UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 29, 2002
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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
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share, which is traded through the
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National Association of Securities
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Dealers, Inc. National Market
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System.
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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 NO X
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The aggregate market value of the voting stock held by nonaffiliates of
the registrant as of March 11, 2003, was $14.6 million.
The number of shares outstanding of the registrant's common stock as of
March 14, 2003 was 24,350,658.
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
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Part I
Item 1. Business 3
Item 2. Properties 10
Item 3. Legal Proceedings 11
Item 4. Submission of Matters to a Vote of Security Holders 13
Part II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters 13
Item 6. Selected Consolidated Financial Data 13
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 15
Item 7a. Quantitative and Qualitative Disclosures about Market Risk 31
Item 8. Financial Statements and Supplementary Data 31
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 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. Controls and Procedures 31
Part IV
Item 15. Exhibits, Financial Statement Schedules
and Reports on Form 8-K 32
Signatures 39
Certification of Chief Executive Officer 41
Certification of Chief Financial Officer 42
The Registrant will furnish a copy of any exhibit to this Annual Report on Form
10-K upon the payment of a fee equal to the Registrant's reasonable expense in
furnishing such exhibit.
2
PART I
ITEM l. BUSINESS
General
Foamex International Inc. (referred to in this document as the "Company,
we, us and/or our") is engaged primarily in the manufacturing and distribution
of flexible polyurethane and advanced polymer foam products. As of December 29,
2002, our operations are conducted through our wholly-owned subsidiary, Foamex
L.P., and through Foamex Canada Inc., Foamex Latin America, Inc. and Foamex
Asia, Inc., which are wholly-owned subsidiaries of Foamex L.P. We were
incorporated in 1993 to act as a holding company for Foamex L.P.
Segments
We are the largest manufacturer and distributor of flexible polyurethane
and advanced polymer foam products in North America. We have numerous
manufacturing facilities dedicated to specific product lines as well as
facilities with the capability to support multiple product lines. Each of our
business segments has a customer base that is significantly different from the
other segments. Our senior executives direct sales efforts for each of our
business segments.
Our five business segments are described below.
Foam Products
Our foam products are distributed directly from manufacturing facilities
and indirectly through independent fabricator distributors. These foams are used
by the bedding industry in quilts, toppers, cores and border rolls for
mattresses. In the furniture industry, they are generally used for upholstered
seating products and in the retail industry, for a broad range of products, such
as mattress overlay pads, leisure furniture, futons and pillows. Foam products
are generally sold in large volumes on a regional basis because of high shipping
costs.
Our bedding products are sold to mattress manufacturers. We also supply
cut-to-size seat cushions, back cushions and other pieces to the furniture
industry. Furniture foams are sold directly to manufacturers as well as through
distributors. The consumer products group sells therapeutic sleep products such
as mattress pads and bed pillows for the health care and consumer markets and a
broad line of home furnishing products to retailers throughout North America.
The development and introduction of value-added products continues to be
a priority including products incorporating Reflex(R) and viscoelastic or
"memory" foams for the bedding industry, which maintain their resiliency better
than other foams and materials. Reflex(R) materials include cushion wraps and
cushion cores and are advanced polymer cushioning products designed to improve
comfort, quality and durability in upholstered furniture and bedding products.
Reflex(R) was created using patented VPF(SM) manufacturing technology. We also
have introduced high efficiency thermal management foam products for
applications in work gloves and outerwear.
Carpet Cushion Products
We manufacture carpet cushion products, which include rebond, prime, felt
and rubber carpet padding. Prime carpet padding is made from virgin polyurethane
foam buns. Rebond carpet padding is primarily made from recycled foam, which is
shredded into small pieces, processed and then bonded using a polyurethane
chemical adhesive. Rebond manufacturing requires the management of a
comprehensive recycling business that includes an extensive internal and
external collection network from the automotive and foam industries on a
worldwide basis. Our fiber operation incorporates both mechanical and chemical
bonding techniques to produce high-end padding from virgin and recycled fibers.
We produce high-end rubber carpet padding utilizing both natural and synthetic
rubber.
3
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, which includes our new
SmoothBond(R) product, using patented VPF(SM) technology to provide unique
comfort characteristics in seating applications; CustomFit(R) semi-rigid
thermoformable foams, to provide structure and shape in headliner substrate
applications; Qylite(R) acoustical foams, to reduce noise and improve sound
quality in the vehicle. We provide a range of foams in this category for
applications such as dash insulators, hood insulators and interior trim
insulators; contoured foam products for motor vehicle floor carpet underlay
pads; barrier foam products, which provide soft-touch cushioning, while also
allowing our customers to more efficiently process the 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 allow our customers to meet federal regulatory safety standards for their
components; molded seating cushions, diversifying us further into molded
products to complement our core slab-based business.
We supply our product lines through a range of tiers in the automotive
industry supply chain, varying greatly depending on the specific application and
the original equipment manufacturer ("OEM"). Most frequently, we supply to Tier
1 system integrators, which in turn provide components and systems to the OEMs.
In conjunction with these efforts, we maintain direct contact with OEMs for
material specification development, appearance approvals, and new product
development initiatives.
We maintain our position in the automotive industry through a continuing
focus on new product development, flexible and efficient manufacturing
capabilities, and outstanding quality and service in our QS9000 registered
manufacturing facilities.
Technical Products
We are one of the foam industry's prime innovators and producers of
industrial, specialty, consumer and safety foams, which we refer to as
"Technical Products." Technical Products consist of reticulated foams and other
custom polyester and polyether foams, which are sometimes combined with other
materials to yield specific properties. Reticulation is the thermal or chemical
process used to remove the membranes from the interconnecting cells within foam.
This leaves a porous, skeletal structure allowing for the free flow of gases
and/or liquids. Felting and lamination with other foams or materials give these
composites specific properties.
Reticulated foams are well suited for filtration, reservoiring, sound
absorption and sound transmission. Industrial applications include carburetors,
computer cabinets, inkpad reservoirs, high-speed inkjet printers and speaker
grills. Medical applications include oxygenators for cardiopulmonary surgery,
instrument holders for sterilization, pre-op scrubbers impregnated with
anti-microbial agents and EKG pads containing conductive gels. Other Technical
Products have unique characteristics such as flame retardancy and fluid
absorption. Additional products sold within this group include foams for
refrigerated supermarket produce counters, mop heads, paint brushes and cosmetic
applications.
Due to the highly specialized nature of most Technical Products, our
research staff works with customers to design, develop and manufacture each
product to specification. In addition, we advertise in trade journals and
related media to attract customers and, more generally, to increase an awareness
of our capabilities for Technical Products.
Other
Other consists primarily of certain manufacturing operations in Mexico
City, corporate expenses not allocated to the other business segments and
restructuring, impairment and other charges (credits).
4
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 products and low freight costs through
optimal plant location. Plant locations are critical in this regionalized
business where the transportation cost typically comprises a significant portion
of product cost.
Carpet Cushion Products sells carpet padding to distributors and to major
home product and floor covering retail chains.
Our Automotive Products customer base includes all of the major Tier 1
interior system integrators. We compete for new business both at the beginning
of development of new models and upon the redesign of existing models. Once a
foam producer has been designated to supply parts for a new model program, the
foam producer usually produces parts for the life of the program. Competitive
factors in the market include product quality and reliability, cost and timely
service, technical expertise and development capability, new product innovation
and customer service.
We market our Technical Products through a network of independent
fabrication and distribution companies in North America, the United Kingdom and
Asia. These fabricators or distributors often further process or finish
Technical Products to meet the specific needs of end users. Our specialty and
technical foams service unique end user requirements and are generally sold at
relatively high margins. This business is characterized by a diversity and
complexity of both customers and applications.
International Operations
Our international operations are located in Canada, Mexico and Asia. We
operate four manufacturing facilities in Canada to service our bedding and
automotive customers and have six facilities in Mexico serving the automotive
and cushioning industries. Five of the Mexican facilities are located within the
Mexican free trade zones close to the U.S. border and primarily service
automotive customers. Our Mexico City facility services both automotive and foam
fabrication customers.
We participate in a joint venture with fabrication facilities in
Singapore and Thailand. In December 2001, we increased our non-controlling
equity interest in the joint venture to 70%. The joint venture expects to
install its first foam pourline during 2003. This pourline, which will be
entirely financed by the joint venture entity, will reduce foam shipping costs
for sales to the region and increase the range of markets served.
We have maintained a longstanding relationship with Recticel s.a.
("Recticel"), a leading manufacturer of flexible polyurethane foam in Europe. We
have in the past exchanged technical information and expertise relating to foam
manufacturing with Recticel.
Major Customers
Sales to Johnson Controls, which are included in Automotive Products,
accounted for approximately 17.3% of our net sales in 2002, 15.7% of our net
sales in 2001, and 12.3% of our net sales in 2000. 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 33.8% of our net
sales in 2002, 35.0% of our net sales in 2001 and 29.7% of our net sales in
2000. The loss of any one of these customers could have a material adverse
effect on our business.
5
Manufacturing and Raw Materials
Our manufacturing and distribution facilities are strategically located
to service our major customers because the high freight cost in relation to the
cost of the foam product generally results in distribution being most
cost-effective within a 200 to 300 mile radius. During 2002, we closed certain
rebond carpet padding operations, foam pouring operations, and a foam
fabrication operation. We have identified additional operations to be closed
during 2003. In many cases, the volume from these closed operations will be
absorbed by our existing facilities in order to improve capacity utilization. In
some but not all instances, our other existing facilities will have to be
upgraded to absorb the transferred volume. We may lose some revenue due to
closing these operations.
Our fabrication process involves cutting foam buns into various shapes
and sizes to meet customer specifications. Fabricated foam is sold to customers
and is utilized by us to produce our foam-based consumer products. Scrap foam, a
byproduct of foam production and fabrication, is used to produce rebond carpet
padding.
Raw materials account for a significant portion of our manufacturing
costs. The two principal chemicals used in the manufacture of flexible
polyurethane foam are toluene diisocyanate, or "TDI," and polyol. We generally
have alternative suppliers for each major raw material. We believe that we could
find alternative sources of supply should we cease doing business with any one
of our major suppliers, although there may be some delay in replacing a major
supplier, especially a supplier of TDI and/or polyol. There are a limited number
of major suppliers of TDI and polyol. Our principal supplier of TDI and polyol
is The Dow Chemical Company. Although we have not experienced a significant
shortage of available materials, a disruption in our ability to obtain TDI
and/or polyol that continues for a significant period of time could cause us to
suspend our manufacturing operations, which could have a material adverse effect
on our business and results of operations.
The prices of TDI and polyol have historically been cyclical and
volatile. The prices of these raw materials are influenced by demand,
manufacturing capacity, oil prices and the current geopolitical instability and
its impact on oil production and prices. We experienced 32.0% to 37.0% increases
in the price of raw materials from major chemical manufacturers during the
fiscal year ended December 29, 2002. Our major chemical suppliers have announced
their intention to increase prices by approximately 10.0% to 12.0% effective
April 1, 2003. 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 fiscal year ended December 29, 2002. In the
future, we may not be successful in implementing selling price increases to
fully recover raw material cost increases. Competitive pricing pressure may also
require us to adjust our selling prices or lose volume.
A key material needed in the manufacture of rebond carpet padding is
scrap foam. We internally generate a substantial portion of the scrap foam used
in the production of rebond carpet padding from our other operations.
Historically, the market price of rebond carpet padding has fluctuated with the
market price of scrap foam.
Employees
As of December 29, 2002, we employed approximately 5,800 persons.
Approximately 1,700 of these employees are located outside the United States and
approximately 2,200 employees are covered by collective bargaining agreements
with labor unions. These agreements expire on various dates through 2004. 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, Hickory Springs
Manufacturing Company, Vitafoam, Inc., Flexible Foam Products, Inc., Future
Foam, Inc. and The Woodbridge Group. None of these competitors individually
competes in all of the business segments in which we do business.
6
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 on patent protection or that our operations are dependent
upon any individual patent, trademark or tradename.
Research and Development
We believe we have a leading research and development capability in the
flexible polyurethane foam industry. Our primary research and development
facility is located in Eddystone, Pennsylvania. Expenditures for research and
development amounted to $4.8 million for 2002, $3.1 million for 2001 and $2.5
million for 2000.
Foamex L.P., Recticel, and Beamech Group Limited, an unaffiliated third
party, have an interest in Prefoam AG, a Swiss corporation that develops new
manufacturing technology for the production of polyurethane foam including the
VPFSM manufacturing process. Recticel and affiliates of Recticel are
shareholders of Foamex International. Foamex L.P., Recticel and their affiliates
have a royalty-free license to use technology developed by the Swiss
corporation. We and Recticel have exchanged know-how, trade secrets, engineering
and other data, designs, specifications, chemical formulations, technical
information, market information and drawings which are necessary or useful for
the manufacture, use or sale of foam products. We anticipate that we will
continue to do so in the future.
Risk Factors
In addition to the other information in this Annual Report on Form 10-K,
investors should carefully consider the following factors about us. Certain
statements in "Risk Factors" are forward-looking statements. See
"Forward-Looking Information."
Our substantial debt could impair our financial condition.
We continue to be highly leveraged and have substantial debt service
obligations. As of December 29, 2002, our total debt was approximately $738.6
million and our shareholders' deficiency was approximately $189.7 million. As of
December 29, 2002, we had approximately $27.6 million in revolving loan
availability and approximately $20.6 million in outstanding letters of credit.
We may also incur additional debt in the future, subject to certain limitations
contained in our debt instruments.
The degree to which we are leveraged could have important consequences.
For example:
o our ability to obtain additional financing in the future for working
capital, capital expenditures, acquisitions, general corporate
purposes or other purposes may be limited;
o a significant portion of our cash flow from operations must be
dedicated to the payment of interest and, beginning in 2004, principal
on our debt, which reduces the funds available for operations;
o some of our debt is and will continue to be at variable rates of
interest, which may result in higher interest expense in the event of
increases in interest rates or inability to achieve certain financial
conditions;
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;
and
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o On February 26, 2003, Standard and Poor's Rating Services ("S&P")
announced that it had lowered its corporate credit rating on Foamex
L.P. from "B+" to "B". In their announcement, S&P cited their view
that our weak operating performance, higher raw material costs, and a
sluggish domestic economy, which if not reversed will likely elevate
near-term liquidity concerns. The S&P action could have a negative
impact on the cost of our future borrowings, if any, and the extension
of trade credit.
We and our bank lenders executed an amendment to the Amended Credit Facility on
November 15, 2002 revising our financial covenants. If we are unable to comply
with our revised financial covenants, our bank lenders could cause all amounts
outstanding under the Amended Credit Facility to be due and payable immediately.
On November 15, 2002, Foamex L.P. and the bank lenders executed an
amendment to the Amended Credit Facility, which, among other things, revised the
financial covenants. In addition, borrowings under the Amended Credit Facility
are subject to a borrowing base calculation, which could limit borrowings under
the revolving credit facility to less than the maximum commitment. Also, Foamex
L.P. is subject to other financial covenants through December 28, 2003. A
minimum EBDAIT, as defined, covenant is tested monthly, on a cumulative basis,
beginning with December 2002. Foamex L.P.'s minimum EBDAIT covenants have higher
thresholds in the second half of 2003. Foamex L.P.'s ability to comply with this
covenant will be substantially dependent on an improved gross profit margin and
lower administrative costs compared to the latter part of 2002. If we are unable
to comply with the revised financial covenants, the bank lenders could cause all
amounts outstanding under the Amended Credit Facility 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.
If we breach any of the financial covenants under our various indentures, credit
facilities or guarantees, our debt service obligations could be accelerated.
If we breach any of the financial covenants under our various indentures,
credit facilities or guarantees, our substantial debt service obligations could
be accelerated. Furthermore, any breach of any of the financial covenants under
our subsidiaries' indentures or credit facilities could result in the
acceleration of all the indebtedness of our subsidiaries. In the event of any
such simultaneous acceleration, we would not be able to repay all of the
indebtedness under our various guarantees or under our subsidiaries' indentures,
guarantees or credit facilities.
We may not be able to generate sufficient cash flow to meet our debt service
obligations.
Our ability to generate sufficient cash flow from operations to make
scheduled payments on our debt service obligations will depend on our future
financial performance, which will be affected by a range of economic,
competitive and business factors, many of which are outside of our control. Our
annual debt service obligations will increase by $2.2 million per year for each
1% increase in interest rates, based on the balance of variable rate debt
outstanding as of December 29, 2002. Our estimated debt service obligation for
2003 is $69.7 million, based on levels of debt and interest rates in effect at
December 29, 2002. If we do not generate sufficient cash flow from operations to
satisfy our debt service obligations, we may have to undertake alternative
financing plans, such as refinancing or restructuring our debt, selling assets,
reducing or delaying capital investments or seeking to raise additional capital.
We may not be able to refinance or restructure our debt or sell assets on a
timely basis, on acceptable terms or at all. Furthermore, the proceeds of any
refinancing, restructuring or asset sale may not generate sufficient cash flow
to meet our debt service obligations. In addition, we may not be able to obtain
additional financing on acceptable terms, if at all, or may not be permitted to
obtain additional financing under the terms of our various debt instruments then
in effect. Our inability to generate sufficient cash flow to satisfy our debt
service obligations, or to refinance our obligations on commercially reasonable
terms, would have a material adverse effect on our business, financial condition
and results of operations.
We may incur more debt, which could exacerbate the risks described above.
We and our subsidiaries may be able to incur substantial additional
indebtedness in the future. The Amended Credit Facility and the indentures
relating to Foamex L.P.'s 10 3/4% senior secured notes, 9 7/8% senior
subordinated
8
notes due 2007 and 13 1/2% senior subordinated notes due 2005 restrict Foamex
L.P. and its subsidiaries in incurring additional indebtedness, but do not fully
prohibit Foamex L.P. and its subsidiaries from doing so. If new debt is added to
our and our subsidiaries' current debt levels, the related risks, including
those described above, that we and they now face could intensify, which could
have a material adverse effect on us.
The price and availability of raw materials account for a significant portion of
our manufacturing costs. We have experienced significant increases in raw
material costs and may continue to do so.
The two principal chemicals used in the manufacture of flexible
polyurethane foam are toluene diisocyanate, or "TDI," and polyol. The prices of
TDI and polyol are influenced by demand, manufacturing capacity and oil and
natural gas prices. Historically, the price of raw materials has been cyclical
and volatile, and our principal suppliers of raw materials used in the
manufacture of flexible polyurethane foam have significantly increased the price
of raw materials several times.
We experienced 32.0% to 37.0% increases in the price of raw materials
from major chemical manufacturers during the fiscal year ended December 29,
2002. Our major chemical suppliers have announced their intention to increase
prices by approximately 10.0% to 12.0% effective April 1, 2003. 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 fiscal year ended December 29, 2002. Our suppliers of TDI and polyol, as
well as our other suppliers, may increase raw material prices in the future and
we may not be able to implement additional selling price increases to fully
offset raw material cost increases. This could have a material adverse effect on
our business, financial condition and results of operations.
We depend on a limited number of suppliers of TDI and polyol.
There are a limited number of major suppliers of TDI and polyol. Our
principal supplier of TDI and polyol is The Dow Chemical Company. Although we
have not experienced a significant shortage of available materials, a disruption
in our ability to obtain TDI and/or polyol that continues for a significant
period of time could cause us to suspend our manufacturing operations, which
could have a material adverse effect on our business and results of operations.
We must effectively manage our other operating expenses.
In addition to our ability to effectively increase selling prices in
response to raw material cost increases, we must manage and control our other
operating expenses. We experienced an increase in other operating expenses, and
selling, general and administrative expenses in 2002. If we are unable to
achieve reductions in other operating expenses and in our selling, general and
administrative expenses, this could have a material adverse effect on our
business, financial condition and results of operations.
We rely on a few large customers for a significant portion of our net sales.
A few of our customers are material to our business and operations. Sales
to our five largest customers together accounted for approximately 33.8% of our
net sales in 2002, 35.0% of our net sales in 2001 and 29.7% of our net sales in
2000. Sales to Johnson Controls, our largest customer, accounted for 17.3% of
our net sales in 2002, 15.7% of our net sales in 2001 and 12.3% of our net sales
in 2000. Johnson Controls has informed us that it intends to reduce its
purchases of certain products from us in 2003, in an effort to diversify its
supply base, which may result in up to a $70.0 million reduction in our net
sales to them. 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.
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
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or emission of materials into the environment and the remediation of
environmental contamination. We are currently remediating soil and groundwater
contamination in excess of state standards at several of our current and former
facilities. Further, we are currently designated a Potentially Responsible
Party, or "PRP," by the United States Environmental Protection Agency, or "EPA",
or by state environmental agencies or by other PRPs relating to eight 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.
Forward-Looking Information
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements so long as those statements are
identified as forward-looking and are accompanied by meaningful cautionary
statements identifying important factors that could cause actual results to
differ materially from those projected in such statements. In connection with
certain forward-looking statements contained in this Annual Report on Form 10-K
and those that may be made in the future by or on behalf of us which are
identified as forward-looking, we note that there are various factors that could
cause actual results to differ materially from those set forth in any such
forward-looking statements, such as the ability to implement customer selling
price increases in response to higher raw material costs, raw material price
increases, general economic conditions, the interest rate environment, the level
of automotive production, carpet production, furniture and bedding production,
and housing starts, the completion of various restructuring/consolidation plans,
the achievement of management's business plans, our capital and debt structure
(including various financial covenants), litigation and changes in environmental
legislation and environmental conditions. The forward-looking statements
contained in this Annual Report on Form 10-K were prepared by management and are
qualified by, and subject to, significant business, economic, competitive,
regulatory and other uncertainties and contingencies, all of which are difficult
or impossible to predict and many of which are beyond our control.
Accordingly, there can be no assurance that the forward-looking
statements contained in this Annual Report on Form 10-K will be realized or that
actual results will not be significantly higher or lower. The forward-looking
statements have not been audited by, examined by, compiled by or subjected to
agreed-upon procedures by independent accountants, and no third party has
independently verified or reviewed such statements. Readers of this Annual
Report on Form 10-K should consider these facts in evaluating the information
contained herein. In addition, our business and operations are subject to
substantial risks which increase the uncertainty inherent in the forward-looking
statements contained in this Annual Report on Form 10-K. The inclusion of the
forward-looking statements contained in this Annual Report on Form 10-K should
not be regarded as a representation by us or any other person that any of the
forward-looking statements contained in this Annual Report on Form 10-K will be
achieved. In light of the foregoing, readers of this Annual Report on Form 10-K
are cautioned not to place undue reliance on the forward-looking statements
contained herein.
ITEM 2. PROPERTIES
As of December 29, 2002, we maintained 62 manufacturing and distribution
facilities, including six facilities that will be closed as part of
restructuring plans during 2003. Total floor space in use at our 18 owned
manufacturing and distribution facilities is approximately 3.5 million square
feet and total floor space in use at our 44 leased manufacturing and
distribution facilities is approximately 5.2 million square feet. Fifty-two of
these
10
facilities are located throughout 38 cities in the United States, four
facilities are located in Canada, and six facilities are located in Mexico. We
do not anticipate any problem in renewing or replacing any of the leases
expiring in 2003. In addition, we have approximately 1.4 million square feet of
idle space of which approximately 0.9 million is leased.
We maintain administrative offices in Linwood, Pennsylvania and New York,
New York.
Property information by business segment is not reported because many of
our facilities produce products for multiple business segments.
ITEM 3. LEGAL PROCEEDINGS
Litigation--Breast Implants
As of March 11, 2003, Foamex L.P. and Trace International Holdings, Inc.
("Trace") were two of multiple defendants in 961 actions filed on behalf of
approximately 1,087 recipients of breast implants in various United States
courts and one Canadian provincial court, some of which allege substantial
damages, but most of which allege unspecified damages for personal injuries of
various types. Three of these cases seek to allege claims on behalf of all
breast implant recipients or other allegedly affected parties, but no class has
been approved or certified by the courts. During 1995, we, Foamex L.P. and Trace
were granted summary judgments and dismissed as defendants from all cases in the
federal courts of the United States and the state courts of California. Appeals
for these decisions were withdrawn and the decisions are final. The number of
pending cases has steadily declined over the last several years from a peak of
3,486 cases on behalf of approximately 5,766 individuals. Despite the 1995
Summary Judgment, some cases have been filed against Foamex L.P. and Trace in
federal courts. These have been dismissed and, in many cases, the actions were
re-filed in state courts. No cases relating to breast implants are pending
against Foamex L.P. or Trace in federal courts at this time. None of Foamex
L.P., we, or Trace nor any of our carriers has paid to settle any claims
relating to breast implants, and no judgment has ever been entered against
Foamex L.P., Trace, or us or any of our carriers in respect of these matters.
Although breast implants do not contain foam, certain silicone gel
implants were produced using a polyurethane foam covering fabricated by
independent distributors or fabricators from bulk foam purchased from us or from
Trace. Neither we nor Trace recommended, authorized, or approved the use of foam
for these purposes. We are also indemnified by Trace for any such liabilities
relating to foam manufactured prior to October 1990. Trace's insurance carrier
has continued to pay our litigation expenses after Trace's filing of a petition
for relief under the Bankruptcy Code on July 21, 1999. Trace's insurance
policies continue to cover certain liabilities of Trace, but if the limits of
those policies are exhausted, it is unlikely that Trace will be able to continue
to provide additional indemnification. While it is not feasible to predict or
determine the outcome of these actions, based on management's present assessment
of the merits of pending claims, without taking into account the indemnification
provided by Trace, the coverage provided by Trace's and our liability insurance
and potential indemnity from the manufacturers of polyurethane covered breast
implants, management believes that it is not reasonably possible that the
disposition of the matters that are pending or that may reasonably be
anticipated to be asserted will result in a loss that is material to our
consolidated financial position, results of operations or cash flows. If
management's assessment of our liability relating to these actions is incorrect,
these actions could have a material adverse effect on our financial position,
results of operations and cash flows.
Litigation--Other
During the second quarter of 2001, we were notified by an insurance
provider concerning a dispute involving the reimbursement of liability claims
paid on behalf of Trace. The insurance provider is contending that we are liable
for claims of approximately $6.1 million. We intend to strongly defend this
claim and consider the claim to be without merit. If management's assessment of
our liability relating to this action is incorrect, this action could have a
material adverse effect on our financial position, results of operations and
cash flows.
We and our subsidiaries are party to various other 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,
11
individually or in the aggregate, have a material adverse effect on our
financial position or results of operations. If management's assessment of the
liability relating to these actions is incorrect, these actions could have a
material adverse effect on our consolidated financial position, results of
operations and cash flows. As of December 29, 2002, we have accrued
approximately $0.7 million for litigation and other legal matters in addition to
the environmental matters discussed below.
Environmental and Health and Safety
We are subject to extensive and changing federal, state, local and
foreign environmental laws and regulations, including those relating to the use,
handling, storage, discharge and disposal of hazardous substances, the discharge
or emission of materials into the environment, and the remediation of
environmental contamination, and as a result, are from time to time involved in
administrative and judicial proceedings and inquiries relating to environmental
matters. As of December 29, 2002, we had accruals of approximately $2.7 million
for environmental matters, including approximately $2.3 million related to
remediating and monitoring soil and groundwater contamination and approximately
$0.4 million relating to PRP sites and other matters.
On August 8, 2001, the EPA proposed a National Emission Standard for
Hazardous Air Pollutants, or "NESHAP", for Flexible Polyurethane Foam
Fabrication Operations. The proposed NESHAP regulates emissions of methylene
chloride and other Hazardous Air Pollutants and restricts air emissions from
flame lamination sources. We do not believe that this standard, if adopted, will
require us to make material expenditures.
On August 31, 2002, Environment Canada, the Canadian environmental
regulatory agency, proposed a rule which would require flexible polyurethane
foam manufacturing operations to reduce methylene chloride (dichloromethane) air
emissions. The proposed rule establishes a 50.0% reduction in methylene chloride
emissions by December 1, 2003 and 100.0% reductions by January 1, 2007. We do
not believe that this standard, if adopted, 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. During 2000, we reached an
indemnification agreement with the former owner of the Morristown, Tennessee
facility. The agreement allocates the incurred and future remediation costs
between the former owner and us. The estimated allocation of future costs for
the remediation of this facility is not significant, based on current known
information. The former owner was Recticel Foam Corporation, a subsidiary of
Recticel.
We have either upgraded or closed all underground storage tanks at our
facilities in accordance with applicable regulations.
The Comprehensive Environmental Response, Compensation and Liability Act,
or "CERCLA," and comparable state laws impose liability without fault for the
costs of cleaning up contaminated sites on certain classes of persons that
contributed to the release of hazardous substances into the environment at those
sites, for example, by generating wastes containing hazardous substances which
were disposed at such sites. We are currently designated as a PRP by the EPA or
by state environmental agencies or other PRPs, pursuant to CERCLA or analogous
state statutes, with respect to eight 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 or financial
position.
In 2003, capital expenditures for safety and environmental compliance
projects are anticipated to be approximately $1.5 million. 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
12
environmental contamination, may be found to exist or a reassessment of the
potential exposure to pending environmental matters may be necessary due to new
information or future developments, that may require expenditures not currently
anticipated and that may be material.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Our common stock is traded through the National Association of Securities
Dealers, Inc. National Market System (the "NASDAQ") under the symbol "FMXI".
The following table sets forth the high and low bid prices for the common
stock.
High Low
---- ---
2002
Quarter Ended March 31 $10.43 $ 7.75
Quarter Ended June 30 $11.55 $ 7.75
Quarter Ended September 29 $11.11 $ 4.66
Quarter Ended December 29 $ 5.76 $ 1.12
2001
Quarter Ended March 31 $ 5.94 $4.50
Quarter Ended June 30 $ 7.83 $4.50
Quarter Ended September 30 $ 8.12 $5.90
Quarter Ended December 31 $ 8.46 $6.00
As of December 29, 2002, there were 131 holders of record of the common
stock.
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.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table presents selected historical consolidated financial
data. The financial data should be read in conjunction with the financial
statements and related notes thereto included in this Annual Report on Form
10-K.
13
Fiscal Year (1)
--------------------------------------------------------------------------------
2002 2001 (2) 2000 1999 1998
-------------- ------------ ------------ --------------- -------------
(thousands, except for earnings per share)
Statements of Operations Data
Net sales $ 1,328,094 $ 1,252,904 $ 1,257,778 $ 1,294,639 $ 1,260,559
Income (loss) from continuing
operations (3)(4)(5) $ 62,741 $ (5,612) $ 17,013 $ 19,716 $ (69,853)
Basic earnings (loss) per share from
continuing operations $ 2.58 $ (0.24) $ 0.69 $ 0.79 $ (2.79)
Diluted earnings (loss) per share from
continuing operations $ 2.39 $ (0.24) $ 0.67 $ 0.78 $ (2.79)
Balance Sheet Data
Total assets $ 813,577 $ 766,962 $ 751,581 $ 781,313 $ 874,965
Long-term debt, classified as current (6) - - - - $ 771,092
Long-term debt, excluding current portion $ 738,540 $ 648,232 $ 687,758 $ 725,297 $ 8,240
Stockholders' deficiency $ (189,733) $ (180,746) $ (164,669) $ (166,381) $ (204,119)
Dividends paid - - - - $ 1,245
(1) We changed to a fiscal year from a calendar year during 2002. We have a 52
or 53-week fiscal year ending on the Sunday closest to the end of the
calendar year. The 2002 fiscal year included the 52 weeks ended December
29, 2002 after adjustment for December 31, 2001 which was included in the
prior year.
(2) Includes the results of operations of General Foam Corporation from July
25, 2001, the date the business was acquired.
(3) Includes net restructuring, impairment and other charges (credits), as
discussed in Note 6 to the consolidated financial statements included in
this Annual Report on Form 10-K. Listed below are the pre-tax charges
(credits).
2002 - $ 4.8 million
2001 - $ 36.1 million
2000 - $ 6.3 million
1999 - $ 10.5 million
1998 - $ (9.7)million
(4) The provision for income taxes in 2000 and 1999 reflected the partial
reversal of the deferred income tax valuation allowance recognized in 1998.
The 1998 provision for income taxes of $58.2 million for continuing
operations consisted primarily of an increase in the valuation allowance
for deferred income tax assets.
(5) During 2002, we determined that it was more likely than not that our net
deferred tax assets would be realized in the future. Accordingly, we
reversed a previously recorded valuation allowance which increased income
from continuing operations by $75.8 million.
(6) At December 31, 1998, we classified approximately $771.1 million of
long-term debt as current, in response to financial conditions at year-end
1998.
14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Forward Looking Statements
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements so long as those statements are
identified as forward-looking and are accompanied by meaningful cautionary
statements identifying important factors that could cause actual results to
differ materially from those projected in such statements. In connection with
certain forward-looking statements contained in this Annual Report on Form 10-K
and those that may be made in the future by or on behalf of us which are
identified as forward-looking, we note that there are various factors that could
cause actual results to differ materially from those set forth in any such
forward-looking statements, such as the ability to implement customer selling
price increases in response to higher raw material costs, raw material price
increases, general economic conditions, the interest rate environment, the level
of automotive production, carpet production, furniture and bedding production,
and housing starts, the completion of various restructuring/consolidation plans,
the achievement of management's business plans, our capital and debt structure
(including various financial covenants), litigation and changes in environmental
legislation and environmental conditions. The forward-looking statements
contained in this Annual Report on Form 10-K were prepared by management and are
qualified by, and subject to, significant business, economic, competitive,
regulatory and other uncertainties and contingencies, all of which are difficult
or impossible to predict and many of which are beyond our control.
Accordingly, there can be no assurance that the forward-looking
statements contained in this Annual Report on Form 10-K will be realized or that
actual results will not be significantly higher or lower. The forward-looking
statements have not been audited by, examined by, compiled by or subjected to
agreed-upon procedures by independent accountants, and no third party has
independently verified or reviewed such statements. Readers of this Annual
Report on Form 10-K should consider these facts in evaluating the information
contained herein. In addition, our business and operations are subject to
substantial risks which increase the uncertainty inherent in the forward-looking
statements contained in this Annual Report on Form 10-K. The inclusion of the
forward-looking statements contained in this Annual Report on Form 10-K should
not be regarded as a representation by us or any other person that any of the
forward-looking statements contained in this Annual Report on Form 10-K will be
achieved. In light of the foregoing, readers of this Annual Report on Form 10-K
are cautioned not to place undue reliance on the forward-looking statements
contained herein.
