SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
Commission file 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 November 5, 1999 was 1,000.
<PAGE>
FOAMEX L.P.
FOAMEX CAPITAL CORPORATION
INDEX
Page
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Statements of Operations (unaudited) -
Three and Nine Months Ended September 30, 1999 and 1998 3
Condensed Consolidated Balance Sheets (unaudited) -
as of September 30, 1999 and December 31, 1998 4
Condensed Consolidated Statements of Cash Flows (unaudited) -
Nine Months Ended September 30, 1999 and 1998 5
Notes to Condensed Consolidated Financial Statements
(unaudited) 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 16
Item 3. Quantitative and Qualitative Disclosure
about Market Risk 25
Part II. Other Information 26
Item 1. Legal Proceedings 26
Item 6. Exhibits and Reports on Form 8-K 26
Signatures 27
Exhibits
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FOAMEX L.P. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30, September 30, September 30,
1999 1998 1999 1998
--------- --------- --------- ---------
(thousands)
<S> <C> <C> <C> <C>
NET SALES $ 302,819 $ 299,783 $ 894,925 $ 871,564
COST OF GOODS SOLD 261,708 257,293 777,943 736,569
--------- --------- --------- ---------
GROSS PROFIT 41,111 42,490 116,982 134,995
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 15,098 17,846 43,084 56,669
RESTRUCTURING AND OTHER CHARGES (CREDITS) 2,988 -- 9,962 (700)
--------- --------- --------- ---------
INCOME FROM OPERATIONS 23,025 24,644 63,936 79,026
INTEREST AND DEBT ISSUANCE EXPENSE 17,190 16,706 49,461 49,186
OTHER INCOME (EXPENSE), NET (87) (1,146) (282) (1,765)
--------- --------- --------- ---------
INCOME FROM CONTINUING OPERATIONS
BEFORE PROVISION FOR INCOME TAXES 5,748 6,792 14,193 28,075
PROVISION FOR INCOME TAXES 353 165 1,383 2,049
--------- --------- --------- ---------
INCOME FROM CONTINUING OPERATIONS 5,395 6,627 12,810 26,026
EXTRAORDINARY LOSS ON EARLY
EXTINGUISHMENT OF DEBT -- -- -- (3,195)
--------- --------- ---------
NET INCOME $ 5,395 $ 6,627 $ 12,810 $ 22,831
========= ========= ========= =========
</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>
September 30, December 31,
ASSETS 1999 1998
CURRENT ASSETS: (thousands)
<S> <C> <C>
Cash and cash equivalents $ 3,455 $ 3,192
Accounts receivable, net of allowance of $4,198 in 1999
and $7,278 in 1998 154,996 143,301
Accounts receivable from related parties 15,280 17,533
Inventories 99,866 127,636
Other current assets 25,948 33,849
--------- ---------
Total current assets 299,545 325,511
PROPERTY, PLANT AND EQUIPMENT 363,184 352,719
LESS ACCUMULATED DEPRECIATION (151,350) (133,082)
--------- ---------
NET PROPERTY, PLANT AND EQUIPMENT 211,834 219,637
COST IN EXCESS OF ASSETS ACQUIRED, net of accumulated
amortization of $14,285 in 1999 and $10,635 in 1998 184,867 188,205
DEBT ISSUANCE COSTS, net of accumulated
amortization of $5,007 in 1999 and $2,894 in 1998 15,287 13,946
OTHER ASSETS 22,348 21,229
--------- ---------
TOTAL ASSETS $ 733,881 $ 768,528
========= =========
LIABILITIES AND PARTNERS' DEFICIT
CURRENT LIABILITIES:
Short-term borrowings $ 3,636 $ 2,957
Current portion of long-term debt 12,543 689,478
Current portion of long-term debt - related party -- 34,000
Accounts payable 114,753 139,726
Accrued interest 7,477 7,396
Other accrued liabilities 52,783 52,944
--------- ---------
Total current liabilities 191,192 926,501
LONG-TERM DEBT 652,507 --
LONG-TERM DEBT - RELATED PARTY 34,000 --
OTHER LIABILITIES 36,757 38,064
--------- ---------
Total liabilities 914,456 964,565
--------- ---------
COMMITMENTS AND CONTINGENCIES -- --
--------- ---------
PARTNERS' DEFICIT:
General partner (129,375) (141,426)
Limited partner -- --
Accumulated other comprehensive income (loss) (25,861) (26,208)
Notes and advances receivable from partner (16,118) (18,608)
Notes receivable from related party (9,221) (9,795)
--------- ---------
Total partners' deficit (180,575) (196,037)
--------- ---------
TOTAL LIABILITIES AND PARTNERS' DEFICIT $ 733,881 $ 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>
Nine Months Ended
-------------------------------
September 30, September 30,
1999 1998
--------- ---------
(thousands)
OPERATING ACTIVITIES
<S> <C> <C>
Net income $ 12,810 $ 22,831
Adjustments to reconcile net income to net cash provided
by (used for) operating activities:
Depreciation and amortization 23,359 23,146
Amortization of debt issuance costs, debt discount,
debt premium and deferred swap adjustments 307 (114)
Asset writedown and other charges 2,073 --
Extraordinary loss on early extinguishment of debt -- 2,857
Other operating activities 2,592 2,448
Changes in operating assets and liabilities, net (224) (78,703)
--------- ---------
Net cash provided by (used for) operating activities 40,917 (27,535)
--------- ---------
INVESTING ACTIVITIES
Capital expenditures (14,388) (22,603)
Acquisitions, net of cash acquired -- (3,899)
Redemption of General Felt -- (8,971)
Repayments of note from partner 2,490 --
Other investing activities 574 (168)
--------- ---------
Net cash used for investing activities (11,324) (35,641)
--------- ---------
FINANCING ACTIVITIES
Net proceeds from short-term borrowings 679 185
Net proceeds from (repayments of) revolving loans (17,024) 81,489
Proceeds from long-term debt -- 129,000
Repayment of long-term debt (6,852) (134,203)
Debt issuance cost (3,455) (1,598)
Cash overdraft (2,017) --
Distribution to partners (258) (20,074)
Other financing activities (403) 1,084
--------- ---------
Net cash provided by (used for) financing activities (29,330) 55,883
--------- ---------
CASH AND CASH EQUIVALENTS
Net increase (decrease) 263 (7,293)
Beginning of year 3,192 9,405
--------- ---------
End of period $ 3,455 $ 2,112
========= =========
</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. ORGANIZATION AND BASIS OF PRESENTATION
Basis of Presentation
The condensed consolidated financial statements are unaudited, but in the
opinion of management include all adjustments necessary to present fairly Foamex
L.P. and subsidiaries' financial position and results of operations. These
interim financial statements should be read in conjunction with the financial
statements and related notes included in the 1998 Form 10-K. Results for interim
periods are not necessarily indicative of trends or of results for a full year.
