SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (Fee Required)
For the fiscal year ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file 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 executive offices) (Zip Code)
Registrant's telephone number, including area code: (610) 859-3000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether Foamex L.P. (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter periods that Foamex
L.P. was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
Indicate by check mark whether Foamex Capital Corporation (1) has filed
all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter periods
that Foamex Capital Corporation was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. YES X NO
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrants' knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Annual Report on Form
10-K or any amendment to this Form 10-K. [ ]
None of the voting securities of Foamex L.P. or Foamex Capital
Corporation are held by non-affiliates.
As of May 3, 1999, there were 1,000 shares of Foamex Capital
Corporation's common stock outstanding.
Foamex L.P. and Foamex Capital Corporation meet the conditions set forth
in General Instruction (I)(1)(a) and (b) of Form 10-K and are therefore filing
this form with reduced disclosure format.
DOCUMENTS INCORPORATED BY REFERENCE
None
<PAGE>
FOAMEX L.P.
FOAMEX CAPITAL CORPORATION
<TABLE>
<CAPTION>
INDEX
Page
Part I
<S> <C> <C>
Item 1. Business 3
Item 2. Properties 10
Item 3. Legal Proceedings 11
Item 4. Submission of Matters to a Vote
of Security Holders 15
Part II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters 15
Item 6. Selected Consolidated Financial Data 15
Item 7. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 17
Item 8. Financial Statements and Supplementary Data 28
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 28
Part III
Item 10. Directors and Executive Officers of the Registrant 28
Item 11. Executive Compensation 28
Item 12. Security Ownership of Certain Beneficial Owners
and Management 28
Item 13. Certain Relationships and Related Transactions 28
Part IV
Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K 28
Signatures 36
</TABLE>
The Registrants will furnish a copy of any exhibit to this Form 10-K upon
the payment of a fee equal to the Registrants' reasonable expense in furnishing
such exhibit.
<PAGE>
PART I
ITEM l. BUSINESS
General
Foamex L.P., a wholly owned subsidiary of Foamex International Inc.
("Foamex International"), is engaged primarily in the business of manufacturing
and distributing flexible polyurethane and advanced polymer foam products. As of
December 31, 1998, Foamex L.P.'s operations are conducted directly and through
its wholly owned subsidiaries, Foamex Canada Inc. ("Foamex Canada"), Foamex
Latin America, Inc. ("Foamex Mexico") and Foamex Asia, Inc. ("Foamex Asia") and
consist of the following operating segments: (i) foam products, (ii) carpet
cushion products, (iii) automotive products, (iv) technical products and (v)
other, which primarily consists of certain foreign manufacturing operations,
corporate expenses not allocated to the other operating segments and
restructuring and other charges. The net sales and income (loss) from operations
of these operating segments for each of the last three years are included in
Note 15 to the consolidated financial statements. As of December 31, 1998,
Foamex L.P.'s partners were FMXI, Inc. ("FMXI") with a 2% managing general
partnership interest and Foamex International with a 98% limited partnership
interest. FMXI is a wholly owned subsidiary of Foamex International.
On March 16, 1999, Foamex International announced that it had hired John
G. Johnson, Jr. as President, Chief Executive Officer and director of Foamex
International following the resignation of Andrea Farace from the positions of
Chairman of the Board, Chief Executive Officer and director of Foamex
International. Foamex International also announced that it had hired JP Morgan
Securities Inc. as a financial advisor to explore strategic alternatives to
maximize shareholder value.
On March 16, 1998, Foamex International announced that its Board of
Directors received an unsolicited buyout proposal from Trace International
Holdings, Inc. ("Trace"), Foamex International's principal stockholder. Trace
proposed to acquire all of the outstanding common stock of Foamex International
not owned by Trace and its subsidiaries (the "Public Shares") for a cash price
of $17.00 per share. As of March 16, 1998, Trace 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's offer,
Foamex International's Board of Directors appointed a special committee to
determine the advisability and fairness of the proposed buyout to Foamex
International's stockholders other than Trace and its subsidiaries.
On June 25, 1998, Trace, Trace Merger Sub, Inc., a wholly owned
subsidiary of Trace ("Merger Sub"), and Foamex International entered into an
Agreement and Plan of Merger (the "First Merger Agreement"). Pursuant to the
terms of the First Merger Agreement, Merger Sub would have been merged with and
into Foamex International (the "First Merger") and each outstanding share of
common stock, other than common stock held by Trace and its subsidiaries,
treasury shares, and common stock with respect to which appraisal rights would
have been perfected, would have been converted into the right to receive $18.75
per share in cash. On November 5, 1998, Trace terminated the First Merger
Agreement, pursuant to its terms, due to the failure of certain financing
conditions.
On November 5, 1998, Trace, Merger Sub and Foamex International entered
into a second Agreement and Plan of Merger (the "Second Merger Agreement").
Pursuant to the terms of the Second Merger Agreement, Merger Sub would have been
merged with and into Foamex International (the "Second Merger") and each
outstanding share of common stock, other than common stock held by Trace and its
subsidiaries, treasury shares, and common stock with respect to which appraisal
rights would have been perfected, would have been converted into the right to
receive $12.00 per share in cash. Trace delivered a letter to Foamex
International, dated January 8, 1999 (the "Notice of Termination"), terminating
the Second Merger Agreement, pursuant to its terms, due to the failure of
certain financing conditions.
In connection with the First Merger Agreement and the Second Merger
Agreement, Foamex L.P. commenced but did not close a debt tender offer, a debt
exchange offer, and an internal corporate restructuring and refinancing. The
costs of these offerings were paid by Foamex International.
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On February 27, 1998, Foamex International, Foamex L.P. and certain of
their affiliates completed a series of transactions designed to simplify the
structure of Foamex International and Foamex L.P. and to provide future
operational flexibility (collectively, the "GFI Transaction"). Prior to the
consummation of these transactions; (i) Foamex L.P. and Foamex L.P.'s wholly
owned subsidiary, General Felt Industries, Inc. ("General Felt") entered into a
Supply Agreement and an Administrative Services Agreement and (ii) Foamex L.P.
defeased the $4.5 million outstanding principal amount of its 9 1/2% senior
secured notes due 2000. Foamex L.P. settled its intercompany payables to General
Felt with $4.8 million in cash and a $34.0 million principal promissory note
supported by a $34.5 million letter of credit under the Foamex L.P. credit
facility (the "Foamex/GFI Note"). The initial transaction resulted in the
transfer from Foamex L.P. to Foam Funding LLC, an indirect wholly owned
subsidiary of Trace, of all of the outstanding common stock of General Felt, in
exchange for (i) the assumption by Foam Funding LLC of $129.0 million of Foamex
L.P.'s indebtedness and (ii) the transfer by Foam Funding 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, Foam
Funding 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 cash, 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 Foam Funding LLC in the aggregate
principal amount of $70.2 million. The $20.0 million cash payment was funded
with a distribution by Foamex L.P. to Foamex International. 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 was
merged into its parent entity Foamex L.P. In addition, FMXI and Crain
Industries, Inc. ("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. Foamex Carpet
conducts the carpet cushion business previously conducted by General Felt.
No gain has been recognized on the General Felt transaction. The net
impact of the GFI transaction was an increase in Foamex L.P.'s partners' capital
(deficit) of approximately $10.1 million, a distribution of $20.0 million to
Foamex International and approximately $1.5 million of fees charged to earnings.
The $129.0 million of debt assumed by Foam Funding LLC in the GFI Transaction
was used to repay approximately $125.1 million of term loan borrowings that was
accounted for as an extinguishment of debt which resulted in an extraordinary
loss of approximately $3.2 million. The 1% non-managing general partnership
interest acquired in connection with the GFI Transaction was accounted for as a
redemption of equity.
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements so long as those statements are
identified as forward-looking and are accompanied by meaningful cautionary
statements identifying important factors that could cause actual results to
differ materially from those projected in such statements. In connection with
certain forward-looking statements contained in this Annual Report on Form 10-K
and those that may be made in the future by or on behalf of Foamex L.P. which
are identified as forward-looking, Foamex L.P. notes that there are various
factors that could cause actual results to differ materially from those set
forth in any such forward-looking statements, such as the ability of Foamex L.P.
to negotiate amendments of its debt agreements, Foamex L.P.'s ability to
continue operations as a viable going concern, raw material price increases,
general economic conditions, the level of automotive production, carpet cushion
production and housing starts, the completion of various
restructuring/consolidation plans, Foamex L.P.'s capital and debt structure,
litigation and changes in environmental legislation and environmental
conditions. The forward-looking statements contained in this Annual Report on
Form 10-K were prepared by management and are qualified by, and subject to,
significant business, economic, competitive, regulatory and other uncertainties
and contingencies, all of which are difficult or impossible to predict and many
of which are beyond the control of Foamex L.P. Accordingly, there can be no
assurance that the forward-looking statements contained in this Annual Report on
Form 10-K will be realized or that actual results will not be significantly
higher or lower. The forward-looking statements have not been audited by,
examined by, compiled by or subjected to agreed-upon procedures by independent
accountants, and no third-party has independently verified or reviewed such
statements. Readers of this Annual Report on Form 10-K should consider these
facts in evaluating the information contained herein. In addition, the business
and operations of Foamex L.P. are subject to substantial risks which increase
the uncertainty inherent in the forward-looking statements contained in this
Annual Report on Form 10-K. The inclusion of the forward-looking statements
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contained in this Annual Report on Form 10-K should not be regarded as a
representation by Foamex L.P. or any other person that any of the
forward-looking statements contained in this Annual Report on Form 10-K will be
achieved. In light of the foregoing, readers of this Annual Report on Form 10-K
are cautioned not to place undue reliance on the forward-looking statements
contained herein.
The principal executive offices of Foamex L.P. are located at 1000
Columbia Avenue, Linwood, Pennsylvania 19061 and its telephone number is (610)
859-3000.
References in this Annual Report on Form 10-K to "Foamex L.P." mean
Foamex L.P. and, where relevant or applicable, its subsidiaries.
5
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Flexible Polyurethane Foam and Advanced Polymer Foam Products
Foamex L.P. is one of the largest manufacturers and distributors of
flexible polyurethane and advanced polymer foam products in North America.
Foamex L.P.'s operating segments include: (i) foam products, consisting of (a)
cushioning foams for bedding, furniture, packaging and health care applications
and (b) foam-based consumer products such as futons, pillows, mattress pads and
juvenile furniture, (ii) carpet cushion products, consisting of carpet padding
and related products, (iii) automotive products, consisting of automotive trim,
laminates and other products, (iv) technical products, consisting of reticulated
and other specialty foams used for reservoiring, filtration, gasketing and
sealing applications and (v) other, which primarily consists of certain foreign
manufacturing operations, corporate expenses not allocated to the other
operating segments and restructuring and other charges. See Note 15 to the
consolidated financial statements for further discussion of operating segments.
Foamex L.P. has a diverse customer base in each of its principal
operating segments. Foam products such as cushioning foams are sold to major
bedding and furniture manufacturers such as Sealy, Simmons and Berkline. In
addition, foam-based consumer products such as futons, pillows, mattress pads
and juvenile furniture are sold to retailers such as Wal-Mart, Kmart and JC
Penney. Carpet cushion products such as carpet underlay are sold to Foamex
Carpet, which in turn sells to distributors and major floor covering retailers
such as Sears, CarpetMax and Home Depot. Automotive products such as automotive
foam products and laminates are sold to original equipment manufacturers
("OEMs"), including Ford, General Motors and DaimlerChrysler, and major tier one
suppliers such as Lear Corporation and Johnson Controls. Technical products such
as specialty and technical foams which consist of reticulated foams and other
customized polyester and polyether foams used for filtration and reservoiring in
a wide variety of applications are sold by companies such as Hewlett-Packard and
Briggs & Stratton.
Foam Products
Foamex L.P. distributes foam products both directly and indirectly
through independent fabrication operations. These foams are used by the bedding
industry in quilts, toppers, cores and border rolls for mattresses, the
furniture industry for seating products and the retail industry for a broad
range of products such as leisure furniture, futons, bean bag chairs, floor
pillows and pet beds. The foam products are generally sold in large volumes on a
regional basis because of high shipping costs.
Foamex L.P.'s bedding products are sold to mattress manufacturers such as
Sealy, Simmons, Serta, and Spring Air, both directly and indirectly, through
independent fabrication operations. Foamex L.P. also supplies cut-to-size seat
cushions, back cushions and other pieces to the furniture industry, including to
Berkline, Action, and Schnadig. The consumer products group, acquired as part of
the acquisition of Crain in 1997 (the "Crain Acquisition"), sells therapeutic
sleep products such as mattress pads and bed pillows for the health care and
consumer markets and a broad line of home furnishing products to retailers
throughout the United States.
The development and introduction of value added products continues to be
a priority of Foamex L.P. including viscoelastic or "memory" foams for the
bedding industry, which maintain their resiliency better than other foams and
materials and products incorporating Reflex(R). Reflex(R), one of Foamex L.P.'s
most recent product introductions was created using the VPF(R) manufacturing
process. Reflex(R) materials, which include cushion wraps and cushion cores, are
advanced polymer cushioning products designed to improve comfort, quality and
durability in upholstered furniture and bedding products. Foamex L.P. has also
introduced high efficiency thermal management foam products for applications
such as work gloves and outerwear.
Carpet Cushion Products
Foamex L.P. manufactures and distributes carpet cushion products to
Foamex Carpet which include prime, bonded, sponge rubber and felt carpet
cushion. Prime carpet cushion is made from polyurethane foam buns, whereas
bonded carpet cushion is made from various types of scrap foam which are
shredded into small pieces, processed and then bonded using a chemical adhesive.
In accordance with a supply agreement with Foamex Carpet, if requested by Foamex
Carpet, Foamex L.P. is required to supply all of Foamex Carpet's requirements
for carpet cushion products. (See Note 13 to the consolidated financial
statements.) Foamex Carpet's carpet cushion products are marketed through floor
covering retailers such as Sears, Carpet Max and Home Depot.
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Automotive Products
Foamex L.P. is one of the largest suppliers of automotive foam products
for the North American operations of OEMs. Depending on the automotive
manufacturer and/or the application, automotive foam products are supplied by
Foamex L.P. either directly to the manufacturers or indirectly through
sub-suppliers. Automotive products 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.
Domestic automotive manufacturers have narrowed their supply base during
recent years, and increased the percentage and dollar amount of components that
they purchase from outside suppliers. As a result, a smaller number of companies
are supplying an increasing percentage of automotive foam products since
automotive suppliers are increasingly offering integrated systems which lower
the overall cost and improve quality relative to previous sourcing methods in
which individually sourced components were assembled and installed by the OEMs.
Foamex L.P.'s new product development and flexible manufacturing
capabilities allow it to produce quality automotive foam products to satisfy
changing specifications. Examples of Foamex L.P.'s ability to react to changing
industry requirements include its development of thermoformable headliners,
tri-laminates, advanced cutting technology and energy absorbing foams. For
example, Foamex L.P. is one of the first suppliers to introduce a thermoformable
headliner, Customfit(R), made from rigid polyurethane foam. In addition, Foamex
L.P. recently introduced Isoguard(TM), which is a rubber gasket material for the
automotive and household appliance industries. Also, the use of tri-laminates
has increased due to manufacturers' need for significant cost savings and
consumer demand for improved aesthetics. Foamex L.P. intends to increase its
production and distribution of foam and fabric components, such as tri-laminated
material for automotive seating.
Automotive manufacturers are increasingly requiring the production
facilities of their suppliers to meet certain high quality standards. Foamex
L.P. has achieved and expects to maintain the highest quality ratings awarded to
foam suppliers by automotive manufacturers. In addition, all tier one and tier
two automotive supplier facilities worldwide will eventually be required to meet
the QS-9000 quality manufacturing standards set by the United States automotive
manufacturers. In 1996, Foamex L.P. completed QS-9000 and ISO-9001 certification
for its eight domestic facilities which supply the automotive industry. Foamex
L.P. was one of the first polyurethane manufacturers to be QS-9000 certified
which demonstrates its commitment to producing the highest quality products and
meeting the needs of its customers.
Technical Products
Foamex L.P. believes that it is one of the foam industry's prime
innovators and producers of industrial, specialty, consumer and safety foams
(collectively, "Technical Products"). Technical Products consist of reticulated
foams and other custom polyester and polyether foams, which are sometimes
combined with other materials to yield specific properties. Reticulation is the
thermal or chemical process used to remove the membranes from the
interconnecting cells within foam. This leaves a porous, skeletal structure
allowing for the free flow of gases and/or liquids. Felting and lamination with
other foams or materials give these composites specific properties.
Reticulated foams are well suited for filtration, reservoiring, sound
absorption and sound transmission. Industrial applications include carburetors,
computer cabinets, 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 Technical
Products have unique characteristics such as flame retardancy and fluid
absorption. Additional products sold within this group include foams for
refrigerated supermarket produce counters, mop heads, paint brushes, diapers and
cosmetic applications.
Foamex L.P. uses advertising in trade journals and related media in order
to attract customers and, more generally, to increase an awareness of its
capabilities for Technical Products. In addition, due to the highly specialized
nature of most Technical Products, Foamex L.P.'s research staff works with
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customers to design, develop and manufacture each product to specification.
Foamex L.P.'s Technical Products customers include Hewlett-Packard and Briggs &
Stratton.
Other
Other consists primarily of certain foreign manufacturing operations,
corporate expenses not allocated to the other operating segments and
restructuring and other charges. See Note 15 to the consolidated financial
statements.
Marketing and Sales
As of December 31, 1998, Foamex L.P. has a marketing and sales force of
approximately 120 employees. Foamex L.P.'s executive vice presidents direct
sales efforts for each operating segment.
Foam products are sold directly by Foamex L.P. to major bedding and
furniture manufacturers such as Sealy, Simmons and Berkline and also through
third party independent fabricators. In addition, Foamex L.P. distributes
foam-based consumer products such as futons, pillows, mattress pads and juvenile
furniture to retailers such as Wal-Mart, Kmart and JC Penney. Foamex L.P.'s
foam-based consumer products sales efforts are primarily regionally based with
salespersons selling to local accounts. The key strategic elements supporting
growth in these areas are a focus on marketing and sales efforts, high quality,
cost-competitive products and low freight costs through optimal plant location.
Plant locations are critical in this regionalized line of business where the
transportation cost typically comprises a significant portion of product cost.
Carpet cushion products are sold to Foamex Carpet, which in turn sells to
distributors and major floor covering retailers such as Sears, CarpetMax and
Home Depot.
Foamex L.P. has been a leading supplier of automotive products to OEMs,
including Ford, General Motors and DaimlerChrysler for more than 30 years.
Foamex L.P. is also the primary supplier of automotive products to certain tier
one suppliers, including Lear Corporation and Johnson Controls. Foamex L.P.
competes for new business both at the beginning of development of new models and
upon the redesign of existing models. Once a foam producer has been designated
to supply parts for a new 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.
Foamex L.P.'s Technical Products are used for filtration and reservoiring
in a wide variety of applications by companies such as Hewlett-Packard and
Briggs & Stratton. Foamex L.P. markets most of its Technical Products through a
network of independent fabrication and distribution companies in North America,
the United Kingdom and South Korea. Such fabricators or distributors often
further process Technical Products or finish such products to meet the specific
needs of end user. Foamex L.P.'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 Operations and Export Sales
Foamex L.P.'s net sales for its foreign based operations and export
sales, primarily in Canada and Mexico, for 1998, 1997, and 1996 were $122.4
million (10.6% of net sales), $85.0 million (9.1% of net sales), and $76.0
million (8.2% of net sales), respectively. Foamex L.P.'s remaining net sales are
primarily from customers located in the United States.
Customers
During 1998, sales to Foamex Carpet accounted for approximately $139.2
million of Foamex L.P.'s net sales. However, other than Foamex Carpet, no one
customer accounted for more than 10.0% of Foamex L.P.'s net sales during the
past three years. Customers that represent more than 10% of an operating
segment's net sales are Sealy in foam products, Foamex Carpet in carpet cushion
products, and Lear Corporation and Johnson Controls in automotive products. The
loss of any one of these customers would have a material adverse effect on
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Foamex L.P. During the year ended December 31, 1998, net sales to the five
largest customers, excluding Foamex Carpet, comprised approximately $272.0
million or 23.5% of Foamex L.P.'s net sales.
Manufacturing and Raw Materials
As of December 31, 1998, Foamex L.P. conducted operations at 63
manufacturing and distribution facilities with a total of approximately 8.4
million square feet of floor space. Foamex L.P. believes that its manufacturing
and distribution facilities are well suited for their intended purposes and are
in good condition. The manufacturing and distribution facilities are
strategically located to service Foamex L.P.'s major customers because the high
freight cost in relation to the cost of the foam product generally results in
distribution being most cost effective within a 200 to 300 mile radius.
Foamex L.P.'s fabrication process involves cutting foam buns into various
shapes and sizes to meet customer specifications. Fabrication foam is sold to
customers and is utilized by Foamex L.P. to produce its foam-based consumer
products. Scrap foam, generated in connection with the fabrication of foam
products, is used by Foamex L.P. to produce rebond carpet cushion or sold to
Foamex Carpet in connection with a supply agreement.
Raw materials account for a significant portion of the manufacturing
costs of Foamex L.P. and, historically, the price of raw materials has been
cyclical and volatile. Foamex L.P. generally has alternative suppliers for each
major raw material and Foamex L.P. believes that it could find alternative
sources of supply should it cease doing business with any one of its major
suppliers. Foamex L.P. attempts to offset raw material cost increases through
selling price increases; however, there can be no assurance that Foamex L.P.
will be successful in implementing selling price increases or that competitive
pricing pressure will not require Foamex L.P. to adjust selling prices. Results
of operations have been and could be adversely affected by delays in
implementing, or the inability of Foamex L.P. to implement, selling price
increases to offset raw material cost increases. For example, Foamex L.P.'s
results of operations in 1998, 1997 and 1996 were adversely affected by net
unrecovered raw material costs. Furthermore, there can be no assurance that
chemical or other suppliers will not increase raw material costs in the future
or that Foamex L.P. will be able to implement selling price increases to offset
any such raw material cost increases.
The two principal chemicals used in the manufacture of flexible
polyurethane foam are TDI and polyol. Lyondell Chemical Company (formerly, ARCO
Chemical Company), BASF Corporation, Bayer Corporation and The Dow Chemical
Company are Foamex L.P.'s largest suppliers of TDI and polyol. The price of TDI
and polyol is influenced by demand, manufacturing capacity and oil and natural
gas prices. Since September 1994, suppliers of TDI and polyol have increased the
price of these raw materials several times. Significant increases in these raw
material prices could have a material adverse effect on the financial condition
or results of operations of Foamex L.P.
A key raw material used in the manufacture of carpet cushion is scrap
foam. Foamex L.P. internally generates a substantial portion of the scrap foam
used in the production of rebond carpet cushion from its other operations.
Historically, the market price of rebond carpet cushion has fluctuated with the
market price of scrap foam. Thus, while Foamex L.P.'s gross margins with respect
to the portion of rebond carpet cushion produced with scrap foam purchased on
the open market are fairly constant, Foamex L.P.'s gross margins with respect to
the portion of rebond carpet cushion produced with internally generated scrap
foam are subject to significant variation based on the market price of rebond
carpet cushion.
Employees
As of December 31, 1998, Foamex L.P. employed approximately 5,675
persons, with 5,170 of such employees involved in manufacturing, 385 in
administration and 120 involved in sales and marketing (these numbers include
approximately 240 employees terminated during the first quarter of 1999).
Approximately 1,200 of these employees are located outside the United States.
