UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 29, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from .......... to ..........
Commission file number: 1-11432: 1-11436
FOAMEX L.P.
FOAMEX CAPITAL CORPORATION
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(Exact Name of registrant as Specified in its Charter)
Delaware 05-0475617
Delaware 22-3182164
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1000 Columbia Avenue, Linwood, PA 19061
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (610) 859-3000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether Foamex L.P. (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 periods that Foamex
L.P. 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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Annual Report on Form 10-K or any
amendment to this Annual Report on Form 10-K. [X]
None of the voting securities of Foamex L.P. or Foamex Capital Corporation
are held by non-affiliates.
As of March 24, 2003, there were 1,000 shares of Foamex Capital
Corporation's common stock outstanding.
Foamex L.P. and Foamex Capital Corporation meet the conditions set forth in
General Instruction (I)(1)(a) and (b) of this Annual Report on Form 10-K and are
therefore filing this form with reduced disclosure format.
DOCUMENTS INCORPORATED BY REFERENCE
None
1
FOAMEX L.P.
FOAMEX CAPITAL CORPORATION
INDEX
Page
Part I
Item 1. Business 3
Item 2. Properties 11
Item 3. Legal Proceedings 11
Item 4. Submission of Matters to a Vote of Security Holders 13
Part II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters 13
Item 6. Selected Consolidated Financial Data 13
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 15
Item 7a. Quantitative and Qualitative Disclosures about Market Risk 30
Item 8. Financial Statements and Supplementary Data 30
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 31
Part III
Item 10. Directors and Executive Officers of the Registrant 31
Item 11. Executive Compensation 31
Item 12. Security Ownership of Certain Beneficial Owners
and Management 31
Item 13. Certain Relationships and Related Transactions 31
Item 14. Controls and Procedures 31
Part IV
Item 15 Exhibits, Financial Statement Schedules
and Reports on Form 8-K 32
Signatures 38
Certification of Chief Executive Officer 39
Certification of Chief Financial Officer 40
The Registrant will furnish a copy of any exhibit to this Annual Report on
Form 10-K upon the payment of a fee equal to the Registrant's reasonable expense
in furnishing such exhibit.
2
PART I
ITEM l. BUSINESS
General
Foamex L.P. (referred to in this document as "Foamex L.P., we, us and/or
our"), a wholly-owned subsidiary of Foamex International Inc. ("Foamex
International"), is engaged primarily in the manufacturing and distribution of
flexible polyurethane and advanced polymer foam products. As of December 29,
2002, Foamex L.P.'s operations are conducted directly and through its
wholly-owned subsidiaries, Foamex Canada Inc. ("Foamex Canada"), Foamex Latin
America, Inc. ("Foamex Mexico") and Foamex Asia, Inc. ("Foamex Asia"). Foamex
Carpet Cushion, Inc. ("Foamex Carpet") was converted to a limited liability
company and was contributed by Foamex International to Foamex L.P. on March 25,
2002. The contribution of Foamex Carpet has been accounted for as a merger of
entities under common control and has been recorded in a manner similar to a
pooling of interests. Accordingly, all information in this annual report on Form
10-K includes Foamex Carpet. As of December 29, 2002, Foamex L.P.'s partners
were FMXI, Inc. ("FMXI") with a 1.7% managing general partnership interest and
Foamex International with a 98.3% limited partnership interest.
Segments
We are the largest manufacturer and distributor of flexible polyurethane
and advanced polymer foam products in North America. We have numerous
manufacturing facilities dedicated to specific product lines as well as
facilities with the capability to support multiple product lines. Each of our
business segments has a customer base that is significantly different from the
other segments. Our senior executives direct sales efforts for each of our
business segments.
Our five business segments are described below.
Foam Products
Our foam products are distributed directly from manufacturing facilities
and indirectly through independent fabricator distributors. These foams are used
by the bedding industry in quilts, toppers, cores and border rolls for
mattresses. In the furniture industry, they are generally used for upholstered
seating products and in the retail industry, for a broad range of products, such
as mattress overlay pads, leisure furniture, futons and pillows. Foam products
are generally sold in large volumes on a regional basis because of high shipping
costs.
Our bedding products are sold to mattress manufacturers. We also supply
cut-to-size seat cushions, back cushions and other pieces to the furniture
industry. Furniture foams are sold directly to manufacturers as well as through
distributors. The consumer products group sells therapeutic sleep products such
as mattress pads and bed pillows for the health care and consumer markets and a
broad line of home furnishing products to retailers throughout North America.
The development and introduction of value-added products continues to be a
priority including products incorporating Reflex(R) and viscoelastic or "memory"
foams for the bedding industry, which maintain their resiliency better than
other foams and materials. Reflex(R) materials include cushion wraps and cushion
cores and are advanced polymer cushioning products designed to improve comfort,
quality and durability in upholstered furniture and bedding products. Reflex(R)
was created using patented VPF(SM) manufacturing technology. We also have
introduced high efficiency thermal management foam products for applications in
work gloves and outerwear.
Carpet Cushion Products
We manufacture carpet cushion products, which include rebond, prime, felt
and rubber carpet padding. Prime carpet padding is made from virgin polyurethane
foam buns. Rebond carpet padding is primarily made from recycled foam, which is
shredded into small pieces, processed and then bonded using a polyurethane
chemical adhesive. Rebond manufacturing requires the management of a
comprehensive recycling business that includes an extensive internal and
external collection network from the automotive and foam industries on a
worldwide basis.
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Our fiber operation incorporates both mechanical and chemical bonding techniques
to produce high-end padding from virgin and recycled fibers. We produce high-end
rubber carpet padding utilizing both natural and synthetic rubber.
Automotive Products
We are one of the largest suppliers of polyurethane foam products to the
North American automotive industry. Our product lines include: foam rolls and
flame-laminated composites, to improve comfort and provide pleasing appearance
in seat covers and other interior soft-trim applications, which includes our new
SmoothBond(R) product, using patented VPF(SM) technology to provide unique
comfort characteristics in seating applications; CustomFit(R) semi-rigid
thermoformable foams, to provide structure and shape in headliner substrate
applications; Qylite(R) acoustical foams, to reduce noise and improve sound
quality in the vehicle. We provide a range of foams in this category for
applications such as dash insulators, hood insulators and interior trim
insulators; contoured foam products for motor vehicle floor carpet underlay
pads; barrier foam products, which provide soft-touch cushioning, while also
allowing our customers to more efficiently process the components with
low-pressure injection-molding or foam-in-place manufacturing methods; molded
energy-absorbing foams, to enhance occupant safety in vehicle crash situations
and allow our customers to meet federal regulatory safety standards for their
components; molded seating cushions, diversifying us further into molded
products to complement our core slab-based business.
We supply our product lines through a range of tiers in the automotive
industry supply chain, varying greatly depending on the specific application and
the original equipment manufacturer ("OEM"). Most frequently, we supply to Tier
1 system integrators, which in turn provide components and systems to the OEMs.
In conjunction with these efforts, we maintain direct contact with OEMs for
material specification development, appearance approvals, and new product
development initiatives.
We maintain our position in the automotive industry through a continuing
focus on new product development, flexible and efficient manufacturing
capabilities, and outstanding quality and service in our QS9000 registered
manufacturing facilities.
Technical Products
We are one of the foam industry's prime innovators and producers of
industrial, specialty, consumer and safety foams, which we refer to as
"Technical Products." Technical Products consist of reticulated foams and other
custom polyester and polyether foams, which are sometimes combined with other
materials to yield specific properties. Reticulation is the thermal or chemical
process used to remove the membranes from the interconnecting cells within foam.
This leaves a porous, skeletal structure allowing for the free flow of gases
and/or liquids. Felting and lamination with other foams or materials give these
composites specific properties.
Reticulated foams are well suited for filtration, reservoiring, sound
absorption and sound transmission. Industrial applications include carburetors,
computer cabinets, inkpad reservoirs, high-speed inkjet printers and speaker
grills. Medical applications include oxygenators for cardiopulmonary surgery,
instrument holders for sterilization, pre-op scrubbers impregnated with
anti-microbial agents and EKG pads containing conductive gels. Other Technical
Products have unique characteristics such as flame retardancy and fluid
absorption. Additional products sold within this group include foams for
refrigerated supermarket produce counters, mop heads, paint brushes and cosmetic
applications.
Due to the highly specialized nature of most Technical Products, our
research staff works with customers to design, develop and manufacture each
product to specification. In addition, we advertise in trade journals and
related media to attract customers and, more generally, to increase an awareness
of our capabilities for Technical Products.
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Other
Other consists primarily of certain manufacturing operations in Mexico
City, corporate expenses not allocated to the other business segments and
restructuring, impairment and other charges (credits).
Marketing and Sales
Foam Products sells directly to major bedding and furniture manufacturers
and also through third party independent fabricators. In addition, we
manufacture and distribute foam-based consumer products such as futons, pillows,
mattress pads and children's furniture to retail chains. Our foam-based consumer
products sales efforts are primarily regionally based. The key strategic
elements supporting growth in these areas are a focus on marketing and sales
efforts, high quality, cost-competitive products and low freight costs through
optimal plant location. Plant locations are critical in this regionalized
business where the transportation cost typically comprises a significant portion
of product cost.
Carpet Cushion Products sells carpet padding to distributors and to major
home product and floor covering retail chains.
Our Automotive Products customer base includes all of the major Tier 1
interior system integrators. We compete for new business both at the beginning
of development of new models and upon the redesign of existing models. Once a
foam producer has been designated to supply parts for a new model program, the
foam producer usually produces parts for the life of the program. Competitive
factors in the market include product quality and reliability, cost and timely
service, technical expertise and development capability, new product innovation
and customer service.
We market our Technical Products through a network of independent
fabrication and distribution companies in North America, the United Kingdom and
Asia. These fabricators or distributors often further process or finish
Technical Products to meet the specific needs of end users. Our specialty and
technical foams service unique end user requirements and are generally sold at
relatively high margins. This business is characterized by a diversity and
complexity of both customers and applications.
International Operations
Our international operations are located in Canada, Mexico and Asia. We
operate four manufacturing facilities in Canada to service our bedding and
automotive customers and have six facilities in Mexico serving the automotive
and cushioning industries. Five of the Mexican facilities are located within the
Mexican free trade zones close to the U.S. border and primarily service
automotive customers. Our Mexico City facility services both automotive and foam
fabrication customers.
We participate in a joint venture with fabrication facilities in Singapore
and Thailand. In December 2001, we increased our non-controlling equity interest
in the joint venture to 70%. The joint venture expects to install its first foam
pourline during 2003. This pourline, which will be entirely financed by the
joint venture entity, will reduce foam shipping costs for sales to the region
and increase the range of markets served.
We have maintained a longstanding relationship with Recticel s.a.
("Recticel"), a leading manufacturer of flexible polyurethane foam in Europe. We
have in the past exchanged technical information and expertise relating to foam
manufacturing with Recticel.
Major Customers
Sales to Johnson Controls, which are included in Automotive Products,
accounted for approximately 17.3% of our net sales in 2002, 15.7% of our net
sales in 2001, and 12.3% of our net sales in 2000. No other customer accounted
for more than 10.0% of our net sales during any of the past three years. Net
sales to our five largest customers comprised approximately 33.8% of our net
sales in 2002, 35.0% of our net sales in 2001 and 29.7% of our net sales in
2000. The loss of any one of these customers could have a material adverse
effect on our business.
5
Manufacturing and Raw Materials
Our manufacturing and distribution facilities are strategically located to
service our major customers because the high freight cost in relation to the
cost of the foam product generally results in distribution being most
cost-effective within a 200 to 300 mile radius. During 2002, we closed certain
rebond carpet padding operations, foam pouring operations, and a foam
fabrication operation. We have identified additional operations to be closed
during 2003. In many cases, the volume from these closed operations will be
absorbed by our existing facilities in order to improve capacity utilization. In
some but not all instances, our other existing facilities will have to be
upgraded to absorb the transferred volume. We may lose some revenue due to
closing these operations.
Our fabrication process involves cutting foam buns into various shapes and
sizes to meet customer specifications. Fabricated foam is sold to customers and
is utilized by us to produce our foam-based consumer products. Scrap foam, a
byproduct of foam production and fabrication, is used to produce rebond carpet
padding.
Raw materials account for a significant portion of our manufacturing costs.
The two principal chemicals used in the manufacture of flexible polyurethane
foam are toluene diisocyanate, or "TDI," and polyol. We generally have
alternative suppliers for each major raw material. We believe that we could find
alternative sources of supply should we cease doing business with any one of our
major suppliers, although there may be some delay in replacing a major supplier,
especially a supplier of TDI and/or polyol. There are a limited number of major
suppliers of TDI and polyol. Our principal supplier of TDI and polyol is The Dow
Chemical Company. Although we have not experienced a significant shortage of
available materials, a disruption in our ability to obtain TDI and/or polyol
that continues for a significant period of time could cause us to suspend our
manufacturing operations, which could have a material adverse effect on our
business and results of operations.
The prices of TDI and polyol have historically been cyclical and volatile.
The prices of these raw materials are influenced by demand, manufacturing
capacity, oil prices and the current geopolitical instability and its impact on
oil production and prices. We experienced 32.0% to 37.0% increases in the price
of raw materials from major chemical manufacturers during the fiscal year ended
December 29, 2002. Our major chemical suppliers have announced their intention
to increase prices by approximately 10.0% to 12.0% effective April 1, 2003. We
attempt to offset raw material price increases through selling price increases
and manufacturing process efficiencies, but we were only partially able to do so
in the fiscal year ended December 29, 2002. In the future, we may not be
successful in implementing selling price increases to fully recover raw material
cost increases. Competitive pricing pressure may also require us to adjust our
selling prices or lose volume.
A key material needed in the manufacture of rebond carpet padding is scrap
foam. We internally generate a substantial portion of the scrap foam used in the
production of rebond carpet padding from our other operations. Historically, the
market price of rebond carpet padding has fluctuated with the market price of
scrap foam.
Employees
As of December 29, 2002, we employed approximately 5,800 persons.
Approximately 1,700 of these employees are located outside the United States and
approximately 2,200 employees are covered by collective bargaining agreements
with labor unions. These agreements expire on various dates through 2004. We
consider relations with our employees to be good.
Competition
The flexible polyurethane foam industry is highly competitive with price,
quality and service being significant competitive factors. Our competitors in
the polyurethane foam industry include E. R. Carpenter Company, Hickory Springs
Manufacturing Company, Vitafoam, Inc., Flexible Foam Products, Inc., Future
Foam, Inc. and The Woodbridge Group. None of these competitors individually
competes in all of the business segments in which we do business.
6
Patents and Trademarks
We own various patents and trademarks registered in the United States and
in numerous foreign countries. The registered processes and products were
developed through ongoing research and development activities to improve
quality, reduce costs and expand markets through development of new applications
for flexible polyurethane foam products. While we consider our patents and
trademarks to be a valuable asset, we do not believe that our competitive
position is dependent on patent protection or that our operations are dependent
upon any individual patent, trademark or tradename.
Research and Development
We believe we have a leading research and development capability in the
flexible polyurethane foam industry. Our primary research and development
facility is located in Eddystone, Pennsylvania. Expenditures for research and
development amounted to $4.8 million for 2002, $3.1 million for 2001 and $2.5
million for 2000.
Foamex L.P., Recticel, and Beamech Group Limited, an unaffiliated third
party, have an interest in Prefoam AG, a Swiss corporation that develops new
manufacturing technology for the production of polyurethane foam including the
VPF(SM) manufacturing process. Recticel and affiliates of Recticel are
shareholders of Foamex International. Foamex L.P., Recticel and their affiliates
have a royalty-free license to use technology developed by the Swiss
corporation. We and Recticel have exchanged know-how, trade secrets, engineering
and other data, designs, specifications, chemical formulations, technical
information, market information and drawings which are necessary or useful for
the manufacture, use or sale of foam products. We anticipate that we will
continue to do so in the future.
Risk Factors
In addition to the other information in this Annual Report on Form 10-K,
investors should carefully consider the following factors about us. Certain
statements in "Risk Factors" are forward-looking statements. See
"Forward-Looking Information."
Our substantial debt could impair our financial condition.
We continue to be highly leveraged and have substantial debt service
obligations. As of December 29, 2002, our total debt was approximately $738.6
million and our partners' deficiency was approximately $305.8 million. As of
December 29, 2002, we had approximately $27.6 million in revolving loan
availability and approximately $20.6 million in outstanding letters of credit.
We may also incur additional debt in the future, subject to certain limitations
contained in our debt instruments.
The degree to which we are leveraged could have important consequences. For
example:
o our ability to obtain additional financing in the future for working
capital, capital expenditures, acquisitions, general corporate
purposes or other purposes may be limited;
o a significant portion of our cash flow from operations must be
dedicated to the payment of interest and, beginning in 2004, principal
on our debt, which reduces the funds available for operations;
o some of our debt is and will continue to be at variable rates of
interest, which may result in higher interest expense in the event of
increases in interest rates or inability to achieve certain financial
conditions;
o our debt agreements contain, and any agreements to refinance our debt
likely will contain, financial and restrictive covenants, and our
failure to comply with them may result in an event of default which,
if not cured or waived, could have a material adverse effect on us;
and
7
o On February 26, 2003, Standard and Poor's Rating Services ("S&P")
announced that it had lowered its corporate credit rating on Foamex
L.P. from "B+" to "B". In their announcement, S&P cited their view
that our weak operating performance, higher raw material costs, and a
sluggish domestic economy, which if not reversed will likely elevate
near-term liquidity concerns. The S&P action could have a negative
impact on the cost of our future borrowings, if any, and the extension
of trade credit.
We and our bank lenders executed an amendment to the Amended Credit Facility on
November 15, 2002 revising our financial covenants. If we are unable to comply
with our revised financial covenants, our bank lenders could cause all amounts
outstanding under the Amended Credit Facility to be due and payable immediately.
On November 15, 2002, we and the bank lenders executed an amendment to the
Amended Credit Facility, which, among other things, revised the financial
covenants. In addition, borrowings under the Amended Credit Facility are subject
to a borrowing base calculation, which could limit borrowings under the
revolving credit facility to less than the maximum commitment. Also, we are
subject to other financial covenants through December 28, 2003. A minimum
EBDAIT, as defined, covenant is tested monthly, on a cumulative basis, beginning
with December 2002. Our minimum EBDAIT covenants have higher thresholds in the
second half of 2003. Our ability to comply with this covenant will be
substantially dependent on an improved gross profit margin and lower
administrative costs compared to the latter part of 2002. If we are unable to
comply with the revised financial covenants, the bank lenders could cause all
amounts outstanding under the Amended Credit Facility to be due and payable
immediately. In addition, any event of default or declaration of acceleration
under one debt instrument could also result in an event of default under one or
more of our other debt instruments, which unless cured or waived, would have a
material adverse effect on us and could impair our ability to continue as a
going concern.
If we breach any of the financial covenants under our various indentures, credit
facilities or guarantees, our debt service obligations could be accelerated.
If we breach any of the financial covenants under our various indentures,
credit facilities or guarantees, our substantial debt service obligations could
be accelerated. Furthermore, any breach of any of the financial covenants under
our subsidiaries' indentures or credit facilities could result in the
acceleration of all the indebtedness of our subsidiaries. In the event of any
such simultaneous acceleration, we would not be able to repay all of the
indebtedness under our various guarantees or under our subsidiaries' indentures,
guarantees or credit facilities.
We may not be able to generate sufficient cash flow to meet our debt service
obligations.
Our ability to generate sufficient cash flow from operations to make
scheduled payments on our debt service obligations will depend on our future
financial performance, which will be affected by a range of economic,
competitive and business factors, many of which are outside of our control. Our
annual debt service obligations will increase by $2.2 million per year for each
1% increase in interest rates, based on the balance of variable rate debt
outstanding as of December 29, 2002. Our estimated debt service obligation for
2003 is $69.7 million, based on levels of debt and interest rates in effect at
December 29, 2002. If we do not generate sufficient cash flow from operations to
satisfy our debt service obligations, we may have to undertake alternative
financing plans, such as refinancing or restructuring our debt, selling assets,
reducing or delaying capital investments or seeking to raise additional capital.
We may not be able to refinance or restructure our debt or sell assets on a
timely basis, on acceptable terms or at all. Furthermore, the proceeds of any
refinancing, restructuring or asset sale may not generate sufficient cash flow
to meet our debt service obligations. In addition, we may not be able to obtain
additional financing on acceptable terms, if at all, or may not be permitted to
obtain additional financing under the terms of our various debt instruments then
in effect. Our inability to generate sufficient cash flow to satisfy our debt
service obligations, or to refinance our obligations on commercially reasonable
terms, would have a material adverse effect on our business, financial condition
and results of operations.
8
We may incur more debt, which could exacerbate the risks described above.
We and our subsidiaries may be able to incur substantial additional
indebtedness in the future. The Amended Credit Facility and the indentures
relating to our 10 3/4% senior secured notes due 2009, 9 7/8% senior
subordinated notes due 2007 and 13 1/2% senior subordinated notes due 2005
restrict us and our subsidiaries in incurring additional indebtedness, but do
not fully prohibit us and our subsidiaries from doing so. If new debt is added
to our and our subsidiaries' current debt levels, the related risks, including
those described above, that we and they now face could intensify, which could
have a material adverse effect on us.
The price and availability of raw materials account for a significant portion of
our manufacturing costs. We have experienced significant increases in raw
material costs and may continue to do so.
The two principal chemicals used in the manufacture of flexible
polyurethane foam are toluene diisocyanate, or "TDI," and polyol. The prices of
TDI and polyol are influenced by demand, manufacturing capacity and oil and
natural gas prices. Historically, the price of raw materials has been cyclical
and volatile, and our principal suppliers of raw materials used in the
manufacture of flexible polyurethane foam have significantly increased the price
of raw materials several times.
We experienced 32.0% to 37.0% increases in the price of raw materials from
major chemical manufacturers during the fiscal year ended December 29, 2002. Our
major chemical suppliers have announced their intention to increase prices by
approximately 10.0% to 12.0% effective April 1, 2003. We attempt to offset raw
material price increases through selling price increases and manufacturing
process efficiencies, but we were only partially able to do so in the fiscal
year ended December 29, 2002. Our suppliers of TDI and polyol, as well as our
other suppliers, may increase raw material prices in the future and we may not
be able to implement additional selling price increases to fully offset raw
material cost increases. This could have a material adverse effect on our
business, financial condition and results of operations.
We depend on a limited number of suppliers of TDI and polyol.
There are a limited number of major suppliers of TDI and polyol. Our
principal supplier of TDI and polyol is The Dow Chemical Company. Although we
have not experienced a significant shortage of available materials, a disruption
in our ability to obtain TDI and/or polyol that continues for a significant
period of time could cause us to suspend our manufacturing operations, which
could have a material adverse effect on our business and results of operations.
We must effectively manage our other operating expenses.
In addition to our ability to effectively increase selling prices in
response to raw material cost increases, we must manage and control our other
operating expenses. We experienced an increase in other operating expenses and
selling, general and administrative expenses in 2002. If we are unable to
achieve reductions in other operating expenses and in our selling, general and
administrative expenses, this could have a material adverse effect on our
business, financial condition and results of operations.
We rely on a few large customers for a significant portion of our net sales.
A few of our customers are material to our business and operations. Sales
to our five largest customers together accounted for approximately 33.8% of our
net sales in 2002, 35.0% of our net sales in 2001 and 29.7% of our net sales in
2000. Sales to Johnson Controls, our largest customer, accounted for 17.3% of
our net sales in 2002, 15.7% of our net sales in 2001 and 12.3% of our net sales
in 2000. Johnson Controls has informed us that it intends to reduce its
purchases of certain products from us in 2003, in an effort to diversify its
supply base, which may result in up to a $70.0 million reduction in our net
sales to them. The loss, or a substantial decrease in the amount, of purchases
by any of our major customers could adversely affect our financial position and
results of operations.
9
We are subject to extensive federal, state, local and foreign environmental laws
and regulations.
Our past and present business operations and the past and present ownership
and operation of our real property are 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. We are currently
remediating soil and groundwater contamination in excess of state standards at
several of our current and former facilities. Further, we are currently
designated a Potentially Responsible Party, or "PRP," by the United States
Environmental Protection Agency, or "EPA", or by state environmental agencies or
by other PRPs relating to eight sites. We have accrued our estimated costs for
remediation of these sites. If there are additional sites or our estimates are
not correct, there could be a material adverse effect on our financial condition
and results of operations. We cannot predict what environmental legislation or
regulations will be enacted in the future, how existing or future laws or
regulations will be administered or interpreted or what environmental conditions
may be found to exist on our properties. Compliance with more stringent laws or
regulations, as well as more vigorous enforcement policies of the regulatory
agencies or stricter interpretation of existing laws, and discovery of new
conditions may require us to make additional expenditures, which may be
material.
Our business is cyclical.
The polyurethane foam business is cyclical to the extent that our customers
are in cyclical industries. We are especially subject to the cyclical nature of
the automotive, housing, technology and furniture and bedding industries. A
protracted downturn in the businesses of our customers in any of these
industries, either simultaneously or sequentially, could have a material adverse
effect on our results of operations.
Forward-Looking Information
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements so long as those statements are
identified as forward-looking and are accompanied by meaningful cautionary
statements identifying important factors that could cause actual results to
differ materially from those projected in such statements. In connection with
certain forward-looking statements contained in this Annual Report on Form 10-K
and those that may be made in the future by or on behalf of us which are
identified as forward-looking, we note that there are various factors that could
cause actual results to differ materially from those set forth in any such
forward-looking statements, such as the ability to implement customer selling
price increases in response to higher raw material costs, raw material price
increases, general economic conditions, the interest rate environment, the level
of automotive production, carpet production, furniture and bedding production,
and housing starts, the completion of various restructuring/consolidation plans,
the achievement of management's business plans, our capital and debt structure
(including various financial covenants), litigation and changes in environmental
legislation and environmental conditions. The forward-looking statements
contained in this Annual Report on Form 10-K were prepared by management and are
qualified by, and subject to, significant business, economic, competitive,
regulatory and other uncertainties and contingencies, all of which are difficult
or impossible to predict and many of which are beyond our control.
Accordingly, there can be no assurance that the forward-looking statements
contained in this Annual Report on Form 10-K will be realized or that actual
results will not be significantly higher or lower. The forward-looking
statements have not been audited by, examined by, compiled by or subjected to
agreed-upon procedures by independent accountants, and no third party has
independently verified or reviewed such statements. Readers of this Annual
Report on Form 10-K should consider these facts in evaluating the information
contained herein. In addition, our business and operations are subject to
substantial risks which increase the uncertainty inherent in the forward-looking
statements contained in this Annual Report on Form 10-K. The inclusion of the
forward-looking statements contained in this Annual Report on Form 10-K should
not be regarded as a representation by us or any other person that any of the
forward-looking statements contained in this Annual Report on Form 10-K will be
achieved. In light of the foregoing, readers of this Annual Report on Form 10-K
are cautioned not to place undue reliance on the forward-looking statements
contained herein.
10
ITEM 2. PROPERTIES
As of December 29, 2002, we maintained 62 manufacturing and distribution
facilities, including six facilities that will be closed as part of
restructuring plans during 2003. Total floor space in use at our 18 owned
manufacturing and distribution facilities is approximately 3.5 million square
feet and total floor space in use at our 44 leased manufacturing and
distribution facilities is approximately 5.2 million square feet. Fifty-two of
these facilities are located throughout 38 cities in the United States, four
facilities are located in Canada, and six facilities are located in Mexico. We
do not anticipate any problem in renewing or replacing any of the leases
expiring in 2003. In addition, we have approximately 1.4 million square feet of
idle space of which approximately 0.9 million is leased.
We maintain administrative offices in Linwood, Pennsylvania and New York,
New York.
Property information by business segment is not reported because many of
our facilities produce products for multiple business segments.
