-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QAGaCowm6UxnCMRE9idxFdOx0mP5siEbANUJo2qwkyDbMOqTjD9xd0aAYEqZUdAF tqbjrmxXc2xhC80IHNGvYQ== 0000912908-02-000009.txt : 20020414 0000912908-02-000009.hdr.sgml : 20020414 ACCESSION NUMBER: 0000912908-02-000009 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010630 FILED AS OF DATE: 20020226 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FOAMEX L P CENTRAL INDEX KEY: 0000890080 STANDARD INDUSTRIAL CLASSIFICATION: PLASTICS FOAM PRODUCTS [3086] IRS NUMBER: 050475617 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q/A SEC ACT: 1934 Act SEC FILE NUMBER: 001-11432 FILM NUMBER: 02558988 BUSINESS ADDRESS: STREET 1: 1000 COLUMBIA AVENUE CITY: LINEWOOD STATE: PA ZIP: 19061 BUSINESS PHONE: 6108593000 MAIL ADDRESS: STREET 1: 1000 COLUMBIA AVE CITY: LINWOOD STATE: PA ZIP: 19061 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FOAMEX CAPITAL CORP CENTRAL INDEX KEY: 0000890081 STANDARD INDUSTRIAL CLASSIFICATION: PLASTICS FOAM PRODUCTS [3086] IRS NUMBER: 223182164 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q/A SEC ACT: 1934 Act SEC FILE NUMBER: 001-11436 FILM NUMBER: 02558989 BUSINESS ADDRESS: STREET 1: 1000 COLUMBIA AVE CITY: LINWOOD STATE: PA ZIP: 19061 BUSINESS PHONE: 6108593000 MAIL ADDRESS: STREET 1: 1000 COLUMBIA AVE CITY: LINWOOD STATE: PA ZIP: 19061 10-Q/A 1 flp01q2a.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q/A Amendment No. 1 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarter ended June 30, 2001 Commission file numbers 1-11432; 1-11436 FOAMEX L.P. FOAMEX CAPITAL CORPORATION ------------------------------------------------------ (Exact name of registrant as specified in its charter) Delaware 05-0475617 Delaware 22-3182164 - ------------------------------- ---------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 1000 Columbia Avenue Linwood, PA 19061 - ------------------------------- ---------------------- (Address of principal (Zip Code) executive offices) Registrant's telephone number, including area code: (610) 859-3000 -------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. YES X NO Foamex L.P. and Foamex Capital Corporation meet the conditions set forth in General Instruction H(1)(a) and (b) of Form 10-Q and are therefore filing this form with the reduced disclosure format. The number of shares of Foamex Capital Corporation's common stock outstanding as of August 8, 2001 was 1,000. Foamex L.P. is filing this Form 10-Q/A to restate its unaudited condensed consolidated financial statements as of June 30, 2001 and for the three and six months then ended, as discussed in Note 11. Foamex L.P. also has updated its Management's Discussion and Analysis of Financial Condition and Results of Operations to give effect to the restatement, but has not updated any disclosures to reflect other developments since the original filing. FOAMEX L.P. FOAMEX CAPITAL CORPORATION INDEX
Page Part I. Financial Information Item 1. Financial Statements. Condensed Consolidated Statements of Operations (unaudited) - Quarterly and Year to Date Periods Ended June 30, 2001 (restated) and June 31, 2000 3 Condensed Consolidated Balance Sheets (unaudited) as of June 30, 2001 (restated) and December 31, 2000 4 Condensed Consolidated Statements of Cash Flows (unaudited) - Year to date Periods Ended June 30, 2001 (restated) and June 30, 2000 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. 23 Part II. Other Information Item 1. Legal Proceedings. 24 Item 5. Other Information. 24 Item 6. Exhibits and Reports on Form 8-K. 24 Signatures 25
2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. FOAMEX L.P. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
Quarterly Periods Ended Year to Date Periods Ended ------------------------- -------------------------- June 30, June 30, June 30, June 30, 2001 2000 2001 2000 --------- -------- -------- -------- (As restated, (As restated, see Note 11) see Note 11) (thousands) NET SALES $292,293 $297,688 $573,607 $603,208 COST OF GOODS SOLD 248,800 257,254 494,984 526,265 -------- -------- -------- -------- GROSS PROFIT 43,493 40,434 78,623 76,943 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 17,499 14,115 30,441 28,363 RESTRUCTURING AND OTHER CHARGES (CREDITS) (5) - (47) 2,821 -------- -------- -------- -------- INCOME FROM OPERATIONS 25,999 26,319 48,229 45,759 INTEREST AND DEBT ISSUANCE EXPENSE 15,138 17,257 31,189 34,348 INCOME FROM EQUITY INTEREST IN JOINT VENTURE 324 440 663 732 OTHER EXPENSE, NET (193) (151) (248) (438) -------- -------- -------- -------- INCOME BEFORE PROVISION FOR INCOME TAXES 10,992 9,351 17,455 11,705 PROVISION FOR INCOME TAXES 439 1,473 900 1,690 -------- -------- -------- -------- NET INCOME $ 10,553 $ 7,878 $ 16,555 $ 10,015 ======== ======== ======== ========
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements. 3 FOAMEX L.P. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
June 30, December 31, 2001 2000 -------- ----------- (As restated, ASSETS see Note 11) CURRENT ASSETS (thousands) Cash and cash equivalents $ 1,240 $ 2,887 Accounts receivable, net of allowances of $9,418 in 2001 and $6,458 in 2000 158,853 134,478 Accounts receivable from related parties 13,474 12,483 Inventories 81,578 96,673 Other current assets 24,266 20,569 -------- -------- Total current assets 279,411 267,090 -------- -------- Property, plant and equipment 390,796 377,732 Less accumulated depreciation (186,960) (175,260) -------- -------- NET PROPERTY, PLANT AND EQUIPMENT 203,836 202,472 COST IN EXCESS OF ASSETS ACQUIRED, net of accumulated amortization of $23,156 in 2001 and $20,677 in 2000 175,820 178,299 DEBT ISSUANCE COSTS, net of accumulated amortization of $10,092 in 2001 and $8,719 in 2000 10,118 11,491 OTHER ASSETS 20,016 18,209 -------- -------- TOTAL ASSETS $689,201 $677,561 ======== ======== LIABILITIES AND PARTNERS' DEFICIT CURRENT LIABILITIES Short-term borrowings $ 66 $ - Current portion of long-term debt 5,386 8,356 Accounts payable 101,129 82,756 Cash overdrafts 11,895 6,885 Accrued employee compensation and benefits 21,682 20,420 Accrued interest 8,567 9,133 Accrued customer rebates 8,796 12,400 Other accrued liabilities 14,653 17,662 -------- -------- Total current liabilities 172,174 157,612 LONG-TERM DEBT 638,614 656,168 OTHER LIABILITIES 30,830 32,688 -------- -------- Total liabilities 841,618 846,468 -------- -------- COMMITMENTS AND CONTINGENCIES PARTNERS' DEFICIT General partners (113,857) (130,235) Limited partners - - Accumulated other comprehensive loss (24,349) (24,461) Notes and advances receivable from partner (4,990) (4,990) Notes receivable from related party (9,221) (9,221) -------- -------- Total partners' deficit (152,417) (168,907) -------- -------- TOTAL LIABILITIES AND PARTNERS' DEFICIT $689,201 $677,561 ======== ========
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements. 4 FOAMEX L.P. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Year to Date Periods Ended ---------------------------- June 30, June 30, 2001 2000 --------- -------- (As restated, see Note 11) (thousands) OPERATING ACTIVITIES Net income $16,555 $10,015 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 15,131 15,845 Amortization of debt issuance costs, debt discount and debt premium 57 134 Asset writedowns and other charges - 626 Other operating activities 2,518 1,568 Changes in operating assets and liabilities, net (8,964) (8,035) ------- ------- Net cash provided by operating activities 25,297 20,153 ------- ------- INVESTING ACTIVITIES Capital expenditures (12,451) (10,300) Proceeds from sale of assets 637 3,571 Increase in revolving loan to Foamex International - (1,235) Other investing activities (511) (445) ------- ------- Net cash used for investing activities (12,325) (8,409) ------- ------- FINANCING ACTIVITIES Net proceeds from short-term borrowings 66 867 Net proceeds from (repayments of) revolving loans (14,653) 40,160 Repayments of long-term debt (5,042) (18,493) Repayment of long-term debt - related party - (34,000) Increase (decrease) in cash overdrafts 5,010 (381) ------- ------- Net cash used for financing activities (14,619) (11,847) ------- ------- NET DECREASE IN CASH AND CASH EQUIVALENTS (1,647) (103) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 2,887 1,573 ------- ------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,240 $ 1,470 ======= =======
