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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from .......... to ..........
Commission file number: 0-22624
FOAMEX INTERNATIONAL INC.
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(Exact Name of registrant as Specified in its Charter)
Delaware 05-0473908
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1000 Columbia Avenue, Linwood, PA 19061
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (610) 859-3000
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Securities registered pursuant to Section 12(b) of the Act: None
----
Securities registered pursuant to Section 12(g) of the Act: Common Stock, par
value $.01 per share, which is
traded through the National
Association of Securities
Dealers, Inc. National Market
System.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter periods that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Annual Report on Form
10-K or any amendment to this Annual Report on Form 10-K. [ ]
The aggregate market value of the voting stock held by nonaffiliates of
the registrant as of March 2, 2001, was $50.2 million.
The number of shares outstanding of the registrant's common stock as of
March 15, 2001 was 23,559,994.
DOCUMENTS INCORPORATED BY REFERENCE
None
FOAMEX INTERNATIONAL INC.
INDEX
Page
Part I
Item 1. Business 3
Item 2. Properties 9
Item 3. Legal Proceedings 9
Item 4. Submission of Matters to a Vote of Security Holders 13
Part II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters 13
Item 6. Selected Consolidated Financial Data 13
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 15
Item 7a. Quantitative and Qualitative Disclosures about Market Risk 27
Item 8. Financial Statements and Supplementary Data 27
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 27
Part III
Item 10. Directors and Executive Officers of the Registrant 28
Item 11. Executive Compensation 28
Item 12. Security Ownership of Certain Beneficial Owners
and Management 28
Item 13. Certain Relationships and Related Transactions 28
Part IV
Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K 28
Signatures 36
The Registrant will furnish a copy of any exhibit to this Annual Report on Form
10-K upon the payment of a fee equal to the Registrant's reasonable expense in
furnishing such exhibit.
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PART I
ITEM l. BUSINESS
General
Foamex International Inc. (the "Company") is engaged primarily in the
manufacturing and distribution of flexible polyurethane and advanced polymer
foam products. As of December 31, 2000, the Company's operations are conducted
through its wholly owned subsidiaries, Foamex L.P. and Foamex Carpet Cushion,
Inc. ("Foamex Carpet"). The Company was incorporated in 1993 to act as a holding
company for Foamex L.P.
References in this Annual Report on Form 10-K to the "Company" mean Foamex
International Inc. and, where relevant or applicable, its subsidiaries.
Segments
General
The Company operates in the flexible polyurethane and advanced polymer foam
products industry and is one of the largest manufacturers and distributors of
flexible polyurethane and advanced polymer foam products in North America. The
Company has numerous manufacturing facilities dedicated to certain product lines
as well as facilities with the capability to support multiple product lines.
Each of the Company's business segments has a diverse customer base. The
Company's senior executives direct sales efforts for each business segment.
Business segments are listed below.
Foam Products - manufactures and markets foam used by the bedding industry,
the furniture industry and the retail industry.
Carpet Cushion Products - manufactures and distributes prime, rebond,
sponge rubber and felt carpet cushion.
Automotive Products - supplies foam primarily for automotive interior
applications to automotive manufacturers and tier one suppliers.
Technical Products - manufactures and markets reticulated foams and other
custom polyester and polyether foams for industrial, specialty and consumer
and safety applications.
Other - primarily consists of certain manufacturing operations in Mexico,
corporate expenses not allocated to the other business segments and
restructuring and other charges (credits).
Segment financial information is included in Note 16 to the consolidated
financial statements included in this Annual Report on Form 10-K.
Foam Products
Products are distributed directly from manufacturing facilities and
indirectly through independent fabricator distributors. These foams are used by
the bedding industry in quilts, toppers, cores and border rolls for mattresses.
In the furniture industry, they are generally used for upholstered seating
products and in the retail industry, for a broad range of products such as
mattress overlay pads, leisure furniture, futons, and pillows. Foam Products are
generally sold in large volumes on a regional basis because of high shipping
costs.
The Company's bedding products are sold to mattress manufacturers. The
Company also supplies cut-to-size seat cushions, back cushions and other pieces
to the furniture industry. Furniture foams are sold directly to manufacturers as
well as through distributors. The consumer products group sells therapeutic
sleep products such as mattress pads and bed pillows for the health care and
consumer markets and a broad line of home furnishing products to retailers
throughout North America.
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The development and introduction of value added products continues to be a
priority including viscoelastic or "memory" foams for the bedding industry,
which maintain their resiliency better than other foams and materials, and
products incorporating Reflex(R). Reflex(R) materials include cushion wraps and
cushion cores and are advanced polymer cushioning products designed to improve
comfort, quality and durability in upholstered furniture and bedding products.
Reflex(R) was created using the variable pressure foaming manufacturing process
("VPF(SM)"). High efficiency thermal management foam products for applications
in work gloves and outerwear have also been introduced.
Carpet Cushion Products
The Company manufactures and distributes Carpet Cushion Products, which
include prime, rebond, sponge rubber and felt carpet cushion. Prime carpet
cushion is made from polyurethane foam buns. Rebond carpet cushion is made from
various types of scrap foam which are shredded into small pieces, processed and
then bonded using a chemical adhesive. Rebond manufacturing requires the
management of a comprehensive recycling business that includes an extensive
collection network from the automotive and foam industries on a worldwide basis.
Automotive Products
The Company is one of the largest suppliers of automotive foam products for
the North American operations of original equipment manufacturers ("OEMs").
Depending on the automotive manufacturer and/or the application, automotive foam
products are supplied by the Company either directly to the manufacturers or
indirectly through tier one suppliers. Automotive Products include foam for trim
pads, door panel parts, headliners and for acoustical purposes. Products also
include flame and adhesive laminates and rolls for tri-lamination. Tri-laminated
foam is applied to automotive fabrics to form a foam/fabric composite that
results in cost savings and aesthetic value for the automotive manufacturer.
Domestic automotive manufacturers have narrowed their supply base during
recent years and increased the percentage and dollar amount of components that
they purchase from outside suppliers. As a result, a smaller number of companies
are supplying an increasing percentage of automotive foam products. Automotive
suppliers are increasingly offering integrated systems which lower the overall
cost and improve quality relative to previous sourcing methods in which
individually sourced components were assembled and installed by the OEMs. A
continuing focus on new product development and flexible manufacturing
capabilities are essential to satisfy changing specifications.
Examples of the Company's ability to react to changing industry
requirements include its development of thermoformable headliners,
tri-laminates, advanced cutting technology and energy absorbing foams. For
example, the Company has introduced surface modification technology ("SMT(R)")
and continuous platform cutting ("CPC(SM)") used for vehicle flooring systems.
Also, the use of tri-laminates has increased due to the manufacturers' need for
significant cost savings and consumer demand for improved aesthetics. The
Company intends to increase its production and distribution of foam and fabric
components, such as tri-laminated material for automotive seating.
Automotive manufacturers are increasingly requiring the production
facilities of their suppliers to meet certain high quality standards. The
Company has achieved and expects to maintain the highest quality ratings awarded
to foam suppliers by automotive manufacturers. In addition, all tier one and
tier two automotive supplier facilities worldwide will eventually be required to
meet the QS-9000 quality manufacturing standards set by the United States
automotive manufacturers. In 1996, the Company completed QS-9000 and ISO-9001
certification for its eight domestic facilities which supply the automotive
industry. The Company was one of the first polyurethane manufacturers to be
QS-9000 certified which demonstrates its commitment to producing the highest
quality products and meeting the needs of its customers.
Technical Products
The Company believes that it is one of the foam industry's prime innovators
and producers of industrial, specialty, consumer and safety foams (collectively,
"Technical Products"). Technical Products consist of reticulated foams and other
custom polyester and polyether foams, which are sometimes combined with other
materials to yield
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specific properties. Reticulation is the thermal or chemical process used to
remove the membranes from the interconnecting cells within foam. This leaves a
porous, skeletal structure allowing for the free flow of gases and/or liquids.
Felting and lamination with other foams or materials give these composites
specific properties.
Reticulated foams are well suited for filtration, reservoiring, sound
absorption and sound transmission. Industrial applications include carburetors,
computer cabinets, inkpad reservoirs, high-speed inkjet printers and speaker
grills. Medical applications include oxygenators for cardiopulmonary surgery,
instrument holders for sterilization, pre-op scrubbers impregnated with
anti-microbial agents and EKG pads containing conductive gels. Other Technical
Products have unique characteristics such as flame retardancy and fluid
absorption. Additional products sold within this group include foams for
refrigerated supermarket produce counters, mop heads, paint brushes and cosmetic
applications.
The Company uses advertising in trade journals and related media in order
to attract customers and, more generally, to increase an awareness of its
capabilities for Technical Products. In addition, due to the highly specialized
nature of most Technical Products, the Company's research staff works with
customers to design, develop and manufacture each product to specification.
Other
Other consists primarily of certain manufacturing operations in Mexico,
corporate expenses not allocated to the other business segments and
restructuring and other charges (credits). See Note 16 to the consolidated
financial statements.
Marketing and Sales
Foam Products are sold directly by the Company to major bedding and
furniture manufacturers such as Sealy, Simmons and Berkline and also through
third party independent fabricators. In addition, the Company manufactures and
distributes foam-based consumer products such as futons, pillows, mattress pads
and juvenile furniture to retail chains such as Wal-Mart, Target, J.C. Penney
and Bed Bath & Beyond, Inc. The Company's foam-based consumer products sales
efforts are primarily regionally based. In December 2000, the Company announced
that it was exploring a marketing alliance with Sleep Innovations. Sleep
Innovations is a leader in the marketing of foam-based consumer products and if
a marketing alliance is established, it is anticipated that Sleep Innovations
would direct all marketing efforts. The key strategic elements supporting growth
in these areas are a focus on marketing and sales efforts, high quality,
cost-competitive products and low freight costs through optimal plant location.
Plant locations are critical in this regionalized line of business where the
transportation cost typically comprises a significant portion of product cost.
Carpet Cushion Products are sold to distributors and to major floor
covering retail chains such as Home Depot, Sears and CarpetMax. A key focus in
2001 will be increased marketing efforts of commercial product lines.
The Company has been a leading supplier of Automotive Products to OEMs,
including Ford, General Motors and DaimlerChrysler for more than 30 years. The
Company is also the primary supplier of Automotive Products to certain tier one
suppliers, including Lear Corporation and Johnson Controls. The Company competes
for new business both at the beginning of development of new models and upon the
redesign of existing models. Once a foam producer has been designated to supply
parts for a new model program, the foam producer usually produces parts for the
life of the program. Competitive factors in the market include product quality
and reliability, cost and timely service, technical expertise and development
capability, new product innovation and customer service.
