UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended January 2, 2005
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
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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
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Annual Report on Form 10-K or any
amendment to this Annual Report on Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Act of 1934).
YES X NO
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The aggregate market value of the voting stock held by nonaffiliates of the
registrant as of June 27, 2004, was $54.0 million.
The number of shares outstanding of the registrant's common stock as of
March 31, 2005 was 24,509,728.
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 11
Part II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters 11
Item 6. Selected Financial Data 12
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 14
Item 7a. Quantitative and Qualitative Disclosures about Market Risk 29
Item 8. Financial Statements and Supplementary Data 29
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 29
Item 9a. Controls and Procedures 30
Item 9b. Other Information 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 32
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 January 2,
2005, our operations are conducted through our wholly-owned subsidiary, Foamex
L.P., and through Foamex Canada Inc. ("Foamex Canada"), 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 quilting rolls, 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), Sensus(R), Quiltflex(R),
Resilitex(R) and other viscoelastic "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 and distribute carpet cushion products, which include prime,
rebond, felt and rubber carpet padding. Prime carpet padding is made from virgin
polyurethane foam, which is formed into buns and sliced into sheets. Rebond
carpet padding is primarily made from recycled foam, which is shredded into
small pieces, processed and then bonded using a polyurethane chemical adhesive.
Rebond manufacturing requires the management of a comprehensive recycling
business that includes an extensive internal and external collection network
from the automotive and foam industries on a worldwide basis. Our felt 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.
Technical Products
We are one of the industry's prime innovators and suppliers of specialty
foam material, which we refer to as "Technical Products," for a diverse array of
markets and industries. Technical Products can be tailored to meet a wide
variety of energy and fluid management challenges and are found in automotive,
industrial, electronics, consumer, medical, and other markets. Technical
Products are commonly used in applications such as gasketing and sealing systems
for automobiles, inkjet printer cartridges, rollers in digital imaging
equipment, noise and vibration damping for computer disc drives, air and fluid
filtration in cars and aircraft, medical devices, and numerous consumer items
such as sponges, mops, paint brushes and cosmetic applicators. Due to the highly
specialized nature of most Technical Products, a technical staff of engineering
and research and development experts work with customers to design, develop and
manufacture products to meet specific requirements. We provide technical support
from product conceptualization through prototyping and production and work
closely with the product developers, engineers, brand managers and research and
development staffs of both major OEMs in specific markets and with the
industry's premier foam fabricators to deliver innovative solutions to their
product needs and challenges.
Other
Other consists primarily of certain manufacturing and fabrication
operations in Mexico City, corporate expenses not allocated to the other
business segments and 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
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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 foam products 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. Although we own 70% of the joint venture, we do not control this
entity. The joint venture installed its first foam pourline during 2003. This
pourline, which was entirely financed by the joint venture entity, reduces foam
shipping costs for sales to the region and increases 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 12.5% of our net sales in 2004, 16.3% of our net
sales in 2003, and 17.3% of our net sales in 2002. 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 29.6% of our net
sales in 2004, 34.7% of our net sales in 2003, and 33.8% of our net sales in
2002. The loss of any one of these customers could have a material adverse
effect on our business.
Manufacturing and Raw Materials
Our manufacturing and distribution facilities are strategically located to
service our major customers because the high freight cost in relation to the
cost of the foam product generally results in distribution being most
cost-effective within a 200 to 300 mile radius.
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.
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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. There are a limited number
of major suppliers of TDI and polyol. We generally have alternative suppliers
for each major raw material. We believe that we could find alternative sources
of supply should we cease doing business with any one of our major suppliers,
although there may be some delay in replacing a major supplier. A disruption in
our ability to obtain TDI and/or polyol that continues for a significant period
of time could cause us to suspend 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 and natural gas prices and the current geopolitical instability
and its impact on oil production and prices. We experienced increases of more
than 20% in the price of raw materials from major chemical manufacturers from
the first quarter of 2004 to the fourth quarter of 2004. Our major chemical
suppliers further increased prices for both TDI and polyol by approximately 10%
effective in March 2005. We attempt to offset raw material price increases
through selling price increases and manufacturing process efficiencies, but we
were only partially able to do so in the year ended January 2, 2005. In the
future, we may not be successful in implementing selling price increases to
fully recover raw material cost increases. Competitive pricing pressure may also
require us to adjust our selling prices or lose volume.
A key material needed in the manufacture of rebond carpet padding is scrap
foam. We internally generate a substantial portion of the scrap foam used in the
production of rebond carpet padding from our other operations. Historically, the
market price of rebond carpet padding has fluctuated with the market price of
scrap foam.
Employees
As of January 2, 2005, we employed approximately 5,500 persons.
Approximately 1,500 of these employees are located outside the United States
including approximately 1,000 covered by collective bargaining agreements with
labor unions. Approximately 1,100 United States employees are covered by
collective bargaining agreements at 8 facilities. These agreements expire on
various dates through 2008. 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., Crest Foam Industries, Inc., Wm. T.
Burnett & Co. and The Woodbridge Group. None of these competitors individually
competes in all of the business segments in which we do business.
Patents and Trademarks
We own various patents and trademarks registered in the United States and
in numerous foreign countries. The registered processes and products were
developed through ongoing research and development activities to improve
quality, reduce costs and expand markets through development of new applications
for flexible polyurethane foam products. While we consider our patents and
trademarks to be a valuable asset, we do not believe that our competitive
position is dependent upon patent protection or that our operations are
dependent upon any individual patent, trademark or tradename.
Research and Development
We believe we have a leading research and development capability in the
flexible polyurethane foam industry. Our primary research and development
facility is located in Eddystone, Pennsylvania. Expenditures for research and
development amounted to $2.8 million for 2004, $3.6 million for 2003, and $4.8
million for 2002.
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Foamex L.P., Recticel, and Beamech Group Limited, an unaffiliated third
party, have an interest in Prefoam AG, a Swiss corporation that develops new
manufacturing technology for the production of polyurethane foam including the
VPF(SM) manufacturing process. Recticel and affiliates of Recticel are
shareholders of the Company. 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 January 2, 2005, our total long-term debt and revolving
credit borrowings were approximately $750.5 million and our stockholders'
deficiency was approximately $358.3 million. As of January 2, 2005, we had
approximately $25.0 million in revolving loan availability and approximately
$22.1 million in outstanding letters of credit. We may also incur additional
debt in the future, subject to certain limitations contained in our debt
agreements.
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 our 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 "Senior Secured Credit Facility")
and an $80.0 million Secured Term Loan with another lending group (the "Secured
Term Loan"), which, among other things, requires Foamex L.P. to meet a financial
covenant. On November 3, 2004, Foamex L.P. entered into amendments to the
financing agreements with the existing lenders under the Senior Secured Credit
Facility and the Secured Term Loan to provide up to $54.0 million of new
financing, the proceeds of which could be used only to repurchase prior to or
repay Foamex L.P.'s 13 1/2% senior subordinated notes currently in the face
amount of $51.6 million (the "13 1/2% Senior Subordinated Notes") due on August
15, 2005 and certain fees related to the new financing. The lenders under the
Senior Secured Credit Facility have agreed to lend up to $15.0 million under a
new junior term loan with a floating interest rate based upon either LIBOR, as
defined, reset monthly plus 6.00% or a Base Rate, as defined, plus 4.00% with a
maturity date of April 30, 2007. The lenders under the Secured Term Loan would
lend up to an additional $39.0 million with interest rates identical to the
rates under the existing Secured Term Loan. The Secured Term Loan maturity date
was also
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extended to April 1, 2009. Under the Senior Secured Credit Facility and the
Secured Term Loan, as amended, Foamex L.P. is subject to a fixed charge coverage
ratio, as defined, of 1.00 measured quarterly. On March 15, 2005, the lenders
executed waivers to the Senior Secured Credit Facility and the Secured Term
Loan, which waived compliance with the fixed charge coverage ratio for the four
consecutive quarter period ended January 2, 2005. On March 31, 2005, Foamex L.P.
entered into amendments with the existing lenders under the Senior Secured
Credit Facility and the Secured Term Loan which modified the fixed charge
coverage ratio for the first quarter of 2005 through the first quarter of 2006,
at which time the fixed charge coverage ratio will be 1.00 for the second
quarter of 2006 and thereafter, and permit borrowing of up to $25.0 million of
the additional $39.0 million commitment under the Secured Term Loan, the
proceeds of which would be used to repay revolving loans. Foamex L.P.'s ability
to comply with the revised covenant will be substantially dependent on an
improved gross profit margin and lower administrative costs. If we are unable to
comply with the revised financial covenant, the bank lenders could cause all
amounts outstanding under the 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 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. For
the last three fiscal years we have not generated enough cash flow from
operations sufficient to pay our debt service obligations and capital
expenditures. Our annual debt service obligations will increase by $2.4 million
per year for each 1% increase in interest rates, based on the balance of
variable rate debt outstanding as of January 2, 2005. Our estimated debt service
obligation for 2005 is $136.2 million, based on levels of debt and interest
rates in effect at January 2, 2005. As described in the previous risk factor, we
have arranged for additional borrowings under the Secured Term Loan and junior
term loan in the aggregate amount of up to $54.0 million to repay the 13 1/2%
Senior Subordinated Notes. If we do not generate sufficient cash flow from
operations to satisfy our other 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 Senior Secured Credit Facility, as amended, the
Secured Term Loan, as amended, 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
and 13 1/2% Senior Subordinated Notes 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.
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 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.
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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 2004. Our major chemical suppliers implemented price increases of
approximately 10% effective March 1, 2005. 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. 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.
We depend on a limited number of suppliers of TDI and polyol.
There are a limited number of major suppliers of TDI and polyol. 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 including the costs for ongoing compliance with the
provisions of the Sarbanes-Oxley Act of 2002 (the "Act"). In 2004, we
experienced an increase in selling, general and administrative expenses, which
include expenditures for compliance with Section 404 and other provisions of the
Act. We could incur additional significant costs in implementing improvements to
our internal controls over financial reporting. If we incur such costs or are
otherwise 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 29.6% of our
net sales in 2004, 34.7% of our net sales in 2003, and 33.8% of our net sales in
2002. Sales to Johnson Controls, our largest customer, accounted for 12.5% of
our net sales in 2004, 16.3% of our net sales in 2003, and 17.3% of our net
sales in 2002. 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, 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 as 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 12 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 January 2, 2005, we maintained 56 manufacturing and distribution
facilities. Total floor space in use at our 16 owned manufacturing and
distribution facilities is approximately 3.2 million square feet and total floor
space in use at our 40 leased manufacturing and distribution facilities is
approximately 4.6 million square feet. Forty-seven of these facilities are
located throughout 34 cities in the United States, four facilities are located
in Canada, and five facilities are located in Mexico. We have approximately 1.4
million square feet of idle space.
We do not anticipate any problem in renewing or replacing any of the leases
expiring in 2005.
We maintain administrative offices in Linwood, Pennsylvania.
Property information by business segment is not reported because many of
our facilities produce products for multiple business segments.
ITEM 3. LEGAL PROCEEDINGS
Litigation
We and our subsidiaries are party to various lawsuits, both as defendant
and plaintiff, arising in the normal course of business. It is the opinion of
management that the disposition of these lawsuits will not, individually or in
the aggregate, have a material adverse effect on our financial position or
results of operations. If management's assessment of the liability relating to
these actions is incorrect, these actions could have a material adverse effect
on our consolidated financial position, results of operations and cash flows. As
of January 2, 2005, 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
10
or emission of materials into the environment, and the remediation of
environmental contamination, and as a result, are from time to time involved in
administrative and judicial proceedings and inquiries relating to environmental
matters. As of January 2, 2005, we had accruals of approximately $2.0 million
for environmental matters, including approximately $1.7 million related to
remediating and monitoring soil and groundwater contamination and approximately
$0.3 million relating to 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 established a 50.0% reduction in methylene chloride
emissions by December 1, 2004, which we have implemented, and 100.0% reduction
by January 1, 2007. This standard has not required and will not require us to
make material expenditures for our Canadian plants.
We have reported to the appropriate state authorities that we have found
soil and/or groundwater contamination in excess of state standards at certain
locations. Seven sites are currently in various stages of investigation or
remediation. Accordingly, the extent of contamination and the ultimate liability
is not known with certainty for all sites.
We have either upgraded or closed all underground storage tanks at our
facilities in accordance with applicable regulations.
The 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 12 sites. Estimates of total cleanup costs and
fractional allocations of liability are often provided by the EPA, the state
environmental agency or the committee of PRPs with respect to the specified
site. Based on these estimates (to the extent available) and on known
information, in each case and in the aggregate, we do not expect additional
costs, if any, to be material to our results of operations, 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.
Other
In April 2004, we disclosed certain reportable conditions regarding our
internal controls. Subsequent to that disclosure, we became the subject of an
informal inquiry by the Securities and Exchange Commission relating to our
internal controls. We are currently negotiating a settlement of this matter with
the staff of the Securities and Exchange Commission.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
11
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.
2004 High Low
-------- -------
Quarter Ended March 28 $5.22 $3.15
Quarter Ended June 27 $5.42 $3.07
Quarter Ended September 26 $5.03 $2.88
Quarter Ended January 2, 2005 $4.18 $3.23
2003
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
As of March 11, 2005, there were 129 holders of record of the common stock.
On April 1, 2005, the closing price of our common stock was $1.84.
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 January 2, 2005.
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 3,059,600 $5.13 3,558,509
Equity compensation plans not approved by stockholders - N/A -
--------- ----- ---------
Total 3,059,600 $5.13 3,558,509
========= ===== =========
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.
12
Fiscal Year (1)
-------------------------------------------------------------------
2004 2003 2002 2001 (2) 2000
---------- ---------- ---------- ---------- -----------
(thousands, except for earnings per share)
Statements of Operations Data
Net sales $1,266,394 $1,304,560 $1,328,094 $1,252,904 $1,257,778
Income (loss) from continuing
operations (3)(4)(5) $ (150,933) $ (21,489) $ 60,948 $ (5,612) $ 17,013
Basic earnings (loss) per share from
continuing operations $ (6.17) $ (0.88) $ 2.51 $ (0.24) $ 0.69
Diluted earnings (loss) per share from
continuing operations $ (6.17) $ (0.88) $ 2.32 $ (0.24) $ 0.67
Balance Sheet Data
Total assets $ 645,711 $ 789,906 $ 813,577 $ 766,962 $ 751,581
Long-term debt, classified as current (6) $ 114,907 $ 96,065 - - -
Long-term debt, excluding current portion $ 568,461 $ 633,621 $ 738,540 $ 648,232 $ 687,758
Stockholders' deficiency $ (358,313) $ (203,116) $ (189,733) $ (180,746) $ (164,669)
(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 2004 fiscal year included the 53 weeks ended January 2,
2005. The 2002 fiscal year included the 52 weeks ended December 29, 2002
after adjustment for December 31, 2001 which was included in the prior
year.
(2) Includes the results of operations of General Foam Corporation from July
25, 2001, the date it was acquired.
(3) Includes net restructuring, impairment and other charges (credits), as
discussed in Note 5 to the consolidated financial statements included in
this Annual Report on Form 10-K. Listed below are the pretax charges
(credits).
2004 - $ 3.2 million
2003 - $(1.8) million
2002 - $ 4.8 million
2001 - $36.1 million
2000 - $ 6.3 million
(4) The provision for income taxes in 2000 reflected the partial reversal of
the deferred income tax valuation allowance recognized in 1998.
(5) During 2004, we established a valuation allowance for our U.S. deferred tax
assets as we determined that it is not likely that we will be able to
generate sufficient amounts of future U.S. taxable income to utilize our
net operating loss carryforwards and realize other deferred tax assets. The
establishment of the valuation allowance reduced income from continuing
operations by $128.6 million in 2004. 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 in 2002.
(6) Revolving credit borrowings under Foamex L.P.'s 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").
13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements so long as those statements are
identified as forward-looking and are accompanied by meaningful cautionary
statements identifying important factors that could cause actual results to
differ materially from those projected in such statements. In connection with
certain forward-looking statements contained in this Annual Report on Form 10-K
and those that may be made in the future by or on behalf of us which are
identified as forward-looking, we note that there are various factors that could
cause actual results to differ materially from those set forth in any such
forward-looking statements, such as the ability to implement customer selling
price increases in response to higher raw material costs, raw material price
increases, general economic conditions, the interest rate environment, the level
of automotive production, carpet production, furniture and bedding production,
and housing starts, the achievement of management's business plans, our capital
and debt structure (including various financial covenants), litigation and
changes in environmental legislation and environmental conditions. The
forward-looking statements contained in this Annual Report on Form 10-K were
prepared by management and are qualified by, and subject to, significant
business, economic, competitive, regulatory and other uncertainties and
contingencies, all of which are difficult or impossible to predict and many of
which are beyond our control.
Accordingly, there can be no assurance that the forward-looking statements
contained in this Annual Report on Form 10-K will be realized or that actual
results will not be significantly higher or lower. The forward-looking
statements have not been audited by, examined by, compiled by or subjected to
agreed-upon procedures by independent accountants, and no third party has
independently verified or reviewed such statements. Readers of this Annual
Report on Form 10-K should consider these facts in evaluating the information
contained herein. In addition, our business and operations are subject to
substantial risks which increase the uncertainty inherent in the forward-looking
statements contained in this Annual Report on Form 10-K. The inclusion of the
forward-looking statements contained in this Annual Report on Form 10-K should
not be regarded as a representation by us or any other person that any of the
forward-looking statements contained in this Annual Report on Form 10-K will be
achieved. In light of the foregoing, readers of this Annual Report on Form 10-K
are cautioned not to place undue reliance on the forward-looking statements
contained herein.
