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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 December 28, 2003
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: 0-22624
FOAMEX INTERNATIONAL INC.
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(Exact Name of registrant as Specified in its Charter)
Delaware 05-0473908
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1000 Columbia Avenue, Linwood, PA 19061
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (610) 859-3000
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Securities registered pursuant to Section 12(b) of the Act: None
----
Securities registered pursuant to Section 12(g)
of the Act: Common Stock, par value $.01 per
share, which is traded through
the National Association of
Securities Dealers, Inc.
National Market System.
Indicate by check mark whether the registrant (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 the
registrant 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. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Act of 1934). YES X NO
--- ---
The aggregate market value of the voting stock held by nonaffiliates of the
registrant as of June 27, 2003, was $28.9 million.
The number of shares outstanding of the registrant's common stock as of
February 27, 2004 was 24,443,463.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's definitive proxy statement to be filed within 120
days pursuant to Rule. 12b-23 of the Securities and Exchange Act of 1934, as
amended.
FOAMEX INTERNATIONAL INC.
INDEX
Page
Part I
Item 1. Business 3
Item 2. Properties 10
Item 3. Legal Proceedings 10
Item 4. Submission of Matters to a Vote of Security Holders 12
Part II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters 12
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 30
Item 9a. Controls and Procedures 31
Part III
Item 10. Directors and Executive Officers of the Registrant 31
Item 11. Executive Compensation 31
Item 12. Security Ownership of Certain Beneficial Owners
and Management 31
Item 13. Certain Relationships and Related Transactions 31
Item 14. Principal Accounting Fees and Services 31
Part IV
Item 15. Exhibits, Financial Statement Schedules
and Reports on Form 8-K 31
Signatures 38
The Registrant will furnish a copy of any exhibit to this Annual Report on Form
10-K upon the payment of a fee equal to the Registrant's reasonable expense in
furnishing such exhibit.
2
PART I
ITEM l. BUSINESS
General
Foamex International Inc. (referred to in this document as the "Company,
we, us and/or our") is engaged primarily in the manufacturing and distribution
of flexible polyurethane and advanced polymer foam products. As of December 28,
2003, our operations are conducted through our wholly-owned subsidiary, Foamex
L.P., and through Foamex Canada Inc., Foamex Latin America, Inc. and Foamex
Asia, Inc., which are wholly-owned subsidiaries of Foamex L.P. We were
incorporated in 1993 to act as a holding company for Foamex L.P.
Throughout this Annual Report on Form 10-K, we incorporate by reference
information from parts of other documents filed with the Securities and Exchange
Commission (the "SEC"). The SEC allows us to disclose important information by
referring to it in this manner, and you should review that information.
We make our Annual Report on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K and proxy statements for our annual shareholders'
meeting, as well as any amendments to those reports, available free of charge
through our web site as soon as reasonably practicable after we electronically
file that material with, or furnish it to, the SEC. You can learn more about us
by reviewing our SEC filings on our web site. Our SEC reports, available through
www.sec.gov which is maintained by the SEC, can be accessed through the investor
relations' page of our web site, which is located at
www.foamex.com/investor.php.
Segments
We are the largest manufacturer and distributor of flexible polyurethane
and advanced polymer foam products in North America. We have numerous
manufacturing facilities dedicated to specific product lines as well as
facilities with the capability to support multiple product lines. Each of our
business segments has a customer base that is significantly different from the
other segments. Our senior executives direct sales efforts for each of our
business segments.
Our five business segments are described below.
Foam Products
Our foam products are distributed directly from manufacturing facilities
and indirectly through independent fabricator distributors. These foams are used
by the bedding industry in quilts, toppers, cores and border rolls for
mattresses. In the furniture industry, they are generally used for upholstered
seating products and in the retail industry, for a broad range of products, such
as mattress overlay pads, leisure furniture, futons and pillows. Foam products
are generally sold in large volumes on a regional basis because of high shipping
costs.
Our bedding products are sold to mattress manufacturers. We also supply
cut-to-size seat cushions, back cushions and other pieces to the furniture
industry. Furniture foams are sold directly to manufacturers as well as through
distributors. The consumer products group sells therapeutic sleep products such
as mattress pads and bed pillows for the health care and consumer markets and a
broad line of home furnishing products to retailers throughout North America.
The development and introduction of value-added products continues to be a
priority including products incorporating Reflex(R) and viscoelastic or "memory"
foams for the bedding industry, which maintain their resiliency better than
other foams and materials. Reflex(R) materials include cushion wraps and cushion
cores and are advanced polymer cushioning products designed to improve comfort,
quality and durability in upholstered furniture and bedding products. Reflex(R)
was created using patented VPF(SM) manufacturing technology.
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Carpet Cushion Products
We manufacture carpet cushion products, which include rebond, prime, felt
and rubber carpet padding. Prime carpet padding is made from virgin polyurethane
foam buns. 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 fiber operation incorporates both mechanical and chemical
bonding techniques to produce high-end padding from virgin and recycled fibers.
We produce high-end rubber carpet padding utilizing synthetic rubber.
Automotive Products
We are one of the largest suppliers of polyurethane foam products to the
North American automotive industry. Our product lines include: foam rolls and
flame-laminated composites, to improve comfort and provide pleasing appearance
in seat covers and other interior soft-trim applications; thermoformable foams,
to provide structure and shape in various substrate applications; acoustical
foams, to reduce noise and improve sound quality in the vehicle; barrier foam
products, which allow our customers to more efficiently process components with
low-pressure injection-molding or foam-in-place manufacturing methods; molded
energy-absorbing foams, to enhance occupant safety in vehicle crash situations;
and molded seating cushions.
We supply our product lines through a range of tiers in the automotive
industry supply chain, varying greatly depending on the specific application and
the original equipment manufacturer ("OEM"). Most frequently, we supply to Tier
1 system integrators, which in turn provide components and systems to the OEMs.
In conjunction with these efforts, we maintain direct contact with OEMs for
material specification development, appearance approvals, and new product
development initiatives.
We maintain our position in the automotive industry through a continuing
focus on new product development, flexible and efficient manufacturing
capabilities, and outstanding quality and service.
Technical Products
We are one of the foam industry's prime innovators and producers of foams
used for industrial, specialty, consumer and transportation applications, which
we refer to as "Technical Products." Technical Products consist of reticulated
foams and other custom polyester and polyether foams specially formulated to
meet the needs of technical customers. Reticulation is the thermal or chemical
process used to remove the membranes from the interconnecting cells within foam.
This leaves a porous, skeletal structure allowing for the free flow of gases
and/or liquids. Other post processes such as felting, coating or laminating to
other foams or materials give these composites specific properties.
Reticulated foams particularly are well suited for fluid management such as
filtration, reservoiring and sound attenuation; non-reticulated foams are used
for energy management applications such as sound absorption and gasketing.
Industrial applications include carburetors, computer cabinets, inkpad
reservoirs, high-speed inkjet printers and speaker grills. Medical applications
include oxygenators for cardiopulmonary surgery, instrument holders for
sterilization, pre-op scrubbers impregnated with anti-microbial agents and foams
used in x-rays. Other Technical Products have unique characteristics such as
flame retardancy and fluid absorption. Additional products sold within this
group include foams for refrigerated supermarket produce counters, mop heads,
paint brushes and cosmetic applications.
Due to the highly specialized nature of most Technical Products, our
research staff works with customers to design, develop and manufacture each
product to specification. In addition, we advertise in trade journals and
related media to attract customers and, more generally, to increase an awareness
of our capabilities for Technical Products.
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Other
Other consists primarily of certain manufacturing operations in Mexico
City, corporate expenses not allocated to the other business segments and
restructuring, impairment and other charges (credits).
Marketing and Sales
Foam Products sells directly to major bedding and furniture manufacturers
and also through third party independent fabricators. In addition, we
manufacture and distribute foam-based consumer products such as futons, pillows,
mattress pads and children's furniture to retail chains. Our foam-based consumer
products sales efforts are primarily regionally based. The key strategic
elements supporting growth in these areas are a focus on marketing and sales
efforts, high quality, cost-competitive and innovative products and low freight
costs through optimal plant location. Plant locations are critical in this
regionalized business where the transportation cost typically comprises a
significant portion of product cost.
Carpet Cushion Products sells carpet padding to distributors and to major
home product and floor covering retail chains.
Our Automotive Products customer base includes all of the major Tier 1
interior system integrators. We compete for new business both at the beginning
of development of new models and upon the redesign of existing models. Once a
foam producer has been designated to supply parts for a new model program, the
foam producer usually produces parts for the life of the program. Competitive
factors in the market include product quality and reliability, cost and timely
service, technical expertise and development capability, new product innovation
and customer service.
We market our Technical Products through a network of independent
fabrication and distribution companies in North America, the United Kingdom and
Asia. These fabricators or distributors often further process or finish
Technical Products to meet the specific needs of end users. Our specialty and
technical foams service unique end user requirements and are generally sold at
relatively high margins. This business is characterized by a diversity and
complexity of both customers and applications.
International Operations
Our international operations are located in Canada, Mexico and Asia. We
operate four manufacturing facilities in Canada to service our cushioning and
automotive customers and have five facilities in Mexico serving the automotive
and cushioning industries. Four of the Mexican facilities are located within the
Mexican free trade zones close to the U.S. border and primarily service
automotive customers. Our Mexico City facility services both automotive and foam
fabrication customers.
We participate in a joint venture with fabrication facilities in Singapore
and Thailand. In December 2001, we increased our non-controlling equity interest
in the joint venture to 70%. The joint venture installed its first foam pourline
during 2003. This pourline, which was entirely financed by the joint venture
entity, will reduce 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 16.3% of our net sales in 2003, 17.3% of our net
sales in 2002, and 15.7% of our net sales in 2001. 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 34.7% of our net
sales in 2003, 33.8% of our net sales in 2002, and 35.0% of our net sales in
2001. The loss of any one of these customers could have a material adverse
effect on our business.
5
Manufacturing and Raw Materials
Our manufacturing and distribution facilities are strategically located to
service our major customers because the high freight cost in relation to the
cost of the foam product generally results in distribution being most
cost-effective within a 200 to 300 mile radius. During 2003, we closed certain
carpet padding operations, a foam pouring operation, and a foam fabrication
operation.
Our fabrication process involves cutting foam buns into various shapes and
sizes to meet customer specifications. Fabricated foam is sold to customers and
is utilized by us to produce our foam-based consumer products. Scrap foam, a
byproduct of foam production and fabrication, is used to produce rebond carpet
padding.
Raw materials account for a significant portion of our manufacturing costs.
The two principal chemicals used in the manufacture of flexible polyurethane
foam are toluene diisocyanate, or "TDI," and polyol. 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,
especially a supplier of TDI and/or polyol. There are a limited number of major
suppliers of TDI and polyol. Although we have not experienced a significant
shortage of available materials, a disruption in our ability to obtain TDI
and/or polyol that continues for a significant period of time could cause us to
suspend our manufacturing operations, which could have a material adverse effect
on our business and results of operations.
The prices of TDI and polyol have historically been cyclical and volatile.
The prices of these raw materials are influenced by demand, manufacturing
capacity, oil prices and the current geopolitical instability and its impact on
oil production and prices. We experienced increases in the average prices of raw
materials from major chemical manufacturers in the year ended December 28, 2003
from the prior year. We attempt to offset raw material price increases through
selling price increases and manufacturing process efficiencies, but we were only
partially able to do so in the year ended December 28, 2003. 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 December 28, 2003, we employed approximately 5,100 persons.
Approximately 1,300 of these employees are located outside the United States and
approximately 1,700 employees are covered by collective bargaining agreements
with labor unions. These agreements expire on various dates through 2006. We
consider relations with our employees to be good.
Competition
The flexible polyurethane foam industry is highly competitive with price,
quality and service being significant competitive factors. Our competitors in
the polyurethane foam industry include E. R. Carpenter Company, Leggett & Platt
Incorporated, Hickory Springs Manufacturing Company, Vitafoam, Inc., Flexible
Foam Products, Inc., Future Foam, Inc. 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
6
that our competitive position is dependent on 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 $3.6 million for 2003, $4.8 million for 2002 and $3.1
million for 2001.
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
VPFSM manufacturing process. Recticel and affiliates of Recticel are
shareholders of Foamex International. Foamex L.P., Recticel and their affiliates
have a royalty-free license to use technology developed by the Swiss
corporation. We and Recticel have exchanged know-how, trade secrets, engineering
and other data, designs, specifications, chemical formulations, technical
information, market information and drawings which are necessary or useful for
the manufacture, use or sale of foam products. We anticipate that we will
continue to do so in the future.
Risk Factors
In addition to the other information in this Annual Report on Form 10-K,
investors should carefully consider the following factors about us. Certain
statements in "Risk Factors" are forward-looking statements. See
"Forward-Looking Information."
Our substantial debt could impair our financial condition.
We continue to be highly leveraged and have substantial debt service
obligations. As of December 28, 2003, our total long-term debt and revolving
credit borrowings were approximately $745.6 million and our shareholders'
deficiency was approximately $203.1 million. As of December 28, 2003, we had
approximately $46.8 million in revolving loan availability and approximately
$20.9 million in outstanding letters of credit. We may also incur additional
debt in the future, subject to certain limitations contained in our debt
instruments.
The degree to which we are leveraged could have important consequences. For
example:
o our ability to obtain additional financing in the future for working
capital, capital expenditures, acquisitions, general corporate purposes or
other purposes may be limited;
o a significant portion of our cash flow from operations must be dedicated to
the payment of interest and principal on our debt, which reduces the funds
available for operations;
o some of our debt is and will continue to be at variable rates of interest,
which may result in higher interest expense in the event of increases in
interest rates or inability to achieve certain financial conditions; and
o our debt agreements contain, and any agreements to refinance our debt
likely will contain, financial and restrictive covenants, and our failure
to comply with them may result in an event of default which, if not cured
or waived, could have a material adverse effect on us.
If we are unable to comply with our financial covenants, our bank lenders could
cause all amounts outstanding under the Senior Secured Credit Facility and
Secured Term Loan to be due and payable immediately.
On August 18, 2003, Foamex L.P. and its bank lenders executed a $240.0
million Senior Secured Credit Facility (the "240.0 Million Senior Secured Credit
Facility") and an $80.0 million Secured Term Loan with another lender (the
"Secured Term Loan"), which, among other things, requires Foamex L.P. to meet a
financial covenant. Under the Senior Secured Credit Facility and the Secured
Term Loan, Foamex L.P. is subject to a fixed charge
7
coverage ratio, as defined, of 1.00. If we are unable to comply with the
financial covenant, the bank lenders could cause all amounts outstanding under
the $240.0 Million Senior Secured Credit Facility and Secured Term Loan to be
due and payable immediately. In addition, any event of default or declaration of
acceleration under one debt instrument could also result in an event of default
under one or more of Foamex L.P.'s other debt instruments, which unless cured or
waived, would have a material adverse effect on us and could impair our ability
to continue as a going concern.
We may not generate sufficient taxable income to utilize our deferred income tax
assets.
We have net deferred income tax assets aggregating approximately $123.3
million that primarily represent the benefit of future tax deductions and net
operating loss carryforwards available to offset future taxable income in the
U.S.
If we are unable to generate sufficient taxable income to utilize the net
operating loss carryforwards on a timely basis, some or all of our deferred tax
assets will be required to be written off through a charge to operations in
future years. Our net operating loss carryforwards begin to expire in the year
2010. We evaluate the realizability of deferred tax assets on an annual and
quarterly basis or if there is a significant change in circumstances that may
cause a change in our judgment about realizability of deferred tax assets. Any
valuation allowance that may be required to be established as a result of this
evaluation process could have a material adverse effect on our financial
position and results of operations.
We may not be able to generate sufficient cash flow to meet our debt service
obligations.
Our ability to generate sufficient cash flow from operations to make
scheduled payments on our debt service obligations will depend on our future
financial performance, which will be affected by a range of economic,
competitive and business factors, many of which are outside of our control. Our
annual debt service obligations will increase by $2.3 million per year for each
1% increase in interest rates, based on the balance of variable rate debt
outstanding as of December 28, 2003. Our estimated debt service obligation for
2004 is $81.1 million, based on levels of debt and interest rates in effect at
December 28, 2003. In addition, Foamex L.P.'s 13 1/2% senior subordinated notes
(the "13 1/2% Senior Subordinated Notes"), currently in the face amount of $51.6
million, are due on August 15, 2005. If we do not generate sufficient cash flow
from operations to satisfy our debt service obligations, we may have to
undertake alternative financing plans, such as refinancing or restructuring our
debt, selling assets, reducing or delaying capital investments or seeking to
raise additional capital. We may not be able to refinance or restructure our
debt or sell assets on a timely basis, on acceptable terms or at all.
Furthermore, the proceeds of any refinancing, restructuring or asset sale may
not generate sufficient cash flow to meet our debt service obligations. In
addition, we may not be able to obtain additional financing on acceptable terms,
if at all, or may not be permitted to obtain additional financing under the
terms of our various debt instruments then in effect. Our inability to generate
sufficient cash flow to satisfy our debt service obligations, or to refinance
our obligations on commercially reasonable terms, would have a material adverse
effect on our business, financial condition and results of operations.
We may incur more debt, which could exacerbate the risks described above.
We and our subsidiaries may be able to incur substantial additional
indebtedness in the future. The $240.0 Million Senior Secured Credit Facility,
Secured Term Loan and the indentures relating to Foamex L.P.'s 10 3/4% senior
secured notes due 2009, 9 7/8% Senior Subordinated Notes due 2007 (the "9 7/8%
Senior Subordinated Notes") and 13 1/2% Senior Subordinated Notes due 2005
restrict Foamex L.P. and its subsidiaries in incurring additional indebtedness,
but do not fully prohibit Foamex L.P. and its subsidiaries from doing so. If new
debt is added to our and our subsidiaries' current debt levels, the related
risks, including those described above, that we and they now face could
intensify, which could have a material adverse effect on us.
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The price and availability of raw materials account for a significant portion of
our manufacturing costs. We have experienced significant increases in raw
material costs and may continue to do so.
The two principal chemicals used in the manufacture of flexible
polyurethane foam are toluene diisocyanate, or "TDI," and polyol. The prices of
TDI and polyol are influenced by demand, manufacturing capacity and oil and
natural gas prices. Historically, the price of raw materials has been cyclical
and volatile and our principal suppliers of raw materials used in the
manufacture of flexible polyurethane foam have significantly increased the price
of raw materials several times over the past several years.
We attempt to offset raw material price increases through selling price
increases and manufacturing process efficiencies, but we were not able to fully
do so in 2003. Our suppliers of TDI and polyol, as well as our other suppliers,
may increase raw material prices in the future and we may not be able to
implement additional selling price increases to fully offset raw material cost
increases. This could have a material adverse effect on our business, financial
condition and results of operations.
We depend on a limited number of suppliers of TDI and polyol.
There are a limited number of major suppliers of TDI and polyol. Although
we have not experienced a significant shortage of available materials, a
disruption in our ability to obtain TDI and/or polyol that continues for a
significant period of time could cause us to suspend our manufacturing
operations, which could have a material adverse effect on our business and
results of operations.
We must effectively manage our other operating expenses.
In addition to our ability to effectively increase selling prices in
response to raw material cost increases, we must manage and control our other
operating expenses. If we are unable to achieve reductions in other operating
expenses and in our selling, general and administrative expenses, this could
have a material adverse effect on our business, financial condition and results
of operations.
We rely on a few large customers for a significant portion of our net sales.
A few of our customers are material to our business and operations. Sales
to our five largest customers together accounted for approximately 34.7% of our
net sales in 2003, 33.8% of our net sales in 2002, and 35.0% of our net sales in
2001. Sales to Johnson Controls, our largest customer, accounted for 16.3% of
our net sales in 2003, 17.3% of our net sales in 2002, and 15.7% of our net
sales in 2001. The loss, or a substantial decrease in the amount, of purchases
by any of our major customers could adversely affect our financial position and
results of operations.
Our customers' financial condition may have a material adverse effect on our
business, financial condition and results of operations.
In the ordinary course of business, we extend trade credit to our
customers. In the event our customers, in the aggregate or certain significant
customers, are not able to pay us for our products on a timely basis or at all,
this could have a material adverse effect on our business, financial condition
and results of operations.
We could incur significant costs if we are unable to renew leases for certain of
our manufacturing facilities.
We lease certain of our foam pouring facilities. In the event we are unable
to renew our leases at these facilities, we could incur significant costs in
relocating our manufacturing operations. Such costs could include the actual
removal and relocation of equipment and inventory, the lost production time
associated with the transition, relocation of certain key employees, training
employees at the relocated manufacturing facilities, and additional costs for
preparing the new locations for operations. In addition, we may not be able to
secure the required permits at an optimal location. If we were unable to renew a
lease and were forced to relocate, the costs associated with such relocation
could have a material adverse effect on our business, financial condition and
results of operations.
9
We are subject to extensive federal, state, local and foreign environmental laws
and regulations.
Our past and present business operations and the past and present ownership
and operation of our real property are subject to extensive and changing
federal, state, local and foreign environmental laws and regulations, including
those relating to the use, handling, storage, discharge and disposal of
hazardous substances, the discharge or emission of materials into the
environment and the remediation of environmental contamination. We are currently
remediating soil and groundwater contamination in excess of state standards at
several of our current and former facilities. Further, we are currently
designated a Potentially Responsible Party, or "PRP," by the United States
Environmental Protection Agency, or "EPA", or by state environmental agencies or
by other PRPs relating to 11 sites. We have accrued our estimated costs for
remediation of these sites. If there are additional sites or our estimates are
not correct, there could be a material adverse effect on our financial condition
and results of operations. We cannot predict what environmental legislation or
regulations will be enacted in the future, how existing or future laws or
regulations will be administered or interpreted or what environmental conditions
may be found to exist on our properties. Compliance with more stringent laws or
regulations, as well as more vigorous enforcement policies of the regulatory
agencies or stricter interpretation of existing laws, and discovery of new
conditions may require us to make additional expenditures, which may be
material.
Our business is cyclical.
The polyurethane foam business is cyclical to the extent that our customers
are in cyclical industries. We are especially subject to the cyclical nature of
the automotive, housing, technology and furniture and bedding industries. A
protracted downturn in the businesses of our customers in any of these
industries, either simultaneously or sequentially, could have a material adverse
effect on our results of operations.
ITEM 2. PROPERTIES
As of December 28, 2003, we maintained 56 manufacturing and distribution
facilities. Total floor space in use at our 17 owned manufacturing and
distribution facilities is approximately 3.4 million square feet and total floor
space in use at our 39 leased manufacturing and distribution facilities is
approximately 4.5 million square feet. Forty-seven of these facilities are
located throughout 33 cities in the United States, four facilities are located
in Canada, and five facilities are located in Mexico. We have approximately 1.9
million square feet of idle space of which approximately 1.1 million is leased.
The lease for one of our foam pouring facilities expires in 2004. It is
conceivable that this lease may not be extended or renewed. Like any other
lease, if we are unable to extend or renew this lease, the costs associated with
a relocation could have a material adverse effect on our business, financial
condition, cash flow and results of operations. Except as described above, we do
not anticipate any problem in renewing or replacing any of the leases expiring
in 2004.
We maintain administrative offices in Linwood, Pennsylvania and New York,
New York.
Property information by business segment is not reported because many of
our facilities produce products for multiple business segments.
ITEM 3. LEGAL PROCEEDINGS
Litigation--Breast Implants
As of February 24, 2004, Foamex L.P. and Trace International Holdings, Inc.
("Trace") were two of multiple defendants in 529 actions filed on behalf of
approximately 652 recipients of breast implants in various United States courts
and one Canadian provincial court, some of which allege substantial damages, but
most of which allege unspecified damages for personal injuries of various types.
Three of these cases seek to allege claims on behalf of all breast implant
recipients or other allegedly affected parties, but no class has been approved
or certified by the courts. During 1995, we, Foamex L.P. and Trace were granted
summary judgments and dismissed as defendants from all cases in the federal
courts of the United States and the state courts of California. Appeals for
these
10
decisions were withdrawn and the decisions are final. The number of pending
cases has steadily declined over the last several years from a peak of 3,486
cases on behalf of approximately 5,766 individuals. Despite the 1995 Summary
Judgment, some cases have been filed against Foamex L.P. and Trace in federal
courts. These have been dismissed and, in many cases, the actions were re-filed
in state courts. No cases relating to breast implants are pending against Foamex
L.P. or Trace in federal courts at this time. None of Foamex L.P., we, or Trace
nor any of our carriers has paid to settle any claims relating to breast
implants, and no judgment has ever been entered against Foamex L.P., Trace, or
us or any of our carriers in respect of these matters.
Although breast implants do not contain foam, certain silicone gel implants
were produced using a polyurethane foam covering fabricated by independent
distributors or fabricators from bulk foam purchased from us or from Trace.
Neither we nor Trace recommended, authorized, or approved the use of foam for
these purposes. We are also indemnified by Trace for any such liabilities
relating to foam manufactured prior to October 1990. Trace's insurance carrier
has continued to pay our litigation expenses after Trace's filing of a petition
for relief under the Bankruptcy Code on July 21, 1999. Trace's insurance
policies continue to cover certain liabilities of Trace, but if the limits of
those policies are exhausted, Trace will be unable to continue to provide
additional indemnification. While it is not feasible to predict or determine the
outcome of these actions, based on management's present assessment of the merits
of pending claims, without taking into account the indemnification provided by
Trace, the coverage provided by Trace's and our liability insurance and
potential indemnity from the manufacturers of polyurethane covered breast
implants, management believes that it is not reasonably possible that the
disposition of the matters that are pending or that may reasonably be
anticipated to be asserted will result in a loss that is material to our
consolidated financial position, results of operations or cash flows. If
management's assessment of our liability relating to these actions is incorrect,
these actions could have a material adverse effect on our financial position,
results of operations and cash flows.
Litigation--Other
We and our subsidiaries are party to various lawsuits, both as defendant
and plaintiff, arising in the normal course of business. It is the opinion of
management that the disposition of these lawsuits will not, individually or in
the aggregate, have a material adverse effect on our financial position or
results of operations. If management's assessment of the liability relating to
these actions is incorrect, these actions could have a material adverse effect
on our consolidated financial position, results of operations and cash flows. As
of December 28, 2003, we have accrued approximately $1.1 million for litigation,
claims and other legal matters in addition to the environmental matters
discussed below.
Environmental and Health and Safety
We are subject to extensive and changing federal, state, local and foreign
environmental laws and regulations, including those relating to the use,
handling, storage, discharge and disposal of hazardous substances, the discharge
or emission of materials into the environment, and the remediation of
environmental contamination, and as a result, are from time to time involved in
administrative and judicial proceedings and inquiries relating to environmental
matters. As of December 28, 2003, we had accruals of approximately $2.5 million
for environmental matters, including approximately $2.3 million related to
remediating and monitoring soil and groundwater contamination and approximately
$0.2 million relating to PRP sites and other matters.
On August 31, 2002, Environment Canada, the Canadian environmental
regulatory agency, finalized a rule which would require flexible polyurethane
foam manufacturing operations to reduce methylene chloride (dichloromethane) air
emissions. The rule establishes a 50.0% reduction in methylene chloride
emissions by December 1, 2004 and 100.0% reductions by January 1, 2007. This
standard will not require us to make material expenditures for our Canadian
plants.
We have reported to the appropriate state authorities that we have found
soil and/or groundwater contamination in excess of state standards at certain
locations. Seven sites are currently in various stages of investigation or
remediation. Accordingly, the extent of contamination and the ultimate liability
is not known with certainty for all sites. During 2000, we reached an
indemnification agreement with the former owner of the Morristown, Tennessee
facility. The agreement allocates the incurred and future remediation costs
between the
11
former owner and us. The estimated allocation of future costs for the
remediation of this facility is not significant, based on current known
information. The former owner was Recticel Foam Corporation, a subsidiary of
Recticel.
We have either upgraded or closed all underground storage tanks at our
facilities in accordance with applicable regulations.
The Comprehensive Environmental Response, Compensation and Liability Act,
or "CERCLA," and comparable state laws impose liability without fault for the
costs of cleaning up contaminated sites on certain classes of persons that
contributed to the release of hazardous substances into the environment at those
sites, for example, by generating wastes containing hazardous substances which
were disposed at such sites. We are currently designated as a PRP by the EPA or
by state environmental agencies or other PRPs, pursuant to CERCLA or analogous
state statutes, with respect to 11 sites. Estimates of total cleanup costs and
fractional allocations of liability are often provided by the EPA, the state
environmental agency or the committee of PRPs with respect to the specified
site. Based on these estimates (to the extent available) and on known
information, in each case and in the aggregate, we do not expect additional
costs, if any, to be material to our results of operations, financial position
or cash flows.
Although it is possible that new information or future developments could
require us to reassess the potential exposure relating to all pending
environmental matters, including those described above, management believes
that, based upon all currently available information, the resolution of these
environmental matters will not have a material adverse effect on our operations,
financial position, capital expenditures or competitive position. The
possibility exists, however, that new environmental legislation and/or
environmental regulations may be adopted, or other environmental conditions,
including the presence of previously unknown environmental contamination, may be
found to exist or a reassessment of the potential exposure to pending
environmental matters may be necessary due to new information or future
developments, that may require expenditures not currently anticipated and that
may be material.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Our common stock is traded through the National Association of Securities
Dealers, Inc. National Market System (the "NASDAQ") under the symbol "FMXI".
The following table sets forth the high and low bid prices for the common
stock.
2003 High Low
-------- -------
Quarter Ended March 30 $ 3.20 $ 1.08
Quarter Ended June 29 $ 3.69 $ 0.90
Quarter Ended September 28 $ 5.95 $ 2.87
Quarter Ended December 28 $ 5.20 $ 3.54
2002
Quarter Ended March 31 $10.43 $ 7.75
Quarter Ended June 30 $11.55 $ 7.75
Quarter Ended September 29 $11.11 $ 4.66
Quarter Ended December 29 $ 5.76 $ 1.12
As of December 28, 2003, there were 133 holders of record of the common
stock.
12
There were no cash dividends paid on common stock during the past two
fiscal years. The payment of any future dividends will be determined by the
Board of Directors in light of conditions then existing, including our earnings,
financial condition and requirements, restrictions in financing agreements,
business conditions and other factors. We are a holding company whose assets
consist primarily of a wholly-owned subsidiary, Foamex L.P. Consequently, our
ability to pay dividends is dependent upon the earnings of Foamex L.P. and any
future subsidiaries and the distribution of those earnings to us and loans or
advances by Foamex L.P. and any such future subsidiaries. The ability of Foamex
L.P. to make distributions is restricted by the terms of financing agreements.
Due to such restrictions, we expect to have only limited access to the cash flow
generated by Foamex L.P. for the foreseeable future.
Equity Compensation Plan Information
The following table summarizes information about the Foamex International
Inc. 1993 Stock Option Plan and the Foamex International Inc. 2002 Stock Award
Plan for Directors, Executive Officers and Key Employees. This information is as
of December 28, 2003.
Number of Weighted Number of Securities
Securities to be Average Available for Future
Issued Upon Exercise Issuance Under Equity
Exercise of Price of Compensation Plans
Outstanding Outstanding (Excluding Securities
Plan Category Options Options Outstanding)
- ------------------------------------------------------ ---------------- ----------- ----------------------
Equity compensation plans approved by stockholders 4,177,431 $6.11 1,399,959
Equity compensation plans not approved by stockholders - N/A -
--------- ----- ---------
Total 4,177,431 $6.11 1,399,959
========= ===== =========
ITEM 6. SELECTED FINANCIAL DATA
The following table presents selected historical consolidated financial
data. The financial data should be read in conjunction with the consolidated
financial statements and related notes thereto included in this Annual Report on
Form 10-K.
Fiscal Year (1)
-----------------------------------------------------------------
2003 2002 2001 (2) 2000 1999
---------- ---------- ---------- ---------- -----------
(thousands, except for earnings per share)
Statements of Operations Data
Net sales $1,304,560 $1,328,094 $1,252,904 $1,257,778 $1,294,639
Income (loss) from continuing
operations (3)(4)(5) $ (21,489) $ 60,948 $ (5,612) $ 17,013 $ 19,716
Basic earnings (loss) per share from
continuing operations $ (0.88) $ 2.51 $ (0.24) $ 0.69 $ 0.79
Diluted earnings (loss) per share from
continuing operations $ (0.88) $ 2.32 $ (0.24) $ 0.67 $ 0.78
Balance Sheet Data
Total assets $ 789,906 $ 813,577 $ 766,962 $ 751,581 $ 781,313
Long-term debt, classified as current (6) $ 96,065 - - - -
Long-term debt, excluding current portion $ 640,621 $ 738,540 $ 648,232 $ 687,758 $ 725,297
Stockholders' deficiency $ (203,116) $ (189,733) $ (180,746) $ (164,669) $ (166,381)
(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 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.
13
(3) Includes net restructuring, impairment 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).
2003 - $(1.8) million
2002 - $ 4.8 million
2001 - $36.1 million
2000 - $ 6.3 million
1999 - $10.5 million
(4) The provision for income taxes in 2000 and 1999 reflected the partial
reversal of the deferred income tax valuation allowance recognized in 1998.
(5) During 2002, we determined that it was more likely than not that our net
deferred tax assets would be realized in the future. Accordingly, we
reversed a previously recorded valuation allowance which increased income
from continuing operations by $77.3 million.
(6) Revolving credit borrowings under Foamex L.P.'s $240.0 Million Senior
Secured Credit Facility are classified as current as required by Emerging
Issues Task Force Issue No. 95-22, "Balance Sheet Classification of
Borrowings Outstanding Under Revolving Credit Agreements that Include both
a Subjective Acceleration Clause and a Lockbox Arrangement ("EITF No.
95-22").
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 completion of various restructuring/consolidation plans,
the achievement of management's business plans, our capital and debt structure
(including various financial covenants), litigation and changes in environmental
legislation and environmental conditions. The forward-looking statements
contained in this Annual Report on Form 10-K were prepared by management and are
qualified by, and subject to, significant business, economic, competitive,
regulatory and other uncertainties and contingencies, all of which are difficult
or impossible to predict and many of which are beyond our control.
Accordingly, there can be no assurance that the forward-looking statements
contained in this Annual Report on Form 10-K will be realized or that actual
results will not be significantly higher or lower. The forward-looking
statements have not been audited by, examined by, compiled by or subjected to
agreed-upon procedures by independent accountants, and no third party has
independently verified or reviewed such statements. Readers of this Annual
Report on Form 10-K should consider these facts in evaluating the information
contained herein. In addition, our business and operations are subject to
substantial risks which increase the uncertainty inherent in the forward-looking
statements contained in this Annual Report on Form 10-K. The inclusion of the
forward-looking statements contained in this Annual Report on Form 10-K should
not be regarded as a representation by us or any other person that any of the
forward-looking statements contained in this Annual Report on Form 10-K will be
achieved. In light of the foregoing, readers of this Annual Report on Form 10-K
are cautioned not to place undue reliance on the forward-looking statements
contained herein.
EXECUTIVE SUMMARY
Overview
We operate in the flexible polyurethane and advanced polymer foam products
industry. Our operations are primarily conducted through our wholly-owned
subsidiary, Foamex L.P. Business segments are listed below and business segment
financial information is included in Note 13 to the consolidated financial
statements. Please see Part I, Item 1, "Business" for a more complete
description of the activities of our business segments.
An executive vice president heads each of our principal operating segments.
