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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 29, 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). [X]
The number of shares of the registrant's common stock outstanding as of August
8, 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 and
Two Quarters Ended June 29, 2003 and June 30, 2002 3
Condensed Consolidated Balance Sheets (unaudited) as of June 29, 2003 and
December 29, 2002 4
Condensed Consolidated Statements of Cash Flows (unaudited) - Two Quarters
Ended June 29, 2003 and June 30, 2002 5
Notes to Condensed Consolidated Financial Statements (unaudited) 6
Summarized Financial Information of Foamex Asia Company Limited 18
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations. 19
Item 3. Quantitative and Qualitative Disclosures about Market Risk. 27
Item 4. Controls and Procedures. 27
Part II. Other Information
Item 1. Legal Proceedings. 28
Item 4. Submission of Matters to a Vote of Security Holders. 28
Item 6. Exhibits and Reports on Form 8-K. 28
Signatures 29
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
Quarters Ended Two Quarters Ended
-------------------------- -------------------------
June 29, June 30, June 29, June 30,
2003 2002 2003 2002
----------- ----------- ----------- ---------
(thousands, except per share amounts)
NET SALES $334,344 $345,898 $662,114 $659,960
COST OF GOODS SOLD 294,171 298,951 590,661 575,335
-------- -------- -------- --------
GROSS PROFIT 40,173 46,947 71,453 84,625
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 19,818 21,796 40,273 39,479
RESTRUCTURING, IMPAIRMENT AND OTHER
CHARGES (CREDITS) (860) - (860) (1,538)
-------- -------- -------- --------
INCOME FROM OPERATIONS 21,215 25,151 32,040 46,684
INTEREST AND DEBT ISSUANCE EXPENSE 19,378 17,338 38,489 35,967
INCOME FROM EQUITY INTEREST IN JOINT VENTURES 513 398 879 1,128
OTHER EXPENSE, NET (605) (1,588) (1,848) (1,238)
-------- -------- -------- --------
INCOME (LOSS) BEFORE BENEFIT FOR
INCOME TAXES AND CUMULATIVE EFFECT OF
ACCOUNTING CHANGES 1,745 6,623 (7,418) 10,607
BENEFIT FOR INCOME TAXES (911) (74,822) (2,017) (73,971)
-------- -------- -------- --------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF
ACCOUNTING CHANGES 2,656 81,445 (5,401) 84,578
CUMULATIVE EFFECT OF ACCOUNTING CHANGES - - - (70,647)
-------- -------- -------- --------
NET INCOME (LOSS) $ 2,656 $ 81,445 $ (5,401) $ 13,931
======== ======== ======== ========
EARNINGS PER SHARE - BASIC
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF
ACCOUNTING CHANGES $ 0.11 $ 3.35 $ (0.22) $ 3.50
CUMULATIVE EFFECT OF ACCOUNTING CHANGES - - - (2.92)
-------- -------- -------- --------
NET INCOME (LOSS) $ 0.11 $ 3.35 $ (0.22) $ 0.58
======== ======== ======== ========
EARNINGS PER SHARE - DILUTED
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF
ACCOUNTING CHANGES $ 0.10 $ 3.04 $ (0.22) $ 3.18
CUMULATIVE EFFECT OF ACCOUNTING CHANGES - - - (2.66)
-------- -------- -------- --------
NET INCOME (LOSS) $ 0.10 $ 3.04 $ (0.22) $ 0.52
======== ======== ======== ========
WEIGHTED AVERAGE NUMBER OF SHARES - BASIC 24,407 24,282 24,379 24,198
======== ======== ======== ========
WEIGHTED AVERAGE NUMBER OF SHARES - DILUTED 25,914 26,783 24,379 26,559
======== ======== ======== ========
The accompanying notes are an integral part of the unaudited condensed
consolidated financial statements.
3
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
June 29, 2003 December 29, 2002
------------- -----------------
ASSETS (unaudited)
CURRENT ASSETS (thousands, except share data)
Cash and cash equivalents $ 8,032 $ 4,524
Accounts receivable, net of allowances of $10,552 in 2003
and $10,311 in 2002 189,596 191,546
Inventories 97,591 98,010
Deferred income taxes 16,489 21,011
Other current assets 19,656 22,558
-------- ---------
Total current assets 331,364 337,649
-------- ---------
Property, plant and equipment 420,248 418,569
Less accumulated depreciation (246,260) (236,531)
-------- ---------
NET PROPERTY, PLANT AND EQUIPMENT 173,988 182,038
GOODWILL 126,095 125,321
DEBT ISSUANCE COSTS, net of accumulated
amortization of $18,913 in 2003 and $14,079 in 2002 31,993 36,827
DEFERRED INCOME TAXES 103,062 97,341
SOFTWARE, net of accumulated amortization of $3,520 in
2003 and $2,634 in 2002 9,568 8,254
OTHER ASSETS 27,028 26,147
-------- ---------
TOTAL ASSETS $803,098 $ 813,577
======== =========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES
Current portion of long-term debt $ 23 $ 46
Accounts payable 100,311 87,400
Accrued employee compensation and benefits 22,699 26,330
Accrued interest 13,975 14,173
Accrued customer rebates 15,599 18,813
Cash overdrafts 14,569 17,801
Other accrued liabilities 25,663 36,381
-------- ---------
Total current liabilities 192,839 200,944
LONG-TERM DEBT 736,081 738,540
ACCRUED EMPLOYEE BENEFITS 51,311 48,022
OTHER LIABILITIES 13,682 15,804
-------- ---------
Total liabilities 993,913 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 27,898,149 shares in 2003 and 27,839,658 shares in 2002 279 278
Additional paid-in capital 102,154 101,972
Accumulated deficit (221,644) (216,243)