The Company's Technical Products are used for filtration and reservoiring
in a wide variety of applications by companies such as Hewlett-Packard, Lexmark
and Briggs & Stratton. The Company markets most of its Technical Products
through a network of independent fabrication and distribution companies in North
America, the United Kingdom and South Korea. Such fabricators or distributors
often further process or finish Technical Products to meet the specific needs of
end users. The Company's specialty and technical foams service unique end user
requirements and are generally sold at relatively high margins. This line of
business is characterized by a diversity and complexity of both customers and
applications.
5
International Operations and Export Sales
The Company's geographical information is included in Note 16 to the
consolidated financial statements.
Major Customers
During 2000 and 1999, sales to Johnson Controls, which are included in
Automotive Products, accounted for approximately 12.3% and 11.5% of the
Company's net sales, respectively. No other customer accounted for more than
10.0% of the Company's net sales during any of the past three years. During the
year ended December 31, 2000, net sales to the five largest customers comprised
approximately $373.9 million or 29.7% of the Company's net sales. The loss of
any one of these customers could have a material adverse effect on the Company.
Manufacturing and Raw Materials
As of December 31, 2000, the Company conducted its operations at 64
manufacturing and distribution facilities with a total of approximately 8.4
million square feet of floor space. The Company believes that its manufacturing
and distribution facilities are well suited for their intended purposes and are
in good condition. The manufacturing and distribution facilities are
strategically located to service the Company's major customers because of the
high freight cost in relation to the cost of the foam product generally results
in distribution being most cost effective within a 200 to 300 mile radius.
The Company's fabrication process involves cutting foam buns into various
shapes and sizes to meet customer specifications. Fabricated foam is sold to
customers and is utilized by the Company to produce its foam-based consumer
products. Scrap foam, generated in connection with the fabrication of foam
products, is used by the Company to produce rebond carpet cushion.
Raw materials account for a significant portion of the manufacturing costs
of the Company. The two principal chemicals used in the manufacture of flexible
polyurethane foam are toluene diisocyanate ("TDI") and polyol.
The Company generally has alternative suppliers for each major raw material
and the Company believes that it could find alternative sources of supply should
it cease doing business with any one of its major suppliers.
The price of TDI and polyol has historically been cyclical and volatile.
The price of these raw materials is influenced by demand, manufacturing capacity
and oil prices. The Company's price for TDI and polyol were increased several
times during 2000. In response, the Company increased selling prices, where
possible, for cushioning, automotive and technical foam products depending on
the product. The 2000 results were adversely affected by the delays in, and the
inability to implement selling price increases to offset the raw material price
increases. The Company has announced selling price increases during 2001 to
offset the additional raw material price increases. However, there can be no
assurance that the Company will be successful in implementing selling price
increases or that competitive pricing pressure will not require the Company to
adjust selling prices.
A key raw material used in the manufacture of carpet cushion is scrap foam.
The Company internally generates a substantial portion of the scrap foam used in
the production of rebond carpet cushion from its other operations. Historically,
the market price of rebond carpet cushion has fluctuated with the market price
of scrap foam.
Employees
As of December 31, 2000, the Company employed approximately 5,850 persons.
Approximately 1,650 of these employees are located outside the United States and
approximately 900 of these employees are covered by collective bargaining
agreements with labor unions, which agreements expire on various dates through
2004. The Company considers relations with its employees to be good.
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Competition
The flexible polyurethane foam industry is highly competitive with price,
quality and service being significant competitive factors. The Company's
competitors in the polyurethane foam industry include E. R. Carpenter Company,
Hickory Springs Manufacturing Company, Vitafoam, Inc., General Foam Corporation,
Flexible Foam Products, Inc., and Future Foam, Inc. None of these competitors
individually competes in all of the business segments in which the Company does
business.
Patents and Trademarks
The Company owns various patents and trademarks registered in the United
States and in numerous foreign countries. The registered processes and products
were developed through ongoing research and development activities to improve
quality, reduce costs and expand markets through development of new applications
for flexible polyurethane foam products. While the Company considers its patents
and trademarks to be a valuable asset, it does not believe that its competitive
position is dependent on patent protection or that its operations are dependent
upon any individual patent, trademark or tradename.
Research and Development
The Company believes it has a leading research and development capability
in the flexible polyurethane foam industry. The Company's primary research and
development facility is located in Eddystone, Pennsylvania. Expenditures for
research and development amounted to $2.5 million, $3.3 million and $3.3 million
for 2000, 1999 and 1998, respectively.
The Company, Recticel, s.a. ("Recticel"), a European polyurethane foam
manufacturer, whose subsidiary was a former partner of Foamex L.P. and
affiliates of Recticel are current shareholders of the Company, and Beamech
Group Limited, an unaffiliated third party, have an interest in a Swiss
corporation that develops new manufacturing technology for the production of
polyurethane foam including the VPF(SM) manufacturing process. The Company,
Recticel and their affiliates have a royalty-free license to use technology
developed by the Swiss corporation. The Company and Recticel have exchanged
know-how, trade secrets, engineering and other data, designs, specifications,
chemical formulations, technical information, market information and drawings
which are necessary or useful for the manufacture, use or sale of foam products
and it is anticipated that they will continue to do so in the future.
Buyout Proposals - History
On February 9, 2000, the Company announced that it was in discussions with
respect to a proposal involving the acquisition of all of the Company's
outstanding common stock for cash. The Company stated that the proposal was
subject to a number of conditions, including the buyer's due diligence and the
execution of definitive agreements. The Company agreed to an exclusive
negotiating period ending five business days after delivery of its audited
financial statements included in the Company's Annual Report on Form 10-K to the
prospective buyer. On April 5, 2000, the Company announced that discussions with
the potential buyer were terminated with no agreement having been reached. The
Company subsequently terminated the engagement of J.P. Morgan & Company, Inc.
("JP Morgan"), which acted as financial advisor in connection with such
transaction. During the second quarter of 2000, the Company ended discussions
with JP Morgan concerning an additional engagement.
On August 5, 1999, the Company announced that its Board of Directors signed
a letter of intent with Sorgenti Chemical Industries, LLC and Liberty Partners
Holdings 20, LLC (collectively, the "Purchasers") for a business combination
providing for $11.50 per share for all of the Company's outstanding common stock
(the "Sorgenti Transaction"). Under the terms of the letter of intent, if the
Company entered into a business combination with another party, the Purchasers
would be entitled to a break-up fee of $6.0 million plus reimbursement of
certain expenses, subject to certain conditions, including the willingness of
the Purchasers to enter into a definitive merger agreement providing for a price
of at least $11.50 per share prior to the expiration of the letter of intent.
The proposed transaction was subject to a number of conditions, including the
negotiation of definitive documents regarding certain conditions relating to the
bank credit facilities and the public debt of the Company's subsidiaries.
Additional issues considered included minimum shareholder acceptance, change of
board membership, and other
7
provisions providing for a higher break-up fee and expense reimbursement if the
Company entered into a business combination providing a more favorable
transaction. On December 15, 1999, the Company announced that the letter of
intent with the Purchasers, which had been extended, expired by its terms. The
Purchasers had submitted a revised bid at a price and on terms that were less
favorable than those contained in the letter of intent and the Negotiating
Committee of the Company's Board of Directors rejected the revised bid.
In 1998, the Company received an unsolicited buyout proposal from Trace
International Holdings, Inc. ("Trace"), the Company's principal stockholder. The
Company entered into two merger agreements, which were subsequently terminated
by Trace.
Shareholder and Change in Control Developments
Trace is a privately held company, which owned approximately 29% of the
Company's outstanding voting common stock at September 30, 2000, and whose
former Chairman also serves as the Company's Chairman. The Company's common
stock owned by Trace was pledged as collateral against certain of Trace's
obligations. Certain credit agreements and promissory notes of the Company's
subsidiaries, pursuant to which approximately $401.1 million of debt was
outstanding as of September 30, 2000, provided that a "change of control" would
be an event of default and could result in the acceleration of such
indebtedness. "Change of control" means, for this purpose, that (i) a person or
related group, other than Trace, beneficially owns more than 25% of the
Company's outstanding voting stock and (ii) such voting stock constitutes a
greater percentage of such voting stock than the amount beneficially owned by
Trace. Additionally, certain indentures of Foamex L.P. and Foamex Capital
Corporation ("FCC") relating to senior subordinated notes of $248.0 million
contain similar "change of control" provisions, which require Foamex L.P. and
FCC to tender for such notes at a price in cash equal to 101% of the aggregate
principal amount thereof, plus accrued and unpaid interest thereon, if there is
such a "change of control".
On July 21, 1999, the Company was informed by Trace that it filed a
petition for relief under Chapter 11 of the Bankruptcy Code in Federal Court in
New York City. Subsequently, on January 24, 2000, an order was signed converting
the Trace bankruptcy from Chapter 11 to Chapter 7 of the Bankruptcy Code. A
trustee was appointed to oversee the liquidation of Trace's assets. Neither
Trace's bankruptcy filing nor the conversion to Chapter 7 constituted a "change
of control" under the provisions of the debt agreements described above.
On July 31, 2000, the Company announced that it had entered into an
agreement (the "Exchange Agreement") with The Bank of Nova Scotia relating to a
portion of the 7,197,426 shares of the Company's common stock pledged by Trace
to The Bank of Nova Scotia. The Exchange Agreement provided for the transfer of
the pledged stock to The Bank of Nova Scotia in a manner that would not
constitute a "change of control" as described above. These transactions were
conditioned upon bankruptcy court approval of a settlement agreement between The
Bank of Nova Scotia and the trustee for the Trace bankruptcy, which was entered
on October 18, 2000. On November 2, 2000, the transactions contemplated by the
Exchange Agreement and the settlement agreement were consummated, and did not
constitute a "change of control". As a result, Trace no longer owns any shares
of the Company's common stock.
Under the Exchange Agreement, The Bank of Nova Scotia initially received
1,500,000 shares of the Company's common stock from the Trace bankruptcy estate
and exchanged these common stock shares for 15,000 shares of a new class of the
Company's non-voting non-redeemable convertible preferred stock (the "Series B
Preferred Stock"). Each share of the Series B Preferred Stock can be converted
into 100 shares of the Company's common stock but only if such conversion would
not trigger a "change of control" event, as discussed above. The Series B
Preferred Stock (a) is entitled to dividends only if a dividend is declared on
the Company's common stock, (b) ranks senior to any future preferred stock
issued by the Company and (c) is entitled to a liquidation preference of $100
per share. Following this exchange, The Bank of Nova Scotia became the owner of
24.41% of the outstanding shares of the Company's common stock when the
remaining 5,697,426 shares of the Company's common stock were transferred to The
Bank of Nova Scotia from the Trace bankruptcy estate.
