Document/Exhibit Description Pages Size
1: 10-K Annual Report 89 452K
2: EX-21 Subsidiaries of the Registrant 1 6K
3: EX-31 Certification per Sarbanes-Oxley Act (Section 302) 2± 9K
4: EX-31 Certification per Sarbanes-Oxley Act (Section 302) 2± 9K
5: EX-32 Certification per Sarbanes-Oxley Act (Section 906) 1 6K
6: EX-32 Certification per Sarbanes-Oxley Act (Section 906) 1 6K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended January 1, 2006
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from .......... to ..........
Commission file number: 1-11432: 1-11436
FOAMEX L.P.
FOAMEX CAPITAL CORPORATION
------------------------------------------------------
(Exact Name of registrant as Specified in its Charter)
(Debtor-in-Possession)
Delaware 05-0475617
Delaware 22-3182164
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1000 Columbia Avenue, Linwood, PA 19061
---------------------------------------- -----------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (610) 859-3000
--------------
Securities registered pursuant to Section 12(b) of the Act: None
----
Securities registered pursuant to Section 12(g) of the Act: None
----
Indicate by a check mark if the registrant is a well-known seasoned issuer,
as defined in Rule 405 of the Securities Act. YES NO X
---- ----
Indicate by a check mark if the registrant is not required to file reports
pursuant to Section 13 or 15(d) of the Act. YES NO X
---- ----
Indicate by check mark whether Foamex L.P. (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter periods that Foamex
L.P. was required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
---- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Annual Report on Form 10-K or any
amendment to this Annual Report on Form 10-K. [X]
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, or a non-accelerated filer.
Large accelerated filer Accelerated filer Non-accelerated filer X
---- ---- ----
Indicate by a check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). YES NO X
---- ----
None of the voting securities of Foamex L.P. or Foamex Capital Corporation
are held by non-affiliates.
As of March 17, 2006, there were 1,000 shares of Foamex Capital
Corporation's common stock outstanding.
Foamex L.P. and Foamex Capital Corporation meet the conditions set forth in
General Instruction (I)(1)(a) and (b) of this Annual Report on Form 10-K and are
therefore filing this form with reduced disclosure format.
DOCUMENTS INCORPORATED BY REFERENCE
None
FOAMEX L.P.
FOAMEX CAPITAL CORPORATION
INDEX
[Enlarge/Download Table]
Page
Part I
Item 1. Business 3
Item 1A. Risk Factors 8
Item 1B. Unresolved Staff Comments 11
Item 2. Properties 11
Item 3. Legal Proceedings 12
Item 4. Submission of Matters to a Vote of Security Holders 13
Part II
Item 5. Market for Registrant's Common Equity, Related Stockholder
Matters and Issuer Purchase of Equity Securities 13
Item 6. Selected Financial Data 13
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 15
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 30
Item 8. Financial Statements and Supplementary Data 30
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 31
Item 9A. Controls and Procedures 31
Item 9B. Other Information 32
Part III
Item 10. Directors and Executive Officers of the Registrant 33
Item 11. Executive Compensation 33
Item 12. Security Ownership of Certain Beneficial Owners
and Management 33
Item 13. Certain Relationships and Related Transactions 33
Item 14. Principal Accounting Fees and Services 33
Part IV
Item 15 Exhibits, Financial Statement Schedules 33
Signatures 40
We will furnish a copy of any exhibit to this Annual Report on Form 10-K upon
the payment of a fee equal to our reasonable expense in furnishing such exhibit.
2
PART I
ITEM l. BUSINESS
General
Foamex L.P. (referred to in this document as "Foamex L.P., we, us and/or
our"), a wholly-owned subsidiary of Foamex International Inc. ("Foamex
International"), is engaged primarily in the manufacturing and distribution of
flexible polyurethane and advanced polymer foam products. As of January 1 2006
our operations are conducted directly and through our wholly-owned subsidiaries,
Foamex Canada Inc. ("Foamex Canada"), Foamex Latin America, Inc. ("Foamex
Mexico") and Foamex Asia, Inc. ("Foamex Asia"). As of January 1, 2006, Foamex
L.P.'s partners were FMXI, Inc. ("FMXI") with a 1.7% managing general
partnership interest and Foamex International with a 98.3% limited partnership
interest. Foamex Capital Corporation ("FCC") is a wholly-owned subsidiary of
Foamex L.P.
We make our Annual Report on Form 10-K, quarterly reports on Form 10-Q and
current reports on Form 8-K, as well as any amendments to those reports,
available free of charge through our web site as soon as reasonably practicable
after we electronically file that material with, or furnish it to, the
Securities and Exchange Commission (the "SEC"). You can learn more about us by
reviewing our SEC filings on our web site. Our SEC reports, available through
www.sec.gov which is maintained by the SEC, can be accessed through the investor
relations' page of our web site, which is located at
www.foamex.com/investor.php.
Bankruptcy
On September 19, 2005 (the "Petition Date"), Foamex International and
certain of its domestic subsidiaries, including Foamex L.P. and FCC,
(collectively referred to as the "Debtors"), filed voluntary petitions for
relief under Chapter 11 of the United States Bankruptcy Code ("Bankruptcy Code")
in the United States Bankruptcy Court for the District of Delaware (the
"Bankruptcy Court").
We continue to operate our business and manage our property as
debtors-in-possession pursuant to Sections 1107 and 1108 of the Bankruptcy Code.
On September 29, 2005, the United States Trustee for the District of Delaware
appointed an official committee of unsecured creditors in these Chapter 11 cases
(the "Creditors' Committee"). The Creditors' Committee is currently comprised of
The Bank of New York, the Pension Benefit Guaranty Corporation, Newcastle
Partners, LP, Lyondell Chemical Corporation, Shell Chemicals L.P., Steel
Partners II, L.P. and Donovan Williams. At a hearing held on September 20, 2005,
the Bankruptcy Court granted various first day motions for relief designed to
stabilize our operations and business relationships with customers, vendors,
employees and others, and entered orders granting permission to, among other
things, pay employee salaries, wages and benefits, pay amounts owing in
connection with workers' compensation and other insurance policies; utilize our
existing cash management systems; continue our customer programs; pay vendors
for certain critical goods and services provided prior to September 19, 2005
and, access, on an interim basis, up to $221 million of a $240 million
debtor-in-possession (DIP) revolving credit facility and $80 million of a DIP
term loan. A portion of the proceeds of the debtor-in-possession revolving
credit facility and all of the proceeds of the DIP term loan facility were used
to repay Foamex L.P.'s prepetition revolving credit and term loan facilities. On
October 17, 2005, the Bankruptcy Court granted final approval of the $240
million DIP revolving credit facility and the $80 million DIP term loan.
On November 17, 2005, the Bankruptcy Court approved a motion authorizing a
key executive retention program (the "KERP"). The KERP pertains to 77 employees
who may receive cash distributions aggregating up to $3.2 million. In addition,
certain participants, at the discretion of the Board of Directors of the
reorganized Foamex International, may receive additional distributions
aggregating up to $1.1 million in cash or in common stock of the reorganized
Foamex International at a price per share that reflects the value of the equity
on the effective date of the plan of reorganization. Distributions under the
KERP are generally to be made on or around certain milestone dates during the
Chapter 11 cases and on and subsequent to the effective date of the plan of
reorganization. Cash distributions pursuant to the KERP, aggregating $0.4
million, were paid in December 2005 and additional amounts aggregating $1.1
million have been paid in February and March 2006. The common stock
distributions, if any, will be made at the six month and one year anniversaries
of the effective date of the plan of reorganization. The KERP also includes an
additional $0.5 million discretionary cash pool to address specific employment
matters and unanticipated needs that may arise during the Chapter 11 cases.
3
We have notified all known or potential creditors of the Chapter 11 filings
for the purposes of identifying and quantifying all prepetition claims. The
Chapter 11 filings triggered defaults on substantially all debt and lease
obligations. Subject to certain exceptions under the Bankruptcy Code, the
Chapter 11 filings automatically stayed the continuation of any judicial or
administrative proceedings or other actions against the Debtors or their
property to recover on, collect or secure a claim arising prior to September 19,
2005. On October 18, 2005, the Bankruptcy Court entered an order (the "Bar Date
Order") requiring any person or entity holding or asserting a prepetition
claim(s) against the Debtors to a file a written proof of claim with the
Debtors' claims processing agent on or before December 8, 2005 (the "Bar Date"),
and, for Governmental Units (as defined in the Bankruptcy Code) holding a
prepetition claim(s) against the Debtors' on or before March 20, 2006. With
certain enumerated exceptions, the Bar Date Order further provides that any
person or entity which fails to timely file a proof of claim will, among other
things, be forever barred, estopped and enjoined from asserting a prepetition
claim against the Debtors.
The Debtors are currently assessing all of the proofs of claim filed as of
the Bar Date. As of March 20, 2006, 1,173 proofs of claim are outstanding in the
Chapter 11 cases in the aggregate amount of approximately $3,576.2 million. The
Debtors believe that this amount is vastly overstated and have devoted
substantial time and effort to the claims reconciliation process. The Debtors
have already objected to and expect to object to a number of additional claims
throughout the Chapter 11 cases in an effort to reduce substantially the number
and amount of claims that will be allowed as part of the bankruptcy cases.
The uncertainty regarding our future prospects may hinder our ongoing
business activities and our ability to operate, fund and execute our business
plan by impairing relations with existing and potential customers; negatively
impacting our ability to attract and retain key employees; limiting our ability
to obtain trade credit; impairing present and future relationships with vendors
and service providers; and impairing our ability to continue to operate as a
going concern.
As a result of the Chapter 11 filings, realization of assets and
liquidation of liabilities are subject to significant uncertainty. While
operating as a debtor-in-possession under the protection of Chapter 11, and
subject to Bankruptcy Court approval or otherwise as permitted in the ordinary
course of business, we may sell or otherwise dispose of assets and liquidate or
settle liabilities for amounts other than those reflected in our financial
statements. Further, a plan of reorganization could materially change the
amounts and classifications reported in our historical financial statements,
which do not give effect to any adjustment to the carrying value of assets or
amounts of liabilities that might be necessary as a consequence of confirmation
of a plan of reorganization.
To exit Chapter 11, we must obtain confirmation by the Bankruptcy Court of
a Chapter 11 plan. On December 23, 2005, we filed a Disclosure Statement and
Proposed Plan of Reorganization (the "Plan") with the Bankruptcy Court. The Plan
is designed to complete a financial restructuring which will result in a
reduction of approximately $500 million of total debt from prepetition amounts.
The Plan was supported by an ad hoc committee of our Senior Secured Noteholders
comprising more than 50% of the outstanding principal amount of Senior Secured
Notes. The terms of the Plan include the following:
o Holders of Allowed Administrative Claims, Priority Tax Claims, DIP
Financing Claims, Other Priority Claims, and Other Secured Claims will
receive full payment in cash;
o Holders of Allowed Senior Secured Note Claims will receive a pro rata
share of 100% of new common stock of the reorganized Foamex
International, subject to dilution, provided that the class of such
Claims votes to accept the Plan;
o Holders of Allowed Senior Subordinated Note Claims will receive a pro
rata share of warrants to purchase up to 5% of new common stock of the
reorganized Foamex International, subject to dilution, provided that
the class of such Claims votes to accept the Plan;
o Holders of Allowed General Unsecured Claims will receive a pro rata
share of $1.5 million, provided that the distribution does not exceed
5% of the allowed amount of each such claim and provided that the
class of such Claims votes to accept the Plan;
4
o Holders of Foamex International's existing Preferred Stock and Common
Stock will not receive any distribution under the Plan and their
shares will be cancelled on the effective date of the Plan.
Since we filed our Plan, Foamex L.P. and its advisors have continued to
work with its significant creditor constituencies and their respective advisors
to negotiate a fully consensual plan of reorganization. We expect that we will
continue to do so in the hope of agreeing with these constituents on the terms
of a fully consensual plan. There can be no guarantee that we will file and/or
confirm such a plan. However, even in the absence of a fully consensual plan, it
is likely that we will need to modify the plan that is currently on file with
the Bankruptcy Court.
Segments
We believe we are the largest manufacturer and distributor of flexible
polyurethane and advanced polymer foam products in North America. We have
numerous manufacturing facilities dedicated to specific product lines as well as
facilities with the capability to support multiple product lines. Each of our
business segments has a customer base that is significantly different from the
other segments. Our senior executives direct sales efforts for each of our
business segments. See Note 13 to the consolidated financial statements on page
F-29.
Our five business segments are described below.
Foam Products
Our foam products are used in various market segments, such as bedding,
furniture, recreational and consumer. These foams are distributed directly from
manufacturing facilities or indirectly through independent fabricator
distributors. The bedding industry uses these foams in quilting rolls, toppers,
cores and border rolls for mattresses. In the furniture industry, the foams are
generally used for upholstered seating products. The recreational market segment
uses our foams primarily for cushioning, while the consumer market utilizes
these foams in a broad range of products, such as mattress overlay pads, leisure
furniture, futons and pillows. Foam products are generally sold in large volumes
on a regional basis because of high shipping costs.
The development and introduction of value-added products continues to be
a priority including Sensus(R), Quiltflex(R), Pillowflex(R), viscoelastic
"memory" foams and other high performance foam products for the bedding
industry, which maintain their properties better than other foams and materials.
Carpet Cushion Products
We manufacture and distribute carpet cushion products, which include prime
and rebond carpet padding. Prime carpet padding is made from virgin polyurethane
foam, which is formed into buns and sliced into sheets. Rebond carpet padding is
primarily made from recycled foam, which is shredded into small pieces,
processed and then bonded using a polyurethane chemical adhesive. Rebond
manufacturing requires the management of a comprehensive recycling business that
includes an extensive internal and external collection network from the
automotive and foam industries on a worldwide basis. Our rubber and felt carpet
cushion businesses were sold to Leggett & Platt, Incorporated on April 29, 2005
for net cash proceeds of $38.7 million. See Note 7 to the consolidated financial
statements on page F-19.
Automotive Products
We believe we are one of the largest suppliers of polyurethane foam
products to the North American automotive industry. Our product lines include:
foam rolls and flame-laminated composites, to improve comfort and provide
pleasing appearance in seat covers; engineered foams and flame laminated
composites for headliner and other interior soft-trim applications; ridged
thermoformable foams, to provide structure and shape in various substrate
applications; acoustical foams, to reduce noise and improve sound quality in the
vehicle; barrier foam products, which allow our customers to more efficiently
process components with low-pressure injection-molding or foam-in-place
manufacturing methods; molded energy-absorbing foams, to enhance occupant safety
in vehicle crash situations; and molded seating cushions.
5
We have the ability to conduct most original equipment manufacturer ("OEM")
fabric composite testing in our A2LA accredited laboratory, located in Auburn,
Indiana. This testing is required to meet Federal Motor Vehicle Safety
Standards.
We supply our product lines through a range of tiers in the automotive
industry supply chain, varying greatly depending on the specific application and
the OEM. Most frequently, we supply to Tier 1 system integrators, which in turn
provide components and systems to the OEMs. In conjunction with these efforts,
we maintain direct contact with OEMs for material specification development,
appearance approvals, and new product development initiatives.
Technical Products
We believe we are one of the industry's prime innovators and suppliers of
specialty foam material, which we refer to as "Technical Products," for a
diverse array of markets and industries. Technical Products can be tailored to
meet a wide variety of energy and fluid management challenges and are found in
automotive, industrial, electronics, consumer, medical, and other markets.
Technical Products are commonly used in applications such as gasketing and
sealing systems for automobiles, inkjet printer cartridges, rollers in digital
imaging equipment, noise and vibration damping for computer disc drives, air and
fluid filtration in cars and aircraft, medical devices, and numerous consumer
items such as sponges, mops, paint brushes and cosmetic applicators. Due to the
highly specialized nature of most Technical Products, a technical staff of
engineering and research and development experts work with customers to design,
develop and manufacture products to meet specific requirements. We provide
technical support from product conceptualization through prototyping and
production and work closely with the product developers, engineers, brand
managers and research and development staffs of both major OEMs in specific
markets and with the industry's premier foam fabricators to deliver innovative
solutions to their product needs and challenges.
Other
Other consists primarily of certain manufacturing and fabrication
operations in Mexico City, corporate expenses not allocated to the other
business segments and impairment, restructuring and other charges (credits).
Marketing and Sales
Foam Products sells directly to major bedding and furniture manufacturers
and also through third party independent fabricators. The key strategic elements
supporting growth in these areas are a focus on marketing and sales efforts,
high quality, cost-competitive and innovative products and low freight costs
through optimal plant location. Plant locations are critical in this
regionalized business where the transportation cost typically comprises a
significant portion of product cost.
Carpet Cushion Products sells carpet padding to distributors, major home
centers, flooring covering retail chains and independent retailers.
Our Automotive Products customer base includes all of the major Tier 1
interior system integrators. We compete for new business both at the beginning
of development of new models and upon the redesign of existing models. Once a
foam producer has been designated to supply parts for a new model program, the
foam producer usually produces parts for the life of the program. Competitive
factors in the market include product quality and reliability, cost and timely
service, technical expertise and development capability, new product innovation
and customer service.
We market our Technical Products directly to major OEMs in the Automotive,
Industrial, Electronics, Consumer and Medical sectors where we provide
engineering, research and development resources to assist these customers in
developing innovative solutions to their most demanding technical requirements.
We also market our Technical Products through a network of independent
fabrication and distribution companies in North America, the United Kingdom and
Asia. These fabricators or distributors often further process or finish
Technical Products to meet the specific needs of end users. Our specialty and
technical foams service unique end
6
user requirements and are generally sold at relatively high margins. This
business is characterized by a diversity and complexity of both customers and
applications.
International Operations
Our international operations are located in Canada, Mexico and Asia. We
have operated four manufacturing facilities in Canada to service our foam
products and automotive customers and have five facilities in Mexico serving the
automotive and cushioning industries. On March 7, 2006, we announced the closure
of two manufacturing facilities, including a foam pouring facility, in Toronto,
Canada. Four of the facilities in Mexico are located within the Mexican free
trade zones close to the U.S. border and primarily service automotive customers.
Our Mexico City facility services both automotive and foam fabrication
customers.
We participate in a joint venture with fabrication facilities in Singapore
and Thailand. Although we own 70% of the joint venture, we do not control this
entity. The joint venture installed its first foam pourline during 2003. This
pourline, which was entirely financed by the joint venture entity, reduces foam
shipping costs for sales to the region and increase the range of markets served.
We have maintained a longstanding relationship with Recticel s.a.
("Recticel"), a leading manufacturer of flexible polyurethane foam in Europe. We
have in the past exchanged technical information and expertise relating to foam
manufacturing with Recticel.
Major Customers
Sales to Johnson Controls, which are included in Automotive Products,
accounted for approximately 10.7% of our net sales in 2005, 12.5% of our net
sales in 2004 and 16.3% of our net sales in 2003. No other customer accounted
for more than 10.0% of our net sales during any of the past three years. Net
sales to our five largest customers comprised approximately 27.1% of our net
sales in 2005, 29.6% of our net sales in 2004 and 34.7% of our net sales in
2003. The loss of any one of these customers could have a material adverse
effect on our business.
Manufacturing and Raw Materials
Our manufacturing and distribution facilities are strategically located to
service our major customers because the high freight cost in relation to the
cost of foam products generally results in distribution being most
cost-effective within a 200 to 300 mile radius. The square footage of our foam
manufacturing facilities is significant as foam production requires a large area
for curing or lay down space.
Our fabrication process involves cutting foam buns into various shapes and
sizes to meet customer specifications. Scrap foam, a byproduct of foam
production and fabrication, is used to produce rebond carpet padding.
Raw materials account for over 75% of our manufacturing costs. The two
principal chemicals used in the manufacture of flexible polyurethane foam are
toluene diisocyanate, or "TDI," and polyol. There are a limited number of major
suppliers of TDI and polyol. We generally have alternative suppliers for each
major raw material. We believe that we could find alternative sources of supply
should we cease doing business with any one of our major suppliers, although
there may be some delay in replacing a major supplier. A disruption in our
ability to obtain TDI and/or polyol that continues for a significant period of
time could cause us to suspend or curtail some of our manufacturing operations,
which could have a material adverse effect on our business and results of
operations. In September and October 2005, the supply of TDI was disrupted as a
major supplier closed a plant permanently and other sources of supply were
curtailed for a period of time by Hurricanes Rita and Katrina. Production of
foam was reduced throughout the industry and foam was allocated to customers for
a period of time.
The prices of TDI and polyol have historically been cyclical and volatile.
The prices of these raw materials are influenced by demand, manufacturing
capacity, oil and natural gas prices and the current geopolitical instability
and its impact on oil production and prices. We experienced increases of more
than 40% in the weighted average price of raw materials from major chemical
manufacturers from the fourth quarter of 2004 to the fourth quarter of
7
2005 and prices were at an all-time high at the end of 2005. We attempt to
offset raw material price increases through selling price increases and
manufacturing process efficiencies, but we were only partially able to do so for
the full year ended January 1, 2006. We were able to implement significant
selling price increases in the fourth quarter of 2005. In the future, we may not
be successful in implementing selling price increases to fully recover raw
material cost increases. Competitive pricing pressure may also require us to
adjust our selling prices or lose volume.
A key material needed in the manufacture of rebond carpet padding is scrap
foam. We internally generate a substantial portion of the scrap foam used in the
production of rebond carpet padding from our other operations. Historically, the
market price of rebond carpet padding has fluctuated with the market price of
scrap foam.
Employees
As of January 1, 2006, we employed approximately 5,000 persons.
Approximately 1,400 of these employees are located outside the United States
including approximately 800 covered by collective bargaining agreements with
labor unions. Approximately 900 United States employees are covered by
collective bargaining agreements at seven facilities. These agreements expire on
various dates through September 8, 2008. We consider relations with our
employees to be good.
Competition
The flexible polyurethane foam industry is highly competitive with price,
quality and service and product offering being significant competitive factors.
Our competitors in the polyurethane foam industry include E. R. Carpenter
Company, Leggett & Platt, Incorporated, Hickory Springs Manufacturing Company,
Flexible Foam Products, Inc., Future Foam, Inc., Crest Foam Industries, Inc.,
Wm. T. Burnett & Co. and The Woodbridge Group. None of these competitors
individually competes in all of the business segments in which we do business.
Patents and Trademarks
We own various patents and trademarks registered in the United States and
in numerous foreign countries. The registered processes and products were
developed through ongoing research and development activities to improve
quality, reduce costs and expand markets through development of new applications
for flexible polyurethane foam products. While we consider our patents and
trademarks to be a valuable asset, we do not believe that our competitive
position is dependent upon patent protection or that our operations are
dependent upon any individual patent, trademark or tradename.
Research and Development
We believe we have a leading research and development capability in the
flexible polyurethane foam industry. Our primary research and development
facility is located in Eddystone, Pennsylvania. Expenditures for research and
development amounted to $2.3 million in 2005, $2.8 million in 2004 and $3.6
million for 2003.
Foamex L.P., Recticel, and Beamech Group Limited, an unaffiliated third
party, have an interest in Prefoam AG, a Swiss corporation that develops new
manufacturing technology for the production of polyurethane foam including the
VPF (SM) manufacturing process. Foamex L.P., Recticel and their affiliates have
a royalty-free license to use technology developed by the Swiss corporation. We
and Recticel have exchanged know-how, trade secrets, engineering and other data,
designs, specifications, chemical formulations, technical information, market
information and drawings which are necessary or useful for the manufacture, use
or sale of foam products. We anticipate that we will continue to do so in the
future.
ITEM 1A. RISK FACTORS
In addition to the other information in this Annual Report on Form 10-K,
investors should carefully consider the following factors about us. Certain
statements in "Risk Factors" are forward-looking statements. See item 7 -
Managements' Discussion and Analysis of Financial Condition and Results of
Operations - "Forward-Looking Statements."
8
Operating in bankruptcy imposes significant risks on our operations. We cannot
predict when we will confirm a plan of reorganization and successfully emerge
from bankruptcy.
We are not certain about when we will emerge from bankruptcy. The timing of
our emergence from bankruptcy and the terms of our emergence may affect our
relationships with our creditors, customers, suppliers and employees and have a
significant impact on our business, financial condition and results of
operations. Our ability to continue operating in bankruptcy as a going concern
and to emerge from bankruptcy will depend upon the following factors, among
others:
o our ability to reach agreement with our creditors regarding a plan of
reorganization or otherwise to "cramdown" a plan in order to emerge
from bankruptcy;
o our ability to comply with and operate under the terms of the
debtor-in-possession financing we obtained upon filing for bankruptcy
and any cash management orders entered by the Bankruptcy Court from
time to time, which subject the debtor entities to restrictions,
including restrictions on paying dividends and transferring cash and
other assets;
o our ability to maintain adequate debtor-in-possession financing and to
generate cash from operations;
o the ability of our non-debtor subsidiaries to generate cash from
operations or obtain financing, if necessary;
o our ability to access exit financing sufficient to fund emergence and
to fund our operations after emergence from bankruptcy on reasonable
terms;
o our ability to retain key employees; and
o our ability to maintain good customer and supplier relationships in
light of developments in our bankruptcy cases and the terms of our
emergence.
As a result of our Chapter 11 cases, our historical financial information will
not be indicative of our future financial performance.
Our capital structure will likely be significantly changed under any plan
of reorganization. Under fresh start accounting rules that may apply to us upon
the effective date of any plan of reorganization, our assets and liabilities
would be adjusted to fair values and partners' deficiency would be restated to
zero. Accordingly, if fresh start accounting rules apply, our financial
condition and results of operations following our emergence from Chapter 11
would not be comparable to the financial condition or results of operations
reflected in our historical financial statements.
The accompanying consolidated financial statements have been prepared
assuming that we will continue as a going concern. As discussed in Part II, Item
8, Financial Statements and Supplementary Data - Notes to Consolidated Financial
Statements, Note 1, Bankruptcy and Basis of Presentation, there is significant
uncertainty as to changes in Foamex International's ownership. Our plans
concerning this matter also are described in Note 1 to the consolidated
financial statements. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
Our historical financial information will not be indicative of our
financial performance following our emergence from the bankruptcy case upon the
implementation of a plan of reorganization approved by the Bankruptcy Court.
Under American Institute of Certified Public Accountants Statement of Position
90-7, "Financial Reporting by Entities in Reorganization under the Bankruptcy
Code," certain of our outstanding debt is classified as liabilities subject to
compromise, and interest expense on the unsecured portion of this debt has not
been accrued since September 19, 2005 (the "Petition Date"). From the Petition
Date through January 1, 2006, contractual interest expense not accrued or
recorded on pre-petition debt aggregated approximately $6.5 million. This
calculation
9
excludes the impact of any compounding of interest on unpaid
interest that may be payable under the relevant contractual obligations, as well
as any interest that may be payable under a plan of reorganization to trade or
other creditors.
In connection with the Chapter 11 cases and the development of any plan of
reorganization, it is also possible that additional restructuring and similar
charges may be identified and recorded in future periods. Such charges could be
material to our consolidated financial position and results of operations in any
given period.
The prices of raw materials account for a significant portion of our
manufacturing costs. We have experienced significant increases in raw material
costs since the middle of 2002. Our ability to pass on cost increases may be
hindered by competition or selling price increases may encourage substitutions
for foam in the bedding and furniture industries.
The two principal chemicals used in the manufacture of flexible
polyurethane foam are TDI and polyol. Prices are influenced by demand,
manufacturing capacity and oil and natural gas prices. Historically, the prices
of raw materials have been cyclical and volatile and our principal suppliers of
raw materials used in the manufacture of flexible polyurethane foam have
significantly increased the price of raw materials several times over the past
several years.
We have been more successful in implementing selling price increases in the
fourth quarter of 2005 than historically. However, these price increases have
reduced volumes and have created the potential for the substitution of other
materials by our customers.
We depend on a limited number of suppliers of TDI and polyol.