Accumulated other comprehensive loss (34,618) (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 (190,815) (189,733)
-------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY $803,098 $ 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)
Two Quarters Ended
------------------------
June 29, June 30,
2003 2002
-------- --------
OPERATING ACTIVITIES (thousands)
Net income (loss) $(5,401) $ 13,931
Adjustments to reconcile net income (loss) to net cash provided
by (used for) operating activities:
Cumulative effect of accounting changes - 70,647
Depreciation and amortization 13,250 16,231
Amortization and write off of debt issuance costs, debt premium
and debt discount 2,877 6,389
Deferred income taxes (1,577) (77,334)
Other operating activities 2,181 88
Changes in operating assets and liabilities, net 2,116 (58,617)
------- --------
Net cash provided by (used for) operating activities 13,446 (28,665)
------- --------
INVESTING ACTIVITIES
Capital expenditures (3,501) (10,085)
Other investing activities (2,197) (1,027)
------- --------
Net cash used for investing activities (5,698) (11,112)
------- --------
FINANCING ACTIVITIES
Repayments of revolving loans (979) (125,000)
Proceeds from long-term debt - 356,590
Repayments of long-term debt (29) (141,394)
Repayments of long-term debt - related party - (31,590)
Increase (decrease) in cash overdrafts (3,232) 42,294
Debt issuance costs - (25,491)
Other financing activities - 3,478
------- --------
Net cash provided by (used for) financing activities (4,240) 78,887
------- --------
Net increase in cash and cash equivalents 3,508 39,110
Cash and cash equivalents at beginning of period 4,524 15,064
------- --------
Cash and cash equivalents at end of period $ 8,032 $ 54,174
======= ========
Supplemental Information:
Cash paid for interest $35,810 $ 22,845
======= ========
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
considered necessary to present fairly the Company's consolidated financial
position and results of operations, have been included. As of June 29, 2003, the
Company revised its estimate of costs under its self-insured medical and dental
plans based on recent actual claims experience. The change in estimate reduced
the accrual balance and decreased cost of goods sold by approximately $1.3
million in the quarter and two quarters ended June 29, 2003. 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 statements of operations for the quarter and two quarters ended
June 30, 2002 have been reclassified to conform to the current 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
previously reported in the two quarters ended June 30, 2002 to interest and debt
issuance expense of $4.3 million with the related tax benefit of $1.7 million
included in the provision for income taxes.
2. EARNINGS PER SHARE
The following table shows the amounts used in computing earnings per share.
Quarters Ended Two Quarters Ended
--------------------- -----------------------
June 29, June 30, June 29, June 30,
2003 2002 2003 (a) 2002
-------- -------- -------- --------
(thousands, except per share amounts)
Basic earnings per share:
Income (loss) before cumulative effect of
accounting changes $2,656 $81,445 $(5,401) $ 84,578
Cumulative effect of accounting changes - - - (70,647)
------ ------- ------- --------
Net income (loss) $2,656 $81,445 $(5,401) $ 13,931
====== ======= ======= ========
Weighted average common stock
outstanding 24,407 24,282 24,379 24,198
====== ======= ======= ========
6
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
2. EARNINGS PER SHARE (continued)
Quarters Ended Two Quarters Ended
--------------------- -----------------------
June 29, June 30, June 29, June 30,
2003 2002 2003 (a) 2002
-------- -------- -------- --------
(thousands, except per share amounts)
Income (loss) before cumulative effect of
accounting changes $ 0.11 $ 3.35 $ (0.22) $ 3.50
Cumulative effect of accounting changes - - - (2.92)
------ ------- ------- --------
Net income (loss) $ 0.11 $ 3.35 $ (0.22) $ 0.58
====== ======= ======= ========
Diluted earnings per share:
Income (loss) before cumulative effect of
accounting changes $2,656 $81,445 $(5,401) $ 84,578
Cumulative effect of accounting changes - - - (70,647)
------ ------- ------- --------
Net income (loss) $2,656 $81,445 $(5,401) $ 13,931
====== ======= ======= ========
Weighted average common stock
outstanding 24,407 24,282 24,379 24,198
Incremental shares resulting from
Stock options (b) 7 1,001 - 861
Convertible preferred stock 1,500 1,500 - 1,500
------ ------- ------- --------
Adjusted weighted average shares 25,914 26,783 24,379 26,559
====== ======= ======= ========
Income (loss) before cumulative effect of
accounting changes $ 0.10 $ 3.04 $ (0.22) $ 3.18
Cumulative effect of accounting changes - - - (2.66)
------ ------- ------- --------
Net income (loss) $ 0.10 $ 3.04 $ (0.22) $ 0.52
====== ======= ======= ========
(a) There is no dilution resulting from potential incremental shares in the two
quarters ended June 29, 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 4,375,638 and 250,166 in the quarters
ended June 29, 2003 and June 30, 2002, respectively and 4,411,753 and
257,750 in the two quarters ended June 29, 2003 and June 30, 2002,
respectively.