EXECUTIVE SUMMARY
Overview
We operate in the flexible polyurethane and advanced polymer foam products
industry. Our operations are primarily conducted through our wholly-owned
subsidiary, Foamex L.P. Business segments are listed below and business segment
financial information is included in Note 12 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 OEMs.
14
Technical Products - manufactures and markets reticulated and other
specialty foams used for reservoiring, filtration, gasketing and sealing
applications.
Other - primarily consists of certain manufacturing and fabrication
operations in Mexico City, corporate expenses not allocated to the other
business segments and restructuring, impairment and other charges
(credits).
Our sales are primarily to markets in the United States. These sales are
impacted by economic conditions in several sectors of the United States economy,
including consumer spending, sales of new and existing homes, the overall level
of passenger car and light truck production and seasonality. We typically
experience two seasonally slow periods during each year, in early July and in
late December, due to scheduled plant shutdowns and holidays.
A small number of major customers produce a significant portion of our net
sales. In 2004, our largest customer provided 12.5% of our net sales and our
five largest customers provided 29.6% of our net sales. Two of the five largest
customers are customers of the Automotive Products segment and three are
customers of the Foam Products segment.
The following discussion should be read in conjunction with the
consolidated financial statements and related notes included in this Annual
Report on Form 10-K.
Operations
The following table includes key elements of our financial statements
expressed as a percentage of net sales for the years 1999 through 2004, except
for net cash provided by (used for) operating activities which is expressed in
millions of dollars.
2004 2003 2002 2001 2000 1999
---------- ---------- ---------- ---------- ---------- ----------
Net Sales 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of Goods Sold 88.8% 89.0% 89.2% 85.8% 86.3% 86.1%
Gross Profit Margin 11.2% 11.0% 10.8% 14.2% 13.7% 13.9%
Selling, General and
Administrative Expenses 6.9% 6.3% 7.1% 6.4% 5.5% 5.9%
Operating Income Margin 4.0% 4.8% 3.3% 4.9% 7.7% 7.2%
Interest and Debt
Issuance Expense 6.1% 6.8% 5.2% 5.0% 6.0% 5.6%
Net Cash Provided by (Used
for) Operating Activities $(1.0) $17.5 $(50.4) $106.4 $51.0 $58.7
As demonstrated by the table above, our results significantly deteriorated
in 2002 and improved only marginally in 2003 and 2004. Our gross profit margin
has been reduced by approximately three percentage points compared to 2001 while
selling, general and administrative expenses and interest and debt issuance
expense have both increased as a percentage of net sales, as well as in absolute
dollar terms. Net sales dollars have been relatively flat over the six year
period with 2004 representing a decrease of 2.2% compared to 1999.
Our management is focusing on restoring former levels of profitability by
concentrating on the following key areas:
o Developing new value-added products that leverage our technical
capability and entering new markets with increased profit potential.
o Managing raw material costs.
15
o Maintaining selling price increases to customers to recover raw
material and manufacturing cost increases.
o Controlling and reducing labor and overhead costs both in
manufacturing and administration.
The cost of major chemical raw materials increased several times effective
during the second half 2004, so that the weighted average cost of major
chemicals was more than 20% higher in the fourth quarter of 2004 than in the
first quarter of 2004. Primarily as a result of these raw material cost
increases, our gross profit margin declined to 8.7% in the fourth quarter of
2004. Our major chemical suppliers further increased the price of polyol by
approximately 15% effective in January 2005 and increased prices for both TDI
and polyol by approximately 10% effective in March 2005. There can be no
assurance that chemical prices will not further increase in 2005. In addition to
rising prices, some of the key chemicals we use have been in short supply and
availability may continue to be tight in the future. We manage raw material
costs by negotiating discounts and rebates for volume purchases and seeking
alternative sources of supply.
We have been only partially successful in raising selling prices to recover
raw material and other cost increases. Further selling price increases, reduced
costs and increased mix of higher profit products are major factors in restoring
gross profit margin percentages to the levels experienced in 1999-2001. At those
levels we should be able to reduce borrowings and also cash interest expense,
although there is no assurance we will be successful in our efforts to achieve
those levels of gross profit margins.
We are focused on reducing both manufacturing costs and administrative
expenses. We believe that manufacturing costs can be further reduced by
emphasizing efficiency and better supply chain management. Our focus areas for
further reductions in administrative expenses are employee related costs and
professional service fees, although we have experienced large increases in
professional fees in conjunction with our efforts to comply with the
requirements of Section 404 of the Sarbanes-Oxley Act of 2002. In addition, we
will explore the potential sales of non-strategic assets during 2005.
Financing
Our Senior Secured Credit Facility initially consisted of a revolving
credit facility with a maximum availability of $190.0 million and an initial
term loan of $50.0 million. The revolving credit facility includes a $50.0
million sublimit for letters of credit and availability is limited to eligible
amounts, as defined, of accounts receivable and inventory. At January 2, 2005,
Foamex L.P. had available borrowings of approximately $25.0 million and letters
of credit outstanding of $22.1 million. Borrowings under the term loan are
limited to eligible amounts, as defined, of equipment and real estate.
Substantially all the assets of Foamex L.P. and its domestic subsidiaries and
Foamex Canada are pledged as collateral for the related borrowings. Borrowings
under the revolving credit facility and the term loan bear interest at floating
rates based upon and including a margin over either LIBOR or a Base Rate, as
defined. At January 2, 2005, the weighted average interest rates were 6.00% for
both the revolving loans and the term loan. The term loan requires quarterly
installment payments of approximately $1.8 million. Borrowings under the Senior
Secured Credit Facility will mature on April 30, 2007.
Our Secured Term Loan had an original maturity date of April 30, 2007.
Borrowings under this facility bear interest at a rate that is 9.25% plus the
greater of the Reference Rate, as defined, or 4.25%. The minimum rate, which was
in effect as of December 28, 2003, is 13.50%. The rate in effect at January 2,
2005 was 14.50%. In addition, Foamex L.P. is subject to a 1.00% facility fee on
the initial $80.0 million term loan which is payable annually on the anniversary
date. Borrowings under the Secured Term Loan are collateralized by the same
collateral as the Senior Secured Credit Facility. An intercreditor agreement
governs the distribution of collateral among the lenders under the Senior
Secured Credit Facility and the Secured Term Loan.
Under the Senior Secured Credit Facility and the Secured Term Loan, Foamex
L.P. is subject to a minimum fixed charge coverage ratio, as defined, of 1.00
measured quarterly. For the two quarters ended December 28, 2003, Foamex L.P.'s
fixed charge coverage ratio was 1.09. Amendments to the Senior Secured Credit
Facility and Secured Term Loan executed on November 3, 2004 allowed Foamex L.P.
to exclude certain charges aggregating approximately $3.7 million and
approximately $1.0 million in the first and second quarters of 2004,
respectively,
16
from the computation of the fixed charge coverage ratio. For the four quarters
ended January 2, 2005, FoamexL.P.'s fixed charge coverage ratio was 0.98 and the
lenders have agreed to waive compliance with the fixed charge coverage ratio for
that period. On March 31, 2005, Foamex L.P. entered into amendments with the
existing lenders under the Senior Secured Credit Facility and the Secured Term
Loan that set lower minimum fixed charge coverage ratios through April 2, 2006
and permit borrowing of up to $25.0 million of the additional $39.0 million
commitment, discussed below, under the Secured Term Loan, the proceeds of which
would be used to repay revolving loans. Foamex L.P. incurred fees and expenses
for the waivers and amendments aggregating approximately $1.0 million. Foamex
L.P. is also subject to a maximum annual capital expenditure amount which was
$36.0 million for the year ended January 2, 2005 and will be $46.8 million for
the year ending January 1, 2006.
There can be no assurance that we will be successful in achieving our plans
or complying with the fixed charge coverage ratio, as there are a number of
factors beyond our control, including raw material cost changes and customer
acceptance of selling price increases that are necessary for us to be successful
and we have limited borrowing capacity and access to capital markets.
Additionally, compliance with the amended fixed charge coverage ratio may not be
met if business conditions are not as anticipated or other unforeseen events
impact results unfavorably. In the event that such noncompliance appears likely,
or occurs, we will seek the lenders' further approval of amendments to, or
waivers of, such covenants. Historically, we have been able to renegotiate
financial covenants and/or obtain waivers. Management currently believes that
obtaining waivers and/or amendments in the future may be difficult. If
amendments or waivers are not obtained, Foamex L.P. would be in default and
lenders could demand immediate payment of Foamex L.P.'s outstanding debt under
the Senior Secured Credit Facility and Secured Term Loan. In addition, it is
possible that the holders of Foamex L.P.'s Senior Secured Notes and Senior
Subordinated Notes could also demand immediate payment. We may not be able to
secure additional financing at a reasonable cost, or at all. The lack of
financing would have a material adverse effect on our financial position and
could impair our ability to continue as a going concern.
Our 13 1/2% Senior Subordinated Notes with a face value of $51.6 million
are due on August 15, 2005. We may, from time to time, directly or indirectly
make purchases of these notes or our other public debt in the open market or in
private transactions. On November 3, 2004, Foamex L.P. entered into financing
agreements with the existing lenders under the Senior Secured Credit Facility
and the Secured Term Loan to provide up to $54.0 million of new financing, the
proceeds of which could be used only to repurchase prior to or repay the 13 1/2%
Senior Subordinated Notes at maturity and certain fees related to the new
financing. The lenders under the Senior Secured Credit Facility have agreed to
lend up to $15.0 million under a new junior term loan with a floating interest
rate based upon LIBOR, as defined, reset monthly plus 6.00% with a maturity date
of April 30, 2007. The lenders under the Secured Term Loan would lend up to an
additional $39.0 million with interest rates identical to the rates under the
existing Secured Term Loan. The Secured Term Loan maturity date was also
extended to April 1, 2009. The financing commitment under the Secured Term Loan
requires the payment of an unused commitment fee at the rate of 1.5% per annum
and a funding fee equal to 2.5% of the amount borrowed with a minimum funding
fee of approximately $0.6 million. The amendments permit Foamex L.P. to reduce
the financing commitments by any cash proceeds, as defined in the amendments,
generated from certain sources. If Foamex L.P. is unable to meet its minimum
fixed charge coverage ratio, as amended, the financing commitments under the
Senior Secured Credit Facility and the Secured Term Loan may not be available to
repay the 13 1/2% Senior Subordinated Notes when due. Withdrawal of these
commitments would have a material adverse effect on our financial position and
could impair our ability to continue as a going concern.
CRITICAL ACCOUNTING POLICIES
We prepared the consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America. As
such, we are required to make certain estimates, judgments, and assumptions that
we believe are reasonable based upon the information available. These estimates,
judgments and assumptions affect the reported amounts of the assets and
liabilities and revenues and expenses. Our significant accounting policies are
discussed in Note 2 to the consolidated financial statements. The accounting
policies which we believe are the most critical to aid in fully understanding
and evaluating our reported financial results and which require management to
exercise judgment include the following:
17
Revenue Recognition
Revenue from sales, net of discounts and estimated returns, allowances and
customer rebates, is recognized when product title and the risks and rewards of
ownership passes to the customer, the sales price is fixed and determinable and
collection is reasonably assured. Products are shipped FOB shipping point. Net
sales are reduced by allowances for estimated discounts, returns and customer
rebates. Balances for allowances and rebates are reviewed at least quarterly and
are adjusted if warranted. Shipping and handling costs are included in costs of
goods sold.
Accounts Receivable and Allowance for Uncollectible Accounts
We actively monitor customer payments in conjunction with customer credit
evaluations. Accordingly, a reserve for estimated uncollectible accounts is
maintained and is based on historical collection experience and specific
customer collection issues. A significant change in the financial condition of
one or more of our larger customers could have a material adverse impact on
future financial results.
Long-Lived Assets
Net property, plant and equipment totaled $141.5 million at January 2,
2005. Property and equipment held for use is grouped for impairment testing at
the lowest level for which there are identifiable cash flows. Impairment testing
of the asset group occurs whenever events or changes in circumstances indicate
that the carrying amount of the assets may not be recoverable. The Company
assesses recoverability by comparing the carrying amount of the asset group to
the estimated undiscounted future cash flows expected to be generated by the
assets. If an asset group is considered impaired, the impairment loss to be
recognized would be measured as the amount by which the asset group's carrying
amount exceeds its fair value. Estimated future cash flows are based on
historical results adjusted for estimated future market conditions and operating
plans. To the extent that these estimates change, impairment losses could have a
material adverse impact on future financial results.
Goodwill
We evaluate the recoverability of goodwill on an annual basis as required
by Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" ("SFAS No. 142"). We perform this annual evaluation as of the
first day of the fourth fiscal quarter, or more frequently if events or changes
in circumstances, such as declining sales, earnings or cash flows or material
adverse changes in the business climate, indicate that the carrying value of
goodwill might be impaired. Goodwill is considered to be impaired when the net
book value of a reporting unit exceeds its estimated fair value. Fair values are
primarily established using a discounted cash flow methodology. The
determination of discounted cash flows is based on businesses' strategic plans
and long range planning forecasts.
Deferred Income Taxes
Income taxes are accounted for under the asset and liability method. Under
this method, deferred income taxes are provided for temporary differences
between the financial reporting basis and income tax basis of assets and
liabilities and for net operating loss carryforwards using the income tax rates,
under existing legislation, expected to be in effect at the date such temporary
differences are expected to reverse. Deferred income tax assets are reduced by a
valuation allowance when it is considered more likely than not that a portion of
the deferred income tax assets will not be realized in a future period. The
estimates utilized in the recognition of deferred income tax assets are subject
to revision in future periods.
Self Insurance
We are partially self-insured up to certain limits for a number of risks
including workers' compensation, medical, automobile and general liability.
Commercial insurance policies are carried for amounts in excess of the
self-insured amounts. Management exercises significant judgment in estimating
the ultimate liability for claims. The
18
services of an outside actuary are used to assist management in their evaluation
of the liability for workers' compensation and automobile claims.
Benefit Plans
We maintain defined benefit pension plans that cover most of our employees.
Projected benefit obligations, pension expense and amounts included in other
comprehensive income are impacted by a number of assumptions. Key assumptions
include the discount rates to determine benefit obligations and the expected
long-term rate of return on plan assets. Discount rates are applied to future
cash flows to measure benefit obligations on a present value. We assumed
weighted average discount rates of 7.00%, 6.50% and 6.00% to calculate pension
expense in 2002, 2003 and 2004, respectively. Based on pension plan obligations
at year-end 2004, a 0.50% reduction in the discount rate assumption would
increase pension expense by approximately $0.8 million. The estimated increase
is primarily attributable to the impact on the pension expense component for the
amortization of net losses, discussed below. Based on pension plan assets at
year-end 2004, a 0.50% reduction in the expected rate of return assumption would
increase pension expense by approximately $0.5 million. The amortization of net
actuarial losses remains a significant component of pension expense for the
Company. The net loss position of the pension plans was primarily the result of
declining discount rates and accumulated returns on pension assets below
expected returns, principally in periods before 2003. The pension expense
component for the amortization of net actuarial losses is expected to be
approximately $3.2 million in 2005. We anticipate funding $7.4 million to
retiree benefit plans in 2005.
Claims and Litigation
We receive claims for damages that are not covered by our insurance.
Management evaluates these claims and records its estimate of liabilities when
such liabilities are considered probable and an amount or reasonable range can
be estimated.
Environmental Remediation
We have a number of manufacturing facilities and certain idle facilities
that require remediation of soil and/or groundwater contamination. As required
by applicable State and/or Federal compliance programs, many of these sites are
in the monitoring stage that requires periodic sampling of contamination levels
in conjunction with ongoing assessments of remediation actions. Accordingly, the
recognition of environmental liabilities requires estimates concerning the
duration of monitoring and associated costs, often projected to extend for a
number of years. To the extent that these estimates change, additional
environmental costs could have a material adverse impact on future financial
results. See the section below entitled "Environmental Health and Safety" for
additional information.
LIQUIDITY AND CAPITAL RESOURCES
Our 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, 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 agreements will be adequate to meet its
liquidity requirements for the next 12 months. In addition, we will explore
potential sales of non-strategic assets during this period. 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 $5.4 million at January 2, 2005 compared to
$6.6 million at December 28, 2003. Working capital at January 2, 2005 was a
negative $57.1 million and the current ratio was 0.84 to 1 compared to working
capital at December 28, 2003 of $24.1 million and a current ratio of 1.08 to 1.
The decrease in working capital is primarily due to the reclassification of the
$52.2 million of 13 1/2% Senior Subordinated Notes due August 15, 2005 as they
mature in less than one year, and the establishment of a valuation allowance on
the current portion of deferred tax assets.
19
Total long-term debt and revolving credit borrowings at January 2, 2005
were $750.5 million, a $4.9 million increase from December 28, 2003. As of
January 2, 2005, there were revolving credit borrowings of $114.9 million under
the Senior Secured Credit Facility with $25.0 million available for borrowings
and $22.1 million of letters of credit outstanding. Revolving credit borrowings
at January 2, 2005 reflect working capital requirements.
On August 18, 2003, Foamex L.P. entered into a Senior Secured Credit
Facility with a new group of lenders and a Secured Term Loan with another
lender. Proceeds borrowed under these 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 in 2003.
The Senior Secured Credit Facility initially consisted of a revolving
credit facility with a maximum availability of $190.0 million and an initial
term loan of $50.0 million. On November 3, 2004, the lenders under the Senior
Secured Credit Facility agreed to lend up to an additional $15.0 million under a
new junior term loan. The revolving credit facility includes a $50.0 million
sublimit for letters of credit and availability is limited to eligible amounts,
as defined, of accounts receivable and inventory. Borrowings under the term loan
are limited to eligible amounts, as defined, of equipment and real estate.