Also, approximately 1,050 of these employees are covered by collective
bargaining agreements with labor unions, which agreements expire on various
dates from 1999 through 2002. Foamex L.P. considers relations with its employees
to be good.
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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 L.P.'s competitors in the polyurethane
foam industry include E. R. Carpenter Company, Hickory Springs Manufacturing
Company, Vitafoam, Inc., General Foam Corporation, Flexible Foam Products, Inc.,
and Future Foam, Inc. None of such competitors compete in all of the operating
segments in which Foamex L.P. does business.
Patents and Trademarks
Foamex L.P. owns various patents and trademarks registered in the United
States and in numerous foreign countries. The registered processes and products
were developed through ongoing research and development activities to improve
quality, reduce costs and expand markets through development of new applications
for flexible polyurethane foam products. While Foamex L.P. considers its patents
and trademarks to be a valuable asset, it does not believe that its competitive
position is dependent on patent protection or that its operations are dependent
upon any individual patent, trademark or tradename.
Research and Development
Foamex L.P. believes it has a leading research and development capability
in the flexible polyurethane foam industry. Foamex L.P.'s primary research and
development facility is located in Eddystone, Pennsylvania. Foamex L.P. employs
approximately 41 full-time research and development employees. Expenditures for
research and development amounted to $3.3 million, $2.4 million, and $2.5
million for 1998, 1997, and 1996, respectively, excluding expenditures by Crain
for research and development prior to its acquisition.
Foamex L.P. and Recticel, s.a. ("Recticel"), a European polyurethane foam
manufacturer and former partner in Foamex L.P., 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 L.P.,
Recticel and Beamech Group Limited, an unaffiliated third party, have an
interest in a Swiss corporation that develops new manufacturing technology for
the production of polyurethane foam including the VPF(R) manufacturing process.
Foamex L.P., Recticel and their affiliates have a royalty-free license to use
technology developed by the Swiss corporation.
ITEM 2. PROPERTIES
As of December 31, 1998, Foamex L.P. conducted its operations at 63
manufacturing and distribution facilities, including five facilities which
Foamex L.P. intends to close as part of its restructuring/consolidation
activities primarily associated with the Crain Acquisition, of which 18 were
owned and 45 were leased. Total floor space in use at the owned manufacturing
and distribution facilities is approximately 3.3 million square feet and total
floor space in use at the leased manufacturing and distribution facilities is
approximately 5.1 million square feet. Fifty-five of these facilities are
located in 36 cities throughout the United States, four facilities are located
in two cities in Canada and four facilities are located in three cities in
Mexico. The 1999 annual base rental with respect to such leased facilities is
approximately $8.8 million under leases expiring from 1999 to 2007. Foamex L.P.
does not anticipate any problem in renewing or replacing any of such leases
expiring in 1999. In addition, Foamex L.P. has approximately 1.1 million square
feet of idle space of which approximately 0.5 million is leased.
Foamex L.P. maintains administrative and sales offices in Linwood,
Pennsylvania; Fort Smith, Arkansas; Atlanta, Georgia; St. Louis, Missouri;
Southfield, Michigan; and New York, New York.
10
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ITEM 3. LEGAL PROCEEDINGS
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 1998, 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
31, 1998, Foamex L.P. had accruals of approximately $3.5 million for
environmental matters. During 1998, Foamex L.P. established an allowance of $0.6
million relating to receivables from Trace for environmental indemnification due
to the financial difficulties of Trace (see Note 1 to consolidated financial
statements).
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. The final National
Emission Standard for Hazardous Air Pollutants ("NESHAP") was promulgated
October 7, 1998. NESHAP requires a reduction of approximately 70% of the
emission of methylene chloride for the slab stock foam industry effective
October 7, 2001. Foamex L.P. does not believe implementation of the regulation
will require it to make material expenditures 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 such 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.
In addition to federal regulatory requirements, state laws have resulted
or could result in more stringent regulations regarding the use and emission of
certain chemicals. For example, in California, methylene chloride usage was
phased out at the end of 1995, while in Kent, Washington, a former Crain
facility, pursuant to consent decrees as well as applicable laws, must over a
period of time phase out methylene chloride usage. Foamex L.P. believes that use
of methylene chloride in certain applications can be reduced to be in compliance
with certain state and federal laws. Specifically, through the development of
the Enviro-Cure(R) process, which uses ambient or refrigerated air to remove the
heat of reaction during the foam curing process and various carbon dioxide
processes, Foamex L.P. believes that it can reduce its methylene chloride usage.
Foamex L.P. has installed the Enviro-Cure(R) process at its manufacturing
facilities in Compton, California; San Leandro, California; Elkhart, Indiana;
Tupelo, Mississippi; and Conover, North Carolina and carbon dioxide systems at
its Compton, California; Eddystone, Pennsylvania; Kent, Washington; Corry,
Pennsylvania; and Orlando, Florida plants. There can be no assurance however,
that each of these processes can successfully reduce emissions of methylene
chloride in every product formulation to levels within applicable state and
federal standards or that future changes in regulations governing the use or
emissions of specific chemicals will not have a material impact on Foamex L.P.
Foamex L.P. 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; and at a former facility in Dallas, Texas and groundwater
contamination in excess of state standards at the Orlando, Conover, and
Cornelius 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. Foamex L.P. has accruals of $2.5
million for the estimated cost of completing remediation at these facilities.
Foamex L.P. is in the process of addressing potential contamination at the
Morristown, Tennessee facility, and has submitted a sampling plan to the State
of Tennessee. The extent of the contamination and responsible parties, if any,
has not yet been determined. A former owner may be liable for cleanup costs;
nevertheless, the cost of remediation, if any, is not expected to be material.
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<PAGE>
Federal regulations required 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 upgraded all operating tanks at its facilities in
accordance with these regulations. Foamex L.P. believes that its USTs do not
pose a significant risk of environmental liability. However, there can be no
assurances 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 L.P.'s manufacturing
processes. Foamex L.P. does not believe that it will be required to make any
material expenditures to comply with these new standards.
Foamex L.P. has been designated as a Potentially Responsible Party
("PRP") by the EPA with respect to eight sites with an estimated total liability
to Foamex L.P. for the eight sites of less than $1.0 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 liability of Foamex L.P. is not considered to be material.
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, Foamex L.P. 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.
Legal Proceedings
Stockholder Litigation
Beginning on or about March 17, 1998, six actions (collectively the
"Stockholder Litigation") were filed in the Court of Chancery of the State of
Delaware, New Castle County (the "Court"), by stockholders of Foamex
International. The Stockholder Litigation, purportedly brought as class actions
on behalf of all stockholders of Foamex International, named Foamex
International, certain of its directors, certain of its officers, Trace and
Merger Sub as defendants alleging that they had breached their fiduciary duties
to the plaintiffs and other stockholders of Foamex International unaffiliated
with Trace in connection with the original proposal of Trace to acquire the
publicly traded outstanding common stock of Foamex International for $17.00 per
share. The complaints sought, among other things, class certification, a
declaration that the defendants have breached their fiduciary duties to the
class, preliminary and permanent injunctions barring implementation of the
proposed transaction, rescission of the transaction if consummated, unspecified
compensatory damages, and costs and attorneys' fees. A stipulation and order
consolidating these six actions under the caption In re Foamex International
Inc. Stockholders Litigation, Consolidated Civil Action, No. 16259NC was entered
by the Court on May 28, 1998. Foamex L.P. is not party to the Stockholder
Litigation.
The parties to the Stockholder Litigation entered into a Memorandum of
Understanding, dated June 25, 1998 (the "Memorandum of Understanding"), to
settle the Stockholder Litigation, subject to, inter alia, execution of a
definitive Stipulation of Settlement between the parties and approval by the
Court following notice to the class and a hearing. The Memorandum of
Understanding provided that as a result of, among other things, the Stockholder
Litigation and negotiations among counsel for the parties to the Memorandum of
Understanding, a special meeting of stockholders would be held to vote upon and
approve the First Merger Agreement which provided, among other things, for the
Public Shares owned by stockholders of Foamex International unaffiliated with
Trace and its subsidiaries (the "Public Stockholders") to be converted into the
right to receive $18.75 in cash, without interest.
The Memorandum of Understanding also provided for certification of a
class, for settlement purposes only, consisting of the Public Stockholders, the
dismissal of the Stockholder Litigation with prejudice and the release by the
plaintiffs and all members of the class of all claims and causes of action that
were or could have been asserted against Trace, Foamex International and the
12
<PAGE>
individual defendants in the Stockholders Litigation or that arise out of the
matters alleged by plaintiffs. Following the completion of the confirmatory
discovery which was provided for in the Memorandum of Understanding, on
September 9, 1998, the parties entered into a definitive Stipulation of
Settlement and the Court set a hearing to consider whether the settlement should
be approved for October 27, 1998 (the "Settlement Hearing"). In connection with
the proposed settlement, the plaintiffs intended to apply for an award of
attorney's fees and litigation expenses in an amount not to exceed $925,000, and
the defendants agreed not to oppose this application. Additionally, Foamex
International agreed to pay the cost, if any, of sending notice of the
settlement to the Public Stockholders. On September 24, 1998, a Notice of
Pendency of Class Action, Proposed Settlement of Class Action and Settlement
Hearing was mailed to the members of the settlement class. On October 20, 1998,
the parties to the Stockholder Litigation requested that the Court cancel the
Settlement Hearing in light of the announcement made by Trace on October 16,
1998, that it had been unable to obtain the necessary financing for the
contemplated acquisition by Trace of Foamex International's common stock at a
price of $18.75 per share which was the subject matter of the proposed
settlement. This request was approved by the Court on October 21, 1998, and
Foamex International issued a press release on October 21, 1998, announcing that
the Court had cancelled the Settlement Hearing.
On November 10, 1998, counsel for certain of the defendants in the
Stockholder Litigation gave notice pursuant to the Stipulation of Settlement
that such defendants were withdrawing from the Stipulation of Settlement in
light of the notice given by Trace to Foamex International and the special
committee of the Board of Directors on November 5, 1998 whereby Trace terminated
the First Merger Agreement on the grounds that the financing condition in the
First Merger Agreement was incapable of being satisfied.
On November 12, 1998, the plaintiffs in the Stockholder Litigation filed
an Amended Class Action Complaint (the "Amended Complaint"). The Amended
Complaint named Foamex International, Trace, Merger Sub, Mr. Marshall S. Cogan,
Mr. Andrea Farace, Dr. Stuart Hershon, Mr. John Tunney, and Mr. Etienne Davignon
as defendants, alleging that they breached their fiduciary duties to plaintiffs
and the other Public Stockholders in connection with the Second Merger, that the
proposal to acquire the Public Shares for $12.00 per share lacked entire
fairness, that the individual defendants violated 8 Del. Code ss. 251 in
approving the Second Merger Agreement, and that Trace and Merger Sub breached
the Stipulation of Settlement. On December 2, 1998, plaintiffs served a motion
for a preliminary injunction, seeking an Order to preliminarily enjoin the
defendants from proceeding with, consummating or otherwise effecting the merger
contemplated by the Second Merger Agreement.
The defendants have denied, and continue to deny, that they have
committed or have threatened to commit any violation of law or breaches of duty
to plaintiffs or the purported class or any breach of the Stipulation of
Settlement. The defendants intend to vigorously defend the Stockholder
Litigation.
In addition, on or about November 18, 1998, a putative class action was
filed in the United States District Court for the Eastern District of New York
on behalf of all persons who purchased common stock of Foamex International
between March 16, 1998 and October 19, 1998, naming Trace as defendant and
alleging that Trace breached a contract between the putative class members and
Trace. By order dated January 8, 1999, the Court transferred the action to the
United States District Court for the Southern District of New York. Trace made a
motion to dismiss the action on February 8, 1999, which motion is pending before
the Court, and the Court has stayed all discovery in the action until the motion
is decided. Neither Foamex International, Foamex L.P. nor any of the individual
directors of Foamex International are named as defendants in this litigation.
On April 26, 1999, a putative securities class action entitled Molitor v.
Foamex International Inc., et al., 99 Civ. 3004 (DC), was filed in the United
States District court for the Southern District of New York naming as defendants
Foamex International, Trace and certain officers and directors of Foamex
International on behalf of stockholders who bought shares of Foamex
International's common stock during the period from May 7, 1998 through and
including April 16, 1999. Foamex L.P. is not a party to such suit. The lawsuit
alleges that the defendants violated Section 10(b) of the Securities Exchange
Act of 1934 and Rule 10b-5 by misrepresenting and/or omitting material
information about Foamex International's financial situation and operations,
with the result of artificially inflating the price of Foamex International's
stock. The lawsuit also alleges that Trace and Marshall S. Cogan violated
Section 20(a) of the Securities Exchange Act of 1934 as controlling persons of
Foamex International. The compliant seeks class certification, a declaration
that defendants violated the federal securities law, an award of money damages,
and costs and attorneys', accountants' and experts' fees. The defendants intend
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to vigorously defend the action. To date, no response to the complaint has been
made and no discovery or other proceedings have taken place.
Breast Implant Litigation
As of April 16, 1999, Foamex L.P. and Trace were two of multiple
defendants in actions filed on behalf of approximately 4,321 recipients of
breast implants in various United States federal and state courts and one
Canadian provincial court, some of which allege substantial damages, but most of
which allege unspecified damages for personal injuries of various types. Three
of these cases seek to allege claims on behalf of all breast implant recipients
or other allegedly affected parties, but no class has been approved or certified
by the court. In addition, three cases have been filed alleging claims on behalf
of approximately 39 residents of Australia, New Zealand, England, and Ireland.
Foamex L.P. believes that the number of suits and claimants may increase. During
1995, Foamex L.P. and Trace were granted summary judgments and dismissed as
defendants from all cases in the federal courts of the United States and the
state courts of California. Appeals for these decisions were withdrawn and the
decisions are final.
Although breast implants do not contain foam, certain silicone gel
implants were produced using a polyurethane foam covering fabricated by
independent distributors or fabricators from bulk foam purchased from Foamex
L.P. or Trace. Neither Foamex L.P. nor Trace recommended, authorized, or
approved the use of its foam for these purposes. Foamex L.P. is also indemnified
by Trace for any such liabilities relating to foam manufactured prior to October
1990. Although Trace has paid Foamex L.P.'s litigation expenses to date from
insurance proceeds Trace received, there can be no assurance that Trace 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 management's present
assessment of the merits of pending claims, after consultation with the general
counsel of Trace, and without taking into account the indemnification provided
by Trace, the coverage provided by Trace's and Foamex L.P.'s liability insurance
and 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's consolidated financial
position or results of operations. 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 the financial position, results of operations and
cash flows of Foamex L.P.
Other Litigation
On April 14, 1999, Foamex International received communications addressed
to its Board of Directors from certain of Foamex International's stockholders
regarding aspects of the relationship between Trace and Foamex International.
Such stockholders questioned the propriety of certain relationships and related
transactions between Trace, Foamex International and Foamex L.P., which
previously have been disclosed in Foamex International's and Foamex L.P.'s
periodic filings. Foamex International's Board of Directors, in consultation
with its special counsel, is in the process of evaluating such communications
and what actions, if any, to take with respect thereto.
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 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. Such action could have a
material adverse effect on the financial position, results of operations and
cash flows of 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 Foamex
L.P. 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
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
a) Foamex L.P. is a privately-held limited partnership. There is no
established public trading market for its securities.
b) As of December 31, 1998, there were two holders of Foamex L.P.'s
equity securities.
c) During 1998 and 1997, Foamex L.P. made net cash distributions in
accordance with tax sharing agreements of approximately $0.3 million
and $8.8 million, respectively, at December 31, 1998, Foamex L.P. has
a receivable of approximately $1.2 million from its partners in
accordance with the tax sharing agreement.
<TABLE>
<CAPTION>
Tax Sharing Distributions
1998 1997
-------- --------
(thousands)
<S> <C> <C>
FMXI, Inc. $ 6 $ 80
Foamex International Inc. 287 8,371
Trace Foam Company, Inc. - 80
Foamex-JPS Automotive L.P. - 306
---- ------
$293 $8,837
==== ======
</TABLE>
1998 Distributions
On February 27, 1998, Foamex L.P. distributed $20.0 million in cash pro
rata to its partners, such distribution was funded with borrowings under the
Foamex L.P. credit facility.
1997 Distributions
In connection with the June 1997 refinancing plan, Foamex L.P. made the
following distributions: a $2.0 million promissory note of Foamex International,
a $56.2 million aggregate principal amount ($35.6 million accreted value) note
of Foamex-JPS Automotive L.P. ("FJPS") and $116.7 million aggregate principal
amount of FJPS discount debentures were distributed pro rata to FJPS (a 98%
limited partner) and to FMXI (a 1% managing general partner). Concurrently,
Foamex L.P. distributed approximately $1.5 million in cash to Trace Foam
Company, Inc. (a 1% non-managing general partner).
Limitations on Distributions
The Foamex L.P. Credit Agreement and the Indentures for the 9 7/8% senior
subordinated notes due 2007 and the 13 1/2% senior subordinated notes due 2005
restrict the ability of Foamex L.P. to make distributions to its partners.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table presents selected historical consolidated financial
data of Foamex L.P. and subsidiaries. The results of operations of acquired
businesses (as noted below) are included from the dates of their respective
acquisitions. The financial data should be read in conjunction with the
financial statements and related notes thereto of Foamex L.P. included elsewhere
in this Annual Report on Form 10-K.
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<TABLE>
<CAPTION>
Fiscal Year(1)(2)
1998(3)(4) 1997(6) 1996(7) 1995(8) 1994
---------- --------- --------- -------- --------
(thousands)
Statements of Operations Data:
<S> <C> <C> <C> <C> <C>
Net sales $1,155,918 $931,095 $926,351 $862,834 $833,660
Income (loss) from continuing operations (5,869) 11,265 53,661 (48,126) 38,011
Net income (loss) (9,064) (37,294) 9,699 (53,243) 39,241
Balance Sheet Data (at period end):
Total assets $768,528 $834,068 $586,157 $605,892 $654,176
Long-term debt, classified as current (5) 723,478 12,161 13,735 8,511 12,123
Long-term debt - 726,649 392,617 433,956 441,757
Partners' equity (deficit) (196,037) (156,302) 12,832 (12,604) 52,548
<FN>
(1) Foamex L.P. changed its fiscal year to the calendar year during 1998. Prior
to the change, Foamex L.P. had a 52 or 53 week fiscal year ending on the
Sunday closest to the end of the calendar year. Each fiscal year presented
prior to 1998 was comprised of 52 weeks.
(2) Fiscal years 1994 through 1995 were restated for discontinued operations
and fiscal years 1994 and 1995 were restated for the contribution of Foamex
Mexico.
(3) Includes net restructuring and other credits of $10.1 million (see Note 4
to the consolidated financial statements).
(4) The 1998 financial statements have been prepared assuming Foamex L.P. will
continue as a going concern. As discussed in Note 1 to the consolidated
financial statements, Foamex L.P. was not in compliance with certain debt
covenants and is seeking amendments; however, there can be no assurance
that such amendments will be obtained and therefore Foamex L.P. has
reclassified the majority of its long-term debt as current, which raises
substantial doubt about Foamex L.P.'s ability to continue as a going
concern. In addition, Foamex L.P. has been informed by Trace that Trace has
substantial debt obligations and may not have the financial resources to
pay these obligations when due within the near future. As a result, Trace
creditors could foreclose or otherwise attach Foamex International's stock.
Such an event may result in the acceleration of substantially all of Foamex
L.P.'s debt. Management's plans in regard to these matters are described in
Note 1 to the consolidated financial statements. The financial statements
do not include any adjustments that might result from the outcome of these
uncertainties.
(5) Included in long-term debt, current portion as of December 31, 1998 is
approximately $715.8 million of long-term debt that was classified as
current. Foamex L.P. is in the process of negotiating amendments to the
debt covenants described in (4) above to become compliant with its debt
agreements. There can be no assurance, however, that the covenants will be
amended. See Note 1 to the consolidated financial statements.
(6) The Statements of Operations Data includes restructuring and other charges
of $21.1 million, (see Note 4 to the consolidated financial statements),
but does not include the results of operations of Crain which was acquired
December 23, 1997, since the effect is insignificant. The Balance Sheet
Data included the estimated fair value of the net assets acquired in the
Crain Acquisition.
(7) Includes restructuring credits of $6.4 million (see Note 4 to consolidated
financial statements).
(8) Includes restructuring and other charges of $39.2 million.
</FN>
</TABLE>
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Foamex L.P. operates in the flexible polyurethane and advanced polymer
foam products industry. As of December 31, 1998, Foamex L.P.'s operations
consist of the following operating segments: (i) foam products, (ii) carpet
cushion products, (iii) automotive products, (iv) technical products and (v)
other, which primarily consists of certain foreign manufacturing operations,
corporate expenses not allocated to the other operating segments and
restructuring and other charges. The net sales and income (loss) from operations
of these operating segments for each of the last three years are included in
Note 15 to the consolidated financial statements. For periods prior to February
27, 1998, the consolidated financial statements included the operations and cash
flows of General Felt. Foamex L.P. entered into the GFI Transaction which
transferred these operations to Foamex International. (See Note 9 to the
consolidated financial statements for further discussion.) The following
discussion should be read in conjunction with the consolidated financial
statements and related notes thereto of Foamex L.P. included in this Annual
Report on Form 10-K.
The accompanying financial statements have been prepared assuming Foamex
L.P. will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements and under "Liquidity and Capital Resources"
below, Foamex L.P. is not in compliance with certain financial covenants
contained in the agreements governing approximately $415.4 million principal
amount of indebtedness. Such non-compliance provides that the lenders under
those agreements, upon the notice and lapse of time can declare all of such
indebtedness to be due. To date the lenders have not exercised such rights and
have granted Foamex L.P. waivers of such covenants through May 5, 1999, which
has been extended through June 30, 1999, to enable Foamex L.P. to negotiate an
amendment of such covenants; there can be no assurance that such amendments will
be obtained and therefore such indebtedness has been classified as current on
Foamex L.P.'s financial statements. Were the lenders under those agreements to
accelerate the maturity of their indebtedness, such acceleration would
constitute an event of default, and substantially all of Foamex L.P.'s long-term
debt would become due. Therefore, Foamex L.P. has reclassified approximately
$715.8 million of long-term debt as current. Such classification raises
substantial doubt about Foamex L.P.'s ability to continue as a going concern. In
addition, Foamex L.P. has been informed by Trace that Trace had substantial debt
obligations that were due at the end of December 1998 and did not have the
financial resources to pay those obligations. Subsequently, Trace informed
Foamex L.P. that waivers and/or modifications of such indebtedness had been
obtained for at least the near future; however, there can be no assurance that
such waivers and/or modifications will remain in effect prior to obtaining a
permanent resolution. If Trace were to default on its indebtedness secured by
Foamex International's common stock or other Trace creditors were to take steps
constituting a default under such indebtedness (such as filing an involuntary
bankruptcy petition), and if the holders of such secured indebtedness were to
foreclose on Foamex International's common stock held by Trace, such event could
trigger the acceleration and put rights of substantially all of the debt of
Foamex L.P. as described above. Although management believes that all such debt
obligations would be refinanced under such circumstances, there can be no
assurance that Foamex L.P. or its subsidiaries would be able to do so.
Management's plans in regard to these matters are described in Note 1 to the
consolidated financial statements. In December 1998, Foamex L.P. established a
reserve of $2.4 million against operating receivables due from Trace. The
financial statements do not include any further adjustments that might result
from the outcome of these uncertainties.
