-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SlL9ZmjMJGYQ9OwczfT6mPn5RpSo83tyNxfxx+RogdsIpcBfM06A0cnADwHseAO/ 0kYRFv6Y1RvPtF7tJlWeWA== 0000912908-03-000073.txt : 20030813 0000912908-03-000073.hdr.sgml : 20030813 20030813163358 ACCESSION NUMBER: 0000912908-03-000073 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20030629 FILED AS OF DATE: 20030813 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FOAMEX L P CENTRAL INDEX KEY: 0000890080 STANDARD INDUSTRIAL CLASSIFICATION: PLASTICS FOAM PRODUCTS [3086] IRS NUMBER: 050475617 STATE OF INCORPORATION: DE FISCAL YEAR END: 1229 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-11432 FILM NUMBER: 03841699 BUSINESS ADDRESS: STREET 1: 1000 COLUMBIA AVENUE CITY: LINEWOOD STATE: PA ZIP: 19061 BUSINESS PHONE: 6108593000 MAIL ADDRESS: STREET 1: 1000 COLUMBIA AVE CITY: LINWOOD STATE: PA ZIP: 19061 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FOAMEX CAPITAL CORP CENTRAL INDEX KEY: 0000890081 STANDARD INDUSTRIAL CLASSIFICATION: PLASTICS FOAM PRODUCTS [3086] IRS NUMBER: 223182164 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-11436 FILM NUMBER: 03841700 BUSINESS ADDRESS: STREET 1: 1000 COLUMBIA AVE CITY: LINWOOD STATE: PA ZIP: 19061 BUSINESS PHONE: 6108593000 MAIL ADDRESS: STREET 1: 1000 COLUMBIA AVE CITY: LINWOOD STATE: PA ZIP: 19061 10-Q 1 q0203flp.txt 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 June 29, 2003 Commission file numbers 1-11432; 1-11436 FOAMEX L.P. FOAMEX CAPITAL CORPORATION ------------------------------------------------------ (Exact name of registrant as specified in its charter) Delaware 05-0475617 Delaware 22-3182164 - ------------------------------- ---------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 1000 Columbia Avenue Linwood, PA 19061 - ------------------------------- ---------------------- (Address of principal (Zip Code) executive offices) Registrant's telephone number, including area code: (610) 859-3000 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. YES X NO --- --- Foamex L.P. and Foamex Capital Corporation meet the conditions set forth in General Instruction H(1)(a) and (b) of Form 10-Q and are therefore filing this form with the reduced disclosure format. Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). [ ] The number of shares of Foamex Capital Corporation's common stock outstanding as of August 8, 2003 was 1,000. FOAMEX L.P. FOAMEX CAPITAL CORPORATION INDEX
Page Part I. Financial Information Item 1. Financial Statements. Condensed Consolidated Statements of Operations (unaudited) - Quarters and Two Quarters Ended June 29, 2003 and June 30, 2002 3 Condensed Consolidated Balance Sheets (unaudited) as of June 29, 2003 and December 29, 2002 4 Condensed Consolidated Statements of Cash Flows (unaudited) - Two Quarters Ended June 29, 2003 and June 30, 2002 5 Notes to Condensed Consolidated Financial Statements (unaudited) 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. 23 Item 3. Quantitative and Qualitative Disclosures about Market Risk. 30 Item 4. Controls and Procedures. 30 Part II. Other Information Item 1. Legal Proceedings. 31 Item 6. Exhibits and Reports on Form 8-K. 31 Signatures 32
2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. FOAMEX L.P. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
Quarters Ended Two Quarters Ended ----------------------- ------------------------ June 29, June 30, June 29, June 30, 2003 2002 2003 2002 -------- -------- -------- -------- (thousands) NET SALES $334,344 $345,898 $662,114 $659,960 COST OF GOODS SOLD 294,171 298,951 590,661 575,335 -------- -------- -------- -------- GROSS PROFIT 40,173 46,947 71,453 84,625 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 19,600 22,490 39,789 39,677 RESTRUCTURING, IMPAIRMENT AND OTHER CHARGES (CREDITS) (860) - (860) (1,538) -------- -------- -------- -------- INCOME FROM OPERATIONS 21,433 24,457 32,524 46,486 INTEREST AND DEBT ISSUANCE EXPENSE 19,378 17,338 38,489 35,967 INCOME FROM EQUITY INTEREST IN JOINT VENTURES 513 398 879 1,128 OTHER EXPENSE, NET (605) (1,587) (1,848) (1,205) -------- -------- -------- -------- INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES AND CUMULATIVE EFFECT OF AN ACCOUNTING CHANGE 1,963 5,930 (6,934) 10,442 PROVISION FOR INCOME TAXES 56 839 263 1,072 -------- -------- -------- -------- INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF AN ACCOUNTING CHANGE 1,907 5,091 (7,197) 9,370 CUMULATIVE EFFECT OF AN ACCOUNTING CHANGE - - - (71,966) -------- -------- -------- -------- NET INCOME (LOSS) $ 1,907 $ 5,091 $ (7,197) $(62,596) ======== ======== ======== ========
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements. 3 FOAMEX L.P. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
June 29, 2003 December 29, 2002 ------------- ----------------- ASSETS (unaudited) CURRENT ASSETS (thousands) Cash and cash equivalents $ 8,030 $ 4,363 Accounts receivable, net of allowances of $10,552 in 2003 and $10,311 in 2002 189,596 191,546 Inventories 97,591 98,010 Other current assets 19,575 22,558 -------- --------- Total current assets 314,792 316,477 -------- --------- Property, plant and equipment 420,248 418,569 Less accumulated depreciation (246,260) (236,531) -------- --------- NET PROPERTY, PLANT AND EQUIPMENT 173,988 182,038 GOODWILL 126,095 125,321 DEBT ISSUANCE COSTS, net of accumulated amortization of $18,913 in 2003 and $14,079 in 2002 31,993 36,827 SOFTWARE, net of accumulated amortization of $3,520 in 2003 and $2,634 in 2002 9,568 8,254 OTHER ASSETS 27,547 26,366 -------- --------- TOTAL ASSETS $683,983 $ 695,283 ======== ========= LIABILITIES AND PARTNERS' DEFICIENCY CURRENT LIABILITIES Current portion of long-term debt $ 23 $ 46 Accounts payable 100,299 87,394 Accrued employee compensation and benefits 22,699 26,330 Accrued interest 13,975 14,173 Accrued customer rebates 15,599 18,813 Cash overdrafts 14,569 17,737 Other accrued liabilities 23,894 33,953 -------- --------- Total current liabilities 191,058 198,446 LONG-TERM DEBT 736,081 738,540 ACCRUED EMPLOYEE BENEFITS 51,311 48,022 OTHER LIABILITIES 14,831 16,061 -------- --------- Total liabilities 993,281 1,001,069 -------- --------- COMMITMENTS AND CONTINGENCIES PARTNERS' DEFICIENCY General partner (247,755) (240,107) Limited partner - - Accumulated other comprehensive loss (52,322) (56,458) Notes receivable from related party (9,221) (9,221) -------- --------- Total partners' deficiency (309,298) (305,786) -------- --------- TOTAL LIABILITIES AND PARTNERS' DEFICIENCY $683,983 $ 695,283 ======== =========
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements. 4 FOAMEX L.P. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Two Quarters Ended ------------------------- June 29, June 30, 2003 2002 -------- -------- OPERATING ACTIVITIES (thousands) Net loss $(7,197) $(62,596) Adjustments to reconcile net loss to net cash provided by (used for) operating activities: Cumulative effect of accounting changes - 71,966 Depreciation and amortization 13,250 16,231 Amortization and write off of debt issuance costs, debt premium and debt discount 2,877 6,389 Other operating activities 1,320 (33) Changes in operating assets and liabilities, net 3,499 (60,235) ------- -------- Net cash provided by (used for) operating activities 13,749 (28,278) ------- -------- INVESTING ACTIVITIES Capital expenditures (3,501) (10,085) Collection of note receivable from partner - 2,490 Other investing activities (2,197) (1,027) ------- -------- Net cash used for investing activities (5,698) (8,622) ------- -------- FINANCING ACTIVITIES Repayments of revolving loans (979) (125,000) Proceeds from long-term debt - 356,590 Repayments of long-term debt (29) (141,394) Repayments of long-term debt - related party - (31,590) Increase (decrease) in cash overdrafts (3,168) 42,250 Debt issuance costs - (25,491) Other financing activities (208) 105 ------- -------- Net cash provided by (used for) financing activities (4,384) 75,470 ------- -------- Net increase in cash and cash equivalents 3,667 38,570 Cash and cash equivalents at beginning of period 4,363 15,059 ------- -------- Cash and cash equivalents at end of period $ 8,030 $ 53,629 ======= ======== Supplemental Information: Cash paid for interest $35,810 $ 22,845 ======= ========
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements. 5 FOAMEX L.P. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 1. ORGANIZATION AND BASIS OF PRESENTATION Organization Foamex L.P. operates in the flexible polyurethane and advanced polymer foam products industry. Foamex L.P.'s operations are conducted directly and through its wholly-owned subsidiaries, Foamex Canada Inc. ("Foamex Canada"), Foamex Latin America, Inc. ("Foamex Mexico") and Foamex Asia, Inc. ("Foamex Asia"). Foamex Carpet Cushion, Inc. ("Foamex Carpet") was converted to a limited liability company and was contributed to Foamex L.P. on March 25, 2002. The contribution of Foamex Carpet has been accounted for as a merger of entities under common control and has been recorded in a manner similar to a pooling of interests. Accordingly, the condensed consolidated financial statements include the accounts of Foamex Carpet for all periods presented. On December 30, 2002, Foamex Carpet distributed certain assets, liabilities and its business to Foamex L.P. Financial information concerning the business segments of Foamex L.P. is included in Note 7. Basis of Presentation The accompanying condensed consolidated financial statements are unaudited and do not include certain information and disclosures required by accounting principles generally accepted in the United States of America for complete financial statements. However, in the opinion of management, all adjustments considered necessary to present fairly Foamex L.P.'s consolidated financial position and results of operations, have been included. As of June 29, 2003, Foamex L.P. revised its estimate of costs under its self-insured medical and dental plans based on recent actual claims experience. The change in estimate reduced the accrual balance and decreased cost of goods sold by approximately $1.3 million in the quarter and two quarters ended June 29, 2003. These interim financial statements should be read in conjunction with the consolidated financial statements and related notes included in Foamex L.P.'s 2002 Annual Report on Form 10-K. Results for interim periods are not necessarily indicative of trends or of results for a full year. Certain amounts in the condensed consolidated statements of operations for the quarter and two quarters ended June 30, 2002 have been reclassified to conform to the current presentation. Accounting Changes - Extinguishment of Debt On April 30, 2002, Statement of Financial Accounting Standards No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections" ("SFAS No. 145") was issued. The provisions of this Statement related to the rescission of Statement 4 are applied in fiscal years beginning after May 15, 2002. Any gain or loss on extinguishment of debt that was classified as an extraordinary item in prior periods presented that does not meet the criteria in Opinion 30 for classification as an extraordinary item is reclassified. Foamex L.P. has reclassified the extraordinary item previously reported in the two quarters ended June 30, 2002 to interest and debt issuance expense of $4.3 million with the related tax benefit of $0.1 million included in the provision for income taxes. 