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 quarter ended June 30, 2000
Commission file numbers 1-11432; 1-11436
FOAMEX L.P.
FOAMEX CAPITAL CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 05-0475617
Delaware 22-3182164
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1000 Columbia Avenue
Linwood, PA 19061
------------------------------- -------------------
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code: (610) 859-3000
--------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
----- -----
Foamex L.P. and Foamex Capital Corporation meet the conditions set forth in
General Instruction H(1)(a) and (b) of Form 10-Q and are therefore filing this
form with the reduced disclosure format.
The number of shares of Foamex Capital Corporation's common stock outstanding as
of August 8, 2000 was 1,000.
<PAGE>
<TABLE>
<CAPTION>
FOAMEX L.P.
FOAMEX CAPITAL CORPORATION
INDEX
Page
Part I. Financial Information
<S> <C>
Item 1. Financial Statements.
Condensed Consolidated Statements of Operations (unaudited) - Quarterly and
Year to Date Periods Ended June 30, 2000 and 1999 3
Condensed Consolidated Balance Sheets (unaudited) as of June 30, 2000
and December 31, 1999 4
Condensed Consolidated Statements of Cash Flows (unaudited) - Year to Date
Periods Ended June 30, 2000 and 1999 5
Notes to Condensed Consolidated Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations. 15
Item 3. Quantitative and Qualitative Disclosures about Market Risk. 23
Part II. Other Information
Item 1. Legal Proceedings. 24
Item 6. Exhibits and Reports on Form 8-K. 24
Signatures 25
</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 Year to Date Periods Ended
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
-------- -------- -------- --------
(thousands)
<S> <C> <C> <C> <C>
NET SALES $297,688 $292,229 $603,208 $592,106
COST OF GOODS SOLD 257,654 253,819 526,265 516,235
-------- -------- -------- --------
GROSS PROFIT 40,034 38,410 76,943 75,871
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 13,715 13,653 28,363 27,986
RESTRUCTURING AND OTHER CHARGES - 3,617 2,821 6,974
-------- -------- -------- --------
INCOME FROM OPERATIONS 26,319 21,140 45,759 40,911
INTEREST AND DEBT ISSUANCE EXPENSE 17,257 16,132 34,348 32,271
INCOME FROM EQUITY INTEREST IN
JOINT VENTURE 440 - 732 -
OTHER INCOME (EXPENSE), NET (151) 244 (438) (195)
-------- -------- -------- --------
INCOME BEFORE PROVISION FOR INCOME TAXES 9,351 5,252 11,705 8,445
PROVISION FOR INCOME TAXES 1,473 445 1,690 1,030
-------- -------- -------- --------
NET INCOME $ 7,878 $ 4,807 $ 10,015 $ 7,415
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of the
condensed consolidated financial statements.
3
<PAGE>
FOAMEX L.P. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
ASSETS 2000 1999
-------- ------------
CURRENT ASSETS (thousands)
<S> <C> <C>
Cash and cash equivalents $ 1,470 $ 1,573
Accounts receivable, net of allowances of $6,190 in 2000
and $5,310 in 1999 151,795 128,929
Accounts receivable from related parties 15,080 16,717
Inventories 91,536 93,812
Other current assets 19,092 21,541
-------- --------
Total current assets 278,973 262,572
-------- --------
Property, plant and equipment 371,387 366,035
Less accumulated depreciation (164,716) (154,720)
-------- --------
NET PROPERTY, PLANT AND EQUIPMENT 206,671 211,315
COST IN EXCESS OF ASSETS ACQUIRED, net of
accumulated amortization of $18,235 in 2000 and $15,804 in 1999 180,847 183,481
DEBT ISSUANCE COSTS, net of accumulated amortization
of $7,174 in 2000 and $5,787 in 1999 13,036 14,423
OTHER ASSETS 22,788 26,704
-------- --------
TOTAL ASSETS $702,315 $698,495
======== ========
LIABILITIES AND PARTNERS' DEFICIT
CURRENT LIABILITIES
Short-term borrowings $ 2,494 $ 1,627
Current portion of long-term debt 7,705 7,866
Accounts payable 95,323 82,229
Accrued employee compensation and benefits 16,110 16,341
Accrued interest 8,727 9,457
Accrued customer rebates 7,850 9,652
Other accrued liabilities 22,925 24,859
-------- --------
Total current liabilities 161,134 152,031
LONG-TERM DEBT 667,589 646,544
LONG-TERM DEBT - RELATED PARTY - 34,000
OTHER LIABILITIES 29,760 30,511
-------- --------
Total liabilities 858,483 863,086
-------- --------
COMMITMENTS AND CONTINGENCIES
PARTNERS' DEFICIT
General partner (133,448) (143,271)
Limited partner - -
Accumulated other comprehensive income (loss) (9,088) (8,923)
Notes and advances receivable from partner (4,411) (3,176)
Notes receivable from related party (9,221) (9,221)
-------- --------
Total partners' deficit (156,168) (164,591)
-------- --------
TOTAL LIABILITIES AND PARTNERS' DEFICIT $702,315 $698,495
======== ========
</TABLE>
The accompanying notes are an integral part of the
condensed consolidated financial statements.
4
<PAGE>
FOAMEX L.P. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
<TABLE>
<CAPTION>
Year to Date Periods Ended
June 30, June 30,
2000 1999
-------- --------
(thousands)
OPERATING ACTIVITIES
<S> <C> <C>
Net income $ 10,015 $ 7,415
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 15,845 15,082
Amortization of debt issuance costs, debt discount,
debt premium and deferred swap adjustment and gain 134 (34)
Asset writedowns and other charges 626 2,073
Other operating activities 1,568 6,186
Changes in operating assets and liabilities, net (8,035) 588
-------- -------
Net cash provided by operating activities 20,153 31,310
-------- -------
INVESTING ACTIVITIES
Capital expenditures (10,300) (10,482)
Proceeds from sale of assets 3,571 -
Repayment of note from Foamex International - 2,490
Revolving loan with Foamex International (1,235) -
Other investing activities (445) 574
-------- -------
Net cash used for investing activities (8,409) (7,418)
-------- -------
FINANCING ACTIVITIES
Net proceeds from short-term borrowings 867 1,743
Net proceeds from (repayments of) revolving loans 40,160 (8,969)
Repayments of long-term debt (18,493) (5,385)
Repayment of long-term debt - related party (34,000) -
Debt issuance costs - (3,455)
Decrease in cash overdrafts (381) (7,300)
Other financing activities - (661)
-------- -------
Net cash used for financing activities (11,847) (24,027)
-------- -------
NET DECREASE IN CASH AND CASH EQUIVALENTS (103) (135)
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD 1,573 3,192
-------- -------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 1,470 $ 3,057
======== =======
</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, consisting only of normal
recurring 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 1999 Annual Report on 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").
