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 March 31, 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 executive offices) (Zip Code)
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 May 10, 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) - Quarters Ended
March 31, 2000 and March 31, 1999 3
Condensed Consolidated Balance Sheets (unaudited) as of March 31, 2000
and December 31, 1999 4
Condensed Consolidated Statements of Cash Flows (unaudited) - Quarters Ended
March 31, 2000 and March 31, 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. 19
Part II. Other Information
Item 1. Legal Proceedings. 20
Item 5. Other Information. 20
Item 6. Exhibits and Reports on Form 8-K. 20
Signatures 21
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
FOAMEX L.P. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
<TABLE>
<CAPTION>
Quarters Ended
March 31, March 31,
2000 1999
--------- ---------
(thousands)
<S> <C> <C>
NET SALES $ 305,520 $ 299,877
COST OF GOODS SOLD 268,611 262,416
--------- ---------
GROSS PROFIT 36,909 37,461
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 14,648 14,333
RESTRUCTURING AND OTHER CHARGES 2,821 3,357
--------- ---------
INCOME FROM OPERATIONS 19,440 19,771
INTEREST AND DEBT ISSUANCE EXPENSE 17,091 16,139
INCOME FROM EQUITY INTEREST IN JOINT VENTURE 292 --
OTHER EXPENSE, NET (287) (439)
--------- ---------
INCOME BEFORE PROVISION FOR INCOME TAXES 2,354 3,193
PROVISION FOR INCOME TAXES 217 585
--------- ---------
NET INCOME $ 2,137 $ 2,608
========= =========
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
3
<PAGE>
FOAMEX L.P. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
ASSETS 2000 1999
CURRENT ASSETS (thousands)
<S> <C> <C>
Cash and cash equivalents $ 3,340 $ 1,573
Accounts receivable, net of allowances of $6,256 in 2000
and $5,310 in 1999 157,507 128,929
Accounts receivable from related parties 16,653 16,717
Inventories 90,767 93,812
Other current assets 17,560 21,541
--------- ---------
Total current assets 285,827 262,572
--------- ---------
Property, plant and equipment 368,485 366,035
Less accumulated depreciation (159,664) (154,720)
--------- ---------
NET PROPERTY, PLANT AND EQUIPMENT 208,821 211,315
COST IN EXCESS OF ASSETS ACQUIRED, net of
accumulated amortization of $17,035 in 2000 and $15,804 in 1999 182,215 183,481
DEBT ISSUANCE COSTS, net of accumulated amortization
of $6,481 in 2000 and $5,787 in 1999 13,729 14,423
OTHER ASSETS 27,431 26,704
--------- ---------
TOTAL ASSETS $ 718,023 $ 698,495
========= =========
LIABILITIES AND PARTNERS' DEFICIT
CURRENT LIABILITIES
Short-term borrowings $ 2,226 $ 1,627
Current portion of long-term debt 7,747 7,866
Accounts payable 104,730 82,229
Accrued employee compensation and benefits 16,049 16,341
Accrued interest 7,639 9,457
Accrued customer rebates 6,780 9,652
Other accrued liabilities 22,557 24,859
--------- ---------
Total current liabilities 167,728 152,031
LONG-TERM DEBT 681,539 646,544
LONG-TERM DEBT - RELATED PARTY -- 34,000
OTHER LIABILITIES 31,664 30,511
--------- ---------
Total liabilities 880,931 863,086
--------- ---------
COMMITMENTS AND CONTINGENCIES
PARTNERS' DEFICIT
General partner (141,134) (143,271)
Limited partner -- --
Accumulated other comprehensive income (loss) (8,617) (8,923)
Notes and advances receivable from partner (3,936) (3,176)
Notes receivable from related party (9,221) (9,221)
--------- ---------
Total partners' deficit (162,908) (164,591)
--------- ---------
TOTAL LIABILITIES AND PARTNERS' DEFICIT $ 718,023 $ 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>
Quarters Ended
March 31, March 31,
2000 1999
(thousands)
OPERATING ACTIVITIES
<S> <C> <C>
Net income $ 2,137 $ 2,608
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 8,000 7,669
Amortization of debt issuance costs, debt discount,
debt premium and deferred swap adjustment and gain 79 (101)
Other operating activities 1,067 (96)
Changes in operating assets and liabilities, net (4,112) 992
-------- --------
Net cash provided by operating activities 7,171 11,072
-------- --------
INVESTING ACTIVITIES
Capital expenditures (5,007) (5,743)
Repayments of notes from Foamex International -- 2,490
Revolving loan with Foamex International (760) --
-------- --------
Net cash used for investing activities (5,767) (3,253)
-------- --------
FINANCING ACTIVITIES
Net proceeds from short-term borrowings 599 536
Net proceeds from (repayments of) revolving loans 36,708 (5,237)
Repayments of long-term debt (1,450) (1,212)
Repayment of long- term debt - related party (34,000) --
Debt issuance costs -- (1,154)
Increase (decrease) in cash overdraft (1,494) 963
-------- --------
Net cash provided by (used for) financing activities 363 (6,104)
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,767 1,715
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD 1,573 3,192
-------- --------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 3,340 $ 4,907
======== ========
</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 May 10, 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 $413.8 million of debt was
outstanding as of March 31, 2000, provide 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 the issuers 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
Trace's creditors to foreclose on and take ownership of Foamex International's
common stock owned by Trace, or otherwise authorizes a sale or transfer of these
shares, 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.
