SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
Commission file numbers 1-11432; 1-11436
FOAMEX L.P.
FOAMEX CAPITAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 05-0475617
Delaware 22-3182164
(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
Foamex L.P. and Foamex Capital Corporation meet the conditions set forth in
General Instruction H(1)(a) and (b) of Form 10-Q and are therefore filing this
form with the reduced disclosure format.
The number of shares of Foamex Capital Corporation's common stock outstanding as
of August 10, 1999 was 1,000.
Page 1 of 28
Exhibit List on Page 27 of 28
<PAGE>
FOAMEX L.P.
FOAMEX CAPITAL CORPORATION
INDEX
Page
Part I. Financial Information:
Item 1. Financial Statements
Condensed Consolidated Statements of Operations
(unaudited) - Quarterly and Year to Date Periods
Ended June 30, 1999 and June 28, 1998 3
Condensed Consolidated Balance Sheets (unaudited) as of
June 30, 1999 and December 31, 1998 4
Condensed Consolidated Statements of Cash Flows
(unaudited) - Year to Date Periods Ended June 30,
1999 and June 28, 1998 5
Notes to Condensed Consolidated Financial Statements
(unaudited) 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 16
Item 3. Quantitative and Qualitative Disclosure about
Market Risk 26
Part II. Other Information 27
Item 1. Legal Proceedings 27
Item 6. Exhibits and Reports on Form 8-K 27
Signatures 28
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FOAMEX L.P. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
<TABLE>
<CAPTION>
Quarterly Periods Ended Year to Date Periods Ended
June 30, June 28, June 30, June 28,
1999 1998 1999 1998
--------- --------- --------- ---------
(thousands)
<S> <C> <C> <C> <C>
NET SALES $ 292,229 $ 273,708 $ 592,106 $ 571,781
COST OF GOODS SOLD 253,819 226,111 516,235 479,276
--------- --------- --------- ---------
GROSS PROFIT 38,410 47,597 75,871 92,505
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 13,653 17,824 27,986 38,823
RESTRUCTURING AND OTHER CHARGES (CREDITS) 3,617 (700) 6,974 (700)
--------- --------- --------- ---------
INCOME FROM OPERATIONS 21,140 30,473 40,911 54,382
INTEREST AND DEBT ISSUANCE EXPENSE 16,132 15,568 32,271 32,480
OTHER INCOME (EXPENSE), NET 244 (306) (195) (619)
--------- --------- --------- ---------
INCOME FROM CONTINUING OPERATIONS
BEFORE PROVISION FOR INCOME TAXES 5,252 14,599 8,445 21,283
PROVISION FOR INCOME TAXES 445 808 1,030 1,884
--------- --------- --------- ---------
INCOME FROM CONTINUING OPERATIONS 4,807 13,791 7,415 19,399
EXTRAORDINARY LOSS ON EARLY
EXTINGUISHMENT OF DEBT -- (72) -- (3,195)
--------- --------- --------- ---------
NET INCOME $ 4,807 $ 13,719 $ 7,415 $ 16,204
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of the
condensed consolidated financial statements.
3
<PAGE>
FOAMEX L.P. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
ASSETS 1999 1998
CURRENT ASSETS: (thousands)
<S> <C> <C>
Cash and cash equivalents $ 3,057 $ 3,192
Accounts receivable, net 147,605 143,301
Accounts receivable from related parties 14,985 17,533
Inventories 99,212 127,636
Other current assets 27,028 33,849
--------- ---------
Total current assets 291,887 325,511
PROPERTY, PLANT AND EQUIPMENT, NET 210,968 219,637
COST IN EXCESS OF ASSETS ACQUIRED, NET 186,026 188,205
DEBT ISSUANCE COSTS, NET 16,261 13,946
OTHER ASSETS 22,112 21,229
--------- ---------
TOTAL ASSETS $ 727,254 $ 768,528
========= =========
LIABILITIES AND PARTNERS' DEFICIT
CURRENT LIABILITIES:
Short-term borrowings $ 4,700 $ 2,957
Current portion of long-term debt 13,022 689,478
Current portion of long-term debt - related party -- 34,000
Accounts payable 108,230 139,726
Accrued interest 9,565 7,396
Other accrued liabilities 45,584 52,944
--------- ---------
Total current liabilities 181,101 926,501
LONG-TERM DEBT 661,449 --
LONG-TERM DEBT - RELATED PARTY 34,000 --
OTHER LIABILITIES 36,554 38,064
--------- ---------
Total liabilities 913,104 964,565
--------- ---------
COMMITMENTS AND CONTINGENCIES -- --
--------- ---------
PARTNERS' DEFICIT:
General partner (135,114) (141,426)
Limited partner -- --
Accumulated other comprehensive income (loss) (25,397) (26,208)
Notes and advances receivable from partner (16,118) (18,608)
Notes receivable from related party (9,221) (9,795)
--------- ---------
Total partners' deficit (185,850) (196,037)
--------- ---------
TOTAL LIABILITIES AND PARTNERS' DEFICIT $ 727,254 $ 768,528
========= =========
</TABLE>
The accompanying notes are an integral part of the
condensed consolidated financial statements.
4
<PAGE>
FOAMEX L.P. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
<TABLE>
<CAPTION>
Year to Date Periods Ended
June 30, June 28,
1999 1998
--------- ---------
(thousands)
OPERATING ACTIVITIES:
<S> <C> <C>
Net income $ 7,415 $ 16,204
Adjustments to reconcile net income to net cash provided
by (used for) operating activities:
Depreciation and amortization 15,082 15,206
Amortization of debt issuance costs, debt discount,
debt premium and deferred swap adjustments (34) (33)
Asset writedown and other charges 2,073 --
Extraordinary loss on early extinguishment of debt -- 2,857
Other operating activities 6,186 4,164
Changes in operating assets and liabilities, net 588 (72,420)
--------- ---------
Net cash provided by (used for) operating activities 31,310 (34,022)
--------- ---------
INVESTING ACTIVITIES:
Capital expenditures (10,482) (15,252)
Acquisitions, net of cash acquired -- (3,899)
Sale of subsidiaries -- (8,971)
Repayments of (purchase of) note from partner 2,490 --
Proceeds from (payments of) note receivable - related party -- (424)
Other investing activities 574 (382)
--------- ---------
Net cash used for investing activities (7,418) (28,928)
--------- ---------
FINANCING ACTIVITIES:
Net proceeds from short-term borrowings 1,743 722
Net proceeds from (repayments of) revolving loans (8,969) 82,426
Proceeds from long-term debt -- 129,000
Repayment of long-term debt (5,385) (132,318)
Debt issuance cost (3,455) (1,598)
Cash overdraft (7,300) --
Distribution to partners -- (20,074)
Other financing activities (661) 84
--------- ---------
Net cash provided by (used for) financing activities (24,027) 58,242
--------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS (135) (4,708)
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD 3,192 9,405
--------- ---------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 3,057 $ 4,697
========= =========
</TABLE>
The accompanying notes are an integral part of the
condensed consolidated financial statements.
5
<PAGE>
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Foamex L.P.'s condensed consolidated balance sheet as of December 31, 1998
has been condensed from the audited consolidated balance sheet at that date. The
condensed consolidated balance sheet as of June 30, 1999, the condensed
consolidated statements of operations for the quarterly and year to date periods
ended June 30, 1999 and June 28, 1998 and the condensed consolidated statements
of cash flows for the year to date periods ended June 30, 1999 and June 28, 1998
have been prepared by Foamex L.P. and subsidiaries and have not been audited by
Foamex L.P.'s independent accountants. In the opinion of management, all
adjustments, consisting only of normal recurring adjustments, considered
necessary for a fair presentation of the financial position, results of
operations and cash flows have been included. Foamex L.P. is a wholly owned
subsidiary of Foamex International Inc. ("Foamex International").
Effective September 1998, management of Foamex L.P. elected to change the
year-end reporting period from a fifty-two or fifty-three week fiscal year
ending on the Sunday closest to the end of the calendar year to a calendar year
ending December 31st to improve the internal reporting requirements. This change
was effective for the third fiscal quarter of 1998 which ended on September 30,
1998. As a result, the financial data for the quarterly and year to date periods
ended June 28, 1998 represent thirteen-week and twenty-six week periods,
respectively. The financial data for the quarterly and year to date periods
ended June 30, 1999 represent three and six month periods, respectively, and
include 91 and 181 calendar days, respectively.
Certain information and note disclosures normally included in the financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted in accordance with the rules and regulations of
the Securities and Exchange Commission. These condensed consolidated financial
statements should be read in conjunction with Foamex L.P.'s 1998 consolidated
financial statements and notes thereto as set forth in Foamex L.P.'s Annual
Report on Form 10-K for the year ended December 31, 1998.