On March 16, 1999, Foamex International announced that it had hired John
G. Johnson, Jr. as President, Chief Executive Officer and director of Foamex
International following the resignation of Andrea Farace from the positions of
Chairman of the Board, Chief Executive Officer and director of Foamex
International. Foamex International also announced that it had hired JP Morgan
Securities Inc. as a financial advisor to explore strategic alternatives to
maximize shareholder value.
In 1998, Foamex International received an unsolicited buyout proposal
from Trace, Foamex International's principal stockholder. Foamex International
entered into the First Merger Agreement and the Second Merger Agreement that
were subsequently terminated by Trace. See "Business - General".
17
<PAGE>
Acquisitions and Disposition
On February 27, 1998, Foamex International, Foamex L.P. and certain of
its affiliates completed the GFI Transaction. See "Business - General". As a
result of the GFI Transaction, General Felt was transferred to Foam Funding LLC
in exchange for the assumption of $129.0 million of Foamex L.P.'s indebtedness,
and the transfer to Foamex L.P. of Foam Funding LLC's 1% non-managing general
partnership interest, and Foamex L.P. recorded transaction expenses of
approximately $1.5 million as other expense and an extraordinary loss on early
extinguishment of debt in the amount of approximately $3.2 million. In
connection with the GFI Transaction, Foamex L.P. distributed $20.0 million in
cash pro rata to its partners, such distribution was funded with borrowings
under the Foamex L.P. Credit Agreement.
On December 23, 1997, Foamex International acquired Crain pursuant to a
merger agreement with Crain Holdings Corp. ("Crain Holdings") 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) and contributed all of the assets of Crain,
subject to all of the liabilities of Crain, to Foamex L.P. In addition, fees and
expenses associated with the Crain Acquisition were approximately $13.2 million.
In connection with the Crain Acquisition, Foamex L.P. approved a
restructuring/consolidation plan for the two entities. Foamex L.P. recorded
restructuring charges of $21.1 million during 1997 relating to the restructuring
of Foamex L.P.'s operations in connection with the Crain Acquisition and related
transactions. In addition, during 1997 Foamex L.P. recorded approximately $1.5
million of severance and related costs and $8.5 million for costs associated
with the shut down and consolidation of certain facilities acquired in the Crain
Acquisition.
On October 6, 1997, Foamex L.P. sold 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 sale price was
approximately $41.0 million, net of post-closing adjustments which were
finalized in December 1997. Foamex L.P. used the net proceeds of the sale to
reduce borrowings under an existing credit facility by approximately $38.8
million. Foamex L.P. incurred an extraordinary loss on early extinguishment of
debt of approximately $0.9 million.
On June 12, 1997, Foamex International substantially completed a
refinancing plan (the "1997 Refinancing Plan") designed to reduce Foamex
International's interest expense and increase its financing flexibility. The
1997 Refinancing Plan included a tender offer by Foamex L.P. to purchase $373.0
million of Foamex L.P.'s existing public debt and approximately $116.7 million
principal amount of FJPS discount debentures. Also, the 1997 Refinancing Plan
included the payment of $5.2 million of term loan borrowings under an existing
credit facility and the payment of related fees and expenses. In addition, the
tender offer included amending the existing indentures to remove substantially
all of the restrictive covenants. Foamex L.P. purchased $342.3 million of its
public debt and the $116.7 million of FJPS discount debentures under the tender
offer and incurred an extraordinary loss on the early extinguishment of debt of
approximately $44.5 million. The 1997 Refinancing Plan was funded by $347.0
million of borrowings under a new credit facility (the "Credit Facility") and
the net proceeds from the issuance of $150.0 million principal amount of senior
subordinated notes. As a result of the 1997 Refinancing Plan, Foamex L.P.'s
total long-term debt increased by $150.1 million. Foamex L.P. has increased
interest expense as compared to the debt structure prior to the 1997 Refinancing
Plan. However, the 1997 Refinancing Plan reduced Foamex International's
consolidated interest expense even after giving effect to the additional
borrowings. Foamex L.P.'s future interest expense will vary based on a variety
of factors, including fluctuations in interest rates in general. As a result of
the 1997 Refinancing Plan, variable rate debt comprised a larger percentage of
Foamex L.P.'s overall indebtedness than in the past, and as a result, future
fluctuations in interest rates will have a greater impact on Foamex L.P.'s
interest expense than in the past. In connection with the 1997 Refinancing Plan,
Foamex L.P. made the distributions described under Item 5 above.
On October 1, 1997, Foamex L.P. redeemed approximately $26.2 million of
the approximately $30.7 million of Foamex L.P.'s outstanding public debt that
was not tendered as part of the 1997 Refinancing Plan. These redemptions were
funded with borrowings under the Credit Facility. In connection with these
redemptions, Foamex L.P. incurred an extraordinary loss on the early
extinguishment of debt of approximately $2.1 million. The remaining outstanding
public debt of approximately $4.5 million that was not tendered as part of the
1997 Refinancing Plan was defeased in February 1998 and redeemed in June 1998.
18
<PAGE>
During 1996, Foamex L.P. sold Perfect Fit Industries, Inc. ("Perfect
Fit") which comprised the home comfort products business segment of Foamex L.P.
The consolidated financial statements of Foamex L.P. were 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
9 to the consolidated financial statements).
General
Foamex L.P.'s automotive foam customers are predominantly 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 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.
Operating results for 1999 are expected to be influenced by various
internal and external factors. These factors include, among other things, (i)
Foamex L.P.'s debt structure and Foamex L.P.'s ability to successfully amend its
Credit Facility and certain other indebtedness, (ii) Foamex L.P.'s capital
structure, (iii) continued implementation of the consolidation plan with Crain,
(iv) additional raw material cost increases, if any, by Foamex L.P.'s chemical
suppliers, (v) Foamex L.P.'s success in passing on to its customers selling
price increases to recover such raw material cost increases and (vi)
fluctuations in interest rates.
RESULTS OF OPERATIONS
In the fourth quarter of 1998 Foamex L.P. adopted Statement of Financial
Accounting Standards No. 131 "Disclosure about Segments of an Enterprise and
Restatement Information" ("SFAS No. 131"). SFAS No. 131 requires companies to
report information about their business segments on the basis of how they are
managed and evaluated by the chief operating decision-makers. Each of the
operating segments is headed by an executive vice president who is responsible
for developing plans and directing the operations of the segment.
Foamex L.P.'s reportable business segments are foam products, carpet
cushion products, automotive products and technical products. The foam products
segment manufactures and markets foam used by the bedding industry, furniture
industry and the retail industry. The carpet cushion products segment sells
prime, rebond, sponge rubber and felt carpet cushion to Foamex Carpet through a
Supply Agreement. The automotive products segment supplies foam primarily for
automotive interior applications to automotive manufacturers and to industry sub
suppliers. The Technical Products segment manufactures and markets reticulated
foams and other custom polyester and polyether foams for industrial, specialty
and consumer and safety applications.
The "other" column in the table below represents certain foreign
manufacturing operations in Mexico and Asia that do not meet the quantitative
threshold for determining reportable segments, corporate expenses not allocated
to the other operating segments and restructuring and other charges. Total asset
information by operating segment is not reported because many of Foamex L.P.'s
facilities produce products for multiple operating segments. Data for 1997 and
1996 has been restated to reflect the implementation of SFAS No. 131.
<TABLE>
<CAPTION>
Carpet
Foam Cushion Automotive Technical
Products Products Products Products Other Total
1998
<S> <C> <C> <C> <C> <C> <C>
Net sales $559,690 $210,313 $285,190 $79,140 $21,585 $1,155,918
Income (loss) from operations 36,253 (58) 17,319 14,919 (2,925) 65,508
Depreciation and amortization 17,418 5,092 4,582 2,615 1,972 31,679
1997
Net sales $334,900 $273,920 $225,892 $76,254 $20,129 $931,095
Income (loss) from operations 30,974 8,795 24,885 18,071 (26,393) 56,332
Depreciation and amortization 10,237 4,166 3,309 2,290 880 20,882
19
<PAGE>
Carpet
Foam Cushion Automotive Technical
Products Products Products Products Other Total
1996
Net sales $325,067 $291,338 $227,151 $70,325 $12,470 $926,351
Income from operations 32,431 18,813 28,707 18,208 4,710 102,869
Depreciation and amortization 10,683 4,198 2,874 2,232 1,145 21,132
</TABLE>
1998 Compared to 1997
Net sales for 1998 were $1,155.9 million as compared to $931.1 million in
1997, an increase of $224.8 million or 24.1%. Income from operations increased
$9.2 million or 16.3% to $65.5 million for 1998 from $56.3 million in 1997. The
increase in net sales and income from operations were primarily associated with
the Crain Acquisition in December 1997, restructuring and other credits and the
increase in automotive lamination products during the latter part of 1998 which
were offset by the impact of the GFI Transaction in February 1998 by which
General Felt ceased to be a consolidated subsidiary of Foamex L.P. During 1998,
selling, general and administrative expenses increased $7.4 million primarily
due to costs associated with the integration of Crain and Foamex L.P. (the
"Transition"). Also during 1998, Foamex L.P. recorded income of $14.8 million
for the reversal of 1997 restructuring charges and recorded other charges of
$4.7 million associated with the impairment of goodwill on the Montreal Canada
operations ($2.3 million), and an allowance for receivables due from Trace ($2.4
million).
Foam Products
Foam products net sales for 1998 increased 67.1% to $559.7 million from
$334.9 million in 1997 and income from operations increased 17.0% to $36.3
million (6.5% of net sales) from $31.0 million (9.2% of net sales). The
increases in net sales and income from operations were primarily associated with
the Crain Acquisition in December 1997. The decrease in income from operations
as a percentage of net sales was primarily the result of (i) costs of $4.0
million associated with the Transition, including inventory adjustments for
facilities affected by the consolidation of manufacturing facilities; (ii)
operating inefficiencies and logistic costs of $2.5 million associated with the
sales of juvenile and other consumer products sold through mass merchandisers
and discount stores; (iii) operating losses and inefficiencies of $1.0 million
resulting from the fires at Orlando, Florida and Cornelius, North Carolina; (iv)
selling price decreases of $0.5 million resulting from competitive pricing
pressures due to market share challenges from competitors and (v) the inherently
lower margins of Crain when compared to Foamex L.P.'s historical margins. In
addition, operating margins decreased in 1998 since Foamex L.P. carried the
operating costs of both companies during the Transition.
Carpet Cushion Products
Carpet cushion products net sales for 1998 decreased 23.2% to $210.3
million from $273.9 million in 1997 primarily due to the GFI Transaction offset
by an increase in net sales associated with the Crain Acquisition in December
1997. Income (loss) from operations decreased to a loss of $0.1 million (0.0% of
net sales) from income of $8.8 million (3.2% of net sales). The decreases were
primarily associated with the GFI Transaction and increased costs of $1.0
million associated with the Orlando fire and costs related to the Transition of
$0.9 million.
Automotive Products
Automotive products net sales for 1998 increased 26.2% to $285.2 million
from $225.9 million in 1997 and income from operations decreased 30.5% to $17.3
million (6.1% of net sales) from $24.9 million (11.0% of net sales). The
increase in net sales was associated with increased volume of lamination
products. Income from operations decreased principally as a result of (i) higher
costs of $3.0 million incurred during the start up phase of new lamination
business at the Mexican border, (ii) contract price reductions of approximately
$1.1 million and (iii) losses of $1.0 million associated with the production of
thermoformable headliners.
20
<PAGE>
Technical Products
Technical Products net sales for 1998 increased 3.8% to $79.1 million
from $76.3 million in 1997 and income from operations decreased 17.4% to $14.9
million (18.9% of net sales) from $18.0 million (23.7% of net sales). The
increased net sales were primarily associated with Foamex L.P.'s industrial
gasketing and sealing products. The decrease in income from operations was
primarily associated with a higher mix of lower margin industrial products and
production inefficiencies on certain products.
Other
Other primarily consists of certain foreign manufacturing operations,
corporate expenses not allocated to the other operating segments and
restructuring and other charges. The increase in net sales was associated with
the facility in Mexico City that began operations in the second half of 1997.
The increase in income from operations was principally from a reversal of $14.8
million of restructuring charges primarily established in 1997, offset by
accounts receivable and inventory problems of $8.5 million at the Mexico City
facility, start up costs of $2.5 million for Foamex L.P.'s investment in an
Asian joint-venture and duplicate administrative costs incurred in connection
with the Transition.
Income (Loss) from Continuing Operations
Income (loss) from continuing operations decreased to a loss of $5.9
million for 1998 as compared to income of $11.3 million in 1997. The decrease is
primarily due to the reasons discussed above, an increase of approximately $21.9
million in interest and debt issuance expense and a decrease in other income
(expense) of approximately $6.3 million. The decrease in other income (expense)
is primarily due to costs associated with (i) the GFI Transaction, (ii) foreign
currency losses in Mexico and Canada and (iii) decreased interest income during
1998 as compared to 1997. The increase in interest and debt issuance expense is
primarily due to the additional debt incurred in connection with the Crain
Acquisition and the 1997 Refinancing Plan offset by the net debt reduction
associated with the GFI Transaction.
Income Taxes
Foamex L.P., 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 certain state
income taxes of Foamex L.P. and federal and state income taxes of corporate
subsidiaries and subsidiaries located in foreign jurisdictions that file
separate income tax returns. See Note 11 to the consolidated financial
statements.
Extraordinary Loss
The extraordinary loss on early extinguishment of debt in 1998 of $3.2
million was primarily associated with the write-off of debt issuance costs in
connection with the GFI Transaction. The extraordinary loss on early
extinguishment of debt in 1997 of $48.6 million primarily relates to the
write-off of debt issuance costs and redemption premiums associated with the
early extinguishment of long-term debt in connection with the 1997 Refinancing
Plan.
1997 Compared to 1996
Net sales for 1997 were $931.1 million as compared to $926.4 million in
1996, an increase of $4.7 million or 0.5%. The increase in net sales was
primarily associated with the foam products segment due to higher sales volume
of bedding related products and expansion of facilities in Mexico City. Income
from operations was $56.3 million for 1997 as compared to $102.9 million in
1996. The decrease was primarily due to unrecovered raw material cost increases,
product mix change to lower margin products, 1997 restructuring and other
charges of $21.1 million as compared to a restructuring credit of $6.4 million
in 1996, and an increase in selling, general and administrative expenses of $9.1
million for 1997 as compared to 1996. The 1997 restructuring and other charges
21
<PAGE>
related to the restructuring of Foamex L.P.'s operations in connection with the
Crain Acquisition. The increase in selling, general and administrative expenses
is the result of increases in the provision for uncollectible accounts, employee
compensation and incentives, research and development costs, and travel and
promotion costs associated with the launching of new products and international
expansion.
Foam Products
Foam products net sales for 1997 increased 3.0% to $334.9 million from
$325.1 million in 1996 primarily due to increased net sales volume from both new
and existing customers of bedding related products. Income from operations
decreased 4.5% to $31.0 million (9.2% of net sales) from $32.4 million (10.0% of
net sales). The decreases were primarily associated with unrecovered material
cost increases offset by an increase in net sales.
Carpet Cushion Products
Carpet cushion products net sales for 1997 decreased 6.0% to $273.9
million from $291.3 million in 1996. Income from operations decreased 53.2% to
$8.8 million (3.2% of net sales) from $18.8 million (6.5% of net sales). The
decrease was primarily associated (i) the sale in October 1997 of the Dalton,
Georgia facility which manufactured needlepunch, tufted carpeting, and
artificial grass products and had net sales of approximately $8.3 million in the
fourth quarter of 1996, (ii) reduction in rebond carpet cushion selling prices
due to lower trim material costs, and (iii) a shift in product mix from higher
price carpet cushion to lower price carpet cushion.
Automotive Products
Automotive products net sales for 1997 decreased 0.6% to $225.9 million
from $227.2 million in 1996. Income from operations decreased 13.3% to $24.9
million (11.0% of net sales) from $28.7 million (12.6% of net sales). The
decrease in operating margin was associated with a shift in product mix to
increased volume of lower margin lamination products from higher margin roll
goods.
Technical Products
Technical Products net sales for 1997 increased 8.5% to $76.3 million
from $70.3 million in 1996 primarily due to increased net sales volume of
commercial and industrial products. Income from operations decreased slightly to
$18.1 million (23.7% of net sales) in 1997 as compared to $18.2 million (25.9%
of net sales) in 1996. The decrease in percentage of income from operations to
net sales was primarily associated with a higher mix of lower margin industrial
products in 1997 as compared to higher margin commercial products in 1996.
Other
Other primarily consists of certain foreign manufacturing operations,
corporate expenses not allocated to the other operating segments and
restructuring and other charges. The increase in net sales was primarily
associated with the expansion of facilities in Mexico City. The decrease in
income from operations was primarily associated with the start up in Mexico City
and $21.1 million of restructuring and other charges in 1997 as compared to $6.4
million of restructuring and other credits in 1996.
Income (Loss) from Continuing Operations
Income from continuing operations was $11.3 million for 1997 as compared
to $53.7 million in 1996. The decrease is primarily due to the reasons cited
above and an increase in interest and debt issuance expense of $1.0 million.
Income Taxes
Foamex L.P., 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 11 to the
consolidated financial statements for further discussion.
22
<PAGE>
Extraordinary Loss
The extraordinary loss on early extinguishment of debt in 1997 of $48.6
million primarily relates to the write-off of debt issuance costs and redemption
premiums associated with the early extinguishment of long-term debt in
connection with the 1997 Refinancing Plan.
Liquidity and Capital Resources
Liquidity
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. Foamex L.P. believes that
cash flow from Foamex L.P.'s operating activities, cash on hand and periodic
borrowings under the Credit Facility, if necessary, (provided that such Credit
Facility is successfully amended, as described below) will be adequate to meet
Foamex L.P.'s liquidity requirements. The ability to meet such liquidity
requirements could be impaired if Foamex L.P. were to fail to comply with any
covenants contained in the Credit Facility and such noncompliance was not cured
by Foamex L.P. or waived by the lenders. Foamex L.P. amended its Credit Facility
in March 1999. The amendment adjusted financial covenants, among other things,
as of December 31, 1998 and provided for future measurement periods taking into
account Foamex L.P.'s estimated operating results and financial condition for
1998 and management expectations regarding future measurement periods. As the
Foamex L.P. actual 1998 net loss was greater than originally estimated, on April
15, 1999, Foamex L.P. obtained a waiver through May 5, 1999, which has been
extended through June 30, 1999, of the financial covenants contained in the
Credit Facility and certain events of default arising out of its Mexican
operations, in order to enable it to negotiate a further amendment of the Credit
Facility. There can be no assurance that such an amendment will be obtained, and
the failure to obtain such an amendment would have a material adverse effect on
Foamex L.P. and Foamex International.
Certain credit agreements and promissory notes of Foamex L.P. pursuant to
which approximately $440.2 million of debt has been issued contain provisions
that would result in the acceleration of such indebtedness if Trace were to
cease to own at least 30% of the outstanding common stock of Foamex
International. Similarly, certain indentures of Foamex L.P. and Foamex Capital
Corporation relating to approximately $248.0 million of senior subordinated
notes contain provisions that provide the holders of such senior subordinated
notes with the right to require the issuers thereof to repurchase such senior
subordinated notes at a price in cash equal to 101% of the aggregate principal
amount thereof, plus accrued and unpaid interest thereon, if Trace falls below
certain specified ownership levels of common stock and other persons or group
owns a greater percentage of common stock than Trace. Trace had previously
informed Foamex L.P. that it had substantial debt obligations that were due at
the end of December 1998 and did not have the financial resources to pay these
obligations. Subsequently, Trace informed Foamex L.P. that waivers and/or
modifications of such indebtedness had been obtained for at least the near
future; however, there can be no assurance that such waivers and/or
modifications will remain in effect prior to obtaining a permanent resolution.
If Trace were to default on its indebtedness collaterialized by Foamex
International's common stock or other Trace creditors were to take steps
constituting a default under such indebtedness (such as filing an involuntary
bankruptcy petition), and if the holders of such collateralized indebtedness
were to foreclose on Foamex International's common stock held by Trace, such
event could trigger the acceleration and put rights of substantially all of the
debt of Foamex L.P. as described above. Although management believes that all
such debt obligations would be refinanced under such circumstances, there can be
no assurance that Foamex L.P. would be able to do so.
The accompanying financial statements have been prepared assuming Foamex
L.P. will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, Foamex L.P. is not in compliance with certain
financial covenants contained in the agreements governing approximately $415.4
million principal amount of indebtedness. Such non-compliance provides the
lenders under those agreements, with the right, upon the notice and lapse of
time to declare all of such indebtedness to be due. To date the lenders have not
exercised such rights and have granted Foamex L.P. a waiver of such covenants
through May 5, 1999, which has been extended through June 30, 1999, to enable
Foamex L.P. to negotiate an amendment of such covenants; there can be no
assurance that such amendments will be obtained and therefore such indebtedness
has been classified as current on Foamex L.P.'s financial statements. Were the
lenders under those agreements to accelerate the maturity of their indebtedness,
such acceleration would constitute an event of default, and substantially all of
Foamex L.P.'s long-term debt would become due. Therefore, Foamex L.P. has
reclassified approximately $715.8 million of long-term debt as current. Such
classification raises substantial doubt about Foamex L.P.'s ability to continue
as a going concern. In addition, Foamex L.P. has been informed by Trace that
Trace had substantial debt obligations that were due at the end of December 1998
23
<PAGE>
and did not have the financial resources to pay those obligations. Subsequently,
Trace informed Foamex L.P. that waivers and/or modifications of such
indebtedness had been obtained for at least the near future; however, there can
be no assurance that such waivers and/or modifications will remain in effect
prior to obtaining a permanent resolution. If Trace were to default on its
indebtedness collateralized by Foamex International's common stock or other
Trace creditors were to take steps constituting a default under such
indebtedness (such as filing an involuntary bankruptcy petition), and if the
holders of such collateralized indebtedness were to foreclose on Foamex
International's common stock held by Trace, such event could trigger the
acceleration and put rights of substantially all of the debt of Foamex L.P. as
described above. Although management believes that all such debt obligations
would be refinanced under such circumstances, there can be no assurance that
Foamex L.P. would be able to do so. In December 1998, Foamex L.P. established a
reserve of $2.4 million against operating receivables due from Trace. The
financial statements do not include any adjustments that might result from the
outcome of these uncertainties.
Foamex L.P. has reclassified all of its debt from long-term debt to
reflect such debt as current liabilities. If, however, Foamex L.P. is able to
amend the relevant covenants in its credit agreements and other financial
arrangements, Foamex L.P. may be able to reclassify the liabilities as long-term
debt. However, there can be no assurance that Foamex L.P. will be able to obtain
the necessary amendments, or if obtained, that it will once again be able to
classify such liabilities as long-term.