Management believes that it is unlikely that a "change of control" will
occur as a result of Trace's bankruptcy proceedings. However, 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. or its subsidiaries 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. The accompanying
financial statements were prepared on a going-concern basis and do not include
any adjustments that might result from the outcome of the Trace bankruptcy
filing.
2. 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 and is discussing with JP
Morgan the possibility of an additional engagement.
6
<PAGE>
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
3. COMPREHENSIVE INCOME
The components of comprehensive income are listed below.
Quarters Ended
March 31, March 31,
2000 1999
(thousands)
Net income $2,137 $2,608
Foreign currency translation adjustments 306 412
-------- --------
Total comprehensive income $2,443 $3,020
====== ======
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 increase the VPF(SM) capacity in North Carolina. Additionally, facility
closure costs totaled $0.3 million and related equipment writedowns were $0.4
million. The first quarter 2000 provision included $0.4 million related to
changes in estimates to prior year plans.
Foamex L.P. paid $1.3 million during the first quarter of 2000 for the
various restructuring plans recorded as of December 31, 1999 and during the
first quarter of 2000. As of March 31, 2000, the components of the net accrued
restructuring and plant consolidation balance included, $8.2 million for plant
closures and leases and $3.8 million for personnel reductions. Included in
current assets was $1.5 million and in noncurrent assets was $3.8 million of
estimated proceeds for facility actively being marketed for sale. Substantially
all employees impacted by the first quarter 2000 work force reduction will be
terminated by the end of the second quarter 2000. Approximately $3.7 million is
expected to be spent during the remainder of 2000.
5. INVENTORIES
The components of inventory are listed below.
March 31, December 31,
2000 1999
-------- --------
(thousands)
Raw materials and supplies $58,156 $65,211
Work-in-process 11,465 11,447
Finished goods 21,146 17,154
-------- --------
Total $90,767 $93,812
======= =======
6. LONG-TERM DEBT
The components of long-term debt are listed below.
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
------------- -----------
Foamex L.P. Credit Facility (thousands)
<S> <C> <C>
Term Loan B (a) (d) $ 81,664 $ 81,874
Term Loan C (a) (d) 74,240 74,431
Term Loan D (a) (d) 107,525 107,800
Revolving credit facility (a) (b) (c) (d) 150,394 113,685
9 7/8% Senior subordinated notes due 2007 150,000 150,000
13 1/2% Senior subordinated notes due 2005 (includes
$9,652 and $10,100 of unamortized debt premium) 107,652 108,100
Industrial revenue bonds 7,000 7,000
7
<PAGE>
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
6. LONG-TERM DEBT (continued)
March 31, December 31,
2000 1999
------------- -----------
(thousands)
Subordinated note payable (net of unamortized
debt discount of $164 and $232 4,512 4,444
Other 6,299 7,076
---------- -----------
689,286 654,410
Less current portion 7,747 7,866
----------- -----------
Long-term debt-unrelated parties $681,539 $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. Accordingly, an additional 25 basis point
adjustment is applicable in the second quarter of 2000.
(b) At March 31, 2000, the revolving credit facility commitment was $182.5
million, the weighted average interest rate was 9.95%, available
borrowings totaled $19.6 million and letters of credit outstanding
totaled $12.5 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 prepay
portions of Term B, C and D loans. The prepayment amount determined
for 1999 was $13.3 million. Subsequent to March 31, 2000, the payment
was made as scheduled and was financed through borrowings under the
Foamex L.P. revolving credit facility.
</FN>
</TABLE>
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.
8
<PAGE>
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
7. SEGMENT RESULTS (continued)
Segment results are presented below.
<TABLE>
<CAPTION>
Carpet
Foam Cushion Automotive Technical
Products Products Products Products Other Total
(thousands)
Quarter ended March 31, 2000
<S> <C> <C> <C> <C> <C> <C>
Net sales $128,558 $41,240 $97,311 $27,454 $10,957 $305,520
Income (loss) from operations 12,566 (4,388) 7,308 7,632 (3,678) 19,440
Depreciation and amortization 3,884 1,527 1,205 644 740 8,000
Quarter ended March 31, 1999
Net sales $139,379 $43,303 $88,771 $22,248 $6,176 $299,877
Income (loss) from operations 12,921 (371) 6,792 5,035 (4,606) 19,771
Depreciation and amortization 4,147 1,169 1,235 636 482 7,669
</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. In the first quarter of 1999, Foamex L.P. paid $0.5
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.