Foamex L.P. is a wholly owned subsidiary of Foamex International Inc. ("Foamex
International").
Reporting Period
Effective September 1998, the annual reporting period was changed from a
fifty-two or fifty-three week fiscal year ending on the Sunday closest to the
end of the calendar year to a calendar year ending on December 31. This change
was effective for the third fiscal quarter of 1998, which ended on September 30,
1998.
Potential Business Combinations
On August 5, 1999, 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. The transaction is 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, subject to
certain conditions.
The transaction is subject to a number of conditions, including the
negotiation of definitive documents that will contain certain conditions
relating to the bank credit facilities and the public debt of Foamex L.P.
Additional issues that will need to be addressed include, minimum shareholder
acceptance, change of Foamex International 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 other regulatory
agencies.
On November 1, 1999, Foamex International announced that the letter of
intent expired by its terms. However, the Purchasers requested an extension of
the letter of intent until December 15, 1999. The parties agreed to the
extension and are continuing discussions towards a possible transaction.
Also on November 1, 1999, Foamex International announced that it has
authorized a due diligence review for a possible business combination led by
John G. Johnson, Jr., President and Chief Executive Officer of Foamex
International. Mr. Johnson has informed the Board of Directors that he is
working with various possible sources of equity funding, but that he has no firm
commitments for the financing of a transaction. No formal proposal has been made
to Foamex International by Mr. Johnson.
The accompanying financial statements and notes have been prepared assuming
a going-concern basis and do not recognize the impact of the potential business
combinations.
Going Concern Issue - Financial Condition
As of December 31, 1998, Foamex L.P. was not in compliance with various
debt covenants included in agreements totaling $415.4 million. Had the lenders
under these debt agreements accelerated the maturity of their indebtedness as a
result of noncompliance, the acceleration would have constituted an event of
default and 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,
approximately $715.8 million of long-term debt at December 31, 1998 was
classified as a current liability in the consolidated balance sheet, which
produced a working capital deficit. These issues raised substantial doubt at
year-end 1998 about Foamex L.P.'s ability to continue as a going concern.
6
<PAGE>
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
1. ORGANIZATION AND BASIS OF PRESENTATION (continued)
In response to these financial conditions, amendments to debt agreements
were executed during the first half of 1999, as discussed in Note 5.
Additionally, Foamex L.P. generated net income, provided over $40.0 million of
cash flow from operations and reduced total debt by 3% from the beginning of the
year. The combination of debt amendments, year to date results and management's
expectations regarding compliance with debt covenants in future measurement
periods represented an improved financial position relative to year-end 1998.
Accordingly, $695.4 million of debt at the end of the second quarter 1999 and
$686.5 million of debt at the end of the third quarter 1999 were classified as
long term.
Going Concern Issue - Change In Control
Trace International Holdings, Inc. ("Trace") is a privately held company
which owns approximately 46.1% of Foamex International's outstanding voting
common stock and whose 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. The Foamex L.P. Amended Credit Facility
and the Foamex/GFI Note, pursuant to which approximately $421.2 million of debt
was outstanding as of September 30, 1999, contain provisions that would result
in the acceleration of such indebtedness if a person or group other than Trace
were to beneficially own more than 25% of Foamex International's outstanding
voting stock and a greater percentage of such voting stock than the amount
beneficially owned by Trace. Additionally, certain indentures relating to senior
subordinated notes of $248.0 million contain provisions that provide the holders
of such notes with the right to require the issuers to repurchase such notes at
a price in cash equal to 101% of the aggregate principal amount thereof, plus
accrued and unpaid interest thereon, if a person or group other than Trace were
to beneficially own more than 25% of Foamex International's outstanding voting
stock and a greater percentage of such voting stock than the amount beneficially
owned by 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 above identified 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 authorize a sale or
transfer of these shares to a person or group other than Trace which would
acquire more than 25% of Foamex International's outstanding voting stock and a
greater percentage of such voting stock than the amount beneficially owned by
Trace. According to a filing made with the bankruptcy court on November 2, 1999,
two of Trace's creditors have petitioned the bankruptcy court to permit such
creditors to foreclose on and take ownership of the shares of common stock
pledged to them, representing approximately 17% of Foamex International's
outstanding voting stock.
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, 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 financial statements were
prepared on a going-concern basis and do not include any adjustments that might
result from the outcome of the Trace bankruptcy filing.
2. COMPREHENSIVE INCOME
The components of comprehensive income are listed below.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
----------------------------- -----------------------------
September 30, September 30, September 30, September 30,
1999 1998 1999 1998
-------- -------- -------- --------
(thousands)
<S> <C> <C> <C> <C>
Net income $ 5,395 $ 6,627 $ 12,810 $ 22,831
Foreign currency translation adjustments (464) (1,130) 347 (900)
-------- -------- -------- --------
Total comprehensive income $ 4,931 $ 5,497 $ 13,157 $ 21,931
======== ======== ======== ========
</TABLE>
7
<PAGE>
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
3. RESTRUCTURING AND OTHER CHARGES (CREDITS)
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, restructuring and other charges of approximately $3.4 million were
recognized related primarily to severance in connection with replacing its
former Chief Executive Officer and work force reductions of approximately 78
employees.
During the second quarter of 1999, restructuring and other charges of
approximately $3.6 million were recognized. The provision included $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.
In the third quarter of 1999, restructuring and other charges of
approximately $3.0 million were recognized. The third quarter provision is
comprised of $1.6 million of severance costs in connection with additional work
force reductions of approximately 8 employees, $0.9 million of costs associated
with the closure of Foamex L.P.'s New York office and $0.5 million of other
charges.
Approximately $4.2 million of severance costs incurred in 1999 have been
paid as of September 30, 1999. Approximately $1.5 million of the total 1999
severance costs primarily relate to contractual severance costs payable to
Foamex L.P.'s former Chief Executive Officer, which will be paid through March
2001. Foamex L.P. may record additional restructuring charges as it finalizes
implementation of its restructuring plan.
4. INVENTORIES
The components of inventory are listed below.
