UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from .......... to ..........
Commission file number: 0-22624
FOAMEX INTERNATIONAL INC.
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(Exact Name of registrant as Specified in its Charter)
Delaware 05-0473908
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1000 Columbia Avenue, Linwood, PA 19061
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (610) 859-3000
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Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share,
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which is traded through the National
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Association of Securities Dealers, Inc.
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National Market System.
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter periods that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. YES _X_ NO ___
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Annual Report on Form
10-K or any amendment to this Annual Report on Form 10-K. [ ]
The aggregate market value of the voting stock held by nonaffiliates of
the registrant as of March 4, 2002, was $85.5 million.
The number of shares outstanding of the registrant's common stock as of
March 15, 2002 was 24,173,443.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's definitive proxy statement to be filed within
120 days pursuant to Reg. 12B-23 of the Securities and Exchange Act of 1934, as
amended.
FOAMEX INTERNATIONAL INC.
INDEX
Page
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Part I
Item 1. Business 3
Item 2. Properties 8
Item 3. Legal Proceedings 8
Item 4. Submission of Matters to a Vote of Security Holders 11
Part II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters 11
Item 6. Selected Consolidated Financial Data 12
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 14
Item 7a Quantitative and Qualitative Disclosures about Market Risk 29
Item 8. Financial Statements and Supplementary Data 29
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 29
Part III
Item 10. Directors and Executive Officers of the Registrant 29
Item 11. Executive Compensation 29
Item 12. Security Ownership of Certain Beneficial Owners
and Management 29
Item 13. Certain Relationships and Related Transactions 29
Part IV
Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K 30
Signatures 38
The Registrant will furnish a copy of any exhibit to this Annual Report on Form
10-K upon the payment of a fee equal to the Registrant's reasonable expense in
furnishing such exhibit.
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PART I
ITEM l. BUSINESS
General
Foamex International Inc. (referred to in this document as the "Company,
we, us and/or our") is engaged primarily in the manufacturing and distribution
of flexible polyurethane and advanced polymer foam products. As of December 31,
2001, the Company's operations are conducted through its wholly-owned
subsidiary, Foamex L.P. and through Foamex Canada Inc., Foamex Latin America,
Inc. and Foamex Asia, Inc. which are subsidiaries of Foamex L.P. and through
Foamex Carpet Cushion, Inc. ("Foamex Carpet"). Foamex Carpet was converted into
a limited liability company and was contributed to Foamex L.P. on March 25,
2002. The Company was incorporated in 1993 to act as a holding company for
Foamex L.P.
Segments
We are the largest manufacturer and distributor of flexible polyurethane
and advanced polymer foam products in North America. We have been developing,
manufacturing and marketing polyurethane foam for more than 44 years. We have
numerous manufacturing facilities dedicated to specific product lines as well as
facilities with the capability to support multiple product lines. Each of our
business segments has a diverse customer base. Our senior executives direct
sales efforts for each of our business segments.
Our five business segments are described below.
Foam Products
Our foam products are distributed directly from manufacturing facilities
and indirectly through independent fabricator distributors. These foams are used
by the bedding industry in quilts, toppers, cores and border rolls for
mattresses. In the furniture industry, they are generally used for upholstered
seating products and in the retail industry, for a broad range of products, such
as mattress overlay pads, leisure furniture, futons and pillows. Foam Products
are generally sold in large volumes on a regional basis because of high shipping
costs.
Our bedding products are sold to mattress manufacturers. We also supply
cut-to-size seat cushions, back cushions and other pieces to the furniture
industry. Furniture foams are sold directly to manufacturers as well as through
distributors. The consumer products group sells therapeutic sleep products such
as mattress pads and bed pillows for the health care and consumer markets and a
broad line of home furnishing products to retailers throughout North America.
The development and introduction of value-added products continues to be
a priority including products incorporating Reflex(R) and viscoelastic or
"memory" foams for the bedding industry, which maintain their resiliency better
than other foams and materials. Reflex(R) materials include cushion wraps and
cushion cores and are advanced polymer cushioning products designed to improve
comfort, quality and durability in upholstered furniture and bedding products.
Reflex(R) was created using the VPF(SM) manufacturing process. We also have
introduced high efficiency thermal management foam products for applications in
work gloves and outerwear.
Carpet Cushion Products
We manufacture Carpet Cushion Products, which include rebond, prime, felt
and rubber carpet padding. Prime carpet padding is made from polyurethane foam
buns. Rebond carpet padding is made from various types of scrap foam which are
shredded into small pieces, processed and then bonded using a chemical adhesive.
Rebond manufacturing requires the management of a comprehensive recycling
business that includes an extensive collection network from the automotive and
foam industries on a worldwide basis.
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Automotive Products
We are one of the largest suppliers of automotive foam products for the
North American operations of original equipment manufacturers, or "OEMs."
Depending on the automotive manufacturer and/or the application, automotive foam
products are supplied by us either directly to the manufacturers or indirectly
through tier one suppliers. Automotive Products include foam for trim pads, door
panel parts, headliners and for acoustical purposes. Products also include flame
and adhesive laminates and rolls for tri-lamination. Tri-laminated foam is
applied to automotive fabrics to form a foam/fabric composite that results in
cost savings and aesthetic value for the automotive manufacturer.
Domestic automotive manufacturers have narrowed their supply base during
recent years and increased the percentage and dollar amount of components that
they purchase from outside suppliers. As a result, a smaller number of companies
are supplying an increasing percentage of automotive foam products. Automotive
suppliers are increasingly offering integrated systems which lower the overall
cost and improve quality relative to previous sourcing methods in which
individually sourced components were assembled and installed by the OEMs. A
continuing focus on new product development and flexible manufacturing
capabilities are essential to satisfy changing specifications.
Examples of our ability to react to changing industry requirements
include our development of thermoformable headliners, tri-laminates, advanced
cutting technology and energy absorbing foams. For example, we have introduced
SMT(R), which is used to sculpture the surface of foam, and CPC(R), which is
used for vehicle flooring systems. Also, the use of tri-laminates has increased
due to the manufacturers' need for significant cost savings and consumer demand
for improved aesthetics. We intend to increase our production and distribution
of foam and fabric components, such as tri-laminated material for automotive
seating.
Automotive manufacturers are increasingly requiring the production
facilities of their suppliers to meet certain high quality standards. We have
achieved and expect to maintain the highest quality ratings awarded to foam
suppliers by automotive manufacturers. In addition, all tier one and tier two
automotive supplier facilities worldwide will eventually be required to meet the
QS-9000 quality manufacturing standards set by the United States automotive
manufacturers. We were one of the first polyurethane manufacturers to be QS-9000
certified, which demonstrates our commitment to producing the highest quality
products and meeting the needs of our customers. We are both QS-9000 and
ISO-9001 certified at all of our facilities that supply the automotive industry.
Technical Products
We believe that we are one of the foam industry's prime innovators and
producers of industrial, specialty, consumer and safety foams, which we refer to
as "Technical Products." Technical Products consist of reticulated foams and
other custom polyester and polyether foams, which are sometimes combined with
other materials to yield specific properties. Reticulation is the thermal or
chemical process used to remove the membranes from the interconnecting cells
within foam. This leaves a porous, skeletal structure allowing for the free flow
of gases and/or liquids. Felting and lamination with other foams or materials
give these composites specific properties.
Reticulated foams are well suited for filtration, reservoiring, sound
absorption and sound transmission. Industrial applications include carburetors,
computer cabinets, inkpad reservoirs, high-speed inkjet printers and speaker
grills. Medical applications include oxygenators for cardiopulmonary surgery,
instrument holders for sterilization, pre-op scrubbers impregnated with
anti-microbial agents and EKG pads containing conductive gels. Other Technical
Products have unique characteristics such as flame retardancy and fluid
absorption. Additional products sold within this group include foams for
refrigerated supermarket produce counters, mop heads, paint brushes and cosmetic
applications.
We use advertising in trade journals and related media in order to
attract customers and, more generally, to increase an awareness of our
capabilities for Technical Products. In addition, due to the highly specialized
nature of most Technical Products, our research staff works with customers to
design, develop and manufacture each product to specification.
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Other
Other consists primarily of certain manufacturing operations in Mexico
City, corporate expenses not allocated to the other business segments and
restructuring, impairment and other charges (credits).
Marketing and Sales
We sell Foam Products directly to major bedding and furniture
manufacturers such as Sealy, Simmons and Berkline and also through third party
independent fabricators. In addition, we manufacture and distribute foam-based
consumer products such as futons, pillows, mattress pads and children's
furniture to retail chains, such as Wal-Mart, Target, J.C. Penney and Bed Bath &
Beyond. Our foam-based consumer products sales efforts are primarily regionally
based. The key strategic elements supporting growth in these areas are a focus
on marketing and sales efforts, high quality, cost-competitive products and low
freight costs through optimal plant location. Plant locations are critical in
this regionalized business where the transportation cost typically comprises a
significant portion of product cost.
Carpet Cushion Products sells carpet padding to distributors and to major
floor covering retail chains, such as Home Depot and Carpet One. A key focus in
2001 was increased marketing efforts to commercial product lines.
We have been a leading supplier of automotive products to OEMs, including
DaimlerChrysler, for more than 30 years. We are also the primary supplier of
automotive products to certain tier one suppliers, including Johnson Controls
and Lear Corporation. We compete for new business both at the beginning of
development of new models and upon the redesign of existing models. Once a foam
producer has been designated to supply parts for a new model program, the foam
producer usually produces parts for the life of the program. Competitive factors
in the market include product quality and reliability, cost and timely service,
technical expertise and development capability, new product innovation and
customer service.
Our Technical Products are used for filtration and reservoiring in a wide
variety of applications by companies, such as Hewlett-Packard, Lexmark and
Briggs & Stratton. We market most of our Technical Products through a network of
independent fabrication and distribution companies in North America, the United
Kingdom and South Korea. These fabricators or distributors often further process
or finish Technical Products to meet the specific needs of end users. Our
specialty and technical foams service unique end user requirements and are
generally sold at relatively high margins. This business is characterized by a
diversity and complexity of both customers and applications.
International Operations
Our international operations are located in Canada, Mexico and Asia. We
operate four manufacturing facilities in Canada to service our bedding and
automotive customers and have seven facilities in Mexico serving the automotive
and cushioning industries. Six of the Mexican facilities are located within the
Mexican free trade zones close to the U.S. border and primarily service
automotive customers. Our Mexico City facility services both automotive and
cushioning customers.