Overview
We operate in the flexible polyurethane and advanced polymer foam
products industry. As of December 29, 2002, our operations were principally
conducted through our wholly-owned subsidiary, Foamex L.P. Business segments are
listed below and business segment financial information is included in Note 14
to the consolidated financial statements.
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. We do not allocate restructuring,
impairment and other charges to operating segments because many of our
facilities produce products for multiple segments.
Foam Products - manufactures and markets cushioning foams for bedding,
furniture, packaging and health care applications, and foam-based
consumer products, such as mattress pads and children's furniture.
Carpet Cushion Products - manufactures and distributes rebond, prime,
felt and rubber carpet padding.
Automotive Products - distributes automotive foam products and
laminates to major Tier 1 suppliers and original equipment
manufacturers, or "OEMs".
15
Technical Products - manufactures and markets reticulated and other
specialty foams used for reservoiring, filtration, gasketing and
sealing applications.
Other - primarily consists of certain manufacturing operations in
Mexico City, corporate expenses not allocated to the other business
segments and restructuring, impairment and other charges (credits).
Our sales are primarily to markets in the United States. These sales are
impacted by economic conditions in several sectors of the United States economy,
including consumer spending, sales of new and existing homes, the overall level
of passenger car and light truck production and seasonality. We typically
experience two seasonally slow periods during each year, in early July and in
late December, due to scheduled plant shutdowns and holidays.
A small number of major customers produce a significant portion of our
sales. In 2002, our largest customer provided 17.3% of our net sales and our
five largest customers provided 33.8% 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.
There are a limited number of suppliers of TDI and polyol, the major
chemicals used in the production of foam. Our principal supplier of these
chemicals has historically been The Dow Chemical Company. While we have not
experienced shortages of raw materials, a disruption in our ability to obtain
these chemicals would have a material adverse effect on our business.
TDI and polyol are oil-based chemicals and, as such, the prices of these
chemicals are significantly influenced by crude oil production and prices and by
world political instability, particularly in the Middle East. The conflict in
that part of the world could significantly impact the price of these raw
materials.
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.
Overview of 2002
Operations
We had income from operations of $45.7 million in the six months ended
June 30, 2002 and a loss from operations of $3.8 million in the six months ended
December 29, 2002. Contributing factors to this significant negative turnaround
in operating results included the following:
o Significant increases in raw material prices from major chemical
manufacturers reduced our gross profit margin from 12.7% in the first half
of 2002 to 8.7% in the second half of 2002. We experienced 20.0% to 25.0%
increases in raw material prices beginning in June 2002 and further 10%
increases beginning in November 2002. The two price increases raised raw
material costs by 32.0% to 37.0% by the end of 2002. We achieved only
limited success in raising selling prices to offset these cost increases
during 2002.
o Selling, general and administrative expenses were $39.5 million in the
first half of 2002 and $55.2 million in the second half of 2002. This
increase was partially attributable to organizational and proposed public
offering costs of $3.6 million related to the formation of Symphonex Inc.,
a proposed new subsidiary which would have included our Technical Products
segment and other related activities, and $1.3 million of costs associated
with the proposed sale of our Carpet Cushion Products segment. The public
offering of Symphonex Inc. has been deferred indefinitely and the proposed
sale of the Carpet Cushion Products segment has been terminated. In
addition, in the second half of 2002 we experienced an increase in
professional fees, primarily due to information technology consulting and
accounting fees and an increase in bad debt expense, primarily due to one
large write off of the balance due from a customer that ceased operations.
16
o Restructuring, impairment and other charges increased $6.3 million in the
second half of the year compared to the first six months.
Our results for 2003 will be principally dependent on our success in
maintaining and increasing margins through selling price increases and cost
efficiencies to offset past and future raw material cost increases. We
implemented significant price increases in late 2002, but further selling price
increases are needed to increase gross profit margins to acceptable levels. We
are developing alternative sources of supply for raw materials in an effort to
stabilize and reduce raw material costs. We also expect the reorganization of
our facilities, operations and management to result in savings of approximately
$8.0 to $10.0 million on an annualized basis, in addition to the anticipated
annualized savings of approximately $25.0 to $27.0 million from the business
reorganization that began in the fourth quarter of 2001.
There were a number of unusual items that impacted 2002. Accounting
changes as a result of the adoption of Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets" and Statement of
Financial Accounting Standards No. 141, "Business Combinations" produced a net
charge to income of $70.6 million. We had net extraordinary charges as a result
of the early extinguishment of debt in the amount of $1.8 million. In addition,
we reversed the valuation allowance for deferred tax assets, as we believe that
it is more likely than not that such assets will be realized, resulting in the
recognition of a $77.4 million tax benefit in the consolidated statement of
operations.
Financing
On March 25, 2002, Foamex L.P. completed a refinancing of a major portion
of its debt structure. The refinancing included the issuance of $300.0 million
of 10 3/4% Senior Secured Notes due April 1, 2009 and amendment of the Foamex
L.P. credit facility ("Amended Credit Facility") to provide for term loans with
maturity dates of June 30, 2005 through December 29, 2006, and a $100.0 million
revolving credit facility that matures on June 30, 2005. Net proceeds were used
to pay a portion of debt outstanding under the credit facility and the proceeds
from a new term loan under the Amended Credit Facility was used to repay debt
due to a related party. Additionally, the financial debt covenants contained in
the Amended Credit Facility were adjusted to reflect changes in the capital
structure and business environment. Subsequently, Foamex L.P. purchased and
retired $49.0 million of the 13 1/2% senior subordinated notes, including
unamortized debt premium of $2.5 million, and $1.5 million of the 9 7/8% senior
subordinated notes.
On November 15, 2002, Foamex L.P. and its bank lenders executed an
amendment to the Amended Credit Facility. Foamex L.P. would have been unable to
comply with certain financial covenants as of September 29, 2002. Under the
amendment, compliance with certain existing covenants was suspended through
September 28, 2003 with the covenants revised and reinstated thereafter.
Instead, Foamex L.P. is subject to other financial covenants through December
28, 2003 and was in compliance with such covenants at December 29, 2002. A
minimum EBDAIT, as defined, covenant is tested monthly, on a cumulative basis
beginning with December 2002, in addition to revised minimum net worth, as
defined, and maximum capital expenditures, as defined, covenants, measured
quarterly. Our ability to comply with the EBDAIT covenant will be substantially
dependent on the achievement of an improved gross profit margin and reduction of
administrative costs compared to the last six months of 2002. Additionally,
Foamex L.P. is subject to a borrowing base calculation that may limit its
ability to borrow funds in the future.
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
We record net sales when product title and risk of loss passes to the
customer, which is primarily at the time of shipment. 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.
Account Receivable and Allowance for Uncollectible Accounts
We actively monitor customer payments in conjunction with customer credit
evaluations. Accordingly, an estimate of uncollectible accounts is maintained
and is based on historical collection experience and specific customer
collection issues. A significant change in the financial condition of one or
more of our larger customers could have a material adverse impact on future
financial results.
Long-Lived Assets
We have a significant investment in long-lived assets consisting
primarily of property, plant and equipment. Impairment losses are recognized
when events indicate that certain long-lived assets may be impaired and a
projection of future undiscounted cash flows generated from the assets are less
than the current carrying value of the assets. These cash flow projections are
based on the combination of historical results adjusted for estimated future
market conditions and operating plans. To the extent that these estimates
change, impairment losses could have a material adverse impact on future
financial results.
Deferred Income Taxes
We have a significant amount of Federal net operating loss carryforwards
that can reduce the Federal tax payments required on taxable income generated in
the future. These Federal net operating loss carryforwards are recognized as a
deferred tax asset and the realization of the related asset must be continually
evaluated. In this evaluation, we are required to evaluate existing tax
attributes, projections of future taxable income and tax planning strategies
available to determine the probability that the Federal net operating loss
carryforwards will be utilized in the future. We have determined that it is more
likely than not that all of the Federal net operating losses will be utilized in
future years and have reversed in 2002 a previously provided valuation
allowance. As a result, our effective tax rate has increased following the
reversal. We must continually evaluate the realizability of our deferred tax
assets and it is possible that some or all of the valuation allowance will be
reinstated in future years.
Self Insurance
We are partially self-insured for a number of risks up to certain limits
including workers compensation, medical, automobile and general liability.
Commercial insurance policies are carried for amounts in excess of the
self-insured amounts. Management exercises significant judgment in estimating
the ultimate liability for claims.
Retiree Benefit Plans
We provide defined benefit pension plans that cover most of our
employees. Projected benefit obligations, pension expense and amounts included
in other comprehensive income are impacted by a number of assumptions. These
assumptions include the discount rate on projected benefit obligations, and the
expected long-term rate of return on plan assets. The discount rate on projected
benefit obligations enables us to state expected future cash flows at a present
value on the measurement date. We have little latitude in selecting this rate,
as it is required to represent the market rate for high-quality fixed income
investments. A lower discount rate increases the present value of benefit
obligations and increases pension expense. The decrease in the discount rate on
projected benefit obligations from 7.0% to 6.5% is expected to increase pension
expense by $0.5 million. To determine the expected long-term rate of return on
pension plan assets, we consider the current and expected asset allocations, as
well as historical and expected returns on various categories of plan assets. We
assumed that long-term returns on our pension plans were 9.0% in 2002 and 2001
and 10.0% in 2000. Amortization of losses has been and continues to be a
significant component of pension expense and this amortization is expected to
increase by approximately $1.0 million in 2003. The losses have resulted from
actual returns that are significantly less than the expected return
18
assumption, particularly over the last three years, and funding levels that have
not been sufficient to offset the growth in benefit obligations. We expect
pension expense to increase by a total of approximately $2.0 million in 2003.
Claims and Litigation
We receive claims for damages that are outside of our insurance
coverages. Management evaluates these claims and records its estimate of
liabilities when such liabilities are considered probable and an amount or
reasonable range can be estimated.
Environmental Remediation
We have a number of manufacturing facilities and certain idle facilities
that require remediation of soil and/or groundwater contamination. As required
by applicable State and/or Federal compliance programs, many of these sites are
in the monitoring stage that requires periodic sampling of contamination levels
in conjunction with ongoing assessments of remediation actions. Accordingly, the
recognition of environmental liabilities requires estimates concerning the
duration of monitoring and associated costs, often projected to extend for a
number of years. To the extent that these estimates change, additional
environmental costs could have a material adverse impact on future financial
results. See the section below entitled "Environmental Health and Safety" for
additional information.
LIQUIDITY AND CAPITAL RESOURCES
Our operations are conducted through a wholly-owned subsidiary, Foamex
L.P. Our liquidity requirements consist primarily of the operating cash
requirements of Foamex L.P.
Foamex L.P.'s operating cash requirements consist principally of accounts
receivable, inventory and accounts payable requirements, scheduled payments of
interest 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 Foamex L.P.'s credit facility will be
adequate to meet liquidity requirements. Scheduled principal payments on Foamex
L.P.'s debt are not significant until the second half of 2004. If Foamex L.P.'s
cash flow is not adequate to meet liquidity requirements, there would be a
material adverse effect on our financial position as well as our ability to
continue as a going concern. 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 $4.5 million at December 29, 2002 compared
to $15.1 million at December 31, 2001. Working capital at December 29, 2002 was
$136.7 million and the current ratio was 1.7 to 1 compared to working capital at
December 31, 2001 of $65.0 million and a current ratio of 1.3 to 1. The increase
in working capital is primarily due to increases in accounts receivable,
inventories and deferred income taxes and decreases in current portion of
long-term debt and accounts payable, partially offset by decreases in other
current assets and increases in accrued interest and cash overdrafts.
Total debt at December 29, 2002 was $738.6 million, a $72.3 million
increase from December 31, 2001, including a deferred credit of $14.2 million
related to interest rate swap transactions. (See Note 9 to the consolidated
financial statements.) As of December 29, 2002, there were revolving credit
borrowings of $51.8 million under the Foamex L.P. credit facility with $27.6
million available for borrowings and $20.6 million of letters of credit
outstanding. Foamex Canada Inc. ("Foamex Canada") did not have any outstanding
borrowings as of December 29, 2002 under Foamex Canada's short-term revolving
credit agreement, with unused availability of approximately $5.1 million. The
increased debt balance reflects the issuance of $300.0 million of 10 3/4% Senior
Secured Notes due 2009 on March 25, 2002, offset by $280.0 million of debt
repayments from proceeds of the offering. Revolving credit borrowings at
December 29, 2002 reflect working capital requirements.
In 2002, Foamex L.P. purchased and retired $49.0 million of the 13 1/2%
senior subordinated notes, including unamortized debt premium of $2.5 million,
and $1.5 million of the 9 7/8% senior subordinated notes for a total purchase
price of $48.5 million.
19
On October 16, 2002, Foamex L.P. announced that it had obtained a waiver
of its financial covenants under the Amended Credit Facility for the period
ended September 29, 2002 since it would not have been in compliance with the
covenants. The waiver was effective until November 30, 2002 and reduced the
commitment under the revolving credit facility from $100.0 million to $70.0
million for the period the waiver was in effect. 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. is subject to minimum net worth, minimum
EBDAIT, as defined, and maximum capital expenditure covenants through periods
ending December 28, 2003. The minimum EBDAIT covenant is tested monthly on a
cumulative basis beginning with December 2002. Foamex L.P. was in compliance
with the revised covenants at December 29, 2002. In addition, Foamex L.P. was
subject to a minimum EBDAIT, as defined, covenant for the quarter ended
September 29, 2002 and was in compliance. Compliance with existing covenants on
leverage, fixed charge coverage and interest coverage ratios is suspended
through periods ending September 28, 2003, but the covenants are revised and
will be reinstated thereafter. All of the financial covenants were established
based on a business plan provided to the lenders. In addition, borrowings under
the Amended Credit Facility will be subject to a borrowing base calculation,
which could limit borrowings under the revolving credit facility to less than
the maximum commitment. As of February 23, 2003, the borrowing base calculation
does not limit borrowings under the Amended Credit Facility. The cost of
obtaining the amendment aggregated approximately $4.0 million, including bank
and legal fees.
On February 26, 2003, Standard and Poor's Rating Services ("S&P")
announced that it had lowered its corporate credit rating on Foamex L.P. from
"B+" to "B". In their announcement, S&P cited their view that our weak operating
performance, higher raw material costs, and a sluggish domestic economy, which
if not reversed will likely elevate near-term liquidity concerns. The S&P action
could have a negative impact on the cost of our future borrowings, if any, and
the extension of trade credit.
Foamex L.P.'s minimum EBDAIT covenants have higher thresholds in the
second half of 2003. Management's current plans to achieve EBDAIT covenants
require continued customer selling price management in response to raw material
cost changes, successful implementation of on-going cost savings initiatives,
plant closures, improved operating efficiencies, improved working capital
management and reduced capital expenditures. Management is also continuing to
evaluate strategic alternatives in an effort to reduce our debt. There can be no
assurance that we will be successful in achieving our plans or complying with
the amended covenants, as there are a number of factors beyond our control,
including raw material cost changes and customer acceptances of selling price
increases that are necessary for us to be successful. Additionally, compliance
with the financial covenants 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 financial 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, or not possible if required. 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 Amended
Credit Facility. 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.
During 2002, we purchased, pursuant to the terms of an existing
agreement, the 5% stock interest held by the director of Foamex de Mexico S.A.
de C.V. for a cash payment of $1.0 million. In addition, during 2002 we entered
into an employment agreement with one director and a consulting agreement with
another director. Payments under these agreements were to aggregate at least
$0.7 million and $0.2 million, respectively, on an annual basis. The employment
agreement with the director was terminated effective January 31, 2003.
Foamex L.P. was required to cause a registration statement under the
Securities Act of 1933 for its 10 3/4% Senior Secured Notes to be effective
within 180 days of March 25, 2002. Foamex L.P. filed the registration statement,
but it was not effective until January 30, 2003 and therefore Foamex L.P. is
liable for liquidated damages from September 23, 2002 until January 30, 2003.
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 until a maximum
of $150,000 per week
20
is reached. At December 29, 2002, Foamex L.P. has an accrual for liquidated
damages of $0.2 million. Effective May 1, 2002, Foamex L.P. completed a series
of interest rate swap transactions with notional amounts aggregating $300.0
million. Foamex L.P. designated, documented and accounted for these interest
rate swaps as fair value hedges of its 10 3/4% Senior Secured Notes due April 1,
2009. The risk being hedged in these transactions was the change in fair value
of the 10 3/4% Senior Secured Notes based on changes in the benchmark interest
rate, LIBOR. The effect of these interest rate swap transactions was to convert
the fixed interest rate on the 10 3/4% Senior Secured Notes to floating rates
reset twice per year to correspond with the interest payment dates for the 10
3/4% Senior Secured Notes. On September 18, 2002, Foamex L.P. unwound the
interest rate swap transactions in exchange for a net cash proceeds of $18.4
million, including $3.6 million realized through lower effective interest rates
while the swap transactions were in effect. The unwinding resulted in a deferred
credit of $14.8 million, which will be 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 2002 was $50.4 million compared to
cash provided of $106.4 million in 2001 reflecting significantly higher working
capital requirements principally relating to inventories and accounts payable.
Cash Flow from Investing Activities
Cash used for investing activities totaled $23.6 million for 2002. Cash
requirements included capital expenditures of $15.6 million. Other investing
activities include software development costs of $5.9 million in 2002. In 2001,
cash used for investing activities was $40.6 million, which included $22.5
million of capital expenditures and $17.6 million for an acquisition. Estimated
capital expenditures for 2003 are approximately $19.0 million including
approximately $1.5 million for safety and environmental activities. In addition,
we expect to spend approximately $6.8 million for internally developed software
in 2003, a portion of which may be capitalized.
Cash Flow from Financing Activities
Cash provided by financing activities was $63.4 million in 2002 compared
to cash used of $55.7 million in 2001. Foamex L.P. completed the offering of
$300.0 million of 10 3/4% Senior Secured Notes on March 25, 2002.Foamex L.P.
used $280.0 million of net proceeds from these notes and $56.6 million of new
term loans to repay revolving loans of $125.0 million, term loans of $140.0
million and long-term debt to a related party of $31.6 million. Foamex L.P. also
purchased and retired $49.0 million of the 13 1/2% senior subordinated notes,
including unamortized debt premium of $2.5 million and $1.5 million of the 9
7/8% senior subordinated notes. Cash used during 2001 primarily reflected debt
repayments.
Contractual Obligations and Commercial Commitments
At December 29, 2002, we had obligations to repay a total of $722.0
million of principal of long-term debt borrowed under a number of arrangements.
The amortization schedule for our long-term debt payments is included in Note 9
to the consolidated financial statements. At December 29, 2002, we had
outstanding letters of credit aggregating $20.6 million.
We also have commitments for operating leases as discussed in Note 17 to
the consolidated financial statements that require minimum payments totaling
$52.2 million, with $44.5 million due through December 31, 2007 and the balance
in later years. We have entered into contracts for information technology
services and certain raw materials that have minimum purchase commitments
estimated at $84.8 million in 2003, $98.0 million in 2004, $39.9 million in
2005, $39.4 million in 2006, $36.1 million in 2007 and $32.2 million for each of
the years 2008 to 2010.
21
RESULTS OF OPERATIONS
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 $ 23,896 $ (12,524) $ 25,346 $ 20,339 $ (15,175) $ 41,882
Depreciation and amortization $ 15,466 $ 6,469 $ 3,856 $ 2,982 $ 2,819 $ 31,592
Income (loss) from operations
as a percentage of net sales 5.1% (5.4)% 5.4% 16.4% n.m.(a) 3.2%
2001
Net sales $ 499,668 $ 230,965 $ 377,753 $ 111,043 $ 33,475 $1,252,904
Income (loss) from operations $ 66,312 $ (6,831) $ 21,187 $ 22,884 $ (40,079) $ 63,473
Depreciation and amortization $ 15,732 $ 8,181 $ 4,991 $ 3,312 $ 1,772 $ 33,988
Income (loss) from operations
as a percentage of net sales 13.3% (3.0)% 5.6% 20.6% n.m.(a) 5.1%
2000
Net sales $ 519,197 $ 256,439 $ 342,386 $ 106,697 $ 33,059 $1,257,778
Income (loss) from operations $ 55,001 $ 2,035 $ 22,235 $ 28,888 $ (11,688) $ 96,471
Depreciation and amortization $ 17,813 $ 7,742 $ 5,785 $ 2,663 $ 2,585 $ 36,588
Income (loss) from operations
as a percentage of net sales 10.6% 0.8% 6.5% 27.1% n.m.(a) 7.7%
(a) Not meaningful.
2002 Compared to 2001
Net sales for 2002 increased 6.0% to $1,328.1 million from $1,252.9
million in 2001. The increase was primarily attributable to improved sales in
the Automotive Products and Technical Products segments, partially offset by a
decrease in the Foam Products segment. The improvement in sales partially
reflected the impact of sales related to the acquisition discussed in Note 4 to
the consolidated financial statements.
The gross profit margin was $141.4 million, or 10.6%, in 2002 compared to
$180.1 million, or 14.4%, in 2001 primarily as a result of the 32.0% to 37.0%
increases in the cost of our major chemical raw materials during the second half
of 2002. The gross profit margin was further reduced by higher manufacturing
costs principally in the Foam Products segment, unfavorable yields, higher
manufacturing overhead expense and unfavorable production mix. We are seeking to
improve gross profit margins through customer selling price increases, selective
elimination of unprofitable customer accounts and products, and reductions in
manufacturing overhead expenses.
Income from operations for 2002 was $41.9 million, which represented a
34.0% decrease from the $63.5 million reported for 2001. Income from operations
was 3.2% of net sales in 2002 compared to 5.1% of net sales in 2001. The
decrease attributable to the reduced gross profit margin is discussed above. In
addition, selling, general and administrative expenses increased by $14.2
million, or 17.6%, which included $3.6 million of organizational and proposed
public offering costs related to the formation of Symphonex Inc. The proposed
public offering of Symphonex Inc. has been deferred indefinitely. Selling,
general and administrative expenses also include $1.3 million of transaction
costs associated with the proposed sale of our Carpet Cushion Products segment
which was subsequently terminated. The remainder of the increase was primarily
due to higher professional service fees for information technology and
accounting services and employee related expenses, partially offset by reduced
goodwill amortization and lower bad debt expense.
22
Foam Products
Foam Products net sales for 2002 decreased 5.7% to $471.0 million from
$499.7 million in 2001. The decrease primarily reflected reduction in business
from a major bedding manufacturer and the slow recovery of sales after an odor
issue caused by defective chemicals from a major supplier in late 2001. Foam
Products gross profit margin was 10.8% in 2002, down from 17.9% in 2001. Income
from operations decreased 64.0%, to $23.9 million in 2002 from $66.3 million in
2001, primarily due to increased raw material costs, lower net sales and higher
manufacturing costs. Income from operations was 5.1% of net sales in 2002, down
from 13.3% in 2001.
Carpet Cushion Products
Carpet Cushion Products net sales for 2002 increased 1.3% to $234.0
million from $231.0 million in 2001. We were able to increase our market share
in spite of market weakness and overcome the loss of sales to one large retail
customer that exited the carpet business. Loss from operations, which
principally reflected higher raw material and other operating costs during 2002
and included expenses of $1.3 million in 2002 associated with the proposed sale
of the business which was subsequently terminated, represented 5.4% of net sales
in 2002 and 3.0% of net sales in 2001.
Automotive Products
Automotive Products net sales for 2002 increased 23.6% to $466.7 million
from $377.8 million in 2001. The improvement primarily reflected a continued
high build rate for new cars and new product programs. We have been informed
that our largest customer intends to reduce its purchases of certain products
from us in 2003 to diversify its supply base. This may result in reduced sales
to this customer of up to $70.0 million in 2003, some of which may be replaced
by sales to other customers. Automotive Products gross profit margin was 8.2% in
2002 compared to 8.4% in 2001 and reflects the impact of higher raw material
costs offsetting the contribution from increased net sales. Income from
operations represented 5.4% of net sales in 2002 and 5.6% of net sales in 2001.
Technical Products
Net sales for Technical Products in 2002 increased 11.8% to $124.1
million from $111.0 million in 2001. Higher sales partially reflected sales from
the acquisition of General Foam Corporation in July 2001 (see note 4 to the
consolidated financial statements). Income from operations decreased 11.1% to
$20.3 million in 2002 compared to $22.9 million in 2001. The decrease reflects
the contribution from higher net sales offset by higher raw material costs and
the costs related to Symphonex Inc. as described above. Income from operations
represented 16.4% of net sales in 2002 compared to 20.6% in 2001.
Other
Other primarily consists of certain manufacturing operations in Mexico
City, corporate expenses not allocated to business segments and restructuring,
impairment and other charges. The 3.7% decrease in net sales associated with
this segment primarily resulted from the Mexico City operation. The loss from
operations was $15.2 million in 2002 and included restructuring, impairment and
other charges, discussed below. The loss from operations in 2001 was $40.1
million, including restructuring, impairment and other charges.
Restructuring, Impairment and Other Charges
In 2002, we recorded net restructuring, impairment and other charges of
$4.8 million. Fourth quarter charges of $10.0 million included severance and
other termination benefits for approximately 200 employees and exit costs and
remaining lease payments related to the reorganization of executive and
corporate management and the closure of six operations. Approximately 60 of the
planned terminations occurred during 2002. The charges also included $2.5
million of asset impairments, primarily for leasehold improvements and machinery
and equipment in the Carpet Cushion Products segment. Earlier in 2002, we
recorded restructuring, impairment and other credits of $5.2 million
23
including a reversal of approximately $3.7 million from the reevaluation of the
2001 Operational Reorganization Plan.
In 2001, we recorded restructuring, impairment and other charges of $36.1
million, primarily related to our 2001 Operational Reorganization Plan including
plant facility closures, reductions in management and support personnel, and
cost reductions in purchasing and logistics. The charge included an impairment
charge of $13.8 million (net of anticipated proceeds of $4.6 million) to reduce
certain assets, primarily leasehold improvement and equipment, included within
the Foam Products and Carpet Cushion Products segments to their estimated fair
values. Approximately 700 employee terminations including plant personnel,
support staff and executives and management were originally planned pursuant to
the 2001 Operational Reorganization Plan. The subsequent reevaluation of
facilities closures reduced the number of planned terminations to approximately
500. Approximately 340 employees were terminated in 2002.
We will have substantially completed the remaining actions contemplated
by the 2001 Operational Reorganization Plan in early 2003 and expect to complete
the facility closures and personnel reductions related to the 2002 restructuring
plan during 2003, primarily in the first six months. Terminations of
approximately 300 employees are planned to take place in 2003.
Interest and Debt Issuance Expense
Interest and debt issuance expense was $66.6 million in 2002, which
represented a 5.3% increase from 2001 expense of $63.2 million. The increase was
attributable to higher amortization of debt issuance costs. We capitalized
interest of $0.3 million in 2002 compared to $1.4 million in 2001. We expect
2003 interest and debt issuance expense to be at or higher than the 2002 level.
Income from Equity Interest in Joint Ventures
The income from an equity interest in an Asian joint venture was $1.6
million in both 2002 and 2001. We have a 70% ownership interest in the joint
venture since December 2001. Previously our ownership interest was 49%.
Provision (Benefit) for Income Taxes
During 2002, we determined that, based on the weight of available
evidence, including improved financial results, revised net operating loss
carryforward utilization limitations and other tax planning strategies initiated
in 2002, it was more likely than not, that substantially all of our net deferred
tax assets would be realized in the future. Accordingly, we reversed a
previously recorded valuation allowance of $99.4 million. The adjustment
increased net income for 2002 by $77.4 million.
Extraordinary Items, Net of Income Taxes
In connection with the refinancing transaction completed on March 25,
2002, Foamex L.P. wrote off debt issuance costs associated with the early
extinguishments of long-term debt due to a related party and the revolving
credit facility, resulting in an extraordinary loss of $2.6 million, net of
income tax benefit of $1.7 million. Foamex L.P. purchased and retired $49.0
million of the 13 1/2% senior subordinated notes, including unamortized debt
premium of $2.5 million, and $1.5 million of the 9 7/8% senior subordinated
notes resulting in an extraordinary gain of $0.8 million, net of income taxes of
$0.6 million. These extraordinary items will be reclassified upon the adoption
of Statement of Financial Accounting Standards No. 145 in 2003.
Cumulative Effect of Accounting Changes
The cumulative effect of accounting changes in 2002 includes a goodwill
impairment charge of $72.0 million as a result of the adoption of Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets"
("SFAS No. 142") and the write off of a $1.3 million unamortized deferred credit
as a result of the adoption of Statement of Financial Accounting Standards No.
141, "Business Combinations" ("SFAS No. 141").
24
2001 Compared to 2000
Net sales for 2001 decreased 0.4% to $1,252.9 million from $1,257.8
million in 2000. The decline was primarily attributable to lower sales in Foam
Products and Carpet Cushion Products, partially offset by a significant
improvement in Automotive Products sales. Technical Products also recorded
improved sales.
The gross profit margin was 14.4% in 2001 compared to 13.7% in 2000.
Certain raw material cost reductions had the effect of improving the gross
profit margin percentage in 2001 by approximately 1.4 percentage points. These
2001 cost reductions are not anticipated to continue in 2002. Selling, general
and administrative expenses were 16.2% higher in 2001. The increase included the
impact of higher professional fees, including those associated with a change in
independent accountants, higher bad debt expense related to economic conditions
and increased compensation and benefit costs.
Income from operations in 2001 was $63.5 million, which represented a
34.2% decrease from the $96.5 million recorded during 2000. Results included
restructuring, impairment and other charges of $36.1 million in 2001 and $6.3
million in 2000. Restructuring, impairment and other charges recorded during
2001 are discussed under "Other" below. Excluding the restructuring, impairment
and other charges for comparison purposes, income from operations would have
been $99.5 million in 2001 compared to $102.7 million in 2000. On this basis,
income from operations was 7.9% of net sales in 2001 and 8.2% in 2000. In
addition to the raw material cost reductions discussed above, cost reduction
programs and increases in certain selling prices were also positive factors.
Foam Products
Foam Products net sales for 2001 decreased 3.8% to $499.7 million from
$519.2 million in 2000. The decrease primarily reflected the domestic economic
slowdown that impacted the markets for furniture manufacturers and other foam
fabricators. Despite the sales decline, income from operations increased 20.6%,
from $55.0 million in 2000 to $66.3 million in 2001. The increase was primarily
the impact of raw material cost reductions, discussed above, which primarily
benefited the Foam Products segment. Income from operations was 13.3% of net
sales in 2001, up from 10.6% in 2000.
Carpet Cushion Products
Carpet Cushion Products net sales for 2001 decreased 9.9% to $231.0
million from $256.4 million in 2000. The sales decline continued to reflect
competitive pressures that resulted in lower sales volumes across all product
lines. Lower selling prices in certain product lines and a lower value shipment
mix also contributed to the sales decline. The factors contributing to the sales
decline translated to a loss from operations of $6.8 million in 2001 compared to
income from operations of $2.0 million in 2000. The loss from operations
represented 3.0% of net sales in 2001 and income from operations represented
0.8% of net sales in 2000.
Automotive Products
Automotive Products net sales for 2001 increased 10.3% to $377.8 million
from $342.4 million in 2000. The improvement primarily reflected new product
programs and renewed activity following inventory corrections in the domestic
automotive industry earlier in the year. Income from operations declined 4.7%,
from $22.2 million in 2000 to $21.2 million in 2001. Income from operations
represented 5.6% of net sales in 2001 and 6.5% in 2000. The lower results in
2001 were primarily attributed to intense pricing competition and higher raw
material costs.
Technical Products
Net sales for Technical Products in 2001 were up 4.1% to $111.0 million
from $106.7 million in 2000. Higher sales primarily reflected sales from the
acquisition of certain assets from General Foam Corporation, discussed in Note 4
to the consolidated financial statements. Income from operations decreased 20.8%
to $22.9 million in 2001 compared to $28.9 million in 2000. The decline
reflected a lower value shipment mix and the impact of a slow down
25
in the technology industry, especially during the first half of 2001. Income
from operations represented 20.6% of net sales in 2001 compared to 27.1% in
2000.
Other
Other primarily consists of certain manufacturing operations in Mexico
City, corporate expenses not allocated to business segments and restructuring
and other charges. Net sales were slightly higher in 2001 compared to 2000. The
loss from operations was $40.1 million in 2001 and included restructuring,
impairment and other charges of $36.1 million, discussed below. The $11.7
million loss from operations in 2000 included restructuring, impairment and
other charges totaling $6.3 million. The 2000 loss also included professional
fees associated with the resolution of certain change in control issues
following the Trace bankruptcy and the settlement of certain shareholder
litigation.
Restructuring, Impairment and Other Charges
In December 2001, we announced our 2001 Operational Reorganization Plan
to reduce operating costs and accelerate revenue growth. The major initiatives
of the 2001 Operational Reorganization Plan included plant facility closures,
headcount reductions, purchasing and logistics cost reductions and sales and
marketing management consolidation.
We identified a total of 17 plant operations to be closed. Costs
associated with this aspect of the 2001 Operational Reorganization Plan included
lease termination costs and severance and termination benefits aggregating $14.1
million. Additionally, we identified salaried positions to be eliminated, mainly
in support function areas. Severance, termination and other costs associated
with these positions were estimated to be $4.4 million.
Further, we evaluated the recoverability of certain other long-lived
assets, both associated and not associated with the Operational Reorganization
Plan, in accordance with SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed". As a result, we
recorded an impairment provision of $13.8 million (net of anticipated proceeds
of $4.6 million) to reduce these assets to their estimated fair values.
Severance and termination benefits as a result of the 2001 Operational
Reorganization Plan were expected to be incurred for approximately 700
employees. We expected to spend approximately $12.4 million during 2002 with the
balance to be spent through 2012, primarily for lease costs. Other one-time
period expenses during the fourth quarter consisted primarily of executive
severance of $1.9 million and consulting fees related to the Operational
Reorganization Plan in the amount of $1.2 million.
In addition, we recorded $0.4 million for restructuring plans prior to
the fourth quarter of 2001 that included severance for 41 employees and $1.4
million related to executive severance recorded in other charges. We also
recorded a net restructuring credit of $1.2 million related to changes in
estimates to prior restructuring plans.
