Offer for all Outstanding 97/8% Senior Subordinated Notes Due 2007 in Exchange
for up to $150,000,000 principal amount of
97/8% Senior Subordinated Notes Due 2007
of
[GRAPHIC OMITTED]
Foamex L.P.
Foamex Capital Corporation
The Exchange Offer
will expire at Midnight, New York City time on November 17, 1997,
unless extended
---------------
Foamex L.P., a Delaware limited partnership ("Foamex") and Foamex Capital
Corporation, a Delaware corporation ("FCC" and together with Foamex, the
"Issuers"), hereby offer upon the terms and subject to the conditions set forth
in this Prospectus and the accompanying Letter of Transmittal (which together
constitute the "Exchange Offer") to exchange $1,000 principal amount of the
Issuers' 9 7/8% Senior Subordinated Notes due 2007 (the "New Notes") for each
$1,000 principal amount of their issued and outstanding 9 7/8% Senior
Subordinated Notes due 2007 (the "Old Notes" and, together with the New Notes,
the "Notes") from the holders (the "Holders") thereof. The terms of the New
Notes are identical in all material respects to the terms of the Old Notes,
except that the New Notes have been registered under the Securities Act of 1933,
as amended (the "Securities Act"), and, therefore, will not bear legends
restricting their transfer and will not contain certain terms providing for an
increase in the interest rate on the Old Notes under certain circumstances
described in the Registration Rights Agreement (as defined). The New Notes
evidence the same debt as the Old Notes and will be issued pursuant to, and
entitled to the same benefits under, the Indenture (as defined) governing the
Old Notes.
Interest on the Notes is payable semi-annually in cash on June 15 and
December 15 of each year, commencing December 15, 1997. The Notes are redeemable
at the option of the Issuers, in whole or in part, at any time on or after June
15, 2002 in cash at the redemption prices set forth herein, plus accrued and
unpaid interest and Liquidated Damages (as defined), if any, thereon to the date
of redemption. In addition, at any time prior to June 15, 2000, the Issuers may
on any one or more occasions redeem up to 35% of the initially outstanding
aggregate principal amount of Notes at a redemption price equal to 109.875% of
the principal amount thereof, plus accrued and unpaid interest and Liquidated
Damages, if any, thereon to the redemption date, with the net proceeds of one or
more Public Equity Offerings (as defined); provided that, in each case, at least
65% of the initially outstanding aggregate principal amount of Notes remains
outstanding immediately after the occurrence of any such redemption. See
"Description of Notes--Optional Redemption." In addition, upon the occurrence of
a Change of Control (as defined), each holder of Notes will have the right to
require the Issuers to repurchase all or any part of such holder's Notes at an
offer price in cash equal to 101% of the aggregate principal amount thereof,
plus accrued and unpaid interest and Liquidated Damages, if any, thereon to the
date of purchase. See "Description of Notes--Repurchase at the Option of
Holders--Change of Control." There can be no assurance that, in the event of a
Change of Control, the Issuers would have sufficient funds to purchase all Notes
tendered. See "Risk Factors--Limitations on Ability to Make Change of Control
Payment."
The Notes are general unsecured obligations of the Issuers, rank
subordinate in right of payment to all Senior Debt (as defined), rank pari passu
in right of payment to all Pari Passu Debt (as defined) and rank senior in right
of payment to all existing and future subordinated indebtedness of the Issuers.
The Notes are jointly and severally unconditionally guaranteed (the "Note
Guarantees") on a senior subordinated basis by the Subsidiary Guarantors (as
defined). The Note Guarantees are general unsecured obligations of the
Subsidiary Guarantors, rank subordinate in right of payment to all Senior Debt
of the Subsidiary Guarantors, rank pari passu in right of payment to all Pari
Passu Debt of the Subsidiary Guarantors and rank senior in right of payment to
all existing and future subordinated indebtedness of the Subsidiary Guarantors.
As of June 29, 1997, the Notes are subordinated to approximately $370.1 million
of Senior Debt and pari passu with approximately $27.4 million of Pari Passu
Debt.
The New Notes will bear interest from and including their respective dates
of issuance. Holders whose Old Notes are accepted for exchange will receive
accrued interest thereon to, but not including, the date of issuance of the New
Notes, such interest to be payable with the first interest payment on the New
Notes, but will not receive any payment in respect of interest on the Old Notes
accrued after the issuance of the New Notes.
The Old Notes were originally issued and sold on June 12, 1997 in a
transaction not registered under the Securities Act, in reliance upon the
exemption provided in Section 4(2) of the Securities Act and Rule 144A of the
Securities Act (the "Initial Offering"). The Issuers are making the Exchange
Offer in reliance on the position of the staff of the Securities and Exchange
Commission (the "Commission") as set forth in certain no-action letters
addressed to other parties in other transactions. However, the Issuers have not
sought their own no-action letter and there can be no assurance that the staff
of the Commission would make a similar determination with respect to the
Exchange Offer as in such other circumstances.
(Cover continued on next page)
---------------
See "Risk Factors" beginning on page 12 for a discussion of certain factors
that holders of the Old Notes should consider in connection with the Exchange
Offer and that prospective investors in the New Notes should consider in
connection with such investment.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
---------------
The date of this Prospectus is October 16, 1997
<PAGE>
(Cover continued from previous page)
Each Holder desiring to participate in the Exchange Offer will be required
to represent, among other things, that (i) it is not an "affiliate" (as defined
in Rule 405 of the Securities Act) of the Issuers, (ii) it is not engaged in,
and does not intend to engage in, and has no arrangement or understanding with
any person to participate in, a distribution of the New Notes, and (iii) it is
acquiring the New Notes in the ordinary course of its business (a holder unable
to make the foregoing representations is referred to as a "Restricted Holder").
A Restricted Holder will not be able to participate in the Exchange Offer and
may only sell its Old Notes pursuant to a registration statement containing the
selling securityholder information required by Item 507 of Regulation S-K of the
Securities Act, or pursuant to an exemption from the registration requirement of
the Securities Act.
Each broker-dealer (other than a Restricted Holder) that receives New Notes
for its own account pursuant to the Exchange Offer (a "Participating
Broker-Dealer") is required to acknowledge in the Letter of Transmittal that it
acquired the Old Notes as a result of market-making activities or other trading
activities and that it will deliver a prospectus in connection with the resale
of such New Notes. Based upon interpretations by the staff of the Commission,
the Issuers believe that New Notes issued pursuant to the Exchange Offer to
Participating Broker-Dealers may be offered for resale, resold, and otherwise
transferred by a Participating Broker-Dealer (other than a Restricted Holder)
upon compliance with the prospectus delivery requirements, but without
compliance with the registration requirements, of the Securities Act. The
Issuers have agreed that for a period of 120 days following consummation of the
Exchange Offer they will make this Prospectus available to Participating
Broker-Dealers for use in connection with any such resale. During such period of
time, delivery of this Prospectus, as it may be amended or supplemented, will
satisfy the prospectus delivery requirements of a Participating Broker-Dealer
engaged in market making or other trading activities. See "Exchange Offer" and
"Plan of Distribution".
Based upon interpretations by the staff of the Commission, the Issuers
believe that New Notes issued pursuant to the Exchange Offer may be offered for
resale, resold, and otherwise transferred by a Holder thereof (other than a
Restricted Holder or a Participating Broker-Dealer) without compliance with the
registration and prospectus delivery requirements of the Securities Act.
The New Notes are new securities for which there is currently no market.
The Issuers presently do not intend to apply for listing of the New Notes on any
securities exchange or for quotation through the National Association of
Securities Dealers Automated Quotation System ("NASDAQ"). The Issuers have been
advised by the Initial Purchasers, Donaldson, Lufkin & Jenrette Securities
Corporation, Salomon Brothers Inc and Scotia Capital Markets (USA) Inc. that,
following completion of the Exchange Offer, they presently intend to make a
market in the New Notes; however, the Initial Purchasers are not obligated to do
so and any market-making activities with respect to the New Notes may be
discontinued at any time without notice. There can be no assurance that an
active public market for the New Notes will develop.
Any Old Notes not tendered and accepted in the Exchange Offer will remain
outstanding and will be entitled to all the rights and preferences and will be
subject to the limitations applicable thereto under the Indenture. Following
consummation of the Exchange Offer, the holders of Old Notes will continue to be
subject to the existing restrictions upon transfer thereof and the Issuers will
have no further obligation to such holders (other than (x) to the Restricted
Holders, (y) to any Holder prohibited by law or Commission policy from
participating in the Exchange Offer, or (z) to any Holder required to deliver a
prospectus (other than this Prospectus) in connection with the resale of the New
Notes) to provide for the registration under the Securities Act of the Old Notes
held by them. To the extent that Old Notes are tendered and accepted in the
Exchange Offer, a Holder's ability to sell untendered Old Notes could be
adversely affected. It is not expected that an active market for the Old Notes
will develop while they are subject to restrictions on transfer.
The Issuers will accept for exchange any and all Old Notes that are validly
tendered and not withdrawn on or prior to Midnight, New York City time, on the
date the Exchange Offer expires, which will be November 17, 1997 (the
"Expiration Date"), unless the Exchange Offer is extended by the Issuers in
their sole discretion, in which case the term "Expiration Date" shall mean the
latest date and time to which the Exchange Offer is extended. Tenders of Old
Notes may be withdrawn at any time prior to 5:00 p.m., New York City time, on
the Expiration Date. The Exchange Offer is not conditioned upon any minimum
principal amount of Old Notes being tendered for exchange. However, the Exchange
Offer is subject to certain conditions which may be waived by the Issuers in
their reasonable discretion and to the terms and provisions of the Registration
Rights Agreement (as defined). Old Notes may be tendered only in denominations
of $1,000 and integral multiples thereof. The Issuers have agreed to pay all of
the expenses incurred by them in connection with the Exchange Offer. See "The
Exchange Offer--Fees and Expenses."
This Prospectus, together with the Letter of Transmittal, is being sent to
all registered holders of Old Notes as of , 1997.
The Issuers will not receive any proceeds from this Exchange Offer. No
dealer-manager is being used in connection with this Exchange Offer. See "Use of
Proceeds" and "Plan of Distribution."
ii
<PAGE>
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by Foamex and FCC with the Commission under
file numbers 1-11432 and 1-11436, respectively, are incorporated herein by
reference:
1. The Issuers' Annual Reports on Form 10-K for the fiscal year ended
December 29, 1996 (other than the financial information of Foamex International
Inc.), filed pursuant to Section 13(a) of the Securities Exchange Act of 1934
(the "Exchange Act").
2. All other reports filed by Foamex pursuant to Section 13(a) or 15(d) of
the Exchange Act since December 29, 1996, consisting of the Issuers' Quarterly
Reports on Form 10-Q for the fiscal quarters ended March 30, 1997 and June 29,
1997 and the Issuers' Current Reports on Form 8-K dated May 28, 1997, June 12,
1997 and August 29, 1997.
All documents filed by Foamex pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act after the date of this Prospectus and prior to
termination of this Exchange Offer shall be deemed to be incorporated by
reference into the Prospectus and to be a part hereof from the dates of filing
of such documents.
These documents are available upon request from Foamex, 1000 Columbia
Avenue, Linwood, Pennsylvania 19061 and its telephone number is (610) 859-3000.
AVAILABLE INFORMATION
The Issuers and the Subsidiary Guarantors have filed with the Commission a
Registration Statement on Form S-4 (the "Registration Statement," which term
shall include all amendments, exhibits, annexes and schedules thereto) pursuant
to the Securities Act, and the rules and regulations promulgated thereunder,
covering the New Notes being offered hereby. This Prospectus does not contain
all the information set forth in the Registration Statement, certain parts of
which are omitted in accordance with the rules and regulations of the
Commission. Statements made in this Prospectus as to the contents of any
contract, agreement or other document referred to in the Registration Statement
are not necessarily complete. With respect to each such contract, agreement or
other document filed as an exhibit to the Registration Statement, reference is
made to the exhibit for a more complete description of the matter involved, and
each such statement shall be deemed qualified in its entirety by such reference.
Foamex and FCC are subject to the informational reporting requirements of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith file reports and other information with the Commission.
Reports, proxy statements and other information concerning the Issuers can be
inspected without charge at the Public Reference Room maintained by the
Commission at 450 Fifth Street, N.W., Room 1024, Washington D.C. 20549. In
addition, upon request, such reports, proxy statements and other information
will be made available for inspection and copying at the regional offices of the
Commission located at Seven World Trade Center, 13th Floor, New York, New York
10048, and Northwestern Atrium Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. Copies of such material can be obtained upon request
from the Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, and its public reference facilities in New York, New
York and Chicago, Illinois, at the prescribed rates. Such material may also be
accessed electronically at the Commission's site on the World Wide Web located
at http://www.sec.gov.
In the event that the Issuers cease to be subject to the informational
reporting requirements of the Exchange Act, the Issuers have agreed that,
whether or not they are required to do so by the rules and regulations of the
Commission, for so long as any of the Notes remain outstanding, they will
furnish to the holders of the Notes and file with the Commission (unless the
Commission will not accept such a filing) (i) all quarterly and annual financial
information that would be required to be contained in such a filing with the
Commission on Forms 10-Q and 10-K as if the Issuers were required to file such
forms, including a "Management's Discussion and Analysis of Results of
Operations and Financial Condition" and, with respect to the annual information
only, a report thereon by the Issuers' independent accountants and (ii) all
reports that would be required to be filed with the Commission on Form 8-K as if
the Issuers were required to file such reports. In addition, for so long as any
of the Old Notes remain outstanding, the Issuers have agreed to make available
to any beneficial owner of the Old Notes in connection with any sale thereof,
the information required by Rule 144A(d)(4) under the Securities Act.
iii
<PAGE>
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE EXCHANGE OFFER COVERED BY THIS PROSPECTUS. IF GIVEN OR MADE
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE ISSUERS OR THE SUBSIDIARY GUARANTORS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE NEW NOTES
IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH
OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATIONS THAT THERE HAS
NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR IN THE AFFAIRS
OF THE ISSUERS OR THE SUBSIDIARY GUARANTORS SINCE THE DATE HEREOF.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Incorporation of Certain Documents by Reference ....................................... iii
Available Information .................................................................. iii
Prospectus Summary ..................................................................... 1
Risk Factors ........................................................................... 12
Refinancing Plan ..................................................................... 17
Use of Proceeds ........................................................................ 17
Capitalization ........................................................................ 18
Selected Historical Consolidated Financial Information of Foamex ........................ 19
Selected Historical Consolidated Financial Information of General Felt .................. 21
Selected Historical Consolidated Financial Information of Foamex Fibers ............... 23
Management's Discussion and Analysis of Financial Condition and Results of Operations 25
Business .............................................................................. 36
The Exchange Offer ..................................................................... 46
Management ........................................................................... 54
Security Ownership of Certain Beneficial Owners ....................................... 57
Certain Relationships and Related Transactions ....................................... 58
Description of Certain Debt Instruments ................................................ 61
Description of Notes .................................................................. 64
Description of the Partnership Agreement ............................................. 92
Certain Federal Income Tax Considerations ............................................. 94
Plan of Distribution .................................................................. 95
Legal Matters ........................................................................ 96
Experts .............................................................................. 96
Forward-Looking Statements ............................................................ 96
Index to Financial Statements ......................................................... F-1
</TABLE>
UNTIL JANUARY 14, 1998 (90 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE NEW NOTES OFFERED HEREBY, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
<PAGE>
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and financial data, including
the notes thereto, appearing elsewhere in this Prospectus. Unless the context
requires otherwise, the term "Foamex" refers to Foamex L.P. and its
subsidiaries. Foamex L.P. is an indirect-majority owned subsidiary of Foamex
International Inc. ("Foamex International").
Overview
Foamex is the largest manufacturer and marketer of flexible polyurethane
and advanced polymer foam products in North America. Foamex's products are
utilized primarily in five end-markets: (i) carpet cushion and other carpet
products, (ii) cushioning foams for bedding and furniture fabricators, (iii)
furniture products for furniture manufacturers and packaging fabricators, (iv)
automotive applications, including trim and accessories and (v) specialty and
technical foams. Foamex is the largest North American producer of foams used for
carpet cushion, automotive applications and specialty and technical products and
is a leading North American producer of cushioning foams. As a result of the
1995 Operational Reorganization discussed below, Foamex has refocused on its
flexible polyurethane and advanced polymer foam business by divesting of
non-foam business segments. Foamex believes that a concentrated focus in only
the foam business segment will allow Foamex to concentrate management, financial
and operational resources and will position Foamex to pursue its growth strategy
of developing new products, improving profitability and expanding
internationally.
Foamex distributes carpet cushion to major floor covering retailers such as
Sears, New York Carpet World and Carpetland USA. Foamex supplies cushioning
foams to major bedding and furniture manufacturers such as Sealy, Simmons and
Ethan Allen. Foamex's packaging foams are supplied to distributors and
manufacturers of computers and other electronic devices, including Seagate
Technology and CompUSA. Foamex distributes its automotive foam products to
original equipment manufacturers ("OEMs"), including Ford, General Motors and
Chrysler, and major tier one suppliers such as Lear Corporation, Johnson
Controls and Delphi Automotive Systems. Foamex's specialty and technical foams
consist of reticulated foams and other customized polyester and polyether foams
used for filtration, reservoiring and consumer products which are utilized
worldwide in a wide variety of applications by companies such as Hewlett-Packard
and Briggs & Stratton.
Foamex and its predecessors have been developing, manufacturing and
marketing polyurethane foam for more than 40 years. For the 52 weeks ended June
29, 1997, Foamex had net sales of $935.8 million, EBDAIT (as defined) of $126.1
million and income from continuing operations of $63.1 million. During such
period, the percentage of net sales generated by cushioning foams; carpet
cushion and other carpet products; automotive foams; and specialty and technical
foams was approximately 36%, 31%, 25% and 8%, respectively. Prior to the second
quarter of 1997, the cushioning foams and furniture product markets were treated
as a single product group; therefore, all historical data in this Prospectus
reflects cushioning foam and furniture products as the single product group
"cushioning foam."
Competitive Strengths
Foamex believes that it possesses a number of competitive strengths that
have allowed it to become the largest manufacturer and marketer of flexible
polyurethane and advanced polymer foam products in North America, including:
Emphasis on New Product Development. Based upon Foamex's knowledge and
experience in the industry, Foamex believes it has a significant research and
development capability and, as a result, has been awarded more than 100
foam-related patents worldwide. This capability provides Foamex with a stream of
new products, new applications for existing products, and new processes for foam
manufacturing. An example of this capability is variable pressure foaming
(VPF[TM]), an innovative manufacturing process currently used in North America
only by Foamex, which has been used to create new products such as Reflex[TM]
and Nexol[TM]. Reflex[TM] is designed to replace fiberfill in certain cushioning
products, and Nexol[TM] is designed to replace rigid styrene foam in packaging.
Foamex has also recently introduced Plushlife[TM] for the carpet cushion market
and Powerthane[TM] for automotive applications. Another technology developed by
Foamex is Surface Modification Technology (SMT[TM]), which allows for high
volume precision contouring of foam surfaces, thereby improving Foamex's
existing products and creating new products such as sculpted bed mattresses.
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1
<PAGE>
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Alignment with Key Customers. Foamex has historically maintained a steady
revenue base by aligning itself with key customers, many of which have been
Foamex's customers for many years. These customer relationships are supported by
Foamex's extensive North American network of 58 strategically located
facilities, which allows Foamex to deliver products cost effectively on a
just-in-time basis. As a result of these relationships, Foamex is able to work
with customers during the design phase for new products and new applications,
thereby favorably positioning Foamex to be the principal supplier for these
products.
High Quality Products. Foamex is a pioneer in manufacturing and
distributing high quality flexible polyurethane and advanced polymer foam
products to satisfy the specific needs of customers. During 1996, Foamex
completed QS-9000 and ISO-9001 certification for its eight domestic facilities
that supply the automotive industry and is pursuing the appropriate
certifications for the remainder of its manufacturing facilities. Foamex was one
of the first flexible polyurethane foam manufacturers to be QS-9000 certified,
demonstrating its commitment to producing the highest quality products and
meeting the needs of its customers.
Low Cost Manufacturing Position. Foamex strives to maintain
state-of-the-art manufacturing facilities which utilize recent manufacturing
improvements such as the proprietary VPF[TM] and patented SMT[TM] technologies,
as well as the latest carbon dioxide converting process. These technologies are
designed to, among other things, maximize the conversion efficiency of raw
materials into finished goods and to minimize labor costs. Furthermore, Foamex
has implemented a company-wide Continuous Improvement Process program designed
to continually increase productivity, reduce costs and improve product quality.
In addition, as the largest manufacturer of flexible polyurethane and advanced
polymer foam products in North America, management believes that Foamex is able
to realize economies of scale in its raw materials procurement, which represent
approximately 74% of Foamex's manufacturing costs, and recover costs from the
use of substantially all of its internally generated trim scrap, which is the
principal raw material in the production of bonded carpet cushion.
Growth Strategy
Foamex's strategy focuses on (i) developing new proprietary foam products,
(ii) introducing new uses for advanced foam products, (iii) expanding in
international markets and (iv) reducing costs through continued emphasis on
manufacturing improvements.
New Proprietary Foam Products. Foamex plans to continue to utilize its
significant research and development capability to develop new products. In
recent years, Foamex has developed new proprietary technologies, such as VPF[TM]
and SMT[TM], which have been used to create higher margin, value-added products
designed to replace existing flexible polyurethane foam products. SMT[TM] has
allowed Foamex to develop sculpted mattress toppers, mattress pads and bed
pillows which are replacing traditional polyurethane foam products due to their
superior comfort, quality and value. In certain cases, such as Plushlife[TM], a
proprietary carpet cushion designed to replace traditional bonded and prime
carpet cushion, Foamex brands these products to create product recognition and
to generate higher margins.
New Uses for Foam. Foamex is actively developing new applications for its
advanced foam products to replace other materials. In the automotive industry,
the number of foam applications has increased from 8 per vehicle in 1984 to 20
per vehicle in 1997. For example, Foamex has introduced products such as foam
headliners which are replacing fiberglass headliners (the rigid material between
the fabric and the metal roof of a car). Reflex[TM] foams, which include cushion
wraps and cushion cores and are created using VPF[TM], are advanced polymer
cushioning products designed to improve comfort, quality and durability in
upholstered furniture and to replace standard fiberfill. Nexol[TM] foams, also
created using VPF[TM], expand Foamex's ability to meet the special packaging
requirements of sensitive and fragile products such as electronic components,
and replace standard rigid styrene foam. Foamex's fastest growing business,
specialty and technical foams, focuses on developing customized foam
applications for high-growth product markets such as inkjet printer cartridges,
nickel-metal hydride batteries and oxygenators for cardio-pulmonary surgery.
International Expansion. Foamex has positioned itself to take advantage of
global opportunities. In Mexico, Foamex has built a new state-of-the-art
manufacturing facility, which is expected to meet increasing demand and to allow
Foamex to increase market penetration. In Asia, which management believes offers
attractive growth opportunities, Foamex is actively exploring strategic options
to enter the foam market. Additionally, Foamex has
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2
<PAGE>
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created an alliance with Recticel s.a. ("Recticel"), Europe's largest flexible
polyurethane foam manufacturer, which will allow Foamex to better meet the
increasing global needs of its automotive customers.
Additional Operating Cost Savings. Foamex is continuing to build on the
1995 Operational Reorganization which was designed to reduce operating costs and
improve productivity. Foamex has identified additional operating cost savings in
1997 that are expected to result from (i) improved productivity, through-put and
material yields in the manufacturing process, (ii) the full year benefit of
facilities closed during 1996, (iii) the closure of two additional facilities
during 1997 and (iv) the expansion of the Continuous Improvement Process.
1995 Operational Reorganization
In November 1995, Foamex's parent, Foamex International, announced a plan
(the "1995 Operational Reorganization") to focus on its core flexible
polyurethane and advanced polymer foam business, enhance shareholder value and
maximize future profitability through a series of operational improvements,
asset sales and the reduction of long-term debt. In connection with the 1995
Operational Reorganization, Foamex International sold JPS Automotive L.P. ("JPS
Automotive," a sister subsidiary of Foamex), a manufacturer of automotive fabric
and carpet, and Foamex sold Perfect Fit Industries, Inc. ("Perfect Fit"), a
manufacturer of fabric-based home comfort products. These divestitures have
resulted in a decrease of total debt for Foamex International by approximately
$248.4 million as of June 29, 1997.
As part of the 1995 Operational Reorganization, Foamex implemented a plan
to improve its profitability through (i) the realignment of management to
correspond with product groups, (ii) the consolidation of foam production,
fabrication or branch locations resulting in the elimination of 12 facilities, a
reduction of approximately 300 employees representing approximately 7% of the
work force, and an improved utilization of its remaining production capacity,
(iii) the implementation of additional procedures to reduce manufacturing costs,
including process redesign to eliminate non-value added operations, (iv) the
reduction of selling, general and administrative expenses through cost
containment and (v) the reduction of inventory levels through improved
forecasting and the elimination of inventories associated with closed
facilities. As an example of the improved utilization of the remaining
facilities, Foamex increased the average output per pouring plant by 19% from
1995 to 1996, and by approximately 12% for the first six months of 1997 as
compared to the first six months of 1996.
The Refinancing Plan
On June 12, 1997, Foamex's parent, Foamex International, completed a
refinancing plan (the "Refinancing Plan"), which included (i) a cash tender
offer and consent solicitation (the "Tender Offer") pursuant to which Foamex
purchased (a) $99.8 million of the $104.3 million outstanding principal amount
of the Issuers' 91/2% Senior Secured Notes due 2000 (the "Senior Secured
Notes"), (b) $130.1 million of the $135.9 million outstanding principal amount
of the Issuers' 111/4% Senior Notes due 2002 (the "Senior Notes"), (c) $105.5
million of the $125.8 million outstanding principal amount of the Issuers'
117/8% Senior Subordinated Debentures due 2004 (the "Senior Subordinated
Debentures"), (d) substantially all of the $7.0 million principal amount of the
Issuers' 117/8% Senior Subordinated Debentures, Series B due 2004 (the "Series B
Debentures") and (e) all $116.7 million outstanding principal amount of Senior
Secured Discount Debentures due 2004 of Foamex-JPS Automotive L.P. ("FJPS") and
Foamex-JPS Capital Corporation (the "FJPS Discount Debentures," together with
the Senior Secured Notes, the Senior Notes, the Senior Subordinated Debentures
and the Series B Debentures purchased in the Tender Offer, the "Retired Notes");
(ii) the repayment of $5.2 million of borrowings under its then existing credit
facility (the "Existing Credit Facility"); and (iii) the payment of fees and
expenses. In addition, the indentures pursuant to which the Senior Secured
Notes, Senior Notes, Senior Subordinated Debentures and Series B Debentures were
issued were amended to remove substantially all of the restrictive covenants.
Foamex incurred an extraordinary loss on the early extinguishment of debt
associated with the Refinancing Plan of approximately $44.5 million. The
Refinancing Plan was funded by $347.0 million of borrowings under its new credit
facility (the "New Credit Facility") and the net proceeds from the issuance of
$150.0 million principal amount of Old Notes.
The Refinancing Plan was designed to reduce Foamex International's interest
expense and increase its operating and financial flexibility. After giving
effect to the Refinancing Plan, Foamex International reduced total debt net of
cash from $726.2 million at December 31, 1995 to $553.1 million at June 29,
1997. Also, after giving
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<PAGE>
effect to the Refinancing Plan, Foamex International's pro forma interest
expense for the 52 weeks ended June 29, 1997 would have decreased $5.6 million
and, after the retirement of long-term debt with the net proceeds of the
divestitures in 1996, Foamex International's pro forma interest expense for the
same period would have decreased an additional $1.3 million. In addition, the
Refinancing Plan eliminated the FJPS Discount Debentures thereby eliminating
approximately $2.3 million of additional interest expense that would have been
incurred by Foamex International over the next 12 months as compared to the
previous 12 months.
As a result of the Refinancing Plan, Foamex's total long-term debt
increased $150.1 million to $546.3 million, and variable rate debt comprises a
larger percentage of Foamex's overall indebtedness than in the past, and as a
result, future fluctuations in interest rates will have a greater impact on
Foamex's interest expense than in the past. Foamex expects the Refinancing Plan
to result in increased interest expense of approximately $2.5 million in the
second half of 1997 as compared to the first half of 1997, and annualized
increased interest expense of approximately $5.0 million, as compared to the
debt structure prior to the Refinancing Plan, assuming no material changes in
interest rates. Foamex's future interest expense will vary based on a variety of
factors, including fluctuations in interest rates in general.
In addition, Foamex has called for redemption on October 1, 1997
approximately $26.0 million principal amount of its Senior Notes, Senior
Subordinated Debentures and Series B Debentures of the approximately $30.0
million of its outstanding public debt that was not tendered as part of the
Refinancing Plan. The redemption is expected to be funded with borrowings under
the New Credit Facility. In connection with this redemption, Foamex expects to
incur an extraordinary loss on the early extinguishment of debt of approximately
$2.6 million in the fourth quarter of 1997.
Recent Developments
On August 29, 1997, Foamex entered into a definitive agreement to sell its
needlepunch carpeting, tufted carpeting and artificial grass products business,
located in Dalton, Georgia to Bretlin, Inc., a subsidiary of The Dixie Group,
Inc. The sales price is approximately $33.0 million plus the value of inventory.
The transaction is subject to governmental review and the satisfaction of
certain customary terms and conditions. Foamex intends to use the net proceeds
of the sale to reduce long-term debt.
----------
The principal executive offices of Foamex are located at 1000 Columbia
Avenue, Linwood, Pennsylvania 19061 and its telephone number is (610) 859-3000.
----------
The Exchange Offer
<TABLE>
<S> <C>
The Exchange Offer ...... The Issuers are offering to exchange (the "Exchange
Offer") up to $150,000,000 aggregate principal amount
of 97/8% Senior Subordinated Notes due 2007 (the
"New Notes") for up to $150,000,000 aggregate
principal amount of their outstanding 97/8% Senior
Subordinated Notes due 2007 (the "Old Notes"). Upon
consummation of the Exchange Offer, the terms of the
New Notes will be identical in all material respects
(including principal amount, interest rate, maturity and
ranking) to the terms of the Old Notes for which they
may be exchanged pursuant to the Exchange Offer,
except that the New Notes have been registered under
the Securities Act, and, therefore, will not bear legends
restricting their transfer and will not contain certain
terms providing for an increase in the interest rate on
the Old Notes under certain circumstances described in
the Registration Rights Agreement (as defined).
</TABLE>
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<TABLE>
<S> <C>
Minimum Condition ........................ The Exchange Offer is not conditioned upon any
minimum aggregate principal amount of Old Notes
being tendered for exchange.
Expiration Date ........................ The Exchange Offer will expire at Midnight, New York
City time, on November 17, 1997, unless extended (the
"Expiration Date").
Exchange Date ........................... The date of acceptance for exchange for the Old Notes
will be the first business day following the Expiration
Date.
Conditions to the Exchange Offer ......... The obligation of the Issuers to consummate the
Exchange Offer is subject to certain conditions. See
"The Exchange Offer--Conditions." The Issuers
reserve the right to terminate or amend the Exchange
Offer at any time prior to the Expiration Date upon the
occurrence of any such condition.
Withdrawal Rights ........................ Tenders may be withdrawn at any time prior to 5:00
p.m. on the Expiration Date. Any Old Notes not
accepted for any reason will be returned without
expense to the tendering holders thereof as promptly as
practicable after the expiration or termination of the
Exchange Offer.
Procedures for Tendering Old Notes ...... See "The Exchange Offer--Procedures for
Tendering."
Federal Income Tax Consequences ......... The exchange of Old Notes for New Notes by Holders
will not be a taxable exchange for federal income tax
purposes, and Holders should not recognize any
taxable gain or loss or any interest income as a result
of such exchange.
Certain Representations .................. Each Holder desiring to participate in the Exchange
Offer will be required to represent, among other things,
that (i) it is not an "affiliate" (as defined in Rule 405
of the Securities Act) of the Issuers, (ii) it is not
engaged in, and does not intend to engage in, and has
no arrangement or understanding with any person to
participate in, a distribution of the New Notes, and (iii)
it is acquiring the New Notes in the ordinary course of
its business (a holder unable to make the foregoing
representations is referred to as a "Restricted Holder").
</TABLE>
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<TABLE>
<S> <C>
Transfer Restrictions on New Notes ...... Based upon interpretations by the staff of the
Commission, the Issuers believe that New Notes issued
pursuant to the Exchange Offer to Participating
Broker-Dealers may be offered for resale, resold, and
otherwise transferred by a Participating Broker-Dealer
(other than a Restricted Holder) upon compliance with
the prospectus delivery requirements, but without
compliance with the registration requirements, of the
Securities Act. The Issuers have agreed that for a period
of 120 days following consummation of the Exchange
Offer they will make this Prospectus available to
Participating Broker-Dealers for use in connection
with any such resale. During such period of time,
delivery of this Prospectus, as it may be amended or
supplemented, will satisfy the prospectus delivery
requirements of a Participating Broker-Dealer engaged
in market making or other trading activities. See
"Exchange Offer" and "Plan of Distribution". Based
upon interpretations by the staff of the Commission,
the Issuers believe that New Notes issued pursuant to
the Exchange Offer may be offered for resale, resold,
and otherwise transferred by a Holder thereof (other
than a Restricted Holder or a Participating Broker-
Dealer) without compliance with the registration and
prospectus delivery requirements of the Securities Act.
</TABLE>
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<TABLE>
<S> <C>
Effect on Holders of Old Notes ...... As a result of the making of this Exchange Offer, and
upon acceptance for exchange of all validly tendered
Old Notes pursuant to the terms of this Exchange Offer,
the Issuers will have fulfilled a covenant contained in
the Registration Rights Agreement (the "Registration
Rights Agreement") dated as of June 12, 1997 by and
among the Issuers, General Felt Industries, Inc.
("General Felt"), Foamex Fibers, Inc. ("Foamex
Fibers") and the Initial Purchasers, and the Issuers will
have no further obligation to such holders (other than
(x) to the Restricted Holders, (y) to any Holder
prohibited by law or Commission policy from
participating in the Exchange Offer, or (z) to any
Holder required to deliver a prospectus (other than this
Prospectus) in connection with the resale of the New
Notes) to provide for the registration under the
Securities Act of the Old Notes held by them. Holders
of the Old Notes who do not tender their Old Notes in
the Exchange Offer will continue to hold such Old
Notes and will be entitled to all the rights and
limitations applicable thereto under the Indenture
dated as of June 12, 1997, among the Issuers, General
Felt, Foamex Fibers and The Bank of New York, as
trustee (the "Trustee"), relating to the Old Notes and
the New Notes (the "Indenture"). All untendered, and
tendered but unaccepted, Old Notes will continue to be
subject to the restrictions on transfer provided for in the
Old Notes and the Indenture. To the extent that Old
Notes are tendered and accepted in the Exchange Offer,
the trading market, if any, for the Old Notes could be
adversely affected. See "Risk Factors--Consequences
of Failure to Exchange."
</TABLE>
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The New Notes
<TABLE>
<S> <C>
Issuers ..................... Foamex L.P., a Delaware limited partnership and
Foamex Capital Corporation, a Delaware corporation.
Maturity Date ............... June 15, 2007.
Interest Payment Dates ...... The New Notes bear interest at the rate of 97/8% per
annum, payable semi-annually in cash on June 15 and
December 15 of each year, commencing December 15,
1997.
Ranking ..................... The New Notes are general unsecured obligations of the
Issuers, rank subordinate in right of payment to all Senior
Debt, rank pari passu in right of payment to all Pari Passu
Debt and rank senior in right of payment to all existing
and future subordinated indebtedness of the Issuers. The
Note Guarantees are general unsecured obligations of the
Subsidiary Guarantors, rank subordinate in right of
payment to all Senior Debt of the Subsidiary Guarantors,
rank pari passu in right of payment to all Pari Passu Debt
of the Subsidiary Guarantors and rank senior in right of
payment to all existing and future subordinated
indebtedness of the Subsidiary Guarantors. As of June 29,
1997, the New Notes would have been subordinated to
approximately $370.1 million of Senior Debt and
pari passu with approximately $27.4 million of Pari
Passu Debt. Also as of June 29, 1997, the maximum
amount of Senior Debt that could have been incurred
pursuant to the most restrictive debt incurrence covenant
applicable to the Company was $221.0 million.
Optional Redemption ......... The New Notes are redeemable at the option of the
Issuers, in whole or in part, at any time on or after June
15, 2002 in cash at the redemption prices set forth
herein, plus accrued and unpaid interest and Liquidated
Damages, if any, thereon to the date of redemption. In
addition, at any time prior to June 15, 2000, the Issuers
may on any one or more occasions redeem up to 35%
of the initially outstanding aggregate principal amount
of New Notes at a redemption price equal to 109.875%
of the principal amount thereof, plus accrued and
unpaid interest and Liquidated Damages, if any,
thereon to the redemption date, with the net proceeds
of one or more Public Equity Offerings; provided that,
in each case, at least 65% of the initially outstanding
aggregate principal amount of New Notes remains
outstanding immediately after the occurrence of any
such redemption. See "Description of Notes--
Optional Redemption."
</TABLE>
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<PAGE>
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<TABLE>
<S> <C>
Change of Control ...... Upon the occurrence of a Change of Control, each
holder of New Notes will have the right to require the
Issuers to repurchase all or any part of such holder's
New Notes at an offer price in cash equal to 101% of
the aggregate principal amount thereof, plus accrued
and unpaid interest and Liquidated Damages, if any,
thereon to the date of purchase. See "Description of
Notes--Repurchase at the Option of Holders--Change
of Control." See "Risk Factors--Limitations on
Ability to Make Change of Control Payment."
Note Guarantees ......... The New Notes are jointly and severally fully and uncon-
ditionally guaranteed on a senior subordinated basis by
each of General Felt and Foamex Fibers. The New
Notes will also be guaranteed by all those Restricted
Subsidiaries (as defined) of the Issuers required in the
future to execute a Note Guarantee pursuant to the
provisions of the Indenture described under
"Description of the Notes--Additional Guarantees"
and any other Subsidiary that executes a Note
Guarantee (together, the "Subsidiary Guarantors").
The obligations of any Subsidiary Guarantor under its
Note Guarantee is limited to an amount that would
cause such Note Guarantee not to constitute a
fraudulent conveyance under applicable law. See "Risk
Factors--Certain Creditors' Rights Considerations."
Certain Covenants ...... The Indenture contains certain covenants that limit,
among other things, the ability of the Issuers to: (i) pay
dividends, redeem capital stock or make certain other
restricted payments or investments, (ii) incur
additional indebtedness or issue preferred equity
interests, (iii) merge, consolidate or sell all or
substantially all of its assets, (iv) create liens on assets
and (v) enter into certain transactions with affiliates or
related persons. See "Description of Notes--Certain
Covenants."
</TABLE>
For a discussion of certain factors that should be considered by
prospective participants in connection with the Exchange Offer and the Notes,
see "Risk Factors."
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<PAGE>
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SUMMARY HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The following table presents summary historical and pro forma consolidated
financial information of Foamex, for the fiscal years ended January 3, 1993,
January 2, 1994, January 1, 1995, December 31, 1995 and December 29, 1996, which
have been derived from the audited consolidated financial statements of Foamex,
and for the twenty-six week periods ended June 30, 1996 and June 29, 1997, which
have been derived from the unaudited condensed consolidated financial statements
of Foamex. The pro forma consolidated financial information gives effect to the
Refinancing Plan as if it had occurred on January 1, 1996 for fiscal 1996
statements of operations data purposes and on December 30, 1996 for fiscal 1997
statements of operations data. The pro forma financial information does not
purport to represent what Foamex's results would have actually been if the
Refinancing Plan had occurred at the dates indicated, nor does such information
purport to project the results of Foamex for any future period. The summary
financial information should be read in conjunction with the consolidated and
the condensed consolidated financial statements and related notes thereto of
Foamex included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
Fiscal Year (1)(2) Six Months ended June
---------------------------------------------------------------- ---------------------
1992 1993(3) 1994(4) 1995(5) 1996 1996(2) 1997
(In thousands, except ratios)
<S> <C> <C> <C> <C> <C> <C> <C>
Statements of Operations Data:
Net sales .................. $501,751 $ 684,310 $833,660 $ 862,834 $ 926,351 $459,578 $ 469,007
Gross profit ............... 69,887 93,704 142,395 100,749 153,232 74,198 87,577
Selling, general and
administrative
expenses .................. 29,931 48,403 57,059 63,466 56,778 27,127 31,331
Restructuring and other
charges (credits) ......... -- 7,400 -- 39,249 (6,415) -- --
Operating income (loss) ...... 39,956 37,901 85,336 (1,966) 102,869 47,071 56,246
Income (loss) from
continuing operations ...... 22,011 (7,926) 38,011 (48,126) 53,661 23,166 32,600
Other Data:
EBDAIT(6) .................. $ 58,200 $ 66,773 $107,444 $ 77,593 $ 117,586 $58,005 $ 66,547
Cash flow from operating
activities .................. 37,232 21,263 50,285 27,336 36,180 13,881 (2,187)
Cash flow from investing
activities .................. (23,457) (211,956) (64,478) (30,554) 22,750 (7,299) (110,020)
Cash flow from financing
activities .................. (1,668) 173,188 30,234 (16,163) (38,600) (4,782) 95,747
Gross profit margin ......... 13.9% 13.7% 17.1% 11.7% 16.5% 16.1% 18.7%
EBDAIT margin(7) ............ 11.6 9.8 12.9 9.0 12.7 12.6 14.2
Capital expenditures ......... $ 15,243 $ 21,270 $ 21,201 $ 19,726 $ 23,509 $ 7,798 $ 16,369
Ratio of earnings to fixed
charges(8) .................. 2.12x --(9) 1.94x --(9) 2.31 2.19x 2.54x
Pro Forma Data:
Cash interest expense(10) ... -- -- -- -- $ 46,013 -- $ 22,397
Ratio of EBDAIT to cash
interest expense(11) ...... -- -- -- -- 2.56x -- 2.97x
Ratio of net debt to LTM
EBDAIT(12) .................. -- -- -- -- -- -- 4.33x
Ratio of earnings to fixed
charges(8) .................. -- -- -- -- 2.06x -- 2.31x
</TABLE>
<TABLE>
<CAPTION>
As of June 29, 1997
-------------------
<S> <C>
Balance Sheet Data (at period end):
Cash and cash equivalents .......................................................................... $ 4,508
Total assets ......................................................................................... 600,694
Long-term debt ...................................................................................... 537,951
</TABLE>
(footnotes on following page)
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Notes to Summary Historical and Pro Forma Consolidated Financial Information
(1) Foamex has a 52-53 week fiscal year ending on the Sunday closest to the end
of the calendar year. Each fiscal year presented was 52 weeks with the
exception of 1992, which was 53 weeks.
(2) Fiscal years 1993 through 1995 and the twenty-six week period ended June
30, 1996 have been restated for discontinued operations resulting from the
sale of Perfect Fit. In addition, fiscal years 1994 and 1995 and the
twenty-six week period ended June 30, 1996 have been restated to reflect
the contribution of Foamex Latin America, Inc. and its subsidiaries
("Foamex Mexico") to Foamex from Foamex International because the
contribution was accounted for in a manner similar to a pooling of
interests because the entities were under common control.
(3) Includes the results of operations of General Felt and Great Western Foam
Products Corporation and certain related entities and assets (collectively
"Great Western") from their respective dates of acquisition of March 23,
1993 and May 1, 1993, and thus may not be comparable to other periods.
Great Western was subsequently merged into Foamex.
(4) Includes the operations of Foamex Mexico from its date of acquisition of
March 31, 1994, and thus may not be comparable to other periods. See Note
2 above.
(5) Includes results of operations of Foamex Fibers from its date of
acquisition of April 13, 1995, and thus may not be comparable to other
periods.
(6) EBDAIT consists of earnings before depreciation, amortization, interest,
income taxes and other non-cash or non-recurring items. EBDAIT is not
intended to represent cash flow from operations as defined by generally
accepted accounting principles ("GAAP") and should not be considered as an
alternative to net income as an indicator of operating performance or to
cash flows as a measure of liquidity. In fiscal years 1992, 1993, 1995 and
1996, there were additional non-cash or non-recurring items of
approximately $3.3 million, $7.4 million, $56.7 million and $(6.4) million,
respectively. The Company believes that EBDAIT is a standard measure
commonly reported and widely used by analysts, investors and other
interested parties and further believes that trends in EBDAIT are similar
to trends in operating income, excluding restructuring charges. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." Accordingly, this information has been disclosed herein to
permit a more complete comparative analysis of the Company's operating
performance relative to other companies in the industry. However, not all
companies calculate EBDAIT using the same methods; therefore, the EBDAIT
figures set forth above may not be comparable to EBDAIT reported by other
companies. Certain covenants contained in the New Credit Facility are based
upon measures similar to EBDAIT.
(7) EBDAIT Margin is calculated by dividing EBDAIT by net sales. The Company
believes that EBDAIT Margin is a standard measure commonly reported and
widely used by analysts, investors and other interested parties.
Accordingly, this information has been disclosed herein to permit a more
complete comparative analysis of the Company's operating performance
relative to other companies in the industry. However, see Note 6 above.
(8) For purposes of computing this ratio, earnings consist of income
(loss) before income taxes and extraordinary items and fixed charges,
adjusted to exclude capitalized interest. Fixed charges consist of
interest expense, including amounts capitalized, and the portion of
operating lease rental expense that is representative of the interest
factor (deemed to be one-third of operating lease rental expense).
(9) Earnings were insufficient to cover fixed charges by approximately $8.0
million in fiscal year 1993 and approximately $47.0 million in fiscal year
1995. Earnings before fixed charges for the 1993 and 1995 fiscal years
were reduced by non-cash expenses consisting principally of depreciation
and amortization of approximately $21.7 million and $22.9 million,
respectively.
(10) Includes interest on the Notes and the New Credit Facility and the
application of the net proceeds thereof. (11) Ratio of EBDAIT to cash
interest expense is calculated by dividing EBDAIT by cash interest expense.
The Company believes that the Ratio of EBDAIT to cash interest expense is a
standard measure commonly reported and widely used by analysts, investors
and other interested parties. Accordingly, this information has been
disclosed herein to permit a more complete comparative analysis of the
Company's operating performance relative to other companies in the
industry. However, see Note 6 above.
(12) Ratio of net debt to LTM EBDAIT is calculated by subtracting cash and cash
equivalents from total debt and dividing the result by EBDAIT for the prior
12 months. The Company believes that the ratio of net debt to LTM EBDAIT is
a standard measure commonly reported and widely used by analysts, investors
and other interested parties. Accordingly, this information has been
disclosed herein to permit a more complete comparative analysis of the
Company's operating performance relative to other companies in the
industry. However, see Note 6 above.
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RISK FACTORS
In addition to the other information contained in this Prospectus,
investors should consider carefully the following factors, which may be
generally applicable to the Old Notes as well as the New Notes.
Consequences of Failure to Exchange
Holders of Old Notes who do not exchange their Old Notes for New Notes
pursuant to the Exchange Offer will continue to be subject to the restrictions
on transfer of such Old Notes as set forth in the legend thereon as a
consequence of the issuance of the Old Notes pursuant to exemptions from, or in
transactions not subject to, the registration requirements of the Securities Act
and applicable state securities laws. In general, the Old Notes may not be
offered or sold, unless registered under the Securities Act and applicable state
securities laws, or pursuant to an exemption therefrom. Except under certain
limited circumstances, the Issuers do not intend to register the Old Notes under
the Securities Act. To the extent Old Notes are tendered and accepted in the
Exchange Offer, the trading market, if any, for the Old Notes not tendered and
the price at which they may be sold, could be adversely affected. See "The
Exchange Offer."
Substantial Leverage
As a result of the Refinancing Plan, Foamex's total long-term debt as of
June 29, 1997 increased by $150.1 million, and Foamex's pro forma interest
expense for the 52 weeks ended June 29, 1997 would have increased by $5.2
million. At June 29, 1997, Foamex had long-term debt of $538.0 million, and
partners' equity (deficit) of ($118.2) million. For 1996, Foamex's ratio of
earnings to fixed charges was 2.31 to 1 and, on a pro forma basis after giving
effect to the Refinancing Plan, Foamex's ratio of earnings to fixed charges
would have been 2.06 to 1. For the twenty-six week period ended June 29, 1997,
Foamex's ratio of earnings to fixed charges was 2.54 to 1 and, on a pro forma
basis after giving effect to the Refinancing Plan, Foamex's ratio of earnings to
fixed charges would have been 2.31 to 1.
Foamex will require substantial amounts of cash to fund scheduled payments
of principal and interest on its outstanding indebtedness as well as future
capital expenditures and any increased working capital requirements. Foamex's
obligation to make principal payments on its debt for the twenty-six weeks ended
December 1997 and for each of the next five years is approximately $4.2 million,
$11.9 million, $20.9 million, $31.3 million, $31.3 million and $32.7 million,
respectively. Such principal payment obligation may be accelerated in whole or
in part in connection with certain asset sales, upon certain transactions
constituting a "change of control" as defined under the applicable debt
instrument, upon certain debt or equity offerings, as a result of certain excess
cash flows and upon the occurrence of an "event of default" as defined under the
applicable debt instrument. See "Description of Certain Debt Instruments--New
Credit Facility." Foamex's ability to generate such cash flow in the future will
depend on its financial and operating performance, which, in turn, is subject to
prevailing economic conditions and to financial, business and other factors
beyond its control. Also, the Indenture and the New Credit Facility restrict,
among other things, Foamex's ability to incur additional indebtedness and grant
liens on its properties. The restrictions imposed by the Indenture and the New
Credit Facility, together with Foamex's leverage, could limit Foamex's ability
to respond to changing market and economic conditions, provide for capital
expenditures and take advantage of business opportunities. Foamex believes that
it will have sufficient cash flow from operations and available borrowings to
meet its debt service requirements. However, if Foamex's cash flow and capital
resources are insufficient to fund its debt service obligations, Foamex may be
forced to refinance all or a portion of its indebtedness or sell assets. There
can be no assurance that Foamex would be able to refinance its existing
indebtedness or sell assets on terms that are commercially reasonable or at all.
Partners' Deficit
As of June 29, 1997, Foamex had a partners' deficit of approximately $118.2
million. There can be no assurance as to when or if such deficit will be
eliminated. Foamex believes that such deficit will not have a material adverse
effect on its liquidity and financial condition. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
12
<PAGE>
Price and Availability of Raw Materials
In 1996, raw materials accounted for approximately 74% of the manufacturing
costs of Foamex. The two principal chemicals used in the manufacture of flexible
polyurethane foam, toulene diisocyanate ("TDI") and polyol, accounted for
approximately 50% of raw material costs. ARCO Chemical Company, BASF Corporation
and The Dow Chemical Company are among Foamex's largest suppliers of raw
materials. Foamex generally has alternative chemical suppliers for each major
raw material and Foamex believes that it could find alternative sources of
supply should it cease doing business with any of its major suppliers. The price
of TDI and polyol is influenced by demand, manufacturing capacity and oil and
natural gas prices.
Historically, the price of raw materials has been cyclical and volatile,
and Foamex's principal suppliers of raw materials used in the manufacture of
flexible polyurethane foam have increased the price of raw materials several
times since September 1994. Significant increases in raw material prices could
have a material adverse effect on the financial condition or results of
operations of Foamex. Foamex attempts to offset raw material cost increases
through selling price increases; however, there can be no assurance that Foamex
will be successful in implementing selling price increases or that competitive
pricing pressure will not require Foamex to adjust selling prices. Results of
operations have been and could be adversely affected by delays in implementing,
or the inability of Foamex to implement, selling price increases to offset raw
material cost increases. For example, Foamex estimates that in 1995 the amount
of net unrecovered raw material cost increases was approximately $25.0 million.
The principal suppliers to the foam industry announced raw material price
increases effective April 1997. The impact of the raw material cost increases
were not significant during the second quarter of 1997. However, Foamex
estimates an unfavorable impact for the raw material cost increases, net of sale
price increases to customers, of between $1.5 million to $3.0 million during the
third quarter of 1997. There can be no assurance that chemical suppliers will
not increase raw material costs in the future or that Foamex will be able to
implement selling price increases to offset any such raw material cost
increases.
Subordination; Rights of Senior Lenders
The Notes are subordinated to all Senior Debt including the indebtedness
under the New Credit Facility. The Notes will also be structurally subordinated
to creditors (including trade creditors) of Foamex's subsidiaries that are not
guarantors of the Notes, including Foamex Canada Inc. and its subsidiaries
("Foamex Canada"), Foamex Mexico and Foamex Asia, Inc. and its subsidiaries
("Foamex Asia"). The incurrence of additional indebtedness by Foamex's
Restricted Subsidiaries (as defined) is restricted by the Indenture. See
"Description of Notes--Certain Covenants--Incurrence of Indebtedness and
Issuance of Preferred Stock." By reason of the subordination of the Notes, in
the event of insolvency, bankruptcy, liquidation, reorganization, dissolution or
other winding-up of the Issuers or upon certain defaults with respect to Senior
Debt, creditors who are holders of Senior Debt must be paid in full before the
holders of the Notes may be paid. As of June 29, 1997, Foamex had approximately
$370.1 million of Senior Debt.
The assets of the Issuers may be insufficient to pay the amount due on the
Notes in the event of any insolvency, bankruptcy, or similar event of default.
Interest Rate Fluctuations
Variable rate debt comprises a larger percentage of the Company's overall
indebtedness than prior to the consummation of the Refinancing Plan, and, as a
result, future fluctuation in interest rates will have a greater impact on the
Company's interest expense than in the past. In addition, as a result of an
interest rate swap, the business of Foamex will be significantly more sensitive
to prevailing interest rates than under the terms of its fixed rate
indebtedness. There can be no assurance that the variable interest payments by
Foamex will not increase significantly in the future. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
Certain Creditor's Rights Considerations
The Exchange Offer and the Refinancing Plan may be subject to review under
relevant federal and state fraudulent conveyance laws if a bankruptcy,
reorganization or rehabilitation case or a lawsuit (including in circumstances
where bankruptcy is not involved) were ever commenced by or on behalf of unpaid
creditors of the Issuers or the Subsidiary Guarantors, as the case may be, at
some future date. These laws vary among the various jurisdictions. In general,
under these laws, if a court were to find that, at the time an obligation (such
as the Old
13
<PAGE>
Notes or the New Notes) was incurred or a security interest was granted, either
(a) such obligation was incurred or security interest granted with the intent
of hindering, delaying or defrauding creditors or (b) the entity incurring the
obligation or granting such security interest received less than reasonably
equivalent or fair value or consideration in exchange for the incurrence of
such obligation or the granting of such security interest and (i) was insolvent
or was rendered insolvent by reason thereof, (ii) was engaged in a business or
transaction for which its remaining assets constituted unreasonably small
capital, (iii) intended to incur, or believed, or reasonably should have
believed, that it would incur, debts beyond its ability to pay such debts as
they matured (as all of the foregoing terms are defined in or interpreted under
the fraudulent conveyance statutes) or (iv) such entity was a defendant in an
action for money damages, or had a judgment for money damages docketed against
it (if, in either case, after final judgment, the judgment is unsatisfied) (a
"Fraudulent Conveyance"), such court could impose legal and equitable remedies,
including (x) subordination of the obligation to presently existing and future
indebtedness of the entity, (y) avoidance of the issuance of the obligation or
granting of the security interest, and direction of the repayment of any
amounts paid from the proceeds thereof to a fund for the benefit of the
entity's creditors or (z) taking of other action detrimental to the holders of
the Notes.
The measures of insolvency for purposes of determining whether a Fraudulent
Conveyance occurred would vary depending upon the laws of the relevant
jurisdiction and upon the valuation assumptions and methodology applied by the
court. Generally, however, a company would be considered insolvent for purposes
of the foregoing if the sum of the company's debts, including contingent
unliquidated and unmatured liabilities, is greater than all the company's
property at a fair valuation, or if the present fair saleable value of the
company's assets is less than the amount that would be required to pay the
probable liability on its existing debts as they become absolute and matured.
Pursuant to the terms of the Indenture, the obligations of any Subsidiary
Guarantor under its Note Guarantee is limited to an amount that would cause such
Note Guarantee not to constitute a fraudulent conveyance under applicable law.
Although the Issuers and the Subsidiary Guarantors are unable to predict how a
court would value a Subsidiary Guarantor on the date of issuance of the New
Notes and/or the Old Notes, the Issuers and the Subsidiary Guarantors view it as
likely that a court would limit the amount of the Note Guarantee of Foamex
Fibers to an amount that is substantially less than the outstanding principal
amount of the Notes, and could limit the amount of the Note Guarantee of General
Felt.
The Issuers believe that because the Issuers received cash in an amount
equal to the principal amount less discounts and commissions upon issuance, the
Issuers received reasonably equivalent and fair value at the time the Old Notes
were issued. The Issuers also believe that they will receive reasonably fair and
equivalent value at the time the New Notes are issued, by virtue of the
surrender of a like principal amount of Old Notes. It is possible, however, that
a court could conclude differently. Notwithstanding such possibility, however,
the Company believes that at the time of, or as a result of, the issuance of the
New Notes, the Company (i) will not be insolvent or rendered insolvent under the
foregoing standards, (ii) will not be engaged in a business or transaction for
which its remaining assets constitute unreasonably small capital, (iii) does not
intend to incur, and does not believe that it will or would incur, debts beyond
its ability to pay such debts as they mature and (iv) will have sufficient
assets to satisfy any probable money judgment against it in any pending actions.
Consequently, the Company believes that even if one or more elements of the
transaction were deemed to involve the incurrence of an obligation or the grant
of a security interest for less than reasonably equivalent or fair value, a
Fraudulent Conveyance would not occur. The Company's beliefs with regard to the
solvency of the Company are based in part on the Company's operating history and
analysis of internal cash flow projections, estimated values of assets and
liabilities of the Company at the time of the Exchange Offer and an opinion as
to the solvency of the Company received as of the consummation of the
Refinancing Plan. There can be no assurance, however, that a court passing on
these issues would adopt the same methodology or assumption or arrive at the
same conclusions.
Control of Foamex by Trace Holdings
FMXI, Inc. ("FMXI"), the managing general partner of Foamex and a
wholly-owned subsidiary of Foamex International, controls the management and
operations of Foamex. Trace International Holdings, Inc. ("Trace Holdings"),
directly and indirectly through Trace Foam Company, Inc. ("Trace Foam"), a
wholly-owned subsidiary, owns in excess of 40% of the outstanding common stock
of Foamex International. In addition, Trace Foam owns a 1% non-managing general
partnership interest in Foamex. Andrea Farace, Chairman and Chief Executive
Officer of Foamex, Foamex International and FMXI is also President of Trace
Holdings. Marshall S. Cogan, Vice Chairman
14
<PAGE>
of the Board of Foamex, Foamex International, FMXI and Chairman of Foamex
International's Executive Committee, owns or has voting control over a majority
of the capital stock of Trace Holdings. Foamex and Trace Foam have entered into
a management services agreement pursuant to which Trace Foam provides Foamex
with certain administrative and advisory services. As a result, Trace Holdings
is expected to have the ability to direct the activities of Foamex. See
"Management," "Security Ownership of Certain Beneficial Owners," "Certain
Relationships and Related Transactions" and "Description of the Partnership
Agreement."
Reliance on Major Customers
Foamex's five largest customers together accounted for approximately 24.3%
of Foamex's net sales in fiscal year 1996. The loss, or a substantial decrease
in the amount, of purchases by any of Foamex's major customers could adversely
affect Foamex's financial position and results of operations. See
"Business--Customers."
Environmental Liabilities and Regulations
The past and present business operations of Foamex and the past and present
ownership and operation of real property by Foamex 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 and the remediation of environmental contamination. As a
result, Foamex is involved from time to time in administrative and judicial
proceedings and inquiries relating to environmental matters. Foamex is currently
remediating soil and groundwater contamination in excess of state standards at
several of its current and former facilities, and is either removing or
conducting permanent in place closure of its underground storage tanks ("USTs")
pursuant to federal law. Further, Foamex has been designated a Potentially
Responsible Party by the United States Environmental Protection Agency with
respect to 13 sites. Based on information available at this time with respect to
potential liability involving these facilities and sites, and in view of
indemnification by Trace Holdings and Recticel Foam Corporation ("RFC")
associated with the partnership formation of Foamex, Foamex believes that any
such liability would not have a material adverse effect on its financial
position or results of operations. If management's assessment of Foamex's
liability with respect to these facilities and sites is incorrect, such
liabilities could have a material adverse effect on Foamex.
Foamex cannot predict what environmental legislation or regulations will be
enacted in the future, how existing or future laws or regulations will be
administered or interpreted or what environmental conditions may be found to
exist on its properties. Compliance with more stringent laws or regulations, as
well as more vigorous enforcement policies of the regulatory agencies or
stricter interpretation of existing laws, and discovery of new conditions may
require additional expenditures by Foamex, some of which may be material. See
"Business--Environmental Matters" and "Business--Legal Proceedings."
Litigation
As of August 8, 1997, Foamex and Trace Holdings were two of multiple
defendants in actions filed on behalf of approximately 5,000 recipients of
breast implants in various United States federal and state courts and one
Canadian provincial court. Some of these actions allege substantial damages, but
most of these actions allege unspecified damages for personal injuries of
various types. Three of these cases seek to allege claims on behalf of all
breast implant recipients or other allegedly affected parties, but no class has
been approved or certified by the court. In addition, three cases have been
filed alleging claims on behalf of approximately 700 residents of Australia, New
Zealand, England and Ireland. Foamex believes that the number of suits and
claimants may increase.
During 1995, Foamex and Trace Holdings were granted summary judgments and
dismissed as defendants from all cases in the federal courts of the United
States and the state courts of California. Appeals for these decisions were
withdrawn and the decisions are final.
Although breast implants do not contain foam, certain silicone gel implants
were produced using a polyurethane foam covering fabricated by independent
distributors or fabricators from bulk foam purchased from Foamex or Trace
Holdings. Neither Foamex nor Trace Holdings recommended, authorized, or approved
the use of its foam for these purposes. Foamex is indemnified by Trace Holdings
for any such liabilities relating to foam manufactured prior to October 1990.
Although Trace Holdings has paid Foamex's litigation expenses to date pursuant
to such indemnification and Foamex believes Trace Holdings likely will be in a
position to continue to pay such expenses, there can be no absolute assurance
that Trace Holdings will be able to provide such
15
<PAGE>
indemnification. While it is not feasible to predict or determine the outcome
of these actions, based on Foamex's present assessment of the merits of pending
claims, after consultation with the general counsel of Trace Holdings, and
without taking into account the indemnification provided by Trace Holdings, the
coverage provided by Trace Holdings' and Foamex's liability insurance and the
potential indemnity from the manufacturers of polyurethane foam covered breast
implants, Foamex believes that the disposition of matters that are pending or
that may reasonably be anticipated to be asserted should not have a material
adverse effect on either Foamex's or Trace Holdings' consolidated financial
position or results of operations. If Foamex's assessment of liability with
respect to these actions is incorrect, such actions could have a material
adverse effect on Foamex.
Foamex and its subsidiaries are involved in a number of litigation matters
which have arisen in the ordinary course of business. Foamex believes that the
outcome of these legal proceedings will not have a material adverse effect on
Foamex's financial condition or results of operations. See "Business--Legal
Proceedings."
Limitations on Ability to Make Change of Control Payment
The Indenture requires the Issuers, in the event of a Change of Control, to
make an offer to repurchase the Notes at 101% of the principal amount thereof,
plus accrued and unpaid interest and Liquidated Damages, if any, to the date of
repurchase. Certain events involving a Change of Control may be an event of
default under the New Credit Facility or other indebtedness of the Issuers that
may be incurred in the future. Moreover, the exercise by the holders of the
Notes of their right to require the Issuers to repurchase the Notes may cause a
default under the New Credit Facility or such other indebtedness even if the
Change of Control does not constitute an event of default. Additionally, there
can be no assurance that the Issuers will have the financial resources necessary
to repurchase the Notes upon a Change of Control. In addition, the obligation to
make an offer to repurchase upon the occurrence of a Change of Control may be
waived by the holders of a majority of the outstanding principal amount of the
Notes. See "Description of Notes--Repurchase at the Option of Holders--Change of
Control."
Competition
The flexible polyurethane foam market in which Foamex operates is highly
competitive. Some of Foamex's competitors are larger than Foamex and may have
greater financial and other resources available to them and there can be no
assurance that Foamex can compete successfully with such other companies. See
"Business--Competition."
Absence of Public Market for the New Notes
There is no public market for the New Notes, and the New Notes will not be
listed on a securities exchange and they may trade at a discount from their
principal amount, depending upon a number of factors, including the market for
similar securities, prevailing interest rates and the financial condition of the
Issuers. Accordingly, no assurance can be given that a holder of New Notes will
be able to sell such New Notes in the future or that any such sale will be at a
price equal to or higher than the price paid for such New Notes in the initial
resales by the Initial Purchasers. The Issuers have been advised by each of the
Initial Purchasers of the New Notes that they currently intend to make a market
in the New Notes; however, the Initial Purchasers are not obligated to do so and
may discontinue doing so without notice at any time. Accordingly, no assurance
can be given that a liquid trading market for the New Notes will develop or be
sustained. See "Plan of Distribution."
16
<PAGE>
REFINANCING PLAN
On June 12, 1997, Foamex's parent, Foamex International, completed the
Refinancing Plan, which included (i) the Tender Offer pursuant to which Foamex
purchased (a) $99.8 million of the $104.3 million outstanding principal amount
of the Senior Secured Notes, (b) $130.1 million of the $135.9 million
outstanding principal amount of the Senior Notes, (c) $105.5 million of the
$125.8 million outstanding principal amount of the Senior Subordinated
Debentures, (d) substantially all of the $7.0 million outstanding principal
amount of the Series B Debentures and (e) all $116.7 million outstanding
principal amount of the FJPS Discount Debentures; (ii) the repayment of $5.2
million of borrowings under the Existing Credit Facility; and (iii) the payment
of fees and expenses. In addition, the indentures pursuant to which the Senior
Secured Notes, Senior Notes, Senior Subordinated Debentures and Series B
Debentures were issued were amended to remove substantially all of the
restrictive covenants. Foamex incurred an extraordinary loss on the early
extinguishment of debt associated with the Refinancing Plan of approximately
$44.5 million. The Refinancing Plan was funded by $347.0 million of borrowings
under the New Credit Facility and the net proceeds from the issuance of $150.0
million principal amount of Old Notes.
The Refinancing Plan was designed to reduce Foamex International's interest
expense and increase its operating and financial flexibility. After giving
effect to the Refinancing Plan, Foamex International reduced total debt net of
cash from $726.2 million at December 31, 1995 to $553.1 million at June 29,
1997. Also, after giving effect to the Refinancing Plan, Foamex International's
pro forma interest expense for the 52 weeks ended June 29, 1997 would have
decreased $5.6 million and, after the retirement of long-term debt with the net
proceeds of the divestitures in 1996, Foamex International's pro forma interest
expense for the same period would have decreased an additional $1.3 million. In
addition, the Refinancing Plan eliminated the FJPS Discount Debentures thereby
eliminating approximately $2.3 million of additional interest expense that would
have been incurred by Foamex International over the next 12 months as compared
to the previous 12 months.
As a result of the Refinancing Plan, Foamex's total long-term debt
increased $150.1 million to $546.3 million, and variable rate debt comprises a
larger percentage of Foamex's overall indebtedness than in the past, and as a
result, future fluctuations in interest rates will have a greater impact on
Foamex's interest expense than in the past. Foamex expects the Refinancing Plan
to result in increased interest expense of approximately $2.5 million in the
second half of 1997 as compared to the first half of 1997, and annualized
increased interest expense of approximately $5.0 million, as compared to the
debt structure prior to the Refinancing Plan, assuming no material changes in
interest rates. Foamex's future interest expense will vary based on a variety of
factors, including fluctuations in interest rates in general.
In addition, Foamex has called for redemption on October 1, 1997
approximately $26.0 million principal amount of its Senior Notes, Senior
Subordinated Debentures and Series B Debentures of the approximately $30.0
million of its outstanding public debt that was not tendered as part of the
Refinancing Plan. The redemption is expected to be funded with borrowings under
the New Credit Facility. In connection with this redemption, Foamex expects to
incur an extraordinary loss on the early extinguishment of debt of approximately
$2.6 million in the fourth quarter of 1997.
In connection with the consummation of the Refinancing Plan, FJPS and its
general partner FJGP Inc., were merged into Foamex International. As a result,
the partners of Foamex are Foamex International, with a 98% limited partnership
interest, FMXI, a wholly-owned subsidiary of Foamex International, with a 1%
managing general partnership interest, and Trace Foam, with a 1% non-managing
general partnership interest. In addition, two intercompany promissory notes
(one of Foamex International and one of FJPS) payable to Foamex were distributed
to Foamex's partners, the tax sharing agreement, the tax distribution advance
agreement and the management services agreement were amended and Trace Holding's
promissory note payable to Foamex was amended. See "Certain Relationships and
Related Transactions."
USE OF PROCEEDS
Foamex will not receive any cash proceeds from the issuance of the New
Notes offered hereby. In consideration for issuing the New Notes as described in
this Prospectus, Foamex will receive in exchange Old Notes in like principal
amount. The Old Notes surrendered in exchange for the New Notes will be retired
and cancelled and cannot be reissued. Accordingly, the issuance of the New Notes
will not result in any change in the indebtedness of Foamex.
17
<PAGE>
CAPITALIZATION
The following table sets forth the cash and cash equivalents and the
capitalization of Foamex as of June 29, 1997. Consummation of the Exchange Offer
will not change Foamex's capitalization. This table should be read in
conjunction with the consolidated and the condensed consolidated financial
statements and related notes thereto of Foamex included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
As of June 29, 1997
-------------------
(In thousands)
<S> <C>
Cash and cash equivalents ....................................... $ 4,508
==========
Short-term borrowings and current portion of long-term debt ...... $ 12,311
Long-term debt
91/2% Senior Secured Notes ....................................... 4,523
111/4% Senior Notes ............................................. 5,825
117/8% Senior Subordinated Debentures(1) ........................ 20,224
117/8% Series B Debentures ....................................... 45
New Credit Facility ............................................. 338,900
97/8% Senior Subordinated Notes ................................. 150,000
Other(2) ......................................................... 18,434
----------
Total long-term debt .......................................... 537,951
Partners' equity (deficit) ....................................... (118,217)
----------
Total capitalization .......................................... $ 432,045
==========
</TABLE>
- ----------
(1) Net of unamortized debt discount of approximately $0.1 million.
(2) Net of unamortized debt discount of approximately $1.0 million.
18
<PAGE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION OF FOAMEX
The following table presents selected historical consolidated financial
information of Foamex, for the fiscal years ended January 3, 1993, January 2,
1994, January 1, 1995, December 31, 1995 and December 29, 1996, which have been
derived from the audited consolidated financial statements of Foamex, and for
the twenty-six week periods ended June 30, 1996 and June 29, 1997, which have
been derived from the unaudited condensed consolidated financial statements of
Foamex. The selected historical consolidated financial information should be
read in conjunction with the consolidated and the condensed consolidated
financial statements and related notes thereto of Foamex included elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
Fiscal Year (1)(2) Six Months ended June
----------------------------------------------------------- ---------------------
1992 1993(3) 1994(4) 1995(5) 1996 1996(2) 1997
(In thousands, except ratios)
<S> <C> <C> <C> <C> <C> <C> <C>
Statements of Operations Data:
Net sales ........................... $501,751 $ 684,310 $833,660 $ 862,834 $926,351 $ 459,578 $ 469,007
Gross profit ........................ 69,887 93,704 142,395 100,749 153,232 74,198 87,577
Selling, general and administrative
expenses ........................ 29,931 48,403 57,059 63,466 56,778 27,127 31,331
Restructuring and other charges
(credits) ........................ -- 7,400 -- 39,249 (6,415) -- --
-------- --------- -------- --------- -------- --------- ---------
Operating income (loss) ............ 39,956 37,901 85,336 (1,966) 102,869 47,071 56,246
Interest and debt issuance expense 18,178 47,375 41,532 44,550 43,211 20,724 21,509
Other income (expense),
net .............................. 397 1,809 732 (205) 1,705 537 1,122
-------- --------- -------- --------- -------- --------- ---------
Income (loss) from continuing
operations before provision for
income taxes ..................... 22,175 (7,665) 44,536 (46,721) 61,363 26,884 35,859
Provision for income taxes(6) ...... 164 261 6,525 1,405 7,702 3,718 3,259
-------- --------- -------- --------- -------- --------- ---------
Income (loss) from continuing
operations ........................ 22,011 (7,926) 38,011 (48,126) 53,661 23,166 32,600
Income (loss) from discontinued
operations, net .................. -- 194 1,230 (5,117) (42,050) (39,527) --
Extraordinary loss .................. -- (9,921) -- -- (1,912) -- (45,538)
-------- --------- -------- --------- -------- --------- ---------
Net income (loss) .................. $ 22,011 $ (17,653) $ 39,241 $ (53,243) $ 9,699 $ (16,361) $ (12,938)
======== ========= ======== ========= ======== ========= =========
Other Data:
Capital expenditures ............... $ 15,243 $ 21,270 $ 21,201 $ 19,726 $ 23,509 $ 7,798 $ 16,369
Ratio of earnings to fixed
charges(7) ........................ 2.12x --(8) 1.94x --(8) 2.31x 2.19x 2.54x
Balance Sheet Data (at period end):
Cash and cash
equivalents ..................... $ 21,483 $ 3,978 $ 20,019 $ 638 $ 20,968 $ 2,438 $ 4,508
Total assets ........................ 340,900 575,528 654,176 605,892 586,157 574,833 600,694
Long-term debt ..................... 285,762 414,445 441,757 433,956 392,617 429,848 537,951
Partners' equity (deficit) ......... (39,061) 49,386 52,548 (12,604) 12,832 (34,451) (118,217)
</TABLE>
(footnotes on following page)
19
<PAGE>
Notes to Selected Historical Consolidated Financial Information of Foamex
(1) Foamex has a 52-53 week fiscal year ending on the Sunday closest to the end
of the calendar year. Each fiscal year presented was 52 weeks with the
exception of 1992, which was 53 weeks.
(2) Fiscal years 1993 through 1995 and the twenty-six week period ended June
30, 1996 have been restated for discontinued operations resulting from the
sale of Perfect Fit. In addition, fiscal years 1994 and 1995 and the
twenty-six week period ended June 30, 1996 have been restated to reflect
the contribution of Foamex Mexico to Foamex from Foamex International
because the contribution was accounted for in a manner similar to a
pooling of interests because the entities were under common control.
(3) Includes the results of operations of General Felt and Great Western from
their respective dates of acquisition March 23, 1993 and May 1, 1993, and
thus may not be comparable to other periods. Great Western was
subsequently merged into Foamex.
(4) Includes the operations of Foamex Mexico from its date of acquisition of
March 31, 1994, and thus may not be comparable to other periods. See Note
2 above.
(5) Includes results of operations of Foamex Fibers from its date of
acquisition of April 13, 1995, and thus may not be comparable to other
periods.
(6) Foamex, as a partnership, is not subject to federal and certain state
income taxes. Provision for income taxes for all periods presented relates
to Canadian income tax and certain state income taxes of Foamex and
additionally subsequent to (i) 1992, the federal and state income taxes of
General Felt, (ii) 1993, Mexican income taxes and (iii) 1994, the state
income taxes of Foamex Fibers which files a consolidated federal tax
return with General Felt.
