SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
Commission file 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 its therefore filing this
form with the reduced disclosure format.
The number of shares of Foamex Capital Corporation's common stock outstanding as
of May 12, 1999 was 1,000.
Page 1 of 23
Exhibit List on Page 22 of 23
<PAGE>
FOAMEX L.P.
FOAMEX CAPITAL CORPORATION
<TABLE>
<CAPTION>
INDEX
Page
<S> <C>
Part I. Financial Information:
Item 1. Financial Statements
Condensed Consolidated Statements of Operations (unaudited) - Quarterly Periods Ended
March 31, 1999 and March 29, 1998 3
Condensed Consolidated Balance Sheets (unaudited) as of March 31, 1999
and December 31, 1998 4
Condensed Consolidated Statements of Cash Flows (unaudited) - Quarterly Periods Ended
March 31, 1999 and March 29, 1998 5
Notes to Condensed Consolidated Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations 14
Part II. Other Information 22
Item 1. Legal Proceedings 22
Item 6. Exhibits and Reports on Form 8-K 22
Signatures 23
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FOAMEX L.P. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
<TABLE>
<CAPTION>
Quarterly Periods Ended
March 31, March 29,
1999 1998
--------- ---------
(thousands)
<S> <C> <C>
NET SALES $ 299,877 $ 298,073
COST OF GOODS SOLD 262,416 253,165
--------- ---------
GROSS PROFIT 37,461 44,908
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 14,333 20,999
RESTRUCTURING AND OTHER CHARGES 3,357 --
--------- ---------
INCOME FROM OPERATIONS 19,771 23,909
INTEREST AND DEBT ISSUANCE EXPENSE 16,139 16,912
OTHER EXPENSE, NET 439 313
--------- ---------
INCOME BEFORE PROVISION FOR INCOME TAXES 3,193 6,684
PROVISION FOR INCOME TAXES 585 1,076
--------- ---------
INCOME BEFORE EXTRAORDINARY LOSS 2,608 5,608
EXTRAORDINARY LOSS ON EARLY EXTINGUISHMENT
OF DEBT, NET OF INCOME TAXES -- (3,123)
--------- ---------
NET INCOME $ 2,608 $ 2,485
========= =========
</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>
March 31, December 31,
ASSETS 1999 1998
--------- ---------
CURRENT ASSETS: (thousands, except number of shares)
<S> <C> <C>
Cash and cash equivalents $ 4,907 $ 3,192
Accounts receivable, net 154,130 143,301
Accounts receivable from related parties 9,650 17,533
Inventories 108,451 127,636
Other current assets 28,729 33,849
--------- ---------
Total current assets 305,867 325,511
PROPERTY, PLANT AND EQUIPMENT, NET 219,831 219,637
COST IN EXCESS OF ASSETS ACQUIRED, NET 187,187 188,205
DEBT ISSUANCE COSTS, NET 14,612 13,946
OTHER ASSETS 22,217 21,229
--------- ---------
TOTAL ASSETS $ 749,714 $ 768,528
========= =========
LIABILITIES AND PARTNERS' DEFICIT
CURRENT LIABILITIES:
Short-term borrowings $ 3,493 $ 2,957
Current portion of long-term debt 682,766 689,478
Current portion of long-term debt - related party 34,000 34,000
Accounts payable 119,678 139,726
Accrued interest 7,897 7,396
Other accrued liabilities 53,835 52,944
--------- ---------
Total current liabilities 901,669 926,501
OTHER LIABILITIES 37,998 38,064
--------- ---------
Total liabilities 939,667 964,565
--------- ---------
COMMITMENTS AND CONTINGENCIES -- --
--------- ---------
PARTNERS' DEFICIT:
General partner (138,818) (141,426)
Limited partner -- --
Accumulated other comprehensive income (loss) (25,796) (26,208)
Notes and advances receivable from partner (16,118) (18,608)
Notes receivable from related party (9,221) (9,795)
--------- ---------
Total partners' deficit (189,953) (196,037)
--------- ---------
TOTAL LIABILITIES AND PARTNERS' DEFICIT $ 749,714 $ 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>
Quarterly Periods Ended
March 31, March 29,
1999 1998
--------- ---------
(thousands)
OPERATING ACTIVITIES:
<S> <C> <C>
Net income $ 2,608 $ 2,485
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 7,669 7,251
Amortization of debt issuance costs, debt discount,
debt premium and deferred swap adjustments (101) 247
Extraordinary loss on early extinguishment of debt -- 2,857
Other operating activities (96) 2,142
Changes in operating assets and liabilities, net 992 (44,073)
--------- ---------
Net cash provided by (used for) operating activities 11,072 (29,091)
--------- ---------
INVESTING ACTIVITIES:
Capital expenditures (5,743) (7,115)
Acquisitions, net of cash acquired -- (3,321)
Sale of subsidiaries -- (8,971)
Deposit for defeasance of indebtedness -- (4,809)
Repayments of (purchase of) note from partner 2,490 (2,490)
Proceeds from (payments for) note receivable - related party -- (424)
Other investing activities -- (451)
--------- ---------
Net cash used for investing activities (3,253) (27,581)
--------- ---------
FINANCING ACTIVITIES:
Net proceeds from short-term borrowings 536 (716)
Net proceeds from (repayments of) revolving loans (5,237) 69,973
Proceeds from long-term debt -- 129,000
Repayment of long-term debt (1,212) (126,827)
Debt issuance cost (1,154) (1,149)
Cash overdraft 963 --
