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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 March 30, 2003
Commission file number 0-22624
FOAMEX INTERNATIONAL INC.
(Exact name of registrant as specified in its charter)
Delaware 05-0473908
- --------------------------------- -----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1000 Columbia Avenue
Linwood, PA 19061
- --------------------------------- -----------------------
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code: (610) 859-3000
--------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). [ ]
The number of shares of the registrant's common stock outstanding as of May 2,
2003 was 24,409,149.
FOAMEX INTERNATIONAL INC.
INDEX
Page
Part I. Financial Information
Item 1. Financial Statements.
Condensed Consolidated Statements of Operations (unaudited) - Quarters
Ended March 30, 2003 and March 31, 2002 3
Condensed Consolidated Balance Sheets as of March 30, 2003 (unaudited) and
and December 29, 2002 4
Condensed Consolidated Statements of Cash Flows (unaudited) - Quarters
Ended March 30, 2003 and March 31, 2002 5
Notes to Condensed Consolidated Financial Statements (unaudited) 6
Summarized Financial Information of Foamex Asia Company Limited (unaudited) 17
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations. 18
Item 3. Quantitative and Qualitative Disclosures about Market Risk. 23
Item 4. Controls and Procedures. 23
Part II. Other Information
Item 1. Legal Proceedings. 24
Item 6. Exhibits and Reports on Form 8-K. 24
Signatures 25
Certification of Chief Executive Officer 26
Certification of Chief Financial Officer 27
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
Quarters Ended
--------------------------------
March 30, March 31,
2003 2002
------------- ------------
(thousands, except per share amounts)
NET SALES $327,770 $314,062
COST OF GOODS SOLD 296,490 276,384
-------- --------
GROSS PROFIT 31,280 37,678
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 20,455 17,683
RESTRUCTURING, IMPAIRMENT AND OTHER CREDITS - (1,538)
-------- --------
INCOME FROM OPERATIONS 10,825 21,533
INTEREST AND DEBT ISSUANCE EXPENSE 19,111 18,629
INCOME FROM EQUITY INTEREST IN JOINT VENTURES 366 730
OTHER INCOME (EXPENSE), NET (1,243) 350
-------- --------
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES AND
CUMULATIVE EFFECT OF ACCOUNTING CHANGES (9,163) 3,984
PROVISION (BENEFIT) FOR INCOME TAXES (1,106) 851
-------- --------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF
ACCOUNTING CHANGES (8,057) 3,133
CUMULATIVE EFFECT OF ACCOUNTING CHANGES - (70,647)
-------- --------
NET LOSS $ (8,057) $(67,514)
======== ========
EARNINGS PER SHARE - BASIC
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGES $ (0.33) $ 0.13
CUMULATIVE EFFECT OF ACCOUNTING CHANGES - (2.93)
-------- --------
NET LOSS $ (0.33) $ (2.80)
======== ========
EARNINGS PER SHARE - DILUTED
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGES $ (0.33) $ 0.12
CUMULATIVE EFFECT OF ACCOUNTING CHANGES - (2.68)
-------- --------
NET LOSS $ (0.33) $ (2.56)
======== ========
WEIGHTED AVERAGE NUMBER OF SHARES - BASIC 24,351 24,113
======== ========
WEIGHTED AVERAGE NUMBER OF SHARES - DILUTED 24,351 26,334
======== ========
The accompanying notes are an integral part of the unaudited
condensed consolidated financial statements.
3
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
March 30, 2003 December 29, 2002
-------------- ------------------
ASSETS (unaudited)
CURRENT ASSETS (thousands, except share data)
Cash and cash equivalents $ 3,097 $ 4,524
Accounts receivable, net of allowances of $9,814 in 2003
and $10,311 in 2002 210,160 191,546
Inventories 110,874 98,010
Deferred income taxes 21,013 21,011
Other current assets 20,757 22,558
--------- ---------
Total current assets 365,901 337,649
--------- ---------
Property, plant and equipment 420,750 418,569
Less accumulated depreciation (242,711) (236,531)
--------- ---------
NET PROPERTY, PLANT AND EQUIPMENT 178,039 182,038
GOODWILL 125,630 125,321
DEBT ISSUANCE COSTS, net of accumulated
amortization of $16,493 in 2003 and $14,079 in 2002 34,413 36,827
DEFERRED INCOME TAXES 97,770 97,341
OTHER ASSETS 35,162 34,401
--------- ---------
TOTAL ASSETS $ 836,915 $ 813,577
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES
Current portion of long-term debt $ 30 $ 46
Accounts payable 122,886 87,400
Accrued employee compensation and benefits 26,812 26,330
Accrued interest 24,210 14,173
Accrued customer rebates 14,001 18,813
Cash overdrafts 9,052 17,801
Other accrued liabilities 30,070 36,381
--------- ---------
Total current liabilities 227,061 200,944
LONG-TERM DEBT 742,864 738,540
ACCRUED EMPLOYEE BENEFITS 48,682 48,022
OTHER LIABILITIES 14,529 15,804
--------- ---------
Total liabilities 1,033,136 1,003,310
--------- ---------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIENCY
Preferred Stock, par value $1.00 per share:
Authorized 5,000,000 shares
Issued 15,000 shares - Series B in 2003 and 2002 15 15
Common Stock, par value $.01 per share:
Authorized 50,000,000 shares
Issued 27,839,658 shares in 2003 and 2002 278 278
Additional paid-in capital 101,974 101,972
Accumulated deficit (224,300) (216,243)
Accumulated other comprehensive loss (37,187) (38,754)
Common stock held in treasury, at cost:
3,489,000 shares in 2003 and 2002 (27,780) (27,780)
Shareholder note receivable (9,221) (9,221)
--------- ---------
Total stockholders' deficiency (196,221) (189,733)
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY $ 836,915 $ 813,577
========= =========
The accompanying notes are an integral part of the unaudited
condensed consolidated financial statements.
