ITEM 2. PROPERTIES
As of December 28, 2003, we maintained 56 manufacturing and distribution facilities. Total floor space in use at our 17 owned manufacturing and distribution facilities is approximately 3.4 million square feet and total floor space in use at our 39 leased manufacturing and distribution facilities is approximately 4.5 million square feet. Forty-seven of these facilities are located throughout 33 cities in the United States, four facilities are located in Canada, and five facilities are located in Mexico. We have approximately 1.9 million square feet of idle space of which approximately 1.1 million is leased.
The lease for one of our foam pouring facilities expires in 2004. It is conceivable that this lease may not be extended or renewed. Like any other lease, if we are unable to extend or renew this lease, the costs associated with a relocation could have a material adverse effect on our business, financial condition, cash flow and results of operations. Except as described above, we do not anticipate any problem in renewing or replacing any of the leases expiring in 2004.
We maintain administrative offices in Linwood, Pennsylvania and New York, New York.
Property information by business segment is not reported because many of our facilities produce products for multiple business segments.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
Litigation--Breast Implants
As of February 24, 2004, we and Trace International Holdings, Inc. ("Trace") were two of multiple defendants in 529 actions filed on behalf of approximately 652 recipients of breast implants in various United States courts and one Canadian provincial court, some of which allege substantial damages, but most of which allege unspecified damages for personal injuries of various types. Three of these cases seek to allege claims on behalf of all breast implant recipients or other allegedly affected parties, but no class has been approved or certified by the courts. During 1995, we, Foamex International and Trace were granted summary judgments and dismissed as defendants from all cases in the federal courts of the United States and the state courts of California. Appeals for these decisions were withdrawn and the decisions are final. The number of pending cases has steadily declined over the last several years from a peak of 3,486 cases on behalf of approximately 5,766 individuals. Despite the 1995 Summary Judgment, some cases have been filed against us and Trace in federal courts. These have been dismissed and, in many cases, the actions were re-filed in state courts. No cases relating to breast implants are pending against us or Trace in federal courts at this time. None of Foamex International, we, or Trace nor any of our carriers has paid to settle any claims relating to breast implants, and no judgment has ever been entered against Foamex International, Trace, or us or any of our carriers in respect of these matters.
Although breast implants do not contain foam, certain silicone gel implants were produced using a polyurethane foam covering fabricated by independent distributors or fabricators from bulk foam purchased from us or from Trace. Neither we nor Trace recommended, authorized, or approved the use of foam for these purposes. We are also indemnified by Trace for any such liabilities relating to foam manufactured prior to October 1990. Trace's insurance carrier has continued to pay our litigation expenses after Trace's filing of a petition for relief under the Bankruptcy Code on July 21, 1999. Trace's insurance policies continue to cover certain liabilities of Trace, but if
the limits of those policies are exhausted, Trace will be unable to continue to provide additional indemnification. While it is not feasible to predict or determine the outcome of these actions, based on management's present assessment of the merits of pending claims, without taking into account the indemnification provided by Trace, the coverage provided by Trace's and our liability insurance and potential indemnity from the manufacturers of polyurethane covered breast implants, management believes that it is not reasonably possible that the disposition of the matters that are pending or that may reasonably be anticipated to be asserted will result in a loss that is material to our consolidated financial position, results of operations or cash flows. If management's assessment of our liability relating to these actions is incorrect, these actions could have a material adverse effect on our financial position, results of operations and cash flows.
Litigation--Other
We and our subsidiaries are party to various lawsuits, both as defendant and plaintiff, arising in the normal course of business. It is the opinion of management that the disposition of these lawsuits will not, individually or in the aggregate, have a material adverse effect on our financial position or results of operations. If management's assessment of the liability relating to these actions is incorrect, these actions could have a material adverse effect on our consolidated financial position, results of operations and cash flows. As of December 28, 2003, we have accrued approximately $1.1 million for litigation, claims and other legal matters in addition to the environmental matters discussed below.
Environmental and Health and Safety
We are subject to extensive and changing federal, state, local and foreign environmental laws and regulations, including those relating to the use, handling, storage, discharge and disposal of hazardous substances, the discharge or emission of materials into the environment, and the remediation of environmental contamination, and as a result, are from time to time involved in administrative and judicial proceedings and inquiries relating to environmental matters. As of December 28, 2003, we had accruals of approximately $2.5 million for environmental matters, including approximately $2.3 million related to remediating and monitoring soil and groundwater contamination and approximately $0.2 million relating to PRP sites and other matters.
On August 31, 2002, Environment Canada, the Canadian environmental regulatory agency, finalized a rule which would require flexible polyurethane foam manufacturing operations to reduce methylene chloride (dichloromethane) air emissions. The rule establishes a 50.0% reduction in methylene chloride emissions by December 1, 2004 and 100.0% reductions by January 1, 2007. This standard will not require us to make material expenditures for our Canadian plants.
We have reported to the appropriate state authorities that we have found soil and/or groundwater contamination in excess of state standards at certain locations. Seven sites are currently in various stages of investigation or remediation. Accordingly, the extent of contamination and the ultimate liability is not known with certainty for all sites. During 2000, we reached an indemnification agreement with the former owner of the Morristown, Tennessee facility. The agreement allocates the incurred and future remediation costs between the former owner and us. The estimated allocation of future costs for the remediation of this facility is not significant, based on current known information. The former owner was Recticel Foam Corporation, a subsidiary of Recticel.
We have either upgraded or closed all underground storage tanks at our facilities in accordance with applicable regulations.
The Comprehensive Environmental Response, Compensation and Liability Act, or "CERCLA," and comparable state laws impose liability without fault for the costs of cleaning up contaminated sites on certain classes of persons that contributed to the release of hazardous substances into the environment at those sites, for example, by generating wastes containing hazardous substances which were disposed at such sites. We are currently designated as a PRP by the EPA or by state environmental agencies or other PRPs, pursuant to CERCLA or analogous state statutes, with respect to 11 sites. Estimates of total cleanup costs and fractional allocations of liability are often provided by the EPA, the state environmental agency or the committee of PRPs with respect to the specified site. Based on these estimates (to the extent available) and on known information, in each case and in the aggregate, we
do not expect additional costs, if any, to be material to our results of operations, financial position or cash flows.
Although it is possible that new information or future developments could require us to reassess the potential exposure relating to all pending environmental matters, including those described above, management believes that, based upon all currently available information, the resolution of these environmental matters will not have a material adverse effect on our operations, financial position, capital expenditures or competitive position. The possibility exists, however, that new environmental legislation and/or environmental regulations may be adopted, or other environmental conditions, including the presence of previously unknown environmental contamination, may be found to exist or a reassessment of the potential exposure to pending environmental matters may be necessary due to new information or future developments, that may require expenditures not currently anticipated and that may be material.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) Foamex L.P. is a privately held limited partnership. There is no established public trading market for its securities.
(b) As of December 28, 2003, there were two holders of Foamex L.P.'s equity securities.
(c) Listed below are the net cash receipts in accordance with tax sharing agreements. At December 28, 2003 and December 29, 2002, we have a liability of approximately $0.3 million to our partners in accordance with the tax sharing agreement.
Tax Sharing Distributions ------------------------- 2003 2002 -------- -------- (thousands) FMXI $ - $ - Foamex International - (105) ----- ----- $ - $(105) ===== =====
Limitations on Distributions
Our financing agreements restrict our ability to make distributions to our partners.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following table presents selected historical consolidated financial data of Foamex L.P. The financial data should be read in conjunction with the consolidated financial statements and related notes thereto included in this Annual Report on Form 10-K.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements so long as those statements are identified as forward-looking and are accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those projected in such statements. In connection with certain forward-looking statements contained in this Annual Report on Form 10-K and those that may be made in the future by or on behalf of us which are identified as forward-looking, we note that there are various factors that could cause actual results to differ materially from those set forth in any such forward-looking statements, such as the ability to implement customer selling price increases in response to higher raw material costs, raw material price increases, general economic conditions, the interest rate environment, the level of automotive production, carpet production, furniture and bedding production, and housing starts, the completion of various restructuring/consolidation plans, the achievement of management's business plans, our capital and debt structure (including various financial covenants), litigation and changes in environmental legislation and environmental conditions. The forward-looking statements contained in this Annual Report on Form 10-K were prepared by management and are qualified by, and subject to, significant business, economic, competitive, regulatory and other uncertainties and contingencies, all of which are difficult or impossible to predict and many of which are beyond our control.
Accordingly, there can be no assurance that the forward-looking statements contained in this Annual Report on Form 10-K will be realized or that actual results will not be significantly higher or lower. The forward-looking statements have not been audited by, examined by, compiled by or subjected to agreed-upon procedures by independent accountants, and no third party has independently verified or reviewed such statements. Readers of this Annual Report on Form 10-K should consider these facts in evaluating the information contained herein. In addition, our business and operations are subject to substantial risks which increase the uncertainty inherent in the forward-looking statements contained in this Annual Report on Form 10-K. The inclusion of the forward-looking statements contained in this Annual Report on Form 10-K should not be regarded as a representation by us or any other person that any of the forward-looking statements contained in this Annual Report on Form 10-K will be achieved. In light of the foregoing, readers of this Annual Report on Form 10-K are cautioned not to place undue reliance on the forward-looking statements contained herein.
EXECUTIVE SUMMARY Overview
We operate in the flexible polyurethane and advanced polymer foam products industry. Our operations are conducted directly and through our wholly-owned subsidiaries, Foamex Canada, Foamex Mexico and Foamex Asia. Business segments are listed below and business segment financial information is included in Note 11 to the consolidated financial statements. Please see Part I, Item 1 "Business" for a more complete description of the activities of our business segments.
An executive vice president heads each of our principal operating segments. Each executive vice president is responsible for developing budgets and plans as well as directing the operations of the segment. The performance of each operating segment is measured based upon income from operations, excluding restructuring, impairment and other charges and corporate overhead. We do not allocate restructuring, impairment and other charges to operating segments because many of our facilities produce products for multiple segments.
Foam Products - manufactures and markets cushioning foams for bedding, furniture, packaging and health care applications, and foam-based consumer products, such as mattress pads and children's furniture.
Carpet Cushion Products - manufactures and distributes rebond, prime, felt and rubber carpet padding.
Automotive Products - distributes automotive foam products and laminates to major Tier 1 suppliers and original equipment manufacturers, or "OEMs".
Technical Products - manufactures and markets reticulated and other specialty foams used for reservoiring, filtration, gasketing and sealing applications.
Other - primarily consists of certain manufacturing operations in Mexico City, corporate expenses not allocated to the other business segments and restructuring, impairment and other charges (credits).
Our sales are primarily to markets in the United States. These sales are impacted by economic conditions in several sectors of the United States economy, including consumer spending, sales of new and existing homes, the overall level of passenger car and light truck production and seasonality. We typically experience two seasonally slow periods during each year, in early July and in late December, due to scheduled plant shutdowns and holidays.
A small number of major customers produce a significant portion of our sales. In 2003, our largest customer provided 16.3% of our net sales and our five largest customers provided 34.7% of our net sales. Two of the five largest customers are customers of the Automotive Products segment and three are customers of the Foam Products segment.
The following discussion should be read in conjunction with the consolidated financial statements and related notes included in this Annual Report on Form 10-K.
Operations
The following table includes key elements of our financial statements expressed as a percentage of net sales for the years 1999 through 2003, except for net cash provided by (used for) operating activities which is expressed in millions of dollars.
As demonstrated by the table above, our results in the last two years have significantly deteriorated when compared to the prior three years. Our gross profit margin has been reduced by approximately three percentage points while selling general and administrative expenses and interest and debt issuance expense have both increased as a percentage of net sales, as well as in absolute dollar terms. Net sales dollars have been relatively flat over the 5 year period with 2003 representing an increase of less than one percent compared to 1999.
Our management is focusing on restoring former levels of profitability by concentrating on the following key areas:
o Managing raw material costs.
o Maintaining selling price increases to customers to recover raw material and manufacturing cost increases.
o Controlling and reducing labor and overhead costs both in manufacturing and administration.
o Developing new and more consumer-focused products and entering new markets with increased profit potential.
Our major chemical suppliers increased the cost of our raw materials several times in late 2002. Prices stabilized during 2003 but average unit prices for 2003 were higher than for 2002. There can be no assurance that chemical prices will not increase in 2004. We manage raw material costs by seeking alternative sources of supply, locking in prices when possible and negotiating discounts and rebates for volume purchases.
We have been only partially successful in raising selling prices to recover raw material and other cost increases. Selling price increases, reduced cost and increased mix of higher profit products are the major factors in restoring gross profit margin percentage to the 14% level experienced in 1999-2001 from the 11% level of 2002 and 2003.
We are focused on reducing both manufacturing costs and administrative expenses. We believe that our manufacturing operations are now of the appropriate scale and location to meet demand for our products as a result of closing several facilities in 2002 and 2003. We believe that manufacturing costs can be further reduced by emphasizing efficiency and better supply chain management. Our focus areas for further reductions in administrative expenses are employee related costs and professional service fees. Effective February 10, 2004, the Chairman of Foamex International resigned by mutual agreement with the Foamex International Board of Directors. As a result of this resignation, we may close our New York office, which was primarily used by the former Chairman of Foamex International.
In late 2003, we began to market an all foam mattress product that is vacuum packed in a box and designed to be carried home and self-installed by the consumer. We believe this product provides the consumer with convenience and price advantages when compared to traditional bedding products. We plan to develop and market additional consumer products and enter other consumer markets. We believe that we can achieve higher net sales and gross profit through this approach. We will also continue our development efforts in our other product offerings, especially our Technical Products.
If we can restore our gross profit margin to 14% or more and reduce and control administrative costs, we may be able to restore operating income to the level experienced in 1999 and 2000 and cash flow from operations to the level experienced in 1999, 2000 and 2001. At those levels we should be able to reduce borrowings and also cash interest expense. Our next large required debt repayment is $51.6 million principal of our 13 1/2% Senior Subordinated Notes due August 15, 2005.
Financing
On August 18, 2003, Foamex L.P. entered into a $240.0 Million Senior Secured Credit Facility with a new group of lenders and a Secured Term Loan with another lender. Proceeds borrowed under these new facilities were used to repay all outstanding balances under the Foamex L.P. Amended Credit Facility (the "Amended Credit Facility") which was terminated as of August 18, 2003. In addition, Foamex Canada's revolving credit facility that did not have any outstanding borrowings and had availability of approximately $5.9 million was terminated as of August 18, 2003. The termination of the Amended Credit Facility resulted in a write off of debt issuance costs of $12.9 million.