September 30, December 31,
1999 1998
-------- --------
(thousands)
Raw materials and supplies $ 66,619 $ 93,241
Work-in-process 12,218 12,087
Finished goods 21,029 22,308
-------- --------
Total $ 99,866 $127,636
======== ========
5. LONG-TERM DEBT
Long-term debt consists of:
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
-------- --------
Foamex L.P. Amended Credit Facility: (thousands)
<S> <C> <C>
Term Loan B $ 82,084 $ 82,714
Term Loan C 74,622 75,194
Term Loan D 108,075 108,900
Revolving credit facility 122,414 139,438
9 7/8% Senior subordinated notes due 2007 150,000 150,000
13 1/2% Senior subordinated notes due 2005 (includes
$10,549 and $11,893 of unamortized debt premium) 108,549 109,893
Industrial revenue bonds 7,000 7,000
Subordinated note payable (net of unamortized
debt discount of $280 and $523) 4,396 6,491
Other 7,910 9,848
-------- --------
665,050 689,478
</TABLE>
8
<PAGE>
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
5. LONG-TERM DEBT (continued)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
-------- --------
(thousands)
<S> <C> <C>
Less current portion 12,543 689,478
-------- --------
Long-term debt-unrelated parties $652,507 $ --
======== ========
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>
Foamex L.P. amended its credit facility (the "Foamex L.P. Amended Credit
Facility"), as of June 30, 1999, and modified the financial covenants for net
worth and interest, fixed charge coverage and leverage ratios through December
2006. An earnings requirement, as defined in the debt agreement, was added
through September 30, 1999. Foamex L.P. was in compliance with the interim
requirement at the end of the third quarter 1999. Effective January 1, 2000, the
interest rate on outstanding borrowings under the Foamex L.P. Amended Credit
Facility will increase by 25 basis points each quarter that Foamex L.P.'s
leverage ratio exceeds 5.00 to 1.00. Once the leverage ratio is reduced below
this level, the cumulative amount of any 25 basis point adjustments to the
interest rate on borrowings would be eliminated. The agreement was also amended
to no longer permit Foamex L.P. to make certain cash payments, including the
payment of an annual management fee to a subsidiary of Trace (totaling $3.0
million in 1998) and distributions to Foamex International, and to limit future
investments in foreign subsidiaries and joint ventures. The "change of control"
definition under the agreement was also modified. Revolver borrowings under the
credit facility totaled $122.4 million at the end of the third quarter of 1999.
The weighted average interest rate on these obligations was 8.8% and $17.5
million was available for additional borrowings.
During 1999, the Foamex/GFI Note was amended to incorporate the same change
in control provisions that are included in the Foamex L.P. Amended Credit
Facility.
Foamex L.P. continues to be subject to covenants contained in various debt
agreements 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.
Certain of Foamex L.P.'s Mexican subsidiaries were in default of financial
covenant provisions contained in loan agreements with a Mexican bank. Amendments
to the loan agreements were finalized to modify the financial covenant
provisions. As of September 30, 1999, these Mexican subsidiaries were in
compliance with the financial covenant provisions under the loan agreements.
9
<PAGE>
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
6. SEGMENT RESULTS
Segment results are presented below.
<TABLE>
<CAPTION>
Carpet
Foam Cushion Automotive Technical
Products Products Products Products Other Total
-------- -------- -------- -------- ----- -----
(thousands)
Third Quarter 1999
<S> <C> <C> <C> <C> <C> <C>
Net sales $ 139,111 $ 46,030 $ 83,355 $ 24,322 $ 10,001 $ 302,819
Income (loss) from operations 16,064 (1,080) 7,024 6,573 (5,556) 23,025
Depreciation and amortization 4,141 1,346 1,315 705 770 8,277
Third Quarter 1998
Net sales $ 152,854 $ 51,263 $ 69,843 $ 19,891 $ 5,932 $ 299,783
Income (loss) from operations 21,711 (40) 4,425 4,156 (5,608) 24,644
Depreciation and amortization 4,558 817 1,311 681 573 7,940
Year to Date 1999
Net sales $ 403,399 $ 136,020 $ 262,936 $ 69,598 $ 22,972 $ 894,925
Income (loss) from operations 41,933 (1,516) 19,849 17,811 (14,141) 63,936
Depreciation and amortization 12,383 3,782 3,784 1,978 1,432 23,359
Year to Date 1998
Net sales $ 434,569 $ 162,603 $ 197,447 $ 61,163 $ 15,782 $ 871,564
Income (loss) from operations 56,737 1,711 17,661 12,744 (9,827) 79,026
Depreciation and amortization 12,733 3,002 3,752 1,966 1,693 23,146
</TABLE>
7. RELATED PARTY TRANSACTIONS
Trace Management Fee
Effective June 30, 1999, the Foamex L.P. Amended Credit Facility no longer
permits Foamex L.P. to pay a management fee to a subsidiary of Trace in
connection with a management agreement with the Trace subsidiary. The management
fee was $3.0 million for the year ended December 31, 1998. On July 29, 1999,
Foamex L.P. submitted to the Trace subsidiary formal notice of the termination
of the management agreement.
New York Sublease
Prior to September 30, 1999, Foamex L.P. subleased certain space in its New
York office to Trace (the "New York Sublease"). Foamex L.P. gave notice on June
30, 1999 that if prior unpaid rent under the New York Sublease was not paid,
Foamex L.P. intended to give notice pursuant to Article 7 of the New York Real
Property Actions and Proceedings Law that the space be vacated by September 30,
1999. Trace complied with such request, and Foamex L.P. has closed its New York
office and subleased the premises to a third party.
Foamex/GFI Note
In the third quarter of 1999, Foamex L.P. paid $0.5 million of interest and
$1.6 million of interest for the first three quarters of 1999 on the Foamex/GFI
Note. In the third quarter of 1998, Foamex L.P. paid $0.6 million of interest
and $1.2 million of interest for the first three quarters of 1998 on the
Foamex/GFI Note.
10
<PAGE>
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
7. RELATED PARTY TRANSACTIONS (continued)
Other
Foamex L.P. sold approximately $48.1 million and $43.6 million,
respectively, of carpet cushion products to Foamex Carpet Cushion, Inc. ("Foamex
Carpet") during the quarterly period ended September 30, 1999 and 1998 and
$138.1 million and $154.9 million, respectively, for the year to date periods
ended September 30, 1999 and 1998. In addition, Foamex L.P. provided and
invoiced approximately $0.4 million and $1.7 million of administrative services
to Foamex Carpet during the quarterly periods ended September 30, 1999 and 1998,
respectively, and $1.7 million and $1.8 million for the year to date periods
ended September 30, 1999 and 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 $0.2
million during the quarterly period ended September 30, 1998 and $0.1 million
and $0.7 million during the year to date periods ended September 30, 1999 and
1998, respectively. Foamex International sold this aircraft on March 31, 1999.
The sale of the aircraft triggered an obligation to Trace of approximately $0.6
million. The obligation was offset against Trace's two promissory notes payable
to Foamex L.P. The Trace notes are included in partners' deficit, which is
consistent with the recognition in prior years.
8. COMMITMENTS AND CONTINGENCIES
Litigation - Foamex International Shareholders
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 and Foamex L.P.'s periodic filings. On June
14, 1999, Foamex International received a draft complaint from counsel of
certain stockholders naming Foamex International and certain current and former
Foamex International directors, which included allegations similar to those in
the Second Amended Complaint, as defined below. Foamex International was advised
by such counsel that such stockholders intended to file an action soon
thereafter. On August 13, 1999 two stockholders filed an action on behalf of an
alleged class of Foamex International's shareholders, entitled Watchung Road
Associates, L.P. et al v. Foamex International Inc., et al., Civil Action No.