ITEM 3. LEGAL PROCEEDINGS
Litigation--Breast Implants
As of March 11, 2003, we and Trace International Holdings, Inc. ("Trace")
were two of multiple defendants in 961 actions filed on behalf of approximately
1,087 recipients of breast implants in various United States courts and one
Canadian provincial court, some of which allege substantial damages, but most of
which allege unspecified damages for personal injuries of various types. Three
of these cases seek to allege claims on behalf of all breast implant recipients
or other allegedly affected parties, but no class has been approved or certified
by the courts. During 1995, we, Foamex International and Trace were granted
summary judgments and dismissed as defendants from all cases in the federal
courts of the United States and the state courts of California. Appeals for
these decisions were withdrawn and the decisions are final. The number of
pending cases has steadily declined over the last several years from a peak of
3,486 cases on behalf of approximately 5,766 individuals. Despite the 1995
Summary Judgment, some cases have been filed against us and Trace in federal
courts. These have been dismissed and, in many cases, the actions were re-filed
in state courts. No cases relating to breast implants are pending against us or
Trace in federal courts at this time. None of Foamex International, we, or Trace
nor any of our carriers has paid to settle any claims relating to breast
implants, and no judgment has ever been entered against Foamex International,
Trace, or us or any of our carriers in respect of these matters.
Although breast implants do not contain foam, certain silicone gel implants
were produced using a polyurethane foam covering fabricated by independent
distributors or fabricators from bulk foam purchased from us or from Trace.
Neither we nor Trace recommended, authorized, or approved the use of foam for
these purposes. We are also indemnified by Trace for any such liabilities
relating to foam manufactured prior to October 1990. Trace's insurance carrier
has continued to pay our litigation expenses after Trace's filing of a petition
for relief under the Bankruptcy Code on July 21, 1999. Trace's insurance
policies continue to cover certain liabilities of Trace, but if the limits of
those policies are exhausted, it is unlikely that Trace will be able to continue
to provide additional indemnification. While it is not feasible to predict or
determine the outcome of these actions, based on management's present assessment
of the merits of pending claims, without taking into account the indemnification
provided by Trace, the coverage provided by Trace's and our liability insurance
and potential indemnity from the manufacturers of polyurethane covered breast
implants, management believes that it is not reasonably possible that the
disposition of the matters that are pending or that may reasonably be
anticipated to be asserted will result in a loss that is material to our
consolidated financial position, results of operations or cash flows. If
management's assessment of our liability relating to these actions is incorrect,
these actions could have a material adverse effect on our financial position,
results of operations and cash flows.
11
Litigation--Other
During the second quarter of 2001, we were notified by an insurance
provider concerning a dispute involving the reimbursement of liability claims
paid on behalf of Trace. The insurance provider is contending that we are liable
for claims of approximately $6.1 million. We intend to strongly defend this
claim and consider the claim to be without merit. If management's assessment of
our liability relating to this action is incorrect, this action could have a
material adverse effect on our financial position, results of operations and
cash flows.
We and our subsidiaries are party to various other lawsuits, both as
defendant and plaintiff, arising in the normal course of business. It is the
opinion of management that the disposition of these lawsuits will not,
individually or in the aggregate, have a material adverse effect on our
financial position or results of operations. If management's assessment of the
liability relating to these actions is incorrect, these actions could have a
material adverse effect on our consolidated financial position, results of
operations and cash flows. As of December 29, 2002, we have accrued
approximately $0.7 million for litigation and other legal matters in addition to
the environmental matters discussed below.
Environmental and Health and Safety
We are subject to extensive and changing federal, state, local and foreign
environmental laws and regulations, including those relating to the use,
handling, storage, discharge and disposal of hazardous substances, the discharge
or emission of materials into the environment, and the remediation of
environmental contamination, and as a result, are from time to time involved in
administrative and judicial proceedings and inquiries relating to environmental
matters. As of December 29, 2002, we had accruals of approximately $2.7 million
for environmental matters, including approximately $2.3 million related to
remediating and monitoring soil and groundwater contamination and approximately
$0.4 million relating to PRP sites and other matters.
On August 8, 2001, the EPA proposed a National Emission Standard for
Hazardous Air Pollutants, or "NESHAP", for Flexible Polyurethane Foam
Fabrication Operations. The proposed NESHAP regulates emissions of methylene
chloride and other Hazardous Air Pollutants and restricts air emissions from
flame lamination sources. We do not believe that this standard, if adopted, will
require us to make material expenditures.
On August 31, 2002, Environment Canada, the Canadian environmental
regulatory agency, proposed a rule which would require flexible polyurethane
foam manufacturing operations to reduce methylene chloride (dichloromethane) air
emissions. The proposed rule establishes a 50.0% reduction in methylene chloride
emissions by December 1, 2003 and 100.0% reductions by January 1, 2007. We do
not believe that this standard, if adopted, will require us to make material
expenditures for our Canadian plants.
We have reported to the appropriate state authorities that we have found
soil and/or groundwater contamination in excess of state standards at certain
locations. Seven sites are currently in various stages of investigation or
remediation. Accordingly, the extent of contamination and the ultimate liability
is not known with certainty for all sites. During 2000, we reached an
indemnification agreement with the former owner of the Morristown, Tennessee
facility. The agreement allocates the incurred and future remediation costs
between the former owner and us. The estimated allocation of future costs for
the remediation of this facility is not significant, based on current known
information. The former owner was Recticel Foam Corporation, a subsidiary of
Recticel.
We have either upgraded or closed all underground storage tanks at our
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. We are 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 eight sites. Estimates of total cleanup costs
and fractional allocations of liability are often provided by the EPA, the state
environmental agency or the committee of PRPs with respect to the specified
site.
12
Based on these estimates (to the extent available) and on known information, in
each case and in the aggregate, we do not expect additional costs, if any, to be
material to our results of operations or financial position.
In 2003, capital expenditures for safety and environmental compliance
projects are anticipated to be approximately $1.5 million. Although it is
possible that new information or future developments could require us to
reassess the potential exposure relating to all pending environmental matters,
including those described above, management believes that, based upon all
currently available information, the resolution of these environmental matters
will not have a material adverse effect on our operations, financial position,
capital expenditures or competitive position. The possibility exists, however,
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
(a) Foamex L.P. is a privately held limited partnership. There is no
established public trading market for its securities.
(b) As of December 29, 2002, there were two holders of Foamex L.P.'s
equity securities.
(c) Listed below are the net cash receipts in accordance with tax sharing
agreements. At December 29, 2002, we have a liability of approximately
$0.3 million to our partners in accordance with the tax sharing
agreement.
Tax Sharing Distributions
2002 2001
-------- --------
(thousands)
FMXI $ - $ -
Foamex International (105) 120
----- ----
$(105) $120
===== ====
2001 Distribution
In 2001, we distributed $3.7 million in cash pro rata to our partners.
Limitations on Distributions
Our financing agreements restrict our ability to make distributions to our
partners.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table presents selected historical consolidated financial
data of Foamex L.P. All of the data gives retroactive effect to the common
control merger of Foamex L.P. and subsidiaries and Foamex Carpet Cushion, Inc.,
which has been accounted for in a manner similar to a pooling of interests as
described in Note 1 to the consolidated financial statements. The selected
consolidated financial data should be read in conjunction with the consolidated
financial statements of Foamex L.P. and related notes thereto included in this
Annual Report on Form 10-K.
13
Fiscal Year (1)
------------------------------------------------------------------
2002 2001 (2) 2000 1999 1998
---------- ---------- ---------- ---------- ----------
(thousands)
Statements of Operations Data
Net sales $1,328,094 $1,252,904 $1,257,778 $1,294,639 $1,260,559
Income (loss) from continuing
operations (3)(4) $ (24,410) $ (2,261) $ 19,603 $ 20,061 $ (15,519)
Balance Sheet Data
Total assets $ 695,283 $ 767,650 $ 753,584 $ 783,218 $ 863,851
Long-term debt, classified as current (5) - - - - $ 771,092
Long-term debt, excluding current portion $ 738,540 $ 648,232 $ 687,758 $ 725,297 -
Partners' deficiency $ (305,786) $ (178,128) $ (158,503) $ (160,481) $ (196,407)
(1) We changed to a fiscal year from a calendar year during 2002. We have a 52
or 53-week fiscal year ending on the Sunday closest to the end of the
calendar year. The 2002 fiscal year included the 52 weeks ended December
29, 2002 after adjustment for December 31, 2001 which was included in the
prior year.
(2) Includes the results of operations of General Foam Corporation from July
25, 2001, the date the business was acquired.
(3) Includes net restructuring, impairment and other charges (credits), as
discussed in Note 5 to the consolidated financial statements included in
this Annual Report on Form 10-K. Listed below are the pre-tax charges
(credits).
2002 - $ 4.8 million
2001 - $36.1 million
2000 - $ 6.3 million
1999 - $10.5 million
1998 - $(9.9) million
(4) The provision for income taxes in 2000 and 1999 reflected the partial
reversal of the deferred income tax valuation allowance recognized in 1998.
The 1998 provision for income taxes of $16.0 million for continuing
operations consisted primarily of an increase in the valuation allowance
for deferred income tax assets.
(5) At December 31, 1998, we classified approximately $771.1 million of
long-term debt as current, in response to financial conditions at year-end
1998.
14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Forward Looking Statements
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements so long as those statements are
identified as forward-looking and are accompanied by meaningful cautionary
statements identifying important factors that could cause actual results to
differ materially from those projected in such statements. In connection with
certain forward-looking statements contained in this Annual Report on Form 10-K
and those that may be made in the future by or on behalf of us which are
identified as forward-looking, we note that there are various factors that could
cause actual results to differ materially from those set forth in any such
forward-looking statements, such as the ability to implement customer selling
price increases in response to higher raw material costs, raw material price
increases, general economic conditions, the interest rate environment, the level
of automotive production, carpet production, furniture and bedding production,
and housing starts, the completion of various restructuring/consolidation plans,
the achievement of management's business plans, our capital and debt structure
(including various financial covenants), litigation and changes in environmental
legislation and environmental conditions. The forward-looking statements
contained in this Annual Report on Form 10-K were prepared by management and are
qualified by, and subject to, significant business, economic, competitive,
regulatory and other uncertainties and contingencies, all of which are difficult
or impossible to predict and many of which are beyond our control.
Accordingly, there can be no assurance that the forward-looking statements
contained in this Annual Report on Form 10-K will be realized or that actual
results will not be significantly higher or lower. The forward-looking
statements have not been audited by, examined by, compiled by or subjected to
agreed-upon procedures by independent accountants, and no third party has
independently verified or reviewed such statements. Readers of this Annual
Report on Form 10-K should consider these facts in evaluating the information
contained herein. In addition, our business and operations are subject to
substantial risks which increase the uncertainty inherent in the forward-looking
statements contained in this Annual Report on Form 10-K. The inclusion of the
forward-looking statements contained in this Annual Report on Form 10-K should
not be regarded as a representation by us or any other person that any of the
forward-looking statements contained in this Annual Report on Form 10-K will be
achieved. In light of the foregoing, readers of this Annual Report on Form 10-K
are cautioned not to place undue reliance on the forward-looking statements
contained herein.
Overview
We operate in the flexible polyurethane and advanced polymer foam products
industry. Operations were conducted directly and through our wholly-owned
subsidiaries, Foamex Canada, Foamex Mexico and Foamex Asia. Business segments
are listed below and business segment financial information is included in Note
12 to the consolidated financial statements.
An executive vice president heads each of our principal operating segments.
Each executive vice president is responsible for developing budgets and plans as
well as directing the operations of the segment. The performance of each
operating segment is measured based upon income from operations, excluding
restructuring, impairment and other charges. We do not allocate restructuring,
impairment and other charges to operating segments because many of our
facilities produce products for multiple segments.
Foam Products - manufactures and markets cushioning foams for bedding,
furniture, packaging and health care applications, and foam-based consumer
products, such as mattress pads and children's furniture.
Carpet Cushion Products - manufactures and distributes rebond, prime, felt
and rubber carpet padding.
Automotive Products - distributes automotive foam products and laminates to
major Tier 1 suppliers and original equipment manufacturers, or "OEMs".
15
Technical Products - manufactures and markets reticulated and other
specialty foams used for reservoiring, filtration, gasketing and sealing
applications.
Other - primarily consists of certain manufacturing operations in Mexico
City, corporate expenses not allocated to the other business segments and
restructuring, impairment and other charges (credits).
Our sales are primarily to markets in the United States. These sales are
impacted by economic conditions in several sectors of the United States economy,
including consumer spending, sales of new and existing homes, the overall level
of passenger car and light truck production and seasonality. We typically
experience two seasonally slow periods during each year, in early July and in
late December, due to scheduled plant shutdowns and holidays.
A small number of major customers produce a significant portion of our
sales. In 2002, our largest customer provided 17.3% of our net sales and our
five largest customers provided 33.8% of our net sales. Two of the five largest
customers are customers of the Automotive Products segment and three are
customers of the Foam Products segment.
There are a limited number of suppliers of TDI and polyol, the major
chemicals used in the production of foam. Our principal supplier of these
chemicals has historically been The Dow Chemical Company. While we have not
experienced shortages of raw materials, a disruption in our ability to obtain
these chemicals would have a material adverse effect on our business.
TDI and polyol are oil-based chemicals and, as such, the prices of these
chemicals are significantly influenced by crude oil production and prices and by
world political instability, particularly in the Middle East. The conflict in
that part of the world could significantly impact the price of these raw
materials.
The following discussion should be read in conjunction with the
consolidated financial statements and related notes included in this Annual
Report on Form 10-K.
Overview of 2002
Operations
We had income from operations of $45.5 million in the six months ended June
30, 2002 and a loss from operations of $3.2 million in the six months ended
December 29, 2002. Contributing factors to this significant negative turnaround
in operating results included the following:
o Significant increases in raw material prices from major chemical
manufacturers reduced our gross profit margin from 12.7% in the first
half of 2002 to 8.7% in the second half of 2002. We experienced 20.0%
to 25.0% increases in raw material prices beginning in June 2002 and
further 10% increases beginning in November 2002. The two price
increases raised raw material costs by 32.0% to 37.0% by the end of
2002. We achieved only limited success in raising selling prices to
offset these cost increases during 2002.
o Selling, general and administrative expenses were $39.7 million in the
first half of 2002 and $54.6 million in the second half of 2002. This
increase was partially attributable to organizational and proposed
public offering costs of $3.6 million related to the formation of
Symphonex Inc., a proposed new subsidiary which would have included
our Technical Products segment and other related activities, and $1.3
million of costs associated with the proposed sale of our Carpet
Cushion Products segment. The public offering of Symphonex Inc. has
been deferred indefinitely and the proposed sale of the Carpet Cushion
Products segment has been terminated. In addition, in the second half
of 2002 we experienced an increase in professional fees, primarily due
to information technology consulting and accounting fees, and an
increase in bad debt expense, primarily due to one large write off of
the balance due from a customer that ceased operations.
16
o Restructuring, impairment and other charges increased $6.3 million in
the second half of the year compared to the first six months.
Our results for 2003 will be principally dependent on our success in
maintaining and increasing margins through selling price increases and cost
efficiencies to offset past and future raw material cost increases. We
implemented significant price increases in late 2002, but further selling price
increases are needed to increase gross profit margins to acceptable levels. We
are developing alternative sources of supply for raw materials in an effort to
stabilize and reduce raw material costs. We also expect the reorganization of
our facilities, operations and management to result in savings of approximately
$8.0 to $10.0 million on an annualized basis, in addition to the anticipated
annualized savings of approximately $25.0 to $27.0 million from the business
reorganization that began in the fourth quarter of 2001.
There were a number of unusual items that impacted 2002. Accounting changes
as a result of the adoption of Statement of Financial Accounting Standards No.
142, "Goodwill and Other Intangible Assets" and Statement of Financial
Accounting Standards No. 141, "Business Combinations" produced a net charge to
income of $72.0 million. We had net extraordinary charges as a result of the
early extinguishment of debt in the amount of $2.8 million.
Financing
On March 25, 2002, we completed a refinancing of a major portion of our
debt structure. The refinancing included the issuance of $300.0 million of 10
3/4% Senior Secured Notes due April 1, 2009 and amendment of the Foamex L.P.
credit facility ("Amended Credit Facility") to provide for term loans with
maturity dates of June 30, 2005 through December 29, 2006, and a $100.0 million
revolving credit facility that matures on June 30, 2005. Net proceeds were used
to pay a portion of debt outstanding under the credit facility and the proceeds
from a new term loan under the Amended Credit Facility was used to repay debt
due to a related party. Additionally, the financial debt covenants contained in
the Amended Credit Facility were adjusted to reflect changes in the capital
structure and business environment. Subsequently, we purchased and retired $49.0
million of the 13 1/2% senior subordinated notes, including unamortized debt
premium of $2.5 million, and $1.5 million of the 9 7/8% senior subordinated
notes.
On November 15, 2002, we and our bank lenders executed an amendment to the
Amended Credit Facility. We would have been unable to comply with certain
financial covenants as of September 29, 2002. Under the amendment, compliance
with certain existing covenants was suspended through September 28, 2003 with
the covenants revised and reinstated thereafter. Instead, Foamex L.P. is subject
to other financial covenants through December 28, 2003 and was in compliance
with such covenants at December 29, 2002. A minimum EBDAIT, as defined, covenant
is tested monthly, on a cumulative basis beginning with December 2002, in
addition to revised minimum net worth, as defined, and maximum capital
expenditures, as defined, covenants, measured quarterly. Our ability to comply
with the EBDAIT covenant will be substantially dependent on the achievement of
an improved gross profit margin and reduction of administrative costs compared
to the last six months of 2002. Additionally, we are subject to a borrowing base
calculation that may limit our ability to borrow funds in the future.
Critical Accounting Policies
We prepared the consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America. As
such, we are required to make certain estimates, judgments, and assumptions that
we believe are reasonable based upon the information available. These estimates,
judgments and assumptions affect the reported amounts of the assets and
liabilities and revenues and expenses. Our significant accounting policies are
discussed in Note 2 to the consolidated financial statements. The accounting
policies which we believe are the most critical to aid in fully understanding
and evaluating our reported financial results and which require management to
exercise judgment include the following:
17
Revenue Recognition
We record net sales when product title and risk of loss passes to the
customer, which is primarily at the time of shipment. Net sales are reduced by
allowances for estimated discounts, returns and customer rebates. Balances for
allowances and rebates are reviewed at least quarterly and are adjusted if
warranted.
Account Receivable and Allowance for Uncollectible Accounts
We actively monitor customer payments in conjunction with customer credit
evaluations. Accordingly, an estimate of uncollectible accounts is maintained
and is based on historical collection experience and specific customer
collection issues. A significant change in the financial condition of one or
more of our larger customers could have a material adverse impact on future
financial results.
Long-Lived Assets
We have a significant investment in long-lived assets consisting primarily
of property, plant and equipment. Impairment losses are recognized when events
indicate that certain long-lived assets may be impaired and a projection of
future undiscounted cash flows generated from the assets are less than the
current carrying value of the assets. These cash flow projections are based on
the combination of historical results adjusted for estimated future market
conditions and operating plans. To the extent that these estimates change,
impairment losses could have a material adverse impact on future financial
results.
Self Insurance
We are partially self-insured for a number of risks up to certain limits
including workers compensation, medical, automobile and general liability.
Commercial insurance policies are carried for amounts in excess of the
self-insured amounts. Management exercises significant judgment in estimating
the ultimate liability for claims.
Retiree Benefit Plans
We provide defined benefit pension plans that cover most of our employees.
Projected benefit obligations, pension expense and amounts included in other
comprehensive income are impacted by a number of assumptions. These assumptions
include the discount rate on projected benefit obligations, and the expected
long-term rate of return on plan assets. The discount rate on projected benefit
obligations enables us to state expected future cash flows at a present value on
the measurement date. We have little latitude in selecting this rate, as it is
required to represent the market rate for high-quality fixed income investments.
A lower discount rate increases the present value of benefit obligations and
increases pension expense. The decrease in the discount rate on projected
benefit obligations from 7.0% to 6.5% is expected to increase pension expense by
$0.5 million. To determine the expected long-term rate of return on pension plan
assets, we consider the current and expected asset allocations, as well as
historical and expected returns on various categories of plan assets. We assumed
that long-term returns on our pension plans were 9.0% in 2002 and 2001 and 10.0%
in 2000. Amortization of losses has been and continues to be a significant
component of pension expense and this amortization is expected to increase by
approximately $1.0 million in 2003. The losses have resulted from actual returns
that are significantly less than the expected return assumption, particularly
over the last three years, and funding levels that have not been sufficient to
offset the growth in benefit obligations. We expect pension expense to increase
by a total of approximately $2.0 million in 2003.
Claims and Litigation
We receive claims for damages that are outside of our insurance coverages.
Management evaluates these claims and records its estimate of liabilities when
such liabilities are considered probable and an amount or reasonable range can
be estimated.
18
Environmental Remediation
We have a number of manufacturing facilities and certain idle facilities
that require remediation of soil and/or groundwater contamination. As required
by applicable State and/or Federal compliance programs, many of these sites are
in the monitoring stage that requires periodic sampling of contamination levels
in conjunction with ongoing assessments of remediation actions. Accordingly, the
recognition of environmental liabilities requires estimates concerning the
duration of monitoring and associated costs, often projected to extend for a
number of years. To the extent that these estimates change, additional
environmental costs could have a material adverse impact on future financial
results. See the section below entitled "Environmental Health and Safety" for
additional information.
LIQUIDITY AND CAPITAL RESOURCES
Our operating cash requirements consist principally of accounts receivable,
inventory and accounts payable requirements, scheduled payments of interest on
outstanding indebtedness, capital expenditures, and employee benefit plans. We
believe that cash flow from our operating activities, cash on hand and periodic
borrowings under our credit facility will be adequate to meet liquidity
requirements. Scheduled principal payments on our debt are not significant until
the second half of 2004. If our cash flow is not adequate to meet liquidity
requirements, there would be a material adverse effect on our financial position
as well as our ability to continue as a going concern.
Cash and cash equivalents were $4.4 million at December 29, 2002 compared
to $15.1 million at December 31, 2001. Working capital at December 29, 2002 was
$118.0 million and the current ratio was 1.6 to 1 compared to working capital at
December 31, 2001 of $63.6 million and a current ratio of 1.3 to 1. The increase
in working capital is primarily due to increases in accounts receivable and
inventories and decreases in current portion of long-term debt and accounts
payable, partially offset by decreases in other current assets and increases in
accrued interest and cash overdrafts.
Total debt at December 29, 2002 was $738.6 million, a $72.3 million
increase from December 31, 2001, including a deferred credit of $14.2 million
related to interest rate swap transactions. (See Note 8 to the consolidated
financial statements.) As of December 29, 2002, there were revolving credit
borrowings of $51.8 million under the Foamex L.P. credit facility with $27.6
million available for borrowings and $20.6 million of letters of credit
outstanding. Foamex Canada did not have any outstanding borrowings as of
December 29, 2002 under Foamex Canada's short-term revolving credit agreement,
with unused availability of approximately $5.1 million. The increased debt
balance reflects the issuance of $300.0 million of 10 3/4% Senior Secured Notes
due 2009 on March 25, 2002, offset by $280.0 million of debt repayments from
proceeds of the offering. Revolving credit borrowings at December 29, 2002
reflect working capital requirements.
In 2002, we purchased and retired $49.0 million of the 13 1/2% senior
subordinated notes, including unamortized debt premium of $2.5 million, and $1.5
million of the 9 7/8% senior subordinated notes for a total purchase price of
$48.5 million.
On October 16, 2002, we announced that we had obtained a waiver of
financial covenants under the Amended Credit Facility for the period ended
September 29, 2002 since we would not have been in compliance with the
covenants. The waiver was effective until November 30, 2002 and reduced the
commitment under the revolving credit facility from $100.0 million to $70.0
million for the period the waiver was in effect. On November 15, 2002, we and
our bank lenders executed an amendment to the Amended Credit Facility. Under the
amendment, we are subject to minimum net worth, minimum EBDAIT, as defined, and
maximum capital expenditure covenants through periods ending December 28, 2003.
The minimum EBDAIT covenant is tested monthly on a cumulative basis beginning
with December 2002. We were in compliance with the revised covenants at December
29, 2002. In addition, we were subject to a minimum EBDAIT, as defined, covenant
for the quarter ended September 29, 2002 and were in compliance. Compliance with
existing covenants on leverage, fixed charge coverage and interest coverage
ratios is suspended through periods ending September 28, 2003, but the covenants
are revised and will be reinstated thereafter. All the financial covenants were
established based on a business plan provided to the lenders. In addition,
borrowings under the Amended Credit Facility will be subject to a borrowing base
calculation, which could limit borrowings under the revolving credit facility to
less than the maximum commitment. As of February 23,
19
2003, the borrowing base calculation does not limit borrowings under the Amended
Credit Facility. The cost of obtaining the amendment aggregated approximately
$4.0 million, including bank and legal fees.
On February 26, 2003, Standard and Poor's Rating Services ("S&P") announced
that it had lowered its corporate credit rating on Foamex L.P. from "B+" to "B".
In their announcement, S&P cited their view that our weak operating performance,
higher raw material costs, and a sluggish domestic economy, which if not
reversed will likely elevate near-term liquidity concerns. The S&P action could
have a negative impact on the cost of our future borrowings, if any, and the
extension of trade credit.
Our minimum EBDAIT covenants have higher thresholds in the second half of
2003. Management's current plans to achieve EBDAIT covenants require continued
customer selling price management in response to raw material cost changes,
successful implementation of on-going cost savings initiatives, plant closures,
improved operating efficiencies, improved working capital management and reduced
capital expenditures. Management is also continuing to evaluate strategic
alternatives in an effort to reduce our debt. There can be no assurance that we
will be successful in achieving our plans or complying with the amended
covenants, as there are a number of factors beyond our control, including raw
material cost changes and customer acceptances of selling price increases that
are necessary for us to be successful. Additionally, compliance with the
financial covenants may not be met if business conditions are not as anticipated
or other unforeseen events impact results unfavorably. In the event that such
noncompliance appears likely, or occurs, we will seek the lenders' further
approval of amendments to, or waivers of, such financial covenants.
Historically, we have been able to renegotiate financial covenants and/or obtain
waivers. Management currently believes that obtaining waivers and/or amendments
in the future may be difficult, or not possible, if required. If amendments or
waivers are not obtained, we would be in default and lenders could demand
immediate payment of our outstanding debt under the Amended Credit Facility. In
addition, it is possible that the holders of our Senior Secured Notes and Senior
Subordinated Notes could also demand immediate payment. We may not be able to
secure additional financing at a reasonable cost, or at all. The lack of
financing would have a material adverse effect on our financial position and
could impair our ability to continue as a going concern.
During 2002, we purchased, pursuant to the terms of an existing agreement,
the 5% stock interest held by the director of Foamex de Mexico S.A. de C.V. for
a cash payment of $1.0 million. In addition, during 2002 we entered into an
employment agreement with one director and a consulting agreement with another
director. Payments under these agreements were to aggregate at least $0.7
million and $0.2 million, respectively, on an annual basis. The employment
agreement with the director was terminated effective January 31, 2003.
We were required to cause a registration statement under the Securities Act
of 1933 for our 10 3/4% Senior Secured Notes to be effective within 180 days of
March 25, 2002. We filed the registration statement, but it was not effective
until January 30, 2003 and therefore we are liable for liquidated damages from
September 23, 2002 until January 30, 2003. The liquidated damages were at the
rate of $15,000 per week for the first 90 days, escalating by $15,000 per week
for each additional 90 days until a maximum of $150,000 per week is reached. At
December 29, 2002, we had an accrual for liquidated damages of $0.2 million.
Effective May 1, 2002, we completed a series of interest rate swap
transactions with notional amounts aggregating $300.0 million. We designated,
documented and accounted for these interest rate swaps as fair value hedges of
our 10 3/4% Senior Secured Notes due April 1, 2009. The risk being hedged in
these transactions was the change in fair value of the 10 3/4% Senior Secured
Notes based on changes in the benchmark interest rate, LIBOR. The effect of
these interest rate swap transactions was to convert the fixed interest rate on
the 10 3/4% Senior Secured Notes to floating rates reset twice per year to
correspond with the interest payment dates for the 10 3/4% Senior Secured Notes.