2. CUMULATIVE EFFECT OF AN ACCOUNTING CHANGE Foamex L.P. has adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142"). As required by SFAS No. 142, Foamex L.P. performed a transitional impairment test on its goodwill during 2002. The resulting impairment loss of $72.0 million has been recorded as a cumulative effect of an accounting change in the two quarters ended June 30, 2002. Goodwill at June 29, 2003 increased by $0.8 million from December 29, 2002 as a result of foreign currency translation adjustments. 3. RESTRUCTURING, IMPAIRMENT AND OTHER CHARGES (CREDITS) During the quarter ended June 29, 2003, Foamex L.P. recorded a restructuring credit of $0.9 million from the reversal of prior restructuring charges no longer required, net of a $0.4 million restructuring charge reported in the Other segment as a result of an employee termination plan for approximately 300 employees at its Mexico City operations. Approximately 250 of these employees were terminated in the quarter ended June 29, 2003. 6 FOAMEX L.P. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 3. RESTRUCTURING, IMPAIRMENT AND OTHER CHARGES (CREDITS) (continued) During the two quarters ended June 30, 2002, Foamex L.P. recorded a restructuring credit of $2.1 million related to the collection of deferred rent receivable which had been fully reserved for and an other charge for certain additional expenses of $0.6 million relating to the 2001 restructuring plan. The following tables set forth the components of Foamex L.P.'s restructuring accruals and activity for the quarter and two quarters ended June 29, 2003:
Plant Closure Personnel Total and Leases Reductions Other ----- ------------- ---------- ------- (millions) Balance at March 30, 2003 $18.8 $11.3 $5.7 $1.8 Adjustment (0.9) (0.1) (0.6) (0.2) Cash spending (2.7) (1.0) (1.4) (0.3) ----- ----- ---- ---- Balance at June 29, 2003 $15.2 $10.2 $3.7 $1.3 ===== ===== ==== ==== Balance at December 29, 2002 $22.8 $12.6 $8.2 $2.0 Adjustment (0.9) (0.1) (0.6) (0.2) Cash spending (6.7) (2.3) (3.9) (0.5) ----- ----- ---- ---- Balance at June 29, 2003 $15.2 $10.2 $3.7 $1.3 ===== ===== ==== ====
Foamex L.P. expects to spend approximately $8.9 million during the twelve months ending June 27, 2004, with the balance to be spent through 2012. 4. INVENTORIES The components of inventory are listed below. June 29, December 29, 2003 2002 -------- ------------ (thousands) Raw materials and supplies $59,531 $60,588 Work-in-process 17,980 16,737 Finished goods 20,080 20,685 ------- ------- Total $97,591 $98,010 ======= ======= 5. LONG-TERM DEBT The components of long-term debt are listed below.
June 29, December 29, 2003 2002 -------- ------------ Foamex L.P. Amended Credit Facility (thousands) Term Loan B (1) $ 39,262 $ 39,262 Term Loan C (1) 35,693 35,693 Term Loan D (1) 51,700 51,700 Term Loan E (1) 16,290 16,290 Term Loan F (1) 19,243 19,243 Revolving credit facility (1) 50,844 51,823 10 3/4% Senior secured notes due 2009 (2) (3) 313,216 314,237 9 7/8% Senior subordinated notes due 2007 (2) 148,500 148,500 13 1/2% Senior subordinated notes due 2005 (includes $2,011 and $2,486 of unamortized debt premium) (2) 53,596 54,071 7 FOAMEX L.P. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 5. LONG-TERM DEBT (continued) June 29, December 29, 2003 2002 -------- ------------ (thousands) Industrial revenue bonds 7,000 7,000 Other (net of unamortized debt discount of $116 in 2003 and $137 in 2002) 760 767 -------- -------- 736,104 738,586 Less current portion 23 46 -------- -------- Long-term debt $736,081 $738,540 ======== ======== (1) Debt of Foamex L.P., guaranteed by Foamex International and FMXI, Inc. (2) Debt of Foamex L.P. and Foamex Capital Corporation. (3) Includes $13.2 million in 2003 and $14.2 million in 2002 of deferred credits on interest rate swap transactions.
Amended Credit Facility The Foamex L.P. Amended Credit Facility consists of (1) the revolving credit facility, which is a non-amortizing revolving credit facility provided by a syndicate of lenders (the "$100.0 Million Revolving Credit Facility"), which provides working capital for Foamex L.P. and its subsidiary guarantors and funding for other general corporate purposes, (2) Terms B, C and D loans, (3) a Term E Loan in the initial amount of $31.6 million, the proceeds of which were borrowed at closing and used to repay in full the obligations outstanding under a note payable to Foam Funding LLC, a related party, and (4) a Term F Loan in the initial amount of $25.0 million, the proceeds of which were borrowed at closing and used to repay indebtedness outstanding under the prior revolving credit facility. The remaining obligations outstanding under the prior revolving credit facility were repaid with a portion of the proceeds from the issuance of the 10 3/4% senior secured notes (10 3/4% Senior Secured Notes") as described below. The commitments under the $100.0 Million Revolving Credit Facility are available to Foamex L.P. in the form of (1) revolving credit loans, (2) swing loans (subject to a $20.0 million sublimit) and (3) letters of credit (subject to a $40.0 million sublimit). At June 29, 2003, Foamex L.P. had available borrowings of $28.6 million and letters of credit outstanding of $20.6 million. A portion of the net proceeds from the 10 3/4% Senior Secured Notes was used to repay a portion of the existing term loans, the Term E Loan and the Term F Loan. Loans made under the $100.0 Million Revolving Credit Facility will mature and the commitments under them will terminate on June 30, 2005. The Term B Loan, the Term E Loan and the Term F Loan will mature on June 30, 2005, the Term C Loan will mature on June 30, 2006 and the Term D Loan will mature on December 29, 2006. Each of the Term Loans will be subject to amortization on a quarterly basis; however, after giving effect to the prepayments of the Term Loans, quarterly amortization payments will commence for the Term B Loan, the Term E Loan and the Term F Loan in 2004, for the Term C Loan in 2005 and for the Term D Loan in 2006. Foamex L.P. is required to make mandatory prepayments of loans under the Amended Credit Facility with: (1) the net cash proceeds received from sales of assets by Foamex L.P. or certain of its subsidiaries, (2) the net cash proceeds received from certain issuances by Foamex L.P., or any of its subsidiaries of indebtedness for borrowed money or equity interests and (3) 75% of excess cash flow in any fiscal year, such percentage to be reduced to 50% if the ratio of outstanding obligations under the Amended Credit Facility to EBDAIT (as defined) for such fiscal year is reduced to specified levels, subject, in each case, to certain limited exceptions. 8 FOAMEX L.P. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 5. LONG-TERM DEBT (continued) Foamex L.P. is permitted to make voluntary prepayments and/or permanently reduce the commitments under the $100.0 Million Revolving Credit Facility in whole or in part, without premium or penalty, subject to reimbursement of the lenders' redeployment costs in the case of prepayment of LIBO, as defined, rate borrowings, other than at the end of any interest period. All voluntary prepayments of Term Loans will be applied to such tranches of Term Loans as Foamex L.P. may select. Foamex International, FMXI, Inc. and each of Foamex L.P.'s domestic subsidiaries continue to guarantee the repayment of the obligations under the Amended Credit Facility. The Amended Credit Facility is secured by a first-priority lien (subject to permitted liens) on substantially the same collateral that secured the obligations under the prior Foamex L.P. credit facility, which includes substantially all of its material tangible and intangible assets. In addition, all of the partnership interests, all of the capital stock or other equity interests of Foamex L.P.'s domestic subsidiaries (including Foamex Carpet) and 65% of the capital stock or other equity interests of Foamex L.P.'s first-tier foreign subsidiaries are pledged as part of the security for the obligations under the Amended Credit Facility. Borrowings under the Amended Credit Facility bear interest at a floating rate based upon (and including a margin over), at Foamex L.P.'s option, (1) the higher of (a) the funding agent's prime rate and (b) 0.50% in excess of the Federal Reserve reported weighted average overnight rate for federal funds or (2) the higher of (x) 2.50% per annum and (y) the LIBO rate, as defined, as determined by the funding agent. The effective interest rates at June 29, 2003 for Term Loans B, C, D, E and F ranged between 7.50% and 7.88%. The effective average interest rate for revolving loans at June 29, 2003 was 7.86%. The rates increase 25 basis points each quarter that Foamex L.P.'s leverage ratio, as defined, exceeds 5.00 to 1.00. Once the leverage ratio is reduced below this level, the cumulative amount of any 25 basis point adjustment to the interest rates on borrowings are reset to zero. At June 29, 2003, the calculated leverage ratio was 11.12 to 1.00. The Amended Credit Facility contains affirmative and negative covenants that, subject to certain exceptions, are substantially similar to those contained in the prior credit facility. The Amended Credit Facility also includes the following financial covenants, as defined therein: (1) a minimum net worth test; (2) a minimum ratio of EBDAIT to cash interest expense; (3) a minimum ratio of EBDAIT to fixed charges; and (4) a maximum ratio of funded debt to EBDAIT. These covenants are substantially the same as those contained in the prior credit facility with appropriate changes to take into account the issuance of the Senior Secured Notes and the contribution of Foamex Carpet to Foamex L.P. The Amended Credit Facility also requires the refinancing of the 13 1/2% senior subordinated notes on or prior to March 1, 2005. The Amended Credit Facility contains events of default including, but not limited to, nonpayment of principal, interest, fees or other amounts when due, violation of covenants, inaccuracy of representations and warranties in any material respect, cross default and cross acceleration to certain other indebtedness, bankruptcy, ERISA, material judgments and change of control. Certain of these events of default are subject to grace periods and materiality qualifications. See the Debt Covenants section of this note. 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 Amended 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 Amended Credit Facility. The notes rank effectively junior to all senior indebtedness that is secured by first priority liens and senior in right of payment to all subordinated indebtedness. Interest is payable April 1 and October 1. The notes may be redeemed at the option of Foamex L.P., in whole or in part, at any time on or after April 1, 2006. The initial redemption is at 105.375% of their principal amount, plus accrued and unpaid interest, if any, thereon to the date of redemption and declining annually to 100.0% on or after April 1, 2008. Additionally, on or before April 1, 2005, up to 35.0% of the principal amount of the notes may be redeemed at a redemption price equal to 110.750% of the principal amount, 9 FOAMEX L.P. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 5. LONG-TERM DEBT (continued) plus accrued and unpaid interest, if any, thereon to the date of redemption with the net proceeds of one or more equity offerings. Upon the occurrence of a change of control, as defined, each holder will have the right to require Foamex L.P. to tender for such notes at a price in cash equal to 101.0% of the aggregate principal amount thereof, plus accrued and unpaid interest, if any, if there is such a "change of control". Foamex L.P. was required to cause a registration statement under the Securities Act of 1933 to be effective within 180 days of March 25, 2002. Foamex L.P. filed the registration statement, but it was not effective until January 30, 2003 and therefore Foamex L.P. was liable for liquidated damages from September 23, 2002 until the date the registration statement became effective. The liquidated damages were at the rate of $15,000 per week for the first 90 days, escalating by $15,000 per week for each additional 90 days. The liquidated damages of $0.3 million were paid on April 1, 2003. Effective May 1, 2002, Foamex L.P. completed a series of interest rate swap transactions with notional amounts aggregating $300.0 million. Foamex L.P. designated, documented and accounted for these interest rate swaps as fair value hedges of its 10 3/4% Senior Secured Notes due April 1, 2009. The risk being hedged in these transactions was the change in fair value of its 10 3/4% Senior Secured Notes based on changes in the benchmark interest rate, LIBOR. The effect of these interest rate swap transactions was to convert the fixed interest rate on the senior secured notes to floating rates reset twice per year to correspond with the interest payment dates for the 10 3/4% Senior Secured Notes. On September 18, 2002, Foamex L.P. unwound the interest rate swap transactions in exchange for net cash proceeds of $18.4 million, including $3.6 million realized through lower effective interest rates while the swap transactions were in effect. The unwinding resulted in a deferred credit of $14.8 million which is being amortized through April 1, 2009, using the effective interest rate method. 9 7/8% Senior Subordinated Notes The 9 7/8% Senior Subordinated Notes were issued by Foamex L.P. and Foamex Capital Corporation and are due on June 15, 2007. The notes represent uncollateralized general obligations of Foamex L.P. and are subordinated to all Senior Debt, as defined in the Indenture. Interest is payable June 15 and December 15. The notes may be redeemed at the option of Foamex L.P., in whole or in part, at any time on or after June 15, 2002. The initial redemption is at 104.938% of their principal amount, plus accrued and unpaid interest, if any, thereon to the date of redemption and declining annually to 100.0% on or after June 15, 2005. At June 29, 2003 the redemption price was 103.292% plus accrued and unpaid interest. Upon the occurrence of a change of control, as defined, each holder will have the right to require Foamex L.P. to tender for such notes at a price in cash equal to 101% of the aggregate principal amount thereof, plus accrued and unpaid interest thereon, if there is such a "change of control". The notes are subordinated in right of payment to all senior indebtedness and are pari passu in right of payment to the 13 1/2% Senior Subordinated Notes (described below). 13 1/2% Senior Subordinated Notes The 13 1/2% Senior Subordinated Notes were issued by Foamex L.P. and Foamex Capital Corporation and are due on August 15, 2005. The notes represent uncollateralized general obligations of Foamex L.P. and are subordinated to all Senior Debt, as defined in the Indenture. Interest is payable semiannually on February 15 and August 15. The notes may be redeemed at the option of Foamex L.P., in whole or in part, at any time on or after August 15, 2000. The initial redemption was 106.75% of their principal amount, plus accrued and unpaid interest, if any, thereon to the date of redemption and declining annually to 100.0% on or after August 15, 2004. At June 29, 2003 the redemption price was 103.375% plus accrued and unpaid interest. 10 FOAMEX L.P. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 5. LONG-TERM DEBT (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, if any, thereon, if there is such a "change of control". The notes are subordinated in right of the payment of all senior indebtedness and are pari passu in right of payment to the 9 7/8% Senior Subordinated Notes (described above). Industrial Revenue Bonds ("IRBs") IRB debt includes a $1.0 million bond that matures in 2005 and a $6.0 million bond that matures in 2013. Interest is based on a variable rate, as defined, with options available to Foamex L.P. to convert to a fixed rate. At June 29, 2003, the interest rate was 1.25% on the $1.0 million bond and 1.00% on the $6.0 million bond. The maximum interest rate for either of the IRBs is 15.0% per annum. If Foamex L.P. exercises its option to convert the bonds to a fixed interest rate structure, the IRBs are redeemable at the option of the bondholders. The obligations are collateralized by certain properties, which have an approximate net carrying value of $10.9 million at June 29, 2003. Other Other debt includes a non-interest bearing promissory note with a principal amount of $0.9 million at June 29, 2003 issued in connection with increasing Foamex L.P.'s interest in an Asian joint venture to 70.0% in 2001. The promissory note had unamortized discount of $0.1 million at June 29, 2003. Debt Covenants The indentures, the Amended Credit Facility and other indebtedness agreements contain certain covenants that limit, among other things, the ability of Foamex L.P. (i) to pay distributions or redeem equity interests, (ii) to make certain restrictive payments or investments, (iii) to incur additional indebtedness or issue Preferred Equity Interests, as defined, (iv) to merge, consolidate or sell all or substantially all of its assets or (v) to enter into certain transactions with affiliates or related persons. In addition, certain agreements contain provisions that, in the event of a defined change of control or the occurrence of an undefined material adverse change in the ability of the obligor to perform its obligations, the indebtedness must be repaid, in certain cases, at the option of the holder. Also, Foamex L.P. is required under certain of its agreements to maintain specified financial ratios of which the most restrictive are the maintenance of net worth, interest coverage, fixed charge coverage and leverage ratios, as defined. Under the most restrictive of the distribution restrictions, as of June 29, 2003, Foamex L.P. was able to distribute funds to its partners, only to the extent to enable its partners to meet their tax payment liabilities and Foamex International's normal operating expenses of up to $1.0 million annually, so long as no event of default has occurred. On November 15, 2002, Foamex L.P. and its bank lenders executed an amendment to the Amended Credit Facility. Under the amendment, Foamex L.P. is subject to minimum net worth, minimum EBDAIT, as defined, and maximum capital expenditure covenants through periods ending December 28, 2003. The minimum EBDAIT covenant is tested monthly, on a cumulative basis, beginning with December 2002. Foamex L.P. was in compliance with the revised covenants at December 29, 2002 and throughout the two quarters ended June 29, 2003. At June 29, 2003, Foamex L.P. exceeded the minimum net worth and minimum EBDAIT covenants by $10.2 million and $6.7 million, respectively, and its capital expenditures were $6.8 million less than the permitted maximum. Compliance with existing covenants on leverage, fixed charge coverage and interest coverage ratios is suspended through periods ending September 28, 2003, but the covenants are revised and reinstated thereafter. All of the financial covenants were established based on a business plan provided to the lenders. In addition, borrowings under the Amended Credit Facility are subject to a borrowing base calculation, which could limit borrowings under the revolving credit facility to less than the maximum commitment. Under the borrowing base calculation, availability under the Revolving Credit Facility shall equal the lesser of (1) the Revolving Credit Facility commitment or (2) the sum of 65.0% of Foamex L.P.'s accounts receivable plus 50.0% of Foamex L.P.'s inventory plus $85.0 million, less 11 FOAMEX L.P. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 5. LONG-TERM DEBT (continued) certain other adjustments for Term Loan repayments, less the outstanding balance of Term Loans. As of June 29, 2003, the borrowing base calculation did not limit borrowings under the Amended Credit Facility. Foamex L.P.'s minimum EBDAIT covenants have higher thresholds in the second half of 2003. Management's current plans to achieve EBDAIT covenant compliance require continued successful implementation of overall cost savings initiatives and specific business improvement plans. Management is also continuing to evaluate strategic alternatives in an effort to improve Foamex L.P.'s debt position. Maturities of Long-Term Debt Scheduled maturities of long-term debt as of June 29, 2003 are shown below (thousands):
Two quarters ending December 28, 2003 $ 17 2004 33,795 2005 159,237 2006 73,444 2007 148,500 Thereafter 306,000 -------- 720,993 Unamortized debt premium/discount and fair value adjustment, net 15,111 -------- Total $736,104 ========
6. COMPREHENSIVE INCOME (LOSS) The components of comprehensive income (loss) are listed below.
Quarters Ended Two Quarters Ended -------------------------- ------------------------- June 29, June 30, June 29, June 30, 2003 2002 2003 2002 -------- -------- -------- -------- (thousands) Net income (loss) $1,907 $5,091 $(7,197) $(62,596) Foreign currency translation adjustments 2,569 203 4,136 34 ------ ------ ------- -------- Total comprehensive income (loss) $4,476 $5,294 $(3,061) $(62,562) ====== ====== ======= ========
7. SEGMENT RESULTS Foam Products manufactures and markets cushioning foams for bedding, furniture, packaging and health care applications and foam-based consumer products, such as mattress pads and children's furniture. Carpet Cushion Products manufactures and distributes rebond, prime, felt and rubber carpet padding. Automotive Products supplies foam products and laminates to major tier one suppliers and original equipment manufacturers. Technical Products manufactures and markets reticulated foams and other specialty foams for reservoiring, filtration, gasketing and sealing applications. The "Other" column in the table below represents certain manufacturing operations in Mexico City, corporate expenses not allocated to other business segments and restructuring, impairment and other charges (credits). The restructuring, impairment and other charges (credits) totaled $(0.9) million in the quarter and two quarters ended June 29, 2003 and $(1.5) million in the two quarters ended June 30, 2002. 12 FOAMEX L.P. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 7. SEGMENT RESULTS (continued) Segment results are presented below.
