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 January 2, 2005
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 31, 2005, 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 11
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 13
Item 7a. Quantitative and Qualitative Disclosures about Market Risk 27
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
Item 9b. Other Information 29
Part III
Item 10. Directors and Executive Officers of the Registrant 30
Item 11. Executive Compensation 30
Item 12. Security Ownership of Certain Beneficial Owners
and Management 30
Item 13. Certain Relationships and Related Transactions 30
Item 14. Principal Accounting Fees and Services 30
Part IV
Item 15 Exhibits, Financial Statement Schedules
and Reports on Form 8-K 30
Signatures 36
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 January 2, 2005,
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 January 2, 2005, 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 quilting rolls, 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), Sensus(R), Quiltflex(R),
Resilitex(R) and other viscoelastic "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 and distribute carpet cushion products, which include prime,
rebond, felt and rubber carpet padding. Prime carpet padding is made from virgin
polyurethane foam, which is formed into buns and sliced into sheets. 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 felt 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.
Technical Products
We are one of the industry's prime innovators and suppliers of specialty
foam material, which we refer to as "Technical Products," for a diverse array of
markets and industries. Technical Products can be tailored to meet a wide
variety of energy and fluid management challenges and are found in automotive,
industrial, electronics, consumer, medical, and other markets. Technical
Products are commonly used in applications such as gasketing and sealing systems
for automobiles, inkjet printer cartridges, rollers in digital imaging
equipment, noise and vibration damping for computer disc drives, air and fluid
filtration in cars and aircraft, medical devices, and numerous consumer items
such as sponges, mops, paint brushes and cosmetic applicators. Due to the highly
specialized nature of most Technical Products, a technical staff of engineering
and research and development experts work with customers to design, develop and
manufacture products to meet specific requirements. We provide technical support
from product conceptualization through prototyping and production and work
closely with the product developers, engineers, brand managers and research and
development staffs of both major OEMs in specific markets and with the
industry's premier foam fabricators to deliver innovative solutions to their
product needs and challenges.
Other
Other consists primarily of certain manufacturing and fabrication
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
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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 foam products 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. Although we own 70% of the joint venture, we do not control this
entity. The joint venture installed its first foam pourline during 2003. This
pourline, which was entirely financed by the joint venture entity, reduces 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 12.5% of our net sales in 2004, 16.3% of our net
sales in 2003, and 17.3% of our net sales in 2002. 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 29.6% of our net
sales in 2004, 34.7% of our net sales in 2003, 33.8% of our net sales in 2002.
The loss of any one of these customers could have a material adverse effect on
our business.
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.
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.
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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. There are a limited number
of major suppliers of 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. 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 and natural gas prices and the current geopolitical instability
and its impact on oil production and prices. We experienced increases of more
than 20% in the price of raw materials from major chemical manufacturers from
the first quarter of 2004 to the fourth quarter of 2004. Our major chemical
suppliers further increased the price of polyol by approximately 15% effective
in January 2005 and increased prices for both TDI and polyol by approximately
10% effective in March 2005. 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 January 2, 2005. 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 January 2, 2005, we employed approximately 5,500 persons.
Approximately 1,500 of these employees are located outside the United States,
including approximately 1,000 covered by collective bargaining agreements with
labor unions. Approximately 1,100 United States employees are covered by
collectively bargaining agreements at 8 facilities. These agreements expire on
various dates through 2008. 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., Crest Foam Industries, Inc., Wm. T.
Burnett & Co. 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 that our competitive
position is dependent upon 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 $2.8 million in 2004, $3.6 million for 2003 and $4.8
million for 2002.
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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 January 2, 2005, our total long-term debt and revolving
credit borrowings were approximately $750.5 million and our partners' deficiency
was approximately $355.6 million. As of January 2, 2005, we had approximately
$25.0 million in revolving loan availability and approximately $22.1 million in
outstanding letters of credit. We may also incur additional debt in the future,
subject to certain limitations contained in our debt agreements.
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 our 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 "Senior Secured Credit Facility")
and an $80.0 million Secured Term Loan with another lending group (the "Secured
Term Loan"), which, among other things, requires Foamex L.P. to meet a financial
covenant. On November 3, 2004, Foamex L.P. entered into amendments to the
financing agreements with the existing lenders under the Senior Secured Credit
Facility and the Secured Term Loan to provide up to $54.0 million of new
financing, the proceeds of which could be used only to repurchase prior to or
repay Foamex L.P.'s 13 1/2% senior subordinated notes currently in the face
amount of $51.6 million (the "13 1/2% Senior Subordinated Notes") due on August
15, 2005 and certain fees related to the new financing. The lenders under the
Senior Secured Credit Facility have agreed to lend up to $15.0 million under a
new junior term loan with a floating interest rate based upon either LIBOR, as
defined, reset monthly plus 6.00% or a Base Rate, as defined, plus 4.00% with a
maturity date of April 30, 2007. The lenders under the Secured Term Loan would
lend up to an additional $39.0 million with interest rates identical to the
rates under the existing Secured Term Loan. The Secured Term Loan maturity date
was also
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extended to April 1, 2009. Under the Senior Secured Credit Facility and the
Secured Term Loan, as amended, Foamex L.P. is subject to a fixed charge coverage
ratio, as defined, of 1.00 measured quarterly. On March 15, 2005, the lenders
executed waivers to the Senior Secured Credit Facility and the Secured Term
Loan, which waived compliance with the fixed charge coverage ratio for the four
consecutive quarter period ended January 2, 2005. On March 31, 2005, Foamex L.P.
entered into amendments with the existing lenders under the Senior Secured
Credit Facility and the Secured Term Loan which modified the fixed charge
coverage ratio for the first quarter of 2005 through the first quarter of 2006,
at which time the fixed charge coverage ratio will be 1.00 for the second
quarter of 2006 and thereafter, and permit borrowing of up to $25.0 million of
the additional $39.0 million commitment under the Secured Term Loan, the
proceeds of which would be used to repay revolving loans.. Foamex L.P.'s ability
to comply with the revised covenant will be substantially dependent on an
improved gross profit margin and lower administrative costs. If we are unable to
comply with the revised 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. .
For the last three fiscal years we have not generated enough cash flow from
operations sufficient to pay our debt service obligations and capital
expenditures. Our annual debt service obligations will increase by $2.4 million
per year for each 1% increase in interest rates, based on the balance of
variable rate debt outstanding as of January 2, 2005. Our estimated debt service
obligation for 2005 is $136.2 million, based on levels of debt and interest
rates in effect at January 2, 2005. As described in the previous risk factor, we
have arranged for additional borrowings under the Secured Term Loan and junior
term loan in the aggregate amount of up to $54.0 million to repay the 13 1/2%
Senior Subordinated Notes. If we do not generate sufficient cash flow from
operations to satisfy our other 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, as amended, the
Secured Term Loan, as amended, 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 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
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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 2004. Our major chemical suppliers implemented price increases of
approximately 15% for polyol effective January 15, 2005 and of approximately 10%
for both TDI and polyol effective in March 2005. 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. 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.
We depend on a limited number of suppliers of TDI and polyol.
There are a limited number of major suppliers of TDI and polyol. 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 including the costs for ongoing compliance with the
provisions of the Sarbanes-Oxley Act of 2002 (the "Act"). In 2004, we
experienced an increase in selling, general and administrative expenses, which
include expenditures for compliance with Section 404 and other provisions of the
Act. We could incur additional significant costs in implementing improvements to
our internal controls over financial reporting. If we incur such costs or are
otherwise 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 29.6% of our
net sales in 2004, 34.7% of our net sales in 2003 and 33.8% of our net sales in
2002. Sales to Johnson Controls, our largest customer, accounted for 12.5% of
our net sales in 2004, 16.3% of our net sales in 2003 and 17.3% of our net sales
in 2002. 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.
9
We are subject to extensive federal, state, local and foreign environmental laws
and regulations.
Our past and present business operations and the past and present ownership
and operation of our real property are subject to extensive and changing
federal, state, local and foreign environmental laws and regulations, including
those relating to the use, handling, storage, discharge and disposal of
hazardous substances, the discharge or emission of materials into the
environment and the remediation of environmental contamination. We are currently
remediating soil and groundwater contamination in excess of state standards at
several of our current and former facilities. Further, we are currently
designated as 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 12 sites. We have accrued our estimated costs for
remediation of these sites. If there are additional sites or our estimates are
not correct, there could be a material adverse effect on our financial condition
and results of operations. We cannot predict what environmental legislation or
regulations will be enacted in the future, how existing or future laws or
regulations will be administered or interpreted or what environmental conditions
may be found to exist on our properties. Compliance with more stringent laws or
regulations, as well as more vigorous enforcement policies of the regulatory
agencies or stricter interpretation of existing laws, and discovery of new
conditions may require us to make additional expenditures, which may be
material.
Our business is cyclical.
The polyurethane foam business is cyclical to the extent that our customers
are in cyclical industries. We are especially subject to the cyclical nature of
the automotive, housing, technology and furniture and bedding industries. A
protracted downturn in the businesses of our customers in any of these
industries, either simultaneously or sequentially, could have a material adverse
effect on our results of operations.
ITEM 2. PROPERTIES
As of January 2, 2005, we maintained 56 manufacturing and distribution
facilities. Total floor space in use at our 16 owned manufacturing and
distribution facilities is approximately 3.2 million square feet and total floor
space in use at our 40 leased manufacturing and distribution facilities is
approximately 4.6 million square feet. Forty-seven of these facilities are
located throughout 34 cities in the United States, four facilities are located
in Canada, and five facilities are located in Mexico. We have approximately 1.4
million square feet of idle space.
We do not anticipate any problem in renewing or replacing any of the leases
expiring in 2005.
We maintain administrative offices in Linwood, Pennsylvania.
Property information by business segment is not reported because many of
our facilities produce products for multiple business segments.
ITEM 3. LEGAL PROCEEDINGS
Litigation
We and our subsidiaries are party to various lawsuits, both as defendant
and plaintiff, arising in the normal course of business. It is the opinion of
management that the disposition of these lawsuits will not, individually or in
the aggregate, have a material adverse effect on our financial position or
results of operations. If management's assessment 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 January 2, 2005, we have accrued approximately $1.1 million for litigation,
claims and other legal matters in addition to the environmental matters
discussed below.
10
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 January 2, 2005, we had accruals of approximately $2.0 million
for environmental matters, including approximately $1.7 million related to
remediating and monitoring soil and groundwater contamination and approximately
$0.3 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, which we have implemented, and 100.0% reduction
by January 1, 2007. This standard has not required and 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.
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 12 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 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.
Other
In April 2004, we disclosed certain reportable conditions regarding our
internal controls. Subsequent to that disclosure, we became the subject of an
informal inquiry by the Securities and Exchange Commission relating to our
internal controls. We are currently negotiating a settlement of this matter with
the staff of the Securities and Exchange Commission.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
11
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 January 2, 2005, 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 January 2, 2005 and December 28, 2003, we have a
liability of approximately $0.3 million to our partners in accordance
with the tax sharing agreement.
Tax Sharing Distributions
2004 2003
---------- ----------
(thousands)
FMXI $ - $ -
Foamex International - -
----- -----
$ - $ -
===== =====
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. 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)
-------------------------------------------------------------------
2004 2003 2002 2001 (2) 2000
----------- ---------- ---------- ---------- -----------
(thousands)
Statements of Operations Data
Net sales $1,266,394 $1,304,560 $1,328,094 $1,252,904 $1,257,778
Income (loss) from continuing
operations (3)(4) $ (25,031) $ (27,413) $ (27,204) $ (2,261) $ 19,603
Balance Sheet Data
Total assets $ 645,706 $ 665,155 $ 695,283 $ 767,650 $ 753,584
Long-term debt, classified as current (5) $ 114,907 $ 96,065 $ - $ - $ -
Long-term debt, excluding current portion $ 568,461 $ 633,621 $ 738,540 $ 648,232 $ 687,758
Partners' deficiency $ (355,591) $ (325,131) $ (305,786) $ (178,128) $ (158,503)
(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 2004 fiscal year included the 53 weeks ended January 2,
2005. 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 4 to the consolidated financial statements included in
this Annual Report on Form 10-K. Listed below are the pretax charges
(credits).
12
2004 - $ 3.2 million
2003 - $ (1.8) million
2002 - $ 4.8 million
2001 - $36.1 million
2000 - $ 6.3 million
(4) The provision for income taxes in 2000 reflected the partial reversal of
the deferred income tax valuation allowance recognized in 1998.
(5) Revolving credit borrowings under Foamex L.P.'s 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").
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 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 10 to the consolidated financial statements. Please see Part I,
Item 1 "Business" for a more complete description of the activities of our
business segments.
13
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 prime, rebond, felt
and rubber carpet padding.
