ITEM 2. PROPERTIES
As of December 31, 1998, Foamex L.P. conducted its operations at 63 manufacturing and distribution facilities, including five facilities which Foamex L.P. intends to close as part of its restructuring/consolidation activities primarily associated with the Crain Acquisition, of which 18 were owned and 45 were leased. Total floor space in use at the owned manufacturing and distribution facilities is approximately 3.3 million square feet and total floor space in use at the leased manufacturing and distribution facilities is approximately 5.1 million square feet. Fifty-five of these facilities are located in 36 cities throughout the United States, four facilities are located in two cities in Canada and four facilities are located in three cities in Mexico. The 1999 annual base rental with respect to such leased facilities is approximately $8.8 million under leases expiring from 1999 to 2007. Foamex L.P. does not anticipate any problem in renewing or replacing any of such leases expiring in 1999. In addition, Foamex L.P. has approximately 1.1 million square feet of idle space of which approximately 0.5 million is leased.
Foamex L.P. maintains administrative and sales offices in Linwood, Pennsylvania; Fort Smith, Arkansas; Atlanta, Georgia; St. Louis, Missouri; Southfield, Michigan; and New York, New York.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
Environmental Matters
Foamex L.P. is subject to extensive and changing federal, state, local and foreign environmental laws and regulations, including those relating to the use, handling, storage, discharge and disposal of hazardous substances and the remediation of environmental contamination, and as a result, is from time to time involved in administrative and judicial proceedings and inquiries relating to environmental matters. During 1998, expenditures in connection with Foamex L.P.'s compliance with federal, state, local and foreign environmental laws and regulations did not have a material adverse effect on Foamex L.P.'s operations, financial position, capital expenditures or competitive position. As of December 31, 1998, Foamex L.P. had accruals of approximately $3.5 million for environmental matters. During 1998, Foamex L.P. established an allowance of $0.6 million relating to receivables from Trace for environmental indemnification due to the financial difficulties of Trace (see Note 1 to consolidated financial statements).
The Clean Air Act Amendments of 1990 (the "1990 CAA Amendments") provide for the establishment of federal emission standards for hazardous air pollutants including methylene chloride, propylene oxide and TDI, materials used in the manufacturing of foam. On December 27, 1996, the United States Environmental Protection Agency (the "EPA") proposed regulations under the 1990 CAA Amendments that will require manufacturers of slab stock polyurethane foam and foam fabrication plants to reduce emissions of methylene chloride. The final National Emission Standard for Hazardous Air Pollutants ("NESHAP") was promulgated October 7, 1998. NESHAP requires a reduction of approximately 70% of the emission of methylene chloride for the slab stock foam industry effective October 7, 2001. Foamex L.P. does not believe implementation of the regulation will require it to make material expenditures due to Foamex L.P.'s use of alternative technologies which do not utilize methylene chloride and its ability to shift current production to the facilities which use such alternative technologies. The 1990 CAA Amendments also may result in the imposition of additional standards regulating air emissions from polyurethane foam manufacturers, but these standards have not yet been proposed or promulgated.
In addition to federal regulatory requirements, state laws have resulted or could result in more stringent regulations regarding the use and emission of certain chemicals. For example, in California, methylene chloride usage was phased out at the end of 1995, while in Kent, Washington, a former Crain facility, pursuant to consent decrees as well as applicable laws, must over a period of time phase out methylene chloride usage. Foamex L.P. believes that use of methylene chloride in certain applications can be reduced to be in compliance with certain state and federal laws. Specifically, through the development of the Enviro-Cure(R) process, which uses ambient or refrigerated air to remove the heat of reaction during the foam curing process and various carbon dioxide processes, Foamex L.P. believes that it can reduce its methylene chloride usage. Foamex L.P. has installed the Enviro-Cure(R) process at its manufacturing facilities in Compton, California; San Leandro, California; Elkhart, Indiana; Tupelo, Mississippi; and Conover, North Carolina and carbon dioxide systems at its Compton, California; Eddystone, Pennsylvania; Kent, Washington; Corry, Pennsylvania; and Orlando, Florida plants. There can be no assurance however, that each of these processes can successfully reduce emissions of methylene chloride in every product formulation to levels within applicable state and federal standards or that future changes in regulations governing the use or emissions of specific chemicals will not have a material impact on Foamex L.P.
Foamex L.P. has reported to appropriate state authorities that it has found soil contamination in excess of state standards at facilities in Orlando, Florida; La Porte, Indiana; Conover, North Carolina; Cornelius, North Carolina; Fort Wayne, Indiana; and at a former facility in Dallas, Texas and groundwater contamination in excess of state standards at the Orlando, Conover, and Cornelius facilities. Foamex L.P. has begun remediation and is conducting further investigations into the extent of the contamination at these facilities and, accordingly, the extent of the remediation that may ultimately be required. The actual cost and the timetable of any such remediation cannot be predicted with any degree of certainty at this time. Foamex L.P. has accruals of $2.5 million for the estimated cost of completing remediation at these facilities. Foamex L.P. is in the process of addressing potential contamination at the Morristown, Tennessee facility, and has submitted a sampling plan to the State of Tennessee. The extent of the contamination and responsible parties, if any, has not yet been determined. A former owner may be liable for cleanup costs; nevertheless, the cost of remediation, if any, is not expected to be material.
Federal regulations required that by the end of 1998 all underground storage tanks ("USTs") be removed or upgraded in all states to meet applicable standards. Foamex L.P. has upgraded all operating tanks at its facilities in accordance with these regulations. Foamex L.P. believes that its USTs do not pose a significant risk of environmental liability. However, there can be no assurances that such USTs will not result in significant environmental liability in the future.
On April 10, 1997, the Occupational Health and Safety Administration promulgated new standards governing employee exposure to methylene chloride, which is used as a blowing agent in some of Foamex L.P.'s manufacturing processes. Foamex L.P. does not believe that it will be required to make any material expenditures to comply with these new standards.
Foamex L.P. has been designated as a Potentially Responsible Party ("PRP") by the EPA with respect to eight sites with an estimated total liability to Foamex L.P. for the eight sites of less than $1.0 million. Estimates of total cleanup costs and fractional allocations of liability are generally provided by the EPA or the committee of PRP's with respect to the specified site. In each case, the liability of Foamex L.P. is not considered to be material.
Although it is possible that new information or future developments could require Foamex L.P. to reassess its potential exposure relating to all pending environmental matters, including those described herein, Foamex L.P. believes that, based upon all currently available information, the resolution of such environmental matters will not have a material adverse effect on Foamex L.P.'s operations, financial position, capital expenditures or competitive position. The possibility exists, however, that new environmental legislation and/or environmental regulations may be adopted, or other environmental conditions may be found to exist, that may require expenditures not currently anticipated and that may be material.