(7) For purposes of computing this ratio, earnings consist of income (loss)
before income taxes and extraordinary items and fixed charges, adjusted to
exclude capitalized interest. Fixed charges consist of interest expense,
including amounts capitalized, and the portion of operating lease rental
expense that is representative of the interest factor (deemed to be
one-third of operating lease rental expense).
(8) Earnings were insufficient to cover fixed charges by approximately $8.0
million in fiscal year 1993 and approximately $47.0 million in fiscal year
1995. Earnings before fixed charges for the 1993 and 1995 fiscal years were
reduced by non-cash expenses consisting principally of depreciation and
amortization of approximately $21.7 million and $22.9 million, respectively.
20
<PAGE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION OF GENERAL FELT
The following table presents selected historical consolidated financial
information of General Felt, for the fiscal year ended January 3, 1993 and the
period from January 4, 1993 to March 22, 1993 ("Predecessor Company"), the
period from March 23, 1993 to January 2, 1994 and the fiscal years ended January
1, 1995, December 31, 1995 and December 29, 1996, which have been derived from
the audited consolidated financial statements of the Predecessor Company and
General Felt, and for the twenty-six week periods ended June 30, 1996 and June
29, 1997, which have been derived from the unaudited condensed consolidated
financial statements of General Felt. The selected historical consolidated
financial information should be read in conjunction with the consolidated and
the condensed consolidated financial statements and related notes thereto of
General Felt included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
January 4, March 23,
1993 to 1993 to
Fiscal March 22, January 2, Fiscal
Year 1993 1994(2) Year
------- --------- ---------- ----------
1992(1) 1994(1)(2)
(In thousands, except ratios)
<S> <C> <C> <C> <C>
Statements of Operations Data:
Net sales ........................ $190,841 $ 37,777 $182,240 $290,577
Gross profit ..................... 22,988 3,460 19,765 39,457
Selling, general and
administrative
expenses ........................ 16,474 3,374 16,217 24,392
Restructuring and other
charges (credits) ............... -- -- 1,750 --
------- -------- -------- --------
Operating income (loss) 6,514 86 1,798 15,065
Interest and debt
issuance expense ............... 7,686 1,559 4,509 1,178
Other income (expense),
net ........................... 86 19 32 90
------- -------- -------- --------
Income (loss) from
continuing operations
before provision for
income taxes .................. (1,086) (1,454) (2,679) 13,977
Provision for income
taxes(6) ........................ 338 -- 125 5,587
------- -------- -------- --------
Income (loss) from
continuing operations (1,424) (1,454) (2,804) 8,390
Income (loss) from
discontinued
operations, net .................. -- -- 72 (2,293)
------- -------- -------- --------
Net income (loss) ............... $(1,424) $ (1,454) $ (2,732) $ 6,097
======= ======== ======== ========
Other Data:
Capital expenditures ............ $ 1,501 $ 296 $ 1,805 $ 3,391
Ratio of earnings to
fixed charges(4) ............... --(5) --(5) --(5) 6.94x
Balance Sheet Data (at period end):
Cash and cash
equivalents ..................... $ 68 $ 68 $ 85 $ 72
Total assets (6) .................. 98,406 97,704 173,506 175,131
Total long-term debt (7) . 60,583 63,576 60,310 50,877
Stockholder's equity (8) 9,365 7,910 64,304 70,401
<CAPTION>
Fiscal Fiscal (3)
Year Year Six Months ended June
------------- ------------- ---------------------
1995(1)(2)(3) 1996(1)(2)(3) 1996(2)(3) 1997(3)
<S> <C> <C> <C> <C>
Statements of Operations Data:
Net sales ........................ $ 279,123 $ 302,648 $ 145,997 $148,633
Gross profit ..................... 26,532 39,332 18,995 16,121
Selling, general and
administrative
expenses ........................ 22,312 18,819 9,239 9,577
Restructuring and other
charges (credits) ............... 14,156 (5,460) -- --
--------- --------- --------- --------
Operating income (loss) (9,936) 25,973 9,756 6,544
Interest and debt
issuance expense ............... 1,164 2,179 755 596
Other income (expense),
net ........................... 52 1,015 234 140
--------- --------- --------- --------
Income (loss) from
continuing operations
before provision for
income taxes .................. (11,048) 24,809 9,235 6,088
Provision for income
taxes(6) ........................ 962 6,344 3,880 2,410
--------- --------- --------- --------
Income (loss) from
continuing operations (12,010) 18,465 5,355 3,678
Income (loss) from
discontinued
operations, net .................. (11,040) (45,726) (42,686) --
--------- --------- --------- --------
Net income (loss) ............... $ (23,050) $ (27,261) $ (37,331) $ 3,678
========= ========= ========= ========
Other Data:
Capital expenditures ............ $ 1,604 $ 2,442 $ 1,336 $ 1,002
Ratio of earnings to
fixed charges(4) ............... --(5) 9.60x 9.14x .68x
Balance Sheet Data (at period end):
Cash and cash
equivalents ..................... $ 538 $ 336 $ 231 $ 150
Total assets (6) .................. 155,497 177,681 167,504 164,309
Total long-term debt (7) . 59,556 21,403 60,294 11,944
Stockholder's equity (8) 49,509 97,019 52,983 100,697
</TABLE>
(footnotes on following page)
21
<PAGE>
Notes to Selected Historical Consolidated Financial Information of General Felt
(1) General Felt has a 52-53 week fiscal year ending on the Sunday closest to
the end of the calendar year. Each fiscal year presented was 52 weeks with
the exception of 1992, which was 53 weeks.
(2) The period from March 23, 1993 to January 2, 1994 and the fiscal years 1994
through 1996 and the twenty-six week period ended June 30, 1996 have been
restated for discontinued operations resulting from the sale of Perfect
Fit.
(3) Includes results of operations of Foamex Fibers from its date of
acquisition of April 13, 1995, and thus may not be comparable to other
periods.
(4) For purposes of computing this ratio, earnings consist of income (loss)
before income taxes and extraordinary items and fixed charges, adjusted to
exclude capitalized interest. Fixed charges consist of interest expense,
including amounts capitalized, and the portion of operating lease rental
expense that is representative of the interest factor (deemed to be
one-third of operating lease rental expense).
(5) Earnings were insufficient to cover fixed charges by approximately $1.1
million in fiscal year 1992, approximately $1.5 million in the period
January 4, 1993 to March 22, 1993, approximately $2.7 million in the period
March 23, 1993 to January 2, 1994 and by approximately $11.0 million in
fiscal year 1995. Earnings before fixed charges for the fiscal year 1992,
the period from January 4, 1993 to March 22, 1993, the period from March 23,
1993 to January 2, 1994 and for fiscal year 1995 were reduced by non-cash
expenses consisting principally of depreciation and amortization of
approximately $7.5 million, $1.6 million, $5.6 million and $4.5 million,
respectively.
(6) On March 23, 1993, Foamex acquired the outstanding common stock of General
Felt for approximately $96.0 million. The acquisition was accounted for
using the purchase method of accounting. Accordingly, the purchase price was
allocated to the assets acquired and liabilities assumed based on their
estimated fair values at the date of acquisition.
(7) During fiscal year 1996 and the first six months of 1997, General Felt used
approximately $31.5 million and $12.1 million, respectively, of the net
proceeds from the sale of Perfect Fit to reduce long-term debt.
(8) On March 23, 1993, Foamex contributed approximately $46.3 million to
General Felt in connection with the acquisition of General Felt by Foamex.
During 1996, Foamex contributed intercompany notes of approximately $74.7
million to General Felt in connection with the sale of Perfect Fit.
22
<PAGE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION OF FOAMEX FIBERS
The following table presents selected historical financial information of:
(i) Foamex Fibers (successor to GS Industries, Inc. and Pontotoc Fibers, Inc.)
for the period from April 13, 1995 to December 31, 1995 and for the fiscal year
ended December 29, 1996, which were derived from the audited financial
statements of Foamex Fibers, (ii) the combined historical financial information
of GS Industries, Inc. and Pontotoc Fibers, Inc. (collectively, the "Predecessor
Company") for the year ended December 31, 1994 and for the period from January
1, 1995 to April 12, 1995, which have been derived from the audited financial
statements of Foamex Fibers, and (iii) the historical financial information of
Foamex Fibers for the twenty-six week periods ended June 30, 1996 and June 29,
1997, which have been derived from the condensed financial statements of Foamex
Fibers. The following table also presents the selected combined historical
financial information of the Predecessor Company for the years ended December
31, 1992 and 1993, which have been derived from the unaudited combined financial
statements of the Predecessor Company. The selected historical financial
information should be read in conjunction with the financial statements and the
condensed financial statements and related notes thereto of Foamex Fibers
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
Predecessor Company
----------------------------------------------
Fiscal Year January 1, 1995 April 13, 1995 Fiscal Six Months ended June
---------------------------- to April 12, to December 31, Year ---------------------
1992 1993(1) 1994(1) 1995 1995(2) 1996(1) 1996 1997
-----------------------------------------------------------------------------------------------
(In thousands, except ratios)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Statements of Operations Data:
Net sales ........................ $14,397 $17,827 $16,778 $5,577 $14,112 $21,410 $10,510 $11,888
Gross profit ..................... 1,267 2,118 3,213 997 2,164 4,567 2,187 2,895
Selling, general and
administrative expenses ......... 907 1,282 1,497 336 980 1,257 482 647
------- ------- ------- ------ ------- ------- ------- -------
Operating income .................. 360 836 1,716 661 1,184 3,310 1,705 2,248
Other expense, net ............... 112 163 29 6 12 7 8 1
------- ------- ------- ------ ------- ------- ------- -------
Income from continuing
operations before provision for
income taxes ..................... 248 673 1,687 655 1,172 3,303 1,697 2,247
Provision for income taxes(3) ... -- -- -- -- 469 1,232 634 831
------- ------- ------- ------ ------- ------- ------- -------
Net income ........................ $ 248 $ 673 $ 1,687 $ 655 $ 703 $ 2,071 $ 1,063 $ 1,416
======= ======= ======= ====== ======= ======= ======= =======
Other Data:
Capital expenditures ............... $ 428 $ 525 $ 491 $ 587 $ 191 $ 669 $ 178 $ 588
Balance Sheet Data (at period end):
Cash and cash
equivalents(4) .................. $ 225 $ 462 $ 1,021 $1,622 $ 469 $ 156 $ 152 $ 131
Total assets ..................... 4,605 4,747 5,945 7,113 9,894 13,314 11,446 15,395
Long-term debt(4) .................. 4,430 4,470 4,198 938 -- -- -- --
Stockholder's equity (deficit) ... (592) (261) 964 1,468 7,975 10,046 9,038 11,462
</TABLE>
(footnotes on following page)
23
<PAGE>
Notes to Selected Historical Financial Information of Foamex Fibers
(1) Foamex Fibers has a 52-53 week fiscal year ending on the Sunday closest to
the end of the calendar year. The Predecessor Company's year ended on
December 31.
(2) On April 13, 1995, Foamex Fibers acquired certain assets and assumed
certain liabilities of the Predecessor for aggregate consideration of
approximately $8.0 million, including related fees and expenses. The
acquisition was accounted for using the purchase method of accounting.
(3) The stockholders of the Predecessor Company had elected S Corporation
status under the provisions of the Internal Revenue Code. Accordingly, the
Predecessor Company was not subject to Federal income taxes.
(4) The stockholders of the Predecessor Company retained the cash and long-term
debt of the Predecessor Company in connection with the acquisition by
Foamex Fibers.
24
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
Foamex is the largest manufacturer and marketer of flexible polyurethane
and advanced polymer foam products in North America. Foamex's products are
utilized primarily in five end-markets: (i) carpet cushion and other carpet
products, (ii) cushioning foams for bedding and packaging fabricators, (iii)
furniture products for furniture manufacturers and furniture fabricators, (iv)
automotive applications, including trim and accessories and (v) specialty and
technical foams. Foamex is the largest North American producer of foams used for
carpet cushion, automotive applications and specialty and technical products and
is a leading North American producer of cushioning foams. As a result of the
1995 Operational Reorganization, Foamex has refocused on its flexible
polyurethane and advanced polymer foam business by divesting of non-foam
business segments. Foamex believes that a concentrated focus in only the foam
business segment will allow Foamex to concentrate management, financial and
operational resources and will position Foamex to pursue its growth strategy of
developing new products, improving profitability and expanding internationally.
Prior to the second quarter of 1997, the cushioning foams and furniture
product markets were treated as a single product group; therefore, all
historical data in this Prospectus reflects cushioning foam and furniture
products as the single product group "cushioning foam."
Refinancing Plan
On June 12, 1997, Foamex's parent, Foamex International, completed the
Refinancing Plan which included (i) the Tender Offer pursuant to which Foamex
purchased (a) $99.8 million of the $104.3 million outstanding principal amount
of the Senior Secured Notes, (b) $130.1 million of the $135.9 million
outstanding principal amount of the Senior Notes, (c) $105.5 million of the
$125.8 million outstanding principal amount of the Senior Subordinated
Debentures, (d) substantially all of the $7.0 million outstanding principal
amount of the Series B Debentures and (e) all $116.7 million outstanding
principal amount of the FJPS Discount Debentures; (ii) the repayment of $5.2
million of borrowings under the Existing Credit Facility; and (iii) the payment
of fees and expenses. In addition, the indentures pursuant to which the Senior
Secured Notes, Senior Notes, Senior Subordinated Debentures and Series B
Debentures were issued were amended to remove substantially all of the
restrictive covenants. Foamex incurred an extraordinary loss on the early
extinguishment of debt associated with the Refinancing Plan of approximately
$44.5 million. The Refinancing Plan was funded by $347.0 million of borrowings
under the New Credit Facility and the net proceeds from the issuance of $150.0
million principal amount of Old Notes.
The Refinancing Plan was designed to reduce Foamex International's interest
expense and increase its operating and financial flexibility. After giving
effect to the Refinancing Plan, Foamex International reduced total debt net of
cash from $726.2 million at December 31, 1995 to $553.1 million at June 29,
1997. Also, after giving effect to the Refinancing Plan, Foamex International's
pro forma interest expense for the 52 weeks ended June 29, 1997 would have
decreased $5.6 million and, after the retirement of long-term debt with the net
proceeds of the divestitures in 1996, Foamex International's pro forma interest
expense for the same period would have decreased an additional $1.3 million. In
addition, the Refinancing Plan eliminated the FJPS Discount Debentures thereby
eliminating approximately $2.3 million of additional interest expense that would
have been incurred by Foamex International over the next 12 months as compared
to the previous 12 months.
As a result of the Refinancing Plan, Foamex's total long-term debt
increased $150.1 million to $546.3 million, and variable rate debt comprises a
larger percentage of Foamex's overall indebtedness than in the past, and as a
result, future fluctuations in interest rates will have a greater impact on
Foamex's interest expense than in the past. Foamex expects the Refinancing Plan
to result in increased interest expense of approximately $2.5 million in the
second half of 1997 as compared to the first half of 1997, and annualized
increased interest expense of approximately $5.0 million, as compared to the
debt structure prior to the Refinancing Plan, assuming no material changes in
interest rates. Foamex's future interest expense will vary based on a variety of
factors, including fluctuations in interest rates in general.
In addition, Foamex has called for redemption on October 1, 1997
approximately $26.0 million principal amount of its Senior Notes, Senior
Subordinated Debentures and Series B Debentures of the approximately $30.0
25
<PAGE>
million of its outstanding public debt that was not tendered as part of the
Refinancing Plan. The redemption is expected to be funded with borrowings under
the New Credit Facility. In connection with this redemption, Foamex expects to
incur an extraordinary loss on the early extinguishment of debt of
approximately $2.6 million in the fourth quarter of 1997.
1995 Operational Reorganization
In November 1995, Foamex's parent, Foamex International, announced the 1995
Operational Reorganization to focus on its core flexible polyurethane and
advanced polymer foam business, enhance shareholder value and maximize future
profitability through a series of operational improvements, asset sales and the
reduction of long-term debt. In connection with the 1995 Operational
Reorganization, Foamex International sold JPS Automotive, a manufacturer of
automotive fabric and carpet, and Foamex sold Perfect Fit, a manufacturer of
fabric-based home comfort products. These divestitures have resulted in a
decrease of total debt for Foamex International by approximately $248.4 million
as of June 29, 1997.
As part of the 1995 Operational Reorganization, Foamex implemented a plan
to improve its profitability through (i) the realignment of management to
correspond with product groups, (ii) the consolidation of foam production,
fabrication or branch locations resulting in the elimination of 12 facilities, a
reduction of approximately 300 employees representing approximately 7% of the
work force, and an improved utilization of its remaining production capacity,
(iii) the implementation of additional procedures to reduce manufacturing costs,
including process redesign to eliminate non-value added operations, (iv) the
reduction of selling, general and administrative expenses through cost
containment and (v) the reduction of inventory levels through improved
forecasting and the elimination of inventories associated with closed
facilities. As an example of the improved utilization of the remaining
facilities, Foamex increased the average output per pouring plant by 19% from
1995 to 1996, and by approximately 12% for the first six months of 1997 as
compared to the first six months of 1996.
Price and Availability of Raw Materials
Historically, the price of raw materials has been cyclical and volatile,
and Foamex's principal suppliers of raw materials used in the manufacture of
flexible polyurethane foam have increased the price of raw materials several
times since September 1994. Significant increases in raw material prices could
have a material adverse effect on the financial condition or results of
operations of Foamex. Foamex attempts to offset raw material cost increases
through selling price increases; however, there can be no assurance that Foamex
will be successful in implementing selling price increases or that competitive
pricing pressure will not require Foamex to adjust selling prices. Results of
operations have been and could be adversely affected by delays in implementing,
or the inability of Foamex to implement, selling price increases to offset raw
material cost increases. For example, Foamex estimates that in 1995 the amount
of net unrecovered raw material cost increases was approximately $25.0 million.
See "Risk Factors--Price and Availability of Raw Materials."
The principal suppliers to the foam industry announced raw material price
increases effective April 1997. The impact of the raw material cost increases
were not significant during the second quarter of 1997. However, Foamex
estimates an unfavorable impact for the raw material cost increases, net of
sale price increases to customers, of between $1.5 million to $3.0 million
during the third quarter of 1997. Foamex believes that due to expected
increases in capacity during the next two years for TDI and polyol, it will be
more difficult for Foamex's suppliers to raise raw material prices in the
future. There can be no assurance that chemical suppliers will not increase raw
material costs in the future or that Foamex will be able to implement selling
price increases to offset any such raw material cost increases.
26 Week Period Ended June 29, 1997 Compared to 26 Week Period Ended June 30,
1996
Results of Operations
Foamex
Net sales for 1997 were $469.0 million as compared to $459.6 million in
1996, an increase of $9.4 million or 2.1%. Carpet cushion products net sales for
1997 increased 1.8% to $142.9 million from $140.3 million in 1996 primarily due
to increased net sales during the first quarter of 1997 which resulted from the
effect of increased selling prices that were initiated late in the second
quarter of 1996 as well as increased shipments of certain carpet cushion
26
<PAGE>
products offset by increased competitive pricing pressure during the second
quarter of 1997 as compared to 1996. Cushioning products net sales for 1997
increased 3.9% to $115.4 million from $111.1 million in 1996 primarily due to
an increase in net sales from both new and existing customers of bedding
related products. Furniture products net sales for 1997 of $54.5 million were
consistent as compared to net sales of $54.9 million for 1996. Automotive
products net sales for 1997 of $119.0 million were consistent with net sales of
$119.3 million in 1996 primarily due to increased selling prices implemented
during the first quarter of 1996 offset by reduced net sales volume in 1997 as
compared to 1996 due to the decreased net sales volume resulting from reduced
production of car and light truck builds and the labor strikes at both Chrysler
and General Motors plants. Technical products net sales for 1997 increased 9.2%
to $37.1 million from $34.0 million in 1996 primarily due to increased net
sales volume.
Gross profit as a percentage of net sales increased to 18.7% for 1997 from
16.1% in 1996 primarily due to selling price increases and improved material and
production efficiencies and manufacturing cost containment which includes (i)
the impact during 1997 of the selling prices initiated in 1996 to offset
previous raw material cost increases, (ii) favorable raw material efficiencies
and (iii) an increased favorable impact of the 1995 Operational Reorganization
in 1997 as compared to 1996.
Operating income increased to $56.2 million for 1997 from $47.1 million in
1996 primarily due to improved gross profit margins as discussed above, offset
by a $4.2 million increase in selling, general and administrative expenses for
the second quarter of 1997. The increase in selling, general and administrative
expenses is primarily due to increases in employee compensation and incentives,
research and development costs, and travel and promotion costs associated with
the launching of new products and international expansion.
Income from continuing operations increased to $32.6 million for 1997 as
compared to $23.2 million in 1996. The increase is primarily due to the reasons
cited above. Loss from discontinued operations for 1996 represents the loss on
disposal and the operating loss of Perfect Fit which was sold during 1996. The
decrease in the effective income tax rate for continuing operations for 1997 as
compared to 1996 is primarily due to a decrease in pre-tax earnings and the
related tax provision of a subsidiary that files federal income tax returns.
The extraordinary loss on early extinguishment of debt of approximately
$45.5 million relates to premium and consent fee payments, the write-off of debt
issuance costs and other charges associated with the early extinguishment of
approximately $359.3 million of aggregate principal amount of debt in connection
with the Refinancing Plan and other debt extinguishment during 1997.
Foamex Capital Corporation
FCC is solely a co-issuer of certain indebtedness of Foamex and has no
other material operations.
General Felt
Net sales for 1997 were $148.6 million as compared to $146.0 million for
1996, an increase of $2.6 million, or 1.8%. The increase is primarily due to
increased net sales during the first quarter of 1997 which resulted from the
effect of increased selling prices that were initiated late in the second
quarter of 1996 as well as increased shipments of certain carpet cushion
products offset by increased competitive pricing pressure during the second
quarter of 1997 as compared to 1996.
Gross profit as a percentage of net sales decreased to 10.8% for 1997 from
13.0% in 1996 primarily due to increased shipments of lower margin carpet
cushion products and competitive pricing pressure during the second quarter of
1997, offset by the effect of the selling price increases initiated during the
second quarter of 1996.
Operating income decreased to $6.5 million for 1997 as compared to $9.8
million for 1996 primarily due to the reasons discussed above. Selling, general
and administrative expenses of $9.6 million for 1997 were fairly consistent as
compared to $9.2 million for 1996.
The effective income tax rate decreased to 40% for 1997 as compared to 42%
for 1996. The decrease is primarily due to reduced permanent differences for
income taxes and a decrease in the effective state tax rate.
The loss from discontinued operations related to the loss on disposal and
the operating loss of Perfect Fit which was sold during 1996.
27
<PAGE>
Foamex Fibers
Net sales for 1997 were $11.9 million as compared to $10.5 million for
1996, an increase of $1.4 million, or 13.1%. The increase is primarily due to
increased net sales volume of certain products during 1997 and the effect of
increased selling prices that were initiated during 1996.
Gross profit as a percentage of net sales increased to 24.4% for 1997 from
20.1% in 1996 primarily due to the effect of the selling price increases
initiated during 1996.
Income from operations increased to $2.2 million for 1997 as compared to
$1.7 million for 1996 primarily due to the reasons discussed above. Selling,
general and administrative expenses of $0.6 million for 1997 were fairly
consistent as compared to $0.5 million for 1996.
The effective tax rate remained constant at 37% for 1997 as compared to
1996.
Year Ended December 29, 1996 Compared to Year Ended December 31, 1995
Foamex
Net sales for 1996 were $926.4 million as compared to $862.8 million in
1995, an increase of $63.6 million or 7.4%. Carpet cushion net sales for 1996
increased 7.5% to $291.3 million from $271.0 million in 1995 primarily due to
increased selling prices initiated during the second quarter of 1996 as well as
increased volume of shipments due to improved carpet sales. Cushioning foam net
sales for 1996 increased 7.4% to $332.9 million from $310.0 million in 1995
primarily due to increased net sales volume from both new and existing customers
of bedding related products, increased selling prices initiated at the beginning
of 1996 and a full year of results for a company acquired in April 1995 which
manufactures cushioning products. Automotive foam net sales for 1996 increased
5.5% to $231.9 million from $219.8 million in 1995 primarily due to a continued
increase in net sales of tri-laminates and composite headliners and increased
selling prices initiated at the beginning of 1996. Specialty and technical foam
net sales for 1996 increased 13.4% to $70.3 million from $62.0 million in 1995
primarily due to increased selling prices and increased net sales volume.
Gross profit as a percentage of net sales increased to 16.5% for 1996 from
11.7% in 1995 primarily due to selling price increases and improved material and
production efficiencies, which include (i) selling price increases during 1996
to offset the adverse affect of the 1995 and 1994 raw material cost increases,
(ii) reductions in customer deductions for pricing disputes, promotional
programs and other matters and (iii) reductions in salaries and other overhead
costs associated with the implementation of the 1995 Operational Reorganization.
Operating income was $102.9 million for 1996 as compared to a loss from
operations of $2.0 million in 1995. The increase was primarily due to an
increase in gross profit margin as discussed above, a decrease in restructuring
and other charges (credits) of $45.7 million and a decrease in selling, general
and administrative expenses of $6.7 million for 1996 as compared to 1995. The
decrease in restructuring and other charges (credits) is comprised of the $39.2
million charge for restructuring and other charges in 1995 plus the net
restructuring credit of $6.4 million in 1996. The 1996 net restructuring credit
is comprised of an $11.3 million credit due to Foamex's decision not to close a
facility which was part of the 1995 Operational Reorganization and $1.7 million
of credits relating primarily to the favorable termination of lease agreements
and other matters relating to the 1995 Operational Reorganization, offset by
$6.6 million of restructuring charges relating to the planned closure of two
facilities during 1997. The decrease in selling, general and administrative
expenses is the result of reductions in the provision for uncollectible accounts
of approximately $3.9 million, salaries and employee costs of approximately $3.7
million and a reduction of approximately $2.0 million in environmental accruals
offset by increases in selling expenses associated with the increased net sales
volume and management realignment in connection with the 1995 Operational
Reorganization.
Income from continuing operations before provision for income taxes was
$61.4 million for 1996 as compared to a loss from continuing operations before
provision for income taxes of $46.7 million in 1995. The increase is primarily
due to the reasons cited above and a decrease in interest and debt issuance
expense of $1.3 million. The decrease in interest and debt issuance expense is
primarily due to a $2.3 million increased benefit from interest rate swap
agreements offset by the amount of interest allocated to discontinued operations
in 1996 as compared to 1995. See Note 3 to the consolidated financial statements
for further discussion.
28
<PAGE>
Foamex, as a limited partnership, is not subject to federal and certain
state income taxes. However, the consolidated financial statements include a
provision for income taxes which primarily relates to the federal and state
income taxes of corporate subsidiaries and subsidiaries located in foreign
jurisdictions that file separate income tax returns. See Note 10 to the
consolidated financial statements for further discussion.
The loss from discontinued operations of $42.1 million (net of $2.6 million
income tax benefit) in 1996 relates to the net loss on the sale of the home
comfort products business segment which consisted primarily of the net assets of
Perfect Fit and the operating loss of Perfect Fit through the closing date. See
Note 3 to the consolidated financial statements for further discussion.
The extraordinary loss on early extinguishment of debt of $1.9 million
primarily relates to the write-off of debt issuance costs and redemption
premiums associated with the early extinguishment of $30.6 million of long-term
debt. See Note 11 to the consolidated financial statements for further
discussion.
General Felt
Net sales for 1996 were $302.6 million as compared to $279.1 million in
1995, an increase of $23.5 million or 8.4%. The increase is primarily due to
increased selling prices for carpet cushion initiated during the second quarter
of 1996, increased volume of shipments of carpet cushion and a full year of
results for Foamex Fibers.
Gross profit as a percentage of net sales increased to 13.0% for 1996 from
9.5% in 1995 primarily due to (i) selling price increases, (ii) reductions in
customer deductions for pricing disputes, promotional programs and other matters
and (iii) reductions in salaries and other overhead costs associated with the
implementation of the 1995 Operational Reorganization.
Income from operations was $26.0 million for 1996 as compared to a loss
from operations of $9.9 million in 1995. The increase was primarily due to an
increase in gross profit margins as discussed above, a decrease in restructuring
and other charges (credits) of $19.6 million and a decrease in selling, general
and administrative expenses of $3.5 million for 1996 as compared to 1995. The
decrease in restructuring and other charges (credits) is comprised of the $14.2
million charge for restructuring and other charges in 1995 plus the net
restructuring credit of $5.4 million in 1996. The 1996 net restructuring credit
is comprised of a $11.3 million credit due to General Felt's decision not to
close a facility which was part of the 1995 Operational Reorganization offset by
$5.9 million of restructuring charges relating to the closure of a facility
during 1997. The decrease in selling, general and administrative expenses is the
result of reductions in the provision for uncollectible accounts of
approximately $2.0 million, salaries and employee costs of approximately $2.0
million offset by increases in selling expenses associated with the increased
net sales volume and management realignment in connection with the 1995
Operational Reorganization.
Income from continuing operations before provision for income taxes was
$24.8 million for 1996 as compared to a loss from continuing operations before
provision for income taxes of $11.0 million in 1995. The increase is primarily
due to the reasons cited above and an increase in other income of $1.0 million,
offset by an increase in interest expense of $1.0 million. The increase in
interest expense is due to increased borrowings during 1996 under the revolving
promissory notes with Foamex, offset by a decrease in term borrowings under the
Existing Credit Facility. The increase in other income is primarily due to
interest income associated with the net proceeds from the sale of Perfect Fit.
The increase in the tax provision during 1996 is due to the limitation on
the utilization of certain tax benefits.
The loss from discontinued operations of $45.7 million (net of $1.4 million
income tax benefit) in 1996 relates to the net loss on the sale of the home
comfort products business segment which consisted of the net assets of Perfect
Fit and the operating loss of Perfect Fit through the closing date.
Foamex Fibers
Foamex Fibers was formed on March 29, 1995 for the purpose of acquiring
certain assets and assuming certain liabilities of GS Industries, Inc. and
Pontotoc Fibers, Inc. manufacturers of various nonwoven textile fiber products
used primarily for carpet padding and in the furniture industry (collectively,
the "Predecessor Company"). On April 13, 1995, Foamex Fibers acquired such
assets and assumed such liabilities for an aggregate price of approximately $8.0
million.
29
<PAGE>
Foamex Fibers has presented management's discussion and analysis of the
year ended December 29, 1996 against the combined period from January 1, 1995 to
April 12, 1995 of the Predecessor Company and the period from April 13, 1995 to
December 31, 1995 of Foamex Fibers (collectively, "Combined 1995"), as Foamex
Fibers believes that, except for the provision for income taxes, the data is
comparable since the proforma adjustments had an insignificant effect on all
line items presented in the results of operations for the period from January 1,
1995 to April 12, 1995 of Predecessor Company. Management of Foamex Fibers
believes that there are no factors which are not discussed in this Prospectus
which would materially affect the comparability of the year ended December 29,
1996 and the Combined 1995 period.
Net sales for 1996 were $21.4 million as compared to net sales of $19.7
million in Combined 1995, an increase of $1.7 million or 8.7%. The increase is
primarily due to selling price increases initiated during 1996 and increased net
sales volume in 1996 as compared to Combined 1995.
Gross profit as a percentage of net sales increased to 21.3% for 1996 from
16.1% for Combined 1995 primarily due to selling price increases and production
efficiencies resulting from the increased net sales volume.
Income from operations was $3.3 million for 1996 as compared to $1.8
million for Combined 1995. The increase was primarily due to the reasons
discussed above.
The effective income tax rate decreased to 37.3% for 1996 as compared to
40.0% for the period from April 13, 1995 to December 31, 1995 due to a decrease
in the state effective income tax rate. The Predecessor Company was not subject
to corporate income taxes.
Year Ended December 31, 1995 Compared to Year Ended January 1, 1995
Foamex
Net sales for 1995 were $862.8 million as compared to $833.7 million in
1994, an increase of $29.1 million or 3.5%. Carpet cushion net sales for 1995
decreased 7.4% to $271.0 million from $292.5 million in 1994 primarily due to
reduced net sales volume of certain carpet cushion products resulting from weak
carpet sales and a change in product mix to carpet cushion with lower selling
prices. In addition, carpet cushion selling prices were under pressure from an
excess supply of low priced scrap foam, the primary component of rebond carpet
cushion. Cushioning foam net sales for 1995 increased 7.2% to $310.0 million
from $289.2 million in 1994 primarily due to the April 1995 acquisition of a
company which manufactures cushioning products and increased selling prices
offset by a reduction in net sales volume due to competitive pricing pressures
and reduced demand for certain cushioning foam products. Automotive foam net
sales for 1995 increased 11.0% to $219.8 million from $198.0 million in 1994
primarily due to increased net sales volume of tri-laminates and composite
headliner products offset by a reduction in net sales volume of other
automotive foam products. Specialty and technical foam net sales for 1995
increased 14.8% to $62.0 million from $54.0 million in 1994 primarily due to
increased selling prices and increased net sales volume.
Gross profit as a percentage of net sales decreased to 11.7% for 1995 from
17.1% for 1994. This unfavorable relationship was primarily due to net
unrecovered raw material cost increases of approximately $25.0 million during
1995. In addition, the decrease in gross profit margin for 1995 as compared to
1994 was also associated with (i) approximately $7.7 million of increased
customer deductions for pricing disputes, promotion programs and other matters,
(ii) approximately $3.5 million of increased employee benefits accruals
associated with insurance and pension plans and other accruals, (iii)
approximately $1.5 million of inventory write-offs associated with scrap foam
inventory and discontinued or slow moving product lines, (iv) an increase in
net sales of automotive tri-laminates, which have a lower-margin than other
foam products, (v) under-utilization of manufacturing capacities due to reduced
net sales volume of certain product lines and (vi) carpet cushion selling
prices remaining under pressure from an excess supply of low-priced scrap foam,
the primary component of rebond carpet cushion.
A loss from operations of $2.0 million was incurred for 1995 as compared
to operating income of $85.3 million for 1994. The decrease in operating income
was primarily due to (i) the reduction in gross profit margin as a percentage
of net sales as discussed above, (ii) an increase in selling, general and
administrative expenses of $6.4 million for 1995 as compared to 1994 including
an increase of $3.7 million in the provision for uncollectible accounts and
(iii) restructuring and other charges of $39.2 million (as discussed below).
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In 1995, Foamex approved the 1995 Operational Reorganization to consolidate
13 foam production, fabrication or branch locations to concentrate resources as
a result of industry conditions and better position itself to achieve its
strategic growth objectives. Foamex recorded restructuring and other charges of
$39.2 million which were comprised of charges of $35.6 million associated with
the consolidation of the foam production, fabrication or branch locations, $2.2
million associated with the completion of the 1993 restructuring plan and $1.4
million associated with merger and acquisition activities of Foamex. The
components of the $35.6 million restructuring charge include: $16.7 million for
fixed asset writedowns, $15.1 million for plant closure and operating lease
obligations and $3.8 million for personnel reductions. The $3.8 million cost for
personnel reductions primarily represents severance and employee benefit costs
associated with the elimination of manufacturing and administrative personnel.
See Note 4 to the consolidated financial statements for further discussion.
A net loss of $53.2 million was incurred for 1995 as compared to net income
of $39.2 million for 1994. The decrease is primarily due to (i) the reasons
cited above and (ii) an increase in interest and debt issuance expense of $3.0
million. The increase in interest and debt issuance expense was primarily
associated with (i) a decrease of $1.6 million in the benefit received from
interest rate swap agreements in 1995 as compared to 1994 and (ii) an increase
in term loan interest expense due to a full year of borrowings in 1995 as
compared to 1994.
Foamex, as a limited partnership, is not subject to federal and certain
state income taxes. However, the consolidated financial statements include a
provision for income taxes which primarily relates to the federal and state
income taxes of corporate subsidiaries and subsidiaries located in foreign
jurisdictions that file separate income tax returns. See Note 10 to the
consolidated financial statements for further discussion.
General Felt
Net sales for 1995 were $279.1 million as compared to $290.6 million in
1994, a decrease of $11.5 million or 3.9%. The decrease is primarily due to
reduced net sales volume of certain carpet cushion products offset by the April
1995 acquisition of the Predecessor Company. The reduced net sales volume of
carpet cushion resulted from weak carpet sales and a change in product mix to
carpet cushion with lower selling prices. In addition, carpet cushion selling
prices were under pressure from an excess supply of low priced scrap foam, the
primary component of rebond carpet cushion.
Gross profit as a percentage of net sales decreased to 9.5% for 1995 from
13.6% for 1994. This unfavorable relationship was primarily due the change in
product mix to carpet cushion with lower selling prices. In addition, the
decrease in gross profit margins for 1995 as compared to 1994 was also
associated with (i) approximately $2.2 million of increased customer deductions
for pricing disputes, promotion programs and other matters, (ii) approximately
$0.3 million of inventory write-offs associated with scrap foam inventory and
discontinued or slow moving product lines, (iii) under-utilization of
manufacturing capacities due to reduced net sales volume of carpet cushion and
(iv) carpet cushion selling prices remaining under pressure from an excess
supply of low priced scrap foam, the primary component of rebond carpet cushion.
A loss from operations of $9.9 million was incurred for 1995 as compared to
income of $15.1 million for 1994. The decrease in income from operations was
primarily due to the reduction in gross profit margins as a percentage of net
sales as discussed above and restructuring and other charges of $14.2 million
(as discussed below), offset by a decrease in selling, general and
administrative expenses of $2.1 million for 1995 as compared to 1994. The
decrease in selling, general and administrative expenses is primarily due to
decreased promotion expense of $4.2 million during 1995 as compared to 1994 and
decreased employee costs of $0.5 million during 1995 as compared to 1994 offset
by an increase in the provision for uncollectible accounts of $2.4 million
during 1995 as compared to 1994.
In 1995, General Felt approved its portion of the 1995 Operational
Reorganization to consolidate two foam production, fabrication or branch
locations to concentrate resources as a result of industry conditions and better
position itself to achieve its strategic growth objectives. General Felt
recorded restructuring and other charges of $14.2 million which were comprised
of charges of $13.1 million associated with the consolidation of the foam
production, fabrication or branch locations and a $1.1 million charge associated
with the completion of the 1993 restructuring plan. The components of the $13.1
million restructuring charge include: $8.5 million for fixed asset writedowns
(net of estimated proceeds), $3.8 million for plant closure and operating lease
obligations and $0.8 million for personnel reductions. The $0.8 million cost for
personnel reductions primarily represents severance and employee benefit costs
associated with the elimination of manufacturing and administrative personnel.
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A loss from continuing operations of $12.0 million was incurred for 1995 as
compared to income from continuing operations of $8.4 million for 1994. The
decrease is primarily due to the reasons cited above offset by a decrease in the
provision for income taxes. The decrease in the provision for income taxes is
primarily due to reduced pretax earnings as discussed above, offset by a
limitation on the utilization of certain tax benefits.
The loss from discontinued operations for 1995 and 1994 relate to the
operating loss of Perfect Fit.
Foamex Fibers
Foamex Fibers has presented management's discussion and analysis of the
Combined 1995 period against the 1994 period of the Predecessor Company, as
Foamex Fibers believes that, except for the provision for income taxes, the data
is comparable since the proforma adjustments had an insignificant effect on all
line items presented in the results of operations for the period from January 1,
1995 to April 12, 1995 and the year ended December 31, 1994 of Predecessor
Company. Management of Foamex Fibers believes that there are no factors which
are not discussed in this Prospectus which would materially affect the
comparability of the Combined 1995 period and the 1994 period of the Predecessor
Company.
Net sales for Combined 1995 were $19.7 million as compared to net sales by
the Predecessor Company of $16.8 million for 1994, an increase of $2.9 million,
or 17.4%. The increase is primarily due to increased net sales volume in
Combined 1995 as compared to 1994.
Gross profit as a percentage of net sales decreased to 16.1% for Combined
1995 from 19.2% for 1994 primarily due to increased shipments of certain
products with lower margins in Combined 1995.
Income from operations was $1.8 million for Combined 1995 as compared to
$1.7 million for 1994. The increase is primarily due to the reasons discussed
above, offset by decreased selling, general and administrative expenses of $0.2
million
The Predecessor Company was not subject to corporate income taxes.
Liquidity and Capital Resources
Foamex's primary capital requirements consist principally of working
capital requirements, scheduled payments of principal and interest on
outstanding indebtedness and capital expenditures. Foamex believes that cash
flow from operating activities, cash on hand and periodic borrowings under the
New Credit Facility, if necessary, will be adequate to meet these capital
requirements. The ability to meet the operating cash requirements could be
impaired if Foamex fails to comply with any of the covenants contained in the
New Credit Facility and such noncompliance is not cured by Foamex or waived by
the lenders. Foamex was in compliance with the covenants in the New Credit
Facility as of June 29, 1997, and expects to be in compliance with the covenants
in the New Credit Facility for the foreseeable future.
Cash flow from operating activities was $(2.2) million and $13.9 million
for the first six months of 1997 and for the first six months of 1996,
respectively. The decrease is primarily due to an increase in the use of cash
for operating assets and liabilities offset by improved results from continuing
operations. Cash flow from continuing operations was $36.7 million, $36.5
million and $50.6 million in 1996, 1995 and 1994, respectively. Cash flow from
continuing operations remained consistent for 1996 as compared to 1995 primarily
as a result of improved operating results from continuing operations offset by
an increased use of cash by the operating assets and liabilities. Cash flow from
continuing operations decreased in 1995 as compared to 1994 primarily as a
result of the reduction in operating results from continuing operations.
During the first six months of 1997, Foamex spent approximately $16.4
million on capital expenditures and expects to maintain or reduce spending for
capital expenditures for the foreseeable future since significant capital
projects, such as the new Mexico City facility, are expected to be completed
during 1997. Future capital expenditures are expected to focus primarily on the
maintenance of existing equipment and on the installation of the VPF[TM]
manufacturing process. From the beginning of 1994 through 1996, Foamex spent
approximately $63.9 million on capital improvements. The expenditures included:
(i) installation of new VPF[TM] technology in the Verona, Mississippi and
Orange, California facilities; (ii) initiation of the construction of a facility
in Mexico City, Mexico to improve manufacturing efficiencies and to meet the
growing demand for flexible polyurethane foam products; and (iii) installation
of more efficient flexible polyurethane foam production line systems and
fabricating equipment in a number of manufacturing facilities.
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During 1996, Foamex received net sale proceeds of approximately $42.7
million in connection with the sale of Perfect Fit which was finalized in 1996.
The net sale proceeds were used to repurchase long-term debt of approximately
$30.6 million during 1996 and for the payment of certain retained liabilities,
with the remainder held as restricted cash as of December 29, 1996 for the
repurchase of additional long-term debt during 1997. During the twenty-six week
period ended June 29, 1997, Foamex repurchased approximately $8.0 million of
long-term debt and repaid $3.8 million of term borrowings under the Existing
Credit Facility with the remaining net sale proceeds.
On June 28, 1994, Foamex purchased an $87.9 million principal amount note
due 2006 from its 98% limited partner FJPS for $35.3 million (the "FJPS Note").
During December 1996, Foamex received a partial repayment of the FJPS Note in
the amount of $18.4 million. The FJPS Note was cancelled as part of the
Refinancing Plan. See Note 13 to the consolidated financial statements.
In March 1994, Foamex International acquired Transformacion De Espumas Y
Fieltros, S.A. de C.V. ("TEFSA") for an aggregate purchase price of $4.5
million, including related fees and expenses of approximately $0.4 million, to
be paid over a three-year period with an initial cash payment of $1.7 million.
In April 1995, Foamex acquired certain assets and assumed certain liabilities of
manufacturers of synthetic fabrics for the carpet and furniture industries for
an aggregate consideration of approximately $8.0 million, including related fees
and expenses of approximately $0.3 million, with an initial cash payment of $7.2
million. During 1996, Foamex International contributed its interest in Foamex
Mexico to Foamex. Also, during 1996 Foamex made a scheduled cash payment of
approximately $0.8 million in accordance with the purchase agreement. The final
payment of approximately $0.9 million was made in April 1997.
On August 29, 1997, Foamex entered into a definitive agreement to sell its
needlepunch carpeting, tufted carpeting and artificial grass products business,
located in Dalton, Georgia, to Bretlin, Inc., a subsidiary of The Dixie Group,
Inc. The sales price is approximately $33.0 million plus the value of inventory.
The transaction is subject to governmental review and the satisfaction of
certain customary terms and conditions. Foamex intends to use the net proceeds
of the sale to reduce long-term debt.
As of June 29, 1997, there were approximately $49.0 million of outstanding
revolving credit borrowings under the New Credit Facility with unused
availability of approximately $84.9 million. See "Description of Certain Debt
Instruments--New Credit Facility." Borrowings by Foamex Canada as of June 29,
1997 were approximately $3.5 million under a revolving credit agreement with
unused availability of approximately $1.0 million. Borrowings by Foamex Mexico
as of June 29, 1997 were approximately $0.5 million under a revolving credit
agreement with unused availability of approximately $1.5 million.
In May 1997, Foamex Mexico entered into a loan agreement which provides for
(i) a $5.0 million term loan and (ii) a $2.0 million line of credit. Borrowings
under such loan agreement bear interest at a rate of LIBOR plus 4.5% and are
collateralized by certain assets of Foamex Mexico. The $5.0 million term loan is
amortized in equal quarterly payments after the first year and will mature in
2002. The $2.0 million line of credit will be used for working capital purposes
and is renewable annually. Foamex Mexico plans to use the proceeds of the term
loan for expenditures associated with the construction of a new manufacturing
facility and to repay $2.0 million of borrowings under three promissory notes.
Foamex made cash distributions to its partners, pursuant to the Tax Sharing
Agreement (as defined), of approximately $4.5 million, $3.5 million, $2.4
million and $3.3 million in the twenty-six week period ended June 29, 1997 and
in the years ended 1996, 1995 and 1994, respectively. As of June 29, 1997,
Foamex had accrued an unpaid tax sharing obligation of approximately $12.6
million, of which it has made subsequent payments of approximately $3.0 million.
Interest Rate Swap Agreements. Foamex enters into interest rate swaps to
lower funding costs and/or to manage interest costs and exposure to changing
interest rates. Foamex does not hold or issue financial instruments for trading
purposes.
In connection with the Refinancing Plan, Foamex's existing interest rate
swap agreements with a notional amount of $300.0 million were considered to be
effectively terminated since the underlying debt was extinguished. These
interest rate swap agreements had an estimated fair value liability of $8.2
million at the date of the Refinancing Plan which is included in the
extraordinary loss on the early extinguishment of debt. In lieu of a cash
payment
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for the estimated fair value of the existing interest rate swap agreements,
Foamex entered into an amendment of the existing interest rate swap agreements
resulting in one interest rate swap agreement with a notional amount of $150.0
million through June 2007. Accordingly, the $8.2 million fair value liability
has been recorded as a deferred credit which will be amortized as a reduction
in interest and debt issuance expense on a straight-line basis over the life of
the amended interest rate swap agreement. Under the amended interest rate swap
agreement, Foamex is obligated to make fixed payments of 5.75% per annum
through December 1997 and variable payments based on the higher of LIBOR at the
beginning of the period or the end of the period for the remainder of the
agreement, in exchange for fixed payments by the swap partner at 6.44% per
annum for the life of the agreement, payable semiannually in arrears. The
amended interest rate swap agreement can be terminated by either party in June
2002, and annually thereafter, for a cash settlement based on the fair market
value of the amended interest rate swap agreement. Interest and debt issuance
expense is subject to fluctuations in LIBOR during the term of the swap
agreement except during 1997. Foamex is exposed to credit loss in the event of
nonperformance by the swap partner; however, the occurrence of this event is
not anticipated. The effect of the interest rate swaps described above was a
favorable adjustment to interest and debt issuance expense of $1.9 million and
$1.7 million for the twenty-six week periods ended June 30, 1996 and June 29,
1997, respectively. See "Risk Factors--Interest Rate Fluctuations."
Effects of the Refinancing Plan. On June 12, 1997, Foamex's parent, Foamex
International, completed the Refinancing Plan, which included (i) the Tender
Offer pursuant to which Foamex purchased (a) $99.8 million of the $104.3 million
outstanding principal amount of the Senior Secured Notes, (b) $130.1 million of
the $135.9 million outstanding principal amount of the Senior Notes, (c) $105.5
million of the $125.8 million outstanding principal amount of the Senior
Subordinated Debentures, (d) substantially all of the $7.0 million outstanding
principal amount of the Series B Debentures, and (e) all $116.7 million
outstanding principal amount of the FJPS Discount Debentures; (ii) the repayment
of $5.2 million of borrowings under the Existing Credit Facility; and (iii) the
payment of fees and expenses. In addition, the indentures pursuant to which the
Senior Secured Notes, Senior Notes, Senior Subordinated Debentures and Series B
Debentures were issued were amended to remove substantially all of the
restrictive covenants. Foamex incurred an extraordinary loss on the early
extinguishment of debt associated with the Refinancing Plan of approximately
$44.5 million. The Refinancing Plan was funded by $347.0 million of borrowings
under the New Credit Facility and the net proceeds from the issuance of $150.0
million principal amount of Old Notes. See "Risk Factors--Substantial Leverage"
and "--Partners' Deficit and Charge to Earnings."
As a result of the Refinancing Plan, Foamex's long-term debt increased
$150.1 million to $546.3 million, and variable rate debt comprises a larger
percentage of Foamex's overall indebtedness than in the past, and as a result,
future fluctuations in interest rates will have a greater impact on Foamex's
interest expense than in the past. Foamex expects the Refinancing Plan to result
in increased interest expense of approximately $2.5 million in the second half
of 1997 as compared to the first half of 1997, and annualized increased interest
expense of approximately $5.0 million, as compared to the debt structure prior
to the Refinancing Plan, assuming no material changes in interest rates.
Foamex's future interest expense will vary based on a variety of factors,
including fluctuations in interest rates in general.
In connection with the consummation of the Refinancing Plan, Foamex
distributed (i) to FJPS and FMXI, all FJPS Discount Debentures purchased in the
Tender Offer, the FJPS Note and the promissory note of Foamex International
payable to Foamex, and (ii) to Trace Foam, an amount in cash equal to 1/99th of
the distribution to FJPS and FMXI. As part of the Refinancing Plan (a) FMXI
dividended its distribution to Foamex International, (b) each of the FJPS
Discount Debentures distributed to FJPS, the Foamex International promissory
note, and the FJPS Note were canceled and (c) FJPS and its general partner, FJGP
Inc., were merged into Foamex International.
On July 7, 1996, Trace Holdings issued to Foamex a promissory note for
approximately $4.4 million plus accrued interest of approximately $0.4 million,
which is an extension of an earlier note. As part of the Refinancing Plan, the
Note was amended and restated, with accrued interest being added to principal,
the maturity was extended to July 7, 2001, and the interest rate was changed to
the sum of 23/8% plus Three Month LIBOR. In connection with the Refinancing
Plan, Foamex agreed to permit up to an additional $5.0 million of borrowings by
Trace International (which was borrowed on July 1, 1997) on terms and conditions
substantially similar to the existing promissory note, and the tax distribution
advance agreement was amended to increase the permitted advances to Foamex
International from $17.0 million to $25.0 million.
In addition, Foamex has called for redemption on October 1, 1997,
approximately $26.0 million principal amount of its Senior Notes, Senior
Subordinated Debentures and Series B Debentures of the approximately $30.0
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million of its outstanding public debt that was not tendered as part of the
Refinancing Plan. The redemption is expected to be funded with borrowings under
the New Credit Facility. In connection with this redemption, Foamex expects to
incur an extraordinary loss on the early extinguishment of debt of
approximately $2.6 million in the fourth quarter of 1997.
Inflation and Other Matters
There was no significant impact on Foamex's operations as a result of
inflation during the prior three year period. Effective in January 1997,
Foamex's operations in Mexico became subject to highly inflationary accounting
for financial reporting purposes. Translation adjustments resulting from
fluctuations in the exchange rate between the Mexican peso and the U.S. dollar
will be included in Foamex's consolidated statement of operations as compared to
partners' equity (deficit). Large fluctuations in the Mexican peso exchange rate
could have an adverse impact on Foamex's results of operations. The effect of
the translation adjustments on the 1997 results of operations have been
insignificant. In some circumstances, market conditions or customer expectations
may prevent Foamex from increasing the price of its products to offset the
inflationary pressures that may increase its costs in the future. See "--Results
of Operations--Year Ended December 31, 1995 Compared to Year Ended January 1,
1995" and "Risk Factors--Price and Availability of Raw Materials" for a
discussion of the impact of raw material price increases.
Business Cycle and Seasonality
Foamex's automotive foam customers are predominantly automotive OEMs or
other automotive suppliers. As such, the sales of these product lines are
directly related to the overall level of passenger car and light truck
production in North America. Also, Foamex's sales are sensitive to sales of new
and existing homes, changes in personal disposable income and seasonality.
Foamex typically experiences two seasonally slow periods during each year, in
early July and in late December, due to scheduled plant shutdowns and holidays.
Environmental Matters
Foamex is subject to extensive and changing environmental laws and
regulations. Expenditures to date in connection with Foamex's compliance with
such laws and regulations have not had a material adverse effect on its
operations, financial position, capital expenditures or competitive position.
The amount of liabilities recorded by Foamex in connection with environmental
matters as of June 29, 1997 was approximately $4.2 million. In addition, as of
June 29, 1997, Foamex has net receivables of approximately $1.0 million for
indemnification of environmental liabilities from former owners, net of a $1.0
million allowance relating to potential disagreements regarding the scope of the
indemnification. Although it is possible that new information or future
developments could require Foamex to reassess its potential exposure to all
pending environmental matters, including those described in the footnotes to
Foamex's condensed consolidated financial statements, Foamex believes that,
based upon all currently available information, the resolution of all such
pending environmental matters will not have a material adverse effect on
Foamex's operations, financial position, capital expenditures or competitive
position. See "Risk Factors--Environmental Liabilities and Regulations."
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BUSINESS
Foamex's operations are conducted together with its wholly-owned
subsidiaries, General Felt, Foamex Fibers, Foamex Canada, Foamex Mexico and
Foamex Asia, and their respective operations. FCC is a wholly-owned special
purpose subsidiary of Foamex whose sole business is to act as a co-issuer of
certain indebtedness of Foamex.
Business Overview
Foamex is the largest manufacturer and marketer of flexible polyurethane
and advanced polymer foam products in North America. Foamex's products are
utilized primarily in five end-markets: (i) carpet cushion and other carpet
products, (ii) cushioning foams for bedding and furniture fabricators, (iii)
furniture products for furniture manufacturers and packaging fabricators, (iv)
automotive applications, including trim and accessories and (v) specialty and
technical foams. Foamex is the largest North American producer of foams used for
carpet cushion, automotive applications and specialty and technical products and
is a leading North American producer of cushioning foams. As a result of the
1995 Operational Reorganization, Foamex has refocused on its flexible
polyurethane and advanced polymer foam business by divesting of non-foam
business segments. Foamex believes that a concentrated focus in only the foam
business segment will allow Foamex to concentrate management, financial and
operational resources and will position Foamex to pursue its growth strategy of
developing new products, improving profitability and expanding internationally.
Foamex distributes carpet cushion to major floor covering retailers such as
Sears, New York Carpet World and Carpetland USA. Foamex supplies cushioning
foams to major bedding and furniture manufacturers such as Sealy, Simmons and
Ethan Allen. Foamex's packaging foams are supplied to distributors and
manufacturers of computers and other electronic devices, including Seagate
Technology and CompUSA. Foamex distributes its automotive foam products to OEMs,
including Ford, General Motors and Chrysler, and major tier one suppliers such
as Lear Corporation, Johnson Controls and Delphi Automotive Systems. Foamex's
specialty and technical foams consist of reticulated foams and other customized
polyester and polyether foams used for filtration, reservoiring and consumer
products which are utilized worldwide in a wide variety of applications by
companies such as Hewlett-Packard and Briggs & Stratton.
Foamex and its predecessors have been developing, manufacturing and
marketing polyurethane foam for more than 40 years. For the 52 weeks ended June
29, 1997, Foamex had net sales of $935.8 million, EBDAIT of $126.1 million and
income from continuing operations of $63.1 million. During such period, the
percentage of net sales generated by cushioning foams; carpet cushion and other
carpet products; automotive foams; and specialty and technical foams was
approximately 36%, 31%, 25% and 8%, respectively. Prior to the second quarter of
1997, the cushioning foams and furniture product markets were treated as a
single product group; therefore, all historical data in this Prospectus reflects
cushioning foam and furniture products as the single product group "cushioning
foam."
Competitive Strengths
Foamex believes that it possesses a number of competitive strengths that
have allowed it to become the largest manufacturer and marketer of flexible
polyurethane and advanced polymer foam products in North America, including:
Emphasis on New Product Development. Based upon Foamex's knowledge and
experience in the industry, Foamex believes it has a significant research and
development capability and, as a result, has been awarded more than 100
foam-related patents worldwide. This capability provides Foamex with a stream of
new products, new applications for existing products, and new processes for foam
manufacturing. An example of this capability is VPF[TM], an innovative
manufacturing process currently used in North America only by Foamex, which has
been used to create new products such as Reflex[TM] and Nexol[TM]. Reflex[TM] is
designed to replace fiberfill in certain cushioning products, and Nexol[TM] is
designed to replace rigid styrene foam in packaging. Foamex has also recently
introduced Plushlife[TM] for the carpet cushion market and Powerthane[TM] for
automotive applications. Another technology developed by Foamex is SMT[TM],
which allows for high volume precision contouring of foam surfaces, thereby
improving Foamex's existing products and creating new products such as sculpted
bed mattresses.
Alignment with Key Customers. Foamex has historically maintained a steady
revenue base by aligning itself with key customers, many of which have been
Foamex's customers for many years. These customer relationships are supported by
Foamex's extensive North American network of 58 strategically located
facilities, which allows Foamex to deliver products cost effectively on a
just-in-time basis. As a result of these relationships, Foamex is
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able to work with customers during the design phase for new products and new
applications, thereby favorably positioning Foamex to be the principal supplier
for these products.
High Quality Products. Foamex is a pioneer in manufacturing and
distributing high quality flexible polyurethane and advanced polymer foam
products to satisfy the specific needs of customers. During 1996, Foamex
completed QS-9000 and ISO-9001 certification for its eight domestic facilities
that supply the automotive industry and is pursuing the appropriate
certifications for the remainder of its manufacturing facilities. Foamex was
one of the first flexible polyurethane foam manufacturers to be QS-9000
certified, demonstrating its commitment to producing the highest quality
products and meeting the needs of its customers.
Low Cost Manufacturing Position. Foamex strives to maintain
state-of-the-art manufacturing facilities which utilize recent manufacturing
improvements such as the proprietary VPF[TM] and patented SMT[TM] technologies,
as well as the latest carbon dioxide converting process. These technologies are
designed to, among other things, maximize the conversion efficiency of raw
materials into finished goods and to minimize labor costs. Furthermore, Foamex
has implemented a company-wide Continuous Improvement Process program designed
to continually increase productivity, reduce costs and improve product quality.
In addition, as the largest manufacturer of flexible polyurethane and advanced
polymer foam products in North America, management believes that Foamex is able
to realize economies of scale in its raw materials procurement, which represent
approximately 74% of Foamex's manufacturing costs, and recover costs from the
use of substantially all of its internally generated trim scrap, which is the
principal raw material in the production of bonded carpet cushion.
Growth Strategy
Foamex's strategy focuses on (i) developing new proprietary foam products,
(ii) introducing new uses for advanced foam products, (iii) expanding in
international markets and (iv) reducing costs through continued emphasis on
manufacturing improvements.
New Proprietary Foam Products. Foamex plans to continue to utilize its
significant research and development capability to develop new products. In
recent years, Foamex has developed new proprietary technologies, such as VPF[TM]
and SMT[TM], which have been used to create higher margin, value-added products
designed to replace existing flexible polyurethane foam products. SMT[TM] has
allowed Foamex to develop sculpted mattress toppers, mattress pads and bed
pillows which are replacing traditional polyurethane foam products due to their
superior comfort, quality and value. In certain cases, such as Plushlife[TM], a
proprietary carpet cushion designed to replace traditional bonded and prime
carpet cushion, Foamex brands these products to create product recognition and
to generate higher margins.
New Uses for Foam. Foamex is actively developing new applications for its
advanced foam products to replace other materials. In the automotive industry,
the number of foam applications has increased from 8 per vehicle in 1984 to 20
per vehicle in 1997. For example, Foamex has introduced products such as foam
headliners which are replacing fiberglass headliners (the rigid material between
the fabric and the metal roof of a car). Reflex[TM] foams, which include cushion
wraps and cushion cores and are created using VPF[TM], are advanced polymer
cushioning products designed to improve comfort, quality and durability in
upholstered furniture and to replace standard fiberfill. Nexol[TM] foams, also
created using VPF[TM], expand Foamex's ability to meet the special packaging
requirements of sensitive and fragile products such as electronic components,
and replace standard rigid styrene foam. Foamex's fastest growing business,
specialty and technical foams, focuses on developing customized foam
applications for high-growth product markets such as inkjet printer cartridges,
nickel-metal hydride batteries and oxygenators for cardio-pulmonary surgery.
International Expansion. Foamex has positioned itself to take advantage of
global opportunities. In Mexico, Foamex has built a new state-of-the-art
manufacturing facility, which is expected to meet increasing demand and to allow
Foamex to increase market penetration. In Asia, which management believes offers
attractive growth opportunities, Foamex is actively exploring strategic options
to enter the foam market. Additionally, Foamex has created an alliance with
Recticel, Europe's largest flexible polyurethane foam manufacturer, which will
allow Foamex to better meet the increasing global needs of its automotive
customers.
Additional Operating Cost Savings. Foamex is continuing to build on the
1995 Operational Reorganization which was designed to reduce operating costs and
improve productivity. Foamex has identified additional operating cost savings in
1997 that are expected to result from (i) improved productivity, through-put and
material yields
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in the manufacturing process, (ii) the full year benefit of facilities closed
during 1996, (iii) the closure of two additional facilities during 1997 and
(iv) the expansion of the Continuous Improvement Process.
Products
Foamex is a manufacturer and distributor of quality flexible polyurethane
and advanced polymer foam products designed to satisfy the specific needs of
customers. Foamex's 46 foam manufacturing and 12 distribution facilities enable
it to source production efficiently and meet the needs of its customers
throughout North America. Such facilities are also important for satisfying all
of the foam requirements of large national customers in a timely and cost
effective manner.
Foamex's products are utilized primarily in five end-markets: (i) carpet
cushion and other carpet products, (ii) cushioning foams for bedding and
furniture fabricators, (iii) furniture products for furniture manufacturers and
packaging fabricators, (iv) automotive applications, including trim and
accessories and (v) specialty and technical foams. Prior to the second quarter
of 1997, the cushioning foams and furniture product markets were treated as a
single product group; therefore, all historical data in this Prospectus reflects
cushioning foam and furniture products as the single product group "cushioning
foam." The table below sets forth net sales of Foamex by product category for
the periods indicated:
<TABLE>
<CAPTION>
Fiscal Year Six months ended June
---------------------------------------------------------- ------------------------------------------
1994 1995 1996 1996 1997
----------------- ----------------- ----------------- ----------------- -----------------
$ % $ % $ % $ % $ %
(Dollars in millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Carpet cushion $ 292.5 35.1% $ 271.0 31.4% $ 291.3 31.5% $ 140.3 30.5% $ 142.9 30.5%
Cushioning
foams ......... 289.2 34.7 310.0 35.9 332.9 35.9 166.0 36.1 170.0 36.2
Automotive
foams ......... 198.0 23.7 219.8 25.5 231.9 25.0 119.3 26.0 119.0 25.4
Specialty and
technical
foams ......... 54.0 6.5 62.0 7.2 70.3 7.6 34.0 7.4 37.1 7.9
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Total ...... $ 833.7 100.0% $ 862.8 100.0% $ 926.4 100.0% $ 459.6 100.0% $ 469.0 100.0%
======= ===== ======= ===== ======= ===== ======= ===== ======= =====
</TABLE>
Carpet Cushion. Foamex is one of the largest manufacturers and distributors
of prime, bonded, sponge rubber and felt carpet cushion in North America. Foamex
also manufactures synthetic "grass" turf, primarily for the residential market.
Synthetic turf is tufted from polypropylene yarn in a variety of colors,
textures and qualities. In addition, Foamex manufactures a variety of textured
carpeting and wall coverings primarily using solution dyed polypropylene staple
fiber. Such needlepunch carpets have generally been used as indoor/outdoor floor
covering but, through the development of patterned products and stylized color
lines, have found increasing acceptance in both residential and commercial
applications. On August 29, 1997, Foamex entered into a definitive agreement to
sell its needlepunch carpeting, tufted carpeting and artificial grass products
business. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources." Foamex has also
developed Plushlife[TM], a proprietary bonded carpet cushion product, introduced
in February 1997, which Foamex believes to be one of the most significant
improvements in bonded carpet cushion products in many years. Plushlife[TM]
combines two cushions into a single structure one to absorb the energy of foot
traffic and the other to enhance comfort.
Foamex developed ComfortWear[RegTM], a quality prime carpet cushion, which
was introduced in February 1994 in conjunction with significant consumer and
trade promotions. ComfortWear[RegTM] currently is sold in retail outlets
throughout the United States. ComfortWear[RegTM] is marketed through floor
covering retailers in the United States such as Sears, New York Carpet World and
Carpetland USA.
Cushioning Foams. Foamex is one of the largest manufacturers of cushioning
foams in North America. These foams are used by the bedding industry in quilts,
toppers, cores and border rolls for mattresses and by the furniture industry for
seating products. Cushioning foams are generally sold in large volumes on a
regional basis because of high shipping costs. Due to its size and the strategic
location of its production facilities, Foamex believes it will
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continue to have an advantage over small regional producers in supplying large
national accounts with all of their foam requirements.
The development and introduction of value added products continues to be a
priority of Foamex and has included (i) Reflex[TM] and Nexol[TM] discussed
below, (ii) viscoelastic or "memory" foams for the bedding industry, which
maintain their resiliency better than other foams and materials and (iii) Latex
Plus[TM], a urethane-based replacement for latex, a material used in bedding
products. Foamex's most recent product introductions have included Reflex[TM]
and Nexol[TM] for the cushioning and packaging industries, respectively, which
were created using the VPF[TM] manufacturing process. Reflex[TM] materials,
which include cushion wraps and cushion cores, are advanced polymer cushioning
products designed to improve comfort, quality and durability in upholstered
furniture. Nexol[TM] expands Foamex's capabilities in meeting the special
packaging requirements of sensitive and fragile products such as electronic
components.
Foamex's cushioning foams for bedding products are sold to mattress
customers, such as Sealy, Simmons, Serta, and Spring Air Company, both directly
and through independent fabrication operators located across the United States.
Also, Foamex supplies cut-to-size seat cushions, backs and other pieces to the
furniture industry, including to Berkline, Action and Schnadig.
Automotive Foams. Foamex is one of the largest suppliers of the trim foam
requirements of the North American operations of American OEM's. Depending on
the automotive manufacturer and/or the application, foam is supplied by Foamex
either directly to the manufacturer or indirectly through subsuppliers.
Automotive foams are used for trim pads, door panel parts, headliners,
acoustical purposes, 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.
The domestic automotive manufacturers have narrowed their supply base
during recent years, increasing 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 these manufacturers' needs.
Foamex believes it has benefited from this trend, which favors suppliers with
quality facilities and products, cost efficient plants, long- standing
relationships, strong design, technical and product development support and
broad product lines. Foamex believes this outsourcing trend will continue,
particularly for components such as foam, trim and accessories that represent a
small portion of the overall cost of a vehicle. Automotive suppliers are
increasingly offering integrated systems which lower overall cost and improve
quality relative to previous sourcing methods in which individually sourced
components were assembled and installed by the OEMs.
During 1996, Foamex entered into a strategic alliance with Recticel to
design, manufacture and market polyurethane products for the automotive industry
in order to meet the worldwide requirements of the OEMs and the major tier one
suppliers such as Lear Corporation, Johnson Controls, Inc., and Delphi
Automotive Systems. Under this alliance, both companies will jointly supply the
automotive suppliers, with products manufactured in North America by Foamex and
in Europe by Recticel.
Foamex believes that the automotive manufacturers' just-in-time inventory
requirements will provide Foamex with a competitive advantage due to the quality
of Foamex's foam products, its flexible manufacturing capacity and its 46
strategically located manufacturing facilities and 12 distribution facilities
that enable Foamex to minimize shipping time and costs. In addition, Foamex
expects foam usage per vehicle to continue to increase because manufacturers
have generally increased their investment in upgrading automobile and light
truck interiors to improve comfort, attractiveness, safety and noise absorption
capabilities. Foam is well suited to meet these requirements.
Foamex's new product development and flexible manufacturing capabilities
allow it to produce quality products to satisfy changing specifications.
Examples of Foamex's ability to react to changing industry requirements include
thermoformable headliners, tri-laminates, advanced cutting technology and energy
absorbing foams. For example, Foamex is one of the first suppliers to introduce
a thermoformable headliner, Customfit[TM], made from rigid polyurethane foam.
The use of foam headliners is expected to continue to grow due to concerns for
automotive workers' safety caused by fiberglass processing. Foamex intends to
continue manufacturing and supplying foam and fabric components, such as
tri-laminated material for automotive seating. The use of tri-laminates has
become increasingly prevalent due to significant cost savings for manufacturers
and improved aesthetics for consumers.
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Automotive manufacturers are increasingly requiring the production
facilities of their suppliers to meet certain high quality standards. Foamex has
achieved the highest quality ratings awarded to foam suppliers by automotive
manufacturers. For instance, the Ford Motor Company has announced that it will
buy components only from plants which have achieved or are currently being
evaluated for the Ford Q-1 status. All Foamex plants which supply parts to the
Ford Motor Company are currently rated Q-1. In addition, Foamex's facilities
that supply the automotive industry have been highly rated by the General Motors
Corporation's "Target for Excellence" program, and a majority of such facilities
that supply the Chrysler Corporation have received Chrysler's "Quality
Excellence" award. Eventually, all tier one and tier two automotive supplier
facilities worldwide will be required to meet the QS-9000 quality manufacturing
standards set by United States automotive manufacturers. In 1996, Foamex
completed QS-9000 and ISO-9001 certification for its eight domestic facilities
which supply the automotive industry. Foamex was one of the first polyurethane
manufacturers to be QS-9000 certified which demonstrates its commitment to
producing the highest quality products and meeting the needs of its customers.
Specialty and Technical Foams. Foamex believes that it is one of the foam
industry's prime innovators and producers of industrial, specialty, consumer and
safety foams (collectively, "specialty and technical foams"). Specialty and
technical foams 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.
Reticulated foams are well suited for filtration, reservoiring, sound
absorption and sound transmission. Industrial applications include carburetors,
computer cabinets, ink pad 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 specialty
and technical foams have unique characteristics such as flame retardancy and
fluid absorption. In addition, felting and lamination with other foams or
materials give these composites specific properties. Additional products sold
within this group include foams for refrigerated supermarket produce counters,
mop heads, paint brushes, diapers and cosmetic applications.
Foamex utilizes advertising in trade journals and related media in order to
attract customers and, more generally, to create an awareness of its
capabilities for specialty and technical foams. In addition, due to the highly
specialized nature of most specialty and technical foams, Foamex's research
staff works with customers to design, develop and manufacture each product to
specification.
Marketing and Sales
Foamex has a marketing and sales force of approximately 200 employees.
Product business managers direct sales efforts toward each of the end-user
markets (i.e., carpet cushion, cushioning foams, furniture products, automotive
foams and specialty and technical foams).
Foamex's carpet cushion marketing program includes the broad distribution
of products to both the retail and wholesale levels. Furthermore, promotions,
marketing and advertising expenditures are important in positioning Foamex's
carpet cushions as premium, trade branded products.
Bedding and furniture products are sold directly by Foamex to customers and
also through third party independent fabricators. The key strategic elements
supporting growth in these areas are a focus on marketing and sales efforts,
high quality, cost-competitive products and low freight costs through optimal
plant location. Plant locations are critical in this regionalized line of
business where the transportation cost typically comprises a significant portion
of product cost.
Foamex has been a leading supplier of automotive foam products to the
automotive industry for more than 30 years. Foamex is the primary supplier of
automotive foam products to certain tier one suppliers, including Lear
Corporation, Johnson Controls, Inc. and Delphi Automotive Systems. For its other
customers, Foamex competes for new business both at the beginning of the
development of new models and upon the redesign of existing models. Once a foam
producer has been designated to supply parts for a new 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.
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Foamex markets most of its specialty and technical foams through a network
of independent fabrication and distribution companies in North America, the
United Kingdom and South Korea. Such fabricators or distributors often further
process or finish these products to meet the specific needs of the end user.
Foamex's specialty and technical foams service unique end user requirements and
are generally sold at relatively high margins. This line of business is
characterized by a diversity and complexity of both customers and applications.
International and Domestic Operations and Export Sales
International ventures initiated in 1996 illustrate Foamex's long-term
commitment to expanding outside North America. These international ventures
include Foamex's expansion of its international capabilities in Mexico and the
exploration of opportunities in Asia. The first international venture was
Foamex's expansion in Mexico to meet the steady growth in demand there over the
past year. Foamex has a total of three facilities in Mexico serving the
automotive and cushioning industries. Two such facilities are located within
Mexican free trade zones close to the U.S. border and primarily service
automotive customers. The new state-of-the-art Mexico City facility services
both automotive and cushioning customers.
Foamex has created an alliance with Recticel, Europe's largest flexible
polyurethane foam manufacturer, which will allow Foamex to meet the global needs
of its automotive customers. In addition, the alliance will allow Foamex and
Recticel to jointly design, manufacture and market products for U.S. and
European automotive customers. The alliance facilitates supplying automotive
customers with polyurethane foam products in both North America and Europe.
Foamex has in the past exchanged technical information and expertise relating to
foam manufacturing with Recticel.
Foamex has been servicing the Asian market with technical products for
several years primarily through third party distributors. Foamex believes Asia
offers attractive growth opportunities and is exploring opportunities in Asia.
Net sales to customers in foreign markets in 1996, 1995 and 1994 were $76.0
million (8.2% of net sales), $73.3 million (8.5% of net sales) and $66.6 million
(8.0% of net sales), respectively.
Customers
During the past three fiscal years, no one customer accounted for more than
10.0% of Foamex's net sales. However, 1996 net sales to the five largest
customers comprised $225.4 million or 24.3% of Foamex's net sales. See "Risk
Factors--Reliance on Major Customers."
Manufacturing and Raw Materials
Foamex produces bulk and fabricated flexible polyurethane foam at 46
manufacturing facilities in North America with a total of approximately 6.9
million square feet of floor space. Foamex believes that its manufacturing
facilities are well suited for their intended purposes and are in good
condition. See " --Properties." The manufacturing facilities are strategically
located to service their major customers because high freight cost in relation
to the cost of the foam product generally results in distribution being most
cost effective within 200 to 300 miles from each facility.
