10-Q/A 1 flp01q3a.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 September 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 November 13, 2001 was 1,000. Foamex L.P. is filing this Form 10-Q/A to restate its unaudited condensed consolidated financial statements as of September 30, 2001 and for the three and nine months then ended as discussed in Note 12. 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 and has updated other disclosures to reflect significant subsequent events 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 September 30, 2001 (restated) and September 30, 2000 3 Condensed Consolidated Balance Sheets (unaudited) as of September 30, 2001 (restated) and December 31, 2000 4 Condensed Consolidated Statements of Cash Flows (unaudited) - Year to date Periods Ended September 30, 2001 (restated) and September 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. 19 Item 3. Quantitative and Qualitative Disclosures about Market Risk. 26 Part II. Other Information Item 1. Legal Proceedings. 27 Item 5. Other Information. 27 Item 6. Exhibits and Reports on Form 8-K. 27 Signatures 28
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 ----------------------------- ----------------------------- September 30, September 30, September 30, September 30, 2001 2000 2001 2000 ------------- ------------- ------------- ------------- (As restated, (As restated, see Note 12) see Note 12) (thousands) NET SALES $304,283 $286,371 $877,890 $889,579 COST OF GOODS SOLD 261,765 247,732 756,749 773,997 -------- -------- -------- -------- GROSS PROFIT 42,518 38,639 121,141 115,582 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 17,455 13,966 47,896 42,329 RESTRUCTURING AND OTHER CHARGES 238 2,800 191 5,621 -------- -------- -------- -------- INCOME FROM OPERATIONS 24,825 21,873 73,054 67,632 INTEREST AND DEBT ISSUANCE EXPENSE 14,541 17,757 45,730 52,105 INCOME (LOSS) FROM EQUITY INTEREST IN JOINT VENTURE (53) 282 610 1,014 OTHER EXPENSE, NET (755) (488) (1,003) (926) -------- -------- -------- -------- INCOME BEFORE PROVISION FOR INCOME TAXES 9,476 3,910 26,931 15,615 PROVISION FOR INCOME TAXES 1,131 868 2,031 2,558 -------- -------- -------- -------- NET INCOME $ 8,345 $ 3,042 $ 24,900 $ 13,057 ======== ======== ======== ========
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)
September 30, December 31, 2001 2000 ------------- ------------ (As restated, ASSETS see Note 12) CURRENT ASSETS (thousands) Cash and cash equivalents $ 6,632 $ 2,887 Accounts receivable, net of allowances of $8,079 in 2001 and $6,458 in 2000 172,935 134,478 Accounts receivable from related parties 14,108 12,483 Inventories 94,246 96,673 Other current assets 13,380 16,670 -------- -------- Total current assets 301,301 263,191 -------- -------- Property, plant and equipment 392,673 377,732 Less accumulated depreciation (185,429) (175,260) -------- -------- NET PROPERTY, PLANT AND EQUIPMENT 207,244 202,472 COST IN EXCESS OF ASSETS ACQUIRED, net of accumulated amortization of $24,304 in 2001 and $20,677 in 2000 179,555 178,299 DEBT ISSUANCE COSTS, net of accumulated amortization of $10,849 in 2001 and $8,719 in 2000 9,871 11,491 OTHER ASSETS 26,395 18,209 -------- -------- TOTAL ASSETS $724,366 $673,662 ======== ======== LIABILITIES AND PARTNERS' DEFICIENCY CURRENT LIABILITIES Current portion of long-term debt $ 5,436 $ 8,356 Accounts payable 136,981 78,857 Cash overdrafts 14,959 6,884 Accrued employee compensation and benefits 20,795 20,420 Accrued interest 10,573 9,133 Accrued customer rebates 9,878 12,400 Other accrued liabilities 20,198 17,663 -------- -------- Total current liabilities 218,820 153,713 LONG-TERM DEBT 623,700 656,168 OTHER LIABILITIES 46,999 32,688 -------- -------- Total liabilities 889,519 842,569 -------- -------- COMMITMENTS AND CONTINGENCIES PARTNERS' DEFICIENCY General partners (113,263) (130,235) Limited partners - - Accumulated other comprehensive loss (40,179) (24,461) Notes and advances receivable from partner (2,490) (4,990) Notes receivable from related party (9,221) (9,221) -------- -------- Total partners' deficiency (165,153) (168,907) -------- -------- TOTAL LIABILITIES AND PARTNERS' DEFICIENCY $724,366 $673,662 ======== ========
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 --------------------------------- September 30, September 30, 2001 2000 ------------- ------------- (As restated, see Note 12) (thousands) OPERATING ACTIVITIES Net income $24,900 $13,057 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 23,244 24,652 Amortization of debt issuance costs, debt premium and debt discount 131 172 Loss on disposition of assets 586 - Asset writedowns and other charges - 2,789 Other operating activities (585) 3,731 Changes in operating assets and liabilities, net 17,374 21,171 ------- ------- Net cash provided by operating activities 65,650 65,572 ------- ------- INVESTING ACTIVITIES Capital expenditures (17,052) (18,460) Acquisitions - asset purchase (14,827) - Proceeds from sale of assets 683 3,571 Collection of note from Foamex International 2,500 - Increase in revolving loan to Foamex International - (1,805) Other investing activities (941) (1,134) ------- ------- Net cash used for investing activities (29,637) (17,828) ------- ------- FINANCING ACTIVITIES Repayments of short-term borrowings - (1,627) Repayments of revolving loans (27,881) (12,031) Repayments of long-term debt (6,510) (19,201) Repayment of long-term debt - related party - (34,000) Distributions paid to partners (3,764) - Debt issuance costs (510) - Increase in cash overdrafts 8,075 20,748 Other financing activities (1,678) - ------- ------- Net cash used for financing activities (32,268) (46,111) ------- ------- NET INCREASE IN CASH AND CASH EQUIVALENTS 3,745 1,633 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 2,887 1,573 ------- ------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 6,632 $ 3,206 ======= =======
