March 26, 2003

MORGAN
JOSEPH

Foamex International
Table 1: Security Details
Issuer

Issue

Coupon

Amount

Maturity

Ratings

Price

YTW

Foamex LP/
Foamex Capital

Sr Secd
nd
(2 lien)

10.75%

$300.0mm

04/01/09

B3/B-

65

21.3%

Foamex LP /
Foamex Capital

Senior
Sub Nts

13.50%

$51.6mm

08/15/05

Caa2/CCC+

No quote

NM

Foamex LP/
Foamex Capital

Senior
Sub Nts

9.875%

$148.5mm

02/15/07

Caa2/CCC+

26

NM

NM not meaningful
Source: Company data and Morgan Joseph & Co. Inc. estimates

Highlights: Running Out of Cushion, Hold the Bonds

Summary and Conclusion: Foamexs (FMXI) fourth quarter punctuated a very weak

HIGH YIELD RESEARCH

second half, as EBITDA slumped by two-thirds, reflecting a gross margin squeeze (higher energybased raw material costs), greater operating expenses, and the effects of a soft economy. A meaningful
deterioration in credit quality was evidenced, with full-year EBITDA of $86mm comparing
unfavorably to $135mm in 01, while total debt jumped to $723mm from $635mm. Key financial
barometers were poor, with interest coverage a scant 1.3X for 02 (2.2X 01) and debt leverage of 8.4X
(4.7X 01).
Management professed confidence during yesterdays conference call in its ability to meet a Q1 bank
covenant test of roughly $15mm in EBITDA (up from $10.5mm earned in Q4, down 50% year-overyear), as price increases and cost-cutting take hold. However, it is difficult to foresee that business
conditions (and pricing power) will improve sufficiently to meet the Q2 EBITDA test of $24mm, or
the $101mm for all of 03. Even anticipating some sequential improvement in operating results, at
mid-year Trailing Twelve Month (TTM) EBITDA will likely be at low-ebb, in the $60-$65mm
range. At that juncture the ratio of bank debt to EBITDA will be stretched to the high three times
range (11X total debt!), which may test the patience of bank lenders. More upbeat scenarios would
take into account FMXIs solid track record (EBITDA above $100mm 1998-2001) and prospect of
delevering through an asset sale (the sale of its Carpet Cushion unit for $70mm was canceled in
October). Finally, we note that the market value of total debt is a discounted $469mm, or a much less
onerous 5.4X 02 EBITDA. It is not clear how FMXI could take advantage of this discount. In
summary, we believe that the bonds are fairly valued, with the risks and rewards roughly
balanced at current trading levels.

Background: FMXI is the largest manufacturer and distributor of flexible

polyurethane and advanced polymer foam products in North America. FMXI is nearly twice
as large as its largest competitor, and is believed to have a roughly 25% share of the North
American market. FMXI has 63 facilities in a business where it is important to be located
near customers (due to high freight costs as compared to the cost of foam).

Business (see segment results page 4): Biggest customer is automotive parts and
systems supplier Johnson Controls (17.3% of sales first 9 months, up significantly from 01),
while other major customers include bedding companies Sealy and Simmons, Lear Corp.
(auto parts), Wal-Mart, Home Depot, and Hewlett Packard. FMXIs four segments are
Foam Products (bedding, furniture), Automotive Products (trim, laminates, seating) Carpet
Cushion, and Technical Products (for reservoiring, filtration).
The Disclosure section may be found on the last page of this report.

Howard Goldberg
212-218-3701
HGOLDBERG@ MORGAN JOSEPH. COM

Foamex International

March 26, 2003

Margin Squeeze: The company suffered two major cost increases in 02, 20-25% in mid-year, and an estimated
10-12% in October. The principal chemicals used in the manufacture of foam are TDI and polyol, which are
influenced by oil and natural gas prices, and Dow Chemical is their largest supplier. FMXI was unable to move
quickly enough to raise prices to offset these increases (due to existing contracts, competition, and apparent
management inaction), and suffered sharp gross margin erosion in the second half, to 8.7% from 14% year ago.
SG&A (adjusted for unusual expenses) was also not well managed, leading to 2H EBITDA of only $23mm vs.
$65mm in 01. Several management changes were announced last October, and the company has indicated a
resolve to restore gross margins and cut overhead.