Cash and cash equivalents decreased $6.2 million during 1998 to $3.2
million at December 31, 1998 as compared to $9.4 million at December 28, 1997
primarily due to the loss from operations. Cash and cash equivalents decreased
$11.6 million during 1997 to $9.4 million at December 28, 1997 from $21.0
million at December 29, 1996 primarily due to the decrease in operating results
offset by less cash used for the operating assets and liabilities. Excluding the
reclassification of other long-term debt to current, working capital decreased
$11.3 million during 1998 to $114.8 million at December 31, 1998 from $126.1
million at December 28, 1997 primarily due to a reduction in net operating
assets and an increase in accrued liabilities, offset by a decrease in accrued
restructuring and plant consolidation costs. Net operating assets and
liabilities (comprised of accounts receivable, accounts receivable from related
parties, inventories, accounts payable and accounts payable to related parties)
decreased $16.1 million to $148.0 million at December 31, 1998 as compared to
$164.1 million at December 28, 1997. The decrease was primarily due to: (i) a
net decrease in accounts receivable and accounts receivable related party and
(ii) a net increase in accounts payable and accounts payable from related
parties offset by (iii) an increase in inventories. The net decrease in accounts
receivable and accounts receivable related parties was primarily associated with
the GFI Transaction by which General Felt ceased to be a consolidated subsidiary
of Foamex L.P. The increase in inventories was primarily due to year-end
purchases of raw materials to maintain favorable pricing with chemical suppliers
and projected net sales during the first quarter of 1999. In addition,
inventories increased because of lower than anticipated sales during the month
of December 1998. The net increase in accounts payable and accounts payable
related parties is primarily associated with the year-end purchase of raw
material inventories and the termination of a supply agreement between Foamex
L.P. and Foamex International. The decrease in accrued restructuring and plant
consolidation costs is primarily associated with the payment of costs for
closure of facilities during 1998 and the reversal during 1998 of restructuring
charges previously recorded in 1997. The increase in other accrued liabilities
is primarily associated with an increase in workers compensation liabilities and
$7.3 million of checks issued to be funded under the Credit Facility, offset by
other general decreases. Working capital decreased $11.0 million during 1997 to
$126.1 million at December 28, 1997 from $137.1 million at December 29, 1996
primarily due to the decrease of cash and cash equivalents and accrued
restructuring and plant consolidation costs. Net operating assets and
liabilities (comprised of accounts receivable, accounts receivable from related
parties, inventories and accounts payable and accounts payable to related
parties) increased $21.5 million during 1997 to $164.1 million at December 28,
1997 from $142.6 million at December 29, 1996 primarily due to increases in
accounts receivable and inventories offset by an increase in accounts payable.
These increases were primarily associated with the Crain Acquisition. Foamex
L.P.'s restructuring/consolidation plan includes accruals of approximately $9.5
million of cash charges of which $2.5 million is expected to be paid during
1999.
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As of December 31, 1998, there were $139.4 million of revolving credit
borrowings at an average interest rate of 7.89% under the Credit Facility with
$6.5 million available for borrowings and approximately $49.1 million associated
with letters of credit outstanding which are supported by the Credit Facility.
Borrowings by Foamex Canada Inc. as of December 31, 1998 were approximately $2.9
million, at an interest rate of 7.25%, under Foamex Canada Inc.'s revolving
credit agreement with unused availability of approximately $2.3 million.
Cash Flow from Operating Activities
Cash flow from continuing operations was a negative $27.8 million and a
positive $22.0 million and $36.7 million in 1998, 1997, and 1996, respectively.
Cash flow from continuing operations decreased in 1998 as compared to 1997
primarily as a result of the loss from continuing operations, as described
above, cash used for restructuring and plant consolidations and an increased use
of cash by the operating assets and liabilities. Cash flow from continuing
operations decreased in 1997 as compared to 1996 primarily as a result of the
use of approximately $24.4 million of cash for payments and costs associated
with the debt extinguishment during 1997 and reduced operating results offset by
a decreased use of cash by the operating assets and liabilities.
Cash Flow from Investing Activities
From the beginning of 1996 through 1998, Foamex L.P. spent approximately
$88.2 million on capital improvements. The expenditures included: (i) the
construction of a facility in Mexico City, Mexico to improve manufacturing
efficiencies and to meet the growing local demand for foam products; (ii) the
expansion and modernization of a facility in Orlando, Florida to improve
manufacturing efficiencies, (iii) installation of more efficient foam production
line systems and fabricating equipment in a number of manufacturing facilities
and (iv) installation of flame laminators to support the increased volume of
automotive laminated products. Foamex L.P. expects to reduce capital
expenditures from historical levels for the foreseeable future.
During 1998, the GFI Transaction used cash of approximately $10.2 million
consisting of the $4.8 million payment on the Foamex/GFI Note and the fees and
other costs.
On December 23, 1997, Foamex International acquired Crain pursuant to a
merger agreement with Crain Holdings for a purchase price of approximately
$213.7 million, which was primarily funded with $118.0 million of bank
borrowings under the Credit Facility and the assumption of debt with a face
value of approximately $98.6 million (and an estimated fair value of
approximately $112.3 million). Fees and expenses associated with the Crain
Acquisition were approximately $13.2 million.
On October 6, 1997, Foamex L.P. sold 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 was
approximately $41.0 million, net of post-closing adjustments which were
finalized in December 1997.
During 1996, Foamex L.P. 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 and for the
payment of certain retained liabilities.
Cash Flow from Financing Activities
In connection with the GFI Transaction in February 1998, Foamex L.P.
extinguished approximately $125.1 million of term loans under the Credit
Facility funded with $129.0 million of cash proceeds from borrowings under new
term loan agreements which were subsequently assumed by Foam Funding LLC. In
connection with the GFI Transaction, Foamex L.P. distributed $20.0 million in
cash pro rata to its partners, such distribution was funded with borrowings
under the Foamex L.P. Credit Agreement. See Note 9 to the consolidated financial
statements.
On June 12, 1997, Foamex International substantially completed the 1997
Refinancing Plan designed to reduce Foamex International's interest expense and
increase its financing flexibility. The 1997 Refinancing Plan included a tender
offer to purchase $373.0 million of Foamex L.P.'s existing public debt and
approximately $116.7 million of FJPS discount debentures. Also, the 1997
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Refinancing Plan included the payment of $5.2 million of term loan borrowings
under an existing credit facility and the payment of related fees and expenses.
In addition, the tender offer included amending the existing indentures to
remove substantially all of the restrictive covenants. Foamex L.P. purchased
$342.3 million of its public debt and the $116.7 million principal amount of
FJPS discount debentures under the tender offer and incurred an extraordinary
loss on the early extinguishment of debt of approximately $44.5 million. The
1997 Refinancing Plan was funded by $347.0 million of borrowings under the
Credit Facility and the net proceeds from the issuance of $150.0 million
principal amount of senior subordinated notes. As a result of the 1997
Refinancing Plan, Foamex L.P.'s total long-term debt increased by $150.1
million. Foamex L.P. expects the 1997 Refinancing Plan to result in increased
interest expense as compared to the debt structure prior to the 1997 Refinancing
Plan, assuming no material changes in interest rates. Foamex L.P.'s future
interest expense will vary based on a variety of factors, including fluctuations
in interest rates in general. As a result of the 1997 Refinancing Plan, variable
rate debt comprised a larger percentage of Foamex L.P.'s overall indebtedness
than in the past, and as a result, future fluctuations in interest rates will
have a greater impact on Foamex L.P.'s interest expense than in the past. In
connection with the 1997 Refinancing Plan, Foamex L.P. made the distributions
described under Item 5 above.
On October 1, 1997, Foamex L.P. redeemed approximately $26.2 million of
the approximately $30.7 million of its outstanding public debt that was not
tendered as part of the 1997 Refinancing Plan. These redemptions were funded
with borrowings under the Credit Facility. In connection with these redemptions,
Foamex L.P. incurred an extraordinary loss on the early extinguishment of debt
of approximately $2.1 million. The remaining outstanding public debt of $4.5
million that was not tendered as part of the 1997 Refinancing Plan was defeased
in February 1998 and redeemed in June 1998.
On October 6, 1997, Foamex L.P. sold its needlepunch carpeting, tufted
carpeting and artificial grass products business, located in Dalton, Georgia to
Bretlin, Inc., a subsidiary of The Dixie Group, Inc. Foamex L.P. used the net
proceeds of the sale to reduce borrowings under the Credit Facility by
approximately $38.8 million.
During 1997 and 1996, Foamex L.P. repurchased long-term debt of
approximately $42.4 million with the net proceeds from the sale of Perfect Fit.
Foamex L.P. made cash distributions to its partners, pursuant to a tax
sharing agreement, of approximately $0.3 million, $8.8 million and $3.5 million
in 1998, 1997 and 1996, respectively. Also, in connection with the GFI
Transaction in February 1998, Foamex L.P. made a $20.0 million distribution to
its partners. In connection with the 1997 Refinancing Plan, Foamex L.P. made the
distributions described under Item 5 above. See Note 14 to the consolidated
financial statements.
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 December 31, 1998 was $3.5 million. 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, Foamex L.P. 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. See "Legal Proceedings -
Environmental Matters."
Inflation and Other Matters
There was no significant impact on Foamex L.P.'s operations as a result
of inflation during the prior three year period; however, during 1998, 1997 and
1996, Foamex L.P.'s results of operations were adversely affected by raw
material cost increases. Foamex L.P. attempts to offset raw material cost
increases through selling price increases; however, there can be no assurance
that Foamex L.P. will be successful in implementing selling price increases or
26
<PAGE>
that competitive pricing pressure will not require Foamex L.P. to adjust selling
prices. Results of operations have been and could be adversely affected by
delays in implementing, or the inability of Foamex L.P. to implement, selling
price increases to offset raw material cost increases. For example, Foamex
L.P.'s results of operations in 1998, 1997 and 1996 were adversely affected by
net unrecovered raw material costs. See "Results of Operations" for a discussion
of the impact of raw material price increases. 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.
Year 2000 Compliance
Foamex L.P. uses numerous business information systems as well as
manufacturing support systems that could be impacted by the "Year 2000 Problem".
The Year 2000 Problem arises from computer programs that were written using two
digits rather than four to designate the year. In connection with the Year 2000
Problem, date-sensitive computer software may recognize a date using "00" as the
year 1900 rather than the year 2000. This could result in system failures or
miscalculations which would cause significant operational disruptions.
Foamex L.P. has a Year 2000 Executive Sponsor Team comprised of
representatives of Foamex L.P. The Year 2000 Executive Sponsor Team is providing
direction to and receiving reports from the Year 2000 Steering Committee (the
"Steering Committee") within the organization. The Steering Committee has
completed an assessment of the state of readiness of the Information Technology
("IT") and non-IT systems of Foamex L.P. These assessments cover desktop
computers, environmental systems, manufacturing systems (including laboratory
information systems), field instrumentation, and significant third party vendor
and supplier systems, which include employee compensation and benefit plan
maintenance systems. The Steering Committee is also in the process of assessing
the readiness of Foamex L.P.'s significant customers and suppliers.
The Year 2000 assessment process for each facility consists of an
inventory of Year 2000 sensitive equipment, an assessment of the impact of
possible failures, determination of required remediation actions, if any, and
testing and implementation of these solutions. The inventory, assessment,
remediation and testing phases were completed at the end of 1998, with fail safe
testing and final implementation currently taking place in 1999. The progress of
these phases as of March 31, 1999 is summarized as follows.
Foamex L.P. completed the inventory and assessment phases of the project
by December 31, 1998. These phases consisted of a visit to each critical
location by team members to promote awareness of the project and verify the
initial inventory provided by the contact at each facility. Testing plans were
developed which included correspondence with suppliers regarding date-sensitive
devices. In addition, local management was advised of their roles and
responsibilities in connection with the Year 2000 Problem.
Foamex L.P. completed the remediation and testing of critical business
information computer systems as of December 31, 1998. The completion of these
phases included the modification of several million lines of system code, the
conversion of the systems acquired from Crain to standard business information
computer systems, upgrading system hardware and operating system software,
testing of the applicable systems in a development testing area, and the
migration of the remediated systems into the production environment.
Foamex L.P. estimates it will spend $2.0 million in connection with the
Year 2000 Problem. The spending estimate will be refined as phases of the
project are completed. Spending on the Year 2000 Problem is funded by cash
generated from operations.
Management believes that all significant systems controlled by Foamex
L.P. will be Year 2000 ready in the latter half of 1999. While the Steering
Committee is communicating readiness to third party customers, as requested, and
is assessing the readiness of critical suppliers, there can be no assurance that
third parties with a significant business relationship will successfully test,
reprogram, and replace all of their IT and non-IT systems on a timely basis. As
part of the overall response to the Year 2000 Problem, Foamex L.P. is in the
process of developing contingency plans in the event of Year 2000 non-compliance
of certain systems or third parties. Details of such contingency plans will be
determined after the Steering Committee has completed its assessment of its
supply chain, other third parties and the potential for possible failures.
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There is inherent uncertainty in connection with the Year 2000 Problem
due to the possibility of unanticipated failures by third party customers and
suppliers. Accordingly, Foamex L.P. is unable, at this time, to assess the
extent and resulting materiality of the impact of possible Year 2000 failures on
its operations, liquidity or financial position. The Year 2000 assessment,
remediation, and testing process continues to provide information in order to
reduce the level of uncertainty regarding the impact of the Year 2000 Problem.
Management believes that if Foamex L.P.'s solutions to the Year 2000 Problem are
completed as scheduled such solutions may help minimize the possibility of
significant disruptions to Foamex L.P.'s operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
An index to the financial statements and the required financial statement
schedule is set forth in Item 14.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
The information required by this Part III (Items 10, 11, 12, and 13) is
not applicable since Foamex L.P. is a wholly owned subsidiary of Foamex
International.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
<S> <C>
(a) Financial Statements and Schedules
Foamex L.P. and Subsidiaries:
Report of Independent Accountants F-2
Consolidated Balance Sheets as of December 31, 1998 and December 28, 1997 F-3
Consolidated Statements of Operations for the years ended 1998, 1997 and 1996 F-5
Consolidated Statements of Cash Flows for the years ended 1998, 1997 and 1996 F-6
Consolidated Statements of Partners' Equity (Deficit) for the years ended 1998, 1997 and 1996 F-7
Notes to Consolidated Financial Statements F-8
Foamex Capital Corporation:
Report of Independent Accountants F-37
Balance Sheets as of December 31, 1998 and December 28, 1997 F-38
Notes to Balance Sheets F-39
Foamex L.P. and Subsidiaries Financial Statement Schedule:
Schedule II - Valuation and Qualifying Accounts S-2
</TABLE>
(b) Reports on Form 8-K
Form 8-K, dated October 16, 1998 reporting the termination of the
First Merger Agreement.
Form 8-K, dated November 4, 1998 reporting the change in fiscal
year from 52-53 week to calendar year for Foamex International,
Foamex L.P., and Foamex Capital Corporation.
Form 8-K, dated November 5, 1998 reporting the signing of the
Second Merger Agreement.
Form 8-K, dated January 8, 1999 reporting the termination of the
Second Merger Agreement.
Form 8-K, dated March 11, 1999 reporting press release involving
preliminary earnings, appointment of John G. Johnson, Jr. and
amendments to credit agreements, guarantee and promissory notes.
Form 8-K, dated April 20, 1999 reporting update to preliminary
earnings.
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(c) Exhibits
2.1(x) - Transfer Agreement, dated as of February 27, 1998, by and
between Foam Funding LLC and Foamex L.P.
2.2(x) - Asset Purchase Agreement, dated as of February 27, 1998, by and
among Foamex Carpet Cushion, Inc. ("Foamex Carpet"), Foamex
International Inc. ("Foamex International"), Foam Funding LLC and
General Felt Industries, Inc. ("General Felt").
2.3(z) - Agreement and Plan of Merger, dated as of November 5, 1998, by
and among Foamex International, Trace International Holdings,
Inc. and Trace Merger Sub Corp.
2.4(aa) - Agreement and Plan of Merger, dated as of June 25, 1998, by and
among Trace International Holdings, Inc., Trace Merger Sub, Inc.
and Foamex International Inc.
2.5(z) - Notice of termination of Agreement and Plan of Merger, dated as
of November 5, 1998, from Trace International Holdings, Inc. to
Foamex International Inc.
3.1(a) - Certificate of Limited Partnership of Foamex L.P.
3.2.1(a) - Fourth Amended and Restated Agreement of Limited Partnership of
Foamex L.P., dated as of December 14, 1993, by and among FMXI,
Inc. ("FMXI") and Trace Foam Company, Inc. ("Trace Foam"), as
general partners, and Foamex International, as a limited partner
(the "Partnership Agreement").
3.2.2(b) - First Amendment to the Partnership Agreement, dated June 28,
1994.
3.2.3(c) - Second Amendment to the Partnership Agreement, dated June 12,
1997.
3.2.4(v) - Third Amendment to the Partnership Agreement, dated December
23, 1997.
3.2.5(x) - Fourth Amendment to the Partnership Agreement, dated February
27, 1998.
3.3(y) - Certificate of Incorporation of FMXI.
3.4(y) - By-laws of FMXI.
3.5(k) - Certificate of Incorporation of Foamex Capital Corporation
("FCC").
3.6(k) - By-laws of FCC.
3.7.1(a) - Certificate of Incorporation of Foamex International.
3.7.1(dd) - Amendment to Certificate of Incorporation of Foamex
International.
3.7.2(cc) - Certificate of Incorporation of Foamex Carpet Cushion, Inc.
("Foamex Carpet")
3.8(a) - By-laws of Foamex International.
3.8.1(cc) - By-laws of Foamex Carpet.
4.1.1(d) - Indenture, dated as of June 12, 1997, by and among Foamex L.P.,
FCC, the Subsidiary Guarantors and The Bank of New York, as
trustee, relating to $150,000,000 principal amount of 9 7/8%
Senior Subordinated Notes due 2007 (the "9 7/8% Notes"),
including the form of Senior Subordinated Note and Subsidiary
Guarantee.
4.1.2(v) - First Supplemental Indenture, dated as of December 23, 1997,
between Foamex LLC ("FLLC") and The Bank of New York, as trustee,
relating to the 9 7/8% Notes.
4.1.3(x) - Second Supplemental Indenture, dated as of February 27, 1998,
among Foamex L.P. and FCC, as joint and several obligors, General
Felt, Foamex Fibers, Inc. (`Foamex Fibers"), and FLLC, as
withdrawing guarantors, and The Bank of New York, as trustee,
relating to the 9 7/8% Notes.
4.1.4(d) - Registration Rights Agreement, dated as of June 12, 1997, by
and among Foamex L.P., FCC, General Felt, Foamex Fibers, and all
future direct or indirect domestic subsidiaries of Foamex L.P. 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.
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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.
4.4.1.2(bb) - Amendment No. 2 to Foamex L.P. Credit Agreement, dated March
11, 1999.
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.
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(r) - Foamex Pledge Agreement, dated as of June 12, 1997, made by
Foamex L.P. in favor of Citicorp USA, Inc., as Collateral Agent.
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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.
4.4.30(bb) - Amendment No. 1 to Second Amended and Restated Foamex
International Guaranty, dated March 11, 1999.
4.4.31(bb) - Amendment No. 1 to Foamex International Guaranty, dated March
12, 1999.
4.4.32 - Foamex Patent Agreement, dated as of June 12, 1997, by Foamex
L.P. in favor of Citicorp USA, Inc., as Collateral Agent.
4.4.33 - Trademark Security Agreement, dated as of June 12, 1997, by
Foamex L.P. in favor of Citicorp USA, Inc., as Collateral Agent.
4.5(u) - Commitment letter, dated July 17, 1997, from The Bank of Nova
Scotia to Foamex Canada Inc.
4.6(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").
4.7(a) - Marely Loan Commitment Agreement, dated as of December 14,
1993, by and between Foamex L.P. and Marely s.a. ("Marely").
4.8(a) - DLJ Loan Commitment Agreement, dated as of December 14, 1993,
by and between Foamex L.P. and DLJ Funding, Inc. ("DLJ Funding").
4.9.1(p) - Promissory Note, dated June 12, 1997, in the aggregate
principal amount of $5,000,000, executed by Trace Holdings to
Foamex L.P.
4.9.2(p) - Promissory Note, dated June 12, 1997, in the aggregate
principal amount of $4,794,828, executed by Trace Holdings to
Foamex L.P.
4.10.1(x) - Credit Agreement, dated as of February 27, 1998, by and among
Foamex Carpet, the institutions from time to time party thereto
as lenders, the institutions from time to time party thereto as
issuing banks and Citicorp USA, Inc. and The Bank of Nova Scotia,
as administrative agents.
4.10.2(x) - Foamex International Guaranty, dated as of February 27, 1998,
made by Foamex International in favor of Citicorp USA, Inc., as
Collateral Agent.
4.10.3(x) - Foamex International Pledge Agreement, dated as of February 27,
1998, made by Foamex International in favor of Citicorp USA,
Inc., as Collateral Agent.
4.10.4(x) - New GFI Security Agreement, dated as of February 27, 1998, made
by Foamex Carpet in favor of Citicorp USA, Inc., as Collateral
Agent.
4.10.5(x) - New GFI Intercreditor Agreement, dated as of February 27, 1998,
by and among Foamex Carpet, The Bank of Nova Scotia, as
Administrative Agent, and Citicorp USA, Inc., as Administrative
Agent and Collateral Agent.
4.10.6(x) - FII Intercreditor Agreement, dated as of February 27, 1998, by
and between Foamex International and Citicorp USA, Inc., as
Collateral Agent.
4.10.7(dd) - Amendment No. 1 to Foamex L.P. Credit Agreement, dated as of
October 30, 1998.
4.10.8(bb) - Amendment No. 2 to Foamex L.P. Credit Agreement, dated March
12, 1999.
4.10.9(dd) - Amendment No. 1 to Foamex Carpet Cushion, Inc. Credit
Agreement, dated October 30, 1998.
4.10.10(bb) - Amendment No. 2 to Foamex Carpet Cushion, Inc. Credit
Agreement, dated March 12, 1999.
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4.11.1(x) - Promissory Note of Foamex L.P. in favor of Foam Funding LLC in
the principal amount of $34 million, dated February 27, 1998.
4.12.1(x) - Promissory Note of Foamex Carpet in favor of Foam Funding LLC
in the principal amount of $70.2 million, dated February 27,
1998.
4.12.2(bb) - Amendment to Promissory Note, dated March 15, 1999.
4.13(dd) - Waiver, dated as of April 15, 1999 to the Credit Agreement,
dated as of February 27, 1998, among Foamex Carpet Cushion, Inc.,
the institutions party thereto as Lenders, the institutions party
thereto as Issuing Banks, and Citicorp USA, Inc. and The Bank of
Nova Scotia as Administrative Agents.
10.1.1(p) - Amendment to Master Agreement, dated as of June 5, 1997,
between Citibank, N.A. and Foamex L.P.
10.1.2(p) - Amended Confirmation, dated as of June 13, 1997, between
Citibank, N.A. and Foamex L.P.
10.1.3(w) - Amended Confirmation, dated as of February 2, 1998, between
Citibank, N.A. and Foamex L.P.
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 L.P. (the "Trace Holdings Asset
Transfer Agreement").
10.4.2(k) - First Amendment, dated as of December 19, 1991, to the Trace
Holdings Asset Transfer Agreement. 10.4.3(k) - Amended and
Restated Guaranty, dated as of December 19, 1991, made by Trace
Foam in favor of Foamex L.P.
10.5.1(k) - Asset Transfer Agreement, dated as of October 2, 1990, between
Recticel Foam Corporation ("RFC") and Foamex L.P. (the "RFC Asset
Transfer Agreement").
10.5.2(k) - First Amendment, dated as of December 19, 1991, to the RFC
Asset Transfer Agreement.
10.5.3(k) - Schedule 5.03 to the RFC Asset Transfer Agreement (the "5.03
Protocol").
10.5.4(h) - The 5.03 Protocol Assumption Agreement, dated as of October 13,
1992, between RFC and Foamex L.P.
10.5.5(h) - Letter Agreement between Trace Holdings and Recticel regarding
the Recticel Guaranty, dated as of July 22, 1992.
10.6(l) - Supply Agreement, dated June 28, 1994, between Foamex L.P. and
Foamex International.
10.7.1(l) - First Amended and Restated Tax Sharing Agreement, dated as of
December 14, 1993, among Foamex L.P., Trace Foam, FMXI and Foamex
International.
