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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 numbers 1-11432; 1-11436
FOAMEX L.P.
FOAMEX CAPITAL CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 05-0475617
Delaware 22-3182164
- ------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1000 Columbia Avenue
Linwood, PA 19061
- ------------------------------- ----------------------
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code: (610) 859-3000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
--- ---
Foamex L.P. and Foamex Capital Corporation meet the conditions set forth in
General Instruction H(1)(a) and (b) of Form 10-Q and are therefore filing this
form with the reduced disclosure format.
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 Foamex Capital Corporation's common stock outstanding as
of August 8, 2003 was 1,000.
FOAMEX L.P.
FOAMEX CAPITAL CORPORATION
INDEX
Page
Part I. Financial Information
Item 1. Financial Statements.
Condensed Consolidated Statements of Operations (unaudited) - Quarters and
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
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations. 23
Item 3. Quantitative and Qualitative Disclosures about Market Risk. 30
Item 4. Controls and Procedures. 30
Part II. Other Information
Item 1. Legal Proceedings. 31
Item 6. Exhibits and Reports on Form 8-K. 31
Signatures 32
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
FOAMEX L.P. 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)
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 19,600 22,490 39,789 39,677
RESTRUCTURING, IMPAIRMENT AND OTHER
CHARGES (CREDITS) (860) - (860) (1,538)
-------- -------- -------- --------
INCOME FROM OPERATIONS 21,433 24,457 32,524 46,486
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) (1,587) (1,848) (1,205)
-------- -------- -------- --------
INCOME (LOSS) BEFORE PROVISION FOR INCOME
TAXES AND CUMULATIVE EFFECT OF AN
ACCOUNTING CHANGE 1,963 5,930 (6,934) 10,442
PROVISION FOR INCOME TAXES 56 839 263 1,072
-------- -------- -------- --------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF
AN ACCOUNTING CHANGE 1,907 5,091 (7,197) 9,370
CUMULATIVE EFFECT OF AN ACCOUNTING CHANGE - - - (71,966)
-------- -------- -------- --------
NET INCOME (LOSS) $ 1,907 $ 5,091 $ (7,197) $(62,596)
======== ======== ======== ========
The accompanying notes are an integral part of the
unaudited condensed consolidated financial statements.
3
FOAMEX L.P. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
June 29, 2003 December 29, 2002
------------- -----------------
ASSETS (unaudited)
CURRENT ASSETS (thousands)
Cash and cash equivalents $ 8,030 $ 4,363
Accounts receivable, net of allowances of $10,552 in 2003
and $10,311 in 2002 189,596 191,546
Inventories 97,591 98,010
Other current assets 19,575 22,558
-------- ---------
Total current assets 314,792 316,477
-------- ---------
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
SOFTWARE, net of accumulated amortization of $3,520 in
2003 and $2,634 in 2002 9,568 8,254
OTHER ASSETS 27,547 26,366
-------- ---------
TOTAL ASSETS $683,983 $ 695,283
======== =========
LIABILITIES AND PARTNERS' DEFICIENCY
CURRENT LIABILITIES
Current portion of long-term debt $ 23 $ 46
Accounts payable 100,299 87,394
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 17,737
Other accrued liabilities 23,894 33,953
-------- ---------
Total current liabilities 191,058 198,446
LONG-TERM DEBT 736,081 738,540
ACCRUED EMPLOYEE BENEFITS 51,311 48,022
OTHER LIABILITIES 14,831 16,061
-------- ---------
Total liabilities 993,281 1,001,069
-------- ---------
COMMITMENTS AND CONTINGENCIES
PARTNERS' DEFICIENCY
General partner (247,755) (240,107)
Limited partner - -
Accumulated other comprehensive loss (52,322) (56,458)
Notes receivable from related party (9,221) (9,221)
-------- ---------
Total partners' deficiency (309,298) (305,786)
-------- ---------
TOTAL LIABILITIES AND PARTNERS' DEFICIENCY $683,983 $ 695,283
======== =========
The accompanying notes are an integral part of the
unaudited condensed consolidated financial statements.
