SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 29, 1998
Commission file numbers 1-11432; 1-11436
FOAMEX L.P.
FOAMEX CAPITAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 05-0475617
Delaware 22-3182164
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1000 Columbia Avenue
Linwood, PA 19061
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code: (610) 859-3000
Indicate by check mark whether the registrants (1) have filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) have been subject to such
filing requirements for the past 90 days. YES X NO __
Foamex Capital Corporation meets the conditions set forth in General Instruction
H (1) (a) and (b) of Form 10-Q and is therefore filing this form with the
reduced disclosure format.
The number of shares of Foamex Capital Corporation's common stock outstanding as
of May 15, 1998 was 1,000.
Page 1 of 26
Exhibit List on Page 20 of 26
<PAGE>
FOAMEX L.P.
FOAMEX CAPITAL CORPORATION
INDEX
Page
Part I. Financial Information:
Item 1. Financial Statements
Foamex L.P.
Condensed Consolidated Statements of Operations - Thirteen
Week Periods Ended March 29, 1998 and March 30, 1997 3
Condensed Consolidated Balance Sheets as of March 29, 1998
and December 28, 1997 4
Condensed Consolidated Statements of Cash Flows - Thirteen
Week Periods Ended March 29, 1998 and March 30, 1997 5
Notes to Condensed Consolidated Financial Statements 6
Foamex Capital Corporation
Balance Sheets as of March 29, 1998 and December 28, 1997 14
Notes to Balance Sheets 15
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 16
Part II. Other Information 20
Exhibit List 20
Signatures 26
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FOAMEX L.P. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
13 Week Periods Ended
March 29, March 30,
1998 1997
--------- ---------
(thousands)
NET SALE $284,545 $194,134
COST OF GOODS SOLD 240,982 157,293
--------- ---------
GROSS PROFIT 43,563 36,841
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 17,766 11,123
--------- ---------
INCOME FROM OPERATIONS 25,797 25,718
INTEREST AND DEBT ISSUANCE EXPENSE 17,675 10,666
OTHER INCOME (EXPENSE), NET (274) 821
--------- ---------
INCOME BEFORE PROVISION FOR INCOME TAXES 7,848 15,873
PROVISION FOR INCOME TAXES 725 368
--------- ---------
INCOME BEFORE EXTRAORDINARY LOSS 7,123 15,505
EXTRAORDINARY LOSS ON EARLY
EXTINGUISHMENT OF DEBT (3,123) (679)
--------- ---------
NET INCOME $4,000 $14,826
========= =========
The accompanying notes are an integral part of the condensed
consolidated financial statements.
3
<PAGE>
FOAMEX L.P. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
<TABLE>
<CAPTION>
March 29, December 28,
ASSETS 1998 1997
------------ -----------
CURRENT ASSETS: (thousands)
<S> <C> <C>
Cash and cash equivalents $ 2,972 $ 8,982
Accounts receivable, net 150,687 138,571
Inventories 112,532 112,094
Accounts receivable, related party 15,970 12,823
Other current assets 45,803 32,519
--------- ---------
Total current assets 327,964 304,989
PROPERTY, PLANT AND EQUIPMENT, NET 206,383 205,705
COST IN EXCESS OF ASSETS ACQUIRED, NET 183,925 184,523
DEBT ISSUANCE COSTS, NET 15,420 18,889
OTHER ASSETS 24,806 21,831
--------- ---------
TOTAL ASSETS $758,498 $735,937
======== ========
LIABILITIES AND PARTNERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Short-term borrowings $ 5,882 $ 6,598
Current portion of long-term debt 4,009 12,161
Accounts payable 115,044 110,640
Accounts payable - related parties 1,598 11,662
Accrued interest 8,029 10,655
Other accrued liabilities 45,338 47,119
--------- ---------
Total current liabilities 179,900 198,835
LONG-TERM DEBT 677,582 726,649
LONG-TERM DEBT - RELATED PARTY 34,000 38,800
OTHER LIABILITIES 30,984 31,076
COMMITMENTS AND CONTINGENCIES - -
PARTNERS' EQUITY (DEFICIT):
General partners (127,706) (122,304)
Limited partners - -
Note receivable from partner (18,608) (16,118)
Investment in General Felt - (103,121)
Other (17,654) (17,880)
--------- ---------
Total partners' equity (deficit) (163,968) (259,423)
-------- --------
TOTAL LIABILITIES AND PARTNERS' EQUITY (DEFICIT) $758,498 $735,937
======== ========
</TABLE>
The accompanying notes are an integral part of the condensed
consolidated financial statements.
4
<PAGE>
FOAMEX L.P. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
<TABLE>
<CAPTION>
13 Week Periods Ended
March 29, March 30,
1998 1997
--------- ---------
OPERATING ACTIVITIES: (thousands)
<S> <C> <C>
Net income $4,000 $14,826
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 7,588 3,908
Amortization of debt issuance costs and debt discount 247 703
Extraordinary loss on extinguishment of debt 2,857 679
Other operating activities 1,937 227
Changes in operating assets and liabilities (46,164) 1,874
--------- ---------
Net cash provided by (used for) operating activities (29,535) 22,217
--------- ---------
INVESTING ACTIVITIES:
Capital expenditures (6,972) (6,817)
Acquisition, net of cash acquired (3,321) --
Purchase of note from partner (2,490) --
Deposit for defeasence of indebtedness (4,809) --
Decrease in restricted cash -- 5,239
Other investing activities (424) --
--------- ---------
Net cash used for investing activities (18,016) (1,578)
--------- ---------
FINANCING ACTIVITIES:
Net proceeds from (repayments of) short-term borrowings (716) 293
Net proceeds from revolving loans 69,973 --
Proceeds from long-term debt 129,000 500
Repayment of long-term debt (126,827) (9,038)
Repayment of long-term debt - related party (4,800) --
Debt issuance costs (1,149) --
Distributions to partners (20,000) (124)
Transfer of General Felt common stock (3,898) --
Other financing activities (42) (410)
--------- ---------
Net cash provided by (used for) financing activities 41,541 (8,779)
--------- ---------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (6,010) 11,860
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD 8,982 20,632
--------- ---------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $2,972 $32,492
========= =========
</TABLE>
The accompanying notes are an integral part of the condensed
consolidated financial statements.
5
<PAGE>
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
1. ORGANIZATION AND BASIS OF PRESENTATION
Foamex L.P.'s condensed consolidated balance sheet as of December 28,
1997 has been condensed from the audited consolidated balance sheet at that date
after being restated for the transfer of General Felt Industries, Inc. ("General
Felt") common stock (see Note 2). The condensed consolidated balance sheet as of
March 29, 1998 and the condensed consolidated statements of operations for the
thirteen week periods ended March 29, 1998 and March 30, 1997 and the condensed
consolidated statements of cash flows for the thirteen week periods ended March
29, 1998 and March 30, 1997 have been prepared by Foamex L.P. and subsidiaries
and have not been audited by Foamex L.P.'s independent accountants. In addition,
the condensed consolidated statement of operations and statement of cash flows
for the thirteen week period ended March 30, 1997 has been restated for the
transfer of General Felt common stock (see Note 2). 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 December 23, 1997, Foamex L.P. acquired Crain Industries, Inc.
("Crain") pursuant to a merger agreement with Crain Holdings Corp. for a
purchase price of approximately $213.7 million, including the assumption of debt
with a face value of approximately $98.6 million (and an estimated fair value of
approximately $112.3 million) (the "Crain Acquisition"). In addition, fees and
expenses associated with the Crain Acquisition were approximately $13.2 million.
(See Note 3).
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 1997 consolidated financial statements and notes thereto as set forth in
Foamex L.P.'s Annual Report on Form 10-K/A for the fiscal year ended December
28, 1997.
