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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 28, 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 November
7, 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
Three Quarters Ended September 28, 2003 and September 29, 2002 3
Condensed Consolidated Balance Sheets as of September 28, 2003 (unaudited) and
December 29, 2002 4
Condensed Consolidated Statements of Cash Flows (unaudited) - Three Quarters
Ended September 28, 2003 and September 29, 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 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 Three Quarters Ended
---------------------------- -----------------------------
September 28, September 29, September 28, September 29,
2003 2002 2003 2002
------------- ------------- ------------- -------------
(thousands, except per share amounts)
NET SALES $321,466 $340,823 $983,580 $1,000,783
COST OF GOODS SOLD 283,957 310,009 874,618 885,344
-------- -------- -------- ----------
GROSS PROFIT 37,509 30,814 108,962 115,439
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 19,335 29,774 59,608 69,253
RESTRUCTURING, IMPAIRMENT AND OTHER
CHARGES (CREDITS) (377) (3,674) (1,237) (5,212)
-------- -------- -------- ----------
INCOME FROM OPERATIONS 18,551 4,714 50,591 51,398
INTEREST AND DEBT ISSUANCE EXPENSE 31,550 15,258 70,039 51,225
INCOME FROM EQUITY INTEREST IN
JOINT VENTURES 495 386 1,374 1,514
OTHER EXPENSE, NET (952) (198) (2,800) (1,436)
-------- -------- -------- ----------
INCOME (LOSS) BEFORE BENEFIT FOR
INCOME TAXES (13,456) (10,356) (20,874) 251
BENEFIT FOR INCOME TAXES (2,403) (3,114) (4,420) (77,085)
-------- -------- -------- ----------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF
ACCOUNTING CHANGES (11,053) (7,242) (16,454) 77,336
CUMULATIVE EFFECT OF ACCOUNTING CHANGES - - - (70,647)
-------- -------- -------- ----------
NET INCOME (LOSS) $(11,053) $ (7,242) $(16,454) $ 6,689
======== ======== ======== ==========
EARNINGS PER SHARE - BASIC
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF
ACCOUNTING CHANGES $ (0.45) $ (0.30) $ (0.67) $ 3.19
CUMULATIVE EFFECT OF ACCOUNTING CHANGES - - - (2.91)
-------- -------- -------- ----------
NET INCOME (LOSS) $ (0.45) $ (0.30) $ (0.67) $ 0.28
======== ======== ======== ==========
EARNINGS PER SHARE - DILUTED
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF
ACCOUNTING CHANGES $ (0.45) $ (0.30) $ (0.67) $ 2.92
CUMULATIVE EFFECT OF ACCOUNTING CHANGES - - - (2.67)
-------- -------- -------- ----------
NET INCOME (LOSS) $ (0.45) $ (0.30) $ (0.67) $ 0.25
======== ======== ======== ==========
WEIGHTED AVERAGE NUMBER OF SHARES - BASIC 24,409 24,349 24,389 24,249
======== ======== ========= ==========
WEIGHTED AVERAGE NUMBER OF SHARES - DILUTED 24,409 24,349 24,389 26,449
======== ======== ========= ==========
The accompanying notes are an integral part of the unaudited
condensed consolidated financial statements.
3
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
September 28, 2003 December 29, 2002
------------------ -----------------
ASSETS (unaudited)
CURRENT ASSETS (thousands, except share data)
Cash and cash equivalents $ 4,964 $ 4,524
Accounts receivable, net of allowances of $10,715 in 2003
and $10,311 in 2002 196,110 191,546
Inventories 100,812 98,010
Deferred income taxes 12,462 21,011
Other current assets 21,295 22,558
--------- ---------
Total current assets 335,643 337,649
--------- ---------
Property, plant and equipment 418,307 418,569
Less accumulated depreciation (250,616) (236,531)
--------- ---------
NET PROPERTY, PLANT AND EQUIPMENT 167,691 182,038
GOODWILL 126,068 125,321
DEBT ISSUANCE COSTS, net of accumulated
amortization of $8,970 in 2003 and $14,079 in 2002 28,652 36,827
DEFERRED INCOME TAXES 109,634 97,341
SOFTWARE, net of accumulated amortization of $3,103 in
2003 and $2,634 in 2002 9,584 8,254
OTHER ASSETS 30,908 26,147
--------- ---------
TOTAL ASSETS $ 808,180 $ 813,577
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES
Current portion of long-term debt $ 7,158 $ 46
Accounts payable 110,159 87,400
Accrued employee compensation and benefits 25,912 26,330
Accrued interest 22,157 14,173
Accrued customer rebates 18,636 18,813
Cash overdrafts 11,024 17,801
Other accrued liabilities 22,215 36,381
--------- ---------
Total current liabilities 217,261 200,944
LONG-TERM DEBT 728,599 738,540
ACCRUED EMPLOYEE BENEFITS 48,901 48,022
OTHER LIABILITIES 13,793 15,804
--------- ---------
Total liabilities 1,008,554 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 102,155 101,972
Accumulated deficit (232,697) (216,243)
Accumulated other comprehensive loss (33,125) (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 (200,374) (189,733)
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY $ 808,180 $ 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)
Three Quarters Ended
----------------------------------
September 28, September 29,
2003 2002
------------- -------------
(thousands)
OPERATING ACTIVITIES
Net income (loss) $(16,454) $ 6,689
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 19,250 23,745
Amortization of debt issuance costs, debt premium
and debt discount 3,967 2,074
Write off of debt issuance costs 12,928 4,892
Deferred income taxes (2,318) (77,393)
Other operating activities (1,763) (747)
Changes in operating assets and liabilities, net 10,152 (36,787)
-------- --------
Net cash provided by (used for) operating activities 25,762 (6,880)
-------- --------
INVESTING ACTIVITIES
Capital expenditures (4,683) (11,877)
Proceeds from sale of assets 1,135 21
Other investing activities (2,729) (4,205)
-------- --------
Net cash used for investing activities (6,277) (16,061)
-------- --------
FINANCING ACTIVITIES
Proceeds from (repayments of) revolving loans, net 31,618 (125,000)
Proceeds from long-term debt 130,000 356,590
Repayments of long-term debt (162,227) (190,060)
Repayments of long-term debt - related party - (31,590)
Increase (decrease) in cash overdrafts (6,777) 21,214
Debt issuance costs (11,659) (25,491)
Interest rate swaps - 14,821
Other financing activities - 3,494
-------- --------
Net cash provided by (used for) financing activities (19,045) 23,978
-------- --------
Net increase in cash and cash equivalents 440 1,037
Cash and cash equivalents at beginning of period 4,524 15,064
-------- --------
Cash and cash equivalents at end of period $ 4,964 $ 16,101
======== ========
Supplemental Information:
Cash paid for interest $ 45,160 $ 29,823
======== ========
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 Canada"), 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. 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 three quarters ended September 29,
2002 have been reclassified to conform to the current presentation.
