
and foreign environmental laws and regulations, including those relating to the
use, handling, storage, discharge and disposal of hazardous substances and the
remediation of environmental contamination, and as a result, is from time to
time involved in administrative and judicial proceedings and inquiries relating
to environmental matters. As of September 30, 1999, the Company
15
<PAGE>
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
12. COMMITMENTS AND CONTINGENCIES (continued)
had accruals of approximately $4.5 million for environmental matters. During
1998, the Company established an allowance of $1.2 million relating to
receivables from Trace for environmental indemnifications due to the financial
difficulties of Trace.
The Clean Air Act Amendments of 1990 (the "1990 CAA Amendments") provide
for the establishment of federal emission standards for hazardous air pollutants
including methylene chloride, propylene oxide and TDI, materials used in the
manufacturing of foam. On December 27, 1996, the United States Environmental
Protection Agency (the "EPA") proposed regulations under the 1990 CAA Amendments
that will require manufacturers of slab stock polyurethane foam and foam
fabrication plants to reduce emissions of methylene chloride. The final National
Emission Standard for Hazardous Air Pollutants ("NESHAP") was promulgated
October 7, 1998. NESHAP requires a reduction of approximately 70% of the
emission of methylene chloride for the slab stock foam industry effective
October 7, 2001. The Company does not believe implementation of the regulation
will require it to make material expenditures due to the Company's use of
alternative technologies which do not utilize methylene chloride and its ability
to shift current production to the facilities which use these alternative
technologies. The 1990 CAA Amendments also may result in the imposition of
additional standards regulating air emissions from polyurethane foam
manufacturers, but these standards have not yet been proposed or promulgated.
The Company has reported to appropriate state authorities that it has
found soil and groundwater contamination in excess of state standards at three
facilities and soil contamination in excess of state standards at three other
facilities. The Company has begun remediation and is conducting further
investigations into the extent of the contamination at these facilities and,
accordingly, the extent of the remediation that may ultimately be required. The
actual cost and the timetable of any such remediation cannot be predicted with
any degree of certainty at this time. The Company has accruals of $3.3 million
for the estimated cost of completing remediation at these facilities. The
Company is in the process of addressing potential contamination at its
Morristown, Tennessee facility, and has submitted a sampling plan to the State
of Tennessee. The extent of the contamination and responsible parties, if any,
has not yet been determined. A former owner may be liable for cleanup costs;
nevertheless, the cost of remediation, if any, is not expected to be material.
Federal regulations required that by the end of 1998 all underground
storage tanks ("USTs") be removed or upgraded in all states to meet applicable
standards. The Company has upgraded all USTs at its facilities in accordance
with these regulations and recently completed the closure of remaining USTs at
two sites to meet applicable standards. Some petroleum contamination in soils
was found at one of the sites; the extent of the contamination is currently
being investigated. The Company has accrued approximately $0.5 million for the
estimated remediation costs associated with this site. However, the full extent
of contamination, and accordingly, the actual cost of such remediation, cannot
be predicted with any degree of certainty at this time. Based upon the
investigation conducted thus far, the Company believes that its USTs do not pose
a significant risk of environmental liability. However, there can be no
assurances that such USTs will not result in significant environmental liability
in the future.
On April 10, 1997, the Occupational Health and Safety Administration
promulgated new standards governing employee exposure to methylene chloride,
which is used as a blowing agent in some of the Company's manufacturing
processes. The phase-in of the standards was completed in 1999 and the Company
has developed and implemented a compliance program. Capital expenditures
required and changes in operating procedures are not anticipated to
significantly impact the Company's competitive position.
The Company has been designated as a Potentially Responsible Party
("PRP") by the EPA with respect to seven sites. Estimates of total cleanup costs
and fractional allocations of liability are generally provided by the EPA or the
committee of PRP's with respect to the specified site. In each case, the
liability of the Company is not considered to be material.
16
<PAGE>
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
12. COMMITMENTS AND CONTINGENCIES (continued)
Although it is possible that new information or future developments could
require the Company to reassess its potential exposure relating to all pending
environmental matters, including those described herein, the Company believes
that, based upon all currently available information, the resolution of such
environmental matters will not have a material adverse effect on the Company's
operations, financial position, capital expenditures or competitive position.
The possibility exists, however, that new environmental legislation and/or
environmental regulations may be adopted, or other environmental conditions may
be found to exist, that may require expenditures not currently anticipated and
that may be material.
17
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Going Concern Issues
The accompanying financial statements and notes have been prepared
assuming the Company will continue as a going concern. As discussed in Note 1,
there are going concern issues involving the financial condition of the Company
and related impact of debt covenants, and change in control provisions that have
the potential to accelerate certain debt obligations.
The Company is subject to various internal and external factors which
could significantly impact its liquidity and capital structure, including, among
other things, (a) the Company's debt and capital structures, (b) the Crain
Consolidation, (c) additional raw material cost increases, (d) the ability to
increase customers selling price to recover 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 in the Company's
subsidiaries' debt agreements (discussed below), 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.