4
FOAMEX L.P. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Two Quarters Ended
-------------------------
June 29, June 30,
2003 2002
-------- --------
OPERATING ACTIVITIES (thousands)
Net loss $(7,197) $(62,596)
Adjustments to reconcile net loss to net cash provided
by (used for) operating activities:
Cumulative effect of accounting changes - 71,966
Depreciation and amortization 13,250 16,231
Amortization and write off of debt issuance costs, debt premium
and debt discount 2,877 6,389
Other operating activities 1,320 (33)
Changes in operating assets and liabilities, net 3,499 (60,235)
------- --------
Net cash provided by (used for) operating activities 13,749 (28,278)
------- --------
INVESTING ACTIVITIES
Capital expenditures (3,501) (10,085)
Collection of note receivable from partner - 2,490
Other investing activities (2,197) (1,027)
------- --------
Net cash used for investing activities (5,698) (8,622)
------- --------
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 (3,168) 42,250
Debt issuance costs - (25,491)
Other financing activities (208) 105
------- --------
Net cash provided by (used for) financing activities (4,384) 75,470
------- --------
Net increase in cash and cash equivalents 3,667 38,570
Cash and cash equivalents at beginning of period 4,363 15,059
------- --------
Cash and cash equivalents at end of period $ 8,030 $ 53,629
======= ========
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 L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
1. ORGANIZATION AND BASIS OF PRESENTATION
Organization
Foamex L.P. operates in the flexible polyurethane and advanced polymer foam
products industry. Foamex L.P.'s operations are conducted directly and through
its wholly-owned subsidiaries, Foamex Canada Inc. ("Foamex Canada"), Foamex
Latin America, Inc. ("Foamex Mexico") and Foamex Asia, Inc. ("Foamex Asia").
Foamex Carpet Cushion, Inc. ("Foamex Carpet") was converted to a limited
liability company and was contributed to Foamex L.P. on March 25, 2002. The
contribution of Foamex Carpet has been accounted for as a merger of entities
under common control and has been recorded in a manner similar to a pooling of
interests. Accordingly, the condensed consolidated financial statements include
the accounts of Foamex Carpet for all periods presented. On December 30, 2002,
Foamex Carpet distributed certain assets, liabilities and its business to Foamex
L.P. Financial information concerning the business segments of Foamex L.P. is
included in Note 7.
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 Foamex L.P.'s consolidated financial
position and results of operations, have been included. As of June 29, 2003,
Foamex L.P. 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 Foamex L.P.'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. Foamex L.P. 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 $0.1 million
included in the provision for income taxes.
2. CUMULATIVE EFFECT OF AN ACCOUNTING CHANGE
Foamex L.P. has adopted Statement of Financial Accounting Standards No.
142, "Goodwill and Other Intangible Assets" ("SFAS No. 142"). As required by
SFAS No. 142, Foamex L.P. 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.
Goodwill at June 29, 2003 increased by $0.8 million from December 29, 2002
as a result of foreign currency translation adjustments.
3. RESTRUCTURING, IMPAIRMENT AND OTHER CHARGES (CREDITS)
During the quarter ended June 29, 2003, Foamex L.P. 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.
6
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
3. RESTRUCTURING, IMPAIRMENT AND OTHER CHARGES (CREDITS) (continued)
During the two quarters ended June 30, 2002, Foamex L.P. 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 Foamex L.P.'s
restructuring accruals and activity for the quarter and two quarters ended June
29, 2003:
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
===== ===== ==== ====
Foamex L.P. expects to spend approximately $8.9 million during the twelve
months ending June 27, 2004, with the balance to be spent through 2012.
4. 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
======= =======
5. 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) (3) 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
7
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
5. LONG-TERM DEBT (continued)
June 29, December 29,
2003 2002
-------- ------------
(thousands)
Industrial revenue bonds 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
======== ========
(1) Debt of Foamex L.P., guaranteed by Foamex International and FMXI, Inc.
(2) Debt of Foamex L.P. and Foamex Capital Corporation.
(3) 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.
8
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
5. LONG-TERM DEBT (continued)
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.
Foamex International, 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 its material tangible and
intangible assets. In addition, all of the partnership interests, all of the
capital stock or other equity interests of Foamex L.P.'s domestic subsidiaries
(including Foamex Carpet) and 65% of the capital stock or other equity interests
of Foamex L.P.'s first-tier foreign subsidiaries are pledged as part of the
security for the obligations under the Amended Credit Facility.
Borrowings under the Amended Credit Facility bear interest at a floating
rate based upon (and including a margin over), at Foamex L.P.'s 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,
9
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
5. LONG-TERM DEBT (continued)
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".
Foamex L.P. was required to cause a registration statement under the
Securities Act of 1933 to be effective within 180 days of March 25, 2002. Foamex
L.P. 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 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.
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 its 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, Foamex L.P. 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.
10
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
5. LONG-TERM DEBT (continued)
Upon the occurrence of a change of control, as defined, each holder will
have the right to require Foamex L.P. to tender for such notes at a price in
cash equal to 101% of the aggregate principal amount thereof, plus accrued and
unpaid interest, if any, thereon, if there is such a "change of control". The
notes are subordinated in right of the payment of all senior indebtedness and
are pari passu in right of payment to the 9 7/8% Senior Subordinated Notes
(described above).