The $240.0 Million Senior Secured Credit Facility consists of a revolving credit facility with a maximum availability of $190.0 million and a term loan of $50.0 million. The revolving credit facility includes a $50.0 million sublimit for letters of credit and availability is limited to eligible amounts, as defined, of accounts receivable and
inventory. At December 28, 2003, Foamex L.P. had available borrowings of approximately $46.8 million and letters of credit outstanding of $20.9 million. Borrowings under the term loan are limited to eligible amounts, as defined, of equipment and real estate. Substantially all the assets of Foamex L.P. and its domestic subsidiaries and Foamex Canada are pledged as collateral for the related borrowings. Borrowings under the revolving credit facility and the term loan bear interest at floating rates based upon and including a margin over either LIBOR or a Base Rate, as defined. At December 28, 2003, the weighted average interest rates were 4.53% and 4.42% for the revolving loans and the term loan, respectively. The term loan requires quarterly installment payments of approximately $1.8 million. All borrowings under the $240.0 Million Senior Secured Credit Facility will mature on April 30, 2007. The $240.0 Million Senior Secured Credit Facility includes both a subjective acceleration clause and a lockbox arrangement which requires all lockbox receipts be used to repay revolving credit borrowings. Accordingly, borrowings under the revolving credit facility are classified as current in the accompanying balance sheet as of December 28, 2003 as required by EITF No. 95-22.
The Secured Term Loan will mature on April 30, 2007. Borrowings under this facility will bear interest at a rate that is 9.25% plus the greater of the Reference Rate, as defined, or 4.25%. The minimum rate, which is in effect as of December 28, 2003, is 13.50%. In addition, Foamex L.P. is subject to a 1.00% facility fee which is payable annually on the anniversary date. Borrowings under the Secured Term Loan are collateralized by the same collateral as the $240.0 Million Senior Secured Credit Facility. An intercreditor agreement governs the distribution of collateral among the lenders under the $240.0 Million Senior Secured Credit Facility and the Secured Term Loan.
Under the $240.0 Million Senior Secured Credit Facility and the Secured Term Loan, Foamex L.P. is subject to a minimum fixed charge coverage ratio, as defined, of 1.00. For the two quarters ended December 28, 2003, Foamex L.P.'s fixed charge coverage ratio was 1.09. Foamex L.P. is also subject to a maximum annual capital expenditure amount which was $17.7 million for the year ended December 28, 2003 and will be $36.0 million for the year ending January 2, 2005.
Our 13 1/2% Senior Subordinated Notes with a face value of $51.6 million are due on August 15, 2005. We must generate sufficient cash flow to repay these notes or we must obtain additional financing. We cannot determine at this time if we will be able to obtain financing at a reasonable cost, or at all. The 13 1/2% Senior Subordinated Notes will be required to be classified as a current liability on our consolidated balance sheet beginning in the third quarter of 2004.
CRITICAL ACCOUNTING POLICIES
We prepared the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. As such, we are required to make certain estimates, judgments, and assumptions that we believe are reasonable based upon the information available. These estimates, judgments and assumptions affect the reported amounts of the assets and liabilities and revenues and expenses. Our significant accounting policies are discussed in Note 2 to the consolidated financial statements. The accounting policies which we believe are the most critical to aid in fully understanding and evaluating our reported financial results and which require management to exercise judgment include the following:
Revenue Recognition
We record net sales when product title and the risks and rewards of ownership passes to the customer, the sales price is fixed and determinable and collection is reasonably assured. Products are shipped FOB shipping point. Net sales are reduced by allowances for estimated discounts, returns and customer rebates based on our experience. Balances for allowances and rebates are reviewed at least quarterly and are adjusted if warranted.
Accounts Receivable and Allowance for Uncollectible Accounts
We actively monitor customer payments in conjunction with customer credit evaluations. Accordingly, an estimate of uncollectible accounts is maintained and is based on historical collection experience and specific
customer collection issues. A significant change in the financial condition of one or more of our larger customers could have a material adverse impact on future financial results.
Long-Lived Assets
We have a significant investment in long-lived assets consisting primarily of property, plant and equipment. Impairment losses are recognized when events indicate that certain long-lived assets may be impaired and a projection of future undiscounted cash flows generated from the assets are less than the current carrying value of the assets. These cash flow projections are based on the combination of historical results adjusted for estimated future market conditions and operating plans. To the extent that these estimates change, impairment losses could have a material adverse impact on future financial results.
Goodwill
We evaluate the recoverability of goodwill on an annual basis as required by Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142"). We perform this annual evaluation as of the first day of the fourth fiscal quarter, or more frequently if events or changes in circumstances, such as declining sales, earnings or cash flows or material adverse changes in the business climate, indicate that the carrying value of goodwill might be impaired. Goodwill is considered to be impaired when the net book value of a reporting unit exceeds it estimated fair value. Fair values are primarily established using a discounted cash flow methodology. The determination of discounted cash flows is based on businesses' strategic plans and long range planning forecasts.
Self Insurance
We are partially self-insured for a number of risks up to certain limits including workers compensation, medical, automobile and general liability. Commercial insurance policies are carried for amounts in excess of the self-insured amounts. Management exercises significant judgment in estimating the ultimate liability for claims. The services of an outside actuary are used to assist management in their evaluation of the liability for workers' compensation and automobile claims.
Retiree Benefit Plans
We provide defined benefit pension plans that cover most of our employees. Projected benefit obligations, pension expense and amounts included in other comprehensive income are impacted by a number of assumptions. These assumptions include the discount rate on projected benefit obligations, and the expected long-term rate of return on plan assets. The discount rate on projected benefit obligations enables us to state expected future cash flows at a present value on the measurement date. We have little latitude in selecting this rate, as it is required to represent the market rate for high-quality fixed income investments. We assumed weighted average discount rates of 7.25%, 7.00% and 6.50% to calculate pension expense for 2001, 2002 and 2003, respectively. A 0.50% reduction in this assumption would increase the interest component of pension expense by approximately $0.6 million. To determine the expected long-term rate of return on pension plan assets, we consider the current and expected asset allocations, as well as historical and expected returns on various categories of plan assets. We assumed that long-term returns on our pension plans were 9.0% in 2003, 2002 and 2001. A 0.50% reduction in this assumption would increase pension expense by approximately $0.4 million. Amortization of losses has been and continues to be a significant component of pension expense and this amortization is expected to increase by approximately $0.4 million in 2004. The losses have resulted from actual returns that were less than the expected return assumption, particularly over the 2000-2002 period, and funding levels that have not been sufficient to offset the growth in benefit obligations. In 2003, actual returns were significantly higher than the expected return assumption and we expect pension expense to decrease by $1.4 million to $1.8 million in 2004 primarily because of the growth in plan assets. We anticipated funding of $11.8 million to retiree benefit plans in 2004.
Claims and Litigation
We receive claims for damages that are outside of our insurance coverages. Management evaluates these claims and records its estimate of liabilities when such liabilities are considered probable and an amount or reasonable range can be estimated.
Environmental Remediation
We have a number of manufacturing facilities and certain idle facilities that require remediation of soil and/or groundwater contamination. As required by applicable State and/or Federal compliance programs, many of these sites are in the monitoring stage that requires periodic sampling of contamination levels in conjunction with ongoing assessments of remediation actions. Accordingly, the recognition of environmental liabilities requires estimates concerning the duration of monitoring and associated costs, often projected to extend for a number of years. To the extent that these estimates change, additional environmental costs could have a material adverse impact on future financial results. See the section below entitled "Environmental Health and Safety" for additional information.
LIQUIDITY AND CAPITAL RESOURCES
Our operating cash requirements consist principally of accounts receivable, inventory and accounts payable requirements, scheduled payments of interest and principal on outstanding indebtedness, capital expenditures, and employee benefit plans. We believe that cash flow from our operating activities, cash on hand and periodic borrowings under our credit facility will be adequate to meet liquidity requirements for the next 12 months. Scheduled principal payments on our debt are not significant until the second half of 2005. The ability of us to make distributions to Foamex International is restricted by the terms of our financing agreements.
Cash and cash equivalents were $6.6 million at December 28, 2003 compared to $4.4 million at December 29, 2002. Working capital at December 28, 2003 was $18.7 million and the current ratio was 1.06 to 1 compared to working capital at December 29, 2002 of $118.0 million and a current ratio of 1.59 to 1. The decrease in working capital is primarily due to the requirement to classify $96.1 million of borrowings under the revolving credit portion of its $240.0 Million Senior Secured Credit Facility as current in accordance with EITF No. 95-22 (see Note 7 to the consolidated financial statements).
Total long-term debt and revolving credit borrowings at December 28 2003 was $745.6 million, a $7.0 million increase from December 29, 2002. As of December 28 2003, there were revolving credit borrowings of $96.1 million under the $240.0 Million Senior Secured Credit Facility with $46.8 million available for borrowings and $20.9 million of letters of credit outstanding. Revolving credit borrowings at December 28, 2003 reflect working capital requirements.
On November 15, 2002, Foamex L.P. and its bank lenders executed an amendment to the Amended Credit Facility. Under the amendment, Foamex L.P. was subject to minimum net worth, minimum EBDAIT, as defined, and maximum capital expenditure covenants through periods ended December 28, 2003. The minimum EBDAIT covenant was tested monthly, on a cumulative basis, beginning with December 2002. Foamex L.P. was in compliance with the revised covenants at December 29, 2002 and throughout 2003 until the Amended Credit Facility was terminated on August 18, 2003.
On August 18, 2003, Foamex L.P. entered into a $240.0 Million Senior Secured Credit Facility with a new group of lenders and a Secured Term Loan with another lender. Proceeds borrowed under these new facilities were used to repay all outstanding balances under the Foamex L.P. Amended Credit Facility (the "Amended Credit Facility"). In addition, Foamex Canada's revolving credit facility that did not have any outstanding borrowings and had availability of approximately $5.9 million was terminated. The termination of the Amended Credit Facility resulted in a write off of debt issuance costs of $12.9 million in 2003.
The $240.0 Million Senior Secured Credit Facility consists of a revolving credit facility with a maximum availability of $190.0 million and a term loan of $50.0 million. The revolving credit facility includes a $50.0 million sublimit for letters of credit and availability is limited to eligible amounts, as defined, of accounts receivable and
inventory. Borrowings under the term loan are limited to eligible amounts, as defined, of equipment and real estate. Substantially all the assets of Foamex L.P. and its domestic subsidiaries and Foamex Canada are pledged as collateral for the related borrowings. Borrowings under the revolving credit facility and the term loan bear interest at floating rates based upon and including a margin over either LIBOR or a Base Rate, as defined. At December 28, 2003, the weighted average interest rates were 4.53% and 4.42% for the revolving loans and the term loan, respectively. The term loan requires quarterly installment payments of approximately $1.8 million. All borrowings under the $240.0 Million Senior Secured Credit Facility will mature on April 30, 2007.
The Secured Term Loan will mature on April 30, 2007. Borrowings under this facility bear interest at a rate that is 9.25% plus the greater of Reference Rate, as defined, or 4.25%. The minimum rate, which is in effect as of December 28, 2003, is 13.50%. In addition, Foamex L.P. is subject to a 1.00% facility fee which is payable annually on the anniversary date. Borrowings under the Secured Term Loan are collateralized by the same collateral as the $240.0 Million Senior Secured Credit Facility. An intercreditor agreement governs the distribution of collateral among the lenders under the $240.0 Million Senior Secured Credit Facility and the Secured Term Loan.
Under the $240.0 Million Senior Secured Credit Facility and the Secured Term Loan, Foamex L.P. is subject to a minimum fixed charge coverage ratio, as defined, of 1.00. For the two quarters ended December 28, 2003, Foamex L.P.'s fixed charge coverage ratio was 1.09. Foamex L.P. is also subject to a maximum annual capital expenditure amount which was $17.7 million for the year ended December 28, 2003 and will be $36.0 million for the year ending January 2, 2005.
Effective May 1, 2002, Foamex L.P. completed a series of interest rate swap transactions with notional amounts aggregating $300.0 million. Foamex L.P. designated, documented and accounted for these interest rate swaps as fair value hedges of its 10 3/4% Senior Secured Notes due April 1, 2009. The risk being hedged in these transactions was the change in fair value of the 10 3/4% Senior Secured Notes based on changes in the benchmark interest rate, LIBOR. The effect of these interest rate swap transactions was to convert the fixed interest rate on the 10 3/4% Senior Secured Notes to floating rates reset twice per year to correspond with the interest payment dates for the 10 3/4% Senior Secured Notes. On September 18, 2002, Foamex L.P. unwound the interest rate swap transactions in exchange for a net cash proceeds of $18.4 million, including $3.6 million realized through lower effective interest rates while the swap transactions were in effect. The unwinding resulted in a deferred credit of $14.8 million, which is being amortized over the term of the 10 3/4% Senior Secured Notes, using the effective interest rate method.
As discussed above, our 13 1/2% Senior Subordinated Notes with a face value of $51.6 million are due on August 15, 2005. We must generate sufficient cash flow to repay these notes or obtain additional financing. We may not be able to obtain financing at a reasonable cost, or at all.
Cash Flow from Operating Activities
Cash provided by operating activities in 2003 was $18.1 million compared to cash used of $49.6 million in the 2002. Cash provided by operating activities consisted principally of depreciation and amortization of $26.0 million and amortization and write off of $17.4 million of costs associated with debt, reduced by our net loss of $27.4 million. We also had cash costs of $11.3 million to pay restructuring liabilities.
Cash Flow from Investing Activities
Cash used in investing activities totaled $8.6 million for 2003. Cash requirements included capital expenditures of $6.5 million and capitalized software development costs of $3.3 million. Cash used for investing activities in 2002 included capital expenditure of $15.6 million and capitalized software development costs of $8.0 million. Estimated capital expenditures for 2004 are approximately $10.0 million. In addition, we expect to spend approximately $4.2 million for internally developed software in 2004, a portion of which may be capitalized.
Cash Flow from Financing Activities
Cash used for financing activities was $7.2 million in 2003 compared to cash provided by of $60.0 million in 2002. During 2003, we utilized $130.0 million of proceeds from new term loans and an increase in revolving credit
borrowings of $44.2 million to repay $162.2 million of term loans under our former Amended Credit Facility and to pay $11.9 million of debt issuance costs.
Contractual Obligations
Our contractual obligations as of December 28, 2003 are shown in the following table:
RESULTS OF OPERATIONS
(a) Not meaningful.
Business segment results include revenues and costs that are specifically identifiable and costs shared by business segments have been allocated based on utilization. At the end of 2003, we changed our measure of segment operating income to exclude an allocation of corporate overhead, as our management no longer evaluates the performance of our segments using this allocation. Rather we now attempt to manage and control these costs independent of segment performance. Segment results for 2002 and 2001 have been adjusted to reflect this change for comparative purposes.
2003 Compared to 2002
Net sales for 2003 decreased 2% to $1,304.6 million from $1,328.1 million in 2002. An increase in Foam Products net sales were more than offset by decreases in the other segments. Selling price increases in all segments were more than offset, in the aggregate, by reductions in volume. The volume reductions were primarily due to the requirement to increase selling prices and plant closures as we shifted away from unprofitable business.
Gross profit was $143.7 million, or 11.0%, in 2003 compared to $143.7 million, or 10.8%, in 2002. Gross profit margin has improved throughout 2003 from the depressed levels experienced in the second half of 2002 as we have been successful at recovering some of the raw material cost increases experienced in the second half of 2002 and we have realized manufacturing cost savings.