4
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Quarters Ended
------------------------
March 30, March 31,
2003 2002
--------- ----------
(thousands)
OPERATING ACTIVITIES
Net loss $(8,057) $(67,514)
Adjustments to reconcile net loss to net cash provided
by (used for) operating activities:
Cumulative effect of accounting changes - 70,647
Depreciation and amortization 6,144 8,280
Amortization and write off of debt issuance costs, debt premium
and debt discount 1,439 4,980
Other operating activities (195) 487
Changes in operating assets and liabilities, net 6,374 (41,795)
------- --------
Net cash provided by (used for) operating activities 5,705 (24,915)
------- --------
INVESTING ACTIVITIES
Capital expenditures (2,223) (6,354)
Other investing activities (1,208) (55)
------- --------
Net cash used for investing activities (3,431) (6,409)
------- --------
FINANCING ACTIVITIES
Proceeds from (repayments of) revolving loans 5,066 (125,000)
Proceeds from long-term debt - 356,590
Repayments of long-term debt (18) (140,686)
Repayments of long-term debt - related party - (31,590)
Increase (decrease) in cash overdrafts (8,749) 12,949
Debt issuance costs - (24,691)
Other financing activities - 2,858
------- --------
Net cash provided by (used for) financing activities (3,701) 50,430
------- --------
Net increase (decrease) in cash and cash equivalents (1,427) 19,106
Cash and cash equivalents at beginning of period 4,524 15,064
------- --------
Cash and cash equivalents at end of period $ 3,097 $ 34,170
======= ========
Supplemental Information:
Cash paid for interest $ 7,635 $ 15,292
======= ========
The accompanying notes are an integral part of the unaudited
condensed consolidated financial statements.
5
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
1. ORGANIZATION AND BASIS OF PRESENTATION
Organization
Foamex International Inc. (the "Company") operates in the flexible
polyurethane and advanced polymer foam products industry. The Company's
operations are primarily conducted through its wholly-owned subsidiary, Foamex
L.P. Foamex Carpet Cushion, Inc. ("Foamex Carpet") was converted to a limited
liability company and was contributed to Foamex L.P. on March 25, 2002. On
December 30, 2002, Foamex Carpet distributed certain assets, liabilities and its
business to Foamex L.P. Foamex L.P. conducts foreign operations through Foamex
Canada Inc., Foamex Latin America, Inc. and Foamex Asia, Inc. Financial
information concerning the business segments of the Company is included in Note
10.
Basis of Presentation
The accompanying condensed consolidated financial statements are unaudited
and do not include certain information and disclosures required by accounting
principles generally accepted in the United States of America for complete
financial statements. However, in the opinion of management, all adjustments,
consisting only of normal recurring adjustments considered necessary to present
fairly the Company's consolidated financial position and results of operations,
have been included. These interim financial statements should be read in
conjunction with the consolidated financial statements and related notes
included in the Company's 2002 Annual Report on Form 10-K. Results for interim
periods are not necessarily indicative of trends or of results for a full year.
Certain amounts in the condensed consolidated statement of operations for the
quarter ended March 31, 2002 have been reclassified to conform to the current
period presentation.
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 are 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 is reclassified. The Company has reclassified the extraordinary item
originally reported in the quarter ended March 31, 2002 to interest and debt
issuance expense of $4.3 million with the related tax benefit of $0.1 million
included in provision for income taxes.
2. EARNINGS PER SHARE
The following table shows the amounts used in computing earnings per share.
Quarters Ended
------------------------------------
March 30, March 31,
2003 2002
--------- ---------
(thousands, except per share amounts)
Basic earnings per share:
Income (loss) before cumulative effect of accounting changes $(8,057) $ 3,133
Cumulative effect of accounting changes - (70,647)
------- --------
Net loss $(8,057) $(67,514)
======= ========
Weighted average common stock outstanding 24,351 24,113
======= ========
Income (loss) before cumulative effect of accounting changes $ (0.33) $ 0.13
Cumulative effect of accounting changes - (2.93)
------- --------
Net loss $ (0.33) $ (2.80)
======= ========
6
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
2. EARNINGS PER SHARE (continued)
Quarters Ended
------------------------------------
March 30, March 31,
2003 (a) 2002
--------- ---------
(thousands, except per share amounts)
Diluted earnings per share:
Income (loss) before cumulative effect of accounting changes $(8,057) $ 3,133
Cumulative effect of accounting changes - (70,647)
------- --------
Net loss $(8,057) $(67,514)
======= ========
Weighted average common stock outstanding 24,351 24,113
Incremental shares resulting from
Stock options (b) - 721
Convertible preferred stock - 1,500
------- --------
Adjusted weighted average shares 24,351 26,334
======= ========
Income (loss) before cumulative effect of accounting changes $ (0.33) $ 0.12
Cumulative effect of accounting changes - (2.68)
------- --------
Net loss $ (0.33) $ (2.56)
======= ========
(a) There is no dilution resulting from potential incremental shares in the
quarter ended March 30, 2003 because the Company has a loss before
cumulative effect of accounting changes and the inclusion of potential
incremental shares would be antidilutive.
(b) The average number of stock options that were not included in the diluted
earnings per share calculation because the exercise price was greater than
the average market price aggregated 265,300 in the quarter ended March 31,
2002.
3. STOCK-BASED COMPENSATION
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS No. 123"), encourages, but does not require,
companies to record compensation cost for stock-based employee compensation
plans at fair value. The Company has chosen to continue to account for
stock-based compensation using the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB No. 25"), and related interpretations. Accordingly, the Company
records expense in an amount equal to the excess, if any, of the quoted market
price on the grant date over the option price.
The following table includes as reported and proforma information required
by Statement of Financial Accounting Standards No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure ("SFAS No. 148"). Proforma
information is based on the fair value method under SFAS No. 123.
7
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
3. STOCK-BASED COMPENSATION (continued)
Quarters Ended
--------------------------------
March 30, March 31,
2003 2002
---------- ---------
(thousands, except per share data)
Net loss as reported $(8,057) $(67,514)
Add: Stock-based employee compensation
expense included in reported net loss,
net of tax benefit 1 35
Deduct: Total stock-based compensation
expense determined under fair value
based method, net of tax benefit (461) (381)
------- --------
Proforma net loss $(8,517) $(67,860)
======= ========
Basic loss per share
As reported $ (0.33) $ (2.80)
Proforma $ (0.35) $ (2.81)
Diluted loss per share
As reported $ (0.33) $ (2.56)
Proforma $ (0.35) $ (2.58)
4. CUMULATIVE EFFECT OF ACCOUNTING CHANGES
The Company has adopted Statement of Financial Accounting Standards No.
142, "Goodwill and Other Intangible Assets" ("SFAS No. 142"). As required by
SFAS No. 142, the Company performed a transitional impairment test on its
goodwill during 2002. The resulting impairment loss of $72.0 million has been
recorded as a cumulative effect of an accounting change in the quarter ended
March 31, 2002.
