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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 April 3, 2005
Commission file number 0-22624
FOAMEX INTERNATIONAL INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 05-0473908
- ------------------------------- ------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1000 Columbia Avenue
Linwood, PA 19061
- ------------------------------- ------------------------
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code: (610) 859-3000
--------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
----- -----
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
YES X NO
----- -----
The number of shares of the registrant's common stock outstanding as of May 9,
2005 was 24,509,728.
FOAMEX INTERNATIONAL INC.
INDEX
Page
Part I. Financial Information
Item 1. Financial Statements (unaudited).
Condensed Consolidated Statements of Operations - Quarters Ended
April 3, 2005 and March 28, 2004 3
Condensed Consolidated Balance Sheets as of April 3, 2005 and
January 2, 2005 4
Condensed Consolidated Statements of Cash Flows - Quarters Ended
April 3, 2005 and March 28, 2004 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations. 15
Item 3. Quantitative and Qualitative Disclosures about Market Risk. 19
Item 4. Controls and Procedures. 19
Part II. Other Information
Item 1. Legal Proceedings. 21
Item 6. Exhibits. 21
Signatures 22
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
Quarters Ended
------------------------------------
April 3, March 28,
2005 2004
-------- ---------
(thousands, except per share amounts)
NET SALES $332,670 $313,618
COST OF GOODS SOLD 304,945 273,859
-------- --------
GROSS PROFIT 27,725 39,759
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 18,022 25,985
RESTRUCTURING CHARGES - 528
-------- --------
INCOME FROM OPERATIONS 9,703 13,246
INTEREST AND DEBT ISSUANCE EXPENSE 19,940 18,611
INCOME FROM EQUITY INTEREST IN JOINT VENTURES 331 277
OTHER INCOME (EXPENSE), NET (982) 992
-------- --------
LOSS BEFORE BENEFIT FOR INCOME TAXES (10,888) (4,096)
BENEFIT FOR INCOME TAXES (34) (1,981)
-------- --------
NET LOSS $(10,854) $ (2,115)
======== ========
LOSS PER SHARE - BASIC $ (0.44) $ (0.09)
======== ========
LOSS PER SHARE - DILUTED $ (0.44) $ (0.09)
======== ========
WEIGHTED AVERAGE NUMBER OF SHARES - BASIC 24,507 24,437
======== ========
WEIGHTED AVERAGE NUMBER OF SHARES - DILUTED 24,507 24,437
======== ========
The accompanying notes are an integral part of the unaudited condensed
consolidated financial statements.
3
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
April 3, 2005 January 2, 2005
ASSETS ------------- ---------------
CURRENT ASSETS (thousands, except share data)
Cash and cash equivalents $ 5,147 $ 5,351
Accounts receivable, net of allowances of $9,058 and $9,001 208,900 182,740
Inventories 105,311 100,029
Other current assets 21,191 22,403
--------- ---------
Total current assets 340,549 310,523
--------- ---------
Property, plant and equipment 401,978 402,746
Less accumulated depreciation (263,428) (261,203)
--------- ---------
NET PROPERTY, PLANT AND EQUIPMENT 138,550 141,543
GOODWILL 126,728 126,814
DEBT ISSUANCE COSTS, net of accumulated amortization of $19,110
and $17,477 19,519 21,152
DEFERRED INCOME TAXES 236 237
SOFTWARE COSTS, net of accumulated amortization of $7,061
and $6,401 9,207 9,325
INVESTMENT IN AND ADVANCES TO AFFILIATES 16,912 16,521
OTHER ASSETS 18,022 19,595
--------- ---------
TOTAL ASSETS $ 669,723 $ 645,710
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES
Revolving credit borrowings $ 144,972 $ 114,907
Current portion of long-term debt 66,922 67,131
Accounts payable 121,340 104,315
Accrued employee compensation and benefits 25,854 22,354
Accrued interest 5,877 13,063
Accrued customer rebates 12,006 16,979
Cash overdrafts 10,376 10,437
Other accrued liabilities 18,134 18,439
--------- ---------
Total current liabilities 405,481 367,625
LONG-TERM DEBT 566,109 568,461
ACCRUED EMPLOYEE BENEFITS 55,673 55,388
OTHER LIABILITIES 11,700 12,549
--------- ---------
Total liabilities 1,038,963 1,004,023
--------- ---------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIENCY
Preferred Stock, par value $1.00 per share:
Authorized 5,000,000 shares
Issued 15,000 shares - Series B 15 15
Common Stock, par value $.01 per share:
Authorized 50,000,000 shares
Issued 27,998,728 shares and 27,949,762 shares 280 279
Additional paid-in capital 102,531 102,354
Accumulated deficit (399,519) (388,665)
Accumulated other comprehensive loss (35,546) (35,295)
Common stock held in treasury, at cost:
3,489,000 shares (27,780) (27,780)
Shareholder note receivable (9,221) (9,221)
--------- ---------
Total stockholders' deficiency (369,240) (358,313)
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY $ 669,723 $ 645,710
========= =========
The accompanying notes are an integral part of the unaudited condensed
consolidated financial statements.