The Company participates in a joint venture with fabrication facilities
in Singapore and Thailand. In December 2001, we increased our non-controlling
equity interest holding in the joint venture to 70%. Our income from equity
interest in the joint venture was $1.6 million, $1.7 million and $0.5 million
for the years ended December 31, 2001, 2000 and 1999, respectively. The joint
venture expects to install its first pourline during 2002. This pourline, which
will be entirely financed by the joint venture entity (on a non-recourse basis
to the Company) will reduce foam shipping costs for sales to the region and
increase the range of markets served.
We have maintained a longstanding relationship with Recticel s.a., a
leading manufacturer of flexible polyurethane foam in Europe. We have in the
past exchanged technical information and expertise relating to foam
manufacturing with Recticel s.a.
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Major Customers
Sales to Johnson Controls, which are included in Automotive Products,
accounted for approximately 15.7% of net sales in 2001, 12.3% of net sales in
2000 and 11.5% of net sales in 1999. No other unaffiliated customer accounted
for more than 10.0% of net sales during any of the past three years. During
2001, net sales to our five largest customers comprised approximately $438.2
million, or 35.0%, of net sales. The loss of any one of these customers could
have a material adverse effect on our business.
Manufacturing and Raw Materials
As of December 31, 2001, we conducted our operations at 62 manufacturing
and distribution facilities with a total of approximately 8.7 million square
feet of floor space. We believe that our manufacturing and distribution
facilities are well suited for their intended purposes and are in good
condition. The manufacturing and distribution facilities are strategically
located to service our major customers because the high freight cost in relation
to the cost of the foam product generally results in distribution being most
cost-effective within a 200 to 300 mile radius.
We have identified four non-VPF(SM) foam pouring operations, six foam
fabrication operations, six rebond carpet padding operations and one fiber
operation to be closed during 2002. In many cases, the volume from these
facilities will be absorbed by our other existing facilities in order to improve
capacity utilization. In some, but not all instances, our other existing
facilities will have to be upgraded to absorb the transferred volume. We may
lose some revenue due to closing these operations.
Our fabrication process involves cutting foam buns into various shapes
and sizes to meet customer specifications. Fabricated foam is sold to customers
and is utilized by us to produce our foam-based consumer products. Scrap foam,
generated in connection with the fabrication of foam products, is used by us to
produce rebond carpet padding.
Raw materials account for a significant portion of our manufacturing
costs. The two principal chemicals used in the manufacture of flexible
polyurethane foam are toluene diisocyanate, or "TDI," and polyol. We generally
have alternative suppliers for each major raw material. We believe that we could
find alternative sources of supply should we cease doing business with any one
of our major suppliers, although there may be some delay in replacing a major
supplier, especially a supplier of TDI and/or polyol.
There are a limited number of major suppliers of TDI and polyol. A
disruption in our ability to obtain TDI and/or polyol that continues for a
significant period of time would have a material adverse effect on our business
and results of operations.
The prices of TDI and polyol have historically been cyclical and
volatile. The prices of these raw materials are influenced by demand,
manufacturing capacity and oil prices. Some of our suppliers of TDI and polyol
have informed us that they intend to seek to raise prices in the first six
months of 2002. We attempt to offset raw material price increases through
selling price increases; however, there can be no assurance that we will be
successful in implementing selling price increases or that competitive pricing
pressure will not require us to adjust selling prices.
A key raw material used in the manufacture of carpet padding is scrap
foam. We internally generate a substantial portion of the scrap foam used in the
production of rebond carpet padding from our other operations. Historically, the
market price of rebond carpet padding has fluctuated with the market price of
scrap foam.
We recently discovered that some mattresses containing foam supplied by
us had a discernible odor. The cause of the odor was traced to chemicals from
one supplier used in the manufacture of the foam. This supplier has advised us
that the odor was attributable to a change in its chemical manufacturing
process, which has since been corrected. We have received claims from some of
our customers for costs purportedly associated with the odorous foam, and we
have reached agreement with this chemical supplier regarding the terms of and
manner in which the supplier will reimburse us for certain obligations we may
have to our customers relating to these claims, as well as for certain of our
internal costs. Under this agreement, this supplier will pay us a fixed sum in
exchange for eliminating certain future claims we may have against this supplier
and obligates us to indemnify this supplier for certain claims that may be
brought
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against it by others, including our customers. The ultimate amounts of these
third party claims and the amount of our own internal costs are uncertain. We
cannot be certain that this supplier's payments to us will be sufficient to
cover all payments that we may be required to make to third parties in respect
to their claims, to cover all of our related internal costs or that our
indemnification obligations to this supplier will not be material.
Employees
As of December 31, 2001, we employed approximately 6,100 persons.
Approximately 1,850 of these employees are located outside the United States and
approximately 2,200 employees are covered by collective bargaining agreements
with labor unions. These agreements expire on various dates through 2004. We
consider relations with our employees to be good.
To reduce administrative costs throughout our operations, we expect to
eliminate 100 salaried positions during 2002, mainly in support functions,
including information technology, finance, quality, engineering, maintenance and
customer service. In connection with this reduction, we are centralizing some of
our support functions, including human resources, environmental, health and
safety, quality, purchasing and customer service. As of March 1, 2002, 79
salaried positions, mostly in corporate and support functions, have been
eliminated.
Competition
The flexible polyurethane foam industry is highly competitive with price,
quality and service being significant competitive factors. Our competitors in
the polyurethane foam industry include E. R. Carpenter Company, Hickory Springs
Manufacturing Company, Vitafoam, Inc., Flexible Foam Products, Inc. and Future
Foam, Inc. None of these competitors individually competes in all of the
business segments in which we do business.
Patents and Trademarks
We own various patents and trademarks registered in the United States and
in numerous foreign countries. The registered processes and products were
developed through ongoing research and development activities to improve
quality, reduce costs and expand markets through development of new applications
for flexible polyurethane foam products. While we consider our patents and
trademarks to be a valuable asset, we do not believe that our competitive
position is dependent on patent protection or that our operations are dependent
upon any individual patent, trademark or tradename.
Research and Development
We believe we have a leading research and development capability in the
flexible polyurethane foam industry. Our primary research and development
facility is located in Eddystone, Pennsylvania. Expenditures for research and
development amounted to $3.1 million for 2001, $2.5 million for 2000 and $3.3
million for 1999.
The Company, Recticel s.a. ("Recticel"), a European polyurethane foam
manufacturer, and Beamech Group Limited, an unaffiliated third party, have an
interest in a Swiss corporation that develops new manufacturing technology for
the production of polyurethane foam including the VPF(SM) manufacturing process.
Recticel and affiliates of Recticel are shareholders of the Company. The
Company, Recticel and their affiliates have a royalty-free license to use
technology developed by the Swiss corporation. The Company and Recticel have
exchanged know-how, trade secrets, engineering and other data, designs,
specifications, chemical formulations, technical information, market information
and drawings which are necessary or useful for the manufacture, use or sale of
foam products. We anticipate that we will continue to do so in the future.
Forward-Looking Information
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements so long as those statements are
identified as forward-looking and are accompanied by meaningful cautionary
statements identifying important factors that could cause actual results to
differ materially from those projected in such statements. In connection with
certain forward-looking statements contained in this Annual Report on Form 10-K
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and those that may be made in the future by or on behalf of the Company which
are identified as forward-looking, the Company notes that there are various
factors that could cause actual results to differ materially from those set
forth in any such forward-looking statements, such as the ability to implement
customer selling price increases in response to higher raw material costs, raw
material price increases, general economic conditions, the interest rate
environment, the level of automotive production, carpet production, furniture
and bedding production, and housing starts, the completion of various
restructuring/consolidation plans, the achievement of management's business
plans, the Company's capital and debt structure (including various financial
covenants), litigation and changes in environmental legislation and
environmental conditions. The forward-looking statements contained in this
Annual Report on Form 10-K were prepared by management and are qualified by, and
subject to, significant business, economic, competitive, regulatory and other
uncertainties and contingencies, all of which are difficult or impossible to
predict and many of which are beyond the control of the Company.
Accordingly, there can be no assurance that the forward-looking
statements contained in this Annual Report on Form 10-K will be realized or that
actual results will not be significantly higher or lower. The forward-looking
statements have not been audited by, examined by, compiled by or subjected to
agreed-upon procedures by independent accountants, and no third party has
independently verified or reviewed such statements. Readers of this Annual
Report on Form 10-K should consider these facts in evaluating the information
contained herein. In addition, the business and operations of the Company are
subject to substantial risks which increase the uncertainty inherent in the
forward-looking statements contained in this Annual Report on Form 10-K. The
inclusion of the forward-looking statements contained in this Annual Report on
Form 10-K should not be regarded as a representation by the Company or any other
person that any of the forward-looking statements contained in this Annual
Report on Form 10-K will be achieved. In light of the foregoing, readers of this
Annual Report on Form 10-K are cautioned not to place undue reliance on the
forward-looking statements contained herein.
ITEM 2. PROPERTIES
As of December 31, 2001, we conducted our operations at 62 manufacturing
and distribution facilities. Total floor space in use at our 16 owned
manufacturing and distribution facilities is approximately 3.3 million square
feet and total floor space in use at our 46 leased manufacturing and
distribution facilities is approximately 5.4 million square feet. Fifty-one of
these facilities are located throughout 37 cities in the United States, four
facilities are located in Canada and seven facilities are located in Mexico. We
do not anticipate any problem in renewing or replacing any of the leases
expiring in 2002. In addition, we have approximately 1.3 million square feet of
idle space of which approximately 0.8 million is leased.
The Company maintains its administrative office in Linwood, Pennsylvania.
Property information by business segment is not reported because many of
the Company's facilities produce products for multiple business segments.
ITEM 3. LEGAL PROCEEDINGS
Litigation - Foamex International Shareholders
The Company has reached agreements with the plaintiffs in the stockholder
actions described below providing for the settlement and dismissal of these
actions. Court approval of these settlements has been obtained although such
approval may be appealed.
The Shareholder Litigation. Beginning on March 17, 1998, six actions,
which were subsequently consolidated under the caption In re Foamex
International Inc. Shareholders Litigation, were filed in the Court of Chancery
of the State of Delaware, and on August 13, 1999, another action, Watchung Road
Associates, L.P., et al. v. Foamex International Inc., et al. (the "Watchung
Action"), was filed in the same court. The two actions were consolidated on May
3, 2000, into a single action under the caption In re Foamex International Inc.
Shareholders Litigation (the "Delaware Action"). The Delaware Action, a
purported derivative and class action on behalf of the Company and its
stockholders, originally named as defendants the Company, certain of its current
and former directors and officers, Trace International Holdings, Inc. ("Trace
International"), the principal stockholder of the Company at the time, and a
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Trace International affiliate. The complaint in the Delaware Action alleged,
among other things, that certain of the defendants breached their fiduciary
duties to the Company in connection with an attempt by Trace International to
acquire the Company's publicly traded common stock as well as with a potential
acquisition transaction with a group led by Sorgenti Chemical Industries LLC,
and that certain of the defendants breached their fiduciary duties by causing
the Company to waste assets in connection with a variety of transactions entered
into with Trace International and its affiliates. The Delaware Action sought
various remedies, including injunctive relief, money damages and the appointment
of a receiver for the Company.
