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 28, 2003
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
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Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act: None
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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
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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 2, 2004, 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
FOAMEX L.P.
FOAMEX CAPITAL CORPORATION
INDEX
Page
Part I
Item 1. Business 3
Item 2. Properties 10
Item 3. Legal Proceedings 10
Item 4. Submission of Matters to a Vote of Security Holders 12
Part II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters 12
Item 6. Selected Financial Data 12
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 14
Item 7a. Quantitative and Qualitative Disclosures about Market Risk 28
Item 8. Financial Statements and Supplementary Data 28
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 28
Item 9a. Controls and Procedures 28
Part III
Item 10. Directors and Executive Officers of the Registrant 29
Item 11. Executive Compensation 29
Item 12. Security Ownership of Certain Beneficial Owners
and Management 29
Item 13. Certain Relationships and Related Transactions 29
Item 14. Principal Accounting Fees and Services 29
Part IV
Item 15 Exhibits, Financial Statement Schedules
and Reports on Form 8-K 29
Signatures 35
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 28,
2003, our operations are conducted directly and through our wholly-owned
subsidiaries, Foamex Canada Inc. ("Foamex Canada"), Foamex Latin America, Inc.
("Foamex Mexico") and Foamex Asia, Inc. ("Foamex Asia"). As of December 28,
2003, 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.
Throughout this Annual Report on Form 10-K, we incorporate by reference
information from parts of other documents filed with the Securities and Exchange
Commission (the "SEC"). The SEC allows us to disclose important information by
referring to it in this manner, and you should review that information.
We make our Annual Report on Form 10-K, quarterly reports on Form 10-Q and
current reports on Form 8-K, as well as any amendments to those reports,
available free of charge through our web site as soon as reasonably practicable
after we electronically file that material with, or furnish it to, the SEC. You
can learn more about us by reviewing our SEC filings on our web site. Our SEC
reports, available through www.sec.gov which is maintained by the SEC, can be
accessed through the investor relations' page of our web site, which is located
at www.foamex.com/investor.php.
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.
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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. 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 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; thermoformable foams,
to provide structure and shape in various substrate applications; acoustical
foams, to reduce noise and improve sound quality in the vehicle; barrier foam
products, which allow our customers to more efficiently process 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 molded seating cushions.
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.
Technical Products
We are one of the foam industry's prime innovators and producers of foams
used for industrial, specialty, consumer and transportation applications, which
we refer to as "Technical Products." Technical Products consist of reticulated
foams and other custom polyester and polyether foams specially formulated to
meet the needs of technical customers. 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. Other post processes such as felting, coating or laminating to
other foams or materials give these composites specific properties.
Reticulated foams particularly are well suited for fluid management such as
filtration, reservoiring and sound attenuation; non-reticulated foams are used
for energy management applications such as sound absorption and gasketing.
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 foams
used in x-rays. 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 and innovative 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 cushioning and
automotive customers and have five facilities in Mexico serving the automotive
and cushioning industries. Four 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 installed its first foam pourline
during 2003. This pourline, which was 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 16.3% of our net sales in 2003, 17.3% of our net
sales in 2002, and 15.7% of our net sales in 2001. 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 34.7% of our net
sales in 2003, 33.8% of our net sales in 2002 and 35.0% of our net sales in
2001. The loss of any one of these customers could have a material adverse
effect on our business.
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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 2003, we closed certain
carpet padding operations, foam pouring operations, and a foam fabrication
operation.
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. 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 increases in the average prices of raw
materials from major chemical manufacturers in the year ended December 28, 2003
from the prior year. 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 year ended December 28, 2003. 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 28, 2003, we employed approximately 5,100 persons.
Approximately 1,300 of these employees are located outside the United States and
approximately 1,700 employees are covered by collective bargaining agreements
with labor unions. These agreements expire on various dates through 2006. 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, Leggett & Platt
Incorporated, 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.
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
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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 $3.6 million for 2003, $4.8 million for 2002 and $3.1
million for 2001.
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 28, 2003, our total long-term debt and revolving
credit borrowings were approximately $745.6 million and our partners' deficiency
was approximately $325.1 million. As of December 28, 2003, we had approximately
$46.8 million in revolving loan availability and approximately $20.9 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 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; and
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.
If we are unable to comply with our financial covenants, our bank lenders could
cause all amounts outstanding under the Senior Secured Credit Facility and
Secured Term Loan to be due and payable immediately.
On August 18, 2003, Foamex L.P. and its bank lenders executed a $240.0
Million Senior Secured Credit Facility (the "$240.0 Million Senior Secured
Credit Facility") and an $80.0 million Secured Term Loan with another lender
(the "Secured Term Loan"), which, among other things, requires Foamex L.P. to
meet a financial covenant. Under the Senior Secured Credit Facility and the
Secured Term Loan, Foamex L.P. is subject to a fixed charge
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coverage ratio, as defined, of 1.00. If we are unable to comply with the
financial covenant, the bank lenders could cause all amounts outstanding under
the Senior Secured Credit Facility and Secured Term Loan 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 Foamex L.P.'s 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.
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 $2.3 million per year for each
1% increase in interest rates, based on the balance of variable rate debt
outstanding as of December 28, 2003. Our estimated debt service obligation for
2004 is $81.1 million, based on levels of debt and interest rates in effect at
December 28, 2003. In addition, Foamex L.P.'s 13 1/2% senior subordinated notes
(the "13 1/2% Senior Subordinated Notes"), currently in the face amount of $51.6
million, are due on August 15, 2005. 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.
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 Senior Secured Credit Facility, Secured Term
Loan and the indentures relating to Foamex L.P.'s 10 3/4% senior secured notes
due 2009 (the "10 3/4% Senior Secured Notes"), 9 7/8% senior subordinated notes
due 2007 (the "9 7/8% Senior Subordinated Notes") and 13 1/2% Senior
Subordinated Notes due 2005 restrict Foamex L.P. and its subsidiaries in
incurring additional indebtedness, but do not fully prohibit Foamex L.P. and its
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 over the past several years.
We attempt to offset raw material price increases through selling price
increases and manufacturing process efficiencies, but we were not able to fully
do so in 2003. 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.
8
We depend on a limited number of suppliers of TDI and polyol.
There are a limited number of major suppliers of TDI and polyol. 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. 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 34.7% of our
net sales in 2003, 33.8% of our net sales in 2002, and 35.0% of our net sales in
2001. Sales to Johnson Controls, our largest customer, accounted for 16.3% of
our net sales in 2003, 17.3% of our net sales in 2002, and 15.7% of our net
sales in 2001. 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.
Our customers' financial condition may have a material adverse effect on our
business, financial condition and results of operations.
In the ordinary course of business, we extend trade credit to our
customers. In the event our customers, in the aggregate or certain significant
customers, are not able to pay us for our products on a timely basis or at all,
this could have a material adverse effect on our business, financial condition
and results of operations.
We could incur significant costs if we are unable to renew leases for certain of
our manufacturing facilities.
We lease certain of our foam pouring facilities. In the event we are unable
to renew our leases at these facilities, we could incur significant costs in
relocating our manufacturing operations. Such costs could include the actual
removal and relocation of equipment and inventory, the lost production time
associated with the transition, relocation of certain key employees, training
employees at the relocated manufacturing facilities, and additional costs for
preparing the new locations for operations. In addition, we may not be able to
secure the required permits at an optimal location. If we were unable to renew
leases and were forced to relocate, the costs associated with such relocation
could have a material adverse effect on our business, financial condition and
results of operations.
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 11 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
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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.
ITEM 2. PROPERTIES
As of December 28, 2003, we maintained 56 manufacturing and distribution
facilities. Total floor space in use at our 17 owned manufacturing and
distribution facilities is approximately 3.4 million square feet and total floor
space in use at our 39 leased manufacturing and distribution facilities is
approximately 4.5 million square feet. Forty-seven of these facilities are
located throughout 33 cities in the United States, four facilities are located
in Canada, and five facilities are located in Mexico. We have approximately 1.9
million square feet of idle space of which approximately 1.1 million is leased.
The lease for one of our foam pouring facilities expires in 2004. It is
conceivable that this lease may not be extended or renewed. Like any other
lease, if we are unable to extend or renew this lease, the costs associated with
a relocation could have a material adverse effect on our business, financial
condition, cash flow and results of operations. Except as described above, we do
not anticipate any problem in renewing or replacing any of the leases expiring
in 2004.
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 February 24, 2004, we and Trace International Holdings, Inc.
("Trace") were two of multiple defendants in 529 actions filed on behalf of
approximately 652 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
10
the limits of those policies are exhausted, Trace will be unable 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.
Litigation--Other
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 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 28, 2003, we have accrued approximately $1.1 million for litigation,
claims 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 28, 2003, we had accruals of approximately $2.5 million
for environmental matters, including approximately $2.3 million related to
remediating and monitoring soil and groundwater contamination and approximately
$0.2 million relating to PRP sites and other matters.
On August 31, 2002, Environment Canada, the Canadian environmental
regulatory agency, finalized a rule which would require flexible polyurethane
foam manufacturing operations to reduce methylene chloride (dichloromethane) air
emissions. The rule establishes a 50.0% reduction in methylene chloride
emissions by December 1, 2004 and 100.0% reductions by January 1, 2007. This
standard will not 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 11 sites. Estimates of total cleanup costs and
fractional allocations of liability are often provided by the EPA, the state
environmental agency or the committee of PRPs with respect to the specified
site. Based on these estimates (to the extent available) and on known
information, in each case and in the aggregate, we
11
do not expect additional costs, if any, to be material to our results of
operations, financial position or cash flows.
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 28, 2003, 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 28, 2003 and 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
-------------------------
2003 2002
-------- --------
(thousands)
FMXI $ - $ -
Foamex International - (105)
----- -----
$ - $(105)
===== =====
Limitations on Distributions
Our financing agreements restrict our ability to make distributions to our
partners.
ITEM 6. SELECTED FINANCIAL DATA
The following table presents selected historical consolidated financial
data of Foamex L.P. The financial data should be read in conjunction with the
consolidated financial statements and related notes thereto included in this
Annual Report on Form 10-K.
Fiscal Year (1)
----------------------------------------------------------------
2003 2002 2001 (2) 2000 1999
----------- ---------- ---------- ---------- ----------
(thousands)
Statements of Operations Data
Net sales $1,304,560 $1,328,094 $1,252,904 $1,257,778 $1,294,639
Income (loss) from continuing
operations (3)(4) $ (27,413) $ (27,204) $ (2,261) $ 19,603 $ 20,061
12
Fiscal Year (1)
----------------------------------------------------------------
2003 2002 2001 (2) 2000 1999
----------- ---------- ---------- ---------- ----------
(thousands)
Balance Sheet Data
Total assets $ 665,155 $ 695,283 $ 767,650 $ 753,584 $ 783,218
Long-term debt, classified as current (5) $ 96,065 $ - $ - $ - $ -
Long-term debt, excluding current portion $ 640,621 $ 738,540 $ 648,232 $ 687,758 $ 725,297
Partners' deficiency $ (325,131) $ (305,786) $ (178,128) $ (158,503) $ (160,481)
(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 it 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).
2003 - $(1.8) million
2002 - $ 4.8 million
2001 - $36.1 million
2000 - $ 6.3 million
1999 - $10.5 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.
(5) Revolving credit borrowings under Foamex L.P.'s $240.0 Million Senior
Secured Credit Facility are classified as current as required by Emerging
Issues Task Force Issue No. 95-22, "Balance Sheet Classification of
Borrowings Outstanding Under Revolving Credit Agreements that Include both
a Subjective Acceleration Clause and a Lockbox Arrangement ("EITF No.
95-22").
13
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.
EXECUTIVE SUMMARY
Overview
We operate in the flexible polyurethane and advanced polymer foam products
industry. Our operations are 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
11 to the consolidated financial statements. Please see Part I, Item 1
"Business" for a more complete description of the activities of our business
segments.
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 and corporate overhead. 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.
14
Automotive Products - distributes automotive foam products and laminates to
major Tier 1 suppliers and original equipment manufacturers, or "OEMs".
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 2003, our largest customer provided 16.3% of our net sales and our
five largest customers provided 34.7% 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.
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.
Operations
The following table includes key elements of our financial statements
expressed as a percentage of net sales for the years 1999 through 2003, except
for net cash provided by (used for) operating activities which is expressed in
millions of dollars.
2003 2002 2001 2000 1999
-------- -------- -------- -------- --------
Net Sales 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of Goods Sold 89.0% 89.2% 85.8% 86.3% 86.1%
Gross Profit Margin 11.0% 10.8% 14.2% 13.7% 13.9%
Selling, General and
Administrative Expenses 6.2% 7.1% 6.3% 5.4% 5.8%
Operating Income Margin 4.9% 3.4% 5.0% 7.7% 7.3%
Interest and Debt
Issuance Expense 6.8% 5.2% 5.0% 6.0% 5.6%
Net Cash Provided by (Used
For) Operating Activities $18.1 $(49.6) $108.7 $52.9 $68.6
As demonstrated by the table above, our results in the last two years have
significantly deteriorated when compared to the prior three years. Our gross
profit margin has been reduced by approximately three percentage points while
selling general and administrative expenses and interest and debt issuance
expense have both increased as a percentage of net sales, as well as in absolute
dollar terms. Net sales dollars have been relatively flat over the 5 year period
with 2003 representing an increase of less than one percent compared to 1999.
Our management is focusing on restoring former levels of profitability by
concentrating on the following key areas:
15
o Managing raw material costs.
o Maintaining selling price increases to customers to recover raw
material and manufacturing cost increases.
o Controlling and reducing labor and overhead costs both in
manufacturing and administration.
o Developing new and more consumer-focused products and entering new
markets with increased profit potential.
Our major chemical suppliers increased the cost of our raw materials
several times in late 2002. Prices stabilized during 2003 but average unit
prices for 2003 were higher than for 2002. There can be no assurance that
chemical prices will not increase in 2004. We manage raw material costs by
seeking alternative sources of supply, locking in prices when possible and
negotiating discounts and rebates for volume purchases.
We have been only partially successful in raising selling prices to recover
raw material and other cost increases. Selling price increases, reduced cost and
increased mix of higher profit products are the major factors in restoring gross
profit margin percentage to the 14% level experienced in 1999-2001 from the 11%
level of 2002 and 2003.
