-----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, HwnY6pIdDneXVkzARaCpgN0pAN2R2ctr3XK7d5ZTlTejEQs6JoX9CKJ38IUHuWyV fDb+LlT1DLbsY0pUS1kpbg== 0000912908-05-000100.txt : 20051121 0000912908-05-000100.hdr.sgml : 20051121 20051121172507 ACCESSION NUMBER: 0000912908-05-000100 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20051002 FILED AS OF DATE: 20051121 DATE AS OF CHANGE: 20051121 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FOAMEX INTERNATIONAL INC CENTRAL INDEX KEY: 0000912908 STANDARD INDUSTRIAL CLASSIFICATION: PLASTICS FOAM PRODUCTS [3086] IRS NUMBER: 050473908 STATE OF INCORPORATION: DE FISCAL YEAR END: 1229 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-22624 FILM NUMBER: 051218998 BUSINESS ADDRESS: STREET 1: 1000 COLUMBIA AVENUE 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 q10fii100205.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 October 2, 2005 Commission file number 0-22624 FOAMEX INTERNATIONAL INC. (Exact name of registrant as specified in its charter) (Debtor-in-Possession) Delaware 05-0473908 - ------------------------------- ------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 1000 Columbia Avenue Linwood, PA 19061 - ------------------------------- ------------------------- (Address of principal (Zip Code) executive offices) Registrant's telephone number, including area code: (610) 859-3000 -------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. YES X NO ----- ----- Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). YES X NO ----- ----- Indicate by a check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934. YES NO X ---- ------ The number of shares of the registrant's common stock outstanding as of November 7, 2005 was 24,509,728. FOAMEX INTERNATIONAL INC. INDEX
Page Part I. Financial Information Item 1. Financial Statements (unaudited). Condensed Consolidated Statements of Operations - Quarters and Three Quarters Ended October 2, 2005 and September 26, 2004 3 Condensed Consolidated Balance Sheets as of October 2, 2005 and January 2, 2005 4 Condensed Consolidated Statements of Cash Flows - Three Quarters Ended October 2, 2005 and September 26, 2004 5 Notes to Condensed Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. 21 Item 3. Quantitative and Qualitative Disclosures about Market Risk. 29 Item 4. Controls and Procedures. 30 Part II. Other Information Item 1. Legal Proceedings. 31 Item 3. Defaults Upon Senior Securities. 31 Item 6. Exhibits. 31 Signatures 32
2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
Quarters Ended Three Quarters Ended -------------------------- ------------------------- October 2, September 26, October 2, September 26, 2005 2004 2005 2004 ---------- ------------- --------- ------------- (thousands, except per share amounts) NET SALES $322,155 $ 309,993 $972,036 $ 937,751 COST OF GOODS SOLD 301,865 276,821 903,422 824,639 -------- --------- -------- --------- GROSS PROFIT 20,290 33,172 68,614 113,112 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 21,058 18,213 61,001 66,005 RESTRUCTURING AND IMPAIRMENT CHARGES 25,238 78 49,949 2,322 -------- --------- -------- --------- INCOME (LOSS) FROM OPERATIONS (26,006) 14,881 (42,336) 44,785 GAIN ON SALE OF BUSINESSES - - 29,719 - INTEREST AND DEBT ISSUANCE EXPENSE (22,546) (18,702) (62,806) (55,911) INCOME FROM EQUITY INTEREST IN JOINT VENTURES 642 67 1,171 342 REORGANIZATION ITEMS, NET (2,109) - (2,109) - OTHER EXPENSE, NET (1,086) (531) (1,874) (279) -------- --------- -------- --------- LOSS BEFORE PROVISION (BENEFIT) FOR INCOME TAXES (51,105) (4,285) (78,235) (11,063) PROVISION (BENEFIT) FOR INCOME TAXES (1,513) 126,949 (3,123) 124,903 -------- --------- -------- --------- NET LOSS $(49,592) $(131,234) $(75,112) $(135,966) ======== ========= ======== ========= NET LOSS PER SHARE - BASIC $ (2.02) $ (5.37) $ (3.06) $ (5.56) ======== ========= ======== ========= NET LOSS PER SHARE - DILUTED $ (2.02) $ (5.37) $ (3.06) $ (5.56) ======== ========= ======== ========= WEIGHTED AVERAGE NUMBER OF SHARES - BASIC 24,510 24,443 24,509 24,441 ======== ========= ======== ========= WEIGHTED AVERAGE NUMBER OF SHARES - DILUTED 24,510 24,443 24,509 24,441 ======== ========= ======== =========
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements. 3 FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
October 2, 2005 January 2, 2005 --------------- --------------- ASSETS (thousands, except share data) CURRENT ASSETS Cash and cash equivalents $ 4,602 $ 5,351 Accounts receivable, net of allowances of $12,724 and $9,001 210,903 182,740 Inventories 84,322 100,029 Other current assets 35,609 22,403 --------- --------- Total current assets 335,436 310,523 --------- --------- Property, plant and equipment 396,900 402,746 Less accumulated depreciation (280,478) (261,203) --------- --------- NET PROPERTY, PLANT AND EQUIPMENT 116,422 141,543 GOODWILL 88,803 126,814 DEBT ISSUANCE COSTS, net of accumulated amortization of $4,793 and $17,477 9,704 21,152 DEFERRED INCOME TAXES - 237 SOFTWARE COSTS, net of accumulated amortization of $7,690 and $6,401 8,547 9,325 INVESTMENT IN AND ADVANCES TO AFFILIATES 17,036 16,521 OTHER ASSETS 17,789 19,595 --------- --------- TOTAL ASSETS $ 593,737 $ 645,710 ========= ========= LIABILITIES AND STOCKHOLDERS' DEFICIENCY CURRENT LIABILITIES Revolving credit borrowings $ 172,698 $ 114,907 Current portion of long-term debt 87,203 67,131 Accounts payable 60,998 104,315 Accrued employee compensation and benefits 16,756 22,354 Accrued interest 908 13,063 Accrued customer rebates 11,146 16,979 Cash overdrafts 5,561 10,437 Other accrued liabilities 12,255 18,439 --------- --------- Total current liabilities 367,525 367,625 LONG-TERM DEBT 337 568,461 ACCRUED EMPLOYEE BENEFITS 11,444 55,388 OTHER LIABILITIES 2,602 12,549 LIABILITIES SUBJECT TO COMPROMISE 643,979 - --------- --------- Total liabilities 1,025,887 1,004,023 --------- --------- COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' DEFICIENCY Preferred Stock, par value $1.00 per share: Authorized 5,000,000 shares Issued 15,000 shares - Series B 15 15 Common Stock, par value $.01 per share: Authorized 50,000,000 shares Issued 27,998,728 shares and 27,949,762 shares 280 279 Additional paid-in capital 102,547 102,354 Accumulated deficit (463,777) (388,665) Accumulated other comprehensive loss (34,214) (35,295) Common stock held in treasury, at cost: 3,489,000 shares (27,780) (27,780) Shareholder note receivable (9,221) (9,221) --------- --------- Total stockholders' deficiency (432,150) (358,313) --------- --------- TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY $ 593,737 $ 645,710 ========= =========
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements. 4 FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Three Quarters Ended ------------------------------ October 2, September 26, 2005 2004 ---------- ------------- OPERATING ACTIVITIES (thousands) Net loss $(75,112) $(135,966) Adjustments to reconcile net loss to net cash provided by (used for) operating activities: Depreciation and amortization 15,785 19,047 Impairment charges 49,303 2,178 Amortization of debt issuance costs, debt premium and debt discount 5,099 2,059 Valuation allowance on U.S. deferred income tax assets - 128,598 Gain on sale of assets (29,819) (1,005) Provision for uncollectible accounts 5,043 3,619 Other operating activities 619 (6,325) Changes in operating assets and liabilities, net (9,417) (2,232) -------- --------- Net cash provided by (used for) operating activities before reorganization items (38,499) 9,973 Cash used for reorganization items (4,592) - -------- --------- Net cash provided by (used for) operating activities (43,091) 9,973 -------- --------- INVESTING ACTIVITIES Capital expenditures (4,228) (4,209) Proceeds from sales of assets 39,815 2,243 Other investing activities (1,774) (2,362) -------- --------- Net cash provided by (used for) investing activities 33,813 (4,328) -------- --------- FINANCING ACTIVITIES Proceeds from DIP revolving loans 174,328 - Proceeds from revolving loans, net - 2,797 Proceeds from DIP term loan 80,000 - Repayments of debt (233,963) (7,280) Increase (decrease) in cash overdrafts (4,876) (1,891) Debt issuance costs (6,962) - Other financing activities 2 - -------- --------- Net cash provided by (used for) financing activities 8,529 (6,374) -------- --------- Net decrease in cash and cash equivalents (749) (729) Cash and cash equivalents at beginning of period 5,351 6,613 -------- --------- Cash and cash equivalents at end of period $ 4,602 $ 5,884 ======== ========= Supplemental Information: Cash paid for interest $45,376 $44,504 ======= ======= Cash paid for income taxes $ 381 $ 494 ========= =========
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements. 5 FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 1. ORGANIZATION AND BASIS OF PRESENTATION Bankruptcy On September 19, 2005, Foamex International Inc. (the "Company") and certain of its domestic subsidiaries, including Foamex L.P., its primary operating subsidiary (collectively referred to as the "Debtors"), filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code ("Bankruptcy Code") in the United States Bankruptcy Court for the District of Delaware (the "Bankruptcy Court"). Each of the Debtors continues to operate its business and manage its property as a debtor in possession pursuant to Sections 1107 and 1108 of the Bankruptcy Code. At a hearing held on September 20, 2005, the Bankruptcy Court granted the Company's first day motions for relief designed to stabilize its operations and business relationships with customers, vendors, employees and others, and entered orders granting permission to, among other things, pay employee salaries, wages and benefits, pay amounts owing in connection with workers' compensation and other insurance policies; utilize its existing cash management systems; continue its customer programs; pay vendors for certain critical goods and services provided prior to September 19, 2005; access, on an interim basis, of up to $221 million of a $240 million debtor-in-possession (DIP) revolving credit facility and $80 million of a DIP term loan. A portion of the proceeds of the debtor-in-possession revolving credit facility and all of the proceeds of the DIP term loan facility were used to repay the Debtor's prepetition revolving credit and term loan facilities. On October 17, 2005, the Bankruptcy Court granted final approval of the $240 million DIP credit facility and the $80 million DIP term loan. To exit Chapter 11 successfully, the Company must obtain confirmation by the Bankruptcy Court of a plan of reorganization. The Company has reached an agreement in principle with an ad hoc committee of holders of a majority of the Company's 10 3/4% Senior Secured Notes. Pursuant to that agreement in principle, the holders of the Senior Secured Notes would convert their debt into 100% of the equity of the reorganized Company, subject to dilution. The agreement in principle further provides that if unsecured creditors (to the extent that their claims are not otherwise treated as critical vendor claims or paid through assumption of their contracts during the bankruptcy cases) and the holders of the Company's Senior Subordinated Notes vote to accept the reorganization plan, then they will receive, on a pro rata basis, warrants to purchase between 5% and 10% of the equity of the reorganized Company, depending on the ultimate allowed amount of general unsecured claims. Under the agreement in principle, there would be no recovery for holders of equity securities in the Company. Subsequent to the bankruptcy filing date, Statement of Position 90-7, "Financial Reporting by Entities in Reorganization Under the Bankruptcy Code ("SOP 90-7") applies to the Debtors' financial statements while the Debtors operate under the provision of Chapter 11. SOP 90-7 does not change the application of generally accepted accounting principles in the preparation of financial statements. However, SOP 90-7 does require that the financial statements, for periods including and subsequent to the filing of the Chapter 11 petition, distinguish transactions and events that are directly associated with the reorganization from the ongoing operations of the business. A final plan of reorganization could materially change amounts reported in the Company's consolidated financial statements, which do not give effect to any adjustments of