In 1996, raw materials accounted for approximately 74% of the manufacturing
costs of Foamex. The two principal chemicals used in the manufacture of flexible
polyurethane foam, TDI and polyol, accounted for approximately 50% of raw
material costs. ARCO Chemical Company, BASF Corporation and The Dow Chemical
Company are among Foamex's largest suppliers of raw materials. Foamex generally
has alternative chemical suppliers for each major raw material and Foamex
believes that it could find alternative sources of supply should it cease doing
business with any of its major suppliers. The price of TDI and polyol is
influenced by demand, manufacturing capacity and oil and natural gas prices.
Foamex's principal suppliers of raw materials used in the manufacture of
flexible polyurethane foam have increased the price of raw materials several
times since September 1994. In response, Foamex increased selling prices, where
possible, for cushioning, automotive and specialty and technical foam products.
Results of operations have been and could be adversely affected by delays in
implementing, or the inability of Foamex to implement, selling price increases
to offset raw material cost increases. For example, Foamex estimates that in
1995 the amount of net unrecovered raw material cost increases was approximately
$25.0 million. Foamex's principal suppliers of
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raw materials unsuccessfully attempted to implement price increases in October
1996 and these suppliers have again announced price increases effective April
1997. Foamex believes that if any price increases are sustained in the
industry, Foamex will also be impacted by such increases to the extent any such
price increases are not offset through a selling price increase. The impact of
raw material cost increases was not significant during the second quarter of
1997. However, Foamex estimates an unfavorable impact for the raw material cost
increases, net of sales price increases to customers of between $1.5 million to
$3.0 million during the third quarter of 1997. Significant increases in raw
material costs could have a material adverse effect on Foamex's financial
condition or results of operations. There can be no assurance that chemical
suppliers will not increase raw material costs in the future or that Foamex
will be able to implement selling price increases to offset any such raw
material cost increases. See "Risk Factors--Price and Availability of Raw
Materials."
Employees
As of June 29, 1997, Foamex employed approximately 4,675 persons, with
4,150 of such employees involved in manufacturing, 325 in administration and 200
involved in sales and marketing. Approximately 900 of these employees are
located outside the United States. Also, approximately 1,350 of these employees
are covered by collective bargaining agreements with labor unions, which
agreements expire on various dates from 1997 through 2001. Foamex considers
relations with its employees to be good.
Competition
The flexible polyurethane foam industry is highly competitive. With respect
to flexible polyurethane foam, competition is based primarily on price, quality
of products and service. Foamex's larger competitors in the polyurethane foam
industry include E. R. Carpenter Company, Crain Industries Inc., Hickory Springs
Manufacturing Company, Vitafoam, Inc., General Foam Corporation, Flexible Foam
Products, Inc. and Crest Foam Industries, Inc. None of such competitors competes
in all of the product categories in which Foamex does business. See "Risk
Factors--Competition."
Patents and Trademarks
Foamex owns various United States and foreign patents relating to the
manufacture and processing of foam. Patented technologies developed by Foamex
have included SMT[TM], reticulation and felting. Trademarks and servicemarks
include Foamex[RegTM], General Felt Industries[RegTM], ComfortWear[RegTM],
Plushlife[TM], SMT[TM], Reflex[TM], Nexol[TM], Chamber TechnologySM and
Berber-Mate[TM]. The registered processes and products were developed through
on-going research and development activities to improve quality, reduce costs
and expand markets through the development of new applications for flexible
polyurethane foam products. Foamex uses several additional trademarks and
tradenames for product identification, the majority of which are used in the
carpet cushion and specialty and technical foams product lines. See "--Research
and Development" below for a discussion of the VPF[TM] technology. Foamex
believes its business is not dependent upon any individual patent, trademark,
servicemark or tradename.
Research and Development
Foamex believes it has a significant research and development capability.
This capability give Foamex a significant advantage in the on-going development
of new products and new applications for existing products. Foamex has research
and development facilities located in Hayward, California; Dalton, Georgia; and
Eddystone, Pennsylvania employing approximately 28 full-time employees.
Expenditures for research and development amounted to $2.7 million, $3.2 million
and $2.5 million for 1994, 1995 and 1996, respectively.
Foamex and Recticel, have exchanged know-how, trade secrets, engineering
and other data, designs, specifications, chemical formulations, technical
information, market information and drawings which are necessary or useful for
the manufacture, use or sale of foam products and it is anticipated that they
will continue to do so in the future. Foamex, Recticel and Beamech Group
Limited, an unaffiliated third party ("Beamech"), have an interest in a Swiss
corporation that develops new manufacturing technology for the production of
polyurethane foam including the VPF[TM] manufacturing process. VPF[TM] is a
manufacturing process that contains no chlorofluorocarbons and eliminates
volatile auxiliary blowing agents. Moreover, VPF[TM] produces polymers with a
wide range of properties, including previously unavailable low density,
ultrasoft products. Foamex believes that the VPF[TM] process will expand
applications for urethane-based products. Foamex, Recticel, and their affiliates
have
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a royalty-free license to use technology developed by the Swiss corporation.
The Swiss corporation, subject to certain limitations, is free to license the
VPF[TM] technology to third parties. Foamex currently operates the only two
VPF[TM] units in North America.
Foamex recently developed SMT[TM] which allows for high volume precision
contouring of foam surfaces, including the pattern, the size of the pattern and
the depth of the cut, thereby improving Foamex's existing products and creating
new products such as sculpted bed mattresses that provide enhanced comfort.
Properties
As of June 29, 1997, Foamex conducted its operations through 46
manufacturing and 12 distribution facilities. Of these 58 facilities, 19 are
owned and 39 are leased. Total floor space in use at the owned manufacturing and
distribution facilities is approximately 3.9 million square feet and total floor
space in use at the leased manufacturing and distribution facilities is
approximately 3.5 million square feet. Fifty of these facilities are located in
36 cities in the United States, five facilities are located in two cities in
Canada and three facilities are located in three cities in Mexico. The 1997
annual base rental with respect to such leased facilities is approximately $7.4
million under leases expiring from 1997 to 2005. Foamex does not anticipate any
problem in renewing or replacing any of such leases expiring in 1997. In
addition, Foamex has approximately 1.1 million square feet of idle space of
which approximately 0.5 million is leased.
Foamex maintains administrative and sales offices in Linwood, Pennsylvania;
Hayward, California; Chicago, Illinois; Southfield, Michigan; and New York, New
York.
Environmental Matters
Foamex is subject to extensive and changing federal, state, local and
foreign environmental laws and regulations, including those relating to the use,
handling, storage, discharge and disposal of hazardous substances and the
remediation of environmental contamination, and as a result, is from time to
time involved in administrative and judicial proceedings and inquiries relating
to environmental matters. During 1996, expenditures in connection with Foamex's
compliance with federal, state, local and foreign environmental laws and
regulations did not have a material adverse effect on its operations, financial
position, capital expenditures or competitive position. As of June 29, 1997,
Foamex has accruals of approximately $4.2 million for environmental matters.
The Clean Air Act Amendments of 1990 (the "1990 CAA Amendments") provide
for the establishment of federal emission standards for hazardous air pollutants
including methylene chloride and TDI, principal raw materials used in the
manufacturing of foam. On December 27, 1996, the United States Environmental
Protection Agency (the "EPA") proposed regulations under the 1990 CAA Amendments
that will require manufacturers of slab stock polyurethane foam to reduce
emissions of methylene chloride. Because these regulations are subject to change
prior to finalization, Foamex cannot accurately predict the actual cost of their
implementation. Foamex does not believe implementation of the regulations will
require it to make material expenditures, however, due to Foamex's use of
alternative technologies which do not utilize methylene chloride and its ability
to shift current production to the facilities which use these alternative
technologies. The 1990 CAA Amendments also may result in the imposition of
additional standards regulating air emissions from polyurethane foam
manufacturers, but these standards have not yet been proposed or promulgated.
Foamex has reported to appropriate state authorities that it has found soil
contamination in excess of state standards at facilities in Orlando, Florida; La
Porte, Indiana; Conover, North Carolina; Cornelius, North Carolina; Fort Wayne,
Indiana; Philadelphia, Pennsylvania; and at a former facility in Dallas, Texas
and groundwater contamination in excess of state standards at the Orlando,
Conover, Philadelphia, and Cornelius facilities. Foamex has begun remediation
and is conducting further investigations into the extent of the contamination at
these facilities and, accordingly, the extent of the remediation that may
ultimately be required. The actual cost and the timetable of any such
remediation cannot be predicted with any degree of certainty at this time.
Foamex, based on engineering estimates of the remaining potential remediation
costs for these facilities, has accruals of $3.0 million for the estimated cost
of completing remediation and established a net receivable of $1.0 million on
the basis of indemnifications by Trace Holdings and RFC associated with the
partnership formation of Foamex. Foamex has completed remediation of soil
contamination at a former Trenton, New Jersey manufacturing facility closed in
October 1993 and is awaiting final closure approvals from the New Jersey
Department of Environmental Protection regarding the remediation of soil
contamination and monitoring of groundwater at the former Trenton facility.
Also,
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Foamex has completed remediation at its Mesquite, Texas facility and is
awaiting a certificate of completion under the Texas Voluntary Clean Up
program.
Federal regulations require that by the end of 1998 all USTs be removed or
upgraded in all states to meet applicable standards. Foamex has six USTs that
will require removal or permanent in-place closure by the end of 1998. Due to
the age of these tanks, leakage may have occurred resulting in soil and possibly
groundwater contamination. Foamex has accrued approximately $0.3 million for the
estimated removal and remediation costs, if any, associated with these USTs.
However, the full extent of contamination, and accordingly, the actual cost of
such remediation cannot be predicted with any degree of certainty at this time.
Foamex believes that its USTs do not pose a significant risk of environmental
liability because of its monitoring practices for USTs and conditional approval
for the permanent in-place closure for certain USTs. However, there can be no
assurance that such USTs will not result in significant environmental liability
in the future.
On April 10, 1997, the Occupational Health and Safety Administration
promulgated new standards governing employee exposure to methylene chloride,
which is used as a blowing agent in some of Foamex's manufacturing processes.
Foamex does not believe that it will be required to make any material
expenditures to comply with these new standards due to its use of alternative
technologies which do not use methylene chloride and its ability to shift
production to facilities which use these technologies.
Foamex has been designated as a Potentially Responsible Party ("PRP") by
the EPA with respect to 13 sites with an estimated total liability to Foamex for
the 13 sites of less than approximately $0.5 million. Estimates of total cleanup
costs and fractional allocations of liability are generally provided by the EPA
or the committee of PRPs with respect to the specified site. In each case, the
participation of Foamex is considered to be immaterial.
On May 5, 1997, there was an accidental chemical spill at one of Foamex's
manufacturing facilities. Such spill was contained on site and the clean-up will
consist of on-site remediation and disposal of contaminated soil at an
anticipated cost of approximately $0.4 million. Although it is possible that new
information or future developments could require Foamex to reassess its
potential exposure relating to all pending environmental matters, including
those described herein, Foamex believes that, based upon all currently available
information, the resolution of such environmental matters will not have a
material adverse effect on Foamex's operations, financial position, capital
expenditures or competitive position. The possibility exists, however, that new
environmental legislation and/or environmental regulations may be adopted, or
other environmental conditions may be found to exist, that may require
expenditures not currently anticipated and that may be material. See "Risk
Factors--Environmental Liabilities and Regulations."
Legal Proceedings
As of August 8, 1997, Foamex and Trace Holdings were two of multiple
defendants in actions filed on behalf of approximately 5,000 recipients of
breast implants in various United States federal and state courts and one
Canadian provincial court. Some of these actions allege substantial damages, but
most of these actions allege unspecified damages for personal injuries of
various types. Three of these cases seek to allege claims on behalf of all
breast implant recipients or other allegedly affected parties, but no class has
been approved or certified by the court. In addition, three cases have been
filed alleging claims on behalf of approximately 700 residents of Australia, New
Zealand, England, and Ireland. Foamex believes that the number of suits and
claimants may increase.
During 1995, Foamex and Trace Holdings were granted summary judgments and
dismissed as defendants from all cases in the federal courts of the United
States and the state courts of California. Appeals for these decisions were
withdrawn and the decisions are final.
Although breast implants do not contain foam, certain silicone gel implants
were produced using a polyurethane foam covering fabricated by independent
distributors or fabricators from bulk foam purchased from Foamex or Trace
Holdings. Neither Foamex nor Trace Holdings recommended, authorized, or approved
the use of its foam for these purposes. Foamex is indemnified by Trace Holdings
for any such liabilities relating to foam manufactured prior to October 1990.
Although Trace Holdings has paid Foamex's litigation expenses to date pursuant
to such indemnification and Foamex believes Trace Holdings likely will be in a
position to continue to pay such expenses, there can be no absolute assurance
that Trace Holdings will be able to provide such indemnification. While it is
not feasible to predict or determine the outcome of these actions, based on
Foamex's present assessment of the merits of pending claims, after consultation
with the general counsel of Trace Holdings,
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and without taking into account the indemnification provided by Trace Holdings,
the coverage provided by Trace Holdings' and Foamex's liability insurance, and
the potential indemnity from the manufacturers of polyurethane covered breast
implants, Foamex believes that the disposition of matters that are pending or
that may reasonably be anticipated to be asserted should not have a material
adverse effect on either Foamex's or Trace Holdings' consolidated financial
position or results of operations. If Foamex's assessment of liability with
respect to these actions is incorrect, such actions could have a material
adverse effect on Foamex.
Foamex is party to various other lawsuits, both as defendant and plaintiff,
arising in the normal course of business. It is the opinion of Foamex that the
disposition of these lawsuits will not, individually or in the aggregate, have a
material adverse effect on the financial position or results of operations of
Foamex. If Foamex's assessment of Foamex's liability with respect to these
actions is incorrect, such actions could have a material adverse effect on
Foamex's consolidated financial position. See "Risk Factors--Litigation."
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THE EXCHANGE OFFER
Purpose and Effect of the Exchange Offer
The Old Notes were sold by the Issuers on June 12, 1997 to the Initial
Purchasers, who placed the Old Notes with certain institutional and accredited
investors. In connection therewith, the Issuers, the Subsidiary Guarantors and
the Initial Purchasers entered into the Registration Rights Agreement, pursuant
to which the Issuers and the Subsidiary Guarantors agreed, for the benefit of
the Holders of the Old Notes, that the Issuers and the Subsidiary Guarantors
would, at their sole cost, (i) within 45 days following the original issuance of
the Old Notes, file with the Commission the Exchange Offer Registration
Statement (of which this Prospectus is a part) under the Securities Act with
respect to an issue of a series of new notes of the Issuers identical in all
material respects to the series of Old Notes and (ii) use their reasonable best
efforts to cause such Exchange Offer Registration Statement to become effective
under the Securities Act at the earliest possible time, but in no event later
than 120 days following the original issuance of the Old Notes. Upon the
effectiveness of the Exchange Offer Registration Statement (of which this
Prospectus is a part), the Issuers will offer to the Holders of the Old Notes
the opportunity to exchange their Old Notes for a like principal amount of New
Notes, to be issued without a restrictive legend and which may, subject to
certain exceptions described below, be reoffered and resold by the Holder
without restrictions or limitations under the Securities Act. The term "Holder"
with respect to any Note means any person in whose name such Note is registered
on the books of Foamex.
Each Holder desiring to participate in the Exchange Offer will be required
to represent, among other things, that (i) it is not an "affiliate" (as defined
in Rule 405 of the Securities Act) of the Issuers, (ii) it is not engaged in,
and does not intend to engage in, and has no arrangement or understanding with
any person to participate in, a distribution of the New Notes, and (iii) it is
acquiring the New Notes in the ordinary course of its business (a holder unable
to make the foregoing representations is referred to herein as a "Restricted
Holder"). A Restricted Holder will not be able to participate in the Exchange
Offer, and may only sell its Old Notes pursuant to a registration statement
containing the selling securityholder information required by Item 507 of
Regulation S-K of the Securities Act, or pursuant to an exemption from the
registration requirement of the Securities Act.
Each Participating Broker-Dealer is required to acknowledge in the Letter
of Transmittal that it acquired the Old Notes as a result of market-making
activities or other trading activities and that it will deliver a prospectus in
connection with the resale of such New Notes. Based upon interpretations by the
staff of the Commission, the Issuers believe that New Notes issued pursuant to
the Exchange Offer to Participating Broker-Dealers may be offered for resale,
resold, and otherwise transferred by a Participating Broker-Dealer (other than a
Restricted Holder) upon compliance with the prospectus delivery requirements,
but without compliance with the registration requirements, of the Securities
Act. The Issuers have agreed that for a period of 120 days following
consummation of the Exchange Offer they will make this Prospectus available to
Participating Broker-Dealers for use in connection with any such resale. During
such period of time, delivery of this Prospectus, as it may be amended or
supplemented, will satisfy the prospectus delivery requirements of a
Participating Broker-Dealer engaged in market making or other trading
activities. See "Plan of Distribution."
Based upon interpretations by the staff of the Commission, the Issuers
believe that New Notes issued pursuant to the Exchange Offer may be offered for
resale, resold and otherwise transferred by a Holder thereof (other than a
Restricted Holder or a Participating Broker-Dealer) without compliance with the
registration and prospectus delivery requirements of the Securities Act.
If (i) the Issuers are not required to file the Exchange Offer Registration
Statement or permitted to consummate the Exchange Offer because the Exchange
Offer is not permitted by applicable law or Commission policy or (ii) any Holder
of Transfer Restricted Securities (as defined) notifies the Issuers 20 business
days following the consummation of the Exchange Offer that (A) such Holder is
prohibited by law or Commission policy from participating in the Exchange Offer
or (B) such Holder may not resell the New Notes acquired by it in the Exchange
Offer to the public without delivering a prospectus and this Prospectus is not
appropriate or available for such resales or (C) such Holder is a broker-dealer
and owns Old Notes acquired directly from the Issuers or an affiliate of the
Issuers, then the Issuers are required under the Registration Rights Agreement
to file with the Commission a shelf registration statement (the "Shelf
Registration Statement") to cover resales of Transfer Restricted Securities by
the Holder thereof who satisfies certain conditions relating to the provision of
information in connection with the Shelf Registration Statement. The Issuers are
required under the Registration Rights Agreement to use their reasonable
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best efforts to cause the Shelf Registration Statement to be declared effective
at the earliest possible time but in no event later than 120 days after the
date on which the Issuers become obligated to file such Shelf Registration
Statement and, except under certain circumstances, keep effective such Shelf
Registration Statement until two years after its effective date. For purposes
of the foregoing, "Transfer Restricted Securities" means each Note until the
earliest to occur of (i) the date on which such Old Note has been exchanged by
a person other than a Participating Broker-Dealer for a New Note in the
Exchange Offer, (ii) following the exchange by a Participating Broker-Dealer in
the Exchange Offer of an Old Note for a New Note, the date on which such New
Note is sold to a purchaser who receives from such Participating Broker-Dealer
on or prior to the date of such sale a copy of the prospectus contained in the
Exchange Offer Registration Statement, (iii) the date on which such Note has
been effectively registered under the Securities Act and disposed of in
accordance with the Shelf Registration Statement or (iv) the date on which such
Note is distributed to the public pursuant to Rule 144 under the Securities
Act. The Issuers will, in the event of the filing of the Shelf Registration
Statement, provide to each Holder of Transfer Restricted Securities covered by
the Shelf Registration Statement copies of any Shelf Registration Statement or
any prospectus which is a part of the Shelf Registration Statement, notify each
such Holder when the Shelf Registration Statement has become effective and take
certain other actions as are required to permit unrestricted resales of
Transfer Restricted Securities. A Holder of Transfer Restricted Securities that
sells such Transfer Restricted Securities pursuant to the Shelf Registration
Statement generally will be required to be named as a selling security holder
in the related prospectus and to deliver a prospectus to the purchaser, will be
subject to certain of the civil liability provisions under the Securities Act
in connection with such sales and will be bound by the provisions of the
Registration Rights Agreement which are applicable to such Holder (including
certain indemnification obligations). In addition, Holders of Transfer
Restricted Securities will be required to deliver information to be used in
connection with the Shelf Registration Statement and to provide comments on the
Shelf Registration Statement within the time periods set forth in the
Registration Rights Agreement in order to have their Transfer Restricted
Securities included in the Shelf Registration Statement and benefit from the
provisions regarding Liquidated Damages, if any, set forth in the following
paragraph.
If the Issuers are required to file the Shelf Registration Statement and
(i) the Issuers fail to file the Shelf Registration Statement on or prior to 30
days after such filing obligation arises, (ii) the Shelf Registration Statement
is not declared effective by the Commission on or prior to 120 days after such
filing obligation arises or (iii) the Shelf Registration Statement is declared
effective but thereafter ceases to be effective or usable in connection with
resales of Transfer Restricted Securities during the period specified in the
Registration Rights Agreement (each such event referred to in clauses (i)
through (iii) above, a "Registration Default"), then the Issuers will pay
liquidated damages ("Liquidated Damages"), if any, to each Holder of Transfer
Restricted Securities, with respect to the first 90-day period immediately
following the occurrence of such Registration Default in an amount equal to $.05
per week per $1,000 principal amount of Transfer Restricted Securities held by
such Holder for each week or portion thereof that the Registration Default
continues. The amount of Liquidated Damages, if any, will increase by an
additional $.05 per week per $1,000 principal amount of Transfer Restricted
Securities with respect to each subsequent 90-day period until all Registration
Defaults have been cured, up to a maximum amount of Liquidated Damages, if any,
of $.50 per week per $1,000 principal amount of Transfer Restricted Securities.
Following the cure of all Registration Defaults, the accrual of Liquidated
Damages, if any, shall cease.
Payment of Liquidated Damages is the sole remedy available to the Holders
of Transfer Restricted Securities in the event that the Issuers do not comply
with the deadlines set forth in the Registration Rights Agreement with respect
to the registration of Transfer Restricted Securities for resale under the Shelf
Registration Statement.
As of June 29, 1997, the Notes are subordinated to approximately $370.1
million of Senior Debt and pari passu with approximately $27.4 million of Pari
Passu Debt.
Terms of the Exchange Offer
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Letter of Transmittal, the Issuers will accept any and all Old Notes
validly tendered and not withdrawn prior to 5:00 p.m., New York City time, on
the Expiration Date. The Issuers will issue $1,000 principal amount of New Notes
in exchange for each $1,000 principal amount of outstanding Old Notes accepted
in the Exchange Offer. Holders may tender some or all of their Old Notes
pursuant to the Exchange Offer. However, Old Notes may be tendered only in
integral multiples of $1,000.
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The form and terms of the New Notes will be identical in all material
respects (including principal amount, interest rate, maturity and ranking) to
terms of the Old Notes for which they may be exchanged pursuant to the Exchange
Offer except that the New Notes have been registered under the Securities Act
and, therefore, will not bear legends restricting their transfer and will not
contain certain terms providing for an increase in the interest rate on the Old
Notes under certain circumstances described in the Registration Rights Agreement
(as defined). The New Notes will evidence the same debt as the Old Notes and
will be entitled to the benefits of the Indenture under which the Old Notes
were, and the New Notes will be, issued.
As of the date of this Prospectus, $150.0 million aggregate principal
amount of the Old Notes is outstanding. The Issuers have fixed the close of
business on October 15, 1997 as the record date for the Exchange Offer for
purposes of determining the persons to whom this Prospectus, together with the
Letter of Transmittal, will initially be sent. As of such date, there was one
registered Holder of the Old Notes.
Holders of the Old Notes do not have any appraisal or dissenters' rights
under law or the Indenture in connection with the Exchange Offer. The Issuers
intend to conduct the Exchange Offer in accordance with the applicable
requirements of the Exchange Act and the rules and regulations of the Commission
thereunder.
Holders who tender Old Notes in the Exchange Offer will not be required to
pay brokerage commission or fees or, subject to the instructions in the Letter
of Transmittal, transfer taxes with respect to the exchange of Old Notes
pursuant to the Exchange Offer. The Issuers will pay all charges and expenses,
other than certain applicable taxes, in connection with the Exchange Offer. See
"--Fees and Expenses."
Expiration Date; Extensions; Amendments
The term "Expiration Date" shall mean Midnight, New York City time, on
November 17, 1997, unless the Issuers, in their reasonable discretion, extend
the Exchange Offer, in which case the term "Expiration Date" shall mean the
latest date and time to which the Exchange Offer is extended.
In order to extend the Exchange Offer, the Issuers will notify the Exchange
Agent (as defined) of any extension by oral or written notice and will make a
public announcement thereof prior to 9:00 a.m., New York City time, on the next
business day after each previously scheduled Expiration Date, unless otherwise
required by applicable law or regulation.
The Issuers reserve the right, in their reasonable discretion, (i) to delay
accepting any Old Notes, to extend the Exchange Offer or, if in their reasonable
judgment any of the conditions set forth below under the caption "-- Conditions"
shall not have been satisfied, to terminate the Exchange Offer, by giving oral
or written notice of such delay, extension or termination to the Exchange Agent,
or (ii) to amend the terms of the Exchange Offer in any manner. Any such delay
in acceptance, extension, termination or amendment will be followed as promptly
as practicable by a public announcement thereof. If the Exchange Offer is
amended in a manner determined by the Issuers to constitute a material change,
the Issuers will promptly disclose such amendment by means of a prospectus
supplement that will be distributed to the registered Holders, and the Issuers
will extend the Exchange Offer for a period of five to ten business days,
depending upon the significance of the amendment and the manner of disclosure to
the registered Holders, if the Exchange Offer would otherwise expire during such
five to ten business day period.
Without limiting the manner in which the Issuers may choose to make a
public announcement of any delay, extension, termination or amendment of the
Exchange Offer, the Issuers shall have no obligation to publish, advertise or
otherwise communicate any such public announcement, other than by making a
timely release to the Dow Jones News Service.
Procedures for Tendering
Only a Holder of Old Notes may tender such Old Notes in the Exchange Offer.
A Holder who wishes to tender Old Notes for exchange pursuant to the Exchange
Offer must transmit a properly completed and duly executed Letter of
Transmittal, or a facsimile thereof, together with any required signature
guarantees, or, in the case of a book-entry transfer, Agent's Message (as
defined), and any other required documents, to the Exchange Agent prior to
Midnight, New York City time, on the Expiration Date. In addition, either (i)
certificates for such Old Notes must be received by the Exchange Agent prior to
the Expiration Date along with the Letter of Transmittal, (ii) a timely
confirmation of a book-entry transfer (a "Book-Entry Confirmation") of such Old
Notes into the Exchange Agent's account at The Depository Trust Company ("DTC"
or the "Book-Entry Transfer Facility") pursuant to the
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procedure for book-entry transfer described below, must be received by the
Exchange Agent prior to the Expiration Date or (iii) the Holder must comply
with the guaranteed delivery procedures described below. To be tendered
effectively, the Old Notes, or Book-Entry Confirmation, as the case may be, the
Letter of Transmittal and other required documents must be received by the
Exchange Agent at the address set forth below under "--Exchange Agent" prior to
Midnight, New York City time, on the Expiration Date. DELIVERY OF DOCUMENTS TO
THE BOOK ENTRY TRANSFER FACILITY IN ACCORDANCE WITH ITS PROCEDURE DOES NOT
CONSTITUTE DELIVERY TO THE EXCHANGE AGENT.
DTC has authorized DTC participants that hold Old Notes on behalf of
beneficial owners of Old Notes through DTC to tender their Old Notes as if they
were Holders. To effect a tender of Old Notes, DTC participants should either
(i) complete and sign the Letter of Transmittal (or a manually signed facsimile
thereof), have the signature thereon guaranteed if required by the Instructions
to the Letter of Transmittal, and mail or deliver the Letter of Transmittal (or
such manually signed facsimile) to the Exchange Agent pursuant to the procedure
set forth in "Procedures for Tendering" or (ii) transmit their acceptance to DTC
through the DTC Automated Tender Offer Program ("ATOP") for which the
transaction will be eligible and follow the procedure for book-entry transfer
set forth in "--Book-Entry Transfer."
The tender by a Holder will constitute an agreement between such Holder and
the Issuers in accordance with the terms and subject to the conditions set forth
herein and in the Letter of Transmittal.
The method of delivery of the Old Notes and the Letter of Transmittal and
all other required documents to the Exchange Agent is at the election and risk
of the Holder. Instead of delivery by mail, it is recommended that Holders use
an overnight or hand delivery service. In all cases, sufficient time should be
allowed to assure delivery to the Exchange Agent before the Expiration Date. No
Letter of Transmittal or Old Notes, or Book-Entry Confirmation, as the case may
be, should be sent to the Issuers.
Any beneficial owner whose Old Notes are registered in the name of a
broker, dealer, commercial bank, trust company or other nominee and who wishes
to tender should contact the registered Holder promptly and instruct such
registered Holder to tender on such beneficial owner's behalf. If such
beneficial owner wishes to tender on such beneficial owner's own behalf, such
owner must, prior to completing and executing the Letter of Transmittal and
delivering such beneficial owner's Old Notes, either make appropriate
arrangement to register ownership of the Old Notes in such owner's name or
obtain a properly completed bond power from the registered Holder. The transfer
of registered ownership may take considerable time.
If the Letter of Transmittal is signed by a person other than the
registered Holder of any Old Notes listed therein, such Old Notes must be
endorsed or accompanied by a properly completed bond power and signed by such
registered Holder as such registered Holder's name appears on such Old Notes.
If the Letter of Transmittal or any Old Notes or bond powers are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and unless waived by the Issuers,
evidence satisfactory to the Issuers of their authority to so act must be
submitted with the Letter of Transmittal.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed by an Eligible Institution (as defined below)
unless the Old Notes tendered pursuant thereto are tendered (i) by a registered
Holder who has not completed the box entitled "Special Issuance Instructions" or
"Special Delivery Instructions" on the Letter of Transmittal or (ii) for the
account of an Eligible Institution. In the event that signatures on a Letter of
Transmittal or a notice of withdrawal, as the case may be, are required to be
guaranteed, such guarantee must be by a member firm of a registered national
securities exchange or of the National Association of Securities Dealers, Inc.,
a commercial bank or trust company having an office or correspondent in the
United States or an "eligible guarantor institution" within the meaning of Rule
17Ad-15 under the Exchange Act (an "Eligible Institution").
All questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of tendered Old Notes will be determined by
the Issuers in their sole discretion, which determination shall be final and
binding. The Issuers reserve the absolute right to reject any and all Old Notes
not properly tendered or any Old Notes the Issuers' acceptance of which would,
in the opinion of counsel for the Issuers, be unlawful. The Issuers also reserve
the right to waive any defects, irregularities or conditions of tender as to
particular Old Notes. The
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Issuers' interpretation of the terms and conditions of the Exchange Offer
(including the instructions in the Letter of Transmittal) shall be final and
binding on all parties. Unless waived, any defects or irregularities in
connection with tenders of Old Notes must be cured within such time as the
Issuers shall determine. Neither the Issuers, the Exchange Agent nor any other
person shall incur any liability for failure to give notice of any defect or
irregularity with respect to any tender of Old Notes. Tenders of Old Notes will
not be deemed to have been made until such defects or irregularities have been
cured or waived. Any Old Notes received by the Exchange Agent that are not
properly tendered and as to which the defects or irregularities have not been
cured or waived will not be deemed to have been properly tendered. Any Old
Notes received by the Exchange Agent that are not properly tendered and as to
which the defects or irregularities have not been cured or waived will be
returned by the Exchange Agent to the tendering Holders, unless otherwise
provided in the Letter of Transmittal, as soon as practicable following the
Expiration Date.
By tendering, each Holder will represent to the Issuers, among other
things, that such Holder is not a Restricted Holder. Each Participating
Broker-Dealer must acknowledge that it will deliver a prospectus in connection
with any resale of such New Notes. See "Plan of Distribution."
Acceptance of Old Notes for Exchange; Delivery of New Notes
For each Old Note accepted for exchange, the Holder of such Old Note will
receive a New Note having a principal amount equal to that of the surrendered
Old Note. For purposes of the Exchange Offer, the Issuers shall be deemed to
have accepted properly tendered Old Notes for exchange when, as and if the
Issuers have given oral or written notice thereof to the Exchange Agent.
In all cases, issuance of New Notes for Old Notes that are accepted for
exchange pursuant to the Exchange Offer will be made only after timely receipt
by the Exchange Agent of certificates for such Old Notes or a timely Book-Entry
Confirmation of such Old Notes into the Exchange Agent's account at the
Book-Entry Transfer Facility, a properly completed and duly executed Letter of
Transmittal or Agent's Message and all other required documents. If any tendered
Old Notes are not accepted for any reason set forth in the terms and conditions
of the Exchange Offer or if Old Notes are submitted for a greater principal
amount than the Holder desires to exchange, such unaccepted or non-exchanged Old
Notes will be returned without expense to the tendering Holder thereof (or, in
the case of Old Notes tendered by book-entry transfer into the Exchange Agent's
account at the Book-Entry Transfer Facility pursuant to the book-entry transfer
procedures described below, such non-exchanged Old Notes will be credited to an
account maintained with such Book-Entry Transfer Facility) as promptly as
practicable after the Expiration Date.
Book-Entry Transfer
The Exchange Agent will establish a new account or utilize an existing
account with respect to the Old Notes at DTC promptly after the date of this
Prospectus, and any financial institution that is a participant in DTC and whose
name appears on a security position listing as the owner of Old Notes may make a
book-entry tender of Old Notes by causing DTC to transfer such Old Notes into
the Exchange Agent's account in accordance with DTC's procedures for such
transfer. However, although tender of Old Notes may be effected through
book-entry transfer into the Exchange Agent's account at DTC, the Letter of
Transmittal (or a manually signed facsimile thereof), properly completed and
validly executed, with any required signature guarantees, or an Agent's Message
in lieu of the Letter of Transmittal, and any other required documents, must, in
any case, be received by the Exchange Agent at its address set forth below under
the caption "Exchange Agent" on or prior to the Expiration Date, or the
guaranteed delivery procedures described below must be complied with. The
confirmation of a book-entry transfer of Old Notes into the Exchange Agent's
account at DTC as described above is referred to herein as a "Book-Entry
Confirmation." Delivery of documents to DTC in accordance with DTC's procedures
does not constitute delivery to the Exchange Agent.
The term "Agent's Message" means a message transmitted by DTC to, and
received by, the Exchange Agent and forming a part of a Book-Entry Confirmation,
which states that DTC has received an express acknowledgment from the
participant in DTC tendering the Old Notes stating (i) the aggregate principal
amount of Old Notes which have been tendered by such participant, (ii) that such
participant has received and agrees to be bound by the term of the Letter of
Transmittal and (iii) that the Company may enforce such agreement against the
participant.
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Guarantee Delivery Procedures
Holders who wish to tender their Old Notes and (i) whose Old Notes are not
immediately available, (ii) who cannot deliver their Old Notes, the Letter of
Transmittal or any other required documents to the Exchange Agent prior to the
Expiration Date or (iii) who cannot complete the procedure for book-entry
transfer on a timely basis, may effect a tender if:
(a) the tender is made through an Eligible Institution;
(b) prior to the Expiration Date, the Exchange Agent receives from such
Eligible Institution a properly completed and duly executed Notice of Guaranteed
Delivery (by facsimile transmission, mail or hand delivery) setting forth the
name and address of the Holder, the certificate number(s) of such Old Notes and
the principal amount of Old Notes tendered, stating that the tender is being
made thereby and guaranteeing that, within three New York Stock Exchange trading
days after the Expiration Date, the Letter of Transmittal (or facsimile thereof)
or, in the case of a book-entry transfer, an Agent's Message, together with the
certificate(s) representing the Old Notes, or a Book-Entry Confirmation, as the
case may be, and any other documents required by the Letter of Transmittal will
be deposited by the Eligible Institution with the Exchange Agent; and
(c) such properly completed and executed Letter of Transmittal (or
facsimile thereof) or, in the case of a book-entry transfer, an Agent's Message,
as well as the certificate(s) representing all tendered Old Notes in proper form
for transfer, or a Book-Entry Confirmation, as the case may be, and all other
documents required by the Letter of Transmittal are received by the Exchange
Agent within three New York Stock Exchange trading days after the Expiration
Date.
Withdrawal of Tenders
Except as otherwise provided herein, tenders of Old Notes may be withdrawn
at any time prior to 5:00 p.m., New York City time, on the Expiration Date.
To withdraw a tender of Old Notes in the Exchange Offer, a written or
facsimile transmission notice of withdrawal must be received by the Exchange
Agent at its address set forth herein prior to 5:00 p.m., New York City time, on
the Expiration Date. Any such notice of withdrawal must (i) specify the name of
the person having deposited the Old Notes to be withdrawn (the "Depositor"),
(ii) identify the Old Notes to be withdrawn (including the certificate number or
numbers and principal amount of such Old Notes), (iii) be signed by the Holder
in the same manner as the original signature on the Letter of Transmittal by
which such Old Notes were tendered (including any required signature guarantees)
or be accompanied by documents of transfer sufficient to have the Trustee with
respect to the Old Notes register the transfer of such Old Notes into the name
of the person withdrawing the tender and (iv) specify the name in which any such
Old Notes are to be registered, if different from that of the Depositor. If
certificates for Old Notes have been delivered or otherwise identified to the
Exchange Agent, then, prior to the release of such certificates, the withdrawing
Holder must also submit the serial numbers of the particular certificates to be
withdrawn and a signed notice of withdrawal with signatures guaranteed by an
Eligible Institution unless such Holder is an Eligible Institution. If Old Notes
have been tendered pursuant to the procedure for book-entry transfer described
above, any notice of withdrawal must specify the name and number of the account
at the Book-Entry Transfer Facility to be credited with the withdrawn Old Notes
and otherwise comply with the procedures of the Book Entry Transfer Facility.
All questions as to the validity, form and eligibility (including time of
receipt) of such notices will be determined by the Issuers in their sole
discretion, which determination shall be final and binding on all parties. Any
Old Notes so withdrawn will be deemed not to have been validly tendered for
purposes of the Exchange Offer and no New Notes will be issued with respect
thereto unless the Old Notes so withdrawn are validly retendered. Properly
withdrawn Old Notes may be retendered by following one of the procedures
described above under "--Procedures for Tendering" at any time prior to the
Expiration Date.
Any Old Notes which have been tendered but which are not accepted for
payment due to withdrawal, rejection of tender or termination of the Exchange
Offer will be returned as soon as practicable after withdrawal, rejection of
tender or termination of the Exchange Offer to the Holder thereof without cost
to such Holder (or, in the case of Old Notes tendered by book-entry transfer
into the Exchange Agent's account at the Book-Entry Transfer Facility pursuant
to the book-entry transfer procedures described above, such Old Notes will be
credited to an account maintained with such Book-Entry Transfer Facility for the
Old Notes).
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Conditions
Notwithstanding any other term of the Exchange Offer, the Issuers shall not
be required to accept for exchange, or exchange New Notes for, any Old Notes,
and may terminate the Exchange Offer as provided herein before the acceptance of
such Old Notes, if:
(a) any action or proceeding is instituted or threatened in any court or by
or before any governmental agency with respect to the Exchange Offer which, in
the reasonable judgment of the Issuers, might materially impair the ability of
the Issuers to proceed with the Exchange Offer or materially impair the
contemplated benefits of the Exchange Offer to the Issuers, or any material
adverse development has occurred in any existing action or proceeding with
respect to the Issuers or any of their subsidiaries;
(b) any change, or any development involving a prospective change, in the
business or financial affairs of the Issuers or any of their subsidiaries has
occurred which, in the reasonable judgment of the Issuers, might materially
impair the ability of the Issuers to proceed with the Exchange Offer or
materially impair the contemplated benefits of the Exchange Offer to the
Issuers;
(c) any law, statute, rule or regulation is proposed, adopted or enacted,
which, in the reasonable judgment of the Issuers, might materially impair the
ability of the Issuers to proceed with the Exchange Offer or materially impair
the contemplated benefits of the Exchange Offer to the Issuers; or
(d) any governmental approval has not been obtained, which approval the
Issuers shall, in their reasonable discretion, deem necessary for the
consummation of the Exchange Offer as contemplated hereby.
The foregoing conditions are for the sole benefit of the Issuers and may be
asserted by the Issuers regardless of the circumstances giving rise to any such
condition or may be waived by the Issuers in whole or in part at any time and
from time to time in their reasonable discretion. The failure by the Issuers at
any time to exercise any of the foregoing rights shall not be deemed a waiver of
such right and each such right shall be deemed an ongoing right which may be
asserted at any time and from time to time.
If the Issuers determine in their reasonable discretion that any of the
conditions are not satisfied, the Issuers may (i) refuse to accept any Old Notes
and return all tendered Old Notes to the tendering Holders, (ii) extend the
Exchange Offer and retain all Old Notes tendered prior to the expiration of the
Exchange Offer, subject, however, to the rights of Holders to withdraw such Old
Notes (see "--Withdrawal of Tenders" above) or (iii) waive such unsatisfied
conditions with respect to the Exchange Offer and accept all properly tendered
Old Notes which have not been withdrawn. If such waiver constitutes a material
change to the Exchange Offer, the Issuers will promptly disclose such waiver by
means of a prospectus supplement that will be distributed to the registered
Holders, and the Issuers will extend the Exchange Offer for a period of five to
ten business days, depending upon the significance of the waiver and the manner
of disclosure to the registered Holders, if the Exchange Offer would otherwise
expire during such five to ten business day period.
52
<PAGE>
Exchange Agent
The Bank of New York has been appointed as Exchange Agent for the Exchange
Offer. Requests for additional copies of this Prospectus or of the Letter of
Transmittal should be directed to the Exchange Agent addressed as follows:
To: The Bank of New York
By Hand/Overnight Courier:
The Bank of New York
101 Barclay Street
New York, New York 10286
Attn: Denise Robinson
Reorganization Section
Facsimile Transmission:
(212) 815-6339
Confirm by Telephone: (212) 815-2791
Fees and Expenses
The expenses of soliciting tenders will be borne by the Issuers. The
principal solicitation is being made by mail; however, additional solicitation
may be made by telegraph, telephone or in person by officers and regular
employees of the Issuers and their affiliates.
The Issuers have not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers, dealers or others
soliciting acceptances of the Exchange Offer. The Issuers, however, will pay the
Exchange Agent reasonable and customary fees for its services and will reimburse
it for its reasonable out-of-pocket expenses in connection therewith.
The cash expenses to be incurred in connection with the Exchange Offer will
be paid by the Issuers. Such expenses include fees and expenses of the Exchange
Agent and Trustee, accounting and legal fees and printing costs, among others.
The Issuers will pay all transfer taxes, if any, applicable to the exchange
of Old Notes pursuant to the Exchange Offer. If, however, certificates
representing New Notes or Old Notes for principal amounts not tendered or
accepted for exchange are to be delivered to, or are to be issued in the name
of, any person other than the registered Holder of the Old Notes tendered, or if
tendered Old Notes are registered in the name of any person other than the
person signing the Letter of Transmittal, or if a transfer tax is imposed for
any reason other than the exchange of Old Notes pursuant to the Exchange Offer,
then the amount of any such transfer taxes (whether imposed on the registered
Holder or any other persons) will be payable by the tendering Holder. If
satisfactory evidence of payment of such taxes or exemption therefrom is not
submitted with the Letter of Transmittal, the amount of such transfer taxes will
be billed directly to such tendering Holder.
Accounting Treatment
The New Notes will be recorded at the same carrying value as the Old Notes,
which is the principal amount as reflected in the Issuers' accounting records on
the date of the exchange. Accordingly, no gain or loss for accounting purposes
will be recognized. The expenses of the Exchange Offer and the unamortized
expenses related to the issuance of the Old Notes will be amortized over the
term of the Notes.
Regulatory Approvals
The Issuers do not believe that the receipt of any material federal or
state regulatory approvals will be necessary in connection with the Exchange
Offer, other than the effectiveness of the Exchange Offer Registration Statement
under the Securities Act.
Other
Participation in the Exchange Offer is voluntary and Holders of Old Notes
should carefully consider whether to accept the terms and conditions thereof.
Holders of the Old Notes are urged to consult their financial and tax advisors
in making their own decisions on what action to take with respect to the
Exchange Offer.
53
<PAGE>
MANAGEMENT
Directors and Executive Officers of the Issuers and the Subsidiary Guarantors
Pursuant to the Partnership Agreement (as defined), Foamex is managed by
its managing general partner, FMXI. All of the directors and executive officers
of FMXI are employees of Foamex and/or Foamex International and are not
compensated by FMXI for their services as directors and executive officers of
FMXI. See "Description of the Partnership Agreement."
FCC and General Felt are wholly owned subsidiaries of Foamex. Foamex Fibers
is a wholly owned subsidiary of General Felt. The directors of each of FCC,
General Felt and Foamex Fibers are not compensated by FCC, General Felt or
Foamex Fibers for their services as directors.
The following sets forth certain information with respect to the persons
who, as of the Offering, are executive officers of Foamex and/or directors and
executive officers of FMXI, FCC, General Felt and/or Foamex Fibers.
<TABLE>
<CAPTION>
Name Age Position
<S> <C> <C>
Andrea Farace ............ 41 Chairman and Chief Executive Officer of
Foamex, FMXI, FCC and Foamex Fibers;
Chairman of General Felt
Marshall S. Cogan ......... 60 Vice Chairman of Foamex and FMXI; a
director of FCC, General Felt and Foamex
Fibers
Robert J. Hay ............ 71 Chairman Emeritus of Foamex
Salvatore J. Bonanno ...... 56 President and Chief Operating Officer of
Foamex and FMXI; a director of FMXI, FCC
and Foamex Fibers
Kenneth R. Fuette ......... 52 Senior Vice President of Finance and Chief
Financial Officer of Foamex and FCC; Senior
Vice President of Finance and a director of
FMXI; a director of General Felt and FCC;
Vice President and Treasurer of Foamex
Fibers
William H. Bundy ......... 56 Executive Vice President of Foamex; Vice
President of Foamex Fibers
Paul A. Haslanger ......... 50 Senior Vice President, Manufacturing Support
of Foamex
Barry Zimmerman ............ 59 Executive Vice President of Productivity and
Quality of Foamex; Vice President of FMXI;
and Vice President and a director of General
Felt
Philip N. Smith, Jr. ...... 54 Vice President of Foamex; Vice President,
Secretary and General Counsel and a director of
FMXI; Vice President and Secretary of FCC,
General Felt and Foamex Fibers
Theodore J. Kall ......... 56 President and a director of General Felt
George L. Karpinski ...... 49 Senior Vice President, Treasurer and Secretary
of Foamex; Vice President of FMXI, FCC,
General Felt and Foamex Fibers
Robert H. Nelson ......... 51 Vice President and a director of FCC
</TABLE>
The board of directors of each of FMXI, FCC, General Felt and Foamex Fibers
is elected annually until their successors are elected and qualified. Successors
are required to be elected by stockholder vote while vacancies in unexpired
terms and any additional positions created by board action are filled by action
of the existing board of directors. The executive officers named above were
elected to serve in such capacities until their respective successors have been
duly elected and have been qualified, or until their earlier death, resignation,
disqualifications or removal from office. There is no family relationship
between any of the directors and executive officers.
54
<PAGE>
Andrea Farace began serving as Chairman and Chief Executive Officer of
Foamex, Foamex International, FMXI, FCC, Foamex Fibers and certain affiliated
entities in May 1997. Mr. Farace has also served as Chairman of the Board of
General Felt since May 1997. Mr. Farace has also served as a director of Foamex
International since February 1996, and has been President and a director of
Trace Holdings since December 1994 and December 1993, respectively. Prior to
December 1993, Mr. Farace held several executive positions within Trace Holdings
beginning in April 1991. Mr. Farace was Senior Executive of C.I.R. S.p.A. from
May 1990 to March 1991. Prior to that, Mr. Farace was a Managing Director at
Shearson Lehman Hutton, Inc. Mr. Farace is a director of Trace Foam and CHF
Industries, Inc., both of which are subsidiaries of Trace Holdings, as well as
Atlantic Auto Finance, Inc. ("Atlantic Finance"), an affiliate of Trace
Holdings, and General Felt. Additionally, Mr. Farace is a director of the
Managed High Income Portfolio, Inc. and a member of the Advisory Board of the
Italy Fund, both of which are NYSE-listed mutual funds.
Marshall S. Cogan began serving as Vice Chairman of Foamex International,
Foamex and FMXI and as a director of FCC, General Felt and Foamex Fibers in May
1997. Additionally, Mr. Cogan became the Chairman and Chief Executive Officer of
United Auto Group, Inc. ("UAG"), an affiliate of Trace Holdings in April 1997.
Mr. Cogan served as the Chairman of the Board and Chief Executive Officer of
Foamex, FMXI and FCC from January 1994 to May 1997. Additionally, Mr. Cogan
served as Chairman of the Board and Chief Executive Officer of Foamex
International from its inception in September 1993 to May 1997. Mr. Cogan has
served as Chairman of the Executive Committee of Foamex International since
September 1993. Mr. Cogan has been a director of Trace Foam since December 1991
and the Chairman of the Board and President of Trace Foam and its wholly-owned
subsidiary Trace Foam Sub, Inc. ("Trace Foam Sub"), since January 1992 and March
1995, respectively. Mr. Cogan also served as Vice Chairman of Foamex from
January 1993 until January 1994. Mr. Cogan has been the principal stockholder,
Chairman or Co-Chairman of the Board and Chief Executive Officer or Co-Chief
Executive Officer of Trace Holdings, since 1974. He has also been a member of
the Board of Directors of UAG since November 1990, and of Recticel since
February 1993. Additionally, Mr. Cogan serves on the Board of Directors of the
American Friends of the Israel Museum and the American Ballet Theater, the Board
of Trustees of The Museum of Modern Art, the Boston Latin School and New York
University Medical Center. Mr. Cogan also serves on several committees of
Harvard University.
Robert J. Hay has been Chairman Emeritus of Foamex since January 1994. Mr.
Hay was Chairman Emeritus and a director of FMXI from January 1994 to May 1997
and also served as Chairman Emeritus and a director of Foamex International from
1993 to 1997. Mr. Hay was Chairman and Chief Executive Officer of Foamex from
January 1993 to January 1994. Mr. Hay was President of Foamex and its
predecessor from 1972 through 1992. Mr. Hay began his career as a chemist with
The Firestone Tire and Rubber Company, a predecessor of Foamex, in 1948.
Salvatore J. Bonanno has been President of Foamex since July 1995 and began
serving as President of Foamex International and FMXI in May 1997 and as Chief
Operating Officer of Foamex and FMXI in July 1997. Mr. Bonanno has also served
as Executive Vice President of Manufacturing, Corporate Planning of Foamex
International since July 1995, and a director since February 1996. Prior to
joining Foamex International, Mr. Bonanno was employed with Chrysler Corporation
for thirty years, most recently serving as the General Manager of International
Manufacturing Operations. Mr. Bonanno currently serves on the Industrial
Advisory Board of Lawrence Livermore National Laboratories and became a director
of FCC and Foamex Fibers in June 1997.
Kenneth R. Fuette has been Senior Vice President of Finance and Chief
Financial Officer of Foamex and Foamex International since July 1997, and Senior
Vice President of Finance of FMXI since January 1994. Mr. Fuette began serving
as a director of FMXI, Senior Vice President of Finance, Chief Financial Officer
and a director of FCC and Vice President and Treasurer of Foamex Fibers in May
1997. Prior thereto, Mr. Fuette served as Senior Vice President of Finance,
Chief Accounting Officer and Chief Financial Officer of Foamex and Foamex
International from January 1996 to July 1997. Mr. Fuette served as a Vice
President of Foamex International and its predecessors from 1983 to 1995 and as
Controller of Foamex International or its predecessors from 1977 to 1995. Mr.
Fuette became a director of General Felt in June 1997.
William H. Bundy has been an Executive Vice President of Foamex since July
1997 and a Senior Vice President of Foamex International since March 1994. Mr.
Bundy began serving as Vice President of Foamex Fibers in May 1997. Prior
thereto, Mr. Bundy served as a Senior Vice President of Foamex from January 1994
to July 1997 and as a Senior Vice President of FMXI from March 1994 to May 1997.
Mr. Bundy also served as a director of Foamex International
55
<PAGE>
from September 1993 to May 1994, President and Chief Operating Officer of
Foamex International from September 1993 to January 1994 and President and
Chief Operating Officer of Foamex from January 1993 until January 1994. Mr.
Bundy was Senior Vice President of Manufacturing of Foamex from 1984 through
1992. Mr. Bundy began his career as a production manager for the predecessor to
Foamex in 1967.
Paul A. Haslanger began serving as Senior Vice President, Manufacturing
Support of Foamex International and Foamex in July 1997. Prior thereto, Mr.
Haslanger served as Senior Vice President of Technical Products of Foamex
International and Foamex from October 1995 to July 1997. Mr. Haslanger served as
Senior Vice President of Manufacturing of FMXI from October 1993 through May
1997 and Senior Vice President of Foamex International from September 1993 to
January 1996. Mr. Haslanger was also Senior Vice President of Manufacturing of
Foamex from February 1993 to January 1996. Prior thereto, Mr. Haslanger was Vice
President of Manufacturing of Foamex and its predecessor from 1984 through
January 1993. He began his career with the predecessor to Foamex in 1969.
Barry Zimmerman has been Executive Vice President of Productivity and
Quality of Foamex since November 1996, Chairman, President and a director of
Foamex Mexico since September 1993 and Vice President of FMXI and General Felt
since April 1995. Mr. Zimmerman has been a Senior Vice President of Foamex from
October 1995 to November 1996 and a Senior Vice President or Vice President and
Managing Director of Trace Holdings since October 1986. Prior to that, Mr.
Zimmerman held several executive positions within Trace Holdings beginning in
August 1978. Mr. Zimmerman has been a director of Trace Foam since October 1990.
Mr. Zimmerman has served as director of General Felt since March 1993 and
director of FCC since July 1992.
Philip N. Smith, Jr. has been Vice President of Foamex, Vice President,
Secretary and General Counsel of FMXI since October 1993 and Vice President,
Secretary and General Counsel of Foamex International since its inception in
September 1993 and of UAG since June 1996. Since May 1997, Mr. Smith has served
as a director of FMXI and Vice President and Secretary of FCC, General Felt and
Foamex Fibers. Mr. Smith has been the Secretary of Trace Foam since its
inception in October 1990 and a Vice President of Trace Foam since December
1991. Mr. Smith has been a Vice President or Senior Vice President and the
Secretary and General Counsel of Trace Holdings since January 1988 and has
overseen and been actively involved in transaction negotiations, litigation,
stockholder and director relations and other corporate legal matters. Prior to
joining Trace Holdings, he was the sole shareholder of a professional
corporation which was a partner of Akin, Gump, Strauss, Hauer & Feld, L.L.P.
Theodore J. Kall was appointed President and a director of General Felt in
April 1995. Mr. Kall previously served as General Felt's National Accounts
Manager since July 1993. Mr. Kall has served in various sales, marketing and
product management positions including Vice President of Sales and Marketing
from 1980 to 1993. He began his career with General Felt in 1974.
George L. Karpinski has been Senior Vice President, Treasurer and Secretary
of Foamex since July 1997 and has been Vice President and Treasurer of Foamex
International since May 1996. Prior thereto, Mr. Karpinski served as Vice
President, Secretary and Treasurer of Foamex from May 1993 to July 1997. Mr.
Karpinski was Treasurer of Foamex from March 1989 to May 1993 and was Assistant
Treasurer of Foamex from November 1985 to March 1989. Mr. Karpinski began
serving as Vice President of FMXI, FCC, General Felt and Foamex Fibers in May
1997 and became a director of Foamex Mexico in June 1997. Mr. Karpinski began
his career with the predecessor to Foamex in 1969.
Robert H. Nelson has served as Vice President and a director of FCC since
July 1992. Mr. Nelson has also served as Executive Vice President and Chief
Financial Officer of UAG since January 1997 and as a director since January
1996. He has also served as Vice Chairman of Atlantic Finance since March 1996,
Chief Financial Officer and Treasurer of Trace since 1987 and Senior Vice
President, Chief Operating Officer and a director of Trace since 1994.
For information regarding executive compensation for Foamex and General
Felt, see Foamex's 1996 Annual Report on Form 10-K. The executive officers of
General Felt and Foamex Fibers, with the exception of Theodore J. Kall, are not
compensated in connection with their positions at General Felt and Foamex
Fibers. In the case of Theodore J. Kall, his compensation is paid by General
Felt and Foamex provides information regarding such compensation in its annual
report. See "Incorporation of Certain Documents by Reference."
56
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth, as of June 15, 1997, the beneficial
ownership of the partnership interests of Foamex by (i) each person who is
known to Foamex to own beneficially more than 5.0% of any class of Foamex's
partnership interests, (ii) each director of FMXI (the managing general partner
of Foamex) and FCC, (iii) each executive officer listed in the summary
compensation table of Foamex's 1996 Form 10-K and (iv) all executive officers
and directors of Foamex, FMXI and FCC as a group. FCC and General Felt are each
wholly owned subsidiaries of Foamex. Foamex Fibers is a wholly owned subsidiary
of General Felt.
<TABLE>
<CAPTION>
Name and Address Type of % of % of
of Beneficial Owners Interest Profits Class
<S> <C> <C> <C>
FMXI, Inc. (1)
1000 Columbia Avenue
Linwood, Pennsylvania 19061 ......... General Partner 1.0 50.0
Trace Foam Company, Inc. (2)
375 Park Avenue, 11th Floor
New York, New York 10152 ............ General Partner 1.0 50.0
Foamex International Inc. (1)
1000 Columbia Avenue
Linwood, Pennsylvania 19061 ......... Limited Partner 98.0 100.0
Marshall S. Cogan (2)
375 Park Avenue, 11th Floor
New York, New York 10152 ............ General Partner 1.0 50.0
All officers and directors as
a group (11 persons) (2), (3) ...... General Partner 1.0 50.0
</TABLE>
- ----------
(1) FMXI is wholly owned by Foamex International.
(2) Trace Foam is a wholly owned subsidiary of Trace Holdings. Marshall S.
Cogan, a director of FMXI, Foamex International and Trace Foam, is the
majority stockholder of Trace Holdings. Mr. Cogan disclaims beneficial
ownership of the partnership interest owned by Trace Foam. The disclosure
of Marshall S. Cogan's beneficial ownership does not include the
beneficially owned partnership interests of Foamex International. Trace
Holdings beneficially owns in excess of 40% of the common stock of Foamex
International.
(3) The disclosure of beneficial ownership of officers and directors does not
include any beneficial ownership arising solely by virtue of such person's
position with FMXI or Foamex International.
57
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Foamex regularly enters into transactions with its affiliates on terms it
believes to be no less favorable to Foamex than those which Foamex could have
obtained from unaffiliated third parties. Payments to affiliates by Foamex and
its subsidiaries in connection with any such transactions are governed by the
provisions of the Indenture and the New Credit Facility, which generally provide
that such transactions be on terms comparable to those generally available in
equivalent transactions with third parties.
Airplane Lease
Foamex was party to a lease agreement for an airplane with Trace Aviation
Corp., a subsidiary of Trace Holdings ("Trace Aviation"). During 1995, Foamex
paid Trace Aviation $1.6 million, pursuant to the lease agreement. The lease
agreement also provided for the use of the airplane by Trace Holdings with
remuneration to Foamex based on actual usage of the airplane. During 1995, Trace
Holdings paid to Foamex $0.6 million pursuant to the lease agreement. During
August 1995, Foamex Aviation Inc. ("Aviation"), a wholly-owned subsidiary of
Foamex International, acquired the airplane from Trace Holdings and the Foamex
lease and other agreements were terminated. Foamex anticipates that it will
distribute approximately $2.0 million per year to Aviation to enable Aviation to
pay debt service and certain operating costs.
Tax Sharing Agreement
In 1992, Foamex and its partners entered into a tax sharing agreement, as
amended (the "Tax Sharing Agreement"), pursuant to which Foamex agreed to make
quarterly distributions to its partners which, in the aggregate, will equal the
tax liability that Foamex would have paid if it had been a Delaware corporation
filing separate tax returns rather than a Delaware partnership. In connection
with Foamex International's initial public offering in 1993 and the attendant
reallocation of partnership interests, the Foamex Tax Sharing Agreement was
amended to provide that 99% of the payments will be made to Foamex International
and its subsidiaries and 1% of the payments would be made to Trace Foam. For the
fiscal years ended January 1, 1995, December 31, 1995 and December 29, 1996,
Foamex made payments of approximately $3.3 million, $2.4 million and $3.5
million, respectively, pursuant to the terms of the Tax Sharing Agreement to
Foamex International and its subsidiaries. As of June 29, 1997, there were
accrued, but unpaid, distributions under the Tax Sharing Agreement of
approximately $12.6 million, of which Foamex has made subsequent payments of
approximately $3.0 million.
Tax Distribution Advance Agreement
On December 11, 1996, Foamex and FJPS entered into a Tax Distribution
Advance Agreement pursuant to which FJPS has the right to obtain up to $17.0
million of advances against future distributions to the Tax Sharing Agreement.
Any such advances will bear interest at a rate equal to 13.25% per annum. All
advances must be repaid by December 31, 1999, and FJPS is obligated to use 50.0%
of any tax distribution to prepay the outstanding advances. As of June 29, 1997,
there were no advances outstanding under this agreement. In connection with the
Refinancing Plan, the maximum amount of advances was increased to $25.0 million
and FJPS's rights and obligations under the Tax Distribution Advance Agreement
were assumed by Foamex International.
Management Services Agreement
Foamex and Trace Foam entered into a management services agreement,
pursuant to which Trace Foam provides Foamex with general managerial services of
a financial, technical, legal, commercial, administrative and/or advisory nature
for an annual fee of $3.0 million and reimbursement of expenses incurred. During
the last three years the annual fee was $1.75 million. Foamex believes that the
agreement is no less favorable to Foamex than that which Foamex could have
obtained from unaffiliated third parties.
Indemnification Regarding Environmental Matters
Pursuant to the Asset Transfer Agreement, dated as of October 2, 1990, as
amended, between Trace Holdings and Foamex (the "Trace Holdings Asset Transfer
Agreement"), Foamex is indemnified by Trace Holdings for any liabilities
incurred by Foamex arising out of or resulting from, among other things, the
ownership or use of any of the assets transferred pursuant to the Trace Holdings
Asset Transfer Agreement or the conduct of the transferred business on or prior
to October 2, 1990, including, without limitation, any loss actually arising out
of or resulting from any events, occurrences, acts or activities occurring after
October 2, 1990, to the extent resulting from
58
<PAGE>
conditions existing on or prior to October 2, 1990, relating to (i) injuries to
or the contraction of any diseases by any person resulting from exposure to
Hazardous Substances (as defined in the Trace Holdings Asset Transfer
Agreement) without regard to when such injuries or diseases are first
manifested, (ii) the generation, processing, handling, storage or disposition
of or contamination by any waste or Hazardous Substance, whether on or off the
premises from which the transferred business has been conducted or (iii) any
pollution or other damage or injury to the environment, whether on or off the
premises from which the transferred business has been conducted. Foamex is also
indemnified by Trace Holdings for any liabilities arising under Environmental
Laws (as defined in the Trace Holdings Asset Transfer Agreement) relating to
current or former Trace Holdings assets and for any liability relating to
products of the transferred business shipped on or prior to October 2, 1990.
Certain Transactions Relating to the Acquisition of General Felt
In connection with Foamex's acquisition of General Felt in March 1993,
Trace Holdings and General Felt entered into a reimbursement agreement pursuant
to which Trace Holdings agreed to reimburse General Felt on a pro rata basis
reflecting the period of time each occupied a former General Felt facility for
costs relating to an environmental cleanup plan.
In 1994, General Felt leased two facilities from limited partnerships in
which directors and officers of Foamex International, Foamex and/or Trace Foam
have an interest. These partnerships purchased the properties from General Felt
in 1978. The rental terms under each lease were determined on the basis of
appraised values for comparable properties within each respective area. The
lessor under the first of these leases (the "East State Lease") was East State
Associates, the partners of which include Mr. Cogan. The East State Lease
related to a 100,000 square foot warehouse in Hamilton Township (Trenton), New
Jersey. In accordance with the terms of the East State Lease, the lessor
exercised its right to require General Felt to purchase the facility at the
appraised fair market value of $2,250,000, as agreed by both parties. General
Felt assigned the purchase contract for the property to an unaffiliated third
party who purchased the property on March 28, 1994.
The lessor under the second lease (the "West State Lease") was West State
Associates, the partners of which include Mr. Cogan. The West State Lease
related to a General Felt manufacturing facility in Pico Rivera, California. On
August 26, 1994, General Felt in mutual agreement with the lessor purchased the
facility at the appraised fair market value of $3,350,000.
Certain Transactions Relating to the Acquisition of Great Western
In connection with the acquisition of Great Western in May 1993, Foamex
entered into lease agreements dated May 1993, with John Rallis ("Rallis"),
individually, or an affiliate, relating to former Great Western manufacturing
facilities. Aggregate lease payments for each of the fiscal years ended January
1, 1995, December 31, 1995 and December 29, 1996 were $1.6 million, $1.6 million
and $1.7 million, respectively. Foamex has the option to purchase each of the
properties at any time after April 2001 at a price equal to fair market value.
Part of the aggregate consideration paid by Foamex for the assets of Great
Western was in the form of a subordinated promissory note payable to Rallis in
the principal amount of $7,014,864 that bears interest at a maximum rate of 6.0%
per annum payable semi-annually.
FJPS Note
On June 28, 1994, Foamex purchased an $87.9 million principal amount note
due 2006 from its 98% limited partner FJPS for $35.3 million (the "FJPS Note").
In December 1996 in exchange for certain waivers and amendment of the FJPS Note,
FJPS repaid $18.4 million of the FJPS Note and a waiver payment of $0.2 million
using a portion of the proceeds from the sale of its partnership interest in JPS
Automotive. The FJPS Note was classified in partners' equity (deficit) and the
accreted principal of $16.3 million for the period from June 28, 1994 to
December 29, 1996 was included in the FJPS Note. In connection with the
Refinancing Plan, the FJPS Note was distributed by Foamex to its partners and
canceled.
Foamex International Supply Agreement
In June 1994, Foamex also entered into a supply agreement with Foamex
International (the "Supply Agreement"). Pursuant to the terms of the Supply
Agreement, at the option of Foamex, Foamex International will purchase certain
raw materials which are necessary for the manufacture of Foamex's products, and
resell such raw materials to Foamex
59
<PAGE>
at a price equal to net cost plus reasonable out-of-pocket expenses. Management
believes that the terms of the Supply Agreement are no less favorable than
those which Foamex could have obtained from an unaffiliated third party. For
the fiscal years ended January 1, 1995, December 31, 1995 and December 29,
1996, Foamex purchased $66.6 million, $105.1 million and $129.7 million,
respectively, in raw materials under the Supply Agreement.
Certain Transactions in Connection with the Refinancing Plan
In connection with the consummation of the Refinancing Plan, Foamex
distributed (i) to FJPS and FMXI, all FJPS Discount Debentures purchased in the
Tender Offer, the FJPS Note and the promissory note of Foamex International
payable to Foamex, and (ii) to Trace Foam, an amount in cash equal to 1/99th of
the distribution to FJPS and FMXI. As part of the Refinancing Plan (a) FMXI
dividended its distribution to Foamex International, (b) each of the FJPS
Discount Debentures distributed to FJPS, the Foamex International promissory
note, and the FJPS Note were canceled and (c) FJPS and its general partner, FJGP
Inc., were merged into Foamex International.
On July 7, 1996, Trace Holdings issued to Foamex a promissory note for
approximately $4.4 million plus accrued interest of approximately $0.4 million,
which is an extension of an earlier note. As part of the Refinancing Plan, the
Note was amended and restated, with accrued interest being added to principal,
the maturity was extended to July 7, 2001, and the interest rate was changed to
the sum of 23/8% plus Three Month LIBOR. In connection with the Refinancing
Plan, on July 1, 1997 Trace International borrowed an additional $5.0 million on
terms and conditions substantially similar to the existing promissory note, and
the tax distribution advance agreement was amended to increase the permitted
advances to Foamex International from $17.0 million to $25.0 million.
In connection with the Refinancing Plan, FJPS and its general partner FJGP
Inc. were merged into Foamex International. As a result, the partners of Foamex
are Foamex International, with a 98% limited partnership interest, FMXI, a
wholly owned subsidiary of Foamex International, with a 1% managing general
partnership interest, and Trace Foam, with a 1% non-managing general partnership
interest. In addition, Foamex's tax sharing agreement, tax distribution advance
agreement and management agreement were amended as described above.
Other Transactions
For each of the fiscal years ended January 1, 1995, December 31, 1995 and
December 29, 1996, Foamex made charitable contributions to the Trace
International Holdings, Inc. Foundation (the "Foundation") in the amount of $0.2
million. The Foundation is a Delaware tax-exempt private foundation. Marshall S.
Cogan, Vice Chairman of Foamex International and Foamex, is the sole director of
the Foundation.
In December 1995, Foamex entered into a $2.0 million promissory note with
Foamex International. The note bore interest at a rate per annum equal to six
month LIBOR plus 4.0% and was payable semi-annually in June and December. The
note was scheduled to mature in December 1997. The note was classified in the
other component of partners' equity (deficit). This note was distributed to
Foamex's partners and canceled in connection with the Refinancing Plan.
Trace Holdings rents approximately 5,900 square feet of general, executive
and administrative office space in New York, New York from Foamex on
substantially the same terms as Foamex leases such space from a third party
lessor. The lease commenced October 1, 1993 with the occupancy and rent payments
commencing on October 1, 1994. The lease provides for an initial term of 11
years and expires on September 30, 2004. The lease provides for two optional
five-year renewal periods at the fair market rental value of the property on the
first day of such renewal term. The annual rental for the period October 1, 1994
through September 30, 2004 is approximately $0.7 million. Under the lease,
Foamex is required to pay certain excess real estate taxes and operating
expenses incurred by the lessor relating to the property for which it will be
proportionally reimbursed by Trace Holdings. The rental terms were the result of
arm-length negotiations between Foamex and the third party lessor. Trace
Holdings will reimburse, through increased rent, Foamex for the cost of any
leasehold improvements applicable to the space occupied for the benefit of Trace
Holdings.
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DESCRIPTION OF CERTAIN DEBT INSTRUMENTS
Set forth below is a summary of all of the material payment terms of
certain debt instruments to which Foamex is a party.
New Credit Facility
Foamex and General Felt have entered into a credit agreement with a group
of banks for which The Bank of Nova Scotia ("Scotiabank") and Citicorp USA, Inc.
act as administrative agents (the "Administrative Agents"). The New Credit
Facility provides for (i) $330 million of term loans, comprised of a $120
million term A sub-facility (the "Term A Loan"), a $110 million term B
sub-facility (the "Term B Loan") and a $100 million term C sub-facility (the
"Term C Loan") and (ii) a $150 million revolving credit facility (the "Revolving
Facility").
Any unused Term A Loan commitments will remain open until June 15, 1998 and
can be drawn for the purpose of funding any future repurchase of notes not
repurchased in connection with the Refinancing Plan. In conjunction with the
Refinancing Plan, $88.0 million of Term A Loans, $110.0 million of Term B Loans,
$100.0 million of Term C Loans and $49.0 million of borrowings under the
Revolving Facility were drawn.
The Term A Loan, the Term B Loan and the Term C Loan are amortized each
year and will mature on the sixth, eighth and ninth anniversaries, respectively,
of the closing of the Refinancing Plan. The Revolving Facility will terminate on
the sixth anniversary of the closing of the Refinancing Plan. Set forth below
are the aggregate principal amounts of the term loans that are amortized in each
year following the Refinancing Plan assuming 100% of each term loan is drawn and
no excess cash flow or other prepayments are made.
<TABLE>
<CAPTION>
Calendar Year Amount
<S> <C>
1997 ............. $ 4,050,000
1998 ............. 11,100,000
1999 ............. 17,100,000
2000 ............. 23,100,000
2001 ............. 27,600,000
2002 ............. 32,100,000
2003 ............. 40,050,000
2004 ............. 68,700,000
2005 ............. 76,200,000
2006 ............. 30,000,000
------------
Total ............. $330,000,000
============
</TABLE>
The maturity of borrowings under the New Credit Facility may be accelerated
upon the occurrence of certain events. In addition, Foamex and General Felt are
required, subject to certain exceptions, to prepay outstanding borrowings from
the net proceeds of certain asset sales, equity and debt issuances and a
percentage of annual excess cash flow (based on Foamex's then current Leverage
Ratio (as defined below)). Borrowings under the New Credit Facility are secured
by the accounts receivable, inventories, certain real and personal property and
certain intangible assets of Foamex and General Felt, the partnership interests
of Foamex and the capital stock of all the direct and indirect subsidiaries of
Foamex and General Felt.
Funds borrowed under the New Credit Facility bear interest at either (i)
Scotiabank's alternate base rate ("Base Rate") or (ii) LIBOR plus, in each case,
an applicable margin (the "Applicable Margin") based on Foamex's ratio (the
"Leverage Ratio") of (a) total funded indebtedness less cash to (b) its trailing
four quarter EBDAIT. Generally, for LIBOR borrowings, the Applicable Margin
ranges from 0.625% (corresponding to a Leverage Ratio less than 2.50) to 2.625%
(corresponding to a Leverage Ratio greater than or equal to 4.50). Generally,
for Base Rate borrowings, the Applicable Margin ranges from 0.0% (corresponding
to a Leverage Ratio less than 3.00) to 1.625% (corresponding to a Leverage Ratio
greater than or equal to 4.50). Within these ranges, the Applicable Margin
varies depending on the maturity date of the borrowings.
The New Credit Facility restricts, among other things and subject to
certain exceptions, Foamex's and General Felt's ability: (i) to incur additional
indebtedness, except for extensions or refundings of certain permitted
indebtedness, (ii) to merge, consolidate, liquidate, dissolve, sell or transfer
all or substantially all of their assets or make other similar fundamental
changes, (iii) to sell assets outside the ordinary course of business in excess
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of amounts set forth therein in any fiscal year, (iv) to guarantee or invest
in, or make loans or advances to, other persons or entities, (v) to declare or
pay dividends or make other distributions with respect to their equity
interests and (vi) to engage in certain transactions with affiliates and
holders of their equity interests. In general, these covenants are more
restrictive than those contained in the Indenture. The New Credit Facility also
requires Foamex to maintain specified financial ratios.
Events of default under the New Credit Facility include, among other
things: (i) any failure by Foamex or General Felt to pay principal thereunder
when due, or to pay interest or any other amount due within five days after the
date due, (ii) the failure of Foamex or any of its subsidiaries to pay any other
indebtedness (including capitalized leases) when due in excess of amounts set
forth therein, or the occurrence of any breach, default or event of default that
would cause or permit the acceleration of indebtedness in excess of amounts set
forth therein, (iii) the breach by Foamex, General Felt, FMXI or Trace Foam of
certain covenants and agreements of the New Credit Facility, (iv) the material
inaccuracy of any representation or warranty given by Foamex, General Felt, FMXI
or Trace Foam in the New Credit Facility, (v) the continuance of a default by
Foamex, General Felt, FMXI or Trace Foam in the performance of or compliance
with other covenants and agreements in the New Credit Facility for 30 days after
the occurrence thereof and (vi) certain changes of control and acts of
bankruptcy, insolvency or dissolution. Under the terms of the Indenture, an
event of default under the New Credit Facility would result in an Event of
Default under the Indenture.