Accounting Changes
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 items
previously reported in the quarter and three quarters ended September 29, 2002
with the related tax impacts included in the provision for income taxes.
In January 2003, FASB Interpretation 46, "Consolidation of Variable
Interest Entities" ("FIN No. 46") was issued. FIN No. 46 clarifies the
application of Accounting Research Bulletin No. 51, "Consolidated Financial
Statements", to certain entities in which the equity investors do not have a
controlling financial interest or do not have sufficient equity at risk. FIN No.
46 was effective on January 31, 2003 for entities acquired after that date. The
Financial Accounting Standards Board has postponed the effective date for
entities acquired on or before January 31, 2003 to December 15, 2003. The
Company believes that FIN No. 46 will have no impact on its current equity
investments.
2. EARNINGS PER SHARE
The following table shows the amounts used in computing earnings per share.
Quarters Ended Three Quarters Ended
----------------------------- -----------------------------
September 28, September 29, September 28, September 29,
2003 (a) 2002 (a) 2003 (a) 2002
------------- ------------- ------------ -------------
(thousands, except per share amounts)
Basic earnings per share:
Income (loss) before cumulative effect of
accounting changes $(11,053) $(7,242) $(16,454) $77,336
Cumulative effect of accounting changes - - - (70,647)
-------- ------- -------- -------
Net income (loss) $(11,053) $(7,242) $(16,454) $ 6,689
======== ======= ======== =======
6
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
2. EARNINGS PER SHARE (continued)
Quarters Ended Three Quarters Ended
----------------------------- -----------------------------
September 28, September 29, September 28, September 29,
2003 (a) 2002 (a) 2003 (a) 2002
------------- ------------- ------------ -------------
(thousands, except per share amounts)
Weighted average common stock
outstanding 24,409 24,349 24,389 24,249
======== ======= ======== =======
Income (loss) before cumulative effect of
accounting changes $ (0.45) $ (0.30) $ (0.67) $ 3.19
Cumulative effect of accounting changes - - - (2.91)
-------- ------- -------- -------
Net income (loss) $ (0.45) $ (0.30) $ (0.67) $ 0.28
======== ======= ======== =======
Diluted earnings per share:
Income (loss) before cumulative effect of
accounting changes $(11,053) $(7,242) $(16,454) $77,336
Cumulative effect of accounting changes - - - (70,647)
-------- ------- -------- -------
Net income (loss) $(11,053) $(7,242) $(16,454) $ 6,689
======== ======= ======== =======
Weighted average common stock
outstanding 24,409 24,349 24,389 24,249
Incremental shares resulting from
Stock options (b) - - - 700
Convertible preferred stock - - - 1,500
-------- ------- -------- -------
Adjusted weighted average shares 24,409 24,349 24,389 26,449
======== ======= ======== =======
Income (loss) before cumulative effect of
accounting changes $ (0.45) $ (0.30) $ ( 0.67) $ 2.92
Cumulative effect of accounting changes - - - (2.67)
-------- ------- -------- -------
Net income (loss) $ (0.45) $ (0.30) $ (0.67) $ 0.25
======== ======= ======== =======
(a) There is no dilution resulting from potential incremental shares in the
quarters ended September 28, 2003 and September 29, 2002 and three quarters
ended September 28, 2003 because the Company had losses 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 3,285,557 and 1,487,351 in the quarters
ended September 28, 2003 and September 29, 2002, respectively and 4,036,354
and 667,617 in the three quarters ended September 28, 2003 and September
29, 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.
7
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
3. STOCK-BASED COMPENSATION (continued)
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.
Quarters Ended Three Quarters Ended
----------------------------- -----------------------------
September 28, September 29, September 28, September 29,
2003 2002 2003 2002
------------- ------------- ------------- -------------
(thousands, except per share amounts)
Net income (loss) as reported $(11,053) $(7,242) $(16,454) $6,689
Add: Stock-based employee compensation
expense included in reported net income
(loss), net of tax provision (benefit) 1 1 2 27
Deduct: Total stock-based compensation
expense determined under fair value
based method, net of tax benefit (533) (270) (1,029) (1,024)
-------- ------- -------- ------
Proforma net income (loss) $(11,585) $(7,511) $(17,481) $5,692
======== ======= ======== ======
Basic income (loss) per share
As reported $ (0.45) $ (0.30) $ (0.67) $ 0.28
======== ======= ======== ======
Proforma $ (0.47) $ (0.31) $ (0.72) $ 0.23
======== ======= ======== ======
Diluted income (loss) per share
As reported $ (0.45) $ (0.30) $ (0.67) $ 0.25
======== ======= ======== ======
Proforma $ (0.47) $ (0.31) $ (0.72) $ 0.22
======== ======= ======== ======
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 three quarters
ended September 29, 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 three quarters ended September 29, 2002.
Goodwill at September 28, 2003 increased by $0.7 million from December 29,
2002 as a result of foreign currency translation adjustments.
5. RESTRUCTURING, IMPAIRMENT AND OTHER CHARGES (CREDITS)
During the three quarters ended September 28, 2003, the Company recorded
restructuring credits of $1.2 million consisting of a $2.3 million reduction in
the liability primarily for severance and termination benefits no longer
required as the actions contemplated under the related plans have been
substantially completed, and a charge of $0.7 million for additional lease
termination costs for a closed facility as a result of changes in real estate
market conditions. Additionally, the Company recorded 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.
The actions under this plan were substantially completed as of September 28,
2003.
During the fourth quarter of 2001, the Company announced an Operational
Reorganization Plan as discussed in the Company's Form 10-K for the year ended
December 31, 2001. That Plan included closing certain plants of the Carpet
Cushion Products segment and certain personnel reductions and other savings at
the corporate level. During the three quarters ended September 29, 2002, the
Company attempted a sale of the Carpet Cushion Products
8
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
5. RESTRUCTURING, IMPAIRMENT AND OTHER CHARGES (CREDITS) (continued)
segment and management put such plant closings on hold until the completion of
the sale negotiations. On October 4, 2002, the Company announced that
negotiations to sell the Carpet Cushion Products segment had been terminated.