2. TRANSFER OF GENERAL FELT INDUSTRIES, INC.
On February 27, 1998, Foamex International Inc. ("Foamex International), Foamex
L.P. and certain of its affiliates completed a series of transactions designed
to simplify Foamex International's structure and to provide future operational
flexibility. Prior to the consummation of these transactions, (i) Foamex L.P.
and Foamex L.P.'s wholly-owned subsidiary, General Felt, entered into a Supply
Agreement and an Administrative Services Agreement (see Note 7), (ii) Foamex
L.P. repaid its outstanding indebtedness to General Felt with $4.8 million in
cash and a $34.0 million principal amount promissory note (the "Foamex/GFI
Note") supported by a $34.5 million letter of credit under the credit facility,
(the "Credit Facility") (iii) Foamex L.P. contributed to General Felt $9.4
million of outstanding net intercompany payables and intercompany loans with
General Felt, and (iv) Foamex L.P. defeased the $4.5 million outstanding
principal amount of its 9 1/2% senior secured notes due 2000. The initial
transaction resulted in the transfer from Foamex L.P. to Trace Foam LLC of all
of the outstanding common stock of General Felt, in exchange for (i) the
assumption by Trace Foam LLC of $129.0 million of Foamex L.P.'s indebtedness and
(ii) the transfer by Trace Foam LLC to Foamex L.P. of a 1% non-managing general
partnership interest in Foamex L.P. As a result, General Felt ceased being a
subsidiary of Foamex L.P. and was relieved from all obligations under Foamex
L.P.'s 9 7/8% senior subordinated notes due 2007 and 13 1/2% senior subordinated
notes due 2005. Upon consummation of the initial transaction, Foamex Carpet
Cushion, Inc. ("Foamex Carpet"), a newly formed wholly-owned subsidiary of
Foamex International, Foamex International, Trace Foam LLC, and General Felt
entered into an Asset Purchase Agreement dated February 27, 1998, in which
General Felt sold substantially all of its assets (other than the Foamex/GFI
Note and its operating facility in Pico Rivera, California) to Foamex Carpet in
exchange for (i) $20.0 million in cash and (ii) a promissory note issued by
Foamex Carpet to Trace Foam LLC in the amount of $70.2 million. The $20.0
million cash payment was funded with a distribution by Foamex L.P. As part of
these transactions, Foamex Fibers, Inc. ("Foamex Fibers") a wholly-owned
subsidiary of General Felt, was merged with and into General Felt and Foamex
LLC, a wholly-owned subsidiary of Foamex L.P., was merged with and into Foamex
L.P. In addition, FMXI, Inc. and Crain, both wholly-owned subsidiaries of Foamex
International and general partners of
6
<PAGE>
2. TRANSFER OF GENERAL FELT INDUSTRIES, INC. (continued)
Foamex L.P., were merged and Crain, as the surviving corporation, subsequently
changed its name to FMXI, Inc. Foamex Carpet will conduct the carpet cushion
business previously conducted by General Felt. Also, Trace Foam LLC has retained
ownership of one of General Felt's operating facilities which is being leased to
Foamex Carpet and the $34.0 million Foamex/GFI Note.
These transactions have been reflected as a transfer and accounted for in
a manner similar to a pooling of interests since the entities are under common
control. Accordingly, prior periods have been restated to exclude the
consolidated operations of General Felt and partners' equity (deficit) was
charged to reflect the net effect of these transactions. The consolidated
balance sheet as of December 28, 1997 has been restated to exclude the
consolidated assets and liabilities of General Felt and reflect Foamex L.P.'s
investment in General Felt of approximately $103.1 million as a reduction of
partners' equity (deficit). Upon consummation of these transactions, Foamex L.P.
recorded an increase in partners' equity (deficit) of approximately $113.2
million associated with the assumption of indebtedness by Trace Foam LLC,
related expenses and fees and other matters. In addition, Foamex L.P. recorded
the $20.0 million distribution to Foamex International as discussed above.
In connection with these transactions, the consolidated balance sheet as
of December 28, 1997 and the consolidated statement of operations for the
thirteen week period ended March 30, 1997 have been restated as follows:
<TABLE>
<CAPTION>
As previously General As
Reported Felt Restated
Balance Sheet:
<S> <C> <C> <C>
Current assets $352,217 $(47,228) $304,989
Total assets 834,068 (98,131) 735,937
Current liabilities 226,143 (27,308) 198,835
Total liabilities 990,370 (4,990) 995,360
Equity (156,302) (103,121) (259,423)
Statement of Operations:
Net sales $229,120 $(34,986) $194,134
Income before extraordinary loss 16,216 (711) 15,505
Net income (loss) 15,537 (711) 14,826
</TABLE>
3. CRAIN ACQUISITION
On December 23, 1997, Foamex L.P. acquired Crain pursuant to a merger
agreement with Crain Holdings Corp. for a purchase price of approximately $213.7
million, including the assumption of debt with a face value of approximately
$98.6 million (with an estimated fair value of approximately $112.3 million). In
addition, fees and expenses associated with the Crain Acquisition are
approximately $13.2 million. The acquisition was funded by $118.0 million in
bank borrowings by Foamex L.P. under the Credit Facility. The excess of the
purchase price over the estimated fair value of the net assets acquired was
approximately $152.5 million.
The Crain Acquisition was accounted for as a purchase and the operations
of Crain are included in the consolidated statements of operations and cash
flows from its respective date of acquisition. The cost of the Crain 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. The allocation of the purchase price for the Crain
Acquisition is based upon preliminary estimates and assumptions and is subject
to revision once appraisals, valuations and other studies of the fair value of
the acquired assets and liabilities have been completed. The pro forma results
listed below are unaudited and assume that the Crain Acquisition occurred at the
beginning of the period presented.
7
<PAGE>
3. CRAIN ACQUISITION (continued)
1997
(thousands)
Net sales $271,782
========
Income before extraordinary loss $ 12,072
========
The pro forma results are not necessarily indicative of what would have
occurred if the Crain Acquisition had been in effect for the entire periods
presented nor are they necessarily indicative of future consolidated results.
4. INVENTORIES
Inventories consist of:
<TABLE>
<CAPTION>
March 29, December 28,
1998 1997
------------ -----------
(thousands)
<S> <C> <C>
Raw materials and supplies $ 70,099 $ 70,071
Work-in-process 16,561 15,406
Finished goods 25,872 26,617
--------- ---------
Total $112,532 $112,094
======== ========
5. LONG-TERM DEBT AND LONG-TERM DEBT - RELATED PARTY
Long-term debt consists of:
March 29, December 28,
1998 1997
Credit Facility: (thousands)
Term Loan A $ - $ 76,700
Term Loan B 83,553 109,725
Term Loan C 75,958 99,750
Term Loan D 110,000 110,000
Revolving credit facility 124,901 54,928
9 7/8% Senior subordinated notes due 2007 150,000 150,000
13 1/2% Senior subordinated notes due 2005 (includes
$13,272 and $13,720 of unamortized debt premiums) 111,272 111,720
9 1/2% Senior secured notes due 2000 4,523 4,523
Industrial revenue bonds 7,000 7,000
Subordinated note payable (net of unamortized
debt discount of $804 and $886) 6,211 6,129
Other 8,173 8,335
-------- --------
681,591 738,810
Less current portion 4,009 12,161
-------- --------
Long-term debt-unrelated parties $677,582 $726,649
======== ========
</TABLE>
8
<PAGE>
5. LONG-TERM DEBT AND LONG-TERM DEBT - RELATED PARTY
<TABLE>
<CAPTION>
March 29, December 28,
1998 1997
------------ -----------
(thousands)
<S> <C> <C>
Long-term debt-related party consists of:
Foamex/GFI Note $ 34,000 $ 38,800
========= =========
</TABLE>
Refinancing Associated with Transfer of General Felt Common Stock
In connection with the transfer of General Felt common stock (see Note
2), Foamex L.P. amended its agreements with lenders under the Credit Facility,
which included additional borrowings of $129.0 million under new term loan
agreements that were assumed by Trace Foam LLC (as discussed in Note 2) and
borrowings of $32.0 million under the existing revolving credit facility. These
funds were used to (i) repay approximately $125.1 million of existing term loans
and accrued interest thereon of approximately $0.9 million, (ii) deposit $4.8
million into an escrow account in order to redeem the Senior Secured Notes in
June 1998, (iii) repay $4.8 million on the Foamex/GFI Note, (iv) fund the $20.0
million distribution to Foamex International and (v) pay fees and expenses of
approximately $5.4 million. Also, this amendment increased the availability
under the revolving credit facility from $150.0 million to $200.0 million;
however, $34.5 million of this increase is used for a letter of credit to
support the Foamex/GFI Note.