Substantially all the assets of Foamex L.P. and its domestic subsidiaries and
Foamex Canada are pledged as collateral for the related borrowings. Borrowings
under the revolving credit facility and the term loan bear interest at floating
rates based upon and including a margin over either LIBOR or a Base Rate, as
defined. At January 2, 2005, the weighted average interest rates were 6.00% for
both the revolving loans and the term loan. The margin for borrowings under the
revolving credit facility and the term loan increased by 0.25% in 2004 and
increased by an additional 0.25% as of March 31, 2005. The term loan requires
quarterly installment payments of approximately $1.8 million. Borrowings under
the junior term loan can be used only to repay the 13 1/2% Senior Subordinated
Notes at maturity and will bear interest at a floating rate based upon LIBOR, as
defined, reset monthly plus 6.00%. All borrowings under the Senior Secured
Credit Facility will mature on April 30, 2007. The Senior Secured Credit
Facility includes both a subjective acceleration clause and a lockbox
arrangement which requires all lockbox receipts be used to repay revolving
credit borrowings. Accordingly, borrowings under the revolving credit facility
are classified as current in the accompanying balance sheet as required by EITF
No. 95-22.
The Secured Term Loan had an original maturity date of April 30, 2007. On
November 3, 2004, the lenders agreed to lend up to an additional $39.0 million,
the proceeds of which could be used only to repurchase prior to or repay the 13
1/2% Senior Subordinated Notes at maturity and certain fees related to the new
financing. The lenders also agreed to extend the maturity of the Secured Term
Loan to April 1, 2009. Borrowings under this facility bear interest at a rate
that is 9.25% plus the greater of the Reference Rate, as defined, or 4.25%. The
minimum rate, which was in effect as of December 28, 2003, is 13.50%. The rate
in effect at January 2, 2005 was 14.50%. In addition, Foamex L.P. is subject to
a 1.00% facility fee on the initial $80.0 million term loan which is payable
annually on the anniversary date, a 1.5% commitment fee on the unused portion of
the $39.0 million additional commitment and a funding fee equal to 2.5% of the
amount borrowed with a minimum funding fee of approximately $0.6 million.
Borrowings under the Secured Term Loan are collateralized by the same collateral
as the Senior Secured Credit Facility. An intercreditor agreement governs the
distribution of collateral among the lenders under the Senior Secured Credit
Facility and the Secured Term Loan.
Under the Senior Secured Credit Facility and the Secured Term Loan, as
amended, Foamex L.P. is subject to a minimum fixed charge coverage ratio, as
defined, of 1.00 measured quarterly. For the two quarters ended December 28,
2003, Foamex L.P.'s fixed charge coverage ratio was 1.09. Amendments to the
Senior Secured Credit Facility and Secured Term Loan executed on November 3,
2004 allowed Foamex L.P. to exclude certain charges aggregating approximately
$3.7 million and approximately $1.0 million in the first and second quarters of
2004, respectively, from the computation of the fixed charge coverage ratio. For
the four quarters ended January 2, 2005, Foamex L.P.'s fixed charge coverage
ratio was 0.98 and the lenders have agreed to waive compliance with the fixed
charge coverage ratio for that period. On March 31, 2005, Foamex L.P. entered
into amendments with the existing lenders under the Senior Secured Credit
Facility and the Secured Term Loan that set lower minimum fixed charge coverage
ratios through April 2, 2006 and permit borrowing of up to $25.0 million of the
additional $39.0 million
20
commitment under the Secured Term Loan, the proceeds of which would be used to
repay revolving loans. Foamex L.P. incurred fees and expenses for the waivers
and amendments aggregating approximately $1.0 million. Foamex L.P. is also
subject to a maximum annual capital expenditure amount which was $36.0 million
for the year ended January 2, 2005 and will be $46.8 million for the year ending
January 1, 2006.
Effective May 1, 2002, Foamex L.P. completed a series of interest rate swap
transactions with notional amounts aggregating $300.0 million. Foamex L.P.
designated, documented and accounted for these interest rate swaps as fair value
hedges of its 10 3/4% Senior Secured Notes due April 1, 2009. The risk being
hedged in these transactions was the change in fair value of the 10 3/4% Senior
Secured Notes based on changes in the benchmark interest rate, LIBOR. The effect
of these interest rate swap transactions was to convert the fixed interest rate
on the 10 3/4% Senior Secured Notes to floating rates reset twice per year to
correspond with the interest payment dates for the 10 3/4% Senior Secured Notes.
On September 18, 2002, Foamex L.P. unwound the interest rate swap transactions
in exchange for net cash proceeds of $18.4 million, including $3.6 million
realized through lower effective interest rates while the swap transactions were
in effect. The unwinding resulted in a deferred credit of $14.8 million, which
is being amortized over the term of the 10 3/4% Senior Secured Notes, using the
effective interest rate method.
Cash Flow from Operating Activities
Cash used for operating activities in 2004 was $1.0 million compared to
cash provided of $17.5 million in 2003. In 2004, cash used for operations
consisted of approximately $4.5 million of cash generated from results of
operations after adjusting for deferred income taxes and non cash charges
included in net loss, offset by approximately $5.5 million of cash requirements
used to fund working capital needs, other operating expenses and restructuring
liabilities. In 2003, cash provided by operations consisted of approximately
$15.9 million of cash generated from results of operations after adjusting for
deferred income taxes and non cash charges included in net loss and
approximately $14.6 million of cash generated from working capital accounts
offset by $13.0 million used to pay restructuring liabilities.
Cash Flow from Investing Activities
Cash used for investing activities totaled $5.2 million for 2004 compared
to $8.6 million in 2003. Cash requirements included capital expenditures of $5.5
million and capitalized software development costs of $2.4 million. These uses
were partially offset by proceeds from asset disposals of $2.7 million. Cash
used for investing activities in 2003 included capital expenditures of $6.5
million and capitalized software development costs of $3.3 million. Estimated
capital expenditures for 2005 are approximately $6 to $8 million. In addition,
we expect to spend approximately $5 million for internally developed software in
2005, a portion of which may be capitalized.
Cash Flow from Financing Activities
Cash provided by financing activities was $4.9 million in 2004 compared to
cash used of $6.8 million in 2003. During 2004, Foamex L.P. utilized $18.8
million of increased revolving credit borrowings to reduce its long-term debt by
$10.9 million and to satisfy working capital requirements. 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 January 2, 2005 are shown in the
following table:
21
Payment due by Period
----------------------------------------------------------------------
Contractual Obligations Total 2005 2006-07 2008-09 2010 and beyond
- ----------------------- -------- -------- --------- --------- ---------------
(dollars in millions)
Long-Term Debt, including
Capital Leases $ 740.1 $ 60.4 $293.7 (1) $380.0 $ 6.0
Interest (2) 296.7 79.4 143.0 73.8 0.5
Operating Leases 71.4 16.2 22.1 14.2 18.9
Purchase Obligations (3) 688.4 232.0 190.9 177.0 88.5
Restructuring Liabilities 7.4 1.8 1.9 1.6 2.1
Employee Benefits and Other (4)
-------- ------ ------ ------ ------
Total Contractual Obligations (5) $1,804.0 $389.8 $651.6 $646.6 $116.0
======== ====== ====== ====== ======
(1) Includes $114.9 million of revolving credit borrowings due in 2007 but
classified as current in the consolidated balance sheet to comply with
EITF 95-22. See Note 7 to the consolidated financial statements.
(2) Includes interest applicable to borrowings outstanding at January 2,
2005 computed using interest rates in effect as of January 2, 2005
through the due dates of the borrowings as defined by the applicable
financing agreements plus interest on replacement financing after the
13 1/2% Senior Subordinated Notes are repaid at maturity on August 15,
2005.
(3) Includes outstanding purchase orders and other commitments to purchase
minimum quantities of materials or services.
(4) We also have obligations to provide employee benefits including those
under our defined benefit and defined contribution retirement plans
and our medical benefit plan. In addition, we are partially
self-insured for a number of risks including workers' compensation,
automobile and general liability. Due to the many variables involved,
accurate estimates of these future obligations cannot be made. In
2004, payments for these obligations aggregated approximately $37.7
million.
(5) Comprised of the following:
Liabilities recorded on the balance sheet $ 760.6
Commitments not recorded on the balance sheet 1,043.4
--------
$1,804.0
RESULTS OF OPERATIONS
Carpet
Foam Cushion Automotive Technical
Products Products Products Products Other Total
-------- -------- ---------- --------- --------- ----------
2004 (dollars in thousands)
Net sales $551,414 $209,182 $350,985 $124,146 $ 30,667 $1,266,394
Income (loss) from operations $ 52,418 $ 8,539 $ 19,245 $ 32,916 $(62,516) $ 50,602
Depreciation and amortization $ 10,213 $ 2,978 $ 3,116 $ 2,801 $ 6,825 $ 25,933
Income (loss) from operations
as a percentage of net sales 9.5% 4.1% 5.5% 26.5% n.m.(a) 4.0%
2003
Net sales $507,586 $208,855 $447,068 $117,450 $ 23,601 $1,304,560
Income (loss) from operations $ 43,983 $ 5,395 $ 33,399 $ 32,115 $(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%
22
Carpet
Foam Cushion Automotive Technical
Products Products Products Products Other Total
-------- -------- ---------- --------- --------- ----------
2002 (dollars in thousands)
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%
(a) Not meaningful.
Business segment results include revenues and costs that are specifically
identifiable and costs shared by business segments have been allocated based on
utilization.
2004 Compared to 2003
Net sales for 2004 decreased 3% to $1,266.4 million from $1,304.6 million
in 2003. The decrease was primarily attributable to a $96.1 million decline in
net sales in the Automotive Products segment due to lower volume, including
sourcing actions by major customers, partially offset by higher net sales in the
Foam Products and Technical Products segments.
Gross profit was $141.8 million, or 11.2% of net sales, in 2004 compared to
$143.7 million, or 11.0% of net sales, in 2003. Gross profit margin has improved
primarily due to profit improvements as a result of better product mix in Foam
Products and lower costs in Carpet Cushion Products, partially offset by lower
volume in the Automotive Products segment. However, gross profit margin declined
in the last six months of 2004 and in the fourth quarter was 8.7%. We were only
partially able to recover raw material cost increases during 2004.
Income from operations for 2004 was $50.6 million, or 4.0% of net sales,
which represented a 20% decrease from the $62.9 million, or 4.8% of net sales,
reported during 2003. A decline of $14.2 million in the Automotive Products
segment more than offset increases in the other operating segments. Selling,
general and administrative expenses increased $5.4 million, or 7% principally
due to a $3.0 million net charge to bad debt expense following a customer
bankruptcy, litigation related costs and higher professional fees primarily for
information technology and the cost of our efforts under Section 404 of the
Sarbanes-Oxley Act, partially offset by lower corporate expenses and employee
costs as a result of the closing of our New York City office. Results include
net restructuring charges of $3.2 million in 2004 and net restructuring credits
of $1.8 million in 2003. Restructuring items are discussed below.
Foam Products
Foam Products net sales for 2004 increased 9% to $551.4 million from $507.6
million in 2003 primarily due to higher volumes of value-added products and
higher selling prices. Income from operations increased 19% to $52.4 million in
2004 from $44.0 million in 2003 as a result of improved volume mix and higher
selling prices partially offset by higher raw material costs. Income from
operations was 9.5% of net sales in 2004 and 8.7% of net sales in 2003.
Carpet Cushion Products
Carpet Cushion Products net sales for 2004 of $209.2 million were
essentially flat compared to 2003. Income from operations was $8.5 million in
2004 compared to $5.4 million in 2003 with the increase due primarily to lower
material and operating costs. Income from operations was 4.1% of net sales in
2004 and 2.6% of net sales in 2003.
Automotive Products
Automotive Products net sales for 2004 decreased 21% to $351.0 million from
$447.1 million in 2003 principally as a result of lower volumes from sourcing
actions by major customers including a decrease in sales of $54.4 million to our
largest customer. Income from operations decreased 42% to $19.2 million compared
to $33.4
23
million in 2003 primarily due to lower sales volume and higher per unit
labor and overhead costs. Income from operations was 5.5% of net sales in 2004
and 7.5% of net sales in 2003. We expect that sales will increase during 2005
but may be substantially less than in 2003.
Technical Products
Net sales for Technical Products in 2004 increased 6% to $124.1 million
from $117.5 million in 2003 primarily due to higher unit volume and new product
introductions. Income from operations increased 2% to $32.9 million in 2004
compared to $32.1 million in 2003 primarily due to new product introductions and
slightly higher overall pricing partially offset by higher selling, general and
administrative expenses. Income from operations was 26.5% of net sales in 2004
and 27.3% of net sales in 2003.
Other
Other primarily consists of certain manufacturing and fabrication
operations in Mexico City, corporate expenses not allocated to business segments
and restructuring charges (credits). The increase in net sales associated with
this segment resulted from our Mexico City operations. The loss from operations
was $62.5 million in 2004 and $52.0 million in 2003 and reflects generally
higher corporate expenses in 2004 and includes restructuring, impairment and
other charges of $3.2 million, discussed below. During 2003, we recorded
restructuring credits of $1.8 million.
Restructuring, Impairment and Other Charges
In 2004, we recorded restructuring, impairment and other charges of $3.2
million, primarily consisting of a $1.7 million charge related to lease costs
and asset write offs in connection with the closing of our New York office, a
$0.7 million charge related to the realignment of our automotive operations and
an impairment charge of $0.6 million for an idle facility.
In 2003, we recorded restructuring credits of $1.8 million consisting of a
$3.2 million reduction in the liability primarily for severance and termination
benefits no longer required as the actions contemplated under the related plans
have been substantially completed, and a charge of $1.1 million for additional
lease termination costs for a closed facility as a result of changes in real
estate market conditions. Additionally, we recorded a $0.3 million restructuring
charge reported in the Other segment as a result of an employee termination plan
for approximately 300 employees at our Mexico City operations. The actions under
this plan were substantially completed in 2003.
Interest and Debt Issuance Expense
Interest and debt issuance expense was $76.7 million in 2004, which
represented a 13% decrease from 2003 expense of $88.4 million. The decrease is
primarily due to lower amortization of debt issuance costs, which included a
write off of $12.9 million in 2003 associated with the refinancing of our credit
facilities.
Income from Equity Interest in Joint Ventures
The income from an equity interest in an Asian joint venture was $0.5
million in 2004 and $1.2 million in 2003. Income from an equity interest in a
joint venture in Eastern Europe was $0.2 million in 2004 and $0.3 million in
2003.
Other Income (Expenses), Net
Other expense, net was $0.2 million in 2004 compared to $3.4 million in
2003. The 2004 period includes foreign currency transaction losses related to
operations in Mexico and Canada of $0.6 million compared to $2.7 million in
2003. Also included in 2004 were gains of $1.0 million on asset disposals.
24
Provision (Benefit) for Income Taxes
During 2004, we established a valuation allowance of $128.6 million for our
U.S. deferred tax assets. As a result of our evaluation of the realizability of
our deferred tax assets conducted in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No. 109"), we
have determined that it is not likely that we will be able to generate
sufficient amounts of future U.S. taxable income to utilize our net operating
loss carryforwards and realize other deferred tax assets. The uncertainty of
recent economic conditions, including the escalating cost of chemical
feedstocks, in part due to increases in crude oil prices and their volatility
combined with our limited near term ability to timely recover material cost
increases from our customers, have adversely impacted our forecast of future
U.S. taxable income. Net U.S. deferred tax assets generated since the third
quarter of 2004 have been subject to a full valuation allowance.
In accordance with SFAS No. 109, we will continue to test the realization
of our U.S. net operating loss carryforwards and other deferred tax assets. Our
assessment will include an analysis of both positive and negative objective and
subjective evidence such as our recent performance, market conditions and prices
of our major chemical raw materials and the levels of our future profitability.
If, as a result of this assessment, there is sufficient positive evidence such
that it is more likely than not that we will realize the benefit of our deferred
tax assets we may reduce a portion or all of our valuation allowance in future
periods.
The effective tax benefit rate was 21.8% for 2003 and 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. 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 resulted in a reduction in the amount of the U.S. net operating
loss carryforwards available.
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.
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.
25
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 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.
26
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 $3.1 million of tax expense related to the
Foamex L.P. 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 resulted 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 had net deferred income tax assets aggregating $123.3 million as of
December 28, 2003 that primarily represented 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 $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 included a tax loss in 2004
that can be carried forward to 2024. 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.
27
As discussed in the 2004 compared to 2003 section above, we have
established a valuation allowance of $128.6 million in 2004 for all of our U.S.
deferred tax assets. We will continue to 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.
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").
OTHER
Environmental Health and Safety
We are subject to extensive and changing federal, state, local and foreign
environmental laws and regulations, including those relating to the use,
handling, storage, discharge and disposal of hazardous substances, the discharge
or emission of materials into the environment, and the remediation of
environmental contamination, and as a result, are from time to time involved in
administrative and judicial proceedings and inquiries relating to environmental
matters. As of January 2, 2005, we had accruals of approximately $2.0 million
for environmental matters including approximately $1.7 million related to
remediating and monitoring soil and groundwater contamination and approximately
$0.3 million relating to sites where we had been designated as a PRP by the EPA
or a state authority and other matters. Additional losses, if any, in excess of
amounts currently accrued, cannot be reasonably estimated at this time. If there
are additional matters or if any current estimates are incorrect, there could be
a material adverse effect on our financial position, results of operations and
cash flows.
On August 31, 2002, Environment Canada, the Canadian environmental
regulatory agency, finalized a rule which requires flexible polyurethane foam
manufacturing operations to reduce methylene chloride (dichloromethane) air
emissions. The rule established a 50.0% reduction in methylene chloride
emissions by December 1, 2004 and 100.0% reductions by January 1, 2007. We do
not believe this standard will require us to make material expenditures for our
Canadian plants.