Income from operations for 2003 was $64.4 million, or 4.9% of net sales, which represented a 45% increase from the $44.6 million, or 3.4% of net sales, reported for 2002. Selling general and administrative expenses decreased $13.3 million, or 14%, due primarily to lower employee costs and professional fees. In 2002, we incurred $4.9 million of organizational and transaction costs in connection with a proposed public offering of a subsidiary, which was subsequently terminated, and a proposed sale of the Carpet Cushion products segment. Restructuring, impairment and other credits discussed below were $1.8 million in 2003, while we recorded restructuring, impairment and other charges of $4.8 million in 2002.
Foam Products
Foam Products net sales for 2003 increased 8% to $507.6 million from $471.0 million in 2002 primarily due to increases in selling prices to customers and increased volumes of consumer products, partially offset by decreases in volume in other markets. Income from operations decreased 3%, to $44.0 million in 2003 from $45.5 million in 2002, primarily due to increases in the cost of raw materials. Income from operations was 8.7% of net sales in 2003, and 9.7% of net sales in 2002.
Carpet Cushion Products
Carpet Cushion Products net sales for 2003 decreased 11% to $208.9 million from $234.0 million in 2002. Average selling prices increased but were more than offset by an approximate 16% decline in volumes, as we closed several carpet cushion facilities in 2002 and 2003 to focus this business on more profitable markets. Income from operations increased $4.2 million, or 335%, primarily due to cost containment from the streamlining of operations and higher selling prices. Income from operations represented 2.6% of net sales in 2003 and 0.5% of net sales in 2002.
Automotive Products
Automotive Products net sales for 2003 decreased 4% to $447.1 million from $466.7 million in 2002. Sales declined throughout the second half of 2003 as a major customer decreased its purchases from us in an effort to diversify its supplier base. While some of this business has been recovered from other customers, automotive products net sales were just over $100 million per quarter in the second half of 2003, which is an annual rate of more than $60.0 million less than the 2002 net sales. For the full year 2003, volumes were down about 1% and average selling prices were down about 3% due to lower fabric costs passed on to customers. Income from operations decreased $0.7 million, or 2%, as the lower sales were partially offset by lower manufacturing costs, resulting from a plant closure in early 2003 and labor and overhead reductions. Income from operations represented 7.5% of net sales in 2003 and 7.3% of net sales in 2002.
Technical Products
Net sales for Technical Products in 2003 decreased 5% to $117.5 million from $124.1 million in 2002 primarily due to a decrease in volume of 9% partially offset by an increase in average selling prices. Income from operations decreased 9% to $32.1 million in 2003 compared to $35.2 million in 2002 due to higher raw material and overhead costs. Income from operations represented 27.3% of net sales in 2003 and 28.3% of net sales in 2002.
Other
Other primarily consists of certain manufacturing operations in Mexico City, corporate expenses not allocated to business segments and restructuring, impairment and other charges. The $8.6 million, or 27%, decrease in net sales associated with this segment primarily resulted from the Mexico City operation and was primarily due to a decline in the consumer products business. The loss from operations was $50.5 million in 2003 and included restructuring, impairment and other credits of $1.8 million, discussed below. The loss from operations in 2002 was $71.5 million, including restructuring, impairment and other charges of $4.8 million, discussed below. Corporate overhead expenses and employee costs decreased $7.8 million in 2003 compared to 2002.
Restructuring, Impairment and Other Charges
In 2003, we recorded restructuring credits of $1.8 million consisting of a $3.2 million reduction in the liability primarily for severance and termination benefits no longer required as the actions contemplated under the related plans have been substantially completed, and a charge of $1.1 million for additional lease termination costs for a closed facility as a result of changes in real estate market conditions. Additionally, we recorded a $0.3 million restructuring charge reported in the Other segment as a result of an employee termination plan for approximately 300 employees at our Mexico City operations. The actions under this plan were substantially completed in 2003.
In 2002, we recorded net restructuring, impairment and other charges of $4.8 million. Fourth quarter charges of $10.0 million included severance and other termination benefits for approximately 200 employees and exit costs and remaining lease payments related to the reorganization of executive and corporate management and the closure of six operations. Approximately 60 of the planned terminations occurred during 2002 with the remainder occuring in 2003. The charges also included $2.5 million of asset impairments, primarily for leasehold improvements and machinery and equipment in the Carpet Cushion Products segment. Earlier in 2002, we recorded restructuring, impairment and other credits of $5.2 million including a reversal of approximately $3.7 million from the reevaluation of the 2001 Operational Reorganization Plan.
Interest and Debt Issuance Expense
Interest and debt issuance expense was $88.4 million in 2003, which represented a 27% increase from 2002 expense of $69.7 million. The 2003 and 2002 periods include charges of $12.9 million and $4.9 million, respectively, relating to the write off of debt issuance costs as a result of early extinguishment of debt. Higher average debt levels, higher effective interest rates and higher amortization of debt issuance costs all contributed to the increase in 2003.
Income from Equity Interest in Joint Ventures
The income from an equity interest in an Asian joint venture was $1.2 million in 2003 and $1.6 million in 2002. Income from an equity interest in a joint venture in Eastern Europe was $0.3 million in 2003 and $0.1 million in 2002.
Other Income (Expenses), Net
Other expense, net was $3.4 million in 2003 compared to $2.0 million in 2002. We incurred foreign currency transaction losses of $2.7 million in 2003 compared to foreign currency transaction losses of $2.3 million in 2002.
Provision for Income Taxes
Foamex L.P., as a limited partnership, is not subject to Federal income taxes; therefore no current or deferred provision has been provided for such taxes. However, we have provided for the income taxes of certain states in which we are subject to taxes and for certain subsidiaries, which are subject to Federal and state income taxes and for subsidiaries located in foreign jurisdictions that file separate tax returns. The partners will provide for their respective shares of income or loss in their Federal or applicable state income tax returns. Foamex L.P. has a tax sharing agreement that provides for the payment of distributions to our partners for amounts that would be required to be paid if we were a corporation filing separate tax returns. Our ability to make such distributions is limited by the terms of our credit agreement and indentures.
Cumulative Effect of Accounting Change
The cumulative effect of accounting change in 2002 includes a goodwill impairment charge of $72.0 million as a result of the adoption of SFAS No. 142.
2002 Compared to 2001
Net sales for 2002 increased 6.0% to $1,328.1 million from $1,252.9 million in 2001. The increase was primarily attributable to improved sales in the Automotive Products and Technical Products segments, partially offset by a decrease in the Foam Products segment. The improvement in sales partially reflected the impact of sales related to the acquisition discussed in Note 3 to the consolidated financial statements.
The gross profit margin was $143.7 million, or 10.8%, in 2002 compared to $178.5 million, or 14.2%, in 2001 primarily as a result of increases in the cost of our major chemical raw materials during the second half of 2002. The gross profit margin was further reduced by higher manufacturing costs principally in the Foam Products segment, unfavorable yields, higher manufacturing overhead expenses and unfavorable production mix. We are seeking to improve gross profit margins through customer selling price increases, selective elimination of unprofitable customer accounts and products, and reductions in manufacturing overhead expenses.
Income from operations for 2002 was $44.6 million, which represented a 29% decrease from the $63.2 million reported for 2001. Income from operations was 3.4% of net sales in 2002 compared to 5.0% of net sales in 2001. The decrease is attributable to the reduced gross profit margins as discussed above. In addition, selling, general and administrative expenses increased by $15.0 million, or 19%, which included $3.6 million of organizational costs in connection with a proposed public offering of a subsidiary which was subsequently terminated. Selling, general and administrative expenses also included $1.3 million of transaction costs associated with the proposed sale of our Carpet Cushion Products segment which was subsequently terminated. The remainder of the increase was primarily due to higher professional service fees for information technology and accounting services and employee related expenses, partially offset by reduced goodwill amortization and lower bad debt expense. Partially offsetting the decrease in gross profit and increased selling, general and administrative expenses was a decline of $31.3 million in restructuring, impairment and other charges which is more fully discussed below.
Foam Products
Foam Products net sales for 2002 decreased 6% to $471.0 million from $499.7 million in 2001. The decrease primarily reflected reduction in business from a major bedding manufacturer and the slow recovery of sales after an odor issue caused by defective chemicals from a major supplier in late 2001. Foam Products gross profit margin was 12.3% in 2002, down from 18.8% in 2001. Income from operations decreased 44%, to $45.5 million in 2002 from $81.1 million in 2001, primarily due to increased raw material costs, lower net sales and higher manufacturing costs. Income from operations was 9.7% of net sales in 2002, down from 16.2% of net sales in 2001.
Carpet Cushion Products
Carpet Cushion Products net sales for 2002 increased 1% to $234.0 million from $231.0 million in 2001. We were able to increase our market share in spite of market weakness and overcome the loss of sales to one large retail customer that exited the carpet business. Income from operations, which principally reflected higher raw material and other operating costs during 2002 and included expenses of $1.3 million in 2002 associated with the proposed sale of the business which was subsequently terminated, represented 0.5% of net sales in 2002 and 3.2% of net sales in 2001.
Automotive Products
Automotive Products net sales for 2002 increased 24% to $466.7 million from $377.8 million in 2001. The improvement primarily reflected a continued high build rate for new cars and new product programs. We were informed that our largest customer intends to reduce its purchases of certain products from us in 2003 to diversify its supply base. Automotive Products gross profit margin was 8.4% in 2002 and 2001 and reflects the impact of higher raw material costs offsetting the contribution from increased net sales. Income from operations represented 7.3% of net sales in 2002 and 7.2% of net sales in 2001.
Technical Products
Net sales for Technical Products in 2002 increased 12% to $124.1 million from $111.0 million in 2001. Higher sales partially reflected sales from the acquisition of General Foam Corporation in July 2001 (see Note 3 to the consolidated financial statements). Income from operations increased 8% to $35.2 million in 2002 compared to $32.7 million in 2001. The decrease reflects the contribution from higher net sales offset by higher material costs and the costs related to a proposed public offering of a subsidiary as described above. Income from operations represented 28.3% of net sales in 2002 compared to 29.4% in 2001.
Other
Other primarily consists of certain manufacturing operations in Mexico City, corporate expenses not allocated to business segments and restructuring, impairment and other charges. The 4% decrease in net sales associated with this segment primarily resulted from the Mexico City operation. The loss from operations was $71.5 million in 2002 and included restructuring, impairment and other charges, discussed below. The loss from operations in 2001 was $85.1 million, including restructuring, impairment and other charges of $36.1 million, discussed below. Corporate overhead expenses and employee costs increased by $16.1 million in 2002.
Restructuring, Impairment and Other Charges
In 2002, we recorded net restructuring, impairment and other charges of $4.8 million. Fourth quarter charges of $10.0 million included severance and other termination benefits for approximately 200 employees and exit costs and remaining lease payments related to the reorganization of executive and corporate management and the closure of six operations. Approximately 60 of the planned terminations occurred during 2002. The charges also included $2.5 million of asset impairments, primarily for leasehold improvements and machinery and equipment in the Carpet Cushion Products segment. Earlier in 2002, we recorded restructuring, impairment and other credits of $5.2 million including a reversal of approximately $3.7 million from the reevaluation of the 2001 Operational Reorganization Plan.
In 2001, we recorded restructuring, impairment and other charges of $36.1 million, primarily related to our 2001 Operational Reorganization Plan including plant facility closures, reductions in management and support personnel, and cost reductions in purchasing and logistics. The charge included an impairment charge of $13.8 million (net of anticipated proceeds of $4.6 million) to reduce certain assets, primarily leasehold improvement and equipment, included within the Foam Products and Carpet Cushion Products segments to their estimated fair values. Approximately 700 employee terminations including plant personnel, support staff and executives and management were originally planned pursuant to the 2001 Operational Reorganization Plan. The subsequent reevaluation of facilities closures reduced the number of planned terminations to approximately 500. Approximately 340 employees were terminated in 2002.
Interest and Debt Issuance Expense
Interest and debt issuance expense was $69.7 million in 2002, which represented a 10% increase from 2001 expense of $63.2 million. The increase was attributable to higher amortization of debt issuance cost. We capitalized interest of $0.3 million in 2002 compared to $1.4 million in 2001.
Income from Equity Interest in Joint Ventures
The income from an equity interest in an Asian joint venture was $1.6 million in both 2002 and 2001. We have a 70% ownership interest in the joint venture since December 2001. Previously our ownership interest was 49%.
Provision for Income Taxes
Foamex L.P., as a limited partnership, is not subject to Federal income taxes; therefore no current or deferred provision has been provided for such taxes. However, we have provided for the income taxes of certain states in which we are subject to taxes and for certain subsidiaries, which are subject to Federal and state income taxes and for subsidiaries located in foreign jurisdictions that file separate tax returns. The partners will provide for their respective shares of income or loss in their Federal or applicable state income tax returns. Foamex L.P. has a tax sharing agreement that provides for the payment of distributions to our partners for amounts that would be required to be paid if we were a corporation filing separate tax returns. Our ability to make such distributions is limited by the terms of our credit agreement and indentures.
Cumulative Effect of Accounting Change
The cumulative effect of accounting change in 2002 includes a goodwill impairment charge of $72.0 million as a result of the adoption of SFAS No. 142.
OTHER
Environmental Health and Safety
We are subject to extensive and changing federal, state, local and foreign environmental laws and regulations, including those relating to the use, handling, storage, discharge and disposal of hazardous substances, the discharge or emission of materials into the environment, and the remediation of environmental contamination, and as a result, are from time to time involved in administrative and judicial proceedings and inquiries relating to environmental matters. As of December 28, 2003, we had accruals of approximately $2.5 million for environmental matters including approximately $2.3 million related to remediating and monitoring soil and groundwater contamination and approximately $0.2 million relating to sites where we had been designated as a Potentially Responsible Party or "PRP" by the EPA or a state authority and other matters. Additional losses, if any, in excess of amounts currently accrued, cannot be reasonably estimated at this time. If there are additional matters or if any current estimates are incorrect, there could be a material adverse effect on our financial position, results of operations and cash flows.
On August 31, 2002, Environment Canada, the Canadian environmental regulatory agency, finalized a rule which would require flexible polyurethane foam manufacturing operations to reduce methylene chloride (dichloromethane) air emissions. The rule establishes a 50.0% reduction in methylene chloride emissions by December 1, 2004 and 100.0% reductions by January 1, 2007. This standard will not require us to make material expenditures for our Canadian plants.
We have reported to the appropriate state authorities that we have found soil and/or groundwater contamination in excess of state standards at certain locations. Seven sites are currently in various stages of investigation or remediation. Accordingly, the extent of contamination and the ultimate liability is not known with certainty for all sites. During 2000, we reached an indemnification agreement with the former owner of the Morristown, Tennessee facility. The agreement allocates the incurred and future remediation costs between the former owner and us. The estimated allocation of future costs for the remediation of this facility is not significant, based on current known information. The former owner was Recticel Foam Corporation, a subsidiary of Recticel.
We have either upgraded or closed all underground storage tanks at our facilities in accordance with applicable regulations.