Foamex/GFI Note
In connection with the transfer of General Felt's common stock, Foamex
L.P. entered into the $34.0 million Foamex/GFI Note to settle an existing
intercompany note payable to General Felt. The Foamex/GFI Note matures in March
2000 with interest payable at LIBOR plus an applicable margin. The principal
amount is due upon maturity in March 2000.
Principal Payments
Principal payments on Foamex L.P.'s long-term debt for the remainder of
1998 and for the next five years are as follows: 1998 - $3.9 million; 1999 -
$7.3 million; 2000 - $11.5 million; 2001 - $6.9 million; 2002 - $2.9 million;
and thereafter - $636.6 million.
6. EARLY EXTINGUISHMENT OF DEBT
In connection with the General Felt transaction, Foamex L.P. incurred an
extraordinary loss on the early extinguishment of debt of approximately $3.1
million. The extraordinary loss is comprised of approximately $2.9 million for
the write-off of debt issuance costs and approximately $0.2 million of
professional fees and other costs.
During 1997, Foamex L.P. used approximately $8.4 million of restricted
cash to repurchase outstanding indebtedness of approximately $8.0 million, which
resulted in an extraordinary loss of approximately $0.7 million.
7. RELATED PARTY TRANSACTIONS
During the thirteen week periods ended March 29, 1998 and March 30, 1997,
Foamex L.P. sold approximately $29.2 million and $35.0 million of carpet cushion
to Foamex Carpet pursuant to a Supply Agreement between Foamex L.P. and Foamex
Carpet.
9
<PAGE>
7. RELATED PARTY TRANSACTIONS (continued)
In connection with the General Felt transaction (see Note 2), Foamex L.P.
and Foamex Carpet entered into a Management Services Agreement whereby Foamex
L.P. will provide certain administrative functions on behalf of Foamex Carpet at
a cost basis. During the thirteen week period ended March 29, 1998, Foamex L.P.
received $0.1 million for services provided to Foamex Carpet.
During the thirteen week period ended March 29, 1998, Foamex L.P. paid
approximately $0.5 million to Foamex Carpet for interest expense on a $38.8
million principal note due to Foamex Carpet. This note was subsequently replaced
by the Foamex/GFI Note, which was retained by Trace Foam LLC in connection with
the transfer of General Felt (see Note 2).
On December 28, 1997, Foamex L.P. entered into a promissory note with a
principal amount of approximately $2.5 million. The note bears interest at a
rate per annum equal to LIBOR plus 2 3/8%. The note and interest are due on
demand, or if no demand is made, then on December 31, 2001.
During the thirteen week period ended March 29, 1998, Foamex L.P. paid
approximately $0.2 million to Trace Foam LLC for interest on the $34.0 million
Foamex/GFI Note (see Note 2).
On July 1, 1997, Trace Holdings borrowed $5.0 million pursuant to a
promissory note with an aggregate principal amount of $5.0 million issued to
Foamex L.P. on June 12, 1997. The promissory note is due and payable on demand
or, if no demand is made, on July 7, 2001, and bears interest at 2 3/8% plus
three-month LIBOR, as defined, per annum payable quarterly in arrears commencing
October 1, 1997. The promissory note is included in the other component of
partners' equity (deficit).
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 that was
due in July 1997. The aggregate principal amount of the amended promissory note
was increased to approximately $4.8 million and the maturity of the promissory
note was extended. The promissory note is due and payable on demand or, if no
demand is made, on July 7, 2001, and bears interest at 2 3/8% plus three-month
LIBOR, as defined, per annum payable quarterly in arrears. The promissory note
is included in the other component of partners' equity (deficit).
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 thirteen week periods ended March 29, 1998 and March 30, 1997, Foamex L.P.
purchased approximately $15.0 million and $11.6 million, respectively, of raw
materials under the Supply Agreement. Effective March 31, 1998, Foamex L.P. has
discontinued utilizing the Supply Agreement to purchase its raw materials.
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 $0.2 million and $0.4 million during the thirteen week periods
ended March 29, 1998 and March 30, 1997, respectively.
On December 26, 1997, Foamex L.P. entered into a $2.5 million promissory
note with Foamex International. The note bears interest at the rate of LIBOR
plus 2 3/8%. The note and interest are payable on demand, or if no demand is
made, then on December 31, 2001.
10
<PAGE>
7. RELATED PARTY TRANSACTIONS (continued)
On December 11, 1996, Foamex L.P. entered into a Tax Distribution Advance
Agreement, pursuant to which its partners are 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 March 29, 1998, there were $13.6
million of advances to Foamex International under this agreement.
8. 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 1997, 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 March
29, 1998, Foamex L.P. has environmental accruals of approximately $3.9 million
for environmental matters. In addition, as of March 29, 1998 Foamex L.P. has net
receivables of approximately $0.6 million relating to indemnification for
environmental liabilities. Foamex L.P. believes that realization of the
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, propylene oxide and TDI, materials used in the
manufacturing of foam. On December 27, 1996, the United States Environmental
Protection Agency (the "EPA") proposed regulations under the 1990 CAA Amendments
that will require manufacturers of slab stock polyurethane foam and foam
fabrication plants to reduce emissions of methylene chloride. Because these
regulations are subject to change prior to finalization, Foamex L.P. cannot
accurately predict the actual cost of their implementation. Foamex L.P. does not
believe implementation of the regulations will require it to make material
expenditures at facilities owned prior to December 23, 1997, due to Foamex
L.P.'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; however, material expenditures may be required at the
facilities formerly operated by Crain. 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 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 March 29, 1998, Foamex L.P. has
environmental accruals of approximately $3.4 million for the remaining potential
remediation costs for these facilities based on 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 two 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 $0.1 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.
11
<PAGE>
8. ENVIRONMENTAL MATTERS (continued)
Foamex L.P. has been designated as a Potentially Responsible Party
("PRP") by the EPA with respect to twelve sites, with an estimated total
liability to Foamex L.P. for the twelve sites of less than approximately $0.4
million. Estimates of total clean-up 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.
9. LITIGATION
As of May 15, 1998, 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. 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.
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 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.
In November 1997, a complaint was filed in the United States District
Court for the Southern District of Texas alleging that various defendants,
including Crain through the use of the CARDIO(R) process licensed from a third
party, infringed on a patent held by plaintiff. Foamex L.P. is negotiating with
the licensor of the process for
12
<PAGE>
9. LITIGATION (continued)
the assumption of the defense of the action by the licensor; however, the action
is in the preliminary stages, and there can be no assurance as to the ultimate
outcome of the action.