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements. 5 FOAMEX L.P. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 1. ORGANIZATION AND BASIS OF PRESENTATION Basis of Presentation The accompanying condensed consolidated financial statements are unaudited and do not include certain information and disclosures required by accounting principles generally accepted in the United States of America for complete financial statements. However, in the opinion of management all adjustments, consisting only of normal recurring adjustments considered necessary to present fairly Foamex L.P.'s consolidated financial position and results of operations, have been included. These interim financial statements should be read in conjunction with the financial statements and related notes included in the 2000 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"). Accounting Changes - Accounting for Derivatives and Hedging Activities Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133") requires the fair value of derivatives be recognized in the consolidated balance sheets. Changes in the fair value of derivatives are recognized in earnings or in other comprehensive loss, essentially depending on the structure and the purpose of the derivatives. During 2000, SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities", which amended SFAS No. 133 on a limited number of issues, was issued. The statements were effective for Foamex L.P. in the first quarter of 2001. These statements create a foundation that will address accounting and reporting issues for a wide range of financial instruments defined as derivatives and related hedging activities. As of December 31, 2000, Foamex L.P. did not have any derivatives, as defined in the statements. Accordingly, the initial adoption of the statements did not have a significant impact on the results of operations or financial position of Foamex L.P. 2. COMPREHENSIVE INCOME The components of comprehensive income are listed below.
Quarterly Periods Ended Year to Date Periods Ended ----------------------- -------------------------- June 30, June 30, June 30, June 30, 2001 2000 2001 2000 -------- -------- -------- -------- (thousands) Net income $10,553 $7,878 $16,555 $10,015 Foreign currency translation adjustments 1,040 (471) 112 (165) ------- ------ ------- ------- Total comprehensive income $11,593 $7,407 $16,667 $ 9,850 ======= ====== ======= =======
3. RESTRUCTURING AND OTHER CHARGES (CREDITS) During the first quarter of 2001, a net restructuring credit of less than $0.1 million was recorded. The credit was comprised of: (i) restructuring charges of $0.3 million for severance relating to the termination of 26 employees; (ii) other charges of $1.4 million relating to severance for the former President and Chief Executive Officer; (iii) offset by a $1.8 million restructuring credit. The restructuring credit is comprised of $1.5 million for a sublease and early lease termination of an idle facility and $0.3 million for the sale of another facility. Both facilities and related restructuring charges were part of prior years' restructuring plans. During the second quarter of 2001, Foamex L.P. recorded restructuring and other charges (credits) of less than $(0.1) million. The net credit was comprised of changes in estimates for previously recognized restructuring plans. 6 FOAMEX L.P. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 3. RESTRUCTURING AND OTHER CHARGES (CREDITS) (continued) During the first quarter of 2000, restructuring and other charges of approximately $2.8 million were recorded. The provision included $1.7 million for work force reduction costs that included 27 employees, including certain executives and employees impacted by the closure of certain operations as a result of a 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 included $0.4 million related to changes in estimates to prior year plans. All employees impacted by the first and second quarter 2001 work force reductions were terminated by the end of the second quarter of 2001. Approximately $1.1 million is expected to be spent during the remainder of 2001 for the various restructuring plans. The following table sets forth the components of Foamex L.P.'s restructuring and other charges (credits) for the quarterly period ended June 30, 2001:
Plant Closure Personnel Total and Leases Reductions Other ----- --------------- ---------- ----- (millions) Balance at March 31, 2001 $6.0 $4.6 $0.6 $0.8 Cash spending (1.4) (0.9) 0.3 (0.8) Cash proceeds 0.6 - - 0.6 2001 restructuring charge - - - - Restructuring adjustments - - - - ---- ---- ---- ---- Balance at June 30, 2001 $5.2 $3.7 $0.9 $0.6 ==== ==== ==== ====
4. INVENTORIES The components of inventory are listed below. June 30, December 31, 2001 2000 -------- ----------- (thousands) Raw materials and supplies $48,715 $64,801 Work-in-process 12,188 11,437 Finished goods 20,675 20,435 ------- ------- Total $81,578 $96,673 ======= ======= 5. LONG-TERM DEBT The components of long-term debt are listed below.
June 30, December 31, 2001 2000 -------- ------------ Foamex L.P. Credit Facility (thousands) Term Loan B (a) $ 76,737 $ 77,136 Term Loan C (a) 69,761 70,124 Term Loan D (a) 101,043 101,565 Revolving credit facility (a) (b) 131,203 145,904 9 7/8% Senior subordinated notes due 2007 150,000 150,000 13 1/2% Senior subordinated notes due 2005 (includes $7,411 and $8,308 of unamortized debt premium) 105,411 106,308 Industrial revenue bonds 7,000 7,000 7 FOAMEX L.P. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 5. LONG-TERM DEBT (continued) June 30, December 31, 2001 2000 -------- ------------ (thousands) Subordinated note payable (net of unamortized debt discount of $49 in 2000) - 2,289 Other 2,845 4,198 -------- -------- 644,000 664,524 Less current portion 5,386 8,356 -------- -------- Long-term debt $638,614 $656,168 ======== ======== (a) 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, 2000, the calculated leverage ratio was 5.3 to 1.00. Consequently, the 25 basis point adjustment was applicable following the delivery of the financial statements for 2000 to the lenders, which was early in the second quarter of 2001. At March 31, 2001, the calculated leverage ratio was 5.1 to 1.00 and an additional 25 basis point adjustment became effective in the second quarter of 2001. At June 30, 2001, the calculated leverage ratio was 5.1 to 1.00. Accordingly, an additional 25 basis point adjustment will become effective during the third quarter of 2001, resulting in a 75 basis points cumulative adjustment to the applicable interest rate margin. (b) At June 30, 2001, the revolving credit facility commitment was $172.5 million, the weighted average interest rate was 7.98%, available borrowings totaled $20.1 million and letters of credit outstanding totaled $21.2 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 July 2, 2001, the revolving credit facility commitment was $170.0 million with the second quarter 2001 reduction applied on July 2nd because the last day of the second quarter 2001 was a Saturday.