Management reevaluated the original plan developed during the fourth quarter of
2001 and determined that certain previously recorded amounts were no longer
required. The net impact of such reevaluation was a reversal of $3.7 million of
previously recorded liabilities in the quarter ended September 29, 2002. The
Operational Reorganization Plan has been substantially completed as of September
28, 2003.
During the three quarters ended September 29, 2002, the Company recorded an
additional restructuring credit of $2.1 million related to the collection of
deferred rent receivable and other charges for certain additional expenses of
$0.6 million relating to the 2001 restructuring plan.
The following tables set forth the components of the Company's
restructuring accruals and activity for the quarter and three quarters ended
September 28, 2003:
Plant Closure Personnel
Total and Leases Reductions Other
----- ------------- ---------- -------
(millions)
Balance at June 29, 2003 $15.2 $10.2 $3.7 $1.3
Adjustments (0.3) 0.7 (1.0) -
Cash spending (2.5) (1.1) (1.1) (0.3)
----- ----- ---- ----
Balance at September 28, 2003 $12.4 $ 9.8 $1.6 $1.0
===== ===== ==== ====
Balance at December 29, 2002 $22.8 $12.6 $8.2 $2.0
Adjustments (1.2) 0.6 (1.6) (0.2)
Cash spending (9.2) (3.4) (5.0) (0.8)
----- ----- ---- ----
Balance at September 28, 2003 $12.4 $ 9.8 $1.6 $1.0
===== ===== ==== ====
The Company expects to spend approximately $6.4 million during the twelve
months ending September 26, 2004, with the balance to be spent through 2012,
primarily for lease costs.
6. INVENTORIES
The components of inventory are listed below.
September 28, December 29,
2003 2002
------------- ------------
(thousands)
Raw materials and supplies $ 63,533 $60,588
Work-in-process 17,227 16,737
Finished goods 20,052 20,685
-------- -------
Total $100,812 $98,010
======== =======
7. LONG-TERM DEBT
The components of long-term debt are listed below.
September 28, December 29,
2003 2002
------------- ------------
Foamex L.P. Senior Secured Credit Facility (thousands)
Term Loan (1) $ 50,000 $ -
Revolving credit facility (1) 83,442 -
Foamex L.P. Secured Term Loan (1) 80,000 -
9
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
7. LONG-TERM DEBT (continued)
September 28, December 29,
2003 2002
------------- ------------
(thousands)
Foamex L.P. Amended Credit Facility
Term Loan B (2) - 39,262
Term Loan C (2) - 35,693
Term Loan D (2) - 51,700
Term Loan E (2) - 16,290
Term Loan F (2) - 19,243
Revolving credit facility (2) - 51,823
10 3/4% Senior secured notes due 2009 (3) (5) 312,696 314,237
9 7/8% Senior subordinated notes due 2007 (3) 148,500 148,500
13 1/2% Senior subordinated notes due 2005 (includes
$1,773 and $2,486 of unamortized debt premium) (3) 53,358 54,071
Industrial revenue bonds (4) 7,000 7,000
Other (net of unamortized debt discount of $105 in 2003
and $137 in 2002) 761 767
-------- --------
735,757 738,586
Less current portion 7,158 46
-------- --------
Long-term debt $728,599 $738,540
======== ========
(1) Subsidiary debt of Foamex L.P., guaranteed by the Company, FMXI, Inc. and
Foamex Canada.
(2) Subsidiary debt of Foamex L.P., guaranteed by the Company and FMXI, Inc.
(3) Subsidiary debt of Foamex L.P. and Foamex Capital Corporation.
(4) Subsidiary debt of Foamex L.P.
(5) Includes $12.7 million in 2003 and $14.2 million in 2002 of deferred
credits on interest rate swap transactions.
Senior Secured Credit Facility
On August 18, 2003, Foamex L.P. entered into a $240.0 Million Senior
Secured Credit Facility with a new group of lenders and an $80.0 million term
loan facility with another lender. Proceeds borrowed under these new facilities
were used to repay all outstanding balances under the Foamex L.P. Amended Credit
Facility which was terminated as of August 18, 2003. In addition, Foamex
Canada's revolving credit facility that did not have any outstanding borrowings
and had availability of approximately $5.9 million was terminated as of August
18, 2003. The termination of the Amended Credit Facility resulted in a write off
of debt issuance costs of $12.9 million recorded in the quarter ended September
28, 2003.
The $240.0 Million Senior Secured Credit Facility consists of a revolving
credit facility with a maximum availability of $190.0 million and a term loan of
$50.0 million. The revolving credit facility includes a $50.0 million sublimit
for letters of credit and availability is limited to eligible amounts, as
defined, of accounts receivable and inventory. At September 28, 2003, Foamex
L.P. had available borrowings of approximately $59.0 million and letters of
credit outstanding of $20.9 million. Borrowings under the term loan are limited
to eligible amounts, as defined, of equipment and real estate. Substantially all
the assets of Foamex L.P. and its domestic subsidiaries and Foamex Canada are
pledged as collateral for the related borrowings. Borrowings under the revolving
credit facility and the term loan bear interest at floating rates based upon and
including a margin over either LIBOR or a Base Rate, as defined. At September
28, 2003, the weighted average interest rates were 4.34% and 4.38% for the
revolving loans and the term loan, respectively. The term loan requires
quarterly installment payments of approximately $1.8 million, commencing on
September 30, 2003. All borrowings under the $240.0 Million Senior Secured
Credit Facility will mature on April 30, 2007.
10
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
7. LONG-TERM DEBT (continued)
The $80.0 million term loan facility (the "Secured Term Loan") will mature
on April 30, 2007. Borrowings under this facility will bear interest at a rate
that is 9.25% plus the greater of the Reference Rate, as defined, or 4.25%. The
minimum rate, which is in effect as of September 28, 2003, is 13.50%. In
addition, Foamex L.P. is subject to a 1.00% facility fee which is payable
annually on the anniversary date. Borrowings under the Secured Term Loan are
collateralized by the same collateral as the $240.0 Million Senior Secured
Credit Facility. An intercreditor agreement governs the distribution of
collateral among the lenders under the $240.0 Million Senior Secured Credit
Facility and the Secured Term Loan.
