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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 September 29, 2002
Commission file numbers 1-11432; 1-11436
FOAMEX L.P.
FOAMEX CAPITAL CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 05-0475617
Delaware 22-3182164
- ------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1000 Columbia Avenue
Linwood, PA 19061
- ------------------------------- ----------------------
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code: (610) 859-3000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [ ]
Foamex L.P. and Foamex Capital Corporation meet the conditions set forth in
General Instruction H(1)(a) and (b) of Form 10-Q and are therefore filing this
form with the reduced disclosure format.
The number of shares of Foamex Capital Corporation's common stock outstanding as
of November 15, 2002 was 1,000.
FOAMEX L.P.
FOAMEX CAPITAL CORPORATION
INDEX
Page
Part I. Financial Information
Item 1. Financial Statements.
Condensed Consolidated Statements of Operations (unaudited) - Quarters and
Three Quarters Ended September 29, 2002 and September 30, 2001 3
Condensed Consolidated Balance Sheets as of September 29, 2002 (unaudited) and
and December 31, 2001 4
Condensed Consolidated Statements of Cash Flows (unaudited) - Three Quarters
Ended September 29, 2002 and September 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. 22
Item 3. Quantitative and Qualitative Disclosures about Market Risk. 36
Item 4. Controls and Procedures. 36
Part II. Other Information
Item 1. Legal Proceedings. 37
Item 6. Exhibits and Reports on Form 8-K. 37
Signatures 38
Certification of Chief Executive Officer 39
Certification of Interim Chief Financial Officer 40
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
FOAMEX L.P. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
Quarter Ended Three Quarters Ended
---------------------------- -----------------------------
September 29, September 30, September 29, September 30,
2002 2001 2002 2001
------------ ------------- ------------- -------------
(thousands, except per share amounts)
NET SALES $340,823 $326,166 $1,000,783 $942,334
COST OF GOODS SOLD 310,735 278,757 887,071 803,853
-------- -------- ---------- --------
GROSS PROFIT 30,088 47,409 113,712 138,481
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 29,423 21,202 69,100 58,806
RESTRUCTURING, IMPAIRMENT AND OTHER
CHARGES (CREDITS) (3,674) 252 (5,212) 204
-------- -------- ---------- --------
INCOME FROM OPERATIONS 4,339 25,955 49,824 79,471
INTEREST AND DEBT ISSUANCE EXPENSE 16,510 15,503 48,153 49,100
INCOME (LOSS) FROM EQUITY INTEREST IN
JOINT VENTURE 386 (53) 1,514 610
OTHER INCOME (EXPENSE), NET 370 (1,192) 166 (1,510)
-------- -------- ---------- --------
INCOME (LOSS) BEFORE PROVISION FOR
INCOME TAXES (11,415) 9,207 3,351 29,471
PROVISION FOR INCOME TAXES 389 1,047 1,581 2,549
-------- -------- ---------- --------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEMS AND
CUMULATIVE EFFECT OF ACCOUNTING CHANGES (11,804) 8,160 1,770 26,922
EXTRAORDINARY ITEMS, NET OF INCOME TAXES 1,410 - (2,794) -
CUMULATIVE EFFECT OF ACCOUNTING CHANGES - - (68,172) -
-------- -------- ---------- --------
NET INCOME (LOSS) $(10,394) $ 8,160 $ (69,196) $ 26,922
======== ======== ========== ========
The accompanying notes are an integral part of the
unaudited condensed consolidated financial statements.
3
FOAMEX L.P. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
September 29, 2002 December 31, 2001
------------------ -----------------
ASSETS (unaudited)
CURRENT ASSETS (thousands, except share data)
Cash and cash equivalents $ 15,800 $ 15,059
Accounts receivable, net of allowances of $9,427 in 2002
and $10,940 in 2001 208,913 173,461
Inventories 112,408 89,430
Other current assets 19,114 32,685
-------- --------
Total current assets 356,235 310,635
-------- --------
Property, plant and equipment 426,417 407,204
Less accumulated depreciation (236,711) (206,407)
-------- --------
NET PROPERTY, PLANT AND EQUIPMENT 189,706 200,797
-------- --------
GOODWILL 129,091 209,503
DEBT ISSUANCE COSTS, net of accumulated
amortization of $11,812 in 2002 and $14,643 in 2001 34,603 13,690
OTHER ASSETS 32,210 33,025
-------- --------
TOTAL ASSETS $741,845 $767,650
======== ========
LIABILITIES AND PARTNERS' DEFICIENCY
CURRENT LIABILITIES
Current portion of long-term debt $ 429 $ 4,023
Current portion of long-term debt - related party - 14,040
Accounts payable 143,494 128,756
Accrued employee compensation and benefits 24,114 25,858
Accrued interest 23,928 8,946
Accrued customer rebates 17,688 21,869
Cash overdrafts 25,281 4,073
Other current liabilities 29,603 39,429
-------- --------
Total current liabilities 264,537 246,994
-------- --------
LONG-TERM DEBT 687,549 630,682
LONG-TERM DEBT - RELATED PARTY - 17,550
OTHER LIABILITIES 46,030 50,552
-------- --------
Total liabilities 998,116 945,778
-------- --------
COMMITMENTS AND CONTINGENCIES
PARTNERS' DEFICIENCY
General partner (210,131) (130,095)
Limited partner - -
Accumulated other comprehensive loss (36,919) (36,322)
Notes and advances receivable from partner - (2,490)
Notes receivable from related party (9,221) (9,221)
-------- --------
Total partners' deficiency (256,271) (178,128)
-------- --------
TOTAL LIABILITIES AND PARTNERS' DEFICIENCY $741,845 $767,650
======== ========
The accompanying notes are an integral part of the
unaudited condensed consolidated financial statements.
4
FOAMEX L.P. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Three Quarters Ended
------------------------------
September 29, September 30,
2002 2001
------------- -------------
(thousands)
OPERATING ACTIVITIES
Net income (loss) $(69,196) $26,922
Adjustments to reconcile net income (loss) to net cash provided
by (used for) operating activities:
Extraordinary charge on extinguishment of debt 2,794 -
Cumulative effect of accounting changes 68,172 -
Depreciation and amortization 23,745 25,448
Amortization of debt issuance costs, debt premium
and debt discount 3,591 918
Other operating activities 612 1,400
Changes in operating assets and liabilities, net (35,989) 20,356
-------- -------
Net cash provided by (used for) operating activities (6,271) 75,044
-------- -------
INVESTING ACTIVITIES
Capital expenditures (11,877) (17,159)
Proceeds from sale of assets 21 600
Proceeds from notes due from partner - 2,500
Acquisition - (14,827)
Repayment of revolving loan by partner 2,490 -
Other investing activities (4,205) (941)
-------- -------
Net cash used for investing activities (13,571) (29,827)
-------- -------
FINANCING ACTIVITIES
Repayments of revolving loans (125,000) (27,881)
Proceeds from long-term debt 356,590 -
Repayments of long-term debt (190,060) (6,510)
Repayments of long-term debt - related party (31,590) (8,775)
Increase in cash overdrafts 21,208 8,429
Debt issuance costs (25,491) (510)
Interest rate swaps 14,821 -
Other financing activities 105 (5,447)
-------- -------
Net cash provided by (used for) financing activities 20,583 (40,694)
-------- -------
Net increase in cash and cash equivalents 741 4,523
Cash and cash equivalents at beginning of period 15,059 4,873
-------- -------
Cash and cash equivalents at end of period $ 15,800 $ 9,396
======== =======
Supplemental Information:
Cash paid for interest $ 29,823 $47,689
======== =======
The accompanying notes are an integral part of the
unaudited condensed consolidated financial statements.
5
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
1. ORGANIZATION AND BASIS OF PRESENTATION
Organization
Foamex L.P. operates in the flexible polyurethane and advanced polymer foam
products industry. As of December 31, 2001, Foamex L.P.'s operations were
conducted through its wholly-owned subsidiaries, Foamex Canada Inc. ("Foamex
Canada"), Foamex Latin America, Inc. ("Foamex Mexico"), Foamex Asia, Inc.
("Foamex Asia") and through Foamex Carpet Cushion, Inc. ("Foamex Carpet").
Foamex Carpet was converted to a limited liability company and was contributed
by Foamex International Inc. ("Foamex International") to Foamex L.P. on March
25, 2002. The contribution of Foamex Carpet has been accounted for as a merger
of entities under common control and has been recorded in a manner similar to a
pooling of interests. Accordingly, the condensed consolidated financial
statements include the accounts of Foamex Carpet for all periods presented.
Adjustments recorded to restate previously reported financial statements for the
quarter and three quarters ended September 30, 2001 consisted of those necessary
to include the balances and results of Foamex Carpet and to eliminate
intercompany balances and transactions between Foamex L.P. and Foamex Carpet.
Financial information concerning the business segments of Foamex L.P. is
included in Note 8.
Basis of Presentation
The accompanying condensed consolidated financial statements are unaudited
and do not include certain information and disclosures required by accounting
principles generally accepted in the United States of America for complete
financial statements. However, in the opinion of management, all adjustments,
consisting only of normal recurring adjustments considered necessary to present
fairly Foamex L.P.'s consolidated financial position and results of operations,
have been included. These interim financial statements should be read in
conjunction with the consolidated financial statements and related notes
included in Foamex L.P.'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.
Foamex L.P. has changed its reporting period from a calendar year to a
52/53-week fiscal year ending on the Sunday closest to January 1. The third
quarter of 2002 includes the 13 weeks ended September 29, 2002 and the first
three quarters of 2002 includes the 39 weeks ended September 29, 2002, after
adjustment for December 31, 2001 which was included in the prior year.
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. An impairment loss for goodwill due to the initial
application of SFAS No. 142 is discussed below. 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 Foamex L.P. on January
1, 2002. The quarter and three quarters ended September 30, 2001 included
goodwill amortization of $1.5 million and $4.5 million, respectively. On a pro
forma basis, net income for the quarter and three quarters ended September 30,
2001 would have been $9.7 million and $31.4 million, respectively, if SFAS No.
142 had been adopted as of January 1, 2001.
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. Foamex L.P. completed this assessment in the second quarter of 2002.