On or about March 17, 1998, five purported class action lawsuits were
filed in the Delaware Chancery Court, New Castle County, against Foamex
International, directors of Foamex International, Trace Holdings, and individual
officers and directors of Trace Holdings:
Brickell Partners v. Marshall S. Cogan, et al., No. 16260NC;
Mimona Capital v. Salvatore J. Bonanno, et al., No. 16259NC;
Daniel Cohen v. Foamex International Inc., No. 16263;
Eileen Karisinki v. Foamex International Inc., et al., No. 16261NC and
John E. Funky Trust v. Salvatore J. Bonanno, et al., No. 16267.
A sixth purported class action lawsuit, Barnett Stepak v. Foamex
International Inc., et al., No. 16277, was filed on or about March 23, 1998
against the same defendants. The complaints in the six actions allege, among
other things, that the defendants have violated fiduciary and other common law
duties purportedly owed to Foamex International's stockholders in connection
with Trace Holdings proposal to acquire all of the shares of Foamex
International's common stock. The complaints seek, among other things, class
certification, a declaration that the defendants have breached their fiduciary
duties to the class, preliminary and permanent injunctions baring implementation
of the proposed transaction, rescission of the transaction if consummated,
unspecified compensatory damages, and costs and attorneys' fees.
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.
13
<PAGE>
FOAMEX CAPITAL CORPORATION
(A Wholly-Owned Subsidiary of Foamex L.P.)
BALANCE SHEETS (unaudited)
<TABLE>
<CAPTION>
March 29, December 28,
1998 1997
------- -------
ASSETS (thousands)
<S> <C> <C>
CASH $ 1 $ 1
====== ======
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 - -
Additional paid-in capital 1 1
------ ------
TOTAL STOCKHOLDER'S EQUITY $ 1 $ 1
====== ======
</TABLE>
The accompanying notes are an integral part of the balance sheets.
14
<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 and severally liable 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
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. 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 repurchase.
The Senior Subordinated Notes are subordinated in right of payment to all senior
indebtedness and are pari passu in right of payment to the subordinated note.
13 1/2% Senior Subordinated Notes due 2005 ("13 1/2% Senior Subordinated
Notes")
The 13 1/2% 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 December 23, 1997 in connection with the Crain Acquisition. The 13
1/2% Senior Subordinated Notes represent unsecured general obligations of Foamex
L.P. and are subordinated to all Senior Debt (as defined in the Indenture).
The 13 1/2% Senior Subordinated Notes mature on August 15, 2005. Interest
on the 13 1/2% Senior Subordinated Notes is payable semiannually on each
February 15 and August 15. The 13 1/2% Senior Subordinated Notes bear interest
at the rate of 13 1/2% per annum. The 13 1/2% Senior Subordinated Notes may not
be redeemed prior to August 15, 2002, except in the event of a Change of Control
(as defined) or Foamex L.P. may, subject to certain requirements (as defined),
on or prior to August 15, 1998 redeem up to 33 1/3% of the aggregate original
principal amount with proceeds from an Equity Offering (as defined).
Foamex L.P. has filed a registration statement relating to an exchange
offer in which Foamex L.P. will offer to exchange the 13 1/2% 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 13
1/2% 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 13 1/2% Senior Subordinated Notes held
by affiliates of Foamex L.P. and for certain other holders), and are not subject
to any covenant regarding registration under the Securities Act of 1933, as
amended.
15
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALAYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Foamex L.P. operates primarily in the flexible polyurethane and advanced
polymer foam products industry. The following discussion should be read in
conjunction with the condensed consolidated financial statements and related
notes thereto of Foamex L.P. included in this report. Certain information in
this report contains forward-looking statements and should be read in
conjunction with the discussion regarding forward-looking statements set forth
on page five of Foamex L.P.'s 1997 Annual Report on Form 10-K/A.
During 1997, Foamex L.P.'s products were utilized primarily in five
end-markets; (i) carpet cushion and other carpet products, (ii) cushioning
foams, including bedding products, (iii) furniture products for furniture
manufacturers and distributors, (iv) automotive applications, including trim and
accessories, and (v) specialty and technical applications, including those for
filtration, gasketing and sealing. As a result of the Crain Acquisition, Foamex
L.P. has added a sixth end market: consumer products.
On March 16, 1998, Foamex International announced that its Board of
Directors received an unsolicited buyout proposal from Trace Holdings, Foamex
International's principal stockholder. Trace Holdings proposed to acquire all of
the outstanding common stock of Foamex International not currently owned by
Trace Holdings and its subsidiaries for a cash price of $17.00 per share. Also,
Trace Holdings informed the Board of Directors that financing for the buyout
transaction would be arranged through Donaldson, Lufkin & Jenrette Securities
Corporation and The Bank of Nova Scotia/Scotia Capital Markets. As of March 16,
1998, Trace Holdings and its subsidiaries beneficially owned approximately
11,475,000 shares or approximately 46% of the outstanding common stock of Foamex
International. In response to Trace Holding's offer, Foamex International's
Board of Directors has appointed a special committee to determine the
advisability and fairness of the proposed buyout to Foamex International's
stockholders other than Trace Holdings and its subsidiaries. Trace Holding's
proposed buyout is subject to a number of conditions, including the negotiations
of definitive documents (which are expected to contain customary closing
conditions); the filing of a disclosure statement and other documents with the
Securities and Exchange Commission; regulatory filings; and approval of the
transaction by a majority of Foamex International's stockholders.
On February 27, 1998, Foamex International, Foamex L.P. and certain of
its affiliates completed a series of transactions designed to simplify Foamex
International's structure and to provide future operational flexibility. Prior
to the consummation of these transactions, (i) Foamex L.P. and Foamex L.P.'s
wholly-owned subsidiary, General Felt, entered into a Supply Agreement and an
Administrative Services Agreement, (ii) Foamex L.P. repaid its outstanding
indebtedness to General Felt with $4.8 million in cash and a $34.0 million
principal amount promissory note (the "Foamex/GFI Note") supported by a $34.5
million letter of credit under the Foamex L.P. Credit Facility and (iii) Foamex
L.P. defeased the $4.5 million outstanding principal amount of its 9 1/2% senior
secured notes due 2000. The initial transaction resulted in the transfer from
Foamex L.P. to Trace Foam LLC of all of the outstanding common stock of General
Felt, in exchange for (i) the assumption by Trace Foam LLC of $129.0 million of
Foamex L.P.'s indebtedness and (ii) the transfer by Trace Foam LLC to Foamex
L.P. of a 1% non-managing general partnership interest in Foamex L.P. As a
result, General Felt ceased being a subsidiary of Foamex L.P. and was relieved
from all obligations under Foamex L.P.'s 9 7/8% senior subordinated notes due
2007 and 13 1/2% senior subordinated notes due 2005. Upon consummation of the
initial transaction, Foamex Carpet, a newly formed wholly-owned subsidiary of
Foamex International, Foamex International, Trace Foam LLC, and General Felt
entered into an Asset Purchase Agreement dated February 27, 1998, in which
General Felt sold substantially all of its assets (other than the Foamex/GFI
Note and its operating facility in Pico Rivera, California) to Foamex Carpet in
exchange for (i) $20.0 million in cash and (ii) a promissory note issued by
Foamex Carpet to Trace Foam LLC in the amount of $70.2 million. The $20.0
million cash payment was funded with a distribution by Foamex L.P. As part of
these transactions, Foamex Fibers, a wholly-owned subsidiary of General Felt,
was merged with and into General Felt and Foamex LLC, a wholly-owned subsidiary
of Foamex L.P., was merged with and into Foamex L.P. In addition, FMXI, Inc. and
Crain, both wholly-owned subsidiaries of Foamex International and general
partners of Foamex L.P., were merged and Crain, as the surviving corporation,
subsequently changed its name to FMXI, Inc. Upon consummation of these
transactions contemplated by the Asset Purchase Agreement, Foamex Carpet entered
into a credit agreement with the institutions from time to time party thereto as
lenders, the institutions from time to time party thereto, as issuing banks, and
Citicorp USA, Inc. and The Bank of Nova Scotia, as administrative agents, which
provides for up to $20.0 million in revolving credit borrowings. These
16
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALAYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
transactions will be accounted for as a transfer and future Foamex L.P.
financial statements will exclude the operations of General Felt. Foamex Carpet
will conduct the carpet cushion business previously conducted by General Felt.