17370 (the "Watchung Complaint"), in the Court of Chancery of the State of
Delaware, New Castle County. The suit names Foamex International, Mr. Marshall
S. Cogan, Mr. Etienne Davignon, Mr. John Gutfreund, Mr. Robert Hay, Dr. Stuart
Hershon, Mr. Jack Johnson, and Mr. John Tunney as defendants. The Watchung
Complaint alleges that the individual defendants breached their fiduciary duties
by agreeing to the potential buyout of Foamex International by Sorgenti Chemical
Industries LLC and Liberty Partners L.P. (the "Sorgenti Transaction").
The Watchung Complaint alleges that the Sorgenti Transaction's buy-out
price of $11.50 per outstanding share is inadequate and fails to take into
consideration claims Foamex International allegedly has a result of the supposed
wrongful diversions of Foamex International's assets in Foamex International's
dealings with Trace and its affiliates. The Watchung Complaint also alleges that
the directors breached their fiduciary duties agreeing to the proposed Sorgenti
Transaction without conducting an auction or active market check. The suit
alleges that the board placed Mr. Cogan's interest ahead of those of Foamex
International's stockholders, and alleges that a critical condition of the
Sorgenti Transaction is a consulting agreement for Mr. Cogan. The Watchung suit
seeks to enjoin the Sorgenti Transaction, seeks rescission or damages if the
Sorgenti Transaction is consummated, and seeks an accounting from the directors
for plaintiffs alleged losses. To date, no response to the Watchung Complaint
has been made.
On April 26, 1999, a putative securities class action entitled Molitor v.
Foamex International Inc., et al., 99 Civ. 3004, was filed in the United States
District court for the Southern District of New York naming as defendants 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,
11
<PAGE>
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
8. COMMITMENTS AND CONTINGENCIES (continued)
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. On May 18, 1999, a
similar action entitled Thomas W. Riley v. Foamex International Inc., et al., 99
Civ. 3653 was filed in the same court. The two actions have been consolidated.
To date, no response to the complaint has been made and no discovery or other
proceedings has taken place. Plaintiffs have advised Foamex International that
they plan to file a consolidated complaint within 45 days of October 7, 1999.
After service, defendants will have 45 days to respond to the consolidated
complaint.
Beginning on or about March 17, 1998, six actions (collectively the
"Shareholder Litigation") were filed in the Court of Chancery of the State of
Delaware, New Castle County (the "Court"), by stockholders of 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 under an Agreement and Plan of Merger
(the "First Merger Agreement"). The complaints sought, among other things, class
certification, a declaration that the defendants breached their fiduciary duties
to the class, preliminary and permanent injunctions barring implementation of
the proposed transaction, rescission of the transaction if consummated,
unspecified compensatory damages, and costs and attorneys' fees. A stipulation
and order consolidating these six actions under the caption In re Foamex
International Inc. Shareholders Litigation, Consolidated Civil Action No.
16259NC, was entered by the Court on May 28, 1998.
The parties to the Shareholder Litigation entered into a Memorandum of
Understanding, dated June 25, 1998 (the "Memorandum of Understanding"), to
settle the Shareholder Litigation, subject to, inter alia, execution of a
definitive Stipulation of Settlement between the parties and approval by the
Court following notice to the class and a hearing. The Memorandum of
Understanding provided that as a result of, among other things, the Shareholder
Litigation and negotiations among counsel for the parties to the Memorandum of
Understanding, a special meeting of stockholders would be held to vote upon and
approve the First Merger Agreement which provided, among other things, for all
Foamex International's outstanding common stock not owned by Trace and its
subsidiaries (the "Public Shares") to be converted into the right to receive
$18.75 in cash, without interest.
The Memorandum of Understanding also provided for certification of a class,
for settlement purposes only, consisting of the Public Shares owned by
stockholders of 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.
12
<PAGE>
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
8. COMMITMENTS AND CONTINGENCIES (continued)
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. In January 1999, Trace advised that it could not finance the offer
reflected in the Second Merger Agreement. As a result, the preliminary
injunction motion did not go forward.
On June 9, 1999, the plaintiffs in the Shareholder Litigation moved for
leave to file a Second Amended and Supplemental Class Action and Derivative
Complaint (the "Second Amended Complaint"). The Second Amended Complaint was
filed on July 14, 1999, and named 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.
On August 26, 1999, the plaintiffs in the Shareholder Litigation moved for
leave to file a Third Amended and Supplemental Class Action and Derivative
Complaint (the "Third Amended Complaint"). The Third Amended Complaint was filed
on October 27, 1999. The Third Amended Complaint alleges both class claims and
derivative claims, and names Foamex International, Mr. Marshall S. Cogan, Mr.
Andrea Farace, Dr. Stuart Hershon, Mr. John Tunney, Mr. Etienne Davignon, Mr.
John Gutfreund, Mr. Robert Hay and Mr. John Johnson as defendants.
The Third Amended Complaint alleges that the individual defendants breached
their duties to Foamex International's Public Shareholders by agreeing to the
Sorgenti Transaction at an inadequate price that fails to take into
consideration Foamex International's allegedly valuable claims arising out of
purported diversions of money from Foamex International to Trace, and by failing
to maximize shareholder value in a sale of Foamex International and instead
agreeing to a deal with a buyer who is willing to enter into a consulting deal
with Mr. Cogan to get his and the Foamex International board's approval. The
Third Amended Complaint purports to assert a derivative claim for waste and
breach of fiduciary duty against Mr. Cogan, Mr. Farace, Dr. Hershon, Mr. Tunney,
Mr. Davignon, Mr. Gutfreund, and Mr. Hay. The Third Amended Complaint seeks the
appointment of a receiver for Foamex International, alleging that the directors
have mismanaged Foamex International. The Third Amended Complaint also alleges
that Mr. Cogan, Mr. Farace, Dr. Hershon, Mr. Davignon, Mr. Tunney, Mr.
Gutfreund, and Mr. Hay breached their fiduciary duties by failing to enforce
Foamex International's rights under the First Merger Agreement.
The Third Amended Complaint seeks: a declaration that the individual
defendants have breached their fiduciary duties; damages; the imposition of a
constructive trust on profits and benefits Mr. Cogan, Trace, and the other
individual defendants allegedly received as a result of the alleged wrongdoing;
an injunction against the Sorgenti Transaction under its present terms;
rescission and damages if the deal is consummated; and the appointment of a
receiver for Foamex International. To date, no response to the Third Amended
Complaint has been made.
13
<PAGE>
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
8. COMMITMENTS AND CONTINGENCIES (continued)
The defendants intend to vigorously defend these litigations, which if
adversely determined, could have a material adverse effect on the financial
position, results of operations and cash flows of Foamex International and its
subsidiaries.