Legal Proceedings
Stockholder Litigation
Beginning on or about March 17, 1998, six actions (collectively the "Stockholder Litigation") were filed in the Court of Chancery of the State of Delaware, New Castle County (the "Court"), by stockholders of Foamex International. The Stockholder Litigation, purportedly brought as class actions on behalf of all stockholders of Foamex International, named Foamex International, certain of its directors, certain of its officers, Trace and Merger Sub as defendants alleging that they had breached their fiduciary duties to the plaintiffs and other stockholders of Foamex International unaffiliated with Trace in connection with the original proposal of Trace to acquire the publicly traded outstanding common stock of Foamex International for $17.00 per share. The complaints sought, among other things, class certification, a declaration that the defendants have breached their fiduciary duties to the class, preliminary and permanent injunctions barring implementation of the proposed transaction, rescission of the transaction if consummated, unspecified compensatory damages, and costs and attorneys' fees. A stipulation and order consolidating these six actions under the caption In re Foamex International Inc. Stockholders Litigation, Consolidated Civil Action, No. 16259NC was entered by the Court on May 28, 1998. Foamex L.P. is not party to the Stockholder Litigation.
The parties to the Stockholder Litigation entered into a Memorandum of Understanding, dated June 25, 1998 (the "Memorandum of Understanding"), to settle the Stockholder Litigation, subject to, inter alia, execution of a definitive Stipulation of Settlement between the parties and approval by the Court following notice to the class and a hearing. The Memorandum of Understanding provided that as a result of, among other things, the Stockholder Litigation and negotiations among counsel for the parties to the Memorandum of Understanding, a special meeting of stockholders would be held to vote upon and approve the First Merger Agreement which provided, among other things, for the Public Shares owned by stockholders of Foamex International unaffiliated with Trace and its subsidiaries (the "Public Stockholders") to be converted into the right to receive $18.75 in cash, without interest.
The Memorandum of Understanding also provided for certification of a class, for settlement purposes only, consisting of the Public Stockholders, the dismissal of the Stockholder Litigation with prejudice and the release by the plaintiffs and all members of the class of all claims and causes of action that were or could have been asserted against Trace, Foamex International and the
individual defendants in the Stockholders Litigation or that arise out of the matters alleged by plaintiffs. Following the completion of the confirmatory discovery which was provided for in the Memorandum of Understanding, on September 9, 1998, the parties entered into a definitive Stipulation of Settlement and the Court set a hearing to consider whether the settlement should be approved for October 27, 1998 (the "Settlement Hearing"). In connection with the proposed settlement, the plaintiffs intended to apply for an award of attorney's fees and litigation expenses in an amount not to exceed $925,000, and the defendants agreed not to oppose this application. Additionally, Foamex International agreed to pay the cost, if any, of sending notice of the settlement to the Public Stockholders. On September 24, 1998, a Notice of Pendency of Class Action, Proposed Settlement of Class Action and Settlement Hearing was mailed to the members of the settlement class. On October 20, 1998, the parties to the Stockholder Litigation requested that the Court cancel the Settlement Hearing in light of the announcement made by Trace on October 16, 1998, that it had been unable to obtain the necessary financing for the contemplated acquisition by Trace of Foamex International's common stock at a price of $18.75 per share which was the subject matter of the proposed settlement. This request was approved by the Court on October 21, 1998, and Foamex International issued a press release on October 21, 1998, announcing that the Court had cancelled the Settlement Hearing.
On November 10, 1998, counsel for certain of the defendants in the Stockholder Litigation gave notice pursuant to the Stipulation of Settlement that such defendants were withdrawing from the Stipulation of Settlement in light of the notice given by Trace to Foamex International and the special committee of the Board of Directors on November 5, 1998 whereby Trace terminated the First Merger Agreement on the grounds that the financing condition in the First Merger Agreement was incapable of being satisfied.
On November 12, 1998, the plaintiffs in the Stockholder Litigation filed an Amended Class Action Complaint (the "Amended Complaint"). The Amended Complaint named Foamex International, Trace, Merger Sub, Mr. Marshall S. Cogan, Mr. Andrea Farace, Dr. Stuart Hershon, Mr. John Tunney, and Mr. Etienne Davignon as defendants, alleging that they breached their fiduciary duties to plaintiffs and the other Public Stockholders in connection with the Second Merger, that the proposal to acquire the Public Shares for $12.00 per share lacked entire fairness, that the individual defendants violated 8 Del. Code ss. 251 in approving the Second Merger Agreement, and that Trace and Merger Sub breached the Stipulation of Settlement. On December 2, 1998, plaintiffs served a motion for a preliminary injunction, seeking an Order to preliminarily enjoin the defendants from proceeding with, consummating or otherwise effecting the merger contemplated by the Second Merger Agreement.
The defendants have denied, and continue to deny, that they have committed or have threatened to commit any violation of law or breaches of duty to plaintiffs or the purported class or any breach of the Stipulation of Settlement. The defendants intend to vigorously defend the Stockholder Litigation.
In addition, on or about November 18, 1998, a putative class action was filed in the United States District Court for the Eastern District of New York on behalf of all persons who purchased common stock of Foamex International between March 16, 1998 and October 19, 1998, naming Trace as defendant and alleging that Trace breached a contract between the putative class members and Trace. By order dated January 8, 1999, the Court transferred the action to the United States District Court for the Southern District of New York. Trace made a motion to dismiss the action on February 8, 1999, which motion is pending before the Court, and the Court has stayed all discovery in the action until the motion is decided. Neither Foamex International, Foamex L.P. nor any of the individual directors of Foamex International are named as defendants in this litigation.
On April 26, 1999, a putative securities class action entitled Molitor v. Foamex International Inc., et al., 99 Civ. 3004 (DC), was filed in the United States District court for the Southern District of New York naming as defendants Foamex International, Trace and certain officers and directors of Foamex International on behalf of stockholders who bought shares of Foamex International's common stock during the period from May 7, 1998 through and including April 16, 1999. Foamex L.P. is not a party to such suit. The lawsuit alleges that the defendants violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 by misrepresenting and/or omitting material information about Foamex International's financial situation and operations, with the result of artificially inflating the price of Foamex International's stock. The lawsuit also alleges that Trace and Marshall S. Cogan violated Section 20(a) of the Securities Exchange Act of 1934 as controlling persons of Foamex International. The compliant seeks class certification, a declaration that defendants violated the federal securities law, an award of money damages, and costs and attorneys', accountants' and experts' fees. The defendants intend
to vigorously defend the action. To date, no response to the complaint has been made and no discovery or other proceedings have taken place.
Breast Implant Litigation
As of April 16, 1999, Foamex L.P. and Trace were two of multiple defendants in actions filed on behalf of approximately 4,321 recipients of breast implants in various United States federal and state courts and one Canadian provincial court, some of which allege substantial damages, but most of which allege unspecified damages for personal injuries of various types. Three of these cases seek to allege claims on behalf of all breast implant recipients or other allegedly affected parties, but no class has been approved or certified by the court. In addition, three cases have been filed alleging claims on behalf of approximately 39 residents of Australia, New Zealand, England, and Ireland. Foamex L.P. believes that the number of suits and claimants may increase. During 1995, Foamex L.P. and Trace were granted summary judgments and dismissed as defendants from all cases in the federal courts of the United States and the state courts of California. Appeals for these decisions were withdrawn and the decisions are final.
