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 number 0-22624
FOAMEX INTERNATIONAL INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 05-0473908
------------------------------- ----------------------
(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
----- -----
The number of shares of the registrant's common stock outstanding as of November
8, 2000 was 23,559,994.
<PAGE>
<TABLE>
<CAPTION>
FOAMEX INTERNATIONAL INC.
INDEX
Page
Part I. Financial Information
Item 1. Financial Statements.
<S> <C>
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. 16
Item 3. Quantitative and Qualitative Disclosures about Market Risk. 25
Part II. Other Information
Item 1. Legal Proceedings. 26
Item 2. Changes in Securities. 26
Item 5. Other Information. 26
Item 6. Exhibits and Reports on Form 8-K. 26
Signatures 27
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
FOAMEX INTERNATIONAL INC. 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,except per share data)
<S> <C> <C> <C> <C>
NET SALES $309,666 $330,563 $961,506 $973,998
COST OF GOODS SOLD 264,937 281,750 826,068 837,811
-------- -------- -------- --------
GROSS PROFIT 44,729 48,813 135,438 136,187
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 17,394 19,484 54,450 56,778
RESTRUCTURING AND OTHER CHARGES 2,842 2,988 6,064 10,112
-------- -------- -------- --------
INCOME FROM OPERATIONS 24,493 26,341 74,924 69,297
INTEREST AND DEBT ISSUANCE EXPENSE 19,255 18,740 56,655 54,111
INCOME FROM EQUITY INTEREST IN JOINT VENTURE 282 - 1,014 -
OTHER INCOME (EXPENSE), NET (662) (459) (2,467) 2,605
-------- -------- -------- --------
INCOME BEFORE PROVISION FOR INCOME TAXES 4,858 7,142 16,816 17,791
PROVISION FOR INCOME TAXES 1,073 1,014 3,262 2,473
-------- -------- -------- --------
NET INCOME $ 3,785 $ 6,128 $ 13,554 $ 15,318
======== ======== ======== ========
EARNINGS PER SHARE
BASIC $ 0.15 $ 0.24 $ 0.54 $ 0.61
======== ======== ======== =======
DILUTED $ 0.15 $ 0.24 $ 0.54 $ 0.61
======== ======== ======== =======
WEIGHTED AVERAGE NUMBER OF SHARES - BASIC 25,060 25,053 25,059 25,053
======== ======== ======== =======
WEIGHTED AVERAGE NUMBER OF SHARES
AND EQUIVALENTS - DILUTED 25,193 25,342 25,247 25,229
======== ======== ======== =======
The accompanying notes are an integral part of the
condensed consolidated financial statements.
</TABLE>
3
<PAGE>
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
<TABLE>
<CAPTION>
ASSETS September 30, 2000 December 31, 1999
================== =================
CURRENT ASSETS (thousands, except share data)
<S> <C> <C>
Cash and cash equivalents $ 6,390 $ 6,577
Accounts receivable, net of allowances of $10,387 in
2000 and $9,549 in 1999 184,963 166,571
Inventories 99,061 97,882
Other current assets 19,405 23,662
-------- --------
Total current assets 309,819 294,692
-------- --------
Property, plant and equipment 394,192 384,978
Less accumulated depreciation (179,405) (163,145)
-------- --------
NET PROPERTY, PLANT AND EQUIPMENT 214,787 221,833
COST IN EXCESS OF ASSETS ACQUIRED, net of accumulated
amortization of $27,608 in 2000 and $23,252 in 1999 210,593 215,258
DEBT ISSUANCE COSTS, net of accumulated
amortization of $9,593 in 2000 and $6,791 in 1999 16,164 18,966
OTHER ASSETS 26,002 30,564
-------- --------
TOTAL ASSETS $777,365 $781,313
======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Short-term borrowings $ - $ 1,627
Current portion of long-term debt 7,684 7,866
Current portion of long-term debt - related party 11,408 10,530
Accounts payable 122,395 86,576
Cash overdrafts 26,851 5,856
Accrued employee compensation and benefits 24,413 17,878
Accrued interest 13,234 9,741
Accrued customer rebates 22,944 22,823
Other accrued liabilities 25,348 26,149
-------- --------
Total current liabilities 254,277 189,046
LONG-TERM DEBT 614,299 646,544
LONG-TERM DEBT - RELATED PARTY 38,610 78,753
OTHER LIABILITIES 23,531 33,351
-------- --------
Total liabilities 930,717 947,694
-------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT
Preferred Stock, par value $1.00 per share:
Authorized 5,000,000 shares - none issued - -
Common Stock, par value $.01 per share:
Authorized 50,000,000 shares
Issued 27,048,994 and 27,045,480 shares, respectively;
Outstanding 25,059,994 and 25,056,480 shares, respectively 270 270
Additional paid-in capital 87,502 87,475
Accumulated deficit (204,391) (217,945)
Accumulated other comprehensive income (loss) (8,310) (7,758)
Other (28,423) (28,423)
-------- --------
Total stockholders' deficit (153,352) (166,381)
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $777,365 $781,313
======== ========
</TABLE>
The accompanying notes are an integral part of the
condensed consolidated financial statements.