Other
Foamex L.P. sold during the quarters ended March 31, 2000 and 1999,
approximately $41.2 million and $43.3 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 $0.6
million of administrative services to Foamex Carpet during the quarters ended
March 31, 2000 and 1999, respectively.
9. COMMITMENTS AND CONTINGENCIES
Litigation - Foamex International Shareholders
During 1999, Foamex International received several communications
addressed to its Board of Directors from certain of Foamex International's
stockholders regarding aspects of the relationship between Trace and Foamex
International. Such stockholders questioned the propriety of certain
relationships and related transactions between Trace and Foamex International,
which previously had been disclosed in Foamex International's periodic filings.
On June 14, 1999, Foamex International received a draft complaint from counsel
of certain stockholders naming Foamex International and certain current and
former directors, which included allegations similar to those in the Second
Amended Complaint, as defined below. Foamex International was advised by such
counsel that such stockholders intended to file an action soon thereafter. On
August 13, 1999, two stockholders filed an action on behalf of an alleged class
of Foamex International's shareholders, entitled Watchung Road Associates, L.P.
et al v. Foamex International Inc., et al., Civil Action No. 17370 (the
"Watchung Complaint"), in the Court of Chancery of the State of Delaware, New
Castle County. The suit names Foamex International, Mr. Marshall S. Cogan, Mr.
Etienne Davignon, Mr. John Gutfreund, Mr. Robert Hay, Dr. Stuart Hershon, Mr.
John G. Johnson, Jr. and Mr. John Tunney as defendants. The Watchung Complaint
alleges that the individual defendants breached their fiduciary duties by
agreeing to the potential buyout of Foamex International by Sorgenti Chemical
Industries, LLC and Liberty Partners Holdings 20, LLC ("Sorgenti Transaction").
9
<PAGE>
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
9. COMMITMENTS AND CONTINGENCIES (continued)
The Watchung Complaint alleges that the Sorgenti Transaction's buy-out
price of $11.50 per outstanding share is inadequate and fails to take into
consideration claims Foamex International allegedly has as a result of the
supposed wrongful diversions of company assets in Foamex International's
dealings with Trace and its affiliates. The Watchung Complaint also alleges that
the directors breached their fiduciary duties by agreeing to the proposed
Sorgenti Transaction without conducting an auction or active market check. The
suit alleges that the board placed Mr. Cogan's interest ahead of those of Foamex
International's stockholders, and alleges that a critical condition of the
Sorgenti Transaction is a consulting agreement for Mr. Cogan. The Watchung suit
seeks to enjoin the Sorgenti Transaction, seeks rescission or damages if the
Sorgenti Transaction is consummated, and seeks an accounting from the directors
for plaintiffs alleged losses. The Sorgenti Transaction was not consummated.
Defendants have moved to consolidate this action with In re Foamex International
Inc. Shareholders Litigation, discussed below, and to dismiss the complaint.
Plaintiffs have agreed to consolidate.
On April 26, 1999, a putative securities class action entitled Molitor v.
Foamex International Inc., et al., 99 Civ. 3004, was filed in the United States
District court for the Southern District of New York naming as defendants Foamex
International, Trace and certain officers and directors of Foamex International
on behalf of stockholders who bought shares of Foamex International's common
stock during the period from May 7, 1998 through and including April 16, 1999.
The lawsuit alleges that the defendants violated Section 10(b) of the Securities
Exchange Act of 1934 and Rule 10b-5 by misrepresenting and/or omitting material
information about Foamex International's financial situation and operations,
with the result of artificially inflating the price of Foamex International's
stock. The lawsuit also alleges that Trace and Marshall S. Cogan violated
Section 20(a) of the Securities Exchange Act of 1934 as controlling persons of
Foamex International. The complaint seeks class certification, a declaration
that defendants violated the federal securities laws, an award of money damages,
and costs and attorneys', accountants' and experts' fees. On May 18, 1999, a
similar action entitled Thomas W. Riley v. Foamex International Inc., et al., 99
Civ. 3653 was filed in the same court. The two actions have been consolidated,
and the Consolidated Amended Class Action Complaint setting forth the
allegations of the two earlier complaints, was filed on December 6, 1999. The
defendants filed motions to dismiss the consolidated complaint on February 4,
2000. No discovery has taken place to date.
Beginning on or about March 17, 1998, six actions (collectively the
"Shareholder Litigation") were filed in the Court of Chancery of the State of
Delaware, New Castle County (the "Court"), by stockholders of Foamex
International. The Shareholder Litigation, purportedly brought as class actions
on behalf of all stockholders of Foamex International, named Foamex
International, certain of its directors, certain of its officers, Trace and
Trace Merger Sub, Inc. ("Merger Sub") as defendants alleging that they had
breached their fiduciary duties to the plaintiffs and other stockholders of
Foamex International unaffiliated with Trace in connection with the original
proposal of Trace to acquire the publicly traded outstanding common stock of
Foamex International for $17.00 per share under an Agreement and Plan of Merger
(the "First Merger Agreement"). The complaints sought, among other things, class
certification, a declaration that the defendants breached their fiduciary duties
to the class, preliminary and permanent injunctions barring implementation of
the proposed transaction, rescission of the transaction if consummated,
unspecified compensatory damages, and costs and attorneys' fees. A stipulation
and order consolidating these six actions under the caption In re Foamex
International Inc. Shareholders Litigation, Consolidated Civil Action No.