Automotive Products - distributes automotive foam products and laminates to
major Tier 1 suppliers and 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 and fabrication
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 net
sales. In 2004, our largest customer provided 12.5% of our net sales and our
five largest customers provided 29.6% 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 2004, except
for net cash provided by (used for) operating activities which is expressed in
millions of dollars.
2004 2003 2002 2001 2000 1999
------- ------- ------- ------- ------- ------
Net Sales 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of Goods Sold 88.8% 89.0% 89.2% 85.8% 86.3% 86.1%
Gross Profit Margin 11.2% 11.0% 10.8% 14.2% 13.7% 13.9%
Selling, General and
Administrative Expenses 6.9% 6.2% 7.1% 6.3% 5.4% 5.8%
Operating Income Margin 4.1% 4.9% 3.4% 5.0% 7.7% 7.3%
14
2004 2003 2002 2001 2000 1999
------- ------- ------- ------- ------- ------
Interest and Debt
Issuance Expense 6.1% 6.8% 5.2% 5.0% 6.0% 5.6%
Net Cash Provided by (Used
for) Operating Activities $0.2 $18.1 $(49.6) $108.7 $52.9 $68.6
As demonstrated by the table above, our results significantly deteriorated
in 2002 and improved only marginally in 2003 and 2004. 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 six year period with 2004
representing a decrease of 2.2% compared to 1999.
Our management is focusing on restoring former levels of profitability by
concentrating on the following key areas:
o Developing new value-added products that leverage our technical
capability and entering new markets with increased profit potential.
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.
The cost of major chemical raw materials increased several times effective
during the second half 2004, so that the weighted average cost of major
chemicals was more than 20% higher in the fourth quarter of 2004 than in the
first quarter of 2004. Primarily as a result of these raw material cost
increases, our gross profit margin declined to 8.7% in the fourth quarter of
2004. Our major chemical suppliers further increased the price of polyol by
approximately 15% effective in January 2005 and increased prices for both TDI
and polyol by approximately 10% effective in March 2005. There can be no
assurance that chemical prices will not further increase in 2005. In addition to
rising prices, some of the key chemicals we use have been in short supply and
availability may continue to be tight in the future. We manage raw material
costs by negotiating discounts and rebates for volume purchases and seeking
alternative sources of supply.
We have been only partially successful in raising selling prices to recover
raw material and other cost increases. Further selling price increases, reduced
costs and increased mix of higher profit products are major factors in restoring
gross profit margin percentages to the levels experienced in 1999-2001. At those
levels we should be able to reduce borrowings and also cash interest expense,
although there is no assurance we will be successful in our efforts to achieve
those levels of gross profit margins.
We are focused on reducing both manufacturing costs and administrative
expenses. 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, although we have experienced large increases in
professional fees in conjunction with our efforts to comply with the
requirements of Section 404 of the Sarbanes-Oxley Act of 2002. In addition, we
will explore the potential sales of non-strategic assets during 2005.
Financing
Our Senior Secured Credit Facility initially consisted of a revolving
credit facility with a maximum availability of $190.0 million and an initial
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
15
and inventory. At January 2, 2005, Foamex L.P. had available borrowings of
approximately $25.0 million and letters of credit outstanding of $22.1 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 January 2, 2005, the weighted
average interest rates were 6.00% for both the revolving loans and the term
loan. The term loan requires quarterly installment payments of approximately
$1.8 million. Borrowings under the Senior Secured Credit Facility will mature on
April 30, 2007.
The Secured Term Loan had an original maturity date of April 30, 2007.
Borrowings under this facility bear interest at a rate that is 9.25% plus the
greater of the Reference Rate, as defined, or 4.25%. The minimum rate, which was
in effect as of December 28, 2003, is 13.50%. The rate in effect at January 2,
2005 was 14.50%. In addition, Foamex L.P. is subject to a 1.00% facility fee on
the initial $80.0 million term loan which is payable annually on the anniversary
date. Borrowings under the Secured Term Loan are collateralized by the same
collateral as the Senior Secured Credit Facility. An intercreditor agreement
governs the distribution of collateral among the lenders under the Senior
Secured Credit Facility and the Secured Term Loan.
Under the 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
measured quarterly. For the two quarters ended December 28, 2003, Foamex L.P.'s
fixed charge coverage ratio was 1.09. Amendments to the Senior Secured Credit
Facility and Secured Term Loan executed on November 3, 2004 allowed Foamex L.P.
to exclude certain charges aggregating approximately $3.7 million and
approximately $1.0 million in the first and second quarters of 2004,
respectively, from the computation of the fixed charge coverage ratio. For the
four quarters ended January 2, 2005, Foamex L.P.'s fixed charge coverage ratio
was 0.98. The lenders have agreed to waive compliance with the fixed charge
coverage ratio for that period. On March 31, 2005, Foamex L.P. entered into
amendments with the existing lenders under the Senior Secured Credit Facility
and the Secured Term Loan that set lower minimum fixed charge coverage ratios
through April 2, 2006 and permit borrowing of up to $25.0 million of the
additional $39.0 million commitment, discussed below, under the Secured Term
Loan, the proceeds of which would be used to repay revolving loans. Foamex L.P.
incurred fees and expenses for the waivers and amendments aggregating
approximately $1.0 million. Foamex L.P. is also subject to a maximum annual
capital expenditure amount which was $36.0 million for the year ended January 2,
2005 and will be $46.8 million for the year ending January 1, 2006.
There can be no assurance that we will be successful in achieving our plans
or complying with the fixed charge coverage ratio, as there are a number of
factors beyond our control, including raw material cost changes and customer
acceptance of selling price increases that are necessary for us to be successful
and we have limited borrowing capacity and access to capital markets.
Additionally, compliance with the amended fixed charge coverage ratio may not be
met if business conditions are not as anticipated or other unforeseen events
impact results unfavorably. In the event that such noncompliance appears likely,
or occurs, we will seek the lenders' further approval of amendments to, or
waivers of, such covenants. Historically, we have been able to renegotiate
financial covenants and/or obtain waivers. Management currently believes that
obtaining waivers and/or amendments in the future may be difficult. If
amendments or waivers are not obtained, Foamex L.P. would be in default and
lenders could demand immediate payment of Foamex L.P.'s outstanding debt under
the Senior Secured Credit Facility and Secured Term Loan. In addition, it is
possible that the holders of Foamex L.P.'s Senior Secured Notes and Senior
Subordinated Notes could also demand immediate payment. We may not be able to
secure additional financing at a reasonable cost, or at all. The lack of
financing would have a material adverse effect on our financial position and
could impair our ability to continue as a going concern.
Our 13 1/2% Senior Subordinated Notes with a face value of $51.6 million
are due on August 15, 2005. We may, from time to time, directly or indirectly
make purchases of these notes or our other public debt in the open market or in
private transactions. On November 3, 2004, Foamex L.P. entered into financing
agreements with the existing lenders under the Senior Secured Credit Facility
and the Secured Term Loan to provide up to $54.0 million of new financing, the
proceeds of which could be used only to repurchase prior to or repay the 13 1/2%
Senior Subordinated Notes at maturity and certain fees related to the new
financing. The lenders under the Senior Secured Credit Facility have agreed to
lend up to $15.0 million under a new junior term loan with a floating interest
rate based upon LIBOR, as defined, reset monthly plus 6.00% with a maturity date
of April 30, 2007. The lenders under
16
the Secured Term Loan would lend up to an additional $39.0 million with interest
rates identical to the rates underthe existing Secured Term Loan. The Secured
Term Loan maturity date was also extended to April 1, 2009. The financing
commitment under the Secured Term Loan requires the payment of an unused
commitment fee at the rate of 1.5% per annum and a funding fee equal to 2.5% of
the amount borrowed with a minimum funding fee of approximately $0.6 million.
The amendments permit Foamex L.P. to reduce the financing commitments by any
cash proceeds, as defined in the amendments, generated from certain sources. If
Foamex L.P. is unable to meet its minimum fixed charge coverage ratio, as
amended, the financing commitments under the Senior Secured Credit Facility and
the Secured Term Loan may not be available to repay the 13 1/2% Senior
Subordinated Notes when due. Withdrawal of these commitments would have a
material adverse effect on our financial position and could impair our ability
to continue as a going concern.
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
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 pass 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. Balances for allowances and rebates are reviewed at least quarterly and
are adjusted if warranted. Shipping and handling costs are included in costs of
goods sold.
Accounts Receivable and Allowance for Uncollectible Accounts
We actively monitor customer payments in conjunction with customer credit
evaluations. Accordingly, a reserve for estimated uncollectible accounts is
maintained and is based on historical collection experience and specific
customer collection issues. A significant change in the financial condition of
one or more of our larger customers could have a material adverse impact on
future financial results.
Long-Lived Assets
Net property, plant and equipment totaled $141.5 million at January 2,
2005. Property and equipment held for use is grouped for impairment testing at
the lowest level for which there are identifiable cash flows. Impairment testing
of the asset group occurs whenever events or changes in circumstances indicate
that the carrying amount of the assets may not be recoverable. Foamex L.P.
assesses recoverability by comparing the carrying amount of the asset group to
the estimated undiscounted future cash flows expected to be generated by the
assets. If an asset group is considered impaired, the impairment loss to be
recognized would be measured as the amount by which the asset group's carrying
amount exceeds its fair value. Estimated future cash flows are based on
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
17
carrying value of goodwill might be impaired. Goodwill is considered to be
impaired when the net book value of a reporting unit exceeds its 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 up to certain limits for a number of risks
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.
Benefit Plans
We maintain 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. Key assumptions
include the discount rates to determine benefit obligations and the expected
long-term rate of return on plan assets. Discount rates are applied to future
cash flows to measure benefit obligations on a present value. We assumed
weighted average discount rates of 7.00%, 6.50% and 6.00% to calculate pension
expense in 2002, 2003 and 2004, respectively. Based on pension plan obligations
at year-end 2004, a 0.50% reduction in the discount rate assumption would
increase pension expense by approximately $0.8 million. The estimated increase
is primarily attributable to the impact on the pension expense component for the
amortization of net losses, discussed below. Based on pension plan assets at
year-end 2004, a 0.50% reduction in the expected rate of return assumption would
increase pension expense by approximately $0.5 million. The amortization of net
actuarial losses remains a significant component of pension expense for the
Company. The net loss position of the pension plans was primarily the result of
declining discount rates and accumulated returns on pension assets below
expected returns, principally in periods before 2003. The pension expense
component for the amortization of net actuarial losses is expected to be
approximately $3.2 million in 2005. We anticipate funding $7.4 million to
retiree benefit plans in 2005.
Claims and Litigation
We receive claims for damages that are not covered by our insurance.
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 cash requirements consist principally of accounts receivable, inventory
and accounts payable, 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 agreements will be adequate to meet liquidity
requirements for the next 12 months. In addition, we will explore potential
sales of non-strategic assets during this period. Our ability to make
distributions to Foamex International is restricted by the terms of our
financing agreements.
18
Cash and cash equivalents were $5.3 million at January 2, 2005 compared to
$6.6 million at December 28, 2003. Working capital at January 2, 2005 was a
negative $54.0 million and the current ratio was 0.85 to 1 compared to working
capital at December 28, 2003 of $11.7 million and a current ratio of 1.04 to 1.
The decrease in working capital is primarily due to the reclassification of the
$52.2 million of 13 1/2% Senior Subordinated Notes due August 15, 2005 as they
mature in less than one year, and the establishment of a valuation allowance on
the current portion of deferred tax assets.
Total long-term debt and revolving credit borrowings at January 2, 2005 was
$750.5 million, a $4.9 million increase from December 28, 2003. As of January 2,
2005, there were revolving credit borrowings of $114.9 million under the Senior
Secured Credit Facility with $25.0 million available for borrowings and $22.1
million of letters of credit outstanding. Revolving credit borrowings at January
2, 2005 reflect working capital requirements.
On August 18, 2003, Foamex L.P. entered into a Senior Secured Credit
Facility with a new group of lenders and a Secured Term Loan with another
lending group. Proceeds borrowed under these new facilities were used to repay
all outstanding balances under 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 in 2003.
The Senior Secured Credit Facility initially consisted of a revolving
credit facility with a maximum availability of $190.0 million and an initial
term loan of $50.0 million. On November 3, 2004, the lenders under the Senior
Secured Credit Facility agreed to lend up to an additional $15.0 million under a
new junior term loan. The revolving credit facility includes a $50.0 million
sublimit for letters of credit and availability is limited to eligible amounts,
as defined, of accounts receivable and inventory. Borrowings under the term loan
are limited to eligible amounts, as defined, of equipment and real estate.