4
<PAGE>
FOAMEX INTERNATIONAL INC. 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 $13,554 $ 15,318
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 26,727 25,772
Amortization of debt issuance costs, debt discount,
debt premium and deferred swap adjustment and gain 894 696
Asset writedowns and other charges 2,789 2,073
(Gain) loss on disposal of assets 1,204 (4,217)
Other operating activities 4,298 2,703
Changes in operating assets and liabilities, net 18,042 (6,761)
------- -------
Net cash provided by operating activities 67,508 35,584
------- -------
INVESTING ACTIVITIES
Capital expenditures (18,957) (14,861)
Proceeds from sale of assets 3,525 16,313
Other investing activities (1,134) 924
------- -------
Net cash provided by (used for) investing activities (16,566) 2,376
------- -------
FINANCING ACTIVITIES
Net proceeds from (repayments of) short-term borrowings (1,627) 679
Net repayments of revolving loans (12,031) (14,332)
Repayments of long-term debt (19,201) (15,862)
Repayments of long-term debt - related party (39,265) (7,020)
Increase (decrease) in cash overdrafts 20,995 (2,017)
Debt issuance costs - (7,993)
Other financing activities - 253
------- -------
Net cash used for financing activities (51,129) (46,292)
------- -------
NET DECREASE IN CASH AND CASH EQUIVALENTS (187) (8,332)
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD 6,577 12,572
------- -------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 6,390 $ 4,240
======= =======
</TABLE>
The accompanying notes are an integral part of the
condensed consolidated financial statements.
5
<PAGE>
FOAMEX INTERNATIONAL INC. 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 International Inc.'s
(the "Company") 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.
Change in Control
Trace International Holdings, Inc. ("Trace") is a privately held company,
which owned approximately 29% of the Company's outstanding voting common stock
at September 30, 2000, and whose former Chairman also serves as the Company's
Chairman. The Company's common stock owned by Trace is pledged as collateral
against certain of Trace's obligations. Certain credit agreements and promissory
notes of the Company's subsidiaries, pursuant to which approximately $401.1
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 the Company'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, the Company 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 the Company'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 the Company's outstanding voting stock and
owned a greater percentage of such voting stock than the amount beneficially
owned by Trace.
On July 31, 2000, the Company 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 the Company'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
the Company's common stock from the Trace bankruptcy estate and exchange these
common stock shares for 15,000 shares of a new class of the Company'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
the Company'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 the Company's
common stock, rank senior to any future preferred stock issued by the Company
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 the Company's common stock when the remaining 5,697,426
shares of the Company'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
6
<PAGE>
1. ORGANIZATION AND BASIS OF PRESENTATION (continued)
consummated. As a result, Trace no longer owns any shares of the Company's
common stock and The Bank of Nova Scotia owns approximately 24% of the Company'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 the Company. 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. The Company'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, the Company 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 the Company.
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. The Company has determined that
a portion of shipping costs billed to customers required a reclassification from
cost of sales to revenue. Accordingly, net sales reported for all periods in the
condensed consolidated statements of operations reflect the reclassification
required. On a segment basis, Note 10, the Carpet Cushion Segment was the only
business segment impacted and net sales for all periods presented reflect the
reclassification required. 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 the
Company. The Company continues to evaluate the impact that the adoption of these
SFAS's will have on its results of operations or financial position.
2. BUYOUT PROPOSALS
As previously reported in the Annual Report on Form 10-K for 1999, on
February 9, 2000, the Company announced that it was in discussions with respect
to a proposal involving the acquisition of all of the Company's outstanding
common stock for cash. On April 5, 2000, the Company announced that discussions
with the potential buyer were terminated with no agreement having been reached.
The Company 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, the Company ended discussions
with JP Morgan concerning an additional engagement.
3. INCOME TAXES
The effective tax rates in 2000 and 1999 reflect the partial reversal of
the deferred income tax asset valuation allowance recognized in 1998. The
valuation allowance was reduced to reflect the utilization of Federal loss
carryforwards that reduced the current tax component of the Federal tax
provision. Additionally, the valuation allowance was reduced to offset the net
deferred Federal tax liability generated in 2000 and 1999. The effective tax
7
<PAGE>
3. INCOME TAXES (continued)
rate was higher in 2000 compared to 1999 primarily due to a greater percentage
of income from foreign sources and a higher effective rate on foreign source
income.