Forward-Looking Information
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements so long as those statements are
identified as forward-looking and are accompanied by meaningful cautionary
8
statements identifying important factors that could cause actual results to
differ materially from those projected in such statements. In connection with
certain forward-looking statements contained in this Annual Report on Form 10-K
and those that may be made in the future by or on behalf of the Company which
are identified as forward-looking, the Company notes that there are various
factors that could cause actual results to differ materially from those set
forth in any such forward-looking statements, such as the ability to implement
customer selling price increases in response to higher raw material costs, raw
material price increases, general economic conditions, the interest rate
environment, the level of automotive production, carpet cushion production and
housing starts, the completion of various restructuring/consolidation plans, the
achievement of management's business plans, the Company's capital and debt
structure (including various financial covenants), litigation and changes in
environmental legislation and environmental conditions. The forward-looking
statements contained in this Annual Report on Form 10-K were prepared by
management and are qualified by, and subject to, significant business, economic,
competitive, regulatory and other uncertainties and contingencies, all of which
are difficult or impossible to predict and many of which are beyond the control
of the Company.
Accordingly, there can be no assurance that the forward-looking statements
contained in this Annual Report on Form 10-K will be realized or that actual
results will not be significantly higher or lower. The forward-looking
statements have not been audited by, examined by, compiled by or subjected to
agreed-upon procedures by independent accountants, and no third party has
independently verified or reviewed such statements. Readers of this Annual
Report on Form 10-K should consider these facts in evaluating the information
contained herein. In addition, the business and operations of the Company are
subject to substantial risks which increase the uncertainty inherent in the
forward-looking statements contained in this Annual Report on Form 10-K. The
inclusion of the forward-looking statements contained in this Annual Report on
Form 10-K should not be regarded as a representation by the Company or any other
person that any of the forward-looking statements contained in this Annual
Report on Form 10-K will be achieved. In light of the foregoing, readers of this
Annual Report on Form 10-K are cautioned not to place undue reliance on the
forward-looking statements contained herein.
ITEM 2. PROPERTIES
As of December 31, 2000, the Company conducted its operations at 64
manufacturing and distribution facilities. Total floor space in use at the owned
manufacturing and distribution facilities is approximately 3.3 million square
feet and total floor space in use at the leased manufacturing and distribution
facilities is approximately 5.1 million square feet. Fifty-three of these
facilities are located throughout 37 cities in the United States, four
facilities are located in Canada and seven facilities are located in Mexico. The
2001 annual base rental with respect to such leased facilities is approximately
$12.3 million under leases expiring from 2001 to 2025. The Company does not
anticipate any problem in renewing or replacing any such leases expiring in
2001. In addition, the Company has approximately 1.8 million square feet of idle
space of which approximately 1.3 million is leased.
The Company maintains its administrative office in Linwood, Pennsylvania.
Property information by business segment is not reported because many of
the Company's facilities produce products for multiple business segments.
ITEM 3. LEGAL PROCEEDINGS
Litigation - Shareholders
On August 1, 2000, the Company announced that it had reached agreements in
principle with the plaintiffs in the stockholder actions described below
providing for the settlement and dismissal of such actions, subject to certain
conditions, including court approval.
The Shareholder Litigation. Beginning on March 17, 1998, six actions, which
were subsequently consolidated under the caption In re Foamex International Inc.
Shareholders Litigation, were filed in the Court of Chancery of the State of
Delaware, and on August 13, 1999, another action, Watchung Road Associates,
L.P., et al. v. Foamex International Inc., et al. (the "Watchung Action"), was
filed in the same court. The two actions were consolidated on May 3, 2000, into
a single action under the caption In re Foamex International Inc. Shareholders
9
Litigation (the "Delaware Action"). The Delaware Action, a purported derivative
and class action on behalf of the Company and its stockholders, originally named
as defendants the Company, certain of its current and former directors and
officers, Trace and a Trace affiliate. The complaint in the Delaware Action
alleges, among other things, that certain of the defendants breached their
fiduciary duties to the Company in connection with an attempt by Trace to
acquire the Company's publicly traded common stock as well as with a potential
acquisition transaction with a group led by Sorgenti Chemical Industries LLC,
and that certain of the defendants breached their fiduciary duties by causing
the Company to waste assets in connection with a variety of transactions entered
into with Trace and its affiliates. The Delaware Action seeks various remedies,
including injunctive relief, money damages and the appointment of a receiver for
the Company.
On April 26, 1999, a putative securities class action entitled Molitor v.
Foamex International Inc., et al., was filed in the United States District Court
for the Southern District of New York naming as defendants the Company, Trace
and certain current and former directors and officers of the Company, on behalf
of stockholders who bought shares of the Company's common stock during the
period from May 7, 1998 through and including April 16, 1999. The lawsuit
alleged that the defendants violated Section 10(b) of the Securities Exchange
Act of 1934 and Rule 10b-5 by misrepresenting and/or omitting material
information about the Company's financial situation and operations, with the
result of artificially inflating the price of the Company's stock. The lawsuit
also alleged that Trace and Marshall S. Cogan violated Section 20(a) of the
Securities Exchange Act of 1934 as controlling persons of the Company. The
complaint sought class certification, a declaration that defendants violated the
federal securities laws, an award of money damages, and costs and attorneys',
accountants' and experts' fees. On May 18, 1999, a similar action entitled
Thomas W. Riley v. Foamex International Inc., et al., was filed in the same
court. The two actions were consolidated and a consolidated complaint was filed;
the consolidated suit is referred to herein as the "Federal Action."
The Settlements. On August 23, 2000, the Company and the plaintiffs in the
Federal Action entered into a settlement agreement providing that members of the
class of shareholders who purchased shares between May 7, 1998 and April 16,
1999 would receive payments as defined in the agreement. The court approved the
settlement and dismissed the action with prejudice on January 11, 2001, and no
appeals were filed. Payments to class members and plaintiffs' lawyers' fees in
the Federal Action have been paid directly by the Company's insurance carrier on
behalf of the Company.
Under the terms of the agreement in principle to settle the Delaware
Action, the Company agreed that a special nominating committee of the Board of
Directors, consisting of Robert J. Hay as chairman, Stuart J. Hershon, John G.
Johnson, Jr., and John V. Tunney, will nominate two additional independent
directors to serve on the Board. The terms of the agreement also establish the
criteria for the independence of the directors and require that certain
transactions with affiliates be approved by a majority of the disinterested
members of the Board. On September 28, 2000, the Company announced that Raymond
E. Mabus, Jr. was elected to the Company's Board of Directors. On December 21,
2000, the Company announced that Virginia A. Kamsky was elected to the Company's
Board of Directors. The addition of Mr. Mabus and Ms. Kamsky adds two
independent directors and brought the total number of directors to eight. The
parties are negotiating the terms of the settlement agreement and related
documentation. On January 9, 2001, the Court ordered the Watchung Action
dismissed with prejudice only as to the named plaintiffs Watchung Road
Associates, L.P. and Pyramid Trading Limited Partnership. The dismissal did not
have any effect on the claims asserted in the consolidated action.
The settlement of the Delaware Action (assuming a definitive settlement
agreement is reached with plaintiffs) is subject to court approval, which, if
obtained, will resolve all outstanding shareholder litigation against the
Company and its current and former directors and officers. The settlements of
the Federal Action and the Delaware Action involve no admissions or findings of
liability or wrongdoing by the Company or any individuals. If management's
assessment of the Company's liability with respect to these actions is
incorrect, such actions could have a material adverse effect on the Company's
consolidated financial position, results of operations and cash flows.
10
Litigation - Breast Implants
As of March 21, 2001, the Company and Trace were two of multiple defendants
in actions filed on behalf of approximately 2,104 recipients of breast implants
in various United States federal and state courts and one Canadian provincial
court, some of which allege substantial damages, but most of which allege
unspecified damages for personal injuries of various types. Three of these cases
seek to allege claims on behalf of all breast implant recipients or other
allegedly affected parties, but no class has been approved or certified by the
court. In addition, three cases have been filed alleging claims on behalf of
approximately 39 residents of Australia, New Zealand, England, and Ireland. The
Company believes that the number of suits and claimants may increase. During
1995, the Company and Trace were granted summary judgments and dismissed as
defendants from all cases in the federal courts of the United States and the
state courts of California. Appeals for these decisions were withdrawn and the
decisions are final.
Although breast implants do not contain foam, certain silicone gel implants
were produced using a polyurethane foam covering fabricated by independent
distributors or fabricators from bulk foam purchased from the Company or Trace.
Neither the Company nor Trace recommended, authorized, or approved the use of
its foam for these purposes. The Company is also indemnified by Trace for any
such liabilities relating to foam manufactured prior to October 1990. Trace's
insurance carrier has continued to pay the Company's litigation expenses after
Trace's filing under the Bankruptcy Code. Trace's insurance policies continue to
cover certain liabilities of Trace but if the limits of those policies are
exhausted, it is unlikely that Trace will be able to continue to provide
additional indemnification. While it is not feasible to predict or determine the
outcome of these actions, based on management's present assessment of the merits
of pending claims, after consultation with the general counsel of the Company,
and without taking into account the indemnification provided by Trace, the
coverage provided by Trace's and the Company's liability insurance and potential
indemnity from the manufacturers of polyurethane covered breast implants,
management believes that the disposition of the matters that are pending or that
may reasonably be anticipated to be asserted should not have a material adverse
effect on either the Company's consolidated financial position or results of
operations. If management's assessment of the Company's liability with respect
to these actions is incorrect, such actions could have a material adverse effect
on the financial position, results of operations and cash flows of the Company.
Litigation - Other
The Company is party to various other lawsuits, both as defendant and
plaintiff, arising in the normal course of business. It is the opinion of
management that the disposition of these lawsuits will not, individually or in
the aggregate, have a material adverse effect on the financial position or
results of operations of the Company. If management's assessment of the
Company's liability with respect to these actions is incorrect, such actions
could have a material adverse effect on the Company's consolidated financial
position, results of operations and cash flows.
Environmental and Health and Safety
The Company is subject to extensive and changing federal, state, local and
foreign environmental laws and regulations, including those relating to the use,
handling, storage, discharge and disposal of hazardous substances and the
remediation of environmental contamination, and as a result, is from time to
time involved in administrative and judicial proceedings and inquiries relating
to environmental matters. As of December 31, 2000, the Company had accruals of
approximately $4.1 million for environmental matters. During 1998, the Company
established an allowance of $1.2 million relating to receivables from Trace for
environmental indemnifications due to the financial difficulties of Trace.