Each executive vice president is responsible for developing budgets and plans as
well as directing the operations of the segment. The performance of each
operating segment is measured based upon income from operations, excluding
restructuring, impairment and other charges and corporate overhead. We do not
allocate restructuring, impairment and other charges to operating segments
because many of our facilities produce products for multiple segments.
Foam Products - manufactures and markets cushioning foams for bedding,
furniture, packaging and health care applications, and foam-based consumer
products, such as mattress pads and children's furniture.
Carpet Cushion Products - manufactures and distributes rebond, prime, felt
and rubber carpet padding.
Automotive Products - distributes automotive foam products and laminates to
major Tier 1 suppliers and original equipment manufacturers, or "OEMs".
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 operations in Mexico
City, corporate expenses not allocated to the other business segments and
restructuring, impairment and other charges (credits).
Our sales are primarily to markets in the United States. These sales are
impacted by economic conditions in several sectors of the United States economy,
including consumer spending, sales of new and existing homes, the overall level
of passenger car and light truck production and seasonality. We typically
experience two seasonally slow periods during each year, in early July and in
late December, due to scheduled plant shutdowns and holidays.
A small number of major customers produce a significant portion of our
sales. In 2003, our largest customer provided 16.3% of our net sales and our
five largest customers provided 34.7% of our net sales. Two of the five largest
customers are customers of the Automotive Products segment and three are
customers of the Foam Products segment.
The following discussion should be read in conjunction with the
consolidated financial statements and related notes included in this Annual
Report on Form 10-K.
Operations
The following table includes key elements of our financial statements
expressed as a percentage of net sales for the years 1999 through 2003, except
for net cash provided by (used for) operating activities which is expressed in
millions of dollars.
2003 2002 2001 2000 1999
-------- -------- -------- -------- --------
Net Sales 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of Goods Sold 89.0% 89.2% 85.8% 86.3% 86.1%
Gross Profit Margin 11.0% 10.8% 14.2% 13.7% 13.9%
Selling, General and
Administrative Expenses 6.3% 7.1% 6.4% 5.5% 5.9%
Operating Income Margin 4.8% 3.3% 4.9% 7.7% 7.2%
Interest and Debt
Issuance Expense 6.8% 5.2% 5.0% 6.0% 5.6%
Net Cash Provided by (Used
For) Operating Activities $17.5 $(50.4) $106.4 $51.0 $58.7
As demonstrated by the table above, our results in the last two years have
significantly deteriorated when compared to the prior three years. Our gross
profit margin has been reduced by approximately three percentage points while
selling general and administrative expenses and interest and debt issuance
expense have both increased as a percentage of net sales, as well as in absolute
dollar terms. Net sales dollars have been relatively flat over the 5 year period
with 2003 representing an increase of less than one percent compared to 1999.
Our management is focusing on restoring former levels of profitability by
concentrating on the following key areas:
o Managing raw material costs.
16
o Maintaining selling price increases to customers to recover raw
material and manufacturing cost increases.
o Controlling and reducing labor and overhead costs both in
manufacturing and administration.
o Developing new and more consumer-focused products and entering new
markets with increased profit potential.
Our major chemical suppliers increased the cost of our raw materials
several times in late 2002. Prices stabilized during 2003, but average unit
prices for 2003 were higher than for 2002. There can be no assurance that
chemical prices will not increase in 2004. We manage raw material costs by
seeking alternative sources of supply, locking in prices when possible and
negotiating discounts and rebates for volume purchases.
We have been only partially successful in raising selling prices to recover
raw material and other cost increases. Selling price increases, reduced cost and
increased mix of higher profit products are the major factors in restoring gross
profit margin percentage to the 14% level experienced in 1999-2001 from the 11%
level of 2002 and 2003.
We are focused on reducing both manufacturing costs and administrative
expenses. We believe that our manufacturing operations are now of the
appropriate scale and location to meet demand for our products as a result of
closing several facilities in 2002 and 2003. We believe that manufacturing costs
can be further reduced by emphasizing efficiency and better supply chain
management. Our focus areas for further reductions in administrative expenses
are employee related costs and professional service fees. Effective February 10,
2004, our Chairman resigned by mutual agreement with the Board of Directors. As
a result of this resignation, we may close our New York office, which was
primarily used by the former Chairman.
In late 2003, we began to market an all foam mattress product that is
vacuum packed in a box and designed to be carried home and self-installed by the
consumer. We believe this product provides the consumer with convenience and
price advantages when compared to traditional bedding products. We plan to
develop and market additional consumer products and enter other consumer
markets. We believe that we can achieve higher net sales and gross profit
through this approach. We will also continue our development efforts in our
other product offerings, especially our Technical Products.
If we can restore our gross profit margin to 14% or more and reduce and
control administrative costs, we may be able to restore operating income to the
level experienced in 1999 and 2000 and cash flow from operations to the level
experienced in 1999, 2000 and 2001. At those levels we should be able to reduce
borrowings and also cash interest expense. Our next large required debt
repayment is $51.6 million principal of our 13 1/2% Senior Subordinated Notes
due August 15, 2005.
Financing
On August 18, 2003, Foamex L.P. entered into a $240.0 Million Senior
Secured Credit Facility with a new group of lenders and a Secured Term Loan with
another lender. Proceeds borrowed under these new facilities were used to repay
all outstanding balances under the Foamex L. P. Amended Credit Facility (the
"Amended Credit Facility") which was terminated as of August 18, 2003. In
addition, Foamex Canada's revolving credit facility that did not have any
outstanding borrowings and had availability of approximately $5.9 million was
terminated as of August 18, 2003. The termination of the Amended Credit Facility
resulted in a write off of debt issuance costs of $12.9 million.
The $240.0 Million Senior Secured Credit Facility consists of a revolving
credit facility with a maximum availability of $190.0 million and a term loan of
$50.0 million. The revolving credit facility includes a $50.0 million sublimit
for letters of credit and availability is limited to eligible amounts, as
defined, of accounts receivable and inventory. At December 28, 2003, Foamex L.P.
had available borrowings of approximately $46.8 million and letters
17
of credit outstanding of $20.9 million. Borrowings under the term loan are
limited to eligible amounts, as defined, of equipment and real estate.
Substantially all the assets of Foamex L.P. and its domestic subsidiaries and
Foamex Canada are pledged as collateral for the related borrowings. Borrowings
under the revolving credit facility and the term loan bear interest at floating
rates based upon and including a margin over either LIBOR or a Base Rate, as
defined. At December 28, 2003, the weighted average interest rates were 4.53%
and 4.42% for the revolving loans and the term loan, respectively. The term loan
requires quarterly installment payments of approximately $1.8 million. All
borrowings under the $240.0 Million Senior Secured Credit Facility will mature
on April 30, 2007. The $240.0 Million Senior Secured Credit Facility includes
both a subjective acceleration clause and a lockbox arrangement which requires
all lockbox receipts be used to repay revolving credit borrowings. Accordingly,
borrowings under the revolving credit facility are classified as current in the
accompanying balance sheet as of December 28, 2003 as required by EITF No.
95-22.
The Secured Term Loan will mature on April 30, 2007. Borrowings under this
facility will bear interest at a rate that is 9.25% plus the greater of the
Reference Rate, as defined, or 4.25%. The minimum rate, which is in effect as of
December 28, 2003, is 13.50%. In addition, Foamex L.P. is subject to a 1.00%
facility fee which is payable annually on the anniversary date. Borrowings under
the Secured Term Loan are collateralized by the same collateral as the $240.0
Million Senior Secured Credit Facility. An intercreditor agreement governs the
distribution of collateral among the lenders under the $240.0 Million Senior
Secured Credit Facility and the Secured Term Loan.
Under the $240.0 Million Senior Secured Credit Facility and the Secured
Term Loan, Foamex L.P. is subject to a minimum fixed charge coverage ratio, as
defined, of 1.00. For the two quarters ended December 28, 2003, Foamex L.P.'s
fixed charge coverage ratio was 1.09. Foamex L.P. is also subject to a maximum
annual capital expenditure amount which was $17.7 million for the year ended
December 28, 2003 and will be $36.0 million for the year ending January 2, 2005.
Our 13 1/2% Senior Subordinated Notes with a face value of $51.6 million
are due on August 15, 2005. We must generate sufficient cash flow to repay these
notes or we must obtain additional financing. We cannot determine at this time
if we will be able to obtain financing at a reasonable cost, or at all. The 13
1/2% Senior Subordinated Notes will be required to be classified as a current
liability on our consolidated balance sheet beginning in the third quarter of
2004.
CRITICAL ACCOUNTING POLICIES
We prepared the consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America. As
such, we are required to make certain estimates, judgments, and assumptions that
we believe are reasonable based upon the information available. These estimates,
judgments and assumptions affect the reported amounts of the assets and
liabilities and revenues and expenses. Our significant accounting policies are
discussed in Note 2 to the consolidated financial statements. The accounting
policies which we believe are the most critical to aid in fully understanding
and evaluating our reported financial results and which require management to
exercise judgment include the following:
Revenue Recognition
We record net sales when product title and the risks and rewards of
ownership passes to the customer, the sales price is fixed and determinable and
collection is reasonably assured. Products are shipped FOB shipping point. Net
sales are reduced by allowances for estimated discounts, returns and customer
rebates based on our experience. Balances for allowances and rebates are
reviewed at least quarterly and are adjusted if warranted.
Accounts Receivable and Allowance for Uncollectible Accounts
We actively monitor customer payments in conjunction with customer credit
evaluations. Accordingly, an estimate of uncollectible accounts is maintained
and is based on historical collection experience and specific customer
collection issues. A significant change in the financial condition of one or
more of our larger customers could have a material adverse impact on future
financial results.
18
Long-Lived Assets
We have a significant investment in long-lived assets consisting primarily
of property, plant and equipment. Impairment losses are recognized when events
indicate that certain long-lived assets may be impaired and a projection of
future undiscounted cash flows generated from the assets are less than the
current carrying value of the assets. These cash flow projections are based on
the combination of historical results adjusted for estimated future market
conditions and operating plans. To the extent that these estimates change,
impairment losses could have a material adverse impact on future financial
results.
Goodwill
We evaluate the recoverability of goodwill on an annual basis as required
by Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" ("SFAS No. 142"). We perform this annual evaluation as of the
first day of the fourth fiscal quarter, or more frequently if events or changes
in circumstances, such as declining sales, earnings or cash flows or material
adverse changes in the business climate, indicate that the carrying value of
goodwill might be impaired. Goodwill is considered to be impaired when the net
book value of a reporting unit exceeds it estimated fair value. Fair values are
primarily established using a discounted cash flow methodology. The
determination of discounted cash flows is based on businesses' strategic plans
and long range planning forecasts.
Deferred Income Taxes
We have a significant amount of Federal net operating loss carryforwards
that can reduce the Federal tax payments required on taxable income generated in
the future. These Federal net operating loss carryforwards are recognized as a
deferred tax asset and the realization of the related asset must be continually
evaluated. In this evaluation, we are required to evaluate historical operating
performance, existing tax attributes, projections of future taxable income and
tax planning strategies available to determine the probability that the Federal
net operating loss carryforwards will be utilized in the future. We have
determined that it is more likely than not that all of the Federal net operating
losses will be utilized in future years. We must continually evaluate the
realizability of our deferred tax assets and it is possible that some or all of
the valuation allowance will be reinstated in future years.
Self Insurance
We are partially self-insured for a number of risks up to certain limits
including workers' compensation, medical, automobile and general liability.
Commercial insurance policies are carried for amounts in excess of the
self-insured amounts. Management exercises significant judgment in estimating
the ultimate liability for claims. The services of an outside actuary are used
to assist management in their evaluation of the liability for workers'
compensation and automobile claims.
Retiree Benefit Plans
We provide defined benefit pension plans that cover most of our employees.
Projected benefit obligations, pension expense and amounts included in other
comprehensive income are impacted by a number of assumptions. These assumptions
include the discount rate on projected benefit obligations, and the expected
long-term rate of return on plan assets. The discount rate on projected benefit
obligations enables us to state expected future cash flows at a present value on
the measurement date. We have little latitude in selecting this rate, as it is
required to represent the market rate for high-quality fixed income investments.
We assumed weighted average discount rates of 7.25%, 7.00% and 6.50% to
calculate pension expense for 2001, 2002 and 2003, respectively. A 0.50%
reduction in this assumption would increase the interest component of pension
expense by approximately $0.6 million. To determine the expected long-term rate
of return on pension plan assets, we consider the current and expected asset
allocations, as well as historical and expected returns on various categories of
plan assets. We assumed that long-term returns on our pension plans were 9.0% in
2003, 2002 and 2001. A 0.50% reduction in this assumption would increase pension
expense by approximately $0.4 million. Amortization of losses has been and
continues to be a significant component of pension expense and this amortization
is expected to increase by approximately $0.4 million in 2004. The losses have
resulted from actual returns that were less than the expected return assumption,
19
particularly over the 2000-2002 period, and funding levels that have not been
sufficient to offset the growth in benefit obligations. In 2003, actual returns
were significantly higher than the expected return assumption and we expect
pension expense to decrease by $1.4 million to $1.8 million in 2004 primarily
because of the growth in plan assets. We anticipate funding $11.8 million to
retiree benefit plans in 2004.
Claims and Litigation
We receive claims for damages that are outside of our insurance coverages.
Management evaluates these claims and records its estimate of liabilities when
such liabilities are considered probable and an amount or reasonable range can
be estimated.
Environmental Remediation
We have a number of manufacturing facilities and certain idle facilities
that require remediation of soil and/or groundwater contamination. As required
by applicable State and/or Federal compliance programs, many of these sites are
in the monitoring stage that requires periodic sampling of contamination levels
in conjunction with ongoing assessments of remediation actions. Accordingly, the
recognition of environmental liabilities requires estimates concerning the
duration of monitoring and associated costs, often projected to extend for a
number of years. To the extent that these estimates change, additional
environmental costs could have a material adverse impact on future financial
results. See the section below entitled "Environmental Health and Safety" for
additional information.
LIQUIDITY AND CAPITAL RESOURCES
Our operations are conducted through a wholly-owned subsidiary, Foamex L.P.
Our liquidity requirements consist primarily of the operating cash requirements
of Foamex L.P.
Foamex L.P.'s cash requirements consist principally of accounts receivable,
inventory and accounts payable requirements, scheduled payments of interest and
principal on outstanding indebtedness, capital expenditures, and employee
benefit plans. We believe that cash flow from Foamex L.P.'s operating
activities, cash on hand and periodic borrowings under its credit facility will
be adequate to meet its liquidity requirements for the next 12 months. Scheduled
principal payments on Foamex L.P.'s debt are not significant until the second
half of 2005. The ability of Foamex L.P. to make distributions to us is
restricted by the terms of its financing agreements. We expect to have only
limited access to the cash flow generated by Foamex L.P. for the foreseeable
future.
Cash and cash equivalents were $6.6 million at December 28, 2003 compared
to $4.5 million at December 29, 2002. Working capital at December 28, 2003 was
$31.1 million and the current ratio was 1.11 to 1 compared to working capital at
December 29, 2002 of $136.7 million and a current ratio of 1.68 to 1. The
decrease in working capital is primarily due to the requirement to classify
$96.1 million of borrowings under the revolving credit portion of Foamex L.P.'s
$240.0 Million Senior Secured Credit Facility as current in accordance with EITF
No. 95-22 (see Note 8 to the consolidated financial statements).
Total long-term debt and revolving credit borrowings at December 28, 2003
were $745.6 million, a $7.0 million increase from December 29, 2002. As of
December 28, 2003, there were revolving credit borrowings of $96.1 million under
the $240.0 Million Senior Secured Credit Facility with $46.8 million available
for borrowings and $20.9 million of letters of credit outstanding. Revolving
credit borrowings at December 28, 2003 reflect working capital requirements.
On November 15, 2002, Foamex L.P. and its bank lenders executed an
amendment to the Amended Credit Facility. Under the amendment, Foamex L.P. was
subject to minimum net worth, minimum EBDAIT, as defined, and maximum capital
expenditure covenants through periods ended December 28, 2003. The minimum
EBDAIT covenant was tested monthly, on a cumulative basis, beginning with
December 2002. Foamex L.P. was in compliance with the revised covenants at
December 29, 2002 and throughout 2003 until the Amended Credit Facility was
terminated on August 18, 2003.
20
On August 18, 2003, Foamex L.P. entered into a $240.0 Million Senior
Secured Credit Facility with a new group of lenders and an $80.0 million Secured
Term Loan facility with another lender. Proceeds borrowed under these new
facilities were used to repay all outstanding balances under the Foamex L. P.
Amended Credit Facility. In addition, Foamex Canada's revolving credit facility
that did not have any outstanding borrowings and had availability of
approximately $5.9 million was terminated. The termination of the Amended Credit
Facility resulted in a write off of debt issuance costs of $12.9 million in
2003.
The $240.0 Million Senior Secured Credit Facility consists of a revolving
credit facility with a maximum availability of $190.0 million and a term loan of
$50.0 million. The revolving credit facility includes a $50.0 million sublimit
for letters of credit and availability is limited to eligible amounts, as
defined, of accounts receivable and inventory. Borrowings under the term loan
are limited to eligible amounts, as defined, of equipment and real estate.
Substantially all the assets of Foamex L.P. and its domestic subsidiaries and
Foamex Canada are pledged as collateral for the related borrowings. Borrowings
under the revolving credit facility and the term loan bear interest at floating
rates based upon and including a margin over either LIBOR or a Base Rate, as
defined. At December 28, 2003, the weighted average interest rates were 4.53%
and 4.42% for the revolving loans and the term loan, respectively. The term loan
requires quarterly installment payments of approximately $1.8 million. All
borrowings under the $240.0 Million Senior Secured Credit Facility will mature
on April 30, 2007.
The $80.0 million Secured Term Loan will mature on April 30, 2007.
Borrowings under this facility bear interest at a rate that is 9.25% plus the
greater of Reference Rate, as defined, or 4.25%. The minimum rate, which is in
effect as of December 28, 2003, is 13.50%. In addition, Foamex L.P. is subject
to a 1.00% facility fee which is payable annually on the anniversary date.
Borrowings under the Secured Term Loan are collateralized by the same collateral
as the $240.0 Million Senior Secured Credit Facility. An intercreditor agreement
governs the distribution of collateral among the lenders under the $240.0
Million Senior Secured Credit Facility and the Secured Term Loan.
Under the $240.0 Million Senior Secured Credit Facility and the Secured
Term Loan, Foamex L.P. is subject to a minimum fixed charge coverage ratio, as
defined, of 1.00. For the two quarters ended December 28, 2003, Foamex L.P.'s
fixed charge coverage ratio was 1.09. Foamex L.P. is also subject to a maximum
annual capital expenditure amount which was $17.7 million for the year ended
December 28, 2003 and will be $36.0 million for the year ending January 2, 2005.
Effective May 1, 2002, Foamex L.P. completed a series of interest rate swap
transactions with notional amounts aggregating $300.0 million. Foamex L.P.
designated, documented and accounted for these interest rate swaps as fair value
hedges of its 10 3/4% Senior Secured Notes due April 1, 2009. The risk being
hedged in these transactions was the change in fair value of the 10 3/4% Senior
Secured Notes based on changes in the benchmark interest rate, LIBOR. The effect
of these interest rate swap transactions was to convert the fixed interest rate
on the 10 3/4% Senior Secured Notes to floating rates reset twice per year to
correspond with the interest payment dates for the 10 3/4% Senior Secured Notes.
On September 18, 2002, Foamex L.P. unwound the interest rate swap transactions
in exchange for a net cash proceeds of $18.4 million, including $3.6 million
realized through lower effective interest rates while the swap transactions were
in effect. The unwinding resulted in a deferred credit of $14.8 million, which
is being amortized over the term of the 10 3/4% Senior Secured Notes, using the
effective interest rate method.
As discussed above, our 13 1/2% Senior Subordinated Notes with a face value
of $51.6 million are due on August 15, 2005. We must generate sufficient cash
flow to repay these notes or obtain additional financing. We may not be able to
obtain financing at a reasonable cost, or at all.
Cash Flow from Operating Activities
Cash provided by operating activities in 2003 was $17.5 million compared to
cash used of $50.4 million in 2002. Cash provided by operating activities
consisted principally of depreciation and amortization of $26.0 million and
amortization and write off of $17.4 million of costs associated with debt,
reduced by our net loss of $21.5 million. We also had cash costs of $11.3
million to pay restructuring liabilities.
21
Cash Flow from Investing Activities
Cash used for investing activities totaled $8.6 million for 2003. Cash
requirements included capital expenditures of $6.5 million and capitalized
software development costs of $3.3 million. Cash used for investing activities
in 2002 included capital expenditure of $15.6 million and capitalized software
development costs of $7.0 million. Estimated capital expenditures for 2004 are
approximately $10.0 million. In addition, we expect to spend approximately $4.2
million for internally developed software in 2004, a portion of which may be
capitalized.
Cash Flow from Financing Activities
Cash used for financing activities was $6.8 million in 2003 compared to
cash provided of $63.4 million in 2002. During 2003, Foamex L.P. utilized $130.0
million of proceeds from new term loans and an increase in revolving credit
borrowings of $44.2 million to repay $162.2 million of term loans under its
former Amended Credit Facility and to pay $11.9 million of debt issuance costs.
Contractual Obligations
Our contractual obligations as of December 28, 2003 are shown in the
following table:
Payment due by Period
-----------------------------------------------------------------
Contractual Obligations Total 2004 2005-06 2007-08 2009 and beyond
- ----------------------- ------- ------- ----------- ------------ ---------------
(millions of dollars)
Long-Term Debt, including
Capital Leases $732.2 $ 8.9 $ 67.7 $349.6 (1) $306.0
Interest (2) $297.5 $ 72.2 $135.8 $ 73.0 $ 16.5
Operating Leases $ 44.9 $ 14.1 $ 16.7 $ 8.2 $ 5.9
Purchase Obligations (3) $592.5 $224.7 $125.9 $122.9 $119.0
Restructuring Liabilities $ 9.7 $ 3.9 $ 1.9 $ 1.3 $ 2.6
Employee Benefits and Other (4)
(1) Includes $96.1 million of revolving credit borrowings due in 2007 but
classified as current in the consolidated balance sheet to comply with EITF
95-22. See Note 8 to the consolidated financial statements.
(2) Includes interest applicable only to borrowings outstanding at December 28,
2003 computed using interest rates in effect as of December 28, 2003
through the due dates of the borrowings as defined by the applicable
financing agreements.
(3) Includes outstanding purchase orders and other commitments to purchase
minimum quantities of materials or services.
(4) We 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 2003, payments for these obligations
aggregated approximately $34.6 million.
22
RESULTS OF OPERATIONS
Carpet
Foam Cushion Automotive Technical
Products Products Products Products Other Total
-------- -------- ---------- ---------- -------- -----------
2003 (dollars in thousands)
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 $(52,031) $ 62,861
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) 4.8%
2002
Net sales $471,005 $234,001 $466,718 $124,124 $ 32,246 $1,328,094
Income (loss) from operations $ 45,466 $ 1,239 $ 34,146 $ 35,185 $(71,877) $ 44,159
Depreciation and amortization $ 13,632 $ 5,904 $ 3,721 $ 2,815 $ 5,520 $ 31,592
Income (loss) from operations
as a percentage of net sales 9.7% 0.5% 7.3% 28.3% n.m.(a) 3.3%
2001
Net sales $499,668 $230,965 $377,753 $111,043 $ 33,475 $1,252,904
Income (loss) from operations $ 81,144 $ 7,422 $ 27,040 $ 32,692 $(86,387) $ 61,911
Depreciation and amortization $ 11,018 $ 5,390 $ 4,150 $ 2,670 $ 10,760 $ 33,988
Income (loss) from operations
as a percentage of net sales 16.2% 3.2% 7.2% 29.4% 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. At the end of 2003, we changed our measure of segment operating
income to exclude an allocation of corporate overhead, as our management no
longer evaluates the performance of our segments using this allocation. Rather
we now attempt to manage and control these costs independent of segment
performance. Segment results for 2002 and 2001 have been adjusted to reflect
this change for comparative purposes.
2003 Compared to 2002
Net sales for 2003 decreased 2% to $1,304.6 million from $1,328.1 million
in 2002. An increase in Foam Products net sales were more than offset by
decreases in the other segments. Selling price increases in all segments were
more than offset, in the aggregate, by reductions in volume. The volume
reductions were primarily due to the requirement to increase selling prices and
plant closures as we shifted away from unprofitable business.
Gross profit was $143.7 million, or 11.0%, in 2003 compared to $143.7
million, or 10.8%, in 2002. Gross profit margin has improved throughout 2003
from the depressed levels experienced in the second half of 2002 as we have been
successful at recovering some of the raw material cost increases experienced in
the second half of 2002 and we have realized manufacturing cost savings.
Income from operations for 2003 was $62.9 million, or 4.8% of net sales,
which represented a 42% increase from the $44.2 million, or 3.3% of net sales,
reported for 2002. Selling general and administrative expenses decreased $12.2
million, or 13%, due primarily to lower employee costs and professional fees. In
2002, we incurred $4.9 million of organizational and transaction costs in
connection with a proposed public offering of a subsidiary, which was
subsequently terminated, and a proposed sale of the Carpet Cushion products
segment. Restructuring, impairment and other credits discussed below were $1.8
million in 2003, while we recorded restructuring, impairment and other charges
of $4.8 million in 2002.
23
Foam Products
Foam Products net sales for 2003 increased 8% to $507.6 million from $471.0
million in 2002 primarily due to increases in selling prices to customers and
increased volumes of consumer products, partially offset by decreases in volume
in other markets. Income from operations decreased 3%, to $44.0 million in 2003
from $45.5 million in 2002, primarily due to increases in the cost of raw
materials. Income from operations was 8.7% of net sales in 2003, and 9.7% of net
sales in 2002.
Carpet Cushion Products
Carpet Cushion Products net sales for 2003 decreased 11% to $208.9 million
from $234.0 million in 2002. Average selling prices increased but were more than
offset by an approximate 16% decline in volumes, as we closed several carpet
cushion facilities in 2002 and 2003 to focus this business on more profitable
markets. Income from operations increased $4.2 million, or 335%, primarily due
to cost containment from the streamlining of operations and higher selling
prices. Income from operations represented 2.6% of net sales in 2003 and 0.5% of
net sales in 2002.
Automotive Products
Automotive Products net sales for 2003 decreased 4% to $447.1 million from
$466.7 million in 2002. Sales declined throughout the second half of 2003 as a
major customer decreased its purchases from us in an effort to diversify its
supplier base. While some of this business has been recovered from other
customers, automotive products net sales were just over $100 million per quarter
in the second half of 2003, which is an annual rate of more than $60.0 million
less than the 2002 net sales. For the full year 2003, volumes were down about 1%
and average selling prices were down about 3% due to lower fabric costs passed
on to customers. Income from operations decreased $0.7 million, or 2%, as the
lower sales were partially offset by lower manufacturing costs, resulting from a
plant closure in early 2003 and labor and overhead reductions. Income from
operations represented 7.5% of net sales in 2003 and 7.3% of net sales in 2002.
Technical Products
Net sales for Technical Products in 2003 decreased 5% to $117.5 million
from $124.1 million in 2002 primarily due to a decrease in volume of 9%
partially offset by an increase in average selling prices. Income from
operations decreased 9% to $32.1 million in 2003 compared to $35.2 million in
2002 due to higher raw material and overhead costs. Income from operations
represented 27.3% of net sales in 2003 and 28.3% of net sales in 2002.
Other
Other primarily consists of certain manufacturing operations in Mexico
City, corporate expenses not allocated to business segments and restructuring,
impairment and other charges. The $8.6 million, or 27%, decrease in net sales
associated with this segment primarily resulted from the Mexico City operation
and was primarily due to a decline in the consumer products business. The loss
from operations was $52.0 million in 2003 and included restructuring, impairment
and other credits of $1.8 million, discussed below. The loss from operations in
2002 was $71.9 million, including restructuring, impairment and other charges of
$4.8 million, discussed below. Corporate overhead expenses and employee costs
decreased $6.7 million in 2003 compared to 2002.
Restructuring, Impairment and Other Charges
In 2003, we recorded restructuring credits of $1.8 million consisting of a
$3.2 million reduction in the liability primarily for severance and termination
benefits no longer required as the actions contemplated under the related plans
have been substantially completed, and a charge of $1.1 million for additional
lease termination costs for a closed facility as a result of changes in real
estate market conditions. Additionally, we recorded a $0.3 million
24
restructuring charge reported in the Other segment as a result of an employee
termination plan for approximately 300 employees at our Mexico City operations.
The actions under this plan were substantially completed in 2003.
In 2002, we recorded net restructuring, impairment and other charges of
$4.8 million. Fourth quarter charges of $10.0 million included severance and
other termination benefits for approximately 200 employees and exit costs and
remaining lease payments related to the reorganization of executive and
corporate management and the closure of six operations. Approximately 60 of the
planned terminations occurred during 2002 with the remainder occurring in 2003.
The charges also included $2.5 million of asset impairments, primarily for
leasehold improvements and machinery and equipment in the Carpet Cushion
Products segment. Earlier in 2002, we recorded restructuring, impairment and
other credits of $5.2 million including a reversal of approximately $3.7 million
from the reevaluation of the 2001 Operational Reorganization Plan.
Interest and Debt Issuance Expense
Interest and debt issuance expense was $88.4 million in 2003, which
represented a 27% increase from 2002 expense of $69.7 million. The 2003 and 2002
periods include charges of $12.9 million and $4.9 million, respectively,
relating to the write off of debt issuance costs as a result of early
extinguishment of debt. Higher average debt levels, higher effective interest
rates and higher amortization of debt issuance costs all contributed to the
increase in 2003.
Income from Equity Interest in Joint Ventures
The income from an equity interest in an Asian joint venture was $1.2
million in 2003 and $1.6 million in 2002. Income from an equity interest in a
joint venture in Eastern Europe was $0.3 million in 2003 and $0.1 million in
2002.
Other Income (Expenses), Net
Other expense, net was $3.4 million in 2003 compared to $2.1 million in
2002. We incurred foreign currency transaction losses of $2.7 million in 2003
compared to foreign currency transaction losses of $2.3 million in 2002.
Benefit for Income Taxes
The effective tax benefit rate was 21.8% for 2003. The effective tax
benefit rate for 2003, included a $3.1 million provision that reduced the
effective tax benefit rate. The $3.1 million of tax expense was related to the
Foamex L.P. $240.0 Million Senior Secured Credit Facility and the collateral
provisions that pledged the stock of Foamex Canada. This collateral pledge under
the U.S. Internal Revenue Code resulted in a deemed distribution of accumulated
earnings, as defined, of Foamex Canada. Because we will not be able to utilize
any Canadian tax credits associated with the deemed distribution, the full
amount of the distribution was subject to U.S. taxation and will result in a
reduction in the amount of the U.S. net operating loss carryforwards available.
Without this adjustment, the effective tax benefit rate would have been 33.1%
for 2003. Effective tax rates are impacted by annual income from equity in joint
ventures, which is considered to be permanently invested. Accordingly, no
deferred tax liabilities are recognized on such income.
During 2002, we determined that, based on the weight of available evidence,
including improved financial results for the rolling three years ended March 31,
2002, reduced NOL carryforward utilization limitations based on an asset
appraisal report received in the quarter ended June 30, 2002, projected future
taxable income, and tax planning strategies initiated in the two quarters ended
June 30, 2002, it was more likely than not that substantially all of our net
deferred tax assets would be realized in the future. Accordingly in 2002, we
reversed a previously recorded valuation allowance of $99.3 million. The
adjustment increased net income for 2002 by $77.3 million, and decreased
goodwill by $12.4 million and other comprehensive loss by $9.6 million.
We have net deferred income tax assets aggregating $123.3 million as of
December 28, 2003 that primarily represent the benefit of future tax deductions
and net operating loss carryforwards available to offset future taxable income
in the U.S. In order to realize these assets, we must generate sufficient
taxable income to offset our U.S. net
25
operating loss carryforwards of approximately $267.3 million at December 28,
2003 expiring from 2010 to 2023. Approximately $111.5 million of the net
operating loss carryforwards, related to $39.0 million of deferred tax assets,
expire in the years 2010 to 2012 with the remainder principally expiring in the
2018-2023 period. Our actual results for 2002 were essentially similar to the
results we projected when we reversed the valuation allowance in 2002, as
discussed above. Our projections as of December 29, 2002 included tax losses for
2003 and 2004 that can be carried forward to 2023 and 2024. Our actual results
for 2003 were essentially similar to our projection. Our projections as of
December 28, 2003 continue to include a tax loss in 2004 that can be carried
forward to 2024. We continue to project that we will have sufficient taxable
income in the years 2005 to 2012 to utilize all of the expiring net operating
loss carryforwards. We have had an ownership change as defined in IRC Section
382 and accordingly, we are limited (on an annual basis) to approximately $21.0
million of operating loss carryforward utilization.
If we are unable to generate sufficient taxable income to utilize the net
operating loss carryforwards on a timely basis, some or all of our deferred tax
assets will be required to be written off through a charge to operations in
future years. We evaluate the realizability of deferred tax assets on an annual
and quarterly basis or if there is a significant change in circumstances that
may cause a change in our judgment about realizability of deferred tax assets.
Any valuation allowance that may be required to be established as a result of
this evaluation process could have a material adverse effect on future results
of operations.
Cumulative Effect of Accounting Changes
The cumulative effect of accounting changes in 2002 includes a goodwill
impairment charge of $72.0 million as a result of the adoption of SFAS No. 142
and the write off of a $1.3 million unamortized deferred credit as a result of
the adoption of Statement of Financial Accounting Standards No. 141, "Business
Combinations" ("SFAS No. 141").
2002 Compared to 2001
Net sales for 2002 increased 6% to $1,328.1 million from $1,252.9 million
in 2001. The increase was primarily attributable to improved sales in the
Automotive Products and Technical Products segments, partially offset by a
decrease in the Foam Products segment. The improvement in sales partially
reflected the impact of sales related to the acquisition discussed in Note 4 to
the consolidated financial statements.
The gross profit margin was $143.7 million, or 10.8%, in 2002 compared to
$178.5 million, or 14.2%, in 2001 primarily as a result of increases in the cost
of our major chemical raw materials during the second half of 2002. The gross
profit margin was further reduced by higher manufacturing costs principally in
the Foam Products segment, unfavorable yields, higher manufacturing overhead
expenses and unfavorable production mix. We are seeking to improve gross profit
margins through customer selling price increases, selective elimination of
unprofitable customer accounts and products, and reductions in manufacturing
overhead expenses.
Income from operations for 2002 was $44.2 million, which represented a 29%
decrease from the $61.9 million reported for 2001. Income from operations was
3.3% of net sales in 2002 compared to 4.9% of net sales in 2001. The decrease is
attributable to the reduced gross profit margins as discussed above. In
addition, selling, general and administrative expenses increased by $14.2
million, or 18%, which included $3.6 million of organizational costs in
connection with a proposed public offering of a subsidiary which was
subsequently terminated. Selling, general and administrative expenses also
included $1.3 million of transaction costs associated with the proposed sale of
our Carpet Cushion Products segment which was subsequently terminated. The
remainder of the increase was primarily due to higher professional service fees
for information technology and accounting services and employee related
expenses, partially offset by reduced goodwill amortization and lower bad debt
expense. Partially offsetting the decrease in gross profit and increased
selling, general and administrative expenses was a decline of $31.3 million in
restructuring, impairment and other charges which is more fully discussed below.
Foam Products
Foam Products net sales for 2002 decreased 6% to $471.0 million from $499.7
million in 2001. The decrease primarily reflected reduction in business from a
major bedding manufacturer and the slow recovery of sales after an
26
odor issue caused by defective chemicals from a major supplier in late 2001.
