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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
Commission file number 0-22624
FOAMEX INTERNATIONAL INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 05-0473908
- ------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1000 Columbia Avenue
Linwood, PA 19061
- ------------------------------- ----------------------
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code: (610) 859-3000
--------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
The number of shares of the registrant's common stock outstanding as of August
8, 2002 was 24,349,301.
FOAMEX INTERNATIONAL INC.
INDEX
Page
Part I. Financial Information
Item 1. Financial Statements.
Condensed Consolidated Statements of Operations (unaudited) - Three Months and
Six Months Ended June 30, 2002 and June 30, 2001 3
Condensed Consolidated Balance Sheets as of June 30, 2002 (unaudited) and
and December 31, 2001 4
Condensed Consolidated Statements of Cash Flows (unaudited) - Six Months
Ended June 30, 2002 and June 30, 2001 5
Notes to Condensed Consolidated Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations. 21
Item 3. Quantitative and Qualitative Disclosures about Market Risk. 29
Part II. Other Information
Item 1. Legal Proceedings. 30
Item 2. Changes in Securities. 30
Item 4. Submission of Matters to a Vote of Security Holders. 30
Item 6. Exhibits and Reports on Form 8-K. 30
Signatures 32
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
Three Months Ended Six Months Ended
------------------------- -------------------------
June 30, June 30, June 30, June 30,
2002 2001 2002 2001
----------- ----------- ----------- ---------
(thousands, except per share amounts)
NET SALES $345,898 $314,261 $659,960 $616,168
COST OF GOODS SOLD 300,512 264,365 576,336 525,096
-------- -------- -------- --------
GROSS PROFIT 45,386 49,896 83,624 91,072
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 21,796 21,055 39,479 37,978
RESTRUCTURING, IMPAIRMENT AND OTHER
CHARGES (CREDITS) - (77) (1,538) (48)
-------- -------- -------- --------
INCOME FROM OPERATIONS 23,590 28,918 45,683 53,142
INTEREST AND DEBT ISSUANCE EXPENSE 17,338 16,249 31,643 33,597
INCOME FROM EQUITY INTEREST IN JOINT VENTURE 398 324 1,128 663
OTHER EXPENSE, NET (27) (390) (237) (552)
-------- -------- -------- --------
INCOME BEFORE PROVISION (BENEFIT) FOR
INCOME TAXES 6,623 12,603 14,931 19,656
PROVISION (BENEFIT) FOR INCOME TAXES (74,822) 1,983 (73,851) 3,143
-------- -------- -------- --------
INCOME BEFORE EXTRAORDINARY CHARGE AND
CUMULATIVE EFFECT OF AN ACCOUNTING CHANGE 81,445 10,620 88,782 16,513
EXTRAORDINARY CHARGE, NET OF INCOME TAXES - - (4,204) -
CUMULATIVE EFFECT OF AN ACCOUNTING CHANGE - - 1,319 -
-------- -------- -------- --------
NET INCOME $ 81,445 $ 10,620 $ 85,897 $ 16,513
======== ======== ======== ========
EARNINGS PER SHARE - BASIC
INCOME BEFORE EXTRAORDINARY CHARGE AND
CUMULATIVE EFFECT OF AN ACCOUNTING CHANGE $ 3.35 $ 0.45 $ 3.67 $ 0.70
EXTRAORDINARY CHARGE, NET OF INCOME TAXES - - (0.17) -
CUMULATIVE EFFECT OF AN ACCOUNTING CHANGE - - 0.05 -
------- -------- -------- --------
NET INCOME $ 3.35 $ 0.45 $ 3.55 $ 0.70
======= ======== ======== ========
EARNINGS PER SHARE - DILUTED
INCOME BEFORE EXTRAORDINARY CHARGE AND
CUMULATIVE EFFECT OF AN ACCOUNTING CHANGE $ 3.04 $ 0.42 $ 3.34 $ 0.66
EXTRAORDINARY CHARGE, NET OF INCOME TAXES - - (0.16) -
CUMULATIVE EFFECT OF AN ACCOUNTING CHANGE - - 0.05 -
------- -------- -------- --------
NET INCOME $ 3.04 $ 0.42 $ 3.23 $ 0.66
======= ======== ======== ========
WEIGHTED AVERAGE NUMBER OF SHARES - BASIC 24,282 23,569 24,198 23,565
======= ======== ======== ========
WEIGHTED AVERAGE NUMBER OF SHARES - DILUTED 26,783 25,265 26,559 25,170
======= ======== ======== ========
The accompanying notes are an integral part of the unaudited
condensed consolidated financial statements.
3
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, 2002 December 31, 2001
------------ -----------------
ASSETS (unaudited)
CURRENT ASSETS (thousands, except share data)
Cash and cash equivalents $ 54,174 $ 15,064
Accounts receivable, net of allowances of $8,795 in 2002 and $10,940 in 2001 199,679 173,461
Inventories 106,482 89,430
Deferred income taxes 8,522 375
Other current assets 25,405 32,935
--------- --------
Total current assets 394,262 311,265
--------- --------
Property, plant and equipment 408,528 407,204
Less accumulated depreciation (213,830) (206,407)
--------- --------
NET PROPERTY, PLANT AND EQUIPMENT 194,698 200,797
COST IN EXCESS OF NET ASSETS ACQUIRED, net of accumulated
amortization of $35,247 in 2002 and $34,855 in 2001 197,456 208,184
DEBT ISSUANCE COSTS, net of accumulated
amortization of $10,658 in 2002 and $14,643 in 2001 37,166 13,690
DEFERRED INCOME TAXES 88,620 -
OTHER ASSETS 31,436 33,026
--------- --------
TOTAL ASSETS $ 943,638 $766,962
========= ========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES
Current portion of long-term debt $ 588 $ 4,023
Current portion of long-term debt - related party - 14,040
Accounts payable 119,510 128,852
Accrued employee compensation and benefits 24,158 25,858
Accrued interest 15,829 8,946
Accrued customer rebates 15,160 21,869
Cash overdrafts 46,367 4,073
Other accrued liabilities 28,937 38,555
--------- --------
Total current liabilities 250,549 246,216
LONG-TERM DEBT 723,707 630,682
LONG-TERM DEBT - RELATED PARTY - 17,550
OTHER LIABILITIES 50,376 53,260
--------- --------
Total liabilities 1,024,632 947,708
--------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIENCY
Preferred Stock, par value $1.00 per share:
Authorized 5,000,000 shares
Issued 15,000 shares - Series B in 2002 and 2001 15 15
Common Stock, par value $.01 per share:
Authorized 50,000,000 shares
Issued 27,833,486 shares in 2002 and 27,260,441 shares in 2001 278 273
Additional paid-in capital 101,887 97,668
Accumulated deficit (120,647) (206,544)
Accumulated other comprehensive loss (25,526) (35,157)
Common stock held in treasury, at cost:
3,489,000 shares in 2002 and 2001 (27,780) (27,780)
Shareholder note receivable (9,221) (9,221)
--------- --------
Total stockholders' deficiency (80,994) (180,746)
--------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY $ 943,638 $766,962
========= ========
The accompanying notes are an integral part of the unaudited
condensed consolidated financial statements.
4
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Six Months Ended
---------------------------
June 30, June 30,
2002 2001
----------- ---------
(thousands)
OPERATING ACTIVITIES
Net income $ 85,897 $ 16,513
Adjustments to reconcile net income to net cash provided
by (used for) operating activities:
Extraordinary charge on extinguishment of debt 4,324 -
Cumulative effect of accounting change (1,319) -
Depreciation and amortization 16,231 16,574
Amortization of debt issuance costs, debt premium
and debt discount 2,065 578
Gain on disposition of assets - (178)
Deferred income taxes (77,334) -
Other operating activities 88 3,337
Changes in operating assets and liabilities, net (58,617) (7,198)
-------- --------
Net cash provided by (used for) operating activities (28,665) 29,626
-------- --------
INVESTING ACTIVITIES
Capital expenditures (10,085) (12,481)
Proceeds from sale of assets - 552
Other investing activities (1,027) (511)
-------- --------
Net cash used for investing activities (11,112) (12,440)
-------- --------
FINANCING ACTIVITIES
Repayments of revolving loans (125,000) (14,653)
Proceeds from long-term debt 356,590 -
Repayments of long-term debt (141,394) (5,042)
Repayments of long-term debt - related party (31,590) (5,265)
Increase in cash overdrafts 42,294 5,010
Debt issuance costs (25,491) -
Other financing activities 3,478 66
-------- --------
Net cash provided by (used for) financing activities 78,887 (19,884)
-------- --------
Net increase (decrease) in cash and cash equivalents 39,110 (2,698)
Cash and cash equivalents at beginning of period 15,064 4,890
-------- --------
Cash and cash equivalents at end of period $ 54,174 $ 2,192
======== ========
Supplemental Information:
Cash paid for interest $ 22,845 $ 34,108
======== ========
The accompanying notes are an integral part of the unaudited
condensed consolidated financial statements.
5
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
1. ORGANIZATION AND BASIS OF PRESENTATION
Organization
Foamex International Inc. (the "Company") operates in the flexible
polyurethane and advanced polymer foam products industry. As of December 31,
2001, the Company's operations were primarily conducted through its wholly-owned
subsidiaries, Foamex L.P. and Foamex Carpet Cushion, Inc. ("Foamex Carpet").
Foamex Carpet was converted to a limited liability company and contributed to
Foamex L.P. on March 25, 2002. Foamex L.P. conducts foreign operations through
Foamex Canada Inc., Foamex Latin America, Inc. and Foamex Asia, Inc. Financial
information concerning the business segments of the Company is included in Note
10.