Industrial Revenue Bonds ("IRBs")
IRB debt includes a $1.0 million bond that matures in 2005 and a $6.0
million bond that matures in 2013. Interest is based on a variable rate, as
defined, with options available to Foamex L.P. to convert to a fixed rate. At
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.
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
Foamex L.P.'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 Amended Credit Facility and other indebtedness
agreements contain certain covenants that limit, among other things, the ability
of Foamex L.P. (i) to pay distributions or redeem equity interests, (ii) to make
certain restrictive payments or investments, (iii) to incur additional
indebtedness or issue Preferred Equity Interests, as defined, (iv) to merge,
consolidate or sell all or substantially all of its assets or (v) to enter into
certain transactions with affiliates or related persons. In addition, certain
agreements contain provisions that, in the event of a defined change of control
or the occurrence of an undefined material adverse change in the ability of the
obligor to perform its obligations, the indebtedness must be repaid, in certain
cases, at the option of the holder. Also, Foamex L.P. is required under certain
of its agreements to maintain specified financial ratios of which the most
restrictive are the maintenance of net worth, interest coverage, fixed charge
coverage and leverage ratios, as defined. Under the most restrictive of the
distribution restrictions, as of June 29, 2003, Foamex L.P. was able to
distribute funds to its partners, only to the extent to enable its partners to
meet their tax payment liabilities and Foamex International's 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
11
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
5. LONG-TERM DEBT (continued)
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.
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 improve Foamex L.P.'s debt
position.
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
========
6. 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) $1,907 $5,091 $(7,197) $(62,596)
Foreign currency translation adjustments 2,569 203 4,136 34
------ ------ ------- --------
Total comprehensive income (loss) $4,476 $5,294 $(3,061) $(62,562)
====== ====== ======= ========
7. 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.
12
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
7. SEGMENT RESULTS (continued)
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 $ 7,381 $ (225) $ 7,074 $ 8,466 $(1,263) $ 21,433
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 $ 11,940 $ (1,363) $ 8,361 $ 7,557 $(2,038) $ 24,457
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 $ 9,649 $ (3,293) $ 14,079 $16,060 $(3,971) $ 32,524
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 $ 21,843 $ (4,258) $ 16,982 $13,796 $(1,877) $ 46,486
Depreciation and amortization $ 7,673 $ 3,479 $ 1,967 $ 1,292 $ 1,820 $ 16,231
8. 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").
9. COMMITMENTS AND CONTINGENCIES
Litigation - Breast Implants
As of July 29, 2003, Foamex L.P. 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, Foamex L.P. and Trace were granted summary judgments and
dismissed as defendants from all cases in the federal courts of the United
States and the state courts of California. Appeals for these decisions were
withdrawn and the decisions are final.
Although breast implants do not contain foam, certain silicone gel implants
were produced using a polyurethane foam covering fabricated by independent
distributors or fabricators from bulk foam purchased from Foamex L.P. or Trace.
Neither Foamex L.P. nor Trace recommended, authorized, or approved the use of
its foam for these purposes. Foamex L.P. is also indemnified by Trace for any
such liabilities relating to foam manufactured prior to October 1990. Trace's
insurance carrier has continued to pay Foamex L.P.'s litigation expenses after
Trace's filing 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
13
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
9. COMMITMENTS AND CONTINGENCIES (continued)
actions, based on management's present assessment of the merits of pending
claims, after consultation with the general counsel of Foamex L.P., and without
taking into account the indemnification provided by Trace, the coverage provided
by Trace's and Foamex L.P.'s liability insurance and potential indemnity from
the manufacturers of polyurethane covered breast implants, management believes
that it is not reasonably possible that the disposition of the matters that are
pending or that may reasonably be anticipated to be asserted will result in a
loss that is material to Foamex L.P.'s consolidated financial position, results
of operations or cash flows. If management's assessment of Foamex L.P.'s
liability relating to these actions is incorrect, these actions could have a
material adverse effect on Foamex L.P.'s financial position, results of
operations and cash flows.
Litigation - Other
During 2001, Foamex L.P. was notified by an insurance provider concerning a
dispute involving the reimbursement of liability claims paid on behalf of Trace
before 1990. The insurance provider is contending that Foamex L.P. is liable for
the claims of approximately $6.1 million. Foamex L.P. is strongly defending this
claim and considers the claim to be without merit. If management's assessment of
Foamex L.P.'s liability relating to this action is incorrect, this action could
have a material adverse effect on Foamex L.P.'s financial position, results of
operations and cash flows.
Foamex L.P. is party to various other lawsuits, both as defendant and
plaintiff, arising in the normal course of business. It is the opinion of
management that the disposition of these lawsuits will not, individually or in
the aggregate, have a material adverse effect on Foamex L.P.'s financial
position or results of operations. If management's assessment of Foamex L.P.'s
liability relating to these actions is incorrect, these actions could have a
material adverse effect on Foamex L.P.'s consolidated financial position,
results of operations and cash flows.