Also, Trace Foam LLC has retained ownership of one of General Felt's operating
facilities which is being leased to Foamex Carpet and the $34.0 million
Foamex/GFI Note.
On December 23, 1997, Foamex L.P. acquired Crain pursuant to a merger
agreement with Crain Holdings Corp. a purchase price of approximately $213.7
million, including the assumption of debt with a face value of approximately
$98.6 million (and an estimated fair value of approximately $112.3 million). In
addition, fees and expenses associated with the Crain Acquisition are
approximately $13.2 million.
On October 6, 1997, Foamex L.P. sold substantially all of the net assets
of its needlepunch carpeting, tufted carpeting and artificial grass products
business located at its facilities in Dalton, Georgia ("Dalton"). Dalton's
revenues were $10.7 million for the thirteen week period ended March 30, 1997.
Operating results for 1998 are expected to be influenced by various
internal and external factors. These factors include, among other things, (i)
consolidation of the Crain Acquisition, (ii) continued implementation of the
continuous improvement program to improve Foamex L.P.'s profitability, (iii)
additional raw material cost increases, if any, by Foamex L.P.'s chemical
suppliers, (iv) Foamex L.P.'s success in passing on to its customers selling
price increases to recover such raw material cost increases and (v) fluctuations
in interest rates.
13 Week Period Ended March 29, 1998 Compared to 13 Week Period Ended March 30,
1997
Results of Operations
Net sales for the first quarter of 1998 were $313.8 million as compared
to $229.1 million in the first quarter of 1997, an increase of $84.7 million or
37.0%. Carpet cushion products net sales for the first quarter of 1998 increased
3.8% to $70.5 million from $67.9 million in the first quarter of 1997. Carpet
cushion is exclusively sold to Foamex Carpet. Cushioning products net sales for
the first quarter of 1998 increased 86.3% to $97.8 million from $52.5 million in
the first quarter of 1997 primarily due to net sales from the Crain operations
and increased volume to our national bedding customers and fabricators.
Furniture products net sales for the first quarter of 1998 increased 36.8% to
$43.1 million as compared to net sales of $31.5 million for the first quarter of
1997 primarily due to net sales from the Crain operations. Automotive products
net sales for the first quarter of 1998 increased 10.0% to $65.7 million from
$59.7 million in the first quarter of 1997 primarily due to increased volume.
Technical products net sales for the first quarter of 1998 increased 20.6% to
$21.1 million from $17.5 million in the first quarter of 1997 primarily due to
increased net sales volume for felted, gasketing, and sealing products. Consumer
products net sales for the first quarter of 1998 was $156.9 million. The
consumer products category was acquired in the December 1997 Crain Acquisition.
Gross profit as a percentage of net sales decreased to 15.3% for the
first quarter of 1998 from 19.0% in the first quarter of 1997 primarily due to
the shift in product mix for 1998 as a result of the Crain Acquisition. Crain's
principal product lines, bedding, furniture and carpet cushion, have inherently
lower gross profit margins versus Foamex L.P.'s historical gross profit margins.
Also, the gross profit was lower in the first quarter of 1998 since Foamex L.P.
carried the full start-up costs related to both organizations.
Income from operations was $25.8 million for the first quarter of 1998
compared to $25.7 million in the first quarter of 1997 primarily due the Crain
Acquisition (discussed above) offset by an increase in selling, general and
administrative expenses primarily due to the Crain Acquisition.
Income before extraordinary loss decreased to $17.1 million for the first
quarter of 1998 as compared to $15.5 million for the first quarter of 1997. The
decrease is primarily due increased interest and debt issuance costs
17
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALAYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
and the discussion above. The increase in interest and debt issuance expense is
primarily due to the debt incurred in connection with the Crain Acquisition
offset by the favorable effects of the June 1997 refinancing plan.
The extraordinary loss on early extinguishment of debt of approximately
$3.1 million during the first quarter of 1998 primarily relates to the write-off
of debt issuance costs associated with the GFI Transaction.
Foamex Capital Corporation ("FCC")
FCC is solely a co-issuer of certain indebtedness of Foamex L.P. has no
other material operations.
Liquidity and Capital Resources
Foamex L.P.'s operating cash requirements consist principally of working
capital requirements, scheduled payments of principal and interest on
outstanding indebtedness and capital expenditures of the operating subsidiaries.
Foamex L.P. believes that cash flow from operating activities, cash on hand and
periodic borrowings under the Credit Facility, if necessary, will be adequate to
meet operating cash requirements. The ability to meet the operating cash
requirements of Foamex L.P. could be impaired if Foamex L.P. was to fail to
comply with any of the covenants contained in the Credit Facility and such
noncompliance was not cured by Foamex L.P. or waived by the lenders. Foamex L.P.
was in compliance with the covenants in the Credit Facility as of December 28,
1997 and expects to be in compliance with the covenants for the foreseeable
future.
Cash and cash equivalents decreased $6.0 million during 1998 to $3.0
million at March 29, 1998 from $9.0 million at December 28, 1997 primarily due
to a decrease in cash operating results and used by the operating assets and
liabilities. Working capital increased $41.9 million during 1998 to $148.1
million at March 29, 1998 from $106.2 million at December 28, 1997 primarily due
changes in net operating assets. Net operating assets and liabilities (comprised
of accounts receivable, inventories, accounts payable and accounts payable from
affiliates) increased $21.3 million during 1998 to $162.5 million at March 29,
1998 from $141.2 million at December 28, 1997 primarily due to increases in
accounts receivable.
As of March 29, 1998, there were $124.9 million of revolving credit
borrowings under the Credit Facility with unused availability of approximately
$25.6 million which includes approximately $49.5 million associated with letters
of credit outstanding which are supported by the Credit Facility. Borrowings by
Foamex Canada as of March 29, 1998 were $5.1 million under Foamex Canada's
revolving credit agreement with unused availability of approximately $0.9
million.
Interest Rate Swaps
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.
On January 8, 1998, Foamex L.P. entered into an amended interest rate
swap agreement which provides for an interest rate swap agreement with a
notional amount of $150.0 million through June 2002. Under this agreement,
Foamex L.P. is obligated to make fixed payments of 5.78% per annum through
December 1998 and variable payments based on LIBOR at the beginning of each six
month 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 newly amended interest rate swap agreement can be
terminated by the swap partner at the end of each six month period commencing
December 1999.
18
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALAYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Foamex L.P. is exposed to credit loss in the event of a nonperformance by
the swap partner; however, the occurrence of this event is not anticipated. The
effect of interest rate swaps was a favorable adjustment to interest and debt
issuance expense of $0.3 million, $0.9 million for the thirteen week period
ended March 29, 1998 and March 30, 1997, respectively.
Environmental Matters
Foamex L.P. is subject to extensive and changing environmental laws and
regulations. Expenditures to date in connection with Foamex L.P.'s compliance
with such laws and regulations did not have a material adverse effect on
operations, financial position, capital expenditures or competitive position.
The amount of liabilities recorded by Foamex L.P. in connection with
environmental matters as of March 29, 1998 was $3.9 million. In addition, as of
March 29, 1998 Foamex L.P. has net receivables of $0.6 million for
indemnification of environmental liabilities from former owners. Although it is
possible that new information or future developments could require Foamex L.P.
to reassess its potential exposure to all pending environmental matters,
including those described in the footnotes to Foamex L.P.'s consolidated
financial statements, management 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 L.P.'s operations, financial
position, capital expenditures or competitive position.
