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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 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 November 7, 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
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
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations. 22
Item 3. Quantitative and Qualitative Disclosures about Market Risk. 29
Item 4. Controls and Procedures. 29
Part II. Other Information
Item 1. Legal Proceedings. 30
Item 6. Exhibits and Reports on Form 8-K. 30
Signatures 31
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
FOAMEX L.P. 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)
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 18,804 29,423 58,593 69,100
RESTRUCTURING, IMPAIRMENT AND OTHER
CHARGES (CREDITS) (377) (3,674) (1,237) (5,212)
-------- -------- -------- ----------
INCOME FROM OPERATIONS 19,082 5,065 51,606 51,551
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) (1,403)
-------- -------- -------- ----------
INCOME (LOSS) BEFORE PROVISION FOR
INCOME TAXES (12,925) (10,005) (19,859) 437
PROVISION FOR INCOME TAXES 168 389 431 1,461
-------- -------- -------- ----------
LOSS BEFORE CUMULATIVE EFFECT OF
ACCOUNTING CHANGE (13,093) (10,394) (20,290) (1,024)
CUMULATIVE EFFECT OF ACCOUNTING CHANGE - - - (71,966)
-------- -------- -------- ----------
NET LOSS $(13,093) $(10,394) $(20,290) $ (72,990)
======== ======== ======== ==========
The accompanying notes are an integral part of the unaudited
condensed consolidated financial statements.
3
FOAMEX L.P. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
September 28, 2003 December 29, 2002
------------------ -----------------
ASSETS (unaudited)
CURRENT ASSETS (thousands)
Cash and cash equivalents $ 4,961 $ 4,363
Accounts receivable, net of allowances of $10,715 in 2003
and $10,311 in 2002 196,110 191,546
Inventories 100,812 98,010
Other current assets 21,847 22,558
---------- ----------
Total current assets 323,730 316,477
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
SOFTWARE, net of accumulated amortization of $3,103 in
2003 and $2,634 in 2002 9,584 8,254
OTHER ASSETS 31,401 26,366
---------- ----------
TOTAL ASSETS $ 687,126 $ 695,283
========== ==========
LIABILITIES AND PARTNERS' DEFICIENCY
CURRENT LIABILITIES
Current portion of long-term debt $ 7,158 $ 46
Accounts payable 110,159 87,394
Accrued employee compensation and benefits 25,912 26,330
Accrued interest 22,157 14,173
Accrued customer rebates 18,636 18,813
Cash overdrafts 11,002 17,737
Other accrued liabilities 20,865 33,953
---------- ----------
Total current liabilities 215,889 198,446
LONG-TERM DEBT 728,599 738,540
ACCRUED EMPLOYEE BENEFITS 48,901 48,022
OTHER LIABILITIES 14,634 16,061
---------- ----------
Total liabilities 1,008,023 1,001,069
COMMITMENTS AND CONTINGENCIES
PARTNERS' DEFICIENCY
General partner (260,847) (240,107)
Limited partner - -
Accumulated other comprehensive loss (50,829) (56,458)
Notes receivable from related party (9,221) (9,221)
---------- ----------
Total partners' deficiency (320,897) (305,786)
---------- ----------
TOTAL LIABILITIES AND PARTNERS' DEFICIENCY $ 687,126 $ 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)
Three Quarters Ended
--------------------------------
September 28, September 29,
2003 2002
------------- --------------
(thousands)
OPERATING ACTIVITIES
Net loss $(20,290) $(72,990)
Adjustments to reconcile net loss to net cash provided
by (used for) operating activities:
Cumulative effect of accounting change - 71,966
Depreciation and amortization 19,250 23,745
Write off of debt issuance costs 12,928 4,892
Amortization of debt issuance costs, debt premium
and debt discount 3,967 1,493
Other operating activities (795) 612
Changes in operating assets and liabilities, net 11,026 (35,989)
-------- --------
Net cash provided by (used for) operating activities 26,086 (6,271)
-------- --------
INVESTING ACTIVITIES
Capital expenditures (4,683) (11,877)
Proceeds from sale of assets 1,135 21
Collection of note receivable from partner - 2,490
Other investing activities (2,729) (4,205)
-------- --------
Net cash used for investing activities (6,277) (13,571)
-------- --------
FINANCING ACTIVITIES
Proceeds from (repayments of) revolving loans 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 (6,735) 21,208
Debt issuance costs (11,659) (25,491)
Interest rate swaps - 14,821
Other financing activities (208) 105
-------- --------
Net cash provided by (used for) financing activities (19,211) 20,583
-------- --------
Net increase in cash and cash equivalents 598 741
Cash and cash equivalents at beginning of period 4,363 15,059
-------- --------
Cash and cash equivalents at end of period $ 4,961 $ 15,800
======== ========
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 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 by Foamex International Inc. ("Foamex
International") to Foamex L.P. on March 25, 2002. The contribution of Foamex
Carpet has been accounted for as a merger of entities under common control and
has been recorded in a manner similar to a pooling of interests. Accordingly,
the condensed consolidated financial statements include the accounts of Foamex
Carpet for all periods presented. 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. 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 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. Foamex L.P. has reclassified the extraordinary item
previously reported in the three quarters ended September 29, 2002 with the
related tax benefit 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. Foamex
L.P. believes that FIN No. 46 will have no impact on its current equity
investments.
