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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 26, 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 November 1, 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 and Three Quarters
Ended September 26, 2004 and September 28, 2003 3
Condensed Consolidated Balance Sheets as of September 26, 2004 and December 28, 2003 4
Condensed Consolidated Statements of Cash Flows - Three Quarters Ended
September 26, 2004 and September 28, 2003 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations. 21
Item 3. Quantitative and Qualitative Disclosures about Market Risk. 28
Item 4. Controls and Procedures. 28
Part II. Other Information
Item 1. Legal Proceedings. 30
Item 6. Exhibits. 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 26, September 28, September 26, September 28,
2004 2003 2004 2003
------------- ------------- ------------- -------------
(thousands)
NET SALES $309,993 $323,542 $937,751 $989,330
COST OF GOODS SOLD 276,821 286,196 824,639 882,773
-------- -------- -------- --------
GROSS PROFIT 33,172 37,346 113,112 106,557
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 17,993 18,863 65,010 58,593
RESTRUCTURING CHARGES (CREDITS) 78 314 2,322 (1,237)
-------- -------- -------- --------
INCOME FROM OPERATIONS 15,101 18,169 45,780 49,201
INTEREST AND DEBT ISSUANCE EXPENSE 18,702 31,550 55,911 70,039
INCOME FROM EQUITY INTEREST IN
JOINT VENTURES 67 495 342 1,374
OTHER EXPENSE, NET (531) (952) (279) (2,800)
-------- -------- -------- --------
LOSS BEFORE PROVISION (BENEFIT) FOR
INCOME TAXES (4,065) (13,838) (10,068) (22,264)
PROVISION (BENEFIT) FOR INCOME TAXES (261) 168 231 431
-------- -------- -------- --------
NET LOSS $ (3,804) $(14,006) $(10,299) $(22,695)
======== ======== ======== ========
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)
September 26, 2004 December 28, 2003
ASSETS ------------------ -----------------
CURRENT ASSETS (thousands)
Cash and cash equivalents $ 5,881 $ 6,610
Accounts receivable, net of allowances of $10,416 in 2004
and $10,505 in 2003 193,091 181,288
Inventories 99,283 95,882
Other current assets 21,940 27,287
-------- --------
Total current assets 320,195 311,067
Property, plant and equipment 405,181 414,680
Less accumulated depreciation (258,724) (251,830)
-------- --------
NET PROPERTY, PLANT AND EQUIPMENT 146,457 162,850
GOODWILL 126,439 126,258
DEBT ISSUANCE COSTS, net of accumulated
amortization of $15,681 in 2004 and $10,648 in 2003 22,163 27,195
SOFTWARE COSTS, net of accumulated amortization of $5,597 in
2004 and $3,603 in 2003 10,135 9,767
INVESTMENTS IN AND ADVANCES TO AFFILIATES 15,407 14,503
OTHER ASSETS 20,373 13,515
-------- --------
TOTAL ASSETS $661,169 $665,155
======== ========
LIABILITIES AND PARTNERS' DEFICIENCY
CURRENT LIABILITIES
Revolving credit borrowings $ 98,862 $ 96,065
Current portion of long-term debt 61,348 8,937
Accounts payable 107,935 98,310
Accrued employee compensation and benefits 23,236 28,331
Accrued interest 21,724 12,376
Accrued customer rebates 15,116 18,077
Cash overdrafts 10,794 12,688
Other accrued liabilities 16,472 17,584
-------- --------
Total current liabilities 355,487 292,368
LONG-TERM DEBT 578,617 640,621
ACCRUED EMPLOYEE BENEFITS 50,364 43,348
OTHER LIABILITIES 12,855 13,949
-------- --------
Total liabilities 997,323 990,286
-------- --------
COMMITMENTS AND CONTINGENCIES
PARTNERS' DEFICIENCY
General partner (279,590) (268,097)
Limited partner - -
Accumulated other comprehensive loss (47,343) (47,813)
Notes receivable from related party (9,221) (9,221)
-------- --------
Total partners' deficiency (336,154) (325,131)
-------- --------
TOTAL LIABILITIES AND PARTNERS' DEFICIENCY $661,169 $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)
Three Quarters Ended
------------------------------
September 26, September 28,
2004 2003
------------- -------------
(thousands)
OPERATING ACTIVITIES
Net loss $(10,299) $(22,695)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Depreciation and amortization 19,047 19,250
Amortization of debt issuance costs, debt premium
and debt discount 2,059 3,967
Asset impairment and other charges 2,178 -
Write off of debt issuance costs - 12,928
Gain on sale of assets (1,005) -
Provision for uncollectible accounts 3,619 1,391
Other operating activities (2,570) (2,186)
Changes in operating assets and liabilities, net (1,976) 13,431
-------- --------
Net cash provided by operating activities 11,053 26,086
-------- --------
INVESTING ACTIVITIES
Capital expenditures (4,209) (4,683)
Proceeds from sale of assets 2,243 1,135
Other investing activities (2,362) (2,729)
-------- --------
Net cash used for investing activities (4,328) (6,277)
-------- --------
FINANCING ACTIVITIES
Proceeds from revolving loans, net 2,797 31,618
Proceeds from long-term debt - 130,000
Repayments of long-term debt (7,280) (162,227)
Decrease in cash overdrafts (1,894) (6,735)
Debt issuance costs - (11,659)
Other financing activities (1,077) (208)
-------- --------
Net cash used for financing activities (7,454) (19,211)
-------- --------
Net increase (decrease) in cash and cash equivalents (729) 598
Cash and cash equivalents at beginning of period 6,610 4,363
-------- --------
Cash and cash equivalents at end of period $ 5,881 $ 4,961
======== ========
Supplemental Information:
Cash paid for interest $ 44,504 $ 45,160
======== ========
Cash paid for income taxes $ 494 $ 2,017
======== ========
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 (CREDITS)
During the three quarters ended September 26, 2004, Foamex L.P. recorded
restructuring charges of $2.3 million, which were primarily related to lease
costs and asset write offs in connection with the closing of its New York office
and the realignment of its automotive operations.
