Back to GetFilings.com
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from .......... to ..........
Commission file number: 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 Annual Report on Form 10-K. [X]
None of the voting securities of Foamex L.P. or Foamex Capital
Corporation are held by non-affiliates.
As of March 14, 2000, there were 1,000 shares of Foamex Capital
Corporation's common stock outstanding.
Foamex L.P. and Foamex Capital Corporation meet the conditions set for
the in General Instruction (I)(1)(a) and (b) of this Annual Report on Form 10-K
and are therefore filing this form with reduced disclosure format.
DOCUMENTS INCORPORATED BY REFERENCE
None
FOAMEX L.P.
FOAMEX CAPITAL CORPORATION
INDEX
Page
Part I
Item 1. Business 3
Item 2. Properties 10
Item 3. Legal Proceedings 10
Item 4. Submission of Matters to a Vote
of Security Holders 14
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 7a. Quantitative and Qualitative Disclosures about Market Risk 26
Item 8. Financial Statements and Supplementary Data 26
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 26
Part III
Item 10. Directors and Executive Officers of the Registrant 26
Item 11. Executive Compensation 26
Item 12. Security Ownership of Certain Beneficial Owners
and Management 26
Item 13. Certain Relationships and Related Transactions 26
Part IV
Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K 27
Signatures 35
The Registrant will furnish a copy of any exhibit to this Annual Report on Form
10-K upon the payment of a fee equal to the Registrants' reasonable expense in
furnishing such exhibit.
2
PART I
ITEM l. BUSINESS
General
Foamex L.P., a wholly owned subsidiary of Foamex International Inc.
("Foamex International"), is engaged primarily in the manufacturing and
distribution of flexible polyurethane and advanced polymer foam products. As of
December 31, 1999, 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"). As
of December 31, 1999, Foamex L.P.'s partners were FMXI, Inc. ("FXMI") 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.
References in this Annual Report on Form 10-K to "Foamex L.P." mean
Foamex L.P. and, where relevant or applicable, its subsidiaries.
Segments
General
Foamex L.P. operates in the flexible polyurethane and advanced polymer
foam products industry and is one of the largest manufacturers and distributor
of flexible polyurethane and advanced polymer foam products in North America.
Foamex L.P. has numerous manufacturing facilities dedicated to certain product
lines as well as facilities with the capability to support multiple product
lines. Each business segment has a diverse customer base and is headed by a
senior executive who is responsible for developing plans and directing the
operations of the segment.
Business segments are listed below.
o Foam Products - manufactures and markets foam used by the bedding
industry, the furniture industry and the retail industry.
o Carpet Cushion Products - manufactures and distributes prime,
rebond, sponge rubber and felt carpet cushion to Foamex Carpet
Cushion, Inc. ("Foamex Carpet"), a sister company wholly owned by
Foamex International.
o Automotive Products - supplies foam primarily for automotive
interior applications to automotive manufacturers and tier one
suppliers.
o Technical Products - manufactures and markets reticulated foams
and other custom polyester and polyether foams for industrial,
specialty and consumer and safety applications.
o Other - primarily consists of certain foreign manufacturing
operations, corporate expenses not allocated to the other
business segments and restructuring and other charges (credits).
Segment financial information is included in Note 15 to the consolidated
financial statements included in this Annual Report on Form 10-K.
Foam Products
Products are distributed directly from manufacturing facilities and
indirectly through independent fabricator distributors. These foams are used by
the bedding industry in quilts, toppers, cores and border rolls for mattresses.
In the furniture industry, they are generally used for upholstered seating
products and in the retail industry, for a broad range of products such as
mattress overlay pads, leisure furniture, futons, and pillows. Foam Products are
generally sold in large volumes on a regional basis because of high shipping
costs.
Foamex L.P.'s bedding products are sold to mattress manufacturers. Foamex
L.P. also supplies cut-to-size seat cushions, back cushions and other pieces to
the furniture industry. Furniture foams are sold directly to manufacturers as
well as through distributors. The consumer products group sells therapeutic
sleep products such as
3
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 including viscoelastic or "memory" foams for the bedding industry,
which maintain their resiliency better than other foams and materials, and
products incorporating Reflex(R). Reflex(R) materials include cushion wraps and
cushion cores and are advanced polymer cushioning products designed to improve
comfort, quality and durability in upholstered furniture and bedding products.
Reflex(R) was created using the variable pressure foaming manufacturing process
("VPFSM"). High efficiency thermal management foam products for applications in
work gloves and outerwear have also been introduced.
Carpet Cushion Products
Foamex L.P. manufactures and distributes Carpet Cushion Products, which
include prime, rebond, sponge rubber and felt carpet cushion, to Foamex Carpet.
Prime carpet cushion is made from polyurethane foam buns. Rebond carpet cushion
is made from various types of scrap foam which are shredded into small pieces,
processed and then bonded using a chemical adhesive. 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. Rebond manufacturing requires the management of a comprehensive
recycling business that includes an extensive collection network for the
automotive and foam industries worldwide.
Automotive Products
Foamex L.P. is one of the largest suppliers of automotive foam products
for the North American operations of original equipment manufacturers ("OEMs").
Depending on the automotive manufacturer and/or the application, automotive foam
products are supplied by Foamex L.P. either directly to the manufacturers or
indirectly through tier one suppliers. Automotive Products include foam for trim
pads, door panel parts, headliners and acoustical purposes, as well as flame and
adhesive laminates and rolls for tri-lamination. Tri-laminated foam is applied
to automotive fabrics to form a foam/fabric composite that results in cost
savings and aesthetic value for the automotive manufacturer.
Domestic automotive manufacturers have narrowed their supply base during
recent years and increased the percentage and dollar amount of components that
they purchase from outside suppliers. As a result, a smaller number of companies
are supplying an increasing percentage of automotive foam products. Automotive
suppliers are increasingly offering integrated systems which lower the overall
cost and improve quality relative to previous sourcing methods in which
individually sourced components were assembled and installed by the OEMs. A
continuing focus on new product development and flexible manufacturing
capabilities are essential to satisfy changing specifications.
Examples of 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. has introduced surface modification technology ("SMT(R)")
and continuous platform cutting ("CPCSM") used for vehicle flooring systems.
Also, the use of tri-laminates has increased due to the manufacturers' need for
significant cost savings and consumer demand for improved aesthetics. 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.
4
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, inkpad reservoirs, high-speed inkjet printers and speaker
grills. Medical applications include oxygenators for cardiopulmonary surgery,
instrument holders for sterilization, pre-op scrubbers impregnated with
anti-microbial agents and EKG pads containing conductive gels. Other Technical
Products have unique characteristics such as flame retardancy and fluid
absorption. Additional products sold within this group include foams for
refrigerated supermarket produce counters, mop heads, paint brushes, and
cosmetic applications.
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
customers to design, develop and manufacture each product to specification.
Other
Other consists primarily of certain foreign manufacturing operations,
corporate expenses not allocated to the other business segments and
restructuring and other charges (credits). See Note 15 to the consolidated
financial statements.
Marketing and Sales
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. manufactures and
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 to 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 model program, the foam producer usually produces
parts for the life of the program. Competitive factors in the market include
product quality and reliability, cost and timely service, technical expertise
and development capability, new product innovation and customer service.
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 or finish Technical Products to meet the specific needs of end
users. Foamex L.P.'s specialty and technical foams service unique end user
requirements and are
5
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 geographical information is included in Note 15 to the
consolidated financial statements.
Major Customers
Sales to Foamex Carpet, reported under Carpet Cushion Products, totaled
$187.7 million in 1999 and $185.5 million in 1998. During 1999, sales to Johnson
Controls, which are included in Automotive Products, accounted for approximately
12.5% of Foamex L.P.'s net sales. During 1998 and 1997, no one unaffiliated
customer accounted for more than 10.0% of Foamex L.P.'s net sales. During the
year ended December 31, 1999, net sales to the five largest unaffiliated
customers comprised approximately $360.6 million or 30.3% of Foamex L.P.'s net
sales. The loss of any one of these customers could have a material adverse
effect on Foamex L.P.
Manufacturing and Raw Materials
As of December 31, 1999, Foamex L.P. conducted operations at 59
manufacturing and distribution facilities with a total of approximately 8.1
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. Fabricated 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.
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.
The two principal chemicals used in the manufacture of flexible
polyurethane foam are toluene diisocyanate ("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 prices. 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.
Employees
As of December 31, 1999, Foamex L.P. employed approximately 5,600
persons. Approximately 1,500 of these employees are located outside the United
States and approximately 1,000 of these employees are covered by
6
collective bargaining agreements with labor unions, which agreements expire on
various dates through 2002. Foamex L.P. considers relations with its employees
to be good.
Competition
The flexible polyurethane foam industry is highly competitive with price,
quality and service being significant competitive factors. 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 these competitors
individually competes in all of the business 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. Expenditures for
research and development amounted to $3.3 million, $3.3 million, and $2.4
million for 1999, 1998, and 1997, respectively, excluding expenditures for
research and development by Crain Industries, Inc. ("Crain") prior to its
acquisition in December 1997 (the "Crain Acquisition").
Foamex L.P., Recticel, s.a. ("Recticel"), a European polyurethane foam
manufacturer, whose subsidiary was a former partner of Foamex L.P. and is a
current shareholder of Foamex International, 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 VPFSM manufacturing process. Foamex L.P., Recticel and their affiliates have
a royalty-free license to use technology developed by the Swiss corporation.
Foamex L.P. and Recticel have exchanged know-how, trade secrets, engineering and
other data, designs, specifications, chemical formulations, technical
information, market information and drawings which are necessary or useful for
the manufacture, use or sale of foam products and it is anticipated that they
will continue to do so in the future.
Buyout Proposals
On August 5, 1999, Foamex International announced that its Board of
Directors signed a letter of intent with Sorgenti Chemical Industries, LLC and
Liberty Partners Holdings 20, LLC (collectively, the "Purchasers") for a
business combination providing for $11.50 per share for all of Foamex
International's outstanding common stock (the "Sorgenti Transaction"). Under the
terms of the letter of intent, if Foamex International entered into a business
combination with another party, the Purchasers would be entitled to a break-up
fee of $6.0 million plus reimbursement of certain expenses, subject to certain
conditions, including the willingness of the Purchasers to enter into a
definitive merger agreement providing for a price of at least $11.50 per share
prior to the expiration of the letter of intent. The proposed transaction was
subject to a number of conditions, including the negotiation of definitive
documents regarding certain conditions relating to the bank credit facilities
and the public debt of Foamex International's subsidiaries. Additional issues
considered included, minimum shareholder acceptance, change of board membership,
and other provisions providing for a higher break-up fee and expense
reimbursement if Foamex International entered into a business combination
providing a more favorable transaction. On December 15, 1999, Foamex
International announced that the letter of intent with the Purchasers, which had
been extended, expired by its terms. The Purchasers had submitted a revised bid
at a price and on terms that were less favorable than those contained in the
letter of intent and the Negotiating Committee of Foamex International's Board
of Directors rejected the revised bid.
7
On February 9, 2000, Foamex International announced that it is in
discussions with respect to a proposal involving the acquisition of all of
Foamex International's outstanding common stock for cash. Foamex International
stated that the proposal is subject to a number of conditions, including the
buyer's ongoing due diligence and the execution of definitive agreements. If the
proposal from the new group leads to a transaction, it is anticipated that John
G. Johnson, Jr., Foamex International's President and Chief Executive Officer,
as well as other members of current management, would participate in the
management of Foamex International following such a transaction. Foamex
International agreed to an exclusive negotiating period ending five business
days after delivery of its audited financial statements included in Foamex
International's Annual Report on Form 10-K to the prospective buyer. Foamex
International expects such delivery to be the same day as the filing of its
Annual Report on Form 10-K with the Securities and Exchange Commission.
In 1998, Foamex International received an unsolicited buyout proposal
from Trace International Holdings, Inc. ("Trace"), Foamex International's
principal stockholder. Foamex International entered into two merger agreements,
which were subsequently terminated by Trace.
Change in Control
Trace is a privately held company, which owned approximately 29% of
Foamex International's outstanding voting common stock at March 10, 2000, and
whose former Chairman also serves as Foamex International's Chairman. Foamex
International's common stock owned by Trace is pledged as collateral against
certain of Trace's obligations. The Foamex L.P. credit facility and the
Foamex/GFI Note, as defined, (see Note 12 to the consolidated financial
statements), pursuant to which approximately $411.8 million of debt was
outstanding as of December 31, 1999, provide that a "change of control" would be
an event of default and could result in the acceleration of such indebtedness.
"Change of control" means, for this purpose, that (i) a person or related group,
other than Trace, beneficially owns more than 25% of Foamex International's
outstanding voting stock and (ii) such voting stock constitutes a greater
percentage of such voting stock than the amount beneficially owned by Trace.
Additionally, certain indentures relating to senior subordinated notes of $248.0
million contain similar "change of control" provisions, which require the
issuers to tender for such notes at a price in cash equal to 101% of the
aggregate principal amount thereof, plus accrued and unpaid interest thereon, if
there is such a "change of control".
On July 21, 1999, Foamex L.P. was informed by Trace that it filed a
petition for relief under Chapter 11 of the Bankruptcy Code in Federal Court in
New York City. Subsequently, on January 24, 2000, an order was signed converting
the Trace bankruptcy from Chapter 11 to Chapter 7 of the Bankruptcy Code. A
trustee was appointed to oversee the liquidation of Trace's assets. Neither
Trace's bankruptcy filing nor the conversion to Chapter 7 constituted a "change
of control" under the provisions of the debt agreements described above. A
"change of control" could take place however, if the bankruptcy court allows
Trace's creditors to foreclose on and take ownership of Foamex International's
common stock owned by Trace, or otherwise authorizes a sale or transfer of these
shares, under circumstances in which a person or related group, other than
Trace, acquired more than 25% of Foamex International's outstanding voting stock
and owned a greater percentage of such voting stock than the amount beneficially
owned by Trace. On November 22, 1999, the bankruptcy court allowed two creditors
to take ownership of 11% and 6%, respectively, of Foamex International's common
stock. Such an event did not constitute a "change of control" under the
provisions of the debt agreements.
Management believes that it is unlikely that a "change of control" will
occur as a result of Trace's bankruptcy proceedings. However, Foamex L.P. would
seek to resolve the issues that may arise should the "change of control"
provisions be triggered, by requesting waivers of such provisions and/or
refinancing certain debt, if necessary. There can be no assurance that Foamex
L.P. will be able to do so, or that Foamex L.P. will be able to obtain waivers
of such provisions. Such circumstances raise substantial doubt about Foamex
L.P.'s ability to continue as a going concern. The accompanying financial
statements were prepared on a going-concern basis and do not include any
adjustments that might result from the outcome of the Trace bankruptcy filing.
GFI Transaction
On February 27, 1998, Foamex International, Foamex L.P. and certain of
their affiliates completed a series of transactions which changed Foamex L.P.'s
structure (collectively, the "GFI Transaction"). Prior to the
8
consummation of these transactions, 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 Industries, Inc.
("General Felt") with $4.8 million in cash and a promissory note in the
aggregate principal amount of $34.0 million 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, 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.
No gain has been recognized on the GFI 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.
Forward-Looking Information
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements so long as those statements are
identified as forward-looking and are accompanied by meaningful cautionary
statements identifying important factors that could cause actual results to
differ materially from those projected in such statements. In connection with
certain forward-looking statements contained in this Annual Report on Form 10-K
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 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 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.
9
ITEM 2. PROPERTIES
As of December 31, 1999, Foamex L.P. conducted its operations at 59
manufacturing and distribution facilities. Total floor space in use at the owned
manufacturing and distribution facilities is approximately 3.2 million square
feet and total floor space in use at the leased manufacturing and distribution
facilities is approximately 4.9 million square feet. Forty-eight of these
facilities are located throughout 33 cities in the United States, four
facilities are located in Canada and seven facilities are located in Mexico. The
2000 annual base rental with respect to such leased facilities is approximately
$10.6 million under leases expiring from 2000 to 2025. Foamex L.P. does not
anticipate any problem in renewing or replacing any of such leases expiring in
2000. In addition, Foamex L.P. has approximately 1.5 million square feet of idle
space of which approximately 0.6 million is leased.
Foamex L.P. maintains its administrative office in Linwood, Pennsylvania.
Property information by business segment is not reported because many of
Foamex L.P.'s facilities produce products for multiple business segments.
ITEM 3. LEGAL PROCEEDINGS
Litigation - Foamex International Shareholders
During 1999, Foamex International received several 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 and Foamex International,
which previously had been disclosed in Foamex International's and Foamex L.P.'s
periodic filings. On June 14, 1999, Foamex International received a draft
complaint from counsel of certain stockholders naming Foamex International and
certain current and former directors, which included allegations similar to
those in the Second Amended Complaint, as defined below. Foamex International
was advised by such counsel that such stockholders intended to file an action
soon thereafter. On August 13, 1999, two stockholders filed an action on behalf
of an alleged class of Foamex International's shareholders, entitled Watchung
Road Associates, L.P. et al v. Foamex International Inc., et al., Civil Action
No. 17370 (the "Watchung Complaint"), in the Court of Chancery of the State of
Delaware, New Castle County. The suit names Foamex International, Mr. Marshall
S. Cogan, Mr. Etienne Davignon, Mr. John Gutfreund, Mr. Robert Hay, Dr. Stuart
Hershon, Mr. John G. Johnson, Jr. and Mr. John Tunney as defendants. The
Watchung Complaint alleges that the individual defendants breached their
fiduciary duties by agreeing to the potential buyout of Foamex International by
Sorgenti Chemical Industries, LLC and Liberty Partners Holdings 20, LLC.
