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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 28, 2004
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.
The number of shares of Foamex Capital Corporation's common stock outstanding as
of May 3, 2004 was 1,000.
FOAMEX L.P.
FOAMEX CAPITAL CORPORATION
INDEX
Page
Part I. Financial Information
Item 1. Financial Statements (unaudited).
Condensed Consolidated Statements of Operations - Quarters Ended
March 28, 2004 and March 30, 2003 3
Condensed Consolidated Balance Sheets as of March 28, 2004 and
December 28, 2003 4
Condensed Consolidated Statements of Cash Flows - Quarters Ended
March 28, 2004 and March 30, 2003 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations. 18
Item 3. Quantitative and Qualitative Disclosures about Market Risk. 22
Item 4. Controls and Procedures. 22
Part II. Other Information
Item 1. Legal Proceedings. 24
Item 6. Exhibits and Reports on Form 8-K. 24
Signatures 25
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
FOAMEX L.P. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
Quarters Ended
-----------------------------
March 28, March 30,
2004 2003
--------- ---------
(thousands)
NET SALES $313,618 $328,151
COST OF GOODS SOLD 273,859 297,614
-------- --------
GROSS PROFIT 39,759 30,537
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 25,453 20,633
RESTRUCTURING CHARGES 528 -
-------- --------
INCOME FROM OPERATIONS 13,778 9,904
INTEREST AND DEBT ISSUANCE EXPENSE 18,611 19,111
INCOME FROM EQUITY INTEREST IN JOINT VENTURES 277 366
OTHER INCOME (EXPENSE), NET 992 (1,615)
-------- --------
LOSS BEFORE PROVISION FOR INCOME TAXES (3,564) (10,456)
PROVISION FOR INCOME TAXES 772 87
-------- --------
NET LOSS $ (4,336) $(10,543)
======== ========
The accompanying notes are an integral part of the unaudited
condensed consolidated financial statements.
3
FOAMEX L.P. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
March 28, 2004 December 28, 2003
ASSETS -------------- -----------------
CURRENT ASSETS (thousands)
Cash and cash equivalents $ 4,142 $ 6,610
Accounts receivable, net of allowances of $10,882 in 2004
and $10,505 in 2003 183,833 181,288
Inventories 106,933 95,882
Other current assets 23,963 27,287
--------- --------
Total current assets 318,871 311,067
Property, plant and equipment 412,706 414,680
Less accumulated depreciation (255,579) (251,830)
--------- --------
NET PROPERTY, PLANT AND EQUIPMENT 157,127 162,850
GOODWILL 126,209 126,258
DEBT ISSUANCE COSTS, net of accumulated
amortization of $12,334 in 2004 and $10,648 in 2003 25,509 27,195
SOFTWARE COSTS, net of accumulated amortization of $4,102 in 2004
and $3,603 in 2003 10,124 9,767
INVESTMENT IN AND ADVANCES TO AFFILIATES 15,246 14,503
OTHER ASSETS 17,441 13,515
--------- --------
TOTAL ASSETS $ 670,527 $665,155
========= ========
LIABILITIES AND PARTNERS' DEFICIENCY
CURRENT LIABILITIES
Revolving credit borrowings $ 98,110 $ 96,065
Current portion of long-term debt 8,933 8,937
Accounts payable 104,620 98,310
Accrued employee compensation and benefits 32,896 28,331
Accrued interest 22,317 12,376
Accrued customer rebates 12,143 18,077
Cash overdrafts 10,768 12,688
Other accrued liabilities 18,108 17,584
--------- --------
Total current liabilities 307,895 292,368
LONG-TERM DEBT 636,171 640,621
ACCRUED EMPLOYEE BENEFITS 43,307 43,348
OTHER LIABILITIES 13,372 13,949
--------- --------
Total liabilities 1,000,745 990,286
COMMITMENTS AND CONTINGENCIES
PARTNERS' DEFICIENCY
General partner (272,984) (268,097)
Limited partner - -
Accumulated other comprehensive loss (48,013) (47,813)
Notes receivable from related party (9,221) (9,221)
--------- --------
Total partners' deficiency (330,218) (325,131)
--------- --------
TOTAL LIABILITIES AND PARTNERS' DEFICIENCY $ 670,527 $665,155
========= ========
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)
Quarters Ended
-------------------------
March 28, March 30,
2004 2003
--------- ---------
(thousands)
OPERATING ACTIVITIES
Net loss $(4,336) $(10,543)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Depreciation and amortization 6,366 6,105
Amortization of debt issuance costs, debt premium
and debt discount 704 1,439
Gain on sale of assets (930) -
Other operating activities 7,271 (261)
Changes in operating assets and liabilities, net (7,525) 8,492
------- --------
Net cash provided by operating activities 1,550 5,232
------- --------
INVESTING ACTIVITIES
Capital expenditures (1,215) (2,028)
Proceeds from sale of assets 2,166 -
Other investing activities (856) (1,208)
------- --------
Net cash provided by (used for) investing activities 95 (3,236)
------- --------
FINANCING ACTIVITIES
Proceeds from revolving loans 2,045 5,066
Repayments of long-term debt (3,728) (18)
Decrease in cash overdrafts (1,920) (8,685)
Distribution paid to partners (510) -
------- --------
Net cash used for financing activities (4,113) (3,637)
------- --------
Net decrease in cash and cash equivalents (2,468) (1,641)
Cash and cash equivalents at beginning of period 6,610 4,363
------- --------
Cash and cash equivalents at end of period $ 4,142 $ 2,722
======= ========
Supplemental Information:
Cash paid for interest $ 7,966 $ 7,635
======= ========
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").