Change in Control
Trace International Holdings, Inc. ("Trace") is a privately held company,
which owned approximately 29% of Foamex International's outstanding voting
common stock at July 31, 2000, and whose former 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.
credit facility, pursuant to which approximately $403.3 million of principal was
outstanding as of June 30, 2000, provides that a "change of control" would be an
event of default and could result in the acceleration of such indebtedness.
"Change of control" means, for this purpose, that (i) a person or related group,
other than Trace, beneficially owns more than 25% of Foamex International's
outstanding voting stock and (ii) such voting stock constitutes a greater
percentage of such voting stock than the amount beneficially owned by Trace.
Additionally, certain indentures of Foamex L.P. and Foamex Capital Corporation
("FCC") relating to senior subordinated notes of $248.0 million contain similar
"change of control" provisions, which require Foamex L.P. and FCC to tender for
such notes at a price in cash equal to 101% of the aggregate principal amount
thereof, plus accrued and unpaid interest thereon, if there is such a "change of
control".
On July 21, 1999, 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. Subsequently, on January 24, 2000, an order was signed converting
the Trace bankruptcy from Chapter 11 to Chapter 7 of the Bankruptcy Code. A
trustee was appointed to oversee the liquidation of Trace's assets. Neither
Trace's bankruptcy filing nor the conversion to Chapter 7 constituted a "change
of control" under the provisions of the debt agreements described above. A
"change of control" could take place however, if the bankruptcy court allows the
Trace creditors to foreclose on and take ownership of Foamex International's
common stock owned by Trace, or otherwise authorizes a sale or transfer of these
shares, under circumstances in which a person or related group, other than
Trace, acquired more than 25% of Foamex International's outstanding voting stock
and owned a greater percentage of such voting stock than the amount beneficially
owned by Trace.
On July 31, 2000, Foamex International announced that it had entered into
an agreement (the "Exchange Agreement") with The Bank of Nova Scotia relating to
a portion of the 7,197,426 shares of Foamex International's common stock pledged
by Trace to The Bank of Nova Scotia. The Exchange Agreement provides for the
transfer of the pledged stock to The Bank of Nova Scotia in a manner that will
not constitute a "change of control" as described above. Under the Exchange
Agreement, The Bank of Nova Scotia will initially receive 1,500,000 shares of
Foamex International's common stock from the Trace bankruptcy estate and
exchange these common stock shares for 15,000 shares of a new class of Foamex
International's non-voting non-redeemable convertible preferred stock (the
"Series B Preferred Stock"). Each share of the Series B Preferred Stock can be
converted into 100 shares of Foamex International's common stock; but, only if
such conversion would not trigger a "change of control" event, as discussed
above. The Series B Preferred Stock would be entitled to dividends only if a
dividend is declared on Foamex International's common stock, rank senior to any
future preferred stock issued by Foamex International and be entitled to a
liquidation preference of $100 per share. Following this exchange, The Bank of
Nova Scotia will become the owner of less than 25% of the outstanding shares of
Foamex International's common stock when the remaining 5,697,426 shares of
Foamex International's common stock are transferred to The Bank of Nova Scotia
from the Trace bankruptcy estate.
6
<PAGE>
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
1. ORGANIZATION AND BASIS OF PRESENTATION (continued)
These transactions are conditioned upon a settlement agreement between The
Bank of Nova Scotia and the trustee for the Trace bankruptcy being approved by
the bankruptcy court. Upon completion of these transactions, Trace will no
longer own any shares of Foamex International's common stock.
Management believes that it is unlikely that a "change of control" will
occur as a result of Trace's bankruptcy proceedings particularly in light of the
Exchange Agreement. However, if the transactions contemplated by the Exchange
Agreement are not consummated, Foamex L.P. would seek to resolve the issues that
may arise should the "change of control" provisions be triggered, by requesting
waivers of such provisions and/or refinancing certain debt, if necessary. 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. Such circumstances would
raise substantial doubt about Foamex L.P.'s ability to continue as a going
concern if the transactions contemplated by the Exchange Agreement are not
consummated. 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.
Future Accounting Changes - Accounting for Derivatives and Hedging Activities
As previously reported, Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No.
133") will require the fair value of derivatives be recognized in the
consolidated balance sheets. Changes in the fair value of derivatives will be
recognized in earnings or in other comprehensive income, essentially depending
on the structure and purpose of the derivatives. During 2000, SFAS No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging Activities",
which amends SFAS No. 133 on a limited number of issues, was issued. The
statements will be effective for all quarters of all fiscal years beginning
after June 15, 2000, which is the first calendar quarter of 2001 for the
Company. The Company continues to evaluate the impact that the adoption of these
SFAS's will have on its results of operations or financial position.
Future Accounting Changes - Revenue Recognition and Presentation
The Securities and Exchange Commission (the "SEC") has issued Staff
Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements". SAB No. 101 will be effective (as amended by SAB No. 101B) in
the fourth quarter of 2000 for Foamex L.P. SAB No. 101 outlines the SEC's
position that revenue should not be recognized until it is realized or
realizable, including the criteria that need to be met. Foamex L.P.'s
current policy is that revenue recognition from sales, net of discounts and
estimated returns, allowances and rebates, is recognized when products are
shipped at which time title passes to the customer. Foamex L.P. continues to
evaluate the impact, if any, that the adoption of SAB No. 101 will have on
results of operations.
During July 2000, the Emerging Issues Task Force (the "EITF") of the
Financial Accounting Standards Board reached a consensus on an issue concerning
the components of revenue. EITF No. 00-10 "Accounting for Shipping and Handling
Revenues and Costs" essentially requires that shipping and handling costs that
are billed to a customer be included in revenue. Accordingly, Foamex L.P. has
determined that a portion of shipping costs billed to customers will require a
reclassification from cost of sales to revenue, but continues to work on
accumulating the dollar impact. EITF No. 00-10 will be effective in the fourth
calendar quarter of 2000 and will require reclassification of prior periods.
2. BUYOUT PROPOSALS
As previously reported in the Annual Report on Form 10-K for 1999, on
February 9, 2000, Foamex International announced that it was in discussions with
respect to a proposal involving the acquisition of all of Foamex International's
outstanding common stock for cash. On April 5, 2000, Foamex International
announced that discussions with the potential buyer were terminated with no
agreement having been reached. Foamex International subsequently terminated the
engagement of J.P. Morgan & Company, Inc. ("JP Morgan"), which acted as
financial advisor in connection with such transaction. During the second quarter
of 2000, Foamex International ended discussions with JP Morgan concerning an
additional engagement.
7
<PAGE>
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
3. COMPREHENSIVE INCOME
The components of comprehensive income are listed below.