Although breast implants do not contain foam, certain silicone gel implants were produced using a polyurethane foam covering fabricated by independent distributors or fabricators from bulk foam purchased from Foamex L.P. or Trace. Neither Foamex L.P. nor Trace recommended, authorized, or approved the use of its foam for these purposes. Foamex L.P. is also indemnified by Trace for any such liabilities relating to foam manufactured prior to October 1990. Although Trace has paid Foamex L.P.'s litigation expenses to date from insurance proceeds Trace received, there can be no assurance that Trace will be able to continue to provide such indemnification. While it is not feasible to predict or determine the outcome of these actions, based on management's present assessment of the merits of pending claims, after consultation with the general counsel of Trace, and without taking into account the indemnification provided by Trace, the coverage provided by Trace's and Foamex L.P.'s liability insurance and potential indemnity from the manufacturers of polyurethane covered breast implants, management believes that the disposition of matters that are pending or that may reasonably be anticipated to be asserted should not have a material adverse effect on either Foamex L.P.'s or Trace's consolidated financial position or results of operations. If management's assessment of Foamex L.P.'s liability with respect to these actions is incorrect, such actions could have a material adverse effect on the financial position, results of operations and cash flows of Foamex L.P.
Other Litigation
On April 14, 1999, Foamex International received communications addressed to its Board of Directors from certain of Foamex International's stockholders regarding aspects of the relationship between Trace and Foamex International. Such stockholders questioned the propriety of certain relationships and related transactions between Trace, Foamex International and Foamex L.P., which previously have been disclosed in Foamex International's and Foamex L.P.'s periodic filings. Foamex International's Board of Directors, in consultation with its special counsel, is in the process of evaluating such communications and what actions, if any, to take with respect thereto.
In November 1997, a complaint was filed in the United States District Court for the Southern District of Texas alleging that various defendants, including Crain through the use of the CARDIO(R) process licensed from a third party, infringed on a patent held by plaintiff. Foamex L.P. is negotiating with the licensor of the process for the assumption of the defense of the action by the licensor, however, the action is in the preliminary stages, and there can be no assurance as to the ultimate outcome of the action. Such action could have a material adverse effect on the financial position, results of operations and cash flows of Foamex L.P.
Foamex L.P. is party to various other lawsuits, both as defendant and plaintiff, arising in the normal course of business. It is the opinion of Foamex L.P. that the disposition of these lawsuits will not, individually or in the aggregate, have a material adverse effect on the financial position or results of operations of Foamex L.P. If management's assessment of Foamex L.P.'s liability with respect to these actions is incorrect, such actions could have a material adverse effect on Foamex L.P.'s consolidated financial position.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
a) Foamex L.P. is a privately-held limited partnership. There is no established public trading market for its securities.
b) As of December 31, 1998, there were two holders of Foamex L.P.'s equity securities.
c) During 1998 and 1997, Foamex L.P. made net cash distributions in accordance with tax sharing agreements of approximately $0.3 million and $8.8 million, respectively, at December 31, 1998, Foamex L.P. has a receivable of approximately $1.2 million from its partners in accordance with the tax sharing agreement.
1998 Distributions
On February 27, 1998, Foamex L.P. distributed $20.0 million in cash pro rata to its partners, such distribution was funded with borrowings under the Foamex L.P. credit facility.
1997 Distributions
In connection with the June 1997 refinancing plan, Foamex L.P. made the following distributions: a $2.0 million promissory note of Foamex International, a $56.2 million aggregate principal amount ($35.6 million accreted value) note of Foamex-JPS Automotive L.P. ("FJPS") and $116.7 million aggregate principal amount of FJPS discount debentures were distributed pro rata to FJPS (a 98% limited partner) and to FMXI (a 1% managing general partner). Concurrently, Foamex L.P. distributed approximately $1.5 million in cash to Trace Foam Company, Inc. (a 1% non-managing general partner).
Limitations on Distributions
The Foamex L.P. Credit Agreement and the Indentures for the 9 7/8% senior subordinated notes due 2007 and the 13 1/2% senior subordinated notes due 2005 restrict the ability of Foamex L.P. to make distributions to its partners.
ITEM 6.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table presents selected historical consolidated financial data of Foamex L.P. and subsidiaries. The results of operations of acquired businesses (as noted below) are included from the dates of their respective acquisitions. The financial data should be read in conjunction with the financial statements and related notes thereto of Foamex L.P. included elsewhere in this Annual Report on Form 10-K.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Foamex L.P. operates in the flexible polyurethane and advanced polymer foam products industry. As of December 31, 1998, Foamex L.P.'s operations consist of the following operating segments: (i) foam products, (ii) carpet cushion products, (iii) automotive products, (iv) technical products and (v) other, which primarily consists of certain foreign manufacturing operations, corporate expenses not allocated to the other operating segments and restructuring and other charges. The net sales and income (loss) from operations of these operating segments for each of the last three years are included in Note 15 to the consolidated financial statements. For periods prior to February 27, 1998, the consolidated financial statements included the operations and cash flows of General Felt. Foamex L.P. entered into the GFI Transaction which transferred these operations to Foamex International. (See Note 9 to the consolidated financial statements for further discussion.) The following discussion should be read in conjunction with the consolidated financial statements and related notes thereto of Foamex L.P. included in this Annual Report on Form 10-K.
The accompanying financial statements have been prepared assuming Foamex L.P. will continue as a going concern. As discussed in Note 1 to the consolidated financial statements and under "Liquidity and Capital Resources" below, Foamex L.P. is not in compliance with certain financial covenants contained in the agreements governing approximately $415.4 million principal amount of indebtedness. Such non-compliance provides that the lenders under those agreements, upon the notice and lapse of time can declare all of such indebtedness to be due. To date the lenders have not exercised such rights and have granted Foamex L.P. waivers of such covenants through May 5, 1999, which has been extended through June 30, 1999, to enable Foamex L.P. to negotiate an amendment of such covenants; there can be no assurance that such amendments will be obtained and therefore such indebtedness has been classified as current on Foamex L.P.'s financial statements. Were the lenders under those agreements to accelerate the maturity of their indebtedness, such acceleration would constitute an event of default, and substantially all of Foamex L.P.'s long-term debt would become due. Therefore, Foamex L.P. has reclassified approximately $715.8 million of long-term debt as current. Such classification raises substantial doubt about Foamex L.P.'s ability to continue as a going concern. In addition, Foamex L.P. has been informed by Trace that Trace had substantial debt obligations that were due at the end of December 1998 and did not have the financial resources to pay those obligations. Subsequently, Trace informed Foamex L.P. that waivers and/or modifications of such indebtedness had been obtained for at least the near future; however, there can be no assurance that such waivers and/or modifications will remain in effect prior to obtaining a permanent resolution. If Trace were to default on its indebtedness secured by Foamex International's common stock or other Trace creditors were to take steps constituting a default under such indebtedness (such as filing an involuntary bankruptcy petition), and if the holders of such secured indebtedness were to foreclose on Foamex International's common stock held by Trace, such event could trigger the acceleration and put rights of substantially all of the debt of Foamex L.P. as described above. Although management believes that all such debt obligations would be refinanced under such circumstances, there can be no assurance that Foamex L.P. or its subsidiaries would be able to do so. Management's plans in regard to these matters are described in Note 1 to the consolidated financial statements. In December 1998, Foamex L.P. established a reserve of $2.4 million against operating receivables due from Trace. The financial statements do not include any further adjustments that might result from the outcome of these uncertainties.
