UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from .......... to ..........
Commission file number: 0-22624
FOAMEX INTERNATIONAL INC.
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(Exact Name of registrant as Specified in its Charter)
Delaware 05-0473908
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1000 Columbia Avenue, Linwood, PA 19061
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (610) 859-3000
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Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share,
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which is traded through the National
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Association of Securities Dealers, Inc.
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National Market System.
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter periods that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. YES _X_ NO ___
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 4, 2002, was $85.5 million.
The number of shares outstanding of the registrant's common stock as of
March 15, 2002 was 24,173,443.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's definitive proxy statement to be filed within
120 days pursuant to Reg. 12B-23 of the Securities and Exchange Act of 1934, as
amended.
FOAMEX INTERNATIONAL INC.
INDEX
Page
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Part I
Item 1. Business 3
Item 2. Properties 8
Item 3. Legal Proceedings 8
Item 4. Submission of Matters to a Vote of Security Holders 11
Part II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters 11
Item 6. Selected Consolidated Financial Data 12
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 14
Item 7a Quantitative and Qualitative Disclosures about Market Risk 29
Item 8. Financial Statements and Supplementary Data 29
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 29
Part III
Item 10. Directors and Executive Officers of the Registrant 29
Item 11. Executive Compensation 29
Item 12. Security Ownership of Certain Beneficial Owners
and Management 29
Item 13. Certain Relationships and Related Transactions 29
Part IV
Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K 30
Signatures 38
The Registrant will furnish a copy of any exhibit to this Annual Report on Form
10-K upon the payment of a fee equal to the Registrant's reasonable expense in
furnishing such exhibit.
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PART I
ITEM l. BUSINESS
General
Foamex International Inc. (referred to in this document as the "Company,
we, us and/or our") is engaged primarily in the manufacturing and distribution
of flexible polyurethane and advanced polymer foam products. As of December 31,
2001, the Company's operations are conducted through its wholly-owned
subsidiary, Foamex L.P. and through Foamex Canada Inc., Foamex Latin America,
Inc. and Foamex Asia, Inc. which are subsidiaries of Foamex L.P. and through
Foamex Carpet Cushion, Inc. ("Foamex Carpet"). Foamex Carpet was converted into
a limited liability company and was contributed to Foamex L.P. on March 25,
2002. The Company was incorporated in 1993 to act as a holding company for
Foamex L.P.
Segments
We are the largest manufacturer and distributor of flexible polyurethane
and advanced polymer foam products in North America. We have been developing,
manufacturing and marketing polyurethane foam for more than 44 years. We have
numerous manufacturing facilities dedicated to specific product lines as well as
facilities with the capability to support multiple product lines. Each of our
business segments has a diverse customer base. Our senior executives direct
sales efforts for each of our business segments.
Our five business segments are described below.
Foam Products
Our foam products are distributed directly from manufacturing facilities
and indirectly through independent fabricator distributors. These foams are used
by the bedding industry in quilts, toppers, cores and border rolls for
mattresses. In the furniture industry, they are generally used for upholstered
seating products and in the retail industry, for a broad range of products, such
as mattress overlay pads, leisure furniture, futons and pillows. Foam Products
are generally sold in large volumes on a regional basis because of high shipping
costs.
Our bedding products are sold to mattress manufacturers. We also supply
cut-to-size seat cushions, back cushions and other pieces to the furniture
industry. Furniture foams are sold directly to manufacturers as well as through
distributors. The consumer products group sells therapeutic sleep products such
as mattress pads and bed pillows for the health care and consumer markets and a
broad line of home furnishing products to retailers throughout North America.
The development and introduction of value-added products continues to be
a priority including products incorporating Reflex(R) and viscoelastic or
"memory" foams for the bedding industry, which maintain their resiliency better
than other foams and materials. Reflex(R) materials include cushion wraps and
cushion cores and are advanced polymer cushioning products designed to improve
comfort, quality and durability in upholstered furniture and bedding products.
Reflex(R) was created using the VPF(SM) manufacturing process. We also have
introduced high efficiency thermal management foam products for applications in
work gloves and outerwear.
Carpet Cushion Products
We manufacture Carpet Cushion Products, which include rebond, prime, felt
and rubber carpet padding. Prime carpet padding is made from polyurethane foam
buns. Rebond carpet padding 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.
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Automotive Products
We are one of the largest suppliers of automotive foam products for the
North American operations of original equipment manufacturers, or "OEMs."
Depending on the automotive manufacturer and/or the application, automotive foam
products are supplied by us 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 our ability to react to changing industry requirements
include our development of thermoformable headliners, tri-laminates, advanced
cutting technology and energy absorbing foams. For example, we have introduced
SMT(R), which is used to sculpture the surface of foam, and CPC(R), which is
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. We intend to increase our 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. We have
achieved and expect 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. We were one of the first polyurethane manufacturers to be QS-9000
certified, which demonstrates our commitment to producing the highest quality
products and meeting the needs of our customers. We are both QS-9000 and
ISO-9001 certified at all of our facilities that supply the automotive industry.
Technical Products
We believe that we are one of the foam industry's prime innovators and
producers of industrial, specialty, consumer and safety foams, which we refer to
as "Technical Products." Technical Products consist of reticulated foams and
other custom polyester and polyether foams, which are sometimes combined with
other materials to yield specific properties. Reticulation is the thermal or
chemical process used to remove the membranes from the interconnecting cells
within foam. This leaves a porous, skeletal structure allowing for the free flow
of gases and/or liquids. Felting and lamination with other foams or materials
give these composites specific properties.
Reticulated foams are well suited for filtration, reservoiring, sound
absorption and sound transmission. Industrial applications include carburetors,
computer cabinets, inkpad reservoirs, high-speed inkjet printers and speaker
grills. Medical applications include oxygenators for cardiopulmonary surgery,
instrument holders for sterilization, pre-op scrubbers impregnated with
anti-microbial agents and EKG pads containing conductive gels. Other Technical
Products have unique characteristics such as flame retardancy and fluid
absorption. Additional products sold within this group include foams for
refrigerated supermarket produce counters, mop heads, paint brushes and cosmetic
applications.
We use advertising in trade journals and related media in order to
attract customers and, more generally, to increase an awareness of our
capabilities for Technical Products. In addition, due to the highly specialized
nature of most Technical Products, our research staff works with customers to
design, develop and manufacture each product to specification.
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Other
Other consists primarily of certain manufacturing operations in Mexico
City, corporate expenses not allocated to the other business segments and
restructuring, impairment and other charges (credits).
Marketing and Sales
We sell Foam Products directly to major bedding and furniture
manufacturers such as Sealy, Simmons and Berkline and also through third party
independent fabricators. In addition, we manufacture and distribute foam-based
consumer products such as futons, pillows, mattress pads and children's
furniture to retail chains, such as Wal-Mart, Target, J.C. Penney and Bed Bath &
Beyond. Our foam-based consumer products sales efforts are primarily regionally
based. The key strategic elements supporting growth in these areas are a focus
on marketing and sales efforts, high quality, cost-competitive products and low
freight costs through optimal plant location. Plant locations are critical in
this regionalized business where the transportation cost typically comprises a
significant portion of product cost.
Carpet Cushion Products sells carpet padding to distributors and to major
floor covering retail chains, such as Home Depot and Carpet One. A key focus in
2001 was increased marketing efforts to commercial product lines.
We have been a leading supplier of automotive products to OEMs, including
DaimlerChrysler, for more than 30 years. We are also the primary supplier of
automotive products to certain tier one suppliers, including Johnson Controls
and Lear Corporation. We compete for new business both at the beginning of
development of new models and upon the redesign of existing models. Once a foam
producer has been designated to supply parts for a new model program, the foam
producer usually produces parts for the life of the program. Competitive factors
in the market include product quality and reliability, cost and timely service,
technical expertise and development capability, new product innovation and
customer service.
Our Technical Products are used for filtration and reservoiring in a wide
variety of applications by companies, such as Hewlett-Packard, Lexmark and
Briggs & Stratton. We market most of our Technical Products through a network of
independent fabrication and distribution companies in North America, the United
Kingdom and South Korea. These fabricators or distributors often further process
or finish Technical Products to meet the specific needs of end users. Our
specialty and technical foams service unique end user requirements and are
generally sold at relatively high margins. This business is characterized by a
diversity and complexity of both customers and applications.
International Operations
Our international operations are located in Canada, Mexico and Asia. We
operate four manufacturing facilities in Canada to service our bedding and
automotive customers and have seven facilities in Mexico serving the automotive
and cushioning industries. Six of the Mexican facilities are located within the
Mexican free trade zones close to the U.S. border and primarily service
automotive customers. Our Mexico City facility services both automotive and
cushioning customers.
The Company participates in a joint venture with fabrication facilities
in Singapore and Thailand. In December 2001, we increased our non-controlling
equity interest holding in the joint venture to 70%. Our income from equity
interest in the joint venture was $1.6 million, $1.7 million and $0.5 million
for the years ended December 31, 2001, 2000 and 1999, respectively. The joint
venture expects to install its first pourline during 2002. This pourline, which
will be entirely financed by the joint venture entity (on a non-recourse basis
to the Company) will reduce foam shipping costs for sales to the region and
increase the range of markets served.
We have maintained a longstanding relationship with Recticel s.a., a
leading manufacturer of flexible polyurethane foam in Europe. We have in the
past exchanged technical information and expertise relating to foam
manufacturing with Recticel s.a.
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Major Customers
Sales to Johnson Controls, which are included in Automotive Products,
accounted for approximately 15.7% of net sales in 2001, 12.3% of net sales in
2000 and 11.5% of net sales in 1999. No other unaffiliated customer accounted
for more than 10.0% of net sales during any of the past three years. During
2001, net sales to our five largest customers comprised approximately $438.2
million, or 35.0%, of net sales. The loss of any one of these customers could
have a material adverse effect on our business.
Manufacturing and Raw Materials
As of December 31, 2001, we conducted our operations at 62 manufacturing
and distribution facilities with a total of approximately 8.7 million square
feet of floor space. We believe that our 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 our major customers because the high freight cost in relation
to the cost of the foam product generally results in distribution being most
cost-effective within a 200 to 300 mile radius.
We have identified four non-VPF(SM) foam pouring operations, six foam
fabrication operations, six rebond carpet padding operations and one fiber
operation to be closed during 2002. In many cases, the volume from these
facilities will be absorbed by our other existing facilities in order to improve
capacity utilization. In some, but not all instances, our other existing
facilities will have to be upgraded to absorb the transferred volume. We may
lose some revenue due to closing these operations.
Our fabrication process involves cutting foam buns into various shapes
and sizes to meet customer specifications. Fabricated foam is sold to customers
and is utilized by us to produce our foam-based consumer products. Scrap foam,
generated in connection with the fabrication of foam products, is used by us to
produce rebond carpet padding.
Raw materials account for a significant portion of our manufacturing
costs. The two principal chemicals used in the manufacture of flexible
polyurethane foam are toluene diisocyanate, or "TDI," and polyol. We generally
have alternative suppliers for each major raw material. We believe that we could
find alternative sources of supply should we cease doing business with any one
of our major suppliers, although there may be some delay in replacing a major
supplier, especially a supplier of TDI and/or polyol.
There are a limited number of major suppliers of TDI and polyol. A
disruption in our ability to obtain TDI and/or polyol that continues for a
significant period of time would have a material adverse effect on our business
and results of operations.
The prices of TDI and polyol have historically been cyclical and
volatile. The prices of these raw materials are influenced by demand,
manufacturing capacity and oil prices. Some of our suppliers of TDI and polyol
have informed us that they intend to seek to raise prices in the first six
months of 2002. We attempt to offset raw material price increases through
selling price increases; however, there can be no assurance that we will be
successful in implementing selling price increases or that competitive pricing
pressure will not require us to adjust selling prices.
A key raw material used in the manufacture of carpet padding is scrap
foam. We internally generate a substantial portion of the scrap foam used in the
production of rebond carpet padding from our other operations. Historically, the
market price of rebond carpet padding has fluctuated with the market price of
scrap foam.
We recently discovered that some mattresses containing foam supplied by
us had a discernible odor. The cause of the odor was traced to chemicals from
one supplier used in the manufacture of the foam. This supplier has advised us
that the odor was attributable to a change in its chemical manufacturing
process, which has since been corrected. We have received claims from some of
our customers for costs purportedly associated with the odorous foam, and we
have reached agreement with this chemical supplier regarding the terms of and
manner in which the supplier will reimburse us for certain obligations we may
have to our customers relating to these claims, as well as for certain of our
internal costs. Under this agreement, this supplier will pay us a fixed sum in
exchange for eliminating certain future claims we may have against this supplier
and obligates us to indemnify this supplier for certain claims that may be
brought
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against it by others, including our customers. The ultimate amounts of these
third party claims and the amount of our own internal costs are uncertain. We
cannot be certain that this supplier's payments to us will be sufficient to
cover all payments that we may be required to make to third parties in respect
to their claims, to cover all of our related internal costs or that our
indemnification obligations to this supplier will not be material.
Employees
As of December 31, 2001, we employed approximately 6,100 persons.
Approximately 1,850 of these employees are located outside the United States and
approximately 2,200 employees are covered by collective bargaining agreements
with labor unions. These agreements expire on various dates through 2004. We
consider relations with our employees to be good.
To reduce administrative costs throughout our operations, we expect to
eliminate 100 salaried positions during 2002, mainly in support functions,
including information technology, finance, quality, engineering, maintenance and
customer service. In connection with this reduction, we are centralizing some of
our support functions, including human resources, environmental, health and
safety, quality, purchasing and customer service. As of March 1, 2002, 79
salaried positions, mostly in corporate and support functions, have been
eliminated.
Competition
The flexible polyurethane foam industry is highly competitive with price,
quality and service being significant competitive factors. Our competitors in
the polyurethane foam industry include E. R. Carpenter Company, Hickory Springs
Manufacturing Company, Vitafoam, Inc., Flexible Foam Products, Inc. and Future
Foam, Inc. None of these competitors individually competes in all of the
business segments in which we do business.
Patents and Trademarks
We own various patents and trademarks registered in the United States and
in numerous foreign countries. The registered processes and products were
developed through ongoing research and development activities to improve
quality, reduce costs and expand markets through development of new applications
for flexible polyurethane foam products. While we consider our patents and
trademarks to be a valuable asset, we do not believe that our competitive
position is dependent on patent protection or that our operations are dependent
upon any individual patent, trademark or tradename.
Research and Development
We believe we have a leading research and development capability in the
flexible polyurethane foam industry. Our primary research and development
facility is located in Eddystone, Pennsylvania. Expenditures for research and
development amounted to $3.1 million for 2001, $2.5 million for 2000 and $3.3
million for 1999.
The Company, Recticel s.a. ("Recticel"), a European polyurethane foam
manufacturer, and Beamech Group Limited, an unaffiliated third party, have an
interest in a Swiss corporation that develops new manufacturing technology for
the production of polyurethane foam including the VPF(SM) manufacturing process.
Recticel and affiliates of Recticel are shareholders of the Company. 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. We anticipate that we will continue to do so in the future.
Forward-Looking Information
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements so long as those statements are
identified as forward-looking and are accompanied by meaningful cautionary
statements identifying important factors that could cause actual results to
differ materially from those projected in such statements. In connection with
certain forward-looking statements contained in this Annual Report on Form 10-K
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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 production, furniture
and bedding 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, 2001, we conducted our operations at 62 manufacturing
and distribution facilities. Total floor space in use at our 16 owned
manufacturing and distribution facilities is approximately 3.3 million square
feet and total floor space in use at our 46 leased manufacturing and
distribution facilities is approximately 5.4 million square feet. Fifty-one 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. We
do not anticipate any problem in renewing or replacing any of the leases
expiring in 2002. In addition, we have approximately 1.3 million square feet of
idle space of which approximately 0.8 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 - Foamex International Shareholders
The Company has reached agreements with the plaintiffs in the stockholder
actions described below providing for the settlement and dismissal of these
actions. Court approval of these settlements has been obtained although such
approval may be appealed.
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 International Holdings, Inc. ("Trace
International"), the principal stockholder of the Company at the time, and a
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Trace International affiliate. The complaint in the Delaware Action alleged,
among other things, that certain of the defendants breached their fiduciary
duties to the Company in connection with an attempt by Trace International 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 International and its affiliates. The Delaware Action sought
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
International 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 International and Marshall S. Cogan, the chairman of the
Company, 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 the 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. We refer to the consolidated suit 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 stipulation of settlement related to the Delaware
Action (which was approved by the Delaware Court on March 20, 2002), the Company
agreed that a special nominating committee of its Board of Directors would
nominate two additional independent directors to serve on the Board. The terms
of the agreement also established the criteria for the independence of the
directors and required that certain transactions with affiliates be approved by
a majority of the disinterested members of the Board. 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 resolved all outstanding
shareholder litigation against the Company and its current and former directors
and officers. In early January 2002, two shareholders filed objections to the
settlement. The settlement hearing was held on February 13, 2002, but was not
concluded. On March 20, 2002, the Delaware Court concluded the hearing and
approved the settlement. Approval of the settlement may be appealed by the
objectors. 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.
Litigation - Breast Implants
As of February 28, 2002, we and Trace International were two of multiple
defendants in actions filed on behalf of approximately 1,725 recipients of
breast implants in various United States federal and state courts and one
Canadian provincial court, some of which allege substantial damages, but most of
which allege unspecified damages for personal injuries of various types. Three
of these cases seek to allege claims on behalf of all breast implant recipients
or other allegedly affected parties, but no class has been approved or certified
by the court. During 1995, we and Trace International 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.
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Although breast implants do not contain foam, certain silicone gel
implants were produced using a polyurethane foam covering fabricated by
independent distributors or fabricators from bulk foam purchased from us or from
Trace International. Neither we nor Trace International recommended, authorized,
or approved the use of its foam for these purposes. We are also indemnified by
Trace International for any such liabilities relating to foam manufactured prior
to October 1990. Trace International's insurance carrier has continued to pay
our litigation expenses after Trace International's filing of a petition for
relief under the Bankruptcy Code on July 21, 1999. Trace International's
insurance policies continue to cover certain liabilities of Trace International,
but if the limits of those policies are exhausted, it is unlikely that Trace
International will be able to continue to provide additional indemnification.
While it is not feasible to predict or determine the outcome of these actions,
based on management's present assessment of the merits of pending claims,
without taking into account the indemnification provided by Trace International,
the coverage provided by Trace International's and our 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 our consolidated financial position or results
of operations. If management's assessment of our liability relating to these
actions is incorrect, these actions could have a material adverse effect on our
financial position, results of operations and cash flows.
Litigation - Other
During the second quarter of 2001, the Company was notified by an
insurance provider concerning a dispute involving the reimbursement of liability
claims paid on behalf of Trace International before 1990. The insurance provider
is contending that the Company is liable for claims of approximately $3.0
million. The Company intends to strongly defend this claim and considers the
claim to be without merit. If management's assessment of the Company's liability
relating to these actions is incorrect, these actions could have a material
adverse effect on the financial position, results of operations and cash flows
of the Company.