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 the Company's consolidated financial position and results of operations,
have been included. These interim financial statements should be read in
conjunction with the consolidated financial statements and related notes
included in the Company's 2001 Annual Report on Form 10-K. Results for interim
periods are not necessarily indicative of trends or of results for a full year.
Accounting Changes - Business Combinations
Statement of Financial Accounting Standards No. 141, "Business
Combinations" ("SFAS No. 141") addresses financial accounting and reporting for
business combinations and limits the accounting for business combinations to the
purchase method. The statement was effective for all business combinations,
including the acquisition discussed in Note 3, with an acquisition date of July
1, 2001 or later. SFAS No. 141 also requires that any unamortized deferred
credit related to an excess over cost arising from a business combination that
occurred before July 1, 2001 be written off and recognized as the effect of a
change in accounting principle.
Accounting Changes - Goodwill and Other Intangible Assets
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" ("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 is that goodwill and certain other intangibles are no
longer amortized but will be periodically assessed for impairment, and as a
result 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 3, are subject to the nonamortization and amortization
provisions of SFAS No. 142. The other provisions of SFAS No. 142 were adopted by
the Company on January 1, 2002. The three months and six months ended June 30,
2001 included goodwill amortization of $1.5 million and $3.0 million,
respectively. On a pro forma basis, net income and diluted earnings per share
for the three months and six months ended June 30, 2001 would have been $12.1
million and $19.5 million and $0.48 and $0.77, respectively, if SFAS No. 142 had
been adopted as of January 1, 2001.
As SFAS No. 142 provides a six-month transitional period from the effective
date to perform an assessment of whether there is an indication that goodwill is
impaired, the Company completed this assessment in the second quarter. Step one
of the transitional impairment test uses a fair value methodology, which differs
from the undiscounted cash flow methodology that continues to be used for
intangible assets with an identifiable life. The Company identified six
reporting units during the second quarter and performed step one of the
transitional impairment test on each of the reporting units. Based on the
results of step one of the transitional impairment test, the Company has
identified one reporting unit in the Foam Products segment and one reporting
unit in the Carpet Cushion Products segment, for which the carrying value
exceeded the fair values as at January 1, 2002, indicating a
6
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
1. ORGANIZATION AND BASIS OF PRESENTATION (continued)
potential impairment of goodwill in those reporting units. Step two of the
transitional impairment test, to determine the magnitude of any goodwill
impairment, is expected to be completed by the end of the third quarter of 2002.
Any resulting impairment loss will be recorded as a cumulative effect of a
change in accounting principle, retroactive to the Company's first quarter
results of operations in accordance with the transitional implementation
guidance of SFAS No. 142. Because the determination of whether there is an
impairment of the Company's goodwill will be completed by the end of the third
quarter of 2002 and will involve many aspects of analyses which have not yet
been undertaken, the amount of any write down cannot be reliably predicted at
this time.
Accounting Changes - Impairment or Disposal of Long-Lived Assets
Statement of Financial Accounting Standards No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144") provides 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 became effective January 1, 2002.
The Company has determined the impact of initial adoption of SFAS No. 144 to be
not material.
Future Accounting Changes - Asset Retirement Obligations
Statement of Financial Accounting Standards No. 143, "Accounting for Asset
Retirement Obligations" ("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. The Company is evaluating the statement and
has not determined the impact of SFAS No. 143.
Future Accounting Changes - Extinguishment of Debt
On April 30, 2002, Statement of Financial Accounting Standards No. 145,
"Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement
No. 13, and Technical Corrections" ("SFAS No. 145") was issued. The provisions
of this Statement related to the rescission of Statement 4 shall be applied in
fiscal years beginning after May 15, 2002. Any gain or loss on extinguishment of
debt that was classified as an extraordinary item in prior periods presented
that does not meet the criteria in Opinion 30 for classification as an
extraordinary item shall be reclassified. Early application of the provisions of
this Statement related to the rescission of Statement 4 is encouraged. The
Company expects that adoption of this Statement in 2003 will result in a
reclassification of the extraordinary charge recorded during the six months
ended June 30, 2002.
Future Accounting Changes - Costs Associated with Exit or Disposal Activities
Statement of Financial Accounting Standards No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("SFAS No. 146") was issued in June
2002. SFAS No. 146 revises the accounting and reporting for costs associated
with exit or disposal activities to be recognized when a liability for such cost
is incurred rather than when an entity commits to an exit plan. SFAS No. 146 is
effective for exit or disposal activities initiated after December 31, 2002.
SFAS No. 146 does not impact previously recorded liabilities under EITF 94-3 and
therefore the initial adoption of this standard will not have a material effect
on the financial statements.
7
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
2. EARNINGS PER SHARE
The following table shows the amounts used in computing earnings per share.
Three Months Ended Six Months Ended
------------------------- --------------------------
June 30, June 30, June 30, June 30,
2002 2001 2002 2001
---------- --------- ---------- ----------
(thousands, except per share amounts)
Basic earnings per share:
Income before extraordinary charge and
cumulative effect of an accounting change $81,445 $10,620 $88,782 $16,513
Extraordinary charge - - (4,204) -
Cumulative effect of an accounting change - - 1,319 -
------- ------- ------- -------
Net income $81,445 $10,620 $85,897 $16,513
======= ======= ======= =======
Average common stock outstanding 24,282 23,569 24,198 23,565
======= ======= ======= =======
Income before extraordinary charge and
cumulative effect of an accounting change $ 3.35 $ 0.45 $ 3.67 $ 0.70
Extraordinary charge - - (0.17) -
Cumulative effect of an accounting change - - 0.05 -
------- ------- ------- -------
Net income $ 3.35 $ 0.45 $ 3.55 $ 0.70
======= ======= ======= =======
Diluted earnings per share:
Income before extraordinary charge and
cumulative effect of an accounting change $81,445 $10,620 $88,782 $16,513
Extraordinary charge - - (4,204) -
Cumulative effect of an accounting change - - 1,319 -
------- ------- ------- -------
Net income $81,445 $10,620 $85,897 $16,513
======= ======= ======= =======
Average common stock outstanding 24,282 23,569 24,198 23,565
Incremental shares resulting from
Stock options (a) 1,001 196 861 105
Convertible preferred stock 1,500 1,500 1,500 1,500
------- ------- ------- -------
Adjusted weighted average shares 26,783 25,265 26,559 25,170
======= ======= ======= =======
Income before extraordinary charge and
cumulative effect of an accounting change $ 3.04 $ 0.42 $ 3.34 $ 0.66
Extraordinary charge - - (0.16) -
Cumulative effect of an accounting change - - 0.05 -
------- ------- ------- -------
Net income $ 3.04 $ 0.42 $ 3.23 $ 0.66
======= ======= ======= =======
(a) The average number of stock options that were not included in the diluted
earnings per share calculation because the exercise price was greater than
the average market price aggregated 250,166 and 1,701,700 in the three
months ended June 30, 2002 and June 30, 2001, respectively and 257,750 and
2,057,000 in the six months ended June 30, 2002 and June 30, 2001,
respectively.
3. ACQUISITION
On July 25, 2001, the Company 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 $9.1
million. The business was acquired due to its synergy with the Company's
existing business. The assets purchased primarily included
8
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
3. ACQUISITION (continued)
inventory and machinery and equipment. The results of the acquired business have
been included in the condensed consolidated statement of operations for the
three months and six months ended June 30, 2002. The effects of the acquisition
on the Company's consolidated financial statements are not material.
4. EXTRAORDINARY CHARGE AND CUMULATIVE EFFECT OF AN ACCOUNTING CHANGE
In connection with the refinancing transaction completed on March 25, 2002
(see Note 7), the Company wrote off debt issuance costs associated with the
early extinguishment of its long-term debt due to a related party and its
revolving credit facility, resulting in an extraordinary charge of $4.2 million,
net of income taxes of $0.1 million, in the six months ended June 30, 2002.
SFAS No. 141 requires that any unamortized deferred credit related to an
excess over cost arising from a business combination that occurred before July
1, 2001 to be written off and recognized as the effect of a change in accounting
principle. Accordingly, the Company has recorded a $1.3 million credit as the
cumulative effect of an accounting change in the six months ended June 30, 2002.
5. RESTRUCTURING, IMPAIRMENT AND OTHER CHARGES (CREDITS)
During the six months ended June 30, 2002, the Company recorded a
restructuring credit of $2.1 million related to the reimbursement of certain
lease costs and other charges for certain additional expenses of $0.6 million
relating to the 2001 restructuring plan.
The following tables set forth the components of the Company's
restructuring accruals and activity for the three months and six months ended
June 30, 2002:
Plant Closure Personnel
Total and Leases Reductions Impairment Other
--------- --------------- ---------- ---------- --------
(millions)
Balance at March 31, 2002 $23.6 $14.3 $7.1 $ - $2.2
Cash receipts (spending), net (1.6) (0.3) (0.7) - (0.6)
----- ----- ---- ----- ----
Balance at June 30, 2002 $22.0 $14.0 $6.4 $ - $1.6
===== ===== ==== ===== ====
Balance at December 31, 2001 $25.0 $14.7 $7.8 $ - $2.5
Cash receipts (spending), net (1.5) 1.4 (1.4) - (1.5)
2002 restructuring charge (credit) (1.5) (2.1) - - 0.6
----- ----- ---- ----- ----
Balance at June 30, 2002 $22.0 $14.0 $6.4 $ - $1.6
===== ===== ==== ===== ====
The Company expects to spend approximately $11.3 million during the twelve
months ending June 30, 2003, with the balance to be spent through 2012. As of
June 30, 2002, the Company has closed five facilities and 322 employees have
been terminated under the operational reorganization plan adopted in the fourth
quarter of 2001.