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,
consisting only of normal recurring 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 2003 Annual Report on Form 10-K. Results for interim
periods are not necessarily indicative of trends or of results for a full year.
The condensed consolidated balance sheet as of December 28, 2003 has been
derived from the audited financial statements at that date but does not include
all of the information and footnotes required by accounting principles generally
accepted in the United States of America for complete financial statements.
2. RESTRUCTURING CHARGES
The following table sets forth the components of Foamex L.P.'s
restructuring accruals and activity for the quarter ended March 28, 2004:
Quarter Ended March 28, 2004
-----------------------------------------------------
Plant Closure Personnel
Total and Leases Reductions Other
----- ------------- ---------- -----
(millions)
Balance at December 28, 2003 $9.7 $8.0 $0.9 $0.8
Restructuring charge 0.5 - 0.5 -
Cash spending (1.3) (0.8) (0.3) (0.2)
---- ---- ---- ----
Balance at March 28, 2004 $8.9 $7.2 $1.1 $0.6
==== ==== ==== ====
Foamex L.P. expects to spend approximately $3.4 million during the twelve
months ending April 3, 2005, with the balance to be spent through 2012.
3. INVENTORIES
The components of inventories are listed below.
March 28, December 28,
2004 2003
--------- ------------
(thousands)
Raw materials and supplies $ 69,535 $61,855
Work-in-process 18,457 16,484
Finished goods 18,941 17,543
-------- -------
Total $106,933 $95,882
======== =======
6
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
4. LONG-TERM DEBT AND REVOLVING CREDIT BORROWINGS
The components of long-term debt and revolving credit borrowings are listed
below.
March 28, December 28,
2004 2003
--------- ------------
Foamex L.P. Senior Secured Credit Facility (thousands)
Term Loan (1) $ 44,514 $ 48,214
Foamex L.P. Secured Term Loan (1) 80,000 80,000
10 3/4% Senior secured notes due 2009 (2) (3) 311,426 311,950
9 7/8% Senior subordinated notes due 2007 (2) 148,500 148,500
13 1/2% Senior subordinated notes due 2005 (includes
$1,306 in 2004 and $1,543 in 2003 of unamortized
debt premium) (2) 52,891 53,128
Industrial revenue bonds 7,000 7,000
Other (net of unamortized debt discount of $82 in 2004
and $93 in 2003) 773 766
-------- --------
645,104 649,558
Less current portion 8,933 8,937
-------- --------
Long-term debt $636,171 $640,621
======== ========
Revolving credit borrowings (1) $ 98,110 $ 96,065
======== ========
(1) Debt of Foamex L.P., guaranteed by Foamex International Inc. ("Foamex
International"), FMXI, Inc. and Foamex Canada.
(2) Debt of Foamex L.P. and Foamex Capital Corporation.
(3) Includes $11.4 million in 2004 and $12.0 million in 2003 of deferred credit
on interest rate swap transactions.
Senior Secured Credit Facility
The $240.0 Million Senior Secured Credit Facility consists of a revolving
credit facility with a maximum availability of $190.0 million and an initial
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 March 28, 2004,
Foamex L.P. had available borrowings of approximately $45.7 million and letters
of credit outstanding of $21.4 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 March 28, 2004, the weighted average interest rates were 4.30% and
4.36% for the revolving loans and the term loan, respectively. The term loan
requires quarterly installment payments of approximately $1.8 million, which
commenced on September 30, 2003. All borrowings under the $240.0 Million Senior
Secured Credit Facility will mature on April 30, 2007. The $240.0 Million Senior
Secured Credit Facility includes both a subjective acceleration clause and a
lockbox arrangement which requires all lockbox receipts be used to repay
revolving credit borrowings. Accordingly, borrowings under the revolving credit
facility are classified as current in the accompanying condensed consolidated
balance sheets as of March 28, 2004 and December 28, 2003 as required by
Emerging Issues Task Force Issue No. 95-22, "Balance Sheet Classification of
Borrowings Outstanding Under Revolving Credit Agreements that Include both a
Subjective Acceleration Clause and a Lockbox Arrangement" ("EITF No. 95-22").
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 March 28, 2004, is 13.50%. In addition,
Foamex L.P. is subject
7
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
4. LONG-TERM DEBT AND REVOLVING CREDIT BORROWINGS (continued)
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.
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 Foamex L.P.'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 Foamex L.P.'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, Foamex L.P. unwound the interest rate swap
transactions in exchange for net cash proceeds of $18.4 million, including $3.6
million realized through lower effective interest rates while the swap
transactions were in effect. The unwinding resulted in a deferred credit of
$14.8 million which is being amortized through April 1, 2009, using the
effective interest rate method.
9 7/8% Senior Subordinated Notes
The 9 7/8% Senior Subordinated Notes were issued by Foamex L.P. and Foamex
Capital Corporation and are due on June 15, 2007. The notes represent
uncollateralized general obligations of Foamex L.P. and are subordinated to all
Senior Debt, as defined in the Indenture. Interest is payable June 15 and
December 15. The notes may be redeemed at the option of Foamex L.P., in whole or
in part, at any time on or after June 15, 2002. The initial redemption was
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 March 28, 2004, 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. 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).