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 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.
6
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
3. RESTRUCTURING, IMPAIRMENT AND OTHER CHARGES (CREDITS)
During the three quarters ended September 28, 2003, Foamex L.P. 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, Foamex L.P. 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, Foamex L.P. announced an Operational
Reorganization Plan as discussed in Foamex L.P.'s Form 10-K for the year ended
December 31, 2001. That Plan included closing certain plants of the Carpet
Cushion Products segment and certain personnel reductions and other savings at
the corporate level. During the three quarters ended September 29, 2002, Foamex
L.P. attempted a sale of the Carpet Cushion Products segment and management put
such plant closings on hold until the completion of the sale negotiations. On
October 4, 2002, Foamex L.P. announced that negotiations to sell the Carpet
Cushion Products segment had been terminated. Management 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, Foamex L.P. recorded an
additional restructuring credit of $2.1 million related to the collection of
deferred rent receivable and other charges for certain additional expenses of
$0.6 million relating to the 2001 restructuring plan.
The following tables set forth the components of Foamex L.P.'s
restructuring accruals and activity for the quarter and three quarters ended
September 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
===== ===== ==== ====
Foamex L.P. 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.
4. 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
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
5. 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 -
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) (4) 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 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) Debt of Foamex L.P., guaranteed by Foamex International, FMXI, Inc. and
Foamex Canada.
(2) Debt of Foamex L.P., guaranteed by Foamex International and FMXI, Inc.
(3) Debt of Foamex L.P. and Foamex Capital Corporation.
(4) 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
8
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
5. LONG-TERM DEBT (continued)
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 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. 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".
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
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
5. LONG-TERM DEBT (continued)
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 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 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 September 28,
2003.
10
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
5. LONG-TERM DEBT (continued)
Debt Covenants
The indentures 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. Under the most restrictive of the distribution
restrictions, as of September 28, 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 $1.5 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
========
6. COMPREHENSIVE LOSS
The components of comprehensive loss are listed below.
Quarters Ended Three Quarters Ended
------------------------------ ---------------------------
September 28, September 29, September 28, September 29,
2003 2002 2003 2002
------------- ------------- ------------- -------------
(thousands)
Net loss $(13,093) $(10,394) $(20,290) $(72,990)
Foreign currency translation adjustments 1,493 (631) 5,629 (597)
-------- -------- -------- --------
Total comprehensive loss $(11,600) $(11,025) $(14,661) $(73,587)
======== ======== ======== ========
11
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
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 $(0.4) million and $(1.2) million in the quarter and
three quarters ended September 28, 2003, respectively, 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 $ 10,817 $ (126) $ 5,385 $ 5,032 $(2,026) $ 19,082
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 $ 1,160 $ (4,680) $ 4,745 $ 2,463 $ 1,377 $ 5,065
Depreciation and amortization $ 3,347 $ 1,639 $ 1,046 $ 930 $ 552 $ 7,514
Three quarters ended September 28, 2003
Net sales $378,405 $157,352 $339,518 $88,807 $19,498 $ 983,580
Income (loss) from operations $ 20,466 $ (3,419) $ 19,464 $21,092 $(5,997) $ 51,606
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 $ 23,003 $ (8,938) $ 21,727 $16,259 $ (500) $ 51,551
Depreciation and amortization $ 11,778 $ 5,118 $ 3,012 $ 2,221 $ 1,616 $ 23,745
8. 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").