The Clean Air Act Amendments of 1990 (the "1990 CAA Amendments") provide
for the establishment of federal emission standards for hazardous air pollutants
including methylene chloride, propylene oxide and TDI, which are used in the
manufacturing of foam. On December 27, 1996, the United States Environmental
Protection Agency (the "EPA") proposed regulations under the 1990 CAA Amendments
that will require manufacturers of slab stock polyurethane foam and foam
fabrication plants to reduce emissions of methylene chloride. The final National
Emission Standard for Hazardous Air Pollutants ("NESHAP") was promulgated
October 7, 1998. NESHAP
11
requires a reduction of approximately 70% of the emission of methylene chloride
for the slab stock foam industry effective October 7, 2001. The Company believes
that the use of alternative technologies, including VPF(SM), which do not
utilize methylene chloride and its ability to shift current production to the
facilities which use these alternative technologies will minimize the impact of
these regulations. The 1990 CAA Amendments also may result in the imposition of
additional standards regulating air emissions from polyurethane foam
manufacturers, but these standards have not yet been proposed or promulgated.
The Company has reported to the appropriate state authorities that it has
found soil and/or groundwater contamination in excess of state standards at
seven sites. These sites are in various stages of investigation or remediation.
Accordingly, the extent of contamination and the ultimate liability is not known
with certainty for all sites. The Company has accruals of $2.5 million for the
estimated cost of remediation, including professional fees and monitoring costs,
for these sites. During 2000, Foamex L.P. reached an indemnification agreement
with the former owner of the Morristown, Tennessee facility. The agreement
allocates the incurred and future remediation costs between the former owner and
Foamex L.P. The estimated allocation of future costs for the remediation of this
facility is not significant, based on current information known. The former
owner was Recticel Foam Corporation, a subsidiary of Recticel s.a.
The Company has either upgraded or closed all underground storage tanks at
its facilities in accordance with applicable regulations. Petroleum
contamination was found at one of the sites and the Company has accrued
approximately $0.5 million for the estimated remediation costs. Soil sampling
continues to assess the full extent of contamination.
On November 14, 2000, the United States Occupational Safety and Health
Administration ("OSHA") released the final ergonomics standard ("Ergonomics
Standard"), which applies to the Company, as well as all other employers in the
United States, with certain industry specific exclusions. The Ergonomics
Standard addresses musculoskeletal disorders, including those commonly
referenced as repetitive motion disorders.
The Ergonomics Standard is comprehensive, covering essentially all
employees of the Company in the United States. Although the implementation costs
could be significant, in the present form, the Company does not believe it will
have a negative impact on its competitive position within the industry.
Subsequent to year-end 2000, a joint resolution by the United States House
of Representatives and Senate was approved that repealed the Ergonomics
Standard. The repeal has been submitted to the President of the United States
for his review and signature.
On April 10, 1997, the OSHA promulgated new standards governing employee
exposure to methylene chloride, which is used as a blowing agent in some of the
Company's manufacturing processes. The phase-in of the standards was completed
in 1999 and the Company has developed and implemented a compliance program.
Capital expenditures required and changes in operating procedures are not
anticipated to significantly impact the Company's competitive position.
The Company has been designated as a Potentially Responsible Party ("PRP")
by the EPA with respect to seven sites. Estimates of total cleanup costs and
fractional allocations of liability are generally provided by the EPA or the
committee of PRP's with respect to the specified site. In each case and in the
aggregate, the liability of the Company is not considered to be significant.
In 2001 and 2002, capital expenditures for environmental compliance
projects are anticipated to be approximately $1.0 million per year. Although it
is possible that new information or future developments could require the
Company to reassess its potential exposure relating to all pending environmental
matters, including those described herein, the Company believes that, based upon
all currently available information, the resolution of such environmental
matters will not have a material adverse effect on the Company's operations,
financial position, capital expenditures or competitive position. The
possibility exists, however, that new environmental legislation and/or
environmental regulations may be adopted, or other environmental conditions may
be found to exist, that may require expenditures not currently anticipated and
that may be significant.
12
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's common stock is traded through the National Association of
Securities Dealers, Inc. National Market System (the "NASDAQ") under the symbol
"FMXI".
The following table sets forth the high and low bid prices for the common
stock.
High Low
2000
Quarter Ended March 31, 2000 $10 3/8 $7
Quarter Ended June 30, 2000 $ 9 1/2 $4 3/16
Quarter Ended September 30, 2000 $ 7 1/32 $5 9/16
Quarter Ended December 31, 2000 $ 6 1/2 $4 19/32
1999
Quarter Ended March 31, 1999 $13 3/8 $4 13/16
Quarter Ended June 30, 1999 $ 8 9/16 $4
Quarter Ended September 30, 1999 $10 1/2 $5 3/4
Quarter Ended December 31, 1999 $ 9 $6
As of December 31, 2000 there were approximately 148 holders of record of
the common stock.
There were no cash dividends paid by the Company on its common stock during
the past two fiscal years. The payment of any future dividends will be
determined by the Board of Directors in light of conditions then existing,
including the Company's earnings, financial condition and requirements,
restrictions in financing agreements, business conditions and other factors. The
Company is a holding company whose assets consist primarily of its wholly owned
subsidiaries Foamex L.P. and Foamex Carpet. Consequently, the Company's ability
to pay dividends is dependent upon the earnings of Foamex L.P. and Foamex Carpet
and any future subsidiaries of the Company and the distribution of those
earnings to the Company and loans or advances by Foamex L.P., Foamex Carpet and
any such future subsidiaries of the Company. The ability of Foamex L.P. and
Foamex Carpet to make distributions is restricted by the terms of their
respective financing agreements. Due to such restrictions, the Company is not
expected to have access to the cash flow generated by Foamex L.P. and Foamex
Carpet for the foreseeable future.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table presents selected historical consolidated financial
data of the Company. The financial data should be read in conjunction with the
financial statements and related notes thereto of the Company included in this
Annual Report on Form 10-K.
Fiscal Year (1)
2000 1999 1998 1997 (6) 1996
------------ ------------ ------------ ------------ ------------
(thousands, except for earnings per share)
Statements of Operations Data
Net sales (2) $1,257,778 $1,294,639 $1,260,559 $945,519 $940,924
Income (loss) from continuing
operations (3)(4) 17,013 19,716 (69,853) 4,131 32,492
Basic earnings (loss) per share from
continuing operations 0.69 0.79 (2.79) 0.16 1.28
Diluted earnings (loss) per share from
continuing operations 0.67 0.78 (2.79) 0.16 1.26
13
Fiscal Year (1)
2000 1999 1998 1997 (6) 1996
------------ ------------ ------------ ------------ ------------
(thousands)
Balance Sheet Data
Total assets $755,480 $781,313 $874,965 $893,623 $619,846
Total long-term debt, classified as current (5) - - 771,092 - -
Total long-term debt 687,758 725,297 8,240 735,724 483,344
Stockholders' deficit (164,669) (166,381) (204,119) (113,419) (58,103)
Dividends - - 1,245 - -
(1) The Company changed its fiscal year to the calendar year during 1998. Prior
to the change, the Company had a 52 or 53 week fiscal year ending on the
Sunday closest to the end of the calendar year. Each fiscal year presented
prior to 1998 was comprised of 52 weeks.
(2) As discussed in Note 2 to the consolidated financial statements included in
this Annual Report on Form 10-K, net sales reflect a reclassification of
certain shipping costs that were billed to customers. The reclassification
required shipping costs originally reported in cost of sales to be
recognized in net sales, with no impact on income from continuing
operations.
(3) Includes net restructuring and other charges (credits), as discussed in
Note 4 to the consolidated financial statements included in this Annual
Report on Form 10-K. Listed below are the pre-tax charges (credits).
2000 - $6.3 million
1999 - $10.5 million
1998 - $(9.7) million
1997 - $21.1 million
1996 - $(6.5) million
(4) The provision for income taxes in 2000 and 1999 reflected the partial
reversal of the deferred income tax valuation allowance recognized in 1998.
The 1998 provision for income taxes of $58.2 million for continuing
operations consisted primarily of an increase in the valuation allowance
for deferred income tax assets.
(5) As of December 31, 1998, the Company classified approximately $771.1
million of long-term debt as current, in response to financial conditions
at year-end 1998.
(6) The balance sheet data included the estimated fair value of the net assets
acquired in the acquisition of Crain Industries, Inc. in December 1997. The
income statement data excludes the results of Crain Industries, Inc. from
the acquisition date of December 23, 1997, since the effect was
insignificant.
14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
The Company operates in the flexible polyurethane and advanced polymer foam
products industry. As of December 31, 2000, the Company's operations are
conducted through its wholly owned subsidiaries, Foamex L.P. and Foamex Carpet
Cushion, Inc. ("Foamex Carpet"). Business segments are listed below. Segment
financial information is included in Note 16 to the consolidated financial
statements.
An executive vice president heads each operating segment. Each vice
president is responsible for developing budgets and plans as well as directing
the operations of the segment. The performance of each operating segment is
measured based upon income from operations, excluding restructuring charges. The
Company does not allocate restructuring and other charges to operating segments
because many of the Company's facilities produce products for multiple segments.
Foam Products - manufactures and markets foam used by the bedding industry,
the furniture industry and the retail industry.
Carpet Cushion Products - manufactures and distributes prime, rebond,
sponge rubber and felt carpet cushion.
Automotive Products - supplies foam primarily for automotive interior
applications to automotive manufacturers and tier one suppliers.
Technical Products - manufactures and markets reticulated foams and other
custom polyester and polyether foams for industrial, specialty and consumer
and safety applications.
Other - primarily consists of certain manufacturing operations in Mexico,
corporate expenses not allocated to the other business segments and
restructuring and other charges (credits). The restructuring and other
charges (credits) amounted to $6.3 million in 2000, $10.5 million in 1999
and $(9.7) million in 1998.
The Company's sales are primarily to markets in the United States. These
sales are impacted by economic conditions in several sectors of the United
States economy, including consumer spending, sales of new and existing homes,
the overall level of passenger car and light truck production and seasonality.
The Company typically experiences two seasonally slow periods during each year,
in early July and in late December, due to scheduled plant shutdowns and
holidays.
The following discussion should be read in conjunction with the
consolidated financial statements and related notes included in this Annual
Report on Form 10-K.
