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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 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from .......... to ..........
Commission file number: 0-22624
FOAMEX INTERNATIONAL INC.
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(Exact Name of registrant as Specified in its Charter)
Delaware 05-0473908
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1000 Columbia Avenue, Linwood, PA 19061
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (610) 859-3000
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Securities registered pursuant to Section 12(b) of the Act: None
----
Securities registered pursuant to Section 12(g) of the Act: Common Stock, par
value $.01 per share, which is
traded through the National
Association of Securities
Dealers, Inc. National Market
System.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter periods that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Annual Report on Form
10-K or any amendment to this Annual Report on Form 10-K. [ ]
The aggregate market value of the voting stock held by nonaffiliates of
the registrant as of March 2, 2001, was $50.2 million.
The number of shares outstanding of the registrant's common stock as of
March 15, 2001 was 23,559,994.
DOCUMENTS INCORPORATED BY REFERENCE
None
FOAMEX INTERNATIONAL INC.
INDEX
Page
Part I
Item 1. Business 3
Item 2. Properties 9
Item 3. Legal Proceedings 9
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 27
Item 8. Financial Statements and Supplementary Data 27
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 27
Part III
Item 10. Directors and Executive Officers of the Registrant 28
Item 11. Executive Compensation 28
Item 12. Security Ownership of Certain Beneficial Owners
and Management 28
Item 13. Certain Relationships and Related Transactions 28
Part IV
Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K 28
Signatures 36
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.
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PART I
ITEM l. BUSINESS
General
Foamex International Inc. (the "Company") is engaged primarily in the
manufacturing and distribution of flexible polyurethane and advanced polymer
foam products. As of December 31, 2000, the Company's operations are conducted
through its wholly owned subsidiaries, Foamex L.P. and Foamex Carpet Cushion,
Inc. ("Foamex Carpet"). The Company was incorporated in 1993 to act as a holding
company for Foamex L.P.
References in this Annual Report on Form 10-K to the "Company" mean Foamex
International Inc. and, where relevant or applicable, its subsidiaries.
Segments
General
The Company operates in the flexible polyurethane and advanced polymer foam
products industry and is one of the largest manufacturers and distributors of
flexible polyurethane and advanced polymer foam products in North America. The
Company has numerous manufacturing facilities dedicated to certain product lines
as well as facilities with the capability to support multiple product lines.
Each of the Company's business segments has a diverse customer base. The
Company's senior executives direct sales efforts for each business segment.
Business segments are listed below.
Foam Products - manufactures and markets foam used by the bedding industry,
the furniture industry and the retail industry.
Carpet Cushion Products - manufactures and distributes prime, rebond,
sponge rubber and felt carpet cushion.
Automotive Products - supplies foam primarily for automotive interior
applications to automotive manufacturers and tier one suppliers.
Technical Products - manufactures and markets reticulated foams and other
custom polyester and polyether foams for industrial, specialty and consumer
and safety applications.
Other - primarily consists of certain manufacturing operations in Mexico,
corporate expenses not allocated to the other business segments and
restructuring and other charges (credits).
Segment financial information is included in Note 16 to the consolidated
financial statements included in this Annual Report on Form 10-K.
Foam Products
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.
The Company's bedding products are sold to mattress manufacturers. The
Company also supplies 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.
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The development and introduction of value added products continues to be a
priority including viscoelastic or "memory" foams for the bedding industry,
which maintain their resiliency better than other foams and materials, and
products incorporating Reflex(R). 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 the variable pressure foaming manufacturing process
("VPF(SM)"). High efficiency thermal management foam products for applications
in work gloves and outerwear have also been introduced.
Carpet Cushion Products
The Company manufactures and distributes Carpet Cushion Products, which
include prime, rebond, sponge rubber and felt carpet cushion. Prime carpet
cushion is made from polyurethane foam buns. Rebond carpet cushion is made from
various types of scrap foam which are shredded into small pieces, processed and
then bonded using a chemical adhesive. Rebond manufacturing requires the
management of a comprehensive recycling business that includes an extensive
collection network from the automotive and foam industries on a worldwide basis.
Automotive Products
The Company is one of the largest suppliers of automotive foam products for
the North American operations of original equipment manufacturers ("OEMs").
Depending on the automotive manufacturer and/or the application, automotive foam
products are supplied by the Company either directly to the manufacturers or
indirectly through tier one suppliers. Automotive Products include foam for trim
pads, door panel parts, headliners and for acoustical purposes. Products also
include flame and adhesive laminates and rolls for tri-lamination. Tri-laminated
foam is applied to automotive fabrics to form a foam/fabric composite that
results in cost savings and aesthetic value for the automotive manufacturer.
Domestic automotive manufacturers have narrowed their supply base during
recent years and increased the percentage and dollar amount of components that
they purchase from outside suppliers. As a result, a smaller number of companies
are supplying an increasing percentage of automotive foam products. Automotive
suppliers are increasingly offering integrated systems which lower the overall
cost and improve quality relative to previous sourcing methods in which
individually sourced components were assembled and installed by the OEMs. A
continuing focus on new product development and flexible manufacturing
capabilities are essential to satisfy changing specifications.
Examples of the Company's ability to react to changing industry
requirements include its development of thermoformable headliners,
tri-laminates, advanced cutting technology and energy absorbing foams. For
example, the Company has introduced surface modification technology ("SMT(R)")
and continuous platform cutting ("CPC(SM)") used for vehicle flooring systems.
Also, the use of tri-laminates has increased due to the manufacturers' need for
significant cost savings and consumer demand for improved aesthetics. The
Company intends to increase its production and distribution of foam and fabric
components, such as tri-laminated material for automotive seating.
Automotive manufacturers are increasingly requiring the production
facilities of their suppliers to meet certain high quality standards. The
Company has achieved and expects to maintain the highest quality ratings awarded
to foam suppliers by automotive manufacturers. In addition, all tier one and
tier two automotive supplier facilities worldwide will eventually be required to
meet the QS-9000 quality manufacturing standards set by the United States
automotive manufacturers. In 1996, the Company completed QS-9000 and ISO-9001
certification for its eight domestic facilities which supply the automotive
industry. The Company was one of the first polyurethane manufacturers to be
QS-9000 certified which demonstrates its commitment to producing the highest
quality products and meeting the needs of its customers.
Technical Products
The Company believes that it is one of the foam industry's prime innovators
and producers of industrial, specialty, consumer and safety foams (collectively,
"Technical Products"). Technical Products consist of reticulated foams and other
custom polyester and polyether foams, which are sometimes combined with other
materials to yield
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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.
The Company uses advertising in trade journals and related media in order
to attract customers and, more generally, to increase an awareness of its
capabilities for Technical Products. In addition, due to the highly specialized
nature of most Technical Products, the Company's research staff works with
customers to design, develop and manufacture each product to specification.
Other
Other consists primarily of certain manufacturing operations in Mexico,
corporate expenses not allocated to the other business segments and
restructuring and other charges (credits). See Note 16 to the consolidated
financial statements.
Marketing and Sales
Foam Products are sold directly by the Company to major bedding and
furniture manufacturers such as Sealy, Simmons and Berkline and also through
third party independent fabricators. In addition, the Company manufactures and
distributes foam-based consumer products such as futons, pillows, mattress pads
and juvenile furniture to retail chains such as Wal-Mart, Target, J.C. Penney
and Bed Bath & Beyond, Inc. The Company's foam-based consumer products sales
efforts are primarily regionally based. In December 2000, the Company announced
that it was exploring a marketing alliance with Sleep Innovations. Sleep
Innovations is a leader in the marketing of foam-based consumer products and if
a marketing alliance is established, it is anticipated that Sleep Innovations
would direct all marketing efforts. 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 line of business where the
transportation cost typically comprises a significant portion of product cost.
Carpet Cushion Products are sold to distributors and to major floor
covering retail chains such as Home Depot, Sears and CarpetMax. A key focus in
2001 will be increased marketing efforts of commercial product lines.
The Company has been a leading supplier of Automotive Products to OEMs,
including Ford, General Motors and DaimlerChrysler for more than 30 years. The
Company is also the primary supplier of Automotive Products to certain tier one
suppliers, including Lear Corporation and Johnson Controls. The Company competes
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.
The Company's Technical Products are used for filtration and reservoiring
in a wide variety of applications by companies such as Hewlett-Packard, Lexmark
and Briggs & Stratton. The Company markets most of its Technical Products
through a network of independent fabrication and distribution companies in North
America, the United Kingdom and South Korea. Such fabricators or distributors
often further process or finish Technical Products to meet the specific needs of
end users. The Company's specialty and technical foams service unique end user
requirements and are generally sold at relatively high margins. This line of
business is characterized by a diversity and complexity of both customers and
applications.
5
International Operations and Export Sales
The Company's geographical information is included in Note 16 to the
consolidated financial statements.
Major Customers
During 2000 and 1999, sales to Johnson Controls, which are included in
Automotive Products, accounted for approximately 12.3% and 11.5% of the
Company's net sales, respectively. No other customer accounted for more than
10.0% of the Company's net sales during any of the past three years. During the
year ended December 31, 2000, net sales to the five largest customers comprised
approximately $373.9 million or 29.7% of the Company's net sales. The loss of
any one of these customers could have a material adverse effect on the Company.
Manufacturing and Raw Materials
As of December 31, 2000, the Company conducted its operations at 64
manufacturing and distribution facilities with a total of approximately 8.4
million square feet of floor space. The Company believes that its manufacturing
and distribution facilities are well suited for their intended purposes and are
in good condition. The manufacturing and distribution facilities are
strategically located to service the Company's major customers because of 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.
The Company's 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 the Company to produce its foam-based consumer
products. Scrap foam, generated in connection with the fabrication of foam
products, is used by the Company to produce rebond carpet cushion.
Raw materials account for a significant portion of the manufacturing costs
of the Company. The two principal chemicals used in the manufacture of flexible
polyurethane foam are toluene diisocyanate ("TDI") and polyol.
The Company generally has alternative suppliers for each major raw material
and the Company believes that it could find alternative sources of supply should
it cease doing business with any one of its major suppliers.
The price of TDI and polyol has historically been cyclical and volatile.
The price of these raw materials is influenced by demand, manufacturing capacity
and oil prices. The Company's price for TDI and polyol were increased several
times during 2000. In response, the Company increased selling prices, where
possible, for cushioning, automotive and technical foam products depending on
the product. The 2000 results were adversely affected by the delays in, and the
inability to implement selling price increases to offset the raw material price
increases. The Company has announced selling price increases during 2001 to
offset the additional raw material price increases. However, there can be no
assurance that the Company will be successful in implementing selling price
increases or that competitive pricing pressure will not require the Company to
adjust selling prices.
A key raw material used in the manufacture of carpet cushion is scrap foam.
The Company internally generates a substantial portion of the scrap foam used in
the production of rebond carpet cushion from its other operations. Historically,
the market price of rebond carpet cushion has fluctuated with the market price
of scrap foam.
Employees
As of December 31, 2000, the Company employed approximately 5,850 persons.
Approximately 1,650 of these employees are located outside the United States and
approximately 900 of these employees are covered by collective bargaining
agreements with labor unions, which agreements expire on various dates through
2004. The Company considers relations with its employees to be good.
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Competition
The flexible polyurethane foam industry is highly competitive with price,
quality and service being significant competitive factors. The Company's
competitors in the polyurethane foam industry include E. R. Carpenter Company,
Hickory Springs Manufacturing Company, Vitafoam, Inc., General Foam Corporation,
Flexible Foam Products, Inc., and Future Foam, Inc. None of these competitors
individually competes in all of the business segments in which the Company does
business.
Patents and Trademarks
The Company owns 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 the Company considers its patents
and trademarks to be a valuable asset, it does not believe that its competitive
position is dependent on patent protection or that its operations are dependent
upon any individual patent, trademark or tradename.
Research and Development
The Company believes it has a leading research and development capability
in the flexible polyurethane foam industry. The Company's primary research and
development facility is located in Eddystone, Pennsylvania. Expenditures for
research and development amounted to $2.5 million, $3.3 million and $3.3 million
for 2000, 1999 and 1998, respectively.
The Company, Recticel, s.a. ("Recticel"), a European polyurethane foam
manufacturer, whose subsidiary was a former partner of Foamex L.P. and
affiliates of Recticel are current shareholders of the Company, and Beamech
Group Limited, an unaffiliated third party, have an interest in a Swiss
corporation that develops new manufacturing technology for the production of
polyurethane foam including the VPF(SM) manufacturing process. The Company,
Recticel and their affiliates have a royalty-free license to use technology
developed by the Swiss corporation. The Company 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
and it is anticipated that they will continue to do so in the future.
Buyout Proposals - History
On February 9, 2000, the Company announced that it was in discussions with
respect to a proposal involving the acquisition of all of the Company's
outstanding common stock for cash. The Company stated that the proposal was
subject to a number of conditions, including the buyer's due diligence and the
execution of definitive agreements. The Company agreed to an exclusive
negotiating period ending five business days after delivery of its audited
financial statements included in the Company's Annual Report on Form 10-K to the
prospective buyer. On April 5, 2000, the Company announced that discussions with
the potential buyer were terminated with no agreement having been reached. The
Company subsequently terminated the engagement of J.P. Morgan & Company, Inc.
("JP Morgan"), which acted as financial advisor in connection with such
transaction. During the second quarter of 2000, the Company ended discussions
with JP Morgan concerning an additional engagement.
On August 5, 1999, the Company announced that its Board of Directors signed
a letter of intent with Sorgenti Chemical Industries, LLC and Liberty Partners
Holdings 20, LLC (collectively, the "Purchasers") for a business combination
providing for $11.50 per share for all of the Company's outstanding common stock
(the "Sorgenti Transaction"). Under the terms of the letter of intent, if the
Company entered into a business combination with another party, the Purchasers
would be entitled to a break-up fee of $6.0 million plus reimbursement of
certain expenses, subject to certain conditions, including the willingness of
the Purchasers to enter into a definitive merger agreement providing for a price
of at least $11.50 per share prior to the expiration of the letter of intent.
The proposed transaction was subject to a number of conditions, including the
negotiation of definitive documents regarding certain conditions relating to the
bank credit facilities and the public debt of the Company's subsidiaries.
Additional issues considered included minimum shareholder acceptance, change of
board membership, and other
7
provisions providing for a higher break-up fee and expense reimbursement if the
Company entered into a business combination providing a more favorable
transaction. On December 15, 1999, the Company announced that the letter of
intent with the Purchasers, which had been extended, expired by its terms. The
Purchasers had submitted a revised bid at a price and on terms that were less
favorable than those contained in the letter of intent and the Negotiating
Committee of the Company's Board of Directors rejected the revised bid.
In 1998, the Company received an unsolicited buyout proposal from Trace
International Holdings, Inc. ("Trace"), the Company's principal stockholder. The
Company entered into two merger agreements, which were subsequently terminated
by Trace.
Shareholder and Change in Control Developments
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") relating to senior subordinated notes of $248.0 million
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 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.
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
8
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 the Company which
are identified as forward-looking, the Company notes 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 cushion production and
housing starts, the completion of various restructuring/consolidation plans, the
achievement of management's business plans, the Company's 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 the control
of the Company.
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, the business and operations of the Company 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 the Company 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 31, 2000, the Company conducted its operations at 64
manufacturing and distribution facilities. Total floor space in use at the owned
manufacturing and distribution facilities is approximately 3.3 million square
feet and total floor space in use at the leased manufacturing and distribution
facilities is approximately 5.1 million square feet. Fifty-three of these
facilities are located throughout 37 cities in the United States, four
facilities are located in Canada and seven facilities are located in Mexico. The
2001 annual base rental with respect to such leased facilities is approximately
$12.3 million under leases expiring from 2001 to 2025. The Company does not
anticipate any problem in renewing or replacing any such leases expiring in
2001. In addition, the Company has approximately 1.8 million square feet of idle
space of which approximately 1.3 million is leased.
The Company maintains its administrative office in Linwood, Pennsylvania.
Property information by business segment is not reported because many of
the Company's facilities produce products for multiple business segments.
ITEM 3. LEGAL PROCEEDINGS
Litigation - Shareholders
On August 1, 2000, the Company announced that it had reached agreements in
principle with the plaintiffs in the stockholder actions described below
providing for the settlement and dismissal of such actions, subject to certain
conditions, including court approval.
The Shareholder Litigation. Beginning on March 17, 1998, six actions, which
were subsequently consolidated under the caption In re Foamex International Inc.
Shareholders Litigation, were filed in the Court of Chancery of the State of
Delaware, and on August 13, 1999, another action, Watchung Road Associates,
L.P., et al. v. Foamex International Inc., et al. (the "Watchung Action"), was
filed in the same court. The two actions were consolidated on May 3, 2000, into
a single action under the caption In re Foamex International Inc. Shareholders
9
Litigation (the "Delaware Action"). The Delaware Action, a purported derivative
and class action on behalf of the Company and its stockholders, originally named
as defendants the Company, certain of its current and former directors and
officers, Trace and a Trace affiliate. The complaint in the Delaware Action
alleges, among other things, that certain of the defendants breached their
fiduciary duties to the Company in connection with an attempt by Trace to
acquire the Company's publicly traded common stock as well as with a potential
acquisition transaction with a group led by Sorgenti Chemical Industries LLC,
and that certain of the defendants breached their fiduciary duties by causing
the Company to waste assets in connection with a variety of transactions entered
into with Trace and its affiliates. The Delaware Action seeks various remedies,
including injunctive relief, money damages and the appointment of a receiver for
the Company.
On April 26, 1999, a putative securities class action entitled Molitor v.
Foamex International Inc., et al., was filed in the United States District Court
for the Southern District of New York naming as defendants the Company, Trace
and certain current and former directors and officers of the Company, on behalf
of stockholders who bought shares of the Company's common stock during the
period from May 7, 1998 through and including April 16, 1999. The lawsuit
alleged that the defendants violated Section 10(b) of the Securities Exchange
Act of 1934 and Rule 10b-5 by misrepresenting and/or omitting material
information about the Company's financial situation and operations, with the
result of artificially inflating the price of the Company's stock. The lawsuit
also alleged that Trace and Marshall S. Cogan violated Section 20(a) of the
Securities Exchange Act of 1934 as controlling persons of the Company. The
complaint sought class certification, a declaration that defendants violated the
federal securities laws, an award of money damages, and costs and attorneys',
accountants' and experts' fees. On May 18, 1999, a similar action entitled
Thomas W. Riley v. Foamex International Inc., et al., was filed in the same
court. The two actions were consolidated and a consolidated complaint was filed;
the consolidated suit is referred to herein as the "Federal Action."
The Settlements. On August 23, 2000, the Company and the plaintiffs in the
Federal Action entered into a settlement agreement providing that members of the
class of shareholders who purchased shares between May 7, 1998 and April 16,
1999 would receive payments as defined in the agreement. The court approved the
settlement and dismissed the action with prejudice on January 11, 2001, and no
appeals were filed. Payments to class members and plaintiffs' lawyers' fees in
the Federal Action have been paid directly by the Company's insurance carrier on
behalf of the Company.
Under the terms of the agreement in principle to settle the Delaware
Action, the Company agreed that a special nominating committee of the Board of
Directors, consisting of Robert J. Hay as chairman, Stuart J. Hershon, John G.
Johnson, Jr., and John V. Tunney, will nominate two additional independent
directors to serve on the Board. The terms of the agreement also establish the
criteria for the independence of the directors and require that certain
transactions with affiliates be approved by a majority of the disinterested
members of the Board. On September 28, 2000, the Company announced that Raymond
E. Mabus, Jr. was elected to the Company's Board of Directors. On December 21,
2000, the Company announced that Virginia A. Kamsky was elected to the Company's
Board of Directors. The addition of Mr. Mabus and Ms. Kamsky adds two
independent directors and brought the total number of directors to eight. The
parties are negotiating the terms of the settlement agreement and related
documentation. On January 9, 2001, the Court ordered the Watchung Action
dismissed with prejudice only as to the named plaintiffs Watchung Road
Associates, L.P. and Pyramid Trading Limited Partnership. The dismissal did not
have any effect on the claims asserted in the consolidated action.
The settlement of the Delaware Action (assuming a definitive settlement
agreement is reached with plaintiffs) is subject to court approval, which, if
obtained, will resolve all outstanding shareholder litigation against the
Company and its current and former directors and officers. The settlements of
the Federal Action and the Delaware Action involve no admissions or findings of
liability or wrongdoing by the Company or any individuals. If management's
assessment of the Company's liability with respect to these actions is
incorrect, such actions could have a material adverse effect on the Company's
consolidated financial position, results of operations and cash flows.
10
Litigation - Breast Implants
As of March 21, 2001, the Company and Trace were two of multiple defendants
in actions filed on behalf of approximately 2,104 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. In addition, three cases have been filed alleging claims on behalf of
approximately 39 residents of Australia, New Zealand, England, and Ireland. The
Company believes that the number of suits and claimants may increase. 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 under the Bankruptcy Code. 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 the disposition of the matters that are pending or that
may reasonably be anticipated to be asserted should not have a material adverse
effect on either the Company's consolidated financial position or results of
operations. If management's assessment of the Company's liability with respect
to these actions is incorrect, such actions could have a material adverse effect
on the financial position, results of operations and cash flows of the Company.
Litigation - Other
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 financial position or
results of operations of the Company. If management's assessment of the
Company's liability with respect to these actions is incorrect, such actions
could have a material adverse effect on the Company's consolidated financial
position, results of operations and cash flows.
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 and the
remediation of environmental contamination, and as a result, is from time to
time involved in administrative and judicial proceedings and inquiries relating
to environmental matters. As of December 31, 2000, the Company had accruals of
approximately $4.1 million for environmental matters. During 1998, the Company
established an allowance of $1.2 million relating to receivables from Trace for
environmental indemnifications due to the financial difficulties of Trace.
The Clean Air Act Amendments of 1990 (the "1990 CAA Amendments") provide
for the establishment of federal emission standards for hazardous air pollutants
including methylene chloride, propylene oxide and TDI, which are used in the
manufacturing of foam. On December 27, 1996, the United States Environmental
Protection Agency (the "EPA") proposed regulations under the 1990 CAA Amendments
that will require manufacturers of slab stock polyurethane foam and foam
fabrication plants to reduce emissions of methylene chloride. The final National
Emission Standard for Hazardous Air Pollutants ("NESHAP") was promulgated
October 7, 1998. NESHAP
11
requires a reduction of approximately 70% of the emission of methylene chloride
for the slab stock foam industry effective October 7, 2001. The Company believes
that the use of alternative technologies, including VPF(SM), which do not
utilize methylene chloride and its ability to shift current production to the
facilities which use these alternative technologies will minimize the impact of
these regulations. The 1990 CAA Amendments also may result in the imposition of
additional standards regulating air emissions from polyurethane foam
manufacturers, but these standards have not yet been proposed or promulgated.