16259NC, was entered by the Court on May 28, 1998.
The parties to the Shareholder Litigation entered into a Memorandum of
Understanding, dated June 25, 1998 (the "Memorandum of Understanding"), to
settle the Shareholder Litigation, subject to, inter alia, execution of a
definitive Stipulation of Settlement between the parties and approval by the
Court following notice to the class and a hearing. The Memorandum of
Understanding provided that as a result of, among other things, the Shareholder
Litigation and negotiations among counsel for the parties to the Memorandum of
Understanding, a special meeting of stockholders would be held to vote upon and
approve the First Merger Agreement which provided, among other things, for all
of Foamex International's outstanding common stock not owned by Trace and its
subsidiaries (the "Public Shares") to be converted into the right to receive
$18.75 in cash, without interest.
10
<PAGE>
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
9. COMMITMENTS AND CONTINGENCIES (continued)
The Memorandum of Understanding also provided for certification of a
class, for settlement purposes only, consisting of the Public Shares owned by
stockholders of Foamex International unaffiliated with Trace and its
subsidiaries (the "Public Shareholders"), the dismissal of the Shareholder
Litigation with prejudice and the release by the plaintiffs and all members of
the class of all claims and causes of action that were or could have been
asserted against Trace, Foamex International and the individual defendants in
the Shareholder Litigation or that arise out of the matters alleged by
plaintiffs. Following the completion of the confirmatory discovery which was
provided for in the Memorandum of Understanding, on September 9, 1998, the
parties entered into a definitive Stipulation of Settlement and the Court set a
hearing for October 27, 1998 to consider whether the settlement should be
approved (the "Settlement Hearing"). In connection with the proposed settlement,
the plaintiffs intended to apply for an award of attorney's fees and litigation
expenses in an amount not to exceed $925,000, and the defendants agreed not to
oppose this application. Additionally, Foamex International agreed to pay the
cost, if any, of sending notice of the settlement to the Public Shareholders. On
September 24, 1998, a Notice of Pendency of Class Action, Proposed Settlement of
Class Action and Settlement Hearing was mailed to the members of the settlement
class. On October 20, 1998, the parties to the Shareholder Litigation requested
that the Court cancel the Settlement Hearing in light of the announcement made
by Trace on October 16, 1998, that it had been unable to obtain the necessary
financing for the contemplated acquisition by Trace of Foamex International's
common stock at a price of $18.75 per share, which was the subject matter of the
proposed settlement. This request was approved by the Court on October 21, 1998,
and Foamex International issued a press release on October 21, 1998, announcing
that the Court had cancelled the Settlement Hearing.
On November 10, 1998, counsel for certain of the defendants in the
Shareholder Litigation gave notice pursuant to the Stipulation of Settlement
that such defendants were withdrawing from the Stipulation of Settlement in
light of the notice given by Trace to Foamex International and the special
committee of the Board of Directors on November 5, 1998 whereby Trace terminated
the First Merger Agreement on the grounds that the financing condition in the
First Merger Agreement was incapable of being satisfied.
On November 12, 1998, the plaintiffs in the Shareholder Litigation filed
an Amended Class Action Complaint (the "Amended Complaint"). The Amended
Complaint named Foamex International, Trace, Merger Sub, Mr. Marshall S. Cogan,
Mr. Andrea Farace, Dr. Stuart Hershon, Mr. John Tunney, and Mr. Etienne Davignon
as defendants, alleging that they breached their fiduciary duties to plaintiffs
and the other Public Shareholders in connection with a second Agreement and Plan
of Merger (the "Second Merger Agreement"), that the proposal to acquire the
Public Shares for $12.00 per share lacked entire fairness, that the individual
defendants violated 8 Del. Code ss. 251 in approving the Second Merger
Agreement, and that Trace and Merger Sub breached the Stipulation of Settlement.
On December 2, 1998, plaintiffs served a motion for a preliminary injunction,
seeking an Order to preliminarily enjoin the defendants from proceeding with,
consummating or otherwise effecting the merger contemplated by the Second Merger
Agreement. In January 1999, Trace advised that it could not finance the offer
reflected in the Second Merger Agreement. As a result, the preliminary
injunction motion did not go forward.
On June 9, 1999, the plaintiffs in the Shareholder Litigation moved for
leave to file a Second Amended and Supplemental Class Action and Derivative
Complaint (the "Second Amended Complaint"). The Second Amended Complaint was
filed on July 14, 1999, and named Foamex International, Trace, Merger Sub, Mr.