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 and the September 30, 2001 financial statements and related notes included in Exhibit 99.1 to this Form 10-Q/A. 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 September 30, 2001 and 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. Accounting Changes - Business Combinations During 2001, Statement of Financial Accounting Standards No. 141, "Business Combinations" ("SFAS No. 141") was 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 discussed in Note 2, with an acquisition date of July 1, 2001, or later. Future Accounting Changes - Goodwill and Other Intangible Assets During 2001, Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142") was issued. 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 in varying amounts. 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 discussed in Note 2, will be subject immediately to the nonamortization and amortization provisions of SFAS No. 142. The other provisions of SFAS No. 142 will be adopted by Foamex L.P. on January 1, 2002. Foamex L.P. continues to evaluate SFAS No. 142 and has not yet determined the impact. Future Accounting Changes - Asset Retirement Obligations and Impairment or Disposal of Long-Lived Assets During 2001, Statement of Financial Accounting Standards No. 143, "Accounting for Asset Retirement Obligations ("SFAS No. 143") was issued. SFAS No. 143 requires the recognition of a liability for the estimated cost of disposal as part of the initial cost of a long-lived asset and will be effective in 2003. Subsequent to the third 6 FOAMEX L.P. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 1. ORGANIZATION AND BASIS OF PRESENTATION (continued) quarter of 2001, Statement of Financial Accounting Standards No. 144, "Accounting for Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144") was issued. SFAS No. 144 will provide a single approach for measuring the impairment of long-lived assets, including a segment of a business accounted for as a discontinued operation or those to be sold or disposed of other than by sale. SFAS No. 144 will be effective in 2002. Foamex L.P. has not yet determined the impact of SFAS No. 143 and SFAS No. 144. 2. ACQUISITION On July 25, 2001, Foamex L.P. purchased certain assets and assumed certain liabilities of General Foam Corporation, a manufacturer of polyurethane foam products for the automotive, industrial, and home furnishings markets at a total cost of $18.5 million, which resulted in goodwill of approximately $9.0 million. The business was acquired due to its synergy with Foamex L.P.'s existing business. The assets purchased primarily included inventory and machinery and equipment. The results of the acquired business have been included in the consolidated financial statements since July 25, 2001. The effects of the acquisition on Foamex L.P.'s financial statements is not material. 3. COMPREHENSIVE INCOME (LOSS) The components of comprehensive income are listed below.
Quarterly Periods Ended Year to Date Periods Ended ---------------------------- ----------------------------- September 30, September 30, September 30, September 30, 2001 2000 2001 2000 ------------ ------------- ------------- ------------- (thousands) Net income $ 8,345 $3,042 $24,900 $13,057 Foreign currency translation adjustments (1,178) (387) (1,065) (552) Minimum pension liability adjustment (a) (14,653) - (14,653) - ------- ------ ------- ------- Total comprehensive income (loss) $(7,486) $2,655 $ 9,182 $12,505 ======= ====== ======= =======
(a) See Note 7 4. RESTRUCTURING AND OTHER CHARGES (CREDITS) Nine Months 2001 During the nine months ended September 30, 2001, Foamex L.P. recorded $1.5 million for restructuring plans that included severance for 32 employees. Foamex L.P. also recorded a net restructuring credit of approximately $1.3 million related to changes in estimates to prior years' restructuring plans. The credit primarily related to a sublease of an idle facility and the sale of two other idle facilities. Nine Months 2000 During the nine months ended September 30, 2000, Foamex L.P. recorded $5.6 million for restructuring plans that included severance for 99 employees. Foamex L.P. also recorded a net restructuring charge of approximately $0.2 million related to changes in estimates to prior years' restructuring plans. See Note 11 concerning a fourth quarter 2001 restructuring charge. 7 FOAMEX L.P. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 4. RESTRUCTURING AND OTHER CHARGES (CREDITS) (continued) The following tables set forth the components of Foamex L.P.'s restructuring and other charges (credits):
Three Months Ended September 30, 2001 -------------------------------------------------------------- Plant Closure Personnel Total and Leases Reductions Other --------- --------------- ---------- -------- (millions) Balance at June 30, 2001 $5.2 $3.7 $0.9 $0.6 Cash spending (0.7) (0.3) (0.3) (0.1) 2001 restructuring credit (0.2) - (0.2) - Restructuring adjustments 0.5 0.5 - - ---- ---- ---- ---- Balance at September 30, 2001 $4.8 $3.9 $0.4 $0.5 ==== ==== ==== ==== Nine Months Ended September 30, 2001 -------------------------------------------------------------- Plant Closure Personnel Total and Leases Reductions Other --------- --------------- ---------- -------- (millions) Balance at December 31, 2000 $8.3 $6.8 $1.7 $(0.2) Cash spending (4.3) (2.0) (1.4) (0.9) Cash proceeds 0.6 - - 0.6 2001 restructuring charge 1.5 - 0.1 1.4 Restructuring adjustments (1.3) (0.9) - (0.4) ---- ---- ---- ---- Balance at September 30, 2001 $4.8 $3.9 $0.4 $0.5 ==== ==== ==== ====
As of September 30, 2001, all employees subject to the plans have been terminated. Foamex L.P. expects to spend approximately $2.3 million during the twelve months ending September 30, 2002 with the balance to be spend through 2006, primarily for lease runout costs. 5. INVENTORIES The components of inventory are listed below. September 30, December 31, 2001 2000 ------------- ------------ (thousands) Raw materials and supplies $58,322 $64,801 Work-in-process 12,523 11,437 Finished goods 23,401 20,435 ------- ------- Total $94,246 $96,673 ======= ======= 6. LONG-TERM DEBT The components of long-term debt are listed below.