Substantially all the assets of Foamex L.P. and its domestic subsidiaries and
Foamex Canada are pledged as collateral for the related borrowings. Borrowings
under the revolving credit facility and the term loan bear interest at floating
rates based upon and including a margin over either LIBOR or a Base Rate, as
defined. At January 2, 2005, the weighted average interest rates were 6.00% for
both the revolving loans and the term loan. The margin for borrowings under the
revolving credit facility and the term loan increased by 0.25% in 2004 and
increased by an additional 0.25% as of March 31, 2005. The term loan requires
quarterly installment payments of approximately $1.8 million. Borrowings under
the junior term loan can be used only repay the 13 1/2% Senior Subordinated
Notes at maturity and will bear interest at a floating rate based upon LIBOR, as
defined plus 6.00%. All borrowings under the Senior Secured Credit Facility will
mature on April 30, 2007. The 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 required by EITF No. 95-22.
The Secured Term Loan had an original maturity date of April 30, 2007. On
November 3, 2004, the lenders agreed to lend up to an additional $39.0 million,
the proceeds of which could be used only to repurchase prior to or repay the 13
1/2% Senior Subordinated Notes at maturity and certain fees related to the new
financings. The lenders also agreed to extend the maturity of the Secured Term
Loan to April 1, 2009. 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 was in effect as of December 28, 2003, is 13.50%. The rate
in effect at January 2, 2005 was 14.50%. In addition, Foamex L.P. is subject to
a 1.00% facility fee on the initial $80.0 million term loan which is payable
annually on the anniversary date, a 1.5% commitment fee on the unused portion of
the $39.0 million additional commitment and a funding fee equal to 2.5% of the
amount borrowed with a minimum funding fee of approximately $0.6 million.
Borrowings under the Secured Term Loan are collateralized by the same collateral
as the Senior Secured Credit Facility. An intercreditor agreement governs the
distribution of collateral among the lenders under the Senior Secured Credit
Facility and the Secured Term Loan.
Under the Senior Secured Credit Facility and the Secured Term Loan, as
amended, Foamex L.P. is subject to a fixed charge coverage ratio, as defined, of
1.00 measured quarterly. For the two quarters ended December 28, 2003, Foamex
L.P.'s fixed charge coverage ratio was 1.09. Amendments to the Senior Secured
Credit Facility and Secured Term Loan executed on November 3, 2004 allowed
Foamex L.P. to exclude certain charges aggregating
19
approximately $3.7 million and approximately $1.0 million in the first and
second quarters of 2004, respectively, from the computation of the fixed charge
coverage ratio. For the four quarters ended January 2, 2005, Foamex L.P.'s fixed
charge coverage ratio was 0.98 and the lenders have agreed to waive compliance
with the fixed charge coverage ratio for that period. On March 31, 2005, Foamex
L.P. entered into amendments with the existing lenders under the Senior Secured
Credit Facility and the Secured Term Loan that set lower fixed charge coverage
ratios through April 2, 2006 and permit borrowing of up to $25.0 million of the
additional $39.0 million commitment under the Secured Term Loan, the proceeds of
which would be used to repay revolving loans. Foamex L.P. incurred fees and
expenses for the waivers and amendments aggregating approximately $1.0 million.
Foamex L.P. is also subject to a maximum annual capital expenditure amount which
was $36.0 million for the year ended January 2, 2005 and will be $46.8 million
for the year ending January 1, 2006.
Effective May 1, 2002, Foamex L.P. completed a series of interest rate swap
transactions with notional amounts aggregating $300.0 million. Foamex L.P.
designated, documented and accounted for these interest rate swaps as fair value
hedges of its 10 3/4% Senior Secured Notes due April 1, 2009. The risk being
hedged in these transactions was the change in fair value of the 10 3/4% Senior
Secured Notes based on changes in the benchmark interest rate, LIBOR. The effect
of these interest rate swap transactions was to convert the fixed interest rate
on the 10 3/4% Senior Secured Notes to floating rates reset twice per year to
correspond with the interest payment dates for the 10 3/4% Senior Secured Notes.
On September 18, 2002, Foamex L.P. unwound the interest rate swap transactions
in exchange for a net cash proceeds of $18.4 million, including $3.6 million
realized through lower effective interest rates while the swap transactions were
in effect. The unwinding resulted in a deferred credit of $14.8 million, which
is being amortized over the term of the 10 3/4% Senior Secured Notes, using the
effective interest rate method.
Cash Flow from Operating Activities
Cash provided by operating activities in 2004 was $0.2 million compared to
$18.1 million in 2003. In 2004, cash provided by operations consisted of
approximately $5.6 million of cash generated from results of operations after
adjusting for non cash charges included in net loss, offset by approximately
$5.4 million of cash requirements used to fund working capital needs, other
operating expenses and restructuring liabilities. In 2003, cash provided by
operations consisted of approximately $17.3 million of cash generated from
results of operations after adjusting for non cash charges included in net loss
and approximately $13.8 million of cash generated from working capital accounts
offset by $13.0 million used to pay restructuring liabilities.
Cash Flow from Investing Activities
Cash used for investing activities totaled $5.2 million for 2004 compared
to $8.6 million in 2003. Cash requirements included capital expenditures of $5.5
million and capitalized software development costs of $2.4 million. These uses
were partially offset by proceeds from asset disposals of $2.7 million. Cash
used for investing activities in 2003 included capital expenditure of $6.5
million and capitalized software development costs of $3.3 million. Estimated
capital expenditures for 2005 are approximately $6 to $8 million. In addition,
we expect to spend approximately $5 million for internally developed software in
2005, a portion of which may be capitalized.
Cash Flow from Financing Activities
Cash provided by financing activities was $3.7 million in 2004 compared to
cash used of $7.2 million in 2003. During 2004, we utilized $18.8 million of
increased revolving credit borrowings to reduce long-term debt by $10.9 million
and to satisfy working capital requirements. During 2003, we utilized $130.0
million of proceeds from new term loans and an increase in revolving credit
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.
20
Contractual Obligations
Our contractual obligations as of January 2, 2005 are shown in the
following table:
Payment due by Period
--------------------------------------------------------------------------
Contractual Obligations Total 2005 2006-07 2008-09 2010 and beyond
- ----------------------- --------- --------- --------- ------- ---------------
(dollars in millions)
Long-Term Debt, including
Capital Leases $ 740.1 $ 60.4 $293.7 (1) $380.0 $ 6.0
Interest (2) 296.7 79.4 143.0 73.8 0.5
Operating Leases 71.4 16.2 22.1 14.2 18.9
Purchase Obligations (3) 688.4 232.0 190.9 177.0 88.5
Restructuring Liabilities 7.4 1.8 1.9 1.6 2.1
Employee Benefits and Other (4)
-------- ------ ------ ------ ------
Total Contractual Obligations (5) $1,804.0 $389.8 $651.6 $646.6 $116.0
======== ====== ====== ====== ======
(1) Includes $114.9 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 6 to the consolidated financial statements.
(2) Includes interest applicable to borrowings outstanding at January 2, 2005
computed using interest rates in effect as of January 2, 2005 through the
due dates of the borrowings as defined by the applicable financing
agreements plus interest on replacement financing after the 13 1/2% Senior
Subordinated Notes are repaid at maturity on August 15, 2005.
(3) Includes outstanding purchase orders and other commitments to purchase
minimum quantities of materials or services.
(4) We also 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 2004, payments for these obligations
aggregated approximately $37.7 million.
(5) Comprised of the following:
Liabilities recorded on the balance sheet $ 760.6
Commitments not recorded on the balance sheet 1,043.4
--------
$1,804.0
RESULTS OF OPERATIONS
Carpet
Foam Cushion Automotive Technical
Products Products Products Products Other Total
-------- -------- ---------- --------- --------- ----------
2004 (dollars in thousands)
Net sales $551,414 $209,182 $350,985 $124,146 $ 30,667 $1,266,394
Income (loss) from operations $ 52,418 $ 8,539 $ 19,245 $ 32,916 $(61,318) $ 51,800
Depreciation and amortization $ 10,213 $ 2,978 $ 3,116 $ 2,801 $ 6,825 $ 25,933
Income (loss) from operations
as a percentage of net sales 9.5% 4.1% 5.5% 26.5% n.m.(a) 4.1%
2003
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%
21
Foam Cushion Automotive Technical
Products Products Products Products Other Total
-------- -------- ---------- --------- --------- ----------
2002 (dollars in thousands)
Net sales $471,005 $234,001 $466,718 $124,124 $ 32,246 $1,328,094
Income (loss) from operations $ 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%
(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.
2004 Compared to 2003
Net sales for 2004 decreased 3% to $1,266.4 million from $1,304.6 million
in 2003. The decrease was primarily attributable to a $96.1 million decline in
net sales in the Automotive Products segment due to lower volume, including
sourcing actions by major customers, partially offset by higher net sales in the
Foam Products and Technical Products segments.
Gross profit was $141.8 million, or 11.2% of net sales, in 2004 compared to
$143.7 million, or 11.0% of net sales, in 2003. Gross profit margin has improved
primarily due to profit improvement as a result of better product mix in Foam
Products and lower costs in Carpet Cushion Products, partially offset by lower
volume in the Automotive Products segment. However, gross profit margin declined
in the last six months of 2004 and in the fourth quarter was 8.7%. We were only
partially able to recover raw material cost increases during 2004.
Income from operations for 2004 was $51.8 million, or 4.1% of net sales,
which represented a 20% decrease from the $64.4 million, or 4.9% of net sales,
reported for 2003. A decline of $14.2 million in the Automotive Products segment
more than offset increases in the other operating segments. Selling, general and
administrative expenses increased $5.8 million, or 7%, principally due to a $3.0
million net charge to bad debt expense following a customer bankruptcy,
litigation related costs and higher professional fees primarily for information
technology and the cost of our efforts under Section 404 of the Sarbanes-Oxley
Act, partially offset by lower corporate expense and employee costs as a result
of the closing of our New York City office. Results include net restructuring
charges of $3.2 million in 2004 and net restructuring credits of $1.8 million in
2003. Restructuring items are discussed under "Other" below.
Foam Products
Foam Products net sales for 2004 increased 9% to $551.4 million from $507.6
million in 2003 primarily due to higher volumes of value-added products and
higher selling prices. Income from operation increased 19% to $52.4 million in
2004 from $44.0 million in 2003 principally as a result of improved volume mix
and higher selling prices partially offset by higher raw material costs. Income
from operations was 9.5% of net sales in 2004 and 8.7% of net sales in 2003.
Carpet Cushion Products
Carpet Cushion Products net sales for 2004 of $209.2 million were
essentially flat compared to 2003. Income from operations was $8.5 million in
2004 compared to $5.4 million in 2003 with the increase due primarily to lower
material and operating costs. Income from operations was 4.1% of net sales in
2004 and 2.6% of net sales in 2003.
Automotive Products
Automotive Products net sales for 2004 decreased 21% to $351.0 million from
$447.1 million in 2003 principally as a result of lower volumes from sourcing
actions by major customers including a decrease in sales of
22
$54.4 million to our largest customer. Income from operations decreased 42% to
$19.2 million compared to $33.4 million in 2003 primarily due to lower sales
volume and higher per unit labor and overhead costs. Income from operations was
5.5% of net sales in 2004 and 7.5% of net sales in 2003. We expect that sales
will increase during 2005 but may be substantially less than in 2003.
Technical Products
Net sales for Technical Products in 2004 increased 6% to $124.1 million
from $117.5 million in 2003 primarily due to higher unit volume and new product
introductions. Income from operations increased 2% to $32.9 million in 2004
compared to $32.1 million in 2003 primarily due to new product introductions and
slightly higher overall pricing partially offset by higher selling, general and
administrative expenses. Income from operations was 26.5% of net sales in 2004
and 27.3% of net sales in 2003.
Other
Other primarily consists of certain manufacturing and fabrication
operations in Mexico City, corporate expenses not allocated to business segments
and restructuring charges (credits). The increase in net sales associated with
this segment resulted from our Mexico City operations. The loss from operations
was $61.3 million in 2004 and $50.5 million in 2003 and reflects generally
higher corporate expenses in 2004 and includes restructuring, impairment and
other charges of $3.2 million, discussed below. During 2003, we recorded
restructuring credits of $1.8 million.
Restructuring, Impairment and Other Charges
In 2004, we recorded restructuring, impairment and other charges of $3.2
million, primarily consisting of a $1.7 million charge related to lease costs
and asset write offs in connection with the closing of our New York office, a
$0.7 million charge related to the realignment of our automotive operations and
an impairment charge of $0.6 million for an idle facility.
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.