9 1/2% Senior Secured Notes due 2000
The Senior Secured Notes were issued on June 3, 1993 and bear interest at
the rate of 91/2% payable semi-annually on each June 1 and December 1. The
Senior Secured Notes mature on June 1, 2000. The Senior Secured Notes are
collateralized by a first-priority lien on substantially all of the assets of
Foamex except for receivables, real estate and fixtures. The Senior Secured
Notes may be redeemed at the option of Foamex, in whole or in part, at any time
on or after June 1, 1998, initially at 101.583% of their principal amount, plus
accrued interest, and declining to 100% on or after June 1, 1999. As part of the
Refinancing Plan, the indenture pursuant to which the Senior Secured Notes were
issued was amended to remove substantially all restrictive covenants.
11 1/4% Senior Notes due 2002
The Senior Notes bear interest at the rate of 111/4% payable semi-annually
on each April 1 and October 1. The Senior Notes mature on October 1, 2002. The
Senior Notes may be redeemed at the option of Foamex, in whole or in part, at
any time on or after October 1, 1997, initially at 104.219% of their principal
amount, plus accrued interest, and declining to 100% on or after October 1,
2000. In October 1994, Foamex provided certain real property as collateral for
the Senior Notes, with a net book value of $37.8 million at December 29, 1996.
As part of the Refinancing Plan, the indenture pursuant to which the Senior
Notes were issued was amended to remove substantially all restrictive covenants.
The outstanding Senior Notes have been called for redemption on October 1, 1997.
11 7/8% Senior Subordinated Debentures due 2004
The Senior Subordinated Debentures bear interest at the rate of 117/8%
payable semi-annually on each April 1 and October 1. The Senior Subordinated
Debentures mature on October 1, 2004. The Senior Subordinated Debentures may be
redeemed at the option of Foamex, in whole or in part, at any time on or after
October 1, 1997, initially at 105.938% of their principal amount, plus accrued
interest, and declining to 100% on or after October 1, 2002. The Senior
Subordinated Debentures are subordinated in right of payment to all senior
indebtedness, including the Senior Secured Notes and the Senior Notes and are
pari passu in right of payment with the Notes. As part of the Refinancing Plan,
the indenture pursuant to which the Senior Subordinated Debentures were issued
was amended to remove substantially all restrictive covenants. The outstanding
Senior Subordinated Debentures have been called for redemption on October 1,
1997.
117/8% Senior Subordinated Debentures, Series B due 2004
The Series B Debentures were issued July 30, 1993, by Foamex in an exchange
offer to holders of senior subordinated debentures issued in connection with the
acquisition of General Felt on March 23, 1993. The Series B Debentures have
terms substantially similar to the Senior Subordinated Debentures, except that
holders of the Series B Debentures are entitled to receive proceeds from an
asset sale only if any proceeds remain after an offer
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to repurchase has been made to the holders of the Senior Subordinated
Debentures. As part of the Refinancing Plan, the indenture pursuant to which
the Series B Debentures were issued was amended to remove substantially all
restrictive covenants. The Series B Debentures have been called for redemption
on October 1, 1997.
Industrial Revenue Bonds ("IRBs")
Two bond issues in the principal amount of $1.0 million and $6.0 million,
maturing in 2005 and 2013, respectively, are collateralized by certain
properties which have an approximate net carrying value of $11.3 million at
December 29, 1996 and letters of credit approximating $7.3 million. The IRBs
bear interest at a variable rate with options available to Foamex to convert to
a fixed rate. The interest rates on the IRBs were 4.85% and 4.0% at December 29,
1996 for the $6.0 million and $1.0 million bond issues, respectively. The
interest rate on the $6.0 million bond issue varies weekly based on an interest
rate that is indicative of current bidside yields on high quality short-term,
tax-exempt obligations, or if such interest rate is not available, 70.0% of the
interest rate for thirteen week United States Treasury Bills. The maximum
interest rate for either of the IRBs is 15.0% per annum. At the time of a
conversion to a fixed interest rate and upon appropriate notice, the IRBs are
redeemable at the option of the bondholders.
Subordinated Note Payable
This note payable was issued to the former Chief Operating Officer of
Foamex International, on May 6, 1993 by Foamex in connection with the
acquisition of Great Western. The note bears interest at a maximum rate of 6.0%
per annum and the principal amount is payable in three equal annual installments
beginning May 6, 1999. See "Certain Relationships and Related
Transactions--Certain Transactions Relating to the Acquisition of Great
Western."
Foamex Mexico Loan Agreement
In May 1997, Foamex Mexico entered into a loan agreement which provides for
(i) a $5.0 million term loan and (ii) a $2.0 million line of credit. Borrowings
under such loan agreement bear interest at a rate of LIBOR plus 4.5% and are
collateralized by certain assets of Foamex Mexico. The $5.0 million term loan is
amortized in equal quarterly payments after the first year and will mature in
2002. The $2.0 million line of credit will be used for working capital purposes
and is renewable annually. Foamex Mexico plans to use the proceeds of the term
loan for expenditures associated with the construction of a new manufacturing
facility.
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DESCRIPTION OF NOTES
General
The Old Notes were issued and the New Notes will be issued pursuant to an
indenture (the "Indenture") among Foamex and FCC, as joint and several obligors,
General Felt and Foamex Fibers as Subsidiary Guarantors, and The Bank of New
York, as trustee (the "Trustee"). The terms of the New Notes are identical in
all material respects to the terms of the Old Notes, except that the New Notes
have been registered under the Securities Act, and, therefore, will not bear
legends restricting their transfer and will not contain certain terms providing
for an increase in the interest rate on the Old Notes under the circumstances
described in the Registration Rights Agreement. The terms of the Notes include
those stated in the Indenture and those made part of the Indenture by reference
to the Trust Indenture Act of 1939, as amended (the "Trust Indenture Act"). The
Notes are subject to all such terms, and Holders of Notes are referred to the
Indenture and the Trust Indenture Act for a statement thereof. The following is
a summary of all the material provisions of the Indenture. A copy of the
Indenture and Registration Rights Agreement are filed as exhibits to the
Registration Statement of which this Prospectus is a part. The definitions of
certain terms used in the following summary are set forth below under "--Certain
Definitions." For purposes of this summary, the term "Issuers" refers only to
Foamex and FCC and not to any of their respective Subsidiaries.
The Notes are general unsecured obligations of the Issuers, subordinated in
right of payment to all existing and future Senior Debt of the Issuers,
including Indebtedness pursuant to the New Credit Facility. The Issuers'
obligations under the Notes are jointly and severally unconditionally guaranteed
(the "Note Guarantees") on a senior subordinated basis by the Subsidiary
Guarantors. See "--Note Guarantees." As of June 29, 1997, the Issuers had
approximately $371.1 million aggregate principal amount of Senior Debt and
approximately $27.4 million aggregate principal amount of Pari Passu Debt. The
Indenture permits the incurrence of additional Senior Debt, Pari Passu Debt and
Subordinated Indebtedness in the future.
The operations of Foamex are conducted in part through its Subsidiaries,
and Foamex may, therefore, be dependent upon the cash flow of its Subsidiaries
to meet its debt obligations, including its obligations under the Notes. While
all of the existing domestic subsidiaries of the Issuers are, and certain future
domestic subsidiaries are expected to be, Subsidiary Guarantors, certain other
foreign Subsidiaries of Foamex are not guarantors and may be restricted in their
ability to pay dividends to Foamex pursuant to instruments governing
indebtedness of such Subsidiaries. Under certain circumstances, the Issuers will
be able to designate any Subsidiaries formed by the Issuers or acquired by the
Issuers after the original issuance of the Notes as Unrestricted Subsidiaries.
Unrestricted Subsidiaries are not Subsidiary Guarantors and are not subject to
most of the restrictive covenants set forth in the Indenture.
Principal, Maturity and Interest
The Notes are limited in aggregate principal amount to $150.0 million and
will mature on June 15, 2007. Interest on the Notes will accrue at the rate of
97/8% per annum and will be payable semi-annually in arrears on June 15 and
December 15 of each year, commencing on December 15, 1997, to Holders of record
on the immediately preceding June 1 and December 1. Interest on the Notes will
accrue from the most recent date to which interest has been paid or, if no
interest has been paid, from the date of original issuance. Interest will be
computed on the basis of a 360-day year comprised of twelve 30-day months.
Principal, interest, premium and Liquidated Damages on the Notes will be payable
at the office or agency of the Issuers maintained for such purpose within the
City and State of New York or, at the option of the Issuers, payment of interest
and Liquidated Damages, if any, may be made by check mailed to the Holders of
the Notes at their respective addresses set forth in the register of Holders of
Notes; provided that all payments of principal, interest, premium and Liquidated
Damages, if any, with respect to Notes, the Holders of which have given wire
transfer instructions to the Issuers, will be required to be made by wire
transfer of immediately available next day funds to the accounts specified by
the Holders thereof. Until otherwise designated by the Issuers, the Issuers'
office or agency in New York will be the office of the Trustee maintained for
such purpose. The Notes will be issued in denominations of $1,000 and integral
multiples thereof.
Subordination
The payment of principal of, interest and premium and Liquidated Damages,
if any, on the Notes is subordinate in right of payment, as set forth in the
Indenture, to the prior payment in full of all Senior Debt, whether outstanding
on the date of the Indenture or thereafter created, incurred or assumed and all
permissible renewals, extensions, refundings or refinancings thereof.
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The Indenture provides that, upon any payment or distribution of assets of
the Issuers of any kind or character, whether in cash, property or securities,
to creditors in any Insolvency or Liquidation Proceeding with respect to either
Issuer all amounts due or to become due under or with respect to all Senior Debt
will first be paid in full before any payment is made on account of the Notes,
except that the Holders of Notes may receive Reorganization Securities. Upon any
such Insolvency or Liquidation Proceeding, any payment or distribution of assets
of Foamex or FCC of any kind or character, whether in cash, property or
securities (other than Reorganization Securities), to which the Holders of the
Notes or the Trustee would be entitled will be paid by Foamex or FCC or by any
receiver, trustee in bankruptcy, liquidating trustee, agent or other person
making such payment or distribution, or by the Holders of the Notes or by the
Trustee if received by them, directly to the holders of Senior Debt (pro rata to
such holders on the basis of the amounts of Senior Debt held by such holders) or
their Representative or Representatives, as their interests may appear, for
application to the payment of the Senior Debt remaining unpaid until all such
Senior Debt has been paid in full, after giving effect to any concurrent
payment, distribution or provision therefor to or for the holders of Senior
Debt.
The Indenture provides that (a) in the event of and during the continuation
of any default in the payment of principal of, interest or premium, if any, on
any Senior Debt, or any Obligation owing from time to time under or in respect
of Senior Debt, or in the event that any event of default (other than a payment
default) with respect to any Senior Debt will have occurred and be continuing
and will have resulted in such Senior Debt becoming or being declared due and
payable prior to the date on which it would otherwise have become due and
payable, or (b) if any event of default other than as described in clause (a)
above with respect to any Designated Senior Debt will have occurred and be
continuing permitting the holders of such Designated Senior Debt (or their
Representative or Representatives) to declare such Designated Senior Debt due
and payable prior to the date on which it would otherwise have become due and
payable, then no payment will be made by or on behalf of Foamex or FCC on
account of the Notes (other than payments in the form of Reorganization
Securities) (x) in case of any payment or nonpayment default specified in (a),
unless and until such default will have been cured or waived in writing in
accordance with the instruments governing such Senior Debt or such acceleration
will have been rescinded or annulled, or (y) in case of any nonpayment event of
default specified in (b), during the period (a "Payment Blockage Period")
commencing on the date the Issuers or the Trustee receive written notice (a
"Payment Notice") of such event of default (which notice will be binding on the
Trustee and the Holders of Notes as to the occurrence of such a payment default
or nonpayment event of default) from the Credit Agent (or other holders of
Designated Senior Debt or their Representative or Representatives) and ending on
the earliest of (A) 179 days after such date, (B) the date, if any, on which
such Designated Senior Debt to which such default relates is paid in full or
such default is cured or waived in writing in accordance with the instruments
governing such Designated Senior Debt by the holders of such Designated Senior
Debt and (C) the date on which the Trustee receives written notice from the
Credit Agent (or other holders of Designated Senior Debt or their Representative
or Representatives), as the case may be, terminating the Payment Blockage
Period. During any consecutive 360-day period, the aggregate of all Payment
Blockage Periods shall not exceed 179 days and there shall be a period of at
least 181 consecutive days in each consecutive 360-day period when no Payment
Blockage Period is in effect. No event of default which existed or was
continuing with respect to the Senior Debt to which notice commencing a Payment
Blockage Period was given on the date such Payment Blockage Period commenced
shall be or be made the basis for the commencement of any subsequent Payment
Blockage Period unless such event of default is cured or waived for a period of
not less than 90 consecutive days.
As a result of the subordination provisions described above, in the event
of Foamex's or FCC's liquidation, dissolution, bankruptcy, reorganization,
insolvency, receivership or similar proceeding or in an assignment for the
benefit of the creditors or a marshalling of the assets and liabilities of
either of the Issuers, Holders of Notes may recover less ratably than creditors
of the Issuers who are holders of Senior Debt. See "Risk
Factors--Subordination." The Indenture will limit, subject to certain financial
tests, the amount of additional Indebtedness, including Senior Debt, that the
Issuers and their respective Restricted Subsidiaries can incur. See "--Certain
Covenants--Incurrence of Indebtedness and Issuance of Preferred Stock."
Note Guarantees
The Issuers' payment obligations under the Notes are jointly and severally
fully and unconditionally guaranteed by the Subsidiary Guarantors. The Note
Guarantees will be subordinated to the prior payment in full of all Senior Debt
of each Subsidiary Guarantor (including such Subsidiary Guarantor's guarantee of
the New Credit Agreement,
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if any) to the same extent that the Notes are subordinated to Senior Debt of
the Issuers. The obligations of any Subsidiary Guarantor under its Note
Guarantee will be limited so as not to constitute a fraudulent conveyance under
applicable law. See "Risk Factors--Certain Creditors' Rights Considerations."
The Indenture provides that no Subsidiary Guarantor may consolidate with or
merge with or into (whether or not such Subsidiary Guarantor is the surviving
Person), another corporation, Person or entity whether or not affiliated with
such Subsidiary Guarantor unless, subject to the provisions of the following
paragraph, (i) the Person formed by or surviving any such consolidation or
merger (if other than such Subsidiary Guarantor) assumes all the obligations of
such Subsidiary Guarantor pursuant to a supplemental indenture in form and
substance reasonably satisfactory to the Trustee, under the Notes and the
Indenture; (ii) immediately after giving effect to such transaction, no Default
or Event of Default exists; (iii) such Subsidiary Guarantor, or any Person
formed by or surviving any such consolidation or merger, would have Consolidated
Net Worth (immediately after giving effect to such transaction), equal to or
greater than the Consolidated Net Worth of such Guarantor immediately preceding
the transaction; and (iv) Foamex would be permitted by virtue of Foamex's pro
forma Fixed Charge Coverage Ratio, immediately after giving effect to such
transaction, to incur at least $1.00 of additional Indebtedness pursuant to the
Fixed Charge Coverage Ratio test set forth in the covenant described below under
the caption "Incurrence of Indebtedness and Issuance of Preferred Stock." The
requirements of clauses (iii) and (iv) of this paragraph will not apply in the
case of a consolidation with or merger with or into any other Person if the
acquisition of all of the Equity Interests in such Person would have complied
with the provisions of the covenants described below under the captions
"--Restricted Payments" and "--Incurrence of Indebtedness and Issuance of
Preferred Stock."
The Indenture provides that (a) in the event of a sale or other disposition
of all of the assets of any Subsidiary Guarantor, by way of merger,
consolidation or otherwise, or a sale or other disposition of all of the capital
stock of any Subsidiary Guarantor, or (b) in the event that either of the
Issuers designates a Subsidiary Guarantor to be an Unrestricted Subsidiary, or
such Subsidiary Guarantor ceases to be a Subsidiary of the Issuers, then such
Subsidiary Guarantor (in the event of a sale or other disposition, by way of
such a merger, consolidation or otherwise, of all of the capital stock of such
Subsidiary Guarantor or any such designation) or the entity acquiring the
property (in the event of a sale or other disposition of all of the assets of
such Subsidiary Guarantor) will be released and relieved of any obligations
under its Note Guarantee; provided that the Net Proceeds of such sale or other
disposition are applied in accordance with the applicable provisions of the
Indenture. See "--Repurchase at the Option of Holders." In the case of a sale,
assignment, lease, transfer, conveyance or other disposition of all or
substantially all of the assets of a Subsidiary Guarantor, upon the assumption
provided for in clause (i) in the preceding paragraph, such Subsidiary Guarantor
shall be discharged from all further liability and obligation under the
Indenture.
Optional Redemption
The Notes will not be redeemable at the Issuers' option prior to June 15,
2002. Thereafter, the Notes will be redeemable at the option of the Issuers, in
whole or in part, at any time upon not less than 30 nor more than 60 days'
notice, at the redemption prices (expressed as percentages of principal amount)
set forth below plus accrued and unpaid interest and Liquidated Damages, if any,
thereon, to the applicable redemption date, if redeemed during the twelve-month
period beginning on June 15 of the years indicated below:
<TABLE>
<CAPTION>
Year Percentage
---- ----------
<S> <C>
2002 ..................... 104.938%
2003 ..................... 103.292
2004 ..................... 101.646
2005 and thereafter ...... 100.000%
</TABLE>
Notwithstanding the foregoing, at any time prior to June 15, 2000, the
Issuers may on any one or more occasions redeem up to 35% of the initially
outstanding aggregate principal amount of Notes at a redemption price equal to
109.875% of the principal amount thereof, plus accrued and unpaid interest and
Liquidated Damages, if any, thereon to the redemption date, with the cash
proceeds of one or more Public Equity Offerings; provided that, in each case, at
least 65% of the initially outstanding aggregate principal amount of Notes
remains outstanding immediately after the occurrence of such redemption; and
provided, further, that such redemption shall occur within 45 days of the date
of the closing of such Public Equity Offering.
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Selection and Notice
If less than all of the Notes are to be redeemed at any time, selection of
Notes for redemption will be made by the Trustee in compliance with the
requirements of the principal national securities exchange, if any, on which the
Notes are listed, or, if the Notes are not so listed, on a pro rata basis, by
lot or by such method as the Trustee shall deem fair and appropriate; provided
that no Notes of $1,000 or less shall be redeemed in part. Notices of redemption
shall be mailed by first class mail at least 30 but not more than 60 days before
the redemption date to each Holder of Notes to be redeemed at its registered
address. If any Note is to be redeemed in part only, the notice of redemption
that relates to such Note shall state the portion of the principal amount
thereof to be redeemed. A new Note in principal amount equal to the unredeemed
portion thereof will be issued in the name of the Holder thereof upon
cancellation of the original Note. Notes called for redemption become due on the
date fixed for redemption. On and after the redemption date, interest ceases to
accrue on Notes or portions of them called for redemption.
Mandatory Redemption
Except as set forth below under "--Repurchase at the Option of Holders,"
the Issuers are not required to make mandatory redemption or sinking fund
payments with respect to the Notes.
Repurchase at the Option of Holders
Change of Control
Upon the occurrence of a Change of Control, each Holder of Notes will have
the right to require the Issuers to repurchase all or any part (equal to $1,000
or an integral multiple thereof) of such Holder's Notes pursuant to the offer
described below (the "Change of Control Offer") at an offer price in cash equal
to 101% of the aggregate principal amount thereof, plus accrued and unpaid
interest and Liquidated Damages, if any, thereon to the date of purchase (the
"Change of Control Payment"). Within 30 days following any Change of Control,
the Issuers will mail a notice to each Holder describing the transaction or
transactions that constituted the Change of Control and offering to repurchase
Notes on the date specified in such notice, which date shall be no earlier than
30 days and no later than the fifth Business Day preceding the last day of the
fiscal quarter of Foamex next following the Change of Control date (the "Change
of Control Payment Date"), pursuant to the procedures required by the Indenture
and described in such notice. The Issuers will comply with the requirements of
Rule 14e-1 under the Exchange Act and any other securities laws and regulations
thereunder to the extent such laws and regulations are applicable in connection
with the repurchase of the Notes as a result of a Change of Control.
On the Change of Control Payment Date, the Issuers will, to the extent
lawful, (1) accept for payment all Notes or portions thereof properly tendered
pursuant to the Change of Control Offer, (2) deposit with the Paying Agent an
amount equal to the Change of Control Payment in respect of all Notes or
portions thereof so tendered and (3) deliver or cause to be delivered to the
Trustee the Notes so accepted together with an Officers' Certificate stating the
aggregate principal amount of Notes or portions thereof being purchased by the
Issuers. The Paying Agent will promptly mail to each Holder of Notes so tendered
the Change of Control Payment for such Notes, and the Trustee will promptly
authenticate and mail (or cause to be transferred by book entry) to each Holder
a new Note equal in principal amount to any unpurchased portion of the Notes
surrendered, if any; provided that each such new Note will be in a principal
amount of $1,000 or an integral multiple thereof. The Indenture provides that,
prior to complying with the provisions of this covenant, but in any event prior
to the Change of Control Payment Date, the Issuers will either repay all
outstanding Senior Debt or obtain the requisite consents, if any, under all
agreements governing outstanding Senior Debt to permit the repurchase of Notes
required by this covenant. The Issuers will publicly announce the results of the
Change of Control Offer on or as soon as practicable after the Change of Control
Payment Date. See "Risk Factors--Limitations on Ability to Make Change of
Control Payment."
The Change of Control provisions described above will be applicable whether
or not any other provisions of the Indenture are applicable. Except as described
above with respect to a Change of Control, the Indenture does not contain
provisions that permit the Holders of the Notes to require that the Issuers
repurchase or redeem the Notes in the event of a takeover, recapitalization or
similar transaction.
The New Credit Facility restricts the Issuers from repurchasing any Notes
and also provides that certain asset sales and change of control events with
respect to the Issuers would constitute a default thereunder. Any future credit
agreements or other agreements relating to Senior Debt to which either of the
Issuers becomes a party may
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contain similar restrictions and provisions. In the event a Change of Control
occurs at a time when the Issuers are prohibited from purchasing Notes, the
Issuers could seek the consent of their respective lenders to purchase the
Notes or could attempt to refinance the borrowings that contain such
prohibition. If the Issuers do not obtain such consent or repay such
borrowings, the Issuers will remain prohibited from purchasing Notes. In such
case, the Issuers' failure to purchase tendered Notes would constitute an Event
of Default under the Indenture which would, in turn, constitute a default under
the New Credit Facility and would likely cause an event of default under any
other outstanding Senior Debt. In such circumstances, the subordination
provisions in the Indenture would likely restrict payments to the Holders of
Notes. See "Risk Factors--Subordination; Rights of Senior Lenders" and
"Description of Certain Debt Instruments."
The Issuers will not be required to make a Change of Control Offer upon a
Change of Control if a third party makes the Change of Control Offer in the
manner, at the times and otherwise in compliance with the requirements set forth
in the Indenture applicable to a Change of Control Offer made by the Issuers and
purchases all Notes validly tendered and not withdrawn under such Change of
Control Offer.
The definition of Change of Control includes a phrase relating to the sale,
lease, transfer, conveyance or other disposition of "all or substantially all"
of the assets of each of the Issuers and each of their respective Subsidiaries
taken as a whole. Although there is a developing body of case law interpreting
the phrase "substantially all," there is no precise established definition of
the phrase under applicable law. Accordingly, the ability of a Holder of Notes
to require the Issuers to repurchase such Notes as a result of a sale, lease,
transfer, conveyance or other disposition of less than all of the assets of the
Issuers and their respective Subsidiaries taken as a whole to another Person or
group may be uncertain.
The obligation to make a Change of Control Offer, together with
restrictions in the Indenture described herein on the ability of Foamex and its
Restricted Subsidiaries to incur additional Indebtedness, to grant liens on its
property, to make Restricted Payments and to make Asset Sales, may make more
difficult or discourage a takeover of Foamex, whether favored or opposed by the
management of Foamex. Consummation of any such transaction in certain
circumstances may require redemption or repurchase of the Notes, and there can
be no assurance that Foamex or the acquiring party will have sufficient
financial resources to effect such redemption or repurchase. Such restrictions
and the restrictions on transactions with Affiliates may, in certain
circumstances, make it more difficult to discourage any leveraged buyout of
Foamex or any of its Subsidiaries by the management of Foamex. While such
restrictions cover a wide variety of arrangements which have traditionally been
used to effect highly leveraged transactions, the Indenture may not afford the
Holders of Notes protection in all circumstances from the adverse aspects of a
highly leveraged transaction, reorganization, restructuring, merger or similar
transaction. In addition, while neither Foamex nor the Trustee may waive the
covenant relating to a Holder's right to redemption upon a Change of Control,
such right may be waived by the holders of a majority of the outstanding
principal amount of the Notes.
Asset Sales
The Indenture provides that each of the Issuers will not, and will not
permit any of their respective Restricted Subsidiaries to, consummate an Asset
Sale unless (i) such Issuer (or the Restricted Subsidiary, as the case may be)
receives consideration at the time of such Asset Sale at least equal to the fair
market value (evidenced by an Officers' Certificate delivered to the Trustee and
a resolution of the Board of Directors) of the assets or Equity Interests issued
or sold or otherwise disposed of and (ii) at least 80% of the consideration
therefor received by such Issuer or such Restricted Subsidiary is in the form of
(A) cash, (B) assets useful in a Permitted Business not to exceed $30.0 million
in the aggregate over the life of the Notes, or (C) Equity Interests
representing a controlling interest in a Permitted Business not to exceed $30.0
million in the aggregate over the life of the Notes (collectively, the
"Permitted Consideration"); provided that the amount of (x) any liabilities (as
shown on such Issuer's or such Restricted Subsidiary's most recent balance
sheet), of such Issuer or any Restricted Subsidiary (other than contingent
liabilities (except to the extent reflected (or reserved for) on a balance sheet
of the Issuers or any Restricted Subsidiary as of the date prior to the date of
consummation of such transaction) and liabilities that are by their terms
subordinated to the Notes or the Note Guarantees) that are assumed by the
transferee of any such assets and (y) any securities, notes or other obligations
received by such Issuer or any such Restricted Subsidiary from such transferee
that are converted within 90 days by such Issuer or such Restricted Subsidiary
into Permitted Consideration (to the extent so received), shall be deemed to be
Permitted Consideration for purposes of this provision; and provided further,
that the 80% limitation referred to above shall not apply to any Asset Sale in
which the Permitted Consideration
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portion of the consideration received therefor is equal to or greater than what
the net after-tax proceeds would have been had such Asset Sale complied with
the aforementioned 80% limitation.
Within 365 days after the receipt of any Net Proceeds from an Asset Sale,
the Issuers may apply such Net Proceeds, at their option, (a) to repay Senior
Debt, or (b) to the acquisition of assets to be used in a Permitted Business.
Pending the final application of any such Net Proceeds, the Issuers may
temporarily reduce the New Credit Facility or otherwise invest such Net Proceeds
in any manner that is not prohibited by the Indenture. Any Net Proceeds from
Asset Sales that are not applied or invested as provided in the first sentence
of this paragraph will be deemed to constitute "Excess Proceeds." When the
aggregate amount of Excess Proceeds exceeds $15.0 million, the Issuers will be
required to make an offer to all Holders of Notes (an "Asset Sale Offer") to
purchase the maximum principal amount of Notes that may be purchased out of the
Excess Proceeds, at an offer price in cash in an amount equal to 100% of the
principal amount thereof plus accrued and unpaid interest and Liquidated
Damages, if any, thereon to the date of purchase, in accordance with the
procedures set forth in the Indenture. To the extent that the aggregate amount
of Notes tendered pursuant to an Asset Sale Offer is less than the Excess
Proceeds, the Issuers may use any remaining Excess Proceeds for general
corporate purposes. If the aggregate principal amount of Notes surrendered by
Holders thereof exceeds the amount of Excess Proceeds, the Trustee shall select
the Notes to be purchased on a pro rata basis; provided, however, that the
Issuers shall not be obligated to purchase Notes in denominations other than
integral multiples of $1,000. Upon completion of such offer to purchase, the
amount of Excess Proceeds shall be reset at zero.
Certain Covenants
Restricted Payments
The Indenture provides that each of the Issuers will not, and will not
permit any of their respective Restricted Subsidiaries to, directly or
indirectly: (i) declare or pay any dividend or make any other payment or
distribution on account of the Issuers' or any of their respective Restricted
Subsidiaries' Equity Interests (including, without limitation, any payment in
connection with any merger or consolidation involving the Issuers (other than
cash in lieu of fractional shares)) or to the direct or indirect holders of the
Issuers' or any of their respective Restricted Subsidiaries' Equity Interests in
their capacity as such (other than dividends or distributions payable (a) in
additional Equity Interests (other than Disqualified Stock) of the Issuers or
(in the case of a dividend, other payment or distribution on account of the
Equity Interest of a Restricted Subsidiary) of such Restricted Subsidiary or (b)
to the Issuers or their Restricted Subsidiaries); (ii) purchase, redeem or
otherwise acquire or retire for value (including without limitation, in
connection with any merger or consolidation involving the Issuers) any Equity
Interests of the Issuers or any direct or indirect parent of the Issuers; (iii)
make any Investment in any Unrestricted Subsidiary; (iv) make any payment on or
with respect to, or purchase, redeem, defease or otherwise acquire or retire for
value any Indebtedness (other than the Notes) that is pari passu with or
subordinated to the Notes or the Note Guarantees, except a payment of interest
or principal at Stated Maturity; or (v) make any Restricted Investment (all such
payments and other actions set forth in clauses (i) through (v) above being
collectively referred to as "Restricted Payments"), unless, at the time of and
after giving effect to such Restricted Payment:
(a) no Default or Event of Default shall have occurred and be continuing or
would occur as a consequence thereof; and
(b) Foamex would, at the time of such Restricted Payment and after giving
pro forma effect thereto as if such Restricted Payment had been made at the
beginning of the applicable four-quarter period, have been permitted to incur at
least $1.00 of additional Indebtedness pursuant to the Fixed Charge Coverage
Ratio test set forth in the first paragraph of the covenant described below
under the caption "--Incurrence of Indebtedness and Issuance of Preferred
Stock"; and
(c) such Restricted Payment, together with the aggregate amount of all
other Restricted Payments made by the Issuers and their respective Restricted
Subsidiaries after the date of the Indenture (excluding Restricted Payments
permitted by clauses (ii), (iii), (iv), (vi), (vii), (viii), (x), (xi), (xii),
(xiii), (xiv), (xv), (xvi) and (xvii) of the next succeeding paragraph), is less
than the sum of (i) 50% of the Consolidated Net Income of Foamex for the
preceding four-quarter period, plus (ii) 100% of the aggregate net cash proceeds
received by Foamex from the issue or sale since the date of the Indenture of
Equity Interests of Foamex (other than Disqualified Stock) or of Disqualified
Stock or debt securities of Foamex that have been converted into such Equity
Interests (other than Equity Interests (or
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Disqualified Stock or convertible debt securities) sold to a Subsidiary of the
Issuers and other than Disqualified Stock or convertible debt securities that
have been converted into Disqualified Stock) or of capital contributions to the
Issuers, plus (iii) to the extent that any Restricted Investment that was made
after the date of the Indenture is sold for cash or otherwise liquidated or
repaid for cash (less the cost of disposition, if any), or the cash return,
including, without limitation, any cash dividends or distributions, with
respect to such Restricted Investment or from any Unrestricted Subsidiary.
The foregoing provisions will not prohibit (i) the payment of any dividend
or distribution within 60 days after the date of declaration thereof, if at said
date of declaration such payment would have complied with the provisions of the
Indenture; (ii) the redemption, repurchase, retirement, defeasance or other
acquisition of any Pari Passu Debt, or subordinated Indebtedness or Equity
Interests of the Issuers or any Restricted Subsidiary in exchange for, or out of
the net cash proceeds of the substantially concurrent sale or issuance (other
than to a Restricted Subsidiary of the Issuers) of, Equity Interests of the
Issuers or any Restricted Subsidiary (other than any Disqualified Stock);
provided that the amount of any such net cash proceeds that are utilized for any
such redemption, repurchase, retirement, defeasance or other acquisition shall
be excluded from clause (c) (ii) of the preceding paragraph; (iii) the
defeasance, redemption, repurchase or other acquisition of Pari Passu Debt or
subordinated Indebtedness with the net cash proceeds from an incurrence of
Permitted Refinancing Indebtedness; (iv) the payment of any dividend or
distribution by a Restricted Subsidiary of the Issuers to the holders of its
Equity Interests on a pro rata basis; (v) the repurchase, redemption or other
acquisition or retirement for value of any Equity Interests of the Issuers, any
Restricted Subsidiary of the Issuers, or any direct or indirect parent of the
Issuers or their respective Restricted Subsidiaries held by any member of the
Issuers' (or any of its Restricted Subsidiaries') management pursuant to any
management equity subscription agreement or stock option agreement either (a) in
effect as of the date of the Indenture; provided that the aggregate price paid
for all such repurchased, redeemed, acquired or retired Equity Interests shall
not exceed $2.5 million in any twelve- month period and no Default or Event of
Default shall have occurred and be continuing immediately after such transaction
or (b) upon the termination of such person's employment; (vi) the advancement of
payment or payment of distributions pursuant to the Tax Sharing Agreement and
the making of up to $17.0 million of loans or advances pursuant to the Tax
Advance Agreement dated as of December 11, 1996 between FJPS and Foamex as
amended to the date of the Indenture; (vii) the payment by Foamex of a
management fee pursuant to the Management Services Agreement in an amount not to
exceed $3.0 million per annum; (viii) distributions to Foamex International Inc.
and its Subsidiaries which are utilized to pay the debt service and other
expenses of Foamex Aviation Corp., the aggregate amount of which shall not
exceed $2.0 million in any twelve-month period; (ix) additional payments in an
aggregate amount not to exceed $25.0 million; (x) Contributions to a Restricted
Subsidiary if such Subsidiary (a) executes and delivers to the Trustee a
supplemental indenture in form reasonably satisfactory to the Trustee pursuant
to which such Restricted Subsidiary shall guarantee all of the Obligations of
the Issuers with respect to the Indenture and the Notes and (b) delivers to the
Trustee an Opinion of Counsel reasonably satisfactory to the Trustee to the
effect that such supplemental indenture, has been duly executed and delivered by
such Restricted Subsidiary and is in compliance with the terms of the Indenture;
(xi) distributions, loans or advances to the holders of the Equity Interests of
the Issuers in an amount sufficient to pay all or a portion of the principal of,
interest or premium, if any, on the Foamex-JPS Automotive L.P. Senior Secured
Discount Debentures due 2004; (xii) distributions, loans or advances to holders
of the Equity Interests of the Issuers in an amount sufficient to enable Foamex
International Inc. to pay its reasonable, out of pocket operating and
administrative expenses, including without limitation, directors fees, legal and
audit expenses, SEC compliance expenses and corporate franchise and other taxes;
provided that no such expense payments shall be made to an Affiliate (other than
a director or officer of the Issuers whose status as an Affiliate results solely
from his position as a director or officer of the Issuers) of Foamex
International Inc.; (xiii) Investments received by the Issuers or any of their
Restricted Subsidiaries as non-cash consideration from Asset Sales to the extent
permitted by the covenant described under the caption "--Repurchase at the
Option of Holders--Asset Sales"; (xiv) the Closing Date Transactions; (xv)
payments made pursuant to the Great Western Note; (xvi) payments made to
purchase any Indebtedness subject to the Closing Date Transactions that is not
purchased pursuant to such Transaction; and (xvii) the issuance or sale of
Equity Interests of Foamex Latin America to key executives of Foamex Latin
America not to exceed 5% of the outstanding Equity Interests of Foamex Latin
America.
The Board of Directors may designate any Restricted Subsidiary to be an
Unrestricted Subsidiary if such designation would not cause a Default; provided
that in no event shall the business currently operated by any Subsidiary
Guarantor be transferred to or held by an Unrestricted Subsidiary. For purposes
of making such determination, all outstanding Investments by either Issuer and
their respective Restricted Subsidiaries (except to
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the extent repaid in cash) in the Subsidiary so designated will be deemed to be
Restricted Payments at the time of such designation and will be included for
purposes of calculating the aggregate amount of Restricted Payments under
clause (c) of first paragraph of this covenant. All such outstanding
Investments will be deemed to constitute Investments in an amount equal to the
fair market value of such Investments at the time of such designation. Such
designation will only be permitted if such Restricted Payment would be
permitted at such time and if such Restricted Subsidiary otherwise meets the
definition of an Unrestricted Subsidiary.
The amount of all Restricted Payments (other than cash) shall be the fair
market value on the date of the Restricted Payment of the asset(s) or securities
proposed to be transferred or issued by the Issuers or such Restricted
Subsidiary, as the case may be, pursuant to the Restricted Payment. The fair
market value of any individual or series of related non-cash Restricted Payments
(other than the Closing Date Transactions) shall be determined by the Board of
Directors whose resolution with respect thereto shall be delivered to the
Trustee, such determination to be based upon an opinion or appraisal issued by
an accounting, appraisal or investment banking firm of national standing, as
applicable, if such fair market value exceeds $1.0 million. In connection with
each Restricted Payment, the Issuers shall deliver to the Trustee, prior to or
within 60 days of the making of such Restricted Payment, an Officers'
Certificate stating that such Restricted Payment is permitted and setting forth
the basis upon which the calculations required by the covenant "Restricted
Payments" were computed, together with a copy of any fairness opinion or
appraisal required by the Indenture.
Incurrence of Indebtedness and Issuance of Preferred Stock
The Indenture provides that the Issuers will not, and will not permit any
of their respective Subsidiaries to, directly or indirectly, create, incur,
issue, assume, guarantee or otherwise become directly or indirectly liable,
contingently or otherwise, with respect to (collectively, "incur") any
Indebtedness (including Acquired Debt) and that the Issuers and the Subsidiary
Guarantors will not issue any Disqualified Stock and the Issuers will not permit
any of their respective Subsidiaries which are not Subsidiary Guarantors to
issue any shares of preferred stock; provided, however, that the Issuers and
their Subsidiaries may incur Indebtedness (including Acquired Debt and
Indebtedness under the New Credit Facility) or issue shares of Disqualified
Stock or in the case of Subsidiaries which are not Subsidiary Guarantors, issue
preferred stock if: the Fixed Charge Coverage Ratio for Foamex's most recently
ended four full fiscal quarters for which internal financial statements are
available immediately preceding the date on which such additional Indebtedness
is incurred or such Disqualified Stock or preferred stock is issued would have
been at least 2.25 to 1, determined on a pro forma basis (including a pro forma
application of the net proceeds therefrom), as if the additional Indebtedness
had been incurred, or the Disqualified Stock or preferred stock had been issued
and such net proceeds had been applied, as the case may be, at the beginning of
such four-quarter period.
The provisions of the first paragraph of this covenant will not apply to
the incurrence of any of the following items of Indebtedness (collectively,
"Permitted Debt"):
(i) the incurrence by the Issuers or any of their respective Subsidiaries
of term Indebtedness under the New Credit Facility; provided that the aggregate
principal amount of all term Indebtedness outstanding under the New Credit
Facility after giving effect to such incurrence, including all term Indebtedness
incurred to refund, refinance or replace any other Indebtedness incurred
pursuant to this clause (i), does not exceed an amount equal to $330.0 million
less the aggregate amount of all Net Proceeds of Asset Sales that have been
applied since the date of the Indenture to repay such term Indebtedness under
the New Credit Facility and resulting in a permanent reduction of the related
commitments pursuant to the covenant described above under the caption "Asset
Sales";
(ii) the incurrence by the Issuers or any of their Subsidiaries of
revolving credit Indebtedness and letters of credit (with letters of credit
being deemed to have a principal amount, without duplication, equal to the
maximum potential liability of the Issuers and their Subsidiaries thereunder)
under the New Credit Facility; provided that the aggregate principal amount of
all revolving credit Indebtedness outstanding under the New Credit Facility
after giving effect to such incurrence, including all Indebtedness incurred to
refund, refinance or replace any other revolving Indebtedness incurred pursuant
to this clause (ii), does not exceed an amount equal to $150.0 million, less the
aggregate amount of all Net Proceeds of Asset Sales applied to repay such
revolving Indebtedness and resulting in a permanent reduction of the related
commitments pursuant to the covenant described above under the caption "--Asset
Sales"; provided, however, that notwithstanding anything to the contrary
contained in the Indenture, in no event shall the amount of Indebtedness which
the Issuers and their Subsidiaries may incur in the aggregate pursuant to clause
(i) and this clause (ii) be less than $150.0 million;
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(iii) the incurrence by the Issuers and their respective Subsidiaries of
the Existing Indebtedness;
(iv) the incurrence by the Issuers and the Subsidiary Guarantors of
Indebtedness represented by the Notes;
(v) the incurrence by the Issuers or any of their respective Subsidiaries
of Indebtedness represented by Capital Lease Obligations, mortgage financings or
purchase money obligations, in each case incurred for the purpose of financing
all or any part of the purchase price or cost of construction or improvement of
property, plant or equipment used in the business of the Issuers or such
Subsidiary, in an aggregate principal amount not to exceed $25.0 million at any
time outstanding;
(vi) the incurrence by the Issuers or any of their respective Subsidiaries
of Permitted Refinancing Indebtedness in exchange for, or the net proceeds of
which are used to refund, refinance or replace Indebtedness that was permitted
by the Indenture to be incurred;
(vii) the incurrence by the Issuers or any of their respective Restricted
Subsidiaries of intercompany Indebtedness between or among the Issuers and any
of their respective Restricted Subsidiaries; provided, however, that (i) if an
Issuer is the obligor on such Indebtedness and the payee is not a Subsidiary
Guarantor, such Indebtedness is expressly subordinated to the prior payment in
full in cash of all Obligations with respect to the Notes and (ii)(A) any
subsequent issuance or transfer of Equity Interests that results in any such
Indebtedness being held by a Person other than an Issuer or a Restricted
Subsidiary and (B) any sale or other transfer of any such Indebtedness to a
Person that is not either an Issuer or a Restricted Subsidiary shall be deemed,
in each case, to constitute an incurrence of such Indebtedness by an Issuer or
such Restricted Subsidiary, as the case may be;
(viii) the incurrence by the Issuers or any of their respective
Subsidiaries of Hedging Obligations;
(ix) the Guarantee by the Issuers or any of their respective Subsidiaries
of Indebtedness of the Issuers or a Restricted Subsidiary of the Issuers that
was permitted to be incurred by another provision of this covenant;
(x) the incurrence by the Issuers' Unrestricted Subsidiaries of
Non-Recourse Debt and preferred stock, provided, however, that if any such
Indebtedness ceases to be Non-Recourse Debt of an Unrestricted Subsidiary, such
event shall be deemed to constitute an incurrence of Indebtedness by a
Restricted Subsidiary of the Issuers;
(xi) the incurrence by the Issuers or any of their respective Subsidiaries
of additional Indebtedness including, without limitation, pursuant to the New
Credit Facility, in an aggregate principal amount (or accreted value, as
applicable) at any time outstanding, including all Permitted Refinancing
Indebtedness incurred to refund, refinance or replace any other Indebtedness
incurred pursuant to this clause (xi), not to exceed $45.0 million;
(xii) Acquired Debt of a Subsidiary in existence at the time of the
acquisition of such Subsidiary, if such Acquired Debt was not incurred in
contemplation of such acquisition and such Acquired Debt is Non- Recourse Debt
(except with respect to such acquired Subsidiary and its Subsidiaries);
(xiii) Indebtedness of Foamex Canada, Inc. and its Subsidiaries (which is
Non-Recourse Debt, except with respect to such entities) in an amount, at any
time outstanding not to exceed CND$15.0 million;
(xiv) Indebtedness of Foamex Latin America (which is Non-Recourse Debt,
except with respect to such entities) in an amount, at any time outstanding not
to exceed $12.0 million;
(xv) Assets Sales in the form of Receivables Transactions; and
(xvi) Indebtedness of Foamex Asia, Inc. and its Subsidiaries (which is
Non-Recourse Debt, except with respect to such entities) in an amount, at any
time outstanding not to exceed $5.0 million.
For purposes of determining compliance with this covenant, in the event
that an item of Indebtedness meets the criteria of more than one of the
categories of Permitted Debt described in clauses (i) through (xvi) above or is
entitled to be incurred pursuant to the first paragraph of this covenant, the
Issuers shall, in its sole discretion, classify such item of Indebtedness in any
manner that complies with this covenant and such item of Indebtedness will be
treated as having been incurred pursuant to only one of such clauses or pursuant
to the first paragraph hereof. Neither the accrual of interest, nor the
accretion of accreted value will be deemed to be an incurrence of Indebtedness
for purposes of this covenant.
Liens
The Indenture provides that the Issuers will not and will not permit any of
their respective Restricted Subsidiaries to, directly or indirectly, create,
incur, assume or suffer to exist any Lien on any asset now owned or hereafter
acquired, or any income or profits therefrom or assign or convey any right to
receive income therefrom, except Permitted Liens.
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Dividend and Other Payment Restrictions Affecting Restricted Subsidiaries
The Indenture provides that the Issuers will not, and will not permit any
of their respective Restricted Subsidiaries to, directly or indirectly, create
or otherwise cause or suffer to exist or become effective any encumbrance or
restriction on the ability of any Restricted Subsidiary which is not a
Subsidiary Guarantor to (i)(a) pay dividends or make any other distributions to
the Issuers or any of their respective Restricted Subsidiaries (1) on its
Capital Stock or (2) with respect to any other interest or participation in, or
measured by, its profits, or (b) pay any indebtedness owed to the Issuers or any
of their respective Restricted Subsidiaries, (ii) make loans or advances to the
Issuers or any of their respective Restricted Subsidiaries or (iii) transfer any
of its properties or assets to the Issuers or any of their respective Restricted
Subsidiaries, except for such encumbrances or restrictions existing under or by
reason of (a) Existing Indebtedness as in effect on the date of the Indenture,
(b) the New Credit Facility as in effect as of the date of the Indenture, and
any amendments, modifications, restatements, renewals, increases, supplements,
refundings, replacements or refinancings thereof, provided that such amendments,
modifications, restatements, renewals, increases, supplements, refundings,
replacement or refinancings are no more restrictive with respect to such
dividend and other payment restrictions than those contained in the New Credit
Facility as in effect on the date of the Indenture, (c) the Indenture and the
Notes, (d) applicable law, (e) any instrument governing Indebtedness or Capital
Stock of a Person acquired by the Issuers or any of their respective Restricted
Subsidiaries as in effect at the time of such acquisition (except to the extent
such Indebtedness was incurred in connection with or in contemplation of such
acquisition), which encumbrance or restriction is not applicable to any Person,
or the properties or assets of any Person, other than the Person and its
Subsidiaries, or the property or assets of the Person and its Subsidiaries, so
acquired, provided that, in the case of Indebtedness, such Indebtedness was
permitted by the terms of the Indenture to be incurred, (f) by reason of
customary non-assignment provisions in leases entered into in the ordinary
course of business and consistent with past practices, (g) purchase money
obligations for property acquired that impose restrictions of the nature
described in clause (iii) above on the property so acquired, (h) Permitted
Refinancing Indebtedness, provided that the restrictions contained in the
agreements governing such Permitted Refinancing Indebtedness are no more
restrictive than those contained in the agreements governing the Indebtedness
being refinanced, (i) any instrument or agreement governing Indebtedness
permitted to be incurred under the Indenture, which is secured by a Lien
permitted to be incurred under the Indenture, which encumbrance or restriction
is not applicable to any property or assets other than the property or assets
subject to such Lien, or (j) restrictions applicable to a Receivables Subsidiary
arising from a Receivables Transaction.
Merger, Consolidation, or Sale of Assets
The Indenture provides that the Issuers may not consolidate or merge with
or into (whether or not the Issuers are the surviving corporation), or sell,
assign, transfer, lease, convey or otherwise dispose of all or substantially all
of their properties or assets in one or more related transactions, to another
corporation, Person or entity unless (i) such Issuer is the surviving
corporation or the entity or the Person formed by or surviving any such
consolidation or merger (if other than such Issuer) or to which such sale,
assignment, transfer, lease, conveyance or other disposition shall have been
made is organized and existing under the laws of the United States, any state
thereof or the District of Columbia provided that FCC may not consolidate or
merge with or into any entity other than a corporation satisfying such
requirements for so long as Foamex remains a partnership; (ii) the entity or
Person formed by or surviving any such consolidation or merger (if other than
such Issuer) or the entity or Person to which such sale, assignment, transfer,
lease, conveyance or other disposition shall have been made assumes all the
obligations of such Issuer under the Notes and the Indenture pursuant to a
supplemental indenture in a form reasonably satisfactory to the Trustee; (iii)
immediately after such transaction no Default or Event of Default exists; and
(iv) except in the case of a merger of an Issuer with or into one of its Wholly
Owned Restricted Subsidiaries, the Issuer or the entity or Person formed by or
surviving any such consolidation or merger (if other than the Issuer), or to
which such sale, assignment, transfer, lease, conveyance or other disposition
shall have been made (A) will have Consolidated Net Worth immediately after the
transaction equal to or greater than the Consolidated Net Worth of such Issuer
immediately preceding the transaction and (B) will, at the time of such
transaction and after giving pro forma effect thereto as if such transaction had
occurred at the beginning of the applicable four-quarter period, be permitted to
incur at least $1.00 of additional Indebtedness pursuant to the Fixed Charge
Coverage Ratio test set forth in the first paragraph of the covenant described
above under the caption "-- Incurrence of Indebtedness and Issuance of Preferred
Stock." In the case of a sale, assignment, lease, transfer, conveyance or other
disposition of all or substantially all of the assets of an Issuer, upon the
assumption provided for in clause (ii) above, such Issuer shall be discharged
from all further liability and obligation under the Indenture.
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Transactions with Affiliates
The Indenture provides that the Issuers will not, and will not permit any
of their respective Restricted Subsidiaries to, make any payment to, or sell,
lease, transfer or otherwise dispose of any of its properties or assets to, or
purchase any property or assets from, or enter into or make or amend any
transaction, contract, agreement, understanding, loan, advance or guarantee
with, or for the benefit of, any Affiliate (each of the foregoing, an "Affiliate
Transaction"), unless (i) such Affiliate Transaction is on terms that are no
less favorable to the Issuers or the relevant Subsidiary than those that would
have been obtained in a comparable transaction by the Issuers or such Subsidiary
with an unrelated Person and (ii) the Issuers deliver to the Trustee (a) with
respect to any Affiliate Transaction or series of related Affiliate Transactions
involving aggregate consideration in excess of $1.0 million, a resolution of the
Board of Directors set forth in an Officers' Certificate certifying that such
Affiliate Transaction complies with clause (i) above and that such Affiliate
Transaction has been approved by a majority of the members of the Board of
Directors and (b) with respect to any Affiliate Transaction or series of related
Affiliate Transactions involving aggregate consideration in excess of $5.0
million, an opinion as to the fairness to the Holders of such Affiliate
Transaction from a financial point of view issued by an accounting, appraisal or
investment banking firm of national standing; provided that (m) prepaid expenses
and loans or advances to employees and similar items in the ordinary course of
business; (n) the advancement of payment or payment of distributions pursuant to
the Tax Sharing Agreement and the making of loans or advances pursuant to the
Tax Advance Agreement dated as of December 11, 1996 between FJPS and Foamex, as
amended to the date of the Indenture; (o) the payment by Foamex of a management
fee pursuant to the Management Services Agreement in an amount not to exceed
$3.0 million per annum; (p) distributions to Foamex International Inc. and its
Subsidiaries which are utilized to pay the debt service and other expenses of
Foamex Aviation Corp., the aggregate amount of which shall not exceed $2.0
million in any twelve-month period; (q) the issuance or sale of Equity Interests
of Foamex Latin America to key executives of Foamex Latin America, not to exceed
5% of the outstanding Equity Interests of Foamex Latin America; (r) Investments
in the Trace Note not to exceed $5.0 million; (s) Investments in the Trace
Global Opportunity Fund not to exceed $5.0 million; (t) borrowings of up to $5.0
million by Trace Holdings from the Issuers and their respective Subsidiaries;
(u) the Closing Date Transactions; (v) transactions pursuant to the Supply
Agreement with Foamex International Inc., dated as of June 28, 1994; (w)
purchases (and sales) of inventory and services in the ordinary course of
business at a price not greater (less) than the price paid by (charged to)
purchasers of a similar quantity of inventory and services which are not
Affiliates of the Issuers, (x) any employment agreement entered into by the
Issuers or any of their respective Restricted Subsidiaries in the ordinary
course of business and consistent with the current market practice or the past
practice of the Issuers or such Restricted Subsidiary; (y) transactions between
or among the Issuers and/or its Restricted Subsidiaries; and (z) Restricted
Payments that are permitted by the provisions of the Indenture described above
under the caption "--Restricted Payments," in each case, shall not be deemed
Affiliate Transactions.
Anti-Layering
The Indenture provides that (i) the Issuers will not incur, create, issue,
assume, guarantee or otherwise become liable for any Indebtedness that is both
(a) subordinate or junior in right of payment to any Senior Debt and (b) senior
in any respect in right of payment to the Notes and (ii) no Subsidiary Guarantor
will incur, create, issue, assume, guarantee or otherwise become liable for any
Indebtedness that is both (a) subordinate or junior in right of payment to its
Senior Debt and (b) senior in right of payment to its Note Guarantee.
Sale and Leaseback Transactions
The Indenture provides that the Issuers will not, and will not permit any
of their respective Restricted Subsidiaries to, enter into any sale and
leaseback transaction; provided that the Issuers may enter into a sale and
leaseback transaction if (i) the Issuers could have (a) incurred Indebtedness in
an amount equal to the Attributable Debt relating to such sale and leaseback
transaction pursuant to the covenant described above under the caption
"--Incurrence of Additional Indebtedness and Issuance of Preferred Stock" and
(b) incurred a Lien to secure such Indebtedness pursuant to the covenant
described above under the caption "--Liens" and (ii) the gross cash proceeds of
such sale and leaseback transaction are at least equal to the fair market value
(in the case of gross cash proceeds in excess of $5.0 million as determined in
good faith by the Board of Directors and set forth in an Officers' Certificate
delivered to the Trustee) of the property that is the subject of such sale and
leaseback transaction.
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Limitation on Issuances and Sales of Capital Stock of Restricted Subsidiaries
The Indenture provides that the Issuers (i) will not, and will not permit
any Restricted Subsidiary of the Issuers to, transfer, convey, sell, lease or
otherwise dispose of any Capital Stock of any Restricted Subsidiary of the
Issuers to any Person (other than the Issuers or a Restricted Subsidiary of the
Issuers), unless (a) such transfer, conveyance, sale, lease or other disposition
is of all the Capital Stock of such Restricted Subsidiary and (b) the cash Net
Proceeds from such transfer, conveyance, sale, lease or other disposition are
applied in accordance with the covenant described above under the caption
"--Asset Sales," and (ii) will not permit any Restricted Subsidiary of the
Issuers to issue any of its Equity Interests (other than, if necessary, shares
of its Capital Stock constituting directors' qualifying shares) to any Person
other than to the Issuers or a Restricted Subsidiary of the Issuers; provided,
however, the foregoing restrictions will not apply to (A) Investments in the
entities described under clause (o) of the definition of Permitted Investments;
(B) transfers, conveyances, sales, leases or other dispositions (collectively
"dispositions") of any Capital Stock of any Restricted Subsidiary that have a
fair market value at the time of such disposition of less than $1.0 million; or
(C) a public offering of Equity Interests of Foamex Latin America which results
in the net proceeds to Foamex Latin America of at least $15.0 million.
Business Activities
The Indenture provides that the Issuers will not, and will not permit any
of their respective Restricted Subsidiaries to, engage in any business other
than Permitted Businesses, except to such extent as would not be material to the
Issuers and their respective Restricted Subsidiaries taken as a whole.
Payments for Consent
The Indenture provides that neither the Issuers nor any of their
respective Restricted Subsidiaries will, directly or indirectly, pay or cause
to be paid any consideration, whether by way of interest, fee or otherwise, to
any Holder of any Notes for or as an inducement to any consent, waiver or
amendment of any of the terms or provisions of the Indenture or the Notes
unless such consideration is offered to be paid or is paid to all Holders of
the Notes that consent, waive or agree to amend in the time frame set forth in
the solicitation documents relating to such consent, waiver or agreement.
Additional Guarantees
The Indenture provides that (i) if the Issuers or any of their respective
Restricted Subsidiaries shall, after the date of the Indenture, transfer or
cause to be transferred, including by way of any Investment, in one or a series
of transactions (whether or not related), any assets, businesses, divisions,
real property or equipment having an aggregate fair market value (as determined
in good faith by the Board of Directors) in excess of $1.0 million to any
Restricted Subsidiary that is not a Subsidiary Guarantor or a Foreign
Subsidiary, (ii) if Foamex or any of its Restricted Subsidiaries shall acquire
another Restricted Subsidiary other than a Foreign Subsidiary having total
assets with a fair market value (as determined in good faith by the Board of
Directors) in excess of $1.0 million, or (iii) if any Restricted Subsidiary
other than a Foreign Subsidiary shall incur Acquired Debt in excess of $1.0
million, then the Issuers shall, at the time of such transfer, acquisition or
incurrence, (i) cause such transferee, acquired Restricted Subsidiary or
Restricted Subsidiary incurring Acquired Debt (if not then a Subsidiary
Guarantor) to execute a Note Guarantee of the Obligations of the Issuers under
the Notes in the form set forth in the Indenture and (ii) deliver to the
Trustee an Opinion of Counsel, in form reasonably satisfactory to the Trustee,
that such Note Guarantee is a valid, binding and enforceable obligation of such
transferee, acquired Restricted Subsidiary or Restricted Subsidiary incurring
Acquired Debt, subject to customary exceptions for bankruptcy, fraudulent
conveyance and equitable principles. Notwithstanding the foregoing, the Issuers
or any of their Restricted Subsidiaries may make a Restricted Investment in any
Wholly Owned Restricted Subsidiary of the Issuers without compliance with this
covenant provided that such Restricted Investment is permitted by the covenant
described under the caption, "Restricted Payments."
Reports
The Indenture provides that, whether or not required by the rules and
regulations of the Securities and Exchange Commission (the "Commission"), so
long as any Notes are outstanding, the Issuers will furnish to the Trustee and
the Holders of Notes (i) all quarterly and annual financial information that
would be required to be contained in a filing with the Commission on Forms 10-Q
and 10-K if the Issuers were required to file such Forms, including a
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" that describes the
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financial condition and results of operations of the Issuers and their
consolidated Subsidiaries and, with respect to the annual information only, a
report thereon by Foamex's certified independent accountants and (ii) all
current reports that would be required to be filed with the Commission on Form
8-K if the Issuers were required to file such reports. In addition, whether or
not required by the rules and regulations of the Commission, the Issuers will
file a copy of all such information and reports with the Commission for public
availability (unless the Commission will not accept such a filing) and make
such information available to securities analysts and prospective investors
upon request. In addition, the Issuers have agreed that, for so long as any
Notes remain outstanding, they will furnish to the Holders and to securities
analysts and prospective investors, upon their request, the information
required to be delivered pursuant to Rule 144A(d)(4) under the Securities Act.
Certain Effects of the Covenants
Although the covenant described above under "Incurrence of Indebtedness and
Issuance of Preferred Stock" will restrict the incurrence of certain additional
Indebtedness by Foamex and its Subsidiaries, Foamex and its Subsidiaries will
nevertheless be able to incur Permitted Debt and additional Indebtedness if the
appropriate Fixed Charge Coverage Ratio is obtained (the "Debt Test"). The Debt
Test may have limited applicability in the event of a leveraged buyout initiated
or supported by Foamex, its management, or an affiliate of either party.
However, the Debt Test, together with other covenants in the Indenture,
including those relating to Restricted Payments, Liens, and Transactions with
Affiliates, may not afford holders of Notes protection in all circumstances from
the adverse aspects of a highly leveraged or similar transaction. Neither Foamex
nor the Trustee may waive such covenants; however, such covenants, except for
certain limited exceptions related to payment and subordination, may be waived
by the holders of a majority of the outstanding principal amount of the Notes.
See "Description of Notes--Amendment, Supplement and Waiver."
Events of Default and Remedies
The Indenture provides that each of the following constitutes an Event of
Default: (i) default for 30 days in the payment when due of interest on, or
Liquidated Damages with respect to, the Notes (whether or not prohibited by the
subordination provisions of the Indenture); (ii) default in payment when due of
the principal of or premium, if any, on the Notes (whether or not prohibited by
the subordination provisions of the Indenture); (iii) failure by the Issuers to
comply with the provisions described under the captions "--Change of Control,"
or to consummate a mandatory Offer to purchase pursuant to the covenant
described above under the caption "--Asset Sales," or "--Merger, Consolidation,
or Sale of Assets"; (iv) failure by the Issuers for 60 days after notice to
comply with any of its other agreements in the Indenture or the Notes; (v)
default under any mortgage, indenture or instrument under which there may be
issued or by which there may be secured or evidenced any Indebtedness for money
borrowed by the Issuers or any of their respective Restricted Subsidiaries (or
the payment of which is Guaranteed by the Issuers or any of their respective
Restricted Subsidiaries) whether such Indebtedness or Guarantee now exists, or
is created after the date of the Indenture, which default (a) is caused by a
failure to pay principal of, interest or premium, if any, on such Indebtedness
prior to the expiration of the grace period provided in such Indebtedness on the
date of such default (a "Payment Default") or (b) results in the acceleration of
such Indebtedness prior to its Stated Maturity and, in each case, the principal
amount of any such Indebtedness, together with the principal amount of any other
such Indebtedness under which there has been a Payment Default or the Stated
Maturity of which has been so accelerated, aggregates $20.0 million or more;
(vi) failure by the Issuers or any of their respective Restricted Subsidiaries
to pay final judgments aggregating in excess of $10.0 million, which judgments
are not paid, discharged or stayed for a period of 60 days after entry thereof;
and (vii) certain events of bankruptcy or insolvency with respect to the Issuers
or any of their respective Significant Subsidiaries (as defined in the
Indenture).
If any Event of Default occurs and is continuing, the Trustee or the
Holders of at least 25% in principal amount of the then outstanding Notes may
declare all the Notes to be due and payable immediately provided, however, that
if any Indebtedness or Obligation is outstanding pursuant to the New Credit
Facility, upon a declaration of acceleration by the holders of the Notes or the
Trustee, all principal and interest under the Indenture shall be due and payable
upon the earlier of (x) the day which five Business Days after the provision to
the Issuers, the Credit Agent and the Trustee of such written notice of
acceleration or (y) the date of acceleration of any Indebtedness under the New
Credit Facility; and provided, further, that in the event of an acceleration
based upon an Event of Default set forth in clause (v) above, such declaration
of acceleration shall be automatically annulled if the holders of Indebtedness
which is the subject of such failure to pay at maturity or acceleration have
rescinded their declaration of acceleration in respect of such Indebtedness or
such failure to pay at maturity shall have been cured or waived
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within 30 days thereof and no other Event of Default has occurred during such
30-day period which has not been cured, paid or waived. Notwithstanding the
foregoing, in the case of an Event of Default arising from certain events of
bankruptcy or insolvency, with respect to the Issuers or any of their
respective Restricted Subsidiaries all outstanding Notes will become due and
payable without further action or notice. Holders of the Notes may not enforce
the Indenture or the Notes except as provided in the Indenture. Subject to
certain limitations, Holders of a majority in principal amount of the then
outstanding Notes may direct the Trustee in its exercise of any trust or power.
The Trustee may withhold from Holders of the Notes notice of any continuing
Default or Event of Default (except a Default or Event of Default relating to
the payment of principal or interest) if it determines that withholding notice
is in their interest.
In the case of any Event of Default occurring by reason of any willful
action (or inaction) taken (or not taken) by or on behalf of either of the
Issuers with the intention of avoiding payment of the premium that the Issuers
would have had to pay if the Issuers then had elected to redeem the Notes
pursuant to the optional redemption provisions of the Indenture, an equivalent
premium shall also become and be immediately due and payable to the extent
permitted by law upon the acceleration of the Notes. If an Event of Default
occurs by reason of any willful action (or inaction) taken (or not taken) by or
on behalf of the Issuers with the intention of avoiding the prohibition on
redemption of the Notes prior to June 15, 2002, then the premium specified in
the Indenture shall also become immediately due and payable to the extent
permitted by law upon the acceleration of the Notes.
The Holders of a majority in aggregate principal amount of the Notes then
outstanding by notice to the Trustee may on behalf of the Holders of all of the
Notes waive any existing Default or Event of Default and its consequences under
the Indenture except a continuing Default or Event of Default in the payment of
interest on, or the principal of, the Notes.
The Issuers are required to deliver to the Trustee annually a statement
regarding compliance with the Indenture, and the Issuers are required upon
becoming aware of any Default or Event of Default, to deliver to the Trustee a
statement specifying such Default or Event of Default.
No Personal Liability of Directors, Officers, Employees, Partners and
Stockholders
No director, officer, employee, partner, incorporator or stockholder of the
Issuers or any of their Restricted Subsidiaries, as such, shall have any
liability for any obligations of the Issuers or any Subsidiary Guarantor under
the Notes, the Indenture, the Note Guarantees or for any claim based on, in
respect of, or by reason of, such obligations or their creation. Each Holder of
Notes by accepting a Note waives and releases all such liability. The waiver and
release are part of the consideration for issuance of the Notes. Such waiver may
not be effective to waive liabilities under the federal securities laws and it
is the view of the Commission that such a waiver is against public policy.
Satisfaction and Discharge of the Indenture; Defeasance
The Indenture provides that the Issuers may terminate their Obligations
under the Indenture and the Obligations of the Subsidiary Guarantors under the
Note Guarantees at any time by delivering all outstanding Notes issued under the
Indenture to the Trustee for cancellation and paying all sums to be paid
pursuant to the terms of the Indenture. In addition, the Issuers are permitted
to terminate their Obligations under the Indenture and the Obligations of the
Subsidiary Guarantors under the Note Guarantees by irrevocably depositing with
the Trustee money or United States Government Obligations sufficient to pay
principal, interest and premium and Liquidated Damages, if any, on the Notes to
maturity or redemption, and all other sums payable pursuant to the terms of the
Indenture after complying with certain other procedures set forth therein.
Notwithstanding the foregoing, certain Obligations of the Issuers and the
Subsidiary Guarantors under the Indenture, the Notes and the Note Guarantees
shall survive until the Notes are no longer outstanding.
Transfer and Exchange
A Holder may transfer or exchange Notes in accordance with the Indenture.
The Registrar and the Trustee may require a Holder, among other things, to
furnish appropriate endorsements and transfer documents and the Issuers may
require a Holder to pay any taxes and fees required by law or permitted by the
Indenture. The Issuers are not required to transfer or exchange any Note
selected for redemption. Also, the Issuers are not required to transfer or
exchange any Note for a period of 15 days before a selection of Notes to be
redeemed.
The registered Holder of a Note will be treated as the owner of it for all
purposes.
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Amendment, Supplement and Waiver
Except as provided in the next two succeeding paragraphs, the Indenture or
the Notes may be amended or supplemented with the consent of the Holders of at
least a majority in principal amount of the Notes then outstanding (including,
without limitation, consents obtained in connection with a purchase of, or
tender offer or exchange offer for, Notes), and any existing default or
compliance with any provision of the Indenture or the Notes may be waived with
the consent of the Holders of a majority in principal amount of the then
outstanding Notes (including consents obtained in connection with a tender offer
or exchange offer for Notes).
Without the consent of each Holder affected, an amendment or waiver may not
(with respect to any Notes held by a non-consenting Holder): (i) reduce the
principal amount of Notes whose Holders must consent to an amendment, supplement
or waiver, (ii) reduce the principal of or change the fixed maturity of any Note
or alter the provisions with respect to the redemption of the Notes (other than
provisions relating to the covenants described above under the caption
"--Repurchase at the Option of Holders"), (iii) reduce the rate of or change the
time for payment of interest on any Note, (iv) waive a Default or Event of
Default in the payment of principal of or premium or Liquidated Damages, if any,
or interest on the Notes (except a rescission of acceleration of the Notes by
the Holders of at least a majority in aggregate principal amount of the Notes
and a waiver of the payment default that resulted from such acceleration), (v)
make any Note payable in money other than that stated in the Notes, (vi) make
any change in the provisions of the Indenture relating to waivers of past
Defaults or the rights of Holders of Notes to receive payments of principal of
or premium, if any, or interest on the Notes, (vii) waive a redemption payment
with respect to any Note (other than a payment required by one of the covenants
described above under the caption "--Repurchase at the Option of Holders") or
(viii) make any change in the foregoing amendment and waiver provisions. In
addition, any amendment to the provisions of Article 10 or Article 12 of the
Indenture (which relate to subordination) will require the consent of the
Holders of at least 75% in aggregate principal amount of the Notes then
outstanding if such amendment would adversely affect the rights of Holders of
Notes.
Notwithstanding the foregoing, without the consent of any Holder of Notes,
the Issuers, the Subsidiary Guarantors and the Trustee may amend or supplement
the Indenture or the Notes to cure any ambiguity, defect or inconsistency, to
provide for uncertificated Notes in addition to or in place of certificated
Notes, to provide for the assumption and discharge of the Issuers' and the
Subsidiary Guarantors' obligations to Holders of Notes in the case of a merger,
consolidation or sale of assets or Capital Stock, to make any change that would
provide any additional rights or benefits to the Holders of Notes or that does
not adversely affect the legal rights under the Indenture of any such Holder, to
comply with requirements of the Commission in order to effect or maintain the
qualification of the Indenture under the Trust Indenture Act or to allow any
Subsidiary to Guarantee the Notes.
Concerning the Trustee
The Indenture contains certain limitations on the rights of the Trustee,
should it become a creditor of the Issuers or the Guarantor, to obtain payment
of claims in certain cases, or to realize on certain property received in
respect of any such claim as security or otherwise. The Trustee will be
permitted to engage in other transactions; however, if it acquires any
conflicting interest it must eliminate such conflict within 90 days, apply to
the Commission for permission to continue or resign.
The Holders of a majority in principal amount of the then outstanding Notes
will have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the Trustee, subject to
certain exceptions. The Indenture provides that in case an Event of Default
shall occur (which shall not be cured), the Trustee will be required, in the
exercise of its power, to use the degree of care of a prudent man in the conduct
of his own affairs. Subject to such provisions, the Trustee will be under no
obligation to exercise any of its rights or powers under the Indenture at the
request of any Holder of Notes, unless such Holder shall have offered to the
Trustee security and indemnity satisfactory to it against any loss, liability or
expense.
Book-Entry, Delivery and Form
Except as set forth below, the New Notes will initially be issued in the
form of one or more registered notes in global form without coupons (each, a
"Global Note"). Upon issuance, each Global Note will be deposited with, or on
behalf of, The Depository Trust Company (the "Depositary") and registered in the
name of Cede & Co., as nominee of the Depositary.
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If a holder tendering Old Notes so requests, such holder's New Notes will
be issued as described below under "Certificated Securities" in registered form
without coupons (the "Certificated Securities").
The Depositary has advised the Issuers that it is (i) a limited purpose
trust company organized under the laws of the State of New York, (ii) a member
of the Federal Reserve System, (iii) a "clearing corporation" within the meaning
of the Uniform Commercial Code, as amended, and (iv) a "Clearing Agency"
registered pursuant to Section 17A of the Exchange Act. The Depositary was
created to hold securities for its participants (collectively, the
"Participants") and facilitates the clearance and settlement of securities
transactions between Participants through electronic book-entry charges to the
accounts of its Participants, thereby eliminating the need for physical transfer
and delivery of certificates. The Depositary's Participants include securities
brokers and dealers (including the Initial Purchaser), banks and trust
companies, clearing corporations and certain other organizations. Access to the
Depositary's system is also available to other entities such as banks, brokers,
dealers and trust companies (collectively, the "Indirect Participants") that
clear through or maintain a custodial relationship with a Participant, either
directly or indirectly.
The Issuers expect that pursuant to procedures established by the
Depositary (i) upon deposit of the Global Notes, the Depositary will credit the
accounts of Participants who elect to exchange Old Notes with an interest in the
Global Note and (ii) ownership of the New Notes will be shown on, and the
transfer of ownership thereof will be effected only through, records maintained
by the Depositary (with respect to the interest of Participants), the
Participants and the Indirect Participants. The laws of some states require that
certain persons take physical delivery of definitive form of securities that
they own and that security interests in negotiable instruments can only be
perfected by delivery of certificates representing the instruments.
So long as the Depositary or its nominee is the registered owner of a
Global Note, the Depositary or such nominee, as the case may be, will be
considered the sole owner or holder of the New Notes represented by the Global
Note for all purposes under the Indenture. Except as provided below, owners of
beneficial interests in a Global Note will not be entitled to have New Notes
represented by such Global Notes registered in their names, will not receive or
be entitled to receive physical delivery of Certificated Securities, and will
not be considered the owners or holders thereof under the Indenture for any
purpose, including with respect to the giving of any direction, instruction or
approval to the Trustee thereunder. As a result, the ability of a person having
a beneficial interest in New Notes represented by a Global Note to pledge such
interest to persons or entities that do not participate in the Depositary's
system, or to otherwise take action with respect to such interest, may be
affected by the lack of a physical certificate evidencing such interest.
The Issuers understand that under existing industry practice, in the event
the Issuers request any action of holders or an owner of a beneficial interest
in a Global Note desires to take any action that the Depositary, as the holder
of such Global Note, is entitled to take, the Depositary would authorize the
Participants to take such action and the Participant would authorize persons
owning through such Participants to take such action or would otherwise act upon
the instruction of such persons. Neither the Issuers nor the Trustee will have
any responsibility or liability for any aspect of the records relating to or
payments made on account of New Notes by the Depositary, or for maintaining,
supervising or reviewing any records of the Depositary relating to such New
Notes.
Payments with respect to the principal of, premium, if any, interest and
Liquidated Damages, if any, on any New Notes represented by a Global Note
registered in the name of the Depositary or its nominee on the applicable record
date will be payable by the Trustee to or at the direction of the Depositary or
its nominee in its capacity as the registered holder of the Global Note
representing such New Notes under the Indenture. Under the terms of the
Indenture, the Issuers and the Trustee may treat the persons in whose names the
New Notes, including the Global Notes, are registered as the owners thereof for
the purpose of receiving such payment and for any and all other purposes
whatsoever. Consequently, neither the Issuers nor the Trustee have or will have
any responsibility or liability for the payment of such amounts to beneficial
owners of New Notes (including principal, premium, if any, interest, and
Liquidated Damages, if any), or to immediately credit the accounts of the
relevant Participants with such payment, in amounts proportionate to their
respective holdings in principal amount of beneficial interest in the Global
Note as shown on the records of the Depositary. Payments by the Participants and
the Indirect Participants to the beneficial owners of New Notes will be governed
by standing instructions and customary practice and will be the responsibility
of the Participants or the Indirect Participants.
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Certificated Securities
If (i) the Issuers notify the Trustee in writing that the Depositary is no
longer willing or able to act as a depositary and the Issuers are unable to
locate a qualified successor within 90 days or (ii) the Issuers, at their
option, notify the Trustee in writing that they elect to cause the issuance of
New Notes in definitive form under the Indenture, then, upon surrender by the
Depositary of its Global Notes, Certificated Securities will be issued to each
person that the Depositary identifies as the beneficial owner of the New Notes
represented by the Global Note. In addition, any person having a beneficial
interest in a Global Note or any holder of Old Notes whose Old Notes have been
accepted for exchange may, upon request to the Trustee or the Exchange Agent, as
the case may be, exchange such beneficial interest or Old Notes for Certificated
Securities. Upon any such issuance, the Trustee is required to register such
Certificated Securities in the name of such person or persons (or the nominee of
any thereof), and cause the same to be delivered thereto.