<TABLE>
<CAPTION>
Quarterly Periods Ended Year to Date Periods Ended
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
-------- -------- -------- --------
(thousands)
<S> <C> <C> <C> <C>
Net income $7,878 $4,807 $10,015 $7,415
Foreign currency translation adjustments (471) 399 (165) 811
------ ------ ------- ------
Total comprehensive income $7,407 $5,206 $ 9,850 $8,226
====== ====== ======= ======
</TABLE>
4. RESTRUCTURING AND OTHER CHARGES
During the first quarter of 2000, restructuring and other charges of
approximately $2.8 million were recorded. The provision included $1.7 million
for work force reduction costs that included 27 employees, including certain
executives, and employees impacted by the closure of certain operations related
to a VPFSM capacity increase in North Carolina. Additionally, facility closure
costs totaled $0.3 million and related equipment writedowns were $0.4 million.
The first quarter 2000 provision also included $0.4 million related to changes
in estimates to prior year plans.
Foamex L.P. paid $2.8 million during the first half of 2000 for the various
restructuring plans recorded as of December 31, 1999 and during the first
quarter of 2000. As of June 30, 2000, the components of the net accrued
restructuring and plant consolidation balance included $7.4 million for plant
closures and leases and $3.0 million for personnel reductions. Included in
current assets was $1.5 million and in noncurrent assets was $0.2 million of
estimated proceeds for facilities actively being marketed for sale. During the
second quarter of 2000, Foamex L.P. sold a facility relating to a prior year
restructuring plan for proceeds of approximately $3.6 million. Substantially all
employees impacted by the first quarter 2000 work force reduction were
terminated by the end of the second quarter of 2000. Approximately $2.5 million
is expected to be spent during the remainder of 2000 for the various
restructuring plans.
5. INVENTORIES
The components of inventory are listed below.
June 30, December 31,
2000 1999
-------- ------------
(thousands)
Raw materials and supplies $58,829 $65,211
Work-in-process 12,193 11,447
Finished goods 20,514 17,154
------- -------
Total $91,536 $93,812
======= =======
6. LONG-TERM DEBT
The components of long-term debt are listed below.
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
-------- ------------
Foamex L.P. credit facility (thousands)
<S> <C> <C>
Term loan B (a) (d) $ 77,335 $ 81,874
Term loan C (a) (d) 70,305 74,431
Term loan D (a) (d) 101,826 107,800
Revolving credit facility (a) (b) (c) (d) 153,845 113,685
9 7/8% senior subordinated notes due 2007 150,000 150,000
8
<PAGE>
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
6. LONG-TERM DEBT (continued)
June 30, December 31,
2000 1999
-------- ------------
(thousands)
13 1/2% senior subordinated notes due 2005 (includes
$9,204 and $10,100 of unamortized debt premium) 107,204 108,100
Industrial revenue bonds 7,000 7,000
Subordinated note payable (net of unamortized
debt discount of $118 and $232) 2,220 4,444
Other 5,559 7,076
-------- --------
675,294 654,410
Less current portion 7,705 7,866
-------- --------
Long-term debt-unrelated parties $667,589 $646,544
======== ========
The components of related party long-term debt are listed below.
Foamex/GFI Note (c) $ - $ 34,000
======== ========
<FN>
(a) Effective January 1, 2000, the interest rate on outstanding borrowings
under the Foamex L.P. credit facility will increase by 25 basis points each
quarter that Foamex L.P.'s leverage ratio, as defined, exceeds 5.00 to
1.00. Once the leverage ratio is reduced below this level, the cumulative
amount of the 25 basis point adjustments to the interest rate on borrowings
will be eliminated. At December 31, 1999, the calculated leverage ratio was
5.48 to 1.00. Consequently, the basis point adjustment was applicable for
the calculation of interest in the first quarter of 2000. At March 31,
2000, the calculated leverage ratio was 5.51 to 1.00 and an additional 25
basis point adjustment became effective in the second quarter of 2000. At
June 30, 2000, the calculated ratio was 5.32 to 1.00. Accordingly, an
additional 25 basis point adjustment will become effective during the third
quarter of 2000.
(b) At June 30, 2000, the revolving credit facility commitment was $180.0
million, the weighted average interest rate was 10.78%, available
borrowings totaled $13.6 million and letters of credit outstanding totaled
$12.6 million. The commitment under the revolving credit facility is
reduced $2.5 million each quarter during the remaining term of the
agreement, which expires in June 2003.
(c) During the first quarter of 2000, the Foamex/GFI Note was repaid with
borrowings under the Foamex L.P. revolving credit facility. The $34.5
million letter of credit that was outstanding at year-end 1999 to
collateralize principal and interest payable under the Foamex/GFI Note was
also terminated.
(d) As previously reported in the Annual Report on Form 10-K for 1999, excess
cash flow generated annually, as defined, is required to be used to prepay
portions of the Foamex L.P. Term B, C and D loans. The prepayment amount
determined for 1999 was $13.3 million. During the second quarter of 2000,
the payment was made as scheduled and was financed through borrowings under
the Foamex L.P. revolving credit facility.
</FN>
</TABLE>
Debt 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. (i) to pay distributions or redeem equity interests, (ii) to make
certain restrictive payments or investments, (iii) to incur additional
indebtedness or issue Preferred Equity Interests, as defined, (iv) to merge,
consolidate or sell all or substantially all of its assets or (v) to enter into
certain transactions with affiliates or related persons. In addition, certain
agreements contain provisions that, in the event of a defined change of control
or the occurrence of an undefined material adverse change in the ability of the
obligor to perform its obligations, the indebtedness must be repaid, in certain
cases, at the option of the holder. Also, Foamex
9
<PAGE>
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
6. LONG-TERM DEBT (continued)
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,
interest coverage, fixed charge coverage and leverage ratios, as defined. Under
the most restrictive of the distribution restrictions as of June 30, 1999,
Foamex L.P. was able to pay Foamex International funds only to the extent
necessary to enable Foamex International to meet its tax payment liabilities.
Foamex L.P. was in compliance with its various financial covenants as of
June 30, 2000.
7. SEGMENT RESULTS
Foam Products manufactures and markets foam used by the bedding industry,
the furniture industry and the retail industry. Carpet Cushion Products
manufactures and distributes prime, rebond, sponge rubber and felt carpet
cushion to Foamex Carpet Cushion, Inc. ("Foamex Carpet"). Automotive Products
supplies foam primarily for automotive interior applications. Technical Products
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 in Mexico, corporate expenses not allocated to other business
segments and restructuring and other charges.
Segment results are presented below.