On September 18, 2002, we unwound the interest rate swap transactions in
exchange for a net cash proceeds of $18.4 million, including $3.6 million
realized through lower effective interest rates while the swap transactions were
in effect. The unwinding resulted in a deferred credit of $14.8 million, which
will be amortized over the term of the 10 3/4% Senior Secured Notes, using the
effective interest rate method.
20
Cash Flow from Operating Activities
Cash used in operating activities in 2002 was $49.6 million compared to
cash provided of $108.7 million in the 2001 reflecting significantly higher
working capital requirements principally relating to inventories and accounts
payable.
Cash Flow from Investing Activities
Cash used in investing activities totaled $21.1 million for 2002. Cash
requirements included capital expenditures of $15.6 million. Other investing
activities include software development costs of $5.9 million in 2002. In 2001,
cash used in investing activities was $38.1 million, which included $22.5
million of capital expenditures and $17.6 million for an acquisition. Estimated
capital expenditures for 2003 are approximately $19.0 million including
approximately $1.5 million for safety and environmental activities. In addition,
we expect to spend approximately $6.8 million for internally developed software
in 2003, a portion of which may be capitalized.
Cash Flow from Financing Activities
Cash provided by financing activities was $60.0 million in 2002 compared to
cash used of $60.4 million in 2001. We completed the offering of $300.0 million
of 10 3/4% Senior Secured Notes on March 25, 2002. We used $280.0 million of net
proceeds from these notes and $56.6 million of new term loans to repay revolving
loans of $125.0 million, term loans of $140.0 million and long-term debt to a
related party of $31.6 million. We also purchased and retired $49.0 million of
the 13 1/2% senior subordinated notes, including unamortized debt premium of
$2.5 million and $1.5 million of the 9 7/8% senior subordinated notes. Cash used
during 2001 primarily reflected debt repayments.
Contractual Obligations and Commercial Commitments
At December 29, 2002, we had obligations to repay a total of $722.0 million
of principal of long-term debt borrowed under a number of arrangements. The
amortization schedule for our long-term debt payments is included in Note 8 to
the consolidated financial statements. At December 29, 2002, we had outstanding
letters of credit aggregating $20.6 million.
We also have commitments for operating leases as discussed in Note 15 to
the consolidated financial statements that require minimum payments totaling
$52.2 million, with $44.5 million due through December 31, 2007 and the balance
in later years. We have entered into contracts for information technology
services and certain raw materials that have minimum purchase commitments
estimated at $84.8 million in 2003, $98.0 million in 2004, $39.9 million in
2005, $39.4 million in 2006, $36.1 million in 2007 and $32.2 million for each of
the years 2008 to 2010.
RESULTS OF OPERATIONS
Carpet
Foam Cushion Automotive Technical
Products Products Products Products Other Total
-------- -------- ---------- --------- -------- -----------
2002 (dollars in thousands)
Net sales $471,005 $234,001 $466,718 $124,124 $ 32,246 $1,328,094
Income (loss) from operations $ 24,000 $(12,440) $ 25,430 $ 20,402 $(15,092) $ 42,300
Depreciation and amortization $ 15,466 $ 6,469 $ 3,856 $ 2,982 $ 2,819 $ 31,592
Income (loss) from operations
as a percentage of net sales 5.1% (5.3)% 5.4% 16.4% n.m.(a) 3.2%
21
Carpet
Foam Cushion Automotive Technical
Products Products Products Products Other Total
-------- -------- ---------- --------- -------- -----------
2001 (dollars in thousands)
Net sales $499,668 $230,965 $377,753 $111,043 $ 33,475 $1,252,904
Income (loss) from operations $ 66,634 $ (6,572) $ 21,445 $ 23,080 $(39,860) $ 64,727
Depreciation and amortization $ 15,732 $ 8,181 $ 4,991 $ 3,312 $ 1,812 $ 34,028
Income (loss) from operations
as a percentage of net sales 13.3% (2.8)% 5.7% 20.8% n.m.(a) 5.2%
2000
Net sales $519,197 $256,439 $342,386 $106,697 $ 33,059 $1,257,778
Income (loss) from operations $ 55,227 $ 2,218 $ 22,417 $ 29,027 $(11,506) $ 97,383
Depreciation and amortization $ 17,813 $ 7,742 $ 5,785 $ 2,663 $ 2,625 $ 36,628
Income (loss) from operations
as a percentage of net sales 10.6% 0.9% 6.5% 27.2% n.m.(a) 7.7%
(a) Not meaningful.
2002 Compared to 2001
Net sales for 2002 increased 6.0% to $1,328.1 million from $1,252.9 million
in 2001. The increase was primarily attributable to improved sales in the
Automotive Products and Technical Products segments, partially offset by a
decrease in the Foam Products segment. The improvement in sales partially
reflected the impact of sales related to the acquisition discussed in Note 3 to
the consolidated financial statements.
The gross profit margin was $141.4 million, or 10.6%, in 2002 compared to
$180.1 million, or 14.4%, in 2001 primarily as a result of the 32.0% to 37.0%
increases in the cost of our major chemical raw materials during the second half
of 2002. The gross profit margin was further reduced by higher manufacturing
costs principally in the Foam Products segment, unfavorable yields, higher
manufacturing overhead expense and unfavorable production mix. We are seeking to
improve gross profit margins through customer selling price increases, selective
elimination of unprofitable customer accounts and products, and reductions in
manufacturing overhead expenses.
Income from operations for 2002 was $42.3 million, which represented a
34.6% decrease from the $64.7 million reported for 2001. Income from operations
was 3.2% of net sales in 2002 compared to 5.2% of net sales in 2001. The
decrease attributable to the reduced gross profit margin is discussed above. In
addition, selling, general and administrative expenses increased by $15.0
million, or 19.0%, which included $3.6 million of organizational and proposed
public offering costs related to the formation of Symphonex Inc. The proposed
public offering of Symphonex Inc. has been deferred indefinitely. Selling,
general and administrative expenses also include $1.3 million of transaction
costs associated with the proposed sale of our Carpet Cushion Products segment
which was subsequently terminated. The remainder of the increase was primarily
due to higher professional service fees for information technology and
accounting services and employee related expenses, partially offset by reduced
goodwill amortization and lower bad debt expense.
Foam Products
Foam Products net sales for 2002 decreased 5.7% to $471.0 million from
$499.7 million in 2001. The decrease primarily reflected reduction in business
from a major bedding manufacturer and the slow recovery of sales after an odor
issue caused by defective chemicals from a major supplier in late 2001. Foam
Products gross profit margin was 10.8% in 2002, down from 17.9% in 2001. Income
from operations decreased 64.0%, to $24.0 million in 2002 from $66.6 million in
2001, primarily due to increased raw material costs, lower net sales and higher
manufacturing costs. Income from operations was 5.1% of net sales in 2002, down
from 13.3% in 2001.
22
Carpet Cushion Products
Carpet Cushion Products net sales for 2002 increased 1.3% to $234.0 million
from $231.0 million in 2001. We were able to increase our market share in spite
of market weakness and overcome the loss of sales to one large retail customer
that exited the carpet business. Loss from operations, which principally
reflected higher raw material and other operating costs during 2002 and included
expenses of $1.3 million in 2002 associated with the proposed sale of the
business which was subsequently terminated, represented 5.3% of net sales in
2002 and 2.8% of net sales in 2001.
Automotive Products
Automotive Products net sales for 2002 increased 23.6% to $466.7 million
from $377.8 million in 2001. The improvement primarily reflected a continued
high build rate for new cars and new product programs. We have been informed
that our largest customer intends to reduce its purchases of certain products
from us in 2003 to diversify its supply base. This may result in reduced sales
to this customer of up to $70.0 million in 2003, some of which may be replaced
by sales to other customers. Automotive Products gross profit margin was 8.2% in
2002 compared to 8.4% in 2001 and reflects the impact of higher raw material
costs offsetting the contribution from increased net sales. Income from
operations represented 5.4% of net sales in 2002 and 5.7% of net sales in 2001.
Technical Products
Net sales for Technical Products in 2002 increased 11.8% to $124.1 million
from $111.0 million in 2001. Higher sales partially reflected sales from the
acquisition of General Foam Corporation in July 2001 (see Note 3 to the
consolidated financial statements). Income from operations decreased 11.6% to
$20.4 million in 2002 compared to $23.1 million in 2001. The decrease reflects
the contribution from higher net sales offset by higher material costs and the
costs related to Symphonex Inc. as described above. Income from operations
represented 16.4% of net sales in 2002 compared to 20.8% in 2001.
Other
Other primarily consists of certain manufacturing operations in Mexico
City, corporate expenses not allocated to business segments and restructuring,
impairment and other charges. The 3.7% decrease in net sales associated with
this segment primarily resulted from the Mexico City operation. The loss from
operations was $15.1 million in 2002 and included restructuring, impairment and
other charges, discussed below. The loss from operations in 2001 was $39.9
million, including restructuring, impairment and other charges.
Restructuring, Impairment and Other Charges
In 2002, we recorded net restructuring, impairment and other charges of
$4.8 million. Fourth quarter charges of $10.0 million included severance and
other termination benefits for approximately 200 employees and exit costs and
remaining lease payments related to the reorganization of executive and
corporate management and the closure of six operations. Approximately 60 of the
planned terminations occurred during 2002. The charges also included $2.5
million of asset impairments, primarily for leasehold improvements and machinery
and equipment in the Carpet Cushion Products segment. Earlier in 2002, we
recorded restructuring, impairment and other credits of $5.2 million including a
reversal of approximately $3.7 million from the reevaluation of the 2001
Operational Reorganization Plan.
In 2001, we recorded restructuring, impairment and other charges of $36.1
million, primarily related to our 2001 Operational Reorganization Plan including
plant facility closures, reductions in management and support personnel, and
cost reductions in purchasing and logistics. The charge included an impairment
charge of $13.8 million (net of anticipated proceeds of $4.6 million) to reduce
certain assets, primarily leasehold improvement and equipment, included within
the Foam Products and Carpet Cushion Products segments to their estimated fair
values. Approximately 700 employee terminations including plant personnel,
support staff and executives and management were originally planned pursuant to
the 2001 Operational Reorganization Plan. The subsequent reevaluation of
23
facilities closures reduced the number of planned terminations to approximately
500. Approximately 340 employees were terminated in 2002.
We will have substantially completed the remaining actions contemplated by
the 2001 Operational Reorganization Plan in early 2003 and expect to complete
the facility closures and personnel reductions related to the 2002 restructuring
plan during 2003, primarily in the first six months. Terminations of
approximately 300 employees are planned to take place in 2003.
Interest and Debt Issuance Expense
Interest and debt issuance expense was $66.6 million in 2002, which
represented a 5.3% increase from 2001 expense of $63.2 million. The increase was
attributable to higher amortization of debt issuance cost. We capitalized
interest of $0.3 million in 2002 compared to $1.4 million in 2001. We expect
2003 interest and debt issuance expense to be at or higher than the 2002 level.
Income from Equity Interest in Joint Ventures
The income from an equity interest in an Asian joint venture was $1.6
million in both 2002 and 2001. We have a 70.0% ownership interest in the joint
venture since December 2001. Previously our ownership interest was 49.0%.
Provision (Benefit) for Income Taxes
Foamex L.P., as a limited partnership, is not subject to Federal income
taxes; therefore no current or deferred provision has been provided for such
taxes. However, we have provided for the income taxes of certain states in which
we are subject to taxes and for certain subsidiaries, which are subject to
Federal and state income taxes and for subsidiaries located in foreign
jurisdictions that file separate tax returns. The partners will provide for
their respective shares of income or loss in their Federal or applicable state
income tax returns. Foamex L.P. has a tax sharing agreement that provides for
the payment of distributions to our partners for amounts that would be required
to be paid if we were a corporation filing separate tax returns. Our ability to
make such distributions is limited by the terms of our credit agreement and
indentures.
Extraordinary Items, Net of Income Taxes
In connection with the refinancing transaction completed on March 25, 2002,
we wrote off debt issuance costs associated with the early extinguishments of
long-term debt due to a related party and the revolving credit facility,
resulting in an extraordinary loss of $4.2 million, net of income tax benefit of
$0.1 million. We purchased and retired $49.0 million of the 13 1/2% senior
subordinated notes, including unamortized debt premium of $2.5 million, and $1.5
million of the 9 7/8% senior subordinated notes resulting in an extraordinary
gain of $1.4 million. These extraordinary items will be reclassified upon the
adoption of Statement of Financial Accounting Standards No. 145 in 2003.
Cumulative Effect of Accounting Changes
The cumulative effect of accounting change in 2002 includes a goodwill
impairment charge of $72.0 million as a result of the adoption of Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets"
("SFAS No. 142").
2001 Compared to 2000
Net sales for 2001 decreased 0.4% to $1,252.9 million from $1,257.8 million
in 2000. The decline was primarily attributable to lower sales in Foam Products
and Carpet Cushion Products, partially offset by a significant improvement in
Automotive Products sales. Technical Products also recorded improved sales.
24
The gross profit margin was 14.4% in 2001 compared to 13.7% in 2000.
Certain raw material cost reductions had the effect of improving the gross
profit margin percentage in 2001 by approximately 1.4 percentage points. These
2001 cost reductions are not anticipated to continue in 2002. Selling, general
and administrative expenses were 16.0% higher in 2001. The increase included the
impact of higher professional fees, including those associated with a change in
independent accountants, higher bad debt expense related to economic conditions
and increased compensation and benefit costs.
Income from operations in 2001 was $64.7 million, which represented a 33.5%
decrease from the $97.4 million recorded during 2000. Results included
restructuring, impairment and other charges of $36.1 million in 2001 and $6.3
million in 2000. Restructuring, impairment and other charges recorded during
2001 are discussed under "Other" below. Excluding the restructuring, impairment
and other charges for comparison purposes, income from operations would have
been $100.8 million in 2001 compared to $103.7 million in 2000. On this basis,
income from operations was 8.0% of net sales in 2001 and 8.2% in 2000. In
addition to the raw material cost reductions discussed above, cost reduction
programs and increases in certain selling prices were also positive factors.
Foam Products
Foam Products net sales for 2001 decreased 3.8% to $499.7 million from
$519.2 million in 2000. The decrease primarily reflected the domestic economic
slowdown that impacted the markets for furniture manufacturers and other foam
fabricators. Despite the sales decline, income from operations increased 20.7%,
from $55.2 million in 2000 to $66.6 million in 2001. The increase was primarily
the impact of raw material cost reductions, discussed above, which primarily
benefited the Foam Products segment. Income from operations was 13.3% of net
sales in 2001, up from 10.6% in 2000.
Carpet Cushion Products
Carpet Cushion Products net sales for 2001 decreased 9.9% to $231.0 million
from $256.4 million in 2000. The sales decline continued to reflect competitive
pressures that resulted in lower sales volumes across all product lines. Lower
selling prices in certain product lines and a lower value shipment mix also
contributed to the sales decline. The factors contributing to the sales decline
translated to a loss from operations of $6.6 million in 2001 compared to income
from operations of $2.2 million in 2000. The loss from operations represented
2.8% of net sales in 2001 and income from operations represented 0.9% of net
sales in 2000.
Automotive Products
Automotive Products net sales for 2001 increased 10.3% to $377.8 million
from $342.4 million in 2000. The improvement primarily reflected new product
programs and renewed activity following inventory corrections in the domestic
automotive industry earlier in the year. Income from operations declined 4.3%,
from $22.4 million in 2000 to $21.4 million in 2001. Income from operations
represented 5.7% of net sales in 2001 and 6.5% in 2000. The lower results in
2001 were primarily attributed to intense pricing competition and higher raw
material costs.
Technical Products
Net sales for Technical Products in 2001 were up 4.1% to $111.0 million
from $106.7 million in 2000. Higher sales primarily reflected sales from the
acquisition of certain assets from General Foam Corporation, discussed in Note 3
to the consolidated financial statements. Income from operations decreased 20.5%
to $23.1 million in 2001 compared to $29.0 million in 2000. The decline
reflected a lower value shipment mix and the impact of an economic downturn in
the technology industry, especially during the first half of 2001. Income from
operations represented 20.8% of net sales in 2001 compared to 27.2% in 2000.
Other
Other primarily consists of certain manufacturing operations in Mexico
City, corporate expenses not allocated to business segments and restructuring
and other charges. Net sales were slightly higher in 2001 compared to 2000. The
loss from operations was $39.9 million in 2001 and included restructuring,
impairment and other charges of
25
$36.1 million, discussed below. The $11.5 million loss from operations in 2000
included restructuring, impairment and other charges totaling $6.3 million. The
2000 loss also included professional fees associated with the resolution of
certain change in control issues following the Trace bankruptcy and the
settlement of certain shareholder litigation.
Restructuring, Impairment and Other Charges
In December 2001, we announced our 2001 Operational Reorganization Plan to
reduce operating costs and accelerate revenue growth. The major initiatives of
the 2001 Operational Reorganization Plan included plant facility closures,
headcount reductions, purchasing and logistics cost reductions and sales and
marketing management consolidation.
We identified a total of 17 plant operations to be closed. Costs associated
with this aspect of the 2001 Operational Reorganization Plan included lease
termination costs and severance and termination benefits aggregating $14.1
million. Additionally, we identified salaried positions to be eliminated, mainly
in support function areas. Severance, termination and other costs associated
with these positions were estimated to be $4.4 million.
Further, we evaluated the recoverability of certain other long-lived
assets, both associated and not associated with the Operational Reorganization
Plan, in accordance with SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed". As a result, we
recorded an impairment provision of $13.8 million (net of anticipated proceeds
of $4.6 million) to reduce these assets to their estimated fair values.
Severance and termination benefits as a result of the 2001 Operational
Reorganization Plan were expected to be incurred for approximately 700
employees. We expected to spend approximately $12.4 million during 2002 with the
balance to be spent through 2012, primarily for lease costs. Other one-time
period expenses during the fourth quarter consisted primarily of executive
severance of $1.9 million and consulting fees related to the Operational
Reorganization Plan in the amount of $1.2 million.
In addition, we recorded $0.4 million for restructuring plans prior to the
fourth quarter of 2001 that included severance for 41 employees and $1.4 million
related to executive severance recorded in other charges. We also recorded a net
restructuring credit of $1.2 million related to changes in estimates to prior
restructuring plans.
During 2000, we recorded $6.2 million for restructuring plans that included
severance for 102 employees. We also recorded a net restructuring charge of
approximately $0.1 million related to changes in estimates to prior years'
restructuring plans. Also during 2000, we received $3.6 million of net proceeds
from the sale of assets related to restructuring plans.
Interest and Debt Issuance Expense
Interest and debt issuance expense totaled $63.2 million in 2001, which
represented a 15.9% decrease from $75.2 million recorded in 2000. The decrease
was attributable to lower average debt levels and lower effective interest
rates. We capitalized interest of $1.4 million and $0.8 million in 2001 and
2000, respectively, as a component of the construction cost of plant and
equipment.
Income from Equity Interest in Joint Ventures
Income from an equity interest in an Asian joint venture totaled $1.6
million and $1.7 million in 2001 and 2000, respectively.
Other Expense, Net
Other expense, net for 2001 was $1.9 million. Expense items totaled $2.8
million and included letter of credit fees. Interest income recorded in 2001 was
$0.9 million.
26
Other expense, net in 2000 totaled $1.6 million and primarily included $1.2
million of costs associated with a buyout proposal and $0.7 million letter of
credit fees offset by $0.6 million of interest income.
Income Tax Expense
Foamex L.P., as a limited partnership, is not subject to Federal income
taxes; therefore no current or deferred provision has been provided for such
taxes. However, we have provided for the income taxes of certain states in which
we are subject to taxes and for certain subsidiaries, which are subject to
Federal and state income taxes and for subsidiaries located in foreign
jurisdictions that file separate tax returns. The partners will provide for
their respective shares of income or loss in their Federal or applicable state
income tax returns. We have a tax sharing agreement that provides for the
payment of distributions to our partners for amounts that would be required to
be paid if we were a corporation filing separate tax returns. Our ability to
make such distributions is limited by the terms of our credit agreement and
indentures.
OTHER
Foamex International and Change in Control Developments
Trace International Holdings, Inc. ("Trace") is a privately held company,
which owned approximately 29% of Foamex International's outstanding voting
common stock at September 30, 2000, and whose former Chairman also serves as our
Chairman. Foamex International's common stock owned by Trace was pledged as
collateral against certain of Trace's obligations. Certain credit agreements and
promissory notes, pursuant to which approximately $401.1 million of debt was
outstanding as of September 30, 2000, provided that a "change of control" would
be an event of default and could result in the acceleration of such
indebtedness. "Change of control" means, for this purpose, that (i) a person or
related group, other than Trace, beneficially owns more than 25% of Foamex
International's outstanding voting stock and (ii) such voting stock constitutes
a greater percentage of such voting stock than the amount beneficially owned by
Trace. Additionally, certain of our indentures and those of Foamex Capital
Corporation ("FCC"), a wholly-owned subsidiary, relating to senior subordinated
notes contain similar "change of control" provisions, which require us and FCC
to tender for such notes at a price in cash equal to 101% of the aggregate
principal amount thereof, plus accrued and unpaid interest thereon, if there is
such a "change of control".
On July 21, 1999, Foamex International was informed by Trace that it filed
a petition for relief under Chapter 11 of the Bankruptcy Code in Federal Court
in New York City. Subsequently, on January 24, 2000, an order was signed
converting the Trace bankruptcy from Chapter 11 to Chapter 7 of the Bankruptcy
Code. A trustee was appointed to oversee the liquidation of Trace's assets.
Neither Trace's bankruptcy filing nor the conversion to Chapter 7 constituted a
"change of control" under the provisions of the debt agreements described above.
On July 31, 2000, Foamex International announced that it had entered into
an agreement (the "Exchange Agreement") with The Bank of Nova Scotia relating to
a portion of the 7,197,426 shares of Foamex International common stock pledged
by Trace to The Bank of Nova Scotia. The Exchange Agreement provided for the
transfer of the pledged stock to The Bank of Nova Scotia in a manner that would
not constitute a "change of control" as described above. These transactions were
conditioned upon bankruptcy court approval of a settlement agreement between The
Bank of Nova Scotia and the trustee for the Trace bankruptcy, which was entered
on October 18, 2000. On November 2, 2000, the transactions contemplated by the
Exchange Agreement and the settlement agreement were consummated, and did not
constitute a "change of control". As a result, Trace no longer owns any shares
of Foamex International common stock.
Under the Exchange Agreement, The Bank of Nova Scotia initially received
1,500,000 shares of Foamex International common stock from the Trace bankruptcy
estate and exchanged these common stock shares for 15,000 shares of a new class
of non-voting non-redeemable convertible preferred stock (the "Series B
Preferred Stock"). Each share of the Series B Preferred Stock can be converted
into 100 shares of Foamex International common stock but only if such conversion
would not trigger a "change of control" event, as discussed above. The Series B
Preferred Stock (a) is entitled to dividends only if a dividend is declared on
Foamex International's common stock, (b) ranks senior to any future preferred
stock issued by Foamex International and (c) is entitled to a liquidation
27
preference of $100 per share. Following this exchange, The Bank of Nova Scotia
became the owner of 24.41% of the outstanding shares of Foamex International's
common stock when the remaining 5,697,426 shares of Foamex International common
stock were transferred to The Bank of Nova Scotia from the Trace bankruptcy
estate. Certain equity transactions, primarily the exercise of stock options,
have reduced the Bank of Nova Scotia's common stock ownership percentage to
23.6% at February 15, 2003.
Environmental Health and Safety
We are subject to extensive and changing federal, state, local and foreign
environmental laws and regulations, including those relating to the use,
handling, storage, discharge and disposal of hazardous substances, the discharge
or emission of materials into the environment, and the remediation of
environmental contamination, and as a result, are from time to time involved in
administrative and judicial proceedings and inquiries relating to environmental
matters. As of December 29, 2002, we had accruals of approximately $2.7 million
for environmental matters including approximately $2.3 million related to
remediating and monitoring soil and groundwater contamination and approximately
$0.4 million relating to PRP sites and other matters. Additional losses, if any,
in excess of amounts currently accrued, cannot be reasonably estimated at this
time. If there are additional matters or if any current estimates are incorrect,
there could be a material adverse effect on our financial position, results of
operations and cash flows.
On August 8, 2001, the EPA proposed a National Emission Standard for
Hazardous Air Pollutants or "NESHAP" for Flexible Polyurethane Foam Fabrication
Operations. The proposed NESHAP regulates emissions of methylene chloride and
other Hazardous Air Pollutants and restricts air emissions from flame lamination
sources. We do not believe that this standard, if adopted, will require us to
make material expenditures.
On August 31, 2002, Environment Canada, the Canadian environmental
regulatory agency, proposed a rule which would require flexible polyurethane
foam manufacturing operations to reduce methylene chloride (dichloromethane) air
emissions. The proposed rule establishes a 50.0% reduction in methylene chloride
emissions by December 1, 2003 and 100.0% reductions by January 1, 2007. We do
not believe that this standard, if adopted, will require us to make material
expenditures for our Canadian plants.
We have reported to the appropriate state authorities that we have found
soil and/or groundwater contamination in excess of state standards at certain
locations. Seven sites are currently in various stages of investigation or
remediation. Accordingly, the extent of contamination and the ultimate liability
is not known with certainty for all sites. During 2000, we reached an
indemnification agreement with the former owner of the Morristown, Tennessee
facility. The agreement allocates the incurred and future remediation costs
between the former owner and us. The estimated allocation of future costs for
the remediation of this facility is not significant, based on current known
information. The former owner was Recticel Foam Corporation, a subsidiary of
Recticel.
We have either upgraded or closed all underground storage tanks at our
facilities in accordance with applicable regulations.
The 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. We are 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 eight sites. Estimates of total cleanup costs
and fractional allocations of liability are often provided by the EPA, the state
environmental agency or the committee of PRPs with respect to the specified
site. Based on these estimates (to the extent available) and on known
information, in each case and in the aggregate, we do not expect additional
costs, if any, to be material to liquidity, results of operations or financial
position.
In 2003, capital expenditures for safety and environmental compliance
projects are anticipated to be approximately $1.5 million. Although it is
possible that new information or future developments could require us to
reassess the potential exposure relating to all pending environmental matters,
including those described above, management believes that, based upon all
currently available information, the resolution of these environmental
28
matters will not have a material adverse effect on our operations, financial
position, capital expenditures or competitive position. The possibility exists,
however, 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.
Claims and Litigation
We and our subsidiaries are 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 our financial position or
results of operations. If management's assessment is incorrect, such actions
could have a material adverse effect on our consolidated financial position,
results of operations and cash flows. As of December 29, 2002, we had accrued
approximately $0.7 million for litigation and other legal matters in addition to
the environmental matters discussed above.
Inflation, Raw Material Costs and Other Matters
On average, inflation rates for the domestic economy continue to be
relatively low. Although long-term inflation rates are difficult to predict, we
believe we have the flexibility in operations and capital structure to maintain
a competitive position. The prices of the two principal chemicals used, TDI and
polyol, are influenced by demand and manufacturing capacity. In addition, the
prices of TDI and polyol are significantly influenced by crude oil production
and prices and by world political instability, particularly in the Middle East.
The conflict in that part of the world could significantly impact the price of
these raw materials. Results for 2002 were negatively impacted by higher costs
for raw materials. In 2001, the beginning of the economic slowdown resulted in
excess manufacturing capacity for the major chemical suppliers. This, coupled
with declining oil prices, resulted in lower costs for raw materials in 2001. We
experienced 32.0% to 37.0% increases in the prices of raw material from major
chemical manufacturers during 2002. We sought to recover these cost increases
through manufacturing process efficiencies and management of selling price
increases, but were only partially able to do so during 2002. Our major chemical
suppliers have announced their intention to increase prices by approximately
10.0% to 12.0% effective April 1, 2003. In an attempt to offset these raw
material cost increases, we have announced price increases to our customers to
be effective during April 2003. We may not be successful in implementing these
and further selling price increases to fully recover raw material cost increases
and competitive pricing pressure may require us to adjust selling prices or lose
volume. Results of operations have been and could be adversely affected by
delays in implementing, or inability to implement, additional selling price
increases to offset raw material cost increases. Additionally, we must reduce
and control our other operating expenses including selling, general and
administrative expenses to offset raw material cost increases. A failure to
recover cost increases could result in debt covenant violations which may lead
to lenders demanding immediate payment of our outstanding debt and impair our
ability to continue as a going concern.