9. COMMITMENTS AND CONTINGENCIES
Litigation - Breast Implants
As of November 5, 2003, Foamex L.P. 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,
12
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
9. COMMITMENTS AND CONTINGENCIES (continued)
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 actions, based on management's present
assessment of the merits of pending claims, after consultation with counsel to
Foamex L.P., and without taking into account the indemnification provided by
Trace, the coverage provided by Trace's and Foamex L.P.'s liability insurance
and potential indemnity from the manufacturers of polyurethane covered breast
implants, management believes that it is not reasonably possible that the
disposition of the matters that are pending or that may reasonably be
anticipated to be asserted will result in a loss that is material to Foamex
L.P.'s consolidated financial position, 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 September 28, 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, is from time to time involved in
administrative and judicial proceedings and inquiries relating to environmental
matters. As of September 28, 2003, Foamex L.P. had accruals of approximately
$2.7 million for environmental matters, including approximately $2.2 million
related to remediating and monitoring soil and groundwater contamination and
approximately $0.5 million related to PRP sites and other matters. 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 Foamex L.P.'s
financial position, results of operations and cash flows.
13
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
9. COMMITMENTS AND CONTINGENCIES (continued)
On August 8, 2001, the United States Environmental Protection Agency, or
"EPA," proposed a National Emission Standard for Hazardous Air Pollutants, or
"NESHAP" for Flexible Polyurethane Foam Fabrication Operations. The proposed
NESHAP regulates emissions of methylene chloride and other Hazardous Air
Pollutants and restricts air emissions from flame lamination sources. 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.
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 September 28, 2003 and December 29, 2002 and the condensed
consolidating statements of operations for the quarters and three quarters ended
September 28, 2003 and September 29, 2002 and cash flows for the three quarters
ended September 28, 2003 and September 29, 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,
14
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
10. GUARANTOR INFORMATION (continued)
liabilities and its business to Foamex L.P. and accordingly, Foamex Carpet is
not included as a guarantor in the financial information as of September 28,
2003 and the periods then ended. The nonguarantors are Foamex Canada 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.
Condensed Consolidating Balance Sheet
As of September 28, 2003
Foamex
Capital Foamex L.P. Consolidated
Guarantors Nonguarantors Corporation (Parent) Eliminations Foamex L.P.
---------- ------------- ----------- ----------- ------------ ------------
Assets (thousands of dollars)
Current assets $ 373 $30,457 $ 1 $299,718 $ (6,819) $ 323,730
Investment in subsidiaries 10,652 - - 47,752 (58,404) -
Property, plant and equipment, net - 20,748 - 146,943 - 167,691
Goodwill - 5,582 - 120,486 - 126,068
Debt issuance costs - - - 28,652 - 28,652
Software - - - 9,584 - 9,584
Other assets 13,858 2,083 - 19,660 (4,200) 31,401
------- ------- ----- -------- -------- ---------
Total assets $24,883 $58,870 $ 1 $672,795 $(69,423) $ 687,126
======= ======= ===== ======== ======== =========
Liabilities and Partners' Deficiency
Current liabilities $ - $20,094 $ - $203,660 $ (7,865) $ 215,889
Long-term debt 4,946 - - 727,853 (4,200) 728,599
Other liabilities 535 821 - 62,179 - 63,535
Total liabilities 5,481 20,915 - 993,692 (12,065) 1,008,023
Partners' deficiency 19,402 37,955 1 (320,897) (57,358) (320,897)
------- ------- ----- -------- -------- ---------
Total liabilities and partners'
deficiency $24,883 $58,870 $ 1 $672,795 $(69,423) $ 687,126
======= ======= ===== ======== ======== =========
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
======= ======= ===== ======== ======== =========
15
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 September 28, 2003
Foamex
Capital Foamex L.P. Consolidated
Guarantors Nonguarantors Corporation (Parent) Eliminations Foamex L.P.
---------- ------------- ----------- ----------- ------------ ------------
(thousands of dollars)
Net sales $ - $25,256 $ - $302,472 $(6,262) $321,466
Cost of goods sold - 22,609 - 267,610 (6,262) 283,957
------- ------- ------- -------- ------- --------
Gross profit - 2,647 - 34,862 - 37,509
Selling, general and administrative
expenses - 2,133 - 16,671 - 18,804
Restructuring, impairment and other
charges (credits) - - - (377) - (377)
------- ------- ------- -------- ------- --------
Income from operations - 514 - 18,568 - 19,082
Interest and debt issuance expense 43 8 - 31,499 - 31,550
Equity in undistributed earnings
of affiliates (545) - - 178 862 495
Other expense, net 32 (644) - (340) - (952)
------- ------- ------- -------- ------- --------
Loss before provision for income
taxes (556) (138) - (13,093) 862 (12,925)
Provision for income taxes - 168 - - - 168
------- ------- ------- -------- ------- --------
Net loss $ (556) $( 306) $ - $(13,093) $ 862 $(13,093)
======= ======= ======= ======== ======= ========
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 September 29, 2002
Foamex
Capital Foamex L.P. Consolidated
Guarantors Nonguarantors Corporation (Parent) Eliminations Foamex L.P.