Marshall S. Cogan, Mr. Andrea Farace, Dr. Stuart Hershon, Mr. John Tunney, and
Mr. Etienne Davignon as defendants, alleging that the named individuals breached
their fiduciary duties by causing Foamex International to waste assets in its
transactions with Trace and by failing to enforce Foamex International's rights
under the First Merger Agreement, seeking appointment of a receiver for Foamex
International, and alleging that Trace and Merger Sub breached the Stipulation
of Settlement.
On August 26, 1999, the plaintiffs in the Shareholder Litigation moved
for leave to file a Third Amended and Supplemental Class Action and Derivative
Complaint (the "Third Amended Complaint"). The Third Amended Complaint was filed
on October 27, 1999. The Third Amended Complaint alleges both class claims and
derivative claims, and names Foamex International, Mr. Marshall S. Cogan, Mr.
Andrea Farace, Dr. Stuart Hershon, Mr. John Tunney, Mr. Etienne Davignon, Mr.
John Gutfreund, Mr. Robert Hay and Mr. John G. Johnson, Jr. as defendants.
11
<PAGE>
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
9. COMMITMENTS AND CONTINGENCIES (continued)
The Third Amended Complaint alleges that the individual defendants
breached their duties to Foamex International's Public Shareholders by agreeing
to the Sorgenti Transaction at an inadequate price that fails to take into
consideration Foamex International's allegedly valuable claims arising out of
purported diversions of money from Foamex International to Trace, and by failing
to maximize shareholder value in a sale of Foamex International and instead
agreeing to a deal with a buyer who is willing to enter into a consulting deal
with Mr. Cogan to get his and the board's approval. The Third Amended Complaint
purports to assert a derivative claim for waste and breach of fiduciary duty
against Mr. Cogan, Mr. Farace, Dr. Hershon, Mr. Tunney, Mr. Davignon, Mr.
Gutfreund, and Mr. Hay. The Third Amended Complaint seeks the appointment of a
receiver for Foamex International, alleging that the directors have mismanaged
Foamex International. The Third Amended Complaint also alleges that Mr. Cogan,
Mr. Farace, Dr. Hershon, Mr. Davignon, Mr. Tunney, Mr. Gutfreund, and Mr. Hay
breached their fiduciary duties by failing to enforce Foamex International's
rights under the First Merger Agreement.
The Third Amended Complaint seeks: a declaration that the individual
defendants have breached their fiduciary duties; damages; the imposition of a
constructive trust on profits and benefits Mr. Cogan, Trace, and the other
individual defendants allegedly received as a result of the alleged wrongdoing;
an injunction against the Sorgenti Transaction under its present terms;
rescission and damages if the deal is consummated; and the appointment of a
receiver for Foamex International. Defendants have moved to consolidate this
action with Watchung Road Associates, L.P., et ano v. Foamex International Inc.,
et al., discussed above, and to dismiss the complaint. Plaintiffs have agreed to
consolidation and opposed the motion to dismiss.
The defendants intend to vigorously defend these litigations, which if
adversely determined, could have a material adverse effect on the financial
position, results of operations and cash flows of Foamex International and
Foamex L.P.
Litigation - Breast Implants
As of May 12, 2000, Foamex L.P. and Trace were two of multiple defendants
in actions filed on behalf of approximately 3,871 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, it is unlikely that Trace will be able to continue
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 the general counsel of
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.
12
<PAGE>
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
9. COMMITMENTS AND CONTINGENCIES (continued)
Litigation - Other
Foamex L.P. is party to various other lawsuits, both as defendant and
plaintiff, arising in the normal course of business. It is the opinion of
management that the disposition of these lawsuits will not, individually or in
the aggregate, have a material adverse effect on the financial position or
results of operations of Foamex L.P. If management's assessment of Foamex L.P.'s
liability with respect to these actions is incorrect, such actions could have a
material adverse effect on Foamex L.P.'s consolidated financial position.
Environmental
Foamex L.P. is subject to extensive and changing federal, state, local
and foreign environmental laws and regulations, including those relating to the
use, handling, storage, discharge and disposal of hazardous substances and the
remediation of environmental contamination, and as a result, is from time to
time involved in administrative and judicial proceedings and inquiries relating
to environmental matters. As of March 31, 2000, Foamex L.P. had accruals of
approximately $3.5 million for environmental matters. During 1998, Foamex L.P.
established an allowance of $0.6 million relating to receivables from Trace for
environmental indemnifications due to the financial difficulties of Trace.