Debt Covenants The indentures, credit facilities and other indebtedness agreements contain certain covenants that limit, among other things to varying degrees, the ability of Foamex L.P.'s (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 Interest, as defined, (iv) to merge, consolidate or sell all or substantially all of its assets or (v) to enter into certain transactions with affiliates or related persons. In addition, certain agreements contain provisions that, in the event of a defined change of control or the occurrence of an undefined material adverse change in the ability of the obligor to perform its obligations, the indebtedness must be repaid, in certain cases, at the option of the holder. Also, Foamex L.P. is required under certain of these agreements to maintain specified financial ratios of which the most restrictive are the maintenance of net worth, interest coverage, fixed charge coverage and leverage ratios, as defined. Under the most restrictive of the distribution restrictions as of June 30, 2001, Foamex L.P. was able to pay Foamex International funds only to the extent to enable Foamex International to meet its tax payment liabilities. Foamex L.P. was in compliance with the various financial covenants of its loan agreements as of June 30, 2001. Various Foamex L.P. debt agreements contain certain quarterly financial covenants, which become more restrictive during 2001. Foamex L.P. anticipates that it will continue to comply in 2001 with the quarterly financial covenants in the applicable debt agreements. Management's current business plans for Foamex L.P. anticipate customer selling price management in response to raw material costs changes, improved working capital management, comparable capital expenditures to the prior year, successful implementation of on-going cost savings 8 FOAMEX L.P. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 5. LONG-TERM DEBT (continued) initiatives and improved operating efficiencies. The achievement of the business plans is necessary for compliance with the various financial covenants for the remainder of 2001. The possibility exists that certain financial covenants will not be met if business conditions are other than as anticipated or other unforeseen events impact results. In the absence of a waiver of or amendment to such financial covenants, such noncompliance would constitute a default under the applicable debt agreements, and the lenders would be entitled to accelerate the maturity of the indebtedness outstanding thereunder. In the event that such noncompliance appears likely, or occurs, Foamex L.P. will seek the lenders' approvals of amendments to, or waivers of, such financial covenants. Historically, Foamex L.P. has been able to renegotiate financial covenants and/or obtain waivers, as required, and management believes such waivers and/or amendments could be obtained if required. However, there can be no assurance that future amendments or waivers will be obtained. 6. RETIREE BENEFITS Effective May 15, 2001, a non-qualified supplemental executive retirement plan (the "SERP") for certain executives was established. The SERP is a non-qualified plan and provides retirement benefits that supplement the benefits provided under the qualified pension plan. SERP pension expense for the period May 15, 2001 to December 31, 2001 is $0.2 million. The projected benefit obligation and unamortized prior service cost at May 15, 2001 were $0.9 million each, measured using a 6.75% discount rate. 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 manufacturing operations in Mexico, corporate expenses not allocated to other business segments and restructuring and other charges (credits). The restructuring and other charges (credits) totaled less than ($0.1) million in the second quarter of 2001 and less than ($0.1) million for the 2001 year to date period. No restructuring and other charges were recorded in the second quarter of 2000 and $2.8 million was recorded for the 2000 year to date period. Segment results are presented below.
Carpet Foam Cushion Automotive Technical Products Products Products Products Other Total --------- --------- ---------- ---------- ---------- ---------- (thousands) Quarterly period ended June 30, 2001 Net sales $121,196 $40,104 $100,858 $24,357 $5,778 $292,293 Income (loss) from operations 17,422 (3,945) 7,546 6,113 (1,137) 25,999 Depreciation and amortization 3,584 1,547 1,121 873 454 7,579 Quarterly period ended June 30, 2000 Net sales $129,008 $42,461 $92,428 $26,176 $7,615 $297,688 Income (loss) from operations 15,546 (2,263) 7,445 7,062 (1,471) 26,319 Depreciation and amortization 3,811 1,483 1,192 646 713 7,845 9 FOAMEX L.P. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 7. SEGMENT RESULTS (continued) Carpet Foam Cushion Automotive Technical Products Products Products Products Other Total --------- --------- ---------- ---------- ---------- ---------- (thousands) Year to date period ended June 30, 2001 Net sales $246,434 $74,702 $185,369 $52,138 $14,964 $573,607 Income (loss) from operations 31,351 (7,780) 12,543 14,027 (1,912) 48,229 Depreciation and amortization 7,446 2,843 2,338 1,607 897 15,131 Year to date period ended June 30, 2000 Net sales $257,566 $83,701 $189,739 $53,630 $18,572 $603,208 Income (loss) from operations 28,112 (6,651) 14,753 14,694 (5,149) 45,759 Depreciation and amortization 7,695 3,010 2,397 1,290 1,453 15,845
8. RELATED PARTY TRANSACTIONS AND BALANCES Foamex L.P. regularly enters into transactions with its affiliates in the ordinary course of business. Foamex L.P. sold during the quarters ended June 30, 2001 and 2000, approximately $36.8 million and $42.5 million, respectively, of carpet cushion products to Foamex Carpet at cost, plus 4.7% pursuant to a supply agreement. Foamex L.P. also purchased approximately $2.0 million and $1.5 million, respectively, of carpet cushion products from Foamex Carpet during the quarters ended June 30, 2001 and 2000. In addition, Foamex L.P. provided and invoiced approximately $0.1 million of administrative services to Foamex Carpet during the quarters ended June 30, 2001 and 2000, respectively. Foamex L.P. sold during the first half of 2001 and 2000, approximately $71.5 million and $83.7 million, respectively, of carpet cushion products to Foamex Carpet at cost, plus 4.7% pursuant to a supply agreement. Foamex L.P. also purchased approximately $4.1 million of carpet cushion products from Foamex Carpet during the first half of 2000. In addition, Foamex L.P. provided and invoiced approximately $0.2 million and $0.2 million of administrative services to Foamex Carpet during the first half of 2001 and 2000, respectively. 9. COMMITMENTS AND CONTINGENCIES Litigation - Foamex International Shareholders On August 1, 2000, Foamex International announced that it had reached agreements in principle with the plaintiffs in the stockholder actions described below providing for the settlement and dismissal of such actions, subject to certain conditions, including court approval. The Shareholder Litigation. Beginning on March 17, 1998, six actions, which were subsequently consolidated under the caption In re Foamex International Inc. Shareholders Litigation, were filed in the Court of Chancery of the State of Delaware, and on August 13, 1999, another action, Watchung Road Associates, L.P., et al. v. Foamex International Inc., et al. (the "Watchung Action"), was filed in the same court. The two actions were consolidated on May 3, 2000, into a single action under the caption In re Foamex International Inc. Shareholders Litigation (the "Delaware Action"). The Delaware Action, a purported derivative and class action on behalf of Foamex International and its stockholders, originally named as defendants Foamex International, certain of its current and former directors and officers, Trace International Holdings, Inc. ("Trace") and a Trace affiliate. The complaint in the Delaware Action alleges, among other things, that certain of the defendants breached their fiduciary duties to Foamex International in connection with an attempt by Trace to acquire Foamex International's publicly traded common stock as well as with a potential acquisition transaction with a group led by Sorgenti Chemical Industries LLC, and that certain of the defendants breached their fiduciary duties by causing Foamex International to 10 FOAMEX L.P. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 9. COMMITMENTS AND CONTINGENCIES (continued) waste assets in connection with a variety of transactions entered into with Trace and its affiliates. The Delaware Action seeks various remedies, including injunctive relief, money damages and the appointment of a receiver for Foamex International. On April 26, 1999, a putative securities class action entitled Molitor v. Foamex International Inc., et al., was filed in the United States District Court for the Southern District of New York naming as defendants Foamex International, Trace and certain current and former officers and directors of Foamex International, on behalf of stockholders who bought shares of Foamex International's common stock during the period from May 7, 1998 through and including April 16, 1999. The lawsuit alleged 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 alleged that Trace and Marshall S. Cogan violated Section 20(a) of the Securities Exchange Act of 1934 as controlling persons of Foamex International. The complaint sought class certification, a declaration that defendants violated the federal securities laws, an award of money damages, and costs and attorneys', accountants' and experts' fees. On May 18, 1999, a similar action entitled Thomas W. Riley v. Foamex International Inc., et al., was filed in the same court. The two actions were consolidated and a consolidated complaint was filed; the consolidated suit is referred to herein as the "Federal Action." The Settlements. On August 23, 2000, Foamex International and the plaintiffs in the Federal Action entered into a settlement agreement providing that members of the class of shareholders who purchased shares between May 7, 1998 and April 16, 1999 would receive payments as defined in the agreement. The court approved the settlement and dismissed the action with prejudice on January 11, 2001, and no appeals were filed. Payments to class members and plaintiffs' lawyers' fees in the Federal Action have been paid directly by Foamex International's insurance carrier on behalf of Foamex International. Under the terms of the agreement in principle to settle the Delaware Action, Foamex International agreed that a special nominating committee of the Board of Directors, consisting of Robert J. Hay as chairman, Stuart J. Hershon, John G. Johnson, Jr., and John V. Tunney, would nominate two additional independent directors to serve on the Board. The terms of the agreement also established the criteria for the independence of the directors and required that certain transactions with affiliates be approved by a majority of the disinterested members of the Board. The parties are negotiating the terms of the settlement agreement and related documentation. On January 9, 2001, the Court ordered the Watchung Action dismissed with prejudice only as to the named plaintiffs Watchung Road Associates, L.P. and Pyramid Trading Limited Partnership. The dismissal did not have any effect on the claims asserted in the consolidated action. The settlement of the Delaware Action (assuming a definitive settlement agreement is reached with plaintiffs) is subject to court approval, which, if obtained, will resolve all outstanding shareholder litigation against Foamex International and its current and former directors and officers. The settlements of the Federal Action and the Delaware Action involve no admissions or findings of liability or wrongdoing by Foamex International or any individuals. If management's assessment of Foamex International's liability with respect to these actions is incorrect, such actions could have a material adverse effect on Foamex International's consolidated financial position, results of operations and cash flows. Litigation - Breast Implants As of August 14, 2001, Foamex L.P. and Trace were two of multiple defendants in actions filed on behalf of approximately 2,313 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. 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. 11 FOAMEX L.P. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 9. COMMITMENTS AND CONTINGENCIES (continued) 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. Litigation - Other During the second quarter of 2001, Foamex International was notified by an insurance provider concerning a dispute involving the reimbursement of liability claims paid on behalf of Trace before 1990. The insurance provider is contending that Foamex International is liable for the claims of approximately $3.0 million. Foamex International intends to strongly defend this claim and considers the dispute to be without merit. If management's assessment of Foamex International'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 International. 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, results of operations and cash flows. Environmental and Health and Safety Foamex L.P. is subject to extensive and changing federal, state, local and foreign environmental laws and regulations, including those relating to the use, handling, storage, discharge and disposal of hazardous substances and the remediation of environmental contamination, and as a result, is from time to time involved in administrative and judicial proceedings and inquiries relating to environmental matters. As of June 30, 2001, Foamex L.P. had accruals of approximately $3.1 million for environmental matters. During 1998, Foamex L.P. established an allowance of $0.6 million relating to receivables from Trace for environmental indemnifications due to the financial difficulties of Trace. The Clean Air Act Amendments of 1990 (the "1990 CAA Amendments") provide for the establishment of federal emission standards for hazardous air pollutants including methylene chloride, propylene oxide and TDI, materials used in the manufacturing of foam. On December 27, 1996, the United States Environmental Protection Agency (the "EPA") proposed regulations under the 1990 CAA Amendments that will require manufacturers of slab stock polyurethane foam and foam fabrication plants to reduce emissions of methylene chloride. The final National Emission Standard for Hazardous Air Pollutants ("NESHAP") was promulgated October 7, 1998. NESHAP requires a reduction of approximately 70% of the emission of methylene chloride for the slab stock foam industry effective October 7, 2001. Foamex L.P. believes that the use of alternative technologies, including VPFSM, which do not utilize methylene chloride and its ability to shift current production to the facilities which use these alternative technologies will minimize the impact of these regulations. The 1990 CAA Amendments also may result in the 12 FOAMEX L.P. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 9. COMMITMENTS AND CONTINGENCIES (continued) imposition of additional standards regulating air emissions from polyurethane foam manufacturers, but these standards have not yet been proposed or promulgated. Foamex L.P. has reported to the appropriate state authorities that it has found soil and/or groundwater contamination in excess of state standards at six facilities. These sites are in various stages of investigation or remediation. Accordingly, the extent of contamination and the ultimate liability is not known with certainty for all sites. Foamex L.P. has accruals of $2.1 million for the estimated cost of remediation, including professional fees and monitoring costs, for these sites. During 2000, Foamex L.P. reached an indemnification agreement with the former owner of the Morristown, Tennessee facility. The agreement allocates the incurred and future remediation costs between the former owner and Foamex L.P. The estimated allocation of future costs for the remediation of this facility is not significant, based on current information known. The former owner was Recticel Foam Corporation, a subsidiary of Recticel s.a. Foamex L.P. has either upgraded or closed all underground storage tanks at its facilities in accordance with applicable regulations. On November 14, 2000, the United States Occupational Safety and Health Administration ("OSHA") released the final ergonomics standard ("Ergonomics Standard"), which applies to Foamex L.P., as well as all other employers in the United States, with certain industry specific exclusions. The Ergonomics Standard addresses musculoskeletal disorders, including those commonly referenced as repetitive motion disorders. During 2001, a joint resolution by the United States House of Representatives and Senate was approved that repealed the Ergonomics Standard. The repeal was submitted and signed by the President of the United States. On April 10, 1997, the OSHA promulgated new standards governing employee exposure to methylene chloride, which is used as a blowing agent in some of Foamex L.P.'s manufacturing processes. The phase-in of the standards was completed in 1999 and Foamex L.P. has developed and implemented a compliance program. Capital expenditures required and changes in operating procedures are not anticipated to significantly impact Foamex L.P.'s competitive position. Foamex L.P. has been designated as a Potentially Responsible Party ("PRP") by the EPA with respect to six sites. Estimates of total cleanup costs and fractional allocations of liability are generally provided by the EPA or the committee of PRP's with respect to the specified site. In each case and in the aggregate, the liability of Foamex L.P. is not considered to be significant. Although it is possible that new information or future developments could require Foamex L.P. to reassess its potential exposure relating to all pending environmental matters, including those described herein, Foamex L.P. believes that, based upon all currently available information, the resolution of such environmental matters will not have a material adverse effect on Foamex L.P.'s operations, financial position, capital expenditures or competitive position. The possibility exists, 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 significant. 