The Company has reported to the appropriate state authorities that it has
found soil and/or groundwater contamination in excess of state standards at
seven sites. These sites are in various stages of investigation or remediation.
Accordingly, the extent of contamination and the ultimate liability is not known
with certainty for all sites. The Company has accruals of $2.5 million for the
estimated cost of remediation, including professional fees and monitoring costs,
for these sites. During 2000, Foamex L.P. 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
Foamex L.P. The estimated allocation of future costs for the remediation of this
facility is not significant, based on current information known. 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. Petroleum
contamination was found at one of the sites and the Company has accrued
approximately $0.5 million for the estimated remediation costs. Soil sampling
continues to assess the full extent of contamination.
On November 14, 2000, the United States Occupational Safety and Health
Administration ("OSHA") released the final ergonomics standard ("Ergonomics
Standard"), which applies to the Company, as well as all other employers in the
United States, with certain industry specific exclusions. The Ergonomics
Standard addresses musculoskeletal disorders, including those commonly
referenced as repetitive motion disorders.
The Ergonomics Standard is comprehensive, covering essentially all
employees of the Company in the United States. Although the implementation costs
could be significant, in the present form, the Company does not believe it will
have a negative impact on its competitive position within the industry.
Subsequent to year-end 2000, a joint resolution by the United States House
of Representatives and Senate was approved that repealed the Ergonomics
Standard. The repeal has been submitted to the President of the United States
for his review and signature.
On April 10, 1997, the OSHA promulgated new standards governing employee
exposure to methylene chloride, which is used as a blowing agent in some of the
Company's manufacturing processes. The phase-in of the standards was completed
in 1999 and the Company has developed and implemented a compliance program.
Capital expenditures required and changes in operating procedures are not
anticipated to significantly impact the Company's competitive position.
The Company has been designated as a Potentially Responsible Party ("PRP")
by the EPA with respect to seven sites. Estimates of total cleanup costs and
fractional allocations of liability are generally provided by the EPA or the
committee of PRP's with respect to the specified site. In each case and in the
aggregate, the liability of the Company is not considered to be significant.
In 2001 and 2002, capital expenditures for environmental compliance
projects are anticipated to be approximately $1.0 million per year. Although it
is possible that new information or future developments could require the
Company to reassess its potential exposure relating to all pending environmental
matters, including those described herein, the Company believes that, based upon
all currently available information, the resolution of such environmental
matters will not have a material adverse effect on the Company's 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 may
be found to exist, that may require expenditures not currently anticipated and
that may be significant.
12
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
The Company's 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
2000
Quarter Ended March 31, 2000 $10 3/8 $7
Quarter Ended June 30, 2000 $ 9 1/2 $4 3/16
Quarter Ended September 30, 2000 $ 7 1/32 $5 9/16
Quarter Ended December 31, 2000 $ 6 1/2 $4 19/32
1999
Quarter Ended March 31, 1999 $13 3/8 $4 13/16
Quarter Ended June 30, 1999 $ 8 9/16 $4
Quarter Ended September 30, 1999 $10 1/2 $5 3/4
Quarter Ended December 31, 1999 $ 9 $6
As of December 31, 2000 there were approximately 148 holders of record of
the common stock.
There were no cash dividends paid by the Company on its 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 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
subsidiaries Foamex L.P. and Foamex Carpet. Consequently, the Company's ability
to pay dividends is dependent upon the earnings of Foamex L.P. and Foamex Carpet
and any future subsidiaries of the Company and the distribution of those
earnings to the Company and loans or advances by Foamex L.P., Foamex Carpet and
any such future subsidiaries of the Company. The ability of Foamex L.P. and
Foamex Carpet to make distributions is restricted by the terms of their
respective financing agreements. Due to such restrictions, the Company is not
expected to have access to the cash flow generated by Foamex L.P. and Foamex
Carpet for the foreseeable future.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table presents selected historical consolidated financial
data of the Company. The financial data should be read in conjunction with the
financial statements and related notes thereto of the Company included in this
Annual Report on Form 10-K.
Fiscal Year (1)
2000 1999 1998 1997 (6) 1996
------------ ------------ ------------ ------------ ------------
(thousands, except for earnings per share)
Statements of Operations Data
Net sales (2) $1,257,778 $1,294,639 $1,260,559 $945,519 $940,924
Income (loss) from continuing
operations (3)(4) 17,013 19,716 (69,853) 4,131 32,492
Basic earnings (loss) per share from
continuing operations 0.69 0.79 (2.79) 0.16 1.28
Diluted earnings (loss) per share from
continuing operations 0.67 0.78 (2.79) 0.16 1.26
13
Fiscal Year (1)
2000 1999 1998 1997 (6) 1996
------------ ------------ ------------ ------------ ------------
(thousands)
Balance Sheet Data
Total assets $755,480 $781,313 $874,965 $893,623 $619,846
Total long-term debt, classified as current (5) - - 771,092 - -
Total long-term debt 687,758 725,297 8,240 735,724 483,344
Stockholders' deficit (164,669) (166,381) (204,119) (113,419) (58,103)
Dividends - - 1,245 - -
(1) The Company changed its fiscal year to the calendar year during 1998. Prior
to the change, the Company had a 52 or 53 week fiscal year ending on the
Sunday closest to the end of the calendar year. Each fiscal year presented
prior to 1998 was comprised of 52 weeks.
(2) As discussed in Note 2 to the consolidated financial statements included in
this Annual Report on Form 10-K, net sales reflect a reclassification of
certain shipping costs that were billed to customers. The reclassification
required shipping costs originally reported in cost of sales to be
recognized in net sales, with no impact on income from continuing
operations.
(3) Includes net restructuring and other charges (credits), as discussed in
Note 4 to the consolidated financial statements included in this Annual
Report on Form 10-K. Listed below are the pre-tax charges (credits).
2000 - $6.3 million
1999 - $10.5 million
1998 - $(9.7) million
1997 - $21.1 million
1996 - $(6.5) million
(4) The provision for income taxes in 2000 and 1999 reflected the partial
reversal of the deferred income tax valuation allowance recognized in 1998.
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) As of December 31, 1998, the Company classified approximately $771.1
million of long-term debt as current, in response to financial conditions
at year-end 1998.
(6) The balance sheet data included the estimated fair value of the net assets
acquired in the acquisition of Crain Industries, Inc. in December 1997. The
income statement data excludes the results of Crain Industries, Inc. from
the acquisition date of December 23, 1997, since the effect was
insignificant.
14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
The Company operates in the flexible polyurethane and advanced polymer foam
products industry. As of December 31, 2000, the Company's operations are
conducted through its wholly owned subsidiaries, Foamex L.P. and Foamex Carpet
Cushion, Inc. ("Foamex Carpet"). Business segments are listed below. Segment
financial information is included in Note 16 to the consolidated financial
statements.
An executive vice president heads each operating segment. Each 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 charges. The
Company does not allocate restructuring and other charges to operating segments
because many of the Company's facilities produce products for multiple segments.
Foam Products - manufactures and markets foam used by the bedding industry,
the furniture industry and the retail industry.
Carpet Cushion Products - manufactures and distributes prime, rebond,
sponge rubber and felt carpet cushion.
Automotive Products - supplies foam primarily for automotive interior
applications to automotive manufacturers and tier one suppliers.
Technical Products - manufactures and markets reticulated foams and other
custom polyester and polyether foams for industrial, specialty and consumer
and safety applications.
Other - primarily consists of certain manufacturing operations in Mexico,
corporate expenses not allocated to the other business segments and
restructuring and other charges (credits). The restructuring and other
charges (credits) amounted to $6.3 million in 2000, $10.5 million in 1999
and $(9.7) million in 1998.
The Company's 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.
The Company typically experiences two seasonally slow periods during each year,
in early July and in late December, due to scheduled plant shutdowns and
holidays.
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.
RESULTS OF OPERATIONS
Carpet
Foam Cushion Automotive Technical
Products Products Products Products Other Total
-------- -------- ---------- --------- --------- ----------
2000 (thousands)
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.(b) 7.7%
1999
Net sales (a) $527,159 $285,846 $361,806 $92,180 $27,648 $1,294,639
Income (loss) from operations 57,028 8,512 22,547 22,588 (17,617) 93,058
Depreciation and amortization 17,432 8,096 4,823 2,724 2,675 35,750
Income (loss) from operations
as a percentage of net sales 10.8% 3.0% 6.2% 24.5% n.m.(b) 7.2%
15
Carpet
Foam Cushion Automotive Technical
Products Products Products Products Other Total
-------- -------- ---------- --------- --------- ----------
1998 (thousands)
Net sales (a) $559,690 $314,954 $285,190 $79,140 $21,585 $1,260,559
Income (loss) from operations 35,313 12,005 16,788 14,571 (3,645) 75,032
Depreciation and amortization 18,300 5,529 6,424 2,929 2,203 35,385
Income (loss) from operations
as a percentage of net sales 6.3% 3.8% 5.9% 18.4% n.m.(b) 6.0%
(a) As discussed below, net sales for 1999 and 1998 reflects a reclassification
of certain shipping costs that were billed to customers. The
reclassification required shipping costs originally recorded in cost of
sales to be recognized in net sales, with no impact on income from
operations.
(b) Not meaningful.
2000 Compared to 1999
Net sales for 2000 decreased 2.8% to $1,257.8 million from $1,294.6 million
in 1999. The decline in sales primarily reflected a deterioration in market
conditions during the second half of 2000. Lower sales were recorded in the Foam
Products, Carpet Cushion Products and Automotive Products business segments. The
Technical Products segment continued to report strong sales growth and certain
of the Company's foreign operations reported in the "Other" segment also
reported higher sales, which partially offset sales declines in the business
segments discussed above.
Income from operations in 2000 was $96.5 million, 3.7% higher than the
$93.1 million recorded during 1999. These results included restructuring and
other charges (discussed under "Other" below) of $6.3 million in 2000 and $10.5
million in 1999. Excluding the restructuring and other charges for comparison
purposes, income from operations was $102.7 million in 2000, down 0.8% from
$103.5 million in 1999. On this basis, income from operations was 8.2% of net
sales in 2000 compared to 8.0% of net sales in 1999.
The decline in income from operations, excluding restructuring and other
charges, was largely attributable to the impact of lower sales and higher raw
material costs offset by improved operating efficiencies and lower selling,
general and administrative expenses, discussed below. Higher oil prices
translated into raw material costs increases in 2000 and these higher costs were
not fully recovered through selling price increases. The gross profit margin was
13.7% for 2000 compared to 13.9% in 1999.
Selling, general and administrative expenses were down 9.7% in 2000
compared to 1999. The decrease primarily reflected cost savings initiatives,
lower incentive compensation expenses and lower selling expenses. Partially
offsetting these favorable items were increases to the allowance for
uncollectible accounts receivables and professional fees. The professional fees
were associated with the transfer of the Company's common stock pledged by Trace
to The Bank of Nova Scotia and the shareholder litigation settlements, as
discussed in the Shareholder and Change in Control Developments section below.
Foam Products
Foam Products net sales for 2000 decreased 1.5% to $519.2 million from
$527.2 million in 1999. Lower sales primarily reflected a volume decline in the
consumer products market and the loss of sales from the Company's packaging
business that was sold in 1999. Income from operations in 2000 was down 3.6% to
$55.0 million compared to $57.0 million in 1999. As discussed above, raw
material costs continued to increase during the year, and selling price
increases and improved operating efficiencies did not fully recover the
increased costs. As a percentage of net sales, income from operations was 10.6%
of net sales in 2000, down from 10.8% in 1999.
16
Carpet Cushion Products
Carpet Cushion Products net sales for 2000 decreased 10.3% to $256.4
million from $285.8 million in 1999. The sales decline primarily reflected
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. As a result, income from operations
was $2.0 million in 2000 as compared to $8.5 million in 1999.
Automotive Products
Automotive Products net sales for 2000 were $342.4 million, down 5.4% from
$361.8 million in 1999. The decrease reflected a slow down in the automotive
industry, particularly during the second half of the year. Lower sales
translated to a 1.4% decrease in income from operations, from $22.5 million in
1999 to $22.2 million in 2000. Results in 2000 benefited from the favorable
impact of a selling price adjustment. Income from operations represented 6.5% of
net sales in 2000 and 6.2% of net sales in 1999.
Technical Products
Technical Products net sales for 2000 increased 15.7% to $106.7 million
from $92.2 million in 1999. Income from operations increased 27.9% to $28.9
million in 2000, up from $22.6 million in 1999. Income from operations
represented 27.1% of net sales in 2000 compared to 24.5% in 1999. The
improvement reflected favorable market conditions that resulted in sales volume
growth and improved operating efficiencies.
Other
Other primarily consists of certain manufacturing operations in Mexico,
corporate expenses not allocated to business segments and restructuring and
other charges. The increase in net sales associated with this segment primarily
resulted from an increase in net sales from the Company's Mexico City operation.
The loss from operations of $11.7 million in 2000 included a provision of $6.3
million for restructuring and other charges, discussed below. The loss also
included the professional fees that were associated with the Exchange Agreement
and the shareholder litigation settlements, discussed previously. The loss from
operations of $17.6 million in 1999 included $10.5 million of restructuring and
other charges.
During 2000, the Company approved and implemented four separate
restructuring plans to further rationalize plant operations and to reduce
selling, general and administrative expenses.
The Company recorded restructuring charges of $2.1 million for severance
costs in connection with the first restructuring plan. This plan reduced the
Company's salaried work force by 18 employees, including certain executives of
the Company.
The second restructuring plan was implemented to rationalize certain plant
operations relating to the increase in the VPF(SM) capacity in North Carolina.
The Company recorded a restructuring charge of $0.7 million associated with this
plan. The restructuring charge was comprised of $0.1 million of severance costs
in connection with a work force reduction of 12 employees, $0.4 million of lease
and plant closure costs and $0.2 million of asset write-downs.
The third restructuring plan, as amended, was implemented to exit the
Company's fiber operations in Indiana. The Company recorded a restructuring
charge of $1.1 million in connection with this plan which was comprised of less
than $0.1 million of severance costs for the work force reduction of seven
employees, $0.1 million of lease and plant closure costs and $1.0 million of
asset write-downs.
The fourth restructuring plan was implemented for the consolidation of
pourline operations and certain product line rationalizations resulting from the
closure of facilities in Indiana and Arkansas. The Company recorded a
restructuring charge of $2.3 million in connection with this plan. The charge
was comprised of $0.2 million of severance costs relating to work force
reductions of 65 employees, $0.8 million for lease and plant closure costs and
$1.3 million for asset write-downs.
17
In addition, the Company recorded a net restructuring charge of $0.1
million associated with changes in estimates to prior years' restructuring
plans. The net charge was comprised of $0.1 million for asset write-downs and
$0.1 million for lease and plant closure costs offset by a credit of $0.1
million relating to severance costs.
The accrued restructuring balance at December 31, 2000 will be used for
payments relating to severance and lease and plant closure costs, including
runout costs at the facilities. As of December 31, 2000, all employees subject
to the plans have been terminated. The Company expects to spend approximately
$4.8 million during 2001 with the balance to be spent through 2006, principally
for lease runout costs.
During 1999, the Company approved and implemented four restructuring plans
to reduce selling, general and administrative costs and to rationalize plant
operations.
The Company recorded restructuring charges of approximately $2.4 million
relating to severance costs in connection with the first restructuring plan.
This plan reduced the Company's salaried work force by 82 employees.
The Company recorded restructuring charges of approximately $2.9 million
relating to severance costs in connection with the second restructuring plan for
replacing three of the Company's former executives, including its former Chief
Executive Officer.
In connection with the third restructuring plan, the Company recorded
restructuring charges of approximately $1.7 million relating to the closure of
one facility and certain product line rationalizations. The $1.7 million charge
was comprised of approximately $0.1 million of severance costs in connection
with the work force reductions of 117 employees, $0.1 million of plant closure
and carrying costs and $1.5 million of asset write-downs.
In connection with the fourth restructuring plan, the Company closed its
New York office (see Note 18 to the consolidated financial statements). The
Company recorded approximately $2.5 million of restructuring charges comprised
of $1.6 million of severance costs for eight employees and $0.9 million of costs
primarily relating to future lease obligations, net of sublease proceeds.
In addition, the Company recorded restructuring charges of approximately
$0.7 million relating to changes in estimates to prior years' plans, primarily
for the sale of the packaging business in 1999. The $0.7 million charge is
comprised of $0.2 million of severance, $1.3 million of lease and plant closure
costs, offset by $0.8 million of adjustments for asset write-downs. The Company
also recorded $0.3 million of other charges relating to rent due from Trace for
the New York office prior to its closure.
Interest and Debt Issuance Expense
Interest and debt issuance expense totaled $75.2 million in 2000, which
represented a 3.2% increase from 1999 expense of $72.9 million. The impact of
higher effective interest rates was partially offset by the benefit of lower
average debt levels. Higher effective interest rates reflected market conditions
and the impact of a certain provision of the Foamex L.P. credit facility that
required an incremental interest rate margin, as discussed in Note 13 to the
consolidated financial statements. The additional interest rate margin was 25
basis points in the first quarter of 2000. During the second quarter of 2000,
the interest rate margin was increased 25 basis points to a cumulative
adjustment of 50 basis points. During the third quarter of 2000, an additional
25 basis point adjustment became effective that resulted in a cumulative
adjustment of 75 basis points. Based on the debt leverage ratio of Foamex L.P.
at the end of the third quarter, the cumulative adjustment of 75 basis points
was reset to zero during the fourth quarter of 2000. Interest capitalized as a
component of the construction costs of plant and equipment totaled $0.8 million
in 2000.
Income from Equity Interest in Joint Venture
Income from an equity interest in an Asian joint venture totaled $1.7
million in 2000 compared to $0.5 million in 1999. The improved results reflected
the growth of the joint venture as it moves beyond the start up phase.
18
Other Income (Expense), Net
Other expense, net in 2000 totaled $3.0 million and primarily consisted of:
$1.7 million loss on the disposal of fixed assets, $1.2 million of costs
associated with a buyout proposal, discussed below, and $0.7 million letter of
credit fees offset by $0.6 million of interest income. During, 1999, other
income, net totaled $1.5 million. Income items in 1999 included a $4.2 million
gain recorded on the sale of the corporate aircraft and interest income of $0.5
million. Partially offsetting income items in 1999 were losses on the disposal
of fixed assets and letter of credit fees related to the GFI Transaction,
discussed in Note 13 to the consolidated financial statements.
Income Tax Expense
The effective tax rates in 2000 and 1999 reflect 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 and 1999. The effective tax
rate was higher in 2000 primarily due to a greater percentage of income from
foreign sources and a higher effective tax rate on foreign source income.
As of December 31, 2000, the Company had approximately $178.5 million of
tax operating loss carryforwards for Federal income tax purposes, expiring from
2010 to 2020. See Note 8 to the consolidated financial statements.
Net Income
Net income for 2000 was down 13.7% to $17.0 million compared to $19.7
million in 1999.
1999 Compared to 1998
Net sales for 1999 increased 2.7% to $1,294.6 million from $1,260.6 million
in 1998. The increase was primarily the result of stronger volume growth in the
Automotive Products and Technical Products segments partially offset by sales
declines in the Foam Products and Carpet Cushion Products segments.
Income from operations increased 24.0% to $93.1 million in 1999 from $75.0
million in 1998. Results in 1999 included $10.5 million of restructuring and
other charges. In 1998, a net restructuring credit of previously established
restructuring accruals increased operating income by $9.7 million. These
restructuring and other charges (credits) are discussed further under "Other"
below. Excluding the restructuring and other charges (credits) for comparison
purposes, income from operations increased 58.5% to $103.5 million in 1999 from
$65.3 million in 1998. On this basis, income from operations represented 8.0% of
net sales in 1999, up from 5.2% of net sales in 1998. The improvement was
primarily due to (i) the increase in net sales, (ii) improved gross profit
margins and (iii) lower selling, general and administrative expenses at both the
business unit and corporate levels. Improved gross profit margins resulted
primarily from operating efficiencies, the benefits of the first phase of
implementation of improved operating practices across a number of the Company's
facilities, enhanced raw material utilization and the full year benefits from
the consolidation of facilities acquired in connection with the acquisition of
Crain Industries, Inc. (the "Crain Acquisition") in December 1997. Lower
selling, general and administrative expenses primarily reflected the integration
of the Crain Acquisition, staffing reductions in January 1999, elimination of
the Trace management fee, the closure the New York office and reduced operating
costs as a result of the sale of the corporate aircraft.
Foam Products
Foam Products net sales for 1999 decreased 5.8% to $527.2 million from
$559.7 million in 1998. The decrease was primarily due to decreased sales
volumes resulting from the Company's decision to exit certain business lines and
the closure of facilities related to the Crain Acquisition. Despite the decline
in sales, income from operations increased 61.5% to $57.0 million in 1999 from
$35.3 million in 1998. Income from operations represented 10.8% of net sales in
1999, up from 6.3% in 1998. The improvement was primarily driven by (i) enhanced
raw material utilization, (ii) the benefits of the first phase of implementation
of improved operating
19
practices across a number of the Company's facilities, (iii) the benefits of
consolidation of facilities in the Southeast region of the U.S. and in Southern
California and (iv) the elimination of operating inefficiencies incurred in
1998. Income from operations for 1998 was adversely impacted by a number of
factors, the most significant of which were (i) $4.0 million of costs associated
with the Crain Acquisition transition including inventory adjustments for
facilities affected by the consolidation of manufacturing facilities, (ii)
operating inefficiencies and logistics costs of $2.5 million associated with the
sales of juvenile and other consumer products sold through mass merchandisers
and discount stores and (iii) operating losses and inefficiencies of $1.0
million resulting from fires at the Company's facilities in Orlando, Florida and
Cornelius, North Carolina.
Carpet Cushion Products
Carpet Cushion Products net sales for 1999 decreased 9.2% to $285.8 million
from $315.0 million in 1998 primarily due to lower selling prices and sales
volumes. Competitive pressures in the carpet cushion marketplace contributed to
lower selling prices and lower sales volumes. Sales volumes were also reduced
due to limited production from the Company's Orlando, Florida facility as a
result of the 1998 fire. Income from operations decreased 29.1% to $8.5 million
in 1999 from $12.0 million in 1998. Income from operations represented 3.0% of
net sales in 1999, down from 3.8% in 1998. The decline in income from operations
and the related margin were primarily due to lower selling prices, lower sales
volumes and the Orlando fire, which increased product transportation costs as
the fulfillment process was shifted to less geographically optimal facilities.
The Orlando, Florida carpet cushion line was brought back on stream and
operational in the fourth quarter of 1999. The Pico Rivera, California rebond
operation was consolidated into the other California rebond operations during
1999. These effects were partially offset by lower selling expenses as a result
primarily of the sales force integration and rationalization associated with the
Crain Acquisition. Results in 1998 were impacted by a $1.0 million charge
associated with the Orlando, Florida fire, and costs related to the Crain
Acquisition transition of $0.9 million.