Foamex L.P. operates in the flexible polyurethane and advanced polymer foam
products industry. As of June 30, 1999, Foamex L.P.'s operations consist of the
following operating segments: (i) foam products, (ii) carpet cushion products,
(iii) automotive products, (iv) technical products and (v) other, which
primarily consists of certain foreign manufacturing operations, corporate
expenses not allocated to the other operating segments and restructuring and
other charges. The net sales and income (loss) from operations of these
operating segments for the quarterly and year to date periods ended June 30,
1999 and June 28, 1998 are included in Note 7.
The accompanying condensed consolidated financial statements have been
prepared assuming Foamex L.P. will continue as a going concern. For the year
ended December 31, 1998, Foamex L.P. had a loss from continuing operations and
was not in compliance with certain covenants contained in agreements governing
approximately $415.4 million of principal amount of indebtedness. Had the
lenders under the credit facility (the "Credit Facility") or other debt
agreements accelerated the maturity of their indebtedness as a result of Foamex
L.P.'s noncompliance, such acceleration would have constituted an event of
default under or given the holders the right to require the repurchase of
substantially all of Foamex L.P.'s long-term debt. As a result of these factors,
Foamex L.P. classified approximately $715.8 million of long-term debt at
December 31, 1998 as current in the accompanying condensed consolidated balance
sheet, which resulted in a working capital deficit. These matters raised
substantial doubt as of December 31, 1998 about Foamex L.P.'s ability to
continue as a going concern.
On June 30, 1999, Foamex L.P. amended its Credit Facility (the "Amended
Credit Facility") to, among other things, modify financial covenants and provide
for future measurement periods taking into account Foamex L.P.'s estimated
future operating results and financial condition and management's expectations
regarding compliance with these covenants in future measurement periods (see
Note 3). For the year to date period ended June 30, 1999, Foamex L.P. had
consolidated income from continuing operations and was in compliance with its
debt covenants. As a result of these factors and management's expectations
regarding compliance with these covenants in future measurement periods, Foamex
L.P. classified approximately $695.4 million of debt as long-term in the
accompanying condensed consolidated balance sheet at June 30, 1999, which
resulted in positive working capital. Foamex L.P. continues to be subject to
certain "change of control" provisions under its debt agreements which could
result in an acceleration of the related debt, as discussed below.
6
<PAGE>
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Trace International Holdings, Inc. ("Trace"), a privately held company,
owns approximately 46.1% of Foamex International's outstanding voting common
stock. Trace's Chairman also serves as Foamex International's Chairman. Foamex
International's common stock owned by Trace is pledged as collateral against
certain of Trace's obligations. If Trace defaults on its indebtedness
collateralized by Foamex International's common stock and such creditors
exercise their rights and remedies under the related debt agreements, the
"change of control" provisions of the debt agreements may be triggered and
substantially all of Foamex L.P.'s indebtedness may be accelerated. Foamex L.P.
was informed by Trace that it filed a petition for relief under Chapter 11 of
the Bankruptcy Code in Federal Court in New York City on July 21, 1999. Trace's
bankruptcy filing does not automatically constitute a change of control under
the provisions of the debt agreements. See "Change of Control Provisions" in
Note 3.
2. INVENTORIES
Inventories consist of:
June 30, December 31,
1999 1998
(thousands)
Raw materials and supplies $ 66,623 $ 93,241
Work-in-process 12,731 12,087
Finished goods 19,858 22,308
-------- --------
Total $ 99,212 $127,636
======== ========
3. LONG-TERM DEBT AND LONG-TERM DEBT - RELATED PARTY
Foamex L.P. classified approximately $715.8 million of long-term debt as
current in the accompanying condensed consolidated balance sheet at December 31,
1998 as a result of various factors, including the fact that it had received
waivers for noncompliance with certain debt covenants, which were only granted
through June 30, 1999. The Amended Credit Facility, which was signed June 30,
1999, modify financial covenants as of June 30, 1999 and provides for future
measurement periods taking into account Foamex L.P.'s estimated future operating
results and financial condition and management's expectations regarding these
future measurement periods. For the year to date period ended June 30, 1999,
Foamex L.P. had income from continuing operations and was in compliance with its
debt covenants. As a result of these factors and management's expectations
regarding compliance with these covenants in future measurement periods, Foamex
L.P. has classified approximately $695.4 million of debt as long-term in the
accompanying condensed consolidated balance sheet at June 30, 1999. Foamex L.P.
continues to be subject to "change of control" provisions under its debt
agreements which could result in an acceleration of the related debt. See "Debt
Restrictions and Covenants" and "Change of Control Provisions" below.
7
<PAGE>
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
3. LONG-TERM DEBT AND LONG-TERM DEBT - RELATED PARTY (continued)
Long-term debt consists of:
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
-------- --------
Amended Credit Facility: (thousands)
<S> <C> <C>
Term Loan B $ 82,294 $ 82,714
Term Loan C 74,812 75,194
Term Loan D 108,350 108,900
Revolving credit facility 130,384 139,438
9 7/8% Senior subordinated notes due 2007 150,000 150,000
13 1/2% Senior subordinated notes due 2005 (includes
$10,997 and $11,893 of unamortized debt premium) 108,997 109,893
Industrial revenue bonds 7,000 7,000
Subordinated note payable (net of unamortized
debt discount of $356 and $523) 4,320 6,491
Other 8,314 9,848
-------- --------
674,471 689,478
Less current portion 13,022 689,478
-------- --------
Long-term debt-unrelated parties $661,449 $ --
======== ========
Long-term debt - related party consists of:
Foamex/GFI Note $ 34,000 $ 34,000
Less current portion -- 34,000
-------- --------
Long-term debt - related party $ 34,000 $ --
======== ========
</TABLE>
During the quarterly periods ended June 30, 1999 and June 28, 1998, Foamex
L.P. paid approximately $0.5 million and $0.6 million, respectively, to Foam
Funding LLC for interest on the Foamex/GFI Note. During the year to date periods
ended June 30, 1999 and June 28, 1998, Foamex L.P. paid approximately $1.0
million and $0.6 million, respectively, for interest on the Foamex/GFI Note.
Debt Restrictions and Covenants
The indentures for the senior subordinated notes, the Amended Credit
Facility and other indebtedness agreements contain certain covenants that limit,
among other things to varying degrees, the ability of Foamex L.P. (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 (see "Change of
Control Provisions" below) or the occurrence of an undefined material adverse
change in the ability of the obligor to perform its obligations, the
indebtedness must be repaid, in certain cases, at the option of the holder.
Also, Foamex L.P. is required under certain of these agreements to maintain
specified financial ratios of which the most restrictive are the maintenance of
net worth and interest, fixed charge and leverage coverage ratios, as defined.
The Amended Credit Facility modified the required limits for the net worth
and interest, fixed charge and leverage coverage ratios through December 2006
and added an earnings before interest, taxes, depreciation and amortization
("EBITDA") covenant requirement through September 30, 1999. Also, effective
March 31, 2000, the interest rate on outstanding borrowings under the Amended
Credit Facility will increase by 25 basis points each
8
<PAGE>
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
3. LONG-TERM DEBT AND LONG-TERM DEBT - RELATED PARTY (continued)
quarter that Foamex L.P.'s leverage ratio exceeds 5.00 to 1.00. Once the
leverage ratio is reduced below this level, the cumulative amount of any 25
basis point adjustments to the interest rate on borrowings would be eliminated.
The weighted average interest rate on such borrowings was approximately 8.6% at
June 30, 1999. The Amended Credit Facility was also modified to no longer permit
Foamex L.P. to make certain cash payments, including the payment of an annual
management fee to a subsidiary of Trace (which aggregated $3.0 million for the
year ended December 31, 1998) and distributions to Foamex L.P.'s partners, and
to limit future investments in foreign subsidiaries and joint ventures. In
addition, the Amended Credit Facility modified the "change of control"
definition under the agreement (see "Change of Control Provisions" below).
Prior to signing the Amended Credit Facility, Foamex L.P. amended the
Credit Facility on March 11, 1999. This amendment adjusted financial covenants,
among other things, as of December 31, 1998 and provided for future measurement
periods taking into account Foamex L.P.'s estimated operating results and
financial condition for 1998 and management's expectations regarding future
measurement periods. As the Foamex L.P. actual 1998 net loss was greater than
originally estimated, on April 15, 1999 Foamex L.P. obtained a waiver through
May 5, 1999, which was further extended on May 6, 1999 through June 30, 1999, of
the financial covenants contained in the Credit Facility and certain events of
default arising out of its Mexican operations, in order to enable Foamex L.P. to
negotiate a further amendment to this agreement.
Certain of Foamex L.P.'s Mexican subsidiaries are in default of financial
covenant provisions contained in loan agreements with a Mexican bank as
negotiations continue to finalize amendments to the loan agreements to cure the
defaults. The defaults under the Mexican loan agreements do not have any cross
default consequences for Foamex L.P.'s domestic subsidiaries' debt agreements.