As discussed in the capital structure section below, during the first
half of 1999, amendments to debt agreements were completed and the Company's
subsidiaries were in compliance with the financial covenants of these agreements
on both June 30, 1999 and September 30, 1999. Although the Company believes its
subsidiaries can meet the debt covenant requirements under their financing
agreements, there can be no assurance these covenants will be met. 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, and borrowing capacity 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.
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
$481.8 million of debt was outstanding as of September 30, 1999, contain
provisions that would result in the acceleration of such indebtedness if a
person or group other than Trace were to beneficially own more than 25% of the
Company's outstanding voting stock and a greater percentage of such voting stock
than the amount beneficially owned by Trace. Additionally, certain indentures of
the Foamex L.P. and Foamex Capital Corporation relating to senior subordinated
notes of $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 a person or group other than Trace were to
beneficially own more than 25% of the Company's outstanding voting stock and a
greater percentage of such voting stock than the amount beneficially owned by
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
to a person or group other than Trace which would acquire more than 25% of the
Company's outstanding voting stock and a greater percentage of such voting stock
than the amount beneficially owned by Trace. According to a filing made with the
bankruptcy court on November 2, 1999, two of Trace's creditors have petitioned
the bankruptcy court to permit such creditors to foreclose on and take ownership
of the shares of common stock owned by them, representing approximately 17% of
the Company's outstanding voting stock.
18
<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, 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.
Potential Business Combinations
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. The transaction is 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, subject to certain conditions.
The transaction is subject to a number of conditions, including the
negotiation of definitive documents that will contain certain conditions
relating to the bank credit facilities and the public debt of the Company's
subsidiaries. Additional issues that will need to be addressed include, minimum
shareholder acceptance, 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 other regulatory agencies.
On November 1, 1999, the Company announced that the letter of intent
expired by its terms. However, the Purchasers requested an extension of the
letter of intent until December 15, 1999. The parties agreed to the extension
and are continuing discussions towards a possible transaction.
Also on November 1, 1999, the Company announced that is has authorized a
due diligence review for a possible business combination led by John G. Johnson,
Jr., President and Chief Executive Officer of the Company. Mr. Johnson has
informed the Board of Directors that he is working with various possible sources
of equity funding, but that he has no firm commitments for the financing of a
transaction. No formal proposal has been made to the Company by Mr. Johnson.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
Income from Operations
Net sales for the third quarter of 1999 were $326.9 million, down 1.7%
compared to $332.5 million in the third quarter of 1998. The decrease in the
third quarter versus the prior year reflects a decrease in Foam Products sales
due to manufacturing consolidations and a decrease in Carpet Cushion Products
volume offset by increased volume of automotive lamination products and
Technical Products sales.
Income from operations decreased 3.6% to $26.3 million for the third
quarter of 1999 compared to $27.3 million in the 1998 third quarter. Results in
1999 included a $3.0 million provision for restructuring and other costs. The
decrease in margins versus the prior year resulted principally from lower Foam
Products and Carpet Cushion Products sales and an increase in lower margin
automotive lamination business. The decrease in selling, general and
administrative costs included the elimination of duplicative costs from the
Crain Consolidation and cost reductions implemented during 1999.
Interest and Debt Issuance Expense
Interest and debt issuance expense totaled $18.7 million for the 1999
third quarter, 1.8% higher than the comparable 1998 expense.
19
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Other Income (Expense), Net
Other expense was significantly lower in 1999. The 1998 third quarter net
other expense of $3.2 million included $1.1 million of foreign currency losses
from the Company's Canadian and Mexican operations, $1.1 million of financial
and legal fees in connection with a proposed merger and a $1.0 million reduction
in value of the Company's investment in Trace Global Opportunities Fund.
Income Tax Expense
The third quarter 1999 effective tax rate was 14.2% compared to 40.0% in
the third quarter of 1998. The provision for income taxes in 1999 was based on
year to date results. The 1999 effective tax rate was reduced by the partial
reversal of the deferred tax asset valuation allowance recognized in 1998. The
valuation allowance was reduced to reflect the utilization of Federal loss
carryforwards that reduced the current tax component of the Federal tax
provision. Additionally, the valuation allowance was reduced to offset the net
deferred Federal tax liability generated in 1999.
Net Income
Net income for the third quarter of 1999 was up 78.9% to $6.1 million
compared to $3.4 million in the 1998 third quarter. The increase was largely due
to a reduction in net other expenses combined with a lower effective tax rate in
1999.
Segment Results
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Carpet
Foam Cushion Automotive Technical
Products Products Products Products Other Total
---------- ---------- ----------- --------- -------- -------
(thousands)
Third Quarter 1999
- -------------------
Net sales $139,111 $70,160 $83,355 $24,322 $10,001 $326,949
Income (loss) from operations 16,228 2,497 6,832 6,438 (5,654) 26,341
Third Quarter 1998
- -------------------
Net sales $159,954 $76,890 $69,843 $19,891 $5,932 $332,510
Income (loss) from operations 20,944 5,159 3,775 3,662 (6,227) 27,313
</TABLE>
Foam Products
Foam Products net sales for the third quarter of 1999 decreased 13.0%.