Automotive Products
Automotive Products net sales for 1999 increased 26.9% to $361.8 million
from $285.2 million in 1998, primarily as a result of higher sales volume of
lamination products. Income from operations increased 34.3% to $22.5 million in
1999 from $16.8 million in 1998. Income from operations represented 6.2% of net
sales in 1999, up from 5.9% in 1998. The improvement was primarily due to (i)
operating efficiencies at the Company's Mexican border facilities that became
fully operational in the fourth quarter of 1998 and (ii) increased sales
volumes. Income from operations for 1998 was reduced by (i) $3.0 million of
costs incurred during the start up phase of new lamination business at the
Mexican border, (ii) contract price reductions of approximately $1.1 million and
(iii) losses of $1.0 million associated with the production of thermoformable
headliners.
Technical Products
Technical Products net sales for 1999 increased 16.5% to $92.2 million from
$79.1 million in 1998. Income from operations increased 55.0% to $22.6 million
in 1999 from $14.6 million in 1998. Income from operations represented 24.5% of
net sales in 1999, up from 18.4% in 1998. The improvement was primarily driven
by favorable market conditions, strong growth in sales volumes, a higher-margin
product mix and improved manufacturing efficiencies. Plans to expand capacity
for Technical Products were initiated during the second half of 1999.
Other
Other primarily consists of certain manufacturing operations in Mexico,
corporate expenses not allocated to business segments and restructuring and
other charges (credits). The increase in net sales associated with this segment
primarily resulted from an increase in net sales from the Company's Mexico City
operation. The loss from operations in 1999 was primarily associated with the
$10.5 million of restructuring and other charges discussed below. The loss from
operations in 1998 included $9.7 million of net restructuring credits discussed
below. The loss from operations for 1998 was impacted by accounts receivable and
inventory write downs of approximately $8.5 million at the Mexico City facility
and start up costs of $2.5 million for the Company's Asian joint venture.
20
Restructuring and other charges for 1999 amounted to $10.5 million, as
discussed previously.
In 1998, net restructuring credits were approximately $9.7 million, which
reflect a $15.1 million reversal of prior year's restructuring plans, offset by
other charges of $5.4 million. The $5.4 million was comprised of a $3.1 million
reserve for net receivables due from Trace and a $2.3 million of impaired cost
in excess of assets acquired associated with a foreign facility. However, these
charges were offset by a $15.1 million restructuring credit associated with
modifications to the 1997 restructuring plan. The $15.1 million credit reflected
the reversal of $10.2 million of fixed asset write-downs, $3.8 million of plant
closure and lease obligations and $1.1 million of personnel reductions.
Interest and Debt Issuance Expense
Interest and debt issuance expense totaled $72.9 million in 1999, slightly
higher than the 1998 expense of $72.3 million. The benefit of lower average debt
levels was offset by higher effective interest rates and increased amortization
expense related to additional debt issuance costs paid during 1999.
Other Income (Expense), Net
During the first quarter of 1999, a $4.2 million gain was recorded on the
sale of the corporate aircraft. Interest income totaled $0.5 million in 1999.
Losses on the disposal of fixed assets and letter of credit fees related to the
GFI Transaction (see Note 13 to the consolidated financial statements) partially
offset these income items.
Other expense, net for 1998 primarily consisted of: $6.5 million of costs
associated with the proposed Trace buyout transaction; $3.1 million of fees and
costs related to the GFI Transaction; $3.0 million of foreign currency losses in
Mexico; and a $1.1 million reduction in the value of the Company's investment in
the Trace Global Opportunities Fund (see Note 18 to the consolidated financial
statements). These expenses in 1998 were partially offset by approximately $1.9
million of interest income.
Income Tax Expense
The 1999 effective tax rate was 11.1% and reflected the partial reversal of
the deferred income tax asset valuation allowance recognized in 1998. The
valuation allowance reduction primarily reflected realization 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 1999.
In 1998, the provision for income taxes of $58.2 million consisted
primarily of an increase in the valuation allowance of deferred income tax
assets. The Company has determined that it was more likely than not that the
Company would not have sufficient future income to utilize its net operating
loss carryforwards and realize other deferred income tax assets. In addition,
the Company did not recognize the tax benefits associated with losses in Mexico
because it appeared likely that the net operating loss carryforwards would not
be able to be realized in the near future.
Income (Loss) Before Extraordinary Loss
Income (loss) before extraordinary loss increased to $19.7 million for 1999
as compared to a loss of $69.9 million in 1998. The increase is primarily due to
improved operating results during 1999 as compared to 1998, as discussed above,
and the impact of the 1998 increase to the valuation allowance related to
deferred income tax assets.
Extraordinary Loss
The extraordinary loss on the early extinguishment of debt in 1998 was $1.9
million (net of $1.3 million income tax benefit). The charge primarily reflected
the write-off of debt issuance costs in connection with the GFI Transaction.
21
Business Outlook
The coming year presents a number of challenges for the Company. Although
the domestic economy is clearly not as strong as in recent years, the Company
believes improved results are attainable. In Foam Products, reduced profit
margins are anticipated to continue, given the current cost structure. Any
improvement in profit margins for Foam Products will largely depend on the
ability to implement selling price increases to recover higher raw material
costs and higher transportation costs, combined with a continued focus on
operating efficiencies. In Carpet Cushion Products, the introduction of new
products and marketing strategies, including expansion of commercial
applications, will be a key to improving results in the coming year. In
Automotive Products, the slow down in the automotive industry is anticipated to
continue in the short term and will continue to limit results. Improved results
for the Mexico City operation, reported in Other, is primarily dependent on a
continued focus on a higher-value product mix and increased shipments. Technical
Products are anticipated to continue their growth trend and results for the
business segment should help to offset the impact of the unfavorable business
conditions discussed above.
The effective start up of two new VPF(SM) facilities and the conversion to
other production technologies to comply with new emission standards, effective
in the fourth quarter of 2001, will be also a key success factor.
Results in 2001 should also benefit from continued growth and results from
the Company's joint venture in Asia and from lower interest expense resulting
from anticipated debt reduction and anticipated lower effective interest rates,
discussed below.
Liquidity and Capital Resources
The Company's operations are conducted through its wholly owned
subsidiaries, Foamex L.P. and Foamex Carpet. The liquidity requirements of the
Company consist primarily of the operating cash requirements of its two
principal subsidiaries.
Foamex L.P.'s operating cash requirements consist principally of working
capital requirements, scheduled payments of principal and interest on
outstanding indebtedness and capital expenditures. Based on the business outlook
discussed above, the Company believes 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 its liquidity requirements. The ability
of Foamex L.P. to make distributions to the Company is restricted by the terms
of its financing agreements. Consequently, both the Company and Foamex Carpet
are not expected to have access to the cash flow generated by Foamex L.P. for
the foreseeable future.
Foamex Carpet's operating cash requirements consist principally of working
capital requirements, scheduled payments of principal and interest on
outstanding indebtedness and capital expenditures. Based on the business outlook
discussed above, the Company believes that cash flow from Foamex Carpet's
operating activities, cash on hand and periodic borrowings under Foamex Carpet's
credit facility will be adequate to meet its liquidity requirements. The ability
of Foamex Carpet to make distributions to the Company is restricted by the terms
of its financing agreements. Consequently, both the Company and Foamex L.P. are
not expected to have access to the cash flow generated by Foamex Carpet for the
foreseeable future.
Cash and cash equivalents totaled $4.9 million at the end of 2000 compared
to $6.6 million at the end of 1999. Working capital at the end of the 2000 was
$103.3 million and the current ratio was 1.5 to 1 compared to working capital at
the end of 1999 of $105.6 million and a current ratio of 1.6 to 1. The increase
in accrued employee compensation and benefits primarily reflects an increase in
the amount of contributions required for the Company's defined benefit pension
plan in the United States.
Total debt at the end of 2000 was $711.9 million, down $33.4 million from
year-end 1999. During the first quarter of 2000, the Foamex/GFI Note was repaid
with borrowings under the Foamex L.P. revolving credit facility. The $34.5
million letter of credit that was outstanding at year-end 1999 to collateralize
principal and interest payable under the Foamex/GFI Note was also terminated.
22
Cash Flow from Operating Activities
Cash provided by operating activities in 2000 was $51.0 million compared to
$58.7 million in 1999. The cash flow decrease primarily reflected lower results
and an increase in retirement benefit funding. Working capital and other
requirements were relatively comparable for the two years.
Cash Flow from Investing Activities
Cash used for investing activities totaled $21.9 million in 2000. Cash
requirements for capital expenditures were $23.6 million, partially offset by
$3.6 million of proceeds from the sale of assets. In 1999, cash flow used for
investing activities totaled $1.7 million primarily for $20.1 million of capital
expenditures partially offset by $17.8 million of proceeds from the sale of
assets. The Company expects capital expenditures for 2001 to be less than $20.0
million, which includes the completion of a fourth VPF(SM) facility. In
addition, the Company is continuing to explore the possible implementation of a
new ERP software system, but no significant expenditures are anticipated for the
balance of 2001.
Cash Flow from Financing Activities
Cash used for financing activities was $30.8 million in 2000 compared to
cash used of $63.1 million in 1999. As discussed previously, the $34.0 million
Foamex/GFI Note was repaid during the first quarter of 2000 with borrowings
under the Foamex L.P. revolving credit facility. The remaining cash requirements
for financing activities primarily reflected other debt repayments. Cash used
for financing activities in 1999 was primarily due to net debt repayments and
debt issuance costs.
Financial Condition
Based on the business outlook discussed above, coupled with forecasted
capital expenditures in 2001 of less than $20.0 million, the Company's targeted
debt reduction is approximately $50.0 million in the coming year.
Various Foamex L.P. and Foamex Carpet debt agreements contain certain
quarterly financial covenants which become more restrictive during 2001. Foamex
L.P. and Foamex Carpet anticipate that they will continue to comply in 2001 with
the quarterly financial covenants in the applicable debt agreements.
Management's current business plans for Foamex L.P. and Foamex Carpet anticipate
customer selling price increases in response to higher raw material costs,
improved working capital management, a reduced capital expenditure program,
declining interest rates, successful implementation of on-going cost savings
initiatives and improved operating efficiencies. The achievement of the business
plans is necessary for compliance with the various financial covenants in 2001.
The possibility exists that certain financial covenants will not be met if
business conditions are other than as anticipated or other unforeseen events
impact results. In the absence of a waiver of or amendment to such financial
covenants, such noncompliance would constitute a default under the applicable
debt agreements, and the lenders would be entitled to accelerate the maturity of
the indebtedness outstanding thereunder. In the event that such noncompliance
appears likely, or occurs, the Company will seek the lenders' approvals of
amendments to, or waivers of, such financial covenants. Historically, the
Company has been able to renegotiate financial covenants and/or obtain waivers,
as required, and management believes such waivers and/or amendments could be
obtained if required. However, there can be no assurance of future amendments or
waivers will be obtained.
Foamex L.P. Credit Facility
At December 31, 2000, Foamex L.P. had a credit facility (the "Foamex L.P.
Credit Facility") with a group of banks which provided for a revolving credit
facility commitment of $177.5 million and three term loans with an outstanding
balance totaling $248.8 million. 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, as discussed below. Amendments in 1998 provided for
a $2.5 million quarterly reduction of the availability under the revolving
credit facility, which extends through June 2003. On January 2, 2001, the
revolving credit facility commitment was $175.0 million with the fourth quarter
2000 reduction applied on January 2nd because the last day of 2000 was a Sunday.
23
Borrowings under the Foamex L.P. Credit Facility are collateralized by
substantially all of the assets of Foamex L.P. on a pari passu basis with the
IRBs (see Note 13 to the consolidated financial statements); however, the rights
of the holders of the applicable issue of the IRBs to receive payment upon the
disposition of the collateral securing such issue of the IRBs has been
preserved.
In response to financial conditions at year-end 1998, amendments to debt
agreements were executed during the first half of 1999. As a result the Foamex
L.P. Credit Facility, which was amended and restated in February 1998, was
further amended and restated in June 1999 to modify financial covenants for net
worth, interest coverage, fixed charge coverage and leverage ratios through
December 2006. The agreement was also amended to no longer permit Foamex L.P. to
make certain cash payments, including the payment of an annual management fee of
$3.0 million to a subsidiary of Trace and distributions to the Company, and to
limit future investments in foreign subsidiaries and joint ventures. The "change
of control" definition under the agreement was also modified to conform to the
definition discussed in "change of control" in Note 1 to the consolidated
financial statements. Changes in the interest rate structure, effective in 2000,
were also made and are discussed below. Foamex L.P. was in compliance with this
agreement at year-end 2000 and 1999.
At year-end 2000, interest was based on the combination of a variable rate
consisting of the higher of (i) the base rate of The Bank of Nova Scotia or (ii)
the Federal Funds rate plus 0.5% plus a margin. The margins for revolving, Term
B, Term C and Term D loans were 2.25%, 2.50%, 2.75% and 2.875%, respectively. At
the option of Foamex L.P., portions of the outstanding loans are convertible
into LIBOR based loans plus 1.0% added to the margins identified above. The
effective interest rates for the Foamex L.P. Credit Facility at the end of 2000
ranged between 10.31% and 10.69%.
Effective January 1, 2000, the interest rate on outstanding borrowings
under the Foamex L.P. Credit Facility will increase by 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 adjustments to the interest rate on borrowings is reset to
zero. During 2000, basis point adjustments were incurred in the first three
quarters, beginning with 25 basis points in the first quarter and ending with a
cumulative impact of 75 basis points by the end of the third quarter. There were
no basis point adjustments for the fourth quarter of 2000. At December 31, 2000,
the calculated leverage ratio was 5.3 to 1.00. Consequently, a 25 basis point
adjustment will be applicable for the calculation of interest in 2001, effective
upon delivery of the financial statements to the lenders.
Available borrowings under the revolving credit facility totaled $10.5
million at year-end 2000. Letters of credit outstanding at December 31, 2000
totaled $21.1 million.
As part of the Foamex L.P. Credit Facility, excess cash flow generated
annually, as defined, is required to prepay portions of Term B, C and D loans.
There was no required prepayment at year-end 2000. The prepayment amount
determined for 1999 was $13.3 million and was financed through revolving loans
under the facility. The 1999 required payment was made during the second quarter
of 2000.
Foamex Carpet Credit Facility
Foamex Carpet has a revolving credit facility (the "Foamex Carpet Credit
Facility"), which provides a commitment of $15.0 million through February 2004.
During 1999, amendments modified the financial covenants for net worth, interest
coverage, fixed charge coverage and leverage ratios. Also, effective June 30,
1999, the interest rate on outstanding borrowings under the Foamex Carpet Credit
Facility increased by 25 basis points.
There were no borrowings outstanding under the Foamex Carpet Credit
Facility at year-end 2000 and available borrowings totaled $15.0 million. The
interest rate was based on the combination of a variable rate plus a margin. The
variable rate is the same as the one defined in the Foamex L.P. Credit Facility,
discussed above, and the margin is 2.25%. At the option of Foamex Carpet,
portions of the outstanding loans are convertible into LIBOR based loans plus
3.25%.
Borrowings under the Foamex Carpet Credit Facility are collateralized by
substantially all of the assets of Foamex Carpet on a pari passu basis with the
Note Payable to Foam Funding LLC, discussed in Note 13 to the
24
consolidated financial statements.
Buyout Proposals - History
On February 9, 2000, the Company announced that it was in discussions with
respect to a proposal involving the acquisition of all of the Company's
outstanding common stock for cash. The Company stated that the proposal was
subject to a number of conditions, including the buyer's due diligence and the
execution of definitive agreements. The Company agreed to an exclusive
negotiating period ending five business days after delivery of its audited
financial statements included in the Company's Annual Report on Form 10-K to the
prospective buyer. On April 5, 2000, the Company announced that discussions with
the potential buyer were terminated with no agreement having been reached. The
Company subsequently terminated the engagement of J.P. Morgan & Company, Inc.
("JP Morgan"), which acted as financial advisor in connection with such
transaction. During the second quarter of 2000, the Company ended discussions
with JP Morgan concerning an additional engagement.
On August 5, 1999, the Company announced that its Board of Directors signed
a letter of intent with Sorgenti Chemical Industries, LLC and Liberty Partners
Holdings 20, LLC (collectively, the "Purchasers") for a business combination
providing for $11.50 per share for all of the Company's outstanding common stock
(the "Sorgenti Transaction"). Under the terms of the letter of intent, if the
Company entered into a business combination with another party, the Purchasers
would be entitled to a break-up fee of $6.0 million plus reimbursement of
certain expenses, subject to certain conditions, including the willingness of
the Purchasers to enter into a definitive merger agreement providing for a price
of at least $11.50 per share prior to the expiration of the letter of intent.
The proposed transaction was subject to a number of conditions, including the
negotiation of definitive documents regarding certain conditions relating to the
bank credit facilities and the public debt of the Company's subsidiaries.
Additional issues considered included minimum shareholder acceptance, change of
board membership, and other provisions providing for a higher break-up fee and
expense reimbursement if the Company entered into a business combination
providing a more favorable transaction. On December 15, 1999, the Company
announced that the letter of intent with the Purchasers, which had been
extended, expired by its terms. The Purchasers had submitted a revised bid at a
price and on terms that were less favorable than those contained in the letter
of intent and the Negotiating Committee of the Company's Board of Directors
rejected the revised bid.
In 1998, the Company received an unsolicited buyout proposal from Trace,
the Company's principal stockholder. The Company entered into two merger
agreements, which were subsequently terminated by Trace.
Shareholder and Change in Control Developments
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") relating to senior subordinated notes of $248.0 million
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.
25
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 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.
Environmental and Health and Safety Matters
The Company is subject to extensive and changing environmental laws and
regulations. Expenditures to date in connection with the Company's compliance
with such laws and regulations did not have a material adverse effect on
operations, financial position, capital expenditures or competitive position.
Liabilities recorded by the Company in connection with environmental matters as
of December 31, 2000 totaled $4.1 million. Although it is possible that new
information or future developments could require the Company to reassess its
potential exposure to all pending environmental matters, including those
described in the consolidated financial statements, the Company believes that,
based upon all currently available information, the resolution of all such
pending environmental matters will not have a significant adverse effect on the
Company's operations, financial position, capital expenditures or competitive
position.
On November 14, 2000, the United States Occupational Safety and Health
Administration ("OSHA") released the final ergonomics standard ("Ergonomics
Standard"), which applies to the Company, as well as all other employers in the
United States, with certain industry specific exclusions. The Ergonomics
Standard addresses musculoskeletal disorders, including those commonly
referenced as repetitive motion disorders.
The Ergonomics Standard is comprehensive, covering essentially all
employees of the Company in the United States. Although the implementation costs
could be significant, in the present form, the Company does not believe it will
have a negative impact on the its competitive position within the industry.
Subsequent to year-end 2000, a joint resolution by the United States House
of Representatives and Senate was approved that repealed the Ergonomics
Standard. The repeal has been submitted to the President of the United States
for his review and signature.
Inflation 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, the
Company believes it has the flexibility in operations and capital structure to
maintain a competitive position. In recent years, results of operations were
adversely affected by raw material cost increases. The price of the two
principal chemicals used, TDI and polyol, is influenced by demand, manufacturing
capacity and oil prices. Results for 2000 were negatively impacted by higher
transportation costs related to oil price increases and higher costs for raw
materials. The Company attempts to offset raw material cost increases through
selling price increases; however, there can be no assurance that the Company
will be successful in implementing selling price increases or that competitive
pricing pressure will not require the Company to adjust selling prices.
26
Results of operations have been and could be adversely affected by delays in
implementing, or the inability of the Company to implement, selling price
increases to offset raw material cost increases.
Accounting Changes - Revenue Recognition and Presentation
The Securities and Exchange Commission (the "SEC") issued Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB No. 101").
SAB No. 101, as amended, was effective as of January 1, 2000 and was adopted in
the fourth quarter of 2000. SAB No. 101 outlines the SEC's position that revenue
should not be recognized until it is realized or realizable, including a
comprehensive review of the conditions and criteria necessary for revenue
recognition. Additionally, the Company has internal policies and an on-going
audit program to support the accounting policy. Based on the review of the SAB
No. 101 requirements, no significant impact was incurred or anticipated on the
revenue recognition practices of the Company.
During July 2000, the Emerging Issues Task Force (the "EITF") of the
Financial Accounting Standards Board reached a consensus on an issue concerning
the components of revenue. EITF No. 00-10 "Accounting for Shipping and Handling
Revenues and Costs" essentially requires that shipping and handling costs that
are billed to a customer be included in revenue. The Company determined that a
portion of shipping costs billed to customers required a reclassification from
cost of sales to revenue. Accordingly, net sales reported for all periods in the
consolidated statements of operations reflect the reclassification required. On
a segment basis, the Carpet Cushion Products was the only business segment
impacted and net sales for all periods presented reflect the reclassification
required. All other shipping and handling costs associated with product
shipments are reported in cost of goods sold.
Future Accounting Changes - Accounting for Derivatives and Hedging Activities
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS No. 133") will require the
fair value of derivatives be recognized in the consolidated balance sheets.
Changes in the fair value of derivatives will be recognized in earnings or in
other comprehensive loss, essentially depending on the structure and the purpose
of the derivatives. During 2000, SFAS No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities", which amended SFAS No.
133 on a limited number of issues, was issued. The statements will be effective
for the Company in the first quarter of 2001.
These statements create a foundation that will address accounting and
reporting issues for a wide range of financial instruments defined as
derivatives and related hedging activities. As of December 31, 2000, the Company
did not have any derivatives, as defined in the statements. Accordingly, the
initial adoption of the statements will not have a significant impact on the
results of operations or financial position of the Company. The adoption of the
statements will require a reclassification in the consolidated balance sheets,
effective in 2001. Specifically, $6.1 million recognized at year-end 2000 as
liabilities will be reclassified to accumulated other comprehensive loss under
stockholders' deficit. The amount reclassified is the result of certain interest
rate swaps that were terminated in prior years, as discussed in Note 13 to the
consolidated financial statements. The amount reclassified will continue to be
amortized, with $0.9 million of amortization anticipated in 2001.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's debt securities with variable interest rates are subject to
market risk for changes in interest rates. On December 31, 2000, indebtedness
with variable interest rates totaled $453.0 million. On an annualized basis, if
the interest rates on these debt instruments increased by 1.0%, interest expense
would increase by approximately $4.5 million; concomitantly in fact interest
rates have decreased by 150 basis points for a potential savings in excess of
$6.0 million for the year 2001.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
An index to the financial statements and financial statement schedules is
included in Item 14(a).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
27
PART III
The information required by this Part III (Items 10, 11, 12 and 13) will be
filed as an amendment no later than 120 days after the end of the fiscal year
covered by this Annual Report on Form 10-K.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial statements.
