-----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, DURT/CZ6sH2chtohm+sSFMxrZaaT+RMIX9hxUPQT3MPlavmo7otd0XtjXxD6Varw wevBVI7WQbqhCxZdpxLIuw== 0000912908-03-000093.txt : 20031112 0000912908-03-000093.hdr.sgml : 20031112 20031112171706 ACCESSION NUMBER: 0000912908-03-000093 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20030928 FILED AS OF DATE: 20031112 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: 03994911 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: 03994912 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 q303flp.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 September 28, 2003 Commission file numbers 1-11432; 1-11436 FOAMEX L.P. FOAMEX CAPITAL CORPORATION ------------------------------------------------------ (Exact name of registrant as specified in its charter) Delaware 05-0475617 Delaware 22-3182164 - ------------------------------- ---------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 1000 Columbia Avenue Linwood, PA 19061 - ------------------------------- ---------------------- (Address of principal (Zip Code) executive offices) Registrant's telephone number, including area code: (610) 859-3000 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. YES X NO --- --- Foamex L.P. and Foamex Capital Corporation meet the conditions set forth in General Instruction H(1)(a) and (b) of Form 10-Q and are therefore filing this form with the reduced disclosure format. Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). [ ] The number of shares of Foamex Capital Corporation's common stock outstanding as of November 7, 2003 was 1,000. FOAMEX L.P. FOAMEX CAPITAL CORPORATION INDEX
Page Part I. Financial Information Item 1. Financial Statements. Condensed Consolidated Statements of Operations (unaudited) - Quarters and Three Quarters Ended September 28, 2003 and September 29, 2002 3 Condensed Consolidated Balance Sheets as of September 28, 2003 (unaudited) and December 29, 2002 4 Condensed Consolidated Statements of Cash Flows (unaudited) - Three Quarters Ended September 28, 2003 and September 29, 2002 5 Notes to Condensed Consolidated Financial Statements (unaudited) 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. 22 Item 3. Quantitative and Qualitative Disclosures about Market Risk. 29 Item 4. Controls and Procedures. 29 Part II. Other Information Item 1. Legal Proceedings. 30 Item 6. Exhibits and Reports on Form 8-K. 30 Signatures 31
2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. FOAMEX L.P. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
Quarters Ended Three Quarters Ended ---------------------------- ----------------------------- September 28, September 29, September 28, September 29, 2003 2002 2003 2002 ------------- ------------ ------------- ------------- (thousands) NET SALES $321,466 $340,823 $983,580 $1,000,783 COST OF GOODS SOLD 283,957 310,009 874,618 885,344 -------- -------- -------- ---------- GROSS PROFIT 37,509 30,814 108,962 115,439 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 18,804 29,423 58,593 69,100 RESTRUCTURING, IMPAIRMENT AND OTHER CHARGES (CREDITS) (377) (3,674) (1,237) (5,212) -------- -------- -------- ---------- INCOME FROM OPERATIONS 19,082 5,065 51,606 51,551 INTEREST AND DEBT ISSUANCE EXPENSE 31,550 15,258 70,039 51,225 INCOME FROM EQUITY INTEREST IN JOINT VENTURES 495 386 1,374 1,514 OTHER EXPENSE, NET (952) (198) (2,800) (1,403) -------- -------- -------- ---------- INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES (12,925) (10,005) (19,859) 437 PROVISION FOR INCOME TAXES 168 389 431 1,461 -------- -------- -------- ---------- LOSS BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE (13,093) (10,394) (20,290) (1,024) CUMULATIVE EFFECT OF ACCOUNTING CHANGE - - - (71,966) -------- -------- -------- ---------- NET LOSS $(13,093) $(10,394) $(20,290) $ (72,990) ======== ======== ======== ==========
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements. 3 FOAMEX L.P. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
September 28, 2003 December 29, 2002 ------------------ ----------------- ASSETS (unaudited) CURRENT ASSETS (thousands) Cash and cash equivalents $ 4,961 $ 4,363 Accounts receivable, net of allowances of $10,715 in 2003 and $10,311 in 2002 196,110 191,546 Inventories 100,812 98,010 Other current assets 21,847 22,558 ---------- ---------- Total current assets 323,730 316,477 Property, plant and equipment 418,307 418,569 Less accumulated depreciation (250,616) (236,531) ---------- ---------- NET PROPERTY, PLANT AND EQUIPMENT 167,691 182,038 GOODWILL 126,068 125,321 DEBT ISSUANCE COSTS, net of accumulated amortization of $8,970 in 2003 and $14,079 in 2002 28,652 36,827 SOFTWARE, net of accumulated amortization of $3,103 in 2003 and $2,634 in 2002 9,584 8,254 OTHER ASSETS 31,401 26,366 ---------- ---------- TOTAL ASSETS $ 687,126 $ 695,283 ========== ========== LIABILITIES AND PARTNERS' DEFICIENCY CURRENT LIABILITIES Current portion of long-term debt $ 7,158 $ 46 Accounts payable 110,159 87,394 Accrued employee compensation and benefits 25,912 26,330 Accrued interest 22,157 14,173 Accrued customer rebates 18,636 18,813 Cash overdrafts 11,002 17,737 Other accrued liabilities 20,865 33,953 ---------- ---------- Total current liabilities 215,889 198,446 LONG-TERM DEBT 728,599 738,540 ACCRUED EMPLOYEE BENEFITS 48,901 48,022 OTHER LIABILITIES 14,634 16,061 ---------- ---------- Total liabilities 1,008,023 1,001,069 COMMITMENTS AND CONTINGENCIES PARTNERS' DEFICIENCY General partner (260,847) (240,107) Limited partner - - Accumulated other comprehensive loss (50,829) (56,458) Notes receivable from related party (9,221) (9,221) ---------- ---------- Total partners' deficiency (320,897) (305,786) ---------- ---------- TOTAL LIABILITIES AND PARTNERS' DEFICIENCY $ 687,126 $ 695,283 ========== ==========
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements. 4 FOAMEX L.P. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Three Quarters Ended -------------------------------- September 28, September 29, 2003 2002 ------------- -------------- (thousands) OPERATING ACTIVITIES Net loss $(20,290) $(72,990) Adjustments to reconcile net loss to net cash provided by (used for) operating activities: Cumulative effect of accounting change - 71,966 Depreciation and amortization 19,250 23,745 Write off of debt issuance costs 12,928 4,892 Amortization of debt issuance costs, debt premium and debt discount 3,967 1,493 Other operating activities (795) 612 Changes in operating assets and liabilities, net 11,026 (35,989) -------- -------- Net cash provided by (used for) operating activities 26,086 (6,271) -------- -------- INVESTING ACTIVITIES Capital expenditures (4,683) (11,877) Proceeds from sale of assets 1,135 21 Collection of note receivable from partner - 2,490 Other investing activities (2,729) (4,205) -------- -------- Net cash used for investing activities (6,277) (13,571) -------- -------- FINANCING ACTIVITIES Proceeds from (repayments of) revolving loans 31,618 (125,000) Proceeds from long-term debt 130,000 356,590 Repayments of long-term debt (162,227) (190,060) Repayments of long-term debt - related party - (31,590) Increase (decrease) in cash overdrafts (6,735) 21,208 Debt issuance costs (11,659) (25,491) Interest rate swaps - 14,821 Other financing activities (208) 105 -------- -------- Net cash provided by (used for) financing activities (19,211) 20,583 -------- -------- Net increase in cash and cash equivalents 598 741 Cash and cash equivalents at beginning of period 4,363 15,059 -------- -------- Cash and cash equivalents at end of period $ 4,961 $ 15,800 ======== ======== Supplemental Information: Cash paid for interest $ 45,160 $ 29,823 ======== ========
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements. 5 FOAMEX L.P. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 1. ORGANIZATION AND BASIS OF PRESENTATION Organization Foamex L.P. operates in the flexible polyurethane and advanced polymer foam products industry. Foamex L.P.'s operations are conducted directly and through its wholly-owned subsidiaries, Foamex Canada Inc. ("Foamex Canada"), Foamex Latin America, Inc. ("Foamex Mexico") and Foamex Asia, Inc. ("Foamex Asia"). Foamex Carpet Cushion, Inc. ("Foamex Carpet") was converted to a limited liability company and was contributed by Foamex International Inc. ("Foamex International") to Foamex L.P. on March 25, 2002. The contribution of Foamex Carpet has been accounted for as a merger of entities under common control and has been recorded in a manner similar to a pooling of interests. Accordingly, the condensed consolidated financial statements include the accounts of Foamex Carpet for all periods presented. On December 30, 2002, Foamex Carpet distributed certain assets, liabilities and its business to Foamex L.P. Financial information concerning the business segments of Foamex L.P. is included in Note 7. Basis of Presentation The accompanying condensed consolidated financial statements are unaudited and do not include certain information and disclosures required by accounting principles generally accepted in the United States of America for complete financial statements. However, in the opinion of management, all adjustments considered necessary to present fairly Foamex L.P.'s consolidated financial position and results of operations, have been included. These interim financial statements should be read in conjunction with the consolidated financial statements and related notes included in Foamex L.P.'s 2002 Annual Report on Form 10-K. Results for interim periods are not necessarily indicative of trends or of results for a full year. Certain amounts in the condensed consolidated statements of operations for the quarter and three quarters ended September 29, 2002 have been reclassified to conform to the current presentation. Accounting Changes On April 30, 2002, Statement of Financial Accounting Standards No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections" ("SFAS No. 145") was issued. The provisions of this Statement related to the rescission of Statement 4 are applied in fiscal years beginning after May 15, 2002. Any gain or loss on extinguishment of debt that was classified as an extraordinary item in prior periods presented that does not meet the criteria in Opinion 30 for classification as an extraordinary item is reclassified. Foamex L.P. has reclassified the extraordinary item previously reported in the three quarters ended September 29, 2002 with the related tax benefit included in the provision for income taxes. In January 2003, FASB Interpretation 46, "Consolidation of Variable Interest Entities" ("FIN No. 46") was issued. FIN No. 46 clarifies the application of Accounting Research Bulletin No. 51, "Consolidated Financial Statements", to certain entities in which the equity investors do not have a controlling financial interest or do not have sufficient equity at risk. FIN No. 46 was effective on January 31, 2003 for entities acquired after that date. The Financial Accounting Standards Board has postponed the effective date for entities acquired on or before January 31, 2003 to December 15, 2003. Foamex L.P. believes that FIN No. 46 will have no impact on its current equity investments. 