As of June 29, 2003, Foamex L.P. had accrued approximately $1.1 million for
litigation and other matters in addition to the environmental matters discussed
below.
Environmental and Health and Safety
Foamex L.P. is subject to extensive and changing federal, state, local and
foreign environmental laws and regulations, including those relating to the use,
handling, storage, discharge and disposal of hazardous substances, the discharge
or emission of materials into the environment, and the remediation of
environmental contamination, and as a result, are from time to time involved in
administrative and judicial proceedings and inquiries relating to environmental
matters. As of June 29, 2003, Foamex L.P. 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 Foamex L.P.'s financial position,
results of operations and cash flows.
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. Foamex
L.P. 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. Foamex
L.P. does not believe that this standard, if adopted, will require it to make
material expenditures for its Canadian plants.
14
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
9. COMMITMENTS AND CONTINGENCIES (continued)
Foamex L.P. 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, Foamex L.P. reached an
indemnification agreement with the former owner of the Morristown, Tennessee
facility. The agreement allocates the incurred and future remediation costs
between the former owner and Foamex L.P. The estimated allocation of future
costs for the remediation of this facility is not significant, based on current
known information. The former owner was Recticel Foam Corporation, a subsidiary
of Recticel s.a.
Foamex L.P. has either upgraded or closed all underground storage tanks at
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. Foamex L.P. is currently designated as a
Potentially Responsible Party, or "PRP," by the EPA or by state environmental
agencies or other PRPs, pursuant to CERCLA or analogous state statutes, with
respect to 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, Foamex L.P. 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.
10. GUARANTOR INFORMATION
The payment obligations of Foamex L.P. and Foamex Capital Corporation under
the 10 3/4% Senior Secured Notes are guaranteed by Foamex L.P.'s 100.0%-owned
domestic subsidiaries ("Guarantors"). Such guarantees are full, unconditional
and joint and several. Separate financial statements of the Guarantors are not
presented because Foamex L.P.'s management has determined that they would not be
material to investors. The following presents condensed consolidating balance
sheets as of June 29, 2003 and December 29, 2002 and the condensed consolidating
statements of operations for the quarters and two quarters ended June 29, 2003
and June 30, 2002 and cash flows for the two quarters ended June 29, 2003 and
June 30, 2002 of the Guarantors and nonguarantors. The Guarantors include Foamex
Carpet, Foamex Latin America, Inc., Foamex Mexico, Inc., Foamex Mexico II, Inc.
and Foamex Asia, Inc. On December 30, 2002, Foamex Carpet distributed certain
assets, liabilities and its business to Foamex L.P. and accordingly, Foamex
Carpet is not included as a guarantor in the financial information as of June
29, 2003 and the periods then ended. The nonguarantors are Foamex Canada Inc.
and Grupo Foamex de Mexico, S.A. de C.V. and its subsidiaries. The following
financial information is intended to provide information for the Guarantors and
nonguarantors of Foamex L.P. based on amounts derived from the financial
statements of Foamex L.P.
15
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
10. GUARANTOR INFORMATION (continued)
Condensed Consolidating Balance Sheet
As of June 29, 2003
Foamex
Capital Foamex L.P. Consolidated
Guarantors Nonguarantors Corporation (Parent) Eliminations Foamex L.P.
---------- ------------- ----------- ----------- ------------ ------------
Assets (thousands of dollars)
Current assets $ 1,336 $28,216 $ 1 $292,044 $ (6,805) $ 314,792
Investment in subsidiaries 6,898 - - 44,051 (50,949) -
Property, plant and equipment, net - 22,052 - 151,936 - 173,988
Goodwill - 5,609 - 120,486 - 126,095
Debt issuance costs - - - 31,993 - 31,993
Software - - - 9,568 - 9,568
Other assets 13,239 2,195 - 16,313 (4,200) 27,547
------- ------- --- -------- -------- ----------
Total assets $21,473 $58,072 $ 1 $666,391 $(61,954) $ 683,983
======= ======= === ======== ======== ==========
Liabilities and Partners' Deficiency
Current liabilities $ 341 $23,148 $ - $174,374 $ (6,805) $ 191,058
Long-term debt 4,935 - - 735,346 (4,200) 736,081
Other liabilities - 173 - 65,969 - 66,142
Total liabilities 5,276 23,321 - 975,689 (11,005) 993,281
Partners' deficiency 16,197 34,751 1 (309,298) (50,949) (309,298)
------- ------- --- -------- -------- ----------
Total liabilities and partners' deficiency $21,473 $58,072 $ 1 $666,391 $(61,954) $ 683,983
======= ======= === ======== ======== ==========
Condensed Consolidating Balance Sheet
As of December 29, 2002
Foamex
Capital Foamex L.P. Consolidated
Guarantors Nonguarantors Corporation (Parent) Eliminations Foamex L.P.