The following tables set forth the components of Foamex L.P.'s
restructuring accruals and activity for the quarter and three quarters ended
September 26, 2004:
Plant Closure Personnel
Total and Leases Reductions Other
----- ------------- ---------- -----
(millions)
Balance at June 27, 2004 $8.7 $7.1 $1.2 $0.4
Restructuring charges 0.1 0.1 - -
Cash spending (0.7) (0.3) (0.2) (0.2)
---- ---- ---- ----
Balance at September 26, 2004 $8.1 $6.9 $1.0 $0.2
==== ==== ==== ====
Balance at December 28, 2003 $9.7 $8.0 $0.9 $0.8
Restructuring charges 2.3 1.4 0.9 -
Asset impairment (0.8) (0.8) - -
Cash spending (3.1) (1.7) (0.8) (0.6)
---- ---- ---- ----
Balance at September 26, 2004 $8.1 $6.9 $1.0 $0.2
==== ==== ==== ====
Foamex L.P. expects to spend approximately $2.5 million during the twelve
months ending October 2, 2005, with the balance to be spent through 2012
primarily for lease termination costs which are recorded net of estimated
sublease rental income.
6
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
3. INVENTORIES
The components of inventories are listed below.
September 26, December 28,
2004 2003
------------- ------------
(thousands)
Raw materials and supplies $60,263 $61,855
Work-in-process 20,094 16,484
Finished goods 18,926 17,543
-------- --------
Total $99,283 $95,882
======= =======
4. LONG-TERM DEBT AND REVOLVING CREDIT BORROWINGS
The components of long-term debt and revolving credit borrowings are listed
below.
September 26, December 28,
2004 2003
------------- ------------
(thousands)
Foamex L.P. Senior Secured Credit Facility
Term Loan (1) $ 40,942 $ 48,214
Foamex L.P. Secured Term Loan (1) 80,000 80,000
10 3/4% Senior secured notes due 2009 (2) (3) 310,307 311,950
9 7/8% Senior subordinated notes due 2007 (2) 148,500 148,500
13 1/2% Senior subordinated notes due 2005 (includes
$835 in 2004 and $1,543 in 2003 of unamortized
debt premium) (2) 52,420 53,128
Industrial revenue bonds 7,000 7,000
Other (net of unamortized debt discount of $54 in 2004
and $93 in 2003) 796 766
-------- --------
639,965 649,558
Less current portion 61,348 8,937
-------- --------
Long-term debt $578,617 $640,621
======== ========
Revolving credit borrowings (1) $ 98,862 $ 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 $10.3 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 September 26,
2004, Foamex L.P. had available borrowings of approximately $50.0 million and
letters of credit outstanding of $23.5 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 26, 2004, the weighted average interest rates were 5.45%
and 5.54% for the revolving loan 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
7
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
4. LONG-TERM DEBT AND REVOLVING CREDIT BORROWINGS (continued)
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
September 26, 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") was
originally scheduled to mature on April 30, 2007. An amendment executed on
November 3, 2004 (see below) extends the maturity of the Secured Term Loan to
April 1, 2009. 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 is 13.50% and the rate in effect at September 26, 2004 is 14.00%. In
addition, Foamex L.P. is subject to a 1.00% facility fee on the initial $80.0
million of this facility 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) by 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
8
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
4. LONG-TERM DEBT AND REVOLVING CREDIT BORROWINGS (continued)
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 September 26, 2004, the redemption price
was 101.646% 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).
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 26, 2004, the redemption price
was 100.0% 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).
On November 3, 2004, Foamex L.P. entered into amended financing agreements
with the existing lenders under the $240.0 Million Senior Secured Credit
Facility and the Secured Term Loan to provide up to $54.0 million of new
financing, the proceeds of which could be used only to repurchase prior to or
repay the 13 1/2% Senior Subordinated Notes at maturity and certain fees related
to the new financing. The lenders under the $240.0 Million Senior Secured Credit
Facility have agreed to lend up to $15.0 million under a new junior term loan
with a floating interest rate based upon either LIBOR, as defined, reset monthly
plus 6.00% or a Base Rate, as defined, plus 4.00% with a maturity date of April
30, 2007. The lenders under the Secured Term Loan would lend up to an additional
$39.0 million with interest rates identical to the rates under the existing
Secured Term Loan. The Secured Term Loan maturity date was also extended to
April 1, 2009. The new financing commitment under the Secured Term Loan requires
the payment of an unused commitment fee at the rate of 1.5% per annum. In
addition, in conjunction with the agreements, it is estimated Foamex L.P. will
incur closing fees and expenses aggregating approximately $2.0 million.
Industrial Revenue Bonds ("IRBs")
IRB debt includes a $1.0 million bond that matures on October 1, 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 26, 2004, the interest rate was 1.50% on the $1.0 million bond and
1.57% 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 $10.6 million at September 26, 2004.
Other
Other debt includes a non-interest bearing promissory note with a principal
amount of $0.9 million at September 26, 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 September 26,
2004.
9
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
4. LONG-TERM DEBT AND REVOLVING CREDIT BORROWINGS (continued)
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 September 26, 2004, Foamex L.P. was able to distribute funds
to its partners only to the extend 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 four quarters ended September 26, 2004, Foamex L.P.'s
fixed charge coverage ratio was 1.06. Amendments to the $240.0 Million Senior
Secured Credit Facility and Secured Term Loan executed on November 3, 2004
allowed Foamex L.P. to exclude certain charges aggregating approximately $3.7
million and approximately $1.0 million in the first and second quarters of 2004,
respectively, from the computation of the fixed charge coverage ratio. 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.