We have reported to the appropriate state authorities that we have found
soil and/or groundwater contamination in excess of state standards at certain
locations. Seven sites are currently in various stages of investigation or
remediation. Accordingly, the extent of contamination and the ultimate liability
is not known with certainty for all sites.
We have either upgraded or closed all underground storage tanks at our
facilities in accordance with applicable regulations.
The CERCLA and comparable state laws impose liability without fault for the
costs of cleaning up contaminated sites on certain classes of persons that
contributed to the release of hazardous substances into the environment at those
sites, for example, by generating wastes containing hazardous substances which
were disposed at such sites. We are currently designated as a PRP by the EPA or
by state environmental agencies or other PRPs, pursuant to CERCLA or analogous
state statutes, with respect to 12 sites. Estimates of total cleanup costs and
fractional allocations of liability are often provided by the EPA, the state
environmental agency or the committee of PRPs with respect to the specified
site. Based on these estimates (to the extent available) and on known
information, in each case and in the aggregate, we do not expect additional
costs, if any, to be material to our results of operations, cash flows or
financial position.
Although it is possible that new information or future developments could
require us to reassess the potential exposure relating to all pending
environmental matters, including those described above, management believes
that, based upon all currently available information, the resolution of these
environmental matters will not have a material adverse effect on our operations,
financial position, capital expenditures or competitive position. The
possibility
28
exists, however, that new environmental legislation and/or environmental
regulations may be adopted, or other environmental conditions, including the
presence of previously unknown environmental contamination, may be found to
exist or a reassessment of the potential exposure to pending environmental
matters may be necessary due to new information or future developments, that may
require expenditures not currently anticipated and that may be material.
Claims and Litigation
We and our subsidiaries are party to various lawsuits, both as defendant
and plaintiff, arising in the normal course of business. It is the opinion of
management that the disposition of these lawsuits will not, individually or in
the aggregate, have a material adverse effect on our financial position, results
of operations or cash flows. If management's assessment is incorrect, such
actions could have a material adverse effect on our consolidated financial
position, results of operations and cash flows. As of January 2, 2005, we had
accrued approximately $1.1 million for litigation, 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 2004, 2003 and 2002 were negatively
impacted by higher average costs for raw materials. We experienced significant
increases in the prices of raw material from major chemical manufacturers during
2004 and 2002. We sought to recover these cost increases through manufacturing
process efficiencies and selling price increases, but were only partially
successful. We may not be successful in implementing further selling price
increases to fully recover raw material cost increases and competitive pricing
pressure may require us to adjust selling prices or lose volume. Results of
operations have been and could be adversely affected by delays in implementing,
or inability to implement, additional selling price increases to offset raw
material cost increases. Additionally, we must reduce and control our other
operating and corporate expenses including selling, general and administrative
expenses to offset raw material cost increases. A failure to recover cost
increases could result in debt covenant violations which may lead to lenders
demanding immediate payment of our outstanding debt and impair our ability to
continue as a going concern.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our debt securities with variable interest rates are subject to market risk
for changes in interest rates. On January 2, 2005, indebtedness with variable
interest rates totaled $239.3 million. On an annualized basis, if the interest
rates on these debt instruments increased by 1.0%, interest expense would
increase by approximately $2.4 million.
The two principal chemicals used in the manufacturing of flexible
polyurethane foam are TDI and polyol. The prices of TDI and polyol are
influenced by demand, manufacturing capacity and oil and natural gas prices. We
attempt to offset raw material price increases through selling price increases
and manufacturing process efficiencies.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
An index to the financial statements and financial statement schedules is
included in Item 15.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
We changed accountants during 2004. Detailed information required by this
item was included in Current Reports on Form 8-K and Form 8-K/A filed with the
Securities and Exchange Commission on April 2, 2004 and April 12, 2004.
29
ITEM 9a. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and
Chief Financial Officer, evaluated the effectiveness of our disclosure controls
and procedures as of the end of the period covered by this report. The Chief
Executive Officer and Chief Financial Officer concluded that, due to the
material weaknesses described below, our disclosure controls and procedures as
of the end of the period covered by this report were not effective to provide
reasonable assurance that the information required to be disclosed by us in
reports filed under the Securities Exchange Act of 1934 is (i) recorded,
processed, summarized and reported within the time periods specified in the
SEC's rules and forms and (ii) accumulated and communicated to our management,
including the Chief Executive Officer and Chief Financial Officer, as
appropriate to allow timely decisions regarding disclosure. A controls system
cannot provide absolute assurance that the objectives of the controls system are
met, and no evaluation of controls can provide absolute assurance that all
control issues, errors and instances of fraud, if any, within a company have
been detected.
Management's Annual Report on Internal Control Over Financial Reporting
We are responsible for establishing and maintaining adequate internal
control over financial reporting as defined under Exchange Act Rules 13a-15(f)
and 15d-15(f). Internal control over financial reporting is a process designed
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect
the transactions and dispositions of the assets of the company; provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that the receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal controls over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
We have not completed management's assessment of the internal control over
financial reporting required by Section 404 of the Sarbanes-Oxley Act of 2002
and we will avail ourselves of the 45-day exemptive order to complete such
assessment as provided by SEC Release No. 34-50754. Therefore, as permitted by
the SEC exemptive order, we have not included in this Annual Report on Form 10-K
management's annual report on internal control over financial reporting or the
related attestation report of our independent registered public accounting firm.
However, we have identified two material weaknesses in our internal control over
financial reporting as of January 2, 2005. As defined by the Public Company
Accounting Oversight Board ("PCAOB") in Auditing Standard No. 2, a material
weakness is a significant deficiency, or combination of significant
deficiencies, that results in more than a remote likelihood that a material
misstatement of the annual or interim financial statements will not be prevented
or detected. Because we have identified two material weaknesses, we will not be
able to conclude in our management's annual report on internal control over
financial reporting that our internal control over financial reporting is
effective.
The identification of the material weaknesses is based on findings to date.
Due to the incomplete status of management's assessment, we cannot be certain
that additional material weaknesses will not be identified prior to the filing
of management's annual report on internal control over financial reporting.
The first identified material weakness in our internal control over
financial reporting related to our accounting for labor and overhead variances
to our standard costs, which should be included in our work in process and
finished goods inventories. The material weakness could have resulted in a
material misstatement of the carrying value of our inventory. Management is
addressing the material weakness by revising the process to account for labor
and
30
overhead variances The other material weakness related to the restatement of the
third quarter 2004 financial statements to correct an error in recording the
valuation allowance established in that period for deferred income tax assets. A
portion of the valuation allowance, which was previously charged directly to
stockholders' deficiency as a component of accumulated other comprehensive loss,
should have been included in the provision for income taxes thereby increasing
the net loss in the third quarter by $16.7 million, but having no impact on
total stockholders' deficiency.
Changes in Internal Controls
During the quarter we strengthened our internal controls over the following
areas.
o Information Technology: Segregation of Duties and Information System
Users. In the fourth quarter of 2004 we conducted a review of roles
and responsibilities and user access within our information technology
systems and identified certain users with inappropriate access. As a
result, we implemented changes to tie user access to our information
systems to user needs based on the roles and responsibilities of the
user. This implementation has continued into the first quarter of
2005. During the fourth quarter we also established a formal change
management process to ensure that when employees change
responsibilities or status their system access requirements are also
appropriately and promptly changed accordingly.
o Controls over Fixed Assets. The Company did not have adequate policies
to address the process for taking fixed assets inventories. During the
fourth quarter, we implemented a policy with respect to the
identification of potentially idle assets and the communication of the
need to assess the recoverability of such assets to the appropriate
company personnel for resolution or disposition.
o One Time Transactions and Significant Agreements. During our review,
it was determined that the Company did not have adequate controls in
place to insure the proper accounting for certain non-recurring events
and significant agreements. This issue has been addressed, as we have
implemented comprehensive review processes and procedures for one-time
events and significant agreements to insure more robust reviews and
proper accounting.
Other than as described above, no change in our internal control over
financial reporting occurred during the most recent fiscal quarter that has
materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.
ITEM 9b. OTHER INFORMATION
None
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.
31
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(1) Financial statements.
Foamex International Inc. and Subsidiaries:
Reports of Independent Registered Public Accounting Firms F-2
Consolidated Balance Sheets as of January 2, 2005 and December 28, 2003 F-4
Consolidated Statements of Operations for the years ended January 2, 2005,
December 28, 2003 and December 29, 2002 F-6
Consolidated Statements of Cash Flows for the years ended January 2, 2005,
December 28, 2003 and December 29, 2002 F-7
Consolidated Statements of Stockholders' Deficiency for the years ended January 2, 2005,
December 28, 2003 and December 29, 2002 F-8
Notes to Consolidated Financial Statements F-9
(2) 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
(3) 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(r) - 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.
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(s) - Certificate of Incorporation of Foamex Asia, Inc.
3.10(s) - By-laws of Foamex Asia, Inc.
3.11(s) - Certificate of Incorporation of Foamex Latin America, Inc.
3.12(s) - By-laws of Foamex Latin America, Inc.
3.13(s) - Certificate of Incorporation of Foamex Mexico, Inc.
3.14(s) - By-laws of Foamex Mexico, Inc.
3.15(s) - Certificate of Incorporation of Foamex Mexico II, Inc.
3.16(s) - By-laws of Foamex Mexico II, Inc.
4.1(c) - Indenture, dated as of June 12, 1997, by and among Foamex L.P.,
FCC, the subsidiary guarantors and The Bank of New York, as
trustee, relating to $150,000,000 principal amount of 9 7/8%
Senior Subordinated Notes due 2007, including the form of
Senior Subordinated Note and Subsidiary Guarantee.
32
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(r) - Third Supplemental Indenture, dated as of March 25, 2002,
between Foamex Carpet Cushion LLC and The Bank of New York, as
trustee, relating to the 9 7/8% Senior Subordinated Notes due
2007.
4.2.3(r) - Second Supplemental Indenture, dated as of March 25, 2002,
between Foamex Carpet Cushion LLC and The Bank of New York, as
trustee, relating to the 13 1/2% Senior Subordinated Notes due
2005.
4.3.1(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(r) - Indenture, dated as of March 25, 2002, among Foamex L.P.,
Foamex Capital Corporation, the Guarantors party thereto and U.S.
Bank National Association, as trustee, including as exhibits
thereto, the form of note, relating to $300,000,000 principal
amount of 10 3/4% Senior Secured Notes due 2009, including form
of Senior Secured Note and Subsidiary Guaranty.
4.3.2(r) - Pledge and Security Agreement, dated as of March 25, 2002, made
by Foamex L.P. and U.S. Bank National Association, as
collateral agent.
4.3.3(r) - Patent Security Agreement, dated as of March 25, 2002, by Foamex
L.P. in favor of U.S. Bank National Association, as collateral
agent.
4.3.4(r) - Trademark Security Agreement, dated as of March 25, 2002, by
Foamex L.P. in favor of U.S. Bank National Association, as
collateral agent.
4.3.5(r) - Copyright Security Agreement, dated as of March 25, 2002, by
Foamex L.P. in favor of U.S. Bank National Association, as
collateral agent.
4.3.6(r) - Registration Rights Agreement, dated as of March 25, 2002,
among Foamex L.P., Foamex Capital Corporation, the Guarantors
party thereto and Credit Suisse First Boston Corporation, Salomon
Smith Barney Inc., Scotia Capital (USA) Inc., Bear, Stearns & Co.
Inc., and Jefferies & Company, Inc., as initial purchasers.
4.3.7(z) - Rights Agreement, dated as of August 5, 2004, between Foamex
International Inc. and Mellon Investor Services LLC, as the
Rights Agent.
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(u) - Credit Agreement, dated as of August 18, 2003, among Foamex
L.P. as a Borrower and Guarantor, Foamex International Inc.,
FMXI, Inc., Foamex Canada Inc., Foamex Capital Corporation,
Foamex Latin America, Inc., Foamex Mexico, Inc., Foamex Mexico
II, Inc., Foamex Asia, Inc. and Foamex Carpet Cushion LLC as
Guarantors, the financial institutions party thereto from time to
time as lenders and Bank of America, N.A. as the Administrative
Agent.
4.15.2(u) - 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(v) - 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.
33
4.15.4(y) - Amendment and Waiver No. 2 to Credit Agreement, dated as of June
15, 2004, among Foamex L.P., as Borrower, the affiliates of
Borrower party hereto, the lenders party hereto, and Bank of
America, N.A. as Administrative Agent.
4.15.5(aa) - Amendment No. 3 to Credit Agreement, dated as of November
3, 2004, among Foamex L.P., as Borrower, the affiliates of
Borrower party hereto, the lenders party hereto, and Bank of
America, N.A. as Administrative Agent.
4.15.6(cc) - Waiver to Credit Agreement, dated as of March 15, 2005, among
Foamex L.P., as Borrower, the affiliates of Borrower party
hereto, the lenders party hereto, and Bank of America, N.A. as
Administrative Agent.
4.15.7* - Amendment No. 4 to Credit Agreement, dated as of March 31, 2005,
among Foamex L.P., as Borrower, the affiliates of Borrower party
hereto, the lenders party hereto, and Bank of America, N.A. as
Administrative Agent.
4.16.1(u) - 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(u) - 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(v) - Amendment No. 1 to Credit Agreement, dated as of December 1,
2003, among Foamex L.P., as Borrower, the affiliates of Borrower
party hereto, the lenders party hereto, and Silver Point Finance,
LLC as Administrative Agent.
4.16.4(y) - Amendment No. 2 to Credit Agreement, dated as of June 15, 2004,
among Foamex L.P., as Borrower, the affiliates of Borrower party
hereto, the lenders party hereto, and Silver Point Finance, LLC
as Administrative Agent.
4.16.5(aa) - Amendment No. 3 to Credit Agreement, dated as of November 3,
2004, among Foamex L.P., as Borrower, the affiliates of
Borrower party hereto, the lenders party hereto, and Silver Point
Finance, LLC as Administrative Agent.
4.16.6(cc) - Waiver to Credit Agreement, dated as of March 15, 2005, among
Foamex L.P., as Borrower, the affiliates of Borrower party
hereto, the lenders party hereto, and Silver Point Finance, LLC
as Administrative Agent.
4.16.7* - Amendment No. 4 to Credit Agreement, dated a s of March 31, 2005,
among Foamex L.P., as Borrower, the affiliates of Borrower party
hereto, the lenders party hereto, and Silver Point Finance, LLC
as Administrative Agent.
4.17.1(u) - 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.
34
10.10.5(h) - The Foamex L.P. Hourly Pension Plan (formerly "The Foamex
Products Inc. Hourly Employee Retirement Plan"), as amended
December 31, 1995.
10.10.6(h)+ - Foamex L.P. 401(k) Savings Plan effective October 1, 1997.
10.10.12(q)+- Foamex Supplemental Executive Retirement Plan, effective as of
May 15, 2001.
10.11.6(x)+ - Separation Agreement and General Release, dated as of February
22, 2004, by and between Marshall S. Cogan and Foamex
International Inc.
10.11.11(t)+- Severance Agreement and Release, dates as of January 31, 2003, by
and between Foamex International and Pratt W. Wallace, Jr.
10.11.12(w) - Form of Foamex International Inc. Code of Ethics for Director,
Officers, Senior Management and Certain Other Employees.
10.11.13+(v)- Amended and Restated Employment Agreement, dated January 27,
2004, by and between Foamex International and Thomas E. Chorman.
10.11.14+(v)- Amended and Restated Employment Agreement, dated January 26,
2004, by and between Foamex International and K. Douglas Ralph.
10.11.15+(y)- Separation Agreement and Release, dated as of June 19, 2004,
between Foamex International Inc. and John V. Tunney.
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(o)+ - Foamex International Equity Incentive Plan for Non-Employee
Directors.
10.25(o)+ - Foamex International Key Employee Incentive Bonus Plan.
10.26(p)+ - Agreement with Consultant, dated April 24, 2001 by and between
Robert J. Hay and Foamex L.P.
10.30(bb)+ - Foamex International 2002 Stock Award Plan, as Amended and
Restated.
10.17.2(k) - Loan Agreement between Hua Kee Company Limited and Foamex Asia,
Inc., dated as of July 8, 1997.
10.18.1(p) - Joint Venture Agreement between Hua Kee Company Limited and
Foamex Asia, Inc. amended and restated as of December 3, 2001.
10.44(s)+ - Agreement with Consultant, dated August 8, 2002, by and between
Raymond E. Mabus, Jr. and Foamex International.
21* - Subsidiaries of Foamex International.
23* - Consent of Independent Registered Public Accounting Firm, KPMG
LLP.
23.1* - Consent of Independent Registered Public Accounting Firm,
Deloitte & Touche LLP.
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.
35
(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 on 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 year ended January 3, 1993.
(e) Incorporated herein by reference to the Exhibit to the Registration
Statement of Foamex L.P. and FCC on Form S-1, Registration Nos. 33-49976
and 33-49976-01. (f) Incorporated herein by reference to the Exhibit to the
Annual Report on Form 10-K of Foamex L.P. for fiscal year ended January 2,
1994.
(g) Incorporated herein by reference to the Exhibit in the Registration
Statement of Foamex International 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 on 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 Foamex International 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 Appendix to Foamex International's
definitive amended and restated proxy statement dated July 12, 2001.
(p) Incorporated herein by reference to the Exhibit to the Form 10-Q of Foamex
International for the quarterly period ended June 30, 2001.
(q) Incorporated herein by reference to the Exhibit to the Annual Report on
Form 10-K of Foamex International for the fiscal year ended December 31,
2001.
(r) Incorporated herein by reference to the Exhibit to the Form 10-Q of Foamex
L.P. and FCC for the quarterly period ended March 31, 2002.
(s) Incorporated herein by reference to the Exhibit to Amendment No. 1 to the
Registration Statement of Foamex L.P. and FCC on Form S-4, Registration No.
333-90632, filed October 22, 2002.