<TABLE>
<CAPTION>
Carpet
Foam Cushion Automotive Technical
Products Products Products Products Other Total
-------- -------- ---------- --------- -------- --------
(thousands)
Quarterly period ended June 30, 2000
<S> <C> <C> <C> <C> <C> <C>
Net sales $129,008 $42,461 $92,428 $26,176 $7,615 $297,688
Income (loss) from operations 15,546 (2,263) 7,445 7,062 (1,471) 26,319
Depreciation and amortization 3,811 1,483 1,192 646 713 7,845
Quarterly period ended June 30, 1999
Net sales $124,909 $46,687 $90,810 $23,028 $ 6,795 $292,229
Income (loss) from operations 12,948 (65) 6,033 6,203 (3,979) 21,140
Depreciation and amortization 4,094 1,266 1,235 636 182 7,413
Year to date period ended June 30, 2000
Net sales $257,566 $83,701 $189,739 $53,630 $18,572 $603,208
Income (loss) from operations 28,112 (6,651) 14,753 14,694 (5,149) 45,759
Depreciation and amortization 7,695 3,010 2,397 1,290 1,453 15,845
Year to date period ended June 30, 1999
Net sales $264,288 $89,990 $179,581 $45,276 $12,971 $592,106
Income (loss) from operations 25,869 (436) 12,825 11,239 (8,586) 40,911
Depreciation and amortization 8,242 2,436 2,469 1,273 662 15,082
</TABLE>
8. RELATED PARTY TRANSACTIONS AND BALANCES
Foamex L.P. regularly enters into transactions with its affiliates in
the ordinary course of business.
Foamex/GFI Note
In the first quarter of 2000, Foamex L.P. paid $0.6 million of interest on
the Foamex/GFI Note. As discussed in Note 6, the $34.0 million Foamex/GFI Note
was repaid during the first quarter of 2000. During the quarter and year to date
periods ended June 30, 1999, Foamex L.P. paid $0.5 million and $1.0 million of
interest on the Foamex/GFI Note, respectively.
10
<PAGE>
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
8. RELATED PARTY TRANSACTIONS AND BALANCES (continued)
Other
Foamex L.P. sold during the quarters ended June 30, 2000 and 1999,
approximately $42.5 million and $46.7 million, respectively, of carpet cushion
products to Foamex Carpet at cost, plus 4.7% pursuant to a supply agreement. In
addition, Foamex L.P. provided and invoiced approximately $0.1 million and $0.7
million of administrative services to Foamex Carpet during the quarters ended
June 30, 2000 and 1999, respectively.
Foamex L.P. sold during the first half of 2000 and 1999, approximately
$83.7 million and $90.0 million, respectively, of carpet cushion products to
Foamex Carpet at cost, plus 4.7% pursuant to a supply agreement. In addition,
Foamex L.P. provided and invoiced approximately $0.2 million and $1.3 million of
administrative services to Foamex Carpet during the first half of 2000 and 1999,
respectively.
9. COMMITMENTS AND CONTINGENCIES
Litigation - Foamex International Shareholders
On August 1, 2000, Foamex International announced that it had reached
agreements in principle with the plaintiffs in the stockholder actions described
below providing for the settlement and dismissal of such actions, subject to
certain conditions, including court approval.
The Shareholder Litigation. Beginning on March 17, 1998, six actions, which
were subsequently consolidated under the caption In re Foamex International Inc.
Shareholder Litigation, were filed in the Court of Chancery of the State of
Delaware, and on August 13, 1999 another action, Watchung Road Associates, L.P.,
et al. v. Foamex International Inc., et al., was filed in the same court. The
two actions were consolidated on May 3, 2000, into a single action under the
caption In re Foamex International Inc. Shareholder Litigation (the "Delaware
Action"). The Delaware Action, a purported derivative and class action on behalf
of Foamex International and its stockholders, originally named as defendants
Foamex International, certain of its current and former directors and officers,
Trace and a Trace affiliate. The complaint in the Delaware Action alleges, among
other things, that certain of the defendants breached their fiduciary duties to
Foamex International in connection with an attempt by Trace to acquire Foamex
International's publicly traded common stock as well as with a potential
acquisition transaction with a group led by Sorgenti Chemical Industries LLC,
and that certain of the defendants breached their fiduciary duties by causing
Foamex International to waste assets in connection with a variety of
transactions entered into with Trace and its affiliates. The Delaware Action
seeks various remedies, including injunctive relief, money damages and the
appointment of a receiver for Foamex International.
On April 26, 1999, a putative securities class action entitled Molitor v.
Foamex International Inc., et al., was filed in the United States District Court
for the Southern District of New York naming as defendants Foamex International,
Trace and certain current and former officers and directors of Foamex
International, on behalf of stockholders who bought shares of Foamex
International's common stock during the period from May 7, 1998 through and
including April 16, 1999. The lawsuit alleges that the defendants violated
Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 by
misrepresenting and/or omitting material information about Foamex
International's financial situation and operations, with the result of
artificially inflating the price of Foamex International's stock. The lawsuit
also alleges that Trace and Marshall S. Cogan violated Section 20(a) of the
Securities Exchange Act of 1934 as controlling persons of Foamex International.
The complaint sought 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., was filed in the
same court. The two actions were consolidated and a consolidated complaint was
filed; the consolidated suit is referred to herein as the "Federal Action".
The Settlements. Under the terms of the agreement in principle to settle
the Federal Action, members of the class of shareholders who purchased shares of
common stock between May 7, 1998 and April 16, 1999 will receive payments as
defined in the agreement. Payment to class members in the Federal Action, along
with plaintiffs'
11
<PAGE>
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
9. COMMITMENTS AND CONTINGENCIES (continued)
lawyers' fees in the Federal Action and the Delaware Action, will be paid by
Foamex International's insurance carrier on behalf of Foamex International.
Under the terms of the agreement to settle the Delaware Action, Foamex
International agreed that a special nominating committee of the Board of
Directors, consisting of Robert J. Hay as chairman, Stuart J. Hershon, John G.
Johnson, Jr., and John V. Tunney, will nominate two additional independent
directors to serve on the Board. The terms of the agreement also establish the
criteria for the independence of the directors and require that certain
transactions with affiliates be approved by a majority of the disinterested
members of the Board.
Both settlements are subject to final documentation and court approval,
which, if obtained, will resolve all outstanding shareholder litigation against
Foamex International and its current and former directors and officers. The
settlements involve no admissions or findings of liability or wrongdoing by
Foamex International or any individuals.
Litigation - Breast Implants
As of August 7, 2000, Foamex L.P. and Trace were two of multiple defendants
in actions filed on behalf of approximately 3,623 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. Trace's
insurance carrier has continued to pay Foamex L.P.'s litigation expenses after
Trace's filing under the Bankruptcy Code. Trace's insurance policies continue to
cover certain liabilities of Trace but if the limits of those policies are
exhausted, Trace will be unable to provide additional 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 counsel for Foamex L.P., and without taking into account the
indemnification provided by Trace, the coverage provided by Trace's and Foamex
L.P.'s liability insurance and potential indemnity from the manufacturers of
polyurethane covered breast implants, management believes that the disposition
of the 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 the financial position, results of operations and
cash flows of Foamex L.P.
12
<PAGE>
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
9. COMMITMENTS AND CONTINGENCIES (continued)
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 June 30, 2000, Foamex L.P. had accruals of
approximately $3.4 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.