Interest and Debt Issuance Expense
Interest and debt issuance expense was $76.7 million in 2004, which
represented a 13% decrease from 2003 expense of $88.4 million. The decrease is
primarily due to lower amortization of debt issuance costs, which included a
write off of $12.9 million in 2003 associated with the refinancing of our credit
facilities
Income from Equity Interest in Joint Ventures
The income from an equity interest in an Asian joint venture was $0.5
million in 2004 and $1.2 million in 2003. Income from an equity interest in a
joint venture in Eastern Europe was $0.2 million in 2004 and $0.3 million in
2003.
Other Income (Expenses), Net
Other expense, net was $0.2 million in 2004 compared to $3.4 million in
2003. The 2004 period includes foreign currency transaction losses related to
operations in Mexico and Canada of $0.6 million compared to $2.7 million in
2003. Also included in 2004 were gains of $1.0 million on asset disposals.
23
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 agreements and
indentures.
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% of net sales, in 2003 compared to
$143.7 million, or 10.8% of net sales, 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.
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
24
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 and fabrication
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 occurring 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.
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.
25
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 agreements 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 January 2, 2005, we had accruals of approximately $2.0 million
for environmental matters including approximately $1.7 million related to
remediating and monitoring soil and groundwater contamination and approximately
$0.3 million relating to sites where we had been designated as a 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.
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.
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 12 sites. Estimates of total cleanup costs and
26
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 our results of operations, cash flows 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 January 2, 2005, 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 2004, 2003 and 2002 were negatively
impacted by higher average costs for raw materials. We experienced significant
increases in the prices of raw material from major chemical manufacturers during
2004 and 2002. We sought to recover these cost increases through manufacturing
process efficiencies and selling price increases, but were only partially
successful. 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.
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 January 2, 2005, indebtedness with variable
interest rates totaled $239.3 million. On an annualized basis, if the interest
rates on these debt instruments increased by 1.0%, interest expense would
increase by approximately $2.4 million.
The two principal chemicals used in the manufacturing of flexible
polyurethane foam are TDI and polyol. The prices of TDI and polyol are
influenced by demand, manufacturing capacity and oil and natural gas prices. We
attempt to offset raw material price increases through selling price increases
and manufacturing process efficiencies.
27
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
An index to the financial statements and financial statement schedules is
included in Item 15.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
We changed accountants during 2004. Detailed information required by this
item was included in Current Reports on Form 8-K and Form 8-K/A filed with the
Securities and Exchange Commission on April 2, 2004 and April 12, 2004.
ITEM 9a. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and
Chief Financial Officer, evaluated the effectiveness of our disclosure controls
and procedures as of the end of the period covered by this report. The Chief
Executive Officer and Chief Financial Officer concluded that, due to the
material weakness described below, our disclosure controls and procedures as of
the end of the period covered by this report were not effective to provide
reasonable assurance that the information required to be disclosed by us in
reports filed under the Securities Exchange Act of 1934 is (i) recorded,
processed, summarized and reported within the time periods specified in the
SEC's rules and forms and (ii) accumulated and communicated to our management,
including the Chief Executive Officer and Chief Financial Officer, as
appropriate to allow timely decisions regarding disclosure. A controls system
cannot provide absolute assurance that the objectives of the controls system are
met, and no evaluation of controls can provide absolute assurance that all
control issues, errors and instances of fraud, if any, within a company have
been detected.
Management's Annual Report on Internal Control Over Financial Reporting
We are responsible for establishing and maintaining adequate internal
control over financial reporting as defined under Exchange Act Rules 13a-15(f)
and 15d-15(f). Internal control over financial reporting is a process designed
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect
the transactions and dispositions of the assets of the company; provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that the receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal controls over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
We are not an accelerated filer as defined in Rule 12b-2 of the Securities
Act of 1934 and therefore are not required to complete a management's assessment
of internal control over financial reporting until our fiscal year ending
December 31, 2006. However, our parent company, Foamex International, is an
accelerated filer and therefore is required to complete managements assessment
of internal controls over financial reporting as of January 2, 2005. Foamex
International has not completed management's assessment of the internal control
over financial reporting required by Section 404 of the Sarbanes-Oxley Act of
2002 and will avail itself of the SEC's 45-day exemptive order to complete such
assessment as set forth in SEC Release No. 34-50754. Therefore, as permitted by
the SEC exemptive order, Foamex International has not included in its Annual
Report on Form 10-K management's annual report on internal control over
financial reporting or the related attestation report of its independent
registered
28
public accounting firm. However, Foamex International has identified two
material weaknesses in its internal control over financial reporting. As defined
by the Public Company Accounting Oversight Board ("PCAOB") in Auditing Standard
No. 2, a material weakness is a significant deficiency, or combination of
significant deficiencies, that results in more than a remote likelihood that a
material misstatement of the annual or interim financial statements will not be
prevented or detected. Because Foamex International has identified two material
weaknesses, it will not be able to conclude in its management's annual report on
internal control over financial reporting that its internal control over
financial reporting is effective.
The identification of the material weaknesses is based on findings to date.
Due to the incomplete status of management's assessment, Foamex International
cannot be certain that additional material weaknesses will not be identified
prior to the filing of management's annual report on internal control over
financial reporting.
The first identified material weakness in our internal control over
financial reporting related to our accounting for labor and overhead variances
to our standard costs, which should be included in our work in process and
finished goods inventories. The material weakness could have resulted in a
material misstatement of the carrying value of our inventory. Management is
addressing the material weakness by revising the process to account for labor
and overhead variances. The other material weakness, which has no impact on
Foamex L.P., related to the restatement of the third quarter 2004 financial
statements to correct an error in recording the valuation allowance established
in that period for deferred income taxes. A portion of the valuation allowance,
which was previously charged directly to stockholders' deficiency as a component
of accumulated other comprehensive loss, should have been included in the
provision for income taxes increasing the net loss in the third quarter by $16.7
million but having no impact on total stockholders' deficiency.
Changes in Internal Controls
During the quarter we strengthened our internal controls over the following
areas.
o Information Technology: Segregation of Duties and Information System
Users. In the fourth quarter of 2004 we conducted a review of roles
and responsibilities and user access within our information technology
systems and identified certain users with inappropriate access. As a
result, we implemented changes to tie user access to our information
systems to user needs based on the roles and responsibilities of the
user. This implementation has continued into the first quarter of
2005. During the fourth quarter we also established a formal change
management process to ensure that when employees change
responsibilities or status their system access requirements are also
appropriately and promptly changed accordingly.
o Controls over Fixed Assets. Foamex L.P. did not have adequate policies
to address the process for taking fixed assets inventories. During the
fourth quarter, we implemented a policy with respect to the
identification of potentially idle assets and the communication of the
need to assess the recoverability of such assets to the appropriate
company personnel for resolution or disposition.
o One Time Transactions and Significant Agreements. During our internal
control review, it was determined that Foamex L.P. did not have
adequate controls in place to insure the proper accounting for certain
non-recurring events and significant agreements. During the fourth
quarter, we implemented comprehensive review processes and procedures
for one-time events and significant agreements to insure more robust
reviews and proper accounting.
Other than as described above, no change in Foamex L.P.'s internal control
over financial reporting occurred during the most recent fiscal quarter that has
materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.
ITEM 9b. OTHER INFORMATION
None.
29
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
Reports of Independent Registered Public Accounting Firms F-2
Consolidated Balance Sheets as of January 2, 2005 and December 28, 2003 F-4
Consolidated Statements of Operations for the years ended January 2, 2005,
December 28, 2003, and December 29, 2002 F-6
Consolidated Statements of Cash Flows for the years ended January 2, 2005,
December 28, 2003 and December 29, 2002 F-7
Consolidated Statements of Partners' Deficiency for the years ended January 2, 2005,
December 28, 2003 and December 29, 2002 F-8
Notes to Consolidated Financial Statements F-9
Foamex Capital Corporation
Reports of Independent Registered Public Accounting Firms F-37
Balance Sheets as of January 2, 2005 and December 28, 2003 F-39
Notes to Balance Sheets F-40
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").
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(q) - 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(r) - By-laws of Foamex Asia, Inc.
30
3.11(r) - Certificate of Incorporation of Foamex Latin America, Inc.
3.12(r) - By-laws of Foamex Latin America, Inc.
3.13(r) - Certificate of Incorporation of Foamex Mexico, Inc.
3.14(r) - By-laws of Foamex Mexico, Inc.
3.15(r) - Certificate of Incorporation of Foamex Mexico II, Inc.
3.16(r) - 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(q) - 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(q) - 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(q) - 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(q) - 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(q) - Patent Security Agreement, dated as of March 25, 2002, by
Foamex L.P. in favor of U.S. Bank National Association, as
collateral agent.
4.3.4(q) - 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(q) - 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(q) - 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.
4.9.1(l) - Promissory Note, dated June 12, 1997, in the aggregate
principal amount of $5,000,000, executed by Trace Holdings
to Foamex L.P.
4.9.2(l) - Promissory Note, dated June 12, 1997, in the aggregate
principal amount of $4,794,828, executed by Trace Holdings
to Foamex L.P.
31
4.15.1(t) - 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(t) - 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(u) - 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.
4.15.4(x) - Amendment and Waiver No. 2 to Credit Agreement, dated as of
June 15, 2004, 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.
4.15.5(y) - Amendment No. 3 to Credit Agreement, dated as of November 3,
2004, 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.
4.15.6(z) - Waiver to Credit Agreement, dated as of March 15, 2005,
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.
4.15.7(aa) - Amendment No. 4 to Credit Agreement, dated as of March 31,
2005, 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(t) - 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(t) - 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(u) - 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.
4.16.4(x) - Amendment No. 2 to Credit Agreement, dated as of June 15,
2004, among Foamex L.P., as Borrower, the affiliates of
Borrower party hereto, the lenders party hereto, and Silver
Point Finance, LLC as Administrative Agent.
4.16.5(y) - Amendment No. 3 to Credit Agreement, dated as of November 3,
2004, among Foamex L.P., as Borrower, the affiliates of
Borrower party hereto, the lenders party hereto, and Silver
Point Finance, LLC as Administrative Agent.
4.16.6(z) - Waiver to Credit Agreement, dated as of March 15, 2005,
among Foamex L.P., as Borrower, the affiliates of Borrower
party hereto, the lenders party hereto, and Silver Point
Finance, LLC as Administrative Agent.
4.16.7(aa) - Amendment No. 4 to Credit Agreement, dated as of March 31,
2005, 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(t) - 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.
32
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(p)+ - Foamex Supplemental Executive Retirement Plan, effective as
of May 15, 2001.
10.11.11(s)+ - Severance Agreement and Release, dates as of January 31,
2003, by and between Foamex International and Pratt W.
Wallace, Jr.
10.11.12v - Form of Foamex International Inc. Code of Ethics for
Director, Officers, Senior Management and Certain Other
Employees.
10.11.13(u)+ - Amended and Restated Employment Agreement, dated January 27,
2004, by and between Foamex International and Thomas E.
Chorman.
10.11.14(u)+ - Amended and Restated Employment Agreement, dated January 26,
2004, by and between Foamex International and K. Douglas
Ralph.
10.11.15+(x) - Separation Agreement and Release, dated as of June 19, 2004,
between Foamex International Inc. and John V. Tunney.
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(m)+ - Foamex International Amended and Restated 1993 Stock Option
Plan.
10.23(a)+ - Foamex International Non-Employee Director Compensation
Plan.
10.24(n)+ - Foamex International Equity Incentive Plan for Non-Employee
Directors.
10.25(n)+ - Foamex International Key Employee Incentive Bonus Plan.
10.26(o)+ - Agreement with Consultant, dated April 24, 2001 by and
between Robert J. Hay and Foamex L.P.
10.30(w)+ - Foamex International 2002 Stock Award Plan, as Amended and
Restated.
10.17.2(j) - Loan Agreement between Hua Kee Company Limited and Foamex
Asia, Inc., dated as of July 8, 1997.
10.18.1(o) - Joint Venture Agreement between Hua Kee Company Limited and
Foamex Asia, Inc. amended and restated as of December 3,
2001.
10.44(r)+ - 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.
33
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.
(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 the Annual Report on
Form 10-K of Foamex International for the fiscal year ended December 31,
1998.
(m) Incorporated herein by reference to the Exhibit to Foamex International's
definitive proxy statement dated May 31, 2000.
(n) Incorporated herein by reference to the Appendix to Foamex International's
definitive amended and restated proxy statement, dated July 12, 2001.
(o) Incorporated herein by reference to the Exhibit to the Form 10-Q of Foamex
International for the quarterly period ended June 30, 2001.
(p) 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.
34
(q) 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.
(r) 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.
(s) 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.
(t) Incorporated herein by reference to the Exhibit to the Current Report on
Form 8-K of Foamex International reporting an event that occurred on August
18, 2003.
(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 28,
2003.