Inflation and Other Matters
There was no significant impact on Foamex L.P.'s operations as a result
of inflation during the periods presented. In some circumstances, market
conditions or customer expectations may prevent Foamex L.P. from increasing the
price of its products to offset the inflationary pressures that may increase its
costs in the future.
Foamex L.P. has and will continue to make certain investments in its
software systems and applications to ensure Foamex L. P. is Year 2000 compliant.
Foamex L.P. plans to continue to make modifications to the identified software
during 1998 and test the during 1998. The financial impact to Foamex L.P. has
not been and is not anticipated to be material to its financial position or
results of operation in any given year.
Foamex L.P.'s automotive products customers are predominantly automotive
original equipment manufacturers 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 L.P.'s
sales are sensitive to sales of new and existing homes, changes in personal
disposable income and seasonality. Foamex L.P. typically experiences two
seasonally slow periods during each year, in early July and in late December,
due to scheduled plant shutdowns and holidays.
New Accounting Standards
Statement of Financial Accounting Standards No. 130 ("SFAS No. 130"),
"Reporting Comprehensive Income," was issued by the Financial Accounting
Standards Board in June 1997. This statement requires all items that must be
recognized under accounting standards as components of comprehensive income to
be reported in a financial statement that is displayed with the same prominence
as other financial statements. Foamex L.P. will adopt SFAS No. 130 for 1998.
Statement of Financial Accounting Standards No. 131 ("SFAS No. 131"),
"Disclosures about Segments of an Enterprise and Restated Information," was
issued by the Financial Accounting Standards Board in June 1997. This statement
establishes standards for reporting information about operating segments in
annual financial statements and requires reporting of selected financial
information about operating segments in interim financial reports issued to
stockholders. It also establishes standards for related disclosures about
products and services, geographic areas, and major customers. Foamex L.P. will
adopt SFAS No. 131 for year end 1998 reporting. Management is evaluating the
impact, if any, the standard will have on Foamex L.P.'s present segment
reporting.
19
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
Reference is made to the description of the legal proceedings contained
in the Foamex L.P. Annual Report on Form 10-K/A for the fiscal year
ended December 28, 1997.
The information from Notes 6 and 7 of the condensed consolidated
financial statements of Foamex L.P. and subsidiaries as of March 29,
1998 (unaudited) is incorporated herein by reference.
Item 2. Changes in Securities.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Securities Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits and Financial Statement Schedules.
(a) Exhibits
3.1(a) - Certificate of Limited Partnership of Foamex L.P. ("Foamex")
3.2.1(a) - Fourth Amended and Restated Agreement of Limited Partnership of
Foamex L.P., dated as of December 14, 1993, by and among FMXI Inc.
("FMXI") and Trace Foam Company, Inc. ("Trace Foam"), as general
partners, and Foamex L.P., as a limited partner (the "Partnership
Agreement").
3.2.2(b) - First Amendment to the Partnership Agreement, dated June 28, 1994.
3.2.3(c) - Second Amendment to the Partnership Agreement, dated June 12, 1997.
3.2.4(v) - Third Amendment to the Partnership Agreement, dated December 23,
1997.
3.2.5(x) - Fourth Amendment to the Partnership Agreement, dated February 27,
1998.
3.3(y) - Certificate of Incorporation of FMXI.
3.4(y) - By-laws of FMXI.
3.5(k) - Certificate of Incorporation of Foamex Capital Corporation ("FCC").
3.6(k) - By-laws of FCC.
4.1.1(d) - Indenture, dated as of June 12, 1997, by and among Foamex L.P., FCC,
the Subsidiary Guarantors and The Bank of New York, as Trustee,
relating to $150,000,000 principal amount of 9 7/8% Senior
Subordinated Notes due 2007, including the form of Senior Subordinated
Note and Subsidiary Guarantee.
4.1.2(v) - First Supplemental Indenture, dated as of December 23, 1997, between
Foamex LLC ("FLLC") and The Bank of New York, as trustee, relating to
the 9 7/8% Notes.
4.1.3(x) - Second Supplemental Indenture, dated as of February 27, 1998, among
Foamex L.P. and FCC, as joint and several obligors, General Felt,
Foamex Fibers, and FLLC, as withdrawing guarantors, and The Bank of
New York, as trustee, relating to the 9 7/8% Notes.
20
<PAGE>
4.1.4(d) - Registration Rights Agreement, dated as of June 12, 1997, by and
among Foamex, FCC, General Felt, Foamex Fibers, and all future direct
or indirect domestic subsidiaries of Foamex or FCC, and Donaldson,
Lufkin & Jenrette Securities Corporation, Salomon Brothers Inc. and
Scotia Capital Markets, as Initial Purchasers.
4.2.1(v) - Indenture, dated as of December 23, 1997, by and among Foamex L.P.,
FCC, the Subsidiary Guarantors, Crain Holdings Corp., as Intermediate
obligator, and The Bank of New York, as trustee, relating to
$98,000,000 principal amount of 13 1/2% Senior Subordinated Notes due
2005 (the "13 1/2% Notes"), including the form of Senior Subordinated
Note and Subsidiary Guarantee.
4.2.2(x) - First Supplemental Indenture, dated as of February 27, 1998, among
Foamex L.P. and FCC, as joint and several obligors, General Felt,
Foamex Fibers and FLLC, as withdrawing guarantors, Crain Industries,
Inc., as withdrawing intermediate obligor, and The Bank of New York,
as trustee, relating to the 13 1/2% Notes.
4.3(x) - Discharge of Indenture, dated as of February 27, 1998, by and among
Foamex L.P., General Felt, Foamex International and State Street Bank
and Trust Company, as trustee, relating to the 9 1/2% Senior Secured
Notes due 2000.
4.4.1(x) - Credit Agreement, dated as of June 12, 1997, as amended and restated
as of February 27, 1998, by and among Foamex L.P., and FMXI, the
institutions from time to time party thereto as lenders, the
institutions from time to time party thereto as issuing banks, and
Citicorp USA, Inc. and The Bank of Nova Scotia, as Administrative
Agents.
4.4.2(x) - Second Amended and Restated Foamex International Guaranty, dated as
of February 27, 1998, made by Foamex International in favor of
Citicorp USA, Inc., as Collateral Agent.
4.4.3(x) - Amended and Restated Partnership Guaranty, dated as of February 27,
1998, made by FMXI in favor of Citicorp USA, Inc., as Collateral
Agent.
4.4.4(p) - Foamex Guaranty, dated as of June 12, 1997, made by Foamex L.P. in
favor of Citicorp USA, Inc., as Collateral Agent.
4.4.5(p) - Subsidiary Guaranty, dated as of June 12, 1997, made by Foamex Latin
America, Inc. in favor of Citicorp USA, Inc., as Collateral Agent.
4.4.6(p) - Subsidiary Guaranty, dated as of June 12, 1997, made by Foamex
Mexico, Inc. in favor of Citicorp USA, Inc., as Collateral Agent.
4.4.7(p) - Subsidiary Guaranty, dated as of June 12, 1997, made by FCC in favor
of Citicorp USA, Inc., as Collateral Agent.
4.4.8(p) - Subsidiary Guaranty, dated as of June 12, 1997, made by Foamex
Mexico II, Inc. in favor of Citicorp USA, Inc., as Collateral Agent.
4.4.9(p) - Subsidiary Guaranty, dated as of June 12, 1997, made by Foamex Asia,
Inc. in favor of Citicorp USA, Inc., as Collateral Agent.
4.4.10(p) - Subsidiary Pledge Agreement, dated as of June 12, 1997, made by FCC
in favor of Citicorp USA, Inc., as Collateral Agent.