September 30, December 31, 2001 2000 ------------- ------------ Foamex L.P. Credit Facility (thousands) Term Loan B (1) $ 76,538 $ 77,136 Term Loan C (1) 69,580 70,124 Term Loan D (1) 100,782 101,565 Revolving credit facility (1) 118,024 145,904 9 7/8% Senior subordinated notes due 2007 (2) 150,000 150,000 13 1/2% Senior subordinated notes due 2005 (includes $6,963 and $8,308 of unamortized debt premium) (2) 104,963 106,308 8 FOAMEX L.P. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 6. LONG-TERM DEBT (continued) September 30, December 31, 2001 2000 ------------- ------------ (thousands) Industrial revenue bonds 7,000 7,000 Subordinated note payable (net of unamortized debt discount of $49 in 2000) - 2,289 Other 2,249 4,198 -------- -------- 629,136 664,524 Less current portion 5,436 8,356 -------- -------- Long-term debt $623,700 $656,168 ======== ======== (1) Debt of Foamex L.P., guaranteed by Foamex International and FMXI. (2) Debt of Foamex L.P. and FCC.
Foamex L.P. Credit Facility At September 30, 2001, Foamex L.P. has a credit facility (the "Foamex L.P. Credit Facility") with a group of banks, which provides for a revolving credit facility commitment of $170.0 million and three term loans (Term loans B, C and D) with an outstanding balance totaling $246.9 million. Included in the group of banks that provides the Foamex L.P. Credit Facility is The Bank of Nova Scotia, which is a shareholder of Foamex International, as discussed in Note 1. Amendments in 1998 provided for a $2.5 million quarterly reduction of the availability under the revolving credit facility, which extends through June 2003. On October 1, 2001, the revolving credit facility commitment was $167.5 million with the third quarter 2001 reduction applied on October 1st because the last day of the third quarter of 2001 was a Sunday. Borrowings under the Foamex L.P. Credit Facility are collateralized by substantially all of the assets of Foamex L.P. on a pari passu basis with the IRBs (described below); however, the rights of the holders of the applicable issue of the IRBs to receive payment upon the disposition of the collateral securing such issue of the IRBs has been preserved. In response to financial conditions at year-end 1998, amendments to debt agreements were executed during the first half of 1999. As a result, the Foamex L.P. Credit Facility, which was amended and restated in February 1998, was further amended and restated in June 1999 to modify financial covenants for net worth, interest coverage, fixed charge coverage and leverage ratios through December 2006. The agreement was also amended to no longer permit Foamex L.P. to make certain cash payments, including the payment of an annual management fee of $3.0 million to a subsidiary of Trace and distributions to Foamex International, and to limit future investments in foreign subsidiaries and joint ventures. The "change of control" definition under the agreement was also modified to conform to the definition discussed in "change of control" in Note 1. Changes in the interest rate structure, effective in 2000, were also made and are discussed below. Foamex L.P. was in compliance with this agreement at September 30, 2001 and at year-end 2000 and 1999. At September 30, 2001, interest is based on the combination of a variable rate consisting of the higher of (i) the base rate of The Bank of Nova Scotia or (ii) the Federal Funds rate plus 0.5% plus a margin. The margins for revolving, Term B, Term C and Term D loans were 2.25%, 2.50%, 2.75% and 2.875%, respectively. At the option of Foamex L.P., portions of the outstanding loans are convertible into LIBOR based loans plus 1.0% added to the margins identified above. The effective interest rates for the Foamex L.P. Credit Facility at September 30, 2001 ranged between 7.69% and 8.13%. Term B, Term C and Term D loans mature on June 30, 2005, June 30, 2006 and December 31, 2006, respectively. 9 FOAMEX L.P. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 6. LONG-TERM DEBT (continued) Effective January 1, 2000, the interest rate on outstanding borrowings under the Foamex L.P. Credit Facility increases 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 any 25 basis point adjustments to the interest rate on borrowings is reset to zero. During 2000, basis point adjustments were incurred in the first three quarters, beginning with 25 basis points in the first quarter and ending with a cumulative impact of 75 basis points by the end of the third quarter. There were no basis point adjustments for the fourth quarter of 2000. 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 became effective during the third quarter of 2001, resulting in a 75 basis points cumulative adjustment to the applicable interest rate margin. At September 30, 2001, the calculated leverage ratio was below the 5.00 to 1.00 leverage ratio covenant and the cumulative adjustment of 75 basis points, discussed above, was eliminated. Available borrowings under the revolving credit facility totaled $31.3 million at September 30, 2001. Letters of credit outstanding at September 30, 2001, totaled $20.7 million. As part of the Foamex L.P. Credit Facility, excess cash flow generated annually, as defined, is required to prepay portions of Term B, C and D loans. There was no required prepayment at year-end 2000 or at September 30, 2001. The prepayment amount determined for 1999 was $13.3 million and was financed through revolving loans under the facility. The required 1999 prepayment was made during 2000. 9 7/8% Senior Subordinated Notes The 9 7/8% Senior Subordinated Notes were issued by Foamex L.P. and Foamex Capital Corporation and are due on June 15, 2007. The notes represent uncollateralized general obligations of Foamex L.P. and are subordinated to all Senior Debt, as defined in the Indenture. Interest is payable June 15 and December 15. The notes may be redeemed at the option of Foamex L.P., in whole or in part, at any time on or after June 15, 2002. The initial redemption is at 104.938% of their principal amount, plus accrued and unpaid interest, as defined, if any, thereon to the date of redemption and declining to 100.0% on or after June 15, 2005. Upon the occurrence of a change of control, as defined, each holder will have the right to require Foamex L.P. 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". The notes are subordinated in right of payment to all senior indebtedness and are pari passu in right of payment to the 13 1/2% Senior Subordinated Notes (described below). 13 1/2% Senior Subordinated Notes The 13 1/2% Senior Subordinated Notes were issued by Foamex L.P. and Foamex Capital Corporation and are due on August 15, 2005. The notes represent uncollateralized general obligations of Foamex L.P. and are subordinated to all Senior Debt, as defined in the Indenture. Interest is payable semiannually on February 15 and August 15. The notes may be redeemed at the option of Foamex L.P., in whole or in part, at any time on or after August 15, 2000. The initial redemption is at 106.75% of their principal amount, plus accrued and unpaid interest, if any, thereon to the date of redemption and declining to 100.0% on or after August 15, 2004. Upon the occurrence of a change of control, as defined, each holder will have the right to require Foamex L.P. to tender for such notes at a price in cash equal to 101% of the aggregate principal amount thereof, plus accrued and unpaid interest, if any, thereon, if there is such a "change of control". The notes are subordinated in right of the payment of all senior indebtedness and are pari passu in right of payment to the 9 7/8% Senior Subordinated Notes (described above). 