---------- ------------- ----------- ----------- ------------ ------------
Assets (thousands of dollars)
Current assets $40,111 $28,481 $ 1 $274,700 $(26,816) $ 316,477
Investment in subsidiaries 8,014 - - 27,243 (35,257) -
Property, plant and equipment, net 5,851 21,549 - 154,638 - 182,038
Goodwill 1,249 4,835 - 119,237 - 125,321
Debt issuance costs - - - 36,827 - 36,827
Software - - - 8,254 8,254
Other assets 13,706 2,384 - 32,679 (22,403) 26,366
------- ------- --- -------- -------- ----------
Total assets $68,931 $57,249 $ 1 $653,578 $(84,476) $ 695,283
======= ======= === ======== ======== ==========
Liabilities and Partners' Deficiency
Current liabilities $41,401 $25,065 $ - $158,674 $(26,694) $ 198,446
Long-term debt 713 - - 737,827 - 738,540
Other liabilities 23,623 - - 62,863 (22,403) 64,083
Total liabilities 65,737 25,065 - 959,364 (49,097) 1,001,069
Partners' deficiency 3,194 32,184 1 (305,786) (35,379) (305,786)
------- ------- --- -------- -------- ----------
Total liabilities and partners' deficiency $68,931 $57,249 $ 1 $653,578 $(84,476) $ 695,283
======= ======= === ======== ======== ==========
16
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
10. GUARANTOR INFORMATION (continued)
Condensed Consolidating Statement of Operations
For the quarter ended June 29, 2003
Foamex
Capital Foamex L.P. Consolidated
Guarantors Nonguarantors Corporation (Parent) Eliminations Foamex L.P.
---------- ------------- ----------- ----------- ------------ ------------
(thousands of dollars)
Net sales $ - $27,770 $ - $311,072 $(4,498) $334,344
Cost of goods sold - 25,484 - 273,185 (4,498) 294,171
------- ------- ----- -------- -------- --------
Gross profit - 2,286 - 37,887 - 40,173
Selling, general and administrative
expenses - 1,695 - 17,905 - 19,600
Restructuring, impairment and other
charges (credits) - 403 - (1,263) - (860)
------- ------- ----- -------- -------- --------
Income from operations - 188 - 21,245 - 21,433
Interest and debt issuance expense 74 7 - 19,297 - 19,378
Equity in undistributed earnings
of affiliates 271 - - 57 185 513
Other expense, net 63 (570) - (98) - (605)
------- ------- ----- -------- -------- --------
Income before provision for income
taxes 260 (389) - 1,907 185 1,963
Provision for income taxes - 56 - - - 56
------- ------- ----- -------- -------- --------
Net income $ 260 $ (445) $ - $ 1,907 $ 185 $ 1,907
======= ======= ===== ======== ======== ========
17
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
10. GUARANTOR INFORMATION (continued)
Condensed Consolidating Statement of Operations
For the quarter ended June 30, 2002
Foamex
Capital Foamex L.P. Consolidated
Guarantors Nonguarantors Corporation (Parent) Eliminations Foamex L.P.
---------- ------------- ----------- ----------- ------------ ------------
(thousands of dollars)
Net sales $62,091 $31,593 $ - $295,926 $(43,712) $345,898
Cost of goods sold 57,535 26,983 - 258,145 (43,712) 298,951
------- ------- ----- -------- -------- --------
Gross profit 4,556 4,610 - 37,781 - 46,947
Selling, general and administrative
expenses 3,262 1,797 - 17,431 - 22,490
Restructuring, impairment and other
charges (credits) - - - - - -
------- ------- ----- -------- -------- --------
Income from operations 1,294 2,813 - 20,350 - 24,457
Interest and debt issuance expense 63 71 - 17,327 (123) 17,338
Equity in undistributed earnings
of affiliates 44 - - 2,467 (2,113) 398
Other expense, net - (1,488) - 24 (123) (1,587)
------- ------- ----- -------- -------- --------
Income before provision for income
taxes 1,275 1,254 - 5,514 (2,113) 5,930
Provision for income taxes 8 408 - 423 - 839
------- ------- ----- -------- -------- --------
Net income $ 1,267 $ 846 $ - $ 5,091 $ (2,113) $ 5,091
======= ======= ===== ======== ======== ========
18
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
10. GUARANTOR INFORMATION (continued)
Condensed Consolidating Statement of Operations
For the two quarters ended June 29, 2003
Foamex
Capital Foamex L.P. Consolidated
Guarantors Nonguarantors Corporation (Parent) Eliminations Foamex L.P.