Maturities of Long-Term Debt
Scheduled maturities of long-term debt as of September 26, 2004 are shown
below (thousands):
Quarter ending January 2, 2005 $ 3,571
2005 60,579
2006 7,143
2007 251,585
2008 -
2009 300,000
Thereafter 6,000
--------
628,878
Unamortized debt premium/discount and
fair value adjustment, net 11,087
--------
Total $639,965
========
5. RETIREE BENEFIT PLANS
Components of net periodic pension benefit cost are listed below:
Quarters Ended Three Quarters Ended
----------------------------- ---------------------------
September 26, September 28, September 26, September 28,
2004 2003 2004 2003
------------- ------------- ------------ -------------
(thousands)
Service cost $1,323 $1,158 $3,543 $3,246
Interest cost 1,839 1,854 5,510 5,190
Expected return on plan assets (1,648) (1,475) (5,042) (4,155)
Amortization of transition assets (18) (21) (55) (57)
Amortization of prior service benefit (26) (36) (81) (97)
Amortization of net loss 680 743 2,041 2,080
------ ------ ------ ------
Net periodic pension benefit cost $2,150 $2,223 $5,916 $6,207
====== ====== ====== ======
10
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
5. RETIREE BENEFIT PLANS (continued)
Anticipated contributions to retiree benefit plans are $9.3 million for
fiscal 2004 based on completed actuarial valuations, which is lower than the
previous estimate of $11.8 million. During the quarter and three quarters ending
September 26, 2004, Foamex L.P. contributed $6.1 million and $9.0 million,
respectively.
6. COMPREHENSIVE INCOME (LOSS)
The components of comprehensive income (loss) are listed below.
Quarters Ended Three Quarters Ended
----------------------------- ---------------------------
September 26, September 28, September 26, September 28,
2004 2003 2004 2003
------------- ------------- ------------- -------------
(thousands)
Net loss $(3,804) $(14,006) $(10,299) $(22,695)
Foreign currency translation adjustments 1,240 1,493 470 5,629
------- -------- -------- --------
Total comprehensive loss $(2,564) $(12,513) $ (9,829) $(17,066)
======= ======== ======== ========
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
charges (credits).
Segment results are presented below.
Carpet
Foam Cushion Automotive Technical
Products Products Products Products Other Total
-------- -------- ---------- ---------- -------- --------
(thousands)
Quarter ended September 26, 2004
Net sales $139,980 $ 54,830 $ 77,132 $30,970 $ 7,081 $309,993
Income (loss) from operations $ 13,986 $ 2,996 $ 3,208 $ 8,015 $(13,104) $ 15,101
Depreciation and amortization $ 2,464 $ 710 $ 760 $ 722 $ 2,181 $ 6,837
Quarter ended September 28, 2003
Net sales $137,369 $ 54,126 $100,590 $25,803 $ 5,654 $323,542
Income (loss) from operations $ 14,659 $ 1,772 $ 7,564 $ 6,181 $(12,007) $ 18,169
Depreciation and amortization $ 2,700 $ 791 $ 723 $ 735 $ 1,345 $ 6,294
Three quarters ended September 26, 2004
Net sales $400,464 $154,524 $267,752 $93,310 $ 21,701 $937,751
Income (loss) from operations $ 42,598 $ 7,727 $ 16,222 $25,329 $(46,096) $ 45,780
Depreciation and amortization $ 7,805 $ 2,201 $ 2,026 $ 2,113 $ 4,902 $ 19,047
Three quarters ended September 28, 2003
Net sales $378,408 $157,352 $345,275 $88,807 $ 19,488 $989,330
Income (loss) from operations $ 32,525 $ 2,776 $ 26,424 $24,907 $(37,431) $ 49,201
Depreciation and amortization $ 8,130 $ 2,392 $ 2,155 $ 2,190 $ 4,383 $ 19,250
11
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
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 September 26, 2004, Foamex L.P. had accrued approximately $1.7
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 26, 2004, Foamex L.P. had accruals of approximately
$2.2 million for environmental matters, including approximately $1.9 million
related to remediating and monitoring soil and groundwater contamination and
approximately $0.3 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 our
current estimates are incorrect, there could be a material adverse effect on
Foamex L.P.'s financial position, results of operations and cash flows.
On August 31, 2002, Environment Canada, the Canadian environmental
regulatory agency, finalized a rule, which requires flexible polyurethane foam
manufacturing operations to reduce methylene chloride (dichloromethane) air
emissions. The 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 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.
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 twelve 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.
12
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
8. COMMITMENTS AND CONTINGENCIES
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 100.0% 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 26, 2004 and December 28, 2003 and the condensed
consolidating statements of operations for the quarters and three quarters ended
September 26, 2004 and September 28, 2003 and cash flows for the three quarters
ended September 26, 2004 and September 28, 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.
13
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
9. GUARANTOR INFORMATION (continued)
Condensed Consolidating Balance Sheet
As of September 26, 2004
Foamex
Capital Foamex L.P. Consolidated
Guarantors Nonguarantors Corporation (Parent) Eliminations Foamex L.P.
---------- ------------- ----------- ----------- ------------ ------------
Assets (thousands of dollars)
Current assets $ - $31,231 $ 1 $294,654 $ (5,691) $320,195
Investment in subsidiaries 10,503 - - 41,550 (52,053) -
Property, plant and equipment, net - 18,716 - 127,741 - 146,457
Goodwill - 5,953 - 120,486 - 126,439
Debt issuance costs - - - 22,163 - 22,163
Other assets 14,547 2,433 - 37,985 (9,050) 45,915
------- ------- ---- -------- -------- --------
Total assets $25,050 $58,333 $ 1 $644,579 $(66,794) $661,169
======= ======= ==== ======== ======== ========
Liabilities and Partners' Deficiency
Current liabilities $ 725 $20,688 $ - $340,761 $ (6,687) $355,487
Long-term debt 4,996 4,850 - 577,821 (9,050) 578,617
Other liabilities - 1,068 - 62,151 - 63,219
------- ------- ---- -------- -------- --------
Total liabilities 5,721 26,606 - 980,733 (15,737) 997,323
Partners' deficiency 19,329 31,727 1 (336,154) (51,057) (336,154)
------- ------- ---- -------- -------- --------
Total liabilities and partners'
deficiency $25,050 $58,333 $ 1 $644,579 $(66,794) $661,169
======= ======= ==== ======== ======== ========
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
======= ======= ==== ======== ======== ========
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 September 26, 2004
Foamex
Capital Foamex L.P. Consolidated
Guarantors Nonguarantors Corporation (Parent) Eliminations Foamex L.P.