10 FOAMEX L.P. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 6. LONG-TERM DEBT (continued) Industrial Revenue Bonds ("IRBs") IRB debt includes a $1.0 million bond that matures in 2005 and a $6.0 million bond that matures in 2013. Interest is based on a variable rate, as defined, with options available to Foamex L.P. to convert to a fixed rate. At September 30, 2001, the interest rate was 2.9% on the $6.0 million bond and 2.85% on the $1.0 million bond. The maximum interest rate for either of the IRBs is 15.0% per annum. If Foamex L.P exercises its option to convert the bonds to a fixed interest rate structure, the IRBs are redeemable at the option of the bondholders. The obligations are collateralized by certain properties, which have an approximate net carrying value of $10.4 million at September 30, 2001. Subordinated Note Payable The subordinated note payable was issued during 1993 to a former officer of Foamex L.P. The note was issued by Foamex L.P. in connection with an acquisition. The note carried a maximum interest rate of 6.0% and the principal was payable in three equal annual installments that began in May 1999 and was fully repaid in May 2001. Other Other debt primarily includes a term loan held by Foamex L.P.'s Mexican subsidiary. Quarterly principal payments are due on the term loan through its maturity in May 2002. The interest rate at September 30, 2001 was 9.00%. Debt Covenants The indentures, credit facilities and other indebtedness agreements contain certain covenants that limit, among other things to varying degrees, the ability of Foamex L.P. (i) to pay distributions or redeem equity interests, (ii) to make certain restrictive payments or investments, (iii) to incur additional indebtedness or issue Preferred Equity 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 and interest coverage, fixed charge coverage and leverage ratios, as defined. Under the most restrictive of the distribution restrictions as of September 30, 2001, Foamex L.P. was able to distribute to its partners funds only to the extent to enable its partners to meet their tax payment liabilities and fund Foamex International's normal operating expenses of up to $1.0 million annually, so long as no event of default has occurred. Foamex L.P. was in compliance with the various financial covenants of its loan agreements as of September 30, 2001. Business conditions in 2001 have continued to limit results and covenant compliance remains a primary focus of Foamex L.P. Various Foamex L.P. debt agreements contain certain quarterly financial covenants, which became more restrictive during 2001. Foamex L.P. anticipates that it will continue to comply 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 cost 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 and the realization of proceeds resulting from the implementation of an improved asset utilization program are necessary for compliance with the various financial covenants for the remainder of 2001 and prospectively. 11 FOAMEX L.P. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 6. LONG-TERM DEBT (continued) 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' approval 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. Subsequent to September 30, 2001, Foamex L.P. announced a fourth quarter restructuring charge and related changes to debt covenants to accommodate the restructuring charge. See subsequent event disclosures in Note 11. Future Obligations on Debt Scheduled maturities of long-term debt are shown below (thousands): 10/01/01 - 09/30/02 $ 5,436 10/01/02 - 09/30/03 128,385 10/01/03 - 09/30/04 42,249 10/01/04 - 09/30/05 160,144 10/01/05 - 09/30/06 105,938 Balance 180,021 -------- Total 622,173 Unamortized debt premium, net 6,963 -------- Total $629,136 ======== 7. 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. Foamex L.P. initiated a valuation of pension obligations as of September 30, 2001. The projected benefit obligation, measured using a 7.0% discount rate, was $94.6 million and included the SERP obligations discussed above. As a result of the valuation and a net decrease in pension plan assets from the beginning of the year, an adjustment to the minimum pension liability was required. The increase in minimum pension liability resulted in the increase to other liabilities (long-term) in the condensed consolidated balance sheet. The minimum pension liability adjustment was required as a component of other comprehensive loss. As a result of the valuation, pension expense for the fourth quarter will increase. Foamex L.P. will complete another valuation of pension obligations at year-end 2001. 8. 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. The restructuring and other charges totaled $0.3 million in 12 FOAMEX L.P. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 8. SEGMENT RESULTS (continued) the third quarter of 2001 and $0.2 million for the 2001 year to date period. Restructuring and other charges of $2.8 million were recorded in the third quarter of 2000 and $5.6 million were 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 September 30, 2001 Net sales $130,871 $37,207 $95,683 $29,518 $11,004 $304,283 Income (loss) from operations 21,575 (4,283) 5,337 4,714 (2,518) 24,825 Depreciation and amortization 4,128 1,418 1,302 821 444 8,113 Quarterly period ended September 30, 2000 Net sales $134,456 $41,438 $76,242 $27,029 $7,206 $286,371 Income (loss) from operations 15,543 (1,429) 4,065 7,718 (4,024) 21,873 Depreciation and amortization 4,112 1,462 1,198 657 1,378 8,807 Year to date period ended September 30, 2001 Net sales $377,305 $111,909 $281,052 $81,656 $25,968 $877,890 Income (loss) from operations 52,926 (12,063) 17,880 18,741 (4,430) 73,054 Depreciation and amortization 11,574 4,261 3,640 2,428 1,341 23,244 Year to date period ended September 30, 2000 Net sales $392,022 $125,139 $265,981 $80,659 $25,778 $889,579 Income (loss) from operations 43,655 (8,080) 18,818 22,412 (9,173) 67,632 Depreciation and amortization 11,807 4,472 3,595 1,947 2,831 24,652