The Watchung Complaint alleges that the Sorgenti Transaction's buy-out
price of $11.50 per outstanding share is inadequate and fails to take into
consideration claims Foamex International allegedly has as a result of the
supposed wrongful diversions of company assets in Foamex International's
dealings with Trace and its affiliates. The Watchung Complaint also alleges that
the directors breached their fiduciary duties by agreeing to the proposed
Sorgenti Transaction without conducting an auction or active market check. The
suit alleges that the board placed Mr. Cogan's interest ahead of those of Foamex
International's stockholders, and alleges that a critical condition of the
Sorgenti Transaction is a consulting agreement for Mr. Cogan. The Watchung suit
seeks to enjoin the Sorgenti Transaction, seeks rescission or damages if the
Sorgenti Transaction is consummated, and seeks an accounting from the directors
for plaintiffs alleged losses. The Sorgenti Transaction was not consummated.
Defendants have moved to consolidate this action with In re Foamex International
Inc. Shareholders Litigation, discussed below, and to dismiss the complaint.
Plaintiffs have agreed to consolidate.
On April 26, 1999, a putative securities class action entitled Molitor v.
Foamex International Inc., et al., 99 Civ. 3004, 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.
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.
10
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 complaint 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. On May 18, 1999, a similar
action entitled Thomas W. Riley v. Foamex International Inc., et al., 99 Civ.
3653 was filed in the same court. The two actions have been consolidated, and
the Consolidated Amended Class Action Complaint, setting forth the allegations
of the two earlier complaints, was filed on December 6, 1999. The defendants
filed motions to dismiss the consolidated complaint on February 4, 2000. No
discovery has taken place to date.
Beginning on or about March 17, 1998, six actions (collectively the
"Shareholder Litigation") were filed in the Court of Chancery of the State of
Delaware, New Castle County (the "Court"), by stockholders of Foamex
International. The Shareholder 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
Trace Merger Sub, Inc. ("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 under an Agreement and Plan of Merger
(the "First Merger Agreement"). The complaints sought, among other things, class
certification, a declaration that the defendants 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. Shareholders Litigation, Consolidated Civil Action No.
16259NC, was entered by the Court on May 28, 1998.
The parties to the Shareholder Litigation entered into a Memorandum of
Understanding, dated June 25, 1998 (the "Memorandum of Understanding"), to
settle the Shareholder 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 Shareholder
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 all
of Foamex International's outstanding common stock not owned by Trace and its
subsidiaries (the "Public Shares") 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 Shares owned by
stockholders of Foamex International unaffiliated with Trace and its
subsidiaries (the "Public Shareholders"), the dismissal of the Shareholder
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 Shareholder 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 for October 27, 1998 to consider whether the settlement should be
approved (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 Shareholders. 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 Shareholder 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
Shareholder 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
11
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 Shareholder 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 Shareholders in connection with a second Agreement and Plan
of Merger (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. In January 1999, Trace advised that it could not finance the offer
reflected in the Second Merger Agreement. As a result, the preliminary
injunction motion did not go forward.
On June 9, 1999, the plaintiffs in the Shareholder Litigation moved for
leave to file a Second Amended and Supplemental Class Action and Derivative
Complaint (the "Second Amended Complaint"). The Second Amended Complaint was
filed on July 14, 1999, and 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 the named individuals breached
their fiduciary duties by causing Foamex International to waste assets in its
transactions with Trace and by failing to enforce Foamex International's rights
under the First Merger Agreement, seeking appointment of a receiver for Foamex
International, and alleging that Trace and Merger Sub breached the Stipulation
of Settlement.
On August 26, 1999, the plaintiffs in the Shareholder Litigation moved
for leave to file a Third Amended and Supplemental Class Action and Derivative
Complaint (the "Third Amended Complaint"). The Third Amended Complaint was filed
on October 27, 1999. The Third Amended Complaint alleges both class claims and
derivative claims, and names Foamex International, Mr. Marshall S. Cogan, Mr.
Andrea Farace, Dr. Stuart Hershon, Mr. John Tunney, Mr. Etienne Davignon, Mr.
John Gutfreund, Mr. Robert Hay and Mr. John G. Johnson, Jr. as defendants.
The Third Amended Complaint alleges that the individual defendants
breached their duties to Foamex International's Public Shareholders by agreeing
to the Sorgenti Transaction at an inadequate price that fails to take into
consideration Foamex International's allegedly valuable claims arising out of
purported diversions of money from Foamex International to Trace, and by failing
to maximize shareholder value in a sale of Foamex International and instead
agreeing to a deal with a buyer who is willing to enter into a consulting deal
with Mr. Cogan to get his and the board's approval. The Third Amended Complaint
purports to assert a derivative claim for waste and breach of fiduciary duty
against Mr. Cogan, Mr. Farace, Dr. Hershon, Mr. Tunney, Mr. Davignon, Mr.
Gutfreund, and Mr. Hay. The Third Amended Complaint seeks the appointment of a
receiver for Foamex International, alleging that the directors have mismanaged
Foamex International. The Third Amended Complaint also alleges that Mr. Cogan,
Mr. Farace, Dr. Hershon, Mr. Davignon, Mr. Tunney, Mr. Gutfreund, and Mr. Hay
breached their fiduciary duties by failing to enforce Foamex International's
rights under the First Merger Agreement.
The Third Amended Complaint seeks: a declaration that the individual
defendants have breached their fiduciary duties; damages; the imposition of a
constructive trust on profits and benefits Mr. Cogan, Trace, and the other
individual defendants allegedly received as a result of the alleged wrongdoing;
an injunction against the Sorgenti Transaction under its present terms;
rescission and damages if the deal is consummated; and the appointment of a
receiver for Foamex International. Defendants have moved to consolidate this
action with Watchung Road Associates, L.P., et ano v. Foamex International Inc.,
et al., discussed above, and to dismiss the complaint. Plaintiffs have agreed to
consolidate and opposed the motion to dismiss.
The defendants intend to vigorously defend these litigations, which if
adversely determined, could have a material adverse effect on the financial
position, results of operations and cash flows of Foamex International and
Foamex L.P.
12
Litigation - Breast Implants
As of February 24, 2000, Foamex L.P. and Trace were two of multiple
defendants in actions filed on behalf of approximately 3,857 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. Trace's insurance carrier has continued to pay Foamex L.P.'s litigation
expenses after Trace's filing under the Bankruptcy Code. Trace's insurance
policies continue to cover certain liabilities of Trace but if the limits of
those policies are exhausted, it is unlikely that Trace will be able to continue
to provide additional indemnification. While it is not feasible to predict or
determine the outcome of these actions, based on management's present assessment
of the merits of pending claims, after consultation with the general counsel of
Foamex L.P., 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 the 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 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.
Litigation - Other
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.
Environmental
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. As of December 31, 1999, 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 indemnifications due to the financial difficulties of Trace.
The Clean Air Act Amendments of 1990 (the "1990 CAA Amendments") provide
for the establishment of federal emission standards for hazardous air pollutants
including methylene chloride, propylene oxide and TDI, 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
13
effective October 7, 2001. Foamex L.P. believes that the use of alternative
technologies, including VPFSM, which do not utilize methylene chloride and its
ability to shift current production to the facilities which use these
alternative technologies will minimize the impact of these regulations. The 1990
CAA Amendments also may result in the imposition of additional standards
regulating air emissions from polyurethane foam manufacturers, but these
standards have not yet been proposed or promulgated.
Foamex L.P. has reported to appropriate state authorities that it has
found soil and groundwater contamination in excess of state standards at two
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 its 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 significant.
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 USTs 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. The phase-in of the standards was completed in 1999 and Foamex L.P.
has developed and implemented a compliance program. Capital expenditures
required and changes in operating procedures are not anticipated to
significantly impact Foamex L.P.'s competitive position.
Foamex L.P. has been designated as a Potentially Responsible Party
("PRP") by the EPA with respect to six sites. Estimates of total cleanup costs
and fractional allocations of liability are generally provided by the EPA or the
committee of PRP's with respect to the specified site. In each case and in the
aggregate, the liability of Foamex L.P. is not considered to be significant.
In 2000 and 2001, capital expenditures for environmental compliance
projects are anticipated to be approximately $2.0 million per year. 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 significant.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
14
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, 1999, there were two holders of Foamex L.P.'s
equity securities.
(c) Listed below are the net cash distributions (receipts) in
accordance with tax sharing agreements. At December 31, 1999,
Foamex L.P. has a receivable of approximately $0.9 million from
its partners in accordance with the tax sharing agreement.
Tax Sharing Distributions
1999 1998
---------- -------
(thousands)
FMXI $ (5) $ 6
Foamex International (12) 287
----- -----
$(17) $293
===== ====
1999 Distributions
In 1999, Foamex L.P. distributed $17.3 million in cash pro rata to its
partners.
1998 Distributions
In 1998, Foamex L.P. distributed $20.0 million in cash pro rata to its
partners.
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. 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.
Fiscal Year (1)
1999 1998 (4) 1997 (5) 1996 1995 (2)
(thousands)
Statements of Operations Data
Net sales $1,190,679 $1,155,918 $931,095 $926,351 $862,834
Income (loss) from continuing
operations (3) 15,581 (5,869) 11,265 53,661 (48,126)
Balance Sheet Data (at period end)
Total assets $698,495 $768,528 $834,068 $586,157 $605,892
Total long-term debt, classified as current (4) - 715,817 - - -
Total long-term debt 680,544 - 726,649 392,617 433,956
Partners' equity (deficit) (164,591) (196,037) (156,302) 12,832 (12,604)
15
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA (continued)
(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 1995 was restated for discontinued operations.
(3) Includes net restructuring and other charges (credits), as discussed in
Note 4 to the consolidated financial statements included in this Annual
Report on Form 10-K. Listed below are the pre-tax charges (credits).
1999 - $10.8 million
1998 - $(10.1) million
1997 - $21.1 million
1996 - $(6.4) million
1995 - $39.2 million
(4) As of December 31, 1998, Foamex L.P. classified approximately $715.8
million of long-term debt as current, as discussed in Note 12 to the
consolidated financial statements included in this Annual Report on Form
10-K.
(5) The balance sheet data included the estimated fair value of the net assets
acquired in the Crain Acquisition in December 1997. The income statement
data excludes the results of Crain from the acquisition date of December
23, 1997, since the effect is insignificant.
16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
Foamex L.P. operates in the flexible polyurethane and advanced polymer
foam products industry. As of December 31, 1999, Foamex L.P.'s operations are
conducted directly and through its wholly owned subsidiaries, Foamex Canada,
Foamex Mexico and Foamex Asia. Business segments are listed below. Segment
financial information is included in Note 15 to the consolidated financial
statements.
o Foam Products - manufactures and markets foam used by the bedding
industry, the furniture industry and the retail industry.
o Carpet Cushion Products - manufactures and distributes prime, rebond,
sponge rubber and felt carpet cushion to Foamex Carpet, a sister
company wholly owned by Foamex International.
o Automotive Products - supplies foam primarily for automotive interior
applications to automotive manufacturers and tier one suppliers.
o Technical Products - manufactures and markets reticulated foams and
other custom polyester and polyether foams for industrial, specialty
and consumer and safety applications.
o Other - primarily consists of certain foreign manufacturing
operations, corporate expenses not allocated to the other business
segments and restructuring and other charges (credits).
Foamex L.P.'s sales are impacted by the sales of new and existing homes,
the overall level of passenger car and light truck production, 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.
The following discussion should be read in conjunction with the
consolidated financial statements and related notes included in this Annual
Report on Form 10-K.
RESULTS OF OPERATIONS
Carpet
Foam Cushion Automotive Technical
Products Products Products Products Other Total
1999 (thousands)
Net sales $521,377 $187,668 $361,806 $92,180 $27,648 $1,190,679
Income (loss) from operations 54,439 869 22,853 23,048 (16,962) 84,247
Depreciation and amortization 16,390 6,436 4,596 2,564 2,604 32,590
Income (loss) from operations
as a percentage of net sales 10.4% 0.5% 6.3% 25.0% n.m.* 7.1%
1998
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
Income (loss) from operations
as a percentage of net sales 6.5% 0.0% 6.1% 18.9% n.m.* 5.7%
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
Income (loss) from operations
as a percentage of net sales 9.2% 3.2% 11.0% 23.7% n.m.* 6.1%
* not meaningful
17
Acquisitions and Dispositions
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 (and an estimated fair value of approximately $112.3
million) and contributed all of the assets of Crain, subject to all the
liabilities of Crain, to Foamex L.P. In addition, fees and expenses associated
with the Crain Acquisition were approximately $13.2 million. The Crain
Acquisition was accounted for as a purchase and the results of Crain were
included from the acquisition date, except the results from December 24, 1997 to
December 28, 1997 were not included in the consolidated statements of operations
or cash flows for 1997 since the effect would be insignificant.
GFI Transaction
On February 27, 1998, Foamex International, Foamex L.P. and certain of
their affiliates completed a series of transactions which changed Foamex L.P.'s
structure (collectively, the "GFI Transaction"). Prior to the consummation of
these transactions, 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 Industries, Inc. ("General Felt") with
$4.8 million in cash and a promissory note in the aggregate principal amount of
$34.0 million 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, 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.
No gain has been recognized on the GFI 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.
1999 Compared to 1998
Total net sales for 1999 increased 3.0% to $1,190.7 million from $1,155.9
million in 1998. The increase was primarily the result of stronger volume growth
in the Automotive Products and Technical Products segments partially offset by
sales declines in the Foam Products and Carpet Cushion Products segments.
Income from operations increased 28.6% to $84.2 million in 1999 from
$65.5 million in 1998. Results in 1999 included $10.8 million of restructuring
and other charges. In 1998, a net restructuring credit of previously established
restructuring accruals increased operating income by $10.1 million. These
restructuring and other charges (credits) are discussed further under "Other"
below. Excluding the restructuring and other charges (credits)for comparison
purposes, income from operations increased 71.7% to $95.1 million in 1999 from
$55.4 million in 1998. On this basis, income from operations represented 8.0% of
net sales in 1999, up from 4.8% of net sales in 1998. The improvement was
primarily due to (i) the increase in net sales, (ii) improved gross profit
margins and (iii) lower selling, general and administrative expenses at both the
business unit and corporate levels. Improved gross profit margins resulted
primarily from operating efficiencies, the benefits of the first phase of
implementation of
18
improved operating practices across a number of Foamex L.P.'s facilities,
enhanced raw material utilization and the full year benefits from the
consolidation of former Crain facilities. Lower selling, general and
administrative expenses primarily reflected the integration of the Crain
Acquisition, staffing reductions in January 1999, elimination of the Trace
management fee and the closure of the New York office.
Foam Products
Foam Products net sales for 1999 decreased 6.8% to $521.4 million from
$559.7 million in 1998. The decrease was primarily due to decreased sales
volumes resulting from Foamex L.P.'s decision to exit certain business lines and
the closure of facilities related to the Crain Acquisition. Despite the decline
in sales, income from operations increased 50.2% to $54.4 million in 1999 from
$36.3 million in 1998. Income from operations represented 10.4% of net sales in
1999, up from 6.5% in 1998. The improvement was primarily driven by (i) enhanced
raw material utilization, (ii) the benefits of the first phase of implementation
of improved operating practices across a number of Foamex L.P.'s facilities,
(iii) the benefits of consolidation of facilities in the Southeast region of the
U.S. and in Southern California and (iv) the elimination of operating
inefficiencies incurred in 1998. Income from operations for 1998 was adversely
impacted by a number of factors, the most significant of which were (i) $4.0
million of costs associated with the Crain Acquisition transition including
inventory adjustments for facilities affected by the consolidation of
manufacturing facilities, (ii) operating inefficiencies and logistics costs of
$2.5 million associated with the sales of juvenile and other consumer products
sold through mass merchandisers and discount stores and (iii) operating losses
and inefficiencies of $1.0 million resulting from fires at Foamex L.P.'s
facilities in Orlando, Florida and Cornelius, North Carolina.
Carpet Cushion Products
Carpet Cushion Products net sales for 1999 decreased 10.8% to $187.7
million from $210.3 million in 1998 primarily due to lower sales volumes.