There are a limited number of major suppliers of TDI and polyol and their
manufacturing capacity is concentrated on the U.S. Gulf Coast. A disruption in
our ability to obtain TDI and polyol that continues for a significant period of
time could cause us to suspend all or a portion of our manufacturing operations,
which could have a material adverse effect on our business and results of
operations. Two recent examples of such disruptions were Hurricanes Rita and
Katrina.
We must effectively manage our other operating expenses.
In addition to our ability to effectively increase selling prices in
response to raw material cost increases, we must manage and control our other
operating expenses. If we are unable to achieve reductions in other operating
expenses and in our selling, general and administrative expenses, there could be
a material adverse effect on our business, financial condition and results of
operations.
We rely on a few large customers for a significant portion of our net sales.
A few of our customers are material to our business and operations. Sales
to our five largest customers together accounted for approximately 27.1% of our
net sales in 2005, 29.6% of our net sales in 2004, and 34.7% of our net sales in
2003. Sales to Johnson Controls, our largest customer, accounted for
approximately 10.7% of our net sales in 2005, 12.5% of our net sales in 2004 and
16.3% of our net sales in 2003. The loss, or a substantial decrease in the
amount, of purchases by any of our major customers could adversely affect our
financial position and results of operations.
Our customers' financial condition may have a material adverse effect on our
business, financial condition and results of operations.
In the ordinary course of business, we extend trade credit to our
customers. In the event our customers, in the aggregate or certain significant
customers, are not able to pay us for our products on a timely basis or at all,
there could be a material adverse effect on our business, financial condition
and results of operations. Recent increases in selling prices to our customers
may increase the risk that some customers may not be able to pay us on a timely
basis or at all.
10
We are subject to extensive federal, state, local and foreign environmental laws
and regulations.
Our past and present business operations and the past and present ownership
and operation of our real property are subject to extensive and changing
federal, state, local and foreign environmental laws and regulations, including
those relating to the use, handling, storage, discharge and disposal of
hazardous substances, the discharge or emission of materials into the
environment and the remediation of environmental contamination. We are currently
remediating soil and groundwater contamination in excess of state standards at
several of our current and former facilities. We cannot predict what
environmental legislation or regulations will be enacted in the future, how
existing or future laws or regulations will be administered or interpreted or
what environmental conditions may be found to exist on our properties.
Compliance with more stringent laws or regulations, as well as more vigorous
enforcement policies of the regulatory agencies or stricter interpretation of
existing laws, and discovery of new conditions may require us to make additional
expenditures, which may be material.
Our business has excess capacity and is cyclical.
The polyurethane foam business has limited financial barriers to entry and
presently has excess capacity. The business is also cyclical to the extent that
our customers are in cyclical industries. We are especially subject to the
cyclical nature of the automotive, housing, technology and furniture and bedding
industries. A protracted downturn in the businesses of our customers in any of
these industries, either simultaneously or sequentially, could have a material
adverse effect on our results of operations. In particular, problems facing the
North American automotive industry have negatively impacted our automotive
business and may continue to do so. In 2005, we recorded impairment charges of
$35.4 million for the entire amount of goodwill applicable to the Automotive
Products operating segment.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
As of January 1, 2006, we maintained 44 manufacturing and distribution
facilities. Total floor space in use at our 12 owned facilities is approximately
2.9 million square feet and total floor space in use at our 32 leased facilities
is approximately 3.9 million square feet. 35 of these facilities are located
throughout 28 cities in the United States, four facilities are located in
Canada, and five facilities are located in Mexico. We have approximately 1.5
million square feet of idle space.
We have closed certain manufacturing facilities, warehouse locations, and
administrative offices as part of our restructuring process and it is possible
that additional closures will be implemented prior to our emergence from Chapter
11. On March 7, 2006, we announced the closure of two manufacturing facilities,
including a foam pouring facility, in Toronto, Canada and on March 20, 2006, we
announced the closure of our foam pouring facility in Orlando, Florida. To the
extent possible, we have utilized our ability under Section 365(a) of the
Bankruptcy Code to reject unexpired real property leases and executory contracts
for the closures made to date and expect to continue to utilize this authority
in any future closures.
We do not anticipate any problem in renewing or replacing any of the ten
leases expiring in 2006. The earliest lease termination date for any of our foam
production facilities is 2009.
We maintain a leased corporate administrative office in Linwood,
Pennsylvania and a leased administrative office in Novi, Michigan for the
Automotive Products segment.
We do not report facility information by business segment since many of our
facilities produce products for multiple business segments.
11
ITEM 3. LEGAL PROCEEDINGS
Litigation
We and our subsidiaries are party to various lawsuits, both as defendant
and plaintiff, arising in the normal course of business. It is the opinion of
management that the disposition of these lawsuits will not, individually or in
the aggregate, have a material adverse effect on our financial position or
results of operations. If management's assessment of the liability relating to
these actions is incorrect, these actions could have a material adverse effect
on our consolidated financial position, results of operations and cash flows. As
of January 1, 2006, we have accrued approximately $0.8 million for litigation,
claims and other legal matters (the "Litigation Matters") in addition to the
environmental matters discussed below. The claims relating to the Litigation
Matters are liabilities subject to compromise that are capable of being treated
under the Plan as general unsecured claims.
As a consequence of our Bankruptcy, all litigation pending against the
Debtors on the Petition Date was stayed automatically by Section 362 of the
Bankruptcy Code and, absent further order of the Bankruptcy Court granting
relief from the automatic stay, no party may take any action in respect of such
litigation or to recover on pre-petition claims against the Debtors. In
addition, pursuant to Section 365 of the Bankruptcy Code, the Debtors have
rejected and may reject pre-petition executory contracts and unexpired leases,
and the non-debtor parties to contracts or leases that have been or will be
rejected have asserted or may in the future assert damages for breach of such
contracts or leases as permitted by the Bankruptcy Code.
Environmental and Health and Safety
We are subject to extensive and changing federal, state, local and foreign
environmental laws and regulations, including those relating to the use,
handling, storage, discharge and disposal of hazardous substances, the discharge
or emission of materials into the environment, and the remediation of
environmental contamination, and as a result, are from time to time involved in
administrative and judicial proceedings and inquiries relating to environmental
matters. As of January 1, 2006, we had accruals of approximately $2.1 million
for environmental matters, including approximately $1.9 million related to
remediating and monitoring soil and groundwater contamination and approximately
$0.2 million relating to PRP sites and other matters (the "PRP Site Matters").
The claims relating to PRP Site Matters are liabilities subject to compromise
and are capable of being treated under the Plan as general unsecured claims.
On August 31, 2002, Environment Canada, the Canadian environmental
regulatory agency, finalized a rule which would require flexible polyurethane
foam manufacturing operations to reduce methylene chloride (dichloromethane) air
emissions. The rule establishes a 50.0% reduction in methylene chloride
emissions by December 1, 2004, which we have implemented, and 100.0% reduction
by January 1, 2007. This standard has not required and will not require us to
make material expenditures for our Canadian plants.
We have reported to state authorities that we have found soil and/or
groundwater contamination in excess of state standards. Seven sites are in
various stages of investigation or remediation. The extent of contamination and
the ultimate liability is not known with certainty for all sites.
We have either upgraded or closed all underground storage tanks at our
facilities in accordance with applicable regulations.
The Comprehensive Environmental Response, Compensation and Liability Act,
or "CERCLA," and comparable state laws impose liability without fault for the
costs of cleaning up contaminated sites on certain classes of persons that
contributed to the release of hazardous substances into the environment at those
sites, for example, by generating wastes containing hazardous substances which
were disposed at such sites. We are currently designated as a PRP by the EPA or
by state environmental agencies or other PRPs, pursuant to CERCLA or analogous
state statutes, with respect to 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.
12
Although it is possible that new information or future developments could
require us to reassess the potential exposure relating to all pending
environmental matters, including those described above, management believes
that, based upon all currently available information, the resolution of these
environmental matters will not have a material adverse effect on our operations,
financial position, capital expenditures or competitive position. The
possibility exists, however, that new environmental legislation and/or
environmental regulations may be adopted, or other environmental conditions,
including the presence of previously unknown environmental contamination, may be
found to exist or a reassessment of the potential exposure to pending
environmental matters may be necessary due to new information or future
developments, that may require expenditures not currently anticipated and that
may be material.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASE OF EQUITY SECURITIES
(a) Foamex L.P. is a privately held limited partnership. There is no
established public trading market for its securities.
(b) As of January 1, 2006, there were two holders of Foamex L.P.'s equity
securities.
(c) Listed below are the net cash receipts in accordance with tax sharing
agreements. At January 1, 2006 and January 2, 2005, we have liabilities of
approximately $0.5 million and $0.3 million, respectively, to our partners
in accordance with the tax sharing agreement.
Tax Sharing Distributions
-------------------------
2005 2004
------ ------
(thousands)
FMXI $ - $ -
Foamex International - -
----- -----
$ - $ -
===== =====
Limitations on Distributions
Our financing agreements restrict our ability to make distributions to our
partners.
ITEM 6. SELECTED FINANCIAL DATA
The following table presents selected historical consolidated financial
data. The financial data should be read in conjunction with the consolidated
financial statements and related notes thereto included in this Annual Report on
Form 10-K.
[Enlarge/Download Table]
Fiscal Year (1)
-----------------------------------------------------------------
2005 2004 2003 2002 2001 (2)
---------- ---------- ---------- ---------- ----------
(thousands)
Statements of Operations Data
Net sales $1,311,611 $1,266,394 $1,304,560 $1,328,094 $1,252,904
Gain on sale of businesses $ 29,719 $ - $ - $ - $ -
Loss from continuing operations (3) $ (53,609) $ (25,031) $ (27,413) $ (27,204) $ (2,261)
13
Fiscal Year (1)
-----------------------------------------------------------------
2005 2004 2003 2002 2001 (2)
---------- ---------- ---------- ---------- ----------
(thousands)Balance Sheet Data
Total assets $ 601,317 $ 645,706 $ 665,155 $ 695,283 $ 767,650
Current portion of long-term debt $ 240,804 $ 114,907 $ 96,065 $ - $ -
Long-term debt, excluding current portion (4) $ 366 $ 568,461 $ 633,621 $ 738,540 $ 648,232
Liabilities subject to compromise $ 635,965 $ - $ - $ - $ -
Partners' deficiency $ (414,982) $ (355,591) $ (325,131) $ (305,786) $ (178,128)
(1) We changed to a fiscal year from a calendar year during 2002. We have a 52
or 53-week fiscal year ending on the Sunday closest to the end of the
calendar year. The 2005 fiscal year included 52 weeks ended January 1,
2006. The 2004 fiscal year included the 53 weeks ended January 2, 2005. The
2002 fiscal year included the 52 weeks ended December 29, 2002 after
adjustment for December 31, 2001 which was included in the prior year.
(2) Includes the results of operations of General Foam Corporation from July
25, 2001, the date it was acquired.
(3) Includes net impairment, restructuring and other charges (credits), as
discussed in Note 6 to the consolidated financial statements included in
this Annual Report on Form 10-K. Listed below are the pretax charges
(credits).
2005 - $52.2 million
2004 - $ 3.2 million
2003 - $(1.8) million
2002 - $ 4.8 million
2001 - $36.1 million
(4) Excludes long-term debt of $500.9 million that is included in Liabilities
Subject to Compromise at January 1, 2006.
14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements so long as those statements are
identified as forward-looking and are accompanied by meaningful cautionary
statements identifying important factors that could cause actual results to
differ materially from those projected in such statements. In connection with
certain forward-looking statements contained in this Annual Report on Form 10-K
and those that may be made in the future by or on behalf of us which are
identified as forward-looking, we note that there are various factors that could
cause actual results to differ materially from those set forth in any such
forward-looking statements, such as the ability to implement customer selling
price increases in response to higher raw material costs, raw material price
increases, general economic conditions, the interest rate environment, the level
of automotive production, carpet production, furniture and bedding production,
and housing starts, the 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
13 to our 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
impairment, restructuring and other charges and corporate overhead. We do not
allocate impairment, restructuring 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, recreational and consumer applications.
Carpet Cushion Products - manufactures and distributes prime and rebond
carpet padding.
Automotive Products - manufactures and distributes automotive foam products
and laminates to major Tier 1 suppliers and OEMs.
15
Technical Products - manufactures and markets reticulated and other
specialty foams used for reservoiring, filtration, gasketing and sealing
applications.
Other - primarily consists of certain manufacturing and fabrication
operations in Mexico City, corporate expenses not allocated to the other
business segments and impairment, restructuring 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.
A small number of major customers produce a significant portion of our net
sales. In 2005, our largest customer provided approximately 10.7% of our net
sales and our five largest customers provided approximately 27.1% 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 2005, except
for net cash provided by (used for) operating activities which is expressed in
millions of dollars.
[Enlarge/Download Table]
2005 2004 2003 2002 2001 2000 1999
------ ------ ------ ------ ------ ------ ------
Net Sales 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of Goods Sold 89.6% 88.8% 89.0% 89.2% 85.8% 86.3% 86.1%
Gross Profit Margin 10.4% 11.2% 11.0% 10.8% 14.2% 13.7% 13.9%
Selling, General and
Administrative Expenses 6.2% 6.9% 6.2% 7.1% 6.3% 5.4% 5.8%
Operating Income Margin 0.2% 4.1% 4.9% 3.4% 5.0% 7.7% 7.3%
Interest and Debt
Issuance Expense 6.1% 6.1% 6.8% 5.2% 5.0% 6.0% 5.6%
Net Cash Provided by (Used
for) Operating Activities $(22.0) $0.2 $18.1 $(49.6) $108.7 $52.9 $68.6
As demonstrated by the table above, our results significantly deteriorated
in 2002 and improved only marginally in 2003 and 2004 before declining again in
2005 as a whole. Our gross profit margin has been reduced by more than three
percentage points compared to 2001 while selling, general and administrative
expenses and interest and debt issuance expense have both increased. Net sales
dollars have been relatively flat over the seven year period with 2005
representing an increase of 1.3% compared to 1999.
During the first three quarters of 2005 our gross profit margin continued
to erode and was 6.3% for the third quarter and 7.1% for the first three
quarters. In the third quarter of 2005, three suppliers of TDI closed production
facilities that had accounted for approximately 10% of global supply. In
addition, the evacuation of portions of the U. S. Gulf Coast states as a result
of Hurricanes Katrina and Rita caused curtailment of TDI and polyol production
at several facilities in that area. The reduced availability of raw materials
caused temporary shortages of foam production throughout the industry. Partially
as a result of these shortages, we were able to implement significant price
increases on an immediate basis during the fourth quarter of 2005, particularly
in our Foam Products Operating segment. As a result, our gross profit margin was
19.8% in the fourth quarter, a portion of which was temporary due to market
conditions and inventory impacts on our cost of goods sold. We expect that our
gross profit margin in
16
future periods will be more consistent with historical levels prior to 2005 as
reflected in the above table, depending on future supply and demand
considerations, but there can be no assurance that our expectations will be
realized.
Our management is focusing on restoring and maintaining profitability by
concentrating on the following key areas:
o Maintaining selling price increases to recover raw material and
manufacturing cost increases.
o Managing raw material costs.
o Developing new value-added products that leverage our technical
capability and entering new markets with increased profit potential.
o Closing or selling unprofitable or non-core plants and business.
o Controlling labor and overhead costs both in manufacturing and
administration.
On September 19, 2005 (the "Petition Date"), Foamex International and
certain of its domestic subsidiaries, including Foamex L.P., (collectively
referred to as the "Debtors"), filed voluntary petitions for relief under
Chapter 11 of the United States Bankruptcy Code ("Bankruptcy Code") in the
United States Bankruptcy Court for the District of Delaware (the "Bankruptcy
Court").
We continue to operate our business and manage our property as
debtors-in-possession pursuant to Sections 1107 and 1108 of the Bankruptcy Code.
On September 29, 2005, the United States Trustee for the District of Delaware
appointed an official committee of unsecured creditors in these Chapter 11 cases
(the "Creditors' Committee"). The Creditors' Committee is currently comprised of
The Bank of New York, the Pension Benefit Guaranty Corporation, Newcastle
Partners, LP, Lyondell Chemical Corporation, Shell Chemicals L.P., Steel
Partners II, L.P. and Donovan Williams. At a hearing held on September 20, 2005,
the Bankruptcy Court granted various first day motions for relief designed to
stabilize our operations and business relationships with customers, vendors,
employees and others, and entered orders granting permission to, among other
things, pay employee salaries, wages and benefits, pay amounts owing in
connection with workers' compensation and other insurance policies; utilize our
existing cash management systems; continue our customer programs; pay vendors
for certain critical goods and services provided prior to September 19, 2005
and, access, on an interim basis, up to $221 million of a $240 million
debtor-in-possession (DIP) revolving credit facility and $80 million of a DIP
term loan. A portion of the proceeds of the debtor-in-possession revolving
credit facility and all of the proceeds of the DIP term loan facility were used
to repay Foamex L.P.'s prepetition revolving credit and term loan facilities. On
October 17, 2005, the Bankruptcy Court granted final approval of the $240
million DIP revolving credit facility and the $80 million DIP term loan.
On November 17, 2005, the Bankruptcy Court approved a motion authorizing a
key executive retention program (the "KERP"). The KERP pertains to 77 employees
who may receive cash distributions aggregating up to $3.2 million. In addition,
certain participants, at the discretion of the Board of Directors of the
reorganized Foamex International, may receive additional distributions
aggregating up to $1.1 million in cash or in common stock of the reorganized
Foamex International at a price per share that reflects the value of the equity
on the effective date of the plan of reorganization. Distributions under the
KERP are generally to be made on or around certain milestone dates during the
Chapter 11 cases and on and subsequent to the effective date of the plan of
reorganization. Cash distributions pursuant to the KERP, aggregating $0.4
million, were paid in December 2005 and additional amounts aggregating $1.1
million have been paid in February and March 2006. The common stock
distributions, if any, will be made at the six month and one year anniversaries
of the effective date of the plan of reorganization. The KERP also includes an
additional $0.5 million discretionary cash pool to address specific employment
matters and unanticipated needs that may arise during the Chapter 11 cases.
We have notified all known or potential creditors of the Chapter 11 filings
for the purposes of identifying and quantifying all prepetition claims. The
Chapter 11 filings triggered defaults on substantially all debt and lease
obligations. Subject to certain exceptions under the Bankruptcy Code, the
Chapter 11 filings automatically stayed the continuation of any judicial or
administrative proceedings or other actions against the Debtors or their
property to
17
recover on, collect or secure a claim arising prior to September 19, 2005. On
October 18, 2005, the Bankruptcy Court entered an order (the "Bar Date Order")
requiring any person or entity holding or asserting a prepetition claim(s)
against the Debtors to a file a written proof of claim with the Debtors' claims
processing agent on or before December 8, 2005 (the "Bar Date"), and, for
Governmental Units (as defined in the Bankruptcy Code) holding a prepetition
claim(s) against the Debtors' on or before March 20, 2006. With certain
enumerated exceptions, the Bar Date Order further provides that any person or
entity which fails to timely file a proof of claim will, among other things, be
forever barred, estopped and enjoined from asserting a prepetition claim against
the Debtors.
The Debtors are currently assessing all of the proofs of claim filed as of
the Bar Date. As of March 20, 2006 1,173 proofs of claim are outstanding in the
Chapter 11 cases in the aggregate amount of approximately $3,576.2 million. The
Debtors believe that this amount is vastly overstated and have devoted
substantial time and effort to the claims reconciliation process. The Debtors
have already objected to and expect to object to a number of additional claims
throughout the Chapter 11 cases in an effort to reduce substantially the number
and amount of claims that will be allowed as part of the bankruptcy cases.
The uncertainty regarding our future prospects may hinder our ongoing
business activities and our ability to operate, fund and execute our business
plan by impairing relations with existing and potential customers; negatively
impacting our ability to attract and retain key employees; limiting our ability
to obtain trade credit; impairing present and future relationships with vendors
and service providers; and impairing our ability to continue to operate as a
going concern.
As a result of the Chapter 11 filings, realization of assets and
liquidation of liabilities are subject to significant uncertainty. While
operating as a debtor-in-possession under the protection of Chapter 11, and
subject to Bankruptcy Court approval or otherwise as permitted in the ordinary
course of business, we may sell or otherwise dispose of assets and liquidate or
settle liabilities for amounts other than those reflected in our financial
statements. Further, a plan of reorganization could materially change the
amounts and classifications reported in our historical financial statements,
which do not give effect to any adjustment to the carrying value of assets or
amounts of liabilities that might be necessary as a consequence of confirmation
of a plan of reorganization.
To exit Chapter 11, we must obtain confirmation by the Bankruptcy Court of
a Chapter 11 plan. On December 23, 2005, we filed a Disclosure Statement and
Proposed Plan of Reorganization (the "Plan") with the Bankruptcy Court. The Plan
is designed to complete a financial restructuring which will result in a
reduction of approximately $500 million of total debt from prepetition amounts.
The Plan was supported by an ad hoc committee of our Senior Secured Noteholders
comprising more than 50% of the outstanding principal amount of Senior Secured
Notes. The terms of the Plan include the following:
o Holders of Allowed Administrative Claims, Priority Tax Claims, DIP
Financing Claims, Other Priority Claims, and Other Secured Claims will
receive full payment in cash;
o Holders of Allowed Senior Secured Note Claims will receive a pro rata
share of 100% of new common stock of the reorganized Foamex
International, subject to dilution, provided that the class of such
Claims votes to accept the Plan;
o Holders of Allowed Senior Subordinated Note Claims will receive a pro
rata share of warrants to purchase up to 5% of new common stock of the
reorganized Foamex International, subject to dilution, provided that
the class of such Claims votes to accept the Plan;
o Holders of Allowed General Unsecured Claims will receive a pro rata
share of $1.5 million, provided that the distribution does not exceed
5% of the allowed amount of each such claim and provided that the
class of such Claims votes to accept the Plan;
o Holders of Foamex International's existing Preferred Stock and Common
Stock will not receive any distribution under the Plan and their
shares will be cancelled on the effective date of the Plan.
18
Since we filed our Plan, we and our advisors have continued to work with
its significant creditor constituencies and their respective advisors to
negotiate a fully consensual plan of reorganization. We expect that we will
continue to do so in the hope of agreeing with these constituents on the terms
of a fully consensual plan. There can be no guarantee that we will file and/or
confirm such a plan. However, even in the absence of a fully consensual plan, it
is likely that we will need to modify the plan that is currently on file with
the Bankruptcy Court.
Financing
DIP Revolving Credit Facility
On September 22, 2005, Foamex L.P. entered into a Debtor-in-Possession
Credit Agreement (the "DIP Revolving Credit Facility") with a group of lenders
to provide a revolving credit facility with a maximum availability of $240.0
million. The initial borrowing under the DIP Revolving Credit Facility was used
to repay outstanding obligations under the prepetition Senior Secured Credit
Facility and interest due under the prepetition Secured Term Loan. The DIP
Revolving Credit Facility includes a $40.0 million sublimit for letters of
credit and availability is limited to eligible amounts, as defined, of accounts
receivable, inventory, equipment, and real estate. At January 1, 2006, Foamex
L.P. had total available borrowings of $53.6 million and letters of credit
outstanding of $18.2 million under the facility. As of March 24, 2006, Foamex
L.P.'s total available borrowings had increased to $106.1 million. Substantially
all of the assets of Foamex L. P. and its domestic subsidiaries and Foamex
Canada are pledged as collateral for the related borrowings. Borrowings under
the DIP Revolving Credit Facility bear interest at floating rates based upon and
including a margin over either LIBOR or a Base Rate, as defined. At January 1,
2006, the weighted average interest rate on borrowings was 7.42%. All borrowings
under the DIP Revolving Credit Facility will mature on the earlier of March 22,
2007 or the date that we emerge from Chapter 11. The lenders under the DIP
Revolving Credit Facility have agreed to provide emergence financing, subject to
a number of conditions, of up to $275.0 million upon our emergence from Chapter
11. Fees and expenses that will be incurred to put the emergence financing in
place are expected to be approximately $4.3 million. The DIP Revolving Credit
Facility includes both a subjective acceleration clause and a lock box
arrangement that requires all lock box receipts be used to repay revolving
credit borrowings. Borrowings under the DIP Revolving Credit Facility are
classified as current in the accompanying consolidated balance sheet at January
1, 2006.
DIP Term Loan
On September 22, 2005, Foamex L.P. entered into a Debtor-in-Possession
Credit Agreement (the "DIP Term Loan") with a group of lenders to provide an
$80.0 million term loan. Proceeds from the DIP Term Loan were used to repay
outstanding principal under the prepetition Secured Term Loan. Borrowings under
the DIP Term Loan bear interest at a rate that is either (i) 8.00% plus the
greater of the Base rate, as defined, or 6.50% or (ii) at 10.00% plus the
greater of the LIBOR rate or 3.00%. At January 1, 2006, the weighted average
interest rate was 14.29%. Borrowings under the DIP Term Loan are collateralized
by the same collateral as the DIP Revolving Credit Facility. An intercreditor
agreement governs the distribution of collateral among the lenders under the DIP
Revolving Credit Facility and the DIP Term Loan. All borrowings under the DIP
Term Loan will mature on the earlier of March 22, 2007 or the date that we
emerge from Chapter 11. The lenders under the DIP Term Loan have agreed to
provide emergence financing, subject to a number of conditions, of $80.0 million
upon emergence from Chapter 11. The DIP Term Loan may be repaid prior to
maturity by paying a prepayment premium initially set at 8% and declining
ratably over a 48-month period. The DIP Term Loan is classified as current in
the accompanying consolidated balance sheet at January 1, 2006.
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 our consolidated financial statements beginning on page
F-11. 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:
19
Bankruptcy and Basis of Presentation
As a result of the Chapter 11 filings, realization of assets and
liquidation of liabilities are subject to significant uncertainty. While
operating as a debtor-in-possession under the protection of Chapter 11, and
subject to the Bankruptcy Court approval or otherwise as permitted in the
ordinary course of business, we may sell or otherwise dispose of assets and
liquidate or settle liabilities for amounts other than those reflected in our
financial statements. Further, a plan of reorganization could materially change
the amounts and classifications reported in our historical financial statements,
which do not give effect to any adjustment to the carrying value of assets or
amounts of liabilities that might be necessary as a consequence of confirmation
of a plan of reorganization.
Subsequent to the bankruptcy filing date, Statement of Position 90-7,
"Financial Reporting by Entities in Reorganization Under the Bankruptcy Code"
("SOP 90-7") applies to the Debtors' financial statements while the Debtors
operate under the provision of Chapter 11. SOP 90-7 does not change the
application of generally accepted accounting principles in the preparation of
financial statements. However, SOP 90-7 does require that the financial
statements, for periods including and subsequent to the filing of the Chapter 11
petition, distinguish transactions and events that are directly associated with
the reorganization from the ongoing operations of the business. A confirmed plan
of reorganization could result in material changes in the amounts reported in
our consolidated financial statements, which do not give effect to any
adjustments of the carrying value of assets and liabilities that will be
necessary as a consequence of reorganization under Chapter 11.
Revenue Recognition
Revenue from sales, net of discounts and estimated returns, allowances and
customer rebates, is recognized when product title and the risks and rewards of
ownership pass to the customer, the sales price is fixed and determinable and
collection is reasonably assured. Products are shipped FOB shipping point. Net
sales are reduced by allowances for estimated discounts, returns and customer
rebates. Balances for allowances and rebates are reviewed at least quarterly and
are adjusted if warranted. Shipping and handling costs are included in costs of
goods sold.
Accounts Receivable and Allowance for Uncollectible Accounts
We actively monitor customer payments in conjunction with customer credit
evaluations. Accordingly, a reserve for estimated uncollectible accounts is
maintained and is based on historical collection experience and specific
customer collection issues. A significant change in the financial condition of
one or more of our larger customers could have a material adverse impact on
future financial results.
Long-Lived Assets
Net property, plant and equipment totaled $113.2 million at January 1,
2006. Property and equipment held for use is grouped for impairment testing at
the plant level, the lowest level for which there are identifiable cash flows.