Distribution to partners -- (20,000)
Other financing activities -- (42)
--------- ---------
Net cash provided by (used for) financing activities (6,104) 50,239
--------- ---------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 1,715 (6,433)
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD 3,192 9,405
--------- ---------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 4,907 $ 2,972
========= =========
</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 March 31, 1999, the
condensed consolidated statements of operations and cash flows for quarterly
periods ended March 31, 1999 and March 29, 1998 have been prepared by 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. Fiscal year 1997 was composed of fifty-two weeks and ended on December 28,
1997. As a result, the quarterly financial data for the quarterly period ended
March 29, 1998 represents a thirteen-week period. The first quarter of 1999
ended on March 31st , which was the end of the third full month of 1999, and
included 91 calendar days.
Certain information and note disclosures normally included in the
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted in accordance with the rules and
regulations of the Securities and Exchange Commission. These condensed
consolidated financial statements should be read in conjunction with 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 March 31, 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 periods ended March 31, 1999 and March 29,
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, a
working capital deficit and was not in compliance and does not expect to be in
compliance for future periods with certain debt covenants for which it is
seeking amendments. Foamex L.P. received a waiver under its credit facility (the
"Credit Facility") through May 5, 1999, which was subsequently extended on May
6, 1999 through June 30, 1999, for the covenants for which Foamex L.P. was not
in compliance. Non-compliance under the Credit Facility and other debt
agreements provides the lenders under the agreements, which have an aggregate
outstanding principal balance of approximately $409.2 million at March 31, 1999,
with the right, upon notice and lapse of time, to declare all of such
indebtedness to be due. Notwithstanding the fact that to date, the lenders have
not exercised such rights and have granted waivers of such covenants through
June 30, 1999 to enable Foamex L.P. to negotiate amendments of such covenants;
there can be no assurance that such amendments will be obtained. Were the
lenders under the Credit Facility or the other debt agreements to accelerate the
maturity of their indebtedness, such acceleration would constitute an event of
default and all of Foamex L.P.'s long-term debt would become due. As a result,
Foamex L.P. has reclassified approximately $708.8 million and $715.8 million of
long-term debt as current in the accompanying condensed consolidated balance
sheets at March 31, 1999 and December 31, 1998, respectively. These matters
raise substantial doubt about Foamex L.P.'s ability to continue as a going
concern.
Trace International Holdings, Inc. ("Trace") is a privately held company
which owned approximately 46.1% of Foamex International's outstanding stock as
of April 1, 1999 and whose Chairman also serves as the Chairman of Foamex
International. In 1998, Trace informed Foamex International that Trace had
substantial debt obligations that were due at the end of December 1998 and did
not have the financial resources to pay those obligations. Subsequently, Trace
informed Foamex International that waivers and/or modifications of such
indebtedness had been
6
<PAGE>
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
obtained for at least the near future; however, there can be no assurance that
such waivers and/or modifications will remain in effect prior to obtaining a
permanent resolution. Foamex International's common stock owned by Trace is
pledged as collateral against certain of Trace's obligations. If Trace were to
default on such indebtedness collateralized by Foamex International's common
stock or other Trace creditors were to take steps constituting a default under
such indebtedness (such as filing an involuntary bankruptcy petition), and if
the holders of such indebtedness were to foreclose on Foamex International's
common stock owned by Trace, such event could trigger the "change of control"
provisions and correspondingly the acceleration and put rights contained in
certain of Foamex L.P.'s debt agreements, as described below. This could result
in the acceleration of all of Foamex L.P.'s debt. Although management believes
that Foamex L.P.'s debt obligations could be refinanced under such
circumstances, there can be no assurance that Foamex L.P. or its subsidiaries
would be able to do so. The financial statements do not include any adjustments
that might result from the outcome of these uncertainties.