Foamex International Inc. and Subsidiaries:
Report of Independent Accountants F-2
Consolidated Balance Sheets as of
December 31, 2000 and 1999 F-3
Consolidated Statements of Operations for
the years 2000, 1999 and 1998 F-5
Consolidated Statements of Cash Flows for the
years 2000, 1999 and 1998 F-6
Consolidated Statements of Stockholders' Deficit for
the years 2000, 1999 and 1998 F-7
Notes to Consolidated Financial Statements F-8
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 November 2, 2000, was filed for Item 5. Other Events,
concerning the consummation of an agreement with The Bank of Nova
Scotia relating to the shares of the Company's voting common stock
pledged by Trace to The Bank of Nova Scotia as a result of the Trace
bankruptcy filing.
(c) Exhibits.
2.1(x) - Transfer Agreement, dated as of February 27, 1998, by and between
Foam Funding LLC and Foamex L.P.
2.2(x) - 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").
2.3(z) - Agreement and Plan of Merger, dated as of November 5, 1998, by
and among Foamex International, Trace International Holdings, Inc.
("Trace Holdings") and Trace Merger Sub, Inc. ("Trace Sub").
2.4(aa) - Agreement and Plan of Merger, dated as of June 25, 1998, by and
among Trace Holdings, Trace Sub and Foamex International.
2.5(z) - Notice of termination of Agreement and Plan of Merger, dated as
of November 5, 1998, from Trace International Holdings, Inc. to
Foamex International Inc.
3.1(a) - Certificate of Limited Partnership of Foamex L.P.
3.2.1(a) - Fourth Amended and Restated Agreement of Limited Partnership of
Foamex L.P., dated as of December 14, 1993, by and among FMXI, Inc.
("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(v) - Third Amendment to the Partnership Agreement, dated December 23,
1997.
3.2.5(x) - Fourth Amendment to the Partnership Agreement, dated February 27,
1998.
3.3(y) - Certificate of Incorporation of FMXI.
3.4(y) - By-laws of FMXI.
28
3.5(k) - Certificate of Incorporation of Foamex Capital Corporation
("FCC").
3.6(k) - By-laws of FCC.
3.7.1(a) - Certificate of Incorporation of Foamex International.
3.7.1(dd) - Amendment to Certificate of Incorporation of Foamex
International.
3.7.2(cc) - Certificate of Incorporation of Foamex Carpet Cushion, Inc.
("Foamex Carpet")
3.8(a) - By-laws of Foamex International.
3.8.1(cc) - By-laws of Foamex Carpet.
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(v) - 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(x) - 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(d) - Registration Rights Agreement, dated as of June 12, 1997, by and
among Foamex L.P., FCC, General Felt, Foamex Fibers, and all future
direct or indirect domestic subsidiaries of Foamex L.P. or FCC, and
Donaldson, Lufkin & Jenrette Securities Corporation, Salomon
Brothers Inc. and Scotia Capital Markets, as Initial Purchasers.
4.2.1(v) - 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(x) - 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.
4.3(x) - Discharge of Indenture, dated as of February 27, 1998, by and
among Foamex L.P., General Felt, Foamex International and State
Street Bank and Trust Company, as trustee, relating to the 9 1/2%
Senior Secured Notes due 2000.
4.4.2(x) - Second Amended and Restated Foamex International Guaranty, dated
as of February 27, 1998, made by Foamex International in favor of
Citicorp USA, Inc., as Collateral Agent.
4.4.3(x) - Amended and Restated Partnership Guaranty, dated as of February
27, 1998, made by FMXI in favor of Citicorp USA, Inc., as
Collateral Agent.
4.4.4(p) - Foamex Guaranty, dated as of June 12, 1997, made by Foamex L.P.
in favor of Citicorp USA, Inc., as Collateral Agent.
4.4.5(p) - Subsidiary Guaranty, dated as of June 12, 1997, made by Foamex
Latin America, Inc. in favor of Citicorp USA, Inc., as Collateral
Agent.
4.4.6(p) - Subsidiary Guaranty, dated as of June 12, 1997, made by Foamex
Mexico, Inc. in favor of Citicorp USA, Inc., as Collateral Agent.
4.4.7(p) - Subsidiary Guaranty, dated as of June 12, 1997, made by FCC in
favor of Citicorp USA, Inc., as Collateral Agent.
4.4.8(p) - Subsidiary Guaranty, dated as of June 12, 1997, made by Foamex
Mexico II, Inc. in favor of Citicorp USA, Inc., as Collateral
Agent.
4.4.9(p) - Subsidiary Guaranty, dated as of June 12, 1997, made by Foamex
Asia, Inc. in favor of Citicorp USA, Inc., as Collateral Agent.
4.4.10(p) - Subsidiary Pledge Agreement, dated as of June 12, 1997, made by
FCC in favor of Citicorp USA, Inc., as Collateral Agent.
4.4.11(p) - Subsidiary Pledge Agreement, dated as of June 12, 1997, made by
Foamex Latin America, Inc. in favor of Citicorp USA, Inc., as
Collateral Agent.
4.4.12(p) - Subsidiary Pledge Agreement, dated as of June 12, 1997, made by
Foamex Asia, Inc. in favor of Citicorp USA, Inc., as Collateral
Agent.
29
4.4.13(p) - Subsidiary Pledge Agreement, dated as of June 12, 1997, made by
Foamex Mexico, Inc. in favor of Citicorp USA, Inc., as Collateral
Agent.
4.4.14(p) - Subsidiary Pledge Agreement, dated as of June 12, 1997, made by
Foamex Mexico II, Inc. in favor of Citicorp USA, Inc., as
Collateral Agent.
4.4.15(p) - Foamex Security Agreement, dated as of June 12, 1997, made by
Foamex L.P. in favor of Citicorp USA, Inc., as Collateral Agent.
4.4.16(p) - Subsidiary Security Agreement, dated as of June 12, 1997, made by
Foamex Latin America, Inc. in favor of Citicorp USA, Inc., as
Collateral Agent.
4.4.17(p) - Subsidiary Security Agreement, dated as of June 12, 1997, made by
Foamex Mexico, Inc. in favor of Citicorp USA, Inc., as Collateral
Agent.
4.4.18(p) - Subsidiary Security Agreement, dated as of June 12, 1997, made by
Foamex Mexico II, Inc. in favor of Citicorp USA, Inc., as
Collateral Agent.
4.4.19(p) - Subsidiary Security Agreement, dated as of June 12, 1997, made by
Foamex Asia, Inc. in favor of Citicorp USA, Inc., as Collateral
Agent.
4.4.20(p) - Subsidiary Security Agreement, dated as of June 12, 1997, made by
FCC in favor of Citicorp USA, Inc., as Collateral Agent.
4.4.21(r) - Foamex Pledge Agreement, dated as of June 12, 1997, made by
Foamex L.P. in favor of Citicorp USA, Inc., as Collateral Agent.
4.4.22(w) - First Amendment to Foamex Pledge Agreement, dated as of December
23, 1997, by Foamex L.P. in favor of Citicorp USA, Inc., as
Collateral Agent.
4.4.23(w) - First Amendment to Foamex Security Agreement, dated as of
December 23, 1997, by Foamex L.P. in favor of Citicorp USA, Inc.,
as Collateral Agent.
4.4.24(w) - First Amendment to Foamex Patent Agreement, dated as of December
23, 1997, by Foamex L.P. in favor of Citicorp USA, Inc., as
Collateral Agent.
4.4.25(w) - First Amendment to Trademark Security Agreement, dated as of
December 23, 1997, by Foamex L.P. in favor of Citicorp USA, Inc.,
as Collateral Agent.
4.4.26(w) - Acknowledgment of Guaranty by each of the guarantors to a
Guaranty dated June 12, 1997 in favor of Citicorp USA, Inc.
4.4.27(w) - First Amendment to Pledge Agreement, dated as of December 23,
1997, by pledgors in favor of Citicorp USA, Inc.
4.4.28(w) - Crain Industries, Inc. ("Crain") Guaranty, dated as of December
23, 1997, made by Crain in favor of Citicorp USA, Inc.
4.4.29(x) - Partnership Pledge Agreement, dated as of February 27, 1998, made
by Foamex International and FMXI in favor of Citicorp USA, Inc., as
Collateral Agent.
4.4.30(bb) - Amendment No. 1 to Second Amended and Restated Foamex
International Guaranty, dated March 11, 1999.
4.4.31(bb) - Amendment No. 1 to Foamex International Guaranty, dated March 12,
1999.
4.4.32(dd) - Foamex Patent Agreement, dated as of June 12, 1997, by Foamex
L.P. in favor of Citicorp USA, Inc., as Collateral Agent.
4.4.33(dd) - Trademark Security Agreement, dated as of June 12, 1997, by
Foamex L.P. in favor of Citicorp USA, Inc., as Collateral Agent.
4.4.34(ee) - Amended and Restated Foamex Pledge Agreement, dated as of June
30, 1999 made by Foamex L.P. in favor of Citicorp U.S.A. Inc. as
Collateral Agent.
4.4.35(ee) - Amended and Restated Partnership Pledge Agreement, dated as of
June 30, 1999 by FMXI, Inc. and Foamex International Inc. in favor
of Citicorp USA Inc. as FII Intercreditor Collateral Agent.
4.5 - Commitment letter, dated October 31, 2000, from The Bank of Nova
Scotia to Foamex Canada Inc.
4.6(a) - Subordinated Promissory Note, dated as of May 6, 1993, in the
original principal amount of $7,014,864 executed by Foamex L.P. to
John Rallis ("Rallis").
4.7(a) - Marely Loan Commitment Agreement, dated as of December 14, 1993,
by and between Foamex L.P. and Marely s.a. ("Marely").
4.8(a) - DLJ Loan Commitment Agreement, dated as of December 14, 1993, by
and between Foamex L.P. and DLJ Funding, Inc. ("DLJ Funding").
30
4.9.1(p) - 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(p) - Promissory Note, dated June 12, 1997, in the aggregate principal
amount of $4,794,828, executed by Trace Holdings to Foamex L.P.
4.10.1(x) - Credit Agreement, dated as of February 27, 1998, by and among
Foamex Carpet, the institutions from time to time party thereto as
lenders, the institutions from time to time party thereto as
issuing banks and Citicorp USA, Inc. and The Bank of Nova Scotia,
as administrative agents.
4.10.2(x) - Foamex International Guaranty, dated as of February 27, 1998,
made by Foamex International in favor of Citicorp USA, Inc., as
Collateral Agent.
4.10.3(x) - Foamex International Pledge Agreement, dated as of February 27,
1998, made by Foamex International in favor of Citicorp USA, Inc.,
as Collateral Agent.
4.10.4(x) - New GFI Security Agreement, dated as of February 27, 1998, made
by Foamex Carpet in favor of Citicorp USA, Inc., as Collateral
Agent.
4.10.5(x) - New GFI Intercreditor Agreement, dated as of February 27, 1998,
by and among Foamex Carpet, The Bank of Nova Scotia, as
Administrative Agent, and Citicorp USA, Inc., as Administrative
Agent and Collateral Agent.
4.10.6(x) - FII Intercreditor Agreement, dated as of February 27, 1998, by
and between Foamex International and Citicorp USA, Inc., as
Collateral Agent.
4.10.9(dd) - Amendment No. 1 to Foamex Carpet Credit Agreement, dated October
30, 1998.
4.10.10(bb) - Amendment No. 2 to Foamex Carpet Credit Agreement, dated March
12, 1999.
4.10.11(ee) - Foamex L.P. 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 among Foamex L.P., FMXI, the institutions from
time to time party thereto as lenders, the institutions from time
to time party thereto as issuing banks and Citicorp USA, Inc. and
the Bank of Nova Scotia as Administrative Agents.
4.10.12(ee) - Amendment No. 3 to Foamex Carpet Credit Agreement, dated June 30,
1999.
4.10.13(ee) - Foamex International Pledge Agreement, dated June 30, 1999, made
by Foamex International in favor of Citicorp U.S.A. Inc. as FII
Intercreditor Collateral Agent.
4.10.14(ff) - Amendment No. 1 to the Foamex L.P. Credit Agreement, dated
December 23, 1999, as amended and restated as of February 27, 1998
as further amended and restated as of June 29, 1999 among Foamex
L.P., FMXI, the institutions from time to time party thereto as
lenders, the institutions from time to time party thereto as
issuing banks and Citicorp USA, Inc. and the Bank of Nova Scotia as
Administrative Agents.
4.10.15(gg) - Amendment No. 2 to the Foamex L.P. Credit Agreement, dated
February 16, 2000, as amended and restated as of February 27, 1998
as further amended and restated as of June 29, 1999 among Foamex
L.P., FMXI, the institutions from time to time party thereto as
lenders, the institutions from time to time party thereto as
issuing banks and Citicorp USA, Inc. and the Bank of Nova Scotia as
Administrative Agents.
4.10.16(gg) - Amendment No. 4 to Foamex Carpet Cushion Agreement, dated
February 18, 2000.
4.11.1(x) - Promissory Note of Foamex L.P. in favor of Foam Funding LLC in
the principal amount of $34 million, dated February 27, 1998.
4.12.1(x) - Promissory Note of Foamex Carpet in favor of Foam Funding LLC in
the principal amount of $70.2 million, dated February 27, 1998.
4.12.2(bb)- Amendment to Promissory Note of Foamex Carpet in favor of Foam
Funding LLC dated March 15, 1999.
4.12.3(ee)- Amendment to Promissory Note of Foamex L.P. in favor of Foam
Funding LLC dated as of June 30, 1999.
4.12.4(ee)- Amendment to Promissory Note of Foamex Carpet in favor of Foam
Funding LLC dated as of June 30, 1999.
4.12.5(gg)- Amendment to Promissory Note of Foamex Carpet in favor of Foam
Funding LLC dated as of February 18, 2000.
31
4.13(dd) - Waiver, dated as of April 15, 1999 to the Credit Agreement, dated
as of February 27, 1998, among Foamex Carpet, the institutions
party thereto as Lenders, the institutions party thereto as Issuing
Banks, and Citicorp USA, Inc. and The Bank of Nova Scotia as
Administrative Agents.
4.13.1(gg) - Waiver, dated as of April 15, 1999 to the Promissory Note, dated
as of February 27, 1998, payable by Foamex Carpet to Foam Funding
LLC.
4.13.2(gg) - Waiver, dated as of May 6, 1999 to the Promissory Note, dated as
of February 27, 1998, payable by Foamex Carpet to Foam Funding LLC.
4.14(hh) - Letter Agreement, dated as of July 31, 2000, between the Company
and The Bank of Nova Scotia.
4.14.1(jj) - Certificate of Designations of Series B Preferred Stock of the
Company.
10.1.1(p) - Amendment to Master Agreement, dated as of June 5, 1997, between
Citibank, N.A. and Foamex L.P.
10.1.2(p) - Amended Confirmation, dated as of June 13, 1997, between
Citibank, N.A. and Foamex L.P.
10.1.3(w) - Amended Confirmation, dated as of February 2, 1998, between
Citibank, N.A. and Foamex L.P.
10.2(h) - Reimbursement Agreement, dated as of March 23, 1993, between
Trace Holdings and General Felt.
10.3(h) - 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.
10.4.1(k) - 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(k) - First Amendment, dated as of December 19, 1991, to the Trace
Holdings Asset Transfer Agreement. 10.4.3(k) - Amended and Restated
Guaranty, dated as of December 19, 1991, made by Trace Foam in
favor of Foamex L.P. 10.5.1(k) - 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(k) - First Amendment, dated as of December 19, 1991, to the RFC Asset
Transfer Agreement.
10.5.3(k) - Schedule 5.03 to the RFC Asset Transfer Agreement (the "5.03
Protocol"). 10.5.4(h) - The 5.03 Protocol Assumption Agreement,
dated as of October 13, 1992, between RFC and Foamex L.P.
10.5.5(h) - Letter Agreement between Trace Holdings and Recticel regarding
the Recticel Guaranty, dated as of July 22, 1992.
10.6(l) - Supply Agreement, dated June 28, 1994, between Foamex L.P. and
Foamex International.
10.7.1(l) - 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(w) - 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(y) - 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(m) - 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.
10.9.1(h) - Trace Foam Management Agreement between Foamex L.P. and Trace
Foam, dated as of October 13, 1992.
10.9.2(l) - Affirmation Agreement re: Management Agreement, dated as of
December 14, 1993, between Foamex L.P. and Trace Foam.
10.9.3(d) - First Amendment to Management Agreement, dated as of June 12,
1997, by and between Foamex L.P. and Trace Foam.
10.10.1(k) - Salaried Incentive Plan of Foamex L.P. and Subsidiaries.
10.10.2(k) - Trace Holdings 1987 Nonqualified Stock Option Plan.
10.10.3(k) - Equity Growth Participation Program.
32
10.10.4(o) - 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(u) - The Foamex L.P. Hourly Pension Plan (formerly "The Foamex
Products Inc. Hourly Employee Retirement Plan"), as amended
December 31, 1995.
10.10.6(u) - Foamex L.P. 401(k) Savings Plan effective October 1, 1997.
10.10.7(ii) - Foamex International's Amended and Restated 1993 Stock Option
Plan.
10.10.8(a) - Foamex International's Non-Employee Director Compensation Plan.
10.11.1 - Employment Agreement, dated as of January 1, 1999, by and between
the Company and Marshall S. Cogan.
10.11.2(dd) - Employment Agreement, dated as of March 16, 1999, by and between
Foamex International and John G. Johnson, Jr.
10.11.3 - Employment Agreement, amended effective as of January 29, 2001,
by and between Foamex International and John Televantos.
10.12.1(a) - Warrant Exchange Agreement, dated as of December 14, 1993, by and
between Foamex L.P. and Marely.
10.12.2(a) - Warrant Exchange Agreement, dated as of December 14, 1993, by and
between Foamex L.P. and DLJ Funding.
10.13(t) - Warrant Agreement, dated as of June 28, 1994, by and between
Foamex International and Shawmut Bank.
10.14(o) - 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(r) - 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(s) - 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.
10.16.1(x) - Supply Agreement, dated as of February 27, 1998, by and between
Foamex L.P. and General Felt (as assigned to Foamex Carpet).
10.16.2(x) - Administrative Services Agreement, dated as of February 27, 1998,
by and between Foamex L.P. and General Felt (as assigned to Foamex
Carpet).
10.17(y) - Tax Sharing Agreement, dated as of February 27, 1998, between
Foamex International and Foamex Carpet.
10.18.1(w) - Joint Venture Agreement between Hua Kee Company Limited and
Foamex Asia, Inc., dated as of July 8, 1997.
10.18.2(w) - 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.
----------------------------
(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 Registration
Statement of Foamex L.P. and FCC on Form S-4, Registration No. 33-65158.
33
(f) Incorporated herein by reference to the Exhibit to the Form 10-Q of the
Company for the quarterly period ended June 30, 1996.
(g) Incorporated herein by reference to the Exhibit to the Registration
Statement of Foamex L.P., FCC and General Felt on Form S-1, Registration
Nos. 33-60888, 33-60888-01, and 33-60888-02.
(h) 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.
(i) Incorporated herein by reference to the Exhibit to the Annual Report on
Form 10-K of Foamex L.P. for fiscal 1994.
(j) Incorporated herein by reference to the Exhibit to the Form 10-Q of Foamex
for the quarterly period ended September 30, 1996.
(k) 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.
(l) 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.
(m) Incorporated herein by reference to the Exhibit to the Annual Report on
Form 10-K of the Company for the fiscal year ended December 29, 1996.
(n) Incorporated herein by reference to the Exhibit to the Form 10-Q of the
Company for the quarterly period ended July 2, 1995.
(o) Incorporated herein by reference to the Exhibit to the Annual Report on
Form 10-K of Foamex L.P. for fiscal 1993.
(p) Incorporated herein by reference to the Exhibit in the Registration
Statement of the Company on Form S-4, Registration No. 333-30291.
(q) Incorporated herein by reference to the Exhibit to the Annual Report on
Form 10-K of Foamex L.P. for the fiscal year ended December 31, 1995.
(r) 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.
(s) 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.
(t) Incorporated by reference to the Exhibit to the Form 10-Q of the Company
for the quarterly period ended July 3, 1994.
(u) Incorporated by reference to the Exhibit to the Form 10-Q of Foamex L.P.
for the quarterly period ended September 28, 1997.
(v) 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.
(w) 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.
34
(x) Incorporated herein by reference to the Current Report on Form 8-K of
Foamex International reporting an event that occurred on February 27, 1998.
(y) 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.
(z) Incorporated herein by reference to the Current Report on Form 8-K of the
Company reporting an event that occurred on November 5, 1998.
(aa) Incorporated herein by reference to the Exhibit to the Current Report on
Form 8-K of the Company reporting an event that occurred on June 25, 1998.
(bb) Incorporated herein by reference to the Exhibit to the Current Report on
Form 8-K of the Company reporting an event that occurred on March 11, 1999.
(cc) Incorporated herein by reference to the Exhibit in the Registration
Statement of Foamex L.P. and FCC on Form S-4/A, Registration No. 333-45733,
filed May 11, 1998.
(dd) 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.
(ee) Incorporated herein by reference to the Exhibit to the Current Report on
Form 8-K of the Company reporting an event that occurred on June 30, 1999.
(ff) 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, 1999.
(gg) Incorporated herein by reference to the Exhibit to the Form 10-Q of the
Company for the quarterly period ended March 30, 2000.
(hh) 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.
(ii) Incorporated herein by reference to the Exhibit to the Company's definitive
proxy statement dated May 31, 2000.
(jj) 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.
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.
35
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 30th day of
March 2001.
FOAMEX INTERNATIONAL INC.
By: /s/ John Televantos
-------------------------
Name: John Televantos
Title: President and Chief Executive Officer
By: /s/ Carl E. Kraus
--------------------------
Name: Carl E. Kraus
Title: Interim Chief Financial Officer
By: /s/ Robert S. Graham, Jr.
---------------------------
Name: Robert S. Graham, Jr.
Title: Senior Vice President, Corporate
Controller and Chief Accounting
Officer
36
SIGNATURES
(continued)
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 30, 2001
- -------------------------
Marshall S. Cogan
/s/ Robert J. Hay Chairman Emeritus March 30, 2001
- ------------------------- and Director
Robert J. Hay
/s/ John Televantos President, Chief Executive March 30, 2001
- ------------------------- Officer and Director
John Televantos
/s/ Etienne Davignon Director March 30, 2001
- -------------------------
Etienne Davignon
/s/ Stuart J. Hershon Director March 30, 2001
- -------------------------
Stuart J. Hershon
/s/ Virginia A. Kamsky Director March 30, 2001
- -------------------------
Viriginia A. Kamsky
/s/ Raymond E. Mabus Director March 30, 2001
- -------------------------
Raymond E. Mabus
/s/ John V. Tunney Director March 30, 2001
- -------------------------
John V. Tunney
37
FOAMEX INTERNATIONAL INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Foamex International Inc.