2. CUMULATIVE EFFECT OF AN ACCOUNTING CHANGE Foamex L.P. has adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142"). As required by SFAS No. 142, Foamex L.P. performed a transitional impairment test on its goodwill during 2002. The resulting impairment loss of $72.0 million has been recorded as a cumulative effect of an accounting change in the three quarters ended September 29, 2002. Goodwill at September 28, 2003 increased by $0.7 million from December 29, 2002 as a result of foreign currency translation adjustments. 6 FOAMEX L.P. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 3. RESTRUCTURING, IMPAIRMENT AND OTHER CHARGES (CREDITS) During the three quarters ended September 28, 2003, Foamex L.P. recorded restructuring credits of $1.2 million consisting of a $2.3 million reduction in the liability primarily for severance and termination benefits no longer required as the actions contemplated under the related plans have been substantially completed, and a charge of $0.7 million for additional lease termination costs for a closed facility as a result of changes in real estate market conditions. Additionally, Foamex L.P. recorded a $0.4 million restructuring charge reported in the Other segment as a result of an employee termination plan for approximately 300 employees at its Mexico City operations. The actions under this plan were substantially completed as of September 28, 2003. During the fourth quarter of 2001, Foamex L.P. announced an Operational Reorganization Plan as discussed in Foamex L.P.'s Form 10-K for the year ended December 31, 2001. That Plan included closing certain plants of the Carpet Cushion Products segment and certain personnel reductions and other savings at the corporate level. During the three quarters ended September 29, 2002, Foamex L.P. attempted a sale of the Carpet Cushion Products segment and management put such plant closings on hold until the completion of the sale negotiations. On October 4, 2002, Foamex L.P. announced that negotiations to sell the Carpet Cushion Products segment had been terminated. Management reevaluated the original plan developed during the fourth quarter of 2001 and determined that certain previously recorded amounts were no longer required. The net impact of such reevaluation was a reversal of $3.7 million of previously recorded liabilities in the quarter ended September 29, 2002. The Operational Reorganization Plan has been substantially completed as of September 28, 2003. During the three quarters ended September 29, 2002, Foamex L.P. recorded an additional restructuring credit of $2.1 million related to the collection of deferred rent receivable and other charges for certain additional expenses of $0.6 million relating to the 2001 restructuring plan. The following tables set forth the components of Foamex L.P.'s restructuring accruals and activity for the quarter and three quarters ended September 28, 2003:
Plant Closure Personnel Total and Leases Reductions Other ----- ------------- ---------- ------- (millions) Balance at June 29, 2003 $15.2 $10.2 $3.7 $1.3 Adjustments (0.3) 0.7 (1.0) - Cash spending (2.5) (1.1) (1.1) (0.3) ----- ----- ---- ---- Balance at September 28, 2003 $12.4 $ 9.8 $1.6 $1.0 ===== ===== ==== ==== Balance at December 29, 2002 $22.8 $12.6 $8.2 $2.0 Adjustments (1.2) 0.6 (1.6) (0.2) Cash spending (9.2) (3.4) (5.0) (0.8) ----- ----- ---- ---- Balance at September 28, 2003 $12.4 $ 9.8 $1.6 $1.0 ===== ===== ==== ====
Foamex L.P. expects to spend approximately $6.4 million during the twelve months ending September 26, 2004, with the balance to be spent through 2012, primarily for lease costs. 4. INVENTORIES The components of inventory are listed below. September 28, December 29, 2003 2002 ------------- ------------ (thousands) Raw materials and supplies $ 63,533 $60,588 Work-in-process 17,227 16,737 Finished goods 20,052 20,685 -------- ------- Total $100,812 $98,010 ======== ======= 7 FOAMEX L.P. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 5. LONG-TERM DEBT The components of long-term debt are listed below.
September 28, December 29, 2003 2002 ------------- ------------ Foamex L.P. Senior Secured Credit Facility (thousands) Term Loan (1) $ 50,000 $ - Revolving credit facility (1) 83,442 - Foamex L.P. Secured Term Loan (1) 80,000 - Foamex L.P. Amended Credit Facility Term Loan B (2) - 39,262 Term Loan C (2) - 35,693 Term Loan D (2) - 51,700 Term Loan E (2) - 16,290 Term Loan F (2) - 19,243 Revolving credit facility (2) - 51,823 10 3/4% Senior secured notes due 2009 (3) (4) 312,696 314,237 9 7/8% Senior subordinated notes due 2007 (3) 148,500 148,500 13 1/2% Senior subordinated notes due 2005 (includes $1,773 and $2,486 of unamortized debt premium) (3) 53,358 54,071 Industrial revenue bonds 7,000 7,000 Other (net of unamortized debt discount of $105 in 2003 and $137 in 2002) 761 767 -------- -------- 735,757 738,586 Less current portion 7,158 46 -------- -------- Long-term debt $728,599 $738,540 ======== ======== (1) Debt of Foamex L.P., guaranteed by Foamex International, FMXI, Inc. and Foamex Canada. (2) Debt of Foamex L.P., guaranteed by Foamex International and FMXI, Inc. (3) Debt of Foamex L.P. and Foamex Capital Corporation. (4) Includes $12.7 million in 2003 and $14.2 million in 2002 of deferred credits on interest rate swap transactions.
Senior Secured Credit Facility On August 18, 2003, Foamex L.P. entered into a $240.0 Million Senior Secured Credit Facility with a new group of lenders and an $80.0 million term loan facility with another lender. Proceeds borrowed under these new facilities were used to repay all outstanding balances under the Foamex L.P. Amended Credit Facility which was terminated as of August 18, 2003. In addition, Foamex Canada's revolving credit facility that did not have any outstanding borrowings and had availability of approximately $5.9 million was terminated as of August 18, 2003. The termination of the Amended Credit Facility resulted in a write off of debt issuance costs of $12.9 million recorded in the quarter ended September 28, 2003. The $240.0 Million Senior Secured Credit Facility consists of a revolving credit facility with a maximum availability of $190.0 million and a term loan of $50.0 million. The revolving credit facility includes a $50.0 million sublimit for letters of credit and availability is limited to eligible amounts, as defined, of accounts receivable and inventory. At September 28, 2003, Foamex L.P. had available borrowings of approximately $59.0 million and letters of credit outstanding of $20.9 million. Borrowings under the term loan are limited to eligible amounts, as defined, of equipment and real estate. Substantially all the assets of Foamex L.P. and its domestic subsidiaries and Foamex Canada are pledged as collateral for the related borrowings. Borrowings under the revolving credit facility and the term loan bear interest at floating rates based upon and including a margin over either LIBOR or a Base Rate, as defined. At September 28, 2003, the weighted average interest rates were 4.34% and 4.38% for the 8 FOAMEX L.P. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 5. LONG-TERM DEBT (continued) revolving loans and the term loan, respectively. The term loan requires quarterly installment payments of approximately $1.8 million, commencing on September 30, 2003. All borrowings under the $240.0 Million Senior Secured Credit Facility will mature on April 30, 2007. The $80.0 million term loan facility (the "Secured Term Loan") will mature on April 30, 2007. Borrowings under this facility will bear interest at a rate that is 9.25% plus the greater of the Reference Rate, as defined, or 4.25%. The minimum rate, which is in effect as of September 28, 2003, is 13.50%. In addition, Foamex L.P. is subject to a 1.00% facility fee which is payable annually on the anniversary date. Borrowings under the Secured Term Loan are collateralized by the same collateral as the $240.0 Million Senior Secured Credit Facility. An intercreditor agreement governs the distribution of collateral among the lenders under the $240.0 Million Senior Secured Credit Facility and the Secured Term Loan. 10 3/4% Senior Secured Notes The 10 3/4% Senior Secured Notes were issued by Foamex L.P. and Foamex Capital Corporation on March 25, 2002 and are due on April 1, 2009. The notes are guaranteed on a senior basis by all of Foamex L.P.'s domestic subsidiaries that guarantee the $240.0 Million Senior Secured Credit Facility. The notes are secured on a second-priority basis (subject to permitted liens) on substantially the same collateral that secures the obligations under the $240.0 Million Senior Secured Credit Facility. The notes rank effectively junior to all senior indebtedness that is secured by first priority liens and senior in right of payment to all subordinated indebtedness. Interest is payable April 1 and October 1. The notes may be redeemed at the option of Foamex L.P., in whole or in part, at any time on or after April 1, 2006. The initial redemption is at 105.375% of their principal amount, plus accrued and unpaid interest, if any, thereon to the date of redemption and declining annually to 100.0% on or after April 1, 2008. Additionally, on or before