The Clean Air Act Amendments of 1990 (the "1990 CAA Amendments") provide
for the establishment of federal emission standards for hazardous air pollutants
including methylene chloride, propylene oxide and TDI, materials used in the
manufacturing of foam. On December 27, 1996, the United States Environmental
Protection Agency (the "EPA") proposed regulations under the 1990 CAA Amendments
that will require manufacturers of slab stock polyurethane foam and foam
fabrication plants to reduce emissions of methylene chloride. The final National
Emission Standard for Hazardous Air Pollutants ("NESHAP") was promulgated
October 7, 1998. NESHAP requires a reduction of approximately 70% of the
emission of methylene chloride for the slab stock foam industry effective
October 7, 2001. Foamex L.P. does not believe implementation of the regulation
will require it to make material expenditures due to Foamex L.P.'s use of
alternative technologies, which do not utilize methylene chloride and its
ability to shift current production to the facilities, which use these
alternative technologies. The 1990 CAA Amendments also may result in the
imposition of additional standards regulating air emissions from polyurethane
foam manufacturers, but these standards have not yet been proposed or
promulgated.
Foamex L.P. has reported to appropriate state authorities that it has
found soil and groundwater contamination in excess of state standards at three
facilities and soil contamination in excess of state standards at two other
facilities. Foamex L.P. has begun remediation and is conducting further
investigations into the extent of the contamination at these facilities and,
accordingly, the extent of the remediation that may ultimately be required. The
actual cost and the timetable of any such remediation cannot be predicted with
any degree of certainty at this time. Foamex L.P. has accruals of $2.5 million
for the estimated cost of completing remediation at these facilities. Foamex
L.P. is in the process of addressing potential contamination at its Morristown,
Tennessee facility, and has submitted a sampling plan to the State of Tennessee.
The extent of the contamination and responsible parties, if any, has not yet
been determined. A former owner may be liable for cleanup costs; nevertheless,
the cost of remediation, if any, is not expected to be material.
Federal regulations require that by the end of 1998 all underground
storage tanks ("USTs") be removed or upgraded in all states to meet applicable
standards. Foamex L.P. has upgraded all USTs at its facilities in accordance
with these regulations. Foamex L.P. believes that its USTs do not pose a
significant risk of environmental liability. However, there can be no assurances
that such USTs will not result in significant environmental liability in the
future.
On April 10, 1997, the Occupational Health and Safety Administration
promulgated new standards governing employee exposure to methylene chloride,
which is used as a blowing agent in some of Foamex L.P.'s manufacturing
processes. The phase-in of the standards was completed in 1999 and Foamex L.P.
has developed and implemented a compliance program. Capital expenditures
required and changes in operating procedures are not anticipated to
significantly impact Foamex L.P.'s competitive position.
13
<PAGE>
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
9. COMMITMENTS AND CONTINGENCIES (continued)
Foamex L.P. has been designated as a Potentially Responsible Party
("PRP") by the EPA with respect to six sites. Estimates of total cleanup costs
and fractional allocations of liability are generally provided by the EPA or the
committee of PRP's with respect to the specified site. In each case, the
liability of Foamex L.P. is not considered to be material.
Although it is possible that new information or future developments could
require Foamex L.P. to reassess its potential exposure relating to all pending
environmental matters, including those described herein, Foamex L.P. believes
that, based upon all currently available information, the resolution of such
environmental matters will not have a material adverse effect on Foamex L.P.'s
operations, financial position, capital expenditures or competitive position.
The possibility exists, however, that new environmental legislation and/or
environmental regulations may be adopted, or other environmental conditions may
be found to exist, that may require expenditures not currently anticipated and
that may be material.
14
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE 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 May 10, 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 $413.8 million of debt was outstanding as of March 31, 2000,
provide 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 the issuers 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
Trace's creditors to foreclose on and take ownership of Foamex International's
common stock owned by Trace, or otherwise authorizes a sale or transfer of these
shares, 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.
Management believes that it is unlikely that a "change of control" will
occur as a result of Trace's bankruptcy proceedings. However, 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. or its subsidiaries 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. 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.
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, which acted as financial advisor in connection with
such transaction and is discussing with JP Morgan the possibility of an
additional engagement.
RESULTS OF OPERATIONS FOR THE QUARTER ENDED MARCH 31, 2000 COMPARED TO THE
QUARTER ENDED MARCH 31, 1999
<TABLE>
<CAPTION>
Carpet
Foam Cushion Automotive Technical
Products Products Products Products Other Total
(thousands)
Quarter ended March 31, 2000
<S> <C> <C> <C> <C> <C> <C>
Net sales $128,558 $41,240 $97,311 $27,454 $10,957 $305,520
Income (loss) from operations 12,566 (4,388) 7,308 7,632 (3,678) 19,440
Depreciation and amortization 3,884 1,527 1,205 644 740 8,000
Income (loss) from operations
as a percentage of net sales 9.8% (10.6%) 7.5% 27.8% n.m.* 6.4%
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Carpet
Foam Cushion Automotive Technical
Products Products Products Products Other Total
(thousands)
Quarter ended March 31, 1999
Net sales $139,379 $43,303 $88,771 $22,248 $6,176 $299,877
Income (loss) from operations 12,921 (371) 6,792 5,035 (4,606) 19,771
Depreciation and amortization 4,147 1,169 1,235 636 482 7,669
Income (loss) from operations
as a percentage of net sales 9.3% (0.9%) 7.7% 22.6% n.m.* 6.6%
</TABLE>
* not meaningful
Income from Operations
Net sales for the first quarter of 2000 increased 1.9% to $305.5 million
from $299.9 million in the first quarter of 1999. The increase primarily
reflected higher sales in the Automotive Products and Technical Products
segments and higher sales from certain of Foamex L.P.'s foreign operations
reported in the "Other" segment. Sales declines were recorded in the Foam
Products and Carpet Cushion Products segments.