Related Party Transactions
We have a number of related party transactions. Such related party
transactions and current balances are discussed in Note 14 to the consolidated
financial statements included in this annual report on Form 10-K.
Accounting Changes
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" ("SFAS No. 142") addresses financial accounting and reporting
for acquired goodwill and other intangible assets. A key change as a result of
implementing SFAS No. 142 is that goodwill and certain other intangibles are no
longer amortized but will be periodically assessed for impairment, and as a
result there may be more volatility in the reported results than under the
previous standard because impairment losses are likely to occur irregularly and
in varying amounts. An impairment of goodwill due to the initial application of
SFAS No. 142 is discussed below. Any goodwill and intangible assets acquired
after June 30, 2001, including the acquisition discussed in note 3 to the
consolidated
29
financial statements, are subject to the nonamortization and amortization
provisions of SFAS No. 142. The other provisions of SFAS No. 142 were adopted by
us on January 1, 2002.
SFAS No. 142 provides a six-month transitional period from the effective
date to perform an assessment of whether there is an indication that goodwill is
impaired. We completed this assessment in the second quarter of 2002. Step one
of the transitional impairment test uses a fair value methodology, which differs
from the undiscounted cash flow methodology that continues to be used for
intangible assets with an identifiable life. We identified six reporting units
during the second quarter and performed step one of the transitional impairment
test on each of the reporting units. Based on the results of step one of the
transitional impairment test, we identified one reporting unit in the Foam
Products segment, the Carpet Cushion Products reporting unit and the Other
reporting unit, for which the carrying values exceeded the fair values as at
January 1, 2002, indicating a potential impairment of goodwill in those
reporting units. Step two of the transitional impairment test, to determine the
magnitude of any goodwill impairment, was completed in the third quarter of 2002
and the resulting impairment loss of $72.0 million has been recorded as a
cumulative effect of a change in accounting principle, retroactive to the first
quarter 2002 results of operations in accordance with the transitional
implementation guidance of SFAS No. 142. We performed our annual goodwill
impairment test as of September 30, 2002 which did not result in the recognition
of any additional impairment.
On April 30, 2002, Statement of Financial Accounting Standards No. 145,
"Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement
No. 13, and Technical Corrections" ("SFAS No. 145") was issued. The provisions
of this Statement related to the rescission of Statement 4 shall be applied in
fiscal years beginning after May 15, 2002. Any gain or loss on extinguishment of
debt that was classified as an extraordinary item in prior periods presented
that does not meet the criteria in Opinion 30 for classification as an
extraordinary item shall be reclassified. Early application of the provisions of
this Statement related to the rescission of Statement 4 is encouraged. The
adoption of this Statement in 2003 will result in a reclassification of the
extraordinary items recorded during 2002.
Statement of Financial Accounting Standards No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities ("SFAS No. 146") was issued in June
2002. SFAS No. 146 requires that a liability for costs associated with an exit
or disposal activity be recognized when the liability is incurred rather than at
the date of an entity's commitment to an exit plan. SFAS No. 146 further
establishes that fair value is the objective for initial measurement of the
liability. The statement is effective for exit or disposal activities initiated
after December 31, 2002.
In November 2002, the FASB issued FASB Interpretation ("FIN") No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." FIN No. 45 clarifies the
requirements of SFAS No. 5, "Accounting for Contingencies," relating to the
guarantor's accounting for and disclosures of certain guarantees. The initial
recognition and measurements provisions of the interpretation are applicable on
a prospective basis to guarantees issued or modified after December 31, 2002,
irrespective of the guarantor's fiscal year-end. The disclosure requirements of
the interpretation are effective for financial statements of interim or annual
periods ending after December 15, 2002. The adoption of this interpretation is
not expected to have any impact on our results of operations or financial
position. We do not have any disclosure obligations under this interpretation at
December 29, 2002.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our debt securities with variable interest rates are subject to market risk
for changes in interest rates. On December 29, 2002, indebtedness with variable
interest rates totaled $221.0 million. On an annualized basis, if the interest
rates on these debt instruments increased by 1.0%, interest expense would
increase by approximately $2.2 million.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
An index to the financial statements and financial statement schedules is
included in Item 15(a).
30
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Foamex L.P. changed its accountants during 2001. Detailed information
required by this item was included in the Current Reports on Form 8-K and Form
8-K/A filed with the Securities and Exchange Commission on June 29, July 6, July
17 and July 19, 2001.
PART III
The information required by this Part III (Items 10, 11, 12 and 13) is not
applicable since Foamex L.P. is a wholly-owned subsidiary of Foamex
International.
ITEM 14. CONTROLS AND PROCEDURES.
Foamex L.P.'s management, including its Chief Executive Officer and Chief
Financial Officer, have conducted an evaluation of the effectiveness of Foamex
L.P.'s disclosure controls and procedures as defined in Exchange Act Rules
13a-14(c) and 15d-14(c) as of a date within 90 days of the filing of this Annual
Report on Form 10-K (the "Evaluation Date"). Based on the evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that as of the
Evaluation Date, the disclosure controls and procedures are effective in
ensuring that all material information required to be filed in this annual
report has been made known to them in a timely fashion. There have been no
significant changes in internal controls, or in factors that could significantly
affect internal controls, subsequent to the date of the Chief Executive Officer
and Chief Financial Officer completed their evaluation.
31
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial statements.
Foamex L.P. and Subsidiaries
Independent Auditors' Report F-2
Reports of Independent Accountants F-3
Consolidated Balance Sheets as of December 29, 2002 and December 31, 2001 F-5
Consolidated Statements of Operations for the years ended December 29, 2002,
December 31, 2001 and 2000 F-7
Consolidated Statements of Cash Flows for the years ended December 29, 2002
December 31, 2001 and 2000 F-8
Consolidated Statements of Partners' Deficiency for the years ended December 29, 2002
December 31, 2001 and 2000 F-9
Notes to Consolidated Financial Statements F-10
Foamex Capital Corporation
Independent Auditors' Report F-42
Balance Sheets as of December 29 2002 and December 31, 2001 F-43
Notes to Balance Sheets F-44
Foamex L.P. and Subsidiaries Financial Statement Schedule
Schedule II - Valuation and Qualifying Accounts S-2
(b) Reports on Form 8-K.
A report dated November 11, 2002, was filed for Item 8. - Change in
Fiscal Year, concerning a press release announcing that Foamex L.P.
changed its reporting period from a calendar year to a 52/53-week
fiscal year ending on the Sunday closest to January 1 and that because
the transition period was less than one month, no transition report
was required.
(c) Exhibits.
3.1(a) - Certificate of Limited Partnership of Foamex L.P.
3.2.1(a) - Fourth Amended and Restated Agreement of Limited Partnership of
Foamex L.P., dated as of December 14, 1993, by and among FMXI, Inc.
and Trace Foam Company, Inc., as general partners, and Foamex
International, Inc. as a limited partner (the "Partnership
Agreement").
3.2.2(b) - First Amendment to the Partnership Agreement, dated June 28, 1994.
3.2.3(c) - Second Amendment to the Partnership Agreement, dated June 12,1997.
3.2.4(v) - Third Amendment to the Partnership Agreement, dated December 23,
1997.
3.2.5(x) - Fourth Amendment to the Partnership Agreement, dated February 27,
1998.
3.2.6(aa) - Fifth Amendment to the Partnership Agreement, dated March 26,
2002.
3.3(y) - Certificate of Incorporation of FMXI.
3.4(y) - By-laws of FMXI.
3.5(k) - Certificate of Incorporation of Foamex Capital Corporation.
3.6(k) - By-laws of Foamex Capital Corporation.
3.7(bb) - Certificate of Formation of Foamex Carpet Cushion LLC.
3.8(bb) - Limited Liability Company Agreement of Foamex Carpet Cushion LLC.
3.9(dd) - Certificate of Incorporation of Foamex Asia, Inc.
3.10(dd) - By-laws of Foamex Asia, Inc.
3.11(dd) - Certificate of Incorporation of Foamex Latin America, Inc.
3.12(dd) - By-laws of Foamex Latin America, Inc.
3.13(dd) - Certificate of Incorporation of Foamex Mexico, Inc.
3.14(dd) - By-laws of Foamex Mexico, Inc.
32
3.15(dd) - Certificate of Incorporation of Foamex Mexico II, Inc.
3.16(dd) - By-laws of Foamex Mexico II, Inc.
4.1(bb) - Indenture, dated as of March 25, 2002, among Foamex L.P., Foamex
Capital Corporation, the Guarantors party thereto and U.S. Bank
National Association, as trustee, including as exhibits thereto, the
form of note.
4.2(bb) - Registration Rights Agreement, dated as of March 25, 2002, among
Foamex L.P., Foamex Capital Corporation, the Guarantors party
thereto and Credit Suisse First Boston Corporation, Salomon Smith
Barney Inc., Scotia Capital (USA) Inc., Bear, Stearns & Co. Inc.,
and Jefferies & Company, Inc., as initial purchasers.
4.3(d) - Indenture, dated as of June 12, 1997, by and among Foamex L.P.,
FCC, the subsidiary guarantors and The Bank of New York, as trustee,
relating to $150,000,000 principal amount of 9 7/8% Senior
Subordinated Notes due 2007, including the form of Senior
Subordinated Note and Subsidiary Guarantee.
4.4(v) - First Supplemental Indenture, dated as of December 23, 1997,
between Foamex LLC and The Bank of New York, as trustee, relating to
the 9 7/8% Senior Subordinated Notes due 2007.
4.5(x) - Second Supplemental Indenture, dated as of February 27, 1998,
among Foamex L.P. and Foamex Capital Corporation, as joint and
several obligors, General Felt Industries, Inc. ("General Felt"),
Foamex Fibers, Inc., and Foamex LLC, as withdrawing guarantors, and
The Bank of New York, as trustee, relating to the 9 7/8% Senior
Subordinated Notes due 2007.
4.6(bb) - Third Supplemental Indenture, dated as of March 25, 2002, between
Foamex Carpet Cushion LLC and The Bank of New York, as trustee,
relating to the 9 7/8% Senior Subordinated Notes due 2007.
4.7(v) - Indenture, dated as of December 23, 1997, by and among Foamex
L.P., Foamex Capital Corporation, the subsidiary guarantors, Crain
Holdings Corp., as intermediate obligator, and The Bank of New York,
as trustee, relating to $98,000,000 principal amount of 13 1/2%
Senior Subordinated Notes due 2005, including the form of Senior
Subordinated Note and Subsidiary Guarantee.
4.8(x) - First Supplemental Indenture, dated as of February 27, 1998, among
Foamex L.P. and Foamex Capital Corporation, as joint and several
obligors, General Felt Industries, Inc., Foamex Fibers, Inc. and
Foamex LLC, as withdrawing guarantors, Crain Industries, Inc., as
withdrawing intermediate obligor, and The Bank of New York, as
trustee, relating to the 13 1/2% Senior Subordinated Notes due 2005.
4.9(bb) - Second Supplemental Indenture, dated as of March 25, 2002, between
Foamex Carpet Cushion LLC and The Bank of New York, as trustee,
relating to the 13 1/2% Senior Subordinated Notes due 2005.
4.10.1(cc)- Commitment Letter and Attachment, dated July 5, 2002, from the
Bank of Nova Scotia to Foamex Canada Inc.
4.11(bb) - Pledge and Security Agreement, dated as of March 25, 2002, made by
Foamex L.P. and U.S. Bank National Association, as collateral agent.
4.12(bb) - Patent Security Agreement, dated as of March 25, 2002, by Foamex
L.P. in favor of U.S. Bank National Association, as collateral
agent.
4.13(bb) - Trademark Security Agreement, dated as of March 25, 2002, by
Foamex L.P. in favor of U.S. Bank National Association, as
collateral agent.
4.14(bb) - Copyright Security Agreement, dated as of March 25, 2002, by
Foamex L.P. in favor of U.S. Bank National Association, as
collateral agent.
4.15(bb) - Third Amended and Restated Foamex International Guaranty, dated as
of March 25, 2002, made by Foamex International in favor of Citicorp
USA, Inc., as collateral agent.
4.16(bb) - Amended and Restated Guaranty, dated as of March 25, 2002, made by
FMXI, Inc. and the subsidiary guarantors in favor of Citicorp USA,
Inc., as collateral agent, each lender, each issuing bank and each
other holder of an obligation.
4.17(bb) - Amended and Restated Pledge and Security Agreement, dated as of
March 25, 2002, made by Foamex International, FMXI, Inc., Foamex
L.P. in favor of Citicorp USA, Inc., as collateral agent.
4.18(bb) - Patent Security Agreement, dated as of March 25, 2002, made by
Foamex L.P. in favor of Citicorp USA, Inc., as collateral agent.
33
4.19(bb) - Trademark Security Agreement, dated as of March 25, 2002, made by
Foamex L.P. and Foamex Carpet Cushion LLC in favor of Citicorp USA,
Inc., as collateral agent.
4.20(bb) - Copyright Security Agreement, dated as of March 25, 2002, made by
Foamex L.P. in favor of Citicorp USA, Inc. as collateral agent.
4.21(bb) - Credit Agreement, dated June 12, 1997, as amended and restated as
of February 27, 1998, as further amended and restated as of June 29,
1999 and as further amended and restated as of March 25, 2002 among
Foamex L.P., FMXI, Inc., the institutions from time to time party
thereto as lenders, the institutions from time to time party thereto
as issuing banks and Citicorp USA, Inc. and The Bank of Nova Scotia
as agents.
4.22(ee) - Amendment No. 1, dated as of November 15, 2002, to the Credit
Agreement, dated as of June 12, 1997, as amended and restated as of
February 27, 1998, as further amended and restated as of June 29,
1999 and as further amended and restated as of March 25, 2002, by
and among Foamex L.P., FMXI, Inc., the financial institutions party
thereto from time to time as lenders (the "Lenders"), the financial
institutions party thereto from time to time as issuing banks (the
"Issuing Banks"), Citicorp USA, Inc., as administrative agent and as
collateral agent for the Lenders and the Issuing Banks, and The Bank
of Nova Scotia, as funding agent and as syndication agent for the
Lenders and the Issuing Banks.
4.23(bb) - Intercreditor Agreement, dated as of March 25, 2002, by and among
Citicorp USA, Inc., as Senior Agent, U.S. Bank National Association,
as trustee and collateral agent under the Indenture for the 10 3/4%
Senior Secured Notes and Foamex L.P.
10.1(e) - Reimbursement Agreement, dated as of March 23, 1993, between Trace
Holdings and General Felt Industries, Inc.
10.2(e) - Shareholder Agreement, dated December 31, 1992, among Recticel,
s.a. ("Recticel"), Recticel Holding Noord B.V., Foamex L.P., Beamech
Group Limited, LME-Beamech, Inc., James Brian Blackwell, and Prefoam
AG relating to a foam technology-sharing arrangement.
10.3(f) - Asset Transfer Agreement, dated as of October 2, 1990, between
Trace International Holdings, Inc. ("Trace Holdings") and Foamex
L.P. (the "Trace Holdings Asset Transfer Agreement").
10.4(f) - First Amendment, dated as of December 19, 1991, to the Trace
Holdings Asset Transfer Agreement.
10.5(f) - Amended and Restated Guaranty, dated as of December 19, 1991, made
by Trace Foam Company, Inc. ("Trace Foam") in favor of Foamex L.P.
10.6(f) - Asset Transfer Agreement, dated as of October 2, 1990, between
Recticel Foam Corporation ("RFC") and Foamex L.P. (the "RFC Asset
Transfer Agreement").
10.7(f) - First Amendment, dated as of December 19, 1991, to the RFC Asset
Transfer Agreement.
10.8(f) - Schedule 5.03 to the RFC Asset Transfer Agreement (the "5.03
Protocol").
10.9(e) - The 5.03 Protocol Assumption Agreement, dated as of October 13,
1992, between RFC and Foamex L.P.
10.10(e) - Letter Agreement between Trace Holdings and Recticel regarding the
Recticel Guaranty, dated as of July 22, 1992.
10.11(g) - First Amended and Restated Tax Sharing Agreement, dated as of
December 14, 1993, among Foamex L.P., Trace Foam, FMXI and Foamex
International.
10.12(d) - First Amendment to First Amended and Restated Tax Sharing
Agreement, dated as of June 12, 1997, by and among Foamex L.P.,
Foamex International, FMXI and Trace Foam.
10.13(o) - Second Amendment to First Amended and Restated Tax Sharing
Agreement, dated as of December 23, 1997, by and among Foamex L.P.,
Foamex International, FMXI, and Trace Foam.
10.14(q) - Third Amendment to First Amended and Restated Tax Sharing
Agreement, dated as of February 27, 1998, by and between Foamex
L.P., Foamex International and FMXI.
10.15(h) - Tax Distribution Advance Agreement, dated as of December 11, 1996,
by and between Foamex L.P. and Foamex-JPS Automotive L.P.
10.16(d) - Amendment No. 1 to Tax Distribution Advance Agreement, dated as of
June 12, 1997, by and between Foamex L.P. and Foamex International.
10.17(f)+ - Salaried Incentive Plan of Foamex L.P. and Subsidiaries.
10.18(f)+ - Equity Growth Participation Program.
10.19(i)+ - The Foamex L.P. Salaried Pension Plan (formerly, "The General Felt
Industries, Inc. Retirement Plan for Salaried Employees"), effective
as of January 1, 1995.
34
10.20(m) - The Foamex L.P. Hourly Pension Plan (formerly "The Foamex Products
Inc. Hourly Employee Retirement Plan"), as amended December 31,
1995.
10.21(m)+ - Foamex L.P. 401(k) Savings Plan effective October 1, 1997.
10.22(t)+ - Foamex International Amended and Restated 1993 Stock Option Plan.
10.23(a)+ - Foamex International Non-Employee Director Compensation Plan.
10.24(x)+ - Foamex International Equity Incentive Plan for Non-Employee
Directors.
10.25(x)+ - Foamex International Key Employee Incentive Bonus Plan.
10.26(y)+ - Agreement with Consultant, dated April 24, 2001 by and between
Robert J. Hay and Foamex L.P.
10.27(z)+ - Foamex Supplemental Executive Retirement Plan, effective as of May
15, 2001.
10.28(z)+ - Split Dollar Life Insurance Agreement Between Foamex International
Inc. and Marshall S. Cogan, dated as of December 31, 2001.
10.29(ff)+- Foamex International 2002 Stock Award Plan.
10.30(v)+ - Employment Agreement, dated as of January 1, 1999, by and between
Foamex International and Marshall S. Cogan.
10.31(r)+ - Employment Agreement, dated as of March 16, 1999, by and between
Foamex International and John G. Johnson, Jr.
10.32(v)+ - Employment Agreement, amended effective as of January 29, 2001, by
and between Foamex International and John Televantos.
10.33(y)+ - Termination and Release Agreement dated as of January 30, 2001 by
and between Foamex International and John G. Johnson, Jr.
10.34(z)+ - Termination and Release Agreement dated as of December 6, 2001, by
and between the Foamex International and John Televantos.
10.36(dd)+- Employment Agreement, dated as of August 20, 2002, by and between
Foamex International and Thomas E. Chorman.
10.38(dd)+- Employment Agreement, dated as of August 20, 2002, by and between
Foamex International and Peter W. Johnson.
10.39(dd)+- Employment Agreement, entered into on September 10, 2002 and
effective as of July 22, 2002, between Foamex International and
Virginia Kamsky.
10.40(z)+ - First Amendment to Employment Agreement, dated as of December 31,
2001, by and between Foamex International Inc. and Marshall S.
Cogan.
10.41(p) - Supply Agreement, dated as of February 27, 1998, by and between
Foamex L.P. and General Felt (as assigned to Foamex Carpet).
10.42(p) - Administrative Services Agreement, dated as of February 27, 1998,
by and between Foamex L.P. and General Felt (as assigned to Foamex
Carpet).
10.43(o) - Loan Agreement between Hua Kee Company Limited and Foamex Asia,
Inc., dated as of July 8, 1997.
10.44(dd)+- Agreement with Consultant, dated August 8, 2002, by and between
Raymond E. Mabus, Jr. and Foamex International.
10.45(gg)+- Severance Agreement and Release, dated as of November 23, 2002, by
and between Foamex International and Theodore J. Kall.
10.46(gg)+- Severance Agreement and Release, dates as of January 31, 2003, by
and between Foamex International and Pratt W. Wallace, Jr.
10.47(gg)+- Employment Agreement, dated as of March 24, 2003, by and between
Foamex International and K. Douglas Ralph.
21* - Subsidiaries of Foamex L.P.
- --------------------------------------------------------
* Filed herewith.
+ Management contract or compensatory plan or arrangement.
(a) Incorporated herein by reference to the Exhibit to Foamex L.P.'s
Registration Statement on Form S-1, Registration No. 33-69606.
(b) Incorporated herein by reference to the Exhibit to the Annual Report on
Form 10-K of Foamex International for the fiscal year ended January 1,
1995.
35
(c) Incorporated herein by reference to the Exhibit to the Current Report on
Form 8-K of Foamex International reporting an event that occurred May 28,
1997.
(d) Incorporated herein by reference to the Exhibit to the Current Report on
Form 8-K of Foamex International reporting an event that occurred June 12,
1997.
(e) Incorporated herein by reference to the Exhibit to the Annual Report on
Form 10-K Statement of Foamex L.P. and FCC for fiscal 1992.
(f) Incorporated herein by reference to the Exhibit to the Registration
Statement of Foamex L.P. and FCC on Form S-1, Registration Nos. 33-49976
and 33-49976-01.
(g) Incorporated herein by reference to the Exhibit to the Registration
Statement of FJPS, FJCC and Foamex L.P. on Form S-4, Registration No.
33-82028.
(h) Incorporated herein by reference to the Exhibit to the Annual Report on
Form 10-K of Foamex International for the fiscal year ended December 29,
1996.
(i) Incorporated herein by reference to the Exhibit to the Annual Report on
Form 10-K of Foamex L.P. for fiscal 1993.
(j) Incorporated herein by reference to the Exhibit in the Registration
Statement of Foamex International on Form S-4, Registration No. 333-30291.
(k) Incorporated herein by reference to the Current Report on Form 8-K of
Foamex L.P. reporting an event that occurred on August 29, 1997.
(l) Incorporated herein by reference to the Current Report on Form 8-K of
Foamex L.P. reporting an event that occurred on October 6, 1997.
(m) Incorporated by reference to the Exhibit to the Form 10-Q of Foamex L.P.
for the quarterly period ended September 28, 1997.
(n) Incorporated herein by reference to the Exhibit to the Current Report on
Form 8-K of Foamex L.P., FCC and Foamex International reporting an event
that occurred December 23, 1997.
(o) Incorporated herein by reference to the Exhibit in the Registration
Statement of Foamex L.P. and FCC on Form S-4, Registration No. 333-45733,
filed February 6, 1998.
(p) Incorporated herein by reference to the Current Report on Form 8-K of
Foamex International reporting an event that occurred on February 27, 1998.
(q) Incorporated herein by reference to the Exhibit to the Annual Report on
Form 10-K of Foamex International for the fiscal year ended December 28,
1997.
(r) Incorporated herein by reference to the Exhibit to the Annual Report on
Form 10-K of Foamex International for the fiscal year ended December 31,
1998.
(s) Incorporated herein by reference to the Exhibit to the Current Report on
Form 8-K of Foamex International reporting an event that occurred on July
31, 2000.
(t) Incorporated herein by reference to the Exhibit to Foamex International's
definitive proxy statement dated May 31, 2000.
36
(u) Incorporated herein by reference to the Exhibit to the Current Report on
Form 8-K of Foamex International reporting an event that occurred on
November 2, 2000.
(v) Incorporated herein by reference to the Exhibit to the Annual Report on
Form 10-K of Foamex International for year ended December 31, 2000.
(w) Incorporated herein by reference to the Exhibit to the Form 10-Q of Foamex
International for the quarterly period ended March 31, 2001.
(x) Incorporated herein by reference to the Appendix to Foamex International's
definitive amended and restated proxy statement, dated July 12, 2001.
(y) Incorporated herein by reference to the Exhibit to the Form 10-Q of Foamex
International for the quarterly period ended June 30, 2001.
(z) Incorporated herein by reference to the Exhibit to the Annual Report on
Form 10-K of Foamex International for the fiscal year ended December 31,
2001.
(aa) Incorporated herein by reference to the Exhibit to the Form 10-Q of Foamex
International for the quarterly period ended March 31, 2002.
(bb) Incorporated herein by reference to the Exhibit to the Form 10-Q of Foamex
L.P. and FCC for the quarterly period ended March 31, 2002.
(cc) Incorporated herein by reference to the Exhibit to the Form 10-Q of Foamex
International for the quarterly period ended June 30, 2002.
(dd) Incorporated herein by reference to the Exhibit to Amendment No. 1 to the
Registration Statement of Foamex L.P. and FCC on Form S-4, Registration No.
333-90632, filed October 22, 2002.
(ee) Incorporated herein by reference to the Exhibit to the Form 10-Q of Foamex
L.P. and FCC for the quarterly period ended September 29, 2002.
(ff) Incorporated herein by reference to Appendix C to Foamex International's
definitive proxy statement dated April 30, 2002.
(gg) Incorporated herein by reference to the Exhibit to the Annual Report on
Form 10-K of Foamex International for the fiscal year ended December 29,
2002.
Certain instruments defining the rights of security holders have been excluded
herefrom in accordance with Item 601(b)(4)(iii) of Regulation S-K. The
registrant hereby agrees to furnish a copy of any such instrument to the
Securities and Exchange Commission upon request.
37
SIGNATURES
Pursuant to the requirements of Section 13 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 as of the 27th day of March 2003.
FOAMEX L.P.
By: FMXI, Inc.
its Managing General Partner
By: /s/ K. Douglas Ralph
------------------------------
Name: K. Douglas Ralph
Title: Executive Vice President and
Chief Financial Officer
FOAMEX CAPITAL CORPORATION
By: /s/ K. Douglas Ralph
------------------------------
Name: K. Douglas Ralph
Title: Executive Vice President and
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on its behalf by the
registrant and in the capacities and as of the dates indicated:
Signature Title Date
/s/ Marshall S. Cogan Director of FMXI and FCC March 27, 2003
- ----------------------------
Marshall S. Cogan
/s/ George L. Karpinski Director of FMXI and FCC March 27, 2003
- ----------------------------
George L. Karpinski
38
CERTIFICATION
I, Thomas E. Chorman, certify that:
1. I have reviewed this annual report on Form 10-K of Foamex L.P. and Foamex
Capital Corporation;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 27, 2003
Foamex L.P. Foamex Capital Corporation
/s/ Thomas E. Chorman /s/ Thomas E. Chorman
- ------------------------------------- -------------------------------
Thomas E. Chorman Thomas E. Chorman
President and Chief Executive Officer President
39
CERTIFICATION
I, K. Douglas Ralph, certify that:
1. I have reviewed this annual report on Form 10-K of Foamex L.P. and Foamex
Capital Corporation.;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 27, 2003
Foamex L.P. Foamex Capital Corporation
/s/ K. Douglas Ralph /s/ K. Douglas Ralph
- ----------------------------- ------------------------------
K. Douglas Ralph K. Douglas Ralph
Executive Vice President and Executive Vice President and
Chief Financial Officer Chief Financial Officer
40
FOAMEX L.P. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Financial Statements of Registrants
Foamex L.P.
Independent Auditors' Report F-2
Reports of Independent Accountants F-3
Consolidated Balance Sheets as of December 29, 2002 and December 31, 2001 F-5
Consolidated Statements of Operations for the years ended December 29, 2002 and
December 31, 2001 and 2000 F-7
Consolidated Statements of Cash Flows for the years ended December 29, 2002 and
December 31, 2001 and 2000 F-8
Consolidated Statements of Partners' Deficiency for the years ended December 29, 2002 and
December 31, 2001 and 2000 F-9
Notes to Consolidated Financial Statements F-10
Foamex Capital Corporation
Independent Auditors' Report F-42
Balance Sheets as of December 29, 2002 and December 31, 2001 F-43
Notes to Balance Sheets F-44
F-1
INDEPENDENT AUDITORS' REPORT
To the Partners of Foamex L.P.