During 2000, we recorded $6.2 million for restructuring plans that
included severance for 102 employees. We also recorded a net restructuring
charge of approximately $0.1 million related to changes in estimates to prior
years' restructuring plans. Also during 2000, we received $3.6 million of net
proceeds from the sale of assets related to restructuring plans.
Interest and Debt Issuance Expense
Interest and debt issuance expense totaled $63.2 million in 2001, which
represented a 15.9% decrease from $75.2 million recorded in 2000. The decrease
was attributable to lower average debt levels and lower effective interest rates
in 2001. We capitalized interest of $1.4 million and $0.8 million in 2001 and
2000, respectively, as a component of the construction costs of plant and
equipment.
Income from Equity Interest in Joint Venture
Income from an equity interest in an Asian joint venture totaled $1.6
million and $1.7 million in 2001 and 2000, respectively.
26
Other Expense, Net
Other expense, net for 2001 was $2.2 million. Expense items totaled $2.7
million and included letter of credit fees. Interest income recorded in 2001 was
$0.5 million.
In 2000, other expense, net was $3.0 million. Expense items totaled $3.6
million and significant components included the costs associated with a buyout
proposal and letter of credit fees. Interest income recorded in 2000 was $0.6
million.
Income Tax Expense
The 2001 effective tax rate reflects an increase in the valuation
allowance for deferred tax assets recognized during the year since, in our
judgment, it was more likely than not that these assets will not be realizable.
The effective tax rate in 2000 reflected the partial reversal of the deferred
income tax asset valuation allowance recognized in 1998. The valuation allowance
was reduced to reflect the utilization of Federal loss carryforwards that
reduced the current tax component of the Federal tax provision. Additionally,
the valuation allowance was reduced to offset the net deferred Federal tax
liability generated in 2000.
At December 31, 2001, we had approximately $164.4 million of net
operating loss carryforwards for Federal income tax purposes, expiring from 2010
to 2020. Also at December 31, 2001, there were $1.0 million of alternative
minimum tax credit carryforwards. In addition, we had an ownership change as
defined in IRC Section 382. Accordingly, we may be limited (on an annual basis)
as to the amount of net operating loss utilization.
OTHER
Shareholder and Change in Control Developments
Trace International Holdings, Inc. ("Trace") is a privately held company,
which owned approximately 29% of our outstanding voting common stock at
September 30, 2000, and whose former Chairman also serves as our Chairman. Our
common stock owned by Trace was pledged as collateral against certain of Trace's
obligations. Certain credit agreements and promissory notes of our subsidiaries,
pursuant to which approximately $401.1 million of debt was outstanding as of
September 30, 2000, provided that a "change of control" would be an event of
default and could result in the acceleration of such indebtedness. "Change of
control" means, for this purpose, that (i) a person or related group, other than
Trace, beneficially owns more than 25% of our outstanding voting stock and (ii)
such voting stock constitutes a greater percentage of such voting stock than the
amount beneficially owned by Trace. Additionally, certain indentures of Foamex
L.P. and Foamex Capital Corporation ("FCC"), a wholly-owned subsidiary of Foamex
L.P., relating to senior subordinated notes contain similar "change of control"
provisions, which require Foamex L.P. and FCC 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".
On July 21, 1999, we were informed by Trace that it filed a petition for
relief under Chapter 11 of the Bankruptcy Code in Federal Court in New York
City. Subsequently, on January 24, 2000, an order was signed converting the
Trace bankruptcy from Chapter 11 to Chapter 7 of the Bankruptcy Code. A trustee
was appointed to oversee the liquidation of Trace's assets. Neither Trace's
bankruptcy filing nor the conversion to Chapter 7 constituted a "change of
control" under the provisions of the debt agreements described above.
On July 31, 2000, we announced that we had entered into an agreement (the
"Exchange Agreement") with The Bank of Nova Scotia relating to a portion of the
7,197,426 shares of our common stock pledged by Trace to The Bank of Nova
Scotia. The Exchange Agreement provided for the transfer of the pledged stock to
The Bank of Nova Scotia in a manner that would not constitute a "change of
control" as described above. These transactions were conditioned upon bankruptcy
court approval of a settlement agreement between The Bank of Nova Scotia and the
trustee for the Trace bankruptcy, which was entered on October 18, 2000. On
November 2, 2000, the transactions contemplated by the Exchange Agreement and
the settlement agreement were consummated, and did not constitute a "change of
control". As a result, Trace no longer owns any shares of our common stock.
27
Under the Exchange Agreement, The Bank of Nova Scotia initially received
1,500,000 shares of our common stock from the Trace bankruptcy estate and
exchanged these common stock shares for 15,000 shares of a new class of
non-voting non-redeemable convertible preferred stock (the "Series B Preferred
Stock"). Each share of the Series B Preferred Stock can be converted into 100
shares of our common stock but only if such conversion would not trigger a
"change of control" event, as discussed above. The Series B Preferred Stock (a)
is entitled to dividends only if a dividend is declared on our common stock, (b)
ranks senior to any future preferred stock issued by us and (c) is entitled to a
liquidation preference of $100 per share. Following this exchange, The Bank of
Nova Scotia became the owner of 24.41% of the outstanding shares of our common
stock when the remaining 5,697,426 shares of our common stock were transferred
to The Bank of Nova Scotia from the Trace bankruptcy estate. Certain equity
transactions, primarily the exercise of stock options, have reduced the Bank of
Nova Scotia's common stock ownership percentage to 23.6% at February 15, 2003.
Environmental Health and Safety
We are subject to extensive and changing federal, state, local and
foreign environmental laws and regulations, including those relating to the use,
handling, storage, discharge and disposal of hazardous substances, the discharge
or emission of materials into the environment, and the remediation of
environmental contamination, and as a result, are from time to time involved in
administrative and judicial proceedings and inquiries relating to environmental
matters. As of December 29, 2002, we had accruals of approximately $2.7 million
for environmental matters including approximately $2.3 million related to
remediating and monitoring soil and groundwater contamination and approximately
$0.4 million relating to PRP sites 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 8, 2001, the EPA proposed a National Emission Standard for
Hazardous Air Pollutants or "NESHAP" for Flexible Polyurethane Foam Fabrication
Operations. The proposed NESHAP regulates emissions of methylene chloride and
other Hazardous Air Pollutants and restricts air emissions from flame lamination
sources. We do not believe that this standard, if adopted, will require us to
make material expenditures.
On August 31, 2002, Environment Canada, the Canadian environmental
regulatory agency, proposed a rule which would require flexible polyurethane
foam manufacturing operations to reduce methylene chloride (dichloromethane) air
emissions. The proposed rule establishes a 50.0% reduction in methylene chloride
emissions by December 1, 2003 and 100.0% reductions by January 1, 2007. We do
not believe that this standard, if adopted, 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. During 2000, we reached an
indemnification agreement with the former owner of the Morristown, Tennessee
facility. The agreement allocates the incurred and future remediation costs
between the former owner and us. The estimated allocation of future costs for
the remediation of this facility is not significant, based on current known
information. The former owner was Recticel Foam Corporation, a subsidiary of
Recticel.
We have either upgraded or closed all underground storage tanks at our
facilities in accordance with applicable regulations.
The CERCLA and comparable state laws impose liability without fault for
the costs of cleaning up contaminated sites on certain classes of persons that
contributed to the release of hazardous substances into the environment at those
sites, for example, by generating wastes containing hazardous substances which
were disposed at such sites. We are currently designated as a PRP by the EPA or
by state environmental agencies or other PRPs, pursuant to CERCLA or analogous
state statutes, with respect to eight 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,
28
in each case and in the aggregate, we do not expect additional costs, if any, to
be material to liquidity, results of operations or financial position.
In 2003, capital expenditures for safety and environmental compliance
projects are anticipated to be approximately $1.5 million. Although it is
possible that new information or future developments could require us to
reassess the potential exposure relating to all pending environmental matters,
including those described above, management believes that, based upon all
currently available information, the resolution of these environmental matters
will not have a material adverse effect on our operations, financial position,
capital expenditures or competitive position. The possibility exists, however,
that new environmental legislation and/or environmental regulations may be
adopted, or other environmental conditions, including the presence of previously
unknown environmental contamination, may be found to exist or a reassessment of
the potential exposure to pending environmental matters may be necessary due to
new information or future developments, that may require expenditures not
currently anticipated and that may be material.
Claims and Litigation
We and our subsidiaries are party to various lawsuits, both as defendant
and plaintiff, arising in the normal course of business. It is the opinion of
management that the disposition of these lawsuits will not, individually or in
the aggregate, have a material adverse effect on our financial position or
results of operations. If management's assessment is incorrect, such actions
could have a material adverse effect on our consolidated financial position,
results of operations and cash flows. As of December 29, 2002, we had accrued
approximately $0.7 million for litigation and other legal matters in addition to
the environmental matters discussed above.
Inflation, Raw Material Costs and Other Matters
On average, inflation rates for the domestic economy continue to be
relatively low. Although long-term inflation rates are difficult to predict, we
believe we have the flexibility in operations and capital structure to maintain
a competitive position. The prices of the two principal chemicals used, 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.
The conflict in that part of the world could significantly impact the price of
these raw materials. Results for 2002 were negatively impacted by higher costs
for raw materials. In 2001, the beginning of the economic slowdown resulted in
excess manufacturing capacity for the major chemical suppliers. This, coupled
with declining oil prices, resulted in lower costs for raw materials in 2001. We
experienced 32.0% to 37.0% increases in the prices of raw material from major
chemical manufacturers during 2002. We sought to recover these cost increases
through manufacturing process efficiencies and management of selling price
increases, but were only partially able to do so during 2002. Our major chemical
suppliers have announced their intention to increase prices by approximately
10.0% to 12.0% effective April 1, 2003. In an attempt to offset these raw
material cost increases, we have announced price increases to our customers to
be effective during April 2003. We may not be successful in implementing these
and 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 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.
Related Party Transactions
We have a number of related party transactions. Such related party
transactions and current balances are discussed in Note 16 to the consolidated
financial statements included in this report on Form 10-K.
29
Accounting Changes
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" ("SFAS No. 142") addresses financial accounting and reporting
for acquired goodwill and other intangible assets. A key change as a result of
implementing SFAS No. 142 is that goodwill and certain other intangibles are no
longer amortized but will be periodically assessed for impairment, and as a
result there may be more volatility in the reported results than under the
previous standard because impairment losses are likely to occur irregularly and
in varying amounts. An impairment of goodwill due to the initial application of
SFAS No. 142 is discussed below. Any goodwill and intangible assets acquired
after June 30, 2001, including the acquisition discussed in note 4 to the
consolidated financial statements, are subject to the nonamortization and
amortization provisions of SFAS No. 142. The other provisions of SFAS No. 142
were adopted by us on January 1, 2002.
SFAS No. 142 provides a six-month transitional period from the effective
date to perform an assessment of whether there is an indication that goodwill is
impaired. We completed this assessment in the second quarter of 2002. Step one
of the transitional impairment test uses a fair value methodology, which differs
from the undiscounted cash flow methodology that continues to be used for
intangible assets with an identifiable life. We identified six reporting units
during the second quarter and performed step one of the transitional impairment
test on each of the reporting units. Based on the results of step one of the
transitional impairment test, the Company identified one reporting unit in the
Foam Products segment, the Carpet Cushion Products reporting unit and the Other
reporting unit, for which the carrying values exceeded the fair values as at
January 1, 2002, indicating a potential impairment of goodwill in those
reporting units. Step two of the transitional impairment test, to determine the
magnitude of any goodwill impairment, was completed in the third quarter of 2002
and the resulting impairment loss of $72.0 million has been recorded as a
cumulative effect of a change in accounting principle, retroactive to the first
quarter 2002 results of operations in accordance with the transitional
implementation guidance of SFAS No. 142. We performed our annual goodwill
impairment test as of September 30, 2002 which did not result in the recognition
of any additional impairment.
On April 30, 2002, Statement of Financial Accounting Standards No. 145,
"Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement
No. 13, and Technical Corrections" ("SFAS No. 145") was issued. The provisions
of this Statement related to the rescission of Statement 4 shall be applied in
fiscal years beginning after May 15, 2002. Any gain or loss on extinguishment of
debt that was classified as an extraordinary item in prior periods presented
that does not meet the criteria in Opinion 30 for classification as an
extraordinary item shall be reclassified. Early application of the provisions of
this Statement related to the rescission of Statement 4 is encouraged. The
adoption of this Statement in 2003 will result in a reclassification of the
extraordinary items recorded during 2002.
Statement of Financial Accounting Standards No. 146, "Accounting for
Costs Associated with Exit or Disposal Activities ("SFAS No. 146") was issued in
June 2002. SFAS No. 146 requires that a liability for costs associated with an
exit or disposal activity be recognized when the liability is incurred rather
than at the date of an entity's commitment to an exit plan. SFAS No. 146 further
establishes that fair value is the objective for initial measurement of the
liability. The statement is effective for exit or disposal activities initiated
after December 31, 2002.
In November 2002, the FASB issued FASB Interpretation ("FIN") No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." FIN No. 45 clarifies the
requirements of SFAS No. 5, "Accounting for Contingencies," relating to the
guarantor's accounting for and disclosures of certain guarantees. The initial
recognition and measurements provisions of the interpretation are applicable on
a prospective basis to guarantees issued or modified after December 31, 2002,
irrespective of the guarantor's fiscal year-end. The disclosure requirements of
the interpretation are effective for financial statements of interim or annual
periods ending after December 15, 2002. The adoption of this interpretation is
not expected to have any impact on the results of operations or financial
position of the Company. The Company does not have any disclosure obligations
under this interpretation at December 29, 2002.
Statement of Financial Accounting Standards No. 148, "Accounting for
Stock Based Compensation-Transition and Disclosure: ("SFAS No. 148") which is
effective for fiscal years ending after December 15, 2002,
30
provided alternative methods of transition for a voluntary change to the fair
value based method and requires more prominent and more frequent disclosures in
the financial statements about the effects of stock-based compensation. We
elected to continue accounting for stock-based compensation using the intrinsic
value method under Accounting Principles Board Opinion No. 25, and its related
interpretations. Proforma information is based on the fair value method under
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation." The fair value of options granted were estimated using the
Black-Scholes option pricing model as discussed in Note 11 to the consolidated
financial statements. See Note 2 to the consolidated financial statements for
disclosures related to stock compensation required by SFAS No. 148.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our debt securities with variable interest rates are subject to market
risk for changes in interest rates. On December 29, 2002, indebtedness with
variable interest rates totaled $221.0 million. On an annualized basis, if the
interest rates on these debt instruments increased by 1.0%, interest expense
would increase by approximately $2.2 million.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
An index to the financial statements and financial statement schedules is
included in Item 15(a).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
We changed accountants during 2001. Detailed information required by this
item was included in the Current Reports on Form 8-K and 8-K/A filed with the
Securities and Exchange Commission on June 29, July 6, July 17 and July 19,
2001.
PART III
The information required by Part III (Items 10, 11, 12 and 13) 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.
ITEM 14. CONTROLS AND PROCEDURES
The Company's management, including its Chief Executive Officer and Chief
Financial Officer, have conducted an evaluation of the effectiveness of the
Company's disclosure controls and procedures as defined in Exchange Act Rules
13a-14(c) and 15d-14(c) as of a date within 90 days of the filing of this Annual
Report on Form 10-K (the "Evaluation Date"). Based on the evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that as of the
Evaluation Date, the disclosure controls and procedures are effective in
ensuring that all material information required to be filed in this annual
report has been made known to them in a timely fashion. There have been no
significant changes in internal controls, or in factors that could significantly
affect internal controls, subsequent to the date the Chief Executive Officer and
Chief Financial Officer completed their evaluation.
31
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial statements.
Foamex International Inc. and Subsidiaries:
Independent Auditors' Report F-2
Report of Independent Accountants F-3
Consolidated Balance Sheets as of December 29, 2002 and December 31, 2001 F-4
Consolidated Statements of Operations for the years ended
December 29, 2002, December 31,
2001 and 2000 F-6
Consolidated Statements of Cash Flows for the years ended December 29, 2002, December 31,
2001 and 2000 F-7
Consolidated Statements of Stockholders' Deficiency for the years ended December 29,
2002, December 31, 2001 and 2000 F-8
Notes to Consolidated Financial Statements F-9
Information Required by Rule 3-09
Foamex Asia Company Limited
Consolidated Financial Statements of Foamex Asia Company Limited and Subsidiary
for the year ended December 31, 2002 (unaudited) F-40
Consolidated Financial Statements of Foamex Asia Company Limited and Subsidiary
for the year ended December 31, 2001, including Report of the Independent
Certified Public Accountants F-56
Consolidated Financial Statements of Foamex Asia Company Limited and Subsidiary
for the year ended December 31, 2000 (unaudited) F-72
Foamex International Inc. and Subsidiaries Financial Statement Schedules:
Schedule I - Condensed Financial Information of Registrant S-2
Schedule II - Valuation and Qualifying Accounts S-5
(b) Reports on Form 8-K.
A report dated October 4, 2002, was filed for Item 7. - Financial
Statements and Exhibits submitted for Item 9. - Regulation FD Disclosure,
concerning a press release announcing that the Company had terminated
discussions with Leggett & Platt, Incorporated, a Missouri corporation
("Leggett & Platt") for the sale of the Company's GFI Carpet Cushion
business to Leggett & Platt.
A report dated October 16, 2002, was filed for Item 7. - Financial
Statements and Exhibits submitted for Item 9. - Regulation FD Disclosure,
concerning a press release announcing that the Company expected to report a
net loss for the third quarter ended September 29, 2002 and that in light
of these results it had obtained a waiver from its bank lenders of its
financial covenants for the period ended September 29, 2002.
A report dated November 11, 2002, was filed for Item 8. - Change in Fiscal
Year, concerning a press release announcing that 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 and that because the transition period was
less than one month, no transition report was required.
(c) Exhibits.
2.1(p) - Transfer Agreement, dated as of February 27, 1998, by and between
Foam Funding LLC and Foamex L.P.
2.2(p) - Asset Purchase Agreement, dated as of February 27, 1998, by and
among Foamex Carpet Cushion, Inc. ("Foamex Carpet"), Foamex
International Inc. ("Foamex International"), Foam Funding LLC and
General Felt Industries, Inc. ("General Felt").
3.1(a) - Certificate of Limited Partnership of Foamex L.P.
32
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. ("FMXI") and Trace Foam Company, Inc. ("Trace Foam"), as
general partners, and Foamex International, 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(n) - Third Amendment to the Partnership Agreement, dated December
23, 1997.
3.2.5(p) - Fourth Amendment to the Partnership Agreement, dated February 27,
1998.
3.2.6(aa) - Fifth Amendment to the Partnership Agreement, dated
March 25, 2002.
3.3(q) - Certificate of Incorporation of FMXI.
3.4(q) - By-laws of FMXI.
3.5(f) - Certificate of Incorporation of Foamex Capital Corporation
("FCC").
3.6(f) - By-laws of FCC.
3.7.1(a) - Certificate of Incorporation of Foamex International.
3.7.1(r) - Amendment to Certificate of Incorporation of Foamex
International.
3.7.2(aa) - Certificate of Formation of Foamex Carpet Cushion, Inc.
3.7.3(aa) - Certification of Conversion of Foamex Carpet Cushion LLC.
3.7.4(aa) - Amended and Restated Limited Liability Company Operating
Agreement of Foamex Carpet Cushion LLC, dated March 25, 2002.
3.8(a) - By-laws of Foamex International.
4.1.1(d) - 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 (the "9 7/8% Notes"),
including the form of Senior Subordinated Note and Subsidiary
Guarantee.
4.1.2(n) - First Supplemental Indenture, dated as of December 23, 1997,
between Foamex LLC ("FLLC") and The Bank of New York, as trustee,
relating to the 9 7/8% Notes.
4.1.3(p) - Second Supplemental Indenture, dated as of February 27, 1998,
among Foamex L.P. and FCC, as joint and several obligors, General
Felt, Foamex Fibers, Inc. ("Foamex Fibers"), and FLLC, as
withdrawing guarantors, and The Bank of New York, as trustee,
relating to the 9 7/8% Notes.
4.1.4(aa) - 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% Notes.
4.2.1(n) - Indenture, dated as of December 23, 1997, by and among Foamex
L.P., FCC, 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 (the "13 1/2% Notes"), including the
form of Senior Subordinated Note and Subsidiary Guarantee.
4.2.2(p) - First Supplemental Indenture, dated as of February 27, 1998,
among Foamex L.P. and FCC, as joint and several obligors, General
Felt, Foamex Fibers and FLLC, as withdrawing guarantors, Crain
Industries, Inc., as withdrawing Intermediate Obligor, and The
Bank of New York, as trustee, relating to the 13 1/2% Notes.
4.2.3(aa) - 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% Notes.
4.3.1(aa) - Indenture, dated as of March 25, 2002, by and among Foamex
L.P., Foamex Capital Corporation, each of the Subsidiary
Guarantors and U.S. Bank National Association, as trustee,
relating to $300.000,000 principal amount of 10 3/4% Senior
Secured Notes due 2009 ("10 3/4% Notes"), including form of
Senior Secured Note and Subsidiary Guaranty.
4.3.2(aa) - 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(aa) - 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(aa) - 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(aa) - Copyright Security Agreement, dated as of March 25, 2002, by
Foamex L.P. in favor of U.S. Bank National Association, as
Collateral Agent.
33
4.3.6(aa) - Registration Rights Agreement, dated as of March 25, 2002,
between Foamex L.P. and FCC, the issuers, and Credit Suisse First
Boston Corporation, Salomon Smith Barney, and Scotia Capital
(USA) Inc., the purchasers.
4.4.2.1(aa)- Third Amended and Restated Foamex International Guaranty, dated
as of March 25, 2002, made by Foamex International in favor of
Citicorp USA, Inc., as Collateral Agent.
4.4.3(aa) - Amended and Restated Guaranty, dated as of March 25, 2002, made
by FMXI and the Subsidiary Guarantors in favor of Citicorp USA,
Inc., as Collateral Agent, each Lender, each Issuing Bank and
each other holder of an Obligation.
4.4.4(bb) - Amended and Restated Pledge and Security Agreement, dated as of
March 25, 2002, made by Foamex International, FMXI, Foamex L.P.
in favor of Citicorp USA, Inc., as Collateral Agent.
4.4.5(bb) - Patent Security Agreement, dated as of March 25, 2002, made by
Foamex L.P. in favor of Citicorp USA Inc., as Collateral Agent.
4.4.6(bb) - Trademark Security Agreement, dated as of March 25, 2002, made by
Foamex L.P. and Foamex Carpet Cushion LLC in favor of Citicorp
USA, Inc., as Collateral Agent.
4.4.7(bb) - Copyright Security Agreement, dated as of March 25, 2002, made by
Foamex L.P. in favor of Citicorp USA, Inc., as Collateral Agent.
4.5(cc) - Commitment Letter and Attachment, dated July 5, 2002, from the
Bank of Nova Scotia to Foamex Canada Inc. 4.9.1(j) - 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(j) - Promissory Note, dated June 12, 1997, in the aggregate principal
amount of $4,794,828, executed by Trace Holdings to Foamex L.P.
4.10.11(aa)- Credit Agreement, dated June 12, 1997, as amended and restated
as of February 27, 1998, as further amended and restated as of
June 29, 1999 and as further amended and restated as of March 25,
2002 among Foamex L.P., FMXI, the institutions from time to time
party thereto as lenders, the institutions form time to time
party thereto as issuing banks and Citicorp USA, Inc. and the
Bank of Nova Scotia as Administrative Agents.
4.10.12(aa) - Intercreditor Agreement, dated as of March 25, 2002, by and
among Citicorp USA, Inc., as Senior Agent, U.S. Bank National
Association, as trustee and collateral agent under the Indenture
for the 10 3/4% Notes and Foamex L.P.
4.14(s) - Letter Agreement, dated as of July 31, 2000, between the Company
and The Bank of Nova Scotia.
4.14.1(u) - Certificate of Designations of Series B Preferred Stock of the
Company.
10.1(dd)+ - Employment Agreement, dated as of August 20, 2002, by and between
the Company and Thomas E. Chorman.
10.2(dd)+ - Employment Agreement, dated as of August 20, 2002, by and between
the Company and Peter W. Johnson.
10.2.1(e) - Reimbursement Agreement, dated as of March 23, 1993, between
Trace Holdings and General Felt.
10.3(dd)+ - Employment Agreement, dated as of September 10, 2002 and
effective as of July 22, 2002, by and between the Company and
Virginia Kamsky.
10.3.1(e) - 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.
10.4(dd)+ - Agreement with Consultant dated August 8, 2002, by and between
the Company and Raymond E. Mabus, Jr.
10.4.1(f) - Asset Transfer Agreement, dated as of October 2, 1990, between
Trace Holdings and Foamex L.P. (the "Trace Holdings Asset
Transfer Agreement").
10.4.2(f) - First Amendment, dated as of December 19, 1991, to the Trace
Holdings Asset Transfer Agreement.
10.4.3(f) - Amended and Restated Guaranty, dated as of December 19, 1991,
made by Trace Foam in favor of Foamex L.P.
34
10.5(ee) - Amendment No. 1 dated as of November 15, 2002, to the Credit
Agreement, dated as of June 12, 1997, as amended and restated as
of February 27, 1998, as further amended and restated as of June
29, 1999 and as further amended and restated as of March 25,
2002, by and among Foamex L.P., FMXI, Inc. the financial
institutions party thereto from time to time as lenders (the
"Lenders"), the financial institutions party thereto from time to
time as issuing banks (the "Issuing Banks"), Citicorp USA, Inc.,
as administrative agent and as collateral agent for the Lenders
and the Issuing Banks, and The Bank of Nova Scotia, as funding
agent and as syndication agent for the Lender and the Issuing
Banks.
10.5.1(f) - Asset Transfer Agreement, dated as of October 2, 1990, between
Recticel Foam Corporation ("RFC") and Foamex L.P. (the "RFC Asset
Transfer Agreement").
10.5.2(f) - First Amendment, dated as of December 19, 1991, to the RFC
Asset Transfer Agreement.
10.5.3(f) - Schedule 5.03 to the RFC Asset Transfer Agreement (the "5.03
Protocol").
10.5.4(e) - The 5.03 Protocol Assumption Agreement, dated as of October 13,
1992, between RFC and Foamex L.P.
10.5.5(e) - Letter Agreement between Trace Holdings and Recticel regarding
the Recticel Guaranty, dated as of July 22, 1992.
10.7.1(g) - First Amended and Restated Tax Sharing Agreement, dated as of
December 14, 1993, among Foamex L.P., Trace Foam, FMXI and Foamex
International.
10.7.2(d) - First Amendment to First Amended and Restated Tax Sharing
Agreement, dated as of June 12, 1997, by and among Foamex L.P.,
Foamex International, FMXI and Trace Foam.
10.7.3(o) - Second Amendment to First Amended and Restated Tax Sharing
Agreement, dated as of December 23, 1997, by and among Foamex
L.P., Foamex International, FMXI, and Trace Foam.
10.7.4(q) - Third Amendment to First Amended and Restated Tax Sharing
Agreement, dated as of February 27, 1998, by and between Foamex
L.P., Foamex International and FMXI.
10.8.1(h) - Tax Distribution Advance Agreement, dated as of December 11,
1996, by and between Foamex L.P. and Foamex-JPS Automotive L.P.
10.8.2(d) - Amendment No. 1 to Tax Distribution Advance Agreement, dated as
of June 12, 1997, by and between Foamex L.P. and Foamex
International.
10.10.1(f)+ - Salaried Incentive Plan of Foamex L.P. and Subsidiaries.
10.10.3(f)+ - Equity Growth Participation Program.
10.10.4(i)+ - The Foamex L.P. Salaried Pension Plan (formerly, "The General
Felt Industries, Inc. Retirement Plan for Salaried Employees"),
effective as of January 1, 1995.
10.10.5(m)+ - The Foamex L.P. Hourly Pension Plan (formerly "The Foamex
Products Inc. Hourly Employee Retirement Plan"), as amended
December 31, 1995.
10.10.6(m)+ - Foamex L.P. 401(k) Savings Plan effective October 1, 1997.
10.10.7(t)+ - Foamex International's Amended and Restated 1993 Stock Option
Plan.
10.10.8(a)+ - Foamex International's Non-Employee Director Compensation Plan.
10.10.9(x)+ - Foamex International Inc. Equity Incentive Plan for Non-Employee
Directors.
10.10.10(x)+- Foamex International Key Employee Incentive Bonus Plan.
10.10.11(y)+- Agreement with Consultant, dated April 24, 2001 by and between
Robert J. Hay and Foamex L.P.
10.10.12(z)+- Foamex Supplemental Executive Retirement Plan, effective as of
May 15, 2001.
10.10.13(z)+- Split dollar Life Insurance Agreement Between Foamex
International Inc. and Marshall S. Cogan, dated as of May 1, 2001
10.11.1(v)+ - Employment Agreement, dated as of January 1, 1999, by and between
the Company and Marshall S. Cogan.
10.11.2(r)+ - Employment Agreement, dated as of March 16, 1999, by and between
Foamex International and John G. Johnson, Jr.
10.11.3(v)+ - Employment Agreement, amended effective as of January 29, 2001,
by and between Foamex International and John Televantos.
10.11.4(w)+ - Termination and Release Agreement dated as of January 30, 2001,
by and between the Company and John G. Johnson, Jr.
10.11.5(z)+ - Termination and Release Agreement dated as of December 6, 2001,
by and between the Company and John Televantos.
35
10.11.8(z)+- First Amendment to Employment Agreement, dated as of December 31,
2001, by and between the Company and Marshall S. Cogan.
10.11.9(ff)- Foamex International Inc. 2002 Stock Award Plan.
10.11.10+* - Severance Agreement and Release, dated as of November 23, 2002,
by and between the Company and Theodore J. Kall.
10.11.11+* - Severance Agreement and Release, dated as of January 31, 2003, by
and between the Company and Pratt W. Wallace, Jr.
10.11.12+* - Employment Agreement, dated as of March 24, 2003, by and between
the Company and K. Douglas Ralph.
10.14(i) - Stock Purchase Agreement, dated as of December 23, 1993, by and
between Transformacion de Espumas u Fieltros, S.A., the
stockholders which are parties thereto, and Foamex L.P.
10.15.1(h) - Asset Purchase Agreement, dated as of August 29, 1997, by and
among General Felt, Foamex L.P., Bretlin, Inc. and The Dixie
Group.
10.15.2(l) - Addendum to Asset Purchase Agreement, dated as of October 1,
1997, by and among General Felt, Foamex L.P., Bretlin, Inc. and
The Dixie Group.
10.17(q) - Tax Sharing Agreement, dated as of February 27, 1998, between
Foamex International and Foamex Carpet.
10.18.1(z) - Joint Venture Agreement between Hua Kee Company Limited and
Foamex Asia, Inc. amended and restated as of December 6, 2001.
10.18.2(o) - Loan Agreement between Hua Kee Company Limited and Foamex Asia,
Inc., dated as of July 8, 1997.
21* - Subsidiaries of registrant.
23* - Consent of Independent Accountants, PricewaterhouseCoopers LLP.
23.1* - Consent of Independent Auditors, Deloitte & Touche LLP.
99.1* - Certification of Chief Executive Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
99.2* - Certification of Chief Financial Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
+ Management contract or compensatory plan or arrangement.
* Filed herewith.
- ----------------------------
(a) Incorporated herein by reference to the Exhibit to Foamex L.P.'s
Registration Statement on Form S-1, Registration No. 33-69606.
(b) Incorporated herein by reference to the Exhibit to the Annual Report on
Form 10-K of the Company 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 the Company reporting an event that occurred May 28, 1997.
(d) Incorporated herein by reference to the Exhibit to the Current Report on
Form 8-K of the Company reporting an event that occurred June 12, 1997.
(e) Incorporated herein by reference to the Exhibit to the Annual Report on
Form 10-K Statement of Foamex L.P. and FCC for fiscal 1992.
(f) 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.
(g) Incorporated herein by reference to the Exhibit to the Registration
Statement of FJPS, FJCC and Foamex L.P. on Form S-4, Registration No.
33-82028.
36
(h) Incorporated herein by reference to the Exhibit to the Annual Report on
Form 10-K of the Company for the fiscal year ended December 29, 1996.
(i) Incorporated herein by reference to the Exhibit to the Annual Report on
Form 10-K of Foamex L.P. for fiscal 1993.
(j) Incorporated herein by reference to the Exhibit in the Registration
Statement of the Company on Form S-4, Registration No. 333-30291.
(k) Incorporated herein by reference to the Current Report on Form 8-K of
Foamex L.P. reporting an event that occurred on August 29, 1997.
(l) Incorporated herein by reference to the Current Report on Form 8-K of
Foamex L.P. reporting an event that occurred on October 6, 1997.
(m) Incorporated by reference to the Exhibit to the Form 10-Q of Foamex L.P.
for the quarterly period ended September 28, 1997.
(n) Incorporated herein by reference to the Exhibit to the Current Report on
Form 8-K of Foamex L.P., FCC and the Company reporting an event that
occurred December 23, 1997.
(o) 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.
(p) Incorporated herein by reference to the Current Report on Form 8-K of
Foamex International reporting an event that occurred on February 27,
1998.
(q) Incorporated herein by reference to the Exhibit to the Annual Report on
Form 10-K of the Company for the fiscal year ended December 28, 1997.
(r) Incorporated herein by reference to the Exhibit to the Annual Report on
Form 10-K of the Company for the fiscal year ended December 31, 1998.
(s) Incorporated herein by reference to the Exhibit to the Current Report on
Form 8-K of the Company reporting an event that occurred on July 31,
2000.
(t) Incorporated herein by reference to the Exhibit to the Company's
definitive proxy statement dated May 31, 2000.
(u) Incorporated herein by reference to the Exhibit to the Current Report on
Form 8-K of the Company reporting an event that occurred on November 2,
2000.
(v) Incorporated herein by reference to the Exhibit to the Annual Report on
Form 10-K of the Company for year ended December 31, 2000.
(w) Incorporated herein by reference to the Exhibit to the Form 10-Q of the
Company for the quarterly period ended March 31, 2001.
(x) Incorporated herein by reference to the Appendix to the Company's
definitive amended and restated proxy statement, dated July 12, 2001.
(y) Incorporated herein by reference to the Exhibit to the Form 10-Q of the
Company for the quarterly period ended June 30, 2001.
37
(z) Incorporated herein by reference to the Exhibit to the Annual Report on
Form 10-K of the Company for the fiscal year ended December 31, 2001.