On April 26, 1999, a putative securities class action entitled Molitor v.
Foamex International Inc., et al., was filed in the United States District Court
for the Southern District of New York naming as defendants the Company, Trace
International and certain current and former directors and officers of the
Company, on behalf of stockholders who bought shares of the Company's common
stock during the period from May 7, 1998 through and including April 16, 1999.
The lawsuit alleged that the defendants violated Section 10(b) of the Securities
Exchange Act of 1934 and Rule 10b-5 by misrepresenting and/or omitting material
information about the Company's financial situation and operations, with the
result of artificially inflating the price of the Company's stock. The lawsuit
also alleged that Trace International and Marshall S. Cogan, the chairman of the
Company, violated Section 20(a) of the Securities Exchange Act of 1934 as
controlling persons of the Company. The complaint sought class certification, a
declaration that the defendants violated the federal securities laws, an award
of money damages, and costs and attorneys', accountants' and experts' fees. On
May 18, 1999, a similar action entitled Thomas W. Riley v. Foamex International
Inc., et al., was filed in the same court. The two actions were consolidated and
a consolidated complaint was filed. We refer to the consolidated suit as the
"Federal Action."
The Settlements. On August 23, 2000, the Company and the plaintiffs in
the Federal Action entered into a settlement agreement providing that members of
the class of shareholders who purchased shares between May 7, 1998 and April 16,
1999 would receive payments as defined in the agreement. The court approved the
settlement and dismissed the action with prejudice on January 11, 2001, and no
appeals were filed. Payments to class members and plaintiffs' lawyers' fees in
the Federal Action have been paid directly by the Company's insurance carrier on
behalf of the Company.
Under the terms of the stipulation of settlement related to the Delaware
Action (which was approved by the Delaware Court on March 20, 2002), the Company
agreed that a special nominating committee of its Board of Directors would
nominate two additional independent directors to serve on the Board. The terms
of the agreement also established the criteria for the independence of the
directors and required that certain transactions with affiliates be approved by
a majority of the disinterested members of the Board. On January 9, 2001, the
Court ordered the Watchung Action dismissed with prejudice only as to the named
plaintiffs Watchung Road Associates, L.P. and Pyramid Trading Limited
Partnership. The dismissal did not have any effect on the claims asserted in the
consolidated action.
The settlement of the Delaware Action resolved all outstanding
shareholder litigation against the Company and its current and former directors
and officers. In early January 2002, two shareholders filed objections to the
settlement. The settlement hearing was held on February 13, 2002, but was not
concluded. On March 20, 2002, the Delaware Court concluded the hearing and
approved the settlement. Approval of the settlement may be appealed by the
objectors. The settlements of the Federal Action and the Delaware Action involve
no admissions or findings of liability or wrongdoing by the Company or any
individuals.
Litigation - Breast Implants
As of February 28, 2002, we and Trace International were two of multiple
defendants in actions filed on behalf of approximately 1,725 recipients of
breast implants in various United States federal and state courts and one
Canadian provincial court, some of which allege substantial damages, but most of
which allege unspecified damages for personal injuries of various types. Three
of these cases seek to allege claims on behalf of all breast implant recipients
or other allegedly affected parties, but no class has been approved or certified
by the court. During 1995, we and Trace International were granted summary
judgments and dismissed as defendants from all cases in the federal courts of
the United States and the state courts of California. Appeals for these
decisions were withdrawn and the decisions are final.
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Although breast implants do not contain foam, certain silicone gel
implants were produced using a polyurethane foam covering fabricated by
independent distributors or fabricators from bulk foam purchased from us or from
Trace International. Neither we nor Trace International recommended, authorized,
or approved the use of its foam for these purposes. We are also indemnified by
Trace International for any such liabilities relating to foam manufactured prior
to October 1990. Trace International's insurance carrier has continued to pay
our litigation expenses after Trace International's filing of a petition for
relief under the Bankruptcy Code on July 21, 1999. Trace International's
insurance policies continue to cover certain liabilities of Trace International,
but if the limits of those policies are exhausted, it is unlikely that Trace
International will be able to continue to provide additional indemnification.
While it is not feasible to predict or determine the outcome of these actions,
based on management's present assessment of the merits of pending claims,
without taking into account the indemnification provided by Trace International,
the coverage provided by Trace International's and our liability insurance and
potential indemnity from the manufacturers of polyurethane covered breast
implants, management believes that the disposition of the matters that are
pending or that may reasonably be anticipated to be asserted should not have a
material adverse effect on either our consolidated financial position or results
of operations. If management's assessment of our liability relating to these
actions is incorrect, these actions could have a material adverse effect on our
financial position, results of operations and cash flows.
Litigation - Other
During the second quarter of 2001, the Company was notified by an
insurance provider concerning a dispute involving the reimbursement of liability
claims paid on behalf of Trace International before 1990. The insurance provider
is contending that the Company is liable for claims of approximately $3.0
million. The Company intends to strongly defend this claim and considers the
claim to be without merit. If management's assessment of the Company's liability
relating to these actions is incorrect, these actions could have a material
adverse effect on the financial position, results of operations and cash flows
of the Company.
We are party to various other lawsuits, both as defendant and plaintiff,
arising in the normal course of business. It is the opinion of management that
the disposition of these lawsuits will not, individually or in the aggregate,
have a material adverse effect on our financial position or results of
operations. If management's assessment of our liability relating to these
actions is incorrect, these actions could have a material adverse effect on our
consolidated financial position, results of operations and cash flows.
Environmental and Health and Safety
We are subject to extensive and changing federal, state, local and
foreign environmental laws and regulations, including those relating to the use,
handling, storage, discharge and disposal of hazardous substances, the discharge
or emission of materials into the environment, and the remediation of
environmental contamination, and as a result, are from time to time involved in
administrative and judicial proceedings and inquiries relating to environmental
matters. As of December 31, 2001, we had accruals of approximately $3.0 million
for environmental matters.
The Clean Air Act Amendments of 1990 ("1990 CAA Amendments") provide for
the establishment of federal emission standards for hazardous air pollutants
including methylene chloride, propylene oxide and TDI, which are used in the
manufacturing of foam. The final National Emission Standard for Hazardous Air
Pollutants, or "NESHAP," for flexible polyurethane foam production was
promulgated on October 7, 1998. The NESHAP required a reduction of approximately
70% of the emission of methylene chloride for the slab stock foam industry
effective October 7, 2001. Through the use of alternative technologies,
including VPF(SM) and carbon dioxide, and by shifting current production to
facilities which use these alternative technologies, we are in substantial
compliance with these regulations. On August 8, 2001, the United States
Environmental Protection Agency, or "EPA," proposed a NESHAP for Flexible
Polyurethane Foam Fabrication Operations. The proposed NESHAP regulates
emissions of methylene chloride and other Hazardous Air Pollutants and restricts
air emissions from flame lamination sources. The Company does not believe that
this standard, if adopted, will require us to make material expenditures.
We have reported to the appropriate state authorities that we have found
soil and/or groundwater contamination in excess of state standards at certain
locations. Seven sites are currently in various stages of investigation or
10
remediation. Accordingly, the extent of contamination and the ultimate liability
is not known with certainty for all sites. As of December 31, 2001, we had
accruals of $2.5 million for the estimated cost of remediation, including
professional fees and monitoring costs, for these sites. During 2000, we reached
an indemnification agreement with the former owner of the Morristown, Tennessee
facility. The agreement allocates the incurred and future remediation costs
between the former owner and us. The estimated allocation of future costs for
the remediation of this facility is not significant, based on current known
information. The former owner was Recticel Foam Corporation, a subsidiary of
Recticel.
We have either upgraded or closed all underground storage tanks at our
facilities in accordance with applicable regulations.
The Comprehensive Environmental Response, Compensation and Liability Act,
or "CERCLA," and comparable state laws impose liability without fault for the
costs of cleaning up contaminated sites on certain classes of persons that
contributed to the release of hazardous substances into the environment at those
sites, for example, by generating wastes containing hazardous substances which
were disposed at such sites. We are currently designated as a Potentially
Responsible Party, or "PRP," by the EPA or by state environmental agencies or
other PRPs, pursuant to CERCLA or analogous state statutes, with respect to
eight sites. Estimates of total cleanup costs and fractional allocations of
liability are often provided by the EPA, the state environmental agency or the
committee of PRPs with respect to the specified site. Based on these estimates
(to the extent available) and on known information, in each case and in the
aggregate, our liability is not considered to be significant.
In 2002, capital expenditures for safety and environmental compliance
projects are anticipated to be approximately $2.0 million. Although it is
possible that new information or future developments could require the Company
to reassess the potential exposure relating to all pending environmental
matters, including those described above, management believes that, based upon
all currently available information, the resolution of these environmental
matters will not have a material adverse effect on our operations, financial
position, capital expenditures or competitive position. The possibility exists,
however, that new environmental legislation and/or environmental regulations may
be adopted, or other environmental conditions, including the presence of
previously unknown environmental contamination, may be found to exist or a
reassessment of the potential exposure to pending environmental matters may be
necessary due to new information or future developments, that may require
expenditures not currently anticipated and that may be material.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's common stock is traded through the National Association of
Securities Dealers, Inc. National Market System (the "NASDAQ") under the symbol
"FMXI".
The following table sets forth the high and low bid prices for the common
stock.
High Low
---- ---
2001
Quarter Ended March 31 $ 5.94 $4.50
Quarter Ended June 30 $ 7.83 $4.50
Quarter Ended September 30 $ 8.12 $5.90
Quarter Ended December 31 $ 8.46 $6.00
11
High Low
---- ---
2000
Quarter Ended March 31 $10.38 $ 7.00
Quarter Ended June 30 $ 9.50 $ 4.19
Quarter Ended September 30 $ 7.03 $ 5.56
Quarter Ended December 31 $ 6.50 $ 4.59
As of December 31, 2001, there were 144 holders of record of the common
stock.