36
(t) 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.
(u) Incorporated herein by reference to the Exhibit to the Current Report on
Form 8-K of Foamex International reporting an event that occurred on August
18, 2003.
(v) Incorporated herein by reference to the Exhibit to the Annual Report on
Form 10-K of Foamex International for the fiscal year ended December 28,
2003.
(w) Incorporated herein by reference to the Exhibit to the Annual Report on
Form 10-K of Foamex L.P. and FCC for the fiscal year ended December 28,
2003.
(x) Incorporated herein by reference to the Exhibit to the Current Report on
Form 8-K of Foamex International reporting an event that occurred on
February 22, 2004.
(y) Incorporated herein by reference to the Exhibit to the Form 10-Q of Foamex
International for the quarterly period ended June 27, 2004.
(z) Incorporated herein by reference to the Exhibit to the Current Report on
Form 8-K of Foamex International reporting an event that occurred on August
5, 2004.
(aa) Incorporated herein by reference to the Exhibit to the Form 10-Q of Foamex
International for the quarterly period ended September 26, 2004.
(bb) Incorporated herein by reference to Foamex International's definitive proxy
statement dated April 26, 2004.
(cc) Incorporated herein by reference to the Exhibit to the Current Report on
Form 8-K of Foamex International reporting an event that occurred on March
15, 2005.
Certain instruments defining the rights of security holders have been excluded
herefrom in accordance with Item 601(b)(4)(iii) of Regulation S-K. The
registrant hereby agrees to furnish a copy of any such instrument to the
Securities and Exchange Commission upon request.
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 4th day of April 2005.
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 April 4, 2005
- -----------------------------
Raymond E. Mabus, Jr.
/s/ Robert J. Hay Chairman Emeritus April 4, 2005
- -----------------------------
Robert J. Hay and Director
/s/ Thomas E. Chorman President, Chief Executive April 4, 2005
- -----------------------------
Thomas E. Chorman Officer and Director
/s/ S. Dennis N. Belcher Director April 4, 2005
- -----------------------------
S. Dennis N. Belcher
/s/ John C. Culver Director April 4, 2005
- -----------------------------
John C. Culver
/s/ Thomas M. Hudgins Director April 4, 2005
- -----------------------------
Thomas M. Hudgins
/s/ David A. Lieberman Director April 4, 2005
- -----------------------------
David A. Lieberman
/s/ Raul J. Valdes-Fauli Director April 4, 2005
- -----------------------------
Raul J. Valdes-Fauli
39
FOAMEX INTERNATIONAL INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Index to Consolidated Financial Statements F-1
Reports of Independent Registered Public Accounting Firms F-2
Consolidated Balance Sheets as of January 2, 2005 and December 28, 2003 F-4
Consolidated Statements of Operations for the years ended January 2, 2005,
December 28, 2003 and December 29, 2002 F-6
Consolidated Statements of Cash Flows for the years ended January 2, 2005,
December 28, 2003 and December 29, 2002 F-7
Consolidated Statements of Stockholders' Deficiency for the years
ended January 2, 2005, December 28, 2003 and December 29, 2002 F-8
Notes to Consolidated Financial Statements F-9
F-1
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of
Foamex International Inc.:
We have audited the accompanying consolidated balance sheet of Foamex
International Inc. and subsidiaries (the "Company") as of January 2, 2005 and
the related consolidated statements of operations, cash flows and stockholders'
deficiency for the fiscal year then ended. In connection with our audit of the
consolidated financial statements, we also have audited the financial statement
schedules listed in the Index at Item 15 (2) as of January 2, 2005 and for the
fiscal year then ended. These consolidated financial statements and financial
statement schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and financial statement schedules based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Foamex International
Inc. and subsidiaries as of January 2, 2005, and the results of their operations
and their cash flows for the fiscal year then ended, in conformity with U.S.
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedules, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
/s/ KPMG LLP
Philadelphia, Pennsylvania
April 4, 2005
F-2
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Foamex International Inc.
Linwood, Pennsylvania
We have audited the accompanying consolidated balance sheet of Foamex
International Inc. and subsidiaries (the "Company") as of December 28, 2003 and
the related consolidated statements of operations, cash flows and stockholders'
deficiency for each of the two years in the period ended December 28, 2003. Our
audits also included the consolidated financial statement schedules for the
years ended December 28, 2003 and December 29, 2002 listed in the Index at Item
15(2). 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 the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company at December 28, 2003
and the results of its operations and its cash flows for each of the two years
in the period ended December 28, 2003 in conformity with accounting principles
generally accepted in the United States of America. Also, in our opinion, such
consolidated financial statement 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-3
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
January 2, December 28,
2005 2003
-------------- -------------------
ASSETS (thousands)
CURRENT ASSETS
Cash and cash equivalents $ 5,351 $ 6,613
Accounts receivable, net of allowance for doubtful
accounts and discounts of $9,001 in 2004 and $10,505 in 2003 182,740 181,288
Inventories 100,029 95,882
Deferred income taxes - 15,676
Other current assets 22,403 27,116
-------- --------
Total current assets 310,523 326,575
-------- --------
PROPERTY, PLANT AND EQUIPMENT
Land and land improvements 6,300 6,818
Buildings and leasehold improvements 113,592 117,265
Machinery, equipment and furnishings 281,071 289,528
Construction in progress 1,783 1,069
-------- --------
Total 402,746 414,680
Less accumulated depreciation and amortization (261,203) (251,830)
-------- --------
Property, plant and equipment, net 141,543 162,850
GOODWILL 126,814 126,258
DEBT ISSUANCE COSTS, net of accumulated
amortization of $17,477 in 2004 and $10,648 in 2003 21,152 27,195
DEFERRED INCOME TAXES 237 109,658
SOFTWARE COSTS, net of accumulated amortization of $6,401
in 2004 and $3,603 in 2003 9,325 9,767
INVESTMENTS IN AND ADVANCES TO AFFILIATES 16,521 14,503
OTHER ASSETS 19,595 13,100
-------- --------
TOTAL ASSETS $645,710 $789,906
======== ========
The accompanying notes are an integral part of the
consolidated financial statements.
F-4
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
January 2, December 28,
2005 2003
-------------- -------------------
LIABILITIES AND STOCKHOLDERS' DEFICIENCY (thousands, except share data)
CURRENT LIABILITIES
Revolving credit borrowings $ 114,907 $ 96,065
Current portion of long-term debt 67,131 15,937
Accounts payable 104,315 98,319
Accrued employee compensation and benefits 22,354 28,331
Accrued interest 13,063 12,376
Accrued restructuring 1,759 3,911
Accrued customer rebates 16,979 18,077
Cash overdrafts 10,437 12,692
Other accrued liabilities 16,680 16,721
--------- --------
Total current liabilities 367,625 302,429
LONG-TERM DEBT 568,461 633,621
ACCRUED EMPLOYEE BENEFITS 55,388 43,348
ACCRUED RESTRUCTURING 5,682 5,837
OTHER LIABILITIES 6,867 7,787
--------- --------
Total liabilities 1,004,023 993,022
--------- --------
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 2004 and 2003 15 15
Common Stock, par value $.01 per share:
Authorized 50,000,000 shares
Issued 27,949,762 in 2004 and 27,898,149 shares in 2003
Outstanding 24,460,762 shares in 2004 and 24,409,149 shares in 2003 279 279
Additional paid-in capital 102,354 102,155
Accumulated deficit (388,665) (237,732)
Accumulated other comprehensive loss (35,295) (30,832)
Other:
Common Stock held in treasury, at cost:
3,489,000 shares in 2004 and 2003 (27,780) (27,780)
Shareholder note receivable (9,221) (9,221)
--------- --------
Total stockholders' deficiency (358,313) (203,116)
--------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY $ 645,710 $789,906
========= ========
The accompanying notes are an integral part of the
consolidated financial statements.
F-5
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED
January 2, December 28, December 29,
2005 2003 2002
-------------- ------------ ------------
(thousands, except per share amounts)
NET SALES $1,266,394 $1,304,560 $1,328,094
COST OF GOODS SOLD 1,124,547 1,160,870 1,184,392
---------- ---------- ----------
GROSS PROFIT 141,847 143,690 143,702
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 87,995 82,588 94,744
RESTRUCTURING, IMPAIRMENT AND OTHER
CHARGES (CREDITS) 3,250 (1,759) 4,799
---------- ---------- ----------
INCOME FROM OPERATIONS 50,602 62,861 44,159
INTEREST AND DEBT ISSUANCE EXPENSE 76,667 88,374 69,679
INCOME FROM EQUITY INTEREST IN JOINT VENTURES 687 1,466 1,734
OTHER EXPENSE, NET (220) (3,446) (2,078)
---------- ---------- ----------
LOSS BEFORE PROVISION (BENEFIT) FOR INCOME TAXES
AND CUMULATIVE EFFECT OF ACCOUNTING CHANGES (25,598) (27,493) (25,864)
PROVISION (BENEFIT) FOR INCOME TAXES 125,335 (6,004) (86,812)
---------- ---------- ----------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF
ACCOUNTING CHANGES (150,933) (21,489) 60,948
CUMULATIVE EFFECT OF ACCOUNTING CHANGES - - (70,647)
---------- ---------- ----------
NET LOSS $ (150,933) $ (21,489) $ (9,699)
========== ========== ==========
EARNINGS PER SHARE - BASIC
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF
ACCOUNTING CHANGES $ (6.17) $ (0.88) $ 2.51
CUMULATIVE EFFECT OF ACCOUNTING CHANGES - - (2.91)
---------- ---------- ----------
NET LOSS $ (6.17) $ (0.88) $ (0.40)
========== ========== ==========
EARNINGS PER SHARE - DILUTED
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF
ACCOUNTING CHANGES $ (6.17) $ (0.88) $ 2.32
CUMULATIVE EFFECT OF ACCOUNTING CHANGES - - (2.69)
---------- ---------- ----------
NET LOSS $ (6.17) $ (0.88) $ (0.37)
========== ========== ==========
The accompanying notes are an integral part of the
consolidated financial statements.
F-6
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED
January 2, December 28, December 29,
2005 2003 2002
---------- ----------- ------------
OPERATING ACTIVITIES (thousands)
Net loss $(150,933) $(21,489) $ (9,699)
Adjustments to reconcile net loss to net
cash provided by (used for) operating activities:
Cumulative effect of accounting changes - - 70,647
Depreciation and amortization 25,933 26,045 31,592
Amortization of debt issuance costs, debt premium
and debt discount 2,762 4,458 3,280
Write off of debt issuance costs - 12,928 4,892
Asset impairment and other charges 2,809 - 2,503
Loss (gain) on disposition of assets (1,185) 30 -
Provision for uncollectible accounts 3,291 2,115 2,336
Retirement benefit funding greater than expense (2,175) (892) (1,604)
Deferred income taxes 124,739 (7,488) (92,400)
Other, net (708) 184 266
Changes in operating assets and liabilities:
Accounts receivable (4,742) 8,143 (20,421)
Inventories (4,147) 2,128 (8,580)
Accounts payable 5,996 10,919 (41,452)
Accrued restructuring (2,111) (13,023) (2,225)
Other assets and liabilities (549) (6,567) 10,440
--------- -------- --------
Net cash provided by (used for) operating activities (1,020) 17,491 (50,425)
--------- -------- --------
INVESTING ACTIVITIES
Capital expenditures (5,510) (6,543) (15,582)
Proceeds from sale of assets 2,701 1,237 21
Other investing activities (2,400) (3,329) (7,990)
--------- -------- --------
Net cash used for investing activities (5,209) (8,635) (23,551)
--------- -------- --------
FINANCING ACTIVITIES
Net proceeds from (repayments of) revolving loans 18,841 44,242 (73,176)
Proceeds from long-term debt - 130,000 356,590
Repayments of long-term debt (10,853) (164,020) (190,450)
Repayments of long-term debt-related party - - (31,590)
Increase (decrease) in cash overdrafts (2,255) (5,109) 13,728
Debt issuance costs (785) (11,880) (29,981)
Deferred credit on interest rate swaps - - 14,821
Other financing activities 19 - 3,494
--------- -------- --------
Net cash provided by (used for) financing activities 4,967 (6,767) 63,436
--------- -------- --------
Net increase (decrease) in cash and cash equivalents (1,262) 2,089 (10,540)
Cash and cash equivalents at beginning of period 6,613 4,524 15,064
--------- -------- --------
Cash and cash equivalents at end of period $ 5,351 $ 6,613 $ 4,524
========= ======== ========
The accompanying notes are an integral part of the
consolidated financial statements.
F-7
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, 2002 $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)
Net loss (150,933) (150,933)
Minimum pension liability adjustment (6,501) (6,501)
Foreign currency translation adjustment 2,038 2,038
---------
Comprehensive loss (155,396)
Stock compensation 183 183
Stock options exercised 16 16
--- ---- -------- --------- -------- -------- ---------
Balances at January 2, 2005 $15 $279 $102,354 $(388,665) $(35,295) $(37,001) $(358,313)
=== ==== ======== ========= ======== ======== =========
The accompanying notes are an integral part of the
consolidated financial statements.
F-8
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 12.
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
2004 included 53 weeks ended January 2, 2005 while fiscal year 2003 included the
52 weeks ended December 28, 2003 and 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 23.5% at January 2, 2005.
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". During
early 2005, the Bank of Nova Scotia sold 0.3 million shares of the Company's
common stock and as of February 15, 2005 holds approximately 22.3% of the
Company's outstanding common stock.
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 (Foamex Asia Co., Ltd.) in which it
has ownership of 70%. The Company does not exercise control of this joint
venture due to the minority shareholders' substantive participation rights and
therefore the Company uses the equity method of accounting. All significant
intercompany accounts and transactions have been eliminated in consolidation.
Accounting Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of 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.
F-9
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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.
Revenue Recognition, Discounts and Rebates
Revenue from sales, net of discounts and estimated returns, allowances and
customer rebates, is recognized when product title and the risks and rewards of
ownership passes to the customer, the sales price is fixed and determinable and
collection is reasonably assured. Products are shipped FOB shipping point. Net
sales are reduced by allowances for estimated discounts, returns and customer
rebates. Balances for allowances and rebates are reviewed at least quarterly and
are adjusted if warranted. Shipping and handling costs are included in cost of
goods sold.
Cash and Cash Equivalents
Highly liquid investments with an original maturity of three months or less
when purchased are recognized as cash equivalents.
Accounts Receivable and Allowance for Uncollectible Accounts
An estimate of uncollectible accounts is maintained and is based on
historical collection experience and specific customer collection issues. A
significant change in the financial condition of one or more of 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 January 2, 2005 were $750.5 million and $714.7 million,
respectively, and at December 28, 2003 were $745.6 million and $683.3 million,
respectively. The fair value of long-term debt is estimated using quoted market
prices, where available, or discounted cash flows. Fair value estimates are made
at a specific point in time, based on relevant market information about the
financial instruments. These estimates are subjective in nature and involve
uncertainties and matters of significant judgment and therefore, cannot be
determined with precision. Changes in assumptions could significantly affect the
estimates.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined
on a first-in, first-out basis.
Property, Plant and Equipment
Property, plant and equipment are stated at cost and are depreciated using
the straight-line method over the estimated useful lives of the assets. The
range of useful lives estimated for buildings is generally 20 to 35 years, and
the range for machinery, equipment and furnishings is 5 to 12 years. Leasehold
improvements are amortized over the shorter of the terms of the respective
leases or the estimated useful lives of the leasehold improvements. Depreciation
expense for 2004, 2003 and 2002 was $22.9 million, $24.1 million and $29.1
million, respectively.
F-10
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Maintenance and repairs are charged to expense as incurred. Renewals and
major improvements are capitalized if they extend the life of the asset. When
assets are retired or otherwise disposed of, the asset and related accumulated
depreciation are removed from the accounts and any gain or loss is recognized in
the results of operations.
Goodwill
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 not acquired in a business
combination and the recognition and measurement of goodwill and other intangible
assets subsequent to their acquisition. Under SFAS No. 142, goodwill is no
longer amortized, but is subject to annual impairment tests.
In accordance with SFAS No. 142, goodwill was tested for impairment upon
adoption of the standard and is tested annually thereafter. SFAS No. 142
requires that goodwill be tested for impairment using a two-step process. The
first step is to identify a potential impairment and the second step measures
the amount of the impairment loss, if any. Goodwill is deemed to be impaired if
the carrying amount of a reporting unit's goodwill exceeds its estimated fair
value. 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 in accordance with the transitional implementation guidance
of SFAS No.142. The Company has completed its annual goodwill impairment tests
as of September 27, 2004, September 29, 2003 and September 30, 2002,
respectively, with no recognition of any additional impairment.
Goodwill at January 2, 2005 increased $0.6 million from December 28, 2003
as a result of foreign currency translation adjustments reflected below as
Other.
Goodwill balances include:
Balance Balance
Segments December 28, 2003 Other January 2, 2005
----------------------- ----------------- ---------- ---------------
(thousands)
Foam Products $ 74,631 $222 $ 74,853
Carpet Cushion Products 2,497 - 2,497
Automotive Products 35,261 334 35,595
Technical Products 13,869 - 13,869
-------- ---- --------
Total $126,258 $556 $126,814
======== ==== ========
Debt Issuance Costs
Debt issuance costs consist of amounts incurred in obtaining long-term
financing and are disclosed in the financing activities section of the
consolidated statements of cash flows. These costs are being amortized over the
term of the related debt using the effective interest method.
Software Costs
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 management authorizes the project, the preliminary project
stage is complete and it is probable the project will be completed and the
software will be used for the function intended. 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 2006. Capitalized software costs aggregated $2.4 million, $3.4 million and
$7.0 million in 2004, 2003 and 2002, respectively. The capitalized costs are
amortized beginning in the period when placed in service on a straight-line
basis over the estimated useful life of the software, which is generally five
years or less.