(aa) Incorporated herein by reference to the Exhibit to the Form 10-Q of the
Company for the quarterly period ended March 31, 2002.
(bb) 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.
(cc) Incorporated herein by reference to the Exhibit to the Form 10-Q of the
Company for the quarterly period ended June 30, 2002.
(dd) 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.
(ee) Incorporated herein by reference to the Exhibit to the Form 10-Q of
Foamex L.P. and FCC for the quarterly period ended September 29, 2002.
(ff) Incorporated herein by reference to Appendix C to the Company's
definitive proxy statement dated April 30, 2002.
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
Commission upon request.
38
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 26th day of March 2003.
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
39
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/ Marshall S. Cogan Chairman of the Board March 26, 2003
- --------------------------------
Marshall S. Cogan
/s/ John V. Tunney Vice Chairman and Director March 26, 2003
- ---------------------------------
John V. Tunney
/s/ Robert J. Hay Chairman Emeritus March 26, 2003
- --------------------------------
Robert J. Hay and Director
/s/ Thomas E. Chorman President, Chief Executive March 26, 2003
- --------------------------------
Thomas E. Chorman Officer and Director
/s/ S. Dennis N. Belcher Director March 26, 2003
- --------------------------------
S. Dennis N. Belcher
Director March 26, 2003
- --------------------------------
Luis Echarte
/s/ Julie Nixon Eisenhower Director March 26, 2003
- --------------------------------
Julie Nixon Eisenhower
Director March 26, 2003
- --------------------------------
Stuart J. Hershon
Director March 26, 2003
- --------------------------------
Virginia A. Kamsky
/s/ Raymond E. Mabus Director March 26, 2003
- --------------------------------
Raymond E. Mabus
Director March 26, 2003
- --------------------------------
Henry Tang
40
CERTIFICATION
-------------
I, Thomas E. Chorman, certify that:
1. I have reviewed this annual report on Form 10-K of Foamex International Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 26, 2003 /s/ Thomas E. Chorman
-----------------------------------------
Thomas E. Chorman
President and Chief Executive Officer
41
CERTIFICATION
-------------
I, K. Douglas Ralph, certify that:
1. I have reviewed this annual report on Form 10-K of Foamex International Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 26, 2003 /s/ K. Douglas Ralph
---------------------------------------
K. Douglas Ralph
Executive Vice President and
Chief Financial Officer
42
FOAMEX INTERNATIONAL INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Foamex International Inc.
Index to Consolidated Financial Statements F-1
Independent Auditors' Report F-2
Report of Independent Accountants F-3
Consolidated Balance Sheets as of December 29, 2002 and December 31, 2001 F-4
Consolidated Statements of Operations for the years ended December 29, 2002, December 31,
2001 and 2000 F-6
Consolidated Statements of Cash Flows for the years ended December 29, 2002,
December 31, 2001 and 2000 F-7
Consolidated Statements of Stockholders' Deficiency for the years ended December 29, 2002,
December 31, 2001 and 2000 F-8
Notes to Consolidated Financial Statements F-9
Information Required by Rule 3-09
Foamex Asia Company Limited
Consolidated Financial Statements of Foamex Asia Company Limited and Subsidiary
for the year ended December 31, 2002 (unaudited) F-40
Consolidated Financial Statements of Foamex Asia Company Limited and Subsidiary
for the year ended December 31, 2001, including Report of Independent
Certified Public Accountants F-56
Consolidated Financial Statements of Foamex Asia Company Limited and Subsidiary
for the year ended December 31, 2000 (unaudited) F-72
F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Foamex International Inc.
Linwood, Pennsylvania
We have audited the accompanying consolidated balance sheets of Foamex
International Inc. and subsidiaries (the "Company") as of December 29, 2002 and
December 31, 2001, and the related consolidated statements of operations, cash
flows and stockholders' deficiency for the two years then ended. Our audits also
included the consolidated financial statement schedules as of and for the years
ended December 29, 2002 and December 31, 2001 listed in the Index at Item 15a.
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 audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall consolidated financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company at December 29, 2002
and December 31, 2001, and the results of its operations and its cash flows for
the two years then ended in conformity with accounting principles generally
accepted in the United States of America. Also, in our opinion, such 2002 and
2001 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 18, 2003
Parsippany, New Jersey
F-2
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of Foamex International Inc.:
In our opinion, the consolidated statements of operations, cash flows and
stockholders' deficiency listed in the index appearing under Item 15(a) present
fairly, in all material respects, the results of operations and cash flows of
Foamex International Inc. and its subsidiaries for the year ended December 31,
2000 in conformity with accounting principles generally accepted in the United
States of America. In addition, in our opinion, the financial statement
schedules as of and for the year ended December 31, 2000, listed in the index
appearing under Item 15(a) present fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements. These financial statements and financial
statement schedules are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements and
financial statement schedules based on our audit. We conducted our audit of
these statements in accordance with auditing standards generally accepted in the
United States of America, which 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, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
As discussed in Note 9, during the year ending December 31, 2001, the Company's
financial debt covenants, with which the Company must comply on a quarterly
basis, become more restrictive. Management's plans in regard to this matter are
also described in Note 9.
/s/ PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
March 30, 2001
F-3
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 29, December 31,
2002 2001
------------------- -------------------
ASSETS (thousands)
CURRENT ASSETS
Cash and cash equivalents $ 4,524 $ 15,064
Accounts receivable, net of allowance for doubtful
accounts and discounts of $10,311 in 2002 and $10,940 in 2001 191,546 173,461
Inventories 98,010 89,430
Deferred income taxes 21,011 375
Other current assets 22,558 32,935
---------- ----------
Total current assets 337,649 311,265
--------- ---------
PROPERTY, PLANT AND EQUIPMENT
Land and land improvements 7,272 7,512
Buildings and leasehold improvements 119,582 116,232
Machinery, equipment and furnishings 287,847 275,261
Construction in progress 3,868 8,199
--------- ---------
Total 418,569 407,204
Less accumulated depreciation and amortization (236,531) (206,407)
-------- --------
Property, plant and equipment, net 182,038 200,797
GOODWILL 125,321 208,184
DEBT ISSUANCE COSTS, net of accumulated
amortization of $14,079 in 2002 and $14,643 in 2001 36,827 13,690
DEFERRED INCOME TAXES 97,341 -
OTHER ASSETS 34,401 33,026
---------- ----------
TOTAL ASSETS $813,577 $766,962
======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 29, December 31,
2002 2001
------------------- -------------------
LIABILITIES AND STOCKHOLDERS' DEFICIENCY (thousands, except share data)
CURRENT LIABILITIES
Current portion of long-term debt $ 46 $ 4,023
Current portion of long-term debt - related party - 14,040
Accounts payable 87,400 128,852
Accrued employee compensation and benefits 26,330 25,858
Accrued interest 14,173 8,946
Accrued restructuring 14,424 12,392
Accrued customer rebates 18,813 21,869
Cash overdrafts 17,801 4,073
Other accrued liabilities 20,093 24,551
Deferred income taxes 1,864 1,612
---------- ---------
Total current liabilities 200,944 246,216
LONG-TERM DEBT 738,540 630,682
LONG-TERM DEBT - RELATED PARTY - 17,550
ACCRUED EMPLOYEE BENEFITS 48,022 25,944
DEFERRED INCOME TAXES - 4,171
ACCRUED RESTRUCTURING 8,347 12,604
OTHER LIABILITIES 7,457 10,541
---------- ----------
Total liabilities 1,003,310 947,708
---------- ---------
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 2002 and 2001 15 15
Common Stock, par value $.01 per share:
Authorized 50,000,000 shares
Issued 27,839,658 in 2002 and 27,260,441 shares in 2001
Outstanding 24,350,658 shares in 2002 and 23,771,441 shares in 2001 278 273
Additional paid-in capital 101,972 97,668
Accumulated deficit (216,243) (206,544)
Accumulated other comprehensive loss (38,754) (35,157)
Other:
Common Stock held in treasury, at cost:
3,489,000 shares in 2002 and 2001 (27,780) (27,780)
Shareholder note receivable (9,221) (9,221)
---------- ----------
Total stockholders' deficiency (189,733) (180,746)
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY $813,577 $766,962
======== ========
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
December 29, December 31, December 31,
2002 2001 2000
------------------ ------------------ --------------
(thousands, except per share amounts)
NET SALES $1,328,094 $1,252,904 $1,257,778
COST OF GOODS SOLD 1,186,669 1,072,823 1,085,753
---------- ---------- ----------
GROSS PROFIT 141,425 180,081 172,025
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 94,744 80,540 69,286
RESTRUCTURING, IMPAIRMENT AND OTHER
CHARGES 4,799 36,068 6,268
---------- ---------- ----------
INCOME FROM OPERATIONS 41,882 63,473 96,471
INTEREST AND DEBT ISSUANCE EXPENSE 66,607 63,237 75,229
INCOME FROM EQUITY INTEREST IN JOINT VENTURES 1,734 1,645 1,652
OTHER INCOME (EXPENSE), NET 41 (2,196) (3,042)
---------- ---------- ----------
INCOME (LOSS) BEFORE PROVISION (BENEFIT)
FOR INCOME TAXES (22,950) (315) 19,852
PROVISION (BENEFIT) FOR INCOME TAXES (85,691) 5,297 2,839
---------- ---------- ----------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEMS AND
CUMULATIVE EFFECT OF ACCOUNTING CHANGES 62,741 (5,612) 17,013
EXTRAORDINARY ITEMS, NET OF INCOME TAXES (1,793) - -
CUMULATIVE EFFECT OF ACCOUNTING CHANGES (70,647) - -
---------- ---------- ----------
NET INCOME (LOSS) $ (9,699) $ (5,612) $ 17,013
========= ============ ===========
EARNINGS PER SHARE - BASIC
INCOME (LOSS) BEFORE EXTRAORDINARY ITEMS AND
CUMULATIVE EFFECT OF ACCOUNTING CHANGES $ 2.58 $ (0.24) $ 0.69
EXTRAORDINARY ITEMS, NET OF INCOME TAXES (0.07) - -
CUMULATIVE EFFECT OF ACCOUNTING CHANGES (2.91) - -
---------- ---------- ----------
NET INCOME (LOSS) $ (0.40) $ (0.24) $ 0.69
========= ============ =========
EARNINGS PER SHARE - DILUTED
INCOME (LOSS) BEFORE EXTRAORDINARY ITEMS AND
CUMULATIVE EFFECT OF ACCOUNTING CHANGES $ 2.39 $ (0.24) $ 0.67
EXTRAORDINARY ITEMS, NET OF INCOME TAXES (0.07) - -
CUMULATIVE EFFECT OF ACCOUNTING CHANGES (2.69) - -
---------- ---------- ----------
NET INCOME (LOSS) $ (0.37) $ (0.24) $ 0.67
========== ========== ==========
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
December 29, December 31, December 31,
2002 2001 2000
---------------------- ---------------- ---------------
OPERATING ACTIVITIES (thousands)
Net income (loss) $ (9,699) $ (5,612) $ 17,013
Adjustments to reconcile net income (loss) to net
cash provided by (used for) operating activities:
Extraordinary items 3,375 - -
Cumulative effect of accounting changes 70,647 - -
Depreciation and amortization 31,592 33,988 36,588
Amortization of debt issuance costs, debt premium
and debt discount 4,797 1,288 1,335
Asset impairment and other charges 2,503 13,811 2,621
Loss on disposition of assets - 963 1,654
Provision for uncollectible accounts 2,336 5,479 2,838
Retirement benefit funding greater than expense (1,604) (1,752) (7,198)
Deferred income taxes (92,400) 1,635 513
Other, net 266 361 303
Changes in operating assets and liabilities:
Accounts receivable (20,421) (9,578) (6,857)
Inventories (8,580) 15,177 (2,452)
Accounts payable (41,452) 45,913 262
Accrued restructuring (2,225) 15,549 (3,352)
Other assets and liabilities 10,440 (10,808) 7,720
------------ --------- ---------
Net cash provided by (used for) operating activities (50,425) 106,414 50,988
---------- -------- --------
INVESTING ACTIVITIES
Capital expenditures (15,582) (22,482) (23,593)
Proceeds from sale of assets 21 600 3,570
Acquisitions - (17,559) -
Other investing activities (7,990) (1,130) (1,850)
----------- ---------- ---------
Net cash used for investing activities (23,551) (40,571) (21,873)
--------- --------- --------
FINANCING ACTIVITIES
Repayments of short-term borrowings - - (1,627)
Net proceeds from (repayments of) revolving loans (73,176) (20,905) 32,220
Proceeds from long-term debt 356,590 - -
Repayments of long-term debt (190,450) (8,538) (20,550)
Repayments of long-term debt-related party (31,590) (15,795) (41,898)
Increase (decrease) in cash overdrafts 13,728 (2,812) 1,029
Debt issuance costs (29,981) (2,578) -
Deferred credit on interest rate swaps 14,821 - -
Other financing activities 3,494 (5,041) 24
----------- ----------- -----------
Net cash provided by (used for) financing activities 63,436 (55,669) (30,802)
--------- --------- --------
Net increase (decrease) in cash and cash equivalents (10,540) 10,174 (1,687)
Cash and cash equivalents at beginning of period 15,064 4,890 6,577
--------- ---------- ---------
Cash and cash equivalents at end of period $ 4,524 $ 15,064 $ 4,890
========= ======== ========
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, 2000 $ - $270 $87,475 $(217,945) $(7,758) $(28,423) $(166,381)
Net income 17,013 17,013
Minimum pension liability adjustment (14,628) (14,628)
Foreign currency translation adjustment (910) (910)
-----------
Comprehensive income 1,475
Exchange of common stock for
preferred stock - Series B 15 8,563 (8,578) -
Stock option compensation 213 213
Stock options exercised 24 24
------ ------- ------------ ----------- ------------ ---------- -----------
Balances at December 31, 2000 15 270 96,275 (200,932) (23,296) (37,001) (164,669)
Net loss (5,612) (5,612)
Minimum pension liability adjustment (10,782) (10,782)
Foreign currency translation adjustment (1,079) (1,079)
----------
Comprehensive income (loss) (17,473)
Stock compensation - directors 352 352
Stock options exercised 3 914 917
Deferred taxes on stock option exercises 127 127
------ ------- ------------ ----------- ------------ ---------- -----------
Balances at December 31, 2001 15 273 97,668 (206,544) (35,157) (37,001) (180,746)
Net loss (9,699) (9,699)
Minimum pension liability adjustment (11,325) (11,325)
Deferred tax valuation allowance adjustment 9,597 9,597
Foreign currency translation adjustment (1,869) (1,869)
---------
Comprehensive income (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)
===== ==== ======== ========= ======== ======== =========
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. As of December 29,
2002, 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. Foamex L.P. conducts foreign operations through Foamex Canada
Inc., Foamex Latin America, Inc. and Foamex Asia, Inc. Financial information
concerning the business segments of the Company is included in Note 14.
The Company has 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
2002 includes the 52 weeks ended December 29, 2002, after adjustment for
December 31, 2001 which was included in the prior year.
Shareholder and Change in Control Developments
Trace International Holdings, Inc. ("Trace") is a privately held company,
which owned approximately 29% of the Company's outstanding voting common stock
at September 30, 2000, and whose former Chairman also serves as the Company's
Chairman. The Company's common stock owned by Trace was pledged as collateral
against certain of Trace's obligations. Certain credit agreements and promissory
notes of the Company's subsidiaries, pursuant to which approximately $401.1
million of debt was outstanding as of September 30, 2000, provided that a
"change of control" would be an event of default and could result in the
acceleration of such indebtedness. "Change of control" means, for this purpose,
that (i) a person or related group, other than Trace, beneficially owns more
than 25% of the Company's outstanding voting stock and (ii) such voting stock
constitutes a greater percentage of such voting stock than the amount
beneficially owned by Trace. Additionally, certain indentures of Foamex L.P. and
Foamex Capital Corporation ("FCC"), a wholly-owned subsidiary of Foamex L.P.,
relating to senior subordinated notes contain similar "change of control"
provisions, which require Foamex L.P. and FCC 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".
On July 21, 1999, the Company was informed by Trace that it filed a
petition for relief under Chapter 11 of the Bankruptcy Code in Federal Court in
New York City. Subsequently, on January 24, 2000, an order was signed converting
the Trace bankruptcy from Chapter 11 to Chapter 7 of the Bankruptcy Code. A
trustee was appointed to oversee the liquidation of Trace's assets. Neither
Trace's bankruptcy filing nor the conversion to Chapter 7 constituted a "change
of control" under the provisions of the debt agreements described above.
On July 31, 2000, the Company announced that it had entered into an
agreement (the "Exchange Agreement") with The Bank of Nova Scotia relating to a
portion of the 7,197,426 shares of the Company's common stock pledged by Trace
to The Bank of Nova Scotia. The Exchange Agreement provided for the transfer of
the pledged stock to The Bank of Nova Scotia in a manner that would not
constitute a "change of control" as described above. These transactions were
conditioned upon bankruptcy court approval of a settlement agreement between The
Bank of Nova Scotia and the trustee for the Trace bankruptcy, which was entered
on October 18, 2000. On November 2, 2000, the transactions contemplated by the
Exchange Agreement and the settlement agreement were consummated, and did not
constitute a "change of control". As a result, Trace no longer owns any shares
of the Company's common stock.
Under the Exchange Agreement, The Bank of Nova Scotia initially received
1,500,000 shares of the Company's common stock from the Trace bankruptcy estate
and exchanged these common stock shares for 15,000 shares of a new class of the
Company's non-voting non-redeemable convertible preferred stock (the "Series B
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 discussed above. The Series B
Preferred Stock (a) is entitled to dividends only if a dividend is declared on
the Company's common stock, (b) ranks senior to any future preferred stock
issued by the Company and (c) is entitled to a liquidation preference of $100
per share. Following this exchange, The Bank of Nova Scotia became the owner of
24.41% of the outstanding
F-9
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION (continued)
shares of the Company's common stock when the remaining 5,697,426 shares of the
Company's common stock were transferred to The Bank of Nova Scotia from the
Trace bankruptcy estate. Certain equity transactions, primarily the exercise of
stock options, have reduced the Bank of Nova Scotia's common stock ownership
percentage to 23.6% at December 29, 2002.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation
The consolidated financial statements include the accounts of the Company
and all majority-owned subsidiaries where control exists. The equity method of
accounting is used for investments in which the Company has significant
influence, generally this represents ownership of at least 20% and not more than
50%. The Company has a joint venture in Asia in which it increased its ownership
to 70% in late 2001. The Company does not have control of this joint venture due
to the minority shareholders' substantive participation rights and therefore
uses the equity method of accounting. All significant intercompany accounts and
transactions have been eliminated in consolidation.
Accounting Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to
significant concentrations of credit risk consist primarily of cash and cash
equivalents and trade accounts receivable. The Company maintains cash and cash
equivalents and certain other financial instruments with various large financial
institutions. The Company's periodic evaluation of these financial institutions
are considered in the Company's investment strategy.
The Company sells foam products to the automotive, carpet, cushioning 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 risk of loss passes
to the customer, which is primarily at the time of shipment.
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.
F-10
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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 at December 29, 2002
were $738.6 million and $490.3 million, respectively, and at December 31, 2001
were $666.3 million and $603.4 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 2002, 2001 and 2000 was $29.1 million, $26.4 million
and $28.7 million, respectively.
Maintenance and repairs are charged to expense as incurred. Renewals and
major improvements are capitalized if they extend the life of the asset. When
assets are retired or otherwise disposed of, the asset and related accumulated
depreciation are removed from the accounts and any gain or loss is recognized in
the results of operations.
Capitalized Software Costs
The Company expenses costs incurred in the preliminary project stage of
developing or obtaining internal use software, such as research and feasibility
studies, as well as costs incurred in the post-implementation/operational stage,
such as maintenance and training. Capitalization of software development costs
occurs only after the preliminary project stage is complete, management
authorizes the project, and it is probable that the project will be completed
and the software will be used for the function intended. The capitalized costs
are amortized on a straight-line basis over the estimated useful life of the
software, which is generally five years or less.
Long-Lived Assets
The Company reviews the carrying value of its long-lived assets other
than goodwill whenever events or changes in circumstances indicate that the
carrying value of an asset may no longer be appropriate. The Company assesses
recoverability of the carrying value of the asset by estimating the future net
cash flows expected to result from the asset, including eventual disposition. If
the future undiscounted net cash flows are less than the carrying value of the
asset, an impairment loss is recorded equal to the difference between the
asset's carrying value and fair value.
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.
F-11
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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.
Comprehensive Income (Loss)
Other comprehensive income or loss items are revenues, expenses, gains
and losses that under generally accepted accounting principles are excluded from
net income and reflected as a component of stockholders' deficiency, including
foreign currency translation and minimum pension liability adjustments.
Foreign Currency Translation
The financial statements of foreign subsidiaries have been translated
into U.S. dollars by using period-end exchange rates for the assets and
liabilities and the average exchange rates for the statements of operations.
Currency translation adjustments are included in accumulated other comprehensive
loss. Transaction gains (losses) are reflected in operations.
Research and Development
Research and development costs are expensed as incurred. Amounts charged
against income were $4.8 million, $3.1 million and $2.5 million in 2002, 2001
and 2000, respectively.
Start-Up Costs
Costs incurred in the start-up of a facility, including training and
production testing, are expensed as incurred.
Self Insurance
The Company is partially self-insured for a number of risks up to certain
limits including workers' compensation, medical, automobile and general
liability. Commercial insurance policies are carried for amounts in excess of
the self-insured amounts.
Claims and Litigation
The Company evaluates claims for damages that are outside of its
insurance coverage and records its estimate of liabilities when such liabilities
are considered probable and an amount or reasonable range can be estimated.
Income Taxes
Income taxes are accounted for under the asset and liability method.
Under this method, deferred income taxes are provided for temporary differences
between the financial reporting basis and income tax basis of assets and
liabilities and for net operating loss carryforwards using the income tax rates,
under existing legislation, expected to be in effect at the date such temporary
differences are expected to reverse. Deferred income tax assets are reduced by a
valuation allowance when it is considered more likely than not that a portion of
the deferred income tax assets will not be realized in a future period. The
estimates utilized in the recognition of deferred income tax assets are subject
to revision in future periods.
F-12
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Stock Options
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS No. 123"), encourages, but does not require,
companies to record compensation cost for stock-based employee compensation
plans at fair value. The Company has chosen to continue to account for
stock-based compensation using the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB No. 25"), and related interpretations. Accordingly, the Company
records expense in an amount equal to the excess, if any, of the quoted market
price on the grant date over the option price.
The following table includes as reported and proforma information
required by Statement of Financial Accounting Standards No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure ("SFAS No. 148"). Proforma
information is based on the fair value method under SFAS No. 123. Fair values of
options granted were estimated using the Black-Scholes option pricing model as
discussed in Note 11.
2002 2001 2000
------------ ---------- --------
(thousands, except per share data)
Net income (loss) as reported $ (9,699) $(5,612) $17,013
Add: Stock-based employee compensation
expense included in reported net income
(loss), net of tax benefit 30 8 202
Deduct: Total stock-based compensation
expense determined under fair value
based method, net of tax benefit (1,345) (1,297) (1,465)
---------- -------- --------
Proforma net income (loss) $(11,014) $(6,901) $15,750
======== ======= =======
Basic earnings (loss) per share
As reported $ (0.40) $ (0.24) $ 0.69
Proforma $ (0.45) $ (0.29) $ 0.63
Diluted earnings (loss) per share
As reported $ (0.37) $ (0.24) $ 0.67
Proforma $ (0.42) $ (0.29) $ 0.62
Accounting Changes - Business Combinations
During 2001, Statement of Financial Accounting Standards No. 141,
"Business Combinations" ("SFAS No. 141") was issued. SFAS No. 141 addresses
financial accounting and reporting for business combinations and limits the
accounting for business combinations to the purchase method. The Statement was
effective for all business combinations, including the acquisition discussed in
Note 4, with an acquisition date of July 1, 2001, or later.
Accounting Changes - Goodwill and Other Intangible Assets
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" ("SFAS No. 142") addresses financial accounting and reporting
for acquired goodwill and other intangible assets. A key change as a result of
implementing SFAS No. 142 is that goodwill and certain other intangibles are no
longer amortized but are periodically assessed for impairment, and as a result
there may be more volatility in the reported results than under the previous
standard because impairment losses are likely to occur irregularly and in
varying amounts. An
F-13
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
impairment of goodwill due to the initial application of SFAS No. 142 is
discussed below. Any goodwill and intangible assets acquired after June 30,
2001, including the acquisition discussed in Note 4, are subject to the
nonamortization and amortization provisions of SFAS No. 142. The other
provisions of SFAS No. 142 were adopted by the Company on January 1, 2002. The
impact on the Company's financial statements for prior years was limited to $6.0
million of annual goodwill amortization. The Company's adjusted net income and
diluted earnings per share would have been $0.4 million and $0.02 in 2001 and
$23.0 million and $0.91 in 2000, if SFAS No. 142 had been adopted retroactively
to January 1, 2000.
SFAS No. 142 provides a six-month transitional period from the effective
date to perform an assessment of whether there is an indication that goodwill is
impaired. The Company completed this assessment in the second quarter of 2002.
Step one of the transitional impairment test uses a fair value methodology,
which differs from the undiscounted cash flow methodology that continues to be
used for intangible assets with an identifiable life. The Company identified six
reporting units and during the second quarter performed step one of the
transitional impairment test on each of the reporting units. Based on the
results of step one of the transitional impairment test, the Company identified
one reporting unit in the Foam Products segment, the Carpet Cushion Products
reporting unit and the Other reporting unit, for which the carrying values
exceeded the fair values as of January 1, 2002, indicating a potential
impairment of goodwill in those reporting units. Step two of the transitional
impairment test, to determine the magnitude of any goodwill impairment, was
completed in the third quarter of 2002. The resulting impairment loss of $72.0
million has been recorded as a cumulative effect of a change in accounting
principle, retroactive to the Company's first quarter results of operations in
accordance with the transitional implementation guidance of SFAS No. 142. The
Company performed its annual goodwill impairment test as of September 30, 2002
which did not result in the recognition of any additional impairment.
Goodwill balances include:
Balance Accounting Balance
Segments December 31, 2001 Changes Other (1) December 29, 2002
-------------------------------- ----------------- ------------ ---------- -----------------
(thousands)
Foam Products $ 90,909 $ (7,771) $ (8,869) $ 74,269
Carpet Cushion Products 62,898 (60,401) - 2,497
Automotive Products 37,244 - (2,558) 34,686
Technical Products 14,658 - (789) 13,869
Other 2,475 (2,475) - -
----------- ----------- ------------ ------------
Total $208,184 $(70,647) $(12,216) $125,321
======== ======== ======== ========
(1) Principally the reversal of a deferred income tax valuation allowance
(see note 12).
Future Accounting Changes - Extinguishment of Debt
On April 30, 2002, Statement of Financial Accounting Standards No. 145,
"Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement
No. 13, and Technical Corrections" ("SFAS No. 145") was issued. The provisions
of this Statement related to the rescission of Statement 4 shall be applied in
fiscal years beginning after May 15, 2002. Any gain or loss on extinguishment of
debt that was classified as an extraordinary item in prior periods presented
that does not meet the criteria in Opinion 30 for classification as an
extraordinary item shall be reclassified. Early application of the provisions of
this Statement related to the rescission of Statement 4 is encouraged. The
adoption of this Statement in 2003 will result in a reclassification of the
extraordinary items recorded during 2002.
F-14
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Future Accounting Change - Guarantees
In November 2002, the FASB issued FASB Interpretation ("FIN") No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." FIN No. 45 clarifies the
requirements of SFAS No. 5, "Accounting for Contingencies," relating to the
guarantor's accounting for and disclosures of certain guarantees. The initial
recognition and measurements provisions of the interpretation are applicable on
a prospective basis to guarantees issued or modified after December 31, 2002,
irrespective of the guarantor's fiscal year-end. The disclosure requirements of
the interpretation are effective for financial statements of interim or annual
periods ending after December 15, 2002. The adoption of this interpretation is
not expected to have any impact on the results of operations or financial
position of the Company. The Company does not have any disclosure obligations
under this interpretation at December 29, 2002.
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.
2002 2001 (a) 2000
---------- ------------ ------------
Earnings per share - basic: (thousands, except per share amounts)
Income (loss) before extraordinary items and
cumulative effect of accounting changes $62,741 $(5,612) $17,013
Extraordinary items, net of income taxes (1,793) - -
Cumulative effect of accounting changes (70,647) - -
------- ------------ -------------
Net income (loss) $(9,699) $(5,612) $17,013
======= ======= =======
Weighted average common stock outstanding 24,275 23,599 24,814
======= ======= ========
Income (loss) before extraordinary items and
cumulative effect of accounting changes $ 2.58 $ (0.24) $ 0.69
Extraordinary items, net of income taxes (0.07) - -
Cumulative effect of accounting changes (2.91) - -
--------- ----------- ------------
Net income (loss) $ (0.40) $ (0.24) $ 0.69
======== ======= ========
The following table shows the amounts used in computing diluted earnings
(loss) per share.
2002 2001 (a) 2000
---------- ------------ ------------
(thousands, except per share amounts)
Earnings per share - diluted:
Income (loss) before extraordinary items and
cumulative effect of accounting changes $62,741 $(5,612) $17,013
Extraordinary items, net of income taxes (1,793) - -
Cumulative effect of accounting changes (70,647) - -
------- ------------ -------------
Net income (loss) $(9,699) $(5,612) $17,013
======= ======= =======
Weighted average common stock outstanding 24,275 23,599 24,814
F-15
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. EARNINGS (LOSS) PER SHARE
2002 2001 (a) 2000
---------- ------------ ------------
(thousands, except per share amounts)
Incremental shares resulting from
Stock options (b) 529 - 149
Convertible preferred stock (c) 1,500 - 245
-------- ------------ ---------
Adjusted weighted average shares 26,304 23,599 25,208
======= ======= ========
Income (loss) before extraordinary items and
cumulative effect of accounting changes $ 2.39 $ (0.24) $ 0.67
Extraordinary items, net of income taxes (0.07) - -
Cumulative effect of accounting changes (2.69) - -
-------- ----------- ------------
Net income (loss) $ (0.37) $ (0.24) $ 0.67
======= ======= ========
(a) There is no dilution resulting from potential incremental shares in
2001, because the Company had a net loss before extraordinary items
and cumulative effect of accounting changes, and the inclusion of
potential incremental shares would be antidilutive.
(b) The average number of stock options that were not included in the
diluted earnings per share calculation because the exercise price was
greater than the average market price aggregated 1,462,600 and
1,715,000 in 2002 and 2000, respectively.
(c) Series B Preferred Stock was issued during the fourth quarter of 2000
(see Note 13) and is convertible into 1,500,000 common shares.
4. ACQUISITION
On July 25, 2001, the Company purchased certain assets and assumed
certain liabilities of General Foam Corporation, a manufacturer of polyurethane
foam products for the automotive, industrial, and home furnishings markets, at a
total cost of $18.5 million, which resulted in goodwill of approximately $9.1
million. The business was acquired due to its synergy with the Company's
existing business. The assets purchased primarily included inventory and
machinery and equipment. The results of the acquired business have been included
in the consolidated financial statements since the date of acquisition. The
effects of the acquisition on the Company's consolidated financial statements
are not material.
5. EXTRAORDINARY ITEMS AND CUMULATIVE EFFECT OF ACCOUNTING CHANGES
In connection with the refinancing transaction completed on March 25,
2002 (see Note 9), the Company wrote off debt issuance costs associated with the
early extinguishment of its long-term debt due to a related party and its
revolving credit facility, resulting in an extraordinary loss of $2.6 million,
net of income tax benefit of $1.7 million. In addition, the Company purchased
and retired $49.0 million of its 13 1/2% senior subordinated notes, including
unamortized debt premium of $2.5 million, and $1.5 million of its 9 7/8% senior
subordinated notes resulting in an extraordinary gain of $0.8 million, net of
income taxes of $0.6 million.
Statement of Financial Accounting Standards No. 141, "Business
Combinations" ("SFAS No. 141") requires that any unamortized deferred credit
related to an excess over cost arising from a business combination that occurred
before July 1, 2001 to be written off and recognized as the effect of a change
in accounting principle. Accordingly, the Company has recorded a $1.3 million
credit as the cumulative effect of an accounting change in 2002.
Also included as a cumulative effect of accounting changes in 2002 is a
charge of $72.0 million associated with the adoption of SFAS No. 142 (see Note
2).
F-16
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. RESTRUCTURING, IMPAIRMENT AND OTHER CHARGES
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.
Also in 2002, the Company recorded restructuring, impairment and other
credits of $5.2 million. These credits resulted from a reevaluation of the 2001
Operational Reorganization Plan discussed below and $2.1 million related to the
collection of deferred rent receivable which had been fully reserved for.
The 2001 Operational Reorganization Plan is expected to be substantially
completed in early 2003 and the Company expects to complete all of the remaining
facility closures and personnel reductions related to its 2002 restructuring
plan during 2003, primarily in the first six months. Terminations of
approximately 300 employees for both plans are planned to take place in 2003.
2001
During 2001, the Company recorded restructuring, impairment and other
charges of $36.1 million, primarily related to its December 2001 Operational
Reorganization Plan. Included in the Operational Reorganization Plan were plant
facility closures, reductions in support function personnel and cost reductions
in purchasing and logistics. The Operational Reorganization Plan originally
included severance and termination benefits for approximately 700 employees at
plants, in support functions and in executive management. A reevaluation of the
plan in 2002 reduced the number of facilities to be closed and as a result the
number of employees planned to be terminated was reduced to approximately 500.
Approximately 340 of these employees were terminated in 2002. Restructuring,
impairment and other charges included an impairment provision of $13.8 million
(net of anticipated proceeds of $4.6 million) to reduce certain leasehold
improvements and machinery and equipment included in the Foam Products and
Carpet Cushion Products segments to their estimated fair values.
2000
During 2000, the Company recorded restructuring, impairment and other
charges of $6.3 million which included severance and other termination benefits
for approximately 100 employees, all of whom have been terminated.