9. 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 September 30, 2001 and 2000, approximately $40.3 million and $41.4 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 $1.8 million and $1.7 million, respectively, of carpet cushion products from Foamex Carpet during the quarters ended September 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 September 30, 2001 and 2000, respectively. Foamex L.P. sold during the first three quarters of 2001 and 2000, approximately $111.9 million and $125.1 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 $5.3 million of carpet cushion products from Foamex Carpet during the first three quarters of 2000. In addition, Foamex L.P. provided and invoiced approximately $0.3 million of administrative services to Foamex Carpet during the first three quarters of 2001 and 2000, respectively. 10. 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. 13 FOAMEX L.P. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 10. COMMITMENTS AND CONTINGENCIES (continued) 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 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 stipulation of settlement related to the Delaware Action (which has been filed with the Delaware Court), 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. 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 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. 14 FOAMEX L.P. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 10. COMMITMENTS AND CONTINGENCIES (continued) Litigation - Breast Implants As of November 8, 2001, Foamex L.P. and Trace were two of multiple defendants in actions filed on behalf of approximately 1,955 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. 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 September 30, 2001, Foamex L.P. had accruals of approximately $2.2 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. 15 FOAMEX L.P. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 10. COMMITMENTS AND CONTINGENCIES (continued) 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. Through the use of alternative technologies, including VPFSM, which do not utilize methylene chloride and Foamex L.P.'s ability to shift current production to the facilities which use these alternative technologies, Foamex L.P. is compliance with these regulations. The 1990 CAA Amendments also may result in the imposition of additional standards regulating air emissions from polyurethane foam manufacturers, but these standards have not yet been proposed or promulgated. Foamex L.P. has reported to the appropriate state authorities that it has found soil and/or groundwater contamination in excess of state standards at six 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 $1.7 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 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. Deferred Financing Costs Foamex L.P. is actively pursuing the issuance of new debt agreements to refinance the Foamex L.P. Credit Facility discussed in Note 6. As of September 30, 2001, costs associated with the anticipated issuance of the new debt agreements totaled $1.7 million and costs continued to be incurred subsequent to September 30, 2001. The costs incurred as of September 30, 2001 were recognized in the consolidated balance sheet as other assets. If the issuance of these new debt agreements is not completed as anticipated, costs incurred will be recognized as an expense. 16 FOAMEX L.P. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 11. SUBSEQUENT EVENTS During December 2001, Foamex L.P. announced a comprehensive profit enhancement plan ("Project Transformation"). As part of Project Transformation, Foamex L.P. expects to close eight facilities in 2002 and reduce its workforce by approximately 10% by year-end 2002. As a result of Project Transformation, Foamex L.P. expects to recognize a $35.0 million pre-tax charge in the fourth quarter of 2001 for the plant closings and consolidation, severance and related benefits. Approximately $18.4 million of the fourth quarter charge will be non-cash. Additionally, certain financial covenants included in Foamex L.P.'s debt agreements have been modified to accommodate the fourth quarter 2001 charge and have also been eased for 2002. Foamex L.P. paid a fee of $1.8 million to obtain the modification. Subsequent to September 30, 2001, Foamex L.P. discovered that certain mattresses containing foam supplied by Foamex L.P. had a discernable odor. The cause of the odor was traced to chemicals used in the manufacturing of such foam, and the supplier of such chemicals has advised Foamex L.P. that the odor was attributable to a change in its chemical manufacturing process, which has been since corrected. Foamex L.P. has received claims from certain of its customers for costs purportedly associated with the odorous foam, and intends to seek from its chemical supplier reimbursement of any obligations it may have to its customers in respect to such claims, as well as for Foamex L.P.'s internal costs. The ultimate amounts of these third party claims and the amount of Foamex L.P.'s own costs is uncertain. There can be no assurance that the supplier will make payments to Foamex L.P. sufficient to offset all payments made by Foamex L.P. to third parties in respect to their claims, or to cover all of Foamex L.P.'s internal costs associated therewith. Consequently, there is no assurance that such claims and costs will not have a material adverse effect on Foamex L.P.'s consolidated financial position, results of operations and cash flows. In October 2001, Foamex L.P. experienced a fire at one of its manufacturing facilities. Costs related to the fire, a portion of which may be recoverable from insurance and other sources, aggregate to approximately $1.0 million. 12. RESTATEMENT Subsequent to the issuance of Foamex L.P.'s unaudited interim financial statements as of and for the three and nine months ended September 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, certain purchase discounts that were originally recognized in other quarters, additional bad debt expense and the reclassification of various balance sheet items. As a result, the unaudited interim financial statements as of and for the three months ended September 30, 2001 have been restated from the amounts previously reported to (i) reclassify $5.4 million from accumulated other comprehensive loss to other liabilities to properly reflect the adoption of SFAS No. 133, (ii) recognize approximately $1.6 million of purchase discounts that were originally recognized in other quarters, (iii) record additional bad debt expense, (iv) reflect the income tax impact of adjustments (ii) and (iii) above and (v) reclassify various balance sheet items. A summary of the significant effects of the restatement is as follows:
Quarterly Period Ended September 30, 2001 ----------------------------------------- Previously Reported Restated ------------ -------- (thousands) Statement of Operations Cost of Goods Sold $ 263,307 $ 261,765 Selling, General and Administrative $ 16,431 $ 17,455 Income before Provision for Income Taxes $ 9,691 $ 9,476 Provision for Income Taxes $ 1,184 $ 1,131
17 FOAMEX L.P. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 12. RESTATEMENT (continued)
Nine Months Ended September 30, 2001 ----------------------------------------- Previously Reported Restated ----------- -------- (thousands) Statement of Operations Cost of Goods Sold $ 757,933 $ 756,749 Selling, General and Administrative $ 46,872 $ 47,896 Provision for Income Taxes $ 3,317 $ 2,031 Net Income $ 23,702 $ 24,900 September 30, 2001 ----------------------------------------- Previously Reported Restated ----------- -------- (thousands) Balance Sheet Current assets $ 308,552 $ 301,301 Total assets $ 734,954 $ 724,366 Current liabilities $ 225,254 $ 218,820 Total liabilities $ 891,848 $ 889,519 Partners' deficiency $(156,894) $(165,153)