Impairment testing of the asset group occurs whenever events or changes in
circumstances indicate that the carrying amount of the assets may not be
recoverable. We assess recoverability by comparing the carrying amount of the
asset group to the estimated undiscounted future cash flows expected to be
generated by the assets. If an asset group is considered impaired, the
impairment loss to be recognized would be measured as the amount by which the
asset group's carrying amount exceeds its fair value. Estimated future cash
flows are based on historical results adjusted for estimated future market
conditions and operating plans. To the extent that these estimates change,
impairment losses could result which may have a material adverse impact on
future financial results.
Goodwill
We evaluate the recoverability of goodwill on an annual basis as required
by Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" ("SFAS No. 142"). We perform this annual evaluation as of the
first day of the fourth fiscal quarter, or more frequently if events or changes
in circumstances, such as declining sales, earnings or cash flows or material
adverse changes in the business climate, indicate that the carrying value of
goodwill might be impaired. Goodwill is considered to be impaired when the net
book value of a reporting unit exceeds its estimated fair value. Fair values are
primarily established using a discounted cash flow
20
methodology. The determination of discounted cash flows is based on businesses'
strategic plans and long range planning forecasts.
Self Insurance
We are partially self-insured up to certain limits for a number of risks
including workers compensation, medical, automobile and general liability.
Commercial insurance policies are carried for amounts in excess of the
self-insured amounts. Management exercises 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,
automobile and general liability claims.
Benefit Plans
We maintain defined benefit pension plans that cover most of our U.S.
employees. Projected benefit obligations, pension expense and amounts included
in other comprehensive income are impacted by a number of assumptions. Key
assumptions include the discount rates to determine benefit obligations and the
expected long-term rate of return on plan assets. Discount rates are applied to
future cash flows to measure benefit obligations on a present value basis. We
assumed weighted average discount rates of 6.50%, 6.00% and 5.50% to calculate
pension expense in 2003, 2004 and 2005, respectively. Based on pension plan
obligations at year-end 2005, a 0.50% reduction in the discount rate would
increase pension expense by approximately $0.8 million. Based on pension plan
assets at year-end 2005, a 0.50% reduction in the expected rate of return
assumption would increase pension expense by approximately $0.5 million. The
under funded position of the pension plans was primarily the result of declining
discount rates and accumulated returns on pension assets below expected returns
for the last several years resulting in an accumulated net actuarial loss which
must be amortized in future years. The amortization of net actuarial losses is
estimated to be approximately $3.1 million in 2006. We anticipate funding
approximately $16.0 million to the pension plans in 2006 as compared to $7.3
million in 2005.
Claims and Litigation
We receive claims for damages that are not covered by insurance. Management
evaluates these claims and records its estimate of liabilities when such
liabilities are considered probable and an amount or reasonable range can be
estimated.
Environmental Remediation
We have a number of manufacturing facilities and certain idle facilities
that require remediation of soil and/or groundwater contamination. As required
by applicable State and/or Federal compliance programs, many of these sites are
in the monitoring stage that requires periodic sampling of contamination levels
in conjunction with ongoing assessments of remediation actions. Accordingly, the
recognition of environmental liabilities requires estimates concerning the
duration of monitoring and associated costs, often projected to extend for a
number of years. To the extent that these estimates change, additional
environmental costs could have a material adverse impact on future financial
results. See the section below entitled "Other - Environmental Health and
Safety" for additional information.
LIQUIDITY AND CAPITAL RESOURCES
Our liquidity requirements consist principally of accounts receivable,
inventory and accounts payable, scheduled payments of interest and principal on
outstanding indebtedness, capital expenditures, and employee benefit plans.
Historically, cash flow from our operating activities, cash on hand and periodic
borrowings under our credit agreements have been adequate to meet operating
liquidity requirements.
Cash and cash equivalents were $7.4 million at January 1, 2006 compared to
$5.3 million at January 2, 2005. Working capital at January 1, 2006 was a
negative $18.3 million and the current ratio was 0.95 to 1 compared to negative
working capital at January 2, 2005 of $54.0 million and a current ratio of 0.85
to 1.
21
Total debt, including $500.9 million subject to compromise, and revolving
credit borrowings at January 1, 2006 was $742.1 million, an $8.4 million
decrease from January 2, 2005. The January 2, 2005 carrying value of debt
included $10.3 million of deferred credits and debt premium. As of January 1,
2006, there were revolving credit borrowings of $154.6 million under the DIP
Revolving Credit Facility with $53.6 million available for borrowings and $18.2
million of letters of credit outstanding. Revolving credit borrowings at January
1, 2006 reflect working capital requirements. While we believe that cash flows
from our operating activities, cash on hand and additional borrowings under the
DIP Revolving Credit Facility will provide an adequate level of liquidity until
we emerge from the Chapter 11 process, there is no assurance that we will have
enough cash to meet all ongoing obligations during the Chapter 11 process.
DIP Revolving Credit Facility
As stated previously, on September 22, 2005, Foamex L.P. entered into a DIP
Revolving Credit Facility with a group of lenders to provide a revolving credit
facility with a maximum availability of $240.0 million. The initial borrowing
under the DIP Revolving Credit Facility was used to repay outstanding
obligations under the prepetition Senior Secured Credit Facility and interest
due under the prepetition Secured Term Loan. The DIP Revolving Credit Facility
includes a $40.0 million sublimit for letters of credit and availability is
limited to eligible amounts, as defined, of accounts receivable, inventory,
equipment, and real estate. At January 1, 2006, Foamex L.P. had total available
borrowings of $53.6 million and letters of credit outstanding of $18.2 million
under that facility. As of March 24, 2006, Foamex L.P.'s available borrowings
had increased to $106.1 million. Substantially all of the assets of Foamex L. P.
and its domestic subsidiaries and Foamex Canada are pledged as collateral for
the related borrowings. Borrowings under the DIP Revolving Credit Facility bear
interest at floating rates based upon and including a margin over either LIBOR
or a Base Rate, as defined. At January 1, 2006, the weighted average interest
rate on borrowings was 7.42%. All borrowings under the DIP Revolving Credit
Facility will mature on the earlier of March 22, 2007 or the date that we emerge
from Chapter 11. The lenders under the DIP Revolving Credit Facility have agreed
to provide emergence financing, subject to a number of conditions, of up to
$275.0 million upon our emergence from Chapter 11. Fees and expenses that will
be incurred to put the emergence financing in place are expected to be
approximately $4.3 million. The DIP Revolving Credit Facility includes both a
subjective acceleration clause and a lock box arrangement that requires all lock
box receipts be used to repay revolving credit borrowings. Accordingly,
borrowings under the DIP Revolving Credit Facility are classified as current in
the accompanying consolidated balance sheet at January 1, 2006.
DIP Term Loan
As stated previously, on September 22, 2005, Foamex L.P. entered into a DIP
Term Loan with a group of lenders to provide an $80.0 million term loan.
Proceeds from the DIP Term Loan were used to repay outstanding principal under
the prepetition Secured Term Loan. Borrowings under the DIP Term Loan bear
interest at a rate that is either (i) 8.00% plus the greater of the Base rate,
as defined, or 6.50% or (ii) at 10.00% plus the greater of the LIBOR rate or
3.00%. At January 1, 2006, the weighted average interest rate was 14.29%.
Borrowings under the DIP Term Loan are collateralized by the same collateral as
the DIP Revolving Credit Facility. An intercreditor agreement governs the
distribution of collateral among the lenders under the DIP Revolving Credit
Facility and the DIP Term Loan. All borrowings under the DIP Term Loan will
mature on the earlier of March 22, 2007 or the date that Foamex L.P. emerges
from Chapter 11. The lenders under the DIP Term Loan have agreed to provide
emergence financing, subject to a number of conditions, of $80.0 million upon
our emergence from Chapter 11. The DIP Term Loan may be repaid prior to maturity
by paying a prepayment premium initially set at 8% and declining ratably over a
48-month period. The DIP Term Loan is classified as current in the accompanying
consolidated balance sheet at January 1, 2006.
Debt Covenants
The DIP Revolving Credit Facility and the DIP Term Loan (together, the "DIP
Facilities") contain certain covenants that limit, among other things, our
ability (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 assets, or (v) to enter into
certain transactions with affiliates or related persons. In addition, the DIP
Facilities 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
22
obligations, the indebtedness must be repaid, in certain cases, at the option of
the holders. Under the most restrictive of the distribution restrictions as of
January 1, 2006, we were able to distribute funds to our partners only to the
extent to enable our partners to meet their tax payment liabilities, subject to
Bankruptcy Court approval if such payments constitute prepetition liabilities,
and Foamex International's normal operating expenses of up to $2.3 million
during the term of the DIP Facilities, so long as no default or event of default
has occurred.
Under the DIP Facilities, we are subject to covenants, including an EBITDA,
as defined, covenant beginning with the one month period ended October 30, 2005,
a cumulative net cash flow, as defined, covenant beginning with the two month
period ending December 4, 2005, and a capital expenditure restriction for 12
month rolling periods beginning October 3, 2005. The cumulative EBITDA and net
cash flow covenants will include an increasing number of months until they reach
12 months ending on October 1, 2006 and then will be the trailing 12 months
thereafter through February 2007. We are in compliance with the EBITDA,
cumulative cash flow and capital expenditure covenants for the three months
ended January 1, 2006. The DIP facilities also limit expenditures for certain
prepetition and post petition liabilities, as defined, subject to Bankruptcy
Court approval.
Cash Flow from Operating Activities
Cash used for operating activities in 2005 was $22.0 million compared to
$0.2 million provided by operating activities in 2004. In 2005, cash was
primarily used to fund increases in accounts receivable and inventories,
primarily as a result of increases in selling prices to customers and higher raw
material costs. In 2004, cash used for operations consisted of approximately
$5.6 million of cash generated from results of operations after adjusting for
non cash charges included in net loss offset by approximately $5.4 million of
cash requirements used to fund working capital needs.
Cash Flow from Investing Activities
Cash provided by investing activities totaled $32.0 million for 2005
compared to cash used by investing activities of $5.2 million for 2004. Proceeds
from the sale of the rubber and felt businesses were $38.7 million. Cash
requirements in 2005 included capital expenditures of $5.2 million and
capitalized software development costs of $2.6 million. Cash used for investing
activities in 2004 included capital expenditures of $5.5 million and capitalized
software development costs of $2.4 million. These uses were partially offset by
proceeds from asset disposals of $2.7 million. Estimated capital expenditures
for 2006 are approximately $12 to $18 million. In addition, we expect to spend
approximately $9 million in connection with replacing our primary financial and
operating information and transaction processing systems in 2006, a portion of
which may be capitalized.
Cash Flow from Financing Activities
Cash used for financing activities was $7.9 million in 2005 compared to
cash provided by financing activities of $3.7 million in 2004. In 2005, we
incurred $6.3 million of debt issuance costs. During 2004, we utilized $18.8
million of increased revolving credit borrowings to reduce long-term debt by
$10.9 million and to satisfy working capital requirements.
Contractual Obligations
Our contractual obligations as of January 1, 2006 are shown in the
following table:
[Enlarge/Download Table]
Payment due by Period
---------------------------------------------------------------------
Contractual Obligations Total 2006 2007-08 2009-10 2011 and beyond
----------------------- -------- ------ ------- ------- ---------------
(dollars in millions)
Long-Term Debt, including
Capital Leases (2) $ 241.2 $ 0.2 $235.0 (1) $ - $ 6.0
Interest (2) (3) $ 30.0 $ 23.4 $ 5.6 $ 0.4 $ 0.6
Operating Leases $ 71.4 $ 15.4 $ 24.8 $ 16.5 $14.7
Purchase Commitments (4) $ 851.2 $268.3 $352.9 $230.0 $ -
Employee Benefits and Other (5)
-------- ------ ------ ------ -----
Total Contractual Obligations (6) $1,193.8 $307.3 $618.3 $246.9 $21.3
======== ====== ====== ====== =====
23
(1) Includes $154.6 million of revolving credit borrowings and an $80.0 million
term loan due in 2007 but classified as current in the consolidated balance
sheet. See Note 9 to our consolidated financial statements.
(2) Excludes amounts classified as subject to compromise in the consolidated
balance sheet at January 1, 2006.
(3) Includes interest applicable to borrowings outstanding at January 1, 2006
computed using interest rates in effect as of January 1, 2006 through the
due dates of the borrowings as defined by the applicable financing
agreements and excludes interest on liabilities subject to compromise.
(4) Includes outstanding take or pay purchase commitments with chemical
suppliers and others to purchase minimum quantities of materials or
services. As previously noted, we have the ability to reject prepetition
executory contracts and therefore it is possible that the purchase
commitments reflected may be reduced to the extent that any of such
prepetition executory contracts are rejected.
(5) We also have obligations to provide employee benefits including those under
our defined benefit and defined contribution retirement plans and our
medical benefit plan. In addition, we are partially self-insured for a
number of risks including workers' compensation, automobile and general
liability. Due to the many variables involved, accurate estimates of these
future obligations cannot be made. In 2005, payments for these obligations
aggregated approximately $35.5 million.
(6) Comprised of the following:
Liabilities recorded on the balance sheet $ 243.2
Commitments not recorded on the balance sheet 950.6
--------
$1,193.8
========
RESULTS OF OPERATIONS
[Enlarge/Download Table]
Carpet
Foam Cushion Automotive Technical
Products Products Products Products Other Total
-------- --------- ---------- --------- ---------- ----------
2005 (dollars in thousands)
Net sales $613,507 $178,268 $366,296 $127,712 $ 25,828 $1,311,611
Income (loss) from operations $ 57,516 $ 1,820 $ 22,487 $ 32,749 $(112,084) $ 2,488
Depreciation and amortization $ 7,257 $ 2,277 $ 2,590 $ 2,318 $ 5,603 $ 20,045
Income (loss) from operations
as a percentage of net sales 9.4% 1.0% 6.1% 25.6% n.m.(a) 0.2%
2004
Net sales $551,414 $209,182 $350,985 $124,146 $ 30,667 $1,266,394
Income (loss) from operations $ 52,418 $ 8,539 $ 19,245 $ 32,916 $(61,318) $ 51,800
Depreciation and amortization $ 10,213 $ 2,978 $ 3,116 $ 2,801 $ 6,825 $ 25,933
Income (loss) from operations
as a percentage of net sales 9.5% 4.1% 5.5% 26.5% n.m.(a) 4.1%
2003
Net sales $507,586 $208,855 $447,068 $117,450 $ 23,601 $1,304,560
Income (loss) from operations $ 43,983 $ 5,395 $ 33,399 $ 32,115 $(50,456) $ 64,436
Depreciation and amortization $ 11,002 $ 3,275 $ 2,815 $ 2,931 $ 6,022 $ 26,045
Income (loss) from operations
as a percentage of net sales 8.7% 2.6% 7.5% 27.3% n.m.(a) 4.9%
(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.
24
2005 Compared to 2004
Net sales for 2005 increased 4% to $1,311.6 million from $1,266.4 million
in 2004. Higher selling prices in Foam Products were partially offset by lower
volume principally in the Carpet Cushion operating segment, primarily due to the
sale of the rubber and felt carpet cushion businesses on April 29, 2005. Net
sales from the rubber and felt carpet cushion businesses were $28.0 million
greater in 2004 than in 2005.
Gross profit was $135.8 million, or 10.4% of net sales, in 2005 compared to
$141.8 million, or 11.2% of net sales, in 2004. We have been only partially
successful in the timely execution of customer selling price increases to offset
chemical raw material cost increases which averaged approximately 32% in 2005
due to time lags and because of pricing pressure from competitors particularly
in Foam Products. Our gross profit margin was 7.1% for the first three quarters
of 2005 but improved to 19.8% in the fourth quarter as a result of selling price
increases to customers. We expect the gross profit margin in future periods to
be more consistent with historical levels prior to 2005 depending on market
conditions and other factors. Gross profit in 2005 was also reduced by a charge
of $5.8 million for obsolete consumer products inventory.
Income from operations for 2005 was $2.5 million, or 0.2% of net sales,
compared to income from operations of $51.8 million, or 4.1% of net sales, in
2004. The $6.0 million decline in gross profit was offset by lower selling,
general and administrative expenses which decreased by $5.6 million, or 6%,
principally due to lower professional fees. The 2005 period includes goodwill
and asset impairment charges of $50.7 million. Results include net restructuring
charges of $1.5 million in 2005 and $3.3 million in 2004. Restructuring items
are discussed under "Other" below.
Foam Products
Foam Products net sales for 2005 increased 11% to $613.5 million from
$551.4 million in 2004 primarily due to average selling price increases of 25%
partially offset by a 9% decrease in overall volume. The largest selling price
increases were implemented in the fourth quarter of 2005. Income from operations
increased 10% to $57.5 million in 2005 from $52.4 million in 2004 principally as
a result of the higher selling prices partially offset by higher raw material
costs and charges of $5.8 million for obsolete consumer products inventory and
$3.0 million for a customer product quality claim. Income from operations in the
fourth quarter of 2005 was $39.8 million, compared to $17.7 million in the first
three quarters, primarily due to selling price increases to customers. Income
from operations was 9.4% of net sales in 2005, down from 9.5% of net sales in
2004.
Carpet Cushion Products
Carpet Cushion Products net sales for 2005 decreased 15% to $178.3 million
from $209.2 million in 2004 principally due to the sale of the rubber and felt
businesses on April 29, 2005. Net sales from the rubber and felt carpet cushion
businesses were $28.0 million greater in 2004 than in 2005. Income from
operations was $1.8 million in 2005 compared to income from operations of $8.5
million in 2004 due primarily to higher raw material and manufacturing costs,
lower volume and reduced operating income from the rubber and felt businesses.
Income from operations was 1.0% of net sales in 2005, down from 4.1% of net
sales in 2004.
Automotive Products
Automotive Products net sales for 2005 increased 4% to $366.3 million from
$351.0 million in 2004 primarily as a result of selling price increases and
volume increases from new customers offset by soft industry demand, especially
during the first half of 2005. Income from operations of $22.5 million was up
$3.2 million, or 17%, compared to 2004 primarily due to higher selling prices
partially offset by higher chemical costs. Income from operations was 6.1% of
net sales in 2005, up from 5.5% of net sales in 2004.
Technical Products
Technical Products net sales for 2005 increased 3% to $127.7 million from
$124.1 million in 2004 as selling price increases were partially offset by lower
volume. Income from operations decreased 1% to $32.7 million in 2005 compared to
$32.9 million in 2004 primarily due to lower volume of higher margin products
and higher raw
25
material costs, partially offset by customer selling price increases. Income
from operations was 25.6% of net sales in 2005, down from 26.5% of net sales in
2004.
Other
Other primarily consists of certain manufacturing and fabrication
operations in Mexico City, corporate expenses not allocated to business segments
and impairment and restructuring charges. The decrease in net sales of 16%
associated with this segment resulted from our Mexico City operations. The loss
from operations was $112.1 million in 2005 and $61.3 million in 2004. We
recorded $50.7 million of goodwill and asset impairment charges in 2005.
During 2005, we recorded restructuring charges of $1.5 million primarily
related to the closing of three facilities that produced consumer products,
including the elimination of 132 positions, and the elimination of 14 sales,
administrative and operating positions in the carpet cushion business. During
2004, we recorded restructuring charges of $3.2 million primarily consisting of
a $1.7 million charge to lease costs and asset write offs in connection with the
closing of our New York office, a $0.7 million charge related to the realignment
of our automotive operations and an impairment charge of $0.6 million for an
idle facility.
Gain on Sale of Businesses
On April 29, 2005, we sold our rubber and felt carpet cushion businesses
consisting principally of property, plant and equipment located at Cape
Girardeau, MO and Newton, NC, inventories, and related goodwill to Leggett &
Platt, Incorporated for net cash proceeds of $38.7 million. The property, plant
and equipment, inventories and related goodwill had carrying values of $3.2
million, $2.8 million and $2.5 million, respectively. The net gain of $29.7
million, on which there is no tax impact, has been reflected in the consolidated
statements of operations for 2005. The rubber and felt carpet cushion businesses
provided approximately $41.3 million and $4.5 million of net sales and gross
profit, respectively, in 2004.
Interest and Debt Issuance Expense
Interest and debt issuance expense was $79.7 million in 2005, which
represented a 4% increase from 2004 expense of $76.7 million, reflecting a $4.8
million increase in amortization and write off of debt issuance costs as well as
higher average revolver borrowing levels and interest rates, partially offset by
lower interest accruals on subordinated debt which has been reclassified to
liabilities subject to compromise as a result of our bankruptcy filings.
Income from Equity Interest in Joint Ventures
The income from an equity interest in an Asian joint venture was $1.8
million in 2005 and $0.5 million in 2004, when the joint venture had increased
costs related to the start-up of a manufacturing facility. Income from an equity
interest in a joint venture in Eastern Europe, which was sold in 2005, was $0.2
million in 2004.
Reorganization Items, Net
On September 19, 2005, we filed voluntary petitions for relief under
Chapter 11 of the Bankruptcy Code. During 2005, we adjusted the carrying values
of certain prepetition debt, including related debt issuance costs and deferred
credits, incurred professional fees associated with the bankruptcy cases, and
recorded gains from the rejection of certain leases and other contracts. These
reorganization items resulted in net expense of $6.8 million.
Other Income (Expense), Net
Other expense, net was $1.5 million for 2005 compared to other expense, net
of $0.2 million for 2004. The 2005 period included $1.7 million of fees in
connection with amendments to our credit agreements.
26
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. We have a tax sharing agreement that provides for the
payment of distributions to our partners for amounts that would be required to
be paid if we were a corporation filing separate tax returns. Our ability to
make such distributions is limited by the terms of our credit agreements and
bankruptcy proceedings.
2004 Compared to 2003
Net sales for 2004 decreased 3% to $1,266.4 million from $1,304.6 million
in 2003. The decrease was primarily attributable to a $96.1 million decline in
net sales in the Automotive Products segment due to lower volume, including
sourcing actions by major customers, partially offset by higher net sales in the
Foam Products and Technical Products segments.
Gross profit was $141.8 million, or 11.2% of net sales, in 2004 compared to
$143.7 million, or 11.0% of net sales, in 2003. Gross profit margin has improved
primarily due to profit improvement as a result of better product mix in Foam
Products and lower costs in Carpet Cushion Products, partially offset by lower
volume in the Automotive Products segment. However, gross profit margin declined
in the last six months of 2004 and in the fourth quarter was 8.7%. We were only
partially able to recover raw material cost increases during 2004.
Income from operations for 2004 was $51.8 million, or 4.1% of net sales,
which represented a 20% decrease from the $64.4 million, or 4.9% of net sales,
reported for 2003. A decline of $14.2 million in the Automotive Products segment
more than offset increases in the other operating segments. Selling, general and
administrative expenses increased $5.8 million, or 7%, principally due to a $3.0
million net charge to bad debt expense following a customer bankruptcy,
litigation related costs and higher professional fees primarily for information
technology and the cost of our efforts under Section 404 of the Sarbanes-Oxley
Act, partially offset by lower corporate expense and employee costs as a result
of the closing of our New York City office. Results include net restructuring
charges of $3.2 million in 2004 and net restructuring credits of $1.8 million in
2003. Restructuring items are discussed under "Other" below.
Foam Products
Foam Products net sales for 2004 increased 9% to $551.4 million from $507.6
million in 2003 primarily due to higher volumes of value-added products and
higher selling prices. Income from operation increased 19% to $52.4 million in
2004 from $44.0 million in 2003 principally as a result of improved volume mix
and higher selling prices partially offset by higher raw material costs. Income
from operations was 9.5% of net sales in 2004 and 8.7% of net sales in 2003.
Carpet Cushion Products
Carpet Cushion Products net sales for 2004 of $209.2 million were
essentially flat compared to 2003. Income from operations was $8.5 million in
2004 compared to $5.4 million in 2003 with the increase due primarily to lower
material and operating costs. Income from operations was 4.1% of net sales in
2004 and 2.6% of net sales in 2003.
Automotive Products
Automotive Products net sales for 2004 decreased 21% to $351.0 million from
$447.1 million in 2003 principally as a result of lower volumes from sourcing
actions by major customers including a decrease in sales of $54.4 million to our
largest customer. Income from operations decreased 42% to $19.2 million compared
to $33.4 million in 2003 primarily due to lower sales volume and higher per unit
labor and overhead costs. Income from operations was 5.5% of net sales in 2004
and 7.5% of net sales in 2003. We expect that sales will increase during 2005
but may be substantially less than in 2003.
27
Technical Products
Net sales for Technical Products in 2004 increased 6% to $124.1 million
from $117.5 million in 2003 primarily due to higher unit volume and new product
introductions. Income from operations increased 2% to $32.9 million in 2004
compared to $32.1 million in 2003 primarily due to new product introductions and
slightly higher overall pricing partially offset by higher selling, general and
administrative expenses. Income from operations was 26.5% of net sales in 2004
and 27.3% of net sales in 2003.
Other
Other primarily consists of certain manufacturing and fabrication
operations in Mexico City, corporate expenses not allocated to business segments
and restructuring charges (credits). The increase in net sales associated with
this segment resulted from our Mexico City operations. The loss from operations
was $61.3 million in 2004 and $50.5 million in 2003 and reflects generally
higher corporate expenses in 2004 and includes impairment, restructuring and
other charges of $3.2 million, discussed below. During 2003, we recorded
restructuring credits of $1.8 million.
Impairment, Restructuring and Other Charges
In 2004, we recorded impairment, restructuring and other charges of $3.2
million, primarily consisting of a $1.7 million charge related to lease costs
and asset write offs in connection with the closing of our New York office, a
$0.7 million charge related to the realignment of our automotive operations and
an impairment charge of $0.6 million for an idle facility.
In 2003, we recorded restructuring credits of $1.8 million consisting of a
$3.2 million reduction in the liability primarily for severance and termination
benefits no longer required as the actions contemplated under the related plans
have been substantially completed, and a charge of $1.1 million for additional
lease termination costs for a closed facility as a result of changes in real
estate market conditions. Additionally, we recorded a $0.3 million restructuring
charge reported in the Other segment as a result of an employee termination plan
for approximately 300 employees at our Mexico City operations. The actions under
this plan were substantially completed in 2003.
Interest and Debt Issuance Expense
Interest and debt issuance expense was $76.7 million in 2004, which
represented a 13% decrease from 2003 expense of $88.4 million. The decrease is
primarily due to lower amortization of debt issuance costs, which included a
write off of $12.9 million in 2003 associated with the refinancing of our credit
facilities
Income from Equity Interest in Joint Ventures
The income from an equity interest in an Asian joint venture was $0.5
million in 2004 and $1.2 million in 2003. Income from an equity interest in a
joint venture in Eastern Europe was $0.2 million in 2004 and $0.3 million in
2003.
Other Income (Expenses), Net
Other expense, net was $0.2 million in 2004 compared to $3.4 million in
2003. The 2004 period includes foreign currency transaction losses related to
operations in Mexico and Canada of $0.6 million compared to $2.7 million in
2003. Also included in 2004 were gains of $1.0 million on asset disposals.
Provision for Income Taxes
Foamex L.P., as a limited partnership, is not subject to Federal income
taxes; therefore no current or deferred provision has been provided for such
taxes. However, we have provided for the income taxes of certain states in which
we are subject to taxes and for certain subsidiaries, which are subject to
Federal and state income taxes and for subsidiaries located in foreign
jurisdictions that file separate tax returns. The partners will provide for
their respective shares of income or loss in their Federal or applicable state
income tax returns. We have a tax sharing
28
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 was limited by the
terms of our credit agreements and indentures.
OTHER
Environmental Health and Safety
We are subject to extensive and changing federal, state, local and foreign
environmental laws and regulations, including those relating to the use,
handling, storage, discharge and disposal of hazardous substances, the discharge
or emission of materials into the environment, and the remediation of
environmental contamination, and as a result, are from time to time involved in
administrative and judicial proceedings and inquiries relating to environmental
matters. As of January 1, 2006, we had accruals of approximately $2.1 million
for environmental matters including approximately $1.9 million related to
remediating and monitoring soil and groundwater contamination and approximately
$0.2 million relating to PRP Site Matters and other matters. The claims relating
to PRP Site Matters are liabilities subject to compromise and will be treated
under the Plan as general unsecured claims. 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 requires 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. We do
not believe this standing will require us to make material expenditures for our
Canadian plants.