In addition, the Company adopted Statement of Financial Accounting
Standards No. 141, "Business Combinations" ("SFAS No. 141") which required that
any deferred credit related to an excess over cost arising from a business
combination that occurred before July 1, 2001 be written off and recognized as
the effect of a change in accounting principle. Accordingly, the Company
recorded a $1.3 million credit as the cumulative effect of an accounting change
in the quarter ended March 31, 2002.
Goodwill at March 30, 2003 increased by $0.3 million from December 29, 2002
as a result of foreign currency translation adjustments.
5. RESTRUCTURING, IMPAIRMENT AND OTHER CREDITS
During the quarter ended March 31, 2002, the Company recorded a
restructuring credit of $2.1 million related to the collection of deferred rent
receivable which had been fully reserved for and an other charge for certain
additional expenses of $0.6 million relating to the 2001 restructuring plan.
The following table sets forth the components of the Company's
restructuring accruals and activity for the quarter ended March 30, 2003:
Plant Closure Personnel
Total and Leases Reductions Impairment Other
----- ------------- ---------- ---------- -----
(millions)
Balance at December 29, 2002 $22.8 $12.6 $8.2 $ - $2.0
Cash receipts (spending) (4.0) (1.3) (2.5) - (0.2)
----- ----- ---- ---- ----
Balance at March 30, 2003 $18.8 $11.3 $5.7 $ - $1.8
===== ===== ==== ==== ====
The Company expects to spend approximately $11.2 million during the twelve
months ending March 28, 2004, with the balance to be spent through 2012.
8
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
6. INVENTORIES
The components of inventory are listed below.
March 30, December 29,
2003 2002
--------- -------------
(thousands)
Raw materials and supplies $ 73,218 $60,588
Work-in-process 17,481 16,737
Finished goods 20,175 20,685
-------- -------
Total $110,874 $98,010
======== =======
7. LONG-TERM DEBT
The components of long-term debt are listed below.
March 30, December 29,
2003 2002
--------- ----------
Foamex L.P. Amended Credit Facility (thousands)
Term Loan B (1) $ 39,262 $ 39,262
Term Loan C (1) 35,693 35,693
Term Loan D (1) 51,700 51,700
Term Loan E (1) 16,290 16,290
Term Loan F (1) 19,243 19,243
Revolving credit facility (1) 56,889 51,823
10 3/4% Senior secured notes due 2009 (2) (4) 313,730 314,237
9 7/8% Senior subordinated notes due 2007 (2) 148,500 148,500
13 1/2% Senior subordinated notes due 2005 (includes
$2,248 and $2,486 of unamortized debt premium) (2) 53,833 54,071
Industrial revenue bonds (3) 7,000 7,000
Other (net of unamortized debt discount of $126 in 2003
and $137 in 2002) 754 767
-------- --------
742,894 738,586
Less current portion 30 46
-------- --------
Long-term debt $742,864 $738,540
======== ========
(1) Subsidiary debt of Foamex L.P., guaranteed by the Company and FMXI, Inc.
(2) Subsidiary debt of Foamex L.P. and Foamex Capital Corporation.
(3) Subsidiary debt of Foamex L.P.
(4) Includes $13.7 million and $14.2 million of deferred credit on interest
rate swap transactions.
Amended Credit Facility
The Foamex L.P. Amended Credit Facility consists of (1) the revolving
credit facility, which is a non-amortizing revolving credit facility provided by
a syndicate of lenders (the "$100.0 Million 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
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
a note payable to Foam Funding LLC, a related party, and (4) a 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 prior revolving
credit facility. The remaining obligations outstanding under the prior revolving
credit facility were repaid with a portion of the proceeds from the issuance of
the 10 3/4% senior secured notes ("10 3/4% Senior Secured Notes") as described
below.
9
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
7. LONG-TERM DEBT (continued)
The commitments under the $100.0 Million 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 March 30, 2003, Foamex L.P. had available
borrowings of $22.5 million and letters of credit outstanding of $20.6 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 $100.0 Million 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 $100.0 Million Revolving Credit Facility in
whole or in part, without premium or penalty, subject to reimbursement of the
lenders' redeployment costs in the case of prepayment of LIBO, as defined, rate
borrowings, other than at the end of any interest period. All voluntary
prepayments of Term Loans will be applied to such tranches of Term Loans as
Foamex L.P. may select.
The Company, FMXI, Inc. and each of Foamex L.P.'s domestic subsidiaries
continue to guarantee the repayment of the obligations under the Amended Credit
Facility. The Amended Credit Facility is secured by a first-priority lien
(subject to permitted liens) on substantially the same collateral that secured
the obligations under the prior Foamex L.P. credit facility, which includes
substantially all of the Company's material tangible and intangible assets. In
addition, all of the partnership interests, all of the capital stock or other
equity interests of the Company's domestic subsidiaries (including Foamex
Carpet) and 65% of the capital stock or other equity interests of the Company's
first-tier foreign subsidiaries are pledged as part of the security for the
obligations under the Amended Credit Facility.
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 March 30, 2003 for Term
Loans B, C, D, E and F ranged between 7.00% and 7.38%. The effective average
interest rate for revolving loans at March 30, 2003 was 7.55%. 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 March 30, 2003 and December 29, 2002,
the calculated leverage ratios were 10.76 to 1.00 and 8.66 to 1.00,
respectively. Accordingly, a 25 basis point rate increase became effective on
April 4, 2003 and a second 25 basis point rate increase will become effective
during the quarter ending June 29, 2003.
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
10
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
7. LONG-TERM DEBT (continued)
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.
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. 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, 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, 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, if any, if there is such a "change of control".
The Company was required to cause a registration statement under the
Securities Act of 1933 to be effective within 180 days of March 25, 2002. The
Company filed the registration statement, but it was not effective until January
30, 2003 and therefore the Company is liable for liquidated damages from
September 23, 2002 until the date the registration statement became 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. The amount
accrued for liquidated damages at March 30, 2003 was $0.3 million. The
liquidated damages were paid, as required, on April 1, 2003.