We are focused on reducing both manufacturing costs and administrative
expenses. We believe that our manufacturing operations are now of the
appropriate scale and location to meet demand for our products as a result of
closing several facilities in 2002 and 2003. We believe that manufacturing costs
can be further reduced by emphasizing efficiency and better supply chain
management. Our focus areas for further reductions in administrative expenses
are employee related costs and professional service fees. Effective February 10,
2004, the Chairman of Foamex International resigned by mutual agreement with the
Foamex International Board of Directors. As a result of this resignation, we may
close our New York office, which was primarily used by the former Chairman of
Foamex International.
In late 2003, we began to market an all foam mattress product that is
vacuum packed in a box and designed to be carried home and self-installed by the
consumer. We believe this product provides the consumer with convenience and
price advantages when compared to traditional bedding products. We plan to
develop and market additional consumer products and enter other consumer
markets. We believe that we can achieve higher net sales and gross profit
through this approach. We will also continue our development efforts in our
other product offerings, especially our Technical Products.
If we can restore our gross profit margin to 14% or more and reduce and
control administrative costs, we may be able to restore operating income to the
level experienced in 1999 and 2000 and cash flow from operations to the level
experienced in 1999, 2000 and 2001. At those levels we should be able to reduce
borrowings and also cash interest expense. Our next large required debt
repayment is $51.6 million principal of our 13 1/2% Senior Subordinated Notes
due August 15, 2005.
Financing
On August 18, 2003, Foamex L.P. entered into a $240.0 Million Senior
Secured Credit Facility with a new group of lenders and a Secured Term Loan with
another lender. Proceeds borrowed under these new facilities were used to repay
all outstanding balances under the Foamex L.P. Amended Credit Facility (the
"Amended Credit Facility") which was terminated as of August 18, 2003. In
addition, Foamex Canada's revolving credit facility that did not have any
outstanding borrowings and had availability of approximately $5.9 million was
terminated as of August 18, 2003. The termination of the Amended Credit Facility
resulted in a write off of debt issuance costs of $12.9 million.
The $240.0 Million Senior Secured Credit Facility consists of a revolving
credit facility with a maximum availability of $190.0 million and a term loan of
$50.0 million. The revolving credit facility includes a $50.0 million sublimit
for letters of credit and availability is limited to eligible amounts, as
defined, of accounts receivable and
16
inventory. At December 28, 2003, Foamex L.P. had available borrowings of
approximately $46.8 million and letters of credit outstanding of $20.9 million.
Borrowings under the term loan are limited to eligible amounts, as defined, of
equipment and real estate. Substantially all the assets of Foamex L.P. and its
domestic subsidiaries and Foamex Canada are pledged as collateral for the
related borrowings. Borrowings under the revolving credit facility and the term
loan bear interest at floating rates based upon and including a margin over
either LIBOR or a Base Rate, as defined. At December 28, 2003, the weighted
average interest rates were 4.53% and 4.42% for the revolving loans and the term
loan, respectively. The term loan requires quarterly installment payments of
approximately $1.8 million. All borrowings under the $240.0 Million Senior
Secured Credit Facility will mature on April 30, 2007. The $240.0 Million Senior
Secured Credit Facility includes both a subjective acceleration clause and a
lockbox arrangement which requires all lockbox receipts be used to repay
revolving credit borrowings. Accordingly, borrowings under the revolving credit
facility are classified as current in the accompanying balance sheet as of
December 28, 2003 as required by EITF No. 95-22.
The Secured Term Loan will mature on April 30, 2007. Borrowings under this
facility will bear interest at a rate that is 9.25% plus the greater of the
Reference Rate, as defined, or 4.25%. The minimum rate, which is in effect as of
December 28, 2003, is 13.50%. In addition, Foamex L.P. is subject to a 1.00%
facility fee which is payable annually on the anniversary date. Borrowings under
the Secured Term Loan are collateralized by the same collateral as the $240.0
Million Senior Secured Credit Facility. An intercreditor agreement governs the
distribution of collateral among the lenders under the $240.0 Million Senior
Secured Credit Facility and the Secured Term Loan.
Under the $240.0 Million Senior Secured Credit Facility and the Secured
Term Loan, Foamex L.P. is subject to a minimum fixed charge coverage ratio, as
defined, of 1.00. For the two quarters ended December 28, 2003, Foamex L.P.'s
fixed charge coverage ratio was 1.09. Foamex L.P. is also subject to a maximum
annual capital expenditure amount which was $17.7 million for the year ended
December 28, 2003 and will be $36.0 million for the year ending January 2, 2005.
Our 13 1/2% Senior Subordinated Notes with a face value of $51.6 million
are due on August 15, 2005. We must generate sufficient cash flow to repay these
notes or we must obtain additional financing. We cannot determine at this time
if we will be able to obtain financing at a reasonable cost, or at all. The 13
1/2% Senior Subordinated Notes will be required to be classified as a current
liability on our consolidated balance sheet beginning in the third quarter of
2004.
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:
Revenue Recognition
We record net sales when product title and the risks and rewards of
ownership passes to the customer, the sales price is fixed and determinable and
collection is reasonably assured. Products are shipped FOB shipping point. Net
sales are reduced by allowances for estimated discounts, returns and customer
rebates based on our experience. Balances for allowances and rebates are
reviewed at least quarterly and are adjusted if warranted.
Accounts 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
17
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.
Goodwill
We evaluate the recoverability of goodwill on an annual basis as required
by Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" ("SFAS No. 142"). We perform this annual evaluation as of the
first day of the fourth fiscal quarter, or more frequently if events or changes
in circumstances, such as declining sales, earnings or cash flows or material
adverse changes in the business climate, indicate that the carrying value of
goodwill might be impaired. Goodwill is considered to be impaired when the net
book value of a reporting unit exceeds it estimated fair value. Fair values are
primarily established using a discounted cash flow methodology. The
determination of discounted cash flows is based on businesses' strategic plans
and long range planning forecasts.
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. The services of an outside actuary are used
to assist management in their evaluation of the liability for workers'
compensation and automobile 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.
We assumed weighted average discount rates of 7.25%, 7.00% and 6.50% to
calculate pension expense for 2001, 2002 and 2003, respectively. A 0.50%
reduction in this assumption would increase the interest component of pension
expense by approximately $0.6 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
2003, 2002 and 2001. A 0.50% reduction in this assumption would increase pension
expense by approximately $0.4 million. Amortization of losses has been and
continues to be a significant component of pension expense and this amortization
is expected to increase by approximately $0.4 million in 2004. The losses have
resulted from actual returns that were less than the expected return assumption,
particularly over the 2000-2002 period, and funding levels that have not been
sufficient to offset the growth in benefit obligations. In 2003, actual returns
were significantly higher than the expected return assumption and we expect
pension expense to decrease by $1.4 million to $1.8 million in 2004 primarily
because of the growth in plan assets. We anticipated funding of $11.8 million to
retiree benefit plans in 2004.
18
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.
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 and
principal on outstanding indebtedness, capital expenditures, and employee
benefit plans. We believe that cash flow from our operating activities, cash on
hand and periodic borrowings under our credit facility will be adequate to meet
liquidity requirements for the next 12 months. Scheduled principal payments on
our debt are not significant until the second half of 2005. The ability of us to
make distributions to Foamex International is restricted by the terms of our
financing agreements.
Cash and cash equivalents were $6.6 million at December 28, 2003 compared
to $4.4 million at December 29, 2002. Working capital at December 28, 2003 was
$18.7 million and the current ratio was 1.06 to 1 compared to working capital at
December 29, 2002 of $118.0 million and a current ratio of 1.59 to 1. The
decrease in working capital is primarily due to the requirement to classify
$96.1 million of borrowings under the revolving credit portion of its $240.0
Million Senior Secured Credit Facility as current in accordance with EITF No.
95-22 (see Note 7 to the consolidated financial statements).
Total long-term debt and revolving credit borrowings at December 28 2003
was $745.6 million, a $7.0 million increase from December 29, 2002. As of
December 28 2003, there were revolving credit borrowings of $96.1 million under
the $240.0 Million Senior Secured Credit Facility with $46.8 million available
for borrowings and $20.9 million of letters of credit outstanding. Revolving
credit borrowings at December 28, 2003 reflect working capital requirements.
On November 15, 2002, Foamex L.P. and its bank lenders executed an
amendment to the Amended Credit Facility. Under the amendment, Foamex L.P. was
subject to minimum net worth, minimum EBDAIT, as defined, and maximum capital
expenditure covenants through periods ended December 28, 2003. The minimum
EBDAIT covenant was tested monthly, on a cumulative basis, beginning with
December 2002. Foamex L.P. was in compliance with the revised covenants at
December 29, 2002 and throughout 2003 until the Amended Credit Facility was
terminated on August 18, 2003.
On August 18, 2003, Foamex L.P. entered into a $240.0 Million Senior
Secured Credit Facility with a new group of lenders and a Secured Term Loan with
another lender. Proceeds borrowed under these new facilities were used to repay
all outstanding balances under the Foamex L.P. Amended Credit Facility (the
"Amended Credit Facility"). In addition, Foamex Canada's revolving credit
facility that did not have any outstanding borrowings and had availability of
approximately $5.9 million was terminated. The termination of the Amended Credit
Facility resulted in a write off of debt issuance costs of $12.9 million in
2003.
The $240.0 Million Senior Secured Credit Facility consists of a revolving
credit facility with a maximum availability of $190.0 million and a term loan of
$50.0 million. The revolving credit facility includes a $50.0 million sublimit
for letters of credit and availability is limited to eligible amounts, as
defined, of accounts receivable and
19
inventory. Borrowings under the term loan are limited to eligible amounts, as
defined, of equipment and real estate. Substantially all the assets of Foamex
L.P. and its domestic subsidiaries and Foamex Canada are pledged as collateral
for the related borrowings. Borrowings under the revolving credit facility and
the term loan bear interest at floating rates based upon and including a margin
over either LIBOR or a Base Rate, as defined. At December 28, 2003, the weighted
average interest rates were 4.53% and 4.42% for the revolving loans and the term
loan, respectively. The term loan requires quarterly installment payments of
approximately $1.8 million. All borrowings under the $240.0 Million Senior
Secured Credit Facility will mature on April 30, 2007.
The Secured Term Loan will mature on April 30, 2007. Borrowings under this
facility bear interest at a rate that is 9.25% plus the greater of Reference
Rate, as defined, or 4.25%. The minimum rate, which is in effect as of December
28, 2003, is 13.50%. In addition, Foamex L.P. is subject to a 1.00% facility fee
which is payable annually on the anniversary date. Borrowings under the Secured
Term Loan are collateralized by the same collateral as the $240.0 Million Senior
Secured Credit Facility. An intercreditor agreement governs the distribution of
collateral among the lenders under the $240.0 Million Senior Secured Credit
Facility and the Secured Term Loan.
Under the $240.0 Million Senior Secured Credit Facility and the Secured
Term Loan, Foamex L.P. is subject to a minimum fixed charge coverage ratio, as
defined, of 1.00. For the two quarters ended December 28, 2003, Foamex L.P.'s
fixed charge coverage ratio was 1.09. Foamex L.P. is also subject to a maximum
annual capital expenditure amount which was $17.7 million for the year ended
December 28, 2003 and will be $36.0 million for the year ending January 2, 2005.
Effective May 1, 2002, Foamex L.P. completed a series of interest rate swap
transactions with notional amounts aggregating $300.0 million. Foamex L.P.
designated, documented and accounted for these interest rate swaps as fair value
hedges of its 10 3/4% Senior Secured Notes due April 1, 2009. The risk being
hedged in these transactions was the change in fair value of the 10 3/4% Senior
Secured Notes based on changes in the benchmark interest rate, LIBOR. The effect
of these interest rate swap transactions was to convert the fixed interest rate
on the 10 3/4% Senior Secured Notes to floating rates reset twice per year to
correspond with the interest payment dates for the 10 3/4% Senior Secured Notes.
On September 18, 2002, Foamex L.P. unwound the interest rate swap transactions
in exchange for a net cash proceeds of $18.4 million, including $3.6 million
realized through lower effective interest rates while the swap transactions were
in effect. The unwinding resulted in a deferred credit of $14.8 million, which
is being amortized over the term of the 10 3/4% Senior Secured Notes, using the
effective interest rate method.
As discussed above, our 13 1/2% Senior Subordinated Notes with a face value
of $51.6 million are due on August 15, 2005. We must generate sufficient cash
flow to repay these notes or obtain additional financing. We may not be able to
obtain financing at a reasonable cost, or at all.
Cash Flow from Operating Activities
Cash provided by operating activities in 2003 was $18.1 million compared to
cash used of $49.6 million in the 2002. Cash provided by operating activities
consisted principally of depreciation and amortization of $26.0 million and
amortization and write off of $17.4 million of costs associated with debt,
reduced by our net loss of $27.4 million. We also had cash costs of $11.3
million to pay restructuring liabilities.
Cash Flow from Investing Activities
Cash used in investing activities totaled $8.6 million for 2003. Cash
requirements included capital expenditures of $6.5 million and capitalized
software development costs of $3.3 million. Cash used for investing activities
in 2002 included capital expenditure of $15.6 million and capitalized software
development costs of $8.0 million. Estimated capital expenditures for 2004 are
approximately $10.0 million. In addition, we expect to spend approximately $4.2
million for internally developed software in 2004, a portion of which may be
capitalized.
Cash Flow from Financing Activities
Cash used for financing activities was $7.2 million in 2003 compared to
cash provided by of $60.0 million in 2002. During 2003, we utilized $130.0
million of proceeds from new term loans and an increase in revolving credit
20
borrowings of $44.2 million to repay $162.2 million of term loans under our
former Amended Credit Facility and to pay $11.9 million of debt issuance costs.
Contractual Obligations
Our contractual obligations as of December 28, 2003 are shown in the
following table:
Payment due by Period
-------------------------------------------------------------------
Contractual Obligations Total 2004 2005-06 2007-08 2009 and beyond
- ----------------------- ------- -------- --------- ------------ ---------------
(millions of dollars)
Long-Term Debt, including
Capital Leases $732.2 $ 8.9 $ 67.7 $349.6 (1) $306.0
Interest (2) $297.5 $ 72.2 $135.8 $ 73.0 $ 16.5
Operating Leases $ 44.9 $ 14.1 $ 16.7 $ 8.2 $ 5.9
Purchase Obligations (3) $592.5 $224.7 $125.9 $122.9 $119.0
Restructuring Liabilities $ 9.7 $ 3.9 $ 1.9 $ 1.3 $ 2.6
Employee Benefits and Other (4)
(1) Includes $96.1 million of revolving credit borrowings due in 2007 but
classified as current in the consolidated balance sheet to comply with EITF
95-22. See Note 7 to the consolidated financial statements.