Lower margins resulted in a 22.5% drop in income from operations. Improved
operating efficiencies and cost reductions as part of the Crain Consolidation
helped to offset the income decline.
Carpet Cushion Products
Carpet Cushion Products net sales for the third quarter of 1999 decreased
8.8% primarily due to lower shipments. Income from operations decreased 51.6%
primarily due to lower margins.
Automotive Products
Automotive Products net sales for the third quarter of 1999 increased
19.3%. The increase reflected higher shipments of lamination products. Income
from operations increased 81.0% from the combination of operating efficiencies
and sales gains.
20
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Technical Products
Technical Products net sales for the third quarter of 1999 increased
22.3%. Income from operations increased 75.8% and reflected higher margin sales.
Other
Other primarily consists of certain foreign manufacturing operations,
corporate expenses not allocated to 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 1999 loss from operations was primarily associated with the $3.0 million of
restructuring and other charges.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
Income from Operations
Net sales for the first three quarters of 1999 were $962.8 million
compared to $943.3 million for the comparable period in 1998. The 2.1% increase
was primarily the result of sales gains in the Automotive Products and Technical
Products segments partially offset by declines in the foam and carpet cushion
segments.
Despite the sales improvement, income from operations of $69.3 million
was down 21.0% from $87.7 million for the comparable 1998 period. Results in
1999 included $10.1 million of restructuring and other charges. The remaining
decline primarily reflected lower results in the Foam Products and Carpet
Cushion Products segments. The Foam Products segment was impacted by lower sales
due to plant closures in connection with the Crain Consolidation. Carpet cushion
1999 results were impacted by lower margins. The increase in Automotive Products
and Technical Products segment results translated to improved earnings.
Partially offsetting these negative factors were lower selling, general and
administrative expenses that primarily reflected the elimination of duplicative
costs from the Crain Consolidation and cost reductions implemented during 1999.
Interest and Debt Issuance Expense
Interest and debt issuance expense totaled $54.1 million in 1999,
slightly higher than the 1998 expense of $53.2 million.
Other Income (Expense), Net
During the first quarter of 1999, a $4.2 million gain was recognized on
the sale of the corporate aircraft. Expenses in 1998 included $2.0 million of
costs associated with the GFI Transaction, $0.9 million of foreign currency
losses in Mexico and Canada, $1.1 million in fees associated with the financial
and legal advisors used by the Company in connection with the proposed Merger,
and a $1.0 million reduction in the value of the Company's investment in the
Trace Global Opportunities Fund.
Income Tax Expense
The 1999 effective tax rate for the first three quarters was 13.9%
compared to 40.0% in 1998. The provision for income taxes in 1999 was based on
year to date results. The 1999 effective tax rate was reduced by the partial
reversal of the deferred tax asset valuation allowance recognized in 1998. The
valuation allowance was reduced to reflect the utilization of Federal loss
carryforwards that reduced the current tax component of the Federal tax
provision. Additionally, the valuation allowance was reduced to offset the net
deferred Federal tax liability generated in 1999.
21
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Extraordinary Loss
The extraordinary loss on the early extinguishment of debt in 1998 was
$1.9 million (net of $1.3 million income tax benefit). The charge primarily
reflected the write-off of debt issuance costs in connection with a series of
transactions designed to simplify the Company's capital structure and to provide
future operational flexibility.
Net Income
Net income for the first three quarters of 1999 was $15.3 million, down
3.1% from the comparable period in 1998. Lower income from operations was
partially offset by a net improvement in other income and expense and by a lower
effective tax rate.
Segment Results
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Carpet
Foam Cushion Automotive Technical
Products Products Products Products Other Total
---------- ---------- ----------- --------- -------- -------
(thousands)
Year to Date 1999
- ------------------
Net sales $406,295 $201,040 $262,936 $69,598 $22,972 $962,841
Income (loss) from operations 42,098 5,464 19,187 17,308 (14,760) 69,297
Year to Date 1998
- ------------------
Net sales $442,991 $225,896 $197,447 $61,163 $15,782 $943,279
Income (loss) from operations 55,793 13,568 16,804 12,103 (10,568) 87,700
</TABLE>
Foam Products
Foam Products net sales for the first three quarters decreased 8.3%. The
decrease primarily reflected the closure of several plants as part of the Crain
Consolidation. Income from operations decreased 24.5% due to lower margins.
Carpet Cushion Products
Carpet Cushion Products net sales for the first three quarters decreased
11.0% primarily due to reductions in carpet cushion selling prices and lower
shipments. Income from operations decreased 59.7% primarily due to lower
margins.
Automotive Products
Automotive Products net sales for the first three quarters increased
33.2%. The increase reflected higher shipments of lamination products. Income
from operations increased 14.2% from the combination of operating efficiencies
and sales gains that were especially evident during the third quarter of 1999.
Technical Products
Technical Products net sales for the first three quarter increased 13.8%.
Income from operations increased 43.0% and reflected higher margin sales.
Other
Other primarily consists of certain foreign manufacturing operations,
corporate expenses not allocated to 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 loss from operations in 1999 was primarily associated with the $10.1 million
of restructuring and other charges.