---------- ------------- ----------- ----------- ------------ ------------
(thousands of dollars)
Net sales $ - $24,529 $ - $291,083 $(5,619) $309,993
Cost of goods sold - 22,538 - 259,902 (5,619) 276,821
----- ------- ----- -------- ------- --------
Gross profit - 1,991 - 31,181 - 33,172
Selling, general and administrative
expenses - 1,426 - 16,567 - 17,993
Restructuring charges - - - 78 - 78
----- ------- ----- -------- ------- --------
Income from operations - 565 - 14,536 - 15,101
Interest and debt issuance expense 64 82 - 18,683 (127) 18,702
Equity in undistributed earnings
of affiliates (206) - - (6) 279 67
Other expense, net 49 (311) - (142) (127) (531)
----- ------- ----- -------- ------- --------
Loss before benefit for income taxes (221) 172 - (4,295) 279 (4,065)
Benefit for income taxes - 230 - (491) - (261)
----- ------- ----- -------- ------- --------
Net loss $(221) $ (58) $ - $ (3,804) $ 279 $ (3,804)
===== ======= ===== ======== ======= ========
15
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 September 28, 2003
Foamex
Capital Foamex L.P. Consolidated
Guarantors Nonguarantors Corporation (Parent) Eliminations Foamex L.P.
---------- ------------- ----------- ----------- ------------ ------------
(thousands of dollars)
Net sales $ - $25,256 $ - $304,548 $(6,262) $323,542
Cost of goods sold - 22,609 - 269,849 (6,262) 286,196
----- ------- ----- -------- ------- --------
Gross profit - 2,647 - 34,699 - 37,346
Selling, general and administrative
expenses - 2,133 - 16,730 - 18,863
Restructuring charges - - - 314 - 314
----- ------- ----- -------- ------- --------
Income from operations - 514 - 17,655 - 18,169
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) - (14,006) 862 (13,838)
Provision for income taxes - 168 - - - 168
----- ------- ----- -------- ------- --------
Net loss $(556) $ (306) $ - $(14,006) $ 862 $(14,006)
===== ======= ===== ======== ======= ========
16
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
9. GUARANTOR INFORMATION (continued)
Condensed Consolidating Statement of Operations
For the three quarters ended September 26, 2004
Foamex
Capital Foamex L.P. Consolidated
Guarantors Nonguarantors Corporation (Parent) Eliminations Foamex L.P.
---------- ------------- ----------- ----------- ------------ ------------
(thousands of dollars)
Net sales $ - $72,546 $ - $881,526 $(16,321) $937,751
Cost of goods sold - 66,784 - 774,176 (16,321) 824,639
---- ------- ----- -------- -------- --------
Gross profit - 5,762 - 107,350 - 113,112
Selling, general and administrative
expenses - 4,675 - 60,335 - 65,010
Restructuring charges - - - 2,322 - 2,322
---- ------- ----- -------- -------- --------
Income from operations - 1,087 - 44,693 - 45,780
Interest and debt issuance expense 181 234 - 55,874 (378) 55,911
Equity in undistributed earnings
of affiliates 165 - - 162 15 342
Other expense, net 143 (645) - 601 (378) (279)
---- ------- ----- -------- -------- --------
Loss before provision for income taxes 127 208 - (10,418) 15 (10,068)
Provision for income taxes - 350 - (119) - 231
---- ------- ----- -------- -------- --------
Net loss $127 $ (142) $ - $(10,299) $ 15 $(10,299)
==== ======= ===== ======== ======== ========
17
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
9. 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 $ - $925,258 $(15,454) $989,330
Cost of goods sold - 72,515 - 825,712 (15,454) 882,773
----- ------- ---- -------- -------- --------
Gross profit - 7,011 - 99,546 - 106,557
Selling, general and administrative
expenses - 5,362 - 53,231 - 58,593
Restructuring charges (credits) - 403 - (1,640) - (1,237)
----- ------- ---- -------- -------- --------
Income from operations - 1,246 - 47,955 - 49,201
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)
----- ------- ---- -------- -------- --------
Loss before provision for
income taxes (964) (1,145) - (22,695) 2,540 (22,264)
Provision for income taxes - 431 - - - 431
----- ------- ---- -------- -------- --------
Net loss $(964) $(1,576) $ - $(22,695) $ 2,540 $(22,695)
===== ======= ==== ======== ======== ========
18
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
9. GUARANTOR INFORMATION (continued)
Condensed Consolidating Statement of Cash Flows
For the three quarters ended September 26, 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 $127 $ (142) $ - $(10,299) $ 15 $(10,299)
Total adjustments to reconcile net
loss to net cash used for
operating activities (127) 743 - 20,751 (15) 21,352
---- ------ ----- -------- ------ --------
Net cash provided by
operating activities - 601 - 10,452 - 11,053
---- ------ ----- -------- ------ --------
Cash Flows from Investing Activities
Capital expenditures - (911) - (3,298) - (4,209)
Other - - - 2,381 (2,500) (119)
---- ------ ----- -------- ------ --------
Net cash used for investing activities - (911) - (917) (2,500) (4,328)
---- ------ ----- -------- ------ --------
Cash Flows from Financing Activities
Net proceeds from revolving loans - - - 2,797 - 2,797
Repayments of long-term debt - - - (7,280) - (7,280)
Other, net - (2,500) - (2,971) 2,500 (2,971)
---- ------ ----- -------- ------ --------
Net cash used for financing activities - (2,500) - (7,454) 2,500 (7,454)
---- ------ ----- -------- ------ --------
Net increase (decrease) in cash and
cash equivalents - (2,810) - 2,081 - (729)
Cash and cash equivalents at
beginning of period - 4,669 1 1,940 - 6,610
---- ------ ----- -------- ------ --------
Cash and cash equivalents at
end of period $ - $1,859 $ 1 $ 4,021 $ - $ 5,881
==== ====== ===== ======== ====== ========
19
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
9. 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 loss $(964) $(1,576) $ - $(22,695) $2,540 $(22,695)
Total adjustments to reconcile net
loss to net cash provided
by operating activities 964 1,009 - 49,348 (2,540) 48,781
----- ------- ----- -------- ------ --------
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
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 SEPTEMBER 26, 2004 COMPARED TO THE