10.7.2(d) - First Amendment to First Amended and Restated Tax Sharing
Agreement, dated as of June 12, 1997, by and among Foamex L.P.,
Foamex International, FMXI and Trace Foam.
10.7.3(w) - Second Amendment to First Amended and Restated Tax Sharing
Agreement, dated as of December 23, 1997, by and among Foamex
L.P., Foamex International, FMXI, and Trace Foam.
10.7.4(y) - Third Amendment to First Amended and Restated Tax Sharing
Agreement, dated as of February 27, 1998, by and between Foamex
L.P., Foamex International and FMXI.
10.8.1(m) - Tax Distribution Advance Agreement, dated as of December 11,
1996, by and between Foamex L.P. and Foamex-JPS Automotive.
10.8.2(d) - Amendment No. 1 to Tax Distribution Advance Agreement, dated as
of June 12, 1997, by and between Foamex L.P. and Foamex
International.
10.9.1(h) - Trace Foam Management Agreement between Foamex L.P. 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 L.P. and Trace Foam.
10.9.3(d) - First Amendment to Management Agreement, dated as of June 12,
1997, by and between Foamex L.P. and Trace Foam.
10.10.1(k) - Salaried Incentive Plan of Foamex L.P. and Subsidiaries.
10.10.2(k) - Trace Holdings 1987 Nonqualified Stock Option Plan.
10.10.3(k) - Equity Growth Participation Program.
32
<PAGE>
10.10.4(o) - The Foamex L.P. Salaried Pension Plan (formerly the General
Felt Industries, Inc. Retirement Plan for Salaried Employees),
effective as of January 1, 1995.
10.10.5(u) - The Foamex L.P. Hourly Pension Plan (formerly "The Foamex
Products Inc. Hourly Employee Retirement Plan), as amended
December 31, 1995.
10.10.6(u) - Foamex L.P. 401(k) Savings Plan effective October 1, 1997.
10.10.7(a) - Foamex L.P.'s 1993 Stock Option Plan.
10.10.8(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.
10.11.2(dd) - Employment Agreement, dated as of March 16, 1999, by and
between Foamex International and John G. Johnson, Jr.
10.12.1(a) - Warrant Exchange Agreement, dated as of December 14, 1993, by
and between Foamex L.P. and Marely.
10.12.2(a) - Warrant Exchange Agreement, dated as of December 14, 1993, by
and between Foamex L.P. and DLJ Funding.
10.13(t) - Warrant Agreement, dated as of June 28, 1994, by and between
Foamex International and Shawmut Bank.
10.14(o) - Stock Purchase Agreement, dated as of December 23, 1993, by and
between Transformacion de Espumas u Fieltros, S.A., the
stockholders which are parties thereto, and Foamex L.P.
10.15.1(r) - Asset Purchase Agreement, dated as of August 29, 1997, by and
among General Felt, Foamex L.P., Bretlin, Inc. and The Dixie
Group.
10.15.2(s) - Addendum to Asset Purchase Agreement, dated as of October 1,
1997, by and among General Felt, Foamex L.P., Bretlin, Inc. and
The Dixie Group.
10.16.1(x) - Supply Agreement, dated as of February 27, 1998, by and between
Foamex L.P. and General Felt (as assigned to Foamex Carpet).
10.16.2(x) - Administrative Services Agreement, dated as of February 27,
1998, by and between Foamex L.P. and General Felt (as assigned to
Foamex Carpet).
10.17(y) - Tax Sharing Agreement, dated as of February 27, 1998, between
Foamex International and Foamex Carpet.
10.18.1(w) - Joint Venture Agreement between Hua Kee Company Limited and
Foamex Asia, Inc., dated as of July 8, 1997.
10.18.2(w) - Loan Agreement between Hua Kee Company Limited and Foamex Asia,
Inc., dated as of July 8, 1997.
27 - Financial Data Schedule for the year ended December 31, 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
International 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 International 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 International reporting an event that occurred June 12,
1997.
(e) Incorporated herein by reference to the Exhibit to the Registration
Statement of Foamex L.P. and FCC on Form S-4, Registration No. 33-65158.
(f) Incorporated herein by reference to the Exhibit to the Form 10-Q of Foamex
International for the quarterly period ended June 30, 1996.
33
<PAGE>
(g) Incorporated herein by reference to the Exhibit to the Registration
Statement of Foamex L.P., FCC and General Felt on Form S-1, Registration
Nos. 33-60888, 33-60888-01, and 33-60888-02.
(h) Incorporated herein by reference to the Exhibit to the Form 10-K Statement
of Foamex L.P. 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 L.P. 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 International for the fiscal year ended December 29,
1996.
(n) Incorporated herein by reference to the Exhibit to the Form 10-Q of Foamex
International 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 International 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.
(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 L.P. and FCC on Form S-4, Registration No. 333-45733,
filed February 6, 1998.
(x) Incorporated herein by reference to the Current Report on Form 8-K of
Foamex International reporting an event that occurred on February 27, 1998.
(y) Incorporated herein by reference to the Exhibit to the Form 10-K of Foamex
International for the fiscal year ended December 28, 1997.
34
<PAGE>
(z) Incorporated herein by reference to the Current Report on Form 8-K of
Foamex International reporting an event that occurred on November 5, 1998.
(aa) Incorporated herein by reference to the Exhibit to the Current Report on
Form 8-K of Foamex International reporting an event that occurred on June
25, 1998.
(bb) Incorporated herein by reference to the Exhibit to the Current Report on
Form 8-K of Foamex International reporting an event that occurred on March
11, 1999.
(cc) Incorporated herein by reference to the Exhibit in the Registration
Statement of Foamex L.P. and FCC on Form S-4/A, Registration No. 333-45733,
filed May 11, 1998.
(dd) Incorporated herein by reference to the Exhibit to the Form 10-K Statement
of Foamex International for fiscal year ended December 31, 1998.
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.
35
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized on the 7th day of May 1999.
FOAMEX L.P.
By: FMXI, Inc.
General Partner
By: /s/ John A. Feenan
John A. Feenan
Vice President, Treasurer, Chief
Financial Officer and Assistant Secretary
FOAMEX CAPITAL CORPORATION
By: /s/ John A. Feenan
John A. Feenan
Vice President, Treasurer and Chief
Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on its behalf by the
registrant and in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signatures Title Date
<S> <C> <C>
/s/ Marshall S. Cogan Director of FMXI and FCC May 7, 1999
- ----------------------------
Marshall S. Cogan
/s/ Philip N. Smith, Jr. Director of FMXI May 7, 1999
- ---------------------------
Philip N. Smith, Jr.
/s/ Robert H. Nelson Director of FCC May 7, 1999
- ---------------------------------
Robert H. Nelson
/s/ Barry Zimmerman Director of FCC May 7, 1999
- -------------------------------
Barry Zimmerman
</TABLE>
36
<PAGE>
FOAMEX L.P. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C>
Financial Statements of Registrants:
Foamex L.P.:
Report of Independent Accountants F-2
Consolidated Balance Sheets as of December 31, 1998 and December 28, 1997 F-3
Consolidated Statements of Operations for the years ended 1998, 1997 and 1996 F-5
Consolidated Statements of Cash Flows for the years ended 1998, 1997 and 1996 F-6
Consolidated Statements of Partners' Equity (Deficit) for the years ended 1998, 1997 and 1996 F-7
Notes to Consolidated Financial Statements F-8
Foamex Capital Corporation:
Report of Independent Accountants F-37
Balance Sheets as of December 30, 1998 and December 28, 1997 F-38
Notes to Balance Sheets F-39
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners of Foamex L.P.:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, partners' equity (deficit) and cash flows
present fairly, in all material respects, the financial position of Foamex L.P.
and its subsidiaries at December 31, 1998 and December 28, 1997, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1998, in conformity with generally accepted accounting
principles. In addition, in our opinion, the financial statement schedule as of
and for each of the three years in the period ended December 31, 1998 when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information required to be
included therein. These financial statements and financial statement schedule
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 of these statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
The accompanying financial statements have been prepared assuming Foamex L.P.
will continue as a going concern. As discussed in Note 1 to the accompanying
financial statements, during 1998 Foamex L.P. had a loss from continuing
operations, net cash used by operating activities and a working capital deficit
since it violated certain debt covenants for which it is seeking amendments;
however, there can be no assurance that such amendments will be obtained and
therefore all long-term debt is classified as current. These matters raise
substantial doubt about Foamex L.P.'s ability to continue as a going concern. In
addition, Foamex L.P. has been informed by Trace International Holdings, Inc.
("Trace") that Trace has substantial debt obligations and may not have the
financial resources to pay these obligations when due within the near future. As
a result, Trace creditors could foreclose or otherwise attach Foamex
International Inc.'s common stock. Such an event may result in the acceleration
of substantially all of Foamex L.P.'s debt. Management's plans in regard to
these matters are described in Note 1 to the accompanying financial statements.
The financial statements do not include any adjustments that might result from
the outcome of these uncertainties.
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
April 22, 1999, except as to the
information presented in Note 1,
Note 7 and Note 17, for which the
date is May 5, 1999
F-2
<PAGE>
FOAMEX L.P. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, December 28,
ASSETS 1998 1997
---------- ----------
(thousands)
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 3,192 $ 9,405
Accounts receivable, net of allowance for
doubtful accounts of $7,278 and $8,082 143,301 174,959
Accounts receivable from related parties 17,533 1,680
Inventories 127,636 120,299
Deferred income taxes - 6,850
Other current assets 33,849 39,024
---------- ----------
Total current assets 325,511 352,217
--------- ---------
PROPERTY, PLANT AND EQUIPMENT:
Land and land improvements 7,142 9,054
Buildings and leasehold improvements 97,996 79,876
Machinery, equipment and furnishings 223,449 219,164
Construction in progress 24,132 23,331
--------- ---------
Total 352,719 331,425
Less accumulated depreciation and
Amortization 133,082 110,151
--------- --------
Property, plant and equipment, net 219,637 221,274
COST IN EXCESS OF ASSETS ACQUIRED, NET 188,205 219,699
DEBT ISSUANCE COSTS, NET 13,946 18,889
OTHER ASSETS 21,229 21,989
--------- ---------
TOTAL ASSETS $768,528 $834,068
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
F-3
<PAGE>
FOAMEX L.P. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, December 28,
LIABILITIES AND PARTNERS' EQUITY (DEFICIT) 1998 1997
(thousands)
CURRENT LIABILITIES:
<S> <C> <C>
Short-term borrowings $ 2,957 $ 6,598
Current portion of long-term debt 689,478 12,161
Current portion of long-term debt - related party 34,000 -
Accounts payable 139,726 121,147
Accounts payable to related parties 791 11,662
Accrued employee compensation 6,750 10,827
Accrued interest 7,396 10,655
Accrued restructuring and plant consolidation 2,552 15,644
Deferred income taxes 1,098 -
Other accrued liabilities 41,753 37,449
--------- ---------
Total current liabilities 926,501 226,143
LONG-TERM DEBT - 726,649
DEFERRED INCOME TAXES 991 2,529
ACCRUED RESTRUCTURING AND
PLANT CONSOLIDATION 6,969 11,252
OTHER LIABILITIES 30,104 23,797
--------- ---------
Total liabilities 964,565 990,370
-------- --------
COMMITMENTS AND CONTINGENCIES - -
-------------- -------------
PARTNERS' EQUITY (DEFICIT)
General partners (141,426) (122,304)
Limited partners - -
Accumulated comprehensive income (loss) (26,208) (8,085)
Notes and advances receivable from partner (18,608) (16,118)
Notes receivable from related party (9,795) (9,795)
---------- ----------
Total partners' equity (deficit) (196,037) (156,302)
-------- --------
TOTAL LIABILITIES AND PARTNERS' EQUITY (DEFICIT) $768,528 $834,068
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
F-4
<PAGE>
FOAMEX L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended 1998, 1997 and 1996
<TABLE>
<CAPTION>
December 31, December 28, December 29,
1998 1997 1996
---------- -------- --------
(thousands)
<S> <C> <C> <C>
NET SALES $1,155,918 $931,095 $926,351
COST OF GOODS SOLD 1,027,241 787,756 773,119
---------- -------- --------
GROSS PROFIT 128,677 143,339 153,232
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 73,315 65,907 56,778
RESTRUCTURING AND OTHER CHARGES (CREDITS) (10,146) 21,100 (6,415)
---------- --------- ----------
INCOME FROM OPERATIONS 65,508 56,332 102,869
INTEREST AND DEBT ISSUANCE EXPENSE 66,112 44,181 43,211
OTHER INCOME (EXPENSE), NET (4,325) 2,009 1,705
------------ ---------- ----------
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE PROVISION FOR INCOME TAXES (4,929) 14,160 61,363
PROVISION FOR INCOME TAXES 940 2,895 7,702
------------- ---------- ----------
INCOME (LOSS) FROM CONTINUING OPERATIONS (5,869) 11,265 53,661
------------ --------- ---------
DISCONTINUED OPERATIONS:
LOSS FROM DISCONTINUED OPERATIONS,
NET OF INCOME TAXES - - (230)
LOSS ON DISPOSAL OF DISCONTINUED OPERATIONS,
INCLUDING PROVISION FOR OPERATING LOSSES
DURING THE PHASE-OUT PERIOD, NET OF
INCOME TAXES - - (41,820)
---------------- ------------- ----------
LOSS FROM DISCONTINUED OPERATIONS,
NET OF INCOME TAXES - - (42,050)
---------------- ------------- ---------
INCOME (LOSS) BEFORE EXTRAORDINARY
LOSS (5,869) 11,265 11,611
EXTRAORDINARY LOSS ON EARLY
EXTINGUISHMENT OF DEBT (3,195) (48,559) (1,912)
------------ --------- ----------
NET INCOME (LOSS) $ (9,064) $(37,294) $ 9,699
=========== ======== =========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
F-5
<PAGE>
FOAMEX L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended 1998, 1997 and 1996
<TABLE>
<CAPTION>
December 31, December 28, December 29,
1998 1997 1996
OPERATING ACTIVITIES: (thousands)
<S> <C> <C> <C>
Net income (loss) $ (9,064) $ (37,294) $ 9,699
Adjustments to reconcile net income (loss) to net
cash provided by (used for) operating activities:
Depreciation and amortization 31,679 20,882 21,132
Amortization of debt issuance costs and debt discount (244) 2,307 2,919
Net loss on disposal of discontinued operations - - 40,551
Net loss from discontinued operations - - 1,499
Asset writedowns and other charges (credits) (5,507) 12,041 (7,364)
Extraordinary loss on early extinguishment of debt 2,857 24,182 1,217
Provision for uncollectible accounts 2,000 2,295 704
Deferred income taxes 267 (568) 6,010
Other, net (5,274) (5,977) (5,804)
Changes in operating assets and liabilities,
net of acquisitions
and discontinued operations:
Accounts receivable and accounts receivable from
related parties (19,026) (4,038) (13,130)
Inventories (20,288) 12,882 (13,078)
Accounts payable and accounts payable to related parties 13,530 14,359 5,035
Accrued restructuring and plant consolidation (14,183) 5,701 (7,000)
Other assets and liabilities (4,529) (24,763) (5,724)
--------- --------- ---------
Net cash provided by (used for) continuing operations (27,782) 22,009 36,666
Net cash used for discontinued operations - - (486)
------------ ------------- ----------
Net cash provided by (used for) operating activities (27,782) 22,009 36,180
-------- --------- --------
INVESTING ACTIVITIES:
Capital expenditures (31,715) (33,117) (23,344)
Acquisitions, net of cash acquired - (119,065) (841)
Proceeds from sale of assets 2,230 40,169 -
Proceeds from sale of discontinued operations - - 42,650
Purchase of note from related party - (5,000) -
Repayment of (purchase of) note from partner (2,490) (2,500) 18,623
Redemption of General Felt (10,153) - -
Decrease (increase) in restricted cash - 12,143 (12,143)
Capital expenditures for discontinued operations - - (919)
Other investing activities (922) 112 (1,276)
---------- ----------- ---------
Net cash provided by (used for) investing activities (43,050) (107,258) 22,750
--------- -------- ---------
FINANCING ACTIVITIES:
Net proceeds from (repayments of) short-term borrowings (3,641) 2,894 1,493
Net proceeds from (repayments of) revolving loans 84,511 54,928 -
Proceeds from long-term debt 138,810 594,499 1,500
Repayments of long-term debt (142,212) (430,593) (38,116)
Cash overdraft 7,300 - -
Purchase of FJPS senior secured discount debentures - (105,829) -
Tax distribution advances - (13,618) -
Distributions to partners (20,293) (10,283) (3,487)
Debt issuance costs (979) (18,410) -
Other financing activities 1,123 98 10
---------- ------------ ------------
Net cash provided by (used for) financing activities 64,619 73,686 (38,600)
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents (6,213) (11,563) 20,330
Cash and cash equivalents at beginning of period 9,405 20,968 638
---------- --------- ----------
Cash and cash equivalents at end of period $ 3,192 $ 9,405 $ 20,968
========= ========= ========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
F-6
<PAGE>
FOAMEX L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF PARTNERS' EQUITY (DEFICIT)
For the Years Ended 1998, 1997 and 1996
<TABLE>
<CAPTION>
Accumulated Notes
Notes Other Receivable
General Limited Receivable Comprehensive Related
Partners Partners from Partners Income (Loss) Party Total
(thousands)
<S> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1995 $ 404 $ 46,036 $(46,444) $(8,227) $(4,373) $(12,604)
Net income 184 9,515 9,699
Additional pension liability 2,372 2,372
Foreign currency translation adjustment (46) (46)
---------
Comprehensive income (loss) 12,025
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
-------- -------- -------- --------- ------- ---------
Balances at December 29, 1996 632 57,654 (35,180) (5,901) (4,373) 12,832
Net loss (746) (36,548) (37,294)
Additional pension liability (1,311) (1,311)
Foreign currency translation adjustment (873) (873)
---------
Comprehensive income (loss) (39,478)
Distributions (23) (1,099) (1,122)
Accretion of note receivable from partner 48 2,339 (2,387) -
Distributions associated with the June 1997
Refinancing Plan (2,896) (141,947) 37,567 (107,276)
Increase in note receivable from Trace (5,422) (5,422)
Purchase of note receivable from Foamex
International (2,500) (2,500)
Tax distribution advance (13,618) (13,618)
Other 282 282
Deficit balance of Limited Partners assumed
by General Partners (119,319) 119,319
-------- -------- -------- --------- ------- ---------
Balances at December 28, 1997 (122,304) - (16,118) (8,085) (9,795) (156,302)
Net loss (181) (8,883) (9,064)
Additional pension liability (11,525) (11,525)
Foreign currency translation adjustment (6,598) (6,598)
--------
Comprehensive income (loss) (27,187)
Distributions (8) (326) (334)
Distribution associated with the
GFI Transaction (400) (19,600) (20,000)
Equity adjustment associated with the
GFI Transaction 201 9,868 10,069
Purchase of note receivable from Foamex
International (2,490) (2,490)
Other 207 207
Deficit balance of Limited Partners assumed
by General Partners (18,734) 18,734 --
-------- -------- -------- --------- ------- ---------
Balances at December 31, 1998 $(141,426) $ - $(18,608) $(26,208) $(9,795) $(196,037)
========= ======== ======== ========= ======= =========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
F-7
<PAGE>
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION
Foamex L.P. is a manufacturer and distributor of flexible polyurethane
foam and advanced polymer foam products. As of December 31, 1998, Foamex L.P.'s
operations consists of the following operating segments: (i) foam products, (ii)
carpet cushion products, (iii) automotive products, (iv) technical products and
(v) other, which primarily consists of certain foreign manufacturing operations,
corporate expenses not allocated to the other operating segments and
restructuring and other charges. The net sales and income (loss) from operations
of these operating segments for each of the last three years are included in
Note 15 of the consolidated financial statements. For periods prior to February
27, 1998, the consolidated financial statements include the financial position,
results of operations and cash flows of General Felt Industries, Inc. ("General
Felt"). In connection with the GFI Transaction (as discussed below) the net
assets and operations of General Felt were transferred from Foamex L.P. and were
acquired by Foamex Carpet Cushion, Inc. ("Foamex Carpet"), a wholly owned
subsidiary of Foamex International Inc. ("Foamex International").
Foamex L.P. is a Delaware limited partnership. Effective February 27,
1998, Foamex L.P. became an indirect wholly owned subsidiary of Foamex
International. FMXI, Inc. ("FMXI") has a 2% managing general partnership
interest in Foamex L.P. Foamex International has a 98% limited partnership
interest in Foamex L.P. FMXI is a wholly owned subsidiary of Foamex
International.
The accompanying financial statements have been prepared assuming Foamex
L.P. will continue as a going concern. For the year ended December 31, 1998,
Foamex L.P. had a loss from continuing operations, a working capital deficit and
was not in compliance with certain debt covenants for which it is seeking
amendments. Such non-compliance provides the lenders under those agreements,
which have an aggregate outstanding principal amount of approximately $415.4
million, with the right, upon the notice and lapse of time to declare all of
such indebtedness to be due. To date, the lenders have not executed such rights
and have granted Foamex L.P. a waiver of such covenants through May 5, 1999,
which has been extended through June 30, 1999, to enable Foamex L.P. to
negotiate an amendment of such covenants; there can be no assurance that such
amendments will be obtained and therefore such indebtedness has been classified
as current in Foamex L.P.'s financial statements. Were the lenders under those
agreements to accelerate the maturity of their indebtedness, such acceleration
would constitute an event of default and substantially all of Foamex L.P.'s
long-term debt would become due. Therefore, Foamex L.P. has reclassified
approximately $715.8 million of long-term debt as current. Such classification
raises substantial doubt about Foamex L.P.'s ability to continue as a going
concern. In addition, Foamex L.P. has been informed by Trace International
Holdings, Inc. ("Trace") that Trace had substantial debt obligations that were
due at the end of December 1998 and did not have the financial resources to pay
those obligations. Subsequently, Trace informed Foamex L.P. that waivers and/or
modifications of such indebtedness had been obtained for at least the near
future; however, there can be no assurance that such waivers and/or
modifications will remain in effect prior to obtaining a permanent resolution.
If Trace were to default on its indebtedness secured by Foamex International's
common stock or other Trace creditors were to take steps constituting a default
under such indebtedness (such as filing an involuntary bankruptcy petition), and
if the holders of such secured indebtedness were to foreclose on Foamex
International's common stock held by Trace, such event could trigger the
acceleration and put rights of substantially all of the debt of Foamex L.P. as
described below. Although management believes that all such debt obligations
would be refinanced under such circumstances, there can be no assurance that
Foamex L.P. would be able to do so. The financial statements do not include any
adjustments that might result from the outcome of these uncertainties.
Certain credit agreements and promissory notes of Foamex L.P. pursuant to
which approximately $440.2 million of debt has been issued contain provisions
that would result in the acceleration of such indebtedness if Trace were to
cease to own at least 30% of the outstanding common stock of Foamex
International. Similarly, certain indentures of Foamex L.P. and Foamex Capital
Corporation relating to approximately $248.0 million of senior subordinated
notes contain provisions that provide the holders of such senior subordinated
notes with the right to require the issuers thereof to repurchase such senior
subordinated notes at a price in cash equal to 101% of the aggregate principal
amount thereof, plus accrued and unpaid interest thereon, if Trace falls below
certain specified
F-8
<PAGE>
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION (continued)
ownership levels of common stock and other persons or group owns a greater
percentage of common stock than Trace.
