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 September 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 November 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 September 30, 2000 and 1999 3
Condensed Consolidated Balance Sheets (unaudited) as of September 30, 2000
and December 31, 1999 4
Condensed Consolidated Statements of Cash Flows (unaudited) - Year to
Date Periods Ended September 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. 24
Part II. Other Information
Item 1. Legal Proceedings. 25
Item 6. Exhibits and Reports on Form 8-K. 25
Signatures 26
</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
September 30, September 30, September 30, September 30,
2000 1999 2000 1999
------------- ------------- ------------- -------------
(thousands)
<S> <C> <C> <C> <C>
NET SALES $286,371 $302,819 $889,579 $894,925
COST OF GOODS SOLD 247,732 261,708 773,997 777,943
-------- -------- -------- --------
GROSS PROFIT 38,639 41,111 115,582 116,982
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 13,966 15,098 42,329 43,084
RESTRUCTURING AND OTHER CHARGES 2,800 2,988 5,621 9,962
-------- -------- -------- --------
INCOME FROM OPERATIONS 21,873 23,025 67,632 63,936
INTEREST AND DEBT ISSUANCE EXPENSE 17,757 17,190 52,105 49,461
INCOME FROM EQUITY INTEREST IN JOINT VENTURE 282 - 1,014 -
OTHER EXPENSE, NET (488) (87) (926) (282)
-------- -------- -------- --------
INCOME FROM CONTINUING OPERATIONS
BEFORE PROVISION FOR INCOME TAXES 3,910 5,748 15,615 14,193
PROVISION FOR INCOME TAXES 868 353 2,558 1,383
-------- -------- -------- --------
NET INCOME $ 3,042 $ 5,395 $ 13,057 $ 12,810
======== ======== ======== ========
</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 2000 1999
------------- ------------
CURRENT ASSETS (thousands)
<S> <C> <C>
Cash and cash equivalents $ 3,206 $ 1,573
Accounts receivable, net of allowances of $6,708 in 2000
and $5,310 in 1999 147,882 128,929
Accounts receivable from related parties 15,023 16,717
Inventories 94,728 93,812
Other current assets 17,259 21,541
-------- --------
Total current assets 278,098 262,572
-------- --------
Property, plant and equipment 375,706 366,035
Less accumulated depreciation (170,459) (154,720)
-------- --------
NET PROPERTY, PLANT AND EQUIPMENT 205,247 211,315
COST IN EXCESS OF ASSETS ACQUIRED, net of accumulated
amortization of $19,447 in 2000 and $15,804 in 1999 179,529 183,481
DEBT ISSUANCE COSTS, net of accumulated amortization
of $7,867 in 2000 and $5,787 in 1999 12,343 14,423
OTHER ASSETS 22,342 26,704
-------- --------
TOTAL ASSETS $697,559 $698,495
======== ========
LIABILITIES AND PARTNERS' DEFICIT
CURRENT LIABILITIES
Short-term borrowings $ - $ 1,627
Current portion of long-term debt 7,684 7,866
Accounts payable 116,643 82,229
Cash overdrafts 26,604 5,856
Accrued employee compensation and benefits 22,681 16,341
Accrued interest 13,083 9,457
Accrued customer rebates 11,269 9,652
Other accrued liabilities 18,853 19,003
-------- --------
Total current liabilities 216,817 152,031
LONG-TERM DEBT 614,299 646,544
LONG-TERM DEBT - RELATED PARTY - 34,000
OTHER LIABILITIES 20,620 30,511
-------- --------
Total liabilities 851,736 863,086
-------- --------
COMMITMENTS AND CONTINGENCIES
PARTNERS' DEFICIT
General partner (130,500) (143,271)
Limited partner - -
Accumulated other comprehensive income (loss) (9,475) (8,923)
Notes and advances receivable from partner (4,981) (3,176)
Notes receivable from related party (9,221) (9,221)
-------- --------
Total partners' deficit (154,177) (164,591)
-------- --------
TOTAL LIABILITIES AND PARTNERS' DEFICIT $697,559 $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
September 30, September 30,
2000 1999
------------- --------------
(thousands)
OPERATING ACTIVITIES
<S> <C> <C>
Net income $ 13,057 $ 12,810
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 24,652 23,359
Amortization of debt issuance costs, debt discount,
debt premium and deferred swap adjustment and gain 172 307
Asset writedowns and other charges 2,789 2,073
Other operating activities 3,731 2,592
Changes in operating assets and liabilities, net 21,171 (224)
-------- --------
Net cash provided by operating activities 65,572 40,917
-------- --------
INVESTING ACTIVITIES
Capital expenditures (18,460) (14,388)
Proceeds from sale of assets 3,571 -
Repayment of note from Foamex International - 2,490