Neither the Issuers nor the Trustee shall be liable for any delay by the
Depositary or any Participant or Indirect Participant in identifying the
beneficial owners of the related New Notes and each such person may
conclusively rely on, and shall be protected in relying on, instructions from
the Depositary for all purposes (including with respect to the registration and
delivery, and the respective principal amounts, of the New Notes to be issued).
Certain Definitions
Set forth below are certain defined terms used in the Indenture. Reference
is made to the Indenture for a full disclosure of all such terms, as well as any
other capitalized terms used herein for which no definition is provided.
"Acquired Debt" means, with respect to any specified Person, (i)
Indebtedness of any other Person existing at the time such other Person is
merged with or into or became a Subsidiary of such specified Person, including,
without limitation, Indebtedness incurred in connection with, or in
contemplation of, such other Person merging with or into or becoming a
Subsidiary of such specified Person, and (ii) Indebtedness secured by a Lien
encumbering any asset acquired by such specified Person to the extent of the
fair market value of such asset where the Indebtedness so secured is not the
Indebtedness of such Person.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as used with respect to any Person, shall mean
the possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of such Person, whether through the
ownership of voting securities, by agreement or otherwise; provided that
beneficial ownership of 10% or more of the voting securities of a Person shall
be deemed to be control. Notwithstanding the foregoing, as of the date of the
Indenture, Donaldson, Lufkin & Jenrette Securities Corporation will not be an
Affiliate of the Issuers.
"Asset Sale" means (i) the sale, lease, conveyance or other disposition of
any assets (excluding any sale and leaseback transaction, the granting of a
Permitted Lien, and the transfer of cash and Cash Equivalents) other than sales
of inventory, licensing of intellectual property or sales of services, in each
case in the ordinary course of business, but including a Receivables Transaction
(provided that the sale, lease, conveyance or other disposition of all or
substantially all of the assets of the Issuers and their Restricted Subsidiaries
taken as a whole will be governed by the provisions of the Indenture described
above under the caption "--Change of Control" and/or the provisions described
above under the caption "--Merger, Consolidation or Sale of Assets" and not by
the provisions of the Asset Sale covenant), and (ii) the issue or sale by the
Issuers or any of their respective Restricted Subsidiaries of Equity Interests
of any of the Issuers' Restricted Subsidiaries, in the case of either clause (i)
or (ii), whether in a single transaction or a series of related transactions (a)
that have a fair market value in excess of $10.0 million or (b) for Net Proceeds
in excess of $10.0 million. Notwithstanding the foregoing: (i) a transfer of
assets by either of the Issuers to a Restricted Subsidiary or by a Restricted
Subsidiary to either of the Issuers or to another Restricted Subsidiary, (ii) an
issuance of Equity Interests by a Restricted Subsidiary to either of the Issuers
or to another Restricted Subsidiary, (iii) Hedging Obligations and (iv) a
Restricted Payment that is permitted by the covenant described above under the
caption "--Restricted Payments" will not be deemed to be Asset Sales.
"Attributable Debt" in respect of a sale and leaseback transaction means,
at the time of determination, the present value (discounted at the rate of
interest implicit in such transaction, determined in accordance with GAAP) of
the obligation of the lessee for net rental payments during the remaining term
of the lease included in such sale
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and leaseback transaction (including any period for which such lease has been
extended or may, at the option of the lessor, be extended).
"Beneficial Owner" means "beneficial owner" as such terms is defined in
Rule 13d-3 and Rule 13d-5 under the Exchange Act; provided, however, that (i) a
person shall not be deemed to have beneficial ownership of securities subject to
a stock purchase agreement, merger agreement, or similar agreement until the
consummation of the transactions contemplated by such agreement, and (ii) for
purposes of determining beneficial ownership of Voting Stock of Foamex,
stockholders of Foamex International Inc. shall be deemed to beneficially own a
percentage of Voting Stock of Foamex equal to their percentage beneficial
ownership of Voting Stock of Foamex International Inc. multiplied by Foamex
International Inc.'s beneficial ownership of Voting Stock of Foamex.
"Board of Directors" means the Board of Directors of the Managing General
Partner, on behalf of Foamex (or Foamex, if Foamex is a corporation), FCC, or
any Subsidiary Guarantor or any authorized committee of the Board of Directors.
"Business Day" means any day except a Saturday, Sunday or other day in the
City of New York, or in the city of the corporate trust office of the Trustee,
on which banks are authorized to close.
"Capital Lease Obligation" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that would
at such time be required to be capitalized on a balance sheet in accordance with
GAAP.
"Capital Stock" means (i) in the case of a corporation, corporate stock,
(ii) in the case of an association or business entity, any and all shares,
interests, participations, rights or other equivalents (however designated) of
corporate stock, (iii) in the case of a partnership or limited liability
company, partnership or membership interests (whether general or limited) and
(iv) any other interest or participation that confers on a Person the right to
receive a share of the profits and losses of, or distributions of assets of, the
issuing Person.
"Cash Equivalents" means (i) United States dollars, (ii) securities issued
or directly and fully guaranteed or insured by the United States of America or
any agency or instrumentality thereof (provided that the full faith and credit
of the United States of America is pledged in support thereof), (iii) time
deposits and certificates of deposit, including eurodollar time deposits, of any
commercial bank organized in the United States having capital and surplus in
excess of $100,000,000 or a commercial bank organized under the laws of any
other country that is a member of the OECD having total assets in excess of
$100,000,000 with a maturity date not more than one year from the date of
acquisition, (iv) repurchase obligations with a term of not more than seven days
for underlying securities of the types described in clauses (i) and (ii) above
entered into with any bank meeting the qualifications specified in clause (iii)
above, (v) direct obligations issued by any state of the United States of
America or any political subdivision of any state or any public instrumentality
thereof maturing within 90 days after the date of acquisition thereof and, at
the time of acquisition, having one of the two highest ratings obtainable from
either Standard & Poor's Corporation nor Moody's Investors Service, Inc. (or, if
at any time neither Standard & Poor's Corporation nor Moody's Investors Service,
Inc. shall be rating such obligations, then from such other nationally
recognized rating service acceptable to the Trustee), (vi) commercial paper
issued by the parent corporation of any commercial bank organized in the United
States having capital and surplus in excess of $100,000,000 or a commercial bank
organized under the laws of any other country that is a member of the OECD
having total assets in excess of $100,000,000, and commercial paper issued by
others having one of the two highest ratings obtainable from either Standard &
Poor's Corporation or Moody's Investors Service, Inc. (or, if at any time
neither Standard & Poor's Corporation nor Moody's Investors Service, Inc. shall
be rating such obligations, then from such other nationally recognized rating
services acceptable to the Trustee) and in each case maturing within one year
after the date of acquisition, (vii) overnight bank deposits and bankers'
acceptances at any commercial bank organized in the United States having capital
and surplus in excess of $100,000,000 or a commercial bank organized under the
laws of any other country that is member of the OECD having total assets in
excess of $100,000,000, (viii) deposits available for withdrawal on demand with
commercial banks organized in the United States having capital and surplus in
excess of $50,000,000 or a commercial bank organized under the laws of any other
country that is a member of the OECD having total assets in excess of
$50,000,000 and (ix) investments in money market funds substantially all of
whose assets comprise securities of the types described in clauses (i) through
(viii).
"Change of Control" means the occurrence of any of the following: (i) the
sale, lease, transfer, conveyance or other disposition (other than by way of
merger or consolidation), in one or a series of related transactions, of
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all or substantially all of the assets of either of the Issuers and their
respective Restricted Subsidiaries taken as a whole to any "person" (as such
term is used in Section 13(d)(3) of the Exchange Act) other than the Principals
or their Related Parties (as defined below), (ii) the adoption of a plan
relating to the liquidation or dissolution of the Issuers, (iii) the
consummation of any transaction (including, without limitation, any merger or
consolidation) the result of which is that any "person" (as defined above),
other than the Principals and their Related Parties, becomes the Beneficial
Owner of (A) more than 25% of the Voting Stock of either of the Issuers
(measured by voting power rather than by number of shares) and (B) a greater
percentage of the Voting Stock than the Principals and their Related Parties or
(iv) the first day on which a majority of the members of the Board of Directors
of either of the Issuers are not Continuing Directors.
"Closing Date Transactions" means the following transactions to be entered
into by Foamex in connection with the issuance of the Notes: (i) the
distribution to Foamex- JPS Automotive L.P. ("FJPS") and FMXI, Inc. of: (a) all
of the FJPS and Foamex-JPS Capital Corporation Senior Secured Discount
Debentures due 2004 purchased by Foamex on or prior to the date of the
Indenture; (b) the promissory note of FJPS payable to Foamex, dated June 28,
1994 and (c) the promissory note of Foamex International Inc. payable to Foamex,
dated December 8, 1995; (ii) a cash distribution to Trace Foam Company, Inc. in
an amount equal to one-ninety ninth (1/99) of the distribution in (i) above;
(iii) the amendment of the promissory note of Trace International Holdings, Inc.
payable to Foamex, dated July 7, 1996, which extends the maturity of such
obligation to 2001; and (iv) the Tender Offer and the incurrence of borrowings
under the New Credit Facility in connection with the Refinancing Plan.
"Consolidated Cash Flow" means, with respect to any Person for any period,
the Consolidated Net Income of such Person for such period plus (i) an amount
equal to any extraordinary loss plus any net loss realized in connection with an
Asset Sale or discontinued operations (to the extent such losses were deducted
in computing such Consolidated Net Income), plus (ii) provision for taxes based
on income or profits of such Person and its Subsidiaries for such period
(including, to the extent applicable, payments made pursuant to any tax sharing
agreements), to the extent that such provision for taxes was included in
computing such Consolidated Net Income, plus (iii) consolidated interest expense
of such Person and its Subsidiaries for such period, whether paid or accrued and
whether or not capitalized (including, without limitation, amortization of debt
issuance costs and original issue discount, non-cash interest payments, the
interest component of any deferred payment obligations, the interest component
of all payments associated with Capital Lease Obligations, imputed interest with
respect to Attributable Debt, commissions, discounts and other fees and charges
incurred in respect of letter of credit or bankers' acceptance financings
(whether or not accounted for by the Issuers and their respective Subsidiaries
as interest expense), and net payments (if any) pursuant to Hedging
Obligations), to the extent that any such expense was deducted in computing such
Consolidated Net Income, plus (iv) depreciation, amortization (including
amortization of goodwill and other intangibles) and other non-cash expenses of
such Person and its Subsidiaries for such period to the extent that such
depreciation, amortization and other non-cash expenses were deducted in
computing such Consolidated Net Income, minus (v) non-cash items increasing such
Consolidated Net Income for such period, in each case, on a consolidated basis
and determined in accordance with GAAP.
"Consolidated Net Income" means, with respect to any Person for any period,
the aggregate of the Net Income of such Person and its Restricted Subsidiaries
for such period, on a consolidated basis, determined in accordance with GAAP
(excluding, however, the effect of the Closing Date Transactions and of any
other extraordinary transaction in connection with the incurrence of the Notes,
and the consummation of the recapitalization of the Issuers in connection
therewith); provided that (i) the Net Income of any Person that is not a
Restricted Subsidiary or that is accounted for by the equity method of
accounting shall be included only to the extent of the amount of dividends or
distributions with respect to current or prior years Net Income (if not
previously distributed or dividended) paid in cash to the referent Person or a
Restricted Subsidiary thereof; (ii) the Net Income of any Restricted Subsidiary
that is not a Subsidiary Guarantor shall be excluded to the extent that the
declaration or payment of dividends or similar distributions by that Restricted
Subsidiary of that Net Income is not at the date of determination permitted
without any prior governmental approval (that has not been obtained) or,
directly or indirectly, by operation of the terms of its charter or any
agreement, instrument, judgment, decree, order, statute, rule or governmental
regulation applicable to that Restricted Subsidiary or its stockholders; (iii)
the Net Income of any Person acquired in a pooling of interests transaction for
any period prior to the date of such acquisition shall be excluded; (iv) the
cumulative effect of a change in accounting principles shall be excluded; and
(v) the Net Income (but not loss) of any Unrestricted Subsidiary shall be
excluded, whether or not distributed to the Issuers or one of their respective
Subsidiaries except as set forth in (i).
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"Consolidated Net Worth" means, (A) with respect to any partnership, the
common and preferred partnership equity of such partnership and its consolidated
subsidiaries, as determined on a consolidated basis in accordance with GAAP, and
(B) with respect to any other Person as of any date, the sum of (i) the
consolidated equity of the common equityholders of such Person and its
consolidated Subsidiaries as of such date plus (ii) the respective amounts
reported on such Person's balance sheet as of such date with respect to any
series of preferred equity (other than Disqualified Stock) that by its terms is
not entitled to the payment of dividends unless such dividends may be declared
and paid only out of net earnings in respect of the year of such declaration and
payment, but only to the extent of any cash received by such Person upon
issuance of such preferred stock, less (x) all write-ups (other than write-ups
resulting from foreign currency translations and write-ups of tangible assets of
a going concern business made within 12 months after the acquisition of such
business) subsequent to the date of the Indenture in the book value of any asset
owned by such Person or a consolidated Subsidiary of such Person, (y) all
investments as of such date in unconsolidated Subsidiaries and in Persons that
are not Subsidiaries (except, in each case, Permitted Investments), plus (z) all
unamortized debt discount and expense and unamortized deferred charges as of
such date, all of the foregoing determined in accordance with GAAP.
"Continuing Directors" means, as of any date of determination, any member
of the Board of Directors of the Issuers who (i) was a member of such Board of
Directors on the date of the Indenture or (ii) was nominated for election or
elected to such Board of Directors with the approval of a majority of the
Continuing Directors who were members of such Board at the time of such
nomination or election.
"Contributions" means any loans, cash advances, capital contributions,
investments or other transfers of assets for less than fair value by the Issuers
or any of their respective Restricted Subsidiaries to any Subsidiary or other
Affiliate of the Issuers or any of their respective Restricted Subsidiaries
other than a Subsidiary Guarantor, other than loans and cash advances to
officers and directors made in the ordinary course of business not to exceed
$5.0 million.
"Credit Agent" means any of The Bank of Nova Scotia or Citicorp USA, Inc.,
in their respective capacity as Administrative Agents for the lenders party to
the New Credit Facility, or any successor thereto or any person otherwise
appointed.
"Default" means any event that is or with the passage of time or the giving
of notice or both would be an Event of Default.
"Designated Senior Debt" means (i) any Indebtedness outstanding under the
New Credit Facility and (ii) any other Senior Debt the principal amount of which
is $25.0 million or more and that has been designated by the Issuers as
Designated Senior Debt.
"Disqualified Stock" means any Capital Stock that, by its terms (or by the
terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event, matures or is mandatorily
redeemable, pursuant to a sinking fund obligation or otherwise, or redeemable at
the option of the Holder thereof, in whole or in part, on or prior to the date
that is 91 days after the date on which the Notes mature.
"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"Existing Indebtedness" means up to $14.1 million in aggregate principal
amount of Indebtedness of the Issuers and their respective Restricted
Subsidiaries (other than Indebtedness under the New Credit Facility plus
Indebtedness subject to the Closing Date Transactions that is not purchased
pursuant to such Transactions) in existence on the date of the Indenture,
including the Great Western Note, until all such amounts are repaid.
"Fixed Charges" means, with respect to any Person for any period, the sum,
without duplication, of (i) the consolidated interest expense of such Person and
its Restricted Subsidiaries for such period, whether paid or accrued (including,
without limitation, original issue discount, non-cash interest payments, the
interest component of any deferred payment obligations, the interest component
of all payments associated with Capital Lease Obligations, imputed interest with
respect to Attributable Debt, commissions, discounts and other fees and charges
incurred in respect of letter of credit or bankers' acceptance financings, and
net payments (if any) pursuant to Hedging Obligations, but excluding the
amortization of deferred financing costs) and (ii) the consolidated interest
expense of such Person and its Restricted Subsidiaries that was capitalized
during such period to the extent related to Indebtedness, and (iii) any interest
expense on Indebtedness of another Person (other than such Person's Restricted
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Subsidiaries) that is Guaranteed by such Person or one of its Restricted
Subsidiaries or secured by a Lien on assets of such Person or one of its
Restricted Subsidiaries (whether or not such Guarantee or Lien is called upon),
but only to the extent of the interest expense attributable to the lesser of
(a) the principal amount of such Indebtedness, or (b) the fair market value of
such asset and (iv) the product of (a) all dividend payments, whether or not in
cash, on any series of preferred stock of such Person or any of its Restricted
Subsidiaries, other than dividend payments to such Person or its Restricted
Subsidiaries and dividends on Equity Interests payable solely in Equity
Interests of the Issuers, times (b) a fraction, the numerator of which is one
and the denominator of which is one minus the then current combined federal,
state and local statutory tax rate of such Person and its Restricted
Subsidiaries, expressed as a decimal, in each case, on a consolidated basis and
in accordance with GAAP.
"Fixed Charge Coverage Ratio" means with respect to any Person for any
period, the ratio of the Consolidated Cash Flow of such Person for such period
to the Fixed Charges of such Person for such period. In the event that the
Issuers or any of their respective Restricted Subsidiaries incurs, assumes,
Guarantees or redeems, repurchases or otherwise retires any Indebtedness (other
than revolving credit borrowings) or issues preferred stock subsequent to the
commencement of the period for which the Fixed Charge Coverage Ratio is being
calculated but prior to the date on which the event for which the calculation of
the Fixed Charge Coverage Ratio is made (the "Calculation Date"), then the Fixed
Charge Coverage Ratio shall be calculated giving pro forma effect to such
incurrence, assumption, Guarantee or redemption, repurchase or retirement of
Indebtedness, or such issuance or redemption of preferred stock, as if the same
had occurred at the beginning of the applicable four-quarter reference period.
In addition, for purposes of making the computation referred to above, (i)
acquisitions that have been made by the Issuers or any of their respective
Restricted Subsidiaries, including through mergers or consolidations and
including any related financing transactions, during the four-quarter reference
period or subsequent to such reference period and on or prior to the Calculation
Date shall be deemed to have occurred on the first day of the four- quarter
reference period and Consolidated Cash Flow for such reference period shall be
calculated without giving effect to clause (iii) of the proviso set forth in the
definition of Consolidated Net Income, and (ii) the Consolidated Cash Flow
attributable to discontinued operations, as determined in accordance with GAAP,
and operations or businesses disposed of prior to the Calculation Date, shall be
excluded, and (iii) the Fixed Charges attributable to discontinued operations,
as determined in accordance with GAAP, and operations or businesses disposed of
prior to the Calculation Date, shall be excluded, but only to the extent that
the obligations giving rise to such Fixed Charges will not be obligations of the
referent Person or any of its Restricted Subsidiaries following the Calculation
Date.
"Foamex Latin America" means Foamex Latin America, Inc. and its direct and
indirect Subsidiaries.
"Foreign Subsidiary" means any Subsidiary of the Issuers either (a) which
is organized outside of the United States of America, (b) whose principal
activities are conducted outside of the United States of America or (c) whose
only material assets are Equity Interests in Subsidiaries which are Foreign
Subsidiaries.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, which are in effect on the date of the Indenture.
"Great Western Note" means the subordinated promissory note incurred in
connection with the acquisition of Great Western in the principal amount of
$7,014,864 that bears interest at a maximum rate of 6.0% per annum payable
semi-annually.
"Guarantee" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, letters of credit and
reimbursement agreements in respect thereof), of all or any part of any
Indebtedness.
"Hedging Obligations" means, with respect to any Person, the obligations of
such Person under (i) interest rate or currency swap agreements, interest rate
or currency cap agreements, interest rate or currency collar agreements and (ii)
other agreements or arrangements designed to protect such Person against or
expose such Person to fluctuations in interest rates and/or currency exchange
rates.
"Indebtedness" means, with respect to any Person, without duplication, any
indebtedness of such Person, whether or not contingent, in respect of borrowed
money or evidenced by bonds, notes, debentures or similar
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instruments or letters of credit (or reimbursement agreements in respect
thereof) or banker's acceptances or representing Capital Lease Obligations or
the balance deferred and unpaid of the purchase price of any property, except
any such balance that constitutes an accrued expense or trade payable, if and
to the extent any of the foregoing indebtedness (other than letters of credit)
would appear as a liability upon a balance sheet of such Person prepared in
accordance with GAAP, as well as all Indebtedness of others secured by a Lien
on any asset of such Person (whether or not such Indebtedness is assumed by
such Person) to the extent of the fair market value of such asset where the
Indebtedness so secured is not the Indebtedness of such Person and, to the
extent not otherwise included, the Guarantee by such Person of any Indebtedness
of any other Person. The amount of any Indebtedness outstanding as of any date
shall be (i) the accreted value thereof, to the extent such Indebtedness does
not require current payments of interest, and (ii) the principal amount
thereof, together with any interest thereon that is more than 30 days past due,
in the case of any other Indebtedness. Notwithstanding anything in the
Indenture to the contrary, Hedging Obligations shall not constitute
Indebtedness, except to the extent they appear on the balance sheet of Foamex.
"Insolvency or Liquidation Proceedings" means (i) any insolvency or
bankruptcy case or proceeding, or any receivership, liquidation, reorganization
or other similar case or proceeding, relative to Foamex or FCC or to the
creditors of Foamex or FCC, as such, or to the assets of Foamex or FCC, or (ii)
any liquidation, dissolution, reorganization or winding up of Foamex or FCC,
whether voluntary or involuntary and involving insolvency or bankruptcy, or
(iii) any assignment for the benefit of creditors or any other marshalling of
assets and liabilities of Foamex or FCC.
"Investments" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the forms of direct or
indirect loans (including Guarantees of Indebtedness or other obligations),
advances or capital contributions (excluding advances to officers and employees
made in the ordinary course of business), purchases or other acquisitions for
consideration of Indebtedness, Equity Interests or other securities, together
with all items that are or would be classified as investments on a balance sheet
prepared in accordance with GAAP. If the Issuers or any Restricted Subsidiary of
the Issuers sells or otherwise disposes of any Equity Interests of any direct or
indirect Restricted Subsidiary of the Issuers such that, after giving effect to
any such sale or disposition, such Person is no longer a Restricted Subsidiary
of one of the Issuers, the Issuers shall be deemed to have made an Investment on
the date of any such sale or disposition equal to the fair market value of the
Equity Interests of such Subsidiary not sold or disposed of in an amount
determined as provided in the final paragraph of the covenant described above
under the caption "--Restricted Payments." A provision in an agreement relating
to the purchase or sale of any of the Issuers' or their respective Restricted
Subsidiaries' assets containing an "earn out" or providing for an adjustment to
the purchase or sale price based on a financial statement relating to the assets
purchased or sold shall not be deemed to be an "Investment."
"Lien" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such asset,
whether or not filed, recorded or otherwise perfected under applicable law
(including any conditional sale or other title retention agreement, any lease in
the nature thereof, any option or other agreement to sell or give a security
interest in and any filing of or agreement to give any financing statement under
the Uniform Commercial Code (or equivalent statutes) of any jurisdiction).
"Management Services Agreement" means that management services agreement,
by and between Foamex and Trace Foam Company, Inc. as in effect on the date of
the Indenture.
"Managing General Partner" means FMXI, Inc., a Delaware corporation and its
successors.
"Net Income" means, with respect to any Person, the net income (loss) of
such Person, determined in accordance with GAAP and before any reduction in
respect of preferred stock dividends, excluding, however, (i) any gain (or loss
in the case of (a)), together with any related provision for taxes (including
pursuant to the Tax Sharing Agreement) on such gain (or loss in the case of
(a)), realized in connection with (a) any Asset Sale (including, without
limitation, dispositions pursuant to sale and leaseback transactions and losses)
or (b) the disposition of any securities other than Cash Equivalents by such
Person or any of its Restricted Subsidiaries or the extinguishment of any
Indebtedness of such Person or any of its Restricted Subsidiaries and (ii) any
extraordinary or nonrecurring gain (or loss), together with any related
provision for taxes on such extraordinary or nonrecurring gain (or loss),
excluding charges related to hyper-inflationary accounting pursuant to FASB 52
and interpretations by the Commission thereof.
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"Net Proceeds" means the aggregate cash proceeds received by the Issuers or
any of their respective Restricted Subsidiaries in respect of any Asset Sale
(including, without limitation, any cash received upon the sale or other
disposition of any non-cash consideration received in any Asset Sale), net of
the direct costs relating to such Asset Sale (including, without limitation,
legal, accounting and investment banking fees, consent fees to facilitate such
Asset Sale and sales commissions) and any relocation expenses incurred as a
result thereof, taxes paid or payable as a result thereof (after taking into
account any available tax credits or deductions and any tax sharing
arrangements), and any reserve for adjustment in respect of the sale price of
such asset or assets established in accordance with GAAP.
"New Credit Facility" means that certain New Credit Facility, to be entered
into, by and among the Issuers and The Bank of Nova Scotia and Citicorp USA,
Inc., as Credit Agents, providing for up to $480.0 million of borrowings,
including any related notes, guarantees, collateral documents, instruments and
agreements executed in connection therewith, and in each case as amended,
modified, renewed, refunded, replaced or refinanced from time to time, and after
the Credit Agent has acknowledged in writing that the New Credit Facility has
been terminated and all then outstanding Indebtedness and obligations thereunder
with respect thereto have been repaid in full in cash and discharged, any
successors to or replacements of such New Credit Facility (as designated by the
Board of Directors as evidenced by a resolution), as such successors or
replacements may be amended, modified, renewed, refunded, replaced or refinanced
from time to time.
"Non-Recourse Debt" means Indebtedness (i) as to which neither of the
Issuers nor any of their respective Restricted Subsidiaries (a) provides credit
support of any kind (including any undertaking, agreement or instrument that
would constitute Indebtedness), (b) is directly or indirectly liable (as a
guarantor or otherwise), or (c) constitutes the lender; (ii) no default with
respect to which (including any rights that the holders thereof may have to take
enforcement action against an Unrestricted Subsidiary) would permit (upon
notice, lapse of time or both) any holder of any other Indebtedness of either of
the Issuers or any of their respective Restricted Subsidiaries to declare a
default on such other Indebtedness or cause the payment thereof to be
accelerated or payable prior to its stated maturity; and (iii) as to which the
lenders, except for lenders under instruments governing Acquired Debt (a) have
acknowledged that they do not have recourse to the holder of the Equity Interest
of the debtor or (b) have been notified in writing that they will not have any
recourse to the stock or assets of either of the Issuers or any of their
respective Restricted Subsidiaries.
"Obligations" means any principal, interest, penalties, expenses, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"Pari Passu Debt" means any Indebtedness or the Issuers or any of their
Restricted Subsidiaries which, by its terms is pari passu in right of payment to
the Notes.
"Payment in Full" (together with any correlative phrases e.g. "paid in
full" and "pay in full") means (i) with respect to any Senior Debt other than
Senior Debt under or in respect of the New Credit Facility, payment in full
thereof or due provision for payment thereof (x) in accordance with the terms of
the agreement or instrument pursuant to which such Senior Debt was issued or is
governed or (y) otherwise to the reasonable satisfaction of the holders of such
Senior Debt, which shall include, in any Insolvency or Liquidation Proceeding,
approval by such holders individually or as a class, of the provision for
payment thereof, and (ii) with respect to Senior Debt under or in respect of the
New Credit Facility, payment in full thereof in cash or Cash Equivalents.
"Permitted Business" means (i) the manufacture and distribution of
polyurethane and advanced polymer foam and activities related thereto, and (ii)
other businesses engaged in by the Issuers and their respective Restricted
Subsidiaries on the date of the Indenture and similar lines of businesses to
those engaged in by the Issuers on the date of the Indenture, including, but not
limited to, the manufacture and distribution of plastics and related products.
"Permitted Investments" means (a) any Investment in either of the Issuers
or in a Wholly Owned Restricted Subsidiary of either of the Issuers and that is
engaged in a Permitted Business; (b) any Investment in Cash Equivalents; (c) any
Investment by either of the Issuers or any Restricted Subsidiary of either of
the Issuers in a Person, if as a result of such Investment (i) such Person
becomes a Wholly Owned Restricted Subsidiary of the Issuers or such Restricted
Subsidiary is engaged in a Permitted Business or (ii) such Person is merged,
consolidated or amalgamated with or into, or transfers or conveys substantially
all of its assets to, or is liquidated into, either of the Issuers or a
Restricted Subsidiary of either of the Issuers that is engaged in a Permitted
Business; (d) any Investment made as a result of the receipt of non-cash
consideration from an Asset Sale that was made in compliance
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with the covenant described above under the caption "--Repurchase at the Option
of Holders--Asset Sales"; (e) any Investment to the extent made in exchange for
the issuance of Equity Interests (other than Disqualified Stock) of the Issuers
or a Subsidiary Guarantor; (f) other Investments in any Person having an
aggregate fair market value (measured on the date each such Investment was made
and without giving effect to subsequent changes in value), when taken together
with all other Investments made pursuant to this clause (f) that are at the
time outstanding, not to exceed the sum of (A) $15.0 million, and (B) the
aggregate net cash proceeds (or non-cash proceeds when converted into cash)
received by Foamex and its Restricted Subsidiaries from the sale or disposition
of investments existing as of the date of the Indenture or made pursuant to
this clause (f); (g) securities received in connection with any good faith
settlement or Insolvency or Liquidation Proceeding; (h) Hedging Obligations
entered into in the ordinary course of business in connection with the
operation of the business of the Issuers and their Restricted Subsidiaries or
as required by any Indebtedness issued in compliance with the Indenture; (i)
prepaid expenses and loans or advances to employees and similar items in the
ordinary course of business; (j) endorsements of negotiable instruments and
other similar negotiable documents; (k) transactions with Affiliates as
permitted under the Indenture; (l) Investments outstanding as of the date of
the Indenture, (m) Investments of up to $5.0 million in Trace Global
Opportunities Fund, (n) loans or advances of up to $5.0 million in Trace
Holdings, and (o) Investments in, including Contributions to, Foamex Latin
America, Foamex Asia or one or more Foreign Subsidiaries, provided that the
maximum amount of such Investments outstanding at any one time does not exceed
$50.0 million, plus the cash dividends and distributions received by the Issuer
and its Restricted Subsidiaries with respect to Investments pursuant to this
clause (o).
"Permitted Liens" means (i) Liens securing Indebtedness under the New
Credit Facility; (ii) Liens in favor of either of the Issuers or any Subsidiary
Guarantor; (iii) Liens on property of a Person existing at the time such Person
is merged into or consolidated with the Issuers or any Subsidiary of either of
the Issuers; provided that such Liens were in existence prior to the
contemplation of such merger or consolidation and do not extend to any assets
other than those of the Person merged into or consolidated with either of the
Issuers; (iv) Liens on property existing at the time of acquisition thereof by
the Issuers or any Subsidiary of the Issuers, provided that such Liens were in
existence prior to the contemplation of such acquisition; (v) Liens to secure
the performance of statutory obligations, surety or appeal bonds, performance
bonds or other obligations of a like nature incurred in the ordinary course of
business; (vi) Liens to secure Indebtedness (including Capital Lease
Obligations) permitted by clause (v) of the second paragraph of the covenant
entitled "Incurrence of Indebtedness and Issuance of Preferred Stock" covering
only the assets acquired with such Indebtedness; (vii) Liens existing on the
date of the Indenture; (viii) Liens for taxes, assessments or governmental
charges or claims that are not yet delinquent or that are being contested in
good faith by appropriate proceedings promptly instituted and diligently
concluded, provided that any reserve or other appropriate provision as shall be
required in conformity with GAAP shall have been made therefor; (ix) Liens on
assets of Unrestricted Subsidiaries that secure Non-Recourse Debt of
Unrestricted Subsidiaries; (x) Liens incurred in the ordinary course of business
including, without limitation, judgment and attachment liens, of the Issuers or
any Subsidiary of the Issuers with respect to obligations that do not exceed
$25.0 million at any one time outstanding and that are not incurred in
connection with the borrowing of money or the obtaining of advances or credit
(other than trade credit in the ordinary course of business); (xi) Liens in
favor of the Trustee; (xii) Liens on Receivables in connection with Receivables
Transaction; (xiii) Liens incurred in connection with Permitted Refinancing
Indebtedness, but only if such Liens extend to no more assets than the Liens
securing the Indebtedness being refinanced; (xiv) Liens securing Senior Debt;
(xv) Liens for taxes, assessments, governmental charges or claims which are
being contested in good faith by appropriate proceedings promptly instituted and
diligently conducted and if a reserve or other appropriate provision, if any, as
shall be required in conformity with GAAP shall have been made therefor; (xvi)
statutory Liens of landlords and carriers', warehousemen's, mechanics',
suppliers', materialmen's, repairmen's, or other like Liens (including
contractual landlords liens) arising in the ordinary course of business and with
respect to amounts not yet delinquent or being contested in good faith by
appropriate proceedings, if a reserve or other appropriate provision, if any, as
shall be required in conformity with GAAP shall have been made therefor; (xvii)
Liens incurred or deposits made in the ordinary course of business in connection
with workers' compensation, unemployment insurance and other types of social
security; (xviii) Liens incurred or deposits made to secure the performance of
tenders, bids, leases, statutory obligations, surety and appeal bonds,
government contracts, performance and return-of-money bonds and other
obligations of a like nature incurred in the ordinary course of business
(exclusive of obligations for the payment of borrowed money); (xix) Liens to
secure Indebtedness of any Restricted Subsidiary, that is a Foreign Subsidiary
provided that such Indebtedness is used by such Restricted Subsidiary to finance
operations of such Foreign Subsidiary outside the
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United States and Canada; (xx) easements, rights- of-way, restrictions, minor
defects or irregularities in title and other similar charges or encumbrances
not interfering in any material respect with the business of Foamex or any of
its Subsidiaries; and (xxi) Liens arising from filing Uniform Commercial Code
financing statements regarding leases (other than true leases and true
consignments).
"Permitted Refinancing Indebtedness" means any Indebtedness of the Issuers
or any of their respective Restricted Subsidiaries issued in exchange for, or
the net proceeds of which are used to extend, refinance, renew, replace, defease
or refund other Indebtedness of the Issuers or any of their respective
Restricted Subsidiaries; provided that: (i) the principal amount (or accreted
value, if applicable) of such Permitted Refinancing Indebtedness does not exceed
the principal amount of (or accreted value, if applicable), plus prepayment
premium and accrued interest on, the Indebtedness so extended, refinanced,
renewed, replaced, defeased or refunded (plus the amount of reasonable expenses
incurred in connection therewith); (ii) such Permitted Refinancing Indebtedness
has a final maturity date later than the final maturity date of, and has a
Weighted Average Life to Maturity equal to or greater than the Weighted Average
Life to Maturity of, the Indebtedness being extended, refinanced, renewed,
replaced, defeased or refunded; (iii) if the Indebtedness being extended,
refinanced, renewed, replaced, defeased or refunded is subordinated in right of
payment to the Notes, such Permitted Refinancing Indebtedness has a final
maturity date later than the final maturity date of, and is subordinated in
right of payment to, the Notes on terms at least as favorable to the Holders of
Notes as those contained in the documentation governing the Indebtedness being
extended, refinanced, renewed, replaced, defeased or refunded; and (iv) such
Indebtedness is incurred either by one of the Issuers or by the Restricted
Subsidiary which is the obligor on the Indebtedness being extended, refinanced,
renewed, replaced, defeased or refunded.
"Person" means any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, unincorporated organization, government
or any agency or political subdivision thereof or any other entity.
"Post-Petition Interest" means all interest and expenses accrued or
accruing after the commencement of any Insolvency or Liquidation Proceeding in
accordance with and at the contract rate (including, without limitation, any
rate applicable upon default) specified in the agreement or instrument creating,
evidencing or governing any Senior Debt, whether or not, pursuant to applicable
law or otherwise, the claim for such interest is allowed as a claim in such
Insolvency or Liquidation Proceeding.
"Principals" means Trace International Holdings, Inc. and Marshall S.
Cogan.
"Public Equity Offering" means a public offering of Equity Interests (other
than Disqualified Stock) of (i) Foamex or FCC; or (ii) Foamex International,
Inc. to the extent the net proceeds thereof are contributed to one of the
Issuers as a capital contribution, that, in each case, results in the net
proceeds to either of the Issuers of at least $25.0 million.
"Receivables" means, with respect to any Person or entity, all of the
following property and interests in property of such Person or entity, whether
now existing or existing in the future or hereafter acquired or arising: (i)
accounts, (ii) accounts receivable incurred in the ordinary course of business,
including without limitation, all rights to payment created by or arising from
sales of goods, leases of goods or the rendition of services no matter how
evidenced, whether or not earned by performance, (iii) all rights to any goods
or merchandise represented by any of the foregoing after creation of the
foregoing, including, without limitation, returned or repossessed goods, (iv)
all reserves and credit balances with respect to any such accounts receivable or
account debtors, (v) all letters of credit, security, or guarantees for any of
the foregoing, (vi) all insurance policies or reports relating to any of the
foregoing, (vii) all collection or deposit accounts relating to any of the
foregoing, (viii) all proceeds of the foregoing and (ix) all books and records
relating to any of the foregoing.
"Receivables Subsidiary" means an Unrestricted Subsidiary exclusively
engaged in Receivables Transactions and activities related thereto; provided,
however, that at no time shall the Issuers and their respective Subsidiaries
have more than one Receivables Subsidiary.
"Receivables Transaction" means (i) the sale or other disposition to a
third party of Receivables or an interest therein, or (ii) the sale or other
disposition of Receivables or an interest therein to a Receivables Subsidiary
followed by a financing transaction in connection with such sale or disposition
of such Receivables (whether such financing transaction is effected by such
Receivables Subsidiary or by a third party to whom such Receivables Subsidiary
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sells such Receivables or interests therein); provided that in each of the
foregoing, the Issuers or their Restricted Subsidiaries receive at least 80% of
the aggregate principal amount of any Receivables financed in such transaction.
"Related Party" with respect to any Principal means (A) any controlling
stockholder, 80% (or more) owned Subsidiary, or spouse or immediate family
member (in the case of an individual) of such Principal or (B) any trust,
corporation, partnership or other entity, the beneficiaries, stockholders,
partners, owners or Persons beneficially holding an 80% or more controlling
interest of which consist of such Principal and/or such other Persons referred
to in the immediately preceding clause (A) and this clause (B).
"Reorganization Securities" means securities distributed to the Holders of
the Notes in an Insolvency or Liquidation Proceeding pursuant to a plan of
reorganization consented to by each class of the Senior Debt, but only if all of
the terms and conditions of such securities (including, without limitation,
term, tenor, interest, amortization, subordination, standstills, covenants and
defaults), are at least as favorable (and provide the same relative benefits) to
the holders of Senior Debt and to the holders of any security distributed in
such Insolvency or Liquidation Proceeding on account of any such Senior Debt as
the terms and conditions of the Notes and the Indenture are, and provide to the
holders of Senior Debt.
"Representative" means the trustee, agent or representative for any Senior
Debt.
"Restricted Investment" means an Investment other than a Permitted
Investment.
"Restricted Subsidiary" of a Person means any Subsidiary of the referent
Person that is not an Unrestricted Subsidiary.
"Senior Debt" means all Indebtedness and other Obligations specified below
payable directly or indirectly by either of the Issuers or any of their
respective Restricted Subsidiaries, whether outstanding on the date of the
Indenture or thereafter created, incurred or assumed by either of the Issuers or
any of their respective Restricted Subsidiaries: (i) the principal of, interest
on and all other Obligations related to the New Credit Facility (including
without limitation all loans, letters of credit and other extensions of credit
under the New Credit Facility, and all expenses, fees, reimbursements,
indemnities and other amounts owing pursuant to the New Credit Facility); (ii)
amounts payable in respect of any Hedging Obligations; (iii) all Indebtedness
not prohibited by the "Incurrence of Indebtedness and Issuance of Preferred
Stock" covenant that is not expressly pari passu with or subordinated to the
Notes, and (iv) all permitted renewals, extensions, refundings or refinancings
thereof. All Post-Petition Interest on Senior Debt shall constitute Senior Debt.
Notwithstanding anything to the contrary in the foregoing, Senior Debt will not
include (i) Indebtedness of either of the Issuers or any of their respective
Restricted Subsidiaries to any other Restricted Subsidiaries which is not a
Subsidiary Guarantor, (ii) Indebtedness of FCC to Foamex, (iii) any Indebtedness
which by the express terms of the agreement or instrument creating, evidencing
or governing the same is junior or subordinate in right of payment to any item
of Senior Debt, (iv) any trade payable arising from the purchase of goods or
materials or for services obtained in the ordinary course of business, or (v)
Indebtedness incurred in violation of the Indenture. To the extent any payment
of Senior Debt (whether by or on behalf of the Issuers or any of their
respective Restricted Subsidiaries, as proceeds or security or enforcement of
any right of setoff or otherwise) is declared to be fraudulent or preferential,
set aside, or required to be paid to a trustee, receiver or other similar party
under any bankruptcy, insolvency, receivership or similar law, then if such
payment is recovered by or paid over to, such trustee, receiver or other similar
party, the Senior Debt or part thereof originally intended to be satisfied shall
be deemed to be reinstated and outstanding as if such payment had not occurred.
All Senior Debt shall be and remain Senior Debt for all purposes of the
Indenture, whether or not subordinated in a bankruptcy, receivership, insolvency
or similar proceeding.
"Stated Maturity" means, with respect to any installment of interest,
accreted value or principal on any series of Indebtedness, the date on which
such payment of interest or principal is due or is scheduled to be paid in the
original documentation governing such Indebtedness, and shall not include any
contingent obligations to repay, redeem or repurchase any such interest,
accreted value or principal prior to the date originally scheduled for the
payment or accretion thereof.
"Subsidiary" means, with respect to any Person, (i) any corporation,
association or other business entity of which more than 50% of the total voting
power of shares of Capital Stock entitled (without regard to the occurrence of
any contingency) to vote in the election of directors, managers or trustees
thereof is at the time owned or controlled, directly or indirectly, by such
Person or one or more of the other Subsidiaries of that Person (or a
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combination thereof) and (ii) any partnership (a) the sole general partner or
the managing general partner of which is such Person or a Subsidiary of such
Person or (b) the only general partners of which are such Person or of one or
more Subsidiaries of such Person (or any combination thereof).
"Subsidiary Guarantors" means General Felt Industries, Inc., Foamex Fibers,
Inc. and those Restricted Subsidiaries required to execute a Note Guarantee
pursuant to the provisions of the Indenture described under the caption
"Additional Guarantees" and any other Subsidiary that executes a Note Guarantee.
"Tax Sharing Agreement" means the tax sharing agreement, as of the date of
the Indenture, among Foamex, Trace Foam Company, Inc., FMXI, Inc. and Foamex
International Inc. as in effect on the date of the Indenture.
"Trace Note" means the promissory note of Trace International Holdings,
Inc. dated July 7, 1996 payable to Foamex, as amended and restated as part of
the Closing Date Transactions.
"United States Government Obligations" means direct obligations of the
United States of America, or any agency or instrumentality thereof the payment
of which the full faith and credit of the United States of America is pledged.
"Unrestricted Subsidiary" means (i) any Subsidiary that is designated by
the Board of Directors of either Issuer as an Unrestricted Subsidiary pursuant
to a Board Resolution; but only to the extent that such Subsidiary: (a) has no
Indebtedness other than Non-Recourse Debt; (b) on the date of such designation
is not party to any agreement, contract, arrangement or understanding with
either of the Issuers or any Restricted Subsidiary of either of the Issuers
unless the terms of any such agreement, contract, arrangement or understanding
are no less favorable to such Issuer or such Restricted Subsidiary than those
that might be obtained at the time from Persons who are not Affiliates of such
Issuer; (c) is a Person with respect to which neither of the Issuers nor any of
their respective Restricted Subsidiaries has any direct or indirect obligation
(x) to subscribe for additional Equity Interests or (y) to maintain or preserve
such Person's financial condition or to cause such Person to achieve any
specified levels of operating results; (d) has not guaranteed or otherwise
directly or indirectly provided credit support for any Indebtedness of either of
the Issuers or any of their respective Restricted Subsidiaries; and (e) has at
least one director on its board of directors that is not a director or executive
officer of either of the Issuers or any of their respective Restricted
Subsidiaries and has at least one executive officer that is not a director or
executive officer of either of the Issuers or any of their respective Restricted
Subsidiaries. Any such designation by the Board of Directors of either Issuer
shall be evidenced to the Trustee by filing with the Trustee a certified copy of
the Board Resolution giving effect to such designation and an Officers'
Certificate certifying that such designation complied with the foregoing
conditions and was permitted by the covenant described above under the caption
"Certain Covenants--Restricted Payments." If, at any time, any Unrestricted
Subsidiary would fail to meet the foregoing requirements as an Unrestricted
Subsidiary, it shall thereafter cease to be an Unrestricted Subsidiary for
purposes of the Indenture and any Indebtedness of such Subsidiary shall be
deemed to be incurred by a Restricted Subsidiary of such Issuer as of such date
(and, if such Indebtedness is not permitted to be incurred as of such date under
the covenant described under the caption "--Incurrence of Indebtedness and
Issuance of Preferred Stock," the Issuers shall be in default of such covenant).
The Board of Directors of either of the Issuers may at any time designate any
Unrestricted Subsidiary to be a Restricted Subsidiary; provided that such
designation shall be deemed to be an incurrence of Indebtedness by a Restricted
Subsidiary of such Issuer of any outstanding Indebtedness of such Unrestricted
Subsidiary and such designation shall only be permitted if (i) such Indebtedness
is permitted under the covenant described under the caption "Certain
Covenants--Incurrence of Indebtedness and Issuance of Preferred Stock,"
calculated on a pro forma basis as if such designation had occurred at the
beginning of the four-quarter reference period, and (ii) no Default or Event of
Default would be in existence following such designation.
"Voting Stock" of any Person as of any date means the Capital Stock of such
Person that is at the time entitled to vote in the election of the Board of
Directors of such Person.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (i) the sum of the
products obtained by multiplying (a) the amount of each then remaining
installment, sinking fund, serial maturity or other required payments of
principal, including payment at final maturity, in respect thereof, by (b) the
number of years (calculated to the nearest one-twelfth) that will elapse between
such date and the making of such payment, by (ii) the then outstanding principal
amount of such Indebtedness.
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"Wholly Owned Restricted Subsidiary" of any Person means a Restricted
Subsidiary of such Person all of the outstanding Capital Stock or other
ownership interests of which (other than directors' qualifying shares) shall at
the time be owned by such Person or by one or more Wholly Owned Restricted
Subsidiaries of such Person and one or more Wholly Owned Restricted Subsidiaries
of such Person.
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DESCRIPTION OF THE PARTNERSHIP AGREEMENT
Set forth below is a summary of certain material terms of the Fourth
Amended and Restated Agreement of Limited Partnership of Foamex dated as of
December 14, 1993 and amended as of June 28, 1994 and June 12, 1997 (the
"Partnership Agreement"). A complete copy of such agreement has been filed as an
exhibit to the Registration Statement of which this Prospectus is a part and is
available in the manner described in "Additional Information."
Organization and Duration
Foamex is a Delaware limited partnership. FMXI, a wholly-owned subsidiary
of Foamex International, serves as the managing general partner of Foamex and
has a 1.0% interest therein. Trace Foam is a non-managing general partner of
Foamex and has a 1.0% interest therein. Foamex International is a limited
partner of Foamex and has a 98.0% interest therein. Foamex will continue its
existence until December 14, 2033, unless terminated earlier in accordance with
the terms of the Partnership Agreement. See "--Dissolution" below.
Management
The business and affairs of Foamex are managed by FMXI as the managing
general partner. The Partnership Agreement authorizes FMXI to designate officers
of Foamex who are responsible for implementing the decisions of FMXI and for
conducting the ordinary and usual business and affairs of Foamex. See
"Management--Executive Officers of Foamex and FCC; Directors and Executive
Officers of FMXI."
Assignment of Partnership Interests
No partner of Foamex may sell or otherwise encumber or dispose of, whether
voluntarily or by operation of law (each, a "transfer"), any part or all of its
interest in Foamex without the written consent of the other partners and any
attempt to do so will be void.
A person or entity will not be admitted as a substitute general partner of
Foamex or a substitute limited partner of Foamex until such time as such person
or equity (i) executes a counterpart of the Partnership Agreement or an
amendment to the Partnership Agreement agreeing to be bound by the terms and
conditions of the Partnership Agreement and (ii) is listed as a general partner
or a limited partner, as the case may be, on the books and records of Foamex. No
partner may withdraw from Foamex or otherwise assign its partnership interest
other than pursuant to the Partnership Agreement.
Amendment of the Partnership Agreement
The Partnership Agreement may not be amended except by an instrument in
writing signed by partners holding more than 50% of the partnership interests in
Foamex at such time; provided, however, no amendment affecting the rights of
Trace Foam in respect of allocations, distributions, assignments,
indemnification or capital contributions shall be made without the approval of
Trace Foam.
Dissolution
The partnership existence of Foamex shall continue until December 14, 2033
and then dissolve unless extended by mutual written consent of all partners,
unless any of the following events occur which shall require a dissolution of
Foamex: (i) any event of withdrawal of a general partner that causes a general
partner to cease to be general partner of Foamex under the Delaware Revised
Uniform Limited Partnership Act (the "Partnership Act"), except that Foamex
shall not be dissolved if (a) at the time of such event all remaining general
partners agree to carry on the business of Foamex without dissolution upon such
an event or (b) within 90 days after such event all partners of Foamex agree in
writing to continue the business of Foamex and to the appointment, effective as
of the date of such event, of one or more general partners of Foamex or (ii) the
entry of a decree of judicial dissolution under the Partnership Act.
Notwithstanding the foregoing, except to the extent required by applicable
law, Foamex may not be dissolved until 90 days after Scotiabank, and Citicorp
USA, Inc. as Administrative Agents (or any successor agent as Administrative
Agent) of the New Credit Facility, shall have received written notice of such
impending or proposed dissolution. See "Description of Certain Debt
Instruments--New Credit Facility."
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Indemnification
The Partnership Agreement provides that, to the fullest extent permitted by
law, Foamex will indemnify the partners, their respective affiliates, officers,
directors, stockholders, employees and agents, and any employee, agent and
officer of Foamex, against all expenses actually and reasonably incurred by it
or them in connection with any threatened, pending or completed action, suit or
proceeding against it or them or by, against or in the right of Foamex to which
it or them is or was a party, or is threatened to be made a party, involving an
alleged cause of action for damages arising out of, or in any way related to or
connected with, the business or internal affairs of Foamex, if, in the
transaction giving rise to such action, suit, or proceeding, such person acted
in good faith, without gross negligence or willful misconduct or the willful
breach of the Partnership Agreement and in a manner such person reasonably
believed to be within the scope of its authority under the Partnership
Agreement.
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CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following discussion summarizes certain United States federal income
tax consequences of the acquisition, ownership and disposition of the Notes to a
U.S. Holder. For this purpose, a "U.S. Holder" is a person who is, for United
States federal income tax purposes, (i) a citizen or resident of the United
States; (ii) a corporation, partnership or other entity created or organized in
or under the laws of the United States or of any political subdivision thereof;
(iii) an estate the income of which is subject to United States federal income
taxation regardless of its source; or (iv) a trust if a court within the U.S. is
able to exercise primary supervision over the administration of the trust and
one or more U.S. fiduciaries have the authority to control all substantial
decisions of the trust. Although the following discussion does not purport to
describe all of the tax considerations that may be relevant to a prospective
purchaser of the Notes, such discussion summarizes the material United States
federal income tax consequences to a U.S. Holder that purchases the Notes
pursuant to their original issue and that holds the Notes as a capital asset
within the meaning of Section 1221 of the Internal Revenue Code of 1986, as
amended (the "Code").
The statements regarding United States tax laws and practices set forth
below are based on the Code, administrative pronouncements, judicial decisions
and existing and proposed Treasury regulations in force and as applied in
practice on the date of this Prospectus and are subject to changes to those laws
and practices, and any relevant judicial decisions, subsequent to the date of
this Prospectus, which changes may be retroactive.
This discussion does not deal with persons that are subject to special tax
rules, such as dealers in securities, financial institutions, life insurance
companies, tax-exempt entities, persons holding the Notes as a part of a hedging
or conversion transaction or a straddle or persons whose "functional currency"
is not the United States dollar.
PROSPECTIVE PURCHASERS OF NOTES ARE ADVISED TO CONSULT THEIR OWN TAX
ADVISORS AS TO THE UNITED STATES TAX CONSEQUENCES OF THE PURCHASE, OWNERSHIP AND
DISPOSITION OF THE NOTES, INCLUDING THE EFFECT OF ANY STATE OR LOCAL TAX LAWS.
The Exchange Offer
The exchange of Old Notes for New Notes pursuant to the Exchange Offer
should be treated as a continuation of the corresponding Old Notes because the
terms of the New Notes are not materially different from the terms of the Old
Notes. Accordingly, such exchange should not constitute a taxable event to U.S.
Holders and, therefore, (i) no gain or loss should be realized by U.S. Holders
upon receipt of a New Note, (ii) the holding period of the New Note should
include the holding period of the Old Note exchanged therefor and (iii) the
adjusted tax basis of the New Note should be the same as the adjusted tax basis
of the Old Note exchanged therefor immediately before the exchange.
Stated Interest
Stated interest on a Note will be taxable to a U.S. Holder as ordinary
interest income at the time that such interest accrues or is received, in
accordance with the U.S. Holder's regular method of accounting for federal
income tax purposes. Foamex expects that the Notes will not be considered to be
issued with original issue discount ("OID") for federal income tax purposes.
Payments Upon Registration Default
The occurrence of a Registration Default as described under "Description of
Notes--Registration Rights; Liquidated Damages" will cause Liquidated Damages to
be payable to the holders of the Notes in the manner described therein. The
treatment of such feature of the Notes is not entirely clear. However, Foamex
intends to take the position that the mere possibility that such Liquidated
Damages may become payable on the Notes will not affect the amount of interest
income includible by a U.S. Holder of a Note and will not cause the Notes to be
issued with OID. If such Liquidated Damages in fact become payable on the Notes,
then such Liquidated Damages should be includible in income by the U.S. Holders
of Notes currently as paid or accrued, in accordance with such U.S. Holder's
regular method of accounting for tax purposes.
Sale, Exchange or Retirement of the Notes
A U.S. Holder's tax basis in a Note generally will be its cost. A U.S.
Holder generally will recognize gain or loss on the sale, exchange or retirement
of a Note in an amount equal to the difference between the amount realized on
the sale, exchange or retirement and the tax basis of the Note. Gain or loss
recognized on the sale, exchange
94
<PAGE>
or retirement of a Note (excluding amounts received in respect of accrued
interest, which will be taxable as ordinary interest income) generally will be
capital gain or loss and will be long-term capital gain or loss if the Note was
held for more than one year.
Backup Withholding
Under certain circumstances a U.S. Holder of a Note may be subject to
"backup withholding" at a 31% rate with respect to payments of interest thereon
or the gross proceeds from the disposition thereof. This withholding generally
applies if the U.S. Holder fails to furnish his or her social security number or
other taxpayer identification number ("TIN") in the specified manner and in
certain other circumstances. Any amount withheld from a payment to a U.S. Holder
under the backup withholding rules is allowable as a credit against such U.S.
Holder's federal income tax liability, provided that the required information is
furnished to the Internal Revenue Service. Corporations and certain other
entities described in the Code and Treasury regulations are exempt from backup
withholding if their exempt status is properly established.
PLAN OF DISTRIBUTION
Each Holder desiring to participate in the Exchange Offer will be required
to represent, among other things, that (i) it is not an "affiliate" (as defined
in Rule 405 of the Securities Act) of the Issuers, (ii) it is not engaged in,
and does not intend to engage in, and has no arrangement or understanding with
any person to participate in, a distribution of the New Notes, and (iii) it is
acquiring the New Notes in the ordinary course of its business (a holder unable
to make the foregoing representations is referred to herein as a "Restricted
Holder"). A Restricted Holder will not be able to participate in the Exchange
Offer, and may only sell its Old Notes pursuant to a registration statement
containing the selling securityholder information required by Item 507 of
Regulation S-K of the Securities Act, or pursuant to an exemption from the
registration requirement of the Securities Act.
Each Participating Broker-Dealer is required to acknowledge in the Letter
of Transmittal that it acquired the Old Notes as a result of market-making
activities or other trading activities and that it will deliver a prospectus in
connection with the resale of such New Notes. Based upon interpretations by the
staff of the Commission, the Issuers believe that New Notes issued pursuant to
the Exchange Offer to Participating Broker-Dealers may be offered for resale,
resold, and otherwise transferred by a Participating Broker-Dealer (other than a
Restricted Holder) upon compliance with the prospectus delivery requirements,
but without compliance with the registration requirements, of the Securities
Act. The Issuers have agreed that for a period of 120 days following
consummation of the Exchange Offer, they will make this Prospectus available to
Participating Broker-Dealers for use in connection with any such resale. During
such period of time, delivery of this Prospectus, as it may be amended or
supplemented, will satisfy the prospectus delivery requirements of a
Participating Broker-Dealer engaged in market making or other trading
activities.
Based upon interpretations by the staff of the Commission, the Issuers
believe that New Notes issued pursuant to the Exchange Offer may be offered for
resale, resold and otherwise transferred by a Holder thereof (other than a
Restricted Holder or a Participating Broker-Dealer) without compliance with the
registration and prospectus delivery requirements of the Securities Act.
The Issuers will not receive any proceeds from any sale of New Notes by
broker-dealers. New Notes received by Participating Broker-Dealers for their own
account pursuant to the Exchange Offer may be sold from time to time in one or
more transactions in the over-the-counter market, in negotiated transactions,
through the writing of options on the New Notes or a combination of such methods
of resale, at market prices prevailing at the time of resale, at prices related
to such prevailing market prices or at negotiated prices. Any such resale may be
made directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such
Participating Broker-Dealer and/or the purchasers of any such New Notes. Any
Participating Broker-Dealer that resells New Notes that were received by it for
its own account pursuant to the Exchange Offer and any broker or dealer that
participates in a distribution of such New Notes may be deemed to be an
"underwriter" within the meaning of the Securities Act and any profit on any
such resale of New Notes and any commissions or concessions received by any such
persons may be deemed to be underwriting compensation under the Securities Act.
The Letter of Transmittal states that by acknowledging that it will deliver and
by delivering a prospectus, a Participating Broker-Dealer will not be deemed to
admit that it is an "underwriter" within the meaning of the Securities Act.
95
<PAGE>
The Issuers has agreed to pay all expenses incidental to the Exchange Offer
other than commissions and concessions of any brokers or dealers and will
indemnify holders of the Notes (including any broker-dealers) against certain
liabilities, including liabilities under the Securities Act, as set forth in the
Registration Rights Agreement.
LEGAL MATTERS
Certain legal matters in connection with the New Notes offered hereby will
be passed upon for the Issuers and Subsidiary Guarantors by Willkie Farr &
Gallagher, New York, New York.
EXPERTS
The (i) consolidated financial statements of Foamex as of December 31, 1995
and December 29, 1996 and for each of the three years in the period ended
December 29, 1996, (ii) balance sheets of Foamex Capital Corporation as of
December 31, 1995 and December 29, 1996, (iii) consolidated financial statements
of General Felt Industries, Inc. as of December 31, 1995 and December 29, 1996
and for each of the three years in the period ended December 29, 1996, (iv)
financial statements of Foamex Fibers, Inc. as of December 31, 1995 and December
29, 1996 and for the period from April 13, 1995 to December 31, 1995 and for the
year ended December 29, 1996 and the combined financial statements of GS
Industries, Inc. and Pontotoc Fibers, Inc. for the year ended December 31, 1994
and for the period from January 1, 1995 to April 12, 1995, (v) the consolidated
balance sheet of FMXI, Inc. as of December 29, 1996 and (vi) the consolidated
balance sheet of Trace Foam Company, Inc. as of December 31, 1996, included in
the Registration Statement have been included in reliance upon the reports of
Coopers & Lybrand L.L.P., independent accountants, given on the authority of
that firm as experts in accounting and auditing.
FORWARD-LOOKING STATEMENTS
In connection with certain forward-looking statements contained in this
Prospectus, Foamex 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 raw material price increases, general economic conditions,
the implementation and estimated annualized savings of the operations plan and
changes in environmental legislation and environmental conditions. The
forward-looking statements contained in this Prospectus 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 Foamex. Accordingly, there can be no assurance that the forward-looking
statements contained in this Prospectus 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 Prospectus should consider
these facts in evaluating the information contained herein. In addition, the
business and operations of Foamex are subject to substantial risks which
increase the uncertainty inherent in the forward-looking statements contained in
this Prospectus. The inclusion of forward-looking statements contained in this
Prospectus should not be regarded as a representation by Foamex or any other
person that the forward-looking statements contained herein will be achieved. In
light of the foregoing, readers of this Prospectus are cautioned not to place
undue reliance on the forward-looking statements contained herein.
96
<PAGE>
FOAMEX L.P. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Foamex L.P.
Report of Independent Accountants ............................................................. F-3
Consolidated Balance Sheets as of December 31, 1995 and December 29, 1996 ...................... F-4
Consolidated Statements of Operations for the years ended 1994, 1995 and 1996 ................... F-6
Consolidated Statements of Cash Flows for the years ended 1994, 1995 and 1996 ................... F-7
Consolidated Statements of Partners' Equity (Deficit) for the years ended 1994, 1995 and 1996 ... F-8
Notes to Consolidated Financial Statements .................................................... F-9
Condensed Consolidated Balance Sheets as of December 29, 1996 and June 29, 1997 (unaudited) ..... F-28
Condensed Consolidated Statements of Operations--Twenty-Six Week Periods Ended June 30, 1996
and June 29, 1997 (unaudited) ................................................................ F-29
Condensed Consolidated Statements of Cash Flows--Twenty-Six Week Periods Ended June 30,
1996 and June 29, 1997 (unaudited) .......................................................... F-30
Notes to Condensed Consolidated Financial Statements (unaudited) ............................... F-31
Foamex Capital Corporation
Report of Independent Accountants ............................................................. F-39
Balance Sheets as of December 31, 1995 and December 29, 1996 .................................. F-40
Notes to Balance Sheets ...................................................................... F-41
Balance Sheets as of December 29, 1996 and June 29, 1997 (unaudited) ............................ F-42
Notes to Balance Sheets (unaudited) ............................................................. F-43
General Felt Industries, Inc.
Report of Independent Accountants ............................................................. F-45
Consolidated Balance Sheets as of December 31, 1995 and December 29, 1996 ...................... F-46
Consolidated Statements of Operations for the years ended 1994, 1995 and 1996 ................... F-48
Consolidated Statements of Cash Flows for the years ended 1994, 1995 and 1996 ................... F-49
Consolidated Statements of Stockholder's Equity for the years ended 1994, 1995 and 1996 ......... F-50
Notes to Consolidated Financial Statements .................................................... F-51
Condensed Consolidated Balance Sheets as of December 29, 1996 and June 29, 1997 (unaudited)...... F-62
Condensed Consolidated Statements of Operations--Twenty-Six Week Periods Ended June 30,
1996 and June 29, 1997 (unaudited) ............................................................. F-63
Condensed Consolidated Statements of Cash Flows--Twenty-Six Week Periods Ended June 30,
1996 and June 29, 1997 (unaudited) ............................................................. F-64
Notes to Condensed Consolidated Financial Statements (unaudited) ............................... F-65
</TABLE>
F-1
<PAGE>
FOAMEX L.P. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Foamex Fibers, Inc.
Report of Independent Accountants ............................................................. F-67
Balance Sheets as of December 31, 1995 and December 29, 1996 .................................. F-68
Statements of Operations for the year ended December 31, 1994, for the period from
January 1, 1995 to April 12, 1995 (Predecessor Company), for the period from April 13, 1995
to December 31, 1995 and for the year ended December 29, 1996 ............................... F-69
Statements of Cash Flows for the year ended December 31, 1994, for the period from
January 1, 1995 to April 12, 1995 (Predecessor Company), for the period from April 13, 1995
to December 31, 1995 and for the year ended December 29, 1996 ............................... F-70
Statements of Stockholder's Equity for the year ended December 31, 1994, for the period from
January 1, 1995 to April 12, 1995 (Predecessor Company), for the period from April 13, 1995
to December 31, 1995 and for the year ended December 29, 1996 ............................... F-71
Notes to Financial Statements ................................................................ F-72
Condensed Balance Sheets as of December 29, 1996 and June 29, 1997 (unaudited) .................. F-76
Condensed Statements of Operations--Twenty-Six Week Periods Ended June 30, 1996 and June 29,
1997 (unaudited) ............................................................................... F-77
Condensed Statements of Cash Flows--Twenty-Six Week Periods Ended June 30, 1996 and
June 29, 1997 (unaudited) ...................................................................... F-78
Notes to Condensed Financial Statements (unaudited) ........................................... F-79
FMXI, Inc.
Report of Independent Accountants ............................................................. F-80
Consolidated Balance Sheet as of December 29, 1996 .............................................. F-81
Notes to Consolidated Balance Sheet ............................................................. F-83
Trace Foam Company, Inc.
Report of Independent Accountants ............................................................. F-97
Consolidated Balance Sheet ...................................................................... F-98
Notes to Consolidated Balance Sheet ............................................................. F-99
</TABLE>
F-2
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners of Foamex L.P.:
We have audited the accompanying consolidated balance sheets of Foamex L.P. and
subsidiaries ("Foamex L.P.") as of December 31, 1995 and December 29, 1996, and
the related consolidated statements of operations, cash flows and partners'
equity (deficit) for each of the three years in the period ended December 29,
1996. These financial statements are the responsibility of Foamex L.P.'s
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Foamex L.P. and
subsidiaries as of December 31, 1995 and December 29, 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 29, 1996 in conformity with generally
accepted accounting principles.
COOPERS & LYBRAND L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
February 26, 1997
F-3
<PAGE>
FOAMEX L.P. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(thousands)
<TABLE>
<CAPTION>
December 31, December 29,
1995 1996
------------ ------------
<S> <C> <C>
ASSETS:
CURRENT ASSETS:
Cash and cash equivalents .................................... $ 638 $ 20,968
Restricted cash ............................................. -- 12,143
Accounts receivable, net of allowance for doubtful accounts of
$9,138 and $6,328............................................. 113,583 125,847
Inventories ................................................ 89,952 102,610
Deferred income taxes ....................................... -- 6,720
Due from related parties .................................... 1,569 1,791
Other current assets ....................................... 19,784 18,841
--------- ---------
Total current assets ....................................... 225,526 288,920
--------- ---------
PROPERTY, PLANT AND EQUIPMENT:
Land and land improvements ................................. 4,632 9,674
Buildings and leasehold improvements ........................ 78,169 78,082
Machinery, equipment and furnishings ........................ 176,019 185,348
Construction in progress .................................... 7,985 20,784
--------- ---------
Total ...................................................... 266,805 293,888
Less accumulated depreciation and amortization ............... (97,739) (111,461)
--------- -----------
Property, plant and equipment, net ........................... 169,066 182,427
COST IN EXCESS OF ASSETS ACQUIRED, NET ........................ 91,165 83,991
DEBT ISSUANCE COSTS, NET ....................................... 18,703 14,902
NET ASSETS OF DISCONTINUED OPERATIONS ........................ 85,073 --
OTHER ASSETS ................................................... 16,359 15,917
--------- ---------
TOTAL ASSETS ................................................... $ 605,892 $ 586,157
========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
F-4
<PAGE>
FOAMEX L.P. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS--(Continued)
(thousands)
<TABLE>
<CAPTION>
December 31, December 29,
1995 1996
------------ ------------
<S> <C> <C>
LIABILITIES AND PARTNERS' EQUITY (DEFICIT):
CURRENT LIABILITIES:
Short-term borrowings .................................... $ 2,199 $ 3,692
Current portion of long-term debt--unrelated parties ...... 8,511 13,735
Accounts payable .......................................... 67,658 75,621
Accounts payable to related parties ........................ 11,731 8,803
Accrued employee compensation .............................. 8,116 7,302
Accrued interest .......................................... 9,591 8,871
Accrued restructuring charges .............................. 15,882 6,300
Other accrued liabilities ................................. 30,516 27,506
--------- ---------
Total current liabilities ................................. 154,204 151,830
LONG-TERM DEBT--UNRELATED PARTIES ........................... 428,416 386,800
LONG-TERM DEBT--RELATED PARTIES .............................. 5,540 5,817
DEFERRED INCOME TAXES ....................................... 1,394 4,663
ACCRUED RESTRUCTURING CHARGES ................................. 3,773 4,043
OTHER LIABILITIES ............................................. 25,169 20,172
--------- ---------
Total liabilities ....................................... 618,496 573,325
--------- ---------
COMMITMENTS AND CONTINGENCIES .............................. -- --
--------- ---------
PARTNERS' EQUITY (DEFICIT)
General partners .......................................... 404 632
Limited partners .......................................... 46,036 57,654
Note receivable from partner .............................. (44,444) (33,180)
Other ...................................................... (14,600) (12,274)
--------- ---------
Total partners' equity (deficit) ........................ (12,604) 12,832
--------- ---------
TOTAL LIABILITIES AND PARTNERS' EQUITY (DEFICIT) ............ $ 605,892 $ 586,157
========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
F-5
<PAGE>
FOAMEX L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended 1994, 1995 and 1996
(thousands)
<TABLE>
<CAPTION>
January 1, December 31, December 29,
1995 1995 1996
---------- ------------ ------------
<S> <C> <C> <C>
NET SALES .............................. $833,660 $ 862,834 $ 926,351
COST OF GOODS SOLD ..................... 691,265 762,085 773,119
-------- --------- ---------
GROSS PROFIT ........................... 142,395 100,749 153,232
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES .............................. 57,059 63,466 56,778
RESTRUCTURING AND OTHER CHARGES
(CREDITS) .............................. -- 39,249 (6,415)
-------- --------- ---------
INCOME (LOSS) FROM OPERATIONS ............ 85,336 (1,966) 102,869
INTEREST AND DEBT ISSUANCE EXPENSE ...... 41,532 44,550 43,211
OTHER INCOME (EXPENSE), NET ............ 732 (205) 1,705
-------- --------- ---------
INCOME (LOSS) FROM CONTINUING
OPERATIONS BEFORE PROVISION FOR
INCOME TAXES ........................... 44,536 (46,721) 61,363
PROVISION FOR INCOME TAXES ............... 6,525 1,405 7,702
-------- --------- ---------
INCOME (LOSS) FROM CONTINUING
OPERATIONS .............................. 38,011 (48,126) 53,661
-------- --------- ---------
DISCONTINUED OPERATIONS:
INCOME (LOSS) FROM DISCONTINUED
OPERATIONS, NET OF INCOME TAXES ......... 1,230 (5,117) (230)
LOSS ON DISPOSAL OF DISCONTINUED
OPERATIONS, INCLUDING PROVISIONS
FOR OPERATING LOSSES DURING THE
PHASE-OUT PERIOD, NET OF INCOME
TAXES ................................. -- -- (41,820)
-------- --------- ---------
INCOME (LOSS) FROM DISCONTINUED
OPERATIONS, NET OF INCOME TAXES ......... 1,230 (5,117) (42,050)
-------- --------- ---------
INCOME (LOSS) BEFORE EXTRAORDINARY
LOSS .................................... 39,241 (53,243) 11,611
EXTRAORDINARY LOSS ON EARLY
EXTINGUISHMENT OF DEBT .................. -- -- (1,912)
-------- --------- ---------
NET INCOME (LOSS) ........................ $ 39,241 $ (53,243) $ 9,699
======== ========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
F-6
<PAGE>
FOAMEX L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended 1994, 1995 and 1996
(thousands)
<TABLE>
<CAPTION>
January 1, December 31, December 29,
1995 1995 1996
---------- ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) ............................................. $ 39,241 $ (53,243) $ 9,699
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization ................................. 22,108 22,905 21,132
Amortization of debt issuance costs and debt discount ......... 2,116 2,729 2,919
Net loss on disposal of discontinued operations ............... -- -- 40,551
Net (income) loss from discontinued operations ............... (1,230) 5,117 1,499
Asset writedowns and other charges (credits) .................. -- 16,677 (7,364)
Extraordinary loss on early extinguishment of debt ............ -- -- 1,217
Provision for uncollectible accounts ........................ 878 4,627 704
Deferred income taxes ....................................... 5,520 659 6,010
Other, net ................................................... 6 (706) (5,804)
Changes in operating assets and liabilities, net of acquisitions
and discontinued operations:
Accounts receivable .......................................... (24,677) (1,472) (13,130)
Inventories ................................................... (21,790) 14,146 (13,078)
Accounts payable and accounts payable related parties ......... 28,491 823 5,035
Accrued restructuring charges ................................. (3,469) 16,834 (7,000)
Other assets and liabilities ................................. 3,414 7,415 (5,724)
--------- --------- ---------
Net cash provided by continuing operations .................. 50,608 36,511 36,666
Net cash used for discontinued operations .................. (323) (9,175) (486)
--------- --------- ---------
Net cash provided by operating activities .................. 50,285 27,336 36,180
--------- --------- ---------
INVESTING ACTIVITIES:
Capital expenditures .......................................... (21,201) (19,348) (23,344)
Acquisitions, net of cash acquired ........................... -- (7,272) (841)
Proceeds from sale of discontinued operations .................. -- -- 42,650
Purchase of note from related party ........................... -- (2,000) --
Repayment of (purchase of) note from partner .................. (35,300) -- 18,623
Increase in restricted cash .................................... -- -- (12,143)
Capital expenditures for discontinued operations ............... (6,565) (4,429) (919)
Other investing activities .................................... (1,412) 2,495 (1,276)
--------- --------- ---------
Net cash provided by (used for) investing activities ......... (64,478) (30,554) 22,750
--------- --------- ---------
FINANCING ACTIVITIES:
Net proceeds from (repayments of) short-term borrowings ...... 537 (1,685) 1,493
Net proceeds from (repayments of) revolving loans ............ 3,000 (3,000) --
Proceeds from long-term debt--unrelated parties ............... 40,000 -- 1,500
Repayments of long-term debt--unrelated parties ............... (3,256) (9,099) (38,116)
Distributions and redemptions to partners ..................... (3,257) (2,379) (3,487)
Debt issuance costs .......................................... (4,816) -- --
Other financing activities .................................... (1,974) -- 10
--------- --------- ---------
Net cash provided by (used for) financing activities ......... 30,234 (16,163) (38,600)
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents ............ 16,041 (19,381) 20,330
Cash and cash equivalents at beginning of period ............... 3,978 20,019 638
--------- --------- ---------
Cash and cash equivalents at end of period ..................... $ 20,019 $ 638 $ 20,968
========= ========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
F-7
<PAGE>
FOAMEX L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF PARTNERS' EQUITY (DEFICIT)
For the Years Ended 1994, 1995 and 1996
(thousands)
<TABLE>
<CAPTION>
Note
General Limited Receivable
Partners Partners from Partner Other Total
-------- -------- ------------ --------- ---------
<S> <C> <C> <C> <C> <C>
Balances at January 2, 1994 ..................... $ 11,338 $ 45,199 $ -- $ (7,151) $ 49,386
Net income ....................................... 1,377 37,864 -- -- 39,241
Distributions .................................... (117) (4,487) -- -- (4,604)
Note receivable from partner ..................... -- -- (35,300) -- (35,300)
Accretion of note receivable from partner ...... 58 2,809 (2,867) -- --
Transfer of partnership interests ............... (11,208) 11,208 -- -- --
Contribution of Foamex Latin America, Inc. ...... -- 5,093 -- (453) 4,640
Additional pension liability ..................... -- -- -- 168 168
Foreign currency translation adjustment ......... -- -- -- (983) (983)
-------- -------- --------- --------- ---------
Balances at January 1, 1995 ..................... 1,448 97,686 (38,167) (8,419) 52,548
Net loss ....................................... (1,044) (52,199) -- -- (53,243)
Distributions .................................... (125) (5,603) -- -- (5,728)
Purchase of note receivable from
Foamex International ........................... -- -- -- (2,000) (2,000)
Increase in note receivable from Trace Holdings -- -- -- (1,373) (1,373)
Accretion of note receivable from partner ...... 125 6,152 (6,277) -- --
Additional pension liability ..................... -- -- -- (3,290) (3,290)
Foreign currency translation adjustment ......... -- -- -- 482 482
-------- -------- --------- --------- ---------
Balances at December 31, 1995 .................. 404 46,036 (44,444) (14,600) (12,604)
Net income ....................................... 184 9,515 -- -- 9,699
Distributions .................................... (104) (5,108) -- -- (5,212)
Accretion of note receivable from partner ...... 144 7,031 (7,175) -- --
Repayment of note receivable from partner ...... -- -- 18,439 -- 18,439
Repayment premium on note receivable from partner 4 180 -- -- 184
Additional pension liability ..................... -- -- -- 2,372 2,372
Foreign currency translation adjustment ......... -- -- -- (46) (46)
-------- -------- --------- --------- ---------
Balances at December 29, 1996 .................. $ 632 $ 57,654 $ (33,180) $ (12,274) $ 12,832
======== ======== ========= ========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
F-8
<PAGE>
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION
Foamex L.P., a Delaware limited partnership, is an indirect,
majority-owned subsidiary of Foamex International Inc. ("Foamex
International"). Foamex L.P. is a significant manufacturer and marketer of
flexible polyurethane foam and foam products in North America. Foamex L.P.'s
products include (i) foam for carpet cushion and other carpet products, (ii)
cushioning foams for furniture, bedding, packaging and health care, (iii) foams
for automotive trim and accessories and (iv) technical foams for filtration,
consumer products and packaging.