QUARTER ENDED SEPTEMBER 28, 2003
Carpet
Foam Cushion Automotive Technical
Products Products Products Products Other Total
-------- -------- ---------- --------- --------- ----------
(thousands)
Quarter ended September 26, 2004
Net sales $139,980 $54,830 $ 77,132 $30,970 $ 7,081 $309,993
Income (loss) from operations $ 13,986 $ 2,996 $ 3,208 $ 8,015 $(13,104) $ 15,101
Depreciation and amortization $ 2,464 $ 710 $ 760 $ 722 $ 2,181 $ 6,837
Income (loss) from operations
as a percentage of net sales 10.0% 5.5% 4.2% 25.9% n.m.* 4.9%
Quarter ended September 28, 2003
Net sales $137,369 $54,126 $100,590 $25,803 $ 5,654 $323,542
Income (loss) from operations $ 14,659 $ 1,772 $ 7,564 $ 6,181 $(12,007) $ 18,169
Depreciation and amortization $ 2,700 $ 791 $ 723 $ 735 $ 1,345 $ 6,294
Income (loss) from operations
as a percentage of net sales 10.7% 3.3% 7.5% 24.0% n.m.* 5.6%
* not meaningful
Income from Operations
Net sales for the quarter ended September 26, 2004 decreased 4% to $310.0
million from $323.5 million in the quarter ended September 28, 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 other operating segments.
The gross profit was $33.2 million, or 10.7% of net sales, in the quarter
ended September 26, 2004 compared to $37.3 million, or 11.5% of net sales, in
the 2003 period. The lower gross margin was primarily due to higher chemical and
manufacturing costs and a charge of approximately $1.7 million for the write off
of certain manufacturing assets. We anticipate that the gross margin will
decline in the fourth quarter of 2004 and will be lower on a year over year
basis for the next several quarters primarily due to increases in the cost of
raw materials and our inability to fully recover these costs through price
increases in the near term.
Income from operations for the quarter ended September 26, 2004 was $15.1
million, or 4.9% of net sales, which represented a 17% decrease from the $18.2
million, or 5.6% of net sales, reported in the 2003 period. The lower gross
profit margin, described above, was partially offset by lower selling, general
and administrative expenses which decreased $0.9 million, or 5%, primarily due
to lower corporate expenses and employee costs related to the closing of our New
York office, and bad debt recoveries, partially offset by higher professional
fees primarily for information technology and the cost of our efforts under
Section 404 of the Sarbanes-Oxley Act.
21
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Foam Products
Foam Products net sales for the quarter ended September 26, 2004 increased
2% to $140.0 million from $137.4 million in the 2003 period primarily due to
higher volumes of value-added products. Income from operations decreased 5% to
$14.0 million in the quarter ended September 26, 2004 from $14.7 million in the
2003 period principally due to higher raw material costs. Income from operations
was 10.0% of net sales in 2004 and 10.7% of net sales in 2003.
Carpet Cushion Products
Carpet Cushion Products net sales for the quarter ended September 26, 2004
increased 1% to $54.8 million from $54.1 million in the 2003 period. Income from
operations increased 69% to $3.0 million in the quarter ended September 26, 2004
from $1.8 million in the 2003 period primarily as a result of lower operating
costs partially offset by lower average selling prices. Income from operations
was 5.5% of net sales in 2004 and 3.3% of net sales in 2003.
Automotive Products
Automotive Products net sales for the quarter ended September 26, 2004
decreased 23% to $77.1 million from $100.6 million in the 2003 period primarily
as a result of lower volumes from sourcing actions by major customers. We
anticipate this trend of lower volume in this segment will continue with total
2004 net sales expected to be approximately $350.0 million compared to $447.1
million in 2003. Income from operations decreased 58% to $3.2 million compared
to $7.6 million in the 2003 period primarily due to the decline in sales volume
and lower average selling prices due to changes in sales mix. Income from
operations was 4.2% of net sales in 2004 and 7.5% of net sales in 2003.
Technical Products
Technical Products net sales for the quarter ended September 26, 2004
increased 20% to $31.0 million from $25.8 million in the 2003 period primarily
as a result of increases in unit volume and improved mix and pricing. Income
from operations increased 30% to $8.0 million in the 2004 period compared to
$6.2 million in the 2003 period primarily due to higher volumes and improved mix
and pricing. Income from operations was 25.9% of net sales in 2004 and 24.0% 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
charges (credits). The net sales associated with this segment resulted from our
Mexico City operations. The loss from operations was $13.1 million in the
quarter ended September 26, 2004 and $12.0 million in the quarter ended
September 28, 2003 and primarily reflects corporate expenses not allocated to
operating segments.
During the quarter ended September 26, 2004, we recorded restructuring
charges of $0.1 million. During the quarter ended September 28, 2003, we
recorded restructuring charges of $0.3 million.
Interest and Debt Issuance Expense
Interest and debt issuance expense was $18.7 million in the quarter ended
September 26, 2004, which represented a 41% decrease from the 2003 period
expense of $31.6 million. The 2003 period included a write off of debt issuance
costs of $12.9 million associated with the refinancing of our credit facilities.
22
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Other Income (Expense), Net
Other expense, net was $0.5 million for the quarter ended September 26,
2004 compared to $1.0 million for the quarter ended September 28, 2003. The 2004
period includes foreign currency transaction losses related to operations in
Mexico and Canada of $0.3 million compared to $0.6 million in 2003.
Provision (Benefit) 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.