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
----- ---------- ---------- ---------- -----
2000 (millions)
Balance at January 1, 2000 $9.0 $10.1 $2.7 $(3.8) $ -
Provision 6.3 1.4 2.3 2.6 -
Net cash receipts (spending) (3.5) (3.9) (3.2) 3.6 -
Asset impairment (2.6) - - (2.6) -
------ -------- ------- ----- ------
Balance at December 31, 2000 9.2 7.6 1.8 (0.2) -
F-17
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. RESTRUCTURING, IMPAIRMENT AND OTHER CHARGES (continued)
Plant Closure Personnel
Total and Leases Reductions Impairment Other
----- ---------- ---------- ---------- -----
2001 (millions)
2001 Operational Reorganization
Plan 35.4 10.6 8.3 13.4 3.1
Adjustments and other 0.7 (0.4) (0.3) - 1.4
Net cash receipts (spending) (6.5) (3.1) (2.0) 0.6 (2.0)
Asset impairment (13.8) - - (13.8) -
------ --------- ------- ----- --------
Balance at December 31, 2001 25.0 14.7 7.8 - 2.5
2002
2002 Restructuring Plan 10.0 2.2 4.5 2.5 0.8
Adjustments and other (5.2) (4.4) (1.4) - 0.6
Net cash receipts (spending) (4.5) 0.1 (2.7) - (1.9)
Asset impairment (2.5) - - (2.5) -
------ --------- ------- ----- ---------
Balance at December 29, 2002 $22.8 $12.6 $8.2 $ - $2.0
===== ===== ==== ====== ====
The Company expects to spend approximately $14.4 million during 2003 with
the balance to be spent through 2012, primarily for lease costs.
7. INVENTORIES
The components of inventory are listed below.
December 29, December 31,
2002 2001
------------------- ----------------
(thousands)
Raw materials and supplies $60,588 $53,398
Work-in-process 16,737 12,476
Finished goods 20,685 23,556
-------- --------
Total $98,010 $89,430
======= =======
8. SHORT-TERM BORROWINGS
Foamex Canada Inc. ("Foamex Canada") is a wholly-owned subsidiary of
Foamex L.P. and has a short-term credit facility that provides for $8.0 million
of Canadian dollar loans (U.S. dollar equivalent of approximately $5.1 million
as of December 29, 2002) of which up to $2.0 million is available in U.S. dollar
loans. The amount of borrowings available is based on a combination of accounts
receivable and inventory, as defined in the credit facility. Interest on
Canadian dollar borrowings is based on the bank's prime lending rate plus 1 1/2
%. On U.S. dollar loans, interest is based on the bank's U.S. dollar base rate
in Canada plus 1 1/2 %. At December 29, 2002 and December 31, 2001, there were
no short-term borrowings outstanding and approximately $5.1 million was
available at December 29, 2002.
F-18
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. LONG-TERM DEBT
The components of long-term debt are listed below.
December 29, December 31,
2002 2001
---------------- ---------------
Foamex L.P. Credit Facility (thousands)
Term Loan B (1) $ 39,262 $ 76,139
Term Loan C (1) 35,693 69,218
Term Loan D (1) 51,700 100,259
Term Loan E (1) 16,290 -
Term Loan F (1) 19,243 -
Revolving credit facility (1) 51,823 125,000
10 3/4% Senior secured notes due 2009 (2) (5) 314,237 -
9 7/8% Senior subordinated notes due 2007 (2) 148,500 150,000
13 1/2% Senior subordinated notes due 2005 (includes
$2,486 and $6,515 of unamortized debt premium) (2) 54,071 104,515
Industrial revenue bonds (3) 7,000 7,000
Other (net of unamortized debt discount of $137 in 2002
and $281 in 2001) 767 2,574
------------ ----------
738,586 634,705
Less current portion 46 4,023
------------- ----------
Long-term debt-unrelated parties $738,540 $630,682
======== ========
The components of related party long-term debt are listed below.
December 29, December 31,
2002 2001
-------------- ------------
(thousands)
Note payable to Foam Funding LLC (4) $ - $31,590
Less current portion - 14,040
------------- --------
Long-term debt - related party $ - $17,550
============ =======
(1) Subsidiary debt of Foamex L.P., guaranteed by the Company and FMXI, Inc.
(2) Subsidiary debt of Foamex L.P. and Foamex Capital Corporation.
(3) Subsidiary debt of Foamex L.P.
(4) Subsidiary debt of Foamex Carpet.
(5) Includes $14.2 million of deferred credit on interest rate swap
transactions at December 29, 2002.
On March 25, 2002, Foamex L.P. and Foamex Capital Corporation issued
$300.0 million of 10 3/4% Senior Secured Notes due 2009 (the "Senior Secured
Notes") and amended the Foamex L.P. Credit Facility (the "Amended Credit
Facility"). Under the Amended Credit Facility, the Company may borrow up to
$262.2 million, consisting of $162.2 million of term loans and a $100.0 million
revolving credit facility. Net proceeds from the Senior Secured Notes of $280.0
million were used to repay a portion of the debt outstanding under the Foamex
L.P. Credit Facility. The $31.6 million note payable to a related party, Foam
Funding LLC, was repaid with the initial proceeds of a new term loan under the
Amended Credit Facility. Additionally, financial covenants contained in the
Amended Credit Facility were adjusted to reflect changes in the capital
structure and the current business environment of Foamex L.P. Under the
covenants contained in the Senior Secured Notes and the Amended Credit Facility,
the Company was able to spend up to $48.5 million of the proceeds from the
Senior Secured Notes to repurchase or redeem some of its senior subordinated
notes. In July and August 2002, Foamex L.P. utilized $48.5 million to purchase
and retire $49.0
F-19
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. LONG-TERM DEBT (continued)
million of its 13 1/2% senior subordinated notes, including unamortized debt
premium of $2.5 million, and $1.5 million of its 9 7/8% senior subordinated
notes.
Amended Credit Facility
-----------------------
The Amended Credit Facility consists of (1) the new revolving credit
facility, which is a non-amortizing revolving credit facility provided by a new
syndicate of lenders (the "New Revolving Credit Facility"), which provides
working capital for Foamex L.P. and its subsidiary guarantors and funding for
other general corporate purposes, (2) Term B, C, and D loans, (3) a new Term E
Loan in the initial amount of $31.6 million, the proceeds of which were borrowed
at closing and used to repay in full the obligations outstanding under the note
payable to Foam Funding LLC, and (4) a new Term F Loan in the initial amount of
$25.0 million, the proceeds of which were borrowed at closing and used to repay
indebtedness outstanding under the revolving credit facility. The remaining
obligations outstanding under the revolving credit facility were repaid with a
portion of the proceeds from the issuance of the 10 3/4% Senior Secured Notes as
described below.
The commitments under the New Revolving Credit Facility are available to
Foamex L.P. in the form of (1) revolving credit loans, (2) swing loans (subject
to a $20.0 million sublimit) and (3) letters of credit (subject to a $40.0
million sublimit). At December 29, 2002, Foamex L.P. had available borrowings of
$27.6 million and letters of credit outstanding of $20.6 million.
A portion of the net proceeds from the 10 3/4% Senior Secured Notes was
used to repay a portion of the existing term loans, the Term E Loan and the Term
F Loan. Loans made under the New Revolving Credit Facility will mature and the
commitments under them will terminate on June 30, 2005. The Term B Loan, the
Term E Loan and the Term F Loan will mature on June 30, 2005, the Term C Loan
will mature on June 30, 2006 and the Term D Loan will mature on December 29,
2006. Each of the Term Loans will be subject to amortization on a quarterly
basis; however, after giving effect to the prepayments of the Term Loans,
quarterly principal payments will commence for the Term B Loan, the Term E Loan
and the Term F Loan in 2004, for the Term C Loan in 2005 and for the Term D Loan
in 2006.
Foamex L.P. is required to make mandatory prepayments of loans under the
Amended Credit Facility with: (1) the net cash proceeds received from sales of
assets by Foamex L.P. or certain of its subsidiaries, (2) the net cash proceeds
received from certain issuances by Foamex L.P., or any of its subsidiaries of
indebtedness for borrowed money or equity interests and (3) 75% of excess cash
flow in any fiscal year, such percentage to be reduced to 50% if the ratio of
outstanding obligations under the Amended Credit Facility to EBDAIT (as defined)
for such fiscal year is reduced to specified levels, subject, in each case, to
certain limited exceptions.
Foamex L.P. is permitted to make voluntary prepayments and/or permanently
reduce the commitments under the New Revolving Credit Facility in whole or in
part, without premium or penalty, subject to reimbursement of the lenders'
redeployment costs in the case of prepayment of LIBO, as defined, rate
borrowings, other than at the end of any interest period. All voluntary
prepayments of Term Loans will be applied to such tranches of Term Loans as
Foamex L.P. may select.
The Company, FMXI, Inc. and each of Foamex L.P.'s domestic subsidiaries
continue to guarantee the repayment of the obligations under the Amended Credit
Facility. The Amended Credit Facility is secured by a first-priority lien
(subject to permitted liens) on substantially the same collateral that secured
the obligations under the prior Foamex L.P. credit facility, which includes
substantially all of the Company's material tangible and intangible assets. In
addition, all of the partnership interests, all of the capital stock or other
equity interests of the Company's domestic subsidiaries (including Foamex
Carpet) and 65% of the capital stock or other equity interests of the Company's
first-tier foreign subsidiaries are pledged as part of the security for the
obligations under the Amended Credit Facility.
F-20
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. LONG-TERM DEBT (continued)
Borrowings under the Amended Credit Facility bear interest at a floating
rate based upon (and including a margin over), at our option, (1) the higher of
(a) the funding agent's prime rate and (b) 0.50% in excess of the Federal
Reserve reported weighted average overnight rate for federal funds or (2) the
higher of (x) 2.50% per annum and (y) the LIBO rate, as defined, as determined
by the funding agent. The effective interest rates at December 29, 2002 for Term
Loans B, C, D, E and F ranged between 7.00% and 7.38%. The effective interest
rate for revolving loans at December 29, 2002 was 7.75%. The rates increase 25
basis points each quarter that Foamex L.P.'s leverage ratio, as defined, exceeds
5.00 to 1.00. Once the leverage ratio is reduced below this level, the
cumulative amount of any 25 basis point adjustment to the interest rates on
borrowings are reset to zero. At December 29, 2002, the calculated leverage
ratio was 8.66 to 1.00. Accordingly, an additional 25 basis point rate increase
will become effective early in the second quarter of 2003.
The Amended Credit Facility contains affirmative and negative covenants
that, subject to certain exceptions, are substantially similar to those
contained in the prior credit facility. The Amended Credit Facility also
includes the following financial covenants, as defined therein: (1) a minimum
net worth test; (2) a minimum ratio of EBDAIT to cash interest expense; (3) a
minimum ratio of EBDAIT to fixed charges; and (4) a maximum ratio of funded debt
to EBDAIT. These covenants are substantially the same as those contained in the
prior credit facility with appropriate changes to take into account the issuance
of the Senior Secured Notes and the contribution of Foamex Carpet to Foamex L.P.
The Amended Credit Facility also requires the refinancing of the 13 1/2% senior
subordinated notes on or prior to March 1, 2005.
The Amended Credit Facility contains events of default including, but not
limited to, nonpayment of principal, interest, fees or other amounts when due,
violation of covenants, inaccuracy of representations and warranties in any
material respect, cross default and cross acceleration to certain other
indebtedness, bankruptcy, ERISA, material judgments and change of control.
Certain of these events of default are subject to grace periods and materiality
qualifications. See the Debt Covenants section of this Note.
Foamex Carpet Credit Facility
-----------------------------
At December 31, 2001, Foamex Carpet had a revolving credit facility (the
"Foamex Carpet Credit Facility"), which provided a commitment of $15.0 million
through February 2004. There were no borrowings outstanding under the credit
facility at December 31, 2001 and available borrowings totaled $14.8 million
with $0.2 million of letters of credit outstanding. The Foamex Carpet Credit
Facility was terminated on March 25, 2002 in connection with the refinancing.
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 Amended 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 Amended Credit Facility. 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 and liquidated damages, as defined, if
any, thereon to the date of redemption and declining annually to 100.0% on or
after April 1, 2008. Additionally, on or before April 1, 2005, up to 35.0% of
the principal amount of the notes may be redeemed at a redemption price equal to
110.750% of the principal amount, plus accrued and unpaid interest and
liquidated damages, as defined, if any, thereon to the date of redemption with
the net proceeds of one or more equity offerings.
Upon the occurrence of a change of control, as defined, each holder will
have the right to require 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 and liquidated damages, as defined, if any, if there is such a
"change of control".
F-21
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. LONG-TERM DEBT (continued)
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 is liable for liquidated damages from
September 23, 2002 until the date the registration statement became effective.
The liquidated damages are 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 amount
accrued for liquidated damages at December 29, 2002 was $0.2 million.
Effective May 1, 2002, the Company completed a series of interest rate
swap transactions with notional amounts aggregating $300.0 million. The Company
designated, documented and accounted for these interest rate swaps as fair value
hedges of the Company's 10 3/4% Senior Secured Notes due April 1, 2009. The risk
being hedged in these transactions was the change in fair value of the Company's
10 3/4% Senior Secured Notes based on changes in the benchmark interest rate,
LIBOR. The effect of these interest rate swap transactions was to convert the
fixed interest rate on the 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, 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 will be 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
104.938% of their principal amount, plus accrued and unpaid interest, as
defined, if any, thereon to the date of redemption and declining annually to
100.0% on or after June 15, 2005.
Upon the occurrence of a change of control, as defined, each holder will
have the right to require Foamex L.P. to tender for such notes at a price in
cash equal to 101% of the aggregate principal amount thereof, plus accrued and
unpaid interest thereon, if there is such a "change of control". The notes are
subordinated in right of payment to all senior indebtedness and are pari passu
in right of payment to the 13 1/2% Senior Subordinated Notes (described below).
13 1/2% Senior Subordinated Notes
The 13 1/2% Senior Subordinated Notes were issued by Foamex L.P. and
Foamex Capital Corporation and are due on August 15, 2005. The notes represent
uncollateralized general obligations of Foamex L.P. and are subordinated to all
Senior Debt, as defined in the Indenture. Interest is payable semiannually on
February 15 and August 15. The notes may be redeemed at the option of Foamex
L.P., in whole or in part, at any time on or after August 15, 2000. The initial
redemption was 106.75% of their principal amount, plus accrued and unpaid
interest, if any, thereon to the date of redemption and declining annually to
100.0% on or after August 15, 2004. At December 29, 2002, the redemption price
was 103.375% 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).
F-22
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. LONG-TERM DEBT (continued)
Industrial Revenue Bonds ("IRBs")
IRB debt includes a $1.0 million bond that matures in 2005 and a $6.0
million bond that matures in 2013. Interest is based on a variable rate, as
defined, with options available to Foamex L.P. to convert to a fixed rate. At
December 29, 2002, the interest rate was 1.55% on the $1.0 million bond and
1.60% on the $6.0 million bond. The maximum interest rate for either of the IRBs
is 15.0% per annum.
If Foamex L.P. exercises its option to convert the bonds to a fixed
interest rate structure, the IRBs are redeemable at the option of the
bondholders. The obligations are collateralized by certain properties, which
have an approximate net carrying value of $10.8 million at December 29, 2002.
Other
Other debt at December 31, 2001 included a term loan owed by a
majority-owned Mexican subsidiary, Foamex de Cuautitlan S.A. de C.V. Quarterly
principal payments were due on the term loan through its maturity in May 2002.
Also included in other debt is a non-interest bearing promissory note with a
principal amount of $0.9 million at December 29, 2002 issued in connection with
increasing the Company's interest in an Asian joint venture to 70% in 2001. The
promissory note had unamortized discount of $0.1 million at December 29, 2002.
Related Party - Note Payable to Foam Funding LLC
Foamex Carpet entered into a $70.2 million promissory note payable to
Foam Funding LLC, a subsidiary of Trace International Holdings, Inc. ("Trace").
Principal was payable in quarterly installments that began in June 1998 with a
final installment in February 2004. Interest was based on a variable rate equal
to the sum of 2.25% plus the higher of: (i) the base rate of The Bank of Nova
Scotia or (ii) the Federal Funds rate plus 0.5%. At the option of Foamex Carpet,
interest payable under the note was convertible into LIBOR based loans plus
3.25%.
Amounts outstanding were collateralized by all of the assets of Foamex
Carpet on a pari passu basis with the Foamex Carpet Credit Facility. All
obligations under the note payable to Foam Funding LLC were paid on March 25,
2002.
Debt Covenants
The indentures, the Foamex L.P. Amended Credit Facility 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.
Also, the Company's subsidiaries are required under certain of these agreements
to maintain specified financial ratios of which the most restrictive are the
maintenance of net worth, interest coverage, fixed charge coverage and leverage
ratios, as defined. Under the most restrictive of the distribution restrictions
as of December 29, 2002, the Company could be paid funds by its subsidiaries,
only to the extent to enable the Company to meet its tax payment liabilities and
its normal operating expenses of up to $1.0 million annually, so long as no
event of default has occurred.
Foamex L.P. and Foamex Carpet, the then principal subsidiaries of the
Company, were in compliance with the various financial covenants of their loan
agreements as of December 31, 2000. Certain Foamex L.P. and Foamex Carpet debt
agreements contained certain quarterly financial covenants, which became more
restrictive during 2001. In the absence of a waiver of or amendment to such
financial covenants, noncompliance would have constituted an event of default
under the applicable debt agreements, and the lenders would have been entitled
to accelerate the maturity of the indebtedness outstanding thereunder. Prior to
filing the Annual Report on Form 10-K for the year
F-23
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9.LONG-TERM DEBT (continued)
ended December 31, 2000, the Company, Foamex L.P. and Foamex Carpet anticipated
they would continue to comply with the financial covenants in the applicable
debt agreements during 2001. In the event that noncompliance appeared likely or
occurred, management was prepared to seek lenders' approval of amendments to, or
waivers of, such financial covenants. In December 2001, certain financial
covenants were modified to accommodate the restructuring, impairment and other
charges recorded in the fourth quarter of 2001 as a result of the Company's 2001
Operational Reorganization Plan. At that time certain financial covenants were
also eased for 2002. The Company paid a fee of approximately $1.8 million to
obtain this modification. The Foamex Carpet debt agreements were terminated in
connection with the refinancing which took place on March 25, 2002.
On October 16, 2002, Foamex L.P. announced that it had obtained a waiver
from its bank lenders of its financial covenants under the Amended Credit
Facility for the period ended September 29, 2002 since it would not have been in
compliance with the covenants. The waiver was effective until November 30, 2002
and reduced the commitment under the revolving credit facility from $100.0
million to $70.0 million for the period the waiver was in effect. 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. will be subject to minimum net
worth, minimum EBDAIT, as defined, and maximum capital expenditure covenants
through periods ending December 28, 2003. The minimum EBDAIT covenant is tested
monthly, on a cumulative basis, beginning with December 2002. Foamex L.P. was in
compliance with the revised covenants as of December 29, 2002. In addition,
Foamex L.P. was subject to a minimum EBDAIT, as defined, covenant for the
quarter ended September 29, 2002 and was in compliance. Compliance with existing
covenants on leverage, fixed charge coverage and interest coverage ratios is
suspended through periods ending September 28, 2003, but the covenants are
revised and will be reinstated thereafter. All of the financial covenants were
established based on a business plan provided to the lenders. In addition,
borrowings under the Amended Credit Facility will be subject to a borrowing base
calculation, which could limit borrowings under the revolving credit facility to
less than the maximum commitment. Under the borrowing base calculation,
availability under the Revolving Credit Facility shall equal the lesser of (1)
the Revolving Credit Facility commitment or (2) the sum of 65% of Foamex L.P.'s
accounts receivable plus 50% of Foamex L.P.'s inventory plus $85.0 million, less
certain other adjustments for Term Loan repayments, less the outstanding balance
of Term Loans. As of December 29, 2002, the borrowing base calculation did not
limit borrowings under the Amended Credit Facility. The cost of obtaining the
amendment aggregated $4.0 million, including bank and legal fees.
The Company's minimum EBDAIT covenants have higher thresholds in the
second half of 2003. Management's current plans to achieve EBDAIT covenant
compliance require continued customer selling price management in response to
raw material cost changes, successful implementation of on-going cost savings
initiatives, improved operating efficiencies, improved working capital
management and reduced capital expenditures. Management is also continuing to
evaluate strategic alternatives in an effort to reduce the Company's debt.
Maturities of Long-Term Debt
Scheduled maturities of long-term debt as of December 29, 2002 are shown
below (thousands):
2003 $ 46
2004 33,795
2005 160,216
2006 73,444
2007 148,500
Thereafter 306,000
--------
722,001
Unamortized debt premium/discount
and deferred credit, net 16,585
----------
Total $738,586
========
F-24
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. 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.
Effective May 15, 2001, a supplemental executive retirement plan (the
"SERP") was established. The SERP is a non-qualified plan and provides
retirement benefits to certain executives that supplement the benefits provided
under the Qualified Pension Plan.
The components of pension expense are listed below.
2002 2001 2000
---------- ---------- ----------
(thousands)
Service cost $3,866 $3,666 $3,307
Interest cost 6,556 6,158 5,667
Expected return on plan assets (5,823) (5,829) (6,371)
Amortization
Transition asset (75) (75) (75)
Prior service cost (140) (177) (240)
Losses and other 1,643 1,163 179
Curtailment gain (162) - -
-------- ----------- -----------
Total $5,865 $4,906 $2,467
====== ====== ======
The following table sets forth the changes in obligations and assets and
outlines the development of the funded status and amounts recognized in the
consolidated balance sheets.
December 29, December 31,
2002 2001
------------------- -------------------
(thousands)
Change in Benefit Obligation
Benefit obligation at beginning of year $95,962 $84,820
Service cost 3,866 3,666
Interest cost 6,556 6,158
Amendments, including SERP in 2001 157 1,059
Benefits paid (5,003) (4,525)
Actuarial loss 6,512 4,784
Curtailment (660) -
------------ -------------
Projected benefit obligation at end of year $107,390 $95,962
======== =======
Change in Plan Assets
Fair value of plan assets at beginning of year $65,514 $66,199
Actual return on plan assets (7,350) (2,269)
Company contributions 7,464 6,347
Benefits paid (5,003) (4,525)
Other (540) (238)
---------- ----------
Fair value of plan assets at end of year $60,085 $65,514
======= =======
F-25
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. RETIREE BENEFIT PLANS (continued)
December 29, December 31,
2002 2001
------------------- -------------------
(thousands)
Funded Status
Plan assets less than benefit obligation $ (47,305) $ (30,448)
Unrecognized transition asset (440) (515)
Unrecognized prior service cost (265) (733)
Unrecognized net losses 52,573 34,656
--------- ---------
Net prepaid assets $ 4,563 $ 2,960
========= =========
Amounts Recognized in the Consolidated Balance Sheets
Prepaid benefit costs $ 194 $ 389
Accrued benefit liability (42,983) (26,363)
Intangible assets 763 612
Accumulated other comprehensive loss 46,589 28,322
--------- ---------
Net amount recognized $ 4,563 $ 2,960
========= =========
Significant assumptions used in the calculation of pension expense and
obligations are listed below.
2002 2001 2000
---------- ---------- ----------
Expected long-term rate of return on plan assets 9.0% 9.0% 10.0%
Discount rate on projected benefit obligations 6.5% 7.0% 7.25%
Rate of compensation increase 4.0%-5.0% 4.0%-7.0% 4.0%
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 Internal Revenue Code of 1986, as amended (the
"Code").
At December 31, 2002 and December 31, 2001, included in plan assets were
420,000 shares of the Company's stock. The value of the Plan's investment in the
Company's stock was approximately $1.3 million and $3.4 million at December 31,
2002 and December 31, 2001, respectively.
Defined Contribution Plan
The Company maintains a defined contribution plan, which is qualified
under Section 401(k) of the 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 $1.0 million, $1.0 million and $1.1 million in 2002, 2001 and
2000, respectively.
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 Company retains the right, subject to existing agreements, to
modify or eliminate these benefits.
F-26
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. RETIREE BENEFIT PLANS (continued)
The components of retiree medical and life insurance benefits expense are
listed below.
2002 2001 2000
---------- ---------- ----------
(thousands)
Service cost $29 $19 $15
Interest cost 82 60 57
Amortization
Prior service cost (6) (6) (6)
Losses and other 15 (8) (27)
----- ----- ----
Total $120 $65 $39
==== === ===
The following table outlines the changes in obligations and benefit
payments and outlines the development of the funded status and amounts
recognized in the consolidated balance sheets.
December 29, December 31,
2002 2001
---------------- ----------------
(thousands)
Change in Benefit Obligation
Benefit obligations at beginning of year $ 624 $ 763
Service cost 29 19
Interest cost 82 60
Employee contributions 19 23
Benefits paid (144) (399)
Actuarial loss 638 158
-------- ------
Accumulated postretirement benefit obligation at end of year $1,248 $ 624
====== =====
Change in Plan Assets
Fair value of plan assets at beginning of year $ - $ -
Company contributions 125 376
Employee contributions 19 23
Benefits paid (144) (399)
------ ------
Fair value of plan assets at end of year $ - $ -
======== ========
Funded Status of the Plan
Plan assets less than benefit obligation $(1,248) $ (624)
Unrecognized prior service cost 398 (60)
Unrecognized net gains (53) (224)
---------- -------
Net accrued liabilities $ (903) $ (908)
======== ======
Significant assumptions used in the calculation of retiree and life
insurance benefit expense and obligations are listed below.
2002 2001 2000
---------- ---------- ----------
Discount rates on projected benefit obligations 6.5% 7.0% 7.25%
Health care cost increase 13.0% 9.0% 7.0%
The health care cost increase assumption will gradually be reduced to
5.0% by 2011. Increasing or decreasing the weighted average assumed health care
cost trend rates by one percentage point would not have a significant impact on
the accumulated postretirement benefit obligation or on service and interest
costs.
F-27
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. STOCK OPTION PLANS
At the Annual Meeting of Stockholders on June 5, 2002, stockholders
approved amendments to the Foamex International Inc. 2001 Equity Incentive Plan
for Non-Employee Directors. The amendments:
o expanded participant eligibility to include employees, employee-directors
and consultants to the Company, including its subsidiaries and affiliates;
o expanded the types of awards that may be granted to include incentive stock
options, phantom stock units and performance share units, in addition to
nonqualified options provided for under the existing plan;
o increased the number of shares of Common Stock that are available for
awards by 600,000; and
o renamed the plan to the Foamex International Inc. 2002 Stock Award Plan
(the "2002 Stock Award Plan").
Following these amendments, 2,100,000 shares of the Company's common
stock are reserved for the 2002 Stock Award Plan.
The 1993 stock option plan, as amended, (the "1993 Stock Option Plan")
provides 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 are eligible to participate. At the Annual Meeting
of Stockholders on June 30, 2000, stockholders approved amendments to the 1993
Stock Option Plan that increased from 3,000,000 to 4,750,000 the number of
shares of the Company's common stock that may be issued, and to allow future
option grants to qualify as "performance-based compensation" for purposes of the
Internal Revenue Code of 1986, as amended.
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 2002 included the following terms:
o 210,000 options with a three-year pro-rata vesting period and a
ten-year term.
o 270,500 options with a five-year vesting period and a ten-year
term. The vesting provisions may be accelerated in 50% or 100%
increments, depending on the average closing price of the Company
common stock, as defined.
o 100,000 options with a three-year pro-rata vesting period and a
six-year term.
o 756,250 options with a five-year vesting period and a six-year
term. The vesting provisions may be accelerated to three-year
pro-rata vesting in either 25%, 50%, or 100% increments,
depending on attainment of certain financial goals in fiscal
2003, as defined.
o All other options were granted with five-year pro-rata vesting
period and a ten-year term.
Option grants in 2001 and 2000 included the following terms:
o 100,000 options with pro-rata vesting in years three through five
and a ten-year term.
o 250,000 options with a seven-year vesting period and a ten-year
term. The vesting provisions can be accelerated to full vesting
in at the end of a three-year period depending on attainment of
certain financial performance goals, as defined. o All other
options were granted with five-year pro-rata vesting period and a
ten-year term.
All options were granted with an exercise price equal to the fair market
value at the date of the grant, except for certain options that were repriced in
1996 with an exercise price below the fair market value on the revaluation date.
Compensation expense related to these options was recognized over the vesting
period with approximately $0.2 million recognized in 2000.
F-28
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. STOCK OPTION PLANS (continued)
During 2000, 25,000 options were granted to a director of the Company in
exchange for consulting services. The consulting expense associated with the
25,000 options was less than $0.1 million and is being recognized over the
five-year vesting period.
Option Modifications
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 under the option plans discussed above 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 option price on the modification date.
As provided in certain severance agreements during 2001, the Company
extended by three months the exercise period for 57,200 options beyond the
exercise period provided for under the option plans discussed above.
Compensation expense of $0.1 million was recorded for the fair market value in
excess of the option price on the modification date. Also in 2001, the terms of
750,450 options were modified to provide for 100% vesting and the extension of
the period provided to exercise; including 250,000 options until January 31,
2006 and 500,450 options until January 31, 2002. The Company did not recognize
any compensation expense in connection with these modifications because the fair
market value was less than the option price on the modification date.
A summary of stock option activity is presented below.
2002 2001 2000
------------------------------ ------------------------------- -----------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ -----
Outstanding at beginning of period 3,465,542 $ 6.88 2,980,110 $ 7.35 2,299,649 $ 7.94
Granted 2,234,311 5.87 2,104,576 6.42 885,250 5.93
Exercised (551,352) 6.33 (163,125) 5.62 (3,514) 6.88
Forfeited (619,851) 7.07 (1,456,019) 7.32 (201,275) 7.79
- --------- --------- ---- ----------- ---- --------- ----
Outstanding at end of period 4,528,650 $ 6.42 3,465,542 $ 6.88 2,980,110 $ 7.35
========= ========= =========== ========= ========== =========
Exercisable at end of period 1,365,852 $ 7.34 1,431,489 $ 7.03 1,145,727 $ 8.16
========= ========= =========== ========= ========== =========
Listed below is a summary of the stock options outstanding and
exercisable at December 29, 2002.
Outstanding
Weighted Weighted
Exercise Average Average
Price Exercise Remaining
Range Options Price Life-Years
----------------- ----------- ------------- ----------
$ 1.20 - 2.61 881,250 $2.20 6.1
$ 5.00 - 6.88 1,749,199 $6.07 5.4
$ 7.00 - 8.76 1,382,285 $8.07 8.3
$ 9.33 - 13.25 515,916 $10.45 7.1
----------
4,528,650
==========
F-29
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. STOCK OPTION PLANS (continued)
Exercisable
Weighted
Exercise Average
Price Exercise
Range Options Price
----------------- ----------- --------------
$ 1.20 - 2.61 - -
$ 5.00 - 6.88 923,079 $6.23
$ 7.00 - 8.76 195,840 $7.67
$ 9.33 -13.25 246,933 $11.26
----------
1,365,852
==========
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 $3.74 per
option in 2002, $2.95 per option in 2001 and $2.52 per option in 2000.
2002 2001 2000
------------ ------------ ------------
Expected life in years 3.0 3.0 3.0
Risk-free interest rate 2.82% 4.41% 6.11%
Volatility 97.66% 61.85% 55.00%
Dividend yield 0.00% 0.00% 0.00%
12. INCOME TAXES
The sources of income (loss) before the provision for income taxes are
listed below.
2002 2001 2000
------------ ------------ ------------
(thousands)
United States $(27,404) $(8,293) $14,877
Foreign 4,454 7,978 4,975
----------- -------- ---------
Income (loss) before provision for income taxes $(22,950) $ (315) $19,852
======== ========= =========
A reconciliation of the statutory federal income tax to income tax
expense is listed below.
2002 2001 2000
------------ ------------ ------------
(thousands)
Statutory income taxes $(8,033) $ (110) $ 6,948
State income taxes, net of federal benefit (987) (135) 825
Increase (decrease) in valuation allowance (75,371) 1,400 (6,939)
Non-deductible amortization - 1,391 1,364
Alternative minimum tax (200) 350 -
Use of acquired tax benefits - 1,550 -
Foreign tax rate differential 192 142 874
Other, net (1,292) 709 (233)
-------- --------- ----------
Total $(85,691) $ 5,297 $ 2,839
======== ======= =======
F-30
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. INCOME TAXES (continued)
The provision for income taxes is summarized as follows:
2002 2001 2000
------------ ------------ ------------
Current (thousands)
Federal $3,004 $ 924 $ -
State 160 262 160
Foreign 2,423 2,594 2,541
-------- -------- --------
Total current 5,587 3,780 2,701
-------- -------- --------
Deferred
Federal (13,557) 174 6,083
State (1,678) (397) 920
Foreign (672) 340 74
-------- --------- ----------
Total deferred (15,907) 117 7,077
-------- --------- --------
Change in valuation allowance (75,371) 1,400 (6,939)
------- -------- -------
Total provision for income taxes $(85,691) $ 5,297 $ 2,839
======== ======= =======
The tax effect of the temporary differences that give rise to deferred
income tax assets and liabilities are listed below.
December 29, December 31,
2002 2001
---------------- ----------------
Deferred income tax assets (thousands)
Inventory basis differences $ 757 $ 1,436
Employee benefit accruals 22,006 13,869
Allowances and contingent liabilities 10,459 8,231
Restructuring and plant closing accruals 8,786 10,522
Intangible asset basis differences 4,901 7,393
Other 12,188 9,118
Net operating loss carryforwards 77,873 61,485
Capital loss carryforwards 325 1,333
Valuation allowance for deferred income tax assets (1,770) (100,695)
--------- --------
Deferred income tax assets 135,525 12,692
-------- ---------
Deferred income tax liabilities
Basis difference in property, plant and equipment (12,953) (15,937)
Other (6,084) (2,163)
-------- ---------
Deferred income tax liabilities (19,037) (18,100)
-------- --------
Net deferred income tax assets (liabilities) $116,488 $ (5,408)
======== ========
During 2002, the Company determined that, based on the weight of
available evidence, including adjusted financial results for the last three
years, revised net operating loss carryforward utilization limitations 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 aggregating $99.4 million. The adjustment reduced the loss from
continuing operations and extraordinary items by $75.8 million and $1.6 million,
respectively, and decreased goodwill by $12.4 million and other comprehensive
loss by $9.6 million.