Increase in revolving loan with Foamex International (1,805) -
Other investing activities (1,134) 574
-------- --------
Net cash used for investing activities (17,828) (11,324)
-------- --------
FINANCING ACTIVITIES
Net proceeds from (repayments of) short-term borrowings (1,627) 679
Net repayments of revolving loans (12,031) (17,024)
Repayments of long-term debt (19,201) (6,852)
Repayment of long-term debt - related party (34,000) -
Debt issuance costs - (3,455)
Increase (decrease) in cash overdrafts 20,748 (2,017)
Net distribution paid to partners - (258)
Other financing activities - (403)
-------- --------
Net cash used for financing activities (46,111) (29,330)
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,633 263
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD 1,573 3,192
-------- --------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 3,206 $ 3,455
======== ========
</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 September 30, 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 $351.1 million of
principal was outstanding as of September 30, 2000, provided 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>
1. ORGANIZATION AND BASIS OF PRESENTATION (continued)
These transactions were conditioned upon bankruptcy court approval of a
settlement agreement between The Bank of Nova Scotia and the trustee for the
Trace bankruptcy, which was entered on October 18, 2000. On November 2, 2000,
the transactions contemplated by the Exchange Agreement and the settlement
agreement were consummated. As a result, Trace no longer owns any shares of
Foamex International's common stock and The Bank of Nova Scotia owns
approximately 24% of Foamex International's outstanding voting common stock.
Accounting Changes - Revenue Recognition and Presentation
The Securities and Exchange Commission (the "SEC") issued Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB No. 101").
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 a
comprehensive review of the conditions and criteria necessary for revenue
recognition. Foamex L.P.'s current accounting 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.
Additionally, Foamex L.P. has internal policies and an on-going audit program to
support the accounting policy. Based on the review completed to date of the SAB
No. 101 requirements, no significant impact is anticipated on the revenue
recognition practices of Foamex L.P.
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. Foamex L.P. has determined,
based on the materiality of the amounts involved, that previously reported
revenue amounts do not require any reclassifications. All other shipping and
handling costs associated with product shipments are reported in cost of goods
sold.
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 Foamex L.P.
Foamex L.P. continues to evaluate the impact that the adoption of these SFAS's
will have on its results of operations or financial position.
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>
3. COMPREHENSIVE INCOME
The components of comprehensive income are listed below.
<TABLE>
<CAPTION>
Quarterly Periods Ended Year to Date Periods Ended
September 30, September 30, September 30, September 30,
2000 1999 2000 1999
------------- ------------- ------------- -------------
(thousands)
<S> <C> <C> <C> <C>
Net income $3,042 $5,395 $13,057 $12,810
Foreign currency translation adjustments (387) (464) (552) 347
------ ------ ------- -------
Total comprehensive income $2,655 $4,931 $12,505 $13,157
====== ====== ======= =======
</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 as a
result of a VPF(SM) 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.
During the third quarter of 2000, restructuring and other charges of
approximately $2.8 million were recorded. The provision was primarily for the
consolidation of pourline operations and certain product line rationalizations
resulting from the closure of facilities in Indiana and Arkansas. Components of
the provision included $2.0 million for fixed asset writedowns, $0.8 million for
facility closure costs and $0.2 million in work force reduction costs for 72
employees. The third quarter of 2000 provision also included a favorable
adjustment of $0.2 million related to changes in estimates to previously
recognized restructuring plans.