On March 16, 1999, Foamex International announced that it had hired John G. Johnson, Jr. as President, Chief Executive Officer and director of Foamex International following the resignation of Andrea Farace from the positions of Chairman of the Board, Chief Executive Officer and director of Foamex International. Foamex International also announced that it had hired JP Morgan Securities Inc. as a financial advisor to explore strategic alternatives to maximize shareholder value.
In 1998, Foamex International received an unsolicited buyout proposal from Trace, Foamex International's principal stockholder. Foamex International entered into the First Merger Agreement and the Second Merger Agreement that were subsequently terminated by Trace. See "Business - General".
Acquisitions and Disposition
On February 27, 1998, Foamex International, Foamex L.P. and certain of its affiliates completed the GFI Transaction. See "Business - General". As a result of the GFI Transaction, General Felt was transferred to Foam Funding LLC in exchange for the assumption of $129.0 million of Foamex L.P.'s indebtedness, and the transfer to Foamex L.P. of Foam Funding LLC's 1% non-managing general partnership interest, and Foamex L.P. recorded transaction expenses of approximately $1.5 million as other expense and an extraordinary loss on early extinguishment of debt in the amount of approximately $3.2 million. In connection with the GFI Transaction, Foamex L.P. distributed $20.0 million in cash pro rata to its partners, such distribution was funded with borrowings under the Foamex L.P. Credit Agreement.
On December 23, 1997, Foamex International acquired Crain pursuant to a merger agreement with Crain Holdings Corp. ("Crain Holdings") for a purchase price of approximately $213.7 million, including the assumption of debt with a face value of approximately $98.6 million (and an estimated fair value of approximately $112.3 million) and contributed all of the assets of Crain, subject to all of the liabilities of Crain, to Foamex L.P. In addition, fees and expenses associated with the Crain Acquisition were approximately $13.2 million. In connection with the Crain Acquisition, Foamex L.P. approved a restructuring/consolidation plan for the two entities. Foamex L.P. recorded restructuring charges of $21.1 million during 1997 relating to the restructuring of Foamex L.P.'s operations in connection with the Crain Acquisition and related transactions. In addition, during 1997 Foamex L.P. recorded approximately $1.5 million of severance and related costs and $8.5 million for costs associated with the shut down and consolidation of certain facilities acquired in the Crain Acquisition.
On October 6, 1997, Foamex L.P. sold its needlepunch carpeting, tufted carpeting and artificial grass products business, located in Dalton, Georgia to Bretlin, Inc., a subsidiary of The Dixie Group, Inc. The sale price was approximately $41.0 million, net of post-closing adjustments which were finalized in December 1997. Foamex L.P. used the net proceeds of the sale to reduce borrowings under an existing credit facility by approximately $38.8 million. Foamex L.P. incurred an extraordinary loss on early extinguishment of debt of approximately $0.9 million.
On June 12, 1997, Foamex International substantially completed a refinancing plan (the "1997 Refinancing Plan") designed to reduce Foamex International's interest expense and increase its financing flexibility. The 1997 Refinancing Plan included a tender offer by Foamex L.P. to purchase $373.0 million of Foamex L.P.'s existing public debt and approximately $116.7 million principal amount of FJPS discount debentures. Also, the 1997 Refinancing Plan included the payment of $5.2 million of term loan borrowings under an existing credit facility and the payment of related fees and expenses. In addition, the tender offer included amending the existing indentures to remove substantially all of the restrictive covenants. Foamex L.P. purchased $342.3 million of its public debt and the $116.7 million of FJPS discount debentures under the tender offer and incurred an extraordinary loss on the early extinguishment of debt of approximately $44.5 million. The 1997 Refinancing Plan was funded by $347.0 million of borrowings under a new credit facility (the "Credit Facility") and the net proceeds from the issuance of $150.0 million principal amount of senior subordinated notes. As a result of the 1997 Refinancing Plan, Foamex L.P.'s total long-term debt increased by $150.1 million. Foamex L.P. has increased interest expense as compared to the debt structure prior to the 1997 Refinancing Plan. However, the 1997 Refinancing Plan reduced Foamex International's consolidated interest expense even after giving effect to the additional borrowings. Foamex L.P.'s future interest expense will vary based on a variety of factors, including fluctuations in interest rates in general. As a result of the 1997 Refinancing Plan, variable rate debt comprised a larger percentage of Foamex L.P.'s overall indebtedness than in the past, and as a result, future fluctuations in interest rates will have a greater impact on Foamex L.P.'s interest expense than in the past. In connection with the 1997 Refinancing Plan, Foamex L.P. made the distributions described under Item 5 above.
On October 1, 1997, Foamex L.P. redeemed approximately $26.2 million of the approximately $30.7 million of Foamex L.P.'s outstanding public debt that was not tendered as part of the 1997 Refinancing Plan. These redemptions were funded with borrowings under the Credit Facility. In connection with these redemptions, Foamex L.P. incurred an extraordinary loss on the early extinguishment of debt of approximately $2.1 million. The remaining outstanding public debt of approximately $4.5 million that was not tendered as part of the 1997 Refinancing Plan was defeased in February 1998 and redeemed in June 1998.
During 1996, Foamex L.P. sold Perfect Fit Industries, Inc. ("Perfect Fit") which comprised the home comfort products business segment of Foamex L.P. The consolidated financial statements of Foamex L.P. were restated for discontinued operations and include a net loss of $41.8 million (net of $1.2 million income tax benefit) on the disposal of this business segment, which includes provisions for operating losses during the phase-out period. (See Note 9 to the consolidated financial statements).
General
Foamex L.P.'s automotive foam customers are predominantly OEMs or other automotive suppliers. As such, the sales of these product lines are directly related to the overall level of passenger car and light truck production in North America. Also, Foamex L.P.'s sales are sensitive to sales of new and existing homes, changes in personal disposable income and seasonality. Foamex L.P. typically experiences two seasonally slow periods during each year, in early July and in late December, due to scheduled plant shutdowns and holidays.
Operating results for 1999 are expected to be influenced by various internal and external factors. These factors include, among other things, (i) Foamex L.P.'s debt structure and Foamex L.P.'s ability to successfully amend its Credit Facility and certain other indebtedness, (ii) Foamex L.P.'s capital structure, (iii) continued implementation of the consolidation plan with Crain, (iv) additional raw material cost increases, if any, by Foamex L.P.'s chemical suppliers, (v) Foamex L.P.'s success in passing on to its customers selling price increases to recover such raw material cost increases and (vi) fluctuations in interest rates.