F-31
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. INCOME TAXES (continued)
The 2001 income tax provision included an increase in the valuation
allowance to reduce the Company's deferred tax assets. Effective tax rates for
2000 were reduced by the partial reversal of the deferred income tax asset
valuation allowance originally recognized in 1998. The valuation allowance was
reduced to reflect the realization of Federal loss carryforwards that offset the
current tax component of the Federal and Mexican tax provision. Additionally,
the valuation allowance was reduced to offset the net deferred Federal tax
liability generated. The valuation allowance has also been adjusted by $3.8
million and $4.3 million in 2001 and 2000, respectively, to give effect to the
deferred tax assets resulting from the recognition of a minimum pension
liability.
At December 29, 2002, the Company had approximately $209.8 million of net
operating loss carryforwards for federal income tax purposes expiring from 2010
to 2022. Approximately $113.0 million of the net operating loss carryforwards
expire in the years 2010 to 2012 with the remainder principally expiring in the
2020-2022 period. Also at December 29, 2002, there were $0.7 million of
alternative minimum tax credit carryforwards. In addition, the Company has had
an ownership change as defined in IRC Section 382. Accordingly, the Company is
limited (on an annual basis) as to the amount of its net operating loss
utilization.
At December 29, 2002, the Company had $2.9 million of net operating loss
carryforwards in a Mexican subsidiary that expire in 2009. A full valuation
allowance has been recorded at December 29, 2002 and December 31, 2001 due to
uncertainty regarding utilization of these net operating loss carryforwards.
Cumulative undistributed earnings of foreign subsidiaries for which no
U.S. income or foreign withholding taxes have been provided, amounted to $13.4
million at December 29, 2002 and $10.6 million at December 31, 2001,
respectively. Such earnings are deemed to be permanently invested by the
Company. As such, no deferred tax liability has been recognized with regard to
the remittance of such earnings. Further, determination of the amount of
unrecognized deferred tax liability with regard to such earnings is not
practicable.
13. STOCKHOLDERS' DEFICIENCY
Preferred Stock
The Company has 5.0 million shares of preferred stock, par value of $1.00
per share, authorized for issuance. As discussed in Note 1, 15,000 shares of
Series B Preferred Stock were issued in exchange for 1,500,000 shares of common
stock during the fourth quarter of 2000. Series B Preferred Stock is non-voting,
non-redeemable and convertible into 100 shares of the Company's common stock.
The conversion feature is only available if the conversion would not trigger a
"change of control" event, as discussed in Note 1. The Series B Preferred Stock
is noncumulative and would be entitled to dividends only if a dividend is
declared on the Company's common stock. It ranks senior to any future preferred
stock issued by the Company and is entitled to a liquidation preference of $100
per share. No other preferred shares have been issued.
Common Stock
The Company has 50 million shares of common stock, par value $.01 per
share, authorized. At December 29, 2002, there were 6.9 million shares of common
stock reserved for issuance in connection with stock option plans, discussed in
Note 11. Included in the Consolidated Statements of Stockholders' Deficiency is
the compensation for the Company's directors 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 of the Company. The ability of Foamex L.P.
to make distributions is restricted by the terms of their respective 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.
F-32
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. STOCKHOLDERS' DEFICIENCY (continued)
Treasury Stock
As discussed in Note 1 and the Preferred Stock disclosures above,
1,500,000 shares of common stock were exchanged for Series B Preferred Stock
during the fourth quarter of 2000.
The Board of Directors has authorized the purchase of up to 3,000,000
million shares of the Company's common stock. As of December 29, 2002, 1,989,000
shares have been purchased under this program.
Accumulated Other Comprehensive Loss
The components of accumulated other comprehensive loss are listed below.
December 29, December 31, December 31,
2002 2001 2000
------------ -------------- --------------
(thousands)
Foreign currency translation adjustment $ (9,869) $ (8,000) $ (6,921)
Minimum pension liability (a) (28,885) (27,157) (16,375)
------- --------- ---------
$(38,754) $(35,157) $(23,296)
======== ======== ========
(a) Net of income tax benefit of $16.5 million at December 29, 2002.
14. BUSINESS SEGMENTS
The reportable business segments reflect the Company's management
organization that was structured based on distinct product lines and customers.
An executive vice president heads each operating segment. Each executive
vice president is responsible for developing budgets and plans as well as
directing the operations of the segment. The performance of each operating
segment is measured based upon income from operations, excluding restructuring,
impairment and other charges. The Company does not allocate restructuring,
impairment and other charges to operating segments because many of the Company's
facilities produce products for multiple segments.
Foam Products manufactures and markets cushioning foams for bedding,
furniture, packaging and health care applications and foam-based consumer
products, such as mattress pads and children's furniture. Carpet Cushion
Products manufactures and distributes rebond, prime, felt and rubber carpet
padding. Automotive Products supplies foam products and laminates to major tier
one suppliers and original equipment manufactures. Technical Products
manufactures and markets reticulated and other specialty foams used for
reservoiring, filtration, gasketing and sealing applications.
The "other" column in the table below represents certain manufacturing
operations in Mexico City, corporate expenses not allocated to other business
segments and restructuring, impairment and other charges (see Note 6). Asset and
capital expenditure information by business segment is not reported because many
of the Company's facilities produce products for multiple business segments.
The accounting policies of the business segments are the same as
described in Note 2. Business segment results include revenues and costs that
are specifically identifiable and costs shared by business segments have been
allocated based on utilization. Geographic sales are determined based on the
location in which the sale originated.
Sales to one customer, which are included in Automotive Products,
accounted for approximately 17.3%, 15.7% and 12.3% of net sales in 2002, 2001
and 2000, respectively. No other customer accounted for more than 10.0% of net
sales during the periods presented.
F-33
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. BUSINESS SEGMENTS (continued)
Business segment results are presented below.
Carpet
Foam Cushion Automotive Technical
Products Products Products Products Other Total
-------- -------- -------- -------- ----- -----
2002 (thousands)
Net sales $ 471,005 $ 234,001 $466,718 $ 124,124 $ 32,246 $ 1,328,094
Income (loss) from operations $ 23,896 $ (12,524) $ 25,346 $ 20,339 $ (15,175) $ 41,882
Depreciation and amortization $ 15,466 $ 6,469 $ 3,856 $ 2,982 $ 2,819 $ 31,592
2001
Net sales $ 499,668 $ 230,965 $377,753 $ 111,043 $ 33,475 $ 1,252,904
Income (loss) from operations $ 66,312 $ (6,831) $ 21,187 $ 22,884 $(40,079) $ 63,473
Depreciation and amortization $ 15,732 $ 8,181 $ 4,991 $ 3,312 $ 1,772 $ 33,988
2000
Net sales $ 519,197 $ 256,439 $342,386 $ 106,697 $ 33,059 $1,257,778
Income (loss) from operations $ 55,001 $ 2,035 $ 22,235 $ 28,888 $ (11,688) $ 96,471
Depreciation and amortization $ 17,813 $ 7,742 $ 5,785 $ 2,663 $ 2,585 $ 36,588
Geographical information is presented below.
United
States Canada Mexico Consolidated
------ ------ ------ ------------
2002 (thousands)
Net sales $ 981,927 $ 66,940 $ 279,227 $ 1,328,094
Property, plant and equipment, net $ 157,007 $ 3,898 $ 21,133 $ 182,038
2001
Net sales $ 966,614 $ 65,179 $ 221,111 $ 1,252,904
Property, plant and equipment, net $ 172,456 $ 4,006 $ 24,335 $ 200,797
2000
Net sales $ 1,024,388 $ 69,180 $ 164,210 $ 1,257,778
Property, plant and equipment, net $ 183,266 $ 4,623 $ 24,642 $ 212,531
15. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
2002 2001 2000
------------ ------------ ------------
(thousands)
Cash paid for interest $56,583 $63,593 $ 75,155
======== ======== ========
Cash paid for income taxes, net $ 2,222 $ 1,990 $ 2,962
======== ======== ========
Non cash - capital leases S - $ 299 $ 53
======== ======== ========
Non cash - common stock - preferred stock exchange (Note 1) $ - $ - $ 8,578
======== ======== ========
Non cash - debt exchanged for increased ownership
in joint venture $ - $ 1,069 $ -
======== ======== ========
F-34
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. RELATED PARTY TRANSACTIONS AND BALANCES
The Company regularly enters into transactions with its affiliates in the
ordinary course of business.
Trace Promissory Notes
On July 1, 1997, Trace borrowed $5.0 million pursuant to a promissory
note with an aggregate principal amount of $5.0 million issued to Foamex L.P. on
June 12, 1997. The promissory note was due and payable on demand or, if no
demand was made, on July 7, 2001, and bears interest at 2 3/8% plus three-month
LIBOR, as defined, per annum payable quarterly in arrears commencing October 1,
1997. On June 12, 1997, another promissory note issued to Foamex L.P. by Trace
in July 1996 was amended. The amended promissory note is an extension of a
promissory note of Trace that was due in July 1997. The aggregate principal
amount of the amended promissory note was increased to approximately $4.8
million and the maturity of the promissory note was extended. The principal was
reduced by approximately $0.6 million relating to a portion of the proceeds from
the sale of a corporate aircraft in 1999. The promissory note was due and
payable on demand or, if no demand was made, on July 7, 2001, and bears interest
at 2 3/8% plus three-month LIBOR, as defined, per annum payable quarterly in
arrears.
The Trace notes are included in the other component of stockholders'
deficiency. Based on Trace's financial position discussed in Note 1, it is not
probable that Trace will be able to pay the aggregate amount of $9.2 million.
Upon conclusion of the Trace bankruptcy proceedings, the Company will charge the
uncollected portion of the Trace notes to accumulated deficit. The Company has
not recorded any interest income on these notes since the Trace bankruptcy.
Trace Accounts Receivable
At December 29, 2002 and December 31, 2001, operating accounts receivable
from Trace were approximately $3.4 million. These accounts receivable were fully
reserved for prior to 2000.
Foam Funding LLC Debt
Subsidiaries of the Company paid interest on notes payable to Foam
Funding LLC of $0.7 million, $2.8 million and $5.8 million in 2002, 2001 and
2000, respectively. Subsidiaries of the Company paid principal on notes payable
to Foam Funding LLC of $31.6 million, $15.8 million and $41.9 million in 2002,
2001 and 2000, respectively. This debt was fully repaid pursuant to the
Company's refinancing on March 25, 2002 (see Note 9).
Other
In 2002, pursuant to the terms of an existing agreement, the Company
acquired the 5.0% stock interest in Foamex de Mexico S.A. de C.V. ("Foamex de
Mexico") which had been held by the general director of Foamex de Mexico for
$1.0 million.
In 2001, two members of the board of directors provided consulting
services to the Company for which fees paid were $0.2 million. Also in 2001, one
of these directors received a loan of $0.2 million from the Company's joint
venture in Asia. The loan was evidenced by a 20-year non-recourse promissory
note bearing interest at 4.0% per annum secured by the director's 5.0% interest
in the value of the Company's equity interest in the joint venture in Asia. In
2000, one member of the board provided consulting services totaling $0.1
million. In 2000, this director also received an option to purchase 25,000
shares of common stock of the Company at the fair market value on the date of
grant. The Company also maintained an apartment used by this director. Rent
expense for this facility was $0.2 million in 2002, 2001 and 2000.
As discussed in Note 9, included in the group of banks that provides the
Foamex L.P. Credit Facility is The Bank of Nova Scotia, which is a shareholder
of the Company.
F-35
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. RELATED PARTY TRANSACTIONS AND BALANCES (continued)
The Company, Recticel, s.a. ("Recticel"), a European polyurethane foam
manufacturer and Beamech Group Limited, an unaffiliated third party, have an
interest in a Swiss corporation that develops new manufacturing technology for
the production of polyurethane foam including the VPFSM manufacturing process.
Recticel and affiliates of Recticel are shareholders of the Company.
The Company's Pico Rivera, California facility was owned by Foam Funding
LLC and leased to the Company. The Pico Rivera facility was sold to a third
party during 2002.
During December 2001, the Company entered into an agreement that
guarantees two promissory notes, totaling $0.7 million, payable to a foreign
affiliate that the Company accounts for under the equity method. The promissory
notes were issued to a director of the Company and an employee of Foamex L.P.
During 2002, a member of the Board of Directors became an officer of the
Company at an annual salary of at least $0.4 million plus a target annual bonus
of 75.0% of base salary of which 80.0% was guaranteed in any given year.
Additionally under the employment agreement, the director had the right to
terminate employment and receive termination benefits under certain conditions,
including the Company's failure to purchase a business owned by the director.
Since the Company did not enter into a definitive agreement to purchase the
business by October 31, 2002, the director had the option to terminate the
employment agreement within 90 days and exercised the termination option in
January 2003. During 2002, the Company paid $0.5 million to the director's
business for consulting services and has agreed to engage the director's
business to provide future consulting services to assist in its Asian
operations.
Also during 2002, the Company entered into an agreement with a member of
the Board of Directors to provide consulting services in connection with
potential strategic business opportunities in Asia at an annual cost of $0.2
million. The Company also paid $0.5 million in 2002 for legal services to a law
firm in which another director is a partner.
17. COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company is obligated under various noncancelable lease agreements for
rental of facilities, vehicles and other equipment. Many of the leases contain
renewal options with varying terms and escalation clauses that provide for
increased rentals based upon increases in the Consumer Price Index, real estate
taxes and lessors' operating expenses. Total minimum rental commitments required
under operating leases at December 29, 2002 are (thousands):
2003 $15,438
2004 10,889
2005 7,970
2006 7,575
2007 2,622
Balance 7,701
---------
Total $52,195
=======
Rental expense charged to operations under operating leases approximated
$23.4 million, $20.2 million and $16.3 million in 2002, 2001 and 2000,
respectively. Substantially all such rental expense represented the minimum
rental payments under operating leases.
F-36
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17. 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 $84.8 million in 2003, $98.0 million in 2004, $39.9 million in
2005, $39.4 million in 2006, $36.1 million in 2007 and $32.2 million for each of
the years 2008 to 2010.
Litigation - Breast Implants
As of March 11, 2003, the Company and Trace were two of multiple
defendants in actions filed on behalf of approximately 1,087 recipients of
breast implants in various United States federal and state courts and one
Canadian provincial court, some of which allege substantial damages, but most of
which allege unspecified damages for personal injuries of various types. Three
of these cases seek to allege claims on behalf of all breast implant recipients
or other allegedly affected parties, but no class has been approved or certified
by the court. During 1995, the Company and Trace were granted summary judgments
and dismissed as defendants from all cases in the federal courts of the United
States and the state courts of California. Appeals for these decisions were
withdrawn and the decisions are final.
Although breast implants do not contain foam, certain silicone gel
implants were produced using a polyurethane foam covering fabricated by
independent distributors or fabricators from bulk foam purchased from the
Company or Trace. Neither the Company nor Trace recommended, authorized, or
approved the use of its foam for these purposes. The Company is also indemnified
by Trace for any such liabilities relating to foam manufactured prior to October
1990. Trace's insurance carrier has continued to pay the Company's litigation
expenses after Trace's filing for relief under the Bankruptcy Code on July 21,
1999. Trace's insurance policies continue to cover certain liabilities of Trace
but if the limits of those policies are exhausted, it is unlikely that Trace
will be able to continue to provide additional indemnification. While it is not
feasible to predict or determine the outcome of these actions, based on
management's present assessment of the merits of pending claims, after
consultation with the general counsel of the Company, and without taking into
account the indemnification provided by Trace, the coverage provided by Trace's
and the Company's liability insurance and potential indemnity from the
manufacturers of polyurethane covered breast implants, management believes that
it is not reasonably possible that the disposition of the matters that are
pending or that may reasonably be anticipated to be asserted will result in a
loss that is material to the Company's consolidated financial position, results
of operations or cash flows. 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 financial position, results of
operations and cash flows.
Litigation - Other
During 2001, the Company was notified by an insurance provider concerning
a dispute involving the reimbursement of liability claims paid on behalf of
Trace before 1990. The insurance provider is contending that the Company is
liable for the claims of approximately $6.1 million. The Company intends to
strongly defend this claim and considers the claim to be without merit. If
management's assessment of the Company's liability relating to this action is
incorrect, this action could have a material adverse effect on the Company's
financial position, results of operations and cash flows.
The Company is party to various other lawsuits, both as defendant and
plaintiff, arising in the normal course of business. It is the opinion of
management that the disposition of these lawsuits will not, individually or in
the aggregate, have a material adverse effect on the Company's financial
position or results of operations. If management's assessment of the Company's
liability relating to these actions is incorrect, these actions could have a
material adverse effect on the Company's consolidated financial position,
results of operations and cash flows.
As of December 29, 2002, the Company had accrued approximately $0.7
million for litigation and other legal matters in addition to the environmental
matters discussed below.
F-37
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17. COMMITMENTS AND CONTINGENCIES (continued)
Environmental and Health and Safety
The Company is subject to extensive and changing federal, state, local
and foreign environmental laws and regulations, including those relating to the
use, handling, storage, discharge and disposal of hazardous substances, the
discharge or emission of materials into the environment, and the remediation of
environmental contamination, and as a result, are from time to time involved in
administrative and judicial proceedings and inquiries relating to environmental
matters. As of December 29, 2002, the Company had accruals of approximately $2.7
million for environmental matters, including approximately $2.3 million related
to mediating and monitoring soil and groundwater contamination and approximately
$0.4 million related to PRP sites 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 8, 2001, the United States Environmental Protection Agency, or
"EPA," proposed a National Emission Standard for Hazardous Air Pollutants, or
"NESHAP" for Flexible Polyurethane Foam Fabrication Operations. The proposed
NESHAP regulates emissions of methylene chloride and other Hazardous Air
Pollutants and restricts air emissions from flame lamination sources. The
Company does not believe that this standard, if adopted, will require it to make
material expenditures.
On August 31, 2002, Environment Canada, the Canadian environmental
regulatory agency, proposed a rule which would require flexible polyurethane
foam manufacturing operations to reduce methylene chloride (dichloromethane) air
emissions. The proposed rule establishes a 50.0% reduction in methylene chloride
emissions by December 1, 2003 and 100.0% reductions by January 1, 2007. We do
not believe that this standard, if adopted, will require us to make material
expenditures for our Canadian plants.
The Company reported to the appropriate state authorities that it had
found soil and/or groundwater contamination in excess of state standards at
certain locations. Seven sites are currently in various stages of investigation
or remediation. Accordingly, the extent of contamination and the ultimate
liability is not known with certainty for all sites. During 2000, the Company
reached an indemnification agreement with the former owner of the Morristown,
Tennessee facility. The agreement allocates the incurred and future remediation
costs between the former owner and the Company. The estimated allocation of
future costs for the remediation of this facility is not significant, based on
current known information. The former owner was Recticel Foam Corporation, a
subsidiary of Recticel s.a.
The Company has either upgraded or closed all underground storage tanks
at its facilities in accordance with applicable regulations.
The Comprehensive Environmental Response, Compensation and Liability Act,
or "CERCLA," and comparable state laws impose liability without fault for the
costs of cleaning up contaminated sites on certain classes of persons that
contributed to the release of hazardous substances into the environment at those
sites, for example, by generating wastes containing hazardous substances which
were disposed at such sites. The Company is currently designated as a
Potentially Responsible Party, or "PRP," by the EPA or by state environmental
agencies or other PRPs, pursuant to CERCLA or analogous state statutes, with
respect to eight 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.
In 2003, capital expenditures for safety and environmental compliance
projects are anticipated to be approximately $1.5 million. Although it is
possible that new information or future developments could require the Company
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 its operations, financial
position, capital
F-38
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17. COMMITMENTS AND CONTINGENCIES (continued)
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 October 2001, the Company experienced a fire at one of its
manufacturing facilities. Costs relating to the fire aggregated approximately
$1.2 million. The Company has filed a claim with its insurance carrier and
believes it will recover substantially all costs in excess of a deductible of
$0.2 million.
18. QUARTERLY FINANCIAL DATA (UNAUDITED)
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
(thousands, except per share amounts)
2002
Net sales $ 314,062 $ 345,898 $ 340,823 $ 327,311
Gross profit $ 38,238 $ 45,386 $ 30,088 $ 27,713
Income (loss) before extraordinary items
and cumulative effect of accounting changes $ 7,337 $ 79,863 $ (8,071) $ (16,388)
Net income (loss) $ (67,514) $ 81,445 $ (7,242) $ (16,388)
Earnings (loss) per share
Basic:
Income (loss) before extraordinary items and
cumulative effect of accounting changes $ 0.30 $ 3.29 $ (0.33) $ (0.67)
Net income (loss) $ (2.80) $ 3.35 $ (0.30) $ (0.67)
Diluted:
Income (loss) before extraordinary items and
cumulative effect of accounting changes $ 0.28 $ 2.98 $ (0.33) $ (0.67)
Net income (loss) $ (2.56) $ 3.04 $ (0.30) $ (0.67)
2001
Net sales $ 301,907 $ 314,261 $ 326,166 $ 310,570
Gross profit $ 41,176 $ 49,896 $ 47,409 $ 41,600
Net income (loss) $ 5,893 $ 10,620 $ 7,267 $ (29,392)
Earnings (loss) per share
Basic $ 0.25 $ 0.45 $ 0.31 $ (1.24)
Diluted $ 0.24 $ 0.42 $ 0.28 $ (1.24)
F-39
FOAMEX ASIA COMPANY LIMITED AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET (unaudited)
AS AT DECEMBER 31, 2002
(BAHT)
ASSETS
CURRENT ASSETS
Cash and deposits at financial institutions 118,137,666
Accounts receivable - net 404,451,863
Inventories - net 203,772,938
Receivable from insurance claim 86,924,106
Amounts due from related companies 9,127,728
Other current assets 63,783,893
---------------
Total Current Assets 886,198,194
LOANS TO EMPLOYEE AND DIRECTORS 32,914,538
PLANT AND EQUIPMENT - NET 229,065,082
INTANGIBLE ASSETS - NET 13,895,417
DEPOSITS AT FINANCIAL INSTITUTIONS USED AS COLLATERAL 13,506,547
OTHER NONCURRENT ASSETS - DEPOSITS 5,563,835
--------------
TOTAL ASSETS 1,181,143,613
=============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term borrowings from financial institutions 117,516,433
Accounts payable 203,364,853
Amounts due to related companies 82,013,287
Accrued expenses 80,169,890
Current portion of financial leases 3,312,163
Other current liabilities 5,153,006
----------------
Total Current Liabilities 491,529,632
LONG TERM BORROWINGS FROM FINANCIAL INSTITUTIONS 62,000,000
LOANS FROM SHAREHOLDERS 274,191,480
LONG TERM PORTION OF FINANCE LEASES 2,013,983
----------------
TOTAL LIABILITIES 829,735,095
--------------
SHAREHOLDERS' EQUITY
SHARE CAPITAL
Registered share capital
10,500,000 ordinary shares of Baht 10 each 105,000,000
==============
Issued and paid-up share capital
10,500,000 ordinary shares of Baht 10 each, fully paid 105,000,000
PREMIUM ON SHARE CAPITAL 18,990,504
CURRENCY TRANSLATION DIFFERENCES 14,851,178
RETAINED EARNINGS
Unappropriated 212,566,836
--------------
Total Shareholders' Equity 351,408,518
--------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 1,181,143,613
=============
Notes to the consolidated financial statements form an integral part of these statements
F-40
FOAMEX ASIA COMPANY LIMITED AND SUBSIDIARY
CONSOLIDATED STATEMENT OF INCOME (unaudited)
FOR THE YEAR ENDED DECEMBER 31, 2002
(BAHT)
REVENUES
Revenues from sales 1,848,468,563
Other revenue 15,222,321
---------------
Total Revenues 1,863,690,884
-------------
EXPENSES
Cost of sales 1,359,906,153
Gain on exchange rate (3,398,552)
Selling and administrative expenses 328,812,408
Interest expense 18,157,567
Income tax 43,181,696
---------------
Total Expenses 1,746,659,272
PROFIT FROM ORDINARY ACTIVITIES 117,031,612
Extraordinary item - net 10,990,492
---------------
NET INCOME 106,041,120
==============
EARNINGS PER SHARE
Profit from ordinary activities 11.15
Extraordinary item - net (1.05)
----------------
Net Profit 10.10
===============
WEIGHTED AVERAGE NUMBER OF ORDINARY SHARES 10,500,000
===============
Notes to the consolidated financial statements form an integral part of these statements
F-41
FOAMEX ASIA COMPANY LIMITED AND SUBSIDIARY
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (unaudited)
FOR THE YEAR ENDED DECEMBER 31, 2002
(BAHT)
ISSUED AND PAID-UP SHARE CAPITAL
Beginning balance 105,000,000
Addition -
------------
Ending balance 105,000,000
-----------
PREMIUM ON SHARE CAPITAL
Beginning balance 18,990,504
Addition -
------------
Ending balance 18,990,504
------------
RETAINED EARNINGS
Unappropriated
Beginning balance 106,525,716
Addition 106,041,120
------------
Ending balance 212,566,836
------------
CURRENCY TRANSLATION DIFFERENCES
Beginning balance 6,546,185
Addition 8,304,993
------------
Ending balance 14,851,178
------------
TOTAL SHAREHOLDERS' EQUITY 351,408,518
===========
Notes to the consolidated financial statements form an integral part of these statements
F-42
FOAMEX ASIA COMPANY LIMITED AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS (unaudited)
FOR THE YEAR ENDED DECEMBER 31, 2002
(BAHT)
CASH FLOWS FROM OPERATING ACTIVITIES
Net profit 106,041,120
Reconciliation of net profit to net cash from operating activities
Depreciation and amortization 25,886,337
Allowance for doubtful accounts 917,814
Provision for obsolete stock 2,058,184
Unrealized loss on exchange rate - net (2,000,610)
Loss on involuntary conversion of assets 15,700,847
Gain on disposal of plant and equipment (135,464)
---------------
Operating income before change in operating assets and liabilities 148,468,228
Operating assets (increase) decrease
Accounts receivable (1,242,763)
Amounts due from related companies (44,469,283)
Inventories (6,617,349)
Receivable from insurance claim (86,924,106)
Other current assets 13,220,058
Other assets 100,422
Operating liabilities increase (decrease)
Accounts payable (73,667,829)
Amounts due to related companies 7,764,198
Accrued expenses 14,260,793
Current portion of finance leases 1,927,468
Other current liabilities (23,697,558)
---------------
Net cash used in operating activities (50,877,721)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of plant and equipment (165,579,340)
Proceeds from disposal of plant and equipment 6,326,207
Proceeds from insurance claim 50,000,000
Increase in purchase price of acquired business (14,232,483)
(Increase) decrease in deposits at bank used as collateral 7,480,010
Increase in loans to employee and directors (139,383)
---------------
Net cash used in investing activities (116,144,989)
---------------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in short-term borrowings from financial institutions 87,516,433
Increase in long-term borrowings from financial institutions 62,000,000
Increase in loans from shareholders 13,246,024
Decrease in long term portion of finance leases (542,917)
---------------
Net cash provided by financing activities 162,219,540
---------------
NET EFFECT OF CURRENCY TRANSLATION
DIFFERENCES IN CASH AND DEPOSITS AT FINANCIAL INSTITUTIONS 5,569,230
---------------
Net increase in cash and deposits at financial institutions 766,060
Cash and deposits at financial institutions at January 1, 117,371,606
---------------
Cash and deposits at financial institutions at December 31, 118,137,666
===============
Notes to the consolidated financial statements form an integral part of these statements
F-43
FOAMEX ASIA COMPANY LIMITED AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2002 (unaudited)
1. ECONOMIC TURMOIL IN THE ASIA-PACIFIC REGION
Thailand and many Asia-Pacific countries continue to experience severe
economic difficulties since 1997. The accompanying financial statements reflect
management's current assessment of the possible impact of the economic
conditions on the financial position of the Company.
2. OPERATIONS AND BASIS FOR PREPARATION OF THE CONSOLIDATED FINANCIAL
STATEMENTS
These financial statements have been prepared using generally accepted
accounting principles in Thailand and are unaudited. Foamex Asia Company Limited
was registered in the Kingdom of Thailand on June 5, 1997 with its head office
located at 175 Sathorn City Tower, 20th Floor, South Sathorn Road, Sathorn,
Bangkok 10120. The Company's plants are located at 665 Moo 2 Bangpoo Mung,
Samutprakarn 10540 and 133 Moo 1, Banpo Bangprain, Pranakornsriayuthaya 13160.
The major shareholder of the Company and its subsidiary is Foamex Asia, Inc., a
company incorporated in the United States of America. The Company's principal
objective is to fabricate technical foam, films and adhesives.
As at December 31, 2002, the Company had a total of 405 staff persons.
The staff cost for the year ended December 31, 2002 was Baht 113 million.
2.1 The Company prepares its statutory financial statements in
conformity with accounting and practices generally accepted in
Thailand.
2.2 The consolidated financial statements include the accounts of
Foamex Asia, LLC, the Company's branch incorporated in the United
States of America, and Foamtec (Singapore) Pte. Ltd., a subsidiary
incorporated in the Republic of Singapore, with its head office
located at 6 Sungei Kadut Crescent, Singapore 728689. The Company
has direct and indirect ownership percentages as follows:
% of Shareholding
Subsidiary 2002
Directly owned:
Foamtec (Singapore) Pte. Ltd. 99.99%
Indirectly owned:
Foamex (Malaysia) Sdn. Bhd. 99.99%
Foamex Asia (Wuxi) Co., Ltd. 99.99%
As at December 31, 2002, the Company's subsidiary had a total of 179
staff persons. The staff costs for the year ended December 31, 2002, were Baht
121.2 million.
The major intercompany transactions between the Company and its
subsidiary included in the consolidated financial statements have been
eliminated.
The financial statements of Foamex Asia, LLC, which are included in the
Company's financial statements, have been prepared in U.S. Dollars. For
consolidation purposes, these financial statements have been translated into
Thai Baht as follows:
a. All monetary items are translated using the closing rate announced by
the Bank of Thailand as at the balance sheet date.
F-44
b. All non-monetary items, which are carried in terms of historical cost,
and translated using the rate announced by the Bank of Thailand at the
transaction date.
The functional currency of Foamex Asia, LLC is the U.S. dollar. Net
exchange gain or loss from translation is recognized as income and expense in
the statement of income.
The financial statements of Foamtec (Singapore) Pte. Ltd. and its
subsidiaries have been prepared in Singapore dollars. For consolidation
purposes, these financial statements have been translated into Thai Baht as
follows:
a. All assets and liabilities using the rates announced by the Bank of
Thailand at the balance sheet date.
b. Revenue and expenses using the average exchange rate for the year as
announced by the Bank of Thailand.
The functional currency of Foamtec (Singapore) Pte. Ltd. and its
subsidiaries is the applicable local currency. Net exchange gain or loss from
translation is presented as "Cumulative Translation Differences" under
"Shareholders' Equity" in the balance sheet.
In December 2001, the Institute of Certified Accountants and Auditors of
Thailand issued an Announcement regarding the "Exemption of Accounting Standards
for Non-public Limited Companies". Accordingly, the Company has elected to
discontinue the application of Thai Accounting Standard No. 47 "Related Parties
Disclosure" and No. 48 "Financial Instruments Disclosure and Presentation". The
Company's financial statements for the year ended December 31, 2002 reflect this
election.
3. SIGNIFICANT ACCOUNTING POLICIES
3.1 Cash and deposits at financial institutions
Cash and deposits at financial institutions with original maturities of
three months or less.
3.2 Allowance for doubtful accounts
An allowance for doubtful accounts of the Company and its subsidiary is
provided at the estimated collection losses on receivables, based on the
Company's collection experience together with a review of the current
financial position of each existing receivable.
3.3 Inventories
Inventories are valued at the lower of cost or net realizable value. Cost
is determined as follows:
Finished goods at standard cost which approximates the
weighted average cost basis or net
realizable value, whichever is lower
Work in process at standard cost which approximates the
weighted average cost basis
Raw materials weighted average cost basis
Inventories of subsidiaries are stated at the lower of cost or net
realizable value. Cost is calculated on the first-in first-out basis.
3.4 Plant and equipment
Plant and equipment are stated at cost less accumulated depreciation.
F-45
Depreciation is calculated by the straight-line method, based on the
estimated useful lives of the assets as follows:
Leasehold improvements 5-10 years
Machinery and equipment 3-10 years
Vehicles 5 years
Furniture and office equipment 3-10 years
3.5 Impairment of assets
The Company reviews the impairment of assets for plant and equipment and
other assets whenever events indicate that the carrying value of an asset
exceeds its recoverable amount. In case that the carrying value of an
asset exceeds its recoverable amount, the Company recognizes the
impairment losses in the statement of income.
3.6 Foreign currency transactions
Transactions denominated in foreign currencies incurred during the year
are translated into Baht at the rates of exchange at the transaction
dates. At the end of the year, monetary assets and liabilities
denominated in foreign currencies are translated into Baht at the
reference rates as determined by the Bank of Thailand at that date. Gains
and losses on foreign exchange arising on settlements and translation are
recognized as income or expense when incurred.
3.7 Recognition of revenues
Sales are recognized upon delivery of goods to the customers. Other
income is recognized on the accrual basis of accounting.
3.8 Income tax
Income tax expense is calculated from taxable income and recorded based
on tax paid and accrued for the year.
The consolidated financial statements included the audited financial
statements of a subsidiary. Such subsidiary records its income tax by the
deferred income tax method, which is different from the accounting method
used by the Company. The Company, therefore, adjusts the accounting for
income tax of such subsidiary to be the same with the Company's
accounting method.
3.9 Diluted earnings per share
Diluted earnings per share are calculated by dividing net income by the
weighted average number of ordinary shares outstanding during the year.
In case of a capital increase, the number of shares is weighted according
to time of registration of such increase.
3.10 Use of accounting estimates
Preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and
assumptions that affect the reported amounts of revenues, expenses,
assets and liabilities and disclosure of contingent assets and
liabilities. Actual results may differ from those estimates.
F-46
4. SUPPLEMENTAL DISCOSURE OF CASH FLOWS INFORMATION
4.1 Cash paid for the year ended December 31, for interest and income
tax is as follows:
2002 (Baht)
-----------
Interest 5,211,583
Income tax 35,380,564
5. CASH AND DEPOSITS AT FINANCIAL INSTITUTIONS
As at December 31, 2002 cash at financial institutions of Baht 8.0
million are used as collateral for a bank guarantee (Note 15.2). In addition,
cash at financial institutions of subsidiary of SGD 715,971 is used as
collateral for short-term loan from bank.