F-11
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Long-Lived Assets
Property and equipment held for use is grouped for impairment testing at
the lowest level for which there are identifiable cash flows. Impairment testing
of the asset group occurs whenever events or changes in circumstances indicate
that the carrying amount of the assets may not be recoverable. The Company
assesses recoverability by comparing the carrying amount of the asset group to
the estimated undiscounted future cash flows expected to be generated by the
assets. If an asset group is considered impaired, the impairment loss to be
recognized would be measured as the amount by which the asset group's carrying
amount exceeds its fair value. Estimated future cash flows are based on
historical results adjusted for estimated future market conditions and operating
plans. To the extent that these estimates change, impairment losses could have a
material adverse impact on future financial results.
Environmental Remediation
Environmental expenditures that relate to current operations are expensed.
Expenditures that relate to an existing condition caused by past operations, and
which do not contribute to current or future revenue generation, are expensed.
Liabilities are recorded when environmental assessments and/or remedial efforts
are probable and the costs can be reasonably estimated. Amounts charged to
operations were $0.6 million, $0.5 million and $1.1 million in 2004, 2003 and
2002, respectively.
Comprehensive Income (Loss)
Other comprehensive income or loss items are revenues, expenses, gains and
losses that under generally accepted accounting principles are excluded from net
income and reflected as a component of 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 losses are reflected in other expense in the consolidated statements
of operations and included $0.6 million, $2.7 million, and $2.3 million in 2004,
2003 and 2002, respectively.
Research and Development
Research and development costs are expensed as incurred. Amounts charged to
operations were $2.8 million, $3.6 million and $4.8 million in 2004, 2003 and
2002, respectively.
Self Insurance
The Company is partially self-insured for a number of risks including
workers' compensation, medical, automobile and general liability. Commercial
insurance policies are carried for amounts in excess of the self-insured
amounts. Amounts charged to operations were $26.5 million, $24.9 million and
$31.2 million in 2004, 2003 and 2002, respectively.
Claims and Litigation
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.
F-12
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Income Taxes
Income taxes are accounted for under the asset and liability method. Under
this method, deferred income taxes are provided for temporary differences
between the financial reporting basis and income tax basis of assets and
liabilities and for net operating loss carryforwards using the income tax rates,
under existing legislation, expected to be in effect at the date such temporary
differences are expected to reverse. Deferred income tax assets are reduced by a
valuation allowance when it is considered more likely than not that a portion of
the deferred income tax assets will not be realized in a future period. The
estimates utilized in the recognition of deferred income tax assets are subject
to revision in future periods.
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.
In December 2004, the FASB issued Statement of Financial Accounting
Standards No. 123R, "Share-Based Payment" ("SFAS No. 123R"). The provisions of
SFAS No. 123R require the cost of employee services received in exchange for an
award of equity instruments be based on the grant date fair value of the award
and be recognized over the period during which the employee is required to
provide service in exchange for the award. SFAS No. 123R is required to be
applied to all awards of equity instruments granted in annual or interim periods
beginning after June 15, 2005.
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 9.
2004 2003 2002
---------- ---------- --------
(thousands, except per share data)
Net loss as reported $(150,933) $(21,489) $ (9,699)
Add: Stock-based employee compensation
expense included in reported net loss,
net of tax benefit (2) 2 30
Deduct: Stock-based employee compensation
expense determined under fair value
based method, net of tax benefit (a) (1,427) (1,343) (1,345)
--------- -------- --------
Proforma net loss $(152,362) $(22,830) $(11,014)
========= ======== ========
Basic loss per share
As reported $ (6.17) $ (0.88) $ (0.40)
Proforma $ (6.23) $ (0.94) $ (0.45)
Diluted loss per share
As reported $ (6.17) $ (0.88) $ (0.37)
Proforma $ (6.23) $ (0.94) $ (0.42)
(a) For 2004 there is no tax benefit due to the establishment of a valuation
allowance on U.S. deferred tax assets as discussed in Note 10.
F-13
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Accounting Changes
In January 2003, the FASB issued FASB Interpretation No. 46, "
Consolidation of Variable Interest Entities" ("FIN No. 46") which was amended in
October 2003 and replaced with FIN No. 46R in January 2004. The Company does not
have any "Variable Interest Entities" as defined by FIN No. 46R and accordingly,
the adoption of FIN No. 46R did have an impact on the Company's financial
statements.
In November 2004, the FASB issued Statement of Financial Accounting
Standards No. 151, "Inventory Costs an amendment of ARB No. 43, Chapter 4"
("SFAS No. 151"). The provisions of SFAS No. 151 require that abnormal amounts
of idle facility expense, freight, handling costs and wasted material be
recognized as current period charges, regardless of the circumstances under
which such charges arose. SFAS No. 151 is effective for fiscal years beginning
after June 15, 2005 and is not expected to have a significant impact on 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.
2004 (a) 2003 (a) 2002
---------- ---------- ----------
(thousands, except per share amounts)
Income (loss) before cumulative effect of
accounting changes $(150,933) $(21,489) $60,948
Cumulative effect of accounting changes - - (70,647)
--------- -------- -------
Net loss $(150,933) $(21,489) $(9,699)
========= ======== =======
Weighted average common stock outstanding 24,444 24,394 24,275
========= ======== =======
Income (loss) per share before cumulative effect
of accounting changes $ (6.17) $ (0.88) $ 2.51
Cumulative effect of accounting changes per share - - (2.91)
--------- -------- -------
Net loss per share $ (6.17) $ (0.88) $ (0.40)
========= ======== =======
The following table shows the amounts used in computing diluted earnings
(loss) per share.
2004 (a) 2003 (a) 2002
------------- ---------- ----------
(thousands, except per share amounts)
Income (loss) before cumulative effect of
accounting changes $(150,933) $(21,489) $60,948
Cumulative effect of accounting changes - - (70,647)
--------- -------- -------
Net loss $(150,933) $(21,489) $(9,699)
========= ======== =======
Weighted average common stock outstanding 24,444 24,394 24,275
Incremental shares resulting from
Stock options (b) - - 529
Convertible preferred stock (c) - - 1,500
--------- -------- -------
Adjusted weighted average shares 24,444 24,394 26,304
========= ======== =======
F-14
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. EARNINGS (LOSS) PER SHARE (continued)
2004 (a) 2003 (a) 2002
------------- ---------- ----------
(thousands, except per share amounts)
Income (loss) per share before cumulative effect of
accounting changes $ (6.17) $ (0.88) $ 2.32
Cumulative effect of accounting changes per share - - (2.69)
--------- -------- -------
Net loss per share $ (6.17) $ (0.88) $ (0.37)
========= ======== =======
(a) There is no dilution resulting from potential incremental shares in 2004 or
2003, because the Company had net losses before cumulative effect of
accounting changes, and the inclusion of potential incremental shares would
be antidilutive. For 2004, potential incremental shares included options to
purchase shares of common stock (3,059,606 shares at January 2, 2005) and
Series B Preferred Stock convertible into 1,500,000 of common stock. For
2003, potential incremental shares included options to purchase shares of
common stock (4,177,431 shares at December 28, 2003) and Series B Preferred
Stock convertible into 1,500,000 of common stock.
(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 is convertible into 1,500,000 common shares.
4. 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).
5. RESTRUCTURING, IMPAIRMENT AND OTHER CHARGES
2004
During 2004, the Company recorded restructuring, impairment and other
charges of $3.2 million, primarily consisting of a $1.7 million charge primarily
related to lease costs and asset write offs in connection with the closing of
its New York City office, a $0.7 million charge related to the realignment of
its automotive operations and an impairment charge of $0.6 million for an idle
facility.
2003
During 2003, the Company recorded restructuring, impairment and other
credits of $1.8 million consisting of a $3.2 million reduction in the liability
primarily for severance and termination benefits no longer required as the
actions contemplated under the related plans have been substantially completed,
and a charge of $1.1 million for additional lease termination costs for a closed
facility as a result of changes in real estate market conditions. Additionally,
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.
F-15
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. RESTRUCTURING, IMPAIRMENT AND OTHER CHARGES (continued)
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
Company's 2001 Operational Reorganization Plan and $2.1 million related to the
collection of deferred rent receivable which had been fully reserved.
The following table sets forth the components of the Company's
restructuring, impairment and other charges (credits):
Plant Closure Personnel
Total and Leases Reductions Impairment Other
----- ------------- ---------- ---------- --------
2002 (millions)
Balance at January 1, 2002 $25.0 $14.7 $ 7.8 $ - $2.5
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
2004
Restructuring and impairment charges 3.2 2.4 0.8 - -
Cash spending (4.1) (2.3) (1.0) - (0.8)
Asset impairment (1.4) (1.4) - - -
----- ----- ----- ---- ----
Balance at January 2, 2005 $ 7.4 $ 6.7 $ 0.7 $ - $ -
===== ===== ===== ==== ====
The Company expects to spend approximately $1.8 million during 2005 with
the balance to be spent through 2012, primarily for lease termination costs
which are recorded net of estimated sublease rental income of approximately $3.8
million.
6. INVENTORIES
The components of inventory are listed below.
January 2, December 28,
2005 2003
---------- ------------
(thousands)
Raw materials and supplies $ 63,336 $61,855
Work-in-process 18,667 16,484
Finished goods 18,026 17,543
-------- -------
Total $100,029 $95,882
======== =======
F-16
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. LONG-TERM DEBT AND REVOLVING CREDIT BORROWINGS
The components of long-term debt and revolving credit borrowings are listed
below.
January 2, December 28,
2005 2003
---------- ------------
Foamex L.P. Senior Secured Credit Facility (thousands)
Term Loan (1) $ 37,371 $ 48,214
Foamex L.P. Secured Term Loan (1) 80,000 80,000
10 3/4% Senior Secured Notes due 2009 (2) (4) 309,703 311,950
9 7/8% Senior Subordinated Notes due 2007 (2) 148,500 148,500
13 1/2% Senior Subordinated Notes due 2005 (includes
$581 and $1,543 of unamortized debt premium) (2) 52,166 53,128
Industrial revenue bonds (3) 7,000 7,000
Other (net of unamortized debt discount of $45 in 2004
and $93 in 2003) 852 766
-------- --------
635,592 649,558
Less current portion 67,131 15,937
-------- --------
Long-term debt $568,461 $633,621
======== ========
Revolving credit borrowings (1) $114,907 $ 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. and Foamex Capital Corporation.
(3) Subsidiary debt of Foamex L.P.
(4) Includes $9.7 million in 2004 and $12.0 million in 2003 of deferred credits
on interest rate swap transactions.
Senior Secured Credit Facility
On August 18, 2003, Foamex L.P. entered into a Senior Secured Credit
Facility with a new group of lenders and an $80.0 million term loan facility
with another lender. Proceeds borrowed under these new facilities were used to
repay all outstanding balances under the Foamex L. P. Amended Credit Facility
which was terminated as of August 18, 2003. In addition, Foamex Canada's
revolving credit facility that did not have any outstanding borrowings and had
availability of approximately $5.9 million was terminated as of August 18, 2003.
The termination of the Amended Credit Facility resulted in a write off of debt
issuance costs of $12.9 million recorded in 2003.
The Senior Secured Credit Facility initially consisted of a revolving
credit facility with a maximum availability of $190.0 million and a term loan of
$50.0 million. On November 3, 2004, the lenders under the Senior Secured Credit
Facility agreed to lend up to an additional $15.0 million under a new junior
term loan. The revolving credit facility includes a $50.0 million sublimit for
letters of credit and availability is limited to eligible amounts, as defined,
of accounts receivable and inventory. At January 2, 2005 and December 28, 2003,
Foamex L.P. had available borrowings of approximately $25.0 million and $46.8
million, respectively, and letters of credit outstanding of $22.1 million and
$20.9 million, respectively. Borrowings under the term loan are limited to
eligible amounts, as defined, of equipment and real estate. Substantially all
the assets of Foamex L.P. and its domestic subsidiaries and Foamex Canada are
pledged as collateral for the related borrowings. Borrowings under the revolving
credit facility and the term loan bear interest at floating rates based upon and
including a margin over either LIBOR or a Base Rate, as defined. At January 2,
2005, the weighed average interest rates were 6.00% for both the revolving loans
and the term loan. 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. Borrowings under the junior term
loan can be used only to repay the 13 1/2% Senior Subordinated Notes at maturity
and will bear
F-17
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. LONG-TERM DEBT AND REVOLVING CREDIT BORROWINGS (continued)
interest at a floating rate based upon LIBOR, as defined, reset monthly plus
6.00%. All borrowings under the Senior Secured Credit Facility will mature on
April 30, 2007. The Senior Secured Credit Facility includes both a subjective
acceleration clause and a lockbox arrangement which requires all lockbox
receipts be used to repay revolving credit borrowings. Accordingly, borrowings
under the revolving credit facility are classified as current in the
accompanying consolidated balance sheet as of January 2, 2005 and December 28,
2003 as required by Emerging Issues Task Force Issue No. 95-22, "Balance Sheet
Classification of Borrowings Outstanding Under Revolving Credit Agreements that
Include both a Subjective Acceleration Clause and a Lockbox Arrangement ("EITF
No. 95-22").
The Secured Term Loan had an original maturity date of April 30, 2007. On
November 3, 2004, the lenders agreed to lend up to an additional $39.0 million,
the proceeds of which could be used only to repurchase prior to or repay the 13
1/2% Senior Subordinated Notes at maturity and certain fees related to the new
financing. The lenders also agreed to extend the maturity of the Secured Term
Loan to April 1, 2009. Borrowings under this facility bear interest at a rate
that is 9.25% plus the greater of the Reference Rate, as defined, or 4.25%. The
minimum rate, which was in effect as of December 28, 2003, is 13.50%. The rate
in effect at January 2, 2005 was 14.50%. In addition, Foamex L.P. is subject to
a 1.00% facility fee on the initial $80.0 million term loan which is payable
annually on the anniversary date, a 1.5% commitment fee on the unused portion of
the $39.0 million additional commitment and a funding fee equal to 2.5% of the
additional amount borrowed with a minimum funding fee of approximately $0.6
million. Borrowings under the Secured Term Loan are collateralized by the same
collateral as the Senior Secured Credit Facility. An intercreditor agreement
governs the distribution of collateral among the lenders under the Senior
Secured Credit Facility and the Secured Term Loan.
10 3/4% Senior Secured Notes
The 10 3/4% Senior Secured Notes were issued by Foamex L.P. and Foamex
Capital Corporation on March 25, 2002 and are due on April 1, 2009. The notes
are guaranteed on a senior basis by all of Foamex L.P.'s domestic subsidiaries
that guarantee the Senior Secured Credit Facility. The notes are secured on a
second-priority basis (subject to permitted liens) on substantially the same
collateral that secures the obligations under the Senior Secured Credit Facility
and the Secured Term Loan. The notes rank effectively junior to all senior
indebtedness that is secured by first priority liens and senior in right of
payment to all subordinated indebtedness. Interest is payable April 1 and
October 1. The notes may be redeemed at the option of Foamex L.P., in whole or
in part, at any time on or after April 1, 2006. The initial redemption is at
105.375% of their principal amount, plus accrued and unpaid interest, if any,
thereon to the date of redemption and declining annually to 100.0% on or after
April 1, 2008. Additionally, on or before April 1, 2005, up to 35.0% of the
principal amount of the notes may be redeemed at a redemption price equal to
110.750% of the principal amount, plus accrued and unpaid interest, if any,
thereon to the date of redemption with the net proceeds of one or more equity
offerings.
Upon the occurrence of a change of control, as defined, each holder will
have the right to require Foamex L.P. to tender for such notes at a price in
cash equal to 101.0% of the aggregate principal amount thereof, plus accrued and
unpaid interest, if any.
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
F-18
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. LONG-TERM DEBT AND REVOLVING CREDIT BORROWINGS (continued)
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 redemption and declining annually to 100.0% on or after
June 15, 2005. At January 2, 2005, the redemption price was 101.646% plus
accrued and unpaid interest.
Upon the occurrence of a change of control, as defined, each holder will
have the right to require Foamex L.P. to tender for such notes at a price in
cash equal to 101% of the aggregate principal amount thereof, plus accrued and
unpaid interest thereon, if there is such a "change of control". The notes are
subordinated in right of payment to all senior indebtedness and are pari passu
in right of payment to the 13 1/2% Senior Subordinated Notes (described below).
13 1/2% Senior Subordinated Notes
The 13 1/2% Senior Subordinated Notes were issued by Foamex L.P. and Foamex
Capital Corporation and are due on August 15, 2005. The notes represent
uncollateralized general obligations of Foamex L.P. and are subordinated to all
Senior Debt, as defined in the Indenture. Interest is payable semiannually on
February 15 and August 15. The notes may be redeemed at the option of Foamex
L.P., in whole or in part, at any time on or after August 15, 2000. The initial
redemption was 106.75% of their principal amount, plus accrued and unpaid
interest, if any, thereon to the date of redemption and declining annually to
100.0% on or after August 15, 2004. At January 2, 2005, the redemption price was
100.000% plus accrued and unpaid interest.
Upon the occurrence of a change of control, as defined, each holder will
have the right to require Foamex L.P. to tender for such notes at a price in
cash equal to 101% of the aggregate principal amount thereof, plus accrued and
unpaid interest, if any, thereon, if there is such a "change of control". The
notes are subordinated in right of the payment of all senior indebtedness and
are pari passu in right of payment to the 9 7/8% Senior Subordinated Notes
(described above).