22
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Capital Structure
As of December 31, 1998, certain subsidiaries were not in compliance with
various debt covenants included in agreements totaling $480.4 million. Had the
lenders under these debt agreements accelerated the maturity of their
indebtedness as a result of the subsidiaries' noncompliance, the acceleration
would have constituted an event of default and 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, approximately $771.1 million of
long-term debt at December 31, 1998 was classified as a current liability in the
consolidated balance sheet, which produced a working capital deficit. These
issues raised substantial doubt at year-end 1998 about the Company's ability to
continue as a going concern.
In response to these financial conditions, amendments to debt agreements
were executed during the first half of 1999, as discussed in Note 8.
Additionally, the Company generated net income, provided over $35.0 million of
cash flow from operations and reduced total debt by 5% from the beginning of the
year. The combination of debt amendments, year to date results and management's
expectations regarding compliance with debt covenants in future measurement
periods represented an improved financial position relative to year-end 1998.
Accordingly, $749.8 million of debt at the end of the second quarter 1999 and
approximately $736.6 million at the end of the third quarter 1999 were
classified as long term in the balance sheet.
Amendments to the Foamex L.P. Amended Credit Facility, as of June 30,
1999, modified the financial covenants for net worth and interest, fixed charge
coverage and leverage ratios through December 2006. An earnings requirement, as
defined in the debt agreement, was added through September 30, 1999. The Company
was in compliance with the interim requirement at the end of the third quarter
1999. 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 agreement 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 (totaling $3.0 million in 1998) and distributions to the Company, and
to limit future investments in foreign subsidiaries and joint ventures. The
"change of control" definition under the agreement was also modified.
During 1999, the Foamex/GFI Note was amended to incorporate the same
change in control provisions that are included in the Foamex L.P. Amended Credit
Facility.
Amendments to the Foamex Carpet Amended Credit Facility and to the note
payable to Foam Funding LLC, as of June 30, 1999, modified the financial
covenants for net worth and interest, fixed charge coverage and leverage ratios
through February 2004. An earnings requirement, as defined in the debt
agreement, was added through September 30, 1999. The Company was in compliance
with the interim requirement at the end of the third quarter 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 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.
The Company continues to be subject to covenants contained in various
debt agreements that limit, among other things to varying degrees, the ability
of the Company's subsidiaries (a) to pay distributions or 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 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.
Certain of the Company's Mexican subsidiaries were in default of
financial covenant provisions contained in loan agreements with a Mexican bank.
Amendments to the loan agreements were finalized to modify the financial
23
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
covenant provisions. As of September 30, 1999, these Mexican subsidiaries were
in compliance with the financial covenant provisions under the loan agreements.
Liquidity
Cash provided by operating activities was $35.6 million for the first
three quarters of 1999 as compared to cash used of $17.7 million for the same
period in 1998. The improvement is primarily due to a decrease in cash used for
operating assets and liabilities.
Cash provided by investing activities was $2.4 million for the year to
date period ended September 30, 1999 as compared to cash used of $26.7 million
for the comparable 1998 period. Cash provided by investing activities primarily
represented the proceeds from the sale of the corporate airplane, discussed in
Note 2. Additionally, capital expenditures in 1999 were down. Cash requirements
in 1998 included $4.4 million for the acquisition-related payments.
Cash required for financing activities was $46.3 million for the first
three quarters and primarily reflected net debt repayments and $8.0 million of
debt issuance costs.
The ability of Foamex L.P. and Foamex Carpet to make distributions to the
Company is restricted by the terms of their respective financing agreements.
Consequently, the Company is not expected to have access to the cash flow
generated by their principal subsidiaries for the foreseeable future.
As of September 30, 1999, there were $122.4 million of revolving credit
borrowings, at a weighted average interest rate of 8.8%, under the Foamex L.P.
Amended Credit Facility with $17.5 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 September 30, 1999 were approximately $3.6 million, at an
interest rate of 7.0%, under Foamex Canada Inc.'s revolving credit agreement
with unused availability of approximately $1.8 million. Foamex Carpet had
approximately $2.7 million of outstanding borrowings under the Foamex Carpet
Amended Credit Facility at September 30, 1999, at an interest rate of 9.2%, with
unused availability of $11.9 million and approximately $0.4 million of letters
of credit outstanding which are supported by the Foamex Carpet Amended Credit
Facility.
The Company expects to continue to reduce capital expenditures from
historical levels for the foreseeable future. Lower capital expenditure levels
are not anticipated to materially impact the Company's competitive position.
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 September 30, 1999 was $4.5 million. Although it is
possible that new information or future developments could require the Company
to reassess its potential exposure to all pending environmental matters,
including those described in the notes 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 September 30, 1999, indebtedness
with variable interest rates totaled $499.7 million. On an annualized
24
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
basis, if the interest rates on these debt instruments increased by 1%, interest
expense would increase by approximately $5.0 million.
Year 2000 Compliance
Status Update
-------------
By the end of the third quarter of 1999, the Company has essentially
completed its program to address potential disruptions to operations and
relationships with our business partners related to the Year 2000 software
problem.
The Company utilized a cross-functional team approach that was directed
by a Year 2000 Executive Sponsor Team. A comprehensive assessment of both
information technology (IT) and non-IT systems has been completed.