Competitive pressures in the carpet cushion marketplace contributed to lower
sales volumes. Sales volumes were also reduced due to limited production from
Foamex L.P.'s Orlando, Florida facility as a result of the 1998 fire. Income
from operations for 1999 increased to $0.9 million from a loss of $0.1 million
in 1998. Income from operations continued to be impacted by lower sales volumes
and the Orlando fire, which increased product transportation costs as the
fulfillment process was shifted to less geographically optimal facilities. The
Orlando, Florida carpet cushion line was brought back on stream and operational
in the fourth quarter of 1999. These effects were partially offset by lower
expenses associated with the rationalization associated with the Crain
Acquisition. Results in 1998 were impacted by a $1.0 million charge associated
with the Orlando, Florida fire and costs related to the Crain Acquisition
transition of $0.9 million.
Automotive Products
Automotive Products net sales for 1999 increased 26.9% to $361.8 million
from $285.2 million in 1998, primarily as a result of higher sales volume of
lamination products. Income from operations increased 32.0% to $22.9 million in
1999 from $17.3 million in 1998. Income from operations represented 6.3% of net
sales in 1999, up from 6.1% in 1998. The improvement was primarily due to (i)
operating efficiencies at Foamex L.P.'s Mexican border facilities that became
fully operational in the fourth quarter of 1998 and (ii) increased sales
volumes. Income from operations for 1998 was reduced by (i) $3.0 million of
costs incurred during the start up phase of new lamination business at the
Mexican border, (ii) contract price reductions of approximately $1.1 million and
(iii) losses of $1.0 million associated with the production of thermoformable
headliners.
Technical Products
Technical Products net sales for 1999 increased 16.5% to $92.2 million
from $79.1 million in 1998. Income from operations increased 54.5% to $23.0
million in 1999 from $14.9 million in 1998. Income from operations represented
25.0% of net sales in 1999, up from 18.9% in 1998. The improvement was primarily
driven by favorable market conditions, strong growth in sales volumes, a
higher-margin product mix and improved manufacturing efficiencies. Plans to
expand capacity for Technical Products were initiated during the second half of
1999.
19
Other
Other primarily consists of certain foreign manufacturing operations,
corporate expenses not allocated to business segments and restructuring and
other charges (credits). The increase in net sales associated with this segment
primarily resulted from an increase in net sales from Foamex L.P.'s Mexico City
operation. The loss from operations in 1999 was primarily associated with the
$10.8 million of restructuring and other charges discussed below. The loss from
operations in 1998 included $10.1 million of net restructuring credits discussed
below. The loss from operations for 1998 was impacted by accounts receivable and
inventory writedowns of approximately $8.5 million at the Mexico City facility
and start up costs of $2.5 million for Foamex L.P.'s Asian joint venture.
Restructuring and other charges for 1999 amounted to $10.8 million and
were comprised of restructuring charges of approximately $9.4 million for four
restructuring plans, approximately $1.1 million of restructuring adjustments
related to changes in estimates primarily to the 1998 restructuring plans and
$0.3 million of other charges for additional reserves for Trace receivables. The
$9.4 million 1999 restructuring charge was comprised of $6.9 million for
personnel reductions, $1.0 million for plant closure and lease costs relating to
the closure of one facility and certain product line rationalizations during the
year and $1.5 million for asset writedowns associated with the plant closure and
consolidations. See Note 4 to the consolidated financial statements for further
discussion.
In 1998, net restructuring credits were approximately $10.1 million,
which reflect a $14.8 million reversal of prior year's restructuring plans,
offset by other charges of $4.7 million. The $4.7 million was comprised of a
$2.4 million reserve for net receivables due from Trace and a $2.3 million of
impaired cost in excess of assets acquired associated with a foreign facility.
However, these charges were offset by a $14.8 million restructuring credit
associated with modifications to the 1997 restructuring plan. The $14.8 million
credit reflected the reversal of $10.2 million of fixed asset writedowns, $3.5
million of plant closure and operating lease obligations and $1.1 million of
personnel reductions.
As of December 31, 1999, all personnel affected by restructuring had been
terminated. Cash spending during 1999 for implementation of restructuring plans
approximated $8.6 million. Future cash spending for the restructuring plans
approximates $11.0 million. Foamex L.P. expects to spend approximately $3.9
million during 2000 and the remaining $7.1 million (related principally to lease
runout payments) is expected to be spent through 2006.
Interest and Debt Issuance Expense
Interest and debt issuance expense totaled $66.5 million in 1999,
slightly higher than the 1998 expense of $66.1 million. The benefit of lower
average debt levels was offset by higher effective interest rates and increased
amortization expense related to additional debt issuance costs paid during 1999.
Other Income (Expense), Net
Other income (expense), net totaled $0.9 million and was primarily due to
losses on the disposal of fixed assets and letter of credit fees related to the
GFI Transaction. Interest income totaled $2.2 million in 1999.
Other income (expense), net for 1998 primarily consists of: $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.
Income Tax Expense
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 8 to the consolidated financial
statements.
20
Income (Loss) from Continuing Operations
Income (loss) from continuing operations increased to $15.6 million for
1999 as compared to a loss of $5.9 million in 1998. The increase is primarily
due to improved operating results during 1999 as compared to 1998, as discussed
above.
Extraordinary Loss
The extraordinary loss on the early extinguishment of debt in 1998 was
$3.2 million. The charge primarily reflected the write-off of debt issuance
costs in connection with the GFI Transaction.
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, reduced restructuring and other charges
(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 (the
"Transition"). Also during 1998, Foamex L.P. recorded income of $14.8 million
for the reversal of 1997 restructuring charges, offset by $4.7 million of other
charges 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 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 26.3% to $285.2 million
from $225.9 million in 1997 and income from operations decreased 30.4% to $17.3
million (6.1% of net sales) from $24.9 million (11.0% of net sales). The
increase in net sales was primarily 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.
21
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 $18.1 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 primarily associated with a reversal
of $14.8 million of restructuring charges set up in 1997, offset by accounts
receivable and inventory writedowns of $8.5 million at the Mexico City facility,
start up costs of $2.5 million for Foamex L.P.'s Asian joint venture and
duplicate administrative costs incurred during the Transition.
Interest and Debt Issuance Expense
Interest and debt issuance expense totaled $66.1 million in 1998 compared
to $44.2 million in 1997. The increase was primarily due to the debt incurred in
connection with the Crain Acquisition partially offset by the favorable effect
of a debt refinancing in June 1997.
Other Income (Expense), Net
Other income (expense), net for 1998 primarily consists of: $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.
Other income (expense), net for 1997 was comprised primarily of $1.4
million of interest income and a gain on the sale of assets of $0.4 million.
Income Tax Expense
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. Foamex L.P. did not recognize the tax benefits
associated with losses in Mexico because it appears likely that the net
operating loss carryforwards would not be realized in the near future. See Note
8 to the consolidated financial statements.
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 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, as previously discussed.
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 a 1997 refinancing
plan.
22
Liquidity and Capital Resources
Foamex L.P.'s operating cash requirements consist principally of working
capital requirements, scheduled payments of principal and interest on
outstanding indebtedness and capital expenditures. Foamex L.P. believes that
cash flow from its operating activities, cash on hand and periodic borrowings
under its credit facility, discussed below, will be adequate to meet its
liquidity requirements. All principal and interest payments were made as
scheduled in 1999. The ability of Foamex L.P. to make distributions to Foamex
International is restricted by the terms of its financing agreements; therefore,
Foamex International is not expected to have access to the cash flow generated
by Foamex L.P. for the foreseeable future.
Cash and cash equivalents totaled $1.6 million at year-end 1999 compared
to $3.2 million at the end of 1998. Working capital at the end of 1999 was
$110.5 million and the current ratio was 1.7 to 1. Excluding the $715.8 million
of long-term debt that was classified as a current liability at year-end
December 31, 1998 for comparative purposes, working capital at the end of 1998
was $113.5 million and the current ratio was 1.6 to 1. Improved accounts
receivable and inventory management contributed to a $57.5 million reduction in
accounts payable. Total debt at year-end 1999 was $690.0 million, down $36.4
million or 5.0% from the end of 1998.
Cash Flow from Operating Activities
Cash provided by operating activities was $58.1 million for 1999 as
compared to cash used of $27.8 million in 1998. The improvement was driven by
the increase in income from operations and improved accounts receivable and
inventory management.
Cash Flow from Investing Activities
Cash used for investing activities was $15.8 million for 1999 compared to
$43.1 million in 1998. The decrease was primarily driven by the sale of certain
assets and lower capital spending. Cash provided by the sale of assets primarily
represented the proceeds from the sale of Foamex L.P.'s packaging business ($1.5
million) in October 1999 which was part of a 1998 restructuring plan.
Additionally, capital expenditures in 1999 of $19.4 million were down from prior
years. Foamex L.P. expects capital expenditures for 2000 to return to prior year
levels and be in excess of $30.0 million primarily as a result of the
construction of two new VPFSM machines. In addition, Foamex L.P. is exploring
the possible implementation of a new ERP software system.
Cash Flow from Financing Activities
Cash required for financing activities was $43.8 million for 1999
compared to cash provided of $64.6 million in 1998. Requirements in 1999
primarily reflected net debt repayments, distributions paid to partners and
costs related to amending the debt agreements. Partially offsetting these
requirements was the repayment of a tax distribution advance from Foamex
International (see Note 17 to the consolidated financial statements).
Financial Condition
As of December 31, 1998, Foamex L.P. was not in compliance with various
debt covenants included in agreements totaling $415.4 million. Had the lenders
under these debt agreements accelerated the maturity of the indebtedness as a
result of the noncompliance, the acceleration would have constituted an event of
default and given the holders the right to require the repurchase of
substantially all of Foamex L.P.'s long-term debt. As a result of these factors,
approximately $715.8 million of long-term debt at December 31, 1998 was
classified as a current liability in the consolidated balance sheet, which
produced a working capital deficit. As discussed below, amendments were executed
to modify certain financial covenants. As of December 31, 1999, Foamex L.P. was
in compliance with its financial covenants and long-term debt was classified
based on its maturity schedule as of December 31, 1999.
23
Foamex L.P. Credit Facility
In response to financial conditions at year-end 1998, amendments to debt
agreements were executed during the first half of 1999. As a result the Foamex
L.P. credit facility, which was amended and restated in February 1998, was
further amended and restated in June 1999 (the "Foamex L.P. Credit Facility") to
modify financial covenants for net worth, interest coverage, fixed charge
coverage and leverage ratios through December 2006. The agreement was also
amended to no longer permit Foamex L.P. to make certain cash payments, including
the payment of an annual management fee of $3.0 million to a subsidiary of Trace
and distributions to Foamex International, and to limit future investments in
foreign subsidiaries and joint ventures. The "change of control" definition
under the agreement was also modified to conform to the definition discussed in
"change of control" in Note 1 to the consolidated financial statements. Changes
in the interest rate structure, effective in 2000, were also made and are
discussed below. Foamex L.P. was in compliance with this agreement at year-end
1999.
At year-end 1999, interest was based on the combination of a variable
rate consisting of the higher of (i) the base rate of The Bank of Nova Scotia or
(ii) the Federal Funds rate plus 0.5% plus a margin. The margins for revolving,
Term B, Term C and Term D loans were 2.25%, 2.50%, 2.75% and 2.875%,
respectively. At the option of Foamex L.P., portions of the outstanding loans
are convertible into LIBOR based loans plus 1.0% added to the margins
identified. The effective interest rates for the Foamex L.P. Credit Facility at
the end of 1999 ranged between 9.69% and 10.06%.
Available borrowings under the revolving credit facility totaled $24.2
million at year-end 1999. Letters of credit outstanding at December 31, 1999
totaled $47.1 million. Borrowings under the Foamex L.P. Credit Facility are
collateralized by substantially all of the assets of Foamex L.P. on a pari passu
basis with the IRBs (see Note 12 to the consolidated financial statements).
As part of the Foamex L.P. Credit Facility, excess cash flow generated
annually, as defined, is required to prepay portions of Term B, C and D loans.
The prepayment amount determined for 1999 was $13.3 million and will be financed
through revolving loans under the facility. The required payment is expected to
be made during the second quarter of 2000. The repayment schedules for the Term
B, C and D loans have been adjusted, as of year-end 1999, to reflect the
prepayment required.
Effective January 1, 2000, the interest rate on outstanding borrowings
under the Foamex L.P. Credit Facility will increase by 25 basis points each
quarter that Foamex L.P.'s leverage ratio, as defined, exceeds 5.00 to 1.00.
Once the leverage ratio is reduced below this level, the cumulative amount of
any 25 basis point adjustments to the interest rate on borrowings would be
eliminated. At December 31, 1999, the calculated leverage ratio was 5.48 to
1.00. Consequently, the basis point adjustment will be applicable for the
calculation of interest in the first quarter of 2000.
Buyout Proposals
On February 9, 2000, Foamex International announced that it is in
discussions with respect to a proposal involving the acquisition of all of
Foamex International's outstanding common stock for cash. Foamex International
stated that the proposal is subject to a number of conditions, including the
buyer's ongoing due diligence and the execution of definitive agreements. Foamex
International agreed to an exclusive negotiating period ending five business
days after delivery of its audited financial statements included in Foamex
International's Annual Report on Form 10-K to the prospective buyer. See
"Business - Buyout Proposals".
On August 5, 1999, Foamex International announced that its Board of
Directors signed a letter of intent with Sorgenti Chemical Industries, LLC and
Liberty Partners Holdings 20, LLC (collectively, the "Purchasers") for a
business combination. On December 15, 1999, Foamex International announced that
the letter of intent with the Purchasers, which had been extended, expired by
its terms.
In 1998, Foamex International received an unsolicited buyout proposal
from Trace, Foamex International's principal stockholder. Foamex International
entered into two merger agreements, which were subsequently terminated by Trace.
24
Change in Control
Trace is a privately held company, which owned approximately 29% of
Foamex International's outstanding voting common stock at March 10, 2000, and
whose former Chairman also serves as Foamex International's Chairman. Foamex
International's common stock owned by Trace is pledged as collateral against
certain of Trace's obligations. Certain credit agreements and promissory notes
of Foamex L.P. provide that a "change of control" would be an event of default
and could result in the acceleration of substantially all of Foamex L.P.'s
long-term debt.
Trace is presently in bankruptcy proceedings under Chapter 7 of the
Bankruptcy Code in Federal Court in New York City. Trace's bankruptcy filing
does not constitute a "change of control" under the provisions of the debt
agreements. A "change of control" could take place however, if the bankruptcy
court allows Trace's creditors to foreclose on and take ownership of Foamex
International's common stock owned by Trace, or otherwise authorizes a sale or
transfer of these shares, under circumstances in which a person or related
group, other than Trace, acquired more than 25% of Foamex International's
outstanding voting stock and owned a greater percentage of such voting stock
than the amount beneficially owned by Trace.
Management believes that it is unlikely that a "change of control" will
occur as a result of Trace's bankruptcy proceedings. However, Foamex L.P. would
seek to resolve the issues that may arise should the "change of control"
provisions be triggered, by requesting waivers of such provisions and/or
refinancing certain debt, if necessary. There can be no assurance that Foamex
L.P. or its subsidiaries will be able to do so, or that Foamex L.P. will be able
to obtain waivers of such provisions. Such circumstances raise substantial doubt
about Foamex L.P.'s ability to continue as a going concern. The accompanying
financial statements were prepared on a going-concern basis and do not include
any adjustments that might result from the outcome of the Trace bankruptcy
filing.
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.
Liabilities recorded by Foamex L.P. in connection with environmental matters as
of December 31, 1999 totaled $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 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 significant adverse effect on
Foamex L.P.'s operations, financial position, capital expenditures or
competitive position.
Inflation and Other Matters
On average, inflation rates for the domestic economy continue to be
relatively low. Although long-term inflation rates are difficult to predict,
Foamex L.P. believes it has the flexibility in operations and capital structure
to maintain a competitive position. In recent years, results of operations were
adversely affected by raw material cost increases. The price of the two
principal chemicals used, TDI and polyol, is influenced by demand, manufacturing
capacity and oil prices. The recent increase in oil prices did not significantly
impact raw material costs in 1999. Any sustained increase in oil prices will
likely result in higher raw material cost and also increase the cost of
operations. Results for the first quarter of 2000 are anticipated to be
negatively impacted by higher transportation costs related to oil price
increases and higher costs for raw materials. 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.
25
Year 2000 Compliance
Foamex L.P.'s program to address potential disruptions to operations and
relationships with our business partners related to the Year 2000 software
problem was successful and there were no significant disruptions to operations
or administration.
The cost to prevent the Year 2000 problem was approximately $2.0 million.
The majority of this total project cost was incurred during 1998 and 1999. The
project cost primarily represented the cost for various consultants and system
upgrades. Project cost included internal cost for information technology
employees that worked directly on software programming modifications.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Foamex L.P.'s debt securities with variable interest rates are subject to
market risk for changes in interest rates. On December 31, 1999, indebtedness
with variable interest rates totaled $426.9 million. On an annualized basis, if
the interest rates on these debt instruments increased by 1%, interest expense
would increase by approximately $4.3 million.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
An index to the financial statements and financial statement schedules is
included in Item 14(a).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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.