We are party to various other lawsuits, both as defendant and plaintiff,
arising in the normal course of business. It is the opinion of management that
the disposition of these lawsuits will not, individually or in the aggregate,
have a material adverse effect on our financial position or results of
operations. If management's assessment of our liability relating to these
actions is incorrect, these actions could have a material adverse effect on our
consolidated financial position, results of operations and cash flows.
Environmental and Health and Safety
We are subject to extensive and changing federal, state, local and
foreign environmental laws and regulations, including those relating to the use,
handling, storage, discharge and disposal of hazardous substances, the discharge
or emission of materials into the environment, and the remediation of
environmental contamination, and as a result, are from time to time involved in
administrative and judicial proceedings and inquiries relating to environmental
matters. As of December 31, 2001, we had accruals of approximately $3.0 million
for environmental matters.
The Clean Air Act Amendments of 1990 ("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. The final National Emission Standard for Hazardous Air
Pollutants, or "NESHAP," for flexible polyurethane foam production was
promulgated on October 7, 1998. The NESHAP required a reduction of approximately
70% of the emission of methylene chloride for the slab stock foam industry
effective October 7, 2001. Through the use of alternative technologies,
including VPF(SM) and carbon dioxide, and by shifting current production to
facilities which use these alternative technologies, we are in substantial
compliance with these regulations. On August 8, 2001, the United States
Environmental Protection Agency, or "EPA," proposed a NESHAP for Flexible
Polyurethane Foam Fabrication Operations. The proposed NESHAP regulates
emissions of methylene chloride and other Hazardous Air Pollutants and restricts
air emissions from flame lamination sources. The Company does not believe that
this standard, if adopted, will require us to make material expenditures.
We have reported to the appropriate state authorities that we have found
soil and/or groundwater contamination in excess of state standards at certain
locations. Seven sites are currently in various stages of investigation or
10
remediation. Accordingly, the extent of contamination and the ultimate liability
is not known with certainty for all sites. As of December 31, 2001, we had
accruals of $2.5 million for the estimated cost of remediation, including
professional fees and monitoring costs, for these sites. During 2000, we reached
an indemnification agreement with the former owner of the Morristown, Tennessee
facility. The agreement allocates the incurred and future remediation costs
between the former owner and us. The estimated allocation of future costs for
the remediation of this facility is not significant, based on current known
information. The former owner was Recticel Foam Corporation, a subsidiary of
Recticel.
We have either upgraded or closed all underground storage tanks at our
facilities in accordance with applicable regulations.
The Comprehensive Environmental Response, Compensation and Liability Act,
or "CERCLA," and comparable state laws impose liability without fault for the
costs of cleaning up contaminated sites on certain classes of persons that
contributed to the release of hazardous substances into the environment at those
sites, for example, by generating wastes containing hazardous substances which
were disposed at such sites. We are currently designated as a Potentially
Responsible Party, or "PRP," by the EPA or by state environmental agencies or
other PRPs, pursuant to CERCLA or analogous state statutes, with respect to
eight sites. Estimates of total cleanup costs and fractional allocations of
liability are often provided by the EPA, the state environmental agency or the
committee of PRPs with respect to the specified site. Based on these estimates
(to the extent available) and on known information, in each case and in the
aggregate, our liability is not considered to be significant.
In 2002, capital expenditures for safety and environmental compliance
projects are anticipated to be approximately $2.0 million. Although it is
possible that new information or future developments could require the Company
to reassess the potential exposure relating to all pending environmental
matters, including those described above, management believes that, based upon
all currently available information, the resolution of these environmental
matters will not have a material adverse effect on our operations, financial
position, capital expenditures or competitive position. The possibility exists,
however, that new environmental legislation and/or environmental regulations may
be adopted, or other environmental conditions, including the presence of
previously unknown environmental contamination, may be found to exist or a
reassessment of the potential exposure to pending environmental matters may be
necessary due to new information or future developments, that may require
expenditures not currently anticipated and that may be material.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
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
---- ---
2001
Quarter Ended March 31 $ 5.94 $4.50
Quarter Ended June 30 $ 7.83 $4.50
Quarter Ended September 30 $ 8.12 $5.90
Quarter Ended December 31 $ 8.46 $6.00
11
High Low
---- ---
2000
Quarter Ended March 31 $10.38 $ 7.00
Quarter Ended June 30 $ 9.50 $ 4.19
Quarter Ended September 30 $ 7.03 $ 5.56
Quarter Ended December 31 $ 6.50 $ 4.59
As of December 31, 2001, there were 144 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
subsidiary Foamex L.P. Consequently, the Company's ability to pay dividends is
dependent upon the earnings of Foamex L.P. and any future subsidiaries of the
Company and the distribution of those earnings to the Company and loans or
advances by Foamex L.P. and any such future subsidiaries of the Company. The
ability of Foamex L.P. to make distributions is restricted by the terms of their
respective financing agreements. Due to such restrictions, the Company is
expected to have only limited access to the cash flow generated by Foamex L.P.
for the foreseeable future.
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)
----------------------------------------------------------------------------
2001 (2) 2000 1999 1998 1997 (6)
-------- ---- ---- ---- --------
(thousands, except for earnings per share)
Statements of Operations Data
Net sales $ 1,252,904 $ 1,257,778 $ 1,294,639 $ 1,260,559 $ 945,519
Income (loss) from continuing
operations (3)(4) $ (5,612) $ 17,013 $ 19,716 $ (69,853) $ 4,131
Basic earnings (loss) per share from
continuing operations $ (0.24) $ 0.69 $ 0.79 $ (2.79) $ 0.16
Diluted earnings (loss) per share from
continuing operations $ (0.24) $ 0.67 $ 0.78 $ (2.79) $ 0.16
Balance Sheet Data
Total assets $ 766,962 $ 751,581 $ 781,313 $ 874,965 $ 893,623
Long-term debt, classified as current (5) - - - $ 771,092 -
Long-term debt, excluding current portion $ 648,232 $ 687,758 $ 725,297 $ 8,240 $ 735,724
Stockholders' deficiency $ (180,746) $ (164,669) $ (166,381) $ (204,119) $ (113,419)
Dividends paid - - - $ 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. The 1997 fiscal year
included the 52 weeks ended December 28, 1997.
(2) Includes the results of operations of General Foam from July 25, 2001, the
date the business was acquired.
12
(3) Includes net restructuring, impairment and other charges (credits), as
discussed in Note 5 to the consolidated financial statements included in
this Annual Report on Form 10-K. Listed below are the pre-tax charges
(credits).
2001 - $36.1 million
2000 - $6.3 million
1999 - $10.5 million
1998 - $(9.7) million
1997 - $21.1 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) At 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.
13
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, 2001, the Company's operations were
conducted through its wholly-owned subsidiaries, Foamex L.P. and Foamex Carpet
Cushion, Inc. ("Foamex Carpet"). As discussed below in the section entitled
"Refinancing and Corporate Structure", after December 31, 2001, Foamex Carpet
was converted into a Delaware limited liability company and on March 25, 2002,
the Company contributed its equity interest in such limited liability company to
Foamex L.P. Business segments are listed below and business segment financial
information is included in Note 14 to the consolidated financial statements.
An executive vice president heads each of the Company's principal
operating segments. Each executive vice president is responsible for developing
budgets and plans as well as directing the operations of the segment. The
performance of each operating segment is measured based upon income from
operations, excluding restructuring , impairment and other charges. The Company
does not allocate restructuring, impairment and other charges to operating
segments because many of the Company's facilities produce products for multiple
segments.
Foam Products - manufactures and markets cushioning foams for bedding,
furniture, packaging and health care applications, and foam-based
consumer products, such as mattress pads and children's furniture.
Carpet Cushion Products - manufactures and distributes, rebond, prime,
felt and rubber carpet padding.
Automotive Products - distributes automotive foam products and laminates
to major tier one suppliers and original equipment manufacturers, or
"OEMs".
Technical Products - manufactures and markets reticulated and other
specialty foams used for reservoiring, filtration, gasketing and sealing
applications.
Other - primarily consists of certain manufacturing operations in Mexico
City, corporate expenses not allocated to the other business segments and
restructuring, impairment and other charges (credits).
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.
In July 2001, the Company acquired certain assets of General Foam
Corporation, a former polyurethane foam manufacturer that had operations in
Pennsylvania and New Jersey.
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.
Fourth Quarter 2001 Developments and 2002 Subsequent Events
Operational Reorganization
In December 2001, the Company launched a comprehensive cost reduction
program and revenue growth initiative (the "Operational Reorganization Plan").
The Operational Reorganization Plan covers the components outlined below.
14
Plant Rationalizations. To capitalize on achieving operating efficiencies
and the lower costs of manufacturing associated with our national VPF(SM)
capabilities, the Company has identified four non-VPF(SM) foam pouring
operations, six foam fabrication operations, six rebond carpet padding
operations and one fiber operation to be closed during 2002. In many cases, the
volume from these closed operations will be absorbed by our other existing
facilities in order to improve capacity utilization. In some, but not all
instances, our other existing facilities will be upgraded to absorb the
transferred volume. We anticipate some revenue may be lost due to the closing of
these operations.
Salaried Headcount Reduction. To reduce administrative costs throughout
our operations, we expect to eliminate 100 salaried positions during 2002,
mainly in support function areas, including information technology, finance,
quality, engineering, maintenance and customer service. In connection with this
reduction, we are centralizing some of our support functions, including human
resources, environmental, health and safety, quality, purchasing and customer
service. As of March 1, 2002, 79 salaried positions, mostly in corporate and
support functions, have been eliminated.
Purchasing and Logistics Cost Reductions. We have implemented programs to
reduce costs of manufacturing and distribution, raw materials (other than
toluene diisocyanate and polyol) and logistics services. We plan to centralize
our purchasing function and leverage our scale to negotiate new national
procurement contracts for supplies and services.
Sales and Marketing Management. We have implemented a program to analyze
the profitability of our customer base, the efficiency of our sales people and
our ability to effectively market to potential new customers. Our goal is to
rationalize our customer base and focus our sales and marketing efforts on our
more profitable customers.
Customer Service Centralization. To reduce costs and improve the
effectiveness of our customer service operations, we have begun to centralize
the operations in line with each of our business units. We are focusing on our
key customers and implementing key support technology to further standardize our
customer service process.
These actions resulted in restructuring, impairment and other charges of
approximately $35.4 million during the fourth quarter of 2001, of which
approximately $18.4 million was non-cash. The Company estimates that these
activities will result in incremental income from operations of approximately
$20.0 million and $30.0 million in 2002 and 2003, respectively. The Company
anticipates that the majority of the cash costs will be incurred in 2002.
Including the salaried headcount reduction discussed above, a total of 746
employees are expected to be terminated.
Customer Claims
During the fourth quarter of 2001, the Company discovered that some
mattresses containing foam supplied by the Company had a discernible odor. The
cause of the odor was traced to chemicals from one supplier used in the
manufacture of the foam. The supplier has advised the Company that the odor was
attributable to a change in its chemical manufacturing process, which has since
been corrected. We have received claims from some of our customers for costs
purportedly associated with the odorous foam and we have reached agreement with
this chemical supplier regarding the terms of and manner in which this supplier
will reimburse the Company for certain obligations we may have to our customers
relating to these claims, as well as for certain of our internal costs. Under
this agreement, this supplier will pay us a fixed sum in exchange for
eliminating certain future claims we may have against this supplier and we are
obligated to indemnify this supplier for certain claims that may be brought
against it by others, including the Company's customers. The ultimate amounts of
these third party claims and the amount of our own internal costs are uncertain.
The Company cannot be certain that this supplier's payments to it will be
sufficient to cover all payments that we may be required to make to third
parties in respect to their claims, to cover all of the Company's related
internal costs or that the Company's indemnification obligations to this
supplier will not be material. Consequently, there can no assurance that these
claims and costs will not have a material adverse effect on our consolidated
financial position, results of operations and cash flows.
15
Refinancing and Corporate Structure
On March 25, 2002, Foamex L.P. and Foamex Capital Corporation issued
$300.0 million of 10 3/4% Senior Secured Notes due 2009 (the "Senior Secured
Notes"), and amended the Foamex L.P. Credit Facility (the "Amended Credit
Facility") to provide for $162.2 million of term loans, with maturity dates of
June 30, 2005 through December 29, 2006, and a $100.0 million revolving credit
facility that matures on June 30, 2005. Net proceeds from the Senior Secured
Notes of $280.0 million were used to pay a portion of the debt outstanding under
the Foamex L.P. Credit Facility. The initial proceeds of two new term loans
under the Amended Credit Facility were used to repay a note payable to Foam
Funding LLC (a related party) and debt outstanding under the Foamex L.P. Credit
Facility. Additionally, the financial debt covenants contained in the Amended
Credit Facility were adjusted to reflect changes in the capital structure, and
the current business environment at the Company. Under the covenants contained
in the Senior Secured Notes Indenture and the Amended Credit Facility, the
Company may spend up to $48.5 million of the proceeds from the Senior Secured
Notes to repurchase or redeem some of its senior subordinated notes. To the
extent that the Company spends less than $48.5 million towards such repurchase
or redemption by September 20, 2002, it is required to repay a portion of its
term loans.
In connection with the refinancing transaction discussed above, the
Company simplified its corporate structure, by changing the incorporation status
of Foamex Carpet Cushion, Inc., a wholly-owned subsidiary of the Company, to a
limited liability company, Foamex Carpet Cushion LLC, which was then contributed
to Foamex L.P.
Critical Accounting Policies
We prepared the consolidated financial statements of the Company in
conformity with accounting principles generally accepted in the United States of
America. As such, we are required to make certain estimates, judgments, and
assumptions that we believe are reasonable based upon the information available.
These estimates, judgments and assumptions affect the reported amounts of the
assets and liabilities and revenues and expenses. The Company's significant
accounting policies are fully discussed in Note 2 to the consolidated financial
statements. The significant accounting policies which we believe are the most
critical to aid in fully understanding and evaluating our reported financial
results include the following:
Account Receivable and Allowance for Uncollectible Accounts
The Company actively monitors customer payments in conjunction with
customer credit evaluations. Accordingly, an estimate of uncollectible accounts
is maintained and is based on historical collection experience and specific
customer collection issues. A significant change in the financial condition of
one or more of the Company's larger customers could have a material adverse
impact on future results.
Long-Lived Assets
The Company has a significant investment in long-lived assets; consisting
primarily of property, plant and equipment, and intangible assets representing
the cost in excess of net assets acquired (goodwill) and deferred financing
costs. Impairment losses are recognized when events indicate that certain
long-lived assets may be impaired and a projection of future cash flows
generated from the assets are less than the current carrying value of the
assets. These cash flow projections are based on the combination of historical
results adjusted for estimated future market conditions and operating plans. To
the extent that these estimates change, impairment losses could have material
adverse impact on future results. See the section below entitled "Accounting
Changes" for a discussion on the impact of new accounting statements.
Deferred Income Taxes
The Company has a significant amount of Federal net operating loss
carryforwards that can reduce the Federal tax payments required on taxable
income generated in the future. These Federal net operating loss carryforwards
are recognized as a deferred tax asset of the Company and the realization of the
related asset must be continually evaluated. Accordingly, the Company has
established a valuation allowance for all Federal net operating loss
16
carryforwards available as of December 31, 2001. In establishing a valuation
allowance, the Company is required to evaluate existing tax attributes,
projections of future taxable income and tax planning strategies available to
determine the probability that the Federal net operating loss carryforwards will
be utilized in the future. If the Company determines that it is more likely than
not that the Federal net operating losses will be utilized in future years, then
reported results in that period will benefit from the reversal of a portion of,
or the entire valuation allowance. As a result, the effective tax rate of the
Company will increase following any reversal. See the section below entitled
"Income Tax Expense" for additional information.
Environmental Remediation
The Company has a number of manufacturing facilities and certain idle
facilities that require remediation of soil and/or groundwater contamination. As
required by applicable State and/or Federal compliance programs, many of these
sites are in the monitoring stage that requires periodic sampling of
contamination levels in conjunction with ongoing assessments of remediation
actions. Accordingly, the recognition of environmental liabilities requires
estimates concerning the duration of monitoring and associated costs, often
projected to extend for a number of years. To the extent that these estimates
change, additional environmental costs could have a material adverse impact on
future results. See the section below entitled "Environmental Health and Safety"
for additional information.
RESULTS OF OPERATIONS
Carpet
Foam Cushion Automotive Technical
Products Products Products Products Other Total
-------- -------- -------- -------- ----- -----
2001 (dollars in thousands)
Net sales $ 499,668 $ 230,965 $ 377,753 $ 111,043 $ 33,475 $1,252,904
Income (loss) from operations $ 66,312 $ (6,831) $ 21,187 $ 22,884 $ (40,079) $ 63,473
Depreciation and amortization $ 15,732 $ 8,181 $ 4,991 $ 3,312 $ 1,772 $ 33,988
Income (loss) from operations
as a percentage of net sales 13.3% (3.0)% 5.6% 20.6% n.m.(a) 5.1%
2000
Net sales $ 519,197 $ 256,439 $ 342,386 $ 106,697 $ 33,059 $1,257,778
Income (loss) from operations $ 55,001 $ 2,035 $ 22,235 $ 28,888 $ (11,688) $ 96,471
Depreciation and amortization $ 17,813 $ 7,742 $ 5,785 $ 2,663 $ 2,585 $ 36,588
Income (loss) from operations
as a percentage of net sales 10.6% 0.8% 6.5% 27.1% n.m.(a) 7.7%
1999
Net sales $ 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.(a) 7.2%
(a) Not meaningful.
2001 Compared to 2000
Net sales for 2001 decreased 0.4% to $1,252.9 million from $1,257.8
million in 2000. The decline was primarily attributable to lower sales in Foam
Products and Carpet Cushion Products, partially offset by a significant
improvement in Automotive Products sales. Technical Products also recorded
improved sales.
The gross profit margin was 14.4% in 2001 compared to 13.7% in 2000.
Certain raw material cost reductions had the effect of improving the gross
profit margin percentage in 2001 by approximately 1.4 percentage points. These
2001 cost reductions are not anticipated to continue in 2002. See Item 1 -
Business - Manufacturing and Raw Materials. Selling, general and administrative
17
expenses were 16.2% higher in 2001. The increase included the impact of higher
professional fees, including those associated with a change in independent
accountants, higher bad debt expense related to economic conditions and
increased compensation and benefit costs.
Income from operations in 2001 was $63.5 million, which represented a
34.2% decrease from the $96.5 million recorded during 2000. Results included
restructuring, impairment and other charges of $36.1 million in 2001 and $6.3
million in 2000. Restructuring, impairment and other charges recorded during
2001 are discussed under "Other" below. Excluding the restructuring, impairment
and other charges for comparison purposes, income from operations would have
been $99.5 million in 2001 compared to $102.7 million in 2000. On this basis,
income from operations was 7.9% of net sales in 2001 and 8.2% in 2000. In
addition to the raw material cost reductions discussed above, cost reduction
programs and increases in certain selling prices were also positive factors.
Foam Products
Foam Products net sales for 2001 decreased 3.8% to $499.7 million from
$519.2 million in 2000. The decrease primarily reflected the domestic economic
slowdown that impacted the markets for furniture manufacturers and other foam
fabricators. Despite the sales decline, income from operations increased 20.6%,
from $55.0 million in 2000 to $66.3 million in 2001. The increase was primarily
the impact of raw material cost reductions, discussed above, which primarily
benefited the Foam Products segment. Income from operations was 13.3% of net
sales in 2001, up from 10.6% in 2000.