We have reported to state authorities that we have found soil and/or
groundwater contamination in excess of state standards. Seven sites are in
various stages of investigation or remediation. To the extent of contamination
and the ultimate liability is not known with certainty for all sites.
We have either upgraded or closed all underground storage tanks at our
facilities in accordance with applicable regulations.
The CERCLA and comparable state laws impose liability without fault for the
costs of cleaning up contaminated sites on certain classes of persons that
contributed to the release of hazardous substances into the environment at those
sites, for example, by generating wastes containing hazardous substances which
were disposed at such sites. We are currently designated as a PRP by the EPA or
by state environmental agencies or other PRPs, pursuant to CERCLA or analogous
state statutes, with respect to 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, cash flows or
financial position.
Although it is possible that new information or future developments could
require us to reassess the potential exposure relating to all pending
environmental matters, including those described above, management believes
that, based upon all currently available information, the resolution of these
environmental matters will not have a material adverse effect on our operations,
financial position, capital expenditures or competitive position. The
possibility exists, however, that new environmental legislation and/or
environmental regulations may be adopted, or other environmental conditions,
including the presence of previously unknown environmental contamination, may be
found to exist or a reassessment of the potential exposure to pending
environmental matters may be necessary due to new information or future
developments, that may require expenditures not currently anticipated and that
may be material.
29
Claims and Litigation
We and our subsidiaries are party to various lawsuits, both as defendant
and plaintiff, arising in the normal course of business. It is the opinion of
management that the disposition of these lawsuits will not, individually or in
the aggregate, have a material adverse effect on our financial position, results
of operations or cash flows. If management's assessment is incorrect, such
actions could have a material adverse effect on our consolidated financial
position, results of operations and cash flows. As of January 1, 2006, we had
accrued approximately $0.8 million relating to the Litigation Matters in
addition to the environmental matters discussed above. The litigation claims are
subject to compromise that are capable of being treated under the Plan as
general unsecured claims.
As a consequence of our Bankruptcy, all litigation pending against the
Debtors on the Petition Date was stayed automatically by Section 362 of the
Bankruptcy Code and, absent further order of the Bankruptcy Court granting
relief from the automatic stay, no party may take any action in respect of such
litigation or to recover on pre-petition claims against the Debtors. In
addition, pursuant to Section 365 of the Bankruptcy Code, the Debtors have
rejected and may reject pre-petition executory contracts and unexpired leases,
and the non-debtor parties to contracts or leases that have been or will be
rejected have asserted or may in the future assert damages for breach of such
contracts and leases as permitted by the Bankruptcy Code.
Inflation, Raw Material Costs and Other Matters
The prices of the principal chemicals we use 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 2005, 2004 and 2003 were negatively impacted by higher average costs
for raw materials. We experienced significant increases in the prices of raw
material from major chemical manufacturers during this period. We have sought to
recover these cost increases through selling price increases, but historically
we have only been partially successful. We may not be successful in implementing
further selling price increases to fully recover raw material cost increases and
competitive pricing pressure may require us to adjust selling prices or lose
volume. Results of operations have been and could be adversely affected by
delays in implementing, or inability to implement, additional selling price
increases to offset raw material cost increases. Additionally, we must continue
to reduce and control further our other operating and corporate expenses
including selling, general and administrative expenses to offset raw material
cost increases.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our debt securities with variable interest rates are subject to market risk
for changes in interest rates. On January 1, 2006, indebtedness with variable
interest rates totaled $240.6 million. On an annualized basis, if the interest
rates on these debt instruments increased by 1.0%, interest expense would
increase by approximately $2.4 million.
The principal chemicals used in the manufacturing of flexible polyurethane
foam are TDI and polyol. The prices of TDI and polyol are influenced by demand,
manufacturing capacity and oil and natural gas prices. Historically, the prices
of raw materials have been cyclical and volatile and our principal suppliers of
raw materials used in the manufacturing of flexible polyurethane foam have
significantly increased the price of raw materials several times over the past
several years. We attempt to offset raw material price increases through selling
price increases and manufacturing process efficiencies, but have been only
partially successful in doing so. We were able to substantially increase selling
prices to customers in the fourth quarter of 2005.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
An index to the financial statements and financial statement schedules is
included in Item 15.
30
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
We changed accountants during 2004. Detailed information required by this
item was included in Current Reports on Form 8-K and Form 8-K/A filed with the
SEC on April 2, 2004 and April 12, 2004.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and
Chief Financial Officer, evaluated the effectiveness of our disclosure controls
and procedures as of the end of the period covered by this report. The Chief
Executive Officer and Chief Financial Officer concluded that our disclosure
controls and procedures as of the end of the period covered by this report are
functioning effectively to provide reasonable assurance that the information
required to be disclosed by us in reports filed or submitted under the
Securities Exchange Act of 1934 is (i) recorded, processed, summarized and
reported within the time periods specified in the SEC's rules and forms and (ii)
accumulated and communicated to our management, including the Chief Executive
Officer and Chief Financial Officer, as appropriate to allow timely decisions
regarding disclosure.
Changes in Internal Control over Financial Reporting
For the year ended January 2, 2005, our parent company, Foamex
International, was required, under Section 404 of the Sarbanes-Oxley Act of 2002
and related regulations, to provide a report on internal control over financial
reporting, including assessment of the effectiveness of internal control over
financial reporting as of January 2, 2005. That report, which was included in
Amendment No. 1 to the Annual Report on Form 10-K of Foamex International for
the year ended January 2, 2005, identified two material weaknesses that we
believe subsequently were remediated. Foamex International is no longer an
"accelerated filer" as defined in Rule 12b-2 under the Securities Act of 1934,
nor is it a "large accelerated filer," as defined in the same rule. Therefore,
management of Foamex International is not required to provide and is not
providing a report on internal control over financial reporting as of January 1,
2006. Under current SEC rules, unless Foamex International becomes either an
accelerated filer or a large accelerated filer as of December 31, 2006,
management's next required report on internal control over financial reporting
will contain an assessment of the effectiveness of internal control over
financial reporting as of December 30, 2007.
In addition, on July 11, 2005, Foamex International consented to the entry
of an order by the SEC requiring it to cease and desist from committing or
causing any violations of the books and records, internal control and reporting
provisions of the Securities Exchange Act of 1934, including quarterly reporting
regulations under that act. The order also requires Foamex International to
undertake a process, with the assistance of a special consultant, to remediate
any material weakness or significant deficiency in internal control over
financial reporting identified by Foamex International or by its auditors, and
described in a communication by its auditors to its Audit Committee. The SEC
order required the Special Consultant to review Foamex International's progress
in correcting the unremediated significant deficiencies described in the
auditors' communication to the Audit Committee and to provide a written report
to the Audit Committee and the SEC's staff on the status of our remediation
efforts each calendar quarter thereafter until the reported deficiencies have
been remediated, provided that such remediation efforts be completed by April
2007.
On February 16, 2006, the Special Consultant provided a report to the SEC
stating that all such significant deficiencies that had not been remediated as
of January 2, 2005 have been remediated.
During the course of its audit of our financial statements for the fiscal
year ended January 1, 2006, our auditors identified a number of audit
adjustments, none of which we believe were individually significant, which
constituted corrections of the financial statements that may not have been
detected except through their auditing procedures. We have been addressing, and
intend to continue to address, this by upgrading our accounting department
through the hiring of additional qualified and experienced personnel.
31
Except as set forth in the previous paragraph, no change in our internal
control over financial reporting occurred during the fourth quarter that has
materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
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PART III
The information required by this Part III (Items 10, 11, 12, 13 and 14) is
not applicable since Foamex L.P. is a wholly-owned subsidiary of Foamex
International.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial statements.
[Enlarge/Download Table]
Foamex L.P. and Subsidiaries
Reports of Independent Registered Public Accounting Firms F-2
Consolidated Balance Sheets as of January 1, 2006 and January 2, 2005 F-4
Consolidated Statements of Operations for the years ended January 1, 2006,
January 2, 2005 and December 28, 2003 F-6
Consolidated Statements of Cash Flows for the years ended January 1, 2006,
January 2, 2005 and December 28, 2003 F-7
Consolidated Statements of Partners' Deficiency for the years ended January 1, 2006,
January 2, 2005 and December 28, 2003 F-8
Notes to Consolidated Financial Statements F-9
Foamex Capital Corporation
Report of Independent Registered Public Accounting Firm F-37
Balance Sheets as of January 1, 2006 and January 2, 2005 F-39
Notes to Balance Sheets F-40
Foamex L.P. and Subsidiaries Financial Statement Schedule
Schedule II - Valuation and Qualifying Accounts S-2
(b) Reports on Form 8-K.
None
(c) Exhibits.
2.1(k) - Transfer Agreement, dated as of February 27, 1998, by and
between Foam Funding LLC and Foamex L.P.
2.2(k) - Asset Purchase Agreement, dated as of February 27, 1998, by
and among Foamex Carpet Cushion, Inc. ("Foamex Carpet"),
Foamex International Inc. ("Foamex International" or the
"Company"), Foam Funding LLC and General Felt Industries, Inc.
("General Felt").
3.1(a) - Certificate of Limited Partnership of Foamex L.P.
3.2.1(a) - Fourth Amended and Restated Agreement of Limited Partnership
of Foamex L.P., dated as of December 14, 1993, by and among
FMXI, Inc. and Trace Foam Company, Inc., as general partners,
and Foamex International, Inc. as a limited partner (the
"Partnership Agreement").
3.2.2(b) - First Amendment to the Partnership Agreement, dated June 28,
1994.
3.2.3(c) - Second Amendment to the Partnership Agreement, dated June
12,1997.
3.2.4(h) - Third Amendment to the Partnership Agreement, dated December
23, 1997.
3.2.5(k) - Fourth Amendment to the Partnership Agreement, dated February
27, 1998.
3.2.6(q) - Fifth Amendment to the Partnership Agreement, dated March 26,
2002.
3.3(i) - Certificate of Incorporation of FMXI.
3.4(i) - By-laws of FMXI.
3.5(e) - Certificate of Incorporation of Foamex Capital Corporation.
3.6(e) - By-laws of Foamex Capital Corporation.
3.9(s) - Certificate of Incorporation of Foamex Asia, Inc.
3.10(r) - By-laws of Foamex Asia, Inc.
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3.11(r) - Certificate of Incorporation of Foamex Latin America, Inc.
3.12(r) - By-laws of Foamex Latin America, Inc.
3.13(r) - Certificate of Incorporation of Foamex Mexico, Inc.
3.14(r) - By-laws of Foamex Mexico, Inc.
3.15(r) - Certificate of Incorporation of Foamex Mexico II, Inc.
3.16(r) - By-laws of Foamex Mexico II, Inc.
4.1(c) - Indenture, dated as of June 12, 1997, by and among Foamex
L.P., FCC, the subsidiary guarantors and The Bank of New York,
as trustee, relating to $150,000,000 principal amount of 9
7/8% Senior Subordinated Notes due 2007, including the form of
Senior Subordinated Note and Subsidiary Guarantee.
4.1.3(h) - First Amendment to Indenture, dated as of December 23, 1997,
between Foamex LLC and The Bank of New York, as trustee,
relating to the 9 7/8% Senior Subordinated Notes due 2007.
4.1.3(k) - Second Supplemental Indenture, dated as of February 27,
1998, among Foamex L.P. and Foamex Capital Corporation, as
joint and several obligors, General Felt Industries, Inc.,
Foamex Fibers, Inc., and Foamex LLC, as withdrawing
guarantors, and The Bank of New York, as trustee, relating to
the 9 7/8% Senior Subordinated Notes due 2007.
4.1.4(q) - Third Supplemental Indenture, dated as of March 25, 2002,
between Foamex Carpet Cushion LLC and The Bank of New York, as
trustee, relating to the 9 7/8% Senior Subordinated Notes due
2007.
4.2.3(q) - Second Supplemental Indenture, dated as of March 25, 2002,
between Foamex Carpet Cushion LLC and The Bank of New York, as
trustee, relating to the 13 1/2% Senior Subordinated Notes due
2005.
4.3.1(h) - Indenture, dated as of December 23, 1997, by and among
Foamex L.P., Foamex Capital Corporation, the subsidiary
guarantors, Crain Holdings Corp., as intermediate obligator,
and The Bank of New York, as trustee, relating to $98,000,000
principal amount of 13 1/2% Senior Subordinated Notes due
2005, including the form of Senior Subordinated Note and
Subsidiary Guarantee.
4.3.1(k) - First Supplemental Indenture, dated as of February 27, 1998,
among Foamex L.P. and Foamex Capital Corporation, as joint and
several obligors, General Felt Industries, Inc., Foamex
Fibers, Inc. and Foamex LLC, as withdrawing guarantors, Crain
Industries, Inc., as withdrawing intermediate obligor, and The
Bank of New York, as trustee, relating to the 13 1/2% Senior
Subordinated Notes due 2005.
4.3.1(q) - Indenture, dated as of March 25, 2002, among Foamex L.P.,
Foamex Capital Corporation, the Guarantors party thereto and
U.S. Bank National Association, as trustee, including as
exhibits thereto, the form of note, relating to $300,000,000
principal amount of 10 3/4% Senior Secured Notes due 2009,
including form of Senior Secured Note and Subsidiary Guaranty.
4.3.2(q) - Pledge and Security Agreement, dated as of March 25, 2002,
made by Foamex L.P. and U.S. Bank National Association, as
collateral agent.
4.3.3(q) - Patent Security Agreement, dated as of March 25, 2002, by
Foamex L.P. in favor of U.S. Bank National Association, as
collateral agent.
4.3.4(q) - Trademark Security Agreement, dated as of March 25, 2002, by
Foamex L.P. in favor of U.S. Bank National Association, as
collateral agent.
4.3.5(q) - Copyright Security Agreement, dated as of March 25, 2002, by
Foamex L.P. in favor of U.S. Bank National Association, as
collateral agent.
4.3.6(q) - Registration Rights Agreement, dated as of March 25, 2002,
among Foamex L.P., Foamex Capital Corporation, the Guarantors
party thereto and Credit Suisse First Boston Corporation,
Salomon Smith Barney Inc., Scotia Capital (USA) Inc., Bear,
Stearns & Co. Inc., and Jefferies & Company, Inc., as initial
purchasers.
4.9.1(l) - Promissory Note, dated June 12, 1997, in the aggregate
principal amount of $5,000,000, executed by Trace Holdings to
Foamex L.P.
4.9.2(l) - Promissory Note, dated June 12, 1997, in the aggregate
principal amount of $4,794,828, executed by Trace Holdings to
Foamex L.P.
34
4.15.1(t) - Credit Agreement, dated as of August 18, 2003, among Foamex
L.P. as a Borrower and Guarantor, Foamex International Inc.,
FMXI, Inc., Foamex Canada Inc., Foamex Capital Corporation,
Foamex Latin America, Inc., Foamex Mexico, Inc., Foamex Mexico
II, Inc., Foamex Asia, Inc. and Foamex Carpet Cushion LLC as
Guarantors, the financial institutions party thereto from time
to time as lenders and Bank of America, N.A. as the
Administrative Agent.
4.15.2(t) - Pledge and Security Agreement, dated as of August 18, 2003,
among Foamex L.P. and Bank of America, N.A. as Administrative
Agent.
4.15.3(u) - Amendment No. 1 to Credit Agreement, dated as of December 1,
2003, among Foamex L.P., as Borrower, the affiliates of
Borrower party hereto, the lenders party hereto, and Bank of
America, N.A. as Administrative Agent.
4.15.4(x) - Amendment and Waiver No. 2 to Credit Agreement, dated as of
June 15, 2004, among Foamex L.P., as Borrower, the affiliates
of Borrower party hereto, the lenders party hereto, and Bank
of America, N.A. as Administrative Agent.
4.15.5(y) - Amendment No. 3 to Credit Agreement, dated as of November 3,
2004, among Foamex L.P., as Borrower, the affiliates of
Borrower party hereto, the lenders party hereto, and Bank of
America, N.A. as Administrative Agent.
4.15.6(z) - Waiver to Credit Agreement, dated as of March 15, 2005,
among Foamex L.P., as Borrower, the affiliates of Borrower
party hereto, the lenders party hereto, and Bank of America,
N.A. as Administrative Agent.
4.15.7(aa) - Amendment No. 4 to Credit Agreement, dated as of March 31,
2005, among Foamex L.P., as Borrower, the affiliates of
Borrower party hereto, the lenders party hereto, and Bank of
America, N.A. as Administrative Agent.
4.15.8(dd) - Amendment No. 5 to Credit Agreement, dated as of June 13,
2005, among Foamex L.P., as Borrower, the affiliates of
Borrower party hereto, the lenders party thereto, and Bank of
America, N.A. as Administrative Agent.
4.15.9(ff) - Waiver and Agreement to Credit Agreement, dated as of August
14, 2005, among Foamex L.P., as Borrower, the affiliates of
Borrower party hereto, the lenders party thereto, and Bank of
America, N.A. as Administrative Agent.
4.15.10(ff) - Debtor-in-Possession Credit Agreement, dated as of September
22, 2005, among Foamex L.P., as Borrower, the affiliates of
Borrower party hereto, the lenders party thereto, and Bank of
America, N.A. as Administrative Agent.
4.15.11(ee) - Debtor-in-Possession Pledge and Security Agreement, dated as
of September 22, 2005, among Foamex L.P., as Borrower, the
affiliates of Borrower party thereto, the lenders party
hereto, and Bank of America, N.A. as Administrative Agent.
4.16.1(t) - Credit Agreement, dated as of August 18, 2003, among Foamex
L.P. as a Borrower and Guarantor, Foamex International Inc.,
FMXI, Inc., Foamex Canada Inc., Foamex Capital Corporation,
Foamex Latin America, Inc., Foamex Mexico, Inc., Foamex Mexico
II, Inc., Foamex Asia, Inc. and Foamex Carpet Cushion LLC as
Guarantors, the financial institutions party thereto from time
to time as lenders and Silver Point Finance, LLC as the
Administrative Agent.
4.16.2(t) - Pledge and Security Agreement, dated as of August 18, 2003,
among Foamex L.P. and Silver Point Finance, LLC as
Administrative Agent.
4.16.3(u) - Amendment No. 1 to Credit Agreement, dated as of December 1,
2003, among Foamex L.P., as Borrower, the affiliates of
Borrower party hereto, the lenders party hereto, and Silver
Point Finance, LLC as Administrative Agent.
4.16.4(x) - Amendment No. 2 to Credit Agreement, dated as of June 15,
2004, among Foamex L.P., as Borrower, the affiliates of
Borrower party hereto, the lenders party hereto, and Silver
Point Finance, LLC as Administrative Agent.
4.16.5(y) - Amendment No. 3 to Credit Agreement, dated as of November 3,
2004, among Foamex L.P., as Borrower, the affiliates of
Borrower party hereto, the lenders party hereto, and Silver
Point Finance, LLC as Administrative Agent.
4.16.6(z) - Waiver to Credit Agreement, dated as of March 15, 2005,
among Foamex L.P., as Borrower, the affiliates of Borrower
party hereto, the lenders party hereto, and Silver Point
Finance, LLC as Administrative Agent.
35
4.16.7(aa) - Amendment No. 4 to Credit Agreement, dated as of March 31,
2005, among Foamex L.P., as Borrower, the affiliates of
Borrower party hereto, the lenders party hereto, and Silver
Point Finance, LLC as Administrative Agent.
4.16.8(dd) - Amendment No. 5 to Credit Agreement, dated as of June 13,
2005, among Foamex L.P., as Borrower, the affiliates of
Borrower party thereto, the lenders party hereto, and Silver
Point Finance, LLC as Administrative Agent.
4.16.9(ee) - Waiver and Amendment No. 6 to Credit Agreement, dated as of
August 14, 2005, among Foamex L.P., as Borrower, the
affiliates of Borrower party thereto, the lenders party
hereto, and Silver Point Finance, LLC as Administrative Agent.
4.16.10(ff) - Debtor-in-Possession Credit Agreement, dated as of September
22, 2005, among Foamex L.P., as Borrower, the affiliates of
Borrower party thereto, the lenders party hereto, and Silver
Point Finance, LLC as Administrative Agent.
4.16.11(ff) - Debtor-in-Possession Pledge and Security Agreement, dated as
of September 22, 2005, among Foamex L.P., as Borrower, the
affiliates of Borrower party thereto, the lenders party
hereto, and Silver Point Finance, LLC as Administrative Agent.
4.17.1(t) - Intercreditor Agreement, dated as of August 18, 2003, among
Bank of America, N.A., as Senior Bank Agent and Senior
Collateral Agent, Silver Point Finance, LLC, as Senior Term
Loan B Agent and as future Senior Collateral Agent after a
Discharge of Senior Bank Lender Claims has occurred, U.S. Bank
National Association, as trustee and collateral agent under
the Indenture referred to below, and Foamex L.P., a Delaware
limited partnership.
10.1(d) - Reimbursement Agreement, dated as of March 23, 1993, between
Trace Holdings and General Felt Industries, Inc.
10.2(d) - Shareholder Agreement, dated December 31, 1992, among
Recticel, s.a. ("Recticel"), Recticel Holding Noord B.V.,
Foamex L.P., Beamech Group Limited, LME-Beamech, Inc., James
Brian Blackwell, and Prefoam AG relating to a foam
technology-sharing arrangement.
10.3(e) - Asset Transfer Agreement, dated as of October 2, 1990,
between Trace International Holdings, Inc. ("Trace Holdings")
and Foamex L.P. (the "Trace Holdings Asset Transfer
Agreement").
10.4(e) - First Amendment, dated as of December 19, 1991, to the Trace
Holdings Asset Transfer Agreement. 10.5(e) - Amended and
Restated Guaranty, dated as of December 19, 1991, made by
Trace Foam Company, Inc. ("Trace Foam") in favor of Foamex
L.P.
10.6(e) - Asset Transfer Agreement, dated as of October 2, 1990,
between Recticel Foam Corporation ("RFC") and Foamex L.P. (the
"RFC Asset Transfer Agreement").
10.7(e) - First Amendment, dated as of December 19, 1991, to the RFC
Asset Transfer Agreement.
10.10.5(g) - The Foamex L.P. Hourly Pension Plan (formerly "The Foamex
Products Inc. Hourly Employee Retirement Plan"), as amended
December 31, 1995.
10.10.6(g)+ - Foamex L.P. 401(k) Savings Plan effective October 1, 1997.
10.10.12(p)+ - Foamex Supplemental Executive Retirement Plan, effective as
of May 15, 2001.
10.11.11(s)+ - Severance Agreement and Release, dates as of January 31,
2003, by and between Foamex International and Pratt W.
Wallace, Jr.
10.11.12(v) - Form of Foamex International Inc. Code of Ethics for
Director, Officers, Senior Management and Certain Other
Employees.
10.11.13(u)+ - Amended and Restated Employment Agreement, dated January 27,
2004, by and between Foamex International and Thomas E.
Chorman.
10.11.14(u)+ - Amended and Restated Employment Agreement, dated January 26,
2004, by and between Foamex International and K. Douglas
Ralph.
10.11.15(x)+ - Separation Agreement and Release, dated as of June 19, 2004,
between Foamex International Inc. and John V. Tunney.
10.11.16(bb)+ - Amendment to Amended and Restated Employment Agreement,
dated April 25, 2005, between Foamex International Inc.,
Foamex L.P. and Thomas E. Chorman.
10.11.17(bb)+ - Amendment to Amended and Restated Employment Agreement,
dated April 25, 2005, between Foamex International Inc.,
Foamex L.P. and K. Douglas Ralph.
10.11.18(ee)+ - Employment Agreement, dated January 26, 2004, between Foamex
International Inc., Foamex L.P. and Gregory J. Christian.
36
10.11.19(ee)+ - Amendment No. 1 to Employment Agreement, dated April 25,
2005, between Foamex International Inc., Foamex L.P. and
Gregory J. Christian.
10.11.20(ee)+ - Amendment No. 2 to Employment Agreement, dated August 15,
2005, between Foamex International Inc., Foamex L.P. and
Gregory J. Christian.
10.11.21(ee)+ - Change in Control Protection Agreement, dated January 26,
2004, between Foamex International Inc. and Gregory J.
Christian.
10.16.1(k) - Supply Agreement, dated as of February 27, 1998, by and
between Foamex L.P. and General Felt (as assigned to Foamex
Carpet).
10.16.2(k) - Administrative Services Agreement, dated as of February 27,
1998, by and between Foamex L.P. and General Felt (as assigned
to Foamex Carpet).
10.17(e)+ - Salaried Incentive Plan of Foamex L.P. and Subsidiaries.
10.18(e)+ - Equity Growth Participation Program.
10.19(f)+ - The Foamex L.P. Salaried Pension Plan (formerly, "The
General Felt Industries, Inc. Retirement Plan for Salaried
Employees"), effective as of January 1, 1995.
10.22(m)+ - Foamex International Amended and Restated 1993 Stock Option
Plan.
10.23(a)+ - Foamex International Non-Employee Director Compensation Plan.
10.24(n)+ - Foamex International Equity Incentive Plan for Non-Employee
Directors.
10.25(n)+ - Foamex International Key Employee Incentive Bonus Plan.
10.26(o)+ - Agreement with Consultant, dated April 24, 2001 by and
between Robert J. Hay and Foamex L.P.
10.27(cc)+ - Amended and Restated Consulting Agreement, dated as of
February 27, 2005, by and between Foamex L.P. and Robert J.
Hay.
10.30(w)+ - Foamex International 2002 Stock Award Plan, as Amended and
Restated.
10.17.2(j) - Loan Agreement between Hua Kee Company Limited and Foamex
Asia, Inc., dated as of July 8, 1997.
10.18.1(o) - Joint Venture Agreement between Hua Kee Company Limited and
Foamex Asia, Inc. amended and restated as of December 3, 2001.
10.44(r)+ - Agreement with Consultant, dated August 8, 2002, by and
between Raymond E. Mabus, Jr. and Foamex International.
21* - Subsidiaries of Foamex L.P.
31.1* - Certification of Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
31.2* - Certification of Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
32.1* - Certification of Chief Executive Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
32.2* - Certification of Chief Financial Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
--------------------------------------------------------
* Filed herewith.
+ Management contract or compensatory plan or arrangement.
(a) Incorporated herein by reference to the Exhibit to Foamex L.P.'s
Registration Statement on Form S-1, Registration No. 33-69606.
(b) Incorporated herein by reference to the Exhibit to the Annual Report on
Form 10-K of Foamex International for the fiscal year ended January 1,
1995.
(c) Incorporated herein by reference to the Exhibit to the Current Report on
Form 8-K of Foamex International reporting an event that occurred June 12,
1997.
(d) Incorporated herein by reference to the Exhibit to the Annual Report on
Form 10-K of Foamex L.P. and FCC for fiscal 1992.
37
(e) Incorporated herein by reference to the Exhibit to the Registration
Statement of Foamex L.P. and FCC on Form S-1, Registration Nos. 33-49976
and 33-49976-01.
(f) Incorporated herein by reference to the Exhibit to the Annual Report on
Form 10-K of Foamex L.P. for fiscal 1993.
(g) Incorporated by reference to the Exhibit to the Form 10-Q of Foamex L.P.
for the quarterly period ended September 28, 1997.
(h) Incorporated herein by reference to the Exhibit to the Current Report on
Form 8-K of Foamex L.P., FCC and Foamex International reporting an event
that occurred December 23, 1997.
(i) Incorporated herein by reference to the Exhibit to the Annual Report on
Form 10-K of Foamex International for the fiscal year ended December 28,
1997.
(j) Incorporated herein by reference to the Exhibit in the Registration
Statement of Foamex L.P. and FCC on Form S-4, Registration No. 333-45733,
filed February 6, 1998.
(k) Incorporated herein by reference to the Current Report on Form 8-K of
Foamex International reporting an event that occurred on February 27, 1998.