RESULTS OF OPERATIONS
Carpet
Foam Cushion Automotive Technical
Products Products Products Products Other Total
-------- -------- ---------- --------- --------- ----------
2000 (thousands)
Net sales $519,197 $256,439 $342,386 $106,697 $33,059 $1,257,778
Income (loss) from operations 55,001 2,035 22,235 28,888 (11,688) 96,471
Depreciation and amortization 17,813 7,742 5,785 2,663 2,585 36,588
Income (loss) from operations
as a percentage of net sales 10.6% 0.8% 6.5% 27.1% n.m.(b) 7.7%
1999
Net sales (a) $527,159 $285,846 $361,806 $92,180 $27,648 $1,294,639
Income (loss) from operations 57,028 8,512 22,547 22,588 (17,617) 93,058
Depreciation and amortization 17,432 8,096 4,823 2,724 2,675 35,750
Income (loss) from operations
as a percentage of net sales 10.8% 3.0% 6.2% 24.5% n.m.(b) 7.2%
15
Carpet
Foam Cushion Automotive Technical
Products Products Products Products Other Total
-------- -------- ---------- --------- --------- ----------
1998 (thousands)
Net sales (a) $559,690 $314,954 $285,190 $79,140 $21,585 $1,260,559
Income (loss) from operations 35,313 12,005 16,788 14,571 (3,645) 75,032
Depreciation and amortization 18,300 5,529 6,424 2,929 2,203 35,385
Income (loss) from operations
as a percentage of net sales 6.3% 3.8% 5.9% 18.4% n.m.(b) 6.0%
(a) As discussed below, net sales for 1999 and 1998 reflects a reclassification
of certain shipping costs that were billed to customers. The
reclassification required shipping costs originally recorded in cost of
sales to be recognized in net sales, with no impact on income from
operations.
(b) Not meaningful.
2000 Compared to 1999
Net sales for 2000 decreased 2.8% to $1,257.8 million from $1,294.6 million
in 1999. The decline in sales primarily reflected a deterioration in market
conditions during the second half of 2000. Lower sales were recorded in the Foam
Products, Carpet Cushion Products and Automotive Products business segments. The
Technical Products segment continued to report strong sales growth and certain
of the Company's foreign operations reported in the "Other" segment also
reported higher sales, which partially offset sales declines in the business
segments discussed above.
Income from operations in 2000 was $96.5 million, 3.7% higher than the
$93.1 million recorded during 1999. These results included restructuring and
other charges (discussed under "Other" below) of $6.3 million in 2000 and $10.5
million in 1999. Excluding the restructuring and other charges for comparison
purposes, income from operations was $102.7 million in 2000, down 0.8% from
$103.5 million in 1999. On this basis, income from operations was 8.2% of net
sales in 2000 compared to 8.0% of net sales in 1999.
The decline in income from operations, excluding restructuring and other
charges, was largely attributable to the impact of lower sales and higher raw
material costs offset by improved operating efficiencies and lower selling,
general and administrative expenses, discussed below. Higher oil prices
translated into raw material costs increases in 2000 and these higher costs were
not fully recovered through selling price increases. The gross profit margin was
13.7% for 2000 compared to 13.9% in 1999.
Selling, general and administrative expenses were down 9.7% in 2000
compared to 1999. The decrease primarily reflected cost savings initiatives,
lower incentive compensation expenses and lower selling expenses. Partially
offsetting these favorable items were increases to the allowance for
uncollectible accounts receivables and professional fees. The professional fees
were associated with the transfer of the Company's common stock pledged by Trace
to The Bank of Nova Scotia and the shareholder litigation settlements, as
discussed in the Shareholder and Change in Control Developments section below.
Foam Products
Foam Products net sales for 2000 decreased 1.5% to $519.2 million from
$527.2 million in 1999. Lower sales primarily reflected a volume decline in the
consumer products market and the loss of sales from the Company's packaging
business that was sold in 1999. Income from operations in 2000 was down 3.6% to
$55.0 million compared to $57.0 million in 1999. As discussed above, raw
material costs continued to increase during the year, and selling price
increases and improved operating efficiencies did not fully recover the
increased costs. As a percentage of net sales, income from operations was 10.6%
of net sales in 2000, down from 10.8% in 1999.
16
Carpet Cushion Products
Carpet Cushion Products net sales for 2000 decreased 10.3% to $256.4
million from $285.8 million in 1999. The sales decline primarily reflected
competitive pressures that resulted in lower sales volumes across all product
lines. Lower selling prices in certain product lines and a lower value shipment
mix also contributed to the sales decline. As a result, income from operations
was $2.0 million in 2000 as compared to $8.5 million in 1999.
Automotive Products
Automotive Products net sales for 2000 were $342.4 million, down 5.4% from
$361.8 million in 1999. The decrease reflected a slow down in the automotive
industry, particularly during the second half of the year. Lower sales
translated to a 1.4% decrease in income from operations, from $22.5 million in
1999 to $22.2 million in 2000. Results in 2000 benefited from the favorable
impact of a selling price adjustment. Income from operations represented 6.5% of
net sales in 2000 and 6.2% of net sales in 1999.
Technical Products
Technical Products net sales for 2000 increased 15.7% to $106.7 million
from $92.2 million in 1999. Income from operations increased 27.9% to $28.9
million in 2000, up from $22.6 million in 1999. Income from operations
represented 27.1% of net sales in 2000 compared to 24.5% in 1999. The
improvement reflected favorable market conditions that resulted in sales volume
growth and improved operating efficiencies.
Other
Other primarily consists of certain manufacturing operations in Mexico,
corporate expenses not allocated to business segments and restructuring and
other charges. The increase in net sales associated with this segment primarily
resulted from an increase in net sales from the Company's Mexico City operation.
The loss from operations of $11.7 million in 2000 included a provision of $6.3
million for restructuring and other charges, discussed below. The loss also
included the professional fees that were associated with the Exchange Agreement
and the shareholder litigation settlements, discussed previously. The loss from
operations of $17.6 million in 1999 included $10.5 million of restructuring and
other charges.
During 2000, the Company approved and implemented four separate
restructuring plans to further rationalize plant operations and to reduce
selling, general and administrative expenses.
The Company recorded restructuring charges of $2.1 million for severance
costs in connection with the first restructuring plan. This plan reduced the
Company's salaried work force by 18 employees, including certain executives of
the Company.
The second restructuring plan was implemented to rationalize certain plant
operations relating to the increase in the VPF(SM) capacity in North Carolina.
The Company recorded a restructuring charge of $0.7 million associated with this
plan. The restructuring charge was comprised of $0.1 million of severance costs
in connection with a work force reduction of 12 employees, $0.4 million of lease
and plant closure costs and $0.2 million of asset write-downs.
The third restructuring plan, as amended, was implemented to exit the
Company's fiber operations in Indiana. The Company recorded a restructuring
charge of $1.1 million in connection with this plan which was comprised of less
than $0.1 million of severance costs for the work force reduction of seven
employees, $0.1 million of lease and plant closure costs and $1.0 million of
asset write-downs.
The fourth restructuring plan was implemented for the consolidation of
pourline operations and certain product line rationalizations resulting from the
closure of facilities in Indiana and Arkansas. The Company recorded a
restructuring charge of $2.3 million in connection with this plan. The charge
was comprised of $0.2 million of severance costs relating to work force
reductions of 65 employees, $0.8 million for lease and plant closure costs and
$1.3 million for asset write-downs.
17
In addition, the Company recorded a net restructuring charge of $0.1
million associated with changes in estimates to prior years' restructuring
plans. The net charge was comprised of $0.1 million for asset write-downs and
$0.1 million for lease and plant closure costs offset by a credit of $0.1
million relating to severance costs.
The accrued restructuring balance at December 31, 2000 will be used for
payments relating to severance and lease and plant closure costs, including
runout costs at the facilities. As of December 31, 2000, all employees subject
to the plans have been terminated. The Company expects to spend approximately
$4.8 million during 2001 with the balance to be spent through 2006, principally
for lease runout costs.
During 1999, the Company approved and implemented four restructuring plans
to reduce selling, general and administrative costs and to rationalize plant
operations.
The Company recorded restructuring charges of approximately $2.4 million
relating to severance costs in connection with the first restructuring plan.
This plan reduced the Company's salaried work force by 82 employees.
The Company recorded restructuring charges of approximately $2.9 million
relating to severance costs in connection with the second restructuring plan for
replacing three of the Company's former executives, including its former Chief
Executive Officer.
In connection with the third restructuring plan, the Company recorded
restructuring charges of approximately $1.7 million relating to the closure of
one facility and certain product line rationalizations. The $1.7 million charge
was comprised of approximately $0.1 million of severance costs in connection
with the work force reductions of 117 employees, $0.1 million of plant closure
and carrying costs and $1.5 million of asset write-downs.
In connection with the fourth restructuring plan, the Company closed its
New York office (see Note 18 to the consolidated financial statements). The
Company recorded approximately $2.5 million of restructuring charges comprised
of $1.6 million of severance costs for eight employees and $0.9 million of costs
primarily relating to future lease obligations, net of sublease proceeds.
In addition, the Company recorded restructuring charges of approximately
$0.7 million relating to changes in estimates to prior years' plans, primarily
for the sale of the packaging business in 1999. The $0.7 million charge is
comprised of $0.2 million of severance, $1.3 million of lease and plant closure
costs, offset by $0.8 million of adjustments for asset write-downs. The Company
also recorded $0.3 million of other charges relating to rent due from Trace for
the New York office prior to its closure.
Interest and Debt Issuance Expense
Interest and debt issuance expense totaled $75.2 million in 2000, which
represented a 3.2% increase from 1999 expense of $72.9 million. The impact of
higher effective interest rates was partially offset by the benefit of lower
average debt levels. Higher effective interest rates reflected market conditions
and the impact of a certain provision of the Foamex L.P. credit facility that
required an incremental interest rate margin, as discussed in Note 13 to the
consolidated financial statements. The additional interest rate margin was 25
basis points in the first quarter of 2000. During the second quarter of 2000,
the interest rate margin was increased 25 basis points to a cumulative
adjustment of 50 basis points. During the third quarter of 2000, an additional
25 basis point adjustment became effective that resulted in a cumulative
adjustment of 75 basis points. Based on the debt leverage ratio of Foamex L.P.
at the end of the third quarter, the cumulative adjustment of 75 basis points
was reset to zero during the fourth quarter of 2000. Interest capitalized as a
component of the construction costs of plant and equipment totaled $0.8 million
in 2000.
Income from Equity Interest in Joint Venture
Income from an equity interest in an Asian joint venture totaled $1.7
million in 2000 compared to $0.5 million in 1999. The improved results reflected
the growth of the joint venture as it moves beyond the start up phase.
18
Other Income (Expense), Net
Other expense, net in 2000 totaled $3.0 million and primarily consisted of:
$1.7 million loss on the disposal of fixed assets, $1.2 million of costs
associated with a buyout proposal, discussed below, and $0.7 million letter of
credit fees offset by $0.6 million of interest income. During, 1999, other
income, net totaled $1.5 million. Income items in 1999 included a $4.2 million
gain recorded on the sale of the corporate aircraft and interest income of $0.5
million. Partially offsetting income items in 1999 were losses on the disposal
of fixed assets and letter of credit fees related to the GFI Transaction,
discussed in Note 13 to the consolidated financial statements.