On March 16, 1998, Foamex International announced that its Board of
Directors received an unsolicited buyout proposal from Trace, Foamex
International's principal stockholder. Trace proposed to acquire all of the
outstanding common stock of Foamex International not owned by Trace and its
subsidiaries (the "Public Shares") for a cash price of $17.00 per share. As of
March 16, 1998, Trace 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's offer, Foamex International's Board of
Directors appointed a special committee to determine the advisability and
fairness of the proposed buyout to Foamex International's stockholders other
than Trace and its subsidiaries.
On June 25, 1998, Trace, Trace Merger Sub, Inc. ("Merger Sub"), a
Delaware corporation and wholly owned subsidiary of Trace, and Foamex
International entered into an Agreement and Plan of Merger (the "First Merger
Agreement"). Pursuant to the terms of the First Merger Agreement, Merger Sub
would have been merged with and into Foamex International (the "First Merger")
and each outstanding share of common stock, other than common stock held by
Trace and its subsidiaries, treasury shares, and common stock with respect to
which appraisal rights would have been perfected, would have been converted into
the right to receive $18.75 per share in cash. On November 5, 1998, Trace
terminated the First Merger Agreement, pursuant to its terms, due to the failure
of certain financing conditions contained in the First Merger Agreement.
On November 5, 1998, Trace, Merger Sub and Foamex International entered
into a second Agreement and Plan of Merger (the "Second Merger Agreement").
Pursuant to the terms of the Second Merger Agreement, Merger Sub would have been
merged with and into Foamex International (the "Second Merger") and each
outstanding share of common stock, other than common stock held by Trace and its
subsidiaries, treasury shares, and common stock with respect to which appraisal
rights would have been perfected, would have been converted into the right to
receive $12.00 per share in cash. Trace delivered a letter to Foamex
International, dated January 8, 1999 (the "Notice of Termination"), terminating
the Second Merger Agreement, pursuant to its terms, due to the failure of
certain financing conditions.
On December 23, 1997, Foamex International acquired Crain Industries,
Inc. ("Crain") pursuant to a merger agreement with Crain Holdings Corp. for a
purchase price of approximately $213.7 million, which was primarily funded with
$118.0 million of bank borrowings under the Foamex L.P. credit facility (the
"Credit Facility") and the assumption of debt with a face value of approximately
$98.6 million (and an estimated fair value of approximately $112.3 million) and
contributed all of the assets of Crain, subject to all of the liabilities of
Crain, to Foamex L.P. (the "Crain Acquisition"). In addition, fees and expenses
associated with the Crain Acquisition were approximately $13.2 million.
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. Intercompany accounts and transactions
for continuing operations have been eliminated in consolidation.
Fiscal Year
Effective September 1998, management of Foamex L.P. decided to change the
year-end reporting requirement of Foamex L.P. from a fifty-two or fifty-three
week fiscal year ending on the Sunday closest to the end of the calendar year to
a calendar year ending December 31st to improve the internal reporting
requirements of Foamex L.P. This change was effective for the third fiscal
quarter of 1998 which ended on September 30, 1998 and resulted in a 1998 fiscal
year end of December 31, 1998 as compared to January 3, 1999. Fiscal years 1997
and 1996 were composed of fifty-two weeks and ended on December 28, 1997 and
December 29, 1996, respectively.
F-9
<PAGE>
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Accounting Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
contingent assets and contingent 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.
Revenue Recognition
Revenue from sales is recognized when products are shipped at which time
title passes to the customer.
Sales Discounts
A reduction in sales revenue is recognized for sales discounts when
product is invoiced.
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.
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 1998, 1997 and
1996 was $24.6 million, $17.6 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 effective interest method. Accumulated amortization as of December 31,
1998 and December 28, 1997 was approximately $2.9 million and $1.4 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 and cash flows from operations based
on a going concern basis. Accumulated amortization as of December 31, 1998 and
December 28, 1997 was
F-10
<PAGE>
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
approximately $10.6 million and $12.0 million, respectively. During 1998, Foamex
L.P. recorded a reduction of cost in excess of net assets acquired of
approximately $2.3 million associated with a Montreal Canada facility.
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.
Comprehensive Income
As of December 28, 1997, Foamex L.P. adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS No. 130"),
issued in June 1997. SFAS No. 130 requires the reporting and display of
comprehensive income, which is composed of net income and other comprehensive
income or loss items, in a full set of general purpose financial statements.
Other comprehensive income or loss items are revenues, expenses, gains and
losses that under generally accepted accounting principles are excluded from net
income and reflected as a component of equity, such as currency translation and
minimum pension liability adjustments.
Foreign Currency Accounting
The financial statements of foreign subsidiaries, except in countries
treated as highly inflationary (Mexico), have been translated into U.S. dollars
by using the year end exchange rates for the assets and liabilities and average
exchange 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, such as Mexico for 1998 and 1997, 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. 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. Effective in the
first quarter of 1999, the financial results of the Mexican operations will not
be accounted for as highly inflationary.
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 asset and 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.
F-11
<PAGE>
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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 and for subsidiaries located in foreign
jurisdictions that file separate tax returns. 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. were 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 7).
Reclassifications
Certain amounts in the 1997 and 1996 consolidated
financial statements have been reclassified to conform with the current
year's presentation.
3. ACQUISITIONS
On December 23, 1997, Foamex International 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) and contributed all of the assets of Crain, subject to all of
the liabilities of Crain, to Foamex L.P. In addition, fees and expenses
associated with the Crain Acquisition were approximately $13.2 million. In
connection with the Crain Acquisition, Foamex L.P. approved a
restructuring/consolidation plan for the two entities. Foamex L.P. recorded
restructuring charges of $21.1 million in 1997 relating to the restructuring of
Foamex L.P.'s operations in connection with the Crain Acquisition and related
transactions. In addition, in 1997 Foamex L.P. recorded approximately $1.5
million of severance and related costs and $8.5 million for costs associated
with the shut down and consolidation of certain facilities acquired in the Crain
Acquisition. (See Note 4.)
The Crain Acquisition was accounted for as a purchase and the operations
of Crain have been included in the consolidated statements of operations and
cash flows from its date of acquisition. However, Crain's operations for the
period from December 24, 1997 to December 28, 1997 have not been included in the
1997 consolidated statements of operations or cash flows since the effect would
be insignificant. The cost of the Crain Acquisition has been allocated on the
basis of the fair value of the assets acquired and the liabilities assumed.
During 1998, Foamex L.P. increased the cost in excess of the net assets acquired
by approximately $11.2 million as a result of the finalization of the fixed
asset appraisal and updated estimates of certain former Crain facilities. The
excess of the purchase price over the estimated fair value of the net assets
acquired of $164.2 million is being amortized using the straight-line method
over forty years.
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
better position itself to achieve its strategic growth objectives. Foamex L.P.
recorded restructuring and other charges of $39.2 million which were 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 represented severance and employee benefit costs
associated with the elimination of manufacturing and administrative personnel.
F-12
<PAGE>
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. RESTRUCTURING AND OTHER CHARGES (CREDITS) (continued)
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. 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").
During December 1997, Foamex L.P. approved a restructuring plan (the
"1997 restructuring plan") to consolidate nine foam production, fabrication or
branch locations in connection with the Crain Acquisition. (See Note 3.) Foamex
L.P. recorded restructuring and other charges of $21.1 million which was
comprised of $23.0 million associated with the consolidation of the foam
production, fabrication or branch locations offset by $1.9 million of
restructuring credits due primarily to the favorable termination of certain
lease agreements and other matters associated with the 1996 and 1995
restructuring plans. The components of the $23.0 million restructuring charge
include: $12.1 million for fixed assets writedowns (net of estimated sale
proceeds), $9.8 million for plant closure and operating lease obligations and
$1.1 million for personnel reductions.
In addition, during 1997, Foamex L.P. approved a consolidation plan to
integrate the acquired Crain facilities into Foamex L.P.'s existing facilities.
Foamex L.P. recorded approximately $1.5 million of severance and related costs
and $8.5 million for costs associated with the shut down of certain acquired
facilities.
During 1998, Foamex L.P. determined to continue to operate two facilities
originally identified for closure in the 1997 restructuring plan. One facility
remained open to fill lost capacity resulting from a fire in April 1998 at the
Orlando facility, which is expected to be at full production during the second
quarter of 1999. The other facility remained open during 1998 due to improved
demand on the West Coast. The 1997 restructuring plan also included the closure
of two facilities associated with the packaging business. Foamex L.P. intends to
sell the packaging business during 1999 and does not expect to incur the asset
write-down and lease costs as originally planned. As a result, Foamex L.P.
recorded a $14.8 million restructuring credit associated with the 1997
restructuring plan. The components of the $14.8 million restructuring credit
include: $10.2 million for fixed asset write-downs, $3.5 million for plant
closure and operating lease obligations and $1.1 million for personnel
reductions.
In addition, Foamex L.P. recorded restructuring and other charges of $4.7
million during 1998 to reserve for approximately $2.4 million of net receivables
due from Trace and to write-down approximately $2.3 million of impaired goodwill
associated with a foreign facility. Also during 1998, Foamex L.P. incurred
additional plant closure costs of $5.2 million and personnel reduction costs of
$1.2 million associated with the closure of the former Crain facilities. The
additional costs associated with the closure of the former Crain facilities
resulted in an increase to goodwill.
Except as discussed above, the 1997 and 1996 restructuring plans have
been generally implemented as originally contemplated. The following table sets
forth the components of Foamex L.P.'s restructuring and other charges:
F-13
<PAGE>
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. RESTRUCTURING AND OTHER CHARGES (CREDITS) (continued)
<TABLE>
<CAPTION>
Asset Plant Closure Personnel
Total Writedowns and Leases Reductions Other
(millions)
<S> <C> <C> <C> <C> <C>
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 -
Cash spending (2.3) - (1.4) (0.9) -
1997 restructuring charge 23.0 12.1 9.8 1.1 -
Restructuring credits (1.9) 0.1 (2.3) 0.3 -
Asset write-off/writedowns (16.1) (16.1) - - -
Plant consolidation costs 10.0 - 8.5 1.5 -
------ ------ ----- ----- ------
Balances at December 28, 1997 21.2 (5.7) 23.5 3.4 -
Cash spending (15.3) - (11.8) (3.5) -
Cash proceeds 2.1 2.1 - - -
1998 restructuring charge 4.7 4.7 - - -
1998 restructuring credit (14.8) (10.2) (3.5) (1.1) -
Accruals transferred in connection
with the GFI Transaction (3.7) (0.6) (3.1) - -
Asset write-off/writedowns (5.6) (4.8) (0.8) - -
Reclassified fixed asset basis
for restructuring credit 8.8 8.8 - - -
Plant consolidation costs 6.4 - 5.2 1.2 -
------ ------ ----- ----- ------
Balances at December 31, 1998 $ 3.8 $ (5.7) $ 9.5 $ - $ -
===== ====== ===== ======= ======
</TABLE>
As indicated in the table above, the accrued restructuring and plant
consolidation balance at December 31, 1998 will be used for payments relating to
plant closures and leases including rundown costs at the facilities. The $5.7
million of asset writedowns relates to estimated proceeds from the sale of
assets and is included in noncurrent assets. Foamex L.P. expects to pay
approximately $2.5 million of costs during 1999 with the remaining $7.0 million
to be paid through 2006.
5. INVENTORIES
Inventories consists of:
<TABLE>
<CAPTION>
December 31, 1998 December 28, 1997
(thousands)
<S> <C> <C>
Raw materials and supplies $ 93,241 $ 75,487
Work-in process 12,087 15,620
Finished goods 22,308 29,192
---------- ----------
Total $127,636 $120,299
======== ========
</TABLE>
F-14
<PAGE>
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. SHORT-TERM BORROWINGS
Short-term borrowings represent borrowings outstanding under a line of
credit facility for Foamex Canada Inc. ("Foamex Canada") bearing interest at the
bank's prime rate (6.75% at December 31, 1998) plus 1/2%. The weighted average
interest rates on Foamex Canada's short-term borrowings outstanding for 1998,
1997 and 1996 were 7.3%, 5.4% 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 $17.7 million as of December 31, 1998. The unused amount under
this line of credit totaled approximately $2.3 million as of December 31, 1998.
7. CURRENT PORTION OF LONG-TERM DEBT, LONG-TERM DEBT AND EXTRAORDINARY LOSS
For the year ended December 31, 1998, Foamex L.P. had a loss from
continuing operations, a working capital deficit and was not in compliance with
certain debt covenants for which it is seeking amendments. Such non-compliance
provides the lenders under those agreements, which have an aggregate outstanding
principal amount of approximately $415.4 million, upon notice and lapse of time
to declare all of such indebtedness to be due. Notwithstanding the fact that to
date the lenders have not executed such rights and have granted Foamex L.P.
waivers of such covenants through May 5, 1999, which has been extended through
June 30, 1999, to enable Foamex L.P. to negotiate an amendment of such
covenants; however, there can be no assurance that such amendments will be
obtained and therefore such indebtedness has been classified as current in
Foamex L.P.'s financial statements. Were the lenders under those agreements to
accelerate the maturity of their indebtedness, such acceleration would
constitute an event of default and substantially all of Foamex L.P.'s long-term
debt would become due. Therefore, Foamex L.P. has reclassified approximately
$715.8 million of long-term debt as current. Such classification raises
substantial doubt about Foamex L.P.'s ability to continue as a going concern.
Current portion of long-term debt and long-term debt consists of:
<TABLE>
<CAPTION>
December 31, December 28,
1998 1997
----------- ----------
Credit Facility: (thousands)
<S> <C> <C>
Term Loan A (1) $ - $ 76,700
Term Loan B (1) 82,714 109,725
Term Loan C (1) 75,194 99,750
Term Loan D (1) 108,900 110,000
Revolving credit facility (1) 139,438 54,928
9 7/8% Senior subordinated notes due 2007 (2) 150,000 150,000
13 1/2% Senior subordinated notes due 2005 (includes
$11,893 and $13,720 of unamortized debt premium) (2) 109,893 111,720
9 1/2% Senior secured notes due 2000 (3) - 4,523
Industrial revenue bonds (4) 7,000 7,000
Subordinated note payable (net of unamortized
debt discount of $523 and $1,198) (4) 6,491 6,129
Other 9,848 8,335
----------- --------
689,478 738,810
Less current portion 689,478 12,161
----------- --------
Long-term debt-unrelated parties $ - $726,649
=========== ========
Current portion of long-term debt - related party consists of:
Foamex/GFI Note (4) $ 34,000 $ -
=========== ========
</TABLE>
F-15
<PAGE>
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. CURRENT PORTION OF LONG-TERM DEBT, LONG-TERM DEBT AND EXTRAORDINARY LOSS
(1) Debt of Foamex L.P., guaranteed by Foamex International and Foamex Capital
Corporation ("FCC")
(2) Debt of Foamex L.P. and FCC.
(3) Debt of Foamex L.P. and FCC, guaranteed by Foamex International.
(4) Debt of Foamex L.P.
Credit Facility
On June 12, 1997, Foamex L.P. entered into the Credit Facility with a
group of banks that provides for term loans of up to $440.0 million which expire
from June 2003 to December 2006 and borrowings of up to $150.0 million under a
revolving line of credit which expires in June 2003. The term loans are
comprised of: (i) term A loan ("Term A") which provides up to $120.0 million of
borrowings, (ii) term B loan ("Term B") of $110.0 million, (iii) term C loan
("Term C") of $100.0 million and (iv) term D loan ("Term D") of $110.0 million.
In connection with the GFI Transaction (See Note 9), Foamex L.P. amended
its agreements with the lenders under the Credit Facility, which included
additional borrowings of $129.0 million under new term loan agreements that were
subsequently assumed by Foam Funding LLC 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 during June 1998, (iii) repay $4.8
million of indebtedness owed to General Felt, (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,
subject to a $2.5 million quarterly reduction of the availability under the
revolving credit facility effective September 30, 1998, with $34.5 million of
the increased availability used for a letter of credit to support the Foamex/GFI
Note (described below).
Borrowings under the Credit Facility are collateralized by substantially
all of the assets of Foamex L.P. on a pari passu basis with the IRBs (described
below); however, the rights of the holders of the applicable issue of IRBs to
receive payment upon the disposition of the collateral securing such issue of
IRBs has been preserved.
Pursuant to the terms of the 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 based on 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, from 1.125% per annum to 1.625% per annum for Term C and
from 1.250% per annum to 1.750% per annum for Term D ("Base Rate Interest
Loans"). At the option of Foamex L.P., portions of the outstanding loans under
the 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. Pursuant to a March 11, 1999 amendment to the Credit
Facility, the applicable margin for revolving loans as Base Rate Interest Loans
as determined based on the total net debt to EBDAIT ratio will range from 1.50%
per annum to 2.25% per annum and the applicable margins for Term B, Term C and
Term D as Base Rate Interest Loans will be fixed at 2.50% per annum, 2.75% per
annum and 2.875% per annum, respectively. The applicable margin for LIBOR based
loans will equal the applicable margin for Base Rate Interest Loans plus 1.0%
per annum. As of December 31, 1998, the interest rate for revolver borrowings,
Term B, Term C and Term D were 7.80%, 8.00%, 8.25% and 8.4375%, respectively.
Foamex L.P. had a credit agreement (the "Foamex L.P. Old Credit
Facility") with a group of banks that provided for loans of up to $85.0 million
of which up to $40.0 million was available as a term loan and $45.0 million was
available under a revolving line of credit. During 1997, Foamex L.P. used $3.8
million of net proceeds from the Perfect Fit Industries, Inc. ("Perfect Fit")
sale to repay term loan borrowings. The term loan was repaid in connection with
the refinancing plan (described below).
F-16
<PAGE>
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. CURRENT PORTION OF LONG-TERM DEBT, LONG-TERM DEBT AND EXTRAORDINARY LOSS
(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
connection with the 1997 Refinancing Plan. The Senior Subordinated Notes
represent uncollateralized general obligations of Foamex L.P. and are
subordinated to all Senior Debt (as defined in the Indenture). 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 13 1/2% Senior Subordinated Notes and the Subordinated Note Payable
(described below).
13 1/2% Senior Subordinated Notes due 2005, Series B ("13 1/2% Senior
Subordinated Notes")
The 13 1/2% Senior Subordinated Notes were issued by Foamex L.P. and FCC
in connection with the Crain Acquisition. The 13 1/2% Senior Subordinated Notes
represent uncollateralized 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 bear interest at the rate of 13 1/2% per annum payable
semiannually on each February 15 and August 15. The 13 1/2% Senior Subordinated
Notes mature on August 15, 2005. The 13 1/2% Senior Subordinated Notes may be
redeemed at the option of Foamex L.P., in whole or in part, at any time on or
after August 15, 2000, initially at 106.75% of their principal amount, plus
accrued interest, if any, thereon to the date of redemption and declining to
100.0% on or after August 15, 2004. Upon the occurrence of a change of control,
as defined, each holder of the 13 1/2% Senior Subordinated Notes will have the
right to require Foamex L.P. to repurchase the 13 1/2% 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 13 1/2% Senior
Subordinated Notes are subordinated in right of the payment of all senior
indebtedness and are pari passu in right of payment to the Senior Subordinated
Notes and to the Subordinated Note Payable (described below).
9 1/2% Senior Secured Notes due 2000 ("Senior Secured Notes")
The Senior Secured Notes were issued on June 3, 1993 with interest at the
rate of 9 1/2% payable semiannually on each June 1 and December 1. The Senior
Secured Notes had a maturity date of June 1, 2000. The Senior Secured Notes were
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 were defeased in February 1998 and redeemed in June 1998.
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 $11.1 million at
December 31, 1998 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 4.0% and 3.4% at
December 31, 1998 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
F-17
<PAGE>
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. CURRENT PORTION OF LONG-TERM DEBT, LONG-TERM DEBT AND EXTRAORDINARY LOSS
(continued)
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 John Rallis, the former 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. 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 31, 1998, other debt is comprised primarily of capital
lease obligations and borrowings by Foamex Mexico.
Foamex/GFI Note
In connection with the transfer of General Felt's common stock in the GFI
Transaction (see Note 9), Foamex L.P. entered into the $34.0 million Foamex/GFI
Note to settle an existing intercompany note payable to General Felt, which was
retained by Foam Funding LLC in connection with the asset purchase agreement for
the GFI Transaction. The principal and current interest payable under the
Foamex/GFI Note are secured by a $34.5 million letter of credit issued under the
Credit Facility. The principal amount is due upon maturity in March 2000.
Pursuant to the terms of the Foamex/GFI Note, the note will bear interest
at a floating rate equal to the higher of (i) the base rate of the Holder, as
defined, 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. At the option of
Foamex L.P., interest payable under the note is converted into a LIBOR based
interest rate at a floating rate equal to the sum of 0.75% per annum plus the
average LIBOR, as defined. As of December 31, 1998, the interest rate for
borrowings was 6.3125%.
Refinancing Plan
On June 12, 1997, Foamex International substantially completed a
refinancing plan (the"1997 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 1997 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 the Foamex L.P. Old Credit Facility. The 1997 Refinancing
Plan was funded by $347.0 million of borrowings under Credit Facility and the
net proceeds from the issuance of $150.0 million of Senior Subordinated Notes.
In connection with the 1997 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 1997 Refinancing Plan, Foamex L.P. repaid
$5.2 million in term loan borrowings under the Foamex L.P. Old Credit Facility
and purchased approximately $459.0 million of aggregate principal amount of
public debt comprised of:
F-18
<PAGE>
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. CURRENT PORTION OF LONG-TERM DEBT, LONG-TERM DEBT AND EXTRAORDINARY LOSS
(continued)
o $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%;
o $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%;
o $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%;
o $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
o $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, on October 1, 1997, Foamex L.P. redeemed all of the
outstanding: (i) 11 1/4% senior notes due 2002, (ii) 11 7/8% senior subordinated
debentures due 2004 and (iii) the 11 7/8% senior subordinated debentures due
2004, Series B, constituting approximately $26.2 million of the approximately
$30.7 million of its outstanding public debt that was not tendered as part of
the 1997 Refinancing Plan. These redemptions were funded from borrowings under
the Credit Facility. In connection with these redemptions, Foamex L.P. incurred
an extraordinary loss on the early extinguishment of debt of approximately $2.1
million.
Early Extinguishment of Debt - Other
In connection with the GFI Transaction, Foamex L.P. incurred
extraordinary losses of approximately $3.2 million associated with the early
extinguishment of approximately $125.1 million of term loans under the Credit
Facility funded with $129.0 million of new term loan agreements assumed by Foam
Funding LLC (see Note 9). The extraordinary loss was generated entirely from the
write-off of debt issuance costs.
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:
o $2.5 million of aggregate principal amount of its 9 1/2% senior secured
notes due 2000.
o $5.5 million of aggregate principal amount of its 11 1/4% senior notes due
2002.
o Bank term loan borrowings of $3.8 million under the Foamex L.P. Old Credit
Facility.
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.
F-19
<PAGE>
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. CURRENT PORTION OF LONG-TERM DEBT, LONG-TERM DEBT AND EXTRAORDINARY LOSS
(continued)
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.
In connection with the 1997 Refinancing Plan, Foamex L.P.'s then 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 1997 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 then existing interest
rate swap agreements, Foamex L.P. entered into an amendment of the then 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 through June 2007. On January 8, 1998, Foamex L.P. entered
into a new amendment to its interest rate swap agreement. The new amendment
provided for an interest rate swap agreement with a notional amount of $150.0
million through June 2002. In September 1998, Foamex L.P. sold its existing
interest rate swap agreement for a net gain of approximately $1.0 million.
Accordingly, the $1.0 million gain has been recorded as a deferred credit which
will be amortized through June 2007, which is the maturity date of the
underlying debt.