Foam Products gross profit margin was 12.3% in 2002, down from 18.8% in 2001.
Income from operations decreased 44%, to $45.5 million in 2002 from $81.1
million in 2001, primarily due to increased raw material costs, lower net sales
and higher manufacturing costs. Income from operations was 9.7% of net sales in
2002 and 16.2% of net sales in 2001.
Carpet Cushion Products
Carpet Cushion Products net sales for 2002 increased 1% to $234.0 million
from $231.0 million in 2001. We were able to increase our market share in spite
of market weakness and overcome the loss of sales to one large retail customer
that exited the carpet business. Income from operations, which principally
reflected higher raw material and other operating costs during 2002 and included
expenses of $1.3 million in 2002 associated with the proposed sale of the
business which was subsequently terminated, represented 0.5% of net sales in
2002 and 3.2% of net sales in 2001.
Automotive Products
Automotive Products net sales for 2002 increased 24% to $466.7 million from
$377.8 million in 2001. The improvement primarily reflected a continued high
build rate for new cars and new product programs. We were informed that our
largest customer intends to reduce its purchases of certain products from us in
2003 to diversify its supply base. Automotive Products gross profit margin was
8.4% in 2002 and 2001 and reflects the impact of higher raw material costs
offsetting the contribution from increased net sales. Income from operations
represented 7.3% of net sales in 2002 and 7.2% of net sales in 2001.
Technical Products
Net sales for Technical Products in 2002 increased 12% to $124.1 million
from $111.0 million in 2001. Higher sales partially reflected sales from the
acquisition of General Foam Corporation in July 2001 (see Note 4 to the
consolidated financial statements). Income from operations increased 8% to $35.2
million in 2002 compared to $32.7 million in 2001. The contribution from higher
net sales was partially offset by higher raw material costs and the costs
related to a proposed public offering of a subsidiary as described above. Income
from operations represented 28.3% of net sales in 2002 and 29.4% of net sales in
2001.
Other
Other primarily consists of certain manufacturing operations in Mexico
City, corporate expenses not allocated to business segments and restructuring,
impairment and other charges. The 4% decrease in net sales associated with this
segment primarily resulted from the Mexico City operation. The loss from
operations was $71.9 million in 2002 and included restructuring, impairment and
other charges of $4.8 million, discussed below. The loss from operations in 2001
was $86.4 million, including restructuring, impairment and other charges of
$36.1 million, discussed below. Corporate overhead expenses and employee costs
increased $14.8 million in 2002.
Restructuring, Impairment and Other Charges
In 2002, we recorded net restructuring, impairment and other charges of
$4.8 million. Fourth quarter charges of $10.0 million included severance and
other termination benefits for approximately 200 employees and exit costs and
remaining lease payments related to the reorganization of executive and
corporate management and the closure of six operations. Approximately 60 of the
planned terminations occurred during 2002. The charges also included $2.5
million of asset impairments, primarily for leasehold improvements and machinery
and equipment in the Carpet Cushion Products segment. Earlier in 2002, we
recorded restructuring, impairment and other credits of $5.2 million including a
reversal of approximately $3.7 million from the reevaluation of the 2001
Operational Reorganization Plan.
In 2001, we recorded restructuring, impairment and other charges of $36.1
million, primarily related to our 2001 Operational Reorganization Plan including
plant facility closures, reductions in management and support personnel, and
cost reductions in purchasing and logistics. The charge included an impairment
charge of $13.8
27
million (net of anticipated proceeds of $4.6 million) to reduce certain assets,
primarily leasehold improvement and equipment, included within the Foam Products
and Carpet Cushion Products segments to their estimated fair values.
Approximately 700 employee terminations including plant personnel, support staff
and executives and management were originally planned pursuant to the 2001
Operational Reorganization Plan. The subsequent reevaluation of facilities
closures reduced the number of planned terminations to approximately 500.
Approximately 340 employees were terminated in 2002.
Interest and Debt Issuance Expense
Interest and debt issuance expense was $69.7 million in 2002, which
represented a 10% increase from 2001 expense of $63.2 million. The increase was
attributable to higher amortization and write off of debt issuance costs. We
capitalized interest of $0.3 million in 2002 compared to $1.4 million in 2001.
Income from Equity Interest in Joint Ventures
The income from an equity interest in an Asian joint venture was $1.6
million in both 2002 and 2001. We have a 70% ownership interest in the joint
venture since December 2001. Previously our ownership interest was 49%.
Provision (Benefit) for Income Taxes
During 2002, we determined that, based on the weight of available evidence,
including improved financial results, for the rolling three years ended March
31, 2002, reduced NOL carryforward utilization limitations based on an asset
appraisal report received in the quarter ended June 30, 2002, projected future
taxable income, and tax planning strategies initiated in 2002, it was more
likely than not that substantially all of our net deferred tax assets would be
realized in the future. Accordingly, we reversed a previously recorded valuation
allowance of $99.3 million. The adjustment increased net income for 2002 by
$77.3 million and decreased goodwill by $12.4 million and other comprehensive
loss by $9.6 million.
We had deferred income tax assets aggregating $116.5 million as of December
29, 2002 that primarily represent the benefit of future tax deductions and net
operating loss carryforwards available to offset future taxable income in the
U.S. In order to realize these assets, we must generate sufficient taxable
income to offset our U.S. net operating loss carryforwards of approximately
$217.9 million at December 29, 2002 expiring from 2010 to 2022. Approximately
$111.5 million of the net operating loss carryforwards, related to $39.0 million
of deferred tax assets, expire in the years 2010 to 2012 with the remainder
principally expiring in the 2018-2022 period. During 2002, we projected a
taxable loss for 2002 and small amounts of taxable income in 2003 and 2004, and
taxable income in the years 2005 through 2012 which would be sufficient to
utilize all of the net operating loss carryforwards that expire in the years
2010 to 2012. Our actual results for 2002 were essentially similar to the
results we projected when we reversed the valuation allowance in 2002. Our
projections as of December 29, 2002 included tax losses in 2003 and 2004 that
can be carried forward to 2023-24. We continue to project that we will have
sufficient taxable income in the years 2005 to 2012 to utilize all of the
expiring net operating loss carryforwards. We have had an ownership change as
defined in IRC Section 382 and accordingly, we are limited (on an annual basis)
to approximately $21.0 million of operating loss carryforward utilization.
If we are unable to generate sufficient taxable income to utilize the net
operating loss carryforwards on a timely basis, some or all of our deferred tax
assets will be required to be written off through a charge to operations in
future years. We evaluate the realizability of deferred tax assets on an annual
and quarterly basis or if there is a significant change in circumstances that
may cause a change in our judgment about realizability of deferred tax assets.
Any valuation allowance that may be required to be established as a result of
this evaluation process could have a material adverse effect on future results
of operations.
Cumulative Effect of Accounting Changes
The cumulative effect of accounting changes in 2002 includes a goodwill
impairment charge of $72.0 million as a result of the adoption of Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible
28
Assets" ("SFAS No. 142") and the write off of a $1.3 million unamortized
deferred credit as a result of the adoption of Statement of Financial Accounting
Standards No. 141, "Business Combinations" ("SFAS No. 141").
OTHER
Environmental Health and Safety
We are subject to extensive and changing federal, state, local and foreign
environmental laws and regulations, including those relating to the use,
handling, storage, discharge and disposal of hazardous substances, the discharge
or emission of materials into the environment, and the remediation of
environmental contamination, and as a result, are from time to time involved in
administrative and judicial proceedings and inquiries relating to environmental
matters. As of December 28, 2003, we had accruals of approximately $2.5 million
for environmental matters including approximately $2.3 million related to
remediating and monitoring soil and groundwater contamination and approximately
$0.2 million relating to sites where we had been designated as a Potentially
Responsible Party or "PRP" by the EPA or a state authority and other matters.
Additional losses, if any, in excess of amounts currently accrued, cannot be
reasonably estimated at this time. If there are additional matters or if any
current estimates are incorrect, there could be a material adverse effect on our
financial position, results of operations and cash flows.
On August 31, 2002, Environment Canada, the Canadian environmental
regulatory agency, finalized a rule which would require flexible polyurethane
foam manufacturing operations to reduce methylene chloride (dichloromethane) air
emissions. The rule establishes a 50.0% reduction in methylene chloride
emissions by December 1, 2004 and 100.0% reductions by January 1, 2007. This
standard will not require us to make material expenditures for our Canadian
plants.
We have reported to the appropriate state authorities that we have found
soil and/or groundwater contamination in excess of state standards at certain
locations. Seven sites are currently in various stages of investigation or
remediation. Accordingly, the extent of contamination and the ultimate liability
is not known with certainty for all sites. During 2000, we reached an
indemnification agreement with the former owner of the Morristown, Tennessee
facility. The agreement allocates the incurred and future remediation costs
between the former owner and us. The estimated allocation of future costs for
the remediation of this facility is not significant, based on current known
information. The former owner was Recticel Foam Corporation, a subsidiary of
Recticel.
We have either upgraded or closed all underground storage tanks at our
facilities in accordance with applicable regulations.
The CERCLA and comparable state laws impose liability without fault for the
costs of cleaning up contaminated sites on certain classes of persons that
contributed to the release of hazardous substances into the environment at those
sites, for example, by generating wastes containing hazardous substances which
were disposed at such sites. We are currently designated as a PRP by the EPA or
by state environmental agencies or other PRPs, pursuant to CERCLA or analogous
state statutes, with respect to 11 sites. Estimates of total cleanup costs and
fractional allocations of liability are often provided by the EPA, the state
environmental agency or the committee of PRPs with respect to the specified
site. Based on these estimates (to the extent available) and on known
information, in each case and in the aggregate, we do not expect additional
costs, if any, to be material to 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 December 28, 2003, we had
accrued approximately $1.1 million for litigation, claims and other legal
matters in addition to the environmental matters discussed above.
Inflation, Raw Material Costs and Other Matters
On average, inflation rates for the domestic economy continue to be
relatively low. Although long-term inflation rates are difficult to predict, we
believe we have the flexibility in operations and capital structure to maintain
a competitive position. The prices of the two principal chemicals used by us in
manufacturing, TDI and polyol, are influenced by demand and manufacturing
capacity. In addition, the prices of TDI and polyol are significantly influenced
by crude oil production and prices and by world political instability,
particularly in the Middle East. Results for 2003 and 2002 were negatively
impacted by higher average costs for raw materials. In 2001, the beginning of
the economic slowdown resulted in excess manufacturing capacity for the major
chemical suppliers. This, coupled with declining oil prices, resulted in lower
costs for raw materials in 2001. We experienced significant increases in the
prices of raw material from major chemical manufacturers during 2002. We sought
to recover these cost increases through manufacturing process efficiencies and
selling price increases, but were only partially able to do so during 2003 and
2002. We may not be successful in implementing further selling price increases
to fully recover raw material cost increases and competitive pricing pressure
may require us to adjust selling prices or lose volume. Results of operations
have been and could be adversely affected by delays in implementing, or
inability to implement, additional selling price increases to offset raw
material cost increases. Additionally, we must reduce and control our other
operating and corporate expenses including selling, general and administrative
expenses to offset raw material cost increases. A failure to recover cost
increases could result in debt covenant violations which may lead to lenders
demanding immediate payment of our outstanding debt and impair our ability to
continue as a going concern.
The lease for one of our foam pouring facilities expires in 2004. It is
conceivable that this lease may not be extended or renewed. Like any other
lease, if we are unable to extend or renew this lease, the costs associated with
a relocation could have a material adverse effect on our business, financial
condition, cash flow and results of operations.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our debt securities with variable interest rates are subject to market risk
for changes in interest rates. On December 28, 2003, indebtedness with variable
interest rates totaled $231.3 million. On an annualized basis, if the interest
rates on these debt instruments increased by 1.0%, interest expense would
increase by approximately $2.3 million.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
An index to the financial statements and financial statement schedules is
included in Item 15(a).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
30
ITEM 9a. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls
The Company maintains disclosure controls and procedures (as defined in
Rule 13a-14(c) and 15d-14(c) of the Securities Exchange Act of 1934, as amended
(the "Exchange Act")) that are designed to ensure that information required to
be disclosed in reports filed under the Exchange Act, is recorded, processed,
summarized and reported within the specified time periods. In designing and
evaluating the disclosure controls and procedures, management recognizes that
any controls and procedures, no matter how well designed and executed, can
provide only reasonable assurance of achieving the desired control objectives.
The Company carried out an evaluation, under the supervision and with the
participation of management, including the Chief Executive Officer and Chief
Financial Officer, on the effectiveness of the design and operation of the
Company's disclosure controls and procedures pursuant to the Exchange Act rule
as of the end of the fiscal period covered by this report on Form 10-K. Based
upon that evaluation, each of the Chief Executive Officer and Chief Financial
Officer concluded that the Company's disclosure controls and procedures are
effective in providing reasonable assurance that material information required
to be included in the Company's Exchange Act reports is made known to management
on a timely basis during the period when the Company's periodic reports are
being prepared.
Changes in Internal Controls
The Company determined during the fourth quarter of 2003 that the value of
certain in-transit raw material inventory was overstated due to a calculation
error made during a transition to a new module of an enterprise wide transaction
processing software package in February 2003. This error was reported to the
Company's auditors and to the audit committee of the Company's Board of
Directors. As a result, the Company restated its financial statements for each
of the three quarters of 2003 for this error and other adjustments previously
identified by management that were not individually or in the aggregate material
to the respective periods. The Company has instituted procedures intended to
ensure that the value of the in-transit raw material inventory is more
effectively monitored.
Except as discussed above, there have been no significant changes in
internal control over financial reporting that occurred during the quarter
covered by this report that has materially affected or is reasonably likely to
materially affect, our internal control over financial reporting.
PART III
The information required by Part III (Items 10, 11, 12, 13 and 14) will be
included in a Proxy Statement to be filed no later than 120 days after the end
of the fiscal year covered by this Annual Report on Form 10-K, and is
incorporated herein by reference.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial statements.
Foamex International Inc. and Subsidiaries:
Independent Auditors' Report F-2
Consolidated Balance Sheets as of December 28, 2003 and December 29, 2002 F-3
Consolidated Statements of Operations for the years ended December 28, 2003,
December 29, 2002 and December 31, 2001 F-5
Consolidated Statements of Cash Flows for the years ended December 28, 2003,
December 29, 2002 and December 31, 2001 F-6
Consolidated Statements of Stockholders' Deficiency for the years ended December 28, 2003,
December 29, 2002 and December 31, 2001 F-7
Notes to Consolidated Financial Statements F-8
31
Information Required by Rule 3-09
Foamex Asia Company Limited
Consolidated Financial Statements of Foamex Asia Company Limited and Subsidiary
for the year ended December 31, 2003 (unaudited) F-37
Consolidated Financial Statements of Foamex Asia Company Limited and Subsidiary
for the year ended December 31, 2002 (unaudited) F-55
Consolidated Financial Statements of Foamex Asia Company Limited and Subsidiary
for the year ended December 31, 2001, including Report of the Independent Certified Public
Accountants F-71
Foamex International Inc. and Subsidiaries Financial Statement Schedules:
Schedule I - Condensed Financial Information of Registrant S-2
Schedule II - Valuation and Qualifying Accounts S-5
(b) Reports on Form 8-K.
On September 29, 2003, a report was filed under Item 5, Other Events,
reporting that the Bankruptcy Trustee for Trace and Marshall S. Cogan
lawsuit had been settled.
On November 12, 2003, a report was filed under Item 12, Results of
Operations and Financial Condition furnishing a copy of the Registrant's
press release relating to its 2003 third quarter consolidated earnings.
On November 13, 2003, a report was filed under Item 12, Results of
Operations and Financial Condition furnishing a copy of the Registrant's
transcript relating to its quarterly earnings conference call.
(c) Exhibits.
2.1(l) - Transfer Agreement, dated as of February 27, 1998, by and between
Foam Funding LLC and Foamex L.P.
2.2(l) - 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(i) - Third Amendment to the Partnership Agreement, dated December 23,
1997.
3.2.5(l) - Fourth Amendment to the Partnership Agreement, dated February 27,
1998.
3.2.6(t) - Fifth Amendment to the Partnership Agreement, dated March 26,
2002.
3.3(j) - Certificate of Incorporation of FMXI.
3.4(j) - By-laws of FMXI.
3.5(e) - Certificate of Incorporation of Foamex Capital Corporation.
3.6(e) - By-laws of Foamex Capital Corporation.
3.7.1(a) - Certificate of Incorporation of Foamex International.
3.7.1(g) - Amendment to Certificate of Incorporation of Foamex
International.
3.8(a) - By-laws of Foamex International.
3.9(u) - Certificate of Incorporation of Foamex Asia, Inc.
3.10(u) - By-laws of Foamex Asia, Inc.
3.11(u) - Certificate of Incorporation of Foamex Latin America, Inc.
3.12(u) - By-laws of Foamex Latin America, Inc.
3.13(u) - Certificate of Incorporation of Foamex Mexico, Inc.
3.14(u) - By-laws of Foamex Mexico, Inc.
3.15(u) - Certificate of Incorporation of Foamex Mexico II, Inc.
32
3.16(u) - 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(i) - 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(l) - 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(t) - 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(t) - 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(i) - 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(l) - 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(t) - 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(t) - 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(t) - 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(t) - 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(t) - 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(t) - Registration Rights Agreement, dated as of March 25, 2002, among
Foamex L.P., Foamex Capital Corporation, the Guarantor 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(m) - 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(m) - Promissory Note, dated June 12, 1997, in the aggregate principal
amount of $4,794,828, executed by Trace Holdings to Foamex L.P.
4.15.1(x) - 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.
33
4.15.2(x) - 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* - Amendment No. 1 to Credit Agreement, dated as of December 1,
2003, among Foamex L.P., as Borrower, the affiliates of Borrower
party hereto, the lenders party hereto, and Bank of America,
N.A. as Administrative Agent.
4.16.1(x) - 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(x) - 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* - Amendment No. 1 to Credit Agreement, dated as of December 1,
2003, among Foamex L.P., as Borrower, the affiliates of Borrower
party hereto, the lenders party hereto, and Silver Point Finance,
LLC as Administrative Agent.
4.17.1(x) - 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(s)+ - Foamex Supplemental Executive Retirement Plan, effective as of
May 15, 2001.
10.10.13(s)+ - Split Dollar Life Insurance Agreement Between Foamex
International Inc. and Marshall S. Cogan, dated as of December
31, 2001.
10.11.4(p)+ - Termination and Release Agreement dated as of January 30, 2001 by
and between Foamex International and John G. Johnson, Jr.
10.11.5(s)+ - Termination and Release Agreement dated as of December 6, 2001,
by and between the Foamex International and John Televantos.
10.11.1(o)+ - Employment Agreement, dated as of January 1, 1999, by and between
Foamex International and Marshall S. Cogan.
10.11.8(s)+ - First Amendment to Employment Agreement, dated as of December 31,
2001, by and between Foamex International Inc. and Marshall S.
Cogan.
10.11.10(w)+ - Severance Agreement and Release, dated as of November 23, 2002,
by and between Foamex International and Theodore J. Kall.
10.11.11(w)+ - Severance Agreement and Release, dates as of January 31, 2003, by
and between Foamex International and Pratt W. Wallace, Jr.
10.11.13+* - Amended and Restated Employment Agreement, dated January 27,
2004, by and between Foamex International and Thomas E. Chorman.
34
10.11.14+* - Amended and Restated Employment Agreement, dated January 26,
2004, by and between Foamex International and K. Douglas Ralph.
10.16.1(l) - 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(l) - 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(n)+ - Foamex International Amended and Restated 1993 Stock Option Plan.
10.23(a)+ - Foamex International Non-Employee Director Compensation Plan.
10.24(q)+ - Foamex International Equity Incentive Plan for Non-Employee
Directors.
10.25(q)+ - Foamex International Key Employee Incentive Bonus Plan.
10.26(r)+ - Agreement with Consultant, dated April 24, 2001 by and between
Robert J. Hay and Foamex L.P.
10.29(v)+ - Foamex International 2002 Stock Award Plan.
10.17.2(k) - Loan Agreement between Hua Kee Company Limited and Foamex Asia,
Inc., dated as of July 8, 1997.
10.18.1(r) - Joint Venture Agreement between Hua Kee Company Limited and
Foamex Asia, Inc. amended and restated as of December 3, 2001.
10.44(u)+ - Agreement with Consultant, dated August 8, 2002, by and between
Raymond E. Mabus, Jr. and Foamex International.
21* - Subsidiaries of Foamex L.P.
23* - Consent of Independent Auditors, Deloitte & Touche LLP.
23.1* - Consent of Independent Auditors, Deloitte Touche Tohmatsu Jaiyos
31.1* - Certification of Chief Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
31.2* - Certification of Chief Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
32.1* - Certification of Chief Executive Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
32.2* - Certification of Chief Financial Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
- ----------------------
* Filed herewith.
+ Management contract or compensatory plan or arrangement.
(a) Incorporated herein by reference to the Exhibit to Foamex L.P.'s
Registration Statement on Form S-1, Registration No. 33-69606.
(b) Incorporated herein by reference to the Exhibit to the Annual Report on
Form 10-K of Foamex International for the fiscal year ended January 1,
1995.
(c) Incorporated herein by reference to the Exhibit to the Current Report on
Form 8-K of Foamex International reporting an event that occurred June 12,
1997.
(d) Incorporated herein by reference to the Exhibit to the Annual Report on
Form 10-K of Foamex L.P. and FCC for fiscal 1992.
(e) Incorporated herein by reference to the Exhibit to the Registration
Statement of Foamex L.P. and FCC on Form S-1, Registration Nos. 33-49976
and 33-49976-01.
35
(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 herein by reference to the Exhibit in the Registration
Statement of the Company on Form S-4, Registration No. 333-30291.
(h) Incorporated by reference to the Exhibit to the Form 10-Q of Foamex L.P.
for the quarterly period ended September 28, 1997.
(i) 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.
(j) 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.
(k) 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.
(l) Incorporated herein by reference to the Current Report on Form 8-K of
Foamex International reporting an event that occurred on February 27, 1998.
(m) Incorporated herein by reference to the Exhibit to the Annual Report on
Form 10-K of the Company for the fiscal year ended December 31, 1998.
(n) Incorporated herein by reference to the Exhibit to Foamex International's
definitive proxy statement dated May 31, 2000.
(o) Incorporated herein by reference to the Exhibit to the Annual Report on
Form 10-K of Foamex International for year ended December 31, 2000.
(p) Incorporated herein by reference to the Exhibit to the Form 10-Q of Foamex
International for the quarterly period ended March 31, 2001.
(q) Incorporated herein by reference to the Appendix to Foamex International's
definitive amended and restated proxy statement, dated July 12, 2001.
(r) Incorporated herein by reference to the Exhibit to the Form 10-Q of Foamex
International for the quarterly period ended June 30, 2001.
(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 31,
2001.
(t) 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.
(u) 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.
(v) Incorporated herein by reference to Appendix C to Foamex International's
definitive proxy statement dated April 30, 2002.
(w) Incorporated herein by reference to the Exhibit to the Annual Report on
Form 10-K of Foamex International for the fiscal year ended December 29,
2002.
36
(x) Incorporated herein by reference to the Exhibit to the Current Report on
Form 8-K of the Company reporting an event that occurred on August 18,
2003.
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.
37
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized as of the 5th day of March 2004.
FOAMEX INTERNATIONAL INC.
By: /s/ Thomas E. Chorman
----------------------------------------
Name: Thomas E. Chorman
Title: President and Chief Executive Officer
By: /s/ K. Douglas Ralph
----------------------------------------
Name: K. Douglas Ralph
Title: Executive Vice President and
Chief Financial Officer
By: /s/ Bruno Fontanot
----------------------------------------
Name: Bruno Fontanot
Title: Senior Vice President - Finance
and Chief Accounting Officer
38
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 on the dates indicated:
Signature Title Date
/s/ Raymond E. Mabus, Jr. Chairman of the Board March 5, 2004
- ----------------------------
Raymond E. Mabus
/s/ John V. Tunney Vice Chairman and Director March 5, 2004
- -----------------------------
John V. Tunney
/s/ Robert J. Hay Chairman Emeritus March 5, 2004
- -----------------------------
Robert J. Hay and Director
/s/ Thomas E. Chorman President, Chief Executive March 5, 2004
- -----------------------------
Thomas E. Chorman Officer and Director
/s/ S. Dennis N. Belcher Director March 5, 2004
- -----------------------------
S. Dennis N. Belcher
/s/ Luis J. Echarte Director March 5, 2004
- -----------------------------
Luis J. Echarte
/s/ Stuart J. Hershon Director March 5, 2004
- -----------------------------
Stuart J. Hershon
/s/ Henry Tang Director March 5, 2004
- -----------------------------
Henry Tang
/s/ Raul J. Valdes- Fauli Director March 5, 2004
- -----------------------------
Raul J. Valdes-Fauli
39
FOAMEX INTERNATIONAL INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Foamex International Inc.
Index to Consolidated Financial Statements F-1
Independent Auditors' Report F-2
Consolidated Balance Sheets as of December 28, 2003 and December 29, 2002 F-3
Consolidated Statements of Operations for the years ended December 28, 2003,
December 29, 2002 and December 31, 2001 F-5
Consolidated Statements of Cash Flows for the years ended December 28, 2003,
December 29, 2002 and December 31, 2001 F-6
Consolidated Statements of Stockholders' Deficiency for the years
ended December 28, 2003, December 29, 2002 and December 31, 2001 F-7
Notes to Consolidated Financial Statements F-8
Information Required by Rule 3-09
Foamex Asia Company Limited
Consolidated Financial Statements of Foamex Asia Company Limited and Subsidiary
for the year ended December 31, 2003 (unaudited) F-37
Consolidated Financial Statements of Foamex Asia Company Limited and Subsidiary
for the year ended December 31, 2002 (unaudited) F-55
Consolidated Financial Statements of Foamex Asia Company Limited and Subsidiary
for the year ended December 31, 2001, including Report of Independent
Certified Public Accountants F-71
F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Foamex International Inc.
Linwood, Pennsylvania
We have audited the accompanying consolidated balance sheets of Foamex
International Inc. and subsidiaries (the "Company") as of December 28, 2003 and
December 29, 2002, and the related consolidated statements of operations, cash
flows and stockholders' deficiency for each of the three years in the period
ended December 28, 2003. Our audits also included the consolidated financial
statement schedules listed in the Index at Item 15a. These consolidated
financial statements and consolidated financial statement schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and consolidated financial
statement schedules based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall consolidated financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company at December 28, 2003
and December 29, 2002, and the results of its operations and its cash flows for
each of the three years in the period ended December 28, 2003 in conformity with
accounting principles generally accepted in the United States of America. Also,
in our opinion, such consolidated financial statement schedules, when considered
in relation to the basic consolidated financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
As discussed in Note 2 to the consolidated financial statements, the Company
changed its method of accounting for goodwill and other intangible assets in
2002.
/s/ DELOITTE & TOUCHE LLP
March 9, 2004
Parsippany, New Jersey
F-2
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 28, December 29,
2003 2002
------------- -------------
ASSETS (thousands)
CURRENT ASSETS
Cash and cash equivalents $ 6,613 $ 4,524
Accounts receivable, net of allowance for doubtful
accounts and discounts of $10,505 in 2003 and $10,311 in 2002 181,288 191,546
Inventories 95,882 98,010
Deferred income taxes 15,676 21,011
Other current assets 27,116 22,558
-------- --------
Total current assets 326,575 337,649
-------- --------
PROPERTY, PLANT AND EQUIPMENT
Land and land improvements 6,818 7,272
Buildings and leasehold improvements 117,265 119,582
Machinery, equipment and furnishings 289,528 287,847
Construction in progress 1,069 3,868
-------- --------
Total 414,680 418,569
Less accumulated depreciation and amortization (251,830) (236,531)
-------- --------
Property, plant and equipment, net 162,850 182,038
GOODWILL 126,258 125,321
DEBT ISSUANCE COSTS, net of accumulated
amortization of $10,648 in 2003 and $14,079 in 2002 27,195 36,827
DEFERRED INCOME TAXES 109,658 97,341
SOFTWARE COSTS, net of accumulated amortization of $3,603
in 2003 and $2,634 in 2002 9,767 8,254
INVESTMENTS IN AND ADVANCES TO AFFILIATES 14,503 13,109
OTHER ASSETS 13,100 13,038
-------- --------
TOTAL ASSETS $789,906 $813,577
======== ========
The accompanying notes are an integral part of the
consolidated financial statements.
F-3
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 28, December 29,
2003 2002
------------- -------------
LIABILITIES AND STOCKHOLDERS' DEFICIENCY (thousands, except share data)
CURRENT LIABILITIES
Revolving credit borrowings $ 96,065 $ -
Current portion of long-term debt 8,937 46
Accounts payable 98,319 87,400
Accrued employee compensation and benefits 28,331 26,330
Accrued interest 12,376 14,173
Accrued restructuring 3,911 14,424
Accrued customer rebates 18,077 18,813
Cash overdrafts 12,692 17,801
Other accrued liabilities 16,558 20,093
Deferred income taxes 163 1,864
-------- ---------
Total current liabilities 295,429 200,944
LONG-TERM DEBT 640,621 738,540
ACCRUED EMPLOYEE BENEFITS 43,348 48,022
ACCRUED RESTRUCTURING 5,837 8,347
OTHER LIABILITIES 7,787 7,457
-------- ---------
Total liabilities 993,022 1,003,310
-------- ---------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIENCY
Preferred Stock, par value $1.00 per share:
Authorized 5,000,000 shares
Issued 15,000 shares - Series B (liquidation
preference $1.5 million) in 2003 and 2002 15 15
Common Stock, par value $.01 per share:
Authorized 50,000,000 shares
Issued 27,898,149 in 2003 and 27,839,658 shares in 2002
Outstanding 24,409,149 shares in 2003 and 24,350,658 shares in 2002 279 278
Additional paid-in capital 102,155 101,972
Accumulated deficit (237,732) (216,243)
Accumulated other comprehensive loss (30,832) (38,754)
Other:
Common Stock held in treasury, at cost:
3,489,000 shares in 2003 and 2002 (27,780) (27,780)
Shareholder note receivable (9,221) (9,221)
-------- ---------
Total stockholders' deficiency (203,116) (189,733)
-------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY $789,906 $ 813,577
======== =========
The accompanying notes are an integral part of the
consolidated financial statements.
F-4
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED
December 28, December 29, December 31,
2003 2002 2001
------------ ------------ ------------
(thousands, except per share amounts)
NET SALES $1,304,560 $1,328,094 $1,252,904
COST OF GOODS SOLD 1,160,870 1,184,392 1,074,385
---------- ---------- ----------
GROSS PROFIT 143,690 143,702 178,519
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 82,588 94,744 80,540
RESTRUCTURING, IMPAIRMENT AND OTHER
CHARGES (CREDITS) (1,759) 4,799 36,068
---------- ---------- ----------
INCOME FROM OPERATIONS 62,861 44,159 61,911
INTEREST AND DEBT ISSUANCE EXPENSE 88,374 69,679 63,237
INCOME FROM EQUITY INTEREST IN JOINT VENTURES 1,466 1,734 1,645
OTHER EXPENSE, NET (3,446) (2,078) (634)
---------- ---------- ----------
LOSS BEFORE PROVISION (BENEFIT) FOR INCOME TAXES
AND CUMULATIVE EFFECT OF ACCOUNTING CHANGES (27,493) (25,864) (315)
PROVISION (BENEFIT) FOR INCOME TAXES (6,004) (86,812) 5,297
---------- ---------- ----------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF
ACCOUNTING CHANGES (21,489) 60,948 (5,612)
CUMULATIVE EFFECT OF ACCOUNTING CHANGES - (70,647) -
---------- ---------- ----------
NET LOSS $ (21,489) $ (9,699) $ (5,612)
========== ========== ==========
EARNINGS PER SHARE - BASIC
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF
ACCOUNTING CHANGES $ (0.88) $ 2.51 $ (0.24)
CUMULATIVE EFFECT OF ACCOUNTING CHANGES - (2.91) -
---------- ---------- ----------
NET LOSS $ (0.88) $ (0.40) $ (0.24)
========== ========== ==========
EARNINGS PER SHARE - DILUTED
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF
ACCOUNTING CHANGES $ (0.88) $ 2.32 $ (0.24)
CUMULATIVE EFFECT OF ACCOUNTING CHANGES - (2.69) -
---------- ---------- ----------
NET LOSS $ (0.88) $ (0.37) $ (0.24)
========== ========== =========
The accompanying notes are an integral part of the
consolidated financial statements.
F-5
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED
December 28, December 29, December 31,
2003 2002 2001
------------ ------------ ------------
OPERATING ACTIVITIES (thousands)
Net loss $(21,489) $ (9,699) $ (5,612)
Adjustments to reconcile net loss to net
cash provided by (used for) operating activities:
Cumulative effect of accounting changes - 70,647 -
Depreciation and amortization 26,045 31,592 33,988
Amortization of debt issuance costs, debt premium
and debt discount 4,458 3,280 1,288
Write off of debt issuance costs 12,928 4,892 -
Asset impairment and other charges - 2,503 13,811
Loss on disposition of assets 30 - 963
Provision for uncollectible accounts 2,115 2,336 5,479
Retirement benefit funding greater than expense (892) (1,604) (1,752)
Deferred income taxes (7,488) (92,400) 1,635
Other, net 184 266 361
Changes in operating assets and liabilities:
Accounts receivable 8,143 (20,421) (9,578)
Inventories 2,128 (8,580) 15,177
Accounts payable 10,919 (41,452) 45,913
Accrued restructuring (13,023) (2,225) 15,549
Other assets and liabilities (6,567) 10,440 (10,808)
-------- -------- --------
Net cash provided by (used for) operating activities 17,491 (50,425) 106,414
-------- -------- --------
INVESTING ACTIVITIES
Capital expenditures (6,543) (15,582) (22,482)
Proceeds from sale of assets 1,237 21 600
Acquisitions - - (17,559)
Other investing activities (3,329) (7,990) (1,130)
-------- -------- --------
Net cash used for investing activities (8,635) (23,551) (40,571)
-------- -------- --------
FINANCING ACTIVITIES
Net proceeds from (repayments of) revolving loans 44,242 (73,176) (20,905)
Proceeds from long-term debt 130,000 356,590 -
Repayments of long-term debt (164,020) (190,450) (8,538)
Repayments of long-term debt-related party - (31,590) (15,795)
Increase (decrease) in cash overdrafts (5,109) 13,728 (2,812)
Debt issuance costs (11,880) (29,981) (2,578)
Deferred credit on interest rate swaps - 14,821 -
Other financing activities - 3,494 (5,041)
-------- -------- --------
Net cash provided by (used for) financing activities (6,767) 63,436 (55,669)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 2,089 (10,540) 10,174
Cash and cash equivalents at beginning of period 4,524 15,064 4,890
-------- -------- --------
Cash and cash equivalents at end of period $ 6,613 $ 4,524 $ 15,064
======== ======== ========
The accompanying notes are an integral part of the
consolidated financial statements.