During 1996, Foamex L.P. sold Perfect Fit Industries, Inc. ("Perfect Fit")
which comprised the home comfort products segment of Foamex L.P. The
consolidated financial statements of Foamex L.P. have been restated for
discontinued operations and include a net loss of $41.8 million (net of $1.2
million income tax benefit) on the disposal of this business segment which
includes provisions for operating losses during the phase-out period. (See Note
3 for further discussion.) In addition, during April 1996 Foamex International
contributed the foam products operations of Foamex Latin America, Inc. ("Foamex
Mexico") to Foamex L.P. The contribution was accounted for in a manner similar
to a pooling of interests since the entities were under common control.
Accordingly, all prior periods presented have been restated to reflect the
results of operations and financial position of Foamex Mexico.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation
The consolidated financial statements include the accounts of Foamex L.P.
and all subsidiaries that Foamex L.P. directly or indirectly controls, either
through majority ownership or otherwise, other than the home comfort products
segment which is accounted for as discontinued operations. Intercompany accounts
and transactions for continuing operations have been eliminated in
consolidation.
The consolidated financial statements have been restated for discontinued
operations. The accompanying notes present amounts related only to continuing
operations.
Fiscal Year
Foamex L.P.'s fiscal year ends on the Sunday closest to the thirty-first
day of December. Fiscal years 1994, 1995 and 1996 were composed of fifty-two
weeks and ended on January 1, 1995, December 31, 1995 and December 29, 1996,
respectively.
Accounting Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reported period. Actual results could differ from those
estimates. (See Notes 4, 9, 10, 15, 16 and 17 and Cost in Excess of Net Assets
Acquired below.)
Revenue Recognition
Revenue from sales is recognized when products are shipped.
Discounts and Billing Adjustments
A reduction in sales revenue is recognized for sales discounts when product
is invoiced or for other billing adjustments when authorized.
Cash and Cash Equivalents
Foamex L.P. considers all highly liquid investments with an original
maturity of three months or less when purchased to be cash equivalents. On
December 29, 1996, cash and cash equivalents included $18.4 million of
repurchase agreements collateralized by U.S. Government securities.
F-9
<PAGE>
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Restricted Cash
As of December 29, 1996, Foamex L.P. had restricted cash of approximately
$12.1 million. This cash was derived from the net sales proceeds relating to the
sale of Perfect Fit and is restricted by Foamex L.P.'s debt agreements. As of
February 26, 1997, Foamex L.P. has used approximately $8.4 million of the
restricted cash to repurchase approximately $8.0 million of outstanding
indebtedness.
Inventories
Inventories are stated at the lower of cost or market. The cost of the
inventories is determined on a first-in, first-out basis.
Property, Plant and Equipment
Property, plant and equipment are stated at cost and are depreciated using
the straight-line method over the estimated useful lives of the assets. The
range of useful lives estimated for buildings is generally twenty to thirty-five
years and the range for machinery, equipment and furnishings is five to twelve
years. Leasehold improvements are amortized over the shorter of the terms of the
respective leases or the estimated useful lives of the leasehold improvements.
Depreciation expense for the years ended 1994, 1995 and 1996 was $16.8 million,
$18.7 million and $17.9 million, respectively. For income tax purposes, Foamex
L.P. uses accelerated depreciation methods.
Cost of maintenance and repairs is charged to expense as incurred. Renewals
and improvements are capitalized. Upon retirement or other disposition of items
of plant and equipment, the cost and related accumulated depreciation are
removed from the accounts and any gain or loss is included in operations.
Debt Issuance Costs
Debt issuance costs consist of amounts incurred in obtaining long-term
financing. These costs are being amortized over the term of the related debt
using the interest method. Accumulated amortization as of December 31, 1995 and
December 29, 1996 was approximately $5.7 million and $7.5 million, respectively.
Cost in Excess of Net Assets Acquired
The excess of the acquisition cost over the fair value of net assets
acquired in business combinations accounted for as purchases is amortized using
the straight-line method over a forty year period. At each balance sheet date
Foamex L.P. evaluates the recoverability of cost in excess of net assets
acquired using certain financial indicators such as historical and future
ability to generate income from operations based on a going concern basis.
Accumulated amortization as of December 31, 1995 and December 29, 1996 was
approximately $9.1 million and $11.6 million, respectively.
Environmental Matters
Environmental expenditures that relate to current operations are expensed
or capitalized as appropriate. Expenditures that relate to an existing condition
caused by past operations, and which do not contribute to current or future
revenue generation, are expensed. Liabilities are recorded when environmental
assessments and/or remedial efforts are probable and the costs can be reasonably
estimated.
Postretirement and Postemployment Benefits
Foamex L.P. accrues postretirement benefits throughout the employees'
active service periods until they attain full eligibility for those benefits.
Also, Foamex L.P. accrues postemployment benefits when it becomes probable that
such benefits will be paid and when sufficient information exists to make
reasonable estimates of the amounts to be paid.
Foreign Currency Accounting
The financial statements of foreign subsidiaries, except in countries
treated as highly inflationary, have been translated into U.S. dollars by using
the year end exchange rates for assets and liabilities and average exchange
F-10
<PAGE>
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
rates for the statements of operations. Currency translation adjustments are
included in other partners' equity (deficit) until the entity is substantially
sold or liquidated. For operations in countries treated as highly inflationary,
certain financial statement amounts are translated at historical exchange
rates, with all other assets and liabilities translated at year end exchange
rates. These translation adjustments are reflected in the results of operations
and are insignificant for all periods presented. Also, foreign currency
transaction gains and losses are insignificant for all periods presented. The
effect of foreign currency exchange rates on cash flows is not material.
Interest Rate Swap Agreement
The differential to be paid or received under an interest rate swap
agreement is recognized as an adjustment to interest and debt issuance expense
in the current period as interest rates change.
Income Taxes
Income taxes are accounted for under the liability method, in which
deferred income taxes are provided for temporary differences between the
financial reporting and income tax basis of assets and liabilities using the
income tax rates, under existing legislation, expected to be in effect at the
date such temporary differences are expected to reverse.
Foamex L.P., as a limited partnership, is not subject to federal income
taxes; therefore no current or deferred provision has been provided for such
taxes. However, Foamex L.P. has provided for the income taxes of certain states
in which it is subject to taxes and for certain subsidiaries which are subject
to federal and state income taxes. The partners will provide for their
respective shares of income or loss in their federal or applicable state income
tax returns. Foamex L.P. has a tax sharing agreement that provides for the
payment of distributions to the partners for amounts that would be required to
be paid if Foamex L.P. was a corporation filing separate tax returns. The
ability of Foamex L.P. to make such distributions is limited by the terms of its
credit agreements and indentures. (See Note 8).
Reclassifications
Certain amounts in the 1994 and 1995 consolidated financial statements have
been reclassified to conform with the current year's presentation.
3. DISCONTINUED OPERATIONS
During 1996, Foamex L.P. finalized the sale of the outstanding common stock
of Perfect Fit, a wholly-owned subsidiary, for an adjusted sale price of
approximately $44.2 million. The sale included all of the net assets of Foamex
L.P.'s home comfort products segment. Actual and estimated transaction expenses
related to the sale totaled approximately $1.5 million. Foamex L.P. has recorded
a net loss on the sale of Perfect Fit of approximately $41.8 million, which
includes the loss on disposal and a net loss of $1.3 million (net of $1.2
million income tax benefit) relating to operating losses during the phase-out
period. Interest and debt issuance expense was allocated to discontinued
operations based on the estimated debt to be retired from the net proceeds of
the sale. A valuation allowance has been provided for the capital loss relating
to the sale of Perfect Fit since future capital gain taxable income is not
likely to be sufficient to recognize the deferred tax asset relating to the
capital loss carryforward.
F-11
<PAGE>
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
3. DISCONTINUED OPERATIONS (continued)
Foamex L.P.'s financial statements have been restated to reflect the
discontinuation of the home comfort products segment. A summary of the
operating results for the discontinued operations is as follows:
<TABLE>
<CAPTION>
1994 1995 1996 1
------- -------- --------
(thousands)
<S> <C> <C> <C>
Net Sales ....................................... $95,381 $ 98,464 $ 50,097
Gross profit .................................... 18,200 14,946 8,065
Income (loss) from operations .................. 4,170 (3,058) 1,123
Interest and debt issuance expense ............ 3,671 4,699 2,384
Other expense ................................. -- -- 348
Income (loss) from discontinued operations before
income taxes ................................. 499 (7,757) (1,609)
Provision (benefit) for income taxes ............ (731) (2,640) (1,379)
Income (loss) from discontinued operations, net of
income taxes ................................. 1,230 (5,117) (230)
</TABLE>
1 Foamex L.P.'s discontinued operations includes the operations of Perfect
Fit through June 1996.
Net assets of discontinued operations (excluding intercompany net assets)
at December 31, 1995 were as follows:
<TABLE>
<CAPTION>
1995
-----------
(thousands)
<S> <C>
Current assets .............................. $31,925
Property, plant and equipment, net ......... 21,672
Cost in excess of assets acquired, net ...... 40,333
Other assets ................................. 2,219
-------
Total assets .............................. 96,149
-------
Current liabilities ........................ 11,076
-------
Total liabilities ........................... 11,076
-------
Net assets ................................. $85,073
=======
</TABLE>
4. RESTRUCTURING AND OTHER CHARGES (CREDITS)
In 1995, Foamex L.P. approved a restructuring plan (the "1995 restructuring
plan") to consolidate thirteen foam production, fabrication or branch locations,
to concentrate resources as a result of industry conditions and to better
position itself to achieve its strategic growth objectives. Foamex L.P. recorded
restructuring and other charges of $39.2 million which was comprised of $35.6
million associated with the consolidation of the foam production, fabrication or
branch locations, $2.2 million associated with the completion of a 1993
restructuring plan and $1.4 million associated with merger and acquisition
activities of Foamex L.P. The components of the $35.6 million restructuring
charge include: $16.7 million for fixed asset writedowns (net of estimated sale
proceeds), $15.1 million for plant closure and operating lease obligations and
$3.8 million for personnel reductions. The $3.8 million cost for personnel
reductions primarily represents severance and employee benefit costs associated
with the elimination of manufacturing and administrative personnel.
In 1996, Foamex L.P. determined to continue to operate one of the
facilities originally identified for closure in the 1995 restructuring plan
because of improved economics and the lack of synergy to be achieved from
relocating the manufacturing process. In addition, Foamex L.P. has approved a
plan to close two facilities that were not originally identified in the 1995
restructuring plan. As a result of these changes to the 1995 restructuring plan
and the favorable termination of certain lease agreements and other matters,
Foamex L.P. recorded a $6.4 million net restructuring credit which included a
restructuring credit of $11.3 million associated with Foamex L.P.'s decision not
to close the facility
F-12
<PAGE>
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
4. RESTRUCTURING AND OTHER CHARGES (CREDITS) (continued)
identified as part of the 1995 restructuring plan and $1.7 million of
restructuring credits relating primarily to the favorable termination of
certain lease agreements and other matters relating to the 1995 restructuring
plan, offset by $6.6 million of restructuring charges relating to the closure
of the two facilities during 1997 (the "1996 restructuring plan").
Generally, the 1995 restructuring plan has been implemented as originally
contemplated. The following table sets forth the components of Foamex L.P.'s
restructuring and other charges:
<TABLE>
<CAPTION>
Asset Plant Closure Personnel
Total Writedowns and Leases Reductions Other
------- ---------- ------------- ---------- -------
(millions)
<S> <C> <C> <C> <C> <C>
1995 restructuring charge ........................ $ 39.2 $ 16.7 $ 15.1 $ 3.8 $ 3.6
Asset writeoff/writedowns ........................ (23.3) (20.9) -- -- (2.4)
Cash spending .................................... (0.4) -- (0.3) (0.1) --
------- ------- ------- ------- -------
Balances at December 31, 1995 .................. 15.5 (4.2) 14.8 3.7 1.2
Cash spending .................................... (9.7) -- (6.6) (2.0) (1.1)
Cash proceeds .................................... 1.0 1.0 -- -- --
1996 restructuring charge ........................ 6.6 2.4 4.1 0.1 --
Restructuring credits ........................... (13.0) (9.7) (2.8) (0.4) (0.1)
Asset adjustment for restructuring credits ...... 8.1 8.7 (0.6) -- --
------- ------- ------- ------- -------
Balances at December 29, 1996 .................. $ 8.5 $ (1.8) $ 8.9 $ 1.4 $ --
======= ======= ======= ======= =======
</TABLE>
As indicated in the table above, the accrued restructuring balance at
December 29, 1996 will be used for payments relating to plant closure and leases
including rundown costs at the facilities. The $1.8 million of asset writedowns
relates to estimated proceeds and is included in noncurrent assets. Foamex L.P.
expects to incur approximately $6.3 million of charges during 1997 with the
remaining $4.0 million to be incurred through 2001. As of December 29, 1996,
Foamex L.P. has terminated approximately 270 employees and notified
approximately 40 employees in the manufacturing and administrative areas of
their impending termination in connection with the 1995 and 1996 restructuring
plans.
5. ACQUISITIONS
In April 1995, Foamex L.P. acquired certain assets and assumed certain
liabilities of manufacturers of synthetic fabrics for the carpet and furniture
industries for aggregate consideration of approximately $8.0 million, including
related fees and expenses of approximately $0.3 million, with an initial cash
payment of $7.2 million. The excess of the purchase price over the estimated
fair value of the net assets acquired was approximately $3.9 million. The
acquisition was accounted for as a purchase and the operations of the acquired
company are included in the consolidated statements of operations and cash flows
from the date of its acquisition. The excess of the purchase price over the
estimated fair value of the net assets acquired is being amortized using the
straight-line method over forty years.
F-13
<PAGE>
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
6. INVENTORIES
Inventories consists of:
<TABLE>
<CAPTION>
December 31, December 29,
1995 1996
------------ ------------
(thousands)
<S> <C> <C>
Raw materials and supplies ...... $ 49,963 $ 61,559
Work in process .................. 14,451 13,453
Finished goods .................. 25,538 27,598
--------- ---------
Total ........................... $ 89,952 $102,610
========= =========
</TABLE>
7. SHORT-TERM BORROWINGS
Short-term borrowings include borrowings outstanding under a line of credit
facility for Foamex Canada Inc. ("Foamex Canada") bearing interest at the bank's
prime rate (4.75% at December 29, 1996) plus 1/2%. The weighted average interest
rates on Foamex Canada's short-term borrowings outstanding for 1994, 1995 and
1996 were 7.3%, 8.0% and 5.9%, respectively. Borrowings under Foamex Canada's
credit facility are due on demand and are collateralized by accounts receivable,
property and inventories of Foamex Canada having an approximate net carrying
value of $17.1 million as of December 29, 1996. The unused amount under this
line of credit totaled $0.7 million as of December 29, 1996.
8. LONG-TERM DEBT
<TABLE>
<CAPTION>
Long-term debt consists of:
December 31, December 29,
1995 1996
------------ ------------
(thousands)
<S> <C> <C>
Unrelated parties:
91/2% Senior secured notes due 2000 .............................. $116,667 $106,793
111/4% Senior notes due 2002 .................................... 150,000 141,400
117/8% Senior subordinated debentures due 2004 (net of unamortized
debt discount of $827 and $769) ................................. 125,173 125,056
117/8% Senior subordinated debentures due 2004, Series B ......... 7,000 7,000
Industrial revenue bonds .......................................... 7,000 7,000
Foamex L.P. term loan (8.54% interest rate as of December 29, 1996) 30,000 11,000
Other ............................................................ 1,087 2,286
-------- --------
Total ............................................................ 436,927 400,535
Less current portion ............................................. 8,511 13,735
-------- --------
Long-term debt--unrelated parties ................................. $428,416 $386,800
======== ========
Related parties:
Subordinated note payable (net of unamortized debt discount of
$1,475 and $1,198) ................................................ $ 5,540 $ 5,817
======== ========
</TABLE>
91/2% Senior Secured Notes due 2000 ("Senior Secured Notes")
The Senior Secured Notes were issued on June 3, 1993 and bear interest at
the rate of 91/2% payable semiannually on each June 1 and December 1. The Senior
Secured Notes mature on June 1, 2000. The Senior Secured Notes are
collateralized by a first-priority lien on substantially all of the assets of
Foamex L.P. except for receivables, real estate and fixtures. The Senior Secured
Notes may be redeemed at the option of Foamex L.P., in whole or in part, at any
time on or after June 1, 1998, initially at 101.583% of their principal amount,
plus accrued interest, and declining to 100% on or after June 1, 1999. The
Senior Secured Notes have been guaranteed, on a senior secured basis by General
Felt Industries, Inc. ("General Felt") and on a senior unsecured basis by Foamex
International. During 1996, Foamex L.P. repurchased $9.9 million of Senior
Secured Notes with the net proceeds from the sale of Perfect Fit (see Note 11).
F-14
<PAGE>
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
8. LONG-TERM DEBT
11 1/4% Senior Notes due 2002 ("Senior Notes")
The Senior Notes bear interest at the rate of 111/4% payable semiannually
on each April 1 and October 1. The Senior Notes mature on October 1, 2002. The
Senior Notes may be redeemed at the option of Foamex L.P., in whole or in part,
at any time on or after October 1, 1997, initially at 104.219% of their
principal amount, plus accrued interest, and declining to 100% on or after
October 1, 2000. In October 1994, Foamex L.P. provided certain real property as
collateral for the Senior Notes, with a net book value of $37.8 million at
December 29, 1996. The Senior Notes have been guaranteed, on a senior basis, by
General Felt and Foamex International. During 1996, Foamex L.P. repurchased $8.6
million of Senior Notes with the net proceeds from the sale of Perfect Fit (see
Note 11).
11 7/8% Senior Subordinated Debentures ("Subordinated Debentures")
The Subordinated Debentures bear interest at the rate of 117/8% payable
semiannually on each April 1 and October 1. The Subordinated Debentures mature
on October 1, 2004. The Subordinated Debentures may be redeemed at the option of
Foamex L.P., in whole or in part, at any time on or after October 1, 1997,
initially at 105.938% of their principal amount, plus accrued interest, and
declining to 100% on or after October 1, 2002. The Subordinated Debentures are
subordinated in right of payment to all senior indebtedness, including the
Senior Secured Notes and the Senior Notes. The Subordinated Debentures have been
guaranteed, on a senior subordinated basis, by General Felt and Foamex
International. During 1996, Foamex L.P. repurchased $0.1 million of Subordinated
Debentures with the net proceeds from the sale of Perfect Fit (see Note 11).
11 7/8% Senior Subordinated Debentures, Series B ("Series B Debentures")
The Series B Debentures were issued July 30, 1993, by Foamex L.P. in an
exchange offer to holders of senior subordinated debentures issued in connection
with the acquisition of General Felt on March 23, 1993. The Series B Debentures
have terms substantially similar to the Subordinated Debentures, except that
holders of the Series B Debentures are entitled to receive proceeds from an
asset sale only if any proceeds remain after an offer to repurchase has been
made to the holders of the Subordinated Debentures. The Series B Debentures have
been guaranteed on a senior subordinated basis by General Felt.
Industrial Revenue Bonds ("IRBs")
Two bond issues in the principal amount of $1.0 million and $6.0 million,
maturing in 2005 and 2013, respectively, are collateralized by certain
properties which have an approximate net carrying value of $11.3 million at
December 29, 1996 and letters of credit approximating $7.3 million. The IRBs
bear interest at a variable rate with options available to Foamex L.P. to
convert to a fixed rate. The interest rates on the IRBs were 4.85% and 4.0% at
December 29, 1996 for the $6.0 million and $1.0 million bond issues,
respectively. The interest rate on the $6.0 million bond issue varies weekly
based on an interest rate that is indicative of current bidside yields on high
quality short-term, tax-exempt obligations, or if such interest rate is not
available, 70.0% of the interest rate for thirteen week United States Treasury
Bills. The maximum interest rate for either of the IRBs is 15.0% per annum. At
the time of a conversion to a fixed interest rate and upon appropriate notice,
the IRBs are redeemable at the option of the bondholders.
Term and Revolving Loans
Foamex L.P. has a credit agreement (the "Foamex L.P. Credit Facility") with
a group of banks that provide for loans of up to $85.0 million of which up to
$40.0 million was available as a term loan payable in twenty equal quarterly
installments commencing October 1994 and up to $45.0 million is available under
a revolving line of credit which expires in June 1999. In 1994, Foamex L.P. and
General Felt entered into a $40.0 million term loan under the Foamex L.P. Credit
Facility; no further term loan borrowings are available thereunder. During 1996,
Foamex L.P. and General Felt used $12.0 million of net proceeds from the Perfect
Fit sale to repay term loan
F-15
<PAGE>
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
8. LONG-TERM DEBT (continued)
borrowings. Borrowings under the Foamex L.P. Credit Facility are collateralized
by the accounts receivable of Foamex L.P. and General Felt. Pursuant to the
terms of the Foamex L.P. Credit Facility, borrowed funds will bear interest at
a floating rate equal to 1.0% per annum plus the highest of (i) the base rate
of The Bank of Nova Scotia, as in effect from time to time, (ii) a rate that
is, generally, 0.5% per annum plus a fluctuating rate generally equal to the
rate on three month certificates of deposit, subject to certain adjustments,
plus a fluctuating rate generally equal to the annual assessment rate paid by
The Bank of Nova Scotia to the Federal Deposit Insurance Corporation or (iii)
0.5% per annum plus the federal funds rate in effect from time to time. At the
option of Foamex L.P., portions of the outstanding loan under the Foamex L.P.
Credit Facility will be convertible into Eurodollar rate loans bearing interest
at a rate generally equal to 3.0% per annum above the average LIBOR rate of
Citibank, N.A. and The Bank of Nova Scotia. As of December 29, 1996, there was
approximately $11.7 million in letters of credit outstanding under the Foamex
L.P. Credit Facility. As of December 29, 1996, there was unused availability of
approximately $33.3 million under the Foamex L.P. Credit Facility.
Subordinated Note Payable
This note payable was issued to John Rallis ("Rallis"), the Chief Operating
Officer of Foamex International, on May 6, 1993 by Foamex L.P. in connection
with the acquisition of Great Western Foam Products Corporation and certain
related entities and assets (collectively, "Great Western"). The note bears
interest at a maximum rate of 6% per annum and the principal amount is payable
in three equal annual installments beginning May 6, 1999.
Other
As of December 29, 1996, other debt is comprised primarily of capital
lease obligations and borrowings by Foamex Mexico.
Interest Rate Swap Agreements
Foamex L.P. enters into interest rate swaps to lower funding costs and/or
to manage interest costs and exposure to changing interest rates. Foamex L.P.
does not hold or issue financial instruments for trading purposes. Foamex L.P.
has an interest rate swap agreement, as amended, with a notional amount of
$150.0 million through December 2001. Under the swap agreement, Foamex L.P. has
made variable payments based on LIBOR through December 1996 and is obligated to
make fixed payments at 5.30% per annum for the twelve months ended in December
1997 and variable payments based on LIBOR for the remainder of the agreement, in
exchange for fixed payments by the swap partner at 5.81% per annum through
December 1996, and 6.50% per annum for the remainder of the agreement, payable
semiannually in arrears. The swap partner has the ability to terminate the swap
agreement after the December 1997 payment if the LIBOR rate Foamex L.P. is to
pay for any period thereafter is equal to or less than 4.50% per annum. Interest
expense will be subject to fluctuations in LIBOR during the term of the swap
agreement except during 1997. Foamex L.P. is exposed to credit loss in the event
of nonperformance by the swap partner; however, the occurrence of this event is
not anticipated.
Also, Foamex L.P. has an interest rate swap agreement, as amended, for a
notional amount of $150.0 million through December 2001. Under this swap
agreement, Foamex L.P. has made variable payments based on LIBOR with a cap of
5.50% per annum and a floor of 4.75% per annum for the six months ended in June
1995, variable payments based on LIBOR with a floor of 4.75% per annum for the
six months ended in December 1995, fixed payments at a rate of 5.81% per annum
for the twelve months ended in December 1996 and is obligated to make fixed
payments at a rate of 5.30% per annum for the twelve months in December 1997 and
variable payments based on LIBOR for the remainder of the agreement, in exchange
for variable payments by the swap partner at the rate of LIBOR plus 0.80% per
annum for the six months ended in June 1995, LIBOR plus 0.72% per annum for the
six months ended in December 1995, LIBOR plus 2.45% per annum for the six months
ended in June 1996, LIBOR plus 2.39% per annum for the six months ended in
December 1996 and fixed payments at 6.50% per annum for the remainder of the
term of the agreement, payable semiannually in arrears. The swap partner has the
ability to terminate the swap agreement after the December 1997 payment if the
LIBOR rate Foamex L.P. is to pay for any
F-16
<PAGE>
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
8. LONG-TERM DEBT (continued)
period thereafter is equal to or less than 4.50% per annum. Foamex L.P. is
exposed to credit loss in the event of nonperformance by the swap partner;
however, the occurrence of this event is not anticipated. Interest expense will
be subject to fluctuations in LIBOR during the term of the swap agreement
except during 1997. The effect of the two interest rate swaps described above
was a favorable adjustment to interest expense of $3.0 million, $1.4 million
and $3.7 million for 1994, 1995 and 1996, respectively.
Debt Restrictions and Covenants
The indentures, credit agreement and other indebtedness agreements contain
various covenants, including restrictions on payments of distributions by Foamex
L.P. to its partners, the incurrence of additional indebtedness, the sale of
assets, mergers and consolidations and transactions with affiliates. In
addition, certain agreements contain a provision that, in the event of a defined
change of control, the indebtedness must be repaid, in certain cases at the
option of the holder. Also, Foamex L.P. is required under certain of these
agreements to maintain specified financial ratios of which the most restrictive
is the maintenance of net worth and interest coverage ratios, as defined. Under
the most restrictive of the distribution restrictions, approximately $0.7
million was available to be paid by Foamex L.P. to its partners at December 29,
1996.
As of December 29, 1996, Foamex L.P. was in compliance with the covenants
of the indentures, credit agreements and other indebtedness agreements and
expects to be in compliance with these covenants for the foreseeable future.
Future Obligations on Long-Term Debt
Scheduled maturities of long-term debt are shown below:
<TABLE>
<CAPTION>
Year Ended Long-Term Debt
---------- --------------
(thousands)
<S> <C>
1997 ........................... $ 13,490
1998 ........................... 4,000
1999 ........................... 5,338
2000 ........................... 106,631
2001 ........................... 2,339
Thereafter ..................... 275,735
--------
Total ........................ 407,533
Less unamortized discount ...... 1,967
--------
Total ........................... $405,566
========
</TABLE>
In addition, Foamex L.P. has approximately $0.8 million of total capital
lease obligations that are payable in 1997 through 2000 in annual amounts of
approximately $0.2 million.
9. EMPLOYEE BENEFIT PLANS
Defined Benefit Pension Plans
Foamex L.P. maintains noncontributory defined benefit pension plans for
salaried and certain hourly employees. The salaried plan provides benefits that
are based principally on years of credited service and level of compensation.
The hourly plans provide benefits that are based principally on stated amounts
for each year of credited service.
F-17
<PAGE>
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
9. EMPLOYEE BENEFIT PLANS (continued)
Net periodic pension cost included the following components:
<TABLE>
<CAPTION>
1994 1995 1996
-------- -------- --------
(thousands)
<S> <C> <C> <C>
Service cost ........................ $ 2,452 $ 2,087 $ 2,471
Interest cost ..................... 3,541 3,742 3,997
Actual return on plan assets ...... 624 (5,682) (8,841)
Net amortization and deferral ...... (4,649) 1,807 4,643
-------- -------- --------
Total .............................. $ 1,968 $ 1,954 $ 2,270
======== ======== ========
</TABLE>
Foamex L.P.'s funding policy is to contribute annually an amount that both
satisfies the minimum funding requirements of the Employee Retirement Income
Security Act of 1974 and does not exceed the full funding limitations of the
Internal Revenue Code of 1986, as amended (the "Code"). Plan investments consist
primarily of corporate equity and debt securities, mutual life insurance funds
and cash equivalents. During 1996, the discount rate was adjusted to 7.50%. The
following table sets forth the funded status of Foamex L.P.'s underfunded plans
and the amounts recognized in the accompanying consolidated balance sheets as of
December 31, 1995 and December 29, 1996:
<TABLE>
<CAPTION>
December 31, December 29,
1995 1996
------------ ------------
(thousands)
<S> <C> <C>
Actuarial present value of accumulated benefit obligations:
Vested benefits ............................................. $ 52,762 $ 55,336
Nonvested benefits .......................................... 1,916 2,137
--------- ---------
Accumulated benefit obligations .............................. $ 54,678 $ 57,473
========= =========
Total projected benefit obligations ........................ $ 55,810 $ 58,775
Fair value of plan assets .................................... 44,441 53,734
--------- ---------
Projected benefit obligations in excess of plan assets ...... (11,369) (5,041)
Unrecognized net loss from past experience difference from that
assumed and effect of changes in assumptions ............... 6,394 1,099
Additional minimum liability ................................. (5,265) (2,694)
--------- ---------
Accrued pension cost ....................................... $ (10,240) $ (6,636)
========= =========
</TABLE>
Significant assumptions used in determining the plans' funded status are as
follows:
<TABLE>
<CAPTION>
December 31, December 29,
1995 1996
------------ ------------
<S> <C> <C>
Expected long-term rates of return on plan assets ............... 9.00% 9.50%
Discount rates on projected benefit obligations .................. 7.25% 7.50%
Rates of increase in compensation levels (where applicable) ...... 4.00% 4.00%
</TABLE>
Defined Contribution Plan
Foamex L.P. maintains a defined contribution plan which is qualified under
Section 401(k) of the Code and is available for eligible employees who elect to
participate in the plan. Employee contributions are voluntary and subject to
certain limitations as imposed by the Code. During 1995 and 1996, Foamex L.P.
provided contributions amounting to a 25% match of employees' contributions up
to 4% of eligible compensation. Foamex L.P. also provides an additional 25%
match of employees' contributions up to 4% of eligible compensation made to a
fund which invests in Foamex International common stock. In addition, Foamex
L.P. may make discretionary contributions amounting to a 25% match of employees'
contributions up to 4% of eligible compensation. Prior to 1995, employer
contributions were discretionary and provided a 50% match of employees'
contributions up to 3%
F-18
<PAGE>
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
9. EMPLOYEE BENEFIT PLANS (continued)
of eligible compensation. The expense for these contributions for 1994, 1995
and 1996 was approximately $0.4 million, $0.7 million and $0.8 million,
respectively.
Postretirement Benefits
In addition to providing pension benefits, Foamex L.P. provides
postretirement health care and life insurance for eligible employees. During
1995, changes were made to postretirement benefits offered to certain employees
which resulted in a curtailment loss of $0.6 million. During 1996, certain
employees accepted an early retirement program resulting in a special
termination loss of $0.6 million. These plans are unfunded and Foamex L.P.
retains the right, subject to existing agreements, to modify or eliminate these
benefits.
The components of 1994, 1995 and 1996 expense for postretirement benefits
are as follows:
<TABLE>
<CAPTION>
1994 1995 1996
---- ----- -----
(thousands)
<S> <C> <C> <C>
Service costs for benefits earned ............ $172 $ 24 $ 12
Interest cost on liability ..................... 192 83 67
Net amortization and deferral .................. 134 (13) (53)
Special termination/curtailment loss ......... -- 619 576
---- ----- -----
Net periodic postretirement benefit cost ...... $498 $ 713 $ 602
==== ===== =====
</TABLE>
The accumulated postretirement benefit obligation at December 31, 1995 and
December 29, 1996 resulted in an unfunded obligation of $1.6 million and $2.1
million, respectively.
A 10% and 9% annual rate of increase in the per capita costs of covered
health care benefits was assumed for each of 1995 and 1996, respectively. This
rate was assumed to gradually decrease to 5% by the year 2000. Increasing the
weighted average assumed health care cost trend rates by one percentage point
would have an insignificant impact on the accumulated postretirement benefit
obligation and service and interest cost. The discount rate used was 7.25% and
7.50% as of December 31, 1995 and December 29, 1996, respectively.
Postemployment Benefits
Foamex L.P. provides certain postemployment benefits to former or inactive
employees and their dependents during the time period following employment but
before retirement. At December 31, 1995 and December 29, 1996, Foamex L.P.'s
liability for postemployment benefits was insignificant for each period.
Other
In December 1994, Foamex L.P. changed its method of compensating certain
employees for vacation which increased income from operations by $4.3 million
for 1994.
10. INCOME TAXES
Income (loss) from continuing operations before provision for income taxes
consists of the following:
<TABLE>
<CAPTION>
1994 1995 1996
------- --------- -------
(thousands)
<S> <C> <C> <C>
United States .............................. $42,610 $ (45,738) $58,277
Foreign .................................... 1,926 (983) 3,086
------- --------- -------
Income (loss) from continuing operations before
provision (benefit) for income taxes ...... $44,536 $ (46,721) $61,363
======= ========= =======
</TABLE>
F-19
<PAGE>
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
10. INCOME TAXES (continued)
The components of the total consolidated provision (benefit) for income
taxes are summarized as follows:
<TABLE>
<CAPTION>
1994 1995 1996
------ -------- --------
(thousands)
<S> <C> <C> <C>
Continuing operations ........................... $6,525 $ 1,405 $ 7,702
Discontinued operations ........................ (731) (2,640) (2,606)
------ -------- --------
Total consolidated provision (benefit) for income
taxes ....................................... $5,794 $ (1,235) $ 5,096
====== ======== ========
</TABLE>
The total consolidated provision (benefit) for income taxes is summarized
as follows:
<TABLE>
<CAPTION>
1994 1995 1996
------ -------- ------
(thousands)
<S> <C> <C> <C>
Current:
Federal ....................................... $ -- $ -- $ 220
State .......................................... 172 266 686
Foreign ....................................... 833 480 786
------ -------- ------
Total current ................................. 1,005 746 1,692
------ -------- ------
Deferred:
Federal ....................................... 3,598 (1,424) 1,665
State .......................................... 1,212 (268) 1,248
Foreign ....................................... (21) (289) 491
------ -------- ------
Total deferred ................................. 4,789 (1,981) 3,404
------ -------- ------
Total consolidated provision (benefit) for income
taxes ....................................... $5,794 $ (1,235) $5,096
====== ======== ======
</TABLE>
The tax effects of the temporary differences that give rise to significant
deferred tax assets and liabilities are:
<TABLE>
<CAPTION>
December 31, December 29,
1995 1996
------------ ------------
(thousands)
<S> <C> <C>
Deferred tax assets:
Inventory basis differences ........................... $ 861 $ 415
Employee benefit accruals .............................. 976 714
Allowances and contingent liabilities .................. 2,427 2,548
Restructuring and plant closing accruals ............... 7,644 3,632
Other ................................................... 77 221
Net operating loss carryforwards ........................ 8,975 5,154
Capital loss carryforwards .............................. -- 14,193
Valuation allowance for deferred tax assets ............ (13,473) (15,988)
--------- ---------
Deferred tax assets .................................... 7,487 10,889
--------- ---------
Deferred tax liabilities:
Basis difference in property, plant and equipment ...... 8,507 7,644
Other ................................................... 374 1,188
--------- ---------
Deferred tax liabilities .............................. 8,881 8,832
--------- ---------
Net deferred tax assets (liabilities) .................. $ (1,394) $ 2,057
========= =========
</TABLE>
F-20
<PAGE>
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
10. INCOME TAXES (continued)
Foamex L.P. has determined that taxable capital gains in the foreseeable
future for a subsidiary that files a separate federal income tax return will
likely not be sufficient to recognize the deferred tax asset associated with the
capital loss carryforward of that subsidiary. Accordingly, a valuation allowance
has been provided for the deferred tax asset associated with the capital loss
carryforward and certain other deferred tax assets. During 1996, the valuation
allowance for deferred tax assets increased by $2.5 million which included a
$14.2 million increase for the capital loss carryforward, offset by $6.9 million
decrease due to reversal of General Felt preacquisition temporary differences
and $4.8 million for reversal of General Felt postacquisition temporary
differences which is reflected in the consolidated statement of operations. The
$6.9 million reversal of preacquisition temporary differences was used to reduce
cost in excess of assets acquired. As of December 29, 1996, approximately $1.8
million of deferred tax assets are related to preacquisition activities and if
utilized will further reduce cost in excess of assets acquired. At December 29,
1996, General Felt has $14.7 million of regular tax net operating loss
carryforwards for federal income tax purposes expiring from 2003 to 2010 of
which $7.0 million was acquired in 1993 and is subject to limitations. In
addition, General Felt has $40.6 million of capital loss carryforwards that
expire in 2001.
A reconciliation of the statutory federal income tax rate to the effective
income tax rate on continuing operations is as follows:
<TABLE>
<CAPTION>
1994 1995 1996
--------- --------- ---------
(thousands)
<S> <C> <C> <C>
Statutory income taxes .............................. $ 15,588 $ (16,352) $ 21,477
State income taxes, net of federal .................. 900 266 1,288
Permanent difference on partnership income ......... (11,009) 12,233 (11,714)
Limitation on the utilization of tax benefits ...... -- 4,929 --
Valuation allowance ................................. (452) -- (4,823)
Cost in excess of assets acquired .................. 525 554 551
Other ............................................. 973 (225) 923
--------- --------- ---------
Total ............................................. $ 6,525 $ 1,405 $ 7,702
========= ========= =========
</TABLE>
11. EXTRAORDINARY LOSS
During 1996, Foamex L.P. used $31.3 million of the net proceeds from the
sale of Perfect Fit to extinguish debt of $30.6 million and redemption premiums
of $0.6 million. Foamex L.P. wrote off $1.2 million of debt issuance costs
associated with the early extinguishment of debt and incurred transaction costs
of $0.1 million. The early extinguishment of debt resulted in an extraordinary
loss of $1.9 million.
12. COMMITMENTS AND CONTINGENCIES
Operating Leases
Foamex L.P. is obligated under various noncancelable lease agreements for
rental of facilities, vehicles and other equipment. Many of the leases contain
renewal options with varying terms and escalation clauses that provide for
increased rentals based upon increases in the Consumer Price Index, real estate
taxes and lessors' operating expenses. Total minimum rental commitments
(excluding commitments accrued as part of the 1995 and 1996 restructuring plans)
required under operating leases at December 29, 1996 are:
F-21
<PAGE>
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
12. COMMITMENTS AND CONTINGENCIES (continued)
<TABLE>
<CAPTION>
Third Party Related Party
Leases Leases
----------- -------------
(thousands)
<S> <C> <C>
1997 ............ $ 7,874 $ 1,767
1998 ............ 6,164 1,823
1999 ............ 4,866 1,823
2000 ............ 3,812 1,823
2001 ............ 2,883 2,265
Thereafter ...... 4,122 5,800
------- -------
Total ......... $29,721 $15,301
======= =======
</TABLE>
Rental expense charged to operations under operating leases approximated
$9.7 million, $10.1 million and $9.6 million for 1994, 1995 and 1996,
respectively. Substantially all such rental expense represented the minimum
rental payments under operating leases. In addition, Foamex L.P. incurred rental
expense of approximately $3.9 million, $3.5 million and $1.7 million for 1994,
1995 and 1996, respectively, under leases with related parties.
13. RELATED PARTY TRANSACTIONS AND BALANCES
Foamex L.P. regularly enters into transactions with its affiliates in the
ordinary course of business.
During April 1996, Foamex International contributed the foam products
operations of Foamex Mexico to Foamex L.P. The contribution was accounted for in
a manner similar to a pooling of interests since the entities were under common
control. Accordingly, all prior periods presented have been restated to reflect
the results of operations and financial position of Foamex Mexico. The
restatement of prior periods was insignificant to the consolidated financial
statements.
During 1996, Foamex L.P. chartered an aircraft (which is owned by a
wholly-owned subsidiary of Foamex International) through a third party and
incurred costs of approximately $1.4 million.
In December 1995, Foamex L.P. entered into a $2.0 million promissory note
with Foamex International. The note bears interest at a rate per annum equal to
six months LIBOR plus 4.0% and is payable semiannually in June and December. The
note matures in December 1997. The note has been classified in the other
component of partners' equity (deficit).
On July 7, 1996, Trace International Holdings, Inc. ("Trace Holdings")
issued to Foamex L.P. a promissory note for $4.4 million in principal amount
plus accrued interest of $0.4 million, which is an extension of a promissory
note of Trace Holdings that was due in July 1996. The promissory note is due and
payable on demand or, if no demand is made, July 7, 1997, and bears interest at
9.5%, payable quarterly in arrears commencing October 1, 1996. The promissory
note is included in other partners' equity (deficit).
In connection with the acquisition of Great Western, Foamex L.P. issued a
promissory note to Rallis (see Note 8) and entered into lease agreements (see
Note 12) with Rallis and an affiliate of Rallis, for the rental of former Great
Western manufacturing facilities located in Orange, Ontario and Hayward,
California and a warehouse facility in Tigard, Oregon. Foamex L.P. has the
option to purchase each of these properties from Rallis or such affiliate.
Foamex L.P. was party to a lease agreement for an airplane with Trace
Aviation Corp. ("Trace Aviation"), a subsidiary of Trace Holdings. During 1994
and 1995, Foamex L.P. paid Trace Aviation $2.7 million and $1.6 million,
respectively, pursuant to the lease agreement. The lease agreement also provided
for the use of the airplane by Trace Holdings with remuneration to Foamex L.P.
based on actual usage of the plane. During 1994 and 1995, Trace Holdings paid to
Foamex L.P. $0.5 million and $0.6 million, respectively, pursuant to the
agreement. During August 1995, Foamex Aviation Inc. ("Aviation"), a wholly-owned
subsidiary of Foamex International, acquired the aircraft
F-22
<PAGE>
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
13. RELATED PARTY TRANSACTIONS AND BALANCES (continued)
from Trace Holdings for $3.0 million in cash and the assumption of $11.7
million of related debt. In connection with the acquisition of the aircraft,
the Foamex L.P. lease and other agreements were terminated.
Foamex L.P. has a management service agreement with Trace Foam Company,
Inc. ("Trace Foam"), a wholly-owned subsidiary of Trace Holdings, pursuant to
which Trace Foam provides general managerial services of a financial, technical,
legal, commercial, administrative and/or advisory nature to Foamex L.P. for an
annual fee of $1.75 million and reimbursement of expenses incurred. Trace
Holdings rents approximately 5,900 square feet of general, executive, and
administrative office space in New York, New York from Foamex L.P. on
substantially the same terms as Foamex L.P. leases such space from a third party
lessor.
During 1994 and 1995, Foamex L.P. purchased approximately $11.9 million and
$2.5 million, respectively, of scrap material from Recticel Foam Corporation
("RFC"), a former partner of Foamex L.P. and whose chairman is a director of
Foamex International, under a minimum annual volume agreement which expired in
June 1995.
On June 28, 1994, Foamex L.P. purchased an $87.9 million principal amount
note due 2006 from its 98% limited partner Foamex-JPS Automotive L.P. ("FJPS")
for $35.3 million (the "FJPS Note"). The FJPS Note will not pay interest until
July 2000. Instead, principal will accrete (from the initial purchase price of
$35.3 million) on a daily basis and compound semiannually at the rate of 15.50%
per annum through June 1996; 15.75% per annum thereafter through June 1997; and
16.00% per annum thereafter through June 2000. Interest will be due semiannually
in cash at 16.00% per annum from July 2000 through the maturity date. In
December 1996 in exchange for certain waivers and amendment of the FJPS Note,
FJPS repaid $18.4 million of the FJPS Note and a waiver payment of $0.2 million
using a portion of the proceeds from the sale of its partnership interest in JPS
Automotive L.P. FJPS has the right to reborrow such amount, subject to
limitations in the Foamex L.P. Credit Facility, solely for the purpose of
funding a purchase price adjustment payment, if any, in connection with the JPS
Automotive L.P. sale. The FJPS Note has been classified in partners' equity
(deficit) and the accreted principal of $16.3 million for the period from June
28, 1994 to December 29, 1996 has been included in the FJPS Note. The FJPS Note
may be redeemed at the option of FJPS, in whole or in part, at any time at the
redemption prices (expressed as percentages of the Accreted Value (as defined)
if on or prior to July 1, 2000, and thereafter, expressed as percentages of the
principal amount) initially equal to 108% for the twelve-month period commencing
July 1, 1994 declining to 100% on or after July 1, 2005. If FJPS does not repay
the indebtedness with at least 85% of the net proceeds of any Equity Offering
(as defined), the rate at which the FJPS Note accretes and the interest rate on
the FJPS Note will increase.
In June 1994, Foamex L.P. also entered into a supply agreement with Foamex
International (the "Supply Agreement"). Pursuant to the terms of the Supply
Agreement, at the option of Foamex L.P., Foamex International will purchase
certain raw materials which are necessary for the manufacture of Foamex L.P.'s
products, and resell such materials to Foamex L.P. at a price equal to net cost
plus reasonable out of pocket expenses. Management believes that the terms of
the Supply Agreement are no less favorable than those which Foamex L.P. could
have obtained from an unaffiliated third party. During 1995 and 1996, Foamex
L.P. made $105.1 million and $129.7 million, respectively, of purchases relating
to the Supply Agreement.
As of December 31, 1995 and December 29, 1996, due to related parties
amounted to $11.7 million and $8.8 million, respectively, and represents the net
amounts payable to Foamex International and subsidiaries for purchases under the
Supply Agreement and other matters.
Foamex L.P. made charitable contributions to the Trace International
Holdings, Inc. Foundation of approximately $0.2 million in each of 1994, 1995
and 1996.
On December 11, 1996, Foamex L.P. entered into a Tax Distribution Advance
Agreement with FJPS, pursuant to which FJPS is entitled to obtain advances, in
the aggregate not to exceed $17.0 million, against future distributions under
Foamex L.P.'s tax distribution agreement. As of December 29, 1996, there were no
advances under this agreement.
F-23
<PAGE>
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
14. PARTNERS' EQUITY (DEFICIT)
Foamex L.P. was formed as a Delaware limited partnership on September 5,
1990, and initially capitalized on October 2, 1990, in accordance with a limited
partnership agreement as amended through June 1994. In connection with a June
1994 amendment, the ownership of Foamex L.P. changed as follows: (i) FMXI, a
wholly-owned subsidiary of Foamex International, bifurcated its 4% managing
general partnership interest into a 1% managing general partnership interest and
a 3% limited partnership interest and distributed the limited partnership
interest to Foamex International, (ii) Foamex International contributed its 95%
limited partnership interest and the 3% limited partnership interest received
from FMXI to FJPS and withdrew as a partner of Foamex L.P. and (iii) FJPS was
admitted as a partner of Foamex L.P. with a 98% limited partnership interest.
The partners also consented to the pledge by FJPS of a 43.44% limited
partnership interest in Foamex L.P. to secure the repayment of certain of FJPS's
indebtedness incurred in connection with the acquisition of JPS Automotive L.P.
by Foamex International. As of December 31, 1995 and December 29, 1996, the
partnership interests of FMXI, Inc. ("FMXI"), Trace Foam, and FJPS were 1.0%,
1.0% and 98.0%, respectively.
Cash distributions for 1994, 1995 and 1996 were paid (received) as follows:
<TABLE>
<CAPTION>
1994 1995 1996
------ ------ ------
(thousands)
<S> <C> <C> <C>
FMXI ..................... $ 59 $ 12 $ (35)
Trace Foam ............... 29 -- 45
Foamex International ...... 653 -- --
FJPS ..................... 2,516 2,367 3,477
------- ------- ------
Total ..................... $3,257 $2,379 $3,487
======= ======= ======
</TABLE>
Other
The other component of partners' equity (deficit) consists of the
following:
<TABLE>
<CAPTION>
January 1, December 31, December 29,
1995 1995 1996
---------- ------------ ------------
(thousands)
<S> <C> <C> <C>
Foreign currency translation adjustment ......... $ 3,930 $ 3,448 $ 3,494
Additional pension liability .................. 1,489 4,779 2,407
Note receivable from Trace Holdings ............ 3,000 4,373 4,373
Note receivable from Foamex International ...... -- 2,000 2,000
------- ------- -------
$ 8,419 $14,600 $12,274
======= ======= =======
</TABLE>
15. ENVIRONMENTAL MATTERS
Foamex L.P. is subject to extensive and changing federal, state, local and
foreign environmental laws and regulations, including those relating to the use,
handling, storage, discharge and disposal of hazardous substances and the
remediation of environmental contamination, and as a result, is from time to
time involved in administrative and judicial proceedings and inquiries relating
to environmental matters. During 1996, expenditures in connection with Foamex
L.P.'s compliance with federal, state, local and foreign environmental laws and
regulations did not have a material adverse effect on Foamex L.P.'s operations,
financial position, capital expenditures or competitive position. As of December
29, 1996, Foamex L.P. has environmental accruals of approximately $4.1 million
for environmental matters. In addition, as of December 29, 1996 Foamex L.P. has
net receivables of approximately $0.9 million relating to indemnification for
environmental liabilities, net of an allowance of approximately $1.0 million
relating to potential disagreements regarding the scope of the indemnification.
Foamex L.P. believes that realization of the net receivables established for
indemnification is probable.
The Clean Air Act Amendments of 1990 (the "1990 CAA Amendments") provide
for the establishment of federal emission standards for hazardous air pollutants
including methylene chloride and TDI, principal raw
F-24
<PAGE>
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
15. ENVIRONMENTAL MATTERS (continued)
materials used in the manufacturing of foam. Foamex L.P. completely eliminated
the use of chlorofluorocarbons and methylchloroform by the end of 1995. The
1990 CAA Amendments also may result in the imposition of more stringent
standards regulating air emissions from the use of these chemicals by
polyurethane foam manufacturers, but these standards have not yet been
promulgated.
Foamex L.P. has reported to appropriate state authorities that it has found
soil and groundwater contamination in excess of state standards at four
facilities and soil contamination in excess of state standards at three other
facilities. Foamex L.P. has begun remediation and is conducting further
investigations into the extent of the contamination at these facilities and,
accordingly, the extent of the remediation that may ultimately be required. The
actual cost and the timetable of any such remediation cannot be predicted with
any degree of certainty at this time. As of December 29, 1996, Foamex L.P. has
environmental accruals of approximately $3.2 million for the remaining potential
remediation costs for these facilities based on engineering estimates.
Federal regulations require that by the end of 1998 all underground storage
tanks ("USTs") be removed or upgraded in all states to meet applicable
standards. Foamex L.P. has six USTs that will require removal or permanent
in-place closure by the end of 1998. Due to the age of these tanks, leakage may
have occurred resulting in soil and possibly groundwater contamination. Foamex
L.P. has accrued $0.4 million for the estimated removal and remediation, if any,
associated with these USTs. However, the full extent of contamination and,
accordingly, the actual cost of such remediation cannot be predicted with any
degree of certainty at this time. Foamex L.P. believes that its USTs do not pose
a significant risk of environmental liability because of Foamex L.P.'s
monitoring practices for USTs and conditional approval for the permanent
in-place closure for certain USTs. However, there can be no assurance that such
USTs will not result in significant environmental liability in the future.
Foamex L.P. has been designated as a Potentially Responsible Party ("PRP")
by the United States Environmental Protection Agency (the "EPA") with respect to
thirteen sites, with an estimated total liability to Foamex L.P. for the
thirteen sites of less than approximately $0.5 million. Estimates of total
cleanup costs and fractional allocations of liability are generally provided by
the EPA or the committee of PRP's with respect to the specified site. In each
case, the participation of Foamex L.P. is considered to be immaterial.
Although it is possible that new information or future developments could
require Foamex L.P. to reassess its potential exposure relating to all pending
environmental matters, including those described herein, management believes
that, based upon all currently available information, the resolution of such
environmental matters will not have a material adverse effect on Foamex L.P.'s
operations, financial position, capital expenditures or competitive position.
The possibility exists, however, that new environmental legislation and/or
environmental regulations may be adopted, or other environmental conditions may
be found to exist, that may require expenditures not currently anticipated and
that may be material.
16. LITIGATION
As of February 26, 1997, Foamex L.P. and Trace Holdings were two of
multiple defendants in actions filed on behalf of approximately 5,000 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. Five of
these cases seek to allege claims on behalf of all breast implant recipients or
other allegedly affected parties, but no class has been approved or certified by
the court. In addition, three cases have been filed alleging claims on behalf of
approximately 700 residents of Australia, New Zealand, England, and Ireland.
During 1995, Foamex L.P. and Trace Holdings 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. In addition, two of the cases filed on
behalf of 903 foreign plaintiffs were dismissed on the grounds that the cases
could not be brought in the United States courts. This decision is subject to
appeal. Foamex L.P. believes that the number of suits and claimants may
increase.
F-25
<PAGE>
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
16. LITIGATION (continued)
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 Foamex L.P. or Trace
Holdings. Neither Foamex L.P. nor Trace Holdings recommended, authorized or
approved the use of its foam for these purposes. While it is not feasible to
predict or determine the outcome of these actions, based on management's
present assessment of the merits of pending claims, after consultation with the
general counsel of Trace Holdings, and without taking into account potential
indemnity from the manufacturers of polyurethane covered breast implants,
management believes that the disposition of matters that are pending or that
may reasonably be anticipated to be asserted should not have a material adverse
effect on either Foamex L.P.'s or Trace Holdings' consolidated financial
position or results of operations. In addition, Foamex L.P. is also indemnified
by Trace Holdings for any such liabilities relating to foam manufactured prior
to October 1990. Although Trace Holdings has paid Foamex L.P.'s litigation
expenses to date pursuant to such indemnification and management believes Trace
Holdings likely will be in a position to continue to pay such expenses, there
can be no absolute assurance that Trace Holdings will be able to provide such
indemnification. Based on information available at this time with respect to
the potential liability, and without taking into account the indemnification
provided by Trace Holdings and the coverage provided by Trace Holdings' and
Foamex L.P.'s liability insurance, Foamex L.P. believes that the proceedings
should not ultimately result in any liability that would have a material
adverse effect on the financial position or results of operations of Foamex
L.P. If management's assessment of Foamex L.P.'s liability with respect to
these actions is incorrect, such actions could have a material adverse effect
on Foamex L.P.
Foamex L.P. is party to various other lawsuits, both as defendant and
plaintiff, arising in the normal course of business. It is the opinion of
management that the disposition of these lawsuits will not individually or in
the aggregate, have a material adverse effect on the financial position or
results of operations of Foamex L.P. If management's assessment of Foamex L.P.'s
liability with respect to these actions is incorrect, such actions could have a
material adverse effect on Foamex L.P.'s consolidated financial position.
17. FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK
Interest Rate Swap Agreements
Foamex L.P. has two interest rate swap agreements involving the exchange of
fixed and floating interest payment obligations without the exchange of the
underlying principal amounts. At December 29, 1996, the total notional principal
amount of these interest rate swap agreements was $300.0 million. The
counterparty to these agreements is a large international financial institution.
The interest rate swap agreements subject Foamex L.P. to financial risk that
will vary during the life of these agreements in relation to market interest
rates.
Concentration of Credit Risk
Financial instruments which potentially subject Foamex L.P. to significant
concentrations of credit risk consist primarily of cash and cash equivalents and
trade accounts receivable. Foamex L.P. maintains cash and cash equivalents and
certain other financial instruments with various large financial institutions.
Foamex L.P.'s periodic evaluation of these financial institutions is considered
in Foamex L.P.'s investment strategy.
Foamex L.P. sells foam products to the automotive, carpet, cushioning and
other industries. Foamex L.P. performs ongoing credit evaluations of its
customers and generally does not require collateral. Foamex L.P. maintains
allowance accounts for potential credit losses and such losses have been within
management's expectations.
Disclosure about Fair Value of Financial Instruments
The following disclosures of the estimated fair value amounts have been
determined based on Foamex L.P.'s assessment of available market information and
appropriate valuation methodologies.
F-26
<PAGE>
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
17. FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK (continued)
The estimated fair values of Foamex L.P.'s financial instruments as of
December 29, 1996 are as follows:
<TABLE>
<CAPTION>
Carrying Amount Fair Value
--------------- ----------
(thousands)
<S> <C> <C>
Liabilities:
Long-term debt ............ $406,352 $427,862
======== ========
Interest rate swaps ...... $ -- $ 3,160
======== ========
</TABLE>
Carrying amounts reported in the consolidated balance sheet for cash and
cash equivalents, accounts receivable, accounts payable, accrued liabilities and
short-term borrowings approximates fair value due to the short-term nature of
these instruments.
The fair value of long-term debt is estimated using quoted market prices,
where available, or discounted cash flows.
The fair value of interest rate swaps is based on the amount at which
Foamex L.P. would pay if the swaps were settled, as determined by estimates
obtained from dealers.
Fair value estimates are made at a specific point in time, based on
relevant market information about the financial instruments. These estimates are
subjective in nature and involve uncertainties and matters of significant
judgment and, therefore, cannot be determined with precision. Changes in
assumptions could significantly affect the estimates.
18. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
1994 1995 1996
------- ------- -------
(thousands)
<S> <C> <C> <C>
Cash paid for interest ............ $42,734 $47,282 $43,378
======= ======= =======
Cash paid for income taxes ......... $ 1,757 $ 634 $ 1,533
======= ======= =======
Noncash capital expenditures ...... $ -- $ 378 $ 165
======= ======= =======
</TABLE>
F-27
<PAGE>
FOAMEX L.P. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
(thousands)
<TABLE>
<CAPTION>
December 29, June 29,
1996 1997
ASSETS: ------------ ----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents .............................. $ 20,968 $ 4,508
Accounts receivable, net .............................. 125,847 136,211
Inventories .......................................... 102,610 106,723
Other current assets ................................. 39,495 45,483
--------- ----------
Total current assets ................................. 288,920 292,925
PROPERTY, PLANT AND EQUIPMENT, NET ..................... 182,427 190,631
COST IN EXCESS OF ASSETS ACQUIRED, NET .................. 83,991 82,732
DEBT ISSUANCE COSTS, NET .............................. 14,902 18,428
OTHER ASSETS .......................................... 15,917 15,978
--------- ----------
TOTAL ASSETS .......................................... $ 586,157 $ 600,694
========= ==========
LIABILITIES AND PARTNERS' EQUITY (DEFICIT):
CURRENT LIABILITIES:
Short-term borrowings ................................. $ 3,692 $ 3,960
Current portion of long-term debt ..................... 13,735 8,351
Accounts payable ....................................... 75,621 67,659
Accounts payable to related parties .................. 8,803 12,347
Accrued interest ....................................... 8,871 3,172
Other accrued liabilities .............................. 41,108 47,588
--------- ----------
Total current liabilities ........................... 151,830 143,077
--------- ----------
LONG-TERM DEBT .......................................... 392,617 537,951
--------- ----------
OTHER LIABILITIES ....................................... 28,878 37,883
--------- ----------
COMMITMENTS AND CONTINGENCIES -- --
PARTNERS' EQUITY (DEFICIT):
Partners' capital accounts ........................... 58,286 (107,774)
Note receivable from partner ........................... (33,180) --
Other ................................................ (12,274) (10,443)
--------- ----------
Total partners' equity (deficit) ..................... 12,832 (118,217)
--------- ----------
TOTAL LIABILITIES AND PARTNERS' EQUITY (DEFICIT) ...... $ 586,157 $ 600,694
========= ==========
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
F-28
<PAGE>
FOAMEX L.P. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
(thousands)
<TABLE>
<CAPTION>
26 Week Periods Ended
-------------------------
June 30, June 29,
1996 1997
--------- ---------
<S> <C> <C>
NET SALES .............................. $ 459,578 $ 469,007
COST OF GOODS SOLD ..................... 385,380 381,430
--------- ---------
GROSS PROFIT ........................... 74,198 87,577
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES ............... 27,127 31,331
--------- ---------
INCOME FROM OPERATIONS .................. 47,071 56,246
INTEREST AND DEBT ISSUANCE EXPENSE ...... 20,724 21,509
OTHER INCOME, NET ........................ 537 1,122
--------- ---------
INCOME FROM CONTINUING OPERATIONS
BEFORE PROVISION FOR INCOME TAXES ...... 26,884 35,859
PROVISION FOR INCOME TAXES ............... 3,718 3,259
--------- ---------
INCOME FROM CONTINUING OPERATIONS ...... 23,166 32,600
LOSS FROM DISCONTINUED OPERATIONS ...... (39,527) --
EXTRAORDINARY LOSS ON EARLY
EXTINGUISHMENT OF DEBT .................. -- (45,538)
--------- ---------
NET INCOME (LOSS) ........................ $ (16,361) $ (12,938)
========= =========
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
F-29
<PAGE>
FOAMEX L.P. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(thousands)
<TABLE>
<CAPTION>
26 Week Periods Ended
--------------------------
June 30, June 29,
1996 1997
--------- ----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) ............................................. $ (16,361) $ (12,938)
Adjustments to reconcile net income to net cash provided by
operating activities: .......................................
Depreciation and amortization .............................. 10,711 10,301
Amortization of debt issuance costs and debt discount ...... 1,433 1,370
Extraordinary loss on extinguishment of debt ............... -- 45,538
Loss from discontinued operations ........................... 39,527 --
Other operating activities ................................. (597) 798
Changes in operating assets and liabilities .................. (19,815) (47,256)
--------- ----------
Net cash provided by (used for) continuing operations ...... 14,898 (2,187)
Net cash used for discontinued operations .................. (1,017) --
--------- ----------
Net cash provided by (used for) operating activities ...... 13,881 (2,187)
--------- ----------
INVESTING ACTIVITIES:
Capital expenditures ....................................... (7,798) (16,369)
Purchase of FJPS senior secured discount debentures ......... -- (105,829)
Decrease in restricted cash ................................. -- 12,143
Other investing activities ................................. 1,399 35
Discontinued operations investing activities ............... (900) --
--------- ----------
Net cash used for investing activities ..................... (7,299) (110,020)
--------- ----------
FINANCING ACTIVITIES:
Net proceeds from short-term borrowings ..................... 1,976 256
Proceeds from revolving loans .............................. -- 49,000
Proceeds from long-term debt ................................. -- 453,500
Repayment of long-term debt ................................. (4,272) (363,392)
Premiums and costs associated with debt extinguishment ...... -- (22,918)
Debt issuance costs .......................................... -- (14,746)
Distributions to partners .................................... (2,478) (5,949)
Other financing activities ................................. (8) (4)
--------- ----------
Net cash provided by (used for) financing activities ...... (4,782) 95,747
--------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS ................................................ 1,800 (16,460)
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD ....................................... 638 20,968
--------- ----------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD ............................................. $ 2,438 $ 4,508
========= ==========
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
F-30
<PAGE>
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION
Foamex L.P.'s condensed consolidated balance sheet as of December 29, 1996
has been condensed from the audited consolidated balance sheet at that date. The
condensed consolidated balance sheet as of June 29, 1997 and the condensed
consolidated statements of operations and the condensed consolidated statements
of cash flows for the twenty-six week periods ended June 30, 1996 and June 29,
1997 have been prepared by Foamex L.P. and subsidiaries and have not been
audited by Foamex L.P.'s independent accountants. Also, the condensed
consolidated statement of operations for and the condensed consolidated
statement of cash flows for the twenty-six week period ended June 30, 1996 have
been restated for discontinued operations (see Note 2 below). In the opinion of
management, all adjustments, consisting only of normal recurring adjustments,
considered necessary for a fair presentation of the consolidated financial
position, results of operations and cash flows have been included.
On June 12, 1997, Foamex International Inc. ("Foamex International")
substantially completed a refinancing plan (the "Refinancing Plan") that
included the refinancing of certain long-term indebtedness to reduce Foamex
International's interest expense and improve financing flexibility. In
connection with the Refinancing Plan, Foamex L.P. purchased approximately $342.3
million of aggregate principal amount of its public debt and approximately
$116.7 million of aggregate principal amount of Foamex-JPS Automotive L.P.'s
("FJPS") senior secured discount debentures due 2004 (the "Discount Debentures")
and repaid $5.2 million of term loan borrowings under its old credit facility.
Foamex L.P. incurred an extraordinary loss on the early extinguishment of debt
associated with the Refinancing Plan of approximately $44.5 million. (See Note 5
below for further discussion.) The Refinancing Plan was funded by $347.0 million
of borrowings under a new $480.0 million credit facility (the "New Credit
Facility") and the net proceeds from the issuance of $150.0 million of 97/8%
senior subordinated notes due 2007.
In addition, Foamex L.P. has called for redemption on October 1, 1997
approximately $26.0 million of the approximately $30.0 million of its
outstanding public debt that was not tendered as part of the Refinancing Plan.
The redemption is expected to be funded from the New Credit Facility. In
connection with this redemption, Foamex L.P. is expected to incur an
extraordinary loss on the early extinguishment of debt of approximately $2.6
million in the fourth quarter of 1997.
Upon consummation of the Refinancing Plan on June 12, 1997, FJPS was merged
into Foamex International, which thus became a 98% limited partner of Foamex
L.P. FMXI, Inc. ("FMXI") is a 1% managing general partner of Foamex L.P. and
Trace Foam Company, Inc. ("Trace Foam") is a 1% non-managing general partner of
Foamex L.P. FMXI is a wholly-owned subsidiary of Foamex International.
Certain information and note disclosures normally included in the financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted in accordance with the rules and regulations of
the Securities and Exchange Commission. These condensed consolidated financial
statements should be read in conjunction with Foamex L.P.'s 1996 consolidated
financial statements and notes thereto as set forth elsewhere in this
Prospectus.
2. DISCONTINUED OPERATIONS
During 1996, Foamex L.P. sold the outstanding common stock of Perfect Fit
Industries, Inc. ("Perfect Fit"), a wholly-owned subsidiary, for an adjusted
sale price of approximately $44.2 million. The sale included the net assets of
Foamex L.P.'s home comfort products business segment.
F-31
<PAGE>
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
2. DISCONTINUED OPERATIONS (continued)
Foamex L.P.'s condensed consolidated financial statements have been
restated to reflect the discontinuation of the home comfort products business
segment. A summary of the operating results for the discontinued operations is
as follows:
<TABLE>
<CAPTION>
Week Period Ended
26 June 30, 1996
-----------------
(thousands)
-----------------
<S> <C>
Net sales ................................................... $ 50,097
Gross profit ................................................ 8,065
Income (loss) from operations .............................. 1,123
Interest and debt issuance expense ........................... 2,384
Other expense ................................................ 348
Loss on disposal of discontinued operations .................. (39,297)
Loss from discontinued operations before (benefit)
from income taxes .......................................... (40,906)
Benefit for income taxes .................................... (1,379)
Loss from discontinued operations, net of income taxes ...... (39,527)
</TABLE>
3. INVENTORIES
The components of inventories consist of:
<TABLE>
<CAPTION>
December 29, June 29,
1996 1997
----------- --------
(thousands)
<S> <C> <C>
Raw materials and supplies ...... $ 61,559 $ 59,070
Work-in-process .................. 13,453 17,305
Finished goods .................. 27,598 30,348
-------- --------
Total ........................... $102,610 $106,723
======== ========
</TABLE>
4. RELATED PARTY TRANSACTIONS
In connection with the Refinancing Plan, Foamex L.P. purchased
approximately $116.7 million of aggregate principal amount of Discount
Debentures for approximately $105.8 million including transaction costs of
approximately $0.8 million. Foamex L.P. subsequently distributed the Discount
Debentures to FJPS and FMXI.
On June 12, 1997, Foamex L.P. distributed its $2.0 million aggregate
principal amount promissory note due from Foamex International to FJPS and FMXI.
Also on June 12, 1997, Foamex L.P. distributed its $56.2 million aggregate
principal amount note, as amended, due 2006 (the "FJPS Note") from FJPS with an
accreted value as of June 12, 1997 of $35.6 million to FJPS and FMXI. The
accretion of the original issue discount of $3.5 million and $2.4 million for
the twenty-six week periods ended June 30, 1996 and June 29, 1997, respectively,
was reflected as a direct increase in the FJPS Note and partners' capital
account, and thereby excluded from the condensed consolidated statements of
operations.
In connection with the Refinancing Plan, Foamex L.P. made a cash
distribution of approximately $1.5 million to Trace Foam as a result of Foamex
L.P.'s distribution to FJPS and FMXI of the Discount Debentures, the FJPS Note
and the $2.0 million aggregate principal amount promissory note due from Foamex
International.
On June 12, 1997, a promissory note issued to Foamex L.P. by Trace
International Holdings, Inc. ("Trace Holdings") was amended. The amended
promissory note is an extension of a promissory note of Trace Holdings
F-32
<PAGE>
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4. RELATED PARTY TRANSACTIONS (continued)
that was due in July 1997. The aggregate principal amount of the amended
promissory note was increased to approximately $4.9 million and the maturity of
the promissory note was extended. The promissory note is due and payable on
demand or, if no demand is made, on July 7, 2001, and bears interest at 23/8%
plus three-month LIBOR, as defined, per annum payable quarterly in arrears. The
promissory note is included in the other component of partners' equity
(deficit).
In connection with the Refinancing Plan, on July 1, 1997 Trace
International borrowed an additional $5.0 million on terms and conditions
substantially similar to the existing promissory note, and the tax distribution
advance agreement was amended to increase the permitted advances to Foamex
International from $17.0 million to $25.0 million.
During June 1997, Foamex L.P. and Trace Foam amended their management
services agreement to increase the annual fee from $1.75 million to $3.0
million, plus reimbursement of expenses incurred.
Foamex L.P. has a supply agreement (the "Supply Agreement") with Foamex
International pursuant to which, at the option of Foamex L.P., Foamex
International will purchase certain raw materials, which are necessary for the
manufacture of Foamex L.P.'s products, and resell such materials to Foamex L.P.
at a price equal to net cost plus reasonable out of pocket expenses. Management
believes that the terms of the Supply Agreement are no less favorable than those
which Foamex L.P. could have obtained from an unaffiliated third party. During
the twenty-six week periods ended June 30, 1996 and June 29, 1997, Foamex L.P.
purchased approximately $54.1 million and $63.0 million, respectively, of raw
materials under the Supply Agreement. As of December 29, 1996 and June 29,1997,
Foamex L.P. had accounts payable to Foamex International of approximately $8.8
million and $12.3 million, respectively, associated with the Supply Agreement.
Foamex L.P. chartered an aircraft (which is owned by a wholly-owned
subsidiary of Foamex International) through a third party and incurred costs of
approximately $0.5 million and $0.6 million for the twenty-six week periods
ended June 30, 1996 and June 29, 1997, respectively.
5. LONG-TERM DEBT
Long-term debt consists of:
<TABLE>
<CAPTION>
December 29, June 29,
1996 1997
------------ --------
(thousands)
<S> <C> <C>
97/8% senior subordinated notes due 20071 ..................... $ -- $150,000
Foamex L.P. term loan facilities (7.95% interest rate at
June 29, 1997)2 ................................................ -- 298,000
Foamex L.P. revolving loan (7.65% interest rate at
June 29, 1997)3 ................................................ -- 49,000
91/2% senior secured notes due 20004 ........................... 106,793 4,523
111/4% senior notes due 20024 ................................. 141,400 5,825
117/8% senior subordinated debentures due 2004
(net of unamortized debt discount of $769 and $119)4 ............ 125,056 20,224
117/8% senior subordinated debentures due 2004, Series B5 ...... 7,000 45
Industrial revenue bonds6 ....................................... 7,000 7,000
Foamex L.P. term loan (8.54% interest rate as of
December 29, 1996)6 .......................................... 11,000 --
</TABLE>
F-33
<PAGE>
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5. LONG-TERM DEBT (continued)
<TABLE>
<CAPTION>
December 29, June 29,
1996 1997
------------ ---------
<S> <C> <C>
Subordinated note (net of debt discount of $1,198 and $1,047) 6 5,817 5,968
Other .......................................................... 2,286 5,717
-------- --------
406,352 546,302
Less current portion ........................................... 13,735 8,351
-------- --------
Long-term debt ................................................. $392,617 $537,951
======== ========
</TABLE>
- ----------
(1) Debt of Foamex L.P. and Foamex Capital Corporation ("FCC") (together the
"Issuers") and guaranteed by General Felt Industries, Inc. ("General
Felt"), Foamex Fibers, Inc. ("Foamex Fibers") and all other future domestic
subsidiaries of the Issuers.
(2) Debt of Foamex L.P. and guaranteed by Foamex International, General Felt
and Foamex Fibers.
(3) Debt of Foamex L.P. and General Felt and guaranteed by Foamex International
and Foamex Fibers.
(4) Debt of the Issuers and guaranteed by Foamex International and General
Felt.
(5) Debt of the Issuers and guaranteed by General Felt.
(6) Debt of Foamex L.P.
Term Loans and Revolving Loan
On June 12, 1997, Foamex L.P. entered into the New Credit Facility with a
group of banks that provides for term loans of up to $330.0 million which expire
from June 2003 to June 2006 and up to $150.0 million under a revolving line of
credit which expires in June 2003. In connection with the Refinancing Plan,
Foamex L.P. entered into term loans of $298.0 million and borrowed $49.0 million
under the revolving line of credit.