(2) Includes interest applicable only to borrowings outstanding at December 28,
2003 computed using interest rates in effect as of December 28, 2003
through the due dates of the borrowings as defined by the applicable
financing agreements.
(3) Includes outstanding purchase orders and other commitments to purchase
minimum quantities of materials or services.
(4) We have obligations to provide employee benefits including those under our
defined benefit and defined contribution retirement plans and our medical
benefit plan. In addition, we are partially self-insured for a number of
risks including workers' compensation, automobile and general liability.
Due to the many variables involved, accurate estimates of these future
obligations cannot be made. In 2003, payments for these obligations
aggregated approximately $34.6 million.
RESULTS OF OPERATIONS
Carpet
Foam Cushion Automotive Technical
Products Products Products Products Other Total
-------- -------- ---------- --------- -------- ----------
2003 (dollars in thousands)
Net sales $507,586 $208,855 $447,068 $117,450 $ 23,601 $1,304,560
Income (loss) from operations $ 43,983 $ 5,395 $ 33,399 $ 32,115 $(50,456) $ 64,436
Depreciation and amortization $ 11,002 $ 3,275 $ 2,815 $ 2,931 $ 6,022 $ 26,045
Income (loss) from operations
as a percentage of net sales 8.7% 2.6% 7.5% 27.3% n.m.(a) 4.9%
2002
Net sales $471,005 $234,001 $466,718 $124,124 $ 32,246 $1,328,094
Income (loss) from operations $ 45,466 $ 1,239 $ 34,146 $ 35,185 $(71,459) $ 44,577
Depreciation and amortization $ 13,632 $ 5,904 $ 3,721 $ 2,815 $ 5,520 $ 31,592
Income (loss) from operations
as a percentage of net sales 9.7% 0.5% 7.3% 28.3% n.m.(a) 3.4%
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 $ 81,144 $ 7,422 $ 27,040 $ 32,692 $(85,133) $ 63,165
Depreciation and amortization $ 11,018 $ 5,390 $ 4,150 $ 2,670 $ 10,760 $ 33,988
Income (loss) from operations
as a percentage of net sales 16.2% 3.2% 7.2% 29.4% n.m.(a) 5.0%
(a) Not meaningful.
Business segment results include revenues and costs that are specifically
identifiable and costs shared by business segments have been allocated based on
utilization. At the end of 2003, we changed our measure of segment operating
income to exclude an allocation of corporate overhead, as our management no
longer evaluates the performance of our segments using this allocation. Rather
we now attempt to manage and control these costs independent of segment
performance. Segment results for 2002 and 2001 have been adjusted to reflect
this change for comparative purposes.
2003 Compared to 2002
Net sales for 2003 decreased 2% to $1,304.6 million from $1,328.1 million
in 2002. An increase in Foam Products net sales were more than offset by
decreases in the other segments. Selling price increases in all segments were
more than offset, in the aggregate, by reductions in volume. The volume
reductions were primarily due to the requirement to increase selling prices and
plant closures as we shifted away from unprofitable business.
Gross profit was $143.7 million, or 11.0%, in 2003 compared to $143.7
million, or 10.8%, in 2002. Gross profit margin has improved throughout 2003
from the depressed levels experienced in the second half of 2002 as we have been
successful at recovering some of the raw material cost increases experienced in
the second half of 2002 and we have realized manufacturing cost savings.
Income from operations for 2003 was $64.4 million, or 4.9% of net sales,
which represented a 45% increase from the $44.6 million, or 3.4% of net sales,
reported for 2002. Selling general and administrative expenses decreased $13.3
million, or 14%, due primarily to lower employee costs and professional fees. In
2002, we incurred $4.9 million of organizational and transaction costs in
connection with a proposed public offering of a subsidiary, which was
subsequently terminated, and a proposed sale of the Carpet Cushion products
segment. Restructuring, impairment and other credits discussed below were $1.8
million in 2003, while we recorded restructuring, impairment and other charges
of $4.8 million in 2002.
Foam Products
Foam Products net sales for 2003 increased 8% to $507.6 million from $471.0
million in 2002 primarily due to increases in selling prices to customers and
increased volumes of consumer products, partially offset by decreases in volume
in other markets. Income from operations decreased 3%, to $44.0 million in 2003
from $45.5 million in 2002, primarily due to increases in the cost of raw
materials. Income from operations was 8.7% of net sales in 2003, and 9.7% of net
sales in 2002.
Carpet Cushion Products
Carpet Cushion Products net sales for 2003 decreased 11% to $208.9 million
from $234.0 million in 2002. Average selling prices increased but were more than
offset by an approximate 16% decline in volumes, as we closed several carpet
cushion facilities in 2002 and 2003 to focus this business on more profitable
markets. Income from operations increased $4.2 million, or 335%, primarily due
to cost containment from the streamlining of operations and higher selling
prices. Income from operations represented 2.6% of net sales in 2003 and 0.5% of
net sales in 2002.
22
Automotive Products
Automotive Products net sales for 2003 decreased 4% to $447.1 million from
$466.7 million in 2002. Sales declined throughout the second half of 2003 as a
major customer decreased its purchases from us in an effort to diversify its
supplier base. While some of this business has been recovered from other
customers, automotive products net sales were just over $100 million per quarter
in the second half of 2003, which is an annual rate of more than $60.0 million
less than the 2002 net sales. For the full year 2003, volumes were down about 1%
and average selling prices were down about 3% due to lower fabric costs passed
on to customers. Income from operations decreased $0.7 million, or 2%, as the
lower sales were partially offset by lower manufacturing costs, resulting from a
plant closure in early 2003 and labor and overhead reductions. Income from
operations represented 7.5% of net sales in 2003 and 7.3% of net sales in 2002.
Technical Products
Net sales for Technical Products in 2003 decreased 5% to $117.5 million
from $124.1 million in 2002 primarily due to a decrease in volume of 9%
partially offset by an increase in average selling prices. Income from
operations decreased 9% to $32.1 million in 2003 compared to $35.2 million in
2002 due to higher raw material and overhead costs. Income from operations
represented 27.3% of net sales in 2003 and 28.3% of net sales in 2002.
Other
Other primarily consists of certain manufacturing operations in Mexico
City, corporate expenses not allocated to business segments and restructuring,
impairment and other charges. The $8.6 million, or 27%, decrease in net sales
associated with this segment primarily resulted from the Mexico City operation
and was primarily due to a decline in the consumer products business. The loss
from operations was $50.5 million in 2003 and included restructuring, impairment
and other credits of $1.8 million, discussed below. The loss from operations in
2002 was $71.5 million, including restructuring, impairment and other charges of
$4.8 million, discussed below. Corporate overhead expenses and employee costs
decreased $7.8 million in 2003 compared to 2002.
Restructuring, Impairment and Other Charges
In 2003, we recorded restructuring credits of $1.8 million consisting of a
$3.2 million reduction in the liability primarily for severance and termination
benefits no longer required as the actions contemplated under the related plans
have been substantially completed, and a charge of $1.1 million for additional
lease termination costs for a closed facility as a result of changes in real
estate market conditions. Additionally, we recorded a $0.3 million restructuring
charge reported in the Other segment as a result of an employee termination plan
for approximately 300 employees at our Mexico City operations. The actions under
this plan were substantially completed in 2003.
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 with the remainder occuring in 2003.
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.
Interest and Debt Issuance Expense
Interest and debt issuance expense was $88.4 million in 2003, which
represented a 27% increase from 2002 expense of $69.7 million. The 2003 and 2002
periods include charges of $12.9 million and $4.9 million, respectively,
relating to the write off of debt issuance costs as a result of early
extinguishment of debt. Higher average debt levels, higher effective interest
rates and higher amortization of debt issuance costs all contributed to the
increase in 2003.
23
Income from Equity Interest in Joint Ventures
The income from an equity interest in an Asian joint venture was $1.2
million in 2003 and $1.6 million in 2002. Income from an equity interest in a
joint venture in Eastern Europe was $0.3 million in 2003 and $0.1 million in
2002.
Other Income (Expenses), Net
Other expense, net was $3.4 million in 2003 compared to $2.0 million in
2002. We incurred foreign currency transaction losses of $2.7 million in 2003
compared to foreign currency transaction losses of $2.3 million in 2002.
Provision 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.
Cumulative Effect of Accounting Change
The cumulative effect of accounting change in 2002 includes a goodwill
impairment charge of $72.0 million as a result of the adoption of SFAS No. 142.
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 $143.7 million, or 10.8%, in 2002 compared to
$178.5 million, or 14.2%, in 2001 primarily as a result of 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
expenses 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 $44.6 million, which represented a 29%
decrease from the $63.2 million reported for 2001. Income from operations was
3.4% of net sales in 2002 compared to 5.0% of net sales in 2001. The decrease is
attributable to the reduced gross profit margins as discussed above. In
addition, selling, general and administrative expenses increased by $15.0
million, or 19%, which included $3.6 million of organizational costs in
connection with a proposed public offering of a subsidiary which was
subsequently terminated. Selling, general and administrative expenses also
included $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. Partially offsetting the decrease in gross profit and increased
selling, general and administrative expenses was a decline of $31.3 million in
restructuring, impairment and other charges which is more fully discussed below.
24
Foam Products
Foam Products net sales for 2002 decreased 6% 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 12.3% in 2002, down from 18.8% in 2001. Income from
operations decreased 44%, to $45.5 million in 2002 from $81.1 million in 2001,
primarily due to increased raw material costs, lower net sales and higher
manufacturing costs. Income from operations was 9.7% of net sales in 2002, down
from 16.2% of net sales in 2001.
Carpet Cushion Products
Carpet Cushion Products net sales for 2002 increased 1% 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. Income 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 0.5% of net sales in
2002 and 3.2% of net sales in 2001.
Automotive Products
Automotive Products net sales for 2002 increased 24% 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 were informed that our
largest customer intends to reduce its purchases of certain products from us in
2003 to diversify its supply base. Automotive Products gross profit margin was
8.4% in 2002 and 2001 and reflects the impact of higher raw material costs
offsetting the contribution from increased net sales. Income from operations
represented 7.3% of net sales in 2002 and 7.2% of net sales in 2001.
Technical Products
Net sales for Technical Products in 2002 increased 12% 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 increased 8% to $35.2
million in 2002 compared to $32.7 million in 2001. The decrease reflects the
contribution from higher net sales offset by higher material costs and the costs
related to a proposed public offering of a subsidiary as described above. Income
from operations represented 28.3% of net sales in 2002 compared to 29.4% 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 4% decrease in net sales associated with this
segment primarily resulted from the Mexico City operation. The loss from
operations was $71.5 million in 2002 and included restructuring, impairment and
other charges, discussed below. The loss from operations in 2001 was $85.1
million, including restructuring, impairment and other charges of $36.1 million,
discussed below. Corporate overhead expenses and employee costs increased by
$16.1 million in 2002.
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.
25
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
facilities closures reduced the number of planned terminations to approximately
500. Approximately 340 employees were terminated in 2002.
Interest and Debt Issuance Expense
Interest and debt issuance expense was $69.7 million in 2002, which
represented a 10% 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.
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% ownership interest in the joint
venture since December 2001. Previously our ownership interest was 49%.
Provision 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.
Cumulative Effect of Accounting Change
The cumulative effect of accounting change in 2002 includes a goodwill
impairment charge of $72.0 million as a result of the adoption of SFAS No. 142.
OTHER
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 28, 2003, we had accruals of approximately $2.5 million
for environmental matters including approximately $2.3 million related to
remediating and monitoring soil and groundwater contamination and approximately
$0.2 million relating to sites where we had been designated as a Potentially
Responsible Party or "PRP" by the EPA or a state authority 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.
26
On August 31, 2002, Environment Canada, the Canadian environmental
regulatory agency, finalized a rule which would require flexible polyurethane
foam manufacturing operations to reduce methylene chloride (dichloromethane) air
emissions. The rule establishes a 50.0% reduction in methylene chloride
emissions by December 1, 2004 and 100.0% reductions by January 1, 2007. This
standard will not 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 11 sites. Estimates of total cleanup costs and
fractional allocations of liability are often provided by the EPA, the state
environmental agency or the committee of PRPs with respect to the 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.
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.
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, results
of operations or cash flows. 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 28, 2003, we had
accrued approximately $1.1 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 by us in
manufacturing, 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. Results for 2003 and 2002 were negatively
impacted by higher average costs for raw materials. In 2001, the beginning of
the economic slowdown resulted in excess manufacturing capacity for the major
chemical
27
suppliers. This, coupled with declining oil prices, resulted in lower costs for
raw materials in 2001. We experienced significant 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 selling
price increases, but were only partially able to do so during 2003 and 2002. We
may not be successful in implementing 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 and
corporate 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.
The lease for one of our foam pouring facilities expires in 2004. It is
conceivable that this lease may not be extended or renewed. Like any other
lease, if we are unable to extend or renew this lease, the costs associated with
a relocation could have a material adverse effect on our business, financial
condition, cash flow and results of operations.
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 28, 2003, indebtedness with variable
interest rates totaled $231.3 million. On an annualized basis, if the interest
rates on these debt instruments increased by 1.0%, interest expense would
increase by approximately $2.3 million.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
An index to the financial statements and financial statement schedules is
included in Item 15(a).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
ITEM 9a. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls
Foamex L.P. maintains disclosure controls and procedures (as defined in
Rule 13a-14(c) and 15d-14(c) of the Securities Exchange Act of 1934, as amended
(the "Exchange Act")) that are designed to ensure that information required to
be disclosed in reports filed under the Exchange Act, as amended, is recorded,
processed, summarized and reported within the specified time periods. In
designing and evaluating the disclosure controls and procedures, management
recognizes that any controls and procedures, no matter how well designed and
executed, can provide only reasonable assurance of achieving the desired control
objectives.
Foamex L.P. carried out an evaluation, under the supervision and with the
participation of management, including the Chief Executive Officer and Chief
Financial Officer, on the effectiveness of the design and operation of Foamex
L.P.'s disclosure controls and procedures pursuant to the Exchange Act rule as
of the end of the fiscal period covered by this report on Form 10-K. Based upon
that evaluation, each of the Chief Executive Officer and Chief Financial Officer
concluded that Foamex L.P.'s disclosure controls and procedures are effective in
providing reasonable assurance that material information required to be included
in Foamex L.P.'s Exchange Act reports is made known to management on a timely
basis during the period when Foamex L.P.'s periodic reports are being prepared.