April 1, 2005, up to 35.0% of the principal amount of the notes may be redeemed at a redemption price equal to 110.750% of the principal amount, plus accrued and unpaid interest, if any, thereon to the date of redemption with the net proceeds of one or more equity offerings. Upon the occurrence of a change of control, as defined, each holder will have the right to require Foamex L.P. to tender for such notes at a price in cash equal to 101.0% of the aggregate principal amount thereof, plus accrued and unpaid interest, if any, if there is such a "change of control". Foamex L.P. was required to cause a registration statement under the Securities Act of 1933 to be effective within 180 days of March 25, 2002. Foamex L.P. filed the registration statement, but it was not effective until January 30, 2003 and therefore Foamex L.P. was liable for liquidated damages from September 23, 2002 until the date the registration statement became effective. The liquidated damages were at the rate of $15,000 per week for the first 90 days, escalating by $15,000 per week for each additional 90 days. The liquidated damages of $0.3 million were paid on April 1, 2003. Effective May 1, 2002, Foamex L.P. completed a series of interest rate swap transactions with notional amounts aggregating $300.0 million. Foamex L.P. designated, documented and accounted for these interest rate swaps as fair value hedges of its 10 3/4% Senior Secured Notes due April 1, 2009. The risk being hedged in these transactions was the change in fair value of its 10 3/4% Senior Secured Notes based on changes in the benchmark interest rate, LIBOR. The effect of these interest rate swap transactions was to convert the fixed interest rate on the senior secured notes to floating rates reset twice per year to correspond with the interest payment dates for the 10 3/4% Senior Secured Notes. On September 18, 2002, Foamex L.P. unwound the interest rate swap transactions in exchange for net cash proceeds of $18.4 million, including $3.6 million realized through lower effective interest rates while the swap transactions were in effect. The unwinding resulted in a deferred credit of $14.8 million which is being amortized through April 1, 2009, using the effective interest rate method. 9 FOAMEX L.P. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 5. LONG-TERM DEBT (continued) 9 7/8% Senior Subordinated Notes The 9 7/8% Senior Subordinated Notes were issued by Foamex L.P. and Foamex Capital Corporation and are due on June 15, 2007. The notes represent uncollateralized general obligations of Foamex L.P. and are subordinated to all Senior Debt, as defined in the Indenture. Interest is payable June 15 and December 15. The notes may be redeemed at the option of Foamex L.P., in whole or in part, at any time on or after June 15, 2002. The initial redemption is at 104.938% of their principal amount, plus accrued and unpaid interest, if any, thereon to the date of redemption and declining annually to 100.0% on or after June 15, 2005. At September 28, 2003, the redemption price was 103.292% plus accrued and unpaid interest. Upon the occurrence of a change of control, as defined, each holder will have the right to require Foamex L.P. to tender for such notes at a price in cash equal to 101% of the aggregate principal amount thereof, plus accrued and unpaid interest thereon, if there is such a "change of control". The notes are subordinated in right of payment to all senior indebtedness and are pari passu in right of payment to the 13 1/2% Senior Subordinated Notes (described below). 13 1/2% Senior Subordinated Notes The 13 1/2% Senior Subordinated Notes were issued by Foamex L.P. and Foamex Capital Corporation and are due on August 15, 2005. The notes represent uncollateralized general obligations of Foamex L.P. and are subordinated to all Senior Debt, as defined in the Indenture. Interest is payable semiannually on February 15 and August 15. The notes may be redeemed at the option of Foamex L.P., in whole or in part, at any time on or after August 15, 2000. The initial redemption was 106.75% of their principal amount, plus accrued and unpaid interest, if any, thereon to the date of redemption and declining annually to 100.0% on or after August 15, 2004. At September 28, 2003, the redemption price was 101.6875% plus accrued and unpaid interest. Upon the occurrence of a change of control, as defined, each holder will have the right to require Foamex L.P. to tender for such notes at a price in cash equal to 101% of the aggregate principal amount thereof, plus accrued and unpaid interest, if any, thereon, if there is such a "change of control". The notes are subordinated in right of the payment of all senior indebtedness and are pari passu in right of payment to the 9 7/8% Senior Subordinated Notes (described above). Industrial Revenue Bonds ("IRBs") IRB debt includes a $1.0 million bond that matures in 2005 and a $6.0 million bond that matures in 2013. Interest is based on a variable rate, as defined, with options available to Foamex L.P. to convert to a fixed rate. At September 28, 2003, the interest rate was 1.05% on the $1.0 million bond and 1.10% on the $6.0 million bond. The maximum interest rate for either of the IRBs is 15.0% per annum. If Foamex L.P. exercises its option to convert the bonds to a fixed interest rate structure, the IRBs are redeemable at the option of the bondholders. The obligations are collateralized by certain properties, which have an approximate net carrying value of $10.9 million at September 28, 2003. Other Other debt includes a non-interest bearing promissory note with a principal amount of $0.9 million at September 28, 2003 issued in connection with increasing Foamex L.P.'s interest in an Asian joint venture to 70.0% in 2001. The promissory note had unamortized discount of $0.1 million at September 28, 2003. 10 FOAMEX L.P. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 5. LONG-TERM DEBT (continued) Debt Covenants The indentures and other indebtedness agreements contain certain covenants that limit, among other things, the ability of Foamex L.P. (i) to pay distributions or redeem equity interests, (ii) to make certain restrictive payments or investments, (iii) to incur additional indebtedness or issue Preferred Equity Interests, as defined, (iv) to merge, consolidate or sell all or substantially all of its assets, or (v) to enter into certain transactions with affiliates or related persons. In addition, certain agreements contain provisions that, in the event of a defined change of control or the occurrence of an undefined material adverse change in the ability of the obligor to perform its obligations, the indebtedness must be repaid, in certain cases, at the option of the holder. Under the most restrictive of the distribution restrictions, as of September 28, 2003, Foamex L.P. was able to distribute funds to its partners, only to the extent to enable its partners to meet their tax payment liabilities and Foamex International's normal operating expenses of up to $1.5 million annually, so long as no default or event of default has occurred. On November 15, 2002, Foamex L.P. and its bank lenders executed an amendment to the Amended Credit Facility. Under the amendment, Foamex L.P. was subject to minimum net worth, minimum EBDAIT, as defined, and maximum capital expenditure covenants through periods ending December 28, 2003. The minimum EBDAIT covenant was tested monthly, on a cumulative basis, beginning with December 2002. Foamex L.P. was in compliance with the revised covenants at December 29, 2002 and throughout 2003 until the Amended Credit Facility was terminated on August 18, 2003. Under the $240.0 Million Senior Secured Credit Facility and the Secured Term Loan, Foamex L.P. is subject to a fixed charge coverage ratio, as defined. For the quarter ended September 28, 2003, Foamex L.P.'s fixed charge coverage ratio was 1.28 which exceeded the required fixed charge coverage ratio of 1.00. Foamex L.P. is also subject to a maximum annual capital expenditure amount which is $17.7 million for the year ending December 28, 2003. Maturities of Long-Term Debt Scheduled maturities of long-term debt as of September 28, 2003 are shown below (thousands): Quarter ending December 28, 2003 $ 1,793 2004 8,937 2005 60,578 2006 7,143 2007 336,942 Thereafter 306,000 -------- 721,393 Unamortized debt premium/discount and fair value adjustment, net 14,364 -------- Total $735,757 ======== 6. COMPREHENSIVE LOSS The components of comprehensive loss are listed below.
Quarters Ended Three Quarters Ended ------------------------------ --------------------------- September 28, September 29, September 28, September 29, 2003 2002 2003 2002 ------------- ------------- ------------- ------------- (thousands) Net loss $(13,093) $(10,394) $(20,290) $(72,990) Foreign currency translation adjustments 1,493 (631) 5,629 (597) -------- -------- -------- -------- Total comprehensive loss $(11,600) $(11,025) $(14,661) $(73,587) ======== ======== ======== ========
11 FOAMEX L.P. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 7. SEGMENT RESULTS Foam Products manufactures and markets cushioning foams for bedding, furniture, packaging and health care applications and foam-based consumer products, such as mattress pads and children's furniture. Carpet Cushion Products manufactures and distributes rebond, prime, felt and rubber carpet padding. Automotive Products supplies foam products and laminates to major tier one suppliers and original equipment manufacturers. Technical Products manufactures and markets reticulated foams and other specialty foams for reservoiring, filtration, gasketing and sealing applications. The "Other" column in the table below represents certain manufacturing operations in Mexico City, corporate expenses not allocated to other business segments and restructuring, impairment and other charges (credits). The restructuring, impairment and other charges (credits) totaled $(0.4) million and $(1.2) million in the quarter and three quarters ended September 28, 2003, respectively, and $(3.7) million and $(5.2) million in the quarter and three quarters ended September 29, 2002, respectively. Segment results are presented below.