Change of Control Provisions
Trace is a privately held company which owns approximately 46.1% of Foamex
International's outstanding voting common stock and whose Chairman also serves
as the Chairman of Foamex International. Foamex International's common stock
owned by Trace is pledged as collateral against certain of Trace's obligations.
Certain credit agreements and promissory notes of Foamex L.P., pursuant to which
approximately $429.8 million of debt was issued as of June 30, 1999, contain
provisions that would result in the acceleration of such indebtedness if Trace
were to cease to beneficially own at least 25% of the outstanding voting common
stock of Foamex International and other persons or groups were to own a greater
percentage of such voting common stock than Trace. Additionally, certain
indentures of Foamex L.P. and Foamex Capital Corporation relating to senior
subordinated notes of approximately $248.0 million contain provisions that
provide the holders of such notes with the right to require the issuers to
repurchase such notes at a price in cash equal to 101% of the aggregate
principal amount thereof, plus accrued and unpaid interest thereon, if Trace
were to cease to beneficially own at least 25% of the outstanding voting common
stock of Foamex International and other persons or groups were to own a greater
percentage of such voting common stock than Trace.
Foamex L.P. 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 Foamex International's common
stock owned by Trace, or otherwise authorizes a sale or transfer of these
shares, and Trace, its affiliates and subsidiaries cease to own at least 25% of
Foamex International's outstanding voting common stock and other persons or
groups own a greater percentage of voting common stock than Trace.
Foamex L.P. 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 Foamex L.P.'s 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 Foamex L.P. will be able to do so or that Foamex
L.P. will be able to obtain waivers of such provisions. The accompanying
condensed
9
<PAGE>
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
3. LONG-TERM DEBT AND LONG-TERM DEBT - RELATED PARTY (continued)
consolidated financial statements do not include any adjustments that might
result from the outcome of these uncertainties.
4. LITIGATION
During 1999, Foamex International received several communications addressed
to its Board of Directors from certain of Foamex International's stockholders
regarding aspects of the relationship between Trace and Foamex International.
Such stockholders questioned the propriety of certain relationships and related
transactions between Trace and Foamex International, which previously had been
disclosed in Foamex International's periodic filings. On June 14, 1999, Foamex
International received a draft complaint from counsel to certain stockholders
naming Foamex International and certain current and former directors, which
include allegations similar to those in the Second Amended Complaint, as defined
below. Foamex International has been advised by such counsel that such
stockholders intend to file an action shortly. Foamex International's Board of
Directors, in consultation with its special counsel, is in the process of
evaluating such communications and what actions, if any, to take with respect
thereto. Foamex L.P. was not named in such communications.
On April 26, 1999, a putative securities class action entitled Molitor v.
Foamex International Inc., et al., 99 Civ. 3004 (DC), was filed in the United
States District court for the Southern District of New York naming as defendants
Foamex International, Trace and certain officers and directors of Foamex
International on behalf of stockholders who bought shares of Foamex
International'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 Foamex
International's financial situation and operations, with the result of
artificially inflating the price of Foamex International'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 Foamex International.
The complaint seeks class certification, a declaration that defendants violated
the federal securities laws, an award of money damages, and costs and
attorneys', accountants' and experts' fees. The defendants intend to vigorously
defend the action. On May 18, 1999, a similar action entitled Thomas W. Riley v.
Foamex International Inc., et al., 99 Civ. 3653 (DC) was filed in the same
court. The two actions have been consolidated. To date, no response to the
complaint has been made and no discovery or other proceedings has taken place.
Foamex L.P. is not a party to such suit.
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 Foamex
International. The Shareholder Litigation, purportedly brought as class actions
on behalf of all stockholders of Foamex International, named Foamex
International, 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
Foamex International unaffiliated with Trace in connection with the original
proposal of Trace to acquire the publicly traded outstanding common stock of
Foamex International for $17.00 per share. The complaints sought, among other
things, class certification, a declaration that the defendants have breached
their fiduciary duties to the class, preliminary and permanent injunctions
barring implementation of the proposed transaction, rescission of the
transaction if consummated, unspecified compensatory damages, and costs and
attorneys' fees. A stipulation and order consolidating these six actions under
the caption In re Foamex International Inc. Shareholders Litigation,
Consolidated Civil Action, No. 16259NC was entered by the Court on May 28, 1998.
Foamex L.P. is not a party to the Shareholder Litigation.
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 Agreement and Plan of Merger (the "First Merger Agreement") which
provided, among other things, for all of the Foamex International outstanding
common stock not
10
<PAGE>
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
4. LITIGATION (continued)
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 Foamex International 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, Foamex International and the individual defendants in
the Shareholders Litigation or that arise out of the matters alleged by
plaintiffs. Following the completion of the confirmatory discovery which was
provided for in the Memorandum of Understanding, on September 9, 1998, the
parties entered into a definitive Stipulation of Settlement and the Court set a
hearing for October 27, 1998 to consider whether the settlement should be
approved (the "Settlement Hearing"). In connection with the proposed settlement,
the plaintiffs intended to apply for an award of attorney's fees and litigation
expenses in an amount not to exceed $925,000, and the defendants agreed not to
oppose this application. Additionally, Foamex International agreed to pay the
cost, if any, of sending notice of the settlement to the Public Shareholders. On
September 24, 1998, a Notice of Pendency of Class Action, Proposed Settlement of
Class Action and Settlement Hearing was mailed to the members of the settlement
class. On October 20, 1998, the parties to the Shareholder Litigation requested
that the Court cancel the Settlement Hearing in light of the announcement made
by Trace on October 16, 1998, that it had been unable to obtain the necessary
financing for the contemplated acquisition by Trace of Foamex International'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 Foamex International 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 Foamex International 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 Foamex International, Trace, Merger Sub, Mr. Marshall S. Cogan, Mr. Andrea
Farace, Dr. Stuart Hershon, Mr. John Tunney, and Mr. Etienne Davignon as
defendants, alleging that they breached their fiduciary duties to plaintiffs and
the other Public Shareholders in connection with a second agreement and plan of
merger (the "Second Merger Agreement"), that the proposal to acquire the Public
Shares for $12.00 per share lacked entire fairness, that the individual
defendants violated 8 Del. Code ss. 251 in approving the Second Merger
Agreement, and that Trace and Merger Sub breached the Stipulation of Settlement.
On December 2, 1998, plaintiffs served a motion for a preliminary injunction,
seeking an Order to preliminarily enjoin the defendants from proceeding with,
consummating or otherwise effecting the merger contemplated by the Second Merger
Agreement.
On June 9, 1999, the plaintiffs in the Shareholder Litigation moved for
leave to file a Second Amended and Supplemental Class Action and Derivative
Complaint (the "Second Amended Complaint"). The Second Amended Complaint was
filed on July 14, 1999, and named Foamex International, 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 Foamex International to waste assets in its
transactions with Trace and by failing to enforce Foamex International's rights
under the First Merger Agreement, seeking appointment of a receiver for Foamex
International, and alleging that Trace and Merger Sub breached the Stipulation
of Settlement.
11
<PAGE>
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
4. LITIGATION (continued)
The defendants have denied, and continue to deny, that they have committed
or have threatened to commit any violation of law or breaches of duty to
plaintiffs or the purported class or any breach of the Stipulation of
Settlement. The defendants intend to vigorously defend the Shareholder
Litigation. If the Shareholder Litigation is adversely determined, it could have
a material adverse effect on the financial position, results of operations and
cash flows of Foamex International.
In addition, on or about November 18, 1998, a putative class action was
filed in the United States District Court for the Eastern District of New York
on behalf of all persons who purchased common stock of Foamex International
between March 16, 1998 and October 19, 1998, naming Trace as defendant and
alleging that Trace breached a contract between the putative class members and
Trace. By order dated January 8, 1999, the Court transferred the action to the
United States District Court for the Southern District of New York. Trace made a
motion to dismiss the action on February 8, 1999, which was granted during
August 1999. Neither Foamex International, Foamex L.P. nor any of the individual
directors of Foamex International are named as defendants in this litigation.
As of August 9, 1999, Foamex L.P. and Trace were two of multiple defendants
in actions filed on behalf of approximately 4,209 recipients of breast implants
in various United States federal and state courts and one Canadian provincial
court, some of which allege substantial damages, but most of which allege
unspecified damages for personal injuries of various types. Three of these cases
seek to allege claims on behalf of all breast implant recipients or other
allegedly affected parties, but no class has been approved or certified by the
court. In addition, three cases have been filed alleging claims on behalf of
approximately 39 residents of Australia, New Zealand, England, and Ireland.
Foamex L.P. believes that the number of suits and claimants may increase. During
1995, Foamex L.P. 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 Foamex L.P. or Trace.