Industrial Revenue Bonds ("IRBs")
IRB debt includes a $1.0 million bond that matures on October 1, 2005 and a
$6.0 million bond that matures in 2013. Interest is based on a variable rate, as
defined, with options available to Foamex L.P. to convert to a fixed rate. At
January 2, 2005, the interest rate was 1.95% on the $1.0 million bond and 2.04%
on the $6.0 million bond. The maximum interest rate for either of the IRBs is
15.0% per annum. If Foamex L.P. exercises its option to convert the bonds to a
fixed interest rate structure, the IRBs are redeemable at the option of the
bondholders. In addition, at any time prior to conversion to a fixed interest
rate structure, bondholders upon notice to the bond trustee and the remarketing
agent may place the bonds for sale. If the remarketing agent is not successful
in reselling the bonds before settlement is due on bonds placed for sale, the
bond trustee may draw on a letter of credit issued under the Senior Secured
Credit Facility to repay the bondholder for the bonds placed for sale until the
bonds can be resold by the remarketing agent. Pursuant to this arrangement, the
IRBs have been classified as current in the accompanying consolidated balance
sheets at January 2, 2005 and December 28, 2003.
F-19
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. LONG-TERM DEBT AND REVOLVING CREDIT BORROWINGS (continued)
The IRBs are collateralized by certain properties, which have an
approximate net carrying value of $10.5 million at January 2, 2005.
Other
Other debt includes a non-interest bearing promissory note with a principal
amount of $0.9 million at January 2, 2005 issued in connection with increasing
the Company's interest in an Asian joint venture to 70.0% in 2001. The
promissory note which matures on December 1, 2005 had unamortized discount of
$0.1 million at January 2, 2005.
Debt Covenants
The indentures and other indebtedness agreements contain certain covenants
that limit, among other things, the ability of 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 January 2,
2005, 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 Senior Secured Credit Facility and the
Secured Term Loan, Foamex L.P. is subject to a minimum fixed charge coverage
ratio, as defined, of 1.00 measured quarterly. Amendments to the Senior Secured
Credit Facility and Secured Term Loan executed on November 3, 2004 allowed
Foamex L.P. to exclude certain charges aggregating approximately $3.7 million
and approximately $1.0 million in the first and second quarters of 2004,
respectively, from the computation of the fixed charge coverage ratio. For the
four quarters ended January 2, 2005, Foamex L.P.'s fixed charge coverage ratio
was 0.98 and the lenders have agreed to waive compliance with the fixed charge
coverage ratio for that period. On March 31, 2005, Foamex L.P. entered into
amendments with the existing lenders under the Senior Secured Credit Facility
and the Secured Term Loan that set lower minimum fixed charge coverage ratios
through April 2, 2006 and permit borrowing of up to $25.0 million of the
additional $39.0 million commitment under the Secured Term Loan, the proceeds of
which would be used to repay revolving loans. Foamex L.P. incurred fees and
expenses for the waivers and amendments aggregating approximately $1.0 million.
For the two quarters ended December 28, 2003, Foamex L.P.'s fixed charge
coverage ratio was 1.09. Foamex L.P. is also subject to a maximum annual capital
expenditure amount which was $36.0 million for the year ended January 2, 2005
and will be $46.8 million for the year ending January 1, 2006.
F-20
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. LONG-TERM DEBT AND REVOLVING CREDIT BORROWINGS (continued)
Maturities of Long-Term Debt
Scheduled maturities of long-term debt as of January 2, 2005 are shown
below (thousands):
2005 $ 60,595
2006 7,172
2007 171,586
2008 -
2009 380,000
Thereafter 6,000
--------
625,353
Unamortized debt premium/discount and fair
value adjustment, net 10,239
--------
Total $635,592
========
8. 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.
The Company also has a supplemental executive retirement plan (the "SERP").
The SERP is a non-qualified plan and provides retirement benefits to certain
executives that supplement the benefits provided under the Qualified Pension
Plan.
Retiree Medical and Life Insurance Benefits
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.
F-21
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. RETIREE BENEFIT PLANS (continued)
Change in projected benefit obligations, plan assets and funded status
follows:
Pension Benefits Other Benefits
2004 2003 2004 2003
---------- ---------- -------- --------
Change in Benefit Obligations (thousands)
Benefit obligations at beginning of year $125,052 $107,390 $ 1,234 $ 1,248
Service cost 4,804 4,300 30 29
Interest cost 7,463 7,086 69 76
Amendments - 257 - -
Benefits paid (6,038) (5,392) (78) (139)
Plan participants' contributions - - 16 15
Actuarial loss (gain) 12,008 10,461 (45) 5
Foreign currency exchange rate changes 615 950 - -
-------- -------- ------- -------
Benefit obligation at end of year $143,904 $125,052 $ 1,226 $ 1,234
======== ======== ======= =======
Change in Plan Assets
Fair value of plan assets at
beginning of year $ 79,886 $ 60,085 $ - $ -
Actual return on plan assets 7,746 15,240 - -
Employer contribution 10,186 9,564 62 124
Plan participants' contributions - - 16 15
Benefits paid (6,038) (5,392) (78) (139)
Plan administrative expenses (500) (438) - -
Foreign currency exchange rate changes 588 827 - -
-------- -------- ------- -------
Fair value of plan assets at end of year $ 91,868 $ 79,886 $ - $ -
======== ======== ======= =======
Funded Status and Net Amounts Recognized
in Consolidated Balance Sheets
Funded status $(52,036) $(45,166) $(1,226) $(1,234)
Unrecognized transition asset (290) (365) - -
Unrecognized prior service cost (benefit) 192 92 (41) (47)
Unrecognized net actuarial loss 60,021 50,997 328 387
-------- -------- ------- -------
Net amount recognized in consolidated
balance sheets $ 7,887 $ 5,558 $ (939) $ (894)
======== ======== ======= =======
Amounts Recognized in the Consolidated
Balance Sheets
Prepaid benefit costs $ 9,263 $ 6,520 $ - $ -
Accrued benefit liability (53,109) (46,192) (939) (894)
Intangible assets 596 674 - -
Accumulated other comprehensive loss* 51,137 44,556 - -
-------- -------- ------- -------
Net amount recognized $ 7,887 $ 5,558 $ (939) $ (894)
======== ======== ======= =======
* Before related income tax benefit.
The accumulated benefit obligation for all defined benefit plans was $135.9
million at year-end 2004 and $119.5 million at year-end 2003. Information for
defined benefit plans with an accumulated benefit obligation in excess of plan
assets is listed below.
F-22
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. RETIREE BENEFIT PLANS (continued)
December 31, 2004 December 31, 2003
----------------- -----------------
(thousands)
Projected benefit obligation $139,242 $121,381
Accumulated benefit obligation $132,444 $116,767
Fair value of plan assets $ 88,128 $ 76,871
Components of Net Periodic Benefit Plan Cost
Pension Benefits Other Benefits
---------------------------- -------------------------
2004 2003 2002 2004 2003 2002
------ ------ ------ ------ ------ ------
(thousands)
Service cost $4,804 $4,300 $3,866 $30 $ 29 $ 29
Interest cost 7,463 7,086 6,556 69 76 82
Expected return on plan assets (6,891) (5,611) (5,823) - - -
Amortization of transition assets (75) (75) (75) - - -
Amortization of prior service benefit (111) (109) (140) (6) (6) (6)
Amortization of net loss (gain) 2,776 3,090 1,643 14 16 15
Curtailment - - (162) - - -
------ ------ ------ ---- ---- ----
Net periodic benefit plan cost $7,966 $8,681 $5,865 $107 $115 $120
====== ====== ====== ==== ==== ====
Additional Information
Pension Benefits Other Benefits
------------------------ -----------------------
2004 2003 2004 2003
---------- ---------- -------- --------
(thousands)
Increase (decrease) in minimum liability
included in other comprehensive loss* $6,581 $(2,033) N/A N/A
* Before related income tax benefit.
Weighted-Average Assumptions Used Pension Benefits Other Benefits
------------------------ -----------------------
to Determine Benefit Obligations 2004 2003 2004 2003
---------------------------------------- ---------- ---------- -------- --------
Discount rate -U.S. Plans 5.5% 6.0% 5.5% 6.0%
Discount rate - Canadian Plans 5.75% 6.0% N/A N/A
Expected long-term return on plan assets* 8.5% 9.0% N/A N/A
Rate of compensation increase 3.5%-5.0% 3.5%-5.0% N/A N/A
Weighted-Average Assumptions Used
to Determine Annual Net Benefit Cost
Discount rate 6.0% 6.5% 6.0% 6.5%
Expected long-term return on plan assets* 8.5% 9.0% N/A N/A
Rate of compensation increase 3.5%-5.0% 4.0%-5.0% 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
-----------------------------------------
Assumed Health Care Cost Trend Rates December 31, 2004 December 31, 2003
Health care cost trend rate assumed for next year 11.0% 12.0%
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
F-23
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. RETIREE BENEFIT PLANS (continued)
Assumed health care cost trend rates have a significant effect on the
amounts reported for the health care plans. A one-percentage point change in
assumed health care cost trend rates would have the effects listed below for
2004.
Assumed Health Care Cost Trend
1% Point Increase 1% Point Decrease
----------------- -----------------
(thousands)
Effect on total of service cost and interest cost $10 $ (8)
Effect on postretirement benefit obligation $98 $(84)
Funding, Investment Strategy, Asset Allocations and Risk Management for Plan
Assets.
U.S. pension plan assets are primarily comprised of equity and debt
securities, including both U.S. and foreign securities. At year-end 2004, common
stock of the Company totaled $1.6 million, or 1.9% of the assets. At year-end
2003, common stock of the Company totaled $2.1 million, or 2.8% of the assets.
U. S. Plan Assets
--------------------------------------------
December 31, 2004 December 31, 2003
----------------- -----------------
Equity securities 63% 64%
Debt securities 30 30
Other 7 6
--- ---
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.
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.
Canadian Plan Assets
Pension plan assets from pension plans in Canada totaled $7.2 million, or
7.9% of assets, at year-end 2004 and $5.5 million, or 6.9% of assets, at
year-end 2003. Canadian pension plan assets are primarily invested in Canadian
equity securities with the balance in foreign equities.
Cash Flows
Contributions
The Company expects to contribute $7.4 million to its pension plans and
$0.1 million to its other postretirement benefit plans in 2005.
F-24
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. RETIREE BENEFIT PLANS (continued)
Estimated Future Benefit Payments
The following benefit payments, which reflect expected future service, as
appropriate, are expected to be paid:
Pension Benefits Other Benefits
---------------- --------------
2005 $ 6,200 $132
2006 $ 6,548 $120
2007 $ 6,822 $100
2008 $ 7,314 $ 98
2009 $ 7,751 $ 82
Years 2010-2014 $46,264 $441
Defined Contribution Plan
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, $0.9 million and $1.0 million in 2004, 2003 and
2002, respectively.
9. STOCK OPTION PLANS
The Foamex International Inc. 2002 Stock Award Plan, as amended (the "2002
Stock Award Plan") provides for the issuance of nonqualified and incentive stock
options for common stock of the Company. Eligibility extends to employees,
directors and consultants of the Company, including its subsidiaries and
affiliates. At the Annual Meeting of Stockholders on May 25, 2004, stockholders
approved an increase in the number of shares reserved for issuance under the
2002 Stock Award Plan by 2,500,000. As of January 2, 2005, 4,600,000 shares of
the Company's common stock are reserved for issuance under the 2002 Stock Award
Plan.
The 2002 Stock Award Plan also provides for stock appreciation rights,
restricted stock, phantom stock units, performance share units and/or stock
bonuses, although none of these awards have been issued. Of the 4,600,000 shares
of the Company's common stock reserved under the 2002 Stock Award Plan, 500,000
of these shares are available for awards of restricted stock, phantom stock
units, performance share units and/or stock bonuses.
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 under the plan. 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.
Option Grants
Options granted in 2004 included the following terms:
o 805,500 options with a three-year vesting period and a six-year term.
o 83,334 options with a five-year vesting period and a ten-year term.
F-25
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. STOCK OPTION PLANS (continued)
Options granted in 2003 included the following terms:
o 141,750 options with a three-year 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 could be accelerated to three-year vesting in
either 25%, 50%, or 100% increments, depending on certain financial
measures in fiscal 2003, as defined. These goals were not attained.
o 130,833 options with a five-year vesting period and a ten-year term.
Options granted in 2002 included the following terms:
o 210,000 options with a three-year 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 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 897,561 options with a five-year 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.
Option Modifications
As provided in a severance agreement during 2004, the Company extended the
exercise period for 81,000 options for up to one year beyond the exercise period
provided 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 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.
A summary of stock option activity is presented below.
2004 2003 2002
-------------------- --------------------- -----------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
--------- -------- --------- -------- --------- --------
Outstanding at beginning of period 4,177,431 $6.11 4,528,650 $6.42 3,465,542 $6.88
Granted 888,834 $4.19 312,583 $3.29 2,234,311 $5.87
Exercised (15,000) $1.23 - $ - (551,352) $6.33
Forfeited/expired (1,991,659) $6.79 (663,802) $6.93 (619,851) $7.07
---------- --------- ---------
Outstanding at end of period 3,059,606 $5.13 4,177,431 $6.11 4,528,650 $6.42
========== ========= =========
Exercisable at end of period 1,088,409 $6.50 1,480,265 $7.38 1,365,852 $7.34
F-26
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. STOCK OPTION PLANS (continued)
Listed below is a summary of the stock options outstanding and exercisable
at January 2, 2005.
Outstanding
Weighted Weighted
Exercise Average Average
Price Exercise Remaining
Range Options Price Life-Years
----------------- ----------- --------- --------
$ 1.20 - 2.61 626,166 $2.23 4.4
$ 3.07 - 4.60 960,084 $4.12 5.2
$ 5.06 - 6.88 819,106 $5.82 4.8
$ 7.49 - 13.25 654,250 $8.56 5.9
---------
3,059,606
=========
Exercisable
Weighted
Exercise Average
Price Exercise
Range Options Price
---------------- ----------- ----------
$ 1.20 - 2.61 75,333 $2.54
$ 3.07 - 4.60 55,520 $4.11
$ 5.06 - 6.88 563,506 $5.75
$ 7.49 -13.25 394,050 $8.66
---------
1,088,409
=========
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 $2.66 per option in 2004,
$2.12 per option in 2003 and $3.74 per option in 2002.
2004 2003 2002
--------- --------- ----------
Expected life in years 3.0 3.0 3.0
Risk-free interest rate 1.89% 2.22% 2.82%
Volatility 102.29% 101.73% 97.66%
Dividend yield 0.00% 0.00% 0.00%
10. INCOME TAXES
The sources of income (loss) before the provision (benefit) for income
taxes are shown below.
2004 2003 2002
--------- -------- --------
(thousands)
United States $(25,342) $(28,467) $(30,609)
Foreign (256) 974 4,745
-------- -------- --------
Loss before provision (benefit) for income taxes $(25,598) $(27,493) $(25,864)
======== ======== ========
F-27
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. INCOME TAXES (continued)
A reconciliation of the statutory federal income tax to income tax expense
is shown below.
2004 2003 2002
-------- -------- ---------
(thousands)
Statutory income taxes $ (8,959) $(9,623) $ (9,052)
State income taxes, net of federal benefit (1,116) (876) (1,089)
Increase (decrease) in valuation allowance 134,737 649 (75,371)
Deemed distributions of foreign earnings to U.S. - 3,109 -
Alternative minimum tax - - (200)
Foreign tax rate differential 12 (10) 192
Impact of tax rate changes - 85 -
Other, net 661 662 (1,292)
-------- ------- --------
Total $125,335 $(6,004) $(86,812)
======== ======= ========
The provision (benefit) for income taxes is summarized as follows:
2004 2003 2002
------------ ------------ ------------
Current (thousands)
Federal $ - $ - $ 3,004
State 19 39 160
Foreign 577 1,286 2,423
-------- ------- --------
Total current 596 1,325 5,587
-------- ------- --------
Deferred
Federal (8,825) (6,562) (14,577)
State (1,135) (915) (1,779)
Foreign (38) (501) (672)
-------- ------- --------
Total deferred (9,998) (7,978) (17,028)
-------- ------- --------
Change in valuation allowance 134,737 649 (75,371)
-------- ------- --------
Total provision (benefit) for income taxes $125,335 $(6,004) $(86,812)
======== ======= ========
The tax effect of the temporary differences that give rise to deferred
income tax assets and liabilities are listed below.
January 2, December 28,
2005 2003
---------- ------------
Deferred income tax assets (thousands)
Inventory basis differences $ 2,089 $ 1,804
Employee benefit accruals 22,989 21,749
Allowances and contingent liabilities 10,342 9,740
Restructuring and plant closing accruals 2,812 3,704
Other 4,990 7,201
Net operating loss carryforwards 114,953 99,432
Capital loss carryforwards 190 394
Valuation allowance for deferred income tax assets (139,847) (2,560)
-------- --------
Deferred income tax assets 18,518 141,464
-------- --------
F-28
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. INCOME TAXES (continued)
January 2, December 28,
2005 2003
---------- ------------
Deferred income tax liabilities (thousands)
Basis difference in property, plant and equipment (12,488) (13,538)
Other (7,786) (4,673)
-------- --------
Deferred income tax liabilities (20,274) (18,211)
-------- --------
Net deferred income tax assets (liabilities) $ (1,756) $123,253
======== ========
During the third quarter of 2004, the Company established a valuation
allowance of $128.6 million for its U.S. deferred tax assets. As a result of its
evaluation of the realizability of its deferred tax assets conducted in
accordance with SFAS No. 109, the Company determined that it is not likely that
it will be able to generate sufficient amounts of future U.S. taxable income to
utilize its net operating loss carryforwards and realize other deferred tax
assets. The uncertainty of recent economic conditions, including the escalating
cost of chemical feedstocks, in part due to increases in crude oil prices and
their volatility, combined with the Company's limited near term ability to
timely recover material cost increases from its customers, have adversely
impacted the Company's forecast of future U.S. taxable income. Net U.S. deferred
tax assets generated since the third quarter of 2004 have been subject to a full
valuation allowance.