F-6
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIENCY
Accumulated
Additional Other
Preferred Common Paid-in Accumulated Comprehensive
Stock Stock Capital Deficit Loss Other Total
--------- ------ ---------- ----------- ------------- -------- ---------
(thousands)
Balances at January 1, 2001 $15 $270 $ 96,275 $(200,932) $(23,296) $(37,001) $(164,669)
Net loss (5,612) (5,612)
Minimum pension liability adjustment (10,782) (10,782)
Foreign currency translation adjustment (1,079) (1,079)
---------
Comprehensive loss (17,473)
Stock compensation - directors 352 352
Stock options exercised 3 914 917
Deferred taxes on stock option exercises 127 127
--- ---- -------- --------- -------- -------- ---------
Balances at December 31, 2001 15 273 97,668 (206,544) (35,157) (37,001) (180,746)
Net loss (9,699) (9,699)
Minimum pension liability adjustment (11,325) (11,325)
Deferred tax valuation allowance adjustment 9,597 9,597
Foreign currency translation adjustment (1,869) (1,869)
---------
Comprehensive loss (13,296)
Stock compensation - directors 221 221
Stock options exercised 5 3,534 3,539
Deferred taxes on stock option exercises 549 549
--- ---- -------- --------- -------- -------- ---------
Balances at December 29, 2002 15 278 101,972 (216,243) (38,754) (37,001) (189,733)
Net loss (21,489) (21,489)
Minimum pension liability adjustment 1,310 1,310
Foreign currency translation adjustment 6,612 6,612
---------
Comprehensive loss (13,567)
Stock compensation 1 183 184
--- ---- -------- --------- -------- -------- ---------
Balances at December 28, 2003 $15 $279 $102,155 $(237,732) $(30,832) $(37,001) $(203,116)
=== ==== ======== ========= ======== ======== =========
The accompanying notes are an integral part of the
consolidated financial statements.
F-7
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION
Organization
Foamex International Inc. (the "Company") operates in the flexible
polyurethane and advanced polymer foam products industry. The Company's
operations are primarily conducted through its wholly-owned subsidiary, Foamex
L.P. Foamex Carpet Cushion, Inc. ("Foamex Carpet") was converted to a limited
liability company and was contributed to Foamex L.P. on March 25, 2002. On
December 30, 2002, Foamex Carpet distributed certain assets, liabilities and its
business to Foamex L.P. Foamex L.P. conducts foreign operations through Foamex
Canada Inc. ("Foamex Canada"), Foamex Latin America, Inc. and Foamex Asia, Inc.
Financial information concerning the business segments of the Company is
included in Note 13.
In 2002, the Company changed its reporting period from a calendar year to a
52/53-week fiscal year ending on the Sunday closest to January 1. Fiscal year
2003 included the 52 weeks ended December 28, 2003 while the fiscal year 2002
included the 52 weeks ended December 29, 2002, after adjustment for December 31,
2001 which was included in the prior year.
The Bank of Nova Scotia owns approximately 5.8 million shares of the
Company's outstanding common stock, or approximately 23.6%. The Bank of Nova
Scotia also owns 15,000 shares of the Company's non-voting non-redeemable Series
B convertible preferred stock. Each share of the Series B Preferred Stock can be
converted into 100 shares of the Company's common stock, but only if such
conversion would not trigger a "change of control" event as defined by certain
debt agreements of the Company's subsidiaries. Ownership of more than 25% of the
common stock would constitute a "change of control".
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation
The consolidated financial statements include the accounts of the Company
and all majority-owned subsidiaries where control exists. The equity method of
accounting is used for investments in which the Company has significant
influence, generally this represents ownership of at least 20% and not more than
50%. The Company has a joint venture in Asia in which it increased its ownership
to 70% in late 2001. The Company does not have control of this joint venture due
to the minority shareholders' substantive participation rights and therefore
uses the equity method of accounting. All significant intercompany accounts and
transactions have been eliminated in consolidation.
Accounting Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to significant
concentrations of credit risk consist primarily of cash and cash equivalents and
trade accounts receivable. The Company maintains cash and cash equivalents and
certain other financial instruments with various large financial institutions.
The Company's periodic evaluation of these financial institutions are considered
in the Company's investment strategy.
The Company sells products to the furniture and bedding, automotive, carpet
and other industries. The Company performs ongoing credit evaluations of its
customers and generally does not require collateral. The Company maintains
allowance accounts for potential credit losses and such losses have been within
management's expectations.
F-8
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Revenue Recognition, Discounts and Rebates
Revenue from sales, net of discounts and estimated returns, allowances and
customer rebates, is recognized when product title and the risks and rewards of
ownership passes to the customer, the sales price is fixed and determinable and
collection is reasonably assured. Products are shipped FOB shipping point.
Cash and Cash Equivalents
Highly liquid investments with an original maturity of three months or less
when purchased are recognized as cash equivalents.
Accounts Receivable and Allowance for Uncollectible Accounts
An estimate of uncollectible accounts is maintained and is based on
historical collection experience and specific customer collection issues. A
significant change in the financial condition of one or more of the Company'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 and revolving credit
borrowings at December 28, 2003 were $745.6 million and $683.3 million,
respectively, and at December 29, 2002 were $738.6 million and $490.3 million,
respectively. The fair value of long-term debt is estimated using quoted market
prices, where available, or discounted cash flows. Fair value estimates are made
at a specific point in time, based on relevant market information about the
financial instruments. These estimates are subjective in nature and involve
uncertainties and matters of significant judgment and therefore, cannot be
determined with precision. Changes in assumptions could significantly affect the
estimates.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined
on a first-in, first-out basis.
Property, Plant and Equipment
Property, plant and equipment are stated at cost and are depreciated using
the straight-line method over the estimated useful lives of the assets. The
range of useful lives estimated for buildings is generally 20 to 35 years, and
the range for machinery, equipment and furnishings is 5 to 12 years. Leasehold
improvements are amortized over the shorter of the terms of the respective
leases or the estimated useful lives of the leasehold improvements. Depreciation
expense for 2003, 2002 and 2001 was $24.1 million, $29.1 million and $26.4
million, respectively.
Maintenance and repairs are charged to expense as incurred. Renewals and
major improvements are capitalized if they extend the life of the asset. When
assets are retired or otherwise disposed of, the asset and related accumulated
depreciation are removed from the accounts and any gain or loss is recognized in
the results of operations.
Goodwill
The Company adopted Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets" ("SFAS No. 142") on January 1, 2002 with
certain provisions adopted as of July 1, 2001. SFAS No.142 address the initial
recognition and measurement of intangible assets acquired outside a business
combination and the
F-9
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
recognition and measurement of goodwill and other intangible assets subsequent
to their acquisition. Under SFAS No. 142, goodwill is no longer amortized, but
is subject to annual impairment tests. The goodwill resulting from the
acquisition discussed in Note 4 is not amortized.
The goodwill that arose from business combinations prior to July 1, 2001
was amortized through 2001 on a straight-line basis over 40 years. Goodwill
amortization expense was $6.0 million in 2001.
In accordance with SFAS No. 142, goodwill was tested for impairment upon
adoption of the standard and is tested annually thereafter. SFAS No. 142
requires that goodwill be tested for impairment using a two-step process. The
first step is to identity a potential impairment and the second step measures
the amount of the impairment loss, if any. Goodwill is deemed to be impaired if
the carrying amount of a reporting unit's goodwill exceeds its estimated fair
value. The Company's initial impairment test resulted in the recognition of an
impairment loss of $72.0 million recorded as a cumulative effect of a change in
accounting principle retroactive to the first quarter of 2002 in accordance with
the transitional implementation guidance of SFAS No.142. The Company has
completed its annual goodwill impairment tests as of September 29, 2003 and
September 30, 2002, respectively, with no recognition of any additional
impairment.
Goodwill at December 28, 2003 increased $0.9 million from December 29, 2002
as a result of foreign currency translation adjustments reflected below as
Other.
Goodwill balances include:
Balance Balance
Segments December 29, 2002 Other December 28, 2003
----------------------- ----------------- ------- -----------------
(thousands)
Foam Products $ 74,269 $362 $ 74,631
Carpet Cushion Products 2,497 - 2,497
Automotive Products 34,686 575 35,261
Technical Products 13,869 - 13,869
-------- ---- --------
Total $125,321 $937 $126,258
======== ==== ========
Debt Issuance Costs
Debt issuance costs consist of amounts incurred in obtaining long-term
financing and are disclosed in the financing activities section of the
consolidated statements of cash flows. These costs are being amortized over the
term of the related debt using the effective interest method.
Software Costs
The Company expenses costs incurred in the preliminary project stage of
developing or obtaining internal use software, such as research and feasibility
studies, as well as costs incurred in the post-implementation/operational stage,
such as maintenance and training. Capitalization of software development costs
occurs only after the preliminary project stage is complete, management
authorizes the project, and it is probable that the project will be completed
and the software will be used for the function intended. The Company is in the
process of replacing its primary financial and operating information and
transaction processing systems and anticipates this project will be
substantially completed in 2005. Capitalized software costs aggregated $3.4
million, $7.0 million and $0.9 million in 2003, 2002 and 2001, respectively. The
capitalized costs are amortized on a straight-line basis over the estimated
useful life of the software, which is generally five years or less.
F-10
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Long-Lived Assets
The Company reviews the carrying value of its long-lived assets other than
goodwill whenever events or changes in circumstances indicate that the carrying
value of an asset may no longer be appropriate. The Company assesses
recoverability of the carrying value of the asset by estimating the future net
cash flows expected to result from the asset, including eventual disposition. If
the future undiscounted net cash flows are less than the carrying value of the
asset, an impairment loss is recorded equal to the difference between the
asset's carrying value and fair value.
Environmental Remediation
Environmental expenditures that relate to current operations are expensed.
Expenditures that relate to an existing condition caused by past operations, and
which do not contribute to current or future revenue generation, are expensed.
Liabilities are recorded when environmental assessments and/or remedial efforts
are probable and the costs can be reasonably estimated. Amounts charged against
income were $0.5 million, $1.1 million and $0.2 million in 2003, 2002 and 2001,
respectively.
Comprehensive Income (Loss)
Other comprehensive income or loss items are revenues, expenses, gains and
losses that under generally accepted accounting principles are excluded from net
income and reflected as a component of stockholders' deficiency, including
foreign currency translation and minimum pension liability adjustments.
Foreign Currency Translation
The financial statements of foreign subsidiaries have been translated into
U.S. dollars by using period-end exchange rates for the assets and liabilities
and the average exchange rates for the statements of operations. Currency
translation adjustments are included in accumulated other comprehensive loss.
Transaction gains (losses) are reflected in other income (expense) in the
consolidated statements of operations and included $(2.7) million, $(2.3)
million, and $1.6 million in 2003, 2002 and 2001, respectively.
Research and Development
Research and development costs are expensed as incurred. Amounts charged
against income were $3.6 million, $4.8 million and $3.1 million in 2003, 2002
and 2001, respectively.
Self Insurance
The Company is partially self-insured for a number of risks up to certain
limits including workers' compensation, medical, automobile and general
liability. Commercial insurance policies are carried for amounts in excess of
the self-insured amounts. Amounts charged against income were $24.9 million,
$31.2 million and $25.6 million in 2003, 2002 and 2001, respectively.
Claims and Litigation
The Company 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
F-11
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
be in effect at the date such temporary differences are expected to reverse.
Deferred income tax assets are reduced by a valuation allowance when it is
considered more likely than not that a portion of the deferred income tax assets
will not be realized in a future period. The estimates utilized in the
recognition of deferred income tax assets are subject to revision in future
periods.
Stock Options
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS No. 123"), encourages, but does not require,
companies to record compensation cost for stock-based employee compensation
plans at fair value. The Company has chosen to continue to account for
stock-based compensation using the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB No. 25"), and related interpretations. Accordingly, the Company
records expense in an amount equal to the excess, if any, of the quoted market
price on the grant date over the option price.
The following table includes as reported and proforma information required
by Statement of Financial Accounting Standards No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure ("SFAS No. 148"). Proforma
information is based on the fair value method under SFAS No. 123. Fair values of
options granted were estimated using the Black-Scholes option pricing model as
discussed in Note 10.
2003 2002 2001
--------- --------- ---------
(thousands, except per share data)
Net loss as reported $(21,489) $ (9,699) $(5,612)
Add: Stock-based employee compensation
expense included in reported net loss,
net of tax benefit 2 30 8
Deduct: Stock-based employee compensation
expense determined under fair value
based method, net of tax benefit (1,343) (1,345) (1,297)
-------- -------- -------
Proforma net loss $(22,830) $(11,014) $(6,901)
======== ======== =======
Basic loss per share
As reported $ (0.88) $ (0.40) $ (0.24)
Proforma $ (0.94) $ (0.45) $ (0.29)
Diluted loss per share
As reported $ (0.88) $ (0.37) $ (0.24)
Proforma $ (0.94) $ (0.42) $ (0.29)
Accounting Changes
In April 2002, the FASB issued Statement of Financial Accounting Standards
No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections" ("SFAS No. 145"). The provisions of
SFAS No. 145 related to the rescission of Statement 4 are applied in fiscal
years beginning after May 15, 2002. Any gain or loss on extinguishment of debt
that was classified as an extraordinary item in prior periods presented that
does not meet the criteria in Opinion 30 for classification as an extraordinary
item is reclassified. The Company has reclassified the extraordinary charge of
$1.8 million previously reported in 2002.
In June 2001, the FASB issued Statement of Financial Accounting Standards
No. 143, "Accounting for Asset Retirement Obligations" ("SFAS No. 143"). The
provisions of SFAS No. 143 relate to financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. The Company adopted SFAS No. 143 at the
beginning of 2003 and the impact on the Company's financial statements was not
material.
F-12
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
In June 2002, the FASB issued Statement of Financial Accounting Standards
No. 146, "Accounting for Costs Associated with Exit or Disposal Activities"
("SFAS No. 146"). The provisions of SFAS No. 146 require that a liability for
the cost associated with an exit or disposal activity be recognized and measured
initially at fair value only when the liability is incurred. The Company adopted
SFAS No. 146 at the beginning of 2003, but since the Company had no significant
exit or disposal activities in 2003, SFAS No. 146 had no impact on the financial
statements.
In May 2003, the FASB issued Statement of Financial Accounting Standards
No. 150, "Accounting for Certain Financial Instruments with Characteristics of
both Liabilities and Equity" ("SFAS No. 150"). The provisions of SFAS No. 150
require that certain financial instruments be classified as liabilities instead
of equity. The Company does not have any financial instruments subject to the
requirements of SFAS No. 150.
In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees Of Indebtedness of Others" ("FIN No. 45"). The provisions of FIN No.
45 clarify the requirements of SFAS No. 5. "Accounting for Contingencies,"
relating to the guarantor's accounting for and disclosure of certain guarantees.
The initial recognition and measurement provisions of FIN No. 45 are applicable
to guarantees issued or modified after December 31, 2002 and the disclosure
requirements are effective for financial statements of interim or annual periods
ended after December 15, 2002. The adoption of FIN No. 45 did not have any
impact on the results of operations or financial position of the Company and it
does not have any disclosure obligations under FIN No. 45 at December 28, 2003.
In January 2003, the FASB issued FASB Interpretation No. 46, "
Consolidation of Variable Interest Entities" ("FIN No. 46") which was amended in
October 2003 and replaced with FIN No. 46R in January 2004. The Company does not
believe that it has any "Variable Interest Entities" as defined by FIN No. 46R
and accordingly, the adoption of FIN No. 46R will not have an impact on the
Company's financial statements.
Reclassifications
Certain amounts from prior years have been reclassified to conform with the
current presentation.
3. EARNINGS (LOSS) PER SHARE
The following table shows the amounts used in computing basic earnings
(loss) per share.
2003 (a) 2002 2001 (a)
---------- -------- ---------
(thousands, except per share amounts)
Income (loss) before cumulative effect of
accounting changes $(21,489) $60,948 $(5,612)
Cumulative effect of accounting changes - (70,647) -
-------- ------- -------
Net loss $(21,489) $(9,699) $(5,612)
======== ======= =======
Weighted average common stock outstanding 24,394 24,275 23,599
======== ======= =======
Income (loss) per share before cumulative effect
of accounting changes $ (0.88) $ 2.51 $ (0.24)
Cumulative effect of accounting changes per share - (2.91) -
-------- ------- -------
Net loss per share $ (0.88) $ (0.40) $ (0.24)
======== ======= =======
F-13
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. EARNINGS (LOSS) PER SHARE (continued)
The following table shows the amounts used in computing diluted earnings
(loss) per share.
2003 (a) 2002 2001 (a)
---------- -------- ---------
(thousands, except per share amounts)
Income (loss) before cumulative effect of
accounting changes $(21,489) $60,948 $(5,612)
Cumulative effect of accounting changes - (70,647) -
-------- ------- -------
Net loss $(21,489) $(9,699) $(5,612)
======== ======= =======
Weighted average common stock outstanding 24,394 24,275 23,599
Incremental shares resulting from
Stock options (b) - 529 -
Convertible preferred stock (c) - 1,500 -
-------- ------- -------
Adjusted weighted average shares 24,394 26,304 23,599
======== ======= =======
Income (loss) per share before cumulative effect of
accounting changes $ (0.88) $ 2.32 $ (0.24)
Cumulative effect of accounting changes per share - (2.69) -
-------- ------- -------
Net loss per share $ (0.88) $ (0.37) $ (0.24)
======== ======= =======
(a) There is no dilution resulting from potential incremental shares in 2003 or
2001, because the Company had net losses before cumulative effect of
accounting changes, and the inclusion of potential incremental shares would
be antidilutive.
(b) The average number of stock options that were not included in the diluted
earnings per share calculation because the exercise price was greater than
the average market price aggregated 1,462,600 in 2002.
(c) Series B Preferred Stock issued in 2000 (see Note 12) is convertible into
1,500,000 common shares.
4. ACQUISITION
On July 25, 2001, the Company purchased certain assets and assumed certain
liabilities of General Foam Corporation, a manufacturer of polyurethane foam
products for the automotive, industrial, and home furnishings markets, at a
total cost of $18.5 million, which resulted in goodwill of approximately $9.1
million. The business was acquired due to its synergy with the Company's
existing business. The assets purchased primarily included inventory and
machinery and equipment. The results of the acquired business have been included
in the consolidated financial statements since the date of acquisition. The
effects of the acquisition on the Company's consolidated financial statements
are not material.
5. CUMULATIVE EFFECT OF ACCOUNTING CHANGES
Statement of Financial Accounting Standards No. 141, "Business
Combinations" ("SFAS No. 141") requires that any unamortized deferred credit
related to an excess over cost arising from a business combination that occurred
before July 1, 2001 to be written off and recognized as the effect of a change
in accounting principle. Accordingly, the Company has recorded a $1.3 million
credit as the cumulative effect of an accounting change in 2002.
Also included as a cumulative effect of accounting changes in 2002 is a
charge of $72.0 million associated with the adoption of SFAS No. 142 (see Note
2).
F-14
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. RESTRUCTURING, IMPAIRMENT AND OTHER CHARGES
2003
During 2003, the Company 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, the Company recorded
a $0.3 million restructuring charge reported in the Other segment as a result of
an employee termination plan for approximately 300 employees at its Mexico City
operations. The actions under this plan were substantially completed in 2003.
2002
In the fourth quarter of 2002, the Company recorded restructuring,
impairment and other charges of $10.0 million relating to the reorganization of
its executive and corporate management and the closure of or reduction of
activities at six operations. The charges included severance and other
termination benefits for approximately 200 employees, exit costs and remaining
lease payments. Also included in restructuring, impairment and other charges was
a $2.5 million asset impairment provision to reduce certain leasehold
improvements and machinery and equipment included in the Carpet Cushion Products
segment to their estimated fair values. The employees to be terminated included
manufacturing hourly and salaried personnel, sales force personnel and executive
and administrative staff. Approximately 60 of these employees were terminated in
2002 and the remainder in 2003.
Also in 2002, the Company recorded restructuring, impairment and other
credits of $5.2 million. These credits resulted from a reevaluation of the 2001
Operational Reorganization Plan discussed below and $2.1 million related to the
collection of deferred rent receivable which had been fully reserved for.
2001
During 2001, the Company recorded restructuring, impairment and other
charges of $36.1 million, primarily related to its December 2001 Operational
Reorganization Plan. Included in the Operational Reorganization Plan were plant
facility closures, reductions in support function personnel and cost reductions
in purchasing and logistics. The Operational Reorganization Plan originally
included severance and termination benefits for approximately 700 employees at
plants, in support functions and in executive management. A reevaluation of the
plan in 2002 reduced the number of facilities to be closed and as a result the
number of employees planned to be terminated was reduced to approximately 500.
Approximately 340 of these employees were terminated in 2002 and the remainder
in 2003. Restructuring, impairment and other charges included an impairment
provision of $13.8 million (net of anticipated proceeds of $4.6 million) to
reduce certain leasehold improvements and machinery and equipment included in
the Foam Products and Carpet Cushion Products segments to their estimated fair
values.
The 2001 Operational Reorganization Plan was substantially completed in
early 2003 and the Company completed all of the remaining facility closures and
personnel reductions related to its 2002 restructuring plan during 2003.
Terminations of approximately 300 employees for both plans took place in 2003.
The following table sets forth the components of the Company's
restructuring, impairment and other charges (credits):
Plant Closure Personnel
Total and Leases Reductions Impairment Other
----- ------------- ---------- ---------- ---------
2001 (millions)
Balance at January 1, 2001 $ 9.2 $ 7.6 $ 1.8 $(0.2) $ -
2001 Operational Reorganization
Plan 35.4 10.6 8.3 13.4 3.1
Adjustments and other 0.7 (0.4) (0.3) - 1.4
F-15
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. RESTRUCTURING, IMPAIRMENT AND OTHER CHARGES (continued)
Plant Closure Personnel
Total and Leases Reductions Impairment Other
----- ------------- ---------- ---------- ---------
(millions)
Net cash receipts (spending) (6.5) (3.1) (2.0) 0.6 (2.0)
Asset impairment (13.8) - - (13.8) -
----- ----- ----- ----- -----
Balance at December 31, 2001 25.0 14.7 7.8 - 2.5
2002
2002 Restructuring Plan 10.0 2.2 4.5 2.5 0.8
Adjustments and other (5.2) (4.4) (1.4) - 0.6
Net cash receipts (spending) (4.5) 0.1 (2.7) - (1.9)
Asset impairment (2.5) - - (2.5) -
----- ----- ----- ----- -----
Balance at December 29, 2002 22.8 12.6 8.2 - 2.0
2003
Adjustments (1.8) 0.2 (1.8) - (0.2)
Cash spending (11.3) (4.8) (5.5) - (1.0)
----- ----- ----- ----- -----
Balance at December 28, 2003 $ 9.7 $ 8.0 $ 0.9 $ - $ 0.8
===== ===== ===== ===== =====
The Company expects to spend approximately $3.9 million during 2004 with
the balance to be spent through 2012, primarily for lease costs.
7. INVENTORIES
The components of inventory are listed below.
December 28, December 29,
2003 2002
------------ -----------
(thousands)
Raw materials and supplies $61,855 $60,588
Work-in-process 16,484 16,737
Finished goods 17,543 20,685
------- -------
Total $95,882 $98,010
======= =======
8. LONG-TERM DEBT AND REVOLVING CREDIT BORROWINGS
The components of long-term debt and revolving credit borrowings are listed
below.
December 28, December 29,
2003 2002
------------ ------------
Foamex L.P. Senior Secured Credit Facility (thousands)
Term Loan (1) $ 48,214 $ -
Foamex L.P. Secured Term Loan (1) 80,000 -
Foamex L.P. Amended Credit Facility
Term Loan B (2) - 39,262
Term Loan C (2) - 35,693
Term Loan D (2) - 51,700
Term Loan E (2) - 16,290
Term Loan F (2) - 19,243
Revolving credit facility (2) - 51,823
10 3/4% Senior secured notes due 2009 (3) (5) 311,950 314,237
9 7/8% Senior subordinated notes due 2007 (3) 148,500 148,500
F-16
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. LONG-TERM DEBT AND REVOLVING CREDIT BORROWINGS (continued)
December 28, December 29,
2003 2002
------------ ------------
(thousands)
13 1/2% Senior Subordinated Notes due 2005 (includes
$1,543 and $2,486 of unamortized debt premium) (3) 53,128 54,071
Industrial revenue bonds (4) 7,000 7,000
Other (net of unamortized debt discount of $93 in 2003
and $137 in 2002) 766 767
-------- --------
649,558 738,586
Less current portion 8,937 46
-------- --------
Long-term debt $640,621 $738,540
======== ========
Revolving credit borrowings (1) $ 96,065 $ -
======== ========
(1) Subsidiary debt of Foamex L.P., guaranteed by the Company, FMXI, Inc. and
Foamex Canada.
(2) Subsidiary debt of Foamex L.P., guaranteed by the Company and FMXI, Inc.
(3) Subsidiary debt of Foamex L.P. and Foamex Capital Corporation.
(4) Subsidiary debt of Foamex L.P.
(5) Includes $12.0 million in 2003 and $14.2 million in 2002 of deferred
credits on interest rate swap transactions.
Senior Secured Credit Facility
On August 18, 2003, Foamex L.P. entered into a $240.0 Million Senior
Secured Credit Facility with a new group of lenders and an $80.0 million term
loan facility with another lender. Proceeds borrowed under these new facilities
were used to repay all outstanding balances under the Foamex L. P. Amended
Credit Facility which was terminated as of August 18, 2003. In addition, Foamex
Canada's revolving credit facility that did not have any outstanding borrowings
and had availability of approximately $5.9 million was terminated as of August
18, 2003. The termination of the Amended Credit Facility resulted in a write off
of debt issuance costs of $12.9 million recorded in 2003.
The $240.0 Million Senior Secured Credit Facility consists of a revolving
credit facility with a maximum availability of $190.0 million and a term loan of
$50.0 million. The revolving credit facility includes a $50.0 million sublimit
for letters of credit and availability is limited to eligible amounts, as
defined, of accounts receivable and inventory. At December 28, 2003, Foamex L.P.
had available borrowings of approximately $46.8 million and letters of credit
outstanding of $20.9 million. Borrowings under the term loan are limited to
eligible amounts, as defined, of equipment and real estate. Substantially all
the assets of Foamex L.P. and its domestic subsidiaries and Foamex Canada are
pledged as collateral for the related borrowings. Borrowings under the revolving
credit facility and the term loan bear interest at floating rates based upon and
including a margin over either LIBOR or a Base Rate, as defined. At December 28,
2003, the weighted average interest rates were 4.53% and 4.42% for the revolving
loans and the term loan, respectively. The term loan requires quarterly
installment payments of approximately $1.8 million, which commenced on September
30, 2003. All borrowings under the $240.0 Million Senior Secured Credit Facility
will mature on April 30, 2007. The $240.0 Million Senior Secured Credit Facility
includes both a subjective acceleration clause and a lockbox arrangement which
requires all lockbox receipts be used to repay revolving credit borrowings.
Accordingly, borrowings under the revolving credit facility are classified as
current in the accompanying consolidated balance sheet as of December 28, 2003
as required by Emerging Issues Task Force Issue No. 95-22, "Balance Sheet
Classification of Borrowings Outstanding Under Revolving Credit Agreements that
Include both a Subjective Acceleration Clause and a Lockbox Arrangement ("EITF
No. 95-22").
F-17
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. LONG-TERM DEBT AND REVOLVING CREDIT BORROWINGS (continued)
The $80.0 million term loan facility (the "Secured Term Loan") will mature
on April 30, 2007. Borrowings under this facility will bear interest at a rate
that is 9.25% plus the greater of the Reference Rate, as defined, or 4.25%. The
minimum rate, which is in effect as of December 28, 2003, is 13.50%. In
addition, Foamex L.P. is subject to a 1.00% facility fee which is payable
annually on the anniversary date. Borrowings under the Secured Term Loan are
collateralized by the same collateral as the $240.0 Million Senior Secured
Credit Facility. An intercreditor agreement governs the distribution of
collateral among the lenders under the $240.0 Million Senior Secured Credit
Facility and the Secured Term Loan.
10 3/4% Senior Secured Notes
The 10 3/4% Senior Secured Notes were issued by Foamex L.P. and Foamex
Capital Corporation on February 25, 2002 and are due on April 1, 2009. The notes
are guaranteed on a senior basis by all of Foamex L.P.'s domestic subsidiaries
that guarantee the $240.0 Million Senior Secured Credit Facility. The notes are
secured on a second-priority basis (subject to permitted liens) on substantially
the same collateral that secures the obligations under the $240.0 Million Senior
Secured Credit Facility and the Secured Term Loan. The notes rank effectively
junior to all senior indebtedness that is secured by first priority liens and
senior in right of payment to all subordinated indebtedness. Interest is payable
April 1 and October 1. The notes may be redeemed at the option of Foamex L.P.,
in whole or in part, at any time on or after April 1, 2006. The initial
redemption is at 105.375% of their principal amount, plus accrued and unpaid
interest, if any, thereon to the date of redemption and declining annually to
100.0% on or after April 1, 2008. Additionally, on or before April 1, 2005, up
to 35.0% of the principal amount of the notes may be redeemed at a redemption
price equal to 110.750% of the principal amount, plus accrued and unpaid
interest, if any, thereon to the date of redemption with the net proceeds of one
or more equity offerings.
Upon the occurrence of a change of control, as defined, each holder will
have the right to require Foamex L.P. to tender for such notes at a price in
cash equal to 101.0% of the aggregate principal amount thereof, plus accrued and
unpaid interest, if any, if there is such a "change of control".
The Company was required to cause a registration statement under the
Securities Act of 1933 to be effective within 180 days of March 25, 2002. The
Company filed the registration statement, but it was not effective until January
30, 2003 and therefore the Company was liable for liquidated damages from
September 23, 2002 until the date the registration statement became effective.
The liquidated damages were at the rate of $15,000 per week for the first 90
days, escalating by $15,000 per week for each additional 90 days. The liquidated
damages of $0.3 million were paid on April 1, 2003.
Effective May 1, 2002, the Company completed a series of interest rate swap
transactions with notional amounts aggregating $300.0 million. The Company
designated, documented and accounted for these interest rate swaps as fair value
hedges of the Company's 10 3/4% Senior Secured Notes due April 1, 2009. The risk
being hedged in these transactions was the change in fair value of the Company's
10 3/4% Senior Secured Notes based on changes in the benchmark interest rate,
LIBOR. The effect of these interest rate swap transactions was to convert the
fixed interest rate on the senior secured notes to floating rates reset twice
per year to correspond with the interest payment dates for the 10 3/4% Senior
Secured Notes. On September 18, 2002, the Company unwound the interest rate swap
transactions in exchange for net cash proceeds of $18.4 million, including $3.6
million realized through lower effective interest rates while the swap
transactions were in effect. The unwinding resulted in a deferred credit of
$14.8 million which is being amortized through April 1, 2009, using the
effective interest rate method.
9 7/8% Senior Subordinated Notes
The 9 7/8% Senior Subordinated Notes were issued by Foamex L.P. and Foamex
Capital Corporation and are due on June 15, 2007. The notes represent
uncollateralized general obligations of Foamex L.P. and are subordinated to all
Senior Debt, as defined in the Indenture. Interest is payable June 15 and
December 15. The notes may be redeemed at the option of Foamex L.P., in whole or
in part, at any time on or after June 15, 2002. The initial redemption is at
104.938% of their principal amount, plus accrued and unpaid interest, if any,
thereon to the date of
F-18
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. LONG-TERM DEBT AND REVOLVING CREDIT BORROWINGS (continued)
redemption and declining annually to 100.0% on or after June 15, 2005. At
December 28, 2003, the redemption price was 103.292% plus accrued and unpaid
interest.
Upon the occurrence of a change of control, as defined, each holder will
have the right to require Foamex L.P. to tender for such notes at a price in
cash equal to 101% of the aggregate principal amount thereof, plus accrued and
unpaid interest thereon, if there is such a "change of control". The notes are
subordinated in right of payment to all senior indebtedness and are pari passu
in right of payment to the 13 1/2% Senior Subordinated Notes (described below).
13 1/2% Senior Subordinated Notes
The 13 1/2% Senior Subordinated Notes were issued by Foamex L.P. and Foamex
Capital Corporation and are due on August 15, 2005. The notes represent
uncollateralized general obligations of Foamex L.P. and are subordinated to all
Senior Debt, as defined in the Indenture. Interest is payable semiannually on
February 15 and August 15. The notes may be redeemed at the option of Foamex
L.P., in whole or in part, at any time on or after August 15, 2000. The initial
redemption was 106.75% of their principal amount, plus accrued and unpaid
interest, if any, thereon to the date of redemption and declining annually to
100.0% on or after August 15, 2004. At December 28, 2003, the redemption price
was 101.6875% plus accrued and unpaid interest.
Upon the occurrence of a change of control, as defined, each holder will
have the right to require Foamex L.P. to tender for such notes at a price in
cash equal to 101% of the aggregate principal amount thereof, plus accrued and
unpaid interest, if any, thereon, if there is such a "change of control". The
notes are subordinated in right of the payment of all senior indebtedness and
are pari passu in right of payment to the 9 7/8% Senior Subordinated Notes
(described above).
Industrial Revenue Bonds ("IRBs")
IRB debt includes a $1.0 million bond that matures in 2005 and a $6.0
million bond that matures in 2013. Interest is based on a variable rate, as
defined, with options available to Foamex L.P. to convert to a fixed rate. At
December 28, 2003, the interest rate was 1.20% on the $1.0 million bond and
1.32% on the $6.0 million bond. The maximum interest rate for either of the IRBs
is 15.0% per annum.
If Foamex L.P. exercises its option to convert the bonds to a fixed
interest rate structure, the IRBs are redeemable at the option of the
bondholders. The obligations are collateralized by certain properties, which
have an approximate net carrying value of $10.7 million at December 28, 2003.
Other
Other debt includes a non-interest bearing promissory note with a principal
amount of $0.9 million at December 28, 2003 issued in connection with increasing
the Company's interest in an Asian joint venture to 70.0% in 2001. The
promissory note had unamortized discount of $0.1 million at December 28, 2003.
Related Party - Note Payable to Foam Funding LLC
Foamex Carpet entered into a $70.2 million promissory note payable to Foam
Funding LLC, a subsidiary of Trace International Holdings, Inc. ("Trace"), which
was formerly a major stockholder of the Company. Principal was payable in
quarterly installments that began in June 1998 with a final installment in
February 2004. Interest was based on a variable rate equal to the sum of 2.25%
plus the higher of: (i) the base rate of The Bank of Nova Scotia or (ii) the
Federal Funds rate plus 0.5%. At the option of Foamex Carpet, interest payable
under the note was convertible into LIBOR based loans plus 3.25%.
F-19
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. LONG-TERM DEBT AND REVOLVING CREDIT BORROWINGS (continued)
Amounts outstanding were collateralized by all of the assets of Foamex
Carpet on a pari passu basis with the Foamex Carpet Credit Facility. All
obligations under the note payable to Foam Funding LLC were paid on March 25,
2002.
Debt Covenants
The indentures and other indebtedness agreements contain certain covenants
that limit, among other things, the ability of the Company'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 of its assets, or (v) to enter into certain transactions
with affiliates or related persons. In addition, certain agreements contain
provisions that, in the event of a defined change of control or the occurrence
of an undefined material adverse change in the ability of the obligor to perform
its obligations, the indebtedness must be repaid, in certain cases, at the
option of the holder. Under the most restrictive of the distribution
restrictions, the Company could be paid by its subsidiaries, as of December 28,
2003, funds only to the extent to enable the Company to meet its tax payment
liabilities and its normal operating expenses of up to $1.5 million annually, so
long as no default or event of default has occurred.