Index to Consolidated Financial Statements F-1
Report of Independent Accountants F-2
Consolidated Balance Sheets as of December 31, 2000 and 1999 F-3
Consolidated Statements of Operations for the years 2000, 1999 and 1998 F-5
Consolidated Statements of Cash Flows for the years 2000, 1999 and 1998 F-6
Consolidated Statements of Stockholders' Deficit for the years 2000,
1999 and 1998 F-7
Notes to Consolidated Financial Statements F-8
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of Foamex International Inc.:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of stockholders' deficit and of cash
flows present fairly, in all material respects, the financial position of Foamex
International Inc. and its subsidiaries (the "Company") at December 31, 2000 and
1999 and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 2000 in conformity with accounting
principles generally accepted in the United States. In addition, in our opinion,
the financial statement schedules as of and for each of the three years in the
period ended December 31, 2000 when considered in relation to the basic
consolidated financial statements taken as a whole, present fairly, in all
material respects, the information required to be included therein. 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 based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States 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
audits provide a reasonable basis for our opinion.
As discussed in Note 13, 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 13.
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
March 30, 2001
F-2
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, December 31,
ASSETS 2000 1999
------------ ------------
(thousands)
CURRENT ASSETS
Cash and cash equivalents $ 4,890 $ 6,577
Accounts receivable, net of allowance for doubtful
accounts and discounts of $9,926 and $9,549 170,590 166,571
Inventories 100,334 97,882
Deferred income taxes - 60
Other current assets 22,788 23,602
--------- --------
Total current assets 298,602 294,692
--------- --------
PROPERTY, PLANT AND EQUIPMENT
Land and land improvements 6,805 6,947
Buildings and leasehold improvements 100,169 98,939
Machinery, equipment and furnishings 268,353 264,241
Construction in progress 21,964 14,851
-------- --------
Total 397,291 384,978
Less accumulated depreciation and amortization (184,760) (163,145)
-------- --------
Property, plant and equipment, net 212,531 221,833
COST IN EXCESS OF ASSETS ACQUIRED, net of
accumulated amortization of $29,076 in 2000 and
$23,252 in 1999 209,125 215,258
DEBT ISSUANCE COSTS, net of
accumulated amortization of $10,675 in 2000 and
$6,791 in 1999 15,082 18,966
DEFERRED INCOME TAXES 328 285
OTHER ASSETS 19,812 30,279
-------- --------
TOTAL ASSETS $755,480 $781,313
======== ========
The accompanying notes are an integral part of the
consolidated financial statements.
F-3
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, December 31,
LIABILITIES AND STOCKHOLDERS' DEFICIT 2000 1999
------------ ------------
(thousands except share data)
CURRENT LIABILITIES
Short-term borrowings $ - $ 1,627
Current portion of long-term debt 8,356 7,866
Current portion of long-term debt - related party 15,795 10,530
Accounts payable 86,838 86,576
Accrued employee compensation and benefits 21,853 17,878
Accrued interest 9,198 9,741
Accrued restructuring 4,766 5,266
Accrued customer rebates 23,839 22,823
Other accrued liabilities 23,196 23,519
Deferred income taxes 1,511 3,220
-------- --------
Total current liabilities 195,352 189,046
LONG-TERM DEBT 656,168 646,544
LONG-TERM DEBT - RELATED PARTY 31,590 78,753
ACCRUED EMPLOYEE BENEFITS 18,824 14,901
DEFERRED INCOME TAXES 2,708 997
ACCRUED RESTRUCTURING 4,681 7,533
OTHER LIABILITIES 10,826 9,920
-------- --------
Total liabilities 920,149 947,694
-------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT
Preferred Stock, par value $1.00 per share:
Authorized 5,000,000 shares
Issued 15,000 shares - Series B 15 -
Common Stock, par value $.01 per share:
Authorized 50,000,000 shares
Issued 27,048,994 and 27,045,480 shares, respectively;
Outstanding 23,559,994 and 25,056,480 shares, respectively 270 270
Additional paid-in capital 96,275 87,475
Accumulated deficit (200,932) (217,945)
Accumulated other comprehensive loss (23,296) (7,758)
Other:
Common Stock held in treasury, at cost:
3,489,000 and 1,989,000 shares, respectively (27,780) (19,202)
Shareholder note receivable (9,221) (9,221)
-------- --------
Total stockholders' deficit (164,669) (166,381)
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $755,480 $781,313
======== ========
The accompanying notes are an integral part of the
consolidated financial statements.
F-4
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years 2000, 1999 and 1998
2000 1999 1998
---------- ---------- ----------
(thousands except per share amounts)
NET SALES $1,257,778 $1,294,639 $1,260,559
COST OF GOODS SOLD 1,085,753 1,114,331 1,106,054
---------- ---------- ----------
GROSS PROFIT 172,025 180,308 154,505
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 69,286 76,759 89,171
RESTRUCTURING AND OTHER CHARGES (CREDITS) 6,268 10,491 (9,698)
---------- ---------- ----------
INCOME FROM OPERATIONS 96,471 93,058 75,032
INTEREST AND DEBT ISSUANCE EXPENSE 75,229 72,908 72,295
INCOME FROM EQUITY INTEREST IN JOINT VENTURE 1,652 512 -
OTHER INCOME (EXPENSE), NET (3,042) 1,516 (14,348)
---------- ---------- ----------
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES 19,852 22,178 (11,611)
PROVISION FOR INCOME TAXES 2,839 2,462 58,242
---------- ---------- ----------
INCOME (LOSS) BEFORE EXTRAORDINARY LOSS 17,013 19,716 (69,853)
EXTRAORDINARY LOSS ON EARLY EXTINGUISHMENT
OF DEBT, NET OF INCOME TAXES - - (1,917)
---------- ---------- ----------
NET INCOME (LOSS) $ 17,013 $ 19,716 $ (71,770)
========== ========== ==========
BASIC EARNINGS (LOSS) PER SHARE
BEFORE EXTRAORDINARY LOSS $ 0.69 $ 0.79 $ (2.79)
EXTRAORDINARY LOSS - - (0.08)
---------- ---------- ----------
NET EARNINGS (LOSS) $ 0.69 $ 0.79 $ (2.87)
========== ========== ==========
DILUTED EARNINGS (LOSS) PER SHARE
BEFORE EXTRAORDINARY LOSS $ 0.67 $ 0.78 $ (2.79)
EXTRAORDINARY LOSS - - (0.08)
---------- ---------- ----------
NET EARNINGS (LOSS) $ 0.67 $ 0.78 $ (2.87)
========== ========== ==========
The accompanying notes are an integral part of the
consolidated financial statements.
F-5
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years 2000, 1999 and 1998
2000 1999 1998
---------- ---------- ----------
(thousands)
OPERATING ACTIVITIES
Net income (loss) $17,013 $19,716 $(71,770)
Adjustments to reconcile net income (loss) to net
cash provided by (used for) operating activities:
Depreciation and amortization 36,588 35,750 35,385
Amortization of debt issuance costs, debt premium, deferred
swap adjustment and gain, and debt discount 1,335 1,315 (100)
Asset write-downs and other charges (credits) 2,621 314 (7,972)
Provision for uncollectible accounts 2,838 2,758 2,611
Retirement benefit funding (greater) less than expense (7,198) 1,865 787
Deferred income taxes 513 807 54,178
Other, net 1,957 (3,407) (4,056)
Changes in operating assets and liabilities:
Accounts receivable (6,857) 15,829 (12,085)
Inventories (2,452) 38,776 (20,809)
Accounts payable 262 (62,692) 17,579
Accrued restructuring (3,352) 849 (14,946)
Other assets and liabilities 7,720 6,839 7,272
------- ------- --------
Net cash provided by (used for) operating activities 50,988 58,719 (13,926)
------- ------- --------
INVESTING ACTIVITIES
Capital expenditures (23,593) (20,080) (33,701)
Proceeds from sale of assets 3,570 17,823 2,230
Other investing activities (1,850) 599 (1,290)
------- ------- --------
Net cash used for investing activities (21,873) (1,658) (32,761)
------- ------- --------
FINANCING ACTIVITIES
Repayments of short-term borrowings (1,627) (1,330) (3,641)
Net proceeds from (repayments of) revolving loans 32,220 (25,753) 84,511
Proceeds from long-term debt - - 138,810
Repayments of long-term debt (20,550) (17,281) (143,047)
Repayments of long-term debt-related party (41,898) (9,652) (5,265)
Increase (decrease) in cash overdrafts 1,029 (1,444) 7,300
Debt issuance costs - (7,866) (2,029)
GFI transaction costs - - (5,229)
GFI transaction payments of accounts payable - - (4,800)
GFI transaction purchase of assets - - (20,000)
Payment of dividends - - (1,245)
Other financing activities 24 270 1,850
------- ------- --------
Net cash provided by (used for) financing activities (30,802) (63,056) 47,215
------- ------- --------
Net increase (decrease) in cash and cash equivalents (1,687) (5,995) 528
Cash and cash equivalents at beginning of period 6,577 12,572 12,044
------- ------- -------
Cash and cash equivalents at end of period $ 4,890 $ 6,577 $12,572
======= ======= =======
The accompanying notes are an integral part of the
consolidated financial statements.
F-6
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
For the Years 2000, 1999 and 1998
Accumulated
Additional Other
Preferred Common Paid-in Accumulated Comprehensive
Stock Stock Capital Deficit Loss Other Total
--------- ---------- ---------- ------------ ------------- --------- ----------
thousands)
Balances at December 28, 1997 $ - $269 $86,025 $(164,118) $ (6,598) $(28,997) $(113,419)
Net loss (71,770) (71,770)
Minimum pension liability adjustment (11,525) (11,525)
Foreign currency translation adjustment (6,598) (6,598)
---------
Comprehensive loss (89,893)
Issuance of common stock 163 163
Stock option compensation 208 208
Stock options exercised 1 594 595
Cash dividend (1,245) (1,245)
Other (528) (528)
----- ---- ------- --------- -------- -------- ---------
Balances at December 31, 1998 - 270 86,990 (237,661) (24,721) (28,997) (204,119)
Net income 19,716 19,716
Minimum pension liability adjustment 12,009 12,009
Foreign currency translation adjustment 4,954 4,954
---------
Comprehensive income 36,679
Stock option compensation 215 215
Stock options exercised - 270 270
Other 574 574
----- ---- ------- --------- -------- -------- ---------
Balances at December 31, 1999 - 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)
===== ==== ======= ========= ======== ======== =========
The accompanying notes are an integral part of the
consolidated financial statements.
F-7
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION
Organization
Foamex International Inc. (the "Company") operates in the flexible
polyurethane and advanced polymer foam products industry. As of December 31,
2000, the Company's operations are primarily conducted through its wholly owned
subsidiaries, Foamex L.P. and Foamex Carpet Cushion, Inc. ("Foamex Carpet").
Financial information concerning the business segments of the Company is
included in Note 16.
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") relating to senior subordinated notes of
$248.0 million 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 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.
F-8
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. Investments in
affiliates with 20% or greater ownership are accounted for using the equity
method. All significant intercompany accounts and transactions have been
eliminated in consolidation.
Reporting Period
Effective September 1998, the annual reporting period was changed from a 52
or 53 week fiscal year ending on the Sunday closest to the end of the calendar
year to a calendar year ending on December 31. This change was effective for the
third fiscal quarter of 1998, which ended on September 30, 1998.
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 and contingency disclosures. Actual
results could differ from those estimates.
Revenue Recognition, Discounts and Rebates
Revenue from sales, net of discounts and estimated returns, allowances and
rebates, is recognized when product title passes to the customer, which is
primarily at the time of shipment. See the section below entitled "Accounting
Changes - Revenue Recognition" regarding developments concerning revenue
recognition requirements.
Cash Equivalents
Highly liquid investments with an original maturity of three months or less
when purchased are recognized as cash equivalents.
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 2000, 1999 and 1998 was $28.7 million, $27.9 million and $27.3
million, respectively.
Maintenance and repairs are charged to expense as incurred. Renewals and
major improvements are capitalized. 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.
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-9
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Cost in Excess of Net Assets Acquired
The excess of the acquisition cost over the fair value of net assets
acquired in business combinations accounted for as purchases is amortized using
the straight-line method over 40 years. At each balance sheet date, the Company
evaluates the recoverability of cost in excess of net assets acquired using
certain financial indicators such as historical and future ability to generate
income and cash flows from operations based on a going concern basis. If an
impairment loss has occurred, based on expected future (undiscounted) cash
flows, the loss is recognized in the income statement. During 1998, a $2.3
million impairment charge was recorded associated with the cost in excess of net
assets acquired related with a foreign facility.
Environmental Remediation
Environmental expenditures that relate to current operations are expensed
or capitalized as appropriate. 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
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 equity, such as currency translation and
minimum pension liability adjustments.
Foreign Currency Translation
The financial statements of foreign subsidiaries, except in countries that
are considered as highly inflationary as discussed below, have been translated
into U.S. dollars by using the year-end exchange rates for the assets and
liabilities and the average exchange rates for the statements of operations.
Currency translation adjustments are included in other stockholders' deficit. In
1998, Mexico was considered a highly inflationary economy. Accordingly, certain
financial statement amounts for the Mexican operations were translated at either
current or historical exchange rates, as appropriate. These translation
adjustments were reflected in the results of operations. Transaction gains
(losses) are reflected in operations and are insignificant. The effect of
foreign currency exchange rates on cash flows is insignificant.
Start-Up Costs
Costs incurred in the start-up of a facility, including training and
production testing, are expensed as incurred.
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 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-10
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Accounting Changes - Revenue Recognition and Presentation
The Securities and Exchange Commission (the "SEC") issued Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB No. 101").
SAB No. 101, as amended, was effective as of January 1, 2000 and was adopted in
the fourth quarter of 2000. SAB No. 101 outlines the SEC's position that revenue
should not be recognized until it is realized or realizable. Based on the review
of the SAB No. 101 requirements, no significant impact was incurred or
anticipated on the revenue recognition practices of the Company.
During July 2000, the Emerging Issues Task Force (the "EITF") of the
Financial Accounting Standards Board reached a consensus on an issue concerning
the components of revenue. EITF No. 00-10 "Accounting for Shipping and Handling
Revenues and Costs" essentially requires that shipping and handling costs that
are billed to a customer be included in revenue. The Company determined that a
portion of shipping costs billed to customers required a reclassification from
cost of sales to revenue. Accordingly, net sales reported for all periods in the
consolidated statements of operations reflect the reclassification required. On
a segment basis, Note 16, the Carpet Cushion Segment was the only business
segment impacted and net sales for all periods presented reflect the
reclassification required. All other shipping and handling costs associated with
product shipments are reported in cost of goods sold.
Reclassifications
Certain amounts have been reclassified to conform with the current year's
presentation.
Future Accounting Changes - Accounting for Derivatives and Hedging Activities
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS No. 133") will require the
fair value of derivatives be recognized in the consolidated balance sheets.
Changes in the fair value of derivatives will be recognized in earnings or in
other comprehensive loss, essentially depending on the structure and the purpose
of the derivatives. During 2000, SFAS No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities", which amended SFAS No.
133 on a limited number of issues, was issued. The statements will be effective
for the Company in the first quarter of 2001.
These statements create a foundation that will address accounting and
reporting issues for a wide range of financial instruments defined as
derivatives and related hedging activities. As of December 31, 2000, the Company
did not have any derivatives, as defined in the statements. Accordingly, the
initial adoption of the statements will not have a significant impact on the
results of operations or financial position of the Company. The adoption of the
statements will require a reclassification in the consolidated balance sheets,
effective in 2001. Specifically, $6.1 million recognized at year-end 2000 as
liabilities will be reclassified to accumulated other comprehensive loss under
stockholders' deficit. The amount reclassified is the result of certain interest
rate swaps that were terminated in prior years, as discussed in Note 13 to the
consolidated financial statements. The amount reclassified will continue to be
amortized, with $0.9 million of amortization anticipated in 2001.
3. ASSET SALES
On March 31, 1999, the Company sold its corporate airplane for $16.3
million and recorded a gain of approximately $4.2 million. The gain was recorded
in other income (expense) in the consolidated statements of operations. Debt
associated with the airplane of $8.9 million was repaid with a portion of the
proceeds.
The sale of the airplane resulted in an obligation to Trace of
approximately $0.6 million. Under the terms of the aircraft acquisition
agreement with Trace, the Company was obligated to share the net proceeds in
excess of a specified amount defined in the agreement. The obligation was offset
against Trace's two promissory notes payable to Foamex L.P., discussed in Note
18, at Trace's request.
F-11
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. RESTRUCTURING AND OTHER CHARGES (CREDITS)
1998
Based on business developments during 1998, the Company decided not to
close two facilities originally identified for closure in the 1997 restructuring
plan. One facility remained open to fill lost capacity resulting from a fire in
April 1998 at the Orlando, Florida facility, which returned to full operations
during 1999. The other facility remained open during 1998 due to improved demand
on the West Coast. The 1997 restructuring plan also included the closure of two
facilities associated with the Company's packaging business. During 1998, the
Company modified the plan, and decided to sell the packaging business and did
not expect to incur the asset write-down and lease costs as originally planned.
As a result, the Company recorded a $15.1 million restructuring adjustment
associated with the 1997 restructuring plan. The components of the $15.1 million
restructuring adjustment included: $10.2 million for fixed asset write-downs,
$3.8 million for plant closure and operating lease obligations and $1.1 million
for personnel reductions.
In addition, the Company recorded restructuring and other charges (credits)
of $5.4 million during 1998 to reserve for approximately $3.1 million of net
receivables due from Trace and to write down approximately $2.3 million of
impaired cost in excess of net assets acquired associated with a foreign
facility. Also during 1998, the Company incurred additional plant closure costs
of $5.2 million and personnel reduction costs of $1.2 million associated with
the closure of the former Crain facilities. The additional costs associated with
the closure of the former Crain facilities resulted in an increase in cost in
excess of net assets acquired.
1999
During 1999, the Company approved and implemented four restructuring plans
to reduce selling, general and administrative costs and to rationalize plant
operations.
The Company recorded restructuring charges of approximately $2.4 million
relating to severance costs in connection with the first restructuring plan.
This plan reduced the Company's salaried work force by 82 employees.
The Company recorded restructuring charges of approximately $2.9 million
relating to severance costs in connection with the second restructuring plan for
replacing three of the Company's former executives, including its former Chief
Executive Officer.
In connection with the third restructuring plan, the Company recorded
restructuring charges of approximately $1.7 million relating to the closure of
one facility and certain product line rationalizations. The $1.7 million charge
was comprised of approximately $0.1 million of severance costs in connection
with the work force reductions of 117 employees, $0.1 million of lease and plant
closure costs and $1.5 million of asset write-downs.
In connection with the fourth restructuring plan, the Company closed its
New York office (see Note 18). The Company recorded approximately $2.5 million
of restructuring charges comprised of $1.6 million of severance costs for eight
employees and $0.9 million of costs primarily relating to future lease
obligations, net of sublease proceeds.
In addition, the Company recorded restructuring charges of approximately
$0.7 million relating to changes in estimates to prior years' plans, primarily
for the sale of the packaging business in 1999. The $0.7 million charge is
comprised of $0.2 million of severance, $1.3 million of lease and plant closure
costs, offset by $0.8 million of adjustments for asset write-downs. The Company
also recorded $0.3 million of other charges relating to rent due from Trace for
the New York office prior to its closure.
2000
During 2000, the Company approved and implemented four separate
restructuring plans to further rationalize plant operations and to reduce
selling, general and administrative expenses.
F-12
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. RESTRUCTURING AND OTHER CHARGES (CREDITS) (continued)
The Company recorded restructuring charges of $2.1 million for severance
costs in connection with the first restructuring plan. This plan reduced the
Company's salaried work force by 18 employees, including certain executives of
the Company.
The second restructuring plan was implemented to rationalize certain plant
operations relating to the increase in the VPF(SM) capacity in North Carolina.
The Company recorded a restructuring charge of $0.7 million associated with this
plan. The restructuring charge was comprised of $0.1 million of severance costs
in connection with a work force reduction of 12 employees, $0.4 million of lease
and plant closure costs and $0.2 million of asset write-downs.
The third restructuring plan, as amended, was implemented to exit the
Company's fiber operations in Indiana. The Company recorded a restructuring
charge of $1.1 million in connection with this plan which was comprised of less
than $0.1 million of severance costs for the work force reduction of seven
employees, $0.1 million of lease and plant closure costs and $1.0 million of
asset write-downs.
The fourth restructuring plan was implemented for the consolidation of
pourline operations and certain product line rationalizations resulting from the
closure of facilities in Indiana and Arkansas. The Company recorded a
restructuring charge of $2.3 million in connection with this plan. The charge
was comprised of $0.2 million of severance costs relating to work force
reductions of 65 employees, $0.8 million for lease and plant closure costs and
$1.3 million for asset write-downs.
In addition, the Company recorded a net restructuring charge of $0.1
million associated with changes in estimates to prior years' restructuring
plans. The net charge was comprised of $0.1 million for asset write-downs and
$0.1 million for lease and plant closure costs offset by a credit of $0.1
million relating to severance costs. Also during May 2000, the Company sold a
facility for net proceeds of $3.6 million. The facility was closed as part of a
1997 restructuring plan.
The following table sets forth the components of the Company's
restructuring and other charges (credits):
Asset Plant Closure Personnel
Total Write-downs and Leases Reductions Other
---------- ----------- ------------- ---------- -----------
(millions)
Balance at December 28, 1997 $ 21.2 $ (5.7) $ 23.5 $ 3.4 $ -
Cash spending (15.7) - (12.2) (3.5) -
Cash proceeds 2.1 2.1 - - -
1998 restructuring charge 5.4 5.4 - - -
Restructuring adjustments (15.1) (10.2) (3.8) (1.1) -
Asset write-off/write-downs (6.3) (5.5) (0.8) - -
Reclassified fixed asset basis
for restructuring credit 8.2 8.2 - - -
Plant consolidation costs 6.4 - 5.2 1.2 -
------ ------ ------- ----- -----
Balance at December 31, 1998 6.2 (5.7) 11.9 - -
Cash spending (8.9) - (4.1) (4.5) (0.3)
Cash proceeds 1.5 1.5 - - -
1999 restructuring charge 9.8 1.5 1.0 7.0 0.3
Restructuring adjustments 0.7 (0.8) 1.3 0.2 -
Asset write-off/write-downs (0.3) (0.3) - - -
------ ------ ------- ----- -----
Balance at December 31, 1999 9.0 (3.8) 10.1 2.7 -
F-13
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. RESTRUCTURING AND OTHER CHARGES (CREDITS) (continued)
Asset Plant Closure Personnel
Total Write-downs and Leases Reductions Other
---------- ----------- ------------- ---------- -----------
(millions)
Cash spending (7.1) - (3.9) (3.2) -
Cash proceeds 3.6 3.6 - - -
2000 restructuring charge 6.2 2.5 1.3 2.4 -
Restructuring adjustments 0.1 0.1 0.1 (0.1) -
Asset write-off/write-downs (2.6) (2.6) - - -
------ ------ ------- ----- -----
Balance at December 31, 2000 $9.2 $(0.2) $ 7.6 $ 1.8 $ -
====== ====== ======= ===== =====
As indicated in the table above, the balance at December 31, 2000 will be
used for payments relating to severance and lease and plant closure costs,
including runout costs at the facilities. As of December 31, 2000, all employees
subject to the plans have been terminated. The $0.2 million of asset write-downs
relates to estimated proceeds and is included in noncurrent assets. The Company
expects to spend approximately $4.8 million during 2001 with the balance to be
spent through 2006, principally for lease runout costs.