The CERCLA and comparable state laws impose liability without fault for the costs of cleaning up contaminated sites on certain classes of persons that contributed to the release of hazardous substances into the environment at those sites, for example, by generating wastes containing hazardous substances which were disposed at such sites. We are currently designated as a PRP by the EPA or by state environmental agencies or other PRPs, pursuant to CERCLA or analogous state statutes, with respect to 11 sites. Estimates of total cleanup costs and fractional allocations of liability are often provided by the EPA, the state environmental agency or the committee of PRPs with respect to the specified site. Based on these estimates (to the extent available) and on known information, in each case and in the aggregate, we do not expect additional costs, if any, to be material to liquidity, results of operations or financial position.
Although it is possible that new information or future developments could require us to reassess the potential exposure relating to all pending environmental matters, including those described above, management believes that, based upon all currently available information, the resolution of these environmental matters will not have a material adverse effect on our operations, financial position, capital expenditures or competitive position. The possibility exists, however, that new environmental legislation and/or environmental regulations may be adopted, or other environmental conditions, including the presence of previously unknown environmental contamination, may be found to exist or a reassessment of the potential exposure to pending environmental matters may be necessary due to new information or future developments, that may require expenditures not currently anticipated and that may be material.
Claims and Litigation
We and our subsidiaries are party to various lawsuits, both as defendant and plaintiff, arising in the normal course of business. It is the opinion of management that the disposition of these lawsuits will not, individually or in the aggregate, have a material adverse effect on our financial position, results of operations or cash flows. If management's assessment is incorrect, such actions could have a material adverse effect on our consolidated financial position, results of operations and cash flows. As of December 28, 2003, we had accrued approximately $1.1 million for litigation and other legal matters in addition to the environmental matters discussed above.
Inflation, Raw Material Costs and Other Matters
On average, inflation rates for the domestic economy continue to be relatively low. Although long-term inflation rates are difficult to predict, we believe we have the flexibility in operations and capital structure to maintain a competitive position. The prices of the two principal chemicals used by us in manufacturing, TDI and polyol, are influenced by demand and manufacturing capacity. In addition, the prices of TDI and polyol are significantly influenced by crude oil production and prices and by world political instability, particularly in the Middle East. Results for 2003 and 2002 were negatively impacted by higher average costs for raw materials. In 2001, the beginning of the economic slowdown resulted in excess manufacturing capacity for the major chemical
suppliers. This, coupled with declining oil prices, resulted in lower costs for raw materials in 2001. We experienced significant increases in the prices of raw material from major chemical manufacturers during 2002. We sought to recover these cost increases through manufacturing process efficiencies and selling price increases, but were only partially able to do so during 2003 and 2002. We may not be successful in implementing further selling price increases to fully recover raw material cost increases and competitive pricing pressure may require us to adjust selling prices or lose volume. Results of operations have been and could be adversely affected by delays in implementing, or inability to implement, additional selling price increases to offset raw material cost increases. Additionally, we must reduce and control our other operating and corporate expenses including selling, general and administrative expenses to offset raw material cost increases. A failure to recover cost increases could result in debt covenant violations which may lead to lenders demanding immediate payment of our outstanding debt and impair our ability to continue as a going concern.
The lease for one of our foam pouring facilities expires in 2004. It is conceivable that this lease may not be extended or renewed. Like any other lease, if we are unable to extend or renew this lease, the costs associated with a relocation could have a material adverse effect on our business, financial condition, cash flow and results of operations.
ITEM 7a.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our debt securities with variable interest rates are subject to market risk for changes in interest rates. On December 28, 2003, indebtedness with variable interest rates totaled $231.3 million. On an annualized basis, if the interest rates on these debt instruments increased by 1.0%, interest expense would increase by approximately $2.3 million.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
An index to the financial statements and financial statement schedules is included in Item 15(a).
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
ITEM 9a.
ITEM 9a. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls
Foamex L.P. maintains disclosure controls and procedures (as defined in Rule 13a-14(c) and 15d-14(c) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) that are designed to ensure that information required to be disclosed in reports filed under the Exchange Act, as amended, is recorded, processed, summarized and reported within the specified time periods. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and executed, can provide only reasonable assurance of achieving the desired control objectives.
Foamex L.P. carried out an evaluation, under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, on the effectiveness of the design and operation of Foamex L.P.'s disclosure controls and procedures pursuant to the Exchange Act rule as of the end of the fiscal period covered by this report on Form 10-K. Based upon that evaluation, each of the Chief Executive Officer and Chief Financial Officer concluded that Foamex L.P.'s disclosure controls and procedures are effective in providing reasonable assurance that material information required to be included in Foamex L.P.'s Exchange Act reports is made known to management on a timely basis during the period when Foamex L.P.'s periodic reports are being prepared.
Changes in Internal Controls
Foamex L.P. determined during the fourth quarter of 2003 that the value of certain in-transit raw material inventory was overstated due to a calculation error made during a transition to a new module of an enterprise wide transaction processing software package in February 2003. This error was reported to Foamex L.P.'s auditors and to the audit committee of Foamex International's Board of Directors. As a result, Foamex L.P. restated its financial statements for each of the three quarters of 2003 for this error and other adjustments previously identified by management that were not individually or in the aggregate material to the respective periods. Foamex L.P. has instituted procedures intended to ensure that the value of the in-transit raw material inventory is more effectively monitored.
Except as discussed above, there have been no significant changes in internal control over financial reporting that occurred during the quarter covered by this report that has materially affected or is reasonably likely to materially affect, our internal control over financial reporting.
PART III
The information required by this Part III (Items 10, 11, 12, 13 and 14) is not applicable since Foamex L.P. is a wholly-owned subsidiary of Foamex International.
PART IV ITEM 15.
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(r) - Fifth Amendment to the Partnership Agreement, dated March 26, 2002. 3.3(i) - Certificate of Incorporation of FMXI. 3.4(i) - By-laws of FMXI. 3.5(e) - Certificate of Incorporation of Foamex Capital Corporation. 3.6(e) - By-laws of Foamex Capital Corporation. 3.9(s) - Certificate of Incorporation of Foamex Asia, Inc. 3.10(s) - By-laws of Foamex Asia, Inc. 3.11(s) - Certificate of Incorporation of Foamex Latin America, Inc. 3.12(s) - By-laws of Foamex Latin America, Inc. 3.13(s) - Certificate of Incorporation of Foamex Mexico, Inc. 3.14(s) - By-laws of Foamex Mexico, Inc. 3.15(s) - Certificate of Incorporation of Foamex Mexico II, Inc. 3.16(s) - By-laws of Foamex Mexico II, Inc. 4.1(c) - Indenture, dated as of June 12, 1997, by and among Foamex L.P., FCC, the subsidiary guarantors and The Bank of New York, as trustee, relating to $150,000,000 principal amount of 9 7/8% Senior Subordinated Notes due 2007, including the form of Senior Subordinated Note and Subsidiary Guarantee. 4.1.3(h) - First Amendment to Indenture, dated as of December 23, 1997, between Foamex LLC and The Bank of New York, as trustee, relating to the 9 7/8% Senior Subordinated Notes due 2007. 4.1.3(k) - Second Supplemental Indenture, dated as of February 27, 1998, among Foamex L.P. and Foamex Capital Corporation, as joint and several obligors, General Felt Industries, Inc., Foamex Fibers, Inc., and Foamex LLC, as withdrawing guarantors, and The Bank of New York, as trustee, relating to the 9 7/8% Senior Subordinated Notes due 2007. 4.1.4(r) - Third Supplemental Indenture, dated as of March 25, 2002, between Foamex Carpet Cushion LLC and The Bank of New York, as trustee, relating to the 9 7/8% Senior Subordinated Notes due 2007. 4.2.3(r) - Second Supplemental Indenture, dated as of March 25, 2002, between Foamex Carpet Cushion LLC and The Bank of New York, as trustee, relating to the 13 1/2% Senior Subordinated Notes due 2005. 4.3.1(h) - Indenture, dated as of December 23, 1997, by and among Foamex L.P., Foamex Capital Corporation, the subsidiary guarantors, Crain Holdings Corp., as intermediate obligator, and The Bank of New York, as trustee, relating to $98,000,000 principal amount of 13 1/2% Senior Subordinated Notes due 2005, including the form of Senior Subordinated Note and Subsidiary Guarantee. 4.3.1(k) - First Supplemental Indenture, dated as of February 27, 1998, among Foamex L.P. and Foamex Capital Corporation, as joint and several obligors, General Felt Industries, Inc., Foamex Fibers, Inc. and Foamex LLC, as withdrawing guarantors, Crain Industries, Inc., as withdrawing intermediate obligor, and The Bank of New York, as trustee, relating to the 13 1/2% Senior Subordinated Notes due 2005. 4.3.1(r) - Indenture, dated as of March 25, 2002, among Foamex L.P., Foamex Capital Corporation, the Guarantors party thereto and U.S. Bank National Association, as trustee, including as exhibits thereto, the form of note, relating to $300,000,000 principal amount of 10 3/4% Senior Secured Notes due 2009, including form of Senior Secured Note and Subsidiary Guaranty. 4.3.2(r) - Pledge and Security Agreement, dated as of March 25, 2002, made by Foamex L.P. and U.S. Bank National Association, as collateral agent. 4.3.3(r) - Patent Security Agreement, dated as of March 25, 2002, by Foamex L.P. in favor of U.S. Bank National Association, as collateral agent.
4.3.4(r) - Trademark Security Agreement, dated as of March 25, 2002, by Foamex L.P. in favor of U.S. Bank National Association, as collateral agent. 4.3.5(r) - Copyright Security Agreement, dated as of March 25, 2002, by Foamex L.P. in favor of U.S. Bank National Association, as collateral agent. 4.3.6(r) - Registration Rights Agreement, dated as of March 25, 2002, among Foamex L.P., Foamex Capital Corporation, the Guarantors party thereto and Credit Suisse First Boston Corporation, Salomon Smith Barney Inc., Scotia Capital (USA) Inc., Bear, Stearns & Co. Inc., and Jefferies & Company, Inc., as initial purchasers. 4.15.1(v) - Credit Agreement, dated as of August 18, 2003, among Foamex L.P. as a Borrower and Guarantor, Foamex International Inc., FMXI, Inc., Foamex Canada Inc., Foamex Capital Corporation, Foamex Latin America, Inc., Foamex Mexico, Inc., Foamex Mexico II, Inc., Foamex Asia, Inc. and Foamex Carpet Cushion LLC as Guarantors, the financial institutions party thereto from time to time as lenders and Bank of America, N.A. as the Administrative Agent. 4.15.2(v) - Pledge and Security Agreement, dated as of August 18, 2003, among Foamex L.P. and Bank of America, N.A. as Administrative Agent. 4.15.3(w) - Amendment No. 1 to Credit Agreement, dated as of December 1, 2003, among Foamex L.P., as Borrower, the affiliates of Borrower party hereto, the lenders party hereto, and Bank of America, N.A. as Administrative Agent. 4.16.1(v) - Credit Agreement, dated as of August 18, 2003, among Foamex L.P. as a Borrower and Guarantor, Foamex International Inc., FMXI, Inc., Foamex Canada Inc., Foamex Capital Corporation, Foamex Latin America, Inc., Foamex Mexico, Inc., Foamex Mexico II, Inc., Foamex Asia, Inc. and Foamex Carpet Cushion LLC as Guarantors, the financial institutions party thereto from time to time as lenders and Silver Point Finance, LLC as the Administrative Agent. 4.16.2(v) - Pledge and Security Agreement, dated as of August 18, 2003, among Foamex L.P. and Silver Point Finance, LLC as Administrative Agent. 4.16.3(w) - Amendment No. 1 to Credit Agreement, dated as of December 1, 2003, among Foamex L.P., as Borrower, the affiliates of Borrower party hereto, the lenders party hereto, and Silver Point Finance, LLC as Administrative Agent. 4.17.1(v) - Intercreditor Agreement, dated as of August 18, 2003, among Bank of America, N.A., as Senior Bank Agent and Senior Collateral Agent, Silver Point Finance, LLC, as Senior Term Loan B Agent and as future Senior Collateral Agent after a Discharge of Senior Bank Lender Claims has occurred, U.S. Bank National Association, as trustee and collateral agent under the Indenture referred to below, and Foamex L.P., a Delaware limited partnership. 10.1(d) - Reimbursement Agreement, dated as of March 23, 1993, between Trace Holdings and General Felt Industries, Inc. 10.2(d) - Shareholder Agreement, dated December 31, 1992, among Recticel, s.a. ("Recticel"), Recticel Holding Noord B.V., Foamex L.P., Beamech Group Limited, LME-Beamech, Inc., James Brian Blackwell, and Prefoam AG relating to a foam technology-sharing arrangement. 10.3(e) - Asset Transfer Agreement, dated as of October 2, 1990, between Trace International Holdings, Inc. ("Trace Holdings") and Foamex L.P. (the "Trace Holdings Asset Transfer Agreement"). 10.4(e) - First Amendment, dated as of December 19, 1991, to the Trace Holdings Asset Transfer Agreement. 10.5(e) - Amended and Restated Guaranty, dated as of December 19, 1991, made by Trace Foam Company, Inc. ("Trace Foam") in favor of Foamex L.P. 10.6(e) - Asset Transfer Agreement, dated as of October 2, 1990, between Recticel Foam Corporation ("RFC") and Foamex L.P. (the "RFC Asset Transfer Agreement"). 10.7(e) - First Amendment, dated as of December 19, 1991, to the RFC Asset Transfer Agreement. 10.10.5(g) - The Foamex L.P. Hourly Pension Plan (formerly "The Foamex Products Inc. Hourly Employee Retirement Plan"), as amended December 31, 1995. 10.10.6(g)+ - Foamex L.P. 401(k) Savings Plan effective October 1, 1997. 10.10.12(q)+ - Foamex Supplemental Executive Retirement Plan, effective as of May 15, 2001. 10.10.13(q)+ - Split Dollar Life Insurance Agreement Between Foamex International Inc. and Marshall S. Cogan, dated as of December 31, 2001.