As at December 31, 2002, cash at financial institutions of Baht 5.1
million is used to guarantee letters of credit. (Note 15.2)
6. ACCOUNTS RECEIVABLE, NET
Accounts receivable - net as at December 31, consists of the following:
2002 (Baht)
-----------
Accounts receivable 406,926,492
Less Allowance for doubtful accounts (2,474,629)
---- ------------
404,451,863
7. INVENTORIES - NET
Inventories - net as of December 31, consist of the following:
2002 (Baht)
-----------
Finished goods 53,342,973
Work in process 14,521,221
Raw materials 94,785,855
Goods in transit 48,684,161
------------
211,334,210
Less Provision for obsolete stock (7,561,272)
---- ------------
203,772,938
8. RECEIVABLE FROM INSURANCE CLAIM
On July 14, 2002, the Company's fabrication and contamination control
specialty foam factory in Samutprakarn, Thailand was destroyed by fire. All of
the Company's inventory and most of the machinery and equipment maintained in
the factory were lost. The carrying value of the inventory and the net book
value of the machinery and equipment at the date of the fire were Baht 84.0
million and Baht 65.1 million, respectively. The Company filed a claim with
their insurance carrier for the inventory and machinery and equipment in the
amount of Baht 70.0 million and 107.8 million, respectively. The Company
recorded an extraordinary loss in 2002 of Baht 9.8 million, net of taxes of Baht
4.2 million, for the underinsured inventory and an additional Baht 1.19 million,
net of taxes of Baht 0.32 million, for other fire related expenses.
F-47
The Company received an interim payment from their insurance carrier in
the amount of Baht 50 million on December 27, 2002 and an additional Baht 50
million on February 7, 2003. Full and final settlement of the Company's
insurance claim is still pending, however, the Company's management believes a
gain will ultimately be realized.
9. LOANS TO EMPLOYEE AND DIRECTORS
Loans to employee and directors as at December 31, consist of the
following:
2002 (Baht)
-----------
Loan to employee 1,820,000
Loans to directors 31,494,538
----------
33,314,538
Less: Current portion of loan to employee 400,000
------------
32,914,538
============
As at December 31, 2002, the loan to employee represented an
interest-free Thai Baht denominated loan, which is guaranteed by another person.
The loan is repayable in monthly installments beginning January 2002 and matures
in December 2006.
As at December 31, 2002, loans to directors represented foreign currency
denominated loans totaling US $700,000. These loans are secured by a grant of a
security interest of the director's percentage right in a major shareholder's
interest in the Company as specified in the loan agreement, carry interest at a
rate of 4% per annum and are due in December 2021.
10. PLANT AND EQUIPMENT - NET
Plant and equipment - net consist of the following:
Balance as at Currency Balance as at
December 31, translation December 31,
2001 Additions Disposals Transfers differences 2002
Baht Baht Baht Baht Baht Baht
Cost:
Leasehold improvement 14,328,062 3,871,512 (9,227,837) - 200,058 9,171,795
Machinery and equipment 161,779,885 68,689,166 (89,097,384) 2,700,537 2,670,887 146,743,091
Vehicles 22,883,734 8,345,681 (111,828) - 83,004 31,200,590
Furniture and office
equipment 25,291,877 8,720,713 (8,897,174) - 555,652 25,671,068
Construction in progress and
machinery under
installation 3,090,537 75,952,268 (2,700,537) - 76,342,268
----------- ------------ --------------- -------------- ------------ -------------
227,374,095 165,579,340 (107,334,224) - 3,509,601 289,128,812
----------- ------------ --------------- -------------- ------------ -------------
Accumulated depreciation:
Leasehold improvement (7,156,012) (1,639,198) 6,412,050 - (87,317) (2,470,477)
Machinery and equipment (40,923,398) (14,313,244) 25,749,677 - (925,722) (30,412,687)
Vehicles (11,310,026) (4,597,859) - - (60,791) (15,968,676)
Furniture and office
equipment (10,331,337) (4,436,197) 3,868,577 - (312,933) (11,211,890)
----------- ------------ --------------- -------------- ------------ -------------
(69,720,773) (24,986,498) 36,030,304 - (1,386,763) (60,063,730)
----------- ------------ --------------- -------------- ------------ -------------
Plant and equipment - net 157,653,322 229,065,082
=========== ===========
Depreciation for the year
2002 24,986,498
============
F-48
11. INTANGIBLE ASSETS - NET
Intangible assets as at December 31, consist of the following:
2002 (Baht)
-----------
Goodwill on acquisitions 13,895,417
==========
On April 26, 2000, the Company entered into an Asset Purchase Agreement
("Agreement") with Wilshire Technologies, Inc. ("Wilshire") to acquire their
contamination control division, which later became the Company's branch. As per
the Agreement, the Company is required to make quarterly payments to Wilshire
equal to a percentage of sales on applicable contamination control products
("covered products") sold by the Company until June 30, 2003 or the total of all
payments made equal US $2.5 million, whichever occurs first. As at December 31,
2002, the goodwill related to this transaction resulted from purchase price
contingencies now being realized through the sales of the covered products. The
amount of amortization expense for the year ended December 31, 2002 was Baht
899,840.
12. SHORT-TERM BORROWINGS FROM FINANCIAL INSTITUTIONS
Short-term borrowings from financial institutions as at December 31,
consist of the following:
2002 (Baht)
-----------
Loans from banks 98,000,000
Trust receipt 19,516,433
------------
117,516,433
============
As at December 31, 2002, short-term Thai Baht denominated loan from banks
of Baht 98 million, carried interest at a rate of MLR per annum and was
repayable within one year from the balance sheet date. As discussed more fully
in Note 13, the Company entered into a new credit facility on May 16, 2002. A
portion of the outstanding trust receipts as of December 31, 2002 is related to
the Term Loan Facility, which is subject to interest at a rate of 6.375% per
annum. The remaining trust receipts are related to the Revolving Facility which
is subject to interest at current money market rates. The average interest rate
for this portion of the outstanding trust receipts was 3.61% at December 31,
2002.
13. LONG-TERM BORROWINGS FROM FINANCIAL INSTITUTIONS
Long-term borrowings from financial institutions as at December 31,
consist of the following:
2002 (Baht)
-----------
Loans from banks 62,000,000
===========
On May 16, 2002, the Company entered into a new credit facility with a
financial institution. The new credit facility ("New Credit Facility") provides
for borrowings in the aggregate amount of Baht 300 million and is composed of:
(i) a Baht 150 million term loan and non-revolving letter of credit/trust
receipts facility (the "Term Loan Facility") and (ii) a Baht 150 million
revolving working capital facility (the "Revolving Facility"), both maturing on
August 30, 2007. The New Term Loan Facility is to be repaid in eight equal
semi-annual installments with the first repayment to be made in February 2004.
The interest for the term loan portion of the Term Loan Facility is
6.375% per annum in relation to the first two years after August 30, 2002, and
then the higher of (i) financial institution's minimum lending rate (MLR) minus
1.25%, and (ii) another local commercial bank's MLR minus 0.5% per annum for the
remainder of the loan. The Company shall pay a commercial letter of opening fee
at a rate of 1/12% per quarter and interest on the trust receipts at the rate of
6.375% per annum. The interest for the Revolving Facility is at the money market
rate on each relevant maturity date. Interest is due and payable every three
calendar months beginning on November 30, 2002.
F-49
The Company is required to pay a commitment fee at the rate of 0.25% per
annum on the daily undrawn balance of the Term Loan calculated from the first
anniversary date of the agreement, May 16, 2003, up to and including the last
day of the Availability Period, which ends on the earlier of (i) August 16, 2003
or (ii) the date on which the Term Loan Facility is fully drawn, cancelled or
terminated under the provisions of the Agreement.
The collateral required for the New Credit Facility is the assignment of
the land leasehold right, mortgage of the newly-constructed factory, office
building and machinery, pledge of inventory and receivables and the assignment
of construction and operational insurance proceeds to the financial institution
as beneficiary. The Company is also required to meet various debt covenants,
including maintaining certain financial ratios.
14. LOANS FROM SHAREHOLDERS
Loans from shareholders as at December 31, consist of the following:
2002 (Baht)
-----------
Loans from shareholders 259,823,400
Interest of the loans 14,368,080
------------
274,191,480
============
On December 3, 2001, the Company received loans from its shareholders
totaling US $6 million. These loans are unsecured and carry interest at the rate
of LIBOR + 3.25% per annum, and mature on December 3, 2008. Interest accrues
quarterly beginning at the inception of the loan, however, the first interest
payment is not due until December 3, 2005 ("First Interest Payment Date") and
then quarterly thereafter beginning March 1, 2006. The accrued interest for the
first three years of the loan is not due until maturity. The accrued interest
for the fourth year of the loan is due entirely on the First Interest Payment
Date.
15. COMMITMENTS AND CONTINGENCIES
15.1 The Company has commitments for land, buildings and vehicle lease
agreement as follows:
Annual Lease
Period Payment (Baht)
--------------
2003 11,768,770
2004 10,071,753
2005 8,126,544
2006-2018 63,035,169
15.2 The Company had contingent liabilities to banks for letters of
guarantee of Baht 10.31 million at December 31, 2002 (Note 5).
15.3 The Company had commitments to a bank for unused letter of credit
of Baht 1.3 million at December 31, 2002.
15.4 The Company had one construction contract with outstanding
commitments of Baht 27.3 million at December 31, 2002.
16. REVENUE REPORTING OF A PROMOTED INDUSTRY
To comply with the Announcement of the Board of Investment No. Por.
14/2541 (1998) dated December 30, 1998 regarding revenue reporting of a promoted
industry, the Company is required to report the revenues from domestic sales and
export sales separately and to report separately between the promoted and the
non-promoted businesses. For the year ended December 31, the required
information is as follows:
F-50
2002 Promoted Business Non-Promoted Business Total
Baht Baht Baht
Sales - 1,212,912,552 1,212,912,552
The information to present local sales and export sales separately was
not available.
17. INVESTMENT PROMOTION PRIVILEGES
In 1998-2001, the Company was granted certain rights and privileges (No.
1377/2541 (1998), 6453/2541 (1998), 4650/2543 (2000), 5026/2543 (2000),
5153/2543 (2000) and 6235/2544 (2001)) as a promoted industry under the
Investment Promotion Act of B.E. 2520 (1977), which included an exemption from
customs duties for machinery imported for production as approved by the Board of
Investment until August 14, 2002 and an exemption from custom duties for raw
materials until May 19, 2002.
The Company has to comply with certain conditions contained in the
investment promotion certificate including the size of its operations and
amounts of investments and annual export sales volume.
18. EMPLOYEES' PROVIDENT FUND
The Company has established a registered provident fund covering all
employees. This fund was registered with the Ministry of Finance under the
Provident Fund Act. B.E. 2530. Membership is voluntary upon attaining permanent
status. Under the regulation of the fund, members and the Company are required
to make monthly contributions to the fund at a percentage of the employees' base
salaries, depending on the length of employment.
The Company's contribution charged to operations for the years ended
December 31, 2002 and 2001 amounted to Baht 970,965 and 546,470, respectively.
The Company's subsidiary has established a defined contribution plan
covering all employees, and its contributions charged to operations for the
years ended December 31, 2002 and 2001 amounted to Baht 12,008,000 and Baht
9,809,638, respectively.
19. SUMMARY OF SIGNIFICANT DIFFERENCES BETWEEN ACCOUNTING PRINCIPLES FOLLOWED
BY THE COMPANY AND ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED
STATES OF AMERICA (U.S. GAAP)
The Company's consolidated financial statements have been prepared in
accordance with generally accepted accounting principles in the Kingdom of
Thailand ("Thai GAAP"), which differs in certain respects from U.S. GAAP.
The differences, as they affect the financial statements, are reflected
in the amounts provided in Note 20 and arise due to the items discussed in the
following paragraphs:
Accounting for Income Taxes
Under U.S. GAAP, SFAS No. 109, Accounting for Income Taxes, requires an
enterprise to record deferred tax assets or liabilities based on the difference
between the financial statement and income tax basis of assets and liabilities
using the enacted tax rate. Deferred income tax expenses or credits are based on
the changes in the assets or liabilities from period to period. Deferred tax
assets are reduced by a valuation allowance if it is more likely than not that
some or all of the deferred tax assets will not be realized.
Thai GAAP does not address the reporting or disclosure of deferred income
taxes.
Amortization of Goodwill
F-51
Under Thai GAAP, goodwill should be amortized to expense on a systematic
basis over its useful life. The amortization period should reflect the best
estimate of the period during which future economic benefits are expected to
flow to the enterprise. The amortization method used should reflect the pattern
in which the future economic benefits arising from goodwill are expected to be
consumed. The straight-line method should be adopted unless there is persuasive
evidence that another method is more appropriate in the circumstances.
Under U.S. GAAP, SFAS No. 142, Goodwill and Other Intangible Assets,
goodwill and certain other intangible assets are no longer amortized but are to
be periodically assessed for impairment.
Reporting Comprehensive Income
Under Thai GAAP, a company is given the option to present a statement
showing (i) all changes in equity; or (ii) changes in equity other than those
arising from capital transactions with owners and distributions owners (i.e.
statement of comprehensive income). The Company has chosen to present all
changes in equity.
Under U.S. GAAP, SFAS No. 130, Reporting Comprehensive Income, requires
an enterprise to display an amount representing total comprehensive income for
each period of operations presented in the financial statements. Comprehensive
income comprises of net income and other comprehensive income, such as
unrealized gains and losses on securities, foreign currency translation
adjustments and minimum pension liability adjustments. In addition, an
enterprise is required to classify items of other comprehensive income by their
nature in a financial statement and display the accumulated balance of other
comprehensive income separately from retained earnings and premium on share
capital in the equity section of a statement of financial position.
Reclassification of financial statement for earlier periods provided for
comparative purposes is also required.
Extraordinary item, net
The extraordinary item, net would be classified within profit from
ordinary activities under U.S. GAAP.
20. RECONCILIATION BETWEEN NET INCOME AND SHAREHOLDERS' EQUITY UNDER THAI GAAP
AND U.S. GAAP
Baht
Net income according to financial statements prepared under
Thai GAAP 106,041,120
U.S. GAAP adjustments
Increase (decrease) due to:
Deferred tax accounting (567,859)
Amortization of goodwill (Note 14) 346,231
-------------------
Net income in accordance with U.S. GAAP 105,819,492
===================
Basic and Diluted Earnings Per Share 10.08
Basic and diluted weighted average number of shares 10,500,000
Shareholders' equity according to financial statements prepared
under Thai GAAP 351,408,518
U.S. GAAP adjustments
Increase (decrease) due to:
Loans to directors (Note 12) (31,494,538)
Deferred tax accounting (8,842,497)
Amortization of goodwill 348,159
Currency translation difference (Note 2.2) (911,336)
-------------------
Shareholders' equity in accordance with U.S. GAAP 310,508,306
===================
F-52
With regard to the balance sheet, the following significant captions
determined under U.S. GAAP would have been:
Loans to employee - non-current asset 1,420,000
Intangible assets - net 14,241,648
Other liabilities 10,321,692
The following table presents comprehensive income for the year ended
December 31, 2001:
Baht
Net income (U.S. GAAP) 105,819,492
Foreign currency translation adjustments 7,393,657
-----------------
Comprehensive income 113,213,149
=================
21. ADDITIONAL FINANCIAL STATEMENT DISCLOSURES REQUIRED UNDER U.S. GAAP
21.1 Income Taxes
The sources of income before the provision for income taxes for
the year ended December 31, 2002 are as follows:
Baht
Thailand 72,382,370
Foreign 72,130,235
-------------------
Income before provision for income taxes 144,512,605
===================
The provision for income taxes for the year ended December 31,
2002 is summarized as follows:
Baht
Current
Thailand 25,800,115
Foreign 13,342,453
-------------------
Total current 39,142,568
-------------------
Deferred
Thailand -
Foreign 567,859
-------------------
Total deferred 567,859
-------------------
Approximate provision for income taxes in accordance
with U.S. GAAP 39,710,427
===================
As at December 31, 2002, in providing for applicable deferred income taxes under U.S. GAAP, the tax
effect of significant temporary differences that give rise to deferred income tax assets and
liabilities are listed below.
Baht
Deferred income tax assets resulted from:
Inventory basis differences 828,792
F-53
Allowance for doubtful accounts 604,031
Valuation allowance (1,432,823)
-----------------
Total deferred income tax assets -
-----------------
Deferred income tax liabilities resulted from:
Property, plant and equipment basis differences 10,321,692
-----------------
Total deferred income tax liabilities 10,321,692
-----------------
Net deferred income tax liabilities 10,321,692
=================
Deferred income taxes have not been provided on approximately Baht
171.3 million of undistributed earnings of foreign affiliated
companies, which are considered to be permanently reinvested. It
is not practicable to estimate the amount of tax that might be
payable on the eventual remittance of such earnings.
21.2 Transactions with Related Parties
A portion of the Company's assets, revenues and expenses arose
from transactions with related parties, which occur in the
ordinary course of business on terms equivalent to those with
third parties. The relationship may be by shareholding or the
companies may have the same group of shareholders or directors.
The Company's management believes that the Company does not have
significant influence over the related parties. The accompanying
financial statements reflect the effects of these transactions
determined on the basis of commitments and conditions as in the
normal course of business.
Significant balances and transactions are as follows:
Relationship Balance at
December 31,
2002
Baht
Amounts due from related companies
Foamex L.P. Affiliated Company 278,645
Foamex Asia, Inc. Major Shareholder 8,849,084
Amounts due to related companies
Foamex L.P. Affiliated Company 82,013,287
Relationship Balance for the
year ended
December 31,
2002
Baht
Reimbursement of expenses
Foamex L.P. Affiliated Company 30,230,917
Foamex Asia, Inc. Major Shareholder 18,069,036
Purchases
Foamex L.P. Affiliated Company 218,190,503
21.3 Estimated Fair Values of Financial Instruments
F-54
The fair values have been estimated by the Company using available market
information and appropriate valuation methodologies.
As at December 31, the carrying amounts of financial assets and financial
liabilities which were different from the estimated fair values were as
follows:
Carrying Value Fair Value
Baht Baht
Loans to employee and directors 33,314,538 16,305,922
Loans from shareholders 259,823,400 222,131,206
Long-term borrowings from financial institutions 62,000,000 70,903,616
The following methods and assumptions were used by the Company in
estimating fair value of financial instruments as disclosed herein:
Financial assets - The fair values of financial assets for which their
remaining terms to maturity are within 90 days are based on carrying
value. For those with remaining terms to maturity greater than 90 days are
estimated by using a discounted cash flow analysis based on the minimum
leading rate of a commercial bank at December 31, 2002 for the remaining
years to maturity.
Financial liabilities - The fair values of financial liabilities for which
their remaining terms to maturity are within 90 days are based on carrying
value. For those with remaining terms to maturity greater than 90 days are
estimated by using a discounted cash flow analysis based on the minimum
leading rate of a commercial bank at December 31, 2002 for the remaining
years to maturity.
F-55
REPORT OF THE INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
TO THE BOARD OF DIRECTORS
FOAMEX ASIA COMPANY LIMITED
We have audited the consolidated balance sheet of Foamex Asia Company Limited
and its subsidiary as at December 31, 2001, and the related consolidated
statements of income, changes in shareholders' equity and cash flows for the
year then ended. These financial statements are the responsibility of the
Company's management as to their correctness and completeness of the
presentation. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance as to whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to in the first
paragraph present fairly, in all material respects, the financial position of
Foamex Asia Company Limited and its subsidiary as at December 31, 2001, and the
results of its operations and its cash flows for the year then ended, in
conformity with generally accepted accounting principles in Thailand.
As discussed in Note 4 to the financial statements, the Company has elected to
discontinue the application of certain accounting standards for the current
year's financial statements.
Generally accepted accounting principles in Thailand do not conform to those in
the United States of America. A description of the significant differences
between these two generally accepted accounting principles and the approximate
effects of these differences on net income and shareholders' equity are set
forth in Notes 18 and 19 to the consolidated financial statements.
Wimolporn Boonyusthian
Certified Public Accountant (Thailand)
BANGKOK Registration No. 4067
February 22, 2002 DELOITTE TOUCHE TOHMATSU JAIYOS
(March 5, 2003 as to Notes 2, 18, 19, 20, 21)
F-56
FOAMEX ASIA COMPANY LIMITED AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
AS AT DECEMBER 31, 2001
BAHT
ASSETS
CURRENT ASSETS
Cash in hand and at banks 138,358,163
Accounts receivable - net (Note 7) 408,060,820
Inventories - net (Note 8) 219,051,180
Amounts due from related companies 2,502,334
Other current assets 19,134,610
-----------
Total Current Assets 787,107,107
-----------
LOANS TO EMPLOYEE AND DIRECTORS (Note 9) 32,955,155
PLANT AND EQUIPMENT - NET (Note 10) 157,653,322
OTHER ASSETS (Note 11) 6,217,866
-----------
TOTAL ASSETS 983,933,450
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Loans from bank (Note 12) 30,000,000
Accounts payable 297,040,040
Amounts due to related companies 43,100,301
Accrued expenses 46,292,992
Other current liabilities 35,428,948
------------
Total Current Liabilities 451,862,281
-----------
LOANS FROM SHAREHOLDERS (Note 13) 266,158,200
OTHER LIABILITIES (Note 14) 28,850,564
-----------
TOTAL LIABILITIES 746,871,045
===========
SHAREHOLDERS' EQUITY
SHARE CAPITAL (Note 15)
Registered share capital
10,500,000 ordinary shares of Baht 10 each 105,000,000
===========
10,500,000 ordinary shares of Baht 10 each, fully paid 105,000,000
PREMIUM ON SHARE CAPITAL 18,990,504
CURRENCY TRANSLATION DIFFERENCES 6,546,185
RETAINED EARNINGS
Unappropriated 106,525,716
-----------
Total Shareholders' Equity 237,062,405
-----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 983,933,450
===========
Notes to the financial statements form an integral part of these statements
F-57
FOAMEX ASIA COMPANY LIMITED AND SUBSIDIARY
CONSOLIDATED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 2001
BAHT
REVENUES
Sales 1,461,757,023
Other income 25,175,124
---------------
Total Revenues 1,486,932,147
-------------
EXPENSES
Cost of sales 1,103,005,580
Selling and administrative expenses 197,207,253
Loss on exchange rate 1,723,772
Interest expense 9,778,202
Income tax expense 32,763,373
---------------
Total Expenses 1,344,478,180
-------------
NET INCOME 142,453,967
==============
BASIC EARNINGS PER SHARE 24.31
WEIGHTED AVERAGE NUMBER OF ORDINARY SHARES 5,859,721
---------=========
Notes to the financial statements form an integral part of these statements
F-58
FOAMEX ASIA COMPANY LIMITED AND SUBSIDIARY
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 2001
BAHT
ISSUED AND PAID-UP SHARE CAPITAL
Beginning balance 54,087,120
Addition 50,912,880
------------
Ending balance 105,000,000
-----------
PREMIUM ON SHARE CAPITAL
Beginning balance -
Addition 18,990,504
------------
Ending balance 18,990,504
------------
RETAINED EARNINGS (DEFICIT)
Unappropriated (Deficit)
Beginning balance (35,928,251)
Addition 142,453,967
------------
Ending balance 106,525,716
------------
CURRENCY TRANSLATION DIFFERENCES
Beginning balance 13,781,075
Deduction during the year (7,234,890)
-------------
Ending balance 6,546,185
-------------
TOTAL SHAREHOLDERS' EQUITY 237,062,405
===========
Notes to the financial statements form an integral part of these statements
F-59
FOAMEX ASIA COMPANY LIMITED AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2001
BAHT
CASH FLOWS FROM OPERATING ACTIVITIES
Net income 142,453,967
Reconciliation of net income to net cash from operating activities
Depreciation and amortization 25,378,127
Allowance for doubtful accounts (66,071)
Provision for obsolete stock (525,220)
Unrealized loss on exchange rate - net 6,052,891
Loss on disposal of plant and equipment 40,587
----------------
Operating income before change in operating assets and liabilities 173,334,281
Operating assets (increase) decrease
Accounts receivable (128,422,075)
Inventories (39,958,875)
Other current assets (2,365,216)
Amounts due from related companies (2,502,334)
Other assets (4,945,848)
Operating liabilities increase (decrease)
Accounts payable 31,845,283
Amounts due to related companies (217,875,904)
Accrued expenses (5,737,192)
Other current liabilities 30,157,608
-------------
Net cash used in operating activities (166,470,272)
------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of plant and equipment (61,178,177)
Proceeds from disposal of plant and equipment 1,433,111
Increase in deposits at bank used as collateral (15,282,248)
Increase in loans to employee and directors (32,955,155)
-------------
Net cash used in investing activities (107,982,469)
------------
CASH FLOWS FROM FINANCING ACTIVITIES
Cash receipt from share capital increase 69,903,384
Cash receipt from loans from shareholders 264,761,400
Cash payment for loans from shareholders (36,366,340)
Increase in loan from bank 15,000,000
Increase in long term accounts payable (6,855,945)
--------------
Net cash provided by financing activities 306,442,499
------------
NET EFFECT OF CURRENCY TRANSLATION
DIFFERENCES IN CASH AND CASH EQUIVALENTS (4,859,666)
------------
Net increase in cash and cash equivalents 27,130,092
Cash and cash equivalents at January 1, 90,241,514
------------
Cash and cash equivalents at December 31, 117,371,606
===========
Notes to the financial statements form an integral part of these statements
F-60
FOAMEX ASIA COMPANY LIMITED AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2001
1. ECONOMIC TURMOIL IN THE ASIA-PACIFIC REGION
Thailand and many Asia-Pacific countries continue to experience severe
economic difficulties since 1997. The accompanying financial statements reflect
management's current assessment of the possible impact of the economic
conditions on the financial position of the Company.
2. COMPANY'S OPERATIONS AND BASIS FOR PREPARATION OF THE CONSOLIDATED FINANCIAL
STATEMENTS
Foamex Asia Company Limited was registered in the Kingdom of Thailand on
June 5, 1997 with its head office located at 175 Sathorn City Tower, 20th Floor,
South Sathorn Road, Sathorn, Bangkok 10120. The Company's plant is located at
51/2 Bangna-trad Road KM22, Samutprakarn 10540 (see Note 21.2). The Company and
its Subsidiary are members of Foamex International, Inc. and Hau Kee Group and
the Company's principal objective is to fabricate technical foam, films and
adhesives.
As at December 31, 2001, the Company had a total of 520 staff persons.
The staff costs for the year ended December 31, 2001 were Baht 198 million.
2.1 The Company prepares its statutory financial statements in conformity
with accounting and practices generally accepted in Thailand.
2.2 The consolidated financial statements include the accounts of Foamex
Asia, LLC, the Company's branch incorporated in the United States of
America, and Foamtec (Singapore) Pte. Ltd., a subsidiary incorporated
in the Republic of Singapore. The Company has direct and indirect
ownership percentages as follows:
Subsidiary % of Shareholding
Directly owned:
Foamtec (Singapore) Pte. Ltd. 99.99%
Indirectly owned:
Foamex (Malaysia) Sdn. Bhd. 99.99%
The major intercompany transactions between the Company and its
Subsidiary included in the consolidated financial statements have been
eliminated.
The financial statements of Foamtec (Singapore) Pte. Ltd. and its
subsidiary have been prepared in Singapore dollars. For consolidation purposes,
these financial statements have been translated into Thai Baht as follows:
a.All assets and liabilities using the rates announced by the Bank of
Thailand at the balance sheet date.
b.Revenues and expenses using the average exchange rates for the year as
announced by the Bank of Thailand.
Net exchange gain or loss from translation is presented as "Currency
Translation Differences" under "Shareholders' Equity" in the balance sheet.
F-61
3. SIGNIFICANT ACCOUNTING POLICIES
3.1 Cash and cash equivalents
Cash and cash equivalents consist of cash in hand, deposits at banks
and financial institutions with original maturities of 3 months or
less.
3.2 Allowance for doubtful accounts
An allowance for doubtful accounts of the Company and its subsidiary
is provided at the estimated collection losses on receivables, based
on the Company's collection experience together with a review of the
current financial position of each existing receivable.
3.3 Inventories
Inventories are valued at the lower of cost or net realizable value.
Cost is determined as follows:
Finished goods at standard cost which approximates actual cost or net realizable value,
whichever is lower
Work in process at standard cost which approximates actual cost
Raw materials weighted average cost basis
Inventories of subsidiaries are stated at the lower of cost or net
realizable value. Cost is calculated on the first-in first-out basis.
3.4 Plant and equipment
Plant and equipment are stated at cost less accumulated depreciation.
Depreciation is calculated by the straight-line method, based on the
estimated useful lives of the assets as follows:
Leasehold improvements 5-10 years
Machinery and equipment 3-10 years
Vehicles 5 years
Furniture and office equipment 3-10 years
3.5 Impairment of assets
The Company reviews the impairment of assets for plant and equipment,
investment in subsidiary and other assets whenever events indicate
that the carrying value of an asset exceeds its recoverable amount. In
case that the carrying value of an asset exceeds its recoverable
amount, the Company recognizes the impairment losses in the statement
of income.
3.6 Foreign currency transactions
Transactions denominated in foreign currencies incurred during the
year are translated into Baht at the rates of exchange at the
transaction dates. At the end of the year, monetary assets and
liabilities denominated in foreign currencies are translated into Baht
at the reference rates as determined by the Bank of Thailand at that
date. Gains and losses on foreign exchange arising on settlements and
translation are recognized as income or expense when incurred.
F-62
3.7 Recognition of revenues
Sales are recognized upon delivery of goods to the customers. Other
income is recognized on the accrual basis of accounting.
3.8 Income tax
Income tax expense is calculated from taxable income and recorded
based on tax paid and accrued for the year.
The consolidated financial statements included the audited financial
statements of a subsidiary. Such subsidiary records its income tax by
the deferred income tax method, which is different from the accounting
method used by the Company. The Company, therefore, adjusts the
accounting for income tax of such subsidiary to be the same with the
Company's accounting method.
3.9 Basic earnings per share
Basic earnings per share are calculated by dividing net income by the
weighted average number of ordinary shares outstanding during the
year. In case of a capital increase, the number of shares is weighted
according to time of registration of such increase.
3.10 Use of accounting estimates
Preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of revenues,
expenses, assets and liabilities and disclosure of contingent assets
and liabilities. Actual results may differ from those estimates.
4. ACCOUNTING CHANGES
In December 2001, the Institute of Certified Accountants and Auditors of
Thailand issued an Announcement regarding "Exemption of Accounting Standards for
Non-public Limited Companies". Accordingly, the Company has elected to
discontinue the application of Thai Accounting Standard No. 47 "Related Parties
Disclosure" and No. 48 "Financial Instruments Disclosure and Presentation".
5. SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION
5.1 Cash paid for interest and income tax are as follows:
Baht
Interest 22,609,801
============
Income tax 2,016,304
============
5.2 Cash and cash equivalents consist of the following:
Baht
Cash on hand and in banks 138,358,163
Less Deposit at banks used as collateral (20,986,557)
---- -----------
Cash and cash equivalents 117,371,606
===========
F-63
6. CASH IN HAND AND AT BANKS
As at December 31, 2001 cash at banks of Baht 2.86 million, are used as
collateral for a bank guarantee (Note 16.2). In addition, cash at bank of
subsidiary of SGD 759,359 is used as collateral for short-term loan from bank.
7. ACCOUNTS RECEIVABLE - NET
Accounts receivable - net consist of the following:
Baht
Accounts receivable 409,617,635
Less Allowance for doubtful accounts (1,556,815)
---- -------------
408,060,820
=============
8. INVENTORIES - NET
Inventories - net consist of the following:
Baht
Finished goods 69,187,121
Work in process 11,935,231
Raw materials 112,978,963
Goods in transit 30,452,955
------------
224,554,270
Less Provision for obsolete stock (5,503,090)
---- ------------
219,051,180
============
9. LOANS TO EMPLOYEE AND DIRECTORS
Loans to employee and directors consist of the following:
Baht
Loan to employee 2,000,000
Loans to directors 30,955,155
----------
32,955,155
==========
As at December 31, 2001, loan to employee represented an interest-free
Thai Baht loan, which is guaranteed by another person. The loan is repayable in
monthly installments beginning January 2002 to December 2006.
As at December 31, 2001, loans to directors represented foreign currency
denominated loans totaling US$ 700,000. These loans are secured by the
director's interest in the Company as specified in the loan agreement, carry
interest at a rate of 4% per annum and are due in December 2021.
F-64
10. PLANT AND EQUIPMENT - NET
Plant and equipment - net consist of the following:
Balance as at Currency Balance as at
December 31, translation December 31,
2000 Additions Disposals Transfers difference 2001
Baht Baht Baht Baht Baht Baht
Cost:
Leasehold improvement 13,525,671 1,296,811 (303,160) - (191,260) 14,328,062
Machinery and
equipment 118,696,605 20,124,029 (154,302) 25,545,944 (2,432,391) 161,779,885
Vehicles 13,508,582 9,456,120 - - (80,968) 22,883,734
Furniture and office
equipment 20,921,934 5,000,313 (101,455) - (528,915) 25,291,877
Construction in progress and
machinery in transit 4,334,970 25,300,904 (999,393) (25,545,944) - 3,090,537
------------- ---------- ----------- ----------- --------------- --------------
170,987,762 61,178,177 (1,558,310) - 3,233,534) 227,374,095
------------- ---------- ----------- ----------- --------------- --------------
Accumulated depreciation:
Leasehold improvement (4,969,650) (2,301,817) 57,248 - 58,207 (7,156,012)
Machinery and
equipment (27,176,683)(14,362,401) 19,831 - 595,855 (40,923,398)
Vehicles (7,712,437) (3,636,974) - - 39,385 (11,310,026)
Furniture and office
equipment (6,091,131) (4,412,606) 7,533 - 164,867 (10,331,337)
------------- ---------- ----------- ----------- --------------- --------------
(45,949,901)(24,713,798) 84,612 - 858,314 (69,720,773)
------------- ---------- ----------- ----------- --------------- --------------
Plant and equipment - net125,037,861 157,653,322
=========== ===========
Depreciation for the year
2001 24,713,798
============
11. OTHER ASSETS
Other assets of the following:
Baht
Technical license - net 553,609
Deposits 5,664,257
---------
6,217,866
12. LOANS FROM BANKS
Loans from banks consist of the following:
Baht
Loans from banks 30,000,000
----------
30,000,000
As at December 31, 2001, short-term Thai Baht denominated loan from banks
of Baht 15 million, carried interest at a rate of MLR per annum and was
repayable within one year from the balance sheet date.