Carpet Cushion Products
Carpet Cushion Products net sales for 2001 decreased 9.9% to $231.0
million from $256.4 million in 2000. The sales decline continued to reflect
competitive pressures that resulted in lower sales volumes across all product
lines. Lower selling prices in certain product lines and a lower value shipment
mix also contributed to the sales decline. The factors contributing to the sales
decline translated to a loss from operations of $6.8 million in 2001 compared to
income from operations of $2.0 million in 2000. The loss from operations
represented 3.0% of net sales in 2001 and income from operations represented
0.8% of net sales in 2000.
Automotive Products
Automotive Products net sales for 2001 increased 10.3% to $377.8 million
from $342.4 million in 2000. The improvement primarily reflected new product
programs and renewed activity following inventory corrections in the domestic
automotive industry earlier in the year. Income from operations declined 4.7%,
from $22.2 million in 2000 to $21.2 million in 2001. Income from operations
represented 5.6% of net sales in 2001 and 6.5% in 2000. The lower results in
2001 were primarily attributed to intense pricing competition and higher raw
material costs.
Technical Products
Net sales for Technical Products in 2001 were up 4.1% to $111.0 million
from $106.7 million in 2000. Higher sales primarily reflected sales from the
acquisition of certain assets from General Foam Corporation, discussed in Note 4
to the consolidated financial statements. Income from operations decreased 20.8%
to $22.9 million in 2001 compared to $28.9 million in 2000. The decline
reflected a lower value shipment mix and the impact of a slow down in the
technology industry, especially during the first half of 2001. Income from
operations represented 20.6% of net sales in 2001 compared to 27.1% in 2000.
Other
Other primarily consists of certain manufacturing operations in Mexico
City, corporate expenses not allocated to business segments and restructuring
and other charges. Net sales were slightly higher in 2001 compared to 2000. The
loss from operations was $40.1 million in 2001 and included restructuring,
impairment and other charges of $36.1 million, discussed below. The $11.7
million loss from operations in 2000 included restructuring, impairment and
other charges totaling $6.3 million. The 2000 loss also included professional
fees associated with the resolution of certain change in control issues
18
following the Trace bankruptcy and the settlement of certain shareholder
litigation.
Restructuring, Impairment and Other Charges
In December 2001, the Company announced the launching of its Operational
Reorganization Plan to reduce its operating costs and accelerate revenue growth.
The major initiatives of the Operational Reorganization Plan included plant
rationalization, headcount reductions, purchasing and logistics cost reductions
and sales and marketing management.
In connection with the plant rationalization, we identified a total of 17
plant operations to be closed. Costs associated with this aspect of the
Operational Reorganization Plan included lease termination costs and severance
and termination benefits aggregating $14.1 million.
Additionally, we identified 100 salaried positions to be eliminated,
mainly in support function areas. Severance, termination and other costs
associated with these positions were estimated to be $4.4 million. At March 1,
2002, 79 positions, mostly in corporate and support functions, have been
eliminated.
Further, the Company evaluated the recoverability of certain other
long-lived assets, both associated and not associated with the Operational
Reorganization Plan, in accordance with SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed". As a
result, the Company recorded an impairment provision of $13.8 million (net of
anticipated proceeds of $4.6 million) to reduce these assets to their estimated
fair values. The assets which are held for disposal consist mainly of leasehold
improvements and machinery and equipment which have a remaining carrying value
of approximately $19.8 million.
Other one-time period expenses during the fourth quarter consisted
primarily of executive severance of $1.9 million and consulting fees related to
the Operational Reorganization Plan in the amount of $1.2 million.
Severance and termination benefits as a result of the Operational
Reorganization Plan are expected to be incurred for 746 employees. Total cash
outlays related to the Operational Reorganization Plan are expected to aggregate
$17.0 million. We expect to complete implementation before the end of 2002. The
Company expects to spend approximately $12.4 million during 2002 with the
balance to be spent through 2012, primarily for lease costs.
In addition, the Company recorded $0.4 million for restructuring plans
prior to the fourth quarter of 2001 that included severance for 41 employees and
$1.4 million related to executive severance recorded in other charges. The
Company also recorded a net restructuring credit of $1.2 million related to
changes in estimates to prior restructuring plans.
During 2000, the Company recorded $6.2 million for restructuring plans
that included severance for 102 employees. The Company also recorded a net
restructuring charge of approximately $0.1 million related to changes in
estimates to prior years' restructuring plans. Also during 2000, the Company
received $3.6 million of net proceeds from the sale of assets related to
restructuring plans.
Interest and Debt Issuance Expense
Interest and debt issuance expense totaled $63.2 million in 2001, which
represented a 15.9% decrease from $75.2 million recorded in 2000. The decrease
was attributable to lower average debt levels and lower effective interest rates
in 2001. The Company capitalized interest of $1.4 million and $0.8 million in
2001 and 2000, respectively, as a component of the construction costs of plant
and equipment.
Income from Equity Interest in Joint Venture
Income from an equity interest in an Asian joint venture totaled $1.6
million and $1.7 million in 2001 and 2000, respectively.
19
Other Expense, Net
Other expense, net for 2001 was $2.2 million. Expense items totaled $2.7
million and included letter of credit fees. Interest income recorded in 2001 was
$0.5 million.
In 2000, other expense, net was $3.0 million. Expense items totaled $3.6
million and significant components included the costs associated with a buyout
proposal and letter of credit fees. Interest income recorded in 2000 was $0.6
million.
Income Tax Expense
The 2001 effective tax rate reflects an increase in the valuation
allowance for deferred tax assets recognized during the year since, in our
judgment, it is more likely than not that these assets will not be realizable.
The effective tax rate in 2000 reflected the partial reversal of the deferred
income tax asset valuation allowance recognized in 1998. The valuation allowance
was reduced to reflect the utilization of Federal loss carryforwards that
reduced the current tax component of the Federal tax provision. Additionally,
the valuation allowance was reduced to offset the net deferred Federal tax
liability generated in 2000.
At December 31, 2001, the Company had approximately $164.4 million of net
operating loss carryforwards for Federal income tax purposes, expiring from 2010
to 2020. Also at December 31, 2001, there were $1.0 million of alternative
minimum tax credit carryforwards. In addition, the Company has an ownership
change as defined in IRC Section 382. Accordingly, the Company may be limited
(on an annual basis) as to the amount of its net operating loss utilization.
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.
20
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.
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
City, 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 above.
The loss also included the professional fees that were associated with equity
transactions and shareholder litigation settlements. The loss from operations of
$17.6 million in 1999 included $10.5 million of restructuring and other charges,
discussed below.
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
21
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 16 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 8 to the
consolidated financial statements. 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.
Other Income (Expense), Net
Other expense, net in 2000 totaled $3.0 million. Expense items totaled
$3.6 million and significant components included the costs associated with a
buyout proposal and letter of credit fees 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 letter of credit fees.
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.
Business Outlook
Results in 2002 are dependent on a number of key factors, including those
discussed below.
o The extent of the domestic economic recovery and related impact on
consumer spending in key markets of the Company, including
automotive, housing and related furnishings, and technology and
related hardware.
o The successful implementation of the Operational Reorganization
Plan.
22
o The ultimate resolution of recent claims from customers relating
to odors from mattresses containing foam manufactured by the
Company, as discussed above.
o The ability of the Company to implement selling price increases in
the event of higher raw material costs, which comprise a
significant percentage of the cost of many of the Company's
products.
LIQUIDITY AND CAPITAL RESOURCES
The principal source of cash for the Company in 2002 is anticipated to be
from operating activities of its wholly-owned subsidiary Foamex L.P. The
Company's operating cash requirements consist principally of working capital
requirements, scheduled payments of principal and interest on outstanding
indebtedness and capital expenditures. During 2002, cash provided by operating
activities will be limited by the cash requirements resulting from the
Operational Reorganization Plan and related restructuring charge recorded in the
fourth quarter of 2001. The Company believes that cash flow from operating
activities, cash on hand and periodic borrowings under its Amended Credit
Facility will be adequate to meet its liquidity requirements. Any unforeseen
decrease in demand for the Company's products could significantly reduce cash
flow from activities. The ability of Foamex L.P. to make distributions to the
Company is restricted by the terms of its financing agreements; therefore, the
Company is expected to have only limited access to the cash flow generated by
Foamex L.P. for the foreseeable future.
Cash and cash equivalents totaled $15.1 million at the end of 2001
compared to $4.9 million at the end of 2000. Working capital at the end of 2001
was $65.0 million and the current ratio was 1.3 to 1 compared to working capital
at the end of 2000 of $103.3 million and a current ratio of 1.5 to 1. The
decrease in working capital is primarily due to a $45.9 million increase in
accounts payable, partially attributable to certain vendor payment terms that
were lengthened in 2001.
Total debt at the end of 2001 was $666.3 million, down $45.6 million from
year-end 2000. As of December 31, 2001, there were $125.0 million of revolving
credit borrowings, at a weighted average interest rate of 6.2%, under the Foamex
L.P. credit facility with $19.3 million available for additional borrowings and
$20.7 million of letters of credit outstanding. Foamex Canada Inc. ("Foamex
Canada") did not have any outstanding borrowings as of December 31, 2001 under
Foamex Canada's revolving credit agreement, with unused availability of
approximately $5.0 million. Foamex Carpet did not have any outstanding
borrowings under the Foamex Carpet credit facility at December 31, 2001, with
unused availability of $14.8 million and $0.2 million of letters of credit
outstanding.
On March 25, 2002, the Company consummated a series of related financing
transactions, described under the caption "Refinancing and Corporate Structure"
above, designed to strengthen the Company's capital structure.
Cash Flow from Operating Activities
Cash provided by operating activities in 2001 was $106.4 million compared
to $51.0 million in 2000. The increase primarily reflected an increase in
accounts payable that contributed $45.9 million of the improvement. Also
contributing to the 2001 increase was a $15.2 million reduction in inventories.
As discussed above, results in 2001 included significant restructuring charges.
Included in the restructuring charge were non-cash items for asset impairments
and at year-end 2001 there was a net increase in the accrued restructuring
liability of $15.5 million.
Cash Flow from Investing Activities
Cash used for investing activities totaled $40.6 million for 2001. Cash
requirements included capital expenditures of $22.5 million and $17.6 million
for an acquisition, see Note 4 to the consolidated financial statements. In
2000, cash flow used for investing activities totaled $21.9 million, which
included $23.6 million of capital expenditures, partially offset by $3.6 million
of proceeds from the sale of assets. The estimate of capital expenditures for
2002 is approximately $24.0 million.
23
Cash Flow from Financing Activities
Cash used in financing activities was $55.7 million for 2001 compared to
cash used of $30.8 million in 2000. The increase reflected higher net debt
payments compared to 2000, a decrease in cash overdrafts, debt issuance costs
and other financing activities. During the first half of 2000, the $34.0 million
Foamex/GFI Note was repaid with borrowings under the Foamex L.P. revolving
credit facility.
Financial Condition
The Company anticipates that it will continue to comply with the
quarterly financial covenants contained in its Amended Credit Facility and its
other debt agreements. Management's current business plans anticipate customer
selling price management in response to raw material cost changes, improved
working capital management, comparable capital expenditures to the prior year,
successful implementation of on-going cost savings initiatives and improved
operating efficiencies. The achievement of the business plans and the
realization of proceeds resulting from the implementation of an improved asset
utilization program are necessary for compliance with the various financial
covenants for 2002 and prospectively.
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' approval 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, 2001, 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 $165.0 million and three term loans (Term loans B, C and
D) with an outstanding balance totaling $245.6 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.
Amended Credit Facility
The Amended Credit Facility consists of (1) the new revolving credit
facility, which is a non-amortizing revolving credit facility of $100.0 million
provided by a new syndicate of lenders (the "New Revolving Credit Facility"),
which will provide working capital for the Company and funding for other general
corporate purposes, (2) the various term loan facilities under the existing
credit agreement, (3) a new Term E Loan in an initial amount of $31.6 million,
the proceeds of which were borrowed at closing and used to repay in full the
obligations outstanding under the note payable to Foam Funding LLC, and (4) a
new Term F Loan in an initial amount of $25.0 million, the proceeds of which
were borrowed at closing and used to repay indebtedness outstanding under the
existing revolving credit facility. The remaining obligations outstanding under
the existing revolving credit facility were repaid with a portion of the
proceeds from the issuance of Senior Secured Notes as described below.
The commitments under the New Revolving Credit Facility are available to
the Company in the form of (1) revolving credit loans, (2) swing loans (subject
to a $20.0 million sublimit) and (3) letters of credit (subject to a $40.0
million sublimit).
The Company used a portion of the net proceeds from its Senior Secured
Notes to repay a portion of the existing term loans, the Term E Loan and the
Term F Loan as described below. After this repayment, the term loan facilities
under the Amended Credit Facility will consist of a $39.3 million Term B Loan, a
24
$35.7 million Term C Loan, a $51.7 million Term D Loan, a $16.3 million Term E
Loan and a $19.3 million Term F Loan (together with the Term B Loan, the Term C
Loan, the Term D Loan and the Term E Loan, the "Term Loans").
Loans made under the New Revolving Credit Facility will mature and the
commitments will terminate on June 30, 2005. The Term B Loan, the Term E Loan
and the Term F Loan will mature on June 30, 2005, the Term C Loan will mature on
June 30, 2006 and the Term D Loan will mature on December 29, 2006.
Each of the Term Loans will be subject to amortization on a quarterly
basis; however, after giving effect to the prepayments of the Term Loans as
described above, quarterly amortization payments will commence for the Term B
Loan, the Term E Loan and the Term F Loan in 2004, for the Term C Loan in 2005
and for the Term D Loan in 2006.
Net proceeds from the issuance of the Senior Secured Notes were applied
as follows: (1) $91.5 million was used to repay indebtedness outstanding under
the existing revolving credit facility; (2) $91.5 million was used to repay the
Existing Term Loans and the Term E Loan on a pro rata basis, which in the case
of the Existing Term Loans, were applied to outstanding installments thereof in
the order of their earliest maturities; (3) $48.5 million was used to repay the
Term Loans on a pro rata basis and applied to outstanding installments thereof
in the order of their earliest maturities and (4) the remaining $48.5 million
will be used to repurchase or redeem the senior subordinated notes, but to the
extent such proceeds are not used for this purpose by September 20, 2002, the
proceeds are required to be used to repay the Term Loans on a pro rata basis and
apply the prepayments to the outstanding installments in the order of their
earliest maturities.
Foamex L.P. is required to make mandatory prepayments of loans under the
Amended Credit Facility with: (1) the net cash proceeds received from sales of
assets by Foamex L.P. or certain of its subsidiaries, (2) the net cash proceeds
received from certain issuances by the Company, or certain of its subsidiaries
of indebtedness for borrowed money or equity interests and (3) 75% of excess
cash flow of Foamex L.P. and its subsidiaries in any fiscal year, such
percentage to be reduced to 50% if the ratio of outstanding obligations under
the Amended Credit Facility to EBDAIT for such fiscal year is reduced to
specified levels, subject, in each case, to certain limited exceptions.
Foamex L.P. is permitted to make voluntary prepayments and/or permanently
reduce the commitments under the New Revolving Credit Facility in whole or in
part, without premium or penalty, subject to reimbursement of the lenders'
redeployment costs in the case of prepayment of LIBO rate borrowings, other than
at the end of any interest period. All voluntary prepayments of Term Loans will
be applied to such tranches of Term Loans as Foamex L.P. may select.
The Company, FMXI, Inc. and each of Foamex L.P.'s domestic subsidiaries
will continue to guarantee the repayment of the obligations under the Amended
Credit Facility. The Amended Credit Facility will be secured by a first-priority
lien (subject to permitted liens) on substantially the same collateral that
secures the obligations under the existing credit facility, which includes
substantially all material tangible and intangible assets. In addition, all of
the partnership interests, all of the capital stock or other equity interests of
our domestic subsidiaries (including Foamex Carpet) and 65% of the capital stock
or other equity interests of Foamex L.P.'s first-tier foreign subsidiaries will
be pledged as part of the security for the obligations under the Amended Credit
Facility.
Borrowings under the Amended Credit Facility will bear interest at a
floating rate based upon (and including a spread over), at our option, (1) the
higher of (a) the funding agent's prime rate and (b) 0.50 of 1% in excess of the
Federal Reserve reported weighted average overnight rate for federal funds or
(2) the higher of (x) 2.50% per annum and (y) the LIBO rate, as defined, as
determined by the funding agent. Foamex L.P. will pay administration fees,
commitment fees, letter of credit fees and certain other expenses and provide
certain indemnities, all of which are believed to be customary for financings of
this type.
The Amended Credit Facility contains affirmative and negative covenants
that, subject to certain exceptions, are substantially similar to those
contained in the existing credit facility. The Amended Credit Facility includes
the following financial covenants, as defined therein: (1) a minimum EBDAIT test
for the year ended December 31, 2001; (2) a minimum net worth test; (3) a
minimum ratio of EBDAIT to cash interest expense; (4) a minimum ratio of EBDAIT
to fixed charges; and (5) a maximum ratio of funded debt to EBDAIT. These
covenants will be substantially the same as those contained in the existing
25
credit facility with appropriate changes to take into account the issuance of
the Senior Secured Notes and the contribution of Foamex Carpet to Foamex L.P.
The Amended Credit Facility also requires the refinancing of the 13 1/2% senior
subordinated notes on or prior to March 31, 2005.
The Amended Credit Facility contains events of default that, subject to
certain exceptions, are substantially similar to those contained in the existing
credit facility, including, but not limited to, nonpayment of principal,
interest, fees or other amounts when due, violation of covenants, inaccuracy of
representations and warranties in any material respect, cross default and cross
acceleration to certain other indebtedness, bankruptcy, ERISA, material
judgments and change of control. The events of default are subject to grace
periods and materiality qualifications.
Foamex Carpet Credit Facility
At December 31, 2001, Foamex Carpet had a revolving credit facility (the
"Foamex Carpet Credit Facility"), which provided a commitment of $15.0 million
through February 2004. There were no borrowings outstanding under the credit
facility at December 31, 2001 and available borrowings totaled $14.8 million
with $0.2 million of letters of credit outstanding.
Contractual Obligations and Commercial Commitments
At December 31, 2001, the Company had obligations to repay a total of
$660.1 million of principal of long-term debt borrowed under a number of
arrangements with lenders. The amortization schedule for the Company's long-term
debt payments is included in Note 8 to the consolidated financial statements. On
March 25, 2002, the Company issued $300.0 million of Senior Secured Notes due on
April 1, 2009. A total of $231.5 million of the proceeds from the Senior Secured
Notes was used to repay debt that would have matured in 2002, 2003 and 2004. At
December 31, 2001, the Company had outstanding letters of credit aggregating
$20.9 million.
The Company also has commitments for operating leases discussed in Note
17 to the consolidated financial statements that require minimum payments
totaling $51.3 million, with $44.5 million due through December 31, 2006 and the
balance in later years. The Company does not have any other significant
contractual obligations or commercial commitments.