28
Changes in Internal Controls
Foamex L.P. determined during the fourth quarter of 2003 that the value of
certain in-transit raw material inventory was overstated due to a calculation
error made during a transition to a new module of an enterprise wide transaction
processing software package in February 2003. This error was reported to Foamex
L.P.'s auditors and to the audit committee of Foamex International's Board of
Directors. As a result, Foamex L.P. restated its financial statements for each
of the three quarters of 2003 for this error and other adjustments previously
identified by management that were not individually or in the aggregate material
to the respective periods. Foamex L.P. has instituted procedures intended to
ensure that the value of the in-transit raw material inventory is more
effectively monitored.
Except as discussed above, there have been no significant changes in
internal control over financial reporting that occurred during the quarter
covered by this report that has materially affected or is reasonably likely to
materially affect, our internal control over financial reporting.
PART III
The information required by this Part III (Items 10, 11, 12, 13 and 14) is
not applicable since Foamex L.P. is a wholly-owned subsidiary of Foamex
International.
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
Consolidated Balance Sheets as of December 28, 2003 and December 29, 2002 F-3
Consolidated Statements of Operations for the years ended December 28, 2003,
December 29, 2002 and December 31, 2001 F-5
Consolidated Statements of Cash Flows for the years ended December 28, 2003
December 29, 2002 and December 31, 2001 F-6
Consolidated Statements of Partners' Deficiency for the years ended December 28, 2003
December 29, 2002 and December 31, 2001 F-7
Notes to Consolidated Financial Statements F-8
Foamex Capital Corporation
Independent Auditors' Report F-36
Balance Sheets as of December 28, 2003 and December 29, 2002 F-37
Notes to Balance Sheets F-38
Foamex L.P. and Subsidiaries Financial Statement Schedule
Schedule II - Valuation and Qualifying Accounts S-2
(b) Reports on Form 8-K.
None
(c) Exhibits.
2.1(k) - Transfer Agreement, dated as of February 27, 1998, by and
between Foam Funding LLC and Foamex L.P.
2.2(k) - Asset Purchase Agreement, dated as of February 27, 1998, by and
among Foamex Carpet Cushion, Inc. ("Foamex Carpet"), Foamex
International Inc. ("Foamex International" or the "Company"),
Foam Funding LLC and General Felt Industries, Inc. ("General
Felt").
29
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(h) - Third Amendment to the Partnership Agreement, dated December
23, 1997.
3.2.5(k) - Fourth Amendment to the Partnership Agreement, dated February
27, 1998.
3.2.6(r) - Fifth Amendment to the Partnership Agreement, dated March 26,
2002.
3.3(i) - Certificate of Incorporation of FMXI.
3.4(i) - By-laws of FMXI.
3.5(e) - Certificate of Incorporation of Foamex Capital Corporation.
3.6(e) - By-laws of Foamex Capital Corporation.
3.9(s) - Certificate of Incorporation of Foamex Asia, Inc.
3.10(s) - By-laws of Foamex Asia, Inc.
3.11(s) - Certificate of Incorporation of Foamex Latin America, Inc.
3.12(s) - By-laws of Foamex Latin America, Inc.
3.13(s) - Certificate of Incorporation of Foamex Mexico, Inc.
3.14(s) - By-laws of Foamex Mexico, Inc.
3.15(s) - Certificate of Incorporation of Foamex Mexico II, Inc.
3.16(s) - By-laws of Foamex Mexico II, Inc.
4.1(c) - 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.
4.1.3(h) - First Amendment to 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.
4.1.3(k) - 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., 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.
4.1.4(r) - 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.
4.2.3(r) - 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.
4.3.1(h) - 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.
4.3.1(k) - 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.
4.3.1(r) - 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, relating to $300,000,000
principal amount of 10 3/4% Senior Secured Notes due 2009,
including form of Senior Secured Note and Subsidiary Guaranty.
4.3.2(r) - Pledge and Security Agreement, dated as of March 25, 2002, made
by Foamex L.P. and U.S. Bank National Association, as
collateral agent.
4.3.3(r) - Patent Security Agreement, dated as of March 25, 2002, by
Foamex L.P. in favor of U.S. Bank National Association, as
collateral agent.
30
4.3.4(r) - Trademark Security Agreement, dated as of March 25, 2002, by
Foamex L.P. in favor of U.S. Bank National Association, as
collateral agent.
4.3.5(r) - Copyright Security Agreement, dated as of March 25, 2002, by
Foamex L.P. in favor of U.S. Bank National Association, as
collateral agent.
4.3.6(r) - 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.
4.15.1(v) - Credit Agreement, dated as of August 18, 2003, among Foamex
L.P. as a Borrower and Guarantor, Foamex International Inc.,
FMXI, Inc., Foamex Canada Inc., Foamex Capital Corporation,
Foamex Latin America, Inc., Foamex Mexico, Inc., Foamex Mexico
II, Inc., Foamex Asia, Inc. and Foamex Carpet Cushion LLC as
Guarantors, the financial institutions party thereto from time
to time as lenders and Bank of America, N.A. as the
Administrative Agent.
4.15.2(v) - Pledge and Security Agreement, dated as of August 18, 2003,
among Foamex L.P. and Bank of America, N.A. as Administrative
Agent.
4.15.3(w) - Amendment No. 1 to Credit Agreement, dated as of December 1,
2003, among Foamex L.P., as Borrower, the affiliates of
Borrower party hereto, the lenders party hereto, and Bank of
America, N.A. as Administrative Agent.
4.16.1(v) - Credit Agreement, dated as of August 18, 2003, among Foamex
L.P. as a Borrower and Guarantor, Foamex International Inc.,
FMXI, Inc., Foamex Canada Inc., Foamex Capital Corporation,
Foamex Latin America, Inc., Foamex Mexico, Inc., Foamex
Mexico II, Inc., Foamex Asia, Inc. and Foamex Carpet Cushion
LLC as Guarantors, the financial institutions party thereto
from time to time as lenders and Silver Point Finance,
LLC as the Administrative Agent.
4.16.2(v) - Pledge and Security Agreement, dated as of August 18, 2003,
among Foamex L.P. and Silver Point Finance, LLC as
Administrative Agent.
4.16.3(w) - Amendment No. 1 to Credit Agreement, dated as of December 1,
2003, among Foamex L.P., as Borrower, the affiliates of
Borrower party hereto, the lenders party hereto, and Silver
Point Finance, LLC as Administrative Agent.
4.17.1(v) - Intercreditor Agreement, dated as of August 18, 2003, among
Bank of America, N.A., as Senior Bank Agent and Senior
Collateral Agent, Silver Point Finance, LLC, as Senior Term
Loan B Agent and as future Senior Collateral Agent after a
Discharge of Senior Bank Lender Claims has occurred, U.S. Bank
National Association, as trustee and collateral agent under the
Indenture referred to below, and Foamex L.P., a Delaware
limited partnership.
10.1(d) - Reimbursement Agreement, dated as of March 23, 1993, between
Trace Holdings and General Felt Industries, Inc.
10.2(d) - 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(e) - 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(e) - First Amendment, dated as of December 19, 1991, to the Trace
Holdings Asset Transfer Agreement.
10.5(e) - 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(e) - 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(e) - First Amendment, dated as of December 19, 1991, to the RFC
Asset Transfer Agreement.
10.10.5(g) - The Foamex L.P. Hourly Pension Plan (formerly "The Foamex
Products Inc. Hourly Employee Retirement Plan"), as amended
December 31, 1995.
10.10.6(g)+ - Foamex L.P. 401(k) Savings Plan effective October 1, 1997.
10.10.12(q)+ - Foamex Supplemental Executive Retirement Plan, effective as of
May 15, 2001.
10.10.13(q)+ - Split Dollar Life Insurance Agreement Between Foamex
International Inc. and Marshall S. Cogan, dated as of December
31, 2001.
31
10.11.4(n)+ - Termination and Release Agreement dated as of January 30, 2001
by and between Foamex International and John G. Johnson, Jr.
10.11.5(q)+ - Termination and Release Agreement dated as of December 6, 2001,
by and between the Foamex International and John Televantos.
10.11.1(m)+ - Employment Agreement, dated as of January 1, 1999, by and
between Foamex International and Marshall S. Cogan.
10.11.8(q)+ - First Amendment to Employment Agreement, dated as of December
31, 2001, by and between Foamex International Inc. and Marshall
S. Cogan.
10.11.10(u)+ - Severance Agreement and Release, dated as of November 23, 2002,
by and between Foamex International and Theodore J. Kall.
10.11.11(u)+ - Severance Agreement and Release, dates as of January 31, 2003,
by and between Foamex International and Pratt W. Wallace, Jr.
10.11.12* - Form of Foamex International Inc. Code of Ethics for Director,
Officer, Senior Management and Certain Other Employees.
10.11.13(w)+ - Amended and Restated Employment Agreement, dated January 27,
2004, by and between Foamex International and Thomas E.
Chorman.
10.11.14(w)+ - Amended and Restated Employment Agreement, dated January 26,
2004, by and between Foamex International and K. Douglas Ralph.
10.16.1(k) - Supply Agreement, dated as of February 27, 1998, by and between
Foamex L.P. and General Felt (as assigned to Foamex Carpet).
10.16.2(k) - Administrative Services Agreement, dated as of February 27,
1998, by and between Foamex L.P. and General Felt (as assigned
to Foamex Carpet).
10.17(e)+ - Salaried Incentive Plan of Foamex L.P. and Subsidiaries.
10.18(e)+ - Equity Growth Participation Program.
10.19(f)+ - The Foamex L.P. Salaried Pension Plan (formerly, "The General
Felt Industries, Inc. Retirement Plan for Salaried Employees"),
effective as of January 1, 1995.
10.22(l)+ - Foamex International Amended and Restated 1993 Stock Option
Plan.
10.23(a)+ - Foamex International Non-Employee Director Compensation Plan.
10.24(o)+ - Foamex International Equity Incentive Plan for Non-Employee
Directors.
10.25(o)+ - Foamex International Key Employee Incentive Bonus Plan.
10.26(p)+ - Agreement with Consultant, dated April 24, 2001 by and between
Robert J. Hay and Foamex L.P.
10.29(t)+ - Foamex International 2002 Stock Award Plan.
10.17.2(j) - Loan Agreement between Hua Kee Company Limited and Foamex Asia,
Inc., dated as of July 8, 1997.
10.18.1(p) - Joint Venture Agreement between Hua Kee Company Limited and
Foamex Asia, Inc. amended and restated as of December 3, 2001.
10.44(s)+ - Agreement with Consultant, dated August 8, 2002, by and between
Raymond E. Mabus, Jr. and Foamex International.
21* - Subsidiaries of Foamex L.P.
31.1* - Certification of Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
31.2* - Certification of Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
32.1* - Certification of Chief Executive Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
32.2* - Certification of Chief Financial Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
- ---------------------------------
* 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.
32
(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.
(c) 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.
(d) Incorporated herein by reference to the Exhibit to the Annual Report on
Form 10-K of Foamex L.P. and FCC for fiscal 1992.
(e) 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.
(f) Incorporated herein by reference to the Exhibit to the Annual Report on
Form 10-K of Foamex L.P. for fiscal 1993.
(g) Incorporated by reference to the Exhibit to the Form 10-Q of Foamex L.P.
for the quarterly period ended September 28, 1997.
(h) 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.
(i) 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.
(j) 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.
(k) Incorporated herein by reference to the Current Report on Form 8-K of
Foamex International reporting an event that occurred on February 27, 1998.
(l) Incorporated herein by reference to the Exhibit to Foamex International's
definitive proxy statement dated May 31, 2000.
(m) Incorporated herein by reference to the Exhibit to the Annual Report on
Form 10-K of Foamex International for year ended December 31, 2000.
(n) Incorporated herein by reference to the Exhibit to the Form 10-Q of Foamex
International for the quarterly period ended March 31, 2001.
(o) Incorporated herein by reference to the Appendix to Foamex International's
definitive amended and restated proxy statement, dated July 12, 2001.
(p) Incorporated herein by reference to the Exhibit to the Form 10-Q of Foamex
International for the quarterly period ended June 30, 2001.
(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 31,
2001.
(r) 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.
(s) 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.
33
(t) Incorporated herein by reference to Appendix C to Foamex International's
definitive proxy statement dated April 30, 2002.
(u) 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.
(v) Incorporated herein by reference to the Exhibit to the Current Report on
Form 8-K of the Company reporting an event that occurred on August 18,
2003.
(w) 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,
2003.
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.
34
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 5th day of March 2004.
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/ Thomas E. Chorman Director of FMXI and FCC March 5, 2004
- ---------------------------
Thomas E. Chorman
/s/ George L. Karpinski Director of FMXI and FCC March 5, 2004
- ---------------------------
George L. Karpinski
35
FOAMEX L.P. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Financial Statements of Registrants
Foamex L.P.
Independent Auditors' Report F-2
Consolidated Balance Sheets as of December 28, 2003 and December 29, 2002 F-3
Consolidated Statements of Operations for the years ended December 29, 2002 and
December 31, 2001 and 2000 F-5
Consolidated Statements of Cash Flows for the years ended December 28, 2003,
December 29, 2002 and December 31, 2001 F-6
Consolidated Statements of Partners' Deficiency for the years ended December 28, 2003,
December 29, 2002 and December 31, 2001 F-7
Notes to Consolidated Financial Statements F-8
Foamex Capital Corporation
Independent Auditors' Report F-36
Balance Sheets as of December 28, 2003 and December 29, 2002 F-37
Notes to Balance Sheets F-38
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 28, 2003 and December 29, 2002, and the
related consolidated statements of operations, cash flows and partners'
deficiency for each of the three years in the period ended December 28, 2003.
Our audits also included the consolidated financial statement schedule listed in
the Index at Item 15a. These consolidated financial statements and consolidated
financial statement schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these consolidated financial
statements and consolidated 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 28, 2003
and December 29, 2002, and the results of its operations and its cash flows for
each of the three years in the period ended December 28, 2003 in conformity with
accounting principles generally accepted in the United States of America. Also,
in our opinion, such 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.