the carrying value of assets and liabilities that will be necessary as a consequence of reorganization under Chapter 11. Organization The Company operates in the flexible polyurethane and advanced polymer foam products industry. The Company's operations are primarily conducted through its wholly-owned subsidiary, Foamex L.P. Foamex L.P. conducts foreign operations through Foamex Canada Inc. ("Foamex Canada"), Foamex Latin America, Inc. and Foamex Asia, Inc. Financial information concerning the business segments of the Company is included in Note 13. Basis of Presentation The accompanying condensed consolidated financial statements are unaudited and do not include certain information and disclosures required by accounting principles generally accepted in the United States of America for complete financial statements. However, in the opinion of management, all adjustments, consisting only of normal 6 FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 1. ORGANIZATION AND BASIS OF PRESENTATION (continued) recurring adjustments considered necessary to present fairly the Company's consolidated financial position and results of operations, have been included. These interim financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Company's 2004 Annual Report on Form 10-K. Results for interim periods are not necessarily indicative of trends or of results for a full year. The condensed consolidated balance sheet as of January 2, 2005 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. New Accounting Pronouncements In March 2005, the Financial Accounting Standards Board ("FASB") issued interpretation No. 47, "Accounting for Conditional Asset Retirement Obligations" ("FIN No. 47"). FIN No. 47 clarifies that the term conditional obligation as used in FASB Statement No. 143, "Accounting for Assets Retirement Obligations", refers to a legal obligation to perform an asset retirement activity in which the timing and/or method of settlement are conditional on a future event that may or may not be within the control of the entity. FIN No. 47 requires that the uncertainty about the timing and/or method of settlement of a conditional asset retirement obligation be factored into the measurement of the liability when sufficient information exists. FIN No. 47 also clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. FIN No. 47 is effective for fiscal years ending after December 15, 2005. The Company has not yet determined the impact of the adoption of FIN No. 47 on its financial statements. In December 2004, the FASB issued Statement of Financial Accounting Standards No. 123R, "Share-Based Payment" ("SFAS No. 123R"). The provisions of SFAS No. 123R require the cost of employee services received in exchange for an award of equity instruments be based on the grant date fair value of the award and be recognized over the period during which the employee is required to provide service in exchange for the award. SFAS No. 123R was required to be applied to all awards of equity instruments granted in annual or interim periods beginning after June 15, 2005. On April 15, 2005, the Securities and Exchange Commission postponed the effective date of SFAS No. 123R to periods within the first fiscal year beginning after June 15, 2005. The Company has not yet determined the impact of SFAS No. 123R on its financial statements. In November 2004, the FASB issued Statement of Financial Accounting Standards No. 151, "Inventory Costs an amendment of ARB No. 43, Chapter 4" ("SFAS No. 151"). The provisions of SFAS No. 151 require that abnormal amounts of idle facility expense, freight, handling costs and wasted material be recognized as current period charges, regardless of the circumstances under which such charges arose. SFAS No. 151 is effective for fiscal years beginning after June 15, 2005. The Company has not yet determined the impact of SFAS No. 151 on its financial statements. Accounting Estimates The preparation of financial statements in conformity with generally accepted accounting principles in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 2. LIABILITIES SUBJECT TO COMPROMISE AND REORGANIZATION ITEMS On August 15, 2005, the Company notified the trustee of its 13 1/2% Senior Subordinated Notes that it would not remit a principal payment of $51.6 million and an interest payment of $3.5 million that were due on that date. Failure to remit the principal payment put the Company in default under its 13 1/2% Senior Subordinated Notes Indenture and caused the Company to be in default under its Senior Secured Credit Facility, Secured Term Loan, 10 3/4% Senior Secured Notes and 9 7/8% Senior Subordinated Notes. The holders of these loans and notes would be entitled to demand immediate payment absent a cure of the default. On August 14, 2005, the Company executed 7 FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 2. LIABILITIES SUBJECT TO COMPROMISE AND REORGANIZATION ITEMS (continued) amendments to its Senior Secured Credit Facility and Secured Term Loan that waived the default until September 30, 2005 caused by the Company's failure to remit the principal and interest payments to the 13 1/2% Senior Subordinated Note holders. In addition to the Company's prepetition debt which is in default, liabilities subject to compromise reflects the Debtors' other liabilities incurred prior to the commencement of the bankruptcy proceedings. These amounts represent the Company's estimate of known or potential prepetition claims to be resolved in connection with the bankruptcy proceedings. Such claims remain subject to future adjustments, based on such things as (i) negotiations; (ii) actions taken by the Bankruptcy Court; (iii) further developments with respect to disputed claims; (iv) additional rejection of executory contracts and leases; (v) the determination of the value of collateral securing claims; (vi) the filing of proofs of claims; or (vii) other events. Payment terms for these claims will be established in connection with the Company's plan of reorganization. Liabilities subject to compromise at October 2, 2005 consist of the following: Debt: (thousands) 10 3/4% Senior Secured Notes $300,000 9 7/8% Senior Subordinated Notes 148,500 13 1/2% Senior Subordinated Notes 51,585 Other debt 850 -------- Total debt 500,935 Employee benefit plans 54,195 Accounts payable 53,687 Accrued interest on debt subject to compromise 24,486 Accrued liabilities and other 10,676 -------- $643,979 ======== The Debtors have incurred certain professional fees and other expenses directly associated with the bankruptcy proceedings. In addition, the Debtors have made certain adjustments to the carrying value of certain prepetition liabilities. Such costs and adjustments are classified as reorganization items in the accompanying condensed consolidated statement of operations for the quarter and three quarters ended October 2, 2005 and consist of the following: (thousands) Debt issuance costs on debt subject to compromise $(10,465) Deferred credits on interest rate swap transactions 9,684 Professional fees associated with bankruptcy (4,538) Net gain on rejected leases and other contracts 3,360 Other, net (150) -------- $ (2,109) ======== Pursuant to the Bankruptcy Code, the Debtors have filed schedules with the Bankruptcy Court setting forth the assets and liabilities of the Debtors as of September 19, 2005. On October 27, 2005, the Debtors issued proof of claim forms to, among others, current and prior employees, known creditors, vendors and other parties with whom the Debtors have previously conducted business. To the extent the recipients disagree with the claims quantified on these forms, the recipient may file a proof of claim in a different amount with the Debtors' claim agent, Bankruptcy Services, LLC. Differences between the amounts scheduled by the Debtors and claims filed by creditors will be investigated and resolved as part of the bankruptcy proceedings. If necessary, the Bankruptcy Court ultimately will determine liability amounts that will be allowed for these claims. The Company is only just beginning the process of receiving, cataloging and reconciling claims received in conjunction with the process. Because the last day for most creditors to file claims is December 8, 2005, the Debtors have not received the vast majority of the claims and the number and allowed amount of such claims is not presently known. The resolution of such claims could result in a material adjustment to the Company's financial statements. 8 FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 3. DEBTORS' FINANCIAL STATEMENTS The Company's bankruptcy filing included the Company and certain of its domestic subsidiaries, including Foamex L.P., and excluded subsidiaries in Mexico and Canada. Presented below are the condensed combined financial statements of the Debtors. These statements reflect the financial position, results of operations and cash flows of the combined Debtors, including certain transactions and resulting assets and liabilities between the Debtors and non-Debtor subsidiaries of the Company, which are eliminated in the Company's consolidated financial statements. Debtors' Condensed Combined Balance Sheet (thousands - unaudited)
October 2, 2005 ASSETS --------------- Current Assets: Cash and cash equivalents $ 2,820 Accounts receivable, net 196,095 Inventories 78,970 Other current assets 36,319 --------- Total current assets 314,204 Property, plant and equipment, net 102,626 Other assets, net 162,473 --------- Total assets $ 579,303 ========= LIABILITIES AND STOCKHOLDERS' DEFICIENCY Current Liabilities Not Subject to Compromise: Current maturities of long-term debt and revolving credit borrowings $ 259,901 Accounts payable 52,859 Accrued liabilities 40,288 --------- Total current liabilities 353,048 Liabilities subject to compromise 643,979 Non-Current Liabilities Not Subject to Compromise: Long-term debt, net of current maturities 337 Other noncurrent liabilities 14,089 --------- Total liabilities 1,011,453 Total stockholders' deficiency (432,150) --------- Total liabilities and stockholders' deficiency $ 579,303 =========
Debtors' Condensed Combined Statements of Operations (thousands - unaudited)
Quarter Ended Three Quarters Ended October 2, 2005 October 2, 2005 --------------- -------------------- Net sales $296,913 $914,488 Cost of goods sold 277,618 846,798 -------- -------- Gross profit 19,295 67,690 Selling, general and administrative expenses 17,827 53,614 Restructuring and impairment charges 25,239 42,831 -------- -------- Loss from operations (23,771) (28,755) 9 FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 3. DEBTORS' FINANCIAL STATEMENTS (continued) Quarter Ended Three Quarters Ended October 2, 2005 October 2, 2005 --------------- -------------------- Interest and debt issuance expense (22,533) (62,765) Reorganization items, net (2,046) (2,046) Other (293) 28,967 -------- -------- Loss before benefit for income taxes and equity in loss of non-debtor subsidiaries (48,643) (64,599) Benefit for income taxes (1,564) (1,559) -------- -------- Loss before equity in loss of non-debtor subsidiaries (47,079) (63,040) Equity in loss of non-debtor subsidiaries (2,513) (12,072) -------- -------- Net loss $(49,592) $(75,112) ======== ========
Debtors' Condensed Combined Statement of Cash Flows (thousands - unaudited)
Three Quarters Ended October 2, 2005 -------------------- OPERATING ACTIVITIES: Net loss $(75,112) Adjustments required to reconcile net loss to net cash used in operating activities: Impairment charges 42,185 Depreciation and amortization 13,761 Reorganization items (4,592) Change in working capital and other operating items (18,971) -------- Net cash used in operating activities (42,729) -------- INVESTING ACTIVITIES: Capital expenditures (4,172) Proceeds from sales of assets 39,815 Other (1,774) -------- Net cash provided by investing activities 33,869 -------- FINANCING ACTIVITIES: Repayments of prepetition borrowings (233,963) Proceeds from DIP borrowings 254,328 Other (11,836) -------- Net cash provided by financing activities 8,529 -------- NET CHANGE IN CASH AND CASH EQUIVALENTS (331) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 3,151 -------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 2,820 ========
10 FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 4. LOSS PER SHARE The following table shows the amounts used in computing loss per share.