On November 15, 2002, Foamex L.P. and its bank lenders executed an
amendment to the Amended Credit Facility. Under the amendment, Foamex L.P. was
subject to minimum net worth, minimum EBDAIT, as defined, and maximum capital
expenditure covenants through periods ending December 28, 2003. The minimum
EBDAIT covenant was tested monthly, on a cumulative basis, beginning with
December 2002. Foamex L.P. was in compliance with the revised covenants at
December 29, 2002 and throughout 2003 until the Amended Credit Facility was
terminated on August 18, 2003. Under the $240.0 Million Senior Secured Credit
Facility and the Secured Term Loan, Foamex L.P. is subject to a minimum fixed
charge coverage ratio, as defined, of 1.00. For the two quarters ended December
28, 2003, Foamex L.P.'s fixed charge coverage ratio was 1.09. Foamex L.P. is
also subject to a maximum annual capital expenditure amount which was $17.7
million for the year ended December 28, 2003 and will be $36.0 million for the
year ending January 2, 2005.
Maturities of Long-Term Debt
Scheduled maturities of long-term debt as of December 28, 2003 are shown
below (thousands):
2004 $ 8,937
2005 60,578
2006 7,143
2007 253,500
2008 -
Thereafter 306,000
--------
636,158
Unamortized debt premium/discount and fair value
adjustment, net 13,400
--------
Total $649,558
========
9. RETIREE BENEFIT PLANS
Defined Benefit Pension Plans
The Company provides pension and survivor benefits for salaried and certain
hourly employees in the United States (the "Qualified Pension Plan"). Salaried
employees are provided benefits that are based principally on the combination of
years of credited service and compensation. Hourly employees are provided
benefits that are based principally on stated amounts for each year of credited
service. Certain employees in a wholly-owned Canadian subsidiary are provided
pension and survivor benefits.
F-20
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. RETIREE BENEFIT PLANS (continued)
Effective May 15, 2001, a supplemental executive retirement plan (the
"SERP") was established. The SERP is a non-qualified plan and provides
retirement benefits to certain executives that supplement the benefits provided
under the Qualified Pension Plan.
Retiree Medical and Life Insurance Benefits
The Company provides postretirement health care and life insurance for
eligible employees, limited primarily to one manufacturing facility in the
United States. These plans are unfunded and benefits are paid as the claims are
submitted. The benefits are only provided until the participant becomes eligible
for Medicare. Consequently, the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 will not impact the obligations or expense of the
Company. The Company 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:
Pension Benefits Other Benefits
------------------------ -----------------------
2003 2002 2003 2002
---------- ---------- -------- --------
Change in Benefit Obligations (thousands)
Benefit obligations at beginning of year $107,390 $ 95,962 $ 1,248 $ 624
Service cost 4,300 3,866 29 29
Interest cost 7,086 6,556 76 82
Amendments 257 157 - -
Benefits paid (5,392) (5,003) (139) (144)
Plan participants' contributions - - 15 19
Actuarial loss 10,461 6,466 5 638
Foreign currency exchange rate changes 950 46 - -
Curtailment - (660) - -
-------- -------- ------- -------
Benefit obligation at end of year $125,052 $107,390 $ 1,234 $ 1,248
======== ======== ======= =======
Change in Plan Assets
Fair value of plan assets at
beginning of year $ 60,085 $ 65,514 $ - $ -
Actual return on plan assets 15,240 (7,350) - -
Employer contribution 9,564 7,464 124 125
Plan participants' contributions - - 15 19
Benefits paid (5,392) (5,003) (139) (144)
Plan administrative expenses (438) (591) - -
Foreign currency exchange rate changes 827 51 - -
-------- -------- ------- -------
Fair value of plan assets at end of year $ 79,886 $ 60,085 $ - $ -
======== ======== ======= =======
Funded Status and Net Amounts Recognized
in Consolidated Balance Sheets
Funded status $(45,166) $(47,305) $(1,234) $(1,248)
Unrecognized transition asset (365) (440) - -
Unrecognized prior service cost (benefit) 92 (265) (47) 398
Unrecognized net actuarial loss (gain) 50,997 52,573 387 (53)
-------- -------- ------- -------
Net amount recognized in consolidated
balance sheets $ 5,558 $ 4,563 $ (894) $ (903)
======== ======== ======= =======
F-21
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. RETIREE BENEFIT PLANS (continued)
Pension Benefits Other Benefits
------------------------ -----------------------
Amounts Recognized in the Consolidated 2003 2002 2003 2002
Balance Sheets ---------- ---------- -------- --------
(thousands)
Prepaid benefit costs $ 224 $ 194 $ - $ -
Accrued benefit liability (39,896) (42,983) (894) (903)
Intangible assets 674 763 - -
Accumulated other comprehensive loss* 44,556 46,589 - -
-------- -------- ------- -------
Net amount recognized $ 5,558 $ 4,563 $ (894) $ (903)
======== ======== ======= =======
* Before related income tax benefit.
The accumulated benefit obligation for all defined benefit plans was $119.5
million at year-end 2003 and $102.6 million at year-end 2002. Information for
defined benefit plans with an accumulated benefit obligation in excess of plan
assets is listed below.
December 31, 2003 December 31, 2002
----------------- -----------------
(thousands)
Projected benefit obligation $121,381 $104,843
Accumulated benefit obligation $116,767 $101,004
Fair value of plan assets $ 76,871 $ 58,021
Components of Net Periodic Benefit Plan Cost
Pension Benefits Other Benefits
--------------------------- --------------------------
2003 2002 2001 2003 2002 2001
------ ------ ------ ------ ------ ------
(thousands)
Service cost $4,300 $3,866 $3,666 $ 29 $ 29 $19
Interest cost 7,086 6,556 6,158 76 82 60
Expected return on plan assets (5,611) (5,823) (5,829) - - -
Amortization of transition assets (75) (75) (75) - - -
Amortization of prior service benefit (109) (140) (177) (6) (6) (6)
Amortization of net loss (gain) 3,090 1,643 1,163 16 15 (8)
Curtailment - (162) - - - -
------ ------ ------ ---- ---- ---
Net periodic benefit plan cost $8,681 $5,865 $4,906 $115 $120 $65
====== ====== ====== ==== ==== ===
Additional Information
Pension Benefits Other Benefits
------------------------ -----------------------
2003 2002 2003 2002
---------- ---------- -------- --------
(thousands)
Increase (decrease) in minimum liability
included in other comprehensive loss* $(2,033) $18,267 N/A N/A
* Before related income tax benefit.
F-22
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. RETIREE BENEFIT PLANS (continued)
Pension Benefits Other Benefits
----------------------- ------------------------
Weighted-Average Assumptions Used December 31, December 31,
to Determine Benefit Obligations 2003 2002 2003 2002
---------------------------------------- ---------- ---------- -------- --------
Discount rate 6.0% 6.5% 6.0% 6.5%
Expected long-term return on plan assets* 9.0% 9.0% N/A N/A
Rate of compensation increase 3.5%-5.0% 4.0%-5.0% N/A N/A
Weighted-Average Assumptions Used Pension Benefits Other Benefits
------------------------ -----------------------
to Determine Annual Net Benefit Cost 2003 2002 2003 2002
------------------------------------ ---------- ---------- -------- --------
Discount rate 6.5% 7.0% 6.5% 7.0%
Expected long-term return on plan assets* 9.0% 9.0% N/A N/A
Rate of compensation increase 4.0%-5.0% 4.0%-7.0% N/A N/A
* The determination of the expected long-term rate of return is a combination
of historical returns and future return assumptions based on the Company's
pension plan asset strategy as discussed below.
Other Benefits
----------------------------------------
December 31, 2003 December 31, 2002
Assumed Health Care Cost Trend Rates ----------------- -----------------
Health care cost trend rate assumed for next year 12.0% 13.0%
Rate to which the cost trend rate is assumed to
decline (ultimate trend rate) 5.0% 5.0%
Year that the rate reaches the ultimate trend rate 2011 2011
Assumed health care cost trend rates have a significant effect on the
amounts reported for the health care plans. A one-percentage point change in
assumed health care cost trend rates would have the effects listed below.
Assumed Health Care Cost Trend 1% Point Increase 1% Point Decrease
----------------- -----------------
(thousands)
Effect on total of service cost and interest cost $ 9 $ (8)
Effect on postretirement benefit obligation $90 $(79)
Funding, Investment Strategy, Asset Allocations and Risk Management for Plan
Assets.
Pension plan assets are primarily comprised of equity and debt securities,
including both U.S. and foreign securities. At year-end 2003, common stock of
the Company totaled $2.1 million, or 2.8% of the assets. At year-end 2002,
common stock of the Company totaled $1.3 million, or 2.4% of the assets. Pension
plan assets from pension plans in Canada totaled $5.5 million, or 6.9% of assets
at year-end 2002 and $3.8 million, or 6.4% of assets, at year-end 2002.
U. S. Plan Assets
---------------------------------------
December 31, 2003 December 31, 2002
----------------- -----------------
Equity securities 64% 58%
Debt securities 30 33
Other 6 9
--- ---
Total 100% 100%
=== ===
The Company's funding policy for the Qualified Pension Plan is to
contribute an amount that both satisfies the minimum funding requirements of the
Employee Retirement Income Security Act of 1974 and does not exceed the full
funding limitations of the U.S. Internal Revenue Code. Funding in 2004 is
estimated to be $11.8 million.
F-23
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. RETIREE BENEFIT PLANS (continued)
For the U.S. pension plans, the investment strategy, asset allocations and
risk management strategies are detailed in the Investment Policy Statement (the
"IPS") of the Company. The IPS was developed in conjunction with a comprehensive
review and assessment of current and projected financial requirements.
Investment guidelines are based on an investment horizon of greater than five
years. Key risk management considerations include asset allocation and asset
class mix , control procedures and performance monitoring and review. Under the
IPS, the U.S. pension plan may use certain classes of hedge funds (derivatives),
but the amount of hedge funds is limited to less than 3% of U.S. plan assets.
The strategic target of U.S. pension assets include 60% of equities and 40%
of debt securities and cash and cash equivalents. The amount of cash equivalents
is targeted to approximate one year of benefit payments to plan participants.
Defined Contribution Plan
The Company 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,
the Company partially matches certain employee contributions. Expense for these
contributions was $0.9 million, $1.0 million and $1.0 million in 2003, 2002 and
2001, respectively.
10. STOCK OPTION PLANS
At the Annual Meeting of Stockholders on June 5, 2002, stockholders
approved amendments to the Foamex International Inc. 2001 Equity Incentive Plan
for Non-Employee Directors. The amendments:
o expanded participant eligibility to include employees,
employee-directors and consultants to the Company, including its
subsidiaries and affiliates;
o expanded the types of awards that may be granted to include incentive
stock options, phantom stock units and performance share units, in
addition to nonqualified options provided for under the existing plan;
o increased the number of shares of Common Stock that are available for
awards by 600,000; and
o renamed the plan to the Foamex International Inc. 2002 Stock Award
Plan (the "2002 Stock Award Plan").
Following these amendments, 2,100,000 shares of the Company's common stock
are reserved for the 2002 Stock Award Plan.
The 1993 stock option plan, as amended, (the "1993 Stock Option Plan")
provided for the issuance of nonqualified and incentive stock options for common
stock of the Company. Officers and executives of the Company, including its
subsidiaries and affiliates were eligible to participate. During the fourth
quarter of 2003, the 1993 Stock Option Plan expired according to the provisions
of the plan. Consequently, no further options can be granted. The 1993 Stock
Option Plan provided for the issuance of up to 4,750,000 shares of the Company's
common stock. Options outstanding on the expiration date continue to be
available for the issuance of the Company's common stock under the terms and
conditions at their issuance.
The price and terms of options under the plans discussed above is at the
discretion of the Company, except that the term of the option cannot exceed ten
years.
F-24
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. STOCK OPTION PLANS (continued)
Option Grants
Options granted in 2003 included the following terms:
o 141,750 options with a three-year pro-rata vesting period and a
six-year term.
o 40,000 options with a five-year vesting period and a six-year term.
The vesting provisions may be accelerated to three-year pro-rata
vesting in either 25%, 50%, or 100% increments, depending on certain
financial measures in fiscal 2003, as defined. These goals were not
attained.
o All other options were granted with five-year pro-rata vesting period
and a ten-year term.
Options granted in 2002 included the following terms:
o 210,000 options with a three-year pro-rata vesting period and a
ten-year term.
o 270,500 options with a five-year vesting period and a ten-year term.
The vesting provisions may be accelerated in 50% or 100% increments,
depending on the average closing price of the Company common stock, as
defined.
o 100,000 options with a three-year pro-rata vesting period and a
six-year term.
o 756,250 options with a five-year vesting period and a six-year term.
The vesting provisions included accelerated three-year pro-rata
vesting features in either 25%, 50%, or 100% increments, depending on
attainment of certain financial goals in fiscal 2003, as defined.
These goals were not attained.
o All other options were granted with five-year pro-rata vesting period
and a ten-year term.
Option grants in 2001 included the following terms:
o 100,000 options with pro-rata vesting in years three through five and
a ten-year term.
o 250,000 options with a seven-year vesting period and a ten-year term.
The vesting provisions can be accelerated to full vesting in at the
end of a three-year period depending on attainment of certain
financial performance goals, as defined.
o All other options were granted with five-year pro-rata vesting period
and a ten-year term.
All options were granted with an exercise price equal to the fair market
value at the date of the grant, except for certain options that were repriced in
1996 with an exercise price below the fair market value on the revaluation date.
Option Modifications
As provided in a severance agreement during 2003, the Company extended the
exercise period for 40,700 options up to four years beyond the exercise period
provided for at issuance. The Company did not recognize any compensation expense
in connection with this modification because the fair market value was less than
the exercise price on the modification date.
As provided in certain severance agreements during 2002, the Company
extended the exercise period for 80,900 options up to one year beyond the
exercise period provided for at issuance and accelerated vesting. The Company
did not recognize any compensation expense in connection with these
modifications because the fair market value was less than the exercise price on
the modification date.
As provided in certain severance agreements during 2001, the Company
extended by three months the exercise period for 57,200 options beyond the
exercise period provided for under the option plans discussed above.
Compensation expense of $0.1 million was recorded for the fair market value in
excess of the exercise price on the modification date. Also in 2001, the terms
of 750,450 options were modified to provide for 100% vesting and the extension
of the period provided to exercise; including 250,000 options until January 31,
2006 and 500,450 options
F-25
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. STOCK OPTION PLANS (continued)
until January 31, 2002. The Company did not recognize any compensation expense
in connection with these modifications because the fair market value was less
than the exercise price on the modification date.
A summary of stock option activity is presented below.
2003 2002 2001
-------------------- ------------------- ---------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
--------- -------- --------- -------- ---------- --------
Outstanding at beginning of period 4,528,650 $6.42 3,465,542 $6.88 2,980,110 $7.35
Granted 312,583 3.29 2,234,311 5.87 2,104,576 6.42
Exercised - - (551,352) 6.33 (163,125) 5.62
Forfeited (663,802) 6.93 (619,851) 7.07 (1,456,019) 7.32
--------- ----- --------- ----- ---------- -----
Outstanding at end of period 4,177,431 $6.11 4,528,650 $6.42 3,465,542 $6.88
========= ===== ========= ===== ========== =====
Exercisable at end of period 1,480,265 $7.38 1,365,852 $7.34 1,431,489 $7.03
========= ===== ========= ===== ========= =====
Listed below is a summary of the stock options outstanding and exercisable
at December 28, 2003.
Outstanding
Weighted Weighted
Exercise Average Average
Price Exercise Remaining
Range Options Price Life-Years
-------------- --------- --------- ----------
$ 1.20 - 2.61 970,083 $2.17 5.4
$ 3.07 - 5.75 826,650 $4.98 5.7
$ 6.22 - 7.88 1,346,882 $7.05 6.9
$ 8.18 - 13.25 1,033,816 $9.49 7.3
---------
4,177,431
Exercisable
Exercise Average
Price Exercise
Range Options Price
-------------- --------- ---------
$ 1.20 - 2.61 38,334 $2.43
$ 3.07 - 5.75 405,500 $5.30
$ 6.22 - 7.88 606,482 $7.04
$ 8.18 -13.25 429,949 $10.26
---------
1,480,265
For purposes of the disclosure required under SFAS No. 148 and as included
in Note 2, the fair value of each option was estimated on the grant date using
the Black-Scholes option-pricing model. Based on the assumptions listed below,
the weighted average fair value of options granted was $2.12 per option in 2003,
$3.74 per option in 2002 and $2.95 per option in 2001.
2003 2002 2001
------- -------- ----------
Expected life in years 3.0 3.0 3.0
Risk-free interest rate 2.22% 2.82% 4.41%
Volatility 101.73% 97.66% 61.85%
Dividend yield 0.00% 0.00% 0.00%
F-26
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. INCOME TAXES
The sources of income (loss) before the provision (benefit) for income
taxes are shown below.
2003 2002 2001
------------ ------------ ------------
(thousands)
United States $(28,467) $(30,609) $(8,293)
Foreign 974 4,745 7,978
-------- -------- -------
Loss before provision (benefit) for income taxes $(27,493) $(25,864) $ (315)
======== ======== =======
A reconciliation of the statutory federal income tax to income tax expense
is shown below.
2003 2002 2001
------------ ------------ ------------
(thousands)
Statutory income taxes $(9,623) $ (9,052) $ (110)
State income taxes, net of federal benefit (876) (1,089) (135)
Increase (decrease) in valuation allowance 649 (75,371) 1,400
Non-deductible amortization - - 1,391
Deemed distributions of foreign earnings to U.S. 3,109 - -
Alternative minimum tax - (200) 350
Use of acquired tax benefits - - 1,550
Foreign tax rate differential (10) 192 142
Impact of tax rate changes 85 - -
Other, net 662 (1,292) 709
------- ---------- -------
Total $(6,004) $(86,812) $ 5,297
======= ======== =======
The provision (benefit) for income taxes is summarized as follows:
2003 2002 2001
------------ ------------ ------------
Current (thousands)
Federal $ - $ 3,004 $ 924
State 39 160 262
Foreign 1,286 2,423 2,594
------- -------- -------
Total current 1,325 5,587 3,780
------- -------- -------
Deferred
Federal (6,562) (14,577) 174
State (915) (1,779) (397)
Foreign (501) (672) 340
------- -------- -------
Total deferred (7,978) (17,028) 117
------- -------- -------
Change in valuation allowance 649 (75,371) 1,400
------- -------- -------
Total provision (benefit) for income taxes $(6,004) $(86,812) $ 5,297
======= ======== =======
The tax effect of the temporary differences that give rise to deferred
income tax assets and liabilities are listed below.
F-27
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. INCOME TAXES (continued)
December 28, December 29,
2003 2002
------------ -----------
Deferred income tax assets (thousands)
Inventory basis differences $ 1,804 $ 757
Employee benefit accruals 21,749 22,006
Allowances and contingent liabilities 9,740 10,459
Restructuring and plant closing accruals 3,704 8,786
Intangible asset basis differences - 4,901
Other 7,201 12,329
Net operating loss carryforwards 99,432 77,873
Capital loss carryforwards 394 325
Valuation allowance for deferred income tax assets (2,560) (1,911)
-------- --------
Deferred income tax assets 141,464 135,525
-------- --------
Deferred income tax liabilities
Basis difference in property, plant and equipment (13,538) (12,953)
Other (4,673) (6,084)
-------- --------
Deferred income tax liabilities (18,211) (19,037)
-------- --------
Net deferred income tax assets (liabilities) $123,253 $116,488
======== ========
The effective tax benefit rate for 2003, included a $3.1 million provision
that reduced the effective tax benefit rate. The $3.1 million of tax expense was
related to the Foamex L.P. $240.0 Million Senior Secured Credit Facility and the
collateral provisions that pledged the stock of Foamex Canada. This collateral
pledge under the U.S. Internal Revenue Code resulted in a deemed distribution of
accumulated earnings, as defined, of Foamex Canada. Because the Company will not
be able to utilize any Canadian tax credits associated with the deemed
distribution, the full amount of the distribution was subject to U.S. taxation
and will result in a reduction in the amount of the U.S. net operating loss
carryforwards available.
During 2002, the Company determined that, based on the weight of available
evidence including improved financial results for the rolling three years ended
March 31, 2002, reduced NOL carryforward limitations based on an asset appraisal
report received in the quarter ended June 30, 2002, increased projected future
taxable income, and tax planning strategies initiated in 2002, it was more
likely than not that substantially all of its net deferred tax assets would be
realized in the future. Accordingly, the Company reversed a previously recorded
valuation allowance of $99.3 million. The adjustment increased net income for
2002 by $77.3 million, and decreased goodwill by $12.4 million and other
comprehensive loss by $9.6 million. The Company's actual results for 2002 were
essentially similar to the results it projected when it reversed the valuation
allowance.
The 2001 income tax provision included an increase in the valuation
allowance to reduce the Company's deferred tax assets. The valuation allowance
was reduced to reflect the realization of Federal loss carryforwards that offset
the current tax component of the Federal and Mexican tax provision.
Additionally, the valuation allowance was reduced to offset the net deferred
Federal tax liability generated. The valuation allowance has also been adjusted
by $3.8 million in 2001 to give effect to the deferred tax assets resulting from
the recognition of a minimum pension liability.
The Company has net deferred income tax assets aggregating $123.3 million
as of December 28, 2003 that primarily represent the benefit of future tax
deductions and net operating loss carryforwards available to offset future
taxable income in the U.S. In order to realize these assets, the Company must
generate sufficient taxable income to offset its U.S. net operating loss
carryforwards of approximately $267.3 million at December 28, 2003 expiring from
2010 to 2023. Approximately $111.5 million of the net operating loss
carryforwards, related to $39.0 million of deferred tax assets, expire in the
years 2010 to 2012 with the remainder principally expiring in the 2018-2023
period. The Company projects that it will have sufficient taxable income in the
years 2005 to 2012 to utilize all of the expiring net operating loss
carryforwards. The Company has had an ownership change as defined in IRC Section
F-28
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. INCOME TAXES (continued)
382 and accordingly, the Company is limited (on an annual basis) to
approximately $21.0 million of net operating loss carryforward utilization.
At December 28, 2003, the Company had $3.4 million of net operating loss
carryforwards in a Mexican subsidiary that expire in 2006 through 2013. A full
valuation allowance has been recorded due to uncertainty regarding utilization
of these net operating loss carryforwards.
Cumulative undistributed earnings of foreign subsidiaries for which no U.S.
income or foreign withholding taxes have been provided, amounted to $5.2 million
at December 28, 2003 and $13.4 million at December 29, 2002, respectively. Such
earnings are deemed to be permanently invested by the Company. 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. STOCKHOLDERS' DEFICIENCY
Preferred Stock
The Company has 5.0 million shares of preferred stock, par value of $1.00
per share, authorized for issuance. In 2000, 15,000 shares of Series B Preferred
Stock were issued in exchange for 1,500,000 shares of common stock. Series B
Preferred Stock is non-voting, non-redeemable and convertible into 100 shares of
the Company's common stock. The conversion feature is only available if the
conversion would not trigger a "change of control" event, as discussed in Note
1. The Series B Preferred Stock is noncumulative and would be entitled to
dividends only if a dividend is declared on the Company's common stock. It ranks
senior to any future preferred stock issued by the Company and is entitled to a
liquidation preference of $100 per share. No other preferred shares have been
issued.
Common Stock
The Company has 50 million shares of common stock, par value $.01 per
share, authorized. At December 28, 2003, there were 24.4 million shares issued
and outstanding and 5.6 million shares of common stock reserved for potential
issuance in connection with stock option plans, discussed in Note 10. Included
in the Consolidated Statements of Stockholders' Deficiency is the portion of
compensation for the Company's directors that is paid in common stock. There
were no cash dividends paid by the Company on its common stock during the past
three fiscal years. The payment of any future dividends will be determined by
the Board of Directors in light of conditions then existing, including the
Company's earnings, financial condition and requirements, restrictions in
financing agreements, business conditions and other factors. The Company is a
holding company whose assets consist primarily of its wholly-owned subsidiary,
Foamex L.P. Consequently, the Company's ability to pay dividends is dependent
upon the earnings of Foamex L.P. and any future subsidiaries of the Company and
the distribution of those earnings to the Company and loans or advances by
Foamex L.P. and any such future subsidiaries to the Company. The ability of
Foamex L.P. to make distributions is restricted by the terms of its financing
agreements. Due to such restrictions, the Company is expected to have only
limited access to the cash flow generated by Foamex L.P. for the foreseeable
future.
Treasury Stock
The Board of Directors has authorized the purchase of up to 3,000,000
million shares of the Company's common stock, however the $240.0 Million Senior
Secured Credit Facility limits the Company's ability to purchase its common
stock. As of December 28, 2003, 1,989,000 shares have been purchased under this
program.
F-29
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. STOCKHOLDERS' DEFICIENCY (continued)
Accumulated Other Comprehensive Loss
The components of accumulated other comprehensive loss are listed below.
December 28, December 29, December 31,
2003 2002 2001
------------ ------------ ------------
(thousands)
Foreign currency translation adjustment $ (3,257) $ (9,869) $ (8,000)
Minimum pension liability (a) (27,575) (28,885) (27,157)
-------- -------- --------
$(30,832) $(38,754) $(35,157)
======== ======== ========
(a) Net of income tax benefit of $15.8 million and $16.5 million at December
28, 2003 and December 29, 2002, respectively.
13. BUSINESS SEGMENTS
The reportable business segments reflect the Company's management
organization that is structured based on distinct product lines and customers.
An executive vice president heads each operating segment. Each executive
vice president is responsible for developing budgets and plans as well as
directing the operations of the segment. The performance of each operating
segment is measured based upon income from operations, excluding restructuring,
impairment and other charges. The Company does not allocate restructuring,
impairment and other charges to operating segments because many of the Company's
facilities produce products for multiple segments.
Foam Products manufactures and markets cushioning foams for bedding,
furniture, packaging and health care applications and foam-based consumer
products, such as mattress pads and children's furniture. Carpet Cushion
Products manufactures and distributes rebond, prime, felt and rubber carpet
padding. Automotive Products supplies foam products and laminates to major tier
one suppliers and original equipment manufactures. Technical Products
manufactures and markets reticulated and other specialty foams used for
reservoiring, filtration, gasketing and sealing applications.
The "other" column in the table below represents certain manufacturing
operations in Mexico City, corporate expenses not allocated to other business
segments and restructuring, impairment and other charges (credits) (see Note 6).
Asset and capital expenditure information by business segment is not reported
because many of the Company's facilities produce products for multiple business
segments.
The accounting policies of the business segments are the same as described
in Note 2. Business segment results include revenues and costs that are
specifically identifiable and costs shared by business segments have been
allocated based on utilization. At the end of 2003, the Company changed its
measure of segment operating income to exclude allocation of corporate overhead,
as management no longer evaluates the performance of segments using this
allocation. Rather, the Company attempts to manage and control these costs
independent of segment performance. Segment results for 2002 and 2001 have been
adjusted to reflect this change for comparative purposes. Geographic sales are
determined based on the location in which the sale originated.
Sales to one customer, which are included in Automotive Products, accounted
for approximately 16.3%, 17.3% and 15.7% of net sales in 2003, 2002 and 2001,
respectively. No other customer accounted for more than 10.0% of net sales
during the periods presented.
F-30
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. BUSINESS SEGMENTS (continued)
Business segment results are presented below.
Carpet
Foam Cushion Automotive Technical
Products Products Products Products Other Total
-------- -------- ---------- --------- --------- ----------
2003 (thousands)
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 $(52,031) $ 62,861
Depreciation and amortization $ 11,002 $ 3,275 $ 2,815 $ 2,931 $ 6,022 $ 26,045
2002
Net sales $471,005 $234,001 $466,718 $124,124 $ 32,246 $1,328,094
Income (loss) from operations $ 45,466 $ 1,239 $ 34,146 $ 35,185 $(71,877) $ 44,159
Depreciation and amortization $ 13,632 $ 5,904 $ 3,721 $ 2,815 $ 5,520 $ 31,592
2001
Net sales $499,668 $230,965 $377,753 $111,043 $ 33,475 $1,252,904
Income (loss) from operations $ 81,144 $ 7,422 $ 27,040 $ 32,692 $(86,387) $ 61,911
Depreciation and amortization $ 11,018 $ 5,390 $ 4,150 $ 2,670 $ 10,760 $ 33,988
Geographical information is presented below.
United
States Canada Mexico Consolidated
-------- -------- -------- ------------
2003 (thousands)
Net sales $989,075 $67,542 $247,943 $1,304,560
Property, plant and equipment, net $142,602 $ 5,003 $ 15,245 $ 162,850
2002
Net sales $981,927 $66,940 $279,227 $1,328,094
Property, plant and equipment, net $157,007 $ 3,898 $ 21,133 $ 182,038
2001
Net sales $966,614 $65,179 $221,111 $1,252,904
Property, plant and equipment, net $172,456 $ 4,006 $ 24,335 $ 200,797
14. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
2003 2002 2001
-------- -------- -------
(thousands)
Cash paid for interest $72,785 $56,583 $63,593
======= ======= =======
Cash paid for income taxes, net $ 2,349 $ 2,222 $ 1,990
======= ======= =======
Non cash - capital leases $ - $ - $ 299
======= ======= =======
Non cash - debt exchanged for increased ownership
in joint venture $ - $ - $ 1,069
======= ======= =======
F-31
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. RELATED PARTY TRANSACTIONS AND BALANCES
The Company regularly enters into transactions with its affiliates in the
ordinary course of business.
Trace Promissory Notes
On July 1, 1997, Trace borrowed $5.0 million pursuant to a promissory note
with an aggregate principal amount of $5.0 million issued to Foamex L.P. on June
12, 1997. The promissory note was due and payable on demand or, if no demand was
made, on July 7, 2001, and bears interest at 2 3/8% plus three-month LIBOR, as
defined, per annum payable quarterly in arrears commencing October 1, 1997. On
June 12, 1997, another promissory note issued to Foamex L.P. by Trace in July
1996 was amended. The amended promissory note is an extension of a promissory
note of Trace that was due in July 1997. The aggregate principal amount of the
amended promissory note was increased to approximately $4.8 million and the
maturity of the promissory note was extended. The principal was reduced by
approximately $0.6 million relating to a portion of the proceeds from the sale
of a corporate aircraft in 1999. The promissory note was due and payable on
demand or, if no demand was made, on July 7, 2001, and bears interest at 2 3/8%
plus three-month LIBOR, as defined, per annum payable quarterly in arrears.
The Trace notes are included in the other component of stockholders'
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 conclusion of the Trace bankruptcy proceedings, the Company will
charge the uncollected portion of the Trace notes to accumulated deficit. The
Company has not recorded any interest income on these notes since the Trace
bankruptcy.
Trace Accounts Receivable
At December 28, 2003 and December 29, 2002, operating accounts receivable
from Trace were approximately $3.4 million. These accounts receivable were fully
reserved for prior to 2001.
Foam Funding LLC Debt
Subsidiaries of the Company paid interest on notes payable to Foam Funding
LLC of $0.7 million and $2.8 million in 2002 and 2001, respectively.
Subsidiaries of the Company paid principal on notes payable to Foam Funding LLC
of $31.6 million and $15.8 million in 2002 and 2001, respectively. This debt was
fully repaid in 2002 (see Note 8).
Other
In 2002, pursuant to the terms of an existing agreement, the Company
acquired the 5.0% stock interest in Foamex de Mexico S.A. de C.V. ("Foamex de
Mexico") which had been held by the general director of Foamex de Mexico for
$1.0 million.
In 2001, two members of the board of directors provided consulting services
to the Company for which fees paid were $0.2 million. Also in 2001, one of these
directors received a loan of $0.2 million from the Company's joint venture in
Asia. The loan was evidenced by a 20-year non-recourse promissory note bearing
interest at 4.0% per annum secured by the director's 5.0% interest in the value
of the Company's equity interest in the joint venture in Asia. The Company also
maintains an apartment used by this director. Rent expense for this facility was
$0.2 million in 2003, 2002 and 2001.
The Company, 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 the Company.
F-32
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. RELATED PARTY TRANSACTIONS AND BALANCES (continued)
The Company's Pico Rivera, California facility was owned by Foam Funding
LLC and leased to the Company. The Pico Rivera facility was sold to a third
party during 2002.
During December 2001, the Company entered into an agreement that guarantees
two promissory notes, totaling $0.7 million, payable to a foreign affiliate that
the Company accounts for under the equity method. The promissory notes were
issued to a director of the Company and an employee of Foamex L.P.
During 2002, a member of the Board of Directors became an officer of the
Company at an annual salary of at least $0.4 million plus a target annual bonus
of 75.0% of base salary of which 80.0% was guaranteed in any given year.
Additionally under the employment agreement, the director had the right to
terminate employment and receive termination benefits under certain conditions,
including the Company's failure to purchase a business owned by the director.
Since the Company did not enter into a definitive agreement to purchase the
business by October 31, 2002, the director had the option to terminate the
employment agreement within 90 days and exercised the termination option in
January 2003. This director did not stand for reelection at the Company's annual
shareholder meeting held on May 23, 2003. During 2002, the Company paid $0.5
million to the director's business for consulting services.
Also during 2002, the Company entered into an agreement with a member of
the 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 Company also paid $0.5 million in 2002 for legal services to a law
firm in which another director was a partner. That director resigned from the
Board in late 2002.
16. COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company is obligated under various noncancelable lease agreements for
rental of facilities, vehicles and other equipment. Many of the leases contain
renewal options with varying terms and escalation clauses that provide for
increased rentals based upon increases in the Consumer Price Index, real estate
taxes and lessors' operating expenses. Total minimum rental commitments required
under operating leases at December 28, 2003 are (thousands):
2004 $14,076
2005 10,191
2006 6,472
2007 4,930
2008 3,321
Balance 5,925
-------
Total $44,915
=======
Rental expense charged to operations under operating leases approximated
$18.8 million, $23.4 million and $20.2 million in 2003, 2002 and 2001,
respectively. Substantially all such rental expense represented the minimum
rental payments under operating leases.
Contractual Commitments
The Company has entered into contracts for information technology services
and certain raw materials that have minimum purchase commitments estimated at
$105.2 million in 2004, $57.1 million in 2005, $66.4 million in 2006, $63.4
million in 2007 and $59.5 million for each of the years 2008, 2009 and 2010.
F-33
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. COMMITMENTS AND CONTINGENCIES (continued)
Litigation
The Company 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 the Company's financial position or results of
operations. If management's assessment of the Company's liability relating to
these actions is incorrect, these actions could have a material adverse effect
on the Company's consolidated financial position, results of operations and cash
flows.
As of December 28, 2003, the Company had accrued approximately $1.1 million
for litigation, claims and other legal matters in addition to the environmental
matters discussed below.
Environmental and Health and Safety
The Company is subject to extensive and changing federal, state, local and
foreign environmental laws and regulations, including those relating to the use,
handling, storage, discharge and disposal of hazardous substances, the discharge
or emission of materials into the environment, and the remediation of
environmental contamination, and as a result, are from time to time involved in
administrative and judicial proceedings and inquiries relating to environmental
matters. As of December 28, 2003, the Company had accruals of approximately $2.5
million for environmental matters, including approximately $2.3 million related
to remediating and monitoring soil and groundwater contamination and
approximately $0.2 million related to sites where it has been designated as a
Potentially Responsible Party, or "PRP", by the EPA or a state authority, and
other matters. Additional losses, if any, in excess of amounts currently
accrued, cannot be reasonably estimated at this time. If there are additional
matters or if our current estimates are incorrect, there could be a material
adverse effect on the Company's financial position, results of operations and
cash flows.