10.11.4(n)+ - Termination and Release Agreement dated as of January 30, 2001 by and between Foamex International and John G. Johnson, Jr. 10.11.5(q)+ - Termination and Release Agreement dated as of December 6, 2001, by and between the Foamex International and John Televantos. 10.11.1(m)+ - Employment Agreement, dated as of January 1, 1999, by and between Foamex International and Marshall S. Cogan. 10.11.8(q)+ - First Amendment to Employment Agreement, dated as of December 31, 2001, by and between Foamex International Inc. and Marshall S. Cogan. 10.11.10(u)+ - Severance Agreement and Release, dated as of November 23, 2002, by and between Foamex International and Theodore J. Kall. 10.11.11(u)+ - Severance Agreement and Release, dates as of January 31, 2003, by and between Foamex International and Pratt W. Wallace, Jr. 10.11.12* - Form of Foamex International Inc. Code of Ethics for Director, Officer, Senior Management and Certain Other Employees. 10.11.13(w)+ - Amended and Restated Employment Agreement, dated January 27, 2004, by and between Foamex International and Thomas E. Chorman. 10.11.14(w)+ - Amended and Restated Employment Agreement, dated January 26, 2004, by and between Foamex International and K. Douglas Ralph. 10.16.1(k) - Supply Agreement, dated as of February 27, 1998, by and between Foamex L.P. and General Felt (as assigned to Foamex Carpet). 10.16.2(k) - Administrative Services Agreement, dated as of February 27, 1998, by and between Foamex L.P. and General Felt (as assigned to Foamex Carpet). 10.17(e)+ - Salaried Incentive Plan of Foamex L.P. and Subsidiaries. 10.18(e)+ - Equity Growth Participation Program. 10.19(f)+ - The Foamex L.P. Salaried Pension Plan (formerly, "The General Felt Industries, Inc. Retirement Plan for Salaried Employees"), effective as of January 1, 1995. 10.22(l)+ - Foamex International Amended and Restated 1993 Stock Option Plan. 10.23(a)+ - Foamex International Non-Employee Director Compensation Plan. 10.24(o)+ - Foamex International Equity Incentive Plan for Non-Employee Directors. 10.25(o)+ - Foamex International Key Employee Incentive Bonus Plan. 10.26(p)+ - Agreement with Consultant, dated April 24, 2001 by and between Robert J. Hay and Foamex L.P. 10.29(t)+ - Foamex International 2002 Stock Award Plan. 10.17.2(j) - Loan Agreement between Hua Kee Company Limited and Foamex Asia, Inc., dated as of July 8, 1997. 10.18.1(p) - Joint Venture Agreement between Hua Kee Company Limited and Foamex Asia, Inc. amended and restated as of December 3, 2001. 10.44(s)+ - Agreement with Consultant, dated August 8, 2002, by and between Raymond E. Mabus, Jr. and Foamex International. 21* - Subsidiaries of Foamex L.P. 31.1* - Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2* - Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1* - Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2* - Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
- --------------------------------- * Filed herewith.
+ Management contract or compensatory plan or arrangement.
(a) Incorporated herein by reference to the Exhibit to Foamex L.P.'s Registration Statement on Form S-1, Registration No. 33-69606.
(b) Incorporated herein by reference to the Exhibit to the Annual Report on Form 10-K of Foamex International for the fiscal year ended January 1, 1995.
(c) Incorporated herein by reference to the Exhibit to the Current Report on Form 8-K of Foamex International reporting an event that occurred June 12, 1997.
(d) Incorporated herein by reference to the Exhibit to the Annual Report on Form 10-K of Foamex L.P. and FCC for fiscal 1992.
(e) Incorporated herein by reference to the Exhibit to the Registration Statement of Foamex L.P. and FCC on Form S-1, Registration Nos. 33-49976 and 33-49976-01.
(f) Incorporated herein by reference to the Exhibit to the Annual Report on Form 10-K of Foamex L.P. for fiscal 1993.
(g) Incorporated by reference to the Exhibit to the Form 10-Q of Foamex L.P. for the quarterly period ended September 28, 1997.
(h) Incorporated herein by reference to the Exhibit to the Current Report on Form 8-K of Foamex L.P., FCC and Foamex International reporting an event that occurred December 23, 1997.
(i) Incorporated herein by reference to the Exhibit to the Annual Report on Form 10-K of Foamex International for the fiscal year ended December 28, 1997.
(j) Incorporated herein by reference to the Exhibit in the Registration Statement of Foamex L.P. and FCC on Form S-4, Registration No. 333-45733, filed February 6, 1998.
(k) Incorporated herein by reference to the Current Report on Form 8-K of Foamex International reporting an event that occurred on February 27, 1998.
(l) Incorporated herein by reference to the Exhibit to Foamex International's definitive proxy statement dated May 31, 2000.
(m) Incorporated herein by reference to the Exhibit to the Annual Report on Form 10-K of Foamex International for year ended December 31, 2000.
(n) Incorporated herein by reference to the Exhibit to the Form 10-Q of Foamex International for the quarterly period ended March 31, 2001.
(o) Incorporated herein by reference to the Appendix to Foamex International's definitive amended and restated proxy statement, dated July 12, 2001.
(p) Incorporated herein by reference to the Exhibit to the Form 10-Q of Foamex International for the quarterly period ended June 30, 2001.
(q) Incorporated herein by reference to the Exhibit to the Annual Report on Form 10-K of Foamex International for the fiscal year ended December 31, 2001.
(r) Incorporated herein by reference to the Exhibit to the Form 10-Q of Foamex L.P. and FCC for the quarterly period ended March 31, 2002.
(s) Incorporated herein by reference to the Exhibit to Amendment No. 1 to the Registration Statement of Foamex L.P. and FCC on Form S-4, Registration No. 333-90632, filed October 22, 2002.
(t) Incorporated herein by reference to Appendix C to Foamex International's definitive proxy statement dated April 30, 2002.
(u) Incorporated herein by reference to the Exhibit to the Annual Report on Form 10-K of Foamex International for the fiscal year ended December 29, 2002.
(v) Incorporated herein by reference to the Exhibit to the Current Report on Form 8-K of the Company reporting an event that occurred on August 18, 2003.
(w) Incorporated herein by reference to the Exhibit to the Annual Report on Form 10-K of Foamex International for the fiscal year ended December 28, 2003.
Certain instruments defining the rights of security holders have been excluded herefrom in accordance with Item 601(b)(4)(iii) of Regulation S-K. The registrant hereby agrees to furnish a copy of any such instrument to the Securities and Exchange Commission upon request.
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized as of the 5th day of March 2004.
FOAMEX L.P. By: FMXI, Inc. its Managing General Partner
By: /s/ K. Douglas Ralph ------------------------------- Name: K. Douglas Ralph Title: Executive Vice President and Chief Financial Officer
FOAMEX CAPITAL CORPORATION
By: /s/ K. Douglas Ralph ------------------------------- Name: K. Douglas Ralph Title: Executive Vice President and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on its behalf by the registrant and in the capacities and as of the dates indicated:
Signature Title Date
/s/ Thomas E. Chorman Director of FMXI and FCC March 5, 2004 - --------------------------- Thomas E. Chorman
/s/ George L. Karpinski Director of FMXI and FCC March 5, 2004 - --------------------------- George L. Karpinski
FOAMEX L.P. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Financial Statements of Registrants
INDEPENDENT AUDITORS' REPORT
To the Partners of Foamex L.P. Linwood, Pennsylvania
We have audited the accompanying consolidated balance sheets of Foamex L.P. and subsidiaries (the "Company"), an indirect wholly-owned subsidiary of Foamex International Inc., as of December 28, 2003 and December 29, 2002, and the related consolidated statements of operations, cash flows and partners' deficiency for each of the three years in the period ended December 28, 2003. Our audits also included the consolidated financial statement schedule listed in the Index at Item 15a. These consolidated financial statements and consolidated financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and consolidated financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 28, 2003 and December 29, 2002, and the results of its operations and its cash flows for each of the three years in the period ended December 28, 2003 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
As discussed in Note 2 to the consolidated financial statements, the Company changed its method of accounting for goodwill and other intangible assets in 2002.
/s/ DELOITTE & TOUCHE LLP
March 9, 2004 Parsippany, New Jersey
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 11.
In 2002, Foamex L.P. changed its reporting period from a calendar year to a 52/53-week fiscal year ending on the Sunday closest to January 1. Fiscal year 2003 included the 52 weeks ended December 28, 2003 while the fiscal year 2002 include the 52 weeks ended December 29, 2002, after adjustment for December 31, 2001 which was included in the prior year.
The Bank of Nova Scotia owns approximately 5.8 million shares of Foamex International's outstanding common stock, or approximately 23.6%. The Bank of Nova Scotia also owns 15,000 shares of Foamex International's non-voting non-redeemable Series B convertible preferred stock. Each share of the Series B Preferred Stock can be converted into 100 shares of Foamex International's common stock, but only if such conversion would not trigger a "change of control" event as defined by certain debt agreements of Foamex International's subsidiaries. Ownership of more than 25% of the common stock would constitute a "change of control".
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation
The consolidated financial statements include the accounts of Foamex L.P. and all majority-owned subsidiaries where control exists. The equity method of accounting is used for investments in which Foamex L.P. has significant influence, generally this represents ownership of at least 20% and not more than 50%. Foamex L.P. has a joint venture in Asia in which it increased its ownership to 70% in late 2001. Foamex L.P. does not have control of this joint venture due to the minority shareholders' substantive participation rights and therefore uses the equity method of accounting. All significant intercompany accounts and transactions have been eliminated in consolidation.
Accounting Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Concentration of Credit Risk
Financial instruments which potentially subject Foamex L.P. to significant concentrations of credit risk consist primarily of cash and cash equivalents and trade accounts receivable. Foamex L.P. maintains cash and cash equivalents and certain other financial instruments with various large financial institutions. Foamex L.P.'s periodic evaluation of these financial institutions are considered in Foamex L.P.'s investment strategy.
Foamex L.P. sells products to the furniture and bedding, automotive, carpet and other industries. Foamex L.P. performs ongoing credit evaluations of its customers and generally does not require collateral. Foamex L.P. maintains allowance accounts for potential credit losses and such losses have been within management's expectations.
FOAMEX L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Revenue Recognition, Discounts and Rebates
Revenue from sales, net of discounts and estimated returns, allowances and customer rebates, is recognized when product title and the risks and rewards of ownership passes to the customer, the sales price is fixed and determinable and collection is reasonably assured. Products are shipped FOB shipping point.
Cash and Cash Equivalents
Highly liquid investments with an original maturity of three months or less when purchased are recognized as cash equivalents.
Accounts Receivable and Allowance for Uncollectible Accounts
An estimate of uncollectible accounts is maintained and is based on historical collection experience and specific customer collection issues. A significant change in the financial condition of one or more of Foamex L.P.'s larger customers could have a material adverse impact on future results.
Fair Value of Financial Instruments
Carrying amounts reported in the consolidated balance sheets for cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities and short-term borrowings approximate fair value due to the short-term nature of these instruments.
The carrying amount and fair value of long-term debt and revolving credit borrowings at December 28, 2003 were $745.6 million and $683.3 million, respectively, and at December 29, 2002 were $738.6 million and $490.3 million, respectively. The fair value of long-term debt is estimated using quoted market prices, where available, or discounted cash flows. Fair value estimates are made at a specific point in time, based on relevant market information about the financial instruments. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined on a first-in, first-out basis.
Property, Plant and Equipment
Property, plant and equipment are stated at cost and are depreciated using the straight-line method over the estimated useful lives of the assets. The range of useful lives estimated for buildings is generally 20 to 35 years, and the range for machinery, equipment and furnishings is 5 to 12 years. Leasehold improvements are amortized over the shorter of the terms of the respective leases or the estimated useful lives of the leasehold improvements. Depreciation expense for 2003, 2002 and 2001 was $24.1 million, $29.1 million and $26.4 million, respectively.
Maintenance and repairs are charged to expense as incurred. Renewals and major improvements are capitalized if they extend the life of the asset. When assets are retired or otherwise disposed of, the asset and related accumulated depreciation are removed from the accounts and any gain or loss is recognized in the results of operations.
Goodwill
Foamex L.P. adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142") on January 1, 2002 with certain provisions adopted as of July 1, 2001. SFAS No.142 addresses the initial recognition and measurement of intangible assets acquired outside a business combination and
FOAMEX L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
the recognition and measurement of goodwill and other intangible assets subsequent to their acquisition. Under SFAS No. 142, goodwill is no longer amortized, but is subject to annual impairment tests. The goodwill resulting from the acquisition discussed in Note 3 is not amortized.
The goodwill that arose form business combinations prior to July 1, 2001 was amortized through 2001 on a straight-line basis over 40 years. Goodwill amortization expense was $6.0 million in 2001.
In accordance with SFAS No. 142, goodwill was tested for impairment upon adoption of the standard and is tested annually thereafter. SFAS No. 142 requires that goodwill be tested for impairment using a two-step process. The first step is to identity a potential impairment and the second step measures the amount of the impairment loss, if any. Goodwill is deemed to be impaired if the carrying amount of a reporting unit's goodwill exceeds its estimated fair value. Foamex L.P.'s initial impairment test resulted in the recognition of an impairment loss of $72.0 million recorded as a cumulative effect of a change in accounting principle retroactive to the first quarter of 2002 in accordance with the transitional implementation guidance of SFAS No.142. Foamex L.P. has completed its annual goodwill impairment tests as of September 29, 2003 and September 30, 2002, respectively, with no recognition of any additional impairment.
Goodwill at December 28, 2003 increased $0.9 million from December 29, 2002 as a result of foreign currency translation adjustments reflected below as "Other".
Goodwill balances include:
Balance Balance Segments December 29, 2002 Other December 28, 2003 ------------------------ ----------------- --------- ----------------- (thousands) Foam Products $ 74,269 $362 $ 74,631 Carpet Cushion Products 2,497 - 2,497 Automotive Products 34,686 575 35,261 Technical Products 13,869 - 13,869 -------- ---- -------- Total $125,321 $937 $126,258 ======== ==== ========
Debt Issuance Costs
Debt issuance costs consist of amounts incurred in obtaining long-term financing and are disclosed in the financing activities section of the consolidated statements of cash flows. These costs are being amortized over the term of the related debt using the effective interest method.
Software Costs
Foamex L.P. expenses costs incurred in the preliminary project stage of developing or obtaining internal use software, such as research and feasibility studies, as well as costs incurred in the post-implementation/operational stage, such as maintenance and training. Capitalization of software development costs occurs only after the preliminary project stage is complete, management authorizes the project, and it is probable that the project will be completed and the software will be used for the function intended. Foamex L.P. is in the process of replacing its primary financial and operating information and transaction processing systems and anticipates this project will be substantially completed in 2005. Capitalized software costs aggregated $3.4 million, $7.0 million and $0.9 million in 2003, 2002 and 2001, respectively. The capitalized costs are amortized on a straight-line basis over the estimated useful life of the software, which is generally five years or less.
FOAMEX L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Long-Lived Assets
Foamex L.P. reviews the carrying value of its long-lived assets other than goodwill whenever events or changes in circumstances indicate that the carrying value of an asset may no longer be appropriate. Foamex L.P. assesses recoverability of the carrying value of the asset by estimating the future net cash flows expected to result from the asset, including eventual disposition. If the future undiscounted net cash flows are less than the carrying value of the asset, an impairment loss is recorded equal to the difference between the asset's carrying value and fair value.
Environmental Remediation
Environmental expenditures that relate to current operations are expensed. Expenditures that relate to an existing condition caused by past operations, and which do not contribute to current or future revenue generation, are expensed. Liabilities are recorded when environmental assessments and/or remedial efforts are probable and the costs can be reasonably estimated. Amounts charged against income were $0.5 million, $1.1 million and $0.2 million in 2003, 2002 and 2001, respectively.
Comprehensive Income (Loss)
Other comprehensive income or loss items are revenues, expenses, gains and losses that under generally accepted accounting principles are excluded from net income and reflected as a component of partners' deficiency, including foreign currency translation and minimum pension liability adjustments.