Certain credit agreements and promissory notes of Foamex L.P. pursuant to
which approximately $434.3 million of debt has been issued, as of March 31,
1999, contain provisions that would result in the acceleration of such
indebtedness if Trace were to cease to own at least 30% of the outstanding
common stock of Foamex International. Similarly, certain indentures of Foamex
L.P. and Foamex Capital Corporation relating to approximately $248.0 million of
senior subordinated notes contain provisions that provide the holders of such
senior subordinated notes with the right to require the issuers thereof to
repurchase such senior subordinated notes at a price in cash equal to 101% of
the aggregate principal amount thereof, plus accrued and unpaid interest
thereon, if Trace falls below certain specified ownership levels of Foamex
International's common stock and other persons or group owns a greater
percentage of Foamex International's common stock than Trace.
2. INVENTORIES
Inventories consist of:
March 31, December 31,
1999 1998
(thousands)
Raw materials and supplies $ 74,254 $ 93,241
Work-in-process 11,748 12,087
Finished goods 22,449 22,308
-------- --------
Total $108,451 $127,636
======== ========
3. CURRENT PORTION OF LONG-TERM DEBT AND LONG-TERM DEBT - RELATED PARTY
Foamex L.P. reclassified approximately $708.8 million and $715.8 million
of long-term debt as current in the accompanying condensed consolidated balance
sheets at March 31, 1999 and December 31, 1998, respectively, in connection with
waivers granted through June 30, 1999 under the Credit Facility for
noncompliance with certain debt covenants. These matters raise substantial doubt
about Foamex L.P.'s ability to continue as a going concern. Foamex L.P. is
seeking amendments to its Credit Facility. (See Note 1.)
7
<PAGE>
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
3. CURRENT PORTION OF LONG-TERM DEBT AND LONG-TERM DEBT - RELATED PARTY
(continued)
Current portion of long-term debt consists of:
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
-------- --------
Credit Facility: (thousands)
<S> <C> <C>
Term Loan B $ 82,504 $ 82,714
Term Loan C 75,003 75,194
Term Loan D 108,625 108,900
Revolving credit facility 134,201 139,438
9 7/8% Senior subordinated notes due 2007 150,000 150,000
13 1/2% Senior subordinated notes due 2005 (includes
$11,445 and $11,893 of unamortized debt premium) 109,445 109,893
Industrial revenue bonds 7,000 7,000
Subordinated note payable (net of unamortized
debt discount of $431 and $523) 6,583 6,491
Other 9,405 9,848
-------- --------
682,766 689,478
Less current portion 682,766 689,478
-------- --------
Long-term debt-unrelated parties $ -- $ --
======== ========
Current portion of long-term debt - related party consists of:
Foamex/GFI Note $ 34,000 $ 34,000
======== ========
</TABLE>
Debt Restrictions and Covenants
The indentures, credit facilities 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
or the occurrence of an undefined material adverse change in the ability of the
obligor to perform its obligations, the indebtedness must be repaid, in certain
cases, at the option of the holder (see Note 1). Also, 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. Under the most restrictive of
the distribution restrictions, Foamex L.P. can make distributions to Foamex
International only to the extent necessary to enable Foamex International to
meet its operating and debt obligations.
Foamex L.P. amended its Credit Facility on March 11, 1999. The amendment
adjusted financial covenants, among other things, as of December 31, 1998 and
provided for future measurement periods taking into account Foamex L.P.'s
estimated operating results and financial condition for 1998 and managements'
expectations regarding future measurement periods. As the Foamex L.P. actual
1998 net loss was greater than originally estimated, on April 15, 1999, Foamex
L.P. obtained a waiver through May 5, 1999, which was further extended on May 6,
1999 through June 30, 1999, of the financial covenants contained in the Credit
Facility and certain events of default arising out of its Mexican operations, in
order to enable Foamex L.P. to negotiate a further amendment of the Credit
Facility.
During the quarterly periods ended March 31, 1999 and March 29, 1998,
Foamex L.P. paid approximately $0.5 million and $0.2 million, respectively to
Foam Funding LLC for interest on a note payable to them.
8
<PAGE>
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
4. LITIGATION
On April 26, 1999, a putative securities class action entitled Molitor v.
Foamex International Inc., et al., 99 Civ. 3004 (DC), was filed in the United
States District court for the Southern District of New York naming as defendants
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 compliant seeks class certification, a declaration that defendants violated
the federal securities laws, an award of money damages, and costs and
attorneys', accountants' and experts' fees. The defendants intend to vigorously
defend the action. To date, no response to the complaint has been made and no
discovery or other proceedings have taken place. Foamex L.P. is not a party to
such suit.
On April 14, 1999, Foamex International received 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 and Foamex L.P., which
previously have been disclosed in Foamex International's and Foamex L.P.'s
periodic filings. 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.