The term loans are comprised of a (i) term A loan ("Term A") which provides
up to $120.0 million of borrowings of which Foamex L.P. borrowed $88.0 million
in connection with the Refinancing Plan, (ii) term B loan ("Term B") of $110.0
million and (iii) term C loan ("Term C") of $100.0 million. The remaining $32.0
million available under the Term A is restricted and can only be used by Foamex
L.P. to retire its public debt not tendered in connection with the Refinancing
Plan with such unused availability terminating June 15, 1998.
Borrowings under the New Credit Facility are collateralized by
substantially all of the assets of Foamex L.P., General Felt and Foamex Fibers
on a pari passu basis with the 91/2% senior secured notes due 2000, the 111/4%
senior notes due 2002 and the industrial revenue bonds (collectively, the
"Notes"); however, the rights of the holders of the applicable issue of Notes to
receive payment upon the disposition of the collateral securing such issue of
Notes has been preserved.
Pursuant to the terms of the New Credit Facility, borrowed funds will bear
interest at a floating rate equal to an applicable margin, as defined, plus the
higher of (i) the base rate of The Bank of Nova Scotia, in effect from time to
time, or (ii) a rate that is equal to 0.5% per annum plus the federal funds rate
in effect from time to time. The applicable margin is determined by a
calculation of the total net debt to EBDAIT ratio, as defined, and can range
from no margin up to 1.125% per annum for Term A and revolving loans, from
0.875% per annum to 1.375% per annum for Term B and from 1.125% per annum to
1.625% per annum for Term C. At the option of Foamex L.P., portions of the
outstanding loans under the New Credit Facility are convertible into LIBOR based
loans which bear interest at a floating rate equal to an applicable margin for
LIBOR based loans, as defined, plus the average LIBOR, as defined. The
applicable margin for LIBOR based loans is a rate that will generally equal the
applicable margin (discussed above) plus 1.0% per annum.
F-34
<PAGE>
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5. LONG-TERM DEBT (continued)
9 7/8% Senior Subordinated Notes due 2007 ("Senior Subordinated Notes")
The Senior Subordinated Notes were issued by Foamex L.P. and FCC in a
private placement under Rule 144A of the Securities Act of 1933, as amended, on
June 12, 1997 in connection with the Refinancing Plan. The Senior Subordinated
Notes bear interest at the rate of 9 7/8% per annum payable semiannually on each
June 15 and December 15, commencing December 15, 1997. The Senior Subordinated
Notes mature on June 15, 2007. The Senior Subordinated Notes may be redeemed at
the option of Foamex L.P., in whole or in part, at any time on or after June 15,
2002, initially at 104.938% of their principal amount, plus accrued interest and
liquidated damages, as defined, if any, thereon to the date of redemption and
declining to 100.0% on or after June 15, 2005. In addition, at any time prior to
June 15, 2000, Foamex L.P. may on one or more occasions redeem up to 35.0% of
the initially outstanding principal amount of the Senior Subordinated Notes at a
redemption price equal to 109.875% of the principal amount, plus accrued
interest and liquidated damages, if any, thereon to the date of redemption with
the cash proceeds of one or more Public Equity Offerings, as defined; provided,
that, in each case, at least 65% of the initially outstanding aggregate
principal amount of Notes remains outstanding immediately after the occurrence
of such redemption. Upon the occurrence of a change of control, as defined, each
holder of Senior Subordinated Notes will have the right to require Foamex L.P.
to repurchase the Senior Subordinated Notes at a price equal to 101.0% of the
principal amount, plus accrued interest and liquidated damages, if any, to the
date of redemption. The Senior Subordinated Notes are subordinated in right of
payment to all senior indebtedness and are pari passu in right of payment to two
issues of senior subordinated debentures due 2004 and the subordinated note. The
Senior Subordinated Notes contain certain covenants that limit, among other
things, the ability of Foamex L.P. (i) to pay distributions or redeem
partnership interests, (ii) to make certain restrictive payments or investments,
(iii) to incur additional indebtedness or issue Preferred Equity Interest, as
defined, (iv) to merge, consolidate or sell all or substantially all of its
assets, or (vi) to enter into certain transactions with affiliates or related
persons. The Senior Subordinated Notes are guaranteed by General Felt and Foamex
Fibers and all other future domestic subsidiaries of the Issuers.
Foamex L.P. and FCC have filed a registration statement relating to an
exchange offer in which Foamex L.P. and FCC will offer to exchange the Senior
Subordinated Notes issued in the private placement for new notes. The terms of
the new notes will be substantially identical in all respects (including
principal amount, interest rate, maturity and ranking) to the terms of the
Senior Subordinated Notes, except that the new notes will be transferable by
holders thereof without further registration under the Securities Act of 1933,
as amended (except in the case of Senior Subordinated Notes held by affiliates
of the Issuers and for certain other holders), and are not subject to any
covenant regarding registration under the Securities Act of 1933, as amended.
The exchange offer is expected to be consummated during the third quarter of
1997.
Principal payments on Foamex L.P.'s long-term debt for the remainder of
1997 and for the next five years are as follows: 1997--$4.2 million; 1998--$11.9
million; 1999--$20.9 million; 2000--$31.3 million; 2001--$31.3 million;
2002--$32.7 million; and thereafter--$415.2 million. Such principal payment
obligation may be accelerated in whole or in part in connection with certain
asset sales, upon certain transactions constituting a "change of control" as
defined under the applicable debt instrument, upon certain debt or equity
offerings, as a result of certain excess cash flows, and upon the occurrence of
an "event of default" as defined under the applicable debt instrument. See
"Description of Certain Debt Instruments-- New Credit Facility."
Early Extinguishment of Debt--Refinancing Plan
In connection with the Refinancing Plan, Foamex L.P. incurred an
extraordinary loss on the early extinguishment of debt of approximately $44.5
million. The extraordinary loss is comprised of approximately $20.2 million for
premium and consent fee payments, approximately $12.6 million for the write-off
of debt issuance costs and debt discount, approximately $8.2 million for the
loss associated with the effective termination and amendment of the interest
rate swap agreements and approximately $3.5 million of professional fees and
other costs. In connection with the Refinancing Plan, Foamex L.P. repaid $5.2
million in term loan borrowings under its old credit facility and purchased
approximately $459.0 million of aggregate principal amount of public debt
comprised of:
F-35
<PAGE>
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5. LONG-TERM DEBT (continued)
[bullet] $99.8 million of aggregate principal amount of its 9 1/2% senior
secured notes due 2000 for an aggregate consideration of 104.193% of
principal plus accrued interest, comprised of a tender price of
102.193% and a consent fee of 2.0%;
[bullet] $130.1 million of aggregate principal amount of its 11 1/4% senior
notes due 2002 for an aggregate consideration of 105.709% of principal
plus accrued interest, comprised of a tender price of 103.709% and a
consent fee of 2.0%;
[bullet] $105.5 million of aggregate principal amount of its 11 7/8% senior
subordinated debentures due 2004 for an aggregate consideration of
107.586% of principal plus accrued interest, comprised of a tender
price of 105.586% and a consent fee of 2.0%;
[bullet] $6.9 million of aggregate principal amount of its 11 7/8% senior
subordinated debentures, series B due 2004 for an aggregate
consideration of 107.586% of principal plus accrued interest,
comprised of a tender price of 105.586% and a consent fee of 2.0%; and
[bullet] $116.7 million of aggregate principal amount of the Discount
Debentures for an aggregate consideration of 90.0% of principal amount,
which represents approximately 121.9% of the accreted book value as of
June 12, 1997, comprised of a tender price of 88.0% of principal amount
and a consent fee of 2.0%.
In addition, Foamex L.P. has called for redemption on October 1, 1997
approximately $26.0 million of the approximately $30.0 million of its
outstanding public debt that was not tendered as part of the Refinancing Plan.
The redemption is expected to be funded with borrowings under the New Credit
Facility. In connection with the redemption, Foamex L.P. is expected to incur an
extraordinary loss on the early extinguishment of debt of approximately $2.6
million in the fourth quarter of 1997.
Early Extinguishment of Debt--Other
In addition, during 1997 Foamex L.P. incurred extraordinary losses of
approximately $1.0 million associated with the early extinguishment of
approximately $11.8 million of long-term debt funded with approximately $12.1
million of the remaining net proceeds from the sale of Perfect Fit. The
extraordinary loss is comprised of approximately $0.4 million of premium
payments and approximately $0.6 million for the write-off of debt issuance
costs. The long-term debt was comprised of:
[bullet] $2.5 million of aggregate principal amount of its 9 1/2% senior
secured notes due 2000.
[bullet] $5.5 million of aggregate principal amount of its 11 1/4% senior
notes due 2002.
[bullet] Bank term loan borrowings of $3.8 million under its old credit
facility.
Interest Rate Swaps
Foamex L.P. uses derivative financial instruments to manage interest
expense. All derivative financial instruments are classified as "held for
purposes other than trading". Foamex L.P. does not use derivatives for
speculative purposes.
Interest rate swap agreements are used to manage interest expense by
changing the interest rate characteristics of certain debt instruments to
approximate current market conditions. The amended interest rate swap agreement
matures in June 2007 which is consistent with the underlying debt. The
differential paid or received on interest rate swap agreements is recognized on
an accrual basis as an adjustment to interest and debt issuance expense. Gains
and losses on terminated interest rate swap agreements are amortized and
reflected in interest and debt issuance expense over the remaining term of the
underlying debt.
In connection with the Refinancing Plan, Foamex L.P.'s existing interest
rate swap agreements with a notional amount of $300.0 million were considered to
be effectively terminated since the underlying debt was extinguished.
F-36
<PAGE>
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5. LONG-TERM DEBT (continued)
These interest rate swap agreements had an estimated fair value liability of
$8.2 million at the date of the Refinancing Plan which is included in the
extraordinary loss on the early extinguishment of debt. In lieu of a cash
payment for the estimated fair value of the existing interest rate swap
agreements, Foamex L.P. entered into an amendment of the existing interest rate
swap agreements resulting in one interest rate swap agreement with a notional
amount of $150.0 million through June 2007. Accordingly, the $8.2 million fair
value liability has been recorded as a deferred credit which will be amortized
as a reduction in interest and debt issuance expense on a straight-line basis
over the life of the amended interest rate swap agreement. Under the amended
interest rate swap agreement, Foamex L.P. is obligated to make fixed payments
of 5.75% per annum through December 1997 and variable payments based on the
higher of LIBOR at the beginning of the period or the end of the period for the
remainder of the agreement, in exchange for fixed payments by the swap partner
at 6.44% per annum for the life of the agreement, payable semiannually in
arrears. The amended interest rate swap agreement can be terminated by either
party in June 2002, and annually thereafter, for a cash settlement based on the
fair market value of the amended interest rate swap agreement. Interest and
debt issuance expense is subject to fluctuations in LIBOR during the term of
the swap agreement except during 1997. Foamex L.P. is exposed to credit loss in
the event of nonperformance by the swap partner; however, the occurrence of
this event is not anticipated. The effect of the interest rate swaps described
above was a favorable adjustment to interest and debt issuance expense of $1.9
million and $1.7 million for the twenty-six week periods ended June 30, 1996
and June 29, 1997, respectively.
6. ENVIRONMENTAL MATTERS
As of June 29, 1997, Foamex L.P. has accruals of approximately $4.2 million
for environmental matters. In addition, as of June 29, 1997, Foamex L.P. has net
receivables of approximately $1.0 million relating to indemnification for
environmental liabilities, net of an allowance of approximately $1.0 million
relating to potential disagreements regarding the scope of the indemnification.
Foamex L.P. believes that realization of the net receivables established for
indemnification is probable.
On May 5, 1997, there was an accidental chemical spill at one of Foamex
L.P.'s manufacturing facilities that was contained on site. Foamex L.P. is in
the process of disposing of the contaminated soil which is estimated to cost
approximately $0.4 million. The actual cost and the timetable for the clean-up
of the site cannot be predicted with any degree of certainty at this time;
therefore, there can be no assurance that the clean-up of the site will not
result in a more significant environmental liability in the future.
Foamex L.P. has reported to appropriate state authorities that it has found
soil and groundwater contamination in excess of state standards at four
additional facilities and soil contamination in excess of state standards at
three other facilities. Foamex L.P. has begun remediation and is conducting
further investigations into the extent of the contamination at these facilities
and, accordingly, the extent of the remediation that may ultimately be required.
The actual cost and the timetable of any such remediation cannot be predicted
with any degree of certainty at this time. As of June 29, 1997, Foamex L.P. has
environmental accruals of approximately $3.0 million for the remaining potential
remediation costs for these facilities based on engineering estimates.
Federal regulations require that by 1998 all underground storage tanks
("USTs") be removed or upgraded in most states to meet applicable standards.
Foamex L.P. has six USTs that will require removal or permanent in-place closure
by the end of 1998. Due to the age of these tanks, leakage may have occurred
resulting in soil and possibly groundwater contamination. Foamex L.P. has
accrued approximately $0.3 million for the estimated removal and remediation, if
any, associated with the USTs. However, the full extent of contamination and,
accordingly, the actual cost of such remediation cannot be predicted with any
degree of certainty at this time. Foamex L.P. believes that its USTs do not pose
a significant risk of environmental liability because of Foamex L.P.'s
monitoring practices for USTs and conditional approval for permanent in-place
closure for certain USTs. However, there can be no assurance that such USTs will
not result in significant environmental liability in the future.
F-37
<PAGE>
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
6. ENVIRONMENTAL MATTERS (continued)
Foamex L.P. has been designated as a Potentially Responsible Party ("PRP")
by the United States Environmental Protection Agency (the "EPA") with respect to
thirteen sites, with an estimated total liability to Foamex L.P. for the
thirteen sites of less than approximately $0.5 million. Estimates of total
cleanup costs and fractional allocations of liability are generally provided by
the EPA or the committee of PRP's with respect to the specified site. In each
case, the participation of Foamex L.P. is considered to be immaterial.
Although it is possible that new information or future developments could
require Foamex L.P. to reassess its potential exposure relating to all pending
environmental matters, management believes that, based upon all currently
available information, the resolution of such environmental matters will not
have a material adverse effect on Foamex L.P.'s operations, financial position,
capital expenditures or competitive position. The possibility exists, however,
that new environmental legislation and/or environmental regulations may be
adopted, or other environmental conditions may be found to exist, that may
require expenditures not currently anticipated and that may be material.
7. LITIGATION
As of August 8, 1997, Foamex L.P. and Trace Holdings were two of multiple
defendants in actions filed on behalf of approximately 5,000 recipients of
breast implants in various United States federal and state courts and one
Canadian provincial court. Some of these actions allege substantial damages, but
most of these actions allege unspecified damages for personal injuries of
various types. Three of these cases seek to allege claims on behalf of all
breast implant recipients or other allegedly affected parties, but no class has
been approved or certified by the court. In addition, three cases have been
filed alleging claims on behalf of approximately 700 residents of Australia and
New Zealand. Foamex L.P. believes that the number of suits and claimants may
increase.
During 1995, Foamex L.P. and Trace Holdings were granted summary judgments
and dismissed as defendants from all cases in the federal courts of the United
States and the state courts of California. Appeals for these decisions were
withdrawn and the decisions are final.
Although breast implants do not contain foam, certain silicone gel implants
were produced using a polyurethane foam covering fabricated by independent
distributors or fabricators from bulk foam purchased from Foamex L.P. or Trace
Holdings. Neither Foamex L.P. nor Trace Holdings recommended, authorized or
approved the use of its foam for these purposes. Foamex L.P. is indemnified by
Trace Holdings for any such liabilities relating to foam manufactured prior to
the capitalization of Foamex L.P. in October 1990. Although Trace Holdings has
paid Foamex L.P.'s litigation expenses to date pursuant to such indemnification,
and Foamex L.P. believes Trace Holdings will likely be in a position to continue
to pay such expenses, there can be no assurance that Trace Holdings will be able
to continue to provide such indemnification. While it is not feasible to predict
or determine the outcome of these actions, based on present assessment of the
merits of pending claims, after consultation with the general counsel of Trace
Holdings, and without taking into account the indemnification provided by Trace
Holdings, the coverage provided by Trace Holdings' and Foamex L.P.'s liability
insurance, and the potential indemnity from the manufacturers of polyurethane
covered breast implants, Foamex L.P. believes that the disposition of matters
that are pending or that may reasonably be anticipated to be asserted should not
have a material adverse effect on either Foamex L.P.'s or Trace Holdings'
consolidated financial position or results of operations. If Foamex L.P.'s
assessment of Foamex L.P.'s liability with respect to these actions is
incorrect, such actions could have a material adverse effect on Foamex L.P.
Foamex L.P. is party to various other lawsuits, both as defendant and
plaintiff, arising in the normal course of business. It is the opinion of
management that the disposition of these lawsuits will not individually or in
the aggregate, have a material adverse effect on the financial position or
results of operations of Foamex L.P. If management's assessment of Foamex L.P.'s
ability with respect to these actions is incorrect, such actions could have a
material adverse effect on Foamex L.P's consolidated financial position.
F-38
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors
Foamex Capital Corporation
Wilmington, Delaware
We have audited the accompanying balance sheets of Foamex Capital Corporation
("FCC") (a wholly-owned subsidiary of Foamex L.P.) as of December 31, 1995 and
December 29, 1996. These balance sheets are the responsibility of FCC's
management. Our responsibility is to express an opinion on these balance sheets
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the balance sheets are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the balance sheet. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall balance sheet presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the balance sheets referred to above present fairly, in all
material respects, the financial position of FCC at December 31, 1995 and
December 29, 1996, in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
February 26, 1997
F-39
<PAGE>
FOAMEX CAPITAL CORPORATION
(A Wholly-Owned Subsidiary of Foamex L.P.)
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, December 29,
1995 1996
------------ ------------
<S> <C> <C>
ASSETS
CASH ................................................ $ 1,000 $ 1,000
======== ========
COMMITMENTS AND CONTINGENCIES ..................... $ -- $ --
-------- --------
STOCKHOLDER'S EQUITY:
Common stock, par value $.01 per share; 1,000 shares
authorized, issued and outstanding ............... 10 10
Additional paid-in capital ........................ 990 990
-------- --------
TOTAL STOCKHOLDER'S EQUITY ........................ $ 1,000 $ 1,000
======== ========
</TABLE>
The accompanying notes are an integral part of the balance sheets.
F-40
<PAGE>
FOAMEX CAPITAL CORPORATION
(A Wholly-Owned Subsidiary of Foamex L.P.)
NOTES TO BALANCE SHEETS
1. ORGANIZATION
Foamex Capital Corporation ("FCC"), a wholly-owned subsidiary of Foamex
L.P., was formed on July 20, 1992 and initially capitalized on July 23, 1992,
for the sole purpose of obtaining financing from external sources.
2. COMMITMENTS AND CONTINGENCIES
FCC is a joint obligor on the following borrowings of Foamex L.P.:
9 1/2% Senior Secured Notes due 2000 ("Senior Secured Notes")
The Senior Secured Notes were issued on June 3, 1993 and bear interest at
the rate of 91/2% payable semiannually on each June 1 and December 1. The Senior
Secured Notes mature on June 1, 2000. The Senior Secured Notes are
collateralized by a first-priority lien on substantially all of the assets of
Foamex L.P. except for receivables, real estate and fixtures. The Senior Secured
Notes may be redeemed at the option of Foamex L.P., in whole or in part, at any
time on or after June 1, 1998, initially at 101.583% of their principal amount,
plus accrued interest, and declining to 100% on or after June 1, 1999. The
Senior Secured Notes have been guaranteed, on a senior secured basis by General
Felt Industries, Inc. (General Felt) and on a senior unsecured basis by Foamex
International Inc. (Foamex International). During 1996, Foamex L.P. repurchased
$9.9 million of Senior Secured Notes.
11 1/4% Senior Notes due 2002 ("Senior Notes")
The Senior Notes bear interest at the rate of 11 1/4% payable semiannually
on each April 1 and October 1. The Senior Notes mature on October 1, 2002. The
Senior Notes may be redeemed at the option of Foamex L.P., in whole or in part,
at any time on or after October 1, 1997, initially at 104.219% of their
principal amount, plus accrued interest, and declining to 100% on or after
October 1, 2000. In October 1994, Foamex L.P. provided certain real property as
collateral for the Senior Notes, with a net book value of $37.8 million at
December 29, 1996. The Senior Notes have been guaranteed, on a senior basis, by
General Felt and Foamex International. During 1996, Foamex L.P. repurchased $8.6
million of Senior Notes.
11 7/8% Senior Subordinated Debentures ("Subordinated Debentures")
The Subordinated Debentures bear interest at the rate of 11 7/8% payable
semiannually on each April 1 and October 1. The Subordinated Debentures mature
on October 1, 2004. The Subordinated Debentures may be redeemed at the option of
Foamex L.P., in whole or in part, at any time on or after October 1, 1997,
initially at 105.938% of their principal amount, plus accrued interest, and
declining to 100% on or after October 1, 2002. The Subordinated Debentures are
subordinated in right of payment to all senior indebtedness, including the
Senior Secured Notes and the Senior Notes. The Subordinated Debentures have been
guaranteed, on a senior subordinated basis, by General Felt and Foamex
International. During 1996, Foamex L.P. repurchased $0.1 million of Subordinated
Debentures.
11 7/8% Senior Subordinated Debentures, Series B ("Series B Debentures")
The Series B Debentures were issued July 30, 1993, by Foamex L.P. in an
exchange offer to holders of senior subordinated debentures issued in connection
with the acquisition of General Felt on March 23, 1993. The Series B Debentures
have terms substantially similar to the Subordinated Debentures, except that
holders of the Series B Debentures are entitled to receive proceeds from an
asset sale only if any proceeds remain after an offer to repurchase has been
made to the holders of the Subordinated Debentures. The Series B Debentures have
been guaranteed on a senior subordinated basis by General Felt.
F-41
<PAGE>
FOAMEX CAPITAL CORPORATION
(A Wholly-Owned Subsidiary of Foamex L.P.)
BALANCE SHEETS (unaudited)
<TABLE>
<CAPTION>
December 29, June 29,
1996 1997
------------ --------
<S> <C> <C>
ASSETS
CASH ................................................ $1,000 $1,000
====== ======
LIABILITIES AND STOCKHOLDER'S EQUITY
COMMITMENTS AND CONTINGENCIES ..................... $ -- $ --
------ ------
STOCKHOLDER'S EQUITY:
Common stock, par value $.01 per share; 1,000 shares
authorized, issued and outstanding ............... 10 10
Additional paid-in capital ........................ 990 990
------ ------
TOTAL STOCKHOLDER'S EQUITY ........................ $1,000 $1,000
====== ======
</TABLE>
The accompanying notes are an integral part of the balance sheets.
F-42
<PAGE>
FOAMEX CAPITAL CORPORATION
(A Wholly-Owned Subsidiary of Foamex L.P.)
NOTES TO BALANCE SHEETS (unaudited)
1. ORGANIZATION
Foamex Capital Corporation ("FCC"), a wholly-owned subsidiary of Foamex
L.P., was formed for the sole purpose of obtaining financing from external
sources.
2. COMMITMENTS AND CONTINGENCIES
FCC is a joint obligor on the following borrowings of Foamex L.P.:
9 7/8% Senior Subordinated Notes due 2007 ("Senior Subordinated Notes")
The Senior Subordinated Notes were issued by Foamex L.P. and FCC in a
private placement under Rule 144A of the Securities Act of 1933, as amended, on
June 12, 1997 in connection with the Refinancing Plan. The Senior Subordinated
Notes bear interest at the rate of 9 7/8% per annum payable semiannually on each
June 15 and December 15, commencing December 15, 1997. The Senior Subordinated
Notes mature on June 15, 2007. The Senior Subordinated Notes may be redeemed at
the option of Foamex L.P., in whole or in part, at any time on or after June 15,
2002, initially at 104.938% of their principal amount, plus accrued interest and
liquidated damages, as defined, if any, thereon to the date of redemption and
declining to 100.0% on or after June 15, 2005. In addition, at any time prior to
June 15, 2000, Foamex L.P. may on one or more occasions redeem up to 35.0% of
the initially outstanding principal amount of the Senior Subordinated Notes at a
redemption price equal to 109.875% of the principal amount, plus accrued
interest and liquidated damages, if any, thereon to the date of redemption with
the cash proceeds of one or more Public Equity Offerings, as defined; provided,
that, in each case, at least 65% of the initially outstanding aggregate
principal amount of Notes remains outstanding immediately after the occurrence
of such redemption. Upon the occurrence of a change of control, as defined, each
holder of Senior Subordinated Notes will have the right to require Foamex L.P.
to repurchase the Senior Subordinated Notes at a price equal to 101.0% of the
principal amount, plus accrued interest and liquidated damages, if any, to the
date of redemption. The Senior Subordinated Notes are subordinated in right of
payment to all senior indebtedness and are pari passu in right of payment to two
issues of senior subordinated debentures due 2004 and the subordinated note. The
Senior Subordinated Notes contain certain covenants that limit, among other
things, the ability of Foamex L.P. (i) to pay distributions or redeem
partnership interests, (ii) to make certain restrictive payments or investments,
(iii) to incur additional indebtedness or issue Preferred Equity Interest, as
defined, (iv) to merge, consolidate or sell all or substantially all of its
assets, or (vi) to enter into certain transactions with affiliates or related
persons. The Senior Subordinated Notes are guaranteed by General Felt and Foamex
Fibers and all other future domestic subsidiaries of Foamex L.P. and FCC.
Foamex L.P. and FCC have filed a registration statement relating to an
exchange offer in which Foamex L.P. will offer to exchange the Senior
Subordinated Notes issued in the private placement for new notes. The terms of
the new notes will be substantially identical in all respects (including
principal amount, interest rate, maturity and ranking) to the terms of the
Senior Subordinated Notes, except that the new notes will be transferable by
holders thereof without further registration under the Securities Act of 1933,
as amended (except in the case of Senior Subordinated Notes held by affiliates
of the issuers and for certain other holders), and are not subject to any
covenant regarding registration under the Securities Act of 1933, as amended.
The exchange offer is expected to be consummated during the third quarter of
1997.
9 1/2% Senior Secured Notes due 2000 ("Senior Secured Notes")
The Senior Secured Notes were issued on June 3, 1993 and bear interest at
the rate of 9 1/2% per annum payable semiannually on each June 1 and December 1.
The Senior Secured Notes mature on June 1, 2000. The Senior Secured Notes are
collateralized by a first-priority lien on substantially all of the assets of
Foamex L.P. except for receivables, real estate and fixtures. The Senior Secured
Notes may be redeemed at the option of Foamex L.P., in whole or in part, at any
time on or after June 1, 1998, initially at 101.583% of their principal amount,
plus accrued interest, and declining to 100.0% on or after June 1, 1999. The
Senior Secured Notes have been guaranteed, on a senior secured basis by General
Felt and on a senior unsecured basis by Foamex International. During 1996 and
F-43
<PAGE>
FOAMEX CAPITAL CORPORATION
(A Wholly-Owned Subsidiary of Foamex L.P.)
NOTES TO BALANCE SHEETS (unaudited)
2. COMMITMENTS AND CONTINGENCIES (continued)
1997, Foamex L.P. repurchased $9.9 million and $102.3 million, respectively,
aggregate principal amount of Senior Secured Notes.
11 1/4% Senior Notes due 2002 ("Senior Notes")
The Senior Notes bear interest at the rate of 11 1/4% per annum payable
semiannually on each April 1 and October 1. The Senior Notes mature on October
1, 2002. The Senior Notes may be redeemed at the option of Foamex L.P., in whole
or in part, at any time on or after October 1, 1997, initially at 104.219% of
their principal amount, plus accrued interest, and declining to 100.0% on or
after October 1, 2000. In October 1994, Foamex L.P. provided certain real
property as collateral for the Senior Notes, with a net book value of $37.8
million at December 29, 1996. The Senior Notes have been guaranteed, on a senior
basis, by General Felt. During 1996 and 1997, Foamex L.P. repurchased $8.6
million and $135.6 million, respectively, aggregate principal amount of Senior
Notes. Foamex L.P. intends to redeem all of the outstanding Senior Notes on
October 1, 1997.
11 7/8% Senior Subordinated Debentures ("Subordinated Debentures")
The Subordinated Debentures bear interest at the rate of 11 7/8% per annum
payable semiannually on each April 1 and October 1. The Subordinated Debentures
mature on October 1, 2004. The Subordinated Debentures may be redeemed at the
option of Foamex L.P., in whole or in part, at any time on or after October 1,
1997, initially at 105.938% of their principal amount, plus accrued interest,
and declining to 100.0% on or after October 1, 2002. The Subordinated Debentures
are subordinated in right of payment to all senior indebtedness, including the
Senior Secured Notes and the Senior Notes. The Subordinated Debentures have been
guaranteed, on a senior subordinated basis, by General Felt and rank pari passu
in right of payment to the Senior Subordinated Notes. During 1996 and 1997,
Foamex L.P. repurchased $0.1 million and $104.9 million, respectively, aggregate
principal amount of Subordinated Debentures. Foamex L.P. intends to redeem all
of the outstanding Subordinated Debentures on October 1, 1997.
11 7/8% Senior Subordinated Debentures, Series B ("Series B Debentures")
The Series B Debentures were issued July 30, 1993, by Foamex L.P. in an
exchange offer to holders of senior subordinated debentures issued in connection
with the acquisition of General Felt on March 23, 1993. The Series B Debentures
have terms substantially similar to the Subordinated Debentures, except that
holders of the Series B Debentures are entitled to receive proceeds from an
asset sale only if any proceeds remain after an offer to repurchase has been
made to the holders of the Subordinated Debentures. The Series B Debentures have
been guaranteed on a senior subordinated basis by General Felt. During 1997,
Foamex L.P. repurchased $6.9 million of Series B Debentures. Foamex L.P. intends
to redeem all of the outstanding Series B Debentures on October 1, 1997.
F-44
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholder of
General Felt Industries, Inc.:
We have audited the accompanying consolidated balance sheets of General Felt
Industries, Inc. and subsidiaries ("General Felt") as of December 31, 1995 and
December 29, 1996, and the related consolidated statements of operations, cash
flows and stockholder's equity for each of the three years in the period ended
December 29, 1996. These financial statements are the responsibility of General
Felt's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of General Felt as
of December 31, 1995 and December 29, 1996, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 29, 1996, in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
February 26, 1997
F-45
<PAGE>
GENERAL FELT INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(thousands)
<TABLE>
<CAPTION>
December 31, December 29,
1995 1996
-------------- -------------
<S> <C> <C>
ASSETS:
CURRENT ASSETS:
Cash ................................................... $ 538 $ 336
Restricted cash .......................................... -- 12,143
Accounts receivable, net of allowance for doubtful accounts
of $5,986 and $4,453 .................................... 35,532 44,973
Inventories ............................................. 18,485 25,314
Deferred income taxes .................................... -- 6,342
Other current assets .................................... 3,574 3,093
-------- --------
Total current assets .................................... 58,129 92,201
-------- --------
PROPERTY, PLANT AND EQUIPMENT:
Land and land improvements .............................. 600 3,491
Buildings and leasehold improvements ..................... 5,579 5,896
Machinery, equipment and furnishings ..................... 23,426 29,354
Construction in progress ................................. 803 1,957
-------- --------
Total ................................................... 30,408 40,698
Less accumulated depreciation and amortization ......... (5,322) (8,950)
-------- --------
Property, plant and equipment, net ........................ 25,086 31,748
COST IN EXCESS OF ASSETS ACQUIRED, NET ..................... 58,964 50,574
NET ASSETS OF DISCONTINUED OPERATIONS ..................... 11,689 --
OTHER ASSETS ................................................ 1,629 3,158
-------- --------
TOTAL ASSETS ................................................ $155,497 $177,681
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
F-46
<PAGE>
GENERAL FELT INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS--(Continued)
(thousands)
<TABLE>
<CAPTION>
December 31, December 29,
1995 1996
------------ ------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDER'S EQUITY:
CURRENT LIABILITIES:
Current portion of long-term debt--unrelated parties ...... $ 3,000 $ --
Current portion of long-term debt--related party ......... -- 12,143
Accounts payable .......................................... 10,697 13,719
Accounts payable to related party ........................ 13,000 17,987
Accrued employee compensation .............................. 2,133 1,434
Accrued restructuring charges .............................. 4,308 2,279
Other accrued liabilities ................................. 10,780 14,210
--------- ---------
Total current liabilities ................................. 43,918 61,772
LONG-TERM DEBT--UNRELATED PARTIES ........................... 8,250 --
LONG-TERM DEBT--RELATED PARTY .............................. 48,306 9,260
DEFERRED INCOME TAXES ....................................... -- 3,273
ACCRUED RESTRUCTURING--NONCURRENT ........................... -- 2,308
OTHER LIABILITIES .......................................... 5,514 4,049
--------- ---------
Total liabilities ....................................... 105,988 80,662
--------- ---------
COMMITMENTS AND CONTINGENCIES .............................. -- --
--------- ---------
STOCKHOLDER'S EQUITY:
Common stock, $.01 par value; authorized, issued and
outstanding 1,000 shares ................................. -- --
Additional paid-in capital ................................. 69,194 143,965
Retained earnings (accumulated deficit) .................. (19,685) (46,946)
--------- ---------
Total stockholder's equity .............................. 49,509 97,019
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY .................. $ 155,497 $ 177,681
========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
F-47
<PAGE>
GENERAL FELT INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended 1994, 1995 and 1996
(thousands)
<TABLE>
<CAPTION>
January 1, December 31, December 29,
1995 1995 1996
---------- ------------ ------------
<S> <C> <C> <C>
NET SALES ................................. $290,577 $ 279,123 $ 302,648
COST OF GOODS SOLD ........................ 251,120 252,591 263,316
-------- --------- ---------
GROSS PROFIT .............................. 39,457 26,532 39,332
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES ................................. 24,392 22,312 18,819
RESTRUCTURING CHARGES (CREDITS) ......... -- 14,156 (5,460)
-------- --------- ---------
INCOME (LOSS) FROM OPERATIONS ............ 15,065 (9,936) 25,973
INTEREST EXPENSE ........................ 1,178 1,164 2,179
OTHER INCOME, NET ........................ 90 52 1,015
-------- --------- ---------
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE PROVISION FOR INCOME TAXES ...... 13,977 (11,048) 24,809
PROVISION FOR INCOME TAXES ............... 5,587 962 6,344
-------- --------- ---------
INCOME (LOSS) FROM CONTINUING OPERATIONS . 8,390 (12,010) 18,465
-------- --------- ---------
DISCONTINUED OPERATIONS:
OPERATING LOSS FROM DISCONTINUED
OPERATIONS, NET OF INCOME TAXES ......... (2,293) (11,040) (3,389)
LOSS ON DISPOSAL OF DISCONTINUED
OPERATIONS INCLUDING PROVISION FOR
OPERATING LOSSES DURING THE PHASE-
OUT PERIOD, NET OF INCOME TAXES ......... -- -- (42,337)
-------- --------- ---------
LOSS FROM DISCONTINUED OPERATIONS, NET OF
INCOME TAXES ........................... (2,293) (11,040) (45,726)
-------- --------- ---------
NET INCOME (LOSS) ........................ $ 6,097 $ (23,050) $ (27,261)
======== ========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
F-48
<PAGE>
GENERAL FELT INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended 1994, 1995 and 1996
(thousands)
<TABLE>
<CAPTION>
January 1, December 31, December 29,
1995 1995 1996
---------- ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) .......................................... $ 6,097 $ (23,050) $ (27,261)
Adjustments to reconcile net income (loss) to net cash
provided by (used for) operating activities:
Depreciation and amortization .............................. 4,054 4,476 4,564
Net loss on disposal of discontinued operations ............ -- -- 40,551
Net loss from discontinued operations ..................... 2,293 11,040 5,175
Asset writedowns and other charges (credits) ............... -- 8,505 (6,769)
Provision for uncollectible accounts ..................... 607 2,992 967
Deferred income taxes .................................... 5,541 962 5,519
Changes in operating assets and liabilities, net of
acquisitions and discontinued operations: ..................
Accounts receivable ....................................... (4,512) 721 (10,358)
Inventories ................................................ 254 157 (6,829)
Accounts payable and accounts payable to related party 6,039 (6,309) 8,009
Accrued restructuring charges .............................. (566) 3,424 280
Other assets and liabilities .............................. (7,961) (2,328) (1,813)
--------- --------- ---------
Net cash provided by continued operations .................. 11,846 590 12,035
Net cash used for discontinued operations .................. (969) (12,617) (524)
--------- --------- ---------
Net cash provided by (used for) operating activities ...... 10,877 (12,027) 11,511
--------- --------- ---------
INVESTING ACTIVITIES:
Capital expenditures ....................................... (3,391) (1,604) (2,442)
Proceeds from sale of subsidiary ........................... -- -- 42,650
Acquisition, net of cash acquired ........................ -- (7,272) --
Increase in restricted cash .............................. -- --- (12,143)
Capital expenditures for discontinued operations ......... (6,565) (4,429) (919)
Other investing activities ................................. 1,016 10 (2,149)
--------- --------- ---------
Net cash provided by (used for) investing activities ...... (8,940) (13,295) 24,997
--------- --------- ---------
FINANCING ACTIVITIES:
Net proceeds from (repayments of) revolving loans ......... 3,000 (3,000) --
Net proceeds from (repayments of) Foamex L.P. notes
payable ................................................... (26,734) 14,742 (26,903)
Proceeds from long-term debt--unrelated party ............ 15,000 -- --
Payments on long-term debt--unrelated party ............... (750) (3,000) (11,250)
Net financing activities of discontinued operations ...... 7,534 17,046 1,443
--------- --------- ---------
Net cash provided by (used for) financing activities ...... (1,950) 25,788 (36,710)
--------- --------- ---------
Net increase (decrease) in cash .............................. (13) 466 (202)
Cash at beginning of period ................................. 85 72 538
--------- --------- ---------
Cash at end of period ....................................... $ 72 $ 538 $ 336
========= ========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
F-49
<PAGE>
GENERAL FELT INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
For the Years Ended 1994, 1995 and 1996
(thousands)
<TABLE>
<CAPTION>
Retained
Common Stock Additional Earnings
------------------ Paid-In (Accumulated
Shares Amount Capital Deficit)
------ ------ ---------- ------------
<S> <C> <C> <C> <C>
Balances at January 2, 1994 ............... 1 -- $ 67,036 $ (2,732)
Net income ................................. -- -- -- 6,097
--- --- -------- ---------
Balances at January 1, 1995 ............... 1 -- 67,036 3,365
Assumption of pension liability by
Foamex L.P. .............................. -- -- 2,158 --
Net loss .................................... -- -- -- (23,050)
--- ---- -------- ---------
Balances at December 31, 1995 ............... 1 -- 69,194 (19,685)
Net loss .................................... -- -- -- (27,261)
Contribution by Foamex L.P. of
intercompany notes in connection with
sale of Perfect Fit Industries, Inc. ...... -- -- 74,771 --
--- ---- -------- ---------
Balances at December 29, 1996 ............... 1 -- $143,965 $ (46,946)
=== ==== ======== =========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
F-50
<PAGE>
GENERAL FELT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION
General Felt Industries, Inc. and subsidiaries ("General Felt") is one of
the largest distributors and manufacturers of carpet cushion in North America.
In addition, Foamex Fibers, Inc. ("Foamex Fibers"), a wholly-owned subsidiary,
manufactures various nonwoven textile fiber products used primarily for carpet
padding and in the furniture industry.
General Felt is a wholly-owned subsidiary of Foamex L.P. which in turn is a
99% owned subsidiary of Foamex International Inc. ("Foamex International").
During 1996, General Felt sold Perfect Fit Industries, Inc. ("Perfect Fit")
which comprised the home comfort products segment of General Felt. The
consolidated financial statements of General Felt have been restated for
discontinued operations and include a net loss of $42.3 million, which includes
the loss on disposal and a net loss of $1.8 million (net of $1.2 million income
tax benefit) relating to operating losses during the phase-out period.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation
The consolidated financial statements include the accounts of General Felt,
other than the home comfort products segment, which is accounted for as
discontinued operations. Intercompany accounts and transactions for continuing
operations have been eliminated in consolidation.
The consolidated financial statements have been restated for discontinued
operations. The accompanying notes present amounts related only to continuing
operations.
Fiscal Year
General Felt's fiscal year ends on the Sunday closest to the thirty-first
day of December. Fiscal years 1994, 1995 and 1996 were composed of fifty-two
weeks and ended on January 1, 1995, December 31, 1995 and December 29, 1996,
respectively.
Accounting Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and reported amounts of revenues and expenses
during the reported period. Actual results could differ from those estimates.
(See Notes 4, 10, 11 and 14 and Cost in Excess of Net Assets Acquired below).
Revenue Recognition
Revenue from sales is recognized when products are shipped.
Discounts and Billing Adjustments
A reduction in sales revenue is recognized for sales discounts when product
is invoiced or for other billing adjustments when authorized.
Cash Management
General Felt's cash management system operates such that checks processed
by General Felt but not yet presented to the bank are not considered reductions
of cash or accounts payable. Checks presented to the bank for payment are
provided for by a draw on the revolving notes with Foamex L.P. Cash receipts are
used to reduce the outstanding borrowings under the Foamex L.P. revolving notes.
As of December 31, 1995 and December 29, 1996, $0.4 million and $0.4 million,
respectively, of processed checks have not been presented to the bank and are
included in accounts payable.
Restricted Cash
As of December 29, 1996, General Felt had restricted cash of approximately
$12.1 million. This cash was derived from the net sales proceeds relating to the
sale of Perfect Fit and is restricted by Foamex L.P.'s debt agreements. This
restricted cash will be used to reduce long-term debt--related party with Foamex
L.P. during 1997;
F-51
<PAGE>
GENERAL FELT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
accordingly, a corresponding amount of long-term debt--related party has been
classified as current in the accompanying consolidated balance sheets.
Inventories
Inventories are stated at the lower of cost or market. The cost of
inventories is determined on a first-in, first-out basis.
Property, Plant and Equipment
Property, plant and equipment are stated at cost and are depreciated using
the straight-line method over the estimated useful lives of the assets. The
range of useful lives estimated for buildings and building improvements is
generally ten to forty years and the range for machinery, equipment and
furnishings is five to twelve years. Leasehold improvements are amortized over
the shorter of the terms of the respective lease or the estimated useful life of
the improvement, whichever is shorter. Depreciation expense for the years ended
1994, 1995 and 1996 was $2.6 million, $2.8 million and $3.0 million,
respectively. For income tax purposes, General Felt uses accelerated
depreciation methods.
Cost of maintenance and repairs is charged to expense as incurred. Renewals
and improvements are capitalized. Upon retirement or other disposition of items
of plant and equipment, the cost and related accumulated depreciation are
removed from the accounts and any gain or loss is included in operations. During
1994, General Felt sold equipment with a net book value of approximately $1.0
million to a related party. There was no gain or loss on the sale.
Cost in Excess of Net Assets Acquired
The excess of the acquisition cost over the fair value of net assets
acquired in business combinations accounted for by the purchase method is
amortized using the straight-line method over a forty year period. At each
balance sheet date General Felt evaluates the recoverability of cost in excess
of net assets acquired using certain financial indicators such as historical and
future ability to generate income from operations based on a going concern
basis. Accumulated amortization as of December 31, 1995 and December 29, 1996 is
approximately $4.3 million and $5.9 million, respectively.
Environmental Matters
Environmental expenditures that relate to current operations are expensed
or capitalized as appropriate. Expenditures that relate to an existing condition
caused by past operations, which do not contribute to current or future revenue
generation, are expensed. Liabilities are recorded when environmental
assessments and/or remedial efforts are probable, and the cost can be reasonably
estimated.
Income Taxes
Income taxes are accounted for under the liability method in which deferred
income taxes are provided for temporary differences between the financial
reporting and income tax basis of assets and liabilities using the income tax
rates, under existing legislation, expected to be in effect at the date such
temporary differences are expected to reverse.
Reclassifications
Certain amounts in the 1994 and 1995 consolidated financial statements have
been reclassified to conform with the current year's presentation.
3. DISCONTINUED OPERATIONS
During 1996, General Felt finalized the sale of the outstanding common
stock of Perfect Fit, a wholly-owned subsidiary, for an adjusted sale price of
approximately $44.2 million. The sale included all of the net assets of the home
comfort products segment with an adjusted net book value of approximately $84.5
million after Foamex L.P.
F-52
<PAGE>
GENERAL FELT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
3. DISCONTINUED OPERATIONS (continued)
contributed Perfect Fit's intercompany notes receivable and accrued interest
thereon with Foamex L.P. to General Felt. Actual and estimated transaction
expenses related to the sale totaled approximately $1.5 million. General Felt
has recorded a loss for discontinued operations of approximately $42.3 million,
which includes the loss on disposal and a net loss of $1.8 million (net of $1.2
million income tax benefit) relating to operating losses during the phase-out
period. A valuation allowance has been provided for the capital loss relating
to the sale of Perfect Fit since General Felt has determined that capital gain
taxable income is not likely to be sufficient to recognize the deferred tax
asset relating to the capital loss carryforward.
Summary operating results of General Felt's discontinued operations were as
follows:
<TABLE>
<CAPTION>
1994 1995 1996 1
-------- --------- --------
(thousands)
<S> <C> <C> <C>
Net sales .................................... $ 95,381 $ 98,464 $ 50,097
Gross profit ................................. 18,200 14,946 8,065
Income (loss) from operations ............... 4,170 (3,058) 1,123
Interest and debt issuance expense ............ 7,194 10,636 5,543
Other expense ................................. -- -- 348
Loss from discontinued operations before income
taxes ....................................... (3,024) (13,694) (4,768)
Provision (benefit) for income taxes ......... (731) (2,654) (1,379)
-------- --------- --------
Loss from discontinued operations, net of income
taxes ....................................... $ (2,293) $ (11,040) $ (3,389)
======== ========= ========
</TABLE>
1 General Felt's discontinued operations includes the operations of Perfect Fit
through June 1996.
Net assets of General Felt's discontinued operations (excluding
intercompany net assets) at December 31, 1995 is as follows:
<TABLE>
<CAPTION>
1995
-----------
(thousands)
<S> <C>
Current assets .............................. $31,925
Property, plant and equipment, net ......... 21,672
Cost in excess of assets acquired, net ...... 40,333
Other assets ................................. 2,219
-------
Total assets .............................. 96,149
-------
Current liabilities ........................ 11,076
Long-term debt due to Foamex L.P. ............ 73,384
-------
Total liabilities ........................... 84,460
-------
Net assets ................................. $11,689
=======
</TABLE>
4. RESTRUCTURING CHARGES
In 1995, General Felt approved a restructuring plan (the "1995
restructuring plan") to consolidate two foam production, fabrication or branch
locations to concentrate resources as a result of industry conditions and better
position itself to achieve its strategic growth objectives. General Felt
recorded restructuring charges of $14.2 million which was comprised of $13.1
million charge associated with the consolidation of the two foam production,
fabrication or branch locations and a $1.1 million charge associated with the
completion of a 1993 restructuring plan. The components of the $13.1 million
restructuring charge include: $8.5 million for fixed asset writedowns
F-53
<PAGE>
GENERAL FELT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
4. RESTRUCTURING CHARGES (continued)
(net of estimated sale proceeds), $3.8 million for plant closure and operating
lease obligations and $0.8 million for personnel reductions. The $0.8 million
cost for personnel reductions primarily represents severance and employee
benefit costs associated with the elimination of manufacturing and
administrative personnel.
In 1996, General Felt determined to continue to operate one of the
facilities originally identified for closure in the 1995 restructuring plan
because of improved economics and the lack of synergy to be achieved from
relocating the manufacturing process. In addition, General Felt has approved a
plan to close a facility that was not originally identified in the 1995
restructuring plan. As a result of these changes to the 1995 restructuring plan,
General Felt recorded a $5.5 million net restructuring credit which included a
restructuring credit of $11.3 million associated with General Felt's decision
not to close the facility identified as part of the 1995 restructuring plan
offset by $5.8 million of restructuring charges relating to the closure of a
facility during 1997 (the "1996 restructuring plan").
Generally, the 1995 restructuring plan has been implemented as originally
contemplated. The following table sets forth the components of General Felt's
restructuring and other charges:
<TABLE>
<CAPTION>
Asset Plant Closure Personnel
Total Writedowns and Leases Reductions Other
------- ---------- ------------- ---------- ------
(millions)
<S> <C> <C> <C> <C> <C>
1995 restructuring charge ........................ $ 14.2 $ 8.5 $ 3.8 $ 0.8 $ 1.1
Asset writeoff/writedowns ........................ (11.3) (9.9) (0.3) -- (1.1)
------- ------ ------ ------ ------
Balances at December 31, 1995 ..................... 2.9 (1.4) 3.5 0.8 --
Cash spending .................................... (1.0) -- (0.5) (0.5) --
1996 restructuring charge ........................ 5.8 1.6 3.9 0.3 --
Restructuring credits ........................... (11.3) (8.4) (2.7) (0.2) --
Asset adjustments for restructuring credits ...... 8.2 8.2 -- -- --
------- ------ ------ ------ ------
Balances at December 29, 1996 ..................... $ 4.6 $ -- $ 4.2 $ 0.4 $ --
======= ====== ====== ====== ======
</TABLE>
As indicated in the table above, the accrued restructuring balance at
December 29, 1996, will be used for plant closure and leases including rundown
costs at the facilities. General Felt expects to incur approximately $2.3
million of charges during 1997 with the remaining $2.3 million to be incurred
through 2001. General Felt has terminated or notified 61 employees in the
manufacturing and administrative areas of their impending termination.
5. ACQUISITIONS
In April 1995, Foamex Fibers acquired certain assets and assumed certain
liabilities of GS Industries, Inc. and Pontotoc Fibers, Inc., manufacturers of
various nonwoven textile fiber products used primarily for carpet padding and in
the furniture industry for aggregate consideration of approximately $8.0
million, including related fees and expenses of approximately $0.3 million, with
an initial cash payment of $7.2 million. The excess of the purchase price over
the estimated fair value of the net assets acquired was approximately $3.9
million. The acquisition was accounted for as a purchase and the operations of
the acquired companies are included in the consolidated statements of operations
and cash flows from the date of acquisition. The cost of the acquisition has
been allocated on the basis of the fair value of the assets acquired and the
liabilities assumed. The excess of the purchase price over the estimated fair
value of the net assets acquired is being amortized using the straight-line
method over forty years.
F-54
<PAGE>
GENERAL FELT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
6. INVENTORIES
Inventories consist of:
<TABLE>
<CAPTION>
December 31, December 29,
1995 1996
------------ ------------
(thousands)
<S> <C> <C>
Raw material and supplies ...... $ 7,277 $12,795
Work in process ............... 917 1,120
Finished goods .................. 10,291 11,399
------- -------
Total ........................ $18,485 $25,314
======= =======
</TABLE>
7. LONG-TERM DEBT--RELATED PARTY
General Felt has two revolving promissory notes with Foamex L.P. to borrow
up to a maximum of $64.0 million. During 1996, General Felt used approximately
$22.5 million of the net proceeds from the sale of Perfect Fit to reduce these
promissory notes with Foamex L.P. The notes are due on demand, however, the
remaining net proceeds of $12.1 million from the sale of Perfect Fit will be
used to paydown the notes with Foamex L.P. during 1997 and is classified as a
current liability in the accompanying balance sheets. Foamex L.P. has indicated
that it does not intend to demand payment on the remaining balance of the notes
during 1997. Accordingly, the balance of the notes of $9.3 million is classified
as long-term in the accompanying balance sheets. Interest is payable quarterly
at the prime rate (8.25% at December 29, 1996). General Felt's cash receipts
reduce the outstanding balance and the cash requirements increase the
outstanding balance on a daily basis.
8. LONG-TERM DEBT--UNRELATED PARTY
Long-term debt--unrelated parties consists of:
<TABLE>
<CAPTION>
December 31,
1995
------------
(thousands)
<S> <C>
Term loan .................. $11,250
Revolving loan ............ --
-------
11,250
Less current portion ...... 3,000
-------
Total ..................... $ 8,250
=======
</TABLE>
Term and Revolving Loans
On June 28, 1994, Foamex L.P. and General Felt entered into an amended
credit agreement (the "Foamex L.P. Credit Facility"). The Foamex L.P. Credit
Facility provides for loans of up to $85.0 million of which up to $40.0 million
was available as a term loan payable in 20 equal quarterly installments
commencing October 1994 and up to $45.0 million is available under a revolving
line of credit which expires in June 1999. On June 28, 1994, Foamex L.P. and
General Felt entered into a $40.0 million term loan under the Foamex L.P. Credit
Facility of which $15.0 million was borrowed by General Felt; no further term
loan borrowings are available thereunder. Borrowings under the Foamex L.P.
Credit Facility are collateralized by the accounts receivable of Foamex L.P. and
General Felt. During 1996, General Felt used $9.0 million of net proceeds from
the sale of Perfect Fit to repay its outstanding term loan borrowings. Pursuant
to the terms of the Foamex L.P. Credit Facility, borrowed funds will bear
interest at a floating rate equal to 1.0% per annum plus the higher of (I) the
base rate of The Bank of Nova Scotia, as in effect from time to time, (ii) a
rate that is, generally, 0.5% per annum plus a fluctuating rate generally equal
to the rate on three-month certificates of deposit, subject to certain
adjustments, plus a fluctuating rate generally equal to the annual assessment
rate paid by The Bank of Nova Scotia to the Federal Deposit Insurance
Corporation or (iii) 0.5% per annum plus the federal funds rate in effect from
time to time. At the option of either borrower, portions
F-55
<PAGE>
GENERAL FELT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
8. LONG-TERM DEBT--UNRELATED PARTY (continued)
of outstanding loans under the Foamex L.P. Credit Facility will be convertible
into Eurodollar rate loans bearing interest at a rate generally equal to 3.0%
per annum above the average LIBOR rate of Citibank, N.A. and The Bank of Nova
Scotia. As of December 29, 1996, no revolving credit borrowings were
outstanding under the Foamex L.P. Credit Facility with unused availability of
$33.3 million. In addition, there were $11.7 million in letters of credit
outstanding under the Foamex L.P. Credit Facility.
Debt Restrictions and Covenants
The Foamex L.P. indentures, credit agreement and other indebtedness
agreements contain various covenants, including restrictions on payments of
distributions by Foamex L.P. to its partners, the incurrence of additional
indebtedness, the sale of assets, mergers and consolidations and transactions
with affiliates. In addition, certain agreements contain a provision that, in
the event of a defined change of control, the indebtedness must be repaid, in
certain cases at the option of the holder. Also, Foamex L.P. is required under
certain of these agreements to maintain specified financial ratios of which the
most restrictive is the maintenance of net worth and interest coverage ratios,
as defined. Under the most restrictive of the distribution restrictions,
approximately $0.7 million was available to be paid by Foamex L.P. to its
partners at December 29, 1996. Also, General Felt is required to maintain $41.0
million net worth, as defined.
As of December 29, 1996, Foamex L.P. and General Felt were in compliance
with the covenants of the Foamex L.P. Credit Facility and expect to be in
compliance with the covenants for the foreseeable future.
9. EMPLOYEE BENEFIT PLANS
Prior to December 31, 1996, General Felt had noncontributory defined
benefit pension plans (the "Plans") for eligible salaried employees (the
"Salaried Plan") and certain hourly employees at the Trenton and Pico Rivera
manufacturing facilities (the "Trenton Plan" and the "Pico Plan"). The Plans
provided benefits based principally on years of credited service and the highest
level of compensation earned during a specified period before retirement for the
Salaried Plan and stated amounts for each year of credited service for the
Trenton Plan and the Pico Plan. General Felt accounted for such pension plans
pursuant to SFAS No. 87, "Employer's Accounting for Pensions".
General Felt's funding policy was to make no less than the minimum annual
contributions required based upon actuarial methods allowable by applicable
governmental regulations. Effective January 1, 1995, General Felt merged the
Salaried Plan and the Trenton Plan with the defined benefit salaried pension
plan of Foamex L.P. During 1995, General Felt merged the Pico Plan with the
defined benefit hourly pension plan of Foamex L.P. Consequently, the aggregate
pension liability of approximately $2.2 million as of December 31, 1995 relating
to these plans has been included in additional paid-in capital since Foamex L.P.
has assumed all future obligations under the plans. General Felt will incur
pension expense for future periods to the extent it provides funding to the
plans. During 1996, General Felt funded approximately $0.1 million to the plans.
Net periodic pension cost includes the following components:
<TABLE>
<CAPTION>
1994
----------
(thousands)
<S> <C>
Service cost-benefits earned during the period ...... $ 419
Interest cost on projected benefit obligation ...... 1,077
Actual return on plan assets ........................ 84
Net amortization and deferral ........................ (1,195)
--------
Net periodic pension cost ........................... $ 385
========
</TABLE>
F-56
<PAGE>
GENERAL FELT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
9. EMPLOYEE BENEFIT PLANS (continued)
The assumptions used to determine net periodic pension cost and related
pension obligations were as follows:
<TABLE>
<CAPTION>
1994
-----
<S> <C>
Discount rate .................................... 8.25%
Rate of increase in compensation levels ......... 4.00
Expected long-term rate of return on assets ...... 9.75
</TABLE>
In addition, certain employees of General Felt are covered by
union-sponsored collectively bargained, multi-employer pension plans. General
Felt contributed and charged to expense $0.1 million related to these plans for
each of the years 1994, 1995 and 1996.
During 1995, General Felt merged its defined contribution plan with Foamex
L.P. Foamex L.P. is the plan sponsor; however, General Felt incurs a
contribution expense for its employees. The plan is qualified under Section
401(k) of the Internal Revenue Code (the "Code") and covers eligible employees
who elect to participate in the plan. Employee contributions are voluntary and
subject to certain limitations as imposed by the Code. During 1995, General Felt
provided contributions amounting to a 25% match of employees' contributions up
to 4% of eligible compensation. General Felt also provides an additional 25%
match of employees' contributions up to 4% of eligible compensation made to a
fund which invests in Foamex International common stock. In addition, General
Felt may make discretionary contributions amounting to a 25% match of employees'
contributions up to 4% of eligible compensation. Prior to 1995, contributions
were provided only to employees who were members of collective bargaining
agreements. The expense for these contributions was $0.1 million for each of the
years 1995 and 1996.
10. INCOME TAXES
The components of the total consolidated provision (benefit) for income
taxes are summarized as follows:
<TABLE>
<CAPTION>
1994 1995 1996
------- -------- --------
(thousands)
<S> <C> <C> <C>
Continuing operations ................................. $ 5,587 $ 962 $ 6,344
Discontinued operations .............................. (731) (2,654) (2,558)
------- -------- --------
Total consolidated provision (benefit) for income taxes $4,856 $ (1,692) $ 3,786
====== ======== ========
Current:
Federal ............................................. $ -- $ -- $ 220
State ................................................ 46 -- 605
------ -------- --------
Total current ....................................... 46 -- 825
------ -------- --------
Deferred:
Federal ............................................. 3,598 (1,424) 1,666
State ................................................ 1,212 (268) 1,295
------ -------- --------
Total deferred .................................... 4,810 (1,692) 2,961
------ -------- --------
Total consolidated provision (benefit) for income
taxes ............................................. $4,856 $ (1,692) $ 3,786
====== ======== ========
</TABLE>
F-57
<PAGE>
GENERAL FELT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
10. INCOME TAXES (continued)
The components of the temporary differences that give rise to significant
deferred tax assets and liabilities are:
<TABLE>
<CAPTION>
December 31, December 29,
1995 1996
------------ ------------
(thousands)
<S> <C> <C>
Deferred tax assets:
Inventory basis differences ........................ $ 861 $ 415
Employee benefit accruals ........................ 1,004 714
Allowances and contingent liabilities ............ 2,427 2,548
Restructuring and plant closing accruals ......... 7,498 3,632
Other ............................................. 77 139
Net operating loss carryforward .................. 8,975 5,154
Capital loss carryforwards ........................ -- 14,193
Valuation allowance .............................. (13,473) (15,988)
--------- ---------
Deferred tax assets .............................. 7,369 10,807
--------- ---------
Deferred tax liabilities:
Difference between book and tax depreciation ...... 7,009 6,722
Other ............................................. 360 1,016
--------- ---------
Deferred tax liabilities ........................ 7,369 7,738
--------- ---------
Net deferred tax asset (liabilities) ............... $ -- $ 3,069
========= =========
</TABLE>
A reconciliation of the statutory federal income tax rate to the effective
income tax rate on continuing opera-tions is as follows:
<TABLE>
<CAPTION>
1994 1995 1996
------- -------- --------
(thousands)
<S> <C> <C> <C>
Statutory income taxes ........................ $ 4,892 $ (3,867) $ 8,683
State income taxes, net of federal ............ 839 (648) 1,235
Limitation on utilization of tax benefits ...... -- 4,929 --
Amortization of excess cost ..................... 525 554 517
Valuation allowance ........................... (452) -- (4,823)
Other .......................................... (217) (6) 732
------- -------- --------
Tax provision ................................. $ 5,587 $ 962 $ 6,344
======= ======== ========
</TABLE>
General Felt has determined that taxable capital gains in the foreseeable
future will likely not be sufficient to recognize the deferred tax asset
associated with the capital loss carryforward. Accordingly, a valuation
allowance has been provided for the deferred tax asset associated with the
capital loss carryforward and certain other deferred tax assets. During 1996,
the valuation allowance for deferred tax assets increased by $2.5 million which
included a $14.2 million increase for the capital loss carryforward, offset by
$6.9 million decrease due to reversal of preacquisition temporary differences
and $4.8 million for reversal of postacquisition temporary differences which is
reflected in the consolidated statement of operations. The $6.9 million reversal
of preacquisition temporary differences was used to reduce cost in excess of
assets acquired. As of December 29, 1996, approximately $1.8 million of deferred
tax assets are related to preacquisition activities and if utilized will further
reduce cost in excess of assets acquired. At December 29, 1996, General Felt has
$14.7 million of regular tax net operating loss carryforwards for federal income
tax purposes expiring from 2003 to 2010 of which $7.0 million was acquired in
1993 and is subject to limitations. In addition, General Felt has $40.6 million
of capital loss carryforwards that expire in 2001.
F-58
<PAGE>
GENERAL FELT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
11. ENVIRONMENTAL MATTERS
During 1996, expenditures in connection with General Felt's compliance with
federal, state, and local environmental laws and regulations did not have a
material adverse effect on General Felt's operations, financial position,
capital expenditures or competitive position. As of December 29, 1996, General
Felt had environmental accruals of approximately $1.5 million for environmental
matters.
General Felt has reported to appropriate state authorities that it has
found soil and groundwater contamination in excess of state standards at a
facility located in Philadelphia. General Felt has begun remediation and is
conducting further investigations into the extent of the contamination at this
facility and, accordingly, the extent of the remediation that may ultimately be
required. The actual cost and the timetable of any such remediation cannot be
predicted with any degree of certainty at this time. As of December 29, 1996,
General Felt had environmental accruals of approximately $1.2 million for the
remaining potential remediation costs for these facilities based on engineering
estimates.
Federal regulations require that by the end of 1998 all underground storage
tanks ("USTs") be removed or upgraded in all states to meet applicable
standards. General Felt has six USTs that will require removal or permanent
in-place closure by the end of 1998. Due to the age of these tanks, leakage may
have occurred resulting in soil and possibly groundwater contamination. General
Felt has accrued $0.3 million for the estimated removal and remediation, if any,
associated with these USTs. However, the full extent of contamination and,
accordingly, the actual cost of such remediation cannot be predicted with any
degree of certainty at this time. General Felt believes that its USTs do not
pose a significant risk of environmental liability because of General Felt's
monitoring practices for USTs and conditional approval for the permanent
in-place closure for certain USTs. However, there can be no assurance that such
USTs will not result in significant environmental liability in the future.
Although it is possible that new information or future developments could
require General Felt to reassess its potential exposure relating to all pending
environmental matters, including those described herein, management believes
that, based upon all currently available information, the resolution of such
environmental matters will not have a material adverse effect on General Felt's
operations, financial position, capital expenditures or competitive position.
The possibility exists, however, that new environmental legislation and/or
environmental regulations may be adopted, or other environmental conditions may
be found to exist, that may require expenditures not currently anticipated and
that may be material.
12. COMMITMENTS AND CONTINGENCIES
Operating Leases
General Felt is obligated, under various noncancellable lease agreements,
for rental of facilities and machinery and equipment. Many of the leases contain
renewal options with varying terms and escalation clauses that provide for
increased rentals based upon increases in the Consumer Price Index, real estate
taxes and the lessors' operating expenses. Total minimum rental commitment
(excluding commitments accrued as part of the 1995 and 1996 restructuring plans)
required under operating leases at December 29, 1996 was:
<TABLE>
<S> <C>
1997 .............................. $1,070
1998 .............................. 809
1999 .............................. 446
2000 .............................. 367
2001 .............................. 340
Thereafter ........................ 1,061
------
Total minimum lease payments ...... $4,093
======
</TABLE>
F-59
<PAGE>
GENERAL FELT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
12. COMMITMENTS AND CONTINGENCIES (continued)
Total rent expense for all operating leases for the years ended 1994, 1995
and 1996 was approximately $3.5 million, $2.8 million and $2.1 million,
respectively.
Guarantor
General Felt has pledged its stock as collateral for certain debt of Foamex
L.P. and is a co-guarantor of the borrowings outstanding under the Foamex L.P.
Credit Facility and Foamex L.P. bond indentures, which as of December 29, 1996,
had amounts outstanding of approximately $11.0 million and $380.2 million,
respectively.
13. RELATED PARTY TRANSACTIONS AND BALANCES
General Felt purchased $149.0 million, $141.2 million and $154.0 million of
carpet cushion foam from Foamex L.P. during 1994, 1995 and 1996, respectively.
In connection with the consolidation of General Felt's administrative
functions with those of Foamex L.P., General Felt paid approximately $2.3
million and $1.4 million to Foamex L.P. in 1995 and 1996, respectively, for
direct costs incurred by Foamex L.P. on General Felt's behalf and for an
allocation of shared services and facilities.
During 1993, General Felt leased two facilities from limited partnerships
in which certain directors and officers of related parties have an interest. The
lessor under the first of these leases (the "East State Lease") is East State
Associates. The lease related to a warehouse at General Felt's Trenton, New
Jersey facility. In accordance with the terms of the lease, the lessor exercised
its right to require General Felt to purchase the facility at the appraised fair
market value of approximately $2.3 million. General Felt assigned the purchase
contract for the property to an unaffiliated third party who purchased the
property on March 28, 1994. General Felt no longer leases the facility. The
lessor under the second lease (the "West State Lease") is West State Associates.
The lease relates to General Felt's manufacturing facility in Pico Rivera,
California. During 1994, General Felt purchased the facility in Pico Rivera,
California from the lessor at the appraised fair market value of $3.4 million.
Rental payments for these leases for the year ended January 1, 1995 were $0.3
million.
14. FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK
Concentration of Credit Risk
General Felt's financial instruments subject to credit risk are primarily
trade accounts receivable. Accounts receivable are concentrated with large
retail customers. General Felt performs ongoing credit evaluations of its
customers' financial conditions and, generally, requires no collateral. General
Felt maintains allowance accounts for potential credit losses and such losses
have been within management's expectations. Additionally, General Felt's ten
largest customers accounted for approximately 32.6% and 30.8% of accounts
receivable at December 31, 1995 and December 29, 1996, respectively.
Disclosure about Fair Value of Financial Instruments
The following disclosures of the estimated fair value amounts have been
determined based on General Felt's assessment of available market information
and appropriate valuation methodologies.
Carrying amounts reported in the consolidated balance sheet for cash and
cash equivalents, accounts receivable, accounts payable, accrued liabilities and
short term borrowings approximates fair value due to the short-term nature of
these instruments.
The carrying value of long-term debt approximates fair value based on the
borrowing rate available to General Felt for bank loans with similar terms and
maturities.
F-60
<PAGE>
GENERAL FELT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
14. FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK (continued)
Fair value estimates are made at a specific point in time, based on
relevant market information about the financial instruments. These estimates are
subjective in nature and involve uncertainties and matters of significant
judgment and, therefore, cannot be determined with precision. Changes in
assumptions could significantly affect the estimates.
15. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Supplemental disclosures of cash flow information:
<TABLE>
<CAPTION>
1994 1995 1996
------ ------ ------
(thousands)
<S> <C> <C> <C>
Interest paid ............... $3,609 $5,300 $4,434
====== ====== ======
Income taxes paid, net ...... $ 316 $ 183 $ 596
====== ====== ======
</TABLE>
F-61
<PAGE>
GENERAL FELT INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
(thousands)
<TABLE>
<CAPTION>
December 29, June 29,
1996 1997
------------ ---------
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash ................................................... $ 336 $ 150
Restricted cash ....................................... 12,143 --
Accounts receivable, net .............................. 44,973 45,571
Inventories .......................................... 25,314 26,325
Other current assets ................................. 9,435 8,115
--------- ---------
Total current assets ................................. 92,201 80,161
PROPERTY, PLANT AND EQUIPMENT, NET ..................... 31,748 31,244
COST IN EXCESS OF ASSETS ACQUIRED, NET .................. 50,574 49,879
OTHER ASSETS .......................................... 3,158 3,025
--------- ---------
TOTAL ASSETS .......................................... $ 177,681 $ 164,309
========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt--related party ...... $ 12,143 $ --
Accounts payable ....................................... 13,719 10,415
Accounts payable to related parties .................. 17,987 15,180
Other accrued liabilities .............................. 17,923 16,640
--------- ---------
Total current liabilities ........................... 61,772 42,235
--------- ---------
LONG-TERM DEBT--RELATED PARTY ........................... 9,260 11,944
--------- ---------
OTHER LIABILITIES ....................................... 9,630 9,433
--------- ---------
COMMITMENTS AND CONTINGENCIES ........................... -- --
--------- ---------
STOCKHOLDER'S EQUITY:
Common stock, $.01 par value; authorized, issued and
outstanding 1,000 shares .............................. -- --
Additional paid-in capital ........................... 143,965 143,965
Retained earnings (accumulated deficit) ............... (46,946) (43,268)
--------- ---------
Total stockholder's equity ........................... 97,019 100,697
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY ............ $ 177,681 $ 164,309
========= =========
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
F-62
<PAGE>
GENERAL FELT INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
(thousands)
<TABLE>
<CAPTION>
26 Week Periods Ended
-----------------------
June 30, June 29,
1996 1997
--------- --------
<S> <C> <C>
NET SALES ................................................... $ 145,997 $148,633
COST OF GOODS SOLD .......................................... 127,002 132,512
--------- --------
GROSS PROFIT ................................................ 18,995 16,121
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES .................................... 9,239 9,577
--------- --------
INCOME FROM OPERATIONS ....................................... 9,756 6,544
INTEREST EXPENSE ............................................. 755 596
OTHER INCOME, NET .......................................... 234 140
--------- --------
INCOME FROM CONTINUING OPERATIONS BEFORE PROVISION FOR
INCOME TAXES ................................................ 9,235 6,088
PROVISION FOR INCOME TAXES ................................. 3,880 2,410
--------- --------
INCOME FROM CONTINUING OPERATIONS ........................... 5,355 3,678
LOSS FROM DISCONTINUED OPERATIONS, NET OF INCOME TAXES ...... (42,686) --
--------- --------
NET INCOME (LOSS) .......................................... $ (37,331) $ 3,678
========= ========
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
F-63
<PAGE>
GENERAL FELT INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(thousands)
<TABLE>
<CAPTION>
26 Week Periods Ended
----------------------
June 30, June 29,
1996 1997
--------- --------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) .......................................... $ (37,331) $ 3,678
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization .............................. 2,212 2,293
Loss from discontinued operations ........................... 42,686 --
Other operating activities ................................. 238 1,941
Changes in operating assets and liabilities, net of
discontinued operations .................................... (7,514) (9,780)
--------- -------
Net cash provided by (used for) operating activities ...... 291 (1,868)
Net cash used for discontinued operations .................. (1,017) --
--------- -------
Net cash used for operating activities ..................... (726) (1,868)
--------- -------
INVESTING ACTIVITIES:
Capital expenditures ....................................... (1,336) (1,002)
Decrease in restricted cash ................................. -- 12,143
Capital expenditures for discontinued operations ............ (900) --
--------- -------
Net cash provided by (used for) investing activities ...... (2,236) 11,141
--------- -------
FINANCING ACTIVITIES:
Net proceeds from (repayments of) Foamex L.P.
notes payable ............................................. 2,238 (9,459)
Payment on long-term debt--unrelated party .................. (1,500) --
Net financing activities of discontinued operations ......... 1,917 --
--------- -------
Net cash (used for) provided by financing activities ...... 2,655 (9,459)
--------- -------
Net decrease in cash ....................................... (307) (186)
Cash at beginning of period ................................. 538 336
--------- -------
Cash at end of period ....................................... $ 231 $ 150
========= =======
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
F-64
<PAGE>
GENERAL FELT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
1. ORGANIZATION AND BASIS OF PRESENTATION
General Felt Industries, Inc. and subsidiaries' ("General Felt") condensed
consolidated balance sheet as of December 29, 1996 has been condensed from the
audited consolidated balance sheet at that date. The condensed consolidated
balance sheet as of June 29, 1997 and the condensed consolidated statements of
operations and the condensed consolidated statements of cash flows for the
twenty-six week periods ended June 30, 1996 and June 29, 1997 have been prepared
by General Felt and have not been audited by General Felt's independent
accountants. Also, the condensed consolidated statements of operations and the
condensed consolidated statement of cash flows for the twenty-six week period
ended June 30, 1996 have been restated for discontinued operations (see Note 2
below). In the opinion of management, all adjustments, consisting only of normal
recurring adjustments, considered necessary for a fair presentation of the
consolidated financial position, results of operations and cash flows have been
included.
Certain information and note disclosures normally included in the financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted in accordance with the rules and regulations of
the Securities and Exchange Commission. These condensed consolidated financial
statements should be read in conjunction with General Felt's 1996 consolidated
financial statements and notes thereto as set forth elsewhere in this
Prospectus.
2. DISCONTINUED OPERATIONS
During 1996, General Felt sold the outstanding common stock of Perfect Fit
Industries, Inc. ("Perfect Fit"), a wholly-owned subsidiary, for an adjusted
sale price of approximately $44.2 million. The sale included the net assets of
General Felt's home comfort products business segment.
General Felt's condensed consolidated financial statements have been
restated to reflect the discontinuation of the home comfort products business
segment. A summary of the operating results for the discontinued operations is
as follows:
<TABLE>
<CAPTION>
26 Week
Period Ended
June 30, 1996
(thousands)
------------
<S> <C>
Net sales .................................................................. $ 50,097
Gross profit ............................................................... 8,065
Income (loss) from operations ................................................ 1,123
Interest and debt issuance expense .......................................... 5,543
Loss on disposal of discontinued operations (39,297)
Other expense ............................................................... 348
Loss from discontinued operations before (benefit) from income taxes (44,065)
Benefit for income taxes ................................................... (1,379)
Loss from discontinued operations, net of income taxes (42,686)
</TABLE>
F-65
<PAGE>
GENERAL FELT INDUSTRIES, INC. AND SUBSIDIARIES.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
3. INVENTORIES
Inventories consist of:
<TABLE>
<CAPTION>
December 29, June 29,
1996 1997
------------ --------
(thousands)
<S> <C> <C>
Raw materials and supplies ...... $12,795 $13,517
Work-in-process .................. 1,120 1,200
Finished goods .................. 11,399 11,608
------- -------
Total ........................... $25,314 $26,325
======= =======
</TABLE>
4. RELATED PARTY TRANSACTIONS
General Felt purchased approximately $72.7 million and $72.5 million of
carpet cushion from Foamex L.P. during the twenty-six week periods ended June
30, 1996 and June 29, 1997, respectively.