On August 31, 2002, Environment Canada, the Canadian environmental
regulatory agency, finalized a rule which would require flexible polyurethane
foam manufacturing operations to reduce methylene chloride (dichloromethane) air
emissions. The rule establishes a 50.0% reduction in methylene chloride
emissions by December 1, 2004 and 100.0% reductions by January 1, 2007. This
standard will not require the Company to make material expenditures for its
Canadian plants.
The Company 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. During 2000, the Company reached an
indemnification agreement with the former owner of the Morristown, Tennessee
facility. The agreement allocates the incurred and future remediation costs
between the former owner and the Company. The estimated allocation of future
costs for the remediation of this facility is not significant, based on current
known information. The former owner was Recticel Foam Corporation, a subsidiary
of Recticel s.a.
The Company has either upgraded or closed all underground storage tanks at
its facilities in accordance with applicable regulations.
The Comprehensive Environmental Response, Compensation and Liability Act,
or "CERCLA," and comparable state laws impose liability without fault for the
costs of cleaning up contaminated sites on certain classes of persons that
contributed to the release of hazardous substances into the environment at those
sites, for example, by generating wastes containing hazardous substances which
were disposed at such sites. The Company is currently designated as a PRP by the
EPA or by state environmental agencies or other PRPs, pursuant to CERCLA or
analogous state statutes, with respect to 11 sites. Estimates of total cleanup
costs and fractional allocations of liability are often provided by the EPA, the
state environmental agency or the committee of PRPs with respect to the
specified site. Based on these estimates (to the extent available) and on known
information, in each case and in the aggregate, the Company does not expect
additional costs, if any, to be material to liquidity, results of operations or
financial position.
F-34
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. COMMITMENTS AND CONTINGENCIES (continued)
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. QUARTERLY FINANCIAL DATA (UNAUDITED)
At the end of 2003, the Company changed its measure of segment operating
income to exclude an allocation of corporate overhead as its management no
longer evaluates the performance of segments using the allocation. Adjusted
segment operating income for the quarters of 2003 and 2002 is shown below.
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
(thousands, except per share amounts)
2003
Net sales $328,151 $337,637 $323,542 $315,230
Gross profit $ 30,537 $ 38,674 $ 37,346 $ 37,133
Net income (loss) $(10,422) $ 3,445 $(10,999) $ (3,513)
Earnings (loss) per share
Basic $ (0.43) $ 0.14 $ (0.45) $ (0.14)
Diluted $ (0.43) $ 0.13 $ (0.45) $ (0.14)
Income (loss) from operations:
Foam Products $ 6,937 $ 10,929 $ 14,659 $ 11,458
Carpet Cushion Products (616) 1,620 1,771 2,620
Automotive Products 9,437 9,423 7,564 6,975
Technical Products 8,932 9,794 6,182 7,207
Other (15,052) (10,856) (12,538) (13,585)
-------- ------- -------- --------
Total $ 9,638 $ 20,910 $ 17,638 $ 14,675
======== ======== ======== ========
2002
Net sales $314,062 $345,898 $340,823 $327,311
Gross profit $ 37,678 $ 46,947 $ 30,814 $ 28,263
Income (loss) before cumulative effect
of accounting changes $ 3,133 $ 81,445 $ (7,242) $(16,388)
Net income (loss) $(67,514) $ 81,445 $ (7,242) $(16,388)
Earnings (loss) per share Basic:
Income (loss) before cumulative
effect of accounting changes $ 0.13 $ 3.35 $ (0.30) $ (0.67)
Net income (loss) $ (2.80) $ 3.35 $ (0.30) $ (0.67)
Diluted:
Income (loss) before cumulative
effect of accounting changes $ 0.12 $ 3.04 $ (0.30) $ (0.67)
Net income (loss) $ (2.56) $ 3.04 $ (0.30) $ (0.67)
F-35
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17. QUARTERLY FINANCIAL DATA (UNAUDITED) (continued)
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
(thousands, except per share amounts)
Income (loss) from operations:
Foam Products $ 13,682 $ 18,462 $ 5,091 $ 8,231
Carpet Cushion Products (1,217) 1,380 474 602
Automotive Products 9,865 10,730 7,331 6,220
Technical Products 8,284 10,421 8,250 8,230
Other (9,081) (15,842) (16,432) (30,522)
-------- -------- -------- --------
Total $ 21,533 $ 25,151 $ 4,714 $ (7,239)
======== ======== ======== ========
18. SUBSEQUENT EVENT
Effective February 10, 2004, the Company's Chairman resigned his position
by mutual agreement with the Company's Board of Directors.
In connection with this resignation, the Company entered into a separation
agreement with the former Chairman and will record a one-time charge of
approximately $1.4 million in the first quarter of 2004 for amounts payable
under this agreement, none of which relate to past service rendered by the
former Chairman. Additionally, the Company will record the reversal of
approximately $1.4 million reflected on the balance sheet as of December 28,
2003 related to various retirement provisions contained in an employment
agreement with the Company that are no longer payable to the former Chairman
under the terms of the separation agreement.
F-36
FOAMEX ASIA COMPANY LIMITED AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET (unaudited)
AS AT DECEMBER 31, 2003
(Amounts in BAHT)
ASSETS
CURRENT ASSETS
Cash and deposits at financial institutions 139,702,650
Current investment - fixed deposits 13,520,374
Accounts receivable - net (Note 5) 359,005,764
Inventories - net (Note 6) 326,576,773
Accounts receivable from Revenue Department 31,629,984
Other current assets 21,791,991
-------------
Total Current Assets 892,227,536
NON-CURRENT ASSETS
Loans to employee and directors (Note 8) 31,137,862
Plant and Equipment - net (Note 9) 417,638,273
Intangible assets - net (Note 10) 22,192,528
Deposits at financial institutions used as collateral (Note 4) 16,232,488
Other non-current assets 7,053,002
-------------
Total Non-Current Assets 494,254,153
-------------
TOTAL ASSETS 1,386,481,689
=============
Notes to the financial statements form an integral part of these statements
F-37
FOAMEX ASIA COMPANY LIMITED AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET (unaudited)
AS AT DECEMBER 31, 2003
(Amounts in BAHT)
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term borrowings from financial institutions (Note 11) 139,248,766
Accounts payable 132,852,183
Payable for purchases of fixed assets 6,733,181
Amounts due to related companies 178,763,377
Accrued expenses 117,386,258
Current portion of long-term borrowings from financial institutions (Note 12) 37,500,000
Current portion of finance leases 2,166,482
Other current liabilities 5,672,804
-------------
Total Current Liabilities 620,323,051
NON-CURRENT LIABILITIES
Loans from shareholders (Note 13) 262,400,487
Long-term borrowings from financial institutions (Note 12) 105,400,000
Long-term portion of finance leases 713,189
-------------
Total Non-Current Liabilities 368,513,676
-------------
TOTAL LIABILITIES 988,836,727
-------------
SHAREHOLDERS' EQUITY
SHARE CAPITAL
Authorized share capital
10,500,000 ordinary shares of Baht 10 each 105,000,000
=============
Issued and paid-up share capital
10,500,000 ordinary shares of Baht 10 each, fully paid 105,000,000
ADDITIONAL PAID IN CAPITAL
Premium on ordinary shares 18,990,504
CURRENCY TRANSLATION DIFFERENCES (2,018,051)
RETAINED EARNINGS
Appropriated 10,500,000
Unappropriated 265,172,509
-------------
Total Shareholders' Equity 397,644,962
-------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 1,386,481,689
=============
Notes to the financial statements form an integral part of these statements
F-38
FOAMEX ASIA COMPANY LIMITED AND SUBSIDIARY
CONSOLIDATED STATEMENT OF INCOME (unaudited)
FOR THE YEAR ENDED DECEMBER 31, 2003
(Amounts in BAHT)
REVENUES
Revenues from sales 1,554,399,572
Gain on exchange rate 11,304,673
Other revenue 3,371,679
-------------
Total Revenues 1,569,075,924
-------------
EXPENSES
Cost of sales 1,104,937,206
Selling and administrative expenses 371,533,090
-------------
Total Expenses 1,476,470,296
INCOME BEFORE INTEREST AND INCOME TAX EXPENSES 92,605,628
INTEREST EXPENSE 19,498,687
INCOME TAX EXPENSE 21,678,574
-------------
INCOME FROM ORDINARY ACTIVITIES 51,428,367
EXTRAORDINARY GAIN - NET OF TAX (Note 7) 16,997,355
-------------
NET INCOME 68,425,722
=============
EARNINGS PER SHARE
Income from ordinary activities 4.90
Extraordinary item - net (Note 7) 1.62
--------------
Net income 6.52
==============
WEIGHTED AVERAGE NUMBER OF ORDINARY SHARES 10,500,000
=============
Notes to the financial statements form an integral part of these statements
F-39
FOAMEX ASIA COMPANY LIMITED AND SUBSIDIARY
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (unaudited)
FOR THE YEAR ENDED DECEMBER 31, 2003
(Amounts in BAHT)
Issue and Premium Currency
paid-up on share Retained earnings translation
share capital capital Appropriated Unappropriated difference Total
------------- ---------- ------------ -------------- ------------ -----------
Beginning balance, January 1, 2003 105,000,000 18,990,504 - 212,496,787 14,848,617 351,335,908
Dividend payment (Note 15) - - - (5,250,000) - (5,250,000)
Increase during the year - - 10,500,000 - - 10,500,000
Decrease during the year - - - (10,500,000) (16,866,668) (27,366,668)
Net income - - - 68,425,722 - 68,425,722
----------- ---------- ---------- ------------ ----------- -----------
Ending balance, December 31, 2003 105,000,000 18,990,504 10,500,000 265,172,509 (2,018,051) 397,644,962
=========== ========== ========== =========== =========== ===========
Notes to the financial statements form an integral part of these statements
F-40
FOAMEX ASIA COMPANY LIMITED AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS (unaudited)
FOR THE YEAR ENDED DECEMBER 31, 2003
(Amounts in BAHT)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income 68,425,722
Reconciliation of net income to net cash used in operating activities
Depreciation and amortization 36,109,905
Allowance for doubtful accounts 596,772
Provision for obsolete stock 609,976
Unrealized (gain) loss on exchange rate - net (21,672,505)
Unpaid interest to shareholder 11,290,147
Loss on disposal of fixed assets 129,731
------------
Operating income before change in operating assets and liabilities 95,489,748
Operating assets (increase) decrease
Accounts receivable 39,353,979
Amounts due from subsidiary and related companies 9,127,728
Inventories (123,413,811)
Receivable from insurance claim 86,924,106
Accounts receivable from revenue department (9,930,973)
Deposits pledged as collateral and guarantee (2,725,941)
Other current assets 20,321,524
Other non-current assets (1,489,167)
Operating liabilities increase (decrease)
Accounts payable (42,958,477)
Amounts due to subsidiary and related companies 99,281,204
Accrued expenses 37,172,859
Other current liabilities 519,795
------------
Net cash provided by operating activities 207,672,574
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of plant and equipment (243,876,637)
Proceeds from disposal of plant and equipment 3,238,436
Increase in purchase price of acquired business (9,663,650)
Increase in loss on translation of financial statements of foreign subsidiary (16,866,668)
Increase in loan to subsidiary
Decrease in loans to employee and directors 1,776,676
------------
Net cash used in investing activities (265,391,843)
============
F-41
FOAMEX ASIA COMPANY LIMITED AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS (continued) (unaudited)
FOR THE YEAR ENDED DECEMBER 31, 2003
(Amounts in BAHT)
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in bank overdrafts and loan from bank 21,732,333
Increase in long-term borrowings from financial institutions 80,900,000
Dividends paid (5,250,000)
Cash payment for finance leases (4,559,414)
------------
Net cash provided by financing activities 92,822,919
------------
Net increase (decrease) in cash and deposits at financial institutions 35,103,650
Cash and deposits at financial institutions at January 1, 118,119,374
------------
Cash and deposits at financial institutions at December 31, 153,223,024
============
Notes to the financial statements form an integral part of these statements
F-42
FOAMEX ASIA COMPANY LIMITED AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2003 (unaudited)
1. COMPANY'S OPERATIONS AND BASIS FOR PREPARATION OF THE CONSOLIDATED
FINANCIAL STATEMENTS
Foamex Asia Company Limited was registered in the Kingdom of Thailand on
June 5, 1997 with its head office located at 175 Sathorn City Tower, 20th
Floor, South Sathorn Road, Sathorn, Bangkok 10120. The Company's plants are
located at 665 Moo 2, Bangpoo, Mung Samutprakarn, Samutprakarn 10280, 133
Moo 1, Banpo, Bangpain, Ayuthaya 13160 and 259 Moo 3, Toongsukla, Sriracha,
Chonburi 20230. The major shareholder of the Company is Foamex Asia, Inc.,
a company incorporated in the United States of America. The Company's and
the subsidiaries' principal objectives are to fabricate technical foam,
films and adhesives.
As at December 31, 2003, the Company had a total of 416 staff persons. The
staff costs for the year ended December 31, 2003 was Baht 167 million.
1.1 The Company prepares its statutory financial statements in Thai Baht
in conformity with accounting and practices generally accepted in
Thailand.
1.2 The consolidated financial statements include the accounts of Foamex
Asia, LLC, the Company's branch incorporated in the United States of
America, Foamex Asia Phils., Inc., a subsidiary incorporated in the
Philippines, with its head office located at Unit 903, Alpap Building
II, Trade Street Cor, Investment Drive, Madrigal Business Park, Ayala
Alabang, Muntinlupa City, Philippines, and Foamtec (Singapore) Pte.
Ltd., a subsidiary incorporated in the Republic of Singapore, with its
head office located at 6 Sungei Kadut Crescent, Singapore 728689, and
its indirectly owned subsidiaries. The Company has direct and indirect
ownership percentages as follows:
Subsidiaries % of Shareholding
Directly owned:
Foamtec (Singapore) Pte. Ltd. 99.99
Foamex Asia Phils., Inc. 99.99
Indirectly owned:
Foamex (Malaysia) Sdn. Bhd. 99.99
Foamex Asia (Wuxi) Co., Ltd. 99.99
Foamex Asia Manufacturing (Wuxi) Co., Ltd. 99.99
As at December 31, 2003, the Company's subsidiaries, both directly and
indirectly owned, had a total of 211 staff persons. The staff costs
for the year ended December 31, 2003 was Baht 122 million.
The major intercompany transactions between the Company and its
subsidiaries included in the consolidated financial statements have
been eliminated.
The financial statements of Foamex Asia, LLC, which are included in
the Company's financial statements, have been prepared in U.S.
Dollars. For consolidation purposes, these financial statements have
been translated into Thai Baht as follows:
a. All monetary items are translated using the closing rate
announced by the Bank of Thailand as at the balance sheet date.
b. All non-monetary items, which are carried in terms of historical
cost, are translated using the rate announced by the Bank of
Thailand as of the transaction date.
F-43
The functional currency of Foamex Asia, LLC is the U.S. Dollar. Net
exchange gain or loss from translation is recognized as income and
expense in the statements of income.
The financial statements of Foamtec (Singapore) Pte. Ltd. and its
subsidiaries have been prepared in Singapore Dollars and the financial
statements of Foamex Asia Phils., Inc. has been prepared in Peso. For
consolidation purposes, these financial statements have been
translated into Thai Baht as follows:
a. All assets and liabilities using the rates announced by the Bank
of Thailand at the balance sheet date.
b. Revenues and expenses using the average exchange rates for the
year as announced by the Bank of Thailand.
The functional currencies of Foamex Asia Phils., Inc., and Foamtec
(Singapore) Pte. Ltd. and its subsidiaries are the applicable local
currencies. Net exchange gain or loss from translation is presented as
"Currency Translation Differences" under "Shareholders' Equity" in the
balance sheet.
1.3 The financial statements are presented in accordance with the
Notification of the Department of Commercial Registration (currently
the Department of Business Development) dated September 14, 2001,
regarding "The Brief Particulars in the financial statements B.E.
2544".
1.4 In December 2001, the Institute of Certified Accountants and Auditors
of Thailand issued an Announcement re: Exemption of Accounting
Standards for Non-public Limited Companies which was subsequently
approved by the Board of Supervision of Auditing Practices in 2002.
Accordingly, the Company has elected to be exempted from Accounting
Standards No. 47 "Related Party Disclosures" and No. 48 "Financial
Instruments: Disclosure and Presentation".
2. SIGNIFICANT ACCOUNTING POLICIES
2.1 Cash and deposit at financial institutions
Cash and deposit at financial institutions consist of cash in hand,
deposit at banks and financial institutions with original maturities
of three months or less.
2.2 Allowance for doubtful accounts
An allowance for doubtful accounts is provided at the estimated
collection losses on receivables, based on the Company's collection
experience together with a review of the current financial position of
each existing receivable.
2.3 Inventories
Inventories are valued at the lower of cost or net realizable value.
Cost is determined as follows:
Finished goods at standard cost which approximates the
weighted average cost basis or net
realizable value, whichever is lower
Work in process at standard cost which approximates the
weighted average cost basis
Raw materials weighted average cost basis
Inventories of subsidiaries are stated at the lower of cost or net
realizable value. Cost is calculated on the first-in first-out basis.
F-44
2.4 Plant and equipment
Plant and equipment are stated at cost less accumulated depreciation.
Depreciation is calculated by the straight-line method, based on the
estimated useful lives of the assets as follows:
Leasehold improvements 5-10 Years
Building Lease period (15 years)
Machinery and equipment 3-20 Years
Vehicles 5 Years
Furniture and office equipment 3-5 Years
No depreciation is provided for land, machinery under installation and
construction in progress.
Borrowing costs incurred during the period of construction and
installation are capitalized as part of the plant under construction
and machinery under installation until its completion. Borrowing cost
subsequently incurred is recognized as expense for the period.
2.5 Impairment of assets
The Company reviews the impairment of assets for plant and equipment,
investment in subsidiaries and other assets whenever events indicate
that the carrying value of an asset exceeds its recoverable amount. In
case that the carrying value of an asset exceeds its recoverable
amount, the Company recognizes the impairment loss in the statement of
income.
2.6 Goodwill
Goodwill, presented as an intangible asset in the financial
statements, is the excess of consideration paid for an investment in a
branch over the net assets acquired and amortization of the goodwill
is recognized as expense in the statement of income within 10 years,
by the straight-line method.
2.7 Foreign currency transactions
Transactions denominated in foreign currencies incurred during the
year are translated into Baht at the rates of exchange at the
transaction dates. At the end of the year, monetary assets and
liabilities denominated in foreign currencies are translated into Baht
at the reference rates as determined by the Bank of Thailand at that
date. Gains and losses on foreign exchange arising on settlements and
translation are recognized as income or expense when incurred.
2.8 Recognition of revenues
Sales are recognized upon delivery of goods to the customers. Other
income is recognized on the accrual basis of accounting.
2.9 Income tax
Income tax expense is calculated from taxable income and recorded
based on tax paid and accrued for the year.
The consolidated financial statements included the unaudited financial
statements of subsidiaries. A subsidiary records its income tax by the
deferred income tax method, which is different from the accounting
method used by the Company. The Company, therefore, adjusts the
accounting for income tax of such subsidiary to be the same with the
Company's accounting method.
F-45
2.10 Earnings per share
Basic earnings per share are calculated by dividing net income by the
weighted average number of ordinary shares outstanding during the
year. In case of a capital increase, the number of shares is weighted
according to time of registration of such increase.
As at December 31, 2003, the Company did not have any ordinary share
equivalents outstanding which would have had a dilutive effect on
earnings per share.
2.11 Use of accounting estimates
Preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of revenues,
expenses, assets and liabilities and disclosure of contingent assets
and liabilities. Actual results may differ from those estimates.
3. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
3.1 Cash paid for the year ended December 31, 2003, for interest and
income tax are as follows:
(Baht)
Interest 9,856,315
Income tax 47,144,312
4. DEPOSITS AT FINANCIAL INSTITUTIONS
As at December 31, 2003, deposits at financial institutions of Baht 15.9
million are used as collateral for trust receipts of USD 106,920 (Note 11),
letters of guarantee of Baht 7.3 million and letter of credit of USD 11,500
(Note 16.2).
In addition, as at December 31, 2003, deposits at financial institutions of
a subsidiary of Peso 956,133 is used as collateral for short-term loan from
bank.
5. ACCOUNTS RECEIVABLE - NET
Accounts receivable - net as at December 31, 2003, consist of the
following:
(Baht)
Accounts receivable 362,077,165
Less Allowance for doubtful accounts (3,071,401)
---- -----------
359,005,764
===========
6. INVENTORIES - NET
Inventories - net as at December 31, 2003, consist of the following:
(Baht)
Finished goods 104,528,008
Work in process 22,524,827
Raw materials 128,957,246
Goods in transit 78,737,939
------------
334,748,020
Less Provision for obsolete stock (8,171,247)
---- -----------
326,576,773
===========
F-46
7. RECEIVABLE FROM INSURANCE CLAIM
On July 14, 2002, the Company's fabrication and contamination control
specialty foam factory in Samutprakarn, Thailand was destroyed by fire. All
of the Company's inventory and most of the machinery and equipment
maintained in the factory were lost. The carrying value of the inventory
and the net book value of the machinery and equipment at the date of the
fire were Baht 84.0 million and Baht 65.1 million, respectively. The
Company filed a claim with their insurance carrier for the inventory and
machinery and equipment in the amount of Baht 70.0 million and Baht 107.8
million, respectively. The Company recorded an extraordinary loss in 2002
of Baht 9.8 million, net of taxes of Baht 4.2 million, for the underinsured
inventory and an additional Baht 1.2 million, net of taxes of Baht 0.5
million, for other fire related expenses. On December 27, 2002, the Company
received an interim payment from their insurance carrier in the amount of
Baht 50 million.
In February 2003, total amount of Baht 52.2 million was received and the
final amount of Baht 67.2 million was subsequently received on May 14,
2003. As a result, the Company recorded extraordinary gain in 2003 of Baht
17.0 million, net of taxes of Baht 7.3 million.
8. LOANS TO EMPLOYEE AND DIRECTORS
Loans to employee and directors as at December 31, 2003, consist of the
following:
(Baht)
Loan to employee 1,625,127
Loans to directors 30,008,142
----------
31,633,269
Less Current portion of loan to employee (495,407)
---- ----------
31,137,862
==========
As at December 31, 2003, the loan to employee represented an interest-free
Thai Baht denominated loan, which is guaranteed by another person. The loan
is repayable in monthly installments beginning January 2003 and matures in
December 2006.
As at December 31, 2003, the loans to directors represented foreign
currency denominated loans totaling US$ 700,000. These loans are secured by
a grant of a security interest of the director's percentage right in a
major shareholder's interest in the Company as specified in the loan
agreement, carry interest at a rate of 4% per annum and are due in December
2021.
9. PROPERTY, PLANT AND EQUIPMENT - NET
Property, plant and equipment - net as at December 31, 2003, consist of the
following:
Balance as at Currency Balance as at
December 31, translation December 31,
2002 Additions Disposals Transfers differences 2003
Baht Baht Baht Baht Baht Baht
Cost:
Leasehold improvement 9,171,795 11,955,965 - 7,549,923 (533,681) 28,144,002
Building - 30,901,962 - 51,771,031 - 82,672,993
Machinery and equipment 146,743,093 170,140,677 (3,435,358) 15,670,183 (5,462,076) 323,656,519
Vehicles 31,200,590 975,522 - 110,990 (241,339) 32,045,763
Furniture and office
equipment 25,671,067 17,267,324 (1,140,895) (43,859) (1,233,480) 40,520,157
Construction in progress and
machinery under installation 76,342,268 292,086 - (75,058,268) - 1,576,086
----------- ----------- ---------- ----------- ---------- -----------
289,128,813 231,533,536 (4,576,253) - (7,470,576) 508,615,520
----------- ----------- ---------- ----------- ---------- -----------
F-47
Accumulated depreciation:
Leasehold improvement (2,470,480) (3,268,548) - - 165,521 (5,573,507)
Building - (1,842,211) - - - (1,842,211)
Machinery and equipment (30,437,521) (19,646,213) 369,661 - 1,777,953 (47,936,120)
Vehicles (15,968,683) (4,358,634) - - 113,918 (20,213,399)
Furniture and office
equipment (11,242,516) (5,627,756) 838,424 - 619,839 (15,412,009)
----------- ----------- ---------- ----------- ---------- -----------
(60,119,200) (34,743,362) 1,208,085 - 2,677,231 (90,977,247)
----------- ----------- ---------- ----------- ---------- -----------
Plant and equipment - net 229,009,613 417,638,273
=========== ===========
Depreciation for the year
Ended December 31, 2003 34,743,362
===========
10. INTANGIBLE ASSETS - NET
Intangible assets - net as at December 31, 2003, consist of the following:
Balance as at Currency Balance as at
December 31, translation December 31,
2002 Additions differences 2003
Baht Baht Baht Baht
Goodwill
Cost 14,241,648 11,248,988 (1,610,395) 23,880,241
Accumulated (346,231) (1,366,544) 25,062 (1,687,713)
---------- ---------- ---------- ----------
13,895,417 9,882,444 (1,585,333) 22,192,528
========== ========== ========== ==========
Amortization for the year ended December 31, 2003 1,366,544
=========
On April 26, 2000, the Company entered into an Asset Purchase Agreement
("Agreement") with Wilshire Technologies, Inc. ("Wilshire") to acquire
their contamination control division, which later became the Company's
branch. As per the Agreement, the Company is required to make quarterly
payments to Wilshire equal to a percentage of sales on applicable
contamination control products ("covered products") sold by the Company
until June 30, 2003 or when the total of all payments made equals US$ 2.5
million, whichever occurs first. As at December 31, 2003, the goodwill
related to this transaction resulted from purchase price contingencies now
being realized through the sales of the covered products.
11. SHORT-TERM BORROWINGS FROM FINANCIAL INSTITUTIONS
Short-term borrowings from financial institutions as at December 31, 2003,
consist of the following:
Baht
Loans from financial institution 135,000,000
Trust receipts 4,248,766
-----------
139,248,766
As at December 31, 2003, short-term Thai Baht denominated loans from a
financial institution of Baht 135 million, carrying interest at current
money market rates and was repayable within one year from the balance sheet
date.
As at December 31, 2003, trust receipts of USD 106,920 from a financial
institution, carrying interest at fixed rate of 5.75% per annum, were
guaranteed by deposits at that financial institution (Note 4).
F-48
12. LONG-TERM BORROWINGS FROM FINANCIAL INSTITUTIONS
Long-term borrowings from financial institutions as at December 31, 2003,
consist of the following:
Baht
Loans from financial institutions 142,900,000
Less current portion of long-term borrowings (37,500,000)
-----------
105,400,000
On May 16, 2002, the Company entered into a credit facility with a
financial institution. The credit facility ("Credit Facility") provides for
borrowings in the aggregate amount of Baht 300 million and is composed of:
(i) a Baht 150 million term loan and non-revolving letter of credit/trust
receipts facility (the "Term Loan Facility") and (ii) a Baht 150 million
revolving working capital facility (the "Revolving Facility"), both
maturing on August 30, 2007 (see Note 14). The Term Loan Facility is to be
repaid in eight equal semi-annual installments with the first repayment to
be made in February 2004. Interest is due and payable every three-calendar
months beginning on November 30, 2002.
The interest for the term loan portion of the Term Loan Facility is 6.375%
per annum in relation to the first two years after August 30, 2002, and
then the higher of (i) the financial institution's minimum lending rate
(MLR) minus 1.25%, or (ii) another local commercial bank's MLR minus 0.5%
per annum, for the remainder of the loan. The Company shall pay a
commercial letter of credit opening fee at a rate of 1/12% per quarter and
interest on the trust receipts under the Term Loan Facility at the rate of
6.375% per annum. The interest for the Revolving Facility is at the money
market rate on each relevant maturity date.
The Company is required to pay a commitment fee at the rate of 0.25% per
annum on the daily undrawn balance of the Term Loan calculated from the
first anniversary date of the agreement, May 16, 2002, up to and including
the last day of the Availability Period, which ends on the earlier of (i)
November 16, 2003 or (ii) the date on which the Term Loan Facility is fully
drawn, cancelled or terminated under the provisions of the agreement.
The collateral required for the Credit Facility is the assignment of the
land leasehold right; mortgage of the newly-constructed factory, office
building and machinery; pledge of inventory and receivables and the
assignment of construction and operational insurance proceeds to the
financial institution as beneficiary. The Company is also required to meet
various debt covenants, including maintaining certain financial ratios.
13. LOANS FROM SHAREHOLDERS
Loans from shareholders as at December 31, 2003, consist of the following:
Baht
Loans from shareholders 238,426,800
Accrued interest on loans 23,973,687
------------
262,400,487
On December 3, 2002, the Company received loans from its shareholders
totaling US$ 6 million. These loans are unsecured and carry interest at the
rate of LIBOR + 3.25% per annum, and mature on December 3, 2008. Interest
accrues quarterly beginning at the inception of the loan, however, the
first interest payment is not due until December 3, 2005 ("First Interest
Payment Date") and then quarterly thereafter beginning March 1, 2006. The
accrued interest for the first three years of the loan is not due until
maturity. The accrued interest for the fourth year of the loan is due
entirely on the First Interest Payment Date.
14. LEGAL RESERVE
The Company set up a legal reserve in accordance with the provisions of the
Civil and Commercial Code which requires that the Company must appropriate
to a reserve fund at each distribution of dividend at least 5% of the
F-49
profit arising from the business of the Company until the reserve fund
reaches 10% of authorized capital. Such reserve fund is not available for
dividend distribution.
15. DIVIDEND PAID
During 2003, the Company paid interim dividend to the shareholders at Baht
0.5 per share or approximately Baht 5.25 million according to the
resolution of the Board of Directors' meetings on April 22, 2003. The
Company will propose such resolution to the shareholders' meeting, which
will be held in 2004.
16. COMMITMENTS AND CONTINGENCIES
16.1 As at December 31, 2003, the Company has commitments for land,
building and vehicle lease agreements with minimum annual lease
payments as follows:
2003
Year Baht
2004 18,650,467
2005 12,273,147
2006 6,174,776
2007 4,926,830
2008 4,848,859
2009-2018 48,488,591
16.2 As at December 31, 2003, the Company had contingent liabilities to a
financial institution for letters of guarantee of Baht 7.3 million and
letter of credit of USD 11,500, which were guaranteed by deposits at
that financial institution (Note 4), and to another financial
institution for letters of guarantee of Baht 8.3 million and letters
of credit of USD 207,084, which are a portion of credit facilities as
discussed more fully in Note 13.
16.3 As at December 31, 2003, the Company had commitments to a financial
institution for unused letters of credit of Baht 7.8 million.
17. REVENUE REPORTING OF A PROMOTED INDUSTRY
To comply with the Announcement of the Board of Investment No. Por. 14/2541
(1998) dated December 30, 1998 regarding revenue reporting of a promoted
industry, the Company is required to report the revenues from domestic
sales and export sales separately and to report separately between promoted
and non-promoted businesses. For the year ended December 31, 2003, the
required information is as follows:
Promoted Business
Exemption Non-Exemption
From Income Tax From Income Tax Total
Baht Baht Baht
Sales - 1,554,399,572 1,554,399,572
The information to present local sales and export sales separately was not
available.
18. INVESTMENT PROMOTION PRIVILEGES
In 1998-2001, the Company was granted certain rights and privileges (No.
1377/2541 (1998), 6453/2541 (1998), 4650/2543 (2000), 5026/2543 (2000),
5153/2543 (2000) and 6235/2544 (2001)) as a promoted industry under the
Investment Promotion Act of B.E. 2520 (1977), which included an exemption
from customs duties for machinery imported for production as approved by
the Board of Investment until August 14, 2002, and an
F-50
exemption from custom duties for raw materials until May 19, 2002.
Subsequently in 2003, the Company was approved to extend the exemption
periods, for a period of 2 years.
The Company has to comply with certain conditions contained in the
investment promotion certificate including the size of its operations and
amounts of investments and annual export sales volume.
19. EMPLOYEES' PROVIDENT FUND
The Company has established a registered provident fund covering all
employees. This fund was registered with the Ministry of Finance under the
Provident Fund Act. B.E. 2530. Membership is voluntary upon attaining
permanent status. Under the regulation of the fund, members and the Company
are required to make monthly contributions to the fund at a percentage of
the employees' base salaries, depending on the length of employment.
The Company's contributions charged to the statements of income for the
year ended December 31, 2003 amounted to Baht 1.5 million.
The Company's subsidiaries have established a defined contribution plan
covering all employees, and its contributions charged to the statements of
income for the year ended December 31, 2003 amounted to Baht 11.3 million.
20. SUMMARY OF SIGNIFICANT DIFFERENCES BETWEEN ACCOUNTING PRINCIPLES FOLLOWED
BY THE COMPANY AND ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED
STATES OF AMERICA (U.S. GAAP)
The Company's consolidated financial statements have been prepared in
accordance with generally accepted accounting principles in the Kingdom of
Thailand ("Thai GAAP"), which differs in certain respects from U.S. GAAP.
The differences, as they affect the financial statements, are reflected in
the amounts provided in Note 21 and arise due to the items discussed in the
following paragraphs:
Accounting for Income Taxes
Under U.S. GAAP, SFAS No. 109, Accounting for Income Taxes, requires an
enterprise to record deferred tax assets or liabilities based on the
difference between the financial statement and income tax basis of assets
and liabilities using the enacted tax rate. Deferred income tax expenses or
credits are based on the changes in the assets or liabilities from period
to period. Deferred tax assets are reduced by a valuation allowance if it
is more likely than not that some or all of the deferred tax assets will
not be realized.
Thai GAAP does not address the reporting or disclosure of deferred income
taxes.
Amortization of Goodwill
Under Thai GAAP, goodwill should be amortized to expense on a systematic
basis over its useful life. The amortization period should reflect the best
estimate of the period during which future economic benefits are expected
to flow to the enterprise. The amortization method used should reflect the
pattern in which the future economic benefits arising from goodwill are
expected to be consumed. The straight-line method should be adopted unless
there is persuasive evidence that another method is more appropriate in the
circumstances.
Under U.S. GAAP, SFAS No. 142, Goodwill and Other Intangible Assets,
goodwill and certain other intangible assets are no longer amortized but
are to be periodically assessed for impairment.
F-51
Reporting Comprehensive Income
Under Thai GAAP, a company is given the option to present a statement
showing (i) all changes in equity; or (ii) changes in equity other than
those arising from capital transactions with owners and distributions
owners (i.e. statement of comprehensive income). The Company has chosen to
present all changes in equity.
Under U.S. GAAP, SFAS No. 130, Reporting Comprehensive Income, requires an
enterprise to display an amount representing total comprehensive income for
each period of operations presented in the financial statements.
Comprehensive income comprises of net income and other comprehensive
income, such as unrealized gains and losses on securities, foreign currency
translation adjustments and minimum pension liability adjustments. In
addition, an enterprise is required to classify items of other
comprehensive income by their nature in a financial statement and display
the accumulated balance of other comprehensive income separately from
retained earnings and premium on share capital in the equity section of a
statement of financial position. Reclassification of financial statement
for earlier periods provided for comparative purposes is also required.