Linwood, Pennsylvania
We have audited the accompanying consolidated balance sheets of Foamex L.P. and
subsidiaries (the "Company"), an indirect wholly-owned subsidiary of Foamex
International Inc. as of December 29, 2002 and December 31, 2001, and the
related consolidated statements of operations, cash flows and partners'
deficiency for the two years then ended. Our audits also included the
consolidated financial statement schedule as of and for the years ended December
29, 2002 and December 31, 2001 listed in the Index at Item 15a. The consolidated
financial statements and financial statement schedule give retroactive effect to
the common control merger of Foamex L.P. and subsidiaries and Foamex Carpet
Cushion, Inc., which has been accounted for in a manner similar to a pooling of
interests as described in Note 1 to the consolidated financial statements. These
consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company at December 29, 2002
and December 31, 2001, and the results of its operations and its cash flows for
the years then ended in conformity with accounting principles generally accepted
in the United States of America. Also, in our opinion, such 2002 and 2001
consolidated financial statement schedule, when considered in relation to the
basic consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
The 2000 financial statements were audited by other auditors. We audited the
adjustments described in Note 1 that were applied to restate such financial
statements to give retroactive effect to the common control merger of Foamex
L.P. and subsidiaries and Foamex Carpet Cushion, Inc. In our opinion, such
adjustments are appropriate and have been properly applied. We also audited the
allocations of the condensed consolidating financial information and the related
eliminations included in Note 16 for the year ended December 31, 2000. In our
opinion, such allocations and eliminations are appropriate and have been
properly applied.
As discussed in Note 2 to the consolidated financial statements, the Company
changed its method of accounting for goodwill and other intangible assets in
2002.
/s/ DELOITTE & TOUCHE LLP
March 18, 2003
Parsippany, New Jersey
F-2
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners of Foamex L.P.:
In our opinion, the consolidated statements of operations, partners' deficiency
and cash flows for the year ended December 31, 2000 of Foamex L.P. and its
subsidiaries (not presented separately herein) present fairly, in all material
respects, the results of operations and cash flows of Foamex L.P. and its
subsidiaries for the year ended December 31, 2000, (before giving effect to the
adjustments to give retroactive effect to the contribution of Foamex Carpet
Cushion, Inc., described in Note 1 and excluding the information included in
Note 16, "Guarantor Information") in conformity with accounting principles
generally accepted in the United States of America. In addition, in our opinion,
the financial statement schedule of Foamex L.P. and its subsidiaries (not
presented separately herein) as of and for the year ended December 31, 2000,
(before giving effect to the adjustments to give retroactive effect to the
contribution of Foamex Carpet Cushion, Inc., described in Note 1) when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information set forth
therein. These financial statements and the financial statement schedule are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audit. We conducted our audit of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
As discussed in Note 7, during the year ending December 31, 2001, Foamex L.P.'s
financial debt covenants, with which Foamex L.P. must comply on a quarterly
basis, become more restrictive. Management's plans in regard to this matter are
also described in Note 7.
/s/ PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
March 30, 2001
F-3
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders of Foamex Carpet Cushion, Inc.:
In our opinion, the statements of operations, stockholder's equity and cash
flows for the year ended December 31, 2000 of Foamex Carpet Cushion, Inc. (not
presented separately herein) present fairly, in all material respects, the
results of operations and cash flows of Foamex Carpet Cushion, Inc. for the year
ended December 31, 2000, in conformity with accounting principles generally
accepted in the United States of America. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our audit
of these statements in accordance with auditing standards generally accepted in
the United States of America, which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
As discussed in Note 5 to the financial statements Foamex Carpet Cushion, Inc.'s
financial debt covenants, with which Foamex Carpet Cushion, Inc. must comply on
a quarterly basis, become more restrictive. Management's plans in regard to this
matter are also described in Note 5.
/s/ PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
March 30, 2001
F-4
FOAMEX L.P. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 29, December 31,
2002 2001
------------ ------------
ASSETS (thousands)
CURRENT ASSETS
Cash and cash equivalents $ 4,363 $ 15,059
Accounts receivable, net of allowance for doubtful
accounts and discounts of $10,311 in 2002 and $10,940 in 2001 191,546 173,461
Inventories 98,010 89,430
Other current assets 22,558 32,685
-------- --------
Total current assets 316,477 310,635
-------- --------
PROPERTY, PLANT AND EQUIPMENT
Land and land improvements 7,272 7,512
Buildings and leasehold improvements 119,582 116,232
Machinery, equipment and furnishings 287,847 275,261
Construction in progress 3,868 8,199
-------- --------
Total 418,569 407,204
Less accumulated depreciation and amortization (236,531) (206,407)
-------- --------
Property, plant and equipment, net 182,038 200,797
GOODWILL 125,321 209,503
DEBT ISSUANCE COSTS, net of
accumulated amortization of $14,079 in 2002 and
$14,643 in 2001 36,827 13,690
OTHER ASSETS 34,620 33,025
-------- --------
TOTAL ASSETS $695,283 $767,650
======== ========
The accompanying notes are an integral part of the
consolidated financial statements.
F-5
FOAMEX L.P. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 29, December 31,
2002 2001
----------- ------------
LIABILITIES AND PARTNERS' DEFICIENCY (thousands)
CURRENT LIABILITIES
Current portion of long-term debt $ 46 $ 4,023
Current portion of long-term debt - related party - 14,040
Accounts payable 87,394 128,756
Accrued employee compensation and benefits 26,330 25,858
Accrued interest 14,173 8,946
Accrued restructuring 14,424 12,392
Accrued customer rebates 18,813 21,869
Cash overdrafts 17,737 4,073
Other accrued liabilities 17,665 25,405
Deferred income taxes 1,864 1,632
---------- --------
Total current liabilities 198,446 246,994
LONG-TERM DEBT 738,540 630,682
LONG-TERM DEBT - RELATED PARTY - 17,550
ACCRUED EMPLOYEE BENEFITS 48,022 25,944
DEFERRED INCOME TAXES - 1,542
ACCRUED RESTRUCTURING 8,347 12,604
OTHER LIABILITIES 7,714 10,462
---------- --------
Total liabilities 1,001,069 945,778
---------- --------
COMMITMENTS AND CONTINGENCIES
PARTNERS' DEFICIENCY
General partner (240,107) (130,095)
Limited partner - -
Accumulated other comprehensive loss (56,458) (36,322)
Notes and advances receivable from partner - (2,490)
Notes receivable from related party (9,221) (9,221)
---------- --------
Total partners' deficiency (305,786) (178,128)
---------- --------
TOTAL LIABILITIES AND PARTNERS' DEFICIENCY $ 695,283 $767,650
========== ========
The accompanying notes are an integral part of the
consolidated financial statements.
F-6
FOAMEX L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED
December 29, December 31, December 31,
2002 2001 2000
------------ ------------ ------------
(thousands)
NET SALES $1,328,094 $1,252,904 $1,257,778
COST OF GOODS SOLD 1,186,669 1,072,823 1,085,753
---------- ---------- ----------
GROSS PROFIT 141,425 180,081 172,025
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 94,326 79,286 68,374
RESTRUCTURING, IMPAIRMENT AND OTHER CHARGES 4,799 36,068 6,268
---------- ---------- ----------
INCOME FROM OPERATIONS 42,300 64,727 97,383
INTEREST AND DEBT ISSUANCE EXPENSE 66,607 63,237 75,229
INCOME FROM EQUITY INTEREST IN JOINT VENTURE 1,734 1,645 1,652
OTHER INCOME (EXPENSE), NET 74 (1,853) (1,550)
---------- ---------- ----------
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES (22,499) 1,282 22,256
PROVISION FOR INCOME TAXES 1,911 3,543 2,653
---------- ---------- ----------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEMS AND
CUMULATIVE EFFECT OF ACCOUNTING CHANGE (24,410) (2,261) 19,603
EXTRAORDINARY ITEMS, NET OF INCOME TAXES (2,794) - -
CUMULATIVE EFFECT OF ACCOUNTING CHANGE (71,966) - -
---------- ---------- ----------
NET INCOME (LOSS) $ (99,170) $ (2,261) $ 19,603
========== ========== ==========
The accompanying notes are an integral part of the
consolidated financial statements.
F-7
FOAMEX L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED
December 29, December 31, December 31,
2002 2001 2000
------------ ------------ ------------
OPERATING ACTIVITIES (thousands)
Net income (loss) $(99,170) $ (2,261) $ 19,603
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 31,592 34,028 36,628
Amortization of debt issuance costs, debt premium
and debt discount 4,797 1,288 1,335
Extraordinary loss on extinguishment of debt 2,794 - -
Asset impairment and other charges 2,503 13,811 2,621
Cumulative effect of accounting change 71,966 - -
Loss on disposition of assets - 963 1,654
Provision for uncollectible accounts 2,336 5,479 2,838
Retirement benefit funding greater than expense (1,604) (1,752) (7,198)
Deferred income taxes (738) 1,068 (425)
Other, net 47 2 344
Changes in operating assets and liabilities:
Accounts receivable (20,421) (9,578) (6,857)
Inventories (8,580) 15,177 (2,452)
Accounts payable (41,362) 45,867 252
Accrued restructuring (2,225) 15,549 (3,352)
Other assets and liabilities 8,447 (10,937) 7,873
-------- -------- -------
Net cash provided by (used in) operating activities (49,618) 108,704 52,864
-------- -------- -------
INVESTING ACTIVITIES
Capital expenditures (15,582) (22,482) (23,593)
Proceeds from sale of assets 21 600 3,570
Repayment of note from Foamex International - 2,500 -
Acquisitions - (17,559) -
Decrease (increase) in revolving loan with Foamex
International 2,490 - (1,814)
Other investing activities (7,990) (1,130) (1,850)
-------- -------- -------
Net cash used in investing activities (21,061) (38,071) (23,687)
-------- -------- -------
FINANCING ACTIVITIES
Repayments of short-term borrowings - - (1,627)
Net proceeds from (repayments of) revolving loans (73,176) (20,905) 32,220
Proceeds from long-term debt 356,590 - -
Repayments of long-term debt (190,450) (8,538) (20,550)
Repayments of long-term debt-related party (31,590) (15,795) (41,898)
Increase (decrease) in cash overdrafts 13,664 (2,812) 1,029
Debt issuance costs (29,981) (2,578) -
Interest rate swaps 14,821 - -
Distribution paid to partners - (3,861) (41)
Other financing activities 105 (5,958) -
-------- -------- -------
Net cash provided by (used in) financing activities 59,983 (60,447) (30,867)
-------- -------- -------
Net increase (decrease) in cash and cash equivalents (10,696) 10,186 (1,690)
Cash and cash equivalents at beginning of period 15,059 4,873 6,563
-------- -------- -------
Cash and cash equivalents at end of period $ 4,363 $ 15,059 $ 4,873
======== ======== =======
The accompanying notes are an integral part of the
consolidated financial statements.
F-8
FOAMEX L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF PARTNERS' DEFICIENCY
Accumulated Notes
Other Notes Receivable
General Limited Comprehensive Receivable Related
Partners Partners Loss from Partners Party Total
-------- -------- ------------- ------------- ------------ ----------
(thousands)
2000
Balances at January 1, 2000 $(139,161) $ - $ (8,923) $(3,176) $(9,221) $(160,481)
Net income 392 19,211 19,603
Minimum pension liability adjustment (14,628) (14,628)
Foreign currency translation adjustment (910) (910)
Comprehensive income 4,065
Distributions (10) (471) (481)
Revolving loan with Foamex International (1,814) (1,814)
Other 208 208
Offset balance against Limited Partner
deficit assumed by General Partner 18,948 (18,948) -
--------- -------- -------- ------ ------- ---------
Balances at December 31, 2000 (119,831) - (24,461) (4,990) (9,221) (158,503)
2001
Net loss (45) (2,216) (2,261)
Minimum pension liability adjustment (10,782) (10,782)
Foreign currency translation adjustment (1,079) (1,079)
Comprehensive loss (14,122)
Distributions and other (160) (7,843) (8,003)
Repayment of note receivable from Foamex
International 2,500 2,500
Offset balance against Limited Partner
deficit assumed by General Partner (10,059) 10,059 -
--------- -------- -------- ------ ------- ---------
Balances at December 31, 2001 (130,095) - (36,322) (2,490) (9,221) (178,128)
2002
Net loss (1,698) (97,472) (99,170)
Minimum pension liability adjustment (18,267) (18,267)
Foreign currency translation adjustment (1,869) (1,869)
Comprehensive loss (119,306)
Distributions and other (5) (10,837) (10,842)
Repayment of revolving loan with Foamex
International 2,490 2,490
Offset balance against Limited Partner
deficit assumed by General Partner (108,309) 108,309 -
--------- -------- -------- ------ ------- ---------
Balances at December 29, 2002 $(240,107) $ - $(56,458) $ - $(9,221) $(305,786)
========= ======== ======== ====== ======= =========
The accompanying notes are an integral part of the
consolidated financial statements.
F-9
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION
Organization
Foamex L.P. operates in the flexible polyurethane and advanced polymer foam
products industry. As of December 29, 2002, Foamex L.P.'s operations were
conducted directly and through its wholly-owned subsidiaries, Foamex Canada Inc.
("Foamex Canada"), Foamex Latin America, Inc. ("Foamex Mexico"), Foamex Asia,
Inc. ("Foamex Asia") and through Foamex Carpet Cushion, Inc. ("Foamex Carpet").
Foamex Carpet was converted to a limited liability company and was contributed
by Foamex International Inc. ("Foamex International") to Foamex L.P. on March
25, 2002. The contribution of Foamex Carpet has been accounted for as a merger
of entities under common control and has been recorded in a manner similar to a
pooling of interests. Accordingly, the consolidated financial statements include
the accounts of Foamex Carpet for all periods presented. Adjustments recorded to
restate previously reported financial statements for the year ended December 31,
2000 consisted of those necessary to include the balances and results of Foamex
Carpet and to eliminate intercompany balances and transactions between Foamex
L.P. and Foamex Carpet. Financial information concerning the business segments
of Foamex L.P. is included in Note 12.
The following table represents selected historical financial data for
Foamex L.P. and subsidiaries and Foamex Carpet Cushion, Inc. and the adjustments
required to affect the merger of entities under common control similar to a
pooling of interests.
Consolidated
Foamex L.P. Foamex Carpet Adjustments Foamex L.P.
----------- ------------- ----------- ------------
2000 Income Statement
Net Sales $1,161,017 $270,898 $(174,137) $1,257,778
Income from Operations $ 84,115 $ 13,268 - $ 97,383
Net Income $ 13,268 $ 6,335 - $ 19,603
Foamex L.P. has changed its reporting period from a calendar year to a
52/53-week fiscal year ending on the Sunday closest to January 1. Fiscal year
2002 includes the 52 weeks ended December 29, 2002, after adjustment for
December 31, 2001 which was included in the prior year.
Foamex International Shareholder and Change in Control Developments
Trace International Holdings, Inc. ("Trace") is a privately held company,
which owned approximately 29% of Foamex International's outstanding voting
common stock at September 30, 2000, and whose former Chairman also serves as
Foamex International's Chairman. Foamex International's common stock owned by
Trace was pledged as collateral against certain of Trace's obligations. Certain
credit agreements and promissory notes of Foamex International's subsidiaries,
pursuant to which approximately $401.1 million of debt was outstanding as of
September 30, 2000, provided that a "change of control" would be an event of
default and could result in the acceleration of such indebtedness. "Change of
control" means, for this purpose, that (i) a person or related group, other than
Trace, beneficially owns more than 25% of Foamex International's outstanding
voting stock and (ii) such voting stock constitutes a greater percentage of such
voting stock than the amount beneficially owned by Trace. Additionally, certain
indentures of Foamex L.P. and Foamex Capital Corporation ("FCC"), a wholly-owned
subsidiary of Foamex L.P., contain similar "change of control" provisions, which
require Foamex L.P. and FCC to tender for such notes at a price in cash equal to
101% of the aggregate principal amount thereof, plus accrued and unpaid interest
thereon, if there is such a "change of control".
On July 21, 1999, Foamex International was informed by Trace that it filed
a petition for relief under Chapter 11 of the Bankruptcy Code in Federal Court
in New York City. Subsequently, on January 24, 2000, an order was signed
converting the Trace bankruptcy from Chapter 11 to Chapter 7 of the Bankruptcy
Code. A trustee was appointed to oversee the liquidation of Trace's assets.
Neither Trace's bankruptcy filing nor the conversion to Chapter 7 constituted a
"change of control" under the provisions of the debt agreements described above.
F-10
1. ORGANIZATION AND BASIS OF PRESENTATION (continued)
On July 31, 2000, Foamex International announced that it had entered into
an agreement (the "Exchange Agreement") with The Bank of Nova Scotia relating to
a portion of the 7,197,426 shares of Foamex International's common stock pledged
by Trace to The Bank of Nova Scotia. The Exchange Agreement provided for the
transfer of the pledged stock to The Bank of Nova Scotia in a manner that would
not constitute a "change of control" as described above. These transactions were
conditioned upon bankruptcy court approval of a settlement agreement between The
Bank of Nova Scotia and the trustee for the Trace bankruptcy, which was entered
on October 18, 2000. On November 2, 2000, the transactions contemplated by the
Exchange Agreement and the settlement agreement were consummated, and did not
constitute a "change of control". As a result, Trace no longer owns any shares
of Foamex International's common stock.
Under the Exchange Agreement, The Bank of Nova Scotia initially received
1,500,000 shares of Foamex International's common stock from the Trace
bankruptcy estate and exchanged these common stock shares for 15,000 shares of a
new class of Foamex International's non-voting non-redeemable convertible
preferred stock (the "Series B Preferred Stock"). Each share of the Series B
Preferred Stock can be converted into 100 shares of Foamex International's
common stock but only if such conversion would not trigger a "change of control"
event, as discussed above. The Series B Preferred Stock (a) is entitled to
dividends only if a dividend is declared on Foamex International's common stock,
(b) ranks senior to any future preferred stock issued by Foamex International
and (c) is entitled to a liquidation preference of $100 per share. Following
this exchange, The Bank of Nova Scotia became the owner of 24.41% of the
outstanding shares of Foamex International's common stock when the remaining
5,697,426 shares of Foamex International's common stock were transferred to The
Bank of Nova Scotia from the Trace bankruptcy estate. Certain equity
transactions, primarily the exercise of stock options, have reduced the Bank of
Nova Scotia's common stock ownership percentage to 23.6% at December 29, 2002.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation
The consolidated financial statements include the accounts of Foamex L.P.
and all majority-owned subsidiaries where control exists. The equity method of
accounting is used for investments in which Foamex L.P. has significant
influence, generally this represents ownership of at least 20% and not more than
50%. Foamex L.P. has a joint venture in Asia in which it increased its ownership
to 70% in late 2001. Foamex L.P. does not have control due to the minority
shareholders' substantive participation rights and therefore uses the equity
method of accounting. All significant intercompany accounts and transactions
have been eliminated in consolidation.
Accounting Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles 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 revenue and expenses during the reporting
period. Actual results could differ from those estimates.
Concentration of Credit Risk
Financial instruments which potentially subject Foamex L.P. to significant
concentrations of credit risk consist primarily of cash and cash equivalents and
trade accounts receivable. Foamex L.P. maintains cash and cash equivalents and
certain other financial instruments with various large financial institutions.
Foamex L.P.'s periodic evaluation of these financial institutions are considered
in Foamex L.P.'s investment strategy.
Foamex L.P. sells foam products to the automotive, carpet, cushioning and
other industries. Foamex L.P. performs ongoing credit evaluations of its
customers and generally does not require collateral. Foamex L.P. maintains
allowance accounts for potential credit losses and such losses have been within
management's expectations.
F-11
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Revenue Recognition, Discounts and Rebates
Revenue from sales, net of discounts and estimated returns, allowances and
rebates, is recognized when product title and risk of loss passes to the
customer, which is primarily at the time of shipment.
Cash and Cash Equivalents
Highly liquid investments with an original maturity of three months or less
when purchased are recognized as cash equivalents.
Accounts Receivable and Allowance for Uncollectible Accounts
An estimate of uncollectible accounts is maintained and is based on
historical collection experience and specific customer collection issues. A
significant change in the financial condition of one or more of Foamex L.P.'s
larger customers could have a material impact on future results.
Fair Value of Financial Instruments
Carrying amounts reported in the consolidated balance sheets for cash and
cash equivalents, accounts receivable, accounts payable, accrued liabilities and
short-term borrowings approximate fair value due to the short-term nature of
these instruments.
The carrying amount and fair value of long-term debt at December 29, 2002
were $738.6 million and $490.3 million, respectively, and at December 31, 2001
were $666.3 million and $603.4 million, respectively. The fair value of
long-term debt is estimated using quoted market prices, where available, or
discounted cash flows. Fair value estimates are made at a specific point in
time, based on relevant market information about the financial instruments.
These estimates are subjective in nature and involve uncertainties and matters
of significant judgment and therefore, cannot be determined with precision.
Changes in assumptions could significantly affect the estimates.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined
on a first-in, first-out basis.
Property, Plant and Equipment
Property, plant and equipment are stated at cost and are depreciated using
the straight-line method over the estimated useful lives of the assets. The
range of useful lives estimated for buildings is generally 20 to 35 years, and
the range for machinery, equipment and furnishings is 5 to 12 years. Leasehold
improvements are amortized over the shorter of the terms of the respective
leases or the estimated useful lives of the leasehold improvements. Depreciation
expense for 2002, 2001 and 2000 was $29.1 million, $26.4 million and $28.7
million, respectively.
Maintenance and repairs are charged to expense as incurred. Renewals and
major improvements are capitalized if they extend the life of the asset. When
assets are retired or otherwise disposed of, the asset and related accumulated
depreciation are removed from the accounts and any gain or loss is recognized in
the results of operations.
Capitalized Software Costs
Foamex L.P. expenses costs incurred in the preliminary project stage of
developing or obtaining internal use software, such as research and feasibility
studies, as well as costs incurred in the post-implementation/operational stage,
such as maintenance and training. Capitalization of software development costs
occurs only after the preliminary project stage is complete, management
authorizes the project, and it is probable that the project will be
F-12
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
completed and the software will be used for the function intended. The
capitalized costs are amortized on a straight-line basis over the estimated
useful life of the software, which is generally five years or less.
Impairment of Long-Lived Assets
Foamex L.P. reviews the carrying value of its long-lived assets other than
goodwill whenever events or changes in circumstances indicate that the carrying
value of an asset may no longer be appropriate. Foamex L.P. assesses
recoverability of the carrying value of the asset by estimating the future net
cash flows expected to result from the asset, including eventual disposition. If
the future undiscounted net cash flows are less than the carrying value of the
asset, an impairment loss is recorded equal to the difference between the
asset's carrying value and fair value.
Debt Issuance Costs
Debt issuance costs consist of amounts incurred in obtaining long-term
financing and are disclosed in the financing activities section of the
consolidated statements of cash flows. These costs are being amortized over the
term of the related debt using the effective interest method.
Environmental Remediation
Environmental expenditures that relate to current operations are expensed.
Expenditures that relate to an existing condition caused by past operations, and
which do not contribute to current or future revenue generation, are expensed.
Liabilities are recorded when environmental assessments and/or remedial efforts
are probable and the costs can be reasonably estimated.
Comprehensive Income (Loss)
Other comprehensive income or loss items are revenues, expenses, gains and
losses that under generally accepted accounting principles are excluded from net
income and reflected as a component of partners' deficiency, including foreign
currency translation and minimum pension liability adjustments.
Foreign Currency Translation
The financial statements of foreign subsidiaries have been translated into
U.S. dollars by using period-end exchange rates for the assets and liabilities
and the average exchange rates for the statements of operations. Currency
translation adjustments are included in accumulated other comprehensive loss.
Transaction gains (losses) are reflected in operations.
Research and Development
Research and development costs are expensed as incurred. Amounts charged
against income were $4.8 million, $3.1 million and $2.5 million in 2002, 2001
and 2000, respectively.
Start-Up Costs
Costs incurred in the start-up of a facility, including training and
production testing, are expensed as incurred.
Self Insurance
Foamex L.P. is partially self-insured for a number of risks up to certain
limits including workers' compensation, medical, automobile and general
liability. Commercial insurance policies are carried for amounts in excess of
the self-insured amounts.
F-13
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Claims and Litigation
Foamex L.P. evaluates claims for damages that are outside of its insurance
coverage and records its estimate of liabilities when such liabilities are
considered probable and an amount or reasonable range can be estimated.
Income Taxes
Income taxes are accounted for under the asset and liability method. Under
this method, deferred income taxes are provided for temporary differences
between the financial reporting basis and income tax basis of assets and
liabilities and for net operating loss carryforwards using the income tax rates,
under existing legislation, expected to be in effect at the date such temporary
differences are expected to reverse. Deferred income tax assets are reduced by a
valuation allowance when it is considered more likely than not that a portion of
the deferred income tax assets will not be realized in a future period. The
estimates utilized in the recognition of deferred income tax assets are subject
to revision in future periods.
Foamex L.P., as a limited partnership, is not subject to Federal income
taxes; therefore no current or deferred provision has been provided for such
taxes. However, Foamex L.P. has provided for the income taxes of certain states
in which it is subject to taxes and for certain subsidiaries, which are subject
to Federal and state income taxes and for subsidiaries located in foreign
jurisdictions that file separate tax returns. The partners will provide for
their respective shares of income or loss in their Federal or applicable state
income tax returns. Foamex L.P. has a tax sharing agreement that provides for
the payment of distributions to the partners for amounts that would be required
to be paid if Foamex L.P. were a corporation filing separate tax returns. The
ability of Foamex L.P. to make such distributions is limited by the terms of its
credit agreement. See Note 8.
Accounting Changes - Business Combinations
During 2001, Statement of Financial Accounting Standards No. 141, "Business
Combinations" ("SFAS No. 141") was issued. SFAS No. 141 addresses financial
accounting and reporting for business combinations and limits the accounting for
business combinations to the purchase method. The statement was effective for
all business combinations, including the acquisition discussed in Note 3, with
an acquisition date of July 1, 2001, or later.
Accounting Changes - Goodwill and Other Intangible Assets
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" ("SFAS No. 142") addresses financial accounting and reporting
for acquired goodwill and other intangible assets. A key change as a result of
implementing SFAS No. 142 is that goodwill and certain other intangibles are no
longer amortized but are periodically assessed for impairment, and as a result
there may be more volatility in the reported results than under the previous
standard because impairment losses are likely to occur irregularly and in
varying amounts. Any impairment of goodwill due to the initial application of
SFAS No. 142 is discussed below. Any goodwill and intangible assets acquired
after June 30, 2001, including the acquisition discussed in Note 3, are subject
to the nonamortization and amortization provisions of SFAS No. 142. The other
provisions of SFAS No. 142 were adopted by Foamex L.P. on January 1, 2002. The
impact on Foamex L.P.'s financial statement for prior years was limited to $6.0
million of annual goodwill amortization. Foamex L.P.'s adjusted net income would
have been $3.7 million in 2001 and $25.6 million in 2000, if SFAS No. 142 had
been adopted retroactively to January 1, 2000.
SFAS No. 142 provides a six-month transitional period from the effective
date to perform an assessment of whether there is an indication that goodwill is
impaired. Foamex L.P. completed this assessment in the second quarter of 2002.