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 Two Quarters Ended
--------------------- -----------------------
June 29, June 30, June 29, June 30,
2003 2002 2003 (a) 2002
-------- -------- -------- --------
(thousands, except per share amounts)
Net income (loss) as reported $2,656 $81,445 $(5,401) $ 13,931
Add: Stock-based employee compensation
expense included in reported net income
(loss), net of tax provision (benefit) 1 1 2 36
Deduct: Total stock-based compensation
expense determined under fair value
based method, net of tax benefit (36) (383) (497) (764)
------ ------- ------- --------
Proforma net income (loss) $2,621 $81,063 $(5,896) $ 13,203
====== ======= ======= ========
Basic income (loss) per share
As reported $ 0.11 $ 3.35 $ (0.22) $ 0.58
Proforma $ 0.11 $ 3.34 $ (0.24) $ 0.55
Diluted income (loss) per share
As reported $ 0.10 $ 3.04 $ (0.22) $ 0.52
Proforma $ 0.10 $ 3.03 $ (0.24) $ 0.50
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 two quarters
ended June 30, 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 two quarters ended June 30, 2002.
Goodwill at June 29, 2003 increased by $0.8 million from December 29, 2002
as a result of foreign currency translation adjustments.
8
5. RESTRUCTURING, IMPAIRMENT AND OTHER CHARGES (CREDITS)
During the quarter ended June 29, 2003, the Company recorded a
restructuring credit of $0.9 million from the reversal of prior restructuring
charges no longer required, net of a $0.4 million restructuring charge reported
in the Other segment as a result of an employee termination plan for
approximately 300 employees at its Mexico City operations. Approximately 250 of
these employees were terminated in the quarter ended June 29, 2003.
During the two quarters ended June 30, 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 tables set forth the components of the Company's
restructuring accruals and activity for the quarter and two quarters ended June
29, 2003:
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
5. RESTRUCTURING, IMPAIRMENT AND OTHER CHARGES (CREDITS) (continued)
Plant Closure Personnel
Total and Leases Reductions Other
----- ------------- ---------- -----
(millions)
Balance at March 30, 2003 $18.8 $11.3 $5.7 $1.8
Adjustment (0.9) (0.1) (0.6) (0.2)
Cash spending (2.7) (1.0) (1.4) (0.3)
----- ----- ---- ----
Balance at June 29, 2003 $15.2 $10.2 $3.7 $1.3
===== ===== ==== ====
Balance at December 29, 2002 $22.8 $12.6 $8.2 $2.0
Adjustment (0.9) (0.1) (0.6) (0.2)
Cash spending (6.7) (2.3) (3.9) (0.5)
------ ----- ---- ----
Balance at June 29, 2003 $15.2 $10.2 $3.7 $1.3
===== ===== ==== ====
The Company expects to spend approximately $8.9 million during the twelve
months ending June 27, 2004, with the balance to be spent through 2012.
6. INVENTORIES
The components of inventory are listed below.
June 29, December 29,
2003 2002
-------- ------------
(thousands)
Raw materials and supplies $59,531 $60,588
Work-in-process 17,980 16,737
Finished goods 20,080 20,685
------- -------
Total $97,591 $98,010
======= =======
7. LONG-TERM DEBT
The components of long-term debt are listed below.
June 29, 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) 50,844 51,823
10 3/4% Senior secured notes due 2009 (2) (4) 313,216 314,237
9 7/8% Senior subordinated notes due 2007 (2) 148,500 148,500
13 1/2% Senior subordinated notes due 2005 (includes
$2,011 and $2,486 of unamortized debt premium) (2) 53,596 54,071
Industrial revenue bonds (3) 7,000 7,000
Other (net of unamortized debt discount of $116 in 2003
and $137 in 2002) 760 767
-------- --------
736,104 738,586
Less current portion 23 46
-------- --------
Long-term debt $736,081 $738,540
======== ========
9
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
7. LONG-TERM DEBT (continued)
(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 $13.2 million in 2003 and $14.2 million in 2002 of deferred
credits 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) Terms 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.
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 June 29, 2003, Foamex L.P. had available
borrowings of $28.6 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
10
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
7. LONG-TERM DEBT (continued)
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 June 29, 2003 for Term
Loans B, C, D, E and F ranged between 7.50% and 7.88%. The effective average
interest rate for revolving loans at June 29, 2003 was 7.86%. The rates increase
25 basis points each quarter that Foamex L.P.'s leverage ratio, as defined,
exceeds 5.00 to 1.00. Once the leverage ratio is reduced below this level, the
cumulative amount of any 25 basis point adjustment to the interest rates on
borrowings are reset to zero. At June 29, 2003, the calculated leverage ratio
was 11.12 to 1.00.
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.
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 was liable for liquidated damages from
September 23, 2002 until the date the registration statement became effective.
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. The liquidated
damages of $0.3 million were paid on April 1, 2003.
11
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
7. LONG-TERM DEBT (continued)
Effective May 1, 2002, the Company completed a series of interest rate swap
transactions with notional amounts aggregating $300.0 million. The Company
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 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 redemption is at
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. At June 29, 2003 the redemption price was 103.292% 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 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 June 29, 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
June 29, 2003, the interest rate was 1.25% on the $1.0 million bond and 1.00% 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 $10.9 million at June 29, 2003.
12
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
7. LONG-TERM DEBT (continued)
Other
Other debt includes a non-interest bearing promissory note with a principal
amount of $0.9 million at June 29, 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 June 29, 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 coverage and leverage
ratios, as defined. Under the most restrictive of the distribution restrictions,
the Company could be paid by its subsidiaries, as of June 29, 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 two quarters ended June 29, 2003. At June
29, 2003, Foamex L.P. exceeded the minimum net worth and minimum EBDAIT
covenants by $10.2 million and $6.7 million, respectively, and its capital
expenditures were $6.8 million less than the permitted maximum. 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 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 June 29, 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 continued successful implementation of overall cost savings initiatives
and specific business improvement plans. Management is also continuing to
evaluate strategic alternatives in an effort to improve the Company's debt
position.