These assessments included:
o administrative, manufacturing and laboratory computer systems
o desktop and telecommunications systems
o safety and environmental systems
o systems provided by vendors and suppliers, including employee
compensation and benefit plan maintenance systems
o process control systems and manufacturing equipment
o significant customers and suppliers.
Assessment & Remediation Process
--------------------------------
The assessment process for each facility consisted of:
o an inventory of potential Year 2000 sensitive equipment and
systems
o an impact evaluation of possible failures and determination of
required remediation actions
o testing and implementation of remediation actions.
The assessment process, including fail safe testing, was completed in
1999. The following discussion focuses on the process.
The inventory and assessment phases were completed by the end of 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. Remediation actions
included:
o the modification of several million lines of system code
o the conversion of the systems acquired in business combinations
to standard business information computer systems
o upgrading system hardware and operating system software
o testing of the applicable systems in a development testing area
o the migration of the remediated systems into the production
environment.
Cost and Project Impact
-----------------------
The cost to address the Year 2000 Problem is approximately $2.0 million.
The majority of this total project cost has already been incurred during 1998
and 1999. The project cost primarily represents the cost for various
25
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
consultants and system upgrades. Project cost includes internal Company cost for
IT employees that worked directly on software programming modifications.
Spending on the Year 2000 Problem has been funded by cash generated from
operations. The project did not significantly impact the other responsibilities
and project schedule of the IT department during the past two years.
Contingency Plans
-----------------
As part of the overall response to the Year 2000 Problem, the Company has
developed contingency plans in the event of Year 2000 non-compliance of certain
systems or third parties. These contingency plans include:
o additional security of manufacturing and administrative
facilities
o response teams to address incidents
o status review and testing of critical applications prior to
initiation of normal processing requirements on or about January
1, 2000
o alternative production and shipping locations in the event of
localized power outages.
Risks
-----
Management believes that all significant systems controlled by the
Company are ready. While the Company is communicating readiness to 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.
There is inherent uncertainty in connection with the Year 2000 Problem
due to the possibility of unanticipated failures by customers, suppliers and
infrastructure services. 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 has provided information in order
to reduce the level of uncertainty regarding the impact of the Year 2000
Problem. Management believes that the Company's solutions to the Year 2000
Problem will help minimize the possibility of significant disruptions to the
Company's operations.
Forward-Looking Statements Relating to the Year 2000 Problem
------------------------------------------------------------
The Year 2000 Problem discussion includes a number of forward-looking
statements that are based on the Company's best estimates. The actual impact of
the Year 2000 Problem could differ materially from these estimates because of a
number of factors, including the failure of third parties to achieve Year 2000
compliance and the inability of Foamex to:
o accurately assess which systems and relationships with third
parties are important
o identify and correct all computer code in key systems
o identify and correct all production equipment that could have an
embedded date sensitive chip
o identify all significant issues.
The factors identified above are not necessarily all of the factors that
could result in materially different impact from the estimates included in the
Company's forward-looking statements.
Forward-Looking Statements
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.
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 12 of the condensed consolidated financial
statements of the Company as of September 30, 1999 (unaudited) is
incorporated herein by reference.
Item 5. Other Information
------------------
Information concerning the extension of a Letter of Intent for the
acquisition of the Company is incorporated by reference to Exhibit
No. 99.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
4.5 Commitment Letter dated August 9, 1999, from The Bank of
Nova Scotia to Foamex Canada Inc.
27 Financial Data Schedule for the year to date period ended
September 30, 1999.
99 Press release concerning the extension of a Letter of Intent
for the acquisition of the Company.
(b) The Company filed the following Current Reports on Form 8-K for
the quarter ended September 30, 1999:
A report, dated August 5, 1999, was filed for Item 5. Other
Events, reporting press release of proposed buyout.
A report, dated August 13, 1999, was filed for Item. 5. Other
Events, concerning a purported class action complaint by certain
shareholders.
28
<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: November 12, 1999 By: /s/ George L. Karpinski
-------------------------------
George L. Karpinski
Senior Vice President, Treasurer
and Assistant Secretary
29
Scotiabank
The Bank of Nova Scotia
44 King Street West
Toronto, Ontario M5H 1H1
August 9, 1999
Foamex Canada Inc.
415 Evans Avenue
Etobicoke, Ontario
M8W 2T2
Attention: Mr. John Gaw, Controller
Dear Sirs:
We confirm that subject to acceptance by you, The Bank of Nova Scotia (the
"Bank"), will make available to Foamex Canada Inc. (the "Borrower"), credit
facilities on the terms and conditions set out in the attached Terms and
Conditions Sheet and Schedule "A".
If the arrangements set out in this letter, and in the attached Terms and
Conditions Sheet and Schedule "A" (collectively the "Commitment Letter") are
acceptable to you, please sign the enclosed copy of this letter in the space
indicated below and return the letter to us by the close of business on August
20, 1999.
This Commitment Letter replaces all previous commitments issued by the Bank to
the Borrower.