The American Jobs Creation Act of 2004 introduced a special one-time
dividends received deduction on the repatriation of certain foreign earnings.
Following a review by the Company, no earnings from foreign subsidiaries are
anticipated to be repatriated to utilize the special deduction.
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. 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 resulted 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 Company has U.S. net operating loss carryforwards of approximately
$305.9 million at January 2, 2005 expiring from 2010 to 2024. Approximately
$111.5 million of the net operating loss carryforwards expire in the years 2010
to 2012 with the remainder principally expiring in the 2018-2024 period. The
Company has had an ownership change as defined in IRC Section 382 and
accordingly, the Company is limited (on an annual basis) to approximately $21.0
million of net operating loss carryforward utilization.
At January 2, 2005, the Company had $2.3 million of net operating loss
carryforwards in a Mexican subsidiary that expire in 2006 through 2014. A full
valuation allowance has been recorded due to uncertainty regarding utilization
of these net operating loss carryforwards.
F-29
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. INCOME TAXES (continued)
Cumulative undistributed earnings of foreign subsidiaries for which no U.S.
income or foreign withholding taxes have been provided, amounted to $5.2 million
at January 2, 2005 and December 28, 2003. Such earnings are deemed to be
permanently invested by 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.
11. 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 January 2, 2005, there were 24.5 million shares issued and
outstanding and 6.5 million shares of common stock reserved for potential
issuance in connection with stock option plans, discussed in Note 9. 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
shares of the Company's common stock, however the Senior Secured Credit Facility
limits the Company's ability to purchase its common stock. As of January 2,
2005, 1,989,000 shares have been purchased under this program.
Accumulated Other Comprehensive Loss
The components of accumulated other comprehensive loss are listed below.
January 2, December 28, December 29,
2005 2003 2002
---------- ------------ ------------
(thousands)
Foreign currency translation adjustment $ (1,219) $ (3,257) $ (9,869)
Minimum pension liability (a) (34,076) (27,575) (28,885)
-------- -------- --------
$(35,295) $(30,832) $(38,754)
======== ======== ========
F-30
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. STOCKHOLDERS' DEFICIENCY (continued)
(a) Net of income tax benefit of $17.0 million, $15.8 million and $16.5
million at January 2, 2005, December 28, 2003 and December 29, 2002,
respectively.
Preferred Share Purchase Rights
On August 5, 2004, the Board of Directors of the Company declared a
dividend of one preferred share purchase right (a "Right") for each outstanding
share of common stock, par value $0.01 per share, payable on August 23, 2004 to
the stockholders of record on August 16, 2004. The Board of Directors declared
these rights to protect stockholders from coercive or otherwise unfair takeover
tactics. The Rights would not interfere with any merger or other business
combination approved by the Board of Directors. The Rights will become
exercisable only if a person or group beneficially acquires 20% or more of the
stockholder voting power of the Company or if a person or group announces a
tender offer, which, if consummated, would result in such person or group
beneficially owning 20% or more of such voting power, in either case without the
approval of the Board of Directors. The Board of Directors may, at its option,
redeem the Rights at $0.001 per Right or amend the rights plan within a certain
period of time before the rights become exercisable.
Under most circumstances involving an acquisition by a person or group of
20% or more of the stockholder voting power of the Company, and in which the
Rights become exercisable, each Right will entitle its holder (other than such
person or group), in lieu of purchasing preferred stock, to purchase common
stock of the Company at a 50% discount. In addition, in the event of certain
business combinations following such an acquisition, each Right will entitle its
holder to purchase the common stock of an acquirer of the Company at a 50%
discount.
Unless earlier redeemed, exercised or exchanged, the Rights will expire on
August 4, 2014.
12. 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 and
fabrication operations in Mexico City, corporate expenses not allocated to other
business segments and restructuring, impairment and other charges (credits) (see
Note 5). Asset and capital expenditure information by business segment is not
reported because many of 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.
F-31
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. BUSINESS SEGMENTS (continued)
Sales to one customer, which are included in Automotive Products, accounted
for approximately 12.5%, 16.3% and 17.3% of net sales in 2004, 2003 and 2002,
respectively. No other customer accounted for more than 10.0% of net sales
during the periods presented.
Business segment results are presented below.
Carpet
Foam Cushion Automotive Technical
Products Products Products Products Other Total
-------- -------- ---------- --------- --------- ----------
2004 (dollars in thousands)
Net sales $551,414 $209,182 $350,985 $124,146 $ 30,667 $1,266,394
Income (loss) from operations $ 52,418 $ 8,539 $ 19,245 $ 32,916 $(62,516) $ 50,602
Depreciation and amortization $ 10,213 $ 2,978 $ 3,116 $ 2,801 $ 6,825 $ 25,933
2003
Net sales $507,586 $208,855 $447,068 $117,450 $ 23,601 $1,304,560
Income (loss) from operations $ 43,983 $ 5,395 $ 33,399 $ 32,115 $(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
(a) Not meaningful.
Geographical information is presented below.
United
States Canada Mexico Consolidated
---------- ------- -------- ------------
2004 (thousands)
Net sales $1,009,102 $59,435 $197,857 $1,266,394
Property, plant and equipment, net $ 120,578 $ 5,100 $ 15,865 $ 141,543
2003
Net sales $ 989,075 $67,542 $247,943 $1,304,560
Property, plant and equipment, net $ 142,602 $ 5,003 $ 15,245 $ 162,850
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
13. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
2004 2003 2002
------------ ------------ ---------
(thousands)
Cash paid for interest $73,218 $72,785 $56,583
======= ======= =======
Cash paid for income taxes, net $ 120 $ 2,349 $ 2,222
======= ======= =======
Non cash - capital leases $ 49 $ - $ -
======= ======= ======
F-32
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. 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 International Holdings, Inc. ("Trace"), which was
formerly a major stockholder of the Company, borrowed $5.0 million pursuant to a
promissory note with an aggregate principal amount of $5.0 million issued to
Foamex L.P. on June 12, 1997. The promissory note was due and payable on demand
or, if no demand was made, on July 7, 2001, and bears interest at 2?% plus
three-month LIBOR, as defined, per annum payable quarterly in arrears commencing
October 1, 1997. On June 12, 1997, another promissory note issued to Foamex L.P.
by Trace in July 1996 was amended. The amended promissory note is an extension
of a promissory note of Trace that was due in July 1997. The aggregate principal
amount of the amended promissory note was increased to approximately $4.8
million and the maturity of the promissory note was extended. The principal was
reduced by approximately $0.6 million relating to a portion of the proceeds from
the sale of a corporate aircraft in 1999. The promissory note was due and
payable on demand or, if no demand was made, on July 7, 2001, and bears interest
at 2 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 January 2, 2005 and December 28, 2003, operating accounts receivable
from Trace were approximately $3.1 million and $3.4 million, respectively. These
accounts receivable were fully reserved for prior to 2002.
Foam Funding LLC Debt
Subsidiaries of the Company paid interest on notes payable to Foam Funding
LLC, an affiliate of Trace, of $0.7 million in 2002. Subsidiaries of the Company
paid principal on notes payable to Foam Funding LLC of $31.6 million in 2002.
This debt was fully repaid in 2002.
Other
Effective February 10, 2004, 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 recorded a one-time charge of approximately $1.4 million in
the first quarter of 2004 for amounts payable under this agreement, none of
which related to past service rendered by the former Chairman. Additionally, the
Company recorded the reversal of approximately $1.4 million reflected on the
balance sheet as of December 28, 2003 related to various retirement provisions
contained in an employment agreement with the Company that are no longer payable
to the former Chairman under the terms of the separation agreement.
In 2002, pursuant to the terms of an existing agreement, 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, one of the Company's former 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 former director's 5.0% interest in the value of the Company's equity
interest in the joint venture in Asia. The Company also maintained an apartment
used by this former director. Rent expense for this
F-33
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. RELATED PARTY TRANSACTIONS AND BALANCES (continued)
facility was $0.1 million in 2004 and $0.2 million in 2003 and 2002. The
apartment lease expired in 2004 and was not renewed.
The Company, 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.
The Company's former 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 2001, the Company entered into an agreement that guarantees two
non-recourse 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 former director of the Company and an employee of Foamex
L.P. The Company has established an accrual of $0.3 million included in other
liabilities at January 2, 2005 since the promissory notes are non recourse.
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 $0.1 million in 2004 and $0.5 million in 2002 for
legal services to a law firm in which another director is a partner.
15. 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 January 2, 2005 are (thousands):
2005 $16,232
2006 12,065
2007 10,012
2008 8,061
2009 6,186
Balance 18,878
-------
Total $71,434
=======
Rental expense charged to operations under operating leases approximated
$19.3 million, $18.8 million and $23.4 million in 2004, 2003 and 2002,
respectively. Substantially all such rental expense represented the minimum
rental payments under operating leases.
F-34
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. COMMITMENTS AND CONTINGENCIES (continued)
Contractual Commitments
The Company has entered into contracts for information technology services
and certain raw materials that have minimum purchase commitments estimated at
$117.7 million in 2005, $98.3 million in 2006, $92.5 million in 2007, $88.5
million in 2008 and $88.5 million in 2009.
Litigation
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 January 2, 2005, the Company had accrued approximately $1.1 million
for litigation and other legal matters in addition to the environmental matters
discussed below.
Environmental and Health and Safety
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, is from time to time involved in
administrative and judicial proceedings and inquiries relating to environmental
matters. As of January 2, 2005, the Company had accruals of approximately $2.0
million for environmental matters, including approximately $1.7 million related
to remediating and monitoring soil and groundwater contamination and
approximately $0.3 million related to sites where it has been designated as a
PRP, by the EPA or a state authority, and other matters. Additional losses, if
any, in excess of amounts currently accrued, cannot be reasonably estimated at
this time. If there are additional matters or if our current estimates are
incorrect, there could be a material adverse effect on 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 requires flexible polyurethane foam
manufacturing operations to reduce methylene chloride (dichloromethane) air
emissions. The rule established a 50.0% reduction in methylene chloride
emissions by December 1, 2004, which we have implemented, and 100.0% reductions
by January 1, 2007. This standard has not and will not require the Company to
make material expenditures for its Canadian plants.
The Company has reported to the appropriate state authorities that it had
found soil and/or groundwater contamination in excess of state standards at
certain locations. Seven sites are currently in various stages of investigation
or remediation. Accordingly, the extent of contamination and the ultimate
liability is not known with certainty for all sites.
The Company has either upgraded or closed all underground storage tanks at
its facilities in accordance with applicable regulations.
The CERCLA and comparable state laws impose liability without fault for the
costs of cleaning up contaminated sites on certain classes of persons that
contributed to the release of hazardous substances into the environment at those
sites, for example, by generating wastes containing hazardous substances which
were disposed at such sites. 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 12 sites. Estimates of total cleanup
costs and fractional allocations of liability are often provided by the EPA, the
state environmental agency or the committee of PRPs with respect to the
specified site. Based on these estimates (to the extent available) and on known
information, in each case and in the aggregate, the Company does not expect
additional costs, if any, to be material to liquidity, results of operations or
financial position.
F-35
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. 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.
16. QUARTERLY FINANCIAL DATA (UNAUDITED)
First Second Third Fourth
Quarter Quarter Quarter(a) Quarter
------- ------- ---------- -------
(restated)
(thousands, except per share amounts)
2004
Net sales $313,618 $314,140 $ 309,993 $328,643
Gross profit $ 39,759 $ 40,181 $ 33,172 $ 28,735
Net loss $ (2,115) $ (2,617) $(131,234)(b) $(14,967)
Loss per share
Basic $ (0.09) $ (0.11) $ (5.37) $ (0.61)
Diluted $ (0.09) $ (0.11) $ (5.37) $ (0.61)
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)
(a) The third quarter of 2004 has been restated on April 4, 2005 to correct an
error in recording a valuation allowance established in that period for
deferred income tax assets. The restatement increased the reported net loss
in the third quarter of 2004 by $16.7 million, but had no impact on total
stockholders' deficiency.
(b) Includes establishment of a deferred tax valuation allowance of $128.6
million.
F-36
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
January 2, December 28,
2005 2003
--------- -------------
ASSETS (thousands, except share data)
CURRENT ASSETS
Cash and cash equivalents $ - $ -
Intercompany receivables 298 141
Deferred taxes - 15,676
-------- ---------
Total current assets 298 15,817
DEFERRED INCOME TAXES - 109,243
-------- ---------
TOTAL ASSETS $ 298 $125,060
======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES
Accounts payable $ 1 $ 9
Other accrued liabilities 3,044 3,051
-------- --------
Total current liabilities 3,045 3,060
LONG-TERM LIABILITIES
Deficit in consolidated subsidiaries 355,566 325,116
-------- --------
Total liabilities 358,611 328,176
-------- --------
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 2004 and 2003 15 15
Common Stock, par value $.01 per share:
Authorized 50,000,000 shares
Issued 27,949,762 shares in 2004 and 27,898,149 shares in 2003;
Outstanding 24,460,762 shares in 2004 and 24,409,149 shares in 2003 279 279
Additional paid-in capital 102,354 102,155
Accumulated deficit (388,665) (237,732)
Accumulated other comprehensive loss (35,295) (30,832)
Other:
Common Stock held in treasury, at cost:
3,489,000 shares in 2004 and 2003 (27,780) (27,780)
Shareholder note receivable (9,221) (9,221)
-------- --------
Total stockholders' deficit (358,313) (203,116)
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY $ 298 $125,060
======== ========
See notes to consolidated financial statements,
beginning on Page F-9.
(continued)
S-2
Schedule I
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF OPERATIONS
2004 2003 2002
----------- ---------- ------------
(amounts in thousands except per share amounts)
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES $ 1,198 $ 1,574 $ 418
--------- -------- --------
LOSS FROM OPERATIONS (1,198) (1,574) (418)
EQUITY IN LOSS OF CONSOLIDATED
SUBSIDIARIES (25,033) (27,416) (27,208)
INTEREST EXPENSE - - 33
--------- -------- --------
LOSS BEFORE PROVISION (BENEFIT) FOR
INCOME TAXES AND CUMULATIVE EFFECT
OF ACCOUNTING CHANGES (26,231) (28,990) (27,659)
PROVISION (BENEFIT) FOR INCOME TAXES 124,702 (7,501) (88,607)
--------- -------- --------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF
ACCOUNTING CHANGES (150,933) (21,489) 60,948
CUMULATIVE EFFECT OF ACCOUNTING
CHANGES - - (70,647)
--------- -------- --------
NET LOSS $(150,933) $(21,489) $ (9,699)
========= ======== ========
EARNINGS PER SHARE - BASIC
INCOME (LOSS) BEFORE CUMULATIVE EFFECT
OF ACCOUNTING CHANGES $ (6.17) $ (0.88) $ 2.51
CUMULATIVE EFFECT OF ACCOUNTING CHANGES - - (2.91)
--------- -------- --------
NET LOSS $ (6.17) $ (0.88) $ (0.40)
========= ======== ========
EARNINGS PER SHARE - DILUTED
INCOME (LOSS) BEFORE CUMULATIVE EFFECT
OF ACCOUNTING CHANGES $ (6.17) $ (0.88) $ 2.32
CUMULATIVE EFFECT OF ACCOUNTING CHANGES - - (2.69)
--------- -------- --------
NET LOSS $ (6.17) $ (0.88) $ (0.37)
========= ======== ========
Provision for income taxes includes the establishment of a valuation allowance
for deferred income tax assets of $128.6 million in 2004.
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-9.
(continued)
S-3
Schedule I
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF CASH FLOWS
2004 2003 2002
--------- ---------- ------------
OPERATING ACTIVITIES (thousands)
Net loss $(150,933) $(21,489) $ (9,699)
Adjustments to reconcile net loss to
net cash used for operating activities:
Deferred income taxes 124,702 (7,509) (90,681)
Equity in losses of consolidated subsidiaries 25,033 27,416 24,413
Cumulative effect of accounting changes - - 70,647
Other 183 180 2,012
Changes in operating assets and liabilities:
Intercompany receivables (157) 952 (377)
Accounts payable (8) 3 (90)
Other assets and liabilities (37) (164) 2,968
--------- -------- --------
Net cash used for operating activities (1,217) (611) (807)
--------- -------- --------
INVESTING ACTIVITIES
Distribution from (to) subsidiaries 1,200 513 (105)
--------- -------- --------
Net cash provided by (used for) investing activities 1,200 513 (105)
--------- -------- --------
FINANCING ACTIVITIES
Repayments of note payable to consolidated
subsidiary - - (2,490)
Proceeds from exercise of stock options 18 - 3,494
Increase (decrease) in cash overdraft (1) (60) 64
--------- -------- --------
Net cash provided by (used for) financing activities 17 (60) 1,068
--------- -------- --------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS - (158) 156
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD - 158 2
--------- -------- --------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ - $ - $ 158
========= ======== ========
See notes to consolidated financial statements,
beginning on Page F-9.
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 JANUARY 2, 2005
Allowance for Uncollectible Accounts $8,254 $3,291 $ - $ 4,491 $7,054
====== ====== ======= ======= ======
Reserve for Discounts $2,251 $ - $14,751 (1) $15,055 $1,947
====== ====== ======= ======= ======
YEAR ENDED DECEMBER 28, 2003
Allowance for Uncollectible Accounts $7,963 $2,115 $ (217) $ 1,607 $8,254
====== ====== ======= ======= ======
Reserve for Discounts $2,348 $ - $13,429 (1) $13,526 $2,251
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YEAR ENDED DECEMBER 29, 2002
Allowance for Uncollectible Accounts $8,720 $2,336 $ - $ 3,093 $7,963
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Reserve for Discounts $2,220 $ - $15,143 (1) $15,015 $2,348
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(1) Adjustments reflect a reduction in net sales.
S-5