Neither Foamex L.P. nor Trace recommended, authorized, or approved the use of
its foam for these purposes. Foamex L.P. is also indemnified by Trace for any
such liabilities relating to foam manufactured prior to October 1990. Although
Trace has paid Foamex L.P.'s litigation expenses to date from insurance proceeds
Trace received, in light of Trace's recent filing under Chapter 11 of the
Bankruptcy Code, there can be no assurance that Trace will be able to continue
to provide such indemnification. While it is not feasible to predict or
determine the outcome of these actions, based on management's present assessment
of the merits of pending claims, after consultation with the general counsel of
Trace, and without taking into account indemnification provided by Trace, the
coverage provided by Trace and Foamex L.P.'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 Foamex L.P.'s consolidated financial position or results of
operations. If management's assessment of Foamex L.P.'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 Foamex L.P.
In November 1997, a complaint was filed in the United States District Court
for the Southern District of Texas alleging that various defendants, including
Crain, through the use of the CARDIO(R) process licensed from a third party,
infringed on a patent held by the plaintiff. Foamex L.P. is negotiating with the
licensor of the process for the assumption of the defense of the action by the
licensor, however, the action is in the preliminary stages, and there can be no
assurance as to the ultimate outcome of the action. Such action could have a
material adverse effect on the financial position, results of operations and
cash flows of Foamex L.P.
12
<PAGE>
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
4. LITIGATION (continued)
Other Litigation
Foamex L.P. 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 Foamex L.P. If management's assessment of Foamex L.P.'s
liability with respect to these actions is incorrect, such actions could have a
material adverse effect on Foamex L.P.'s consolidated financial position.
5. COMPREHENSIVE INCOME
Comprehensive income for the periods noted below is comprised of the
following:
<TABLE>
<CAPTION>
Quarterly Periods Ended Year to Date Periods Ended
June 30, June 28, June 30, June 28,
1999 1998 1999 1998
(thousands)
<S> <C> <C> <C> <C>
Net income $ 4,807 $13,719 $ 7,415 $16,204
Foreign currency translation adjustments 399 3 811 230
------- ------- ------- -------
Total comprehensive income $ 5,206 $13,722 $ 8,226 $16,434
======= ======= ======= =======
</TABLE>
6. RESTRUCTURING AND OTHER CHARGES
Foamex International and its subsidiaries 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, Foamex L.P. recorded restructuring and other charges of approximately
$3.4 million in connection with this plan related primarily to severance in
connection with replacing its former Chairman and Chief Executive Officer and
work force reductions of approximately 78 employees. During the second quarter
of 1999, Foamex L.P. recorded restructuring and other charges of approximately
$3.6 million. The $3.6 million of restructuring and other charges is comprised
of $1.2 million of severance costs in connection with additional work force
reductions of approximately 60 employees, $2.3 million of costs associated with
the closure of two additional manufacturing operations and facilities and $0.1
million of other charges. Approximately $2.5 million of severance costs incurred
in 1999 have been paid as of June 30, 1999. Approximately $1.5 million of the
total 1999 severance costs primarily relate to contractual severance costs
payable to the former Chairman and Chief Executive Officer, which will be paid
through March 2001. Foamex L.P. may record additional restructuring charges in
the future as it finalizes implementation of its restructuring plan.
7. OPERATING SEGMENT AND RELATED DATA
Foamex L.P. reports information about its business segments on the basis of
how they are managed and evaluated by the chief operating decision-makers. Each
of the operating segments is headed by one or more executive vice presidents who
are responsible for developing plans and directing the operations of the
segment.
Foamex L.P.'s reportable business segments are foam products, carpet
cushion products, automotive products and technical products. The foam products
segment manufactures and markets foam used by the bedding, furniture and retail
industries. The carpet cushion products segment sells prime, rebond, sponge
rubber and felt carpet cushion principally to Foamex Carpet Cushion, Inc.
("Foamex Carpet"), a wholly owned subsidiary of Foamex International. The
automotive products segment supplies foam primarily for automotive interior
applications to automotive manufacturers and to industry sub suppliers. The
technical products segment manufactures and markets reticulated foams and other
custom polyester and polyether foams for industrial, specialty and consumer and
safety applications.
13
<PAGE>
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
7. OPERATING SEGMENT AND RELATED DATA (continued)
The "other" column in the table below represents certain foreign
manufacturing operations that do not meet the quantitative threshold for
determining reportable segments, corporate expenses not allocated to the other
operating segments and restructuring and other charges. Total asset information
by operating segment is not reported because many of Foamex L.P.'s facilities
produce products for multiple operating segments.
The accounting policies of the operating segments are the same as described
in the "Summary of Significant Accounting Policies" in Note 2 to Foamex L.P.'s
consolidated financial statements in its Annual Report on Form 10-K for the year
ended December 31, 1998. Revenues and costs have been included in operating
segments where specifically identified. Costs shared by operating segments have
been allocated on the basis of the amount utilized.
<TABLE>
<CAPTION>
Carpet
Foam Cushion Automotive Technical
Products Products Products Products Other Total
<S> <C> <C> <C> <C> <C> <C>
Quarterly period ended June 30, 1999:
Net sales $ 124,909 $ 46,687 $ 90,810 $ 23,028 $ 6,795 $ 292,229
Income (loss) from operations 12,948 (65) 6,033 6,203 (3,979) 21,140
Depreciation and amortization 4,094 1,266 1,235 636 182 7,413
Quarterly period ended June 28, 1998:
Net sales $ 133,422 $ 55,176 $ 61,923 $ 20,156 $ 3,031 $ 273,708
Income (loss) from operations 22,913 247 5,821 4,051 (2,559) 30,473
Depreciation and amortization 4,369 1,114 1,264 655 553 7,955
Year to date period ended June 30, 1999:
Net sales $ 264,288 $ 89,990 $ 179,581 $ 45,276 $ 12,971 $ 592,106
Income (loss) from operations 25,869 (436) 12,825 11,239 (8,586) 40,911
Depreciation and amortization 8,242 2,436 2,469 1,273 662 15,082
Year to date period ended June 28, 1998:
Net sales $ 281,715 $ 111,340 $ 127,604 $ 41,272 $ 9,850 $ 571,781
Income (loss) from operations 35,027 1,751 13,236 8,588 (4,220) 54,382
Depreciation and amortization 8,175 2,185 2,441 1,285 1,120 15,206
</TABLE>
8. RELATED PARTY TRANSACTIONS
Effective June 30, 1999, the Amended Credit Facility no longer permits
Foamex L.P. or its subsidiaries to pay management fees to a subsidiary of Trace
in connection with a management agreement with the Trace subsidiary (the
"Management Agreement"). Such management fee was $3.0 million for the year ended
December 31, 1998. On July 29, 1999, Foamex L.P. submitted to the Trace
subsidiary formal notice of the termination of the Management Agreement, which
Foamex L.P. believes took place by informal action on June 29, 1999.
Foamex L.P. subleases certain space in its New York office to Trace (the
"New York Sublease"). Foamex L.P. gave notice on June 30, 1999 that if prior
unpaid rent under the New York Sublease was not paid, Foamex L.P. intended to
give notice pursuant to Article 7 of the New York Real Property Actions and
Proceedings Law (the "Notice") that the space be vacated by September 30, 1999.
However, as a result of Trace's bankruptcy filing and the imposition of the
automatic stay under Section 362 of the Bankruptcy Code, Foamex L.P. is not
permitted to give Notice or otherwise pursue state law remedies for breach of
the New York Sublease without relief from the automatic stay. Under the
Bankruptcy Code, Trace has 60 days (which period may be extended for cause) to
determine whether to assume or reject the New York Sublease. Pending assumption
or rejection, Trace is required under the Bankruptcy Code to timely perform its
post-bankruptcy obligations under the New York Sublease.
14
<PAGE>
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
8. RELATED PARTY TRANSACTIONS (continued)
Foamex L.P. sold approximately $46.7 million and $55.2 million,
respectively, of carpet cushion products to Foamex Carpet during the quarterly
period ended June 30, 1999 and June 28, 1998 and $90.0 million and $111.3
million, respectively, for the year to date periods ended June 30, 1999 and June
28, 1998. In addition, Foamex L.P. provided and invoiced approximately $0.7
million and $0.5 million of administrative services to Foamex Carpet during the
quarterly periods ended June 30, 1999 and June 28, 1998, respectively, and $1.3
million and $0.6 million for the year to date periods ended June 30, 1999 and
June 28, 1998, respectively.
Also, Foamex L.P. chartered an aircraft which was owned by a wholly owned
subsidiary of Foamex International and incurred costs of approximately $0.3
million during the quarterly period ended June 28, 1998 and $0.1 million and
$0.5 million during the year to date periods ended June 30, 1999 and June 28,
1998, respectively. Foamex International sold this aircraft on March 31, 1999.