Litigation - Breast Implants
As of November 8, 1999, Foamex L.P. and Trace were two of multiple
defendants in actions filed on behalf of approximately 4,157 recipients of
breast implants in various United States federal and state courts and one
Canadian provincial court, some of which allege substantial damages, but most of
which allege unspecified damages for personal injuries of various types. Three
of these cases seek to allege claims on behalf of all breast implant recipients
or other allegedly affected parties, but no class has been approved or certified
by the court. In addition, three cases have been filed alleging claims on behalf
of approximately 39 residents of Australia, New Zealand, England, and Ireland.
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's insurance carrier has paid Foamex L.P.'s litigation expenses to date, in
light of Trace's recent filing under Chapter 11 of the Bankruptcy Code, there
can be no assurance that Trace will be able to continue to provide such
indemnification. While it is not feasible to predict or determine the outcome of
these actions, based on management's present assessment of the merits of pending
claims, after consultation with the general counsel of Trace, and without taking
into account indemnification provided by Trace, the coverage provided by Trace
and 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 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.
Litigation - Other
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.
Environmental
Foamex L.P. is subject to extensive and changing federal, state, local and
foreign environmental laws and regulations, including those relating to the use,
handling, storage, discharge and disposal of hazardous substances and the
remediation of environmental contamination, and as a result, is from time to
time involved in administrative and judicial proceedings and inquiries relating
to environmental matters. As of September 30, 1999, Foamex L.P. had accruals of
approximately $3.5 million for environmental matters. During 1998, Foamex L.P.
established an allowance of $0.6 million relating to receivables from Trace for
environmental indemnifications due to the financial difficulties of Trace.
14
<PAGE>
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
8. COMMITMENTS AND CONTINGENCIES (continued)
The Clean Air Act Amendments of 1990 (the "1990 CAA Amendments") provide
for the establishment of federal emission standards for hazardous air pollutants
including methylene chloride, propylene oxide and TDI, materials used in the
manufacturing of foam. On December 27, 1996, the United States Environmental
Protection Agency (the "EPA") proposed regulations under the 1990 CAA Amendments
that will require manufacturers of slab stock polyurethane foam and foam
fabrication plants to reduce emissions of methylene chloride. The final National
Emission Standard for Hazardous Air Pollutants ("NESHAP") was promulgated
October 7, 1998. NESHAP requires a reduction of approximately 70% of the
emission of methylene chloride for the slab stock foam industry effective
October 7, 2001. Foamex L.P. does not believe implementation of the regulation
will require it to make material expenditures due to Foamex L.P.'s use of
alternative technologies which do not utilize methylene chloride and its ability
to shift current production to the facilities which use these alternative
technologies. The 1990 CAA Amendments also may result in the imposition of
additional standards regulating air emissions from polyurethane foam
manufacturers, but these standards have not yet been proposed or promulgated.
Foamex L.P. has reported to appropriate state authorities that it has found
soil and groundwater contamination in excess of state standards at three
facilities and soil contamination in excess of state standards at three other
facilities. Foamex L.P. has begun remediation and is conducting further
investigations into the extent of the contamination at these facilities and,
accordingly, the extent of the remediation that may ultimately be required. The
actual cost and the timetable of any such remediation cannot be predicted with
any degree of certainty at this time. Foamex L.P. has accruals of $2.5 million
for the estimated cost of completing remediation at these facilities. Foamex
L.P. is in the process of addressing potential contamination at its Morristown,
Tennessee facility, and has submitted a sampling plan to the State of Tennessee.
The extent of the contamination and responsible parties, if any, has not yet
been determined. A former owner may be liable for cleanup costs; nevertheless,
the cost of remediation, if any, is not expected to be material.
Federal regulations require that by the end of 1998 all underground storage
tanks ("USTs") be removed or upgraded in all states to meet applicable
standards. Foamex L.P. has upgraded all USTs at its facilities in accordance
with these regulations. Foamex L.P. believes that its USTs do not pose a
significant risk of environmental liability. However, there can be no assurances
that such USTs will not result in significant environmental liability in the
future.
On April 10, 1997, the Occupational Health and Safety Administration
promulgated new standards governing employee exposure to methylene chloride,
which is used as a blowing agent in some of Foamex L.P.'s manufacturing
processes. The phase-in of the standards was completed in 1999 and Foamex L.P.
has developed and implemented a compliance program. Capital expenditures
required and changes in operating procedures are not anticipated to
significantly impact Foamex L.P.'s competitive position.
Foamex L.P. has been designated as a Potentially Responsible Party ("PRP")
by the EPA with respect to six sites. Estimates of total cleanup costs and
fractional allocations of liability are generally provided by the EPA or the
committee of PRP's with respect to the specified site. In each case, the
liability of Foamex L.P. is not considered to be material.
Although it is possible that new information or future developments could
require Foamex L.P. to reassess its potential exposure relating to all pending
environmental matters, including those described herein, Foamex L.P. believes
that, based upon all currently available information, the resolution of such
environmental matters will not have a material adverse effect on Foamex L.P.'s
operations, financial position, capital expenditures or competitive position.
The possibility exists, however, that new environmental legislation and/or
environmental regulations may be adopted, or other environmental conditions may
be found to exist, that may require expenditures not currently anticipated and
that may be material.
15
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Going Concern Issues
The accompanying financial statements and notes have been prepared assuming
Foamex L.P. will continue as a going concern. As discussed in Note 1, there are
going concern issues involving the financial condition of Foamex L.P. and
related impact of debt covenants, and change in control provisions that have the
potential to accelerate certain debt obligations.
Foamex L.P. is subject to various internal and external factors which could
significantly impact its liquidity and capital structure, including, among other
things, (a) Foamex L.P.'s debt and capital structures, (b) the Crain
Consolidation, (c) additional raw material cost increases, (d) the ability to
increase customers selling price to recover raw material cost increases, (e)
fluctuations in interest rates, and (f) Trace's financial condition, including
the potential of triggering the "change of control" provisions in Foamex L.P.'s
debt agreements (discussed below), 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.
As discussed in the capital structure section below, during the first half
of 1999, amendments to debt agreements were completed and Foamex L.P. was in
compliance with the financial covenants of these agreements on both June 30,
1999 and September 30, 1999. Although Foamex L.P. believes it can meet the debt
covenant requirements under its financing agreements, there can be no assurance
these covenants will be met. 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. Additionally, although Foamex L.P. believes
that consolidated cash flow from its operating activities and borrowing capacity
under its credit facility, if necessary, will be adequate to meet its 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 its
operations and permit it to continue as a going concern.