Quarters Ended Three Quarters Ended ----------------------------- ---------------------------- October 2, September 26, October 2, September 26, 2005 2004 2005 2004 ---------- ------------- ---------- ------------- (thousands, except per share amounts) Basic: Net loss $(49,592) $(131,234) $(75,112) $(135,966) ======== ========= ======== ========= Weighted average common shares outstanding 24,510 24,443 24,509 24,441 ======== ========= ======== ========= Net loss per share $ (2.02) $ (5.37) $ (3.06) $ (5.56) ======== ========= ======== ========= Diluted: Net loss $(49,592) $(131,234) $(75,112) $(135,966) ======== ========= ======== ========= Weighted average common shares outstanding 24,510 24,443 24,509 24,441 Incremental shares resulting from (a) Stock options - - - - Convertible preferred stock - - - - -------- --------- -------- --------- Adjusted weighted average shares 24,510 24,443 24,509 24,441 ======== ========= ======== ========= Net loss per share $ (2.02) $ (5.37) $ (3.06) $ (5.56) ======== ========= ======== =========
(a) There is no dilution resulting from potential incremental shares in any of the periods presented because the Company had net losses and the inclusion of potential incremental shares would be antidilutive. For the quarter and three quarters ended October 2, 2005 and September 26, 2004 potential incremental shares included options to purchase shares of common stock (3,661,591 shares and 3,098,572 shares at October 2, 2005 and September 26, 2004, respectively) and Series B preferred stock convertible into 1,500,000 shares of common stock. 5. STOCK-BASED COMPENSATION Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"), encourages, but does not require, companies to record compensation cost for stock-based employee compensation plans at fair value. The Company has chosen to continue to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25"), and related interpretations. Accordingly, the Company records expense in an amount equal to the excess, if any, of the quoted market price on the grant date over the option price. The following table includes as reported and proforma information required by Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure ("SFAS No. 148"). Proforma information is based on the fair value method under SFAS No. 123. 11 FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 5. STOCK-BASED COMPENSATION (continued)
Quarters Ended Three Quarters Ended ----------------------------- ---------------------------- October 2, September 26, October 2, September 26, 2005 2004 2005 2004 ---------- ------------- ---------- ------------- (thousands, except per share amounts) Net loss as reported $(49,592) $(131,234) $(75,112) $(135,966) Add: Stock-based employee compensation expense included in reported net loss, net of tax provision (benefit) 8 - 14 (1) Deduct: Stock-based employee compensation expense determined under fair value based method, net of tax benefit (444) (237) (1,300) (605) -------- --------- -------- --------- Proforma net loss $(50,028) $(131,471) $(76,398) $(136,572) ======== ========= ======== ========= Basic loss per share As reported $ (2.02) $ (5.37) $ (3.06) $ (5.56) ======== ========= ======== ========= Proforma $ (2.04) $ (5.38) $ (3.12) $ (5.59) ======== ========= ======== ========= Diluted loss per share As reported $ (2.02) $ (5.37) $ (3.06) $ (5.56) ======== ========= ======== ========= Proforma $ (2.04) $ (5.38) $ (3.12) $ (5.59) ======== ========= ======== =========
6. RESTRUCTURING AND IMPAIRMENT CHARGES During the fourth quarter of each year, the Company performs an annual impairment test required by Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142"). The test is a two step process, with the first test involving an estimate of enterprise fair value and the second step involving a more detailed appraisal of individual assets. The fair value estimate uses a discounted cash flow method. SFAS No. 142 also requires that impairment tests of goodwill be updated during the year if circumstances change that would more likely than not indicate that the fair value of a reporting unit no longer exceeds its value for financial statement purposes. During the second quarter of 2005, the Company updated its long-term forecast to address the impact of deteriorating business conditions, including recent adverse developments in the domestic auto industry. As part of this exercise, the Company also conducted goodwill impairment tests of its various reporting units. The Foam Products and Technical Products reporting units passed the step one impairment test. However, the Automotive Products reporting unit failed the step one test, reflecting industry conditions. On a preliminary basis in the quarter ended July 3, 2005, the Company estimated that $17.0 million of its Automotive Products goodwill was impaired and recorded this charge in the second quarter. The Company subsequently completed the required second step of the goodwill impairment test resulting in a further Automotive Products goodwill impairment charge of $18.4 million in the quarter ended October 2, 2005. The adjusted balances of goodwill at October 2, 2005 were $74.9 million for the Foam Products segment and $13.9 million for the Technical Products segment for a total of $88.8 million. Also during the quarter ended July 3, 2005, the Company determined that a $7.0 million pre-tax impairment charge was required for property, plant and equipment at certain production facilities. The impairment evaluation was also triggered by the facts and circumstances discussed above concerning the goodwill impairment. The impairment loss was determined using fair value estimates for similar assets. The Company has obtained independent appraisals of its production facilities and as a result has recorded an additional impairment charge of $6.9 million in the quarter ended October 2, 2005. 12 FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 6. RESTRUCTURING AND IMPAIRMENT CHARGES (continued) In addition, the Company recorded restructuring charges of $0.6 million, which were primarily related to the elimination of 14 sales, administrative and operating positions in the carpet cushion business. The following table sets forth the components of the Company's restructuring accruals and activity for the quarter and three quarters ended October 2, 2005:
Plant Closure Personnel Total and Leases Reductions Impairment ----- ------------- ---------- ---------- (millions) Balance at July 4, 2005 $ 7.1 $6.3 $0.8 $ - Restructuring and impairment charges 25.2 - (0.1) 25.3 Cash spending (0.6) (0.4) (0.2) - Rejected leases and agreements (5.4) (5.1) (0.3) - Goodwill and asset impairment (25.3) - - (25.3) ----- ---- ---- ----- Balance at October 2, 2005 $ 1.0 $0.8 $0.2 $ - ===== ==== ==== ===== Balance at January 3, 2005 $ 7.4 $6.7 $0.7 $ - Restructuring and impairment charges 49.9 0.2 0.4 49.3 Cash spending (1.6) (1.0) (0.6) - Rejected leases and agreements (5.4) (5.1) (0.3) - Goodwill and asset impairment (49.3) - - (49.3) ----- ---- ---- ----- Balance at October 2, 2005 $ 1.0 $0.8 $0.2 $ - ===== ==== ==== =====
7. GAIN ON SALE OF BUSINESSES On April 29, 2005, the Company sold its rubber and felt carpet cushion businesses consisting principally of property, plant and equipment located at Cape Girardeau, MO and Newton, NC, inventories and related goodwill to Leggett & Platt, Incorporated for net cash proceeds of $38.7 million. The property, plant and equipment, inventories and related goodwill had carrying values of $3.2 million, $2.8 million and $2.5 million, respectively. The net gain of $29.7 million, on which there is no tax impact, has been reflected on the accompanying condensed consolidated statements of operations for the three quarters ended October 2, 2005. The rubber and felt carpet cushion businesses provided approximately $41.3 million and $4.5 million of net sales and gross profit, respectively, in the year ended January 2, 2005. 8. INVENTORIES The components of inventories are listed below. October 2, January 2, 2005 2005 ---------- ---------- (thousands) Raw materials and supplies $49,035 $ 63,336 Work-in-process 20,120 18,667 Finished goods 15,167 18,026 ------- -------- Total $84,322 $100,029 ======= ======== 13 FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 9. REVOLVING CREDIT BORROWINGS AND LONG-TERM DEBT The components of revolving credit borrowings and long-term debt are listed below.