8
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
4. LONG-TERM DEBT AND REVOLVING CREDIT BORROWINGS (continued)
13 1/2% Senior Subordinated Notes
The 13 1/2% Senior Subordinated Notes were issued by Foamex L.P. and Foamex
Capital Corporation and are due on August 15, 2005. The notes represent
uncollateralized general obligations of Foamex L.P. and are subordinated to all
Senior Debt, as defined in the Indenture. Interest is payable semiannually on
February 15 and August 15. The notes may be redeemed at the option of Foamex
L.P., in whole or in part, at any time on or after August 15, 2000. The initial
redemption was 106.75% of their principal amount, plus accrued and unpaid
interest, if any, thereon to the date of redemption and declining annually to
100.0% on or after August 15, 2004. At March 28, 2004, 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. The notes are subordinated in right of the
payment of all senior indebtedness and are pari passu in right of payment to the
9 7/8% Senior Subordinated Notes (described above).
Industrial Revenue Bonds ("IRBs")
IRB debt includes a $1.0 million bond that matures in 2005 and a $6.0
million bond that matures in 2013. Interest is based on a variable rate, as
defined, with options available to Foamex L.P. to convert to a fixed rate. At
March 28, 2004, the interest rate was 1.10% on the $1.0 million bond and 1.09%
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 March 28, 2004.
Other
Other debt includes a non-interest bearing promissory note with a principal
amount of $0.9 million at March 28, 2004 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 March 28, 2004.
Debt Covenants
The indentures and other indebtedness agreements contain certain covenants
that limit, among other things, the ability of Foamex L.P.'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, as of March 28, 2004, 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.
Under the $240.0 Million Senior Secured Credit Facility and the Secured
Term Loan, Foamex L.P. is subject to a minimum fixed charge coverage ratio, as
defined, of 1.00. For the three quarters ended March 28, 2004, Foamex L.P.'s
fixed charge coverage ratio was 1.05. Foamex L.P. is also subject to a maximum
annual capital expenditure amount which is $36.0 million for the year ending
January 2, 2005.
9
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
4. LONG-TERM DEBT AND REVOLVING CREDIT BORROWINGS (continued)
Maturities of Long-Term Debt
Scheduled maturities of long-term debt as of March 28, 2004 are shown below
(thousands):
Three quarters ending January 2, 2005 $ 7,148
2005 60,578
2006 7,143
2007 251,585
2008 -
Thereafter 306,000
--------
632,454
Unamortized debt premium/discount and fair
value adjustment, net 12,650
--------
Total $645,104
========
5. RETIREE BENEFIT PLANS
Components of net periodic pension benefit cost are listed below:
Quarters Ended
---------------------------
March 28, March 30,
2004 2003
--------- ---------
(thousands)
Service cost $1,270 $ 971
Interest cost 1,802 1,548
Expected return on plan assets (1,698) (1,242)
Amortization of transition assets (18) (17)
Amortization of prior service benefit (27) (27)
Amortization of net loss 704 621
------ ------
Net periodic pension benefit cost $2,033 $1,854
====== ======
Foamex L.P. previously disclosed that it anticipated estimated retiree
benefit plan contributions of $11.8 million for fiscal 2004. During the quarter
ending March 28, 2004, Foamex L.P. contributed $0.1 million and there has been
no change in estimated contributions for fiscal 2004. Actuarial valuations are
in process for fiscal 2004 that will determine the actual contribution
requirements and net periodic pension benefit cost.
6. COMPREHENSIVE INCOME (LOSS)
The components of comprehensive income (loss) are listed below.
Quarters Ended
-----------------------
March 28, March 30,
2004 2003
--------- ---------
(thousands)
Net loss $(4,336) $(10,543)
Foreign currency translation adjustments (200) 1,567
------- --------
Total comprehensive loss $(4,536) $ (8,976)
======= ========
10
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).
Segment results are presented below.
Carpet
Foam Cushion Automotive Technical
Products Products Products Products Other Total
-------- -------- ---------- --------- --------- --------
(thousands)
Quarter ended March 28, 2004
Net sales $134,395 $46,098 $94,000 $31,087 $ 8,038 $313,618
Income (loss) from operations $ 16,280 $ 1,303 $ 5,023 $ 8,856 $(17,684) $ 13,778
Depreciation and amortization $ 2,816 $ 774 $ 628 $ 713 $ 1,435 $ 6,366
Quarter ended March 30, 2003
Net sales $118,230 $49,137 $121,145 $32,388 $ 7,251 $328,151
Income (loss) from operations $ 6,937 $ (616) $ 9,437 $ 8,932 $(14,786) $ 9,904
Depreciation and amortization $ 2,756 $ 798 $ 685 $ 723 $ 1,143 $ 6,105
8. COMMITMENTS AND CONTINGENCIES
Litigation
Foamex L.P. is party to various 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, 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 consolidated financial position, results of
operations and cash flows.
As of March 28, 2004, Foamex L.P. had accrued approximately $1.0 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 March 28, 2004, Foamex L.P. had accruals of approximately $2.3
million for environmental matters, including approximately $2.1 million related
to remediating and monitoring soil and groundwater contamination and
approximately $0.2 million related to sites where Foamex L.P. has been
designated as a Potentially Responsible Party or "PRP" 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.
11
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
8. COMMITMENTS AND CONTINGENCIES (continued)
On August 31, 2002, Environment Canada, the Canadian environmental
regulatory agency, finalized 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, 2004 and 100.0% reductions by January 1, 2007. Foamex
L.P. does not believe that this standard will require Foamex L.P. to make
material expenditures for its Canadian plants.