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. believes that the use of alternative technologies,
including VPFSM, which do not utilize methylene chloride and its ability to
shift current production to the facilities which use these alternative
technologies will minimize the impact of these regulations. 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 the appropriate state authorities that it has
found soil and/or groundwater contamination in excess of state standards at six
sites. These sites are in various stages of investigation or remediation.
Accordingly, the extent of contamination and the ultimate liability is not known
with certainty for all sites. Foamex L.P. has accruals of $2.4 million for the
estimated cost of remediation, including professional fees and monitoring costs,
for these sites. During 2000, Foamex L.P reached an indemnification agreement
with the former owner of the Morristown, Tennessee facility. The agreement
allocates the incurred and future remediation costs between the former owner and
Foamex L.P. The estimated allocation of future costs for the remediation of this
facility is not significant, based on current information known. The former
owner was Recticel Foam Corporation, a subsidiary of Recticel s.a.
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 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 and in the
aggregate, 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
13
<PAGE>
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
9. COMMITMENTS AND CONTINGENCIES (continued)
have a material adverse effect on Foamex L.P.'s operations, financial position,
capital expenditures or competitive position. The possibility exists that new
environmental legislation and/or environmental regulations may be adopted, or
other environmental conditions may be found to exist, that would require
expenditures not currently anticipated and that may be material.
14
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Change in Control
Trace is a privately held company, which owned approximately 29% of Foamex
International's outstanding voting common stock at July 31, 2000, and whose
former 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. credit facility, pursuant to
which approximately $403.3 million of principal was outstanding as of June 30,
2000, provides that a "change of control" would be an event of default and could
result in the acceleration of such indebtedness. "Change of control" means, for
this purpose, that (i) a person or related group, other than Trace, beneficially
owns more than 25% of Foamex International's outstanding voting stock and (ii)
such voting stock constitutes a greater percentage of such voting stock than the
amount beneficially owned by Trace. Additionally, certain indentures of Foamex
L.P. and FCC relating to senior subordinated notes of $248.0 million contain
similar "change of control" provisions, which require Foamex L.P. and FCC to
tender for such notes at a price in cash equal to 101% of the aggregate
principal amount thereof, plus accrued and unpaid interest thereon, if there is
such a "change of control".
On July 21, 1999, 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. Subsequently, on January 24, 2000, an order was signed converting
the Trace bankruptcy from Chapter 11 to Chapter 7 of the Bankruptcy Code. A
trustee was appointed to oversee the liquidation of Trace's assets. Neither
Trace's bankruptcy filing nor the conversion to Chapter 7 constituted a "change
of control" under the provisions of the debt agreements described above. A
"change of control" could take place however, if the bankruptcy court allows the
Trace creditors to foreclose on and take ownership of Foamex International's
common stock owned by Trace, or otherwise authorizes a sale or transfer of these
shares, under circumstances in which a person or related group, other than
Trace, acquired more than 25% of Foamex International's outstanding voting stock
and owned a greater percentage of such voting stock than the amount beneficially
owned by Trace.
On July 31, 2000, Foamex International announced that it had entered into
an Exchange Agreement with The Bank of Nova Scotia relating to a portion of the
7,197,426 shares of Foamex International's common stock pledged by Trace to The
Bank of Nova Scotia. The Exchange Agreement provides for the transfer of the
pledged stock to The Bank of Nova Scotia in a manner that will not constitute a
"change of control" as described above. Under the Exchange Agreement, The Bank
of Nova Scotia will initially receive 1,500,000 shares of Foamex International's
common stock from the Trace bankruptcy estate and exchange these common stock
shares for 15,000 shares of a new class of Foamex International's non-voting
non-redeemable convertible preferred stock (the "Series B Preferred Stock").
Each share of the Series B Preferred Stock can be converted into 100 shares of
Foamex International's common stock; but, only if such conversion would not
trigger a "change of control" event, as discussed above. The Series B Preferred
Stock would be entitled to dividends only if a dividend is declared on Foamex
International's common stock, rank senior to any future preferred stock issued
by Foamex International and be entitled to a liquidation preference of $100 per
share. Following this exchange, The Bank of Nova Scotia will become the owner of
less than 25% of the outstanding shares of Foamex International's common stock
when the remaining 5,697,426 shares of Foamex International's common stock are
transferred to The Bank of Nova Scotia from the Trace bankruptcy estate.
These transactions are conditioned upon a settlement agreement between The
Bank of Nova Scotia and the trustee for the Trace bankruptcy being approved by
the bankruptcy court. Upon completion of these transactions, Trace will no
longer own any shares of Foamex International's common stock.
Management believes that it is unlikely that a "change of control" will
occur as a result of Trace's bankruptcy proceedings particularly in light of the
Exchange Agreement. However, if the transactions contemplated by the Exchange
Agreement are not consummated, Foamex L.P. would seek to resolve the issues that
may arise should the "change of control" provisions be triggered, by requesting
waivers of such provisions and/or refinancing certain debt, if necessary. 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. Such circumstances raise
substantial doubt about Foamex L.P.'s ability to continue as a going concern, if
the transactions contemplated by the Exchange Agreement are not consummated. 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.
15
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Future Accounting Changes - Accounting for Derivatives and Hedging Activities
As previously reported, SFAS No. 133 will require the fair value of
derivatives be recognized in the consolidated balance sheets. Changes in the
fair value of derivatives will be recognized in earnings or in other
comprehensive income, essentially depending on the structure and purpose of the
derivatives. During 2000, SFAS No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities", which amends SFAS No. 133 on a
limited number of issues, was issued. The statements will be effective for all
quarters of all fiscal years beginning after June 15, 2000, which is the first
calendar quarter of 2001 for the Company. The Company continues to evaluate the
impact that the adoption of these SFAS's will have on its results of operations
or financial position.
Future Accounting Changes - Revenue Recognition and Presentation
The SEC has issued SAB No. 101, which will be effective (as amended by SAB
No. 101B) in the fourth quarter of fiscal years beginning after December 15,
1999. SAB No. 101 outlines the SEC's position that revenue should not be
recognized until it is realized or realizable, including the criteria that need
to be met. Foamex L.P.'s current policy is that revenue recognition from sales,
net of discounts and estimated returns, allowances and rebates, is recognized
when products are shipped at which time title passes to the customer. Foamex
L.P. continues to evaluate the impact, if any, that the adoption of SAB No. 101
will have on results of operations.
During July 2000, the EITF of the Financial Accounting Standards Board
reached a consensus on an issue concerning revenue recognition. EITF No. 00-10
"Accounting for Shipping and Handling Revenues and Costs" essentially requires
that shipping and handling costs that are billed to a customer be included in
revenue. Accordingly, Foamex L.P. has determined that a portion of shipping
costs billed to customers will require a reclassification from cost of sales to
revenue, but continues to work on accumulating the dollar impact. EITF No. 00-10
will be effective in the fourth calendar quarter of 2000 and will require
restatement of prior periods.