October 2, January 2, 2005 2005 ---------- ---------- (thousands) Revolving Credit Borrowings (1) $172,698 $114,907 ======== ======== Foamex L.P. Senior Secured Credit Facility Term Loan (1) $ - $ 37,371 DIP Term Loan (1) 80,000 - Foamex L.P. Secured Term Loan (1) - 80,000 10 3/4% Senior Secured Notes due 2009 (2) (4) (5) - 309,703 9 7/8% Senior Subordinated Notes due 2007 (2) (5) - 148,500 13 1/2% Senior Subordinated Notes due August 2005 (includes $581 of unamortized debt premium) (2) (5) - 52,166 Industrial revenue bonds (3) 7,000 7,000 Other 540 852 -------- -------- 87,540 635,592 Less current portion 87,203 67,131 -------- -------- Long-term debt $ 337 $568,461 ======== ========
(1) Subsidiary debt of Foamex L.P., guaranteed by the Company, FMXI, Inc. and Foamex Canada. (2) Subsidiary debt of Foamex L.P. and Foamex Capital Corporation. (3) Subsidiary debt of Foamex L.P. (4) Includes $9.7 million of deferred credits on interest rate swap transactions at January 2, 2005. (5) Reclassified to liabilities subject to compromise at October 2, 2005. DIP Revolving Credit Facility On September 22, 2005, Foamex L.P. entered into a Debtor-in-Possession Credit Agreement (the "DIP Revolving Credit Facility") with a group of banks to provide a revolving credit facility with a maximum availability of $240.0 million. The initial borrowing under the DIP Revolving Credit Facility was used to repay outstanding obligations under the prepetition Senior Secured Credit Facility and interest due under the prepetition Secured Term Loan. The DIP Revolving Credit Facility includes a $40.0 million sublimit for letters of credit and availability is limited to eligible amounts, as defined, of accounts receivable, inventory, equipment, and real estate. At October 2, 2005, Foamex L.P. had total available borrowings of $23.9 million and letters of credit outstanding of $29.1 million under that facility. Substantially all of the assets of Foamex L. P. and its domestic subsidiaries and Foamex Canada are pledged as collateral for the related borrowings. Borrowings under the DIP Revolving Credit Facility bear interest at floating rates based upon and including a margin over either LIBOR or a Base Rate, as defined. At October 2, 2005, the weighted average interest rate on borrowings was 8.13%. All borrowings under the DIP Revolving Credit Facility will mature on the earlier of March 22, 2007 or the date that the Company emerges from Chapter 11 proceedings. The lenders under the DIP Revolving Credit Facility have agreed to provide emergence financing, subject to a number of conditions, of up to $275.0 million upon the Company's emergence from Chapter 11 proceedings. The DIP Revolving Credit Facility includes both a subjective acceleration clause and a lock box arrangement that requires all lock box receipts be used to repay revolving credit borrowings. Accordingly, borrowings under the DIP Revolving Credit Facility are classified as current in the accompanying condensed consolidated balance sheet at October 2, 2005. 14 FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 9. REVOLVING CREDIT BORROWINGS AND LONG-TERM DEBT (continued) DIP Term Loan On September 22, 2005, Foamex L.P. entered into a Debtor-in-Possession Credit Agreement (the "DIP Term Loan") with a group of lenders to provide an $80.0 million term loan. Proceeds from the DIP Term Loan were used to repay outstanding principal under the prepetition Secured Term Loan. Borrowings under the DIP Term Loan bear interest at a rate that is either (i) 8.00% plus the greater of the Base rate, as defined, or 6.50% or (ii) at 10.00% plus the greater of the LIBOR rate or 3.00%. At October 2, 2005, the weighted average interest rate was 13.78%. Borrowings under the DIP Term Loan are collateralized by the same collateral as the DIP Revolving Credit Facility. An intercreditor agreement governs the distribution of collateral among the lenders under the DIP Revolving Credit Facility and the DIP Term Loan. All borrowings under the DIP Term Loan will mature on the earlier of March 22, 2007 or the date that the Company emerges from Chapter 11 proceedings. The lenders under the DIP Term Loan have agreed to provide emergence financing, subject to a number of conditions, of $80.0 million upon the Company's emergence from Chapter 11 proceedings. The DIP Term Loan may be repaid prior to maturity by paying a prepayment premium initially set at 8% and declining ratably over a 48-month period. Industrial Revenue Bonds ("IRBs") IRB debt includes a $1.0 million bond that matured on October 1, 2005 and was repaid on October 3, 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 October 2, 2005, the interest rate was 2.70% on the $1.0 million bond and 2.85% on the $6.0 million bond. The maximum interest rate for either of the IRBs is 15.0% per annum. If Foamex L.P. exercises its option to convert the bonds to a fixed interest rate structure, the IRBs are redeemable at the option of the bondholders. In addition, at any time prior to conversion to a fixed interest rate structure, bondholders upon notice to the bond trustee and the remarketing agent may place the bonds for sale. If the remarketing agent is not successful in reselling the bonds before settlement is due on bonds placed for sale, the bond trustee may draw on a letter of credit issued under the DIP Revolving Credit Facility to repay the bondholder for the bonds placed for sale until the bonds can be resold by the remarketing agent. Pursuant to this arrangement, the IRBs have been classified as current in the accompanying condensed consolidated balance sheets at October 2, 2005 and January 2, 2005. The obligations are collateralized by certain properties, which have an approximate net carrying value of $10.6 million at October 2, 2005. Senior Secured Credit Facility The $240.0 million Senior Secured Credit Facility (the "Senior Secured Credit Facility") consisted of a revolving credit facility with a maximum availability of $190.0 million and an initial term loan of $50.0 million. The term loan required quarterly installment payments of approximately $1.8 million, which commenced on September 30, 2003. All obligations under the Senior Secured Credit Facility were repaid with proceeds from the DIP Revolving Credit Facility. The Senior Secured Credit Facility included both a subjective acceleration clause and a lockbox arrangement that required all lockbox receipts be used to repay revolving credit borrowings. Accordingly, borrowings under the revolving credit facility were classified as current in the accompanying condensed consolidated balance sheet at January 2, 2005. Secured Term Loan The $80.0 million term loan facility (the "Secured Term Loan") was repaid with proceeds from the DIP Term Loan. Borrowings under the Secured Term Loan were collateralized by the same collateral as the Senior Secured Credit Facility. An intercreditor agreement governed the distribution of collateral among the lenders under the Senior Secured Credit Facility and the Secured Term Loan. 15 FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 9. REVOLVING CREDIT BORROWINGS AND LONG-TERM DEBT (continued) Debt Covenants The DIP Revolving Credit Facility and the DIP Term Loan (the "DIP Facilities") contain certain covenants that limit, among other things, the ability of the Company's subsidiaries (i) to pay distributions or redeem equity interests, (ii) to make certain restrictive payments or investments, (iii) to incur additional indebtedness or issue Preferred Equity Interests, as defined, (iv) to merge, consolidate or sell all or substantially all of its assets, or (v) to enter into certain transactions with affiliates or related persons. In addition, the DIP Facilities 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 holders. Under the most restrictive of the distribution restrictions, the Company could be paid by its subsidiaries, as of October 2, 2005, funds only to the extent to enable the Company to meet its tax payment liabilities, subject to Bankruptcy Court approval if such payments constitute prepetition liabilities, and its normal operating expenses of up to $2.3 million during the term of the DIP Facilities, so long as no default or event of default has occurred. Under the DIP Facilities, the Company is subject to covenants, including an EBITDA, as defined, covenant beginning with the one month period ended October 30, 2005, a cumulative net cash flow, as defined, covenant beginning with the two month period ending December 4, 2005, and a capital expenditure restriction for 12 month rolling periods beginning October 3, 2005. The cumulative EBITDA and net cash flow covenants will include an increasing number of months until they reach 12 months ending on October 1, 2006 and then will be the trailing 12 months thereafter through February 2007. The DIP facilities also limit expenditures for certain prepetition and post petition liabilities, as defined, subject to Bankruptcy Court approval. Maturities of Long-Term Debt Scheduled maturities of revolving credit borrowings and long-term debt as of October 2, 2005 are shown below (thousands): Quarter ending January 1, 2006 $ 1,064 2006 204 2007 252,874 2008 96 2009 - Thereafter 6,000 -------- Total $260,238 ======== The following debt issues were reclassified as liabilities subject to compromise in the condensed consolidated balance sheet as of October 2, 2005: 10 3/4% Senior Secured Notes The 10 3/4% Senior Secured Notes were issued by Foamex L.P. and Foamex Capital Corporation (the "Issuers") 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 DIP Revolving 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 DIP Revolving Credit Facility and the DIP Term Loan. The notes rank effectively junior to all senior indebtedness that is secured by first priority liens and senior in right of payment to all subordinated indebtedness. Interest is payable April 1 and October 1. The Issuers did not remit the interest payment due October 1, 2005. The notes may be redeemed at the option of the Issuers, 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. 16 FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 9. REVOLVING CREDIT BORROWINGS AND 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 (the "Issuers") and are due on June 15, 2007. The notes represent uncollateralized general obligations of the Issuers and are subordinated to all Senior Debt, as defined in the Indenture. The Issuers do not intend to make any future payments on the Notes and in conjunction with the payment default on the 13 1/2% Senior Subordinated Notes discussed below, the Issuers are in default under the 9 7/8% Senior Subordinated Notes. 13 1/2% Senior Subordinated Notes The 13 1/2% Senior Subordinated Notes were issued by Foamex L.P. and Foamex Capital Corporation (the "Issuers") and matured on August 15, 2005. The principal due of $51.6 million plus accrued and unpaid interest of $3.5 million were not paid resulting in the Issuers being in default under the 13 1/2% Senior Subordinated Notes. The Issuers have ceased accrual of interest as of the date of the bankruptcy filing. The notes represent uncollateralized general obligations of the Issuers and are subordinated to all Senior Debt, as defined in the Indenture and are pari passu in right of payment to the 9 7/8% Senior Subordinated Notes (described above). 10. RETIREE BENEFIT PLANS Components of net periodic pension benefit cost are listed below:
Quarters Ended Three Quarters Ended ---------------------------- --------------------------- October 2, September 26, October 2, September 26, 2005 2004 2005 2004 --------- ------------- ---------- ------------- (thousands) Service cost $1,347 $1,323 $4,037 $3,543 Interest cost 1,956 1,839 5,857 5,510 Expected return on plan assets (1,960) (1,648) (5,869) (5,042) Amortization of transition assets (19) (18) (56) (55) Amortization of prior service benefit (28) (26) (84) (81) Amortization of net loss 787 680 2,359 2,041 ------ ------ ------ ------ Net periodic pension benefit cost $2,083 $2,150 $6,244 $5,916 ====== ====== ====== ======
During the quarter and three quarters ended October 2, 2005, the Company contributed $2.0 million and $5.4 million, respectively, to its pension plans. The Company anticipates total pension plan contributions of $7.4 million in 2005 and may be required to make an accelerated funding contribution for 2006 to comply with requirements for underfunded plans. The amount of contributions may be materially impacted by the outcome of certain legislation now pending before the U.S. Congress. 11. INCOME TAXES The benefit for income taxes for the quarter and three quarters ended October 2, 2005 relates solely to foreign subsidiaries as tax benefits associated with losses from U.S. operations are fully reserved through a tax valuation allowance. The benefit recorded in the quarter ended October 2, 2005 includes an adjustment of $1.6 million for certain foreign tax reserves that are deemed to be no longer required. During the quarter ended September 26, 2004, the Company established a valuation allowance of $128.6 million for its U.S. deferred tax assets. 17 FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 12. COMPREHENSIVE INCOME (LOSS) Components of comprehensive income (loss) are listed below.