RESULTS OF OPERATIONS FOR THE THREE QUARTERS ENDED SEPTEMBER 26, 2004 COMPARED
TO THE THREE QUARTERS ENDED SEPTEMBER 28, 2003
Carpet
Foam Cushion Automotive Technical
Products Products Products Products Other Total
-------- -------- ---------- ---------- --------- ---------
(thousands)
Three Quarters ended September 26, 2004
Net sales $400,464 $154,524 $267,752 $93,310 $ 21,701 $937,751
Income (loss) from operations $ 42,598 $ 7,727 $ 16,222 $25,329 $(46,096) $ 45,780
Depreciation and amortization $ 7,805 $ 2,201 $ 2,026 $ 2,113 $ 4,902 $ 19,047
Income (loss) from operations
as a percentage of net sales 10.6% 5.0% 6.1% 27.1% n.m.* 4.9%
Three Quarters ended September 28, 2003
Net sales $378,408 $157,352 $345,275 $88,807 $ 19,488 $989,330
Income (loss) from operations $ 32,525 $ 2,776 $ 26,424 $24,907 $(37,431) $ 49,201
Depreciation and amortization $ 8,130 $ 2,392 $ 2,155 $ 2,190 $ 4,383 $ 19,250
Income (loss) from operations
as a percentage of net sales 8.6% 1.8% 7.7% 28.0% n.m.* 5.0%
* not meaningful
Income from Operations
Net sales for the three quarters ended September 26, 2004 decreased 5% to
$937.8 million from $989.3 million in the three quarters ended September 28,
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 and
Technical Products segments.
The gross profit was $113.1 million, or 12.1% of net sales, in the three
quarters ended September 26, 2004 compared to $106.6 million, or 10.8% of net
sales, in the 2003 period. Gross profit margin has improved primarily due to
profit improvements as a result of better product mix in Foam Products and lower
costs in Carpet Cushion Products, partially offset by lower volume in the
Automotive Products segment.
Income from operations for the three quarters ended September 26, 2004 was
$45.8 million, or 4.9% of net sales, which represented a 7% decrease from the
$49.2 million, or 5.0% of net sales, reported during the 2003 period. The
improved gross profit margin, described above, was offset by higher selling,
general and administrative expenses which increased $6.4 million, or 11%, due
partially to a $3.0 million increase to bad debt expense due to a customer
bankruptcy, net of settlements of $0.7 million, litigation related costs and
higher professional fees primarily
23
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
for information technology and the cost of our efforts under Section 404 of the
Sarbanes-Oxley Act, partially offset by lower corporate expenses and employee
costs as a result of the closing of our New York office. Results include net
restructuring charges of $2.3 million in 2004 and net restructuring credits of
$1.2 million in 2003. Restructuring items are discussed under "Other" below.
Foam Products
Foam Products net sales for the three quarters ended September 26, 2004
increased 6% to $400.5 million from $378.4 million in the 2003 period primarily
due to higher volumes of value-added products. Income from operations increased
31% to $42.6 million in the three quarters ended September 26, 2004 from $32.5
million in the 2003 period principally as a result of the improved volume mix.
Income from operations was 10.6% of net sales in 2004 and 8.6% of net sales in
2003.
Carpet Cushion Products
Carpet Cushion Products net sales for the three quarters ended September
26, 2004 decreased 2% to $154.5 million from $157.4 million in the 2003 period
principally due to volume declines and lower average selling prices. Income from
operations was $7.7 million in the three quarters ended September 26, 2004
compared to $2.8 million in the 2003 period with the increase due primarily to
lower material and operating costs partially offset by lower average selling
prices. Income from operations was 5.0% of net sales in 2004 and 1.8% of net
sales in 2003.
Automotive Products
Automotive Products net sales for the three quarters ended September 26,
2004 decreased 22% to $267.8 million from $345.3 million in the 2003 period
principally as a result of lower volume from sourcing actions by major
customers. Income from operations decreased 39% to $16.2 million compared to
$26.4 million in the 2003 period primarily due the lower sales volume. Income
from operations was 6.1% of net sales in 2004 and 7.7% of net sales in 2003.
Technical Products
Technical Products net sales for the three quarters ended September 26,
2004 increased 5% to $93.3 million from $88.8 million in the 2003 period
primarily due to higher unit volume and improved mix. Income from operations
increased 2% to $25.3 million in the 2004 period compared to $24.9 million in
the 2003 period primarily due to product mix improvements. Income from
operations was 27.1% of net sales in 2004 and 28.0% 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
charges (credits). The increase in net sales associated with this segment
resulted from our Mexico City operations. The loss from operations was $46.1
million in the three quarters ended September 26, 2004 and $37.4 million in the
three quarters ended September 28, 2003 and reflects generally higher corporate
expenses in 2004 and includes restructuring items discussed below.
During the three quarters ended September 26, 2004, we recorded
restructuring charges of $2.3 million primarily related to lease costs and asset
write offs in connection with the closing of the New York office and the
realignment of automotive operations. During the three quarters ended September
28, 2003, we recorded restructuring credits of $1.2 million primarily from the
reversal of prior restructuring charges no longer required.
24
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 $55.9 million in the three quarters
ended September 26, 2004, which represented a 20% decrease from the 2003 period
expense of $70.0 million. The decrease is primarily due to lower amortization of
debt issuance costs, which included a write off of $12.9 million in the 2003
period associated with the refinancing of our credit facilities.
Other Income (Expense), Net
Other expense, net was $0.3 million for the three quarters ended September
26, 2004 compared to other expense, net of $2.8 million for the three quarters
ended September 28, 2003. The 2004 period includes foreign currency transaction
losses related to operations in Mexico and Canada of $0.7 million compared to
$2.3 million in 2003. Also included in 2004 were gains of $1.0 million on asset
disposals.