RESULTS OF OPERATIONS
In the fourth quarter of 1998 Foamex L.P. adopted Statement of Financial Accounting Standards No. 131 "Disclosure about Segments of an Enterprise and Restatement Information" ("SFAS No. 131"). SFAS No. 131 requires companies to report information about their business segments on the basis of how they are managed and evaluated by the chief operating decision-makers. Each of the operating segments is headed by an executive vice president who is responsible for developing plans and directing the operations of the segment.
Foamex L.P.'s reportable business segments are foam products, carpet cushion products, automotive products and technical products. The foam products segment manufactures and markets foam used by the bedding industry, furniture industry and the retail industry. The carpet cushion products segment sells prime, rebond, sponge rubber and felt carpet cushion to Foamex Carpet through a Supply Agreement. The automotive products segment supplies foam primarily for automotive interior applications to automotive manufacturers and to industry sub suppliers. The Technical Products segment manufactures and markets reticulated foams and other custom polyester and polyether foams for industrial, specialty and consumer and safety applications.
The "other" column in the table below represents certain foreign manufacturing operations in Mexico and Asia that do not meet the quantitative threshold for determining reportable segments, corporate expenses not allocated to the other operating segments and restructuring and other charges. Total asset information by operating segment is not reported because many of Foamex L.P.'s facilities produce products for multiple operating segments. Data for 1997 and 1996 has been restated to reflect the implementation of SFAS No. 131.
1998 Compared to 1997
Net sales for 1998 were $1,155.9 million as compared to $931.1 million in 1997, an increase of $224.8 million or 24.1%. Income from operations increased $9.2 million or 16.3% to $65.5 million for 1998 from $56.3 million in 1997. The increase in net sales and income from operations were primarily associated with the Crain Acquisition in December 1997, restructuring and other credits and the increase in automotive lamination products during the latter part of 1998 which were offset by the impact of the GFI Transaction in February 1998 by which General Felt ceased to be a consolidated subsidiary of Foamex L.P. During 1998, selling, general and administrative expenses increased $7.4 million primarily due to costs associated with the integration of Crain and Foamex L.P. (the "Transition"). Also during 1998, Foamex L.P. recorded income of $14.8 million for the reversal of 1997 restructuring charges and recorded other charges of $4.7 million associated with the impairment of goodwill on the Montreal Canada operations ($2.3 million), and an allowance for receivables due from Trace ($2.4 million).
Foam Products
Foam products net sales for 1998 increased 67.1% to $559.7 million from $334.9 million in 1997 and income from operations increased 17.0% to $36.3 million (6.5% of net sales) from $31.0 million (9.2% of net sales). The increases in net sales and income from operations were primarily associated with the Crain Acquisition in December 1997. The decrease in income from operations as a percentage of net sales was primarily the result of (i) costs of $4.0 million associated with the Transition, including inventory adjustments for facilities affected by the consolidation of manufacturing facilities; (ii) operating inefficiencies and logistic costs of $2.5 million associated with the sales of juvenile and other consumer products sold through mass merchandisers and discount stores; (iii) operating losses and inefficiencies of $1.0 million resulting from the fires at Orlando, Florida and Cornelius, North Carolina; (iv) selling price decreases of $0.5 million resulting from competitive pricing pressures due to market share challenges from competitors and (v) the inherently lower margins of Crain when compared to Foamex L.P.'s historical margins. In addition, operating margins decreased in 1998 since Foamex L.P. carried the operating costs of both companies during the Transition.
Carpet Cushion Products
Carpet cushion products net sales for 1998 decreased 23.2% to $210.3 million from $273.9 million in 1997 primarily due to the GFI Transaction offset by an increase in net sales associated with the Crain Acquisition in December 1997. Income (loss) from operations decreased to a loss of $0.1 million (0.0% of net sales) from income of $8.8 million (3.2% of net sales). The decreases were primarily associated with the GFI Transaction and increased costs of $1.0 million associated with the Orlando fire and costs related to the Transition of $0.9 million.
Automotive Products
Automotive products net sales for 1998 increased 26.2% to $285.2 million from $225.9 million in 1997 and income from operations decreased 30.5% to $17.3 million (6.1% of net sales) from $24.9 million (11.0% of net sales). The increase in net sales was associated with increased volume of lamination products. Income from operations decreased principally as a result of (i) higher costs of $3.0 million incurred during the start up phase of new lamination business at the Mexican border, (ii) contract price reductions of approximately $1.1 million and (iii) losses of $1.0 million associated with the production of thermoformable headliners.
Technical Products
Technical Products net sales for 1998 increased 3.8% to $79.1 million from $76.3 million in 1997 and income from operations decreased 17.4% to $14.9 million (18.9% of net sales) from $18.0 million (23.7% of net sales). The increased net sales were primarily associated with Foamex L.P.'s industrial gasketing and sealing products. The decrease in income from operations was primarily associated with a higher mix of lower margin industrial products and production inefficiencies on certain products.
Other
Other primarily consists of certain foreign manufacturing operations, corporate expenses not allocated to the other operating segments and restructuring and other charges. The increase in net sales was associated with the facility in Mexico City that began operations in the second half of 1997. The increase in income from operations was principally from a reversal of $14.8 million of restructuring charges primarily established in 1997, offset by accounts receivable and inventory problems of $8.5 million at the Mexico City facility, start up costs of $2.5 million for Foamex L.P.'s investment in an Asian joint-venture and duplicate administrative costs incurred in connection with the Transition.
Income (Loss) from Continuing Operations
Income (loss) from continuing operations decreased to a loss of $5.9 million for 1998 as compared to income of $11.3 million in 1997. The decrease is primarily due to the reasons discussed above, an increase of approximately $21.9 million in interest and debt issuance expense and a decrease in other income (expense) of approximately $6.3 million. The decrease in other income (expense) is primarily due to costs associated with (i) the GFI Transaction, (ii) foreign currency losses in Mexico and Canada and (iii) decreased interest income during 1998 as compared to 1997. The increase in interest and debt issuance expense is primarily due to the additional debt incurred in connection with the Crain Acquisition and the 1997 Refinancing Plan offset by the net debt reduction associated with the GFI Transaction.
Income Taxes
Foamex L.P., as a limited partnership, is not subject to federal and certain state income taxes. However, the consolidated financial statements include a provision for income taxes which primarily relates to certain state income taxes of Foamex L.P. and federal and state income taxes of corporate subsidiaries and subsidiaries located in foreign jurisdictions that file separate income tax returns. See Note 11 to the consolidated financial statements.
Extraordinary Loss
The extraordinary loss on early extinguishment of debt in 1998 of $3.2 million was primarily associated with the write-off of debt issuance costs in connection with the GFI Transaction. The extraordinary loss on early extinguishment of debt in 1997 of $48.6 million primarily relates to the write-off of debt issuance costs and redemption premiums associated with the early extinguishment of long-term debt in connection with the 1997 Refinancing Plan.