Foamex L.P. paid $4.5 million during the first three quarters of 2000 for
the various restructuring plans recorded as of December 31, 1999 and recorded
during the first and third quarters of 2000. As of September 30, 2000, the
components of the net accrued restructuring and plant consolidation balance
included $7.0 million for plant closures and leases and $2.4 million for
personnel reductions. Included in noncurrent assets was $0.3 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. Employees impacted by the
third quarter 2000 work force reduction are anticipated to be terminated by the
end of 2000. Approximately $1.1 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.
September 30, December 31,
2000 1999
------------- ------------
(thousands)
Raw materials and supplies $61,999 $65,211
Work-in-process 12,623 11,447
Finished goods 20,106 17,154
------- -------
Total $94,728 $93,812
======= =======
8
<PAGE>
6. LONG-TERM DEBT
The components of long-term debt are listed below.
<TABLE>
<CAPTION>
September 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) 101,654 113,685
9 7/8% senior subordinated notes due 2007 150,000 150,000
13 1/2% senior subordinated notes due 2005 (includes
$8,756 and $10,100 of unamortized debt premium) 106,756 108,100
Industrial revenue bonds 7,000 7,000
Subordinated note payable (net of unamortized
debt discount of $84 and $232) 2,254 4,444
Other 4,853 7,076
-------- --------
621,983 654,410
Less current portion 7,684 7,866
-------- --------
Long-term debt-unrelated parties $614,299 $646,544
======== ========
The components of related party long-term debt are listed below.
<S> <C> <C>
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 and an additional 25
basis point adjustment became effective during the third quarter of 2000.
At September 30, 2000, the calculated leverage ratio was 4.88 to 1.00.
Consequently, the cumulative adjustment of 75 basis points will be reset to
zero during the fourth quarter.
(b) At September 30, 2000, the revolving credit facility commitment was $180.0
million, the weighted average interest rate was 10.75%, available
borrowings totaled $66.9 million and letters of credit outstanding totaled
$11.4 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. On October 2, 2000, the revolving
credit facility commitment was $177.5 million with the third quarter 2000
reduction applied on October 2nd because the last day of the third quarter
of 2000 was a weekend.
(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>
9
<PAGE>
6. LONG-TERM DEBT (continued)
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 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 September 30, 2000, 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
September 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 September 30, 2000
<S> <C> <C> <C> <C> <C> <C>
Net sales $134,456 $41,438 $76,242 $27,029 $7,206 $286,371
Income (loss) from operations 15,543 (1,429) 4,065 7,718 (4,024) 21,873
Depreciation and amortization 4,112 1,462 1,198 657 1,378 8,807
Quarterly period ended September 30, 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
Depreciation and amortization 4,141 1,346 1,315 705 770 8,277
Year to date period ended September 30, 2000
Net sales $392,022 $125,139 $265,981 $80,659 $25,778 $889,579
Income (loss) from operations 43,655 (8,080) 18,818 22,412 (9,173) 67,632
Depreciation and amortization 11,807 4,472 3,595 1,947 2,831 24,652
Year to date period ended September 30, 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
</TABLE>
10
<PAGE>
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 September 30, 1999, Foamex L.P. paid $0.5 million and $1.6 million
of interest on the Foamex/GFI Note, respectively.
Other
Foamex L.P. sold during the quarters ended September 30, 2000 and 1999,
approximately $41.4 million and $46.0 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 $0.1 million and $0.4
million of administrative services to Foamex Carpet during the quarters ended
September 30, 2000 and 1999, respectively.
Foamex L.P. sold during the first three quarters of 2000 and 1999,
approximately $125.1 million and $136.0 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 $0.3 million and $1.7
million of administrative services to Foamex Carpet during the first three
quarters 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.