26
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements and Schedule
Foamex L.P. and Subsidiaries
Report of Independent Accountants F-2
Consolidated Balance Sheets as of December 31, 1999 and 1998 F-3
Consolidated Statements of Operations for the years 1999, 1998 and 1997 F-5
Consolidated Statements of Cash Flows for the years 1999, 1998 and 1997 F-6
Consolidated Statements of Partners' Equity (Deficit) for the years
1999, 1998 and 1997 F-7
Notes to Consolidated Financial Statements F-8
Foamex Capital Corporation
Report of Independent Accountants F-38
Balance Sheets as of December 31, 1999 and 1998 F-39
Notes to Balance Sheets F-40
Foamex L.P. and Subsidiaries Financial Statement Schedule
Schedule II - Valuation and Qualifying Accounts S-2
(b) Reports on Form 8-K.
A report, dated December 15, 1999, was filed for Item 5. Other Events,
concerning the termination of a letter of intent for the acquisition of
Foamex International.
A report, dated February 9, 2000, was filed for Item 5. Other Events,
concerning preliminary merger discussions.
(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.
("Trace Holdings") and Trace Merger Sub, Inc. ("Trace Sub").
2.4(aa) - Agreement and Plan of Merger, dated as of June 25, 1998, by and
among Trace Holdings, Trace Sub and Foamex International.
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").
27
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.
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.
4.4.2(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.
28
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.
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, Inc. ("Crain") 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(dd) - 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(dd) - Trademark Security Agreement, dated as of June 12, 1997, by Foamex
L.P. in favor of Citicorp USA, Inc., as Collateral Agent.
4.4.34(ee) - Amended and Restated Foamex Pledge Agreement, dated as of June 30,
1999 made by Foamex L.P. in favor of Citicorp U.S.A. Inc. as
Collateral Agent.
4.4.35(ee) - Amended and Restated Partnership Pledge Agreement, dated as of
June 30, 1999 by FMXI and Foamex International in favor of Citicorp
USA Inc. as FII Intercreditor Collateral Agent.
4.5(ff) - Commitment letter, dated August 9, 1999, 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").
29
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.
4.10.9(dd) - Amendment No. 1 to Foamex Carpet Credit Agreement, dated October
30, 1998.
4.10.10(bb) - Amendment No. 2 to Foamex Carpet Credit Agreement, dated March 12,
1999.
4.10.11(ee) - Foamex L.P. Credit Agreement, dated June 12, 1997, as amended and
restated as of February 27, 1998 as further amended and restated as
of June 29, 1999 among Foamex L.P., 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.
4.10.12(ee) - Amendment No. 3 to Foamex Carpet Credit Agreement, dated June 30,
1999.
4.10.13(ee) - Foamex International Pledge Agreement, dated June 30, 1999, made
by Foamex International in favor of Citicorp U.S.A. Inc. as FII
Intercreditor Collateral Agent.
4.10.14(gg) - Amendment No. 1 to the Foamex L.P. Credit Agreement, dated
December 23, 1999, as amended and restated as of February 27, 1998
as further amended and restated as of June 29, 1999 among Foamex
L.P., 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.
4.11.1(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 of Foamex Carpet in favor of Foam
Funding LLC dated March 15, 1999.
4.12.3(ee) - Amendment to Promissory Note of Foamex L.P. in favor of Foam
Funding LLC dated as of June 30, 1999.
4.12.4(ee) - Amendment to Promissory Note of Foamex Carpet in favor of Foam
Funding LLC dated as of June 30, 1999.
4.13(dd) - Waiver, dated as of April 15, 1999 to the Credit Agreement, dated
as of February 27, 1998, among Foamex Carpet, 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.
4.13.1(gg) - Waiver, dated as of April 15, 1999 to the Promissory Note, dated
as of February 27, 1998, payable by Foamex Carpet to Foam Funding
LLC.
4.13.2(gg) - Waiver, dated as of May 6, 1999 to the Promissory Note, dated as
of February 27, 1998, payable by Foamex Carpet to Foam Funding LLC.
4.14.1 - Revolving Note of Foamex International in favor of Foamex L.P. in
the principal amount of $2,490,000, dated as of October 20, 1999.
30
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 L.P.
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.
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.'s 401(k) Savings Plan effective October 1, 1997.
10.10.7(a) - Foamex International's 1993 Stock Option Plan.
10.10.8(a) - Foamex International'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.
31
10.11.2(dd) - Employment Agreement, dated as of March 16, 1999, by and between
Foamex International and John G. Johnson, Jr.
10.11.3(gg) - Employment Agreement, dated as of March 16, 1999, by and between
Foamex International and John Televantos.
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.
21 - Subsidiaries of registrant.
27 - Financial Data Schedule for the year ended December 31, 1999.
- ----------------------------
(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.
(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.
32
(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., FCC 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.
(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.
33
(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 of
Foamex International Inc. for the fiscal year ended December 31, 1998.
(ee) Incorporated herein by reference to the Exhibit to the Current Report on
Form 8-K of Foamex International Inc. reporting an event that occurred on
June 30, 1999.
(ff) Incorporated herein by reference to the Exhibit to the Form 10-Q of
Foamex International for the quarterly period ended September 30, 1999.
(gg) Incorporated herein by reference to the Exhibit to the Form 10-K of
Foamex International for the fiscal year ended December 31, 1999.
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.
34
SIGNATURES
Pursuant to the requirements of Section 13 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 as of the 30th day of March 2000.
FOAMEX L.P.
By: FMXI, Inc.
General Partner
By: /s/ George L. Karpinski
-----------------------
Name: George L. Karpinski
Title: Vice President
FOAMEX CAPITAL CORPORATION
By: /s/ George L. Karpinski
-----------------------
Name: George L. Karpinski
Title: Vice President
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 as of the dates indicated:
Signature Title Date
/s/ Marshall S. Cogan Director of FMXI and FCC March 30, 2000
- ------------------------
Marshall S. Cogan
/s/ Philip N. Smith, Jr. Director of FMXI March 30, 2000
- ---------------------------
Philip N. Smith, Jr.
/s/ Barry Zimmerman Director of FCC March 30, 2000
- ------------------------
Barry Zimmerman
35
FOAMEX L.P. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Financial Statements of Registrants
Foamex L.P.
Report of Independent Accountants F-2
Consolidated Balance Sheets as of December 31, 1999 and 1998 F-3
Consolidated Statements of Operations for the years 1999, 1998 and 1997 F-5
Consolidated Statements of Cash Flows for the years 1999, 1998 and 1997 F-6
Consolidated Statements of Partners' Equity (Deficit) for the years 1999, 1998 and 1997 F-7
Notes to Consolidated Financial Statements F-8
Foamex Capital Corporation
Report of Independent Accountants F-38
Balance Sheets as of December 31, 1999 and 1998 F-39
Notes to Balance Sheets F-40
F-1
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, an indirect wholly owned subsidiary of Foamex
International Inc. ("Foamex International"), at December 31, 1999 and 1998 and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 1999 in conformity with accounting principles
generally accepted in the United States. In addition, in our opinion, the
financial statement schedule as of and for each of the three years in the period
ended December 31, 1999 when considered in relation to the basic consolidated
financial statements taken as a whole, present 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
auditing standards generally accepted in the United States 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, on July 21, 1999, Trace International Holdings, Inc.
("Trace"), a major stockholder of Foamex International, filed a petition for
relief under Chapter 11 of the Bankruptcy Code. On January 24, 2000, an order
was signed converting the Trace case from Chapter 11 to Chapter 7 of the
Bankruptcy Code. A trustee was appointed to oversee the liquidation of Trace's
assets. The outcome of the Trace bankruptcy could result in the acceleration of
substantially all of Foamex L.P.'s debt. This matter raises substantial doubt
about Foamex L.P.'s ability to continue as a going concern. Management's plans
in regard to this matter 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 this uncertainty.
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
March 10, 2000
F-2
FOAMEX L.P. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, December 31,
ASSETS 1999 1998
(thousands)
CURRENT ASSETS
Cash and cash equivalents $ 1,573 $ 3,192
Accounts receivable, net of allowance for doubtful
accounts and discounts of $5,310 and $7,278 128,929 143,301
Accounts receivable from related parties 16,717 17,533
Inventories 93,812 127,636
Other current assets 21,541 26,896
--------- ---------
Total current assets 262,572 318,558
--------- ---------
PROPERTY, PLANT AND EQUIPMENT
Land and land improvements 6,947 7,142
Buildings and leasehold improvements 98,098 97,996
Machinery, equipment and furnishings 246,392 223,449
Construction in progress 14,598 24,132
--------- ---------
Total 366,035 352,719
Less accumulated depreciation and amortization (154,720) (133,082)
--------- ---------
Property, plant and equipment, net 211,315 219,637
COST IN EXCESS OF ASSETS ACQUIRED, net of
accumulated amortization of $15,804 in 1999 and
$10,635 in 1998 183,481 188,205
DEBT ISSUANCE COSTS, net of
accumulated amortization of $5,787 in 1999 and
$2,894 in 1998 14,423 13,946
OTHER ASSETS 26,704 28,182
--------- ---------
TOTAL ASSETS $ 698,495 $ 768,528
========= =========
The accompanying notes are an integral part of the consolidated
financial statements.
F-3
FOAMEX L.P. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, December 31,
LIABILITIES AND PARTNERS' EQUITY (DEFICIT) 1999 1998
(thousands)
CURRENT LIABILITIES
Short-term borrowings $ 1,627 $ 2,957
Current portion of long-term debt 7,866 689,478
Current portion of long-term debt - related party -- 34,000
Accounts payable 82,229 139,726
Accounts payable to related parties -- 791
Accrued employee compensation and benefits 16,341 12,406
Accrued interest 9,457 7,396
Accrued restructuring and plant consolidation 3,915 2,552
Deferred income taxes 2,080 1,098
Accrued customer rebates 9,652 5,813
Other accrued liabilities 18,864 24,699
--------- ---------
Total current liabilities 152,031 920,916
LONG-TERM DEBT 646,544 --
LONG-TERM DEBT - RELATED PARTY 34,000 --
ACCRUED EMPLOYEE BENEFITS 14,131 26,559
ACCRUED RESTRUCTURING AND
PLANT CONSOLIDATION 7,097 6,969
OTHER LIABILITIES 9,283 10,121
--------- ---------
Total liabilities 863,086 964,565
--------- ---------
COMMITMENTS AND CONTINGENCIES
PARTNERS' EQUITY (DEFICIT)
General partners (143,271) (141,426)
Limited partners -- --
Accumulated comprehensive loss (8,923) (26,208)
Notes and advances receivable from partner (3,176) (18,608)
Notes receivable from related party (9,221) (9,795)
--------- ---------
Total partners' equity (deficit) (164,591) (196,037)
--------- ---------
TOTAL LIABILITIES AND PARTNERS' EQUITY (DEFICIT) $ 698,495 $ 768,528
========= =========
The accompanying notes are an integral part of the consolidated
financial statements.
F-4
FOAMEX L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years 1999, 1998 and 1997
1999 1998 1997
----------- ----------- -----------
(thousands)
NET SALES $ 1,190,679 $ 1,155,918 $ 931,095
COST OF GOODS SOLD 1,036,056 1,027,241 787,756
----------- ----------- -----------
GROSS PROFIT 154,623 128,677 143,339
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 59,555 73,315 65,907
RESTRUCTURING AND OTHER CHARGES (CREDITS) 10,821 (10,146) 21,100
----------- ----------- -----------
INCOME FROM OPERATIONS 84,247 65,508 56,332
INTEREST AND DEBT ISSUANCE EXPENSE 66,471 66,112 44,181
OTHER INCOME (EXPENSE), NET (882) (4,325) 2,009
----------- ----------- -----------
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE PROVISION FOR INCOME TAXES 16,894 (4,929) 14,160
PROVISION FOR INCOME TAXES 1,313 940 2,895
----------- ----------- -----------
INCOME (LOSS) FROM CONTINUING OPERATIONS 15,581 (5,869) 11,265
EXTRAORDINARY LOSS ON EARLY
EXTINGUISHMENT OF DEBT -- (3,195) (48,559)
----------- ----------- -----------
NET INCOME (LOSS) $ 15,581 $ (9,064) $ (37,294)
=========== =========== ===========
The accompanying notes are an integral part of the consolidated
financial statements.
F-5
FOAMEX L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years 1999, 1998 and 1997
1999 1998 1997
--------- --------- ---------
OPERATING ACTIVITIES (thousands)
Net income (loss) $ 15,581 $ (9,064) $ (37,294)
Adjustments to reconcile net income (loss) to net
cash provided by (used for) operating activities:
Depreciation and amortization 32,590 31,679 20,882
Amortization of debt issuance costs, debt premium, deferred
swap adjustment and gain, and debt discount 457 (244) 2,307
Asset writedowns and other charges (credits) 356 (5,507) 12,041
Extraordinary loss on early extinguishment of debt -- 2,857 24,182
Provision for uncollectible accounts 2,493 2,000 2,295
Deferred income taxes 81 267 (568)
Other, net 1,075 (5,274) (5,977)
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable and accounts receivable from related parties 12,695 (19,026) (4,038)
Inventories 33,824 (20,288) 12,882
Accounts payable and accounts payable to related parties (58,288) 13,530 14,359
Accrued restructuring and plant consolidation 1,491 (14,183) 5,701
Other assets and liabilities 15,706 (4,529) (24,763)
--------- --------- ---------
Net cash provided by (used for) operating activities 58,061 (27,782) 22,009
--------- --------- ---------
INVESTING ACTIVITIES
Capital expenditures (19,407) (31,715) (33,117)
Acquisitions, net of cash acquired -- -- (119,065)
Proceeds from sale of assets 1,510 2,230 40,169
Purchase of note from related party -- -- (5,000)
Repayment of (purchase of) notes from Foamex International 2,490 (2,490) (2,500)
Redemption of General Felt -- (10,153) --
Revolving loan with Foamex International (676) -- --
Decrease in restricted cash -- -- 12,143
Other investing activities 249 (922) 112
--------- --------- ---------
Net cash used for investing activities (15,834) (43,050) (107,258)
--------- --------- ---------
FINANCING ACTIVITIES
Net proceeds from (repayments of) short-term borrowings (1,330) (3,641) 2,894
Net proceeds from (repayments of) revolving loans (25,753) 84,511 54,928
Proceeds from long-term debt -- 138,810 594,499
Repayments of long-term debt (8,271) (142,212) (430,593)
Increase (decrease) in cash overdraft (1,444) 7,300 --
Purchase of FJPS senior secured discount debentures -- -- (105,829)
Tax distribution repayments (advances) 13,618 -- (13,618)
Net distribution paid to partners (17,296) (20,293) (10,283)
Debt issuance costs (3,370) (979) (18,410)
Other financing activities -- 1,123 98
--------- --------- ---------
Net cash provided by (used for) financing activities (43,846) 64,619 73,686
--------- --------- ---------
Net decrease in cash and cash equivalents (1,619) (6,213) (11,563)
Cash and cash equivalents at beginning of period 3,192 9,405 20,968
--------- --------- ---------
Cash and cash equivalents at end of period $ 1,573 $ 3,192 $ 9,405
========= ========= =========
The accompanying notes are an integral part of the consolidated
financial statements.
F-6
FOAMEX L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF PARTNERS' EQUITY (DEFICIT)
For the Years Ended 1999, 1998 and 1997
Accumulated Notes
Other Notes Receivable
General Limited Comprehensive Receivable Related
Partners Partners Income (Loss) from Partners Party Total
(thousands)
Balances at December 29, 1996 $ 632 $ 57,654 $(5,901) $(35,180) $(4,373) $ 12,832
Net loss (746) (36,548) (37,294)
Minimum pension liability adjustment (1,311) (1,311)
Foreign currency translation adjustment (873) (873)
---------
Comprehensive 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) - (8,085) (16,118) (9,795) (156,302)
Net loss (181) (8,883) (9,064)
Minimum pension liability adjustment (11,525) (11,525)
Foreign currency translation adjustment (6,598) (6,598)
---------
Comprehensive 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) - (26,208) (18,608) (9,795) (196,037)
Net income 312 15,269 15,581
Minimum pension liability adjustment 12,331 12,331
Foreign currency translation adjustment 4,954 4,954
---------
Comprehensive income 32,866
Distributions (7) (321) (328)
Distribution associated with tax distribution
advance (346) (16,967) (17,313)
Repayment of note receivable from Foamex
International 2,490 2,490
Repayment of tax advance 13,618 13,618
Revolving loan with Foamex International (676) (676)
Other 215 574 789
Deficit balance of Limited Partners assumed
by General Partners (1,804) 1,804 -
--------- ------- -------- -------- -------- ---------
Balances at December 31, 1999 $(143,271) $ - $ (8,923) $ (3,176) $ (9,221) $(164,591)
--------- ------- -------- -------- -------- ---------
The accompanying notes are an integral part of the consolidated
financial statements.
F-7
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION
Organization
Foamex L.P. is a manufacturer and distributor of flexible polyurethane
foam and advanced polymer foam products. As of December 31, 1999, 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. 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 (see Note 12) 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.