Quarters Ended Three Quarters Ended ----------------------------- --------------------------- October 2, September 26, October 2, September 26, 2005 2004 2005 2004 ---------- ------------- ---------- ------------- (thousands) Net loss $(49,592) $(131,234) $(75,112) $(135,966) Foreign currency translation adjustments 1,141 1,240 1,081 470 -------- --------- -------- --------- Total comprehensive income (loss) $(48,451) $(129,994) $(74,031) $(135,496) ======== ========= ======== =========
13. 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 and prime 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 and fabrication operations in Mexico City, corporate expenses not allocated to other business segments and restructuring, impairment and other charges (credits). Segment results are presented below.
Carpet Foam Cushion Automotive Technical Products Products Products Products Other Total -------- -------- ---------- ---------- --------- --------- (thousands) Quarter ended October 2, 2005 - ----------------------------- Net sales $152,286 $ 42,846 $89,585 $31,180 $ 6,258 $322,155 Income (loss) from operations $ 3,673 $ 519 $ 3,533 $ 7,907 $(41,638) $(26,006) Depreciation and amortization $ 1,977 $ 425 $ 591 $ 571 $ 1,505 $ 5,069 Quarter ended September 26, 2004 - -------------------------------- Net sales $139,980 $ 54,830 $ 77,132 $30,970 $ 7,081 $309,993 Income (loss) from operations $ 13,986 $ 2,996 $ 3,208 $ 8,015 $(13,324) $ 14,881 Depreciation and amortization $ 2,464 $ 710 $ 760 $ 722 $ 2,181 $ 6,837 Three quarters ended October 2, 2005 - ------------------------------------ Net sales $457,116 $134,886 $266,355 $93,387 $ 20,292 $972,036 Income (loss) from operations $ 17,677 $ (1,199) $ 13,993 $23,130 $(95,937) $(42,336) Depreciation and amortization $ 5,644 $ 2,043 $ 2,082 $ 1,727 $ 4,289 $ 15,785 Three quarters ended September 26, 2004 - --------------------------------------- Net sales $400,464 $154,524 $267,752 $93,310 $ 21,701 $937,751 Income (loss) from operations $ 42,598 $ 7,727 $ 16,222 $25,329 $(47,091) $ 44,785 Depreciation and amortization $ 7,805 $ 2,201 $ 2,026 $ 2,113 $ 4,902 $ 19,047
18 FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 14. COMMITMENTS AND CONTINGENCIES Litigation and Claims The Company is a party to various lawsuits, both as defendant and plaintiff, arising in the normal course of business. It is the opinion of management that the disposition of these lawsuits will not, individually or in the aggregate, have a material adverse effect on the Company's financial position or results of operations. If management's assessment of the Company's liability relating to these actions is incorrect, these actions could have a material adverse effect on the Company's consolidated financial position, results of operations and cash flows. The Company accrues liabilities for claims when it becomes probable that payment will be made and when an amount can be reasonably estimated. During the three quarters ended October 2, 2005, the Company has recorded charges of $4.5 million for several claims including product quality issues and the bankruptcy of a major provider of manufacturing supplies. As of October 2, 2005, the Company had accrued $0.5 million for litigation and $1.0 million for customer and vendor claims in addition to the environmental matters discussed below. Environmental and Health and Safety The Company is subject to extensive and changing federal, state, local and foreign environmental laws and regulations, including those relating to the use, handling, storage, discharge and disposal of hazardous substances, the discharge or emission of materials into the environment, and the remediation of environmental contamination, and as a result, is from time to time involved in administrative and judicial proceedings and inquiries relating to environmental matters. As of October 2, 2005, the Company had accruals of approximately $1.9 million for environmental matters, including approximately $1.6 million related to remediating and monitoring soil and groundwater contamination and approximately $0.3 million related to sites where the Company has been designated as a Potentially Responsible Party or "PRP" and other matters. Additional losses, if any, in excess of amounts currently accrued, cannot be reasonably estimated at this time. If there are additional matters or if current estimates are incorrect, there could be a material adverse effect on the Company's financial position, results of operations and cash flows. On August 31, 2002, Environment Canada, the Canadian environmental regulatory agency, finalized a rule which would require flexible polyurethane foam manufacturing operations to reduce methylene chloride (dichloromethane) air emissions. The rule established a 50.0% reduction in methylene chloride emissions by December 1, 2004, which the Company has implemented, and 100.0% reductions by January 1, 2007. This standard has not and will not require the Company to make material expenditures for its Canadian plants. The Company previously has reported to the appropriate state authorities that it had found soil and/or groundwater contamination in excess of state standards at certain locations. Seven sites are currently in various stages of investigation or remediation. Accordingly, the extent of contamination and the ultimate liability is not known with certainty for all sites. The Company has either upgraded or closed all underground storage tanks at its facilities in accordance with applicable regulations. The Comprehensive Environmental Response, Compensation and Liability Act, or "CERCLA," and comparable state laws impose liability without fault for the costs of cleaning up contaminated sites on certain classes of persons that contributed to the release of hazardous substances into the environment at those sites, for example, by generating wastes containing hazardous substances which were disposed at such sites. The Company is currently designated as a PRP by the EPA or by state environmental agencies or other PRPs, pursuant to CERCLA or analogous state statutes, with respect to 11 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 19 FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 14. COMMITMENTS AND CONTINGENCIES (continued) specified site. Based on these estimates (to the extent available) and on known information, in each case and in the aggregate, the Company does not expect additional costs, if any, to be material to liquidity, results of operations or financial position. The possibility exists that new environmental legislation and/or environmental regulations may be adopted or other environmental conditions, including the presence of previously unknown environmental contamination, may be found to exist or a reassessment of the potential exposure to pending environmental matters may be necessary due to new information or future developments, that may require expenditures not currently anticipated and that may be material. 15. SUBSEQUENT EVENTS On October 3, 2005, an insurance company, the holder of one of Foamex L.P.'s outstanding letters of credit, exercised a draw on that letter of credit in the amount of $9.7 million. This draw had the impact of increasing the outstanding balance under the DIP Revolving Credit Facility. In late October 2005, the Company announced to employees at three facilities that were primarily engaged in the production of consumer products that it would be closing these facilities and substantially reducing its consumer products business. Charges for employee severance, will be recorded in the period that the closings of the facilities are completed. On November 17, 2005, the Bankruptcy Court approved a motion authorizing a key executive retention program (the "KERP"). The KERP pertains to 77 employees who may receive cash distributions aggregating up to $3.7 million. Certain participants, at the discretion of the Board of Directors of the reorganized Company, may receive distributions of common stock in the reorganized Company at a price per share that reflects the value of the equity on the effective date of the plan of reorganization. The common stock component, if triggered, is estimated at $0.6 million. The distributions are generally to be made on or around certain milestone dates during the Chapter 11 case and on or subsequent to the effective date of the plan of reorganization. The common stock distributions, if triggered, will be made at or within one year subsequent to the plan of reorganization. The KERP also includes an additional $0.5 million discretionary cash pool to address specific employment matters and unanticipated needs that arise during the Chapter 11 case. 20 FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Forward-Looking Statements This document contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on management's present expectations and beliefs about future events. As with any projection or forecast, they are inherently susceptible to uncertainty and changes in circumstances, and we are under no obligation to, and expressly disclaim any obligation to, update or alter forward-looking statements whether as a result of such changes, new information, subsequent events or otherwise. Bankruptcy On September 19, 2005, the Company and certain of its domestic subsidiaries, including Foamex L.P., its primary operating subsidiary (collectively referred to as the "Debtors"), filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware. Each of the Debtors continues to operate its business and manage its property as a debtor in possession pursuant to Sections 1107 and 1108 of the Bankruptcy Code. At a hearing held on September 20, 2005, the Bankruptcy Court granted the Company's first day motions for relief designed to stabilize its operations and business relationships with customers, vendors, employees and others, and entered orders granting permission to, among other things, pay employee salaries, wages and benefits, pay amounts owing in connection with workers' compensation and other insurance policies; utilize its existing cash management systems; continue its customer programs; pay vendors for certain critical goods and services provided prior to September 19, 2005; access, on an interim basis, of up to $221 million of a $240 million debtor-in-possession (DIP) revolving credit facility and $80 million of a DIP term loan. A portion of the proceeds of the debtor-in-possession revolving credit facility and all of the proceeds of the new DIP term loan facility were used to repay the Debtors' prepetition revolving credit and term loan facilities. On October 17, 2005, the Bankruptcy Court granted final approval of the $240 million DIP credit facility and $80 million DIP term loan. To exit Chapter 11 successfully, the Company must obtain confirmation by the Bankruptcy Court of a plan of reorganization. The Company has reached an agreement in principle with an ad hoc committee of holders of a majority of the Company's 10 3/4% Senior Secured Notes. Pursuant to that agreement in principle, the holders of the Senior Secured Notes would convert their debt into 100% of the equity of the reorganized Company, subject to dilution. The agreement in principle further provides that if unsecured creditors (to the extent that their claims are not otherwise treated as critical vendor claims or paid through assumption of their contracts during the bankruptcy cases) and the holders of the Company's Senior Subordinated Notes vote to accept the reorganization plan, then they will receive, on a pro rata basis, warrants to purchase between 5% and 10% of the equity of the reorganized Company, depending on the ultimate allowed amount of general unsecured claims. Under the agreement in principle, there would be no recovery for holders of equity securities in the Company. Chemical Supply Situation Three TDI suppliers closed production facilities during the third quarter of 2005. These facilities had accounted for nearly 10% of global capacity. In addition, the evacuation of portions of the Gulf Coast states as a result of Hurricanes Katrina and Rita caused significant stoppages of polyol and TDI production at several facilities in that area. The foam industry has been allocated reduced amounts of chemical supply since late September and TDI supply is not expected to return to normal until the end of 2005 at the earliest. We believe there has been excess foam pouring capacity in the industry in the past several years as evidenced by margin erosion, as the industry has been unable to fully pass chemical cost increases onto its customers. Current TDI and polyol shortages appear to have brought foam supply and demand into balance at least in the short term and we are attempting to recover chemical cost increases. 21 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. RESULTS OF OPERATIONS FOR THE QUARTER ENDED OCTOBER 2, 2005 COMPARED TO THE QUARTER ENDED SEPTEMBER 26, 2004