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. Foamex L.P. 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, Foamex L.P. has
identified one reporting unit in the Foam Products segment and the Carpet
Cushion Products reporting unit, for which the carrying value exceeded the fair
values as at January 1, 2002, indicating a potential impairment of
6
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
1. ORGANIZATION AND BASIS OF PRESENTATION (continued)
goodwill in those reporting units. Step two of the transitional impairment test,
to determine the magnitude of any goodwill impairment, was completed in the
third quarter of 2002. The resulting impairment loss of $68.2 million has been
recorded as a cumulative effect of a change in accounting principle, retroactive
to Foamex L.P.'s first quarter results of operations in accordance with the
transitional implementation guidance of SFAS No. 142.
The quarter ended March 31, 2002 and the two quarters ended June 30, 2002
have been restated as follows:
Quarter Ended Two Quarters Ended
March 31, 2002 June 30, 2002
-------------- ------------------
(thousands)
Net income, as originally reported $ 4,279 $ 9,370
Change in accounting principle (68,172) (68,172)
-------- --------
Net income (loss) as adjusted $(63,893) $(58,802)
======== ========
Goodwill balances include:
Balance Accounting Balance
December 31, 2001 Change Other (1) September 29, 2002
----------------- ---------- --------- ------------------
(thousands)
Foam Products $90,909 $ (7,771) $ (8,904) $ 74,234
Carpet Cushion Products 62,898 (60,401) - 2,497
Automotive Products 38,827 - (2,582) 36,245
Technical Products 14,658 - (789) 13,869
Other 2,211 - 35 2,246
-------- -------- -------- --------
Total $209,503 $(68,172) $(12,240) $129,091
======== ======== ======== ========
(1) Principally the reversal of a deferred income tax valuation allowance.
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. Foamex
L.P. expects that adoption of this Statement in 2003 will result in a
reclassification of the extraordinary items recorded during the quarter and
three quarters ended September 29, 2002.
2. ACQUISITION
On July 25, 2001, Foamex L.P. purchased certain assets and assumed certain
liabilities of General Foam Corporation, a manufacturer of polyurethane foam
products for the automotive, industrial, and home furnishings markets, at a
total cost of $18.5 million, which resulted in goodwill of approximately $9.1
million. The business was acquired due to its synergy with Foamex L.P.'s
existing business. The assets purchased primarily included inventory and
machinery and equipment. The results of the acquired business have been included
in the condensed consolidated statement of operations since the date of
acquisition. The effects of the acquisition on Foamex L.P.'s consolidated
financial statements are not material.
7
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
3. EXTRAORDINARY ITEMS
In connection with the refinancing transaction completed on March 25, 2002
(see Note 6), Foamex L.P. 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 loss of $4.2 million,
net of income taxes of $0.1 million, in the three quarters ended September 29,
2002. In the quarter ended September 29, 2002, Foamex L.P. purchased and retired
$49.0 million of its 13 1/2% senior subordinated notes, including unamortized
debt premium of $2.5 million, and $1.5 million of its 9 7/8% senior subordinated
notes resulting in an extraordinary gain of $1.4 million.
4. RESTRUCTURING, IMPAIRMENT AND OTHER CHARGES (CREDITS)
During the fourth quarter of 2001, Foamex L.P. announced an Operational
Reorganization Plan as discussed in Foamex L.P.'s Form 10-K for the year ended
December 31, 2001. That Plan included closing certain plants of the Carpet
Cushion Products segment and certain personnel reductions and other savings at
the corporate level. During the three quarters ended September 29, 2002, Foamex
L.P. attempted a sale of the Carpet Cushion Products segment and management put
such plant closings on hold until the completion of the sale negotiations. On
October 4, 2002, Foamex L.P. announced that negotiations to sell the Carpet
Cushion Products segment had been terminated. Management has reevaluated the
original plan developed during the fourth quarter of 2001 and has determined
that certain previously recorded amounts were no longer required. The net impact
of such reevaluation was a reversal of $3.7 million of previously recorded
liabilities in the quarter ended September 29, 2002.
During the three quarters ended September 29, 2002, Foamex L.P. recorded an
additional restructuring credit of $2.1 million related to the collection of
deferred rent receivable 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 Foamex L.P.'s
restructuring accruals and activity for the quarter and three quarters ended
September 29, 2002:
Plant Closure Personnel
Total and Leases Reductions Impairment Other
(millions)
Balance at June 30, 2002 $22.0 $14.0 $6.4 $ - $1.6
Cash receipts (spending), net (1.2) (0.3) (0.6) - (0.3)
2002 restructuring credit (3.7) (2.3) (1.4) - -
----- ----- ---- ----- ----
Balance at September 29, 2002 $17.1 $11.4 $4.4 $ - $1.3
===== ===== ==== ===== ====
Balance at December 31, 2001 $25.0 $14.7 $7.8 $ - $2.5
Cash receipts (spending), net (2.7) 1.1 (2.0) - (1.8)
2002 restructuring charge (credit) (5.2) (4.4) (1.4) - 0.6
----- ----- ---- ----- ----
Balance at September 29, 2002 $17.1 $11.4 $4.4 $ - $1.3
===== ===== ==== ===== ====
Foamex L.P. expects to spend approximately $8.4 million during the 52 weeks
ending September 28, 2003, which is included in other current liabilities in the
accompanying condensed consolidated balance sheet. The balance to be spent
through 2012, primarily related to ongoing cost of abandoned leased facilities,
is included in other liabilities in the accompanying condensed consolidated
balance sheet. As of September 29, 2002, Foamex L.P. has closed five facilities
and approximately 335 employees have been terminated under the Operational
Reorganization Plan. Foamex L.P. expects to substantially complete the
implementation of the Operational Reorganization Plan by December 29, 2002.
8
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
5. INVENTORIES
The components of inventory are listed below.
September 29, December 31,
2002 2001
------------- -------------
(thousands)
Raw materials and supplies $ 74,120 $53,398
Work-in-process 17,413 12,476
Finished goods 20,875 23,556
-------- -------
Total $112,408 $89,430
======== =======
6. LONG-TERM DEBT
The components of long-term debt are listed below.
September 29, December 31,
2002 2001
------------- ------------
Foamex L.P. Credit Facility (thousands)
Term Loan B (1) $ 39,262 $ 76,139
Term Loan C (1) 35,693 69,218
Term Loan D (1) 51,700 100,259
Term Loan E (1) 16,290 -
Term Loan F (1) 19,243 -
Revolving credit facility (1) - 125,000
10 3/4% Senior secured notes due 2009 (2) (5) 314,754 -
9 7/8% Senior subordinated notes due 2007 (2) 148,500 150,000
13 1/2% Senior subordinated notes due 2005 (includes
$2,868 and $6,515 of unamortized debt premium) (2) 54,453 104,515
Industrial revenue bonds (3) 7,000 7,000
Other (net of unamortized debt discount of $211 in 2002
and $281 in 2001) 1,083 2,574
-------- --------
687,978 634,705
Less current portion 429 4,023
-------- --------
Long-term debt-unrelated parties $687,549 $630,682
======== ========
The components of related party long-term debt are listed below.
September 29, 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 Foamex International 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.
(5) Includes $14.8 million of deferred credit on interest rate swap
transactions at September 29, 2002.
9
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
6. LONG-TERM DEBT (continued)
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, Foamex L.P. 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, Foamex L.P. was able to
spend up to $48.5 million of the proceeds from the Senior Secured Notes to
repurchase or redeem some of its senior subordinated notes. In July and August
2002, Foamex L.P. utilized $48.5 million to purchase and retire $49.0 million of
its 13 1/2% senior subordinated notes, including unamortized debt premium of
$2.5 million, and $1.5 million of its 9 7/8% senior subordinated notes.
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) Term B, C, and D loans, (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 the 10 3/4% 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 September 29, 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 10 3/4% 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.
10
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
6. LONG-TERM DEBT (continued)
Foamex L.P., 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 Foamex L.P.'s material tangible and intangible assets. In
addition, all of the partnership interests, all of the capital stock or other
equity interests of Foamex L.P.'s domestic subsidiaries (including Foamex
Carpet) and 65% of the capital stock or other equity interests of Foamex L.P.'s
first-tier foreign subsidiaries are pledged as part of the security for the
obligations under the Amended Credit Facility.
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 September 29, 2002 for
Term Loans B, C, D, E and F ranged between 6.75% and 7.13%. There were no
revolving loans outstanding at September 29, 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 September 29, 2002, the calculated leverage ratio was 6.38 to
1.00. Accordingly, an additional 25 basis point rate increase will become
effective during the period ending December 29, 2002.
The Amended Credit Facility contains affirmative and negative covenants
that, subject to certain exceptions, are substantially similar to those
contained in the prior 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.
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. See the Debt Covenants section of this Note.
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,
11
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
6. LONG-TERM DEBT (continued)
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 one or more equity offerings.
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 101.0% 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".
Foamex L.P. was required to cause a registration statement under the
Securities Act of 1933 to be effective within 180 days of March 25, 2002. Foamex
L.P. has filed the registration statement, but it is not yet effective and
therefore Foamex L.P. is liable for liquidated damages from September 23, 2002
until the date the registration statement becomes effective. The liquidated
damages are at the rate of $15,000 per week for the first 90 days, escalating by
$15,000 per week for each additional 90 days until a maximum of $150,000 per
week is reached.
Effective May 1, 2002, Foamex L.P. completed a series of interest rate swap
transactions with notional amounts aggregating $300.0 million. Foamex L.P.
designated, documented and accounted for these interest rate swaps as fair value
hedges of Foamex L.P.'s 10 3/4% Senior Secured Notes due April 1, 2009. The risk
being hedged in these transactions was the change in fair value of Foamex L.P.'s
10 3/4% Senior Secured Notes based on changes in the benchmark interest rate,
LIBOR. The effect of these interest rate swap transactions was to convert the
fixed interest rate on the 10 3/4% 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. On September 18, 2002, Foamex L.P. unwound the interest
rate swap transactions in exchange for net cash proceeds of $18.4 million. The
unwinding resulted in a deferred credit of $14.8 million which will be amortized
through April 1, 2009, using the effective interest rate method.