Step one of the transitional impairment test uses a fair value methodology,
which differs from the undiscounted cash flow methodology that continues to be
used for intangible assets with an identifiable life. We identified six
reporting units and during the second quarter performed step one of the
transitional impairment test on each of the reporting units. Based on the
results of step one of the transitional impairment test, Foamex L.P. identified
one reporting unit in the Foam Products segment, the Carpet Cushion Products
reporting unit and the Other reporting unit, for which the carrying values
exceeded the fair values as of January 1, 2002, indicating a
F-14
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
potential impairment of goodwill in those reporting units. Step two of the
transitional impairment test, to determine the magnitude of any goodwill
impairment, was completed in the third quarter of 2002. The resulting impairment
loss of $72.0 million has been recorded as a cumulative effect of a change in
accounting principle, retroactive to Foamex L.P.'s first quarter results of
operations in accordance with the transitional implementation guidance of SFAS
No. 142. Foamex L.P. performed its annual goodwill impairment test as of
September 30, 2002 which did not result in the recognition of any additional
impairment.
Goodwill balances include:
Balance Accounting Balance
Segments December 31, 2001 Changes Other (1) December 29, 2002
------------------------ ----------------- ---------- ---------- -----------------
(thousands)
Foam Products $ 90,909 $ (7,771) $ (8,869) $ 74,269
Carpet Cushion Products 62,898 (60,401) - 2,497
Automotive Products 37,244 - (2,558) 34,686
Technical Products 14,658 - (789) 13,869
Other 3,794 (3,794) - -
-------- -------- -------- --------
Total $209,503 $(71,966) $(12,216) $125,321
======== ======== ======== ========
(1) Principally the reversal of a deferred income tax valuation allowance.
Future Accounting Changes - Extinguishment of Debt
On April 30, 2002, Statement of Financial Accounting Standards No. 145,
"Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement
No. 13, and Technical Corrections" ("SFAS No. 145") was issued. The provisions
of this Statement related to the rescission of Statement 4 shall be applied in
fiscal years beginning after May 15, 2002. Any gain or loss on extinguishment of
debt that was classified as an extraordinary item in prior periods presented
that does not meet the criteria in Opinion 30 for classification as an
extraordinary item shall be reclassified. Early application of the provisions of
this Statement related to the rescission of Statement 4 is encouraged. The
adoption of this Statement in 2003 will result in a reclassification of the
extraordinary items recorded during 2002.
Future Accounting Change - Guarantees
In November 2002, the FASB issued FASB Interpretation ("FIN") No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." FIN No. 45 clarifies the
requirements of SFAS No. 5, "Accounting for Contingencies," relating to the
guarantor's accounting for and disclosures of certain guarantees. The initial
recognition and measurements provisions of the interpretation are applicable on
a prospective basis to guarantees issued or modified after December 31, 2002,
irrespective of the guarantor's fiscal year-end. The disclosure requirements of
the interpretation are effective for financial statements of interim or annual
periods ending after December 15, 2002. The adoption of this interpretation is
not expected to have any impact on the results of operations or financial
position of Foamex L.P. Foamex L.P. does not have any disclosure obligations
under this interpretation at December 29, 2002.
Reclassifications
Certain amounts from prior years have been reclassified to conform with the
current presentation.
F-15
3. ACQUISITION
On July 25, 2001, Foamex L.P. purchased certain assets and assumed certain
liabilities of General Foam Corporation, a manufacturer of polyurethane foam
products for the automotive, industrial, and home furnishings markets, at a
total cost of $18.5 million, which resulted in goodwill of approximately $9.0
million. The business was acquired due to its synergy with Foamex L.P.'s
existing business. The assets purchased primarily included inventory and
machinery and equipment. The results of the acquired business have been included
in the consolidated financial statements since the date of acquisition. The
effects of the acquisition on Foamex L.P.'s consolidated financial statements
are not material.
4. EXTRAORDINARY ITEMS AND CUMULATIVE EFFECT OF ACCOUNTING CHANGE
In connection with the refinancing transaction completed on March 25, 2002
(see Note 8), Foamex L.P. wrote off debt issuance costs associated with the
early extinguishment of its long-term debt due to a related party and its
revolving credit facility, resulting in an extraordinary loss of $4.2 million,
net of income tax benefit of $0.1 million. In addition, Foamex L.P. purchased
and retired $49.0 million of its 13 1/2% senior subordinated notes, including
unamortized debt premium of $2.5 million, and $1.5 million of its 9 7/8% senior
subordinated notes resulting in an extraordinary gain of $1.4 million.
Included as a cumulative effect of accounting change in 2002 is a charge of
$72.0 million associated with the adoption of SFAS No. 142 (see Note 2).
5. RESTRUCTURING, IMPAIRMENT AND OTHER CHARGES
In the fourth quarter of 2002, Foamex L.P. recorded restructuring,
impairment and other charges of $10.0 million relating to the reorganization of
its executive and corporate management and the closure of or reduction of
activities at six operations. The charges included severance and other
termination benefits for approximately 200 employees, exit costs and remaining
lease payments. Also included in restructuring, impairment and other charges was
a $2.5 million asset impairment provision to reduce certain leasehold
improvements and machinery and equipment included in the Carpet Cushion Products
segment to their estimated fair values. The employees to be terminated included
manufacturing hourly and salaried personnel, sales force personnel and executive
and administrative staff. Approximately 60 of these employees were terminated in
2002.
Also in 2002, Foamex L.P. recorded restructuring, impairment and other
credits of $5.2 million. These credits resulted from a reevaluation of the 2001
Operational Reorganization Plan discussed below and $2.1 million related to the
collection of deferred rent receivable which had been fully reserved for.
The 2001 Operational Reorganization Plan is expected to be substantially
completed in early 2003 and Foamex L.P. expects to complete all of the remaining
facility closures and personnel reductions related to its 2002 restructuring
plan during 2003, primarily in the first six months. Terminations of
approximately 300 employees for both plans are planned to take place in 2003.
2001
During 2001, Foamex L.P. recorded restructuring, impairment and other
charges of $36.1 million, primarily related to its December 2001 Operational
Reorganization Plan. Included in the Operational Reorganization Plan were plant
facility closures, reductions in support function personnel and cost reductions
in purchasing and logistics. The Operational Reorganization Plan originally
included severance and termination benefits for approximately 700 employees at
plants, in support functions and in executive management. A reevaluation of the
plan in 2002 reduced the number of facilities to be closed and as a result the
number of employees planned to be terminated was reduced to approximately 500.
Approximately 340 of these employees were terminated in 2002. Restructuring,
impairment and other charges included an impairment provision of $13.8 million
(net of anticipated proceeds of $4.6 million) to reduce certain leasehold
improvements and machinery and equipment included in the Foam Products and
Carpet Cushion Products segments to their estimated fair values.
F-16
5. RESTRUCTURING, IMPAIRMENT AND OTHER CHARGES (continued)
2000
During 2000, Foamex L.P. recorded $6.3 million for restructuring plans
which included severance for approximately 100 employees all of whom have been
terminated.
The following table sets forth the components of Foamex L.P.'s
restructuring and other charges (credits):
Plant Closure Personnel
Total and Leases Reductions Impairment Other
--------- ------------- ---------- ----------- ---------
2000 (millions)
Balance at January 1, 2000 $ 9.0 $10.1 $2.7 $(3.8) $ -
Provision 6.3 1.4 2.3 2.6 -
Net cash receipts (spending) (3.5) (3.9) (3.2) 3.6 -
Asset impairment (2.6) - - (2.6) -
----- ----- ---- ----- ----
Balance at December 31, 2000 9.2 7.6 1.8 (0.2) -
2001
2001 Operational Reorganization
Plan 35.4 10.6 8.3 13.4 3.1
Adjustments and other 0.7 (0.4) (0.3) - 1.4
Net cash receipts (spending) (6.5) (3.1) (2.0) 0.6 (2.0)
Asset impairment (13.8) - - (13.8) -
----- ----- ---- ----- ----
Balance at December 31, 2001 25.0 14.7 7.8 - 2.5
2002
2002 Restructuring Plan 10.0 2.2 4.5 2.5 0.8
Adjustments and other (5.2) (4.4) (1.4) - 0.6
Net cash receipts (spending) (4.5) 0.1 (2.7) - (1.9)
Asset impairment (2.5) - - (2.5) -
----- ----- ---- ----- ----
Balance at December 29, 2002 $22.8 $12.6 $8.2 $ - $2.0
===== ===== ==== ===== ====
Foamex L.P. expects to spend approximately $14.4 million during 2003 with
the balance to be spent through 2012, primarily for lease costs.
6. INVENTORIES
The components of inventory are listed below.
December 29, December 31,
2002 2001
------------ ------------
(thousands)
Raw materials and supplies $60,588 $53,398
Work-in-process 16,737 12,476
Finished goods 20,685 23,556
------- -------
Total $98,010 $89,430
======= =======
F-17
7. SHORT-TERM BORROWINGS
Foamex Canada is a wholly-owned subsidiary of Foamex L.P. and has a
short-term credit facility that provides for $8.0 million of Canadian dollar
loans (U.S. dollar equivalent of approximately $5.1 million as of December 29,
2002) of which up to $2.0 million is available in U.S. dollar loans. The amount
of borrowings available is based on a combination of accounts receivable and
inventory, as defined in the credit facility. Interest on Canadian dollar
borrowings is based on the bank's prime lending rate plus 1 1/2%. On U.S. dollar
loans, interest is based on the bank's U.S. dollar base rate in Canada plus 1
1/2%. At December 29, 2002 and December 31, 2001, there were no short-term
borrowings outstanding and approximately $5.1 million was available at December
29, 2002.
8. LONG-TERM DEBT
The components of long-term debt are listed below.
December 29, December 31,
2002 2001
------------ -------------
Foamex L.P. Credit Facility (thousands)
Term Loan B (1) $ 39,262 $ 76,139
Term Loan C (1) 35,693 69,218
Term Loan D (1) 51,700 100,259
Term Loan E (1) 16,290 -
Term Loan F (1) 19,243 -
Revolving credit facility (1) 51,823 125,000
10 3/4% Senior secured notes due 2009 (2) (4) 314,237 -
9 7/8% Senior subordinated notes due 2007 (2) 148,500 150,000
13 1/2% Senior subordinated notes due 2005 (includes
$2,486 and $6,515 of unamortized debt premium) (2) 54,071 104,515
Industrial revenue bonds 7,000 7,000
Other (net of unamortized debt discount of $137 in 2002
and $281 in 2001) 767 2,574
-------- --------
738,586 634,705
Less current portion 46 4,023
-------- --------
Long-term debt-unrelated parties $738,540 $630,682
======== ========
The components of related party long-term debt are listed below.
December 29, December 31,
2002 2001
------------ -------------
(thousands)
Note payable to Foam Funding LLC (3) $ - $ 31,590
Less current portion - 14,040
-------- --------
Long-term debt - related party $ - $ 17,550
======== ========
(1) Debt of Foamex L.P., guaranteed by Foamex International and FMXI, Inc.
(2) Debt of Foamex L.P. and Foamex Capital Corporation.
(3) Debt of Foamex Carpet.
(4) Includes $14.2 million of deferred credit on interest rate swap
transactions at December 29, 2002.
F-18
8. LONG-TERM DEBT (continued)
On March 25, 2002, Foamex L.P. and Foamex Capital Corporation issued $300.0
million of 10 3/4% Senior Secured Notes due 2009 (the "Senior Secured Notes")
and amended the Foamex L.P. Credit Facility (the "Amended Credit Facility").
Under the Amended Credit Facility, Foamex L.P. may borrow up to $262.2 million,
consisting of $162.2 million of term loans and a $100.0 million revolving credit
facility. Net proceeds from the Senior Secured Notes of $280.0 million were used
to repay a portion of the debt outstanding under the Foamex L.P. Credit
Facility. The $31.6 million note payable to a related party, Foam Funding LLC,
was repaid with the initial proceeds of a new term loan under the Amended Credit
Facility. Additionally, financial covenants contained in the Amended Credit
Facility were adjusted to reflect changes in the capital structure and the
current business environment of Foamex L.P. Under the covenants contained in the
Senior Secured Notes and the Amended Credit Facility, Foamex L.P. was able to
spend up to $48.5 million of the proceeds from the Senior Secured Notes to
repurchase or redeem some of its senior subordinated notes. In July and August
2002, Foamex L.P. utilized $48.5 million to purchase and retire $49.0 million of
its 13 1/2% senior subordinated notes, including unamortized debt premium of
$2.5 million, and $1.5 million of its 9 7/8% senior subordinated notes.
Amended Credit Facility
-----------------------
The Amended Credit Facility consists of (1) the new revolving credit
facility, which is a non-amortizing revolving credit facility provided by a new
syndicate of lenders (the "New Revolving Credit Facility"), which provides
working capital for Foamex L.P. and its subsidiary guarantors and funding for
other general corporate purposes, (2) Term B, C, and D loans, (3) a new Term E
Loan in the initial amount of $31.6 million, the proceeds of which were borrowed
at closing and used to repay in full the obligations outstanding under the note
payable to Foam Funding LLC, and (4) a new Term F Loan in the initial amount of
$25.0 million, the proceeds of which were borrowed at closing and used to repay
indebtedness outstanding under the revolving credit facility. The remaining
obligations outstanding under the revolving credit facility were repaid with a
portion of the proceeds from the issuance of the 10 3/4% Senior Secured Notes as
described below.
The commitments under the New Revolving Credit Facility are available to
Foamex L.P. in the form of (1) revolving credit loans, (2) swing loans (subject
to a $20.0 million sublimit) and (3) letters of credit (subject to a $40.0
million sublimit). At December 29, 2002, Foamex L.P. had available borrowings of
$27.6 million and letters of credit outstanding of $20.6 million.
A portion of the net proceeds from the 10 3/4% Senior Secured Notes was
used to repay a portion of the existing term loans, the Term E Loan and the Term
F Loan. Loans made under the New Revolving Credit Facility will mature and the
commitments under them will terminate on June 30, 2005. The Term B Loan, the
Term E Loan and the Term F Loan will mature on June 30, 2005, the Term C Loan
will mature on June 30, 2006 and the Term D Loan will mature on December 29,
2006. Each of the Term Loans will be subject to amortization on a quarterly
basis; however, after giving effect to the prepayments of the Term Loans,
quarterly amortization payments will commence for the Term B Loan, the Term E
Loan and the Term F Loan in 2004, for the Term C Loan in 2005 and for the Term D
Loan in 2006.
Foamex L.P. is required to make mandatory prepayments of loans under the
Amended Credit Facility with: (1) the net cash proceeds received from sales of
assets by Foamex L.P. or certain of its subsidiaries, (2) the net cash proceeds
received from certain issuances by Foamex L.P., or any of its subsidiaries of
indebtedness for borrowed money or equity interests and (3) 75% of excess cash
flow in any fiscal year, such percentage to be reduced to 50% if the ratio of
outstanding obligations under the Amended Credit Facility to EBDAIT (as defined)
for such fiscal year is reduced to specified levels, subject, in each case, to
certain limited exceptions.
Foamex L.P. is permitted to make voluntary prepayments and/or permanently
reduce the commitments under the New Revolving Credit Facility in whole or in
part, without premium or penalty, subject to reimbursement of the lenders'
redeployment costs in the case of prepayment of LIBO, as defined, rate
borrowings, other than at the end of any interest period. All voluntary
prepayments of Term Loans will be applied to such tranches of Term Loans as
Foamex L.P. may select.
F-19
8. LONG-TERM DEBT (continued)
Foamex International, FMXI, Inc. and each of Foamex L.P.'s domestic
subsidiaries continue to guarantee the repayment of the obligations under the
Amended Credit Facility. The Amended Credit Facility is secured by a
first-priority lien (subject to permitted liens) on substantially the same
collateral that secured the obligations under the prior Foamex L.P. credit
facility, which includes substantially all of Foamex L.P.'s material tangible
and intangible assets. In addition, all of the partnership interests, all of the
capital stock or other equity interests of Foamex L.P.'s domestic subsidiaries
(including Foamex Carpet) and 65% of the capital stock or other equity interests
of Foamex L.P.'s first-tier foreign subsidiaries are pledged as part of the
security for the obligations under the Amended Credit Facility.
Borrowings under the Amended Credit Facility bear interest at a floating
rate based upon (and including a margin over), at our option, (1) the higher of
(a) the funding agent's prime rate and (b) 0.50% in excess of the Federal
Reserve reported weighted average overnight rate for federal funds or (2) the
higher of (x) 2.50% per annum and (y) the LIBO rate, as defined, as determined
by the funding agent. The effective interest rates at December 29, 2002 for Term
Loans B, C, D, E and F ranged between 7.00% and 7.38%. The effective interest
rate for revolving loans at December 29, 2002 was 7.75%. The rates increase 25
basis points each quarter that Foamex L.P.'s leverage ratio, as defined, exceeds
5.00 to 1.00. Once the leverage ratio is reduced below this level, the
cumulative amount of any 25 basis point adjustment to the interest rates on
borrowings are reset to zero. At December 29, 2002, the calculated leverage
ratio was 8.66 to 1.00. Accordingly, an additional 25 basis point rate increase
will become effective early in the second quarter of 2003.
The Amended Credit Facility contains affirmative and negative covenants
that, subject to certain exceptions, are substantially similar to those
contained in the prior credit facility. The Amended Credit Facility also
includes the following financial covenants, as defined therein: (1) a minimum
net worth test; (2) a minimum ratio of EBDAIT to cash interest expense; (3) a
minimum ratio of EBDAIT to fixed charges; and (4) a maximum ratio of funded debt
to EBDAIT. These covenants are substantially the same as those contained in the
prior credit facility with appropriate changes to take into account the issuance
of the Senior Secured Notes and the contribution of Foamex Carpet to Foamex L.P.
The Amended Credit Facility also requires the refinancing of the 13 1/2% senior
subordinated notes on or prior to March 1, 2005.
The Amended Credit Facility contains events of default including, but not
limited to, nonpayment of principal, interest, fees or other amounts when due,
violation of covenants, inaccuracy of representations and warranties in any
material respect, cross default and cross acceleration to certain other
indebtedness, bankruptcy, ERISA, material judgments and change of control.
Certain of these events of default are subject to grace periods and materiality
qualifications. See the Debt Covenants section of this Note.
Foamex Carpet Credit Facility
-----------------------------
At December 31, 2001, Foamex Carpet had a revolving credit facility (the
"Foamex Carpet Credit Facility"), which provided a commitment of $15.0 million
through February 2004. There were no borrowings outstanding under the credit
facility at December 31, 2001 and available borrowings totaled $14.8 million
with $0.2 million of letters of credit outstanding. The Foamex Carpet Credit
Facility was terminated on March 25, 2002 in connection with the refinancing.
10 3/4% Senior Secured Notes
The 10 3/4% Senior Secured Notes were issued by Foamex L.P. and Foamex
Capital Corporation on March 25, 2002 and are due on April 1, 2009. The notes
are guaranteed on a senior basis by all of Foamex L.P.'s domestic subsidiaries
that guarantee the Amended Credit Facility. The notes are secured on a
second-priority basis (subject to permitted liens) on substantially the same
collateral that secures the obligations under the Amended Credit Facility. The
notes rank effectively junior to all senior indebtedness that is secured by
first priority liens and senior in right of payment to all subordinated
indebtedness. Interest is payable April 1 and October 1. The notes may be
redeemed at the option of Foamex L.P., in whole or in part, at any time on or
after April 1, 2006. The initial redemption is at 105.375% of their principal
amount, plus accrued and unpaid interest and liquidated damages, as defined, if
any,
F-20
8. LONG-TERM DEBT (continued)
thereon to the date of redemption and declining annually to 100.0% on or after
April 1, 2008. Additionally, on or before April 1, 2005, up to 35.0% of the
principal amount of the notes may be redeemed at a redemption price equal to
110.750% of the principal amount, plus accrued and unpaid interest and
liquidated damages, as defined, if any, thereon to the date of redemption with
the net proceeds of one or more equity offerings.
Upon the occurrence of a change of control, as defined, each holder will
have the right to require Foamex L.P. to tender for such notes at a price in
cash equal to 101.0% of the aggregate principal amount thereof, plus accrued and
unpaid interest and liquidated damages, as defined, if any, if there is such a
"change of control".
Foamex L.P. was required to cause a registration statement under the
Securities Act of 1933 to be effective within 180 days of March 25, 2002. Foamex
L.P. filed the registration statement, but it was not effective until January
30, 2003 and therefore is liable for liquidated damages from September 23, 2002
until the date the registration statement became effective. The liquidated
damages are at the rate of $15,000 per week for the first 90 days, escalating by
$15,000 per week for each additional 90 days. The amount accrued for liquidated
damages at December 29, 2002 was $0.2 million.
Effective May 1, 2002, Foamex L.P. completed a series of interest rate swap
transactions with notional amounts aggregating $300.0 million. Foamex L.P.
designated, documented and accounted for these interest rate swaps as fair value
hedges of its 10 3/4% Senior Secured Notes due April 1, 2009. The risk being
hedged in these transactions was the change in fair value of its 10 3/4% Senior
Secured Notes based on changes in the benchmark interest rate, LIBOR. The effect
of these interest rate swap transactions was to convert the fixed interest rate
on the 10 3/4% Senior Secured Notes to floating rates reset twice per year to
correspond with the interest payment dates for the 10 3/4% Senior Secured Notes.
On September 18, 2002, Foamex L.P. unwound the interest rate swap transactions
in exchange for net cash proceeds of $18.4 million, including $3.6 million
realized through lower effective interest rates while the swap transactions were
in effect. The unwinding resulted in a deferred credit of $14.8 million which
will be amortized through April 1, 2009, using the effective interest rate
method.
9 7/8% Senior Subordinated Notes
The 9 7/8% Senior Subordinated Notes were issued by Foamex L.P. and Foamex
Capital Corporation and are due on June 15, 2007. The notes represent
uncollateralized general obligations of Foamex L.P. and are subordinated to all
Senior Debt, as defined in the Indenture. Interest is payable June 15 and
December 15. The notes may be redeemed at the option of Foamex L.P., in whole or
in part, at any time on or after June 15, 2002. The initial redemption is at
104.938% of their principal amount, plus accrued and unpaid interest, as
defined, if any, thereon to the date of redemption and declining annually to
100.0% on or after June 15, 2005.
Upon the occurrence of a change of control, as defined, each holder will
have the right to require Foamex L.P. to tender for such notes at a price in
cash equal to 101% of the aggregate principal amount thereof, plus accrued and
unpaid interest thereon, if there is such a "change of control". The notes are
subordinated in right of payment to all senior indebtedness and are pari passu
in right of payment to the 13 1/2% Senior Subordinated Notes (described below).
13 1/2% Senior Subordinated Notes
The 13 1/2% Senior Subordinated Notes were issued by Foamex L.P. and Foamex
Capital Corporation and are due on August 15, 2005. The notes represent
uncollateralized general obligations of Foamex L.P. and are subordinated to all
Senior Debt, as defined in the Indenture. Interest is payable semiannually on
February 15 and August 15. The notes may be redeemed at the option of Foamex
L.P., in whole or in part, at any time on or after August 15, 2000. The initial
redemption was 106.75% of their principal amount, plus accrued and unpaid
interest, if any, thereon to the date of redemption and declining annually to
100.0% on or after August 15, 2004. At December 29, 2002 the redemption price is
103.375% plus accrued and unpaid interest.
F-21
8. LONG-TERM DEBT (continued)
Upon the occurrence of a change of control, as defined, each holder will
have the right to require Foamex L.P. to tender for such notes at a price in
cash equal to 101% of the aggregate principal amount thereof, plus accrued and
unpaid interest, if any, thereon, if there is such a "change of control". The
notes are subordinated in right of the payment of all senior indebtedness and
are pari passu in right of payment to the 9 7/8% Senior Subordinated Notes
(described above).
Industrial Revenue Bonds ("IRBs")
IRB debt includes a $1.0 million bond that matures in 2005 and a $6.0
million bond that matures in 2013. Interest is based on a variable rate, as
defined, with options available to Foamex L.P. to convert to a fixed rate. At
December 31, 2001, the interest rate was 2.0% on the $1.0 million bond and 1.7%
on the $6.0 million bond. The maximum interest rate for either of the IRBs is
15.0% per annum.
If Foamex L.P. exercises its option to convert the bonds to a fixed
interest rate structure, the IRBs are redeemable at the option of the
bondholders. The obligations are collateralized by certain properties, which
have an approximate net carrying value of $10.8 million at December 29, 2002.
Other
Other debt at December 31, 2001 included a term loan owed by a
majority-owned Mexican subsidiary, Foamex de Cuautitlan S.A. de C.V. Quarterly
principal payments were due on the term loan through its maturity in May 2002.
Also included in other debt is a non-interest bearing promissory note with a
principal amount of $0.9 million at December 29, 2002 issued in connection with
increasing Foamex L.P.'s interest in an Asian joint venture to 70% in 2001. The
promissory note had unamortized discount of $0.1 million at December 29, 2002.
Related Party - Note Payable to Foam Funding LLC
Foamex Carpet entered into a $70.2 million promissory note payable to Foam
Funding LLC, a subsidiary of Trace. Principal was payable in quarterly
installments that began in June 1998 with a final installment in February 2004.
Interest was based on a variable rate equal to the sum of 2.25% plus the higher
of: (i) the base rate of The Bank of Nova Scotia or (ii) the Federal Funds rate
plus 0.5%. At the option of Foamex Carpet, interest payable under the note was
convertible into LIBOR based loans plus 3.25%.
Amounts outstanding were collateralized by all of the assets of Foamex
Carpet on a pari passu basis with the Foamex Carpet Credit Facility. All
obligations under the note payable to Foam Funding LLC were paid on March 25,
2002.
Debt Covenants
The indentures, the Foamex L.P. Amended Credit Facility and other
indebtedness agreements contain certain covenants that limit, among other
things, the ability of Foamex L.P. (i) to pay distributions or redeem equity
interests, (ii) to make certain restrictive payments or investments, (iii) to
incur additional indebtedness or issue Preferred Equity Interests, as defined,
(iv) to merge, consolidate or sell all or substantially all of its assets or (v)
to enter into certain transactions with affiliates or related persons. In
addition, certain agreements contain provisions that, in the event of a defined
change of control or the occurrence of an undefined material adverse change in
the ability of the obligor to perform its obligations, the indebtedness must be
repaid, in certain cases, at the option of the holder. Also, Foamex L.P. is
required under certain of these agreements to maintain specified financial
ratios of which the most restrictive are the maintenance of net worth, interest
coverage, fixed charge coverage and leverage ratios, as defined. Under the most
restrictive of the distribution restrictions as of December 29, 2002, Foamex
L.P. was able to distribute to its partners, only to the extent to enable its
partners to meet their tax payment liabilities and Foamex International's normal
operating expenses of up to $1.0 million annually, so long as no event of
default has occurred.
F-22
8. LONG-TERM DEBT (continued)
Foamex L.P. and Foamex Carpet were in compliance with the various financial
covenants of their loan agreements as of December 31, 2000. Certain Foamex L.P.
and Foamex Carpet debt agreements contained certain quarterly financial
covenants, which became more restrictive during 2001. In the absence of a waiver
of or amendment to such financial covenants, noncompliance would have
constituted an event of default under the applicable debt agreements, and the
lenders would have been entitled to accelerate the maturity of the indebtedness
outstanding thereunder. Prior to filing the Annual Report on Form 10-K for the
year ended December 31, 2000, Foamex L.P. and Foamex Carpet anticipated they
would continue to comply with the financial covenants in the applicable debt
agreements during 2001. In the event that noncompliance appeared likely or
occurred, management was prepared to seek lenders' approval of amendments to, or
waivers of, such financial covenants. In December 2001, certain financial
covenants were modified to accommodate the restructuring impairment and other
charges recorded in the fourth quarter of 2001 as a result of Foamex L.P.'s 2001
Operational Reorganization Plan. At that time certain financial covenants were
also eased for 2002. Foamex L.P. paid a fee of approximately $1.8 million to
obtain this modification. The Foamex Carpet debt agreements were terminated in
connection with the refinancing which took place on March 25, 2002.