4
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Quarters Ended
---------------------------
April 3, March 28,
2005 2004
--------- --------
(thousands)
OPERATING ACTIVITIES
Net loss $(10,854) $(2,115)
Adjustments to reconcile net loss to net cash provided
by (used for) operating activities:
Depreciation and amortization 5,201 6,366
Amortization of debt issuance costs, debt premium
and debt discount 621 704
Loss (gain) on sale of assets 5 (930)
Other operating activities 818 4,697
Changes in operating assets and liabilities, net (22,552) (7,673)
-------- -------
Net cash provided by (used for) operating activities (26,761) 1,049
-------- -------
INVESTING ACTIVITIES
Capital expenditures (1,137) (1,215)
Proceeds from sale of assets 3 2,166
Other investing activities (537) (856)
-------- -------
Net cash provided by (used for) investing activities (1,671) 95
-------- -------
FINANCING ACTIVITIES
Proceeds from revolving loans 30,065 2,045
Repayments of long-term debt (1,794) (3,728)
Decrease in cash overdrafts (61) (1,779)
Other 18 -
-------- -------
Net cash provided by (used for) financing activities 28,228 (3,462)
-------- -------
Net decrease in cash and cash equivalents (204) (2,318)
Cash and cash equivalents at beginning of period 5,351 6,613
-------- -------
Cash and cash equivalents at end of period $ 5,147 $ 4,295
======== =======
Supplemental Information:
Cash paid for interest $ 26,505 $ 7,966
======== =======
Cash paid for income taxes $ 86 $ 147
======== =======
The accompanying notes are an integral part of the unaudited condensed
consolidated financial statements.
5
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
1. ORGANIZATION AND BASIS OF PRESENTATION
Organization
Foamex International Inc. (the "Company") operates in the flexible
polyurethane and advanced polymer foam products industry. The Company's
operations are primarily conducted through its wholly-owned subsidiary, Foamex
L.P. Foamex L.P. conducts foreign operations through Foamex Canada Inc. ("Foamex
Canada"), Foamex Latin America, Inc. and Foamex Asia, Inc. Financial information
concerning the business segments of the Company is included in Note 10.
Basis of Presentation
The accompanying condensed consolidated financial statements are unaudited
and do not include certain information and disclosures required by accounting
principles generally accepted in the United States of America for complete
financial statements. However, in the opinion of management, all adjustments,
consisting only of normal recurring adjustments considered necessary to present
fairly the Company's consolidated financial position and results of operations,
have been included. These interim financial statements should be read in
conjunction with the consolidated financial statements and related notes
included in the Company's 2004 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 January 2, 2005 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.
New Accounting Pronouncements
In March 2005, the Financial Accounting Standards Board ("FASB") issued
interpretation No. 47, "Accounting for Conditional Asset Retirement Obligations"
("FIN No. 47"). FIN No. 47 clarifies that the term conditional obligation as
used in FASB Statement No. 143, "Accounting for Assets Retirement Obligations",
refers to a legal obligation to perform an asset retirement activity in which
the timing and/or method of settlement are conditional on a future event that
may or may not be within the control of the entity. FIN No. 47 requires that the
uncertainty about the timing and/or method of settlement of a conditional asset
retirement obligation be factored into the measurement of the liability when
sufficient information exists. FIN No. 47 also clarifies when an entity would
have sufficient information to reasonably estimate the fair value of an asset
retirement obligation. FIN No. 47 is effective for fiscal years ending after
December 15, 2005. The Company has not yet determined the impact, if any, of the
adoption of FIN No. 47 on its financial statements.
In December 2004, the FASB issued Statement of Financial Accounting
Standards No. 123R, "Share-Based Payment" ("SFAS No. 123R"). The provisions of
SFAS No. 123R require the cost of employee services received in exchange for an
award of equity instruments be based on the grant date fair value of the award
and be recognized over the period during which the employee is required to
provide service in exchange for the award. SFAS No. 123R was required to be
applied to all awards of equity instruments granted in annual or interim periods
beginning after June 15, 2005. On April 15, 2005, the Securities and Exchange
Commission postponed the effective date of SFAS No. 123R to periods within the
first fiscal year beginning after June 15, 2005. The Company has not yet
determined the impact of SFAS No. 123R on its financial statements.
Accounting Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
6
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
2. EARNINGS PER SHARE
The following table shows the amounts used in computing earnings per share.
Quarters Ended
------------------------------------
April 3, March 28,
2005 2004
-------- ---------
(thousands, except per share amounts)
Basic:
Net loss $(10,854) $(2,115)
======== =======
Weighted average common shares outstanding 24,507 24,437
======== =======
Net loss per share $ (0.44) $ (0.09)
======== =======
Diluted:
Net loss $(10,854) $(2,115)
======== =======
Weighted average common shares outstanding 24,507 24,437
Incremental shares resulting from (a)
Stock options - -
Convertible preferred stock - -
-------- -------
Adjusted weighted average shares 24,507 24,437
======== =======
Net loss per share $ (0.44) $ (0.09)
======== =======
(a) There is no dilution resulting from potential incremental shares in the
quarters ended April 3, 2005 and March 28, 2004 because the Company had net
losses and the inclusion of potential incremental shares would be
antidilutive. For the quarter ended April 3, 2005, potential incremental
shares included options to purchase shares of common stock (3,121,674
shares at April 3, 2005) and Series B Preferred Stock convertible into
1,500,000 shares of common stock. For the quarter ended March 28, 2004
potential incremental shares included options to purchase shares of common
stock (4,068,525 shares at March 28, 2004) and Series B preferred stock
convertible into 1,500,000 shares of common stock.