(l) Incorporated herein by reference to the Exhibit to the Annual Report on
Form 10-K of Foamex International for the fiscal year ended December 31,
1998.
(m) Incorporated herein by reference to the Exhibit to Foamex International's
definitive proxy statement dated May 31, 2000.
(n) Incorporated herein by reference to the Appendix to Foamex International's
definitive amended and restated proxy statement, dated July 12, 2001.
(o) Incorporated herein by reference to the Exhibit to the Form 10-Q of Foamex
International for the quarterly period ended June 30, 2001.
(p) Incorporated herein by reference to the Exhibit to the Annual Report on
Form 10-K of Foamex International for the fiscal year ended December 31,
2001.
(q) Incorporated herein by reference to the Exhibit to the Form 10-Q of Foamex
L.P. and FCC for the quarterly period ended March 31, 2002.
(r) Incorporated herein by reference to the Exhibit to Amendment No. 1 to the
Registration Statement of Foamex L.P. and FCC on Form S-4, Registration No.
333-90632, filed October 22, 2002.
(s) Incorporated herein by reference to the Exhibit to the Annual Report on
Form 10-K of Foamex International for the fiscal year ended December 29,
2002.
(t) Incorporated herein by reference to the Exhibit to the Current Report on
Form 8-K of Foamex International reporting an event that occurred on August
18, 2003.
(u) Incorporated herein by reference to the Exhibit to the Annual Report on
Form 10-K of Foamex International for the fiscal year ended December 28,
2003.
(v) Incorporated herein by reference to the Exhibit to the Annual Report on
Form 10-K of Foamex L.P. for the fiscal year ended December 28, 2003.
38
(w) Incorporated herein by reference to Foamex International's definitive proxy
statement dated April 26, 2004.
(x) Incorporated herein by reference to the Exhibit to the Form 10-Q of Foamex
International Inc. for the quarterly period ended June 27, 2004.
(y) Incorporated herein by reference to the Exhibit to the Form 10-Q of Foamex
International Inc. for the quarterly period ended September 26, 2004.
(z) Incorporated herein by reference to the Exhibit to the Current Report on
Form 8-K of Foamex L.P. reporting an event that occurred on March 15, 2005.
(aa) Incorporated herein by reference to the Exhibit to the Annual Report on
Form 10-K of Foamex International for the fiscal year ended January 2,
2005.
(bb) Incorporated herein by reference to the Exhibit to the Current Report on
Form 8-K of Foamex International reporting an event that occurred on April
25, 2005.
(cc) Incorporated herein by reference to the Exhibit to the Form 10-Q of Foamex
L.P. for the quarterly period ended April 3, 2005.
(dd) Incorporated herein by reference to the Exhibit to the Current Report on
Form 8-K of Foamex International reporting an event that occurred on June
14, 2005.
(ee) Incorporated herein by reference to the Exhibit to the Current Report on
Form 8-K of Foamex International reporting an event that occurred on August
14, 2005.
(ff) Incorporated herein by reference to the Exhibit to the Current Report on
Form 8-K of Foamex International reporting an event that occurred on
September 22, 2005.
Certain instruments defining the rights of security holders have been excluded
herefrom in accordance with Item 601(b)(4)(iii) of Regulation S-K. The
registrant hereby agrees to furnish a copy of any such instrument to the
Securities and Exchange Commission upon request.
39
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 3rd day of April 2006.
FOAMEX L.P.
By: FMXI, Inc.
its Managing General Partner
By: /s/ K. Douglas Ralph
-----------------------------
Name: K. Douglas Ralph
Title: Executive Vice President and
Chief Financial Officer
FOAMEX CAPITAL CORPORATION
By: /s/ K. Douglas Ralph
-----------------------------
Name: K. Douglas Ralph
Title: Executive Vice President and
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on its behalf by the
registrant and in the capacities and as of the dates indicated:
Signature Title Date
/s/ Thomas E. Chorman Director of FMXI and FCC April 3, 2006
-------------------------
Thomas E. Chorman
/s/ George L. Karpinski Director of FMXI and FCC April 3, 2006
-------------------------
George L. Karpinski
40
FOAMEX L.P. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
[Enlarge/Download Table]
Financial Statements of Registrants
Index to Consolidated Financial Statements F-1
Foamex L.P.
Reports of Independent Registered Public Accounting Firms F-2
Consolidated Balance Sheets as of January 1, 2006 and January 2, 2005 F-4
Consolidated Statements of Operations for the years ended January 1, 2006,
January 2, 2005 and December 28, 2003 F-6
Consolidated Statements of Cash Flows for the years ended January 1, 2006,
January 2, 2005 and December 28, 2003 F-7
Consolidated Statements of Partners' Deficiency for the years ended January 1, 2006,
January 2, 2005 and December 28, 2003 F-8
Notes to Consolidated Financial Statements F-9
Foamex Capital Corporation
Report of Independent Registered Public Accounting Firm F-37
Balance Sheets as of January 1, 2006 and January 2, 2005 F-39
Notes to Balance Sheets F-40
F-1
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
The Partners of
Foamex L.P.:
We have audited the accompanying consolidated balance sheets of Foamex L.P. and
subsidiaries (the "Company"), an indirect wholly-owned subsidiary of Foamex
International Inc., as of January 1, 2006 and January 2, 2005 and the related
consolidated statements of operations, cash flows, and partners' deficiency for
the fiscal years then ended. In connection with our audits of the consolidated
financial statements, we also have audited the financial statement schedule
listed in the Index at Item 15 as of January 1, 2006 and January 2, 2005 and for
the fiscal years then ended. These consolidated financial statements and
financial statement schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these consolidated financial
statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Foamex L.P. and
subsidiaries as of January 1, 2006 and January 2, 2005, and the results of their
operations and their cash flows for the fiscal years then ended, in conformity
with U.S. generally accepted accounting principles. Also, in our opinion, the
related financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
The accompanying consolidated financial statements and financial statement
schedule have been prepared assuming that Foamex L.P. will continue as a going
concern. As discussed in Note 1 to the consolidated financial statements, on
September 19, 2005 Foamex International Inc. and certain of its domestic
subsidiaries, including Foamex L.P., its primary operating subsidiary,
(collectively referred to as the "Debtors"), filed voluntary petitions for
relief under Chapter 11 of the United States Bankruptcy Code in the United
States Bankruptcy Court for the District of Delaware (the "Bankruptcy Court")
the effects of which raise substantial doubt about its ability to continue as a
going concern. Although the Debtors are currently operating as
debtors-in-possession under the jurisdiction of the Bankruptcy Court, the
continuation of Foamex L.P. as a going concern is contingent upon, among other
things, the ability to formulate a plan of reorganization which will gain
approval of the creditors and confirmation of the Bankruptcy Court. The
accompanying consolidated financial statements and financial statement schedule
do not include any adjustments that might result from the outcome of these
uncertainties.
As discussed in Note 5 to the consolidated financial statements, effective
January 1, 2006, the Company adopted Financial Accounting Standards Board
Interpretation No. 47, "Accounting for Conditional Asset Retirement
Obligations".
/s/ KPMG LLP
Philadelphia, Pennsylvania
March 31, 2006
F-2
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
To the Partners of Foamex L.P.
Linwood, Pennsylvania
We have audited the accompanying consolidated statements of operations, cash
flows and partners' deficiency of Foamex L.P. and subsidiaries (the "Company")
for the year ended December 28, 2003. Our audit also included the consolidated
financial statement schedule for the year ended December 28, 2003 listed in the
Index at Item 15. These consolidated financial statements and consolidated
financial statement schedule are the responsibility of Foamex L.P.'s management.
Our responsibility is to express an opinion on these consolidated financial
statements and consolidated financial statement schedule based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the results of operations and cash flows the year 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.
/s/ DELOITTE & TOUCHE LLP
March 9, 2004
Parsippany, New Jersey
F-3
FOAMEX L.P. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
[Enlarge/Download Table]
January 1, January 2,
2006 2005
---------- ----------
ASSETS (thousands)
CURRENT ASSETS
Cash and cash equivalents $ 7,415 $ 5,347
Accounts receivable, net of allowance for doubtful
accounts and discounts of $13,802 in 2005 and $9,001 in 2004 197,896 182,740
Inventories 112,142 100,029
Other current assets 24,427 22,403
--------- ---------
Total current assets 341,880 310,519
--------- ---------
PROPERTY, PLANT AND EQUIPMENT
Land and land improvements 6,146 6,300
Buildings and leasehold improvements 105,281 113,592
Machinery, equipment and furnishings 257,579 281,071
Construction in progress 1,206 1,783
--------- ---------
Total 370,212 402,746
Less accumulated depreciation and amortization (256,979) (261,203)
--------- ---------
Property, plant and equipment, net 113,233 141,543
GOODWILL 88,803 126,814
DEBT ISSUANCE COSTS, net of accumulated
amortization of $7,205 in 2005 and $17,477 in 2004 6,667 21,152
SOFTWARE COSTS, net of accumulated amortization of
$8,388 in 2005 and $6,401 in 2004 8,691 9,325
INVESTMENTS IN AND ADVANCES TO AFFILIATES 17,191 16,521
OTHER ASSETS 24,852 19,832
--------- ---------
TOTAL ASSETS $ 601,317 $ 645,706
========= =========
The accompanying notes are an integral part of the
consolidated financial statements.
F-4
FOAMEX L.P. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
[Download Table]
January 1, January 2,
2006 2005
---------- ----------
LIABILITIES AND PARTNERS' DEFICIENCY (thousands)
CURRENT LIABILITIES
Revolving credit borrowings $ 154,566 $ 114,907
Current portion of long-term debt 86,238 67,131
Accounts payable 65,430 104,314
Accrued employee compensation and benefits 14,937 22,354
Accrued interest 2,049 13,063
Accrued restructuring 598 1,759
Accrued customer rebates 11,239 16,979
Cash overdrafts 8,554 10,434
Other accrued liabilities 16,524 13,623
--------- ---------
Total current liabilities 360,135 364,564
LONG-TERM DEBT 366 568,461
ACCRUED EMPLOYEE BENEFITS 13,724 55,388
ACCRUED RESTRUCTURING 431 5,682
OTHER LIABILITIES 5,678 7,202
LIABILITIES SUBJECT TO COMPROMISE 635,965 -
--------- ---------
Total liabilities 1,016,299 1,001,297
--------- ---------
COMMITMENTS AND CONTINGENCIES
PARTNERS' DEFICIENCY
General partner (352,374) (294,342)
Limited partner - -
Accumulated other comprehensive loss (53,387) (52,028)
Notes receivable from related party (9,221) (9,221)
--------- ---------
Total partners' deficiency (414,982) (355,591)
--------- ---------
TOTAL LIABILITIES AND PARTNERS' DEFICIENCY $ 601,317 $ 645,706
========= =========
The accompanying notes are an integral part of the
consolidated financial statements.
F-5
FOAMEX L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED
[Enlarge/Download Table]
January 1, January 2, December 28,
2006 2005 2003
---------- ---------- ------------
(thousands)
NET SALES $1,311,611 $1,266,394 $1,304,560
COST OF GOODS SOLD 1,175,776 1,124,547 1,160,870
---------- ---------- ----------
GROSS PROFIT 135,835 141,847 143,690
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 81,163 86,797 81,013
IMPAIRMENT, RESTRUCTURING AND OTHER
CHARGES (CREDITS) 52,184 3,250 (1,759)
---------- ---------- ----------
INCOME FROM OPERATIONS 2,488 51,800 64,436
GAIN ON SALE OF BUSINESSES 29,719 - -
INTEREST AND DEBT ISSUANCE EXPENSE (79,749) (76,667) (88,374)
INCOME FROM EQUITY INTEREST IN JOINT VENTURES 1,764 687 1,466
REORGANIZATION ITEMS, NET (6,805) - -
OTHER EXPENSE, NET (1,489) (220) (3,447)
----------- ---------- ----------
LOSS BEFORE INCOME TAXES
AND CUMULATIVE EFFECT OF ACCOUNTING CHANGE (54,072) (24,400) (25,919)
PROVISION (BENEFIT) FOR INCOME TAXES (463) 631 1,494
---------- ---------- ----------
LOSS BEFORE CUMULATIVE EFFECT OF
ACCOUNTING CHANGE (53,609) (25,031) (27,413)
CUMULATIVE EFFECT OF ACCOUNTING CHANGE (3,499) - -
---------- ---------- ----------
NET LOSS $ (57,108) $ (25,031) $ (27,413)
========== ========== ==========
The accompanying notes are an integral part of the
consolidated financial statements.
F-6
<
FOAMEX L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED
[Enlarge/Download Table]
January 1, January 2, December 28,
2006 2005 2003
---------- --------- ------------
OPERATING ACTIVITIES (thousands)
Net loss $(57,108) $(25,031) $(27,413)
Adjustments to reconcile net loss to net cash provided by
(used for) operating activities:
Cumulative effect of accounting change 3,499 - -
Depreciation and amortization 20,045 25,933 26,045
Amortization of debt issuance costs, debt premium
and debt discount 6,733 2,762 4,458
Write off of deferred credits on swap transactions (9,684) - -
Write off of debt issuance costs 10,465 - 12,928
Impairment charges 50,659 2,809 -
Loss (gain) on disposition of assets (29,998) (1,185) 30
Provision for uncollectible accounts 6,204 3,291 2,115
Retirement benefit funding less (greater) than expense 1,093 (2,175) (892)
Deferred income taxes (1,595) 35 21
Other, net 4,791 (889) 4
Changes in operating assets and liabilities:
Accounts receivable (21,360) (4,742) 8,143
Inventories (14,851) (4,147) 2,128
Accounts payable (24) 6,004 10,916
Accrued restructuring (762) (2,111) (13,023)
Other assets and liabilities 14,785 (357) (7,358)
-------- -------- --------
Net cash provided by (used for) operating activities
before reorganization items (17,108) 197 18,102
Cash used for reorganization items (4,929) - -
-------- -------- --------
Net cash provided by (used for) operating activities (22,037) 197 18,102
-------- -------- --------
INVESTING ACTIVITIES
Capital expenditures (5,195) (5,510) (6,543)
Proceeds from sale of assets 39,815 2,701 1,237
Other investing activities (2,616) (2,400) (3,329)
-------- -------- --------
Net cash provided by (used for) investing activities 32,004 (5,209) (8,635)
-------- -------- --------
FINANCING ACTIVITIES
Proceeds from DIP revolving loans 174,328 - -
Repayment of DIP revolving loans, net (19,762) - -
Net proceeds from (repayments of) revolving loans (114,907) 18,841 44,242
Proceeds from DIP Term Loan 80,000 - -
Proceeds from long-term debt - - 130,000
Repayments of long-term debt (118,479) (10,853) (164,020)
Decrease in cash overdrafts (1,879) (2,254) (5,049)
Debt issuance costs (6,337) (785) (11,880)
Distribution paid to partners (863) (1,200) (513)
Other financing activities - - -
-------- -------- --------
Net cash provided by (used for) financing activities (7,899) 3,749 (7,220)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 2,068 (1,263) 2,247
Cash and cash equivalents at beginning of period 5,347 6,610 4,363
-------- -------- --------
Cash and cash equivalents at end of period $ 7,415 $ 5,347 $ 6,610
======== ======== ========
The accompanying notes are an integral part of the
consolidated financial statements.
F-7
FOAMEX L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF PARTNERS' DEFICIENCY
[Enlarge/Download Table]
Accumulated Notes
Other Receivable
General Limited Comprehensive Related
Partner Partner Loss Party Total
------- ------- ------------- ---------- ----------
(thousands)
2003
Balances at December 30, 2002 $(240,107) $ - $(56,458) $(9,221) $(305,786)
Net loss (469) (26,944) (27,413)
Minimum pension liability adjustment 2,033 2,033
Foreign currency translation adjustment 6,612 6,612
---------
Comprehensive loss (18,768)
Distributions and other (2) (575) (577)
Offset balance against Limited Partner deficit
assumed by General Partner (27,519) 27,519 - - -
--------- ------- -------- ------- ---------
Balances at December 28, 2003 (268,097) - (47,813) (9,221) (325,131)
2004
Net loss (426) (24,605) (25,031)
Minimum pension liability adjustment (6,253) (6,253)
Foreign currency translation adjustment 2,038 2,038
---------
Comprehensive loss (29,246)
Distributions and other (3) (1,211) (1,214)
Offset balance against Limited Partner deficit
assumed by General Partner (25,816) 25,816 - - -
--------- ------- -------- ------- ---------
Balances at January 2, 2005 (294,342) - (52,028) (9,221) (355,591)
2005
Net loss (981) (56,127) (57,108)
Minimum pension liability adjustment (1,236) (1,236)
Foreign currency translation adjustment (123) (123)
---------
Comprehensive loss (58,467)
Distributions and other (1) (923) (924)
Offset balance against Limited Partner deficit
assumed by General Partner (57,050) 57,050 - - -
--------- ------- -------- ------- ---------
Balances at January 1, 2006 $(352,374) $ - $(53,387) $(9,221) $(414,982)
========= ======= ======== ======= =========
The accompanying notes are an integral part of the
consolidated financial statements.
F-8
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BANKRUPTCY AND BASIS OF PRESENTATION
On September 19, 2005 (the "Petition Date"), Foamex International Inc.
("Foamex International") and certain of its domestic subsidiaries, including
Foamex L.P., (collectively referred to as the "Debtors"), filed voluntary
petitions for relief under Chapter 11 of the United States Bankruptcy Code
("Bankruptcy Code") in the United States Bankruptcy Court for the District of
Delaware (the "Bankruptcy Court").
Each of the Debtors continues to operate its business and manage its
property as debtors-in-possession pursuant to Sections 1107 and 1108 of the
Bankruptcy Code. On September 29, 2005, the United States Trustee for the
District of Delaware appointed an official committee of unsecured creditors in
these Chapter 11 cases (the "Creditors' Committee"). The Creditors' Committee is
currently comprised of The Bank of New York, the Pension Benefit Guaranty
Corporation, Newcastle Partners, LP, Lyondell Chemical Corporation, Shell
Chemicals L.P., Steel Partners II, L.P. and Donovan Williams. At a hearing held
on September 20, 2005, the Bankruptcy Court granted various first day motions
for relief designed to stabilize Foamex L.P.'s operations and business
relationships with customers, vendors, employees and others, and entered orders
granting permission to, among other things, pay employee salaries, wages and
benefits, pay amounts owing in connection with workers' compensation and other
insurance policies; utilize Foamex L.P.'s existing cash management systems;
continue Foamex L.P.'s customer programs; pay vendors for certain critical goods
and services provided prior to September 19, 2005 and, access, on an interim
basis, up to $221 million of a $240 million debtor-in-possession (DIP) revolving
credit facility and $80 million of a DIP term loan. A portion of the proceeds of
the debtor-in-possession revolving credit facility and all of the proceeds of
the DIP term loan facility were used to repay Foamex L.P.'s prepetition
revolving credit and term loan facilities. On October 17, 2005, the Bankruptcy
Court granted final approval of the $240 million DIP revolving credit facility
and the $80 million DIP term loan.
On November 17, 2005, the Bankruptcy Court approved a motion authorizing a
key executive retention program (the "KERP"). The KERP pertains to 77 employees
who may receive cash distributions aggregating up to $3.2 million. In addition,
certain participants, at the discretion of the Board of Directors of the
reorganized Foamex International, may receive additional distributions
aggregating up to $1.1 million in cash or in common stock of the reorganized
Foamex International at a price per share that reflects the value of the equity
on the effective date of the plan of reorganization. Distributions under the
KERP are generally to be made on or around certain milestone dates during the
Chapter 11 cases and on and subsequent to the effective date of the plan of
reorganization. Cash distributions pursuant to the KERP, aggregating $0.4
million, were paid in December 2005 and additional amounts aggregating $1.1
million have been paid in February and March 2006. The common stock
distributions, if any, will be made at the six month and one year anniversaries
of the effective date of the plan of reorganization. The KERP also includes an
additional $0.5 million discretionary cash pool to address specific employment
matters and unanticipated needs that may arise during the Chapter 11 cases.
Foamex L.P. has notified all known or potential creditors of the Chapter 11
filings for the purposes of identifying and quantifying all prepetition claims.
The Chapter 11 filings triggered defaults on substantially all debt and lease
obligations. Subject to certain exceptions under the Bankruptcy Code, the
Chapter 11 filings automatically stayed the continuation of any judicial or
administrative proceedings or other actions against the Debtors or their
property to recover on, collect or secure a claim arising prior to September 19,
2005. On October 18, 2005, the Bankruptcy Court entered an order (the "Bar Date
Order") requiring any person or entity holding or asserting a prepetition
claim(s) against the Debtors to a file a written proof of claim with the
Debtors' claims processing agent on or before December 8, 2005 (the "Bar Date"),
and, for Governmental Units (as defined in the Bankruptcy Code) holding a
prepetition claim(s) against the Debtors' on or before March 20, 2006. With
certain enumerated exceptions, the Bar Date Order further provides that any
person or entity which fails to timely file a proof of claim will, among other
things, be forever barred, estopped and enjoined from asserting a prepetition
claim against the Debtors.
The uncertainty regarding Foamex L.P.'s future prospects may hinder its
ongoing business activities and its ability to operate, fund and execute its
business plan by impairing relations with existing and potential customers;
negatively impacting its ability to attract and retain key employees; limiting
its ability to obtain trade credit; impairing present and future relationships
with vendors and service providers; and impairing its ability to continue to
operate as a going concern.
F-9
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BANKRUPTCY AND BASIS OF PRESENTATION (continued)
As a result of the Chapter 11 filings, realization of assets and
liquidation of liabilities are subject to significant uncertainty. While
operating as a debtor-in-possession under the protection of Chapter 11, and
subject to Bankruptcy Court approval or otherwise as permitted in the ordinary
course of business, Foamex L.P. may sell or otherwise dispose of assets and
liquidate or settle liabilities for amounts other than those reflected in Foamex
L.P.'s financial statements. Further, a plan of reorganization could materially
change the amounts and classifications reported in Foamex L.P.'s historical
financial statements, which do not give effect to any adjustment to the carrying
value of assets or amounts of liabilities that might be necessary as a
consequence of confirmation of a plan of reorganization.
To exit Chapter 11, Foamex L.P. must obtain confirmation by the Bankruptcy
Court of a Chapter 11 plan. On December 23, 2005, Foamex L.P. filed a Disclosure
Statement and Proposed Plan of Reorganization (the "Plan") with the Bankruptcy
Court. The Plan is designed to complete a financial restructuring which will
result in a reduction of approximately $500 million of total debt from
prepetition amounts. The Plan was supported by an ad hoc committee of Foamex
L.P.'s Senior Secured Noteholders comprising more than 50% of the outstanding
principal amount of Senior Secured Notes. The terms of the Plan include the
following:
o Holders of Allowed Administrative Claims, Priority Tax Claims, DIP
Financing Claims, Other Priority Claims, and Other Secured Claims will
receive full payment in cash;
o Holders of Allowed Senior Secured Note Claims will receive a pro rata
share of 100% of new common stock of the reorganized Foamex
International, subject to dilution, provided that the class of such
Claims votes to accept the Plan;
o Holders of Allowed Senior Subordinated Note Claims will receive a pro
rata share of warrants to purchase up to 5% of new common stock of the
reorganized Foamex International, subject to dilution, provided that
the class of such Claims votes to accept the Plan;
o Holders of Allowed General Unsecured Claims will receive a pro rata
share of $1.5 million, provided that the distribution does not exceed
5% of the allowed amount of each such claim and provided that the
class of such Claims votes to accept the Plan;
o Holders of Foamex International's existing Preferred Stock and Common
Stock will not receive any distribution under the Plan and their
shares will be cancelled on the effective date of the Plan.
Since Foamex L.P. filed its Plan, Foamex L.P. and its advisors have
continued to work with its significant creditor constituencies and their
respective advisors to negotiate a fully consensual plan of reorganization.
Foamex L.P. expects that it will continue to do so in the hope of agreeing with
these constituents on the terms of a fully consensual plan. There can be no
guarantee that Foamex L.P. will file and/or confirm such a plan. However, even
in the absence of a fully consensual plan, it is likely that Foamex L.P. will
need to modify the plan that is currently on file with the Bankruptcy Court.
Subsequent to the bankruptcy filing date, Statement of Position 90-7,
"Financial Reporting by Entities in Reorganization Under the Bankruptcy Code"
("SOP 90-7") applies to the Debtors' financial statements while the Debtors
operate under the provision of Chapter 11. SOP 90-7 does not change the
application of generally accepted accounting principles in the preparation of
financial statements. However, SOP 90-7 does require that the financial
statements, for periods including and subsequent to the filing of the Chapter 11
petition, distinguish transactions and events that are directly associated with
the reorganization from the ongoing operations of the business. A confirmed plan
of reorganization could result in material changes in the amounts reported in
Foamex L.P.'s consolidated financial statements, which do not give effect to any
adjustments of the carrying value of assets and liabilities that will be
necessary as a consequence of reorganization under Chapter 11.
F-10
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Foamex L.P., an indirect wholly-owned subsidiary of 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"). Financial
information concerning the business segments of Foamex L.P. is included in Note
13.
Foamex L.P.'s reporting period is a 52/53 week fiscal year ending on the
Sunday closest to January 1. Fiscal year 2005 included the 52 weeks ended
January 1, 2006. Fiscal year 2004 included 53 weeks ended January 2, 2005 while
fiscal year 2003 include the 52 weeks ended December 28, 2003.
Consolidation
The consolidated financial statements include the accounts of Foamex L.P.
and all majority-owned subsidiaries where control exists. The equity method of
accounting is used for investments in which Foamex L.P. has significant
influence. Generally this represents ownership of at least 20% and not more than
50%. Foamex L.P. has a joint venture in Asia (Foamex Asia Co., Ltd.) in which it
has ownership of 70%. Foamex L.P. does not exercise control of this joint
venture due to the minority shareholders' substantive participation rights and
therefore Foamex L.P. uses the equity method of accounting. All significant
intercompany accounts and transactions have been eliminated in consolidation.
Accounting Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during
the reporting period. Actual results could differ from those estimates.
Concentration of Credit Risk
Financial instruments which potentially subject Foamex L.P. to significant
concentrations of credit risk consist primarily of cash and cash equivalents and
trade accounts receivable. Foamex L.P. maintains cash and cash equivalents and
certain other financial instruments with various large financial institutions.
Foamex L.P.'s periodic evaluation of these financial institutions are considered
in Foamex L.P.'s investment strategy.
Foamex L.P. sells products to the furniture and bedding, automotive, carpet
and other industries. Foamex L.P. performs ongoing credit evaluations of its
customers and generally does not require collateral. Foamex L.P. maintains
allowance accounts for potential credit losses and such losses have been within
management's expectations.
Revenue Recognition, Discounts and Rebates
Revenue from sales, net of discounts and estimated returns, allowances and
customer rebates, is recognized when product title and the risks and rewards of
ownership passes to the customer, the sales price is fixed and determinable and
collection is reasonably assured. Products are shipped FOB shipping point. Net
sales are reduced by allowances for estimated discounts, returns and customer
rebates. Balances for allowances and rebates are reviewed at least quarterly and
are adjusted if warranted. Shipping and handling costs are included in cost of
goods sold.
F-11
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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 financial
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, including debt
subject to compromise, and revolving credit borrowings at January 1, 2006 were
$742.1 million and $496.6 million, respectively, and at January 2, 2005 were
$750.5 million and $714.7 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 2005, 2004 and 2003 was $17.1 million, $22.9 million and $24.1
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
In accordance with SFAS No. 142, goodwill was tested for impairment upon
adoption of the standard and is tested annually thereafter. SFAS No. 142
requires that goodwill be tested for impairment using a two-step process. The
first step is to identify a potential impairment and the second step measures
the amount of the impairment loss, if any. Goodwill is deemed to be impaired if
the carrying amount of a reporting unit's goodwill exceeds its estimated fair
value.
F-12
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Debt Issuance Costs
Debt issuance costs consist of amounts incurred in obtaining long-term
financing and are disclosed in the financing activities section of the
consolidated statements of cash flows. These costs are being amortized over the
term of the related debt using the effective interest method.