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
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 was 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 September 29, 2002 the redemption price
is 103.375% plus accrued and unpaid interest.
12
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
6. LONG-TERM DEBT (continued)
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
September 29, 2002, the interest rate was 1.55% on the $1.0 million bond and
1.70% on the $6.0 million bond. The maximum interest rate for either of the IRBs
is 15.0% per annum.
If Foamex L.P. exercises its option to convert the bonds to a fixed
interest rate structure, the IRBs are redeemable at the option of the
bondholders. The obligations are collateralized by certain properties, which
have an approximate net carrying value of $11.0 million at September 29, 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 $1.2 million at September 29, 2002 issued in connection with
increasing Foamex L.P.'s interest in an Asian joint venture to 70% in 2001. The
promissory note had unamortized discount of $0.2 million at September 29, 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 Foamex L.P.'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, Foamex L.P. is required under certain of these agreements to maintain
specified financial ratios of which the most restrictive are the maintenance of
net worth, interest coverage, fixed charge coverage and leverage ratios, as
defined. Under the most restrictive of the distribution restrictions as of
September 29, 2002, Foamex International could be paid funds by Foamex L.P. and
its subsidiaries, only to the extent to enable Foamex International 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.
13
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
6. LONG-TERM DEBT (continued)
On October 16, 2002, Foamex L.P. announced that it had obtained a waiver
from its bank lenders of its financial covenants for the period ended September
29, 2002. The waiver was effective until November 30, 2002 and reduced the
commitment under the revolving credit facility from $100.0 million to $70.0
million for the period the waiver was in effect. On November 15, 2002, Foamex
L.P. and its bank lenders executed an amendment to the Amended Credit Facility.
Under the amendment, Foamex L.P. will be subject to minimum net worth, minimum
EBDAIT, as defined, and maximum capital expenditure covenants through periods
ending December 28, 2003. In addition, Foamex L.P. was subject to a minimum
EBDAIT, as defined, covenant for the quarter ended September 29, 2002 and was in
compliance. Compliance with existing covenants on leverage, fixed charge
coverage and interest coverage ratios is suspended through periods ending
September 28, 2003, but the covenants are revised and will be reinstated
thereafter. In addition, borrowings under the Amended Credit Facility will be
subject to a borrowing base calculation, which could limit borrowings under the
revolving credit facility to less than the maximum commitment. As of November
15, 2002, the borrowing base calculation does not limit borrowings under the
Amended Credit Facility.
Maturities of Long-Term Debt
Scheduled maturities of long-term debt as of September 29, 2002 are shown
below (thousands):
Quarter ending December 29, 2002 $ 64
2003 379
2004 33,787
2005 108,393
2006 73,444
Thereafter 454,500
--------
670,567
Unamortized debt premium/discount and deferred credit, net 17,411
--------
Total $687,978
========
7. COMPREHENSIVE INCOME (LOSS)
The components of comprehensive income (loss) are listed below.
Quarter Ended Three Quarters Ended
------------------------------- -----------------------------
September 29, September 30, September 29, September 30,
2002 2001 2002 2001
------------- ------------- ------------- -------------
(thousands)
Net income (loss) $(10,394) $ 8,160 $(69,196) $26,922
Foreign currency translation adjustments (631) (1,178) (597) (1,065)
Pension liability adjustments - (14,653) - (14,653)
-------- ------- -------- -------
Total comprehensive income (loss) $(11,025) $(7,671) $(69,793) $11,204
======== ======= ======== =======
8. 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 (credits).
14
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
8. SEGMENT RESULTS (continued)
Segment results are presented below.
Carpet
Foam Cushion Automotive Technical
Products Products Products Products Other Total
-------- -------- ---------- --------- ------- ---------
(thousands)
Quarter ended September 29, 2002
Net sales $121,773 $61,105 $120,151 $30,500 $7,294 $340,823
Income (loss) from operations 1,160 (4,680) 4,745 2,463 651 4,339
Depreciation and amortization 3,347 1,639 1,046 930 552 7,514
Quarter ended September 30, 2001
Net sales $132,380 $61,145 $95,683 $29,518 $7,440 $326,166
Income (loss) from operations 21,883 (3,203) 5,151 4,602 (2,478) 25,955
Depreciation and amortization 4,251 2,045 1,303 821 434 8,854
Three Quarters ended September 29, 2002
Net sales $358,384 $174,338 $348,282 $94,889 $24,890 $1,000,783
Income (loss) from operations 23,004 (8,937) 21,727 16,258 (2,228) 49,824
Depreciation and amortization 11,778 5,118 3,012 2,221 1,616 23,745
Three Quarters ended September 30, 2001
Net sales $381,867 $172,363 $281,052 $81,656 $25,396 $942,334
Income (loss) from operations 52,814 (5,162) 17,653 18,584 (4,418) 79,471
Depreciation and amortization 11,909 6,130 3,641 2,428 1,340 25,448
9. RELATED PARTY TRANSACTIONS AND BALANCES
Foam Funding LLC Debt
During the three quarters ended September 29, 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 quarter ended September 30, 2001, Foamex Carpet paid $0.6
million of interest and $3.5 million of principal on a note payable to Foam
Funding LLC. During the three quarters ended September 30, 2001, Foamex Carpet
paid $2.5 million of interest and $8.8 million of principal on a note payable to
Foam Funding LLC.
Other
In July 2002, pursuant to the terms of an existing agreement, Foamex L.P.
acquired the 5.0% stock interest in Foamex de Mexico S. A. de C. V. which had
been held by the general director of Foamex de Mexico S.A. de C.V. for $1.0
million.
Effective July 22, 2002, a member of the Foamex International Board of
Directors became an officer of Foamex L.P. at an annual salary of at least $0.4
million plus a target annual bonus of 75.0% of base salary of which 80.0% is
guaranteed in any given year. Additionally under the employment agreement, the
director has the right to terminate employment and receive termination benefits
under certain conditions, including Foamex L.P.'s failure to purchase a business
owned by the director. Since Foamex L.P. did not enter into a definitive
agreement to purchase the business by October 31, 2002, the director has the
option to terminate the employment agreement within 90 days. During the quarter
ended September 29, 2002, Foamex L.P. has accrued a liability of $0.3 million
for consulting fees payable to such company and has engaged that company to
provide future consulting services to assist its Asian operations.
15
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
9. RELATED PARTY TRANSACTIONS AND BALANCES (continued)
On August 8, 2002, Foamex L.P. entered into an agreement with a member of
the Foamex International Board of Directors to provide consulting services in
connection with potential strategic business opportunities in Asia at an annual
cost of $0.2 million.
10. COMMITMENTS AND CONTINGENCIES
Litigation - Foamex International Shareholders
----------------------------------------------
Foamex International 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 Foamex International and its stockholders,
originally named as defendants Foamex International, 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 Foamex International in connection with an
attempt by Trace to acquire Foamex International's publicly traded common stock
as well as with a potential acquisition transaction with a group led by Sorgenti
Chemical Industries LLC, and that certain of the defendants breached their
fiduciary duties by causing Foamex International to waste assets in connection
with a variety of transactions entered into with Trace and its affiliates. The
Delaware Action sought various remedies, including injunctive relief, money
damages and the appointment of a receiver for Foamex International.
On April 26, 1999, a putative securities class action entitled Molitor v.
Foamex International Inc., et al., was filed in the United States District Court
for the Southern District of New York naming as defendants Foamex International,
Trace and certain current and former officers and directors of Foamex
International, on behalf of stockholders who bought shares of Foamex
International's common stock during the period from May 7, 1998 through and
including April 16, 1999. The lawsuit alleged that the defendants violated
Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 by
misrepresenting and/or omitting material information about Foamex
International's financial situation and operations, with the result of
artificially inflating the price of Foamex International's stock. The lawsuit
also alleged that Trace and Marshall S. Cogan, Chairman of Foamex International,
violated Section 20(a) of the Securities Exchange Act of 1934 as controlling
persons of Foamex International. The complaint sought class certification, a
declaration that defendants violated the federal securities laws, an award of
money damages, and costs and attorneys', accountants' and experts' fees. On May
18, 1999, a similar action entitled Thomas W. Riley v. Foamex International
Inc., et al., was filed in the same court. The two actions were consolidated and
a consolidated complaint was filed; the consolidated suit is referred to herein
as the "Federal Action."
The Settlements. On August 23, 2000, Foamex International and the
plaintiffs in the Federal Action entered into a settlement agreement providing
that members of the class of shareholders who purchased shares between May 7,
1998 and April 16, 1999 would receive payments as defined in the agreement. The
court approved the settlement and dismissed the action with prejudice on January
11, 2001, and no appeals were filed. Payments to class members and plaintiffs'
lawyers' fees in the Federal Action aggregating $2.5 million have been paid
directly by Foamex International's insurance carrier on behalf of Foamex
International.
Under the terms of the stipulation of settlement related to the Delaware
Action (which was approved by the Delaware Court on March 20, 2002), Foamex
International 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
16
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
10. COMMITMENTS AND CONTINGENCIES (continued)
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 Foamex International 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 Foamex
International or any individuals.
In April 2002, Foamex International was informed that the period for the
objectors to the settlement of the Delaware Action to appeal had expired without
an appeal filed. Foamex International subsequently received insurance proceeds
pursuant to the settlement. After the payment of certain expenses, Foamex
International recorded income from the settlement proceeds of $0.9 million in
the three quarters ended September 29, 2002.
Litigation - Breast Implants
As of November 6, 2002, Foamex L.P. and Trace were two of multiple
defendants in actions filed on behalf of approximately 1,167 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, Foamex L.P. and Trace were granted summary judgments and
dismissed as defendants from all cases in the federal courts of the United
States and the state courts of California. Appeals for these decisions were
withdrawn and the decisions are final.
Although breast implants do not contain foam, certain silicone gel implants
were produced using a polyurethane foam covering fabricated by independent
distributors or fabricators from bulk foam purchased from Foamex L.P. or Trace.