Carpet Foam Cushion Automotive Technical Products Products Products Products Other Total -------- -------- ---------- ---------- ------- ------- (thousands) Quarter ended June 29, 2003 Net sales $123,239 $ 54,291 $119,138 $30,616 $ 7,060 $334,344 Income (loss) from operations $ 7,381 $ (225) $ 7,074 $ 8,466 $(1,263) $ 21,433 Depreciation and amortization $ 2,839 $ 1,030 $ 904 $ 981 $ 1,352 $ 7,106 Quarter ended June 30, 2002 Net sales $119,129 $ 60,434 $123,750 $33,460 $ 9,125 $345,898 Income (loss) from operations $ 11,940 $ (1,363) $ 8,361 $ 7,557 $(2,038) $ 24,457 Depreciation and amortization $ 3,602 $ 1,586 $ 873 $ 573 $ 1,317 $ 7,951 Two quarters ended June 29, 2003 Net sales $241,290 $103,226 $240,283 $63,004 $14,311 $662,114 Income (loss) from operations $ 9,649 $ (3,293) $ 14,079 $16,060 $(3,971) $ 32,524 Depreciation and amortization $ 5,608 $ 1,975 $ 1,591 $ 1,704 $ 2,372 $ 13,250 Two quarters ended June 30, 2002 Net sales $236,611 $113,233 $228,131 $64,389 $17,596 $659,960 Income (loss) from operations $ 21,843 $ (4,258) $ 16,982 $13,796 $(1,877) $ 46,486 Depreciation and amortization $ 7,673 $ 3,479 $ 1,967 $ 1,292 $ 1,820 $ 16,231
8. RELATED PARTY TRANSACTIONS AND BALANCES Foam Funding LLC Debt During the two quarters ended June 30, 2002, Foamex Carpet paid $0.7 million of interest and $31.6 million of principal on a note payable to Foam Funding LLC, a subsidiary of Trace International Holdings ("Trace"). 9. COMMITMENTS AND CONTINGENCIES Litigation - Breast Implants As of July 29, 2003, Foamex L.P. and Trace were two of multiple defendants in actions filed on behalf of approximately 885 recipients of breast implants in various United States federal and state courts and one Canadian provincial court, some of which allege substantial damages, but most of which allege unspecified damages for personal injuries of various types. Three of these cases seek to allege claims on behalf of all breast implant recipients or other allegedly affected parties, but no class has been approved or certified by the court. During 1995, Foamex L.P. and Trace were granted summary judgments and dismissed as defendants from all cases in the federal courts of the United States and the state courts of California. Appeals for these decisions were withdrawn and the decisions are final. Although breast implants do not contain foam, certain silicone gel implants were produced using a polyurethane foam covering fabricated by independent distributors or fabricators from bulk foam purchased from Foamex L.P. or Trace. Neither Foamex L.P. nor Trace recommended, authorized, or approved the use of its foam for these purposes. Foamex L.P. is also indemnified by Trace for any such liabilities relating to foam manufactured prior to October 1990. Trace's insurance carrier has continued to pay Foamex L.P.'s litigation expenses after Trace's filing for relief under the Bankruptcy Code on July 21, 1999. Trace's insurance policies continue to cover certain liabilities of Trace but if the limits of those policies are exhausted, it is unlikely that Trace will be able to continue to provide additional indemnification. While it is not feasible to predict or determine the outcome of these 13 FOAMEX L.P. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 9. COMMITMENTS AND CONTINGENCIES (continued) actions, based on management's present assessment of the merits of pending claims, after consultation with the general counsel of Foamex L.P., and without taking into account the indemnification provided by Trace, the coverage provided by Trace's and Foamex L.P.'s liability insurance and potential indemnity from the manufacturers of polyurethane covered breast implants, management believes that it is not reasonably possible that the disposition of the matters that are pending or that may reasonably be anticipated to be asserted will result in a loss that is material to Foamex L.P.'s consolidated financial position, results of operations or cash flows. If management's assessment of Foamex L.P.'s liability relating to these actions is incorrect, these actions could have a material adverse effect on Foamex L.P.'s financial position, results of operations and cash flows. Litigation - Other During 2001, Foamex L.P. was notified by an insurance provider concerning a dispute involving the reimbursement of liability claims paid on behalf of Trace before 1990. The insurance provider is contending that Foamex L.P. is liable for the claims of approximately $6.1 million. Foamex L.P. is strongly defending this claim and considers the claim to be without merit. If management's assessment of Foamex L.P.'s liability relating to this action is incorrect, this action could have a material adverse effect on Foamex L.P.'s financial position, results of operations and cash flows. Foamex L.P. is party to various other lawsuits, both as defendant and plaintiff, arising in the normal course of business. It is the opinion of management that the disposition of these lawsuits will not, individually or in the aggregate, have a material adverse effect on Foamex L.P.'s financial position or results of operations. If management's assessment of Foamex L.P.'s liability relating to these actions is incorrect, these actions could have a material adverse effect on Foamex L.P.'s consolidated financial position, results of operations and cash flows. As of June 29, 2003, Foamex L.P. had accrued approximately $1.1 million for litigation and other matters in addition to the environmental matters discussed below. Environmental and Health and Safety Foamex L.P. is subject to extensive and changing federal, state, local and foreign environmental laws and regulations, including those relating to the use, handling, storage, discharge and disposal of hazardous substances, the discharge or emission of materials into the environment, and the remediation of environmental contamination, and as a result, are from time to time involved in administrative and judicial proceedings and inquiries relating to environmental matters. As of June 29, 2003, Foamex L.P. had accruals of approximately $2.7 million for environmental matters, including approximately $2.2 million related to mediating and monitoring soil and groundwater contamination and approximately $0.5 million related to PRP sites and other matters. Additional losses, if any, in excess of amounts currently accrued, cannot be reasonably estimated at this time. If there are additional matters or if 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 8, 2001, the United States Environmental Protection Agency, or "EPA," proposed a National Emission Standard for Hazardous Air Pollutants, or "NESHAP" for Flexible Polyurethane Foam Fabrication Operations. The proposed NESHAP regulates emissions of methylene chloride and other Hazardous Air Pollutants and restricts air emissions from flame lamination sources. Foamex L.P. does not believe that this standard, if adopted, will require it to make material expenditures. On August 31, 2002, Environment Canada, the Canadian environmental regulatory agency, proposed a rule which would require flexible polyurethane foam manufacturing operations to reduce methylene chloride (dichloromethane) air emissions. The proposed rule establishes a 50.0% reduction in methylene chloride emissions by December 1, 2003 and 100.0% reductions by January 1, 2007. Foamex L.P. does not believe that this standard, if adopted, will require it to make material expenditures for its Canadian plants. 14 FOAMEX L.P. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 9. COMMITMENTS AND CONTINGENCIES (continued) Foamex L.P. has reported to the appropriate state authorities that it found soil and/or groundwater contamination in excess of state standards at certain locations. Seven sites are currently in various stages of investigation or remediation. Accordingly, the extent of contamination and the ultimate liability is not known with certainty for all sites. During 2000, Foamex L.P. reached an indemnification agreement with the former owner of the Morristown, Tennessee facility. The agreement allocates the incurred and future remediation costs between the former owner and Foamex L.P. The estimated allocation of future costs for the remediation of this facility is not significant, based on current known information. The former owner was Recticel Foam Corporation, a subsidiary of Recticel s.a. Foamex L.P. has either upgraded or closed all underground storage tanks at its facilities in accordance with applicable regulations. The Comprehensive Environmental Response, Compensation and Liability Act, or "CERCLA," and comparable state laws impose liability without fault for the costs of cleaning up contaminated sites on certain classes of persons that contributed to the release of hazardous substances into the environment at those sites, for example, by generating wastes containing hazardous substances which were disposed at such sites. Foamex L.P. is currently designated as a Potentially Responsible Party, or "PRP," by the EPA or by state environmental agencies or other PRPs, pursuant to CERCLA or analogous state statutes, with respect to nine sites. Estimates of total cleanup costs and fractional allocations of liability are often provided by the EPA, the state environmental agency or the committee of PRPs with respect to the specified site. Based on these estimates (to the extent available) and on known information, in each case and in the aggregate, Foamex L.P. does not expect additional costs, if any, to be material to liquidity, results of operations or financial position. In 2003, capital expenditures for safety and environmental compliance projects are anticipated to be approximately $1.5 million. The possibility exists that new environmental legislation and/or environmental regulations may be adopted, or other environmental conditions, including the presence of previously unknown environmental contamination, may be found to exist or a reassessment of the potential exposure to pending environmental matters may be necessary due to new information or future developments, that may require expenditures not currently anticipated and that may be material. 10. GUARANTOR INFORMATION The payment obligations of Foamex L.P. and Foamex Capital Corporation under the 10 3/4% Senior Secured Notes are guaranteed by Foamex L.P.'s 100.0%-owned domestic subsidiaries ("Guarantors"). Such guarantees are full, unconditional and joint and several. Separate financial statements of the Guarantors are not presented because Foamex L.P.'s management has determined that they would not be material to investors. The following presents condensed consolidating balance sheets as of June 29, 2003 and December 29, 2002 and the condensed consolidating statements of operations for the quarters and two quarters ended June 29, 2003 and June 30, 2002 and cash flows for the two quarters ended June 29, 2003 and June 30, 2002 of the Guarantors and nonguarantors. The Guarantors include Foamex Carpet, Foamex Latin America, Inc., Foamex Mexico, Inc., Foamex Mexico II, Inc. and Foamex Asia, Inc. On December 30, 2002, Foamex Carpet distributed certain assets, liabilities and its business to Foamex L.P. and accordingly, Foamex Carpet is not included as a guarantor in the financial information as of June 29, 2003 and the periods then ended. 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. 15 FOAMEX L.P. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 10. GUARANTOR INFORMATION (continued) Condensed Consolidating Balance Sheet As of June 29, 2003