6. INVENTORIES
The components of inventory are listed below.
June 30, December 31,
2002 2001
------------- --------------
(thousands)
Raw materials and supplies $ 67,200 $53,398
Work-in-process 13,586 12,476
Finished goods 25,696 23,556
-------- -------
Total $106,482 $89,430
======== =======
9
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
7. LONG-TERM DEBT
The components of long-term debt are listed below.
June 30, December 31,
2002 2001
--------------- -------------
Foamex L.P. Credit Facility (thousands)
Term Loan B (1) $ 39,266 $ 76,139
Term Loan C (1) 35,697 69,218
Term Loan D (1) 51,706 100,259
Term Loan E (1) 16,292 -
Term Loan F (1) 19,245 -
Revolving credit facility (1) - 125,000
10 3/4% Senior secured notes due 2009 (at fair value) (2) 300,260 -
9 7/8% Senior subordinated notes due 2007 (2) 150,000 150,000
13 1/2% Senior subordinated notes due 2005 (includes
$5,619 and $6,515 of unamortized debt premium) (2) 103,619 104,515
Industrial revenue bonds (3) 7,000 7,000
Other (net of unamortized debt discount of $251 in 2002
and $281 in 2001) 1,210 2,574
-------- --------
724,295 634,705
Less current portion 588 4,023
-------- --------
Long-term debt-unrelated parties $723,707 $630,682
======== ========
The components of related party long-term debt are listed below.
June 30, December 31,
2002 2001
---------- ------------
(thousands)
Note payable to Foam Funding LLC (4) $ - $31,590
Less current portion - 14,040
-------- -------
Long-term debt - related party $ - $17,550
======== =======
(1) Subsidiary debt of Foamex L.P., guaranteed by the Company and FMXI, Inc.
(2) Subsidiary debt of Foamex L.P. and Foamex Capital Corporation.
(3) Subsidiary debt of Foamex L.P.
(4) Subsidiary debt of Foamex Carpet.
On March 25, 2002, Foamex L.P. and Foamex Capital Corporation issued $300.0
million of 10 3/4% Senior Secured Notes due 2009 (the "Senior Secured Notes")
and amended the Foamex L.P. Credit Facility (the "Amended Credit Facility").
Under the Amended Credit Facility, the Company may borrow up to $262.2 million,
consisting of $162.2 million of term loans and a $100.0 million revolving credit
facility. Net proceeds from the Senior Secured Notes of $280.0 million were used
to repay a portion of the debt outstanding under the Foamex L.P. Credit
Facility. The $31.6 million note payable to a related party, Foam Funding LLC,
was repaid with the initial proceeds of a new term loan under the Amended Credit
Facility. Additionally, financial covenants contained in the Amended Credit
Facility were adjusted to reflect changes in the capital structure and the
current business environment of Foamex L.P. Under the covenants contained in the
Senior Secured Notes and the Amended Credit Facility, the Company may spend up
to $48.5 million of the proceeds from the Senior Secured Notes to repurchase or
redeem some of its senior
10
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
7. LONG-TERM DEBT (continued)
subordinated notes. To the extent that Foamex L.P. spends less than $48.5
million towards such repurchase or redemption by September 20, 2002, it is
required to repay a portion of its term loans. (See Note 13.)
Amended Credit Facility
The Amended Credit Facility consists of (1) the new revolving credit
facility, which is a non-amortizing revolving credit facility provided by a new
syndicate of lenders (the "New Revolving Credit Facility"), which provides
working capital for Foamex L.P. and its subsidiary guarantors and funding for
other general corporate purposes, (2) the various term loan facilities under the
existing credit agreement, (3) a new Term E Loan in the initial amount of $31.6
million, the proceeds of which were borrowed at closing and used to repay in
full the obligations outstanding under the note payable to Foam Funding LLC, and
(4) a new Term F Loan in the initial amount of $25.0 million, the proceeds of
which were borrowed at closing and used to repay indebtedness outstanding under
the revolving credit facility. The remaining obligations outstanding under the
revolving credit facility were repaid with a portion of the proceeds from the
issuance of Senior Secured Notes as described below.
The commitments under the New Revolving Credit Facility are available to
Foamex L.P. in the form of (1) revolving credit loans, (2) swing loans (subject
to a $20.0 million sublimit) and (3) letters of credit (subject to a $40.0
million sublimit). At June 30, 2002, Foamex L.P. had available borrowings of
$79.2 million and letters of credit outstanding of $20.8 million.
A portion of the net proceeds from the Senior Secured Notes was used to
repay a portion of the existing term loans, the Term E Loan and the Term F Loan.
Loans made under the New Revolving Credit Facility will mature and the
commitments under them will terminate on June 30, 2005. The Term B Loan, the
Term E Loan and the Term F Loan will mature on June 30, 2005, the Term C Loan
will mature on June 30, 2006 and the Term D Loan will mature on December 29,
2006. Each of the Term Loans will be subject to amortization on a quarterly
basis; however, after giving effect to the prepayments of the Term Loans,
quarterly amortization payments will commence for the Term B Loan, the Term E
Loan and the Term F Loan in 2004, for the Term C Loan in 2005 and for the Term D
Loan in 2006.
Foamex L.P. is required to make mandatory prepayments of loans under the
Amended Credit Facility with: (1) the net cash proceeds received from sales of
assets by Foamex L.P. or certain of its subsidiaries, (2) the net cash proceeds
received from certain issuances by Foamex L.P., or any of its subsidiaries of
indebtedness for borrowed money or equity interests and (3) 75% of excess cash
flow in any fiscal year, such percentage to be reduced to 50% if the ratio of
outstanding obligations under the Amended Credit Facility to EBDAIT (as defined)
for such fiscal year is reduced to specified levels, subject, in each case, to
certain limited exceptions.
Foamex L.P. is permitted to make voluntary prepayments and/or permanently
reduce the commitments under the New Revolving Credit Facility in whole or in
part, without premium or penalty, subject to reimbursement of the lenders'
redeployment costs in the case of prepayment of LIBO, as defined, rate
borrowings, other than at the end of any interest period. All voluntary
prepayments of Term Loans will be applied to such tranches of Term Loans as
Foamex L.P. may select.
The Company, FMXI, Inc. and each of Foamex L.P.'s domestic subsidiaries
continue to guarantee the repayment of the obligations under the Amended Credit
Facility. The Amended Credit Facility is secured by a first-priority lien
(subject to permitted liens) on substantially the same collateral that secured
the obligations under the prior Foamex L.P. credit facility, which includes
substantially all of the Company's material tangible and intangible assets. In
addition, all of the partnership interests, all of the capital stock or other
equity interests of the Company's domestic subsidiaries (including Foamex
Carpet) and 65% of the capital stock or other equity interests of the Company's
first-tier foreign subsidiaries are pledged as part of the security for the
obligations under the Amended Credit Facility.
11
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
7. LONG-TERM DEBT (continued)
Borrowings under the Amended Credit Facility bear interest at a floating
rate based upon (and including a margin over), at our option, (1) the higher of
(a) the funding agent's prime rate and (b) 0.50% in excess of the Federal
Reserve reported weighted average overnight rate for federal funds or (2) the
higher of (x) 2.50% per annum and (y) the LIBO rate, as defined, as determined
by the funding agent. The effective interest rates at June 30, 2002 for Term
Loans B, C, D, E and F ranged between 6.50% and 6.88%. There were no revolving
loans outstanding at June 30, 2002. The rates increase 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 adjustment to the interest rates on borrowings are reset to
zero. At June 30, 2002, the calculated leverage ratio was 5.19 to 1.00.
Accordingly, an additional 25 basis point rate increase will become effective
during the period ending September 29, 2002.
The Amended Credit Facility contains affirmative and negative covenants
that, subject to certain exceptions, are substantially similar to those
contained in the existing credit facility. The Amended Credit Facility also
includes the following financial covenants, as defined therein: (1) a minimum
net worth test; (2) a minimum ratio of EBDAIT to cash interest expense; (3) a
minimum ratio of EBDAIT to fixed charges; and (4) a maximum ratio of funded debt
to EBDAIT. These covenants are substantially the same as those contained in the
prior credit facility with appropriate changes to take into account the issuance
of the Senior Secured Notes and the contribution of Foamex Carpet to Foamex L.P.
Foamex L.P. was in compliance with the financial covenants at June 30, 2002. The
Amended Credit Facility also requires the refinancing of the 13 1/2% senior
subordinated notes on or prior to March 1, 2005.
The Amended Credit Facility contains events of default including, but not
limited to, nonpayment of principal, interest, fees or other amounts when due,
violation of covenants, inaccuracy of representations and warranties in any
material respect, cross default and cross acceleration to certain other
indebtedness, bankruptcy, ERISA, material judgments and change of control.
Certain of these events of default are subject to grace periods and materiality
qualifications.
Foamex Carpet Credit Facility
At December 31, 2001, Foamex Carpet had a revolving credit facility (the
"Foamex Carpet Credit Facility"), which provided a commitment of $15.0 million
through February 2004. There were no borrowings outstanding under the credit
facility at December 31, 2001 and available borrowings totaled $14.8 million
with $0.2 million of letters of credit outstanding. The Foamex Carpet Credit
Facility was terminated on March 25, 2002 in connection with the refinancing.