---------- ------------- ----------- ----------- ------------ ------------
(thousands of dollars)
Net sales $ - $54,271 $ - $617,036 $ (9,193) $662,114
Cost of goods sold - 49,906 - 549,948 (9,193) 590,661
------- ------- ----- -------- -------- --------
Gross profit - 4,365 - 67,088 - 71,453
Selling, general and administrative
expenses - 3,230 - 36,559 - 39,789
Restructuring, impairment and other
charges (credits) - 402 - (1,262) - (860)
------- ------- ----- -------- -------- --------
Income from operations - 733 - 31,791 - 32,524
Interest and debt issuance expense 133 19 - 38,337 - 38,489
Equity in undistributed earnings
of affiliates (385) - - (408) 1,672 879
Other expense, net 112 (1,717) - (243) - (1,848)
------- ------- ----- -------- -------- --------
Loss before provision for income
taxes (406) (1,003) - (7,197) 1,672 (6,934)
Provision for income taxes - 263 - - - 263
------- ------- ----- -------- -------- --------
Net loss $ (406) $(1,266) $ - $ (7,197) $ 1,672 $ (7,197)
======= ======= ===== ======== ======== ========
19
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
10. GUARANTOR INFORMATION (continued)
Condensed Consolidating Statement of Operations
For the two quarters ended June 30, 2002
Foamex
Capital Foamex L.P. Consolidated
Guarantors Nonguarantors Corporation (Parent) Eliminations Foamex L.P.
---------- ------------- ----------- ----------- ------------ ------------
(thousands of dollars)
Net sales $116,789 $59,772 $ - $567,965 $(84,566) $659,960
Cost of goods sold 109,083 51,967 - 498,851 (84,566) 575,335
-------- ------- ----- -------- -------- --------
Gross profit 7,706 7,805 - 69,114 - 84,625
Selling, general and administrative
expenses 6,320 3,271 - 30,086 - 39,677
Restructuring, impairment and other
charges (credits) - - - (1,538) - (1,538)
-------- ------- ----- -------- -------- --------
Income from operations 1,386 4,534 - 40,566 - 46,486
Interest and debt issuance expense 3,258 126 - 32,737 (154) 35,967
Equity in undistributed earnings
of affiliates 1,461 - - (32,064) 31,731 1,128
Other expense, net (49) (893) - (109) (154) (1,205)
-------- ------- ----- -------- -------- --------
Income before provision for income
taxes (460) 3,515 - (24,344) 31,731 10,442
Provision for income taxes (159) 1,207 - 24 - 1,072
-------- ------- ----- -------- -------- --------
Income before accounting change (301) 2,308 - (24,368) 31,731 9,370
Accounting change (29,944) (3,794) - (38,228) - (71,966)
-------- ------- ----- -------- -------- --------
Net loss $(30,245) $(1,486) $ - $(62,596) $ 31,731 $(62,596)
======== ======= ===== ======== ======== ========
20
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
10. GUARANTOR INFORMATION (continued)
Condensed Consolidating Statement of Cash Flows
For the two quarters ended June 29, 2003
Foamex
Capital Foamex L.P. Consolidated
Guarantors Nonguarantors Corporation (Parent) Eliminations Foamex L.P.
---------- ------------- ----------- ----------- ------------ ------------
(thousands of dollars)
Cash Flows from Operating Activities
Net income (loss) $(406) $(1,266) $ - $(7,197) $ 1,672 $(7,197)
Total adjustments to reconcile net
income (loss) to net cash provided
by operating activities 406 682 - 21,530 (1,672) 20,946
----- ------- ------ ------- ------- -------
Net cash provided by operating
activities - (584) - 14,333 - 13,749
----- ------- ------ ------- ------- -------
Cash Flows from Investing Activities
Capital expenditures - (414) - (3,087) - (3,501)
Other - - - (2,197) - (2,197)
----- ------- ------ ------- ------- -------
Net cash used for investing activities - (414) - (5,284) - (5,698)
----- ------- ------ ------- ------- -------
Cash Flows from Financing Activities
Repayments of revolving loans - - - (979) - (979)
Repayments of long-term debt - - - (29) - (29)
Other, net - - - (3,376) - (3,376)
----- ------- ------ ------- ------- -------
Net cash used for financing activities - - - (4,384) - (4,384)
----- ------- ------ ------- ------- -------
Net increase (decrease) in cash and
cash equivalents - (998) - 4,665 - 3,667
Cash and cash equivalents at
beginning of period - 1,781 1 2,581 - 4,363
----- ------- ------ ------- ------- -------
Cash and cash equivalents at
end of period $ - $ 783 $ 1 $ 7,246 $ - $ 8,030
===== ======= ====== ======= ======= =======
21
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
10. GUARANTOR INFORMATION (continued)
Condensed Consolidating Statement of Cash Flows
For the two quarters ended June 30, 2002
Foamex
Capital Foamex L.P. Consolidated
Guarantors Nonguarantors Corporation (Parent) Eliminations Foamex L.P.