1997 Compared to 1996
Net sales for 1997 were $931.1 million as compared to $926.4 million in 1996, an increase of $4.7 million or 0.5%. The increase in net sales was primarily associated with the foam products segment due to higher sales volume of bedding related products and expansion of facilities in Mexico City. Income from operations was $56.3 million for 1997 as compared to $102.9 million in 1996. The decrease was primarily due to unrecovered raw material cost increases, product mix change to lower margin products, 1997 restructuring and other charges of $21.1 million as compared to a restructuring credit of $6.4 million in 1996, and an increase in selling, general and administrative expenses of $9.1 million for 1997 as compared to 1996. The 1997 restructuring and other charges
related to the restructuring of Foamex L.P.'s operations in connection with the Crain Acquisition. The increase in selling, general and administrative expenses is the result of increases in the provision for uncollectible accounts, employee compensation and incentives, research and development costs, and travel and promotion costs associated with the launching of new products and international expansion.
Foam Products
Foam products net sales for 1997 increased 3.0% to $334.9 million from $325.1 million in 1996 primarily due to increased net sales volume from both new and existing customers of bedding related products. Income from operations decreased 4.5% to $31.0 million (9.2% of net sales) from $32.4 million (10.0% of net sales). The decreases were primarily associated with unrecovered material cost increases offset by an increase in net sales.
Carpet Cushion Products
Carpet cushion products net sales for 1997 decreased 6.0% to $273.9 million from $291.3 million in 1996. Income from operations decreased 53.2% to $8.8 million (3.2% of net sales) from $18.8 million (6.5% of net sales). The decrease was primarily associated (i) the sale in October 1997 of the Dalton, Georgia facility which manufactured needlepunch, tufted carpeting, and artificial grass products and had net sales of approximately $8.3 million in the fourth quarter of 1996, (ii) reduction in rebond carpet cushion selling prices due to lower trim material costs, and (iii) a shift in product mix from higher price carpet cushion to lower price carpet cushion.
Automotive Products
Automotive products net sales for 1997 decreased 0.6% to $225.9 million from $227.2 million in 1996. Income from operations decreased 13.3% to $24.9 million (11.0% of net sales) from $28.7 million (12.6% of net sales). The decrease in operating margin was associated with a shift in product mix to increased volume of lower margin lamination products from higher margin roll goods.
Technical Products
Technical Products net sales for 1997 increased 8.5% to $76.3 million from $70.3 million in 1996 primarily due to increased net sales volume of commercial and industrial products. Income from operations decreased slightly to $18.1 million (23.7% of net sales) in 1997 as compared to $18.2 million (25.9% of net sales) in 1996. The decrease in percentage of income from operations to net sales was primarily associated with a higher mix of lower margin industrial products in 1997 as compared to higher margin commercial products in 1996.
Other
Other primarily consists of certain foreign manufacturing operations, corporate expenses not allocated to the other operating segments and restructuring and other charges. The increase in net sales was primarily associated with the expansion of facilities in Mexico City. The decrease in income from operations was primarily associated with the start up in Mexico City and $21.1 million of restructuring and other charges in 1997 as compared to $6.4 million of restructuring and other credits in 1996.
Income (Loss) from Continuing Operations
Income from continuing operations was $11.3 million for 1997 as compared to $53.7 million in 1996. The decrease is primarily due to the reasons cited above and an increase in interest and debt issuance expense of $1.0 million.
Income Taxes
Foamex L.P., as a limited partnership, is not subject to federal and certain state income taxes. However, the consolidated financial statements include a provision for income taxes which primarily relates to the federal and state income taxes of corporate subsidiaries and subsidiaries located in foreign jurisdictions that file separate income tax returns. See Note 11 to the consolidated financial statements for further discussion.
Extraordinary Loss
The extraordinary loss on early extinguishment of debt in 1997 of $48.6 million primarily relates to the write-off of debt issuance costs and redemption premiums associated with the early extinguishment of long-term debt in connection with the 1997 Refinancing Plan.
Liquidity and Capital Resources
Liquidity
Foamex L.P.'s operating cash requirements consist principally of working capital requirements, scheduled payments of principal and interest on outstanding indebtedness and capital expenditures. Foamex L.P. believes that cash flow from Foamex L.P.'s operating activities, cash on hand and periodic borrowings under the Credit Facility, if necessary, (provided that such Credit Facility is successfully amended, as described below) will be adequate to meet Foamex L.P.'s liquidity requirements. The ability to meet such liquidity requirements could be impaired if Foamex L.P. were to fail to comply with any covenants contained in the Credit Facility and such noncompliance was not cured by Foamex L.P. or waived by the lenders. Foamex L.P. amended its Credit Facility in March 1999. The amendment adjusted financial covenants, among other things, as of December 31, 1998 and provided for future measurement periods taking into account Foamex L.P.'s estimated operating results and financial condition for 1998 and management expectations regarding future measurement periods. As the Foamex L.P. actual 1998 net loss was greater than originally estimated, on April 15, 1999, Foamex L.P. obtained a waiver through May 5, 1999, which has been extended through June 30, 1999, of the financial covenants contained in the Credit Facility and certain events of default arising out of its Mexican operations, in order to enable it to negotiate a further amendment of the Credit Facility. There can be no assurance that such an amendment will be obtained, and the failure to obtain such an amendment would have a material adverse effect on Foamex L.P. and Foamex International.
Certain credit agreements and promissory notes of Foamex L.P. pursuant to which approximately $440.2 million of debt has been issued contain provisions that would result in the acceleration of such indebtedness if Trace were to cease to own at least 30% of the outstanding common stock of Foamex International. Similarly, certain indentures of Foamex L.P. and Foamex Capital Corporation relating to approximately $248.0 million of senior subordinated notes contain provisions that provide the holders of such senior subordinated notes with the right to require the issuers thereof to repurchase such senior subordinated notes at a price in cash equal to 101% of the aggregate principal amount thereof, plus accrued and unpaid interest thereon, if Trace falls below certain specified ownership levels of common stock and other persons or group owns a greater percentage of common stock than Trace. Trace had previously informed Foamex L.P. that it had substantial debt obligations that were due at the end of December 1998 and did not have the financial resources to pay these obligations. Subsequently, Trace informed Foamex L.P. that waivers and/or modifications of such indebtedness had been obtained for at least the near future; however, there can be no assurance that such waivers and/or modifications will remain in effect prior to obtaining a permanent resolution. If Trace were to default on its indebtedness collaterialized by Foamex International's common stock or other Trace creditors were to take steps constituting a default under such indebtedness (such as filing an involuntary bankruptcy petition), and if the holders of such collateralized indebtedness were to foreclose on Foamex International's common stock held by Trace, such event could trigger the acceleration and put rights of substantially all of the debt of Foamex L.P. as described above. Although management believes that all such debt obligations would be refinanced under such circumstances, there can be no assurance that Foamex L.P. would be able to do so.