More Covenant Relief May be Necessary: Bank covenants require roughly $15mm in EBITDA to be in
compliance for Q1:03, scaling up ($24mm, $31mm each of Q3 and Q4) to reach $101mm for year.
Management stated yesterday that it was comfortable in its ability to meet the Q1 EBITDA target. It is difficult
to foresee that FMXI can ramp-up quickly enough to reach the $24mm, though sequential progress together with
the prospect of a better industry outlook (such as lower oil prices, consumer confidence driving bedding and
carpeting purchases) could position the company favorably with its lenders.

Cash Needs: Management indicated its cash usage in 03 (about $90mm) will roughly be as follows: $69mm
interest expense, $20mm capex (maximum), and minimal cash taxes. There are no real debt maturities until
Q3:04 (about $35mm). This brief cash flow snapshot suggests further borrowing needs in 03 to the extent
EBITDA does not reach $90mm. However, following poor working capital management in 02 (A/R and
inventory up, A/P down, causing a $77mm usage), it is likely the company can recoup some portion of this
working capital investment and keep bank borrowings relatively flat if EBITDA falls mod estly short of uses.

Management: Management turnover has been high, with several regimes over the last few years. During 02, plans
to sell the carpet division for $70MM (to Leggett & Platt) fell through. Another plan to spin-off the Technical
Products division failed.

Debt Structure: In March 2002, FMXI issued, through its subsidiaries Foamex L.P. and Foamex Capital
Corporation, the $300 million 10.75s senior secured notes. The notes are secured by a second lien on the capital
stock of domestic subsidiaries and 65% of certain foreign subsidiaries and other assets. The companys bank credit
facility ($162mm of term loans and up to $100mm of revolving credit borrowings) ranks ahead of the 10.75s
with a first lien on these assets. Revolver availability at 12/31/02 was stated to be $27.6mm. FMXI is required to
use asset sale proceeds to offer to repurchase the 9.875s before it can offer to repurchase the 13.50s.

Table 2: Market-Adjusted Debt Leverage

Issue

Est at 12/31/02

Price

Market-Adjusted
Debt

Credit facility

$212mm

100%

$212mm

IRBs, other

100%

First priority

$219mm

10.75s

$300mm

1st + 2nd priority

$519mm

13.50s

$ 52mm

30% est.

$ 16mm

9.75s

$148.5mm

26%

$ 39mm

Total debt

$219mm
65%

2.55X

$195mm
$414mm

$469mm

** Based on market -adjusted debt divided by LTM EBITDA of $86mm.

Source: Company reports and Morgan Joseph & Co. Inc. estimates.

Mkt. Adj Debt

Leverage **

4.81X

5.45X

Foamex International

March 26, 2003

Table 3: Foamex International - Financial Summary

Fiscal Periods Ended December 31,

$000

INCOME STATEMENT
Net Sales
Cost of Goods Sold
Gross Profit
Gross Margin
OPERATING COST & EXPENSE
Selling, General & Administrative
Restructuring and Other Charges
TOTAL OPERATING EXPENSE
OPERATING INCOME
EBITDA (excluding restructuring charges )
EBITDA % Change
EBITDA Margin
Interest Expense
Income From Equity Interest in JV
Other expense, net
TOTAL PRETAX INCOME
Total Income Tax Expense
NET INCOME (LOSS) AVAILABLE FOR COMMON

FY99
Actual
1,283,607
1,103,299
180,308
14.0%

1,257,778
1,085,753
172,025
13.7%

76,247
10,491
86,738
93,570
106,334

69,286
6,268
75,554
96,471
140,979
32.6%
11.2%
75,229
1,652
(3,042)
19,852
2,836
17,016

8.3%
72,908
1,516
22,178
2,462
19,716
0.79

Net Income (Loss) Basic Per share

Key Credit Stats
Interest expense
Capital expenditures
Total Debt
EBITDA/Interest
Total Debt / EBITDA