4.4.11(p) - Subsidiary Pledge Agreement, dated as of June 12, 1997, made by
Foamex Latin America, Inc. in favor of Citicorp USA, Inc., as
Collateral Agent.
4.4.12(p) - Subsidiary Pledge Agreement, dated as of June 12, 1997, made by
Foamex Asia, Inc. in favor of Citicorp USA, Inc., as Collateral Agent.
4.4.13(p) - Subsidiary Pledge Agreement, dated as of June 12, 1997, made by
Foamex Mexico, Inc. in favor of Citicorp USA, Inc., as Collateral
Agent.
4.4.14(p) - Subsidiary Pledge Agreement, dated as of June 12, 1997, made by
Foamex Mexico II, Inc. in favor of Citicorp USA, Inc., as Collateral
Agent.
4.4.15(p) - Foamex Security Agreement, dated as of June 12, 1997, made by Foamex
L.P. in favor of Citicorp USA, Inc., as Collateral Agent.
4.4.16(p) - Subsidiary Security Agreement, dated as of June 12, 1997, made by
Foamex Latin America, Inc. in favor of Citicorp USA, Inc., as
Collateral Agent.
4.4.17(p) - Subsidiary Security Agreement, dated as of June 12, 1997, made by
Foamex Mexico, Inc. in favor of Citicorp USA, Inc., as Collateral
Agent.
21
<PAGE>
4.4.18(p) - Subsidiary Security Agreement, dated as of June 12, 1997, made by
Foamex Mexico II, Inc. in favor of Citicorp USA, Inc., as Collateral
Agent.
4.4.19(p) - Subsidiary Security Agreement, dated as of June 12, 1997, made by
Foamex Asia, Inc. in favor of Citicorp USA, Inc., as Collateral Agent.
4.4.20(p) - Subsidiary Security Agreement, dated as of June 12, 1997, made by
FCC in favor of Citicorp USA, Inc., as Collateral Agent.
4.4.21 - Intentionally omitted.
4.4.22(w) - First Amendment to Foamex Pledge Agreement, dated as of December 23,
1997, by Foamex L.P. in favor of Citicorp USA, Inc., as Collateral
Agent.
4.4.23(w) - First Amendment to Foamex Security Agreement, dated as of December
23, 1997, by Foamex L.P. in favor of Citicorp USA, Inc., as Collateral
Agent.
4.4.24(w) - First Amendment to Foamex Patent Agreement, dated as of December 23,
1997, by Foamex L.P. in favor of Citicorp USA, Inc., as Collateral
Agent.
4.4.25(w) - First Amendment to Trademark Security Agreement, dated as of
December 23, 1997, by Foamex L.P. in favor of Citicorp USA, Inc., as
Collateral Agent.
4.4.26(w) - Acknowledgment of Guaranty by each of the guarantors to a Guaranty
dated June 12, 1997 in favor of Citicorp USA, Inc.
4.4.27(w) - First Amendment to Pledge Agreement, dated as of December 23, 1997,
by pledgors in favor of Citicorp USA, Inc.
4.4.28(w) - Crain Industries Guaranty, dated as of December 23, 1997, made by
Crain in favor of Citicorp USA, Inc.
4.4.29(x) - Partnership Pledge Agreement, dated as of February 27, 1998, made by
Foamex International and FMXI in favor of Citicorp USA, Inc., as
Collateral Agent.
4.6(j) - Commitment letter, dated July 9, 1996, from The Bank of Nova Scotia
to Foamex Canada Inc.
4.7(a) - Subordinated Promissory Note, dated as of May 6, 1993, in the
original principal amount of $7,014,864 executed by Foamex L.P. to
John Rallis ("Rallis").
4.8(a) - Marely Loan Commitment Agreement, dated as of December 14, 1993, by
and between Foamex L.P. and Marely s.a. ("Marely").
4.9(a) - DLJ Loan Commitment Agreement, dated as of December 14, 1993, by and
between Foamex L.P. and DLJ Funding, Inc. ("DLJ Funding").
4.10(p) - Promissory Note, dated June 12, 1997, in the aggregate principal
amount of $5,000,000, executed by Trace Holdings to Foamex.
4.10.1(p) - Promissory Note, dated June 12, 1997, in the aggregate principal
amount of $4,794,828, executed by Trace Holdings to Foamex.
4.11.1(x) - Promissory Note of Foamex L.P. in favor of Trace Foam LLC in the
principal amount of $34 million, dated February 27, 1998.
10.1.1(p) - Amendment to Master Agreement, dated as of June 5, 1997, between
Citibank, N.A. and Foamex.
10.1.2(p) - Amended confirmation, dated as of June 13, 1997, between Citibank,
N.A. and Foamex.
10.2(h) - Reimbursement Agreement, dated as of March 23, 1993, between Trace
Holdings and General Felt.
10.3(h) - Shareholder Agreement, dated December 31, 1992, among Recticel, s.a.
("Recticel"), Recticel Holding Noord B.V., Foamex L.P., Beamech Group
Limited, LME-Beamech, Inc., James Brian Blackwell, and Prefoam AG
relating to foam technology sharing arrangement.
10.4.1(k) - Asset Transfer Agreement, dated as of October 2, 1990, between Trace
Holdings and Foamex (the "Trace Holdings Asset Transfer Agreement").
10.4.2(k) - First Amendment, dated as of December 19, 1991, to the Trace
Holdings Asset Transfer Agreement.
10.4.3(k) - Amended and Restated Guaranty, dated as of December 19, 1991, made
by Trace Foam in favor of Foamex L.P.
22
<PAGE>
10.5.1(k) - Asset Transfer Agreement, dated as of October 2, 1990, between RFC
and Foamex L.P. (the "RFC Asset Transfer Agreement").
10.5.2(k) - First Amendment, dated as of December 19, 1991, to the RFC Asset
Transfer Agreement.
10.5.3(k) - Schedule 5.03 to the RFC Asset Transfer Agreement (the "5.03
Protocol").
10.5.4(h) - The 5.03 Protocol Assumption Agreement, dated as of October 13,
1992, between RFC and Foamex L.P.
10.5.5(h) - Letter Agreement between Trace Holdings and Recticel regarding the
Recticel Guaranty, dated as of July 22, 1992.
10.6(l) - Supply Agreement, dated June 28, 1994, between Foamex L.P. and
Foamex International.
10.7.1(l) - First Amended and Restated Tax Sharing Agreement, dated as of
December 14, 1993, among Foamex, Trace Foam, FMXI and Foamex L.P.
10.7.2(d) - First Amendment to Amended and Restated Tax Sharing Agreement of
Foamex, dated as of June 12, 1997, by and among Foamex, Foamex L.P.,
FMXI, Inc. and Trace Foam.
10.7.3(w) - Second Amendment to Amended and Restated Tax Sharing Agreement of
Foamex L.P., dated as of December 23, 1997, by and among Foamex L.P.,
Foamex International, FMXI, and Trace Foam.
10.7.4(y) - Third Amendment to Amended and Restated Tax Sharing Agreement of
Foamex L.P., dated as of February 27, 1998, by and between Foamex
L.P., Foamex International and FMXI.
10.8.1(m) - Tax Distribution Advance Agreement, dated as of December 11, 1996,
by and between Foamex and Foamex-JPS Automotive.
10.8.2(d) - Amendment No. 1 to Tax Distribution Advance Agreement, dated as of
June 12, 1997, by and between Foamex L.P. and Foamex.
10.9.1(h) - Trace Foam Management Agreement between Foamex and Trace Foam, dated
as of October 13, 1992.
10.9.2(l) - Affirmation Agreement re: Management Agreement, dated as of December
14, 1993, between Foamex and Trace Foam.
10.9.3(d) - First Amendment to Management Agreement, dated as of June 12, 1997,
by and between Foamex and Trace Foam.