5. RETIREE BENEFIT PLANS
Pensions
The Company provides pension and survivor benefits for salaried and certain
hourly employees in the United States. 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. Effective at the end of
1999, the two defined benefit plans for the salaried and hourly employees in the
United States were merged into a single plan. Benefits provided did not change
as a result of the plan merger.
Certain employees in a wholly owned Canadian subsidiary are provided
pension and survivor benefits. The following disclosures include the results
from this foreign plan, which is relatively small compared to the plan discussed
above.
The components of pension expense are listed below.
2000 1999 1998
--------- --------- ---------
(thousands)
Service cost $3,307 $3,685 $3,064
Interest cost 5,667 5,121 4,721
Expected return on plan assets (6,371) (5,708) (5,953)
Amortization
Transition asset (75) (75) (75)
Prior service cost (240) (240) (245)
(Gains) losses and other 179 819 111
------ ------ ------
Total $2,467 $3,602 $1,623
====== ====== ======
The following table sets forth the changes in obligations and assets, and
outlines the development of the funded status and amounts recognized in the
accompanying consolidated balance sheets.
F-14
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. RETIREE BENEFIT PLANS (continued)
December 31, December 31,
2000 1999
------------ ------------
(thousands)
Change in Benefit Obligation
Benefit obligations at beginning of year $ 75,220 $ 77,451
Service cost 3,307 3,685
Interest cost 5,667 5,121
Amendments - 85
Benefits paid (4,207) (3,933)
Actuarial loss (gain) 4,833 (7,189)
-------- --------
Projected benefit obligation at end of year $ 84,820 $ 75,220
======== ========
Change in Plan Assets
Fair value of plan assets at beginning of year $ 65,102 $ 58,378
Actual return on plan assets (3,075) 9,506
Company contributions 9,299 1,656
Benefits paid (4,207) (3,933)
Other (920) (505)
-------- --------
Fair value of plan assets at end of year $ 66,199 $ 65,102
======== ========
Funded Status
Plan assets in excess of (less than) benefit obligation $(18,621) $(10,118)
Unamortized transition (asset) obligation (590) (665)
Unamortized prior service cost (1,832) (2,072)
Unamortized net (gains) losses 22,578 7,565
-------- --------
Net prepaid assets (accrued liabilities) $ 1,535 $ (5,290)
======== ========
Amounts Recognized in the Consolidated Balance Sheets
Prepaid benefit costs $ 207 $ 114
Accrued benefit liability (16,480) (8,613)
Intangible assets 268 296
Accumulated other comprehensive loss (a) 17,540 2,913
-------- --------
Net amount recognized $ 1,535 $ (5,290)
======== ========
(a) Minimum pension liability.
Significant assumptions used in the calculation of pension expense and
obligations are listed below.
2000 1999 1998
---------- ---------- ----------
Expected long-term rate of return on plan assets (a) 10.0% 10.0% 10.0%
Discount rate on projected benefit obligations 7.25% 7.5% 6.5%
Rate of compensation increase 4.0% 4.0% 4.0%
(a) Beginning in 2001, the expected long-term rate of return on plan assets
assumption will be lowered to 9.0%.
The Company's funding policy is to contribute annually 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").
F-15
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. RETIREE BENEFIT PLANS (continued)
At December 31, 2000 and 1999, included in plan assets were 420,000 shares
of the Company's stock. In 1994, 250,000 shares were purchased for $2.5 million,
and in 1995, 170,000 shares were purchased for $1.6 million. The value of the
plan's investment in the Company's stock was approximately $2.3 million and $3.5
million at December 31, 2000 and 1999, respectively. Plan assets at the end of
1998 included shares of Trace Global Opportunities Fund, which was a related
party to Trace. The shares were purchased during 1995 and 1997, at an aggregate
cost of $5.0 million. The value of the plan's investment in Trace Global
Opportunities Fund, was approximately $4.3 million at December 31, 1998. In
1999, Trace divested its interest in the Trace Global Opportunities Fund. The
fund changed its name to the GLS Global Opportunities Fund, which is not a
related party to the Company. During 1998, 250,000 shares of United Auto Group
("UAG"), which was a related party to Trace, were purchased for approximately
$4.8 million. The value of the UAG shares was $2.2 million at December 31, 1999.
During the fourth quarter of 2000, all of the UAG shares were sold for $1.8
million.
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.
The components of retiree medical and life insurance benefits expense are
listed below.
2000 1999 1998
-------- -------- --------
(thousands)
Service cost $15 $20 $10
Interest cost 57 62 46
Amortization
Prior service costs (6) (6) (35)
(Gains) losses and other (27) (21) (29)
--- --- ---
Total $39 $55 $(8)
=== === ===
The following table outlines the changes in obligations and benefit
payments, and outlines the development of the funded status and amounts
recognized in the accompanying consolidated balance sheets.
December 31, December 31,
2000 1999
------------ ------------
(thousands)
Change in Benefit Obligation
Benefit obligations at beginning of year $ 868 $ 651
Service cost 15 20
Interest cost 57 62
Employee contributions 28 28
Benefits paid (433) (164)
Amendments - 363
Actuarial loss (gain) 228 (92)
------- -------
Projected benefit obligation at end of year $ 763 $ 868
======= =======
Change in Plan Assets
Fair value of plan assets at beginning of year $ - $ -
Company contributions 405 136
Employee contributions 28 28
Benefits paid (433) (164)
------- -------
Fair value of plan assets at end of year $ - $ -
======= =======
F-16
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. RETIREE BENEFIT PLANS (continued)
December 31, December 31,
2000 1999
------------ ------------
(thousands)
Funded Status of the Plan
Plan assets in excess of (less than) benefit obligation $ (763) $ (868)
Unamortized prior service cost (67) (73)
Unamortized net (gains) losses (389) (644)
------- -------
Net prepaid assets (accrued liabilities) $(1,219) $(1,585)
======= =======
Significant assumptions used in the calculation of retiree and life
insurance benefit expense and obligations are listed below.
2000 1999 1998
---------- ---------- ----------
Discount rates on projected benefit obligations 7.25% 7.5% 6.5%
Health care cost increase 7.0% 7.5% 6.0%
The health care cost increase assumption was revised during 1999. The rate
will gradually be reduced to 5.0% by 2005. 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.
6. COMPENSATION PLANS
Stock Options
The 1993 stock option plan, as amended, provides for the issuance of
nonqualified and incentive stock options for common stock. Officers and
executive employees of the Company, its subsidiaries and affiliates are eligible
to participate. Directors of the Company are also 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 each such option is at the discretion of the Company, except that the
term cannot exceed ten years. During 2000, 25,000 options were granted to a
director of the Company in exchange for consulting services. Also in 2000,
60,000 options were granted to non-employee directors. These options are
included in the stock activity disclosure below and the options carry the same
terms and conditions as options granted to employees under the 1993 stock option
plan, as amended. During 1999, 750,450 options were granted with a three-year
vesting period. All other options outstanding at year-end 2000 were granted with
a five-year vesting period and a ten-year term.
A summary of stock option activity is presented below.
2000 1999 1998
----------------------- ----------------------- --------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
--------- ---------- --------- ---------- --------- ----------
Outstanding at beginning of year 2,299,649 $7.94 1,388,916 $7.02 1,439,049 $ 7.08
Granted 885,250 5.93 1,067,950 6.11 132,750 13.22
Exercised (3,514) 6.88 (39,728) 6.88 (82,440) 7.03
Forfeited (201,275) 7.79 (117,489) 9.08 (100,443) 9.84
--------- ------ --------- ------ --------- ------
Outstanding at end of year 2,980,110 $7.35 2,299,649 $7.94 1,388,916 $ 9.41
========= ===== ========= ===== ========= ======
Exercisable at end of year 1,145,727 $8.16 803,303 $8.36 549,124 $ 7.02
========= ===== ========= ===== ========= ======
F-17
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. COMPENSATION PLANS (continued)
Listed below is a summary of the stock options outstanding and exercisable
at year-end 2000.
Outstanding
Weighted Weighted
Exercise Average Average
Price Exercise Remaining
Range Options Price Life-Years
---------------- ---------- ----------- ----------
$ 5.06 - 5.75 801,475 $ 5.29 8.91
6.06 - 6.50 510,975 6.42 8.32
6.56 - 6.88 1,004,327 6.72 7.49
7.88 - 14.00 663,333 11.53 7.02
Exercisable
Weighted Weighted
Exercise Average Average
Price Exercise Remaining
Range Options Price Life-Years
---------------- ---------- ----------- ----------
$ 5.44 - 6.50 294,900 $ 5.96 8.31
6.88 485,327 6.88 5.52
9.00 - 14.00 365,500 11.65 6.89
Options granted were issued with an exercise price equal to the fair market
value at the date of the grant. During 1996, the Company granted 202,240 options
with a weighted average market price on the date of grant of $6.52. The 1996
aggregate difference of $1.1 million between the fair market value of the
options at the date of grant and the option price was charged to expense over
the five-year vesting period which ended December 2000. Total compensation
expense relating to options amounted to approximately $0.2 million in 2000, 1999
and 1998. The consulting expense associated with the 25,000 options granted to a
director of the Company was less than $0.1 million and will be recognized over
the five-year vesting period.
The Company applies the provisions of Accounting Principles Board Opinion
No. 25 ("Accounting for Stock Issued to Employees") and related interpretations
("APB 25") in accounting for its stock-based compensation plans. Accordingly,
compensation expense has been recognized in the consolidated financial
statements with respect to the above plans in accordance with APB 25. Had
compensation costs for the above plans been determined based on the fair value
of the options at the grant dates under those plans consistent with the methods
under Statement of Financial Accounting Standards No. 123 ("Accounting for Stock
Based Compensation"), the Company's income from continuing operations and
earnings (loss) per share would have the pro forma amounts indicated below:
2000 1999 1998
------------ ------------ ------------
(thousands, except per share data)
Income (loss) before extraordinary loss
As reported $17,013 $19,716 $(69,853)
======= ======= ========
Pro forma $15,750 $18,719 $(70,270)
======= ======= ========
Basic earnings (loss) per share -
before extraordinary loss
As reported $ 0.69 $ 0.79 $ (2.79)
======= ======= ========
Pro forma $ 0.63 $ 0.75 $ (2.81)
======= ======= ========
Diluted earnings (loss) per share -
before extraordinary loss
As reported $ 0.67 $ 0.78 $ (2.79)
======= ======= ========
Pro forma $ 0.62 $ 0.74 $ (2.81)
======= ======= ========
F-18
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. COMPENSATION PLANS (continued)
The fair value of each option was estimated on the grant date using the
Black-Scholes option pricing model. Based on the assumptions listed below, the
weighted average fair value of options granted was $2.52 per option in 2000,
$2.30 per option in 1999 and $4.74 per option in 1998.
2000 1999 1998
---------- ---------- ----------
Expected life in years 3 3 3
Risk-free interest rate 6.11% 5.21% 5.40%
Volatility 55.00% 48.00% 45.00%
Dividend yield 0.00% 0.00% 0.00%
Incentive Compensation
Most of the Company's salaried employees participate in incentive
compensation programs. These programs are based on the consolidated results of
the Company and on the results of business segments. Incentive compensation
expense was approximately $1.5 million in 2000, $3.0 million in 1999 and $0.3
million in 1998.
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 for 2000, 1999 and 1998 was approximately $1.1 million, $1.0
million and $0.9 million, respectively.
7. OTHER INCOME (EXPENSE), NET
Other expense, net in 2000 totaled $3.0 million and primarily consisted of:
$1.7 million loss on the disposal of fixed assets, $1.2 million of costs
associated with a buyout proposal (see Note 19) and $0.7 million of letter of
credit fees offset by $0.6 million of interest income.
As discussed in Note 3, during the first quarter of 1999 a $4.2 million
gain was recognized on the sale of the corporate aircraft. Interest income
totaled $0.5 million in 1999. Losses on the disposal of fixed assets and letter
of credit fees related to the GFI Transaction (see Note 13) partially offset
these income items.
Other income (expense), net in 1998 primarily consisted of: $6.5 million of
costs associated with a buyout proposal (see Note 19); $3.1 million of fees and
costs related to the GFI Transaction, as defined; $3.0 million of foreign
currency losses in Mexico; and a $1.1 million reduction in the value of the
Company's investment in the Trace Global Opportunities Fund. These expenses in
1998 were partially offset by approximately $1.9 million of interest income.
8. INCOME TAXES
The sources of income (loss) before the provision for income taxes and
extraordinary loss are listed below.
2000 1999 1998
------------ ------------ ------------
(thousands)
United States $14,877 $19,243 $(1,318)
Foreign 4,975 2,935 (10,293)
------- ------- --------
Income (loss) before provision for income taxes
and extraordinary loss $19,852 $22,178 $(11,611)
======= ======= ========
F-19
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. INCOME TAXES (continued)
Listed below are the components of the provision for income taxes included
in the statements of operations.
2000 1999 1998
------------ ------------ ------------
(thousands)
Provision for income taxes - before extraordinary loss $ 2,839 $ 2,462 $ 58,242
Extraordinary loss on early extinguishment
of debt - - (1,278)
------- ------- --------
Total consolidated provision for income taxes $ 2,839 $ 2,462 $ 56,964
======= ======= ========
A reconciliation of the statutory federal income tax to the income tax
before extraordinary loss is listed below.
2000 1999 1998
------------ ------------ ------------
(thousands)
Statutory income taxes $ 6,948 $ 7,762 $ (4,064)
State income taxes, net of federal benefit 825 1,060 -
Increase (decrease) in valuation allowance (6,939) (7,300) 52,573
Amortization of cost in excess of assets acquired 1,364 1,385 1,505
Write-off excess cost - - 770
Costs associated with buyout proposal - - 1,750
Limitation on the utilization of foreign tax benefits - - 3,800
Other, net 641 (445) 1,908
------- -------- --------
Total $ 2,839 $ 2,462 $ 58,242
======= ======= ========
The provision for income taxes is summarized as follows:
2000 1999 1998
------------ ------------ ------------
(thousands)
Current
Federal $ - $ 300 $ 3,391
State 160 238 -
Foreign 2,541 1,117 673
------- ------- --------
Total current 2,701 1,655 4,064
------- ------- --------
Deferred
Federal 6,083 8,247 378
State 920 837 -
Foreign 74 (977) (51)
------- ------- --------
Total deferred 7,077 8,107 327
------- ------- --------
Change in valuation allowance (6,939) (7,300) 52,573
------- ------- --------
Total provision for income taxes $ 2,839 $ 2,462 $ 56,964
======= ======= ========
The tax effect of the temporary differences that give rise to deferred
income tax assets and liabilities are listed below.
F-20
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. INCOME TAXES (continued)
December 31, December 31,
2000 1999
------------ ------------
Deferred income tax assets (thousands)
Inventory basis differences $ 777 $ 781
Employee benefit accruals 12,561 7,126
Allowances and contingent liabilities 8,225 8,987
Restructuring and plant closing accruals 3,590 4,894
Other 6,762 10,977
Net operating loss carryforwards 69,229 67,264
Capital loss carryforwards 2,105 2,105
Valuation allowance for deferred income tax assets (71,180) (73,826)
------- -------
Deferred income tax assets 32,069 28,308
------- -------
Deferred income tax liabilities
Basis difference in property, plant and equipment (23,854) (23,587)
Other (12,106) (8,593)
------- -------
Deferred income tax liabilities (35,960) (32,180)
------- -------
Net deferred income tax liabilities $(3,891) $(3,872)
======= =======
The 2000 and 1999 effective tax rates were reduced by the partial reversal
of the deferred income tax asset valuation allowance 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 tax
provision. Additionally, the valuation allowance was reduced to offset the net
deferred Federal tax liability generated in 2000 and 1999.
The 1998 provision for income taxes consisted primarily of an increase in
valuation allowance for deferred income tax assets.
The Company has determined that it will be more likely than not to have
insufficient future income to utilize its net operating loss carryforwards and
realize other deferred income tax assets. In addition, the Company did not
recognize the tax benefits associated with net operating loss carryforwards in
Mexico since it appears likely that the net operating loss carryforwards will
not be able to be realized in the near future.
During 1998, the valuation allowance for deferred income tax assets and net
deferred income tax assets decreased by $9.1 million primarily due to the
reduction of capital loss carryforwards associated with the transfer of General
Felt's common stock in connection with the GFI Transaction. In addition, during
1998, deferred income tax assets were increased by $8.7 million associated with
a change in the income tax basis of Foamex Carpet.
The Company will continually review the adequacy of the valuation allowance
and recognize benefits only as reassessment indicates that it is more likely
than not that the benefits will be realized. At December 31, 2000, the Company
had approximately $178.5 million of net operating loss carryforwards for federal
income tax purposes expiring from 2010 to 2020. Also at year-end 2000, there
were $0.3 million of alternative minimum tax credits carryforwards.
9. EXTRAORDINARY LOSSES
In 1998, extraordinary losses of $1.9 million (net of income tax benefits
of $1.3 million), or $.08 per common share - basic, were recorded. The loss was
in connection with the GFI Transaction, and related to the early extinguishment
of approximately $125.1 million of term loans under a Foamex L.P. credit
facility. The extraordinary loss was generated entirely from the write-off of
debt issuance costs.
F-21
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. EARNINGS (LOSS) PER SHARE
The calculation of earnings (loss) per share is presented in the table
below.
2000 1999 1998
------------ ------------ ------------
(thousands, except per share amounts)
Basic earnings (loss) per share
Income (loss) before extraordinary loss $ 17,013 $ 19,716 $(69,853)
======== ======== ========
Average common stock outstanding 24,814 25,053 24,996
======== ======== ========
Basic earnings (loss) per share $ 0.69 $ 0.79 $ (2.79)
======== ======== ========
Diluted earnings (loss) per share
Income (loss) before extraordinary loss available
for common stock and dilutive securities $ 17,013 $ 19,716 $(69,853)
======== ======== ========
Average common stock outstanding 24,814 25,053 24,996
Common stock equivalents resulting from
Stock options (a) (b) 149 203 -
Warrants (c) - - -
Convertible preferred stock (d) 245 - -
-------- -------- --------
Average common stock and dilutive
equivalents 25,208 25,256 24,996
======== ======== ========
Diluted earnings (loss) per share $ 0.67 $ 0.78 $ (2.79)
======== ======== ========
(a) In periods with a loss, stock options and warrants were not included in the
calculations because they were anti-dilutive.
(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 totaled 1,715,000 in 2000 and 849,000 in 1999.
(c) All warrants expired without being exercised in 1999, as discussed in Note
17.
(d) Series B Preferred Stock was issued during the fourth quarter of 2000 (Note
17) and is convertible into 1,500,000 common shares.
11. INVENTORIES
The components of inventory are listed below.
December 31, December 31,
2000 1999
------------ ------------
(thousands)
Raw materials and supplies $ 66,690 $67,520
Work-in-process 11,580 11,574
Finished goods 22,064 18,788
-------- -------
Total $100,334 $97,882
======== =======
F-22
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. SHORT-TERM BORROWINGS
Foamex Canada Inc., a wholly owned subsidiary of Foamex L.P., has a
short-term credit facility that provides for $8.0 million of Canadian dollar
loans (U.S. dollar equivalent of $5.2 million) of which up to $2.0 million are
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 1/2% as of December 31, 2000. On U.S. dollar loans, interest
is based on the bank's U.S. dollar base rate in Canada plus 1/2% as of December
31, 2000. At year-end 2000, there were no short-term borrowings outstanding and
$5.2 million was available. The weighted average interest rate on short-term
borrowings outstanding at year-end 1999 was 7.3%.
13. LONG-TERM DEBT
The components of long-term debt are listed below.
December 31, December 31,
2000 1999
------------ ------------
Foamex L.P. Credit Facility (thousands)
Term Loan B (1) $ 77,136 $ 81,874
Term Loan C (1) 70,124 74,431
Term Loan D (1) 101,565 107,800
Revolving credit facility (1) 145,904 113,685
Foamex Carpet Credit Facility (2) - -
9 7/8% Senior subordinated notes due 2007 (3) 150,000 150,000
13 1/2% Senior subordinated notes due 2005 (includes
$8,308 and $10,100 of unamortized debt premium) (3) 106,308 108,100
Industrial revenue bonds (4) 7,000 7,000
Subordinated note payable (net of unamortized
debt discount of $49 and $232) (4) 2,289 4,444
Other 4,198 7,076
-------- --------
664,524 654,410
Less current portion 8,356 7,866
-------- --------
Long-term debt-unrelated parties $656,168 $646,544
======== ========
The components of related party long-term debt are listed below.
December 31, December 31,
2000 1999
------------ ------------
(thousands)
Foamex/GFI Note (4) $ - $ 34,000
Note payable to Foam Funding LLC (5) 47,385 55,283
-------- --------
47,385 89,283
Less current portion 15,795 10,530
-------- --------
Long-term debt - related party $ 31,590 $ 78,753
======== ========
(1) Subsidiary debt of Foamex L.P., guaranteed by the Company and FMXI, Inc.
(2) Subsidiary debt of Foamex Carpet, guaranteed by the Company.
(3) Subsidiary debt of Foamex L.P. and FCC.
(4) Subsidiary debt of Foamex L.P.
(5) Subsidiary debt of Foamex Carpet.
F-23
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. LONG-TERM DEBT (continued)
Foamex L.P. Credit Facility
At December 31, 2000, Foamex L.P. had a credit facility (the "Foamex L.P.