Income Tax Expense
The effective tax rates in 2000 and 1999 reflect the partial reversal of
the deferred income tax asset valuation allowance recognized in 1998. The
valuation allowance was reduced to reflect the utilization of Federal loss
carryforwards that reduced the current tax component of the Federal tax
provision. Additionally, the valuation allowance was reduced to offset the net
deferred Federal tax liability generated in 2000 and 1999. The effective tax
rate was higher in 2000 primarily due to a greater percentage of income from
foreign sources and a higher effective tax rate on foreign source income.
As of December 31, 2000, the Company had approximately $178.5 million of
tax operating loss carryforwards for Federal income tax purposes, expiring from
2010 to 2020. See Note 8 to the consolidated financial statements.
Net Income
Net income for 2000 was down 13.7% to $17.0 million compared to $19.7
million in 1999.
1999 Compared to 1998
Net sales for 1999 increased 2.7% to $1,294.6 million from $1,260.6 million
in 1998. The increase was primarily the result of stronger volume growth in the
Automotive Products and Technical Products segments partially offset by sales
declines in the Foam Products and Carpet Cushion Products segments.
Income from operations increased 24.0% to $93.1 million in 1999 from $75.0
million in 1998. Results in 1999 included $10.5 million of restructuring and
other charges. In 1998, a net restructuring credit of previously established
restructuring accruals increased operating income by $9.7 million. These
restructuring and other charges (credits) are discussed further under "Other"
below. Excluding the restructuring and other charges (credits) for comparison
purposes, income from operations increased 58.5% to $103.5 million in 1999 from
$65.3 million in 1998. On this basis, income from operations represented 8.0% of
net sales in 1999, up from 5.2% of net sales in 1998. The improvement was
primarily due to (i) the increase in net sales, (ii) improved gross profit
margins and (iii) lower selling, general and administrative expenses at both the
business unit and corporate levels. Improved gross profit margins resulted
primarily from operating efficiencies, the benefits of the first phase of
implementation of improved operating practices across a number of the Company's
facilities, enhanced raw material utilization and the full year benefits from
the consolidation of facilities acquired in connection with the acquisition of
Crain Industries, Inc. (the "Crain Acquisition") in December 1997. Lower
selling, general and administrative expenses primarily reflected the integration
of the Crain Acquisition, staffing reductions in January 1999, elimination of
the Trace management fee, the closure the New York office and reduced operating
costs as a result of the sale of the corporate aircraft.
Foam Products
Foam Products net sales for 1999 decreased 5.8% to $527.2 million from
$559.7 million in 1998. The decrease was primarily due to decreased sales
volumes resulting from the Company's decision to exit certain business lines and
the closure of facilities related to the Crain Acquisition. Despite the decline
in sales, income from operations increased 61.5% to $57.0 million in 1999 from
$35.3 million in 1998. Income from operations represented 10.8% of net sales in
1999, up from 6.3% in 1998. The improvement was primarily driven by (i) enhanced
raw material utilization, (ii) the benefits of the first phase of implementation
of improved operating
19
practices across a number of the Company's facilities, (iii) the benefits of
consolidation of facilities in the Southeast region of the U.S. and in Southern
California and (iv) the elimination of operating inefficiencies incurred in
1998. Income from operations for 1998 was adversely impacted by a number of
factors, the most significant of which were (i) $4.0 million of costs associated
with the Crain Acquisition transition including inventory adjustments for
facilities affected by the consolidation of manufacturing facilities, (ii)
operating inefficiencies and logistics costs of $2.5 million associated with the
sales of juvenile and other consumer products sold through mass merchandisers
and discount stores and (iii) operating losses and inefficiencies of $1.0
million resulting from fires at the Company's facilities in Orlando, Florida and
Cornelius, North Carolina.
Carpet Cushion Products
Carpet Cushion Products net sales for 1999 decreased 9.2% to $285.8 million
from $315.0 million in 1998 primarily due to lower selling prices and sales
volumes. Competitive pressures in the carpet cushion marketplace contributed to
lower selling prices and lower sales volumes. Sales volumes were also reduced
due to limited production from the Company's Orlando, Florida facility as a
result of the 1998 fire. Income from operations decreased 29.1% to $8.5 million
in 1999 from $12.0 million in 1998. Income from operations represented 3.0% of
net sales in 1999, down from 3.8% in 1998. The decline in income from operations
and the related margin were primarily due to lower selling prices, lower sales
volumes and the Orlando fire, which increased product transportation costs as
the fulfillment process was shifted to less geographically optimal facilities.
The Orlando, Florida carpet cushion line was brought back on stream and
operational in the fourth quarter of 1999. The Pico Rivera, California rebond
operation was consolidated into the other California rebond operations during
1999. These effects were partially offset by lower selling expenses as a result
primarily of the sales force integration and rationalization associated with the
Crain Acquisition. Results in 1998 were impacted by a $1.0 million charge
associated with the Orlando, Florida fire, and costs related to the Crain
Acquisition transition of $0.9 million.
Automotive Products
Automotive Products net sales for 1999 increased 26.9% to $361.8 million
from $285.2 million in 1998, primarily as a result of higher sales volume of
lamination products. Income from operations increased 34.3% to $22.5 million in
1999 from $16.8 million in 1998. Income from operations represented 6.2% of net
sales in 1999, up from 5.9% in 1998. The improvement was primarily due to (i)
operating efficiencies at the Company's Mexican border facilities that became
fully operational in the fourth quarter of 1998 and (ii) increased sales
volumes. Income from operations for 1998 was reduced by (i) $3.0 million of
costs incurred during the start up phase of new lamination business at the
Mexican border, (ii) contract price reductions of approximately $1.1 million and
(iii) losses of $1.0 million associated with the production of thermoformable
headliners.
Technical Products
Technical Products net sales for 1999 increased 16.5% to $92.2 million from
$79.1 million in 1998. Income from operations increased 55.0% to $22.6 million
in 1999 from $14.6 million in 1998. Income from operations represented 24.5% of
net sales in 1999, up from 18.4% in 1998. The improvement was primarily driven
by favorable market conditions, strong growth in sales volumes, a higher-margin
product mix and improved manufacturing efficiencies. Plans to expand capacity
for Technical Products were initiated during the second half of 1999.
Other
Other primarily consists of certain manufacturing operations in Mexico,
corporate expenses not allocated to business segments and restructuring and
other charges (credits). The increase in net sales associated with this segment
primarily resulted from an increase in net sales from the Company's Mexico City
operation. The loss from operations in 1999 was primarily associated with the
$10.5 million of restructuring and other charges discussed below. The loss from
operations in 1998 included $9.7 million of net restructuring credits discussed
below. The loss from operations for 1998 was impacted by accounts receivable and
inventory write downs of approximately $8.5 million at the Mexico City facility
and start up costs of $2.5 million for the Company's Asian joint venture.
20
Restructuring and other charges for 1999 amounted to $10.5 million, as
discussed previously.
In 1998, net restructuring credits were approximately $9.7 million, which
reflect a $15.1 million reversal of prior year's restructuring plans, offset by
other charges of $5.4 million. The $5.4 million was comprised of a $3.1 million
reserve for net receivables due from Trace and a $2.3 million of impaired cost
in excess of assets acquired associated with a foreign facility. However, these
charges were offset by a $15.1 million restructuring credit associated with
modifications to the 1997 restructuring plan. The $15.1 million credit reflected
the reversal of $10.2 million of fixed asset write-downs, $3.8 million of plant
closure and lease obligations and $1.1 million of personnel reductions.
Interest and Debt Issuance Expense
Interest and debt issuance expense totaled $72.9 million in 1999, slightly
higher than the 1998 expense of $72.3 million. The benefit of lower average debt
levels was offset by higher effective interest rates and increased amortization
expense related to additional debt issuance costs paid during 1999.
Other Income (Expense), Net
During the first quarter of 1999, a $4.2 million gain was recorded on the
sale of the corporate aircraft. Interest income totaled $0.5 million in 1999.
Losses on the disposal of fixed assets and letter of credit fees related to the
GFI Transaction (see Note 13 to the consolidated financial statements) partially
offset these income items.
Other expense, net for 1998 primarily consisted of: $6.5 million of costs
associated with the proposed Trace buyout transaction; $3.1 million of fees and
costs related to the GFI Transaction; $3.0 million of foreign currency losses in
Mexico; and a $1.1 million reduction in the value of the Company's investment in
the Trace Global Opportunities Fund (see Note 18 to the consolidated financial
statements). These expenses in 1998 were partially offset by approximately $1.9
million of interest income.
Income Tax Expense
The 1999 effective tax rate was 11.1% and reflected the partial reversal of
the deferred income tax asset valuation allowance recognized in 1998. The
valuation allowance reduction primarily reflected realization of Federal loss
carryforwards that reduced the current tax component of the Federal tax
provision. Additionally, the valuation allowance was reduced to offset the net
deferred Federal tax liability generated in 1999.
In 1998, the provision for income taxes of $58.2 million consisted
primarily of an increase in the valuation allowance of deferred income tax
assets. The Company has determined that it was more likely than not that the
Company would not have sufficient future income to utilize its net operating
loss carryforwards and realize other deferred income tax assets. In addition,
the Company did not recognize the tax benefits associated with losses in Mexico
because it appeared likely that the net operating loss carryforwards would not
be able to be realized in the near future.
Income (Loss) Before Extraordinary Loss
Income (loss) before extraordinary loss increased to $19.7 million for 1999
as compared to a loss of $69.9 million in 1998. The increase is primarily due to
improved operating results during 1999 as compared to 1998, as discussed above,
and the impact of the 1998 increase to the valuation allowance related to
deferred income tax assets.
Extraordinary Loss
The extraordinary loss on the early extinguishment of debt in 1998 was $1.9
million (net of $1.3 million income tax benefit). The charge primarily reflected
the write-off of debt issuance costs in connection with the GFI Transaction.
21
Business Outlook
The coming year presents a number of challenges for the Company. Although
the domestic economy is clearly not as strong as in recent years, the Company
believes improved results are attainable. In Foam Products, reduced profit
margins are anticipated to continue, given the current cost structure. Any
improvement in profit margins for Foam Products will largely depend on the
ability to implement selling price increases to recover higher raw material
costs and higher transportation costs, combined with a continued focus on
operating efficiencies. In Carpet Cushion Products, the introduction of new
products and marketing strategies, including expansion of commercial
applications, will be a key to improving results in the coming year. In
Automotive Products, the slow down in the automotive industry is anticipated to
continue in the short term and will continue to limit results. Improved results
for the Mexico City operation, reported in Other, is primarily dependent on a
continued focus on a higher-value product mix and increased shipments. Technical
Products are anticipated to continue their growth trend and results for the
business segment should help to offset the impact of the unfavorable business
conditions discussed above.
The effective start up of two new VPF(SM) facilities and the conversion to
other production technologies to comply with new emission standards, effective
in the fourth quarter of 2001, will be also a key success factor.