(v) Incorporated herein by reference to the Exhibit to the Annual Report on
Form 10-K of Foamex L.P. for the fiscal year ended December 28, 2003.
(w) Incorporated herein by reference to Foamex International's definitive proxy
statement dated April 26, 2004.
(x) Incorporated herein by reference to the Exhibit to the Form 10-Q of Foamex
International Inc. for the quarterly period ended June 27, 2004.
(y) Incorporated herein by reference to the Exhibit to the Form 10-Q of Foamex
International Inc. for the quarterly period ended September 26, 2004.
(z) Incorporated herein by reference to the Exhibit to the Current Report on
Form 8-K of Foamex L.P. reporting an event that occurred on March 15, 2005.
(aa) Incorporated herein by reference to the Exhibit to the Annual Report on
Form 10-K of Foamex International for the fiscal year ended January 2,
2005.
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.
35
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 4th day of April 2005.
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 April 4, 2005
- ---------------------------
Thomas E. Chorman
/s/ George L. Karpinski Director of FMXI and FCC April 4, 2005
- ---------------------------
George L. Karpinski
36
FOAMEX L.P. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Financial Statements of Registrants
Foamex L.P.
Reports of Independent Registered Public Accounting Firms F-2
Consolidated Balance Sheets as of January 2, 2005 and December 28, 2003 F-4
Consolidated Statements of Operations for the years ended January 2, 2005,
December 28, 2003, and December 29, 2002 F-6
Consolidated Statements of Cash Flows for the years ended January 2, 2005,
December 28, 2003 and December 29, 2002 F-7
Consolidated Statements of Partners' Deficiency for the years ended January 2, 2005,
December 28, 2003 and December 29, 2002 F-8
Notes to Consolidated Financial Statements F-9
Foamex Capital Corporation
Reports of Independent Registered Public Accounting Firms F-37
Balance Sheets as of January 2, 2005 and December 28, 2003 F-39
Notes to Balance Sheets F-40
F-1
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
The Partners of
Foamex L.P.:
We have audited the accompanying consolidated balance sheet of Foamex L.P. and
subsidiaries (the "Company"), an indirect wholly-owned subsidiary of Foamex
International Inc., as of January 2, 2005 and the related consolidated
statements of operations, cash flows and partners' deficiency for the fiscal
year then ended. In connection with our audit of the consolidated financial
statements, we also have audited the financial statement schedule listed in the
Index at Item 15(a) as of January 2, 2005 and for the fiscal year then ended.
These consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedule based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. 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 audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Foamex L.P. and
subsidiaries as of January 2, 2005, and the results of their operations and
their cash flows for the fiscal year then ended, in conformity with U.S.
generally accepted accounting principles. Also, in our opinion, the related
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.
/s/ KPMG LLP
Philadelphia, Pennsylvania
April 4, 2005
F-2
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
To the Partners of Foamex L.P.
Linwood, Pennsylvania
We have audited the accompanying consolidated balance sheet of Foamex L.P. and
subsidiaries (the "Company"), an indirect wholly-owned subsidiary of Foamex
International Inc., as of December 28, 2003 and the related consolidated
statements of operations, cash flows and partners' deficiency for each of the
two years in the period ended December 28, 2003. Our audits also included the
consolidated financial statement schedule for the years ended December 28, 2003
and December 29, 2002 listed in the Index at Item 15. 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 the standards of the Public Company
Accounting Oversight Board (United States). 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 consolidated 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 the results of its operations and its cash flows for each of the two 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-3
FOAMEX L.P. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
January 2, December 28,
2005 2003
---------- ------------
ASSETS (thousands)
CURRENT ASSETS
Cash and cash equivalents $ 5,347 $ 6,610
Accounts receivable, net of allowance for doubtful
accounts and discounts of $9,001 in 2004 and $10,505 in 2003 182,740 181,288
Inventories 100,029 95,882
Other current assets 22,403 27,287
-------- --------
Total current assets 310,519 311,067
-------- --------
PROPERTY, PLANT AND EQUIPMENT
Land and land improvements 6,300 6,818
Buildings and leasehold improvements 113,592 117,265
Machinery, equipment and furnishings 281,071 289,528
Construction in progress 1,783 1,069
-------- --------
Total 402,746 414,680
Less accumulated depreciation and amortization (261,203) (251,830)
-------- --------
Property, plant and equipment, net 141,543 162,850
GOODWILL 126,814 126,258
DEBT ISSUANCE COSTS, net of
accumulated amortization of $17,477 in 2004 and
$10,648 in 2003 21,152 27,195
SOFTWARE COSTS, net of accumulated amortization of
$6,401 in 2004 and $3,603 in 2003 9,325 9,767
INVESTMENTS IN AND ADVANCES TO AFFILIATES 16,521 14,503
OTHER ASSETS 19,832 13,515
-------- --------
TOTAL ASSETS $645,706 $665,155
======== ========
The accompanying notes are an integral part of the consolidated
financial statements.
F-4
FOAMEX L.P. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
January 2, December 28,
2005 2003
----------- -----------
LIABILITIES AND PARTNERS' DEFICIENCY (thousands)
CURRENT LIABILITIES
Revolving credit borrowings $ 114,907 $ 96,065
Current portion of long-term debt 67,131 15,937
Accounts payable 104,314 98,310
Accrued employee compensation and benefits 22,354 28,331
Accrued interest 13,063 12,376
Accrued restructuring 1,759 3,911
Accrued customer rebates 16,979 18,077
Cash overdrafts 10,434 12,688
Other accrued liabilities 13,623 13,673
--------- --------
Total current liabilities 364,564 299,368
LONG-TERM DEBT 568,461 633,621
ACCRUED EMPLOYEE BENEFITS 55,388 43,348
ACCRUED RESTRUCTURING 5,682 5,837
OTHER LIABILITIES 7,202 8,112
--------- --------
Total liabilities 1,001,297 990,286
--------- --------
COMMITMENTS AND CONTINGENCIES
PARTNERS' DEFICIENCY
General partner (294,342) (268,097)
Limited partner - -
Accumulated other comprehensive loss (52,028) (47,813)
Notes receivable from related party (9,221) (9,221)
--------- --------
Total partners' deficiency (355,591) (325,131)
--------- --------
TOTAL LIABILITIES AND PARTNERS' DEFICIENCY $ 645,706 $665,155
========= ========
The accompanying notes are an integral part of the consolidated
financial statements.
F-5
FOAMEX L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED
January 2, December 28, December 29,
2005 2003 2002
---------- ------------- -----------
(thousands)
NET SALES $1,266,394 $1,304,560 $1,328,094
COST OF GOODS SOLD 1,124,547 1,160,870 1,184,392
---------- ---------- ----------
GROSS PROFIT 141,847 143,690 143,702
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 86,797 81,013 94,326
RESTRUCTURING, IMPAIRMENT AND OTHER
CHARGES (CREDITS) 3,250 (1,759) 4,799
---------- ---------- ----------
INCOME FROM OPERATIONS 51,800 64,436 44,577
INTEREST AND DEBT ISSUANCE EXPENSE 76,667 88,374 69,679
INCOME FROM EQUITY INTEREST IN JOINT VENTURES 687 1,466 1,734
OTHER EXPENSE, NET (220) (3,447) (2,045)
---------- ---------- ----------
LOSS BEFORE PROVISION FOR INCOME TAXES
AND CUMULATIVE EFFECT OF ACCOUNTING CHANGE (24,400) (25,919) (25,413)
PROVISION FOR INCOME TAXES 631 1,494 1,791
---------- ---------- ----------
LOSS BEFORE CUMULATIVE EFFECT OF
ACCOUNTING CHANGE (25,031) (27,413) (27,204)
CUMULATIVE EFFECT OF ACCOUNTING CHANGE - - (71,966)
---------- ---------- ----------
NET LOSS $ (25,031) $ (27,413) $ (99,170)
========== ========== ==========
The accompanying notes are an integral part of the consolidated
financial statements.
F-6
FOAMEX L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED
January 2, December 28, December 29,
2005 2003 2002
---------- ------------ ------------
OPERATING ACTIVITIES (thousands)
Net loss $(25,031) $(27,413) $(99,170)
Adjustments to reconcile net loss to net cash provided by
(used for) operating activities:
Depreciation and amortization 25,933 26,045 31,592
Amortization of debt issuance costs, debt premium
and debt discount 2,762 4,458 2,699
Write off of debt issuance costs - 12,928 4,892
Asset impairment and other charges 2,809 - 2,503
Cumulative effect of accounting change - - 71,966
Loss (gain) on disposition of assets (1,185) 30 -
Provision for uncollectible accounts 3,291 2,115 2,336
Retirement benefit funding greater than expense (2,175) (892) (1,604)
Deferred income taxes 35 21 (738)
Other, net (889) 4 47
Changes in operating assets and liabilities:
Accounts receivable (4,742) 8,143 (20,421)
Inventories (4,147) 2,128 (8,580)
Accounts payable 6,004 10,916 (41,362)
Accrued restructuring (2,111) (13,023) (2,225)
Other assets and liabilities (357) (7,358) 8,447
-------- -------- --------
Net cash provided by (used for) operating activities 197 18,102 (49,618)
-------- -------- --------
INVESTING ACTIVITIES
Capital expenditures (5,510) (6,543) (15,582)
Proceeds from sale of assets 2,701 1,237 21
Decrease (increase) in revolving loan with
Foamex International - - 2,490
Other investing activities (2,400) (3,329) (7,990)
-------- -------- --------
Net cash used in investing activities (5,209) (8,635) (21,061)
-------- -------- --------
FINANCING ACTIVITIES
Net proceeds from (repayments of) revolving loans 18,841 44,242 (73,176)
Proceeds from long-term debt - 130,000 356,590
Repayments of long-term debt (10,853) (164,020) (190,450)
Repayments of long-term debt-related party - - (31,590)
Increase (decrease) in cash overdrafts (2,254) (5,049) 13,664
Debt issuance costs (785) (11,880) (29,981)
Interest rate swaps - - 14,821
Distribution paid to partners (1,200) (513) -
Other financing activities - - 105
-------- -------- --------
Net cash provided by (used in) financing activities 3,749 (7,220) 59,983
-------- -------- --------
Net increase (decrease) in cash and cash equivalents (1,263) 2,247 (10,696)
Cash and cash equivalents at beginning of period 6,610 4,363 15,059
-------- -------- --------
Cash and cash equivalents at end of period $ 5,347 $ 6,610 $ 4,363
======== ======== ========
The accompanying notes are an integral part of the consolidated
financial statements.
F-7
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)
2002
Balances at January 1, 2002 $(130,095) $ - $(36,322) $(2,490) $(9,221) $(178,128)
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)
2004
Net loss (426) (24,605) (25,031)
Minimum pension liability adjustment (6,253) (6,253)
Foreign currency translation adjustment 2,038 2,038
---------
Comprehensive loss (29,246)
Distributions and other (3) (1,211) (1,214)
Offset balance against Limited Partner deficit
assumed by General Partner (25,816) 25,816 - - - -
--------- ------- -------- ------- ------- ---------
Balances at January 2, 2005 $(294,342) $ - $(52,028) $ - $(9,221) $(355,591)
========= ======= ======== ======= ======= =========
The accompanying notes are an integral part of the consolidated
financial statements.
F-8
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
10.
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
2004 included the 53 weeks ended January 2, 2005 while the fiscal year 2003
include the 52 weeks ended December 28, 2003 and fiscal year 2002 included 52
weeks ended December 28, 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 23.5% at January 2,
2005. 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". During early 2005, the Bank of Nova
Scotia sold 0.3 million shares of Foamex International's common stock and as of
February 15, 2005 holds approximately 22.3% of Foamex International's
outstanding common stock.
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 (Foamex Asia Co., Ltd.) in which it
has ownership of 70%. Foamex L.P. does not exercise control of this joint
venture due to the minority shareholders' substantive participation rights and
therefore Foamex L.P. 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 in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of 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.
F-9
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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.
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. Net
sales are reduced by allowances for estimated discounts, returns and customer
rebates. Balances for allowances and rebates are reviewed at least quarterly and
are adjusted if warranted. Shipping and handling costs are included in cost of
goods sold.
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 January 2, 2005 were $750.5 million and $714.7 million,
respectively, and at December 28, 2003 were $745.6 million and $683.3 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 2004, 2003 and 2002 was $22.9 million, $24.1 million and $29.1
million, respectively.
F-10
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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 not acquired in a business
combination and 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.
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 identify 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 in accordance with the transitional implementation guidance
of SFAS No.142. Foamex L.P. has completed its annual goodwill impairment tests
as of September 27, 2004, September 29, 2003 and September 30, 2002,
respectively, with no recognition of any additional impairment.
Goodwill at January 2, 2005 increased $0.6 million from December 28, 2003
as a result of foreign currency translation adjustments reflected below as
Other.