Carpet Foam Cushion Automotive Technical Products Products Products Products Other Total -------- -------- ---------- --------- -------- --------- (thousands) Quarter ended September 28, 2003 Net sales $137,115 $ 54,126 $ 99,235 $25,803 $ 5,187 $ 321,466 Income (loss) from operations $ 10,817 $ (126) $ 5,385 $ 5,032 $(2,026) $ 19,082 Depreciation and amortization $ 2,608 $ 594 $ 722 $ 735 $ 1,341 $ 6,000 Quarter ended September 29, 2002 Net sales $121,773 $ 61,105 $120,151 $30,500 $ 7,294 $ 340,823 Income (loss) from operations $ 1,160 $ (4,680) $ 4,745 $ 2,463 $ 1,377 $ 5,065 Depreciation and amortization $ 3,347 $ 1,639 $ 1,046 $ 930 $ 552 $ 7,514 Three quarters ended September 28, 2003 Net sales $378,405 $157,352 $339,518 $88,807 $19,498 $ 983,580 Income (loss) from operations $ 20,466 $ (3,419) $ 19,464 $21,092 $(5,997) $ 51,606 Depreciation and amortization $ 8,216 $ 2,569 $ 2,313 $ 2,439 $ 3,713 $ 19,250 Three quarters ended September 29, 2002 Net sales $358,384 $174,338 $348,282 $94,889 $24,890 $1,000,783 Income (loss) from operations $ 23,003 $ (8,938) $ 21,727 $16,259 $ (500) $ 51,551 Depreciation and amortization $ 11,778 $ 5,118 $ 3,012 $ 2,221 $ 1,616 $ 23,745
8. RELATED PARTY TRANSACTIONS AND BALANCES Foam Funding LLC Debt During the three quarters ended September 29, 2002, Foamex Carpet paid $0.7 million of interest and $31.6 million of principal on a note payable to Foam Funding LLC, a subsidiary of Trace International Holdings ("Trace"). 9. COMMITMENTS AND CONTINGENCIES Litigation - Breast Implants As of November 5, 2003, Foamex L.P. and Trace were two of multiple defendants in actions filed on behalf of approximately 774 recipients of breast implants in various United States federal and state courts and one Canadian provincial court, some of which allege substantial damages, but most of which allege unspecified damages for personal injuries of various types. Three of these cases seek to allege claims on behalf of all breast implant recipients or other allegedly affected parties, but no class has been approved or certified by the court. During 1995, 12 FOAMEX L.P. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 9. COMMITMENTS AND CONTINGENCIES (continued) Foamex L.P. and Trace were granted summary judgments and dismissed as defendants from all cases in the federal courts of the United States and the state courts of California. Appeals for these decisions were withdrawn and the decisions are final. Although breast implants do not contain foam, certain silicone gel implants were produced using a polyurethane foam covering fabricated by independent distributors or fabricators from bulk foam purchased from Foamex L.P. or Trace. Neither Foamex L.P. nor Trace recommended, authorized, or approved the use of its foam for these purposes. Foamex L.P. is also indemnified by Trace for any such liabilities relating to foam manufactured prior to October 1990. Trace's insurance carrier has continued to pay Foamex L.P.'s litigation expenses after Trace's filing for relief under the Bankruptcy Code on July 21, 1999. Trace's insurance policies continue to cover certain liabilities of Trace but if the limits of those policies are exhausted, it is unlikely that Trace will be able to continue to provide additional indemnification. While it is not feasible to predict or determine the outcome of these actions, based on management's present assessment of the merits of pending claims, after consultation with counsel to Foamex L.P., and without taking into account the indemnification provided by Trace, the coverage provided by Trace's and Foamex L.P.'s liability insurance and potential indemnity from the manufacturers of polyurethane covered breast implants, management believes that it is not reasonably possible that the disposition of the matters that are pending or that may reasonably be anticipated to be asserted will result in a loss that is material to Foamex L.P.'s consolidated financial position, results of operations or cash flows. If management's assessment of Foamex L.P.'s liability relating to these actions is incorrect, these actions could have a material adverse effect on Foamex L.P.'s financial position, results of operations and cash flows. Litigation - Other During 2001, Foamex L.P. was notified by an insurance provider concerning a dispute involving the reimbursement of liability claims paid on behalf of Trace before 1990. The insurance provider is contending that Foamex L.P. is liable for the claims of approximately $6.1 million. Foamex L.P. is strongly defending this claim and considers the claim to be without merit. If management's assessment of Foamex L.P.'s liability relating to this action is incorrect, this action could have a material adverse effect on Foamex L.P.'s financial position, results of operations and cash flows. Foamex L.P. is party to various other lawsuits, both as defendant and plaintiff, arising in the normal course of business. It is the opinion of management that the disposition of these lawsuits will not, individually or in the aggregate, have a material adverse effect on Foamex L.P.'s financial position or results of operations. If management's assessment of Foamex L.P.'s liability relating to these actions is incorrect, these actions could have a material adverse effect on Foamex L.P.'s consolidated financial position, results of operations and cash flows. As of September 28, 2003, Foamex L.P. had accrued approximately $1.1 million for litigation and other matters in addition to the environmental matters discussed below. Environmental and Health and Safety Foamex L.P. is subject to extensive and changing federal, state, local and foreign environmental laws and regulations, including those relating to the use, handling, storage, discharge and disposal of hazardous substances, the discharge or emission of materials into the environment, and the remediation of environmental contamination, and as a result, is from time to time involved in administrative and judicial proceedings and inquiries relating to environmental matters. As of September 28, 2003, Foamex L.P. had accruals of approximately $2.7 million for environmental matters, including approximately $2.2 million related to remediating and monitoring soil and groundwater contamination and approximately $0.5 million related to PRP sites and other matters. Additional losses, if any, in excess of amounts currently accrued, cannot be reasonably estimated at this time. If there are additional matters or if current estimates are incorrect, there could be a material adverse effect on Foamex L.P.'s financial position, results of operations and cash flows. 13 FOAMEX L.P. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 9. COMMITMENTS AND CONTINGENCIES (continued) On August 8, 2001, the United States Environmental Protection Agency, or "EPA," proposed a National Emission Standard for Hazardous Air Pollutants, or "NESHAP" for Flexible Polyurethane Foam Fabrication Operations. The proposed NESHAP regulates emissions of methylene chloride and other Hazardous Air Pollutants and restricts air emissions from flame lamination sources. Foamex L.P. does not believe that this standard, if adopted, will require it to make material expenditures. On August 31, 2002, Environment Canada, the Canadian environmental regulatory agency, proposed a rule which would require flexible polyurethane foam manufacturing operations to reduce methylene chloride (dichloromethane) air emissions. The proposed rule establishes a 50.0% reduction in methylene chloride emissions by December 1, 2003 and 100.0% reductions by January 1, 2007. Foamex L.P. does not believe that this standard, if adopted, will require it to make material expenditures for its Canadian plants. Foamex L.P. has reported to the appropriate state authorities that it found soil and/or groundwater contamination in excess of state standards at certain locations. Seven sites are currently in various stages of investigation or remediation. Accordingly, the extent of contamination and the ultimate liability is not known with certainty for all sites. During 2000, Foamex L.P. reached an indemnification agreement with the former owner of the Morristown, Tennessee facility. The agreement allocates the incurred and future remediation costs between the former owner and Foamex L.P. The estimated allocation of future costs for the remediation of this facility is not significant, based on current known information. The former owner was Recticel Foam Corporation, a subsidiary of Recticel s.a. Foamex L.P. has either upgraded or closed all underground storage tanks at its facilities in accordance with applicable regulations. The Comprehensive Environmental Response, Compensation and Liability Act, or "CERCLA," and comparable state laws impose liability without fault for the costs of cleaning up contaminated sites on certain classes of persons that contributed to the release of hazardous substances into the environment at those sites, for example, by generating wastes containing hazardous substances which were disposed at such sites. Foamex L.P. is currently designated as a Potentially Responsible Party, or "PRP," by the EPA or by state environmental agencies or other PRPs, pursuant to CERCLA or analogous state statutes, with respect to nine sites. Estimates of total cleanup costs and fractional allocations of liability are often provided by the EPA, the state environmental agency or the committee of PRPs with respect to the specified site. Based on these estimates (to the extent available) and on known information, in each case and in the aggregate, Foamex L.P. does not expect additional costs, if any, to be material to liquidity, results of operations or financial position. In 2003, capital expenditures for safety and environmental compliance projects are anticipated to be approximately $1.5 million. The possibility exists that new environmental legislation and/or environmental regulations may be adopted, or other environmental conditions, including the presence of previously unknown environmental contamination, may be found to exist or a reassessment of the potential exposure to pending environmental matters may be necessary due to new information or future developments, that may require expenditures not currently anticipated and that may be material. 10. GUARANTOR INFORMATION The payment obligations of Foamex L.P. and Foamex Capital Corporation under the 10 3/4% Senior Secured Notes are guaranteed by Foamex L.P.'s 100.0%-owned domestic subsidiaries ("Guarantors"). Such guarantees are full, unconditional and joint and several. Separate financial statements of the Guarantors are not presented because Foamex L.P.'s management has determined that they would not be material to investors. The following presents condensed consolidating balance sheets as of September 28, 2003 and December 29, 2002 and the condensed consolidating statements of operations for the quarters and three quarters ended September 28, 2003 and September 29, 2002 and cash flows for the three quarters ended September 28, 2003 and September 29, 2002 of the Guarantors and nonguarantors. The Guarantors include Foamex Carpet, Foamex Latin America, Inc., Foamex Mexico, Inc., Foamex Mexico II, Inc. and Foamex Asia, Inc. On December 30, 2002, Foamex Carpet distributed certain assets, 14 FOAMEX L.P. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 10. GUARANTOR INFORMATION (continued) liabilities and its business to Foamex L.P. and accordingly, Foamex Carpet is not included as a guarantor in the financial information as of September 28, 2003 and the periods then ended. The nonguarantors are Foamex Canada and Grupo Foamex de Mexico, S.A. de C.V. and its subsidiaries. The following financial information is intended to provide information for the Guarantors and nonguarantors of Foamex L.P. based on amounts derived from the financial statements of Foamex L.P. Condensed Consolidating Balance Sheet As of September 28, 2003