3. STOCK-BASED COMPENSATION
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS No. 123"), encourages, but does not require,
companies to record compensation cost for stock-based employee compensation
plans at fair value. The Company has chosen to continue to account for
stock-based compensation using the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB No. 25"), and related interpretations. Accordingly, the Company
records expense in an amount equal to the excess, if any, of the quoted market
price on the grant date over the option price.
The following table includes as reported and proforma information required
by Statement of Financial Accounting Standards No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure ("SFAS No. 148"). Proforma
information is based on the fair value method under SFAS No. 123.
7
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
3. STOCK-BASED COMPENSATION (continued)
Quarters Ended
------------------------------------
April 3, March 28,
2005 2004
-------- ---------
(thousands, except per share amounts)
Net loss as reported $(10,854) $(2,115)
Add: Stock-based employee compensation
expense included in reported net loss,
net of tax benefit - 1
Deduct: Stock-based employee compensation
expense determined under fair value
based method, net of tax benefit (411) (59)
-------- -------
Proforma net loss $(11,265) $(2,173)
======== =======
Basic loss per share
As reported $ (0.44) $ (0.09)
Proforma $ (0.46) $ (0.09)
Diluted loss per share
As reported $ (0.44) $ (0.09)
Proforma $ (0.46) $ (0.09)
4. RESTRUCTURING CHARGES
The following table sets forth the components of the Company's
restructuring accruals and activity for the quarter ended April 3, 2005:
Plant Closure Personnel
Total and Leases Reductions
----- ------------- ----------
(millions)
Balance at January 2, 2005 $7.4 $6.7 $0.7
Cash spending (0.5) (0.4) (0.1)
---- ---- ----
Balance at April 3, 2005 $6.9 $6.3 $0.6
==== ==== ====
The Company expects to spend approximately $1.7 million during the twelve
months ending April 2, 2006, with the balance to be spent through 2012 primarily
for lease termination costs which are recorded net of estimated sublease rental
income of approximately $3.8 million.
5. INVENTORIES
The components of inventories are listed below.
April 3, January 2,
2005 2005
-------- ----------
(thousands)
Raw materials and supplies $ 65,813 $ 63,336
Work-in-process 21,551 18,667
Finished goods 17,947 18,026
-------- --------
Total $105,311 $100,029
======== ========
8
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
6. LONG-TERM DEBT AND REVOLVING CREDIT BORROWINGS
The components of long-term debt and revolving credit borrowings are listed
below.
April 3, January 2,
2005 2005
-------- ----------
Foamex L.P. Senior Secured Credit Facility (thousands)
Term Loan (1) $ 35,585 $ 37,371
Foamex L.P. Secured Term Loan (1) 80,000 80,000
10 3/4% Senior Secured Notes due 2009 (2) (4) 309,141 309,703
9 7/8% Senior Subordinated Notes due 2007 (2) 148,500 148,500
13 1/2% Senior Subordinated Notes due August 2005 (includes
$345 and $581 of unamortized debt premium) (2) 51,930 52,166
Industrial revenue bonds (3) 7,000 7,000
Other (net of unamortized debt discount of $33 and $45) 875 852
-------- --------
633,031 635,592
Less current portion 66,922 67,131
-------- --------
Long-term debt $566,109 $568,461
======== ========
Revolving credit borrowings (1) $144,972 $114,907
======== ========
(1) Subsidiary debt of Foamex L.P., guaranteed by the Company, FMXI, Inc. and
Foamex Canada.
(2) Subsidiary debt of Foamex L.P. and Foamex Capital Corporation.
(3) Subsidiary debt of Foamex L.P.
(4) Includes $9.1 million and $9.7 million of deferred credits on interest rate
swap transactions.
Senior Secured Credit Facility
The 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 lenders under the Senior Secured Credit Facility have also agreed
to lend up to an additional $15.0 million under a junior term loan. 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 April 3, 2005, Foamex L.P. had total available
borrowings of approximately $21.9 million, including $14.3 million that could be
borrowed only with consent of the lenders, and letters of credit outstanding of
$22.5 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 April 3, 2005, the weighted
average interest rates were 6.61% and 6.63% 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. Borrowings
under the junior term loan can be used only to repay the 13 1/2% Senior
Subordinated Notes at maturity and will bear interest at a floating rate based
upon LIBOR, as defined, reset monthly plus 6.00%. All borrowings under the
Senior Secured Credit Facility will mature on April 30, 2007. The 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 April 3, 2005 and January 2, 2005 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 1, 2009. The lenders have agreed to lend up to an additional $39.0
million. Up to $25.0 million of the additional $39.0 million can be borrowed to
repay revolving loans under the Senior Secured Credit Facility and the remaining
proceeds could be
9
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
6. LONG-TERM DEBT AND REVOLVING CREDIT BORROWINGS (continued)
used only to repurchase prior to or repay the 13 1/2% Senior Subordinated Notes
at maturity and to pay certain fees related to the financing. 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 April 3, 2005 was 15.00%. Foamex L.P. is subject to a 1.00% facility
fee on the initial $80.0 million term loan payable annually on the anniversary
date, a 1.5% annual commitment fee, payable monthly, on the unused portion of
the $39.0 million additional commitment and a funding fee equal to 2.5% of the
additional amount borrowed with a minimum funding fee of approximately $0.6
million. Borrowings under the Secured Term Loan are collateralized by the same
collateral as the Senior Secured Credit Facility. An intercreditor agreement
governs the distribution of collateral among the lenders under the 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 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 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 could have been 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, the Company completed a series of interest rate swap
transactions with notional amounts aggregating $300.0 million. The Company
designated, documented and accounted for these interest rate swaps as fair value
hedges of the Company's 10 3/4% Senior Secured Notes due April 1, 2009. The risk
being hedged in these transactions was the change in fair value of the Company's
10 3/4% Senior Secured Notes based on changes in the benchmark interest rate,
LIBOR. The effect of these interest rate swap transactions was to convert the
fixed interest rate on the senior secured notes to floating rates reset twice
per year to correspond with the interest payment dates for the 10 3/4% Senior
Secured Notes. On September 18, 2002, the Company unwound the interest rate swap
transactions in exchange for net cash proceeds of $18.4 million, including $3.6
million realized through lower effective interest rates while the swap
transactions were in effect. The unwinding resulted in a deferred credit of
$14.8 million which is being amortized through April 1, 2009, using the
effective interest rate method.