Effective May 1, 2002, the Company completed a series of interest rate swap
transactions with notional amounts aggregating $300.0 million. The Company
designated, documented and accounted for these interest rate swaps as fair value
hedges of the Company's 10 3/4% Senior Secured Notes due April 1, 2009. The risk
being hedged in these transactions was the change in fair value of the Company's
10 3/4% Senior Secured Notes based on changes in the benchmark interest rate,
LIBOR. The effect of these interest rate swap transactions 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, the Company unwound the interest
rate swap transactions in exchange for net cash proceeds of $18.4 million,
including $3.6 million realized through lower effective interest rates while the
swap transactions were in effect. The unwinding resulted in a deferred credit of
$14.8 million which is being 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
11
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
7. LONG-TERM DEBT (continued)
redemption is 104.938% 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 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 March 30, 2003, the redemption price was
103.375% plus accrued and unpaid interest.
Upon the occurrence of a change of control, as defined, each holder will
have the right to require Foamex L.P. to tender for such notes at a price in
cash equal to 101% of the aggregate principal amount thereof, plus accrued and
unpaid interest, if any, thereon, if there is such a "change of control". The
notes are subordinated in right of the payment of all senior indebtedness and
are pari passu in right of payment to the 9 7/8% Senior Subordinated Notes
(described above).
Industrial Revenue Bonds ("IRBs")
IRB debt includes a $1.0 million bond that matures in 2005 and a $6.0
million bond that matures in 2013. Interest is based on a variable rate, as
defined, with options available to Foamex L.P. to convert to a fixed rate. At
March 30, 2003, the interest rate was 1.25% on the $1.0 million bond and 1.15%
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 $10.8 million at March 30, 2003.
Other
Other debt includes a non-interest bearing promissory note with a principal
amount of $0.9 million at March 30, 2003 issued in connection with increasing
the Company's interest in an Asian joint venture to 70.0% in 2001. The
promissory note had unamortized discount of $0.1 million at March 30, 2003.
Debt Covenants
The indentures, the Foamex L.P. Amended Credit Facility and other
indebtedness agreements contain certain covenants that limit, among other
things, the ability of the Company's subsidiaries (i) to pay distributions or
redeem equity interests, (ii) to make certain restrictive payments or
investments, (iii) to incur additional indebtedness or issue Preferred Equity
Interests, as defined, (iv) to merge, consolidate or sell all or substantially
all of its assets or (v) to enter into certain transactions with affiliates or
related persons. In addition, certain agreements contain provisions that, in the
event of a defined change of control or the occurrence of an undefined material
adverse change in the ability of the obligor to perform its obligations, the
indebtedness must be repaid, in certain cases, at the option of the holder.
Also, the Company's subsidiaries are required under certain of these agreements
to maintain specified financial ratios of which the most restrictive are the
maintenance of net worth, interest coverage, fixed charge
12
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
7. LONG-TERM DEBT (continued)
coverage and leverage ratios, as defined. Under the most restrictive of the
distribution restrictions, the Company could be paid by its subsidiaries, as of
March 30, 2003, funds only to the extent to enable the Company to meet its tax
payment liabilities and its normal operating expenses of up to $1.0 million
annually, so long as no event of default has occurred.
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. is
subject to minimum net worth, minimum EBDAIT, as defined, and maximum capital
expenditure covenants through periods ending December 28, 2003. The minimum
EBDAIT covenant is tested monthly, on a cumulative basis, beginning with
December 2002. Foamex L.P. was in compliance with the revised covenants at
December 29, 2002 and throughout the quarter ended March 30, 2003. 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. All of the financial covenants
were established based on a business plan provided to the lenders. In addition,
borrowings under the Amended Credit Facility are subject to a borrowing base
calculation, which could limit borrowings under the revolving credit facility to
less than the maximum commitment. Under the borrowing base calculation,
availability under the Revolving Credit Facility shall equal the lesser of (1)
the Revolving Credit Facility commitment or (2) the sum of 65.0% of Foamex
L.P.'s accounts receivable plus 50.0% of Foamex L.P.'s inventory plus $85.0
million, less certain other adjustments for Term Loan repayments, less the
outstanding balance of Term Loans. As of March 30, 2003, the borrowing base
calculation did not limit borrowings under the Amended Credit Facility.
The Company's minimum EBDAIT covenants have higher thresholds in the second
half of 2003. Management's current plans to achieve EBDAIT covenant compliance
require customer selling price increases in response to higher raw material
costs, successful implementation of on-going cost savings initiatives, improved
operating efficiencies, improved working capital management and reduced capital
expenditures. Management is also continuing to evaluate strategic alternatives
in an effort to improve the Company's debt position.
Maturities of Long-Term Debt
Scheduled maturities of long-term debt are shown below (thousands):
Three quarters ending December 28, 2003 $ 21
2004 33,795
2005 165,282
2006 73,444
2007 148,500
Thereafter 306,000
--------
727,042
Unamortized debt premium/discount and deferred credit, net 15,852
--------
Total $742,894
========
8. INCOME TAXES
The effective tax rate of 21.4% in 2002 reflects the partial reversal of
the deferred income tax asset valuation allowance recognized in 1998. The
valuation allowance was reduced to reflect the utilization of Federal loss
carryforwards that reduced the current tax component of the Federal tax
provision. Additionally, the valuation allowance was reduced to offset the net
deferred Federal tax liability generated in 2002. The effective tax rate of
12.1% in 2003 reflects a high percentage of forecasted income from equity
interests in joint ventures, which is considered to be permanently invested by
the Company. Accordingly, no deferred tax liabilities are recognized on such
income and the 2003 effective tax rate is below the Federal statutory rate.
13
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
9. COMPREHENSIVE INCOME (LOSS)
The components of comprehensive income (loss) are listed below.
Quarters Ended
--------------------------
March 30, March 31,
2003 2002
--------- ----------
(thousands)
Net loss $(8,057) $(67,514)
Foreign currency translation adjustments 1,567 (169)
------- --------
Total comprehensive loss $(6,490) $(67,683)
======= ========
10. SEGMENT RESULTS
Foam Products manufactures and markets cushioning foams for bedding,
furniture, packaging and health care applications and foam-based consumer
products, such as mattress pads and children's furniture. Carpet Cushion
Products manufactures and distributes rebond, prime, felt and rubber carpet
padding. Automotive Products supplies foam products and laminates to major tier
one suppliers and original equipment manufacturers. Technical Products
manufactures and markets reticulated foams and other specialty foams for
reservoiring, filtration, gasketing and sealing applications. The "Other" column
in the table below represents certain manufacturing operations in Mexico City,
corporate expenses not allocated to other business segments and restructuring,
impairment and other charges (credits). The restructuring, impairment and other
charges (credits) totaled $(1.5) million in the quarter ended March 31, 2002.