There were no cash dividends paid by the Company on its common stock
during the past two fiscal years. The payment of any future dividends will be
determined by the Board of Directors in light of conditions then existing,
including the Company's earnings, financial condition and requirements,
restrictions in financing agreements, business conditions and other factors. The
Company is a holding company whose assets consist primarily of its wholly-owned
subsidiary Foamex L.P. Consequently, the Company's ability to pay dividends is
dependent upon the earnings of Foamex L.P. and any future subsidiaries of the
Company and the distribution of those earnings to the Company and loans or
advances by Foamex L.P. and any such future subsidiaries of the Company. The
ability of Foamex L.P. to make distributions is restricted by the terms of their
respective financing agreements. Due to such restrictions, the Company is
expected to have only limited access to the cash flow generated by Foamex L.P.
for the foreseeable future.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table presents selected historical consolidated financial
data of the Company. The financial data should be read in conjunction with the
financial statements and related notes thereto of the Company included in this
Annual Report on Form 10-K.
Fiscal Year (1)
----------------------------------------------------------------------------
2001 (2) 2000 1999 1998 1997 (6)
-------- ---- ---- ---- --------
(thousands, except for earnings per share)
Statements of Operations Data
Net sales $ 1,252,904 $ 1,257,778 $ 1,294,639 $ 1,260,559 $ 945,519
Income (loss) from continuing
operations (3)(4) $ (5,612) $ 17,013 $ 19,716 $ (69,853) $ 4,131
Basic earnings (loss) per share from
continuing operations $ (0.24) $ 0.69 $ 0.79 $ (2.79) $ 0.16
Diluted earnings (loss) per share from
continuing operations $ (0.24) $ 0.67 $ 0.78 $ (2.79) $ 0.16
Balance Sheet Data
Total assets $ 766,962 $ 751,581 $ 781,313 $ 874,965 $ 893,623
Long-term debt, classified as current (5) - - - $ 771,092 -
Long-term debt, excluding current portion $ 648,232 $ 687,758 $ 725,297 $ 8,240 $ 735,724
Stockholders' deficiency $ (180,746) $ (164,669) $ (166,381) $ (204,119) $ (113,419)
Dividends paid - - - $ 1,245 -
(1) The Company changed its fiscal year to the calendar year during 1998. Prior
to the change, the Company had a 52 or 53 week fiscal year ending on the
Sunday closest to the end of the calendar year. The 1997 fiscal year
included the 52 weeks ended December 28, 1997.
(2) Includes the results of operations of General Foam from July 25, 2001, the
date the business was acquired.
12
(3) Includes net restructuring, impairment and other charges (credits), as
discussed in Note 5 to the consolidated financial statements included in
this Annual Report on Form 10-K. Listed below are the pre-tax charges
(credits).
2001 - $36.1 million
2000 - $6.3 million
1999 - $10.5 million
1998 - $(9.7) million
1997 - $21.1 million
(4) The provision for income taxes in 2000 and 1999 reflected the partial
reversal of the deferred income tax valuation allowance recognized in 1998.
The 1998 provision for income taxes of $58.2 million for continuing
operations consisted primarily of an increase in the valuation allowance
for deferred income tax assets.
(5) At December 31, 1998, the Company classified approximately $771.1 million
of long-term debt as current, in response to financial conditions at
year-end 1998.
(6) The balance sheet data included the estimated fair value of the net assets
acquired in the acquisition of Crain Industries, Inc. in December 1997. The
income statement data excludes the results of Crain Industries, Inc. from
the acquisition date of December 23, 1997, since the effect was
insignificant.
13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
The Company operates in the flexible polyurethane and advanced polymer
foam products industry. As of December 31, 2001, the Company's operations were
conducted through its wholly-owned subsidiaries, Foamex L.P. and Foamex Carpet
Cushion, Inc. ("Foamex Carpet"). As discussed below in the section entitled
"Refinancing and Corporate Structure", after December 31, 2001, Foamex Carpet
was converted into a Delaware limited liability company and on March 25, 2002,
the Company contributed its equity interest in such limited liability company to
Foamex L.P. Business segments are listed below and business segment financial
information is included in Note 14 to the consolidated financial statements.
An executive vice president heads each of the Company's principal
operating segments. Each executive vice president is responsible for developing
budgets and plans as well as directing the operations of the segment. The
performance of each operating segment is measured based upon income from
operations, excluding restructuring , impairment and other charges. The Company
does not allocate restructuring, impairment and other charges to operating
segments because many of the Company's facilities produce products for multiple
segments.
Foam Products - manufactures and markets cushioning foams for bedding,
furniture, packaging and health care applications, and foam-based
consumer products, such as mattress pads and children's furniture.
Carpet Cushion Products - manufactures and distributes, rebond, prime,
felt and rubber carpet padding.
Automotive Products - distributes automotive foam products and laminates
to major tier one suppliers and original equipment manufacturers, or
"OEMs".
Technical Products - manufactures and markets reticulated and other
specialty foams used for reservoiring, filtration, gasketing and sealing
applications.
Other - primarily consists of certain manufacturing operations in Mexico
City, corporate expenses not allocated to the other business segments and
restructuring, impairment and other charges (credits).
The Company's sales are primarily to markets in the United States. These
sales are impacted by economic conditions in several sectors of the United
States economy, including consumer spending, sales of new and existing homes,
the overall level of passenger car and light truck production and seasonality.
The Company typically experiences two seasonally slow periods during each year,
in early July and in late December, due to scheduled plant shutdowns and
holidays.
In July 2001, the Company acquired certain assets of General Foam
Corporation, a former polyurethane foam manufacturer that had operations in
Pennsylvania and New Jersey.
The following discussion should be read in conjunction with the
consolidated financial statements and related notes included in this Annual
Report on Form 10-K.
Fourth Quarter 2001 Developments and 2002 Subsequent Events
Operational Reorganization
In December 2001, the Company launched a comprehensive cost reduction
program and revenue growth initiative (the "Operational Reorganization Plan").
The Operational Reorganization Plan covers the components outlined below.
14
Plant Rationalizations. To capitalize on achieving operating efficiencies
and the lower costs of manufacturing associated with our national VPF(SM)
capabilities, the Company has identified four non-VPF(SM) foam pouring
operations, six foam fabrication operations, six rebond carpet padding
operations and one fiber operation to be closed during 2002. In many cases, the
volume from these closed operations will be absorbed by our other existing
facilities in order to improve capacity utilization. In some, but not all
instances, our other existing facilities will be upgraded to absorb the
transferred volume. We anticipate some revenue may be lost due to the closing of
these operations.
Salaried Headcount Reduction. To reduce administrative costs throughout
our operations, we expect to eliminate 100 salaried positions during 2002,
mainly in support function areas, including information technology, finance,
quality, engineering, maintenance and customer service. In connection with this
reduction, we are centralizing some of our support functions, including human
resources, environmental, health and safety, quality, purchasing and customer
service. As of March 1, 2002, 79 salaried positions, mostly in corporate and
support functions, have been eliminated.
Purchasing and Logistics Cost Reductions. We have implemented programs to
reduce costs of manufacturing and distribution, raw materials (other than
toluene diisocyanate and polyol) and logistics services. We plan to centralize
our purchasing function and leverage our scale to negotiate new national
procurement contracts for supplies and services.
Sales and Marketing Management. We have implemented a program to analyze
the profitability of our customer base, the efficiency of our sales people and
our ability to effectively market to potential new customers. Our goal is to
rationalize our customer base and focus our sales and marketing efforts on our
more profitable customers.
Customer Service Centralization. To reduce costs and improve the
effectiveness of our customer service operations, we have begun to centralize
the operations in line with each of our business units. We are focusing on our
key customers and implementing key support technology to further standardize our
customer service process.
These actions resulted in restructuring, impairment and other charges of
approximately $35.4 million during the fourth quarter of 2001, of which
approximately $18.4 million was non-cash. The Company estimates that these
activities will result in incremental income from operations of approximately
$20.0 million and $30.0 million in 2002 and 2003, respectively. The Company
anticipates that the majority of the cash costs will be incurred in 2002.
Including the salaried headcount reduction discussed above, a total of 746
employees are expected to be terminated.
Customer Claims
During the fourth quarter of 2001, the Company discovered that some
mattresses containing foam supplied by the Company had a discernible odor. The
cause of the odor was traced to chemicals from one supplier used in the
manufacture of the foam. The supplier has advised the Company that the odor was
attributable to a change in its chemical manufacturing process, which has since
been corrected. We have received claims from some of our customers for costs
purportedly associated with the odorous foam and we have reached agreement with
this chemical supplier regarding the terms of and manner in which this supplier
will reimburse the Company for certain obligations we may have to our customers
relating to these claims, as well as for certain of our internal costs. Under
this agreement, this supplier will pay us a fixed sum in exchange for
eliminating certain future claims we may have against this supplier and we are
obligated to indemnify this supplier for certain claims that may be brought
against it by others, including the Company's customers. The ultimate amounts of
these third party claims and the amount of our own internal costs are uncertain.
The Company cannot be certain that this supplier's payments to it will be
sufficient to cover all payments that we may be required to make to third
parties in respect to their claims, to cover all of the Company's related
internal costs or that the Company's indemnification obligations to this
supplier will not be material. Consequently, there can no assurance that these
claims and costs will not have a material adverse effect on our consolidated
financial position, results of operations and cash flows.
15
Refinancing and Corporate Structure
On March 25, 2002, Foamex L.P. and Foamex Capital Corporation issued
$300.0 million of 10 3/4% Senior Secured Notes due 2009 (the "Senior Secured
Notes"), and amended the Foamex L.P. Credit Facility (the "Amended Credit
Facility") to provide for $162.2 million of term loans, with maturity dates of
June 30, 2005 through December 29, 2006, and a $100.0 million revolving credit
facility that matures on June 30, 2005. Net proceeds from the Senior Secured
Notes of $280.0 million were used to pay a portion of the debt outstanding under
the Foamex L.P. Credit Facility. The initial proceeds of two new term loans
under the Amended Credit Facility were used to repay a note payable to Foam
Funding LLC (a related party) and debt outstanding under the Foamex L.P. Credit
Facility. Additionally, the financial debt covenants contained in the Amended
Credit Facility were adjusted to reflect changes in the capital structure, and
the current business environment at the Company. Under the covenants contained
in the Senior Secured Notes Indenture and the Amended Credit Facility, the
Company may spend up to $48.5 million of the proceeds from the Senior Secured
Notes to repurchase or redeem some of its senior subordinated notes. To the
extent that the Company spends less than $48.5 million towards such repurchase
or redemption by September 20, 2002, it is required to repay a portion of its
term loans.
In connection with the refinancing transaction discussed above, the
Company simplified its corporate structure, by changing the incorporation status
of Foamex Carpet Cushion, Inc., a wholly-owned subsidiary of the Company, to a
limited liability company, Foamex Carpet Cushion LLC, which was then contributed
to Foamex L.P.