Yours very truly,
/s/ S. Keelty /s/ J. Gervais
S. Keelty J. Gervais
Account Manager Vice President and Manager
The arrangements set out above and in the attached Terms and Conditions and
Schedule "A" (collectively the "Commitment Letter") are hereby acknowledged and
accepted by:
FOAMEX CANADA INC.
By: /s/ John M. Gaw
John M Gaw
Title: Controller
Date: August 15, 1999
<PAGE>
Page 1
TERMS AND CONDITIONS
CREDIT NUMBER: 1 AUTHORIZED AMOUNT: $8,000,000
- -------------------------------------------------------------------------------
TYPE
Operating
PURPOSE
General operating requirements
CURRENCY
Canadian dollars with up to $2,000,000 available in U.S. dollars.
AVAILMENT
The Borrower may avail the credit by way of Direct advances evidenced
by a Grid Note and/or Bankers' Acceptances in Canadian dollars in
multiples of $100,000 (subject to a minimum availment amount of
$500,000 and having terms of maturity of 30 to 360 days without grace).
INTEREST RATE ON DIRECT ADVANCES
The Bank's Prime Lending Rate from time to time, plus 3/4% per annum,
payable monthly.
The Bank's U.S. Dollar Base Rate in Canada, from time to time, plus
3/4% per annum with interest payable monthly.
BANKERS' ACCEPTANCE FEE
The Bank's Commercial Bankers' Acceptance Fee, (subject to revision at
any time), plus 1 1/4% per annum, subject to a minimum fee of $500 per
availment, payable at the time of each acceptance.
REPAYMENT
Advances are repayable on demand.
ADDITIONAL FACILITY
Subject to availability and execution of mutually satisfactory
documentation the Borrower may enter into Forward Exchange Contracts
with the Bank for maximum terms of up to one year.
Maximum aggregate Forward Exchange Contracts outstanding at any one
time are not to exceed $15,000,000 U.S. dollars or the equivalent
thereof in other approved currencies.
GENERAL SECURITY, FEE, TERMS, AND CONDITIONS APPLICABLE TO ALL CREDITS
FEE
Annual Renewal Fee $2,500 is payable by the Borrower.
<PAGE>
Page 2
GENERAL SECURITY
The following security, evidenced by documents in form satisfactory to
the Bank and registered or recorded as required by the Bank, is to be
provided prior to any advances or availment being made under the
Credits:
Bankers' Acceptance Agreement.
General Security Agreement over all present and future
personal property with appropriate insurance coverage, loss if
any, payable to the Bank.
GENERAL CONDITIONS
Until all debts and liabilities under the Credits have been discharged
in full, the following conditions will apply in respect of the Credits:
Combined Operating loans, Bankers' Acceptances and Standby
Letters of Credit are not to exceed 75% of good quality
accounts receivable (excluding accounts over 90 days, offsets
and inter-company accounts) plus 75% of finished goods
inventory and 50% of work-in-process inventory. Advances
against inventory are limited to $1,000,000.
The ratio of current assets to current liabilities is to be
maintained at all times at 1.25:1.
The ratio of Debt (including deferred taxes) to Tangible Net
Work (TNW) is not to exceed 2:1.
Tangible Net Worth (TNW) is to be maintained in excess of
$8,500,000 at all times.
TNW is defined as the sum of share capital, earned and
contributed surplus and postponed funds less (i) amounts due
----
from officers/affiliates, excluding those amounts classified
as current trade receivables under Generally Accepted
Accounting Principles, (ii) investments in affiliates, and
(iii) intangible assets as defined by the Bank.
Without the Bank's prior written consent which shall not be
unreasonably withheld:
Guarantees or other contingent liabilities in excess of
$1,000,000 in the aggregate are not to be entered into and
assets are not be to further encumbered.
No change in ownership is permitted.
No mergers, acquisitions or change in the Borrower's line
of business are permitted.
The Bank acknowledges that mergers and reorganizations in
conjunction with any company or companies controlled
directly or indirectly by Foamex L.P. shall be permitted
without the Bank's consent provided that any such merger
or reorganization shall not adversely affect the Bank's
security position and/or the financial condition of the
Borrower. The Borrower shall give the Bank at least 21
business days advance notice in writing of any such merger
or reorganization.
No redemption of preferred shares is permitted.
For ongoing Credit Risk management purposes, all operating
accounts of the Borrower shall be maintained with the Bank
as long as the Borrower has any operating line facilities
with the Bank.
<PAGE>
Page 3
GENERAL BORROWER REPORTING CONDITIONS
Until all debts and liabilities under the Credits have been discharged
in full, the Borrower will provide the Bank with the following:
Annual Audited Financial Statements within 120 days of the
Borrower's fiscal year end, duly signed.
Annual Audited Financial Statements of Foamex L.P. within 120
days of the Company's fiscal year end, duly signed.
Quarterly Interim Financial Statements of the Borrower,
prepared in accordance with Canadian G.A.A.P., within 45 days
of period end, duly signed.
A Statement of Security monthly, to include information on
inventory, accounts receivable, accounts payable and
outstanding cheques, within 20 days of period end, duly
signed.
Aged Listing of Accounts Receivable upon request.