Shareholders 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. Shareholders 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
11
<PAGE>
9. COMMITMENTS AND CONTINGENCIES (continued)
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., 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. On August 23, 2000, Foamex International and the
plaintiffs in the Federal Action enetered into definitive documentation
reflecting such settlement, which as noted below, remains subject to court
approval. Payment to class members in the Federal Action, along with plaintiffs'
lawyers' fees in the Federal Action and the Delaware Action, will be paid
directly by Foamex International's insurance carrier on behalf of Foamex
International.
Under the terms of the agreement in principle 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. Foamex International announced on September
28, 2000, that a new director, Raymond E. Mabus, was elected to the Board of
Directors of Foamex International. The settlement of the Delaware Action is
subject to the negotiation of a final documentation, which is in process. In the
course of these negotiations in November 2000, additional issues were raised by
plaintiffs in the Delaware Action, and there is no assurance that the parties to
the agreement in principle in the Delaware Action will reach agreement on the
final terms of a settlement.
The settlements of both the Delaware Action (assuming a definitive
settlement agreement is reached with plaintiffs) and of the Federal Action are
subject to court approval, which, if obtained, will resolve all outstanding
shareholder litigation against Foamex International and its current and former
directors and officers. On September 22, 2000, the court in the Federal Action
ordered preliminary approval of the settlement of the Federal Action, and has
scheduled a fairness hearing on such settlement for January 11, 2001. The
settlements involve no admissions or findings of liability or wrongdoing by
Foamex International or any individuals.
Litigation - Breast Implants
As of November 3, 2000, Foamex L.P. and Trace were two of multiple
defendants in actions filed on behalf of approximately 2,922 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
12
<PAGE>
9. COMMITMENTS AND CONTINGENCIES (continued)
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.
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, 2000, Foamex L.P. had accruals of
approximately $3.1 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 $2.1 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 required 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.
13
<PAGE>
9. COMMITMENTS AND CONTINGENCIES (continued)
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 significant.
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 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
significant.
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 September 30, 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 $351.1 million of principal was outstanding as of September
30, 2000, provided 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 were conditioned upon bankruptcy court approval of a
settlement agreement between The Bank of Nova Scotia and the trustee for the
Trace bankruptcy, which was entered on October 18, 2000. On November 2, 2000,
the transactions contemplated by the Exchange Agreement and the settlement
agreement were consummated. As a result, Trace no longer owns any shares of
Foamex International's common stock and The Bank of Nova Scotia owns
approximately 24% of Foamex International's outstanding voting common stock.
Accounting Changes - Revenue Recognition and Presentation
The SEC issued SAB No. 101, which 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 a comprehensive review of the conditions and criteria
necessary for revenue recognition. Foamex L.P.'s current accounting 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
15
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
customer. Additionally, Foamex L.P. has internal policies and an on-going audit
program to support the accounting policy. Based on the review completed to date
of the SAB No. 101 requirements, no significant impact is anticipated on the
revenue recognition practices of Foamex L.P.
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. Foamex L.P. has determined,
based on the materiality of the amounts involved, that previously reported
revenue amounts do not require any reclassifications. All other shipping and
handling costs associated with product shipments are reported in cost of goods
sold.
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 Foamex L.P.
Foamex L.P. continues to evaluate the impact that the adoption of these SFAS's
will have on its results of operations or financial position.
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 September 30, 2000
<S> <C> <C> <C> <C> <C> <C>
Net sales $134,456 $41,438 $76,242 $27,029 $7,206 $286,371
Income (loss) from operations 15,543 (1,429) 4,065 7,718 (4,024) 21,873
Depreciation and amortization 4,112 1,462 1,198 657 1,378 8,807
Income (loss) from operations as
a percentage of net sales 11.6% (3.4)% 5.3% 28.6% n.m* 7.6%
Quarterly period ended September 30, 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
Depreciation and amortization 4,141 1,346 1,315 705 770 8,277
Income (loss) from operations as
a percentage of net sales 11.5% (2.3)% 8.4% 27.0% n.m.* 7.6%
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 September 30, 2000
Net sales $392,022 $125,139 $265,981 $80,659 $25,778 $889,579
Income (loss) from operations 43,655 (8,080) 18,818 22,412 (9,173) 67,632
Depreciation and amortization 11,807 4,472 3,595 1,947 2,831 24,652
Income (loss) from operations as
a percentage of net sales 11.1% (6.5)% 7.1% 27.8% n.m* 7.6%
Year to date period ended September 30, 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
Income (loss) from operations as
a percentage of net sales 10.4% (1.1)% 7.5% 25.6% n.m.* 7.1%
* not meaningful
</TABLE>
RESULTS OF OPERATIONS FOR THE QUARTER ENDED SEPTEMBER 30, 2000 COMPARED TO THE
QUARTER ENDED SEPTEMBER 30, 1999
Income from Operations
Net sales for the third quarter of 2000 decreased 5.4% to $286.4 million
from $302.8 million in the third quarter of 1999. As discussed on a segment
basis below, lower sales were recorded in all segments, except for Technical
Products.