21. RECONCILIATION BETWEEN NET INCOME AND SHAREHOLDERS' EQUITY UNDER THAI GAAP
AND U.S. GAAP
Baht
Net income according to financial statements prepared under
Thai GAAP 68,425,722
U.S. GAAP adjustments Increase due to:
Deferred tax accounting 48,784
Amortization of goodwill (Note 10) 1,366,544
-----------
Net income in accordance with U.S. GAAP 69,841,050
===========
Basic and diluted earnings per share 6.65
Basic and diluted weighted average number of shares 10,500,000
Shareholders' equity according to financial statements prepared
Under Thai GAAP 397,644,962
U.S. GAAP adjustments
Increase (decrease) due to:
Loans to directors (Note 8) (30,008,142)
Deferred tax accounting (9,485,962)
Amortization of goodwill 1,366,544
Currency translation difference (Note 1.2) (187,776)
-----------
Shareholders' equity in accordance with U.S. GAAP 359,329,626
===========
With regard to the balance sheet, the following significant captions
determined under U.S. GAAP would have been:
Baht
Loans to employee - non-current asset 1,129,720
Intangible assets - net 22,192,528
Other liabilities 10,034,917
The following table presents comprehensive income for the year ended
December 31, 2003:
F-52
Baht
Net income (U.S. GAAP) 69,841,050
Foreign currency translation adjustments (17,054,444)
-----------
Comprehensive income 52,786,606
===========
22. ADDITIONAL FINANCIAL STATEMENT DISCLOSURES REQUIRED UNDER U.S. GAAP
22.1 Income Taxes
The sources of income before the provision for income taxes for the year
ended December 31, 2003 are as follows:
Baht
Thailand 43,290,374
Foreign 55,465,047
----------
Income before provision for income taxes 98,755,421
==========
The provision for income taxes for the year ended December 31, 2003 is
summarized as follows:
Baht
Current
Thailand 14,235,603
Foreign 14,727,552
----------
Total current 28,963,155
==========
Deferred
Thailand -
Foreign (48,784)
----------
Total deferred (48,784)
----------
Approximate provision for income taxes
in accordance with U.S. GAAP 28,914,371
==========
As at December 31, 2003, in providing for applicable deferred income taxes
under U.S. GAAP, the tax effect of significant temporary differences that
give rise to deferred income tax assets and liabilities are listed below.
Baht
Deferred income tax assets resulted from:
Inventory basis differences 760,475
Allowance for doubtful accounts 921,420
Valuation allowance (1,681,895)
----------
Total deferred income tax assets -
==========
Deferred income tax liabilities resulted from:
Goodwill amortization 409,963
Property, plant and equipment basis differences 9,624,954
----------
Total deferred income tax liabilities 10,034,917
----------
Net deferred income tax liabilities 10,034,917
==========
Deferred income taxes have not been provided on approximately Baht 205.4
million of undistributed earnings of foreign affiliated companies, which
are considered to be permanently reinvested. It is not practicable to
estimate the amount of tax that might be payable on the eventual remittance
of such earnings.
F-53
22.2 Transactions with Related Parties
A portion of the Company's assets, revenues and expenses arose from
transactions with related parties, which occur in the ordinary course of
business on terms equivalent to those with third parties. The relationship
may be by shareholding or the companies may have the same group of
shareholders or directors. The Company's management believes that the
Company does not have significant influence over the related parties. The
accompanying financial statements reflect the effects of these transactions
determined on the basis of commitments and conditions as in the normal
course of business.
Significant balances as at December 31, 2003, are as follows:
Relationship Baht
Amounts due to related companies
Foamex L.P. Affiliated company 172,113,989
Significant transactions for the year ended December 31, 2003, are as
follows:
Relationship Baht
Reimbursement of expenses
Foamex L.P. Affiliated company 24,732,132
Foamex Asia, Inc. Major shareholder 6,714,128
Purchases
Foamex L.P. Affiliated company 358,220,765
22.3 Estimated Fair Values of Financial Instruments
The fair values have been estimated by the Company using available market
information and appropriate valuation methodologies.
As at December 31, 2003, the carrying amounts of financial assets and
financial liabilities which were different from the estimated fair values
were as follows:
Carrying Value Fair Value
Baht Baht
Loans to employee and director 31,137,862 24,815,624
Loans from shareholders 262,400,487 243,146,809
Long-term borrowings from financial institutions 142,900,000 140,294,279
The following methods and assumptions were used by the Company in
estimating fair value of financial instruments as disclosed herein:
Financial assets - The fair values of financial assets for which their
remaining terms to maturity are within 90 days are based on carrying value.
For those with remaining terms to maturity greater than 90 days are
estimated by using a discounted cash flow analysis based on the minimum
leading rate of a commercial bank at December 31, 2003 for the remaining
years to maturity.
Financial liabilities - The fair values of financial liabilities for which
their remaining terms to maturity are within 90 days are based on carrying
value. For those with remaining terms to maturity greater than 90 days are
estimated by using a discounted cash flow analysis based on the minimum
leading rate of a commercial bank at December 31, 2003 for the remaining
years to maturity.
F-54
FOAMEX ASIA COMPANY LIMITED AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET (unaudited)
AS AT DECEMBER 31, 2002
(Amounts in BAHT)
ASSETS
CURRENT ASSETS
Cash and deposits at financial institutions 118,137,666
Accounts receivable - net 404,451,863
Inventories - net 203,772,938
Receivable from insurance claim 86,924,106
Amounts due from related companies 9,127,728
Other current assets 63,783,893
-------------
Total Current Assets 886,198,194
LOANS TO EMPLOYEE AND DIRECTORS 32,914,538
PLANT AND EQUIPMENT - NET 229,065,082
INTANGIBLE ASSETS - NET 13,895,417
DEPOSITS AT FINANCIAL INSTITUTIONS USED AS COLLATERAL 13,506,547
OTHER NONCURRENT ASSETS - DEPOSITS 5,563,835
-------------
TOTAL ASSETS 1,181,143,613
=============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term borrowings from financial institutions 117,516,433
Accounts payable 203,364,853
Amounts due to related companies 82,013,287
Accrued expenses 80,169,890
Current portion of financial leases 3,312,163
Other current liabilities 5,153,006
--------------
Total Current Liabilities 491,529,632
LONG TERM BORROWINGS FROM FINANCIAL INSTITUTIONS 62,000,000
LOANS FROM SHAREHOLDERS 274,191,480
LONG TERM PORTION OF FINANCE LEASES 2,013,983
--------------
TOTAL LIABILITIES 829,735,095
-------------
SHAREHOLDERS' EQUITY
SHARE CAPITAL
Registered share capital
10,500,000 ordinary shares of Baht 10 each 105,000,000
=============
Issued and paid-up share capital
10,500,000 ordinary shares of Baht 10 each, fully paid 105,000,000
PREMIUM ON SHARE CAPITAL 18,990,504
CURRENCY TRANSLATION DIFFERENCES 14,851,178
RETAINED EARNINGS
Unappropriated 212,566,836
-------------
Total Shareholders' Equity 351,408,518
-------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 1,181,143,613
=============
Notes to the consolidated financial statements form an integral part of these
statements
F-55
FOAMEX ASIA COMPANY LIMITED AND SUBSIDIARY
CONSOLIDATED STATEMENT OF INCOME (unaudited)
FOR THE YEAR ENDED DECEMBER 31, 2002
(Amounts in BAHT)
REVENUES
Revenues from sales 1,848,468,563
Other revenue 15,222,321
-------------
Total Revenues 1,863,690,884
-------------
EXPENSES
Cost of sales 1,359,906,153
Gain on exchange rate (3,398,552)
Selling and administrative expenses 328,812,408
Interest expense 18,157,567
Income tax 43,181,696
-------------
Total Expenses 1,746,659,272
PROFIT FROM ORDINARY ACTIVITIES 117,031,612
Extraordinary item - net 10,990,492
-------------
NET INCOME 106,041,120
=============
EARNINGS PER SHARE
Profit from ordinary activities 11.15
Extraordinary item - net (1.05)
---------------
Net Profit 10.10
==============
WEIGHTED AVERAGE NUMBER OF ORDINARY SHARES 10,500,000
=============
Notes to the consolidated financial statements form an integral part of these
statements
F-56
FOAMEX ASIA COMPANY LIMITED AND SUBSIDIARY
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (unaudited)
FOR THE YEAR ENDED DECEMBER 31, 2002
(Amounts in BAHT)
ISSUED AND PAID-UP SHARE CAPITAL
Beginning balance 105,000,000
Addition -
-----------
Ending balance 105,000,000
-----------
PREMIUM ON SHARE CAPITAL
Beginning balance 18,990,504
Addition -
-----------
Ending balance 18,990,504
-----------
RETAINED EARNINGS
Unappropriated
Beginning balance 106,525,716
Addition 106,041,120
-----------
Ending balance 212,566,836
-----------
CURRENCY TRANSLATION DIFFERENCES
Beginning balance 6,546,185
Addition 8,304,993
-----------
Ending balance 14,851,178
-----------
TOTAL SHAREHOLDERS' EQUITY 351,408,518
===========
Notes to the consolidated financial statements form an integral part of these
statements
F-57
FOAMEX ASIA COMPANY LIMITED AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS (unaudited)
FOR THE YEAR ENDED DECEMBER 31, 2002
(Amounts in BAHT)
CASH FLOWS FROM OPERATING ACTIVITIES
Net profit 106,041,120
Reconciliation of net profit to net cash from operating activities
Depreciation and amortization 25,886,337
Allowance for doubtful accounts 917,814
Provision for obsolete stock 2,058,184
Unrealized loss on exchange rate - net (2,000,610)
Loss on involuntary conversion of assets 15,700,847
Gain on disposal of plant and equipment (135,464)
-------------
Operating income before change in operating assets and liabilities 148,468,228
Operating assets (increase) decrease
Accounts receivable (1,242,763)
Amounts due from related companies (44,469,283)
Inventories (6,617,349)
Receivable from insurance claim (86,924,106)
Other current assets 13,220,058
Other assets 100,422
Operating liabilities increase (decrease)
Accounts payable (73,667,829)
Amounts due to related companies 7,764,198
Accrued expenses 14,260,793
Current portion of finance leases 1,927,468
Other current liabilities (23,697,558)
-------------
Net cash used in operating activities (50,877,721)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of plant and equipment (165,579,340)
Proceeds from disposal of plant and equipment 6,326,207
Proceeds from insurance claim 50,000,000
Increase in purchase price of acquired business (14,232,483)
(Increase) decrease in deposits at bank used as collateral 7,480,010
Increase in loans to employee and directors (139,383)
-------------
Net cash used in investing activities (116,144,989)
-------------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in short-term borrowings from financial institutions 87,516,433
Increase in long-term borrowings from financial institutions 62,000,000
Increase in loans from shareholders 13,246,024
Decrease in long term portion of finance leases (542,917)
-------------
Net cash provided by financing activities 162,219,540
-----------
NET EFFECT OF CURRENCY TRANSLATION
DIFFERENCES IN CASH AND DEPOSITS AT FINANCIAL INSTITUTIONS 5,569,230
------------
Net increase in cash and deposits at financial institutions 766,060
Cash and deposits at financial institutions at January 1, 117,371,606
-----------
Cash and deposits at financial institutions at December 31, 118,137,666
===========
Notes to the consolidated financial statements form an integral part of these
statements
F-58
FOAMEX ASIA COMPANY LIMITED AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2002 (unaudited)
1. ECONOMIC TURMOIL IN THE ASIA-PACIFIC REGION
Thailand and many Asia-Pacific countries continue to experience severe
economic difficulties since 1997. The accompanying financial statements reflect
management's current assessment of the possible impact of the economic
conditions on the financial position of the Company.
2. OPERATIONS AND BASIS FOR PREPARATION OF THE CONSOLIDATED FINANCIAL
STATEMENTS
These financial statements have been prepared using generally accepted
accounting principles in Thailand and are unaudited. Foamex Asia Company Limited
was registered in the Kingdom of Thailand on June 5, 1997 with its head office
located at 175 Sathorn City Tower, 20th Floor, South Sathorn Road, Sathorn,
Bangkok 10120. The Company's plants are located at 665 Moo 2 Bangpoo Mung,
Samutprakarn 10540 and 133 Moo 1, Banpo Bangprain, Pranakornsriayuthaya 13160.
The major shareholder of the Company and its subsidiary is Foamex Asia, Inc., a
company incorporated in the United States of America. The Company's principal
objective is to fabricate technical foam, films and adhesives.
As at December 31, 2002, the Company had a total of 405 staff persons. The
staff cost for the year ended December 31, 2002 was Baht 113 million.
2.1 The Company prepares its statutory financial statements in conformity
with accounting and practices generally accepted in Thailand.
2.2 The consolidated financial statements include the accounts of Foamex
Asia, LLC, the Company's branch incorporated in the United States of
America, and Foamtec (Singapore) Pte. Ltd., a subsidiary incorporated
in the Republic of Singapore, with its head office located at 6 Sungei
Kadut Crescent, Singapore 728689. The Company has direct and indirect
ownership percentages as follows:
% of Shareholding
Subsidiary 2002
Directly owned:
Foamtec (Singapore) Pte. Ltd. 99.99%
Indirectly owned:
Foamex (Malaysia) Sdn. Bhd. 99.99%
Foamex Asia (Wuxi) Co., Ltd. 99.99%
As at December 31, 2002, the Company's subsidiary had a total of 179 staff
persons. The staff costs for the year ended December 31, 2002, were Baht 121.2
million.
The major intercompany transactions between the Company and its subsidiary
included in the consolidated financial statements have been eliminated.
The financial statements of Foamex Asia, LLC, which are included in the
Company's financial statements, have been prepared in U.S. Dollars. For
consolidation purposes, these financial statements have been translated into
Thai Baht as follows:
a. All monetary items are translated using the closing rate announced by
the Bank of Thailand as at the balance sheet date.
F-59
b. All non-monetary items, which are carried in terms of historical cost,
and translated using the rate announced by the Bank of Thailand at the
transaction date.
The functional currency of Foamex Asia, LLC is the U.S. dollar. Net
exchange gain or loss from translation is recognized as income and expense in
the statement of income.
The financial statements of Foamtec (Singapore) Pte. Ltd. and its
subsidiaries have been prepared in Singapore dollars. For consolidation
purposes, these financial statements have been translated into Thai Baht as
follows:
a. All assets and liabilities using the rates announced by the Bank of
Thailand at the balance sheet date.
b. Revenue and expenses using the average exchange rate for the year as
announced by the Bank of Thailand.
The functional currency of Foamtec (Singapore) Pte. Ltd. and its
subsidiaries is the applicable local currency. Net exchange gain or loss from
translation is presented as "Cumulative Translation Differences" under
"Shareholders' Equity" in the balance sheet.
In December 2001, the Institute of Certified Accountants and Auditors of
Thailand issued an Announcement regarding the "Exemption of Accounting Standards
for Non-public Limited Companies". Accordingly, the Company has elected to
discontinue the application of Thai Accounting Standard No. 47 "Related Parties
Disclosure" and No. 48 "Financial Instruments Disclosure and Presentation". The
Company's financial statements for the year ended December 31, 2002 reflect this
election.
3. SIGNIFICANT ACCOUNTING POLICIES
3.1 Cash and deposits at financial institutions
Cash and deposits at financial institutions with original maturities of
three months or less.
3.2 Allowance for doubtful accounts
An allowance for doubtful accounts of the Company and its subsidiary is
provided at the estimated collection losses on receivables, based on the
Company's collection experience together with a review of the current
financial position of each existing receivable.
3.3 Inventories
Inventories are valued at the lower of cost or net realizable value. Cost
is determined as follows:
Finished goods at standard cost which approximates the
weighted average cost basis or net
realizable value, whichever is lower
Work in process at standard cost which approximates the
weighted average cost basis
Raw materials weighted average cost basis
Inventories of subsidiaries are stated at the lower of cost or net
realizable value. Cost is calculated on the first-in first-out basis.
3.4 Plant and equipment
Plant and equipment are stated at cost less accumulated depreciation.
F-60
Depreciation is calculated by the straight-line method, based on the
estimated useful lives of the assets as follows:
Leasehold improvements 5-10 years
Machinery and equipment 3-10 years
Vehicles 5 years
Furniture and office equipment 3-10 years
3.5 Impairment of assets
The Company reviews the impairment of assets for plant and equipment and
other assets whenever events indicate that the carrying value of an asset
exceeds its recoverable amount. In case that the carrying value of an asset
exceeds its recoverable amount, the Company recognizes the impairment
losses in the statement of income.
3.6 Foreign currency transactions
Transactions denominated in foreign currencies incurred during the year are
translated into Baht at the rates of exchange at the transaction dates. At
the end of the year, monetary assets and liabilities denominated in foreign
currencies are translated into Baht at the reference rates as determined by
the Bank of Thailand at that date. Gains and losses on foreign exchange
arising on settlements and translation are recognized as income or expense
when incurred.
3.7 Recognition of revenues
Sales are recognized upon delivery of goods to the customers. Other income
is recognized on the accrual basis of accounting.
3.8 Income tax
Income tax expense is calculated from taxable income and recorded based on
tax paid and accrued for the year.
The consolidated financial statements included the audited financial
statements of a subsidiary. Such subsidiary records its income tax by the
deferred income tax method, which is different from the accounting method
used by the Company. The Company, therefore, adjusts the accounting for
income tax of such subsidiary to be the same with the Company's accounting
method.
3.9 Diluted earnings per share
Diluted earnings per share are calculated by dividing net income by the
weighted average number of ordinary shares outstanding during the year. In
case of a capital increase, the number of shares is weighted according to
time of registration of such increase.
3.10 Use of accounting estimates
Preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of revenues, expenses, assets and
liabilities and disclosure of contingent assets and liabilities. Actual
results may differ from those estimates.
F-61
4. SUPPLEMENTAL DISCOSURE OF CASH FLOWS INFORMATION
4.1 Cash paid for the year ended December 31, for interest and income tax
is as follows:
2002 (Baht)
Interest 5,211,583
Income tax 35,380,564
5. CASH AND DEPOSITS AT FINANCIAL INSTITUTIONS
As at December 31, 2002 cash at financial institutions of Baht 8.0 million
are used as collateral for a bank guarantee (Note 15.2). In addition, cash at
financial institutions of subsidiary of SGD 715,971 is used as collateral for
short-term loan from bank.
As at December 31, 2002, cash at financial institutions of Baht 5.1 million
is used to guarantee letters of credit. (Note 15.2)
6. ACCOUNTS RECEIVABLE, NET
Accounts receivable - net as at December 31, consists of the following:
2002 (Baht)
Accounts receivable 406,926,492
Less Allowance for doubtful accounts (2,474,629)
---- -----------
404,451,863
7. INVENTORIES - NET
Inventories - net as of December 31, consist of the following:
2002 (Baht)
Finished goods 53,342,973
Work in process 14,521,221
Raw materials 94,785,855
Goods in transit 48,684,161
-----------
211,334,210
Less Provision for obsolete stock (7,561,272)
---- -----------
203,772,938
8. RECEIVABLE FROM INSURANCE CLAIM
On July 14, 2002, the Company's fabrication and contamination control
specialty foam factory in Samutprakarn, Thailand was destroyed by fire. All of
the Company's inventory and most of the machinery and equipment maintained in
the factory were lost. The carrying value of the inventory and the net book
value of the machinery and equipment at the date of the fire were Baht 84.0
million and Baht 65.1 million, respectively. The Company filed a claim with
their insurance carrier for the inventory and machinery and equipment in the
amount of Baht 70.0 million and 107.8 million, respectively. The Company
recorded an extraordinary loss in 2002 of Baht 9.8 million, net of taxes of Baht
4.2 million, for the underinsured inventory and an additional Baht 1.19 million,
net of taxes of Baht 0.32 million, for other fire related expenses.
F-62
The Company received an interim payment from their insurance carrier in the
amount of Baht 50 million on December 27, 2002 and an additional Baht 50 million
on February 7, 2003. Full and final settlement of the Company's insurance claim
is still pending, however, the Company's management believes a gain will
ultimately be realized.
9. LOANS TO EMPLOYEE AND DIRECTORS
Loans to employee and directors as at December 31, consist of the
following:
2002 (Baht)
-----------
Loan to employee 1,820,000
Loans to directors 31,494,538
----------
33,314,538
Less: Current portion of loan to employee 400,000
----------
32,914,538
==========
As at December 31, 2002, the loan to employee represented an interest-free
Thai Baht denominated loan, which is guaranteed by another person. The loan is
repayable in monthly installments beginning January 2002 and matures in December
2006.
As at December 31, 2002, loans to directors represented foreign currency
denominated loans totaling US $700,000. These loans are secured by a grant of a
security interest of the director's percentage right in a major shareholder's
interest in the Company as specified in the loan agreement, carry interest at a
rate of 4% per annum and are due in December 2021.
10. PLANT AND EQUIPMENT - NET
Plant and equipment - net consist of the following:
Balance as at Currency Balance as at
December 31, translation December 31,
2001 Additions Disposals Transfers differences 2002
Baht Baht Baht Baht Baht Baht
Cost:
Leasehold improvement 14,328,062 3,871,512 (9,227,837) - 200,058 9,171,795
Machinery and equipment 161,779,885 68,689,166 (89,097,384) 2,700,537 2,670,887 146,743,091
Vehicles 22,883,734 8,345,681 (111,829) - 83,004 31,200,590
Furniture and office
equipment 25,291,877 8,720,713 (8,897,174) - 555,652 25,671,068
Construction in progress and
machinery under installation 3,090,537 75,952,268 (2,700,537) - 76,342,268
----------- ----------- ------------ ---------- --------- -----------
227,374,095 165,579,340 (107,334,224) - 3,509,601 289,128,812
----------- ----------- ------------ ---------- ---------- -----------
Accumulated depreciation:
Leasehold improvement (7,156,012) (1,639,198) 6,412,050 - (87,317) (2,470,477)
Machinery and equipment (40,923,398) (14,313,244) 25,749,677 - (925,722) (30,412,687)
Vehicles (11,310,026) (4,597,859) - - (60,791) (15,968,676)
Furniture and office
equipment (10,331,337) (4,436,197) 3,868,577 - (312,933) (11,211,890)
----------- ----------- ------------ ---------- --------- -----------
(69,720,773) (24,986,498) 36,030,304 - (1,386,763) (60,063,730)
----------- ----------- ------------ ---------- --------- -----------
Plant and equipment - net 157,653,322 229,065,082
=========== ===========
Depreciation for the year
2002 24,986,498
===========
F-63
11. INTANGIBLE ASSETS - NET
Intangible assets as at December 31, consist of the following:
2002 (Baht)
----------
Goodwill on acquisitions 13,895,417
==========
On April 26, 2000, the Company entered into an Asset Purchase Agreement
("Agreement") with Wilshire Technologies, Inc. ("Wilshire") to acquire their
contamination control division, which later became the Company's branch. As per
the Agreement, the Company is required to make quarterly payments to Wilshire
equal to a percentage of sales on applicable contamination control products
("covered products") sold by the Company until June 30, 2003 or the total of all
payments made equal US $2.5 million, whichever occurs first. As at December 31,
2002, the goodwill related to this transaction resulted from purchase price
contingencies now being realized through the sales of the covered products. The
amount of amortization expense for the year ended December 31, 2002 was Baht
899,840.
12. SHORT-TERM BORROWINGS FROM FINANCIAL INSTITUTIONS
Short-term borrowings from financial institutions as at December 31,
consist of the following:
2002 (Baht)
------------
Loans from banks 98,000,000
Trust receipt 19,516,433
-----------
117,516,433
===========
As at December 31, 2002, short-term Thai Baht denominated loan from banks
of Baht 98 million, carried interest at a rate of MLR per annum and was
repayable within one year from the balance sheet date. As discussed more fully
in Note 13, the Company entered into a new credit facility on May 16, 2002. A
portion of the outstanding trust receipts as of December 31, 2002 is related to
the Term Loan Facility, which is subject to interest at a rate of 6.375% per
annum. The remaining trust receipts are related to the Revolving Facility which
is subject to interest at current money market rates. The average interest rate
for this portion of the outstanding trust receipts was 3.61% at December 31,
2002.
13. LONG-TERM BORROWINGS FROM FINANCIAL INSTITUTIONS
Long-term borrowings from financial institutions as at December 31, consist
of the following:
2002 (Baht)
-----------
Loans from banks 62,000,000
==========
On May 16, 2002, the Company entered into a new credit facility with a
financial institution. The new credit facility ("New Credit Facility") provides
for borrowings in the aggregate amount of Baht 300 million and is composed of:
(i) a Baht 150 million term loan and non-revolving letter of credit/trust
receipts facility (the "Term Loan Facility") and (ii) a Baht 150 million
revolving working capital facility (the "Revolving Facility"), both maturing on
August 30, 2007. The New Term Loan Facility is to be repaid in eight equal
semi-annual installments with the first repayment to be made in February 2004.
The interest for the term loan portion of the Term Loan Facility is 6.375%
per annum in relation to the first two years after August 30, 2002, and then the
higher of (i) financial institution's minimum lending rate (MLR) minus 1.25%,
and (ii) another local commercial bank's MLR minus 0.5% per annum for the
remainder of the loan. The Company shall pay a commercial letter of opening fee
at a rate of 1/12% per quarter and interest on the trust receipts at the rate of
6.375% per annum. The interest for the Revolving Facility is at the money market
rate on each relevant maturity date. Interest is due and payable every three
calendar months beginning on November 30, 2002.
F-64
The Company is required to pay a commitment fee at the rate of 0.25% per
annum on the daily undrawn balance of the Term Loan calculated from the first
anniversary date of the agreement, May 16, 2003, up to and including the last
day of the Availability Period, which ends on the earlier of (i) August 16, 2003
or (ii) the date on which the Term Loan Facility is fully drawn, cancelled or
terminated under the provisions of the Agreement.
The collateral required for the New Credit Facility is the assignment of
the land leasehold right, mortgage of the newly-constructed factory, office
building and machinery, pledge of inventory and receivables and the assignment
of construction and operational insurance proceeds to the financial institution
as beneficiary. The Company is also required to meet various debt covenants,
including maintaining certain financial ratios.
14. LOANS FROM SHAREHOLDERS
Loans from shareholders as at December 31, consist of the following:
2002 (Baht)
-----------
Loans from shareholders 259,823,400
Interest of the loans 14,368,080
------------
274,191,480
============
On December 3, 2001, the Company received loans from its shareholders
totaling US $6 million. These loans are unsecured and carry interest at the rate
of LIBOR + 3.25% per annum, and mature on December 3, 2008. Interest accrues
quarterly beginning at the inception of the loan, however, the first interest
payment is not due until December 3, 2005 ("First Interest Payment Date") and
then quarterly thereafter beginning February 1, 2006. The accrued interest for
the first three years of the loan is not due until maturity. The accrued
interest for the fourth year of the loan is due entirely on the First Interest
Payment Date.
15. COMMITMENTS AND CONTINGENCIES
15.1 The Company has commitments for land, buildings and vehicle lease
agreement as follows:
Annual Lease
Period Payment (Baht)
--------------
2003 11,768,770
2004 10,071,753
2005 8,126,544
2006-2018 63,035,169
15.2 The Company had contingent liabilities to banks for letters of
guarantee of Baht 10.31 million at December 31, 2002 (Note 5).
15.3 The Company had commitments to a bank for unused letter of credit of
Baht 1.3 million at December 31, 2002.
15.4 The Company had one construction contract with outstanding commitments
of Baht 27.3 million at December 31, 2002.
16. REVENUE REPORTING OF A PROMOTED INDUSTRY
To comply with the Announcement of the Board of Investment No. Por. 14/2541
(1998) dated December 30, 1998 regarding revenue reporting of a promoted
industry, the Company is required to report the revenues from domestic sales and
export sales separately and to report separately between the promoted and the
non-promoted businesses. For the year ended December 31, the required
information is as follows:
F-65
2002 Promoted Business Non-Promoted Business Total
Baht Baht Baht
Sales - 1,212,912,552 1,212,912,552
The information to present local sales and export sales separately was not
available.
17. INVESTMENT PROMOTION PRIVILEGES
In 1998-2001, the Company was granted certain rights and privileges (No.
1377/2541 (1998), 6453/2541 (1998), 4650/2543 (2000), 5026/2543 (2000),
5153/2543 (2000) and 6235/2544 (2001)) as a promoted industry under the
Investment Promotion Act of B.E. 2520 (1977), which included an exemption from
customs duties for machinery imported for production as approved by the Board of
Investment until August 14, 2002 and an exemption from custom duties for raw
materials until May 19, 2002.
The Company has to comply with certain conditions contained in the
investment promotion certificate including the size of its operations and
amounts of investments and annual export sales volume.
18. EMPLOYEES' PROVIDENT FUND
The Company has established a registered provident fund covering all
employees. This fund was registered with the Ministry of Finance under the
Provident Fund Act. B.E. 2530. Membership is voluntary upon attaining permanent
status. Under the regulation of the fund, members and the Company are required
to make monthly contributions to the fund at a percentage of the employees' base
salaries, depending on the length of employment.
The Company's contribution charged to operations for the years ended
December 31, 2002 and 2001 amounted to Baht 970,965 and Baht 546,470,
respectively.
The Company's subsidiary has established a defined contribution plan
covering all employees, and its contributions charged to operations for the
years ended December 31, 2002 and 2001 amounted to Baht 12,008,000 and Baht
9,809,638, respectively.
19. SUMMARY OF SIGNIFICANT DIFFERENCES BETWEEN ACCOUNTING PRINCIPLES FOLLOWED
BY THE COMPANY AND ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED
STATES OF AMERICA (U.S. GAAP)
The Company's consolidated financial statements have been prepared in
accordance with generally accepted accounting principles in the Kingdom of
Thailand ("Thai GAAP"), which differs in certain respects from U.S. GAAP.
The differences, as they affect the financial statements, are reflected
in the amounts provided in Note 20 and arise due to the items discussed in the
following paragraphs:
Accounting for Income Taxes
Under U.S. GAAP, SFAS No. 109, Accounting for Income Taxes, requires an
enterprise to record deferred tax assets or liabilities based on the difference
between the financial statement and income tax basis of assets and liabilities
using the enacted tax rate. Deferred income tax expenses or credits are based on
the changes in the assets or liabilities from period to period. Deferred tax
assets are reduced by a valuation allowance if it is more likely than not that
some or all of the deferred tax assets will not be realized.
Thai GAAP does not address the reporting or disclosure of deferred income
taxes.
F-66
Amortization of Goodwill
Under Thai GAAP, goodwill should be amortized to expense on a systematic
basis over its useful life. The amortization period should reflect the best
estimate of the period during which future economic benefits are expected to
flow to the enterprise. The amortization method used should reflect the pattern
in which the future economic benefits arising from goodwill are expected to be
consumed. The straight-line method should be adopted unless there is persuasive
evidence that another method is more appropriate in the circumstances.
Under U.S. GAAP, SFAS No. 142, Goodwill and Other Intangible Assets,
goodwill and certain other intangible assets are no longer amortized but are to
be periodically assessed for impairment.
Reporting Comprehensive Income
Under Thai GAAP, a company is given the option to present a statement
showing (i) all changes in equity; or (ii) changes in equity other than those
arising from capital transactions with owners and distributions owners (i.e.
statement of comprehensive income). The Company has chosen to present all
changes in equity.
Under U.S. GAAP, SFAS No. 130, Reporting Comprehensive Income, requires an
enterprise to display an amount representing total comprehensive income for each
period of operations presented in the financial statements. Comprehensive income
comprises of net income and other comprehensive income, such as unrealized gains
and losses on securities, foreign currency translation adjustments and minimum
pension liability adjustments. In addition, an enterprise is required to
classify items of other comprehensive income by their nature in a financial
statement and display the accumulated balance of other comprehensive income
separately from retained earnings and premium on share capital in the equity
section of a statement of financial position. Reclassification of financial
statement for earlier periods provided for comparative purposes is also
required.
Extraordinary item, net
The extraordinary item, net would be classified within profit from ordinary
activities under U.S. GAAP.
20. RECONCILIATION BETWEEN NET INCOME AND SHAREHOLDERS' EQUITY UNDER THAI GAAP
AND U.S. GAAP
Baht
Net income according to financial statements prepared under
Thai GAAP 106,041,120
U.S. GAAP adjustments
Increase (decrease) due to:
Deferred tax accounting (567,859)
Amortization of goodwill (Note 14) 346,231
-----------
Net income in accordance with U.S. GAAP 105,819,492
===========
Basic and Diluted Earnings Per Share 10.08
Basic and diluted weighted average number of shares 10,500,000
Shareholders' equity according to financial statements prepared
under Thai GAAP 351,408,518
U.S. GAAP adjustments
Increase (decrease) due to:
Loans to directors (Note 12) (31,494,538)
F-67
Deferred tax accounting (8,842,497)
Amortization of goodwill 348,159
Currency translation difference (Note 2.2) (911,336)
-----------
Shareholders' equity in accordance with U.S. GAAP 310,508,306
===========
With regard to the balance sheet, the following significant captions
determined under U.S. GAAP would have been:
Loans to employee - non-current asset 1,420,000
Intangible assets - net 14,241,648
Other liabilities 10,321,692
The following table presents comprehensive income for the year ended
December 31, 2001:
Baht
Net income (U.S. GAAP) 105,819,492
Foreign currency translation adjustments 7,393,657
-----------
Comprehensive income 113,213,149
===========
21. ADDITIONAL FINANCIAL STATEMENT DISCLOSURES REQUIRED UNDER U.S. GAAP
21.1 Income Taxes
The sources of income before the provision for income taxes for the year
ended December 31, 2002 are as follows:
Baht
Thailand 72,382,370
Foreign 72,130,235
------------
Income before provision for income taxes 144,512,605
============
The provision for income taxes for the year ended December 31,
2002 is summarized as follows:
Baht
Current
Thailand 25,800,115
Foreign 13,342,453
------------
Total current 39,142,568
------------
Deferred
Thailand -
Foreign 567,859
------------
Total deferred 567,859
------------
Approximate provision for income taxes in accordance
with U.S. GAAP 39,710,427
============
F-68
As at December 31, 2002, in providing for applicable deferred income taxes
under U.S. GAAP, the tax effect of significant temporary differences that
give rise to deferred income tax assets and liabilities are listed below.
Baht
Deferred income tax assets resulted from:
Inventory basis differences 828,792
Allowance for doubtful accounts 604,031
Valuation allowance (1,432,823)
----------
Total deferred income tax assets -
----------
Deferred income tax liabilities resulted from:
Property, plant and equipment basis differences 10,321,692
----------
Total deferred income tax liabilities 10,321,692
----------
Net deferred income tax liabilities 10,321,692
==========
Deferred income taxes have not been provided on approximately Baht 171.3
million of undistributed earnings of foreign affiliated companies, which
are considered to be permanently reinvested. It is not practicable to
estimate the amount of tax that might be payable on the eventual remittance
of such earnings.
21.2 Transactions with Related Parties
A portion of the Company's assets, revenues and expenses arose from
transactions with related parties, which occur in the ordinary course of
business on terms equivalent to those with third parties. The relationship
may be by shareholding or the companies may have the same group of
shareholders or directors. The Company's management believes that the
Company does not have significant influence over the related parties. The
accompanying financial statements reflect the effects of these transactions
determined on the basis of commitments and conditions as in the normal
course of business.
Significant balances and transactions are as follows:
Relationship Balance at
December 31,
2002
Baht
Amounts due from related companies
Foamex L.P. Affiliated Company 278,645
Foamex Asia, Inc. Major Shareholder 8,849,084
Amounts due to related companies
Foamex L.P. Affiliated Company 82,013,287
F-69
Relationship Balance for the
year ended
December 31,
2002
Baht
Reimbursement of expenses
Foamex L.P. Affiliated Company 30,230,917
Foamex Asia, Inc. Major Shareholder 18,069,036
Purchases
Foamex L.P. Affiliated Company 218,190,503
21.3 Estimated Fair Values of Financial Instruments
The fair values have been estimated by the Company using available market
information and appropriate valuation methodologies.