Neither Foamex L.P. nor Trace recommended, authorized, or approved the use of
its foam for these purposes. Foamex L.P. is also indemnified by Trace for any
such liabilities relating to foam manufactured prior to October 1990. Trace's
insurance carrier has continued to pay Foamex L.P.'s litigation expenses after
Trace's filing under the Bankruptcy Code. Trace's insurance policies continue to
cover certain liabilities of Trace but if the limits of those policies are
exhausted, it is unlikely that Trace will be able to continue to provide
additional indemnification. While it is not feasible to predict or determine the
outcome of these actions, based on management's present assessment of the merits
of pending claims, after consultation with counsel to Foamex L.P., and without
taking into account the indemnification provided by Trace, the coverage provided
by Trace's and Foamex L.P.'s liability insurance and potential indemnity from
the manufacturers of polyurethane covered breast implants, management believes
that 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 Foamex L.P.'s consolidated financial position or
results of operations. If management's assessment of Foamex L.P.'s liability
with respect to these actions is incorrect, such actions could have a material
adverse effect on the financial position, results of operations and cash flows
of Foamex L.P.
Litigation - Other
------------------
During the second quarter of 2001, Foamex L.P. 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 Foamex L.P. is liable for the claims of approximately $3.0
million. Foamex L.P. intends to strongly defend this claim and considers the
claim to be without merit. If management's assessment of Foamex L.P.'s liability
with respect to these actions is incorrect, such actions could have a material
adverse effect on the financial position, results of operations and cash flows
of Foamex L.P.
17
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
10. COMMITMENTS AND CONTINGENCIES (continued)
Foamex L.P. is party to various other lawsuits, both as defendant and
plaintiff, arising in the normal course of business. It is the opinion of
management that the disposition of these lawsuits will not, individually or in
the aggregate, have a material adverse effect on the financial position or
results of operations of Foamex L.P.. If management's assessment of Foamex
L.P.'s liability with respect to these actions is incorrect, such actions could
have a material adverse effect on Foamex L.P.'s consolidated financial position,
result of operations and cash flows.
As of September 29, 2002, Foamex L.P. had accrued approximately $0.4
million for litigation and other legal matters in addition to the environmental
matters discussed below.
Environmental and Health and Safety
-----------------------------------
Foamex L.P. is subject to extensive and changing federal, state, local and
foreign environmental laws and regulations, including those relating to the use,
handling, storage, discharge and disposal of hazardous substances, 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 September 29, 2002, Foamex L.P. had accruals of approximately
$2.7 million for environmental matters, including approximately $2.2 million
related to remediating and monitoring soil and groundwater contamination and
approximately $0.5 million related to PRP sites and other matters.
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, Foamex L.P. is 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. Foamex L.P. does not believe that
this standard, if adopted, will require Foamex L.P. to make material
expenditures.
Foamex L.P. has reported to the appropriate state authorities that it has
found soil and/or groundwater contamination in excess of state standards at
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, Foamex L.P.
reached an indemnification agreement with the former owner of the Morristown,
Tennessee facility. The agreement allocates the incurred and future remediation
costs between the former owner and Foamex L.P. The estimated allocation of
future costs for the remediation of this facility is not significant, based on
current known information. The former owner was Recticel Foam Corporation, a
subsidiary of Recticel s.a.
Foamex L.P. has either upgraded or closed all underground storage tanks at
Foamex L.P.'s 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. Foamex L.P. is 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
18
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
10. COMMITMENTS AND CONTINGENCIES (continued)
information, in each case and in the aggregate, Foamex L.P. 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 $1.5 million. Although it is
possible that new information or future developments could require Foamex L.P.
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, Foamex L.P. experienced a fire at one of its manufacturing
facilities. Costs relating to the fire aggregate approximately $1.2 million.
Foamex L.P. 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. The
net recoverable amount of $1.0 million is included in other current assets in
the condensed consolidated balance sheet at September 29, 2002.
During the fourth quarter of 2001, Foamex L.P. discovered that some
mattresses containing foam supplied by Foamex L.P. 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 Foamex L.P. that the odor was
attributable to a change in its chemical manufacturing process, which has since
been corrected. Foamex L.P. 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 Foamex L.P. 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 agreed to pay Foamex L.P. a fixed sum in exchange for
eliminating certain future claims Foamex L.P. may have against this supplier and
Foamex L.P. is obligated to indemnify this supplier for certain claims that may
be brought against it by others, including Foamex L.P.'s customers. The ultimate
amounts of these third party claims are uncertain. This supplier's settlement
with Foamex L.P. is insufficient to cover payments made or payments that may be
required to third parties in respect of their claims or to cover all of Foamex
L.P.'s related internal costs.
11. GUARANTOR INFORMATION
The payment obligations of Foamex L.P. and Foamex Capital Corporation under
the Senior Secured Notes are guaranteed by Foamex L.P.'s wholly-owned domestic
subsidiaries ("Guarantors"). Such guarantees are full, unconditional and joint
and several. Separate financial statements of the Guarantors are not presented
because Foamex L.P.'s management has determined that they would not be material
to investors. The following presents condensed consolidating balance sheets as
of September 29, 2002 and December 31, 2001 and the condensed consolidating
statements of operations for the quarter and three quarters ended September 29,
2002 and September 30, 2001; and the condensed consolidating statements of cash
flows for the three quarters ended September 29, 2002 and September 30, 2001 of
the Guarantors and nonguarantors. The Guarantors include Foamex Carpet Cushion
LLC, Foamex Latin America, Inc., Foamex Mexico, Inc., Foamex Mexico II, Inc. and
Foamex Asia, Inc. The nonguarantors are Foamex Canada Inc. and Grupo Foamex de
Mexico, S.A. de C.V. and its subsidiaries. The following financial information
is intended to provide information for the Guarantors and nonguarantors of
Foamex L.P. based on amounts derived from the financial statements of Foamex
L.P.
19
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
11. GUARANTOR INFORMATION (continued)
Condensed Consolidating Balance Sheet
As of September 29, 2002
Foamex L.P. Consolidated
Guarantors Nonguarantors (Parent) Eliminations Foamex L.P.
---------- ------------- ----------- ------------ ------------
Assets (thousands)
Current assets $41,185 $30,947 $310,374 $ (26,271) $356,235
Investment in subsidiaries 13,491 - 40,036 (53,527) -
Property, plant and equipment, net 6,390 21,962 161,354 - 189,706
Goodwill 3,164 6,690 119,237 - 129,091
Debt issuance costs - - 34,603 - 34,603
Other assets 13,746 1,671 45,478 (28,685) 32,210
------- ------- -------- --------- --------
Total assets $77,976 $61,270 $711,082 $(108,483) $741,845
======= ======= ======== ========= ========
Liabilities and Partners' Deficiency
Current liabilities $41,083 $21,160 $225,554 $ (23,260) $264,537
Long-term debt 29,324 - 686,910 (28,685) 687,549
Other liabilities 1,554 790 43,686 - 46,030
------- ------- -------- --------- --------
Total liabilities 71,961 21,950 956,150 (51,945) 998,116
Partners' deficiency 6,015 39,320 (245,068) (56,538) (256,271)
------- ------- -------- --------- --------
Total liabilities and partners' deficiency $77,976 $61,270 $711,082 $(108,483) $741,845
======= ======= ======== ========= ========
Condensed Consolidating Balance Sheet
As of December 31, 2001
Foamex L.P. Consolidated
Guarantors Nonguarantors (Parent) Eliminations Foamex L.P.
---------- ------------- ----------- ------------ ------------
Assets (thousands)
Current assets $ 39,421 $31,389 $263,240 $(23,415) $310,635
Investment in subsidiaries 14,824 - 48,268 (63,092) -
Property, plant and equipment, net 6,743 24,780 169,274 - 200,797
Goodwill 32,774 6,989 169,740 - 209,503
Debt issuance costs 2,783 - 10,907 - 13,690
Other assets 6,271 1,351 25,403 - 33,025
-------- ------- --------- --------- --------
Total assets $102,816 $64,509 $686,832 $(86,507) $767,650
======== ======= ========= ========= ========
Liabilities and Partners' Deficiency
Current liabilities $ 50,070 $25,908 $192,411 $(21,395) $246,994
Long-term debt 18,619 - 629,613 - 648,232
Other liabilities 3,389 785 46,378 - 50,552
-------- ------- -------- -------- --------
Total liabilities 72,078 26,693 868,402 (21,395) 945,778
Partners' deficiency 30,738 37,816 (181,570) (65,112) (178,128)
-------- ------- -------- -------- --------
Total liabilities and partners' deficiency $102,816 $64,509 $686,832 $(86,507) $767,650
======== ======= ======== ======== ========
20
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
11. GUARANTOR INFORMATION (continued)
Condensed Consolidating Statement of Operations
For the quarter ended September 29, 2002
Foamex L.P. Consolidated
Guarantors Nonguarantors (Parent) Eliminations Foamex L.P.
---------- ------------- ----------- ------------ ------------
(thousands)
Net sales $62,594 $27,453 $295,004 $(44,228) $340,823
Cost of goods sold 57,656 25,625 271,682 (44,228) 310,735
------- ------- -------- -------- --------
Gross profit 4,938 1,828 23,322 - 30,088
Selling, general and administrative
expenses 2,889 1,841 24,693 - 29,423
Restructuring, impairment and other
charges (credits) 225 - (3,899) - (3,674)
------- ------- -------- -------- --------
Income (loss) from operations 1,824 (13) 2,528 - 4,339
Interest and debt issuance expense 332 78 16,424 (324) 16,510
Equity in undistributed earnings
of affiliates (873) - 2,096 (837) 386
Other income (expense), net 509 74 111 (324) 370
------- ------- -------- -------- --------
Income (loss) before provision (benefit)
for income taxes 1,128 (17) (11,689) (837) (11,415)
Provision (benefit) for income taxes (413) 687 115 - 389
------- ------- -------- -------- --------
Income (loss) before extraordinary items 1,541 (704) (11,804) (837) (11,804)
Extraordinary items - - 1,410 - 1,410
------- ------- -------- -------- --------
Net income (loss) $ 1,541 $ (704) $(10,394) $ (837) $(10,394)
======= ======= ======== ======== ========
21
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
11. GUARANTOR INFORMATION (continued)
Condensed Consolidating Statement of Operations
For the quarter ended September 30, 2001
Foamex L.P. Consolidated
Guarantors Nonguarantors (Parent) Eliminations Foamex L.P.