OTHER
Shareholder and Change in Control Developments
Trace International Holdings, Inc. ("Trace") is a privately held company,
which owned approximately 29% of the Company's outstanding voting common stock
at September 30, 2000, and whose former Chairman also serves as the Company's
Chairman. The Company's common stock owned by Trace was pledged as collateral
against certain of Trace's obligations. Certain credit agreements and promissory
notes of the Company's subsidiaries, pursuant to which approximately $401.1
million of debt was outstanding as of September 30, 2000, provided that a
"change of control" would be an event of default and could result in the
acceleration of such indebtedness. "Change of control" means, for this purpose,
that (i) a person or related group, other than Trace, beneficially owns more
than 25% of the Company's outstanding voting stock and (ii) such voting stock
constitutes a greater percentage of such voting stock than the amount
beneficially owned by Trace. Additionally, certain indentures of Foamex L.P. and
Foamex Capital Corporation ("FCC"), a wholly-owned subsidiary of Foamex L.P.,
relating to senior subordinated notes 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.
26
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. Certain equity
transactions, primarily the exercise of stock options, have reduced the Bank of
Nova Scotia's common stock ownership percentage to 23.6% at February 15, 2002.
Environmental Health and Safety
We are subject to extensive and changing federal, state, local and
foreign environmental laws and regulations, including those relating to the use,
handling, storage, discharge and disposal of hazardous substances, the discharge
or emission of materials into the environment, and the remediation of
environmental contamination, and as a result, are from time to time involved in
administrative and judicial proceedings and inquiries relating to environmental
matters. As of December 31, 2001, we had accruals of approximately $3.0 million
for environmental matters.
The Clean Air Act Amendments of 1990 ("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. The final National Emission Standard for Hazardous Air
Pollutants, or "NESHAP," for flexible polyurethane foam production was
promulgated on October 7, 1998. The NESHAP required a reduction of approximately
70% of the emission of methylene chloride for the slab stock foam industry
effective October 7, 2001. Through the use of alternative technologies,
including VPF(SM) and carbon dioxide, and by shifting current production to
facilities which use these alternative technologies, we are in substantial
compliance with these regulations. On August 8, 2001, the United States
Environmental Protection Agency, or "EPA," proposed a NESHAP for Flexible
Polyurethane Foam Fabrication Operations. The proposed NESHAP regulates
emissions of methylene chloride and other Hazardous Air Pollutants and restricts
air emissions from flame lamination sources. The Company does not believe that
this standard, if adopted, will require us to make material expenditures.
We have reported to the appropriate state authorities that we have found
soil and/or groundwater contamination in excess of state standards at certain
locations. Seven sites are currently in various stages of investigation or
remediation. Accordingly, the extent of contamination and the ultimate liability
is not known with certainty for all sites. As of December 31, 2001, we had
accruals of $2.5 million for the estimated cost of remediation, including
professional fees and monitoring costs, for these sites. During 2000, we reached
an indemnification agreement with the former owner of the Morristown, Tennessee
facility. The agreement allocates the incurred and future remediation costs
between the former owner and us. The estimated allocation of future costs for
the remediation of this facility is not significant, based on current known
information. The former owner was Recticel Foam Corporation, a subsidiary of
Recticel.
We have either upgraded or closed all underground storage tanks at our
facilities in accordance with applicable regulations.
27
The Comprehensive Environmental Response, Compensation and Liability Act,
or "CERCLA," and comparable state laws impose liability without fault for the
costs of cleaning up contaminated sites on certain classes of persons that
contributed to the release of hazardous substances into the environment at those
sites, for example, by generating wastes containing hazardous substances which
were disposed at such sites. We are currently designated as a Potentially
Responsible Party, or "PRP," by the EPA or by state environmental agencies or
other PRPs, pursuant to CERCLA or analogous state statutes, with respect to
eight sites. Estimates of total cleanup costs and fractional allocations of
liability are often provided by the EPA, the state environmental agency or the
committee of PRPs with respect to the specified site. Based on these estimates
(to the extent available) and on known information, in each case and in the
aggregate, our liability is not considered to be significant.
In 2002, capital expenditures for safety and environmental compliance
projects are anticipated to be approximately $2.0 million. Although it is
possible that new information or future developments could require the Company
to reassess the potential exposure relating to all pending environmental
matters, including those described above, management believes that, based upon
all currently available information, the resolution of these environmental
matters will not have a material adverse effect on our operations, financial
position, capital expenditures or competitive position. The possibility exists,
however, that new environmental legislation and/or environmental regulations may
be adopted, or other environmental conditions, including the presence of
previously unknown environmental contamination, may be found to exist or a
reassessment of the potential exposure to pending environmental matters may be
necessary due to new information or future developments, that may require
expenditures not currently anticipated and that may be material.
Inflation, Raw Material Costs and Other Matters
On average, inflation rates for the domestic economy continue to be
relatively low. Although long-term inflation rates are difficult to predict, the
Company believes it has the flexibility in operations and capital structure to
maintain a competitive position. The prices of the two principal chemicals used,
TDI and polyol, are influenced by demand, 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. In 2001, the
beginning of the economic slowdown resulted in excess manufacturing capacity for
the major chemical suppliers. This, coupled with declining oil prices, resulted
in lower costs for raw materials in 2001. Some TDI and polyol suppliers have
informed the Company that they will seek to raise prices in the first six months
of 2002. The Company will attempt 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 us to adjust selling prices. Results of
operations have been and could be adversely affected by delays in implementing,
or the Company's inability to implement, selling price increases to offset raw
material cost increases.
Related Party Transactions
The Company has had a number of related party transactions in the past,
primarily with affiliates of Trace. Such related party transactions and current
balances are discussed in Note 16 to the consolidated financial statements
included in this report on Form 10-K.
Accounting Changes
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS No. 133") requires the
fair value of derivatives be recognized in the consolidated balance sheets.
Changes in the fair value of derivatives are 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 were effective for the
Company in the first quarter of 2001.
These statements create a foundation that addresses 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
adoption of the statements did not have any impact on the results of operations
or financial position of the Company.
28
During the third quarter of 2001, Statement of Financial Accounting
Standards No. 141, "Business Combinations" ("SFAS No. 141") and Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets"
("SFAS No. 142") were issued. SFAS No. 141 addresses financial accounting and
reporting for business combinations and limits the accounting for business
combinations to the purchase method. The statement is effective for all business
combinations, including the acquisition discussed in Note 4 to the consolidated
financial statements, with an acquisition date of July 1, 2001, or later. SFAS
No. 142 addresses financial accounting and reporting for acquired goodwill and
other intangible assets. A key change as a result of implementing SFAS No. 142
will be that goodwill and certain other intangibles will no longer be amortized
and there may be more volatility in the reported results than under the previous
standard because impairment losses are likely to occur irregularly and in
varying amounts. Any impairment losses for goodwill and indefinite-lived
intangible assets that arise due to the initial application of SFAS No. 142 will
be reported as resulting from a change in accounting principle. Any goodwill and
intangible assets acquired after June 30, 2001, including the acquisition
discussed in Note 4 to the consolidated financial statements, will be subject
immediately to the nonamortization and amortization provisions of SFAS No. 142.
The Company continues to evaluate SFAS No. 142 and has not yet determined the
impact, however the Company expects that the adoption of SFAS No. 142 will
reduce annual amortization expense by approximately $5.9 million.
Also during the third quarter of 2001, Statement of Financial Accounting
Standards No. 143, "Accounting for Asset Retirement Obligations ("SFAS No. 143")
was issued. SFAS No. 143 requires the recognition of a liability for the
estimated cost of disposal as part of the initial cost of a long-lived asset and
will be effective in 2003. In late 2001, Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" ("SFAS No. 144") was issued. SFAS No. 144 will provide a single approach
for measuring the impairment of long-lived assets, including a segment of a
business accounted for as a discontinued operation or those to be sold or
disposed of other than by sale. SFAS No. 144 will be effective in 2002. The
Company has not yet determined the impact of SFAS No. 143 and SFAS No. 144.
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, 2001, indebtedness
with variable interest rates totaled $410.5 million. On an annualized basis, if
the interest rates on these debt instruments increased by 1.0%, interest expense
would increase by approximately $4.1 million. As discussed in Item 7, the
Company completed a refinancing on March 25, 2002. The impact of the refinancing
will be to significantly reduce the amount of the Company's debt subject to
variable interest rates.
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
The Company changed its accountants during 2001. Detailed information
required by this item was included in the Current Reports on Form 8-K and 8-K/A
filed with the Securities and Exchange Commission on June 29, July 6, July 17
and July 19, 2001.
PART III
The information required by this Part III (Items 10, 11, 12 and 13) will
be included in a Proxy Statement to be filed no later than 120 days after the
end of the fiscal year covered by this Annual Report on Form 10-K, and is
incorporated herein by reference.
29
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial statements.
Foamex International Inc. and Subsidiaries:
Independent Auditors' Report F-2
Report of Independent Accountants F-3
Consolidated Balance Sheets as of December 31, 2001 and 2000 F-4
Consolidated Statements of Operations for the years ended December 31, 2001, 2000 and 1999 F-6
Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2000 and 1999 F-7
Consolidated Statements of Stockholders' Deficiency for the years ended December 31,
2001, 2000 and 1999 F-8
Notes to Consolidated Financial Statements F-9
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 December 26, 2001, was filed for Item 5. - Other
Events, concerning a press release announcing the implementation of a
comprehensive profit enhancement program and related charge against
earnings in the fourth quarter of 2001.
(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").
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.
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.
30
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.
4.2.1(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.
4.4.2(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.
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 - Amended and Restated Foamex Security Agreement, dated as of
July 18, 2001, made by Foamex L.P. in favor of Citicorp USA,
Inc., as Collateral Agent.
4.4.16 - Amended and Restated Subsidiary Security Agreement, dated as of
July 18, 2001, made by Foamex Latin America, Inc. in favor of
Citicorp USA, Inc., as Collateral Agent.
4.4.17 - Amended and Restated Subsidiary Security Agreement, dated as of
July 18, 2001, made by Foamex Mexico, Inc. in favor of Citicorp
USA, Inc., as Collateral Agent.
4.4.18 - Amended and Restated Subsidiary Security Agreement, dated as of
July 18, 2001, made by Foamex Mexico II, Inc. in favor of
Citicorp USA, Inc., as Collateral Agent.
4.4.19 - Amended and Restated Subsidiary Security Agreement, dated as of
July 18, 2001, made by Foamex Asia, Inc. in favor of Citicorp
USA, Inc., as Collateral Agent.
4.4.20 - Amended and Restated Subsidiary Security Agreement, dated as of
July 18, 2001, 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.
31
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 and Attachment, dated August 8, 2001, from
the Bank of Nova Scotia to Foamex Canada Inc.
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.
32
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 - Amendment No. 3 to Foamex Credit Agreement, dated as of July
18, 2001.
4.10.17 - Amendment No. 4 to Foamex Credit Agreement dated as of December
21, 2001.
4.10.18(gg) - Amendment No. 4 to Foamex Carpet Cushion Agreement, dated
February 18, 2000.
4.10.19(ll) - Amendment No. 5 to Foamex Carpet Cushion Agreement, dated March
30, 2001.
4.10.20 - Amendment No. 6 to Foamex Carpet Cushion Agreement, dated as of
December 21, 2001
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.
4.12.6(ll) - Amendment to Promissory Note of Foamex Carpet in favor of Foam
Funding LLC dated as of March 30, 2001.
4.12.7 - Amendment to Promissory Note of Foamex Carpet in favor of Foam
Funding LLC, dated as of December 21, 2001.
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(ff) - 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(ff) - 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.
10.2(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.
33
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.
10.10.1(k) - Salaried Incentive Plan of Foamex L.P. and Subsidiaries.
10.10.3(k) - Equity Growth Participation Program.
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.
10.10.9(mm) - Foamex International Inc. Equity Incentive Plan for
Non-Employee Directors.
10.10.10(mm) - Foamex International Key Employee Incentive Bonus Plan.
10.10.11(nn) - Agreement with Consultant, dated April 24, 2001 by and between
Robert J. Hay and Foamex L.P.
10.10.12 - Foamex Supplemental Executive Retirement Plan, effective as of
May 15, 2001.
10.10.13 - Split dollar Life Insurance Agreement Between Foamex
International Inc. and Marshall S. Cogan, dated as of May 1,
2001
10.11.1(kk) - 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(kk) - Employment Agreement, amended effective as of January 29, 2001,
by and between Foamex International and John Televantos.
10.11.4(ll) - Termination and Release Agreement dated as of January 30, 2001,
by and between the Company and Jack G. Johnson.
10.11.5 - Termination and Release Agreement dated as of December 6, 2001,
by and between the Company and John Televantos.
10.11.6 - Employment Offer Letter, dated August 4, 2001, by and between
Foamex International and Thomas E. Chorman
10.11.7 - Employment Offer Letter, dated December 5, 2001, by and between
Foamex International and Peter W. Johnson
10.11.8 - First Amendment to Employment Agreement, dated as of December
31, 2001, by and between the Company and Marshall S. Cogan.
34
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 - Joint Venture Agreement between Hua Kee Company Limited and
Foamex Asia, Inc. amended and restated as of December 6, 2001.
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.
23.1 - Consent of Independent Auditors, Deloitte & Touche 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.
(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.
35
(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.
(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.
36
(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 31, 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.
(kk) Incorporated herein by reference to the Exhibit to the Annual Report on
Form 10-K of the Company for year ended December 31, 2000.
(ll) Incorporated herein by reference to the Exhibit to the Form 10-Q of the
Company for the quarterly period ended March 31, 2001.
(mm) Incorporated herein by reference to the Appendix to the Company's
definitive amended and restated proxy statement, dated July 12, 2001.
(nn) Incorporated herein by reference to the Exhibit to the Form 10-Q of the
Company for the quarterly period ended June 30, 2001.
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.
37
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized as of the 29th day of March 2002.
FOAMEX INTERNATIONAL INC.
By: /s/ Peter W. Johnson
---------------------------------------
Name: Peter W. Johnson
Title: President and Chief Operating Officer
(Principal Executive Officer)
By: /s/ Thomas E. Chorman
---------------------------------------
Name: Thomas E. Chorman
Title: Executive Vice President, Chief
Financial Officer and Chief
Administrative Officer
By: /s/ Michael D. Carlini
---------------------------------------
Name: Michael D. Carlini
Title: Senior Vice President - Finance
and Chief Accounting Officer
38
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on its behalf by the
registrant and in the capacities and on the dates indicated:
Signature Title Date
/s/ Marshall S. Cogan Chairman of the Board March 29, 2002
- ----------------------------
Marshall S. Cogan
/s/ John V. Tunney Vice Chairman and Director March 29, 2002
- ----------------------------
John V. Tunney
/s/ Robert J. Hay Chairman Emeritus March 29, 2002
- ----------------------------
Robert J. Hay and Director
/s/ John C. Culver Director March 29, 2002
- ----------------------------
John C. Culver
/s/ Julie Nixon Eisenhower Director March 29, 2002
- ----------------------------
Julie Nixon Eisenhower
/s/ Stuart J. Hershon Director March 29, 2002
- ----------------------------
Stuart J. Hershon
/s/ Virginia A. Kamsky Director March 29, 2002
- ----------------------------
Virginia A. Kamsky
/s/ Raymond E. Mabus Director March 29, 2002
- ----------------------------
Raymond E. Mabus
/s/ Steven B. Sharpe Director March 29, 2002
- ----------------------------
Steven B. Sharpe
39
FOAMEX INTERNATIONAL INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Foamex International Inc.
Index to Consolidated Financial Statements F-1
Independent Auditors' Report F-2
Report of Independent Accountants F-3
Consolidated Balance Sheets as of December 31, 2001 and 2000 F-4
Consolidated Statements of Operations for the years ended December 31, 2001,
2000 and 1999 F-6
Consolidated Statements of Cash Flows for the years ended December 31, 2001,
2000 and 1999 F-7
Consolidated Statements of Stockholders' Deficiency for the years ended December 31, 2001,
2000 and 1999 F-8
Notes to Consolidated Financial Statements F-9
F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Foamex International Inc.
Linwood, Pennsylvania
We have audited the accompanying consolidated balance sheet of Foamex
International Inc. and subsidiaries (the "Company") as of December 31, 2001, and
the related consolidated statements of operations, cash flows and stockholders'
deficiency for the year then ended. Our audit also included the consolidated
financial statement schedules as of and for the year ended December 31, 2001
listed in the Index at Item 14a. These consolidated financial statements and
financial statement schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements and financial statement schedules based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall consolidated financial statement presentation. We
believe that our audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company at December 31, 2001,
and the results of its operations and its cash flows for the year then ended in
conformity with accounting principles generally accepted in the United States of
America. Also, in our opinion, such 2001 consolidated financial statement
schedules, when considered in relation to the basic consolidated financial
statements taken as a whole, present fairly in all material respects the
information set forth therein.
/s/ DELOITTE & TOUCHE LLP
March 25, 2002
Parsippany, New Jersey
F-2
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of Foamex International Inc.:
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14 (a) present fairly, in all material respects, the
financial position of Foamex International Inc and its subsidiaries at December
31, 2000, and the results of their operations and their cash flows for each of
the two years in the period ended December 31, 2000 in conformity with
accounting principles generally accepted in the United States of America. In
addition, in our opinion, the financial statement schedules listed in the index
appearing under Item 14 (a) present fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements. These financial statements and financial
statement schedules are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements and
financial statement schedules based on our audits. We conducted our audits of
these statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
As discussed in Note 8, 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 8.
/s/ PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
March 30, 2001
F-3
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, December 31,
2001 2000
---------- ----------
ASSETS (thousands)
CURRENT ASSETS
Cash and cash equivalents $ 15,064 $ 4,890
Accounts receivable, net of allowance for doubtful
accounts and discounts of $10,940 in 2001 and $9,926 in 2000 173,461 170,590
Inventories 89,430 100,334
Deferred income taxes 375 -
Other current assets 32,935 18,889
---------- ----------
Total current assets 311,265 294,703
---------- ----------
PROPERTY, PLANT AND EQUIPMENT
Land and land improvements 7,512 6,805
Buildings and leasehold improvements 116,232 100,169
Machinery, equipment and furnishings 275,261 268,353
Construction in progress 8,199 21,964
---------- ----------
Total 407,204 397,291
Less accumulated depreciation and amortization (206,407) (184,760)
---------- ----------
Property, plant and equipment, net 200,797 212,531
COST IN EXCESS OF NET ASSETS ACQUIRED, net of
accumulated amortization of $34,855 in 2001 and
$29,076 in 2000 208,184 209,125
DEBT ISSUANCE COSTS, net of
accumulated amortization of $14,643 in 2001 and
$10,675 in 2000 13,690 15,082
DEFERRED INCOME TAXES - 328
OTHER ASSETS 33,026 19,812
---------- ----------
TOTAL ASSETS $766,962 $751,581
========== ==========
The accompanying notes are an integral part of the consolidated
financial statements.