Software Costs
Foamex L.P. expenses costs incurred in the preliminary project stage of
developing or obtaining internal use software, such as research and feasibility
studies, as well as costs incurred in the post-implementation/operational stage,
such as maintenance and training. Capitalization of software development costs
occurs only after management authorizes the project, the preliminary project
stage is complete and it is probable the project will be completed and the
software will be used for the function intended. Foamex L.P. is in the process
of replacing its primary financial and operating information and transaction
processing systems and anticipates this project will be substantially completed
by the end of 2007. Capitalized software costs aggregated $1.4 million, $2.4
million and $3.4 million in 2005, 2004 and 2003, respectively. The capitalized
costs are amortized beginning in the period when placed in service on a
straight-line basis over the estimated useful life of the software, which is
generally five years or less.
Long-Lived Assets
Property and equipment held for use is grouped for impairment testing at
the plant level, the lowest level for which there are identifiable cash flows.
Impairment testing of the asset group occurs whenever events or changes in
circumstances indicate that the carrying amount of the assets may not be
recoverable. Foamex L.P. assesses recoverability by comparing the carrying
amount of the asset group to the estimated undiscounted future cash flows
expected to be generated by the assets. If an asset group is considered
impaired, the impairment loss to be recognized would be measured as the amount
by which the asset group's carrying amount exceeds its fair value. Estimated
future cash flows are based on historical results adjusted for estimated future
market conditions and operating plans. To the extent that these estimates
change, impairment losses could have a material adverse impact on future
financial results.
Environmental Remediation
Environmental expenditures that relate to current operations are expensed.
Expenditures that relate to an existing condition caused by past operations, and
which do not contribute to current or future revenue generation, are expensed.
Liabilities are recorded when environmental assessments and/or remedial efforts
are probable and the costs can be reasonably estimated. Amounts charged to
operations were $0.9 million, $0.6 million and $0.5 million in 2005, 2004 and
2003, 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 and losses are reflected in other expense, net in the
consolidated statements of operations and included $0.5 million of gains in 2005
and $0.6 million and $2.7 million of losses in 2004 and 2003, respectively.
F-13
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Research and Development
Research and development costs are expensed as incurred. Amounts charged to
operations were $2.3 million, $2.8 million and $3.6 million in 2005, 2004 and
2003, respectively.
Self Insurance
Foamex L.P. is partially self-insured for a number of risks including
workers' compensation, medical, automobile and general liability. Commercial
insurance policies are carried for amounts in excess of the self-insured
amounts. Amounts charged to operations for insurance premiums and self-insured
losses were $28.7 million, $26.5 million and $24.9 million in 2005, 2004 and
2003, 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 be in effect at the date such temporary
differences are expected to reverse. Deferred income tax assets are reduced by a
valuation allowance when it is considered more likely than not that a portion of
the deferred income tax assets will not be realized in a future period. The
estimates utilized in the recognition of deferred income tax assets are subject
to revision in future periods.
Foamex L.P., as a limited partnership, is not subject to Federal income
taxes; therefore no current or deferred provision has been provided for such
taxes. However, Foamex L.P. has provided for the income taxes of certain states
in which it is subject to taxes and for certain subsidiaries, which are subject
to Federal and state income taxes and for subsidiaries located in foreign
jurisdictions that file separate tax returns. The partners will provide for
their respective shares of income or loss in their Federal or applicable state
income tax returns. Foamex L.P. has a tax sharing agreement that provides for
the payment of distributions to the partners for amounts that would be required
to be paid if Foamex L.P. were a corporation filing separate tax returns. The
ability of Foamex L.P. to make such distributions is limited by the terms of its
credit agreements and the bankruptcy process. See Note 9.
Prospective Accounting Pronouncement
In November 2004, the FASB issued Statement of Financial Accounting
Standards No. 151, "Inventory Costs an amendment of ARB No. 43, Chapter 4"
("SFAS No. 151"). The provisions of SFAS No. 151 require that abnormal amounts
of idle facility expense, freight, handling costs and wasted material be
recognized as current period charges, regardless of the circumstances under
which such charges arose. SFAS No. 151 is effective for fiscal years beginning
after June 15, 2005 and is not expected to have a significant impact on Foamex
L.P.'s financial statements.
Reclassifications
Certain amounts from prior years have been reclassified to conform with the
current presentation.
F-14
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. LIABILITIES SUBJECT TO COMPROMISE AND REORGANIZATION ITEMS
On August 15, 2005, Foamex L.P. notified the trustee of its 13 1/2% Senior
Subordinated Notes that it would not remit a principal payment of $51.6 million
and an interest payment of $3.5 million that were due on that date. Failure to
remit the principal payment put Foamex L.P. in default under its 13 1/2% Senior
Subordinated Notes Indenture and caused Foamex L.P. to also be in default under
its Senior Secured Credit Facility, Secured Term Loan, 10 3/4% Senior Secured
Notes and 9 7/8% Senior Subordinated Notes. The holders of these other loans and
notes would be entitled to demand immediate payment absent a cure of the
default. On August 14, 2005, Foamex L.P. executed amendments to its Senior
Secured Credit Facility and Secured Term Loan that waived the default until
September 30, 2005 caused by Foamex L.P.'s failure to remit the principal and
interest payments to the 13 1/2% Senior Subordinated Note holders.
In addition to Foamex L.P.'s prepetition debt which is in default,
liabilities subject to compromise reflects the Debtors' other liabilities
incurred prior to the commencement of the bankruptcy proceedings. These amounts
represent Foamex L.P.'s estimate of known or potential prepetition claims to be
resolved in connection with the bankruptcy proceedings. Such claims remain
subject to future adjustments, based on such things as (i) negotiations; (ii)
actions taken by the Bankruptcy Court; (iii) further developments with respect
to disputed claims; (iv) additional rejection of executory contracts and leases;
(v) the determination of the value of collateral securing claims; (vi) the
filing of proofs of claims; or (vii) other events. Payment terms for these
claims will be established in connection with Foamex L.P.'s confirmed plan of
reorganization.
Liabilities subject to compromise at January 1, 2006 consist of the
following:
Debt: (thousands)
10 3/4% Senior Secured Notes $300,000
9 7/8% Senior Subordinated Notes 148,500
13 1/2% Senior Subordinated Notes 51,585
Other debt 850
--------
Total debt 500,935
Employee benefit plans 56,060
Accounts payable 37,395
Accrued interest on debt subject to compromise 33,201
Accrued liabilities and other 8,374
--------
$635,965
========
The Debtors have incurred certain professional fees and other expenses
directly associated with the bankruptcy proceedings. In addition, the Debtors
have made certain adjustments to the carrying value of certain prepetition
liabilities. Such costs and adjustments are classified as reorganization items,
net in the accompanying consolidated statement of operations for the year ended
January 1, 2006 and consist of the following:
(thousands)
Debt issuance costs on debt subject to compromise $(10,465)
Deferred credits on interest rate swap transactions 9,684
Professional fees associated with bankruptcy (8,841)
Net gain on rejected leases and other contracts 2,854
Other, net (37)
--------
$ (6,805)
========
F-15
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. LIABILITIES SUBJECT TO COMPROMISE AND REORGANIZATION ITEMS (continued)
Pursuant to the Bankruptcy Code, the Debtors have filed schedules with the
Bankruptcy Court setting forth the assets and liabilities of the Debtors as of
September 19, 2005. On October 24, 2005, the Debtors mailed proof of claim forms
to, among others, current and prior employees, known creditors, vendors and
other parties with whom the Debtors have previously conducted business. To the
extent the recipients disagree with the claim amounts or priorities set forth on
the Debtors' schedules, the recipient may file a proof of claim in a different
amount or priority with the Debtors' claim agent, Bankruptcy Services, LLC.
Differences between the amounts and/or priorities scheduled by the Debtors and
claims filed by creditors will be investigated and resolved as part of the
bankruptcy proceedings. If necessary, the Bankruptcy Court ultimately will
determine liability amounts and priorities that will be allowed for these
claims. The resolution of such claims could result in a material adjustment to
Foamex L.P.'s financial statements.
4. DEBTORS' FINANCIAL STATEMENTS
Foamex L.P.'s bankruptcy filing included certain of its domestic
subsidiaries and excluded subsidiaries in Mexico and Canada. Presented below are
the condensed combined financial statements of the Debtors. These statements
reflect the financial position, results of operations and cash flows of the
combined Debtors, including certain transactions and resulting assets and
liabilities between the Debtors and non-Debtor subsidiaries of Foamex L.P.,
which are eliminated in Foamex L.P.'s consolidated financial statements.
Debtors' Condensed Combined Balance Sheet
January 1, 2006
(thousands - unaudited)
[Download Table]
ASSETS
Current Assets:
Cash and cash equivalents $ 4,836
Accounts receivable, net 184,608
Inventories 105,903
Other current assets 27,103
---------
Total current assets 322,450
Property, plant and equipment, net 99,830
Other assets, net 166,750
---------
Total assets $ 589,030
=========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current Liabilities Not Subject to Compromise:
Current maturities of long-term debt and revolving credit borrowings $ 240,780
Accounts payable 58,800
Accrued liabilities 48,374
---------
Total current liabilities 347,954
Liabilities subject to compromise 635,965
Non-Current Liabilities Not Subject to Compromise:
Long-term debt, net of current maturities 340
Other noncurrent liabilities 19,753
---------
Total liabilities 1,004,012
Total partners' deficiency (414,982)
---------
Total liabilities and partners' deficiency $ 589,030
=========
F-16
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. DEBTORS' FINANCIAL STATEMENTS (continued)
Debtors' Condensed Combined Statement of Operations
Year Ended January 1, 2006
(thousands - unaudited)
Net sales $1,236,105
Cost of goods sold 1,102,961
----------
Gross profit 133,144
Selling, general and administrative expenses 72,601
Impairment, restructuring and other charges 44,945
----------
Income from operations 15,598
Interest and debt issuance expense (79,745)
Reorganization items, net (6,685)
Other 28,072
----------
Loss before provision for income taxes and
equity in loss of non-debtor subsidiaries (42,760)
Provision for income taxes 519
----------
Loss before equity in loss of non-debtor subsidiaries (43,279)
Equity in loss of non-debtor subsidiaries (10,330)
----------
Loss before cumulative effect of accounting change (53,609)
Cumulative effect of accounting change (3,499)
----------
Net loss $ (57,108)
==========
Debtors' Condensed Combined Statement of Cash Flows
Year Ended January 1, 2006
(thousands - unaudited)
OPERATING ACTIVITIES:
Net loss $(57,108)
Adjustments required to reconcile net loss to net cash
used for operating activities:
Impairment charges 43,419
Depreciation and amortization 17,463
Reorganization items 6,685
Change in working capital and other operating items (32,439)
--------
Net cash used for operating activities (21,980)
--------
INVESTING ACTIVITIES:
Capital expenditures (5,650)
Proceeds from sales of assets 39,815
Other (2,616)
--------
Net cash provided by investing activities 31,549
--------
FINANCING ACTIVITIES:
Repayments of prepetition borrowings (233,386)
Proceeds from DIP borrowings 234,566
Other (9,060)
--------
Net cash used for financing activities (7,880)
--------
NET CHANGE IN CASH AND CASH EQUIVALENTS 1,689
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 3,147
--------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 4,836
========
F-17
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. CUMULATIVE EFFECT OF ACCOUNTING CHANGE
On January 1, 2006, Foamex L.P. adopted the provisions of FASB
Interpretation No. 47, "Accounting for Conditional Asset Retirement Obligations,
an interpretation of FASB Statement No. 143", ("FIN No. 47"). FIN No. 47
requires the recognition of a liability for the fair value of conditional asset
retirement obligations if the fair value of the liability can be reasonably
estimated.
Foamex L.P. evaluated its conditional asset retirement obligations for its
manufacturing facilities, primarily for chemical storage and delivery facilities
and as a result recorded a $3.6 million noncurrent liability for conditional
asset retirement obligations and a $0.1 million increase in the carrying value
of the related assets, net of $1.0 million of accumulated depreciation. The
noncurrent liability for conditional asset retirement obligations would have
been $3.3 million at January 2, 2005. The cumulative effect that was recorded in
the fourth quarter of 2005 upon the adoption of FIN No. 47 resulted in a charge
of $3.5 million.
The following table presents pro forma net loss for 2005, 2004 and 2003 as
if the provisions of FIN No. 47 had been applied at the beginning of 2003:
[Download Table]
2005 2004 2003
-------- -------- ---------
(thousands, except per share amounts)
Net loss as reported $(57,108) $(25,031) $(27,413)
Add: Cumulative effect of change in
Accounting principle 3,499 - -
Deduct: Accretion and depreciation (520) (392) (367)
-------- -------- --------
Proforma net loss $(54,129) $(25,423) $(27,780)
======== ======== ========
6. IMPAIRMENT, RESTRUCTURING AND OTHER CHARGES
2005
Foamex L.P. performs an annual impairment test required by Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets"
("SFAS No. 142") on the first day of the fiscal fourth quarter. The test is a
two step process, with the first step involving an estimate of enterprise fair
value and the second step involving a more detailed appraisal of individual
assets. The fair value estimate uses a discounted cash flow method. SFAS No. 142
also requires that impairment tests of goodwill be updated during the year if
circumstances change that would more likely than not indicate that the fair
value of a reporting unit no longer exceeds its value for financial statement
purposes.
During 2005, Foamex L.P. updated its long-term forecast to address the
impact of deteriorating business conditions, including recent adverse
developments in the domestic auto industry. As part of this exercise, Foamex
L.P. also conducted goodwill impairment tests of its various reporting units.
The Foam Products and Technical Products reporting units passed the step one
impairment test. However, the Automotive Products reporting unit failed the step
one test, reflecting industry conditions. Foamex L.P. completed the second step
of the goodwill impairment test resulting in Automotive Products goodwill
impairment charges of $35.4 million.
The balances of goodwill at January 1, 2006 were $74.9 million for the Foam
Products segment and $13.9 million for the Technical Products segment for a
total of $88.8 million.
Also during 2005, Foamex L.P. determined that $15.3 million of pre-tax
impairment charges were required for property, plant and equipment at certain
production facilities. The impairment evaluation was also triggered by the facts
and circumstances discussed above concerning the goodwill impairment. The
impairment loss was determined using fair value estimates and appraisals for
similar assets.
F-18
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. IMPAIRMENT, RESTRUCTURING AND OTHER CHARGES (continued)
In addition, Foamex L.P. recorded restructuring charges of $1.5 million,
which were primarily related to the closing of three facilities that produced
consumer products, including the elimination of 132 positions, and elimination
of 14 sales, administrative and operating positions in the carpet cushion
business.
2004
During 2004, Foamex L.P. recorded impairment, restructuring and other
charges of $3.2 million, primarily consisting of a $1.7 million charge primarily
related to lease costs and asset write offs in connection with the closing of
its New York City office, a $0.7 million charge related to the realignment of
its automotive operations and an impairment charge of $0.6 million for an idle
facility.
2003
During 2003, Foamex L.P. recorded impairment, restructuring and other
credits of $1.8 million consisting of a $3.2 million reduction in the liability
primarily for severance and termination benefits no longer required as the
actions contemplated under the related plans have been substantially completed,
and a charge of $1.1 million for additional lease termination costs for a closed
facility as a result of changes in real estate market conditions. Additionally,
Foamex L.P. recorded a $0.3 million restructuring charge reported in the Other
segment as a result of an employee termination plan for approximately 300
employees at its Mexico City operations. The actions under this plan were
substantially completed in 2003.
The following table sets forth the components of Foamex L.P.'s
restructuring and other charges (credits):
[Enlarge/Download Table]
Plant Closure Personnel
Total and Leases Reductions Impairment Other
----- ------------- ---------- ---------- -----
2003 (millions)
Balance at December 29, 2002 $22.8 $12.6 $8.2 $ - $2.0
Adjustments (1.8) 0.2 (1.8) - (0.2)
Cash spending (11.3) (4.8) (5.5) - (1.0)
----- ---- ---- ---- ----
Balance at December 28, 2003 9.7 8.0 0.9 - 0.8
2004
Restructuring and impairment charges 3.2 2.4 0.8 - -
Cash spending (4.1) (2.3) (1.0) - (0.8)
Asset impairment (1.4) (1.4) - - -
----- ----- ---- ----- ----
Balance at January 2, 2005 7.4 6.7 0.7 - -
2005
Restructuring and impairment charges 52.2 0.7 0.8 50.7 -
Cash spending (1.9) (1.2) (0.7) - -
Rejected leases and agreements (6.0) (5.6) (0.4) - -
Goodwill and asset impairment (50.7) - - (50.7) -
----- ----- ---- ----- ----
Balance at January 1, 2006 $ 1.0 $ 0.6 $0.4 $ - $ -
7. GAIN ON SALE OF BUSINESSES
On April 29, 2005, Foamex L.P. sold its rubber and felt carpet cushion
businesses consisting principally of property, plant and equipment located at
Gape Girardeau, MO and Newton, NC, inventories, and related goodwill to Leggett
& Platt, Incorporated for net cash proceeds of $38.7 million. The property,
plant and equipment, inventories and related goodwill had carrying values of
$3.2 million, $2.8 million and $2.5 million, respectively. The net gain of $29.7
million, on which there is no tax impact, has been reflected on the accompanying
consolidated statement of operations for the year ended January 1, 2006. The
rubber and felt carpet cushion businesses provided approximately $41.3 million
and $4.5 million of net sales and gross profit, respectively, in the year ended
January 2, 2005.
F-19
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. INVENTORIES
The components of inventory are listed below.
January 1, January 2,
2006 2005
--------- ----------
(thousands)
Raw materials and supplies $ 74,886 $ 63,336
Work-in-process 22,657 18,667
Finished goods 14,599 18,026
-------- --------
Total $112,142 $100,029
======== ========
9. REVOLVING CREDIT BORROWINGS AND LONG-TERM DEBT
The components of revolving credit borrowings and long-term debt are listed
below.
[Enlarge/Download Table]
January 1, January 2,
2006 2005
---------- ---------
(thousands)
Revolving credit borrowings (1) $154,566 $114,907
======== ========
Foamex L.P. Senior Secured Credit Facility Term Loan (1) $ - $ 37,371
DIP Term Loan (1) 80,000 -
Foamex L.P. Secured Term Loan (1) - 80,000
10 3/4% Senior Secured Notes due 2009 (2) (4) (5) - 309,703
9 7/8% Senior Subordinated Notes due 2007 (2) (5) - 148,500
13 1/2% Senior Subordinated Notes due August 2005 (includes
$581 of unamortized debt premium) (2) (5) - 52,166
Industrial revenue bonds (3) 6,000 7,000
Other 604 852
-------- --------
86,604 635,592
Less current portion 86,238 67,131
-------- --------
Long-term debt $ 366 $568,461
======== ========
(1) Debt of Foamex L.P., guaranteed by Foamex International, FMXI, Inc. and
Foamex Canada.
(2) Debt of Foamex L.P. and Foamex Capital Corporation.
(3) Debt of Foamex L.P.
(4) Includes $9.7 million of deferred credits on interest rate swap
transactions at January 2, 2005.
(5) Reclassified to liabilities subject to compromise at January 1, 2006.
DIP Revolving Credit Facility
On September 22, 2005, Foamex L.P. entered into a Debtor-in-Possession
Credit Agreement (the "DIP Revolving Credit Facility") with a group of lenders
to provide a revolving credit facility with a maximum availability of $240.0
million. The initial borrowing under the DIP Revolving Credit Facility was used
to repay outstanding obligations under the prepetition Senior Secured Credit
Facility and interest due under the prepetition Secured Term Loan. The DIP
Revolving Credit Facility includes a $40.0 million sublimit for letters of
credit and availability is limited to eligible amounts, as defined, of accounts
receivable, inventory, equipment, and real estate. At January 1, 2006, Foamex
L.P. had total available borrowings of $53.6 million and letters of credit
outstanding of $18.2 million under the facility. Substantially all of the assets
of Foamex L. P. and its domestic subsidiaries and Foamex Canada are pledged as
collateral for the related borrowings. Borrowings under the DIP Revolving Credit
Facility bear interest at floating rates based upon and including a margin over
either LIBOR or a Base Rate, as defined. At January 1, 2006, the weighted
average interest rate on borrowings was 7.42%. All borrowings under the DIP
F-20
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. LONG-TERM DEBT AND REVOLVING CREDIT BORROWINGS (continued)
Revolving Credit Facility will mature on the earlier of March 22, 2007 or the
date that Foamex L.P. emerges from Chapter 11. The lenders under the DIP
Revolving Credit Facility have agreed to provide emergence financing, subject to
a number of conditions, of up to $275.0 million upon Foamex L.P.'s emergence
from Chapter 11. The DIP Revolving Credit Facility includes both a subjective
acceleration clause and a lock box arrangement that requires all lock box
receipts be used to repay revolving credit borrowings. Borrowings under the DIP
Revolving Credit Facility are classified as current in the accompanying
consolidated balance sheet at January 1, 2006.
DIP Term Loan
On September 22, 2005, Foamex L.P. entered into a Debtor-in-Possession
Credit Agreement (the "DIP Term Loan") with a group of lenders to provide an
$80.0 million term loan. Proceeds from the DIP Term Loan were used to repay
outstanding principal under the prepetition Secured Term Loan. Borrowings under
the DIP Term Loan bear interest at a rate that is either (i) 8.00% plus the
greater of the Base rate, as defined, or 6.50% or (ii) at 10.00% plus the
greater of the LIBOR rate or 3.00%. At January 1, 2006, the weighted average
interest rate was 14.29%. Borrowings under the DIP Term Loan are collateralized
by the same collateral as the DIP Revolving Credit Facility. An intercreditor
agreement governs the distribution of collateral among the lenders under the DIP
Revolving Credit Facility and the DIP Term Loan. All borrowings under the DIP
Term Loan will mature on the earlier of March 22, 2007 or the date that Foamex
L.P. emerges from Chapter 11. The lenders under the DIP Term Loan have agreed to
provide emergence financing, subject to a number of conditions, of $80.0 million
upon Foamex L.P.'s emergence from Chapter 11. The DIP Term Loan may be repaid
prior to maturity by paying a prepayment premium initially set at 8% and
declining ratably over a 48-month period. The DIP Term Loan is classified as
current in the accompanying consolidated balance sheet at January 1, 2006.
Industrial Revenue Bond ("IRB")
IRB debt includes a $6.0 million bond that matures in 2013. Interest is
based on a variable rate, as defined, with options available to Foamex L.P. to
convert to a fixed rate. At January 1, 2006, the interest rate was 3.63% on the
bond. The maximum interest rate for the IRB is 15.0% per annum. If Foamex L.P.
exercises its option to convert the bond to a fixed interest rate structure, the
IRB is redeemable at the option of the bondholders. In addition, at any time
prior to conversion to a fixed interest rate structure, bondholders upon notice
to the bond trustee and the remarketing agent may place the bonds for sale. If
the remarketing agent is not successful in reselling the bonds before settlement
is due on bonds placed for sale, the bond trustee may draw on a letter of credit
issued under the DIP Revolving Credit Facility to repay the bondholders for the
bonds placed for sale until the bonds can be resold by the remarketing agent.
Pursuant to this arrangement, the IRB has been classified as current in the
accompanying consolidated balance sheets at January 1, 2006 and January 2, 2005.
The obligation is collateralized by certain assets, which have an approximate
net carrying value of $4.7 million at January 1, 2006 and by a letter of credit
in the amount of $6.3 million.
Senior Secured Credit Facility
On August 18, 2003, Foamex L.P. entered into a Senior Secured Credit
Facility with a new group of lenders and an $80.0 million term loan facility
with another lender. Proceeds borrowed under these new facilities were used to
repay all outstanding balances under a former 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 former 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 (the "Senior Secured
Credit Facility") consisted of a revolving credit facility with a maximum
availability of $190.0 million and an initial term loan of $50.0 million. The
term loan required quarterly installment payments of approximately $1.8 million,
which commenced on September 30, 2003. All obligations under the Senior Secured
Credit Facility were repaid with proceeds from the DIP Revolving Credit
Facility. The Senior Secured Credit Facility included both a subjective
acceleration clause and a
F-21
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. LONG-TERM DEBT AND REVOLVING CREDIT BORROWINGS (continued)
lockbox arrangement that required all lockbox receipts be used to repay
revolving credit borrowings. Accordingly, borrowings under the revolving credit
facility were classified as current in the accompanying condensed consolidated
balance sheet at January 2, 2005.
Secured Term Loan
The $80.0 million term loan facility (the "Secured Term Loan") was repaid
with proceeds from the DIP Term Loan. Borrowings under the Secured Term Loan
were collateralized by the same collateral as the Senior Secured Credit
Facility. An intercreditor agreement governed the distribution of collateral
among the lenders under the Senior Secured Credit Facility and the Secured Term
Loan.
Debt Covenants
The DIP Revolving Credit Facility and the DIP Term Loan (the "DIP
Facilities") contain certain covenants that limit, among other things, the
ability of Foamex L.P.'s subsidiaries (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 assets, or (v) to
enter into certain transactions with affiliates or related persons. In addition,
the DIP Facilities 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 holders. Under the most restrictive of the
distribution restrictions as of January 1, 2006, Foamex L.P. was able to
distribute funds to its partners only to the extent to enable its partners to
meet tax payment liabilities, subject to Bankruptcy Court approval if such
payments constitute prepetition liabilities, and Foamex International's normal
operating expenses of up to $2.3 million during the term of the DIP Facilities,
so long as no default or event of default has occurred.
Under the DIP Facilities, Foamex L.P. is subject to covenants, including an
EBITDA, as defined, covenant beginning with the one month period ended October
30, 2005, a cumulative net cash flow, as defined, covenant beginning with the
two month period ending December 4, 2005, and a capital expenditure restriction
for 12 month rolling periods beginning October 3, 2005. The cumulative EBITDA
and net cash flow covenants will include an increasing number of months until
they reach 12 months ending on October 1, 2006 and then will be the trailing 12
months thereafter through February 2007. Foamex L.P. is in compliance with the
EBITDA, cumulative net cash flow and capital expenditure covenants for the three
months ended January 1, 2006. The DIP facilities also limit expenditures for
certain prepetition and post petition liabilities, as defined, subject to
Bankruptcy Court approval.
On November 15, 2002, Foamex L.P. and its bank lenders executed an
amendment to a prior 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 that credit facility was terminated
on August 18, 2003. Under the Senior Secured Credit Facility and the Secured
Term Loan, Foamex L.P. was subject to a minimum fixed charge coverage ratio, as
defined, of 1.00 measured quarterly. Amendments to the Senior Secured Credit
Facility and Secured Term Loan executed on November 3, 2004 allowed Foamex L.P.
to exclude certain charges aggregating approximately $3.7 million and
approximately $1.0 million in the first and second quarters of 2004,
respectively, from the computation of the fixed charge coverage ratio. For the
four quarters ended January 2, 2005, Foamex L.P.'s fixed charge coverage ratio
was 0.98 and the lenders agreed to waive compliance with the fixed charge
coverage ratio for that period. On March 31, 2005, Foamex L.P. entered into
amendments with the existing lenders under the Senior Secured Credit Facility
and the Secured Term Loan that set lower minimum fixed charge coverage ratios
through April 2, 2006 and permitted borrowing of up to $25.0 million of an
additional $39.0 million commitment under the Secured Term Loan, the proceeds of
which would be used to repay revolving loans. Foamex L.P. incurred fees and
expenses for the waivers and amendments aggregating approximately $1.0 million.
For the two quarters ended December 28, 2003, Foamex L.P.'s fixed charge
coverage
F-22
9. LONG-TERM DEBT AND REVOLVING CREDIT BORROWINGS (continued)
ratio was 1.09. Foamex L.P. was also subject to a maximum annual capital
expenditure amount which was $36.0 million for the year ended January 2, 2005
and $46.8 million for the year ended January 1, 2006.