Buyout Proposals
As previously reported in the Annual Report on Form 10-K for 1999, on
February 9, 2000, Foamex International announced that it was in discussions with
respect to a proposal involving the acquisition of all of Foamex International's
outstanding common stock for cash. On April 5, 2000, Foamex International
announced that discussions with the potential buyer were terminated with no
agreement having been reached. Foamex International subsequently terminated the
engagement of JP Morgan, which acted as financial advisor in connection with
such transaction. During the second quarter of 2000, Foamex International ended
discussions with JP Morgan concerning an additional engagement.
Segment Results
<TABLE>
<CAPTION>
Carpet
Foam Cushion Automotive Technical
Products Products Products Products Other Total
-------- -------- ---------- --------- -------- --------
(thousands)
Quarterly period ended June 30, 2000
<S> <C> <C> <C> <C> <C> <C>
Net sales $129,008 $42,461 $92,428 $26,176 $7,615 $297,688
Income (loss) from operations 15,546 (2,263) 7,445 7,062 (1,471) 26,319
Depreciation and amortization 3,811 1,483 1,192 646 713 7,845
Income (loss) from operations
as a percentage of net sales 12.1% (5.3)% 8.1% 27.0% n.m* 8.8%
Quarterly period ended June 30, 1999
Net sales $124,909 $46,687 $90,810 $23,028 $ 6,795 $292,229
Income (loss) from operations 12,948 (65) 6,033 6,203 (3,979) 21,140
Depreciation and amortization 4,094 1,266 1,235 636 182 7,413
Income (loss) from operations
as a percentage of net sales 10.4% (0.1)% 6.6% 26.9% n.m* 7.2%
16
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Carpet
Foam Cushion Automotive Technical
Products Products Products Products Other Total
-------- -------- ---------- --------- -------- --------
(thousands)
Year to date period ended June 30, 2000
Net sales $257,566 $83,701 $189,739 $53,630 $18,572 $603,208
Income (loss) from operations 28,112 (6,651) 14,753 14,694 (5,149) 45,759
Depreciation and amortization 7,695 3,010 2,397 1,290 1,453 15,845
Income (loss) from operations
as a percentage of net sales 10.9% (7.9)% 7.8% 27.4% n.m* 7.6%
Year to date period ended June 30, 1999
Net sales $264,288 $89,990 $179,581 $45,276 $12,971 $592,106
Income (loss) from operations 25,869 (436) 12,825 11,239 (8,586) 40,911
Depreciation and amortization 8,242 2,436 2,469 1,273 662 15,082
Income (loss) from operations
as a percentage of net sales 9.8% (0.5)% 7.1% 24.8% n.m* 6.9%
</TABLE>
* not meaningful
RESULTS OF OPERATIONS FOR THE QUARTER ENDED JUNE 30, 2000 COMPARED TO THE
QUARTER ENDED JUNE 30, 1999
Income from Operations
Net sales for the second quarter of 2000 increased 1.9% to $297.7 million
from $292.2 million in the second quarter of 1999. The increase primarily
reflected higher sales in the Foam Products, Automotive Products and Technical
Products segments and higher sales from certain of the Company's foreign
operations reported in the "Other" segment. Lower sales were recorded in the
Carpet Cushion Products segment.
Income from operations for the second quarter of 2000 was $26.3 million,
which represented a 24.5% increase from the $21.1 million recorded during the
comparable 1999 period. Results in 1999 included restructuring and other charges
of $3.6 million. Excluding the 1999 restructuring and other charges for
comparison purposes, income from operations was $24.8 million in the second
quarter of 1999. On this basis, income from operations was 8.8% of net sales in
2000 compared to 8.5% of net sales in 1999.
Higher income from operations reflected an improved gross profit margin of
13.4% in the second quarter of 2000 compared to 13.1% in same quarter of 1999.
Gross profit margins benefited from price increases in certain product lines
that became effective in the second quarter of 2000. The selling price increases
helped to offset higher raw material costs that primarily resulted from higher
oil costs. A more profitable shipment mix also contributed to the improvement.
In the second quarter of 2000, gross profits were also impacted by foreign
currency losses.
Selling, general and administrative expenses were slightly higher in the
second quarter of 2000 with the benefits of cost savings initiatives implemented
during 1999 offset by increases to the allowance for uncollectible accounts
receivables and higher incentive compensation accruals.
Foam Products
Foam Products net sales for the second quarter of 2000 increased 3.3% to
$129.0 million from $124.9 million in the second quarter of 1999. Higher sales
primarily reflected improvements in volume and the impact of selling price
increases that became effective during the second quarter. Partially offsetting
the sales gains was a sales decline in the consumer products market and the loss
of sales from Foamex L.P.'s packaging business that was sold in 1999. The
improvement in sales combined with operating efficiencies translated to a 20.1%
increase in income from operations, from $12.9 million in the second quarter of
1999 to $15.5 million in the second quarter of 2000. Income from operations was
12.1% of net sales in 2000, up from 10.4% in 1999.
17
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Carpet Cushion Products
Carpet Cushion Products net sales for the second quarter of 2000 decreased
9.1% to $42.5 million from $46.7 million in the second quarter of 1999.
Competitive pressures continued in the second quarter of 2000, which resulted in
lower sales volumes. The sales decline translated to a $2.3 million loss from
operations compared to a $0.1 million loss in the second quarter of 1999.
Automotive Products
Automotive Products net sales for the second quarter of 2000 increased 1.8%
to $92.4 million from $90.8 million in the second quarter of 1999. The strong
automotive market continues to fuel sales gains for lamination products. Income
from operations of $7.4 million in the second quarter of 2000 compared to $6.0
million in the comparable 1999 period. The increase in income from operations
was primarily due to the favorable impact of a selling price adjustment during
the second quarter of 2000, which included adjustments for certain prior
periods. Income from operations represented 8.1% of net sales in 2000 and 6.6%
in 1999.
Technical Products
Technical Products net sales for the second quarter of 2000 increased 13.7%
to $26.2 million from $23.0 million in the second quarter of 1999. Income from
operations increased 13.8% to $7.1 million in the second quarter of 2000 from
$6.2 million in the second quarter of 1999. Income from operations represented
27.0% of net sales in 2000 compared to 26.9% in 1999. Favorable market
conditions continued to drive sales gains in Technical Products, but with a
lower-value shipment mix in the second quarter of 2000 compared to 1999.
Other
Other primarily consists of certain foreign manufacturing operations,
corporate expenses not allocated to business 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 Mexico City operation.
The loss from operations was $1.5 million in the second quarter of 2000. The
loss from operations of $4.0 million in the second quarter of 1999 included $3.6
million of restructuring and other charges.