Foamex Capital Foamex L.P. Consolidated Guarantors Nonguarantors Corporation (Parent) Eliminations Foamex L.P. ---------- ------------- ----------- ----------- ------------ ------------ Assets (thousands of dollars) Current assets $ 373 $30,457 $ 1 $299,718 $ (6,819) $ 323,730 Investment in subsidiaries 10,652 - - 47,752 (58,404) - Property, plant and equipment, net - 20,748 - 146,943 - 167,691 Goodwill - 5,582 - 120,486 - 126,068 Debt issuance costs - - - 28,652 - 28,652 Software - - - 9,584 - 9,584 Other assets 13,858 2,083 - 19,660 (4,200) 31,401 ------- ------- ----- -------- -------- --------- Total assets $24,883 $58,870 $ 1 $672,795 $(69,423) $ 687,126 ======= ======= ===== ======== ======== ========= Liabilities and Partners' Deficiency Current liabilities $ - $20,094 $ - $203,660 $ (7,865) $ 215,889 Long-term debt 4,946 - - 727,853 (4,200) 728,599 Other liabilities 535 821 - 62,179 - 63,535 Total liabilities 5,481 20,915 - 993,692 (12,065) 1,008,023 Partners' deficiency 19,402 37,955 1 (320,897) (57,358) (320,897) ------- ------- ----- -------- -------- --------- Total liabilities and partners' deficiency $24,883 $58,870 $ 1 $672,795 $(69,423) $ 687,126 ======= ======= ===== ======== ======== =========
Condensed Consolidating Balance Sheet As of December 29, 2002
Foamex Capital Foamex L.P. Consolidated Guarantors Nonguarantors Corporation (Parent) Eliminations Foamex L.P. ---------- ------------- ----------- ----------- ------------ ------------ Assets (thousands of dollars) Current assets $40,111 $28,481 $ 1 $274,700 $(26,816) $ 316,477 Investment in subsidiaries 8,014 - - 27,243 (35,257) - Property, plant and equipment, net 5,851 21,549 - 154,638 - 182,038 Goodwill 1,249 4,835 - 119,237 - 125,321 Debt issuance costs - - - 36,827 - 36,827 Software - - - 8,254 8,254 Other assets 13,706 2,384 - 32,679 (22,403) 26,366 ------- ------- ----- -------- -------- --------- Total assets $68,931 $57,249 $ 1 $653,578 $(84,476) $ 695,283 ======= ======= ===== ======== ======== ========= Liabilities and Partners' Deficiency Current liabilities $41,401 $25,065 $ - $158,674 $(26,694) $ 198,446 Long-term debt 713 - - 737,827 - 738,540 Other liabilities 23,623 - - 62,863 (22,403) 64,083 Total liabilities 65,737 25,065 - 959,364 (49,097) 1,001,069 Partners' deficiency 3,194 32,184 1 (305,786) (35,379) (305,786) ------- ------- ----- -------- -------- --------- Total liabilities and partners' deficiency $68,931 $57,249 $ 1 $653,578 $(84,476) $ 695,283 ======= ======= ===== ======== ======== =========
15 FOAMEX L.P. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 10. GUARANTOR INFORMATION (continued) Condensed Consolidating Statement of Operations For the quarter ended September 28, 2003
Foamex Capital Foamex L.P. Consolidated Guarantors Nonguarantors Corporation (Parent) Eliminations Foamex L.P. ---------- ------------- ----------- ----------- ------------ ------------ (thousands of dollars) Net sales $ - $25,256 $ - $302,472 $(6,262) $321,466 Cost of goods sold - 22,609 - 267,610 (6,262) 283,957 ------- ------- ------- -------- ------- -------- Gross profit - 2,647 - 34,862 - 37,509 Selling, general and administrative expenses - 2,133 - 16,671 - 18,804 Restructuring, impairment and other charges (credits) - - - (377) - (377) ------- ------- ------- -------- ------- -------- Income from operations - 514 - 18,568 - 19,082 Interest and debt issuance expense 43 8 - 31,499 - 31,550 Equity in undistributed earnings of affiliates (545) - - 178 862 495 Other expense, net 32 (644) - (340) - (952) ------- ------- ------- -------- ------- -------- Loss before provision for income taxes (556) (138) - (13,093) 862 (12,925) Provision for income taxes - 168 - - - 168 ------- ------- ------- -------- ------- -------- Net loss $ (556) $( 306) $ - $(13,093) $ 862 $(13,093) ======= ======= ======= ======== ======= ========
16 FOAMEX L.P. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 10. GUARANTOR INFORMATION (continued) Condensed Consolidating Statement of Operations For the quarter ended September 29, 2002
Foamex Capital Foamex L.P. Consolidated Guarantors Nonguarantors Corporation (Parent) Eliminations Foamex L.P. ---------- ------------- ----------- ----------- ------------ ------------ (thousands of dollars) Net sales $62,594 $27,453 $ - $295,004 $(44,228) $340,823 Cost of goods sold 57,656 24,899 - 271,682 (44,228) 310,009 ------- ------- ------- -------- ------- -------- Gross profit 4,938 2,554 - 23,322 - 30,814 Selling, general and administrative expenses 2,889 1,841 - 24,693 - 29,423 Restructuring, impairment and other charges (credits) 225 - - (3,899) - (3,674) ------- ------- ------- -------- ------- -------- Income from operations 1,824 713 - 2,528 - 5,065 Interest and debt issuance expense 332 78 - 15,172 (324) 15,258 Equity in undistributed earnings of affiliates (873) - - 2,096 (837) 386 Other expense, net 509 (652) - 269 (324) (198) ------- ------- ------- -------- ------- -------- Income before provision for income taxes 1,128 (17) - (10,279) (837) (10,005) Provision for income taxes (413) 687 - 115 - 389 ------- ------- ------- -------- ------- -------- Net loss $ 1,541 $ (704) $ - $(10,394) $ (837) $(10,394) ======= ======= ======= ======== ======= ========
17 FOAMEX L.P. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 10. GUARANTOR INFORMATION (continued) Condensed Consolidating Statement of Operations For the three quarters ended September 28, 2003
Foamex Capital Foamex L.P. Consolidated Guarantors Nonguarantors Corporation (Parent) Eliminations Foamex L.P. ---------- ------------- ----------- ----------- ------------ ------------ (thousands of dollars) Net sales $ - $79,526 $ - $919,508 $(15,454) $983,580 Cost of goods sold - 72,515 - 817,557 (15,454) 874,618 ----- ------- ----- -------- -------- -------- Gross profit - 7,011 - 101,951 - 108,962 Selling, general and administrative expenses - 5,362 - 53,231 - 58,593 Restructuring, impairment and other charges (credits) - 403 - (1,640) - (1,237) ----- ------- ----- -------- -------- -------- Income from operations - 1,246 - 50,360 - 51,606 Interest and debt issuance expense 176 26 - 69,837 - 70,039 Equity in undistributed earnings of affiliates (931) - - (235) 2,540 1,374 Other expense, net 143 (2,365) - (578) - (2,800) ----- ------- ----- -------- -------- -------- Income (loss) before provision (benefit) for income taxes (964) (1,145) - (20,290) 2,540 (19,859) Provision (benefit) for income taxes - 431 - - - 431 ----- ------- ----- -------- -------- -------- Net income (loss) $(964) $(1,576) $ - $(20,290) $ 2,540 $(20,290) ===== ======= ===== ======== ======== ========
18 FOAMEX L.P. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 10. GUARANTOR INFORMATION (continued) Condensed Consolidating Statement of Operations For the three quarters ended September 29, 2002
Foamex Capital Foamex L.P. Consolidated Guarantors Nonguarantors Corporation (Parent) Eliminations Foamex L.P. ---------- ------------- ----------- ----------- ------------ ------------ (thousands of dollars) Net sales $179,383 $87,225 $ - $862,969 $(128,794) $1,000,783 Cost of goods sold 166,739 76,866 - 770,533 (128,794) 885,344 -------- ------- ----- -------- --------- ---------- Gross profit 12,644 10,359 - 92,436 - 115,439 Selling, general and administrative expenses 9,209 5,112 - 54,779 - 69,100 Restructuring, impairment and other charges (credits) 225 - - (5,437) - (5,212) -------- ------- ----- -------- --------- ---------- Income from operations 3,210 5,247 - 43,094 - 51,551 Interest and debt issuance expense 3,590 204 - 47,909 (478) 51,225 Equity in undistributed earnings of affiliates 588 - - (29,968) 30,894 1,514 Other expense, net 460 (1,545) - 160 (478) (1,403) -------- ------- ----- -------- --------- ---------- Income (loss) before provision (benefit) for income taxes 668 3,498 - (34,623) 30,894 437 Provision (benefit) for income taxes (572) 1,894 - 139 - 1,461 -------- ------- ----- -------- --------- ---------- Income (loss) before accounting change 1,240 1,604 - (34,762) 30,894 (1,024) Cumulative effect of accounting change (29,944) (3,794) - (38,228) - (71,966) -------- ------- ----- -------- --------- ---------- Net income (loss) $(28,704) $(2,190) $ - $(72,990) $ 30,894 $ (72,990) ======== ======= ===== ======== ========= ==========
19 FOAMEX L.P. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 10. GUARANTOR INFORMATION (continued) Condensed Consolidating Statement of Cash Flows For the three quarters ended September 28, 2003
Foamex Capital Foamex L.P. Consolidated Guarantors Nonguarantors Corporation (Parent) Eliminations Foamex L.P. ---------- ------------- ----------- ----------- ------------ ------------ (thousands of dollars) Cash Flows from Operating Activities Net income (loss) $(964) $(1,576) $ - $(20,290) $2,540 $(20,290) Total adjustments to reconcile net income (loss) to net cash provided by operating activities 964 1,009 - 46,943 (2,540) 46,376 ----- ------- ------ -------- ------ -------- Net cash provided by operating activities - (567) - 26,653 - 26,086 ----- ------- ------ -------- ------ -------- Cash Flows from Investing Activities Capital expenditures - (82) - (4,601) - (4,683) Other - - - (1,594) - (1,594) ----- ------- ------ -------- ------ -------- Net cash used for investing activities - (82) - (6,195) - (6,277) ----- ------- ------ -------- ------ -------- Cash Flows from Financing Activities Proceeds from (repayments of) revolving loans - - - 31,618 - 31,618 Proceeds form long-term debt - - - 130,000 - 130,000 Repayments of long-term debt - - - (162,227) - (162,227) Other, net - - - (18,602) - (18,602) ----- ------- ------ -------- ------ -------- Net cash used for financing activities - - - (19,211) - (19,211) ----- ------- ------ -------- ------ -------- Net increase (decrease) in cash and cash equivalents - (649) - 1,247 - 598 Cash and cash equivalents at beginning of period - 1,781 1 2,581 - 4,363 ----- ------- ------ -------- ------ -------- Cash and cash equivalents at end of period $ - $ 1,132 $ 1 $ 3,828 $ - $ 4,961 ===== ======= ====== ======== ====== ========
20 FOAMEX L.P. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 10. GUARANTOR INFORMATION (continued) Condensed Consolidating Statement of Cash Flows For the three quarters ended September 29, 2002