---------- ------------- ----------- ----------- ------------ ------------
(thousands of dollars)
Cash Flows from Operating Activities
Net income (loss) $(30,245) $(1,486) $ - $(62,596) $31,731 $(62,596)
Total adjustments to reconcile net
income (loss) to net cash used for
operating activities 29,613 (2,038) - 38,573 (31,830) 34,318
-------- ------- ------ -------- ------- --------
Net cash used for
operating activities (632) (3,524) - (24,023) (99) (28,278)
-------- ------- ------ -------- ------- --------
Cash Flows from Investing Activities
Capital expenditures (301) (403) - (9,480) 99 (10,085)
Other - - - (27,239) 28,702 1,463
-------- ------- ------ -------- ------- --------
Net cash used for investing activities (301) (403) - (36,719) 28,801 (8,622)
-------- ------- ------ -------- ------- --------
Cash Flows from Financing Activities
Net repayments of revolving loans - - - (125,000) - (125,000)
Repayments of long-term debt (2,888) (1,304) - (140,090) (28,702) (172,984)
Proceeds from long-term debt - - - 356,590 - 356,590
Other, net 1,902 - - 14,962 - 16,864
-------- ------- ------ -------- ------- --------
Net cash provided by financing activities (986) (1,304) - 106,462 (28,702) 75,470
-------- ------- ------ -------- ------- --------
Net increase in cash and cash equivalents (1,919) (5,231) - 45,720 - 38,570
Cash and cash equivalents at
beginning of period 2,758 7,163 1 5,137 - 15,059
-------- ------- ------ -------- ------- --------
Cash and cash equivalents at
end of period $ 839 $ 1,932 $ 1 $ 50,857 $ - $ 53,629
======== ======= ====== ======== ======= ========
22
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 Product 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 $ 7,381 $ (225) $ 7,074 $ 8,466 $(1,263) $ 21,433
Depreciation and amortization $ 2,839 $ 1,030 $ 904 $ 981 $ 1,352 $ 7,106
Income (loss) from operations
as a percentage of net sales 6.0% (0.4)% 5.9% 27.7% n.m.* 6.4%
Quarter ended June 30, 2002
Net sales $119,129 $60,434 $123,750 $33,460 $ 9,125 $345,898
Income (loss) from operations $ 11,940 $(1,363) $ 8,361 $ 7,557 $(2,038) $ 24,457
Depreciation and amortization $ 3,602 $ 1,586 $ 873 $ 573 $ 1,317 $ 7,951
Income (loss) from operations
as a percentage of net sales 10.0% (2.3)% 6.8% 22.6% n.m.* 7.1%
* 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 $21.4
million, or 6.4% of net sales, which represented a 12.4% decrease from the $24.5
million, or 7.1% of net sales, reported during the comparable 2002 period.
Results for the 2003 period included a 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 $2.9 million, or 12.9% 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 38.2% to $7.4 million in the quarter ended June 29,
2003 from $11.9 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 6.0% of net sales in 2003, down from 10.0% in 2002.
23
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 $0.2 million in
the quarter ended June 29, 2003 was less than the $1.4 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 0.4% of net sales in 2003 and 2.3% 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 15.4% to $7.1 million
compared to $8.4 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 6.8% 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
due primarily to lower volumes of commodity products. Income from operations
increased 12.0% to $8.5 million in the 2003 period compared to $7.6 million in
the 2002 period. The improvement was due to increased sales of high-end products
and lower operating expenses. Income from operations represented 27.7% of net
sales in 2003 compared to 22.6% 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 increase in net sales associated
with this segment resulted from its Mexico City operations. The loss from
operations was $1.3 million in the quarter ended June 29, 2003 and $2.0 million
in the quarter ended June 30, 2002 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 termination 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 5 to the condensed consolidated financial
statements, a provision of the Amended Credit Facility requires an incremental
interest rate margin adjustment based on 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.
24
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
Foamex L.P., as a limited partnership, is not subject to Federal income
taxes. Consequently, no current or deferred provision has been provided for such
taxes. However, Foamex L.P. has provided for the income taxes of certain states
in which it is subject to taxes and for subsidiaries located in foreign
jurisdictions that file separate tax returns.