18 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Accounting Changes 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 September 30, 2001 and 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 During the third quarter of 2001, 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 discussed in Note 2, 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 in varying amounts. 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 discussed in Note 2, 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. Also during the third quarter of 2001, Statement of Financial Accounting Standards No. 143, "Accounting for Asset Retirement Obligations ("SFAS No. 143") was issued. SFAS No. 143 requires the recognition of a liability for the estimated cost of disposal as part of the initial cost of a long-lived asset and will be effective in 2003. Subsequent to the third quarter of 2001, Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144") was issued. SFAS No. 144 will provide a single approach for measuring the impairment of long-lived assets, including a segment of a business accounted for as a discontinued operation or those to be sold or disposed of other than by sale. SFAS No. 144 will be effective in 2002. Foamex L.P. has not yet determined the impact of SFAS No. 143 and SFAS No. 144. RESULTS OF OPERATIONS FOR THE QUARTER ENDED SEPTEMBER 30, 2001 COMPARED TO THE QUARTER ENDED SEPTEMBER 30, 2000
Carpet Foam Cushion Automotive Technical Products Products Products Products Other Total -------- -------- ---------- --------- --------- ----------- (thousands) Quarterly period ended September 30, 2001 Net sales $130,871 $37,207 $95,683 $29,518 $11,004 $304,283 Income (loss) from operations 21,575 (4,283) 5,337 4,714 (2,518) 24,825 Depreciation and amortization 4,128 1,418 1,302 821 444 8,113 Income (loss) from operations as a percentage of net sales 16.5% (11.5)% 5.6% 16.0% n.m.* 8.2%
19 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Carpet Foam Cushion Automotive Technical Products Products Products Products Other Total -------- -------- ---------- --------- --------- ----------- (thousands) Quarterly period ended September 30, 2000 Net sales $134,456 $41,438 $76,242 $27,029 $7,206 $286,371 Income (loss) from operations 15,543 (1,429) 4,065 7,718 (4,024) 21,873 Depreciation and amortization 4,112 1,462 1,198 657 1,378 8,807 Income (loss) from operations as a percentage of net sales 11.6% (3.4)% 5.3% 28.6% n.m.* 7.6%
* not meaningful Income from Operations Net sales for the third quarter of 2001 increased 6.3% to $304.3 million from $286.4 million in the third quarter of 2000. The increase was primarily attributable to improved sales in Automotive Products. Technical Products and the Other segment also reported higher sales. Partially offsetting these sales gains were decreases in Foam Products and Carpet Cushion Products. The improvement in sales partially reflected the impact of sales related to the acquisition, discussed in Note 2. The gross profit margin was 14.0% in the third quarter of 2001 and 13.5% in the third quarter of 2000. Certain favorable raw material cost reductions had the effect of improving the gross profit margin percentage in the third quarter of 2001 by approximately 1.2 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 25.0% higher in the third quarter of 2001. The increase included the impact of higher professional fees, including those related to the change in independent accountants. Income from operations for the third quarter of 2001 was $24.8 million, which represented a 13.5% increase from the $21.9 million recorded during the comparable 2000 period. Results included restructuring and other charges of $0.2 million in 2001 and $2.8 million in 2000. Restructuring and other charges recorded during 2001 are discussed under "Other" below. Excluding the restructuring and other charges for comparison purposes, income from operations was $25.1 million in the third quarter of 2001 compared to $24.7 million in the 2000 third quarter. On this basis, income from operations was 8.2% of net sales in 2001 compared to 8.6% of net sales in 2000. Foam Products Foam Products net sales for the third quarter of 2001 decreased 2.7% to $130.9 million from $134.5 million in the third quarter of 2000. The decrease primarily reflected the domestic economic slow down that impacted the markets for furniture manufacturers and for other foam fabricators. Despite the sales decline, income from operations increased 38.8%, from $15.5 million in the third quarter of 2000 to $21.6 million in the third quarter of 2001. Income from operations was 16.5% of net sales in 2001, up from 11.6% in 2000. Carpet Cushion Products Carpet Cushion Products net sales for the third quarter of 2001 decreased 10.2% to $37.2 million in 2001 from $41.4 million in the third quarter of 2000. Sales declines translated to a loss from operations of $4.3 million in the third quarter of 2001 compared to a loss from operations of $1.4 million in the 2000 third quarter. The loss from operations represented 11.5% of net sales in 2001 and 3.4% of net sales in 2000. Automotive Products Automotive Products net sales for the third quarter of 2001 increased 25.5% to $95.7 million from $76.2 million in the third quarter of 2000. The improvement primarily reflected new product programs and renewed activity following inventory corrections in the domestic automotive industry earlier in the year. Higher sales 20 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. translated into a 31.3% increase in income from operations, from $4.1 million in the third quarter of 2000 to $5.3 million in the third quarter of 2001. Income from operations represented 5.6% of net sales in 2001 and 5.3% in 2000. Technical Products Net sales for Technical Products in the third quarter of 2001 were up 9.2% to $29.5 million from $27.0 million in the third quarter of 2000. The improvement primarily reflected sales from the acquisition, discussed in Note 2. Income from operations decreased 38.9% to $4.7 million in the third quarter of 2001 compared to $7.7 million in the third quarter of 2000. Results continue to be impacted by a slow down in the technology industry. Income from operations represented 16.0% of net sales in 2001 compared to 28.6% 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 increase in net sales associated with this segment primarily resulted from Foamex L.P.'s Mexico City operation. The loss from operations was $2.5 million in the third quarter of 2001 and included restructuring and other charges, discussed below. The $4.0 million loss from operations in the third quarter of 2000 also included restructuring and other charges, discussed below. During the third quarter of 2001, Foamex L.P. recorded restructuring and other charges of $0.3 million for changes in estimates for previously recognized restructuring 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. Interest and Debt Issuance Expense Interest and debt issuance expense totaled $14.5 million in the third quarter of 2001, which represented a 18.1% decrease from the 2000 third quarter expense of $17.8 million. The decrease was attributable to lower average debt levels and lower effective interest rates. As discussed in Note 7, 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 fourth quarter of 2001, interest expense will be benefit from the elimination of a 75 basis point cumulative adjustment. Income from Equity Interest in Joint Venture A loss from an equity interest in an Asian joint venture totaled $0.1 million for the third quarter of 2001 compared to $0.3 million of income in the third quarter of 2000. Other Expense, Net Other net expense recorded for the third quarter of 2001 totaled $0.8 million. During the third quarter of 2000, other net expense recorded totaled $0.5 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. 21 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Net Income Net income for the third quarter of 2001 was $8.3 million compared to $3.0 million recorded in the third quarter of 2000. RESULTS OF OPERATIONS FOR THE YEAR TO DATE PERIOD ENDED SEPTEMBER 30, 2001 COMPARED TO THE YEAR TO DATE PERIOD ENDED SEPTEMBER 30, 2000