Foamex L.P.'s Annual Report on Form 10-K for the year ended December 31,
1998 included the following discussions of other material litigation involving
Foamex L.P. and Foamex International. There have been no significant
developments in such litigation since the filing of Foamex L.P.'s Annual Report
on Form 10-K.
Beginning on or about March 17, 1998, six actions (collectively the
"Stockholder Litigation") were filed in the Court of Chancery of the State of
Delaware, New Castle County (the "Court"), by stockholders of Foamex
International. The Stockholder 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 Stockholder Litigation.
The parties to the Stockholder Litigation entered into a Memorandum of
Understanding, dated June 25, 1998 (the "Memorandum of Understanding"), to
settle the Stockholder Litigation, subject to, inter alia, execution of a
definitive stipulation of settlement between the parties and approval by the
Court following notice to the class and a hearing. The Memorandum of
Understanding provided that as a result of, among other things, the Stockholder
Litigation and negotiations among counsel for the parties to the Memorandum of
Understanding, a special meeting of stockholders would be held to vote upon and
approve the Agreement and Plan of Merger (the "First Merger Agreement") which
provided, among other things, for all of the Foamex International 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.
9
<PAGE>
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
4. LITIGATION (continued)
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 Stockholders"), the dismissal of the Stockholder
Litigation with prejudice and the release by the plaintiffs and all members of
the class of all claims and causes of action that were or could have been
asserted against Trace, Foamex International and the individual defendants in
the Stockholders Litigation or that arise out of the matters alleged by
plaintiffs. Following the completion of the confirmatory discovery which was
provided for in the Memorandum of Understanding, on September 9, 1998, the
parties entered into a definitive Stipulation of Settlement and the Court set a
hearing to consider whether the settlement should be approved for October 27,
1998 (the "Settlement Hearing"). In connection with the proposed settlement, the
plaintiffs intended to apply for an award of attorney's fees and litigation
expenses in an amount not to exceed $925,000, and the defendants agreed not to
oppose this application. Additionally, Foamex International agreed to pay the
cost, if any, of sending notice of the settlement to the Public Stockholders. On
September 24, 1998, a Notice of Pendency of Class Action, Proposed Settlement of
Class Action and Settlement Hearing was mailed to the members of the settlement
class. On October 20, 1998, the parties to the Stockholder Litigation requested
that the Court cancel the Settlement Hearing in light of the announcement made
by Trace on October 16, 1998, that it had been unable to obtain the necessary
financing for the contemplated acquisition by Trace of 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
Stockholder Litigation gave notice pursuant to the Stipulation of Settlement
that such defendants were withdrawing from the Stipulation of Settlement in
light of the notice given by Trace to 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 Stockholder 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 Stockholders in connection with a second Agreement and Plan
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.
The defendants have denied, and continue to deny, that they have
committed or have threatened to commit any violation of law or breaches of duty
to plaintiffs or the purported class or any breach of the stipulation of
settlement. The defendants intend to vigorously defend the Stockholder
Litigation. If the Stockholder Litigation is adversely determined, it could have
a material adverse effect on the financial position, results of operations and
cash flows of 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 the Company between March
16, 1998 and October 19, 1998, naming Trace as defendant and alleging that Trace
breached a contract between the putative class members and Trace. By order dated
January 8, 1999, the Court transferred the action to the United States District
Court for the Southern District of New York. Trace made a motion to dismiss the
action on February 8, 1999, which motion is pending before the Court, and the
Court has stayed all discovery in the action until the motion is decided.
Neither Foamex International, Foamex L.P. nor any of the individual directors of
Foamex International are named as defendants in this litigation.
10
<PAGE>
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
4. LITIGATION (continued)
As of May 17, 1999, Foamex L.P. and Trace were two of multiple defendants
in actions filed on behalf of approximately 4,300 recipients of breast implants
in various United States federal and state courts and one Canadian provincial
court, some of which allege substantial damages, but most of which allege
unspecified damages for personal injuries of various types. Three of these cases
seek to allege claims on behalf of all breast implant recipients or other
allegedly affected parties, but no class has been approved or certified by the
court. In addition, three cases have been filed alleging claims on behalf of
approximately 39 residents of Australia, New Zealand, England, and Ireland.
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, 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 either Foamex L.P.'s or Trace'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 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.
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 quarterly periods noted below is comprised
of the following:
Quarterly Period Ended
March 31, March 29,
1999 1998
------ ------
(thousands)
Net income $2,608 $2,485
Foreign current translation adjustments 412 227
------ ------
Total comprehensive income $3,020 $2,712
====== ======
11
<PAGE>
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
6. RESTRUCTURING AND OTHER CHARGES
As announced previously by Foamex International in its March 16, 1999
press release, 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 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. Approximately
$1.9 million of these severance costs will be paid by June 30, 1999.