Foamex Capital Foamex L.P. Consolidated Guarantors Nonguarantors Corporation (Parent) Eliminations Foamex L.P. ---------- ------------- ----------- ----------- ------------ ------------ Assets (thousands of dollars) Current assets $ 1,336 $28,216 $ 1 $292,044 $ (6,805) $ 314,792 Investment in subsidiaries 6,898 - - 44,051 (50,949) - Property, plant and equipment, net - 22,052 - 151,936 - 173,988 Goodwill - 5,609 - 120,486 - 126,095 Debt issuance costs - - - 31,993 - 31,993 Software - - - 9,568 - 9,568 Other assets 13,239 2,195 - 16,313 (4,200) 27,547 ------- ------- --- -------- -------- ---------- Total assets $21,473 $58,072 $ 1 $666,391 $(61,954) $ 683,983 ======= ======= === ======== ======== ========== Liabilities and Partners' Deficiency Current liabilities $ 341 $23,148 $ - $174,374 $ (6,805) $ 191,058 Long-term debt 4,935 - - 735,346 (4,200) 736,081 Other liabilities - 173 - 65,969 - 66,142 Total liabilities 5,276 23,321 - 975,689 (11,005) 993,281 Partners' deficiency 16,197 34,751 1 (309,298) (50,949) (309,298) ------- ------- --- -------- -------- ---------- Total liabilities and partners' deficiency $21,473 $58,072 $ 1 $666,391 $(61,954) $ 683,983 ======= ======= === ======== ======== ==========
Condensed Consolidating Balance Sheet As of December 29, 2002
Foamex Capital Foamex L.P. Consolidated Guarantors Nonguarantors Corporation (Parent) Eliminations Foamex L.P. ---------- ------------- ----------- ----------- ------------ ------------ Assets (thousands of dollars) Current assets $40,111 $28,481 $ 1 $274,700 $(26,816) $ 316,477 Investment in subsidiaries 8,014 - - 27,243 (35,257) - Property, plant and equipment, net 5,851 21,549 - 154,638 - 182,038 Goodwill 1,249 4,835 - 119,237 - 125,321 Debt issuance costs - - - 36,827 - 36,827 Software - - - 8,254 8,254 Other assets 13,706 2,384 - 32,679 (22,403) 26,366 ------- ------- --- -------- -------- ---------- Total assets $68,931 $57,249 $ 1 $653,578 $(84,476) $ 695,283 ======= ======= === ======== ======== ========== Liabilities and Partners' Deficiency Current liabilities $41,401 $25,065 $ - $158,674 $(26,694) $ 198,446 Long-term debt 713 - - 737,827 - 738,540 Other liabilities 23,623 - - 62,863 (22,403) 64,083 Total liabilities 65,737 25,065 - 959,364 (49,097) 1,001,069 Partners' deficiency 3,194 32,184 1 (305,786) (35,379) (305,786) ------- ------- --- -------- -------- ---------- Total liabilities and partners' deficiency $68,931 $57,249 $ 1 $653,578 $(84,476) $ 695,283 ======= ======= === ======== ======== ==========
16 FOAMEX L.P. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 10. GUARANTOR INFORMATION (continued) Condensed Consolidating Statement of Operations For the quarter ended June 29, 2003
Foamex Capital Foamex L.P. Consolidated Guarantors Nonguarantors Corporation (Parent) Eliminations Foamex L.P. ---------- ------------- ----------- ----------- ------------ ------------ (thousands of dollars) Net sales $ - $27,770 $ - $311,072 $(4,498) $334,344 Cost of goods sold - 25,484 - 273,185 (4,498) 294,171 ------- ------- ----- -------- -------- -------- Gross profit - 2,286 - 37,887 - 40,173 Selling, general and administrative expenses - 1,695 - 17,905 - 19,600 Restructuring, impairment and other charges (credits) - 403 - (1,263) - (860) ------- ------- ----- -------- -------- -------- Income from operations - 188 - 21,245 - 21,433 Interest and debt issuance expense 74 7 - 19,297 - 19,378 Equity in undistributed earnings of affiliates 271 - - 57 185 513 Other expense, net 63 (570) - (98) - (605) ------- ------- ----- -------- -------- -------- Income before provision for income taxes 260 (389) - 1,907 185 1,963 Provision for income taxes - 56 - - - 56 ------- ------- ----- -------- -------- -------- Net income $ 260 $ (445) $ - $ 1,907 $ 185 $ 1,907 ======= ======= ===== ======== ======== ========
17 FOAMEX L.P. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 10. GUARANTOR INFORMATION (continued) Condensed Consolidating Statement of Operations For the quarter ended June 30, 2002
Foamex Capital Foamex L.P. Consolidated Guarantors Nonguarantors Corporation (Parent) Eliminations Foamex L.P. ---------- ------------- ----------- ----------- ------------ ------------ (thousands of dollars) Net sales $62,091 $31,593 $ - $295,926 $(43,712) $345,898 Cost of goods sold 57,535 26,983 - 258,145 (43,712) 298,951 ------- ------- ----- -------- -------- -------- Gross profit 4,556 4,610 - 37,781 - 46,947 Selling, general and administrative expenses 3,262 1,797 - 17,431 - 22,490 Restructuring, impairment and other charges (credits) - - - - - - ------- ------- ----- -------- -------- -------- Income from operations 1,294 2,813 - 20,350 - 24,457 Interest and debt issuance expense 63 71 - 17,327 (123) 17,338 Equity in undistributed earnings of affiliates 44 - - 2,467 (2,113) 398 Other expense, net - (1,488) - 24 (123) (1,587) ------- ------- ----- -------- -------- -------- Income before provision for income taxes 1,275 1,254 - 5,514 (2,113) 5,930 Provision for income taxes 8 408 - 423 - 839 ------- ------- ----- -------- -------- -------- Net income $ 1,267 $ 846 $ - $ 5,091 $ (2,113) $ 5,091 ======= ======= ===== ======== ======== ========
18 FOAMEX L.P. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 10. GUARANTOR INFORMATION (continued) Condensed Consolidating Statement of Operations For the two quarters ended June 29, 2003
Foamex Capital Foamex L.P. Consolidated Guarantors Nonguarantors Corporation (Parent) Eliminations Foamex L.P. ---------- ------------- ----------- ----------- ------------ ------------ (thousands of dollars) Net sales $ - $54,271 $ - $617,036 $ (9,193) $662,114 Cost of goods sold - 49,906 - 549,948 (9,193) 590,661 ------- ------- ----- -------- -------- -------- Gross profit - 4,365 - 67,088 - 71,453 Selling, general and administrative expenses - 3,230 - 36,559 - 39,789 Restructuring, impairment and other charges (credits) - 402 - (1,262) - (860) ------- ------- ----- -------- -------- -------- Income from operations - 733 - 31,791 - 32,524 Interest and debt issuance expense 133 19 - 38,337 - 38,489 Equity in undistributed earnings of affiliates (385) - - (408) 1,672 879 Other expense, net 112 (1,717) - (243) - (1,848) ------- ------- ----- -------- -------- -------- Loss before provision for income taxes (406) (1,003) - (7,197) 1,672 (6,934) Provision for income taxes - 263 - - - 263 ------- ------- ----- -------- -------- -------- Net loss $ (406) $(1,266) $ - $ (7,197) $ 1,672 $ (7,197) ======= ======= ===== ======== ======== ========
19 FOAMEX L.P. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 10. GUARANTOR INFORMATION (continued) Condensed Consolidating Statement of Operations For the two quarters ended June 30, 2002
Foamex Capital Foamex L.P. Consolidated Guarantors Nonguarantors Corporation (Parent) Eliminations Foamex L.P. ---------- ------------- ----------- ----------- ------------ ------------ (thousands of dollars) Net sales $116,789 $59,772 $ - $567,965 $(84,566) $659,960 Cost of goods sold 109,083 51,967 - 498,851 (84,566) 575,335 -------- ------- ----- -------- -------- -------- Gross profit 7,706 7,805 - 69,114 - 84,625 Selling, general and administrative expenses 6,320 3,271 - 30,086 - 39,677 Restructuring, impairment and other charges (credits) - - - (1,538) - (1,538) -------- ------- ----- -------- -------- -------- Income from operations 1,386 4,534 - 40,566 - 46,486 Interest and debt issuance expense 3,258 126 - 32,737 (154) 35,967 Equity in undistributed earnings of affiliates 1,461 - - (32,064) 31,731 1,128 Other expense, net (49) (893) - (109) (154) (1,205) -------- ------- ----- -------- -------- -------- Income before provision for income taxes (460) 3,515 - (24,344) 31,731 10,442 Provision for income taxes (159) 1,207 - 24 - 1,072 -------- ------- ----- -------- -------- -------- Income before accounting change (301) 2,308 - (24,368) 31,731 9,370 Accounting change (29,944) (3,794) - (38,228) - (71,966) -------- ------- ----- -------- -------- -------- Net loss $(30,245) $(1,486) $ - $(62,596) $ 31,731 $(62,596) ======== ======= ===== ======== ======== ========
20 FOAMEX L.P. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 10. GUARANTOR INFORMATION (continued) Condensed Consolidating Statement of Cash Flows For the two quarters ended June 29, 2003
Foamex Capital Foamex L.P. Consolidated Guarantors Nonguarantors Corporation (Parent) Eliminations Foamex L.P. ---------- ------------- ----------- ----------- ------------ ------------ (thousands of dollars) Cash Flows from Operating Activities Net income (loss) $(406) $(1,266) $ - $(7,197) $ 1,672 $(7,197) Total adjustments to reconcile net income (loss) to net cash provided by operating activities 406 682 - 21,530 (1,672) 20,946 ----- ------- ------ ------- ------- ------- Net cash provided by operating activities - (584) - 14,333 - 13,749 ----- ------- ------ ------- ------- ------- Cash Flows from Investing Activities Capital expenditures - (414) - (3,087) - (3,501) Other - - - (2,197) - (2,197) ----- ------- ------ ------- ------- ------- Net cash used for investing activities - (414) - (5,284) - (5,698) ----- ------- ------ ------- ------- ------- Cash Flows from Financing Activities Repayments of revolving loans - - - (979) - (979) Repayments of long-term debt - - - (29) - (29) Other, net - - - (3,376) - (3,376) ----- ------- ------ ------- ------- ------- Net cash used for financing activities - - - (4,384) - (4,384) ----- ------- ------ ------- ------- ------- Net increase (decrease) in cash and cash equivalents - (998) - 4,665 - 3,667 Cash and cash equivalents at beginning of period - 1,781 1 2,581 - 4,363 ----- ------- ------ ------- ------- ------- Cash and cash equivalents at end of period $ - $ 783 $ 1 $ 7,246 $ - $ 8,030 ===== ======= ====== ======= ======= =======
21 FOAMEX L.P. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 10. GUARANTOR INFORMATION (continued) Condensed Consolidating Statement of Cash Flows For the two quarters ended June 30, 2002
Foamex Capital Foamex L.P. Consolidated Guarantors Nonguarantors Corporation (Parent) Eliminations Foamex L.P. ---------- ------------- ----------- ----------- ------------ ------------ (thousands of dollars) Cash Flows from Operating Activities Net income (loss) $(30,245) $(1,486) $ - $(62,596) $31,731 $(62,596) Total adjustments to reconcile net income (loss) to net cash used for operating activities 29,613 (2,038) - 38,573 (31,830) 34,318 -------- ------- ------ -------- ------- -------- Net cash used for operating activities (632) (3,524) - (24,023) (99) (28,278) -------- ------- ------ -------- ------- -------- Cash Flows from Investing Activities Capital expenditures (301) (403) - (9,480) 99 (10,085) Other - - - (27,239) 28,702 1,463 -------- ------- ------ -------- ------- -------- Net cash used for investing activities (301) (403) - (36,719) 28,801 (8,622) -------- ------- ------ -------- ------- -------- Cash Flows from Financing Activities Net repayments of revolving loans - - - (125,000) - (125,000) Repayments of long-term debt (2,888) (1,304) - (140,090) (28,702) (172,984) Proceeds from long-term debt - - - 356,590 - 356,590 Other, net 1,902 - - 14,962 - 16,864 -------- ------- ------ -------- ------- -------- Net cash provided by financing activities (986) (1,304) - 106,462 (28,702) 75,470 -------- ------- ------ -------- ------- -------- Net increase in cash and cash equivalents (1,919) (5,231) - 45,720 - 38,570 Cash and cash equivalents at beginning of period 2,758 7,163 1 5,137 - 15,059 -------- ------- ------ -------- ------- -------- Cash and cash equivalents at end of period $ 839 $ 1,932 $ 1 $ 50,857 $ - $ 53,629 ======== ======= ====== ======== ======= ========