---------- ------------- ----------- ----------- ------------ ------------
(thousands of dollars)
Net sales $62,594 $27,453 $ - $295,004 $(44,228) $340,823
Cost of goods sold 57,656 24,899 - 271,682 (44,228) 310,009
------- ------- ------- -------- ------- --------
Gross profit 4,938 2,554 - 23,322 - 30,814
Selling, general and administrative
expenses 2,889 1,841 - 24,693 - 29,423
Restructuring, impairment and other
charges (credits) 225 - - (3,899) - (3,674)
------- ------- ------- -------- ------- --------
Income from operations 1,824 713 - 2,528 - 5,065
Interest and debt issuance expense 332 78 - 15,172 (324) 15,258
Equity in undistributed earnings
of affiliates (873) - - 2,096 (837) 386
Other expense, net 509 (652) - 269 (324) (198)
------- ------- ------- -------- ------- --------
Income before provision for income
taxes 1,128 (17) - (10,279) (837) (10,005)
Provision for income taxes (413) 687 - 115 - 389
------- ------- ------- -------- ------- --------
Net loss $ 1,541 $ (704) $ - $(10,394) $ (837) $(10,394)
======= ======= ======= ======== ======= ========
17
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
10. GUARANTOR INFORMATION (continued)
Condensed Consolidating Statement of Operations
For the three quarters ended September 28, 2003
Foamex
Capital Foamex L.P. Consolidated
Guarantors Nonguarantors Corporation (Parent) Eliminations Foamex L.P.
---------- ------------- ----------- ----------- ------------ ------------
(thousands of dollars)
Net sales $ - $79,526 $ - $919,508 $(15,454) $983,580
Cost of goods sold - 72,515 - 817,557 (15,454) 874,618
----- ------- ----- -------- -------- --------
Gross profit - 7,011 - 101,951 - 108,962
Selling, general and administrative
expenses - 5,362 - 53,231 - 58,593
Restructuring, impairment and other
charges (credits) - 403 - (1,640) - (1,237)
----- ------- ----- -------- -------- --------
Income from operations - 1,246 - 50,360 - 51,606
Interest and debt issuance expense 176 26 - 69,837 - 70,039
Equity in undistributed earnings
of affiliates (931) - - (235) 2,540 1,374
Other expense, net 143 (2,365) - (578) - (2,800)
----- ------- ----- -------- -------- --------
Income (loss) before provision (benefit)
for income taxes (964) (1,145) - (20,290) 2,540 (19,859)
Provision (benefit) for income taxes - 431 - - - 431
----- ------- ----- -------- -------- --------
Net income (loss) $(964) $(1,576) $ - $(20,290) $ 2,540 $(20,290)
===== ======= ===== ======== ======== ========
18
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
10. GUARANTOR INFORMATION (continued)
Condensed Consolidating Statement of Operations
For the three quarters ended September 29, 2002
Foamex
Capital Foamex L.P. Consolidated
Guarantors Nonguarantors Corporation (Parent) Eliminations Foamex L.P.