Maturities of Long-Term Debt
Scheduled maturities of revolving credit borrowings and long-term debt as
of January 1, 2006 are shown below (thousands):
2006 $ 238
2007 234,791
2008 141
2009 -
2010 -
Thereafter 6,000
--------
Total $241,170
========
The following debt issues were reclassified as liabilities subject to
compromise in the consolidated balance sheet as of January 1, 2006:
10 3/4% Senior Secured Notes
The 10 3/4% Senior Secured Notes were issued by Foamex L.P. and Foamex
Capital Corporation (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 DIP Revolving 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 DIP
Revolving Credit Facility and the DIP 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 Issuers did not remit the interest payment due
October 1, 2005, but have continued to accrue interest at the default rate of
11.75% pursuant to the Bankruptcy Court order approving the borrowing under the
DIP Revolving Credit Facility and DIP Term Loan. The notes may be redeemed at
the option of the Issuers, in whole or in part, at any time on or after April 1,
2006. The initial redemption is at 105.375% of their principal amount, plus
accrued and unpaid interest, if any, thereon to the date of redemption and
declining annually to 100.0% on or after April 1, 2008.
9 7/8% Senior Subordinated Notes
The 9 7/8% Senior Subordinated Notes (the "Notes") were issued by Foamex
L.P. and Foamex Capital Corporation (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. The
Issuers do not intend to make any future payments on the Notes and in
conjunction with the payment default on the 13 1/2% Senior Subordinated Notes
discussed below, the Issuers are in default under the Notes. The Issuers have
not accrued interest on the Notes of $4.2 million from as of the date of the
bankruptcy filing through January 1, 2006.
13 1/2% Senior Subordinated Notes
The 13 1/2% Senior Subordinated Notes were issued by Foamex L.P. and Foamex
Capital Corporation (the "Issuers") and matured on August 15, 2005. The
principal due of $51.6 million plus accrued and unpaid interest of $3.5 million
were not paid resulting in the Issuers being in default under the 13 1/2% Senior
Subordinated Notes. The Issuers have not accrued interest on the 13 1/2% Senior
Subordinated Notes of $2.3 million from the date of the bankruptcy filing
through January 1, 2006. The notes represent uncollateralized general
obligations of the Issuers and are subordinated to all Senior Debt, as defined
in the Indenture and are pari passu in right of payment to the 9 7/8% Senior
Subordinated Notes (described above).
F-23
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. RETIREE BENEFIT PLANS
Defined Benefit Pension Plans
Foamex L.P. provides pension and survivor benefits through a
non-contributory defined benefit plan to almost all U.S. salaried and hourly
employees and to salaried and hourly employees in Toronto, Canada through
separate plans. The benefit formula for U.S. salaried employees is based on
credited years of service and average compensation over the service period. The
benefit formula for U.S. hourly employees is based on a stated amount multiplied
by credited years of service. Employees who reach the credited years of service
requirement receive a benefit annuity upon retirement and employees who have
vested benefits but terminated employment before retirement age receive an
annuity in accordance with the plan provisions.
The Toronto plans are much smaller in relationship to the U.S. plan and
represent less than 10% of total plan assets and projected benefit obligations
presented below. Employees in the Montreal, Canada plant and the Mexico
operations participate only in defined contribution programs.
The U.S. plan has historically been funded to satisfy minimum ERISA
requirements. Given its financial condition, Foamex L.P. was not able to
contribute additional amounts. Because of decreasing interest rates in recent
years, lower returns on plan assets than expected, and funding at the ERISA
minimum the U.S. plan was approximately $50.5 million underfunded at year-end
2005.
The U.S. plan liability is a contingent general unsecured claim and could
be compromised with the Pension Benefit Guaranty Corporation ("PBGC") in the
Chapter 11 process. However, it is Foamex L.P.'s intent in its proposed Plan of
Reorganization to honor its current accrued benefit obligation and not to revert
any of the obligation back to the PBGC. The PBGC is a member of the Creditors
Committee in the Bankruptcy proceedings.
Foamex L.P. also provides a supplemental executive retirement plan ("SERP")
to a limited number of executives. The SERP reflects a pension benefit for the
difference between the executives' compensation and the IRS imposed limit for
qualified defined benefit plans. The SERP is a non-qualified plan and is not
funded.
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 did 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:
[Enlarge/Download Table]
Pension Benefits Other Benefits
---------------------- -------------------
2005 2004 2005 2004
-------- -------- ------ ------
Change in Benefit Obligations (thousands)
Benefit obligations at beginning of year $143,904 $125,052 $ 1,226 $ 1,234
Service cost 5,478 4,804 35 30
Interest cost 7,810 7,463 63 69
Amendments 147 - - -
Benefits paid (6,349) (6,038) (142) (78)
Plan participants' contributions - - 15 16
Actuarial loss (gain) 1,174 12,008 7 (45)
Foreign currency exchange rate changes 290 615 - -
-------- -------- ------- -------
Benefit obligation at end of year $152,454 $143,904 $ 1,204 $ 1,226
======== ======== ======= =======
F-24
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. RETIREE BENEFIT PLANS (continued)
[Enlarge/Download Table]
Change in Plan Assets
Fair value of plan assets at
beginning of year $ 91,868 $ 79,886 $ - $ -
Actual return on plan assets 4,928 7,746 - -
Employer contribution 7,295 10,186 127 62
Plan participants' contributions - - 15 16
Benefits paid (6,349) (6,038) (142) (78)
Plan administrative expenses (1,081) (500) - -
Foreign currency exchange rate changes 257 588 - -
-------- -------- ------- -------
Fair value of plan assets at end of year $ 96,918 $ 91,868 $ - $ -
======== ======== ======= =======
Funded Status and Net Amounts Recognized
in Consolidated Balance Sheets
Funded status $(55,536) $(52,036) $(1,204) $(1,226)
Unrecognized transition asset (215) (290) - -
Unrecognized prior service cost (benefit) 279 192 (34) (41)
Unrecognized net actuarial loss 62,287 60,021 324 328
-------- -------- ------- -------
Net amount recognized in consolidated
balance sheets $ 6,815 $ 7,887 $ (914) $ (939)
======== ======== ======= =======
Amounts Recognized in the Consolidated
Balance Sheets
Prepaid benefit costs $ 8,612 $ 9,263 $ - $ -
Accrued benefit liability (54,426) (53,109) (914) (939)
Intangible assets 517 596 - -
Accumulated other comprehensive loss* 52,112 51,137 - -
-------- -------- ------- -------
Net amount recognized $ 6,815 $ 7,887 $ (914) $ (939)
======== ======== ======= =======
* Before related income tax benefit.
The accumulated benefit obligation for all defined benefit plans was $143.1
million at year-end 2005 and $135.9 million at year-end 2004. Information for
defined benefit plans with an accumulated benefit obligation in excess of plan
assets is listed below.
[Download Table]
December 31, 2005 December 31, 2004
----------------- -----------------
(thousands)
Projected benefit obligation $146,628 $139,242
Accumulated benefit obligation $138,897 $132,444
Fair value of plan assets $ 92,564 $ 88,128
Components of Net Periodic Benefit Plan Cost
[Enlarge/Download Table]
Pension Benefits Other Benefits
---------------------------- -------------------------
2005 2004 2003 2005 2004 2003
------ ------ ------ ------ ------ ------
(thousands)
Service cost $5,478 $4,804 $4,300 $ 35 $ 30 $ 29
Interest cost 7,810 7,463 7,086 63 69 76
Expected return on plan assets (7,836) (6,891) (5,611) - - -
Amortization of transition assets (75) (75) (75) - - -
Amortization of prior service benefit (101) (111) (109) (6) (6) (6)
Amortization of net loss (gain) 3,137 2,776 3,090 10 14 16
------ ------ ------ ---- ---- ----
Net periodic benefit plan cost $8,413 $7,966 $8,681 $102 $107 $115
====== ====== ====== ==== ==== ====
F-25
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. RETIREE BENEFIT PLANS (continued)
Additional Information
[Enlarge/Download Table]
Pension Benefits Other Benefits
------------------- ---------------------
2005 2004 2005 2004
------ ------ ------ ------
(thousands)
Increase (decrease) in minimum liability
included in other comprehensive loss* $975 $6,581 N/A N/A
* Before related income tax benefit.
[Enlarge/Download Table]
Pension Benefits Other Benefits
Weighted-Average Assumptions Used --------------------- ---------------------
to Determine Benefit Obligations 2005 2004 2005 2004
---------------------------------------- --------- --------- ------ ------
Discount rate - U.S. Plans (a) 5.5% 5.5% 5.5% 5.5%
Discount rate - Canadian Plans (a) 5.25% 5.75% N/A N/A
Rate of compensation increase 3.5%-5.0% 3.5%-5.0% N/A N/A
Weighted-Average Assumptions Used Pension Benefits Other Benefits
--------------------- ---------------------
to Determine Annual Net Benefit Cost 2005 2004 2005 2004
------------------------------------ --------- --------- ------ ------
Discount rate - U.S. Plans (a) 5.5% 6.0% 5.5% 6.0%
Discount rate - Canadian Plans (a) 5.75% 6.0% N/A N/A
Expected long-term return on plan assets (b) 8.5% 8.5% N/A N/A
Rate of compensation increase 3.5%-5.0% 3.5%-5.0% N/A N/A
(a) Discount rates for each retiree benefit plan are established by matching
the projected benefit payouts of the specific plan to the yield curve of an
index of high quality corporate bonds.
(b) 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.
[Enlarge/Download Table]
Other Benefits
---------------------------------------
Assumed Health Care Cost Trend Rates December 31, 2005 December 31, 2004
----------------- -----------------
Health care cost trend rate assumed for next year 11.0% 11.0%
Rate to which the cost trend rate is assumed to
decline (ultimate trend rate) 5.0% 5.0%
Year that the rate reaches the ultimate trend rate 2012 2011
Assumed health care cost trend rates have a significant effect on the
amounts reported for the health care plans. A one-percentage point change in
assumed health care cost trend rates would have the effects listed below for
2005.
[Enlarge/Download Table]
Assumed Health Care Cost Trend 1% Point Increase 1% Point Decrease
----------------- -----------------
(thousands)
Effect on total of service cost and interest cost $ 11 $ (9)
Effect on postretirement benefit obligation $107 $(91)
Investment Strategy, Asset Allocation, Risk Management and Funding
U.S. pension plan assets are primarily comprised of equity and debt
securities, including both U.S. and foreign securities. At year-end 2005, common
stock of Foamex L.P. totaled $11 thousand. At year-end 2004, common stock of
Foamex L.P. totaled $1.6 million, or 1.9% of the assets. Our U.S. pension plan
asset allocation at year-end 2005 and 2004, and target allocation for 2006 are
listed below.
F-26
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. RETIREE BENEFIT PLANS (continued)
Percentage of U. S. Plan Assets
2006 Target --------------------------------------
Asset Category Allocation December 31, 2005 December 31, 2004
-------------- ---------- ----------------- -----------------
Equity securities 50-68% 59% 63%
Debt securities 34-38% 36 30
Other 3-7% 5 7
--- ---
Total 100% 100%
=== ===
The Benefits Committee of Foamex L.P. has a formal Investment Policy
Statement that was established to guide the third party investment manager in
asset allocations, control procedures, performance monitoring and review for the
U.S. defined benefit plan. The investment strategy is to maintain a
well-diversified portfolio designed to achieve a long-term rate of return goal
of 8.5%. As with any investment portfolio of this nature, there are no
assurances that the portfolio's performance will match the goal. Asset
allocation target ranges for equity, debt and other investments are evaluated
yearly utilizing the expertise of the third party investment manger.
The majority of the U.S. Plan assets are invested in equity securities.
Given that equity securities have historically provided higher comparable
returns to debt and other asset classes, equity securities carry a higher risk
premium. The risk loss in the U.S. Plan's equity portfolio is mitigated by
investing in a broad range of equity types, including a blend of large and small
capitalization companies and international companies.
Canadian Plan Assets
Pension plan assets in Canada totaled $8.2 million, or 8.5% of pension
assets, at year-end 2005 and $7.2 million, or 7.9% of pension assets, at
year-end 2004. Canadian pension plan assets are primarily invested in Canadian
equity securities with the balance in foreign equities.
Cash Flows
Contributions
Foamex L.P. expects to contribute approximately $16.0 million to its
pension plan and approximately $0.1 million to its other postretirement benefit
plans in 2006.
Estimated Future Benefit Payments
The following benefit payments, which reflect expected future service, as
appropriate, are expected to be paid:
Pension Benefits Other Benefits
---------------- --------------
2006 $ 6,684 $127
2007 $ 6,952 $103
2008 $ 7,368 $100
2009 $ 7,808 $ 74
2010 $ 8,221 $ 66
Years 2011-2015 $49,588 $406
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 $0.8 million, $0.9 million and $0.9 million in 2005, 2004 and
2003, respectively.
F-27
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. INCOME TAXES
The sources of loss before income taxes are shown below.
2005 2004 2003
--------- --------- ---------
(thousands)
United States $(42,760) $(24,144) $(26,893)
Foreign (11,312) (256) 974
-------- -------- --------
Loss before income taxes $(54,072) $(24,400) $(25,919)
======== ======== ========
A reconciliation of the statutory federal income tax benefit to income tax
provision (benefit) is listed below.
[Download Table]
2005 2004 2003
--------- -------- -------
(thousands)
Statutory income taxes $(18,925) $(8,540) $(9,072)
State income taxes, net of federal benefit (27) (1,062) (831)
Nondeductible goodwill impairment 12,500 - -
Nondeductible bankruptcy costs 3,094 - -
Permanent difference on partnership income 349 9,552 9,668
Increase (decrease) in valuation allowance 2,389 8 649
Impact of tax rate change - - 85
Other, net 157 673 995
-------- ------- -------
Provision (benefit) for income taxes $ (463) $ 631 $ 1,494
======== ======= =======
The provision (benefit) for income taxes is summarized as follows:
[Download Table]
2005 2004 2003
--------- -------- -------
Current (thousands)
Federal $ - $ - $ -
State - 19 60
Foreign 116 577 1,286
-------- ------- -------
Total current 116 596 1,346
-------- ------- -------
Deferred
Federal - - -
State - - -
Foreign (2,968) 27 (501)
-------- ------- -------
Total deferred (2,968) 27 (501)
-------- ------- -------
Change in valuation allowance 2,389 8 649
-------- ------- -------
Total provision (benefit) for income taxes $ (463) $ 631 $ 1,494
======== ======= =======
The tax effect of the temporary differences that give rise to deferred
income tax assets and liabilities are listed below.
[Enlarge/Download Table]
January 1, January 2,
2006 2005
---------- ----------
(thousands)
Loss carryforwards and other $ 6,493 $ 4,431
Valuation allowance for deferred income tax assets (4,812) (2,025)
------- -------
Deferred income tax assets 1,681 2,406
------- -------
F-28
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. INCOME TAXES (continued)
January 1, January 2,
2006 2005
---------- ----------
(thousands)
Deferred income tax liabilities
Basis difference in property, plant and equipment - (612)
Investment in joint venture (771) (771)
Other (2,000) (2,779)
------- --------
Deferred income tax liabilities (2,771) (4,162)
------- --------
Net deferred income tax liabilities $(1,090) $(1,756)
======= ========
The American Jobs Creation Act of 2004 introduced a special one-time
dividends received deduction on the repatriation of certain foreign earnings.
Following a review by Foamex L.P., no earnings from foreign subsidiaries are
anticipated to be repatriated to utilize the special deduction.
At January 1, 2006, Foamex L.P. had $4.8 million of net operating loss
carryforwards in a Mexican subsidiary that expire in 2006 through 2015. A full
valuation allowance has been recorded 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 $6.2 million
at January 1, 2006 and $5.2 million at January 2, 2005. 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.
12. PARTNERS' DEFICIENCY
Foamex L.P. was formed as a Delaware limited partnership on September 5,
1990, and initially capitalized on October 2, 1990, in accordance with a limited
partnership agreement as amended through March 2002. As of January 1, 2006, the
partnership interests of Foamex L.P. are a 1.7% managing general partnership
interest held by FMXI and a 98.3% limited partnership interest held by Foamex
International.
Accumulated Other Comprehensive Loss
The components of accumulated other comprehensive loss are listed below.
[Download Table]
2005 2004 2003
--------- ---------- ---------
(thousands)
Foreign currency translation adjustment $ (1,342) $ (1,219) $ (3,257)
Minimum pension liability (52,045) (50,809) (44,556)
-------- -------- --------
$(53,387) $(52,028) $(47,813)
======== ======== ========
13. 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 impairment,
restructuring and other charges. Foamex L.P. does not allocate impairment,
restructuring and other charges to operating segments because many of Foamex
L.P.'s facilities produce products for multiple segments.
F-29
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. BUSINESS SEGMENTS (continued)
Foam Products manufactures and markets cushioning foams for bedding,
furniture, recreational and consumer applications. Carpet Cushion Products
manufactures and distributes rebond and prime carpet padding. Automotive
Products supplies foam products and laminates to major tier one suppliers and
OEMs. Technical Products manufactures and markets reticulated and other
specialty foams used for reservoiring, filtration, gasketing and sealing
applications.
The "other" column in the table below represents certain manufacturing and
fabrication operations in Mexico City, corporate expenses not allocated to other
business segments and impairment, restructuring and other charges (credits) (see
Note 6). Asset and capital expenditure information by business segment is not
reported because many of Foamex L.P.'s facilities produce products for multiple
business segments.
The accounting policies of the business segments are the same as described
in Note 2. Business segment results include revenues and costs that are
specifically identifiable and costs shared by business segments have been
allocated based on utilization.
Sales to one customer, which are included in Automotive Products, accounted
for approximately 10.7%, 12.5% and 16.3% of net sales in 2005, 2004 and 2003,
respectively. No other customer accounted for more than 10.0% of net sales
during the periods presented.
Business segment results are presented below.
[Enlarge/Download Table]
Carpet
Foam Cushion Automotive Technical
Products Products Products Products Other Total
-------- --------- ---------- --------- ---------- ----------
2005 (dollars in thousands)
Net sales $613,507 $178,268 $366,296 $127,712 $ 25,828 $1,311,611
Income (loss) from operations $ 57,516 $ 1,820 $ 22,487 $ 32,749 $(112,084) $ 2,488
Depreciation and amortization $ 7,257 $ 2,277 $ 2,590 $ 2,318 $ 5,603 $ 20,045
2004
Net sales $551,414 $209,182 $350,985 $124,146 $ 30,667 $1,266,394
Income (loss) from operations $ 52,418 $ 8,539 $ 19,245 $ 32,916 $ (61,318) $ 51,800
Depreciation and amortization $ 10,213 $ 2,978 $ 3,116 $ 2,801 $ 6,825 $ 25,933
2003
Net sales $507,586 $208,855 $447,068 $117,450 $ 23,601 $1,304,560
Income (loss) from operations $ 43,983 $ 5,395 $ 33,399 $ 32,115 $ (50,456) $ 64,436
Depreciation and amortization $ 11,002 $ 3,275 $ 2,815 $ 2,931 $ 6,022 $ 26,045
Geographical information is presented below.
[Enlarge/Download Table]
United
States Canada Mexico * Consolidated
----------- -------- -------- ------------
2005 (thousands)
Net sales $1,043,280 $63,464 $204,867 $1,311,611
Property, plant and equipment, net $ 97,815 $ 1,594 $ 13,824 $ 113,233
2004
Net sales $1,009,102 $59,435 $197,857 $1,266,394
Property, plant and equipment, net $ 120,578 $ 5,100 $ 15,865 $ 141,543
2003
Net sales $ 989,075 $67,542 $247,943 $1,304,560
Property, plant and equipment, net $ 142,602 $ 5,003 $ 15,245 $ 162,850
* Includes four plants along the U.S. border whose operations are included in
Automotive Products in the business segment results.
F-30
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
2005 2004 2003
------- ------- -------
(thousands)
Cash paid for interest $50,829 $73,218 $72,785
======= ======= =======
Cash paid for income taxes, net $ 505 $ 120 $ 2,349
======= ======= =======
Non cash - capital leases $ 665 $ 49 $ -
======= ======= =======
15. RELATED PARTY TRANSACTIONS AND BALANCES
Foamex L.P. regularly enters into transactions with its affiliates in the
ordinary course of business.
Trace Promissory Notes
On July 1, 1997, Trace International Holdings, Inc. ("Trace"), which was
formerly a major stockholder of Foamex International, borrowed $5.0 million
pursuant to a promissory note with an aggregate principal amount of $5.0 million
issued to Foamex L.P. on June 12, 1997. The promissory note was due and payable
on demand or, if no demand was made, on July 7, 2001, and bears interest at 2
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. Foamex L.P. has not recorded any interest income on these notes
since the Trace bankruptcy.
Trace Accounts Receivable
At January 1, 2006 and January 2, 2005, operating accounts receivable from
Trace were approximately $3.2 million. These accounts receivable were fully
reserved for prior to 2002.
Other
Effective February 10, 2004, Foamex International's Chairman resigned his
position by mutual agreement with Foamex International's Board of Directors. In
connection with this resignation, Foamex International entered into a separation
agreement with the former Chairman and recorded a one-time charge of
approximately $1.4 million in the first quarter of 2004 for amounts payable
under this agreement, none of which related to past service rendered by the
former Chairman. Additionally, Foamex International recorded the reversal of
approximately $1.4 million reflected on the balance sheet as of December 28,
2003 related to various retirement provisions contained in an employment
agreement with Foamex International that are no longer payable to the former
Chairman under the terms of the separation agreement. The separation agreement
was rejected by Foamex International effective as of September 30, 2005 pursuant
to Section 365 of the Bankruptcy Code and as a result of the rejection, Foamex
International has no further obligations to the former Chairman under the
separation agreement.
F-31
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. RELATED PARTY TRANSACTIONS AND BALANCES (continued)
In 2001, one of Foamex International's former directors received a loan of
$0.2 million from Foamex L.P.'s joint venture in Asia. The loan was evidenced by
a 20-year non-recourse promissory note bearing interest at 4.0% per annum
secured by the former director's 5.0% interest in the value of Foamex L.P.'s
equity interest in the joint venture in Asia. Foamex L.P. also maintained an
apartment used by this former director. Rent expense for this facility was $0.1
million in 2004 and $0.2 million in 2003 and 2002. The apartment lease expired
in 2004 and was not renewed.
Foamex L.P., Recticel 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.
During 2001, Foamex International entered into an agreement that guarantees
two non-recourse promissory notes, totaling $0.7 million, payable to a foreign
affiliate that Foamex L.P. accounts for under the equity method. The promissory
notes were issued to a former director of Foamex International and a former
employee of Foamex L.P. Foamex L.P. established an accrual of $0.3 million
included in other liabilities at January 2, 2005 since the promissory notes are
nonrecourse. In 2005, Foamex L.P. accrued the remaining amount of the guarantee,
including accrued interest, upon termination of the former employee's contract.
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. The agreement was terminated in 2004. Foamex L.P. also
paid $0.1 million in 2004 for legal services to a law firm in which another
Foamex International director is counsel. A deminimis amount of fees were paid
to this firm in 2005.
16. COMMITMENTS AND CONTINGENCIES
Operating Leases
Foamex L.P. is obligated under various lease agreements for rental of
facilities, vehicles and other equipment. Many of the leases contain renewal
options with varying terms and escalation clauses that provide for increased
rentals based upon increases in the Consumer Price Index, real estate taxes and
lessors' operating expenses. Total minimum rental commitments required under
operating leases at January 1, 2006 are (thousands):
2006 $15,453
2007 13,329
2008 11,438
2009 9,171
2010 7,280
Balance 14,733
-------
Total $71,404
=======
Rental expense charged to operations under operating leases approximated
$18.3 million, $19.3 million and $18.8 million in 2005, 2004 and 2003,
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
$268.3 million in 2006, $237.9 million in 2007 and $115.0 million in 2008, 2009
and 2010. In addition, Foamex L.P. has committed to pay fees aggregating $7
million to $8 million to certain financial advisors subject to final approval by
the Bankruptcy Court.
F-32
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. COMMITMENTS AND CONTINGENCIES (continued)
Litigation
Foamex L.P. is party to various lawsuits, both as defendant and plaintiff,
arising in the normal course of business. It is the opinion of management that
the disposition of these lawsuits will not, individually or in the aggregate,
have a material adverse effect on Foamex L.P.'s financial position or results of
operations. If management's assessment of Foamex L.P.'s liability relating to
these actions is incorrect, these actions could have a material adverse effect
on Foamex L.P.'s consolidated financial position, results of operations and cash
flows.
As a consequence of the Filing, all pending litigation against the Debtors
was stayed automatically by Section 362 of the Bankruptcy Code and, absent
further order of the Bankruptcy Court, no party may take any action to recover
on pre-petition claims against the Debtors. In addition, pursuant to Section 365
of the Bankruptcy Code, the Debtors may reject or assume pre-petition executory
contracts and unexpired leases, and other parties to contracts or leases that
are rejected may assert rejection damages claims as permitted by the Bankruptcy
Code.
As of January 1, 2006, Foamex L.P. had accrued approximately $0.8 million
for litigation and other legal matters in addition to the environmental matters
discussed below. The litigation claims are liabilities subject to compromise
that are capable of being treated as general unsecured claims under the Plan.
Environmental and Health and Safety
Foamex L.P. is subject to extensive and changing federal, state, local and
foreign environmental laws and regulations, including those relating to the use,
handling, storage, discharge and disposal of hazardous substances, the discharge
or emission of materials into the environment, and the remediation of
environmental contamination, and as a result, is from time to time involved in
administrative and judicial proceedings and inquiries relating to environmental
matters. As of January 1, 2006, Foamex L.P. had accruals of approximately $2.1
million for environmental matters, including approximately $1.9 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
PRP by the EPA or a state authority, and other matters. The PRP sites are
liabilities subject to compromise and Foamex L.P. believes they will be treated
as general unsecured claims under the Plan. 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 requires flexible polyurethane foam
manufacturing operations to reduce methylene chloride (dichloromethane) air
emissions. The rule established a 50.0% reduction in methylene chloride
emissions by December 1, 2004, which we have implemented, and 100.0% reduction
by January 1, 2007. This standard has not and will not require Foamex L.P. to
make material expenditures for its Canadian plants.
Foamex L.P. has reported to the appropriate state authorities that it had
found soil and/or groundwater contamination in excess of state standards at
certain locations. Seven sites are currently in various stages of investigation
or remediation. Accordingly, the extent of contamination and the ultimate
liability is not known with certainty for all sites.
Foamex L.P. has either upgraded or closed all underground storage tanks at
its facilities in accordance with applicable regulations.
The CERCLA and comparable state laws impose liability without fault for the
costs of cleaning up contaminated sites on certain classes of persons that
contributed to the release of hazardous substances into the environment at those
sites, for example, by generating wastes containing hazardous substances which
were disposed at such sites. Foamex L.P. is currently designated as a PRP by the
EPA or by state environmental agencies or other PRPs, pursuant to CERCLA or
analogous state statutes, with respect to 11 sites. Estimates of total cleanup
F-33
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. COMMITMENTS AND CONTINGENCIES (continued)
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.
17. GUARANTOR INFORMATION
The payment obligations of Foamex L.P. and Foamex Capital Corporation under
the 10 3/4% Senior Secured Notes are guaranteed by Foamex L.P.'s 100% owned
domestic subsidiaries ("Guarantors"). Such guarantees are full, unconditional
and joint and several. Separate financial statements of the Guarantors are not
presented because Foamex L.P.'s management has determined that they would not be
material to investors. The following presents condensed consolidating balance
sheets as of January 1, 2006 and January 2, 2005 and the condensed consolidating
statements of operations and cash flows for the years ended January 1, 2006,
January 2, 2005 and December 28, 2003 of the Guarantors and nonguarantors. The
Guarantors include Foamex Carpet Cushion LLC ("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 January 1, 2006, January 2, 2005
and December 28, 2003 and for the years then ended. The nonguarantors are Foamex
Canada Inc. and Grupo Foamex de Mexico, S.A. de C.V. and its subsidiaries. The
following financial information is intended to provide information for the
Guarantors and nonguarantors of Foamex L.P. based on amounts derived from the
financial statements of Foamex L.P.