Foreign Currency Translation
The financial statements of foreign subsidiaries have been translated into U.S. dollars by using period-end exchange rates for the assets and liabilities and the average exchange rates for the statements of operations. Currency translation adjustments are included in accumulated other comprehensive loss. Transaction gains (losses) are reflected in other income (expense) in the consolidated statements of operations and included $(2.7) million, $(2.3) million and $1.6 million in 2003, 2002 and 2001, respectively.
Research and Development
Research and development costs are expensed as incurred. Amounts charged against income were $3.6 million, $4.8 million and $3.1 million in 2003, 2002 and 2001, respectively.
Self Insurance
Foamex L.P. is partially self-insured for a number of risks up to certain limits including workers' compensation, medical, automobile and general liability. Commercial insurance policies are carried for amounts in excess of the self-insured amounts. Amounts charged against income were $24.9 million, $31.2 million and $25.6 million in 2003, 2002 and 2001, respectively.
Claims and Litigation
Foamex L.P. evaluates claims for damages and records its estimate of liabilities when such liabilities are considered probable and an amount or reasonable range can be estimated.
Income Taxes
Income taxes are accounted for under the asset and liability method. Under this method, deferred income taxes are provided for temporary differences between the financial reporting basis and income tax basis of assets and liabilities and for net operating loss carryforwards using the income tax rates, under existing legislation, expected to
FOAMEX L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
be in effect at the date such temporary differences are expected to reverse. Deferred income tax assets are reduced by a valuation allowance when it is considered more likely than not that a portion of the deferred income tax assets will not be realized in a future period. The estimates utilized in the recognition of deferred income tax assets are subject to revision in future periods.
Foamex L.P., as a limited partnership, is not subject to Federal income taxes; therefore no current or deferred provision has been provided for such taxes. However, Foamex L.P. has provided for the income taxes of certain states in which it is subject to taxes and for certain subsidiaries, which are subject to Federal and state income taxes and for subsidiaries located in foreign jurisdictions that file separate tax returns. The partners will provide for their respective shares of income or loss in their Federal or applicable state income tax returns. Foamex L.P. has a tax sharing agreement that provides for the payment of distributions to the partners for amounts that would be required to be paid if Foamex L.P. were a corporation filing separate tax returns. The ability of Foamex L.P. to make such distributions is limited by the terms of its credit agreement. See Note 7.
Accounting Changes
In April 2002, the FASB issued Statement of Financial Accounting Standards No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections" ("SFAS No. 145"). The provisions of SFAS No. 145 related to the rescission of Statement 4 are applied in fiscal years beginning after May 15, 2002. Any gain or loss on extinguishment of debt that was classified as an extraordinary item in prior periods presented that does not meet the criteria in Opinion 30 for classification as an extraordinary item is reclassified. Foamex L.P. has reclassified the extraordinary charge of $2.8 million previously reported in 2002.
In June 2001, the FASB issued Statement of Financial Accounting Standards No. 143, "Accounting for Asset Retirement Obligations" ("SFAS No. 143"). The provisions of SFAS No. 143 relate to financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. Foamex L.P. adopted SFAS No. 143 at the beginning of 2003 and the impact on its financial statements was not material.
In June 2002, the FASB issued Statement of Financial Accounting Standards No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS No. 146"). The provisions of SFAS No. 146 require that a liability for the cost associated with an exit or disposal activity be recognized and measured initially at fair value only when the liability is incurred. Foamex L.P. adopted SFAS No. 146 at the beginning of 2003, but since it had no significant exit or disposal activities in 2003, SFAS No. 146 had no impact on the financial statements.
In May 2003, the FASB issued Statement of Financial Accounting Standards No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity" ("SFAS No. 150"). The provisions of SFAS No. 150 require that certain financial instruments be classified as liabilities instead of equity. Foamex L.P. does not have any financial instruments subject to the requirements of SFAS No. 150.
In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees Of Indebtedness of Others" ("FIN No. 45"). The provisions of FIN No. 45 clarify the requirements of SFAS No. 5. "Accounting for Contingencies," relating to the guarantor's accounting for and disclosure of certain guarantees. The initial recognition and measurement provisions of FIN No. 45 are applicable to guarantees issued or modified after December 31, 2002 and the disclosure requirements are effective for financial statements of interim or annual periods ended after December 15, 2002. The adoption of FIN No. 45 did not have any impact on the results of operations or financial position of Foamex L.P. and it does not have any disclosure obligations under FIN No. 45 at December 28, 2003.
In January 2003, the FASB issued FASB Interpretation No. 46, " Consolidation of Variable Interest Entities" ("FIN No. 46") which was amended in October 2003 and replaced with FIN No. 46R in January 2004. Foamex L.P. does not believe that it has any "Variable Interest Entities" as defined by FIN No. 46R and accordingly, the adoption of FIN No. 46R will not have an impact on its financial statements.
FOAMEX L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Reclassifications
Certain amounts from prior years have been reclassified to conform with the current presentation.
3. ACQUISITION
On July 25, 2001, Foamex L.P. purchased certain assets and assumed certain liabilities of General Foam Corporation, a manufacturer of polyurethane foam products for the automotive, industrial, and home furnishings markets, at a total cost of $18.5 million, which resulted in goodwill of approximately $9.1 million. The business was acquired due to its synergy with Foamex L.P.'s existing business. The assets purchased primarily included inventory and machinery and equipment. The results of the acquired business have been included in the consolidated financial statements since the date of acquisition. The effects of the acquisition on Foamex L.P.'s consolidated financial statements are not material.
4. CUMULATIVE EFFECT OF ACCOUNTING CHANGE
Included as a cumulative effect of accounting change in 2002 is a charge of $72.0 million associated with the adoption of SFAS No. 142 (see Note 2).
5. RESTRUCTURING, IMPAIRMENT AND OTHER CHARGES
During 2003, Foamex L.P. recorded restructuring credits of $1.8 million consisting of a $3.2 million reduction in the liability primarily for severance and termination benefits no longer required as the actions contemplated under the related plans have been substantially completed, and a charge of $1.1 million for additional lease termination costs for a closed facility as a result of changes in real estate market conditions. Additionally, Foamex L.P. recorded a $0.3 million restructuring charge reported in the Other segment as a result of an employee termination plan for approximately 300 employees at its Mexico City operations. The actions under this plan were substantially completed in 2003.
In the fourth quarter of 2002, Foamex L.P. recorded restructuring, impairment and other charges of $10.0 million relating to the reorganization of its executive and corporate management and the closure of or reduction of activities at six operations. The charges included severance and other termination benefits for approximately 200 employees, exit costs and remaining lease payments. Also included in restructuring, impairment and other charges was a $2.5 million asset impairment provision to reduce certain leasehold improvements and machinery and equipment included in the Carpet Cushion Products segment to their estimated fair values. The employees to be terminated included manufacturing hourly and salaried personnel, sales force personnel and executive and administrative staff. Approximately 60 of these employees were terminated in 2002 and the remainder in 2003.
Also in 2002, Foamex L.P. recorded restructuring, impairment and other credits of $5.2 million. These credits resulted from a reevaluation of the 2001 Operational Reorganization Plan discussed below and $2.1 million related to the collection of deferred rent receivable which had been fully reserved for.
During 2001, Foamex L.P. recorded restructuring, impairment and other charges of $36.1 million, primarily related to its December 2001 Operational Reorganization Plan. Included in the Operational Reorganization Plan were plant facility closures, reductions in support function personnel and cost reductions in purchasing and logistics. The Operational Reorganization Plan originally included severance and termination benefits for approximately 700 employees at plants, in support functions and in executive management. A reevaluation of the plan in 2002 reduced
FOAMEX L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. RESTRUCTURING, IMPAIRMENT AND OTHER CHARGES (continued)
the number of facilities to be closed and as a result the number of employees planned to be terminated was reduced to approximately 500. Approximately 340 of these employees were terminated in 2002 and the remainder in 2003. Restructuring, impairment and other charges included an impairment provision of $13.8 million (net of anticipated proceeds of $4.6 million) to reduce certain leasehold improvements and machinery and equipment included in the Foam Products and Carpet Cushion Products segments to their estimated fair values.
The 2001 Operational Reorganization Plan was substantially completed in early 2003 and Foamex L.P. completed all of the remaining facility closures and personnel reductions related to its 2002 restructuring plan during 2003. Terminations of approximately 300 employees for both plans took place in 2003.
The following table sets forth the components of Foamex L.P.'s restructuring and other charges (credits):
Foamex L.P. expects to spend approximately $3.9 million during 2004 with the balance to be spent through 2012, primarily for lease costs.
6. INVENTORIES
The components of inventory are listed below.
December 28, December 29, 2003 2002 ------------ ------------ (thousands) Raw materials and supplies $61,855 $60,588 Work-in-process 16,484 16,737 Finished goods 17,543 20,685 ------- ------- Total $95,882 $98,010 ======= =======
FOAMEX L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. LONG-TERM DEBT AND REVOLVING CREDIT BORROWINGS
The components of long-term debt are listed below.
(1) Debt of Foamex L.P., guaranteed by Foamex International, FMXI, Inc. and Foamex Canada.
(2) Debt of Foamex L.P., guaranteed by Foamex International and FMXI, Inc.
(3) Debt of Foamex L.P. and Foamex Capital Corporation.
(4) Includes $12.0 million in 2003 and $14.2 million in 2002 of deferred credits on interest rate swap transactions.
Senior Secured Credit Facility
On August 18, 2003, Foamex L.P. entered into a $240.0 Million Senior Secured Credit Facility with a new group of lenders and an $80.0 million term loan facility with another lender. Proceeds borrowed under these new facilities were used to repay all outstanding balances under the Foamex L.P. Amended Credit Facility which was terminated as of August 18, 2003. In addition, Foamex Canada's revolving credit facility that did not have any outstanding borrowings and had availability of approximately $5.9 million was terminated as of August 18, 2003. The termination of the Amended Credit Facility resulted in a write off of debt issuance costs of $12.9 million recorded in 2003.
The $240.0 Million Senior Secured Credit Facility consists of a revolving credit facility with a maximum availability of $190.0 million and a term loan of $50.0 million. The revolving credit facility includes a $50.0 million sublimit for letters of credit and availability is limited to eligible amounts, as defined, of accounts receivable and inventory. At December 28, 2003, Foamex L.P. had available borrowings of approximately $46.8 million and letters of credit outstanding of $20.9 million. Borrowings under the term loan are limited to eligible amounts, as defined, of equipment and real estate. Substantially all the assets of Foamex L.P. and its domestic subsidiaries and Foamex Canada are pledged as collateral for the related borrowings. Borrowings under the revolving credit facility and the term loan bear interest at floating rates based upon and including a margin over either LIBOR or a Base Rate, as
FOAMEX L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. LONG-TERM DEBT AND REVOLVING CREDIT BORROWINGS (continued)
defined. At December 28, 2003, the weighted average interest rates were 4.53% and 4.42% for the revolving loans and the term loan, respectively. The term loan requires quarterly installment payments of approximately $1.8 million, which commenced on September 30, 2003. All borrowings under the $240.0 Million Senior Secured Credit Facility will mature on April 30, 2007. The $240.0 Million Senior Secured Credit Facility includes both a subjective acceleration clause and a lockbox arrangement which requires all lockbox receipts be used to repay revolving credit borrowings. Accordingly, borrowings under the revolving credit facility are classified as current in the accompanying consolidated balance sheet as of December 28, 2003 as required by Emerging Issues Task Force Issue No. 95-22, "Balance Sheet Classification of Borrowings Outstanding Under Revolving Credit Agreements that Include both a Subjective Acceleration Clause and a Lockbox Arrangement" ("EITF No. 95-22").
The $80.0 million term loan facility (the "Secured Term Loan") will mature on April 30, 2007. Borrowings under this facility will bear interest at a rate that is 9.25% plus the greater of the Reference Rate, as defined, or 4.25%. The minimum rate, which is in effect as of December 28, 2003, is 13.50%. In addition, Foamex L.P. is subject to a 1.00% facility fee which is payable annually on the anniversary date. Borrowings under the Secured Term Loan are collateralized by the same collateral as the $240.0 Million Senior Secured Credit Facility. An intercreditor agreement governs the distribution of collateral among the lenders under the $240.0 Million Senior Secured Credit Facility and the Secured Term Loan.
10 3/4% Senior Secured Notes
The 10 3/4% Senior Secured Notes were issued by Foamex L.P. and Foamex Capital Corporation on March 25, 2002 and are due on April 1, 2009. The notes are guaranteed on a senior basis by all of Foamex L.P.'s domestic subsidiaries that guarantee the $240.0 Million Senior Secured Credit Facility. The notes are secured on a second-priority basis (subject to permitted liens) on substantially the same collateral that secures the obligations under the $240.0 Million Senior Secured Credit Facility and the Secured Term Loan. The notes rank effectively junior to all senior indebtedness that is secured by first priority liens and senior in right of payment to all subordinated indebtedness. Interest is payable April 1 and October 1. The notes may be redeemed at the option of Foamex L.P., in whole or in part, at any time on or after April 1, 2006. The initial redemption is at 105.375% of their principal amount, plus accrued and unpaid interest, if any, thereon to the date of redemption and declining annually to 100.0% on or after April 1, 2008. Additionally, on or before April 1, 2005, up to 35.0% of the principal amount of the notes may be redeemed at a redemption price equal to 110.750% of the principal amount, plus accrued and unpaid interest, if any, thereon to the date of redemption with the net proceeds of one or more equity offerings.
Upon the occurrence of a change of control, as defined, each holder will have the right to require Foamex L.P. to tender for such notes at a price in cash equal to 101.0% of the aggregate principal amount thereof, plus accrued and unpaid interest, if any, if there is such a "change of control".
Foamex L.P. was required to cause a registration statement under the Securities Act of 1933 to be effective within 180 days of March 25, 2002. Foamex L.P. filed the registration statement, but it was not effective until January 30, 2003 and therefore Foamex L.P. was liable for liquidated damages from September 23, 2002 until the date the registration statement became effective. The liquidated damages were at the rate of $15,000 per week for the first 90 days, escalating by $15,000 per week for each additional 90 days. The liquidated damages of $0.3 million were paid on April 1, 2003.
Effective May 1, 2002, Foamex L.P. completed a series of interest rate swap transactions with notional amounts aggregating $300.0 million. Foamex L.P. designated, documented and accounted for these interest rate swaps as fair value hedges of its 10 3/4% Senior Secured Notes due April 1, 2009. The risk being hedged in these transactions was the change in fair value of its 10 3/4% Senior Secured Notes based on changes in the benchmark interest rate, LIBOR. The effect of these interest rate swap transactions was to convert the fixed interest rate on the senior secured notes to floating rates reset twice per year to correspond with the interest payment dates for the 10 3/4% Senior Secured Notes. On September 18, 2002, Foamex L.P. unwound the interest rate swap transactions in exchange for net cash proceeds of $18.4 million, including $3.6 million realized through lower effective interest
FOAMEX L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. LONG-TERM DEBT AND REVOLVING CREDIT BORROWINGS (continued)
rates while the swap transactions were in effect. The unwinding resulted in a deferred credit of $14.8 million which is being amortized through April 1, 2009, using the effective interest rate method.