---------- ------------- ----------- ------------ ------------
(thousands)
Net sales $58,665 $27,274 $283,115 $(42,888) $326,166
Cost of goods sold 53,774 23,688 244,183 (42,888) 278,757
------- ------- -------- -------- --------
Gross profit 4,891 3,586 38,932 - 47,409
Selling, general and administrative
expenses 3,776 1,836 15,590 - 21,202
Restructuring, impairment and other
charges 14 - 238 - 252
------- ------- -------- -------- --------
Income from operations 1,101 1,750 23,104 - 25,955
Interest and debt issuance expense 962 62 14,479 - 15,503
Equity in undistributed earnings
of affiliates 254 - 1,207 (1,514) (53)
Other income (expense), net (437) 3 (758) - (1,192)
------- ------- -------- -------- --------
Income (loss) before provision (benefit)
for income taxes (44) 1,691 9,074 (1,514) 9,207
Provision (benefit) for income taxes (84) 217 914 - 1,047
------- ------- -------- -------- --------
Net income $ 40 $ 1,474 $ 8,160 $ (1,514) $ 8,160
======= ======= ======== ======== ========
22
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
11. GUARANTOR INFORMATION (continued)
Condensed Consolidating Statement of Operations
For the three quarters ended September 29, 2002
Foamex L.P. Consolidated
Guarantors Nonguarantors (Parent) Eliminations Foamex L.P.
---------- ------------- ----------- ------------ ------------
(thousands)
Net sales $179,383 $87,225 $862,969 $(128,794) $1,000,783
Cost of goods sold 166,739 78,593 770,533 (128,794) 887,071
-------- ------- -------- --------- ----------
Gross profit 12,644 8,632 92,436 - 113,712
Selling, general and administrative
expenses 9,209 5,112 54,779 - 69,100
Restructuring, impairment and other
charges (credits) 225 - (5,437) - (5,212)
-------- ------- -------- --------- ----------
Income from operations 3,210 3,520 43,094 - 49,824
Interest and debt issuance expense 1,072 204 47,355 (478) 48,153
Equity in undistributed earnings
of affiliates 588 - (26,174) 27,100 1,514
Other income (expense), net 460 182 2 (478) 166
-------- ------- -------- --------- ----------
Income (loss) before provision (benefit)
for income taxes 3,186 3,498 (30,433) 27,100 3,351
Provision (benefit) for income taxes (452) 1,894 139 - 1,581
-------- ------- -------- --------- ----------
Income (loss) before extraordinary items
and accounting change 3,638 1,604 (30,572) 27,100 1,770
Extraordinary items (2,398) - (396) - (2,794)
Cumulative effect of accounting change (29,944) - (38,228) - (68,172)
-------- ------- -------- --------- ----------
Net income (loss) $(28,704) $ 1,604 $(69,196) $ 27,100 $ (69,196)
======== ======= ======== ========= ==========
23
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
11. GUARANTOR INFORMATION (continued)
Condensed Consolidating Statement of Operations
For the three quarters ended September 30, 2001
Foamex L.P. Consolidated
Guarantors Nonguarantors (Parent) Eliminations Foamex L.P.
---------- ------------- ----------- ------------ ------------
(thousands)
Net sales $176,829 $87,448 $806,615 $(128,558) $942,334
Cost of goods sold 159,489 75,705 697,217 (128,558) 803,853
-------- ------- -------- --------- --------
Gross profit 17,340 11,743 109,398 - 138,481
Selling, general and administrative
expenses 10,998 5,001 42,807 - 58,806
Restructuring, impairment and other
charges 13 - 191 - 204
-------- ------- -------- --------- --------
Income from operations 6,329 6,742 66,400 - 79,471
Interest and debt issuance expense 3,370 210 45,520 - 49,100
Equity in undistributed earnings
of affiliates 3,668 - 7,651 (10,709) 610
Other income (expense), net (507) 2 (1,005) - (1,510)
-------- ------- -------- --------- --------
Income before provision for income
taxes 6,120 6,534 27,526 (10,709) 29,471
Provision for income taxes 518 1,427 604 - 2,549
-------- ------- -------- --------- --------
Net income $ 5,602 $ 5,107 $ 26,922 $ (10,709) $ 26,922
======== ======= ======== ========= ========
24
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
11. GUARANTOR INFORMATION (continued)
Condensed Consolidating Statement of Cash Flows
For the three quarters ended September 29, 2002
Foamex L.P. Consolidated
Guarantors Nonguarantors (Parent) Eliminations Foamex L.P.
---------- ------------- ----------- ------------ ------------
(thousands)
Cash Flows from Operating Activities
Net income (loss) $(28,704) $ 1,604 $(69,196) $ 27,100 $(69,196)
Total adjustments to reconcile net
income (loss) to net cash provided
by (used in) operating activities 33,230 (4,608) 61,502 (27,199) 62,925
-------- ------- -------- -------- --------
Net cash provided by (used in)
operating activities 4,526 (3,004) (7,694) (99) (6,271)
-------- ------- -------- -------- --------
Cash Flows from Investing Activities
Capital expenditures (390) (541) (11,045) 99 (11,877)
Repayment of revolving loan by partner - - 2,490 - 2,490
Intercompany investing activities 135 - (24,620) 24,485 -
Other - - (4,184) - (4,184)
-------- ------- -------- -------- --------
Net cash used in investing activities (255) (541) (37,359) 24,584 (13,571)
-------- ------- -------- -------- --------
Cash Flows from Financing Activities
Net repayments of revolving loans - - (125,000) - (125,000)
Proceeds from long-term debt - - 356,590 - 356,590
Repayments of long-term debt (135) (1,304) (188,621) - (190,060)
Repayments of long-term debt--
related party (31,590) - - - (31,590)
Increase (decrease) in intercompany note 24,485 - - (24,485) -
Increase in cash overdrafts 1,392 - 19,816 - 21,208
Debt issuance costs - - (25,491) - (25,491)
Interest rate swaps - - 14,821 - 14,821
Other financing activities - - 105 - 105
-------- ------- -------- -------- --------
Net cash provided by (used in)
financing activities (5,848) (1,304) 52,220 (24,485) 20,583
-------- ------- -------- -------- --------
Net increase (decrease) in cash and
cash equivalents (1,577) (4,849) 7,167 - 741
Cash and cash equivalents at
beginning of period 2,758 7,163 5,138 - 15,059
-------- ------- -------- -------- --------
Cash and cash equivalents at
end of period $ 1,181 $ 2,314 $ 12,305 $ - $ 15,800
======== ======= ======== ======== ========
25
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
11. GUARANTOR INFORMATION (continued)
Condensed Consolidating Statement of Cash Flows
For the three quarters ended September 30, 2001
Foamex L.P. Consolidated
Guarantors Nonguarantors (Parent) Eliminations Foamex L.P.
---------- ------------- ----------- ------------ ------------
(thousands)
Cash Flows from Operating Activities
Net income $ 5,602 $ 5,107 $ 26,922 $(10,709) $ 26,922
Total adjustments to reconcile net
income to net cash provided by
operating activities 3,792 292 33,329 10,709 48,122
-------- ------- -------- -------- --------
Net cash provided by
operating activities 9,394 5,399 60,251 - 75,044
-------- ------- -------- -------- --------
Cash Flows from Investing Activities
Capital expenditures (190) (755) (16,297) 83 (17,159)
Acquisition - - (14,827) - (14,827)
Other investing activities - - 2,242 (83) 2,159
-------- ------- -------- -------- --------
Net cash used in
investing activities (190) (755) (28,882) - (29,827)
-------- ------- -------- -------- --------
Cash Flows from Financing Activities
Net repayments of revolving loans - - (27,881) - (27,881)
Repayments of long-term debt - (1,955) (4,555) - (6,510)
Repayments of long-term debt
related parties (8,775) - - - (8,775)
Increase in cash overdrafts 354 - 8,075 - 8,429
Other, net (5) - (5,952) - (5,957)
-------- ------- -------- -------- --------
Net cash used in financing activities (8,426) (1,955) (30,313) - (40,694)
-------- ------- -------- -------- --------
Net increase in cash and cash equivalents 778 2,689 1,056 - 4,523
Cash and cash equivalents at
beginning of period 1,986 1,821 1,066 - 4,873
-------- ------- -------- -------- --------
Cash and cash equivalents at
end of period $ 2,764 $ 4,510 $ 2,122 $ - $ 9,396
======== ======= ======== ======== ========
26
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Certain statements in this Management's Discussion and Analysis of Financial
Condition and Results of Operations are forward-looking statements. See
"Forward-Looking Statements".
RESULTS OF OPERATIONS FOR THE QUARTER ENDED SEPTEMBER 29, 2002 COMPARED TO THE
QUARTER ENDED SEPTEMBER 30, 2001
Carpet
Foam Cushion Automotive Technical
Products Products Products Products Other Total
-------- -------- ---------- ---------- --------- ---------
(thousands)
Quarter ended September 29, 2002
Net sales $121,773 $61,105 $120,151 $30,500 $7,294 $340,823
Income (loss) from operations 1,160 (4,680) 4,745 2,463 651 4,339
Depreciation and amortization 3,347 1,639 1,046 930 552 7,514
Income (loss) from operations
as a percentage of net sales 1.0% (7.7)% 3.9% 8.1% n.m.* 1.3%
Quarter ended September 30, 2001
Net sales $132,380 $61,145 $95,683 $29,518 $7,440 $326,166
Income (loss) from operations 21,883 (3,203) 5,151 4,602 (2,478) 25,955
Depreciation and amortization 4,251 2,045 1,303 821 434 8,854
Income (loss) from operations
as a percentage of net sales 16.5% (5.2)% 5.4% 15.6% n.m.* 8.0%
* not meaningful
Income from Operations
Net sales for the quarter ended September 29, 2002 increased 4.5% to $340.8
million from $326.2 million in the quarter ended September 30, 2001. The
increase was primarily attributable to improved sales in the Automotive Products
segment, partially offset by lower sales in the Foam Products segment.