Foamex Capital Foamex L.P. Consolidated Guarantors Nonguarantors Corporation (Parent) Eliminations Foamex L.P. ---------- ------------- ----------- ----------- ------------ ------------ (thousands of dollars) Cash Flows from Operating Activities Net income (loss) $(28,704) $(2,190) $ - $ (72,990) $30,894 $ (72,990) Total adjustments to reconcile net income (loss) to net cash used for operating activities 33,230 (814) - 65,296 (30,993) 66,719 -------- ------- ------ --------- ------- --------- Net cash used for operating activities 4,526 (3,004) - (7,694) (99) (6,271) -------- ------- ------ --------- ------- --------- Cash Flows from Investing Activities Capital expenditures (390) (541) - (11,045) 99 (11,877) Repayment of revolving loan by partner - - - 2,490 - 2,490 Intercompany investing activities 135 - - (24,620) 24,485 - Other - - - (4,184) - (4,184) -------- ------- ------ --------- ------- --------- Net cash used for investing activities (255) (541) - (37,359) 24,584 (13,571) -------- ------- ------ --------- ------- --------- Cash Flows from Financing Activities Net repayments of revolving loans - - - (125,000) - (125,000) Proceeds form long-term debt - - - 356,590 - 356,590 Repayments of long-term debt (135) (1,304) - (188,621) - (190,060) Repayments of long-term debt Related party (31,590) - - - - (31,590) Increase (decrease) in intercompany note 24,485 - - - (24,485) - Increase in cash overdrafts 1,392 - - 19,816 - 21,208 Debt issuance costs - - - (25,491) - (25,491) Interest rate swaps - - - 14,821 - 14,821 Other financing activities - - - 105 - 105 -------- ------- ------ --------- ------- --------- Net cash provided by financing activities (5,848) (1,304) - 52,220 (24,485) 20,583 -------- ------- ------ --------- ------- --------- Net increase in cash and cash equivalents (1,577) (4,849) - 7,167 - 741 Cash and cash equivalents at beginning of period 2,758 7,163 1 5,137 - 15,059 -------- ------- ------ --------- ------- --------- Cash and cash equivalents at end of period $ 1,181 $ 2,314 $ 1 $ 12,304 $ - $ 15,800 ======== ======= ====== ========= ======= =========
21 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. RESULTS OF OPERATIONS FOR THE QUARTER ENDED SEPTEMBER 28, 2003 COMPARED TO THE QUARTER ENDED SEPTEMBER 29, 2002
Carpet Foam Cushion Automotive Technical Products Products Products Products Other Total -------- -------- ---------- --------- -------- --------- (thousands) Quarter ended September 28, 2003 Net sales $137,115 $54,126 $ 99,235 $25,803 $ 5,187 $321,466 Income (loss) from operations $ 10,817 $ (126) $ 5,385 $ 5,032 $(2,026) $ 19,082 Depreciation and amortization $ 2,608 $ 594 $ 722 $ 735 $ 1,341 $ 6,000 Income (loss) from operations as a percentage of net sales 7.9% (0.2)% 5.4% 19.5% n.m.* 5.9% Quarter ended September 29, 2002 Net sales $121,773 $61,105 $120,151 $30,500 $ 7,294 $340,823 Income (loss) from operations $ 1,160 $(4,680) $ 4,745 $ 2,463 $ 1,377 $ 5,065 Depreciation and amortization $ 3,347 $ 1,639 $ 1,046 $ 930 $ 552 $ 7,514 Income (loss) from operations as a percentage of net sales 1.0% (7.7)% 3.9% 8.1% n.m.* 1.5%
* not meaningful Income from Operations Net sales for the quarter ended September 28, 2003 decreased 5.7% to $321.5 million from $340.8 million in the quarter ended September 29, 2002. An increase in Foam Products net sales was more than offset by decreases in the other segments. We expect that net sales in the quarter ending December 28, 2003 will decline about 8.0% primarily as a result of lower sales in our Automotive Products segment. The gross profit margin was $37.5 million, or 11.7%, in the quarter ended September 28, 2003 compared to $30.8 million, or 9.0%, in the 2002 period. Operating efficiencies and selling price increases to customers have allowed us to recover a substantial portion of increases in the cost of our major chemical raw materials that began to impact us in the quarter ended September 29, 2002. Income from operations for the quarter ended September 28, 2003 was $19.1 million, or 5.9% of net sales, which represented a 276.7% increase from the $5.1 million, or 1.5% of net sales, reported during the comparable 2002 period. Results for the 2003 and 2002 periods included restructuring, impairment and other credits of $0.4 million and $3.7 million, respectively, described in "Other" below. In addition to the improved gross profit discussed above, selling, general and administrative expenses decreased $10.6 million, or 36.1%. Employee related costs and professional fees were lower in the 2003 period. The 2002 period included $4.4 million of costs associated with a proposed public offering of Symphonex Inc., a proposed new subsidiary which would have included our Technical Products segment, and the proposed sale of the Carpet Cushion Products segment. Foam Products Foam Products net sales for the quarter ended September 28, 2003 increased 12.6% to $137.1 million from $121.8 million in the comparable 2002 period. Increases in volumes of consumer products and in selling prices to customers were partially offset by decreases in volume of commodity products primarily related to the closure of inefficient manufacturing facilities. Income from operations increased to $10.8 million in the quarter ended September 28, 2003 from $1.2 million in the comparable 2002 period as selling price increases and operating efficiencies were partially offset by higher raw material costs and lower volumes of commodity products. Income from operations was 7.9% of net sales in 2003, up from 1.0% of net sales in 2002. 22 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Carpet Cushion Products Carpet Cushion Products net sales for the quarter ended September 28, 2003 decreased 11.4% to $54.1 million from $61.1 million in the comparable 2002 period. Selling price increases were more than offset by declines in volume as we closed several carpet cushion facilities during 2002 and 2003 to focus this business on more profitable markets. The loss from operations of $0.1 million in the quarter ended September 28, 2003 was less than the $4.7 million loss from operations in the comparable 2002 period primarily as a result of our continued efforts to streamline the cost structure of this segment. The loss from operations represented 0.2% of net sales in 2003 and 7.7% of net sales in 2002. Automotive Products Automotive Products net sales for the quarter ended September 28, 2003 decreased 17.4% to $99.2 million from $120.2 million in the comparable 2002 period as a result of lower volumes, including an expected reduction in business with certain customers. Income from operations increased 13.5% to $5.4 million compared to $4.7 million in the comparable 2002 period primarily due to lower selling, general and administrative expenses and lower allocation of corporate expenses. Income from operations represented 5.4% of net sales in 2003 and 3.9% of net sales in 2002. Technical Products Net sales for Technical Products for the quarter ended September 28, 2003 decreased 15.4% to $25.8 million from $30.5 million in the comparable 2002 period due primarily to lower volumes partially offset by higher prices of specialty products. Income from operations increased 104.3% to $5.0 million in the 2003 period compared to $2.5 million in the 2002 period. The improvement was due to lower operating expenses and to costs related to Symphonex Inc. included in the 2002 period. Income from operations represented 19.5% of net sales in 2003 compared to 8.1% of net sales in 2002. Other Other primarily consists of certain manufacturing operations in Mexico City, corporate expenses not allocated to business segments and restructuring, impairment and other charges (credits). The decrease in net sales associated with this segment resulted from our Mexico City operations. The loss from operations was $2.0 million in the quarter ended September 28, 2003 compared to income from operations of $1.4 million in the quarter ended September 29, 2002. The quarters ended September 28, 2003 and September 29, 2002 included net restructuring, impairment and other credits of $0.4 million and $3.7 million, respectively. (See Note 3 to the condensed consolidated financial statements.) Interest and Debt Issuance Expense Interest and debt issuance expense was $31.6 million in the quarter ended September 28, 2003, which represented a 106.8% increase from the comparable 2002 period expense of $15.3 million. The 2003 period includes a write off of debt issuance costs of $12.9 million associated with the refinancing of our credit facilities. Also, higher average debt levels and higher effective interest rates contributed to the increase in 2003. Income from Equity Interest in Joint Ventures The income from equity interest in joint ventures was $0.5 million for the quarter ended September 28, 2003 compared to income of $0.4 million in the 2002 period. 23 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Other Income (Expense), Net Other expense, net was $1.0 million for the quarter ended September 28, 2003 compared to $0.2 million for the quarter ended September 29, 2002. The 2003 period includes foreign currency transaction losses of $0.6 million compared to foreign currency transaction losses of $0.7 million in 2002. The 2003 period includes higher agency fees and lower interest and other income. Income Tax Expense Foamex L.P., as a limited partnership, is not subject to Federal income taxes. Consequently, no current or deferred provision has been provided for such taxes. However, Foamex L.P. has provided for the income taxes of certain states in which it is subject to taxes and for subsidiaries located in foreign jurisdictions that file separate tax returns. RESULTS OF OPERATIONS FOR THE THREE QUARTERS ENDED SEPTEMBER 28, 2003 COMPARED TO THE THREE QUARTERS ENDED SEPTEMBER 29, 2002
Carpet Foam Cushion Automotive Technical Products Products Products Products Other Total -------- -------- ---------- --------- -------- --------- (thousands) Three Quarters ended September 28, 2003 Net sales $378,405 $157,352 $339,518 $88,807 $19,498 $ 983,580 Income (loss) from operations $ 20,466 $ (3,419) $ 19,464 $21,092 $(5,997) $ 51,606 Depreciation and amortization $ 8,216 $ 2,569 $ 2,313 $ 2,439 $ 3,713 $ 19,250 Income (loss) from operations as a percentage of net sales 5.4% (2.2)% 5.7% 23.8% n.m.* 5.2% Three Quarters ended September 29, 2002 Net sales $358,384 $174,338 $348,282 $94,889 $24,890 $1,000,783 Income (loss) from operations $ 23,003 $ (8,938) $ 21,727 $16,259 $ (500) $ 51,551 Depreciation and amortization $ 11,778 $ 5,118 $ 3,012 $ 2,221 $ 1,616 $ 23,745 Income (loss) from operations as a percentage of net sales 6.4% (5.1)% 6.2% 17.1% n.m.* 5.2%