Approximately $1.5 million, which relates to contractual severance costs payable
to the former Chairman and Chief Executive Officer, will be paid through March
2001. Foamex L.P. expects to record additional restructuring charges in the
future as it fully implements 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 industry, furniture
industry and the retail industry. The carpet cushion products segment sells
prime, rebond, sponge rubber and felt carpet cushion principally to Foamex
Carpet Cushion, Inc. ("Foamex Carpet"). 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.
The accounting policies of the operating segments are the same as
described in the "Summary of Significant Accounting Policies" (see Note 2 to
Foamex L.P.'s Annual Report on Form 10-K for the year ended December 31, 1998).
Revenues and costs have been included in operating segments where specifically
identified. Costs shared by operating segments have been allocated on the basis
of the amount utilized.
<TABLE>
<CAPTION>
Carpet
Foam Cushion Automotive Technical
Products Products Products Products Other Total
Quarterly period ended March 31, 1999:
<S> <C> <C> <C> <C> <C> <C>
Net sales $139,379 $43,303 $88,771 $22,248 $6,176 $299,877
Income (loss) from operations 12,921 (371) 6,792 5,035 (4,606) 19,771
Depreciation and amortization 4,147 1,169 1,235 636 482 7,669
Quarterly period ended March 29, 1998:
Net sales $148,293 $56,164 $65,681 $21,116 $6,819 $298,073
Income (loss) from operations 12,113 1,504 7,415 4,537 (1,660) 23,909
Depreciation and amortization 3,806 1,071 1,177 629 568 7,251
</TABLE>
8. RELATED PARTY TRANSACTIONS
During the quarterly periods ended March 31, 1999 and March 29, 1998,
Foamex L.P. sold approximately $43.3 million and $56.2 million, respectively, of
carpet cushion products to Foamex Carpet. In addition, Foamex L.P. provided and
invoiced approximately $0.6 million and $0.3 million of administrative services
to Foamex Carpet during the quarterly periods ended March 31, 1999 and March 29,
1998, respectively.
12
<PAGE>
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
8. RELATED PARTY TRANSACTIONS (continued)
Also, Foamex L.P. chartered an aircraft (which is owned by a wholly owned
subsidiary of Foamex International) through a third party and incurred costs of
approximately $0.1 million and $0.2 million during the quarterly periods ended
March 31, 1999 and March 29, 1998, respectively.
13
<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 March 31, 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. As discussed in
Note 1 to the accompanying condensed consolidated financial statements and under
"Liquidity and Capital Resources" below, at December 31, 1998 Foamex L.P. was
not in compliance and does not expect to be in compliance for future periods
with certain financial covenants contained in certain of its debt agreements.
These debt agreements had outstanding principal balances aggregating
approximately $409.2 million at March 31, 1999. Were the lenders under these
agreements to accelerate the maturity of their indebtedness, such acceleration
would constitute an event of default and all of Foamex L.P.'s long-term debt
would become due. Additionally, as discussed in Note 1 to the accompanying
condensed consolidated financial statements and under "Liquidity and Capital
Resources" below, if Trace defaults on its indebtedness collateralized by Foamex
International's common stock and such creditors exercise their rights and
remedies under the related debt agreements, all of Foamex L.P.'s indebtedness
may be accelerated. As a result, Foamex L.P. reclassified approximately $708.8
million and $715.8 million of long-term debt as current in the accompanying
condensed consolidated balance sheets at March 31, 1999 and December 31, 1998,
respectively. These matters raise substantial doubt about Foamex L.P.'s ability
to continue as a going concern. The financial statements do not include any
adjustments that might result from the outcome of these uncertainties.
On March 16, 1999, Foamex International announced that it had 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.
Restructuring Plan
As announced previously by Foamex International in its March 16, 1999
press release, 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 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. Approximately
$1.9 million of these severance costs will be paid by June 30, 1999.
Approximately $1.5 million, which relates to contractual severance costs payable
to the former Chairman and Chief Executive Officer, will be paid through March
2001. Foamex L.P. expects to record additional restructuring charges in the
future as it fully implements its restructuring plan. Such amounts cannot be
estimated at this time but are expected to relate primarily to severance costs.
Acquisitions and Dispositions
On 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
14
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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. 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.
Operating results for 1999 are expected to be influenced by various
internal and external factors. These factors include, among other things, (a)
Foamex L.P.'s debt structure and Foamex L.P.'s ability to successfully amend the
terms of its Credit Facility and certain other indebtedness, (b) Foamex L.P.'s
capital structure, (c) continued integration of the operations of Crain
Industries, Inc. ("Crain") with Foamex L.P.'s operations (the "Crain
Consolidation"), (d) raw material cost increases, if any, by Foamex L.P.'s
chemical suppliers, (e) Foamex L.P.'s success in passing on to its customers
selling price increases to recover any such raw material cost increases and (f)
fluctuations in interest rates.