Carpet Foam Cushion Automotive Technical Products Products Products Products Other Total --------- --------- ------------- ---------- ---------- ----------- (thousands) Year to date period ended September 30, 2001 Net sales $377,305 $111,909 $281,052 $81,656 $25,968 $877,890 Income (loss) from operations 52,926 (12,063) 17,880 18,741 (4,430) 73,054 Depreciation and amortization 11,574 4,261 3,640 2,428 1,341 23,244 Income (loss) from operations as a percentage of net sales 14.0% (10.8)% 6.4% 23.0% n.m.* 8.3% Year to date period ended September 30, 2000 Net sales $392,022 $125,139 $265,981 $80,659 $25,778 $889,579 Income (loss) from operations 43,655 (8,080) 18,818 22,412 (9,173) 67,632 Depreciation and amortization 11,807 4,472 3,595 1,947 2,831 24,652 Income (loss) from operations as a percentage of net sales 11.1% (6.5)% 7.1% 27.8% n.m.* 7.6%
* not meaningful Income from Operations Net sales for the first three quarters of 2001 decreased 1.3% to $877.9 million from $889.6 million in the first three quarters of 2000. The decline was primarily attributable to lower sales in Foam Products and Carpet Cushion Products, partially offset by higher sales in Automotive Products and Technical Products. The gross profit margin was 13.8% in the first three quarters of 2001 compared to 13.0% in the comparable period in 2000. Certain favorable raw material cost reductions had the effect of improving the gross profit margin percentage in the first three quarters of 2001 by approximately 1.8 percentage points. There can no assurance that these cost reductions will continue at the same level for the balance of the year. Selling, general and administrative expenses were 13.2% higher in the first three quarters of 2001. The increase included the impact of higher professional fees, including those associated with the change in independent accountants. Income from operations for the first three quarters of 2001 was $73.1 million, which represented an 8.0% increase from the $67.6 million recorded during the comparable 2000 period. Results included restructuring and other charges of $0.2 million in 2001 and $5.6 million in the first three quarters of 2000. Restructuring and other charges recorded during 2001 are discussed under "Other" below. Excluding the restructuring and other charges for comparison purposes, income from operations was $73.2 million for the first three quarters of 2001 compared to $73.3 million in the comparable 2000 period. On this basis, income from operations was 8.3% of net sales in 2001 and 8.2% of 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 three quarters of 2001 decreased 3.8% to $377.3 million from $392.0 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. Despite the sales decline, income from operations increased 21.2%, from $43.7 million in the first three quarters of 2000 to $52.9 million in the comparable period of 2001. Income from operations was 14.0% of net sales in 2001, up from 11.1% in 2000. 22 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Carpet Cushion Products Carpet Cushion Products net sales for the first three quarters of 2001 decreased 10.6% to $111.9 million from $125.1 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. Sales declines translated to a loss from operations of $12.1 million in the first three quarters of 2001 compared to a loss from operations of $8.1 million in 2000. The loss from operations represented 10.8% of net sales in 2001 and 6.5% of net sales in 2000. Automotive Products Automotive Products net sales for the first three quarters of 2001 increased 5.7% to $281.1 million from $266.0 million in the first three quarters of 2000. The improvement primarily reflected new product programs and renewed activity following inventory corrections in the domestic automotive industry earlier in the year. Income from operations declined 5.0%, from $18.8 million in the first three quarters of 2000 to $17.9 million in the first three quarters of 2001. Income from operations represented 6.4% of net sales in 2001 and 7.1% in 2000. Technical Products Net sales for Technical Products in the first three quarters of 2001 were up 1.2% to $81.7 million from $80.7 million in the comparable period of 2000. Higher sales primarily reflected sales from the acquisition, discussed in Note 3. Income from operations decreased 16.4% to $18.7 million in the first three quarters of 2001 compared to $22.4 million in the first three quarters of 2000. The decline reflected a lower value shipment mix and a slow down in the technology industry. Income from operations represented 23.0% of net sales in 2001 compared to 27.8% in 2000. Other Other primarily consists of certain manufacturing operations in Mexico, corporate expenses not allocated to business segments and restructuring and other charges. Net sales associated with this segment primarily are from Foamex L.P.'s Mexico City operation. The loss from operations was $4.4 million in the first three quarters of 2001 and included restructuring and other charges (credits), discussed below. The $9.2 million loss from operations in the first three quarters of 2000 included restructuring and other charges totaling $5.6 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 third quarter of 2001, Foamex L.P. recorded restructuring and other charges of $0.3 million for 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 VPF(SM) capacity increase in North Carolina. Additionally, facility closure costs totaled $0.3 million and related equipment writedowns were $0.4 million. The first quarter 2000 provision also included $0.4 million related to changes in estimates to prior year plans. During the third quarter of 2000, restructuring and other charges of approximately $2.8 million were recorded. The provision was primarily for the consolidation of pourline operations and certain product line rationalizations 23 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. resulting from the closure of facilities in Indiana and Arkansas. Components of the provision included $2.0 million for fixed asset writedowns, $0.8 million for facility closure costs and $0.2 million in work force reduction costs for 72 employees. The third quarter of 2000 provision also included a favorable adjustment of $0.2 million related to changes in estimates to previously recognized restructuring plans. Foamex L.P. paid $3.8 million during the three quarters of 2001 for the various restructuring plans recorded as of December 31, 2000 and during the first and second quarters of 2001. As of September 30, 2001, the components of the net accrued restructuring and other charges balance included $3.9 million for plant closure and lease costs, $0.4 million for personnel reductions and $0.5 million for other costs. 