F-4
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, December 31,
2001 2000
--------- ---------
LIABILITIES AND STOCKHOLDERS' DEFICIENCY (thousands, except share data)
CURRENT LIABILITIES
Current portion of long-term debt $ 4,023 $ 8,356
Current portion of long-term debt - related party 14,040 15,795
Accounts payable 128,852 82,939
Accrued employee compensation and benefits 25,858 21,853
Accrued interest 8,946 9,198
Accrued restructuring 12,392 4,766
Accrued customer rebates 21,869 23,839
Cash overdrafts 4,073 6,885
Other accrued liabilities 24,551 16,311
Deferred income taxes 1,612 1,511
--------- ---------
Total current liabilities 246,216 191,453
LONG-TERM DEBT 630,682 656,168
LONG-TERM DEBT - RELATED PARTY 17,550 31,590
ACCRUED EMPLOYEE BENEFITS 25,944 18,824
DEFERRED INCOME TAXES 4,171 2,708
ACCRUED RESTRUCTURING 12,604 4,681
OTHER LIABILITIES 10,541 10,826
--------- ---------
Total liabilities 947,708 916,250
--------- ---------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIENCY
Preferred Stock, par value $1.00 per share:
Authorized 5,000,000 shares
Issued 15,000 shares - Series B in 2001 and 2000 15 15
Common Stock, par value $.01 per share:
Authorized 50,000,000 shares
Issued 27,260,441 shares in 2001 and 27,048,994 shares in 2000
Outstanding 23,771,441 shares in 2001 and 23,559,994 shares in 2000 273 270
Additional paid-in capital 97,668 96,275
Accumulated deficit (206,544) (200,932)
Accumulated other comprehensive loss (35,157) (23,296)
Other:
Common Stock held in treasury, at cost:
3,489,000 shares in 2001 and 2000 (27,780) (27,780)
Shareholder note receivable (9,221) (9,221)
--------- ---------
Total stockholders' deficiency (180,746) (164,669)
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY $766,962 $751,581
========= =========
The accompanying notes are an integral part of the consolidated
financial statements.
F-5
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31,
2001 2000 1999
---------- ---------- ----------
(thousands, except per share amounts)
NET SALES $1,252,904 $1,257,778 $1,294,639
COST OF GOODS SOLD 1,072,823 1,085,753 1,114,331
---------- ---------- ----------
GROSS PROFIT 180,081 172,025 180,308
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 80,540 69,286 76,759
RESTRUCTURING, IMPAIRMENT AND OTHER CHARGES 36,068 6,268 10,491
---------- ---------- ----------
INCOME FROM OPERATIONS 63,473 96,471 93,058
INTEREST AND DEBT ISSUANCE EXPENSE 63,237 75,229 72,908
INCOME FROM EQUITY INTEREST IN JOINT VENTURE 1,645 1,652 512
OTHER INCOME (EXPENSE), NET (2,196) (3,042) 1,516
---------- ---------- ----------
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES (315) 19,852 22,178
PROVISION FOR INCOME TAXES 5,297 2,839 2,462
---------- ---------- ----------
NET INCOME (LOSS) $ (5,612) $ 17,013 $ 19,716
========== ========== ==========
BASIC EARNINGS (LOSS) PER SHARE $ (0.24) $ 0.69 $ 0.79
========== ========== ==========
DILUTED EARNINGS (LOSS) PER SHARE $ (0.24) $ 0.67 $ 0.78
========== ========== ==========
The accompanying notes are an integral part of the consolidated
financial statements.
F-6
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31,
2001 2000 1999
-------- -------- --------
OPERATING ACTIVITIES (thousands)
Net income (loss) $ (5,612) $ 17,013 $ 19,716
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 33,988 36,588 35,750
Amortization of debt issuance costs, debt premium
and debt discount 1,288 1,335 1,315
Asset impairment and other charges 13,811 2,621 314
Loss (gain) on disposition of assets 963 1,654 (3,061)
Provision for uncollectible accounts 5,479 2,838 2,758
Retirement benefit funding (greater) less than expense (1,752) (7,198) 1,865
Deferred income taxes 1,635 513 807
Other, net 361 303 (346)
Changes in operating assets and liabilities:
Accounts receivable (9,578) (6,857) 15,829
Inventories 15,177 (2,452) 38,776
Accounts payable 45,913 262 (62,692)
Accrued restructuring 15,549 (3,352) 849
Other assets and liabilities (10,808) 7,720 6,839
-------- -------- --------
Net cash provided by operating activities 106,414 50,988 58,719
-------- -------- --------
INVESTING ACTIVITIES
Capital expenditures (22,482) (23,593) (20,080)
Proceeds from sale of assets 600 3,570 17,823
Acquisitions (17,559) - -
Other investing activities (1,130) (1,850) 599
-------- -------- --------
Net cash used in investing activities (40,571) (21,873) (1,658)
-------- -------- --------
FINANCING ACTIVITIES
Repayments of short-term borrowings - (1,627) (1,330)
Net proceeds from (repayments of) revolving loans (20,905) 32,220 (25,753)
Repayments of long-term debt (8,538) (20,550) (17,281)
Repayments of long-term debt-related party (15,795) (41,898) (9,652)
Increase (decrease) in cash overdrafts (2,812) 1,029 (1,444)
Debt issuance costs (2,578) - (7,866)
Other financing activities (5,041) 24 270
-------- -------- --------
Net cash used in financing activities (55,669) (30,802) (63,056)
Net increase (decrease) in cash and cash equivalents 10,174 (1,687) (5,995)
Cash and cash equivalents at beginning of period 4,890 6,577 12,572
-------- -------- --------
Cash and cash equivalents at end of period $ 15,064 $ 4,890 $ 6,577
======== ======== =========
The accompanying notes are an integral part of the consolidated
financial statements.
F-7
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIENCY
Accumulated
Additional Other
Preferred Common Paid-in Accumulated Comprehensive
Stock Stock Capital Deficit Loss Other Total
---- ---- ------- --------- -------- -------- ---------
(thousands)
Balances at January 1, 1999 $ - $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)
Net loss (5,612) (5,612)
Minimum pension liability adjustment (10,782) (10,782)
Foreign currency translation adjustment (1,079) (1,079)
---------
Comprehensive income (loss) (17,473)
Stock compensation - directors 352 352
Stock options exercised 3 914 917
Deferred taxes on stock option exercises 127 127
---- ---- ------- --------- -------- -------- ---------
Balances at December 31, 2001 $15 $273 $97,668 $(206,544) $(35,157) $(37,001) $(180,746)
=== ==== ======= ========= ======== ======== =========
The accompanying notes are an integral part of the consolidated
financial statements.
F-8
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION
Organization
Foamex International Inc. (the "Company") operates in the flexible
polyurethane and advanced polymer foam products industry. As of December 31,
2001, the Company's operations are primarily conducted through its wholly-owned
subsidiaries, Foamex L.P. and Foamex Carpet Cushion, Inc. ("Foamex Carpet").
Foamex Carpet was converted to a limited liability company and was contributed
to Foamex L.P. on March 25, 2002. Foamex L.P. conducts foreign operation through
Foamex Canada Inc., Foamex Latin America, Inc. and Foamex Asia, Inc. Financial
information concerning the business segments of the Company is included in Note
14.
Shareholder and Change in Control Developments
Trace International Holdings, Inc. ("Trace") is a privately held company,
which owned approximately 29% of the Company's outstanding voting common stock
at September 30, 2000, and whose former Chairman also serves as the Company's
Chairman. The Company's common stock owned by Trace was pledged as collateral
against certain of Trace's obligations. Certain credit agreements and promissory
notes of the Company's subsidiaries, pursuant to which approximately $401.1
million of debt was outstanding as of September 30, 2000, provided that a
"change of control" would be an event of default and could result in the
acceleration of such indebtedness. "Change of control" means, for this purpose,
that (i) a person or related group, other than Trace, beneficially owns more
than 25% of the Company's outstanding voting stock and (ii) such voting stock
constitutes a greater percentage of such voting stock than the amount
beneficially owned by Trace. Additionally, certain indentures of Foamex L.P. and
Foamex Capital Corporation ("FCC"), a wholly-owned subsidiary of Foamex L.P.,
relating to senior subordinated notes 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. Certain equity
transactions, primarily the exercise of stock options, have reduced the Bank of
Nova Scotia's common stock ownership percentage to 23.6% at February 15, 2002.
F-9
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. The equity method of
accounting is used for investments in which the Company has significant
influence, generally this represents ownership of at least 20% and not more than
50%. The Company has a joint venture in Asia in which that it increased its
ownership to 70% in late 2001. The Company does not have control due to the
minority shareholders' substantive participation rights and therefore uses the
equity method of accounting. All significant intercompany accounts and
transactions have been eliminated in consolidation.
Accounting Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to
significant concentrations of credit risk consist primarily of cash and cash
equivalents and trade accounts receivable. The Company maintains cash and cash
equivalents and certain other financial instruments with various large financial
institutions. The Company's periodic evaluation of these financial institutions
are considered in the Company's investment strategy.
The Company sells foam products to the automotive, carpet, cushioning and
other industries. The Company performs ongoing credit evaluations of its
customers and generally does not require collateral. The Company maintains
allowance accounts for potential credit losses and such losses have been within
management's expectations.
Revenue Recognition, Discounts and Rebates
Revenue from sales, net of discounts and estimated returns, allowances
and rebates, is recognized when product title passes to the customer, which is
primarily at the time of shipment.
Cash and Cash Equivalents
Highly liquid investments with an original maturity of three months or
less when purchased are recognized as cash equivalents.
Accounts Receivable and Allowance for Uncollectible Accounts
An estimate of uncollectible accounts is maintained and is based on
historical collection experience and specific customer collection issues. A
significant change in the financial condition of one or more of the Company's
larger customers could have a material adverse impact on future results.
Fair Value of Financial Instruments
Carrying amounts reported in the consolidated balance sheets for cash and
cash equivalents, accounts receivable, accounts payable, accrued liabilities and
short-term borrowings approximate fair value due to the short-term nature of
these instruments.
F-10
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
The carrying amount and fair value of long-term debt at December 31, 2001
were $666.3 million and $603.4 million, respectively, and at December 31, 2000
were $711.9 million and $595.1 million, respectively. The fair value of
long-term debt is estimated using quoted market prices, where available, or
discounted cash flows. Fair value estimates are made at a specific point in
time, based on relevant market information about the financial instruments.
These estimates are subjective in nature and involve uncertainties and matters
of significant judgment and therefore, cannot be determined with precision.
Changes in assumptions could significantly affect the estimates.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined
on a first-in, first-out basis.
Property, Plant and Equipment
Property, plant and equipment are stated at cost and are depreciated
using the straight-line method over the estimated useful lives of the assets.
The range of useful lives estimated for buildings is generally 20 to 35 years,
and the range for machinery, equipment and furnishings is 5 to 12 years.
Leasehold improvements are amortized over the shorter of the terms of the
respective leases or the estimated useful lives of the leasehold improvements.
Depreciation expense for 2001, 2000 and 1999 was $26.4 million, $28.7 million
and $27.9 million, respectively.
Maintenance and repairs are charged to expense as incurred. Renewals and
major improvements are capitalized if they extend the life of the asset. When
assets are retired or otherwise disposed of, the asset and related accumulated
depreciation are removed from the accounts and any gain or loss is recognized in
the results of operations.
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. See the section below entitled "Future
Accounting Changes - Goodwill and Other Intangible Assets."
Impairment of Long-Lived Assets
The Company reviews the carrying value of its long-lived assets,
including goodwill, whenever events or changes in circumstances indicate that
the carrying value of an asset may no longer be appropriate. The Company
assesses recoverability of the carrying value of the asset by estimating the
future net cash flows expected to result from the asset, including eventual
disposition. If the future undiscounted net cash flows are less than the
carrying value of the asset, an impairment loss is recorded equal to the
difference between the asset's carrying value and fair value.
Debt Issuance Costs
Debt issuance costs consist of amounts incurred in obtaining long-term
financing and are disclosed in the financing activities section of the
consolidated statements of cash flows. These costs are being amortized over the
term of the related debt using the effective interest method.
Environmental Remediation
Environmental expenditures that relate to current operations are
expensed. Expenditures that relate to an existing condition caused by past
operations, and which do not contribute to current or future revenue generation,
are expensed. Liabilities are recorded when environmental assessments and/or
remedial efforts are probable and the costs can be reasonably estimated.
F-11
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Comprehensive Income (Loss)
Other comprehensive income or loss items are revenues, expenses, gains
and losses that under generally accepted accounting principles are excluded from
net income and reflected as a component of stockholders' deficiency, including
foreign currency translation and minimum pension liability adjustments.
Foreign Currency Translation
The financial statements of foreign subsidiaries have been translated
into U.S. dollars by using period-end exchange rates for the assets and
liabilities and the average exchange rates for the statements of operations.
Currency translation adjustments are included in accumulated other comprehensive
loss. Transaction gains (losses) are reflected in operations.
Research and Development
Research and development costs are expensed as incurred. Amounts charged
against income were $3.1 million, $2.5 million and $3.3 million in 2001, 2000
and 1999, respectively.
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 and for net operating loss carryforwards using the income tax rates,
under existing legislation, expected to be in effect at the date such temporary
differences are expected to reverse. Deferred income tax assets are reduced by a
valuation allowance when it is considered more likely than not that a portion of
the deferred income tax assets will not be realized in a future period. The
estimates utilized in the recognition of deferred income tax assets are subject
to revision in future periods.
Stock Options
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS No. 123"), encourages, but does not require,
companies to record compensation cost for stock-based employee compensation
plans at fair value. The Company has chosen to continue to account for
stock-based compensation using the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB No. 25"), and related interpretations. Accordingly, the Company
records expense in an amount equal to the excess, if any, of the quoted market
price on the grant date over the option price.
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") requires the
fair value of derivatives to be recognized in the consolidated balance sheet.
Changes in the fair value of derivatives are 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 were effective for the
Company in the first quarter of 2001.
These statements create a foundation that addresses accounting and
reporting issues for a wide range of financial instruments defined as
derivatives and related hedging activities. As of December 31, 2001 and 2000,
the
F-12
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Company did not have any derivatives, as defined in the statements. Accordingly,
the adoption of the statements did not have any impact on the results of
operations or financial position of the Company.
Accounting Changes - Business Combinations
During 2001, Statement of Financial Accounting Standards No. 141,
"Business Combinations" ("SFAS No. 141") was issued. SFAS No. 141 addresses
financial accounting and reporting for business combinations and limits the
accounting for business combinations to the purchase method. The statement was
effective for all business combinations, including the acquisition discussed in
Note 4, with an acquisition date of July 1, 2001, or later.
Future Accounting Changes - Goodwill and Other Intangible Assets
During 2001, Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets" ("SFAS No. 142") was issued. SFAS No. 142
addresses financial accounting and reporting for acquired goodwill and other
intangible assets. A key change as a result of implementing SFAS No. 142 will be
that goodwill and certain other intangibles will no longer be amortized but will
be periodically assessed for impairment, and as a result there may be more
volatility in the reported results than under the previous standard because
impairment losses are likely to occur irregularly and in varying amounts. Any
impairment losses for goodwill and indefinite-lived intangible assets that arise
due to the initial application of SFAS No. 142 will be reported as resulting
from a change in accounting principle. Any goodwill and intangible assets
acquired after June 30, 2001, including the acquisition discussed in Note 4,
will be subject immediately to the nonamortization and amortization provisions
of SFAS No. 142. The other provisions of SFAS No. 142 will be adopted by the
Company on January 1, 2002. The Company continues to evaluate SFAS No. 142 and
has not yet determined the complete impact, however the Company expects that the
adoption of SFAS No. 142 will reduce annual amortization expense by
approximately $5.9 million.
Future Accounting Changes - Asset Retirement Obligations and Impairment or
Disposal of Long-Lived Assets
During 2001, Statement of Financial Accounting Standards No. 143,
"Accounting for Asset Retirement Obligations ("SFAS No. 143") was issued. SFAS
No. 143 requires the recognition of a liability for the estimated cost of
disposal as part of the initial cost of a long-lived asset and will be effective
in 2003. Subsequent to the third quarter of 2001, Statement of Financial
Accounting Standards No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets" ("SFAS No. 144") was issued. SFAS No. 144 will provide a
single approach for measuring the impairment of long-lived assets, including a
segment of a business accounted for as a discontinued operation or those to be
sold or disposed of other than by sale. SFAS No. 144 will be effective in 2002.
The Company continues to evaluate the statements and has not yet determined the
impact of SFAS No. 143 and SFAS No. 144.
Reclassifications
Certain amounts from prior years have been reclassified to conform with
the current presentation.
3. EARNINGS (LOSS) PER SHARE
The calculation of earnings (loss) per share is presented in the table
below.
2001 2000 1999
-------- -------- --------
(thousands, except per share amounts)
Basic earnings (loss) per share
Net income (loss) $ (5,612) $ 17,013 $ 19,716
======== ======== ========
Average common stock outstanding 23,599 24,814 25,053
======== ======== ========
Basic earnings (loss) per share $ (0.24) $ 0.69 $ 0.79
======== ======== ========
F-13
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. EARNINGS (LOSS) PER SHARE (continued)
2001 (a) 2000 1999
-------- -------- --------
(thousands, except per share amounts)
Diluted earnings (loss) per share
Net income (loss) $ (5,612) $ 17,013 $ 19,716
======== ======== ========
Average common stock outstanding 23,599 24,814 25,053
Incremental shares resulting from
Stock options (b) - 149 203
Warrants (c) - - -
Convertible preferred stock (d) - 245 -
-------- -------- --------
Adjusted weighted average shares 23,599 25,208 25,256
======== ======== ========
Diluted earnings (loss) per share $ (0.24) $ 0.67 $ 0.78
======== ======== ========
(a) There is no dilution resulting from potential incremental shares
in 2001, because the Company has a net loss and the inclusion of
potential incremental shares would be antidilutive.
(b) The average number of stock options that were not included in the
diluted earnings per share calculation because the exercise price
was greater than the average market price totaled 1,715,000 and
849,000 in 2000 and 1999, respectively.
(c) All warrants expired without being exercised in 1999, as discussed
in Note 13.
(d) Series B Preferred Stock was issued during the fourth quarter of
2000 (see Note 13) and is convertible into 1,500,000 common
shares.
4. ACQUISITION
On July 25, 2001, the Company purchased certain assets and assumed
certain liabilities of General Foam Corporation, a manufacturer of polyurethane
foam products for the automotive, industrial, and home furnishings markets, at a
total cost of $18.5 million, which resulted in goodwill of approximately $9.0
million. The business was acquired due to its synergy with the Company's
existing business. The assets purchased primarily included inventory and
machinery and equipment. The results of the acquired business have been included
in the consolidated financial statements since July 25, 2001. The effects of the
acquisition on the Company's consolidated financial statements is not material.
5. RESTRUCTURING, IMPAIRMENT AND OTHER CHARGES
2001
In December 2001, the Company announced the launching of its Operational
Reorganization Plan to reduce its operating costs and accelerate revenue growth.
The major initiatives of the Operational Reorganization Plan included plant
rationalization, salaried headcount reductions, purchasing and logistics cost
reductions and sales and marketing management.
In connection with the plant rationalization, we identified a total of 17
plant operations to be closed. Costs associated with this aspect of the
Operational Reorganization Plan included lease termination costs and severance
and termination benefits aggregating $14.1 million.