Income from operations for the third quarter of 2000 was $21.9 million,
which represented a 5.0% decrease from the $23.0 million recorded during the
comparable 1999 period. Results included restructuring and other charges of $2.8
million in 2000 and $3.0 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 $24.7 million in the third quarter of 2000 compared to $26.0 million in the
1999 third quarter. On this basis, income from operations was 8.6% of net sales
in 2000 and in 1999.
The sales decline coupled with higher raw material costs resulted in the
income from operations decrease. Higher oil prices continued to drive raw
material cost increases and these increased costs were not fully recovered
through selling price increases, improved operating efficiencies and lower
selling, general and administrative expenses, discussed below. The gross profit
margin was 13.5% in the third quarter of 2000 compared to 13.6% in same quarter
of 1999.
Selling, general and administrative expenses were down 7.5% in the third
quarter of 2000 compared to the third quarter of 1999. Contributing to the
decrease were lower selling expenses and certain executive compensation
expenses. Expenses in 1999 also included certain non-recurring professional
fees.
Foam Products
Foam Products net sales for the third quarter of 2000 decreased 3.3% to
$134.5 million from $139.1 million in the third quarter of 1999. The decrease
was primarily attributable to 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. Partially offsetting the sales declines were selling price increases that
became effective during the second quarter of 2000 and an increase in demand for
bedding products. The combination of lower sales and higher raw material costs
resulted in a 3.2% decrease in income from operations, from $16.1 million in the
third quarter of 1999 to $15.5 million in the third quarter of 2000. Income from
operations was 11.6% of net sales in 2000, compared to 11.5% 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 third quarter of 2000 decreased
10.0% to $41.4 million from $46.0 million in the third quarter of 1999.
Competitive pressures continued in the third quarter of 2000, which resulted in
lower sales volumes. The sales decline translated to a $1.4 million loss from
operations compared to a $1.1 million loss in the third quarter of 1999.
Automotive Products
Automotive Products net sales for the third quarter of 2000 decreased 8.5%
to $76.2 million from $83.4 million in the third quarter of 1999. The decline
reflected the termination of certain lamination programs that were not fully
replaced. Income from operations of $4.1 million in the third quarter of 2000
was down 42.1% compared to $7.0 million in the comparable 1999 period. The
combination of lower sales and higher raw material costs resulted in the
decrease. Income from operations represented 5.3% of net sales in 2000 and 8.4%
in 1999.
Technical Products
Favorable market conditions continued to drive sales gains in Technical
Products with net sales for the third quarter of 2000 up 11.1% to $27.0 million
from $24.3 million in the third quarter of 1999. Income from operations
increased 17.4% to $7.7 million in the third quarter of 2000, up from $6.6
million in the third quarter of 1999. Income from operations represented 28.6%
of net sales in 2000 compared to 27.0% in 1999.
Other
Other primarily consists of certain foreign manufacturing operations,
corporate expenses not allocated to business segments and restructuring and
other charges. The decrease in net sales associated with this segment primarily
resulted from lower net sales from Foamex L.P.'s Mexico City operation. The loss
from operations was $4.0 million in the third quarter of 2000 and included a
provision of $2.8 million for restructuring and other charges, discussed below.