<PAGE>
Page 4
SCHEDULE A
ADDITIONAL TERMS AND CONDITIONS APPLICABLE
TO ALL CREDITS
Calculation and Payment of Interest
1. Interest on loans/advances made in Canadian dollars will be calculated
on a daily basis and payable monthly on the 22nd day of each month
(unless otherwise stipulated by the Bank). Interest shall be payable
not in advance on the basis of a calendar year for the actual number of
days elapsed both before and after demand of payment or default and/or
judgment.
2. Interest on loans/advances in U.S. dollars will be calculated on a
daily basis and payable monthly on the 22nd day of each month, (unless
otherwise stipulated by the Bank). Interest shall be payable not in
advance on the basis of a 360 day year for the actual number of days
elapsed both before and after demand of payment or default and/or
judgment. The rate of interest based on a 360 days year is equivalent
to a rate based on a calendar year of 365 days of 365/360 times the
rate of interest that applies to the U.S. dollar loan/advances.
Interest on Overdue Interest
3. Interest on overdue interest shall be calculated at the same rate as
interest on the loans/advances in respect of which interest is overdue,
but shall be compounded monthly and be payable on demand, both before
and after demand and judgment.
Calculation and Payment of Bankers' Acceptance Fee
4. The fee for the acceptance of each Bankers' Acceptance will be payable
on the face amount of each Bankers' Acceptance at the time of
acceptance of each draft calculated on the basis of a calendar year for
the actual number of days elapsed from and including the date of
acceptance to the due date of the draft.
Environment
5. The Borrower agrees:
(a) to comply with all applicable laws and requirements of any
federal, provincial, or any other governmental authority
relating to the environment and the operation of the business
activities of the Borrower;
(b) to allow the Bank access during normal business hours to the
business premises of the Borrower to monitor and inspect all
property and business activities of the Borrower with respect
to the Borrower's compliance with all applicable environmental
laws and regulations;
(c) to notify the Bank of any change in current, normal business
activity conducted by the Borrower which involves the use or
handling of hazardous materials or wastes which increases the
environmental liability of the Borrower in any material
manner;
(d) to notify the Bank of any proposed material change in the use
or occupation of the property of the Borrower prior to any
change occurring;
(e) to provide the Bank with written notice within ten (10)
business days of the Borrower having knowledge of any
environmental problem and any hazardous materials or
substances which may have a material adverse effect on the
property, equipment, or business activities of the Borrower
and with any other environmental information requested by the
Bank;
<PAGE>
Page 5
(f) to conduct all environmental remedial activities in compliance
with applicable requirements of any federal, provincial, or
any other governmental authority relating to the environment
which a commercially reasonable person would perform in
similar circumstances to meet its environmental
responsibilities and if the Borrower receives from the Bank a
written notification of the Borrower's failure to conduct such
environmental remedial activities for thirty (30) days after
receipt of such written notification from the Bank, then the
Bank may perform such activities; and
(g) to pay for any environmental investigations, assessments or
remedial activities with respect to any property of the
Borrower that may be performed for or by the Bank.
If the Borrower notifies the Bank of any specified activity or change
or provides the Bank with any information pursuant to subsections (c),
(d), or (e), or if the Bank receives any environmental information from
other sources, the Bank, in its sole discretion, may decide that an
adverse change in the environmental condition of the Borrower or any of
the property, equipment, or business activities of the Borrower has
occurred which decision will constitute, in the absence of manifest
error, conclusive evidence of the adverse change. Following this
decision being made by the Bank, the Bank shall give written
notification to the Borrower of the Bank's decision concerning the
adverse change, which shall take effect thirty (30) days after the
Borrower's receipt of such written notification, if the Borrower has
not initiated the activities necessary to correct the adverse change
condition.
If the Bank is required to incur expenses for compliance or to verify
the Borrower's compliance with applicable environmental or other
regulations, the Borrower shall indemnify the Bank in respect of such
expenses, which will constitute further advances by the Bank to the
Borrower under this Agreement.
Periodic Review
6. The obligation of the Bank to make further advances or other
accommodation available under any Credits of the Borrower under which
the indebtedness or liability of the Borrower is payable on demand, is
subject to periodic review and to no adverse change occurring in the
financial condition of the Borrower or any guarantor.
Evidence of Indebtedness
7. The Bank's accounts, books and records constitute, in the absence of
manifest error, conclusive evidence of the advances made under this
Credit, repayments on account thereof and the indebtedness of the
Borrower to the Bank.