Goodwill balances include:
Balance Balance
Segments December 28, 2003 Other January 2, 2005
----------------------- ----------------- ---------- ---------------
(thousands)
Foam Products $ 74,631 $222 $ 74,853
Carpet Cushion Products 2,497 - 2,497
Automotive Products 35,261 334 35,595
Technical Products 13,869 - 13,869
-------- ---- --------
Total $126,258 $556 $126,814
======== ==== ========
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 management authorizes the project, the preliminary project
stage is complete and it is probable 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 2006. Capitalized software costs aggregated $2.4 million, $3.4 million and
$7.0 million
F-11
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
in 2004, 2003 and 2002, respectively. The capitalized costs are amortized
beginning in the period when placed in service on a straight-line basis over the
estimated useful life of the software, which is generally five years or less.
Long-Lived Assets
Property and equipment held for use is grouped for impairment testing at
the lowest level for which there are identifiable cash flows. Impairment testing
of the asset group occurs whenever events or changes in circumstances indicate
that the carrying amount of the assets may not be recoverable. Foamex L.P.
assesses recoverability by comparing the carrying amount of the asset group to
the estimated undiscounted future cash flows expected to be generated by the
assets. If an asset group is considered impaired, the impairment loss to be
recognized would be measured as the amount by which the asset group's carrying
amount exceeds its fair value. Estimated future cash flows are based on
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.
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 to
operations were $0.6 million, $0.5 million and $1.1 million in 2004, 2003 and
2002, 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 losses are reflected in other expense in the consolidated statements
of operations and included $0.6 million, $2.7 million and $2.3 million in 2004,
2003 and 2002, respectively.
Research and Development
Research and development costs are expensed as incurred. Amounts charged to
operations were $2.8 million, $3.6 million and $4.8 million in 2004, 2003 and
2002, respectively.
Self Insurance
Foamex L.P. is partially self-insured for a number of risks including
workers' compensation, medical, automobile and general liability. Commercial
insurance policies are carried for amounts in excess of the self-insured
amounts. Amounts charged to operations were $26.5 million, $24.9 million and
$31.2 million in 2004, 2003 and 2002, 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.
F-12
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Income Taxes
Income taxes are accounted for under the asset and liability method. Under
this method, deferred income taxes are provided for temporary differences
between the financial reporting basis and income tax basis of assets and
liabilities and for net operating loss carryforwards using the income tax rates,
under existing legislation, expected to be in effect at the date such temporary
differences are expected to reverse. Deferred income tax assets are reduced by a
valuation allowance when it is considered more likely than not that a portion of
the deferred income tax assets will not be realized in a future period. The
estimates utilized in the recognition of deferred income tax assets are subject
to revision in future periods.
Foamex L.P., as a limited partnership, is not subject to Federal income
taxes; therefore no current or deferred provision has been provided for such
taxes. However, Foamex L.P. has provided for the income taxes of certain states
in which it is subject to taxes and for certain subsidiaries, which are subject
to Federal and state income taxes and for subsidiaries located in foreign
jurisdictions that file separate tax returns. The partners will provide for
their respective shares of income or loss in their Federal or applicable state
income tax returns. Foamex L.P. has a tax sharing agreement that provides for
the payment of distributions to the partners for amounts that would be required
to be paid if Foamex L.P. were a corporation filing separate tax returns. The
ability of Foamex L.P. to make such distributions is limited by the terms of its
credit agreements. See Note 6.
Accounting Changes
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
have any "Variable Interest Entities" as defined by FIN No. 46R and accordingly,
the adoption of FIN No. 46R did not have an impact on its financial statements.
In November 2004, the FASB issued Statement of Financial Accounting
Standards No. 151, "Inventory Costs an amendment of ARB No. 43, Chapter 4"
("SFAS No. 151"). The provisions of SFAS No. 151 require that abnormal amounts
of idle facility expense, freight, handling costs and wasted material be
recognized as current period charges, regardless of the circumstances under
which such charges arose. SFAS No. 151 is effective for fiscal years beginning
after June 15, 2005 and is not expected to have a significant impact on Foamex
L.P.'s financial statements.
Reclassifications
Certain amounts from prior years have been reclassified to conform with the
current presentation.
3. CUMULATIVE EFFECT OF ACCOUNTING CHANGE
Included as a cumulative effect of accounting changes in 2002 is a charge
of $72.0 million associated with the adoption of SFAS No. 142 (see Note 2).
4. RESTRUCTURING, IMPAIRMENT AND OTHER CHARGES
2004
During 2004, Foamex L.P. recorded restructuring, impairment and other
charges of $3.2 million, primarily consisting of a $1.7 million charge primarily
related to lease costs and asset write offs in connection with the closing of
its New York City office, a $0.7 million charge related to the realignment of
its automotive operations and an impairment charge of $0.6 million for an idle
facility.
F-13
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. RESTRUCTURING, IMPAIRMENT AND OTHER CHARGES (continued)
2003
During 2003, Foamex L.P. recorded restructuring, impairment and other
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 and $2.1 million related to the collection of
deferred rent receivable which had been fully reserved.
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
----- ------------- ---------- ---------- --------
2002 (millions)
Balance at January 1, 2002 $25.0 $14.7 $ 7.8 $ - $2.5
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
2004
Restructuring and impairment charges 3.2 2.4 0.8 - -
Cash spending (4.1) (2.3) (1.0) - (0.8)
Asset impairment (1.4) (1.4) - - -
----- ----- ----- ---- ----
Balance at January 2, 2005 $ 7.4 $ 6.7 $ 0.7 $ - $ -
===== ===== ===== ==== ====
Foamex L.P. expects to spend approximately $1.8 million during 2005 with
the balance to be spent through 2012, primarily for lease termination costs
which are recorded net of estimated sublease rental income of approximately $3.8
million.
F-14
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. INVENTORIES
The components of inventory are listed below.
January 2, December 28,
2005 2003
---------- ------------
(thousands)
Raw materials and supplies $ 63,336 $61,855
Work-in-process 18,667 16,484
Finished goods 18,026 17,543
-------- -------
Total $100,029 $95,882
======== =======
6. LONG-TERM DEBT AND REVOLVING CREDIT BORROWINGS
The components of long-term debt and revolving credit borrowings are listed
below.
January 2, December 28,
2005 2003
---------- ------------
Foamex L.P. Senior Secured Credit Facility (thousands)
Term Loan (1) $ 37,371 $ 48,214
Foamex L.P. Secured Term Loan (1) 80,000 80,000
10 3/4% Senior Secured Notes due 2009 (2) (4) 309,703 311,950
9 7/8% Senior Subordinated Notes due 2007 (2) 148,500 148,500
13 1/2% Senior Subordinated Notes due 2005 (includes
$581 and $1,543 of unamortized debt premium) (2) 52,166 53,128
Industrial revenue bonds (3) 7,000 7,000
Other (net of unamortized debt discount of $45 in 2004
and $93 in 2003) 852 766
-------- --------
635,592 649,558
Less current portion 67,131 15,937
-------- --------
Long-term debt $568,461 $633,621
======== ========
Revolving credit borrowings (1) $114,907 $ 96,065
======== ========
(1) Debt of Foamex L.P., guaranteed by Foamex International, FMXI, Inc. and
Foamex Canada.
(2) Debt of Foamex L.P. and Foamex Capital Corporation.
(3) Debt of Foamex L.P.
(4) Includes $9.7 million in 2004 and $12.0 million in 2003 of deferred credits
on interest rate swap transactions.
Senior Secured Credit Facility
On August 18, 2003, Foamex L.P. entered into a 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 Senior Secured Credit Facility initially consisted of a revolving
credit facility with a maximum availability of $190.0 million and a term loan of
$50.0 million. On November 3, 2004, the lenders under the Senior Secured Credit
Facility agreed to lend up to an additional $15.0 million under a new junior
term loan. The revolving
F-15
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. LONG-TERM DEBT AND REVOLVING CREDIT BORROWINGS (continued)
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 January 2, 2005 and December 28, 2003, Foamex L.P. had
available borrowings of approximately $25.0 million and $46.8 million,
respectively, and letters of credit outstanding of $22.1 million and $20.9
million, respectively. 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 January 2,
2005, the weighted average interest rates were 6.00% for both the revolving
loans and the term loan. At December 28, 2004, 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. Borrowings
under the junior term loan can be used only to repay the 13 1/2% Senior
Subordinated Notes at maturity and will bear interest at a floating rte based on
either LIBOR, as defined, reset monthly plus 6.00%. All borrowings under the
Senior Secured Credit Facility will mature on April 30, 2007. The 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
January 2, 2005 and 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 Secured Term Loan had an original maturity date of April 30, 2007. On
November 3, 2004, the lenders agreed to lend up to an additional $39.0 million,
the proceeds of which could be used only to repurchase prior to or repay the 13
1/2% Senior Subordinated Notes at maturity and certain fees related to the new
financing. The lenders also agreed to extend the maturity of the Secured Term
Loan to April 1 2009. 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 was in effect as of December 28, 2003, is 13.50%. The
rate in effect at January 2, 2005 was 14.50%. In addition, Foamex L.P. is
subject to a 1.00% facility fee on the initial $80.0 million term loan which is
payable annually on the anniversary date, a 1.5% commitment fee on the unused
portion of the $39.0 million additional commitment and a funding fee equal to
2.5% of the additional amount borrowed with a minimum funding fee of
approximately $0.6 million. Borrowings under the Secured Term Loan are
collateralized by the same collateral as the Senior Secured Credit Facility. An
intercreditor agreement governs the distribution of collateral among the lenders
under the 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 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 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.
F-16
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. LONG-TERM DEBT AND REVOLVING CREDIT BORROWINGS (continued)
Foamex L.P. was required to cause a registration statement under the
Securities Act of 1933 to be effective within 180 days of March 25, 2002. Foamex
L.P. filed the registration statement, but it was not effective until January
30, 2003 and therefore Foamex L.P. was liable for liquidated damages from
September 23, 2002 until the date the registration statement became effective.
The liquidated damages were at the rate of $15,000 per week for the first 90
days, escalating by $15,000 per week for each additional 90 days. The liquidated
damages of $0.3 million were paid on April 1, 2003.
Effective May 1, 2002, Foamex L.P. completed a series of interest rate swap
transactions with notional amounts aggregating $300.0 million. Foamex L.P.
designated, documented and accounted for these interest rate swaps as fair value
hedges of its 10 3/4% Senior Secured Notes due April 1, 2009. The risk being
hedged in these transactions was the change in fair value of its 10 3/4% Senior
Secured Notes based on changes in the benchmark interest rate, LIBOR. The effect
of these interest rate swap transactions was to convert the fixed interest rate
on the senior secured notes to floating rates reset twice per year to correspond
with the interest payment dates for the 10 3/4% Senior Secured Notes. On
September 18, 2002, Foamex L.P. unwound the interest rate swap transactions in
exchange for net cash proceeds of $18.4 million, including $3.6 million realized
through lower effective interest rates while the swap transactions were in
effect. The unwinding resulted in a deferred credit of $14.8 million which is
being amortized through April 1, 2009, using the effective interest rate method.
9 7/8% Senior Subordinated Notes
The 9 7/8% Senior Subordinated Notes were issued by Foamex L.P. and Foamex
Capital Corporation and are due on June 15, 2007. The notes represent
uncollateralized general obligations of Foamex L.P. and are subordinated to all
Senior Debt, as defined in the Indenture. Interest is payable June 15 and
December 15. The notes may be redeemed at the option of Foamex L.P., in whole or
in part, at any time on or after June 15, 2002. The initial redemption is at
104.938% of their principal amount, plus accrued and unpaid interest, if any,
thereon to the date of redemption and declining annually to 100.0% on or after
June 15, 2005. At January 2, 2005, the redemption price was 101.646% 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 January 2, 2005, the redemption price was
100.000% 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).
F-17
6. LONG-TERM DEBT AND REVOLVING CREDIT BORROWINGS (continued)
Industrial Revenue Bonds ("IRBs")
IRB debt includes a $1.0 million bond that matures on October 1, 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
January 2, 2005, the interest rate was 1.95% on the $1.0 million bond and 2.04%
on the $6.0 million bond. The maximum interest rate for either of the IRBs is
15.0% per annum. If Foamex L.P. exercises its option to convert the bonds to a
fixed interest rate structure, the IRBs are redeemable at the option of the
bondholders. In addition, at any time prior to conversion to a fixed interest
rate structure, bondholders upon notice to the bond trustee and the remarketing
agent may place the bonds for sale. If the remarketing agent is not successful
in reselling the bonds before settlement is due on bonds placed for sale, the
bond trustee may draw on a letter of credit issued under the Senior Secured
Credit Facility to repay the bondholder for the bonds placed for sale until the
bonds can be resold by the remarketing agent. Pursuant to this arrangement, the
IRBs have been classified as current in the accompanying consolidated balance
sheets at January 2, 2005 and December 28, 2003.
