Item 1 "Business" for a more complete description of the activities of our business segments.
An executive vice president heads each of our principal operating segments. Each executive vice president is responsible for developing budgets and plans as well as directing the operations of the segment. The performance of each operating segment is measured based upon income from operations, excluding restructuring, impairment and other charges and corporate overhead. We do not allocate restructuring, impairment and other charges to operating segments because many of our facilities produce products for multiple segments.
Foam Products - manufactures and markets cushioning foams for bedding, furniture, packaging and health care applications, and foam-based consumer products, such as mattress pads and children's furniture.
Carpet Cushion Products - manufactures and distributes 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.
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
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
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
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.
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
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.
Contractual Obligations
Our contractual obligations as of January 2, 2005 are shown in the following table:
(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
(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
$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.
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
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.
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
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.
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.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
An index to the financial statements and financial statement schedules is included in Item 15.
ITEM 9.
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.
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
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.
ITEM 9b. OTHER INFORMATION
None.
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.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial statements.
(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.
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.
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.
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.
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.
(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.
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
FOAMEX L.P. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
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
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
FOAMEX L.P. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
The accompanying notes are an integral part of the consolidated financial statements.
FOAMEX L.P. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
The accompanying notes are an integral part of the consolidated financial statements.
FOAMEX L.P. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED
The accompanying notes are an integral part of the consolidated financial statements.
FOAMEX L.P. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED
The accompanying notes are an integral part of the consolidated financial statements.
FOAMEX L.P. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF PARTNERS' DEFICIENCY
The accompanying notes are an integral part of the consolidated financial statements.
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.
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.
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
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.
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
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.
FOAMEX L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. RESTRUCTURING, IMPAIRMENT AND OTHER CHARGES (continued)
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.
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):
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.
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.
(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
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.
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).
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.
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.
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:
* 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.
FOAMEX L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. RETIREE BENEFIT PLANS (continued)
Components of Net Periodic Benefit Plan Cost
Additional Information
* Before related income tax benefit.
* 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.
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
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.
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.
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.
A reconciliation of the statutory federal income tax to income tax expense is listed below.
The provision for income taxes is summarized as follows:
FOAMEX L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. INCOME TAXES (continued)
The tax effect of the temporary differences that give rise to deferred income tax assets and liabilities are listed below.
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.
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.
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.
FOAMEX L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. BUSINESS SEGMENTS (continued)
Results by geographical area are presented below.
11. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
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
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
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.
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,
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 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 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 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 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 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 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
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
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
FOAMEX CAPITAL CORPORATION (A Wholly-Owned Subsidiary of Foamex L.P.) BALANCE SHEETS
The accompanying notes are an integral part of the balance sheets.
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
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).
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)
(1) Adjustments reflect a reduction in net sales.
S-2