Income from operations decreased 1.7% to $19.4 million in the first
quarter of 2000 from $19.8 million in the first quarter of 1999. First quarter
results included $2.8 million of restructuring and other charges in 2000 and
$3.4 million in 1999. Restructuring and other charges for the first quarter of
2000 are discussed further under "Other" below. Excluding the restructuring and
other charges for comparison purposes, income from operations was $22.3 million
for the first quarter of 2000 and $23.1 million in the first quarter of 1999. On
this basis, income from operations represented 7.3% of net sales in 2000
compared to 7.7% of net sales in 1999. The favorable impact of cost savings
initiatives implemented during 1999 was essentially offset by higher raw
material costs, increases to the allowance for uncollectible accounts
receivables and higher incentive compensation accruals. Higher raw material
costs reduced gross profit margins compared to the first quarter of 1999 as the
impact of higher oil costs began to filter through the domestic economy. In
response to the impact of higher oil costs, selling price increases in certain
product lines have been announced during the second quarter of 2000.
Foam Products
Foam Products net sales for the first quarter of 2000 decreased 7.8% to
$128.6 million from $139.4 million in the first quarter of 1999. Lower sales
primarily reflected a volume decline in the consumer products market. The sales
decline translated in to a 2.7% decline in income from operations, from $12.9
million in the first quarter of 1999 to $12.6 million in the first quarter of
2000. Income from operations was 9.8% of net sales in 2000, up from 9.3% in
1999. The improvement largely reflected operating efficiencies, partially offset
by higher raw material costs.
Carpet Cushion Products
Carpet Cushion Products net sales for the first quarter of 2000 decreased
4.8% to $41.2 million from $43.3 million in the first quarter of 1999.
Competitive pressures continued in the first quarter of 2000, which resulted in
lower sales volumes. As a result, a loss from operations of $4.4 million was
recorded in the first quarter of 2000 compared to a loss of $0.4 million in the
first quarter of 1999. Improved results in Carpet Cushion Products will depend
on increased sales volume anticipated during the seasonally stronger second and
third quarters combined with operating efficiencies.
Automotive Products
Automotive Products net sales for the first quarter of 2000 increased
9.6% to $97.3 million from $88.8 million in the first quarter of 1999. The
strong automotive market continues to fuel sales gains for lamination products.
Income from operations increased 7.6% to $7.3 million in the first quarter of
2000 from $6.8 million in the first quarter of 1999. Income from operations
represented 7.5% of net sales in 2000 and 7.7% in 1999.
16
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Technical Products
Technical Products net sales for the first quarter of 2000 increased
23.4% to $27.5 million from $22.2 million in the first quarter of 1999. Income
from operations increased 51.6% to $7.6 million in the first quarter of 2000
from $5.0 million in the first quarter of 1999. Income from operations
represented 27.8% of net sales in 2000, up from 22.6% in 1999. The improvement
was primarily driven by favorable market conditions that resulted in sales
volume growth, a higher-margin product mix 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 $3.7 million in the first quarter of 2000 was
primarily associated with the $2.8 million of restructuring and other charges
discussed below. The loss from operations in the first quarter of 1999 included
$3.4 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 operations
related to increase the VPF(SM) capacity in North Carolina executives and
employees impacted by the closure of certain operations related to increase the
VPF (SM) capacity in North Carolina. Additionally, facility closure cost totaled
$0.3 million and related equipment writedowns were $0.4 million. The first
quarter 2000 provision included $0.4 million related to changes in estimates to
prior year plans.
Foamex L.P. paid $1.3 million during the first quarter of 2000 for the
various restructuring plans recorded as of December 31, 1999 and during the
first quarter of 2000. As of March 31, 2000, the components of the net accrued
restructuring and plant consolidation balance included, $8.2 million for plant
closures and leases and $3.8 million for personnel reductions. Included in
current assets was $1.5 million and in noncurrent assets was $3.8 million of
estimated proceeds for facilities actively being marketed for sale.
Substantially all employees impacted by the first quarter 2000 work force
reduction will be terminated by the end of the second quarter 2000.
Approximately $3.7 million is expected to spent during the remainder of 2000.
Interest and Debt Issuance Expense
Interest and debt issuance expense totaled $17.1 million in the first
quarter of 2000, which represented a 5.9% increase from the first quarter 1999
expense of $16.1 million. The benefit of lower average debt levels was offset by
higher effective interest rates and increased amortization expense related to
additional debt issuance costs that were incurred primarily during the first
half of 1999. Higher effective interest rates reflect market conditions as well
as the impact of certain provisions of the Foamex L.P. credit facility that
resulted in a 25 basis point increase for the first quarter of 2000, as
discussed in Note 6 to the condensed consolidated financial statements.