4. EARNINGS PER SHARE
The following table shows the amounts used in computing earnings per share.
<TABLE>
<CAPTION>
Quarterly Periods Ended Year to Date Periods Ended
September 30, September 30, September 30, September 30,
2000 1999 2000 1999
------------- ------------- ------------- -------------
(thousands, except per share amounts)
Basic earnings per share (a)
<S> <C> <C> <C> <C>
Net income $ 3,785 $ 6,128 $13,554 $15,318
======= ======= ======= =======
Average common stock outstanding 25,060 25,053 25,059 25,053
======= ======= ======= =======
Basic earnings per share $ 0.15 $ 0.24 $ 0.54 $ 0.61
======= ======= ======= =======
Diluted earnings per share (a)
Net income available for common stock
and dilutive securities $ 3,785 $ 6,128 $13,554 $15,318
======= ======= ======= =======
Average common stock outstanding 25,060 25,053 25,059 25,053
Common stock equivalents resulting
from stock options (b) 133 289 188 176
------- ------- ------- -------
Average common stock and dilutive
equivalents 25,193 25,342 25,247 25,229
======= ======= ======= =======
Diluted earnings per share $ 0.15 $ 0.24 $ 0.54 $ 0.61
======= ======= ======= =======
<FN>
(a) On November 2, 2000, 1,500,000 shares of common stock were exchanged for
15,000 shares of Series B Preferred Stock as part of an agreement to
resolve certain change in control issues, discussed in Note 1. The impact
of the transaction on the earnings per share calculations will be to reduce
the number of common stock shares outstanding used in the average common
stock outstanding calculation. Regarding the diluted earnings per share
calculation, the Series B Preferred Stock will be considered a common stock
equivalent of 1,500,000 shares.
(b) The number of stock options that were not included in the diluted earnings
per share calculations because the exercise price was greater than the
average market price totaled 2,046,200 and 704,100 for the third quarter of
2000 and 1999, respectively. The number of stock options not included in
the diluted earnings per share calculations for the year to date period
2000 was 1,539,800 and 905,300 in the year to date period 1999.
</FN>
</TABLE>
8
<PAGE>
5. 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 $3,785 $6,128 $13,554 $15,318
Foreign currency translation adjustments (387) (464) (552) 347
------ ------ ------- -------
Total comprehensive income $3,398 $5,664 $13,002 $15,665
====== ====== ======= =======
</TABLE>
6. RESTRUCTURING AND OTHER CHARGES
During the first quarter of 2000, restructuring and other charges of
approximately $3.2 million were recorded. The provision included $2.1 million in
work force reduction costs for 30 employees, including certain executives, and
employees impacted by the closure of certain operations as a result of a VPFSM
capacity increase in North Carolina. Additionally, facility closure costs
totaled $0.3 million and related equipment writedowns were $0.4 million. The
first quarter 2000 provision also included $0.4 million related to changes in
estimates to prior year plans.
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.
The Company paid $5.3 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 $8.2 million for plant closures and leases and $2.6 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, the Company 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 $1.5 million is expected to be spent during the
remainder of 2000 for the various restructuring plans.
7. INVENTORIES
The components of inventory are listed below.
September 30, December 31,
2000 1999
------------- ------------
(thousands)
Raw materials and supplies $64,452 $67,520
Work-in-process 12,739 11,574
Finished goods 21,870 18,788
------- -------
Total $99,061 $97,882
======= =======
9
<PAGE>
8. 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) (e) $ 77,335 $ 81,874
Term loan C (a) (e) 70,305 74,431
Term loan D (a) (e) 101,826 107,800
Revolving credit facility (a) (b) (c) (e) 101,654 113,685
Foamex Carpet credit facility (d) - -
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.
September 30, December 31,
2000 1999
------------- ------------
(thousands)
<S> <C> <C>
Foamex/GFI Note (c) $ - $ 34,000
Note payable to Foam Funding LLC (f) 50,018 55,283
-------- --------
50,018 89,283
Less current portion 11,408 10,530
-------- --------
Long-term debt - related party $ 38,610 $ 78,753
======== ========
<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.
10
<PAGE>
8. LONG-TERM DEBT (continued)
(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) At September 30, 2000, available borrowings under the Foamex Carpet
Cushion, Inc. ("Foamex Carpet") credit facility totaled $14.9 million
and a $0.1 million letter of credit was outstanding.
(e) 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.
(f) See Note 11 for disclosure of principal and interest payments.
</FN>
</TABLE>
Debt Covenants
The indentures, credit facilities and other indebtedness agreements contain
certain covenants that limit, among other things to varying degrees, the ability
of the Company's subsidiaries (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, the Company's
subsidiaries are 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, the
Company was available to be paid by its subsidiaries as of September 30, 2000,
funds only to the extent necessary to enable the Company to meet its tax payment
liabilities.