13
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
7. LONG-TERM DEBT (continued)
Maturities of Long-Term Debt
Scheduled maturities of long-term debt as of June 29, 2003 are shown below
(thousands):
Two quarters ending December 28, 2003 $ 17
2004 33,795
2005 159,237
2006 73,444
2007 148,500
Thereafter 306,000
--------
720,993
Unamortized debt premium/discount and fair value adjustment, net 15,111
--------
Total $736,104
========
8. INCOME TAXES
The estimated effective tax rate of 27.2% for the two quarters ended June
29, 2003 reflects a high percentage of forecasted income from equity interest 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
estimated effective tax rate for the two quarters ended June 29, 2003, is below
the Federal statutory rate.
The estimated effective tax rate was revised during the quarter ended June
29, 2003, to reflect an updated annual forecast of earnings. Based on the
revised earnings forecast, the annual estimated effective tax rate was higher
compared to the estimate from the first quarter of 2003. The income tax
provision for the quarter ended June 29, 2003, includes an adjustment for the
higher rate, which resulted in a net income tax benefit for the quarter.
During the two quarters ended June 30, 2002, the Company determined that,
based on the weight of available evidence including improved financial results
for the rolling three years ended March 31, 2002, reduced NOL carryforward
limitations based on an asset appraisal report received in the quarter ended
June 30, 2002, increased projected future taxable income, and tax planning
strategies initiated in the two quarters ended June 30, 2002, it was more likely
than not that substantially all of its net deferred tax assets would be realized
in the future. Accordingly, the Company reversed a previously recorded valuation
allowance of $99.3 million. The adjustment increased net income for the two
quarters ended June 30, 2002 by $77.3 million, and decreased goodwill by $12.4
million and other comprehensive loss by $9.6 million.
9. COMPREHENSIVE INCOME (LOSS)
The components of comprehensive income (loss) are listed below.
Quarters Ended Two Quarters Ended
------------------------- -----------------------
June 29, June 30, June 29, June 30,
2003 2002 2003 2002
-------- -------- -------- -------
(thousands)
Net income (loss) $2,656 $81,445 $(5,401) $13,931
Foreign currency translation adjustments 2,569 203 4,136 34
Pension liability adjustments - 9,597 - 9,597
------ ------- ------- -------
Total comprehensive income (loss) $5,225 $91,245 $(1,265) $23,562
====== ======= ======= =======
14
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
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 $(0.9) million in the quarter and two quarters ended
June 29, 2003 and $(1.5) million in the two quarters ended June 30, 2002.
Segment results are presented below.
Carpet
Foam Cushion Automotive Technical
Products Products Products Products Other Total
-------- -------- ---------- ---------- ------- --------
(thousands)
Quarter ended June 29, 2003
Net sales $123,239 $ 54,291 $119,138 $30,616 $ 7,060 $334,344
Income (loss) from operations $ 7,295 $ (263) $ 7,027 $ 8,448 $(1,292) $ 21,215
Depreciation and amortization $ 2,839 $ 1,030 $ 904 $ 981 $ 1,352 $ 7,106
Quarter ended June 30, 2002
Net sales $119,129 $ 60,434 $123,750 $33,460 $ 9,125 $345,898
Income (loss) from operations $ 12,114 $ (1,224) $ 8,500 $ 7,661 $(1,900) $ 25,151
Depreciation and amortization $ 3,602 $ 1,586 $ 873 $ 573 $ 1,317 $ 7,951
Two quarters ended June 29, 2003
Net sales $241,290 $103,226 $240,283 $63,004 $14,311 $662,114
Income (loss) from operations $ 9,467 $ (3,381) $ 13,984 $16,020 $(4,050) $ 32,040
Depreciation and amortization $ 5,608 $ 1,975 $ 1,591 $ 1,704 $ 2,372 $ 13,250
Two quarters ended June 30, 2002
Net sales $236,611 $113,233 $228,131 $64,389 $17,596 $659,960
Income (loss) from operations $ 21,894 $ (4,218) $ 17,022 $13,824 $(1,838) $ 46,684
Depreciation and amortization $ 7,673 $ 3,479 $ 1,967 $ 1,292 $ 1,820 $ 16,231
11. RELATED PARTY TRANSACTIONS AND BALANCES
Foam Funding LLC Debt
During the two quarters ended June 30, 2002, Foamex Carpet paid $0.7
million of interest and $31.6 million of principal on a note payable to Foam
Funding LLC, a subsidiary of Trace International Holdings ("Trace").
12. COMMITMENTS AND CONTINGENCIES
Litigation - Breast Implants
As of July 29, 2003, the Company and Trace were two of multiple defendants
in actions filed on behalf of approximately 885 recipients of breast implants in
various United States federal and state courts and one Canadian provincial
court, some of which allege substantial damages, but most of which allege
unspecified damages for personal injuries of various types. Three of these cases
seek to allege claims on behalf of all breast implant recipients or other
allegedly affected parties, but no class has been approved or certified by the
court. During 1995, the Company and Trace were granted summary judgments and
dismissed as defendants from all cases in the federal
15
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
12. COMMITMENTS AND CONTINGENCIES (continued)
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 is strongly defending 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 June 29, 2003, the Company had accrued approximately $1.1 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 June 29, 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.
16
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 has reported to the appropriate state authorities that it 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. The possibility
exists 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.