The gross profit margin was $30.1 million, or 8.8%, in the quarter ended
September 29, 2002 compared to $47.4 million, or 14.5%, in the comparable 2001
period. Higher raw material costs primarily as a result of 20.0% to 25.0%
increases in the price of chemicals from major suppliers effective in June 2002
reduced the gross profit margin by approximately $10.0 million compared to the
quarter ended September 30, 2001. The gross profit margin was further reduced by
higher manufacturing costs primarily related to unfavorable yields and
production mix in the Foam Products segment.
Selling, general and administrative expenses increased by $8.2 million, or
38.8%, which included $3.3 million of organizational and proposed public
offering costs related to the formation of Symphonex Inc., a proposed new
subsidiary which would have included the Technical Products segment. The
proposed public offering of Symphonex Inc. has been deferred indefinitely.
Selling, general and administrative expenses also include $1.1 million of costs
associated with the proposed sale of the Carpet Cushion Products segment which
was subsequently terminated. The remainder of the increase was primarily due to
higher professional service fees and employee related expenses partially offset
by reduced goodwill amortization and lower bad debt expense.
The quarter ended September 29, 2002 includes restructuring, impairment and
other credits of $3.7 million (see note 4 to the condensed consolidated
financial statements). The quarter ended September 30, 2001 included
restructuring, impairment and other charges of $0.3 million.
Income from operations for the quarter ended September 29, 2002 was $4.3
million, which represented an 83.3% decrease from the $26.0 million reported
during the comparable 2001 period. Income from operations was 1.3% of net sales
in 2002 compared to 8.0% of net sales in 2001.
27
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Foam Products
Foam Products net sales for the quarter ended September 29, 2002 decreased
8.0% to $121.8 million from $132.4 million in the comparable 2001 period. The
decrease primarily reflected reduction in business from a major bedding
manufacturer. Income from operations decreased 94.7%, to $1.2 million in the
quarter ended September 29, 2002 from $21.9 million in the comparable 2001
period primarily due to increased raw material costs, lower net sales, higher
manufacturing costs and higher selling, general and administrative expenses.
Income from operations was 1.0% of net sales in 2002, down from 16.5% in 2001.
Carpet Cushion Products
Carpet Cushion Products net sales for the quarter ended September 29, 2002
were equal to the $61.1 million in the comparable 2001 period. Foamex L.P. was
able to maintain its market share in spite of market weakness and overcome the
loss of sales to one large retail customer that exited the carpet business. Loss
from operations, which included $1.1 million of expenses in 2002 associated with
the proposed sale of the business which was subsequently terminated, represented
7.7% of net sales in 2002 compared to 5.2% of net sales in 2001.
Automotive Products
Automotive Products net sales for the quarter ended September 29, 2002
increased 25.6% to $120.2 million from $95.7 million in the comparable 2001
period. The improvement reflected a continued high build rate for new cars and
new product programs. Despite the increase in sales, income from operations
declined due to higher raw material costs. Income from operations represented
3.9% of net sales in 2002 compared to 5.4% of net sales in 2001.
Technical Products
Net sales for Technical Products in the quarter ended September 29, 2002
increased 3.3% to $30.5 million from $29.5 million in the comparable 2001
period. Income from operations decreased 46.5% to $2.5 million in the 2002
period compared to $4.6 million in the 2001 period primarily due to costs
related to Symphonex Inc. Income from operations represented 8.1% of net sales
in 2002 compared to 15.6% 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). Income from operations was $0.7 million
in the quarter ended September 29, 2002. The loss from operations in the third
quarter of 2001 was $2.5 million. The quarter ended September 29, 2002 included
restructuring, impairment and other credits of $3.7 million while the quarter
ended September 30, 2001 included restructuring, impairment and other charges of
$0.3 million.
Interest and Debt Issuance Expense
Interest and debt issuance expense was $16.5 million in the quarter ended
September 29, 2002, which represented a 6.5% increase from the comparable 2001
period expense of $15.5 million. The increase was attributable to higher debt
levels as a result of the refinancing completed on March 25, 2002.
Income from Equity Interest in Joint Venture
The income from an equity interest in an Asian joint venture was $0.4
million for the quarter ended September 29, 2002 compared to a loss of $0.1
million in the comparable 2001 period. Foamex L.P. has a 70% ownership interest
in the joint venture in 2002 compared to a 49% ownership in 2001.
28
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Provision (Benefit) for Income Taxes
Foamex L.P., as a limited partnership, is not subject to Federal income
taxes. Consequently, no current or deferred provision has been provided for such
taxes. However, Foamex L.P. has provided for the income taxes of certain states
in which it is subject to taxes and for subsidiaries located in foreign
jurisdictions that file separate tax returns.
Extraordinary Items, Net of Income Taxes
In the quarter ended September 29, 2002, Foamex L.P. purchased $49.0
million of its 13 1/2% senior subordinated notes, including unamortized debt
premium of $2.5 million, and $1.5 million of its 9 7/8% senior subordinated
notes resulting in an extraordinary gain of $1.4 million.
RESULTS OF OPERATIONS FOR THE THREE QUARTERS ENDED SEPTEMBER 29, 2002 COMPARED
TO THE THREE QUARTERS ENDED SEPTEMBER 30, 2001
Carpet
Foam Cushion Automotive Technical
Products Products Products Products Other Total
-------- -------- ---------- ---------- --------- ---------
(thousands)
Three Quarters ended September 29, 2002
Net sales $358,384 $174,338 $348,282 $94,889 $24,890 $1,000,783
Income (loss) from operations 23,004 (8,937) 21,727 16,258 (2,228) 49,824
Depreciation and amortization 11,778 5,118 3,012 2,221 1,616 23,745
Income (loss) from operations
as a percentage of net sales 6.4% (5.1)% 6.2% 17.1% n.m.* 5.0%
Three Quarters ended September 30, 2001
Net sales $381,867 $172,363 $281,052 $81,656 $25,396 $942,334
Income (loss) from operations 52,814 (5,162) 17,653 18,584 (4,418) 79,471
Depreciation and amortization 11,909 6,130 3,641 2,428 1,340 25,448
Income (loss) from operations
as a percentage of net sales 13.8% (3.0)% 6.3% 22.8% n.m.* 8.4%
* not meaningful
Income from Operations
Net sales for the three quarters ended September 29, 2002 increased 6.2% to
$1,000.8 million from $942.3 million in the three quarters ended September 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 2 to
the condensed consolidated financial statements.
The gross profit margin was $113.7 million, or 11.4%, in the three quarters
ended September 29, 2002 compared to $138.5 million, or 14.7%, in the comparable
2001 period. Higher raw material costs primarily as a result of 20.0% to 25.0%
increases in the price of chemicals from major suppliers during the three
quarters ended September 29, 2002 reduced the gross profit margin by
approximately $12.0 million compared to the comparable 2001 period. The gross
profit margin was further reduced by higher manufacturing costs in the Foam
Products segment, primarily related to odorous foam issues in the two quarters
ended June 30, 2002 and unfavorable yields and production mix.
Selling, general and administrative expenses increased by $10.3 million, or
17.5%, which included $3.3 million of organizational and proposed public
offering costs related to the formation of Symphonex Inc., a proposed new
subsidiary which would have included the Technical Products segment. The
proposed public offering of
29
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Symphonex Inc. has been deferred indefinitely. Selling, general and
administrative expenses also include $1.1 million of costs associated with the
proposed sale of the Carpet Cushion Products segment which was subsequently
terminated. The remainder of the increase was primarily due to higher
professional service fees and employee related expenses, partially offset by
reduced goodwill amortization and lower bad debt expense.
The three quarters ended September 29, 2002 include restructuring,
impairment and other credits of $5.2 million. The three quarters ended September
30, 2001 included restructuring, impairment and other charges of $0.2 million.
Income from operations for the three quarters ended September 29, 2002 was
$49.8 million, which represented a 37.3% decrease from the $79.5 million
reported during the comparable 2001 period. Income from operations was 5.0% of
net sales in 2002 compared to 8.4% of net sales in 2001.
Foam Products
Foam Products net sales for the three quarters ended September 29, 2002
decreased 6.1% to $358.4 million from $381.9 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, discussed in Note 10
to the condensed consolidated financial statements. Income from operations
decreased 56.4%, to $23.0 million in the three quarters ended September 29, 2002
from $52.8 million in the comparable 2001 period, primarily due to increased raw
material costs, lower net sales, higher manufacturing costs and higher selling,
general and administrative expenses. Income from operations was 6.4% of net
sales in 2002, down from 13.8% in 2001.
Carpet Cushion Products
Carpet Cushion Products net sales for the three quarters ended September
29, 2002 increased 1.1% to $174.3 million from $172.4 million in the comparable
2001 period. Foamex L.P. 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. Loss from operations, which included expenses of
$1.1 million in 2002 associated with the proposed sale of the business which was
subsequently terminated, represented 5.1% of net sales in 2002 and 3.0% of net
sales in 2001.
Automotive Products
Automotive Products net sales for the three quarters ended September 29,
2002 increased 23.9% to $348.3 million from $281.1 million in the comparable
2001 period. The improvement primarily reflected a continued high build rate for
new cars and new product programs. Income from operations represented 6.2% of
net sales in 2002 and 6.3% of net sales in 2001.
Technical Products
Net sales for Technical Products in the three quarters ended September 29,
2002 increased 16.2% to $94.9 million from $81.7 million in the comparable 2001
period. Higher sales primarily reflected sales from the acquisition of General
Foam Corporation (see note 2 to the condensed consolidated financial
statements). Income from operations decreased 12.5% to $16.3 million in the 2002
period compared to $18.6 million in the 2001 period. The decrease was primarily
due to costs related to Symphonex Inc. Income from operations represented 17.1%
of net sales in 2002 compared to 22.8% 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 Foamex L.P.'s Mexico City
operation. The loss from operations was $2.2 million in the three quarters ended
September 29, 2002 and included restructuring, impairment
30
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
and other credits, discussed below. The loss from operations in the three
quarters ended September 30, 2001 was $4.4 million.