Results in 2001 should also benefit from continued growth and results from
the Company's joint venture in Asia and from lower interest expense resulting
from anticipated debt reduction and anticipated lower effective interest rates,
discussed below.
Liquidity and Capital Resources
The Company's operations are conducted through its wholly owned
subsidiaries, Foamex L.P. and Foamex Carpet. The liquidity requirements of the
Company consist primarily of the operating cash requirements of its two
principal subsidiaries.
Foamex L.P.'s operating cash requirements consist principally of working
capital requirements, scheduled payments of principal and interest on
outstanding indebtedness and capital expenditures. Based on the business outlook
discussed above, the Company believes that cash flow from Foamex L.P.'s
operating activities, cash on hand and periodic borrowings under Foamex L.P.'s
credit facility will be adequate to meet its liquidity requirements. The ability
of Foamex L.P. to make distributions to the Company is restricted by the terms
of its financing agreements. Consequently, both the Company and Foamex Carpet
are not expected to have access to the cash flow generated by Foamex L.P. for
the foreseeable future.
Foamex Carpet's operating cash requirements consist principally of working
capital requirements, scheduled payments of principal and interest on
outstanding indebtedness and capital expenditures. Based on the business outlook
discussed above, the Company believes that cash flow from Foamex Carpet's
operating activities, cash on hand and periodic borrowings under Foamex Carpet's
credit facility will be adequate to meet its liquidity requirements. The ability
of Foamex Carpet to make distributions to the Company is restricted by the terms
of its financing agreements. Consequently, both the Company and Foamex L.P. are
not expected to have access to the cash flow generated by Foamex Carpet for the
foreseeable future.
Cash and cash equivalents totaled $4.9 million at the end of 2000 compared
to $6.6 million at the end of 1999. Working capital at the end of the 2000 was
$103.3 million and the current ratio was 1.5 to 1 compared to working capital at
the end of 1999 of $105.6 million and a current ratio of 1.6 to 1. The increase
in accrued employee compensation and benefits primarily reflects an increase in
the amount of contributions required for the Company's defined benefit pension
plan in the United States.
Total debt at the end of 2000 was $711.9 million, down $33.4 million from
year-end 1999. During the first quarter of 2000, the Foamex/GFI Note was repaid
with borrowings under the Foamex L.P. revolving credit facility. The $34.5
million letter of credit that was outstanding at year-end 1999 to collateralize
principal and interest payable under the Foamex/GFI Note was also terminated.
22
Cash Flow from Operating Activities
Cash provided by operating activities in 2000 was $51.0 million compared to
$58.7 million in 1999. The cash flow decrease primarily reflected lower results
and an increase in retirement benefit funding. Working capital and other
requirements were relatively comparable for the two years.
Cash Flow from Investing Activities
Cash used for investing activities totaled $21.9 million in 2000. Cash
requirements for capital expenditures were $23.6 million, partially offset by
$3.6 million of proceeds from the sale of assets. In 1999, cash flow used for
investing activities totaled $1.7 million primarily for $20.1 million of capital
expenditures partially offset by $17.8 million of proceeds from the sale of
assets. The Company expects capital expenditures for 2001 to be less than $20.0
million, which includes the completion of a fourth VPF(SM) facility. In
addition, the Company is continuing to explore the possible implementation of a
new ERP software system, but no significant expenditures are anticipated for the
balance of 2001.
Cash Flow from Financing Activities
Cash used for financing activities was $30.8 million in 2000 compared to
cash used of $63.1 million in 1999. As discussed previously, the $34.0 million
Foamex/GFI Note was repaid during the first quarter of 2000 with borrowings
under the Foamex L.P. revolving credit facility. The remaining cash requirements
for financing activities primarily reflected other debt repayments. Cash used
for financing activities in 1999 was primarily due to net debt repayments and
debt issuance costs.
Financial Condition
Based on the business outlook discussed above, coupled with forecasted
capital expenditures in 2001 of less than $20.0 million, the Company's targeted
debt reduction is approximately $50.0 million in the coming year.
Various Foamex L.P. and Foamex Carpet debt agreements contain certain
quarterly financial covenants which become more restrictive during 2001. Foamex
L.P. and Foamex Carpet anticipate that they will continue to comply in 2001 with
the quarterly financial covenants in the applicable debt agreements.
Management's current business plans for Foamex L.P. and Foamex Carpet anticipate
customer selling price increases in response to higher raw material costs,
improved working capital management, a reduced capital expenditure program,
declining interest rates, successful implementation of on-going cost savings
initiatives and improved operating efficiencies. The achievement of the business
plans is necessary for compliance with the various financial covenants in 2001.
The possibility exists that certain financial covenants will not be met if
business conditions are other than as anticipated or other unforeseen events
impact results. In the absence of a waiver of or amendment to such financial
covenants, such noncompliance would constitute a default under the applicable
debt agreements, and the lenders would be entitled to accelerate the maturity of
the indebtedness outstanding thereunder. In the event that such noncompliance
appears likely, or occurs, the Company will seek the lenders' approvals of
amendments to, or waivers of, such financial covenants. Historically, the
Company has been able to renegotiate financial covenants and/or obtain waivers,
as required, and management believes such waivers and/or amendments could be
obtained if required. However, there can be no assurance of future amendments or
waivers will be obtained.
Foamex L.P. Credit Facility
At December 31, 2000, Foamex L.P. had a credit facility (the "Foamex L.P.
Credit Facility") with a group of banks which provided for a revolving credit
facility commitment of $177.5 million and three term loans with an outstanding
balance totaling $248.8 million. Included in the group of banks that provides
the Foamex L.P. Credit Facility is The Bank of Nova Scotia, which is a
shareholder of the Company, as discussed below. Amendments in 1998 provided for
a $2.5 million quarterly reduction of the availability under the revolving
credit facility, which extends through June 2003. On January 2, 2001, the
revolving credit facility commitment was $175.0 million with the fourth quarter
2000 reduction applied on January 2nd because the last day of 2000 was a Sunday.
23
Borrowings under the Foamex L.P. Credit Facility are collateralized by
substantially all of the assets of Foamex L.P. on a pari passu basis with the
IRBs (see Note 13 to the consolidated financial statements); however, the rights
of the holders of the applicable issue of the IRBs to receive payment upon the
disposition of the collateral securing such issue of the IRBs has been
preserved.
In response to financial conditions at year-end 1998, amendments to debt
agreements were executed during the first half of 1999. As a result the Foamex
L.P. Credit Facility, which was amended and restated in February 1998, was
further amended and restated in June 1999 to modify financial covenants for net
worth, interest coverage, fixed charge coverage and leverage ratios through
December 2006. The agreement was also amended to no longer permit Foamex L.P. to
make certain cash payments, including the payment of an annual management fee of
$3.0 million to a subsidiary of Trace and distributions to the Company, and to
limit future investments in foreign subsidiaries and joint ventures. The "change
of control" definition under the agreement was also modified to conform to the
definition discussed in "change of control" in Note 1 to the consolidated
financial statements. Changes in the interest rate structure, effective in 2000,
were also made and are discussed below. Foamex L.P. was in compliance with this
agreement at year-end 2000 and 1999.
At year-end 2000, interest was based on the combination of a variable rate
consisting of the higher of (i) the base rate of The Bank of Nova Scotia or (ii)
the Federal Funds rate plus 0.5% plus a margin. The margins for revolving, Term
B, Term C and Term D loans were 2.25%, 2.50%, 2.75% and 2.875%, respectively. At
the option of Foamex L.P., portions of the outstanding loans are convertible
into LIBOR based loans plus 1.0% added to the margins identified above. The
effective interest rates for the Foamex L.P. Credit Facility at the end of 2000
ranged between 10.31% and 10.69%.
Effective January 1, 2000, the interest rate on outstanding borrowings
under the Foamex L.P. Credit Facility will increase by 25 basis points each
quarter that Foamex L.P.'s leverage ratio, as defined, exceeds 5.00 to 1.00.
Once the leverage ratio is reduced below this level, the cumulative amount of
any 25 basis point adjustments to the interest rate on borrowings is reset to
zero. During 2000, basis point adjustments were incurred in the first three
quarters, beginning with 25 basis points in the first quarter and ending with a
cumulative impact of 75 basis points by the end of the third quarter. There were
no basis point adjustments for the fourth quarter of 2000. At December 31, 2000,
the calculated leverage ratio was 5.3 to 1.00. Consequently, a 25 basis point
adjustment will be applicable for the calculation of interest in 2001, effective
upon delivery of the financial statements to the lenders.
Available borrowings under the revolving credit facility totaled $10.5
million at year-end 2000. Letters of credit outstanding at December 31, 2000
totaled $21.1 million.
As part of the Foamex L.P. Credit Facility, excess cash flow generated
annually, as defined, is required to prepay portions of Term B, C and D loans.
There was no required prepayment at year-end 2000. The prepayment amount
determined for 1999 was $13.3 million and was financed through revolving loans
under the facility. The 1999 required payment was made during the second quarter
of 2000.
Foamex Carpet Credit Facility
Foamex Carpet has a revolving credit facility (the "Foamex Carpet Credit
Facility"), which provides a commitment of $15.0 million through February 2004.
During 1999, amendments modified the financial covenants for net worth, interest
coverage, fixed charge coverage and leverage ratios. Also, effective June 30,
1999, the interest rate on outstanding borrowings under the Foamex Carpet Credit
Facility increased by 25 basis points.
There were no borrowings outstanding under the Foamex Carpet Credit
Facility at year-end 2000 and available borrowings totaled $15.0 million. The
interest rate was based on the combination of a variable rate plus a margin. The
variable rate is the same as the one defined in the Foamex L.P. Credit Facility,
discussed above, and the margin is 2.25%. At the option of Foamex Carpet,
portions of the outstanding loans are convertible into LIBOR based loans plus
3.25%.
Borrowings under the Foamex Carpet Credit Facility are collateralized by
substantially all of the assets of Foamex Carpet on a pari passu basis with the
Note Payable to Foam Funding LLC, discussed in Note 13 to the
24
consolidated financial statements.
Buyout Proposals - History
On February 9, 2000, the Company announced that it was in discussions with
respect to a proposal involving the acquisition of all of the Company's
outstanding common stock for cash. The Company stated that the proposal was
subject to a number of conditions, including the buyer's due diligence and the
execution of definitive agreements. The Company agreed to an exclusive
negotiating period ending five business days after delivery of its audited
financial statements included in the Company's Annual Report on Form 10-K to the
prospective buyer. On April 5, 2000, the Company announced that discussions with
the potential buyer were terminated with no agreement having been reached. The
Company subsequently terminated the engagement of J.P. Morgan & Company, Inc.