10 3/4% Senior Secured Notes
The 10 3/4% Senior Secured Notes were issued by Foamex L.P. and Foamex
Capital Corporation on March 25, 2002 and are due on April 1, 2009. The notes
are guaranteed on a senior basis by all of Foamex L.P.'s domestic subsidiaries
that guarantee the Amended Credit Facility. The notes are secured on a
second-priority basis (subject to permitted liens) on substantially the same
collateral that secures the obligations under the Amended Credit Facility. The
notes rank effectively junior to all senior indebtedness that is secured by
first priority liens and senior in right of payment to all subordinated
indebtedness. Interest is payable April 1 and October 1 beginning October 1,
2002. The notes may be redeemed at the option of Foamex L.P., in whole or in
part, at any time on or after April 1, 2006. The initial redemption is at
105.375% of their principal amount, plus accrued and unpaid interest and
liquidated damages, as defined, if any, thereon to the date of redemption and
declining annually to 100.0% on or after April 1, 2008. Additionally, on or
before April 1, 2005, up to 35.0% of the principal amount of the notes may be
redeemed at a redemption price equal to 110.750% of the principal amount, plus
accrued and unpaid interest and liquidated damages, as defined, if any, thereon
to the date of redemption with the net proceeds of on or more equity offerings.
Upon the occurrence of 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 101.0% of the aggregate principal amount thereof, plus accrued and
unpaid interest and liquidated damages, as defined, if any, if there is such a
"change of control".
12
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
7. LONG-TERM DEBT (continued)
Effective May 1, 2002, the Company completed a series of interest rate swap
transactions with notional amounts aggregating $300.0 million. The Company has
designated, documented and accounted for these interest rate swaps as fair value
hedges of the Company's 10 3/4% Senior Secured Notes due April 1, 2009. The risk
being hedged in these transactions is the change in fair value of the Company's
10 3/4% Senior Secured Notes based on changes in the benchmark interest rate,
LIBOR. The effect of these interest rate swap transactions is to convert the
fixed interest rate on the senior secured notes to floating rates reset twice
per year to correspond with the interest payment dates for the 10 3/4% Senior
Secured Notes. For the two months ended June 30, 2002, the effective interest
rate on the 10 3/4% Senior Secured Notes was reduced to a weighted average rate
of 7.55%. At June 30, 2002, the swap instruments have a fair value of a $0.3
million asset which is included in other assets in the accompanying condensed
consolidated balance sheet. The interest rate swaps qualify for the "short cut"
method; therefore, the Company has made an assumption that there is no
ineffectiveness. As such, a similar amount of $0.3 million has been included in
the carrying amount of the 10 3/4% Senior Secured Notes as of June 30, 2002.
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 annually 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 annually to
100.0% on or after August 15, 2004. At June 30, 2002 the redemption price is
105.0625% plus accrued and unpaid interest.
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).
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
June 30, 2002, the interest rate was 1.85% on the $1.0 million bond and 1.50% on
the $6.0 million bond. The maximum interest rate for either of the IRBs is 15.0%
per annum.
13
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
7. LONG-TERM DEBT (continued)
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 $10.6 million at June 30, 2002.
Other
Other debt at December 31, 2001 included a term loan owed by a
majority-owned Mexican subsidiary, Foamex de Cuautitlan S.A. de C.V. Quarterly
principal payments were due on the term loan through its maturity in May 2002.
Also included in other debt is a non-interest bearing promissory note with a
principal amount of $1.4 million issued in connection with increasing the
Company's interest in an Asian joint venture to 70% in 2001. The promissory note
had unamortized discount of $0.3 million at June 30, 2002.
Related Party - Note Payable to Foam Funding LLC
Foamex Carpet entered into a $70.2 million promissory note payable to Foam
Funding LLC, a subsidiary of Trace International Holdings, Inc. ("Trace").
Principal was payable in quarterly installments that began in June 1998 with a
final installment in February 2004. Interest was based on a variable rate equal
to the sum of 2.25% plus the higher of: (i) the base rate of The Bank of Nova
Scotia or (ii) the Federal Funds rate plus 0.5%. At the option of Foamex Carpet,
interest payable under the note was convertible into LIBOR based loans plus
3.25%.
Amounts outstanding were collateralized by all of the assets of Foamex
Carpet on a pari passu basis with the Foamex Carpet Credit Facility. All
obligations under the note payable to Foam Funding LLC were paid on March 25,
2002.
Debt Covenants
The indentures, the Foamex L.P. Amended Credit Facility and other
indebtedness agreements contain certain covenants that limit, among other
things, the ability of the Company's subsidiaries (i) to pay distributions or
redeem equity interests, (ii) to make certain restrictive payments or
investments, (iii) to incur additional indebtedness or issue Preferred Equity
Interests, as defined, (iv) to merge, consolidate or sell all or substantially
all of its assets or (v) to enter into certain transactions with affiliates or
related persons. In addition, certain agreements contain provisions that, in the
event of a defined change of control or the occurrence of an undefined material
adverse change in the ability of the obligor to perform its obligations, the
indebtedness must be repaid, in certain cases, at the option of the holder.
Also, the Company's subsidiaries are required under certain of these agreements
to maintain specified financial ratios of which the most restrictive are the
maintenance of net worth, interest coverage, fixed charge coverage and leverage
ratios, as defined. Under the most restrictive of the distribution restrictions,
the Company could be paid by its subsidiaries, as of June 30, 2002, funds only
to the extent to enable the Company to meet its tax payment liabilities and its
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 June 30, 2002.
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, the Company will seek the lenders' approval of
amendments to, or waivers of, such financial covenants. Historically, the
Company 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.
14
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
7. LONG-TERM DEBT (continued)
Maturities of Long-Term Debt
Scheduled maturities of long-term debt as of June 30, 2002 are shown below
(thousands):
Six months ending December 31, 2002 $ 223
2003 388
2004 33,795
2005 154,812
2006 73,449
Thereafter 456,000
--------
718,667
Unamortized debt premium/discount and
fair value adjustment, net 5,628
--------
Total $724,295
========
8. INCOME TAXES
During the three months ended June 30, 2002, the Company determined that,
based on the weight of available evidence, including improved financial results,
revised NOL carryforward utilization limitations and other tax planning
strategies initiated in the three months ended June 30, 2002, it was more likely
than not that its net deferred tax assets would be realized in the future.
Accordingly, the Company reversed a previously recorded valuation allowance
aggregating $99.3 million. The adjustment increased net income in the three
months and six months ended June 30, 2002 by $77.3 million and decreased cost in
excess of net assets acquired by $12.4 million and other comprehensive loss by
$9.6 million.
The Company continues to have federal net operating loss carryforwards
aggregating approximately $160.0 million and expiring from 2010 to 2020. The
Company has had an ownership change as defined in Internal Revenue Code Section
382 and may be limited on an annual basis in its net operating loss utilization.
9. COMPREHENSIVE INCOME (LOSS)
The components of comprehensive income (loss) are listed below.
Three Months Ended Six Months Ended
--------------------------- --------------------------
June 30, June 30, June 30, June 30,
2002 2001 2002 2001
---------- ---------- ---------- ---------
(thousands)
Net income $81,445 $10,620 $85,897 $16,513
Foreign currency translation adjustments 203 1,040 34 112
Pension liability adjustments 9,597 - 9,597 -
------- ------- ------- -------
Total comprehensive income $91,245 $11,660 $95,528 $16,625
======= ======= ======= =======
10. SEGMENT RESULTS
Foam Products manufactures and markets cushioning foams for bedding,
furniture, packaging and health care applications and foam-based consumer
products, such as mattress pads and children's furniture. Carpet Cushion
Products manufactures and distributes rebond, prime, felt and rubber carpet
padding. Automotive Products supplies foam products and laminates to major tier
one suppliers and original equipment manufacturers. Technical Products
manufactures and markets reticulated foams and other specialty foams for
reservoiring, filtration, gasketing and sealing applications. The "Other" column
in the table below represents certain manufacturing operations in Mexico City,
corporate expenses not allocated to other business segments and restructuring,
impairment and other charges
15
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
10. SEGMENT RESULTS (continued)
(credits). The restructuring, impairment and other charges (credits) totaled
less than $0.1 million in the three months ended June 30, 2002 and June 30,
2001.
Segment results are presented below.
Carpet
Foam Cushion Automotive Technical
Products Products Products Products Other Total
--------- --------- ------------- ---------- ---------- -----------
(thousands)
Three months ended June 30, 2002
Net sales $119,129 $60,434 $123,750 $33,460 $9,125 $345,898
Income (loss) from operations 11,948 (1,224) 8,019 7,661 (2,814) 23,590
Depreciation and amortization 3,602 1,586 873 573 1,317 7,951
Three months ended June 30, 2001
Net sales $122,586 $57,534 $100,858 $24,357 $8,926 $314,261
Income (loss) from operations 17,302 (797) 7,547 6,113 (1,247) 28,918
Depreciation and amortization 3,735 2,161 1,121 873 410 8,300
Six months ended June 30, 2002
Net sales $236,611 $113,233 $228,131 $64,389 $17,596 $659,960
Income (loss) from operations 21,894 (4,218) 17,021 13,824 (2,838) 45,683
Depreciation and amortization 7,674 3,479 1,966 1,291 1,821 16,231
Six months ended June 30, 2001
Net sales $249,487 $111,218 $185,369 $52,138 $17,956 $616,168
Income (loss) from operations 31,017 (2,165) 12,544 14,027 (2,281) 53,142
Depreciation and amortization 7,658 4,085 2,338 1,607 886 16,574
11. RELATED PARTY TRANSACTIONS AND BALANCES
Foam Funding LLC Debt
During the six months ended June 30, 2002, Foamex Carpet paid $0.7 million
of interest and $31.6 million of principal on a note payable to Foam Funding
LLC, a subsidiary of Trace. All obligations under the note payable to Foam
Funding LLC were paid on March 25, 2002.
During the three months ended June 30, 2001, Foamex Carpet paid $0.8
million of interest and $2.6 million of principal on a note payable to Foam
Funding LLC. During the six months ended June 30, 2001, Foamex Carpet paid $1.9
million of interest and $5.3 million of principal on a note payable to Foam
Funding LLC.