Income from Equity Interest in Joint Venture
Income from an equity interest in an Asian joint venture totaled $0.3
million for the first quarter of 2000.
Other Income (Expense), Net
Other net expense recorded for the first quarter of 2000 totaled $0.3
million compared to $0.4 million in the first quarter of 1999.
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.
17
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Net Income
Net income for the first quarter of 2000 was down 18.1% to $2.1 million
compared to $2.6 million in the first quarter 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 quarter 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 $3.3 million at the end of the first
quarter of 2000 compared to $1.6 million at the end of 1999. Working capital at
the end of the first quarter of 2000 was $118.1 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 $28.6 million in accounts receivable
that was partially offset by a $22.5 million increase in accounts payable.
Total debt at the end of the first quarter of 2000 was $691.5 million, up
$1.5 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 March 31, 2000, there were $150.4 million of revolving credit
borrowings, at a weighted average interest rate of 9.95%, under the Foamex L.P.
credit facility with $19.6 million available for additional borrowings and
approximately $12.5 million of letters of credit outstanding. Borrowings by
Foamex Canada Inc. ("Foamex Canada") as of March 31, 2000 were approximately
$2.2 million, at an interest rate of 7.75%, under Foamex Canada's revolving
credit agreement with unused availability of approximately $3.3 million. As of
March 31, 2000, Foamex L.P. was in compliance with their respective financial
covenants.
Cash Flow from Operating Activities
Cash provided by operating activities was $7.2 million for the first
quarter of 2000 compared to cash provided of $11.1 million in the first quarter
of 1999. Lower cash provided by operating activities was attributed to
requirements for operating assets and liabilities.
Cash Flow from Investing Activities
Cash used for investing activities of $5.8 million for the first quarter
of 2000 included $5.0 million of capital expenditures and $0.8 million of
revolving loan payments to Foamex International. In the first quarter of 1999,
net investing activity required $3.3 million with capital expenditures of $5.7
million partially offset by the proceeds from the repayment of notes receivable
from Foamex International. Foamex L.P. expects capital expenditures for 2000 to
be in excess of $30.0 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
Cash Flow from Financing Activities
Cash provided by financing activities was $0.4 million for the first
quarter of 2000 compared to cash used of $6.1 million in the first quarter 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.
18
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE 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 March 31, 2000 was $3.5 million. Although it is
possible that new information or future developments could require Foamex L.P.
to reassess its potential exposure to all pending environmental matters,
including those described in Note 9 to Foamex L.P.'s condensed consolidated
financial statements for the quarter ended March 31, 2000, 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 March 31, 2000, indebtedness with
variable interest rates totaled $428.9 million. On an annualized basis, if the
interest rates on these debt instruments increased by 1.0%, interest expense
would increase by approximately $4.3 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.
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.
19
<PAGE>
Part II - Other Information.
Item 1. Legal Proceedings.
Reference is made to the description of the legal proceedings
contained in Foamex L.P.'s Annual Report on Form 10-K for the year
ended December 31, 1999.
The information from Note 9 of the condensed consolidated financial
statements of Foamex L.P. as of March 31, 2000 (unaudited) is
incorporated herein by reference.
Item 5. Other Information.
On April 10, 2000, John Televantos was named Chief Operating Officer
of Foamex International and was elected to the Board of Directors of
Foamex International. Mr. Televantos retained his responsibilities as
President, Foam Business Group.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
4.10.15 (a) - Amendment No. 2 dated February 18, 2000 to the
Foamex L.P. Credit Agreement as amended and restated
as of February 27, 1998 as further amended and
restated as of June 29, 1999 among Foamex L.P., FMXI,
the institutions from time to time party thereto as
lenders, the institutions from time to time party
thereto as issuing banks and Citicorp USA, Inc. and
The Bank of Nova Scotia as Administrative Agents.
27 - Financial Data Schedule for the quarter ended
March 31, 2000.
(b) Foamex L.P. filed the following Current Reports on Form 8-K for
the quarter ended March 31, 2000:
A report, dated February 9, 2000, was filed for Item 5. Other
Events, concerning preliminary merger discussions.
Subsequent to the end of the first quarter of 2000, a report dated
April 5, 2000, was filed for Item 5. Other Events, concerning the
termination of discussion involving a proposed buyout.
(a) Incorporated herein by reference to the Exhibit to the Form 10-Q of Foamex
International for the quarter ended March 31, 2000.
20
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FOAMEX L.P.
By: FMXI, Inc.
General Partner
Date: May 12, 2000 By: /s/ George L. Karpinski
George L. Karpinski
Vice President
FOAMEX CAPITAL CORPORATION
Date: May 12, 2000 By: /s/ George L. Karpinski
George L. Karpinski
Vice President
21
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