9. SUBSEQUENT EVENT
On August 5, 1999, Foamex International 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 Foamex
International's outstanding common stock, subject to due diligence, the
execution of definitive agreements and other conditions. Under the terms of the
letter of intent, if Foamex International enters into a business combination
with another party, the Purchasers will be entitled to a break-up fee of $6.0
million plus reimbursement of certain expenses. The buyout offer is subject to a
number of conditions, including the negotiation of definitive documents, which
will contain certain conditions relating to the bank credit facilities and
public debt of Foamex International's subsidiaries, including Foamex L.P., as
well as certain other conditions relating to minimum shareholder acceptance and
change of board membership, and other provisions providing for a higher break-up
fee and expense reimbursement if Foamex International enters into a business
combination providing a more favorable transaction. The definitive buyout
agreement will require appropriate filings with the Securities and Exchange
Commission and regulatory agencies.
Following the execution of the letter of intent, the Purchasers will
commence their due diligence investigation of Foamex International. The parties
are discussing the process by which waivers and/or consents from the holders of
the bank and public indebtedness of Foamex International and subsidiaries will
be sought in connection with the buyout and will seek such to negotiate the
terms of a definitive buyout agreement prior to October 31, 1999.
15
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Foamex L.P. operates in the flexible polyurethane and advanced polymer foam
products industry. As of June 30, 1999, Foamex L.P.'s operations consist of the
following operating segments: (i) foam products, (ii) carpet cushion products,
(iii) automotive products, (iv) technical products and (v) other, which
primarily consists of certain foreign manufacturing operations, corporate
expenses not allocated to the other operating segments and restructuring and
other charges. Certain information in this report contains forward-looking
statements and should be read in conjunction with the discussion regarding
forward-looking statements set forth on page 4 of Foamex L.P.'s Annual Report on
Form 10-K for the year ended December 31, 1998.
The accompanying condensed consolidated financial statements have been
prepared assuming Foamex L.P. will continue as a going concern. See Note 1 to
the accompanying condensed consolidated financial statements and "Liquidity and
Capital Resources" below.
On March 16, 1999, Foamex International announced that it hired John G.
Johnson, Jr. as President, Chief Executive Officer and director of Foamex
International following the resignation of Andrea Farace from the positions of
Chairman of the Board, Chief Executive Officer and director of Foamex
International. Mr. Johnson holds the position of Chief Executive Officer of
Foamex L.P. Foamex International also announced that it had hired JP Morgan
Securities Inc. as a financial advisor to explore strategic alternatives to
maximize shareholder value. On May 26, 1999, Foamex International announced
major executive changes in connection with its ongoing restructuring
initiatives, which included the appointment of John Televantos, an ARCO Chemical
Company veteran, as President of the Foam Business Group.
On August 5, 1999, Foamex International 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 Foamex International's
outstanding common stock, subject to due diligence, the execution of definitive
agreements and other conditions. Under the terms of the letter of intent, if
Foamex International enters into a business combination with another party, the
Purchasers will be entitled to a break-up fee of $6.0 million plus reimbursement
of certain expenses. The buyout offer is subject to a number of conditions,
including the negotiation of definitive documents, which will contain certain
conditions relating to the bank credit facilities and public debt of Foamex
International's subsidiaries, including Foamex L.P., as well as certain other
conditions relating to minimum shareholder acceptance and change of board
membership, and other provisions providing for a higher break-up fee and expense
reimbursement if Foamex International enters into a business combination
providing a more favorable transaction. The definitive buyout agreement will
require appropriate filings with the Securities and Exchange Commission and
regulatory agencies.
Following the execution of the letter of intent, the Purchasers will
commence their due diligence investigation of Foamex International. The parties
are discussing the process by which waivers and/or consents from the holders of
the bank and public indebtedness of Foamex International and subsidiaries will
be sought in connection with the buyout and will seek such to negotiate the
terms of a definitive buyout agreement prior to October 31, 1999.
Restructuring Plan
Foamex International and its subsidiaries 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, Foamex L.P. recorded restructuring and other charges of approximately
$3.4 million in connection with this plan related primarily to severance in
connection with replacing its former Chairman and Chief Executive Officer and
work force reductions of approximately 78 employees. During the second quarter
of 1999, Foamex L.P. recorded restructuring and other charges of approximately
$3.6 million. The $3.6 million of restructuring and other charges is comprised
of $1.2 million of severance costs in connection with additional work force
reductions of approximately 60 employees, $2.3 million of costs associated with
the closure of two additional manufacturing operations and facilities and $0.1
million of other charges. Approximately $2.5 million of severance costs incurred
in 1999 have been paid as of June 30, 1999. Approximately $1.5 million of the
total 1999 severance costs primarily relate to contractual severance costs
payable to the former Chairman and Chief Executive Officer, which will be paid
through March 2001. Foamex L.P. may record additional restructuring charges in
the future as it finalizes implementation of its restructuring plan.
16
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Acquisitions and Dispositions
On February 27, 1998, Foamex International, Foamex L.P. and certain of
their affiliates completed a series of transactions designed to simplify Foamex
International's and Foamex L.P.'s structure and to provide future operational
flexibility (collectively, the "GFI Transaction"). Prior to the consummation of
these transactions, Foamex L.P. defeased the $4.5 million outstanding principal
amount of its 9 1/2% senior secured notes due 2000. Foamex L.P. settled its
intercompany payables to General Felt Industries, Inc. ("General Felt") with
$4.8 million in cash and a promissory note in the aggregate principal amount of
$34.0 million supported by a $34.5 million letter of credit under the Foamex
L.P. credit facility (the "Foamex/GFI Note"). The initial transaction resulted
in the transfer from Foamex L.P. to Foam Funding LLC, an indirect wholly owned
subsidiary of Trace, of all of the outstanding common stock of General Felt, in
exchange for (i) the assumption by Foam Funding LLC of $129.0 million of Foamex
L.P.'s indebtedness and (ii) the transfer by Foam Funding LLC to Foamex L.P. of
a 1% non-managing general partnership interest in Foamex L.P. As a result,
General Felt ceased being a subsidiary of Foamex L.P. and was relieved from all
obligations under Foamex L.P.'s 9 7/8% senior subordinated notes due 2007 and 13
1/2% senior subordinated notes due 2005. Upon consummation of the initial
transaction, Foamex Carpet, a newly formed wholly owned subsidiary of Foamex
International, Foamex L.P., Foam Funding LLC, and General Felt entered into an
Asset Purchase Agreement dated February 27, 1998, in which General Felt sold
substantially all of its assets (other than cash, the Foamex/GFI Note and its
operating facility in Pico Rivera, California) to Foamex Carpet in exchange for
(i) $20.0 million in cash and (ii) a promissory note issued by Foamex Carpet to
Foam Funding LLC in the aggregate principal amount of $70.2 million. The $20.0
million cash payment was funded with a distribution by Foamex L.P. to Foamex
International. Foam Funding LLC retained ownership of the $34.0 million
Foamex/GFI Note.
No gain was recognized on the GFI Transaction. The impact of the GFI
Transaction recorded during the quarterly period ended March 29, 1998 was an
increase in Foamex L.P.'s partners' capital (deficit) of approximately $10.1
million, a distribution of $20.0 million to Foamex International and
approximately $1.5 million of fees charged to earnings. The $129.0 million of
debt assumed by Foam Funding LLC in the GFI Transaction was used to repay
approximately $125.1 million of term loan borrowings that was accounted for as
an extinguishment of debt which resulted in an extraordinary loss of
approximately $3.2 million. The 1% non-managing general partnership interest
acquired in connection with the GFI Transaction was accounted for as a
redemption of equity. The GFI Transaction used cash of approximately $10.2
million. The non-cash portion was insignificant.
General
Foamex L.P.'s automotive foam customers are predominantly original
equipment manufacturers or other automotive suppliers. As such, the sales of
these product lines are directly related to the overall level of passenger car
and light truck production in North America. Also, Foamex L.P.'s sales are
sensitive to sales of new and existing homes, changes in personal disposable
income and seasonality. Foamex L.P. typically experiences two seasonally slow
periods during each year, in early July and in late December, due to scheduled
plant shutdowns and holidays.
Foamex L.P. is subject to various internal and external factors which could
significantly impact its business, including, among other things, (a) Foamex
L.P.'s debt and capital structures, (b) the Crain Consolidation, (c) additional
raw material cost increases, if any, by Foamex L.P.'s chemical suppliers, (d)
Foamex L.P.'s success in passing on to its customers selling price increases to
recover such raw material cost increases, (e) fluctuations in interest rates,
and (f) Trace's financial condition, including the potential of triggering the
"change of control" provisions of Foamex L.P.'s debt agreements, and other such
factors which may be beyond Foamex L.P.'s control. Refer to page 4 of Foamex
L.P.'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
Foamex L.P. These factors could cause future results to differ materially from
historical trends and management's current expectations and could impact Foamex
L.P.'s ability to continue as a going concern. Although Foamex L.P. believes it
can meet the debt covenant requirements under its financing agreements, there
can be no assurance such covenants will be met and the related indebtedness will
continue to be classified as long-term. Although management believes that Foamex
L.P.'s debt obligations could be refinanced if accelerated as a result of the
"change in control" provisions under its related debt agreements, there can be
no assurance that Foamex L.P. or its subsidiaries will be able to do so or that
Foamex L.P. will be able to obtain waivers of such provisions. Additionally,
although Foamex L.P. believes that cash flow from its operating activities, cash
on hand and periodic borrowings under the Amended Credit Facility, if necessary,
17
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
will be adequate to meet Foamex L.P.'s liquidity requirements, there can be no
assurance that Foamex L.P.'s internally generated funds and funds from any
borrowings will prove to be sufficient to fund Foamex L.P.'s operations and
permit it to continue as a going concern.