10. SUBSEQUENT EVENTS Acquisitions On July 25, 2001, Foamex L.P. announced the purchase of certain assets of General Foam Corporation, a manufacturer of polyurethane foam products for the automotive, industrial, and home furnishings markets. The asset purchase primarily included inventory and machinery and equipment. 13 FOAMEX L.P. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 10. SUBSEQUENT EVENTS (continued) Future Accounting Changes Subsequent to quarter end, Statement of Financial Accounting Standards No. 141, "Business Combinations" ("SFAS No. 141") and Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142") were issued. SFAS No. 141 addresses financial accounting and reporting for business combinations and limits the accounting for business combinations to the purchase method. The statement will be effective for all business combinations, including the acquisition referenced above, with an acquisition date of July 1, 2001, or later. SFAS No. 142 addresses financial accounting and reporting for acquired goodwill and other intangible assets. A key change as a result of implementing SFAS No. 142 will be that goodwill and certain other intangibles will no longer be amortized and there may be more volatility in the reported results than under the previous standard because impairment losses are likely to occur irregularly and vary in amount. SFAS No. 142 is effective starting with fiscal years beginning after December 15, 2001. Any impairment losses for goodwill and indefinite-lived intangible assets that arise due to the initial application of SFAS No. 142 will be reported as resulting from a change in accounting principle. Any goodwill and intangible assets acquired after June 30, 2001, including the acquisition referenced above, will be subject immediately to the nonamortization and amortization provisions of SFAS No. 142. Foamex L.P. continues to evaluate SFAS No. 141 and SFAS No. 142 and has not yet determined the impact. 11. RESTATEMENT Subsequent to the issuance of Foamex L.P.'s unaudited interim financial statements as of June 30, 2001 and for the three and six-month periods ended June 30, 2001, Foamex L.P.'s management determined that the 2001 interim financial statements required certain adjustments related to Foamex L.P.'s adoption of SFAS No. 133 and certain purchase discounts that were originally recognized in other quarters. As a result, the unaudited interim financial statements as of and for the three months ended June 30, 2001 have been restated from the amounts previously reported to (i) reclassify $5.6 million from accumulated other comprehensive loss to other liabilities to properly reflect the adoption of SFAS No. 133, (ii) recognize approximately $0.4 million of purchase discounts that were originally recognized in other quarters and (iii) reflect certain income tax adjustments. A summary of the significant effects of the restatement is as follows:
Quarterly Period Ended June 30, 2001 ------------------------------------ Previously Reported As Restated ---------- ----------- Statement of Operations (thousands) Cost of Goods Sold $ 249,337 $ 248,800 Gross Profit $ 42,956 $ 43,493 Income from Operations $ 25,462 $ 25,999 Income before Provision for Income Taxes $ 10,455 $ 10,992 Provision for Income Taxes $ 1,236 $ 439 Net Income $ 9,219 $ 10,553 Year to Date Period June 30, 2001 ------------------------------------ Previously Reported As Restated ---------- ----------- Statement of Operations (thousands) Cost of Goods Sold $ 494,626 $ 494,984 Gross Profit $ 78,981 $ 78,623 Income from Operations $ 48,587 $ 48,229 Income before Provision for Income Taxes $ 17,328 $ 17,455 Provision for Income Taxes $ 2,133 $ 900 Net Income $ 15,195 $ 16,555
14 FOAMEX L.P. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 11. RESTATEMENT (continued)
June 30, 2001 ------------------------------------ Previously Reported As Restated ---------- ----------- Balance Sheet (thousands) Current Assets $ 279,696 $ 279,411 Property, Plant and Equipment $ 203,490 $ 203,836 Total Assets $ 689,001 $ 689,201 Current Liabilities $ 172,396 $ 172,174 Total Liabilities $ 837,166 $ 841,618 Partners' Deficit $(148,165) $(152,417) Total Liabilities and Partners' Deficit $ 689,001 $ 689,201
15 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Accounting Changes - Accounting for Derivatives and Hedging Activities Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133") requires the fair value of derivatives be recognized in the consolidated balance sheets. Changes in the fair value of derivatives are recognized in earnings or in other comprehensive loss, essentially depending on the structure and the purpose of the derivatives. During 2000, SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities", which amended SFAS No. 133 on a limited number of issues, was issued. The statements were effective for Foamex L.P. in the first quarter of 2001. These statements create a foundation that will address accounting and reporting issues for a wide range of financial instruments defined as derivatives and related hedging activities. As of December 31, 2000, Foamex L.P. did not have any derivatives, as defined in the statements. Accordingly, the initial adoption of the statements did not have a significant impact on the results of operations or financial position of Foamex L.P. Future Accounting Changes Subsequent to quarter end, Statement of Financial Accounting Standards No. 141, "Business Combinations" ("SFAS No. 141") and Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142") were issued. SFAS No. 141 addresses financial accounting and reporting for business combinations and limits the accounting for business combinations to the purchase method. The statement will be effective for all business combinations, including the acquisition referenced above, with an acquisition date of July 1, 2001, or later. SFAS No. 142 addresses financial accounting and reporting for acquired goodwill and other intangible assets. A key change as a result of implementing SFAS No. 142 will be that goodwill and certain other intangibles will no longer be amortized and there may be more volatility in the reported results than under the previous standard because impairment losses are likely to occur irregularly and vary in amount. SFAS No. 142 is effective starting with fiscal years beginning after December 15, 2001. Any impairment losses for goodwill and indefinite-lived intangible assets that arise due to the initial application of SFAS No. 142 will be reported as resulting from a change in accounting principle. Any goodwill and intangible assets acquired after June 30, 2001, will be subject immediately to the nonamortization and amortization provisions of SFAS No. 142. Foamex L.P. continues to evaluate SFAS No. 141 and SFAS No. 142 and has not yet determined the impact. RESULTS OF OPERATIONS FOR THE QUARTER ENDED JUNE 30, 2001 COMPARED TO THE QUARTER ENDED JUNE 30, 2000
Carpet Foam Cushion Automotive Technical Products Products Products Products Other Total -------- -------- ---------- ---------- --------- ---------- Quarterly period ended June 30, 2001 (thousands) - ------------------------------------ Net sales $121,196 $40,104 $100,858 $24,357 $5,778 $292,293 Income (loss) from operations 17,422 (3,945) 7,546 6,113 (1,137) 25,999 Depreciation and amortization 3,584 1,547 1,121 873 454 7,579 Income (loss) from operations as a percentage of net sales 14.4% (9.8)% 7.5% 25.1% n.m.* 8.9% Quarterly period ended June 30, 2000 Net sales $129,008 $42,461 $92,428 $26,176 $7,615 $297,688 Income (loss) from operations 15,546 (2,263) 7,445 7,062 (1,471) 26,319 Depreciation and amortization 3,811 1,483 1,192 646 713 7,845 Income (loss) from operations as a percentage of net sales 12.1% (5.3)% 8.1% 27.0% n.m* 8.8%