17
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
SUMMARIZED FINANCIAL INFORMATION OF FOAMEX ASIA COMPANY LIMITED
(Amounts in Baht)
(unaudited)
Quarters Ended
---------------------------------
June 29, June 30,
2003 2002
----------- -----------
Net sales 344,002,602 481,339,700
=========== ===========
Net income 30,060,505 22,691,404
=========== ===========
Two Quarters Ended
---------------------------------
June 29, June 30,
2003 2002
----------- -----------
Net sales 753,908,457 954,482,431
=========== ===========
Net income 53,321,371 68,267,099
=========== ===========
As of
------------------------------------
June 29, December 31,
2003 2002
------------- -------------
Total assets 1,182,032,507 1,181,143,613
============= =============
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS FOR THE QUARTER ENDED JUNE 29, 2003 COMPARED TO THE
QUARTER ENDED JUNE 30, 2002
Carpet
Foam Cushion Automotive Technical
Products Products Products Products Other Total
-------- -------- ---------- ---------- ------- --------
(thousands)
Quarter ended June 29, 2003
Net sales $123,239 $54,291 $119,138 $30,616 $ 7,060 $334,344
Income (loss) from operations $ 7,295 $ (263) $ 7,027 $ 8,448 $(1,292) $ 21,215
Depreciation and amortization $ 2,839 $ 1,030 $ 904 $ 981 $ 1,352 $ 7,106
Income (loss) from operations
as a percentage of net sales 5.9% (0.5)% 5.9% 27.6% n.m.* 6.3%
Quarter ended June 30, 2002
Net sales $119,129 $60,434 $123,750 $33,460 $ 9,125 $345,898
Income (loss) from operations $ 12,114 $(1,224) $ 8,500 $ 7,661 $(1,900) $ 25,151
Depreciation and amortization $ 3,602 $ 1,586 $ 873 $ 573 $ 1,317 $ 7,951
Income (loss) from operations
as a percentage of net sales 10.2% (2.0)% 6.9% 22.9% n.m.* 7.3%
* not meaningful
Income from Operations
Net sales for the quarter ended June 29, 2003 decreased 3.3% to $334.3
million from $345.9 million in the quarter ended June 30, 2002. An increase in
Foam Products net sales was more than offset by decreases in the other segments.
The gross profit margin was $40.2 million, or 12.0%, in the quarter ended
June 29, 2003 compared to $46.9 million, or 13.6%, in the 2002 period. The
decrease in gross profit is primarily due to increases in the cost of our major
chemical raw materials since the second half of 2002 that have not been fully
recovered through customer selling price increases, partially offset by a
decrease of approximately $1.3 million in our estimated liability for medical
and dental costs during the quarter ended June 29, 2003.
Income from operations for the quarter ended June 29, 2003 was $21.2
million, or 6.3% of net sales, which represented a 15.6% decrease from the $25.2
million, or 7.3% of net sales, reported during the comparable 2002 period.
Results for the 2003 period included a net restructuring, impairment and other
credit of $0.9 million, described in "Other" below. Partially offsetting the
reduced gross profit discussed above was a decrease of $2.0 million, or 9.1% in
selling, general and administrative expenses. This decrease was primarily due to
lower employee costs partially offset by higher professional fees primarily
related to information technology. We paid bonuses to certain employees in the
quarter ended June 30, 2002 as a result of our March 25, 2002 refinancing.
Foam Products
Foam Products net sales for the quarter ended June 29, 2003 increased 3.5%
to $123.2 million from $119.1 million in the comparable 2002 period. Increases
in selling prices to customers were partially offset by decreases in volume
primarily related to the closure of inefficient manufacturing facilities. Income
from operations decreased 39.8% to $7.3 million in the quarter ended June 29,
2003 from $12.1 million in the comparable 2002 period as selling price increases
were more than offset by higher raw material costs and lower volumes. Income
from operations was 5.9% of net sales in 2003, down from 10.2% in 2002.
19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Carpet Cushion Products
Carpet Cushion Products net sales for the quarter ended June 29, 2003
decreased 10.2% to $54.3 million from $60.4 million in the comparable 2002
period. Selling price increases were more than offset by declines in volume as
we closed several carpet cushion facilities during 2002 and 2003 to focus this
business on more profitable markets. The loss from operations of $0.3 million in
the quarter ended June 29, 2003 was less than the $1.2 million loss from
operations in the comparable 2002 period primarily as a result of our efforts to
streamline the cost structure of this segment. The loss from operations
represented 0.5% of net sales in 2003 and 2.0% of net sales in 2002.
Automotive Products
Automotive Products net sales for the quarter ended June 29, 2003 decreased
3.7% to $119.1 million from $123.8 million in the comparable 2002 period as a
result of lower volumes. Income from operations decreased 17.3% to $7.0 million
compared to $8.5 million in the comparable 2002 period primarily due to the
lower sales and higher raw material costs. Income from operations represented
5.9% of net sales in 2003 and 6.9% of net sales in 2002.
Technical Products
Net sales for Technical Products for the quarter ended June 29, 2003
decreased 8.5% to $30.6 million from $33.5 million in the comparable 2002 period
primarily due to lower volumes of commodity products. Income from operations
increased 10.3% to $8.4 million in the 2003 period compared to $7.7 million in
the 2002 period. The improvement was due to increased sales of high-end products
and lower operating expenses. Income from operations represented 27.6% of net
sales in 2003 compared to 22.9% 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 was $1.3 million in the quarter ended June 29, 2003 and $1.9
million in the quarter ended June 30, 2002 and primarily reflects corporate
expenses not allocated to operating segments.