12. COMMITMENTS AND CONTINGENCIES
Litigation - Shareholders
The Company has reached agreements with the plaintiffs in the stockholder
actions described below providing for the settlement and dismissal of such
actions. Court approval of these settlements has been obtained although such
approval may be appealed.
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 the
16
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
12. COMMITMENTS AND CONTINGENCIES (continued)
Company and its stockholders, originally named as defendants the Company,
certain of its current and former directors and officers, Trace and a Trace
affiliate. The complaint in the Delaware Action alleged, among other things,
that certain of the defendants breached their fiduciary duties to the Company in
connection with an attempt by Trace to acquire the Company's publicly traded
common stock as well as with a potential acquisition transaction with a group
led by Sorgenti Chemical Industries LLC, and that certain of the defendants
breached their fiduciary duties by causing the Company to waste assets in
connection with a variety of transactions entered into with Trace and its
affiliates. The Delaware Action sought various remedies, including injunctive
relief, money damages and the appointment of a receiver for the Company.
On April 26, 1999, a putative securities class action entitled Molitor v.
Foamex International Inc., et al., was filed in the United States District Court
for the Southern District of New York naming as defendants the Company, Trace
and certain current and former officers and directors of the Company, on behalf
of stockholders who bought shares of the Company's common stock during the
period from May 7, 1998 through and including April 16, 1999. The lawsuit
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 the Company's financial situation and operations, with the
result of artificially inflating the price of the Company's stock. The lawsuit
also alleged that Trace and Marshall S. Cogan, Chairman of the Company, violated
Section 20(a) of the Securities Exchange Act of 1934 as controlling persons of
the Company. 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, the Company 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 aggregating $2.5 million have been paid directly by the
Company's insurance carrier on behalf of the Company.
Under the terms of the stipulation of settlement related to the Delaware
Action (which was approved by the Delaware Court on March 20, 2002), the Company
agreed that a special nominating committee of the Board of Directors 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 resolved all outstanding shareholder
litigation against the Company and its current and former directors and
officers. In early January 2002, two shareholders filed objections to the
settlement. The settlement hearing was held on February 13, 2002, but was not
concluded. On March 20, 2002, the Delaware Court concluded the hearing and
approved the settlement. The settlements of the Federal Action and the Delaware
Action involve no admissions or findings of liability or wrongdoing by the
Company or any individuals.
In April 2002, the Company was informed that the period for the objectors
to the settlement of the Delaware Action to appeal had expired without an appeal
filed. The Company subsequently received insurance proceeds pursuant to the
settlement. After the payment of certain expenses, the Company recorded income
from the settlement proceeds of $0.9 million in the three months ended June 30,
2002.
17
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
12. COMMITMENTS AND CONTINGENCIES (continued)
Litigation - Breast Implants
As of July 23, 2002, the Company and Trace were two of multiple defendants
in actions filed on behalf of approximately 1,198 recipients of breast implants
in various United States 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 courts. During 1995, the
Company and Trace were granted summary judgments and dismissed as defendants
from all cases in the federal courts of the United States and the state courts
of California. Appeals for these decisions were withdrawn and the decisions are
final.
Although breast implants do not contain foam, certain silicone gel implants
were produced using a polyurethane foam covering fabricated by independent
distributors or fabricators from bulk foam purchased from the Company or Trace.
Neither the Company nor Trace recommended, authorized, or approved the use of
its foam for these purposes. The Company is also indemnified by Trace for any
such liabilities relating to foam manufactured prior to October 1990. Trace's
insurance carrier has continued to pay the Company's litigation expenses after
Trace's filing under the Bankruptcy Code. Trace's insurance policies continue to
cover certain liabilities of Trace but if the limits of those policies are
exhausted, 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 the Company,
and without taking into account the indemnification provided by Trace, the
coverage provided by Trace's and the Company's liability insurance and potential
indemnity from the manufacturers of polyurethane covered breast implants,
management believes that it is not reasonably possible that the disposition of
the matters that are pending or that may reasonably be anticipated to be
asserted will result in a loss that is material to the Company's consolidated
financial position or results of operations. If management's assessment of the
Company's liability with respect to these actions is incorrect, such actions
could have a material adverse effect on the financial position, results of
operations and cash flows of the Company.
Litigation - Other
During the second quarter of 2001, the Company was notified by an insurance
provider concerning a dispute involving the reimbursement of liability claims
paid on behalf of Trace prior to October 1990. The insurance provider is
contending that the Company is liable for the claims of approximately $3.0
million. The Company intends to strongly defend this claim and considers the
claim to be without merit. If management's assessment of the Company's liability
with respect to these actions is incorrect, such actions could have a material
adverse effect on the financial position, results of operations and cash flows
of the Company.
The Company is party to various other lawsuits, both as defendant and
plaintiff, arising in the normal course of business. It is the opinion of
management that the disposition of these lawsuits will not, individually or in
the aggregate, have a material adverse effect on the financial position or
results of operations of the Company. If management's assessment of the
Company's liability with respect to these actions is incorrect, such actions
could have a material adverse effect on the Company's consolidated financial
position, result of operations and cash flows.
Environmental and Health and Safety
The Company is subject to extensive and changing federal, state, local and
foreign environmental laws and regulations, including those relating to the use,
handling, storage, discharge and disposal of hazardous substances, the discharge
or emission of materials into the environment, 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, 2002, the Company had accruals of approximately $3.0
million for environmental matters, including approximately $2.5 million related
to remediating and monitoring soil and groundwater contamination and
approximately $0.5 million related to PRP sites and other matters.
18
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
12. COMMITMENTS AND CONTINGENCIES (continued)
The Clean Air Act Amendments of 1990 ("1990 CAA Amendments") provide for
the establishment of federal emission standards for hazardous air pollutants
including methylene chloride, propylene oxide and TDI, which are used in the
manufacturing of foam. The final National Emission Standard for Hazardous Air
Pollutants, or "NESHAP," for flexible polyurethane foam production was
promulgated on October 7, 1998. The NESHAP required 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 VPF(SM) and carbon dioxide, and by shifting current production to
facilities which use these alternative technologies, we are in substantial
compliance with these regulations. On August 8, 2001, the United States
Environmental Protection Agency, or "EPA," proposed a NESHAP for Flexible
Polyurethane Foam Fabrication Operations. The proposed NESHAP regulates
emissions of methylene chloride and other Hazardous Air Pollutants and restricts
air emissions from flame lamination sources. The Company does not believe that
this standard, if adopted, will require us to make material expenditures.
The Company has reported to the appropriate state authorities that we have
found soil and/or groundwater contamination in excess of state standards at
certain locations. Seven sites are currently in various stages of investigation
or remediation. Accordingly, the extent of contamination and the ultimate
liability is not known with certainty for all sites. During 2000, we 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 the Company. The estimated allocation of future
costs for the remediation of this facility is not significant, based on current
known information. The former owner was Recticel Foam Corporation, a subsidiary
of Recticel s.a.
The Company has either upgraded or closed all underground storage tanks at
our facilities in accordance with applicable regulations.
The Comprehensive Environmental Response, Compensation and Liability Act,
or "CERCLA," and comparable state laws impose liability without fault for the
costs of cleaning up contaminated sites on certain classes of persons that
contributed to the release of hazardous substances into the environment at those
sites, for example, by generating wastes containing hazardous substances which
were disposed at such sites. We are currently designated as a Potentially
Responsible Party, or "PRP," by the EPA or by state environmental agencies or
other PRPs, pursuant to CERCLA or analogous state statutes, with respect to
eight sites. Estimates of total cleanup costs and fractional allocations of
liability are often provided by the EPA, the state environmental agency or the
committee of PRPs with respect to the specified site. Based on these estimates
(to the extent available) and on known information, in each case and in the
aggregate, the Company does not expect additional costs, if any, to be material
to liquidity, results of operations or financial position.
In 2002, capital expenditures for safety and environmental compliance
projects are anticipated to be approximately $2.0 million. Although it is
possible that new information or future developments could require the Company
to reassess the potential exposure relating to all pending environmental
matters, including those described above, management believes that, based upon
all currently available information, the resolution of these environmental
matters will not have a material adverse effect on our 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, including the presence of
previously unknown environmental contamination, may be found to exist or a
reassessment of the potential exposure to pending environmental matters may be
necessary due to new information or future developments, that may require
expenditures not currently anticipated and that may be material.
Other
In October 2001, the Company experienced a fire at one of its manufacturing
facilities. Costs relating to the fire aggregate approximately $1.2 million. The
Company has filed a claim with its insurance carrier and believes it will
recover substantially all costs in excess of a deductible of $0.2 million.
19
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
12. COMMITMENTS AND CONTINGENCIES (continued)
During the fourth quarter of 2001, the Company discovered that some
mattresses containing foam supplied by the Company had a discernible odor. The
cause of the odor was traced to chemicals from one supplier used in the
manufacture of the foam. The supplier has advised the Company that the odor was
attributable to a change in its chemical manufacturing process, which has since
been corrected. The Company received claims from some of its customers for costs
purportedly associated with the odorous foam, and has reached agreement with
this chemical supplier regarding the terms of and manner in which this supplier
will reimburse the Company for certain obligations it may have to its customers
relating to these claims, as well as for certain internal costs. Under this
agreement, this supplier will pay the Company a fixed sum in exchange for
eliminating certain future claims the Company may have against this supplier and
the Company is obligated to indemnify this supplier for certain claims that may
be brought against it by others, including the Company's customers. The ultimate
amounts of these third party claims and the amount of the Company's internal
costs are uncertain. This supplier's payments to the Company may not be
sufficient to cover all payments it may be required to make to third parties in
respect of their claims or to cover all of the Company's related internal costs.