Critical Accounting Policies
We prepared the consolidated financial statements of the Company in
conformity with accounting principles generally accepted in the United States of
America. As such, we are required to make certain estimates, judgments, and
assumptions that we believe are reasonable based upon the information available.
These estimates, judgments and assumptions affect the reported amounts of the
assets and liabilities and revenues and expenses. The Company's significant
accounting policies are fully discussed in Note 2 to the consolidated financial
statements. The significant accounting policies which we believe are the most
critical to aid in fully understanding and evaluating our reported financial
results include the following:
Account Receivable and Allowance for Uncollectible Accounts
The Company actively monitors customer payments in conjunction with
customer credit evaluations. Accordingly, an estimate of uncollectible accounts
is maintained and is based on historical collection experience and specific
customer collection issues. A significant change in the financial condition of
one or more of the Company's larger customers could have a material adverse
impact on future results.
Long-Lived Assets
The Company has a significant investment in long-lived assets; consisting
primarily of property, plant and equipment, and intangible assets representing
the cost in excess of net assets acquired (goodwill) and deferred financing
costs. Impairment losses are recognized when events indicate that certain
long-lived assets may be impaired and a projection of future cash flows
generated from the assets are less than the current carrying value of the
assets. These cash flow projections are based on the combination of historical
results adjusted for estimated future market conditions and operating plans. To
the extent that these estimates change, impairment losses could have material
adverse impact on future results. See the section below entitled "Accounting
Changes" for a discussion on the impact of new accounting statements.
Deferred Income Taxes
The Company has a significant amount of Federal net operating loss
carryforwards that can reduce the Federal tax payments required on taxable
income generated in the future. These Federal net operating loss carryforwards
are recognized as a deferred tax asset of the Company and the realization of the
related asset must be continually evaluated. Accordingly, the Company has
established a valuation allowance for all Federal net operating loss
16
carryforwards available as of December 31, 2001. In establishing a valuation
allowance, the Company is required to evaluate existing tax attributes,
projections of future taxable income and tax planning strategies available to
determine the probability that the Federal net operating loss carryforwards will
be utilized in the future. If the Company determines that it is more likely than
not that the Federal net operating losses will be utilized in future years, then
reported results in that period will benefit from the reversal of a portion of,
or the entire valuation allowance. As a result, the effective tax rate of the
Company will increase following any reversal. See the section below entitled
"Income Tax Expense" for additional information.
Environmental Remediation
The Company has a number of manufacturing facilities and certain idle
facilities that require remediation of soil and/or groundwater contamination. As
required by applicable State and/or Federal compliance programs, many of these
sites are in the monitoring stage that requires periodic sampling of
contamination levels in conjunction with ongoing assessments of remediation
actions. Accordingly, the recognition of environmental liabilities requires
estimates concerning the duration of monitoring and associated costs, often
projected to extend for a number of years. To the extent that these estimates
change, additional environmental costs could have a material adverse impact on
future results. See the section below entitled "Environmental Health and Safety"
for additional information.
RESULTS OF OPERATIONS
Carpet
Foam Cushion Automotive Technical
Products Products Products Products Other Total
-------- -------- -------- -------- ----- -----
2001 (dollars in thousands)
Net sales $ 499,668 $ 230,965 $ 377,753 $ 111,043 $ 33,475 $1,252,904
Income (loss) from operations $ 66,312 $ (6,831) $ 21,187 $ 22,884 $ (40,079) $ 63,473
Depreciation and amortization $ 15,732 $ 8,181 $ 4,991 $ 3,312 $ 1,772 $ 33,988
Income (loss) from operations
as a percentage of net sales 13.3% (3.0)% 5.6% 20.6% n.m.(a) 5.1%
2000
Net sales $ 519,197 $ 256,439 $ 342,386 $ 106,697 $ 33,059 $1,257,778
Income (loss) from operations $ 55,001 $ 2,035 $ 22,235 $ 28,888 $ (11,688) $ 96,471
Depreciation and amortization $ 17,813 $ 7,742 $ 5,785 $ 2,663 $ 2,585 $ 36,588
Income (loss) from operations
as a percentage of net sales 10.6% 0.8% 6.5% 27.1% n.m.(a) 7.7%
1999
Net sales $ 527,159 $ 285,846 $ 361,806 $ 92,180 $ 27,648 $1,294,639
Income (loss) from operations $ 57,028 $ 8,512 $ 22,547 $ 22,588 $ (17,617) $ 93,058
Depreciation and amortization $ 17,432 $ 8,096 $ 4,823 $ 2,724 $ 2,675 $ 35,750
Income (loss) from operations
as a percentage of net sales 10.8% 3.0% 6.2% 24.5% n.m.(a) 7.2%
(a) Not meaningful.
2001 Compared to 2000
Net sales for 2001 decreased 0.4% to $1,252.9 million from $1,257.8
million in 2000. The decline was primarily attributable to lower sales in Foam
Products and Carpet Cushion Products, partially offset by a significant
improvement in Automotive Products sales. Technical Products also recorded
improved sales.
The gross profit margin was 14.4% in 2001 compared to 13.7% in 2000.
Certain raw material cost reductions had the effect of improving the gross
profit margin percentage in 2001 by approximately 1.4 percentage points. These
2001 cost reductions are not anticipated to continue in 2002. See Item 1 -
Business - Manufacturing and Raw Materials. Selling, general and administrative
17
expenses were 16.2% higher in 2001. The increase included the impact of higher
professional fees, including those associated with a change in independent
accountants, higher bad debt expense related to economic conditions and
increased compensation and benefit costs.
Income from operations in 2001 was $63.5 million, which represented a
34.2% decrease from the $96.5 million recorded during 2000. Results included
restructuring, impairment and other charges of $36.1 million in 2001 and $6.3
million in 2000. Restructuring, impairment and other charges recorded during
2001 are discussed under "Other" below. Excluding the restructuring, impairment
and other charges for comparison purposes, income from operations would have
been $99.5 million in 2001 compared to $102.7 million in 2000. On this basis,
income from operations was 7.9% of net sales in 2001 and 8.2% in 2000. In
addition to the raw material cost reductions discussed above, cost reduction
programs and increases in certain selling prices were also positive factors.
Foam Products
Foam Products net sales for 2001 decreased 3.8% to $499.7 million from
$519.2 million in 2000. The decrease primarily reflected the domestic economic
slowdown that impacted the markets for furniture manufacturers and other foam
fabricators. Despite the sales decline, income from operations increased 20.6%,
from $55.0 million in 2000 to $66.3 million in 2001. The increase was primarily
the impact of raw material cost reductions, discussed above, which primarily
benefited the Foam Products segment. Income from operations was 13.3% of net
sales in 2001, up from 10.6% in 2000.
Carpet Cushion Products
Carpet Cushion Products net sales for 2001 decreased 9.9% to $231.0
million from $256.4 million in 2000. The sales decline continued to reflect
competitive pressures that resulted in lower sales volumes across all product
lines. Lower selling prices in certain product lines and a lower value shipment
mix also contributed to the sales decline. The factors contributing to the sales
decline translated to a loss from operations of $6.8 million in 2001 compared to
income from operations of $2.0 million in 2000. The loss from operations
represented 3.0% of net sales in 2001 and income from operations represented
0.8% of net sales in 2000.
Automotive Products
Automotive Products net sales for 2001 increased 10.3% to $377.8 million
from $342.4 million in 2000. The improvement primarily reflected new product
programs and renewed activity following inventory corrections in the domestic
automotive industry earlier in the year. Income from operations declined 4.7%,
from $22.2 million in 2000 to $21.2 million in 2001. Income from operations
represented 5.6% of net sales in 2001 and 6.5% in 2000. The lower results in
2001 were primarily attributed to intense pricing competition and higher raw
material costs.
Technical Products
Net sales for Technical Products in 2001 were up 4.1% to $111.0 million
from $106.7 million in 2000. Higher sales primarily reflected sales from the
acquisition of certain assets from General Foam Corporation, discussed in Note 4
to the consolidated financial statements. Income from operations decreased 20.8%
to $22.9 million in 2001 compared to $28.9 million in 2000. The decline
reflected a lower value shipment mix and the impact of a slow down in the
technology industry, especially during the first half of 2001. Income from
operations represented 20.6% of net sales in 2001 compared to 27.1% in 2000.
Other
Other primarily consists of certain manufacturing operations in Mexico
City, corporate expenses not allocated to business segments and restructuring
and other charges. Net sales were slightly higher in 2001 compared to 2000. The
loss from operations was $40.1 million in 2001 and included restructuring,
impairment and other charges of $36.1 million, discussed below. The $11.7
million loss from operations in 2000 included restructuring, impairment and
other charges totaling $6.3 million. The 2000 loss also included professional
fees associated with the resolution of certain change in control issues
18
following the Trace bankruptcy and the settlement of certain shareholder
litigation.
Restructuring, Impairment and Other Charges
In December 2001, the Company announced the launching of its Operational
Reorganization Plan to reduce its operating costs and accelerate revenue growth.
The major initiatives of the Operational Reorganization Plan included plant
rationalization, headcount reductions, purchasing and logistics cost reductions
and sales and marketing management.
In connection with the plant rationalization, we identified a total of 17
plant operations to be closed. Costs associated with this aspect of the
Operational Reorganization Plan included lease termination costs and severance
and termination benefits aggregating $14.1 million.
Additionally, we identified 100 salaried positions to be eliminated,
mainly in support function areas. Severance, termination and other costs
associated with these positions were estimated to be $4.4 million. At March 1,
2002, 79 positions, mostly in corporate and support functions, have been
eliminated.
Further, the Company evaluated the recoverability of certain other
long-lived assets, both associated and not associated with the Operational
Reorganization Plan, in accordance with SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed". As a
result, the Company recorded an impairment provision of $13.8 million (net of
anticipated proceeds of $4.6 million) to reduce these assets to their estimated
fair values. The assets which are held for disposal consist mainly of leasehold
improvements and machinery and equipment which have a remaining carrying value
of approximately $19.8 million.
Other one-time period expenses during the fourth quarter consisted
primarily of executive severance of $1.9 million and consulting fees related to
the Operational Reorganization Plan in the amount of $1.2 million.
Severance and termination benefits as a result of the Operational
Reorganization Plan are expected to be incurred for 746 employees. Total cash
outlays related to the Operational Reorganization Plan are expected to aggregate
$17.0 million. We expect to complete implementation before the end of 2002. The
Company expects to spend approximately $12.4 million during 2002 with the
balance to be spent through 2012, primarily for lease costs.
In addition, the Company recorded $0.4 million for restructuring plans
prior to the fourth quarter of 2001 that included severance for 41 employees and
$1.4 million related to executive severance recorded in other charges. The
Company also recorded a net restructuring credit of $1.2 million related to
changes in estimates to prior restructuring plans.