Change in Control
Trace International Holdings, Inc. ("Trace") is a privately held company,
which owned approximately 29% of Foamex International's outstanding voting
common stock at March 10, 2000, and whose former Chairman also serves as Foamex
International's Chairman. Foamex International's common stock owned by Trace is
pledged as collateral against certain of Trace's obligations. The Foamex L.P.
Credit Facility and the Foamex/GFI Note (see Note 12), pursuant to which
approximately $411.8 million of debt was outstanding as of December 31, 1999,
provide that a "change of control" would be an event of default and could result
in the acceleration of such indebtedness. "Change of control" means, for this
purpose, that (i) a person or related group, other than Trace, beneficially owns
more than 25% of Foamex International's outstanding voting stock and (ii) such
voting common stock constitutes a greater percentage of such voting stock than
the amount beneficially owned by Trace. Additionally, certain indentures
relating to senior subordinated notes of $248.0 million contain similar "change
of control" provisions, which require the issuers to tender for such notes at a
price in cash equal to 101% of the aggregate principal amount thereof, plus
accrued and unpaid interest thereon, if there is such a "change of control".
On July 21, 1999, Foamex L.P. was informed by Trace that it filed a
petition for relief under Chapter 11 of the Bankruptcy Code in Federal Court in
New York City. Subsequently, on January 24, 2000, an order was signed converting
the Trace bankruptcy from Chapter 11 to Chapter 7 of the Bankruptcy Code. A
trustee was appointed to oversee the liquidation of Trace's assets. Neither
Trace's bankruptcy filing nor the conversion to Chapter 7 constituted a "change
of control" under the provisions of the debt agreements described above. A
"change of control" could take place however, if the bankruptcy court allows
Trace's creditors to foreclose on and take ownership of Foamex International's
common stock owned by Trace, or otherwise authorizes a sale or transfer of these
shares, under circumstances in which a person or related group, other than
Trace, acquired more than 25% of Foamex International's outstanding voting stock
and owned a greater percentage of such voting stock than the amount beneficially
owned by Trace. On November 22, 1999, the bankruptcy court allowed two creditors
to take ownership of 11% and 6%, respectively, of Foamex International's common
stock. Such an event did not constitute a "change of control" under the
provisions of the debt agreements.
Management believes that it is unlikely that a "change of control" will
occur as a result of Trace's bankruptcy proceedings. However, Foamex L.P. would
seek to resolve the issues that may arise should the "change of control"
provisions be triggered, by requesting waivers of such provisions and/or
refinancing certain debt, if necessary. There can be no assurance that Foamex
L.P. or its subsidiaries will be able to do so, or that Foamex L.P. will be able
to
F-8
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION (continued)
obtain waivers of such provisions. Such circumstances raise substantial doubt
about Foamex L.P.'s ability to continue as a going concern. The accompanying
financial statements were prepared on a going-concern basis and do not include
any adjustments that might result from the outcome of the Trace bankruptcy
filing.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation
The consolidated financial statements include the accounts of Foamex L.P.
and all majority-owned subsidiaries where control exists. Investments in
affiliates with 20% or greater ownership are accounted for using the equity
method. All significant intercompany accounts and transactions have been
eliminated in consolidation.
Reporting Period
Effective September 1998, the annual reporting period was changed from a
52 or 53 week fiscal year ending on the Sunday closest to the end of the
calendar year to a calendar year ending on December 31. This change was
effective for the third fiscal quarter of 1998, which ended on September 30,
1998. Fiscal year 1997 was a 52 week period that ended on December 28, 1997.
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 and contingency disclosures. Actual
results could differ from those estimates.
Revenue Recognition, Discounts and Rebates
Revenue from sales, net of discounts and estimated returns, allowances
and rebates, is recognized when products are shipped at which time title passes
to the customer.
Cash Equivalents
Highly liquid investments with an original maturity of three months or
less when purchased are recognized as cash equivalents.
Inventories
Inventories are stated at the lower of cost or market. Cost 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 20 to 35 years,
and the range for machinery, equipment and furnishings is 5 to 12 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 1999, 1998 and 1997 was $25.9 million, $24.6 million
and $17.6 million, respectively.
Maintenance and repairs are charged to expense as incurred. Renewals and
major improvements are capitalized. When assets are retired or otherwise
disposed of, the asset and related accumulated depreciation are removed from the
accounts and any gain or loss is recognized in operations.
F-9
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Debt Issuance Costs
Debt issuance costs consist of amounts incurred in obtaining long-term
financing and are disclosed in the financing activities section of the
consolidated statements of cash flows. These costs are being amortized over the
term of the related debt using the effective interest method.
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 40 years. 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 and cash flows from operations based on a going concern basis. If an
impairment loss has occurred, based on expected future (undiscounted) cash
flows, the loss is recognized in the income statement. During 1998, a $2.3
million impairment charge was recorded associated with the cost in excess of net
assets acquired related with a foreign facility.
Environmental Remediation
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.
Comprehensive Income
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 Translation
The financial statements of foreign subsidiaries, except in countries
that are considered as highly inflationary as discussed below, have been
translated into U.S. dollars by using the year-end exchange rates for the assets
and liabilities and the average exchange rates for the statements of operations.
Currency translation adjustments are included in other partners' equity
(deficit). In 1998 and 1997, Mexico was considered a highly inflationary
economy. Accordingly, certain financial statement amounts for the Mexican
operations were translated at either current or historical exchange rates, as
appropriate. These translation adjustments were reflected in the results of
operations. Transaction gains (losses) are reflected in operations and are
insignificant. The effect of foreign currency exchange rates on cash flows is
insignificant.
Start-Up Costs
Costs incurred in the start-up of a facility, including training and
production testing, are expensed as incurred.
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.
F-10
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Income Taxes
Income taxes are accounted for under the asset and liability method.
Under this method, 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. Deferred income
tax assets are reduced by a valuation allowance when it is considered more
likely than not that a portion of the deferred income tax assets will not be
realized in a future period. The estimates utilized in the recognition of
deferred income tax assets are subject to revision in future periods.
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 Notes 8 and 12).
Reclassifications
Certain amounts have been reclassified to conform with the current year's
presentation.
Future Accounting Changes
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS No. 133") will require the
fair value of derivatives be recognized in the consolidated balance sheets.
Changes in the fair value of derivatives will be recognized in earnings or in
other comprehensive income, essentially depending on the structure and purpose
of the derivatives. The statement will be effective (as amended by SFAS No. 137)
for all quarters of all fiscal years beginning after June 15, 2000. Foamex L.P.
has not determined the impact, if any, that the adoption of SFAS No. 133 will
have on results of operations or financial position.
3. ACQUISITIONS, ASSET SALES AND DISCONTINUED OPERATIONS
Acquisitions
On December 23, 1997, Foamex International acquired Crain Industries,
Inc. ("Crain") pursuant to a merger agreement with Crain Holdings Corp. (the
"Crain Acquisition") for a purchase price of approximately $213.7 million and
contributed all of the assets of Crain, subject to all the liabilities of Crain,
to Foamex L.P. The Crain Acquisition was primarily funded with borrowings under
a Foamex L.P. 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. In addition, fees and expenses associated with the Crain Acquisition
were approximately $13.2 million.
The Crain Acquisition was accounted for as a purchase and the results of
Crain were included from the acquisition date, except the results from December
24, 1997 to December 28, 1997 were not included in the consolidated statements
of operations or cash flows for 1997 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 closing 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 40 years.
F-11
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. ACQUISITIONS, ASSET SALES AND DISCONTINUED OPERATIONS (continued)
In connection with the Crain Acquisition, Foamex L.P. approved a
consolidation plan to integrate the acquired Crain facilities into Foamex L.P.'s
existing facilities. Foamex L.P. recorded, after changes in estimates,
approximately $2.7 million of severance and related costs and $13.7 million for
costs associated with the shut down of certain acquired facilities. These
liabilities were established in purchase accounting (see Note 4).
Asset Sales
On March 31, 1999, Foamex International sold its corporate airplane for
$16.3 million. The sale of the airplane resulted in an obligation to Trace of
approximately $0.6 million. Under the terms of the aircraft acquisition
agreement with Trace, Foamex International was obligated to share the net
proceeds in excess of a specified amount defined in the agreement. The
obligation was offset against Trace's two promissory notes payable to Foamex
L.P., discussed in Note 17, at Trace's request.
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 term loan borrowings under a credit facility. In
connection with this repayment, an extraordinary loss was recognized as
discussed in Note 9.
4. RESTRUCTURING AND OTHER CHARGES (CREDITS)
1997
During 1997, net restructuring and other charges (credits) of $21.1
million were recorded. In connection with the Crain Acquisition discussed in
Note 3, a restructuring plan (the "1997 Restructuring Plan") to consolidate nine
foam production, fabrication or branch locations was approved in December 1997.
The consolidation of foam production, fabrication or branch locations resulted
in a restructuring provision that totaled $23.0 million. Included in the
provision was $12.1 million for fixed assets write downs (net of estimated sale
proceeds), $9.8 million for plant closure and operating lease obligations and
$1.1 million for personnel reductions. A $1.9 million adjustment for changes in
estimates to prior year restructuring plans was also recorded in 1997.
1998
Based on business developments during 1998, Foamex L.P. decided not to
close 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, Florida facility, which returned to full operations
during 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 Foamex L.P.'s packaging business. During 1998, Foamex
L.P. modified the plan, and decided to sell the packaging business and did 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 adjustment associated
with the 1997 Restructuring Plan. The components of the $14.8 million
restructuring adjustment include: $10.2 million for fixed asset writedowns, $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
(credits) of $4.7 million during 1998 to reserve for approximately $2.4 million
of net receivables due from Trace and to writedown approximately $2.3 million of
impaired cost in excess of net assets acquired 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 cost in
excess of net assets acquired.
F-12
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. RESTRUCTURING AND OTHER CHARGES (CREDITS) (continued)
1999
During 1999, Foamex L.P. approved and implemented four restructuring
plans to reduce selling, general and administrative costs and to further
rationalize plant operations.
Foamex L.P. recorded restructuring charges of approximately $2.3 million
relating to severance costs in connection with the first restructuring plan.
This plan reduced Foamex L.P.'s salaried work force by 78 employees.
Foamex L.P. recorded restructuring charges of approximately $2.9 million
relating to severance costs in connection with the second restructuring plan for
replacing three of Foamex L.P.'s former executives, including its former Chief
Executive Officer.
In connection with the third restructuring plan, Foamex L.P. recorded
restructuring charges of approximately $1.7 million relating to the closure of
one facility and certain product line rationalizations. The $1.7 million charge
was comprised of approximately $0.1 million of severance costs in connection
with the work force reductions of 115 employees, $0.1 million of plant closure
and carrying costs and $1.5 million of asset write downs.
In connection with the fourth restructuring plan, Foamex L.P. closed its
New York office (see Note 17). Foamex L.P. recorded approximately $2.5 million
of restructuring charges comprised of $1.6 million of severance costs for eight
employees and $0.9 million of costs primarily relating to future lease
obligations, net of sublease proceeds.
In addition, Foamex L.P. recorded restructuring charges of approximately
$1.1 million relating to changes in estimates to prior years' plans, primarily
for the sale of the packaging business in 1999. The $1.1 million charge is
comprised of $0.2 million of severance, $1.7 million of lease and closure costs,
offset by $0.8 million of adjustments for asset writedowns. Foamex L.P. also
recorded $0.3 million of other charges relating to rent due from Trace for the
New York office prior to its closure.
The following table sets forth the components of Foamex L.P.'s
restructuring and other charges (credits):
Asset Plant Closure Personnel
Total Writedowns and Leases Reductions Other
(millions)
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 adjustments (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 -
----- ----- ----- ----- ----
Balance 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 - - -
Restructuring adjustments (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 -
----- ----- ----- ----- ----
Balance at December 31, 1998 3.8 (5.7) 9.5 - -
F-13
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. RESTRUCTURING AND OTHER CHARGES (CREDITS) (continued)
Asset Plant Closure Personnel
Total Writedowns and Leases Reductions Other
--------------------- ------------- ---------- --------
(millions)
Cash spending (8.6) - (3.9) (4.4) (0.3)
Cash proceeds 1.5 1.5 - - -
1999 restructuring charge 9.7 1.5 1.0 6.9 0.3
Restructuring adjustments 1.1 (0.8) 1.7 0.2 -
Asset write-off/writedowns (0.3) (0.3) - - -
---- ----- ---- ---- -----
Balance at December 31, 1999 $7.2 $(3.8) $8.3 $2.7 $ -
==== ===== ==== ==== =====
As indicated in the table above, the accrued restructuring and plant
consolidation balance at December 31, 1999 will be used for payments relating to
severance, plant closure and leases including runout costs at the facilities. As
of December 31, 1999, all employees subject to the plans have been terminated.
The $3.8 million of asset writedowns relates to estimated proceeds and is
included in noncurrent assets. Foamex L.P. expects to spend approximately $3.9
million during 2000 with the remaining $7.1 million to be spent through 2006,
principally for lease runout costs.
5. RETIREE BENEFIT PLANS
Pensions
Foamex L.P. provides pension and survivor benefits for salaried and
certain hourly employees of Foamex L.P. and Foamex Carpet in the United States.
Salaried employees are provided benefits that are based principally on the
combination of years of credited service and compensation. Hourly employees are
provided benefits that are based principally on stated amounts for each year of
credited service.
Effective at the end of 1999, the two defined benefit plans for the
salaried and hourly employees were merged in to a single plan. Benefits provided
to salary and hourly employees did not change as a result of the plan merger.
The components of pension expense, including Foamex Carpet's allocated
net periodic costs of $0.5 million and $0.4 million for 1999 and 1998,
respectively, are listed below.
1999 1998 1997
------ ------ -------
(thousands)
Service cost $3,469 $2,833 $2,229
Interest cost 4,887 4,517 4,273
Expected return on plan assets (5,484) (5,758) (5,357)
Amortization
Transition asset (75) (75) (75)
Prior service cost (240) (245) (245)
(Gains) losses and other 819 104 72
------ ------ -------
Total $3,376 $1,376 $ 897
====== ====== =======
F-14
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. RETIREE BENEFIT PLANS (continued)
The following table sets forth the changes in obligations and assets, and
outlines the development of the funded status and amounts recognized in the
accompanying consolidated balance sheets.
December 31, December 31,
1999 1998
(thousands)
Change in Benefit Obligation
Benefit obligations at beginning of year $ 74,589 $ 65,948
Service cost 3,469 2,833
Interest cost 4,887 4,517
Amendments 85 --
Benefits paid (3,809) (4,043)
Actuarial loss (gain) (7,249) 5,334
-------- --------
Projected benefit obligation at end of year $ 71,972 $ 74,589
======== ========
Change in Plan Assets
Fair value of plan assets at beginning of year $ 55,546 $ 58,952
Actual return on plan assets 9,011 439
Company contributions 1,440 200
Benefits paid (3,809) (4,043)
Other (690) (2)
-------- --------
Fair value of plan assets at end of year $ 61,498 $ 55,546
======== ========
Funded Status
Plan assets in excess of (less than) benefit obligation $(10,474) $(19,043)
Unamortized transition (asset) obligation (665) (740)
Unamortized prior service cost (2,072) (2,397)
Unamortized net (gains) losses 7,807 18,712
-------- --------
Net prepaid assets (accrued liabilities) $ (5,404) $ (3,468)
======== ========
Amounts Recognized in the Consolidated Balance Sheets
Prepaid benefit costs $ -- $ 1,200
Accrued benefit liability (8,613) (20,150)
Intangible assets 296
239
Accumulated other comprehensive income 2,913 15,243
-------- --------
Net amount recognized $ (5,404) $ (3,468)
======== ========
Significant assumptions used in the calculation of pension expense and
obligations are listed below.
1999 1998 1997
---------- ---------- -------
Expected long-term rates of return on plan assets 10.0% 10.0% 10.0%
Discount rates on projected benefit obligations 7.5% 6.5% 7.0%
Rate of compensation increase 4.0% 4.0% 4.0%
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 $0.5 million and $0.4 million
during 1999 and 1998, respectively.
F-15
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. RETIREE BENEFIT PLANS (continued)
In addition, Foamex L.P. also provides for retirement benefits for its
Canadian employees. Net periodic pension expense for these plans approximated
$0.2 million, $0.2 million and $0.3 million for 1999, 1998 and 1997,
respectively. Plan assets for these plans approximated $3.6 million and $2.8
million; and plan liabilities approximated $3.4 million and $2.8 million at
December 31, 1999 and 1998, respectively.