Interest and Debt Issuance Expense
Interest and debt issuance expense totaled $17.3 million in the second
quarter of 2000, which represented a 7.0% increase from the 1999 second quarter
expense of $16.1 million. The increase primarily reflected higher effective
interest rates partially offset by the benefit of lower average debt levels.
Higher effective interest rates reflected market conditions and the impact of
certain provisions of the Foamex L.P. credit facility that require an
incremental interest rate margin. During the second quarter of 2000 the interest
rate margin was increased another 25 basis points to a cumulative adjustment of
50 basis points. As discussed in Note 6 to the condensed consolidated financial
statements, an additional 25 basis point adjustment will become effective during
the third quarter of 2000.
Income from Equity Interest in Joint Venture
Income from an equity interest in an Asian joint venture totaled $0.4
million for the second quarter of 2000.
Other Income (Expense), Net
Other expense, net recorded for the second quarter of 2000 totaled $0.2
million and included a loss on the disposition of fixed assets.
Income Tax Expense
Foamex L.P., as a limited partnership, is not subject to Federal income
taxes. Consequently, no current or deferred provision has been provided for such
taxes. However, Foamex L.P. has provided for the income taxes of
18
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
certain states in which it is subject to taxes and for subsidiaries located in
foreign jurisdictions that file separate tax returns. Compared to 1999, the
effective tax rate was higher in 2000 primarily due to a greater percentage of
income from foreign sources.
Net Income
Net income for the second quarter of 2000 was up 63.9% to $7.9 million
compared to $4.8 million in the second quarter of 1999.
RESULTS OF OPERATIONS FOR THE YEAR TO DATE PERIOD ENDED JUNE 30, 2000
COMPARED TO THE YEAR TO DATE PERIOD ENDED JUNE 30, 1999
Income from Operations
Net sales for the first half of 2000 increased 1.9% to $603.2 million from
$592.1 million for the first half of 1999. The increase primarily reflected
higher sales in the Automotive Products and Technical Products segments and
higher sales from certain of the Company's foreign operations reported in the
"Other" segment. Sales declines were recorded in the Foam Products and Carpet
Cushion Products segments.
Income from operations for the first half of 2000 was $45.8 million, 11.9%
higher than the $40.9 million recorded during the comparable period in 1999.
Results included restructuring and other charges of $2.8 million in 2000 and
$7.0 million in 1999. Restructuring and other charges recorded during 2000 are
discussed under "Other" below. Excluding the restructuring and other charges for
comparison purposes, income from operations was $48.6 million for the first half
of 2000 and $47.9 million in the first half of 1999. On this basis, income from
operations was 8.1% of net sales in both 2000 and 1999.
Gross profit margins for the first half of 2000 benefited from a
higher-value shipment mix and price increases in certain product lines that
became effective in the second quarter of 2000. These favorable developments
were essentially offset by higher raw material costs that primarily resulted
from higher oil costs. In the first half of 2000, gross profits were also
impacted by foreign currency losses.
Selling, general and administrative expenses were up 1.3% in the first half
of 2000 with the benefits of cost savings initiatives implemented during 1999
offset by increases to the allowance for uncollectible accounts receivables and
higher incentive compensation accruals.
Foam Products
Foam Products net sales for the first half of 2000 decreased 2.5% to $257.6
million from $264.3 million in the first half of 1999. Lower sales primarily
reflected a volume decline in the consumer products market and the loss of sales
from Foamex L.P.'s packaging business that was sold in 1999. Despite lower
sales, income from operations was $28.1 million, up 8.7% compared to $25.9
million in the first half of 2000. The improvement largely reflected operating
efficiencies and selling price increases implemented during the second quarter
of 2000 that helped to offset higher raw material costs. As a percentage of net
sales, income from operations was 10.9% of net sales in 2000 up from 9.8% in
1999.
Carpet Cushion Products
Carpet Cushion Products net sales for the first half of 2000 decreased 7.0%
to $83.7 million from $90.0 million in the first half of 1999. Competitive
pressures continued in the first half of 2000, which resulted in lower sales
volumes. As a result, a loss from operations of $6.7 million was recorded in the
first half of 2000 compared to a loss from operations of $0.4 million in the
comparable 1999 period. Results in Carpet Cushion Products improved during the
second quarter of 2000, but any significant improvement in results is largely
dependent on increased sales volume.
19
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Automotive Products
Automotive Products net sales for the first half of 2000 increased 5.7% to
$189.7 million from $179.6 million in the first half of 1999. The strong
automotive market continues to fuel sales gains for lamination products. Income
from operations increased 15.0% to $14.8 million in the first half of 2000 from
$12.8 million in the comparable 1999 period. The increase in income from
operations was primarily due to the favorable impact of a selling price
adjustment during the second quarter of 2000, which included adjustments for
certain prior periods. Income from operations represented 7.8% of net sales in
2000 and 7.1% of net sales in 1999.
Technical Products
Technical Products net sales for the first half of 2000 increased 18.5% to
$53.6 million from $45.3 million in the first half of 1999. Income from
operations increased 30.7% to $14.7 million in the first half of 2000 from $11.2
million in the comparable 1999 period. Income from operations represented 27.4%
of net sales in 2000, up from 24.8% in 1999. The improvement reflected favorable
market conditions that resulted in sales volume growth and improved operating
efficiencies.
Other
Other primarily consists of certain foreign manufacturing operations,
corporate expenses not allocated to business 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 Mexico City operation.
The loss from operations of $5.1 million in the first half of 2000 included a
provision of $2.8 million for restructuring and other charges discussed below.
The loss from operations of $8.6 million in the first half of 1999 included $7.0
million of restructuring and other charges.
During the first quarter of 2000, restructuring and other charges of
approximately $2.8 million were recorded. The provision included $1.7 million in
work force reduction costs that included 27 employees, including certain
executives, and employees impacted by the closure of certain operations related
to a VPFSM capacity increase in North Carolina. Additionally, facility closure
cost totaled $0.3 million and related equipment writedowns were $0.4 million.
The first quarter 2000 provision also included $0.4 million related to changes
in estimates to prior year plans.
Foamex L.P. paid $2.8 million during the first half of 2000 for the various
restructuring plans recorded as of December 31, 1999 and during the first
quarter of 2000. As of June 30, 2000, the components of the net accrued
restructuring and plant consolidation balance included $7.4 million for plant
closures and leases and $3.0 million for personnel reductions. Included in
current assets was $1.5 million and in noncurrent assets was $0.2 million of
estimated proceeds for facilities actively being marketed for sale. During the
second quarter of 2000, Foamex L.P. sold a facility relating to a prior year
restructuring plan for proceeds of approximately $3.6 million. Substantially all
employees impacted by the first quarter 2000 work force reduction were
terminated by the end of the second quarter of 2000. Approximately $2.5 million
is expected to be spent during the remainder of 2000 for the various
restructuring plans.