* not meaningful Income from Operations Net sales for the three quarters ended September 28, 2003 decreased 1.7% to $983.6 million from $1,000.8 million in the three quarters ended September 29, 2002. An increase in Foam Products net sales was more than offset by decreases in the other segments. The gross profit margin was $109.0 million, or 11.1%, in the three quarters ended September 28, 2003 compared to $115.4 million, or 11.5%, in the 2002 period. The decrease in gross profit is primarily due to increases in the cost of our major chemical raw materials since the second half of 2002 that have not been fully recovered through customer selling price increases and operating efficiencies. Income from operations for the three quarters ended September 28, 2003 was $51.6 million, or 5.2% of net sales, which represented a 0.1% increase from the $51.6 million, or 5.2% of net sales, reported during the comparable 2002 period. The reduction in gross profit was more than offset by a decline of $10.5 million, or 15.2%, in selling, general and administrative expenses, primarily due to the lower employee costs. The 2002 period included $4.4 million of costs associated with Symphonex Inc. and the proposed sale of the Carpet Cushion Products segment. Results include restructuring, impairment and other credits of $1.2 million in 2003 and $5.2 million in 2002. Restructuring, impairment and other credits are discussed under "Other" below. 24 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Foam Products Foam Products net sales for the three quarters ended September 28, 2003 increased 5.6% to $378.4 million from $358.4 million in the comparable 2002 period. Increases in selling prices to customers and increased volumes of consumer products were partially offset by decreases in volumes in other markets. Income from operations decreased 11.0% to $20.5 million in the three quarters ended September 28, 2003 from $23.0 million in the comparable 2002 period. Income from operations was negatively impacted by increased raw material prices in the three quarters ended September 28, 2003. Income from operations was 5.4% of net sales in 2003, down from 6.4% of net sales in 2002. Carpet Cushion Products Carpet Cushion Products net sales for the three quarters ended September 28, 2003 decreased 9.7% to $157.4 million from $174.3 million in the comparable 2002 period. Selling price increases were more than offset by declines in volume as we closed several carpet cushion facilities during 2002 and 2003 to focus this business on more profitable markets. The loss from operations was $3.4 million in the three quarters ended September 28, 2003 compared to an $8.9 million loss in the comparable 2002 period primarily due to cost containment from the streamlining of operations and higher selling prices. The loss from operations represented 2.2% of net sales in 2003 and 5.1% of net sales in 2002. Automotive Products Automotive Products net sales for the three quarters ended September 28, 2003 decreased 2.5% to $339.5 million from $348.3 million in the comparable 2002 period. Higher selling prices were more than offset by lower volumes. Income from operations decreased 10.4% to $19.5 million compared to $21.7 million in the comparable 2002 period primarily due to higher raw material costs. Income from operations represented 5.7% of net sales in 2003 and 6.2% of net sales in 2002. Technical Products Net sales for Technical Products for the three quarters ended September 28, 2003 decreased 6.4% to $88.8 million from $94.9 million in the comparable 2002 period primarily due to lower volumes. Income from operations increased 29.7% to $21.1 million in the 2003 period compared to $16.3 million in the 2002 period. The improvement is partially due to increased sales of high-end products. The 2002 period also included costs related to Symphonex Inc. Income from operations represented 23.8% of net sales in 2003 compared to 17.1% in 2002. Other Other primarily consists of certain manufacturing operations in Mexico City, corporate expenses not allocated to business segments and restructuring, impairment and other charges (credits). The decrease in net sales associated with this segment resulted from our Mexico City operations. The loss from operations was $6.0 million in the three quarters ended September 28, 2003 and $0.5 million in the three quarters ended September 29, 2002 and reflected generally higher corporate expenses in 2003 and included restructuring and other credits discussed below. During the three quarters ended September 28, 2003, we recorded restructuring credits of $1.2 million consisting of a $2.3 million reduction in the liability primarily for severance and termination benefits no longer required as the actions contemplated under the related plans have substantially been completed, and a charge of $0.7 million for additional lease termination costs for a closed facility as a result of changes in real estate market conditions. Additionally, we recorded a $0.4 million restructuring charge reported in the Other segment as a result of an employee termination plan for approximately 300 employees at our Mexico City operations. The actions under this plan were substantially completed as of September 28, 2003. During the three quarters ended September 29, 2002, we recorded restructuring, impairment and other credits of $5.2 million, primarily related to the reversal of previously recorded liabilities and the reimbursement of certain lease costs. 25 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Interest and Debt Issuance Expense Interest and debt issuance expense was $70.0 million in the three quarters ended September 28, 2003, which represented a 36.7% increase from the comparable 2002 period expense of $51.2 million. The 2003 and 2002 periods include charges of $12.9 million and $4.9 million, respectively, relating to the write off of debt issuance costs as a result of early extinguishments of debt. Higher average debt levels, effective interest rates and amortization of debt issuance costs all contributed to the increase in 2003. Income from Equity Interest in Joint Ventures The income from equity interest in joint ventures was $1.4 million for the three quarters ended September 28, 2003 compared to income of $1.5 million in the 2002 period. Other Income (Expense), Net Other expense, net was $2.8 million for the three quarters ended September 28, 2003 compared to $1.4 million for the three quarters ended September 29, 2002. The 2003 period includes foreign currency transaction losses of $2.3 million compared to foreign currency transaction losses of $1.7 million in 2002. Income Tax Expense Foamex L.P., as a limited partnership, is not subject to Federal income taxes. Consequently, no current or deferred provision has been provided for such taxes. However, Foamex L.P. has provided for the income taxes of certain states in which it is subject to taxes and for subsidiaries located in foreign jurisdictions that file separate tax returns. Liquidity and Capital Resources Our operating cash requirements consist principally of accounts receivable, inventory and accounts payable requirements, scheduled payments of interest and principal on outstanding indebtedness, capital expenditures and employee benefit plans. We believe that cash flow from our operating activities, cash on hand and periodic borrowings under our credit facility will be adequate to meet our liquidity requirements. Scheduled principal payments on our debt are not significant until the second half of 2005. Cash and cash equivalents were $5.0 million at September 28, 2003 compared to $4.4 million at December 29, 2002. Working capital at September 28, 2003 was $107.8 million and the current ratio was 1.50 to 1 compared to working capital at December 29, 2002 of $118.0 million and a current ratio of 1.59 to 1. Total debt at September 28, 2003 was $735.8 million, down $2.8 million from December 29, 2002. As of September 28, 2003, there were $83.4 million of revolving credit borrowings under the Foamex L.P. $240.0 Million Senior Secured Credit Facility with approximately $59.0 million available for borrowings and $20.9 million of letters of credit outstanding. In 2002, Foamex L.P. purchased and retired $49.0 million of the 13 1/2% senior subordinated notes, including unamortized debt premium of $2.5 million, and $1.5 million of the 9 7/8% senior subordinated notes for a total purchase price of $48.5 million. On November 15, 2002, Foamex L.P. and its bank lenders executed an amendment to the Amended Credit Facility. Under the amendment, Foamex L.P. was subject to minimum net worth, minimum EBDAIT, as defined, and maximum capital expenditure covenants through periods ending December 28, 2003. The minimum EBDAIT covenant was tested monthly on a cumulative basis beginning with December 2002. Foamex L.P. was in compliance with the revised covenants at December 29, 2002 and throughout 2003 until the Amended Credit Facility was terminated on August 18, 2003. 26 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. On August 18, 2003, Foamex L.P. entered into a $240.0 Million Senior Secured Credit Facility with a new group of lenders and an $80.0 million Secured Term Loan facility with another lender. Proceeds borrowed under these new facilities were used to repay all outstanding balances under the Foamex L. P. Amended Credit Facility. In addition, Foamex Canada's revolving credit facility that did not have any outstanding borrowings and had availability of approximately $5.9 million was terminated. The termination of the Amended Credit Facility resulted in a write off of debt issuance costs of $12.9 million recorded in the quarter ended September 28, 2003. The $240.0 Million Senior Secured Credit Facility consists of a revolving credit facility with a maximum availability of $190.0 million and a term loan of $50.0 million. The revolving credit facility includes a $50.0 million sublimit for letters of credit and availability is limited to eligible amounts, as defined, of accounts receivable and inventory. Borrowings under the term loan are limited to eligible amounts, as defined, of equipment and real estate. Substantially all the assets of Foamex L.P. and its domestic subsidiaries and Foamex Canada are pledged as collateral for the related borrowings. Borrowings under the revolving credit facility and the term loan bear interest at floating rates based upon and including a margin over either LIBOR or a Base Rate, as defined. At September 28, 2003, the weighted average interest rates were 4.34% and 4.38% for the revolving loans and the term loan, respectively. The term loan requires quarterly installment payments of approximately $1.8 million, commencing on September 30, 2003. All borrowings under the $240.0 Million Senior Secured Credit Facility will mature on April 30, 2007. The $80.0 million Secured Term Loan facility will mature on April 30, 2007. Borrowings under this facility bear interest at a rate that is 9.25% plus the greater of the Reference Rate, as defined, or 4.25%. The minimum rate, which is in effect as of September 28, 2003, is 13.50%. In addition, Foamex L.P. is subject to a 1.00% facility fee which is payable annually on the anniversary date. Borrowings under the Secured Term Loan are collateralized by the same collateral as the $240.0 Million Senior Secured Credit Facility. An intercreditor agreement governs the distribution of collateral among the lenders under the $240.0 Million Senior Secured Credit Facility and the Secured Term Loan. Under the $240.0 Million Senior Secured Credit Facility and the Secured Term Loan, Foamex L.P. is subject to a fixed charge coverage ratio, as defined. For the quarter ended September 28, 2003, Foamex L.P.'s fixed charge coverage ratio was 1.28 which exceeded the required fixed charge coverage ratio of 1.00. Foamex L.P. is also subject to a maximum annual capital expenditure amount which is $17.7 million for the year ending December 28, 2003. On February 26, 2003, Standard and Poor's Rating Services ("S&P") announced that it had lowered its corporate credit rating on Foamex L.P. from "B+" to "B". In their announcement, S&P cited their view that our weak operating performance, higher raw material costs, and a sluggish