Foamex L.P. previously had reported to the appropriate state authorities
that it had found soil and/or groundwater contamination in excess of state
standards at certain locations. Seven sites are currently in various stages of
investigation or remediation. Accordingly, the extent of contamination and the
ultimate liability is not known with certainty for all sites. During 2000,
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 PRP by the
EPA or by state environmental agencies or other PRPs, pursuant to CERCLA or
analogous state statutes, with respect to eleven 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, result of operations or
financial position.
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.
9. 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% 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 March 28, 2004 and December 28, 2003 and the condensed
consolidating statements of operations and cash flows for the quarters ended
March 28, 2004 and March 30, 2003 of the Guarantors and nonguarantors. The
Guarantors include Foamex Latin America, Inc., Foamex Mexico, Inc., Foamex
Mexico II, Inc. and Foamex Asia, Inc. The nonguarantors are Foamex Canada Inc.
and Grupo Foamex de Mexico, S.A. de C.V. and its subsidiaries. The following
financial information is intended to provide information for the Guarantors and
nonguarantors of Foamex L.P. based on amounts derived from the financial
statements of Foamex L.P.
12
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
9. GUARANTOR INFORMATION (continued)
Condensed Consolidating Balance Sheet
As of March 28, 2004
Foamex
Capital Foamex L.P. Consolidated
Guarantors Nonguarantors Corporation (Parent) Eliminations Foamex L.P.
---------- ------------- ----------- ----------- ------------ ------------
Assets (thousands of dollars)
Current assets $ - $31,081 $ 1 $292,722 $ (4,933) $ 318,871
Investment in subsidiaries 11,434 - - 42,038 (53,472) -
Property, plant and equipment, net - 19,469 - 137,658 - 157,127
Goodwill - 5,723 - 120,486 - 126,209
Debt issuance costs - - - 25,509 - 25,509
Other assets 14,566 2,497 - 34,798 (9,050) 42,811
------- ------- ------ -------- -------- ----------
Total assets $26,000 $58,770 $ 1 $653,211 $(67,455) $ 670,527
======= ======= ====== ======== ======== ==========
Liabilities and Partners' Deficiency
Current liabilities $ 629 $19,733 $ - $292,420 $ (4,887) $307,895
Long-term debt 4,969 4,850 - 635,402 (9,050) 636,171
Other liabilities - 1,072 - 55,607 - 56,679
------- ------- ------ -------- -------- ----------
Total liabilities 5,598 25,655 - 983,429 (13,937) 1,000,745
Partners' deficiency 20,402 33,115 1 (330,218) (53,518) (330,218)
------- ------- ------ -------- -------- ----------
Total liabilities and partners'
deficiency $26,000 $58,770 $ 1 $653,211 $(67,455) $ 670,527
======= ======= ====== ======== ======== ==========
Condensed Consolidating Balance Sheet
As of December 28, 2003
Foamex
Capital Foamex L.P. Consolidated
Guarantors Nonguarantors Corporation (Parent) Eliminations Foamex L.P.
---------- ------------- ----------- ----------- ------------ ------------
Assets (thousands of dollars)
Current assets $ 419 $31,859 $ 1 $283,144 $ (4,356) $311,067
Investment in subsidiaries 10,513 - - 43,598 (54,111) -
Property, plant and equipment, net - 19,736 - 143,114 - 162,850
Goodwill - 5,772 - 120,486 - 126,258
Debt issuance costs - - - 27,195 - 27,195
Other assets 13,857 2,125 - 30,853 (9,050) 37,785
------- ------- ------ -------- -------- --------
Total assets $24,789 $59,492 $ 1 $648,390 $(67,517) $665,155
======= ======= ====== ======== ======== ========
Liabilities and Partners' Deficiency
Current liabilities $ 585 $18,746 $ - $277,393 $ (4,356) $292,368
Long-term debt 4,957 4,851 - 639,863 (9,050) 640,621
Other liabilities - 1,032 - 56,265 - 57,297
------- ------- ------ -------- -------- ----------
Total liabilities 5,542 24,629 - 973,521 (13,406) 990,286
Partners' deficiency 19,247 34,863 1 (325,131) (54,111) (325,131)
------- ------- ------ -------- -------- --------
Total liabilities and partners'
deficiency $24,789 $59,492 $ 1 $648,390 $(67,517) $665,155
======= ======= ====== ======== ======== ========
13
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
9. GUARANTOR INFORMATION (continued)
Condensed Consolidating Statement of Operations
For the quarter ended March 28, 2004
Foamex
Capital Foamex L.P. Consolidated
Guarantors Nonguarantors Corporation (Parent) Eliminations Foamex L.P.
---------- ------------- ----------- ----------- ------------ ------------
(thousands of dollars)
Net sales $ - $24,842 $ - $294,250 $(5,474) $313,618
Cost of goods sold - 22,468 - 256,865 (5,474) 273,859
------ ------- ------ -------- ------- --------
Gross profit - 2,374 - 37,385 - 39,759
Selling, general and administrative
expenses - 1,548 - 23,905 - 25,453
Restructuring charges - - - 528 - 528
------ ------- ------ -------- ------- --------
Income from operations - 826 - 12,952 - 13,778
Interest and debt issuance expense 59 70 - 18,613 (131) 18,611
Equity in undistributed earnings
of affiliates 1,116 - - 1,175 (2,014) 277
Other income (expense), net 47 294 - 782 (131) 992
------ ------- ------ -------- ------- --------
Loss before provision for income
taxes 1,104 1,050 - (3,704) (2,014) (3,564)
Provision for income taxes - 140 - 632 - 772
------ ------- ------ -------- ------- --------
Net loss $1,104 $ 910 $ - $ (4,336) $(2,014) $ (4,336)
====== ======= ====== ======== ======= ========
14
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
9. GUARANTOR INFORMATION (continued)
Condensed Consolidating Statement of Operations
For the quarter ended March 30, 2003
Foamex
Capital Foamex L.P. Consolidated
Guarantors Nonguarantors Corporation (Parent) Eliminations Foamex L.P.