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 $240.0 Million Senior Secured 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 $240.0 Million Senior
Secured Credit Facility and the Secured Term Loan. 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.
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
11
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
7. LONG-TERM DEBT (continued)
redemption and declining annually to 100.0% on or after June 15, 2005. At
September 28, 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 September 28, 2003, the redemption price
was 101.6875% 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
September 28, 2003, the interest rate was 1.05% on the $1.0 million bond and
1.10% 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 September 28, 2003.
Other
Other debt includes a non-interest bearing promissory note with a principal
amount of $0.9 million at September 28, 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 September 28,
2003.
Debt Covenants
The indentures 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. Under the most restrictive of the distribution
restrictions, the Company could be paid by its subsidiaries, as of September 28,
2003,
12
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
7. LONG-TERM DEBT (continued)
funds only to the extent to enable the Company to meet its tax payment
liabilities and its normal operating expenses of up to $1.5 million annually, so
long as no default or 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. was
subject to minimum net worth, minimum EBDAIT, as defined, and maximum capital
expenditure covenants through periods ending December 28, 2003. The minimum
EBDAIT covenant was 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 2003 until the Amended Credit Facility was
terminated on August 18, 2003. Under the $240.0 Million Senior Secured Credit
Facility and the Secured Term Loan, Foamex L.P. is subject to a fixed charge
coverage ratio, as defined. For the quarter ended September 28, 2003, Foamex
L.P.'s fixed charge coverage ratio was 1.28 which exceeded the required fixed
charge coverage ratio of 1.00. Foamex L.P. is also subject to a maximum annual
capital expenditure amount which is $17.7 million for the year ending December
28, 2003.
Maturities of Long-Term Debt
Scheduled maturities of long-term debt as of September 28, 2003 are shown
below (thousands):
Quarter ending December 28, 2003 $ 1,793
2004 8,937
2005 60,578
2006 7,143
2007 336,942
Thereafter 306,000
--------
721,393
Unamortized debt premium/discount and fair value adjustment, net 14,364
--------
Total $735,757
========
8. INCOME TAXES
The effective tax benefit rate was 21.2% for the three quarters ended
September 28, 2003. The effective tax benefit rate for the quarter and three
quarters ended September 28, 2003, included a $3.1 million provision that
reduced the effective tax benefit rate. The $3.1 million of tax expense was
related to the Foamex L.P. $240.0 Million Senior Secured Credit Facility and the
collateral provisions that pledged the stock of Foamex Canada. This collateral
pledge under the U.S. Internal Revenue Code resulted in a deemed distribution of
accumulated earnings, as defined, of Foamex Canada. Because the Company will not
be able to utilize any Canadian tax credits associated with the deemed
distribution, the full amount of the distribution was subject to U.S. taxation
and will result in a reduction in the amount of the U.S. net operating loss
carryforwards available. Without this adjustment, the effective tax benefit rate
would have been 35.9% for the three quarters ended September 28, 2003. Effective
tax rates are impacted by annual income from equity in joint ventures, which is
considered to be permanently invested. Accordingly, no deferred tax liabilities
are recognized on such income. The income tax benefit rate for the quarter ended
September 28, 2003 was 17.9%.
During the three quarters ended September 29, 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 three quarters ended September 29, 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 three quarters ended September 29, 2002 by $77.3 million, and
decreased goodwill by $12.4 million and other comprehensive loss by $9.6
million. The Company's actual results for 2002 were essentially similar to the
results it projected when it reversed the valuation allowance.
13
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
8. INCOME TAXES (continued)
The Company has deferred income tax assets aggregating $122.1 million as of
September 28, 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, the Company must generate
sufficient taxable income to offset its U.S. net operating loss carryforwards of
approximately $217.9 million at December 29, 2002 expiring from 2010 to 2022.
Approximately $111.5 million of the net operating loss carryforwards, related to
$39.0 million of deferred tax assets, expire in the years 2010 to 2012 with the
remainder principally expiring in the 2018-2022 period. The Company projects
that it will have sufficient taxable income in the years 2005 to 2012 to utilize
all of the expiring net operating loss carryforwards. The Company has had an
ownership change as defined in IRC Section 382 and accordingly, the Company is
limited (on an annual basis) to approximately $21.0 million of net operating
loss carryforward utilization.
9. COMPREHENSIVE INCOME (LOSS)
The components of comprehensive income (loss) are listed below.
Quarters Ended Three Quarters Ended
----------------------------- ---------------------------
September 28, September 29, September 28, September 29,
2003 2002 2003 2002
------------- ------------- ------------ -------------
(thousands)
Net income (loss) $(11,053) $(7,242) $(16,454) $ 6,689
Foreign currency translation adjustments 1,493 (631) 5,629 (597)
Pension liability adjustments - - - 9,597
-------- ------- -------- -------
Total comprehensive income (loss) $ (9,560) $(7,873) $(10,825) $15,689
======== ======= ======== =======
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 $(0.4) million and $(1.2) million in the quarter and
three quarters ended September 28, 2003 and $(3.7) million and $(5.2) million in
the quarter and three quarters ended September 29, 2002, respectively.
Segment results are presented below.
Carpet
Foam Cushion Automotive Technical
Products Products Products Products Other Total
-------- -------- ---------- ---------- -------- ----------
(thousands)
Quarter ended September 28, 2003
Net sales $137,115 $ 54,126 $ 99,235 $25,803 $ 5,187 $ 321,466
Income (loss) from operations $ 10,597 $ (235) $ 5,275 $ 4,981 $(2,067) $ 18,551
Depreciation and amortization $ 2,608 $ 594 $ 722 $ 735 $ 1,341 $ 6,000
Quarter ended September 29, 2002
Net sales $121,773 $ 61,105 $120,151 $30,500 $ 7,294 $ 340,823
Income (loss) from operations $ 1,070 $ (4,749) $ 4,675 $ 2,412 $ 1,306 $ 4,714
Depreciation and amortization $ 3,347 $ 1,639 $ 1,046 $ 930 $ 552 $ 7,514
14
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
10. SEGMENT RESULTS (continued)
Carpet
Foam Cushion Automotive Technical
Products Products Products Products Other Total
-------- -------- ---------- ---------- -------- ----------
(thousands)
Three quarters ended September 28, 2003
Net sales $378,405 $157,352 $339,518 $88,807 $19,498 $ 983,580
Income (loss) from operations $ 20,064 $ (3,616) $ 19,259 $21,001 $(6,117) $ 50,591
Depreciation and amortization $ 8,216 $ 2,569 $ 2,313 $ 2,439 $ 3,713 $ 19,250
Three quarters ended September 29, 2002
Net sales $358,384 $174,338 $348,282 $94,889 $24,890 $1,000,783
Income (loss) from operations $ 22,965 $ (8,967) $ 21,696 $16,235 $ (531) $ 51,398
Depreciation and amortization $ 11,778 $ 5,118 $ 3,012 $ 2,221 $ 1,616 $ 23,745
11. RELATED PARTY TRANSACTIONS AND BALANCES
Foam Funding LLC Debt
During the three quarters ended September 29, 2002, Foamex Carpet paid $0.7
million of interest and $31.6 million of principal on a note payable to Foam
Funding LLC, a subsidiary of Trace International Holdings ("Trace").