During the quarter ended June 29, 2003, we recorded restructuring,
impairment and other credits of $0.9 million from the reversal of prior
restructuring charges no longer required, net of a $0.4 million restructuring
charge related to terminations of approximately 300 employees at our Mexico City
operations. Approximately 250 of these employees were terminated in the quarter
ended June 29, 2003.
Interest and Debt Issuance Expense
Interest and debt issuance expense was $19.4 million in the quarter ended
June 29, 2003, which represented an 11.8% increase from the comparable 2002
period expense of $17.3 million. 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.
Income from Equity Interest in Joint Ventures
The income from an equity interest in an Asian joint venture was $0.5
million for the quarter ended June 29, 2003 compared to income of $0.4 million
in the 2002 period.
20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Other Income (Expense), Net
Other expense, net was $0.6 million for the quarter ended June 29, 2003
compared to $1.6 million for the quarter ended June 30, 2002. The 2003 period
includes foreign currency transaction losses of $0.6 million compared to foreign
currency transaction losses of $1.6 million in 2002.
Income Tax Expense
As required on a quarterly basis, the estimated effective tax rate was
revised during the quarter ended June 29, 2003, to reflect an updated annual
forecast of earnings. Based on the revised earnings forecast, the annual
estimated effective tax rate was higher compared to the estimate from the first
quarter of 2003. Consequently, the income tax provision for the quarter ended
June 29, 2003, includes an adjustment for the higher rate, which resulted in a
net income tax benefit for the quarter. See the income tax expense discussion
below for the two quarters ended June 29, 2003 concerning the revised annual
effective tax rate for 2003.
During the quarter ended June 30, 2002, we determined that, based on the
weight of available evidence, including improved financial results for the
rolling three years ended March 31, 2002, reduced NOL carryforward utilization
limitations based on an asset appraisal report received in the quarter ended
June 30, 2002, projected future taxable income, and tax planning strategies
initiated in the quarter ended June 30, 2002, it was more likely than not that
substantially all of our net deferred tax assets would be realized in the
future. Accordingly, we reversed a previously recorded valuation allowance of
$99.3 million. The adjustment increased net income for the quarter ended June
30, 2002 by $77.3 million, and decreased goodwill by $12.4 million and other
comprehensive loss by $9.6 million.
RESULTS OF OPERATIONS FOR THE TWO QUARTERS ENDED JUNE 29, 2003 COMPARED TO THE
TWO QUARTERS ENDED JUNE 30, 2002
Carpet
Foam Cushion Automotive Technical
Products Products Products Products Other Total
-------- -------- ---------- ---------- ------- --------
(thousands)
Two Quarters ended June 29, 2003
Net sales $241,290 $103,226 $240,283 $63,004 $14,311 $662,114
Income (loss) from operations $ 9,467 $ (3,381) $ 13,984 $16,020 $(4,050) $ 32,040
Depreciation and amortization $ 5,608 $ 1,975 $ 1,591 $ 1,704 $ 2,372 $ 13,250
Income (loss) from operations
as a percentage of net sales 3.9% (3.3)% 5.8% 25.4% n.m.* 4.8%
Two Quarters ended June 30, 2002
Net sales $236,611 $113,233 $228,131 $64,389 $17,596 $659,960
Income (loss) from operations $ 21,894 $ (4,218) $ 17,022 $13,824 $(1,838) $ 46,684
Depreciation and amortization $ 7,673 $ 3,479 $ 1,967 $ 1,292 $ 1,820 $ 16,231
Income (loss) from operations
as a percentage of net sales 9.3% (3.7)% 7.5% 21.5% n.m.* 7.1%
* not meaningful
Income from Operations
Net sales for the two quarters ended June 29, 2003 increased 0.3% to $662.1
million from $660.0 million in the two quarters ended June 30, 2002. The
increase was primarily attributable to improved sales in Automotive Products and
Foam Products, partially offset by a decrease in Carpet Cushion Products.
The gross profit margin was $71.5 million, or 10.8%, in the two quarters
ended June 29, 2003 compared to $84.6 million, or 12.8%, in the 2002 period. The
decrease in gross profit is primarily due to increases in the cost of our major
chemical raw materials since the second half of 2002 that have not been fully
recovered through customer
21
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
selling price increases, partially offset by a decrease of approximately $1.3
million in our estimated liability for medical and dental costs during the two
quarters ended June 29, 2003.
Income from operations for the two quarters ended June 29, 2003 was $32.0
million, or 4.8% of net sales, which represented a 31.4% decrease from the $46.7
million, or 7.1% of net sales, reported during the comparable 2002 period and
was primarily due to the reduced gross profit. Results include net
restructuring, impairment and other credits of $0.9 million in 2003 and $1.5
million in 2002. Restructuring, impairment and other credits are discussed under
"Other" below.
Foam Products
Foam Products net sales for the two quarters ended June 29, 2003 increased
2.0% to $241.3 million from $236.6 million in the comparable 2002 period.
Increases in selling prices to customers and increased volumes of our consumer
products were partially offset by decreases in volume in other markets. Income
from operations decreased 56.8% to $9.5 million in the two quarters ended June
29, 2003 from $21.9 million in the comparable 2002 period. Income from
operations was negatively impacted by increased raw material prices in the two
quarters ended June 29, 2003. Income from operations was 3.9% of net sales in
2003, down from 9.3% in 2002.
Carpet Cushion Products
Carpet Cushion Products net sales for the two quarters ended June 29, 2003
decreased 8.8% to $103.2 million from $113.2 million in the comparable 2002
period. Selling price increases were more than offset by declines in volume as
we closed several carpet cushion facilities during 2002 and 2003 to focus this
business on more profitable markets. The loss from operations was $3.4 million
in the two quarters ended June 29, 2003 compared to a $4.2 million loss in the
comparable 2002 period due primarily to the higher selling prices and cost
containment from the streamlining of operations. The loss from operations
represented 3.3% of net sales in 2003 and 3.7% of net sales in 2002.