Credit Facility") with a group of banks which provided for a revolving credit
facility commitment of $177.5 million and three term loans with an outstanding
balance totaling $248.8 million. 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, as discussed in Note 1. Amendments in 1998 provided
for a $2.5 million quarterly reduction of the availability under the revolving
credit facility, which extends through June 2003. On January 2, 2001, the
revolving credit facility commitment was $175.0 million with the fourth quarter
2000 reduction applied on January 2nd because the last day of 2000 was a Sunday.
Borrowings under the Foamex L.P. Credit Facility are collateralized by
substantially all of the assets of Foamex L.P. on a pari passu basis with the
IRBs (described below); however, the rights of the holders of the applicable
issue of the IRBs to receive payment upon the disposition of the collateral
securing such issue of the IRBs has been preserved.
In response to financial conditions at year-end 1998, amendments to debt
agreements were executed during the first half of 1999. As a result, the Foamex
L.P. Credit Facility, which was amended and restated in February 1998, was
further amended and restated in June 1999 to modify financial covenants for net
worth, interest coverage, fixed charge coverage and leverage ratios through
December 2006. The agreement was also amended to no longer permit Foamex L.P. to
make certain cash payments, including the payment of an annual management fee of
$3.0 million to a subsidiary of Trace and distributions to the Company, and to
limit future investments in foreign subsidiaries and joint ventures. The "change
of control" definition under the agreement was also modified to conform to the
definition discussed in "change of control" in Note 1. Changes in the interest
rate structure, effective in 2000, were also made and are discussed below.
Foamex L.P. was in compliance with this agreement at year-end 2000 and 1999.
At year-end 2000, interest was based on the combination of a variable rate
consisting of the higher of (i) the base rate of The Bank of Nova Scotia or (ii)
the Federal Funds rate plus 0.5% plus a margin. The margins for revolving, Term
B, Term C and Term D loans were 2.25%, 2.50%, 2.75% and 2.875%, respectively. At
the option of Foamex L.P., portions of the outstanding loans are convertible
into LIBOR based loans plus 1.0% added to the margins identified above. The
effective interest rates for the Foamex L.P. Credit Facility at the end of 2000
ranged between 10.31% and 10.69%. Interest capitalized as a component of the
construction costs of plant and equipment totaled $0.8 million in 2000.
Effective January 1, 2000, the interest rate on outstanding borrowings
under the Foamex L.P. Credit Facility will increase by 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 adjustments to the interest rate on borrowings is reset to
zero. During 2000, basis point adjustments were incurred in the first three
quarters, beginning with 25 basis points in the first quarter and ending with a
cumulative impact of 75 basis points by the end of the third quarter. There was
no basis point adjustments for the fourth quarter of 2000. At December 31, 2000,
the calculated leverage ratio was 5.3 to 1.00. Consequently, the 25 basis point
adjustment will be applicable for the calculation of interest in 2001, effective
upon delivery of the financial statements to the lenders.
Available borrowings under the revolving credit facility totaled $10.5
million at year-end 2000. Letters of credit outstanding at December 31, 2000
totaled $21.1 million.
As part of the Foamex L.P. Credit Facility, excess cash flow generated
annually, as defined, is required to prepay portions of Term B, C and D loans.
There was no required prepayment at year-end 2000. The prepayment amount
determined for 1999 was $13.3 million and was financed through revolving loans
under the facility. The 1999 required payment was made during the second quarter
of 2000.
F-24
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. LONG-TERM DEBT (continued)
Foamex Carpet Credit Facility
Foamex Carpet has a revolving credit facility (the "Foamex Carpet Credit
Facility"), which provides a commitment of $15.0 million through February 2004.
During 1999, amendments modified the financial covenants for net worth, interest
coverage, fixed charge coverage and leverage ratios. Also, effective June 30,
1999, the interest rate on outstanding borrowings under the Foamex Carpet Credit
Facility increased by 25 basis points.
There were no borrowings outstanding under the credit facility at year-end
2000 and available borrowings totaled $15.0 million. The interest rate was based
on the combination of a variable rate plus a margin. The variable rate is the
same as the one defined in the Foamex L.P. Credit Facility, discussed above, and
the margin is 2.25%. At the option of Foamex Carpet, portions of the outstanding
loans are convertible into LIBOR based loans plus 3.25%.
Borrowings under the Foamex Carpet Credit Facility are collateralized by
substantially all of the assets of Foamex Carpet on a pari passu basis with the
Note Payable to Foam Funding LLC (described below).
9 7/8% Senior Subordinated Notes
The 9 7/8% Senior Subordinated Notes were issued by Foamex L.P. and FCC and
are due on June 15, 2007. The notes represent uncollateralized general
obligations of Foamex L.P. and are subordinated to all Senior Debt, as defined
in the Indenture. Interest is payable June 15 and December 15. The notes may be
redeemed at the option of Foamex L.P., in whole or in part, at any time on or
after June 15, 2002. The initial redemption is at 104.938% of their principal
amount, plus accrued and unpaid interest, as defined, if any, thereon to the
date of redemption and declining 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 and the
Subordinated Note Payable (described below).
13 1/2% Senior Subordinated Notes
The 13 1/2% Senior Subordinated Notes were issued by Foamex L.P. and FCC
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 is at 106.75% of
their principal amount, plus accrued and unpaid interest, if any, thereon to the
date of redemption and declining to 100.0% on or after August 15, 2004.
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 and
to the Subordinated Note Payable (described above).
Industrial Revenue Bonds ("IRBs")
IRB debt includes a $1.0 million bond that matures in 2005 and a $6.0
million bond that matures in 2013. Interest is based on a variable rate, as
defined, with options available to Foamex L.P. to convert to a fixed rate. At
the end of 2000, the interest rate was 4.85% on the $6.0 million bond and 4.65%
on the $1.0 million bond. The maximum interest rate for either of the IRBs is
15.0% per annum.
F-25
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. LONG-TERM DEBT (continued)
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 $10.6 million at December 31, 2000 and letters of credit
approximating $7.3 million.
Subordinated Note Payable
This note payable was issued during 1993 to John Rallis, a former President
and Chief Operating Officer of the Company. The note was issued by Foamex L.P.
in connection with the 1993 acquisition of Great Western Foam Products
Corporation and certain related entities and assets. The note carries a maximum
interest rate of 6.0% and the principal is payable in three equal annual
installments that began in May 1999 and end in May 2001.
Other
At year-end 2000, other debt primarily included a term loan held by a
majority owned Mexican subsidiary. Quarterly principal payments are due on the
term loan through its maturity in May 2002. The interest rate at year-end 2000
was 11.11%.
Related Party - Foamex/GFI Note
As a result of the GFI Transaction, discussed below, Foamex L.P. owed a
$34.0 million promissory note payable to Foam Funding LLC. Interest was based on
a variable rate equal to 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 L.P.,
the note was convertible to a LIBOR-based interest rate plus 0.75%.
During the first quarter of 2000, the Foamex/GFI Note was repaid with
borrowings under the Foamex L.P. revolving credit facility. The $34.5 million
letter of credit that was outstanding at year-end 1999 to collateralize
principal and interest payable under the Foamex/GFI Note was also terminated. At
year-end 1999, the note was recognized as long-term in the consolidated balance
sheet because of the ability and intent, evidenced by the letter of credit, to
refinance the debt on a long-term basis.
Related Party - Note Payable to Foam Funding LLC
As part of the GFI Transaction, discussed below, Foamex Carpet entered into
a $70.2 million promissory note payable to Foam Funding LLC. Principal is
payable in quarterly installments that began in June 1998 with a final
installment in February 2004. Interest is 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 is convertible into LIBOR based loans plus 3.25%. As of
December 31, 2000, the interest rate for borrowings was 9.94%.
Amounts outstanding under the Note Payable to Foam Funding LLC are
collateralized by all of the assets of Foamex Carpet on a pari passu basis with
the Foamex Carpet Credit Facility.
GFI Transaction
On February 27, 1998, the Company and certain of its affiliates completed a
series of transactions which changed the Company's structure (collectively, the
"GFI Transaction"). Prior to the consummation of these transactions, Foamex L.P.
defeased the $4.5 million outstanding principal amount of its 9 1/2% senior
secured notes due 2000. Foamex L.P. settled its intercompany payables to General
Felt Industries, Inc. ("General Felt") with $4.8 million in cash and a
promissory note in the aggregate principal amount of $34.0 million supported by
a $34.5 million letter of credit under the Foamex L.P. Credit Facility (the
"Foamex/GFI Note"). The initial transaction resulted in the transfer from Foamex
L.P. to Foam Funding LLC, an indirect wholly owned subsidiary of Trace, of all
of the outstanding common stock of General Felt, in exchange for (i) the
assumption by Foam Funding LLC of
F-26
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. LONG-TERM DEBT (continued)
$129.0 million of Foamex L.P.'s indebtedness and (ii) the transfer by Foam
Funding LLC to Foamex L.P. of a 1% non-managing general partnership interest in
Foamex L.P. As a result, General Felt ceased being a subsidiary of Foamex L.P.
and was relieved from all obligations under Foamex L.P.'s 9 7/8% senior
subordinated notes due 2007 and 13 1/2% senior subordinated notes due 2005. Upon
consummation of the initial transaction, Foamex Carpet, a newly formed wholly
owned subsidiary of the Company, the Company, Foam Funding LLC, and General Felt
entered into an Asset Purchase Agreement dated February 27, 1998, in which
General Felt sold substantially all of its assets (other than cash, the
Foamex/GFI Note and its operating facility in Pico Rivera, California) to Foamex
Carpet in exchange for (i) $20.0 million in cash and (ii) a promissory note
issued by Foamex Carpet to Foam Funding LLC in the aggregate principal amount of
$70.2 million. The $20.0 million cash payment was funded with a distribution by
Foamex L.P. Upon consummation of the transactions contemplated by the Asset
Purchase Agreement, Foamex Carpet entered into a credit agreement with the
institutions from time to time party thereto as issuing banks, and Citicorp USA,
Inc. and The Bank of Nova Scotia, as administrative agents, which provided for
up to $20.0 million in revolving credit borrowings. Foamex Carpet conducts the
carpet cushion business previously conducted by General Felt. Also, Foam Funding
LLC retained ownership of one of General Felt's operating facilities, which is
being leased to Foamex Carpet, and the $34.0 million Foamex/GFI Note.
No gain was recognized on the GFI Transaction. The Company has continued to
account for these net assets using the carryover basis of Foamex L.P. The $129.0
million of debt assumed by Foam Funding LLC in the GFI Transaction was accounted
for as an extinguishment of debt, which resulted in an extraordinary loss of
approximately $1.9 million, net of income taxes. The 1% non-managing general
partnership interest acquired in connection with the GFI Transaction was
accounted for as a redemption of equity. By virtue of the transfer of General
Felt stock and the subsequent merger of General Felt into Foam Funding LLC, the
Pico Rivera, California facility was transferred to Foam Funding LLC; no gain
was recognized on the transfer since the Company leased-back the facility. The
net effect resulted in a charge to stockholders' deficit of approximately $0.5
million.
Interest Rate Swap Agreements
Prior to 1999, the Company entered into interest rate swaps to lower
funding costs and/or to manage interest costs and exposure to changing interest
rates. The Company did not hold or issue financial instruments for trading
purposes.
In connection with a refinancing plan in 1997, the Company's then existing
interest rate swap agreements with a notional amount of $300.0 million were
considered to be effectively terminated since the underlying debt was
extinguished. These interest rate swap agreements had an estimated fair value
liability of $8.2 million at the date of the refinancing plan which is included
in the extraordinary loss on the early extinguishment of debt. In lieu of a cash
payment for the estimated fair value of the then existing interest rate swap
agreements, the Company entered into an amendment of the then existing interest
rate swap agreements resulting in one interest rate swap agreement with a
notional amount of $150.0 million through June 2007. Accordingly, the $8.2
million fair value liability has been recorded as a deferred credit, which is
being amortized as a reduction in interest and debt issuance expense on a
straight-line basis through June 2007. On January 8, 1998, the Company entered
into a new amendment to its interest rate swap agreement. The new amendment
provided for an interest rate swap agreement with a notional amount of $150.0
million through June 2002. In September 1998, the Company sold its existing
interest rate swap agreement for a net gain of approximately $1.0 million.
Accordingly, the $1.0 million gain has been recorded as a deferred credit, which
is being amortized through June 2007, which is the maturity date of the
underlying debt.
See Future Accounting Changes - Accounting for Derivatives and Hedging
Activities included in Note 2, which discusses a balance sheet reclassification
required in 2001 related to these swap transactions.
The effect of the interest rate swaps was a favorable adjustment to
interest and debt issuance expense of $0.7 million in 1998. The effect of the
amortization of the deferred credits was a favorable adjustment to interest and
debt issuance expense of $0.9 million for 2000, 1999 and 1998.
F-27
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. LONG-TERM DEBT (continued)
Debt Covenants
The indentures, credit facilities and other indebtedness agreements contain
certain covenants that will limit, among other things to varying degrees, 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 Interest, 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, the
Company was available to be paid by its subsidiaries as of December 31, 2000,
funds only to the extent to enable the Company to meet its tax payment
liabilities.
Foamex L.P. and Foamex Carpet were in compliance with the various financial
covenants of their loan agreements as of December 31, 2000 and 1999.
Various Foamex L.P. and Foamex Carpet debt agreements contain certain
quarterly financial covenants which become more restrictive during 2001. Foamex
L.P. and Foamex Carpet anticipate that they will continue to comply in 2001 with
the quarterly financial covenants in the applicable debt agreements.
Management's current business plans for Foamex L.P. and Foamex Carpet anticipate
customer selling price increases in response to higher raw material costs,
improved working capital management, a reduced capital expenditure program,
declining interest rates, successful implementation of on-going cost savings
initiatives and improved operating efficiencies. The achievement of the business
plans is necessary for compliance with the various financial covenants in 2001.
The possibility exists that certain financial covenants will not be met if
business conditions are other than as anticipated or other unforeseen events
impact results. In the absence of a waiver of or amendment to such financial
covenants, such noncompliance would constitute a default under the applicable
debt agreements, and the lenders would be entitled to accelerate the maturity of
the indebtedness outstanding thereunder. In the event that such noncompliance
appears likely, or occurs, the Company will seek the lenders' approvals of
amendments to, or waivers of, such financial covenants. Historically, the
Company has been able to renegotiate financial covenants and/or obtain waivers,
as required, and management believes such waivers and/or amendments could be
obtained if required. However, there can be no assurance of future amendments or
waivers will be obtained.
Future Obligations on Debt
Scheduled maturities of long-term debt and long-term debt - related party
are shown below (thousands):
2001 $ 24,151
2002 17,976
2003 178,071
2004 54,354
2005 155,273
Balance 273,825
--------
Total 703,650
Unamortized debt premium, net 8,259
--------
Total $711,909
========
F-28
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK
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.
Fair Value of Financial Instruments
The following disclosures of the estimated fair value amounts have been
determined based on the Company's assessment of available market information and
appropriate valuation methodologies.
The estimated fair values of the Company's financial instruments are listed
below.
Carrying Amount Fair Value
--------------- ----------
Liabilities: (thousands)
Total debt - December 31, 2000 $711,909 $595,051
======== ========
Total debt - December 31, 1999 $745,320 $705,340
======== ========
Carrying amounts reported in the consolidated balance sheet for cash and
cash equivalents, accounts receivable, accounts payable, accrued liabilities and
short-term borrowings approximates fair value due to the short-term nature of
these instruments.
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.
15. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
2000 1999 1998
------------ ------------ ------------
(thousands)
Cash paid for interest $75,155 $71,182 $75,260
======= ======= =======
Cash paid for income taxes, net $ 2,962 $ 1,032 $ 2,134
======= ======= =======
Non cash - capital leases $ 53 $ 456 $ 24
======= ======= =======
Non cash - common stock - preferred stock
exchange (Note 1) $ 8,578 $ - $ -
======= ======= =======
16. BUSINESS SEGMENTS
The reportable business segments reflects the Company's management
organization that was structured based on distinct product lines and customers.
F-29
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. BUSINESS SEGMENTS (continued)
An executive vice president heads each operating segment. Each 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 charges. The
Company does not allocate restructuring and other charges to operating segments
because many of the Company's facilities produce products for multiple segments.
Foam Products manufactures and markets foam used by the bedding industry,
the furniture industry and the retail industry. Carpet Cushion Products
manufactures and distributes prime, rebond, sponge rubber and felt carpet
cushion. Automotive Products supplies foam primarily for automotive interior
applications. Technical Products manufactures and markets reticulated foams
(foams that are well suited for filtration, reservoiring, sound absorption and
sound transmissions) and other custom polyester and polyether foams for
industrial, specialty and consumer and safety applications.
The "other" column in the table below represents certain manufacturing
operations in Mexico, corporate expenses not allocated to other business
segments and restructuring and other charges (credits). 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
restructuring and other charges (credits) amount to $6.3 million in 2000, $10.5
million in 1999 and $(9.7) million in 1998.
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.
During 2000 and 1999, sales to a customer, which is included in Automotive
Products, accounted for approximately 12.3% and 11.5%, respectively, of the
Company's net sales. No other customer accounted for more than 10.0% of the
Company's net sales during any of the last three years.
Carpet
Foam Cushion Automotive Technical
Products Products Products Products Other Total
--------- --------- ------------- ---------- ---------- -------------
2000 (thousands)
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
1999
Net sales (a) $527,159 $285,846 $361,806 $92,180 $27,648 $1,294,639
Income (loss) from operations 57,028 8,512 22,547 22,588 (17,617) 93,058
Depreciation and amortization 17,432 8,096 4,823 2,724 2,675 35,750
1998
Net sales (a) $559,690 $314,954 $285,190 $79,140 $21,585 $1,260,559
Income (loss) from operations 35,313 12,005 16,788 14,571 (3,645) 75,032
Depreciation and amortization 18,300 5,529 6,424 2,929 2,203 35,385
United
States Canada Mexico Consolidated
---------- --------- ---------- ------------
2000 (thousands)
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
1999
Net sales (a) $1,082,009 $61,486 $151,144 $1,294,639
Property, plant and equipment, net 193,051 5,406 23,376 221,833
F-30
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. BUSINESS SEGMENTS (continued)
United
States Canada Mexico Consolidated
---------- --------- ---------- ------------
1998 (thousands)
Net sales (a) $1,127,827 $62,529 $70,203 $1,260,559
Property, plant and equipment, net 212,658 4,998 24,517 242,173
(a) As discussed in Note 2, net sales for 1999 and 1998 reflected a
reclassification of certain shipping costs that were billed to customers.
The reclassification impacted Carpet Cushion Products. On a geographic
basis, the reclassification impacted United States net sales in 1999 and
1998.
17. STOCKHOLDERS' DEFICIT
Preferred Stock
There are 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 non cumulative and would be entitled to dividends only if a dividend is
declared on the Company's common stock, rank senior to any future preferred
stock issued by the Company and be entitled to a liquidation preference of $100
per share. No other preferred shares have been issued.
Common Stock
At year-end 2000, there were 4.75 million shares of common stock reserved
for issuance in connection with the stock option plan, discussed in Note 6. Also
included in Note 6 is the number of common shares issued during the last three
years resulting from the exercise of stock options.
Warrants
On July 1, 1999, 116,745 warrants for an aggregate of 0.6 million of common
stock expired without having been exercised. All remaining warrants outstanding
to purchase 1.2 million shares of common stock expired on October 12, 1999,
without being exercised.
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 have authorized the purchase of up to 3.0 million
shares of the Company's common stock. At the end of 2000, 1,989,000 shares have
been purchased under these programs.
Accumulated Other Comprehensive Loss
The accumulated other comprehensive loss consists of the following:
December 31, December 31, December 31,
2000 1999 1998
------------ ------------ ------------
(thousands)
Foreign currency translation adjustment $ (6,921) $(6,011) $(10,965)
Minimum pension liability (a) (16,375) (1,747) (13,756)
-------- ------- --------
$(23,296) $(7,758) $(24,721)
======== ======= ========
F-31
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17. STOCKHOLDERS' DEFICIT (continued)
(a) As discussed in Note 8, a valuation allowance was established in 1998 for
essentially all deferred income tax assets. Accordingly, the minimum
pension liability amounts do not include any of their related tax benefits.
18. 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 is due and payable on demand or, if no demand is
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 promissory note is due and
payable on demand or, if no demand is made, on July 7, 2001, and bears interest
at 2 3/8% plus three-month LIBOR, as defined, per annum payable quarterly in
arrears.
Note 3 includes disclosures regarding 1999 activity concerning Trace
promissory notes payable to Foamex L.P. The Trace notes are included in the
other component of stockholders' deficit, which is consistent with the
recognition in prior years. Based on Trace's financial position discussed in
Note 1, Trace may not be able to pay the aggregate amount of $9.2 million.
Accordingly, the Company did not record interest income on these notes since the
Trace bankruptcy.
Trace Accounts Receivables
At year-end 2000 and 1999, operating accounts receivables from Trace were
approximately $3.4 million. During 1998, an allowance of $3.1 million was
recorded as a restructuring and other charges (credits) due to the financial
difficulties of Trace. The Company established an allowance of $0.3 million
during 1999 for additional operating accounts receivable from Trace. The
allowance was recorded as a restructuring and other charges (credits).
Trace Buyout Negotiations and Related Financing
During 1998, $6.5 million was recorded in other income and expense
associated with negotiations related to a proposed Trace buyout and related
refinancing that was subsequently terminated.
Trace Global Opportunities Fund
During 1997, the Company purchased a $2.0 million investment in Trace
Global Opportunities Fund, which primarily invests in companies organized or
operating outside the G-7 markets and was a related party to Trace. The value of
the Company's investment in Trace Global Opportunities Fund was $0.9 million at
December 31, 1998. The change in value of this investment was recorded as a
charge to other income and expense. In 1999, the investment was sold for $0.9
million.
Trace Management Agreement
Foamex L.P. had a management service agreement with a subsidiary of Trace
pursuant to which general managerial services of a financial, technical, legal,
commercial, administrative and/or advisory nature were provided to Foamex L.P.
During June 1997, the management services agreement was amended to increase the
annual fee from
F-32
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
18. RELATED PARTY TRANSACTIONS AND BALANCES (continued)
$1.75 million to $3.0 million, plus reimbursement of expenses incurred. An
amendment to the Foamex L.P. Credit Facility on June 30, 1999 no longer permits
Foamex L.P. to pay the management fee. On July 29, 1999, Foamex L.P. submitted
formal notice of the termination of the management agreement.
Trace New York Sublease
Prior to September 30, 1999, Foamex L.P. subleased to Trace approximately
5,900 square feet of general, executive and administrative office space in New
York, New York. The terms of the lease were substantially the same terms as
Foamex L.P. leased such space from a third party lessor. The Company has closed
the New York office and Foamex L.P. subleased the premises to a third party at
an amount in excess of Foamex L.P.'s lease commitment.