RESULTS OF OPERATIONS
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 industry, furniture
industry and the retail industry. 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.
15
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
Carpet
Foam Cushion Automotive Technical
Products Products Products Products Other Total
Quarterly period ended March 31, 1999:
<S> <C> <C> <C> <C> <C> <C>
Net sales $139,379 $43,303 $88,771 $22,248 $6,176 $299,877
Income (loss) from operations 12,921 (371) 6,792 5,035 (4,606) 19,771
Depreciation and amortization 4,147 1,169 1,235 636 482 7,669
Quarterly period ended March 29, 1998:
Net sales $148,293 $56,164 $65,681 $21,116 $6,819 $298,073
Income (loss) from operations 12,113 1,504 7,415 4,537 (1,660) 23,909
Depreciation and amortization 3,806 1,071 1,177 629 568 7,251
</TABLE>
Quarterly Period Ended March 31, 1999 Compared to Quarterly Period Ended March
27, 1998
Net sales for the first quarter of 1999 were $299.9 million as compared
to $298.1 million in the first quarter of 1998, an increase of $1.8 million or
0.6%. The increase in net sales was primarily associated with increased sales of
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 $4.1 million or 17.3% to $19.8
million for the first quarter of 1999 from $23.9 million in the first quarter of
1998. The decrease in income from operations resulted primarily from (a)
restructuring costs of $3.4 million recorded during the first quarter of 1999
and (b) a decrease in gross profit of $7.4 million resulting primarily from
increased raw material costs and a decrease in carpet cushion units sold, offset
in part by a decrease in selling, general and administrative expenses of $6.7
million. The decrease in selling, general and administrative costs was primarily
due to (a) the elimination of duplicative costs from the Crain Consolidation,
(b) cost reductions implemented during the first quarter of 1999 and (c)
reductions as a result of the GFI Transaction which occurred at the end of
February 1998.
Foam Products
Foam products net sales for the first quarter of 1999 decreased 6.0% to
$139.4 million from $148.3 million in the first quarter of 1998. Income from
operations increased 6.7% to $12.9 million (9.3% of net sales) for the first
quarter of 1999 from $12.1 million (8.2% of net sales) in the first quarter of
1998. The decrease in net sales was primarily associated with the closure of
several plants as part of the Crain Consolidation. The increase in income from
operations as a percentage of net sales was primarily the result of improved
operating efficiencies resulting from the Crain Consolidation.
Carpet Cushion Products
Carpet cushion products net sales for the first quarter of 1999 decreased
22.9% to $43.3 million from $56.2 million in the first quarter of 1998 primarily
due to the GFI Transaction and decreased units sold. Income from operations
decreased 124.7% to a loss of $0.4 million (0.9% of net sales) for the first
quarter of 1999 from income of $1.5 million (2.7% of net sales) in the first
quarter of 1998. This decrease was primarily associated with the factors that
caused the decrease in net sales.
Automotive Products
Automotive products net sales for the first quarter of 1999 increased
35.2% to $88.8 million from $65.7 million in the first quarter of 1998. The
increase in net sales was associated with increased volume of lamination
products. Income from operations decreased 8.4% to $6.8 million (7.7% of net
sales) for the first quarter of 1999 from $7.4 million (11.3% of net sales) in
the first quarter of 1998. This decrease was primarily a result of contract
price reductions and the change in product mix to more laminated products which
have lower margins than other automotive products.
16
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Technical Products
Technical Products net sales for the first quarter of 1999 increased 5.4%
to $22.2 million from $21.1 million in the first quarter of 1998. Income from
operations increased 11.0% to $5.0 million (22.6% of net sales) for the first
quarter of 1999 from $4.5 million (21.5% of net sales) in the first quarter of
1998. The increase in net sales and income from operations was primarily
associated with increased sales of foam for ink jet printers.
Other
Other primarily consists of certain foreign manufacturing operations,
corporate expenses not allocated to the other operating segments and
restructuring and other charges. The decrease in net sales associated with this
segment primarily resulted from a decrease in net sales from Foamex L.P.'s
Mexican operations. The increase in loss from operations was primarily
associated with the $3.4 million of restructuring charges recorded in the first
quarter of 1999 discussed previously.
Income Before Provision for Income Taxes
Income before provision for income taxes decreased to $3.2 million for
the first quarter of 1999 as compared to $6.7 million in the first quarter of
1998. This decrease is primarily due to the decrease in income from operations,
as discussed above.
Income Taxes
The first quarter of 1999 provision for income taxes of $0.6 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 $3.1
million was primarily associated with the write-off of debt issuance costs in
connection with the GFI Transaction.