Carpet Foam Cushion Automotive Technical Products Products Products Products Other Total -------- -------- ---------- ---------- --------- --------- (thousands) Quarter ended October 2, 2005 - ----------------------------- Net sales $152,286 $42,846 $89,585 $31,180 $ 6,258 $322,155 Income (loss) from operations $ 3,673 $ 519 $ 3,533 $ 7,907 $(41,638) $(26,006) Depreciation and amortization $ 1,977 $ 425 $ 591 $ 571 $ 1,505 $ 5,069 Income (loss) from operations as a percentage of net sales 2.4% 1.2% 3.9% 25.4% n.m.* (8.1)% Quarter ended September 26, 2004 - -------------------------------- Net sales $139,980 $54,830 $77,132 $30,970 $ 7,081 $309,993 Income (loss) from operations $ 13,986 $ 2,996 $ 3,208 $ 8,015 $(13,324) $ 14,881 Depreciation and amortization $ 2,464 $ 710 $ 760 $ 722 $ 2,181 $ 6,837 Income (loss) from operations as a percentage of net sales 10.0% 5.5% 4.2% 25.9% n.m.* 4.8%
* not meaningful Income from Operations Net sales for the quarter ended October 2, 2005 increased 4% to $322.2 million from $310.0 million in the quarter ended September 26, 2004. Higher prices in the Foam Products segment were partially offset by lower volume, principally in the Carpet Cushion operating segment, primarily due to the sale of the rubber and felt carpet cushion businesses on April 29, 2005. Net sales from the rubber and felt carpet cushion businesses were $10.6 million in the 2004 quarter. Gross profit was $20.3 million, or 6.3% of net sales, in the quarter ended October 2, 2005 compared to $33.2 million, or 10.7% of net sales, in the 2004 quarter. We have been only partially successful in the timely execution of customer price increases to offset chemical raw material cost increases of approximately 19% since the third quarter of 2004 due to time lags and because of pricing pressures from competitors, particularly in Foam Products. Gross profit in the quarter ended October 2, 2005 was reduced by a charge of $5.8 million for obsolete consumer products inventory. Loss from operations for the quarter ended October 2, 2005 was $26.0 million, or 8.1% of net sales, which compared to income from operations of $14.9 million, or 4.8% of net sales, reported in the 2004 period. The $12.9 million decline in gross profit, a $2.8 million increase in selling, general and administrative expenses, primarily due to higher bad debt expenses; and impairment charges of $25.3 million were the main factors in generating the operating loss. Foam Products Foam Products net sales for the quarter ended October 2, 2005 increased 9% to $152.3 million from $140.0 million in the 2004 period primarily due to higher prices partially offset by small volume decreases. Income from operations decreased 74%, to $3.7 million in the quarter ended October 2, 2005 from $14.0 million in the 2004 period principally as a result of higher raw material costs that could not be fully recovered through customer price increases and a charge of $5.8 million for obsolete consumer products inventory. Income from operations was 2.4% of net sales in 2005, down from 10.0% in 2004. 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 October 2, 2005 decreased 22% to $42.8 million from $54.8 million in the 2004 period primarily due to the sale of the rubber and felt businesses on April 29, 2005. Income from operations was $0.5 million in the quarter ended October 2, 2005 compared to $3.0 million in the 2004 period primarily due to the sale of the rubber and felt businesses partially offset by lower expenses. Income from operations was 1.2% of net sales in 2005 and 5.5% of net sales in 2004. Automotive Products Automotive Products net sales for the quarter ended October 2, 2005 increased 16% to $89.6 million from $77.1 million in the 2004 period. The increase was principally due to higher volumes. Income from operations of $3.5 million was up $0.3 million, or 10%, from the 2004 period primarily due to the increased sales volume partially offset by chemical cost increases not recovered by customer pricing. Income from operations was 3.9% of net sales in 2005 and 4.2% of net sales in 2004. Technical Products Technical Products net sales for the quarter ended October 2, 2005 increased 1% to $31.2 million from $31.0 million in the 2004 period as higher net pricing and mix effects were largely offset by lower volume. Income from operations was down 1% to $7.9 million from $8.0 million in the 2004 period primarily as a result of higher customer prices offset by chemical cost increases and lower volume. Income from operations was 25.4% of net sales in 2005 and 25.9% of net sales in 2004. Other Other primarily consists of certain manufacturing and fabrication operations in Mexico City, corporate expenses not allocated to business segments and restructuring and impairment charges. The decrease in net sales of 12% associated with this segment resulted from our Mexico City operations. The loss from operations was $41.6 million in the quarter ended October 2, 2005, which included $25.3 million of impairment charges, and was $13.3 million in the quarter ended September 26, 2004. Interest and Debt Issuance Expense Interest and debt issuance expense was $22.5 million in the quarter ended October 2, 2005, which represented an increase of $3.8 million, or 21%, from the 2004 period expense of $18.7 million, reflecting a $2.8 million increase in amortization and write off of debt issuance costs as well as higher average borrowings and interest rates. Reorganization Items, Net On September 19, 2005, the Debtors filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code. During the quarter ended October 2, 2005, the Debtors adjusted the carrying values of certain prepetition debt, including related debt issuance costs and deferred credits, incurred professional fees associated with the bankruptcy, and recorded gains from the rejection of certain leases and other contracts. These reorganization items resulted in net expense of $2.1 million. Other Income (Expense), Net Other expense, net was $1.1 million for the quarter ended October 2, 2005 compared to other expense, net of $0.5 million for the quarter ended September 26, 2004. The 2005 period included $0.9 million of fees in connection with amendments to our credit agreements and the 2004 period included $0.3 million of foreign currency transaction losses. 23 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Benefit for Income Taxes The benefit for income taxes for the quarter ended October 2, 2005 relates solely to foreign subsidiaries as tax benefits associated with losses from U.S. operations are fully reserved through a tax valuation allowance. The benefit recorded in the quarter ended October 2, 2005 includes an adjustment of $1.6 million for certain foreign tax reserves that are deemed to be no longer required. During the quarter ended September 26, 2004, we established a valuation allowance of $128.6 million for our U.S. deferred tax assets. RESULTS OF OPERATIONS FOR THE THREE QUARTERS ENDED OCTOBER 2, 2005 COMPARED TO THE THREE QUARTERS ENDED SEPTEMBER 26, 2004
Carpet Foam Cushion Automotive Technical Products Products Products Products Other Total -------- -------- ---------- ---------- --------- --------- (thousands) Three Quarters ended October 2, 2005 - ------------------------------------ Net sales $457,116 $134,886 $266,355 $93,387 $ 20,292 $972,036 Income (loss) from operations $ 17,677 $ (1,199) $ 13,993 $23,130 $(95,937) $(42,336) Depreciation and amortization $ 5,644 $ 2,043 $ 2,082 $ 1,727 $ 4,289 $ 15,785 Income (loss) from operations as a percentage of net sales 3.9% (0.9)% 5.3% 24.8% n.m.* (4.4)% Three Quarters ended September 26, 2004 - --------------------------------------- Net sales $400,464 $154,524 $267,752 $93,310 $ 21,701 $937,751 Income (loss) from operations $ 42,598 $ 7,727 $ 16,222 $25,329 $(47,091) $ 44,785 Depreciation and amortization $ 7,805 $ 2,201 $ 2,026 $ 2,113 $ 4,902 $ 19,047 Income (loss) from operations as a percentage of net sales 10.6% 5.0% 6.1% 27.1% n.m.* 4.8%
* not meaningful Income from Operations Net sales for the three quarters ended October 2, 2005 increased 4% to $972.0 million from $937.8 million in the three quarters ended September 26, 2004. Higher prices in Foam Products were partially offset by lower volume principally in the Carpet Cushion operating segment, primarily due to the sale of the rubber and felt carpet cushion businesses on April 29, 2005. Net sales from the rubber and felt carpet cushion businesses were $16.7 million greater in 2004 than in 2005. Gross profit was $68.6 million, or 7.1% of net sales, in the three quarters ended October 2, 2005 compared to $113.1 million, or 12.1% of net sales, in the 2004 period. We have been only partially successful in the timely execution of customer price increases to offset chemical raw material cost increases of approximately 29% since the first three quarters of 2004 due to time lags and because of pricing pressure from competitors particularly in Foam Products. Gross profit in the three quarters ended October 2, 2005 was reduced by a charge of $5.8 million for obsolete consumer products inventory. Loss from operations for the three quarters ended October 2, 2005 was $42.3 million, or 4.4% of net sales, compared to income from operations of $44.8 million, or 4.8% of net sales, reported during the 2004 period. The $44.5 million decline in gross profit was partially offset by lower selling, general and administrative expenses which decreased by $5.0 million, or 8%, principally due to lower bad debt expense, professional fees and employee costs. The 2004 period included a $3.7 million charge to bad debt expense as a result of a customer bankruptcy. The 2005 24 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. period includes impairment charges of $49.3 million. Results include net restructuring charges of $0.6 million in 2005 and $2.3 million in 2004. Restructuring items are discussed under "Other" below. Foam Products Foam Products net sales for the three quarters ended October 2, 2005 increased 14% to $457.1 million from $400.5 million in the 2004 period primarily due to higher prices partially offset by small volume decreases. Income from operations decreased 59% to $17.7 million in the three quarters ended October 2, 2005 from $42.6 million in the 2004 period principally as a result of higher raw material costs that could not be fully recovered, a charge of $5.8 million for obsolete consumer products inventory and $3.0 million for a customer product quality claim. Income from operations was 3.9% of net sales in 2005, down from 10.6% of net sales in 2004. Carpet Cushion Products Carpet Cushion Products net sales for the three quarters ended October 2, 2005 decreased 13% to $134.9 million from $154.5 million in the 2004 period principally due to the sale of the