The loss from operations of $5.6 million in the third quarter of 1999 included
$3.0 million of restructuring and other charges.
During the third quarter of 2000, restructuring and other charges of
approximately $2.8 million were recorded. The provision was primarily for the
consolidation of pourline operations and certain product line rationalizations
resulting from the closure of facilities in Indiana and Arkansas. Components of
the provision included $2.0 million for fixed asset writedowns, $0.8 million for
facility closure costs and $0.2 million in work force reduction costs for 72
employees. The third quarter of 2000 provision also included a favorable
adjustment of $0.2 million related to changes in estimates to previously
recognized restructuring plans.
Interest and Debt Issuance Expense
Interest and debt issuance expense totaled $17.8 million in the third
quarter of 2000, which represented a 3.3% increase from the 1999 third quarter
expense of $17.2 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 a
certain provision of the Foamex L.P. credit facility that requires an
incremental interest rate margin, as discussed in Note 6 to the condensed
consolidated financial statements. During the third quarter of 2000, the
interest rate margin was increased another 25 basis points for a cumulative
adjustment of 75 basis points. Based on the debt leverage ratio of Foamex L.P.
at the end of the third quarter, the cumulative adjustment of 75 basis points
will be reset to zero during the fourth quarter.
Income from Equity Interest in Joint Venture
Income from an equity interest in an Asian joint venture totaled $0.3
million for the third quarter of 2000.
18
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Other Income (Expense), Net
Other expense, net recorded for the third quarter of 2000 totaled $0.5
million and primarily reflected 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 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 and a higher effective tax rate on foreign source income.
Net Income
Net income for the third quarter of 2000 was down 43.6% to $3.0 million
compared to $5.4 million in the third quarter of 1999.
RESULTS OF OPERATIONS FOR THE YEAR TO DATE PERIOD ENDED SEPTEMBER 30, 2000
COMPARED TO THE YEAR TO DATE PERIOD ENDED SEPTEMBER 30, 1999
Income from Operations
Net sales for the first three quarters of 2000 decreased 0.6% to $889.6
million from $894.9 million for the first three quarters of 1999. The decline in
sales primarily reflected lower sales in the Foam Products and Carpet Cushion
Products segments. The decrease was partially offset by higher sales in the
Automotive Products and Technical Products segments and higher sales from
certain Foamex L.P. foreign operations reported in the "Other" segment.
Income from operations for the first three quarters of 2000 was $67.6
million, 5.8% higher than the $63.9 million recorded during the comparable
period in 1999. Results included restructuring and other charges of $5.6 million
in 2000 and $10.0 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 $73.3 million
for the first three quarters of 2000 and $73.9 million in the first three
quarters of 1999. On this basis, income from operations was 8.2% of net sales in
2000 compared to 8.3% of net sales in 1999.
During the third quarter of 2000, lower sales and higher raw material cost
resulted in lower margins and results. Consequently, improved results during the
first half of 2000 were offset. The increase in oil prices continued to drive
raw material costs higher and these increased costs were not fully recovered
through selling price increases, improved operating efficiencies and lower
selling, general and administrative expenses, discussed below. The gross profit
margin of 13.0% for the first three quarters of 2000 compared to 13.1% in the
comparable 1999 period.
Selling, general and administrative expenses were down 1.8% in the first
three quarters of 2000 compared to the same period in 1999 primarily due to cost
savings initiatives implemented during 1999 and lower selling expenses.
Partially offsetting these favorable items were increases to the allowance for
uncollectible accounts receivables.
Foam Products
Foam Products net sales for the first three quarters of 2000 decreased 2.8%
to $392.0 million from $403.4 million in the first three quarters 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 in the first three quarters of 2000
was up 4.1% to $43.7 million compared to $41.9 million in the first three
quarters of 1999. The improvement was primarily generated during the first half
of the year. As
19
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
discussed above, raw material costs continued to increase during the third
quarter and previously announced selling price increases and operating
efficiencies did not fully recover the increased costs. As a percentage of net
sales, income from operations was 11.1% of net sales in 2000 up from 10.4% in
1999. Given the current cost structure, reduced profit margins are anticipated
to continue in the short term. Improved results for Foam Products will largely
depend on the ability to recover higher raw material costs through selling price
increases, combined with a continued focus on operating efficiencies.