Acceleration
8. (a) All indebtedness and liability of the Borrower to the Bank
payable on demand, is repayable by the Borrower to the Bank at
any time on demand;
(b) All indebtedness and liability of the Borrower to the Bank not
payable on demand, shall, at the option of the Bank, become
immediately due and payable, the security held by the Bank
shall immediately become enforceable, and the obligation of
the Bank to make further advances or other accommodation
available under the Credits shall terminate, if any one of the
following Events of Default occurs:
(i) the Borrower or any guarantor fails to make when due,
whether on demand or at a fixed payment date, by
acceleration or otherwise, any payment of interest,
principal, fees, commissions or other amounts payable
to the Bank;
(ii) there is a breach by the Borrower or any guarantor of
any other terms or condition contained in this
Commitment Letter or in any other agreement to which
the Borrower and/or any guarantor and the Bank are
parties;
<PAGE>
Page 6
(iii) any default occurs under any security listed in this
Commitment Letter under the headings "Specific
Security" or "General Security" or under any other
credit, loan or security agreement to which the
Borrower and/or any guarantor is a party;
(iv) any bankruptcy, re-organization, compromise,
arrangement, insolvency or liquidation proceedings or
other proceedings for the relief of debtors are
instituted by or against the Borrower or any
guarantor and, if instituted against the Borrower or
any guarantor, are allowed against or consented to by
the Borrower or any guarantor or are not dismissed or
stayed within 60 days after such institution;
(v) a receiver is appointed over any property of the
Borrower or any guarantor or any judgement or order
or any process of any court becomes enforceable
against the Borrower or any guarantor or any property
of the Borrower or any guarantor or any creditor
takes possession of any property of the Borrower or
any guarantor;
(vi) any course of action is undertaken by the Borrower or
any guarantor or with respect to the Borrower or any
guarantor which would result in the Borrower's or
guarantor's reorganization, amalgamation or merger
with another corporation or the transfer of all or
substantially all of the Borrower's or any
guarantor's assets except where permitted elsewhere
in the commitment letter;
(vii) any guarantee of indebtedness and liability under the
Credit Line is withdrawn, determined to be invalid or
otherwise rendered ineffective;
(viii) any adverse change occurs in the financial condition
of the Borrower or any guarantor.
(ix) Any adverse change occurs in the environmental
condition of:
(A) the Borrower or any guarantor of the Borrower;
or
(B) any property, equipment, or business
activities of the Borrower or any guarantor of
the Borrower.
Costs
9. All costs, including legal and appraisal fees incurred by the Bank
relative to security and other documentation, shall be for the account
of the Borrower and may be charged to the Borrower's deposit account
when submitted.
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<NAME> FOAMEX INTERNATIONAL INC.
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<FISCAL-YEAR-END> Dec-31-1999
<PERIOD-START> Jan-01-1999
<PERIOD-END> Sep-30-1999
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0
0
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<TOTAL-REVENUES> 962,841
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<OTHER-EXPENSES> 56,778
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<INTEREST-EXPENSE> 54,111
<INCOME-PRETAX> 17,791
<INCOME-TAX> 2,473
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[GRAPHIC OMITTED]
Press Release Contact: John G. Johnson, Jr. Media: David E. Bright
Foamex International Inc. 212 634-8810
610 859-3030
FOR IMMEDIATE RELEASE
LETTER OF INTENT FOR ACQUISITION OF
FOAMEX INTERNATIONAL EXTENDED
------------------------------------
Discussions Continue With Sorgenti/Liberty Group
------------------------------------
Possible Management -led Buyout Also Being Discussed
------------------------------------
LINWOOD, PENNSYLVANIA, November 1, 1999 - Foamex International Inc.
(Nasdaq: FMXI), North America's largest manufacturer of flexible
polyurethane and advanced polymer foam products, today announced that
the Letter of Intent with Sorgenti Chemical Industries, LLC and Liberty
Partners Holdings 20, LLC has expired by its terms. However, the
Sorgenti/Liberty Group requested an extension of the Letter of Intent
until December 15, 1999. The parties agreed to the extension and are
continuing discussions towards a possible transaction. As previously
announced, the Letter of Intent provides for a business combination at
$11.50 per share in cash for all of the Company's outstanding common
shares, subject to due diligence and execution of a definitive
agreement.
Foamex also announced that it has authorized a due diligence
review for a possible business combination led by John G. Johnson, the
President and Chief Executive Officer of the Company. Mr. Johnson has
informed the Board of Directors that he is working with various
possible sources of equity funding, but that he has no firm commitments
for the financing of a transaction. No formal proposal has been made to
the Company by Mr. Johnson.
There can be no assurance that any transaction will take place
with Sorgenti/Liberty, Mr. Johnson's group or any other party, or, if
there is a transaction, that it would provide for payment in cash at or
above $11.50 per share.
-more-
<PAGE>
2
Marshall S. Cogan, Chairman of Foamex, stated, "The Company is
continuing to work with J.P. Morgan to develop an appropriate strategic
alternative for Foamex that would be in the best interest of all Foamex
shareholders."
Separately, John G. Johnson, Jr., Chief Executive Officer and
President, added, "During the third quarter of 1999 Foamex continued to
implement programs designed to build a new organization and position
the Company for sustained profitability. Strong top line performance by
our Automotive and Technical Products businesses paced our third
quarter results, signaling continued improved performance."
The Company expects to report results for the third quarter 1999
on or about November 9, 1999.
Foamex, headquartered in Linwood, Pennsylvania, manufactures and
markets flexible polyurethane and advanced polymer products in North
America. For more information, visit its web site at
http://www.foamex.com.
This press release contains forward-looking information, and
actual results may materially vary from those expressed or implied
herein. Factors that could affect these results include those mentioned
in the documents filed with the Securities and Exchange Commission.
# # #