Automotive Products
Automotive Products net sales for the two quarters ended June 29, 2003
increased 5.3% to $240.3 million from $228.1 million in the comparable 2002
period. The improvement primarily reflects an inventory correction by our
customers during the first half of 2002. Income from operations decreased 17.8%
to $14.0 million compared to $17.0 million in the comparable 2002 period
primarily due to higher raw material costs. Income from operations represented
5.8% of net sales in 2003 and 7.5% of net sales in 2002.
Technical Products
Net sales for Technical Products for the two quarters ended June 29, 2003
decreased 2.2% to $63.0 million from $64.4 million in the comparable 2002 period
primarily due to lower volumes. Income from operations increased 15.9% to $16.0
million in the 2003 period compared to $13.8 million in the 2002 period. The
improvement is primarily due to increased sales of higher-end products. Income
from operations represented 25.4% of net sales in 2003 compared to 21.5% 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 was $4.1 million in the two quarters ended June 29, 2003 and
$1.8 million in the two quarters ended June 30, 2002 reflected generally higher
corporate expenses in 2003 and included restructuring and other credits
discussed below.
22
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
During the two quarters ended June 29, 2003, we recorded restructuring,
impairment and other credits of $0.9 million from the reversal of prior
restructuring charges no longer required, net of a $0.4 million restructuring
charge associated with terminations of approximately 300 employees at our Mexico
City operations. Approximately 250 of these employees were terminated in the two
quarters ended June 29, 2003.
During the two quarters ended June 30, 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 $38.5 million in the two quarters
ended June 29, 2003, which represented a 7.0% increase from the comparable 2002
period expense of $36.0 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. Higher average 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.
Income from Equity Interest in Joint Ventures
The income from an equity interest in an Asian joint venture was $0.9
million for the two quarters ended June 29, 2003 compared to income of $1.1
million in the 2002 period.
Other Income (Expense), Net
Other expense, net was $1.8 million for the two quarters ended June 29,
2003 compared to $1.2 million for the two quarters ended June 30, 2002. The 2003
period includes foreign currency transaction losses of $1.7 million compared to
foreign currency transaction losses of $1.0 million in 2002.
Income Tax Expense
The estimated effective tax rate of 27.2% for the two quarters ended June
29, 2003 reflects a high percentage of forecasted income from equity interest in
joint ventures, which is considered to be permanently invested. Accordingly, no
deferred tax liabilities are recognized on such income and the estimated
effective tax rate for the two quarters ended June 29, 2003, is below the
Federal statutory rate.
During the two quarters ended June 30, 2002, we determined that, based on
the weight of available evidence, including improved financial results for the
rolling three years ending March 31, 2002, reduced NOL carryforward utilization
limitations based on as asset appraisal report received in the quarter ended
June 30, 2002, projected future taxable income, and tax planning strategies
initiated in the two quarters ended June 30, 2002, it was more likely than not
that substantially all of our net deferred tax assets would be realized in the
future. Accordingly, we reversed a previously recorded valuation allowance of
$99.3 million. The adjustment increased net income for the two quarters ended
June 30, 2002 by $77.3 million, and decreased goodwill by $12.4 million and
other comprehensive loss by $9.6 million.
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
23
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
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 $8.0 million at June 29, 2003 compared to
$4.5 million at December 29, 2002. Working capital at June 29, 2003 was $138.5
million and the current ratio was 1.7 to 1 compared to working capital at
December 29, 2002 of $136.7 million and a current ratio of 1.7 to 1.
Total debt at June 29, 2003 was $736.1 million, down $2.5 million from
December 29, 2002. As of June 29, 2003, there were $50.8 million of revolving
credit borrowings under the Foamex L.P. credit facility with $28.6 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 June 29, 2003 under Foamex Canada's revolving credit agreement, with unused
availability of approximately $5.9 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 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 two quarters ended June 29, 2003. At June 29, 2003,
Foamex L.P. exceeded the minimum net worth and minimum EBDAIT covenants by $10.2
million and $6.7 million, respectively, and its capital expenditures were $6.8
million less than the permitted maximum. 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
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 June 29, 2003, the borrowing base calculation does not limit
borrowings under the Amended Credit Facility.
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 continued successful implementation of overall cost savings initiatives
and specific business improvement plans. Management is also continuing to
evaluate strategic alternatives in an effort to reduce the cost and improve the
maturity structure of our debt, see below. 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 any
further 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 the third quarter of 2003, we anticipate refinancing our Amended
Credit Facility by entering into a new $240.0 Million Senior Secured Credit
Facility, consisting of a $190.0 million revolving credit facility and a $50.0
million term loan with a new group of lenders and an $80.0 million term loan
facility with another lender. Both of the new facilities are expected to mature
in the second quarter of 2007. A significant portion of the proceeds
24
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
under these anticipated new facilities would be used to repay all outstanding
balances under the Foamex L.P. Amended Credit Facility (see Note 7), with the
effect of extending the maturity of approximately $213.0 million of debt that
would have been due at various times through 2006, while requiring only
approximately $25.0 million in principal payments under the proposed new
facility. The remaining proceeds would be used to fund operations, as required.
Borrowings under the new $240.0 Million Senior Secured Credit Facility
would be limited to eligible amounts of accounts receivable, inventory,
equipment and real estate which would be pledged as collateral for the related
borrowings and would bear interest based upon a margin over LIBOR. We expect the
term loan to require quarterly installment principal payments.