Provision (Benefit) 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 principal and
interest on outstanding indebtedness, capital expenditures and software
development costs, and employee and non-employee benefits. Periodic borrowings
under our revolving credit facility ($50.0 million available at September 26,
2004) and cash flows from operating activities are the principal sources of cash
needed to meet our liquidity requirements for the next twelve months. Scheduled
principal payments on our debt become more significant in 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 $5.9 million at September 26, 2004 compared
to $6.6 million at December 28, 2003. Working capital at September 26, 2004 was
a negative $35.3 million and the current ratio was 0.90 to 1 compared to working
capital at December 28, 2003 of $18.7 million and a current ratio of 1.06 to 1.
The decline in working capital is primarily due to the reclassification of the
$52.4 million of 13 1/2% Senior Subordinated Notes due August 15, 2005 as they
mature in less than one year.
Total long-term debt and revolving credit borrowings at September 26, 2004
were $738.8 million, down $6.8 million from December 28, 2003. As of September
26, 2004, there were $98.9 million of revolving credit borrowings under the
$240.0 Million Senior Secured Credit Facility with $50.0 million available for
borrowings and $23.5 million of letters of credit outstanding. Revolving credit
borrowings at September 26, 2004 primarily 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 September 26, 2004, the weighted average
interest rates were 5.45% and 5.54% for the revolving loan and the term loan,
respectively. The margin for borrowings under the revolving credit facility and
term loan increased by 0.50% as of September 1, 2004 and will decrease by 0.25%
as of December 1, 2004. The term loan requires quarterly
25
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
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 was originally schedule to mature on
April 30, 2007. An Amendment executed on November 3, 2004 (see below) extends
the maturity of the Secured Term Loan to April 1, 2009. 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 is 13.50% and the rate in effect at
September 26, 2004 was 14.00%. In addition, Foamex L.P. is subject to a 1.00%
facility fee on the initial $80.0 million of this facility 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 minimum fixed charge coverage ratio, as
defined, of 1.00. For the four quarters ended September 26, 2004, Foamex L.P.'s
fixed charge coverage ratio was 1.06, which translates into $5.2 million of
excess coverage. Amendments to the $240.0 Million Senior Secured Credit Facility
and Secured Term Loan executed on November 3, 2004 allowed Foamex L.P. to
exclude certain charges aggregating approximately $3.7 million and approximately
$1.0 million in the first and second quarters of 2004, respectively, from the
computation of the fixed charge coverage ratio. If we are not able to maintain
or improve our operating results and manage our fixed charges, we may not be
able to meet our required fixed charge coverage ratio. If we are not able to
meet the fixed charge coverage ratio and we are not able to obtain waivers or
further amendments under the $240.0 Million Senior Secured Credit Facility and
the Secured Term Loan, there would be a material adverse impact on our financial
condition. 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 may, from time to time, directly or indirectly
make purchases of these notes or our other public debt in the open market or in
private transactions.
On November 3, 2004, Foamex L.P. entered into financing agreements with the
existing lenders under the $240.0 Million Senior Secured Credit Facility and the
Secured Term Loan to provide up to $54.0 million of new financing, the proceeds
of which could be used only to repurchase prior to or repay the 13 1/2% Senior
Subordinated Notes at maturity and certain fees related to the new financing.
The lenders under the $240.0 Million Senior Secured Credit Facility have agreed
to lend up to $15.0 million under a new junior term loan with a floating
interest rate based upon either LIBOR, as defined, reset monthly plus 6.00% or a
Base Rate, as defined, plus 4.00% with a maturity date of April 30, 2007. The
lenders under the Secured Term Loan would lend up to an additional $39.0 million
with interest rates identical to the rates under the existing Secured Term Loan.
The Secured Term Loan maturity date was also extended to April 1, 2009. The new
financing commitment under the Secured Term Loan requires the payment of an
unused commitment fee at the rate of 1.5% per annum. In addition, in conjunction
with the agreements, it is estimated Foamex L.P. will incur closing fees and
expenses aggregating approximately $2.0 million. The amendments permit Foamex
L.P. to reduce the financing commitments by any cash proceeds, as defined in the
amendments, generated from certain sources.
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 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.
26
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
We anticipate contributing a total of $9.3 million to our pension plans in
2004 and have contributed $9.0 million for the three quarters ended September
26, 2004.
Cash Flow from Operating Activities
Cash provided by operating activities in the three quarters ended September
26, 2004 was $11.1 million compared to cash provided of $26.1 million in the
three quarters ended September 28, 2003. Accounts receivable increased $11.7
million before changes in allowances while other assets increased by $6.9
million. The increase in accounts receivable is primarily due to higher net
sales in the last two months of the current quarter when compared to the last
two months of 2003. Other assets increased primarily as a result of cash
collateral deposits under our insurance programs. Accounts payable increased
$9.6 million as a result of the timing of payments to vendors while accrued
interest increased $9.3 million. We made an interest payment of $16.1 million on
our 10 3/4% Senior Secured Notes on October 1, 2004.
Cash Flow from Investing Activities
Investing activities used $4.3 million of cash for the three quarters ended
September 26, 2004. Cash requirements included capital expenditures of $4.2
million and capitalized software development costs of $2.4 million. These uses
were partially offset by proceeds from asset disposals of $2.2 million. In the
three quarters ended September 28, 2003, cash used for investing activities was
$6.3 million, which consisted of capital expenditures of $4.7 million and
capitalized software development costs of $2.7 million partially offset by
proceeds from asset disposals of $1.1 million. The estimated capital
expenditures and software development costs for the full year 2004 are expected
to be approximately $6.0 million and approximately $4.0 million, respectively.
Cash Flow from Financing Activities
Cash used for financing activities was $7.5 million for the three quarters
ended September 26, 2004 and consisted principally of scheduled payments of the
term loan under the $240.0 Million Senior Secured Credit Facility and the net
proceeds from the asset sale used to make an additional payment on the Term Loan
as required under the facility partially offset by $2.8 million of revolving
credit borrowings. In addition, cash overdrafts decreased by $1.9 million. Cash
used for financing activities in 2003 was $19.2 million consisting primarily of
$11.7 million for debt issuance costs and a $6.8 million deduction in cash
overdrafts with repayments of long-term debt offset by new long-term debt and
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 September
26, 2004 was $2.2 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 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 September 26, 2004, indebtedness
with variable interest rates aggregated $226.8 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.