10.10.1(k) - Salaried Incentive Plan of Foamex and Subsidiaries.
10.10.2(k) - Trace Holdings 1987 Nonqualified Stock Option Plan.
10.10.3(k) - Equity Growth Participation Program.
10.10.4(e)(o) - Foamex L.P. Salaried Retirement Plan (formerly known as the
Foamex L.P. Products, Inc. Salaried Employee Retirement Plan), as
amended, effective July 1, 1994.
10.10.5(u) - Foamex L.P. 401(k) Savings Plan effective October 1, 1997.
10.10.6(a) - Foamex L.P.'s 1993 Stock Option Plan.
10.10.7(a) - Foamex L.P.'s Non-Employee Director Compensation Plan.
10.11.1(o)- Employment Agreement, dated as of February 1, 1994, by and between
Foamex L.P. and William H. Bundy.
10.12(a) - Warrant Exchange Agreement, dated as of December 14, 1993, by and
between Foamex L.P. and Marely.
10.13(a) - Warrant Exchange Agreement, dated as of December 14, 1993, by and
between Foamex L.P. and DLJ Funding.
10.14(o) - Stock Purchase Agreement, dated as of December 23, 1993, by and
between Transformacion de
10.15.1(r)- Asset Purchase Agreement, dated as of August 29, 1997, by and among
General Felt, Foamex L.P., Bretlin, Inc. and The Dixie Group.
10.15.2(s)- Addendum to Asset Purchase Agreement, dated as of October 1, 1997,
by and among General Felt, Foamex L.P., Bretlin, Inc. and The Dixie
Group.
10.16.1(x)- Supply Agreement, dated as of February 27, 1998, by and between
Foamex L.P. and General Felt (as assigned to Foamex Carpet).
10.16.2(x)- Administrative Services Agreement, dated as of February 27, 1998,
by and between Foamex L.P. and General Felt (as assigned to Foamex
Carpet).
23
<PAGE>
27 - Financial Data Schedule for the period ended March 29, 1998.
- ----------------------------
(a) Incorporated herein by reference to the Exhibit to Foamex L.P.'s
Registration Statement on Form S-1, Registration No. 33-69606.
(b) Incorporated herein by reference to the Exhibit to the Form 10-K of Foamex
for the fiscal year ended January 1, 1995.
(c) Incorporated herein by reference to the Exhibit to the Current Report on
Form 8-K of Foamex reporting an event that occurred May 28, 1997.
(d) Incorporated herein by reference to the Exhibit to the Current Report on
Form 8-K of Foamex reporting an event that occurred June 12, 1997.
(e) Incorporated herein by reference to the Exhibit to the Registration
Statement of Foamex and FCC on Form S-4, Registration No. 33-65158.
(f) Incorporated herein by reference to the Exhibit to the Form 10-Q of Foamex
for the quarterly period ended June 30, 1996.
(g) Incorporated herein by reference to the Exhibit to the Registration
Statement of Foamex, FCC and General Felt on Form S-1, Registration Nos.
33-60888, 33-60888-01, and 33-60888-02.
(h) Incorporated herein by reference to the Exhibit to the Form 10-K Statement
of Foamex and FCC for fiscal 1992.
(i) Incorporated herein by reference to the Exhibit to the Form 10-K of Foamex
L.P. for fiscal 1994.
(j) Incorporated herein by reference to the Exhibit to the Form 10-Q of Foamex
for the quarterly period ended September 30, 1996.
(k) Incorporated herein by reference to the Exhibit to the Registration
Statement of Foamex and FCC on Form S-1, Registration Nos. 33-49976 and
33-49976-01.
(l) Incorporated herein by reference to the Exhibit to the Registration
Statement of FJPS, FJCC and Foamex L.P. on Form S-4, Registration No.
33-82028.
(m) Incorporated herein by reference to the Exhibit to the Annual Report on
Form 10-K of Foamex for the fiscal year ended December 29, 1996.
(n) Incorporated herein by reference to the Exhibit to the Form 10-Q of Foamex
for the quarterly period ended July 2, 1995.
(o) Incorporated herein by reference to the Exhibit to the Form 10-K of Foamex
L.P. for fiscal 1993.
(p) Incorporated herein by reference to the Exhibit in the Registration
Statement of Foamex on Form S-4, Registration No. 333-30291.
(q) Incorporated herein by reference to the Exhibit to the Form 10-K of Foamex
L.P. for the fiscal year ended December 31, 1995.
24
<PAGE>
(r) Incorporated herein by reference to the Current Report on Form 8-K of
Foamex L.P. reporting an event that occurred on August 29, 1997.
(s) Incorporated herein by reference to the Current Report on Form 8-K of
Foamex L.P. reporting an event that occurred on October 6, 1997.
(t) Incorporated by reference to the Exhibit to the Form 10-Q of Foamex
International for the quarterly period ended July 3, 1994.
(u) Incorporated by reference to the Exhibit to the Form 10-Q of Foamex L.P.
for the quarterly period ended September 28, 1997.
(v) Incorporated herein by reference to the Exhibit to the Current Report on
Form 8-K of Foamex L.P., Foamex Capital Corporation and Foamex
International reporting an event that occurred December 23, 1997.
(w) Incorporated herein by reference to the Exhibit in the Registration
Statement of Foamex on Form S-4, Registration No. 333-45733.
(x) Incorporated herein by reference to the Current Report on Form 8-K of
Foamex International reporting an event that occurred on February 27, 1998.
(y) Incorporated herein by reference to the Exhibit to the Form 10-K of Foamex
International for fiscal 1997.
Certain instruments defining the rights of security holders have been
excluded herefrom in accordance with Item 601(b)(4)(iii) of Regulation S-K. The
registrant hereby agrees to furnish a copy of any such instrument to the
Commission upon request.
(b) Foamex L.P. filed the following Current Reports on Form 8-K:
Form 8-K/A, dated March 9, 1998, providing pro forma financial
information relating to the acquisition of Crain Industries, Inc.
Form 8-K, dated February 28, 1998, reporting the change in
corporate structure.
25
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrants have duly caused this report to be signed on their behalf by the
undersigned thereunto duly authorized.
FOAMEX L.P.
By: FMXI, INC.
General Partner
Date: May 12, 1998 By: /s/ Kenneth R. Fuette
Kenneth R. Fuette
Executive Vice President and
Chief Financial Officer
FOAMEX CAPITAL CORPORATION
Date: May 12, 1998 By: /s/ Kenneth R. Fuette
Kenneth R. Fuette
Vice President, Treasurer and
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
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<NAME> FOAMEX L.P.
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-mos
<FISCAL-YEAR-END> Jan-03-1999
<PERIOD-START> Dec-29-1997
<PERIOD-END> Mar-29-1998
<EXCHANGE-RATE> 1
<CASH> 2,972
<SECURITIES> 0
<RECEIVABLES> 150,687
<ALLOWANCES> 0
<INVENTORY> 112,532
<CURRENT-ASSETS> 327,964
<PP&E> 206,383
<DEPRECIATION> 0
<TOTAL-ASSETS> 758,498
<CURRENT-LIABILITIES> 179,900
<BONDS> 711,582
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0
<COMMON> 0
<OTHER-SE> (163,968)
<TOTAL-LIABILITY-AND-EQUITY> 758,498
<SALES> 284,545
<TOTAL-REVENUES> 284,545
<CGS> 240,982
<TOTAL-COSTS> 240,982
<OTHER-EXPENSES> 17,766
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 17,675
<INCOME-PRETAX> 7,848
<INCOME-TAX> 725
<INCOME-CONTINUING> 7,123
<DISCONTINUED> 0
<EXTRAORDINARY> (3,123)
<CHANGES> 0
<NET-INCOME> 4,000
<EPS-PRIMARY> 0
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