* not meaningful 16 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Income from Operations Net sales for the second quarter of 2001 decreased 1.8% to $292.3 million from $297.7 million in the second quarter of 2000. The decrease was primarily attributed to lower sales in Foam Products, Carpet Cushion Products, Technical Products and Other segments, partially offset by an increase in Automotive Products. The gross profit margin was 14.9% in the second quarter of 2001 compared to 13.6% in the same quarter of 2000. Certain raw material cost reductions had the favorable effect of improving the gross margin in the second quarter by approximately 2.5 percentage points. There can be no assurance that these cost reductions will continue at the same level for the balance of the year. Selling, general and administrative expenses were 24.0% higher in the second quarter of 2001 with the increase attributable to higher expenses for the estimation of uncollectible accounts receivable, incentive compensation and professional fees. Income from operations for the second quarter of 2001 was $26.0 million, which represented a 1.2% decrease from the $26.3 million recorded during the comparable 2000 period. Results included restructuring and other charges (credits) of less than ($0.1) million in 2001. Restructuring and other charges (credits) recorded during 2001 are discussed under "Other" below. Excluding the restructuring and other charges (credits) for comparison purposes, income from operations remained at $26.0 million in the second quarter of 2001 compared to $26.3 million in the 2000 second quarter. On this basis, income from operations was 8.9% of net sales in 2001 compared to 8.8% of net sales in 2000. In addition to the certain raw material cost reductions discussed above, cost reduction programs were also a positive factor. Foam Products Foam Products net sales for the second quarter of 2001 decreased 6.1% to $121.2 million from $129.0 million in the second quarter of 2000. The decrease primarily reflected the domestic economic slow down that impacted the markets for furniture manufacturers and for other foam fabricators. Partially offsetting these unfavorable factors was an increase in consumer products sales. Despite the sales decline, income from operations increased 12.1% from $15.5 million in the second quarter of 2000 to $17.4 million in the second quarter of 2001. Income from operations was 14.3% of net sales in 2001, up from 12.1% in 2000. Carpet Cushion Products Carpet Cushion Products net sales for the second quarter of 2001 decreased 5.6% to $40.1 million from $42.5 million in the second quarter of 2000. The sales decline continued to reflect competitive pressures that resulted in lower sales volumes across all product lines. Lower sales translated to a loss from operations of $3.9 million in 2001 compared to a loss from operations of 2.3 million in 2000. The loss from operations represented 9.8% of net sales in 2001 and 5.3% in 2000. Automotive Products Automotive Products net sales for the second quarter of 2001 increased 9.1% to $100.9 million from $92.4 million in the second of 2000. The improvement primarily reflected new product programs and renewed activity in the domestic automotive industry following inventory corrections earlier in the year. Higher sales translated to a 1.4% increase in income from operations, from $7.4 million in the second quarter of 2000 to $7.5 million in the second quarter of 2001. Income from operations represented 7.5% of net sales in 2001 and 8.1% in 2000. Technical Products Net sales for Technical Products in the second quarter of 2001 were down 6.9% to $24.4 million from $26.2 million in the second quarter of 2000. Lower sales primarily reflected a slow down in the technology sector. Income from operations decreased 13.4% to $6.1 million in the second quarter of 2001 compared to $7.1 million in the second quarter of 2000. Income from operations represented 25.1% of net sales in 2001 compared to 27.0% in 2000. 17 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Other Other primarily consists of certain manufacturing operations in Mexico, corporate expenses not allocated to business segments and restructuring and other charges (credits). The decrease in net sales associated with this segment primarily resulted from lower net sales from the Foamex L.P.'s Mexico City operation. The loss from operations was $1.1 million in the second quarter of 2001 and included restructuring and other charges (credits) of less than ($0.1) million, discussed below. In the second quarter of 2000, a $1.5 million loss from operations was recorded. During the second quarter of 2001, Foamex L.P. recorded restructuring and other charges (credits) of less than $(0.1) million. The net credit was comprised of changes in estimates for previously recognized restructuring plans. Interest and Debt Issuance Expense Interest and debt issuance expense totaled $15.1 million in the second quarter of 2001, which represented a 12.3% decrease from the 2000 second quarter expense of $17.3 million. The decrease was attributable to lower average debt levels and lower effective interest rates. As discussed in Note 5 to the condensed consolidated financial statements, a provision of the Foamex L.P. credit facility requires an incremental interest rate margin based on the debt leverage ratio, as defined. During the third quarter of 2001, a total of 75 basis points will be the cumulative adjustment to the applicable interest rate margin. Income from Equity Interest in Joint Venture Income from an equity interest in an Asian joint venture totaled $0.3 million for the second quarter of 2001 compared to $0.4 million in the second quarter of 2000. Other Expense, Net Other net expense recorded for the second quarter of 2001 totaled $0.2 million and primarily included letter of credit fees. During the second quarter of 2000, other net expense recorded totaled $0.2 million. Income Tax Expense Foamex L.P., as a limited partnership, is not subject to Federal income taxes. Consequently, no current or deferred provision has been provided for such taxes. However, Foamex L.P. has provided for the income taxes of certain states in which it is subject to taxes and for subsidiaries located in foreign jurisdictions that file separate tax returns. Compared to 2000 the effective tax rate was lower in 2001 primarily due to a lower percentage of income from foreign sources. Net Income Net income for the second quarter of 2001 was $10.6 million compared to $7.9 million recorded in the second quarter of 2000. RESULTS OF OPERATIONS FOR THE YEAR TO DATE PERIOD ENDED JUNE 30, 2001 COMPARED TO THE YEAR TO DATE PERIOD ENDED JUNE 30, 2000
Carpet Foam Cushion Automotive Technical Products Products Products Products Other Total --------- -------- ---------- ---------- --------- ----------- Year to date period ended June 30, 2001 (thousands) - --------------------------------------- Net sales $246,434 $74,702 $185,369 $52,138 $14,964 $573,607 Income (loss) from operations 31,351 (7,780) 12,543 14,027 (1,912) 48,229 Depreciation and amortization 7,446 2,843 2,338 1,607 897 15,131 Income (loss) from operations as a percentage of net sales 12.7% (10.4)% 6.8% 26.9% n.m.* 8.4% 18 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Carpet Foam Cushion Automotive Technical Products Products Products Products Other Total --------- -------- ---------- ---------- --------- ----------- Year to date period ended June 30, 2000 (thousands) - --------------------------------------- Net sales $257,566 $83,701 $189,739 $53,630 $18,572 $603,208 Income (loss) from operations 28,112 (6,651) 14,753 14,694 (5,149) 45,759 Depreciation and amortization 7,695 3,010 2,397 1,290 1,453 15,845 Income (loss) from operations as a percentage of net sales 10.9% (7.9)% 7.8% 27.4% n.m* 7.6%