---------- ------------- ----------- ----------- ------------ ------------
(thousands of dollars)
Net sales $ - $26,501 $ - $306,345 $(4,695) $328,151
Cost of goods sold - 24,423 - 277,886 (4,695) 297,614
------ ------- ------ -------- ------- --------
Gross profit - 2,078 - 28,459 - 30,537
Selling, general and administrative
expenses - 1,536 - 19,097 - 20,633
Restructuring charges - - - - - -
------ ------- ------ -------- ------- --------
Income from operations - 542 - 9,362 - 9,904
Interest and debt issuance expense 59 11 - 19,041 - 19,111
Equity in undistributed earnings
of affiliates (656) - - (719) 1,741 366
Other income (expense), net 49 (1,519) - (145) - (1,615)
------ ------- ------ -------- ------- --------
Loss before provision for income
taxes (666) (988) - (10,543) 1,741 (10,456)
Provision for income taxes - 87 - - - 87
------ ------- ------ -------- ------- --------
Net loss $ (666) $(1,075) $ - $(10,543) $ 1,741 $(10,543)
====== ======= ====== ======== ======= ========
15
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
9. GUARANTOR INFORMATION (continued)
Condensed Consolidating Statement of Cash Flows
For the quarter ended March 28, 2004
Foamex
Capital Foamex L.P. Consolidated
Guarantors Nonguarantors Corporation (Parent) Eliminations Foamex L.P.
---------- ------------- ----------- ----------- ------------ ------------
(thousands of dollars)
Cash Flows from Operating Activities
Net loss $1,104 $ 910 $ - $(4,336) $(2,014) $(4,336)
Total adjustments to reconcile net
loss to net cash provided
by operating activities (1,104) (3,465) - 8,441 2,014 5,886
------ ------- ------ ------- ------- -------
Net cash provided by operating
activities - (2,555) - 4,105 - 1,550
------ ------- ------ ------- ------- -------
Cash Flows from Investing Activities
Capital expenditures - (175) - (1,040) - (1,215)
Other - - - 1,310 - 1,310
------ ------- ------ ------- ------- -------
Net cash provided by investing
activities - (175) - 270 - 95
------ ------- ------ ------- ------- -------
Cash Flows from Financing Activities
Proceeds from revolving loans - - - 2,045 - 2,045
Repayments of long-term debt - - - (3,728) - (3,728)
Other, net - - - (2,430) - (2,430)
------ ------- ------ ------- ------- -------
Net cash used for financing
activities - - - (4,113) - (4,113)
------ ------- ------ ------- ------- -------
Net decrease in cash and
cash equivalents - (2,730) - 262 - (2,468)
Cash and cash equivalents at
beginning of period - 4,669 1 1,940 - 6,610
------ ------- ------ ------- ------- -------
Cash and cash equivalents at
end of period $ - $ 1,939 $ 1 $ 2,202 $ - $ 4,142
====== ======= ====== ======= ======= =======
16
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
9. GUARANTOR INFORMATION (continued)
Condensed Consolidating Statement of Cash Flows
For the quarter ended March 30, 2003
Foamex
Capital Foamex L.P. Consolidated
Guarantors Nonguarantors Corporation (Parent) Eliminations Foamex L.P.
---------- ------------- ----------- ----------- ------------ ------------
(thousands of dollars)
Cash Flows from Operating Activities
Net loss $(666) $(1,075) $ - $(10,543) $1,741 $(10,543)
Total adjustments to reconcile net
loss to net cash provided
by operating activities 666 (33) - 16,883 (1,741) 15,775
------ ------- ------ -------- ------- --------
Net cash provided by operating
activities - (1,108) - 6,340 - 5,232
------ ------- ------ -------- ------- --------
Cash Flows from Investing Activities
Capital expenditures - (155) - (1,873) - (2,028)
Other - - - (1,208) - (1,208)
------ ------- ------ -------- ------- --------
Net cash used for investing activities - (155) - (3,081) - (3,236)
------ ------- ------ -------- ------- --------
Cash Flows from Financing Activities
Proceeds from revolving loans - - - 5,066 - 5,066
Repayments of long-term debt - - - (18) - (18)
Other, net - - - (8,685) - (8,685)
------ ------- ------ -------- ------- --------
Net cash used for financing activities - - - (3,637) - (3,637)
------ ------- ------ -------- ------- --------
Net decrease in cash and
cash equivalents - (1,263) - (378) - (1,641)
Cash and cash equivalents at
beginning of period - 1,781 1 2,581 - 4,363
------ ------- ------ -------- ------- --------
Cash and cash equivalents at
end of period $ - $ 518 $ 1 $ 2,203 $ - $ 2,722
====== ======= ====== ======== ======= ========
17
FOAMEX L.P. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Forward-Looking Statements
This document contains "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995. These forward-looking
statements are based on management's present expectations and beliefs about
future events. As with any projection or forecast, they are inherently
susceptible to uncertainty and changes in circumstances, and we are under no
obligation to, and expressly disclaim any obligation to, update or alter
forward-looking statements whether as a result of such changes, new information,
subsequent events or otherwise.