Foamex L.P. and Foamex Carpet, the principal subsidiaries of the Company,
were in compliance with the various financial covenants of their loan agreements
as of September 30, 2000.
9. STOCK OPTIONS
At the Annual Meeting of Stockholders on June 30, 2000, stockholders
approved amendments to the 1993 Stock Option Plan to increase from 3,000,000 to
4,750,000 the number of shares of the Company's common stock that may be issued
and to allow future option grants to qualify as "performance-based compensation"
for purposes of the Internal Revenue Code of 1986, as amended.
10. 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. 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.
11
<PAGE>
10. SEGMENT RESULTS (continued)
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 $135,999 $63,301 $76,242 $27,029 $7,095 $309,666
Income (loss) from operations 15,554 1,428 3,985 7,651 (4,125) 24,493
Depreciation and amortization 4,132 2,068 1,198 657 1,401 9,456
Quarterly period ended September 30, 1999
Net sales $139,111 $73,774 $83,355 $24,322 $10,001 $330,563
Income (loss) from operations 16,228 2,497 6,832 6,438 (5,654) 26,341
Depreciation and amortization 4,512 1,587 1,370 736 769 8,974
Year to date period ended September 30, 2000
Net sales $396,846 $192,212 $265,981 $80,659 $25,808 $961,506
Income (loss) from operations 43,756 709 18,413 22,014 (9,968) 74,924
Depreciation and amortization 12,221 6,072 3,593 1,946 2,895 26,727
Year to date period ended September 30, 1999
Net sales $406,295 $212,197 $262,936 $69,598 $22,972 $973,998
Income (loss) from operations 42,098 5,464 19,187 17,308 (14,760) 69,297
Depreciation and amortization 13,355 4,647 3,995 2,119 1,656 25,772
</TABLE>
11. RELATED PARTY TRANSACTIONS AND BALANCES
Foam Funding LLC Debt
During the quarter and year to date periods ended September 30, 2000,
subsidiaries of the Company paid $1.3 million and $4.5 million of interest,
respectively, on notes payable to Foam Funding LLC. During the year to date
period ended September 30, 2000, subsidiaries of the Company paid $39.3 million
of principal on notes payable to Foam Funding LLC. There were no such principal
payments in the third quarter of 2000. Included in the principal payments was
the repayment of the Foamex/GFI Note discussed in Note 8.
During the quarter and year to date periods ended September 30, 1999,
subsidiaries of the Company paid $1.9 million and $5.6 million of interest,
respectively, on notes payable to Foam Funding LLC. During the quarter and year
to date periods ended September 30, 1999, subsidiaries of the Company paid $2.6
million and $7.0 million of principal, respectively, on notes payable to Foam
Funding LLC.
12. COMMITMENTS AND CONTINGENCIES
Litigation - Shareholder
On August 1, 2000, the Company 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 the Company and its
stockholders, originally named as defendants the Company, certain of its
current and former directors and officers,
12
<PAGE>
12. COMMITMENTS AND CONTINGENCIES (continued)
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
the Company in connection with an attempt by Trace to acquire the Company'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 the Company 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 the Company.
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 the Company, Trace
and certain current and former officers and directors of the Company, on behalf
of stockholders who bought shares of the Company'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 the Company's financial situation and operations, with the
result of artificially inflating the price of the Company'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 the Company. 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, the Company and the plaintiffs in
the Federal Action entered 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 the Company's
insurance carrier on behalf of the Company.
Under the terms of the agreement in principle to settle the Delaware
Action, the Company 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. As discussed in Part II - Other Information, Item 5 Other
Information, the Company announced on September 28, 2000, that a new director
was elected to the Board. 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 reach with plaintiffs) and of the Federal Action are
subject to court approval, which, if obtained, will resolve all outstanding
shareholder litigation against the Company 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 the Company or
any individuals.
Litigation - Breast Implants
As of November 3, 2000, the Company 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,
13
<PAGE>
12. COMMITMENTS AND CONTINGENCIES (continued)
three cases have been filed alleging claims on behalf of approximately 39
residents of Australia, New Zealand, England, and Ireland. The Company believes
that the number of suits and claimants may increase. During 1995, the Company
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 the Company or Trace.
Neither the Company nor Trace recommended, authorized, or approved the use of
its foam for these purposes. The Company 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 the Company'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 the Company, and without taking into account the
indemnification provided by Trace, the coverage provided by Trace's and the
Company'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 the Company's
consolidated financial position or results of operations. If management's
assessment of the Company'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 the Company.
Litigation - Other
The Company 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 the Company. If management's assessment of the
Company'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 the Company.