Condensed Consolidating Balance Sheet
As of January 1, 2006
[Enlarge/Download Table]
Foamex
Capital Foamex L.P. Consolidated
Guarantors Nonguarantors Corporation (Parent) Eliminations Foamex L.P.
---------- ------------- ----------- ----------- ------------ ------------
Assets (thousands of dollars)
Current assets $ - $25,575 $ 1 $ 322,448 $ (6,144) $ 341,880
Investment in subsidiaries 2,870 - - 31,706 (34,576) -
Property, plant and equipment, net - 13,403 - 99,830 - 113,233
Goodwill - 2,611 - 86,192 - 88,803
Debt issuance costs - - - 6,667 - 6,667
Other assets 17,191 2,312 - 40,281 (9,050) 50,734
------- ------- ----- --------- -------- ---------
Total assets $20,061 $43,901 $ 1 $ 587,124 $(49,770) $ 601,317
======= ======= ===== ========= ======== =========
Liabilities and Partners' Deficiency
Current liabilities $ 1,057 $18,323 $ - $ 346,899 $ (6,144) $ 360,135
Long-term debt 4,200 4,876 - 340 (9,050) 366
Liabilities subject to compromise 851 - - 635,114 - 635,965
Other liabilities - 80 - 19,753 - 19,833
------- ------- ----- --------- -------- ---------
Total liabilities 6,108 23,279 - 1,002,106 (15,194) 1,016,299
Partners' deficiency 13,953 20,622 1 (414,982) (34,576) (414,982)
------- ------- ----- --------- -------- ---------
Total liabilities and partners' deficiency $20,061 $43,901 $ 1 $ 587,124 $(49,770) $ 601,317
======= ======= ===== ========= ======== =========
F-34
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17. GUARANTOR INFORMATION (continued)
Condensed Consolidating Balance Sheet
As of January 2, 2005
[Enlarge/Download Table]
Foamex
Capital Foamex L.P. Consolidated
Guarantors Nonguarantors Corporation (Parent) Eliminations Foamex L.P.
---------- ------------- ----------- ----------- ------------ ------------
Assets (thousands of dollars)
Current assets $ - $29,953 $ 1 $284,159 $ (3,594) $ 310,519
Investment in subsidiaries 8,768 - - 42,213 (50,981) -
Property, plant and equipment, net - 18,650 - 122,893 - 141,543
Goodwill - 6,328 - 120,486 - 126,814
Debt issuance costs - - - 21,152 - 21,152
Other assets 15,686 2,486 - 36,556 (9,050) 45,678
------- ------- ----- -------- -------- ---------
Total assets $24,454 $57,417 $ 1 $627,459 $(63,625) $ 645,706
======= ======= ===== ======== ======== =========
Liabilities and Partners' Deficiency
Current liabilities $ 1,589 $19,020 $ - $347,549 $(3,594) $ 364,564
Long-term debt 4,200 4,850 - 568,461 (9,050) 568,461
Other liabilities - 1,232 - 67,040 - 68,272
------- ------- ----- -------- -------- ---------
Total liabilities 5,789 25,102 - 983,050 (12,644) 1,001,297
Partners' deficiency 18,665 32,315 1 (355,591) (50,981) (355,591)
------- ------- ----- -------- -------- ---------
Total liabilities and partners' deficiency $24,454 $57,417 $ 1 $627,459 $(63,625) $ 645,706
======= ======= ===== ======== ======== =========
Condensed Consolidating Statement of Operations
For the year ended January 1, 2006
[Enlarge/Download Table]
Foamex
Capital Foamex L.P. Consolidated
Guarantors Nonguarantors Corporation (Parent) Eliminations Foamex L.P.
---------- ------------- ----------- ----------- ------------ -----------
(thousands of dollars)
Net sales $ - $102,810 $ - $1,236,105 $(27,304) $1,311,611
Cost of goods sold - 100,119 - 1,102,961 (27,304) 1,175,776
------- -------- ----- --------- -------- ----------
Gross profit - 2,691 - 133,144 - 135,835
Selling, general and administrative
expenses - 8,562 - 72,601 - 81,163
Impairment, restructuring and other
charges - 7,240 - 44,944 - 52,184
------- -------- ----- --------- -------- ----------
Income from operations - (13,111) - 15,599 - 2,488
Gain on sale of businesses - - - 29,719 - 29,719
Interest and debt issuance expense (310) (405) - (79,708) 674 (79,749)
Equity in undistributed earnings
of affiliates (4,249) - - (10,377) 16,390 1,764
Other expense, net 273 559 - (1,647) (674) (1,489)
Reorganization items, net (9) (120) - (6,676) - (6,805)
------- -------- ----- --------- -------- ----------
Loss before income taxes (4,295) (13,077) - (53,090) 16,390 (54,072)
Provision (benefit) for income taxes - (982) - 519 - (463)
------- -------- ----- --------- -------- ----------
Loss before cumulative effect of
accounting change (4,295) (12,095) - (53,609) 16,390 (53,609)
Cumulative effect of accounting change - - - (3,499) - (3,499)
------- -------- ----- --------- -------- ----------
Net loss $(4,295) $(12,095) $ - $ (57,108) $ 16,390 $ (57,108)
======= ======== ===== ========= ======== ==========
F-35
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17. GUARANTOR INFORMATION (continued)
Condensed Consolidating Statement of Operations
For the year ended January 2, 2005
[Enlarge/Download Table]
Foamex
Capital Foamex L.P. Consolidated
Guarantors Nonguarantors Corporation (Parent) Eliminations Foamex L.P.
---------- ------------- ----------- ----------- ------------ -----------
(thousands of dollars)
Net sales $ - $100,515 $ - $1,187,774 $(21,895) $1,266,394
Cost of goods sold - 93,882 - 1,052,560 (21,895) 1,124,547
------- -------- ---- ---------- -------- ----------
Gross profit - 6,633 - 135,214 - 141,847
Selling, general and administrative
expenses - 6,722 - 80,075 - 86,797
Impairment, restructuring and other
charges - - - 3,250 - 3,250
------- -------- ----- ---------- --------- ----------
Income from operations - (89) - 51,889 - 51,800
Interest and debt issuance expense (250) (330) - (76,614) 527 (76,667)
Equity in undistributed earnings
of affiliates (658) - - (760) 2,105 687
Other expense, net 202 (524) - 629 (527) (220)
------- -------- ----- ---------- --------- ----------
Loss before income taxes (706) (943) - (24,856) 2,105 (24,400)
Provision for income taxes - 456 - 175 - 631
------- -------- ----- ---------- --------- ----------
Net loss $ (706) $ (1,399) $ - $ (25,031) $ 2,105 $ (25,031)
======= ======== ===== ========== ========= ==========
F-36
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17. GUARANTOR INFORMATION (continued)
Condensed Consolidating Statement of Operations
For the year ended December 28, 2003
[Enlarge/Download Table]
Foamex
Capital Foamex L.P. Consolidated
Guarantors Nonguarantors Corporation (Parent) Eliminations Foamex L.P.
---------- ------------- ----------- ----------- ------------ -----------
(thousands of dollars)
Net sales $ - $105,604 $ - $1,222,399 $(23,443) $1,304,560
Cost of goods sold - 95,567 - 1,088,746 (23,443) 1,160,870
------- -------- ----- ---------- -------- ----------
Gross profit - 10,037 - 133,653 - 143,690
Selling, general and administrative
expenses - 7,399 - 73,614 - 81,013
Impairment, restructuring and other
credits - 320 - (2,079) - (1,759)
------- -------- ----- ---------- -------- ----------
Income from operations - 2,318 - 62,118 - 64,436
Interest and debt issuance expense (234) (25) - (88,303) 188 (88,374)
Equity in undistributed earnings
of affiliates (1,156) - - (379) 3,001 1,466
Other expense, net 190 (2,784) - (665) (188) (3,447)
------- -------- ----- ---------- -------- ----------
Loss before income taxes (1,200) (491) - (27,229) 3,001 (25,919)
Provision for income taxes - 1,310 - 184 - 1,494
------- -------- ----- ---------- -------- ----------
Net loss $(1,200) $ (1,801) $ - $ (27,413) $ 3,001 $ (27,413)
======= ======== ===== ========== ======== ==========
F-37
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17. GUARANTOR INFORMATION (continued)
Condensed Consolidating Statement of Cash Flows
For the year ended January 1, 2006
[Enlarge/Download Table]
Foamex
Capital Foamex L.P. Consolidated
Guarantors Nonguarantors Corporation (Parent) Eliminations Foamex L.P.
---------- ------------- ----------- ----------- ------------ -----------
(thousands of dollars)
Cash Flows from Operating Activities
Net income (loss) $(4,295) $(12,095) $ - $(57,108) $16,390 $(57,108)
Total adjustments to reconcile net
income (loss) to net cash used
for operating activities 4,295 12,019 - 35,147 (16,390) 35,071
------- -------- ----- -------- ------- --------
Net cash used for operating
activities - (76) - (21,961) - (22,037)
------- -------- ----- -------- ------- --------
Cash Flows from Investing Activities
Capital expenditures - (62) - (5,650) 517 (5,195)
Proceeds from sale of assets - - - 39,815 - 39,815
Other - 517 - (2,616) (517) (2,616)
------- -------- ----- -------- ------- --------
Net cash provided by investing
activities - 455 - 31,549 - 32,004
------- -------- ----- -------- ------- --------
Cash Flows from Financing Activities
Proceeds from long-term debt - - - 119,659 - 119,659
Repayments of long-term debt - - - (118,479) - (118,479)
Other, net - - - (9,079) - (9,079)
------- -------- ----- -------- ------- --------
Net cash used for financing
activities - - - (7,899) - (7,899)
------- -------- ----- -------- ------- --------
Net decrease in cash and
cash equivalents - 379 - 1,689 - 2,068
Cash and cash equivalents at - 2,200 1 3,146 - 5,347
------- -------- ----- -------- ------- --------
Cash and cash equivalents at
end of period $ - $ 2,579 $ 1 $ 4,835 $ - $ 7,415
======= ======== ===== ======== ======= =======
F-38
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17. GUARANTOR INFORMATION (continued)
Condensed Consolidating Statement of Cash Flows
For the year ended January 2, 2005
[Enlarge/Download Table]
Foamex
Capital Foamex L.P. Consolidated
Guarantors Nonguarantors Corporation (Parent) Eliminations Foamex L.P.
---------- ------------- ----------- ----------- ------------ -----------
(thousands of dollars)
Cash Flows from Operating Activities
Net income (loss) $(705) $(1,399) $ - $(25,031) $ 2,104 $(25,031)
Total adjustments to reconcile net
income (loss) to net cash provided
by (used in) operating activities 705 2,665 - 23,962 (2,104) 25,228
------- ------- ----- -------- ------- --------
Net cash provided by
operating activities - 1,266 - (1,069) - 197
Cash Flows from Investing Activities
Capital expenditures - (1,235) - (4,275) - (5,510)
Acquisition - - - - - -
Other - - - 2,801 (2,500) 301
------- ------- ----- -------- ------- --------
Net cash used for investing activities - (1,235) - (1,474) (2,500) (5,209)
Cash Flows from Financing Activities
Net proceeds from revolving loans - - - 18,841 - 18,841
Repayments of long-term debt - - - (10,853) - (10,853)
Other, net - (2,500) - (4,239) 2,500 (4,239)
------- ------- ----- -------- ------- --------
Net cash provided by financing
activities - (2,500) - 3,749 2,500 3,749
------- ------- ----- -------- ------- --------
Net decrease in cash and cash equivalents - (2,469) - 1,206 - (1,263)
Cash and cash equivalents at
beginning of period - 4,669 1 1,940 - 6,610
------- ------- ----- -------- ------- --------
Cash and cash equivalents at
end of period $ - $ 2,200 $ 1 $ 3,146 $ - $ 5,347
======= ======= ===== ======== ======= ========
F-39
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17. GUARANTOR INFORMATION (continued)
Condensed Consolidating Statement of Cash Flows
For the year ended December 28, 2003
[Enlarge/Download Table]
Foamex
Capital Foamex L.P. Consolidated
Guarantors Nonguarantors Corporation (Parent) Eliminations Foamex L.P.
---------- ------------- ----------- ----------- ------------ -----------
(thousands of dollars)
Cash Flows from Operating Activities
Net income (loss) $(1,200) $(1,801) $ - $(27,413) $ 3,001 $(27,413)
Total adjustments to reconcile net
income (loss) to net cash provided
by operating activities 1,119 6,429 - 40,887 (2,920) 45,515
------- ------- ----- -------- ------- --------
Net cash provided by operating
activities (81) 4,628 - 13,474 81 18,102
------- ------- ----- -------- ------- --------
Cash Flows from Investing Activities
Capital expenditures - (1,740) - (5,806) 1,003 (6,543)
Other 81 - - (1,089) (1,084) (2,092)
------- ------- ----- -------- ------- --------
Net cash used for investing
activities 81 (1,740) - (6,895) (81) (8,635)
------- ------- ----- -------- ------- --------
Cash Flows from Financing Activities
Net proceeds from (repayments of)
revolving loans - - - 44,242 - 44,242
Proceeds from long-term debt - - - 130,000 - 130,000
Repayments of long-term debt - - - (164,020) - (164,020)
Other, net - - - (17,442) - (17,442)
------- ------- ----- -------- ------- --------
Net cash used for financing
activities - - - (7,220) - (7,220)
------- ------- ----- -------- ------- --------
Net increase in cash and
cash equivalents - 2,888 - (641) - 2,247
Cash and cash equivalents at
beginning of period - 1,781 1 2,581 - 4,363
------- ------- ----- -------- ------- --------
Cash and cash equivalents at
end of period $ - $ 4,669 $ 1 $ 1,940 $ - $ 6,610
======= ======= ===== ======== ======= ========
18. SUBSEQUENT EVENT
On March 7, 2006, Foamex L.P. announced the closure of two manufacturing
facilities, including a foam pouring facility, located in Toronto, Canada, and
on March 20, 2006, Foamex L.P. announced the closure of its foam pouring
facility in Orlando, Florida. Foamex L.P. expects to incur costs of
approximately $8.0 million to $11.0 million in connection with the closures.
F-40
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
The Board of Directors of
Foamex Capital Corporation:
We have audited the accompanying balance sheets of Foamex Capital Corporation
(the "Company"), a wholly-owned subsidiary of Foamex L.P., as of January 1, 2006
and January 2, 2005 which are the responsibility of the Company's management.
Our responsibility is to express an opinion on the balance sheets based on our
audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the balance
sheets are free of material misstatement. An audit of a balance sheet includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the balance sheet. An audit of a balance sheet also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall balance sheet presentation. We believe that our audits
of the balance sheets provide a reasonable basis for our opinion.
In our opinion, the balance sheets referred to above present fairly, in all
material respects, the financial position of Foamex Capital Corporation as of
January 1, 2006 and January 2, 2005, in conformity with U.S. generally accepted
accounting principles.
The accompanying balance sheets have been prepared assuming that the Company
will continue as a going concern. As discussed in Note 2 to the balance sheets,
on September 19, 2005 Foamex International Inc. and certain of its domestic
subsidiaries, including Foamex L.P., its primarily operating subsidiary and
Foamex Capital Corporation, (collectively referred to as the "Debtors"), filed
voluntary petitions for relief under Chapter 11 of the United States Bankruptcy
Code in the United States Bankruptcy Court for the District of Delaware (the
"Bankruptcy Court") the effects of which raise substantial doubt about its
ability to continue as a going concern. Although the Debtors are currently
operating as debtors-in-possession under the jurisdiction of the Bankruptcy
Court, the continuation of the Company as a going concern is contingent upon,
among other things, the ability to formulate a plan of reorganization which will
gain approval of the creditors and confirmation of the Bankruptcy Court. The
accompanying balance sheets do not include any adjustments that might result
from the outcome of these uncertainties.
/s/ KPMG LLP
Philadelphia, Pennsylvania
March 31, 2006
F-41
FOAMEX CAPITAL CORPORATION
(A Wholly-Owned Subsidiary of Foamex L.P.)
BALANCE SHEETS
[Download Table]
January 1, January 2,
2006 2005
---------- ----------
CASH $1,000 $1,000
====== ======
COMMITMENTS AND CONTINGENCIES
STOCKHOLDER'S EQUITY
Common stock, par value $.01 per share;
1,000 shares authorized, issued and outstanding $ 10 $ 10
Additional paid-in capital 990 990
------ ------
Total Stockholder's Equity $1,000 $1,000
====== ======
The accompanying notes are an integral part of
the balance sheets.
F-42
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. BANKRUPTCY AND BASIS OF PRESENTATION
On September 19, 2005 (the "Petition Date"), Foamex International and
certain of its domestic subsidiaries, including FCC and Parent, (collectively
referred to as the "Debtors"), filed voluntary petitions for relief under
Chapter 11 of the United States Bankruptcy Code ("Bankruptcy Code") in the
United States Bankruptcy Court for the District of Delaware (the "Bankruptcy
Court").
Each of the Debtors continues to operate its business and manage its
property as debtors-in-possession pursuant to Sections 1107 and 1108 of the
Bankruptcy Code. On September 29, 2005, the United States Trustee for the
District of Delaware appointed an official committee of unsecured creditors in
these Chapter 11 cases (the "Creditors' Committee"). The Creditors' Committee is
currently comprised of The Bank of New York, the Pension Benefit Guaranty
Corporation, Newcastle Partners, LP, Lyondell Chemical Corporation, Shell
Chemicals L.P., Steel Partners II, L.P. and Donovan Williams. At a hearing held
on September 20, 2005, the Bankruptcy Court granted various first day motions
for relief designed to stabilize Parent's operations and business relationships
with customers, vendors, employees and others, and entered orders granting
permission to, among other things, pay employee salaries, wages and benefits,
pay amounts owing in connection with workers' compensation and other insurance
policies; utilize our existing cash management systems; continue Parent's
customer programs; pay vendors for certain critical goods and services provided
prior to September 19, 2005 and, access, on an interim basis, up to $221 million
of a $240 million debtor-in-possession (DIP) revolving credit facility and $80
million of a DIP term loan. A portion of the proceeds of the
debtor-in-possession revolving credit facility and all of the proceeds of the
DIP term loan facility were used to repay Parent's prepetition revolving credit
and term loan facilities. On October 17, 2005, the Bankruptcy Court granted
final approval of the $240 million DIP revolving credit facility and the $80
million DIP term loan.
On November 17, 2005, the Bankruptcy Court approved a motion authorizing a
key executive retention program (the "KERP"). The KERP pertains to 77 employees
who may receive cash distributions aggregating up to $3.2 million. In addition,
certain participants, at the discretion of the Board of Directors of the
reorganized Foamex International, may receive additional distributions
aggregating up to $1.1 million in cash or in common stock of the reorganized
Foamex International, at a price per share that reflects the value of the equity
on the effective date of the plan of organization. Distributions under the KERP
are generally to be made on or around certain milestone dates during the Chapter
11 cases and on and subsequent to the effective date of the plan of
reorganization. Cash distributions pursuant to the KERP, aggregating $0.4
million, were paid in December 2005 and additional amounts aggregating $1.1
million have been paid in February and March 2006. The common stock
distributions, if any, will be made at the six month and one year anniversaries
of the effective date of the plan of reorganization. The KERP also includes an
additional $0.5 million discretionary cash pool to address specific employment
matters and unanticipated needs that may arise during the Chapter 11 cases.
Parent has notified all known or potential creditors of the Chapter 11
filings for the purposes of identifying and quantifying all prepetition claims.
The Chapter 11 filings triggered defaults on substantially all debt and lease
obligations. Subject to certain exceptions under the Bankruptcy Code, the
Chapter 11 filings automatically stayed the continuation of any judicial or
administrative proceedings or other actions against the Debtors or their
property to recover on, collect or secure a claim arising prior to September 19,
2005. On October 18, 2005, the Bankruptcy Court entered an order (the "Bar Date
Order") requiring any person or entity holding or asserting a prepetition
claim(s) against the Debtors to a file a written proof of claim with the
Debtors' claims processing agent on or before December 8, 2005 (the "Bar Date"),
and, for Governmental Units (as defined in the Bankruptcy Code)
F-43
FOAMEX CAPITAL CORPORATION
(A Wholly-Owned Subsidiary of Foamex L.P.)
NOTES TO BALANCE SHEETS
2. BANKRUPTCY AND BASIS OF PRESENTATION (continued)
holding a prepetition claim(s) against the Debtors' on or before March 20, 2006.
With certain enumerated exceptions, the Bar Date Order further provides that any
person or entity which fails to timely file a proof of claim will, among other
things, be forever barred, estopped and enjoined from asserting a prepetition
claim against the Debtors.
The uncertainty regarding Parent's future prospects may hinder Parent's
ongoing business activities and its ability to operate, fund and execute
Parent's business plan by impairing relations with existing and potential
customers; negatively impacting Parent's ability to attract and retain key
employees; limiting Parent's ability to obtain trade credit; impairing present
and future relationships with vendors and service providers; and impairing its
ability to continue to operate as a going concern.
As a result of the Chapter 11 filings, realization of assets and
liquidation of liabilities are subject to significant uncertainty. While
operating as a debtor-in-possession under the protection of Chapter 11, and
subject to Bankruptcy Court approval or otherwise as permitted in the ordinary
course of business, Parent may sell or otherwise dispose of assets and liquidate
or settle liabilities for amounts other than those reflected in Parent's
financial statements. Further, a plan of reorganization could materially change
the amounts and classifications reported in Parent's historical financial
statements, which do not give effect to any adjustment to the carrying value of
assets or amounts of liabilities that might be necessary as a consequence of
confirmation of a plan of reorganization.
To exit Chapter 11, Parent must obtain confirmation by the Bankruptcy Court
of a Chapter 11 plan. On December 23, 2005, Parent filed a Disclosure Statement
and Proposed Plan of Reorganization (the "Plan") with the Bankruptcy Court. The
Plan is designed to complete a financial restructuring which will result in a
reduction of approximately $500 million of total debt from prepetition amounts.
The Plan was supported by an ad hoc committee of Parent's Senior Secured
Noteholders comprising more than 50% of the outstanding principal amount of
Senior Secured Notes. The terms of the Plan include the following:
o Holders of Allowed Administrative Claims, Priority Tax Claims, DIP
Financing Claims, Other Priority Claims, and Other Secured Claims will
receive full payment in cash;
o Holders of Allowed Senior Secured Note Claims will receive a pro rata
share of 100% of new common stock of the reorganized Foamex
International, subject to dilution, provided that the class of such
Claims votes to accept the Plan;
o Holders of Allowed Senior Subordinated Note Claims will receive a pro
rata share of warrants to purchase up to 5% of new common stock of the
reorganized Foamex International, subject to dilution, provided that
the class of such Claims votes to accept the Plan;
o Holders of Allowed General Unsecured Claims will receive a pro rata
share of $1.5 million, provided that the distribution does not exceed
5% of the allowed amount of each such claim and provided that the
class of such Claims votes to accept the Plan;
o Holders of Foamex International's existing Preferred Stock and Common
Stock will not receive any distribution under the Plan and their
shares will be cancelled on the effective date of the Plan.
F-44
FOAMEX CAPITAL CORPORATION
(A Wholly-Owned Subsidiary of Foamex L.P.)
NOTES TO BALANCE SHEETS
2. BANKRUPTCY AND BASIS OF PRESENTATION (continued)
Since Parent filed its Plan, Parent and its advisors have continued to work
with its significant creditor constituencies and their respective advisors to
negotiate a fully consensual plan of reorganization. Parent expects that it will
continue to do so in the hope of agreeing with these constituents on the terms
of a fully consensual plan. There can be no guarantee that Parent will file
and/or confirm such a plan. However, even in the absence of a fully consensual
plan, it is likely that Parent will need to modify the plan that is currently on
file with the Bankruptcy Court.
Subsequent to the bankruptcy filing date, Statement of Position 90-7,
"Financial Reporting by Entities in Reorganization Under the Bankruptcy Code"
("SOP 90-7") applies to the Debtors' financial statements while the Debtors
operate under the provision of Chapter 11. SOP 90-7 does not change the
application of generally accepted accounting principles in the preparation of
financial statements. However, SOP 90-7 does require that the financial
statements, for periods including and subsequent to the filing of the Chapter 11
petition, distinguish transactions and events that are directly associated with
the reorganization from the ongoing operations of the business. A confirmed plan
of reorganization could materially change amounts reported in FCC's balance
sheet, which does not give effect to any adjustments of the carrying value of
assets and liabilities that will be necessary as a consequence of reorganization
under Chapter 11.
3. 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 Parent 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 Parent's domestic subsidiaries that
guarantee the DIP Revolving 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 DIP Revolving Credit Facility
and the DIP 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 Issuers did not remit the interest payment due October 1, 2005
but have continued to accrue interest at the default rate of 11.75% as the
Senior Secured Notes are a priority claim in bankruptcy. The notes may be
redeemed at the option of the Issuers, in whole or in part, at any time on or
after April 1, 2006. The initial redemption is at 105.375% of their principal
amount, plus accrued and unpaid interest, if any, thereon to the date of
redemption and declining annually to 100.0% on or after April 1, 2008.
9 7/8% Senior Subordinated Notes due 2007
("9 7/8% Senior Subordinated Notes")
The 9 7/8% Senior Subordinated Notes (the "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. The Issuers do not intent to make any future payments
on the Notes and in conjunction with the payment default on the 13 1/2% Senior
Subordinated Notes discussed below, the Issuers are in default under the Notes.
The Issuers have not accrued interest on the Notes of $4.2 million from the date
of the bankruptcy filed through January 1, 2006.
F-45
FOAMEX CAPITAL CORPORATION
(A Wholly-Owned Subsidiary of Foamex L.P.)
NOTES TO BALANCE SHEETS
3. COMMITMENTS AND CONTINGENCIES (continued)
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
matured on August 15, 2005. The principal due of $51.6 million plus accrued
interest and unpaid interest of $3.5 million were not paid resulting in the
Issuers being in default under the 13 1/2% Senior Subordinated Notes. The
Issuers have not accrued interest on the 13 1/2% Senior Subordinated Notes of
$2.3 million from the date of the bankruptcy filing through January 1, 2006. The
notes represent uncollateralized general obligations of the Issuers and are
subordinated to all Senior Debt, as defined in the Indenture and a pari passu in
right of payment to the Notes described above.
F-46
FOAMEX L.P.
INDEX TO FINANCIAL STATEMENT SCHEDULES
Index to Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts
All other schedules are omitted since the required information is not
present or is not present in amounts sufficient to require submission of the
schedule, or because the information required is included in the consolidated
financial statements and notes thereto.
S-1
Schedule II
FOAMEX L.P. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(thousands)
[Enlarge/Download Table]
Balance at Charged to Charged to Balance at
Beginning of Costs and Other End of
Period Expenses Accounts Deductions Period
------------ ---------- ---------- ---------- ----------
YEAR ENDED JANUARY 1, 2006
Allowance for Uncollectible Accounts $ 7,054 $ 6,204 $ - $ 1,841 $11,417
======== ======== ======= ======= =======
Reserve for Discounts $ 1,947 $ - $15,173 (1) $14,735 $ 2,385
======== ======== ======= ======= =======
YEAR ENDED JANUARY 2, 2005
Allowance for Uncollectible Accounts $ 8,254 $ 3,291 $ - $ 4,491 $ 7,054
======== ======== ======= ======= =======
Reserve for Discounts $ 2,251 $ - $14,751 (1) $15,055 $ 1,947
======== ======== ======= ======= =======
YEAR ENDED DECEMBER 28, 2003
Allowance for Uncollectible Accounts $ 7,963 $ 2,115 $ (217) $ 1,607 $ 8,254
======== ======== ======= ======= =======
Reserve for Discounts $ 2,348 $ - $13,429 (1) $13,526 $ 2,251
======== ======== ======= ======= =======
S-2
(1) Adjustments reflect a reduction in net sales.
Dates Referenced Herein and Documents Incorporated by Reference
2 Subsequent Filings that Reference this Filing
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