Segment results are presented below.
Carpet
Foam Cushion Automotive Technical
Products Products Products Products Other Total
-------- -------- ---------- --------- -------- ---------
(thousands)
Quarter ended March 30, 2003
Net sales $118,051 $48,935 $121,145 $32,388 $ 7,251 $327,770
Income (loss) from operations $ 2,172 $(3,118) $ 6,957 $ 7,572 $(2,758) $ 10,825
Depreciation and amortization $ 2,769 $ 945 $ 687 $ 723 $ 1,020 $ 6,144
Quarter ended March 31, 2002
Net sales $117,482 $52,799 $104,381 $30,929 $ 8,471 $314,062
Income (loss) from operations $ 9,780 $(2,994) $ 8,522 $ 6,163 $ 62 $ 21,533
Depreciation and amortization $ 4,071 $ 1,893 $ 1,094 $ 719 $ 503 $ 8,280
11. RELATED PARTY TRANSACTIONS AND BALANCES
Foam Funding LLC Debt
During the quarter ended March 31, 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 International Holdings, Inc. ("Trace").
12. COMMITMENTS AND CONTINGENCIES
Litigation - Breast Implants
As of May 9, 2003, the Company and Trace were two of multiple defendants in
actions filed on behalf of approximately 1,058 recipients of breast implants in
various United States federal and state courts and one Canadian provincial
court, some of which allege substantial damages, but most of which allege
unspecified damages for personal injuries of various types. Three of these cases
seek to allege claims on behalf of all breast implant
14
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
12. COMMITMENTS AND CONTINGENCIES (continued)
recipients or other allegedly affected parties, but no class has been approved
or certified by the court. During 1995, the Company and Trace were granted
summary judgments and dismissed as defendants from all cases in the federal
courts of the United States and the state courts of California. Appeals for
these decisions were withdrawn and the decisions are final.
Although breast implants do not contain foam, certain silicone gel implants
were produced using a polyurethane foam covering fabricated by independent
distributors or fabricators from bulk foam purchased from the Company or Trace.
Neither the Company nor Trace recommended, authorized, or approved the use of
its foam for these purposes. The Company is also indemnified by Trace for any
such liabilities relating to foam manufactured prior to October 1990. Trace's
insurance carrier has continued to pay the Company's litigation expenses after
Trace's filing for relief under the Bankruptcy Code on July 21, 1999. Trace's
insurance policies continue to cover certain liabilities of Trace but if the
limits of those policies are exhausted, it is unlikely that Trace will be able
to continue to provide additional indemnification. While it is not feasible to
predict or determine the outcome of these actions, based on management's present
assessment of the merits of pending claims, after consultation with the general
counsel of the Company, and without taking into account the indemnification
provided by Trace, the coverage provided by Trace's and the Company's liability
insurance and potential indemnity from the manufacturers of polyurethane covered
breast implants, management believes that it is not reasonably possible that the
disposition of the matters that are pending or that may reasonably be
anticipated to be asserted will result in a loss that is material to the
Company's consolidated financial position, results of operations or cash flows.
If management's assessment of the Company's liability relating to these actions
is incorrect, these actions could have a material adverse effect on the
Company's financial position, results of operations and cash flows.
Litigation - Other
During 2001, the Company was notified by an insurance provider concerning a
dispute involving the reimbursement of liability claims paid on behalf of Trace
before 1990. The insurance provider is contending that the Company is liable for
the claims of approximately $6.1 million. The Company intends to strongly defend
this claim and considers the claim to be without merit. If management's
assessment of the Company's liability relating to this action is incorrect, this
action could have a material adverse effect on the Company's financial position,
results of operations and cash flows.
The Company is party to various other lawsuits, both as defendant and
plaintiff, arising in the normal course of business. It is the opinion of
management that the disposition of these lawsuits will not, individually or in
the aggregate, have a material adverse effect on the Company's financial
position or results of operations. If management's assessment of the Company's
liability relating to these actions is incorrect, these actions could have a
material adverse effect on the Company's consolidated financial position,
results of operations and cash flows.
As of March 30, 2003, the Company had accrued approximately $1.2 million
for litigation and other matters in addition to the environmental matters
discussed below.
Environmental and Health and Safety
The Company is subject to extensive and changing federal, state, local and
foreign environmental laws and regulations, including those relating to the use,
handling, storage, discharge and disposal of hazardous substances, the discharge
or emission of materials into the environment, and the remediation of
environmental contamination, and as a result, are from time to time involved in
administrative and judicial proceedings and inquiries relating to environmental
matters. As of March 30, 2003, the Company had accruals of approximately $2.7
million for environmental matters, including approximately $2.2 million related
to mediating and monitoring soil and groundwater contamination and approximately
$0.5 million related to PRP sites and other matters. Additional losses, if any,
in excess of amounts currently accrued, cannot be reasonably estimated at this
time. If there are additional matters or if our current estimates are incorrect,
there could be a material adverse effect on the Company's financial position,
results of operations and cash flows.
15
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
12. COMMITMENTS AND CONTINGENCIES (continued)
On August 8, 2001, the United States Environmental Protection Agency, or
"EPA," proposed a National Emission Standard for Hazardous Air Pollutants, or
"NESHAP" for Flexible Polyurethane Foam Fabrication Operations. The proposed
NESHAP regulates emissions of methylene chloride and other Hazardous Air
Pollutants and restricts air emissions from flame lamination sources. The
Company does not believe that this standard, if adopted, will require it to make
material expenditures.
On August 31, 2002, Environment Canada, the Canadian environmental
regulatory agency, proposed a rule which would require flexible polyurethane
foam manufacturing operations to reduce methylene chloride (dichloromethane) air
emissions. The proposed rule establishes a 50.0% reduction in methylene chloride
emissions by December 1, 2003 and 100.0% reductions by January 1, 2007. The
Company does not believe that this standard, if adopted, will require it to make
material expenditures for its Canadian plants.
The Company reported to the appropriate state authorities that it had 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, the Company reached an
indemnification agreement with the former owner of the Morristown, Tennessee
facility. The agreement allocates the incurred and future remediation costs
between the former owner and the Company. The estimated allocation of future
costs for the remediation of this facility is not significant, based on current
known information. The former owner was Recticel Foam Corporation, a subsidiary
of Recticel s.a.