FY00
Actual

71,593
20,080

Debt Structure
Revolving Credit
Term Loan
Other
10.75% Sr Secured Nts 4/01/09 B3/B13.5% Sr Subs 8/15/05 Caa2/CCC+
9.875% Sr Subs 6/15/07 Caa2/CCC+
Total Debt
Bank debt/EBITDA
Bank debt + 10.75s/EBITDA

1.49x

0.68

1Q01
Actual

2Q01
Actual

3Q01
Actual

4Q01
Actual

301,907
260,731
41,176
13.6%

314,261
264,365
49,896
15.9%

326,166
278,757
47,409
14.5%

310,570
268,970
41,600
13.4%

16,923
29
16,952
24,224
32,866

21,055
(77)
20,978
28,918
37,465

21,705
252
21,957
25,452
34,495

20,857
35,864
56,721
(15,121)
30,348

10.9%
17,348
339
(162)
7,053
1,160
5,893

11.9%
16,249
324
(390)
12,603
1,983
10,620

10.6%
15,503
(53)
(1,264)
8,632
1,365
7,267

9.8%
14,173
1,035
(380)
(28,639)
789
(29,428)

0.25

0.45

0.31

(1.24)

FY01
Actual

1Q02
Actual

2Q02
Actual

3Q02
Actual

4Q02
Actual

FY02
Actual

1,252,904
1,072,823
180,081
14.4%

314,062
275,824
38,238
12.2%

345,898
300,512
45,386
13.1%

340,823
310,735
30,088
8.8%

327,311
299,598
27,713
8.7%

1,328,094
1,186,669
141,425
10.7%

80,540
36,068
116,608
63,473
135,174
(4.1%)
10.8%
63,273
1,645
(2,196)
(351)
5,297
(5,648)

17,683
(1,538)
16,145
22,093
30,893
(6.0%)
9.8%
14,305
730
(210)
8,308
971
7,337

21,796

29,774
(3,674)
26,100
3,988
12,609
(63.4%)
3.7%
16,510
386
370
(11,766)
(3,695)
(8,071)

25,491
10,011
35,502
3,950
10,450
(65.6%)
3.2%
18,454
220
(92)
(14,632)
(4,606)
(7,843)

94,744
4,799
99,543
41,882
85,699
(36.6%)
6.5%
66,607
1,734
41
(22,950)
(85,691)
62,741

(0.23) $

0.30

73,894
23,593
664,524
1.91x
4.71x

61,985
22,482
634,705
2.18x
4.70x

14,005

145,904
248,825
13,487
0
106,308
150,000
664,524
2.80x
2.80x

125,000
245,616
9,574
0
104,515
150,000
634,705
2.74x
2.74x

0
162,206
8,904
300,000
104,067
150,000
725,177

15,064
173,641
89,430
128,852

34,170
187,044
103,971
139,401

Balance Sheet Items

Cash
A/R
Inventory
A/P

Source: Company reports and Morgan Joseph & Co. Inc. estimates

2.21x

21,796
23,590
31,747
(15.3%)
9.2%
17,338
398
(27)
6,623
993
5,630
$

0.23

17,038

1.86x

(0.33) $

16,210

0.78x

0
162,188
8,083
300,000
54,453
148,500
673,224

(0.67)

18,154
3700
0.58x

65,319
15600
722,753 e
1.31x
8.43x
est below
51,800
161,000
7,000
300,000
54,453
148,500
722,753 e
2.48x
5.98x

191,500
98,000
87,400

Foamex International

March 26, 2003

Table 4: Foamex International Segment Data

Fiscal Periods Ended December 31,
Thousands of Dollars Except Per Share Amounts
FY00
1Q01
2Q01
3Q01
4Q01
Actual
Actual
Actual
Actual
Actual
Foam Products
Revenue
519,197 126,901 122,586 132,380 117,801
Operating Income
55,001
13,715
17,302
21,578
13,717
Depreciation & Amortization
17,813
3,923
3,735
4,251
3,823
EBITDA
72,814
17,638
21,037
25,829
17,540
EBITDA % Revenues
14.0%
13.9%
17.2%
19.5%
14.9%

FY01
Actual

1Q02
Actual

2Q02
Actual

3Q02
Actual

4Q02
Actual

FY02
Est.