F-14
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. RESTRUCTURING, IMPAIRMENT AND OTHER CHARGES (continued)
Additionally, we identified 100 salaried positions to be eliminated,
mainly in support function areas. Severance, termination and other costs
associated with these positions were estimated to be $4.4 million.
Further, the Company evaluated the recoverability of certain other
long-lived assets, both associated and not associated with the Operational
Reorganization Plan, in accordance with SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed". As a
result, the Company recorded an impairment provision of $13.8 million (net of
anticipated proceeds of $4.6 million) to reduce these assets to their estimated
fair values. The assets which are held for disposal consist mainly of leasehold
improvements and machinery and equipment which have a remaining carrying value
of approximately $19.8 million.
Other one-time period expenses during the fourth quarter consisted
primarily of executive severance of $1.9 million and consulting fees related to
the Operational Reorganization Plan in the amount of $1.2 million.
Severance and termination benefits as a result of the Operational
Reorganization Plan are expected to be incurred for 746 employees. Total cash
outlays related to the Operational Reorganization Plan are expected to aggregate
$17.0 million. We expect to complete implementation before the end of 2002.
In addition, the Company recorded $0.4 million for restructuring plans
prior to the fourth quarter of 2001 that included severance for 41 employees and
$1.4 million related to executive severance recorded as other charges. The
Company also recorded a net restructuring credit of $1.2 million related to
changes in estimates to prior restructuring plans.
2000
During 2000, the Company recorded $6.2 million for restructuring plans
that included severance for 102 employees. The Company also recorded a net
restructuring charge of approximately $0.1 million related to changes in
estimates to prior years' restructuring plans. Also during 2000, the Company
received $3.6 million of net proceeds from the sale of assets related to
restructuring plans.
1999
During 1999, the Company recorded $9.8 million for restructuring plans
that included severance for 210 employees. The Company also recorded a net
restructuring charge of approximately $0.7 million related to changes in
estimates to prior years' restructuring plans. Also during 1999, the Company
received $1.5 million of net proceeds from the sale of assets related to
restructuring plans.
The following table sets forth the components of the Company's
restructuring, impairment and other charges (credits):
Plant Closure Personnel
Total and Leases Reductions Impairment Other
----- ---------- ---------- ---------- -----
1999 (millions)
Balance at January 1, 1999 $ 6.2 $ 11.9 $ - $ (5.7) $ -
Provision with adjustments 10.5 2.3 7.2 0.7 0.3
Net cash receipts (spending) (7.4) (4.1) (4.5) 1.5 (0.3)
Asset impairment (0.3) - - (0.3) -
------- ------- ------- ------- ------
Balance at December 31, 1999 9.0 10.1 2.7 (3.8) -
2000
Provision with adjustments 6.3 1.4 2.3 2.6 -
Net cash receipts (spending) (3.5) (3.9) (3.2) 3.6 -
Asset impairment (2.6) - - (2.6) -
------- ------- ------- ------- ------
Balance at December 31, 2000 9.2 7.6 1.8 (0.2) -
F-15
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. RESTRUCTURING, IMPAIRMENT AND OTHER CHARGES (continued)
Plant Closure Personnel
Total and Leases Reductions Impairment Other
----- ---------- ---------- ---------- -----
1999 (millions)
Provision with adjustments 36.1 10.2 8.0 13.4 4.5
Net cash receipts (spending) (6.5) (3.1) (2.0) 0.6 (2.0)
Asset impairment (13.8) - - (13.8) -
----- ----- ----- ------- -----
Balance at December 31, 2001 $25.0 $14.7 $ 7.8 $ - $ 2.5
===== ===== ===== ======= =====
The Company expects to spend approximately $12.4 million during 2002 with
the balance to be spent through 2012, primarily for lease costs.
6. INVENTORIES
The components of inventory are listed below.
December 31, December 31,
2001 2000
------- ---------
(thousands)
Raw materials and supplies $53,398 $ 66,690
Work-in-process 12,476 11,580
Finished goods 23,556 22,064
------- --------
Total $89,430 $100,334
======= ========
7. SHORT-TERM BORROWINGS
Foamex Canada Inc. ("Foamex Canada") is a wholly-owned subsidiary of
Foamex L.P. and has a short-term credit facility that provides for $8.0 million
of Canadian dollar loans (U.S. dollar equivalent of approximately $5.0 million
as of December 31, 2001) of which up to $2.0 million is available in U.S. dollar
loans. The amount of borrowings available is based on a combination of accounts
receivable and inventory, as defined in the credit facility. Interest on
Canadian dollar borrowings is based on the bank's prime lending rate plus 1 1/2
%. On U.S. dollar loans, interest is based on the bank's U.S. dollar base rate
in Canada plus 1 1/2 %. At December 31, 2001 and 2000, there were no short-term
borrowings outstanding and approximately $5.0 million was available at December
31, 2001.
8. LONG-TERM DEBT
The components of long-term debt are listed below.
December 31, December 31,
2001 2000
-------- --------
Foamex L.P. Credit Facility (thousands)
Term Loan B (1) $ 76,139 $ 77,136
Term Loan C (1) 69,218 70,124
Term Loan D (1) 100,259 101,565
Revolving credit facility (1) 125,000 145,904
9 7/8% Senior subordinated notes due 2007 (2) 150,000 150,000
13 1/2% Senior subordinated notes due 2005 (includes
$6,515 and $8,308 of unamortized debt premium) (2) 104,515 106,308
Industrial revenue bonds (3) 7,000 7,000
Subordinated note payable (net of unamortized
debt discount of $49 in 2000) (3) - 2,289
Other (net of unamortized debt discount of $281 in 2001) 2,574 4,198
-------- --------
634,705 664,524
F-16
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. LONG-TERM DEBT (continued)
December 31, December 31,
2001 2000
-------- --------
(thousands)
Less current portion 4,023 8,356
-------- --------
Long-term debt-unrelated parties $630,682 $656,168
======== ========
The components of related party long-term debt are listed below.
December 31, December 31,
2001 2000
-------- --------
(thousands)
Note payable to Foam Funding LLC (4) $ 31,590 $ 47,385
Less current portion 14,040 15,795
-------- --------
Long-term debt - related party $ 17,550 $ 31,590
======== ========
(1) Subsidiary debt of Foamex L.P., guaranteed by the Company and
FMXI, Inc.
(2) Subsidiary debt of Foamex L.P. and FCC.
(3) Subsidiary debt of Foamex L.P.
(4) Subsidiary debt of Foamex Carpet.
Foamex L.P. Credit Facility
At December 31, 2001, 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 $165.0 million and three term loans (Term loans B, C and
D) with an outstanding balance totaling $245.6 million. Included in the group of
banks that provided the Foamex L.P. Credit Facility was 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 extended through June 2003.
Borrowings under the Foamex L.P. Credit Facility were 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 had 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 December 31, 2001 and 2000.
At December 31, 2001, 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 2.50%, 2.75%, 3.00% and 3.125%,
respectively. At the option of Foamex L.P., portions of the outstanding loans
were convertible into LIBOR based loans consisting of a rate equal to the
greater of (i) 2.50% or (ii) LIBO rate (as defined) plus 1.0% added to the
margins identified above. The
F-17
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. LONG-TERM DEBT (continued)
effective interest rates for the Foamex L.P. Credit Facility at December 31,
2001 ranged between 6.20% and 6.63%. Term B, Term C and Term D loans mature on
June 30, 2005, June 30, 2006 and December 31, 2006, respectively.
Effective January 1, 2000, the interest rate on outstanding borrowings
under the Foamex L.P. Credit Facility increases 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, the 25 basis point
adjustment was applicable following the delivery of the financial statements for
2000 to the lenders, which was early in the second quarter of 2001. At March 31,
2001, the calculated leverage ratio was 5.1 to 1.00 and an additional 25 basis
point adjustment became effective in the second quarter of 2001. At June 30,
2001, the calculated leverage ratio was 5.1 to 1.00. Accordingly, an additional
25 basis point adjustment became effective during the third quarter of 2001,
resulting in a 75 basis points cumulative adjustment to the applicable interest
rate margin. At September 30, 2001, the calculated leverage ratio was below the
5.00 to 1.00 leverage ratio covenant and the cumulative adjustment of 75 basis
points, discussed above, was eliminated. The requirement for an adjustment based
on the December 31, 2001 leverage ratio was eliminated with the amendment and
restatement of the credit agreement on March 25, 2002 (see Note 18).
Available borrowings under the revolving credit facility totaled $19.3
million at December 31, 2001. Letters of credit outstanding at December 31,
2001, totaled $20.7 million.
As part of the Foamex L.P. Credit Facility, excess cash flow generated
annually, as defined, is required to prepay portions of the Term B, C and D
loans. The requirement for a prepayment at year-end 2001 was eliminated with the
amendment and restatement of the credit agreement on March 25, 2002 (see Note
18). 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 required 1999 prepayment was made during 2000.
Foamex Carpet Credit Facility
Foamex Carpet had a revolving credit facility (the "Foamex Carpet Credit
Facility"), which provides a commitment of $15.0 million through February 2004.
There were no borrowings outstanding under the credit facility at December 31,
2001 and available borrowings totaled $14.8 million, net of outstanding letters
of credit of $0.2 million. The interest rate is 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 any 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). The outstanding obligations
under the Foamex Carpet Credit Facility were paid and the commitments terminated
in conjunction with the refinancing that took place on March 25, 2002 (see Note
18).
9 7/8% Senior Subordinated Notes
The 9 7/8% Senior Subordinated Notes were issued by Foamex L.P. and
Foamex Capital Corporation and are due on June 15, 2007. The notes represent
uncollateralized general obligations of Foamex L.P. and are subordinated to all
Senior Debt, as defined in the Indenture. Interest is payable June 15 and
December 15. The notes may be redeemed at the option of Foamex L.P., in whole or
in part, at any time on or after June 15, 2002. The initial redemption is at
104.938% of their principal amount, plus accrued and unpaid interest, as
defined, if any, thereon to the date of redemption and declining annually to
100.0% on or after June 15, 2005.
F-18
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. LONG-TERM DEBT (continued)
Upon the occurrence of a change of control, as defined, each holder will
have the right to require Foamex L.P. to tender for such notes at a price in
cash equal to 101% of the aggregate principal amount thereof, plus accrued and
unpaid interest thereon, if there is such a "change of control". The notes are
subordinated in right of payment to all senior indebtedness and are pari passu
in right of payment to the 13 1/2% Senior Subordinated Notes (described below).
13 1/2% Senior Subordinated Notes
The 13 1/2% Senior Subordinated Notes were issued by Foamex L.P. and
Foamex Capital Corporation and are due on August 15, 2005. The notes represent
uncollateralized general obligations of Foamex L.P. and are subordinated to all
Senior Debt, as defined in the Indenture. Interest is payable semiannually on
February 15 and August 15. The notes may be redeemed at the option of Foamex
L.P., in whole or in part, at any time on or after August 15, 2000. The initial
redemption is at 106.75% of their principal amount, plus accrued and unpaid
interest, if any, thereon to the date of redemption and declining annually to
100.0% on or after August 15, 2004. At December 31, 2001 the redemption price is
105.0625% plus accrued and unpaid interest.
Upon the occurrence of a change of control, as defined, each holder will
have the right to require Foamex L.P. to tender for such notes at a price in
cash equal to 101% of the aggregate principal amount thereof, plus accrued and
unpaid interest, if any, thereon, if there is such a "change of control". The
notes are subordinated in right of the payment of all senior indebtedness and
are pari passu in right of payment to the 9 7/8% Senior Subordinated Notes
(described above).
Industrial Revenue Bonds ("IRBs")
IRB debt includes a $1.0 million bond that matures in 2005 and a $6.0
million bond that matures in 2013. Interest is based on a variable rate, as
defined, with options available to Foamex L.P. to convert to a fixed rate. At
December 31, 2001, the interest rate was 2.0% on the $1.0 million bond and 1.7%
on the $6.0 million bond. The maximum interest rate for either of the IRBs is
15.0% per annum.
If Foamex L.P. exercises its option to convert the bonds to a fixed
interest rate structure, the IRBs are redeemable at the option of the
bondholders. The obligations are collateralized by certain properties, which
have an approximate net carrying value of $10.2 million at December 31, 2001.
Subordinated Note Payable
The subordinated note payable was issued during 1993 to a former officer
of the Company. The note was issued by Foamex L.P. in connection with an
acquisition. The note carried a maximum interest rate of 6.0% and the principal
was payable in three equal annual installments that began in May 1999 and was
fully repaid in May 2001.
Other
Other debt includes a $1.3 million 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 December 31, 2001 was
6.61%. Also included in other debt is a non-interest bearing promissory note
with a principal amount of $1.4 million issued in connection with increasing the
Company's interest in an Asian joint venture to 70% in 2001. The promissory note
had unamortized discount of $0.3 million at December 31, 2001.
Related Party - Note Payable to Foam Funding LLC
Foamex Carpet entered into a $70.2 million promissory note payable to
Foam Funding LLC, a subsidiary of Trace. Principal is payable in quarterly
installments that began in June 1998 with a final installment in February
F-19
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. LONG-TERM DEBT (continued)
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, 2001,
the interest rate for borrowings was 5.56%.
Amounts outstanding were collateralized by all of the assets of Foamex
Carpet on a pari passu basis with the Foamex Carpet Credit Facility. All
obligations under the note payable to Foam Funding LLC were paid on March 25,
2002 (see Note 18).
Debt Covenants
The indentures, credit facilities and other indebtedness agreements
contain certain covenants that limit, among other things, the ability of the
Company's subsidiaries (i) to pay distributions or redeem equity interests, (ii)
to make certain restrictive payments or investments, (iii) to incur additional
indebtedness or issue Preferred Equity 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 could be paid by its
subsidiaries, as of December 31, 2001, funds only to the extent to enable the
Company to meet its tax payment liabilities and its normal operating expenses of
up to $1.0 million annually, so long as no event of default has occurred.
Foamex L.P. and Foamex Carpet, the principal subsidiaries of the Company,
were in compliance with the various financial covenants of their loan agreements
as of December 31, 2001. Business conditions in 2001 limited results and
covenant compliance remained a primary focus of the Company.
Certain Foamex L.P. debt agreements contained certain quarterly financial
covenants, which became more restrictive during 2001. Foamex L.P. anticipates
that it will continue to comply with the quarterly financial covenants in the
applicable debt agreements. Management's current business plans for Foamex L.P.
anticipate customer selling price management in response to raw material cost
changes, improved working capital management, comparable capital expenditures to
the prior year, successful implementation of on-going cost savings initiatives
and improved operating efficiencies. The achievement of the business plans and
the realization of proceeds resulting from the implementation of an improved
asset utilization program are necessary for compliance with the various
financial covenants for 2002 and prospectively.
Various Foamex Carpet debt agreements contained certain quarterly
financial covenants, which became more restrictive during 2001. Foamex Carpet
anticipates that it will continue to comply with the quarterly financial
covenants in the applicable debt agreements. Management's current business plans
for Foamex Carpet anticipate customer selling price management in response to
raw material cost changes, improved working capital management, comparable
capital expenditures to the prior year, successful implementation of on-going
cost savings initiatives and improved operating efficiencies. The achievement of
the business plans and the realization of proceeds resulting from the
implementation of an improved asset utilization program are necessary for
compliance with the various financial covenants for 2002 and prospectively. The
Foamex Carpet debt agreements were terminated in connection with the refinancing
took place on March 25, 2002 (see Note 18).
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
F-20
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. LONG-TERM DEBT (continued)
noncompliance appears likely, or occurs, the Company will seek the lenders'
approval 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
that 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):
Years Ending December 31:
2002 $ 18,063
2003 157,202
2004 54,347
2005 156,623
2006 117,826
Balance 156,000
--------
Total 660,061
Unamortized debt premium/discount, net 6,234
--------
Total $666,295
========
The refinancing on March 25, 2002 (see Note 18) had a significant impact
on maturities of long-term debt. Substantially all payments required in 2002 and
2003 have been extended to later maturities.
9. RETIREE BENEFIT PLANS
Defined Benefit Pension Plans
The Company provides pension and survivor benefits for salaried and
certain hourly employees in the United States. 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. Following the
merger of the two defined benefit plans for salaried and hourly participants at
the end of 1999, the pension benefits are provided through a single qualified
pension plan (the "Qualified Pension Plan"). Certain employees in a wholly-owned
Canadian subsidiary are provided pension and survivor benefits.
Effective May 15, 2001, a supplemental executive retirement plan (the
"SERP") was established. The SERP is a non-qualified plan and provides
retirement benefits to certain executives that supplement the benefits provided
under the Qualified Pension Plan.
The components of pension expense are listed below.
2001 2000 1999
------- ------- -------
(thousands)
Service cost $ 3,666 $ 3,307 $ 3,685
Interest cost 6,158 5,667 5,121
Expected return on plan assets (5,829) (6,371) (5,708)
Amortization
Transition asset (75) (75) (75)
Prior service cost (177) (240) (240)
Losses and other 1,163 179 819
------- ------- -------
Total $ 4,906 $ 2,467 $ 3,602
======= ======= =======
F-21
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. RETIREE BENEFIT PLANS (continued)
The following table sets forth the changes in obligations and assets and
outlines the development of the funded status and amounts recognized in the
consolidated balance sheets.
December 31, December 31,
2001 2000
-------- --------
(thousands)
Change in Benefit Obligation
Benefit obligation at beginning of year $ 84,820 $ 75,220
Service cost 3,666 3,307
Interest cost 6,158 5,667
Amendments, including SERP 1,059 -
Benefits paid (4,525) (4,207)
Actuarial loss 4,784 4,833
-------- --------
Projected benefit obligation at end of year $ 95,962 $ 84,820
======== ========
Change in Plan Assets
Fair value of plan assets at beginning of year $ 66,199 $ 65,102
Actual return on plan assets (2,269) (3,075)
Company contributions 6,347 9,299
Benefits paid (4,525) (4,207)
Other (238) (920)
-------- --------
Fair value of plan assets at end of year $ 65,514 $ 66,199
======== ========
Funded Status
Plan assets less than benefit obligation $(30,448) $(18,621)
Unrecognized transition asset (515) (590)
Unrecognized prior service cost (733) (1,832)
Unrecognized net losses 34,656 22,578
-------- --------
Net prepaid assets $ 2,960 $ 1,535
======== ========
Amounts Recognized in the Consolidated Balance Sheets
Prepaid benefit costs $ 389 $ 207
Accrued benefit liability (26,363) (16,480)
Intangible assets 612 268
Accumulated other comprehensive loss 28,322 17,540
-------- --------
Net amount recognized $ 2,960 $ 1,535
======== ========
Significant assumptions used in the calculation of pension expense and
obligations are listed below.
2001 2000 1999
---- ---- ----
Expected long-term rate of return on plan assets 9.0% 10.0% 10.0%
Discount rate on projected benefit obligations 7.0% 7.25% 7.5%
Rate of compensation increase (a) 4.0%-7.0% 4.0% 4.0%
(a) SERP established in 2001 uses a 7.0% assumption.