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 Foamex International's Chairman. Foamex International's common stock owned by
Trace is pledged as collateral against certain of Trace's obligations. The
Foamex L.P. Amended Credit Facility and the Foamex/GFI Note, pursuant to which
approximately $421.2 million of debt was outstanding as of September 30, 1999,
contain provisions that would result in the acceleration of such indebtedness if
a person or group other than Trace were to beneficially own more than 25% of
Foamex International's outstanding voting stock and a greater percentage of such
voting stock than the amount beneficially owned by Trace. Additionally, certain
indentures relating to senior subordinated notes of $248.0 million contain
provisions that provide the holders of such notes with the right to require the
issuers to repurchase such notes at a price in cash equal to 101% of the
aggregate principal amount thereof, plus accrued and unpaid interest thereon, if
a person or group other than Trace were to beneficially own more than 25% of
Foamex International's outstanding voting stock and a greater percentage of such
voting stock than the amount beneficially owned by 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 above identified 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 authorize a sale or
transfer of these shares to a person or group other than Trace which would
acquire more than 25% of Foamex International's outstanding voting stock and a
greater percentage of such voting stock than the amount beneficially owned by
Trace. According to a filing made with the bankruptcy court on November 2, 1999,
two of Trace's creditors have petitioned the bankruptcy court to permit such
creditors to foreclose on and take ownership of the shares of common stock
pledged to them, representing approximately 17% of Foamex International's
outstanding voting stock.
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
16
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
believes that Foamex L.P.'s debt obligations could be refinanced if accelerated
as a result of the "change of control" provisions, 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.
Potential Business Combinations
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. The transaction is 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, subject to certain conditions.
The transaction is subject to a number of conditions, including the
negotiation of definitive documents that will contain certain conditions
relating to the bank credit facilities and the public debt of Foamex L.P.
Additional issues that will need to be addressed include, minimum shareholder
acceptance, change of Foamex International 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 other regulatory
agencies.
On November 1, 1999, Foamex International announced that the letter of
intent expired by its terms. However, the Purchasers requested an extension of
the letter of intent until December 15, 1999. The parties agreed to the
extension and are continuing discussions towards a possible transaction.
Also on November 1, 1999, Foamex International announced that it has
authorized a due diligence review for a possible business combination led by
John G. Johnson, Jr., President and Chief Executive Officer of Foamex
International. Mr. Johnson has informed the Board of Directors that he is
working with various possible sources of equity funding, but that he has no firm
commitments for the financing of a transaction. No formal proposal has been made
to Foamex International by Mr. Johnson.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
Income from Operations
Net sales for the third quarter of 1999 were $302.8 million, up 1.0%
compared to $299.8 million in the third quarter of 1998. The increase in the
third quarter versus the prior year reflects a decrease in Foam Products sales
due to manufacturing consolidations and a decrease in Carpet Cushion Products
volume offset by increased volume of automotive lamination products and
Technical Products sales.
Income from operations decreased 6.6% to $23.0 million for the third
quarter of 1999 compared to $24.6 million in the 1998 third quarter. Results in
1999 included a $3.0 million provision for restructuring and other costs. The
decrease in margins versus the prior year resulted principally from lower Foam
Products and Carpet Cushion Products sales and an increase in lower margin
automotive lamination business. The decrease in selling, general and
administrative costs included the elimination of duplicative costs from the
Crain Consolidation and cost reductions implemented during 1999.
Interest and Debt Issuance Expense
Interest and debt issuance expense totaled $17.2 million for the 1999 third
quarter, 2.9% higher than the comparable 1998 expense.
17
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Other Income (Expense), Net
Other expense of $0.1 million was significantly lower in 1999. The 1998
third quarter net other expense of $1.1 million included foreign currency losses
from Foamex L.P.'s Canadian and Mexican operations.
Net Income
Net income for the third quarter of 1999 was down 18.6% to $5.4 million
compared to $6.6 million in the 1998 third quarter.
Segment Results
<TABLE>
<CAPTION>
Carpet
Foam Cushion Automotive Technical
Products Products Products Products Other Total
-------- -------- -------- -------- ----- -----
(thousands)
<S> <C> <C> <C> <C> <C> <C>
Third Quarter 1999
Net sales $139,111 $ 46,030 $ 83,355 $ 24,322 $ 10,001 $302,819
Income (loss) from operations 16,064 (1,080) 7,024 6,573 (5,556) 23,025
Third Quarter 1998
Net sales $152,854 $ 51,263 $ 69,843 $ 19,891 $ 5,932 $299,783
Income (loss) from operations 21,711 (40) 4,425 4,156 (5,608) 24,644
</TABLE>
Foam Products
Foam Products net sales for the third quarter of 1999 decreased 9.0%. Lower
margins resulted in a 26.0% drop in income from operations. Improved operating
efficiencies and cost reductions as part of the Crain Consolidation helped to
offset the income decline.
Carpet Cushion Products
Carpet Cushion Products net sales for the third quarter of 1999 decreased
10.2% primarily due to lower shipments. Lower margins resulted in a loss for the
third quarter of 1999.
Automotive Products
Automotive Products net sales for the third quarter of 1999 increased
19.3%. The increase reflected higher shipments of lamination products. Income
from operations increased 58.7% from the combination of operating efficiencies
and sales gains.
Technical Products
Technical Products net sales for the third quarter of 1999 increased 22.3%.
Income from operations increased 58.2% and reflected higher margin sales.
Other
Other primarily consists of certain foreign manufacturing operations,
corporate expenses not allocated to operating segments and restructuring and
other charges. The increase in net sales associated with this segment primarily
resulted from an increase in net sales from Foamex L.P.'s Mexican operations.
The loss from operations in 1999 was primarily associated with the $3.0 million
of restructuring and other charges.
18
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
Income from Operations
Net sales for the first three quarters of 1999 were $894.9 million compared
to $871.6 million for the comparable period in 1998. The 2.7% increase was
primarily the result of sales gains in the Automotive Products and Technical
Products segments partially offset by declines in the Foam Products and Carpet
Cushion Products segments.
Despite the sales improvement, income from operations of $63.9 million was
down 19.1% from $79.0 million for the comparable 1998 period. Results in 1999
included $10.0 million of restructuring and other charges. The remaining decline
primarily reflected lower results in the Foam Products and Carpet Cushion
Products segments. The Foam Products segment was impacted by lower sales due to
plant closures in connection with the Crain Consolidation. Carpet Cushion
Products 1999 results were impacted by lower margins. The increase in Automotive
Products and Technical Products segment results translated to improved earnings.
Partially offsetting these negative factors were lower selling, general and
administrative expenses that primarily reflected the elimination of duplicative
costs from the Crain Consolidation and cost reductions implemented during 1999.
Interest and Debt Issuance Expense
Interest and debt issuance expense totaled $49.5 million in 1999, slightly
higher than the 1998 expense of $49.2 million.