Environmental
The Company 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, the Company had accruals of
approximately $3.9 million for environmental matters. During 1998, the Company
established an allowance of $1.2 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. The Company 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.
14
<PAGE>
12. COMMITMENTS AND CONTINGENCIES (continued)
The Company has reported to the appropriate state authorities that it has
found soil and/or groundwater contamination in excess of state standards at
seven 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. The Company has accruals of $2.8 million for the
estimated cost of remediation, including professional fees and monitoring costs,
for these sites. During 2000, Foamex L.P., a wholly owned subsidiary of the
Company, 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. The Company has upgraded all USTs at its facilities in accordance
with these regulations. Some petroleum contamination in soils was found at one
of the sites; the extent of the contamination is currently being investigated.
The Company has accrued approximately $0.5 million for the estimated remediation
costs associated with this site. However, the full extent of contamination, and
accordingly, the actual cost of such remediation, cannot be predicted with any
degree of certainty at this time. Based upon investigations conducted thus far,
the Company believes that its USTs do not pose a significant risk of
environmental liability. However, there can be no assurances that such USTs will
not result in significant environmental liability in the future.
On April 10, 1997, the Occupational Health and Safety Administration
promulgated new standards governing employee exposure to methylene chloride,
which is used in some of the Company's manufacturing processes. The phase-in of
the standards was completed in 1999 and the Company has developed and
implemented a compliance program. Capital expenditures required and changes in
operating procedures are not anticipated to significantly impact the Company's
competitive position.
The Company has been designated as a Potentially Responsible Party ("PRP")
by the EPA with respect to seven 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 the Company is not considered to be significant.
Although it is possible that new information or future developments could
require the Company to reassess its potential exposure relating to all pending
environmental matters, including those described herein, the Company believes
that, based upon all currently available information, the resolution of such
environmental matters will not have a material adverse effect on the Company'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.
15
<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 the
Company's outstanding voting common stock at September 30, 2000, and whose
former Chairman also serves as the Company's Chairman. The Company's common
stock owned by Trace is pledged as collateral against certain of Trace's
obligations. Certain credit agreements and a promissory note of the Company's
subsidiaries, pursuant to which approximately $401.1 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 the
Company'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, the Company 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 the Company'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 the Company's outstanding voting stock and
owned a greater percentage of such voting stock than the amount beneficially
owned by Trace.
On July 31, 2000, the Company 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 the Company'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 the Company's common stock
from the Trace bankruptcy estate and exchange these common stock shares for
15,000 shares of a new class of the Company'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 the Company'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 the Company's common stock, rank
senior to any future preferred stock issued by the Company 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
the Company's common stock when the remaining 5,697,426 shares of the Company'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 the
Company's common stock and The Bank of Nova Scotia owns approximately 24% of the
Company'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 the Company. 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. The Company'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, the Company has internal policies
and an on-going audit program to support the accounting
16
<PAGE>
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 the
Company.
During July 2000, 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. The Company has determined that a portion of shipping costs
billed to customers required a reclassification from cost of sales to revenue.
Accordingly, net sales reported for all periods in the condensed consolidated
statements of operations reflect the reclassification required. On a segment
basis, see Note 10 to the condensed consolidated financial statements, the
Carpet Cushion Segment was the only business segment impacted and net sales for
all periods presented reflect the reclassification required. All other shipping
and handling costs associated with product shipments are reported in costs of
goods sold.
Future Accounting Changes - Accounting for Derivatives and Hedging Activities
As previously reported, SFAS No. 133 will require the fair value of
derivatives be recognized in the consolidated balance sheets. Changes in the
fair value of derivatives will be recognized in earnings or in other
comprehensive income, essentially depending on the structure and purpose of the
derivatives. During 2000, SFAS No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities", which amends SFAS No. 133 on a
limited number of issues, was issued. The statements will be effective for all
quarters of all fiscal years beginning after June 15, 2000, which is the first
calendar quarter of 2001 for the Company. The Company continues to evaluate the
impact that the adoption of these SFAS's will have on its results of operations
or financial position.
Buyout Proposals
As previously reported in the Annual Report on Form 10-K for 1999, on
February 9, 2000, the Company announced that it was in discussions with respect
to a proposal involving the acquisition of all of the Company's outstanding
common stock for cash. On April 5, 2000, the Company announced that discussions
with the potential buyer were terminated with no agreement having been reached.