---------- ------------- ----------- ----------- ------------ ------------
(thousands of dollars)
Net sales $179,383 $87,225 $ - $862,969 $(128,794) $1,000,783
Cost of goods sold 166,739 76,866 - 770,533 (128,794) 885,344
-------- ------- ----- -------- --------- ----------
Gross profit 12,644 10,359 - 92,436 - 115,439
Selling, general and administrative
expenses 9,209 5,112 - 54,779 - 69,100
Restructuring, impairment and other
charges (credits) 225 - - (5,437) - (5,212)
-------- ------- ----- -------- --------- ----------
Income from operations 3,210 5,247 - 43,094 - 51,551
Interest and debt issuance expense 3,590 204 - 47,909 (478) 51,225
Equity in undistributed earnings
of affiliates 588 - - (29,968) 30,894 1,514
Other expense, net 460 (1,545) - 160 (478) (1,403)
-------- ------- ----- -------- --------- ----------
Income (loss) before provision (benefit)
for income taxes 668 3,498 - (34,623) 30,894 437
Provision (benefit) for income taxes (572) 1,894 - 139 - 1,461
-------- ------- ----- -------- --------- ----------
Income (loss) before accounting change 1,240 1,604 - (34,762) 30,894 (1,024)
Cumulative effect of accounting change (29,944) (3,794) - (38,228) - (71,966)
-------- ------- ----- -------- --------- ----------
Net income (loss) $(28,704) $(2,190) $ - $(72,990) $ 30,894 $ (72,990)
======== ======= ===== ======== ========= ==========
19
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
10. GUARANTOR INFORMATION (continued)
Condensed Consolidating Statement of Cash Flows
For the three quarters ended September 28, 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) $(964) $(1,576) $ - $(20,290) $2,540 $(20,290)
Total adjustments to reconcile net
income (loss) to net cash provided
by operating activities 964 1,009 - 46,943 (2,540) 46,376
----- ------- ------ -------- ------ --------
Net cash provided by operating
activities - (567) - 26,653 - 26,086
----- ------- ------ -------- ------ --------
Cash Flows from Investing Activities
Capital expenditures - (82) - (4,601) - (4,683)
Other - - - (1,594) - (1,594)
----- ------- ------ -------- ------ --------
Net cash used for investing activities - (82) - (6,195) - (6,277)
----- ------- ------ -------- ------ --------
Cash Flows from Financing Activities
Proceeds from (repayments of)
revolving loans - - - 31,618 - 31,618
Proceeds form long-term debt - - - 130,000 - 130,000
Repayments of long-term debt - - - (162,227) - (162,227)
Other, net - - - (18,602) - (18,602)
----- ------- ------ -------- ------ --------
Net cash used for financing activities - - - (19,211) - (19,211)
----- ------- ------ -------- ------ --------
Net increase (decrease) in cash and
cash equivalents - (649) - 1,247 - 598
Cash and cash equivalents at
beginning of period - 1,781 1 2,581 - 4,363
----- ------- ------ -------- ------ --------
Cash and cash equivalents at
end of period $ - $ 1,132 $ 1 $ 3,828 $ - $ 4,961
===== ======= ====== ======== ====== ========
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 three quarters ended September 29, 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) $(28,704) $(2,190) $ - $ (72,990) $30,894 $ (72,990)
Total adjustments to reconcile net
income (loss) to net cash used for
operating activities 33,230 (814) - 65,296 (30,993) 66,719
-------- ------- ------ --------- ------- ---------
Net cash used for
operating activities 4,526 (3,004) - (7,694) (99) (6,271)
-------- ------- ------ --------- ------- ---------
Cash Flows from Investing Activities
Capital expenditures (390) (541) - (11,045) 99 (11,877)
Repayment of revolving loan by partner - - - 2,490 - 2,490
Intercompany investing activities 135 - - (24,620) 24,485 -
Other - - - (4,184) - (4,184)
-------- ------- ------ --------- ------- ---------
Net cash used for investing activities (255) (541) - (37,359) 24,584 (13,571)
-------- ------- ------ --------- ------- ---------
Cash Flows from Financing Activities
Net repayments of revolving loans - - - (125,000) - (125,000)
Proceeds form long-term debt - - - 356,590 - 356,590
Repayments of long-term debt (135) (1,304) - (188,621) - (190,060)
Repayments of long-term debt
Related party (31,590) - - - - (31,590)
Increase (decrease) in intercompany note 24,485 - - - (24,485) -
Increase in cash overdrafts 1,392 - - 19,816 - 21,208
Debt issuance costs - - - (25,491) - (25,491)
Interest rate swaps - - - 14,821 - 14,821
Other financing activities - - - 105 - 105
-------- ------- ------ --------- ------- ---------
Net cash provided by financing activities (5,848) (1,304) - 52,220 (24,485) 20,583
-------- ------- ------ --------- ------- ---------
Net increase in cash and cash equivalents (1,577) (4,849) - 7,167 - 741
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 $ 1,181 $ 2,314 $ 1 $ 12,304 $ - $ 15,800
======== ======= ====== ========= ======= =========
21
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 $ 10,817 $ (126) $ 5,385 $ 5,032 $(2,026) $ 19,082
Depreciation and amortization $ 2,608 $ 594 $ 722 $ 735 $ 1,341 $ 6,000
Income (loss) from operations
as a percentage of net sales 7.9% (0.2)% 5.4% 19.5% n.m.* 5.9%
Quarter ended September 29, 2002
Net sales $121,773 $61,105 $120,151 $30,500 $ 7,294 $340,823
Income (loss) from operations $ 1,160 $(4,680) $ 4,745 $ 2,463 $ 1,377 $ 5,065
Depreciation and amortization $ 3,347 $ 1,639 $ 1,046 $ 930 $ 552 $ 7,514
Income (loss) from operations
as a percentage of net sales 1.0% (7.7)% 3.9% 8.1% n.m.* 1.5%
* 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 $19.1
million, or 5.9% of net sales, which represented a 276.7% increase from the $5.1
million, or 1.5% of net sales, reported during the comparable 2002 period.