RESULTS OF OPERATIONS
Foamex L.P. reports information about its business segments on the basis of
how they are managed and evaluated by the chief operating decision-makers. Each
of the operating segments is headed by one or more executive vice presidents who
are responsible for developing plans and directing the operations of the
segment.
Foamex L.P.'s reportable business segments are foam products, carpet
cushion products, automotive products and technical products. The foam products
segment manufactures and markets foam used by the bedding, furniture and retail
industries. The carpet cushion products segment sells prime, rebond, sponge
rubber and felt carpet cushion to Foamex Carpet through a supply agreement. The
automotive products segment supplies foam primarily for automotive interior
applications to automotive manufacturers and to industry sub suppliers. The
technical products segment manufactures and markets reticulated foams and other
custom polyester and polyether foams for industrial, specialty and consumer and
safety applications.
The "other" column in the table below represents certain foreign
manufacturing operations that do not meet the quantitative threshold for
determining reportable segments, corporate expenses not allocated to the other
operating segments and restructuring and other charges. Total asset information
by operating segment is not reported because many of Foamex L.P.'s facilities
produce products for multiple operating segments.
<TABLE>
<CAPTION>
Carpet
Foam Cushion Automotive Technical
Products Products Products Products Other Total
<S> <C> <C> <C> <C> <C> <C>
Quarterly period ended June 30, 1999:
Net sales $ 124,909 $ 46,687 $ 90,810 $ 23,028 $ 6,795 $ 292,229
Income (loss) from operations 12,948 (65) 6,033 6,203 (3,979) 21,140
Depreciation and amortization 4,094 1,266 1,235 636 182 7,413
Quarterly period ended June 28, 1998:
Net sales $ 133,422 $ 55,176 $ 61,923 $ 20,156 $ 3,031 $ 273,708
Income (loss) from operations 22,913 247 5,821 4,051 (2,559) 30,473
Depreciation and amortization 4,369 1,114 1,264 655 553 7,955
Year to date period ended June 30, 1999:
Net sales $ 264,288 $ 89,990 $ 179,581 $ 45,276 $ 12,971 $ 592,106
Income (loss) from operations 25,869 (436) 12,825 11,239 (8,586) 40,911
Depreciation and amortization 8,242 2,436 2,469 1,273 662 15,082
Year to date period ended June 28, 1998:
Net sales $ 281,715 $ 111,340 $ 127,604 $ 41,272 $ 9,850 $ 571,781
Income (loss) from operations 35,027 1,751 13,236 8,588 (4,220) 54,382
Depreciation and amortization 8,175 2,185 2,441 1,285 1,120 15,206
</TABLE>
Quarterly Period Ended June 30, 1999 Compared to Quarterly Period Ended June 28,
1998
Net sales for the second quarter of 1999 were $292.2 million as compared to
$273.7 million in the second quarter of 1998, an increase of $18.5 million or
6.8%. The increase in net sales was primarily associated with an increase in
automotive lamination products, which was offset by decreased sales due to the
closure of several plants in connection with the Crain Consolidation. Income
from operations decreased $9.3 million or 30.6% to $21.1 million for the second
quarter of 1999 from $30.5 million in the second quarter of 1998. The decrease
in income from operations resulted primarily from (a) restructuring costs of
$3.6 million recorded during the second quarter of 1999 and (b) a decrease in
gross profit of $9.2 million resulting primarily from increased raw material
costs and a shift in product mix resulting from a decrease in carpet cushion
units sold and lower sales of foam products offset by an increase in lower
margin automotive lamination sales, offset in part by a decrease in selling,
general
18
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
and administrative expenses of $4.2 million. The decrease in selling, general
and administrative costs was primarily due to the elimination of duplicative
costs from the Crain Consolidation and cost reductions implemented during the
first and second quarters of 1999.
Foam Products
Foam products net sales for the second quarter of 1999 decreased 6.4% to
$124.9 million from $133.4 million in the second quarter of 1998. The decrease
in net sales was primarily associated with the closure of several plants as part
of the Crain Consolidation. Income from operations decreased 43.5% to $12.9
million (10.4% of net sales) for the second quarter of 1999 from $22.9 million
(17.2% of net sales) in the second quarter of 1998. The decrease in income from
operations was primarily the result of increased raw material costs and the
decrease in net sales, offset in part by improved operating efficiencies and
cost reductions as part of the Crain Consolidation.
Carpet Cushion Products
Carpet cushion products net sales for the second quarter of 1999 decreased
15.4% to $46.7 million from $55.2 million in the second quarter of 1998
primarily due to decreased units sold. Income from operations decreased 126.3%
to a loss of $0.1 million (0.1% of net sales) for the second quarter of 1999
from income of $0.2 million (0.4% of net sales) in the second quarter of 1998.
This decrease was primarily due to the decrease in net sales.
Automotive Products
Automotive products net sales for the second quarter of 1999 increased
46.6% to $90.8 million from $61.9 million in the second quarter of 1998. The
increase in net sales was associated with increased volume of lamination
products. Income from operations increased 3.6% to $6.0 million (6.6% of net
sales) for the second quarter of 1999 from $5.8 million (9.4% of net sales) in
the second quarter of 1998. This increase was primarily a result of the increase
in net sales offset in part by contract price reductions and the change in
product mix to more laminated products which have lower margins than other
automotive products.
Technical Products
Technical products net sales for the second quarter of 1999 increased 14.2%
to $23.0 million from $20.2 million in the second quarter of 1998. Income from
operations increased 53.1% to $6.2 million (26.9% of net sales) for the second
quarter of 1999 from $4.1 million (20.1% of net sales) in the second quarter of
1998. The increase in net sales and income from operations was primarily
associated with increased sales of foam for ink jet printers.
Other
Other primarily consists of certain foreign manufacturing operations,
corporate expenses not allocated to the other operating segments and
restructuring and other charges. The increase in net sales associated with this
segment primarily resulted from an increase in net sales from Foamex L.P.'s
Mexican operations. The decrease in income (loss) from operations was primarily
associated with the $3.6 million of restructuring and other charges recorded in
the second quarter of 1999 discussed previously.
Income Before Provision for Income Taxes
Income before provision for income taxes decreased to $5.3 million for the
second quarter of 1999 as compared to $14.6 million in the second quarter of
1998. This decrease is primarily due to the decrease in income from operations
of $9.3 million discussed above.
Income Taxes
The second quarter of 1999 provision for income taxes of $0.4 million
primarily represents statutory taxes on operations in Mexico and Canada and
state income taxes for those states who do not permit use of net operating loss
carryforwards.
19
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Year to Date Period Ended June 30, 1999 Compared to Year to Date Period Ended
June 28, 1998
Net sales for the year to date period ended June 30, 1999 were $592.1
million as compared to $571.8 million in the year to date period ended June 28,
1998, an increase of $20.3 million or 3.6%. The increase in net sales was
primarily associated with the increase in automotive lamination products, which
was offset by decreased sales due to the closure of several plants in connection
with the Crain Consolidation and a reduction in sales in connection with the GFI
Transaction, which occurred at the end of February 1998. Income from operations
decreased $13.5 million or 24.8% to $40.9 million for the year to date period
ended June 30, 1999 from $54.4 million in the year to date period ended June 28,
1998. The decrease in income from operations resulted primarily from (a)
restructuring costs recorded during the year to date period ended June 30, 1999
of $7.0 million and (b) a decrease in gross profit of $16.6 million resulting
primarily from increased raw material costs and a shift in product mix resulting
from a decrease in carpet cushion units sold and lower sales of foam products
offset by an increase in lower margin automotive lamination sales, offset in
part by a decrease in selling, general and administrative expenses of $10.8
million. The decrease in selling, general and administrative costs was primarily
due to the elimination of duplicative costs from the Crain Consolidation and
cost reductions implemented during the year to date period ended June 30, 1999.