The Company subsequently terminated the engagement of JP Morgan, which acted as
financial advisor in connection with such transaction. During the second quarter
of 2000, the Company 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 $135,999 $63,301 $76,242 $27,029 $7,095 $309,666
Income (loss) from operations 15,554 1,428 3,985 7,651 (4,125) 24,493
Depreciation and amortization 4,132 2,068 1,198 657 1,401 9,456
Income (loss) from operations
as a percentage of net sales 11.4% 2.3% 5.2% 28.3% n.m* 7.9%
Quarterly period ended September 30, 1999
Net sales $139,111 $73,774 $83,355 $24,322 $10,001 $330,563
Income (loss) from operations 16,228 2,497 6,832 6,438 (5,654) 26,341
Depreciation and amortization 4,512 1,587 1,370 736 769 8,974
Income (loss) from operations
as a percentage of net sales 11.7% 3.4% 8.2% 26.5% n.m* 8.0%
17
<PAGE>
Carpet
Foam Cushion Automotive Technical
Products Products Products Products Other Total
-------- -------- ---------- --------- ------- -------
(thousands)
Year to date period ended September 30, 2000
Net sales $396,846 $192,212 $265,981 $80,659 $25,808 $961,506
Income (loss) from operations 43,756 709 18,413 22,014 (9,968) 74,924
Depreciation and amortization 12,221 6,072 3,593 1,946 2,895 26,727
Income (loss) from operations
as a percentage of net sales 11.0% 0.4% 6.9% 27.3% n.m* 7.8%
Year to date period ended September 30, 1999
Net sales $406,295 $212,197 $262,936 $69,598 $22,972 $973,998
Income (loss) from operations 42,098 5,464 19,187 17,308 (14,760) 69,297
Depreciation and amortization 13,355 4,647 3,995 2,119 1,656 25,772
Income (loss) from operations
as a percentage of net sales 10.4% 2.6% 7.3% 24.9% 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 6.3% to $309.7 million
from $330.6 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 $24.5 million,
which represented a 7.0% decrease from the $26.3 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 $27.3 million in the third quarter of 2000 compared to $29.3 million in the
1999 third quarter. On this basis, income from operations was 8.8% of net sales
in 2000 compared to 8.9% of net sales 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 14.4% in the third quarter of 2000 compared to 14.8% in same quarter
of 1999.
Selling, general and administrative expenses were down 10.7% 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 2.2% to
$136.0 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 the Company'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 4.2% decrease in income from operations, from $16.2 million in the
third quarter of 1999 to $15.6 million in the third quarter of 2000. Income from
operations was 11.4% of net sales in 2000, down from 11.7% in 1999.
18
<PAGE>
Carpet Cushion Products
Carpet Cushion Products net sales for the third quarter of 2000 decreased
14.2% to $63.3 million from $73.8 million in the third quarter of 1999. The
sales decline primarily reflected competitive pressures that resulted in lower
sales volumes across all product lines. Lower selling prices in certain product
lines and a lower value shipment mix also contributed to the sales decline.
Lower sales translated to a 42.8% decline in income from operations, from $2.5
million in the third quarter of 1999 to $1.4 million in the third quarter of
2000. Income from operations represented 2.3% of net sales in 2000 and 3.4% in
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 $4.0 million in the third quarter of 2000
was down 41.7% compared to $6.8 million in the comparable 1999 period. The
combination of lower sales and higher raw material costs resulted in the
decrease. Income from operations represented 5.2% of net sales in 2000 and 8.2%
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 18.8% to $7.7 million in the third quarter of 2000, up from $6.4
million in the third quarter of 1999. Income from operations represented 28.3%
of net sales in 2000 compared to 26.5% 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 the Company's Mexico City operation. The loss
from operations was $4.1 million in the third quarter of 2000 and included a
provision of $2.8 million for restructuring and other charges, discussed below.
The $5.7 million loss from operations in the third quarter of 1999 included
restructuring and other charges totaling $3.0 million.
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 assets writedowns, $0.8 million
for facility closure costs and $0.2 million in work force reduction costs for 72
employees. The third quarter 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 $19.3 million in the third
quarter of 2000, which represented a 2.7% increase from the 1999 third quarter
expense of $18.7 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 8 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.
19
<PAGE>
Other Income (Expense), Net
Other expense, net recorded for the third quarter of 2000 totaled $0.7
million and primarily reflected a loss on the disposition of fixed assets.
Income Tax Expense
The effective tax rates in 2000 and 1999 reflected the partial reversal of
the deferred income tax asset valuation allowance recognized in 1998. The
valuation allowance was reduced to reflect the utilization of Federal loss
carryforwards that reduced the current tax component of the Federal tax
provision. Additionally, the valuation allowance was reduced to offset the net
deferred Federal tax liability generated in 2000 and 1999. 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 $3.8 million compared to $6.1
million recorded 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 1.3% to $961.5
million from $974.0 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 of the Company's foreign operations reported in the "Other" segment.