On October 16, 2002, Foamex L.P. announced that it had obtained a waiver
from its bank lenders of its financial covenants for the period ended September
29, 2002 since it would not have been in compliance with the covenants. The
waiver was effective until November 30, 2002 and reduced the commitment under
the revolving credit facility from $100.0 million to $70.0 million for the
period the waiver was in effect. On November 15, 2002, Foamex L.P. and its bank
lenders executed an amendment to the Amended Credit Facility. Under the
amendment, Foamex L.P. will be subject to minimum net worth, minimum EBDAIT, as
defined, and maximum capital expenditure covenants through periods ending
December 28, 2003. The minimum EBDAIT covenant is tested monthly, on a
cumulative basis, beginning with December 2002. Foamex L.P. was in compliance
with the revised covenants as of December 29, 2002. In addition, Foamex L.P. was
subject to a minimum EBDAIT, as defined, covenant for the quarter ended
September 29, 2002 and was in compliance. Compliance with existing covenants on
leverage, fixed charge coverage and interest coverage ratios is suspended
through periods ending September 28, 2003, but the covenants are revised and
will be reinstated thereafter. All of the financial covenants were established
based on a business plan provided to the lenders. In addition, borrowings under
the Amended Credit Facility will be subject to a borrowing base calculation,
which could limit borrowings under the revolving credit facility to less than
the maximum commitment. Under the borrowing base calculation, availability under
the Revolving Credit Facility shall equal the lesser of (1) the Revolving Credit
Facility commitment or (2) the sum of 65% of Foamex L.P.'s accounts receivable
plus 50% of Foamex L.P.'s inventory plus $85.0 million, less certain other
adjustments for Term Loan repayments, less the outstanding balance of Term
Loans. As of December 29, 2002, the borrowing base calculation did not limit
borrowings under the Amended Credit Facility. The cost of obtaining the
amendment aggregated $4.0 million, including bank and legal fees.
Foamex L.P.'s minimum EBDAIT covenants have higher thresholds in the second
half of 2003. Management's current plans to achieve EBDAIT covenant compliance
require continued customer selling price management in response to raw material
cost changes, successful implementation of on-going cost savings initiatives,
improved operating efficiencies, improved working capital management and reduced
capital expenditures. Management is also continuing to evaluate strategic
alternatives in an effort to reduce Foamex L.P.'s debt.
F-23
8. LONG-TERM DEBT (continued)
Maturities of Long-Term Debt
Scheduled maturities of long-term debt as of December 29, 2002 are shown
below (thousands):
2003 $ 46
2004 33,795
2005 160,216
2006 73,444
2007 148,500
Thereafter 306,000
--------
722,001
Unamortized debt premium/discount and
deferred credit, net 16,585
--------
Total $738,586
========
9. RETIREE BENEFIT PLANS
Defined Benefit Pension Plans
Foamex L.P. provides pension and survivor benefits for salaried and certain
hourly employees in the United States (the "Qualified Pension Plan"). Salaried
employees are provided benefits that are based principally on the combination of
years of credited service and compensation. Hourly employees are provided
benefits that are based principally on stated amounts for each year of credited
service. Certain employees in a wholly-owned Canadian subsidiary are provided
pension and survivor benefits.
Effective May 15, 2001, a supplemental executive retirement plan (the
"SERP") was established. The SERP is a non-qualified plan and provides
retirement benefits to certain executives that supplement the benefits provided
under the Qualified Pension Plan.
The components of pension expense are listed below.
2002 2001 2000
------ ------ -------
(thousands)
Service cost $3,866 $3,666 $3,307
Interest cost 6,556 6,158 5,667
Expected return on plan assets (5,823) (5,829) (6,371)
Amortization
Transition asset (75) (75) (75)
Prior service cost (140) (177) (240)
Losses and other 1,643 1,163 179
Curtailment gain (162) - -
------ ------ ------
Total $5,865 $4,906 $2,467
====== ====== ======
F-24
9. RETIREE BENEFIT PLANS (continued)
The following table sets forth the changes in obligations and assets and
outlines the development of the funded status and amounts recognized in the
consolidated balance sheets.
December 29, December 31,
2002 2001
------------ ------------
(thousands)
Change in Benefit Obligation
Benefit obligation at beginning of year $ 95,962 $ 84,820
Service cost 3,866 3,666
Interest cost 6,556 6,158
Amendments, including SERP in 2001 157 1,059
Benefits paid (5,003) (4,525)
Actuarial loss 6,512 4,784
Curtailment (660) -
-------- --------
Projected benefit obligation at end of year $107,390 $ 95,962
======== ========
Change in Plan Assets
Fair value of plan assets at beginning of year $ 65,514 $ 66,199
Actual return on plan assets (7,350) (2,269)
Company contributions 7,464 6,347
Benefits paid (5,003) (4,525)
Other (540) (238)
-------- --------
Fair value of plan assets at end of year $ 60,085 $ 65,514
======== ========
Funded Status
Plan assets less than benefit obligation $(47,305) $(30,448)
Unrecognized transition asset (440) (515)
Unrecognized prior service cost (265) (733)
Unrecognized net losses 52,573 34,656
-------- --------
Net prepaid assets $ 4,563 $ 2,960
======== ========
Amounts Recognized in the Consolidated Balance Sheets
Prepaid benefit costs $ 194 $ 389
Accrued benefit liability (42,983) (26,363)
Intangible assets 763 612
Accumulated other comprehensive loss 46,589 28,322
-------- --------
Net amount recognized $ 4,563 $ 2,960
======== ========
Significant assumptions used in the calculation of pension expense and
obligations are listed below.
2002 2001 2000
-------- --------- -------
Expected long-term rate of return on plan assets 9.0% 9.0% 10.0%
Discount rate on projected benefit obligations 6.5% 7.0% 7.25%
Rate of compensation increase 4.0%-5.0% 4.0%-7.0% 4.0%
Foamex L.P.'s funding policy for the Qualified Pension Plan is to
contribute an amount that both satisfies the minimum funding requirements of the
Employee Retirement Income Security Act of 1974 and does not exceed the full
funding limitations of the Internal Revenue Code of 1986, as amended (the
"Code").
At December 29, 2002 and December 31, 2001, included in plan assets were
420,000 shares of Foamex International's stock. The value of the Plan's
investment in Foamex International's stock was approximately $1.3 million and
$3.4 million at December 29, 2002 and December 31, 2001, respectively.
F-25
9. RETIREE BENEFIT PLANS (continued)
Defined Contribution Plan
Foamex L.P. maintains a defined contribution plan, which is qualified under
Section 401(k) of the Code ("401(k) Plan") and is available for eligible
employees who elect to participate. Under the terms of the 401(k) Plan, Foamex
L.P. partially matches certain employee contributions. Expense for these
contributions was $1.0 million, $1.0 million and $1.1 million in 2002, 2001 and
2000, respectively.
Retiree Medical and Life Insurance Benefits
Foamex L.P. provides postretirement health care and life insurance for
eligible employees, limited primarily to one manufacturing facility in the
United States. These plans are unfunded and benefits are paid as the claims are
submitted. Foamex L.P. retains the right, subject to existing agreements, to
modify or eliminate these benefits.
The components of retiree medical and life insurance benefits expense are
listed below.
2002 2001 2000
-------- -------- ---------
(thousands)
Service cost $ 29 $19 $15
Interest cost 82 60 57
Amortization
Prior service cost (6) (6) (6)
Losses and other 15 (8) (27)
---- --- ---
Total $120 $65 $39
==== === ===
The following table outlines the changes in obligations and benefit
payments and outlines the development of the funded status and amounts
recognized in the consolidated balance sheets.
December 29, December 31,
2002 2001
------------ ------------
(thousands)
Change in Benefit Obligation
Benefit obligations at beginning of year $ 624 $ 763
Service cost 29 19
Interest cost 82 60
Employee contributions 19 23
Benefits paid (144) (399)
Actuarial loss 638 158
------- -----
Accumulated postretirement benefit obligation at end of year $ 1,248 $ 624
======= =====
Change in Plan Assets
Fair value of plan assets at beginning of year $ - $ -
Company contributions 125 376
Employee contributions 19 23
Benefits paid (144) (399)
------- -----
Fair value of plan assets at end of year $ - $ -
======= =====
Funded Status of the Plan
Plan assets less than benefit obligation $(1,248) $(624)
Unrecognized prior service cost 398 (60)
Unrecognized net gains (53) (224)
------- -----
Net accrued liabilities $ (903) $(908)
======= =====
F-26
9. RETIREE BENEFIT PLANS (continued)
Significant assumptions used in the calculation of retiree and life
insurance benefit expense and obligations are listed below.
2002 2001 2000
------ ------ ------
Discount rates on projected benefit obligations 6.5% 7.0% 7.25%
Health care cost increase 13.0% 9.0% 7.0%
The health care cost increase assumption will gradually be reduced to 5.0%
by 2009. Increasing or decreasing the weighted average assumed health care cost
trend rates by one percentage point would not have a significant impact on the
accumulated postretirement benefit obligation or on service and interest costs.
10. INCOME TAXES
The sources of income (loss) before the provision for income taxes are
listed below.
2002 2001 2000
--------- -------- --------
(thousands)
United States $(26,953) $(6,696) $17,281
Foreign 4,454 7,978 4,975
-------- ------- -------
Income (loss) before provision for income taxes $(22,499) $ 1,282 $22,256
======== ======= =======
A reconciliation of the statutory federal income tax to income tax expense
is listed below.
2002 2001 2000
-------- ---------- ---------
(thousands)
Statutory income taxes $(7,875) $ 449 $ 7,790
State income taxes, net of federal benefit (810) (368) 916
Permanent difference on partnership income 10,916 2,712 (6,156)
Increase (decrease) in valuation allowance 332 (526) (1,688)
Non-deductible amortization - 1,391 1,364
Other, net (652) (115) 427
------- ------- -------
Total $ 1,911 $ 3,543 $ 2,653
======= ======= =======
The provision for income taxes is summarized as follows:
2002 2001 2000
-------- -------- --------
Current (thousands)
Federal $ - $ - $ 445
State 226 239 142
Foreign 2,423 2,594 1,566
------ ------- -------
Total current 2,649 2,833 2,153
------ ------- -------
Deferred
Federal - 576 2,408
State (398) 320 221
Foreign (672) 340 (441)
------ ------- -------
Total deferred (1,070) 1,236 2,188
------ ------- -------
Change in valuation allowance 332 (526) (1,688)
Total provision for income taxes $1,911 $ 3,543 $ 2,653
====== ======= =======
F-27
10. INCOME TAXES (continued)
The tax effect of the temporary differences that give rise to deferred
income tax assets and liabilities are listed below.
December 29, December 31,
2002 2001
----------- ------------
(thousands)
Intangible asset basis difference $ - $ 6,931
Other 2,406 4,238
Valuation allowance for deferred income tax assets (1,020) (9,601)
------- -------
Deferred income tax assets 1,386 1,568
------- -------
Deferred income tax liabilities
Basis difference in property, plant and equipment (586) (2,245)
Investment in joint venture (771) (771)
Other (1,674) (1,726)
------- -------
Deferred income tax liabilities (3,031) (4,742)
------- -------
Net deferred income tax liabilities $(1,645) $(3,174)
======= =======
At December 29, 2002, Foamex L.P. had $2.9 million of net operating loss
carryforwards in a Mexican subsidiary that expire in 2009. A full valuation
allowance has been recorded at December 29, 2002 and December 31, 2001 due to
uncertainty regarding utilization of the net operating loss carryforwards.
Cumulative undistributed earnings of foreign subsidiaries for which no U.S.
income or foreign withholding taxes have been provided, amounted to $13.4
million at December 29, 2002 and $10.6 million at December 31, 2001,
respectively. Such earnings are deemed to be permanently invested by Foamex L.P.
As such, no deferred tax liability has been recognized with regard to the
remittance of such earnings. Further, determination of the amount of
unrecognized deferred tax liability with regard to such earnings is not
practicable.
11. PARTNERS' DEFICIENCY
Foamex L.P. was formed as a Delaware limited partnership on September 5,
1990, and initially capitalized on October 2, 1990, in accordance with a limited
partnership agreement as amended through March 2002. As of December 29, 2002,
the partnership interests of Foamex L.P. are a 1.7% managing general partnership
interest held by FMXI, Inc. and a 98.3% limited partnership interest held by
Foamex International.
Accumulated Other Comprehensive Loss
The components of accumulated other comprehensive loss are listed below.
2002 2001 2000
--------- --------- ---------
(thousands)
Foreign currency translation adjustment $ (9,869) $ (8,000) $ (6,921)
Minimum pension liability (46,589) (28,322) (17,540)
-------- -------- --------
$(56,458) $(36,322) $(24,461)
======== ======== ========
F-28
12. BUSINESS SEGMENTS
The reportable business segments reflect Foamex L.P.'s management
organization that was structured based on distinct product lines and customers.
An executive vice president heads each operating segment. Each executive
vice president is responsible for developing budgets and plans as well as
directing the operations of the segment. The performance of each operating
segment is measured based upon income from operations, excluding restructuring,
impairment and other charges. Foamex L.P. does not allocate restructuring,
impairment and other charges to operating segments because many of Foamex L.P.'s
facilities produce products for multiple segments.
Foam Products manufactures and markets cushioning foams for bedding,
furniture, packaging and health care applications and foam-based consumer
products, such as mattress pads and children's furniture. Carpet Cushion
Products manufactures and distributes rebond, prime, felt and rubber carpet
padding. Automotive Products supplies foam products and laminates to major tier
one suppliers and original equipment manufactures. Technical Products
manufactures and markets reticulated and other specialty foams used for
reservoiring, filtration, gasketing and sealing applications.
The "other" column in the table below represents certain manufacturing
operations in Mexico City, corporate expenses not allocated to other business
segments and restructuring, impairment and other charges (see Note 5). Asset and
capital expenditure information by business segment is not reported because many
of Foamex L.P.'s facilities produce products for multiple business segments.
The accounting policies of the business segments are the same as described
in Note 2. Business segment results include revenues and costs that are
specifically identifiable and costs shared by business segments have been
allocated based on utilization. Geographic sales are determined based on the
location in which the sale originated.
Sales to one customer, which are included in Automotive Products, accounted
for approximately 17.3%, 15.7% and 12.3% of net sales in 2002, 2001 and 2000,
respectively. No other customer accounted for more than 10.0% of net sales
during the periods presented.
Business segment results are presented below.
Carpet
Foam Cushion Automotive Technical
Products Products Products Products Other Total
-------- -------- ---------- --------- --------- -----------
2002 (thousands)
Net sales $471,005 $234,001 $466,718 $124,124 $ 32,246 $1,328,094
Income (loss) from operations $ 24,000 $(12,440) $ 25,430 $ 20,402 $(15,092) $ 42,300
Depreciation and amortization $ 15,466 $ 6,469 $ 3,856 $ 2,982 $ 2,819 $ 31,592
2001
Net sales $499,668 $230,965 $377,753 $111,043 $ 33,475 $1,252,904
Income (loss) from operations $ 66,634 $ (6,572) $ 21,445 $ 23,080 $(39,860) $ 64,727
Depreciation and amortization $ 15,732 $ 8,181 $ 4,991 $ 3,312 $ 1,812 $ 34,028
2000
Net sales $519,197 $256,439 $342,386 $106,697 $ 33,059 $1,257,778
Income (loss) from operations $ 55,227 $ 2,218 $ 22,417 $ 29,027 $(11,506) $ 97,383
Depreciation and amortization $ 17,813 $ 7,742 $ 5,785 $ 2,663 $ 2,625 $ 36,628
F-29
12. BUSINESS SEGMENTS (continued)
Results by geographical area are presented below.
United
States Canada Mexico Consolidated
----------- ------- -------- ------------
2002 (thousands)
Net sales $ 981,927 $66,940 $279,227 $1,328,094
Property, plant and equipment, net $ 157,007 $ 3,898 $ 21,133 $ 182,038
2001
Net sales $ 966,614 $65,179 $221,111 $1,252,904
Property, plant and equipment, net $ 172,456 $ 4,006 $ 24,335 $ 200,797
2000
Net sales $1,024,388 $69,180 $164,210 $1,257,778
Property, plant and equipment, net $ 183,266 $ 4,623 $ 24,642 $ 212,531
13. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
2002 2001 2000
------- ------- --------
(thousands)
Cash paid for interest $56,583 $63,593 $75,155
======= ======= =======
Cash paid for income taxes, net $ 2,222 $ 1,870 $ 2,870
======= ======= =======
Non cash - capital leases $ - $ 299 $ 53
======= ======= =======
Non cash - debt exchanged for increased ownership
in joint venture $ - $ 1,069 $ -
======= ======= =======
14. RELATED PARTY TRANSACTIONS AND BALANCES
Foamex L.P. regularly enters into transactions with its affiliates in the
ordinary course of business.
Foamex International Notes
On December 26, 1997, Foamex L.P. entered into a $2.5 million promissory
note with Foamex International. The note bears interest at the rate of LIBOR
plus 2 3/8%. The note was repaid during 2001.
On October 20, 1999, Foamex L.P. and Foamex International entered into a
revolving note that allows Foamex International to borrow up to approximately
$2.5 million through October 20, 2004. The revolving note bears interest at a
rate equal to three-month LIBOR plus 2.5%, per annum, and is payable upon
demand, or if no demand is made, then on October 20, 2004. At December 31, 2001,
Foamex L.P. had a receivable of approximately $2.5 million relating to the
revolving note which was repaid in 2002. The receivable for both of these notes
were classified as a component of partners' deficiency.
Trace Promissory Notes
On July 1, 1997, Trace borrowed $5.0 million pursuant to a promissory note
with an aggregate principal amount of $5.0 million issued to Foamex L.P. on June
12, 1997. The promissory note was due and payable on demand or, if no demand was
made, on July 7, 2001, and bears interest at 2 3/8% plus three-month LIBOR, as
defined, per annum payable quarterly in arrears commencing October 1, 1997. On
June 12, 1997, another promissory note issued to Foamex L.P. by Trace in July
1996 was amended. The amended promissory note is an extension of a promissory
note of Trace that was due in July 1997. The aggregate principal amount of the
amended promissory note was increased to approximately $4.8 million and the
maturity of the promissory note was extended.
F-30
14. RELATED PARTY TRANSACTIONS AND BALANCES (continued)
The principal was reduced by approximately $0.6 million relating to a portion of
the proceeds from the sale of a corporate aircraft in 1999. The promissory note
was due and payable on demand or, if no demand was made, on July 7, 2001, and
bears interest at 2 3/8% plus three-month LIBOR, as defined, per annum payable
quarterly in arrears.
The Trace notes are included in the other component of partners'
deficiency. Based on Trace's financial position discussed in Note 1, it is not
probable that Trace will be able to pay the aggregate amount of $9.2 million.
Upon the conclusion of the Trace bankruptcy proceedings, Foamex L.P. will charge
the uncollected portion of the Trace notes to the general partners' deficiency.
Accordingly, Foamex L.P. has not recorded any interest income on these notes
since the Trace bankruptcy.
Trace Accounts Receivable
At December 29, 2002 and December 31, 2001, operating accounts receivable
from Trace were approximately $2.7 million. These accounts receivable were fully
reserved for prior to 2000.
Foam Funding LLC Debt
Foamex L.P. paid interest on notes payable to Foam Funding LLC of $0.7
million, $2.8 million and $5.8 million in 2002, 2001 and 2000, respectively.
Foamex L.P. paid principal on notes payable to Foam Funding LLC of $31.6
million, $15.8 million and $41.9 million in 2002, 2001 and 2000, respectively.
Foamex GFI Note
During March of 2000, Foamex L.P. repaid a $34.0 million note payable to
Foam Funding LLC, a subsidiary of Trace. Foamex L.P. paid interest of $0.6
million on the note in 2000.
Other
In 2002, pursuant to the terms of an existing agreement, Foamex L.P.
acquired 5.0 % stock interest in Foamex de Mexico S.A. de C.V. ("Foamex de
Mexico") which had been held by the general director of Foamex de Mexico for
$1.0 million.
In 2001, two members of the board of directors of Foamex International
provided consulting services to Foamex L.P. for which fees paid were $0.2
million. Also in 2001, one of these directors received a loan of $0.2 million
from Foamex L.P.'s joint venture in Asia. The loan was evidenced by a 20-year
non-recourse promissory note bearing interest at 4.0% per annum secured by the
director's 5.0% interest in the value of Foamex L.P.'s equity interest in the
joint venture in Asia. In 2000, one member of the board of directors of Foamex
International provided consulting services totaling $0.1 million. In 2000, this
director also received an option to purchase 25,000 shares of common stock of
Foamex International at the fair market value on the date of grant. Foamex L.P.
also maintained an apartment used by this director. Rent expense for this
facility was $0.2 million in 2002, 2001 and 2000.
As discussed in Note 8, included in the group of banks that provides the
Foamex L.P. Amended Credit Facility is The Bank of Nova Scotia, which is a
shareholder of Foamex International.
Foamex L.P., Recticel, s.a. ("Recticel"), a European polyurethane foam
manufacturer, and Beamech Group Limited, an unaffiliated third party, have an
interest in a Swiss corporation that develops new manufacturing technology for
the production of polyurethane foam including the VPF(SM) manufacturing process.
Recticel and affiliates of Recticel are shareholders of Foamex International.
Foamex L.P.'s Pico Rivera, California facility was owned by Foam Funding
LLC and leased to Foamex L.P. The Pico Rivera facility was sold to a third party
during 2002.
F-31
14. RELATED PARTY TRANSACTIONS AND BALANCES (continued)
During December 2001, Foamex International entered into an agreement that
guarantees two promissory notes, totaling $0.7 million, payable to a foreign
affiliate that Foamex L.P. accounts for under the equity method. The promissory
notes were issued to a director of Foamex International and an employee of
Foamex L.P.
During 2002, a member of the Foamex International Board of Directors became
an officer of Foamex L.P. at an annual salary of at least $0.4 million plus a
target annual bonus of 75.0% of base salary of which 80.0% is guaranteed in any
given year. Additionally under the employment agreement, the director has the
right to terminate employment and receive termination benefits under certain
conditions, including Foamex International's failure to purchase a business
owned by the director. Since Foamex International did not enter into a
definitive agreement to purchase the business by October 31, 2002, the director
has the option to terminate the employment agreement within 90 days and
exercised the termination option in January 2003. During 2002, Foamex L.P. paid
$0.5 million to the director's business for consulting services and has agreed
to engage the director's business to provide future consulting services to
assist in its Asian operations.
Also during 2002, Foamex L.P. entered into an agreement with a member of
Foamex International's Board of Directors to provide consulting services in
connection with potential strategic business opportunities in Asia at an annual
cost of $0.2 million. Foamex L.P. also paid $0.5 million in 2002 for legal
services to a law firm in which another Foamex International director is a
partner.
15. COMMITMENTS AND CONTINGENCIES
Operating Leases
Foamex L.P. is obligated under various noncancelable lease agreements for
rental of facilities, vehicles and other equipment. Many of the leases contain
renewal options with varying terms and escalation clauses that provide for
increased rentals based upon increases in the Consumer Price Index, real estate
taxes and lessors' operating expenses. Total minimum rental commitments
(excluding commitments accrued as part of Foamex L.P.'s various
restructuring/consolidation plans) required under operating leases at December
29, 2002 are (thousands):
2003 $15,438
2004 10,889
2005 7,970
2006 7,575
2007 2,622
Balance 7,701
-------
Total $52,195
=======
Rental expense charged to operations under operating leases approximated
$23.4 million, $20.2 million and $16.3 million in 2002, 2001 and 2000,
respectively. Substantially all such rental expense represented the minimum
rental payments under operating leases.
Contractual Commitments
Foamex L.P. has entered into contracts for information technology services
and certain raw materials that have minimum purchase commitments estimated at
$84.8 million in 2003, $98.0 million in 2004, $39.9 million in 2005, $39.4
million in 2006, $36.1 million in 2007 and $32.2 million for each of the years
2008 to 2010.
Litigation - Breast Implants
As of March 11, 2003, Foamex L.P. and Trace were two of multiple defendants
in actions filed on behalf of approximately 1,087 recipients of breast implants
in various United States federal and state courts and one Canadian provincial
court, some of which allege substantial damages, but most of which allege
unspecified damages for personal injuries of various types. Three of these cases
seek to allege claims on behalf of all breast implant
F-32
15. COMMITMENTS AND CONTINGENCIES (continued)
recipients or other allegedly affected parties, but no class has been approved
or certified by the court. During 1995, Foamex L.P. and Trace were granted
summary judgments and dismissed as defendants from all cases in the federal
courts of the United States and the state courts of California. Appeals for
these decisions were withdrawn and the decisions are final.
Although breast implants do not contain foam, certain silicone gel implants
were produced using a polyurethane foam covering fabricated by independent
distributors or fabricators from bulk foam purchased from Foamex L.P. or Trace.
Neither Foamex L.P. nor Trace recommended, authorized, or approved the use of
its foam for these purposes. Foamex L.P. is also indemnified by Trace for any
such liabilities relating to foam manufactured prior to October 1990. Trace's
insurance carrier has continued to pay Foamex L.P.'s litigation expenses after
Trace's filing for relief under the Bankruptcy Code on July 21, 1999. Trace's
insurance policies continue to cover certain liabilities of Trace but if the
limits of those policies are exhausted, it is unlikely that Trace will be able
to continue to provide additional indemnification. While it is not feasible to
predict or determine the outcome of these actions, based on management's present
assessment of the merits of pending claims, after consultation with the general
counsel of Foamex L.P., and without taking into account the indemnification
provided by Trace, the coverage provided by Trace's and Foamex L.P.'s liability
insurance and potential indemnity from the manufacturers of polyurethane covered
breast implants, management believes that it is not reasonably possible that the
disposition of the matters that are pending or that may reasonably be
anticipated to be asserted will result in a loss that is material to Foamex
L.P.'s consolidated financial position, results of operations or cash flows. If
management's assessment of Foamex L.P.'s liability relating to these actions is
incorrect, these actions could have a material adverse effect on Foamex L.P.'s
financial position, results of operations and cash flows.
Litigation - Other
During 2001, Foamex L.P. was notified by an insurance provider concerning a
dispute involving the reimbursement of liability claims paid on behalf of Trace
before 1990. The insurance provider is contending that Foamex L.P. is liable for
claims of approximately $6.1 million. Foamex L.P. intends to strongly defend
this claim and considers the claim to be without merit. If management's
assessment of Foamex L.P.'s liability relating to these actions is incorrect,
these actions could have a material adverse effect on the financial position,
results of operations and cash flows.
Foamex L.P. is party to various other lawsuits, both as defendant and
plaintiff, arising in the normal course of business. It is the opinion of
management that the disposition of these lawsuits will not, individually or in
the aggregate, have a material adverse effect on Foamex L.P.'s financial
position or results of operations. If management's assessment of our liability
relating to these actions is incorrect, these actions could have a material
adverse effect on our consolidated financial position, results of operations and
cash flows.
As of December 29, 2002, Foamex L.P. had accrued approximately $0.7 million
for litigation and other legal matters in addition to the environmental matters
discussed below.
Environmental and Health and Safety
Foamex L.P. is subject to extensive and changing federal, state, local and
foreign environmental laws and regulations, including those relating to the use,
handling, storage, discharge and disposal of hazardous substances, the discharge
or emission of materials into the environment, and the remediation of
environmental contamination, and as a result, are from time to time involved in
administrative and judicial proceedings and inquiries relating to environmental
matters. As of December 29, 2002, Foamex L.P. had accruals of approximately $2.7
million for environmental matters, including approximately $2.3 million related
to mediating and monitoring soil and groundwater contamination and approximately
$0.4 million related to PRP sites and other matters. Additional losses, if any,
in excess of amounts currently accrued, cannot be reasonably estimated at this
time. If there are additional matters or if our current estimates are incorrect,
there could be a material adverse effect on Foamex L.P.'s financial position,
results of operations and cash flows.
F-33
15. COMMITMENTS AND CONTINGENCIES (continued)
On August 8, 2001, the United States Environmental Protection Agency, or
"EPA," proposed a National Emission Standard for Hazardous Air Pollutants, or
"NESHAP" for Flexible Polyurethane Foam Fabrication Operations. The proposed
NESHAP regulates emissions of methylene chloride and other Hazardous Air
Pollutants and restricts air emissions from flame lamination sources. Foamex
L.P. does not believe that this standard, if adopted, will require it to make
material expenditures.