9 7/8% Senior Subordinated Notes
The 9 7/8% Senior Subordinated Notes were issued by Foamex L.P. and Foamex
Capital Corporation and are due on June 15, 2007. The notes represent
uncollateralized general obligations of Foamex L.P. and are subordinated to all
Senior Debt, as defined in the Indenture. Interest is payable June 15 and
December 15. The notes may be redeemed at the option of Foamex L.P., in whole or
in part, at any time on or after June 15, 2002. The initial redemption 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 April 3, 2005, the redemption price was 101.646% plus accrued
and unpaid interest.
10
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
6. LONG-TERM DEBT AND REVOLVING CREDIT BORROWINGS (continued)
Upon the occurrence of a change of control, as defined, each holder will
have the right to require Foamex L.P. to tender for such notes at a price in
cash equal to 101% of the aggregate principal amount thereof, plus accrued and
unpaid interest 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.
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 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
April 3, 2005, the interest rate was 2.35% on the $1.0 million bond and 2.37% 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. In addition, at any time prior to conversion to a fixed interest
rate structure, bondholders upon notice to the bond trustee and the remarketing
agent may place the bonds for sale. If the remarketing agent is not successful
in reselling the bonds before settlement is due on bonds placed for sale, the
bond trustee may draw on a letter of credit issued under the Senior Secured
Credit Facility to repay the bondholder for the bonds placed for sale until the
bonds can be resold by the remarketing agent. Pursuant to this arrangement, the
IRBs have been classified as current in the accompanying condensed consolidated
balance sheets at April 3, 2005 and January 2, 2005. The obligations are
collateralized by certain properties, which have an approximate net carrying
value of $10.4 million at April 3, 2005.
Other
Other debt includes a non-interest bearing promissory note with a principal
amount of $0.9 million issued in connection with increasing the Company's
interest in an Asian joint venture to 70.0% in 2001. The promissory note which
matures on December 1, 2005 had unamortized discount of less than $0.1 million
at April 3, 2005.
Debt Covenants
The indentures and other indebtedness agreements contain certain covenants
that limit, among other things, the ability of the Company's subsidiaries (i) to
pay distributions or redeem equity interests, (ii) to make certain restrictive
payments or investments, (iii) to incur additional indebtedness or issue
Preferred Equity Interests, as defined, (iv) to merge, consolidate or sell all
or substantially all of its assets, or (v) to enter into certain transactions
with affiliates or related persons. In addition, certain agreements contain
provisions that, in the event of a defined change of control or the occurrence
of an undefined material adverse change in the ability of the obligor to perform
its obligations, the indebtedness must be repaid, in certain cases, at the
option of the holder. Under the most restrictive of the distribution
restrictions, the Company could be paid by its subsidiaries, as of April 3,
2005, funds only to the extent to enable the Company to meet its tax payment
liabilities and its normal operating expenses of up to $1.5 million annually, so
long as no default or event of default has occurred.
11
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
6. LONG-TERM DEBT AND REVOLVING CREDIT BORROWINGS (continued)
Under the Senior Secured Credit Facility and the Secured Term Loan, Foamex
L.P. is subject to a minimum fixed charge coverage ratio, as defined, of 0.56
for the quarter ended April 3, 2005. For the quarter ended April 3, 2005, Foamex
L.P.'s actual fixed charge coverage ratio was 0.59. The minimum fixed coverage
ratio increases each quarter until reaching 1.00 for the quarter ending July 2,
2006. Foamex L.P. is also subject to a maximum annual capital expenditure amount
which is $46.8 million for the year ending January 1, 2006.
Maturities of Long-Term Debt
Scheduled maturities of long-term debt as of April 3, 2005 are shown below
(thousands):
Three quarters ending January 1, 2006 $ 58,820
2006 7,173
2007 171,586
2008 -
2009 380,000
Thereafter 6,000
--------
623,579
Unamortized debt premium/discount and fair
value adjustment, net 9,452
--------
Total $633,031
========
7. RETIREE BENEFIT PLANS
Components of net periodic pension benefit cost are listed below:
Quarters Ended
----------------------------
April 3, March 28,
2005 2004
-------- ---------
(thousands)
Service cost $1,342 $1,270
Interest cost 1,942 1,802
Expected return on plan assets (1,956) (1,698)
Amortization of transition assets (19) (18)
Amortization of prior service benefit (28) (27)
Amortization of net loss 792 704
------ ------
Net periodic pension benefit cost $2,073 $2,033
====== ======
The Company anticipates pension plan contributions of $7.4 million for
fiscal 2005. During the quarter ended April 3, 2005, the Company contributed
$1.4 million and there has been no change in estimated contributions for fiscal
2005. Actuarial valuations are in process for fiscal 2005 that will determine
the actual contribution requirements and net periodic pension benefit cost.