RESULTS OF OPERATIONS FOR THE QUARTER ENDED MARCH 28, 2004 COMPARED TO THE
QUARTER ENDED MARCH 30, 2003
Carpet
Foam Cushion Automotive Technical
Products Products Products Products Other Total
-------- -------- ---------- --------- -------- ---------
(thousands)
Quarter ended March 28, 2004
Net sales $134,395 $46,098 $94,000 $31,087 $ 8,038 $313,618
Income (loss) from operations $ 16,280 $ 1,303 $ 5,023 $ 8,856 $(17,684) $ 13,778
Depreciation and amortization $ 2,816 $ 774 $ 628 $ 713 $ 1,435 $ 6,366
Income (loss) from operations
as a percentage of net sales 12.1% 2.8% 5.3% 28.5% n.m.* 4.4%
Quarter ended March 30, 2003
Net sales $118,230 $49,137 $121,145 $32,388 $ 7,251 $328,151
Income (loss) from operations $ 6,937 $ (616) $ 9,437 $ 8,932 $(14,786) $ 9,904
Depreciation and amortization $ 2,756 $ 798 $ 685 $ 723 $ 1,143 $ 6,105
Income (loss) from operations
as a percentage of net sales 5.9% (1.3)% 7.8% 27.6% n.m.* 3.0%
* not meaningful
Income from Operations
Net sales for the quarter ended March 28, 2004 decreased 4% to $313.6
million from $328.2 million in the quarter ended March 30, 2003. The decrease
was primarily attributable to lower net sales in the Automotive Products segment
due to lower volume including sourcing actions by major customers, partially
offset by higher net sales in the Foam Products segment primarily due to higher
volume and improved product mix.
The gross profit was $39.8 million, or 12.7% of net sales, in the quarter
ended March 28, 2004 compared to $30.5 million, or 9.3% of net sales, in the
2003 period. Gross profit margin continues to improve from the unusually low
levels experienced in late 2002 and early 2003, primarily due to profit
improvements in Foam Products and lower operating costs in Carpet Cushion
Products, partially offset by the lower volume in the Automotive Products
segment.
Income from operations for the quarter ended March 28, 2004 was $13.8
million, or 4.4% of net sales, which represented a 39% increase from $9.9
million, or 3.0% of net sales, reported during the 2003 period. The improved
gross profit margin, described above, was partly offset by higher selling,
general and administrative expenses. Selling, general and administrative
expenses increased $4.8 million, or 23%, due primarily to a $3.7 million charge
to bad debt expense as a result of a customer bankruptcy along with employee
termination costs and higher promotional expenses. Restructuring charges were
$0.5 million in 2004 as we eliminated a number of sales and administrative
positions.
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
We anticipate net sales to continue to be lower than 2003 primarily due to
declines in the Automotive Products segment, while overall operating margins
should continue to be improved from 2003.
Foam Products
Foam Products net sales for the quarter ended March 28, 2004 increased 14%
to $134.4 million from $118.2 million in the 2003 period primarily due to higher
volumes of value-added products. Income from operations increased 135%, to $16.3
million in the quarter ended March 28, 2004 from $6.9 million in the 2003 period
principally as a result of the improved volume mix. Income from operations was
12.1% of net sales in 2004, up from 5.9% in 2003.
Carpet Cushion Products
Carpet Cushion Products net sales for the quarter ended March 28, 2004
decreased 6% to $46.1 million from $49.1 million in the 2003 period on volume
declines. We closed several carpet cushion facilities during 2002 and 2003.
Income from operations was $1.3 million in the quarter ended March 28, 2004
compared to a $0.6 million loss in the 2003 period as lower raw material costs
and manufacturing costs from the 2002 and 2003 plant closures led to improved
margins. Income from operations represented 2.8% of net sales in 2004 and the
loss from operations was 1.3% of net sales in 2003.
Automotive Products
Automotive Products net sales for the quarter ended March 28, 2004
decreased 22% to $94.0 million from $121.1 million in the 2003 period. The
decline was primarily due to lower volume including sourcing actions by our
major customers. We anticipate this trend of lower volumes in this segment will
continue with total 2004 net sales expected to be approximately $380.0 million
compared to $447.1 million in 2003. Income from operations decreased 47% to $5.0
million in the 2004 period compared to $9.4 million in the 2003 period,
principally due to the decline in sales volume and higher operating costs.
Income from operations represented 5.3% of net sales in 2004 and 7.8% of net
sales in 2003.
Technical Products
Net sales for Technical Products for the quarter ended March 28, 2004
decreased 4% to $31.1 million from $32.4 million in the 2003 period. Increases
in unit volume were more than offset by lower average selling prices due to
product mix. Income from operations was $8.9 million in the 2004 period nearly
the same as in the 2003 period. Income from operations represented 28.5% of net
sales in 2004 compared to 27.6% of net sales in 2003.
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 increased loss from operations
primarily reflects higher bad debt expense and a restructuring charge of $0.5
million.
During the quarter ended March 28, 2004, Foamex International's Chairman
resigned by mutual agreement with Foamex International's Board of Directors. The
$1.4 million of cost associated with his separation agreement has been largely
offset by the reversal of amounts related to retirement provisions of his prior
employment contract that are no longer payable under the terms of his separation
agreement.