The effect of the interest rate swaps resulted in a decrease in interest
and debt issuance expense of $0.7 million, $2.2 million and $3.7 million for
1998, 1997 and 1996, respectively.
Debt Restrictions and Covenants
The indentures, Credit Facility and other indebtedness agreements contain
certain covenants that limit, among other things to varying degrees, 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 (v) to enter into
certain transactions with affiliates or related persons. In addition, certain
agreements contain a provision that, in the event of a defined change of control
or the occurrence of an undefined material adverse change in the ability of the
obligor to perform its obligations, the indebtedness must be repaid, in certain
cases at the option of the holder (see Note 1). Also, Foamex L.P. is required
under certain of these agreements to maintain specified financial ratios of
which the most restrictive are the maintenance of net worth and interest, fixed
charge and leverage coverage ratios, as defined. Under the most restrictive of
the distribution restrictions, Foamex L.P. can make distributions to Foamex
International only to the extent to enable Foamex International to meet its
operating and debt obligations.
Foamex L.P. amended the Credit Facility on March 11, 1999. The amendment
adjusted financial covenants, among other things, as of December 31, 1998 and
provided for future measurement periods taking into account Foamex L.P.'s
estimated operating results and financial condition for 1998 and management
expectations regarding future measurement periods. As the Foamex L.P. actual
1998 net loss was greater than originally estimated, on April 15, 1999, Foamex
L.P. obtained a waiver through May 5, 1999, which has been extended through June
30, 1999, of the financial covenants contained in the Credit Facility and
certain events of default arising out of its Mexican operations, in order to
enable Foamex L.P. to negotiate a further amendment of the Credit Facility.
F-20
<PAGE>
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. CURRENT PORTION OF LONG-TERM DEBT, LONG-TERM DEBT AND EXTRAORDINARY LOSS
(continued)
Future Obligations on Debt
Scheduled maturities of total long-term debt and long-term debt - related
party prior to reclassification as current are shown below (thousands):
<TABLE>
<CAPTION>
Year Ended Long-Term Debt
---------- --------------
<S> <C>
1999 $ 7,668
2000 7,944
2001 7,944
2002 4,122
2003 192,517
Thereafter 491,913
--------
Total 712,108
Unamortized debt premium, net 11,370
--------
Total $723,478
========
</TABLE>
8. EMPLOYEE BENEFIT PLANS
Foamex L.P. adopted, during the fourth quarter of 1998, Statement of
Financial Accounting Standards No. 132, "Employees Disclosure about Pension and
Other Postretirement Benefits" ("SFAS No. 132") which revised the required
disclosures about pension and other postretirement benefit plans.
Defined Benefit Pension Plans
Foamex L.P. maintains noncontributory defined benefit pension plans (the
"Plans") for salaried and certain hourly employees of Foamex L.P. and Foamex
Carpet. 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.
Net periodic pension cost included the following components:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
(thousands)
<S> <C> <C> <C>
Service cost $2,833 $2,229 $2,471
Interest cost 4,517 4,273 3,997
Expected return on plan assets (5,758) (5,357) (4,205)
Amortization of:
Transition (asset/obligation) (75) (75) (75)
Prior service cost (245) (245) (245)
(Gain)/Losses and other 104 72 327
------ ------- ------
Total $1,376 $ 897 $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"). Foamex Carpet's
allocated net periodic costs was approximately $0.4 million during 1998. The
Plans purchased 250,000 shares of Foamex International's stock in 1994 for $2.5
million and 150,000 shares in 1995 for $1.5 million. The value of the Plans'
investment in Foamex International's stock was approximately $5.2 million and
$4.6 million at December 31, 1998 and 1997, respectively. The Plans purchased
approximately $2.5 million of shares of Trace Global Opportunities Fund during
each of 1995 and 1997. The value of the Plans' investment in Trace Global
Opportunities Fund, which primarily
F-21
<PAGE>
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. EMPLOYEE BENEFIT PLANS (continued)
invests in companies organized or operating outside the G-7 markets and is a
related party to Trace, is approximately $4.3 million and $8.7 million at
December 31, 1998 and 1997, respectively. During 1998, the Plans purchased
234,000 shares of United Auto Group ("UAG") stock for approximately $4.8
million. The value of the Plans' investment in UAG, which is a related party to
Trace, is $2.3 million at December 31, 1998. The Plans' investments consist
primarily of corporate equity and debt securities, mutual life insurance funds
and cash equivalents.
During 1998, the discount rate was adjusted to 6.5%. 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,
1998 and December 28, 1997:
<TABLE>
<CAPTION>
December 31, December 28,
1998 1997
(thousands)
Change in Benefit Obligation:
<S> <C> <C>
Benefit obligations at end of prior year $65,948 $58,775
Service cost 2,833 2,229
Interest cost 4,517 4,273
Benefits paid (annuities and lump sums) (4,043) (3,636)
Actuarial loss/(gain) 5,334 4,307
--------- --------
Projected benefit obligation $74,589 $65,948
========= ========
Change in Plan Assets:
Fair value of plan assets at end of prior year $58,952 $53,734
Actual return on plan assets 439 6,308
Company contributions 200 2,546
Benefits paid (4,043) (3,636)
Other (2) -
--------- --------
Fair value of plan assets $55,546 $58,952
========= ========
Funded Status of the Plan:
Plan assets in excess of/(less than) benefit obligation $(19,042) $ (6,996)
Unamortized transition (asset) obligation (740) (815)
Unamortized prior service cost (2,397) (2,642)
Unamortized net (gains)/losses 18,711 8,160
--------- --------
Net prepaid assets/(accrued liabilities) $ (3,468) $ (2,293)
========= ========
Total Recognized Amounts in the Statement of Financial Position:
Prepaid benefit costs $ 1,200 $ 1,749
--------- --------
Accrued benefit liability (20,150) (6,275)
Intangible assets 239 263
Accumulated other comprehensive income 15,243 1,970
--------- --------
Net amount recognized $ (3,468) $ (2,293)
========= ========
Significant assumptions used in determining the plans' funded status are
as follows:
December 31, December 28,
1998 1997
Expected long-term rates of return on plan assets 10.00% 10.00%
Discount rates on projected benefit obligations 6.50% 7.00%
</TABLE>
F-22
<PAGE>
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. EMPLOYEE BENEFIT PLANS (continued)
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 of
Foamex L.P. and Foamex Carpet who elect to participate in the plan. Employee
contributions are voluntary and subject to certain limitations as imposed by the
Code. Foamex L.P. provides contributions amounting to a 25% match of its
employees' contributions up to 4% of eligible compensation. Foamex L.P. also
provides an additional 25% match of its employees' contributions up to 4% of
eligible compensation made to a fund which invests in Foamex International's
common stock. In addition, Foamex L.P. may make discretionary contributions
amounting to a 25% match of its employees' contributions up to 4% of eligible
compensation. The expense for these contributions for 1998, 1997 and 1996 was
approximately $0.8 million, $0.9 million and $0.8 million, respectively. During
1998, Foamex Carpet contributed approximately $0.1 million to the plan for
matching contribution expense for its employees.
Postretirement Benefits
In addition to providing pension benefits, Foamex L.P. provides
postretirement health care and life insurance for eligible employees. These
plans are unfunded and Foamex L.P. retains the right, subject to existing
agreements, to modify or eliminate these benefits.
The components of 1998, 1997 and 1996 expense for postretirement benefits
are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
(thousands)
<S> <C> <C> <C>
Service costs $10 $ 9 $ 12
Interest cost 46 71 67
Amortization of:
Prior service costs (35) (35) (27)
(Gains)/losses and other (29) (21) (26)
Special termination/curtailment loss - 74 576
---- ---- ----
Net periodic postretirement benefit cost $ (8) $ 98 $602
==== ==== ====
</TABLE>
During 1996, certain employees accepted an early retirement program
resulting in a special termination loss of $0.6 million.
The following table sets forth the funded status of Foamex L.P.'s
postretirement plans and the amounts recognized in the accompanying consolidated
balance sheets as of December 31, 1998 and December 28, 1997:
<TABLE>
<CAPTION>
December 31, December 28,
1998 1997
(thousands)
Change in Benefit Obligation:
<S> <C> <C>
Benefit obligations at end of prior year $ 927 $ 1,012
Service cost 10 9
Interest cost 46 71
Employee contributions 27 28
Benefits paid (annuities and lump sums) (312) (220)
Actuarial Loss/(Gain) (47) (47)
Special termination benefits - 74
------- -------
Projected benefit obligation $ 651 $ 927
======= =======
</TABLE>
F-23
<PAGE>
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. EMPLOYEE BENEFIT PLANS (continued)
<TABLE>
<CAPTION>
December 31, December 28,
1998 1997
(thousands)
Change in Plan Assets:
<S> <C> <C>
Fair value of plan assets at end of prior year $ - $ -
Company contributions 285 192
Employee contributions 27 28
Benefits paid (annuities and lump sums) (312) (220)
---------- ----------
Fair value of plan assets $ - $ -
========== ==========
Funded Status of the Plan:
Plan assets in excess of/(less than) benefit obligation $ (651) $ (927)
Unamortized prior service cost (442) (477)
Unamortized net (gains)/losses (573) (555)
---------- ----------
Net prepaid assets/(accrued liabilities) $ (1,666) $ (1,959)
========== ==========
</TABLE>
The net accrued benefit liability recognized at December 31, 1998 and
December 28, 1997 resulted in an unfunded obligation of $1.7 million and $2.0
million, respectively.
A 6% and 8% annual rate of increase in the per capita costs of covered
health care benefits was assumed for each of 1998 and 1997, 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 6.5% and
7.0% as of December 31, 1998 and December 28, 1997, 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, 1998 and December 28, 1997,
Foamex L.P.'s liability for postemployment benefits was insignificant for each
period.
9. DISCONTINUED OPERATIONS AND DIVESTITURES
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 the home
comfort products segment. Actual and estimated transaction expenses related to
the sale totaled approximately $1.5 million. Foamex L.P. 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.
Divestitures
On February 27, 1998, Foamex International, Foamex L.P. and certain of
their affiliates completed a series of transactions designed to simplify the
structure of Foamex International and Foamex L.P. and to provide future
operational flexibility (collectively, the "GFI Transaction"). 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 and (ii) Foamex L.P. defeased the $4.5 million
outstanding principal amount of its 9 1/2% senior secured notes due 2000. Foamex
L.P. settled its intercompany payables to General Felt with $4.8 million in cash
and a $34.0 million principal promissory note supported by a $34.5 million
letter of credit under the
F-24
<PAGE>
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. DISCONTINUED OPERATIONS AND DIVESTITURES (continued)
Credit Facility (the "Foamex/GFI Note"). The initial transaction resulted in the
transfer from Foamex L.P. to Foam Funding LLC, an indirect wholly owned
subsidiary of Trace, of all of the outstanding common stock of General Felt in
exchange for (i) the assumption by Foam Funding LLC of $129.0 million of Foamex
L.P.'s indebtedness and (ii) the transfer by Foam Funding 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, Foam Funding 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 cash, 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 Foam Funding LLC in the aggregate principal amount of $70.2 million. The
$20.0 million cash payment was funded with a distribution by Foamex L.P. to
Foamex International. As part of these transactions, FMXI 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. Foamex Carpet conducts the carpet cushion business previously
conducted by General Felt.
No gain has been recognized on the GFI Transaction. The impact of the GFI
Transaction was an increase in Foamex L.P.'s partners' capital (deficit) of
approximately $10.1 million, a distribution of $20.0 million to Foamex
International and approximately $1.5 million of fees charged to earnings. The
$129.0 million of debt assumed by Foam Funding LLC in the GFI Transaction was
used to repay approximately $125.1 million of term loan borrowings that was
accounted for as an extinguishment of debt which resulted in an extraordinary
loss of approximately $3.2 million. The 1% non-managing general partnership
interest acquired in connection with the GFI Transaction was accounted for as a
redemption of equity. The GFI Transaction used cash of approximately $10.2
million. The non-cash portion was insignificant.
10. OTHER INCOME
Other income (expense), net for 1998 primarily consists, among other
things, $3.0 million of foreign currency translation and transaction losses,
$1.5 million of fees and $1.0 million of continuing costs related to the GFI
Transaction, and other expenses offset by approximately $3.4 million of interest
income.
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 to Bretlin, Inc. for an
aggregate sale price of approximately $41.0 million. Foamex L.P. realized an
insignificant gain on the sale in 1997. Foamex L.P. used $38.8 million of the
net sale proceeds to repay outstanding term loan borrowings under the Credit
Facility. In connection with this repayment, Foamex L.P. incurred an
extraordinary loss on the early extinguishment of debt of approximately $0.9
million during 1997.
11. INCOME TAXES
Income (loss) from continuing operations before provision for income
taxes consists of the following:
<TABLE>
<CAPTION>
1998 1997 1996
(thousands)
<S> <C> <C> <C>
United States $ 5,364 $15,076 $58,277
Foreign (10,293) (916) 3,086
-------- ---------- ---------
Income (loss) from continuing operations
before provision (benefit) for income taxes $(4,929) $14,160 $61,363
======== ======= =======
</TABLE>
F-25
<PAGE>
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. INCOME TAXES (continued)
The components of the total consolidated provision (benefit) for income
taxes are summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ -----------
(thousands)
<S> <C> <C> <C>
Continuing operations $ 940 $ 2,895 $ 7,702
Discontinued operations - - (2,606)
------ -------- --------
Total consolidated provision (benefit)
for income taxes $ 940 $ 2,895 $ 5,096
====== ======== ========
The total consolidated provision (benefit) for income taxes is summarized
as follows:
1998 1997 1996
------------ ------------ ------------
Current: (thousands)
Federal $ - $ 1,958 $ 220
State - 1,007 686
Foreign 673 498 786
------ -------- --------
Total current 673 3,463 1,692
------ -------- --------
Deferred:
Federal 318 (247) 1,665
State - (87) 1,248
Foreign (51) (234) 491
------ -------- --------
Total deferred 267 (568) 3,404
------ -------- --------
Total consolidated provision (benefit) for income taxes $ 940 $ 2,895 $ 5,096
====== ======== ========
</TABLE>
The tax effect of the temporary differences that give rise to significant
deferred tax assets and liabilities are:
<TABLE>
<CAPTION>
December 31, December 28,
1998 1997
Deferred tax assets: (thousands)
<S> <C> <C>
Inventory basis differences $ - $ 422
Employee benefit accruals - 860
Allowances and contingent liabilities - 2,968
Restructuring and plant closing accruals - 2,514
Other - 373
Net operating loss carryforwards - -
Capital loss carryforwards - 9,097
Valuation allowance for deferred tax assets - (9,097)
-------- --------
Deferred tax assets - 7,137
-------- --------
Deferred tax liabilities:
Basis difference in property, plant and equipment 991 2,623
Other 1,098 193
-------- --------
Deferred tax liabilities 2,089 2,816
-------- -------
Net deferred tax assets (liabilities) $(2,089) $ 4,321
======== =======
</TABLE>
F-26
<PAGE>
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. INCOME TAXES (continued)
During 1998, the valuation allowance for deferred tax assets and net
deferred tax assets decreased by $9.1 million primarily due to the reduction of
capital loss carryforwards associated with the transfer of General Felt's common
stock in connection with the GFI Transaction (see Note 9). In addition, deferred
tax assets were decreased by $6.1 million associated with the transfer of
General Felt net assets in connection with the GFI Transaction.
A reconciliation of the statutory federal income tax rate to the
effective income tax rate on continuing operations is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
(thousands)
<S> <C> <C> <C>
Statutory income taxes $(1,725) $ 4,956 $21,477
State income taxes, net of federal 300 785 1,288
Permanent difference on partnership income (1,570) (2,119) (11,714)
Limitation on the utilization of tax benefits 3,800 - -
Write-off of excess cost 770 4,305 -
Valuation allowance - (5,028) (4,823)
Cost in excess of assets acquired 53 419 551
Other (688) (423) 923
-------- -------- --------
Total $ 940 $ 2,895 $ 7,702
======== ======= =======
</TABLE>
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 Foamex L.P.'s various
restructuring/consolidation plans) required under operating leases at December
31, 1998 are:
<TABLE>
<CAPTION>
Operating
Leases
(thousands)
<S> <C>
1999 $11,845
2000 9,027
2001 7,467
2002 6,506
2003 5,591
Thereafter 5,312
-------
Total $45,748
</TABLE>
Rental expense charged to operations under operating leases approximated
$17.8 million, $10.1 million and $9.6 million for 1998, 1997 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 $1.7 million for 1996 under leases with related
parties.
F-27
<PAGE>
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. RELATED PARTY TRANSACTIONS AND BALANCES
Foamex L.P. regularly enters into transactions with its affiliates in the
ordinary course of business.
In connection with the GFI Transaction (see Note 9), Foamex L.P. and
General Felt entered into a supply agreement that was subsequently assigned to
Foamex Carpet (the "Supply Agreement"). Pursuant to the Supply Agreement, Foamex
L.P. will, at the option of Foamex Carpet, supply finished carpet cushion
products to Foamex Carpet at the lower of: (i) cost, as defined, plus 4.7% or
(ii) fair market value, as defined. Foamex L.P. will also supply various raw
materials used in the manufacture of carpet cushion products to Foamex Carpet at
the lower of cost, as defined, or fair market value, as defined. During 1998,
Foamex L.P. had sales of approximately $139.2 million to Foamex Carpet under the
Supply Agreement. In addition, pursuant to the Supply Agreement, Foamex Carpet
will, at the option of Foamex L.P., supply various finished products to Foamex
L.P. at the lower of: (i) cost, as defined, plus 15.0% or (ii) fair market
value, as defined. Foamex Carpet will also supply various raw materials to
Foamex L.P. at the lower of cost, as defined or fair market value, as defined.
During 1998, Foamex L.P. had purchases of approximately $1.3 million from Foamex
Carpet under the Supply Agreement. The initial term of the Supply Agreement is
until December 31, 2004 at which time the Supply Agreement will continue year to
year unless notice of termination is given by either party or unless terminated
earlier due to an event of default, as defined.
Also, in connection with the GFI Transaction, Foamex L.P. and General
Felt entered into an administrative services agreement that was subsequently
assigned to Foamex Carpet (the "Services Agreement"). Pursuant to the Services
Agreement, Foamex L.P. will provide Foamex Carpet administrative and management
services, as defined, at cost plus out-of-pocket expenses. During 1998, Foamex
L.P. invoiced approximately $1.8 million of services to Foamex Carpet under the
Services Agreement. The Services Agreement can be terminated by either party by
giving at least 30 days written notice prior to the end of a calendar year. As
of December 31, 1998, Foamex L.P. had a net receivable due from Carpet Cushion
of approximately $16.8 million associated with the Supply Agreement and Services
Agreement.
Also, in connection with the GFI Transaction, Foamex L.P. entered into
the Foamex/GFI Note with General Felt that was subsequently retained by Foam
Funding LLC (see Note 7).
Also, in connection with the GFI Transaction, Foamex L.P. made a $20.0
million distribution to Foamex International (see Note 9).
On July 1, 1997, Trace 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.
On June 12, 1997, another promissory note issued to Foamex L.P. by Trace in July
1996 was amended. The amended promissory note is an extension of a promissory
note of Trace 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 notes are included in the other component of partners'
equity (deficit). Based on Trace's financial position, Trace may not be able to
pay the aggregate amount of $9.8 million.
Foamex L.P. has current operating receivables from Trace at December 31,
1998 of approximately $2.4 million, for which an allowance has been provided for
in operations as restructuring and other charges due to the financial
difficulties of Trace (see Note 1). Additionally, as described above, Foamex
L.P. continues to include in the other components of partners' equity (deficit),
notes receivable from Trace.
In connection with the 1997 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.
F-28
<PAGE>
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. RELATED PARTY TRANSACTIONS AND BALANCES (continued)
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 $2.4 million for the
period from December 30, 1996 to June 12, 1997 was reflected as a direct
increase in the FJPS Note and partners' capital account, and thereby excluded
from the consolidated statements of operations.
In connection with the 1997 Refinancing Plan, Foamex L.P. made a cash
distribution of approximately $1.5 million to Trace Foam Company, Inc. ("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.
Foamex L.P. had a supply agreement (the "Foamex International Supply
Agreement") with Foamex International pursuant to which, at the option of Foamex
L.P., Foamex International would 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 Foamex International
Supply Agreement were no less favorable than those which Foamex L.P. could have
obtained from an unaffiliated third party. The Foamex International Supply
Agreement was terminated in April 1998. During 1998, 1997 and 1996, Foamex L.P.
purchased approximately $12.6 million, $138.6 million and $129.7 million,
respectively, of raw materials under the Foamex International Supply Agreement.
As of December 28, 1997, Foamex L.P. had accounts payable to Foamex
International of approximately $11.7 million associated with the Foamex
International 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 $0.9 million, $1.2 million and $1.4 million in 1998, 1997 and
1996, 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. Also, on December 31, 1998, Foamex L.P. entered
into another promissory note with Foamex International with a principal amount
of approximately $2.5 million. The note bears interest at the rate LIBOR plus 2
3/8%. The note and interest thereon were repaid on March 31, 1999.
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 were 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.
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 was distributed to FJPS and FMXI on June 12, 1997.
Foamex L.P. has a management service agreement with Trace Foam, a wholly
owned subsidiary of Trace, pursuant to which Trace Foam provides general
managerial services of a financial, technical, legal, commercial, administrative
and/or advisory nature to Foamex L.P. During June 1997, the management services
agreement was amended to increase the annual fee from $1.75 million to $3.0
million, plus reimbursement of expenses incurred. Trace 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. Also, certain employees of Trace
are also employees of Foamex International. Additionally, certain employees of
Trace and its affiliates provide services to Foamex International. Foamex
International pays a portion of the salaries of such employees based on the
amount of time devoted to Foamex International's matters by such employees. Such
payments totaled approximately $2.0 million per year.
F-29
<PAGE>
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. RELATED PARTY TRANSACTIONS AND BALANCES (continued)
During 1997, Foamex L.P. purchased approximately $1.9 million 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 various
agreements, the latest of which expired in March 1998.
Foamex L.P. made charitable contributions to the Trace International
Holding, Inc. Foundation of approximately $0.2 million in each of 1998, 1997 and
1996.
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 December 31, 1998, there were
$13.6 million of advances to Foamex International under this agreement.
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 February 1998. As of December 31, 1998,
the partnership interests of Foamex L.P. are held by FMXI, 2% managing general
partnership interest and Foamex International a 98% limited partnership
interest.
Cash distributions in connection with a tax sharing agreement for 1998,
1997 and 1996 were paid (received) as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
(thousands)
<S> <C> <C> <C>
FMXI $ 6 $ 80 $ (35)
Foamex International 287 8,371 -
Trace Foam - 80 45
FJPS - 306 3,477
------- ------- ------
Total $ 293 $8,837 $3,487
======= ====== ======
</TABLE>
On February 27, 1998, Foamex L.P. distributed $20.0 million in cash pro
rata to its partners, such distribution was funded with borrowings under the
Credit Facility.
Accumulated Other Comprehensive Income (Loss)
The accumulated other comprehensive income (loss) consists of the
following:
<TABLE>
<CAPTION>
December 31, December 28, December 29,
1998 1997 1996
(thousands)
<S> <C> <C> <C>
Foreign currency translation adjustment $(10,965) $ (4,367) $ (3,494)
Additional pension liability (15,243) (3,718) (2,407)
--------- -------- ---------
Total $(26,208) $(8,085) $(5,901)
======== ======= =======
</TABLE>
15. OPERATING SEGMENT AND RELATED DATA
In the fourth quarter of 1998 Foamex L.P. adopted Statement of Financial
Accounting Standards No. 131 "Disclosure about Segment of an Enterprise and
Restatement Information ("SFAS No. 131"). SFAS No. 131 requires companies to
report information about their business segments on the basis of how they are
managed and evaluated by the chief operating decision-makers. Each of the
operating segments is headed by an executive vice president who is responsible
for developing plans and directing the operations of the segment.