During 2000, the Company recorded $6.2 million for restructuring plans
that included severance for 102 employees. The Company also recorded a net
restructuring charge of approximately $0.1 million related to changes in
estimates to prior years' restructuring plans. Also during 2000, the Company
received $3.6 million of net proceeds from the sale of assets related to
restructuring plans.
Interest and Debt Issuance Expense
Interest and debt issuance expense totaled $63.2 million in 2001, which
represented a 15.9% decrease from $75.2 million recorded in 2000. The decrease
was attributable to lower average debt levels and lower effective interest rates
in 2001. The Company capitalized interest of $1.4 million and $0.8 million in
2001 and 2000, respectively, as a component of the construction costs of plant
and equipment.
Income from Equity Interest in Joint Venture
Income from an equity interest in an Asian joint venture totaled $1.6
million and $1.7 million in 2001 and 2000, respectively.
19
Other Expense, Net
Other expense, net for 2001 was $2.2 million. Expense items totaled $2.7
million and included letter of credit fees. Interest income recorded in 2001 was
$0.5 million.
In 2000, other expense, net was $3.0 million. Expense items totaled $3.6
million and significant components included the costs associated with a buyout
proposal and letter of credit fees. Interest income recorded in 2000 was $0.6
million.
Income Tax Expense
The 2001 effective tax rate reflects an increase in the valuation
allowance for deferred tax assets recognized during the year since, in our
judgment, it is more likely than not that these assets will not be realizable.
The effective tax rate in 2000 reflected the partial reversal of the deferred
income tax asset valuation allowance recognized in 1998. The valuation allowance
was reduced to reflect the utilization of Federal loss carryforwards that
reduced the current tax component of the Federal tax provision. Additionally,
the valuation allowance was reduced to offset the net deferred Federal tax
liability generated in 2000.
At December 31, 2001, the Company had approximately $164.4 million of net
operating loss carryforwards for Federal income tax purposes, expiring from 2010
to 2020. Also at December 31, 2001, there were $1.0 million of alternative
minimum tax credit carryforwards. In addition, the Company has an ownership
change as defined in IRC Section 382. Accordingly, the Company may be limited
(on an annual basis) as to the amount of its net operating loss utilization.
2000 Compared to 1999
Net sales for 2000 decreased 2.8% to $1,257.8 million from $1,294.6
million in 1999. The decline in sales primarily reflected a deterioration in
market conditions during the second half of 2000. Lower sales were recorded in
the Foam Products, Carpet Cushion Products and Automotive Products business
segments. The Technical Products segment continued to report strong sales growth
and certain of the Company's foreign operations reported in the "Other" segment
also reported higher sales, which partially offset sales declines in the
business segments discussed above.
Income from operations in 2000 was $96.5 million, 3.7% higher than the
$93.1 million recorded during 1999. These results included restructuring and
other charges (discussed under "Other" below) of $6.3 million in 2000 and $10.5
million in 1999. Excluding the restructuring and other charges for comparison
purposes, income from operations was $102.7 million in 2000, down 0.8% from
$103.5 million in 1999. On this basis, income from operations was 8.2% of net
sales in 2000 compared to 8.0% of net sales in 1999.
The decline in income from operations, excluding restructuring and other
charges, was largely attributable to the impact of lower sales and higher raw
material costs offset by improved operating efficiencies and lower selling,
general and administrative expenses, discussed below. Higher oil prices
translated into raw material costs increases in 2000 and these higher costs were
not fully recovered through selling price increases. The gross profit margin was
13.7% for 2000 compared to 13.9% in 1999.
Selling, general and administrative expenses were down 9.7% in 2000
compared to 1999. The decrease primarily reflected cost savings initiatives,
lower incentive compensation expenses and lower selling expenses. Partially
offsetting these favorable items were increases to the allowance for
uncollectible accounts receivables and professional fees. The professional fees
were associated with the transfer of the Company's common stock pledged by Trace
to The Bank of Nova Scotia and the shareholder litigation settlements, as
discussed in the Shareholder and Change in Control Developments section below.
20
Foam Products
Foam Products net sales for 2000 decreased 1.5% to $519.2 million from
$527.2 million in 1999. Lower sales primarily reflected a volume decline in the
consumer products market and the loss of sales from the Company's packaging
business that was sold in 1999. Income from operations in 2000 was down 3.6% to
$55.0 million compared to $57.0 million in 1999. As discussed above, raw
material costs continued to increase during the year, and selling price
increases and improved operating efficiencies did not fully recover the
increased costs. As a percentage of net sales, income from operations was 10.6%
of net sales in 2000, down from 10.8% in 1999.
Carpet Cushion Products
Carpet Cushion Products net sales for 2000 decreased 10.3% to $256.4
million from $285.8 million in 1999. The sales decline primarily reflected
competitive pressures that resulted in lower sales volumes across all product
lines. Lower selling prices in certain product lines and a lower value shipment
mix also contributed to the sales decline. As a result, income from operations
was $2.0 million in 2000 as compared to $8.5 million in 1999.
Automotive Products
Automotive Products net sales for 2000 were $342.4 million, down 5.4%
from $361.8 million in 1999. The decrease reflected a slow down in the
automotive industry, particularly during the second half of the year. Lower
sales translated to a 1.4% decrease in income from operations, from $22.5
million in 1999 to $22.2 million in 2000. Results in 2000 benefited from the
favorable impact of a selling price adjustment. Income from operations
represented 6.5% of net sales in 2000 and 6.2% of net sales in 1999.
Technical Products
Technical Products net sales for 2000 increased 15.7% to $106.7 million
from $92.2 million in 1999. Income from operations increased 27.9% to $28.9
million in 2000, up from $22.6 million in 1999. Income from operations
represented 27.1% of net sales in 2000 compared to 24.5% in 1999. The
improvement reflected favorable market conditions that resulted in sales volume
growth and improved operating efficiencies.
Other
Other primarily consists of certain manufacturing operations in Mexico
City, corporate expenses not allocated to business segments and restructuring
and other charges. The increase in net sales associated with this segment
primarily resulted from an increase in net sales from the Company's Mexico City
operation. The loss from operations of $11.7 million in 2000 included a
provision of $6.3 million for restructuring and other charges, discussed above.
The loss also included the professional fees that were associated with equity
transactions and shareholder litigation settlements. The loss from operations of
$17.6 million in 1999 included $10.5 million of restructuring and other charges,
discussed below.
During 1999, the Company approved and implemented four restructuring
plans to reduce selling, general and administrative costs and to rationalize
plant operations.
The Company recorded restructuring charges of approximately $2.4 million
relating to severance costs in connection with the first restructuring plan.
This plan reduced the Company's salaried work force by 82 employees.
The Company recorded restructuring charges of approximately $2.9 million
relating to severance costs in connection with the second restructuring plan for
replacing three of the Company's former executives, including its former Chief
Executive Officer.
In connection with the third restructuring plan, the Company recorded
restructuring charges of approximately $1.7 million relating to the closure of
21
one facility and certain product line rationalizations. The $1.7 million charge
was comprised of approximately $0.1 million of severance costs in connection
with the work force reductions of 117 employees, $0.1 million of plant closure
and carrying costs and $1.5 million of asset write-downs.
In connection with the fourth restructuring plan, the Company closed its
New York office (see Note 16 to the consolidated financial statements). The
Company recorded approximately $2.5 million of restructuring charges comprised
of $1.6 million of severance costs for eight employees and $0.9 million of costs
primarily relating to future lease obligations, net of sublease proceeds.
In addition, the Company recorded restructuring charges of approximately
$0.7 million relating to changes in estimates to prior years' plans, primarily
for the sale of the packaging business in 1999. The $0.7 million charge is
comprised of $0.2 million of severance, $1.3 million of lease and plant closure
costs, offset by $0.8 million of adjustments for asset write-downs. The Company
also recorded $0.3 million of other charges relating to rent due from Trace for
the New York office prior to its closure.
Interest and Debt Issuance Expense
Interest and debt issuance expense totaled $75.2 million in 2000, which
represented a 3.2% increase from 1999 expense of $72.9 million. The impact of
higher effective interest rates was partially offset by the benefit of lower
average debt levels. Higher effective interest rates reflected market conditions
and the impact of a certain provision of the Foamex L.P. credit facility that
required an incremental interest rate margin, as discussed in Note 8 to the
consolidated financial statements. Interest capitalized as a component of the
construction costs of plant and equipment totaled $0.8 million in 2000.
Income from Equity Interest in Joint Venture
Income from an equity interest in an Asian joint venture totaled $1.7
million in 2000 compared to $0.5 million in 1999. The improved results reflected
the growth of the joint venture as it moves beyond the start up phase.
Other Income (Expense), Net
Other expense, net in 2000 totaled $3.0 million. Expense items totaled
$3.6 million and significant components included the costs associated with a
buyout proposal and letter of credit fees offset by $0.6 million of interest
income. During 1999, other income, net totaled $1.5 million. Income items in
1999 included a $4.2 million gain recorded on the sale of the corporate aircraft
and interest income of $0.5 million. Partially offsetting income items in 1999
were letter of credit fees.
Income Tax Expense
The effective tax rates in 2000 and 1999 reflect the partial reversal of
the deferred income tax asset valuation allowance recognized in 1998. The
valuation allowance was reduced to reflect the utilization of Federal loss
carryforwards that reduced the current tax component of the Federal tax
provision. Additionally, the valuation allowance was reduced to offset the net
deferred Federal tax liability generated in 2000 and 1999. The effective tax
rate was higher in 2000 primarily due to a greater percentage of income from
foreign sources and a higher effective tax rate on foreign source income.
Business Outlook
Results in 2002 are dependent on a number of key factors, including those
discussed below.
o The extent of the domestic economic recovery and related impact on
consumer spending in key markets of the Company, including
automotive, housing and related furnishings, and technology and
related hardware.
o The successful implementation of the Operational Reorganization
Plan.
22
o The ultimate resolution of recent claims from customers relating
to odors from mattresses containing foam manufactured by the
Company, as discussed above.
o The ability of the Company to implement selling price increases in
the event of higher raw material costs, which comprise a
significant percentage of the cost of many of the Company's
products.
LIQUIDITY AND CAPITAL RESOURCES
The principal source of cash for the Company in 2002 is anticipated to be
from operating activities of its wholly-owned subsidiary Foamex L.P. The
Company's operating cash requirements consist principally of working capital
requirements, scheduled payments of principal and interest on outstanding
indebtedness and capital expenditures. During 2002, cash provided by operating
activities will be limited by the cash requirements resulting from the
Operational Reorganization Plan and related restructuring charge recorded in the
fourth quarter of 2001. The Company believes that cash flow from operating
activities, cash on hand and periodic borrowings under its Amended Credit
Facility will be adequate to meet its liquidity requirements. Any unforeseen
decrease in demand for the Company's products could significantly reduce cash
flow from activities. The ability of Foamex L.P. to make distributions to the
Company is restricted by the terms of its financing agreements; therefore, the
Company is expected to have only limited access to the cash flow generated by
Foamex L.P. for the foreseeable future.