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 Product 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 $ 9,649 $ (3,293) $ 14,079 $16,060 $(3,971) $ 32,524
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 4.0% (3.2)% 5.9% 25.5% n.m.* 4.9%
Two Quarters ended June 30, 2002
Net sales $236,611 $113,233 $228,131 $64,389 $17,596 $659,960
Income (loss) from operations $ 21,843 $ (4,258) $ 16,982 $13,796 $(1,877) $ 46,486
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 9.2% (3.8)% 7.4% 21.4% n.m.* 7.0%
* 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 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 $32.5
million, or 4.9% of net sales, which represented a 30.0% decrease from the $46.5
million, or 7.0% of net sales, reported during the comparable 2002 period and
was primarily due to the reduced gross profit. Results include 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.
25
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
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 volume of our consumer
products were partially offset by decreases in volume in other markets. Income
from operations decreased 55.8% to $9.6 million in the two quarters ended June
29, 2003 from $21.8 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 4.0% of net sales in
2003, down from 9.2% 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 $3.3 million
in the two quarters ended June 29, 2003 compared to a $4.3 million loss in the
comparable 2002 period due primarily to higher selling prices and cost
containment from the streaming of operations. The loss from operations
represented 3.2% of net sales in 2003 and 3.8% 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 17.1%
to $14.1 million compared to $17.0 million in the comparable 2002 period
primarily due to higher raw material costs. Income from operations represented
5.9% of net sales in 2003 and 7.4% 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. Income from operations increased 16.4% to $16.1 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 25.5% of net sales in 2003 compared to 21.4% 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 its Mexico City operations. The loss from
operations was $4.0 million in the two quarters ended June 29, 2003 and $1.9
million in the two quarters ended June 30, 2002 reflected generally higher
corporate expenses in 2003 and included restructuring and other credits
discussed below.
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.
26
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
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 5 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
Foamex L.P., as a limited partnership, is not subject to Federal income
taxes. Consequently, no current or deferred provision has been provided for such
taxes. However, Foamex L.P. has provided for the income taxes of certain states
in which it is subject to taxes and for subsidiaries located in foreign
jurisdictions that file separate tax returns.
Liquidity and Capital Resources
Our 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 our operating activities, cash on hand and periodic
borrowings under our credit facility will be adequate to meet our liquidity
requirements. Scheduled principal payments on Foamex L.P.'s debt are not
significant until the second half of 2004. If our 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.
Cash and cash equivalents were $8.0 million at June 29, 2003 compared to
$4.4 million at December 29, 2002. Working capital at June 29, 2003 was $123.7
million and the current ratio was 1.6 to 1 compared to working capital at
December 29, 2002 of $118.0 million and a current ratio of 1.6 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 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. exceed 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
27
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
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 under these
anticipated new facilities would be used to repay all outstanding balances under
the Foamex L. P. Amended Credit Facility (see Note 5), 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
28
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
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 a Foamex
International director and a consulting agreement with another Foamex
International 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 Foamex International 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.
Cash Flow from Operating Activities
Cash provided by operating activities in the two quarters ended June 29,
2003 was $13.7 million compared to cash used of $28.3 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
payment s 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 $8.6
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 $4.4 million for the two quarters
ended June 29, 2003 compared to $75.5 million of cash provided in the comparable
period of 2002. Cash provided for the 2002 period primarily reflected Foamex
L.P.'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
29
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
information or future developments could require us to reassess its potential
exposure to all pending environmental matters, including those described in Note
9 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
Our debt securities with variable interest rates are 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.
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
See the "Market Risk" section under Item 2, Management's Discussion and
Analysis of Financial Condition and Results of Operations.
ITEM 4. CONTROLS AND PROCEDURES.
Foamex L.P.'s 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
Foamex L.P.'s internal controls, or in other factors that could significantly
affect such controls.
30
Part II - Other Information.
Item 1. Legal Proceedings.
Reference is made to the description of the legal proceedings
contained in Foamex L.P.'s Annual Report on Form 10-K for the year
ended December 29, 2002. The information from Note 9 to the condensed
consolidated financial statements is incorporated herein by reference.
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) Foamex L.P. 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 Foamex International's earnings teleconference and
furnishing a copy of Foamex International's earnings press release for
the quarter ended March 30, 2003.
31
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FOAMEX L.P.
By: FMXI, Inc.
Its Managing General Partner
Date: August 13, 2003 By: /s/ K. Douglas Ralph
----------------------------------
K. Douglas Ralph
Executive Vice President and Chief
Financial Officer
(Duly Authorized Officer)
FOAMEX CAPITAL CORPORATION
Date: August 13, 2003 By: /s/ K. Douglas Ralph
----------------------------------
K. Douglas Ralph
Executive Vice President and Chief
Financial Officer
32