Foam Funding LLC Debt
Subsidiaries of the Company paid $5.8 million, $7.4 million and $6.4
million of interest on notes payable to Foam Funding LLC during 2000, 1999 and
1998, respectively.
Also, during 2000, 1999 and 1998, subsidiaries of the Company paid $41.9
million, $9.7 million and $5.3 million, respectively, of principal on notes
payable to Foam Funding LLC.
Other
The general director of Foamex de Mexico S.A. de C.V. ("Foamex de Mexico")
which is the Company's operating subsidiary in Mexico has a 5% stock interest in
Foamex de Mexico. A member of the board provides consulting services to the
Company for which fees paid to him in 2000 were $0.1 million, in 1999 were $0.2
million and were $0.1 million in 1998. As discussed in Note 6, 25,000 common
stock options of the Company were granted to member of the board in
consideration of consulting services.
As discussed in Note 13, 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.
During 1999, certain employees of the Company were also employed by Trace.
The Company paid a portion of the total compensation of such employees based on
the amount of time devoted to the Company's matters by such employees in the
aggregate. All such dual employment relationships have been terminated. Such
payments totaled $1.8 million and $2.2 million in 1999 and 1998, respectively.
The Company, Recticel, s.a. ("Recticel"), a European polyurethane foam
manufacturer, whose subsidiary was a former partner of Foamex L.P. and
affiliates of Recticle are current shareholders of the Company, and Beamech
Group Limited, an unaffiliated third party, have an interest in a Swiss
corporation that develops new manufacturing technology for the production of
polyurethane foam including the VPF(SM) manufacturing process.
19. BUYOUT PROPOSALS - HISTORY
On February 9, 2000, the Company announced that it was in discussions with
respect to a proposal involving the acquisition of all of the Company's
outstanding common stock for cash. The Company stated that the proposal was
subject to a number of conditions, including the buyer's due diligence and the
execution of definitive agreements. The Company agreed to an exclusive
negotiating period ending five business days after delivery of its audited
financial statements included in the Company's Annual Report on Form 10-K to the
prospective buyer. On April 5, 2000, the Company announced that discussions with
the potential buyer were terminated with no agreement having been reached. The
Company subsequently terminated the engagement of J.P. Morgan & Company, Inc.
("JP Morgan"), which acted as financial advisor in connection with such
transaction. During the second quarter of 2000, the Company ended discussions
with JP Morgan concerning an additional engagement.
F-33
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
19. BUYOUT PROPOSALS - HISTORY (continued)
On August 5, 1999, the Company announced that its Board of Directors signed
a letter of intent with Sorgenti Chemical Industries, LLC and Liberty Partners
Holdings 20, LLC (collectively, the "Purchasers") for a business combination
providing for $11.50 per share for all of the Company's outstanding common stock
(the "Sorgenti Transaction"). Under the terms of the letter of intent, if the
Company entered into a business combination with another party, the Purchasers
would be entitled to a break-up fee of $6.0 million plus reimbursement of
certain expenses, subject to certain conditions, including the willingness of
the Purchasers to enter into a definitive merger agreement providing for a price
of at least $11.50 per share prior to the expiration of the letter of intent.
The proposed transaction was subject to a number of conditions, including the
negotiation of definitive documents regarding certain conditions relating to the
bank credit facilities and the public debt of the Company's subsidiaries.
Additional issues considered included minimum shareholder acceptance, change of
board membership, and other provisions providing for a higher break-up fee and
expense reimbursement if the Company entered into a business combination
providing a more favorable transaction. On December 15, 1999, the Company
announced that the letter of intent with the Purchasers, which had been
extended, expired by its terms. The Purchasers had submitted a revised bid at a
price and on terms that were less favorable than those contained in the letter
of intent and the Negotiating Committee of the Company's Board of Directors
rejected the revised bid.
In 1998, the Company received an unsolicited buyout proposal from Trace,
the Company's principal stockholder. The Company entered into two merger
agreements, which were subsequently terminated by Trace.
20. 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
(excluding commitments accrued as part of the Company's various
restructuring/consolidation plans) required under operating leases at December
31, 2000 are:
Operating
Leases
---------
(thousands)
2001 $14,644
2002 13,150
2003 10,868
2004 8,006
2005 5,156
Balance 11,010
-------
Total $62,834
=======
Rental expense charged to operations under operating leases approximated
$16.3 million, $16.9 million and $18.9 million for 2000, 1999 and 1998,
respectively. Substantially all such rental expense represented the minimum
rental payments under operating leases.
Litigation - Shareholders
On August 1, 2000, the Company announced that it had reached agreements in
principle with the plaintiffs in the stockholder actions described below
providing for the settlement and dismissal of such actions, subject to certain
conditions, including court approval.
F-34
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
20. COMMITMENTS AND CONTINGENCIES (continued)
The Shareholder Litigation. Beginning on March 17, 1998, six actions, which
were subsequently consolidated under the caption In re Foamex International Inc.
Shareholders Litigation, were filed in the Court of Chancery of the State of
Delaware, and on August 13, 1999, another action, Watchung Road Associates,
L.P., et al. v. Foamex International Inc., et al. (the "Watchung Action"), was
filed in the same court. The two actions were consolidated on May 3, 2000, into
a single action under the caption In re Foamex International Inc. Shareholders
Litigation (the "Delaware Action"). The Delaware Action, a purported derivative
and class action on behalf of the Company and its stockholders, originally named
as defendants the Company, certain of its current and former directors and
officers, Trace and a Trace affiliate. The complaint in the Delaware Action
alleges, among other things, that certain of the defendants breached their
fiduciary duties to the Company in connection with an attempt by Trace to
acquire the Company's publicly traded common stock as well as with a potential
acquisition transaction with a group led by Sorgenti Chemical Industries LLC,
and that certain of the defendants breached their fiduciary duties by causing
the Company to waste assets in connection with a variety of transactions entered
into with Trace and its affiliates. The Delaware Action seeks various remedies,
including injunctive relief, money damages and the appointment of a receiver for
the Company.
On April 26, 1999, a putative securities class action entitled Molitor v.
Foamex International Inc., et al., was filed in the United States District Court
for the Southern District of New York naming as defendants the Company, Trace
and certain current and former officers and directors of the Company, on behalf
of stockholders who bought shares of the Company's common stock during the
period from May 7, 1998 through and including April 16, 1999. The lawsuit
alleged that the defendants violated Section 10(b) of the Securities Exchange
Act of 1934 and Rule 10b-5 by misrepresenting and/or omitting material
information about the Company's financial situation and operations, with the
result of artificially inflating the price of the Company's stock. The lawsuit
also alleged that Trace and Marshall S. Cogan violated Section 20(a) of the
Securities Exchange Act of 1934 as controlling persons of the Company. The
complaint sought class certification, a declaration that defendants violated the
federal securities laws, an award of money damages, and costs and attorneys',
accountants' and experts' fees. On May 18, 1999, a similar action entitled
Thomas W. Riley v. Foamex International Inc., et al., was filed in the same
court. The two actions were consolidated and a consolidated complaint was filed;
the consolidated suit is referred to herein as the "Federal Action."
The Settlements. On August 23, 2000, the Company and the plaintiffs in the
Federal Action entered into a settlement agreement providing that members of the
class of shareholders who purchased shares between May 7, 1998 and April 16,
1999 would receive payments as defined in the agreement. The court approved the
settlement and dismissed the action with prejudice on January 11, 2001, and no
appeals were filed. Payments to class members and plaintiffs' lawyers' fees in
the Federal Action have been paid directly by the Company's insurance carrier on
behalf of the Company.
Under the terms of the agreement in principle to settle the Delaware
Action, the Company agreed that a special nominating committee of the Board of
Directors, consisting of Robert J. Hay as chairman, Stuart J. Hershon, John G.
Johnson, Jr., and John V. Tunney, will nominate two additional independent
directors to serve on the Board. The terms of the agreement also establish the
criteria for the independence of the directors and require that certain
transactions with affiliates be approved by a majority of the disinterested
members of the Board. On September 28, 2000, the Company announced that Raymond
E. Mabus, Jr. was elected to the Company's Board of Directors. On December 21,
2000, the Company announced that Virginia A. Kamsky was elected to the Company's
Board of Directors. The addition of Mr. Mabus and Ms. Kamsky adds two
independent directors and brought the total number of directors to eight. The
parties are negotiating the terms of the settlement agreement and related
documentation. On January 9, 2001, the Court ordered the Watchung Action
dismissed with prejudice only as to the named plaintiffs Watchung Road
Associates, L.P. and Pyramid Trading Limited Partnership. The dismissal did not
have any effect on the claims asserted in the consolidated action.
The settlement of the Delaware Action (assuming a definitive settlement
agreement is reached with plaintiffs) is subject to court approval, which, if
obtained, will resolve all outstanding shareholder litigation against the
Company and its current and former directors and officers. The settlements of
the Federal Action and the Delaware Action involve no admissions or findings of
liability or wrongdoing by the Company or any individuals. If
F-35
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
20. COMMITMENTS AND CONTINGENCIES (continued)
management's assessment of the Company's liability with respect to these actions
is incorrect, such actions could have a material adverse effect on the financial
position, results of operations and cash flows of the Company.
Litigation - Breast Implants
As of March 21, 2001, the Company and Trace were two of multiple defendants
in actions filed on behalf of approximately 2,104 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. In addition, three cases have been filed alleging claims on behalf of
approximately 39 residents of Australia, New Zealand, England, and Ireland. The
Company believes that the number of suits and claimants may increase. 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 under the Bankruptcy Code. 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 the disposition of the matters that are pending or that
may reasonably be anticipated to be asserted should not have a material adverse
effect on either the Company's consolidated financial position or results of
operations. If management's assessment of the Company's liability with respect
to these actions is incorrect, such actions could have a material adverse effect
on the financial position, results of operations and cash flows of the Company.
Litigation - Other
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 financial position or
results of operations of the Company. If management's assessment of the
Company's liability with respect to these actions is incorrect, such actions
could have a material adverse effect on the Company's consolidated financial
position, results of operations and cash flows.
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 and the
remediation of environmental contamination, and as a result, is from time to
time involved in administrative and judicial proceedings and inquiries relating
to environmental matters. As of December 31, 2000, the Company had accruals of
approximately $4.1 million for environmental matters. During 1998, the Company
established an allowance of $1.2 million relating to receivables from Trace for
environmental indemnifications due to the financial difficulties of Trace.
F-36
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
20. COMMITMENTS AND CONTINGENCIES (continued)
The Clean Air Act Amendments of 1990 (the "1990 CAA Amendments") provide
for the establishment of federal emission standards for hazardous air pollutants
including methylene chloride, propylene oxide and TDI, materials used in the
manufacturing of foam. On December 27, 1996, the United States Environmental
Protection Agency (the "EPA") proposed regulations under the 1990 CAA Amendments
that will require manufacturers of slab stock polyurethane foam and foam
fabrication plants to reduce emissions of methylene chloride. The final National
Emission Standard for Hazardous Air Pollutants ("NESHAP") was promulgated
October 7, 1998. NESHAP requires a reduction of approximately 70% of the
emission of methylene chloride for the slab stock foam industry effective
October 7, 2001. The Company believes that the use of alternative technologies,
including VPF(SM), which do not utilize methylene chloride and its ability to
shift current production to the facilities which use these alternative
technologies will minimize the impact of these regulations. The 1990 CAA
Amendments also may result in the imposition of additional standards regulating
air emissions from polyurethane foam manufacturers, but these standards have not
yet been proposed or promulgated.
The Company has reported to the appropriate state authorities that it has
found soil and/or groundwater contamination in excess of state standards at
seven sites. These sites are in various stages of investigation or remediation.
Accordingly, the extent of contamination and the ultimate liability is not known
with certainty for all sites. The Company has accruals of $2.5 million for the
estimated cost of remediation, including professional fees and monitoring costs,
for these sites. During 2000, Foamex L.P., a wholly owned subsidiary of 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 Foamex L.P. The estimated
allocation of future costs for the remediation of this facility is not
significant, based on current information known. 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. Petroleum
contamination was found at one of the sites and the Company has accrued
approximately $0.5 million for the estimated remediation costs. Soil sampling
continues to assess the full extent of contamination.
On November 14, 2000, the United States Occupational Safety and Health
Administration ("OSHA") released the final ergonomics standard ("Ergonomics
Standard"), which applies to the Company, as well as all other employers in the
United States, with certain industry specific exclusions. The Ergonomics
Standard addresses musculoskeletal disorders, including those commonly
referenced as repetitive motion disorders.
The Ergonomics Standard is comprehensive, covering essentially all
employees of the Company in the United States. Although the implementation costs
could be significant, in the present form, the Company does not believe it will
have a negative impact on its competitive position within the industry.
Subsequent to year-end 2000, a joint resolution by the United States House
of Representatives and Senate was approved that repealed the Ergonomics
Standard. The repeal has been submitted to the President of the United States
for his review and signature.
On April 10, 1997, the OSHA promulgated new standards governing employee
exposure to methylene chloride, which is used as a blowing agent in some of the
Company's manufacturing processes. The phase-in of the standards was completed
in 1999 and the Company has developed and implemented a compliance program.
Capital expenditures required and changes in operating procedures are not
anticipated to significantly impact the Company's competitive position.
The Company has been designated as a Potentially Responsible Party ("PRP")
by the EPA with respect to seven sites. Estimates of total cleanup costs and
fractional allocations of liability are generally provided by the EPA or the
committee of PRP's with respect to the specified site. In each case and in the
aggregate, the liability of the Company is not considered to be significant.
F-37
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
20. COMMITMENTS AND CONTINGENCIES (continued)
Although it is possible that new information or future developments could
require the Company to reassess its potential exposure relating to all pending
environmental matters, including those described herein, the Company believes
that, based upon all currently available information, the resolution of such
environmental matters will not have a material adverse effect on the Company's
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 may
be found to exist, that may require expenditures not currently anticipated and
that may be significant.
21. QUARTERLY FINANCIAL DATA (UNAUDITED)
First Second Third Fourth
Quarter Quarter Quarter Quarter
--------- --------- --------- ---------
(thousands, except per share amounts)
2000
Net sales (a) $329,119 $322,721 $309,666 $296,272
Gross profit 43,336 47,373 44,729 36,587
Net income (b) 1,783 7,986 3,785 3,459
Earnings per share
Basic (d) 0.07 0.32 0.15 0.14
Diluted 0.07 0.32 0.15 0.14
1999
Net sales (a) $326,626 $316,809 $330,563 $320,641
Gross profit 43,597 43,777 48,813 44,121
Net income (b) (c) 6,013 3,177 6,128 4,398
Earnings per share
Basic 0.24 0.13 0.24 0.18
Diluted 0.24 0.13 0.24 0.17
(a) As discussed in Note 2, net sales reflect a reclassification of certain
shipping costs that were billed to customers. The reclassification required
shipping costs originally recorded in cost of sales to be recognized in net
sales, with no impact on gross profit or net income. As a result, quarterly
net sales in 2000 previously reported on Form 10-Q, increased in thousands
by $3,257 and $3,612 in the first and second quarters of 2000,
respectively, and by $3,763 and $3,780 in the first and second quarters of
1999, respectively.
(b) Restructuring and other charges (credits) are discussed in Note 4.
(c) Fourth quarter 1999 results were favorably impacted by $1.8 million from
the realization of a business interruption insurance claim partially offset
by fourth quarter adjustments related principally to previously recorded
1999 severance costs.
(d) During the fourth quarter of 2000, 1,500,000 shares of common stock were
exchanged for a new preferred stock series, as discussed in Note 1.
F-38
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 31, December 31,
2000 1999
------------ ------------
ASSETS (thousands)
CURRENT ASSETS
Cash and cash equivalents $ 15 $ 13
Intercompany receivables 308 382
Other current assets 215 161
-------- ------
Total current assets 538 556
OTHER ASSETS 1 1
-------- -------
TOTAL ASSETS $ 539 $ 557
======== =======
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable $ 50 $ 40
Deferred income taxes - 1,140
Other accrued liabilities 2,717 3,061
-------- --------
Total current liabilities 2,767 4,241
LONG-TERM LIABILITIES
Revolving loan with consolidated subsidiary 2,490 676
Notes payable to consolidated subsidiary 2,500 2,500
Deficit in consolidated subsidiaries 154,287 158,122
Deferred income taxes 1,805 -
Other liabilities 1,359 1,399
-------- --------
Total liabilities 165,208 166,938
-------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT
Preferred Stock, par value $1.00 per share:
Authorized 5,000,000 shares
Issued 15,000 shares - Series B 15 -
Common Stock, par value $.01 per share:
Authorized 50,000,000 shares
Issued 27,048,994 and 27,045,480 shares, respectively;
Outstanding 23,559,994 and 25,056,480 shares, respectively 270 270
Additional paid-in capital 96,275 87,475
Accumulated deficit (200,932) (217,945)
Accumulated other comprehensive loss (23,296) (7,758)
Other:
Common Stock held in treasury, at cost:
3,489,000 and 1,989,000 shares, respectively (27,780) (19,202)
Shareholder note receivable (9,221) (9,221)
-------- --------
Total stockholders' deficit (164,669) (166,381)
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 539 $ 557
======== ========
See notes to consolidated financial statements, beginning on Page F-8.
(continued)
S-2
Schedule I
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF OPERATIONS
2000 1999 1998
----------- ------------ ------------
(amounts in thousands except per share amounts)
INTERCOMPANY SALES $ - $ - $ 12,619
COST OF GOODS SOLD - - 12,619
------- ------- --------
GROSS PROFIT - - -
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 961 1,417 (183)
------- ------- --------
INCOME (LOSS) FROM OPERATIONS (961) (1,417) 183
EQUITY IN EARNINGS (LOSS) OF
CONSOLIDATED SUBSIDIARIES 19,652 24,091 (18,260)
INTEREST EXPENSE 444 2,042 2,237
OTHER INCOME (EXPENSE) (1,047) 2 (7,326)
------- ------- --------
INCOME (LOSS) BEFORE INCOME TAX
AND EXTRAORDINARY LOSS 17,200 20,634 (27,640)
INCOME TAX PROVISION 187 918 42,213
------- ------- --------
INCOME (LOSS) BEFORE EXTRAORDINARY LOSS 17,013 19,716 (69,853)
EQUITY IN EXTRAORDINARY LOSS - - (1,917)
------- ------- --------
NET INCOME (LOSS) $17,013 $19,716 $(71,770)
======= ======= ========
BASIC EARNINGS (LOSS) PER SHARE
BEFORE EXTRAORDINARY LOSS $ 0.69 $ 0.79 $ (2.79)
EXTRAORDINARY LOSS - - (0.08)
------- ------- --------
NET EARNINGS (LOSS) $ 0.69 $ 0.79 $ (2.87)
======= ======= ========
DILUTED EARNINGS (LOSS) PER SHARE
BEFORE EXTRAORDINARY LOSS $ 0.67 $ 0.78 $ (2.79)
EXTRAORDINARY LOSS - - (0.08)
------- ------- --------
NET EARNINGS (LOSS) $ 0.67 $ 0.78 $ (2.87)
======= ======= ========
Equity in extraordinary loss includes allocated income tax benefits of $1.3
million for 1998.
See notes to consolidated financial statements, beginning on Page F-8.
(continued)
S-3
Schedule I
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF CASH FLOWS
2000 1999 1998
------------ ------------ ------------
OPERATING ACTIVITIES (thousands)
Net income (loss) $17,013 $ 19,716 $(71,770)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Deferred income taxes 665 164 45,189
Equity in extraordinary loss - - 1,917
Equity in (earnings) losses of consolidated subsidiaries (19,652) (24,091) 18,260
Other 88 (34) 1,253
Changes in operating assets and liabilities,
net of acquisitions:
Intercompany receivables 74 4,241 9,919
Accounts payable 10 40 (10,542)
Other assets and liabilities (34) (3,176) 1,189
------- -------- --------
Net cash used for operating activities (1,836) (3,140) (4,585)
------- -------- --------
INVESTING ACTIVITIES
Investment in consolidated subsidiaries - - (20,000)
Distribution from subsidiaries - 17,204 20,293
Other - 924 -
------- -------- --------
Net cash provided by investing activities - 18,128 293
------- -------- --------
FINANCING ACTIVITIES
Proceeds from revolving loan with consolidated subsidiary 1,814 676 -
Proceeds from (repayments of) note payable to consolidated
subsidiary - (2,490) 2,490
Dividend payments - - (1,245)
Repayments of tax distribution advance - (13,618) -
Proceeds from exercise of stock options 24 270 595
------- -------- --------
Net cash provided by (used for) financing activities 1,838 (15,162) 1,840
------- -------- --------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 2 (174) (2,452)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 13 187 2,639
------- -------- --------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 15 $ 13 $ 187
======= ======== ========
Note: During 1999 and 1998, the Company received from (paid to) its
consolidated subsidiaries distributions of $(0.1) million and $0.3
million, respectively, in accordance with tax sharing agreements. Also,
during 1999, the Company received a special distribution from its
subsidiaries of $17.3 million. The proceeds were used to repay the tax
distribution advance and accrued interest to Foamex L.P.
See notes to consolidated financial statements, beginning on Page F-8.
S-4
Schedule II
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(thousands)
Balance at Charged to Charged to Balance at
Beginning of Costs and other End of
Period Expenses Accounts Deductions Period
------------ ---------- ---------- ---------- ----------
YEAR ENDED DECEMBER 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
======= ======= ======= ======= =======
Deferred Income Tax Asset Valuation Allowance $73,826 $(6,939) $ 4,293 $ - $71,180
======= ======= ======= ======= =======
YEAR ENDED DECEMBER 31, 1999
Allowance for Uncollectible Accounts $ 9,790 $ 2,758 $ - $ 5,074 $ 7,474
======= ======= ======= ======= =======
Reserve for Discounts $ 1,840 $ - $16,846 (1) $16,611 $ 2,075
======= ======= ======= ======= =======
Deferred Income Tax Asset Valuation Allowance $85,250 $(7,300) $(4,124)(2) $ - $73,826
======= ======= ======= ======= =======
YEAR ENDED DECEMBER 31, 1998
Allowance for Uncollectible Accounts $ 6,844 $ 2,611 $ 2,500 (1) $ 2,165 $ 9,790
======= ======= ======= ======= =======
Reserve for Discounts $ 1,238 $ - $12,516 (1) $11,914 $ 1,840
======= ======= ======= ======= =======
Deferred Income Tax Asset Valuation Allowance $13,407 $52,573 $19,270 (3) $ - $85,250
======= ======= ======= ======= =======
(1) Adjustments reflect a reduction in net sales.
(2) Represents changes to valuation allowance established on deferred income
tax assets related to minimum pension liability recognized in stockholders'
deficit.
(3) Includes an adjustment to reflect the distribution of valuation reserves
for deferred income tax assets to Trace in connection with the GFI
Transaction (see Note 13 to the consolidated financial statements).
S-5