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 9, 2004
Parsippany, New Jersey
F-2
FOAMEX L.P. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 28, December 29,
2003 2002
------------ ------------
ASSETS (thousands)
CURRENT ASSETS
Cash and cash equivalents $ 6,610 $ 4,363
Accounts receivable, net of allowance for doubtful
accounts and discounts of $10,505 in 2003 and $10,311 in 2002 181,288 191,546
Inventories 95,882 98,010
Other current assets 27,287 22,558
-------- --------
Total current assets 311,067 316,477
-------- --------
PROPERTY, PLANT AND EQUIPMENT
Land and land improvements 6,818 7,272
Buildings and leasehold improvements 117,265 119,582
Machinery, equipment and furnishings 289,528 287,847
Construction in progress 1,069 3,868
-------- --------
Total 414,680 418,569
Less accumulated depreciation and amortization (251,830) (236,531)
-------- --------
Property, plant and equipment, net 162,850 182,038
GOODWILL 126,258 125,321
DEBT ISSUANCE COSTS, net of
accumulated amortization of $10,648 in 2003 and
$14,079 in 2002 27,195 36,827
SOFTWARE COSTS, net of accumulated amortization of
$3,603 in 2003 and $2,634 in 2002 9,767 8,254
INVESTMENTS IN AND ADVANCES TO AFFILIATES 14,503 13,109
OTHER ASSETS 13,515 13,257
-------- --------
TOTAL ASSETS $665,155 $695,283
======== ========
The accompanying notes are an integral part of the
consolidated financial statements.
F-3
FOAMEX L.P. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 28, December 29,
2003 2002
------------ ------------
LIABILITIES AND PARTNERS' DEFICIENCY (thousands)
CURRENT LIABILITIES
Revolving credit borrowings $ 96,065 $ -
Current portion of long-term debt 8,937 46
Accounts payable 98,310 87,394
Accrued employee compensation and benefits 28,331 26,330
Accrued interest 12,376 14,173
Accrued restructuring 3,911 14,424
Accrued customer rebates 18,077 18,813
Cash overdrafts 12,688 17,737
Other accrued liabilities 13,510 17,665
Deferred income taxes 163 1,864
--------- ---------
Total current liabilities 292,368 198,446
LONG-TERM DEBT 640,621 738,540
ACCRUED EMPLOYEE BENEFITS 43,348 48,022
ACCRUED RESTRUCTURING 5,837 8,347
OTHER LIABILITIES 8,112 7,714
--------- ---------
Total liabilities 990,286 1,001,069
--------- ---------
COMMITMENTS AND CONTINGENCIES
PARTNERS' DEFICIENCY
General partner (268,097) (240,107)
Limited partner - -
Accumulated other comprehensive loss (47,813) (56,458)
Notes receivable from related party (9,221) (9,221)
-------- ---------
Total partners' deficiency (325,131) (305,786)
-------- ---------
TOTAL LIABILITIES AND PARTNERS' DEFICIENCY $665,155 $ 695,283
======== =========
The accompanying notes are an integral part of the
consolidated financial statements.
F-4
FOAMEX L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED
December 28, December 29, December 31,
2003 2002 2001
------------ ------------ ------------
(thousands)
NET SALES $1,304,560 $1,328,094 $1,252,904
COST OF GOODS SOLD 1,160,870 1,184,392 1,074,385
---------- ---------- ----------
GROSS PROFIT 143,690 143,702 178,519
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 81,013 94,326 79,286
RESTRUCTURING, IMPAIRMENT AND OTHER
CHARGES (CREDITS) (1,759) 4,799 36,068
---------- ---------- ----------
INCOME FROM OPERATIONS 64,436 44,577 63,165
INTEREST AND DEBT ISSUANCE EXPENSE 88,374 69,679 63,237
INCOME FROM EQUITY INTEREST IN JOINT VENTURE 1,466 1,734 1,645
OTHER EXPENSE, NET (3,447) (2,045) (291)
---------- ---------- ----------
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES
AND CUMULATIVE EFFECT OF ACCOUNTING CHANGE (25,919) (25,413) 1,282
PROVISION FOR INCOME TAXES 1,494 1,791 3,543
---------- ---------- ----------
LOSS BEFORE CUMULATIVE EFFECT OF
ACCOUNTING CHANGE (27,413) (27,204) (2,261)
CUMULATIVE EFFECT OF ACCOUNTING CHANGE - (71,966) -
---------- ---------- ----------
NET LOSS $ (27,413) $ (99,170) $ (2,261)
========== ========== ==========
The accompanying notes are an integral part of the
consolidated financial statements.
F-5
FOAMEX L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED
December 28, December 29, December 31,
2003 2002 2001
------------ ------------ ------------
OPERATING ACTIVITIES (thousands)
Net loss $(27,413) $(99,170) $ (2,261)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization 26,045 31,592 34,028
Amortization of debt issuance costs, debt premium
and debt discount 4,458 2,699 1,288
Write off of debt issuance costs 12,928 4,892 -
Asset impairment and other charges - 2,503 13,811
Cumulative effect of accounting change - 71,966 -
Loss on disposition of assets 30 - 963
Provision for uncollectible accounts 2,115 2,336 5,479
Retirement benefit funding greater than expense (892) (1,604) (1,752)
Deferred income taxes 21 (738) 1,068
Other, net 4 47 2
Changes in operating assets and liabilities:
Accounts receivable 8,143 (20,421) (9,578)
Inventories 2,128 (8,580) 15,177
Accounts payable 10,916 (41,362) 45,867
Accrued restructuring (13,023) (2,225) 15,549
Other assets and liabilities (7,358) 8,447 (10,937)
-------- -------- --------
Net cash provided by (used in) operating activities 18,102 (49,618) 108,704
-------- -------- --------
INVESTING ACTIVITIES
Capital expenditures (6,543) (15,582) (22,482)
Proceeds from sale of assets 1,237 21 600
Repayment of note from Foamex International - - 2,500
Acquisitions - - (17,559)
Decrease (increase) in revolving loan with Foamex International - 2,490 -
Other investing activities (3,329) (7,990) (1,130)
-------- -------- --------
Net cash used in investing activities (8,635) (21,061) (38,071)
-------- -------- --------
FINANCING ACTIVITIES
Net proceeds from (repayments of) revolving loans 44,242 (73,176) (20,905)
Proceeds from long-term debt 130,000 356,590 -
Repayments of long-term debt (164,020) (190,450) (8,538)
Repayments of long-term debt-related party - (31,590) (15,795)
Increase (decrease) in cash overdrafts (5,049) 13,664 (2,812)
Debt issuance costs (11,880) (29,981) (2,578)
Interest rate swaps - 14,821 -
Distribution paid to partners (513) - (3,861)
Other financing activities - 105 (5,958)
-------- -------- --------
Net cash provided by (used in) financing activities (7,220) 59,983 (60,447)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 2,247 (10,696) 10,186
Cash and cash equivalents at beginning of period 4,363 15,059 4,873
-------- -------- --------
Cash and cash equivalents at end of period $ 6,610 $ 4,363 $ 15,059
======== ======== ========
The accompanying notes are an integral part of the
consolidated financial statements.
F-6
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)
2001
Balance at January 1, 2001 $(119,831) $ - $(24,461) $(4,990) $(9,221) $(158,503)
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)
2003
Net loss (469) (26,944) (27,413)
Minimum pension liability adjustment 2,033 2,033
Foreign currency translation adjustment 6,612 6,612
---------
Comprehensive loss (18,768)
Distributions and other (2) (575) (577)
Offset balance against Limited Partner
deficit assumed by General Partner (27,519) 27,519 -
--------- ------- -------- -------- ------- ---------
Balances at December 28, 2003 $(268,097) $ - $(47,813) $ - $(9,221) $(325,131)
========= ======= ======== ======== ======= =========
The accompanying notes are an integral part of the
consolidated financial statements.
F-7
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION
Organization
Foamex L.P., an indirect wholly-owned subsidiary of Foamex International
Inc. ("Foamex International") operates in the flexible polyurethane and advanced
polymer foam products industry. Foamex L.P.'s operations are conducted directly
and through its wholly-owned subsidiaries, Foamex Canada Inc. ("Foamex Canada"),
Foamex Latin America, Inc. ("Foamex Mexico") and Foamex Asia, Inc. ("Foamex
Asia"). Foamex Carpet Cushion, Inc. ("Foamex Carpet") was converted to a limited
liability company and was contributed by Foamex International to Foamex L.P. on
March 25, 2002. On December 30, 2002, Foamex Carpet distributed certain assets,
liabilities and its business to Foamex L.P. Financial information concerning the
business segments of Foamex L.P. is included in Note 11.
In 2002, 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. Fiscal year
2003 included the 52 weeks ended December 28, 2003 while the fiscal year 2002
include the 52 weeks ended December 29, 2002, after adjustment for December 31,
2001 which was included in the prior year.
The Bank of Nova Scotia owns approximately 5.8 million shares of Foamex
International's outstanding common stock, or approximately 23.6%. The Bank of
Nova Scotia also owns 15,000 shares of Foamex International's non-voting
non-redeemable Series B convertible 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 defined by certain debt agreements of Foamex International's
subsidiaries. Ownership of more than 25% of the common stock would constitute a
"change of control".
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 of this joint venture 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 products to the furniture and bedding, automotive, carpet
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-8
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Revenue Recognition, Discounts and Rebates
Revenue from sales, net of discounts and estimated returns, allowances and
customer rebates, is recognized when product title and the risks and rewards of
ownership passes to the customer, the sales price is fixed and determinable and
collection is reasonably assured. Products are shipped FOB shipping point.
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 adverse 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 and revolving credit
borrowings at December 28, 2003 were $745.6 million and $683.3 million,
respectively, and at December 29, 2002 were $738.6 million and $490.3 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 2003, 2002 and 2001 was $24.1 million, $29.1 million and $26.4
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.
Goodwill
Foamex L.P. adopted Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets" ("SFAS No. 142") on January 1, 2002 with
certain provisions adopted as of July 1, 2001. SFAS No.142 addresses the initial
recognition and measurement of intangible assets acquired outside a business
combination and
F-9
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
the recognition and measurement of goodwill and other intangible assets
subsequent to their acquisition. Under SFAS No. 142, goodwill is no longer
amortized, but is subject to annual impairment tests. The goodwill resulting
from the acquisition discussed in Note 3 is not amortized.
The goodwill that arose form business combinations prior to July 1, 2001
was amortized through 2001 on a straight-line basis over 40 years. Goodwill
amortization expense was $6.0 million in 2001.
In accordance with SFAS No. 142, goodwill was tested for impairment upon
adoption of the standard and is tested annually thereafter. SFAS No. 142
requires that goodwill be tested for impairment using a two-step process. The
first step is to identity a potential impairment and the second step measures
the amount of the impairment loss, if any. Goodwill is deemed to be impaired if
the carrying amount of a reporting unit's goodwill exceeds its estimated fair
value. Foamex L.P.'s initial impairment test resulted in the recognition of an
impairment loss of $72.0 million recorded as a cumulative effect of a change in
accounting principle retroactive to the first quarter of 2002 in accordance with
the transitional implementation guidance of SFAS No.142. Foamex L.P. has
completed its annual goodwill impairment tests as of September 29, 2003 and
September 30, 2002, respectively, with no recognition of any additional
impairment.
Goodwill at December 28, 2003 increased $0.9 million from December 29, 2002
as a result of foreign currency translation adjustments reflected below as
"Other".
Goodwill balances include:
Balance Balance
Segments December 29, 2002 Other December 28, 2003
------------------------ ----------------- --------- -----------------
(thousands)
Foam Products $ 74,269 $362 $ 74,631
Carpet Cushion Products 2,497 - 2,497
Automotive Products 34,686 575 35,261
Technical Products 13,869 - 13,869
-------- ---- --------
Total $125,321 $937 $126,258
======== ==== ========
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.
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 completed
and the software will be used for the function intended. Foamex L.P. is in the
process of replacing its primary financial and operating information and
transaction processing systems and anticipates this project will be
substantially completed in 2005. Capitalized software costs aggregated $3.4
million, $7.0 million and $0.9 million in 2003, 2002 and 2001, respectively. 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.
F-10
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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.
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. Amounts charged against
income were $0.5 million, $1.1 million and $0.2 million in 2003, 2002 and 2001,
respectively.
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 other income (expense) in the
consolidated statements of operations and included $(2.7) million, $(2.3)
million and $1.6 million in 2003, 2002 and 2001, respectively.
Research and Development
Research and development costs are expensed as incurred. Amounts charged
against income were $3.6 million, $4.8 million and $3.1 million in 2003, 2002
and 2001, respectively.
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. Amounts charged against income were $24.9 million,
$31.2 million and $25.6 million in 2003, 2002 and 2001, respectively.
Claims and Litigation
Foamex L.P. evaluates claims for damages 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
F-11
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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 7.
Accounting Changes
In April 2002, the FASB issued 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"). The provisions of
SFAS No. 145 related to the rescission of Statement 4 are applied in fiscal
years beginning after May 15, 2002. Any gain or loss on extinguishment of debt
that was classified as an extraordinary item in prior periods presented that
does not meet the criteria in Opinion 30 for classification as an extraordinary
item is reclassified. Foamex L.P. has reclassified the extraordinary charge of
$2.8 million previously reported in 2002.
In June 2001, the FASB issued Statement of Financial Accounting Standards
No. 143, "Accounting for Asset Retirement Obligations" ("SFAS No. 143"). The
provisions of SFAS No. 143 relate to financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. Foamex L.P. adopted SFAS No. 143 at the
beginning of 2003 and the impact on its financial statements was not material.
In June 2002, the FASB issued Statement of Financial Accounting Standards
No. 146, "Accounting for Costs Associated with Exit or Disposal Activities"
("SFAS No. 146"). The provisions of SFAS No. 146 require that a liability for
the cost associated with an exit or disposal activity be recognized and measured
initially at fair value only when the liability is incurred. Foamex L.P. adopted
SFAS No. 146 at the beginning of 2003, but since it had no significant exit or
disposal activities in 2003, SFAS No. 146 had no impact on the financial
statements.
In May 2003, the FASB issued Statement of Financial Accounting Standards
No. 150, "Accounting for Certain Financial Instruments with Characteristics of
both Liabilities and Equity" ("SFAS No. 150"). The provisions of SFAS No. 150
require that certain financial instruments be classified as liabilities instead
of equity. Foamex L.P. does not have any financial instruments subject to the
requirements of SFAS No. 150.
In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees Of Indebtedness of Others" ("FIN No. 45"). The provisions of FIN No.
45 clarify the requirements of SFAS No. 5. "Accounting for Contingencies,"
relating to the guarantor's accounting for and disclosure of certain guarantees.
The initial recognition and measurement provisions of FIN No. 45 are applicable
to guarantees issued or modified after December 31, 2002 and the disclosure
requirements are effective for financial statements of interim or annual periods
ended after December 15, 2002. The adoption of FIN No. 45 did not have any
impact on the results of operations or financial position of Foamex L.P. and it
does not have any disclosure obligations under FIN No. 45 at December 28, 2003.