12. COMMITMENTS AND CONTINGENCIES
Litigation - Breast Implants
As of November 5, 2003, the Company and Trace were two of multiple
defendants in actions filed on behalf of approximately 774 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 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 counsel to
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.
15
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
12. COMMITMENTS AND CONTINGENCIES (continued)
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 September 28, 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, is from time to time involved in
administrative and judicial proceedings and inquiries relating to environmental
matters. As of September 28, 2003, the Company had accruals of approximately
$2.7 million for environmental matters, including approximately $2.2 million
related to remediating and monitoring soil and groundwater contamination and
approximately $0.5 million related to PRP sites and other matters. Additional
losses, if any, in excess of amounts currently accrued, cannot be reasonably
estimated at this time. If there are additional matters or if current estimates
are incorrect, there could be a material adverse effect on the Company'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. 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.
16
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
12. COMMITMENTS AND CONTINGENCIES (continued)
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
------------------------------------
September 28, September 29,
2003 2002
------------- -------------
Net sales 366,387,806 442,710,850
=========== ===========
Net income 17,807,213 32,457,752
=========== ===========
Three Quarters Ended
------------------------------------
September 28, September 29,
2003 2002
------------- -------------
Net sales 1,120,296,263 1,397,193,281
============= =============
Net income 71,128,584 100,724,851
============= =============
As of
------------------------------------
September 28, December 31,
2003 2002
------------- -------------
Total assets 1,265,074,503 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 SEPTEMBER 28, 2003 COMPARED TO THE
QUARTER ENDED SEPTEMBER 29, 2002
Carpet
Foam Cushion Automotive Technical
Products Products Products Products Other Total
-------- -------- ---------- ---------- -------- ----------
(thousands)
Quarter ended September 28, 2003
Net sales $137,115 $54,126 $ 99,235 $25,803 $ 5,187 $321,466
Income (loss) from operations $ 10,597 $ (235) $ 5,275 $ 4,981 $(2,067) $ 18,551
Depreciation and amortization $ 2,608 $ 594 $ 722 $ 735 $ 1,341 $ 6,000
Income (loss) from operations
as a percentage of net sales 7.7% (0.4)% 5.3% 19.3% n.m.* 5.8%
Quarter ended September 29, 2002
Net sales $121,773 $61,105 $120,151 $30,500 $ 7,294 $340,823
Income (loss) from operations $ 1,070 $(4,749) $ 4,675 $ 2,412 $ 1,306 $ 4,714
Depreciation and amortization $ 3,347 $ 1,639 $ 1,046 $ 930 $ 552 $ 7,514
Income (loss) from operations
as a percentage of net sales 0.9% (7.8)% 3.9% 7.9% n.m.* 1.4%
* not meaningful
Income from Operations
Net sales for the quarter ended September 28, 2003 decreased 5.7% to $321.5
million from $340.8 million in the quarter ended September 29, 2002. An increase
in Foam Products net sales was more than offset by decreases in the other
segments. We expect that net sales in the quarter ending December 28, 2003 will
decline about 8.0% primarily as a result of lower sales in our Automotive
Products segment.
The gross profit margin was $37.5 million, or 11.7%, in the quarter ended
September 28, 2003 compared to $30.8 million, or 9.0%, in the 2002 period.
Operating efficiencies and selling price increases to customers have allowed us
to recover a substantial portion of increases in the cost of our major chemical
raw materials that began to impact us in the quarter ended September 29, 2002.
Income from operations for the quarter ended September 28, 2003 was $18.6
million, or 5.8% of net sales, which represented a 293.5% increase from the $4.7
million, or 1.4% of net sales, reported during the comparable 2002 period.
Results for the 2003 and 2002 periods included net restructuring, impairment and
other credits of $0.4 million and $3.7 million, respectively, described in
"Other" below. In addition to the improved gross profit discussed above,
selling, general and administrative expenses decreased $10.4 million, or 35.1%.
Employee related costs and professional fees were lower in the 2003 period. The
2002 period included $4.4 million of costs associated with a proposed public
offering of Symphonex Inc., a proposed new subsidiary which would have included
our Technical Products segment, and the proposed sale of the Carpet Cushion
Products segment.
Foam Products
Foam Products net sales for the quarter ended September 28, 2003 increased
12.6% to $137.1 million from $121.8 million in the comparable 2002 period.
Increases in volumes of consumer products and in selling prices to customers
were partially offset by decreases in volume of commodity products primarily
related to the closure of inefficient manufacturing facilities. Income from
operations increased to $10.6 million in the quarter ended September 28, 2003
from $1.1 million in the comparable 2002 period as selling price increases and
operating efficiencies were partially offset by higher raw material costs and
lower volumes of commodity products. Income from operations was 7.7% of net
sales in 2003, up from 0.9% of net sales 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 September 28, 2003
decreased 11.4% to $54.1 million from $61.1 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 September 28, 2003 was less than the $4.7 million loss from
operations in the comparable 2002 period primarily as a result of our continued
efforts to streamline the cost structure of this segment. The loss from
operations represented 0.4% of net sales in 2003 and 7.8% of net sales in 2002.
Automotive Products
Automotive Products net sales for the quarter ended September 28, 2003
decreased 17.4% to $99.2 million from $120.2 million in the comparable 2002
period as a result of lower volumes, including an expected reduction in business
with certain customers. Income from operations increased 12.8% to $5.3 million
compared to $4.7 million in the comparable 2002 period due to lower selling,
general and administrative expenses and lower allocation of corporate expenses.