domestic economy, which if not reversed will likely elevate near-term liquidity concerns. The S&P action could have a negative impact on the cost of our future borrowings, if any, and the extension of trade credit. During 2002, we entered into an employment agreement with a Foamex International director and a consulting agreement with another Foamex International director. Payments under these agreements were to aggregate at least $0.7 million and $0.2 million, respectively, on an annual basis. The employment agreement with the Foamex International director was terminated effective January 31, 2003 resulting in severance and other payments to the director aggregating $0.6 million. Foamex L.P. was required to cause a registration statement under the Securities Act of 1933 for its 10 3/4% Senior Secured Notes to be effective within 180 days of March 25, 2002. Foamex L.P. filed the registration statement, but it was not effective until January 30, 2003 and therefore Foamex L.P. was liable for liquidated damages from September 23, 2002 until January 30, 2003. The liquidated damages were at the rate of $15,000 per week for the first 90 days, escalating by $15,000 per week for each additional 90 days. The liquidated damages of $0.3 million were paid on April 1, 2003. Effective May 1, 2002, Foamex L.P. completed a series of interest rate swap transactions with notional amounts aggregating $300.0 million. Foamex L.P. designated, documented and accounted for these interest rate swaps as fair value hedges of its 10 3/4% Senior Secured Notes due April 1, 2009. The risk being hedged in these transactions was the change in fair value of the 10 3/4% Senior Secured Notes based on changes in the benchmark 27 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. interest rate, LIBOR. The effect of these interest rate swap transactions was to convert the fixed interest rate on the 10 3/4% Senior Secured Notes to floating rates reset twice per year to correspond with the interest payment dates for the 10 3/4% Senior Secured Notes. On September 18, 2002, Foamex L.P. unwound the interest rate swap transactions in exchange for a net cash proceeds of $18.4 million, including $3.6 million realized through lower effective interest rates while the swap transactions were in effect. The unwinding resulted in a deferred credit of $14.8 million, which is being amortized over the term of the 10 3/4% Senior Secured Notes, using the effective interest rate method. Cash Flow from Operating Activities Cash provided by operating activities in the three quarters ended September 28, 2003 was $26.1 million compared to cash used of $6.3 million in the three quarters ended September 29, 2002. Accounts receivable increased by $4.6 million primarily as a result of higher sales in the latter part of the quarter ended September 28, 2003 when compared to the latter part of the fourth quarter of 2002, while accounts payable and cash overdrafts increased by a net $16.0 million as a result of the timing of our payments to vendors. Cash Flow from Investing Activities Cash used for investing activities totaled $6.3 million for the three quarters ended September 28, 2003. Cash requirements included capital expenditures of $4.7 million and capitalized software development costs of $2.7 million. In the three quarters ended September 29, 2002, cash used for investing activities was $13.6 million which consisted principally of capital expenditures of $11.9 million. The estimated capital expenditures for the full year 2003 are expected to be approximately $7.5 million. Cash Flow from Financing Activities Cash used for financing activities was $19.2 million for the three quarters ended September 28, 2003 compared to $20.6 million of cash provided in the comparable period of 2002. Cash used in 2003 was primarily for debt issuance costs and a reduction in cash overdrafts. Cash provided for the 2002 period primarily reflected Foamex L.P.'s March 25, 2002 refinancing. Environmental Matters We are subject to extensive and changing environmental laws and regulations. Expenditures to date in connection with our compliance with such laws and regulations did not have a material adverse effect on our operations, financial position, capital expenditures or competitive position. The amount of liabilities recorded in connection with environmental matters as of September 28, 2003 was $2.7 million. Although it is possible that new information or future developments could require us to reassess our potential exposure to all pending environmental matters, including those described in Note 9 to our condensed consolidated financial statements, we believe that, based upon all currently available information, the resolution of all such pending environmental matters will not have a material adverse effect on our operations, financial position, capital expenditures or competitive position. Market Risk Our debt securities with variable interest rates are subject to market risk for changes in interest rates. On September 28, 2003, indebtedness with variable interest rates aggregated $220.4 million. On an annualized basis, if the interest rates on these debt instruments increased by 1.0%, interest expense would increase by approximately $2.2 million. Forward-Looking Statements This report contains forward-looking statements and should be read in conjunction with the discussion regarding forward-looking statements set forth in our Annual Report on Form 10-K for the year ended December 29, 2002. 28 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Accounting Change On April 30, 2002, Statement of Financial Accounting Standards No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections" ("SFAS No. 145") was issued. The provisions of this Statement related to the rescission of Statement 4 are applied in fiscal years beginning after May 15, 2002. Any gain or loss on extinguishment of debt that was classified as an extraordinary item in prior periods presented that does not meet the criteria in Opinion 30 for classification as an extraordinary item is reclassified. We have reclassified the extraordinary item previously reported in the three quarters ended September 29, 2002 with the related tax benefit included in the provision for income taxes. In January 2003, FASB Interpretation 46, "Consolidation of Variable Interest Entities" ("FIN No. 46") was issued. FIN No. 46 clarifies the application of Accounting Research Bulletin No. 51, "Consolidated Financial Statements", to certain entities in which the equity investors do not have a controlling financial interest or do not have sufficient equity at risk. FIN No. 46 was effective on January 31, 2003 for entities acquired after that date. The Financial Accounting Standards Board has postponed the effective date for entities acquired on or before January 31, 2003 to December 15, 2003. We believe that FIN No. 46 will have no impact on our current equity investments. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. See the "Market Risk" section under Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations. ITEM 4. CONTROLS AND PROCEDURES. Foamex L.P.'s management, with the participation of Foamex L.P.'s Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of Foamex L.P.'s disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, Foamex L.P.'s Chief Executive Officer and Chief Financial Officer concluded that its disclosure controls and procedures as of the end of the period covered by this report are effective for gathering, analyzing and disclosing the information that Foamex L.P. is required to disclose in its reports filed under the Securities Exchange Act of 1934, as amended (the "Act"). There have not been any significant changes in Foamex L.P.'s internal controls over financial reporting (as defined in Rules 13a-15(f) and 15d-15(e) under the Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, Foamex L.P.'s internal controls over financial reporting. 29 Part II - Other Information. Item 1. Legal Proceedings. Reference is made to the description of the legal proceedings contained in Foamex L.P.'s Annual Report on Form 10-K for the year ended December 29, 2002. The information from Note 9 to the condensed consolidated financial statements is incorporated herein by reference. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits 31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (b) Foamex L.P. filed the following Current Report on Form 8-K for the quarter ended September 28, 2003: On August 19, 2003, a report under Item 5, Other Events, furnishing a copy of the Registrant's press release dated August 18, 2003 announcing that Foamex L.P. had closed a refinancing of its bank debt. 30 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FOAMEX L.P. By: FMXI, Inc. Its Managing General Partner Date: November 12, 2003 By: /s/ K. Douglas Ralph ---------------------------------- K. Douglas Ralph Executive Vice President and Chief Financial Officer (Duly Authorized Officer) FOAMEX CAPITAL CORPORATION Date: November 12, 2003 By: /s/ K. Douglas Ralph ---------------------------------- K. Douglas Ralph Executive Vice President and Chief Financial Officer 31 EX-31 3 ex311flpq303.txt Exhibit 31.1 CERTIFICATION I, Thomas E. Chorman, certify that: 1) I have reviewed this report on Form 10-Q of Foamex L.P. and Foamex Capital Corporation; 2) Based on my knowledge, this 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 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 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-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) disclosed in this report any change in the registrant's internal controls over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5) The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors: a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 12, 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 ex312flpq303.txt Exhibit 31.2 CERTIFICATION I, K. Douglas Ralph, certify that: 1) I have reviewed this report on Form 10-Q of Foamex L.P. and Foamex Capital Corporation; 2) Based on my knowledge, this 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 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 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-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) disclosed in this report any change in the registrant's internal controls over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5) The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors: a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 12, 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 ex321flpq303.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 Corporaton on Form 10-Q for the period ending September 28, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Thomas E. Chorman, 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. 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 November 12, 2003 EX-32 6 ex322flpq303.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 September 28, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, K. Douglas Ralph, Executive Vice President and Chief Financial 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. 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 November 12, 2003 -----END PRIVACY-ENHANCED MESSAGE-----