8. INCOME TAXES
The effective tax rate for the quarter ended April 3, 2005, reflected the
impact of certain foreign subsidiaries. U.S. deferred tax assets related to
losses in the first quarter of 2005 were fully reserved for by an increase to
the valuation allowance.
The effective tax rate was 48.4% for the quarter ended March 28, 2004 and
was based on the forecasted annual rate for 2004 applied to the loss for the
quarter ended March 28, 2004. The higher effective tax rate compared to the
Federal statutory rate of 35% was primarily related to the U.S. taxation of
earnings from the Company's Canadian subsidiary and a higher effective tax rate
applicable to the Company's Mexican subsidiaries. Partially offsetting this
increase was the impact of equity income from a joint venture, which is
considered permanently invested with no deferred tax liabilities recognized.
12
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
9. COMPREHENSIVE INCOME (LOSS)
The components of comprehensive income (loss) are listed below.
Quarters Ended
----------------------------
April 3, March 28,
2005 2004
--------- ---------
(thousands)
Net loss $(10,854) $(2,115)
Foreign currency translation adjustments (251) (200)
-------- -------
Total comprehensive loss $(11,105) $(2,315)
======== =======
10. SEGMENT RESULTS
Foam Products manufactures and markets cushioning foams for bedding,
furniture, packaging and health care applications and foam-based consumer
products, such as mattress pads and children's furniture. Carpet Cushion
Products manufactures and distributes rebond, prime, felt and rubber carpet
padding. Automotive Products supplies foam products and laminates to major tier
one suppliers and original equipment manufacturers. Technical Products
manufactures and markets reticulated foams and other specialty foams for
reservoiring, filtration, gasketing and sealing applications. The "Other" column
in the table below represents certain manufacturing operations in Mexico City,
corporate expenses not allocated to other business segments and restructuring,
impairment and other charges (credits).
Segment results are presented below.
Carpet
Foam Cushion Automotive Technical
Products Products Products Products Other Total
-------- -------- ---------- --------- --------- ---------
(thousands)
Quarter ended April 3, 2005
Net sales $156,220 $46,556 $87,155 $33,200 $ 9,539 $332,670
Income (loss) from operations $ 10,449 $(2,115) $ 4,849 $ 8,935 $(12,415) $ 9,703
Depreciation and amortization $ 1,835 $ 602 $ 739 $ 581 $ 1,444 $ 5,201
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 $(18,216) $ 13,246
Depreciation and amortization $ 2,816 $ 774 $ 628 $ 713 $ 1,435 $ 6,366
11. COMMITMENTS AND CONTINGENCIES
Litigation
The Company 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 the Company's financial position or results of
operations. If management's assessment of the Company's liability relating to
these actions is incorrect, these actions could have a material adverse effect
on the Company's consolidated financial position, results of operations and cash
flows.
As of April 3, 2005, the Company had accrued approximately $1.1 million for
litigation, claims and other legal matters in addition to the environmental
matters discussed below.
13
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
11. COMMITMENTS AND CONTINGENCIES (continued)
Environmental and Health and Safety
The Company is subject to extensive and changing federal, state, local and
foreign environmental laws and regulations, including those relating to the use,
handling, storage, discharge and disposal of hazardous substances, the discharge
or emission of materials into the environment, and the remediation of
environmental contamination, and as a result, is from time to time involved in
administrative and judicial proceedings and inquiries relating to environmental
matters. As of April 3, 2005, the Company had accruals of approximately $2.0
million for environmental matters, including approximately $1.7 million related
to remediating and monitoring soil and groundwater contamination and
approximately $0.3 million related to sites where the Company 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 the
Company's financial position, results of operations and cash flows.
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 rule establishes a 50.0% reduction in methylene chloride
emissions by December 1, 2004, which the Company has implemented, and 100.0%
reductions by January 1, 2007. This standard has not and will not require the
Company to make material expenditures for its Canadian plants.
The Company previously has 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.
The Company 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. The Company 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 12 sites. Estimates of total cleanup
costs and fractional allocations of liability are often provided by the EPA, the
state environmental agency or the committee of PRPs with respect to the
specified site. Based on these estimates (to the extent available) and on known
information, in each case and in the aggregate, the Company does not expect
additional costs, if any, to be material to liquidity, results of operations or
financial position.
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.
12. SUBSEQUENT EVENT
On April 29, 2005, the Company signed an agreement and closed on the sale
of its rubber and felt carpet cushion businesses for approximately $38.5 million
in cash. The assets sold consisted principally of inventories and property,
plant and equipment with carrying values of $3.4 million and $3.2 million,
respectively, at April 3, 2005. The Company expects to record a pre-tax net
gain, after applicable expenses, and the write-off of approximately $2.5 million
of goodwill associated with the businesses, of approximately $29.0 million in
the quarter ending July 3, 2005, subject to post-closing adjustments, if any.