At December 31, 1999 and 1998, included in plan assets were 420,000
shares of Foamex International's stock. In 1994, 250,000 shares of Foamex
International's stock were purchased for $2.5 million, and in 1995, 170,000
shares of Foamex International's stock were purchased for $1.6 million. The
value of the plan's investment in Foamex International's stock was approximately
$3.5 million and $5.2 million at December 31, 1999 and 1998, respectively. Plan
assets at the end of 1998 included shares of Trace Global Opportunities Fund,
which was a related party to Trace. The shares were purchased during 1995 and
1997, at an aggregate cost of $5.0 million. The value of the plan's investment
in Trace Global Opportunities Fund, was approximately $4.3 million at December
31, 1998. In 1999, Trace divested its interest in the Trace Global Opportunities
Fund. The fund changed its name to the GLS Global Opportunities Fund, which is
not a related party to Foamex L.P. During 1998, 250,000 shares of United Auto
Group ("UAG"), which is a related party to Trace, were purchased for
approximately $4.8 million. The value of the UAG shares was $2.2 million and
$2.3 million at December 31, 1999 and 1998, respectively.
Retiree Medical and Life Insurance Benefits
Foamex L.P. provides postretirement health care and life insurance for
eligible employees, limited primarily to one manufacturing facility in the
United States. These plans are unfunded and benefits are paid as the claims are
submitted. Foamex L.P. retains the right, subject to existing agreements, to
modify or eliminate these benefits.
The components of retiree medical and life insurance benefits expense are
listed below.
1999 1998 1997
------ ------ -----
(thousands)
Service cost $20 $10 $ 9
Interest cost 62 46 71
Amortization
Prior service costs (6) (35) (35)
(Gains) losses and other (21) (29) (21)
Special termination benefits - - 74
---- ---- ----
Total $ 55 $ (8) $ 98
==== ==== ====
The following table outlines the changes in obligations and benefit
payments, and outlines the development of the funded status and amounts
recognized in the accompanying consolidated balance sheets.
December 31, December 31,
1999 1998
(thousands)
Change in Benefit Obligation
Benefit obligations at beginning of year $ 651 $ 927
Service cost 20 10
Interest cost 62 46
Employee contributions 28 27
Benefits paid (164) (312)
Amendments 363 -
Actuarial losses (gains) (92) (47)
------ ------
Projected benefit obligation at end of year $ 868 $ 651
====== ======
F-16
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. RETIREE BENEFIT PLANS (continued)
December 31, December 31,
1999 1998
(thousands)
Change in Plan Assets
Fair value of plan assets at beginning of year $ -- $ --
Company contributions 136 285
Employee contributions 28 27
Benefits paid (164) (312)
------- -------
Fair value of plan assets at end of year $ -- $ --
======= =======
Funded Status of the Plan
Plan assets in excess of (less than) benefit obligation $ (868) $ (651)
Unamortized prior service cost (73) (442)
Unamortized net (gains) losses (644) (573)
------- -------
Net prepaid assets (accrued liabilities) $(1,585) $(1,666)
======= =======
Significant assumptions used in the calculation of retiree and life
insurance benefit expense and obligations are listed below.
1999 1998 1997
Discount rates on projected benefit obligations 7.5% 6.5% 7.0%
Health care cost increase 7.5% 6.0% 8.0%
The health care cost increase assumption was revised during 1999. The
rate will gradually be reduced to 5.0% by 2005. Increasing or decreasing the
weighted average assumed health care cost trend rates by one percentage point
would not have a significant impact on the accumulated postretirement benefit
obligation or on service and interest costs.
6. COMPENSATION PLANS
Incentive Compensation
Most of Foamex L.P.'s salaried employees participate in incentive
compensation programs. These programs are based on the consolidated results of
Foamex L.P. and on the results of business segments. Incentive compensation
expense was approximately $3.0 million in 1999, $0.3 million in 1998 and $3.9
million in 1997.
Defined Contribution Plan
Foamex L.P. maintains a defined contribution plan which is qualified
under Section 401(k) of the Code ("401(k) Plan") and is available for eligible
employees of Foamex L.P. and Foamex Carpet who elect to participate. Under the
terms of the 401(k) Plan, Foamex L.P. partially matches certain employee
contributions. Expense for these contributions for 1999, 1998 and 1997 was
approximately $0.9 million, $0.8 million and $0.9 million, respectively. During
1999 and 1998, Foamex Carpet contributed approximately $0.1 million annually to
the plan for matching contribution expense for its employees.
7. OTHER INCOME (EXPENSE), NET
Other income (expense), net totaled $0.9 million of expense and was
primarily due to losses on the disposal of fixed assets and letter of credit
fees related to the GFI Transaction (see Note 12). Interest income totaled $2.2
million in 1999.
F-17
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. OTHER INCOME (EXPENSE), NET (continued)
Other income (expense), net for 1998 primarily consist of: $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.
Other income (expense), net for 1997 was comprised primarily of $1.4
million of interest income and a gain on the sale of assets of $0.4 million.
8. INCOME TAXES
The sources of income (loss) from continuing operations before provision
for income taxes are listed below.
1999 1998 1997
-------- -------- --------
(thousands)
United States $ 13,959 $ 5,364 $ 15,076
Foreign 2,935 (10,293) (916)
-------- -------- --------
Income (loss) from continuing operations
before provision for income taxes $ 16,894 $ (4,929) $ 14,160
======== ======== ========
A reconciliation of the statutory federal income tax to the income tax on
continuing operations is listed below
1999 1998 1997
-------- -------- --------
(thousands)
Statutory income taxes $ 5,913 $ (1,725) $ 4,956
State income taxes, net of federal benefit 794 300 785
Permanent difference on partnership income (6,921) (1,570) (2,119)
Limitation on the utilization of foreign tax benefits -- 3,800 --
Write-off excess cost -- 770 4,305
Increase (decrease) in valuation allowance 711 -- (5,028)
Amortization of cost in excess of assets acquired 1,038 53 419
Other, net (222) (688) (423)
-------- -------- --------
Total $ 1,313 $ 940 $ 2,895
======== ======== ========
The provision for income taxes is summarized as follows:
1999 1998 1997
-------- -------- --------
(thousands)
Federal $ -- $ -- $ 1,958
State 115 -- 1,007
Foreign 1,117 673 498
-------- -------- --------
Total current 1,232 673 3,463
-------- -------- --------
Deferred
Federal -- 318 4,781
State -- -- (87)
Foreign (630) (51) (234)
-------- -------- --------
Total deferred (630) 267 4,460
-------- -------- --------
Change in valuation allowance 711 -- (5,028)
-------- -------- --------
Total provision for income taxes $ 1,313 $ 940 $ 2,895
======== ======== ========
F-18
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. INCOME TAXES (continued)
The tax effect of the temporary differences that give rise to deferred
income tax assets and liabilities are listed below.
December 31, December 31,
1999 1998
(thousands)
Deferred income tax assets $ 1,056 $ --
Valuation allowance for deferred income tax assets (711) --
------- -------
Deferred income tax assets 345 --
------- -------
Deferred income tax liabilities
Basis difference in property, plant and equipment (568) (991)
Other (2,145) (1,098)
------- -------
Deferred income tax liabilities (2,713) (2,089)
------- -------
Net deferred income tax assets (liabilities) $(2,368) $(2,089)
======= =======
During 1999, the valuation allowance for deferred income tax assets
increased by $0.7 million relating to net operating loss carryfowards from a
foreign subsidiary.
During 1998, the valuation allowance for deferred income tax assets and
net deferred income 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 12). In
addition, during 1998, deferred income tax assets were decreased by $6.1 million
associated with the transfer of General Felt net assets in connection with the
GFI Transaction.
During 1997, the valuation allowance for deferred income tax assets
decreased by $5.0 million for the utilization of the loss carryforwards in
connection with a sale of a facility.
Foamex L.P. will continually review the adequacy of the valuation
allowance and recognize benefits only as reassessment indicates that it is more
likely than not that the benefits will be realized.
9. EXTRAORDINARY LOSSES
In 1998, extraordinary losses of $3.2 million were recorded. The loss was
in connection with the GFI Transaction, and related to the early extinguishment
of approximately $125.1 million of term loans under a Foamex L.P. credit
facility. The extraordinary loss was generated entirely from the write-off of
debt issuance costs.
In 1997, extraordinary losses of $48.6 million were recorded relating to
the early extinguishment of debt. Listed below are the components of the loss.
o In connection with a refinancing plan, an extraordinary loss of
approximately $44.5 million was incurred. The extraordinary loss
was 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 interest rate swap agreements and
approximately $3.5 million of professional fees and other costs.
o Foamex L.P. redeemed substantially all of the outstanding public
debt that was not tendered as part of the refinancing plan
referenced above. In connection with these redemptions an
extraordinary loss on the early extinguishment of debt of
approximately $2.1 million was recorded.
F-19
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. EXTRAORDINARY LOSSES (continued)
o In connection with the sale of assets discussed in Note 3,
proceeds from the sale were used to repay outstanding term loan
borrowings under the Foamex L.P. credit facility. As a result, an
extraordinary loss on the early extinguishment of debt of
approximately $1.0 million was recorded.
o Net proceeds remaining from a 1996 divestiture were used for the
early extinguishment of debt. As a result, an extraordinary loss
of approximately $1.0 million was recorded. The extraordinary loss
was comprised of approximately $0.4 million of premium payments
and approximately $0.6 million for the write-off of debt issuance
costs.
10. INVENTORIES
The components of inventory are listed below.
December 31, December 31,
1999 1998
(thousands)
Raw materials and supplies $ 65,211 $ 93,241
Work-in-process 11,447 12,087
Finished goods 17,154 22,308
-------- --------
Total $ 93,812 $127,636
======== ========
11. SHORT-TERM BORROWINGS
Foamex Canada Inc., a wholly owned subsidiary of Foamex L.P., has a
short-term credit facility that provides for $8.0 million of Canadian dollar
loans (U.S. dollar equivalent of $5.5 million) of which up to $2.0 million are
available in U.S. dollar loans. The amount of borrowings available is based on a
combination of accounts receivable and inventory, as defined in the credit
facility. Interest on Canadian dollar borrowings is based on the bank's prime
lending rate plus 3/4%. On U.S. dollar loans, interest is based on the bank's
U.S. dollar base rate in Canada plus 3/4%. The weighted average interest rates
on short-term borrowings outstanding at year-end 1999, 1998 and 1997 were 7.3%,
7.3% and 5.4%, respectively. The unused amount under this line of credit was
$3.9 million as of December 31, 1999.
12. LONG-TERM DEBT
The components of long-term debt are listed below.
December 31, December 31,
1999 1998
---------- ---------
Foamex L.P. Credit Facility (thousands)
Term Loan B (1) $ 81,874 $ 82,714
Term Loan C (1) 74,431 75,194
Term Loan D (1) 107,800 108,900
Revolving credit facility (1) 113,685 139,438
9 7/8% Senior subordinated notes due 2007 (2) 150,000 150,000
13 1/2% Senior subordinated notes due 2005 (includes
$10,100 and $11,893 of unamortized debt premium) (2) 108,100 109,893
Industrial revenue bonds (3) 7,000 7,000
Subordinated note payable (net of unamortized
debt discount of $232 and $523) (3) 4,444 6,491
Other 7,076 9,848
---------- ---------
654,410 689,478
F-20
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. LONG-TERM DEBT (continued)
December 31, December 31,
1999 1998
--------- ---------
(thousands)
Less current portion 7,866 689,478
--------- ---------
Long-term debt-unrelated parties $646,544 $ -
========= =========
The components of related party long-term debt are listed below.
December 31, December 31,
1999 1998
--------- ---------
(thousands)
Foamex/GFI Note (3) $ 34,000 $ 34,000
========= =========
(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.
As of December 31, 1998, Foamex L.P. was not in compliance with various
debt covenants included in agreements totaling $415.4 million. Had the lenders
under Foamex L.P.'s debt agreement accelerated the maturity of the indebtedness
as a result of Foamex L.P.'s noncompliance, the acceleration would have
constituted an event of default and given the holders the right to require the
repurchase of substantially all of Foamex L.P.'s long-term debt. As a result of
these factors, approximately $715.8 million of long-term debt at December 31,
1998 was classified as a current liability in the consolidated balance sheet,
which produced a working capital deficit.
Foamex L.P. Credit Facility
At December 31, 1999, Foamex L.P. had a credit facility (the "Foamex L.P.
Credit Facility") with a group of banks which provided for a revolving credit
facility commitment of $185.0 million and three term loans totaling $264.1
million outstanding at December 31, 1999. Amendments in 1998 provided for a $2.5
million quarterly reduction of the availability under the revolving credit
facility, which extends through June 2003.
Borrowings under the Foamex L.P. Credit Facility are collateralized by
substantially all of the assets of Foamex L.P. on a pari passu basis with the
IRBs (described below); however, the rights of the holders of the applicable
issue of the IRBs to receive payment upon the disposition of the collateral
securing such issue of the IRBs has been preserved.
In response to financial conditions at year-end 1998, amendments to debt
agreements were executed during the first half of 1999. As a result the Foamex
L.P. Credit Facility, which was amended and restated in February 1998, was
further amended and restated in June 1999 to modify financial covenants for net
worth, interest coverage, fixed charge coverage and leverage ratios through
December 2006. The agreement was also amended to no longer permit Foamex L.P. to
make certain cash payments, including the payment of an annual management fee of
$3.0 million to a subsidiary of Trace and distributions to Foamex International,
and to limit future investments in foreign subsidiaries and joint ventures. The
"change of control" definition under the agreement was also modified to conform
to the definition discussed in "change of control" in Note 1. Changes in the
interest rate structure, effective in 2000, were also made and are discussed
below. Foamex L.P. was in compliance with this agreement at year-end 1999.
At year-end 1999, interest was based on the combination of a variable
rate consisting of the higher of (i) the base rate of The Bank of Nova Scotia or
(ii) the Federal Funds rate plus 0.5% plus a margin. The margins for revolving,
Term B, Term C and Term D loans were 2.25%, 2.50%, 2.75% and 2.875%,
respectively. At the option of Foamex L.P., portions of the outstanding loans
are convertible into LIBOR based loans plus 1.0% added to the
F-21
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. LONG-TERM DEBT (continued)
margins identified above. The effective interest rates for the credit facility
at the end of 1999 ranged between 9.69% and 10.06%.
Available borrowings under the revolving credit facility totaled $24.2
million at year-end 1999. Letters of credit outstanding at December 31, 1999
totaled $47.1 million.
As part of the Foamex L.P. Credit Facility, excess cash flow generated
annually, as defined, is required to prepay portions of Term B, C and D loans.
The prepayment amount determined for 1999 was $13.3 million and will be financed
through revolving loans under the facility. The required payment is expected to
be made during the second quarter of 2000. The repayment schedules for the Term
B, C and D loans have been adjusted, as of year-end 1999, to reflect the
prepayment required.
Effective January 1, 2000, the interest rate on outstanding borrowings
under the Foamex L.P. Credit Facility will increase by 25 basis points each
quarter that Foamex L.P.'s leverage ratio, as defined, exceeds 5.00 to 1.00.
Once the leverage ratio is reduced below this level, the cumulative amount of
any 25 basis point adjustments to the interest rate on borrowings would be
eliminated. At December 31, 1999, the calculated leverage ratio was 5.48 to
1.00. Consequently, the basis point adjustment will be applicable for the
calculation of interest in the first quarter of 2000.
9 7/8% Senior Subordinated Notes
The 9 7/8% Senior Subordinated Notes were issued by Foamex L.P. and FCC
and are due on June 15, 2007. The notes represent uncollateralized general
obligations of Foamex L.P. and are subordinated to all Senior Debt, as defined
in the Indenture. Interest is payable June 15 and December 15. The 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. The initial redemption is at 104.938% of their principal
amount, plus accrued and unpaid interest, 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 9 7/8% 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 will
have the right to require Foamex L.P. to tender for such notes at a price in
cash equal to 101% of the aggregate principal amount thereof, plus accrued and
unpaid interest thereon, if there is such a "change of control". The 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
The 13 1/2% Senior Subordinated Notes were issued by Foamex L.P. and FCC
and are due on August 15, 2005. The notes represent uncollateralized general
obligations of Foamex L.P. and are subordinated to all Senior Debt, as defined
in the Indenture. Interest is payable semiannually on February 15 and August 15.
The 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. The initial redemption is at 106.75% of
their principal amount, plus accrued and unpaid 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 will
have the right to require Foamex L.P. to tender for such notes at a price in
cash equal to 101% of the aggregate principal amount thereof, plus accrued and
unpaid interest, if any, thereon, if there is such a "change of control". The
notes are subordinated in right of the payment of all senior indebtedness and
are pari passu in right of payment to the 9 7/8% Senior Subordinated Notes and
to the Subordinated Note Payable (described above).
F-22
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. LONG-TERM DEBT (continued)
Industrial Revenue Bonds ("IRBs")
IRB debt includes a $1.0 million bond that matures in 2005 and a $6.0
million bond that matures in 2013. Interest is based on a variable rate, as
defined, with options available to Foamex L.P. to convert to a fixed rate. At
the end of 1999, the interest rate was 5.5% on the $6.0 million bond and 4.05%
on the $1.0 million bond. The maximum interest rate for either of the IRBs is
15.0% per annum.
If Foamex L.P exercises its option to convert the bonds to a fixed
interest rate structure the IRBs are redeemable at the option of the
bondholders. The obligations are collateralized by certain properties, which
have an approximate net carrying value of $10.8 million at December 31, 1999 and
letters of credit approximating $7.3 million.