Liquidity and Capital Resources
Liquidity
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 Credit Facility, if necessary, (provided that such Credit
Facility is successfully amended, as described below) will be adequate to meet
Foamex L.P.'s liquidity requirements. The ability to meet such liquidity
requirements could be impaired if Foamex L.P. were to fail to comply with any
covenants contained in the Credit Facility and such noncompliance was not cured
by Foamex L.P. or waived by the lenders. Foamex L.P. amended its Credit Facility
in March 1999. Foamex L.P. paid approximately $1.2 million in financing fees and
interest rates were increased in connection with this amendment. The amendment
adjusted financial covenants, among other things, as of December 31, 1998 and
provided for future measurement periods taking into account Foamex L.P.'s
estimated operating results and financial condition for 1998 and management
expectations regarding future measurement periods. As the Foamex L.P. actual
1998 net loss was greater than originally estimated, on April 15, 1999, Foamex
L.P. obtained a waiver through May 5, 1999, which was further extended on May 6,
1999 through June 30, 1999, of the financial covenants contained in the Credit
Facility and certain events of default arising out of its Mexican operations, in
order to enable it to negotiate a further amendment of the Credit Facility.
There can be no assurance that such an amendment will be obtained. The failure
to obtain such an amendment would have a material adverse effect on Foamex L.P.
Certain credit agreements and promissory notes of Foamex L.P. pursuant
to which approximately $434.3 million of debt has been issued, as of March 31,
1999, contain provisions that would result in the acceleration of such
indebtedness if Trace were to cease to own at least 30% of the outstanding
17
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
common stock of Foamex International. Similarly, certain indentures of Foamex
L.P. and Foamex Capital Corporation relating to approximately $248.0 million of
senior subordinated notes contain provisions that provide the holders of such
senior subordinated notes with the right to require the issuers thereof to
repurchase such senior subordinated notes at a price in cash equal to 101% of
the aggregate principal amount thereof, plus accrued and unpaid interest
thereon, if Trace falls below certain specified ownership levels of Foamex
International's common stock and other persons or group owns a greater
percentage of Foamex International's common stock than Trace. Trace is a
privately held company which owned approximately 46.1% of Foamex International's
outstanding common stock as of April 1, 1999 and whose Chairman also serves as
the Chairman of Foamex International. In 1998, Trace informed Foamex
International that Trace had substantial debt obligations that were due at the
end of December 1998 and it did not have the financial resources to pay those
obligations. Subsequently, Trace informed Foamex International that waivers
and/or modifications of such indebtedness had been obtained for at least the
near future; however, there can be no assurance that such waivers and/or
modifications will remain in effect prior to obtaining a permanent resolution.
Foamex International's common stock owned by Trace is pledged as collateral
against certain of Trace's debt obligations. If Trace were to default on such
indebtedness collateralized by Foamex International's common stock or other
Trace creditors were to take steps constituting a default under such
indebtedness (such as filing an involuntary bankruptcy petition), and if the
holders of such secured indebtedness were to foreclose on Foamex International's
common stock owned by Trace, such event could trigger the "change of control"
provisions and correspondingly the acceleration and put rights contained in
certain of Foamex L.P.'s debt agreements, as described below. This could result
in the acceleration of all of Foamex L.P.'s debt. Although management believes
that all such debt obligations could be refinanced under such circumstances,
there can be no assurance that Foamex L.P. or its subsidiaries would be able to
do so.
The accompanying condensed consolidated financial statements have been
prepared assuming Foamex L.P. will continue as a going concern. As discussed in
Note 1 to the accompanying condensed consolidated financial statements, at
December 31, 1998 Foamex L.P. was not in compliance and does not expect to be in
compliance in the future with certain debt covenants for which it is seeking
amendments. These agreements had outstanding principal balances aggregating
approximately $409.2 million at March 31, 1999. Foamex L.P. received a waiver
under the Credit Facility through May 5, 1999, which was subsequently extended
on May 6, 1999 through June 30, 1999, for the covenants for which Foamex L.P.
was not in compliance. Non-compliance under the Credit Facility and other debt
agreements provides the lenders under the agreements, with the rights, upon
notice and the lapse of time, to declare all of such indebtedness to be due.
Notwithstanding the fact that to date the lenders have not exercised such rights
and have granted waivers of such covenants through June 30, 1999, to enable
Foamex L.P. to negotiate amendment of such covenants; there can be no assurance
that such amendments will be obtained. Were the lenders under these agreement to
accelerate the maturity of their indebtedness, such acceleration would
constitute an event of default and all of Foamex L.P.'s long-term debt would
become due. Additionally, as discussed above, 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,
all of Foamex L.P.'s indebtedness may be accelerated. As a result, Foamex L.P.
reclassified approximately $708.8 million and $715.8 million of long-term debt
as current in the accompanying condensed consolidated balance sheets at March
31, 1999 and December 31, 1998, respectively. These matters raise substantial
doubt about Foamex L.P.'s ability to continue as a going concern. The financial
statements do not include any adjustments that might result from the outcome of
these uncertainties.