The IRBs are collateralized by certain properties, which have an
approximate net carrying value of $10.5 million at January 2, 2005.
Other
Other debt includes a non-interest bearing promissory note with a principal
amount of $0.9 million at January 2, 2005 issued in connection with increasing
Foamex L.P.'s interest in an Asian joint venture to 70.0% in 2001. The
promissory note which matures on December 1, 2005 had unamortized discount of
$0.1 million at January 2, 2005.
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 January 2, 2005, 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 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. Amendments to the Senior Secured Credit Facility and
Secured Term Loan executed on November 3, 2004 allowed Foamex L.P. to exclude
certain charges aggregating approximately $3.7 million and approximately $1.0
million in the first and second quarters of 2004, respectively, from the
computation of the fixed charge coverage ratio. For the four quarters ended
January 2, 2005, Foamex L.P.'s fixed charge coverage ratio was 0.98 and the
lenders have agreed to waive compliance with the fixed charge coverage ratio for
that period. On March 31, 2005, Foamex L.P. entered into amendments with the
existing lenders under the Senior Secured Credit Facility and the Secured Term
Loan that set lower minimum fixed charge coverage ratios through April 2, 2006
and permit borrowing of up to $25.0 million of the additional $39.0 million
commitment under the Secured Term Loan, the proceeds of which would be used to
repay revolving loans. Foamex L.P. incurred fees and expenses for the waivers
and amendments aggregating approximately $1.0 million. For the two quarters
ended December 28, 2003, Foamex L.P.'s fixed charge coverage ratio was 1.09.
Foamex L.P.
F-18
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. LONG-TERM DEBT AND REVOLVING CREDIT BORROWINGS (continued)
is also subject to a maximum annual capital expenditure amount which was $36.0
million for the year ended January 2, 2005 and will be $46.8 million for the
year ending January 1, 2006.
Maturities of Long-Term Debt
Scheduled maturities of long-term debt as of January 2, 2005 are shown
below (thousands):
2005 $ 60,595
2006 7,172
2007 171,586
2008 -
2009 380,000
Thereafter 6,000
--------
625,353
Unamortized debt premium/discount and fair
value adjustment, net 10,239
--------
Total $635,592
========
7. 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.
Foamex L.P. also has a supplemental executive retirement plan (the "SERP").
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.
F-19
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. RETIREE BENEFIT PLANS (continued)
Change in projected benefit obligations, plan assets and funded status
follows:
Pension Benefits Other Benefits
2004 2003 2004 2003
---------- ---------- -------- --------
Change in Benefit Obligations (thousands)
Benefit obligations at beginning of year $125,052 $107,390 $ 1,234 $ 1,248
Service cost 4,804 4,300 30 29
Interest cost 7,463 7,086 69 76
Amendments - 257 - -
Benefits paid (6,038) (5,392) (78) (139)
Plan participants' contributions - - 16 15
Actuarial loss (gain) 12,008 10,461 (45) 5
Foreign currency exchange rate changes 615 950 - -
-------- -------- ------- -------
Benefit obligation at end of year $143,904 $125,052 $ 1,226 $ 1,234
======== ======== ======= =======
Change in Plan Assets
Fair value of plan assets at
beginning of year $ 79,886 $ 60,085 $ - $ -
Actual return on plan assets 7,746 15,240 - -
Employer contribution 10,186 9,564 62 124
Plan participants' contributions - - 16 15
Benefits paid (6,038) (5,392) (78) (139)
Plan administrative expenses (500) (438) - -
Foreign currency exchange rate changes 588 827 - -
-------- -------- ------- -------
Fair value of plan assets at end of year $ 91,868 $ 79,886 $ - $ -
======== ======== ======= =======
Funded Status and Net Amounts Recognized
in Consolidated Balance Sheets
Funded status $(52,036) $(45,166) $(1,226) $(1,234)
Unrecognized transition asset (290) (365) - -
Unrecognized prior service cost (benefit) 192 92 (41) (47)
Unrecognized net actuarial loss 60,021 50,997 328 387
-------- -------- ------- -------
Net amount recognized in consolidated
balance sheets $ 7,887 $ 5,558 $ (939) $ (894)
======== ======== ======= =======
Amounts Recognized in the Consolidated
Balance Sheets
Prepaid benefit costs $ 9,263 $ 6,520 $ - $ -
Accrued benefit liability (53,109) (46,192) (939) (894)
Intangible assets 596 674 - -
Accumulated other comprehensive loss* 51,137 44,556 - -
-------- -------- ------- -------
Net amount recognized $ 7,887 $ 5,558 $ (939) $ (894)
======== ======== ======= =======
* Before related income tax benefit.
The accumulated benefit obligation for all defined benefit plans was $135.9
million at year-end 2004 and $119.5 million at year-end 2003. Information for
defined benefit plans with an accumulated benefit obligation in excess of plan
assets is listed below.
F-20
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. RETIREE BENEFIT PLANS (continued)
December 31, 2004 December 31, 2003
----------------- -----------------
(thousands)
Projected benefit obligation $139,242 $121,381
Accumulated benefit obligation $132,444 $116,767
Fair value of plan assets $ 88,128 $ 76,871
Components of Net Periodic Benefit Plan Cost
Pension Benefits Other Benefits
---------------------------- -------------------------
2004 2003 2002 2004 2003 2002
------ ------ ------ ------ ------ ------
(thousands)
Service cost $4,804 $4,300 $3,866 $30 $ 29 $ 29
Interest cost 7,463 7,086 6,556 69 76 82
Expected return on plan assets (6,891) (5,611) (5,823) - - -
Amortization of transition assets (75) (75) (75) - - -
Amortization of prior service benefit (111) (109) (140) (6) (6) (6)
Amortization of net loss (gain) 2,776 3,090 1,643 14 16 15
Curtailment - - (162) - - -
------ ------ ------ ---- ---- ----
Net periodic benefit plan cost $7,966 $8,681 $5,865 $107 $115 $120
====== ====== ====== ==== ==== ====
Additional Information
Pension Benefits Other Benefits
------------------------ -----------------------
2004 2003 2004 2003
---------- ---------- -------- --------
(thousands)
Increase (decrease) in minimum liability
included in other comprehensive loss* $6,581 $(2,033) N/A N/A
* Before related income tax benefit.
Weighted-Average Assumptions Used Pension Benefits Other Benefits
------------------------ -----------------------
to Determine Benefit Obligations 2004 2003 2004 2003
---------------------------------------- ---------- ---------- -------- --------
Discount rate -U.S. Plans 5.5% 6.0% 5.5% 6.0%
Discount rate - Canadian Plans 5.75% 6.0% N/A N/A
Expected long-term return on plan assets* 8.5% 9.0% N/A N/A
Rate of compensation increase 3.5%-5.0% 3.5%-5.0% N/A N/A
Weighted-Average Assumptions Used
to Determine Annual Net Benefit Cost
Discount rate 6.0% 6.5% 6.0% 6.5%
Expected long-term return on plan assets* 8.5% 9.0% N/A N/A
Rate of compensation increase 3.5%-5.0% 4.0%-5.0% 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, 2004 December 31, 2003
Health care cost trend rate assumed for next year 11.0% 12.0%
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
F-21
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. RETIREE BENEFIT PLANS (continued)
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 for
2004.
Assumed Health Care Cost Trend
1% Point Increase 1% Point Decrease
----------------- -----------------
(thousands)
Effect on total of service cost and interest cost $10 $ (8)
Effect on postretirement benefit obligation $98 $(84)
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 2004, common stock of
Foamex International totaled $1.6 million, or 1.9% of the assets. At year-end
2003, common stock of Foamex International totaled $2.1 million, or 2.8% of the
assets.
U. S. Plan Assets
--------------------------------------------
December 31, 2004 December 31, 2003
----------------- -----------------
Equity securities 63% 64%
Debt securities 30 30
Other 7 6
--- ---
Total 100% 100%
=== ===
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.
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.
Canadian Plan Assets
Pension plan assets from pension plans in Canada totaled $7.2 million, or
7.9% of assets, at year-end 2004 and $5.5 million, or 6.9% of assets, at
year-end 2003. Canadian pension plan assets are primarily invested in Canadian
equity securities with the balance in foreign equities.
Cash Flows
Contributions
Foamex L.P. expects to contribute $7.4 million to its pension plan and $0.1
million to its other postretirement benefit plans in 2005.
F-22
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. RETIREE BENEFIT PLANS (continued)
Estimated Future Benefit Payments
The following benefit payments, which reflect expected future service, as
appropriate, are expected to be paid:
Pension Benefits Other Benefits
---------------- --------------
2005 $ 6,200 $132
2006 $ 6,548 $120
2007 $ 6,822 $100
2008 $ 7,314 $ 98
2009 $ 7,751 $ 82
Years 2010-2014 $46,264 $441
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, $0.9 million and $1.0 million in 2004, 2003 and
2002, respectively.
8. INCOME TAXES
The sources of income (loss) before the provision for income taxes are
shown below.
2004 2003 2002
-------- -------- -------
(thousands)
United States $(24,144) $(26,893) $(30,158)
Foreign (256) 974 4,745
-------- -------- --------
Income (loss) before provision for income taxes $(24,400) $(25,919) $(25,413)
======== ======== ========
A reconciliation of the statutory federal income tax to income tax expense
is listed below.
2004 2003 2002
-------- --------- -------
(thousands)
Statutory income taxes $(8,540) $(9,072) $(8,895)
State income taxes, net of federal benefit (1,062) (831) (810)
Permanent difference on partnership income 9,552 9,668 11,816
Increase (decrease) in valuation allowance 8 649 332
Impact of tax rate change - 85 -
Other, net 673 995 (652)
------- ------- -------
Total $ 631 $ 1,494 $ 1,791
======= ======= =======
The provision for income taxes is summarized as follows:
2004 2003 2002
-------- --------- -------
Current (thousands)
Federal $ - $ - $ -
State 19 60 226
Foreign 577 1,286 2,423
------- ------- -------
Total current 596 1,346 2,649
------- ------- -------
F-23
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. INCOME TAXES (continued)
2004 2003 2002
-------- --------- -------
Deferred (thousands)
Federal - - -
State - - (518)
Foreign 27 (501) (672)
------- ------- -------
Total deferred 27 (501) (1,190)
------- ------- -------
Change in valuation allowance 8 649 332
------- ------- -------
Total provision for income taxes $ 631 $ 1,494 $ 1,791
======= ======= =======
The tax effect of the temporary differences that give rise to deferred
income tax assets and liabilities are listed below.
January 2, December 28,
2005 2003
--------- -----------
(thousands)
Loss carryforwards and other $ 4,431 $ 3,602
Valuation allowance for deferred income tax assets (2,025) (1,810)
-------- -------
Deferred income tax assets 2,406 1,792
-------- -------
Deferred income tax liabilities
Basis difference in property, plant and equipment (612) (512)
Investment in joint venture (771) (771)
Other (2,779) (2,175)
-------- -------
Deferred income tax liabilities (4,162) (3,458)
-------- -------
Net deferred income tax liabilities $ (1,756) $(1,666)
======== =======
The American Jobs Creation Act of 2004 introduced a special one-time
dividends received deduction on the repatriation of certain foreign earnings.
Following a review by Foamex L.P., no earnings from foreign subsidiaries are
anticipated to be repatriated to utilize the special deduction.
At January 2, 2005, Foamex L.P. had $3.2 million of net operating loss
carryforwards in a Mexican subsidiary that expire in 2006 through 2014. A full
valuation allowance has been recorded at January 2, 2005 and December 28, 2003
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 January 2, 2005 and December 28, 2003. 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.
9. 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 January 2, 2005, 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-24
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. PARTNERS' DEFICIENCY (continued)
Accumulated Other Comprehensive Loss
The components of accumulated other comprehensive loss are listed below.
2004 2003 2002
--------- ----------- --------
(thousands)
Foreign currency translation adjustment $ (1,219) $ (3,257) $ (9,869)
Minimum pension liability (50,809) (44,556) (46,589)
-------- -------- --------
$(52,028) $(47,813) $(56,458)
======== ======== ========
10. 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 prime, rebond, felt and rubber carpet
padding. Automotive Products supplies foam products and laminates to major tier
one suppliers and OEMs. 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 and
fabrication operations in Mexico City, corporate expenses not allocated to other
business segments and restructuring, impairment and other charges (credits) (see
Note 4). 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.