F-65
As at December 31, 2001, short-term Thai Baht denominated loan from bank
of Baht 15 million, was secured by cash at bank of subsidiary in the Republic of
Singapore, carried interest at rate of MLR per annum and was repayable within
one year from the balance sheet date.
13. LOANS FROM SHAREHOLDERS
Loans from shareholders as at December 31, consist of the following:
Baht
Loans from shareholders 266,158,200
-----------
266,158,200
============
On December 3, 2001, the Company received loans from its shareholders
totaling US$ 6 million. These loans are unsecured, carry interest at the rate of
LIBOR + 3.25% per annum, and mature on December 3, 2008. Interest accrues
quarterly beginning at the inception of the loan, however the first interest
payment is not due until December 3, 2005 and then quarterly thereafter
beginning March 1, 2006.
14. OTHER LIABILITIES
On April 26, 2000, the Company entered into an Asset Purchase Agreement
("Agreement") with Wilshire Technologies, Inc. ("Wilshire") to acquire their
contamination control division, which later became the Company's branch. As per
the agreement, the Company is required to make quarterly payments to Wilshire
equal to a percentage of sales on applicable contamination control products sold
by the Company until June 30, 2003 or the total of all payments made equal US$
2.5 million, whichever occurs first.
15. SHARE CAPITAL
On November 9, 2001, the extraordinary shareholders' meeting passed a
special resolution to increase the authorized share capital from Baht 54,087,120
to Baht 105,000,000 through the issuance of 5,091,288 additional ordinary shares
of Baht 10 par value each. The Company called and fully received the
subscriptions, and registered the increase in share capital with Registrar of
Partnerships and Companies on December 28, 2001.
16. COMMITMENTS AND CONTINGENCIES
16.1 The Company has commitments for vehicle lease agreements as follows:
Period Baht
2002 1,667,964
2003 1,667,964
2004 1,089,203
16.2 The Company has contingent liabilities to banks for letters of
guarantee of Baht 2.86 million at December 31, 2001 (Note 6).
17. INVESTMENT PROMOTION PRIVILEGES
In 1998-2001, the Company was granted certain rights and privileges (No.
1377/2541 (1998), 6453/2541 (1998), 4650/2543 (2000), 5026/2543 (2000),
5153/2543 (2000) and 6235/2544 (2001)) as a promoted industry under the
Investment Promotion Act of B.E. 2520 (1977), which included exemption from
customs duties for machinery imported for production as approved by the Board of
Investment until August 14, 2002 and exemption from custom duties for raw
materials until May 19, 2002.
The Company has to comply with certain conditions contained in the
investment promotion certificate including the size of its operations and
amounts of investments and annual export sales volume.
F-66
18. SUMMARY OF SIGNIFICANT DIFFERENCES BETWEEN ACCOUNTING PRINCIPLES FOLLOWED
BY THE COMPANY AND ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED
STATES OF AMERICA (U.S. GAAP)
The Company's consolidated financial statements have been prepared in
accordance with generally accepted accounting principles in the Kingdom of
Thailand ("Thai GAAP"), which differs in certain respects from U.S. GAAP.
The differences, as they affect the financial statements, are reflected
in the amounts provided in Note 19 and arise due to the items discussed in the
following paragraphs:
Accounting for Income Taxes
Under U.S. GAAP, SFAS No. 109, Accounting for Income Taxes, requires an
enterprise to record deferred tax assets or liabilities based on the difference
between the financial statement and income tax basis of assets and liabilities
using the enacted tax rate. Deferred income tax expenses or credits are based on
the changes in the assets or liabilities from period to period. Deferred tax
assets are reduced by a valuation allowance if it is more likely than not that
some or all of the deferred tax assets will not be realized.
Thai GAAP does not address the reporting or disclosure of deferred income
taxes.
Reporting Comprehensive Income
Under Thai GAAP, a company is given the option to present a statement
showing (i) all changes in equity; or (ii) changes in equity other than those
arising from capital transactions with owners and distributions owners (i.e.
statement of comprehensive income.) The Company has chosen to present all
changes in equity.
Under U.S. GAAP, SFAS No. 130, Reporting Comprehensive Income, requires
an enterprise to display an amount representing total comprehensive income for
each period of operations presented in the financial statements. Comprehensive
income comprises of net income and other comprehensive income, such as
unrealized gains and losses on securities, foreign currency translation
adjustments and minimum pension liability adjustments. In addition, an
enterprise is required to classify items of other comprehensive income by their
nature in a financial statement and display the accumulated balance of other
comprehensive income separately from retained earnings and premium on share
capital in the equity section of a statement of financial position.
Reclassification of financial statement for earlier periods provided for
comparative purposes is also required.
19. RECONCILIATION BETWEEN NET INCOME AND SHAREHOLDERS' EQUITY UNDER THAI GAAP
AND U.S. GAAP
Baht
Net income according to financial statements prepared under
Thai GAAP 142,453,967
U.S. GAAP adjustments
Increase (decrease) due to:
Deferred tax accounting (1,276,823)
------------
Net income in accordance with U.S. GAAP 141,177,144
===========
Diluted Earnings Per Share 24.09
Weight average number of shares
Diluted 5,859,721
F-67
Shareholders' equity accounting to financial statements prepared
Under Thai GAAP 237,062,405
U.S. GAAP adjustments
Increase (decrease) due to:
Loans to directors (30,955,155)
Deferred tax accounting (8,821,423)
Currency translation difference (524,843)
-------------
Approximate shareholders' equity in accordance with U.S. GAAP 196,760,984
===========
With regard to the balance sheet, the following significant captions
determined under U.S. GAAP would have been:
Loans to employee 2,000,000
===========
Other non-current assets - Deposits at banks used as collateral 20,986,557
==========
Other liabilities 38,196,830
==========
The following table presents comprehensive income for the year ended
December 31, 2001:
Baht
Net income (U.S. GAAP) 141,177,144
Foreign currency translation adjustments (7,759,733)
------------
Comprehensive income 133,417,411
===========
20. ADDITIONAL FINANCIAL STATEMENT DISCLOSURES REQUIRED UNDER U.S. GAAP
20.1 Income Taxes
The sources of income before the provision for income taxes for the year
ended December 31, 2001 are as follows:
Baht
Thailand 76,500,742
Foreign 98,716,597
------------
Income before provision for income taxes 175,217,339
===========
The provision for income taxes for the year ended December 31,
2001 is summarized as follows:
Baht
Current
Thailand 12,003,128
Foreign 20,760,245
----------
Total current 32,763,373
----------
Deferred
Thailand -
Foreign 1,276,823
-----------
Total deferred 1,276,823
-----------
Approximate provision for income taxes in accordance with U.S. GAAP 34,040,169
==========
F-68
As at December 31, 2001, in providing for applicable deferred income
taxes under U.S. GAAP, the tax effect of significant temporary differences that
give rise to deferred income tax assets and liabilities are listed below.
Baht
Deferred income tax assets resulted from:
Inventory basis differences 821,369
Allowance for doubtful accounts 324,151
Valuation allowance (1,145,520)
----------
Total deferred income tax assets -
-----------
Deferred income tax liabilities resulted from:
Property, plant and equipment basis differences 9,346,266
----------
Total deferred income tax liabilities 9,346,266
----------
Net deferred income tax liabilities 9,346,266
==========
Deferred income taxes have not been provided on approximately Baht 105.3
million of undistributed earnings of foreign affiliated companies, which
are considered to be permanently reinvested. It is not practicable to
estimate the amount of tax that might be payable on the eventual
remittance of such earnings.
20.2 Transactions with Related Parties
A portion of the Company's assets, revenues and expenses arose from
transactions with related parties. The relationship may be by
shareholding or the companies may have the same group of shareholders or
directors. The Company's management believes that the Company does not
have significant influence over the related parties. The accompanying
financial statements reflect the effects of these transactions determined
on the basis of commitments and conditions as in the normal course of
business.
Significant balances and transactions are as follows:
Balance at
December 31, 2001
Relationship Baht
Amounts due from related companies
Foamex L.P. Affiliated Company 2,502,334
Amounts due to related companies
Foamex L.P. Affiliated Company 74,801,526
Balance for the
year ended
December 31, 2001
Relationship Baht
Reimbursement of expenses
Foamex L.P. Affiliated Company 2,587,980
Purchases
Foamex L.P. Affiliated Company 176,363,932
20.3 Estimated Fair Values of Financial Instruments
The fair values have been estimated by the Company using available market
information and appropriate valuation methodologies.
F-69
As at December 31, 2001 the carrying amounts of financial assets and
financial liabilities which were different from the estimated fair values
were as follows:
Carrying Value Fair Value
Baht Baht
Loans to employee and directors 32,955,155 16,058,215
============ ============
Loans from shareholders 266,158,200 227,388,396
=========== ===========
The following methods and assumptions were used by the Company in
estimating fair value of financial instruments as disclosed herein:
Financial assets - The fair values of financial assets for which their
remaining terms to maturity are within 90 days are based on carrying
value. For those with remaining terms to maturity greater than 90 days
are estimated by using a discounted cash flow analysis based on the
historical minimum leading rate of a commercial bank at December 31, 2001
for the remaining years to maturity.
Financial liabilities - The fair values of financial liabilities for
which their remaining terms to maturity within 90 days are based on
carrying value. For those with remaining terms to maturity greater than
90 days are estimated by using a discounted cash flow analysis based on
current for the remaining years to maturity.
21. SUBSEQUENT EVENTS
21.1 New Credit Facility
On May 16, 2002, the Company entered into a new credit facility with a
financial institution. The new credit facility ("New Credit Facility")
provides for borrowings in the aggregate amount of Baht 300 million and
is composed of: (i) a Baht 150 million term loan and non-revolving letter
of credit/trust receipts facility (the "Term Loan Facility") and (ii) a
Baht 150 million revolving working capital facility (the "Revolving
Facility"), both maturing on August 30, 2007. The New Term Loan Facility
is to be repaid in eight equal semi-annual installments with the first
repayment to be made in February 2004.
The interest for the term loan portion of the Term Loan Facility is
6.375% per annum in relation to the first two years after August 30,
2002, and then the higher of (i) financial institution's minimum lending
rate (MLR) minus 1.25%, and ii) another local commercial bank's minimum
lending rate (MLR) minus 0.5% per annum for the remainder of the loan.
The Company shall pay a commercial letter of opening fee at a rate of
1/12% per quarter and interest on the trust receipts at the rate of
6.375% per annum. The interest for the Revolving Facility is at the money
market rate on each relevant maturity date. Interest is due and payable
every three-calendar months beginning on November 30, 2002.
The Company is required to pay a commitment fee at the rate of 0.25% per
annum of the daily undrawn balance of the Term Loan calculated from the
first anniversary date of the agreement, May 16, 2003, up to and
including the last day of the Availability Period, which ends on the
earlier of (i) August 16, 2003 and (ii) the date on which the Term Loan
Facility is fully drawn, cancelled or terminated under the provisions of
the agreement.
The collateral required for the New Credit Facility is the assignment of
the land leasehold right, mortgage of the constructed factory, office
building and machinery, pledge of inventory and receivables and the
assignment of construction and operational insurance proceeds to the
financial institution as beneficiary. The Company is also required to
meet various debt covenants, including maintaining certain financial
ratios.
F-70
21.2 Thailand Plant Fire
On July 14, 2002, the Company's fabrication and contamination control
specialty foam plant in Samutprakarn, Thailand was destroyed by fire. All
the Company's inventory and most of the machinery and equipment
maintained in the factory were lost. The carrying value of the inventory
and the net book value of the machinery and equipment at the date of the
fire were Baht 84.0 million and Baht 65.1 million, respectively. The
Company filed a claim with their insurance carrier for the inventory and
machinery and equipment in the amount of Baht 70 million and Baht 107.8
million, respectively. The Company recorded a loss in 2002 of Baht 14.0
million for the underinsured inventory and an additional Baht 1.7 million
for other fire related expenses.
The Company received an interim payment from their insurance carrier in
the amount of Baht 50 million on December 27, 2002 and an additional Baht
50 million on February 7, 2003. Full and final settlement of the
Company's insurance claim is still pending, however, the Company's
management believes a gain will ultimately be realized.
F-71
FOAMEX ASIA COMPANY LIMITED AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET (unaudited)
AS AT DECEMBER 31, 2000
BAHT
ASSETS
CURRENT ASSETS
Cash in hand and at banks 95,945,823
Accounts receivable - net 275,513,126
Inventories - net 178,567,086
Amounts due from subsidiary and related companies -
Other current assets 16,769,394
------------
Total Current Assets 566,795,429
-----------
PLANT AND EQUIPMENT - NET 125,037,861
OTHER ASSETS 1,936,348
-------------
TOTAL ASSETS 693,769,638
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Loans from bank 15,000,000
Accounts payable 265,381,615
Amounts due to subsidiary and related companies 252,073,707
Accrued expenses 52,030,184
Other current liabilities 5,271,340
-------------
Total Current Liabilities 589,756,846
-----------
LOANS FROM SHAREHOLDERS 36,366,340
OTHER LIABILITIES 35,706,508
------------
TOTAL LIABILITIES 661,829,694
===========
SHAREHOLDERS' EQUITY
SHARE CAPITAL
Registered share capital
5,408,712 ordinary shares of Baht 10 each 54,087,120
===========
Issuance and paid-up share capital
5,408,712 ordinary shares of Baht 10 each, fully paid 54,087,120
PREMIUM TO SHARE CAPITAL -
CURRENCY TRANSLATION DIFFERENCES 13,781,075
RETAINED EARNINGS (DEFICIT)
Unappropriated (deficit) (35,928,251)
------------
Total Shareholders' Equity 31,939,944
------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 693,769,638
===========
Notes to the financial statements form an integral part of these statements
F-72
FOAMEX ASIA COMPANY LIMITED AND SUBSIDIARY
CONSOLIDATED STATEMENT OF INCOME (unaudited)
FOR THE YEAR ENDED DECEMBER 31, 2000
BAHT
REVENUES
Sales 945,993,433
Other income 4,590,118
-------------
Total Revenues 950,583,551
-----------
EXPENSES
Cost of sales 669,223,817
Selling and administrative expenses 207,568,554
Loss on exchange rate 25,154,911
Interest expense 7,529,054
Income tax expense 10,756,152
------------
Total Expenses 920,242,488
-----------
NET INCOME 30,341,063
============
BASIC EARNINGS PER SHARE 5.61
WEIGHTED AVERAGE NUMBER OF ORDINARY SHARES 5,408,712
Notes to the financial statements form an integral part of these statements
F-73
FOAMEX ASIA COMPANY LIMITED AND SUBSIDIARY
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (unaudited)
FOR THE YEAR ENDED DECEMBER 31, 2000
BAHT
ISSUED AND PAID-UP SHARE CAPITAL
Beginning balance 54,087,120
Addition -
----------
Ending balance 54,087,120
----------
PREMIUM ON SHARE CAPITAL
Beginning balance -
Addition -
----------
Ending balance -
----------
RETAINED EARNINGS (DEFICIT)
Unappropriated (Deficit)
Beginning balance (66,269,314)
Addition 30,341,063
----------
Ending balance (35,928,251)
----------
CURRENCY TRANSLATION DIFFERENCES
Beginning balance 2,884,574
Addition during the year 10,896,501
----------
Ending balance 13,781,075
----------
TOTAL SHAREHOLDERS' EQUITY 31,939,944
==========
Notes to the financial statements form an integral part of these statements
F-74
FOAMEX ASIA COMPANY LIMITED AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS (unaudited)
FOR THE YEAR ENDED DECEMBER 31, 2000
BAHT
CASH FLOWS FROM OPERATING ACTIVITIES
Net income 30,341,063
Reconciliation of net income to net cash from operating activities
Depreciation and amortization 18,167,983
Allowance for doubtful accounts 3,475,811
Provision for obsolete stock 5,994,558
Unrealized loss on exchange rate - net 25,583,498
Loss on disposal of plant and equipment 480,267
--------------
Operating income before change in operating assets and liabilities 84,043,180
Operating assets (increase) decrease
Accounts receivable (95,625,024)
Inventories (73,930,114)
Other current assets (10,484,432)
Amounts due from subsidiary and related companies 10,414
Other assets (247,793)
Operating liabilities increase (decrease)
Accounts payable 25,904,166
Amounts due to subsidiary and related companies 57,343,449
Accrued expenses 29,683,139
Other current liabilities 4,813,207
------------
Net cash provided by operating activities 21,510,192
-----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of plant and equipment (45,282,189)
Proceeds from disposal of plant and equipment 115,125
(Increase) decrease in deposits at bank used as collateral (4,393,909)
Increase in loan to subsidiary -
Increase in loans to employee and directors -
------------
Net cash provided by investing activities (49,560,973)
-----------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in long term accounts payable 35,439,262
-----------
Net cash provided by financing activities 35,439,262
-----------
NET EFFECT OF CURRENCY TRANSLATION
DIFFERENCES IN CASH AND CASH EQUIVALENTS 10,815,307
-----------
Net increase in cash and cash equivalents 18,203,788
Cash and cash equivalents at January 1, 72,037,726
-----------
Cash and cash equivalents at December 31, 90,241,514
===========
Notes to the financial statements form an integral part of these statements
F-75
FOAMEX ASIA COMPANY LIMITED AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
FOR THE YEAR ENDED DECEMBER 31, 2000
1. ECONOMIC TURMOIL IN THE ASIA-PACIFIC REGION
Thailand and many Asia-Pacific countries continue to experience severe
economic difficulties since 1997. The accompanying financial statements reflect
management's current assessment of the possible impact of the economic
conditions on the financial position of the Company.
2. COMPANY'S OPERATIONS AND BASIS FOR PREPARATION OF THE CONSOLIDATED FINANCIAL
STATEMENTS
Foamex Asia Company Limited was registered in the Kingdom of Thailand on
June 5, 1997 with its head office located at 175 Sathorn City Tower, 20th Floor,
South Sathorn Road, Sathorn, Bangkok 10120. The Company's plant is located at
51/2 Bangna-trad Road KM22, Samutprakarn 10540 (see Note 21.2). The Company and
its Subsidiary are members of Foamex International, Inc. and Hau Kee Group and
the Company's principal objective is to fabricate technical foam, films and
adhesives.
As at December 31, 2000, the Company had a total of 395 staff persons.
The staff costs for the year ended December 31, 2000 were Baht 152 million.
2.1 The Company prepares its statutory financial statements in conformity
with accounting and practices generally accepted in Thailand.
2.2 The consolidated financial statements include the accounts of Foamex
Asia, LLC, the Company's branch incorporated in the United States of
America, and Foamtec (Singapore) Pte. Ltd., a subsidiary incorporated
in the Republic of Singapore. The Company has direct and indirect
ownership percentages as follows:
Subsidiary % of Shareholding
Directly owned:
Foamtec (Singapore) Pte. Ltd. 99.9%
Indirectly owned:
Foamex (Malaysia) Sdn. Bhd. 99.9%
The major intercompany transactions between the Company and its
Subsidiary included in the consolidated financial statements have been
eliminated.
The financial statements of Foamex Asia, LLC which are included in the
Company's financial statements have been prepared in U.S. Dollars. For
consolidation purposes, these financial statements have been translated into
Thai Baht as follows:
a. All monetary items are translated using the closing rate announced by
the Bank of Thailand as at the balance sheet date.
b. All non-monetary items, which are carried in terms of historical cost,
are translated using the rate announced by the Bank of Thailand of the
transaction date.
Net exchange gain or loss from translation is recognized as income and
expense in the statement of income.
F-76
The financial statements of Foamtec (Singapore) Pte. Ltd. and its
subsidiary have been prepared in Singapore dollars. For consolidation purposes,
these financial statements have been translated into Thai Baht as follows:
a. All assets and liabilities using the rates announced by the Bank of
Thailand at the balance sheet date.
b. Revenues and expenses using the average exchange rates for the year as
announced by the Bank of Thailand.
Net exchange gain or loss from translation is presented as "Currency
Translation Differences" under "Shareholders' Equity" in the balance sheet.
3. SIGNIFICANT ACCOUNTING POLICIES
3.1 Cash and cash equivalents
Cash and cash equivalents consist of cash in hand, deposits at banks
and financial institutions with original maturities of 3 months or
less.
3.2 Allowance for doubtful accounts
An allowance for doubtful accounts of the Company and its subsidiary
is provided at the estimated collection losses on receivables, based
on the Company's collection experience together with a review of the
current financial position of each existing receivable.
3.3 Inventories
Inventories are valued at the lower of cost or net realizable value.
Cost is determined as follows:
Finished goods at standard cost which approximates actual cost or net realizable value,
whichever is lower
Work in process at standard cost which approximates actual cost
Raw materials weighted average cost basis
Inventories of subsidiaries are stated at the lower of cost or net
realizable value. Cost is calculated on the first-in first-out basis.
3.4 Plant and equipment
Plant and equipment are stated at cost less accumulated depreciation.
Depreciation is calculated by the straight-line method, based on the
estimated useful lives of the assets as follows:
Leasehold improvements 5-10 years
Machinery and equipment 3-10 years
Vehicles 5 years
Furniture and office equipment 3-10 years
3.5 Impairment of assets
The Company reviews the impairment of assets for plant and equipment,
investment in subsidiary and other assets whenever events indicate
that the carrying value of an asset exceeds its recoverable amount. In
case that the carrying value of an asset exceeds its recoverable
amount, the Company recognizes the impairment losses in the statement
of income.
F-77
3.6 Foreign currency transactions
Transactions denominated in foreign currencies incurred during the
year are translated into Baht at the rates of exchange at the
transaction dates. At the end of the year, monetary assets and
liabilities denominated in foreign currencies are translated into Baht
at the reference rates as determined by the Bank of Thailand at that
date. Gains and losses on foreign exchange arising on settlements and
translation are recognized as income or expense when incurred.
3.7 Recognition of revenues
Sales are recognized upon delivery of goods to the customers. Other
income is recognized on the accrual basis of accounting.
3.8 Income tax
Income tax expense is calculated from taxable income and recorded
based on tax paid and accrued for the year.
The consolidated financial statements included the audited financial
statements of a subsidiary. Such subsidiary records its income tax by
the deferred income tax method, which is different from the accounting
method used by the Company. The Company, therefore, adjusts the
accounting for income tax of such subsidiary to be the same with the
Company's accounting method.
3.9 Basic earnings per share
Basic earnings per share are calculated by dividing net income by the
weighted average number of ordinary shares outstanding during the
year. In case of a capital increase, the number of shares is weighted
according to time of registration of such increase.
3.10 Use of accounting estimates
Preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of revenues,
expenses, assets and liabilities and disclosure of contingent assets
and liabilities. Actual results may differ from those estimates.
4. SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION
4.1 Cash paid for interest and income tax are as follows:
Baht
Interest 1,598,998
=========
Income tax 12,868
===========
4.2 Cash and cash equivalents consist of the following:
Baht
Cash on hand and in banks 95,945,823
Less Deposit at banks used as collateral (5,704,309)
---- -----------
Cash and cash equivalents 90,241,514
==========
F-78
5. CASH IN HAND AND AT BANKS
As at December 31, 2000 cash at banks of Baht 2 million, are used as
collateral for a bank guarantee. In addition, cash at bank of subsidiary of SGD
759,359 is used as collateral for short-term loan from bank.
As at December 31, 2000, cash at bank of Baht 3.7 million is used to
guarantee letters of credit.
6. ACCOUNTS RECEIVABLE - NET
Accounts receivable - net consist of the following:
Baht
Accounts receivable 277,136,012
Less Allowance for doubtful accounts (1,622,886)
---- -------------
275,513,126
=============
7. INVENTORIES - NET
Inventories - net consist of the following:
Baht
Finished goods 47,204,194
Work in process 8,189,470
Raw materials 94,200,747
Goods in transit 35,000,983
------------
184,595,394
Less Provision for obsolete stock (6,028,308)
---- ------------
178,567,086
=============
8. PLANT AND EQUIPMENT - NET
Plant and equipment - net consist of the following (in thousands Baht) :
Balance as at Currency Balance as at
January 1, translation December 31,
2000 Additions Disposals Transfers difference 2000
Baht Baht Baht Baht Baht Baht
Cost:
Leasehold improvement 9,240 3,849 - - 437 13,526
Machinery and equipment 88,123 25,800 627 - 5,401 118,697
Vehicles 11,524 1,808 - - 177 13,509
Furniture and office
equipment 10,063 9,926 134 - 1,067 20,922
Construction in progress and
machinery in transit 435 3,899 - - - 4,334
---------- ------- ------ -------- --------- ---------
119,385 45,282 761 - 7,082 170,988
------- ------ --- -------- ----- -------
Accumulated depreciation:
Leasehold improvement 2,978 1,875 - - 116 4,969
Machinery and equipment 16,072 10,052 144 - 1,197 27,177
Vehicles 5,057 2,580 - - 76 7,713
Furniture and office
equipment 3,238 2,554 22 - 321 6,091
--------- -------- ---- -------- ------ ---------
27,345 17,061 166 - 1,710 45,950
-------- ------- --- -------- ----- --------
Plant and equipment - net 92,040 28,221 595 - 5,372 125,038
======== ====== === ======== ===== =======
F-79
9. OTHER ASSETS
Other assets consist of the following:
Baht
Technical license - net 1,217,938
Deposits 718,410
----------
1,936,348
10. LOANS FROM BANKS
Loans from banks consist of the following:
Baht
Loans from banks 15,000,000
----------
15,000,000
As at December 31, 2000, short-term Thai Baht denominated loan from banks
of Baht 15 million, carried interest at a rate of MLR per annum and was
repayable within one year from the balance sheet date.
11. LOANS FROM SHAREHOLDERS
Loans from shareholders consist of the following:
Baht
Loans from shareholders 36,366,340
----------
36,366,340
As at December 31, 2000, loans from shareholders represented unsecured
Thai Baht loans and carried fixed interest at 10% per annum. The loans were due
within 36 months.
12. OTHER LIABILITIES
On April 26, 2000, the Company entered into an Asset Purchase Agreement
("Agreement") with Wilshire Technologies, Inc. ("Wilshire") to acquire their
contamination control division, which later became the Company's branch. As per
the agreement, the Company is required to make quarterly payments to Wilshire
equal to a percentage of sales on applicable contamination control products sold
by the Company until June 30, 2003 or the total of all payments made equal US$
2.5 million, whichever occurs first.
13. COMMITMENTS AND CONTINGENCIES
13.1 The Company has contingent liabilities to banks for letters of
guarantee of Baht 2 million at December 31, 2000 (Note 6).
13.2 The Company has commitments to banks for unused letters of credit of
Baht 3.7 million at December 31, 2000 (Note 6).
14. INVESTMENT PROMOTION PRIVILEGES
In 1998-2000, the Company was granted certain rights and privileges (No.
1377/2541 (1998), 6453/2541 (1998), 4650/2543 (2000), 5026/2543 (2000) and ,
5153/2543 (2000)) as a promoted industry under the Investment Promotion Act of
B.E. 2520 (1977), which included exemption from customs duties for machinery
imported for production as approved by the Board of Investment until August 14,
2002 and exemption from custom duties for raw materials until May 19, 2002.
F-80
The Company has to comply with certain conditions contained in the
investment promotion certificate including the size of its operations and
amounts of investments and annual export sales volume.
F-81
FOAMEX INTERNATIONAL INC.
INDEX TO FINANCIAL STATEMENT SCHEDULES
Index to Financial Statement Schedules
Schedule I - Condensed Financial Information of Registrant
Schedule II - Valuation and Qualifying Accounts
All other schedules are omitted since the required information is not
present or is not present in amounts sufficient to require submission of the
schedule, or because the information required is included in the consolidated
financial statements and notes thereto.
S-1
Schedule I
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS
December 29, December 31,
2002 2001
------------------- -------------------
ASSETS (thousands, except share data)
CURRENT ASSETS
Cash and cash equivalents $ 158 $ 2
Intercompany receivables 1,093 716
Deferred taxes 1,040 375
Other current assets - 1,086
-------------- ----------
Total current assets 2,291 2,179
DEFERRED INCOME TAXES 133,099 -
OTHER ASSETS - 1
-------------- ----------
TOTAL ASSETS $135,390 $ 2,180
======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES
Accounts payable $ 6 $ 96
Other accrued liabilities 3,170 369
-------------- ----------
Total current liabilities 3,176 465
LONG-TERM LIABILITIES
Notes payable to consolidated subsidiary - 2,490
Deficit in consolidated subsidiaries 305,941 176,023
Deferred income taxes 16,006 2,629
Other liabilities - 1,319
-------------- ----------
Total liabilities 325,123 182,926
-------------- ----------
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 2002 and 2001 15 15
Common Stock, par value $.01 per share:
Authorized 50,000,000 shares
Issued 27,839,658 shares in 2002 and 27,260,441 shares in 2001;
Outstanding 24,350,658 shares in 2002 and 23,771,441 shares in 2001 278 273
Additional paid-in capital 101,972 97,668
Accumulated deficit (216,243) (206,544)
Accumulated other comprehensive loss (38,754) (35,157)
Other:
Common Stock held in treasury, at cost:
3,489,000 shares in 2002 and 2001 (27,780) (27,780)
Shareholder note receivable (9,221) (9,221)
-------------- ----------
Total stockholders' deficit (189,733) (180,746)
-------------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY $135,390 $ 2,180
============== =========
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
2002 2001 2000
----------- ------------ ------------
(amounts in thousands except per share amounts)
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES $ 418 $ 1,254 $ 961
-------- ------- ----------
LOSS FROM OPERATIONS (418) (1,254) (961)
EQUITY IN EARNINGS (LOSS) OF
CONSOLIDATED SUBSIDIARIES (24,413) (2,261) 19,652
INTEREST EXPENSE 33 343 444
OTHER EXPENSE - - (1,047)
----------- ----------- ---------
INCOME (LOSS) BEFORE PROVISION
(BENEFIT) FOR INCOME TAXES (24,864) (3,858) 17,200
PROVISION (BENEFIT) FOR
INCOME TAXES (87,605) 1,754 187
------- -------- ----------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEMS
AND CUMULATIVE EFFECT OF ACCOUNTING 62,741 (5,612) 17,013
EXTRAORDINARY ITEMS (1,793) - -
CUMULATIVE EFFECT OF ACCOUNTING
CHANGES (70,647) - -
----------- ---------- ---------
NET INCOME (LOSS) $(9,699) $(5,612) $17,013
======= ======= =======
EARNINGS PER SHARE - BASIC
INCOME (LOSS) BEFORE EXTRAORDINARY ITEMS AND
CUMULATIVE EFFECT OF ACCOUNTING CHANGES $ 2.58 $ (0.24) $ 0.69
EXTRAORDINARY ITEMS, NET OF INCOME TAXES (0.07) - -
CUMULATIVE EFFECT OF ACCOUNTING CHANGES (2.91) - -
----------- ----------- ---------
NET INCOME (LOSS) $ (0.40) $ (0.24) $ 0.69
======== ============ =========
EARNINGS PER SHARE - DILUTED
INCOME (LOSS) BEFORE EXTRAORDINARY ITEMS AND
CUMULATIVE EFFECT OF ACCOUNTING CHANGES $ 2.39 $ (0.24) $ 0.67
EXTRAORDINARY ITEMS, NET OF INCOME TAXES (0.07) - -
CUMULATIVE EFFECT OF ACCOUNTING CHANGES (2.69) - -
----- - -
NET INCOME (LOSS) $ (0.37) $ (0.24) $ 0.67
======= =========== =========
Extraordinary items and cumulative effect of accounting changes include equity
in subsidiaries of $(2.8) million and $(72.0) million, respectively.
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
2002 2001 2000
------------ ------------ ------------
OPERATING ACTIVITIES (thousands)
Net income (loss) $ (9,699) $(5,612) $17,013
Adjustments to reconcile net income (loss) to
net cash used for operating activities:
Deferred income taxes (90,681) 567 665
Equity in (earnings) losses of consolidated subsidiaries 24,413 2,261 (19,652)
Extraordinary items 1,793 - -
Cumulative effect of accounting change 70,647 - -
Other 219 319 88
Changes in operating assets and liabilities:
Intercompany receivables (377) (408) 74
Accounts payable (90) 46 10
Other assets and liabilities 2,968 536 (34)
-------- ---------- ---------
Net cash used for operating activities (807) (2,291) (1,836)
-------- --------- -------
INVESTING ACTIVITIES
Distribution from (to) subsidiaries (105) 3,861 -
Other - - -
----------- ------------ ----------
Net cash provided by (used for) investing activities (105) 3,861 -
-------- -------- ----------
FINANCING ACTIVITIES
Proceeds from (repayments of) note payable to consolidated
subsidiary (2,490) (2,500) 1,814
Proceeds from exercise of stock options 3,494 917 24
Increase in cash overdraft 64 - -
-------- ---------- ----------
Net cash provided by (used for) financing activities 1,068 (1,583) 1,838
------- -------- -------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 156 (13) 2
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 2 15 13
--------- ----------- ---------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 158 $ 2 $ 15
====== =========== ========
Note:During 2001, the Company received a special distribution from its
subsidiaries of $3.7 million. The proceeds were used to repay the note and
interest payable to Foamex L.P.
See notes to consolidated financial statements, beginning on Page F-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 DECEMBER 29, 2002
Allowance for Uncollectible Accounts $ 8,720 $ 2,336 $ - $ 3,093 $ 7,963
======== ======= =========== ======== ========
Reserve for Discounts $ 2,220 $ - $ 15,143 (1) $ 15,015 $ 2,348
======== =========== ======== ======== ========
YEAR ENDED DECEMBER 31, 2001
Allowance for Uncollectible Accounts $ 7,693 $ 5,479 $ 88 $ 4,540 $ 8,720
======== ======= ========== ======== ========
Reserve for Discounts $ 2,233 $ - $15,198 (1) $ 15,211 $ 2,220
======== =========== ======== ======== ========
YEAR ENDED DECEMBER 31, 2000
Allowance for Uncollectible Accounts $ 7,474 $ 2,838 $ - $ 2,619 $ 7,693
======== ======= ============ ======== ========
Reserve for Discounts $ 2,075 $ - $15,823 (1) $15,665 $ 2,233
======== =========== ======= ======= ========
(1) Adjustments reflect a reduction in net sales.
S-5