Results for the 2003 and 2002 periods included 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 $10.6 million, or 36.1%.
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 $10.8 million in the quarter ended September 28, 2003
from $1.2 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 7.9% of net
sales in 2003, up from 1.0% of net sales in 2002.
22
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 $0.1 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 0.2% of net sales in 2003 and 7.7% 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 13.5% to $5.4 million
compared to $4.7 million in the comparable 2002 period primarily due to lower
selling, general and administrative expenses and lower allocation of corporate
expenses. Income from operations represented 5.4% 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 due primarily to lower volumes partially offset by higher prices of
specialty products. Income from operations increased 104.3% to $5.0 million in
the 2003 period compared to $2.5 million in the 2002 period. The improvement was
due to lower operating expenses and to costs related to Symphonex Inc. included
in the 2002 period. Income from operations represented 19.5% of net sales in
2003 compared to 8.1% 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 $2.0 million in the quarter ended September 28, 2003 compared to
income from operations of $1.4 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 3 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.
23
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
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.
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 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 $ 20,466 $ (3,419) $ 19,464 $21,092 $(5,997) $ 51,606
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 5.4% (2.2)% 5.7% 23.8% n.m.* 5.2%
Three Quarters ended September 29, 2002
Net sales $358,384 $174,338 $348,282 $94,889 $24,890 $1,000,783
Income (loss) from operations $ 23,003 $ (8,938) $ 21,727 $16,259 $ (500) $ 51,551
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.* 5.2%
* 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
$51.6 million, or 5.2% of net sales, which represented a 0.1% increase from the
$51.6 million, or 5.2% of net sales, reported during the comparable 2002 period.
The reduction in gross profit was more than offset by a decline of $10.5
million, or 15.2%, in selling, general and administrative expenses, primarily
due to the 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 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.
24
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 11.0% to $20.5 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 5.4% 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 $3.4
million in the three quarters ended September 28, 2003 compared to an $8.9
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 2.2% 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 10.4% to $19.5 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 29.7% to
$21.1 million in the 2003 period compared to $16.3 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 23.8% 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 $6.0 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.
25
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 include 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.
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 and
principal 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 our debt are not
significant until the second half of 2005.
Cash and cash equivalents were $5.0 million at September 28, 2003 compared
to $4.4 million at December 29, 2002. Working capital at September 28, 2003 was
$107.8 million and the current ratio was 1.50 to 1 compared to working capital
at December 29, 2002 of $118.0 million and a current ratio of 1.59 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.
26
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
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 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 facility will mature on April 30, 2007.
Borrowings under this facility 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.
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 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
27
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
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 $26.1 million compared to cash used of $6.3 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, 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 $13.6 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 $19.2 million for the three quarters
ended September 28, 2003 compared to $20.6 million of cash provided in the
comparable period of 2002. Cash used in 2003 was primarily for debt issuance
costs and a reduction in cash overdrafts. 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 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 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 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.
28
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Accounting Change
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 item previously
reported in the three quarters ended September 29, 2002 with the related tax
benefit 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. 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.
Foamex L.P.'s management, with the participation of Foamex L.P.'s Chief
Executive Officer and Chief Financial Officer, evaluated the effectiveness of
Foamex L.P.'s disclosure controls and procedures as of the end of the period
covered by this report. Based on that evaluation, Foamex L.P.'s Chief Executive
Officer and Chief Financial Officer concluded that its 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 Foamex L.P. 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 Foamex L.P.'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, Foamex
L.P.'s internal controls over financial reporting.
29
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 Report on Form 8-K for
the quarter ended September 28, 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.
30
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: November 12, 2003 By: /s/ K. Douglas Ralph
----------------------------------
K. Douglas Ralph
Executive Vice President and Chief
Financial Officer
(Duly Authorized Officer)
FOAMEX CAPITAL CORPORATION
Date: November 12, 2003 By: /s/ K. Douglas Ralph
----------------------------------
K. Douglas Ralph
Executive Vice President and Chief
Financial Officer
31