Cash and cash equivalents totaled $15.1 million at the end of 2001
compared to $4.9 million at the end of 2000. Working capital at the end of 2001
was $65.0 million and the current ratio was 1.3 to 1 compared to working capital
at the end of 2000 of $103.3 million and a current ratio of 1.5 to 1. The
decrease in working capital is primarily due to a $45.9 million increase in
accounts payable, partially attributable to certain vendor payment terms that
were lengthened in 2001.
Total debt at the end of 2001 was $666.3 million, down $45.6 million from
year-end 2000. As of December 31, 2001, there were $125.0 million of revolving
credit borrowings, at a weighted average interest rate of 6.2%, under the Foamex
L.P. credit facility with $19.3 million available for additional borrowings and
$20.7 million of letters of credit outstanding. Foamex Canada Inc. ("Foamex
Canada") did not have any outstanding borrowings as of December 31, 2001 under
Foamex Canada's revolving credit agreement, with unused availability of
approximately $5.0 million. Foamex Carpet did not have any outstanding
borrowings under the Foamex Carpet credit facility at December 31, 2001, with
unused availability of $14.8 million and $0.2 million of letters of credit
outstanding.
On March 25, 2002, the Company consummated a series of related financing
transactions, described under the caption "Refinancing and Corporate Structure"
above, designed to strengthen the Company's capital structure.
Cash Flow from Operating Activities
Cash provided by operating activities in 2001 was $106.4 million compared
to $51.0 million in 2000. The increase primarily reflected an increase in
accounts payable that contributed $45.9 million of the improvement. Also
contributing to the 2001 increase was a $15.2 million reduction in inventories.
As discussed above, results in 2001 included significant restructuring charges.
Included in the restructuring charge were non-cash items for asset impairments
and at year-end 2001 there was a net increase in the accrued restructuring
liability of $15.5 million.
Cash Flow from Investing Activities
Cash used for investing activities totaled $40.6 million for 2001. Cash
requirements included capital expenditures of $22.5 million and $17.6 million
for an acquisition, see Note 4 to the consolidated financial statements. In
2000, cash flow used for investing activities totaled $21.9 million, which
included $23.6 million of capital expenditures, partially offset by $3.6 million
of proceeds from the sale of assets. The estimate of capital expenditures for
2002 is approximately $24.0 million.
23
Cash Flow from Financing Activities
Cash used in financing activities was $55.7 million for 2001 compared to
cash used of $30.8 million in 2000. The increase reflected higher net debt
payments compared to 2000, a decrease in cash overdrafts, debt issuance costs
and other financing activities. During the first half of 2000, the $34.0 million
Foamex/GFI Note was repaid with borrowings under the Foamex L.P. revolving
credit facility.
Financial Condition
The Company anticipates that it will continue to comply with the
quarterly financial covenants contained in its Amended Credit Facility and its
other debt agreements. Management's current business plans anticipate customer
selling price management in response to raw material cost changes, improved
working capital management, comparable capital expenditures to the prior year,
successful implementation of on-going cost savings initiatives and improved
operating efficiencies. The achievement of the business plans and the
realization of proceeds resulting from the implementation of an improved asset
utilization program are necessary for compliance with the various financial
covenants for 2002 and prospectively.
The possibility exists that certain financial covenants will not be met
if business conditions are other than as anticipated or other unforeseen events
impact results. In the absence of a waiver of or amendment to such financial
covenants, such noncompliance would constitute a default under the applicable
debt agreements, and the lenders would be entitled to accelerate the maturity of
the indebtedness outstanding thereunder. In the event that such noncompliance
appears likely, or occurs, the Company will seek the lenders' approval of
amendments to, or waivers of, such financial covenants. Historically, the
Company has been able to renegotiate financial covenants and/or obtain waivers,
as required, and management believes such waivers and/or amendments could be
obtained if required. However, there can be no assurance of future amendments or
waivers will be obtained.
Foamex L.P. Credit Facility
At December 31, 2001, Foamex L.P. had a credit facility (the "Foamex L.P.
Credit Facility") with a group of banks, which provided for a revolving credit
facility commitment of $165.0 million and three term loans (Term loans B, C and
D) with an outstanding balance totaling $245.6 million. Included in the group of
banks that provides the Foamex L.P. Credit Facility is The Bank of Nova Scotia,
which is a shareholder of the Company.
Amended Credit Facility
The Amended Credit Facility consists of (1) the new revolving credit
facility, which is a non-amortizing revolving credit facility of $100.0 million
provided by a new syndicate of lenders (the "New Revolving Credit Facility"),
which will provide working capital for the Company and funding for other general
corporate purposes, (2) the various term loan facilities under the existing
credit agreement, (3) a new Term E Loan in an initial amount of $31.6 million,
the proceeds of which were borrowed at closing and used to repay in full the
obligations outstanding under the note payable to Foam Funding LLC, and (4) a
new Term F Loan in an initial amount of $25.0 million, the proceeds of which
were borrowed at closing and used to repay indebtedness outstanding under the
existing revolving credit facility. The remaining obligations outstanding under
the existing revolving credit facility were repaid with a portion of the
proceeds from the issuance of Senior Secured Notes as described below.
The commitments under the New Revolving Credit Facility are available to
the Company in the form of (1) revolving credit loans, (2) swing loans (subject
to a $20.0 million sublimit) and (3) letters of credit (subject to a $40.0
million sublimit).
The Company used a portion of the net proceeds from its Senior Secured
Notes to repay a portion of the existing term loans, the Term E Loan and the
Term F Loan as described below. After this repayment, the term loan facilities
under the Amended Credit Facility will consist of a $39.3 million Term B Loan, a
24
$35.7 million Term C Loan, a $51.7 million Term D Loan, a $16.3 million Term E
Loan and a $19.3 million Term F Loan (together with the Term B Loan, the Term C
Loan, the Term D Loan and the Term E Loan, the "Term Loans").
Loans made under the New Revolving Credit Facility will mature and the
commitments will terminate on June 30, 2005. The Term B Loan, the Term E Loan
and the Term F Loan will mature on June 30, 2005, the Term C Loan will mature on
June 30, 2006 and the Term D Loan will mature on December 29, 2006.
Each of the Term Loans will be subject to amortization on a quarterly
basis; however, after giving effect to the prepayments of the Term Loans as
described above, quarterly amortization payments will commence for the Term B
Loan, the Term E Loan and the Term F Loan in 2004, for the Term C Loan in 2005
and for the Term D Loan in 2006.
Net proceeds from the issuance of the Senior Secured Notes were applied
as follows: (1) $91.5 million was used to repay indebtedness outstanding under
the existing revolving credit facility; (2) $91.5 million was used to repay the
Existing Term Loans and the Term E Loan on a pro rata basis, which in the case
of the Existing Term Loans, were applied to outstanding installments thereof in
the order of their earliest maturities; (3) $48.5 million was used to repay the
Term Loans on a pro rata basis and applied to outstanding installments thereof
in the order of their earliest maturities and (4) the remaining $48.5 million
will be used to repurchase or redeem the senior subordinated notes, but to the
extent such proceeds are not used for this purpose by September 20, 2002, the
proceeds are required to be used to repay the Term Loans on a pro rata basis and
apply the prepayments to the outstanding installments in the order of their
earliest maturities.
Foamex L.P. is required to make mandatory prepayments of loans under the
Amended Credit Facility with: (1) the net cash proceeds received from sales of
assets by Foamex L.P. or certain of its subsidiaries, (2) the net cash proceeds
received from certain issuances by the Company, or certain of its subsidiaries
of indebtedness for borrowed money or equity interests and (3) 75% of excess
cash flow of Foamex L.P. and its subsidiaries in any fiscal year, such
percentage to be reduced to 50% if the ratio of outstanding obligations under
the Amended Credit Facility to EBDAIT for such fiscal year is reduced to
specified levels, subject, in each case, to certain limited exceptions.
Foamex L.P. is permitted to make voluntary prepayments and/or permanently
reduce the commitments under the New Revolving Credit Facility in whole or in
part, without premium or penalty, subject to reimbursement of the lenders'
redeployment costs in the case of prepayment of LIBO rate borrowings, other than
at the end of any interest period. All voluntary prepayments of Term Loans will
be applied to such tranches of Term Loans as Foamex L.P. may select.
The Company, FMXI, Inc. and each of Foamex L.P.'s domestic subsidiaries
will continue to guarantee the repayment of the obligations under the Amended
Credit Facility. The Amended Credit Facility will be secured by a first-priority
lien (subject to permitted liens) on substantially the same collateral that
secures the obligations under the existing credit facility, which includes
substantially all material tangible and intangible assets. In addition, all of
the partnership interests, all of the capital stock or other equity interests of
our domestic subsidiaries (including Foamex Carpet) and 65% of the capital stock
or other equity interests of Foamex L.P.'s first-tier foreign subsidiaries will
be pledged as part of the security for the obligations under the Amended Credit
Facility.
Borrowings under the Amended Credit Facility will bear interest at a
floating rate based upon (and including a spread over), at our option, (1) the
higher of (a) the funding agent's prime rate and (b) 0.50 of 1% in excess of the
Federal Reserve reported weighted average overnight rate for federal funds or
(2) the higher of (x) 2.50% per annum and (y) the LIBO rate, as defined, as
determined by the funding agent. Foamex L.P. will pay administration fees,
commitment fees, letter of credit fees and certain other expenses and provide
certain indemnities, all of which are believed to be customary for financings of
this type.
The Amended Credit Facility contains affirmative and negative covenants
that, subject to certain exceptions, are substantially similar to those
contained in the existing credit facility. The Amended Credit Facility includes
the following financial covenants, as defined therein: (1) a minimum EBDAIT test
for the year ended December 31, 2001; (2) a minimum net worth test; (3) a
minimum ratio of EBDAIT to cash interest expense; (4) a minimum ratio of EBDAIT
to fixed charges; and (5) a maximum ratio of funded debt to EBDAIT. These
covenants will be substantially the same as those contained in the existing
25
credit facility with appropriate changes to take into account the issuance of
the Senior Secured Notes and the contribution of Foamex Carpet to Foamex L.P.
The Amended Credit Facility also requires the refinancing of the 13 1/2% senior
subordinated notes on or prior to March 31, 2005.