14
FOAMEX INTERNATIONAL INC. 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 APRIL 3, 2005 COMPARED TO THE
QUARTER ENDED MARCH 28, 2004
Carpet
Foam Cushion Automotive Technical
Products Products Products Products Other Total
-------- -------- ---------- --------- --------- ---------
(thousands)
Quarter ended April 3, 2005
Net sales $156,220 $46,556 $87,155 $33,200 $ 9,539 $332,670
Income (loss) from operations $ 10,449 $(2,115) $ 4,849 $ 8,935 $(12,415) $ 9,703
Depreciation and amortization $ 1,835 $ 602 $ 739 $ 581 $ 1,444 $ 5,201
Income (loss) from operations
as a percentage of net sales 6.7% (4.5%) 5.6% 26.9% n.m.* 2.9%
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 $(18,216) $ 13,246
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.* 4.2%
* not meaningful
Income from Operations
Net sales for the quarter ended April 3, 2005 increased 6% to $332.7
million from $313.6 million in the quarter ended March 28, 2004. The increase
was primarily attributable to higher net sales in the Foam Products segment as a
result of higher selling prices, partially offset by lower net sales in the
Automotive Products segment.
Gross profit was $27.7 million, or 8.3% of net sales, in the quarter ended
April 3, 2005 compared to $39.8 million, or 12.7% of net sales, in the 2004
period. The weighted average cost of major chemical raw materials was more than
35% higher in the quarter ended April 3, 2005 than in the quarter ended March
28, 2004. Even though we have increased selling prices, we have been only
partially successful in recovering the large chemical raw material cost
increases.
Income from operations for the quarter ended April 3, 2005 was $9.7
million, or 2.9% of net sales, which represented a 27% decrease from $13.2
million, or 4.2% of net sales, reported during the 2004 period. The $12.0
million decline in gross profit was partially offset by lower selling, general
and administrative expenses which decreased by $8.0 million, or 31%, due
principally to lower bad debt expense and employee costs. The 2004 period
included a $3.7 million charge to bad debt expense as a result of a customer
bankruptcy. Employee costs were lower primarily due to the closing of our New
York office in the second quarter of 2004. We also experienced lower
professional fees in the 2005 period. Restructuring charges were $0.5 million in
2004 as we eliminated a number of sales and administrative positions.
15
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Foam Products
Foam Products net sales for the quarter ended April 3, 2005 increased 16%
to $156.2 million from $134.4 million in the 2004 period primarily due to higher
selling prices. Income from operations decreased 36%, to $10.4 million in the
quarter ended April 3, 2005 from $16.3 million in the 2004 period principally as
a result of higher raw material costs that could not be fully recovered by
increased selling prices. Income from operations was 6.7% of net sales in 2005,
down from 12.1% in 2004.
Carpet Cushion Products
Carpet Cushion Products net sales for the quarter ended April 3, 2005
increased 1% to $46.6 million from $46.1 million in the 2004 period as higher
volumes were partially offset by lower average selling prices. Loss from
operations was $2.1 million in the quarter ended April 3, 2005 compared to $1.3
million income from operations in the 2004 period primarily due to higher
material costs and operating inefficiencies resulting from a shortage of a key
raw material. Loss from operations was 4.5% of net sales in 2005 and income from
operations was 2.8% of net sales in 2004. We sold our rubber and felt carpet
cushion businesses, which provided approximately $41.3 million and $4.5 million
of net sales and gross profit, respectively, in the year ended January 2, 2005,
on April 29, 2005. We expect minimal or no income from operations in Carpet
Cushion Products during 2005.
Automotive Products
Automotive Products net sales for the quarter ended April 3, 2005 decreased
7% to $87.2 million from $94.0 million in the 2004 period. The decline was
primarily due to lower volume as a result of soft industry demand and the
continuing impact of sourcing actions by our major customers. Income from
operations was down 3% to $4.8 million due to the decline in sales volume and
higher raw material costs partially offset by lower operating costs. Income from
operations represented 5.6% of net sales in 2005 and 5.3% of net sales in 2004.
Technical Products
Net sales for Technical Products for the quarter ended April 3, 2005
increased 7% to $33.2 million from $31.1 million in the 2004 period, primarily
due to higher selling prices. Income from operations was flat at $8.9 million as
the sales increase was offset by higher material costs. Income from operations
represented 26.9% of net sales in 2005 compared to 28.5% of net sales in 2004.
Other
Other primarily consists of certain manufacturing and fabrication
operations in Mexico City, corporate expenses not allocated to business segments
and restructuring charges. The increase in net sales associated with this
segment resulted from our Mexico City operations. The loss from operations was
$12.4 million in 2005 and $18.2 million in 2004 and reflects lower corporate
expenses in 2005.
Interest and Debt Issuance Expense
Interest and debt issuance expense was $19.9 million in the quarter ended
April 3, 2005, which represented a 7% increase from the 2004 period expense of
$18.6 million reflecting higher average interest rates and borrowings.
Other Income (Expense), Net
Other expense, net was $1.0 million for the quarter ended April 3, 2005
compared to other income, net of $1.0 million for the quarter ended March 28,
2004. The 2005 period includes $0.9 million of amendment fees charged by lenders
in connection with amendments to Foamex L.P.'s credit agreements executed on
March 31, 2005, while the 2004 period included $0.9 million of gains on asset
disposals.
16
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Benefit for Income Taxes
The effective tax rate for the quarter ended April 3, 2005, reflected the
impact of certain foreign subsidiaries. U.S. deferred tax assets related to
losses in the first quarter of 2005 were fully reserved for by an increase to
the valuation allowance.