9 7/8% Senior Subordinated Notes
The 9 7/8% Senior Subordinated Notes were issued by Foamex L.P. and Foamex Capital Corporation and are due on June 15, 2007. The notes represent uncollateralized general obligations of Foamex L.P. and are subordinated to all Senior Debt, as defined in the Indenture. Interest is payable June 15 and December 15. The notes may be redeemed at the option of Foamex L.P., in whole or in part, at any time on or after June 15, 2002. The initial redemption is at 104.938% of their principal amount, plus accrued and unpaid interest, if any, thereon to the date of redemption and declining annually to 100.0% on or after June 15, 2005. At December 28, 2003, the redemption price was 103.292% plus accrued and unpaid interest.
Upon the occurrence of a change of control, as defined, each holder will have the right to require Foamex L.P. to tender for such notes at a price in cash equal to 101% of the aggregate principal amount thereof, plus accrued and unpaid interest thereon, if there is such a "change of control". The notes are subordinated in right of payment to all senior indebtedness and are pari passu in right of payment to the 13 1/2% Senior Subordinated Notes (described below).
13 1/2% Senior Subordinated Notes
The 13 1/2% Senior Subordinated Notes were issued by Foamex L.P. and Foamex Capital Corporation and are due on August 15, 2005. The notes represent uncollateralized general obligations of Foamex L.P. and are subordinated to all Senior Debt, as defined in the Indenture. Interest is payable semiannually on February 15 and August 15. The notes may be redeemed at the option of Foamex L.P., in whole or in part, at any time on or after August 15, 2000. The initial redemption was 106.75% of their principal amount, plus accrued and unpaid interest, if any, thereon to the date of redemption and declining annually to 100.0% on or after August 15, 2004. At December 28, 2003, the redemption price was 101.6875% plus accrued and unpaid interest.
Upon the occurrence of a change of control, as defined, each holder will have the right to require Foamex L.P. to tender for such notes at a price in cash equal to 101% of the aggregate principal amount thereof, plus accrued and unpaid interest, if any, thereon, if there is such a "change of control". The notes are subordinated in right of the payment of all senior indebtedness and are pari passu in right of payment to the 9 7/8% Senior Subordinated Notes (described above).
Industrial Revenue Bonds ("IRBs")
IRB debt includes a $1.0 million bond that matures in 2005 and a $6.0 million bond that matures in 2013. Interest is based on a variable rate, as defined, with options available to Foamex L.P. to convert to a fixed rate. At December 28, 2003, the interest rate was 1.20% on the $1.0 million bond and 1.32% on the $6.0 million bond. The maximum interest rate for either of the IRBs is 15.0% per annum.
If Foamex L.P. exercises its option to convert the bonds to a fixed interest rate structure, the IRBs are redeemable at the option of the bondholders. The obligations are collateralized by certain properties, which have an approximate net carrying value of $10.7 million at December 28, 2003.
Other
Other debt includes a non-interest bearing promissory note with a principal amount of $0.9 million at December 28, 2003 issued in connection with increasing Foamex L.P.'s interest in an Asian joint venture to 70.0% in 2001. The promissory note had unamortized discount of $0.1 million at December 28, 2003.
FOAMEX L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. LONG-TERM DEBT AND REVOLVING CREDIT BORROWINGS (continued)
Related Party - Note Payable to Foam Funding LLC
Foamex Carpet entered into a $70.2 million promissory note payable to Foam Funding LLC, a subsidiary of Trace International Holdings, Inc. ("Trace"), which was formerly a major stockholder of Foamex International. Principal was payable in quarterly installments that began in June 1998 with a final installment in February 2004. Interest was based on a variable rate equal to the sum of 2.25% plus the higher of: (i) the base rate of The Bank of Nova Scotia or (ii) the Federal Funds rate plus 0.5%. At the option of Foamex Carpet, interest payable under the note was convertible into LIBOR based loans plus 3.25%.
Amounts outstanding were collateralized by all of the assets of Foamex Carpet on a pari passu basis with the Foamex Carpet Credit Facility. All obligations under the note payable to Foam Funding LLC were paid on March 25, 2002.
Debt Covenants
The indentures and other indebtedness agreements contain certain covenants that limit, among other things, the ability of Foamex L.P. (i) to pay distributions or redeem equity interests, (ii) to make certain restrictive payments or investments, (iii) to incur additional indebtedness or issue Preferred Equity Interests, as defined, (iv) to merge, consolidate or sell all or substantially all of its assets, or (v) to enter into certain transactions with affiliates or related persons. In addition, certain agreements contain provisions that, in the event of a defined change of control or the occurrence of an undefined material adverse change in the ability of the obligor to perform its obligations, the indebtedness must be repaid, in certain cases, at the option of the holder. Under the most restrictive of the distribution restrictions, as of December 28, 2003, Foamex L.P. was able to distribute funds to its partners, only to the extent to enable its partners to meet their tax payment liabilities and Foamex International's normal operating expenses of up to $1.5 million annually, so long as no default or event of default has occurred.
On November 15, 2002, Foamex L.P. and its bank lenders executed an amendment to the Amended Credit Facility. Under the amendment, Foamex L.P. was subject to minimum net worth, minimum EBDAIT, as defined, and maximum capital expenditure covenants through periods ending December 28, 2003. The minimum EBDAIT covenant was tested monthly, on a cumulative basis, beginning with December 2002. Foamex L.P. was in compliance with the revised covenants at December 29, 2002 and throughout 2003 until the Amended Credit Facility was terminated on August 18, 2003. Under the $240.0 Million Senior Secured Credit Facility and the Secured Term Loan, Foamex L.P. is subject to a fixed charge coverage ratio, as defined, of 1.00. For the two quarters ended December 28, 2003, Foamex L.P.'s fixed charge coverage ratio was 1.09. Foamex L.P. is also subject to a maximum annual capital expenditure amount which was $17.7 million for the year ended December 28, 2003 and will be $36.0 million for the year ending January 2, 2005.
Maturities of Long-Term Debt
Scheduled maturities of long-term debt as of December 28, 2003 are shown below (thousands):
2004 $ 8,937 2005 60,578 2006 7,143 2007 253,500 2008 - Thereafter 306,000 ------- 636,158
Unamortized debt premium/discount and fair value adjustment, net 13,400 --------
Total $649,558 ========
FOAMEX L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. RETIREE BENEFIT PLANS
Defined Benefit Pension Plans
Foamex L.P. provides pension and survivor benefits for salaried and certain hourly employees in the United States (the "Qualified Pension Plan"). Salaried employees are provided benefits that are based principally on the combination of years of credited service and compensation. Hourly employees are provided benefits that are based principally on stated amounts for each year of credited service. Certain employees in a wholly-owned Canadian subsidiary are provided pension and survivor benefits.
Effective May 15, 2001, a supplemental executive retirement plan (the "SERP") was established. The SERP is a non-qualified plan and provides retirement benefits to certain executives that supplement the benefits provided under the Qualified Pension Plan.
Retiree Medical and Life Insurance Benefits
Foamex L.P. provides postretirement health care and life insurance for eligible employees, limited primarily to one manufacturing facility in the United States. These plans are unfunded and benefits are paid as the claims are submitted. The benefits are only provided until the participant becomes eligible for Medicare. Consequently, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 will not impact the obligations or expense of Foamex L.P. Foamex L.P. retains the right, subject to existing agreements, to modify or eliminate these benefits.
The measurement date to determine pension assets and obligations is the calendar year end.
Change in projected benefit obligations, plan assets and funded status follows:
FOAMEX L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. RETIREE BENEFIT PLANS (continued)
The accumulated benefit obligation for all defined benefit plans was $119.5 million at year-end 2003 and $102.6 million at year-end 2002. Information for defined benefit plans with an accumulated benefit obligation in excess of plan assets is listed below.
Components of Net Periodic Benefit Plan Cost
Additional Information
FOAMEX L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. RETIREE BENEFIT PLANS (continued)
* 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.
Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A one-percentage point change in assumed health care cost trend rates would have the effects listed below.
Assumed Health Care Cost Trend
Funding, Investment Strategy, Asset Allocations and Risk Management for Plan Assets.
Pension plan assets are primarily comprised of equity and debt securities, including both U.S. and foreign securities. At year-end 2003, common stock of Foamex International totaled $2.1 million, or 2.8% of the assets. At year-end 2002, common stock of Foamex International totaled $1.3 million, or 2.4% of the assets. Pension plan assets from pension plans in Canada totaled $5.5 million, or 6.9% of assets at year-end 2002 and $3.8 million, or 6.4% of assets, at year-end 2002.
FOAMEX L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. RETIREE BENEFIT PLANS (continued)
Foamex L.P.'s funding policy for the Qualified Pension Plan is to contribute an amount that both satisfies the minimum funding requirements of the Employee Retirement Income Security Act of 1974 and does not exceed the full funding limitations of the U.S. Internal Revenue Code. Funding in 2004 is estimated to be $11.8 million.
For the U.S. pension plans, the investment strategy, asset allocations and risk management strategies are detailed in the Investment Policy Statement (the "IPS") of Foamex L.P. The IPS was developed in conjunction with a comprehensive review and assessment of current and projected financial requirements. Investment guidelines are based on an investment horizon of greater than five years. Key risk management considerations include asset allocation and asset class mix, control procedures and performance monitoring and review. Under the IPS, the U.S. pension plan may use certain classes of hedge funds (derivatives), but the amount of hedge funds is limited to less than 3% of U.S. plan assets.
The strategic target of U.S. pension assets include 60% of equities and 40% of debt securities and cash and cash equivalents. The amount of cash equivalents is targeted to approximate one year of benefit payments to plan participants.
Defined Contribution Plan
Foamex L.P. maintains a defined contribution plan, which is qualified under Section 401(k) of the Internal Revenue Code ("401(k) Plan") and is available for eligible employees who elect to participate. Under the terms of the 401(k) Plan, Foamex L.P. partially matches certain employee contributions. Expense for these contributions was $0.9 million, $1.0 million and $1.0 million in 2003, 2002 and 2001, respectively.
9. INCOME TAXES
The sources of income (loss) before the provision for income taxes are shown below.
A reconciliation of the statutory federal income tax to income tax expense is listed below.
FOAMEX L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. INCOME TAXES (continued)
The provision for income taxes is summarized as follows:
The tax effect of the temporary differences that give rise to deferred income tax assets and liabilities are listed below.
At December 28, 2003, Foamex L.P. had $3.4 million of net operating loss carryforwards in a Mexican subsidiary that expire in 2006 through 2013. A full valuation allowance has been recorded at December 28, 2003 and December 29, 2002 due to uncertainty regarding utilization of the net operating loss carryforwards.
Cumulative undistributed earnings of foreign subsidiaries for which no U.S. income or foreign withholding taxes have been provided, amounted to $5.2 million at December 28, 2003 and $13.4 million at December 29, 2002, respectively. Such earnings are deemed to be permanently invested by Foamex L.P. As such, no deferred tax liability has been recognized with regard to the remittance of such earnings. Further, determination of the amount of unrecognized deferred tax liability with regard to such earnings is not practicable.
10. PARTNERS' DEFICIENCY
Foamex L.P. was formed as a Delaware limited partnership on September 5, 1990, and initially capitalized on October 2, 1990, in accordance with a limited partnership agreement as amended through March 2002. As of December 28, 2003, the partnership interests of Foamex L.P. are a 1.7% managing general partnership interest held by FMXI, Inc. and a 98.3% limited partnership interest held by Foamex International.
FOAMEX L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. PARTNERS' DEFICIENCY (continued)
Accumulated Other Comprehensive Loss
The components of accumulated other comprehensive loss are listed below.
11. BUSINESS SEGMENTS
The reportable business segments reflect Foamex L.P.'s management organization that is structured based on distinct product lines and customers.
An executive vice president heads each operating segment. Each executive vice president is responsible for developing budgets and plans as well as directing the operations of the segment. The performance of each operating segment is measured based upon income from operations, excluding restructuring, impairment and other charges. Foamex L.P. does not allocate restructuring, impairment and other charges to operating segments because many of Foamex L.P.'s facilities produce products for multiple segments.
Foam Products manufactures and markets cushioning foams for bedding, furniture, packaging and health care applications and foam-based consumer products, such as mattress pads and children's furniture. Carpet Cushion Products manufactures and distributes rebond, prime, felt and rubber carpet padding. Automotive Products supplies foam products and laminates to major tier one suppliers and original equipment manufactures. Technical Products manufactures and markets reticulated and other specialty foams used for reservoiring, filtration, gasketing and sealing applications.
The "other" column in the table below represents certain manufacturing operations in Mexico City, corporate expenses not allocated to other business segments and restructuring, impairment and other charges (credits) (see Note 5). Asset and capital expenditure information by business segment is not reported because many of Foamex L.P.'s facilities produce products for multiple business segments.
The accounting policies of the business segments are the same as described in Note 2. Business segment results include revenues and costs that are specifically identifiable and costs shared by business segments have been allocated based on utilization. At the end of 2003, Foamex L.P. changed its measure of segment operating income to exclude allocation of corporate overhead, as management no longer evaluates the performance of segments using this allocation. Rather, Foamex L.P. attempts to manage and control these costs independent of segment performance. Segment results for 2002 and 2001 have been adjusted to reflect this change for comparative purposes. Geographic sales are determined based on the location in which the sale originated.
Sales to one customer, which are included in Automotive Products, accounted for approximately 16.3%, 17.3% and 15.7% of net sales in 2003, 2002 and 2001, respectively. No other customer accounted for more than 10.0% of net sales during the periods presented.
FOAMEX L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. BUSINESS SEGMENTS (continued)
Business segment results are presented below.
Results by geographical area are presented below.
12. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
FOAMEX L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. RELATED PARTY TRANSACTIONS AND BALANCES
Foamex L.P. regularly enters into transactions with its affiliates in the ordinary course of business.
Trace Promissory Notes
On July 1, 1997, Trace borrowed $5.0 million pursuant to a promissory note with an aggregate principal amount of $5.0 million issued to Foamex L.P. on June 12, 1997. The promissory note was due and payable on demand or, if no demand was made, on July 7, 2001, and bears interest at 2 3/8% plus three-month LIBOR, as defined, per annum payable quarterly in arrears commencing October 1, 1997. On June 12, 1997, another promissory note issued to Foamex L.P. by Trace in July 1996 was amended. The amended promissory note is an extension of a promissory note of Trace that was due in July 1997. The aggregate principal amount of the amended promissory note was increased to approximately $4.8 million and the maturity of the promissory note was extended. The principal was reduced by approximately $0.6 million relating to a portion of the proceeds from the sale of a corporate aircraft in 1999. The promissory note was due and payable on demand or, if no demand was made, on July 7, 2001, and bears interest at 2 3/8% plus three-month LIBOR, as defined, per annum payable quarterly in arrears.
The Trace notes are included in the other component of partners' deficiency. Based on Trace's bankruptcy filing and financial condition, it is not probable that Trace will be able to pay the aggregate amount of $9.2 million. Upon the conclusion of the Trace bankruptcy proceedings, Foamex L.P. will charge the uncollected portion of the Trace notes to the general partners' deficiency. Accordingly, Foamex L.P. has not recorded any interest income on these notes since the Trace bankruptcy.