Foam Products
Foam products net sales for the year to date period ended June 30, 1999
decreased 6.2% to $264.3 million from $281.7 million in the year to date period
ended June 28, 1998. The decrease in net sales was primarily associated with the
closure of several plants as part of the Crain Consolidation. Income from
operations decreased 26.1% to $25.9 million (9.8% of net sales) for the year to
date period ended June 30, 1999 from $35.0 million (12.4% of net sales) in the
year to date period ended June 28, 1998. The decrease in income from operations
was primarily the result of increased raw material costs and the decrease in net
sales, offset in part by improved operating efficiencies resulting from the
Crain Consolidation.
Carpet Cushion Products
Carpet cushion products net sales for the year to date period ended June
30, 1999 decreased 19.2% to $90.0 million from $111.3 million in the year to
date period ended June 28, 1998 primarily due to the GFI Transaction and
decreased units sold. Income from operations decreased 124.9% to a loss of $0.4
million (0.5% of net sales) for the year to date period ended June 30, 1999 from
income of $1.8 million (1.6% of net sales) in the year to date period ended June
28, 1998. This decrease was primarily due to the decrease in net sales.
Automotive Products
Automotive products net sales for the year to date period ended June 30,
1999 increased 40.7% to $179.6 million from $127.6 million in the year to date
period ended June 28, 1998. The increase in net sales was associated with
increased volume of lamination products. Income from operations decreased 3.1%
to $12.8 million (7.1% of net sales) for the year to date period ended June 30,
1999 from $13.2 million (10.4% of net sales) in the year to date period ended
June 28, 1998. This decrease was primarily a result of contract price reductions
and the change in product mix to more laminated products which have lower
margins than other automotive products.
Technical Products
Technical products net sales for the year to date period ended June 30,
1999 increased 9.7% to $45.3 million from $41.3 million in the year to date
period ended June 28, 1998. Income from operations increased 30.9% to $11.2
million (24.8% of net sales) for the year to date period ended June 30, 1999
from $8.6 million (20.8% of net sales) in the year to date period ended June 28,
1998. The increase in net sales and income from operations was primarily
associated with increased sales of foam for ink jet printers.
20
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Other
Other primarily consists of certain foreign manufacturing operations,
corporate expenses not allocated to the other operating segments and
restructuring and other charges. The increase in net sales associated with this
segment primarily resulted from an increase in net sales from Foamex L.P.'s
Mexican operations. The decrease in income (loss) from operations was primarily
associated with the $7.0 million of restructuring and other charges recorded in
the year to date period ended June 30, 1999 discussed previously.
Income Before Provision for Income Taxes
Income before provision for income taxes decreased to $8.4 million for the
year to date period ended June 30, 1999 as compared to $21.3 million in the year
to date period ended June 28, 1998. This decrease is primarily due to the
decrease in income from operations of $13.5 million discussed above.
Income Taxes
The year to date period ended June 30, 1999 provision for income taxes of
$1.0 million primarily represents statutory taxes on operations in Mexico and
Canada and state income taxes for those states who do not permit use of net
operating loss carryforwards.
Extraordinary Loss
The extraordinary loss on early extinguishment of debt in 1998 of $3.2
million was primarily associated with the write-off of debt issuance costs in
connection with the GFI Transaction.
Liquidity and Capital Resources
Foamex L.P.'s operating cash requirements consist principally of working
capital requirements, scheduled payments of principal and interest on
outstanding indebtedness and capital expenditures. Foamex L.P. believes that
cash flow from Foamex L.P.'s operating activities, cash on hand and periodic
borrowings under the Amended Credit Facility, if necessary, will be adequate to
meet Foamex L.P.'s liquidity requirements. The ability to meet such liquidity
requirements could be impaired if Foamex L.P. were to fail to comply with
covenants contained in the Amended Credit Facility and such noncompliance was
not cured by Foamex L.P. or waived by the lenders. Foamex L.P. obtained various
waivers and amendments under the Credit Facility in March, May and June 1999 and
was in compliance with the covenants under the Amended Credit Facility as of
June 30, 1999. See Note 3 to the accompanying condensed consolidated financial
statements. Foamex L.P. incurred aggregate financing fees of approximately $3.5
million in connection with the March and June 1999 amendments. These financing
fees will be amortized along with previously paid financing fees through
December 2006, the remaining term of the Amended Credit Facility.
The accompanying condensed consolidated financial statements have been
prepared assuming Foamex L.P. will continue as a going concern. For the year
ended December 31, 1998, Foamex L.P. had a loss from continuing operations and
was not in compliance with certain covenants contained in agreements governing
approximately $415.4 million principal amount of indebtedness. Had the lenders
under the Credit Facility or other debt agreements accelerated the maturity of
their indebtedness as a result of Foamex L.P.'s noncompliance, such acceleration
would have constituted an event of default under or given the holders the right
to require the repurchase of substantially all of Foamex L.P.'s long-term debt.
As a result of these factors, Foamex L.P. classified approximately $715.8
million of long-term debt at December 31, 1998 as current in the accompanying
condensed consolidated balance sheet, which resulted in a working capital
deficit. These matters raised substantial doubt as of December 31, 1998 about
Foamex L.P.'s ability to continue as a going concern.
The Amended Credit Facility, which was signed on June 30, 1999, modify
financial covenants as of June 30, 1999, among other things, and provided for
future measurement periods taking into account Foamex L.P.'s estimated future
operating results and financial condition and management's expectations
regarding these future measurement periods. See Note 3 to the accompanying
condensed consolidated financial statements. For the year to date period ended
June 30, 1999, Foamex L.P. had income from continuing operations and was in
compliance with its debt
21
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
covenants. As a result of these factors and management's expectations regarding
compliance with these covenants in future measurement periods, Foamex L.P. has
classified approximately $695.4 million of debt as long-term in the accompanying
condensed consolidated balance sheet at June 30, 1999, which resulted in a
positive working capital. Foamex L.P. continues to be subject to certain "change
of control" provisions under its debt agreements which could result in an
acceleration of the related debt.
Certain of Foamex L.P.'s Mexican subsidiaries are in default of financial
covenant provisions contained in loan agreements with a Mexican bank as
negotiations continue to finalize amendments to the loan agreements to cure the
defaults. The defaults under the Mexican loan agreements do not have any cross
default consequences for Foamex L.P.'s domestic subsidiaries' debt agreements.
Trace is a privately held company which owns approximately 46.1% of Foamex
International's outstanding voting common stock and whose Chairman also serves
as the Chairman of Foamex International. Foamex International's common stock
owned by Trace is pledged as collateral against certain of Trace's debt
obligations. Certain credit agreements and promissory notes of Foamex L.P.,
pursuant to which approximately $429.8 million of debt was issued as of June 30,
1999, contain provisions that would result in the acceleration of such
indebtedness if Trace were to cease to beneficially own at least 25% of the
outstanding voting common stock of Foamex International and other persons or
groups were to own a greater percentage of such voting common stock than Trace.
Additionally, certain indentures relating to approximately $248.0 million of
senior subordinated notes contain provisions that provide the holders of such
senior subordinated notes with the right to require the issuers thereof to
repurchase such senior subordinated notes at a price in cash equal to 101% of
the aggregate principal amount thereof, plus accrued and unpaid interest
thereon, if Trace were to cease to beneficially own at least 25% of the
outstanding voting common stock of Foamex International and other persons or
groups were to own a greater percentage of such voting common stock than Trace.
Foamex L.P. 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 Foamex International's common
stock owned by Trace, or otherwise authorizes a sale or transfer of these
shares, and Trace, its affiliates and subsidiaries cease to own at least 25% of
Foamex International's outstanding voting common stock and other persons or
groups own a greater percentage of voting common stock than Trace.
Foamex L.P. 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 Foamex L.P.'s 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 Foamex L.P. will be able to do so or that Foamex
L.P. will be able to obtain waivers of such provisions. The accompanying
condensed consolidated financial statements do not include any adjustments that
might result from the outcome of these uncertainties.
As of June 30, 1999, there were $130.4 million of revolving credit
borrowings, at an average interest rate of 8.34%, under the Amended Credit
Facility with $12.0 million available for additional borrowing and approximately
$47.6 million of letters of credit outstanding which are supported by the
Amended Credit Facility. Borrowings by Foamex Canada Inc. as of June 30, 1999
were approximately $4.7 million, at an interest rate of 6.75%, under Foamex
Canada Inc.'s revolving credit agreement with unused availability of
approximately $0.7 million.
Cash and cash equivalents decreased to $3.1 million at June 30, 1999 from
$3.2 million at December 31, 1998. Excluding the reclassification of other
long-term debt to current at December 31, 1998, working capital decreased $4.0
million to $110.8 million at June 30, 1999 from $114.8 million at December 31,
1998. Net operating assets and liabilities (comprised of accounts receivable,
accounts receivable from related parties, inventories and accounts payable)
increased $4.9 million to $153.6 million at June 30, 1999 as compared to $148.7
million at
22
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
December 31, 1998. The increase was primarily due to an aggregate net increase
in accounts receivable and accounts receivable from related parties of $1.8
million and a decrease in accounts payable of $31.5 million offset by a decrease
in inventories of $28.4 million. The net increase in accounts receivable and
accounts receivable related parties was primarily associated with an increase in
sales during June 1999 as compared to December 1998 and the timing of receipts
from Foamex Carpet. The decrease in inventories was primarily due to the
December 31, 1998 balance including significant purchases of raw materials at
year-end. The decrease in accounts payable is primarily associated with the
timing of payments to vendors and the decrease in inventories from December 31,
1998 to June 30, 1999.