Income from operations represented 5.3% of net sales in 2003 and 3.9% of net
sales in 2002.
Technical Products
Net sales for Technical Products for the quarter ended September 28, 2003
decreased 15.4% to $25.8 million from $30.5 million in the comparable 2002
period primarily due to lower volumes partially offset by higher prices of
specialty products. Income from operations increased 106.5% to $5.0 million in
the 2003 period compared to $2.4 million in the 2002 period. The improvement was
due primarily to lower operating expenses and to costs related to Symphonex Inc.
included in the 2002 period. Income from operations represented 19.3% of net
sales in 2003 compared to 7.9% of net sales 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 our Mexico City operations. The loss from
operations was $2.1 million in the quarter ended September 28, 2003 compared to
income from operations of $1.3 million in the quarter ended September 29, 2002.
The quarters ended September 28, 2003 and September 29, 2002 included net
restructuring, impairment and other credits of $0.4 million and $3.7 million,
respectively. (See Note 5 to the condensed consolidated financial statements.)
Interest and Debt Issuance Expense
Interest and debt issuance expense was $31.6 million in the quarter ended
September 28, 2003, which represented a 106.8% increase from the comparable 2002
period expense of $15.3 million. The 2003 period includes a write off of debt
issuance costs of $12.9 million associated with the refinancing of our credit
facilities. Also, higher average debt levels and higher effective interest rates
contributed to the increase in 2003.
Income from Equity Interest in Joint Ventures
The income from equity interest in joint ventures was $0.5 million for the
quarter ended September 28, 2003 compared to income of $0.4 million in the 2002
period.
Other Income (Expense), Net
Other expense, net was $1.0 million for the quarter ended September 28,
2003 compared to $0.2 million for the quarter ended September 29, 2002. The 2003
period includes foreign currency transaction losses of $0.6 million compared to
foreign currency transaction losses of $0.7 million in 2002. The 2003 period
includes higher agency fees and lower interest and other income.
20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Benefit for Income Taxes
The effective tax benefit rate of 17.9% for the quarter ended September 28,
2003, included a $3.1 million provision that reduced the effective tax benefit
rate. The $3.1 million of tax expense was related to the Foamex L.P. $240.0
Million Senior Secured Credit Facility and the collateral provisions that
pledged the stock of Foamex Canada. This collateral pledge under the U.S.
Internal Revenue Code resulted in a deemed distribution of accumulated earnings,
as defined, of Foamex Canada. Because the Company will not be able to utilize
any Canadian tax credits associated with the deemed distribution, the full
amount of the distribution was subject to U.S. taxation and will result in a
reduction in the amount of the U.S. net operating loss carryforwards available.
Without this adjustment, the effective tax benefit rate would have been 35.9%
for the three quarters ended September 28, 2003. Effective tax rates are
impacted by annual income from equity in joint ventures, which is considered to
be permanently invested. Accordingly, no deferred tax liabilities are recognized
on such income.
RESULTS OF OPERATIONS FOR THE THREE QUARTERS ENDED SEPTEMBER 28, 2003 COMPARED
TO THE THREE QUARTERS ENDED SEPTEMBER 29, 2002
Carpet
Foam Cushion Automotive Technical
Products Products Products Products Other Total
-------- -------- ---------- ---------- -------- ----------
(thousands)
Three Quarters ended September 28, 2003
Net sales $378,405 $157,352 $339,518 $88,807 $19,498 $ 983,580
Income (loss) from operations $ 20,064 $ (3,616) $ 19,259 $21,001 $(6,117) $ 50,591
Depreciation and amortization $ 8,216 $ 2,569 $ 2,313 $ 2,439 $ 3,713 $ 19,250
Income (loss) from operations
as a percentage of net sales 5.3% (2.3)% 5.7% 23.6% n.m.* 5.1%
Three Quarters ended September 29, 2002
Net sales $358,384 $174,338 $348,282 $94,889 $24,890 $1,000,783
Income (loss) from operations $ 22,965 $ (8,967) $ 21,696 $16,235 $ (531) $ 51,398
Depreciation and amortization $ 11,778 $ 5,118 $ 3,012 $ 2,221 $ 1,616 $ 23,745
Income (loss) from operations
as a percentage of net sales 6.4% (5.1)% 6.2% 17.1% n.m.* 5.1%
* not meaningful
Income from Operations
Net sales for the three quarters ended September 28, 2003 decreased 1.7% to
$983.6 million from $1,000.8 million in the three quarters ended September 29,
2002. An increase in Foam Products net sales was more than offset by decreases
in the other segments.
The gross profit margin was $109.0 million, or 11.1%, in the three quarters
ended September 28, 2003 compared to $115.4 million, or 11.5%, 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 and operating
efficiencies.
Income from operations for the three quarters ended September 28, 2003 was
$50.6 million, or 5.1% of net sales, which represented a 1.6% decrease from the
$51.4 million, or 5.1% of net sales, reported during the comparable 2002 period.
The reduction in gross profit was more than offset by a decline of $9.6 million,
or 13.9% in selling, general and administrative expenses, primarily due to lower
employee costs. The 2002 period included $4.4 million of costs associated with
Symphonex Inc. and the proposed sale of the Carpet Cushion Products segment.
Results include net restructuring, impairment and other credits of $1.2 million
in 2003 and $5.2 million in 2002. Restructuring, impairment and other credits
are discussed under "Other" below.
21
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Foam Products
Foam Products net sales for the three quarters ended September 28, 2003
increased 5.6% to $378.4 million from $358.4 million in the comparable 2002
period. Increases in selling prices to customers and increased volumes of
consumer products were partially offset by decreases in volumes in other
markets. Income from operations decreased 12.6% to $20.1 million in the three
quarters ended September 28, 2003 from $23.0 million in the comparable 2002
period. Income from operations was negatively impacted by increased raw material
prices in the three quarters ended September 28, 2003. Income from operations
was 5.3% of net sales in 2003, down from 6.4% of net sales in 2002.
Carpet Cushion Products
Carpet Cushion Products net sales for the three quarters ended September
28, 2003 decreased 9.7% to $157.4 million from $174.3 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 $3.6
million in the three quarters ended September 28, 2003 compared to a $9.0
million loss in the comparable 2002 period primarily due to cost containment
from the streamlining of operations and higher selling prices. The loss from
operations represented 2.3% of net sales in 2003 and 5.1% of net sales in 2002.