22 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. RESULTS OF OPERATIONS FOR THE QUARTER ENDED JUNE 29, 2003 COMPARED TO THE QUARTER ENDED JUNE 30, 2002
Carpet Foam Cushion Automotive Technical Products Products Products Product Other Total -------- -------- ---------- ---------- ------- -------- (thousands) Quarter ended June 29, 2003 Net sales $123,239 $54,291 $119,138 $30,616 $ 7,060 $334,344 Income (loss) from operations $ 7,381 $ (225) $ 7,074 $ 8,466 $(1,263) $ 21,433 Depreciation and amortization $ 2,839 $ 1,030 $ 904 $ 981 $ 1,352 $ 7,106 Income (loss) from operations as a percentage of net sales 6.0% (0.4)% 5.9% 27.7% n.m.* 6.4% Quarter ended June 30, 2002 Net sales $119,129 $60,434 $123,750 $33,460 $ 9,125 $345,898 Income (loss) from operations $ 11,940 $(1,363) $ 8,361 $ 7,557 $(2,038) $ 24,457 Depreciation and amortization $ 3,602 $ 1,586 $ 873 $ 573 $ 1,317 $ 7,951 Income (loss) from operations as a percentage of net sales 10.0% (2.3)% 6.8% 22.6% n.m.* 7.1%
* not meaningful Income from Operations Net sales for the quarter ended June 29, 2003 decreased 3.3% to $334.3 million from $345.9 million in the quarter ended June 30, 2002. An increase in Foam Products net sales was more than offset by decreases in the other segments. The gross profit margin was $40.2 million, or 12.0%, in the quarter ended June 29, 2003 compared to $46.9 million, or 13.6%, in the 2002 period. The decrease in gross profit is primarily due to increases in the cost of our major chemical raw materials since the second half of 2002 that have not been fully recovered through customer selling price increases, partially offset by a decrease of approximately $1.3 million in our estimated liability for medical and dental costs during the quarter ended June 29, 2003. Income from operations for the quarter ended June 29, 2003 was $21.4 million, or 6.4% of net sales, which represented a 12.4% decrease from the $24.5 million, or 7.1% of net sales, reported during the comparable 2002 period. Results for the 2003 period included a restructuring, impairment and other credit of $0.9 million, described in "Other" below. Partially offsetting the reduced gross profit discussed above was a decrease of $2.9 million, or 12.9% in selling, general and administrative expenses. This decrease was primarily due to lower employee costs partially offset by higher professional fees primarily related to information technology. We paid bonuses to certain employees in the quarter ended June 30, 2002 as a result of our March 25, 2002 refinancing. Foam Products Foam Products net sales for the quarter ended June 29, 2003 increased 3.5% to $123.2 million from $119.1 million in the comparable 2002 period. Increases in selling prices to customers were partially offset by decreases in volume primarily related to the closure of inefficient manufacturing facilities. Income from operations decreased 38.2% to $7.4 million in the quarter ended June 29, 2003 from $11.9 million in the comparable 2002 period as selling price increases were more than offset by higher raw material costs and lower volumes. Income from operations was 6.0% of net sales in 2003, down from 10.0% in 2002. 23 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Carpet Cushion Products Carpet Cushion Products net sales for the quarter ended June 29, 2003 decreased 10.2% to $54.3 million from $60.4 million in the comparable 2002 period. Selling price increases were more than offset by declines in volume as we closed several carpet cushion facilities during 2002 and 2003 to focus this business on more profitable markets. The loss from operations of $0.2 million in the quarter ended June 29, 2003 was less than the $1.4 million loss from operations in the comparable 2002 period primarily as a result of our efforts to streamline the cost structure of this segment. The loss from operations represented 0.4% of net sales in 2003 and 2.3% of net sales in 2002. Automotive Products Automotive Products net sales for the quarter ended June 29, 2003 decreased 3.7% to $119.1 million from $123.8 million in the comparable 2002 period as a result of lower volumes. Income from operations decreased 15.4% to $7.1 million compared to $8.4 million in the comparable 2002 period primarily due to the lower sales and higher raw material costs. Income from operations represented 5.9% of net sales in 2003 and 6.8% of net sales in 2002. Technical Products Net sales for Technical Products for the quarter ended June 29, 2003 decreased 8.5% to $30.6 million from $33.5 million in the comparable 2002 period due primarily to lower volumes of commodity products. Income from operations increased 12.0% to $8.5 million in the 2003 period compared to $7.6 million in the 2002 period. The improvement was due to increased sales of high-end products and lower operating expenses. Income from operations represented 27.7% of net sales in 2003 compared to 22.6% in 2002. Other Other primarily consists of certain manufacturing operations in Mexico City, corporate expenses not allocated to business segments and restructuring, impairment and other charges (credits). The increase in net sales associated with this segment resulted from its Mexico City operations. The loss from operations was $1.3 million in the quarter ended June 29, 2003 and $2.0 million in the quarter ended June 30, 2002 primarily reflects corporate expenses not allocated to operating segments. During the quarter ended June 29, 2003, we recorded restructuring, impairment and other credits of $0.9 million from the reversal of prior restructuring charges no longer required, net of a $0.4 million restructuring charge related to termination of approximately 300 employees at our Mexico City operations. Approximately 250 of these employees were terminated in the quarter ended June 29, 2003. Interest and Debt Issuance Expense Interest and debt issuance expense was $19.4 million in the quarter ended June 29, 2003, which represented an 11.8% increase from the comparable 2002 period expense of $17.3 million. Higher debt levels, higher effective interest rates and higher amortization of debt issuance costs all contributed to the increase in 2003. As discussed in Note 5 to the condensed consolidated financial statements, a provision of the Amended Credit Facility requires an incremental interest rate margin adjustment based on debt leverage ratio, as defined. Income from Equity Interest in Joint Ventures The income from an equity interest in an Asian joint venture was $0.5 million for the quarter ended June 29, 2003 compared to income of $0.4 million in the 2002 period. 24 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Other Income (Expense), Net Other expense, net was $0.6 million for the quarter ended June 29, 2003 compared to $1.6 million for the quarter ended June 30, 2002. The 2003 period includes foreign currency transaction losses of $0.6 million compared to foreign currency transaction losses of $1.6 million in 2002. Income Tax Expense Foamex L.P., as a limited partnership, is not subject to Federal income taxes. Consequently, no current or deferred provision has been provided for such taxes. However, Foamex L.P. has provided for the income taxes of certain states in which it is subject to taxes and for subsidiaries located in foreign jurisdictions that file separate tax returns. RESULTS OF OPERATIONS FOR THE TWO QUARTERS ENDED JUNE 29, 2003 COMPARED TO THE TWO QUARTERS ENDED JUNE 30, 2002
Carpet Foam Cushion Automotive Technical Products Products Products Product Other Total -------- -------- ---------- ---------- ------- -------- (thousands) Two Quarters ended June 29, 2003 Net sales $241,290 $103,226 $240,283 $63,004 $14,311 $662,114 Income (loss) from operations $ 9,649 $ (3,293) $ 14,079 $16,060 $(3,971) $ 32,524 Depreciation and amortization $ 5,608 $ 1,975 $ 1,591 $ 1,704 $ 2,372 $ 13,250 Income (loss) from operations as a percentage of net sales 4.0% (3.2)% 5.9% 25.5% n.m.* 4.9% Two Quarters ended June 30, 2002 Net sales $236,611 $113,233 $228,131 $64,389 $17,596 $659,960 Income (loss) from operations $ 21,843 $ (4,258) $ 16,982 $13,796 $(1,877) $ 46,486 Depreciation and amortization $ 7,673 $ 3,479 $ 1,967 $ 1,292 $ 1,820 $ 16,231 Income (loss) from operations as a percentage of net sales 9.2% (3.8)% 7.4% 21.4% n.m.* 7.0%
* not meaningful Income from Operations Net sales for the two quarters ended June 29, 2003 increased 0.3% to $662.1 million from $660.0 million in the two quarters ended June 30, 2002. The increase was primarily attributable to improved sales in Automotive Products and Foam Products, partially offset by a decrease in Carpet Cushion Products. The gross profit margin was $71.5 million, or 10.8%, in the two quarters ended June 29, 2003 compared to $84.6 million, or 12.8%, in the 2002 period. The decrease in gross profit is primarily due to increases in the cost of our major chemical raw materials since the second half of 2002 that have not been fully recovered through customer selling price increases, partially offset by a decrease of approximately $1.3 million in our estimated liability for medical and dental costs during the two quarters ended June 29, 2003. Income from operations for the two quarters ended June 29, 2003 was $32.5 million, or 4.9% of net sales, which represented a 30.0% decrease from the $46.5 million, or 7.0% of net sales, reported during the comparable 2002 period and was primarily due to the reduced gross profit. Results include restructuring, impairment and other credits of $0.9 million in 2003 and $1.5 million in 2002. Restructuring, impairment and other credits are discussed under "Other" below. 