The effective tax rate was 48.4% for the quarter ended March 28, 2004 and
was based on the forecasted annual rate for 2004 applied to the loss for the
quarter ended March 28, 2004. The higher effective tax rate compared to the
Federal statutory rate of 35% was primarily related to the U.S. taxation of
earnings from our Canadian subsidiary and a higher effective tax rate applicable
to our Mexican subsidiaries. Partially offsetting this increase was the impact
of equity income from a joint venture, which is considered permanently invested
with no deferred tax liabilities recognized.
Liquidity and Capital Resources
Our operations are conducted through our wholly-owned subsidiary, Foamex
L.P. Our liquidity requirements consist primarily of the operating cash
requirements of Foamex L.P.
Foamex L.P.'s liquidity requirements consist principally of accounts
receivable, inventory and accounts payable, scheduled payments of interest and
principal on outstanding indebtedness, capital expenditures and employee benefit
plans. We believe that cash flow from Foamex L.P.'s operating activities, cash
on hand and periodic borrowings under its credit agreements will be adequate to
meet our liquidity requirements for the next twelve months. In addition, we will
continue to explore potential sales of non-strategic assets during this period.
On April 29, 2005, we signed an agreement and closed on the sale of our rubber
and felt carpet cushion businesses for approximately $38.5 million in cash. The
ability of Foamex L.P. to make distributions to us is restricted by the terms of
its financing agreements. We expect to have only limited access to the cash flow
generated by Foamex L.P. for the foreseeable future.
Cash and cash equivalents were $5.1 million at April 3, 2005 compared to
$5.4 million at January 2, 2005. Working capital at April 3, 2005 was a negative
$64.9 million and the current ratio was 0.84 to 1 compared to working capital at
January 2, 2005 of a negative $57.1 million and a current ratio of 0.84 to 1.
Total long-term debt and revolving credit borrowings at April 3, 2005 were
$778.0 million, up $27.5 million from January 2, 2005. As of April 3, 2005,
there were $145.0 million of revolving credit borrowings under the Senior
Secured Credit Facility with $21.9 million available for borrowings, including
$14.3 million that could be borrowed only with consent of the lenders, and $22.5
million of letters of credit outstanding. Revolving credit borrowings at April
3, 2005 reflect working capital requirements.
The 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 lenders under the Senior Secured Credit Facility have also agreed
to lend up to an additional $15.0 million under a junior term loan. 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 April 3,
2005, the weighted average interest rates were 6.61% and 6.63% for the revolving
loan and the term loan, respectively. The term loan requires quarterly
installment payments of approximately $1.8 million. Borrowings under the junior
term loan can be used only to repay the 13 1/2% Senior Subordinated Notes at
maturity and will bear interest at a floating rate based upon LIBOR, as defined,
reset monthly plus 6.00%. All borrowings under the Senior Secured Credit
Facility will mature on April 30, 2007.
17
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The Secured Term Loan of $80.0 million will mature on April 1, 2009. The
lenders have agreed to lend up to an additional $39.0 million. Up to $25.0
million of the additional $39.0 million can be borrowed to repay revolving loans
under the Senior Secured Credit Facility and the remaining proceeds could be
used only to repurchase prior to or repay the 13 1/2% Senior Subordinated Notes
at maturity and to repay certain fees related to the financing. 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 is 13.50% and the rate in
effect at April 3, 2005 was 15.00%. In addition, a 1.00% facility fee on the
initial $80.0 million loan is payable annually on the anniversary date, a 1.5%
annual commitment fee, payable monthly, on the unused portion of the $39.0
million additional commitment and a funding fee equal to 2.5% of the additional
amount borrowed with a minimum funding fee of approximately $0.6 million.
Borrowings under the Secured Term Loan are collateralized by the same collateral
as the Senior Secured Credit Facility. An intercreditor agreement governs the
distribution of collateral among the lenders under the Senior Secured Credit
Facility and the Secured Term Loan.
Under the Senior Secured Credit Facility and the Secured Term Loan, Foamex
L.P. is subject to a minimum fixed charge coverage ratio, as defined, of 0.56
for the quarter ended April 3, 2005. Foamex L.P.'s actual fixed charge coverage
ratio for this period was 0.59. The minimum fixed charge coverage ratio
increases each quarter until reaching 1.00 for the quarter ending July 2, 2006.
Foamex L.P. is also subject to a maximum annual capital expenditure amount which
is $46.8 million for the year ending January 1, 2006. We are working with our
lenders to modify certain provisions of our credit agreements as a result of the
sale of our rubber and felt carpet cushion businesses.
Our 13 1/2% Senior Subordinated Notes with a face value of $51.6 million
are due on August 15, 2005. Foamex L.P. has obtained a junior term loan
commitment of $15.0 million under the Senior Secured Credit Facility and an
additional $39.0 million commitment under the Secured Term Loan which can be
used to repay the 13 1/2% Senior Subordinated Notes. Foamex L.P. may use the
proceeds from sales of certain designated assets, including a portion of the
proceeds from the recent sale of the rubber and felt carpet cushion businesses,
to repay the 13 1/2% Senior Subordinated Notes. 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.
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.
We anticipate contributing approximately $7.4 million to our pension plans
in 2005 with $1.4 million contributed during the quarter ended April 3, 2005.
Actuarial valuations are in process for fiscal 2005 that will determine the
actual funding requirements.