F-30
<PAGE>
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. OPERATING SEGMENT AND RELATED DATA (continued)
Foamex L.P.'s reportable business segments are foam products, carpet
cushion products, automotive products and technical products. The foam products
segment manufactures and markets foam used by the bedding industry, furniture
industry and the retail industry. The carpet cushion products segment sells
prime, rebond, sponge rubber and felt carpet cushion principally to Foamex
Carpet. The automotive products segment supplies foam primarily for automotive
interior applications to automotive manufacturers and to industry sub suppliers.
The technical products segment manufactures and markets reticulated foams and
other custom polyester and polyether foams for industrial, specialty and
consumer and safety applications.
The "other" column in the table below represents certain foreign
manufacturing operations that do not meet the quantitative threshold for
determining reportable segments, corporate expenses not allocated to the other
operating segments and restructuring and other charges. Total asset information
by operating segment is not reported because many of Foamex L.P.'s facilities
produce products for multiple operating segments. Data for 1997 and 1996 has
been restated to reflect the implementation of SFAS No. 131.
The accounting policies of the operating segments are the same as
described in the "Summary of Significant Accounting Policies" (see Note 2).
Revenues and costs have been included in operating segments where specifically
identified. Costs shared by operating segments have been allocated on the basis
of the amount utilized.
<TABLE>
<CAPTION>
Carpet
Foam Cushion Automotive Technical
Products Products Products Products Other Total
1998
<S> <C> <C> <C> <C> <C> <C>
Net sales $559,690 $210,313 $285,190 $79,140 $21,585 $1,155,918
Income (loss) from operations 36,253 (58) 17,319 14,919 (2,925) 65,508
Depreciation and amortization 17,418 5,092 4,582 2,615 1,972 31,679
1997
Net sales $334,900 $273,920 $225,892 $76,254 $20,129 $931,095
Income (loss) from operations 30,974 8,795 24,885 18,071 (26,393) 56,332
Depreciation and amortization 10,237 4,166 3,309 2,290 880 20,882
1996
Net sales $325,067 $291,338 $227,151 $70,325 $12,470 $926,351
Income from operations 32,431 18,813 28,707 18,208 4,710 102,869
Depreciation and amortization 10,683 4,198 2,874 2,232 1,145 21,132
United
States Canada Mexico Elimination Consolidated
1998
Net sales $1,049,012 $64,498 $57,718 $(15,310) $1,155,918
Income (loss) from operations 69,197 (310) (3,379) - 65,508
Identifiable assets 703,537 26,606 48,782 (10,397) 768,528
1997
Net sales $844,663 $60,545 $31,472 $(5,585) $931,095
Income (loss) from operations 56,015 977 (660) - 56,332
Identifiable assets 783,512 33,595 39,328 (22,367) 834,068
1996
Net sales $845,916 $57,541 $26,583 $(3,689) $926,351
Income (loss) from operations 99,129 1,982 1,758 - 102,869
Identifiable assets 543,975 29,841 25,736 (13,395) 586,157
</TABLE>
F-31
<PAGE>
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. 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 1998, 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
31, 1998, Foamex L.P. has accruals of approximately $3.5 million for
environmental matters. During 1998, Foamex L.P. established an allowance of $0.6
million relating to receivables from Trace for environmental indemnification due
to the financial difficulties of Trace.
The Clean Air Act Amendments of 1990 (the "1990 CAA Amendments") provide
for the establishment of federal emission standards for hazardous air pollutants
including methylene chloride, propylene oxide and TDI, 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. The final National
Emission Standard for Hazardous Air Pollutants ("NESHAP") was promulgated
October 7, 1998. NESHAP requires a reduction of approximately 70% of the
emission of methylene chloride for the slab stock foam industry effective
October 7, 2001. Foamex L.P. does not believe implementation of the regulation
will require it to make material expenditures 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 such 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 L.P. has reported to appropriate state authorities that it has
found soil and groundwater contamination in excess of state standards at three
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. Foamex L.P. has accruals of $2.5 million
for the estimated cost of completing remediation at these facilities. Foamex
L.P. is in the process of addressing potential contamination at the Morristown,
Tennessee facility, and has submitted a sampling plan to the State of Tennessee.
The extent of the contamination and responsible parties, if any, has not yet
been determined. A former owner may be liable for cleanup costs; nevertheless,
the cost of remediation, if any, is not expected to be material.
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 upgraded all operating tanks at its facilities in
accordance with these regulations. Foamex L.P. believes that its USTs do not
pose a significant risk of environmental liability. However, there can be no
assurances 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 L.P.'s manufacturing
processes. Foamex L.P. does not believe that it will be required to make any
material expenditures to comply with these new standards.
Foamex L.P. has been designated as a Potentially Responsible Party
("PRP") by the EPA with respect to eight sites with an estimated total liability
to Foamex L.P. for the eight sites of less than approximately $1.0 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 liability of Foamex L.P. is not considered to
be material.
F-32
<PAGE>
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. ENVIRONMENTAL MATTERS (continued)
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.
17. LITIGATION
Beginning on or about March 17, 1998, six actions (collectively the
"Stockholder Litigation") were filed in the Court of Chancery of the State of
Delaware, New Castle County (the "Court"), by stockholders of Foamex
International. The Stockholder Litigation, purportedly brought as class actions
on behalf of all stockholders of Foamex International, named Foamex
International, certain of its directors, certain of its officers and Trace as
defendants alleging that they had breached their fiduciary duties to the
plaintiffs and other stockholders of Foamex International unaffiliated with
Trace in connection with the original proposal of Trace to acquire the publicly
traded outstanding common stock of Foamex International for $17.00 per share.
The complaints sought, among other things, class certification, a declaration
that the defendants have breached their fiduciary duties to the class,
preliminary and permanent injunctions barring implementation of the proposed
transaction, rescission of the transaction if consummated, unspecified
compensatory damages, and costs and attorneys' fee. A stipulation and order
consolidating these six actions under the caption In re Foamex International
Inc. Stockholders Litigation Consolidated Civil Action, No. 16259NC was entered
by the Court on May 28, 1998. Foamex L.P. is not party to the Stockholder
Litigation.
The parties to the Stockholder Litigation entered into a Memorandum of
Understanding, dated June 25, 1998 (the "Memorandum of Understanding"), to
settle the Stockholder Litigation, subject to, inter alia, execution of a
definitive stipulation of settlement between the parties and approval by the
Court of filing notice to the class and a hearing. The Memorandum of
Understanding provided that as a result of, among other things, the Stockholder
Litigation and negotiations among counsel for the parties to the Memorandum of
Understanding, a special meeting of stockholders would be held to vote upon and
approve the First Merger Agreement which provided, among other things, for the
Public Shares owned by stockholders of Foamex International unaffiliated with
Trace and its subsidiaries (the "Public Stockholders") to be converted into the
right to receive $18.75 in cash, without interest.
The Memorandum of Understanding also provided for certification of a
class, for settlement purposes only, consisting of the Public Stockholders, the
dismissal of the Stockholder Litigation with prejudice and the release by the
plaintiffs and all members of the class of all claims and causes of action that
were or could have been asserted against Trace, Foamex International and the
individual defendants in the Stockholders Litigation or that arise out of the
matters alleged by plaintiffs. Following the completion of the confirmatory
discovery which was proved for in the Memorandum of Understanding, on September
9, 1998, the parties entered into a definitive Stipulation of Settlement and the
Court set a hearing to consider whether the settlement should be approved for
October 27, 1998 (the "Settlement Hearing"). In connection with the proposed
settlement, the plaintiffs intended to apply for an award of attorney's fees and
litigation expenses in an amount not to exceed $925,000, and the defendants
agreed not to oppose this application. Additionally, Foamex International agreed
to pay the cost, if any, of sending notice of the settlement to the Public
Stockholders. On September 24, 1998, a Notice of Pendency of Class Action,
Proposed Settlement of Class Action and Settlement Hearing was mailed to the
members of the settlement class. On October 20, 1998, the parties to the
Stockholder Litigation requested that the Court cancel the Settlement Hearing in
light of the announcement made by Trace on October 16, 1998, that it had been
unable to obtain the necessary financing for the contemplated acquisition by
Trace of Foamex International's common stock at a price of $18.75 per share
which was the subject matter of the proposed settlement. This request was
approved by the Court on October 21, 1998, and Foamex International issued a
press release on October 21, 1998, announcing that the Court had cancelled the
Settlement Hearing.
F-33
<PAGE>
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17. LITIGATION (continued)
On November 10, 1998, counsel for certain of the defendants in the
Stockholder Litigation gave notice pursuant to the Stipulation of Settlement
that such defendants were withdrawing from the Stipulation of Settlement in
light of the notice given by Trace to Foamex International and the special
committee of the Board of Directors on November 5, 1998 whereby Trace terminated
the First Merger Agreement on the grounds that the financing condition in the
First Merger Agreement was incapable of being satisfied.
On November 12, 1998, the plaintiffs in the Stockholder Litigation filed
an Amended Class Action Complaint (the "Amended Complaint"). The Amended
Complaint named Foamex International, Trace, Merger Sub, Mr. Marshall S. Cogan,
Mr. Andrea Farace, Dr. Stuart Hershon, Mr. John Tunney, and Mr. Etienne Davignon
as defendants, alleging that they breached their fiduciary duties to plaintiffs
and the other Public Stockholders in connection with the Second Merger
Agreement, that the proposal to acquire the Public Shares for $12.00 per share
lacked entire fairness, that the individual defendants violated 8 Del. Code ss.
251 in approving the Second Merger Agreement, and that Trace and Merger Sub
breached the Stipulation of Settlement. On December 2, 1998, plaintiffs served a
motion for a preliminary injunction, seeking an Order to preliminarily enjoin
the defendants from proceeding with, consummating or otherwise effecting the
merger contemplated by the Second Merger Agreement.
The defendants have denied, and continue to deny, that they have
committed or have threatened to commit any violation of law or breaches of duty
to plaintiffs or the purported class or any breach of the stipulation of
settlement. The defendants intend to vigorously defend the Stockholder
Litigation. If the Stockholder Litigation is adversely determined, it could have
a material adverse effect on the financial position, results of operations and
cash flows of Foamex International.
In addition, on or about November 18, 1998, a putative class action was
filed in the United States District Court for the Eastern District of New York
on behalf of all persons who purchased common stock of Foamex International
between March 16, 1998 and October 19, 1998, naming Trace as defendant and
alleging that Trace breached a contract between the putative class members and
Trace. By order dated January 8, 1999, the Court transferred the action to the
United States District Court for the Southern District of New York. Trace made a
motion to dismiss the action on February 8, 1999, which motion is pending before
the Court, and the Court has stayed all discovery in the action until the motion
is decided. Neither Foamex International, Foamex L.P. nor any of the individual
directors of Foamex International are named as defendants in this litigation.
On April 26, 1999, a putative securities class action entitled Molitor v.
Foamex International Inc., et al., 99 Civ. 3004 (DC), was filed in the United
States District court for the Southern District of New York naming as defendants
Foamex International, Trace and certain officers and directors of Foamex
International on behalf of stockholders who bought shares of Foamex
International's common stock during the period from May 7, 1998 through and
including April 16, 1999. Foamex L.P. is not a party to such suit. The lawsuit
alleges that the defendants violated Section 10(b) of the Securities Exchange
Act of 1934 and Rule 10b-5 by misrepresenting and/or omitting material
information about Foamex International's financial situation and operations,
with the result of artificially inflating the price of Foamex International's
stock. The lawsuit also alleges that Trace and Marshall S. Cogan violated
Section 20(a) of the Securities Exchange Act of 1934 as controlling persons of
Foamex International. The compliant seeks class certification, a declaration
that defendants violated the federal securities laws, an award of money damages,
and costs and attorneys', accountants' and experts' fees. The defendants intend
to vigorously defend the action. To date, no response to the complaint has been
made and no discovery or other proceedings have taken place.
As of April 16, 1999, Foamex L.P. and Trace were two of multiple
defendants in actions filed on behalf of approximately 4,321 recipients of
breast implants in various United States federal and state courts and one
Canadian provincial court, some of which allege substantial damages, but most of
which allege unspecified damages for personal injuries of various types. Three
of these cases seek to allege claims on behalf of all breast implant recipients
or other allegedly affected parties, but no class has been approved or certified
by the court. In addition, three cases have been filed alleging claims on behalf
of approximately 39 residents of Australia, New Zealand, England, and Ireland.
Foamex L.P. believes that the number of suits and claimants may increase. During
1995, Foamex L.P. and Trace were granted summary judgments and dismissed as
defendants from all cases in the federal
F-34
<PAGE>
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17. LITIGATION (continued)
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. Neither Foamex L.P. nor Trace recommended, authorized, or
approved the use of its foam for these purposes. Foamex L.P. is also indemnified
by Trace for any such liabilities relating to foam manufactured prior to October
1990. Although Trace has paid Foamex L.P.'s litigation expenses to date from
insurance proceeds Trace received, there can be no assurance that Trace 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 management's present
assessment of the merits of pending claims, after consultation with the general
counsel of Trace, and without taking into account indemnification provided by
Trace, the coverage provided by Trace and Foamex L.P.'s liability insurance and
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's consolidated financial
position or results of operations. 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 the financial position, results of operations and
cash flows of Foamex L.P.
On April 14, 1999, Foamex International received communications addressed
to its Board of Directors from certain of Foamex International's stockholders
regarding aspects of the relationship between Trace and Foamex International.
Such stockholders questioned the propriety of certain relationships and related
transactions between Trace, Foamex International and Foamex L.P., which
previously have been disclosed in Foamex International's and Foamex L.P.'s
periodic filings. Foamex International's Board of Directors, in consultation
with its special counsel, is in the process of evaluating such communications
and what actions, if any, to take with respect thereto.
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 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. Such action could have a
material adverse effect on the financial position, results of operations and
cash flows of 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.
18. FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK
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
are 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.
F-35
<PAGE>
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
18. FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK (continued)
During 1998, sales to Foamex Carpet accounted for approximately $139.2
million of Foamex L.P.'s net sales. However, other than Foamex Carpet, no one
customer accounted for more than 10.0% of Foamex L.P.'s net sales during the
past three years. Customers that represent more than 10% of an operating
segment's net sales are Sealy in foam products, Foamex Carpet in carpet cushion
products, and Lear Corporation and Johnson Controls in automotive products. The
loss of any one of these customers would have a material adverse effect on
Foamex L.P. During the year ended December 31, 1998, net sales to the five
largest customers, excluding Foamex Carpet, comprised approximately $272.0
million or 23.5% of Foamex L.P.'s net sales.
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.
The estimated fair values of Foamex L.P.'s financial instruments as of
December 31, 1998 are as follows:
<TABLE>
<CAPTION>
Carrying Amount Fair Value
Liabilities: (thousands)
<S> <C> <C>
Debt and debt - related party $723,478 $724,998
======== ========
</TABLE>
As of April 22, 1999, the estimated fair value of Foamex L.P.'s financial
instruments was approximately $590.2 million.
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 debt and related party debt is estimated using quoted
market prices, where available, or discounted cash flows.
Fair value estimates are made at a specific point in time, based on
relevant market information about the financial instruments. These estimates are
subjective in nature and involve uncertainties and matters of significant
judgment and therefore, cannot be determined with precision. Changes in
assumptions could significantly affect the estimates.
19. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
(thousands)
<S> <C> <C> <C>
Cash paid for interest $ 69,615 $ 45,330 $43,378
========= ======== =======
Cash paid for income taxes $ 884 $ 4,504 $ 1,533
========= ======== =======
Non-cash capital expenditures $ 24 $ 167 $ 165
========= ======== =======
Non-cash distribution of FJPS note $ - $ 35,567 $ -
========= ======== =======
Non-cash distribution of Foamex International note $ - $ 2,000 $ -
========= ======== =======
Non-cash distribution of investment in FJPS senior
subordinated discount debentures $ - $105,829 $ -
========= ======== =======
</TABLE>
F-36
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors
Foamex Capital Corporation
Wilmington, Delaware
In our opinion, the accompanying consolidated balance sheets present fairly, in
all material respects, the financial position of Foamex Capital Corporation
("FCC") (a wholly owned subsidiary of Foamex L.P.) at December 31, 1998 and
December 28, 1997. These balance sheets are the responsibility of FCC's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
The accompanying financial statements have been prepared assuming FCC will
continue as a going concern. As discussed in Note 2 to the accompanying
financial statements, Foamex L.P. had a loss from continuing operations, net
cash used by operating activities and a working capital deficit since it
violated certain debt covenants for which it is seeking amendments; however,
there can be no assurance that such amendments will be obtained and therefore
all long-term debt is classified as current. These matters raise substantial
doubt about FCC's ability to continue as a going concern. In addition, FCC has
been informed by Trace International Holdings, Inc. ("Trace") that Trace has
substantial debt obligations and may not have the financial resources to pay
these obligations when due within the near future. As a result, Trace creditors
could foreclose or otherwise attach Foamex International Inc.'s common stock.
Such an event may result in the acceleration of all of Foamex L.P.'s debt, of
which FCC is a joint obligor. Management's plans in regard to these matters are
described in Note 2 to the accompanying financial statements. The financial
statements do not include any adjustments that might result from the outcome of
these uncertainties.
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
April 22, 1999, except as to the
information presented in Note 2,
for which the date is May 5, 1999
F-37
<PAGE>
FOAMEX CAPITAL CORPORATION
(A Wholly Owned Subsidiary of Foamex L.P.)
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, December 28,
1998 1997
------ ------
<S> <C> <C>
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-38
<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 purpose of obtaining financing from external sources.
2. COMMITMENTS AND CONTINGENCIES
For the year ended December 31, 1998, Foamex L.P. had a loss from
continuing operations, a working capital deficit and was not in compliance with
certain debt covenants for which it is seeking amendments. Such non-compliance
provides the lenders under those agreements, which have an aggregate outstanding
principal amount of approximately $415.4 million, upon notice and lapse of time
to declare all of such indebtedness to be due. Notwithstanding the fact that to
date the lenders have not executed such rights and have granted Foamex L.P. a
waiver of such covenants through May 5, 1999, which has been extended through
June 30, 1999, to enable Foamex L.P. to negotiate an amendment of such
covenants; however, there can be no assurance that such amendments will be
obtained and therefore such indebtedness has been classified as current in
Foamex L.P.'s financial statements. Were the lenders under those agreements to
accelerate the maturity of their indebtedness, such acceleration would
constitute an event of default and substantially all of Foamex L.P.'s long-term
debt would become due. Therefore, Foamex L.P. has reclassified approximately
$715.8 million of long-term debt as current. Such classification raises
substantial concern about Foamex L.P.'s ability to continue as a going concern.
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 1997 Refinancing Plan. The Senior Subordinated Notes
represent uncollateralized general obligations of Foamex L.P. and are
subordinated to all Senior Debt (as defined in the Indenture). 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 13 1/2% Senior Subordinated Notes and to Foamex L.P.'s subordinated note
payable.
13 1/2% Senior Subordinated Notes due 2005, Series B ("13 1/2% Senior
Subordinated Notes")
The 13 1/2% Senior Subordinated Notes were issued by Foamex L.P. and FCC
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 bear interest at the rate of 13 1/2% per annum payable semiannually on
each February 15 and August 15. The 13 1/2% Senior Subordinated Notes mature on
August 15, 2005. The 13 1/2% Senior Subordinated Notes may be redeemed at the
option of Foamex L.P., in whole or in part, at any time on or after August 15,
2000, initially at 106.75% 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 August 15, 2004. Upon the occurrence of a change
of control, as
F-39
<PAGE>
FOAMEX CAPITAL CORPORATION
(A Wholly Owned Subsidiary of Foamex L.P.)
NOTES TO BALANCE SHEETS
2. COMMITMENTS AND CONTINGENCIES (continued)
defined, each holder of the 13 1/2% Senior Subordinated Notes will have the
right to require Foamex L.P. to repurchase the 13 1/2% 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 13 1/2% Senior
Subordinated Notes are subordinated in right of the payment of all senior
indebtedness and are pari passu in right of payment to the Senior Subordinated
Notes and to Foamex L.P.'s subordinated note payable.
F-40
<PAGE>
FOAMEX L.P. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENT SCHEDULE
Index to Financial Statement Schedule
Schedule II - Valuation and Qualifying Accounts
All other schedules are omitted since the required information is not present or
is not present in amounts sufficient to require submission of the schedule, or
because the information required is included in the consolidated financial
statements and notes thereto.
S-1
<PAGE>
<TABLE>
<CAPTION>
Schedule II
FOAMEX L.P. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(thousands)
Balance at Charged to Charged to Balance at
Beginning of Costs and other End of
Period Expenses Accounts(1) Deductions Period
YEAR ENDED DECEMBER 31, 1998
<S> <C> <C> <C> <C> <C> <C>
Allowance for Uncollectible Accounts $ 6,844 $ 2,000 $ (762) (1)(2) $ 1,733 $ 6,349
======== ======= ======== ======== ========
Reserve for Discounts $ 1,238 $ - $ 6,889 (1) $ 7,198 $ 929
======== ======= ======== ======== ========
Deferred Tax Asset Valuation Allowance $ 9,097 $ - $ (9,097) (4) $ - $ -
======== ======= ======== ======== ========
YEAR ENDED DECEMBER 28, 1997
Allowance for Uncollectible Accounts $ 3,060 $ 2,295 $ 2,898 $ 1,409 $ 6,844
======== ======= ======== ======== ========
Reserve for Discounts $ 3,268 $ - $ 10,182 $ 12,212 $ 1,238
======== ======= ======== ======== ========
Deferred Tax Asset Valuation Allowance $ 15,988 $(5,028) $ (1,863) (3) $ - $ 9,097
======== ======= ======== ======== ========
YEAR ENDED DECEMBER 29, 1996
Allowance for Uncollectible Accounts $ 4,839 $ 704 $ 292 $ 2,775 $ 3,060
======== ======= ======== ======== ========
Reserve for Discounts $ 4,299 $ - $ 12,190 $ 13,221 $ 3,268
======== ======= ======== ======== ========
Deferred Tax Asset Valuation Allowance $ 13,473 $ 9,370 $ (6,855) (3) $ - $ 15,988
======== ======= ======== ======== ========
</TABLE>
(1) Discounts and billing adjustments reflect a reduction in net sales.
(2) Includes $3.2 million of reserved transferred out due to the GFI
Transaction.
(3) Represents an adjustment to cost in excess of net assets relating to the
utilization of preacquisition deferred tax assets of General Felt.
(4) Represents valuation allowances transferred out due to the GFI Transaction.
S-2
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000890080
<NAME> FOAMEX L.P.
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-START> Dec-29-1997
<PERIOD-END> Dec-31-1998
<EXCHANGE-RATE> 1
<CASH> 3,192
<SECURITIES> 0
<RECEIVABLES> 160,834
<ALLOWANCES> 0
<INVENTORY> 127,636
<CURRENT-ASSETS> 325,511
<PP&E> 219,637
<DEPRECIATION> 0
<TOTAL-ASSETS> 768,528
<CURRENT-LIABILITIES> 926,501
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> (196,037)
<TOTAL-LIABILITY-AND-EQUITY> 768,528
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</TABLE>