25 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Foam Products Foam Products net sales for the two quarters ended June 29, 2003 increased 2.0% to $241.3 million from $236.6 million in the comparable 2002 period. Increases in selling prices to customers and increased volume of our consumer products were partially offset by decreases in volume in other markets. Income from operations decreased 55.8% to $9.6 million in the two quarters ended June 29, 2003 from $21.8 million in the comparable 2002 period. Income from operations was negatively impacted by increased raw material prices in the two quarters ended June 29, 2003. Income from operations was 4.0% of net sales in 2003, down from 9.2% in 2002. Carpet Cushion Products Carpet Cushion Products net sales for the two quarters ended June 29, 2003 decreased 8.8% to $103.2 million from $113.2 million in the comparable 2002 period. Selling price increases were more than offset by declines in volume as we closed several carpet cushion facilities during 2002 and 2003 to focus this business on more profitable markets. The loss from operations was $3.3 million in the two quarters ended June 29, 2003 compared to a $4.3 million loss in the comparable 2002 period due primarily to higher selling prices and cost containment from the streaming of operations. The loss from operations represented 3.2% of net sales in 2003 and 3.8% of net sales in 2002. Automotive Products Automotive Products net sales for the two quarters ended June 29, 2003 increased 5.3% to $240.3 million from $228.1 million in the comparable 2002 period. The improvement primarily reflects an inventory correction by our customers during the first half of 2002. Income from operations decreased 17.1% to $14.1 million compared to $17.0 million in the comparable 2002 period primarily due to higher raw material costs. Income from operations represented 5.9% of net sales in 2003 and 7.4% of net sales in 2002. Technical Products Net sales for Technical Products for the two quarters ended June 29, 2003 decreased 2.2% to $63.0 million from $64.4 million in the comparable 2002 period. Income from operations increased 16.4% to $16.1 million in the 2003 period compared to $13.8 million in the 2002 period. The improvement is primarily due to increased sales of higher-end products. Income from operations represented 25.5% of net sales in 2003 compared to 21.4% in 2002. Other Other primarily consists of certain manufacturing operations in Mexico City, corporate expenses not allocated to business segments and restructuring, impairment and other charges (credits). The decrease in net sales associated with this segment resulted from its Mexico City operations. The loss from operations was $4.0 million in the two quarters ended June 29, 2003 and $1.9 million in the two quarters ended June 30, 2002 reflected generally higher corporate expenses in 2003 and included restructuring and other credits discussed below. During the two quarters ended June 29, 2003, we recorded restructuring, impairment and other credits of $0.9 million from the reversal of prior restructuring charges no longer required, net of a $0.4 million restructuring charge associated with terminations of approximately 300 employees at our Mexico City operations. Approximately 250 of these employees were terminated in the two quarters ended June 29, 2003. During the two quarters ended June 30, 2002, we recorded restructuring, impairment and other credits of $1.5 million, primarily from the reimbursement of certain lease costs. Interest and Debt Issuance Expense Interest and debt issuance expense was $38.5 million in the two quarters ended June 29, 2003, which represented a 7.0% increase from the comparable 2002 period expense of $36.0 million. The 2002 period included a $4.3 million charge relating to the write off of debt issuance costs as a result of an early extinguishment of debt. 26 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Higher average debt levels, higher effective interest rates and higher amortization of debt issuance costs all contributed to the increase in 2003. As discussed in Note 5 to the condensed consolidated financial statements, a provision of the Amended Credit Facility requires an incremental interest rate margin adjustment based on the debt leverage ratio, as defined. Income from Equity Interest in Joint Ventures The income from an equity interest in an Asian joint venture was $0.9 million for the two quarters ended June 29, 2003 compared to income of $1.1 million in the 2002 period. Other Income (Expense), Net Other expense, net was $1.8 million for the two quarters ended June 29, 2003 compared to $1.2 million for the two quarters ended June 30, 2002. The 2003 period includes foreign currency transaction losses of $1.7 million compared to foreign currency transaction losses of $1.0 million in 2002. Income Tax Expense Foamex L.P., as a limited partnership, is not subject to Federal income taxes. Consequently, no current or deferred provision has been provided for such taxes. However, Foamex L.P. has provided for the income taxes of certain states in which it is subject to taxes and for subsidiaries located in foreign jurisdictions that file separate tax returns. Liquidity and Capital Resources Our operating cash requirements consist principally of accounts receivable, inventory and accounts payable requirements, scheduled payments of interest on outstanding indebtedness, capital expenditures and employee benefit plans. We believe that cash flow from our operating activities, cash on hand and periodic borrowings under our credit facility will be adequate to meet our liquidity requirements. Scheduled principal payments on Foamex L.P.'s debt are not significant until the second half of 2004. If our cash flow is not adequate to meet liquidity requirements, there would be a material adverse effect on our financial position as well as our ability to continue as a going concern. Cash and cash equivalents were $8.0 million at June 29, 2003 compared to $4.4 million at December 29, 2002. Working capital at June 29, 2003 was $123.7 million and the current ratio was 1.6 to 1 compared to working capital at December 29, 2002 of $118.0 million and a current ratio of 1.6 to 1. Total debt at June 29, 2003 was $736.1 million, down $2.5 million from December 29, 2002. As of June 29, 2003, there were $50.8 million of revolving credit borrowings under the Foamex L.P. credit facility with $28.6 million available for borrowings and $20.6 million of letters of credit outstanding. Foamex Canada did not have any outstanding borrowings as of June 29, 2003 under Foamex Canada's revolving credit agreement, with unused availability of approximately $5.9 million. In 2002, Foamex L.P. purchased and retired $49.0 million of the 13 1/2% senior subordinated notes, including unamortized debt premium of $2.5 million, and $1.5 million of the 9 7/8% senior subordinated notes for a total purchase price of $48.5 million. On November 15, 2002, Foamex L.P. and its bank lenders executed an amendment to the Amended Credit Facility. Under the amendment, Foamex L.P. is subject to minimum net worth, minimum EBDAIT, as defined, and maximum capital expenditure covenants through periods ending December 28, 2003. The minimum EBDAIT covenant is tested monthly on a cumulative basis beginning with December 2002. Foamex L.P. was in compliance with the revised covenants at December 29, 2002 and throughout the two quarters ended June 29, 2003. At June 29, 2003, Foamex L.P. exceed the minimum net worth and minimum EBDAIT covenants by $10.2 million and $6.7 million, respectively, and its capital expenditures were $6.8 million less than the permitted maximum. Compliance with existing covenants on leverage, fixed charge coverage and interest coverage ratios is suspended through periods ending September 28, 2003, but the covenants are revised and reinstated thereafter. All of the financial covenants were established based on a business plan provided to the lenders. In addition, borrowings under the Amended 27 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Credit Facility are subject to a borrowing base calculation, which could limit borrowings under the revolving credit facility to less than the maximum commitment. As of June 29, 2003, the borrowing base calculation does not limit borrowings under the Amended Credit Facility. Foamex L.P.'s minimum EBDAIT covenants have higher thresholds in the second half of 2003. Management's current plans to achieve EBDAIT covenant compliance require continued successful implementation of overall cost savings initiatives and specific business improvement plans. Management is also continuing to evaluate strategic alternatives in an effort to reduce the cost and improve the maturity structure of our debt, see below. There can be no assurance that we will be successful in achieving our plans or complying with the amended covenants, as there are a number of factors beyond our control, including any further raw material cost changes and customer acceptances of selling price increases that are necessary for us to be successful. Additionally, compliance with the financial covenants may not be met if business conditions are not as anticipated or other unforeseen events impact results unfavorably. In the event that such noncompliance appears likely, or occurs, we will seek the lenders' further approval of amendments to, or waivers of, such financial covenants. Historically, we have been able to renegotiate financial covenants and/or obtain waivers. Management currently believes that obtaining waivers and/or amendments in the future may be difficult, or not possible if required. If amendments or waivers are not obtained, Foamex L.P. would be in default and lenders could demand immediate payment of Foamex L.P.'s outstanding debt under the Amended Credit Facility. In addition, it is possible that the holders of Foamex L.P.'s Senior Secured Notes and Senior Subordinated Notes could also demand immediate payment. We may not be able to secure additional financing at a reasonable cost, or at all. The lack of financing would have a material adverse effect on our financial position and could impair our ability to continue as a going concern. During the third quarter of 2003, we anticipate refinancing our Amended Credit Facility by entering into a new $240.0 Million Senior Secured Credit Facility, consisting of a $190.0 million revolving credit facility and a $50.0 million term loan with a new group of lenders and an $80.0 million term loan facility with another lender. Both of the new facilities are expected to mature in the second quarter of 2007. A significant portion of the proceeds under these anticipated new facilities would be used to repay all outstanding balances under the Foamex L. P. Amended Credit Facility (see Note 5), with the effect of extending the maturity of approximately $213.0 million of debt that would have been due at various times through 2006, while requiring only approximately $25.0 million in principal payments under the proposed new facility. The remaining proceeds would be used to fund operations, as required. Borrowings under the new $240.0 Million Senior Secured Credit Facility would be limited to eligible amounts of accounts receivable, inventory, equipment and real estate which would be pledged as collateral for the related borrowings and would bear interest based upon a margin over LIBOR. We expect the term loan to require quarterly installment principal payments. Borrowings under the $80.0 million term loan facility would bear interest based upon a margin over the Prime rate. Financial covenants under these new facilities would be limited to a quarterly fixed charge coverage ratio and maximum annual capital expenditures. The facilities will be subject to a maximum borrowing test. Additionally, the termination of the Amended Credit Facility would result in a noncash charge of approximately $13.0 million related to the write off of debt issuance cost associated with that borrowing. If we are successful in completing the refinancing efforts, Foamex L.P. would no longer be subject to the covenants under the Amended Credit Facility. However, there can be no assurance that