* not meaningful Income from Operations Net sales for the first half of 2001 decreased 4.9% to $573.6 million from $603.2 million in the first half of 2000. Lower sales were recorded in all segments, as discussed on a segment basis below. The gross profit margin was 13.7% in the first half of 2001 compared to 12.8% in the comparable period in 2000. Certain raw material cost reductions had the favorable effect of improving the gross margin in the first half by approximately 2 percentage points. There can be no assurance that these cost reductions will continue at the same level for the balance of the year. Selling, general and administrative expenses were 7.3% higher in the first half of 2001 with the increase primarily attributable to higher expenses for the estimation of uncollectible accounts receivable, higher employee medical costs and professional fees. Income from operations for the first half of 2001 was $48.2 million, which represented a 5.4% increase from the $45.8 million recorded during the comparable 2000 period. Results included restructuring and other charges (credits) of less than ($0.1) million in 2001 and $2.8 million in the first half of 2000. Restructuring and other charges (credits) recorded during 2001 are discussed under "Other" below. Excluding the restructuring and other charges (credits) for comparison purposes, income from operations was $48.2 million for the first half of 2001 compared to $48.6 million in the 2000 first half. On this basis, income from operations was 8.4% of net sales in 2001 compared to 8.1% of net sales in 2000. In addition to the certain raw material cost reductions discussed above, cost reduction programs and increases in certain selling prices were also positive factors. Foam Products Foam Products net sales for the first half of 2001 decreased 4.3% to $246.4 million from $257.6 million in the comparable period of 2000. The decrease primarily reflected the domestic economic slow down that impacted the markets for furniture manufacturers and other foam fabricators. Consumer products sales were also down, although sales levels did rebound during the second quarter. Despite the sales decline, income from operations increased 11.5%, from $28.1 million in the first half of 2000 to $31.4 million in the first half of 2001. Income from operations was 12.7% of net sales in 2001, up from 10.9% in 2000. Carpet Cushion Products Carpet Cushion Products net sales for the first half of 2001 decreased 10.8% to $74.7 million from $83.7 million in the comparable period of 2000. The sales decline continued to reflect competitive pressures that resulted in lower sales volumes across all product lines. Lower sales translated to a loss from operations of $7.8 million in the first half of 2001 compared to a loss from operations of $6.7 million in 2000. The loss from operations represented 10.4% of net sales in 2001 and 7.9% of net sales in 2000. Automotive Products Automotive Products net sales for the first half of 2001 decreased 2.3% to $185.4 million from $189.7 million in the first half of 2000. The decline reflected a slow down in the domestic automobile industry following inventory corrections earlier in the year. During the second quarter of 2001, sales levels rebounded which primarily reflected new product programs and improved order levels. Lower sales translated into a 15.0% decline in income from 19 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. operations, from $14.8 million in the first half of 2000 to $12.5 million in the first half of 2001. Income from operations represented 6.8% of net sales in 2001 and 7.8% in 2000. Technical Products Net sales for Technical Products in the first half of 2001 were down 2.8% to $52.1 million from $53.6 million in the comparable period of 2000. Lower sales primarily reflected a slow down in the technology sector. Income from operations decreased 4.5% to $14.0 million in the first half of 2001 compared to $14.7 million in the first half of 2000. Income from operations represented 26.9% of net sales in 2001 compared to 27.4% in 2000. Other Other primarily consists of certain manufacturing operations in Mexico, corporate expenses not allocated to business segments and restructuring and other charges. The decrease in net sales associated with this segment primarily resulted from lower net sales from Foamex L.P.'s Mexico City operation. The loss from operations was $1.9 million in the first half of 2001 and included restructuring and other charges (credits ), discussed below. The $5.1 million loss from operations in the first half of 2000 included restructuring and other charges totaling $2.8 million. During the first quarter of 2001, a net restructuring credit of less than $0.1 million was recorded. The credit was comprised of: (i) restructuring charges of $0.3 million for severance relating to the termination of 26 employees; (ii) other charges of $1.4 million relating to severance for the former President and Chief Executive Officer; (iii) offset by a $1.8 million restructuring credit. The restructuring credit is comprised of $1.5 million for a sublease and early lease termination of an idle facility and $0.3 million for the sale of another facility. Both facilities and related restructuring charges were part of prior years' restructuring plans. During the second quarter of 2001, Foamex L.P. recorded restructuring and other charges (credits) of less than $(0.1) million. The net credit was comprised of changes in estimates for previously recognized restructuring plans. During the first quarter of 2000, restructuring and other charges of approximately $2.8 million were recorded. The provision included $1.7 million for work force reduction costs that included 27 employees, including certain executives and employees impacted by the closure of certain operations as a result of a 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 included $0.4 million related to changes in estimates to prior year plans. Foamex L.P. paid $3.6 million during the first half of 2001 for the various restructuring plans recorded as of December 31, 2000 and during the first quarter of 2001. As of June 30, 2001, the components of the net accrued restructuring and other charges balance included $3.7 million for plant closure and lease costs, $0.9 million for personnel reductions and $0.6 million for other costs. All employees impacted by the first quarter 2001 work force reduction were terminated by the end of the second quarter of 2001. Approximately $1.1 million is expected to be spent during the remainder of 2001 for the various restructuring plans. Interest and Debt Issuance Expense Interest and debt issuance expense totaled $31.2 million in the first half of 2001, which represented a 9.2% decrease from the 2000 first half expense of $34.3 million. The decrease was attributable to lower average debt levels and lower effective interest rates. As discussed in Note 5 to the condensed consolidated financial statements, a provision of the Foamex L.P. credit facility requires an incremental interest rate margin based on the debt leverage ratio, as defined. By the end of the third quarter of 2001, a total of 75 basis points will be the applicable incremental interest rate margin. Income from Equity Interest in Joint Venture Income from an equity interest in an Asian joint venture totaled $0.7 million for the first half of 2001 compared to $0.7 million in the comparable period of 2000. 20 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Other Expense, Net Other net expense recorded for the first half 2001 totaled $0.2 million and primarily included letter of credit fees. During the first half of 2000, other net expense recorded totaled $0.4 million. Income Tax Expense Foamex L.P., as a limited partnership, is not subject to Federal income taxes. Consequently, no current or deferred provision has been provided for such taxes. However, Foamex L.P. has provided for the income taxes of certain states in which it is subject to taxes and for subsidiaries located in foreign jurisdictions that file separate tax returns. Compared to 2000 the effective tax rate was lower in 2001 primarily due to a lower percentage of income from foreign sources. Net Income Net income for the first half of 2001 was $16.6 million compared to $10.0 million recorded in the first half of 2000. 