As at December 31, the carrying amounts of financial assets and financial
liabilities which were different from the estimated fair values were as
follows:
Carrying Value Fair Value
Baht Baht
Loans to employee and directors 33,314,538 16,305,922
Loans from shareholders 259,823,400 222,131,206
Long-term borrowings from financial institutions 62,000,000 70,903,616
The following methods and assumptions were used by the Company in
estimating fair value of financial instruments as disclosed herein:
Financial assets - The fair values of financial assets for which their
remaining terms to maturity are within 90 days are based on carrying value.
For those with remaining terms to maturity greater than 90 days are
estimated by using a discounted cash flow analysis based on the minimum
leading rate of a commercial bank at December 31, 2002 for the remaining
years to maturity.
Financial liabilities - The fair values of financial liabilities for which
their remaining terms to maturity are within 90 days are based on carrying
value. For those with remaining terms to maturity greater than 90 days are
estimated by using a discounted cash flow analysis based on the minimum
leading rate of a commercial bank at December 31, 2002 for the remaining
years to maturity.
F-70
REPORT OF THE INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
TO THE BOARD OF DIRECTORS
FOAMEX ASIA COMPANY LIMITED
We have audited the consolidated balance sheet of Foamex Asia Company Limited
and its subsidiary as at December 31, 2001, and the related consolidated
statements of income, changes in shareholders' equity and cash flows for the
year then ended. These financial statements are the responsibility of the
Company's management as to their correctness and completeness of the
presentation. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance as to whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to in the first
paragraph present fairly, in all material respects, the financial position of
Foamex Asia Company Limited and its subsidiary as at December 31, 2001, and the
results of its operations and its cash flows for the year then ended, in
conformity with generally accepted accounting principles in Thailand.
As discussed in Note 4 to the financial statements, the Company has elected to
discontinue the application of certain accounting standards for the current
year's financial statements.
Generally accepted accounting principles in Thailand do not conform to those in
the United States of America. A description of the significant differences
between these two generally accepted accounting principles and the approximate
effects of these differences on net income and shareholders' equity are set
forth in Notes 18 and 19 to the consolidated financial statements.
Wimolporn Boonyusthian
Certified Public Accountant (Thailand)
BANGKOK Registration No. 4067
February 22, 2002 DELOITTE TOUCHE TOHMATSU JAIYOS
(February 5, 2003 as to Notes 2, 18, 19, 20, 21)
F-71
FOAMEX ASIA COMPANY LIMITED AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
AS AT DECEMBER 31, 2001
(Amounts in BAHT)
ASSETS
CURRENT ASSETS
Cash in hand and at banks 138,358,163
Accounts receivable - net (Note 7) 408,060,820
Inventories - net (Note 8) 219,051,180
Amounts due from related companies 2,502,334
Other current assets 19,134,610
-----------
Total Current Assets 787,107,107
-----------
LOANS TO EMPLOYEE AND DIRECTORS (Note 9) 32,955,155
PLANT AND EQUIPMENT - NET (Note 10) 157,653,322
OTHER ASSETS (Note 11) 6,217,866
------------
TOTAL ASSETS 983,933,450
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Loans from bank (Note 12) 30,000,000
Accounts payable 297,040,040
Amounts due to related companies 43,100,301
Accrued expenses 46,292,992
Other current liabilities 35,428,948
-----------
Total Current Liabilities 451,862,281
-----------
LOANS FROM SHAREHOLDERS (Note 13) 266,158,200
OTHER LIABILITIES (Note 14) 28,850,564
-----------
TOTAL LIABILITIES 746,871,045
===========
SHAREHOLDERS' EQUITY
SHARE CAPITAL (Note 15)
Registered share capital
10,500,000 ordinary shares of Baht 10 each 105,000,000
===========
10,500,000 ordinary shares of Baht 10 each, fully paid 105,000,000
PREMIUM ON SHARE CAPITAL 18,990,504
CURRENCY TRANSLATION DIFFERENCES 6,546,185
RETAINED EARNINGS
Unappropriated 106,525,716
-----------
Total Shareholders' Equity 237,062,405
-----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 983,933,450
===========
Notes to the financial statements form an integral part of these statements
F-72
FOAMEX ASIA COMPANY LIMITED AND SUBSIDIARY
CONSOLIDATED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 2001
(Amounts in BAHT)
REVENUES
Sales 1,461,757,023
Other income 25,175,124
-------------
Total Revenues 1,486,932,147
-------------
EXPENSES
Cost of sales 1,103,005,580
Selling and administrative expenses 197,207,253
Loss on exchange rate 1,723,772
Interest expense 9,778,202
Income tax expense 32,763,373
-------------
Total Expenses 1,344,478,180
-------------
NET INCOME 142,453,967
=============
BASIC EARNINGS PER SHARE 24.31
WEIGHTED AVERAGE NUMBER OF ORDINARY SHARES 5,859,721
=============
Notes to the financial statements form an integral part of these statements
F-73
FOAMEX ASIA COMPANY LIMITED AND SUBSIDIARY
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 2001
(Amounts in BAHT)
ISSUED AND PAID-UP SHARE CAPITAL
Beginning balance 54,087,120
Addition 50,912,880
-----------
Ending balance 105,000,000
-----------
PREMIUM ON SHARE CAPITAL
Beginning balance -
Addition 18,990,504
-----------
Ending balance 18,990,504
-----------
RETAINED EARNINGS (DEFICIT)
Unappropriated (Deficit)
Beginning balance (35,928,251)
Addition 142,453,967
-----------
Ending balance 106,525,716
-----------
CURRENCY TRANSLATION DIFFERENCES
Beginning balance 13,781,075
Deduction during the year (7,234,890)
-----------
Ending balance 6,546,185
-----------
TOTAL SHAREHOLDERS' EQUITY 237,062,405
===========
Notes to the financial statements form an integral part of these statements
F-74
FOAMEX ASIA COMPANY LIMITED AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2001
(Amounts in BAHT)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income 142,453,967
Reconciliation of net income to net cash from operating activities
Depreciation and amortization 25,378,127
Allowance for doubtful accounts (66,071)
Provision for obsolete stock (525,220)
Unrealized loss on exchange rate - net 6,052,891
Loss on disposal of plant and equipment 40,587
------------
Operating income before change in operating assets and liabilities 173,334,281
Operating assets (increase) decrease
Accounts receivable (128,422,075)
Inventories (39,958,875)
Other current assets (2,365,216)
Amounts due from related companies (2,502,334)
Other assets (4,945,848)
Operating liabilities increase (decrease)
Accounts payable 31,845,283
Amounts due to related companies (217,875,904)
Accrued expenses (5,737,192)
Other current liabilities 30,157,608
------------
Net cash used in operating activities (166,470,272)
------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of plant and equipment (61,178,177)
Proceeds from disposal of plant and equipment 1,433,111
Increase in deposits at bank used as collateral (15,282,248)
Increase in loans to employee and directors (32,955,155)
------------
Net cash used in investing activities (107,982,469)
------------
CASH FLOWS FROM FINANCING ACTIVITIES
Cash receipt from share capital increase 69,903,384
Cash receipt from loans from shareholders 264,761,400
Cash payment for loans from shareholders (36,366,340)
Increase in loan from bank 15,000,000
Increase in long term accounts payable (6,855,945)
------------
Net cash provided by financing activities 306,442,499
------------
NET EFFECT OF CURRENCY TRANSLATION
DIFFERENCES IN CASH AND CASH EQUIVALENTS (4,859,666)
------------
Net increase in cash and cash equivalents 27,130,092
Cash and cash equivalents at January 1, 90,241,514
------------
Cash and cash equivalents at December 31, 117,371,606
============
Notes to the financial statements form an integral part of these statements
F-75
FOAMEX ASIA COMPANY LIMITED AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2001
1. ECONOMIC TURMOIL IN THE ASIA-PACIFIC REGION
Thailand and many Asia-Pacific countries continue to experience severe
economic difficulties since 1997. The accompanying financial statements reflect
management's current assessment of the possible impact of the economic
conditions on the financial position of the Company.
2. COMPANY'S OPERATIONS AND BASIS FOR PREPARATION OF THE CONSOLIDATED
FINANCIAL STATEMENTS
Foamex Asia Company Limited was registered in the Kingdom of Thailand on
June 5, 1997 with its head office located at 175 Sathorn City Tower, 20th Floor,
South Sathorn Road, Sathorn, Bangkok 10120. The Company's plant is located at
51/2 Bangna-trad Road KM22, Samutprakarn 10540 (see Note 21.2). The Company and
its Subsidiary are members of Foamex International, Inc. and Hau Kee Group and
the Company's principal objective is to fabricate technical foam, films and
adhesives.
As at December 31, 2001, the Company had a total of 520 staff persons. The
staff costs for the year ended December 31, 2001 were Baht 198 million.
2.1 The Company prepares its statutory financial statements in conformity
with accounting and practices generally accepted in Thailand.
2.2 The consolidated financial statements include the accounts of Foamex
Asia, LLC, the Company's branch incorporated in the United States of
America, and Foamtec (Singapore) Pte. Ltd., a subsidiary incorporated
in the Republic of Singapore. The Company has direct and indirect
ownership percentages as follows:
Subsidiary % of Shareholding
Directly owned:
Foamtec (Singapore) Pte. Ltd. 99.99%
Indirectly owned:
Foamex (Malaysia) Sdn. Bhd. 99.99%
The major intercompany transactions between the Company and its Subsidiary
included in the consolidated financial statements have been eliminated.
The financial statements of Foamtec (Singapore) Pte. Ltd. and its
subsidiary have been prepared in Singapore dollars. For consolidation purposes,
these financial statements have been translated into Thai Baht as follows:
a. All assets and liabilities using the rates announced by the Bank of
Thailand at the balance sheet date.
b. Revenues and expenses using the average exchange rates for the year as
announced by the Bank of Thailand.
Net exchange gain or loss from translation is presented as "Currency
Translation Differences" under "Shareholders' Equity" in the balance sheet.
F-76
3. SIGNIFICANT ACCOUNTING POLICIES
3.1 Cash and cash equivalents
Cash and cash equivalents consist of cash in hand, deposits at banks and
financial institutions with original maturities of 3 months or less.
3.2 Allowance for doubtful accounts
An allowance for doubtful accounts of the Company and its subsidiary is
provided at the estimated collection losses on receivables, based on the
Company's collection experience together with a review of the current
financial position of each existing receivable.
3.3 Inventories
Inventories are valued at the lower of cost or net realizable value. Cost
is determined as follows:
Finished goods at standard cost which approximates
actual cost or net realizable value,
whichever is lower
Work in process at standard cost which approximates
actual cost
Raw materials weighted average cost basis
Inventories of subsidiaries are stated at the lower of cost or net
realizable value. Cost is calculated on the first-in first-out basis.
3.4 Plant and equipment
Plant and equipment are stated at cost less accumulated depreciation.
Depreciation is calculated by the straight-line method, based on the
estimated useful lives of the assets as follows:
Leasehold improvements 5-10 years
Machinery and equipment 3-10 years
Vehicles 5 years
Furniture and office equipment 3-10 years
3.5 Impairment of assets
The Company reviews the impairment of assets for plant and equipment,
investment in subsidiary and other assets whenever events indicate that the
carrying value of an asset exceeds its recoverable amount. In case that the
carrying value of an asset exceeds its recoverable amount, the Company
recognizes the impairment losses in the statement of income.
3.6 Foreign currency transactions
Transactions denominated in foreign currencies incurred during the year are
translated into Baht at the rates of exchange at the transaction dates. At
the end of the year, monetary assets and liabilities denominated in foreign
currencies are translated into Baht at the reference rates as determined by
the Bank of Thailand at that date. Gains and losses on foreign exchange
arising on settlements and translation are recognized as income or expense
when incurred.
F-77
3.7 Recognition of revenues
Sales are recognized upon delivery of goods to the customers. Other income
is recognized on the accrual basis of accounting.
3.8 Income tax
Income tax expense is calculated from taxable income and recorded based on
tax paid and accrued for the year.
The consolidated financial statements included the audited financial
statements of a subsidiary. Such subsidiary records its income tax by the
deferred income tax method, which is different from the accounting method
used by the Company. The Company, therefore, adjusts the accounting for
income tax of such subsidiary to be the same with the Company's accounting
method.
3.9 Basic earnings per share
Basic earnings per share are calculated by dividing net income by the
weighted average number of ordinary shares outstanding during the year. In
case of a capital increase, the number of shares is weighted according to
time of registration of such increase.
3.10 Use of accounting estimates
Preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of revenues, expenses, assets and
liabilities and disclosure of contingent assets and liabilities. Actual
results may differ from those estimates.
4. ACCOUNTING CHANGES
In December 2001, the Institute of Certified Accountants and Auditors of
Thailand issued an Announcement regarding "Exemption of Accounting Standards for
Non-public Limited Companies". Accordingly, the Company has elected to
discontinue the application of Thai Accounting Standard No. 47 "Related Parties
Disclosure" and No. 48 "Financial Instruments Disclosure and Presentation".
5. SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION
5.1 Cash paid for interest and income tax are as follows:
Baht
Interest 22,609,801
==========
Income tax 2,016,304
==========
5.2 Cash and cash equivalents consist of the following:
Baht
Cash on hand and in banks 138,358,163
Less Deposit at banks used as collateral (20,986,557)
---- -----------
Cash and cash equivalents 117,371,606
===========
F-78
6. CASH IN HAND AND AT BANKS
As at December 31, 2001 cash at banks of Baht 2.86 million, are used as
collateral for a bank guarantee (Note 16.2). In addition, cash at bank of
subsidiary of SGD 759,359 is used as collateral for short-term loan from bank.
7. ACCOUNTS RECEIVABLE - NET
Accounts receivable - net consist of the following:
Baht
Accounts receivable 409,617,635
Less Allowance for doubtful accounts (1,556,815)
---- -----------
408,060,820
8. INVENTORIES - NET
Inventories - net consist of the following:
Baht
Finished goods 69,187,121
Work in process 11,935,231
Raw materials 112,978,963
Goods in transit 30,452,955
-----------
224,554,270
Less Provision for obsolete stock (5,503,090)
---- -----------
219,051,180
9. LOANS TO EMPLOYEE AND DIRECTORS
Loans to employee and directors consist of the following:
Baht
Loan to employee 2,000,000
Loans to directors 30,955,155
----------
32,955,155
As at December 31, 2001, loan to employee represented an interest-free Thai
Baht loan, which is guaranteed by another person. The loan is repayable in
monthly installments beginning January 2002 to December 2006.
As at December 31, 2001, loans to directors represented foreign currency
denominated loans totaling US$ 700,000. These loans are secured by the
director's interest in the Company as specified in the loan agreement, carry
interest at a rate of 4% per annum and are due in December 2021.
F-79
10. PLANT AND EQUIPMENT - NET
Plant and equipment - net consist of the following:
Balance as at Currency Balance as at
December 31, translation December 31,
2000 Additions Disposals Transfers difference 2001
Baht Baht Baht Baht Baht Baht
Cost:
Leasehold improvement 13,525,671 1,296,811 (303,160) - (191,260) 14,328,062
Machinery and
equipment 118,696,605 20,124,029 (154,302) 25,545,944 (2,432,391) 161,779,885
Vehicles 13,508,582 9,456,120 - - (80,968) 22,883,734
Furniture and office
equipment 20,921,934 5,000,313 (101,455) - (528,915) 25,291,877
Construction in progress and
machinery in transit 4,334,970 25,300,904 (999,393) (25,545,944) - 3,090,537
----------- ---------- ---------- ----------- ---------- -----------
170,987,762 61,178,177 (1,558,310) - (3,233,534) 227,374,095
----------- ---------- ---------- ----------- ---------- -----------
Accumulated depreciation:
Leasehold improvement (4,969,650) (2,301,817) 57,248 - 58,207 (7,156,012)
Machinery and
equipment (27,176,683) (14,362,401) 19,831 - 595,855 (40,923,398)
Vehicles (7,712,437) (3,636,974) - - 39,385 (11,310,026)
Furniture and office
equipment (6,091,131) (4,412,606) 7,533 - 164,867 (10,331,337)
------------ ----------- ---------- ----------- ---------- -----------
(45,949,901) (24,713,798) 84,612 - 858,314 (69,720,773)
----------- ----------- ---------- ----------- ---------- -----------
Plant and equipment - net 125,037,861 157,653,322
=========== ===========
Depreciation for the year
2001 24,713,798
===========
11. OTHER ASSETS
Other assets of the following:
Baht
Technical license - net 553,609
Deposits 5,664,257
---------
6,217,866
12. LOANS FROM BANKS
Loans from banks consist of the following:
Baht
Loans from banks 30,000,000
----------
30,000,000
As at December 31, 2001, short-term Thai Baht denominated loan from banks
of Baht 15 million, carried interest at a rate of MLR per annum and was
repayable within one year from the balance sheet date.
F-80
As at December 31, 2001, short-term Thai Baht denominated loan from bank of
Baht 15 million, was secured by cash at bank of subsidiary in the Republic of
Singapore, carried interest at rate of MLR per annum and was repayable within
one year from the balance sheet date.
13. LOANS FROM SHAREHOLDERS
Loans from shareholders as at December 31, consist of the following:
Baht
Loans from shareholders 266,158,200
-----------
266,158,200
On December 3, 2001, the Company received loans from its shareholders
totaling US$ 6 million. These loans are unsecured, carry interest at the rate of
LIBOR + 3.25% per annum, and mature on December 3, 2008. Interest accrues
quarterly beginning at the inception of the loan, however the first interest
payment is not due until December 3, 2005 and then quarterly thereafter
beginning February 1, 2006.
14. OTHER LIABILITIES
On April 26, 2000, the Company entered into an Asset Purchase Agreement
("Agreement") with Wilshire Technologies, Inc. ("Wilshire") to acquire their
contamination control division, which later became the Company's branch. As per
the agreement, the Company is required to make quarterly payments to Wilshire
equal to a percentage of sales on applicable contamination control products sold
by the Company until June 30, 2003 or the total of all payments made equal US$
2.5 million, whichever occurs first.
15. SHARE CAPITAL
On November 9, 2001, the extraordinary shareholders' meeting passed a
special resolution to increase the authorized share capital from Baht 54,087,120
to Baht 105,000,000 through the issuance of 5,091,288 additional ordinary shares
of Baht 10 par value each. The Company called and fully received the
subscriptions, and registered the increase in share capital with Registrar of
Partnerships and Companies on December 28, 2001.
16. COMMITMENTS AND CONTINGENCIES
16.1 The Company has commitments for vehicle lease agreements as follows:
Period Baht
2002 1,667,964
2003 1,667,964
2004 1,089,203
16.2 The Company has contingent liabilities to banks for letters of
guarantee of Baht 2.86 million at December 31, 2001 (Note 6).
17. INVESTMENT PROMOTION PRIVILEGES
In 1998-2001, the Company was granted certain rights and privileges (No.
1377/2541 (1998), 6453/2541 (1998), 4650/2543 (2000), 5026/2543 (2000),
5153/2543 (2000) and 6235/2544 (2001)) as a promoted industry under the
Investment Promotion Act of B.E. 2520 (1977), which included exemption from
customs duties for machinery imported for production as approved by the Board of
Investment until August 14, 2002 and exemption from custom duties for raw
materials until May 19, 2002.
The Company has to comply with certain conditions contained in the
investment promotion certificate including the size of its operations and
amounts of investments and annual export sales volume.
F-81
18. SUMMARY OF SIGNIFICANT DIFFERENCES BETWEEN ACCOUNTING PRINCIPLES FOLLOWED
BY THE COMPANY AND ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED
STATES OF AMERICA (U.S. GAAP)
The Company's consolidated financial statements have been prepared in
accordance with generally accepted accounting principles in the Kingdom of
Thailand ("Thai GAAP"), which differs in certain respects from U.S. GAAP.
The differences, as they affect the financial statements, are reflected in
the amounts provided in Note 19 and arise due to the items discussed in the
following paragraphs:
Accounting for Income Taxes
Under U.S. GAAP, SFAS No. 109, Accounting for Income Taxes, requires an
enterprise to record deferred tax assets or liabilities based on the difference
between the financial statement and income tax basis of assets and liabilities
using the enacted tax rate. Deferred income tax expenses or credits are based on
the changes in the assets or liabilities from period to period. Deferred tax
assets are reduced by a valuation allowance if it is more likely than not that
some or all of the deferred tax assets will not be realized.
Thai GAAP does not address the reporting or disclosure of deferred income
taxes.
Reporting Comprehensive Income
Under Thai GAAP, a company is given the option to present a statement
showing (i) all changes in equity; or (ii) changes in equity other than those
arising from capital transactions with owners and distributions owners (i.e.
statement of comprehensive income.) The Company has chosen to present all
changes in equity.
Under U.S. GAAP, SFAS No. 130, Reporting Comprehensive Income, requires an
enterprise to display an amount representing total comprehensive income for each
period of operations presented in the financial statements. Comprehensive income
comprises of net income and other comprehensive income, such as unrealized gains
and losses on securities, foreign currency translation adjustments and minimum
pension liability adjustments. In addition, an enterprise is required to
classify items of other comprehensive income by their nature in a financial
statement and display the accumulated balance of other comprehensive income
separately from retained earnings and premium on share capital in the equity
section of a statement of financial position. Reclassification of financial
statement for earlier periods provided for comparative purposes is also
required.
19. RECONCILIATION BETWEEN NET INCOME AND SHAREHOLDERS' EQUITY UNDER THAI GAAP
AND U.S. GAAP
Baht
Net income according to financial statements prepared under
Thai GAAP 142,453,967
U.S. GAAP adjustments
Increase (decrease) due to:
Deferred tax accounting (1,276,823)
-----------
Net income in accordance with U.S. GAAP 141,177,144
===========
Diluted Earnings Per Share 24.09
Weight average number of shares
Diluted 5,859,721
F-82
Shareholders' equity accounting to financial statements prepared
Under Thai GAAP 237,062,405
U.S. GAAP adjustments
Increase (decrease) due to:
Loans to directors (30,955,155)
Deferred tax accounting (8,821,423)
Currency translation difference (524,843)
-----------
Approximate shareholders' equity in accordance with U.S. GAAP 196,760,984
===========
With regard to the balance sheet, the following significant captions
determined under U.S. GAAP would have been:
Loans to employee 2,000,000
==========
Other non-current assets - Deposits at banks used as collateral 20,986,557
==========
Other liabilities 38,196,830
==========
The following table presents comprehensive income for the year ended
December 31, 2001:
Baht
Net income (U.S. GAAP) 141,177,144
Foreign currency translation adjustments (7,759,733)
-----------
Comprehensive income 133,417,411
===========
20. ADDITIONAL FINANCIAL STATEMENT DISCLOSURES REQUIRED UNDER U.S. GAAP
20.1 Income Taxes
The sources of income before the provision for income taxes for the year
ended December 31, 2001 are as follows:
Baht
Thailand 76,500,742
Foreign 98,716,597
-----------
Income before provision for income taxes 175,217,339
===========
The provision for income taxes for the year ended December 31,
2001 is summarized as follows:
Baht
Current
Thailand 12,003,128
Foreign 20,760,245
-----------
Total current 32,763,373
-----------
Deferred
Thailand -
Foreign 1,276,823
-----------
Total deferred 1,276,823
-----------
Approximate provision for income taxes in accordance with U.S. GAAP 34,040,169
===========
F-83
As at December 31, 2001, in providing for applicable deferred income
taxes under U.S. GAAP, the tax effect of significant temporary
differences that give rise to deferred income tax assets and
liabilities are listed below.
Baht
Deferred income tax assets resulted from:
Inventory basis differences 821,369
Allowance for doubtful accounts 324,151
Valuation allowance (1,145,520)
----------
Total deferred income tax assets -
----------
Deferred income tax liabilities resulted from:
Property, plant and equipment basis differences 9,346,266
----------
Total deferred income tax liabilities 9,346,266
----------
Net deferred income tax liabilities 9,346,266
==========
Deferred income taxes have not been provided on approximately Baht
105.3 million of undistributed earnings of foreign affiliated
companies, which are considered to be permanently reinvested. It is
not practicable to estimate the amount of tax that might be payable on
the eventual remittance of such earnings.
20.2 Transactions with Related Parties
A portion of the Company's assets, revenues and expenses arose from
transactions with related parties. The relationship may be by
shareholding or the companies may have the same group of shareholders
or directors. The Company's management believes that the Company does
not have significant influence over the related parties. The
accompanying financial statements reflect the effects of these
transactions determined on the basis of commitments and conditions as
in the normal course of business.
Significant balances and transactions are as follows:
Balance at
December 31, 2001
Relationship Baht
Amounts due from related companies
Foamex L.P. Affiliated Company 2,502,334
Amounts due to related companies
Foamex L.P. Affiliated Company 74,801,526
Balance for the
year ended
December 31, 2001
Relationship Baht
Reimbursement of expenses
Foamex L.P. Affiliated Company 2,587,980
Purchases
Foamex L.P. Affiliated Company 176,363,932
20.3 Estimated Fair Values of Financial Instruments
The fair values have been estimated by the Company using available
market information and appropriate valuation methodologies.
F-84
As at December 31, 2001 the carrying amounts of financial assets and
financial liabilities which were different from the estimated fair
values were as follows:
Carrying Value Fair Value
Baht Baht
Loans to employee and directors 32,955,155 16,058,215
=========== ===========
Loans from shareholders 266,158,200 227,388,396
=========== ===========
The following methods and assumptions were used by the Company in
estimating fair value of financial instruments as disclosed herein:
Financial assets - The fair values of financial assets for which their
remaining terms to maturity are within 90 days are based on carrying
value. For those with remaining terms to maturity greater than 90 days
are estimated by using a discounted cash flow analysis based on the
historical minimum leading rate of a commercial bank at December 31,
2001 for the remaining years to maturity.
Financial liabilities - The fair values of financial liabilities for
which their remaining terms to maturity within 90 days are based on
carrying value. For those with remaining terms to maturity greater
than 90 days are estimated by using a discounted cash flow analysis
based on current for the remaining years to maturity.
21. SUBSEQUENT EVENTS
21.1 New Credit Facility
On May 16, 2002, the Company entered into a new credit facility with a
financial institution. The new credit facility ("New Credit Facility")
provides for borrowings in the aggregate amount of Baht 300 million
and is composed of: (i) a Baht 150 million term loan and non-revolving
letter of credit/trust receipts facility (the "Term Loan Facility")
and (ii) a Baht 150 million revolving working capital facility (the
"Revolving Facility"), both maturing on August 30, 2007. The New Term
Loan Facility is to be repaid in eight equal semi-annual installments
with the first repayment to be made in February 2004.
The interest for the term loan portion of the Term Loan Facility is
6.375% per annum in relation to the first two years after August 30,
2002, and then the higher of (i) financial institution's minimum
lending rate (MLR) minus 1.25%, and ii) another local commercial
bank's minimum lending rate (MLR) minus 0.5% per annum for the
remainder of the loan. The Company shall pay a commercial letter of
opening fee at a rate of 1/12% per quarter and interest on the trust
receipts at the rate of 6.375% per annum. The interest for the
Revolving Facility is at the money market rate on each relevant
maturity date. Interest is due and payable every three-calendar months
beginning on November 30, 2002.
The Company is required to pay a commitment fee at the rate of 0.25%
per annum of the daily undrawn balance of the Term Loan calculated
from the first anniversary date of the agreement, May 16, 2003, up to
and including the last day of the Availability Period, which ends on
the earlier of (i) August 16, 2003 and (ii) the date on which the Term
Loan Facility is fully drawn, cancelled or terminated under the
provisions of the agreement.
The collateral required for the New Credit Facility is the assignment
of the land leasehold right, mortgage of the constructed factory,
office building and machinery, pledge of inventory and receivables and
the assignment of construction and operational insurance proceeds to
the financial institution as beneficiary. The Company is also required
to meet various debt covenants, including maintaining certain
financial ratios.
F-85
21.2 Thailand Plant Fire
On July 14, 2002, the Company's fabrication and contamination control
specialty foam plant in Samutprakarn, Thailand was destroyed by fire.
All the Company's inventory and most of the machinery and equipment
maintained in the factory were lost. The carrying value of the
inventory and the net book value of the machinery and equipment at the
date of the fire were Baht 84.0 million and Baht 65.1 million,
respectively. The Company filed a claim with their insurance carrier
for the inventory and machinery and equipment in the amount of Baht 70
million and Baht 107.8 million, respectively. The Company recorded a
loss in 2002 of Baht 14.0 million for the underinsured inventory and
an additional Baht 1.7 million for other fire related expenses.
The Company received an interim payment from their insurance carrier
in the amount of Baht 50 million on December 27, 2002 and an
additional Baht 50 million on February 7, 2003. Full and final
settlement of the Company's insurance claim is still pending, however,
the Company's management believes a gain will ultimately be realized.
F-86
FOAMEX INTERNATIONAL INC.
INDEX TO FINANCIAL STATEMENT SCHEDULES
Index to Financial Statement Schedules
Schedule I - Condensed Financial Information of Registrant
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 I
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS
December 28, December 29,
2003 2002
------------ -------------
ASSETS (thousands, except share data)
CURRENT ASSETS
Cash and cash equivalents $ - $ 158
Intercompany receivables 141 1,093
Deferred taxes 15,676 21,011
-------- --------
Total current assets 15,817 22,262
DEFERRED INCOME TAXES 109,243 97,122
-------- --------
TOTAL ASSETS $125,060 $119,384
======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES
Accounts payable $ 9 $ 6
Other accrued liabilities 3,051 3,170
-------- --------
Total current liabilities 3,060 3,176
LONG-TERM LIABILITIES
Deficit in consolidated subsidiaries 325,116 305,941
-------- --------
Total liabilities 328,176 309,117
-------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIENCY
Preferred Stock, par value $1.00 per share:
Authorized 5,000,000 shares
Issued 15,000 shares - Series B in 2003 and 2002 15 15
Common Stock, par value $.01 per share:
Authorized 50,000,000 shares
Issued 27,898,149 shares in 2003 and 27,839,658 shares in 2002;
Outstanding 24,409,149 shares in 2003 and 24,350,658 shares in 2002 279 278
Additional paid-in capital 102,155 101,972
Accumulated deficit (237,732) (216,243)
Accumulated other comprehensive loss (30,832) (38,754)
Other:
Common Stock held in treasury, at cost:
3,489,000 shares in 2003 and 2002 (27,780) (27,780)
Shareholder note receivable (9,221) (9,221)
-------- ----------
Total stockholders' deficit (203,116) (189,733)
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY $125,060 $119,384
======== ========
See notes to consolidated financial statements,
beginning on Page F-8.
(continued)
S-2
Schedule I
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF OPERATIONS
2003 2002 2001
--------- ------------ ------------
(amounts in thousands except per share amounts)
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES $ 1,574 $ 418 $ 1,254
-------- -------- -------
LOSS FROM OPERATIONS (1,574) (418) (1,254)
EQUITY IN EARNINGS (LOSS) OF
CONSOLIDATED SUBSIDIARIES (27,416) (27,208) (2,261)
INTEREST EXPENSE - 33 343
-------- -------- -------
LOSS BEFORE PROVISION (BENEFIT) FOR
INCOME TAXES AND CUMULATIVE EFFECT
OF ACCOUNTING CHANGES (28,990) (27,659) (3,858)
PROVISION (BENEFIT) FOR INCOME TAXES (7,501) (88,607) 1,754
-------- -------- -------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF
ACCOUNTING CHANGES (21,489) 60,948 (5,612)
CUMULATIVE EFFECT OF ACCOUNTING
CHANGES - (70,647) -
-------- -------- -------
NET LOSS $(21,489) $ (9,699) $(5,612)
======== ======= =======
EARNINGS PER SHARE - BASIC
INCOME (LOSS) BEFORE CUMULATIVE EFFECT
OF ACCOUNTING CHANGES $ (0.88) $ 2.51 $ (0.24)
CUMULATIVE EFFECT OF ACCOUNTING CHANGES - (2.91) -
-------- -------- -------
NET LOSS $ (0.88) $ (0.40) $ 0.24)
======== ======== =======
EARNINGS PER SHARE - DILUTED
INCOME (LOSS) BEFORE CUMULATIVE EFFECT
OF ACCOUNTING CHANGES $ (0.88) $ 2.39 $ (0.24)
CUMULATIVE EFFECT OF ACCOUNTING CHANGES - (2.69) -
-------- -------- -------
NET LOSS $ (0.88) $ (0.37) $ (0.24)
======== ======== =======
Cumulative effect of accounting changes include equity in subsidiaries of $72.0
million in 2002.
See notes to consolidated financial statements,
beginning on Page F-8.
(continued)
S-3
Schedule I
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF CASH FLOWS
2003 2002 2001
------------ ------------ ------------
OPERATING ACTIVITIES (thousands)
Net loss $(21,489) $ (9,699) $(5,612)
Adjustments to reconcile net loss to
net cash used for operating activities:
Deferred income taxes (7,509) (90,681) 567
Equity in losses of consolidated subsidiaries 27,416 24,413 2,261
Cumulative effect of accounting changes - 70,647 -
Other 180 2,012 319
Changes in operating assets and liabilities:
Intercompany receivables 952 (377) (408)
Accounts payable 3 (90) 46
Other assets and liabilities (164) 2,968 536
-------- -------- -------
Net cash used for operating activities (611) (807) (2,291)
-------- -------- -------
INVESTING ACTIVITIES
Distribution from (to) subsidiaries 513 (105) 3,861
Other - - -
-------- -------- -------
Net cash provided by (used for) investing activities 513 (105) 3,861
-------- -------- -------
FINANCING ACTIVITIES
Repayments of note payable to consolidated
subsidiary - (2,490) (2,500)
Proceeds from exercise of stock options - 3,494 917
Increase (decrease) in cash overdraft (60) 64 -
-------- -------- -------
Net cash provided by (used for) financing activities (60) 1,068 (1,583)
-------- -------- -------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (158) 156 (13)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 158 2 15
-------- -------- -------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ - $ 158 $ 2
======== ======== =======
Note: During 2001, the Company received a special distribution from its
subsidiaries of $3.7 million. The proceeds were used to repay the note and
interest payable to Foamex L.P.
See notes to consolidated financial statements,
beginning on Page F-8.
S-4
Schedule II
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(thousands)
Balance at Charged to Charged to Balance at
Beginning of Costs and Other End of
Period Expenses Accounts Deductions Period
------------ ---------- ----------- ---------- -----------
YEAR ENDED DECEMBER 28, 2003
Allowance for Uncollectible Accounts $ 7,963 $ 2,115 $ (217) $ 1,607 $ 8,254
======== ======= ======= ======= =======
Reserve for Discounts $ 2,348 $ - $13,429 (1) $13,526 $ 2,251
======== ======= ======= ======= =======
YEAR ENDED DECEMBER 29, 2002
Allowance for Uncollectible Accounts $ 8,720 $ 2,336 $ - $ 3,093 $ 7,963
======== ======= ======= ======= =======
Reserve for Discounts $ 2,220 $ - $15,143 (1) $15,015 $ 2,348
======== ======= ======= ======= =======
YEAR ENDED DECEMBER 31, 2001
Allowance for Uncollectible Accounts $ 7,693 $ 5,479 $ 88 $ 4,540 $ 8,720
======== ======= ======= ======= =======
Reserve for Discounts $ 2,233 $ - $15,198 (1) $15,211 $ 2,220
======== ======= ======= ======== =======
(1) Adjustments reflect a reduction in net sales.
S-5