In January 2003, the FASB issued FASB Interpretation No. 46, "
Consolidation of Variable Interest Entities" ("FIN No. 46") which was amended in
October 2003 and replaced with FIN No. 46R in January 2004. Foamex L.P. does not
believe that it has any "Variable Interest Entities" as defined by FIN No. 46R
and accordingly, the adoption of FIN No. 46R will not have an impact on its
financial statements.
F-12
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Reclassifications
Certain amounts from prior years have been reclassified to conform with the
current presentation.
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 $9.1
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. CUMULATIVE EFFECT OF ACCOUNTING CHANGE
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
2003
During 2003, Foamex L.P. recorded restructuring credits of $1.8 million
consisting of a $3.2 million reduction in the liability primarily for severance
and termination benefits no longer required as the actions contemplated under
the related plans have been substantially completed, and a charge of $1.1
million for additional lease termination costs for a closed facility as a result
of changes in real estate market conditions. Additionally, Foamex L.P. recorded
a $0.3 million restructuring charge reported in the Other segment as a result of
an employee termination plan for approximately 300 employees at its Mexico City
operations. The actions under this plan were substantially completed in 2003.
2002
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 and the remainder in 2003.
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.
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
F-13
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. RESTRUCTURING, IMPAIRMENT AND OTHER CHARGES (continued)
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 and the remainder in 2003.
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.
The 2001 Operational Reorganization Plan was substantially completed in
early 2003 and Foamex L.P. completed all of the remaining facility closures and
personnel reductions related to its 2002 restructuring plan during 2003.
Terminations of approximately 300 employees for both plans took place in 2003.
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
-------- ------------- ---------- ------------ ----------
2001 (millions)
Balance at January 1, 2001 $ 9.2 $ 7.6 $1.8 $(0.2) $ -
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
2003
Adjustments (1.8) 0.2 (1.8) - (0.2)
Cash spending (11.3) (4.8) (5.5) - (1.0)
----- ----- ---- ----- ----
Balance at December 28, 2003 $ 9.7 $ 8.0 $0.9 $ - $0.8
===== ===== ==== ===== ====
Foamex L.P. expects to spend approximately $3.9 million during 2004 with
the balance to be spent through 2012, primarily for lease costs.
6. INVENTORIES
The components of inventory are listed below.
December 28, December 29,
2003 2002
------------ ------------
(thousands)
Raw materials and supplies $61,855 $60,588
Work-in-process 16,484 16,737
Finished goods 17,543 20,685
------- -------
Total $95,882 $98,010
======= =======
F-14
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. LONG-TERM DEBT AND REVOLVING CREDIT BORROWINGS
The components of long-term debt are listed below.
December 28, December 29,
2003 2002
------------ ------------
Foamex L.P. Senior Secured Credit Facility (thousands)
Term Loan (1) $ 48,214 $ -
Foamex L.P. Secured Term Loan (1) 80,000 -
Foamex L.P. Amended Credit Facility
Term Loan B (2) - 39,262
Term Loan C (2) - 35,693
Term Loan D (2) - 51,700
Term Loan E (2) - 16,290
Term Loan F (2) - 19,243
Revolving credit facility (2) - 51,823
10 3/4% Senior Secured Notes due 2009 (3) (4) 311,950 314,237
9 7/8% Senior Subordinated Notes due 2007 (3) 148,500 148,500
13 1/2% Senior Subordinated Notes due 2005 (includes
$1,543 and $2,486 of unamortized debt premium) (3) 53,128 54,071
Industrial revenue bonds 7,000 7,000
Other (net of unamortized debt discount of $93 in 2003
and $137 in 2002) 766 767
-------- --------
649,558 738,586
Less current portion 8,937 46
-------- --------
Long-term debt $640,621 $738,540
======== ========
Revolving credit borrowings (1) $ 96,065 $ -
======== ========
(1) Debt of Foamex L.P., guaranteed by Foamex International, FMXI, Inc. and
Foamex Canada.
(2) Debt of Foamex L.P., guaranteed by Foamex International and FMXI, Inc.
(3) Debt of Foamex L.P. and Foamex Capital Corporation.
(4) Includes $12.0 million in 2003 and $14.2 million in 2002 of deferred
credits on interest rate swap transactions.
Senior Secured Credit Facility
On August 18, 2003, Foamex L.P. entered into a $240.0 Million Senior
Secured Credit Facility with a new group of lenders and an $80.0 million term
loan facility with another lender. Proceeds borrowed under these new facilities
were used to repay all outstanding balances under the Foamex L.P. Amended Credit
Facility which was terminated as of August 18, 2003. In addition, Foamex
Canada's revolving credit facility that did not have any outstanding borrowings
and had availability of approximately $5.9 million was terminated as of August
18, 2003. The termination of the Amended Credit Facility resulted in a write off
of debt issuance costs of $12.9 million recorded in 2003.
The $240.0 Million Senior Secured Credit Facility consists of a revolving
credit facility with a maximum availability of $190.0 million and a term loan of
$50.0 million. The revolving credit facility includes a $50.0 million sublimit
for letters of credit and availability is limited to eligible amounts, as
defined, of accounts receivable and inventory. At December 28, 2003, Foamex L.P.
had available borrowings of approximately $46.8 million and letters of credit
outstanding of $20.9 million. Borrowings under the term loan are limited to
eligible amounts, as defined, of equipment and real estate. Substantially all
the assets of Foamex L.P. and its domestic subsidiaries and Foamex Canada are
pledged as collateral for the related borrowings. Borrowings under the revolving
credit facility and the term loan bear interest at floating rates based upon and
including a margin over either LIBOR or a Base Rate, as
F-15
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. LONG-TERM DEBT AND REVOLVING CREDIT BORROWINGS (continued)
defined. At December 28, 2003, the weighted average interest rates were 4.53%
and 4.42% for the revolving loans and the term loan, respectively. The term loan
requires quarterly installment payments of approximately $1.8 million, which
commenced on September 30, 2003. All borrowings under the $240.0 Million Senior
Secured Credit Facility will mature on April 30, 2007. The $240.0 Million Senior
Secured Credit Facility includes both a subjective acceleration clause and a
lockbox arrangement which requires all lockbox receipts be used to repay
revolving credit borrowings. Accordingly, borrowings under the revolving credit
facility are classified as current in the accompanying consolidated balance
sheet as of December 28, 2003 as required by Emerging Issues Task Force Issue
No. 95-22, "Balance Sheet Classification of Borrowings Outstanding Under
Revolving Credit Agreements that Include both a Subjective Acceleration Clause
and a Lockbox Arrangement" ("EITF No. 95-22").
The $80.0 million term loan facility (the "Secured Term Loan") will mature
on April 30, 2007. Borrowings under this facility will bear interest at a rate
that is 9.25% plus the greater of the Reference Rate, as defined, or 4.25%. The
minimum rate, which is in effect as of December 28, 2003, is 13.50%. In
addition, Foamex L.P. is subject to a 1.00% facility fee which is payable
annually on the anniversary date. Borrowings under the Secured Term Loan are
collateralized by the same collateral as the $240.0 Million Senior Secured
Credit Facility. An intercreditor agreement governs the distribution of
collateral among the lenders under the $240.0 Million Senior Secured Credit
Facility and the Secured Term Loan.
10 3/4% Senior Secured Notes
The 10 3/4% Senior Secured Notes were issued by Foamex L.P. and Foamex
Capital Corporation on March 25, 2002 and are due on April 1, 2009. The notes
are guaranteed on a senior basis by all of Foamex L.P.'s domestic subsidiaries
that guarantee the $240.0 Million Senior Secured Credit Facility. The notes are
secured on a second-priority basis (subject to permitted liens) on substantially
the same collateral that secures the obligations under the $240.0 Million Senior
Secured Credit Facility and the Secured Term Loan. The notes rank effectively
junior to all senior indebtedness that is secured by first priority liens and
senior in right of payment to all subordinated indebtedness. Interest is payable
April 1 and October 1. The notes may be redeemed at the option of Foamex L.P.,
in whole or in part, at any time on or after April 1, 2006. The initial
redemption is at 105.375% of their principal amount, plus accrued and unpaid
interest, if any, thereon to the date of redemption and declining annually to
100.0% on or after April 1, 2008. Additionally, on or before April 1, 2005, up
to 35.0% of the principal amount of the notes may be redeemed at a redemption
price equal to 110.750% of the principal amount, plus accrued and unpaid
interest, if any, thereon to the date of redemption with the net proceeds of one
or more equity offerings.
Upon the occurrence of a change of control, as defined, each holder will
have the right to require Foamex L.P. to tender for such notes at a price in
cash equal to 101.0% of the aggregate principal amount thereof, plus accrued and
unpaid interest, if any, if there is such a "change of control".
Foamex L.P. was required to cause a registration statement under the
Securities Act of 1933 to be effective within 180 days of March 25, 2002. Foamex
L.P. filed the registration statement, but it was not effective until January
30, 2003 and therefore Foamex L.P. was liable for liquidated damages from
September 23, 2002 until the date the registration statement became effective.
The liquidated damages were at the rate of $15,000 per week for the first 90
days, escalating by $15,000 per week for each additional 90 days. The liquidated
damages of $0.3 million were paid on April 1, 2003.
Effective May 1, 2002, Foamex L.P. completed a series of interest rate swap
transactions with notional amounts aggregating $300.0 million. Foamex L.P.
designated, documented and accounted for these interest rate swaps as fair value
hedges of its 10 3/4% Senior Secured Notes due April 1, 2009. The risk being
hedged in these transactions was the change in fair value of its 10 3/4% Senior
Secured Notes based on changes in the benchmark interest rate, LIBOR. The effect
of these interest rate swap transactions was to convert the fixed interest rate
on the senior secured notes to floating rates reset twice per year to correspond
with the interest payment dates for the 10 3/4% Senior Secured Notes. On
September 18, 2002, Foamex L.P. unwound the interest rate swap transactions in
exchange for net cash proceeds of $18.4 million, including $3.6 million realized
through lower effective interest
F-16
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. LONG-TERM DEBT AND REVOLVING CREDIT BORROWINGS (continued)
rates while the swap transactions were in effect. The unwinding resulted in a
deferred credit of $14.8 million which is being amortized through April 1, 2009,
using the effective interest rate method.
9 7/8% Senior Subordinated Notes
The 9 7/8% Senior Subordinated Notes were issued by Foamex L.P. and Foamex
Capital Corporation and are due on June 15, 2007. The notes represent
uncollateralized general obligations of Foamex L.P. and are subordinated to all
Senior Debt, as defined in the Indenture. Interest is payable June 15 and
December 15. The notes may be redeemed at the option of Foamex L.P., in whole or
in part, at any time on or after June 15, 2002. The initial redemption is at
104.938% of their principal amount, plus accrued and unpaid interest, if any,
thereon to the date of redemption and declining annually to 100.0% on or after
June 15, 2005. At December 28, 2003, the redemption price was 103.292% plus
accrued and unpaid interest.
Upon the occurrence of a change of control, as defined, each holder will
have the right to require Foamex L.P. to tender for such notes at a price in
cash equal to 101% of the aggregate principal amount thereof, plus accrued and
unpaid interest thereon, if there is such a "change of control". The notes are
subordinated in right of payment to all senior indebtedness and are pari passu
in right of payment to the 13 1/2% Senior Subordinated Notes (described below).
13 1/2% Senior Subordinated Notes
The 13 1/2% Senior Subordinated Notes were issued by Foamex L.P. and Foamex
Capital Corporation and are due on August 15, 2005. The notes represent
uncollateralized general obligations of Foamex L.P. and are subordinated to all
Senior Debt, as defined in the Indenture. Interest is payable semiannually on
February 15 and August 15. The notes may be redeemed at the option of Foamex
L.P., in whole or in part, at any time on or after August 15, 2000. The initial
redemption was 106.75% of their principal amount, plus accrued and unpaid
interest, if any, thereon to the date of redemption and declining annually to
100.0% on or after August 15, 2004. At December 28, 2003, the redemption price
was 101.6875% plus accrued and unpaid interest.
Upon the occurrence of a change of control, as defined, each holder will
have the right to require Foamex L.P. to tender for such notes at a price in
cash equal to 101% of the aggregate principal amount thereof, plus accrued and
unpaid interest, if any, thereon, if there is such a "change of control". The
notes are subordinated in right of the payment of all senior indebtedness and
are pari passu in right of payment to the 9 7/8% Senior Subordinated Notes
(described above).
Industrial Revenue Bonds ("IRBs")
IRB debt includes a $1.0 million bond that matures in 2005 and a $6.0
million bond that matures in 2013. Interest is based on a variable rate, as
defined, with options available to Foamex L.P. to convert to a fixed rate. At
December 28, 2003, the interest rate was 1.20% on the $1.0 million bond and
1.32% 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 $10.7 million at December 28, 2003.
Other
Other debt includes a non-interest bearing promissory note with a principal
amount of $0.9 million at December 28, 2003 issued in connection with increasing
Foamex L.P.'s interest in an Asian joint venture to 70.0% in 2001. The
promissory note had unamortized discount of $0.1 million at December 28, 2003.
F-17
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. LONG-TERM DEBT AND REVOLVING CREDIT BORROWINGS (continued)
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 International Holdings, Inc. ("Trace"), which
was formerly a major stockholder of Foamex International. 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 and other indebtedness agreements contain certain covenants
that limit, among other things, the ability of Foamex L.P. (i) to pay
distributions or redeem equity interests, (ii) to make certain restrictive
payments or investments, (iii) to incur additional indebtedness or issue
Preferred Equity Interests, as defined, (iv) to merge, consolidate or sell all
or substantially all of its assets, or (v) to enter into certain transactions
with affiliates or related persons. In addition, certain agreements contain
provisions that, in the event of a defined change of control or the occurrence
of an undefined material adverse change in the ability of the obligor to perform
its obligations, the indebtedness must be repaid, in certain cases, at the
option of the holder. Under the most restrictive of the distribution
restrictions, as of December 28, 2003, Foamex L.P. was able to distribute funds
to its partners, only to the extent to enable its partners to meet their tax
payment liabilities and Foamex International's normal operating expenses of up
to $1.5 million annually, so long as no default or event of default has
occurred.