Interest and Debt Issuance Expense
Interest and debt issuance expense was $48.2 million in the three quarters
ended September 29, 2002, which represented a 1.9% decrease from the comparable
2001 period expense of $49.1 million. The decrease was attributable to lower
average debt levels and lower effective interest rates.
Income from Equity Interest in Joint Venture
The income from an equity interest in an Asian joint venture was $1.5
million for the three quarters ended September 29, 2002 compared to income of
$0.6 million in the comparable 2001 period. Foamex L.P. has a 70% ownership
interest in the joint venture in 2002 compared to a 49% ownership in 2001.
Provision (Benefit) for Income Taxes
Foamex L.P., as a limited partnership, is not subject to Federal income
taxes. Consequently, no current or deferred provision has been provided for such
taxes. However, Foamex L.P. has provided for the income taxes of certain states
in which it is subject to taxes and for subsidiaries located in foreign
jurisdictions that file separate tax returns.
Extraordinary Items, Net of Income Taxes
In connection with the refinancing transaction completed on March 25, 2002,
Foamex L.P. wrote off debt issuance costs associated with the early
extinguishments of its long-term debt due to a related party and its revolving
credit facility, resulting in an extraordinary loss of $4.2 million, net of
income taxes of $0.1 million. During July and August of 2002, Foamex L.P.
purchased and retired $49.0 million of its 13 1/2% senior subordinated notes,
including $2.5 million of unamortized debt premium, and $1.5 million of its 9
7/8% senior subordinated notes resulting in an extraordinary gain of $1.4
million.
Cumulative Effect of Accounting Changes
The cumulative effect of accounting changes in the three quarters ended
September 29, 2002 includes a goodwill impairment charge of $68.2 million as a
result of the adoption of SFAS No. 142, "Goodwill and Other Intangible Assets".
Operational Reorganization Plan
In December 2001, Foamex L.P. announced its Operational Reorganization Plan
(the "Plan") to reduce operating costs and accelerate revenue growth. The Plan
included plant rationalizations, salaried work force reductions, purchasing and
logistics cost reductions, sales and marketing management and customer service
centralization. Foamex L.P. recorded restructuring, impairment and other charges
pursuant to the Plan of $35.4 million in the fourth quarter of 2001 and
estimated that the Plan would result in incremental income from operations of
approximately $20.0 million in 2002 and approximately $30.0 million in 2003. A
total of 746 employees were expected to be terminated as a result of the Plan.
During the first quarter of 2002, Foamex L.P. recorded a restructuring,
impairment and other credit of $2.1 million for the collection of deferred rent
receivable that was not included in the Plan. In addition, Foamex L.P. recorded
a restructuring, impairment and other charge of $0.6 million for certain
additional expenses related to the Plan. During the three quarters ended
September 29, 2002, Foamex L.P. attempted a sale of its Carpet Cushion Products
segment and management put certain Carpet Cushion Products segment facility
closures included in the Plan on hold until the completion of sale negotiations.
On October 4, 2002, Foamex L.P. announced that negotiations to sell the Carpet
Cushion Products segment had been terminated. Management has reevaluated the
Plan and determined that certain previously recorded amounts were no longer
required. The net impact of such
31
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
reevaluation was a reversal of $3.7 million of previously recorded liabilities
in the quarter ended September 29, 2002.
Foamex L.P. expects to substantially complete the implementation of the
Plan by December 29, 2002 and to spend approximately $8.4 million during the 52
weeks ending September 28, 2003. Foamex L.P. currently estimates that the Plan
will result in savings of approximately $15.0 million in 2002 and approximately
$27.0 million in 2003. As of September 29, 2002, Foamex L.P. had closed five
facilities and terminated approximately 335 employees under the Plan.
Additionally, in response to the recent significant deterioration in
profitability, Foamex L.P. has and continues to reorganize its executive
management and is in the process of reorganizing other areas of its business and
corporate management. These activities are expected to result in the termination
of additional employees, the closure of additional facilities and other actions
that will result in the recording of exit costs, restructuring and other charges
in the fourth quarter of 2002 in the range of approximately $5.0 million to $9.0
million including noncash charges of approximately $1.0 million to $2.0 million,
once plans are finalized. If Foamex L.P. is successful in implementing these
initiatives, Foamex L.P. anticipates additional savings from lower employee
costs and operating efficiencies in the range of approximately $6.0 million to
$8.0 million on an annualized basis.
Business Outlook
Foamex L.P.'s major chemical suppliers increased prices by 20% to 25%
effective in June 2002 and have increased prices by an additional 10% effective
October 1, 2002. These actions have increased Foamex L.P.'s cost of chemicals,
which are a major component in the manufacturing of foam, by 32% to 37%.
Foamex L.P.'s efforts to recover increased chemical costs through increases
in its own selling prices were largely unsuccessful in the third quarter due
principally to competitive pressures and long term contracts with several major
customers that limit Foamex L.P.'s pricing flexibility. Foamex L.P. anticipates
that it will only be able to recover a portion of the chemical cost increases in
the fourth quarter of 2002 and as a result, gross profit will be substantially
lower than that reported in the fourth quarter of 2001.
During 2003, Foamex L.P. anticipates that it will be able to implement
selling price increases, primarily in the Foam Products segment, reduce its
manufacturing costs and improve its supply chain management. However, there can
be no assurance that these or other actions contemplated by management will be
successful.
Liquidity and Capital Resources
Foamex L.P.'s operating cash requirements consist principally of working
capital requirements, scheduled payments of interest on outstanding indebtedness
and capital expenditures. Foamex L.P. 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 Foamex International is restricted by the
terms of its financing agreements; therefore, Foamex International 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 $15.8 million at September 29, 2002 compared
to $15.1 million at December 31, 2001. Working capital at September 29, 2002 was
$91.7 million and the current ratio was 1.3 to 1 compared to working capital at
December 31, 2001 of $63.6 million and a current ratio of 1.3 to 1. The increase
in working capital is primarily due to increases in accounts receivable and
inventories, partially offset by increases in accounts payable, accrued interest
and cash overdrafts.
Total debt at September 29, 2002 was $688.0 million, up $21.7 million from
December 31, 2001, including a deferred credit of $14.8 million related to
interest rate swap transactions. As of September 29, 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 September 29, 2002 under Foamex Canada's short-term revolving
credit agreement, with unused availability of approximately $5.1 million. The
increased debt balance reflects the issuance of $300.0 million of
32
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
10 3/4% Senior Secured Notes due 2009 on March 25, 2002, offset by $280.0
million of debt repayments from proceeds of the offering.
In July and August 2002, Foamex L.P. repurchased $49.0 million of Foamex
L.P.'s 13 1/2% senior subordinated notes, including unamortized debt premium of
$2.5 million, and $1.5 million of Foamex L.P.'s 9 7/8% senior subordinated notes
for a total purchase price of $48.5 million.
On October 16, 2002, Foamex L.P. announced that it had obtained a waiver of
its financial covenants under its Amended Credit Facility for the period ended
September 29, 2002. The waiver was effective until November 30, 2002 and reduced
the commitment under the revolving credit facility from $100.0 million to $70.0
million for the period the waiver was in effect. On November 15, 2002, Foamex
L.P. and its bank lenders executed an amendment to the Amended Credit Facility.
Under the amendment, Foamex L.P. will be subject to minimum net worth, minimum
EBDAIT, as defined, and maximum capital expenditure covenants through periods
ending December 28, 2003. In addition, Foamex L.P. was subject to a minimum
EBDAIT, as defined, covenant for the quarter ended September 29, 2002 and was in
compliance. Compliance with existing covenants on leverage, fixed charge
coverage and interest coverage ratios is suspended through periods ending
September 28, 2003, but the covenants are revised and will be reinstated
thereafter. In addition, borrowings under the Amended Credit Facility will be
subject to a borrowing base calculation, which could limit borrowings under the
revolving credit facility to less than the maximum commitment. As of November
15, 2002, the borrowing base calculation does not limit borrowings under the
Amended Credit Facility. The cost of obtaining the amendment aggregated
approximately $4.1 million, including bank and legal fees.
Management's current business plans anticipate customer selling price
management in response to raw material cost changes, improved working capital
management, reduced capital expenditures, successful implementation of on-going
cost savings initiatives and improved operating efficiencies. There can be no
assurance that Foamex L.P. will be successful in achieving its plans or
complying with the amended covenants. Additionally, compliance with the
financial covenants may not be met if business conditions are other than as
anticipated or other unforeseen events impact results. In the absence of a
further waiver of or further amendment to such financial covenants, such
noncompliance would constitute a default under the Amended Credit Facility , and
the lenders would be entitled to accelerate the maturity of the indebtedness
outstanding thereunder. In the event that such noncompliance appears likely, or
occurs, Foamex L.P. will seek the lenders' further approval of amendments to, or
waivers of, such financial covenants. Historically, Foamex L.P. has been able to
renegotiate financial covenants and/or obtain waivers. Management currently
believes such waivers and/or amendments may be difficult to obtain, if required.
If amendments or waivers are not obtained, Foamex L.P. would be in default and
lenders could demand immediate payment of Foamex L.P.'s outstanding debt under
the Amended Credit Facility. In addition, it is possible that the holders of
Foamex L.P.'s Senior Secured Notes and Senior Subordinated Notes could also
demand immediate payment. Foamex L.P. may not be able to secure additional
financing at a reasonable cost, or at all. The lack of financing would have a
material adverse effect on Foamex L.P.'s financial position and would impair its
ability to continue as a going concern.
During the three quarters ended September 29, 2002, Foamex L.P. purchased,
pursuant to the terms of an existing agreement, the 5% stock interest held by
the director of Foamex de Mexico S.A. de C.V. for a cash payment of $1.0
million. In addition, during the quarter ended September 29, 2002, Foamex L.P.
entered into an employment agreement with one director of Foamex International
and a consulting agreement with another director of Foamex International.
Payments under these agreements will aggregate at least $0.9 million on an
annual basis.
Foamex L.P. was required to cause a registration statement under the
Securities Act of 1933 for its 10 3/4% Senior Secured Notes to be effective
within 180 days of March 25, 2002. Foamex L.P. has filed the registration
statement, but it is not yet effective and therefore Foamex L.P. is liable for
liquidated damages from September 23, 2002 until the date the registration
statement becomes effective. The liquidated damages are at the rate of $15,000
per week for the first 90 days, escalating by $15,000 per week for each
additional 90 days until a maximum of $150,000 per week is reached.