Interest and Debt Issuance Expense
Interest and debt issuance expense was $18.6 million in the quarter ended
March 28, 2004, which represented a 3% decrease from the 2003 period expense of
$19.1 million. The decrease is primarily due to lower amortization of debt
issuance costs.
19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Income from Equity Interest in Joint Ventures
The income from equity interests was $0.3 million for the quarter ended
March 28, 2004 compared to income of $0.4 million in the 2003 period.
Other Income (Expense), Net
Other income, net was $1.0 million for the quarter ended March 28, 2004
compared to other expense of $1.6 million for the quarter ended March 30, 2003.
The 2004 period includes foreign currency transaction gains of $0.3 million,
principally related to operations in Mexico, compared to foreign currency
transaction losses of $1.4 million related to operations in both Mexico and
Canada in 2003. Also included in 2004 were $0.9 million of gains on asset
disposals.
Provision for Income Taxes
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 liquidity requirements consist principally of the need to fund accounts
receivable, inventory and accounts payable, scheduled payments of interest on
outstanding indebtedness, capital expenditures and employee and non-employee
benefits. 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 for the next twelve months. Scheduled principal payments
on our debt are not significant until the second half of 2005 when the $51.6
million of 13 1/2% Senior Subordinated Notes mature (see Note 4 to the condensed
consolidated financial statements).
Cash and cash equivalents were $4.1 million at March 28, 2004 compared to
$6.6 million at December 28, 2003. Working capital at March 28, 2004 was $11.0
million and the current ratio was 1.04 to 1 compared to working capital at
December 28, 2003 of $18.7 million and a current ratio of 1.06 to 1.
Total long-term debt and revolving credit borrowings at March 28, 2004 were
$743.2 million, down $2.4 million from December 28, 2003. As of March 28, 2004,
there were $98.1 million of revolving credit borrowings under the $240.0 Million
Senior Secured Credit Facility with $45.7 million available for borrowings and
$21.4 million of letters of credit outstanding. Revolving credit borrowings at
March 28, 2004 reflect working capital requirements.
The $240.0 Million Senior Secured Credit Facility consists of a revolving
credit facility with a maximum availability of $190.0 million and an initial
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 March 28, 2004, the weighted average
interest rates were 4.30% and 4.36% for the revolving loans and the term loan,
respectively. The term loan requires quarterly installment payments of
approximately $1.8 million. 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 was in
effect as of March 28, 2004, is 13.50%. In addition, Foamex L.P. is subject to a
1.00% facility fee which is
20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
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 minimum fixed charge coverage ratio, as
defined, of 1.00. For the three quarters ended March 28, 2004, Foamex L.P.'s
fixed charge coverage ratio was 1.05. Foamex L.P. is also subject to a maximum
annual capital expenditure amount which is $36.0 million for the year ending
January 2, 2005.
Our 13 1/2% Senior Subordinated Notes with a face value of $51.6 million
are due on August 15, 2005. We must generate sufficient cash flow to repay these
notes or obtain additional financing. However, we may not be able to obtain
financing at a reasonable cost, or at all, which may have a material adverse
effect on our financial condition. We may, from time to time, directly or
indirectly make purchases of these notes or other public debt in the open market
or in private transactions.
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.
In the second quarter of 2004, we renewed a lease agreement for a foam
pouring facility that expired in 2004 and we anticipate the ability to renew
other facility leases that expire in 2004. The lease renewal on the foam pouring
facility will increase rent expense by approximately $0.8 million annually.
We anticipate contributing approximately $11.8 million to our pension plans
in 2004. Actuarial valuations are in process for fiscal 2004 that will determine
the actual funding requirements.
Cash Flow from Operating Activities
Cash provided by operating activities in the quarter ended March 28, 2004
was $1.6 million compared to cash provided of $5.2 million in the quarter ended
March 30, 2003. Inventories increased by $11.1 million in the quarter ended
March 28, 2004, while accounts payable increased by $6.3 million. The increases
in inventories and accounts payable are primarily due to advance purchases of
major chemical raw materials in anticipation of price increases.
Cash Flow from Investing Activities
Investing activities provided $0.1 million for the quarter ended March 28,
2004. Cash requirements included capital expenditures of $1.2 million and
capitalized software development costs of $0.9 million. These uses were offset
by proceeds from asset disposals of $2.2 million. In the quarter ended March 30,
2003, cash used for investing activities was $3.2 million, which consisted of
capital expenditures of $2.0 million and capitalized software development costs
of $1.2 million. The estimated capital expenditures and software development
costs for the full year 2004 are expected to be approximately $10.0 million and
approximately $4.2 million, respectively.
Cash Flow from Financing Activities
Cash used for financing activities was $4.1 million for the quarter ended
March 28, 2004 and consisted principally of scheduled payments of the term loan
under the $240.0 Million Senior Secured Facility and the net
21
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
proceeds from the asset sale used to make an additional payment on the Term Loan
as required under the facility. Cash used for financing activities in 2003 was
$3.6 million consisting of a decrease in cash overdrafts, partially offset by an
increase in revolver borrowings.