On November 15, 2002, Foamex L.P. and its bank lenders executed an
amendment to the Amended Credit Facility. Under the amendment, Foamex L.P. was
subject to minimum net worth, minimum EBDAIT, as defined, and maximum capital
expenditure covenants through periods ending December 28, 2003. The minimum
EBDAIT covenant was tested monthly, on a cumulative basis, beginning with
December 2002. Foamex L.P. was in compliance with the revised covenants at
December 29, 2002 and throughout 2003 until the Amended Credit Facility was
terminated on August 18, 2003. Under the $240.0 Million Senior Secured Credit
Facility and the Secured Term Loan, Foamex L.P. is subject to a fixed charge
coverage ratio, as defined, of 1.00. For the two quarters ended December 28,
2003, Foamex L.P.'s fixed charge coverage ratio was 1.09. Foamex L.P. is also
subject to a maximum annual capital expenditure amount which was $17.7 million
for the year ended December 28, 2003 and will be $36.0 million for the year
ending January 2, 2005.
Maturities of Long-Term Debt
Scheduled maturities of long-term debt as of December 28, 2003 are shown
below (thousands):
2004 $ 8,937
2005 60,578
2006 7,143
2007 253,500
2008 -
Thereafter 306,000
-------
636,158
Unamortized debt premium/discount and fair value
adjustment, net 13,400
--------
Total $649,558
========
F-18
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. 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.
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. The benefits are only provided until the participant becomes eligible
for Medicare. Consequently, the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 will not impact the obligations or expense of Foamex
L.P. Foamex L.P. retains the right, subject to existing agreements, to modify or
eliminate these benefits.
The measurement date to determine pension assets and obligations is the
calendar year end.
Change in projected benefit obligations, plan assets and funded status
follows:
Pension Benefits Other Benefits
2003 2002 2003 2002
---------- ---------- --------- ----------
Change in Benefit Obligations (thousands)
Benefit obligations at beginning of year $107,390 $ 95,962 $1,248 $ 624
Service cost 4,300 3,866 29 29
Interest cost 7,086 6,556 76 82
Amendments 257 157 - -
Benefits paid (5,392) (5,003) (139) (144)
Plan participants' contributions - - 15 19
Actuarial loss 10,461 6,466 5 638
Foreign currency exchange rate changes 950 46 - -
Curtailment - (660) - -
-------- -------- ------ ------
Benefit obligation at end of year $125,052 $107,390 $1,234 $1,248
======== ======== ====== ======
Change in Plan Assets
Fair value of plan assets at
beginning of year $ 60,085 $ 65,514 $ - $ -
Actual return on plan assets 15,240 (7,350) - -
Employer contribution 9,564 7,464 124 125
Plan participants' contributions - - 15 19
Benefits paid (5,392) (5,003) (139) (144)
Plan administrative expenses (438) (591) - -
Foreign currency exchange rate changes 827 51 - -
-------- -------- ------ ------
Fair value of plan assets at end of year $ 79,886 $ 60,085 $ - $ -
======== ======== ====== ======
F-19
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. RETIREE BENEFIT PLANS (continued)
Pension Benefits Other Benefits
Funded Status and Net Amounts 2003 2002 2003 2002
---------- ---------- --------- ----------
Recognized in Consolidated Balance Sheets (thousands)
Funded status $(45,166) $(47,305) $(1,234) $(1,248)
Unrecognized transition asset (365) (440) - -
Unrecognized prior service cost (benefit) 92 (265) (47) 398
Unrecognized net actuarial loss (gain) 50,997 52,573 387 (53)
-------- -------- ------- -------
Net amount recognized in consolidated
balance sheets $ 5,558 $ 4,563 $ (894) $ (903)
======== ======== ======= =======
Amounts Recognized in the Consolidated
Balance Sheets
Prepaid benefit costs $ 224 $ 194 $ - $ -
Accrued benefit liability (39,896) (42,983) (894) (903)
Intangible assets 674 763 - -
Accumulated other comprehensive loss 44,556 46,589 - -
-------- -------- ------- -------
Net amount recognized $ 5,558 $ 4,563 $ (894) $ (903)
======== ======== ======= =======
The accumulated benefit obligation for all defined benefit plans was $119.5
million at year-end 2003 and $102.6 million at year-end 2002. Information for
defined benefit plans with an accumulated benefit obligation in excess of plan
assets is listed below.
December 31, 2003 December 31, 2002
----------------- -----------------
(thousands)
Projected benefit obligation $121,381 $104,843
Accumulated benefit obligation $116,767 $101,004
Fair value of plan assets $ 76,871 $ 58,021
Components of Net Periodic Benefit Plan Cost
Pension Benefits Other Benefits
--------------------------- -------------------------
2003 2002 2001 2003 2002 2001
------ ------ ------ ------ ------ ------
(thousands)
Service cost $4,300 $3,866 $3,666 $ 29 $ 29 $19
Interest cost 7,086 6,556 6,158 76 82 60
Expected return on plan assets (5,611) (5,823) (5,829) - - -
Amortization of transition assets (75) (75) (75) - - -
Amortization of prior service benefit (109) (140) (177) (6) (6) (6)
Amortization of net loss (gain) 3,090 1,643 1,163 16 15 (8)
Curtailment - (162) - - - -
------ ------ ------ ---- ---- ---
Net periodic benefit plan cost $8,681 $5,865 $4,906 $115 $120 $65
====== ====== ====== ==== ==== ===
Additional Information
Pension Benefits Other Benefits
2003 2002 2003 2002
---------- ---------- --------- ----------
(thousands)
Increase (decrease) in minimum liability
included in other comprehensive loss $(2,033) $18,267 N/A N/A
F-20
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. RETIREE BENEFIT PLANS (continued)
Pension Benefits Other Benefits
----------------------- -----------------------
Weighted-Average Assumptions Used December 31, December 31,
-
to Determine Benefit Obligations 2003 2002 2003 2002
---------- ---------- --------- ----------
Discount rate 6.0% 6.5% 6.0% 6.5%
Expected long-term return on plan assets* 9.0% 9.0% N/A N/A
Rate of compensation increase 3.5%-5.0% 4.0%-5.0% N/A N/A
Weighted-Average Assumptions Used Pension Benefits Other Benefits
------------------------ -------------------------
to Determine Annual Net Benefit Cost 2003 2002 2003 2002
---------- ---------- --------- ----------
Discount rate 6.5% 7.0% 6.5% 7.0%
Expected long-term return on plan assets* 9.0% 9.0% N/A N/A
Rate of compensation increase 4.0%-5.0% 4.0%-7.0% N/A N/A
* The determination of the expected long-term rate of return is a combination
of historical returns and future return assumptions based on Foamex L.P.'s
pension plan asset strategy as discussed below.
Other Benefits
-------------------------------------
Assumed Health Care Cost Trend Rates December 31, 2003 December 31, 2002
----------------- -----------------
Health care cost trend rate assumed for next year 12.0% 13.0%
Rate to which the cost trend rate is assumed to
decline (ultimate trend rate) 5.0% 5.0%
Year that the rate reaches the ultimate trend rate 2011 2011
Assumed health care cost trend rates have a significant effect on the
amounts reported for the health care plans. A one-percentage point change in
assumed health care cost trend rates would have the effects listed below.
Assumed Health Care Cost Trend
1% Point Increase 1% Point Decrease
----------------- -----------------
(thousands)
Effect on total of service cost and interest cost $ 9 $ (8)
Effect on postretirement benefit obligation $90 $(79)
Funding, Investment Strategy, Asset Allocations and Risk Management for Plan
Assets.
Pension plan assets are primarily comprised of equity and debt securities,
including both U.S. and foreign securities. At year-end 2003, common stock of
Foamex International totaled $2.1 million, or 2.8% of the assets. At year-end
2002, common stock of Foamex International totaled $1.3 million, or 2.4% of the
assets. Pension plan assets from pension plans in Canada totaled $5.5 million,
or 6.9% of assets at year-end 2002 and $3.8 million, or 6.4% of assets, at
year-end 2002.
U. S. Plan Assets
---------------------------------------
December 31, 2003 December 31, 2002
----------------- -----------------
Equity securities 64% 58%
Debt securities 30 33
Other 6 9
--- ---
Total 100% 100%
=== ===
F-21
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. RETIREE BENEFIT PLANS (continued)
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 U.S. Internal Revenue Code. Funding in 2004 is
estimated to be $11.8 million.
For the U.S. pension plans, the investment strategy, asset allocations and
risk management strategies are detailed in the Investment Policy Statement (the
"IPS") of Foamex L.P. The IPS was developed in conjunction with a comprehensive
review and assessment of current and projected financial requirements.
Investment guidelines are based on an investment horizon of greater than five
years. Key risk management considerations include asset allocation and asset
class mix, control procedures and performance monitoring and review. Under the
IPS, the U.S. pension plan may use certain classes of hedge funds (derivatives),
but the amount of hedge funds is limited to less than 3% of U.S. plan assets.
The strategic target of U.S. pension assets include 60% of equities and 40%
of debt securities and cash and cash equivalents. The amount of cash equivalents
is targeted to approximate one year of benefit payments to plan participants.
Defined Contribution Plan
Foamex L.P. maintains a defined contribution plan, which is qualified under
Section 401(k) of the Internal Revenue 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 $0.9 million, $1.0 million and $1.0 million in 2003, 2002 and
2001, respectively.
9. INCOME TAXES
The sources of income (loss) before the provision for income taxes are
shown below.
2003 2002 2001
----------- ------------ -----------
(thousands)
United States $(26,893) $(30,158) $(6,696)
Foreign 974 4,745 7,978
-------- -------- -------
Income (loss) before provision for income taxes $(25,919) $(25,413) $ 1,282
======== ======== =======
A reconciliation of the statutory federal income tax to income tax expense
is listed below.
2003 2002 2001
------------ ------------ -----------
(thousands)
Statutory income taxes $(9,072) $(8,895) $ 449
State income taxes, net of federal benefit (831) (810) (368)
Permanent difference on partnership income 9,668 11,816 2,712
Increase (decrease) in valuation allowance 649 332 (526)
Non-deductible amortization - - 1,391
Impact of tax rate change 85 - -
Other, net 995 (652) (115)
------- ------- --------
Total $ 1,494 $ 1,791 $ 3,543
======= ======= =======
F-22
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. INCOME TAXES (continued)
The provision for income taxes is summarized as follows:
2003 2002 2001
------------ ------------ -----------
Current (thousands)
Federal $ - $ - $ -
State 60 226 239
Foreign 1,286 2,423 2,594
------ ------ ------
Total current 1,346 2,649 2,833
------ ------ ------
Deferred
Federal - - 576
State - (518) 320
Foreign (501) (672) 340
------ ------ ------
Total deferred (501) (1,190) 1,236
------ ------ ------
Change in valuation allowance 649 332 (526)
------ ------ ------
Total provision for income taxes $1,494 $1,791 $3,543
====== ====== ======
The tax effect of the temporary differences that give rise to deferred
income tax assets and liabilities are listed below.
December 28, December 29,
2003 2002
------------ ------------
(thousands)
Loss carryforwards and other $ 3,602 $ 2,547
Valuation allowance for deferred income tax assets (1,810) (1,161)
------- -------
Deferred income tax assets 1,792 1,386
------- -------
Deferred income tax liabilities
Basis difference in property, plant and equipment (512) (586)
Investment in joint venture (771) (771)
Other (2,175) (1,674)
------- -------
Deferred income tax liabilities (3,458) (3,031)
------- -------
Net deferred income tax liabilities $(1,666) $(1,645)
======= =======
At December 28, 2003, Foamex L.P. had $3.4 million of net operating loss
carryforwards in a Mexican subsidiary that expire in 2006 through 2013. A full
valuation allowance has been recorded at December 28, 2003 and December 29, 2002
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 $5.2 million
at December 28, 2003 and $13.4 million at December 29, 2002, 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.
10. 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 28, 2003,
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.
F-23
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. PARTNERS' DEFICIENCY (continued)
Accumulated Other Comprehensive Loss
The components of accumulated other comprehensive loss are listed below.
2003 2002 2001
----------- ----------- -----------
(thousands)
Foreign currency translation adjustment $ (3,257) $ (9,869) $ (8,000)
Minimum pension liability (44,556) (46,589) (28,322)
-------- -------- --------
$(47,813) $(56,458) $(36,322)
======== ======== ========
11. BUSINESS SEGMENTS
The reportable business segments reflect Foamex L.P.'s management
organization that is 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 (credits) (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. At the end of 2003, Foamex L.P. changed its
measure of segment operating income to exclude allocation of corporate overhead,
as management no longer evaluates the performance of segments using this
allocation. Rather, Foamex L.P. attempts to manage and control these costs
independent of segment performance. Segment results for 2002 and 2001 have been
adjusted to reflect this change for comparative purposes. 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 16.3%, 17.3% and 15.7% of net sales in 2003, 2002 and 2001,
respectively. No other customer accounted for more than 10.0% of net sales
during the periods presented.
F-24
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. BUSINESS SEGMENTS (continued)
Business segment results are presented below.
Carpet
Foam Cushion Automotive Technical
Products Products Products Products Other Total
-------- -------- ---------- --------- --------- ------------
2003 (thousands)
Net sales $507,586 $208,855 $447,068 $117,450 $ 23,601 $1,304,560
Income (loss) from operations $ 43,983 $ 5,395 $ 33,399 $ 32,115 $(50,456) $ 64,436
Depreciation and amortization $ 11,002 $ 3,275 $ 2,815 $ 2,931 $ 6,022 $ 26,045
2002
Net sales $471,005 $234,001 $466,718 $124,124 $ 32,246 $1,328,094
Income (loss) from operations $ 45,466 $ 1,239 $ 34,146 $ 35,185 $(71,459) $ 44,577
Depreciation and amortization $ 13,632 $ 5,904 $ 3,721 $ 2,815 $ 5,520 $ 31,592
2001
Net sales $499,668 $230,965 $377,753 $111,043 $ 33,475 $1,252,904
Income (loss) from operations $ 81,144 $ 7,422 $ 27,040 $ 32,692 $(85,133) $ 63,165
Depreciation and amortization $ 11,018 $ 5,390 $ 4,150 $ 2,670 $ 10,760 $ 33,988
Results by geographical area are presented below.
United
States Canada Mexico Consolidated
-------- -------- -------- ------------
2003 (thousands)
Net sales $989,075 $67,542 $247,943 $1,304,560
Property, plant and equipment, net $142,602 $ 5,003 $ 15,245 $ 162,850
2002
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
12. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
2003 2002 2001
------------ ------------ -----------
(thousands)
Cash paid for interest $72,785 $56,583 $63,593
======= ======= =======
Cash paid for income taxes, net $ 2,349 $ 2,222 $ 1,870
======= ======= =======
Non cash - capital leases $ - $ - $ 299
======= ======= =======
Non cash - debt exchanged for increased ownership
in joint venture $ - $ - $ 1,069
======= ======= =======
F-25
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. RELATED PARTY TRANSACTIONS AND BALANCES
Foamex L.P. regularly enters into transactions with its affiliates in the
ordinary course of business.