5. ENVIRONMENTAL MATTERS
As of June 29, 1997, General Felt had accruals of approximately $1.4
million for environmental matters.
General Felt has reported to appropriate state authorities that it has
found soil and groundwater contamination in excess of state standards at a
facility located in Philadelphia, Pennsylvania. General Felt has begun
remediation and is conducting further investigations into the extent of the
contamination at this facility and, accordingly, the extent of the remediation
that may ultimately be required. The actual cost and the timetable of any such
remediation cannot be predicted with any degree of certainty at this time. As of
June 29, 1997, General Felt had environmental accruals of approximately $1.1
million for the remaining potential remediation costs for this facility based on
engineering estimates.
Federal regulations require that by 1998 all underground storage tanks
("USTs") be removed or upgraded in most states to meet applicable standards.
General Felt has six USTs that will require removal or permanent in-place
closure by the end of 1998. Due to the age of these tanks, leakage may have
occurred resulting in soil and possibly groundwater contamination. General Felt
has accrued $0.3 million for the estimated removal and remediation, if any,
associated with these USTs. However, the full extent of contamination and,
accordingly, the actual cost of such remediation cannot be predicted with any
degree of certainty at this time. General Felt believes that its USTs do not
pose a significant risk of environmental liability because of General Felt's
monitoring practices for USTs and conditional approval for permanent in-place
closure for certain USTs. However, there can be no assurance that such USTs will
not result in significant environmental liability in the future.
Although it is possible that new information or future developments could
require General Felt to reassess its potential exposure relating to all pending
environmental matters, including those described herein, management believes
that, based upon all currently available information, the resolution of such
environmental matters will not have a material adverse effect on General Felt's
operations, financial position, capital expenditures or competitive position.
The possibility exists, however, that new environmental legislation and/or
environmental regulations may be adopted, or other environmental conditions may
be found to exist, that may require expenditures not currently anticipated and
that may be material.
F-66
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholder of
Foamex Fibers, Inc.:
We have audited the accompanying balance sheets of Foamex Fibers, Inc. ("Foamex
Fibers") (successor to GS Industries, Inc. and Pontotoc Fibers, Inc.
(collectively, the "Predecessor Company")) as of December 31, 1995 and December
29, 1996, and the related combined statements of operations, cash flows and
stockholder's equity for the year ended December 31, 1994 and the period from
January 1, 1995 to April 12, 1995 (Predecessor Company) and the statements of
operations, cash flows and stockholder's equity for the period from April 13,
1995 to December 31, 1995 and for the year ended December 29, 1996. These
financial statements are the responsibility of Foamex Fibers' management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Foamex Fibers as of December
31, 1995 and December 29, 1996, and the results of its operations and its cash
flows for the year ended December 31, 1994, the period from January 1, 1995 to
April 12, 1995 (Predecessor Company), the period from April 13, 1995 to
December 31, 1995 and for the year ended December 29, 1996, in conformity with
generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Charlotte, North Carolina
June 20, 1997
F-67
<PAGE>
FOAMEX FIBERS, INC.
BALANCE SHEETS (unaudited)
(thousands)
<TABLE>
<CAPTION>
December 31, December 29,
1995 1996
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash ................................................ $ 469 $ 156
Accounts receivable, net ........................... 884 707
Accounts receivable from General Felt ............... 1,389 5,092
Inventories .......................................... 1,282 972
Other current assets ................................. 61 181
------ -------
Total current assets .............................. 4,085 7,108
------ -------
PLANT AND EQUIPMENT:
Machinery, equipment and furnishings ............... 2,002 2,666
Less accumulated depreciation and amortization ...... (131) (340)
------ -------
Plant and equipment, net ........................... 1,871 2,326
COST IN EXCESS OF ASSETS ACQUIRED, NET ............... 3,938 3,880
------ -------
TOTAL ASSETS .......................................... $9,894 $13,314
====== =======
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable .................................... $1,349 $ 1,236
Other accrued liabilities ........................... 160 466
------ -------
Total current liabilities ........................... 1,509 1,702
INCOME TAXES DUE TO GENERAL FELT ..................... 410 1,566
------ -------
Total liabilities ................................. 1,919 3,268
------ -------
COMMITMENTS AND CONTINGENCIES ........................ -- --
------ -------
STOCKHOLDER'S EQUITY:
Common stock, $.01 par value; authorized, issued and
outstanding 1,000 shares ........................... -- --
Additional paid-in capital ........................... 7,272 7,272
Retained earnings .................................... 703 2,774
------ -------
Total stockholder's equity ........................ 7,975 10,046
------ -------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY ............ $9,894 $13,314
====== =======
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-68
<PAGE>
FOAMEX FIBERS, INC.
STATEMENTS OF OPERATIONS
for the year ended December 31, 1994, for the period from January 1, 1995
to April 12, 1995 (Predecessor Company), for the period from April 13, 1995
to December 31, 1995 and for the year ended December 29, 1996
(thousands)
<TABLE>
<CAPTION>
Predecessor Company
---------------------------------- April 13, 1995
Year Ended January 1, 1995 to Year Ended
December 31, to December 31 December 29,
1994 April 12, 1995 1995 1996
------------ --------------- -------------- ------------
<S> <C> <C> <C> <C>
NET SALES ........................ $16,778 $ 5,577 $14,112 $21,410
COST OF GOODS SOLD ............... 13,565 4,580 11,948 16,843
------- ------- ------- -------
GROSS PROFIT ..................... 3,213 997 2,164 4,567
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES ......... 1,497 336 980 1,257
------- ------- ------- -------
INCOME FROM OPERATIONS ......... 1,716 661 1,184 3,310
OTHER EXPENSE, NET ............... 29 6 12 7
------- ------- ------- -------
INCOME BEFORE PROVISION
FOR INCOME TAXES ............... 1,687 655 1,172 3,303
PROVISION FOR INCOME TAXES ...... -- -- 469 1,232
------- ------- ------- -------
NET INCOME ..................... $ 1,687 $ 655 $ 703 $ 2,071
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-69
<PAGE>
FOAMEX FIBERS, INC.
STATEMENTS OF CASH FLOWS
for the year ended December 31, 1994, for the period from January 1, 1995
to April 12, 1995 (Predecessor Company), for the period from April 13, 1995
to December 31, 1995 and for the year ended December 29, 1996
(thousands)
<TABLE>
<CAPTION>
Predecessor Company
-------------------------------- April 13, 1995
Year Ended January 1, 1995 to Year Ended
December 31, to December 31 December 29,
1994 April 12, 1995 1995 1996
------------ --------------- -------------- ------------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income ...................................................... $ 1,687 $ 655 $ 703 $ 2,071
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization .................................. 528 143 195 314
Income taxes due to General Felt ............................... -- -- 410 1,156
Changes in operating assets and
liabilities, net of acquisitions:
Accounts receivable ............................................. (520) (210) 573 178
Accounts receivable from General Felt .......................... -- -- (837) (3,703)
Inventories .................................................... (439) 106 (117) 310
Other assets and liabilities ................................... 148 278 (267) 30
------- ------- ------- -------
Net cash provided by operating
activities .................................................... 1,404 972 660 356
------- ------- ------- -------
INVESTING ACTIVITIES:
Capital expenditures ............................................ (491) (587) (191) (669)
Acquisition, net of cash acquired ............................... -- -- (7,272) --
------- ------- ------- -------
Net cash used for investing
activities .................................................... (491) (587) (7,463) (669)
------- ------- ------- -------
FINANCING ACTIVITIES:
Proceeds from long-term debt ................................... -- 1,000 -- --
Repayment of advances from
former stockholders ........................................... (228) (102) -- --
Repayment of long-term debt .................................... (41) (531) -- --
Distribution to former stockholders ............................ (94) (150) -- --
Cash retained by former owners ................................. -- (1,622) -- --
Capital contributions .......................................... -- -- 7,272 --
------- ------- ------- -------
Net cash provided by (used for)
financing activities .......................................... (363) (1,405) 7,272 --
------- ------- ------- -------
NET INCREASE (DECREASE)
IN CASH ........................................................ 550 (1,020) 469 (313)
CASH AT BEGINNING OF PERIOD ..................................... 470 1,020 -- 469
------- ------- ------- -------
CASH AT END OF PERIOD ........................................... $ 1,020 $ -- $ 469 $ 156
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-70
<PAGE>
FOAMEX FIBERS, INC.
STATEMENTS OF STOCKHOLDER'S EQUITY
for the year ended December 31, 1994, for the period from
January 1, 1995 to April 12, 1995 (Predecessor Company), for the period from
April 13, 1995
to December 31, 1995 and for the year ended December 29, 1996
(thousands)
<TABLE>
<CAPTION>
Additional Retained Earnings
Common Stock
----------------- Paid-In (Accumulated)
Shares Amount Capital Deficit)
------ ------ -------- -----------------
<S> <C> <C> <C> <C>
Balances at January 1, 1994 ..................... 110 $ 200 $ -- $ (829)
Net income ....................................... -- -- -- 1,687
Distributions to former stockholders ............ -- -- -- (94)
---- ----- ------ --------
Balances at December 31, 1994 .................. 110 200 -- 764
Net income for the period from January 1, 1995 to
April 12, 1995 ................................. -- -- -- 655
Distributions to former stockholders ............ -- -- -- (150)
Acquisition adjustment ........................... (110) (200) -- (1,269)
---- ----- ------ --------
Balances at April 12, 1995 ..................... -- -- -- --
Capital Contribution by General Felt ............ 1 -- 7,272 --
Net income for the period from April 13, 1995
to December 31, 1995 ........................... -- -- -- 703
---- ----- ------ --------
Balances at December 31, 1995 .................. 1 -- 7,272 703
Net income ....................................... -- -- -- 2,071
---- ----- ------ --------
Balances at December 29, 1996 .................. 1 -- $7,272 $ 2,774
==== ===== ====== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-71
<PAGE>
FOAMEX FIBERS, INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION
Foamex Fibers, Inc. ("Foamex Fibers") manufactures various nonwoven textile
fiber products used primarily for carpet padding and in the furniture industry.
Foamex Fibers was formed on March 29, 1995 for the purpose of acquiring
certain assets and assuming certain liabilities of GS Industries, Inc. and
Pontotoc Fibers, Inc. On April 13, 1995, Foamex Fibers acquired such assets and
assumed such liabilities for an aggregate purchase price of approximately $8.0
million. (See Note 3 for further discussion.)
Foamex Fibers is a wholly-owned subsidiary of General Felt Industries, Inc.
("General Felt") which in turn is a wholly-owned subsidiary of Foamex L.P.
Foamex L.P. is a 99% owned subsidiary of Foamex International Inc. ("Foamex
International").
The balance sheets as of December 31, 1995 and December 29, 1996 and the
statements of operations, cash flows and stockholder's equity for the period
from April 13, 1995 to December 31, 1995 and for the year ended December 29,
1996 pertain to Foamex Fibers.
The accompanying combined statements of operations, cash flows and
stockholder's equity for the year ended December 31, 1994 and the period from
January 1, 1995 to April 12, 1995 include the combined individual operations of
GS Industries, Inc. and Pontotoc Fibers, Inc. (collectively, the "Predecessor
Company").
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Fiscal Year
Foamex Fibers' fiscal year ends on the Sunday closest to the thirty-first
day of December. Fiscal year 1996 was composed of fifty-two weeks and ended on
December 29, 1996. The Predecessor Company's year end was the thirty-first day
of December.
Accounting Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and reported amounts of revenues and expenses
during the reported period. Actual results could differ from those estimates.
Revenue Recognition
Revenue from sales is recognized when products are shipped.
Discounts and Billing Adjustments
A reduction in sales revenue is recognized for sales discounts when product
is invoiced or for other billing adjustments when authorized.
Inventories
Inventories are stated at the lower of cost or market. The cost of
inventories is determined on a first-in, first-out basis.
Plant and Equipment
Plant and equipment are stated at cost and are depreciated using the
straight-line method over the estimated useful lives of the assets. The range of
useful lives estimated for machinery, equipment and furnishings is five to
twelve years. Leasehold improvements are amortized over the shorter of the terms
of the respective lease or the estimated useful life of the improvement,
whichever is shorter. Depreciation expense for the year ended December
F-72
<PAGE>
FOAMEX FIBERS, INC.
NOTES TO FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
31, 1994, the period from January 1, 1995 to April 12, 1995, the period from
April 13, 1995 to December 31, 1995 and for the year ended December 29, 1996
was $0.5 million, $0.1 million, $0.1 million and $0.2 million, respectively.
For income tax purposes, Foamex Fibers uses accelerated depreciation methods.
Cost of maintenance and repairs is charged to expense as incurred. Renewals
and improvements are capitalized. Upon retirement or other disposition of items
of plant and equipment, the cost and related accumulated depreciation are
removed from the accounts and any gain or loss is included in operations.
Cost in Excess of Net Assets Acquired
The excess of the acquisition cost over the fair value of net assets
acquired in business combinations accounted for by the purchase method is
amortized using the straight-line method over a forty year period. At each
balance sheet date Foamex Fibers evaluates the recoverability of cost in excess
of net assets acquired using certain financial indicators such as historical and
future ability to generate income from operations based on a going concern
basis. Accumulated amortization as of December 31, 1995 and December 29, 1996 is
approximately $0.1 million and $0.2 million, respectively.
Environmental Matters
Environmental expenditures that relate to current operations are expensed
or capitalized as appropriate. Expenditures that relate to an existing condition
caused by past operations, which do not contribute to current or future revenue
generation, are expensed. Liabilities are recorded when environmental
assessments and/or remedial efforts are probable, and the cost can be reasonably
estimated.
Income Taxes
Income taxes are accounted for under the liability method in which deferred
income taxes are provided for temporary differences between the financial
reporting and income tax basis of assets and liabilities using the income tax
rates, under existing legislation, expected to be in effect at the date such
temporary differences are expected to reverse.
Foamex Fibers joins with General Felt in the filing of a consolidated U.S.
Federal income tax return. Foamex Fiber's policy is to provide for Federal and
state income taxes on a separate return basis. As of December 29, 1996, Foamex
Fibers does not have a tax sharing agreement with General Felt therefore current
and deferred Federal income taxes payable are classified as noncurrent and are
included in Income Taxes Due to General Felt. Net deferred Federal income tax
liabilities amounting to approximately $0.3 million at December 29, 1996 are
included in Income Taxes Due to General Felt and consist primarily of
accelerated depreciation for plant and equipment and accelerated amortization
for costs in excess of assets acquired for income tax purposes offset by
deferred tax assets relating to allowance accounts and accrued liabilities not
deductible for income tax purposes.
The stockholders of the Predecessor Company had elected S Corporation
status under the provision of the Internal Revenue Code, which provides that, in
lieu of corporate income taxes, the stockholders are taxed on the Company's
taxable income.
3. ACQUISITIONS
On April 13, 1995, Foamex Fibers acquired certain assets and assumed
certain liabilities of GS Industries, Inc. and Pontotoc Fibers, Inc. for
aggregate consideration of approximately $8.0 million, including related fees
and expenses of approximately $0.3 million, with an initial cash payment of $7.2
million. The purchase price was funded by General Felt in the form of a capital
contribution. The excess of the purchase price over the estimated fair value of
the net assets acquired was approximately $3.9 million. The acquisition was
accounted for as a purchase. The cost of the acquisition has been allocated on
the basis of the fair value of the assets acquired and the liabilities assumed.
The excess of the purchase price over the estimated fair value of the net assets
acquired is being amortized using the straight-line method over forty years.
F-73
<PAGE>
FOAMEX FIBERS, INC.
NOTES TO FINANCIAL STATEMENTS
3. ACQUISITIONS (continued)
The pro forma results listed below are unaudited and assume that the
acquisition of GS Industries, Inc. and Pontotoc Fibers, Inc. occurred at the
beginning of each period presented.
<TABLE>
<CAPTION>
1994 1995
------- -------
(thousands)
<S> <C> <C>
Net sales .................................... $16,778 $19,689
=======
Income before provision for income taxes ...... $ 1,514 $ 1,777
=======
Net income .................................... $ 908 $ 1,066
=======
</TABLE>
The pro forma results are not necessarily indicative of what would have
occurred if the acquisition had been in effect for the entire periods presented
nor are they necessarily indicative of future results.
4. INVENTORIES
Inventories consist of:
<TABLE>
<CAPTION>
December 31, December 29,
1995 1996
------------ ------------
(thousands)
<S> <C> <C>
Raw material and supplies ...... $ 846 $700
Finished goods .................. 436 272
------ ----
Total ........................ $1,282 $972
====== ====
</TABLE>
5. INCOME TAXES
The components of the provision for income taxes are summarized as follows:
<TABLE>
<CAPTION>
Year Ended
Period from April 13, 1995 December 29,
to December 31, 1995 1996
-------------------------- ------------
(thousands)
<S> <C> <C>
Federal ........................... $410 $1,156
State ........................... 59 76
---- ------
Provision for income taxes ...... $469 $1,232
==== ======
</TABLE>
A reconciliation of the statutory federal income tax rate to the effective
income tax rate is as follows:
<TABLE>
<CAPTION>
April 13, 1995 to December 29,
December 31, 1995 1996
----------------- ------------
(thousands)
<S> <C> <C>
Statutory income taxes .................. $410 $1,156
State income taxes, net of federal ...... 59 76
---- ------
Provision for income taxes ............ $469 $1,232
==== ======
</TABLE>
F-74
<PAGE>
FOAMEX FIBERS, INC.
NOTES TO FINANCIAL STATEMENTS
6. COMMITMENTS AND CONTINGENCIES
Operating Leases
Foamex Fibers is obligated, under various noncancellable lease agreements,
for rental of facilities and machinery and equipment. Many of the leases contain
renewal options with varying terms and escalation clauses that provide for
increased rentals based upon increases in the Consumer Price Index, real estate
taxes and the lessors' operating expenses. Total minimum rentals commitment
required under operating leases at December 29, 1996 (thousands) was:
<TABLE>
<S> <C>
1997 .............................. $ 338
1998 .............................. 328
1999 .............................. 318
2000 .............................. 318
2001 .............................. 318
Thereafter ........................ 1,050
------
Total minimum lease payments ...... $2,670
======
</TABLE>
Total rent expense for all operating leases for the year ended December 31,
1994, for the period from January 1, 1995 to April 12, 1995, the period from
April 13, 1995 to December 31, 1995 and for the year ended December 29, 1996 was
approximately $0.2 million, $0.1 million, $0.2 million and $0.3 million,
respectively,
7. RELATED PARTY TRANSACTIONS AND BALANCES
General Felt purchased $1.2 million, $0.8 million, $6.4 million and $10.1
million of carpet cushion from Foamex Fibers for the year ended December 31,
1994, the period from January 1, 1995 to April 12, 1995, the period from April
13, 1995 to December 31, 1995 and for the year ended December 29, 1996,
respectively. As of December 31, 1995 and December 29, 1996, Foamex Fibers had
accounts receivable from General Felt of approximately $1.4 million and $5.1
million, respectively.
Foamex Fibers leases five facilities from an officer of Foamex Fibers. The
rental expense for the year ended December 31, 1994, the period from January 1,
1995 to April 12, 1995, the period from April 13, 1995 to December 31, 1995 and
for the year ended December 29, 1996 was $0.2 million, $0.1 million, $0.2
million and $0.3 million, respectively.
The Predecessor Company had sales of approximately $1.9 million during the
year ended December 31, 1994 to a company controlled by the former shareholder
of GS Industries, Inc.
F-75
<PAGE>
FOAMEX FIBERS, INC. CONDENSED BALANCE SHEETS (unaudited)
(thousands)
<TABLE>
<CAPTION>
December 29, June 29,
1996 1997
------------ ---------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash .......................................... $ 156 $ 131
Accounts receivable, net ..................... 707 1,029
Accounts receivable from General Felt ......... 5,092 6,317
Inventories .................................... 972 1,086
Other current assets ........................... 181 222
------- -------
Total current assets ........................ 7,108 8,785
PLANT AND EQUIPMENT, NET ........................ 2,326 2,780
COST IN EXCESS OF ASSETS ACQUIRED, NET ......... 3,880 3,830
------- -------
TOTAL ASSETS .................................... $13,314 $15,395
======= =======
LIABILITIES AND STOCKHOLDERS EQUITY
CURRENT LIABILITIES:
Accounts payable .............................. $ 1,236 $ 1,212
Other accrued liabilities ..................... 466 399
------- -------
Total current liabilities ..................... 1,702 1,611
------- -------
INCOME TAXES DUE TO GENERAL FELT ............... 1,566 2,322
------- -------
COMMITMENTS AND CONTINGENCIES .................. -- --
STOCKHOLDERS EQUITY:
Common stock ................................. -- --
Additional paid-in capital ..................... 7,272 7,272
Retained earnings .............................. 2,774 4,190
------- -------
Total stockholder's equity .................. 10,046 11,462
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY ...... $13,314 $15,395
======= =======
</TABLE>
The accompanying notes are an integral part of the condensed
financial statements.
F-76
<PAGE>
FOAMEX FIBERS, INC.
CONDENSED STATEMENTS OF OPERATIONS (unaudited)
(thousands)
<TABLE>
<CAPTION>
26 Week Periods Ended
---------------------
June 30, June 29,
1996 1997
-------- --------
<S> <C> <C>
NET SALES .......................................... $10,510 $11,888
COST OF GOODS SOLD ................................. 8,323 8,993
------- -------
GROSS PROFIT ....................................... 2,187 2,895
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ...... 482 647
------- -------
INCOME FROM OPERATIONS ........................... 1,705 2,248
OTHER EXPENSE, NET ................................. 8 1
------- -------
INCOME FROM BEFORE PROVISION FOR INCOME TAXES ...... 1,697 2,247
PROVISION FOR INCOME TAXES ........................ 634 831
------- -------
NET INCOME ....................................... $ 1,063 $ 1,416
======= =======
</TABLE>
The accompanying notes are an integral part of the condensed
financial statements.
F-77
<PAGE>
FOAMEX FIBERS, INC.
CONDENSED STATEMENTS OF CASH FLOWS (unaudited)
(thousands)
<TABLE>
<CAPTION>
26 Week Periods Ended
---------------------
June 30, June 29,
1996 1997
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income ................................................... $ 1,063 $ 1,416
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization .............................. 141 185
Changes in operating assets and liabilities ............... (1,343) (1,038)
------- -------
Net cash provided by (used for) operating activities ...... (139) 563
------- -------
INVESTING ACTIVITIES:
Capital expenditures .......................................... (178) (588)
------- -------
Net cash used for investing activities ..................... (178) (588)
------- -------
Net decrease in cash .......................................... (317) (25)
Cash at beginning of period ................................. 469 156
------- -------
Cash at end of period ....................................... $ 152 $ 131
======= =======
</TABLE>
The accompanying notes are an integral part of the condensed
financial statements.
F-78
<PAGE>
FOAMEX FIBERS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (unaudited)
1. ORGANIZATION AND BASIS OF PRESENTATION
Foamex Fibers, Inc.'s ("Foamex Fibers") condensed balance sheet as of
December 29, 1996 has been condensed from the audited consolidated balance sheet
at that date. The condensed balance sheet as of June 29, 1997 and the condensed
statements of operations and the condensed statements of cash flows for the
twenty-six week periods ended June 30, 1996 and June 29, 1997 have been prepared
by Foamex Fibers and have not been audited by Foamex Fiber's independent
accountants. In the opinion of management, all adjustments, consisting only of
normal recurring adjustments, considered necessary for a fair presentation of
the consolidated financial position, results of operations and cash flows have
been included.
Certain information and note disclosures normally included in the financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted in accordance with the rules and regulations of
the Securities and Exchange Commission. These condensed financial statements
should be read in conjunction with Foamex Fibers 1996 financial statements and
notes thereto as set forth elsewhere in this Prospectus.
2. INVENTORIES
Inventories consist of:
<TABLE>
<CAPTION>
December 29, June 29,
1996 1997
------------ --------
(thousands)
<S> <C> <C>
Raw material and supplies ...... $700 $ 753
Finished goods .................. 272 333
----- -------
Total ........................... $972 $1,086
===== =======
</TABLE>
3. RELATED PARTY TRANSACTIONS
General Felt purchased approximately $4.8 million and $5.2 million of
carpet cushion from Foamex Fibers for the twenty-six week periods ended June 30,
1996 and June 29, 1997, respectively.
F-79
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholder of
FMXI, Inc.:
We have audited the accompanying consolidated balance sheet of FMXI, Inc. and
subsidiary ("FMXI") (a wholly-owned subsidiary of Foamex International Inc.) as
of December 29, 1996. This balance sheet is the responsibility of FMXI's
management. Our responsibility is to express an opinion on this balance sheet
based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the balance sheet is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the balance sheet. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall balance sheet presentation. We
believe that our audit provides a reasonable basis for our opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the consolidated financial position of FMXI at December 29,
1996, in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
February 26, 1997
F-80
<PAGE>
FMXI, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
(thousands)
<TABLE>
<CAPTION>
December 29,
1996
------------
<S> <C>
ASSETS:
CURRENT ASSETS:
Cash and cash equivalents .................................... $ 20,969
Restricted cash ............................................. 12,143
Accounts receivable, net of allowance for doubtful accounts of
$6,328 ...................................................... 125,847
Inventories ................................................ 102,610
Deferred income taxes ....................................... 6,720
Due from related parties .................................... 1,791
Other current assets ....................................... 18,849
----------
Total current assets ....................................... 288,929
----------
PROPERTY, PLANT AND EQUIPMENT:
Land and land improvements ................................. 9,674
Buildings and leasehold improvements ........................ 78,082
Machinery, equipment and furnishings ........................ 185,348
Construction in progress .................................... 20,784
----------
Total ...................................................... 293,888
Less accumulated depreciation and amortization ............... (111,461)
----------
Property, plant and equipment, net ........................... 182,427
COST IN EXCESS OF ASSETS ACQUIRED, NET ........................ 83,991
DEBT ISSUANCE COSTS, NET ....................................... 14,902
OTHER ASSETS ................................................... 15,917
----------
TOTAL ASSETS ................................................... $ 586,166
==========
</TABLE>
The accompanying notes are an integral part of the consolidated balance sheet.
F-81
<PAGE>
FMXI, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET--(Continued)
(thousands)
<TABLE>
<CAPTION>
December 29,
1996
------------
<S> <C>
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT):
CURRENT LIABILITIES:
Short-term borrowings .................................... $ 3,692
Current portion of long-term debt--unrelated parties ...... 13,735
Accounts payable .......................................... 75,621
Accounts payable to related parties ........................ 8,894
Accrued employee compensation .............................. 7,302
Accrued interest .......................................... 8,871
Accrued restructuring charges .............................. 6,300
Other accrued liabilities ................................. 27,506
---------
Total current liabilities ................................. 151,921
---------
LONG-TERM DEBT--UNRELATED PARTIES ........................... 386,800
LONG-TERM DEBT--RELATED PARTIES .............................. 5,817
DEFERRED INCOME TAXES ....................................... 4,998
ACCRUED RESTRUCTURING CHARGES ................................. 4,043
OTHER LIABILITIES ............................................. 19,953
---------
Total liabilities ....................................... 573,532
---------
MINORITY INTEREST ............................................. 21,507
---------
COMMITMENTS AND CONTINGENCIES .............................. --
---------
STOCKHOLDER'S EQUITY (DEFICIT)
Common stock, par value $.01 per share; 1,000 shares
authorized, issued and outstanding ........................ --
Additional paid-in capital ................................. 3,697
Retained earnings (deficit) .............................. (296)
Other ...................................................... (12,274)
---------
Total stockholder's equity (deficit) ..................... (8,873)
---------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT) ......... $ 586,166
=========
</TABLE>
The accompanying notes are an integral part of the consolidated balance sheet.
F-82
<PAGE>
FMXI, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED BALANCE SHEET
1. ORGANIZATION AND BASIS OF PRESENTATION
FMXI, Inc. ("FMXI"), a Delaware corporation, is a wholly-owned subsidiary
of Foamex International Inc. ("Foamex International"). FMXI is a holding company
whose only activity is its 1% managing general partnership interest in Foamex
L.P. FMXI has no employees or operations of its own. Foamex L.P., a Delaware
limited partnership, is a significant manufacturer and marketer of flexible
polyurethane foam and foam products in North America. Foamex L.P.'s products
include (i) foam for carpet cushion and other carpet products, (ii) cushioning
foams for furniture, bedding, packaging and health care, (iii) foams for
automotive trim and accessories and (iv) technical foams for filtration,
consumer products and packaging.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation
The consolidated balance sheet includes the accounts of FMXI and its
consolidated subsidiary, Foamex L.P. Intercompany accounts and transactions have
been eliminated in consolidation.
Fiscal Year
FMXI's fiscal year ends on the Sunday closest to the thirty-first day of
December. Fiscal year 1996 was composed of fifty-two weeks and ended on December
29, 1996.
Accounting Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reported period. Actual results could differ from those
estimates. (See Notes 3, 7, 8, 12, 13, and 14 and Cost in Excess of Net Assets
Acquired below.)
Cash and Cash Equivalents
All highly liquid investments with an original maturity of three months or
less when purchased are considered to be cash equivalents. On December 29, 1996,
cash and cash equivalents included $18.4 million of repurchase agreements
collateralized by U.S. Government securities.
Restricted Cash
As of December 29, 1996, Foamex L.P. had restricted cash of approximately
$12.1 million. This cash was derived from the net sales proceeds relating to the
sale of Perfect Fit and is restricted by Foamex L.P.'s debt agreements. As of
February 26, 1997, Foamex L.P. has used approximately $8.4 million of the
restricted cash to repurchase approximately $8.0 million of outstanding
indebtedness.
Inventories
Inventories are stated at the lower of cost or market. The cost of the
inventories is determined on a first-in, first-out basis.
Property, Plant and Equipment
Property, plant and equipment are stated at cost and are depreciated using
the straight-line method over the estimated useful lives of the assets. The
range of useful lives estimated for buildings is generally twenty to thirty-five
years and the range for machinery, equipment and furnishings is five to twelve
years. Leasehold improvements are amortized over the shorter of the terms of the
respective leases or the estimated useful lives of the leasehold improvements.
Debt Issuance Costs
Debt issuance costs consist of amounts incurred in obtaining long-term
financing. These costs are being amortized over the term of the related debt
using the interest method. Accumulated amortization as of December 29, 1996 was
approximately $7.5 million.
F-83
<PAGE>
FMXI, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED BALANCE SHEET--(Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Cost in Excess of Net Assets Acquired
The excess of the acquisition cost over the fair value of net assets
acquired in business combinations accounted for as purchases is amortized using
the straight-line method over a forty year period. At each balance sheet date
Foamex L.P. evaluates the recoverability of cost in excess of net assets
acquired using certain financial indicators such as historical and future
ability to generate income from operations based on a going concern basis.
Accumulated amortization as of December 29, 1996 was approximately $11.6
million.
Environmental Matters
Environmental expenditures that relate to current operations are expensed
or capitalized as appropriate. Expenditures that relate to an existing condition
caused by past operations, and which do not contribute to current or future
revenue generation, are expensed. Liabilities are recorded when environmental
assessments and/or remedial efforts are probable and the costs can be reasonably
estimated.
Postretirement and Postemployment Benefits
Foamex L.P. accrues postretirement benefits throughout the employees'
active service periods until they attain full eligibility for those benefits.
Also, Foamex L.P. accrues postemployment benefits when it becomes probable that
such benefits will be paid and when sufficient information exists to make
reasonable estimates of the amounts to be paid.
Foreign Currency Accounting
The financial statements of foreign subsidiaries, except in countries
treated as highly inflationary, have been translated into U.S. dollars by using
the year end exchange rates for assets and liabilities and average exchange
rates for the statements of operations. Currency translation adjustments are
included in other stockholder's equity (deficit) until the entity is
substantially sold or liquidated. For operations in countries treated as highly
inflationary, certain financial statement amounts are translated at historical
exchange rates, with all other assets and liabilities translated at year end
exchange rates. These translation adjustments are reflected in the results of
operations and are insignificant for all periods presented.
Interest Rate Swap Agreement
The differential to be paid or received under an interest rate swap
agreement is recognized as an adjustment to interest and debt issuance expense
in the current period as interest rates change.
Income Taxes
Income taxes are accounted for under the liability method, in which
deferred income taxes are provided for temporary differences between the
financial reporting and income tax basis of assets and liabilities using the
income tax rates, under existing legislation, expected to be in effect at the
date such temporary differences are expected to reverse.
Foamex L.P. has a tax sharing agreement that provides for the payment of
distributions to the partners for amounts that would be required to be paid if
Foamex L.P. was a corporation filing separate tax returns. The ability of Foamex
L.P. to make such distributions is limited by the terms of its credit agreements
and indentures. (See Note 6).
3. RESTRUCTURING AND OTHER CHARGES (CREDITS)
In 1995, Foamex L.P. approved a restructuring plan (the "1995 restructuring
plan") to consolidate thirteen foam production, fabrication or branch locations,
to concentrate resources as a result of industry conditions and to better
position itself to achieve its strategic growth objectives. Foamex L.P. recorded
restructuring and other charges of
F-84
<PAGE>
FMXI, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED BALANCE SHEET--(Continued)
3. RESTRUCTURING AND OTHER CHARGES (CREDITS) (continued)
$39.2 million which was comprised of $35.6 million associated with the
consolidation of the foam production, fabrication or branch locations, $2.2
million associated with the completion of a 1993 restructuring plan and $1.4
million associated with merger and acquisition activities of Foamex L.P. The
components of the $35.6 million restructuring charge include: $16.7 million for
fixed asset writedowns (net of estimated sale proceeds), $15.1 million for
plant closure and operating lease obligations and $3.8 million for personnel
reductions. The $3.8 million cost for personnel reductions primarily represents
severance and employee benefit costs associated with the elimination of
manufacturing and administrative personnel.
In 1996, Foamex L.P. determined to continue to operate one of the
facilities originally identified for closure in the 1995 restructuring plan
because of improved economics and the lack of synergy to be achieved from
relocating the manufacturing process. In addition, Foamex L.P. has approved a
plan to close two facilities that were not originally identified in the 1995
restructuring plan. As a result of these changes to the 1995 restructuring plan
and the favorable termination of certain lease agreements and other matters,
Foamex L.P. recorded a $6.4 million net restructuring credit which included a
restructuring credit of $11.3 million associated with Foamex L.P.'s decision
not to close the facility identified as part of the 1995 restructuring plan and
$1.7 million of restructuring credits relating primarily to the favorable
termination of certain lease agreements and other matters relating to the 1995
restructuring plan, offset by $6.6 million of restructuring charges relating to
the closure of the two facilities during 1997 (the "1996 restructuring plan").
Generally, the 1995 restructuring plan has been implemented as originally
contemplated. The following table sets forth the components of Foamex L.P.'s
restructuring and other charges:
<TABLE>
<CAPTION>
Asset Plant Closure Personnel
Total Writedowns and Leases Reductions Other
------- ---------- ------------- ---------- -------
(millions)
<S> <C> <C> <C> <C> <C>
1995 restructuring charge ........................ $ 39.2 $ 16.7 $ 15.1 $ 3.8 $ 3.6
Asset writeoff/writedowns ........................ (23.3) (20.9) -- -- (2.4)
Cash spending .................................... (0.4) -- (0.3) (0.1) --
------- ------- ------- ------- -------
Balances at December 31, 1995 .................. 15.5 (4.2) 14.8 3.7 1.2
Cash spending .................................... (9.7) -- (6.6) (2.0) (1.1)
Cash proceeds .................................... 1.0 1.0 -- -- --
1996 restructuring charge ........................ 6.6 2.4 4.1 0.1 --
Restructuring credits ........................... (13.0) (9.7) (2.8) (0.4) (0.1)
Asset adjustment for restructuring credits ...... 8.1 8.7 (0.6) -- --
------- ------- ------- ------- -------
Balances at December 29, 1996 .................. $ 8.5 $ (1.8) $ 8.9 $ 1.4 $ --
======= ======= ======= ======= =======
</TABLE>
As indicated in the table above, the accrued restructuring balance at
December 29, 1996 will be used for payments relating to plant closure and leases
including rundown costs at the facilities. The $1.8 million of asset writedowns
relates to estimated proceeds and is included in noncurrent assets. Foamex L.P.
expects to incur approximately $6.3 million of charges during 1997 with the
remaining $4.0 million to be incurred through 2001. As of December 29, 1996,
Foamex L.P. has terminated approximately 270 employees and notified
approximately 40 employees in the manufacturing and administrative areas of
their impending termination in connection with the 1995 and 1996 restructuring
plans.
F-85
<PAGE>
FMXI, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED BALANCE SHEET--(Continued)
4. INVENTORIES
Inventories consists of:
<TABLE>
<CAPTION>
December 29,
1996
------------
(thousands)
<S> <C>
Raw materials and supplies ...... $ 61,559
Work in process .................. 13,453
Finished goods .................. 27,598
--------
Total ........................... $102,610
========
</TABLE>
5. SHORT-TERM BORROWINGS
Short-term borrowings include borrowings outstanding under a line of credit
facility for Foamex Canada Inc. ("Foamex Canada") bearing interest at the bank's
prime rate (4.75% at December 29, 1996) plus 1/2%. The weighted average interest
rates on Foamex Canada's short-term borrowings outstanding for 1996 was 5.9%.
Borrowings under Foamex Canada's credit facility are due on demand and are
collateralized by accounts receivable, property and inventories of Foamex Canada
having an approximate net carrying value of $17.1 million as of December 29,
1996. The unused amount under this line of credit totaled $0.7 million as of
December 29, 1996.
6. LONG-TERM DEBT
Long-term debt consists of:
<TABLE>
<CAPTION>
December 29,
1996
------------
(thousands)
<S> <C>
Unrelated parties:
91/2% Senior secured notes due 2000 ................................. $106,793
111/4% Senior notes due 2002 ....................................... 141,400
117/8% Senior subordinated debentures due 2004 (net of unamortized
debt discount of $769) ............................................. 125,056
117/8% Senior subordinated debentures due 2004, Series B ............ 7,000
Industrial revenue bonds ............................................. 7,000
Foamex L.P. term loan (8.54% interest rate as of December 29, 1996) 11,000
Other ............................................................... 2,286
--------
Total ............................................................... 400,535
Less current portion ................................................ 13,735
--------
Long-term debt--unrelated parties .................................... $386,800
========
Related parties:
Subordinated note payable (net of unamortized debt discount of $1,198) $ 5,817
========
</TABLE>
91/2% Senior Secured Notes due 2000 ("Senior Secured Notes")
The Senior Secured Notes were issued on June 3, 1993 and bear interest at
the rate of 91/2% payable semiannually on each June 1 and December 1. The Senior
Secured Notes mature on June 1, 2000. The Senior Secured Notes are
collateralized by a first-priority lien on substantially all of the assets of
Foamex L.P. except for receivables, real estate and fixtures. The Senior Secured
Notes may be redeemed at the option of Foamex L.P., in whole or in part, at any
time on or after June 1, 1998, initially at 101.583% of their principal amount,
plus accrued interest, and declining to 100% on or after June 1, 1999. The
Senior Secured Notes have been guaranteed, on a senior secured basis by General
Felt Industries, Inc. ("General Felt") and on a senior unsecured basis by Foamex
F-86
<PAGE>
FMXI, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED BALANCE SHEET--(Continued)
6. LONG-TERM DEBT (continued)
International. During 1996, Foamex L.P. repurchased $9.9 million of Senior
Secured Notes with the net proceeds from the sale of Perfect Fit.
111/4% Senior Notes due 2002 ("Senior Notes")
The Senior Notes bear interest at the rate of 111/4% payable semiannually
on each April 1 and October 1. The Senior Notes mature on October 1, 2002. The
Senior Notes may be redeemed at the option of Foamex L.P., in whole or in part,
at any time on or after October 1, 1997, initially at 104.219% of their
principal amount, plus accrued interest, and declining to 100% on or after
October 1, 2000. In October 1994, Foamex L.P. provided certain real property as
collateral for the Senior Notes, with a net book value of $37.8 million at
December 29, 1996. The Senior Notes have been guaranteed, on a senior basis, by
General Felt and Foamex International. During 1996, Foamex L.P. repurchased $8.6
million of Senior Notes with the net proceeds from the sale of Perfect Fit.
117/8% Senior Subordinated Debentures ("Subordinated Debentures")
The Subordinated Debentures bear interest at the rate of 117/8% payable
semiannually on each April 1 and October 1. The Subordinated Debentures mature
on October 1, 2004. The Subordinated Debentures may be redeemed at the option of
Foamex L.P., in whole or in part, at any time on or after October 1, 1997,
initially at 105.938% of their principal amount, plus accrued interest, and
declining to 100% on or after October 1, 2002. The Subordinated Debentures are
subordinated in right of payment to all senior indebtedness, including the
Senior Secured Notes and the Senior Notes. The Subordinated Debentures have been
guaranteed, on a senior subordinated basis, by General Felt and Foamex
International. During 1996, Foamex L.P. repurchased $0.1 million of Subordinated
Debentures with the net proceeds from the sale of Perfect Fit.
117/8% Senior Subordinated Debentures, Series B ("Series B Debentures")
The Series B Debentures were issued July 30, 1993, by Foamex L.P. in an
exchange offer to holders of senior subordinated debentures issued in connection
with the acquisition of General Felt on March 23, 1993. The Series B Debentures
have terms substantially similar to the Subordinated Debentures, except that
holders of the Series B Debentures are entitled to receive proceeds from an
asset sale only if any proceeds remain after an offer to repurchase has been
made to the holders of the Subordinated Debentures. The Series B Debentures have
been guaranteed on a senior subordinated basis by General Felt.
Industrial Revenue Bonds ("IRBs")
Two bond issues in the principal amount of $1.0 million and $6.0 million,
maturing in 2005 and 2013, respectively, are collateralized by certain
properties which have an approximate net carrying value of $11.3 million at
December 29, 1996 and letters of credit approximating $7.3 million. The IRBs
bear interest at a variable rate with options available to Foamex L.P. to
convert to a fixed rate. The interest rates on the IRBs were 4.85% and 4.0% at
December 29, 1996 for the $6.0 million and $1.0 million bond issues,
respectively. The interest rate on the $6.0 million bond issue varies weekly
based on an interest rate that is indicative of current bidside yields on high
quality short-term, tax-exempt obligations, or if such interest rate is not
available, 70.0% of the interest rate for thirteen week United States Treasury
Bills. The maximum interest rate for either of the IRBs is 15.0% per annum. At
the time of a conversion to a fixed interest rate and upon appropriate notice,
the IRBs are redeemable at the option of the bondholders.
Term and Revolving Loans
Foamex L.P. has a credit agreement (the "Foamex L.P. Credit Facility") with
a group of banks that provide for loans of up to $85.0 million of which up to
$40.0 million was available as a term loan payable in twenty equal quarterly
installments commencing October 1994 and up to $45.0 million is available under
a revolving line of credit which expires in June 1999. In 1994, Foamex L.P. and
General Felt entered into a $40.0 million term loan
F-87
<PAGE>
FMXI, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED BALANCE SHEET--(Continued)
6. LONG-TERM DEBT (continued)
under the Foamex L.P. Credit Facility; no further term loan borrowings are
available thereunder. During 1996, Foamex L.P. and General Felt used $12.0
million of net proceeds from the Perfect Fit sale to repay term loan
borrowings. Borrowings under the Foamex L.P. Credit Facility are collateralized
by the accounts receivable of Foamex L.P. and General Felt. Pursuant to the
terms of the Foamex L.P. Credit Facility, borrowed funds will bear interest at
a floating rate equal to 1.0% per annum plus the highest of (i) the base rate
of The Bank of Nova Scotia, as in effect from time to time, (ii) a rate that
is, generally, 0.5% per annum plus a fluctuating rate generally equal to the
rate on three month certificates of deposit, subject to certain adjustments,
plus a fluctuating rate generally equal to the annual assessment rate paid by
The Bank of Nova Scotia to the Federal Deposit Insurance Corporation or (iii)
0.5% per annum plus the federal funds rate in effect from time to time. At the
option of Foamex L.P., portions of the outstanding loan under the Foamex L.P.
Credit Facility will be convertible into Eurodollar rate loans bearing interest
at a rate generally equal to 3.0% per annum above the average LIBOR rate of
Citibank, N.A. and The Bank of Nova Scotia. As of December 29, 1996, there was
approximately $11.7 million in letters of credit outstanding under the Foamex
L.P. Credit Facility. As of December 29, 1996, there was unused availability of
approximately $33.3 million under the Foamex L.P. Credit Facility.
Subordinated Note Payable
This note payable was issued to John Rallis ("Rallis"), the Chief Operating
Officer of Foamex International, on May 6, 1993 by Foamex L.P. in connection
with the acquisition of Great Western Foam Products Corporation and certain
related entities and assets (collectively, "Great Western"). The note bears
interest at a maximum rate of 6% per annum and the principal amount is payable
in three equal annual installments beginning May 6, 1999.
Other
As of December 29, 1996, other debt is comprised primarily of capital lease
obligations and borrowings by Foamex Mexico.
Interest Rate Swap Agreements
Foamex L.P. enters into interest rate swaps to lower funding costs and/or
to manage interest costs and exposure to changing interest rates. Foamex L.P.
does not hold or issue financial instruments for trading purposes. Foamex L.P.
has an interest rate swap agreement, as amended, with a notional amount of
$150.0 million through December 2001. Under the swap agreement, Foamex L.P. has
made variable payments based on LIBOR through December 1996 and is obligated to
make fixed payments at 5.30% per annum for the twelve months ended in December
1997 and variable payments based on LIBOR for the remainder of the agreement, in
exchange for fixed payments by the swap partner at 5.81% per annum through
December 1996, and 6.50% per annum for the remainder of the agreement, payable
semiannually in arrears. The swap partner has the ability to terminate the swap
agreement after the December 1997 payment if the LIBOR rate Foamex L.P. is to
pay for any period thereafter is equal to or less than 4.50% per annum. Interest
expense will be subject to fluctuations in LIBOR during the term of the swap
agreement except during 1997. Foamex L.P. is exposed to credit loss in the event
of nonperformance by the swap partner; however, the occurrence of this event is
not anticipated.
Also, Foamex L.P. has an interest rate swap agreement, as amended, for a
notional amount of $150.0 million through December 2001. Under this swap
agreement, Foamex L.P. has made variable payments based on LIBOR with a cap of
5.50% per annum and a floor of 4.75% per annum for the six months ended in June
1995, variable payments based on LIBOR with a floor of 4.75% per annum for the
six months ended in December 1995, fixed payments at a rate of 5.81% per annum
for the twelve months ended in December 1996 and is obligated to make fixed
payments at a rate of 5.30% per annum for the twelve months in December 1997 and
variable payments based on LIBOR for the remainder of the agreement, in exchange
for variable payments by the swap partner at the rate of LIBOR plus 0.80% per
annum for the six months ended in June 1995, LIBOR plus 0.72% per annum for the
six months ended in December 1995, LIBOR plus 2.45% per annum for the six months
ended in June 1996, LIBOR
F-88
<PAGE>
FMXI, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED BALANCE SHEET--(Continued)
6. LONG-TERM DEBT (continued)
plus 2.39% per annum for the six months ended in December 1996 and fixed
payments at 6.50% per annum for the remainder of the term of the agreement,
payable semiannually in arrears. The swap partner has the ability to terminate
the swap agreement after the December 1997 payment if the LIBOR rate Foamex
L.P. is to pay for any period thereafter is equal to or less than 4.50% per
annum. Foamex L.P. is exposed to credit loss in the event of nonperformance by
the swap partner; however, the occurrence of this event is not anticipated.
Interest expense will be subject to fluctuations in LIBOR during the term of
the swap agreement except during 1997. The effect of the two interest rate
swaps described above was a favorable adjustment to interest expense of $3.7
million for 1996.
Debt Restrictions and Covenants
The indentures, credit agreement and other indebtedness agreements contain
various covenants, including restrictions on payments of distributions by Foamex
L.P. to its partners, the incurrence of additional indebtedness, the sale of
assets, mergers and consolidations and transactions with affiliates. In
addition, certain agreements contain a provision that, in the event of a defined
change of control, the indebtedness must be repaid, in certain cases at the
option of the holder. Also, Foamex L.P. is required under certain of these
agreements to maintain specified financial ratios of which the most restrictive
is the maintenance of net worth and interest coverage ratios, as defined. Under
the most restrictive of the distribution restrictions, approximately $0.7
million was available to be paid by Foamex L.P. to its partners at December 29,
1996.
As of December 29, 1996, Foamex L.P. was in compliance with the covenants
of the indentures, credit agreements and other indebtedness agreements and
expects to be in compliance with these covenants for the foreseeable future.
Future Obligations on Long-Term Debt
Scheduled maturities of long-term debt are shown below:
<TABLE>
<CAPTION>
Year Ended Long-Term Debt
---------- --------------
(thousands)
<S> <C>
1997 ........................... $ 13,490
1998 ........................... 4,000
1999 ........................... 5,338
2000 ........................... 106,631
2001 ........................... 2,339
Thereafter ..................... 275,735
--------
Total ........................ 407,533
Less unamortized discount ...... 1,967
--------
Total ........................... $405,566
========
</TABLE>
In addition, Foamex L.P. has approximately $0.8 million of total capital
lease obligations that are payable in 1997 through 2000 in annual amounts of
approximately $0.2 million.
7. EMPLOYEE BENEFIT PLANS
Defined Benefit Pension Plans
Foamex L.P. maintains noncontributory defined benefit pension plans for
salaried and certain hourly employees. The salaried plan provides benefits that
are based principally on years of credited service and level of compensation.
The hourly plans provide benefits that are based principally on stated amounts
for each year of credited service.
Foamex L.P.'s funding policy is to contribute annually an amount that both
satisfies the minimum funding requirements of the Employee Retirement Income
Security Act of 1974 and does not exceed the full funding
F-89
<PAGE>
FMXI, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED BALANCE SHEET--(Continued)
7. EMPLOYEE BENEFIT PLANS (continued)
limitations of the Internal Revenue Code of 1986, as amended (the "Code"). Plan
investments consist primarily of corporate equity and debt securities, mutual
life insurance funds and cash equivalents. During 1996, the discount rate was
adjusted to 7.50%. The following table sets forth the funded status of Foamex
L.P.'s underfunded plans and the amounts recognized in the accompanying
consolidated balance sheet as of December 29, 1996:
<TABLE>
<CAPTION>
December 29,
1996
------------
(thousands)
<S> <C>
Actuarial present value of accumulated benefit obligations:
Vested benefits ............................................. $ 55,336
Nonvested benefits .......................................... 2,137
--------
Accumulated benefit obligations .............................. $ 57,473
========
Total projected benefit obligations ........................ $ 58,775
Fair value of plan assets .................................... 53,734
--------
Projected benefit obligations in excess of plan assets ...... (5,041)
Unrecognized net loss from past experience difference from that
assumed and effect of changes in assumptions ............... 1,099
Additional minimum liability ................................. (2,694)
--------
Accrued pension cost ....................................... $ (6,636)
========
</TABLE>
Significant assumptions used in determining the plans' funded status are as
follows:
<TABLE>
<CAPTION>
December 29,
1996
------------
<S> <C>
Expected long-term rates of return on plan assets ............... 9.50%
Discount rates on projected benefit obligations .................. 7.50%
Rates of increase in compensation levels (where applicable) ...... 4.00%
</TABLE>
Defined Contribution Plan
Foamex L.P. maintains a defined contribution plan which is qualified under
Section 401(k) of the Code and is available for eligible employees who elect to
participate in the plan. Employee contributions are voluntary and subject to
certain limitations as imposed by the Code. During 1996, Foamex L.P. provided
contributions amounting to a 25% match of employees' contributions up to 4% of
eligible compensation. Foamex L.P. also provides an additional 25% match of
employees' contributions up to 4% of eligible compensation made to a fund which
invests in Foamex International common stock. In addition, Foamex L.P. may make
discretionary contributions amounting to a 25% match of employees' contributions
up to 4% of eligible compensation. The expense for these contributions for 1996
was approximately $0.8 million.
Postretirement Benefits
In addition to providing pension benefits, Foamex L.P. provides
postretirement health care and life insurance for eligible employees. During
1996, certain employees accepted an early retirement program resulting in a
special termination loss of $0.6 million. These plans are unfunded and Foamex
L.P. retains the right, subject to existing agreements, to modify or eliminate
these benefits. The accumulated postretirement benefit obligation at Decem-ber
29, 1996 resulted in an unfunded obligation of $2.1 million.
A 9% annual rate of increase in the per capita costs of covered health care
benefits was assumed for 1996. This rate was assumed to gradually decrease to 5%
by the year 2000. Increasing the weighted average assumed health care cost trend
rates by one percentage point would have an insignificant impact on the
accumulated
F-90
<PAGE>
FMXI, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED BALANCE SHEET--(Continued)
7. EMPLOYEE BENEFIT PLANS (continued)
postretirement benefit obligation and service and interest cost. The discount
rate used was 7.50% as of Decem-ber 29, 1996.
Postemployment Benefits
Foamex L.P. provides certain postemployment benefits to former or inactive
employees and their dependents during the time period following employment but
before retirement. At December 29, 1996, Foamex L.P.'s liability for
postemployment benefits was insignificant.
8. INCOME TAXES
The tax effects of the temporary differences that give rise to significant
deferred tax assets and liabilities are:
<TABLE>
<CAPTION>
December 29,
1996
------------
(thousands)
<S> <C>
Deferred tax assets:
Inventory basis differences .............................. $ 415
Employee benefit accruals ................................. 714
Allowances and contingent liabilities ..................... 2,548
Restructuring and plant closing accruals .................. 3,632
Other ...................................................... 221
Net operating loss carryforwards ........................... 5,154
Capital loss carryforwards ................................. 14,193
Valuation allowance for deferred tax assets ............... (15,988)
---------
Deferred tax assets ....................................... 10,889
---------
Deferred tax liabilities:
Basis difference in property, plant and equipment ......... 7,644
Basis difference in Foamex L.P. Partnership interest ...... 335
Other ...................................................... 1,188
---------
Deferred tax liabilities ................................. 9,167
---------
Net deferred tax assets (liabilities) ..................... $ 1,722
=========
</TABLE>
Foamex L.P. has determined that taxable capital gains in the foreseeable
future for a subsidiary that files a separate federal income tax return will
likely not be sufficient to recognize the deferred tax asset associated with the
capital loss carryforward of that subsidiary. Accordingly, a valuation allowance
has been provided for the deferred tax asset associated with the capital loss
carryforward and certain other deferred tax assets. During 1996, the valuation
allowance for deferred tax assets increased by $2.5 million which included a
$14.2 million increase for the capital loss carryforward, offset by $6.9 million
decrease due to reversal of General Felt preacquisition temporary differences
and $4.8 million for reversal of General Felt postacquisition temporary
differences which is reflected in the consolidated statement of operations. The
$6.9 million reversal of preacquisition temporary differences was used to reduce
cost in excess of assets acquired. As of December 29, 1996, approximately $1.8
million of deferred tax assets are related to preacquisition activities and if
utilized will further reduce cost in excess of assets acquired. At December 29,
1996, General Felt has $14.7 million of regular tax net operating loss
carryforwards for federal income tax purposes expiring from 2003 to 2010 of
which $7.0 million was acquired in 1993 and is subject to limitations. In
addition, General Felt has $40.6 million of capital loss carryforwards that
expire in 2001.
F-91
<PAGE>
FMXI, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED BALANCE SHEET--(Continued)
9. COMMITMENTS AND CONTINGENCIES
Operating Leases
Foamex L.P. is obligated under various noncancelable lease agreements for
rental of facilities, vehicles and other equipment. Many of the leases contain
renewal options with varying terms and escalation clauses that provide for
increased rentals based upon increases in the Consumer Price Index, real estate
taxes and lessors' operating expenses. Total minimum rental commitments required
under operating leases at December 29, 1996 are:
<TABLE>
<CAPTION>
Third Party Related Party
Leases Leases
----------- -------------
(thousands)
<S> <C> <C>
1997 ............ $ 7,874 $ 1,767
1998 ............ 6,164 1,823
1999 ............ 4,866 1,823
2000 ............ 3,812 1,823
2001 ............ 2,883 2,265
Thereafter ...... 4,122 5,800
------- -------
Total ......... $29,721 $15,301
======= =======
</TABLE>
Rental expense charged to operations under operating leases approximated
$9.6 million for 1996. Substantially all such rental expense represented the
minimum rental payments under operating leases. In addition, Foamex L.P.
incurred rental expense of approximately $1.7 million for 1996 under leases with
related parties.
10. RELATED PARTY TRANSACTIONS AND BALANCES
Foamex L.P. regularly enters into transactions with its affiliates in the
ordinary course of business.
During April 1996, Foamex International contributed the foam products
operations of Foamex Mexico to Foamex L.P. The contribution was accounted for in
a manner similar to a pooling of interests since the entities were under common
control.
During 1996, Foamex L.P. chartered an aircraft (which is owned by a
wholly-owned subsidiary of Foamex International) through a third party and
incurred costs of approximately $1.4 million.
In December 1995, Foamex L.P. entered into a $2.0 million promissory note
with Foamex International. The note bears interest at a rate per annum equal to
six months LIBOR plus 4.0% and is payable semiannually in June and December. The
note matures in December 1997. The note has been classified in the other
component of stockholder's equity (deficit).
On July 7, 1996, Trace International Holdings, Inc. ("Trace Holdings")
issued to Foamex L.P. a promissory note for $4.4 million in principal amount
plus accrued interest of $0.4 million, which is an extension of a promissory
note of Trace Holdings that was due in July 1996. The promissory note is due and
payable on demand or, if no demand is made, July 7, 1997, and bears interest at
9.5%, payable quarterly in arrears commencing October 1, 1996. The promissory
note is included in other stockholder's equity (deficit).
In connection with the acquisition of Great Western, Foamex L.P. issued a
promissory note to Rallis (see Note 6) and entered into lease agreements (see
Note 9) with Rallis and an affiliate of Rallis, for the rental of former Great
Western manufacturing facilities located in Orange, Ontario and Hayward,
California and a warehouse facility in Tigard, Oregon. Foamex L.P. has the
option to purchase each of these properties from Rallis or such affiliate.
Foamex L.P. has a management service agreement with Trace Foam Company,
Inc. ("Trace Foam"), a wholly-owned subsidiary of Trace Holdings, pursuant to
which Trace Foam provides general managerial services of a financial, technical,
legal, commercial, administrative and/or advisory nature to Foamex L.P. for an
annual fee of $1.75 million and reimbursement of expenses incurred. Trace
Holdings rents approximately 5,900 square feet of
F-92
<PAGE>
FMXI, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED BALANCE SHEET--(Continued)
10. RELATED PARTY TRANSACTIONS AND BALANCES (continued)
general, executive, and administrative office space in New York, New York from
Foamex L.P. on substantially the same terms as Foamex L.P. leases such space
from a third party lessor.
In June 1994, Foamex L.P. also entered into a supply agreement with Foamex
International (the "Supply Agreement"). Pursuant to the terms of the Supply
Agreement, at the option of Foamex L.P., Foamex International will purchase
certain raw materials which are necessary for the manufacture of Foamex L.P.'s
products, and resell such materials to Foamex L.P. at a price equal to net cost
plus reasonable out of pocket expenses. Management believes that the terms of
the Supply Agreement are no less favorable than those which Foamex L.P. could
have obtained from an unaffiliated third party. During 1996, Foamex L.P. made
$129.7 million of purchases relating to the Supply Agreement.
As of December 29, 1996, due to related parties amounted to $8.9 million
and represents the net amounts payable to Foamex International and subsidiaries
for purchases under the Supply Agreement and other matters.
Foamex L.P. made charitable contributions to the Trace International
Holdings, Inc. Foundation of approximately $0.2 million in 1996.
On December 11, 1996, Foamex L.P. entered into a Tax Distribution Advance
Agreement with FJPS, pursuant to which FJPS is entitled to obtain advances, in
the aggregate not to exceed $17.0 million, against future distributions under
Foamex L.P.'s tax distribution agreement. As of December 29, 1996, there were no
advances under this agreement.
11. STOCKHOLDER'S EQUITY (DEFICIT)
The other component of stockholder's equity (deficit) consists of the
following:
<TABLE>
<CAPTION>
December 29,
1996
(thousands)
------------
<S> <C>
Foreign currency translation adjustment ......... $ 3,494
Additional pension liability .................. 2,407
Note receivable from Trace Holdings ............ 4,373
Note receivable from Foamex International ...... 2,000
-------
$12,274
=======
</TABLE>
12. ENVIRONMENTAL MATTERS
Foamex L.P. is subject to extensive and changing federal, state, local and
foreign environmental laws and regulations, including those relating to the use,
handling, storage, discharge and disposal of hazardous substances and the
remediation of environmental contamination, and as a result, is from time to
time involved in administrative and judicial proceedings and inquiries relating
to environmental matters. During 1996, expenditures in connection with Foamex
L.P.'s compliance with federal, state, local and foreign environmental laws and
regulations did not have a material adverse effect on Foamex L.P.'s operations,
financial position, capital expenditures or competitive position. As of December
29, 1996, Foamex L.P. has environmental accruals of approximately $4.1 million
for environmental matters. In addition, as of December 29, 1996 Foamex L.P. has
net receivables of approximately $0.9 million relating to indemnification for
environmental liabilities, net of an allowance of approximately $1.0 million
relating to potential disagreements regarding the scope of the indemnification.
Foamex L.P. believes that realization of the net receivables established for
indemnification is probable.
The Clean Air Act Amendments of 1990 (the "1990 CAA Amendments") provide
for the establishment of federal emission standards for hazardous air pollutants
including methylene chloride and TDI, principal raw materials used in the
manufacturing of foam. Foamex L.P. completely eliminated the use of
chlorofluorocarbons
F-93
<PAGE>
FMXI, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED BALANCE SHEET--(Continued)
12. ENVIRONMENTAL MATTERS (continued)
and methylchloroform by the end of 1995. The 1990 CAA Amendments also may
result in the imposition of more stringent standards regulating air emissions
from the use of these chemicals by polyurethane foam manufacturers, but these
standards have not yet been promulgated.
Foamex L.P. has reported to appropriate state authorities that it has found
soil and groundwater contamination in excess of state standards at four
facilities and soil contamination in excess of state standards at three other
facilities. Foamex L.P. has begun remediation and is conducting further
investigations into the extent of the contamination at these facilities and,
accordingly, the extent of the remediation that may ultimately be required. The
actual cost and the timetable of any such remediation cannot be predicted with
any degree of certainty at this time. As of December 29, 1996, Foamex L.P. has
environmental accruals of approximately $3.2 million for the remaining potential
remediation costs for these facilities based on engineering estimates.
Federal regulations require that by the end of 1998 all underground storage
tanks ("USTs") be removed or upgraded in all states to meet applicable
standards. Foamex L.P. has six USTs that will require removal or permanent
in-place closure by the end of 1998. Due to the age of these tanks, leakage may
have occurred resulting in soil and possibly groundwater contamination. Foamex
L.P. has accrued $0.4 million for the estimated removal and remediation, if any,
associated with these USTs. However, the full extent of contamination and,
accordingly, the actual cost of such remediation cannot be predicted with any
degree of certainty at this time. Foamex L.P. believes that its USTs do not pose
a significant risk of environmental liability because of Foamex L.P.'s
monitoring practices for USTs and conditional approval for the permanent
in-place closure for certain USTs. However, there can be no assurance that such
USTs will not result in significant environmental liability in the future.
Foamex L.P. has been designated as a Potentially Responsible Party ("PRP")
by the United States Environmental Protection Agency (the "EPA") with respect to
thirteen sites, with an estimated total liability to Foamex L.P. for the
thirteen sites of less than approximately $0.5 million. Estimates of total
cleanup costs and fractional allocations of liability are generally provided by
the EPA or the committee of PRP's with respect to the specified site. In each
case, the participation of Foamex L.P. is considered to be immaterial.
Although it is possible that new information or future developments could
require Foamex L.P. to reassess its potential exposure relating to all pending
environmental matters, including those described herein, management believes
that, based upon all currently available information, the resolution of such
environmental matters will not have a material adverse effect on Foamex L.P.'s
operations, financial position, capital expenditures or competitive position.
The possibility exists, however, that new environmental legislation and/or
environmental regulations may be adopted, or other environmental conditions may
be found to exist, that may require expenditures not currently anticipated and
that may be material.
13. LITIGATION
As of February 26, 1997, Foamex L.P. and Trace Holdings were two of
multiple defendants in actions filed on behalf of approximately 5,000 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. Five of
these cases seek to allege claims on behalf of all breast implant recipients or
other allegedly affected parties, but no class has been approved or certified by
the court. In addition, three cases have been filed alleging claims on behalf of
approximately 700 residents of Australia, New Zealand, England, and Ireland.
During 1995, Foamex L.P. and Trace Holdings 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. In addition, two of the cases filed on
behalf of 903 foreign plaintiffs were dismissed on the grounds that the cases
could not be brought in the United States courts. This decision is subject to
appeal. Foamex L.P. believes that the number of suits and claimants may
increase. Although breast implants do not contain foam, certain silicone gel
implants were produced using a polyurethane
F-94
<PAGE>
FMXI, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED BALANCE SHEET--(Continued)
13. LITIGATION (continued)
foam covering fabricated by independent distributors or fabricators from bulk
foam purchased from Foamex L.P. or Trace Holdings. Neither Foamex L.P. nor
Trace Holdings recommended, authorized or approved the use of its foam for
these purposes. While it is not feasible to predict or determine the outcome of
these actions, based on management's present assessment of the merits of
pending claims, after consultation with the general counsel of Trace Holdings,
and without taking into account potential indemnity from the manufacturers of
polyurethane covered breast implants, management believes that the disposition
of matters that are pending or that may reasonably be anticipated to be
asserted should not have a material adverse effect on either Foamex L.P.'s or
Trace Holdings' consolidated financial position or results of operations. In
addition, Foamex L.P. is also indemnified by Trace Holdings for any such
liabilities relating to foam manufactured prior to October 1990. Although Trace
Holdings has paid Foamex L.P.'s litigation expenses to date pursuant to such
indemnification and management believes Trace Holdings likely will be in a
position to continue to pay such expenses, there can be no absolute assurance
that Trace Holdings will be able to provide such indemnification. Based on
information available at this time with respect to the potential liability, and
without taking into account the indemnification provided by Trace Holdings and
the coverage provided by Trace Holdings' and Foamex L.P.'s liability insurance,
Foamex L.P. believes that the proceedings should not ultimately result in any
liability that would have a material adverse effect on the financial position
or results of operations of Foamex L.P. If management's assessment of Foamex
L.P.'s liability with respect to these actions is incorrect, such actions could
have a material adverse effect on Foamex L.P.
Foamex L.P. is party to various other lawsuits, both as defendant and
plaintiff, arising in the normal course of business. It is the opinion of
management that the disposition of these lawsuits will not individually or in
the aggregate, have a material adverse effect on the financial position or
results of operations of Foamex L.P. If management's assessment of Foamex L.P.'s
liability with respect to these actions is incorrect, such actions could have a
material adverse effect on Foamex L.P.'s consolidated financial position.
14. FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK
Interest Rate Swap Agreements
Foamex L.P. has two interest rate swap agreements involving the exchange of
fixed and floating interest payment obligations without the exchange of the
underlying principal amounts. At December 29, 1996, the total notional principal
amount of these interest rate swap agreements was $300.0 million. The
counterparty to these agreements is a large international financial institution.
The interest rate swap agreements subject Foamex L.P. to financial risk that
will vary during the life of these agreements in relation to market interest
rates.
Concentration of Credit Risk
Financial instruments which potentially subject Foamex L.P. to significant
concentrations of credit risk consist primarily of cash and cash equivalents and
trade accounts receivable. Foamex L.P. maintains cash and cash equivalents and
certain other financial instruments with various large financial institutions.
Foamex L.P.'s periodic evaluation of these financial institutions is considered
in Foamex L.P.'s investment strategy.
Foamex L.P. sells foam products to the automotive, carpet, cushioning and
other industries. Foamex L.P. performs ongoing credit evaluations of its
customers and generally does not require collateral. Foamex L.P. maintains
allowance accounts for potential credit losses and such losses have been within
management's expectations.
Disclosure about Fair Value of Financial Instruments
The following disclosures of the estimated fair value amounts have been
determined based on Foamex L.P.'s assessment of available market information and
appropriate valuation methodologies.
F-95
<PAGE>
FMXI, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED BALANCE SHEET--(Continued)
14. FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK (continued)
The estimated fair values of Foamex L.P.'s financial instruments as of
December 29, 1996 are as follows:
<TABLE>
<CAPTION>
Carrying Amount Fair Value
--------------- ----------
(thousands)
<S> <C> <C>
Liabilities:
Long-term debt ............ $406,352 $427,862
======== ========
Interest rate swaps ...... $ -- $ 3,160
======== ========
</TABLE>
Carrying amounts reported in the consolidated balance sheet for cash and
cash equivalents, accounts receivable, accounts payable, accrued liabilities and
short-term borrowings approximates fair value due to the short-term nature of
these instruments.
The fair value of long-term debt is estimated using quoted market prices,
where available, or discounted cash flows.
The fair value of interest rate swaps is based on the amount at which
Foamex L.P. would pay if the swaps were settled, as determined by estimates
obtained from dealers.
Fair value estimates are made at a specific point in time, based on
relevant market information about the financial instruments. These estimates are
subjective in nature and involve uncertainties and matters of significant
judgment and, therefore, cannot be determined with precision. Changes in
assumptions could significantly affect the estimates.
F-96
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholder of
Trace Foam Company, Inc.:
We have audited the accompanying consolidated balance sheet of Trace Foam
Company, Inc. and subsidiary ("Trace Foam") as of December 31, 1996. This
balance sheet is the responsibility of Trace Foam's management. Our
responsibility is to express an opinion on this balance sheet based on our
audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the balance sheet is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the balance sheet. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall balance sheet presentation. We
believe that our audit provides a reasonable basis for our opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the consolidated financial position of Trace Foam at
December 31, 1996, in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Princeton, New Jersey
February 26, 1997
F-97
<PAGE>
TRACE FOAM COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
(thousands)
<TABLE>
<CAPTION>
December 31,
1996
------------
<S> <C>
ASSETS:
CURRENT ASSETS:
Cash and cash equivalents .............................. $ 502
Other current assets .................................... 7
----------
Total current assets .................................... 509
DUE FROM PARENT .......................................... 393
----------
TOTAL ASSETS .......................................... $ 902
==========
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT):
CURRENT LIABILITIES:
Short-term debt .......................................... $ 29,224
LONG-TERM LIABILITIES:
Negative investments in affiliates ..................... 29,078
Deferred income taxes .................................... 53,139
----------
Total long-term liabilities ........................... 82,217
----------
STOCKHOLDER'S EQUITY (DEFICIT):
Common stock, par value $.01 per share; 1,000 shares
issued and outstanding ................................. 29,078
Accumulated deficit .................................... (110,539)
----------
Total stockholder's equity (deficit) .................. (110,539)
----------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT) ...... $ 902
==========
</TABLE>
F-98
<PAGE>
TRACE FOAM COMPANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED BALANCE SHEET
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated balance sheet includes the accounts of Trace Foam Company,
Inc. and subsidiary ("Trace Foam"). Trace Foam has approximately a 28% ownership
interest in Foamex International Inc. ("Foamex International") and a 1%
non-managing general partnership interest in Foamex L.P. Foamex International
indirectly owns the remaining 99% of Foamex L.P. through Foamex-JPS Automotive
L.P., which has a 98% limited partnership interest in Foamex L.P. and through
FMXI, Inc., which has a 1% managing general partnership interest in Foamex L.P.
Foamex L.P. is a significant manufacturer and marketer of flexible polyurethane
foam and foam products in North America. Foamex L.P.'s products include (i) foam
for carpet cushion and other carpet products, (ii) cushioning foams for
furniture, bedding, packaging and health care, (iii) foam for automotive trim
and accessories and (iv) technical foams for filtration, consumer products and
packaging.
All significant intercompany accounts and transactions have been eliminated
in consolidation.
Accounting Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reported period. Actual results could differ from those
estimates.
Cash and Cash Equivalents
All highly liquid instruments with original maturities of three months or
less when purchased are considered to be cash equivalents.
Income Taxes
Income taxes are accounted for under the liability method, in which
deferred income taxes are provided for temporary differences between the
financial reporting and income tax basis of assets and liabilities using the
income tax rates, under existing legislation, expected to be in effect at the
date such temporary differences are expected to reverse.
2. INVESTMENT IN AFFILIATES
The investment in affiliates consists of Trace Foam's investments in Foamex
International and Foamex L.P. which are accounted for on the equity method.
Summarized consolidated financial information of Foamex International as of
December 31, 1996 is as follows:
<TABLE>
<CAPTION>
December 31, 1996
-----------------
(thousands)
<S> <C>
Balance sheet data:
Current assets ............... $307,104
Noncurrent assets ............ 312,742
Current liabilities ......... 170,523
Noncurrent liabilities ...... 507,426
</TABLE>
At December 31, 1996, the quoted market value of Trace Foam's investment in
Foamex International was $115,504. The valuation represents a mathematical
calculation based on a quotation published by Dow Jones and is not necessarily
indicative of the amount that could be realized upon the sale.
F-99
<PAGE>
TRACE FOAM COMPANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED BALANCE SHEET
2. INVESTMENT IN AFFILIATES (continued)
Foamex International Inc. is subject to extensive and changing
environmental laws and regulations. Expenditures to date in connection with
Foamex International's compliance with such laws and regulations did not have a
material adverse effect on its operations, financial position or competitive
position. Although it is possible that new information or future developments
could require Foamex International to reassess its potential exposure to all
pending environmental matters, management of Foamex International believes that
based upon all currently available information, the resolution of all pending
environmental matters will not have a material adverse effect on its operations,
financial position or competitive position.
Foamex International is a defendant in various actions filed on behalf of
recipients of breast implants, some of which allege substantial damages, but
most of which allege unspecified damages for personal injuries of various types.
While it is not feasible to predict or determine the outcome of these actions,
management of Foamex International believes that the disposition of matters that
are pending or that may reasonably be anticipated to be asserted should not have
a material adverse effect on its financial position of results of operations. If
Foamex International management's assessment of its liability with respect to
these actions is incorrect, such actions could have a material adverse effect on
its financial position and results of operation.
3. SHORT-TERM DEBT
Trace Foam was obligated for $29,224 which represents borrowings
outstanding under secured margin loans. The interest rate on the outstanding
balances was $8.0% on December 31, 1996. Borrowing are due on demand and
collateralized by the common stock of Foamex International owned by Trace Foam.
4. INCOME TAXES
Deferred income taxes arise from temporary differences between the tax
basis of assets and liabilities and their reported amounts in the financial
statements and will result in differences between income for tax purposes and
income for financial statement purposes in future years. The temporary
differences that give rise to deferred income taxes and liabilities are as
follows:
<TABLE>
<S> <C>
Assets (liabilities):
Net operating loss carryforward ...... $ 4,060
Basis difference in investments ...... (57,199)
---------
Net liability ........................ $ (53,139)
=========
</TABLE>
At December 31, 1996, Trace Foam has net operating loss carryforwards for
federal income tax purposes of approximately $11,500, which will expire during
2008 through 2011.
F-100