In addition, the Company's indemnification obligations to this supplier may be
material. Consequently, these claims and the costs relating to this matter may
have a material adverse effect on our consolidated financial position, results
of operations and cash flows.
13. SUBSEQUENT EVENTS
In July 2002, the Company repurchased $48.6 million of Foamex L.P.'s 13
1/2% senior subordinated notes, including unamortized debt premium of $2.6
million, and $1.5 million of Foamex L.P.'s 9 7/8% senior subordinated notes for
a total purchase price of $48.1 million. The transaction will result in a gain
of $2.0 million to be recorded in the period ending September 29, 2002. In
addition, the Company will write off $0.6 million of debt issuance and other
costs associated with the repurchased debt in the period ending September 29,
2002.
20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2002 COMPARED TO THE
THREE MONTHS ENDED JUNE 30, 2001
Carpet
Foam Cushion Automotive Technical
Products Products Products Products Other Total
--------- --------- ------------ ---------- ---------- -----------
(thousands)
Three months ended June 30, 2002
Net sales $119,129 $60,434 $123,750 $33,460 $9,125 $345,898
Income (loss) from operations 11,948 (1,224) 8,019 7,661 (2,814) 23,590
Depreciation and amortization 3,602 1,586 873 573 1,317 7,951
Income (loss) from operations
as a percentage of net sales 10.0% (2.0)% 6.5% 22.9% n.m.* 6.8%
Three months ended June 30, 2001
Net sales $122,586 $57,534 $100,858 $24,357 $8,926 $314,261
Income (loss) from operations 17,302 (797) 7,547 6,113 (1,247) 28,918
Depreciation and amortization 3,735 2,161 1,121 873 410 8,300
Income (loss) from operations
as a percentage of net sales 14.1% (1.4)% 7.5% 25.1% n.m.* 9.2%
* not meaningful
Income from Operations
Net sales for the three months ended June 30, 2002 increased 10.1% to
$345.9 million from $314.3 million in the three months ended June 30, 2001. The
increase was primarily attributable to improved sales in the Automotive Products
and Technical Products segments. The improvement in sales partially reflected
the impact of sales related to the acquisition discussed in Note 3 to the
condensed consolidated financial statements.
The gross profit margin was 13.1% in the three months ended June 30, 2002
compared to 15.9% in the comparable 2001 period. The Company experienced 20.0%
to 25.0% increases in the price of raw materials from major chemical
manufacturers during the three months ended June 30, 2002. These higher raw
material prices are expected to increase the Company's costs by approximately
$60.0 million on an annualized basis based on current volumes. The Company has
announced price increases of 8.0% for its Carpet Cushion Products which was
effective on June 3, 2002 and 16.0% for all other products effective July 1,
2002. The Company has been informed that the major chemical manufacturers will
implement additional price increases on September 1, 2002 that will add
approximately $30.0 million to the Company's annualized cost of raw materials.
The Company may not be able to fully recover current or future raw material
price increases through raising the selling prices of its products. If the
Company is unable to recover the raw material price increases, it could
experience a significant decline in income from operations. In addition, the
gross profit margin for Carpet Cushion Products declined by 24.0% when compared
to the 2001 period. Selling, general and administrative expenses increased by
$0.7 million, or 3.5%, primarily due to higher professional service fees and
employee related expenses, partially offset by reduced goodwill amortization,
lower bad debt expense and insurance proceeds from the settlement of litigation.
Income from operations for the three months ended June 30, 2002 was $23.6
million, which represented a 18.4% decrease from the $28.9 million reported
during the comparable 2001 period. Income from operations was 6.8% of net sales
in 2002 compared to 9.2% of net sales in 2001.
Foam Products
Foam Products net sales for the three months ended June 30, 2002 decreased
2.8% to $119.1 million from $122.6 million in the comparable 2001 period. The
decrease primarily reflected reduction in business from a major bedding
manufacturer and the slow recovery of sales after an odor issue caused by
defective chemicals from a major supplier in late 2001. Income from operations
decreased 30.9%, to $11.9 million in the three months ended June 30, 2002 from
$17.3 million in the comparable 2001 period. Income from operations was reduced
by increased raw
21
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
material prices in the latter part of the period and by unusually high
manufacturing costs as the Company adjusted foam formulations and plant
procedures to protect customers from further odor concerns. Income from
operations was 10.0% of net sales in 2002, down from 14.1% in 2001.
Carpet Cushion Products
Carpet Cushion Products net sales for the three months ended June 30, 2002
increased 5.0% to $60.4 million from $57.5 million in the comparable 2001
period. The Company was able to increase its market share in spite of market
weakness and overcome the loss of sales to one large retail customer that exited
the carpet business. Higher costs of scrap foam contributed to a loss from
operations of $1.2 million in the three months ended June 30, 2002 compared to a
$0.8 million loss in the comparable 2001 period. The loss from operations
represented 2.0% of net sales in 2002 and 1.4% of net sales in 2001.
Automotive Products
Automotive Products net sales for the three months ended June 30, 2002
increased 22.7% to $123.8 million from $100.9 million in the comparable 2001
period. The improvement primarily reflected a continued high build rate for new
cars and new product programs. Higher sales translated into a 6.3% increase in
income from operations, to $8.0 million in the 2002 period from $7.5 million in
the 2001 period. Income from operations represented 6.5% of net sales in 2002
and 7.5% of net sales in 2001.
Technical Products
Net sales for Technical Products in the three months ended June 30, 2002
increased 37.4% to $33.5 million from $24.4 million in the comparable 2001
period. Higher sales primarily reflected sales from the acquisition, discussed
in Note 3 to the condensed consolidated financial statements. Income from
operations increased 25.3% to $7.7 million in the 2002 period compared to $6.1
million in the 2001 period due to the increase in net sales. Income from
operations represented 22.9% of net sales in 2002 compared to 25.1% in 2001.
Other
Other primarily consists of certain manufacturing operations in Mexico
City, corporate expenses not allocated to business segments and restructuring,
impairment and other charges (credits). The increase in net sales associated
with this segment primarily resulted from the Company's Mexico City operation.
The loss from operations was $2.8 million in the three months ended June 30,
2002. The loss from operations in the second quarter of 2001 was $1.2 million.
Interest and Debt Issuance Expense
Interest and debt issuance expense was $17.3 million in the three months
ended June 30, 2002, which represented a 6.7% increase from the comparable 2001
period expense of $16.2 million. The increase was attributable to higher debt
levels as a result of the refinancing completed on March 25, 2002. The interest
rate swaps discussed in Note 7 to the condensed consolidated financial
statements and the debt repurchase discussed in Note 13 to the condensed
consolidated financial statements are expected to decrease interest and debt
issuance expense by approximately $7.0 million for the balance of 2002, assuming
current market interest rates.
Income from Equity Interest in Joint Venture
The income from an equity interest in an Asian joint venture was $0.4
million for the three months ended June 30, 2002 compared to income of $0.3
million in the comparable 2001 period. The Company has a 70% ownership interest
in the joint venture in 2002 compared to a 49% ownership in 2001.
22
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Provision (Benefit) for Income Taxes
During the three months ended June 30, 2002, the Company determined that,
based on the weight of available evidence including improved financial results,
revised NOL carryforward utilization limitations and other tax planning
strategies initiated in the three months ended June 30, 2002, it was more likely
than not, that its net deferred tax assets would be realized in the future.
Accordingly, the Company reversed a previously recorded valuation allowance of
$99.3 million. The adjustment increased net income for the three months ended
June 30, 2002 by $77.3 million.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2002 COMPARED TO THE SIX
MONTHS ENDED JUNE 30, 2001
Carpet
Foam Cushion Automotive Technical
Products Products Products Products Other Total
--------- --------- ----------- ---------- ---------- ---------
(thousands)
Six months ended June 30, 2002
Net sales $236,611 $113,233 $228,131 $64,389 $17,596 $659,960
Income (loss) from operations 21,894 (4,218) 17,021 13,824 (2,838) 45,683
Depreciation and amortization 7,674 3,479 1,966 1,291 1,821 16,231
Income (loss) from operations
as a percentage of net sales 9.3% (3.7)% 7.5% 21.5% n.m.* 6.9%
Six months ended June 30, 2001
Net sales $249,487 $111,218 $185,369 $52,138 $17,956 $616,168
Income (loss) from operations 31,017 (2,165) 12,544 14,027 (2,281) 53,142
Depreciation and amortization 7,658 4,085 2,338 1,607 886 16,574
Income (loss) from operations
as a percentage of net sales 12.4% (1.9)% 6.8% 26.9% n.m.* 8.6%
* not meaningful
Income from Operations
Net sales for the six months ended June 30, 2002 increased 7.1% to $660.0
million from $616.2 million in the six months ended June 30, 2001. The increase
was primarily attributable to improved sales in the Automotive Products and
Technical Products segments, partially offset by a decrease in the Foam Products
segment. The improvement in sales partially reflected the impact of sales
related to the acquisition discussed in Note 3 to the condensed consolidated
financial statements.