Carpet Cushion Products
Carpet Cushion Products net sales for the first three quarters of 2000
decreased 8.0% to $125.1 million from $136.0 million in the first three quarters
of 1999. The sales decline primarily reflected competitive pressures that
resulted in lower sales volumes. As a result, a loss from operations of $8.1
million was recorded in the first three quarters of 2000 compared to a loss from
operations of $1.5 million in the comparable 1999 period. Any significant
improvement in results for Carpet Cushion Products is largely dependent on
increased sales volume combined with a continued focus on operating
efficiencies.
Automotive Products
Automotive Products net sales for the first three quarters of 2000
increased 1.2% to $266.0 million from $262.9 million in the first three quarters
of 1999. The increase primarily reflected sales gains for lamination products
during the first half of the year. Income from operations decreased 5.2% to
$18.8 million in the first three quarters of 2000, from $19.8 million in the
comparable 1999 period. The decrease was largely due to lower third quarter
results, discussed above. Results in 2000 benefited from the favorable impact of
a selling price adjustment. Lower sales levels experienced by Automotive
Products in the third quarter of 2000 are anticipated to continue in the short
term. Income from operations represented 7.1% of net sales in 2000 and 7.5% of
net sales in 1999.
Technical Products
Technical Products net sales for the first three quarters of 2000 increased
15.9% to $80.7 million from $69.6 million in the first three quarters of 1999.
Income from operations increased 25.8% to $22.4 million in the first three
quarters of 2000, up from $17.8 million in the comparable 1999 period. Income
from operations represented 27.8% of net sales in 2000 compared to 25.6% 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.
Improved results for the Mexico City operation is primarily dependent on a
continued focus on a higher-value product mix and increased shipments. The loss
from operations of $9.2 million in the first three quarters of 2000 included a
provision of $5.6 million for restructuring and other charges, discussed below.
The loss from operations of $14.1 million in the first three quarters of 1999
included $10.0 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
for work force reduction costs that included 27 employees, including certain
executives, and employees impacted by the closure of certain operations as a
result of a VPF(SM) 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.
During the third quarter of 2000, restructuring and other charges of
approximately $2.8 million were recorded. The provision was primarily for the
consolidation of pourline operations and certain product line rationalizations
resulting from the closure of facilities in Indiana and Arkansas. Components of
the provision included $2.0 million for fixed asset writedowns, $0.8 million for
facility closure costs and $0.2 million in work force reduction costs for
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
72 employees. The third quarter of 2000 provision also included a favorable
adjustment of $0.2 million related to changes in estimates to previously
recognized restructuring plans.
Foamex L.P. paid $4.5 million during the first three quarters of 2000 for
the various restructuring plans recorded as of December 31, 1999 and recorded
during the first and third quarters of 2000. As of September 30, 2000, the
components of the net accrued restructuring and plant consolidation balance
included $7.0 million for plant closures and leases and $2.4 million for
personnel reductions. Included in noncurrent assets was $0.3 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. Employees impacted by the
third quarter 2000 work force reduction are anticipated to be terminated by the
end of 2000. Approximately $1.1 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 $52.1 million in the first three
quarters of 2000, which represented a 5.3% increase from the comparable 1999
expense of $49.5 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 a certain provision
of the Foamex L.P. credit facility that requires an incremental interest rate
margin, as discussed in Note 6 to the condensed consolidated financial
statements. The additional interest rate margin was 25 basis points in the first
quarter of 2000. During the second quarter of 2000, the interest rate margin was
increased 25 basis points to a cumulative adjustment of 50 basis points. During
the third quarter of 2000, an additional 25 basis point adjustment became
effective that resulted in a cumulative adjustment of 75 basis points. Based on
the debt leverage ratio of Foamex L.P. at the end of the third quarter, the
cumulative adjustment of 75 basis points will be reset to zero during the fourth
quarter.