Other Income (Expense), Net
Other expense was significantly lower in 1999. The 1998 net other expense
included foreign currency losses from Foamex L.P.'s Canadian and Mexican
operations.
Extraordinary Loss
The extraordinary loss on the early extinguishment of debt in 1998 was
$3.2 million. The charge primarily reflected the write off of debt issuance
costs in connection with a series of transaction designed to simplify Foamex
L.P.'s capital structure and to provide future operational flexibility.
Net Income
Net income for the first three quarters of 1999 was $12.8 million, down
43.9% from the comparable period in 1998.
Segment Results
<TABLE>
<CAPTION>
Carpet
Foam Cushion Automotive Technical
Products Products Products Products Other Total
-------- -------- -------- -------- ----- -----
(thousands)
<S> <C> <C> <C> <C> <C> <C>
Year to Date 1999
Net sales $ 403,399 $ 136,020 $ 262,936 $ 69,598 $ 22,972 $ 894,925
Income (loss) from operations 41,933 (1,516) 19,849 17,811 (14,141) 63,936
Year to Date 1998
Net sales $ 434,569 $ 162,603 $ 197,447 $ 61,163 $ 15,782 $ 871,564
Income (loss) from operations 56,737 1,711 17,661 12,744 (9,827) 79,026
</TABLE>
19
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Foam Products
Foam Products net sales for the first three quarters decreased 7.2%. The
decrease primarily reflected the closure of several plants as part of the Crain
Consolidation. Income from operations decreased 26.1% primarily due to lower
margins.
Carpet Cushion Products
Carpet Cushion Products net sales for the first three quarters decreased
16.3% primarily due to lower shipments. Lower margins resulted in a loss from
operations for the first three quarters of 1999.
Automotive Products
Automotive Products net sales for the first three quarters increased 33.2%.
The increase reflected higher shipments of lamination products. Income from
operations increased 12.4% from the combination of operating efficiencies and
sales gains that were especially evident during the third quarter of 1999.
Technical Products
Technical Products net sales for the first three quarter increased 13.8%.
Income from operations increased 39.8% and reflected higher margin sales.
Other
Other primarily consists of certain foreign manufacturing operations,
corporate expenses not allocated to operating segments and restructuring and
other charges. The increase in net sales associated with this segment primarily
resulted from an increase in net sales from Foamex L.P.'s Mexican operations.
The loss from operations in 1999 was primarily associated with the $10.0 million
of restructuring and other charges.
Capital Structure
As of December 31, 1998, Foamex L.P. was not in compliance with various
debt covenants included in agreements totaling $415.4 million. Had the lenders
under these debt agreements accelerated the maturity of their indebtedness as a
result of noncompliance, the acceleration would have constituted an event of
default and 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,
approximately $715.8 million of long-term debt at December 31, 1998 was
classified as a current liability in the consolidated balance sheet, which
produced a working capital deficit. These issues raised substantial doubt at
year-end 1998 about Foamex L.P.'s ability to continue as a going concern.
In response to these financial conditions, amendments to debt agreements
were executed during the first half of 1999, as discussed below. Additionally,
Foamex L.P. generated net income, provided over $40.0 million of cash flow from
operations and reduced total debt by 3% from the beginning of the year. The
combination of debt amendments, year to date results and management's
expectations regarding compliance with debt covenants in future measurement
periods represented an improved financial position relative to year-end 1998.
Accordingly, $695.4 million of debt at the end of the second quarter 1999 and
$686.5 million at the end of the third quarter 1999 were classified as long term
in the balance sheet.
Amendments to the Foamex L.P. Amended Credit Facility, as of June 30, 1999,
modified the financial covenants for net worth and interest, fixed charge
coverage and leverage ratios through December 2006. An earnings requirement, as
defined in the debt agreement, was added through September 30, 1999. Foamex L.P.
was in compliance with the interim requirement at the end of the third quarter
of 1999. Effective January 1, 2000, the interest rate on outstanding borrowings
under the Foamex L.P. Amended Credit Facility will increase by 25 basis points
each quarter that Foamex L.P.'s leverage ratio exceeds 5.00 to 1.00. Once the
leverage ratio is reduced below this level, the cumulative amount of any 25
basis point adjustments to the interest rate on borrowings would be eliminated.
The agreement was also modified to no longer permit Foamex L.P. to make certain
cash payments, including the payment of an annual management fee to a subsidiary
20
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
of Trace (totaling $3.0 million in 1998) and distributions to Foamex
International, and to limit future investments in foreign subsidiaries and joint
ventures. The "change of control" definition under the agreement was also
modified.
During 1999, the Foamex/GFI Note was amended to incorporate the same change
in control provisions that are included in the Foamex L.P. Amended Credit
Facility.
Foamex L.P. continues to be subject to covenants contained in various debt
agreements 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.
Certain of Foamex L.P.'s Mexican subsidiaries were in default of financial
covenant provisions contained in loan agreements with a Mexican bank. Amendments
to the loan agreements were finalized to modify the financial covenant
provisions. As of September 30, 1999, these Mexican subsidiaries were in
compliance with the financial covenant provisions under the loan agreements.
Liquidity
Cash provided by operating activities was $40.9 million for the first three
quarters of 1999 as compared to cash used of $27.5 million for the same period
in 1998. The improvement is primarily due to a decrease in cash used for
operating assets and liabilities.
Cash used for investing activities was $11.3 million for the year to date
period ended September 30, 1999 as compared to cash used of $35.6 million for
the comparable 1998 period. Cash requirements in 1998 included $3.9 million for
the acquisition-related payments and $9.0 million of payments related to the
redemption of General Felt Industries, Inc. Capital expenditures were down in
1999.
Cash required for financing activities was $29.3 million for the first
three quarters and primarily reflected net debt repayments and $3.5 million of
debt issuance costs.
The ability of Foamex L.P. to make distributions to Foamex International is
restricted by the terms of its financing agreements. Consequently, Foamex
International is not expected to have access to the cash flow generated by
Foamex L.P. for the foreseeable future.
As of September 30, 1999, there were $122.4 million of revolving credit
borrowings, at a weighted average interest rate of 8.8%, under the Foamex L.P.
Amended Credit Facility with $17.5 million available for additional borrowings
and approximately $47.6 million of letters of credit outstanding which are
supported by the Foamex L.P. Amended Credit Facility. Borrowings by Foamex
Canada Inc. as of September 30, 1999 were approximately $3.6 million, at an
interest rate of 7.0%, under Foamex Canada Inc.'s revolving credit agreement
with unused availability of approximately $1.8 million.
Foamex L.P. expects to continue to reduce capital expenditures from
historical levels for the foreseeable future. Lower capital expenditure levels
are not anticipated to materially impact Foamex L.P.'s competitive position.
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 September 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 notes 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
21
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
L.P.'s operations, financial position, capital expenditures or competitive
position. See Note 17 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.