("JP Morgan"), which acted as financial advisor in connection with such
transaction. During the second quarter of 2000, the Company ended discussions
with JP Morgan concerning an additional engagement.
On August 5, 1999, the Company announced that its Board of Directors signed
a letter of intent with Sorgenti Chemical Industries, LLC and Liberty Partners
Holdings 20, LLC (collectively, the "Purchasers") for a business combination
providing for $11.50 per share for all of the Company's outstanding common stock
(the "Sorgenti Transaction"). Under the terms of the letter of intent, if the
Company entered into a business combination with another party, the Purchasers
would be entitled to a break-up fee of $6.0 million plus reimbursement of
certain expenses, subject to certain conditions, including the willingness of
the Purchasers to enter into a definitive merger agreement providing for a price
of at least $11.50 per share prior to the expiration of the letter of intent.
The proposed transaction was subject to a number of conditions, including the
negotiation of definitive documents regarding certain conditions relating to the
bank credit facilities and the public debt of the Company's subsidiaries.
Additional issues considered included minimum shareholder acceptance, change of
board membership, and other provisions providing for a higher break-up fee and
expense reimbursement if the Company entered into a business combination
providing a more favorable transaction. On December 15, 1999, the Company
announced that the letter of intent with the Purchasers, which had been
extended, expired by its terms. The Purchasers had submitted a revised bid at a
price and on terms that were less favorable than those contained in the letter
of intent and the Negotiating Committee of the Company's Board of Directors
rejected the revised bid.
In 1998, the Company received an unsolicited buyout proposal from Trace,
the Company's principal stockholder. The Company entered into two merger
agreements, which were subsequently terminated by Trace.
Shareholder and Change in Control Developments
Trace is a privately held company, which owned approximately 29% of the
Company's outstanding voting common stock at September 30, 2000, and whose
former Chairman also serves as the Company's Chairman. The Company's common
stock owned by Trace was pledged as collateral against certain of Trace's
obligations. Certain credit agreements and promissory notes of the Company's
subsidiaries, pursuant to which approximately $401.1 million of debt was
outstanding as of September 30, 2000, provided that a "change of control" would
be an event of default and could result in the acceleration of such
indebtedness. "Change of control" means, for this purpose, that (i) a person or
related group, other than Trace, beneficially owns more than 25% of the
Company's outstanding voting stock and (ii) such voting stock constitutes a
greater percentage of such voting stock than the amount beneficially owned by
Trace. Additionally, certain indentures of Foamex L.P. and Foamex Capital
Corporation ("FCC") relating to senior subordinated notes of $248.0 million
contain similar "change of control" provisions, which require Foamex L.P. and
FCC to tender for such notes at a price in cash equal to 101% of the aggregate
principal amount thereof, plus accrued and unpaid interest thereon, if there is
such a "change of control".
On July 21, 1999, the Company was informed by Trace that it filed a
petition for relief under Chapter 11 of the Bankruptcy Code in Federal Court in
New York City. Subsequently, on January 24, 2000, an order was signed converting
the Trace bankruptcy from Chapter 11 to Chapter 7 of the Bankruptcy Code. A
trustee was appointed to oversee the liquidation of Trace's assets. Neither
Trace's bankruptcy filing nor the conversion to Chapter 7 constituted a "change
of control" under the provisions of the debt agreements described above.
25
On July 31, 2000, the Company announced that it had entered into an
agreement (the "Exchange Agreement") with The Bank of Nova Scotia relating to a
portion of the 7,197,426 shares of the Company's common stock pledged by Trace
to The Bank of Nova Scotia. The Exchange Agreement provided for the transfer of
the pledged stock to The Bank of Nova Scotia in a manner that would not
constitute a "change of control" as described above. These transactions were
conditioned upon bankruptcy court approval of a settlement agreement between The
Bank of Nova Scotia and the trustee for the Trace bankruptcy, which was entered
on October 18, 2000. On November 2, 2000, the transactions contemplated by the
Exchange Agreement and the settlement agreement were consummated, and did not
constitute a "change of control". As a result, Trace no longer owns any shares
of the Company's common stock.
Under the Exchange Agreement, The Bank of Nova Scotia initially received
1,500,000 shares of the Company's common stock from the Trace bankruptcy estate
and exchanged these common stock shares for 15,000 shares of a new class of the
Company's non-voting non-redeemable convertible preferred stock (the "Series B
Preferred Stock"). Each share of the Series B Preferred Stock can be converted
into 100 shares of the Company's common stock but only if such conversion would
not trigger a "change of control" event, as discussed above. The Series B
Preferred Stock (a) is entitled to dividends only if a dividend is declared on
the Company's common stock, (b) ranks senior to any future preferred stock
issued by the Company and (c) is entitled to a liquidation preference of $100
per share. Following this exchange, The Bank of Nova Scotia became the owner of
24.41% of the outstanding shares of the Company's common stock when the
remaining 5,697,426 shares of the Company's common stock were transferred to The
Bank of Nova Scotia from the Trace bankruptcy estate.
Environmental and Health and Safety Matters
The Company is subject to extensive and changing environmental laws and
regulations. Expenditures to date in connection with the Company's compliance
with such laws and regulations did not have a material adverse effect on
operations, financial position, capital expenditures or competitive position.
Liabilities recorded by the Company in connection with environmental matters as
of December 31, 2000 totaled $4.1 million. Although it is possible that new
information or future developments could require the Company to reassess its
potential exposure to all pending environmental matters, including those
described in the consolidated financial statements, the Company believes that,
based upon all currently available information, the resolution of all such
pending environmental matters will not have a significant adverse effect on the
Company's operations, financial position, capital expenditures or competitive
position.
On November 14, 2000, the United States Occupational Safety and Health
Administration ("OSHA") released the final ergonomics standard ("Ergonomics
Standard"), which applies to the Company, as well as all other employers in the
United States, with certain industry specific exclusions. The Ergonomics
Standard addresses musculoskeletal disorders, including those commonly
referenced as repetitive motion disorders.
The Ergonomics Standard is comprehensive, covering essentially all
employees of the Company in the United States. Although the implementation costs
could be significant, in the present form, the Company does not believe it will
have a negative impact on the its competitive position within the industry.
Subsequent to year-end 2000, a joint resolution by the United States House
of Representatives and Senate was approved that repealed the Ergonomics
Standard. The repeal has been submitted to the President of the United States
for his review and signature.
Inflation and Other Matters
On average, inflation rates for the domestic economy continue to be
relatively low. Although long-term inflation rates are difficult to predict, the
Company believes it has the flexibility in operations and capital structure to
maintain a competitive position. In recent years, results of operations were
adversely affected by raw material cost increases. The price of the two
principal chemicals used, TDI and polyol, is influenced by demand, manufacturing
capacity and oil prices. Results for 2000 were negatively impacted by higher
transportation costs related to oil price increases and higher costs for raw
materials. The Company attempts to offset raw material cost increases through
selling price increases; however, there can be no assurance that the Company
will be successful in implementing selling price increases or that competitive
pricing pressure will not require the Company to adjust selling prices.
26
Results of operations have been and could be adversely affected by delays in
implementing, or the inability of the Company to implement, selling price
increases to offset raw material cost increases.
Accounting Changes - Revenue Recognition and Presentation
The Securities and Exchange Commission (the "SEC") issued Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB No. 101").
SAB No. 101, as amended, was effective as of January 1, 2000 and was adopted in
the fourth quarter of 2000. SAB No. 101 outlines the SEC's position that revenue
should not be recognized until it is realized or realizable, including a
comprehensive review of the conditions and criteria necessary for revenue
recognition. Additionally, the Company has internal policies and an on-going
audit program to support the accounting policy. Based on the review of the SAB
No. 101 requirements, no significant impact was incurred or anticipated on the
revenue recognition practices of the Company.
During July 2000, the Emerging Issues Task Force (the "EITF") of the
Financial Accounting Standards Board reached a consensus on an issue concerning
the components of revenue. EITF No. 00-10 "Accounting for Shipping and Handling
Revenues and Costs" essentially requires that shipping and handling costs that
are billed to a customer be included in revenue. The Company determined that a
portion of shipping costs billed to customers required a reclassification from
cost of sales to revenue. Accordingly, net sales reported for all periods in the
consolidated statements of operations reflect the reclassification required. On
a segment basis, the Carpet Cushion Products was the only business segment
impacted and net sales for all periods presented reflect the reclassification
required. All other shipping and handling costs associated with product
shipments are reported in cost of goods sold.
Future Accounting Changes - Accounting for Derivatives and Hedging Activities
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS No. 133") will require the
fair value of derivatives be recognized in the consolidated balance sheets.
Changes in the fair value of derivatives will be recognized in earnings or in
other comprehensive loss, essentially depending on the structure and the purpose
of the derivatives. During 2000, SFAS No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities", which amended SFAS No.
133 on a limited number of issues, was issued. The statements will be effective
for the Company in the first quarter of 2001.
These statements create a foundation that will address accounting and
reporting issues for a wide range of financial instruments defined as
derivatives and related hedging activities. As of December 31, 2000, the Company
did not have any derivatives, as defined in the statements. Accordingly, the
initial adoption of the statements will not have a significant impact on the
results of operations or financial position of the Company. The adoption of the
statements will require a reclassification in the consolidated balance sheets,
effective in 2001. Specifically, $6.1 million recognized at year-end 2000 as
liabilities will be reclassified to accumulated other comprehensive loss under
stockholders' deficit. The amount reclassified is the result of certain interest
rate swaps that were terminated in prior years, as discussed in Note 13 to the
consolidated financial statements. The amount reclassified will continue to be
amortized, with $0.9 million of amortization anticipated in 2001.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's debt securities with variable interest rates are subject to
market risk for changes in interest rates. On December 31, 2000, indebtedness
with variable interest rates totaled $453.0 million. On an annualized basis, if
the interest rates on these debt instruments increased by 1.0%, interest expense
would increase by approximately $4.5 million; concomitantly in fact interest
rates have decreased by 150 basis points for a potential savings in excess of
$6.0 million for the year 2001.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
An index to the financial statements and financial statement schedules is
included in Item 14(a).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
27
PART III
The information required by this Part III (Items 10, 11, 12 and 13) will be
filed as an amendment no later than 120 days after the end of the fiscal year
covered by this Annual Report on Form 10-K.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial statements.
Foamex International Inc. and Subsidiaries:
Report of Independent Accountants F-2
Consolidated Balance Sheets as of
December 31, 2000 and 1999 F-3
Consolidated Statements of Operations for
the years 2000, 1999 and 1998 F-5
Consolidated Statements of Cash Flows for the
years 2000, 1999 and 1998 F-6
Consolidated Statements of Stockholders' Deficit for
the years 2000, 1999 and 1998 F-7
Notes to Consolidated Financ