Interest and Debt Issuance Expense
Interest and debt issuance expense totaled $34.3 million in the first half
of 2000, which represented a 6.4% increase from the 1999 first half expense of
$32.3 million. The increase reflected higher effective interest rates partially
offset by the benefit of lower average debt levels. Higher effective interest
rates reflected market conditions and the impact of certain provisions of the
Foamex L.P. credit facility that requires an incremental interest rate margin.
The additional interest rate margin was 25 basis points in the first quarter of
2000 and during the second quarter of 2000 the interest rate margin was
increased another 25 basis points to a cumulative adjustment of 50 basis points.
As discussed in Note 6 to the condensed consolidated financial statements, an
additional 25 basis point adjustment will become effective during the third
quarter of 2000.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Income from Equity Interest in Joint Venture
Income from an equity interest in an Asian joint venture totaled $0.7
million for the first half of 2000.
Other Income (Expense), Net
Other expense, net recorded for the first half of 2000 totaled $0.4 million
and included losses on the disposition of fixed assets.
Income Tax Expense
Foamex L.P., as a limited partnership, is not subject to Federal income
taxes. Consequently, no current or deferred provision has been provided for such
taxes. However, Foamex L.P. has provided for the income taxes of certain states
in which it is subject to taxes and for subsidiaries located in foreign
jurisdictions that file separate tax returns. Compared to 1999, the effective
tax rate was higher in 2000 primarily due to a greater percentage of income from
foreign sources.
Net Income
Net income for the first half of 2000 was up 35.1% to $10.0 million
compared to $7.4 million in the first half of 1999.
Liquidity and Capital Resources
Foamex L.P.'s operating cash requirements consist principally of working
capital requirements, scheduled payments of principal and interest on
outstanding indebtedness and capital expenditures. Foamex L.P. believes that
cash flow from operating activities, cash on hand and periodic borrowings under
its credit facility will be adequate to meet its liquidity requirements. All
principal and interest payments were made as scheduled in the first half of
2000. The ability of Foamex L.P. to make distributions to Foamex International
is restricted by the terms of its financing agreements; therefore, Foamex
International is not expected to have access to the cash flow generated by
Foamex L.P. for the foreseeable future.
Cash and cash equivalents totaled $1.5 million at the end of the second
quarter of 2000 compared to $1.6 million at the end of 1999. Working capital at
the end of the second quarter of 2000 was $117.8 million and the current ratio
was 1.7 to 1 compared to working capital at the end of 1999 of $110.5 million
and a current ratio of 1.7 to 1. Significant changes to the components of
working capital included an increase of $22.9 million in accounts receivable
that was partially offset by a $13.1 million increase in accounts payable.
Total debt at the end of the second quarter of 2000 was $677.8 million,
down $12.2 million from year-end 1999. During the first quarter of 2000, the
Foamex/GFI Note was repaid with borrowings under the Foamex L.P. revolving
credit facility. The $34.5 million letter of credit that was outstanding at
year-end 1999 to collateralize principal and interest payable under the
Foamex/GFI Note was also terminated.
As of June 30, 2000, there were $153.8 million of revolving credit
borrowings, at a weighted average interest rate of 10.78%, under the Foamex L.P.
credit facility with $13.6 million available for additional borrowings and $12.6
million of letters of credit outstanding. Borrowings by Foamex Canada Inc.
("Foamex Canada") as of June 30, 2000 were $2.5 million, at an interest rate of
8.25%, under Foamex Canada's revolving credit agreement with unused availability
of approximately $2.9 million. As of June 30, 2000, Foamex L.P. was in
compliance with its respective financial covenants.
Cash Flow from Operating Activities
Cash provided by operating activities in the first half of 2000 was $20.2
million compared to $31.3 million in the first half of 1999. The decline in cash
provided by operating activities was largely attributable to the benefits of a
1999 inventory reduction plan.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Cash Flow from Investing Activities
Cash used for investing activities totaled $8.4 million for the first half
of 2000. Cash requirements for capital expenditures were $10.3 million partially
offset by $3.6 million of proceeds from the sale of assets. In the first half of
1999, cash flow used for investing activities totaled $7.4 million due to the
net combination of $10.5 million for capital expenditures partially offset by a
$2.5 million repayment of a note from Foamex International. Foamex L.P. expects
capital expenditures for 2000 to be approximately $25.0 million primarily as a
result of the construction of two new VPFSM machines. In addition, Foamex L.P.
is continuing to explore the possible implementation of a new ERP software
system, but no significant expenditures are anticipated for the balance of 2000.
Cash Flow from Financing Activities
Cash used for financing activities was $11.8 million for the first half of
2000 compared to cash used of $24.0 million in the first half of 1999. As
discussed previously, the $34.0 million Foamex/GFI Note was repaid during the
first quarter of 2000 with borrowings under the Foamex L.P. revolving credit
facility. The remaining cash requirements for financing activities primarily
reflected other debt repayments. Cash used for financing activities in the first
half of 1999 was primarily due to the combination of net debt repayments, debt
issuance costs and a decrease in the cash overdraft 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 June 30, 2000 was $3.4 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 Note 9 to Foamex L.P.'s condensed consolidated
financial statements, 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.
Market Risk
Foamex L.P.'s debt securities with variable interest rates are subject to
market risk for changes in interest rates. On June 30, 2000, indebtedness with
variable interest rates totaled $418.0 million. On an annualized basis, if the
interest rates on these debt instruments increased by 1.0%, interest expense
would increase by approximately $4.2 million.
Forward-Looking Statements
This report contains forward-looking statements and should be read in
conjunction with the discussion regarding forward-looking statements set forth
in Foamex L.P.'s Annual Report on Form 10-K for the year ended December 31,
1999.
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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.
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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, 1999.
The information from Note 9 of the condensed consolidated financial
statements of Foamex L.P. is incorporated herein by reference.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
27 - Financial Data Schedule for the year to date period ended June
30, 2000.
(b) Foamex L.P. filed the following Current Reports on Form 8-K for the
the quarter ended June 30, 2000:
A report dated April 5, 2000, was filed for Item 5. Other Events,
concerning the termination of discussions involving a proposed buyout
of Foamex International.
Subsequent to quarter end, a report dated July 31, 2000, was filed for
Item 5. Other Events, concerning an agreement with The Bank of Nova
Scotia relating to the shares of Foamex International's common stock
pledged by Trace to The Bank of Nova Scotia as a result of the Trace
bankruptcy filing.
Subsequent to quarter end, a report dated August 1, 2000, was filed for
Item 5. Other Events, concerning an agreement in principle to settle
the shareholder litigation involving Foamex International.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FOAMEX L.P.
By: FMXI, Inc.
General Partner
Date: August 10, 2000 By: /s/ George L. Karpinski
---------------------------
George L. Karpinski
Vice President
FOAMEX CAPITAL CORPORATION
Date: August 10, 2000 By: /s/ George L. Karpinski
---------------------------
George L. Karpinski
Vice President
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