The Amended Credit Facility contains events of default that, subject to
certain exceptions, are substantially similar to those contained in the existing
credit facility, including, but not limited to, nonpayment of principal,
interest, fees or other amounts when due, violation of covenants, inaccuracy of
representations and warranties in any material respect, cross default and cross
acceleration to certain other indebtedness, bankruptcy, ERISA, material
judgments and change of control. The events of default are subject to grace
periods and materiality qualifications.
Foamex Carpet Credit Facility
At December 31, 2001, Foamex Carpet had a revolving credit facility (the
"Foamex Carpet Credit Facility"), which provided a commitment of $15.0 million
through February 2004. There were no borrowings outstanding under the credit
facility at December 31, 2001 and available borrowings totaled $14.8 million
with $0.2 million of letters of credit outstanding.
Contractual Obligations and Commercial Commitments
At December 31, 2001, the Company had obligations to repay a total of
$660.1 million of principal of long-term debt borrowed under a number of
arrangements with lenders. The amortization schedule for the Company's long-term
debt payments is included in Note 8 to the consolidated financial statements. On
March 25, 2002, the Company issued $300.0 million of Senior Secured Notes due on
April 1, 2009. A total of $231.5 million of the proceeds from the Senior Secured
Notes was used to repay debt that would have matured in 2002, 2003 and 2004. At
December 31, 2001, the Company had outstanding letters of credit aggregating
$20.9 million.
The Company also has commitments for operating leases discussed in Note
17 to the consolidated financial statements that require minimum payments
totaling $51.3 million, with $44.5 million due through December 31, 2006 and the
balance in later years. The Company does not have any other significant
contractual obligations or commercial commitments.
OTHER
Shareholder and Change in Control Developments
Trace International Holdings, Inc. ("Trace") is a privately held company,
which owned approximately 29% of the Company's outstanding voting common stock
at September 30, 2000, and whose former Chairman also serves as the Company's
Chairman. The Company's common stock owned by Trace was pledged as collateral
against certain of Trace's obligations. Certain credit agreements and promissory
notes of the Company's subsidiaries, pursuant to which approximately $401.1
million of debt was outstanding as of September 30, 2000, provided that a
"change of control" would be an event of default and could result in the
acceleration of such indebtedness. "Change of control" means, for this purpose,
that (i) a person or related group, other than Trace, beneficially owns more
than 25% of the Company's outstanding voting stock and (ii) such voting stock
constitutes a greater percentage of such voting stock than the amount
beneficially owned by Trace. Additionally, certain indentures of Foamex L.P. and
Foamex Capital Corporation ("FCC"), a wholly-owned subsidiary of Foamex L.P.,
relating to senior subordinated notes of $248.0 million contain similar "change
of control" provisions, which require Foamex L.P. and FCC to tender for such
notes at a price in cash equal to 101% of the aggregate principal amount
thereof, plus accrued and unpaid interest thereon, if there is such a "change of
control".
On July 21, 1999, the Company was informed by Trace that it filed a
petition for relief under Chapter 11 of the Bankruptcy Code in Federal Court in
New York City. Subsequently, on January 24, 2000, an order was signed converting
the Trace bankruptcy from Chapter 11 to Chapter 7 of the Bankruptcy Code. A
trustee was appointed to oversee the liquidation of Trace's assets. Neither
Trace's bankruptcy filing nor the conversion to Chapter 7 constituted a "change
of control" under the provisions of the debt agreements described above.
26
On July 31, 2000, the Company announced that it had entered into an
agreement (the "Exchange Agreement") with The Bank of Nova Scotia relating to a
portion of the 7,197,426 shares of the Company's common stock pledged by Trace
to The Bank of Nova Scotia. The Exchange Agreement provided for the transfer of
the pledged stock to The Bank of Nova Scotia in a manner that would not
constitute a "change of control" as described above. These transactions were
conditioned upon bankruptcy court approval of a settlement agreement between The
Bank of Nova Scotia and the trustee for the Trace bankruptcy, which was entered
on October 18, 2000. On November 2, 2000, the transactions contemplated by the
Exchange Agreement and the settlement agreement were consummated, and did not
constitute a "change of control". As a result, Trace no longer owns any shares
of the Company's common stock.
Under the Exchange Agreement, The Bank of Nova Scotia initially received
1,500,000 shares of the Company's common stock from the Trace bankruptcy estate
and exchanged these common stock shares for 15,000 shares of a new class of the
Company's non-voting non-redeemable convertible preferred stock (the "Series B
Preferred Stock"). Each share of the Series B Preferred Stock can be converted
into 100 shares of the Company's common stock but only if such conversion would
not trigger a "change of control" event, as discussed above. The Series B
Preferred Stock (a) is entitled to dividends only if a dividend is declared on
the Company's common stock, (b) ranks senior to any future preferred stock
issued by the Company and (c) is entitled to a liquidation preference of $100
per share. Following this exchange, The Bank of Nova Scotia became the owner of
24.41% of the outstanding shares of the Company's common stock when the
remaining 5,697,426 shares of the Company's common stock were transferred to The
Bank of Nova Scotia from the Trace bankruptcy estate. Certain equity
transactions, primarily the exercise of stock options, have reduced the Bank of
Nova Scotia's common stock ownership percentage to 23.6% at February 15, 2002.
Environmental Health and Safety
We are subject to extensive and changing federal, state, local and
foreign environmental laws and regulations, including those relating to the use,
handling, storage, discharge and disposal of hazardous substances, the discharge
or emission of materials into the environment, and the remediation of
environmental contamination, and as a result, are from time to time involved in
administrative and judicial proceedings and inquiries relating to environmental
matters. As of December 31, 2001, we had accruals of approximately $3.0 million
for environmental matters.
The Clean Air Act Amendments of 1990 ("1990 CAA Amendments") provide for
the establishment of federal emission standards for hazardous air pollutants
including methylene chloride, propylene oxide and TDI, which are used in the
manufacturing of foam. The final National Emission Standard for Hazardous Air
Pollutants, or "NESHAP," for flexible polyurethane foam production was
promulgated on October 7, 1998. The NESHAP required a reduction of approximately
70% of the emission of methylene chloride for the slab stock foam industry
effective October 7, 2001. Through the use of alternative technologies,
including VPF(SM) and carbon dioxide, and by shifting current production to
facilities which use these alternative technologies, we are in substantial
compliance with these regulations. On August 8, 2001, the United States
Environmental Protection Agency, or "EPA," proposed a NESHAP for Flexible
Polyurethane Foam Fabrication Operations. The proposed NESHAP regulates
emissions of methylene chloride and other Hazardous Air Pollutants and restricts
air emissions from flame lamination sources. The Company does not believe that
this standard, if adopted, will require us to make material expenditures.
We have reported to the appropriate state authorities that we have found
soil and/or groundwater contamination in excess of state standards at certain
locations. Seven sites are currently in various stages of investigation or
remediation. Accordingly, the extent of contamination and the ultimate liability
is not known with certainty for all sites. As of December 31, 2001, we had
accruals of $2.5 million for the estimated cost of remediation, including
professional fees and monitoring costs, for these sites. During 2000, we reached
an indemnification agreement with the former owner of the Morristown, Tennessee
facility. The agreement allocates the incurred and future remediation costs
between the former owner and us. The estimated allocation of future costs for
the remediation of this facility is not significant, based on current known
information. The former owner was Recticel Foam Corporation, a subsidiary of
Recticel.
We have either upgraded or closed all underground storage tanks at our
facilities in accordance with applicable regulations.
27
The Comprehensive Environmental Response, Compensation and Liability Act,
or "CERCLA," and comparable state laws impose liability without fault for the
costs of cleaning up contaminated sites on certain classes of persons that
contributed to the release of hazardous substances into the environment at those
sites, for example, by generating wastes containing hazardous substances which
were disposed at such sites. We are currently designated as a Potentially
Responsible Party, or "PRP," by the EPA or by state environmental agencies or
other PRPs, pursuant to CERCLA or analogous state statutes, with respect to
eight sites. Estimates of total cleanup costs and fractional allocations of
liability are often provided by the EPA, the state environmental agency or the
committee of PRPs with respect to the specified site. Based on these estimates
(to the extent available) and on known information, in each case and in the
aggregate, our liability is not considered to be significant.
In 2002, capital expenditures for safety and environmental compliance
projects are anticipated to be approximately $2.0 million. Although it is
possible that new information or future developments could require the Company
to reassess the potential exposure relating to all pending environmental
matters, including those described above, management believes that, based upon
all currently available information, the resolution of these environmental
matters will not have a material adverse effect on our operations, financial
position, capital expenditures or competitive position. The possibility exists,
however, that new environmental legislation and/or environmental regulations may
be adopted, or other environmental conditions, including the presence of
previously unknown environmental contamination, may be found to exist or a
reassessment of the potential exposure to pending environmental matters may be
necessary due to new information or future developments, that may require
expenditures not currently anticipated and that may be material.
Inflation, Raw Material Costs and Other Matters
On average, inflation rates for the domestic economy continue to be
relatively low. Although long-term inflation rates are difficult to predict, the
Company believes it has the flexibility in operations and capital structure to
maintain a competitive position. The prices of the two principal chemicals used,
TDI and polyol, are influenced by demand, manufacturing capacity and oil prices.
Results for 2000 were negatively impacted by higher transportation costs related
to oil price increases and higher costs for raw materials. In 2001, the
beginning of the economic slowdown resulted in excess manufacturing capacity for
the major chemical suppliers. This, coupled with declining oil prices, resulted
in lower costs for raw materials in 2001. Some TDI and polyol suppliers have
informed the Company that they will seek to raise prices in the first six months
of 2002. The Company will attempt to offset raw material cost increases through
selling price increases; however, there can be no assurance that the Company
will be successful in implementing selling price increases or that competitive
pricing pressure will not require us to adjust selling prices. Results of
operations have been and could be adversely affected by delays in implementing,
or the Company's inability to implement, selling price increases to offset raw
material cost increases.
Related Party Transactions
The Company has had a number of related party transactions in the past,
primarily with affiliates of Trace. Such related party transactions and current
balances are discussed in Note 16 to the consolidated financial statements
included in this report on Form 10-K.
Accounting Changes
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS No. 133") requires the
fair value of derivatives be recognized in the consolidated balance sheets.
Changes in the fair value of derivatives are recognized in earnings or in other
comprehensive loss, essentially depending on the structure and the purpose of
the derivatives. During 2000, SFAS No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities", which amended SFAS No. 133 on a
limited number of issues, was issued. The statements were effective for the
Company in the first quarter of 2001.
These statements create a foundation that addresses accounting and
reporting issues for a wide range of financial instruments defined as
deri