On October 1, 2002, Foamex L.P. paid $16.7 million of accrued interest on
its 10 3/4% Senior Secured Notes. At November 15, 2002 available borrowings
under the revolving credit facility were approximately $50.4 million.
33
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Effective May 1, 2002, Foamex L.P. completed a series of interest rate swap
transactions with notional amounts aggregating $300.0 million. Foamex L.P.
designated, documented and accounted for these interest rate swaps as fair value
hedges of Foamex L.P.'s 10 3/4% Senior Secured Notes due April 1, 2009. The risk
being hedged in these transactions was the change in fair value of Foamex L.P.'s
10 3/4% Senior Secured Notes based on changes in the benchmark interest rate,
LIBOR. The effect of these interest rate swap transactions was to convert the
fixed interest rate on the 10 3/4% 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. On September 18, 2002, Foamex L.P. unwound the interest
rate swap transactions in exchange for a net cash proceeds of $18.4 million. The
unwinding resulted in a deferred credit of $14.8 million which will be amortized
over the term of the 10 3/4% Senior Secured Notes, using the effective interest
rate method.
Cash Flow from Operating Activities
Cash used for operating activities in the three quarters ended September
29, 2002 was $6.3 million compared to cash provided of $75.0 million in the
comparable 2001 period reflecting lower operating results. Additionally,
accounts receivable and inventories increased by $35.5 million and $23.0
million, respectively, in the three quarters ended September 29, 2002.
Cash Flow from Investing Activities
Cash used for investing activities totaled $13.6 million for the three
quarters ended September 29, 2002. Cash requirements included capital
expenditures of $11.9 million. In the three quarters ended September 30, 2001,
cash used for investing activities was $29.8 million, which included $17.2
million of capital expenditures and $14.8 million for an acquisition. The
estimated capital expenditures for the full year 2002 are expected to be
approximately $16.0 million including $1.5 million for safety and environmental
activities.
Cash Flow from Financing Activities
Cash provided by financing activities was $20.6 million for the three
quarters ended September 29, 2002 compared to cash used of $40.7 million in the
comparable period of 2001. Foamex L.P. completed the offering of $300.0 million
of the 10 3/4% Senior Secured Notes on March 25, 2002. Foamex L.P. used $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.
Other
Environmental Matters
Foamex L.P. is subject to extensive and changing environmental laws and
regulations. Expenditures to date in connection with Foamex L.P.'s compliance
with such laws and regulations did not have a material adverse effect on Foamex
L.P.'s operations, financial position, capital expenditures or competitive
position. The amount of liabilities recorded by Foamex L.P. in connection with
environmental matters as of September 29, 2002 was $2.7 million. Although it is
possible that new information or future developments could require Foamex L.P.
to reassess its potential exposure to all pending environmental matters,
including those described in note 10 to Foamex L.P.'s condensed consolidated
financial statements, Foamex L.P. believes that, based upon all currently
available information, the resolution of all such pending environmental matters
will not have a material adverse effect on Foamex L.P.'s operations, financial
position, capital expenditures or competitive position.
Market Risk
Foamex L.P.'s debt securities with variable interest rates are subject to
market risk for changes in interest rates. On September 29, 2002, indebtedness
with variable interest rates aggregated $169.2 million. On an annualized basis,
if the interest rates on these debt instruments increased by 1.0%, annual
interest expense would increase by approximately $1.7 million.
34
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements that
are made pursuant to the Safe Harbor provisions of the Private Securities
Litigation Reform Act of 1995. The use of words in this Quarterly Report, such
as "anticipates," "intends," "plans," "believes," "estimates," "expects" and
similar expressions, is done to identify forward-looking statements on Foamex
L.P.'s current expectations and projections about future results, and the actual
results may differ materially from those anticipated in such statements.
Forward-looking statements are affected by risks, uncertainties and assumptions
that Foamex L.P. makes about, among other things, its ability to implement
customer selling price increases in response to higher raw material costs, raw
material price increases, general economic conditions, conditions in the capital
markets, the interest rate environment, the level of automotive production,
carpet production, furniture and bedding production and housing starts, the
completion of various restructuring/consolidation plans, the achievement of
financial covenants, effective tax rates, realization of deferred tax assets,
litigation and changes in environmental legislation and environmental conditions
and other factors mentioned in this and other documents filed by Foamex L.P.
with the Securities and Exchange Commission. Readers should be aware that any
forward-looking statement made in this Quarterly Report, or elsewhere, speaks
only as of the date on which it is made. Foamex L.P. assumes no obligation to
update these forward-looking statements.
Accounting Changes
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. An impairment loss for goodwill due to the initial
application of SFAS No. 142 is discussed below. Any goodwill and intangible
assets acquired after June 30, 2001, including the acquisition discussed in note
2 to the condensed consolidated financial statements, are subject to the
nonamortization and amortization provisions of SFAS No. 142. The other
provisions of SFAS No. 142 were adopted by Foamex L.P. on January 1, 2002. The
quarter and three quarters ended September 30, 2001 included goodwill
amortization of $1.5 million and $4.5 million, respectively. On a pro forma
basis, net income for the quarter and three quarters ended September 30, 2001
would have been $9.7 million and $31.4 million, respectively, if SFAS No. 142
had been adopted as of January 1, 2001.
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. Foamex L.P. completed this assessment in the second quarter of 2002.
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. Foamex L.P. 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, Foamex L.P. 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, was completed in the third
quarter of 2002 and the resulting impairment loss of $68.2 million has been
recorded as a cumulative effect of a change in accounting principle, retroactive
to Foamex L.P.'s first quarter results of operations in accordance with the
transitional implementation guidance of SFAS No. 142.
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. Foamex
L.P. expects that adoption of this Statement in 2003 will result in a
reclassification of the extraordinary items recorded during the quarter and
three quarters ended September 29, 2002.
35
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.
ITEM 4. CONTROLS AND PROCEDURES.
Foamex L.P.'s management, including the Principal Executive Officer and
Principal Financial Officer, have conducted an evaluation of the effectiveness
of disclosure controls and procedures pursuant to Exchange Act Rule 13a-14 as of
a date within 90 days of the filing date of this Quarterly Report on Form 10-Q
(the "Evaluation Date"). Based on that evaluation, the Chief Executive Officer
and the Interim Chief Financial Officer concluded that as of the Evaluation
Date, the disclosure controls and procedures are effective in ensuring that all
material information required to be filed in this quarterly report has been made
known to them in a timely fashion. There have been no significant changes in
internal controls, or in factors that could significantly affect internal
controls, subsequent to the date the Chief Executive Officer and the Interim
Chief Financial Officer completed their evaluation.
36
Part II - Other Information.
Item 1. Legal Proceedings.
Reference is made to the description of the legal proceedings
contained in Foamex L.P.'s Annual Report on Form 10-K for the year
ended December 31, 2001. The information from note 10 to the condensed
consolidated financial statements is incorporated herein by reference.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
10.1 Employment Agreement, dated as of August 20, 2002, by and between
Foamex International Inc. and Thomas E. Chorman (incorporated
herein by reference to Exhibit 10.36 to Amendment No. 1 to the
Registration Statement of Foamex L.P. and Foamex Capital
Corporation on Form S-4, Registration No. 333-90632).
10.2 Employment Agreement, dated as of August 20, 2002, by and between
Foamex International Inc. and Peter W. Johnson (incorporated
herein by reference to Exhibit 10.38 to Amendment No. 1 to the
Registration Statement of Foamex L.P. and Foamex Capital
Corporation on Form S-4, Registration No. 333-90632).
10.3 Employment Agreement, dated as of September 10, 2002 and
effective as of July 22, 2002, by and between Foamex
International Inc. and Virginia Kamsky (incorporated herein by
reference to Exhibit 10.39 to Amendment No. 1 to the Registration
Statement of Foamex L.P. and Foamex Capital Corporation on Form
S-4, Registration No. 333-90632).
10.4 Agreement with consultant dated August 9, 2002, by and between
Foamex International Inc. and Raymond E. Mabus, Jr. (incorporated
herein by reference to Exhibit 10.44 to Amendment No. 1 to the
Registration Statement of Foamex L.P. and Foamex Capital
Corporation on Form S-4, Registration No. 333-90632).
10.5 Amendment No. 1, dated as of November 15, 2002, to the Credit
Agreement, dated as of June 12, 1997, as amended and restated as
of February 27, 1998, as further amended and restated as of June
29, 1999 and as further amended and restated as of March 25,
2002, by and among Foamex L.P., FMXI, Inc., the financial
institutions party thereto from time to time as lenders (the
"Lenders"), the financial institutions party thereto from time to
time as issuing banks (the "Issuing Banks"), Citicorp USA, Inc.,
as administrative agent and as collateral agent for the Lenders
and the Issuing Banks, and The Bank of Nova Scotia, as funding
agent and as syndication agent for the Lenders and the Issuing
Banks.
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.
(b Foamex L.P. filed the following Current Report on Form 8-K for
the quarter ended September 29, 2002:
On August 14, 2002, a report under Item 9, Regulation FD,
concerning sworn statements of the principal executive officer
and the principal financial officer in accordance with Order No.
4-460 of the United States Securities and Exchange Commission.
37
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FOAMEX L.P.
By: FMXI, Inc.
General Partner
Date: November 15, 2002 By: /s/ George L. Karpinski
----------------------------
George L. Karpinski
Vice President
FOAMEX CAPITAL CORPORATION
Date: November 15, 2002 By: /s/ George L. Karpinski
----------------------------
George L. Karpinski
Vice President
38
CERTIFICATION
I, Thomas E. Chorman, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Foamex L.P. and
Foamex Capital Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 15, 2002
/s/ Thomas E. Chorman
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Thomas E. Chorman
Chief Executive Officer
39
CERTIFICATION
I, George L. Karpinski, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Foamex L.P. and
Foamex Capital Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 15, 2002
/s/ George L. Karpinski
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George L. Karpinski
Interim Chief Financial Officer
40