27
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The two principal chemicals used in the manufacturing of flexible
polyurethane foam are toluene diisocyanate, or "TDI" and polyol. The prices of
TDI and polyol are influenced by demand, manufacturing capacity and oil and
natural gas prices. We attempt to offset raw material price increases through
selling price increases and manufacturing process efficiencies.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS.
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.
Our management, with the participation of the Chief Executive Officer and
Chief Financial Officer, evaluated the effectiveness of our disclosure controls
and procedures as of the end of the period covered by this report. Based on that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that our disclosure controls and procedures as of the end of the period covered
by this report are functioning effectively to provide reasonable assurance that
the information required to be disclosed by us in reports filed under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported
within the time periods specified in the SEC's rules and forms. A controls
system, no matter how well designed and operated, cannot provide absolute
assurance that the objectives of the controls system are met, and no evaluation
of controls can provide absolute assurance that all control issues and instances
of fraud, if any, within a company have been detected.
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, as of December 28, 2003, to be reportable conditions under
standards established by the American Institute of Certified Public Accountants.
A reportable condition is a matter coming to the auditor's attention that, in
its judgment, represents significant deficiencies in the design or operation of
the internal control, which could adversely affect the organization's ability to
record, process, summarize, and report financial data consistent with the
assertions of management 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, with Audit Committee oversight, is in the process of promptly
remediating the reportable conditions with effective interim solutions. In
addition, Foamex L.P. continues to install a new enterprise-wide information
technology system. Several modules of the system have been installed during 2003
and 2004. During the third quarter of 2004 Foamex L.P. implemented the Accounts
Receivable Module and implemented the Sales Order and Distribution and
Manufacturing Modules at several of its manufacturing facilities. Foamex L.P. is
continuing this implementation effort and expects to substantially complete the
implementation at its facilities during 2006. Foamex L.P. believes it has
addressed and remediated the information technology security matters that were
identified as a reportable condition and continues to assess IT security related
matters. Foamex L.P. implemented improved inventory procedures and processes at
each of its facilities and continues to take appropriate actions to ensure their
effectiveness. Foamex L.P. continues to perform monthly physical counts and
reconciliations of inventory according to documented policies and procedures at
each of its plants and will continue to do so until perpetual inventory records
are available as manufacturing modules of the enterprise-wide information
technology system are implemented at its facilities. Foamex L.P. has
strengthened and continues to address and monitor the controls over the
preparation of its quarterly financial reports including more extensive and
stringent analytical review procedures applied to account reconciliations,
analyses and results. Additionally, updates to certain inventory policies and
procedures and a new policy on the identification and disposition of potentially
idle assets have been implemented.
28
FOAMEX L.P. AND SUBSIDIARIES
ITEM 4. CONTROLS AND PROCEDURES.
Foamex L.P. does not consider the reportable conditions, either
individually or in the aggregate, to be a material weakness as that term was
defined under standards established by the American Institute of Certified
Public Accountants or as currently defined by the Public Company Accounting
Oversight Board under its Auditing Standard No. 2. In making its evaluation of
the effectiveness of disclosure controls and procedures described above,
management considered the existence of the reportable conditions.
Foamex L.P. is a wholly-owned subsidiary of Foamex International, which is
an accelerated filer as defined in Rule 12b-2 of the Securities Exchange Act of
1934. Since Foamex L.P. is not an accelerated filer, Foamex L.P. is not required
to report under Section 404 of the Sarbanes-Oxley Act of 2002 until its fiscal
year ending January 1, 2006. Beginning with Foamex International's Form 10-K for
the fiscal year ending January 2, 2005, Foamex International will be required,
pursuant to Section 404 and SEC regulations, to disclose the conclusions of its
principal executive and principal financial officers regarding the effectiveness
of Foamex International's internal control over financial reporting as of
January 2, 2005 (the end of its fiscal year), including a statement as to
whether or not internal control over financial reporting is effective.
Management may not conclude that the registrant's internal control over
financial reporting is effective if a material weakness exists in the
registrant's internal control over financial reporting. The report will also
contain the independent auditors' attestation report on management's assessment
of internal control over financial reporting.
Foamex L.P. is in the process of documenting and testing its internal
control procedures in preparation for Foamex International's first management
assessment of internal control over financial reporting. As part of the process,
Foamex L.P. has identified a number of deficiencies, related to both the design
and operation of its controls, several of which are considered to be significant
deficiencies as defined under PCAOB Auditing Standard No. 2. Foamex L.P. has
remediated many of the identified deficiencies and is in the process of testing
the effectiveness of the controls that have been enhanced to address these
deficiencies.
Other than as described above, no change in Foamex L.P.'s internal control
over financial reporting occurred during the most recent fiscal quarter that has
materially affected, or is reasonably likely to materially affect, Foamex L.P.'s
internal control over financial reporting.
29
FOAMEX L.P. AND SUBSIDIARIES
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.
(a) Exhibits
4.15.5* Amendment No. 3 to Credit Agreement, dated as of November 3,
2004, among Foamex L.P., as Borrower, the affiliates of
Borrower party thereto, the lenders party thereto, and Bank
of America, N.A. as Administrative Agent.
4.16.5* Amendment No. 3 to Credit Agreement, dated as of November 3,
2004, among Foamex L.P., as Borrower, the affiliates of
Borrower party thereto, the lenders party thereto, and
Silver Point Finance, LLC as Administrative Agent.
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.
* Incorporated by reference to the Exhibits to the Form 10-Q of
Foamex International for the quarterly period ended September 26,
2004.
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 10, 2004 By: /s/ K. Douglas Ralph
-----------------------------------
K. Douglas Ralph
Executive Vice President and Chief
Financial Officer
(Duly Authorized Officer)
FOAMEX CAPITAL CORPORATION
Date: November 10, 2004 By: /s/ K. Douglas Ralph
-----------------------------------
K. Douglas Ralph
Executive Vice President and Chief
Financial Officer
31