Borrowings under the $80.0 million term loan facility would bear interest
based upon a margin over the Prime rate.
Financial covenants under these new facilities would be limited to a
quarterly fixed charge coverage ratio and maximum annual capital expenditures.
The facilities will be subject to a maximum borrowing test. Additionally, the
termination of the Amended Credit Facility would result in a noncash charge of
approximately $13.0 million related to the write off of debt issuance cost
associated with that borrowing.
If we are successful in completing the refinancing efforts, Foamex L.P.
would no longer be subject to the covenants under the Amended Credit Facility.
However, there can be no assurance that we will be able to consummate these
transactions as currently anticipated, if at all. If we are not successful in
completing this refinancing, Foamex L.P. would continue to be subject to the
covenants and provisions of the Amended Credit Facility, described above.
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.
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. The liquidated
damages of $0.3 million were paid 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 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.
25
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
We have deferred income tax assets aggregating $119.6 million as of June
29, 2003 that primarily represent the benefit of future tax deductions and net
operating loss carryforwards available to offset future taxable income in the
U.S. In order to realize these assets, we must generate sufficient future
taxable income to offset our U. S. net operating loss carryforwards which
aggregated approximately $209.8 million at December 29, 2002. Approximately
$113.0 million of the net operating loss carryforwards expire in the years 2010
to 2012 with the majority of the remaining balance expiring in the years 2020 to
2022. If we are unable to generate sufficient taxable income to utilize the net
operating loss carryforwards on a timely basis, some or all of our deferred tax
assets will be required to be written off through a charge to operations in
future years. We evaluate the realizability of deferred tax assets on an annual
basis or if there is a significant change in circumstances that may cause a
change in our judgment about realizability of the deferred tax assets. Any
valuation allowance that may be required to be established as a result of this
evaluation process could have a material adverse effect on future results of
operations.
Cash Flow from Operating Activities
Cash provided by operating activities in the two quarters ended June 29,
2003 was $13.4 million compared to cash used of $28.7 million in the two
quarters ended June 30, 2002. Accounts receivable decreased by $2.0 million
primarily as a result of an increase in the allowance for uncollectible accounts
in the two quarters ended June 29, 2003, while accounts payable and cash
overdrafts increased by a net $9.7 million as a result of the timing of our
payments to vendors and the effect of higher payments for raw materials.
Cash Flow from Investing Activities
Cash used for investing activities totaled $5.7 million for the two
quarters ended June 29, 2003. Cash requirements included capital expenditures of
$3.5 million and capitalized software development costs of $2.2 million. In the
two quarters ended June 29, 2002, cash used for investing activities was $11.1
million which consisted principally of capital expenditures of $10.1 million.
The estimated capital expenditures for the full year 2003 are expected to be
approximately $10.0 million.
Cash Flow from Financing Activities
Cash used for financing activities was $4.2 million for the two quarters
ended June 29, 2003 compared to $78.9 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 June 29,
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 June 29, 2003, indebtedness with
variable interest rates aggregated $220.0 million. On an annualized basis, if
the interest rates on these debt instruments increased by 1.0%, interest expense
would increase by approximately $2.2 million.
26
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
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.
Accounting Change
Statement of Financial Accounting Standards No. 148, "Accounting for Stock
Based Compensation-Transition and Disclosure" ("SFAS No. 148") which is
effective for fiscal years ending after December 15, 2002, provided alternative
methods of transition for a voluntary change to the fair value based method and
requires more prominent and more frequent disclosures in the financial
statements about the effects of stock-based compensation. We elected to continue
accounting for stock-based compensation using the intrinsic value method under
Accounting Principles Board Opinion No. 25, and its related interpretations. See
Note 3 to the condensed consolidated financial statements for disclosures
related to stock compensation required by SFAS No. 148.
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.
27
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 4. Submission of Matters to a Vote of Security Holders.
The Company held its Annual Meeting of Stockholders on May 23, 2003.
Listed below is a summary of the proposals voted on.
Election of Directors
All nine of the nominees for director received the votes necessary for
election to serve for one-year terms or until their successors have
been duly elected and qualified.
Director For Withhold Authority
- ------------------- ---------------- ------------------
Marshall S. Cogan 19,894,832 1,413,978
John V. Tunney 18,986,804 2,322,006
Robert J. Hay 19,160,007 2,148,803
S. Dennis N. Belcher 20,216,091 1,092,719
Thomas E. Chorman 20,916,043 392,767
Luis J. Echarte 19,976,329 1,332,481
Stuart J. Hershon 19,737,244 1,571,566
Raymond E. Mabus, Jr. 19,975,951 1,332,859
Henry Tang 20,293,291 1,015,519
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
31.1 Certification of Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
(b) The Company filed the following Current Reports on Form 8-K for
the quarter ended June 29, 2003:
On May 15, 2003, a report under Item 12, Results of Operations
and Financial Condition concerning the disclosure of a Non-GAAP
financial measure during the Company's earnings teleconference
and furnishing a copy of the Registrant's earnings press release
for the quarter ended March 30, 2003.
28
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FOAMEX INTERNATIONAL INC.
Date: August 13, 2003 By: /s/ K. Douglas Ralph
-----------------------------------
K. Douglas Ralph
Executive Vice President and Chief
Financial Officer
(Duly Authorized Officer)
Date: August 13, 2003 By: /s/ Bruno Fontanot
-----------------------------------
Bruno Fontanot
Senior Vice President - Finance
and Chief Accounting Officer
29