Subordinated Note Payable
This note payable was issued during 1993 to John Rallis, a former
President and Chief Operating Officer of Foamex International. The note was
issued by Foamex L.P. in connection with the acquisition of Great Western Foam
Products Corporation and certain related entities and assets. The note carries a
maximum interest rate of 6.0% and the principal is payable in three equal annual
installments that began in May 1999.
Other
At year-end 1999, other debt primarily included a term loan held by a
majority owned Mexican subsidiary. Quarterly principal payments are due on the
term loan through its maturity in May 2002. The interest rate at year-end 1999
was 11.11%.
Related Party - Foamex/GFI Note
As a result of the GFI Transaction, discussed below, Foamex L.P. owes a
$34.0 million promissory note payable to Foam Funding LLC, due in March 2000.
Interest is based on a variable rate equal to the higher of (i) the base rate of
The Bank of Nova Scotia or (ii) the Federal Funds rate plus 0.5%. At the option
of Foamex L.P., the note is convertible to a LIBOR-based interest rate plus
0.75%. As of December 31, 1999, the interest rate for borrowings was 7.25%.
The principal and current interest payable under the Foamex/GFI Note are
collateralized by a $34.5 million letter of credit issued under the Foamex L.P.
Credit Facility. At year-end 1999, the note was recognized as long-term in the
consolidated balance sheet because of the ability and intent, evidenced by the
letter of credit, to refinance the debt on a long-term basis.
GFI Transaction
On February 27, 1998, Foamex International, Foamex L.P. and certain of
their affiliates completed a series of transactions which changed Foamex L.P.'s
structure (collectively, the "GFI Transaction"). Prior to the consummation of
these transactions, 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 the
Foamex/GFI Note, described above. 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
F-23
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. LONG-TERM DEBT (continued)
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.
No gain has been recognized on the GFI 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.
Interest Rate Swap Agreements
Foamex L.P. entered into interest rate swaps to lower funding costs
and/or to manage interest costs and exposure to changing interest rates. Foamex
L.P. did not hold or issue financial instruments for trading purposes.
In connection with a refinancing plan in 1997, 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 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 was a favorable adjustment to
interest and debt issuance expense of $0.7 million and $2.2 million for 1998 and
1997, respectively.
Debt Covenants
The indentures, credit facilities and other indebtedness agreements contain
certain covenants that will limit, among other things to varying degrees, the
ability of Foamex L.P. (i) to pay distributions or redeem equity 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 provisions 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. 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, interest coverage, fixed charge
coverage and leverage ratios, as defined. Under the most restrictive of the
distribution restrictions as of December 31, 1999, Foamex L.P. was able to pay
Foamex International funds only to the extent to enable Foamex International to
meet its tax payment liabilities.
F-24
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. LONG-TERM DEBT (continued)
Foamex L.P. was in compliance with its various financial covenants as of
December 31, 1999.
Future Obligations on Debt
Scheduled maturities of long-term debt and long-term debt - related party
are shown below (thousands):
2000 $ 7,866
2001 7,665
2002 3,935
2003 179,132
2004 50,844
Thereafter 429,100
--------
Total 678,542
Unamortized debt premium, net 9,868
--------
Total $688,410
========
13. 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.
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 are
listed below.
Carrying Amount Fair Value
Liabilities: (thousands)
Total debt - December 31, 1999 $690,037 $650,057
======== ========
Total debt - December 31, 1998 $726,435 $727,955
======== ========
Carrying amounts reported in the consolidated balance sheet for cash and
cash equivalents, accounts receivable, accounts payable, accrued liabilities and
short-term borrowings approximates fair value due to the short-term nature of
these instruments.
The fair value of long-term debt is estimated using quoted market prices,
where available, or discounted cash flows. Fair value estimates are made at a
specific point in time, based on relevant market information about the financial
instruments. These estimates are subjective in nature and involve uncertainties
and matters of significant judgment and therefore, cannot be determined with
precision. Changes in assumptions could significantly affect the estimates.
F-25
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
1999 1998 1997
-------- -------- --------
(thousands)
Cash paid for interest $ 65,507 $ 69,615 $ 45,330
======== ======== ========
Cash paid for income taxes, net $ 1,126 $ 884 $ 4,504
======== ======== ========
Non-cash capital expenditures $ 456 $ 24 $ 167
======== ======== ========
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
======== ======== ========
15. BUSINESS SEGMENTS
In the fourth quarter of 1998, Foamex L.P. adopted SFAS No. 131
"Disclosure about Segments of an Enterprise and Related Information." 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. Foamex L.P.'s reportable business segments are Foam Products,
Carpet Cushion Products, Automotive Products and Technical Products. Each of the
business segments is headed by a senior executive who is responsible for
developing plans and directing the operations of the segment.
Foam Products manufactures and markets foam used by the bedding industry,
the furniture industry and the retail industry. Carpet Cushion Products
manufactures and distributes prime, rebond, sponge rubber and felt carpet
cushion to Foamex Carpet. Automotive Products supplies foam primarily for
automotive interior applications. Technical Products manufactures and markets
reticulated foams (foams that are well suited for filtration, reservoiring,
sound absorption and sound transmissions) and other custom polyester and
polyether foams for industrial, specialty and consumer and safety applications.
The "other" column in the table below represents foreign manufacturing
operations in Mexico and Asia, corporate expenses not allocated to other
business segments and restructuring and other charges (credits). Asset and
capital expenditure information by business segment is not reported because many
of Foamex L.P.'s facilities produce products for multiple business segments.
The accounting policies of the business segments are the same as
described in Note 2. Revenues and costs have been included in business segments
where specifically identified. Costs shared by business segments have been
allocated on the basis of the amount utilized. Geographic sales are determined
based on the location in which the sale originated.
During 1999, sales to a customer which is included in Automotive
Products, accounted for approximately 12.5% of Foamex L.P.'s net sales. Sales to
Foamex Carpet, reported under Carpet Cushion Products, totaled $187.7 million in
1999 and $185.5 million in 1998. No unaffiliated customers accounted for more
than 10.0% of net sales in 1998 and 1997.
Carpet
Foam Cushion Automotive Technical
Products Products Products Products Other Total
1999 (thousands)
Net sales $521,377 $187,668 $361,806 $92,180 $27,648 $1,190,679
Income (loss) from operations 54,439 869 22,853 23,048 (16,962) 84,247
Depreciation and amortization 16,390 6,436 4,596 2,564 2,604 32,590
F-26
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. BUSINESS SEGMENTS (continued)
Carpet
Foam Cushion Automotive Technical
Products Products Products Products Other Total
1998 (thousands)
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
United
States Canada Mexico Consolidated
1999 (thousands)
Net sales $978,049 $61,486 $151,144 $1,190,679
Property, plant and equipment, net 182,533 5,406 23,376 211,315
1998
Net sales $1,023,186 $62,529 $70,203 $1,155,918
Property, plant and equipment, net 190,122 4,998 24,517 219,637
1997
Net sales $841,618 $58,005 $31,472 $931,095
Property, plant and equipment, net 196,552 5,662 19,060 221,274
16. 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, 1999,
the partnership interests of Foamex L.P. are a 2% managing general partnership
interest held by FMXI and a 98% limited partnership interest held by Foamex
International.
Net cash distributions in connection with a tax sharing agreement for
1999, 1998 and 1997 were paid (received) as follows:
1999 1998 1997
---- ---- ------
(thousands)
FMXI $ (5) $ 6 $ 80
Foamex International (12) 287 8,371
Trace Foam - - 80
FJPS - - 306
---- ---- ------
Total $(17) $293 $8,837
==== ==== ======
Accumulated Other Comprehensive Loss
The accumulated other comprehensive income (loss) consists of the
following:
December 31, December 31, December 28,
1999 1998 1997
(thousands)
Foreign currency translation adjustment $(6,011) $(10,965) $ (4,367)
Minimum pension liability (2,912) (15,243) (3,718)
-------- --------- ---------
$(8,923) $(26,208) $ (8,085)
======= ======== ========
F-27
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17. RELATED PARTY TRANSACTIONS AND BALANCES
Foamex L.P. regularly enters into transactions with its affiliates in the
ordinary course of business.
Supply Agreements
In connection with the GFI Transaction (see Note 12), 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 1999 and
1998, Foamex L.P. had sales of approximately $187.7 million and $185.5 million,
respectively, 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 1999 and 1998, Foamex L.P. had
purchases of approximately $9.9 million and $1.3 million, respectively, 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.
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 and 1997, Foamex L.P.
purchased approximately $12.6 million and $138.6 million, respectively, of raw
materials under the Foamex International Supply Agreement.
Administrative Services Agreement
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 1999 and 1998,
Foamex L.P. invoiced approximately $0.5 million and $1.8 million, respectively,
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, 1999 and 1998,
Foamex L.P. had net receivables due from Foamex Carpet of approximately $16.4
million and $16.8 million, respectively, associated with the Supply Agreement
and Services Agreement.
Partners Distribution
In 1999, Foamex L.P. distributed $17.3 million in cash pro rata to its
partners. During 1998, in connection with the GFI Transaction, Foamex L.P. made
a $20.0 million distribution to Foamex International (see Note 12).
In connection with the 1997 Refinancing Plan, Foamex L.P. purchased
approximately $116.7 million of aggregate principal amount of certain debentures
of Foamex-JPS Automotive L.P. ("FJPS") for approximately $105.8 million
including transaction costs of approximately $0.8 million. Foamex L.P.
subsequently distributed the debentures to FJPS and FMXI.
During 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
F-28
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17. RELATED PARTY TRANSACTIONS AND BALANCES (continued)
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"), a wholly owned subsidiary of Trace, 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.
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 International Notes
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.
On October 20, 1999, Foamex L.P. and Foamex International entered into a
revolving note that allows Foamex International to borrow up to approximately
$2.5 million through October 20, 2004. The revolving note bears interest at a
rate equal to three-month LIBOR plus 2.5%, per annum, and is payable upon
demand, or if no demand is made, then on October 20, 2004.
At December 31, 1999, Foamex L.P. had a receivable of approximately $0.7
million relating to the revolving note. The receivable is classified as a
reduction of partners' capital (deficit).
Trace Promissory Notes
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.
Note 3 includes disclosures regarding 1999 activity concerning Trace
promissory notes payable to Foamex L.P. The Trace notes are included in the
other component of stockholders' deficit, which is consistent with the
recognition in prior years. Based on Trace's financial position discussed in
Note 1, Trace may not be able to pay the aggregate amount of $9.2 million.
Trace Accounts Receivables
At year-end 1999 and 1998, operating accounts receivables from Trace were
approximately $2.7 million and $2.4 million, respectively. During 1998, an
allowance of $2.4 million was recorded as a restructuring and other charges
(credits) due to the financial difficulties of Trace. Foamex L.P. established an
allowance of $0.3 million during 1999 for additional operating accounts
receivable from Trace. The allowance was recorded as a restructuring and other
charges (credit).
F-29
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17. RELATED PARTY TRANSACTIONS AND BALANCES (continued
Trace Foam Distribution
In connection with the 1997 Refinancing Plan, Foamex L.P. made a cash
distribution of approximately $1.5 million to Trace Foam as a result of Foamex
L.P.'s distribution to FJPS and FMXI of the FJPS debentures, a note with a
principal amount of approximately $56.2 million (net of approximately $20.6
million of original issue discount) due from FJPS and a promissory note in the
aggregate principal amount of $2.0 million due from Foamex International. The
distribution to Trace Foam reduced partners' equity (deficit) of Foamex L.P.
Trace Management Agreement
Foamex L.P. had a management service agreement with Trace Foam pursuant
to which Trace Foam provided 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. An amendment to the Foamex L.P. Credit Facility on June 30,
1999 no longer permits Foamex L.P. to pay the management fee. On July 29, 1999,
Foamex L.P. submitted formal notice of the termination of the management
agreement.
Tax Distribution
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. On December 23, 1999, Foamex
International repaid the $13.6 million of advances, plus accrued interest, with
proceeds received from a $17.3 million distribution from Foamex L.P., discussed
above.
Trace New York Sublease
Prior to September 30, 1999, Foamex L.P. subleased to Trace approximately
5,900 square feet of general, executive and administrative office space in New
York, New York. The terms of the lease were substantially the same terms as
Foamex L.P. leased such space from a third party lessor. Foamex L.P. has closed
its New York office and subleased the premises to a third party at an amount in
excess of its lease commitment.
Foamex/GFI Note
In connection with the GFI Transaction (see Note 12) Foamex L.P. entered
into the Foamex/GFI Note with General Felt that was subsequently retained by
Foam Funding LLC. During 1999 and 1998, Foamex L.P. paid approximately $2.1
million and $1.7 million, respectively, of interest on the note payable to Foam
Funding LLC.
Other
The general director of Foamex de Mexico S.A. de C.V. ("Foamex de
Mexico") which is Foamex L.P.'s operating subsidiary in Mexico has a 5% stock
interest in Foamex de Mexico.
Foamex L.P. chartered an aircraft, which was owned by a wholly owned
subsidiary of Foamex International and incurred costs of approximately $0.1
million, $0.9 million and $1.2 million in 1999, 1998 and 1997, respectively.
Foamex International sold this aircraft on March 31, 1999. The sale of the
aircraft triggered an obligation to Trace of approximately $0.6 million. The
obligation was offset against Trace's two promissory notes payable to Foamex
L.P. The Trace notes are included in partners' deficit, which is consistent with
the recognition in prior years.
F-30
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17. RELATED PARTY TRANSACTIONS AND BALANCES (continued)
During 1999, certain employees of Foamex L.P. were also employed by
Trace. Foamex L.P. paid a portion of the total compensation of such employees
based on the amount of time devoted to Foamex L.P.'s matters by such employees
in the aggregate. All such dual employment relationships have been terminated.
Such payments totaled $1.8 million, $2.2 million and $2.5 million in 1999, 1998
and 1997, respectively.
Foamex L.P. made charitable contributions to the Trace International
Holdings, Inc. Foundation of approximately $0.2 million in each of 1998 and
1997.
Foamex L.P., Recticel, s.a. ("Recticel"), a European polyurethane foam
manufacturer, whose subsidiary was a former partner of Foamex L.P. and is a
current shareholder of Foamex International, 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 VPFSM manufacturing process. During 1997, Foamex L.P. purchased
approximately $1.9 million of scrap material from Recticel under various
agreements, the latest of which expired in March 1998.
18. BUYOUT PROPOSALS
On August 5, 1999, Foamex International announced that its Board of
Directors signed a letter of intent with Sorgenti Chemical Industries, LLC and
Liberty Partners Holdings 20, LLC (collectively, the "Purchasers") for a
business combination providing for $11.50 per share for all of Foamex
International's outstanding common stock (the "Sorgenti Transaction"). Under the
terms of the letter of intent, if Foamex International entered into a business
combination with another party, the Purchasers would be entitled to a break-up
fee of $6.0 million plus reimbursement of certain expenses, subject to certain
conditions, including the willingness of the Purchasers to enter into a
definitive merger agreement providing for a price of at least $11.50 per share
prior to the expiration of the letter of intent. The proposed transaction was
subject to a number of conditions, including the negotiation of definitive
documents regarding certain conditions relating to the bank credit facilities
and the public debt of Foamex International's subsidiaries. Additional issues
considered included minimum shareholder acceptance, change of board membership,
and other provisions providing for a higher break-up fee and expense
reimbursement if Foamex International entered into a business combination
providing a more favorable transaction. On December 15, 1999, Foamex
International announced that the letter of intent with the Purchasers, which had
been extended, expired by its terms. The Purchasers had submitted a revised bid
at a price and on terms that were less favorable than those contained in the
letter of intent and the Negotiating Committee of Foamex International's Board
of Directors rejected the revised bid.
On February 9, 2000, Foamex International announced that it is in
discussions with respect to a proposal for the acquisition of all of Foamex
International's outstanding common stock for cash. Foamex International stated
that the proposal is subject to a number of conditions, including the buyer's
ongoing due diligence and the execution of definitive agreements. If the
proposal from the new group leads to a transaction, it is anticipated that John
G. Johnson, Jr., Foamex International's President and Chief Executive Officer,
as well as other members of current management, would participate in the
management of Foamex International following such a transaction. Foamex
International agreed to an exclusive negotiating period ending five business
days after delivery of its audited financial statements included in Foamex
International's Annual Report on Form 10-K to the prospective buyer. Foamex
International expects such delivery to be the same day as the filing of its
Annual Report on Form 10-K with the Securities and Exchange Commission.
In 1998, Foamex International received an unsolicited buyout proposal
from Trace, Foamex International's principal stockholder. Foamex International
entered into two merger agreements, which were subsequently terminated by Trace.
F-31
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
19. 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, 1999 are:
Operating
Leases
----------
(thousands)
2000 $13,443
2001 11,487
2002 10,016
2003 8,030
2004 5,044
Thereafter 13,233
--------
Total $61,253
=======
Rental expense charged to operations under operating leases approximated
$15.4 million, $17.7 million and $10.1 million for 1999, 1998 and 1997,
respectively. Substantially all such rental expense represented the minimum
rental payments under operating leases.