If Foamex L.P. is able to amend the relevant covenants in its credit
agreements and other financial arrangements, Foamex L.P. may be able to
reclassify its long-term debt included in current liabilities as long-term.
However, there can be no assurance that Foamex L.P. will be able to obtain the
necessary amendments, or if obtained, that it will once again be able to
classify such liabilities as long-term.
As of March 31, 1999, there were $134.2 million of revolving credit
borrowings, at an average interest rate of 8.30%, under the Credit Facility with
$10.7 million available for additional borrowings and approximately $47.6
million of letters of credit outstanding which are supported by the Credit
Facility. Borrowings by Foamex Canada Inc. as of March 31, 1999 were
approximately $3.5 million, at an interest rate of 7.25%, under Foamex Canada
Inc.'s revolving credit agreement with unused availability of approximately $1.9
million.
Foamex L.P. paid an aggregate $1.2 million in financing fees associated
with the March 1999 amendment to the Credit Facility. Foamex L.P. has
capitalized these costs and is currently amortizing them along with the
previously paid deferred financing costs over the remaining life of the Credit
Facility as Foamex L.P. expects to successfully amend the Credit Facility during
18
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
the current waiver period. Foamex L.P. is in the process of negotiating further
amendments to the Credit Facility and certain other financing agreements as
discussed previously. Generally, amendments to financing agreements may result
in changes to terms and conditions under the existing debt agreements, including
but not limited to, changes in interest rates and financial and non-financial
covenants. Additionally, there may be additional financing fees associated with
obtaining such amendments. Foamex L.P. cannot determine the changes which may
occur to the Credit Facility at this time, or the amount of financing fees which
may be required in connection with this future amendment.
Cash and cash equivalents increased to $4.9 million at March 31, 1999
from $3.2 million at December 31, 1998 due primarily to the increase in net cash
provided by operating activities offset by the repayment of revolver borrowings.
Excluding the reclassification of other long-term debt to current, working
capital decreased $1.8 million to $113.0 million at March 31, 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 $3.9 million to $152.6 million at March 31, 1999 as
compared to $148.7 million at December 31, 1998. The increase was primarily due
to an aggregate $2.9 million net increase in accounts receivable and accounts
receivable from related parties and a decrease in accounts payable of $20.0
million offset by a decrease in inventories of $19.2 million. The increase in
accounts receivable and accounts receivable related parties was primarily
associated with an increase in sales during March 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 March 31, 1999.
Cash Flow from Operating Activities
Cash flow provided by operating activities was $11.1 million for the
quarterly period ended March 31, 1999 as compared to cash used of $29.1 million
for the quarterly period ended March 29, 1998. The increase is primarily a
result of a decrease in the use of cash by the operating assets and liabilities
during 1999 as compared to 1998.
Cash Flow from Investing Activities
During 1999, Foamex L.P. spent approximately $5.7 million on capital
improvements as compared to $7.1 million during the first quarter of 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.
On March 31, 1999, Foamex International repaid its $2.5 million
promissory note dated December 31, 1998 to Foamex L.P.
Cash Flow from Financing Activities
In connection with the GFI Transaction in February 1998, Foamex L.P.
extinguished approximately $125.1 million of term loans under the Credit
Facility funded with $129.0 million of cash proceeds from borrowings under new
term loan agreements which were subsequently assumed by Foam Funding LLC. 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 March 31, 1999 was $3.5 million. Although it is
19
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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.
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.
Foamex L.P.'s automotive products customers are predominantly automotive
original equipment manufacturers or other automotive suppliers. As such, the
sales of these product lines are directly related to the overall level of
passenger car and light truck production in North America. Also, 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.
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 March 31, 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.
20
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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 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.
21
<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 March 31, 1999 (unaudited) is
incorporated herein by reference.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule for the quarterly period ended
March 31, 1999.
(b) 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, as of dated March 11, 1999 reporting amendments to
aspects of its credit agreements.
22
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FOAMEX L.P.
By: FMXI, Inc.
General Partner
Date: May 17, 1999 By: /s/ John A. Feenan
--------------------------------
John A. Feenan
Vice President, Treasurer, Chief
Financial Officer and Assistant
Secretary
FOAMEX CAPITAL CORPORATION
Date: May 17, 1999 By: /s/ John A. Feenan
--------------------------------
John A. Feenan
Vice President, Treasurer and
Chief Financial Officer
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