The Company's funding policy for the Qualified Pension Plan is to
contribute an amount that both satisfies the minimum funding requirements of the
Employee Retirement Income Security Act of 1974 and does not exceed the full
funding limitations of the Internal Revenue Code of 1986, as amended (the
"Code").
F-22
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. RETIREE BENEFIT PLANS (continued)
At December 31, 2001 and 2000, included in plan assets were 420,000
shares of the Company's stock. The value of the Plan's investment in the
Company's stock was approximately $3.4 million and $2.3 million at December 31,
2001 and 2000, respectively.
Plan assets at the end of 1998 included shares of Trace Global
Opportunities Fund, which was a related party to Trace. 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. During the fourth quarter of 2000, all of the
UAG shares were sold for $1.8 million.
The Company has not yet determined the amount of any curtailment gain or
loss as a result of the Operational Reorganization Plan discussed in Note 5.
Defined Contribution Plan
The Company maintains a defined contribution plan, which is qualified
under Section 401(k) of the Code ("401(k) Plan") and is available for eligible
employees who elect to participate. Under the terms of the 401(k) Plan, the
Company partially matches certain employee contributions. Expense for these
contributions was $1.0 million, $1.1 million and $1.0 million in 2001, 2000 and
1999, respectively.
Retiree Medical and Life Insurance Benefits
The Company provides postretirement health care and life insurance for
eligible employees, limited primarily to one manufacturing facility in the
United States. These plans are unfunded and benefits are paid as the claims are
submitted. The Company retains the right, subject to existing agreements, to
modify or eliminate these benefits.
The components of retiree medical and life insurance benefits expense are
listed below.
2001 2000 1999
---- ---- ----
(thousands)
Service cost $ 19 $ 15 $ 20
Interest cost 60 57 62
Amortization
Prior service costs (6) (6) (6)
Losses and other (8) (27) (21)
---- ---- ----
Total $ 65 $ 39 $ 55
==== ==== ====
The following table outlines the changes in obligations and benefit
payments and outlines the development of the funded status and amounts
recognized in the consolidated balance sheets.
December 31, December 31,
2001 2000
----- -----
(thousands)
Change in Benefit Obligation
Benefit obligations at beginning of year $ 763 $ 868
Service cost 19 15
Interest cost 60 57
Employee contributions 23 28
Benefits paid (399) (433)
Actuarial loss 158 228
----- -----
Accumulated postretirement benefit obligation at end of year $ 624 $ 763
===== =====
F-23
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. RETIREE BENEFIT PLANS (continued)
December 31, December 31,
2001 2000
-------- -------
(thousands)
Change in Plan Assets
Fair value of plan assets at beginning of year $ - $ -
Company contributions 376 405
Employee contributions 23 28
Benefits paid (399) (433)
-------- -------
Fair value of plan assets at end of year $ - $ -
======== =======
Funded Status of the Plan
Plan assets less than benefit obligation $ (624) $ (763)
Unrecognized prior service cost (60) (67)
Unrecognized net gains (224) (389)
-------- -------
Net accrued liabilities $ (908) $(1,219)
======== =======
Significant assumptions used in the calculation of retiree and life
insurance benefit expense and obligations are listed below.
2001 2000 1999
---- ---- ----
Discount rates on projected benefit obligations 7.0% 7.25% 7.5%
Health care cost increase 9.0% 7.0% 7.5%
The health care cost increase assumption will gradually be reduced to
5.0% by 2009. 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.
10. STOCK OPTION PLANS
The 1993 stock option plan, as amended, provides for the issuance of
nonqualified and incentive stock options for common stock of the Company.
Officers and executives of the Company, its subsidiaries and affiliates are
eligible to participate. At the Annual Meeting of Stockholders on June 30, 2000,
stockholders approved amendments to the 1993 stock option plan that increased
from 3,000,000 to 4,750,000 the number of shares of the Company's common stock
that may be issued, and to allow future option grants to qualify as
"performance-based compensation" for purposes of the Internal Revenue Code of
1986, as amended. The price and terms of each such option is at the discretion
of the Company, except that the term cannot exceed ten years.
At the Annual Meeting of Stockholders on August 3, 2001, the Foamex
International Inc. 2001 Equity Incentive Plan for Non-Employee Directors (the
"Directors Plan") was approved. The Directors Plan provides for the issuance of
nonqualified stock options for up to 1,500,000 shares of the Company's common
stock. Options outstanding under the Directors Plan 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 2001, the chief executive officer was granted 100,000 options with an
annual vesting rate of 33.33% in the third, fourth and fifth years.
Additionally, the chief executive officer was granted 250,000 options with
either (i) 100% vesting at the end of three years contingent on certain
performance measures, or (ii) 100% vesting at the end of seven years, regardless
of the performance measures identified in (i). In December 2001, the chief
executive officer resigned from the Company. During 2001, the terms of 750,450
options (granted in 1999 with a three-year vesting period) were modified as part
of a severance agreement. The terms were modified to provide for 100% vesting
and the extension of the period provided to exercise; including 250,000 options
until January 31, 2006 and 500,450 options until January 31, 2002. All other
options outstanding at December 31, 2001 were granted with a five-year vesting
period and a ten-year term.
F-24
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. STOCK OPTION PLANS (continued)
A summary of stock option activity is presented below.
2001 2000 1999
----------------------- ---------------------- ----------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ -----
Outstanding at beginning of period 2,980,110 $7.35 2,299,649 $7.94 1,388,916 $7.02
Granted 2,104,576 6.42 885,250 5.93 1,067,950 6.11
Exercised (163,125) 5.62 (3,514) 6.88 (39,728) 6.88
Forfeited (1,456,019) 7.32 (201,275) 7.79 (117,489) 9.08
--------- ----- --------- ----- --------- -----
Outstanding at end of period 3,465,542 $6.88 2,980,110 $7.35 2,299,649 $7.94
========= ===== ========= ===== ========= =====
Exercisable at end of period 1,431,489 $7.03 1,145,727 $8.16 803,303 $8.36
========= ===== ========= ===== ======= =====
Listed below is a summary of the stock options outstanding and
exercisable at December 31, 2001.
Outstanding
Weighted Weighted
Exercise Average Average
Price Exercise Remaining
Range Options Price Life-Years
----- ------- ----- ----------
$ 5.00 - 5.44 889,976 $5.23 8.48
$ 5.75 - 6.56 874,575 $6.44 7.88
$ 6.88 - 7.88 1,424,658 $7.36 8.13
$ 8.50 - 13.25 276,333 $11.12 6.11
---------
3,465,542
=========
Exercisable
Weighted Weighted
Exercise Average Average
Price Exercise Remaining
Range Options Price Life-Years
----- ------- ----- ----------
$ 5.06 - 5.75 310,020 $5.39 7.55
$ 6.06 - 6.56 498,545 $6.48 7.43
$ 6.88 416,958 $6.88 4.55
$ 7.88 -13.25 205,966 $11.12 6.03
---------
1,431,489
=========
Except as noted below, all options were granted with an exercise price
equal to the fair market value at the date of grant. Compensation expense
related to options granted in 1996 with an exercise price below fair market
value resulted in approximately $0.2 million of expense in the years 2000 and
1999, respectively.
During 2000, 25,000 options were granted to a director of the Company in
exchange for consulting services. The consulting expense associated with the
25,000 options 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 has elected the intrinsic-value method of expense recognition
for stock option grants to employees and directors. If compensation cost for the
option plans discussed above were determined using the fair-value method, the
Company's results would be reduced to the pro forma amounts indicated below.
F-25
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. STOCK OPTION PLANS (continued)
2001 2000 1999
---------- ---------- ----------
(thousands, except per share data)
Net income (loss)
As reported $ (5,612) $ 17,013 $ 19,716
========== ========== ==========
Pro forma $ (6,901) $ 15,750 $ 18,719
========== ========== ==========
Basic earnings (loss) per share
As reported $ (0.24) $ 0.69 $ 0.79
========== ========== ==========
Pro forma $ (0.29) $ 0.63 $ 0.75
========== ========== ==========
Diluted earnings (loss) per share
As reported $ (0.24) $ 0.67 $ 0.78
========== ========== ==========
Pro forma $ (0.29) $ 0.62 $ 0.74
========== ========== ==========
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 $2.95 per option in 2001,
$2.52 per option in 2000 and $2.30 per option in 1999.
2001 2000 1999
------ ------ ------
Expected life in years 3.0 3.0 3.0
Risk-free interest rate 4.41% 6.11% 5.21%
Volatility 61.85% 55.00% 48.00%
Dividend yield 0.00% 0.00% 0.00%
11. INCOME TAXES
The sources of income (loss) before the provision for income taxes are
listed below.
2001 2000 1999
------- ------- -------
(thousands)
United States $(8,293) $14,877 $19,243
Foreign 7,978 4,975 2,935
------- ------- -------
Income (loss) before provision for income taxes $ (315) $19,852 $22,178
======= ======= =======
A reconciliation of the statutory federal income tax to income tax
expense is listed below.
2001 2000 1999
------- ------- -------
(thousands)
Statutory income taxes $ (110) $ 6,948 $ 7,762
State income taxes, net of federal benefit (135) 825 1,060
Increase (decrease) in valuation allowance 1,400 (6,939) (7,300)
Non-deductible amortization 1,391 1,364 1,385
Alternative minimum tax 350 - 285
Use of acquired tax benefits 1,550 - 1,640
Foreign tax rate differential 142 874 (887)
Other, net 709 (233) (1,483)
------- ------- -------
Total $ 5,297 $ 2,839 $ 2,462
======= ======= =======
F-26
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. INCOME TAXES (continued)
The provision for income taxes is summarized as follows:
2001 2000 1999
------- ------ -------
Current (thousands)
Federal $ 924 $ - $ 300
State 262 160 238
Foreign 2,594 2,541 1,117
------- ------ -------
Total current 3,780 2,701 1,655
------- ------ -------
Deferred
Federal 174 6,083 8,247
State (397) 920 837
Foreign 340 74 (977)
------- ------ -------
Total deferred 117 7,077 8,107
------- ------ -------
Change in valuation allowance 1,400 (6,939) (7,300)
------- ------ -------
Total provision for income taxes $ 5,297 $ 2,839 $ 2,462
======= ======= =======
The tax effect of the temporary differences that give rise to deferred
income tax assets and liabilities are listed below.
December 31, December 31,
2001 2000
--------- ---------
Deferred income tax assets (thousands)
Inventory basis differences $ 1,436 $ 777
Employee benefit accruals 13,869 12,561
Allowances and contingent liabilities 8,231 8,225
Restructuring and plant closing accruals 10,522 3,590
Intangible asset basis differences 7,393 12,832
Other 9,118 10,609
Net operating loss carryforwards 61,485 69,229
Capital loss carryforwards 1,333 2,105
Valuation allowance for deferred income tax assets (100,695) (95,634)
--------- ---------
Deferred income tax assets 12,692 24,294
--------- ---------
Deferred income tax liabilities
Basis difference in property, plant and equipment (15,937) (19,249)
Other (2,163) (8,936)
--------- ---------
Deferred income tax liabilities (18,100) (28,185)
--------- ---------
Net deferred income tax liabilities $ (5,408) $ (3,891)
========= =========
The 2001 income tax provision includes an increase in the valuation
allowance to reduce the Company's deferred tax assets to an amount that is more
likely than not to be realized. Effective tax rates for 2000 and 1999 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 and Mexican tax provision. Additionally, the valuation allowance
was reduced to offset the net deferred Federal tax liability generated. The
valuation allowance has also been adjusted by $3.8 million and $4.3 million in
2001 and 2000, respectively, to give effect to the deferred tax assets resulting
from the recognition of a minimum pension liability.
F-27
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. INCOME TAXES (continued)
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.
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, 2001, the
Company had approximately $164.4 million of net operating loss carryforwards for
federal income tax purposes expiring from 2010 to 2020. Also at December 31,
2001, there were $1.0 million of alternative minimum tax credits carryforwards.
In addition, the Company has had an ownership change as defined in IRC Section
382. Accordingly, the Company may be limited (on an annual basis) as to the
amount of its net operating loss utilization.
At December 31, 2001, the Company had $1.9 million of net operating loss
carryforwards in a Mexican subsidiary that expire in 2008. A full valuation
allowance has been recorded at December 31, 2001 and 2000 due to uncertainty
regarding utilization of the net operating loss carryforwards.
Cumulative undistributed earnings of foreign subsidiaries for which no
U.S. income or foreign withholding taxes have been provided, amounted to $10.6
million and $6.8 million at December 31, 2001 and 2000, respectively. Such
earnings are deemed to be permanently invested by the Company. As such, no
deferred tax liability has been recognized with regard to the remittance of such
earnings. Further, determination of the amount of unrecognized deferred tax
liability with regard to such earnings is not practicable.
12. OTHER INCOME (EXPENSE), NET
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. Letter of credit fees partially offset these income items.
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 promissory notes payable to Foamex L.P., discussed in Note 16.
13. STOCKHOLDERS' DEFICIENCY
Preferred Stock
The Company has 5.0 million shares of preferred stock, par value of $1.00
per share, authorized for issuance. As discussed in Note 1, 15,000 shares of
Series B Preferred Stock were issued in exchange for 1,500,000 shares of common
stock during the fourth quarter of 2000. Series B Preferred Stock is non-voting,
non-redeemable and convertible into 100 shares of the Company's common stock.
The conversion feature is only available if the conversion would not trigger a
"change of control" event, as discussed in Note 1. The Series B Preferred Stock
is non cumulative and would be entitled to dividends only if a dividend is
declared on the Company's common stock. It ranks senior to any future preferred
stock issued by the Company and is entitled to a liquidation preference of $100
per share. No other preferred shares have been issued.
Common Stock
The Company has 50 million shares of common stock, par value $.01 per
share, authorized. At December 31, 2001, there were 6.3 million shares of common
stock reserved for issuance in connection with stock option plans, discussed in
Note 10. Included in the Consolidated Statements of Stockholders' Deficiency is
the compensation for the Company's directors paid in common stock.
F-28
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. STOCKHOLDERS' DEFICIENCY (continued)
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
subsidiary Foamex L.P. Consequently, the Company's ability to pay dividends is
dependent upon the earnings of Foamex L.P. and any future subsidiaries of the
Company and the distribution of those earnings to the Company and loans or
advances by Foamex L.P. and any such future subsidiaries of the Company. The
ability of Foamex L.P. to make distributions is restricted by the terms of their
respective financing agreements. Due to such restrictions, the Company is
expected to have only limited access to the cash flow generated by Foamex L.P.
for the foreseeable future.
Treasury Stock
As discussed in Note 1 and the Preferred Stock disclosures above,
1,500,000 shares of common stock were exchanged for Series B Preferred Stock
during the fourth quarter of 2000.
The Board of Directors has authorized the purchase of up to 3.0 million
shares of the Company's common stock. As of December 31, 2001, 1,989,000 shares
have been purchased under this program.
Warrants
On July 1, 1999, 116,745 warrants for an aggregate of 0.6 million shares
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.
Accumulated Other Comprehensive Loss
The components of accumulated other comprehensive loss are listed below.
December 31, December 31, December 31,
2001 2000 1999
-------- -------- --------
(thousands)
Foreign currency translation adjustment $ (8,000) $ (6,921) $ (6,011)
Minimum pension liability (27,157) (16,375) (1,747)
-------- -------- --------
$(35,157) $(23,296) $ (7,758)
======== ======== ========
14. BUSINESS SEGMENTS
The reportable business segments reflect the Company's management
organization that was structured based on distinct product lines and customers.
An executive vice president heads each operating segment. Each executive
vice president is responsible for developing budgets and plans as well as
directing the operations of the segment. The performance of each operating
segment is measured based upon income from operations, excluding restructuring,
impairment and other charges. The Company does not allocate restructuring,
impairment and other charges to operating segments because many of the Company's
facilities produce products for multiple segments.
Foam Products manufactures and markets cushioning foams for bedding,
furniture, packaging and health care applications and foam-based consumer
products, such as mattress pads and children's furniture. Carpet Cushion
Products manufactures and distributes rebond, prime, felt and rubber carpet
padding. Automotive Products supplies foam products and laminates to major tier
one suppliers and original equipment manufactures. Technical Products
manufactures and markets reticulated and other specialty foams used for
reservoiring, filtration, gasketing and sealing applications.
F-29
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. BUSINESS SEGMENTS (continued)
The "other" column in the table below represents certain manufacturing
operations in Mexico City, corporate expenses not allocated to other business
segments and restructuring, impairment and other charges (see Note 5). Asset and
capital expenditure information by business segment is not reported because many
of the Company's facilities produce products for multiple business segments.
The accounting policies of the business segments are the same as
described in Note 2. Business segment results include revenues and costs that
are specifically identifiable and costs shared by business segments have been
allocated based on utilization. Geographic sales are determined based on the
location in which the sale originated.
Sales to one customer, which are included in Automotive Products,
accounted for approximately 15.7%, 12.3% and 11.5% of net sales in 2001, 2000
and 1999, respectively. No other customer accounted for more than 10.0% of net
sales during the periods presented.
Business segment results are presented below.
Carpet
Foam Cushion Automotive Technical
Products Products Products Products Other Total
-------- -------- -------- -------- ----- -----
2001 (thousands)
Net sales $ 499,668 $ 230,965 $ 377,753 $ 111,043 $ 33,475 $1,252,904
Income (loss) from operations $ 66,312 $ (6,831) $ 21,187 $ 22,884 $ (40,079) $ 63,473
Depreciation and amortization $ 15,732 $ 8,181 $ 4,991 $ 3,312 $ 1,772 $ 33,988
2000
Net sales $ 519,197 $ 256,439 $ 342,386 $ 106,697 $ 33,059 $1,257,778
Income (loss) from operations $ 55,001 $ 2,035 $ 22,235 $ 28,888 $ (11,688) $ 96,471
Depreciation and amortization $ 17,813 $ 7,742 $ 5,785 $ 2,663 $ 2,585 $ 36,588
1999
Net sales $ 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
Results by geographical area are presented below.
United
States Canada Mexico Consolidated
------ ------ ------ ------------
2001 (thousands)
Net sales $ 966,614 $ 65,179 $ 221,111 $1,252,904
Property, plant and equipment, net $ 172,456 $ 4,006 $ 24,335 $ 200,797
2000
Net sales $1,024,388 $ 69,180 $ 164,210 $1,257,778
Property, plant and equipment, net $ 183,266 $ 4,623 $ 24,642 $ 212,531
1999
Net sales $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
15. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
2001 2000 1999
------- ------- -------
(thousands)
Cash paid for interest $63,593 $75,155 $71,182
======= ======= =======
Cash paid for income taxes, net $ 1,990 $ 2,962 $ 1,032
======= ======= =======
Non cash - capital leases $ 299 $ 53 $ 456
======= ======= =======
Non cash - common stock - preferred stock exchange (Note 1) $ - $ 8,578 $ -
======= ======= =======
Non cash - debt exchanged for increased ownership
in joint venture $ 1,069 $ - $ -
======= ======= =======
16. RELATED PARTY TRANSACTIONS AND BALANCES
The Company regularly enters into transactions with its affiliates in the
ordinary course of business.