The accompanying financial statements have been prepared assuming Foamex L.P. will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, Foamex L.P. is not in compliance with certain financial covenants contained in the agreements governing approximately $415.4 million principal amount of indebtedness. Such non-compliance provides the lenders under those agreements, with the right, upon the notice and lapse of time to declare all of such indebtedness to be due. To date the lenders have not exercised such rights and have granted Foamex L.P. a waiver of such covenants through May 5, 1999, which has been extended through June 30, 1999, to enable Foamex L.P. to negotiate an amendment of such covenants; there can be no assurance that such amendments will be obtained and therefore such indebtedness has been classified as current on Foamex L.P.'s financial statements. Were the lenders under those agreements to accelerate the maturity of their indebtedness, such acceleration would constitute an event of default, and substantially all of Foamex L.P.'s long-term debt would become due. Therefore, Foamex L.P. has reclassified approximately $715.8 million of long-term debt as current. Such classification raises substantial doubt about Foamex L.P.'s ability to continue as a going concern. In addition, Foamex L.P. has been informed by Trace that Trace had substantial debt obligations that were due at the end of December 1998
and did not have the financial resources to pay those obligations. Subsequently, Trace informed Foamex L.P. that waivers and/or modifications of such indebtedness had been obtained for at least the near future; however, there can be no assurance that such waivers and/or modifications will remain in effect prior to obtaining a permanent resolution. If Trace were to default on its indebtedness collateralized by Foamex International's common stock or other Trace creditors were to take steps constituting a default under such indebtedness (such as filing an involuntary bankruptcy petition), and if the holders of such collateralized indebtedness were to foreclose on Foamex International's common stock held by Trace, such event could trigger the acceleration and put rights of substantially all of the debt of Foamex L.P. as described above. Although management believes that all such debt obligations would be refinanced under such circumstances, there can be no assurance that Foamex L.P. would be able to do so. In December 1998, Foamex L.P. established a reserve of $2.4 million against operating receivables due from Trace. The financial statements do not include any adjustments that might result from the outcome of these uncertainties.
Foamex L.P. has reclassified all of its debt from long-term debt to reflect such debt as current liabilities. If, however, Foamex L.P. is able to amend the relevant covenants in its credit agreements and other financial arrangements, Foamex L.P. may be able to reclassify the liabilities as long-term debt. However, there can be no assurance that Foamex L.P. will be able to obtain the necessary amendments, or if obtained, that it will once again be able to classify such liabilities as long-term.
Cash and cash equivalents decreased $6.2 million during 1998 to $3.2 million at December 31, 1998 as compared to $9.4 million at December 28, 1997 primarily due to the loss from operations. Cash and cash equivalents decreased $11.6 million during 1997 to $9.4 million at December 28, 1997 from $21.0 million at December 29, 1996 primarily due to the decrease in operating results offset by less cash used for the operating assets and liabilities. Excluding the reclassification of other long-term debt to current, working capital decreased $11.3 million during 1998 to $114.8 million at December 31, 1998 from $126.1 million at December 28, 1997 primarily due to a reduction in net operating assets and an increase in accrued liabilities, offset by a decrease in accrued restructuring and plant consolidation costs. Net operating assets and liabilities (comprised of accounts receivable, accounts receivable from related parties, inventories, accounts payable and accounts payable to related parties) decreased $16.1 million to $148.0 million at December 31, 1998 as compared to $164.1 million at December 28, 1997. The decrease was primarily due to: (i) a net decrease in accounts receivable and accounts receivable related party and (ii) a net increase in accounts payable and accounts payable from related parties offset by (iii) an increase in inventories. The net decrease in accounts receivable and accounts receivable related parties was primarily associated with the GFI Transaction by which General Felt ceased to be a consolidated subsidiary of Foamex L.P. The increase in inventories was primarily due to year-end purchases of raw materials to maintain favorable pricing with chemical suppliers and projected net sales during the first quarter of 1999. In addition, inventories increased because of lower than anticipated sales during the month of December 1998. The net increase in accounts payable and accounts payable related parties is primarily associated with the year-end purchase of raw material inventories and the termination of a supply agreement between Foamex L.P. and Foamex International. The decrease in accrued restructuring and plant consolidation costs is primarily associated with the payment of costs for closure of facilities during 1998 and the reversal during 1998 of restructuring charges previously recorded in 1997. The increase in other accrued liabilities is primarily associated with an increase in workers compensation liabilities and $7.3 million of checks issued to be funded under the Credit Facility, offset by other general decreases. Working capital decreased $11.0 million during 1997 to $126.1 million at December 28, 1997 from $137.1 million at December 29, 1996 primarily due to the decrease of cash and cash equivalents and accrued restructuring and plant consolidation costs. Net operating assets and liabilities (comprised of accounts receivable, accounts receivable from related parties, inventories and accounts payable and accounts payable to related parties) increased $21.5 million during 1997 to $164.1 million at December 28, 1997 from $142.6 million at December 29, 1996 primarily due to increases in accounts receivable and inventories offset by an increase in accounts payable. These increases were primarily associated with the Crain Acquisition. Foamex L.P.'s restructuring/consolidation plan includes accruals of approximately $9.5 million of cash charges of which $2.5 million is expected to be paid during 1999.
As of December 31, 1998, there were $139.4 million of revolving credit borrowings at an average interest rate of 7.89% under the Credit Facility with $6.5 million available for borrowings and approximately $49.1 million associated with letters of credit outstanding which are supported by the Credit Facility. Borrowings by Foamex Canada Inc. as of December 31, 1998 were approximately $2.9 million, at an interest rate of 7.25%, under Foamex Canada Inc.'s revolving credit agreement with unused availability of approximately $2.3 million.
Cash Flow from Operating Activities
Cash flow from continuing operations was a negative $27.8 million and a positive $22.0 million and $36.7 million in 1998, 1997, and 1996, respectively. Cash flow from continuing operations decreased in 1998 as compared to 1997 primarily as a result of the loss from continuing operations, as described above, cash used for restructuring and plant consolidations and an increased use of cash by the operating assets and liabilities. Cash flow from continuing operations decreased in 1997 as compared to 1996 primarily as a result of the use of approximately $24.4 million of cash for payments and costs associated with the debt extinguishment during 1997 and reduced operating results offset by a decreased use of cash by the operating assets and liabilities.
Cash Flow from Investing Activities
From the beginning of 1996 through 1998, Foamex L.P. spent approximately $88.2 million on capital improvements. The expenditures included: (i) the construction of a facility in Mexico City, Mexico to improve manufacturing efficiencies and to meet the growing local demand for foam products; (ii) the expansion and modernization of a facility in Orlando, Florida to improve manufacturing efficiencies, (iii) installation of more efficient foam production line systems and fabricating equipment in a number of manufacturing facilities and (iv) installation of flame laminators to support the increased volume of automotive laminated products. Foamex L.P. expects to reduce capital expenditures from historical levels for the foreseeable future.
During 1998, the GFI Transaction used cash of approximately $10.2 million consisting of the $4.8 million payment on the Foamex/GFI Note and the fees and other costs.
On December 23, 1997, Foamex International acquired Crain pursuant to a merger agreement with Crain Holdings for a purchase price of approximately $213.7 million, which was primarily funded with $118.0 million of bank borrowings under the Credit Facility and the assumption of debt with a face value of approximately $98.6 million (and an estimated fair value of approximately $112.3 million). Fees and expenses associated with the Crain Acquisition were approximately $13.2 million.
On October 6, 1997, Foamex L.P. sold its needlepunch carpeting, tufted carpeting and artificial grass products business, located in Dalton, Georgia to Bretlin, Inc., a subsidiary of The Dixie Group, Inc. The sales price was approximately $41.0 million, net of post-closing adjustments which were finalized in December 1997.