The Company has either upgraded or closed all underground storage tanks at
its 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. The Company 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 nine sites. Estimates of total cleanup costs and fractional
allocations of liability are often provided by the EPA, the state environmental
agency or the committee of PRPs with respect to the specified site. Based on
these estimates (to the extent available) and on known information, in each case
and in the aggregate, the Company does not expect additional costs, if any, to
be material to liquidity, results of operations or financial position.
In 2003, 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 the Company
to reassess the potential exposure relating to all pending environmental
matters, including those described above, management believes that, based upon
all currently available information, the resolution of these environmental
matters will not have a material adverse effect on its operations, financial
position, capital expenditures or competitive position. The possibility exists,
however, that new environmental legislation and/or environmental regulations may
be adopted, or other environmental conditions, including the presence of
previously unknown environmental contamination, may be found to exist or a
reassessment of the potential exposure to pending environmental matters may be
necessary due to new information or future developments, that may require
expenditures not currently anticipated and that may be material.
Other
In October 2001, the Company experienced a fire at one of its manufacturing
facilities. Costs relating to the fire aggregated approximately $1.2 million.
The Company has filed a claim with its insurance carrier and believes it will
recover substantially all costs in excess of a deductible of $0.2 million.
16
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
SUMMARIZED FINANCIAL INFORMATION OF FOAMEX ASIA COMPANY LIMITED
(Amounts in Baht)
(unaudited)
Quarters Ended
----------------------------------
March 31, March 31,
2003 2002
------------- ------------
Net sales 409,905,855 473,142,731
=========== ===========
Net income 23,260,866 45,575,694
=========== ===========
As of
----------------------------------
March 31, December 31,
2003 2002
------------- -------------
Total assets 1,116,783,592 1,181,143,613
============= =============
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS FOR THE QUARTER ENDED MARCH 30, 2003 COMPARED TO THE
QUARTER ENDED MARCH 31, 2002
Carpet
Foam Cushion Automotive Technical
Products Products Products Products Other Total
-------- -------- ---------- ---------- -------- ---------
(thousands)
Quarter ended March 30, 2003
Net sales $118,051 $48,935 $121,145 $32,388 $ 7,251 $327,770
Income (loss) from operations $ 2,172 $(3,118) $ 6,957 $ 7,572 $(2,758) $ 10,825
Depreciation and amortization $ 2,769 $ 945 $ 687 $ 723 $ 1,020 $ 6,144
Income (loss) from operations
as a percentage of net sales 1.8% (6.4%) 5.7% 23.4% n.m.* 3.3%
Quarter ended March 31, 2002
Net sales $117,482 $52,799 $104,381 $30,929 $8,471 $314,062
Income (loss) from operations $ 9,780 $(2,994) $ 8,522 $ 6,163 $ 62 $ 21,533
Depreciation and amortization $ 4,071 $ 1,893 $ 1,094 $ 719 $ 503 $ 8,280
Income (loss) from operations
as a percentage of net sales 8.3% (5.7%) 8.2% 19.9% n.m.* 6.9%
* not meaningful
Income from Operations
Net sales for the quarter ended March 30, 2003 increased 4.4% to $327.8
million from $314.1 million in the quarter ended March 31, 2002. The increase
was primarily attributable to improved sales in the Automotive Products and
Technical Products segments, partially offset by a decrease in the Carpet
Cushion Products segment.
The gross profit margin was $31.3 million, or 9.5%, in the quarter ended
March 30, 2003 compared to $37.7 million, or 12.0%, in the 2002 period. The
decrease in gross profit is primarily due to the 32.0% to 37.0% increases in the
cost of our major chemical raw materials during the second half of 2002.
Although we have attempted to increase customer selling prices, we have been
able to recover only a portion of the increased costs of raw materials. Our
chemical suppliers have announced further chemical cost increases of
approximately 10.0% to take effect in the second quarter of 2003. We are
implementing additional customer selling price increases that we expect to fully
offset the most recent cost increases if allowed by market conditions.
Income from operations for the quarter ended March 30, 2003 was $10.8
million, or 3.3% of net sales, which represented a 49.7% decrease from the $21.5
million, or 6.9% of net sales, reported during the comparable 2002 period. In
addition to the reduced gross profit discussed above, the reduction in operating
income is also attributable to a $2.8 million, or 15.7%, increase in selling,
general and administrative expenses. This increase was primarily due to
increased corporate expenses related to professional fees.
Foam Products
Foam Products net sales for the quarter ended March 30, 2003 increased 0.5%
to $118.1 million from $117.5 million in the comparable 2002 period. Increases
in selling prices to customers were largely offset by decreases in volume.
Income from operations decreased 77.8%, to $2.2 million in the quarter ended
March 30, 2003 from $9.8 million in the comparable 2002 period as selling price
increases were more than offset by higher raw material costs, lower volumes and
higher short-term operating and corporate overhead costs. Income from operations
was 1.8% of net sales in 2003, down from 8.3% in 2002.
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Carpet Cushion Products
Carpet Cushion Products net sales for the quarter ended March 30, 2003
decreased 7.3% to $48.9 million from $52.8 million in the comparable 2002
period. Selling price increases were more than offset by declines in volume. We
closed several carpet cushion facilities during 2002 and 2003. Loss from
operations was $3.1 million in the quarter ended March 30, 2003 compared to a
$3.0 million loss in the comparable 2002 period as higher selling prices were
offset by the impact of higher chemical and energy costs and lower sales volume.
The loss from operations represented 6.4% of net sales in 2003 and 5.7% of net
sales in 2002.
Automotive Products
Automotive Products net sales for the quarter ended March 30, 2003
increased 16.1% to $121.1 million from $104.4 million in the comparable 2002
period. The improvement primarily reflected higher sales of laminated and molded
products and plant shutdowns by major customers in the first quarter of 2002.
Income from operations decreased 18.4% to $7.0 million in the 2003 period
compared to $8.5 million in the 2002 period, due to unfavorable sales mix,
higher raw material costs and higher corporate overhead expenses. Income from
operations represented 5.7% of net sales in 2003 and 8.2% of net sales in 2002.