Environmental Matters
We are subject to extensive and changing environmental laws and
regulations. Expenditures to date in connection with our compliance with such
laws and regulations did not have a material adverse effect on our operations,
financial position, capital expenditures or competitive position. The amount of
liabilities recorded in connection with environmental matters as of March 28,
2004 was $2.3 million. Although it is possible that new information or future
developments could require us to reassess its potential exposure to all pending
environmental matters, including those described in Note 8 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
Foamex L.P. has debt securities with variable interest rates subject to
market risk for changes in interest rates. On March 28, 2004, indebtedness with
variable interest rates aggregated $229.6 million. On an annualized basis, if
the interest rates on these debt instruments increased by 1.0%, interest expense
would increase by approximately $2.3 million.
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. maintains disclosure controls and procedures (as defined in
Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended) that are
designed to ensure that information required to be disclosed in reports filed
under the Securities Exchange Act of 1934, as amended, is recorded, processed,
summarized and reported within the specified time periods. In designing and
evaluating the disclosure controls and procedures, management recognizes that
any system of controls and procedures, no matter how well designed and executed,
can provide only reasonable assurance of achieving the desired control
objectives.
On April 2, 2004, Foamex L.P. filed a current report on Form 8-K which
disclosed that Foamex L.P.'s former independent public accountants had
communicated certain matters to Foamex L.P. involving internal controls that
they considered to be reportable conditions under standards established by the
American Institute of Certified Public Accountants. A reportable condition is an
internal control weakness that represents a significant deficiency in the design
or operation of internal control which could adversely affect an organization's
ability to record, process, summarize and report financial data consistent with
management's assertions in the financial statements. These reportable conditions
concerned matters relating to: (1) the integration of Foamex L.P.'s information
technology systems; (2) the design and operation of access and security controls
of Foamex L.P.'s information technology systems; (3) inventory procedures,
processes and systems, including both performance and review and (4) the
preparation of Foamex L.P.'s quarterly financial reports.
Management of Foamex L.P., under the guidance of the Foamex Internatinoal
Audit Committee, is in the process of remediating the reportable conditions.
Foamex L.P. is in the process of installing a new enterprise-wide information
technology system which it expects to substantially complete and implement by
the end of 2005. Several modules of the system have already been installed and
others are currently in the process of being implemented. Foamex L.P. has
addressed and remediated substantially all of the information technology
security issues. Foamex L.P. has implemented certain improved inventory
procedures and processes at each of its facilities
22
FOAMEX L.P. AND SUBSIDIARIES
ITEM 4. CONTROLS AND PROCEDURES.
and is taking appropriate actions to ensure their effectiveness including more
formalized training of personnel and additional management oversight. Foamex
L.P. performs monthly physical counts and reconciliations of inventory at each
of its plants and will continue to do so until perpetual inventory records are
implemented upon completion of the enterprise wide information technology
system. The inventory procedures are formally documented and include
requirements that account reconciliations are reviewed monthly and a checklist
of the tasks performed are prepared and reviewed monthly. Foamex L.P. has
strengthened and continues to address the controls over the preparation of its
quarterly financial reports including more extensive and stringent analytical
review procedures applied to its results as well as developing task logs and
checklists to facilitate the accuracy and completeness of its financial
statements and required disclosures. Foamex L.P. has codified and standardized
closing journal entries across it facilities and has formalized the review and
approval process for such journal entries. Additionally, Foamex L.P. has
implemented a standardized consolidation and reporting system.
Foamex L.P. does not consider the reportable conditions discussed above,
either individually or in the aggregate, to be a material weakness as that term
is defined under standards established by the American Institute of Certified
Public Accountants. As discussed above, Foamex L.P. is taking actions to
remediate the reportable conditions and has concluded that the existence of the
reportable conditions does not have a material impact on its disclosure controls
and procedures.
Foamex L.P.'s Chief Executive Officer and Chief Financial Officer have
conducted an evaluation of the effectiveness of disclosure controls and
procedures pursuant to Exchange Act Rule 13a-15 as of March 28, 2004 and have
concluded that Foamex L.P.'s disclosure controls and procedures were effective
as of March 28, 2004. Foamex L.P.'s management, including the Chief Executive
Officer and the Chief Financial Officer, also evaluated Foamex L.P.'s internal
control over financial reporting to determine whether any changes occurred
during the quarter covered by this report that have materially affected, or are
reasonably likely to materially affect, Foamex L.P.'s internal control over
financial reporting. Other than as described above, there have been no changes
that have materially affected, or are reasonably likely to materially affect,
Foamex L.P.'s internal control over financial reporting.
23
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 28, 2003. The information from Note 8 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. has filed the following Current Reports on Form 8-K
for the quarter ended March 28, 2004.
On January 22, 2004, a Form 8-K furnishing a copy of a Press
Release relating to the restatement of the first three quarters
of 2003.
On February 11, 2004, a Form 8-K announcing the election of
Raymond E. Mabus as Chairman of the Board of Directors of Foamex
International and the resignation of Marshall S. Cogan.
On February 23, 2004, a Form 8-K furnishing as an exhibit, the
Separation Agreement and General Release by and between Marshall
S. Cogan and Foamex International.
24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FOAMEX L.P.
By: FMXI, Inc.
Its Managing General Partner
Date: May 7, 2004 By: /s/ K. Douglas Ralph
----------------------------------
K. Douglas Ralph
Executive Vice President and Chief
Financial Officer
(Duly Authorized Officer)
FOAMEX CAPITAL CORPORATION
Date: May 7, 2004 By: /s/ K. Douglas Ralph
----------------------------------
K. Douglas Ralph
Executive Vice President and Chief
Financial Officer
25