rubber and felt businesses on April 29, 2005. Net sales from the rubber and felt carpet cushion businesses were $16.7 million greater in the 2004 period than in the 2005 period. Loss from operations was $1.2 million in the three quarters ended October 2, 2005 compared to income from operations of $7.7 million in the 2004 period due primarily to higher raw material and manufacturing costs, lower volume and the reduced operating income from the rubber and felt businesses. Loss from operations was 0.9% of net sales in 2005 and income from operations was 5.0% of net sales in 2004. Automotive Products Automotive Products net sales for the three quarters ended October 2, 2005 decreased 1% to $266.4 million from $267.8 million in the 2004 period primarily as a result of volume increases from new customers offset by soft industry demand, especially during the first half of 2005. Income from operations of $14.0 million was down $2.2 million, or 14%, compared to the 2004 period primarily due to chemical costs not fully recovered by customer pricing. Income from operations was 5.3% of net sales in 2005 and 6.1% of net sales in 2004. Technical Products Technical Products net sales for the three quarters ended October 2, 2005 were flat at $93.4 million from $93.3 million in the 2004 period as selling price increases were offset by lower volume including inventory level adjustments by certain large customers. Income from operations decreased 9% to $23.1 million in the 2005 period compared to $25.3 million in the 2004 period primarily due to lower volume of higher margin products and higher raw material costs, partially offset by customer selling price increases. Income from operations was 24.8% of net sales in 2005 and 27.1% of net sales in 2004. Other Other primarily consists of certain manufacturing and fabrication operations in Mexico City, corporate expenses not allocated to business segments and restructuring and impairment charges. The decrease in net sales of 6% associated with this segment resulted from our Mexico City operations. The loss from operations was $95.9 million in the three quarters ended October 2, 2005, including $49.3 million of impairment charges, and $47.1 million in the three quarters ended September 26, 2004, which included restructuring items discussed below. During the three quarters ended October 2, 2005, we recorded restructuring charges of $0.6 million primarily related to the elimination of 14 sales, administrative and operating positions in the carpet cushion business. During the three quarters ended September 26, 2004, we recorded restructuring charges of $2.3 million primarily due to a lease termination and asset write offs to close our New York office and the realignment of automotive operations. 25 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Gain on Sale of Businesses On April 29, 2005, the Company sold its rubber and felt carpet cushion businesses consisting principally of property, plant and equipment located at Cape Girardeau, MO and Newton, NC, inventories, and related goodwill to Leggett & Platt, Incorporated for net cash proceeds of $38.7 million. The property, plant and equipment, inventories and related goodwill had carrying values of $3.2 million, $2.8 million and $2.5 million, respectively. The net gain of $29.7 million, on which there is no tax impact, has been reflected in the condensed consolidated statements of operations for the three quarters ended October 2, 2005. The rubber and felt carpet cushion businesses provided approximately $41.3 million and $4.5 million of net sales and gross profit, respectively, in the year ended January 2, 2005. Interest and Debt Issuance Expense Interest and debt issuance expense was $62.8 million in the three quarters ended October 2, 2005, which represented a 12% increase from the 2004 period expense of $55.9 million, reflecting a $2.9 million increase in amortization and write off of debt issuance costs as well as higher average borrowing levels and interest rates. Reorganization Items, Net On September 19, 2005, the Debtors filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code. During the three quarters ended October 2, 2005, the Debtors adjusted the carrying values of certain prepetition debt, including related debt issuance costs and deferred credits, incurred professional fees associated with the bankruptcy, and recorded gains from the rejection of certain leases and other contracts. These reorganization items resulted in net expense of $2.1 million. Other Income (Expense), Net Other expense, net was $1.9 million for the three quarters ended October 2, 2005 compared to other expense, net of $0.3 million for the three quarters ended September 26, 2004. The 2005 period included $1.7 million of fees in connection with amendments to our credit agreements. Benefit for Income Taxes The benefit for income taxes for the three quarters ended October 2, 2005 relates solely to foreign subsidiaries as tax benefits associated with losses from U.S. operations are fully reserved through a tax valuation allowance. The benefit recorded in the three quarters ended October 2, 2005 includes an adjustment of $1.6 million for certain foreign tax reserves that are deemed to be no longer required. During the three quarters ended September 26, 2004, the Company established a valuation allowance of $128.6 million for its U.S. deferred tax assets. LIQUIDITY AND CAPITAL RESOURCES On September 19, 2005, the Debtors filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware. Each of the Debtors continues to operate its business and manage its property as a debtor in possession pursuant to Sections 1107 and 1108 of the Bankruptcy Code. At a hearing held on September 20, 2005, the Bankruptcy Court granted the Company's first day motions for relief designed to stabilize its operations and business relationships with customers, vendors, employees, and others and entered orders granting permission to, among other things, pay employee salaries, wages and benefits, pay amounts owing in connection with workers' compensation and other insurance policies; utilize its existing cash management systems; continue its customer programs; pay vendors for certain critical goods and services provided prior to September 19, 2005; access, on an interim basis, of 26 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. up to $221 million of a $240 million debtor-in-possession (DIP) revolving credit facility and $80 million of a DIP term loan. A portion of the proceeds of the debtor-in-possession revolving credit facility and all of the proceeds of the new DIP term loan facility were used to repay the Debtor's prepetition revolving credit and term loan facilities. On October 17, 2005, the Bankruptcy Court granted final approval of the $240 million DIP credit facility and $80 million DIP term loan. To exit Chapter 11 successfully, the Company must obtain confirmation by the Bankruptcy Court of a plan of reorganization. The Company has reached an agreement in principle with an ad hoc committee of holders of a majority of the Company's 10 3/4% Senior Secured Notes. Pursuant to that agreement in principle, the holders of the Senior Secured Notes would convert their debt into 100% of the equity of the reorganized Company, subject to dilution. The agreement in principle further provides that if unsecured creditors (to the extent that their claims are not otherwise treated as critical vendor claims or paid through assumption of their contracts during the bankruptcy cases) and the holders of the Company's Senior Subordinated Notes vote to accept the reorganization plan, then they will receive, on a pro rata basis, warrants to purchase between 5% and 10% of the equity of the reorganized Company, depending on the ultimate allowed amount of general unsecured claims. Under the agreement in principle, there would be no recovery for holders of equity securities in the Company. Our operations are conducted through our wholly-owned subsidiary, Foamex L.P. Our liquidity requirements consist primarily of the operating cash requirements of Foamex L.P. Foamex L.P.'s liquidity requirements consist principally of accounts receivable, inventory and accounts payable, scheduled payments of interest on outstanding indebtedness, capital expenditures and employee benefit plans. Historically, cash flow from Foamex L.P.'s operating activities, cash on hand and periodic borrowings under its credit agreements have been adequate to meet Foamex L.P.'s operating liquidity requirements. We are continuing to explore potential sales of non-strategic assets. Total debt, including amounts subject to compromise, and revolving credit borrowings at October 2, 2005 was $761.2 million, up $21.0 million from the face value of the debt at January 2, 2005. As of October 2, 2005, there were $172.7 million of revolving credit borrowings under the DIP Revolving Credit Facility with $23.9 million available for future borrowings and letters of credit outstanding of $29.1 million. Revolving credit borrowings reflect working capital requirements. While we believe that cash flows from Foamex L.P.'s operating activities, cash on hand and additional borrowings under the DIP Revolving Credit Facility will provide an adequate level of liquidity until we emerge from the Chapter 11 process, there is no assurance that we will have enough cash to meet all ongoing obligations during the Chapter 11 process. Cash and cash equivalents were $4.6 million at October 2, 2005 compared to $5.4 million at January 2, 2005. Working capital at October 2, 2005 was a negative $32.1 million compared to working capital at January 2, 2005 of a negative $57.1 million. The improvement is due to the reclassification of certain accounts payable and accrued liabilities to liabilities subject to compromise at October 2, 2005. On September 22, 2005, Foamex L.P. entered into a Debtor-in-Possession Credit Agreement (the "DIP Revolving Credit Facility") with a group of banks to provide a revolving credit facility with a maximum availability of $240.0 million. The initial borrowing under the DIP Revolving Credit Facility was used to repay outstanding obligations under the Senior Secured Credit Facility and interest under the Secured Term Loan. The DIP Revolving Credit Facility includes a $40.0 million sublimit for letters of credit and availability is limited to eligible amounts, as defined, of accounts receivable, inventory, equipment, and real estate. Substantially all of the assets of Foamex L. P. and its domestic subsidiaries and Foamex Canada are pledged as collateral for the related borrowings. Borrowings under the DIP Revolving Credit Facility bear interest at floating rates based upon and including a margin over either LIBOR or a Base Rate, as defined. At October 2, 2005, the weighted average interest rate on borrowings was 8.13%. All borrowings under the DIP Revolving Credit Facility will mature on the earlier of March 22, 2007 or the date that the Company emerges from Chapter 11 proceedings. The lenders under the DIP Revolving Credit Facility have agreed to provide emergence financing, subject to a number of conditions, of up to $275.0 million upon the Company's emergence from Chapter 11 proceedings. The DIP Revolving Credit Facility includes both a subjective 27 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. acceleration clause and a lock box arrangement that requires all lock box receipts be used to repay revolving credit borrowings. Accordingly, borrowings under the DIP Revolving Credit Facility are classified as current in the accompanying condensed consolidated balance sheet at October 2, 2005. On September 22, 2005, Foamex L.P. entered into a Debtor-in-Possession Credit Agreement (the "DIP Term Loan") with a group of lenders to provide an $80.0 million term loan. Proceeds from the DIP Term Loan were used to repay outstanding