Trace Accounts Receivable
At December 28, 2003 and December 29, 2002, operating accounts receivable from Trace were approximately $3.4 million. These accounts receivable were fully reserved for prior to 2001.
Foam Funding LLC Debt
Foamex L.P. paid interest on notes payable to Foam Funding LLC of $0.7 million and $2.8 million in 2002 and 2001, respectively. Foamex L.P. paid principal on notes payable to Foam Funding LLC of $31.6 million and $15.8 million in 2002 and 2001, respectively. This debt was fully repaid in 2002 (see Note 7).
Other
In 2002, pursuant to the terms of an existing agreement, Foamex L.P. acquired 5.0 % stock interest in Foamex de Mexico S.A. de C.V. ("Foamex de Mexico") which had been held by the general director of Foamex de Mexico for $1.0 million.
In 2001, two members of the board of directors of Foamex International provided consulting services to Foamex L.P. for which fees paid were $0.2 million. Also in 2001, one of these directors received a loan of $0.2 million from Foamex L.P.'s joint venture in Asia. The loan was evidenced by a 20-year non-recourse promissory note bearing interest at 4.0% per annum secured by the director's 5.0% interest in the value of Foamex L.P.'s equity interest in the joint venture in Asia. Foamex L.P. also maintains an apartment used by this director. Rent expense for this facility was $0.2 million in 2003, 2002 and 2001.
Foamex L.P., Recticel, s.a. ("Recticel"), a European polyurethane foam manufacturer, and Beamech Group Limited, an unaffiliated third party, have an interest in a Swiss corporation that develops new manufacturing technology for the production of polyurethane foam including the VPF(SM) manufacturing process. Recticel and affiliates of Recticel are shareholders of Foamex International.
Foamex L.P.'s Pico Rivera, California facility was owned by Foam Funding LLC and leased to Foamex L.P. The Pico Rivera facility was sold to a third party during 2002.
FOAMEX L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. RELATED PARTY TRANSACTIONS AND BALANCES (continued)
During December 2001, Foamex International entered into an agreement that guarantees two promissory notes, totaling $0.7 million, payable to a foreign affiliate that Foamex L.P. accounts for under the equity method. The promissory notes were issued to a director of Foamex International and an employee of Foamex L.P.
During 2002, a member of the Foamex International Board of Directors became an officer of Foamex L.P. at an annual salary of at least $0.4 million plus a target annual bonus of 75.0% of base salary of which 80.0% is guaranteed in any given year. Additionally under the employment agreement, the director had the right to terminate employment and receive termination benefits under certain conditions, including Foamex International's failure to purchase a business owned by the director. Since Foamex International did not enter into a definitive agreement to purchase the business by October 31, 2002, the director had the option to terminate the employment agreement within 90 days and exercised the termination option in January 2003. This director did not stand for reelection at Foamex International's annual shareholders meeting held on May 23, 2003. During 2002, Foamex L.P. paid $0.5 million to the director's business for consulting services.
Also during 2002, Foamex L.P. entered into an agreement with a member of Foamex International's Board of Directors to provide consulting services in connection with potential strategic business opportunities in Asia at an annual cost of $0.2 million. Foamex L.P. also paid $0.5 million in 2002 for legal services to a law firm in which another Foamex International director is a partner. That director resigned from the Board in late 2002.
14. COMMITMENTS AND CONTINGENCIES
Operating Leases
Foamex L.P. is obligated under various noncancelable lease agreements for rental of facilities, vehicles and other equipment. Many of the leases contain renewal options with varying terms and escalation clauses that provide for increased rentals based upon increases in the Consumer Price Index, real estate taxes and lessors' operating expenses. Total minimum rental commitments required under operating leases at December 28, 2003 are (thousands):
2004 $14,076 2005 10,191 2006 6,472 2007 4,930 2008 3,321 Balance 5,925 ------- Total $44,915 =======
Rental expense charged to operations under operating leases approximated $18.8 million, $23.4 million and $20.2 million in 2003, 2002 and 2001, respectively. Substantially all such rental expense represented the minimum rental payments under operating leases.
Contractual Commitments
Foamex L.P. has entered into contracts for information technology services and certain raw materials that have minimum purchase commitments estimated at $105.2 million in 2004, $57.1 million in 2005, $66.4 million in 2006, $63.4 million in 2007 and $59.5 million for each of the years 2008, 2009 and 2010.
Litigation
Foamex L.P. is party to various lawsuits, both as defendant and plaintiff, arising in the normal course of business. It is the opinion of management that the disposition of these lawsuits will not, individually or in the aggregate, have a material adverse effect on Foamex L.P.'s financial position or results of operations. If
FOAMEX L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. COMMITMENTS AND CONTINGENCIES (continued)
management's assessment of our liability relating to these actions is incorrect, these actions could have a material adverse effect on our consolidated financial position, results of operations and cash flows.
As of December 28, 2003, Foamex L.P. had accrued approximately $1.1 million for litigation and other legal matters in addition to the environmental matters discussed below.
Environmental and Health and Safety
Foamex L.P. is subject to extensive and changing federal, state, local and foreign environmental laws and regulations, including those relating to the use, handling, storage, discharge and disposal of hazardous substances, the discharge or emission of materials into the environment, and the remediation of environmental contamination, and as a result, are from time to time involved in administrative and judicial proceedings and inquiries relating to environmental matters. As of December 28, 2003, Foamex L.P. had accruals of approximately $2.5 million for environmental matters, including approximately $2.3 million related to remediating and monitoring soil and groundwater contamination and approximately $0.2 million related to sites where it has been designated as a Potentially Responsible Party, or "PRP", by the EPA or a state authority, and other matters. Additional losses, if any, in excess of amounts currently accrued, cannot be reasonably estimated at this time. If there are additional matters or if our current estimates are incorrect, there could be a material adverse effect on Foamex L.P.'s financial position, results of operations and cash flows.
On August 31, 2002, Environment Canada, the Canadian environmental regulatory agency, finalized a rule which would require flexible polyurethane foam manufacturing operations to reduce methylene chloride (dichloromethane) air emissions. The rule establishes a 50.0% reduction in methylene chloride emissions by December 1, 2004 and 100.0% reductions by January 1, 2007. This standard will not require Foamex L.P. to make material expenditures for its Canadian plants.
Foamex L.P. has reported to the appropriate state authorities that we have found soil and/or groundwater contamination in excess of state standards at certain locations. Seven sites are currently in various stages of investigation or remediation. Accordingly, the extent of contamination and the ultimate liability is not known with certainty for all sites. During 2000, Foamex L.P. reached an indemnification agreement with the former owner of the Morristown, Tennessee facility. The agreement allocates the incurred and future remediation costs between the former owner and Foamex L.P. The estimated allocation of future costs for the remediation of this facility is not significant, based on current known information. The former owner was Recticel Foam Corporation, a subsidiary of Recticel.
Foamex L.P. has either upgraded or closed all underground storage tanks at its facilities in accordance with applicable regulations.
The Comprehensive Environmental Response, Compensation and Liability Act, or "CERCLA," and comparable state laws impose liability without fault for the costs of cleaning up contaminated sites on certain classes of persons that contributed to the release of hazardous substances into the environment at those sites, for example, by generating wastes containing hazardous substances which were disposed at such sites. Foamex L.P. is currently designated as a PRP by the EPA or by state environmental agencies or other PRPs, pursuant to CERCLA or analogous state statutes, with respect to 11 sites. Estimates of total cleanup costs and fractional allocations of liability are often provided by the EPA, the state environmental agency or the committee of PRPs with respect to the specified site. Based on these estimates (to the extent available) and on known information, in each case and in the aggregate, Foamex L.P. does not expect additional costs, if any, to be material to liquidity, result of operations or financial position.
The possibility exists, that new environmental legislation and/or environmental regulations may be adopted, or other environmental conditions, including the presence of previously unknown environmental contamination, may be found to exist or a reassessment of the potential exposure to pending environmental matters may be necessary due to new information or future developments, that may require expenditures not currently anticipated and that may be material.
FOAMEX L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. GUARANTOR INFORMATION
The payment obligations of Foamex L.P. and Foamex Capital Corporation under the 10 3/4% Senior Secured Notes are guaranteed by Foamex L.P.'s 100% owned domestic subsidiaries ("Guarantors"). Such guarantees are full, unconditional and joint and several. Separate financial statements of the Guarantors are not presented because Foamex L.P.'s management has determined that they would not be material to investors. The following presents condensed consolidating balance sheets as of December 28, 2003 and December 29, 2002 and the condensed consolidating statements of operations and cash flows for the years ended December 28, 2003, December 29, 2002 and December 31, 2001 of the Guarantors and nonguarantors. The Guarantors include Foamex Carpet, Foamex Latin America, Inc., Foamex Mexico, Inc., Foamex Mexico II, Inc. and Foamex Asia, Inc. On December 30, 2002, Foamex Carpet distributed certain assets, liabilities and its business to Foamex L.P. and accordingly, Foamex Carpet is not included as a guarantor in the financial information as of December 28, 2003 and for the year then ended. The nonguarantors are Foamex Canada Inc. and Grupo Foamex de Mexico, S.A. de C.V. and its subsidiaries. The following financial information is intended to provide information for the Guarantors and nonguarantors of Foamex L.P. based on amounts derived from the financial statements of Foamex L.P.
Condensed Consolidating Balance Sheet As of December 28, 2003
Condensed Consolidating Balance Sheet As of December 29, 2002
FOAMEX L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. GUARANTOR INFORMATION (continued)
Condensed Consolidating Statement of Operations For the year ended December 28, 2003
FOAMEX L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. GUARANTOR INFORMATION (continued)
Condensed Consolidating Statement of Operations For the year ended December 29, 2002
FOAMEX L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. GUARANTOR INFORMATION (continued)
Condensed Consolidating Statement of Operations For the year ended December 31, 2001
FOAMEX L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15 GUARANTOR INFORMATION (continued)
Condensed Consolidating Statement of Cash Flows For the year ended December 28, 2003
FOAMEX L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. GUARANTOR INFORMATION (continued)
Condensed Consolidating Statement of Cash Flows For the year ended December 29, 2002
FOAMEX L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. GUARANTOR INFORMATION (continued)
Condensed Consolidating Statement of Cash Flows For the year ended December 31, 2001
16. SUBSEQUENT EVENT
Effective February 10, 2004, Foamex International's Chairman resigned his position by mutual agreement with Foamex International's Board of Directors.
In connection with this resignation, Foamex International entered into a separation agreement with the former Chairman and Foamex L.P. will record a one-time charge of approximately $1.4 million in the first quarter of 2004 for amounts payable under this agreement, none of which relate to past service rendered by the former Chairman. Additionally, Foamex L.P. will record the reversal of approximately $1.4 million reflected on the balance sheet as of December 28, 2003 related to various retirement provisions contained in an employment agreement with Foamex International that are no longer payable to the former Chairman under the terms of the separation agreement.
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of Foamex Capital Corporation Wilmington, Delaware
We have audited the accompanying balance sheets of Foamex Capital Corporation (a wholly-owned subsidiary of Foamex L.P.) (the "Company") as of December 28, 2003 and December 29, 2002. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the balance sheet is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the balance sheet. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall balance sheet presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such balance sheets present fairly, in all material respects, the financial position of the Company at December 28, 2003 and December 29, 2002, in conformity with accounting principles generally accepted in the United States of America.
/s/ DELOITTE & TOUCHE LLP
March 9, 2004 Parsippany, New Jersey
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 $240.0 Million Senior Secured Credit Facility. The notes are secured on a second-priority basis (subject to permitted liens) on substantially the same collateral that secures the obligations under the $240.0 Million Senior Secured Credit Facility and the Secured Term Loan. The notes rank effectively junior to all senior indebtedness that is secured by first priority liens and senior in right of payment to all subordinated indebtedness. Interest is payable April 1 and October 1. The notes may be redeemed at the option of the Issuers, in whole or in part, at any time on or after April 1, 2006. The initial redemption is at 105.375% of their principal amount, plus accrued and unpaid interest and liquidated damages, as defined, if any, thereon to the date of redemption and declining annually to 100.0% on or after April 1, 2008. Additionally, on or before April 1, 2005, up to 35.0% of the principal amount of the notes may be redeemed at a redemption price equal to 110.750% of the principal amount, plus accrued and unpaid interest and liquidated damages, as defined, if any, thereon to the date of redemption with the net proceeds of one or more equity offerings.
Upon the occurrence of a change of control, as defined, each holder will have the right to require the Issuers to tender for such notes at a price in cash equal to 101.0% of the aggregate principal amount thereof, plus accrued and unpaid interest, if any, if there is such a "change of control".
9 7/8% Senior Subordinated Notes due 2007 ("9 7/8% Senior Subordinated Notes")
The 9 7/8% Senior Subordinated Notes were issued by the Issuers and are due on June 15, 2007. The notes represent uncollateralized general obligations of the Issuers and are subordinated to all Senior Debt, as defined in the Indenture. Interest is payable June 15 and December 15. The notes may be redeemed at the option of the Issuers, in whole or in part, at any time on or after June 15, 2002. The initial redemption is at 104.938% of their principal amount, plus accrued and unpaid interest, as defined, if any, thereon to the date of redemption and declining annually to 100.0% on or after June 15, 2005. At December 28, 2003, the redemption price was 103.292% plus accrued and unpaid interest.
Upon the occurrence of a change of control, as defined, each holder will have the right to require the Issuers to tender for such notes at a price in cash equal to 101% of the aggregate principal amount thereof, plus accrued and unpaid interest thereon, if there is such a "change of control". The notes are subordinated in right of payment to all senior indebtedness and are pari passu in right of payment to the 13 1/2% Senior Subordinated Notes (described below).
13 1/2% Senior Subordinated Notes due 2005, Series B ("13 1/2% Senior Subordinated Notes")
The 13 1/2% Senior Subordinated Notes were issued by the Issuers and are due on August 15, 2005. The notes represent uncollateralized general obligations of the Issuers and are subordinated to all Senior Debt, as defined
FOAMEX CAPITAL CORPORATION (A Wholly-Owned Subsidiary of Foamex L.P.) NOTES TO BALANCE SHEETS
2. COMMITMENTS AND CONTINGENCIES (continued)
in the Indenture. Interest is payable semiannually on February 15 and August 15. The notes may be redeemed at the option of the Issuers, in whole or in part, at any time on or after August 15, 2000. The initial redemption is at 106.75% of their principal amount, plus accrued and unpaid interest, if any, thereon to the date of redemption and declining annually to 100.0% on or after August 15, 2004. At December 28, 2003, the redemption price was 101.6875% plus accrued and unpaid interest.
Upon the occurrence of a change of control, as defined, each holder will have the right to require the Issuers to tender for such notes at a price in cash equal to 101% of the aggregate principal amount thereof, plus accrued and unpaid interest, if any, thereon, if there is such a "change of control". The notes are subordinated in right of the payment of all senior indebtedness and are pari passu in right of payment to the 9 7/8% Senior Subordinated Notes (described above).
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