Cash Flow from Operating Activities
Cash flow provided by operating activities was $31.3 million for the year
to date period ended June 30, 1999 as compared to cash used of $34.0 million for
the year to date period ended June 28, 1998. The improvement is primarily the
result of a decrease in the use of cash for the operating assets and liabilities
during 1999 as compared to 1998.
Cash Flow from Investing Activities
Cash flow used for investing activities was $7.4 million for the year to
date period ended June 30, 1999 as compared to cash used of $28.9 million for
the year to date period ended June 28, 1998. This decrease was due primarily to
(i) a decrease in capital expenditures of $4.8 million in 1999, (ii) $9.0
million used in connection with the GFI Transaction in 1998 and (iii) cash used
in 1998 of $3.9 million for certain acquisition payments. Additionally, on March
31, 1999, Foamex International repaid its $2.5 million promissory note dated
December 31, 1998 to Foamex L.P.
During 1999, Foamex L.P. spent approximately $10.5 million on capital
improvements as compared to $15.3 million during 1998. The 1999 expenditures
were primarily for recurring capital replacement additions. The 1998
expenditures included: (a) finalization of the expansion and modernization of a
facility in Orlando, Florida to improve manufacturing efficiencies, (b)
installation of more efficient foam production line systems and fabricating
equipment in a number of manufacturing facilities and (c) installation of flame
laminators to support the increased volume of automotive laminated products.
Foamex L.P. expects to reduce capital expenditures from historical levels for
the foreseeable future.
Cash Flow from Financing Activities
Cash flow used for financing activities was $24.0 million for the year to
date period ended June 30, 1999 compared to cash flow provided by financing
activities of $58.2 million for the year to date period ended June 28, 1998.
This decrease was primarily due to 1998 including a series of transactions in
connection with the GFI Transaction during February 1998. In connection with the
GFI Transaction, Foamex L.P. distributed $20.0 million in cash pro rata to its
partners, such distribution was funded with borrowings under the Credit
Facility. See "Acquisitions and Dispositions."
Environmental Matters
Foamex L.P. is subject to extensive and changing environmental laws and
regulations. Expenditures to date in connection with Foamex L.P.'s compliance
with such laws and regulations did not have a material adverse effect on Foamex
L.P.'s operations, financial position, capital expenditures or competitive
position. The amount of liabilities recorded by Foamex L.P. in connection with
environmental matters as of June 30, 1999 was $3.5 million. Although it is
possible that new information or future developments could require Foamex L.P.
to reassess its potential exposure to all pending environmental matters,
including those described in the footnotes to Foamex L.P.'s consolidated
financial statements for the year ended December 31, 1998, Foamex L.P. believes
that, based upon all currently available information, the resolution of all such
pending environmental matters will not have a material adverse effect on Foamex
L.P.'s operations, financial position, capital expenditures or competitive
position. See Note 16 to Foamex L.P.'s consolidated financial statements
included in Foamex L.P.'s Annual Report on Form 10-K for the year ended December
31, 1998.
23
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Market Risk
Foamex L.P.'s debt securities with variable interest rates are subject to
market risk for changes in interest rates. On June 30, 1999, long-term debt with
variable interest rates totaled $449.4 million. On an annualized basis, if the
interest rates on these debt instruments increased by 1%, interest expense would
increase by approximately $4.5 million.
Inflation and Other Matters
There was no significant impact on Foamex L.P.'s operations as a result of
inflation during the periods presented. In some circumstances, market conditions
or customer expectations may prevent Foamex L.P. from increasing the price of
its products to offset the inflationary pressures that may increase its costs in
the future.
Year 2000 Compliance
Foamex L.P. uses numerous business information systems as well as
manufacturing support systems that could be impacted by the "Year 2000 Problem".
The Year 2000 Problem arises from computer programs that were written using two
digits rather than four to designate the year. In connection with the Year 2000
Problem, date-sensitive computer software may recognize a date using "00" as the
year 1900 rather than the year 2000. This could result in system failures or
miscalculations, which would cause significant operational disruptions.
Foamex L.P. has a Year 2000 Executive Sponsor Team comprised of
representatives of Foamex L.P. The Year 2000 Executive Sponsor Team is providing
direction to and receiving reports from the Year 2000 Steering Committee (the
"Steering Committee") within the organization. The Steering Committee has
completed an assessment of the state of readiness of the Information Technology
("IT") and non-IT systems of Foamex L.P. These assessments cover desktop
computers, environmental systems, manufacturing systems (including laboratory
information systems), field instrumentation, and significant third party vendor
and supplier systems, which include employee compensation and benefit plan
maintenance systems. The Steering Committee is also in the process of assessing
the readiness of Foamex L.P.'s significant customers and suppliers.
The Year 2000 assessment process for each facility consists of an inventory
of Year 2000 sensitive equipment, an assessment of the impact of possible
failures, determination of required remediation actions, if any, and testing and
implementation of these solutions. The inventory, assessment, remediation and
testing phases were completed at the end of 1998, with fail safe testing and
final implementation currently taking place in 1999. The progress of these
phases as of June 30, 1999 is summarized below.
Foamex L.P. completed the inventory and assessment phases of the project by
December 31, 1998. These phases consisted of a visit to each critical location
by team members to promote awareness of the project and verify the initial
inventory provided by the contact at each facility. Testing plans were developed
which included correspondence with suppliers regarding date-sensitive devices.
In addition, local management was advised of their roles and responsibilities in
connection with the Year 2000 Problem.
Foamex L.P. completed the remediation and testing of critical business
information computer systems as of December 31, 1998. The completion of these
phases included the modification of several million lines of system code, the
conversion of the systems acquired from Crain to standard business information
computer systems, upgrading system hardware and operating system software,
testing of the applicable systems in a development testing area, and the
migration of the remediated systems into the production environment.
Foamex L.P. estimates it will spend $2.0 million in connection with the
Year 2000 Problem. The spending estimate will be refined as phases of the
project are completed. Spending on the Year 2000 Problem is funded by cash
generated from operations.
Management believes that all significant systems controlled by Foamex L.P.
will be Year 2000 ready in the latter half of 1999. While the Steering Committee
is communicating readiness to third party customers, as requested, and is
assessing the readiness of critical suppliers, there can be no assurance that
third parties with a significant business relationship will successfully test,
reprogram, and replace all of their IT and non-IT systems on a timely
24
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
basis. As part of the overall response to the Year 2000 Problem, Foamex L.P. is
in the process of developing contingency plans in the event of Year 2000
non-compliance of certain systems or third parties. Details of such contingency
plans will be determined after the Steering Committee has completed its
assessment of its supply chain, other third parties and the potential for
possible failures.
There is inherent uncertainty in connection with the Year 2000 Problem due
to the possibility of unanticipated failures by third party customers and
suppliers. Accordingly, Foamex L.P. is unable, at this time, to assess the
extent and resulting materiality of the impact of possible Year 2000 failures on
its operations, liquidity or financial position. The Year 2000 assessment,
remediation, and testing process continues to provide information in order to
reduce the level of uncertainty regarding the impact of the Year 2000 Problem.
Management believes that if Foamex L.P.'s solutions to the Year 2000 Problem are
completed as scheduled; such solutions may help minimize the possibility of
significant disruptions to Foamex L.P.'s operations.
25
<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.
26
<PAGE>
Part II - Other Information
Item 1. Legal Proceedings
Reference is made to the description of the legal proceedings
contained in Foamex L.P.'s Annual Report on Form 10-K for the year
ended December 31, 1998.
The information from Note 4 of the condensed consolidated financial
statements of Foamex L.P. as of June 30, 1999 (unaudited) is
incorporated herein by reference.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule for the year to date period ended
June 30, 1999.
(b) Foamex L.P. filed the following Current Reports on Form 8-K since
December 31, 1998 through the date of this report:
Form 8-K, dated as of March 11, 1999 reporting amendments to
aspects of its credit agreements.
Form 8-K, dated as of June 30, 1999 reporting amendments to
aspects of its credit agreements.
Form 8-K, dated as of August 5, 1999 reporting press release on
proposed buyout.
27
<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 L.P.
By: FMXI, Inc.
General Partner
Date: August 13, 1999 By: /s/ George L. Karpinski
George L. Karpinski
Vice President
FOAMEX CAPITAL CORPORATION
Date: August 13, 1999 By: /s/ George L. Karpinski
George L. Karpinski
Vice President
28
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