Market Risk
Foamex L.P.'s debt securities with variable interest rates are subject to
market risk for changes in interest rates. On September 30, 1999, indebtedness
with variable interest rates totaled $439.1 million. On an annualized basis, if
the interest rates on these debt instruments increased by 1%, interest expense
would increase by approximately $4.4 million.
Year 2000 Compliance
Status Update
By the end of the third quarter of 1999, Foamex L.P. has essentially
completed its program to address potential disruptions to operations and
relationships with our business partners related to the Year 2000 software
problem.
Foamex L.P. utilized a cross-functional team approach that was directed by
a Year 2000 Executive Sponsor Team. A comprehensive assessment of both
information technology (IT) and non-IT systems has been completed. These
assessments included:
o administrative, manufacturing and laboratory computer systems
o desktop and telecommunications systems
o safety and environmental systems
o systems provided by vendors and suppliers, including employee
compensation and benefit plan maintenance systems
o process control systems and manufacturing equipment
o significant customers and suppliers.
Assessment & Remediation Process
The assessment process for each facility consisted of:
o an inventory of potential Year 2000 sensitive equipment and systems
o an impact evaluation of possible failures and determination of
required remediation actions
o testing and implementation of remediation actions.
The assessment process, including fail safe testing, was completed in 1999.
The following discussion focuses on the process.
The inventory and assessment phases were completed by the end of 1998.
These phases consisted of a visit to each critical location by team members to
promote awareness of the project and verify the initial inventory provided by
the contact at each facility. Testing plans were developed which included
correspondence with suppliers regarding date-sensitive devices. In addition,
local management was advised of their roles and responsibilities in connection
with the Year 2000 Problem.
Foamex L.P. completed the remediation and testing of critical business
information computer systems as of December 31, 1998. Remediation actions
included:
o the modification of several million lines of system code
o the conversion of the systems acquired in business combinations to
standard business information computer systems
22
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
o upgrading system hardware and operating system software
o testing of the applicable systems in a development testing area
o the migration of the remediated systems into the production
environment.
Cost and Project Impact
The cost to address the Year 2000 Problem is approximately $2.0 million.
The majority of this total project cost has already been incurred during 1998
and 1999. The project cost primarily represents the cost for various consultants
and system upgrades. Project cost includes internal Company cost for IT
employees that worked directly on software programming modifications.
Spending on the Year 2000 Problem has been funded by cash generated from
operations. The project did not significantly impact the other responsibilities
and project schedule of the IT department during the past two years.
Contingency Plans
As part of the overall response to the Year 2000 Problem, Foamex L.P. has
developed contingency plans in the event of Year 2000 non-compliance of certain
systems or third parties. These contingency plans include:
o additional security of manufacturing and administrative facilities
o response teams to address incidents
o status review and testing of critical applications prior to initiation
of normal processing requirements on or about January 1, 2000
o alternative production and shipping locations in the event of
localized power outages.
Risks
Management believes that all significant systems controlled by Foamex L.P.
are ready. While Foamex L.P. is communicating readiness to customers, as
requested, and is assessing the readiness of critical suppliers, there can be no
assurance that third parties with a significant business relationship will
successfully test, reprogram, and replace all of their IT and non-IT systems on
a timely basis.
There is inherent uncertainty in connection with the Year 2000 Problem due
to the possibility of unanticipated failures by customers, suppliers and
infrastructure services. Accordingly, 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 has provided information in order
to reduce the level of uncertainty regarding the impact of the Year 2000
Problem. Management believes that Foamex L.P.'s solutions to the Year 2000
Problem will help minimize the possibility of significant disruptions to Foamex
L.P.'s operations.
Forward-Looking Statements Relating to the Year 2000 Problem
The Year 2000 Problem discussion includes a number of forward-looking
statements that are based on Foamex L.P.'s best estimates. The actual impact of
the Year 2000 Problem could differ materially from these estimates because of a
number of factors, including the failure of third parties to achieve Year 2000
compliance and the inability of Foamex to:
o accurately assess which systems and relationships with third parties
are important
o identify and correct all computer code in key systems
o identify and correct all production equipment that could have an
embedded date sensitive chip
o identify all significant issues.
The factors identified above are not necessarily all of the factors that
could result in materially different impact from the estimates included in
Foamex L.P.'s forward-looking statements.
23
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Forward-Looking Statements
This report contains forward-looking statements and should be read in
conjunction with the discussion regarding forward-looking statements set forth
on page 4 of Foamex L.P.'s Annual Report on Form 10-K for the year ended
December 31, 1998.
24
<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.
25
<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 8 of the condensed consolidated financial
statements of Foamex L.P. as of September 30, 1999 (unaudited) is
incorporated herein by reference.
Item 5. Other Information
Information concerning the extension of a Letter of Intent for the
acquisition of Foamex International is incorporated by reference to
Exhibit No. 99.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
4.5(a) Commitment Letter dated August 9, 1999, from The Bank of
Nova Scotia to Foamex Canada Inc.
27 Financial Data Schedule for the year to date period
ended September 30, 1999.
99(a) Press release concerning the extension of a Letter of
Intent for the acquisition of Foamex International.
(b) Foamex L.P. filed the following Current Reports on Form 8-K for
the quarter ended September 30, 1999:
A report, dated August 5, 1999, was filed for Item 5. Other
Events, reporting press release of proposed buyout of Foamex
International.
A report, dated August 13, 1999, was filed for Item. 5. Other
Events, concerning a purported class action complaint by certain
shareholders of Foamex International.
(a) Incorporated herein by reference to the Exhibit to the Form 10-Q of Foamex
International for the quarter ended September 30, 1999.
26
<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: November 12, 1999 By: /s/ George L. Karpinski
--------------------------------
George L. Karpinski
Vice President
FOAMEX CAPITAL CORPORATION
Date: November 12, 1999 By: /s/ George L. Karpinski
--------------------------------
George L. Karpinski
Vice President
27
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000890081
<NAME> Foamex L.P.
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<EXCHANGE-RATE> 1
<CASH> 3,455
<SECURITIES> 0
<RECEIVABLES> 159,194
<ALLOWANCES> 4,198
<INVENTORY> 99,866
<CURRENT-ASSETS> 299,545
<PP&E> 363,184
<DEPRECIATION> 151,350
<TOTAL-ASSETS> 733,881
<CURRENT-LIABILITIES> 191,192
<BONDS> 686,507
0
0
<COMMON> 0
<OTHER-SE> (180,575)
<TOTAL-LIABILITY-AND-EQUITY> 733,881
<SALES> 894,925
<TOTAL-REVENUES> 894,925
<CGS> 777,943
<TOTAL-COSTS> 777,943
<OTHER-EXPENSES> 43,084
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 49,461
<INCOME-PRETAX> 14,193
<INCOME-TAX> 1,383
<INCOME-CONTINUING> 12,810
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