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. 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 bankruptcy filing and financial condition, 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 28, 2003 and December 29, 2002, operating accounts receivable
from Trace were approximately $3.4 million. These accounts receivable were fully
reserved for prior to 2001.
Foam Funding LLC Debt
Foamex L.P. paid interest on notes payable to Foam Funding LLC of $0.7
million and $2.8 million in 2002 and 2001, respectively. Foamex L.P. paid
principal on notes payable to Foam Funding LLC of $31.6 million and $15.8
million in 2002 and 2001, respectively. This debt was fully repaid in 2002 (see
Note 7).
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. Foamex L.P. also maintains an apartment used by this
director. Rent expense for this facility was $0.2 million in 2003, 2002 and
2001.
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-26
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. 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 had 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
had the option to terminate the employment agreement within 90 days and
exercised the termination option in January 2003. This director did not stand
for reelection at Foamex International's annual shareholders meeting held on May
23, 2003. During 2002, Foamex L.P. paid $0.5 million to the director's business
for consulting services.
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. That director resigned from the Board in late 2002.
14. 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 required
under operating leases at December 28, 2003 are (thousands):
2004 $14,076
2005 10,191
2006 6,472
2007 4,930
2008 3,321
Balance 5,925
-------
Total $44,915
=======
Rental expense charged to operations under operating leases approximated
$18.8 million, $23.4 million and $20.2 million in 2003, 2002 and 2001,
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
$105.2 million in 2004, $57.1 million in 2005, $66.4 million in 2006, $63.4
million in 2007 and $59.5 million for each of the years 2008, 2009 and 2010.
Litigation
Foamex L.P. is party to various lawsuits, both as defendant and plaintiff,
arising in the normal course of business. It is the opinion of management that
the disposition of these lawsuits will not, individually or in the aggregate,
have a material adverse effect on Foamex L.P.'s financial position or results of
operations. If
F-27
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. COMMITMENTS AND CONTINGENCIES (continued)
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 28, 2003, Foamex L.P. had accrued approximately $1.1 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 28, 2003, Foamex L.P. had accruals of approximately $2.5
million for environmental matters, including approximately $2.3 million related
to remediating and monitoring soil and groundwater contamination and
approximately $0.2 million related to sites where it has been designated as a
Potentially Responsible Party, or "PRP", by the EPA or a state authority, and
other matters. Additional losses, if any, in excess of amounts currently
accrued, cannot be reasonably estimated at this time. If there are additional
matters or if our current estimates are incorrect, there could be a material
adverse effect on Foamex L.P.'s financial position, results of operations and
cash flows.
On August 31, 2002, Environment Canada, the Canadian environmental
regulatory agency, finalized a rule which would require flexible polyurethane
foam manufacturing operations to reduce methylene chloride (dichloromethane) air
emissions. The rule establishes a 50.0% reduction in methylene chloride
emissions by December 1, 2004 and 100.0% reductions by January 1, 2007. This
standard will not 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 PRP by the
EPA or by state environmental agencies or other PRPs, pursuant to CERCLA or
analogous state statutes, with respect to 11 sites. Estimates of total cleanup
costs and fractional allocations of liability are often provided by the EPA, the
state environmental agency or the committee of PRPs with respect to the
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.
The possibility exists, that new environmental legislation and/or
environmental regulations may be adopted, or other environmental conditions,
including the presence of previously unknown environmental contamination, may be
found to exist or a reassessment of the potential exposure to pending
environmental matters may be necessary due to new information or future
developments, that may require expenditures not currently anticipated and that
may be material.
F-28
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. GUARANTOR INFORMATION
The payment obligations of Foamex L.P. and Foamex Capital Corporation under
the 10 3/4% Senior Secured Notes are guaranteed by Foamex L.P.'s 100% 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 28, 2003 and December 29, 2002 and the condensed
consolidating statements of operations and cash flows for the years ended
December 28, 2003, December 29, 2002 and December 31, 2001 of the Guarantors and
nonguarantors. The Guarantors include Foamex Carpet, Foamex Latin America, Inc.,
Foamex Mexico, Inc., Foamex Mexico II, Inc. and Foamex Asia, Inc. On December
30, 2002, Foamex Carpet distributed certain assets, liabilities and its business
to Foamex L.P. and accordingly, Foamex Carpet is not included as a guarantor in
the financial information as of December 28, 2003 and for the year then ended.
The nonguarantors are Foamex Canada Inc. and Grupo Foamex de Mexico, S.A. de
C.V. and its subsidiaries. The following financial information is intended to
provide information for the Guarantors and nonguarantors of Foamex L.P. based on
amounts derived from the financial statements of Foamex L.P.
Condensed Consolidating Balance Sheet
As of December 28, 2003
Foamex
Capital Foamex L.P. Consolidated
Guarantors Nonguarantors Corporation (Parent) Eliminations Foamex L.P.
---------- ------------- ----------- ----------- ------------ ------------
Assets (thousands of dollars)
Current assets $ 419 $31,859 $ 1 $283,144 $ (4,356) $311,067
Investment in subsidiaries 10,513 - - 43,598 (54,111) -
Property, plant and equipment, net - 19,736 - 143,114 - 162,850
Goodwill - 5,772 - 120,486 - 126,258
Debt issuance costs - - - 27,195 - 27,195
Other assets 13,857 2,125 - 30,853 (9,050) 37,785
------- ------- ------ -------- -------- --------
Total assets $24,789 $59,492 $ 1 $648,390 $(67,517) $665,155
======= ======= ====== ======== ======== ========
Liabilities and Partners' Deficiency
Current liabilities $ 585 $18,746 $ - $277,393 $ (4,356) $292,368
Long-term debt 4,957 4,851 - 639,863 (9,050) 640,621
Other liabilities - 1,032 - 56,265 - 57,297
------- ------- ------ -------- -------- --------
Total liabilities 5,542 24,629 - 973,521 (13,406) 990,286
Partners' deficiency 19,247 34,863 1 (325,131) (54,111) (325,131)
------- ------- ------ -------- -------- --------
Total liabilities and partners'
deficiency $24,789 $59,492 $ 1 $648,390 $(67,517) $665,155
======= ======= ====== ======== ======== ========
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
======= ======= ====== ======== ======== =========
F-29
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. GUARANTOR INFORMATION (continued)
Condensed Consolidating Statement of Operations
For the year ended December 28, 2003
Foamex
Capital Foamex L.P. Consolidated
Guarantors Nonguarantors Corporation (Parent) Eliminations Foamex L.P.
---------- ------------- ----------- ----------- ------------ ------------
(thousands of dollars)
Net sales $ - $105,604 $ - $1,222,399 $(23,443) $1,304,560
Cost of goods sold - 95,567 - 1,088,746 (23,443) 1,160,870
------- -------- ------ ---------- -------- ----------
Gross profit - 10,037 - 133,653 - 143,690
Selling, general and administrative
expenses - 7,399 - 73,614 - 81,013
Restructuring, impairment and other
charges (credits) - 320 - (2,079) - (1,759)
------- -------- ------ ---------- -------- ----------
Income from operations - 2,318 - 62,118 - 64,436
Interest and debt issuance expense 234 25 - 88,303 (188) 88,374
Equity in undistributed earnings
of affiliates (1,156) - - (379) 3,001 1,466
Other expense, net 190 (2,784) - (665) (188) (3,447)
------- -------- ------ ---------- -------- ----------
Loss before provision for income
taxes (1,200) (491) - (27,229) 3,001 (25,919)
Provision for income taxes - 1,310 - 184 - 1,494
------- -------- ------ ---------- -------- ----------
Net loss $(1,200) $ (1,801) $ - $ (27,413) $ 3,001 $ (27,413)
======= ======== ====== ========== ======== ==========
F-30
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. 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 221,947 100,676 - 1,030,338 (168,569) 1,184,392
-------- -------- ------ ---------- --------- ----------
Gross profit 18,669 12,221 - 112,812 - 143,702
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 5,340 - 33,164 - 44,577
Interest and debt issuance expense 4,046 44 - 66,268 (679) 69,679
Equity in undistributed earnings
of affiliates (4,103) - - (28,199) 34,036 1,734
Other income (expense), net 496 (2,283) - 421 (679) (2,045)
-------- -------- ------ ---------- --------- ----------
Loss before provision for income
taxes (1,580) 3,013 - (60,882) 34,036 (25,413)
Provision for income taxes (20) 1,751 - 60 - 1,791
-------- -------- ------ ---------- --------- ----------
Loss before cumulative effect of
accounting change (1,560) 1,262 - (60,942) 34,036 (27,204)
Cumulative effect of accounting change (29,944) (3,794) - (38,228) - (71,966)
-------- -------- ------ ---------- --------- ----------
Net loss $(31,504) $ (2,532) $ - $ (99,170) $ 34,036 $ (99,170)
======== ======== ====== ========== ========= ==========
F-31
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. 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 99,742 - 932,308 (171,035) 1,074,385
-------- -------- ------ ---------- --------- ----------
Gross profit 24,138 12,360 - 142,021 - 178,519
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 5,001 - 51,140 - 63,165
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) 1,610 - (1,398) - (291)
-------- -------- ------ ---------- --------- ----------
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-32
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15 GUARANTOR INFORMATION (continued)
Condensed Consolidating Statement of Cash Flows
For the year ended December 28, 2003
Foamex
Capital Foamex L.P. Consolidated
Guarantors Nonguarantors Corporation (Parent) Eliminations Foamex L.P.
---------- ------------- ----------- ----------- ------------ ------------
(thousands of dollars)
Cash Flows from Operating Activities
Net income (loss) $(1,200) $(1,801) $ - $(27,413) $3,001 $(27,413)
Total adjustments to reconcile net
income (loss) to net cash provided
by operating activities 1,119 6,429 - 40,887 (2,920) 45,515
------- ------- ------- -------- ------ --------
Net cash provided by operating
activities (81) 4,628 - 13,474 81 18,102
------- ------- ------- -------- ------ --------
Cash Flows from Investing Activities
Capital expenditures - (1,740) - (5,806) 1,003 (6,543)
Other 81 - - (1,089) (1,084) (2,092)
------- ------- ------- -------- ------ --------
Net cash used in investing activities 81 (1,740) - (6,895) (81) (8,635)
------- ------- ------- -------- ------ --------
Cash Flows from Financing Activities
Net proceeds from (repayments of)
revolving loans - - - 44,242 - 44,242
Proceeds from long-term debt - - - 130,000 - 130,000
Repayments of long-term debt - - - (164,020) - (164,020)
Other, net - - - (17,442) - (17,442)
------- ------- ------- -------- ------ --------
Net cash used in financing activities - - - (7,220) - (7,220)
------- ------- ------- -------- ------ --------
Net increase (decrease) in cash and
cash equivalents - 2,888 - (641) - 2,247
Cash and cash equivalents at
beginning of period - 1,781 1 2,581 - 4,363
------- ------- ------- -------- ------ --------
Cash and cash equivalents at
end of period $ - $ 4,669 $ 1 $ 1,940 $ - $ 6,610
======= ======= ======= ======== ====== ========
F-33
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. 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-34
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. 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
======= ====== ======== ======= ======= ========
16. SUBSEQUENT EVENT
Effective February 10, 2004, Foamex International's Chairman resigned his
position by mutual agreement with Foamex International's Board of Directors.
In connection with this resignation, Foamex International entered into a
separation agreement with the former Chairman and Foamex L.P. will record a
one-time charge of approximately $1.4 million in the first quarter of 2004 for
amounts payable under this agreement, none of which relate to past service
rendered by the former Chairman. Additionally, Foamex L.P. will record the
reversal of approximately $1.4 million reflected on the balance sheet as of
December 28, 2003 related to various retirement provisions contained in an
employment agreement with Foamex International that are no longer payable to the
former Chairman under the terms of the separation agreement.
F-35
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 28, 2003
and December 29, 2002. 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 28, 2003 and December 29,
2002, in conformity with accounting principles generally accepted in the United
States of America.
/s/ DELOITTE & TOUCHE LLP
March 9, 2004
Parsippany, New Jersey
F-36
FOAMEX CAPITAL CORPORATION
(A Wholly-Owned Subsidiary of Foamex L.P.)
BALANCE SHEETS
December 28, December 29,
2003 2002
------------ ------------
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-37
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
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 FCC (the
"Issuers") on March 25, 2002 and are due on April 1, 2009. The notes are
guaranteed on a senior basis by all of Foamex L.P.'s domestic subsidiaries that
guarantee the $240.0 Million Senior Secured Credit Facility. The notes are
secured on a second-priority basis (subject to permitted liens) on substantially
the same collateral that secures the obligations under the $240.0 Million Senior
Secured Credit Facility and the Secured Term Loan. The notes rank effectively
junior to all senior indebtedness that is secured by first priority liens and
senior in right of payment to all subordinated indebtedness. Interest is payable
April 1 and October 1. The notes may be redeemed at the option of the Issuers,
in whole or in part, at any time on or after April 1, 2006. The initial
redemption is at 105.375% of their principal amount, plus accrued and unpaid
interest 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 the Issuers to tender for such notes at a price in
cash equal to 101.0% of the aggregate principal amount thereof, plus accrued and
unpaid interest, if any, if there is such a "change of control".
9 7/8% Senior Subordinated Notes due 2007 ("9 7/8% Senior Subordinated
Notes")
The 9 7/8% Senior Subordinated Notes were issued by 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.
At December 28, 2003, the redemption price was 103.292% plus accrued and unpaid
interest.
Upon the occurrence of a change of control, as defined, each holder will
have the right to require 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).
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
F-38
FOAMEX CAPITAL CORPORATION
(A Wholly-Owned Subsidiary of Foamex L.P.)
NOTES TO BALANCE SHEETS
2. COMMITMENTS AND CONTINGENCIES (continued)
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 28, 2003, the redemption price was 101.6875% plus accrued and unpaid
interest.
Upon the occurrence of a change of control, as defined, each holder will
have the right to require 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).
F-39
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 28, 2003
Allowance for Uncollectible Accounts $ 7,963 $ 2,115 $ (217) $ 1,607 $ 8,254
======== ======== ======= ======= =======
Reserve for Discounts $ 2,348 $ - $13,429 (1) $13,526 $ 2,251
======== ======== ======= ======= =======
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
======== ======== ======= ======= =======
(1) Adjustments reflect a reduction in net sales.
S-2