Sales to one customer, which are included in Automotive Products, accounted
for approximately 12.5%, 16.3% and 17.3% of net sales in 2004, 2003 and 2002,
respectively. No other customer accounted for more than 10.0% of net sales
during the periods presented.
Business segment results are presented below.
Foam Cushion Automotive Technical
Products Products Products Products Other Total
-------- -------- ---------- --------- --------- ----------
2004 (dollars in thousands)
Net sales $551,414 $209,182 $350,985 $124,146 $ 30,667 $1,266,394
Income (loss) from operations $ 52,418 $ 8,539 $ 19,245 $ 32,916 $(61,318) $ 51,800
Depreciation and amortization $ 10,213 $ 2,978 $ 3,116 $ 2,801 $ 6,825 $ 25,933
2003
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
F-25
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. BUSINESS SEGMENTS (continued)
Foam Cushion Automotive Technical
Products Products Products Products Other Total
-------- -------- ---------- --------- --------- ----------
2002 (dollars in thousands)
Net sales $471,005 $234,001 $466,718 $124,124 $ 32,246 $1,328,094
Income (loss) from operations $ 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
Results by geographical area are presented below.
United
States Canada Mexico Consolidated
---------- ------- -------- ------------
2004 (thousands)
Net sales $1,009,102 $59,435 $197,857 $1,266,394
Property, plant and equipment, net $ 120,578 $ 5,100 $ 15,865 $ 141,543
2003
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
11. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
2004 2003 2002
------- ------- -------
(thousands)
Cash paid for interest $73,218 $72,785 $56,583
======= ======= =======
Cash paid for income taxes, net $ 120 $ 2,349 $ 2,222
======= ======= =======
Non cash - capital leases $ 49 $ - $ -
======= ======= =======
12. 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 International Holdings, Inc. ("Trace"), which was
formerly a major stockholder of Foamex International, 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?%
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?% 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
F-26
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. RELATED PARTY TRANSACTIONS AND BALANCES (continued)
Trace notes to the general partners' deficiency. Foamex L.P. has not recorded
any interest income on these notes since the Trace bankruptcy.
Trace Accounts Receivable
At January 2, 2005 and December 28, 2003, operating accounts receivable
from Trace were approximately $3.1 million and $3.4 million, respectively. These
accounts receivable were fully reserved for prior to 2002.
Foam Funding LLC Debt
Foamex L.P. paid interest on notes payable to Foam Funding LLC of $0.7
million in 2002. Foamex L.P. paid principal on notes payable to Foam Funding LLC
of $31.6 million in 2002. This debt was fully repaid in 2002.
Other
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 recorded a one-time charge of
approximately $1.4 million in the first quarter of 2004 for amounts payable
under this agreement, none of which related to past service rendered by the
former Chairman. Additionally, Foamex International recorded 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.
In 2002, pursuant to the terms of an existing agreement, Foamex L.P.
acquired the 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, one of Foamex International's former 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 former 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 maintained an
apartment used by this former director. Rent expense for this facility was $0.1
million in 2004 and $0.2 million in 2003 and 2002. The apartment lease expired
in 2004 and was not renewed.
Foamex L.P., 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 former 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.
During 2001, Foamex International entered into an agreement that guarantees
two non-recourse 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 former director of Foamex International and an employee
of Foamex L.P. Foamex L.P. has established an accrual of $0.3 million included
in other liabilities at January 2, 2005 since the promissory notes are
nonrecourse.
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
F-27
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. RELATED PARTY TRANSACTIONS AND BALANCES (continued)
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 $0.1 million in 2004 and $0.5
million in 2002 for legal services to a law firm in which another Foamex
International director is a partner.
13. 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 January 2, 2005 are (thousands):
2005 $16,232
2006 12,065
2007 10,012
2008 8,061
2009 6,186
Balance 18,878
-------
Total $71,434
=======
Rental expense charged to operations under operating leases approximated
$19.3 million, $18.8 million and $23.4 million in 2004, 2003 and 2002,
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
$117.7 million in 2005, $98.3 million in 2006, $92.5 million in 2007, $88.5
million in 2008 and $88.5 million in 2009.
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 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 January 2, 2005, Foamex L.P. had accrued approximately $1.1 million
for litigation and other legal matters in addition to the environmental matters
discussed below.
F-28
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. COMMITMENTS AND CONTINGENCIES (continued)
Environmental and Health and Safety
Foamex L.P. is subject to extensive and changing federal, state, local and
foreign environmental laws and regulations, including those relating to the use,
handling, storage, discharge and disposal of hazardous substances, the discharge
or emission of materials into the environment, and the remediation of
environmental contamination, and as a result, is from time to time involved in
administrative and judicial proceedings and inquiries relating to environmental
matters. As of January 2, 2005, Foamex L.P. had accruals of approximately $2.0
million for environmental matters, including approximately $1.7 million related
to remediating and monitoring soil and groundwater contamination and
approximately $0.3 million related to sites where it has been designated as a
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, which we have implemented, and 100.0% reduction
by January 1, 2007. This standard has not and will not require Foamex L.P. us to
make material expenditures for its Canadian plants.
Foamex L.P. has reported to the appropriate state authorities that it had
found soil and/or groundwater contamination in excess of state standards at
certain locations. Seven sites are currently in various stages of investigation
or remediation. Accordingly, the extent of contamination and the ultimate
liability is not known with certainty for all sites.
Foamex L.P. has either upgraded or closed all underground storage tanks at
its 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. 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 12 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.
14. 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 January 2, 2005 and December 28, 2003 and the condensed
consolidating statements of operations and cash flows for the years ended
January 2, 2005, December 28, 2003 and December 29, 2002 of the Guarantors and
nonguarantors. The Guarantors include Foamex Carpet, Foamex Latin America, Inc.,
Foamex Mexico, Inc., Foamex Mexico II, Inc. and Foamex Asia, Inc. On December
30, 2002,
F-29
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. GUARANTOR INFORMATION (continued)
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 January 2, 2005 and December 28, 2003 and for the
years 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 January 2, 2005
Foamex
Capital Foamex L.P. Consolidated
Guarantors Nonguarantors Corporation (Parent) Eliminations Foamex L.P.
---------- ------------- ----------- ----------- ------------ ------------
Assets (thousands of dollars)
Current assets $ - $29,953 $ 1 $284,159 $ (3,594) $ 310,519
Investment in subsidiaries 8,768 - - 42,213 (50,981) -
Property, plant and equipment, net - 18,650 - 122,893 - 141,543
Goodwill - 6,328 - 120,486 - 126,814
Debt issuance costs - - - 21,152 - 21,152
Other assets 15,686 2,486 - 36,556 (9,050) 45,678
------- ------- ------ -------- -------- ---------
Total assets $24,454 $57,417 $ 1 $627,459 $(63,625) $ 645,706
======= ======= ====== ======== ======== =========
Liabilities and Partners' Deficiency
Current liabilities $ 1,589 $19,020 $ - $347,549 $ (3,594) $ 364,564
Long-term debt 4,200 4,850 - 568,461 (9,050) 568,461
Other liabilities - 1,232 - 67,040 - 68,272
------- ------- ------ -------- -------- ---------
Total liabilities 5,789 25,102 - 983,050 (12,644) 1,001,297
Partners' deficiency 18,665 32,315 1 (355,591) (50,981) (355,591)
------- ------- ------ -------- -------- ---------
Total liabilities and partners'
deficiency $24,454 $57,417 $ 1 $627,459 $(63,625) $ 645,706
======= ======= ====== ======== ======== =========
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
======= ======= ====== ======== ======== ========
F-30
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. GUARANTOR INFORMATION (continued)
Condensed Consolidating Statement of Operations
For the year ended January 2, 2005
Foamex
Capital Foamex L.P. Consolidated
Guarantors Nonguarantors Corporation (Parent) Eliminations Foamex L.P.
---------- ------------- ----------- ----------- ------------ ------------
(thousands of dollars)
Net sales $ - $100,515 $ - $1,187,774 $(21,895) $1,266,394
Cost of goods sold - 93,882 - 1,052,560 (21,895) 1,124,547
------- -------- ------ ---------- -------- ----------
Gross profit - 6,633 - 135,214 - 141,847
Selling, general and administrative
expenses - 6,722 - 80,075 - 86,797
Restructuring, impairment and other
charges - - - 3,250 - 3,250
------- -------- ------ ---------- -------- ----------
Income from operations - (89) - 51,889 - 51,800
Interest and debt issuance expense 250 330 - 76,614 (527) 76,667
Equity in undistributed earnings
of affiliates (658) - - (760) 2,105 687
Other expense, net 202 (524) - 629 (527) (220)
------- -------- ------ ---------- -------- ----------
Loss before provision for income
taxes (706) (943) - (24,856) 2,105 (24,400)
Provision for income taxes - 456 - 175 - 631
------- -------- ------ ---------- -------- ----------
Net loss $ (706) $ (1,399) $ - $ (25,031) $ 2,105 $ (25,031)
======= ======== ====== ========== ======== ==========
F-31
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. 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-32
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. 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-33
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. GUARANTOR INFORMATION (continued)
Condensed Consolidating Statement of Cash Flows
For the year ended January 2, 2005
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) $ (705) $(1,399) $ - $(25,031) $2,104 $(25,031)
Total adjustments to reconcile net
income (loss) to net cash provided
by (used in) operating activities 705 2,665 - 23,962 (2,104) 25,228
------- ------- ------- -------- ------ --------
Net cash provided by
operating activities - 1,266 - (1,069) - 197
Cash Flows from Investing Activities
Capital expenditures - (1,235) - (4,275) - (5,510)
Acquisition - - - - - -
Other - - - 2,801 (2,500) 301
------- ------- ------- -------- ------ --------
Net cash used in investing activities - (1,235) - (1,474) (2,500) (5,209)
Cash Flows from Financing Activities
Net proceeds from revolving loans - - - 18,841 - 18,841
Repayments of long-term debt - - - (10,853) - (10,853)
Other, net - (2,500) - (4,239) 2,500 (4,239)
------- ------- ------- -------- ------ --------
Net cash provided by financing
activities - (2,500) - 3,749 2,500 3,749
------- ------- ------- -------- ------ --------
Net decrease in cash and cash equivalents - (2,469) - 1,206 - (1,263)
Cash and cash equivalents at
beginning of period - 4,669 1 1,940 - 6,610
------- ------- ------- -------- ------ --------
Cash and cash equivalents at
end of period $ - $ 2,200 $ 1 $ 3,146 $ - $ 5,347
======= ======= ======= ======== ====== ========
F-34
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14 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-35
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. 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-36
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
The Board of Directors of
Foamex Capital Corporation:
We have audited the accompanying balance sheet of Foamex Capital Corporation
(the "Company"), a wholly-owned subsidiary of Foamex L.P., as of January 2,
2005. This financial statement is the responsibility of the Company's
management. Our responsibility is to express an opinion on this financial
statement based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). 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 of a balance sheet includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the balance sheet. An audit of a balance sheet 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 audit
of the balance sheet provides a reasonable basis for our opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of Foamex Capital Corporation as of
January 2, 2005, in conformity with U.S. generally accepted accounting
principles.
/s/ KPMG LLP
Philadelphia, Pennsylvania
April 4, 2005
F-37
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
To the Board of Directors of
Foamex Capital Corporation
Wilmington, Delaware
We have audited the accompanying balance sheet of Foamex Capital Corporation (a
wholly-owned subsidiary of Foamex L.P.) (the "Company") as of December 28, 2003.
This financial statement is the responsibility of the Company's management. Our
responsibility is to express an opinion on this financial statement based on our
audit.
We conducted our audit in accordance with standards of the Public Company
Accounting Oversight Board (United States). 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 audit provides a reasonable basis for our
opinion.
In our opinion, such balance sheet presents fairly, in all material respects,
the financial position of the Company at December 28, 2003, in conformity with
accounting principles generally accepted in the United States of America.
/s/ DELOITTE & TOUCHE LLP
March 9, 2004
Parsippany, New Jersey
F-38
FOAMEX CAPITAL CORPORATION
(A Wholly-Owned Subsidiary of Foamex L.P.)
BALANCE SHEETS
January 2, December 28,
2005 2003
---------- -----------
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-39
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 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 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, 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 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, if any, thereon to the date of
redemption and declining annually to 100.0% on or after June 15, 2005. At
January 2, 2005, the redemption price was 101.646% 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-40
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 January 2, 2005, the redemption price was 100.000% 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-41
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 JANUARY 2, 2005
Allowance for Uncollectible Accounts $8,254 $3,291 $ - $ 4,491 $7,054
====== ====== ======= ======= ======
Reserve for Discounts $2,251 $ - $14,751 (1) $15,055 $1,957
====== ====== ======= ======= ======
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
====== ====== ======= ======= ======
(1) Adjustments reflect a reduction in net sales.
S-2