Income from operations for the first three quarters of 2000 was $74.9
million, 8.1% higher than the $69.3 million recorded during the comparable
period in 1999. Results included restructuring and other charges of $6.1 million
in 2000 and $10.1 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 $81.0 million
for the first three quarters of 2000 and $79.4 million in the first three
quarters of 1999. On this basis, income from operations was 8.4% of net sales in
2000 compared to 8.2% of net sales in 1999.
The improvement in income from operations was largely attributable to
results from the first half of the year. During the third quarter of 2000, lower
sales and higher raw material costs resulted in lower margins and limited the
improvement compared to 1999. 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
was 14.1% for the first three quarters of 2000 compared to 14.0% in the
comparable 1999 period.
Selling, general and administrative expenses were down 4.1% 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 and professional fees. The professional fees
were associated with the Exchange Agreement concerning the transfer of the
Company's common stock pledged by Trace to The Bank of Nova Scotia and the
shareholder litigation settlements, as discussed in Note 1 and Note 12,
respectively, to the condensed consolidated financial statements.
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Foam Products
Foam Products net sales for the first three quarters of 2000 decreased 2.3%
to $396.8 million from $406.3 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 the Company's packaging business that was sold in 1999.
Despite lower sales, income from operations in the first three quarters of 2000
was up 3.9% to $43.8 million compared to $42.1 million in the first three
quarters of 1999. The improvement was primarily generated during the first half
of the year. As 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 11.0% 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 9.4% to $192.2 million from $212.2 million in the first three quarters
of 1999. The sales decline primarily reflected competitive pressures that
resulted in lower sales volumes across all product lines. Lower selling prices
in certain product lines and a lower value shipment mix also contributed to the
sales decline. As a result, income from operations of $0.7 million was recorded
in the first three quarters of 2000 compared to income from operations of $5.5
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 4.0% to
$18.4 million in the first three quarters of 2000, from $19.2 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 6.9% of net sales in 2000 and 7.3% 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 27.2% to $22.0 million in the first three
quarters of 2000, up from $17.3 million in the comparable 1999 period. Income
from operations represented 27.3% of net sales in 2000 compared to 24.9% 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 the Company'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 $10.0 million in the first three quarters of 2000 included a
provision of $6.1 million for restructuring and other charges, discussed below.
The loss also included the professional fees that were associated with the
Exchange Agreement and the shareholder litigation settlements, discussed
previously. The loss from operations of $14.8 million in the first three
quarters of 1999 included $10.1 million of restructuring and other charges.
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During the first quarter of 2000, restructuring and other charges of
approximately $3.2 million were recorded. The provision included $2.1 million in
work force reduction costs for 30 employees, including certain executives, and
employees impacted by the closure of certain operations related to a VPFSM
capacity increase in North Carolina. Additionally, facility closure costs
totaled $0.3 million and related equipment writedowns were $0.4 million. The
first quarter 2000 provision also included $0.4 million related to changes in
estimates to prior year plans.
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 assets writedowns, $0.8 million
for facility closure costs and $0.2 million in work force reduction costs for 72
employees. The third quarter 2000 provision also included a favorable adjustment
of $0.2 million related to changes in estimates to previously recognized
restructuring plans.
The Company paid $5.3 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 $8.2 million for plant closures and leases and $2.6 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, the Company 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 $1.5 million is expected to be spent during the
remainder of 2000 for the various restructuring plans.
Interest and Debt Issuance Expense
Interest and debt issuance expense totaled $56.7 million in the first three
quarters of 2000, which represented a 4.7% increase from the comparable 1999
expense of $54.1 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 8 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
$2.5 million and primarily included costs incurred related to the buyout
proposal discussed previously and losses on the disposition of fixed assets. For
the first three quarters of 1999, other income, net totaled $2.6 million and
included a $4.2 million gain recorded on the sale of the corporate aircraft.
Income Tax Expense
The effective tax rates in 2000 and 1999 reflect the partial reversal of
the deferred income tax asset valuation allowance recognized in 1998. The
valuation allowance was reduced to reflect the utilization of Federal loss
carryforwards that reduced the current tax component of the Federal tax
provision. Additionally, the valuation allowance was reduced to offset the net
deferred Federal tax liability generated in 2000 and 1999. Compared to
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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 down 11.5% to $13.6
million compared to $15.3 million in the first three quarters of 1999.
Liquidity and Capital Resources
The Company's operations are conducted through its wholly owned
subsidiaries, Foamex L.P. and Foamex Carpet. The liquidity requirements of
the Company consist primarily of the operating cash requirements of its two
principal subsidiaries.
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. The Company believes that
cash flow from Foamex L.P.'s 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 three quarters of 2000. The ability of Foamex L.P. to make distributions
to the Company is restricted by the terms of its financing agreements;
therefore, neither the Company nor Foamex Carpet is expected to have access to
the cash flow generated by Foamex L.P. for the foreseeable future.