On August 31, 2002, Environment Canada, the Canadian environmental
regulatory agency, proposed a rule which would require flexible polyurethane
foam manufacturing operations to reduce methylene chloride (dichloromethane) air
emissions. The proposed rule establishes a 50.0% reduction in methylene chloride
emissions by December 1, 2003 and 100.0% reductions by January 1, 2007. Foamex
L.P. does not believe that this standard, if adopted, will require Foamex L.P.
to make material expenditures for its Canadian plants.
Foamex L.P. has reported to the appropriate state authorities that we have
found soil and/or groundwater contamination in excess of state standards at
certain locations. Seven sites are currently in various stages of investigation
or remediation. Accordingly, the extent of contamination and the ultimate
liability is not known with certainty for all sites. During 2000, Foamex L.P.
reached an indemnification agreement with the former owner of the Morristown,
Tennessee facility. The agreement allocates the incurred and future remediation
costs between the former owner and Foamex L.P. The estimated allocation of
future costs for the remediation of this facility is not significant, based on
current known information. The former owner was Recticel Foam Corporation, a
subsidiary of Recticel.
Foamex L.P. has either upgraded or closed all underground storage tanks at
its facilities in accordance with applicable regulations.
The Comprehensive Environmental Response, Compensation and Liability Act,
or "CERCLA," and comparable state laws impose liability without fault for the
costs of cleaning up contaminated sites on certain classes of persons that
contributed to the release of hazardous substances into the environment at those
sites, for example, by generating wastes containing hazardous substances which
were disposed at such sites. Foamex L.P. is currently designated as a
Potentially Responsible Party, or "PRP," by the EPA or by state environmental
agencies or other PRPs, pursuant to CERCLA or analogous state statutes, with
respect to eight sites. Estimates of total cleanup costs and fractional
allocations of liability are often provided by the EPA, the state environmental
agency or the committee of PRPs with respect to the specified site. Based on
these estimates (to the extent available) and on known information, in each case
and in the aggregate, Foamex L.P. does not expect additional costs, if any, to
be material to liquidity, result of operations or financial position.
In 2003, capital expenditures for safety and environmental compliance
projects are anticipated to be approximately $1.5 million. Although it is
possible that new information or future developments could require Foamex L.P.
to reassess the potential exposure relating to all pending environmental
matters, including those described above, management believes that, based upon
all currently available information, the resolution of these environmental
matters will not have a material adverse effect on Foamex L.P.'s operations,
financial position, capital expenditures or competitive position. The
possibility exists, however, 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.
Other
In October 2001, Foamex L.P. experienced a fire at one of its manufacturing
facilities. Costs relating to the fire aggregate approximately $1.2 million.
Foamex L.P. has filed a claim with its insurance carrier and believes it will
recover substantially all costs in excess of a deductible of $0.2 million.
F-34
16. GUARANTOR INFORMATION
The payment obligations of Foamex L.P. and Foamex Capital Corporation under
the 10 3/4% Senior Secured Notes are guaranteed by Foamex L.P.'s wholly-owned
domestic subsidiaries ("Guarantors"). Such guarantees are full, unconditional
and joint and several. Separate financial statements of the Guarantors are not
presented because Foamex L.P.'s management has determined that they would not be
material to investors. The following presents condensed consolidating balance
sheets as of December 29, 2002 and December 31, 2001 and the condensed
consolidating statements of operations and cash flows for the years ended
December 29, 2002 and December 31, 2001 and 2000 of the Guarantors and
nonguarantors. The Guarantors include Foamex Carpet Cushion LLC, Foamex Latin
America, Inc., Foamex Mexico, Inc., Foamex Mexico II, Inc. and Foamex Asia, Inc.
The nonguarantors are Foamex Canada Inc. and Grupo Foamex de Mexico, S.A. de
C.V. and its subsidiaries. The following financial information is intended to
provide information for the Guarantors and nonguarantors of Foamex L.P. based on
amounts derived from the financial statements of Foamex L.P.
Condensed Consolidating Balance Sheet
As of December 29, 2002
Foamex
Capital Foamex L.P. Consolidated
Guarantors Nonguarantors Corporation (Parent) Eliminations Foamex L.P.
---------- ------------- ----------- ----------- ------------ ------------
Assets (thousands of dollars)
Current assets $40,111 $28,481 $ 1 $274,700 $(26,816) $ 316,477
Investment in subsidiaries 8,014 - - 27,243 (35,257) -
Property, plant and equipment, net 5,851 21,549 - 154,638 - 182,038
Goodwill 1,249 4,835 - 119,237 - 125,321
Debt issuance costs - - - 36,827 - 36,827
Other assets 13,706 2,384 - 40,933 (22,403) 34,620
------- ------- ------- -------- -------- ----------
Total assets $68,931 $57,249 $ 1 $653,578 $(84,476) $ 695,283
======= ======= ======= ======== ======== ==========
Liabilities and Partners' Deficiency
Current liabilities $41,401 $25,065 $ - $158,674 $(26,694) $ 198,446
Long-term debt 713 - - 737,827 - 738,540
Other liabilities 23,623 - - 62,863 (22,403) 64,083
Total liabilities 65,737 25,065 - 959,364 (49,097) 1,001,069
Partners' deficiency 3,194 32,184 1 (305,786) (35,379) (305,786)
------- ------- ------- -------- -------- ----------
Total liabilities and partners'
deficiency $68,931 $57,249 $ 1 $653,578 $(84,476) $ 695,283
======= ======= ======= ======== ======== ==========
Condensed Consolidating Balance Sheet
As of December 31, 2001
Foamex
Capital Foamex L.P. Consolidated
Guarantors Nonguarantors Corporation (Parent) Eliminations Foamex L.P.
---------- ------------- ----------- ----------- ------------ ------------
Assets (thousands of dollars)
Current assets $ 39,421 $31,389 $ 1 $263,239 $(23,415) $ 310,635
Investment in subsidiaries 14,824 - - 48,268 (63,092) -
Property, plant and equipment, net 6,743 24,780 - 169,274 - 200,797
Cost in excess of net assets
acquired 32,774 6,989 - 169,740 - 209,503
Debt issuance costs 2,783 - - 10,907 - 13,690
Other assets 6,271 1,351 - 25,403 - 33,025
-------- ------- ------- -------- -------- ----------
Total assets $102,816 $64,509 $ 1 $686,831 $(86,507) $ 767,650
======== ======= ======= ======== ======== ==========
Liabilities and Partners' Deficiency
Current liabilities $ 50,070 $25,908 $ - $192,411 $(21,395) $ 246,994
Long-term debt 18,619 - - 629,613 - 648,232
Other liabilities 3,389 785 - 46,378 - 50,552
Total liabilities 72,078 26,693 - 868,402 (21,395) 945,778
Partners' deficiency 30,738 37,816 1 (181,571) (65,112) (178,128)
-------- ------- ------- -------- -------- ----------
Total liabilities and partners'
deficiency $102,816 $64,509 $ 1 $686,831 $(86,507) $ 767,650
======== ======= ======= ======== ======== ==========
F-35
16. GUARANTOR INFORMATION (continued)
Condensed Consolidating Statement of Operations
For the year ended December 29, 2002
Foamex
Capital Foamex L.P. Consolidated
Guarantors Nonguarantors Corporation (Parent) Eliminations Foamex L.P.
---------- ------------- ----------- ----------- ------------ ------------
(thousands of dollars)
Net sales $240,616 $112,897 $ - $1,143,150 $(168,569) $1,328,094
Cost of goods sold 221,947 102,953 - 1,030,338 (168,569) 1,186,669
-------- -------- ------ ---------- --------- ----------
Gross profit 18,669 9,944 - 112,812 - 141,425
Selling, general and administrative
expenses 12,371 6,881 - 75,074 - 94,326
Restructuring, impairment and other
charges (credits) 225 - - 4,574 - 4,799
-------- -------- ------ ---------- --------- ----------
Income from operations 6,073 3,063 - 33,164 - 42,300
Interest and debt issuance expense 1,528 44 - 65,714 (679) 66,607
Equity in undistributed earnings
of affiliates (4,103) - - (28,199) 34,036 1,734
Other income (expense), net 496 (6) - 263 (679) 74
-------- -------- ------ ---------- --------- ----------
Loss before provision for income
taxes 938 3,013 - (60,486) 34,036 (22,499)
Provision for income taxes 100 1,751 - 60 - 1,911
-------- -------- ------ ---------- --------- ----------
Loss before extraordinary items and
accounting change 838 1,262 - (60,546) 34,036 (24,410)
Extraordinary items (2,398) - - (396) - (2,794)
Accounting change (29,944) (3,794) - (38,228) - (71,966)
-------- -------- ------ ---------- --------- ----------
Net loss $(31,504) $ (2,532) $ - $ (99,170) $ 34,036 $ (99,170)
======== ======== ====== ========== ========= ==========
F-36
16. GUARANTOR INFORMATION (continued)
Condensed Consolidating Statement of Operations
For the year ended December 31, 2001
Foamex
Capital Foamex L.P. Consolidated
Guarantors Nonguarantors Corporation (Parent) Eliminations Foamex L.P.
---------- ------------- ----------- ----------- ------------ ------------
(thousands of dollars)
Net sales $237,508 $112,102 $ - $1,074,329 $(171,035) $1,252,904
Cost of goods sold 213,370 98,180 - 932,308 (171,035) 1,072,823
-------- -------- ------ ---------- --------- ----------
Gross profit 24,138 13,922 - 142,021 - 180,081
Selling, general and administrative
expenses 14,850 7,359 - 57,077 - 79,286
Restructuring, impairment and other
charges (credits) 2,264 - - 33,804 - 36,068
-------- -------- ------ ---------- --------- ----------
Income from operations 7,024 6,563 - 51,140 - 64,727
Interest and debt issuance expense 4,201 244 - 58,792 - 63,237
Equity in undistributed earnings
of affiliates 3,349 - - 7,600 (9,304) 1,645
Other income (expense), net (503) 48 - (1,398) - (1,853)
-------- -------- ------ ---------- --------- ----------
Income before provision for income
taxes 5,669 6,367 - (1,450) (9,304) 1,282
Provision for income taxes 541 2,191 - 811 - 3,543
-------- -------- ------ ---------- --------- ----------
Net loss $ 5,128 $ 4,176 $ - $ (2,261) $ (9,304) $ (2,261)
======== ======== ====== ========== ========= ==========
F-37
16. GUARANTOR INFORMATION (continued)
Condensed Consolidating Statement of Operations
For the year ended December 31, 2000
Foamex
Capital Foamex L.P. Consolidated
Guarantors Nonguarantors Corporation (Parent) Eliminations Foamex L.P.
---------- ------------- ----------- ----------- ------------ ------------
(thousands of dollars)
Net sales $270,898 $114,482 $ - $1,060,928 $(188,530) $1,257,778
Cost of goods sold 245,137 103,067 - 926,079 (188,530) 1,085,753
-------- -------- ------- ---------- --------- ----------
Gross profit 25,761 11,415 - 134,849 - 172,025
Selling, general and administrative
expenses 13,284 6,251 - 48,839 - 68,374
Restructuring, impairment and other
charges (credits) 249 - - 6,019 - 6,268
-------- -------- ------- ---------- --------- ----------
Income from operations 12,228 5,164 - 79,991 - 97,383
Interest and debt issuance expense 6,019 677 - 68,533 - 75,229
Equity in undistributed earnings
of affiliates 2,324 - - 9,515 (10,187) 1,652
Other income (expense), net (220) (75) - (1,255) - (1,550)
-------- -------- ------- ---------- --------- ----------
Income before provision for income
taxes 8,313 4,412 - 19,718 (10,187) 22,256
Provision for income taxes 743 1,795 - 115 - 2,653
-------- -------- ------- ---------- --------- ----------
Net income $ 7,570 $ 2,617 $ - $ 19,603 $ (10,187) $ 19,603
======== ======== ======= ========== ========= ==========
F-38
16. GUARANTOR INFORMATION (continued)
Condensed Consolidating Statement of Cash Flows
For the year ended December 29, 2002
Foamex
Capital Foamex L.P. Consolidated
Guarantors Nonguarantors Corporation (Parent) Eliminations Foamex L.P.
---------- ------------- ----------- ----------- ------------ ------------
(thousands of dollars)
Cash Flows from Operating Activities
Net income (loss) $(31,504) $(2,532) $ - $(99,170) $34,036 $(99,170)
Total adjustments to reconcile net
income (loss) to net cash provided
by operating activities 42,126 454 - 41,107 (34,135) 49,552
-------- ------- -------- -------- ------- --------
Net cash used in operating
activities 10,622 (2,078) - (58,063) (99) (49,618)
-------- ------- -------- -------- ------- --------
Cash Flows from Investing Activities
Capital expenditures (414) (2,000) - (13,267) 99 (15,582)
Other 500 - - (24,182) 18,203 (5,479)
-------- ------- -------- -------- ------- --------
Net cash used in investing activities 86 (2,000) - (37,449) 18,302 (21,061)
-------- ------- -------- -------- ------- --------
Cash Flows from Financing Activities
Proceeds from long-term debt - - - 356,590 - 356,590
Repayments of long-term debt (32,090) (1,304) - (261,822) - (295,216)
Other, net 19,468 - - (2,656) (18,203) (1,391)
-------- ------- -------- -------- ------- --------
Net cash provided by financing
activities (12,622) (1,304) - 92,112 (18,203) 59,983
-------- ------- -------- -------- ------- --------
Net increase (decrease) in cash and
cash equivalents (1,914) (5,382) - (3,400) - (10,696)
Cash and cash equivalents at
beginning of period 2,758 7,163 1 5,137 - 15,059
-------- ------- -------- -------- ------- --------
Cash and cash equivalents at
end of period $ 844 $ 1,781 $ 1 $ 1,737 $ - $ 4,363
======== ======= ======== ======== ======= ========
F-39
16. GUARANTOR INFORMATION (continued)
Condensed Consolidating Statement of Cash Flows
For the year ended December 31, 2001
Foamex
Capital Foamex L.P. Consolidated
Guarantors Nonguarantors Corporation (Parent) Eliminations Foamex L.P.
---------- ------------- ----------- ----------- ------------ ------------
(thousands of dollars)
Cash Flows from Operating Activities
Net income (loss) $ 5,128 $4,176 $ - $(2,261) $(9,304) $ (2,261)
Total adjustments to reconcile net
income (loss) to net cash provided
by (used in) operating activities 11,404 5,141 - 85,225 9,195 110,965
------- ------ -------- ------- ------- --------
Net cash provided by
operating activities 16,532 9,317 - 82,964 (109) 108,704
------- ------ -------- ------- ------- --------
Cash Flows from Investing Activities
Capital expenditures (273) (1,368) - (20,950) 109 (22,482)
Acquisition - - - (17,559) - (17,559)
Other - - - 1,970 - 1,970
------- ------ -------- ------- ------- --------
Net cash used in investing activities (273) (1,368) - (36,539) 109 (38,071)
------- ------ -------- ------- ------- --------
Cash Flows from Financing Activities
Net repayments of revolving loans - - - (20,905) - (20,905)
Repayments of long-term debt (15,795) (2,607) - (5,931) - (24,333)
Other, net 308 - - (15,517) - (15,209)
------- ------ -------- ------- ------- --------
Net cash used in financing activities (15,487) (2,607) - (42,353) - (60,447)
------- ------ -------- ------- ------- --------
Net increase in cash and cash equivalents 772 5,342 - 4,072 - 10,186
Cash and cash equivalents at
beginning of period 1,986 1,821 1 1,065 - 4,873
------- ------ -------- ------- ------- --------
Cash and cash equivalents at
end of period $ 2,758 $7,163 $ 1 $ 5,137 $ - $ 15,059
======= ====== ======== ======= ======= ========
F-40
16. GUARANTOR INFORMATION (continued)
Condensed Consolidating Statement of Cash Flows
For the year ended December 31, 2000
Foamex
Capital Foamex L.P. Consolidated
Guarantors Nonguarantors Corporation (Parent) Eliminations Foamex L.P.
---------- ------------- ----------- ----------- ------------ ------------
(thousands of dollars)
Cash Flows from Operating Activities
Net income (loss) $7,570 $2,617 $ - $19,603 $(10,187) $19,603
Total adjustments to reconcile net
income (loss) to net cash provided
by operating activities (1,403) 3,755 - 20,722 10,187 33,261
------ ------ -------- ------- -------- -------
Net cash provided by operating
activities 6,167 6,372 - 40,325 - 52,864
------ ------ -------- ------- -------- -------
Cash Flows from Investing Activities
Capital expenditures (1,232) (1,006) - (21,780) 425 (23,593)
Other - - - 331 (425) (94)
------ ------ -------- ------- -------- -------
Net cash used in investing activities (1,232) (1,006) - (21,449) - (23,687)
------ ------ -------- ------- -------- -------
Cash Flows from Financing Activities
Net proceeds from (repayments of)
revolving loans - (1,627) - 32,220 - 30,593
Repayments of long-term debt (7,898) (2,608) - (51,942) - (62,448)
Other, net (41) - - 1,029 - 988
------ ------ -------- ------- -------- -------
Net cash used in financing activities (7,939) (4,235) - (18,693) - (30,867)
------ ------ -------- ------- -------- -------
Net increase (decrease) in cash and
cash equivalents (3,004) 1,131 - 183 - (1,690)
Cash and cash equivalents at
beginning of period 4,990 690 1 882 - 6,563
------ ------ -------- ------- -------- -------
Cash and cash equivalents at
end of period $1,986 $1,821 $ 1 $ 1,065 $ - $ 4,873
====== ====== ======== ======= ======== =======
F-41
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Foamex Capital Corporation
Wilmington, Delaware
We have audited the accompanying balance sheets of Foamex Capital Corporation (a
wholly-owned subsidiary of Foamex L.P.) (the "Company") as of December 29, 2002
and December 31, 2001. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the balance sheet
is free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the balance sheet. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall balance sheet
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such balance sheets present fairly, in all material respects,
the financial position of the Company at December 29, 2002 and December 31,
2001, in conformity with accounting principles generally accepted in the United
States of America.
/s/ DELOITTE & TOUCHE LLP
March 18, 2003
Parsippany, New Jersey
F-42
FOAMEX CAPITAL CORPORATION
(A Wholly-Owned Subsidiary of Foamex L.P.)
BALANCE SHEETS
December 29, December 31,
2002 2001
------------ ------------
CASH $1,000 $1,000
COMMITMENTS AND CONTINGENCIES
STOCKHOLDER'S EQUITY
Common stock, par value $.01 per share;
1,000 shares authorized, issued and outstanding $ 10 $ 10
Additional paid-in capital 990 990
Total Stockholder's Equity $1,000 $1,000
The accompanying notes are an integral part of the balance sheets.
F-43
FOAMEX CAPITAL CORPORATION
(A Wholly-Owned Subsidiary of Foamex L.P.)
NOTES TO BALANCE SHEETS
1. ORGANIZATION
Foamex Capital Corporation ("FCC"), a wholly-owned subsidiary of Foamex
L.P. (the "Parent"), was formed on July 20, 1992 and initially capitalized on
July 23, 1992 for the purpose of obtaining financing from external sources. All
financing obtained is recorded by the Parent.
2. COMMITMENTS AND CONTINGENCIES
Trace International Holdings, Inc. ("Trace") is a privately held company,
which owned approximately 29% of Foamex International Inc.'s ("Foamex
International") outstanding voting common stock at September 30, 2000, and whose
former Chairman also serves as Foamex International's Chairman. Foamex
International's common stock owned by Trace was pledged as collateral against
certain of Trace's obligations. Certain credit agreements and promissory notes
of Foamex L.P. pursuant to which approximately $401.1 million of debt was
outstanding as of September 30, 2000, provided that a "change of control" would
be an event of default and could result in the acceleration of such
indebtedness. "Change of control" means, for this purpose, that (i) a person or
related group, other than Trace, beneficially owns more than 25% of Foamex
International's outstanding voting stock and (ii) such voting stock constitutes
a greater percentage of such voting stock than the amount beneficially owned by
Trace. Additionally, certain indentures of Foamex L.P. and FCC relating to
senior subordinated notes contain similar "change of control" provisions, which
require Foamex L.P. and FCC to tender for such notes at a price in cash equal to
101% of the aggregate principal amount thereof, plus accrued and unpaid interest
thereon, if there is such a "change of control".
On July 21, 1999, Foamex L.P. was informed by Trace that it filed a
petition for relief under Chapter 11 of the Bankruptcy Code in Federal Court in
New York City. Subsequently, on January 24, 2000, an order was signed converting
the Trace bankruptcy from Chapter 11 to Chapter 7 of the Bankruptcy Code. A
trustee was appointed to oversee the liquidation of Trace's assets. Neither
Trace's bankruptcy filing nor the conversion to Chapter 7 constituted a "change
of control" under the provisions of the debt agreements described above.
On July 31, 2000, Foamex International announced that it had entered into
an agreement (the "Exchange Agreement") with The Bank of Nova Scotia relating to
a portion of the 7,197,426 shares of Foamex International's common stock pledged
by Trace to The Bank of Nova Scotia. The Exchange Agreement provided for the
transfer of the pledged stock to The Bank of Nova Scotia in a manner that would
not constitute a "change of control" as described above. These transactions were
conditioned upon bankruptcy court approval of a settlement agreement between The
Bank of Nova Scotia and the trustee for the Trace bankruptcy, which was entered
on October 18, 2000. On November 2, 2000, the transactions contemplated by the
Exchange Agreement and the settlement agreement were consummated, and did not
constitute a "change of control". As a result, Trace no longer owns any shares
of Foamex International's common stock.
Under the Exchange Agreement, The Bank of Nova Scotia initially received
1,500,000 shares of Foamex International's common stock from the Trace
bankruptcy estate and exchanged these common stock shares for 15,000 shares of a
new class of Foamex International's non-voting non-redeemable convertible
preferred stock (the "Series B Preferred Stock"). Each share of the Series B
Preferred Stock can be converted into 100 shares of Foamex International's
common stock but only if such conversion would not trigger a "change of control"
event, as discussed above. The Series B Preferred Stock (a) is entitled to
dividends only if a dividend is declared on Foamex International's common stock,
(b) ranks senior to any future preferred stock issued by Foamex International
and (c) is entitled to a liquidation preference of $100 per share. Following
this exchange, The Bank of Nova Scotia became the owner of 24.41% of the
outstanding shares of Foamex International's common stock when the remaining
5,697,426 shares of Foamex International's common stock were transferred to The
Bank of Nova Scotia from the Trace bankruptcy estate. Certain equity
transactions, primarily the exercise of stock options, have reduced the Bank of
Nova Scotia's common stock ownership percentage to 23.6% at December 29, 2002.
F-44
FOAMEX CAPITAL CORPORATION
(A Wholly-Owned Subsidiary of Foamex L.P.)
NOTES TO BALANCE SHEETS
2. COMMITMENTS AND CONTINGENCIES (continued)
FCC is a joint obligor and severally liable on the following borrowings of
Foamex L.P.:
10 3/4% Senior Secured Notes
The 10 3/4% Senior Secured Notes were issued by Foamex L.P. and Foamex
Capital Corporation on March 25, 2002 and are due on April 1, 2009. The notes
are guaranteed on a senior basis by all of Foamex L.P.'s domestic subsidiaries
that guarantee the Amended Credit Facility. The notes are secured on a
second-priority basis (subject to permitted liens) on substantially the same
collateral that secures the obligations under the Amended Credit Facility. The
notes rank effectively junior to all senior indebtedness that is secured by
first priority liens and senior in right of payment to all subordinated
indebtedness. Interest is payable April 1 and October 1. The notes may be
redeemed at the option of Foamex L.P., in whole or in part, at any time on or
after April 1, 2006. The initial redemption is at 105.375% of their principal
amount, plus accrued and unpaid interest and liquidated damages, as defined, if
any, thereon to the date of redemption and declining annually to 100.0% on or
after April 1, 2008. Additionally, on or before April 1, 2005, up to 35.0% of
the principal amount of the notes may be redeemed at a redemption price equal to
110.750% of the principal amount, plus accrued and unpaid interest and
liquidated damages, as defined, if any, thereon to the date of redemption with
the net proceeds of one or more equity offerings.
Upon the occurrence of a change of control, as defined, each holder will
have the right to require Foamex L.P. to tender for such notes at a price in
cash equal to 101.0% of the aggregate principal amount thereof, plus accrued and
unpaid interest and liquidated damages, as defined, if any, if there is such a
"change of control".
9 7/8% Senior Subordinated Notes due 2007 ("9 7/8% Senior Subordinated
Notes")
The 9 7/8% Senior Subordinated Notes were issued by Foamex L.P. and FCC
(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. Interest is payable June 15 and
December 15. The notes may be redeemed at the option of the Issuers, in whole or
in part, at any time on or after June 15, 2002. The initial redemption is at
104.938% of their principal amount, plus accrued and unpaid interest, as
defined, if any, thereon to the date of redemption and declining annually to
100.0% on or after June 15, 2005.
Upon the occurrence of a change of control, as defined, each holder will
have the right to require the Issuers to tender for such notes at a price in
cash equal to 101% of the aggregate principal amount thereof, plus accrued and
unpaid interest thereon, if there is such a "change of control". The notes are
subordinated in right of payment to all senior indebtedness and are pari passu
in right of payment to the 13 1/2% Senior Subordinated Notes (described below)
and Foamex L.P.'s subordinated note payable.
13 1/2% Senior Subordinated Notes due 2005, Series B ("13 1/2% Senior
Subordinated Notes")
The 13 1/2% Senior Subordinated Notes were issued by the Issuers and are
due on August 15, 2005. The notes represent uncollateralized general obligations
of the Issuers and are subordinated to all Senior Debt, as defined in the
Indenture. Interest is payable semiannually on February 15 and August 15. The
notes may be redeemed at the option of the Issuers, in whole or in part, at any
time on or after August 15, 2000. The initial redemption is at 106.75% of their
principal amount, plus accrued and unpaid interest, if any, thereon to the date
of redemption and declining annually to 100.0% on or after August 15, 2004. At
December 31, 2001, the redemption price is 105.0625% plus accrued and unpaid
interest.
F-45
FOAMEX CAPITAL CORPORATION
(A Wholly-Owned Subsidiary of Foamex L.P.)
NOTES TO BALANCE SHEETS
Upon the occurrence of a change of control, as defined, each holder will
have the right to require the Issuers to tender for such notes at a price in
cash equal to 101% of the aggregate principal amount thereof, plus accrued and
unpaid interest, if any, thereon, if there is such a "change of control". The
notes are subordinated in right of the payment of all senior indebtedness and
are pari passu in right of payment to the 9 7/8% Senior Subordinated Notes
(described above) and Foamex L.P.'s subordinated note payable.
F-46
FOAMEX L.P.
INDEX TO FINANCIAL STATEMENT SCHEDULES
Index to Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts
All other schedules are omitted since the required information is not
present or is not present in amounts sufficient to require submission of the
schedule, or because the information required is included in the consolidated
financial statements and notes thereto.
S-1
Schedule II
FOAMEX L.P. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(thousands)
Balance at Charged to Charged to Balance at
Beginning of Costs and Other End of
Period Expenses Accounts Deductions Period
------------ ---------- ---------- ---------- -----------
YEAR ENDED DECEMBER 29, 2002
Allowance for Uncollectible Accounts $8,720 $2,336 $ - $ 3,093 $7,963
====== ====== ======= ======= ======
Reserve for Discounts $2,220 $ - $15,143 (1) $15,015 $2,348
====== ====== ======= ======= ======
YEAR ENDED DECEMBER 31, 2001
Allowance for Uncollectible Accounts $7,693 $5,479 $ 88 $ 4,540 $8,720
====== ====== ======= ======= ======
Reserve for Discounts $2,233 $ - $15,198 (1) $15,211 $2,220
====== ====== ======= ======= ======
YEAR ENDED DECEMBER 31, 2000
Allowance for Uncollectible Accounts $7,474 $2,838 $ - $ 2,619 $7,693
====== ====== ======= ======= ======
Reserve for Discounts $2,075 $ - $15,823 (1) $15,665 $2,233
====== ====== ======= ======= ======
(1) Adjustments reflect a reduction in net sales.
S-2