The gross profit margin was 12.7% in the six months ended June 30, 2002
compared to 14.8% in the comparable 2001 period. Certain contract payments in
the six months ended June 30, 2002 had the impact of reducing the gross profit
margin percentage by 0.4%. The Company experienced 20.0% to 25.0% increases in
the price of raw materials from major chemical manufacturers during the six
months ended June 30, 2002. These higher raw material prices are expected to
increase the Company's cost by approximately $60.0 million on an annualized
basis, based on current volumes. The Company announced price increases of 8.0%
for its carpet cushion products which was effective on June 3, 2002 and 16.0%
for all other products effective July 1, 2002. The Company has been informed
that the major chemical manufacturers will implement additional raw material
price increases on September 1, 2002 that will add approximately $30.0 million
to the Company's annualized cost of raw materials. The Company may not be able
to fully recover current or future raw material price increases through raising
the selling prices of its products. If the Company is unable to recover the raw
material price increases, it could experience a significant decline in income
from operations. In addition, the gross profit margin for Carpet Cushion
Products declined by 38.0% when compared to the 2001 period. Selling, general
and administrative expenses increased 4.0%, primarily due to higher professional
service fees and employee related expenses, partially offset by reduced goodwill
amortization, lower bad debt expense and insurance proceeds from the settlement
of litigation.
23
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Income from operations for the six months ended June 30, 2002 was $45.7
million, which represented a 14.0% decrease from the $53.1 million reported
during the comparable 2001 period. Results included restructuring, impairment
and other credits of $1.5 million in 2002 and credits of less than $0.1 million
in 2001. Restructuring, impairment and other charges (credits) recorded during
2002 are discussed under "Other" below. Excluding the restructuring, impairment
and other charges (credits) for comparison purposes, income from operations was
$44.1 million in the six months ended June 30, 2002 compared to $53.1 million in
the comparable 2001 period. On this basis, income from operations was 6.7% of
net sales in 2002 compared to 8.6% of net sales in 2001.
Foam Products
Foam Products net sales for the six months ended June 30, 2002 decreased
5.2% to $236.6 million from $249.5 million in the comparable 2001 period. The
decrease primarily reflected reduction in business from a major bedding
manufacturer and the slow recovery of sales after an odor issue caused by
defective chemicals from a major supplier in late 2001. Income from operations
decreased 29.4%, to $21.9 million in the six months ended June 30, 2002 from
$31.0 million in the comparable 2001 period. Income from operations was reduced
by increased raw material prices in the three months ended June 30, 2002 and by
unusually high manufacturing costs as the Company adjusted foam formulations and
plant procedures to protect customers from further odor concerns. Income from
operations was 9.3% of net sales in 2002, down from 12.4% in 2001.
Carpet Cushion Products
Carpet Cushion Products net sales for the six months ended June 30, 2002
increased 1.8% to $113.2 million from $111.2 million in the comparable 2001
period. The Company was able to increase its market share in spite of market
weakness and overcome the loss of sales to one large retail customer that exited
the carpet business. Higher costs of scrap foam contributed to a loss from
operations of $4.2 million in the six months ended June 30, 2002 compared to a
$2.2 million loss in the comparable 2001 period. The loss from operations
represented 3.7% of net sales in 2002 and 1.9% of net sales in 2001.
Automotive Products
Automotive Products net sales for the six months ended June 30, 2002
increased 23.1% to $228.1 million from $185.4 million in the comparable 2001
period. The improvement primarily reflected a continued high build rate for new
cars and new product programs. Higher sales translated into a 35.7% increase in
income from operations, to $17.0 million in the 2002 period from $12.5 million
in the 2001 period. Income from operations represented 7.5% of net sales in 2002
and 6.8% of net sales in 2001.
Technical Products
Net sales for Technical Products in the six months ended June 30, 2002
increased 23.5% to $64.4 million from $52.1 million in the comparable 2001
period. Higher sales primarily reflected sales from the acquisition discussed in
Note 3 to the condensed consolidated financial statements. Income from
operations decreased 1.4% to $13.8 million in the 2002 period compared to $14.0
million in the 2001 period. The decrease was due to lower value shipment mix as
there were fewer sales to the technology industry. Income from operations
represented 21.5% of net sales in 2002 compared to 26.9% in 2001.
Other
Other primarily consists of certain manufacturing operations in Mexico
City, corporate expenses not allocated to business segments and restructuring,
impairment and other charges (credits). The 2.0% decrease in net sales
associated with this segment primarily resulted from the Company's Mexico City
operation. The loss from operations was $2.8 million in the year to date period
ended June 30, 2002 and included restructuring, impairment and other credits,
discussed below. The $2.3 million loss from operations in the first half of 2001
also included restructuring and other charges, discussed below.
24
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
During the six months ended June 30, 2002, the Company recorded
restructuring, impairment and other credits of $1.5 million, primarily from the
reimbursement of certain lease costs.
During the six months ended June 30, 2001, the Company recorded
restructuring and other credits of less than $0.1 million for changes in
estimates for previously recognized restructuring plans.
Interest and Debt Issuance Expense
Interest and debt issuance expense was $31.6 million in the six months
ended June 30, 2002, which represented a 5.8% decrease from the comparable 2001
period expense of $33.6 million. The decrease was attributable to lower average
debt levels and lower effective interest rates. The interest rate swaps
discussed in Note 7 to the condensed consolidated financial statements and the
debt repurchases discussed in Note 13 to the condensed consolidated financial
statements are expect to decrease interest and debt issuance expense by
approximately $7.0 million for the balance of 2002, assuming current market
interest rates.
Income from Equity Interest in Joint Venture
The income from an equity interest in an Asian joint venture was $1.1
million for the six months ended June 30, 2002 compared to income of $0.7
million in the comparable 2001 period. The Company has a 70% ownership interest
in the joint venture in 2002 compared to a 49% ownership in 2001.
Provision (Benefit) for Income Taxes
During the six months ended June 30, 2002, the Company determined that,
based on the weight of available evidence, including improved financial results,
revised NOL carryforward utilization limitations and other tax planning
strategies initiated in the six months ended June 30, 2002, it was more likely
than not, that its net deferred tax assets would be realized in the future.
Accordingly, the Company reversed a previously recorded valuation allowance of
$99.3 million. The adjustment increased net income for the six months ended June
30, 2002 by $77.3 million.
Liquidity and Capital Resources
The Company's operations are conducted through its wholly-owned subsidiary,
Foamex L.P. The liquidity requirements of the Company consist primarily of the
operating cash requirements of Foamex L.P.
Foamex L.P.'s operating cash requirements consist principally of working
capital requirements, scheduled payments of principal and interest on
outstanding indebtedness and capital expenditures. The Company believes that
cash flow from Foamex L.P.'s operating activities, cash on hand and periodic
borrowings under its credit facility will be adequate to meet its liquidity
requirements. The ability of Foamex L.P. to make distributions to the Company is
restricted by the terms of its financing agreements; therefore, the Company is
expected to have only limited access to the cash flow generated by Foamex L.P.
for the foreseeable future.
Cash and cash equivalents were $54.2 million at June 30, 2002 compared to
$15.1 million at December 31, 2001. Working capital at June 30, 2002 was $143.7
million and the current ratio was 1.6 to 1 compared to working capital at
December 31, 2001 of $65.0 million and a current ratio of 1.3 to 1. The increase
in working capital is primarily due to the refinancing completed on March 25,
2002 and increases in accounts receivable and inventories. Additionally, with
the reversal of the valuation allowance on deferred tax assets discussed above,
working capital increased by $8.5 million, which reflected the current portion
of net deferred tax assets.
Total debt at June 30, 2002 was $724.3 million, up $58.0 million from
December 31, 2001. As of June 30, 2002, there were no revolving credit
borrowings under the Foamex L.P. credit facility with $79.2 million available
for borrowings and $20.8 million of letters of credit outstanding. Foamex Canada
Inc. ("Foamex Canada") did not have any outstanding borrowings as of June 30,
2002 under Foamex Canada's short-term revolving credit agreement, with unused
availability of approximately $5.3 million. The increased debt balance reflects
the issuance of $300.0
25
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
million of 10 3/4% Senior Secured Notes due 2009 on March 25, 2002, offset by
$231.5 million of debt repayments from proceeds of the offering.
In July 2002, the Company repurchased $48.6 million of Foamex L.P.'s 13
1/2% senior subordinated notes, including unamortized debt premium of $2.6
million, and $1.5 million of Foamex L.P.'s 9 7/8% senior subordinated notes for
a total purchase price of $48.1 million.
The Company anticipates that it will continue to comply with the quarterly
financial covenants contained in its Amended Credit Facility and other debt
agreements. Management's current business plans 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 are necessary for
compliance with the various financial covenants for the remainder of 2002 and
prospectively.
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, the Company will seek the lenders' approval of
amendments to, or waivers of, such financial covenants. Historically, the
Company 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 of future amendments or
waivers will be obtained.
Cash Flow from Operating Activities
Cash used for operating activities in the six months ended June 30, 2002
was $28.7 million compared to cash provided of $29.6 million in the comparable
2001 period. Accounts receivable and inventories increased by $26.2 million and
$17.1 million, respectively, in the six months ended June 30, 2002.
Cash Flow from Investing Activities
Cash used for investing activities totaled $11.1 million for the six months
ended June 30, 2002. Cash requirements included capital expenditures of $10.1
million. In the six months ended June 30, 2001, cash used for investing
activities was $12.4 million, which included $12.5 million of capital
expenditures. The estimated capital expenditures for the full year 2002 are
expected to be less than $25.0 million.
Cash Flow from Financing Activities
Cash provided by financing activities was $78.9 million for the six months
ended June 30, 2002 compared to cash used of $19.9 million in the comparable
period of 2001. The Company completed the offering of $300.0 million of senior
secured notes on March 25, 2002. The Company used the $280.0 million of net
proceeds from these notes and $56.6 million of new term loans to repay revolving
loans of $125.0 million, term loans of $140.0 million and long-term debt to a
related party of $31.6 million. Cash requirements for the 2001 period, primarily
reflected debt repayments, partially offset by an increase in cash overdrafts.