Litigation - Foamex International Shareholders
During 1999, Foamex International received several 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 and Foamex International,
which previously had been disclosed in Foamex International's periodic filings.
On June 14, 1999, Foamex International received a draft complaint from counsel
of certain stockholders naming Foamex International and certain current and
former directors, which included allegations similar to those in the Second
Amended Complaint, as defined below. Foamex International was advised by such
counsel that such stockholders intended to file an action soon thereafter. On
August 13, 1999, two stockholders filed an action on behalf of an alleged class
of Foamex International's shareholders, entitled Watchung Road Associates, L.P.
et al v. Foamex International Inc., et al., Civil Action No. 17370 (the
"Watchung Complaint"), in the Court of Chancery of the State of Delaware, New
Castle County. The suit names Foamex International, Mr. Marshall S. Cogan, Mr.
Etienne Davignon, Mr. John Gutfreund, Mr. Robert Hay, Dr. Stuart Hershon, Mr.
John G. Johnson, Jr. and Mr. John Tunney as defendants. The Watchung Complaint
alleges that the individual defendants breached their fiduciary duties by
agreeing to the potential buyout of Foamex International by Sorgenti Chemical
Industries, LLC and Liberty Partners Holdings 20, LLC.
The Watchung Complaint alleges that the Sorgenti Transaction's buy-out
price of $11.50 per outstanding share is inadequate and fails to take into
consideration claims Foamex International allegedly has as a result of the
supposed wrongful diversions of company assets in Foamex International's
dealings with Trace and its affiliates. The Watchung Complaint also alleges that
the directors breached their fiduciary duties by agreeing to the proposed
Sorgenti Transaction without conducting an auction or active market check. The
suit alleges that the board placed Mr. Cogan's interest ahead of those of Foamex
International's stockholders, and alleges that a critical condition of the
Sorgenti Transaction is a consulting agreement for Mr. Cogan. The Watchung suit
seeks to enjoin the Sorgenti Transaction, seeks rescission or damages if the
Sorgenti Transaction is consummated, and seeks an accounting from the directors
for plaintiffs alleged losses. The Sorgenti Transaction was not consummated.
Defendants have moved to consolidate this action with In re Foamex International
Inc. Shareholders Litigation, discussed below, and to dismiss the complaint.
Plaintiffs have agreed to consolidate.
F-32
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
19. COMMITMENTS AND CONTINGENCIES (continued)
On April 26, 1999, a putative securities class action entitled Molitor v.
Foamex International Inc., et al., 99 Civ. 3004, 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.
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 complaint 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. On May 18, 1999, a
similar action entitled Thomas W. Riley v. Foamex International Inc., et al., 99
Civ. 3653 was filed in the same court. The two actions have been consolidated,
and the Consolidated Amended Class Action Complaint, setting forth all
allegations of the two earlier complaints, was filed on December 6, 1999. The
defendants filed motions to dismiss the consolidated complaint on February 4,
2000. No discovery has taken place to date.
Beginning on or about March 17, 1998, six actions (collectively the
"Shareholder Litigation") were filed in the Court of Chancery of the State of
Delaware, New Castle County (the "Court"), by stockholders of Foamex
International. The Shareholder 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
Trace Merger Sub, Inc. ("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 under an Agreement and Plan of Merger
(the "First Merger Agreement"). The complaints sought, among other things, class
certification, a declaration that the defendants 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. Shareholders Litigation, Consolidated Civil Action No.
16259NC, was entered by the Court on May 28, 1998.
The parties to the Shareholder Litigation entered into a Memorandum of
Understanding, dated June 25, 1998 (the "Memorandum of Understanding"), to
settle the Shareholder 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 Shareholder
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 all
of Foamex International's outstanding common stock not owned by Trace and its
subsidiaries (the "Public Shares") 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 Shares owned by
stockholders of Foamex International unaffiliated with Trace and its
subsidiaries (the "Public Shareholders"), the dismissal of the Shareholder
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 Shareholder 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 for October 27, 1998 to consider whether the settlement should be
approved (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 Shareholders. 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 Shareholder Litigation requested
that the Court cancel the Settlement Hearing in light of
F-33
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
19. COMMITMENTS AND CONTINGENCIES (continued)
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
Shareholder 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 Shareholder 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 Shareholders in connection with a second Agreement and Plan
of Merger (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. In January 1999, Trace advised that it could not finance the offer
reflected in the Second Merger Agreement. As a result, the preliminary
injunction motion did not go forward.
On June 9, 1999, the plaintiffs in the Shareholder Litigation moved for
leave to file a Second Amended and Supplemental Class Action and Derivative
Complaint (the "Second Amended Complaint"). The Second Amended Complaint was
filed on July 14, 1999, and 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 the named individuals breached
their fiduciary duties by causing Foamex International to waste assets in its
transactions with Trace and by failing to enforce Foamex International's rights
under the First Merger Agreement, seeking appointment of a receiver for Foamex
International, and alleging that Trace and Merger Sub breached the Stipulation
of Settlement.
On August 26, 1999, the plaintiffs in the Shareholder Litigation moved
for leave to file a Third Amended and Supplemental Class Action and Derivative
Complaint (the "Third Amended Complaint"). The Third Amended Complaint was filed
on October 27, 1999. The Third Amended Complaint alleges both class claims and
derivative claims, and names Foamex International, Mr. Marshall S. Cogan, Mr.
Andrea Farace, Dr. Stuart Hershon, Mr. John Tunney, Mr. Etienne Davignon, Mr.
John Gutfreund, Mr. Robert Hay and Mr. John G. Johnson, Jr. as defendants.
The Third Amended Complaint alleges that the individual defendants
breached their duties to Foamex International's Public Shareholders by agreeing
to the Sorgenti Transaction at an inadequate price that fails to take into
consideration Foamex International's allegedly valuable claims arising out of
purported diversions of money from Foamex International to Trace, and by failing
to maximize shareholder value in a sale of Foamex International and instead
agreeing to a deal with a buyer who is willing to enter into a consulting deal
with Mr. Cogan to get his and the board's approval. The Third Amended Complaint
purports to assert a derivative claim for waste and breach of fiduciary duty
against Mr. Cogan, Mr. Farace, Dr. Hershon, Mr. Tunney, Mr. Davignon, Mr.
Gutfreund, and Mr. Hay. The Third Amended Complaint seeks the appointment of a
receiver for Foamex International, alleging that the directors have mismanaged
Foamex International. The Third Amended Complaint also alleges that Mr. Cogan,
Mr. Farace, Dr. Hershon, Mr. Davignon, Mr. Tunney, Mr. Gutfreund, and Mr. Hay
breached their fiduciary duties by failing to enforce Foamex International's
rights under the First Merger Agreement.
F-34
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
19. COMMITMENTS AND CONTINGENCIES (continued)
The Third Amended Complaint seeks: a declaration that the individual
defendants have breached their fiduciary duties; damages; the imposition of a
constructive trust on profits and benefits Mr. Cogan, Trace, and the other
individual defendants allegedly received as a result of the alleged wrongdoing;
an injunction against the Sorgenti Transaction under its present terms;
rescission and damages if the deal is consummated; and the appointment of a
receiver for Foamex International. Defendants have moved to consolidate this
action with Watchung Road Associates, L.P., et ano v. Foamex International Inc.,
et al., discussed above, and to dismiss the complaint. Plaintiffs have agreed to
consolidation and opposed the motion to dismiss.
The defendants intend to vigorously defend these litigations, which if
adversely determined, could have a material adverse effect on the financial
position, results of operations and cash flows of Foamex International and
Foamex L.P.
Litigation - Breast Implants
As of February 24, 2000, Foamex L.P. and Trace were two of multiple
defendants in actions filed on behalf of approximately 3,857 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. Trace's insurance carrier has continued to pay Foamex L.P.'s litigation
expenses after Trace's filing under the Bankruptcy Code. Trace's insurance
policies continue to cover certain liabilities of Trace but if the limits of
those policies are exhausted, it is unlikely that Trace will be able to continue
to provide additional indemnification. While it is not feasible to predict or
determine the outcome of these actions, based on management's present assessment
of the merits of pending claims, after consultation with the general counsel of
Foamex L.P., 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 the 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 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.
Litigation - Other
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.
F-35
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
19. COMMITMENTS AND CONTINGENCIES (continued)
Environmental
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. As of December 31, 1999, 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 indemnifications due to the financial difficulties of Trace.
The Clean Air Act Amendments of 1990 (the "1990 CAA Amendments") provide
for the establishment of federal emission standards for hazardous air pollutants
including methylene chloride, propylene oxide and TDI, 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. believes that the use of alternative technologies,
including VPFSM, which do not utilize methylene chloride and its ability to
shift current production to the facilities which use these alternative
technologies will minimize the impact of these regulations. The 1990 CAA
Amendments also may result in the imposition of additional standards regulating
air emissions from polyurethane foam manufacturers, but these standards have not
yet been proposed or promulgated.
Foamex L.P. has reported to appropriate state authorities that it has
found soil and groundwater contamination in excess of state standards at two
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 its 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 significant.
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 USTs 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. The phase-in of the standards was completed in 1999 and Foamex L.P.
has developed and implemented a compliance program. Capital expenditures
required and changes in operating procedures are not anticipated to
significantly impact Foamex L.P.'s competitive position.
Foamex L.P. has been designated as a Potentially Responsible Party
("PRP") by the EPA with respect to six sites. Estimates of total cleanup costs
and fractional allocations of liability are generally provided by the EPA or the
committee of PRP's with respect to the specified site. In each case and in the
aggregate, the liability of Foamex L.P. is not considered to be significant.
F-36
FOAMEX L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
19. COMMITMENTS AND CONTINGENCIES (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, 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 significant.
F-37
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, 1999 and 1998
in conformity with accounting principles generally accepted in the United
States. 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
auditing standards generally accepted in the United Sates 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, on July 21, 1999, Trace International Holdings, Inc.
("Trace"), a major stockholder of Foamex International Inc., filed a petition
for relief under Chapter 11 of the Bankruptcy Code. On January 24, 2000, an
order was signed converting the Trace case from Chapter 11 to Chapter 7 of the
Bankruptcy Code. A trustee was appointed to oversee the liquidation of Trace's
assets. The outcome of the Trace bankruptcy could result in the acceleration of
substantially all of Foamex L.P.'s debt of which FCC is a joint obligor. This
matter raises substantial doubt about FCC's ability to continue as a going
concern. Management's plans in regard to this matter 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 this uncertainty.
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
March 10, 2000
F-38
FOAMEX CAPITAL CORPORATION
(A Wholly Owned Subsidiary of Foamex L.P.)
BALANCE SHEETS
December 31, December 31,
1999 1998
------ ------
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
====== ======
The accompanying notes are an integral part of the balance sheets.
F-39
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
Trace International Holdings, Inc. ("Trace") is a privately held company,
which owned approximately 29% of Foamex International Inc.'s ("Foamex
International") outstanding voting common stock at March 10, 2000, and whose
former Chairman also serves as Foamex International's Chairman. Foamex
International's common stock owned by Trace is pledged as collateral against
certain of Trace's obligations. The Foamex L.P. Credit Facility and the
Foamex/GFI Note, pursuant to which approximately $411.8 million of debt was
outstanding as of December 31, 1999, provide that a "change of control" would be
an event of default and could result in the acceleration of such indebtedness.
"Change of control" means, for this purpose, that (i) a person or related group,
other than Trace, beneficially owns more than 25% of Foamex International's
outstanding voting stock and (ii) such voting common stock constitutes a greater
percentage of such voting stock than the amount beneficially owned by Trace.
Additionally, certain indentures to which FCC is a joint obligor relating to
senior subordinated notes of $248.0 million contain similar "change of control"
provisions, which require the issuers to tender for such notes at a price in
cash equal to 101% of the aggregate principal amount thereof, plus accrued and
unpaid interest thereon, if there is such a "change of control".
On July 21, 1999, Foamex L.P. was informed by Trace that it filed a
petition for relief under Chapter 11 of the Bankruptcy Code in Federal Court in
New York City. Subsequently, on January 24, 2000, an order was signed converting
the Trace bankruptcy from Chapter 11 to Chapter 7 of the Bankruptcy Code. A
trustee was appointed to oversee the liquidation of Trace's assets. Neither
Trace's bankruptcy filing nor the conversion to Chapter 7 constituted a "change
of control" under the provisions of the debt agreements described above. A
"change of control" could take place however, if the bankruptcy court allows
Trace's creditors to foreclose on and take ownership of Foamex International's
common stock owned by Trace, or otherwise authorizes a sale or transfer of these
shares, under circumstances in which a person or related group, other than
Trace, acquired more than 25% of Foamex International's outstanding voting stock
and owned a greater percentage of such voting stock than the amount beneficially
owned by Trace. On November 22, 1999, the bankruptcy court allowed two creditors
to take ownership of 11% and 6%, respectively, of Foamex International's common
stock. Such an event did not constitute a "change of control" under the
provisions of the debt agreements.
Management believes that it is unlikely that a "change of control" will
occur as a result of Trace's bankruptcy proceedings. However, Foamex L.P. would
seek to resolve the issues that may arise should the "change of control"
provisions be triggered, by requesting waivers of such provisions and/or
refinancing certain debt, if necessary. There can be no assurance that Foamex
L.P. or its subsidiaries will be able to do so, or that Foamex L.P. will be able
to obtain waivers of such provisions. Such circumstances raise substantial doubt
about Foamex L.P.'s and FCC's ability to continue as a going concern. The
accompanying financial statements were prepared on a going-concern basis and do
not include any adjustments that might result from the outcome of the Trace
bankruptcy filing.
FCC is a joint obligor and severally liable on the following borrowings
of Foamex L.P.:
9 7/8% Senior Subordinated Notes due 2007 ("9 7/8% Senior Subordinated
Notes")
The 9 7/8% Senior Subordinated Notes were issued by Foamex L.P. and FCC
(the "Issuers") and are due on June 15, 2007. The notes represent
uncollateralized general obligations of the Issuers and are subordinated to all
Senior Debt, as defined in the Indenture. Interest is payable June 15 and
December 15. The notes may be redeemed at the option of the Issuers, in whole or
in part, at any time on or after June 15, 2002. The initial redemption is at
104.938% of their principal amount, plus accrued and unpaid interest, as
defined, if any, thereon to the date of
F-40
FOAMEX CAPITAL CORPORATION
(A Wholly Owned Subsidiary of Foamex L.P.)
NOTES TO BALANCE SHEETS
2. COMMITMENTS AND CONTINGENCIES (continued)
redemption and declining to 100.0% on or after June 15, 2005. In addition, at
any time prior to June 15, 2000, the Issuers may on one or more occasions redeem
up to 35.0% of the initially outstanding principal amount of the 9 7/8% 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 will
have the right to require the Issuers to tender for such notes at a price in
cash equal to 101% of the aggregate principal amount thereof, plus accrued and
unpaid interest thereon, if there is such a "change of control". The 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 (described below)
and 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 the Issuers and are
due on August 15, 2005. The notes represent uncollateralized general obligations
of the Issuers and are subordinated to all Senior Debt, as defined in the
Indenture. Interest is payable semiannually on February 15 and August 15. The
notes may be redeemed at the option of the Issuers, in whole or in part, at any
time on or after August 15, 2000. The initial redemption is at 106.75% of their
principal amount, plus accrued and unpaid 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 will
have the right to require the Issuers to tender for such notes at a price in
cash equal to 101% of the aggregate principal amount thereof, plus accrued and
unpaid interest, if any, thereon, if there is such a "change of control". The
notes are subordinated in right of the payment of all senior indebtedness and
are pari passu in right of payment to the 9 7/8% Senior Subordinated Notes
(described above) and Foamex L.P.'s subordinated note payable.
F-41
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
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 Deductions Period
YEAR ENDED DECEMBER 31, 1999
Allowance for Uncollectible Accounts $ 6,349 $ 2,493 $ -- $ 4,509 $ 4,333
======== ======= ======== ======== =======
Reserve for Discounts $ 929 $ -- $ 9,365 (1) $ 9,317 $ 977
======== ======= ======== ======== =======
Deferred Income Tax Asset Valuation Allowance $ -- $ 711 $ -- $ -- $ 711
======== ======= ======== ======== =======
YEAR ENDED DECEMBER 31, 1998
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 Income 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) $ 1,409 $ 6,844
======== ======= ======== ======== =======
Reserve for Discounts $ 3,268 $ -- $ 10,182 (1) $ 12,212 $ 1,238
======== ======= ======== ======== =======
Deferred Income Tax Asset Valuation Allowance $ 15,988 $(5,028) $ (1,863) (3) $ -- $ 9,097
======== ======= ======== ======== =======
_________________________
(1) Discounts and billing adjustments reflect a reduction in net sales.
(2) Includes $3.2 million of reserves 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 income tax assets of General Felt.
(4) Represents valuation allowances transferred out due to the GFI Transaction.
S-2