Technical Products
Net sales for Technical Products for the quarter ended March 30, 2003
increased 4.7% to $32.4 million from $30.9 million in the comparable 2002
period. Income from operations increased 22.9% to $7.6 million in the 2003
period compared to $6.2 million in the 2002 period. The improvement was due to
increased sales of high-end products and lower operating expenses, partially
offset by higher raw material costs. Income from operations represented 23.4% of
net sales in 2003 compared to 19.9% in 2002.
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 decrease in net sales associated
with this segment resulted from the Company's Mexico City operations. The loss
from operations primarily reflects corporate expenses not allocated to operating
segments and reflects generally higher corporate expenses in 2003. Additionally,
during the quarter ended March 31, 2002, we recorded restructuring, impairment
and other credits of $1.5 million, primarily from the reimbursement of certain
lease costs.
Interest and Debt Issuance Expense
Interest and debt issuance expense was $19.1 million in the quarter ended
March 30, 2003, which represented a 2.6% increase from the comparable 2002
period expense of $18.6 million. The 2002 period included a $4.3 million charge
relating to the write off of debt issuance costs as a result of an early
extinguishment of debt, which was previously reported as an extraordinary item.
Higher debt levels, higher effective interest rates and higher amortization of
debt issuance costs all contributed to the increase in 2003. As discussed in
Note 7 to the condensed consolidated financial statements, a provision of the
Amended Credit Facility requires an incremental interest rate margin adjustment
based on the debt leverage ratio, as defined. During the quarter ending June 29,
2003, interest expense from all borrowings under the Amended Credit Facility
will increase from two 25 basis point adjustments due to calculated debt
leverage ratios of more than 5.00 to 1.
Income from Equity Interest in Joint Ventures
The income from an equity interest in an Asian joint venture was $0.4
million for the quarter ended March 30, 2003 compared to income of $0.7 million
in the 2002 period.
19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Other Income (Expense), Net
Other expense, net was $1.2 million for the quarter ended March 30, 2003
compared to $0.4 million of other income for the quarter ended March 31, 2002.
The 2003 period includes foreign currency transaction losses of $1.1 million
compared to foreign currency transaction gains of $0.6 million in 2002.
Income Tax Expense
The effective tax rate of 21.4% in 2002 reflected the partial reversal of
the deferred income tax asset valuation allowance recognized in 1998. The
valuation allowance was reduced to reflect the utilization of Federal loss
carryforwards that reduced the current tax component of the Federal tax
provision. Additionally, the valuation allowance was reduced to offset the net
deferred Federal tax liability generated in 2002. The effective tax rate of
12.1% in 2003 reflects a high percentage of forecasted income from equity
interests in joint ventures, which is considered to be permanently invested by
the Company. Accordingly, no deferred tax liabilities are recognized on such
income and the 2003 effective tax rate is below the Federal statutory rate.
Cumulative Effect of Accounting Changes
The quarter ended March 31, 2002, includes a goodwill impairment charge of
$72.0 million as a result of the adoption of SFAS No. 142. Also, in the quarter
ended March 31, 2002, we recorded a $1.3 million credit related to an excess
over cost arising from a business combination in accordance with SFAS No. 141.
Liquidity and Capital Resources
Our operations are conducted through our wholly-owned subsidiary, Foamex
L.P. Our liquidity requirements consist primarily of the operating cash
requirements of Foamex L.P.
Foamex L.P.'s operating cash requirements consist principally of accounts
receivable, inventory and accounts payable requirements, scheduled payments of
interest on outstanding indebtedness, capital expenditures and employee benefit
plans. We believe 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. Scheduled principal payments on Foamex L.P.'s
debt are not significant until the second half of 2004. If Foamex L.P.'s cash
flow is not adequate to meet liquidity requirements, there would be a material
adverse effect on our financial position as well as our ability to continue as a
going concern. The ability of Foamex L.P. to make distributions to us is
restricted by the terms of its financing agreements. We expect to have only
limited access to the cash flow generated by Foamex L.P. for the foreseeable
future.
Cash and cash equivalents were $3.1 million at March 30, 2003 compared to
$4.5 million at December 29, 2002. Working capital at March 30, 2003 was $138.8
million and the current ratio was 1.6 to 1 compared to working capital at
December 29, 2002 of $136.7 million and a current ratio of 1.7 to 1. The
increase in working capital is primarily due to increases in accounts receivable
and inventories offset by an increase in accounts payable.
Total debt at March 30, 2003 was $742.9 million, up $4.3 million from
December 29, 2002. As of March 30, 2003, there were $56.9 million of revolving
credit borrowings under the Foamex L.P. credit facility with $22.5 million
available for borrowings and $20.6 million of letters of credit outstanding.
Foamex Canada Inc. ("Foamex Canada") did not have any outstanding borrowings as
of March 30, 2003 under Foamex Canada's revolving credit agreement, with unused
availability of approximately $5.4 million.
In 2002, Foamex L.P. purchased and retired $49.0 million of the 13 1/2%
senior subordinated notes, including unamortized debt premium of $2.5 million,
and $1.5 million of the 9 7/8% senior subordinated notes for a total purchase
price of $48.5 million.
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. is
subject to minimum net worth, minimum EBDAIT, as defined, and maximum capital
expenditure covenants through periods ending December 28, 2003. The minimum
EBDAIT
20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
covenant is tested monthly on a cumulative basis beginning with December 2002.
Foamex L.P. was in compliance with the revised covenants at December 29, 2002
and throughout the quarter ended March 30, 2003. 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. All of the financial covenants were
established based on a business plan provided to the lenders. In addition,
borrowings under the Amended Credit Facility are subject to a borrowing base
calculation, which could limit borrowings under the revolving credit facility to
less than the maximum commitment. As of March 30, 2003, the borrowing base
calculation does not limit borrowings under the Amended Credit Facility.
On February 26, 2003, Standard and Poor's Rating Services ("S&P") announced
that it had lowered its corporate credit rating on Foamex L.P. from "B+" to "B".
In their announcement, S&P cited their view that our weak operating performance,
higher raw material costs, and a sluggish domestic economy, which if not
reversed will likely elevate near-term liquidity concerns. The S&P action could
have a negative impact on the cost of our future borrowings, if any, and the
extension of trade credit.
Foamex L.P.'s minimum EBDAIT covenants have higher thresholds in the second
half of 2003. Management's current plans to achieve EBDAIT covenant compliance
require customer selling price increases in response to higher raw material
costs, successful implementation of on-going cost savings initiatives, improved
operating efficiencies, improved working capital management and reduced capital
expenditures. Management is also continuing to evaluate strategic alternatives
in an effort to reduce the cost and improve the maturity structure of our debt.