499,668 117,482 119,129 121,773 112,600

66,312
9,946
11,948
1,070
900
15,732
4,071
3,602
3,347
3,000
82,044
14,017
15,550
4,417
3,900
16.4%
11.9%
13.1%
3.6%
3.5%

470,984
23,864
14,020
37,884
8.0%

Carpet Cushion Products

Revenue
Operating Income
Depreciation & Amortization
EBITDA
EBITDA % Revenues

256,439
2,035
7,742
9,777
3.8%

53,684
(1,368)
1,924
556
1.0%

57,534
(797)
2,161
1,364
2.4%

61,145
(3,173)
2,045
(1,128)
-1.8%

58,602
(1,493)
2,051
558
1.0%

230,965
(6,831)
8,181
1,350
0.6%

59,700
(3,600)
1,600
(2,000)
-3.4%

234,038
(12,567)
6,718
(5,849)
-2.5%

Automotive Products
Revenue
Operating Income
Depreciation & Amortization
EBITDA
EBITDA % Revenues

342,386
22,235
5,785
28,020
8.2%

84,511 100,858
4,997
7,547
1,217
1,121
6,214
8,668
7.4%
8.6%

95,683
4,933
1,302
6,235
6.5%

96,701
3,710
1,351
5,061
5.2%

377,753 104,381 123,750 120,151 118,400

21,187
9,003
8,019
4,675
3,700
4,991
1,094
873
1,046
1,000
26,178
10,097
8,892
5,721
4,700
6.9%
9.7%
7.2%
4.8%
4.0%

466,682
25,397
4,013
29,410
6.3%

Technical Products
Revenue
Operating Income
Depreciation & Amortization
EBITDA
EBITDA % Revenues

106,697
28,888
2,663
31,551
29.6%

27,781
7,914
734
8,648
31.1%

24,357
6,113
873
6,986
28.7%

29,518
4,426
821
5,247
17.8%

29,387
4,431
884
5,315
18.1%

111,043
22,884
3,312
26,196
23.6%

30,929
6,163
719
6,882
22.3%

33,460
7,661
573
8,234
24.6%

30,500
2,412
930
3,342
11.0%

29,200
4,100
800
4,900
16.8%

124,089
20,336
3,022
23,358
18.8%

Other
Revenue
Operating Income
Depreciation & Amortization
EBITDA

33,059
(11,688)
2,585
(9,103)

9,030
(1,034)
476
(558)

8,926
(1,247)
410
(837)

7,440
(2,312)
425
(1,887)

8,079
1,500
461
1,961

33,475
(3,093)
1,772
(1,321)

8,471
(25)
503
478

9,125
(2,814)
1,317
(1,497)

7,294
580
552
1,132

7,400
500
500
1,000

340,823
3,988
7,514
11,502

327,300
5,600
6,900
12,500

Total
Revenue
1,257,778 301,907
Operating Income
96,471
24,224
Depreciation & Amortization
36,588
8,274
EBITDA
133,059
32,498
EBITDA (excluding charges + equity 140,979
interest in JV

314,261
28,918
8,300
37,218

Source: Company reports and Morgan Joseph & Co. Inc. estimates.