we will be able to consummate these transactions as currently anticipated, if at all. If we are not successful in completing this refinancing, Foamex L.P. would continue to be subject to the covenants and provisions of the Amended Credit Facility, described above. On February 26, 2003, Standard and Poor's Rating Services ("S&P") announced that it had lowered its corporate credit rating on Foamex L.P. from "B+" to "B". In their announcement, S&P cited their view that our weak operating performance, higher raw material costs, and a sluggish domestic economy, which if not reversed will 28 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. likely elevate near-term liquidity concerns. The S&P action could have a negative impact on the cost of our future borrowings, if any, and the extension of trade credit. During 2002, we entered into an employment agreement with a Foamex International director and a consulting agreement with another Foamex International director. Payments under these agreements were to aggregate at least $0.7 million and $0.2 million, respectively, on an annual basis. The employment agreement with the Foamex International director was terminated effective January 31, 2003 resulting in severance and other payments to the director aggregating $0.6 million. Foamex L.P. was required to cause a registration statement under the Securities Act of 1933 for its 10 3/4% Senior Secured Notes to be effective within 180 days of March 25, 2002. Foamex L.P. filed the registration statement, but it was not effective until January 30, 2003 and therefore Foamex L.P. was liable for liquidated damages from September 23, 2002 until January 30, 2003. The liquidated damages were at the rate of $15,000 per week for the first 90 days, escalating by $15,000 per week for each additional 90 days. The liquidated damages of $0.3 million were paid on April 1, 2003. Effective May 1, 2002, Foamex L.P. completed a series of interest rate swap transactions with notional amounts aggregating $300.0 million. Foamex L.P. designated, documented and accounted for these interest rate swaps as fair value hedges of its 10 3/4% Senior Secured Notes due April 1, 2009. The risk being hedged in these transactions was the change in fair value of the 10 3/4% Senior Secured Notes based on changes in the benchmark interest rate, LIBOR. The effect of these interest rate swap transactions was to convert the fixed interest rate on the 10 3/4% Senior Secured Notes to floating rates reset twice per year to correspond with the interest payment dates for the 10 3/4% Senior Secured Notes. On September 18, 2002, Foamex L.P. unwound the interest rate swap transactions in exchange for a net cash proceeds of $18.4 million, including $3.6 million realized through lower effective interest rates while the swap transactions were in effect. The unwinding resulted in a deferred credit of $14.8 million, which is being amortized over the term of the 10 3/4% Senior Secured Notes, using the effective interest rate method. Cash Flow from Operating Activities Cash provided by operating activities in the two quarters ended June 29, 2003 was $13.7 million compared to cash used of $28.3 million in the two quarters ended June 30, 2002. Accounts receivable decreased by $2.0 million primarily as a result of an increase in the allowance for uncollectible accounts in the two quarters ended June 29, 2003, while accounts payable and cash overdrafts increased by a net $9.7 million as a result of the timing of our payment s to vendors and the effect of higher payments for raw materials. Cash Flow from Investing Activities Cash used for investing activities totaled $5.7 million for the two quarters ended June 29, 2003. Cash requirements included capital expenditures of $3.5 million and capitalized software development costs of $2.2 million. In the two quarters ended June 29, 2002, cash used for investing activities was $8.6 million which consisted principally of capital expenditures of $10.1 million. The estimated capital expenditures for the full year 2003 are expected to be approximately $10.0 million. Cash Flow from Financing Activities Cash used for financing activities was $4.4 million for the two quarters ended June 29, 2003 compared to $75.5 million of cash provided in the comparable period of 2002. Cash provided for the 2002 period primarily reflected Foamex L.P.'s March 25, 2002 refinancing. Environmental Matters We are subject to extensive and changing environmental laws and regulations. Expenditures to date in connection with our compliance with such laws and regulations did not have a material adverse effect on our operations, financial position, capital expenditures or competitive position. The amount of liabilities recorded in connection with environmental matters as of June 29, 2003 was $2.7 million. Although it is possible that new 29 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. information or future developments could require us to reassess its potential exposure to all pending environmental matters, including those described in Note 9 to our condensed consolidated financial statements, we believe that, based upon all currently available information, the resolution of all such pending environmental matters will not have a material adverse effect on our operations, financial position, capital expenditures or competitive position. Market Risk Our debt securities with variable interest rates are subject to market risk for changes in interest rates. On June 29, 2003, indebtedness with variable interest rates aggregated $220.0 million. On an annualized basis, if the interest rates on these debt instruments increased by 1.0%, interest expense would increase by approximately $2.2 million. Forward-Looking Statements This report contains forward-looking statements and should be read in conjunction with the discussion regarding forward-looking statements set forth in our Annual Report on Form 10-K for the year ended December 29, 2002. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. See the "Market Risk" section under Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations. ITEM 4. CONTROLS AND PROCEDURES. Foamex L.P.'s Chief Executive Officer and Chief Financial Officer have conducted an evaluation of the effectiveness of disclosure controls and procedures pursuant to Exchange Act Rule 13a-14 as of a date within 90 days of the filing of this Quarterly Report on Form 10-Q (the "Evaluation Date"). Based on such evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that, as of the Evaluation Date, the disclosure controls and procedures are effective in ensuring that all material information required to be filed in this quarterly report has been made known to them in a timely fashion. Since the Evaluation Date, there have been no significant changes in Foamex L.P.'s internal controls, or in other factors that could significantly affect such controls. 30 Part II - Other Information. Item 1. Legal Proceedings. Reference is made to the description of the legal proceedings contained in Foamex L.P.'s Annual Report on Form 10-K for the year ended December 29, 2002. The information from Note 9 to the condensed consolidated financial statements is incorporated herein by reference. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits 31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes - Oxley Act of 2002. 32.2 Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes - Oxley Act of 2002. (b) Foamex L.P. filed the following Current Reports on Form 8-K for the quarter ended June 29, 2003: On May 15, 2003, a report under Item 12, Results of Operations and Financial Condition concerning the disclosure of a Non-GAAP financial measure during Foamex International's earnings teleconference and furnishing a copy of Foamex International's earnings press release for the quarter ended March 30, 2003. 31 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: August 13, 2003 By: /s/ K. Douglas Ralph ---------------------------------- K. Douglas Ralph Executive Vice President and Chief Financial Officer (Duly Authorized Officer) FOAMEX CAPITAL CORPORATION Date: August 13, 2003 By: /s/ K. Douglas Ralph ---------------------------------- K. Douglas Ralph Executive Vice President and Chief Financial Officer 32 EX-31 3 ex311q203tecflp.txt Exhibit 31.1 CERTIFICATION I, Thomas E. Chorman, certify that: 1) I have reviewed this quarterly report on Form 10-Q of Foamex L.P. and Foamex Capital Corporation; 2) Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3) Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4) The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5) The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6) The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: August 13, 2003 Foamex L.P. Foamex Capital Corporation /s/ Thomas E. Chorman /s/ Thomas E. Chorman - ------------------------------------- -------------------------- Thomas E. Chorman Thomas E. Chorman President and Chief Executive Officer President EX-31 4 ex312q203kdrflp.txt Exhibit 31.2 CERTIFICATION I, K. Douglas Ralph, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Foamex L.P. and Foamex Capital Corporation; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a. designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b. evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c. presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a. all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: August 13, 2003 Foamex L.P. Foamex Capital Corporation /s/ K. Douglas Ralph /s/ K. Douglas Ralph - --------------------------------- ---------------------------- K. Douglas Ralph K. Douglas Ralph Executive Vice President and Executive Vice President and Chief Financial Officer Chief Financial Officer EX-32 5 ex3210603tecflp.txt Exhibit 32.1 CERTIFICATE PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Foamex L.P. and Foamex Capital Corporation on Form 10-Q for the period ending June 29, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Thomas E. Chorman, President and Chief Executive Officer of Foamex L.P. and Foamex Capital Corporation, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Foamex L.P. and Foamex Capital Corporation. Dated: August 13, 2003 Foamex L.P. Foamex Capital Corporation /s/ Thomas E. Chorman /s/ Thomas E. Chorman - ------------------------------------- ----------------------------- Thomas E. Chorman Thomas E. Chorman President and Chief Executive Officer President EX-32 6 ex3220603kdrflp.txt Exhibit 32.2 CERTIFICATE PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Foamex L.P. and Foamex Capital Corporation on Form 10-Q for the period ending June 29, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, K. Douglas Ralph, Executive Vice President and Chief Executive Officer of Foamex L.P. and Foamex Capital Corporation, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Foamex L.P. and Foamex Capital Corporation. Date: August 13, 2003 Foamex L.P. Foamex Capital Corporation /s/ K. Douglas Ralph /s/ K. Douglas Ralph - ---------------------------------- ---------------------------------- K. Douglas Ralph K. Douglas Ralph Executive Vice President and Chief Executive Vice President and Chief Financial Officer Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----