Environmental Matters
The Company is subject to extensive and changing environmental laws and
regulations. Expenditures to date in connection with the Company's compliance
with such laws and regulations did not have a material adverse effect on the
Company's operations, financial position, capital expenditures or competitive
position. The amount of liabilities recorded by the Company in connection with
environmental matters as of June 30, 2002 was $3.0 million. Although it is
possible that new information or future developments could require the Company
to reassess its potential exposure to all pending environmental matters,
including those described in Note 12 to the Company's condensed consolidated
financial statements, the Company believes that, based upon all currently
available
26
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
information, the resolution of all such pending environmental matters will not
have a material adverse effect on the Company's operations, financial position,
capital expenditures or competitive position.
Potential Transactions
The Company has signed a letter of intent and is in negotiations to
transfer its Carpet Cushion business to Leggett & Platt, Incorporated ("Leggett
& Platt") in exchange for Leggett & Platt's polyurethane foam business and a
cash payment. Should the transaction be consummated, there may be a significant
alteration to the actions originally contemplated by the operational
reorganization plan adopted in the fourth quarter of 2001, as certain carpet
cushion facilities were included in facilities planned to be closed. The
execution of this portion of the operational reorganization plan has been
delayed pending the proposed transaction with Leggett & Platt.
In July 2002, the Company announced the formation of Symphonex, a new
subsidiary which will include our Technical Products group and our investment in
a joint venture in Asia.
Market Risk
The Company's debt securities with variable interest rates are subject to
market risk for changes in interest rates. On June 30, 2002, indebtedness with
variable interest rates aggregated $469.2 million. On an annualized basis, if
the interest rates on these debt instruments increased by 1.0%, annual interest
expense would increase by approximately $4.7 million.
Effective May 1, 2002, the Company completed a series of interest rate swap
transactions with notional amounts aggregating $300.0 million. The Company has
designated, documented and accounted for these interest rate swaps as fair value
hedges of the Company's 10 3/4% Senior Secured Notes due April 1, 2009. The risk
being hedged in these transactions is the change in fair value of the Company's
10 3/4% Senior Secured Notes based on changes in the benchmark interest rate,
LIBOR. The effect of these interest rate swap transactions is to convert the
fixed interest rate on the senior secured notes to floating rates reset twice
per year to correspond with the interest payment dates for the 10 3/4% Senior
Secured Notes. For the two months ended June 30, 2002, the effective interest
rate on the 10 3/4% Senior Secured Notes was reduced to a weighted average rate
of 7.55%. At June 30, 2002, the swap instruments have a fair value of a $0.3
million asset which is included in other assets in the accompanying condensed
consolidated balance sheet. The interest rate swaps qualify for the "short cut"
method; therefore, the Company has made an assumption that there is no
ineffectiveness. As such, a similar amount of $0.3 million has been included in
the carrying amount of the 10 3/4% Senior Secured Notes as of June 30, 2002.
Forward-Looking Statements
This report contains forward-looking statements and should be read in
conjunction with the discussion regarding forward-looking statements set forth
in the Company's Annual Report on Form 10-K for the year ended December 31,
2001.
Accounting Changes
Statement of Financial Accounting Standards No. 141, "Business
Combinations" ("SFAS No. 141") addresses financial accounting and reporting for
business combinations and limits the accounting for business combinations to the
purchase method. The statement was effective for all business combinations,
including the acquisition discussed in Note 3 to the condensed consolidated
financial statements, with an acquisition date of July 1, 2001, or later. SFAS
No. 141 also requires that any unamortized deferred credit related to an excess
over cost arising from a business combination that occurred before July 1, 2001
to be written off and recognized as the effect of a change in accounting
principle.
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" ("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 is that goodwill and certain other intangibles are no
longer amortized but will be periodically assessed for impairment, and as a
result there may be more volatility in the reported results than
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
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 3, are subject to the
nonamortization and amortization provisions of SFAS No. 142. The other
provisions of SFAS No. 142 were adopted by the Company on January 1, 2002. The
three months and six months ended June 30, 2001 included goodwill amortization
of $1.5 million and $3.0 million, respectively. On a pro forma basis, net income
and diluted earnings per share for the three months and six months ended June
30, 2001 would have been $12.1 million and $19.5 million and $0.49 and $0.77,
respectively, if SFAS No. 142 had been adopted as of January 1, 2001.
As SFAS No. 142 provides a six-month transitional period from the effective
date to perform an assessment of whether there is an indication that goodwill is
impaired, the Company completed this assessment in the second quarter. Step one
of the transitional impairment test uses a fair value methodology, which differs
from the undiscounted cash flow methodology that continues to be used for
intangible assets with an identifiable life. The Company identified six
reporting units and during the second quarter and performed step one of the
transitional impairment test on each of the reporting units. Based on the
results of step one of the transitional impairment test, the Company has
identified one reporting unit in the Foam Products segment and one reporting
unit in the Carpet Cushion Products segment, for which the carrying value
exceeded the fair values as at January 1, 2002, indicating a potential
impairment of goodwill in those reporting units. Step two of the transitional
impairment test, to determine the magnitude of any goodwill impairment, is
expected to be completed by the end of the third quarter of 2002 and any
resulting impairment loss will be recorded as a cumulative effect of a change in
accounting principle, retroactive to the Company's first quarter results of
operations in accordance with the transitional implementation guidance of SFAS
No. 142. Because the determination of whether there is an impairment of the
Company's goodwill will be completed by the end of the third quarter of 2002 and
will involve many aspects of analyses which have not yet been undertaken, the
amount of any write down cannot be reliably predicted at this time.
Statement of Financial Accounting Standards No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144") provides 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 became effective on January 1,
2002. The Company has determined the impact of SFAS No. 144 to be not material.
Statement of Financial Accounting Standards No. 143, "Accounting for Asset
Retirement Obligations ("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. The Company is evaluating the statement and
has not determined the impact of SFAS No. 143.
On April 30, 2002, Statement of Financial Accounting Standards No. 145,
"Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement
No. 13, and Technical Corrections" ("SFAS No. 145") was issued. The provisions
of this Statement related to the rescission of Statement 4 shall be applied in
fiscal years beginning after May 15, 2002. Any gain or loss on extinguishment of
debt that was classified as an extraordinary item in prior periods presented
that does not meet the criteria in Opinion 30 for classification as an
extraordinary item shall be reclassified. Early application of the provisions of
this Statement related to the rescission of Statement 4 is encouraged. The
Company expects that adoption of this Statement in 2003 will result in a
reclassification of the extraordinary charge recorded during the six months
ended June 30, 2002.
Statement of Financial Accounting Standards No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("SFAS No. 146") was issued in June
2002. SFAS No. 146 revises the accounting and reporting for costs associated
with exit or disposal activities to be recognized when a liability for such cost
is incurred rather than when an entity commits to an exit plan. SFAS No. 146 is
effective for exit or disposal activities initiated after December 31, 2002.
SFAS No. 146 does not impact previously recorded liabilities under EITF 94-3 and
therefore the initial adoption of this standard will not have a material effect
on the financial statements.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
See the "Market Risk" section under Item 2, Management's Discussion and
Analysis of Financial Condition and Results of Operations.
29
Part II - Other Information.
Item 1. Legal Proceedings.
Reference is made to the description of the legal proceedings
contained in the Company's Annual Report on Form 10-K for the year
ended December 31, 2001. The information from Note 12 to the condensed
consolidated financial statements is incorporated herein by reference.
Item 2. Changes in Securities.
Information concerning the stockholder approval of the Foamex
International Inc. 2002 Stock Award Plan is incorporated herein by
reference to Item 4. Submission of Matters to a Vote of Security
Holders.
Item 4. Submission of Matters to a Vote of Security Holders.
The Company held its Annual Meeting of Stockholders on June 5, 2002.
Listed below is a summary of the proposals voted on.
Election of Directors
All nine of the nominees for director received the votes necessary for
election to serve for one-year terms or until their successors have
been duly elected and qualified.
Director For Withhold Authority
--------------------- ---------------- ------------------
Marshall S. Cogan 18,031,274 1,484,841
S. Dennis N. Belcher 19,317,849 198,266
John C. Culver 19,309,139 206,976
Julie Nixon Eisenhower 19,304,543 211,572
Robert J. Hay 19,227,466 288,649
Stuart J. Hershon 16,550,123 2,965,992
Virginia A. Kamsky 19,249,709 266,406
Raymond E. Mabus 19,232,579 283,536
John V. Tunney 19,251,217 264,898
Foamex International Inc. 2002 Stock Award Plan
Stockholders approved the Foamex International Inc. 2002 Stock Award
Plan.
For Against Abstentions Broker Non-Votes
---------- ---------- ----------- ----------------
11,365,507 2,688,363 2,716,372 2,745,873
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes - Oxley Act of 2002.
99.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes - Oxley Act of 2002.
30
(b) The Company filed the following Current Reports on Form 8-K for
the three months ended June 30, 2002:
On June 5, 2002, a report under Item 5, Other Events concerning
an adjustment to its deferred income tax assets in the three
months ending June 30, 2002
On June 5, 2002, a report under Item 5, Other Events concerning a
press release announcing (i) a price increase, (ii) the recording
of an adjustment to its valuation allowance for deferred income
tax assets, and (iii) the election of a new director. The report
also included presentation material under Item 9, Regulation FD
Disclosure.
On June 18, 2002, a report under Item 5, Other Events concerning
a press release pursuant to which the Company disclosed that it
has signed a letter of intent for an asset exchange with Leggett
& Platt, Incorporated, a Missouri corporation ("Leggett &
Platt").
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FOAMEX INTERNATIONAL INC.
Date: August 14, 2002 By: /s/ Michael D. Carlini
-------------------------
Michael D. Carlini
Senior Vice President - Finance
and Chief Accounting Officer
32