Cash Flow from Operating Activities
Cash used by operating activities in the quarter ended April 3, 2005 was
$26.8 million compared to cash provided from operating activities of $1.0
million in the quarter ended March 28, 2004. This is primarily due to the
increased loss during the 2005 period along with higher accounts receivable at
April 3, 2005 on increased sales and a greater number of days sales outstanding.
In addition, primarily due to the timing of the 2005 quarter compared to the
timing of the 2004 quarter, we made additional cash interest payments of
approximately $18.5 million in the quarter ended April 3, 2005. This was
partially offset by higher accounts payable used to fund our raw material
purchases and other operating costs.
18
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Cash Flow from Investing Activities
Investing activities used $1.7 million for the quarter ended April 3, 2005.
Cash requirements included capital expenditures of $1.1 million and capitalized
software development costs of $0.5 million. In the quarter ended March 28, 2004,
cash provided by investing activities was $0.1 million, which consisted of
capital expenditures of $1.2 million and capitalized software development costs
of $0.9 million offset by proceeds from asset disposals of $2.2 million. The
estimated capital expenditures and software development costs for the full year
2005 are expected to be approximately $6-$8 million and approximately $5
million, respectively.
Cash Flow from Financing Activities
Cash provided by financing activities was $28.2 million for the quarter
ended April 3, 2005 and consisted principally of borrowings under the revolving
credit facility partially offset by scheduled payments of the term loan under
the Senior Secured Credit Facility. Cash used for financing activities in 2004
was $3.5 million including payments of the term loan under the Senior Secured
Credit Facility.
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 April 3,
2005 was $2.0 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 11 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
We have debt securities with variable interest rates subject to market risk
for changes in interest rates. On April 3, 2005, indebtedness with variable
interest rates aggregated $267.6 million. On an annualized basis, if the
interest rates on these debt instruments increased by 1.0%, interest expense
would increase by approximately $2.7 million.
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 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.
(a) Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our 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. The Chief
Executive Officer and Chief Financial Officer concluded that, due to the
material weaknesses identified in Management's Annual Report on Internal Control
Over Financial Reporting included in our Form 10-K/A filed with the Securities
and Exchange Commission on May 2, 2005 (the "Management Report"), our disclosure
controls
19
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
ITEM 4. CONTROLS AND PROCEDURES.
and procedures as of the end of the period covered by this report were not
effective to provide reasonable assurance that the information required to be
disclosed by us in reports filed under the Securities Exchange Act of 1934 is
(i) recorded, processed, summarized and reported within the time periods
specified in the SEC's rules and forms and (ii) accumulated and communicated to
our management, including the Chief Executive Officer and Chief Financial
Officer, as appropriate, to allow timely decisions regarding disclosure.
(b) Changes in Internal Control over Financial Reporting
During the quarter ended April 3, 2005, we strengthened our internal
controls over the following areas.
o Accounting for Inventory. The Management Report identified a material
weakness that arose because our policies and procedures did not
provide for an effective review and analysis of a spreadsheet used to
estimate the amount of labor and overhead variances to include in work
in process and finished goods inventories. Specifically, the
ineffective control did not prevent or detect an improper formula in
this spreadsheet resulting in a misstatement of work in process and
finished goods inventories. The improper formula in this spreadsheet
was corrected prior to the issuance of our consolidated financial
statements as of January 2, 2005 and for the year then ended. We
reviewed the formula and made refinements that we believe produce a
more reasonable estimate of variances that should be included in
inventory. We believe we designed effective review processes for our
inventory calculations during the first quarter of 2005.
o Information Technology: Segregation of Duties and Information System
Users. As previously disclosed in the fourth quarter of 2004, we
conducted a review of roles and responsibilities and user access
within our information technology systems and identified certain users
with inappropriate access. As a result, we began to implement changes
to tie user access to our information systems to user needs based on
the roles and responsibilities of the user. During the first quarter
of 2005, we completed the implementation of these changes.
o Non-Routine Transactions and Significant Agreements. As previously
disclosed, we determined that we did not have adequate controls in
place to ensure the proper accounting for non-routine transactions
such as the establishment of a valuation allowance on our deferred tax
assets and significant agreements. This issue continues to be
addressed through further implementation of comprehensive review
processes and procedures for non-routine transactions and significant
agreements to ensure more robust reviews and proper accounting. We
also intend to hire additional personnel in our internal audit and
accounting functions.
Other than as described above, no change in our internal control over
financial reporting occurred during the most recent fiscal quarter that has
materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.
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Part II - Other Information.
Item 1. Legal Proceedings.
Reference is made to the description of the legal proceedings
contained in the Company's Annual Report on Form 10-K for the year
ended January 2, 2005. The information from Note 11 to the condensed
consolidated financial statements is incorporated herein by reference.
Item 6. Exhibits.
10.27(a) Amended and Restated Consulting Agreement, dated as of
February 27, 2005, by and between Foamex L.P. and Robert J.
Hay.
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.
(a) Incorporated herein by reference to the Exhibit to the Form 10-Q
of Foamex L.P. for the quarterly period ended April 3, 2005.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FOAMEX INTERNATIONAL INC.
Date: May 13, 2005 By: /s/ K. Douglas Ralph
--------------------------------------
K. Douglas Ralph
Executive Vice President and
Chief Financial Officer
(Duly Authorized Officer)
Date: May 13, 2005 By: /s/ Bruno Fontanot
--------------------------------------
Bruno Fontanot
Senior Vice President - Finance and
Chief Accounting Officer
22