Income from Equity Interest in Joint Venture
Income from an equity interest in an Asian joint venture totaled $1.0
million for the first three quarters of 2000.
Other Income (Expense), Net
Other expense, net recorded for the first three quarters of 2000 totaled
$0.9 million and primarily 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 and a higher effective tax rate on foreign source income.
Net Income
Net income for the first three quarters of 2000 was up 1.9% to $13.1
million compared to $12.8 million in the first three quarters 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
21
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
meet its liquidity requirements. All principal and interest payments were made
as scheduled in the first three quarters 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 $3.2 million at the end of the third
quarter of 2000 compared to $1.6 million at the end of 1999. Working capital at
the end of the third quarter of 2000 was $61.3 million and the current ratio was
1.3 to 1 compared to working capital at the end of 1999 of $110.5 million and a
current ratio of 1.7 to 1. The decline in working capital primarily reflected an
increase in current liabilities, including an increase of $34.4 million in
accounts payable and an increase in cash overdrafts of $20.7 million. The
increase in accrued employee compensation benefits primarily reflected an
increase in the amount of contributions required for a defined benefit pension
plan. A corresponding decrease was recorded to long-term other liabilities.
Partially offsetting the impact of higher current liabilities was an increase of
$19.0 million in accounts receivable.
Total debt at the end of the third quarter of 2000 was $622.0 million, down
$68.1 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 September 30, 2000, there were $101.7 million of revolving credit
borrowings, at a weighted average interest rate of 10.75%, under the Foamex L.P.
credit facility with $66.9 million available for additional borrowings and $11.4
million of letters of credit outstanding. There were no borrowings by Foamex
Canada Inc. ("Foamex Canada") as of September 30, 2000 under Foamex Canada's
revolving credit agreement with unused availability of approximately $5.4
million. As of September 30, 2000, Foamex L.P. was in compliance with the
financial covenants of its loan agreements.
Cash Flow from Operating Activities
Cash provided by operating activities in the first three quarters of 2000
was $65.6 million compared to $40.9 million for the first three quarters of
1999. The cash flow increase was primarily due to a net decrease in working
capital, as discussed above.
Cash Flow from Investing Activities
Cash used for investing activities totaled $17.8 million for the first
three quarters of 2000. Cash requirements included capital expenditures of $18.5
million, an increase of $1.8 million to the revolving loan to Foamex
International, partially offset by $3.6 million of proceeds from the sale of
assets. In the first three quarters of 1999, cash flow used for investing
activities totaled $11.3 million and included $14.4 million of 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 $46.1 million for the first three
quarters of 2000 compared to cash used of $29.3 million in the first three
quarters 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, partially offset by a
$20.7 million increase in cash overdrafts. Cash used for financing activities in
the first three quarters of 1999 was primarily due to net debt repayments and
debt issuance costs.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
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, 2000 was $3.1 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 September 30, 2000, indebtedness
with variable interest rates totaled $362.7 million. On an annualized basis, if
the interest rates on these debt instruments increased by 1.0%, interest expense
would increase by approximately $3.6 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
4.14.2 - Certificate of Designations of Series B Preferred Stock of Foamex
International was filed as an exhibit to the Form 8-K, dated November
2, 2000, and is incorporated herein by reference.
27 - Financial Data Schedule for the year to date period ended September
30, 2000.
(b) Foamex L.P. filed the following Current Reports on Form 8-K for the quarter
ended September 30, 2000:
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.
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.
Subsequent to quarter end, a report dated November 2, 2000, was filed
for Item 5. Other Event, concerning the consummation of an agreement
with The Bank of Nova Scotia relating to the shares of Foamex
International's voting common stock pledged by Trace to The Bank of
Nova Scotia as a result of the Trace bankruptcy filing.
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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: November 10, 2000 By: /s/ George L. Karpinski
------------------------------
George L. Karpinski
Vice President
FOAMEX CAPITAL CORPORATION
Date: November 10, 2000 By: /s/ George L. Karpinski
------------------------------
George L. Karpinski
Vice President
26