Automotive Products
Automotive Products net sales for the three quarters ended September 28,
2003 decreased 2.5% to $339.5 million from $348.3 million in the comparable 2002
period. Higher selling prices were more than offset by lower volumes. Income
from operations decreased 11.2% to $19.3 million compared to $21.7 million in
the comparable 2002 period primarily due to higher raw material costs. Income
from operations represented 5.7% of net sales in 2003 and 6.2% of net sales in
2002.
Technical Products
Net sales for Technical Products for the three quarters ended September 28,
2003 decreased 6.4% to $88.8 million from $94.9 million in the comparable 2002
period primarily due to lower volumes. Income from operations increased 29.4% to
$21.0 million in the 2003 period compared to $16.2 million in the 2002 period.
The improvement is partially due to increased sales of high-end products. The
2002 period also included costs related to Symphonex Inc. Income from operations
represented 23.6% of net sales in 2003 compared to 17.1% 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 our Mexico City operations. The loss from
operations was $6.1 million in the three quarters ended September 28, 2003 and
$0.5 million in the three quarters ended September 29, 2002 and reflected
generally higher corporate expenses in 2003 and included restructuring and other
credits discussed below.
During the three quarters ended September 28, 2003, we recorded
restructuring credits of $1.2 million consisting of a $2.3 million reduction in
the liability primarily for severance and termination benefits no longer
required as the actions contemplated under the related plans have substantially
been completed, and a charge of $0.7 million for additional lease termination
costs for a closed facility as a result of changes in real estate market
conditions. Additionally, we recorded a $0.4 million restructuring charge
reported in the Other segment as a result of an employee termination plan for
approximately 300 employees at our Mexico City operations. The actions under
this plan were substantially completed as of September 28, 2003.
During the three quarters ended September 29, 2002, we recorded
restructuring, impairment and other credits of $5.2 million, primarily related
to the reversal of previously recorded liabilities and the reimbursement of
certain lease costs.
22
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Interest and Debt Issuance Expense
Interest and debt issuance expense was $70.0 million in the three quarters
ended September 28, 2003, which represented a 36.7% increase from the comparable
2002 period expense of $51.2 million. The 2003 and 2002 periods included charges
of $12.9 million and $4.9 million, respectively, relating to the write off of
debt issuance costs as a result of early extinguishments of debt. Higher average
debt levels, effective interest rates and amortization of debt issuance costs
all contributed to the increase in 2003.
Income from Equity Interest in Joint Ventures
The income from equity interest in joint ventures was $1.4 million for the
three quarters ended September 28, 2003 compared to income of $1.5 million in
the 2002 period.
Other Income (Expense), Net
Other expense, net was $2.8 million for the three quarters ended September
28, 2003 compared to $1.4 million for the three quarters ended September 29,
2002. The 2003 period includes foreign currency transaction losses of $2.3
million compared to foreign currency transaction losses of $1.7 million in 2002.
Benefit for Income Taxes
The effective tax benefit rate was 21.2% for the three quarters ended
September 28, 2003. The effective tax benefit rate for the quarter and three
quarters ended September 28, 2003, included a $3.1 million provision that
reduced the effective tax benefit rate. The $3.1 million of tax expense was
related to the Foamex L.P. $240.0 Million Senior Secured Credit Facility and the
collateral provisions that pledged the stock of Foamex Canada. This collateral
pledge under the U.S. Internal Revenue Code resulted in a deemed distribution of
accumulated earnings, as defined, of Foamex Canada. Because the Company will not
be able to utilize any Canadian tax credits associated with the deemed
distribution, the full amount of the distribution was subject to U.S. taxation
and will result in a reduction in the amount of the U.S. net operating loss
carryforwards available. Without this adjustment, the effective tax benefit rate
would have been 35.9% for the three quarters ended September 28, 2003. Effective
tax rates are impacted by annual income from equity in joint ventures, which is
considered to be permanently invested. Accordingly, no deferred tax liabilities
are recognized on such income.
During the three quarters ended September 29, 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 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 three
quarters ended September 29, 2002 by $77.3 million, and decreased goodwill by
$12.4 million and other comprehensive loss by $9.6 million.
We have deferred income tax assets aggregating $122.1 million as of
September 28, 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
taxable income to offset our U.S. net operating loss carryforwards of
approximately $217.9 million at December 29, 2002 expiring from 2010 to 2022.
Approximately $111.5 million of the net operating loss carryforwards, related to
$39.0 million of deferred tax assets, expire in the years 2010 to 2012 with the
remainder principally expiring in the 2018-2022 period. During 2002, we
projected a taxable loss for 2002 and small amounts of taxable income in 2003
and 2004, and taxable income in the years 2005 through 2012 which would be
sufficient to utilize all of the net operating loss carryforwards that expire in
the years 2010 to 2012. Our actual results for 2002 were essentially similar to
the results we projected when we reversed the valuation allowance in 2002. Our
projections as of December 29, 2002 included tax losses in each of the years
2002 through 2004 that can be carried forward to 2022-24. We continue to project
that we will have sufficient taxable income in the years 2005 to 2012 to utilize
all of the expiring net operating loss carryforwards. We
23
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
have had an ownership change as defined in IRC Section 382 and accordingly, we
are limited (on an annual basis) to approximately $21.0 million of operating
loss carryforward utilization.
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
and quarterly basis or if there is a significant change in circumstances that
may cause a change in our judgment about realizability of 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.
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 and principal 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 2005. 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 $5.0 million at September 28, 2003 compared
to $4.5 million at December 29, 2002. Working capital at September 28, 2003 was
$118.4 million and the current ratio was 1.54 to 1 compared to working capital
at December 29, 2002 of $136.7 million and a current ratio of 1.68 to 1.
Total debt at September 28, 2003 was $735.8 million, down $2.8 million from
December 29, 2002. As of September 28, 2003, there were $83.4 million of
revolving credit borrowings under the Foamex L.P. $240.0 Million Senior Secured
Credit Facility with approximately $59.0 million available for borrowings and
$20.9 million of letters of credit outstanding.
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. was
subject to minimum net worth, minimum EBDAIT, as defined, and maximum capital
expenditure covenants through periods ending December 28, 2003. The minimum
EBDAIT covenant was 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 2003 until the Amended Credit Facility was terminated on
August 18, 2003.