Trace Promissory Notes
Prior to 1999, Trace borrowed $5.0 million pursuant to a promissory note
issued to Foamex L.P. during 1997. The promissory note was due and payable on
demand or, if no demand was made, on July 7, 2001, and carried an interest rate
of 2 3/8% plus three-month LIBOR, as defined, payable quarterly in arrears.
Another promissory note of $4.2 million was due and payable on demand or, if no
demand was made, on July 7, 2001, and carried an interest rate of 2 3/8% plus
three-month LIBOR, as defined, payable quarterly in arrears.
The Trace notes discussed above are included in the other component of
stockholders' deficiency. Based on Trace's financial position discussed in Note
1, it is unlikely that Trace will 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 December 31, 2001 and 2000, operating accounts receivables from Trace
were approximately $3.4 million. These accounts receivables were fully reserved
for prior to 2000.
Trace Global Opportunities Fund
In 1999, an investment in Trace Global Opportunities Fund, which was a
related party to Trace, 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.
The management services agreement provided for an annual fee of $3.0 million,
plus reimbursement of expenses incurred. An amendment to the Foamex L.P. Credit
Facility on June 30, 1999 no longer permitted 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.
F-31
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. RELATED PARTY TRANSACTIONS AND BALANCES (continued)
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 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 interest on notes payable to Foam
Funding LLC of $2.8 million, $5.8 million and $7.4 million in 2001, 2000 and
1999, respectively. Subsidiaries of the Company paid principal on notes payable
to Foam Funding LLC of $15.8 million, $41.9 million and $9.7 million in 2001,
2000 and 1999, respectively.
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. In 2001, two members of the board provided
consulting services to the Company for which fees paid were $0.2 million. In
2000 and 1999, one member of the board provided consulting services totaling
$0.1 million and $0.2 million, respectively. As discussed in Note 10, 25,000
common stock options of the Company were granted to a member of the board in
consideration of consulting services.
As discussed in Note 8, 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.
The Company, Recticel, s.a. ("Recticel"), a European polyurethane foam
manufacturer and Beamech Group Limited, an unaffiliated third party, have an
interest in a Swiss corporation that develops new manufacturing technology for
the production of polyurethane foam including the VPF(SM) manufacturing process.
Recticel and affiliates of Recticel are current shareholders 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, totaling $1.8 million in 1999.
The Company's Pico Rivera, California facility is owned by Foam Funding
LLC and is leased to the Company.
During December 2001, the Company entered into an agreement that
guarantees two promissory notes, totaling $0.7 million, payable to a foreign
affiliate that the Company accounts for under the equity method. The promissory
notes were issued to a director of the Company and an employee of Foamex L.P.
17. COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company is obligated under various noncancelable lease agreements for
rental of facilities, vehicles and other equipment. Many of the leases contain
renewal options with varying terms and escalation clauses that provide for
increased rentals based upon increases in the Consumer Price Index, real estate
taxes and lessors' operating expenses. Total minimum rental commitments
(excluding commitments accrued as part of the Company's various
F-32
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17. COMMITMENTS AND CONTINGENCIES (continued)
restructuring/consolidation plans) required under operating leases at December
31, 2001 are (thousands):
2002 $13,345
2003 11,774
2004 8,416
2005 6,346
2006 4,605
Balance 6,854
-------
Total $51,340
=======
Rental expense charged to operations under operating leases approximated
$20.2 million, $16.3 million and $16.9 million in 2001, 2000 and 1999,
respectively. Substantially all such rental expense represented the minimum
rental payments under operating leases.
Litigation - Shareholders
The Company has reached agreements with the plaintiffs in the stockholder
actions described below providing for the settlement and dismissal of such
actions. Court approval of these settlements has been obtained although such
approval may be appealed.
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 International Holdings, Inc. ("Trace")
and a Trace affiliate. The complaint in the Delaware Action alleged, 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 sought 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, Chairman of the Company, 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
F-33
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17. COMMITMENTS AND CONTINGENCIES (continued)
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 stipulation of settlement related to the Delaware
Action (which was approved by the Delaware Court on March 20, 2002), the Company
agreed that a special nominating committee of the Board of Directors would
nominate two additional independent directors to serve on the Board. The terms
of the agreement also established the criteria for the independence of the
directors and required that certain transactions with affiliates be approved by
a majority of the disinterested members of the Board. 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 resolved all outstanding
shareholder litigation against the Company and its current and former directors
and officers. In early January 2002, two shareholders filed objections to the
settlement. The settlement hearing was held on February 13, 2002, but was not
concluded. On March 20, 2002, the Delaware Court concluded the hearing and
approved the settlement. Approval of the settlement may be appealed by the
objectors. 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.
Litigation - Breast Implants
As of February 28, 2002, the Company and Trace were two of multiple
defendants in actions filed on behalf of approximately 1,725 recipients of
breast implants in various United States federal and state courts and one
Canadian provincial court, some of which allege substantial damages, but most of
which allege unspecified damages for personal injuries of various types. Three
of these cases seek to allege claims on behalf of all breast implant recipients
or other allegedly affected parties, but no class has been approved or certified
by the court. During 1995, the Company and Trace were granted summary judgments
and dismissed as defendants from all cases in the federal courts of the United
States and the state courts of California. Appeals for these decisions were
withdrawn and the decisions are final.
Although breast implants do not contain foam, certain silicone gel
implants were produced using a polyurethane foam covering fabricated by
independent distributors or fabricators from bulk foam purchased from the
Company or Trace. Neither the Company nor Trace recommended, authorized, or
approved the use of its foam for these purposes. The Company is also indemnified
by Trace for any such liabilities relating to foam manufactured prior to October
1990. Trace's insurance carrier has continued to pay the Company's litigation
expenses after Trace's filing 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
During the second quarter of 2001, the Company was notified by an
insurance provider concerning a dispute involving the reimbursement of liability
claims paid on behalf of Trace before 1990. The insurance provider is contending
that the Company is liable for the claims of approximately $3.0 million. The
Company intends to strongly defend this claim and considers the claim to be
without merit. If management's assessment of the
F-34
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17. COMMITMENTS AND CONTINGENCIES (continued)
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.
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, result of operations and cash flows.
Environmental and Health and Safety
We are subject to extensive and changing federal, state, local and
foreign environmental laws and regulations, including those relating to the use,
handling, storage, discharge and disposal of hazardous substances, the discharge
or emission of materials into the environment, and the remediation of
environmental contamination, and as a result, are from time to time involved in
administrative and judicial proceedings and inquiries relating to environmental
matters. As of December 31, 2001, we had accruals of approximately $3.0 million
for environmental matters.
The Clean Air Act Amendments of 1990 ("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. The final National Emission Standard for Hazardous Air
Pollutants, or "NESHAP," for flexible polyurethane foam production was
promulgated on October 7, 1998. The NESHAP required a reduction of approximately
70% of the emission of methylene chloride for the slab stock foam industry
effective October 7, 2001. Through the use of alternative technologies,
including VPF(SM) and carbon dioxide, and by shifting current production to
facilities which use these alternative technologies, we are in substantial
compliance with these regulations. On August 8, 2001, the United States
Environmental Protection Agency, or "EPA," proposed a NESHAP for Flexible
Polyurethane Foam Fabrication Operations. The proposed NESHAP regulates
emissions of methylene chloride and other Hazardous Air Pollutants and restricts
air emissions from flame lamination sources. The Company does not believe that
this standard, if adopted, will require us to make material expenditures.
We have reported to the appropriate state authorities that we have found
soil and/or groundwater contamination in excess of state standards at certain
locations. Seven sites are currently in various stages of investigation or
remediation. Accordingly, the extent of contamination and the ultimate liability
is not known with certainty for all sites. As of December 31, 2001, we had
accruals of $2.5 million for the estimated cost of remediation, including
professional fees and monitoring costs, for these sites. During 2000, we reached
an indemnification agreement with the former owner of the Morristown, Tennessee
facility. The agreement allocates the incurred and future remediation costs
between the former owner and us. The estimated allocation of future costs for
the remediation of this facility is not significant, based on current known
information. The former owner was Recticel Foam Corporation, a subsidiary of
Recticel.
We have either upgraded or closed all underground storage tanks at our
facilities in accordance with applicable regulations.
The Comprehensive Environmental Response, Compensation and Liability Act,
or "CERCLA," and comparable state laws impose liability without fault for the
costs of cleaning up contaminated sites on certain classes of persons that
contributed to the release of hazardous substances into the environment at those
sites, for example, by generating wastes containing hazardous substances which
were disposed at such sites. We are currently designated as a Potentially
Responsible Party, or "PRP," by the EPA or by state environmental agencies or
other PRPs, pursuant to CERCLA or analogous state statutes, with respect to
eight sites. Estimates of total cleanup costs and fractional allocations of
liability are often provided by the EPA, the state environmental agency or the
committee of PRPs with respect to the specified site. Based on these estimates
(to the extent available) and on known information, in each case and in the
aggregate, our liability is not considered to be significant.
F-35
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17. COMMITMENTS AND CONTINGENCIES (continued)
In 2002, capital expenditures for safety and environmental compliance
projects are anticipated to be approximately $2.0 million. Although it is
possible that new information or future developments could require the Company
to reassess the potential exposure relating to all pending environmental
matters, including those described above, management believes that, based upon
all currently available information, the resolution of these environmental
matters will not have a material adverse effect on our operations, financial
position, capital expenditures or competitive position. The possibility exists,
however, that new environmental legislation and/or environmental regulations may
be adopted, or other environmental conditions, including the presence of
previously unknown environmental contamination, may be found to exist or a
reassessment of the potential exposure to pending environmental matters may be
necessary due to new information or future developments, that may require
expenditures not currently anticipated and that may be material.
Other
In October 2001, the Company experienced a fire at one of its
manufacturing facilities. Costs relating to the fire aggregate approximately
$1.2 million. The Company has filed a claim with its insurance carrier and
believes it will recover substantially all costs in excess of a deductible of
$0.2 million.
During the fourth quarter of 2001, the Company discovered that some
mattresses containing foam supplied by the Company had a discernible odor. The
cause of the odor was traced to chemicals from one supplier used in the
manufacture of the foam. The supplier has advised the Company that the odor was
attributable to a change in its chemical manufacturing process, which has since
been corrected. The Company received claims from some of its customers for costs
purportedly associated with the odorous foam, and we have reached agreement with
this chemical supplier regarding the terms of and manner in which this supplier
will reimburse the Company for certain obligations we may have to our customers
relating to these claims, as well as for certain of our internal costs. Under
this agreement, this supplier will pay us a fixed sum in exchange for
eliminating certain future claims we may have against this supplier and the
Company is obligated to indemnify this supplier for certain claims that may be
brought against it by others, including the Company's customers. The ultimate
amounts of these third party claims and the amount of our own internal costs are
uncertain. The Company cannot be certain that this supplier's payments will be
sufficient to cover all payments it may be required to make to third parties in
respect of their claims, to cover all of the Company's related internal costs or
that the Company's indemnification obligations to this supplier will not be
material. Consequently, there can be no assurance that these claims and costs
will not have a material adverse effect on our consolidated financial position,
results of operations and cash flows.
18. SUBSEQUENT EVENTS
On March 25, 2002, Foamex L.P. and Foamex Capital Corporation issued
$300.0 million of 10 3/4% Senior Secured Notes due 2009 (the "Senior Secured
Notes") and amended the Foamex L.P. Credit Facility ("Amended Credit Facility").
Under the Amended Credit Facility, the Company may borrow up to $262.2 million,
consisting of $162.2 million of term loans and a $100.0 million revolving credit
facility. Term loans will mature at various dates from June 30, 2005 through
December 29, 2006 and revolving loans, if any, will mature on June 30, 2005. Net
proceeds from the Senior Secured Notes of $280.0 million were used to pay a
portion of the debt outstanding under the Foamex L.P. Credit Facility. The $31.6
million note payable to a related party, Foam Funding LLC, was repaid with the
initial proceeds of a new term loan under the Amended Credit Facility.
Additionally, the financial covenants contained in the Amended Credit Facility
were adjusted to reflect changes in the capital structure and the current
business environment at the Company. Under the covenants contained in the Senior
Secured Notes and the Amended Credit Facility, the Company may spend up to $48.5
million of the proceeds from the Senior Secured Notes to repurchase or redeem
some of its senior subordinated notes. To the extent that the Company spends
less than $48.5 million towards such repurchase or redemption by September 20,
2002, it is required to repay a portion of its term loans.
F-36
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
18. SUBSEQUENT EVENTS (continued)
In connection with the refinancing transaction discussed above, the
Company simplified its corporate structure by changing Foamex Carpet Cushion,
Inc. from a corporation to a limited liability company, Foamex Carpet Cushion
LLC. The Company then contributed Foamex Carpet Cushion LLC to Foamex L.P.
Covenants under the Amended Credit Facility will be based on the combined
entities and the Company was in compliance with such revised covenants at
December 31, 2001 to the extent they were applicable.
19. QUARTERLY FINANCIAL DATA (UNAUDITED)
First Second Third Fourth
Quarter Quarter Quarter Quarter
--------- --------- --------- ---------
(thousands, except per share amounts)
2001
Net sales $ 301,907 $ 314,261 $ 326,166 $ 310,570
Gross profit 41,176 49,896 47,409 41,600
Net income (loss) (a) 5,893 10,620 7,267 (29,392)
Earnings (loss) per share
Basic 0.25 0.45 0.31 (1.24)
Diluted 0.24 0.42 0.28 (1.24)
2000
Net sales $ 329,119 $ 322,721 $ 309,666 $ 296,272
Gross profit 42,936 47,773 44,729 36,587
Net income (a) 1,783 7,986 3,785 3,459
Earnings per share
Basic (b) 0.07 0.32 0.15 0.14
Diluted 0.07 0.32 0.15 0.14
(a) Restructuring, impairment and other charges (credits) are
discussed in Note 5.
(b) 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-37
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,
2001 2000
--------- ---------
ASSETS (thousands, except share data)
CURRENT ASSETS
Cash and cash equivalents $ 2 $ 15
Intercompany receivables 716 308
Deferred taxes 375 --
Other current assets 1,086 215
--------- ---------
Total current assets 2,179 538
OTHER ASSETS 1 1
--------- ---------
TOTAL ASSETS $ 2,180 $ 539
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES
Accounts payable $ 96 $ 50
Other accrued liabilities 369 2,717
--------- ---------
Total current liabilities 465 2,767
LONG-TERM LIABILITIES
Notes payable to consolidated subsidiary 2,490 4,990
Deficit in consolidated subsidiaries 176,023 154,287
Deferred income taxes 2,629 1,805
Other liabilities 1,319 1,359
--------- ---------
Total liabilities 182,926 165,208
--------- ---------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIENCY
Preferred Stock, par value $1.00 per share:
Authorized 5,000,000 shares
Issued 15,000 shares - Series B in 2001 and 2000 15 15
Common Stock, par value $.01 per share:
Authorized 50,000,000 shares
Issued 27,260,441 in 2001 and 27,048,994 shares in 2000;
Outstanding 23,771,441 shares in 2001 and 23,559,994 shares in 2000 273 270
Additional paid-in capital 97,668 96,275
Accumulated deficit (206,544) (200,932)
Accumulated other comprehensive loss (35,157) (23,296)
Other:
Common Stock held in treasury, at cost:
3,489,000 shares in 2001 and 2000 (27,780) (27,780)
Shareholder note receivable (9,221) (9,221)
--------- ---------
Total stockholders' deficit (180,746) (164,669)
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY $ 2,180 $ 539
========= =========
See notes to consolidated financial statements, beginning on Page F-9.
(continued)
S-2
Schedule I
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF OPERATIONS
2001 2000 1999
-------- -------- --------
(amounts in thousands except per share amounts)
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES $ 1,254 $ 961 $ 1,417
-------- -------- --------
LOSS FROM OPERATIONS (1,254) (961) (1,417)
EQUITY IN EARNINGS (LOSS) OF
CONSOLIDATED SUBSIDIARIES (2,261) 19,652 24,091
INTEREST EXPENSE 343 444 2,042
OTHER INCOME (EXPENSE) -- (1,047) 2
-------- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES (3,858) 17,200 20,634
INCOME TAX PROVISION 1,754 187 918
-------- -------- --------
NET INCOME (LOSS) $ (5,612) $ 17,013 $ 19,716
======== ======== ========
BASIC EARNINGS (LOSS) PER SHARE $ (0.24) $ 0.69 $ 0.79
======== ======== ========
DILUTED EARNINGS (LOSS) PER SHARE $ (0.24) $ 0.67 $ 0.78
======== ======== ========
See notes to consolidated financial statements, beginning
on Page F-9.
(continued)
S-3
Schedule I
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF CASH FLOWS
2001 2000 1999
-------- -------- --------
OPERATING ACTIVITIES (thousands)
Net income (loss) $ (5,612) $ 17,013 $ 19,716
Adjustments to reconcile net income (loss) to
net cash used for operating activities:
Deferred income taxes 567 665 164
Equity in (earnings) losses of consolidated subsidiaries 2,261 (19,652) (24,091)
Other 319 88 (34)
Changes in operating assets and liabilities,
net of acquisitions:
Intercompany receivables (408) 74 4,241
Accounts payable 46 10 40
Other assets and liabilities 536 (34) (3,176)
-------- -------- --------
Net cash used for operating activities (2,291) (1,836) (3,140)
-------- -------- --------
INVESTING ACTIVITIES
Distribution from subsidiaries 3,861 -- 17,204
Other -- -- 924
-------- -------- --------
Net cash provided by investing activities 3,861 -- 18,128
-------- -------- --------
FINANCING ACTIVITIES
Proceeds from (repayments of) note payable to consolidated
subsidiary (2,500) 1,814 (1,814)
Repayments of tax distribution advance -- -- (13,618)
Proceeds from exercise of stock options 917 24 270
-------- -------- --------
Net cash provided by (used for) financing activities (1,583) 1,838 (15,162)
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (13) 2 (174)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 15 13 187
-------- -------- --------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 2 $ 15 $ 13
======== ======== ========
Note: During 1999, the Company paid to its consolidated subsidiaries distributions of $0.1 million 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.
Also during 2001, the Company received a special distribution from its subsidiaries of $3.7 million. The
proceeds were used to repay the note and interest payable to Foamex L.P.
See notes to consolidated financial statements, beginning
on Page F-9.
S-4
Schedule II
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(thousands)
Balance at Charged to Charged to Balance at
Beginning of Costs and Other End of
Period Expenses Accounts Deductions Period
------ -------- -------- ---------- ------
YEAR ENDED DECEMBER 31, 2001
- ----------------------------
Allowance for Uncollectible Accounts $ 7,693 $ 5,479 $ 88 $ 4,540 $ 8,720
======= ======= ======= ======= =======
Reserve for Discounts $ 2,233 $ -- $15,198 (1) $15,211 $ 2,220
======= ======= ======= ======= =======
YEAR ENDED DECEMBER 31, 2000
- ----------------------------
Allowance for Uncollectible Accounts $ 7,474 $ 2,838 $ -- $ 2,619 $ 7,693
======= ======= ======= ======= =======
Reserve for Discounts $ 2,075 $ -- $15,823 (1) $15,665 $ 2,233
======= ======= ======= ======= =======
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
======= ======= ======= ======= =======
(1) Adjustments reflect a reduction in net sales.
S-5