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 $0.6 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 $45.7 million in the first three quarters of 2001, which represented a 12.2% decrease from $52.1 million recorded during the first three quarters of 2000. The decrease was attributable to lower average debt levels and lower effective interest rates. As discussed in Note 7, 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 fourth quarter of 2001, interest expense will benefit from the elimination of a 75 basis point cumulative adjustment. Income from Equity Interest in Joint Venture Income from an equity interest in an Asian joint venture totaled $0.6 million for the first three quarters of 2001 compared to $1.0 million in the comparable period of 2000. Other Expense, Net Other net expense recorded for the first three quarters of 2001 totaled $1.0 million and included letter of credit fees. During the first three quarters of 2000, other net expense recorded totaled $0.9 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 three quarters of 2001 was $24.9 million compared to $13.1 million recorded in the first three quarters 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 $6.6 million at the end of the third quarter of 2001 compared to $2.9 million at the end of 2000. Working capital at the end of the third quarter of 2001 was $82.5 million and the current 24 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. ratio was 1.4 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 $38.5 million increase in accounts receivable and a $58.1 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 cash flow and may have a more significant favorable effect in the future. Total debt at the end of the third quarter of 2001 was $629.1 million, down $35.4 million from year-end 2000. As of September 30, 2001, there were $118.0 million of revolving credit borrowings, at a weighted average interest rate of 7.69%, under the Foamex L.P. credit facility with $31.3 million available for additional borrowings and $20.7 million of letters of credit outstanding. Foamex Canada Inc. ("Foamex Canada") did not have any outstanding borrowings as of September 30, 2001 under Foamex Canada's revolving credit agreement, with unused availability of approximately $5.1 million. Foamex L.P. was in compliance with the various financial covenants of its loan agreements as of September 30, 2001. Business conditions in 2001 have continued to limit results and covenant compliance remains a primary focus of Foamex L.P. 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 increases in response to raw material cost changes, improved working capital management, comparable capital expenditures to the prior year, declining interest rates, successful implementation of on-going cost savings initiatives and improved operating efficiencies. The continued achievement of the business plans and the realization of proceeds resulting from the implementation of an improved asset utilization program are 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, the asset utilization program does not result in the realization of adequate proceeds, 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. Cash Flow from Operating Activities Cash provided by operating activities in the first three quarters of 2001 was $65.7 million, slightly higher compared to $65.6 million for the first three quarters of 2000. Cash Flow from Investing Activities Cash used for investing activities totaled $29.6 million for the first three quarters of 2001. Cash requirements included capital expenditures of $17.1 million and $14.8 million for asset purchases, see Note 2. In the first three quarters of 2000, cash flow used for investing activities totaled $17.8 million, which included $18.5 million of capital expenditures, partially offset by $3.6 million of proceeds from the sale of assets. The estimate of capital expenditures for 2001 is expected to be less than $25.0 million. Cash Flow from Financing Activities Cash used for financing activities was $32.3 million for the first three quarters of 2001 compared to cash used of $46.1 million in the comparable period of 2000. Cash requirements for 2001 primarily reflected debt repayments and distributions paid to partners, partially offset by an increase in cash overdrafts. Cash required in 2000 included a 25 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. $34.0 million repayment of the Foamex/GFI Note with borrowings under the Foamex L.P. revolving credit facility. Also during the first three quarters of 2000, cash overdrafts increased by $20.7 million. Environmental Matters Foamex L.P. is subject to extensive and changing environmental laws and regulations. Expenditures to date in connection with Foamex L.P.'s compliance with such laws and regulations did not have a material adverse effect on Foamex L.P.'s operations, financial position, capital expenditures or competitive position. The amount of liabilities recorded by Foamex L.P. in connection with environmental matters as of September 30, 2001 was $2.2 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 10 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 September 30, 2001, indebtedness with variable interest rates totaled $373.9 million. On an annualized basis, if the interest rates on these debt instruments increased by 1.0%, interest expense would increase by approximately $3.7 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. 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. 26 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 10 of the condensed consolidated financial statements is incorporated herein by reference. Item 5. Other Information. As previously reported 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 4.5 Commitment letter and attachment, dated August 8, 2001, from the Bank of Nova Scotia to Foamex Canada Inc. 99.1 Consolidated Financial Statements of Foamex L.P. and subsidiaries as of September 30, 2001 and for the nine months then ended. (b) Foamex L.P. filed the following Current Reports on Form 8-K for the quarter ended September 30, 2001: On July 6, 2001, an amended report concerning the resignation of the independent accountants of Foamex International and Foamex L.P. was filed with the required disclosures under Item 4. Changes in Registrant's Certifying Accountant. A report dated July 9, 2001 was filed for Item 5. Other Events, concerning a press release announcing an acquisition agreement. A report dated July 9, 2001 was filed for Item 5. Other Events, concerning a press release announcing the engagement of a new independent auditor for Foamex International and Foamex L.P. On July 19, 2001, an amended report was filed with the required disclosures under Item 4. Changes in Registrant's Certifying Accountant. 27 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 28