On August 18, 2003, Foamex L.P. entered into a $240.0 Million Senior
Secured Credit Facility with a new group of lenders and an $80.0 million Secured
Term Loan facility with another lender. Proceeds borrowed under these new
facilities were used to repay all outstanding balances under the Foamex L. P.
Amended Credit Facility. In addition, Foamex Canada's revolving credit facility
that did not have any outstanding borrowings and had availability of
approximately $5.9 million was terminated. The termination of the Amended Credit
Facility resulted in a write off of debt issuance costs of $12.9 million
recorded in the quarter ended September 28, 2003.
The $240.0 Million Senior Secured Credit Facility consists of a revolving
credit facility with a maximum availability of $190.0 million and a term loan of
$50.0 million. The revolving credit facility includes a $50.0 million sublimit
for letters of credit and availability is limited to eligible amounts, as
defined, of accounts receivable and inventory. Borrowings under the term loan
are limited to eligible amounts, as defined, of equipment and real estate.
Substantially all the assets of Foamex L.P. and its domestic subsidiaries and
Foamex Canada are pledged as
24
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
collateral for the related borrowings. Borrowings under the revolving credit
facility and the term loan bear interest at floating rates based upon and
including a margin over either LIBOR or a Base Rate, as defined. At September
28, 2003, the weighted average interest rates were 4.34% and 4.38% for the
revolving loans and the term loan, respectively. The term loan requires
quarterly installment payments of approximately $1.8 million, commencing on
September 30, 2003. All borrowings under the $240.0 Million Senior Secured
Credit Facility will mature on April 30, 2007.
The $80.0 million Secured Term Loan will mature on April 30, 2007.
Borrowings under this facility bear interest at a rate that is 9.25% plus the
greater of Reference Rate, as defined, or 4.25%. The minimum rate, which is in
effect as of September 28, 2003, is 13.50%. In addition, Foamex L.P. is subject
to a 1.00% facility fee which is payable annually on the anniversary date.
Borrowings under the Secured Term Loan are collateralized by the same collateral
as the $240.0 Million Senior Secured Credit Facility. An intercreditor agreement
governs the distribution of collateral among the lenders under the $240.0
Million Senior Secured Credit Facility and the Secured Term Loan.
Under the $240.0 Million Senior Secured Credit Facility and the Secured
Term Loan, Foamex L.P. is subject to a fixed charge coverage ratio, as defined.
For the quarter ended September 28, 2003, Foamex L.P.'s fixed charge coverage
ratio was 1.28 which exceeded the required fixed charge coverage ratio of 1.00.
Foamex L.P. is also subject to a maximum annual capital expenditure amount which
is $17.7 million for the year ending December 28, 2003.
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.
Cash Flow from Operating Activities
Cash provided by operating activities in the three quarters ended September
28, 2003 was $25.8 million compared to cash used of $6.9 million in the three
quarters ended September 29, 2002. Accounts receivable increased by $4.6 million
primarily as a result of higher sales in the latter part of the quarter ended
September 28,
25
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
2003 when compared to the latter part of the fourth quarter of 2002, while
accounts payable and cash overdrafts increased by a net $16.0 million as a
result of the timing of our payments to vendors.
Cash Flow from Investing Activities
Cash used for investing activities totaled $6.3 million for the three
quarters ended September 28, 2003. Cash requirements included capital
expenditures of $4.7 million and capitalized software development costs of $2.7
million. In the three quarters ended September 29, 2002, cash used for investing
activities was $16.1 million which consisted principally of capital expenditures
of $11.9 million. The estimated capital expenditures for the full year 2003 are
expected to be approximately $7.5 million.
Cash Flow from Financing Activities
Cash used for financing activities was $19.0 million for the three quarters
ended September 28, 2003 compared to $24.0 million of cash provided in the
comparable period of 2002. Cash used in 2003 primarily included debt issuance
costs and a reduction in cash overdrafts. 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 September
28, 2003 was $2.7 million. Although it is possible that new information or
future developments could require us to reassess our 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
Our debt securities with variable interest rates are subject to market risk
for changes in interest rates. On September 28, 2003, indebtedness with variable
interest rates aggregated $220.4 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.
Accounting Changes
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. We have reclassified the extraordinary items previously
reported in the quarter and three quarters ended September 29, 2002 with the
related tax impacts included in the provision for income taxes.
In January 2003, FASB Interpretation 46, "Consolidation of Variable
Interest Entities" ("FIN No. 46") was issued. FIN No. 46 clarifies the
application of Accounting Research Bulletin No. 51, "Consolidated Financial
Statements", to certain entities in which the equity investors do not have a
controlling financial interest or do not
26
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
have sufficient equity at risk. FIN No. 46 was effective on January 31, 2003 for
entities acquired after that date. The Financial Accounting Standards Board has
postponed the effective date for entities acquired on or before January 31, 2003
to December 15, 2003. We believe that FIN No. 46 will have no impact on our
current equity investments.
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 management, with the participation of the Company's Chief
Executive Officer and Chief Financial Officer, evaluated the effectiveness of
the Company's disclosure controls and procedures as of the end of the period
covered by this report. Based on that evaluation, the Company's Chief Executive
Officer and Chief Financial Officer concluded that the Company's disclosure
controls and procedures as of the end of the period covered by this report are
effective for gathering, analyzing and disclosing the information that the
Company is required to disclose in its reports filed under the Securities
Exchange Act of 1934, as amended (the "Act").
There have not been any significant changes in the Company's internal
controls over financial reporting (as defined in Rules 13a-15(f) and 15d-15(e)
under the Act) during the fiscal quarter to which this report relates that have
materially affected, or are reasonably likely to materially affect, the
Company's internal controls over financial reporting.
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 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 September 28, 2003:
On August 14, 2003, a report under Item 12, Results of Operations
and Financial Condition furnishing a copy of the Registrant's
earnings press release for the quarter ended June 29, 2003.
On August 19, 2003, a report under Item 5, Other Events,
furnishing a copy of the Registrant's press release dated August
18, 2003 announcing that Foamex L.P. had closed a refinancing of
its bank debt.
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: November 12, 2003 By: /s/ K. Douglas Ralph
------------------------------------
K. Douglas Ralph
Executive Vice President and Chief
Financial Officer
(Duly Authorized Officer)
Date: November 12, 2003 By: /s/ Bruno Fontanot
------------------------------------
Bruno Fontanot
Senior Vice President - Finance
and Chief Accounting Officer
29