There can be no assurance that we will be successful in achieving our plans or
complying with the amended covenants, as there are a number of factors beyond
our control, including raw material cost changes and customer acceptances of
selling price increases that are necessary for us to be successful.
Additionally, compliance with the financial covenants may not be met if business
conditions are not as anticipated or other unforeseen events impact results
unfavorably. In the event that such noncompliance appears likely, or occurs, we
will seek the lenders' further approval of amendments to, or waivers of, such
financial covenants. Historically, we have been able to renegotiate financial
covenants and/or obtain waivers. Management currently believes that obtaining
waivers and/or amendments in the future may be difficult, or not possible 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. We 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 our financial position and could impair our ability
to continue as a going concern.
During 2002, we entered into an employment agreement with one director and
a consulting agreement with another director. Payments under these agreements
were to aggregate at least $0.7 million and $0.2 million, respectively, on an
annual basis. The employment agreement with the director was terminated
effective January 31, 2003 resulting in severance and other payments to the
director aggregating $0.6 million.
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. filed the registration statement,
but it was not effective until January 30, 2003 and therefore Foamex L.P. was
liable for liquidated damages from September 23, 2002 until January 30, 2003.
The liquidated damages were 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. The amount accrued for liquidated damages at
March 30, 2003 was $0.3 million. The liquidated damages were paid, as required,
on April 1, 2003.
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 its 10 3/4% Senior Secured Notes due April 1, 2009. The risk being
hedged in these transactions was the change in fair value of the 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, including $3.6 million
realized through lower effective interest
21
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
rates while the swap transactions were in effect. The unwinding resulted in a
deferred credit of $14.8 million, which is being amortized over the term of the
10 3/4% Senior Secured Notes, using the effective interest rate method.
Cash Flow from Operating Activities
Cash provided by operating activities in the quarter ended March 30, 2003
was $5.7 million compared to cash used of $24.9 million in the quarter ended
March 31, 2002. Accounts receivable and inventories increased by $18.6 million
and $12.9 million, respectively, in the quarter ended March 30, 2003, while
accounts payable and cash overdrafts increased by a net $26.7 million.
Cash Flow from Investing Activities
Cash used for investing activities totaled $3.4 million for the quarter
ended March 30, 2003. Cash requirements included capital expenditures of $2.2
million and capitalized software development costs of $1.2 million. In the
quarter ended March 31, 2002, cash used for investing activities was $6.4
million, which consisted of capital expenditures. The estimated capital
expenditures for the full year 2003 are expected to be approximately $15.0
million.
Cash Flow from Financing Activities
Cash used for financing activities was $3.7 million for the quarter ended
March 30, 2003 compared to $50.4 million of cash provided in the comparable
period of 2002. Cash provided for the 2002 period primarily reflected the
Company's March 25, 2002 refinancing.
Environmental Matters
We are subject to extensive and changing environmental laws and
regulations. Expenditures to date in connection with our compliance with such
laws and regulations did not have a material adverse effect on our operations,
financial position, capital expenditures or competitive position. The amount of
liabilities recorded in connection with environmental matters as of March 30,
2003 was $2.7 million. Although it is possible that new information or future
developments could require us to reassess its potential exposure to all pending
environmental matters, including those described in Note 12 to our condensed
consolidated financial statements, we believe that, based upon all currently
available information, the resolution of all such pending environmental matters
will not have a material adverse effect on our operations, financial position,
capital expenditures or competitive position.
Market Risk
The Company has debt securities with variable interest rates subject to
market risk for changes in interest rates. On March 30, 2003, indebtedness with
variable interest rates aggregated $226.1 million. On an annualized basis, if
the interest rates on these debt instruments increased by 1.0%, interest expense
would increase by approximately $2.3 million.
Forward-Looking Statements
This report contains forward-looking statements and should be read in
conjunction with the discussion regarding forward-looking statements set forth
in our Annual Report on Form 10-K for the year ended December 29, 2002.
22
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
See the "Market Risk" section under Item 2, Management's Discussion and
Analysis of Financial Condition and Results of Operations.
ITEM 4. CONTROLS AND PROCEDURES.
The Company's Chief Executive Officer and Chief 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 of this Quarterly Report on Form 10-Q (the "Evaluation Date"). Based
on such evaluation, the Chief Executive Officer and the 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. Since the Evaluation Date, there have been no significant changes in
the Company's internal controls, or in other factors that could significantly
affect such controls.
23
Part II - Other Information.
Item 1. Legal Proceedings.
Reference is made to the description of the legal proceedings
contained in the Company's Annual Report on Form 10-K for the year
ended December 29, 2002. The information from Note 12 to the condensed
consolidated financial statements is incorporated herein by reference.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
10.11.13+ Severance Agreement and Release by and between the Company
and Peter Johnson, dated November 21, 2002.
10.11.14+ Change in Control Protection Agreement by and between the
Company and Marshall S. Cogan, dated April 24, 2003
10.11.15+ Change in Control Protection Agreement by and between the
Company and Thomas E. Chorman, dated April 24, 2003
10.11.16+ Change in Control Protection Agreement by and between the
Company and John V. Tunney, dated April 24, 2003
99.1 Certification of Chief Executive Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification of Chief Financial Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
+ Management contract or compensatory plan or arrangement.
(b) The Company has not filed any Current Reports on Form 8-K for the
quarter ended March 30, 2003:
24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FOAMEX INTERNATIONAL INC.
Date: May 14, 2003 By: /s/ K. Douglas Ralph
------------------------------------
K. Douglas Ralph
Executive Vice President and
Chief Financial Officer
(Duly Authorized Officer)
Date: May 14, 2003 By: /s/ Bruno Fontanot
------------------------------------
Bruno Fontanot
Senior Vice President - Finance and
Chief Accounting Officer
25
CERTIFICATION
I, Thomas E. Chorman, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Foamex International
Inc.;
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: May 14, 2003
/s/ Thomas E. Chorman
- --------------------------------------
Thomas E. Chorman
President and Chief Executive Officer
26
CERTIFICATION
I, K. Douglas Ralph, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Foamex International
Inc.;
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: May 14, 2003
/s/ K. Douglas Ralph
- --------------------------------------
K. Douglas Ralph
Executive Vice President and
Chief Financial Officer
27