Foamex Carpet's operating cash requirements consist principally of working
capital requirements, scheduled payments of principal and interest on
outstanding indebtedness and capital expenditures. The Company believes that
cash flow from Foamex Carpet's operating activities, cash on hand and periodic
borrowings under its credit facility will be adequate to meet its liquidity
requirements. The ability of Foamex Carpet to make distributions to the Company
is restricted by the terms of its financing agreements; therefore, neither the
Company nor Foamex L.P. is expected to have access to the cash flow generated by
Foamex Carpet for the foreseeable future.
Cash and cash equivalents totaled $6.4 million at the end of the third
quarter of 2000 compared to $6.6 million at the end of 1999. Working capital at
the end of the third quarter of 2000 was $55.5 million and the current ratio was
1.2 to 1 compared to working capital at the end of 1999 of $105.6 million and a
current ratio of 1.6 to 1. The decline in working capital primarily reflected an
increase in current liabilities, including an increase of $35.8 million in
accounts payable and an increase in cash overdrafts of $21.0 million. The
increase in accrued employee compensation and benefits primarily reflected an
increase in the amount of contributions required for the Company's 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 $18.4 million in accounts receivable.
Total debt at the end of the third quarter of 2000 was $672.0 million, down
$73.3 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. Foamex Carpet did not have any outstanding borrowings under the Foamex
Carpet credit facility at September 30, 2000, with unused availability of $14.9
million and approximately $0.1 million for a letter of credit outstanding. As of
September 30, 2000, the Company's subsidiaries were in compliance with the
financial covenants of their loan agreements.
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Cash Flow from Operating Activities
Cash provided by operating activities in the first three quarters of 2000
was $67.5 million compared to $35.6 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 $16.6 million for the first
three quarters of 2000. Cash requirements for capital expenditures were $19.0
million, partially offset by $3.5 million of proceeds from the sale of assets.
In the first three quarters of 1999, cash flow provided by investing activities
totaled $2.4 million primarily from $16.3 million of proceeds from the sale of
assets, partially offset by $14.9 million of capital expenditures. The Company
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, the Company 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 $51.1 million for the first three
quarters of 2000 compared to cash used of $46.3 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
$21.0 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.
Environmental Matters
The Company is subject to extensive and changing environmental laws and
regulations. Expenditures to date in connection with the Company's compliance
with such laws and regulations did not have a material adverse effect on the
Company's operations, financial position, capital expenditures or competitive
position. The amount of liabilities recorded by the Company in connection with
environmental matters as of September 30, 2000 was $3.9 million. Although it is
possible that new information or future developments could require the Company
to reassess its potential exposure to all pending environmental matters,
including those described in Note 12 to the Company's condensed consolidated
financial statements, the Company believes that, based upon all currently
available information, the resolution of all such pending environmental matters
will not have a material adverse effect on the Company's operations, financial
position, capital expenditures or competitive position.
Market Risk
The Company'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 $412.7 million. On an annualized basis, if
the interest rates on these debt instruments increased by 1.0%, interest expense
would increase by approximately $4.1 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 the Company'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 the Company's Annual Report on Form 10-K for the year ended December
31, 1999.
The information from Note 12 of the condensed consolidated financial
statements is incorporated herein by reference.
Item 2. Changes in Securities.
Information concerning an agreement with The Bank of Nova Scotia
relating to the shares of the Company's voting common stock pledged by
Trace to The Bank of Nova Scotia as a result of the Trace bankruptcy
filing, including the issuance of Series B Preferred Stock in exchange
for voting common stock of the Company, is incorporated herein by
reference from Note 1 of the condensed consolidated financial
statements. See Exhibit 4.14.1 listed below under Item 6. Exhibits and
Reports on Form 8-K.
Item 5. Other Information.
On September 28, 2000, the Company announced that Raymond E. Mabus,
Jr., was elected to the Company's Board of Directors. Mr. Mabus, 51,
is the former Governor of Mississippi and Ambassador to Saudi
Arabia. With the addition of Mr. Mabus, the Company's Board of
Directors totals eight members.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
4.14.1 - Certificate of Designations of Series B Preferred Stock of the
Company 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 quarter ended September 30,
2000.
(b)The Company 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 the Company's voting 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.
Subsequent to quarter end, a report dated November 2, 2000, was filed
for Item 5. Other Events, concerning the consummation of an agreement
with The Bank of Nova Scotia relating to the shares of the Company'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 INTERNATIONAL INC.
Date: November 10, 2000 By: /s/ Robert S. Graham, Jr.
------------------------------
Robert S. Graham, Jr.
Senior Vice President, Corporate
Controller and Chief Accounting
Officer
27