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. The ability of Foamex L.P. to make distributions to Foamex International is restricted by the terms of its financing agreements; therefore, Foamex International is not expected to have access to the cash flow generated by Foamex L.P. for the foreseeable future. Cash and cash equivalents totaled $1.2 million at the end of the first quarter of 2001 compared to $2.9 million at the end of 2000. Working capital at the end of the second quarter of 2001 was $107.2 million and the current ratio was 1.6 to 1 compared to working capital at the end of 2000 of $109.5 million and a current ratio of 1.7 to 1. Significant changes in working capital included a $24.4 million increase in accounts receivable, a $15.1 million decrease in inventories and an $18.4 million increase in accounts payable. During the second quarter of 2001, Foamex L.P. achieved improved payment terms with a number of vendors that contributed to the improvement of working capital and may have a more favorable significant effect in the future. Total debt at the end of the second quarter of 2001 was $644.1 million, down $20.5 million from year-end 2000. As of June 30, 2001, there were $131.2 million of revolving credit borrowings, at a weighted average interest rate of 7.98%, under the Foamex L.P. credit facility with $20.1 million available for additional borrowings and $21.2 million of letters of credit outstanding. There was less than $0.1 million of borrowings by Foamex Canada Inc. ("Foamex Canada") as of June 30, 2001 under Foamex Canada's revolving credit agreement with unused availability of approximately $5.2 million. As of June 30, 2001, Foamex L.P. was in compliance with the various financial covenants of its loan agreements. Various Foamex L.P. debt agreements contain certain quarterly financial covenants which become more restrictive during 2001. Foamex L.P. anticipates that it will continue to comply in 2001 with the quarterly financial covenants in the applicable debt agreements. Management's current business plans for Foamex L.P. anticipate customer selling price management in response to raw material costs changes, improved working capital management, comparable capital expenditures to the prior year, successful implementation of on-going cost savings initiatives and improved operating efficiencies. The achievement of the business plans is necessary for compliance with the various financial covenants for the remainder of 2001. The possibility exists that certain financial covenants will not be met if business conditions are other than as anticipated or other unforeseen events impact results. In the absence of a waiver of or amendment to such financial 21 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. covenants, such noncompliance would constitute a default under the applicable debt agreements, and the lenders would be entitled to accelerate the maturity of the indebtedness outstanding thereunder. In the event that such noncompliance appears likely, or occurs, Foamex L.P. will seek the lenders' approvals of amendments to, or waivers of, such financial covenants. Historically, Foamex L.P. has been able to renegotiate financial covenants and/or obtain waivers, as required, and management believes such waivers and/or amendments could be obtained if required. However, there can be no assurance that future amendments or waivers will be obtained. Cash Flow from Operating Activities Cash provided by operating activities in the first half of 2001 was $25.3 million compared to $20.2 million for the first half of 2000. The increase primarily reflected improved results and reduced working capital requirements. Cash Flow from Investing Activities Cash used for investing activities totaled $12.3 million for the first half of 2001. Cash requirements included capital expenditures of $12.5 million and other investing activities of $0.5 million, partially offset by $0.6 million of proceeds from the sale of assets. In the first half of 2000, cash flow used for investing activities totaled $8.4 million, which included $10.3 million of capital expenditures, and increase in the revolving loan with Foamex International of $1.2 million, partially offset by $3.6 million of proceeds from the sale of assets. Foamex L.P. has increased its estimate of capital expenditures for 2001 and currently expects capital expenditures for 2001 to be less than $25.0 million. Cash Flow from Financing Activities Cash used for financing activities was $14.6 million for the first half of 2001 compared to cash used of $11.8 million in the first half of 2000. Cash requirements for 2001 primarily reflected debt repayments, partially offset by an increase in cash overdrafts. During the first half of 2000, the $34.0 million Foamex/GFI Note was repaid with borrowings under the Foamex L.P. revolving credit facility. Environmental Matters Foamex L.P. is subject to extensive and changing environmental laws and regulations. Expenditures to date in connection with Foamex L.P.'s compliance with such laws and regulations did not have a material adverse effect on Foamex L.P.'s operations, financial position, capital expenditures or competitive position. The amount of liabilities recorded by Foamex L.P. in connection with environmental matters as of June 30, 2001 was $3.1 million. Although it is possible that new information or future developments could require Foamex L.P. to reassess its potential exposure to all pending environmental matters, including those described in Note 9 to Foamex L.P.'s condensed consolidated financial statements, Foamex L.P. believes that, based upon all currently available information, the resolution of all such pending environmental matters will not have a material adverse effect on the Foamex L.P.'s operations, financial position, capital expenditures or competitive position. Market Risk Foamex L.P.'s debt securities with variable interest rates are subject to market risk for changes in interest rates. On June 30, 2001, indebtedness with variable interest rates totaled $388.4 million. On an annualized basis, if the interest rates on these debt instruments increased by 1.0%, interest expense would increase by approximately $3.9 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, 2000. 22 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. 23 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, 2000. The information from Note 9 of the condensed consolidated financial statements is incorporated herein by reference. Item 5. Other Information. On June 28, 2001, PricewaterhouseCoopers LLP, Foamex International's and Foamex L.P.'s independent auditor resigned. Foamex International and Foamex L.P. announced early in July that Deloitte & Touche LLP were retained as the new independent auditor. Additional information concerning these developments were included in the Current Reports on Form 8-K and 8-K/A, referenced in Item 6 below. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits 10.10.9 Foamex International Inc. Equity Incentive Plan for Non-Employee Directors is incorporated herein by reference from the Foamex International Amended and Restated Proxy for the 2001 Annual Meeting. 10.10.10 Foamex International Inc. Key Employee Incentive Bonus Plan is incorporated herein by reference from the Foamex International Amended and Restated Proxy for the 2001 Annual Meeting. 10.10.11 Agreement with Consultant, dated April 24, 2001 by and between Robert J. Hay and Foamex L.P. was filed as an exhibit to the Foamex International Form 10-Q for the second quarter of 2001 and is hereby incorporated by reference. (b) Foamex L.P. filed the following Current Reports on Form 8-K for the quarter ended June 30, 2001: A report dated May 3, 2001, was filed for Item 5. Other Events, concerning a press release announcing Foamex International's financial results for the quarter ended March 31, 2001. A report dated June 28, 2001, was filed for Item 5. Other Events, concerning a press release announcing the resignation of the independent accountants of Foamex International and Foamex L.P. and adjournment of the Foamex International June 29, 2001 Annual Meeting of Stockholders. On July 6, 2001, an amended report was filing with the required disclosures under Item 4. Changes in Registrant's Certifying Accountant. Subsequent to the end of the second quarter of 2001, a report dated July 9, 2001 was filed for Item 5. Other Events, concerning a press release announcing an acquisition agreement. Subsequent to the end of the second quarter of 2001, a report dated July 9, 2001 was filed for Item 5. Other Events, concerning a press release announcing the engagement of a new independent auditors. On July 19, 2001, an amended report was filed with the required disclosures under Item 4. Changes in Registrant's Certifying Accountant. 24 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: February 25, 2002 By: /s/ Michael D. Carlini --------------------------- Michael D. Carlini Senior Vice President FOAMEX CAPITAL CORPORATION Date: February 25, 2002 By: /s/ Michael D. Carlini -------------------------- Michael D. Carlini Senior Vice President 25 -----END PRIVACY-ENHANCED MESSAGE-----