principal under the Secured Term Loan. Borrowings under the DIP Term Loan bear interest at a rate that is either 8.00% plus the greater of the Base rate, as defined, or 6.50% or at 10.00% plus the greater of the LIBOR rate or 3.00%. At October 2, 2005, the weighted average interest rate was 13.78%. Borrowings under the DIP Term Loan are collateralized by the same collateral as the DIP Revolving Credit Facility. An intercreditor agreement governs the distribution of collateral among the lenders under the DIP Revolving Credit Facility and the DIP Term Loan. All borrowings under the DIP Term Loan will mature on the earlier of March 22, 2007 or the date that the Company emerges from Chapter 11 proceedings. The lenders under the DIP Term Loan have agreed to provide emergence financing, subject to a number of conditions, of $80.0 million upon the Company's emergence from Chapter 11 proceedings. The DIP Term Loan may be repaid prior to maturity by paying a prepayment premium initially set at 8% and declining ratably over a 48-month period. We contributed $5.4 million to our pension plans during the three quarters ended October 2, 2005. We anticipate total pension plan contributions of $7.4 million in 2005 and we may be required to make an accelerated funding contribution for 2006 to comply with requirements for underfunded plans. The amount of contributions may be materially impacted by resolution of certain legislation now pending before the U.S. Congress. Cash Flow from Operating Activities Cash used for operating activities in the three quarters ended October 2, 2005 was $43.1 million, including cash used for reorganization items of $4.6 million, compared to $10.0 million provided in the three quarters ended September 26, 2004. This is primarily due to a decline in income from operations before noncash impairment charges of $37.8 million in 2005 compared to 2004. In addition, accounts receivable were higher at October 2, 2005, primarily due to increased sales. Cash Flow from Investing Activities Investing activities provided $33.8 million for the three quarters ended October 2, 2005. Proceeds from the sale of the rubber and felt businesses were $38.7 million. Cash requirements included capital expenditures of $4.2 million and capitalized software development costs of $1.8 million. In the three quarters ended September 26, 2004, cash used for investing activities was $4.3 million. Cash requirements included capital expenditures of $4.2 million and capitalized software development costs of $2.4 million. These uses were partially offset by proceeds from asset sales of $2.2 million. Cash Flow from Financing Activities Cash provided by financing activities was $8.5 million for the three quarters ended October 2, 2005 and consisted principally of proceeds from the debtor-in-possession credit facilities reduced by repayment of debt, debt issuance costs and a decrease in cash overdrafts. Cash used for financing activities was $6.4 million for the three quarters ended September 26, 2004 and consisted principally of scheduled payments of the term loan under the Senior Secured Credit Facility and the net proceeds from certain asset sales used to make an additional payment on the term loan as required under the facility. 28 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Contractual Obligations During the three quarters ended October 2, 2005, except as required by the bankruptcy filing, there were no material changes in our contractual obligations outside of the ordinary course of business. Off Balance Sheet Financing We have no off balance sheet financing arrangements. 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 October 2, 2005 was approximately $1.9 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 14 to our condensed consolidated financial statements, we believe that, based upon all currently available information, the resolution of all such pending environmental matters will not have a material adverse effect on our operations, financial position, capital expenditures or competitive position. Market Risk We have debt securities with variable interest rates subject to market risk for changes in interest rates. On October 2, 2005, indebtedness with variable interest rates aggregated $259.7 million. On an annualized basis, if the interest rates on these debt instruments increased by 1.0%, interest expense would increase by approximately $2.6 million. The two principal chemicals used in the manufacturing of flexible polyurethane foam are toluene diisocyanate, or "TDI," and polyol. The prices of TDI and polyol are influenced by demand, manufacturing capacity and crude oil and natural gas prices. We attempt to offset raw material price increases through selling price increases and manufacturing process efficiencies. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. See the "Market Risk" section under Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations. ITEM 4. CONTROLS AND PROCEDURES. (a) Evaluation of Disclosure Controls and Procedures Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. The Chief Executive Officer and Chief Financial Officer concluded that, due to the material weaknesses identified in Management's Annual Report on Internal Control Over Financial Reporting included in our Form 10-K/A filed with the Securities and Exchange Commission (the "SEC") on May 2, 2005 (the "Management Report"), our disclosure controls and procedures as of the end of the period covered by this report were not effective to provide reasonable assurance that the information required to be disclosed by us in reports filed under the Securities Exchange Act of 1934 is (i) recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and (ii) accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding disclosure. 29 FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES ITEM 4. CONTROLS AND PROCEDURES. (b) Changes in Internal Control over Financial Reporting During the quarter ended October 2, 2005, we continued to strengthen our internal control over financial reporting in the following areas. Non-Routine Transactions and Significant Agreements. As previously disclosed, we determined that we did not have adequate controls in place to ensure the proper accounting for non-routine transactions such as the establishment of a valuation allowance on our deferred tax assets and significant agreements. This issue continues to be addressed through further implementation of comprehensive review processes and procedures for non-routine transactions and significant agreements to ensure more robust reviews and proper accounting. We have hired additional personnel in our internal audit function and retained an experienced accountant during the third quarter. We were the subject of an informal inquiry by the SEC relating to our internal controls. On July 11, 2005, we consented to the entry of an order by the SEC requiring us to cease and desist from committing or causing any violations of the books and records, internal control and reporting provisions of the Securities Exchange Act of 1934, as well as quarterly reporting regulations under that act. The order also requires us to undertake a process, with the assistance of a special consultant, to remediate any material weakness or significant deficiency in our internal control over financial reporting identified by us or our auditors. The special consultant has been retained and commenced work in July 2005. The special consultant issued an initial report to our Audit Committee and the SEC in early October 2005 and will be issuing further quarterly reports as required by the order. Other than as described above, no change in our internal control over financial reporting occurred during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. 30 Part II - Other Information. Item 1. Legal Proceedings. Reference is made to the description of the legal proceedings contained in the Company's Annual Report on Form 10-K for the year ended January 2, 2005. The information from Note 13 to the condensed consolidated financial statements is incorporated herein by reference. Item 3. Defaults Upon Senior Securities On August 15, 2005, the Company notified the trustee of its 13 1/2% Senior Subordinated Notes that it would not remit a principal payment of $51.6 million and an interest payment of $3.5 million that were due on that date. Failure to remit the principal put the Company in default under its 13 1/2% Senior Subordinated Note Indenture and also caused the Company to be in default under its other debt agreements. The Company continues to be in default on its 13 1/2% Senior Subordinated Notes, 9 7/8% Senior Subordinated Notes and 10 3/4% Senior Secured Notes. At November 21, 2005, the total amounts in arrears, including interest computed at the stated rate through November 21, 2005 for each of these issues are $56.9 million, $154.9 million and $320.7 million, respectively. The Company's financial statements are reported under Statement of Position 90-7 and include only the amounts required thereunder. Item 6. 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. 31 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FOAMEX INTERNATIONAL INC. Date: November 21, 2005 By: /s/ K. Douglas Ralph -------------------------------------- K. Douglas Ralph Executive Vice President and Chief Financial Officer (Duly Authorized Officer and Principal Financial Officer) 32 EX-31 2 ex311q305.txt Exhibit 31.1 CERTIFICATION I, Thomas E. Chorman, certify that: 1. I have reviewed this report on Form 10-Q of Foamex International Inc. for the period ended October 2, 2005; 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 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) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) 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 d) disclosed in this report any change in the registrant's internal control 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 the 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 21, 2005 /s/ Thomas E. Chorman ------------------------------------- Thomas E. Chorman President and Chief Executive Officer EX-31 3 ex312q305.txt Exhibit 31.2 CERTIFICATION I, K. Douglas Ralph, certify that: 1. I have reviewed this report on Form 10-Q of Foamex International Inc. for the period ended October 2, 2005; 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 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) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) 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 d) disclosed in this report any change in the registrant's internal control 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 the 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 21, 2005 /s/ K. Douglas Ralph -------------------------------- K. Douglas Ralph Executive Vice President and Chief Financial Officer EX-32 4 ex321q305.txt Exhibit 32.1 CERTIFICATION 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 International Inc. on Form 10-Q for the period ended October 2, 2005 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Thomas E. Chorman, President and Chief Executive Officer of Foamex International Inc., 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 International Inc. /s/ Thomas E. Chorman - ------------------------------------- Thomas E. Chorman President and Chief Executive Officer November 21, 2005 EX-32 5 ex322q305.txt Exhibit 32.2 CERTIFICATION 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 International Inc. on Form 10-Q for the period ended October 2, 2005 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 International Inc., 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 International Inc. /s/ K Douglas Ralph - ---------------------------- K. Douglas Ralph Executive Vice President and Chief Financial Officer November 21, 2005 -----END PRIVACY-ENHANCED MESSAGE-----