326,166
25,452
8,844
34,296

310,570
21,865
8,570
30,435

1,252,904
100,459
33,988
134,447

52,799
(2,994)
1,893
(1,101)
-2.1%

314,062
22,093
8,280
30,373

60,434
(1,224)
1,586
362
0.6%

345,898
23,590
7,951
31,541

61,105
(4,749)
1,639
(3,110)
-5.1%

32,290
(1,759)
2,872
1,113

1,328,083
55,271
30,645
85,916

High Yield Department

600 FIFTH AVENUE, 18TH FLOOR
NEW YORK, NY 10020
TELEPHONE 212.218.3701

FACSIMILE

212.218.3705

WWW .MORGANJOSEPH .COM

Sales
NAME

TITLE

E-MAIL

MATTHEW STEDMAN

MANAGING DIRECTOR ,
DIRECTOR OF SALES

MSTEDMAN @MORGANJOSEPH .COM

GREGORY BEHLING

VICE PRESIDENT, SALES

GBEHLING@MORGANJOSEPH .COM

LAURENCE BERGER

SENIOR VICE PRESIDENT, SALES

LBERGER @ MORGANJOSEPH .COM

MARK FEIN

SENIOR VICE PRESIDENT, SALES

MFEIN@MORGANJOSEPH .COM

PAUL FOLEY

SENIOR VICE PRESIDENT, SALES

PFOLEY @MORGANJOSEPH .COM

CHARLES PEOS

SENIOR VICE PRESIDENT, SALES

CPEOS@ MORGANJOSEPH .COM

DAVID WEISS

SENIOR VICE PRESIDENT, SALES

DWEISS@MORGANJOSEPH .COM

NAME

TITLE

E-MAIL

JAMES TUMULTY

MANAGING DIRECTOR ,
DIRECTOR OF TRADING

JTUMULTY @MORGANJOSEPH .COM

MICHAEL CAPPA

SENIOR VICE PRESIDENT, TRADING

MCAPPA @MORGANJOSEPH .COM

KERRY STEIN

SENIOR VICE PRESIDENT, TRADING

KSTEIN@ MORGANJOSEPH .COM

TODD SEPSICK

VICE PRESIDENT, TRADING

TSEPSICK@MORGANJOSEPH .COM

NAME

TITLE

E-MAIL

HOWARD GOLDBERG

MANAGING DIRECTOR ,
DIRECTOR OF RESEARCH

HGOLDBERG@ MORGANJOSEPH .COM

JOSEPH GALZERANO

SENIOR VICE PRESIDENT, RESEARCH

JGALZERANO@MORGANJOSEPH .COM

DAN TRAVERS

SENIOR VICE PRESIDENT, RESEARCH

DTRAVERS@ MORGANJOSEPH .COM

JOSEPHINE SHEA

VICE PRESIDENT, RESEARCH

JSHEA@MORGANJOSEPH .COM

Trading

Research

Administration
NAME

E-MAIL

VANESSA DOOLEY

VDOOLEY @MORGANJOSEPH .COM

I, Howard Goldberg, the author of this research report, certify that the views expressed in this report accurately reflect my
personal views about the subject securities and issuers, and no part of my compensation was, is, or will be directly or
indirectly tied to the specific recommendations or views contained in this research report.
The information contained herein is based upon sources believed to be reliabl e but is not guaranteed by us and is not
considered to be all-inclusive. It is not to be construed as an offer or the solicitation of an offer to sell or buy the securities
mentioned herein. Morgan Joseph & Co. Inc., its affiliates, shareholders, officers, staff, and/or members of their families, may
have a position in the securities mentioned herein, and, before or after your receipt of this report, may make or recommend
purchases and/or sales for their own accounts or for the accounts of other customers of the Firm from time to time in the
open market or otherwise. Opinions expressed are our present opinions only and are subject to change without notice.
Morgan Joseph & Co. Inc. is under no obligation to provide updates to the opinions or information provi ded herein. Additional
information is available upon request.
Morgan Lewins & Co. Inc. has managed or co-managed a public offering of securities or received compensation for
investment banking services from the subject company within the past 12 months.
Research analyst compensation is dependent, in part, upon investment banking revenues received by Morgan Joseph & Co.
Inc.
Morgan Joseph & Co. Inc. may receive or intends to seek compensation for investment banking services from the subject
company.
All prices are indications only, and are subject to change without notice. Prices are informational in nature only, and are not
to be construed as an offer or solicitation with respect to the purchase or sale of any security or debt referred to herein.
Investors in securities referenced herein should understand that statements regarding future prospects might not be realized.
Investors should note that income from such securities, if any, may fluctuate and that each securitys price or value may rise
or fall. Accordingly, investors may receive fewer funds than originally invested. Past performance is not necessarily a guide
to future performance.

Copyright 2003 by Morgan Joseph