During 1996, Foamex L.P. received net sale proceeds of approximately $42.7 million in connection with the sale of Perfect Fit which was finalized in 1996. The net sale proceeds were used to repurchase long-term debt and for the payment of certain retained liabilities.
Cash Flow from Financing Activities
In connection with the GFI Transaction in February 1998, Foamex L.P. extinguished approximately $125.1 million of term loans under the Credit Facility funded with $129.0 million of cash proceeds from borrowings under new term loan agreements which were subsequently assumed by Foam Funding LLC. In connection with the GFI Transaction, Foamex L.P. distributed $20.0 million in cash pro rata to its partners, such distribution was funded with borrowings under the Foamex L.P. Credit Agreement. See Note 9 to the consolidated financial statements.
On June 12, 1997, Foamex International substantially completed the 1997 Refinancing Plan designed to reduce Foamex International's interest expense and increase its financing flexibility. The 1997 Refinancing Plan included a tender offer to purchase $373.0 million of Foamex L.P.'s existing public debt and approximately $116.7 million of FJPS discount debentures. Also, the 1997
Refinancing Plan included the payment of $5.2 million of term loan borrowings under an existing credit facility and the payment of related fees and expenses. In addition, the tender offer included amending the existing indentures to remove substantially all of the restrictive covenants. Foamex L.P. purchased $342.3 million of its public debt and the $116.7 million principal amount of FJPS discount debentures under the tender offer and incurred an extraordinary loss on the early extinguishment of debt of approximately $44.5 million. The 1997 Refinancing Plan was funded by $347.0 million of borrowings under the Credit Facility and the net proceeds from the issuance of $150.0 million principal amount of senior subordinated notes. As a result of the 1997 Refinancing Plan, Foamex L.P.'s total long-term debt increased by $150.1 million. Foamex L.P. expects the 1997 Refinancing Plan to result in increased interest expense as compared to the debt structure prior to the 1997 Refinancing Plan, assuming no material changes in interest rates. Foamex L.P.'s future interest expense will vary based on a variety of factors, including fluctuations in interest rates in general. As a result of the 1997 Refinancing Plan, variable rate debt comprised a larger percentage of Foamex L.P.'s overall indebtedness than in the past, and as a result, future fluctuations in interest rates will have a greater impact on Foamex L.P.'s interest expense than in the past. In connection with the 1997 Refinancing Plan, Foamex L.P. made the distributions described under Item 5 above.
On October 1, 1997, Foamex L.P. redeemed approximately $26.2 million of the approximately $30.7 million of its outstanding public debt that was not tendered as part of the 1997 Refinancing Plan. These redemptions were funded with borrowings under the Credit Facility. In connection with these redemptions, Foamex L.P. incurred an extraordinary loss on the early extinguishment of debt of approximately $2.1 million. The remaining outstanding public debt of $4.5 million that was not tendered as part of the 1997 Refinancing Plan was defeased in February 1998 and redeemed in June 1998.
On October 6, 1997, Foamex L.P. sold its needlepunch carpeting, tufted carpeting and artificial grass products business, located in Dalton, Georgia to Bretlin, Inc., a subsidiary of The Dixie Group, Inc. Foamex L.P. used the net proceeds of the sale to reduce borrowings under the Credit Facility by approximately $38.8 million.
During 1997 and 1996, Foamex L.P. repurchased long-term debt of approximately $42.4 million with the net proceeds from the sale of Perfect Fit.
Foamex L.P. made cash distributions to its partners, pursuant to a tax sharing agreement, of approximately $0.3 million, $8.8 million and $3.5 million in 1998, 1997 and 1996, respectively. Also, in connection with the GFI Transaction in February 1998, Foamex L.P. made a $20.0 million distribution to its partners. In connection with the 1997 Refinancing Plan, Foamex L.P. made the distributions described under Item 5 above. See Note 14 to the consolidated financial statements.
Environmental Matters
Foamex L.P. is subject to extensive and changing environmental laws and regulations. Expenditures to date in connection with Foamex L.P.'s compliance with such laws and regulations did not have a material adverse effect on operations, financial position, capital expenditures or competitive position. The amount of liabilities recorded by Foamex L.P. in connection with environmental matters as of December 31, 1998 was $3.5 million. Although it is possible that new information or future developments could require Foamex L.P. to reassess its potential exposure to all pending environmental matters, including those described in the footnotes to Foamex L.P.'s consolidated financial statements, Foamex L.P. believes that, based upon all currently available information, the resolution of all such pending environmental matters will not have a material adverse effect on Foamex L.P.'s operations, financial position, capital expenditures or competitive position. See "Legal Proceedings - Environmental Matters."
Inflation and Other Matters
There was no significant impact on Foamex L.P.'s operations as a result of inflation during the prior three year period; however, during 1998, 1997 and 1996, Foamex L.P.'s results of operations were adversely affected by raw material cost increases. Foamex L.P. attempts to offset raw material cost increases through selling price increases; however, there can be no assurance that Foamex L.P. will be successful in implementing selling price increases or
that competitive pricing pressure will not require Foamex L.P. to adjust selling prices. Results of operations have been and could be adversely affected by delays in implementing, or the inability of Foamex L.P. to implement, selling price increases to offset raw material cost increases. For example, Foamex L.P.'s results of operations in 1998, 1997 and 1996 were adversely affected by net unrecovered raw material costs. See "Results of Operations" for a discussion of the impact of raw material price increases. In some circumstances, market conditions or customer expectations may prevent Foamex L.P. from increasing the price of its products to offset the inflationary pressures that may increase its costs in the future.
Year 2000 Compliance
Foamex L.P. uses numerous business information systems as well as manufacturing support systems that could be impacted by the "Year 2000 Problem". The Year 2000 Problem arises from computer programs that were written using two digits rather than four to designate the year. In connection with the Year 2000 Problem, date-sensitive computer software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in system failures or miscalculations which would cause significant operational disruptions.
Foamex L.P. has a Year 2000 Executive Sponsor Team comprised of representatives of Foamex L.P. The Year 2000 Executive Sponsor Team is providing direction to and receiving reports from the Year 2000 Steering Committee (the "Steering Committee") within the organization. The Steering Committee has completed an assessment of the state of readiness of the Information Technology ("IT") and non-IT systems of Foamex L.P. These assessments cover desktop computers, environmental systems, manufacturing systems (including laboratory information systems), field instrumentation, and significant third party vendor and supplier systems, which include employee compensation and benefit plan maintenance systems. The Steering Committee is also in the process of assessing the readiness of Foamex L.P.'s significant customers and suppliers.
The Year 2000 assessment process for each facility consists of an inventory of Year 2000 sensitive equipment, an assessment of the impact of possible failures, determination of required remediation actions, if any, and testing and implementation of these solutions. The inventory, assessment, remediation and testing phases were completed at the end of 1998, with fail safe testing and final implementation currently taking place in 1999. The progress of these phases as of March 31, 1999 is summarized as follows.
Foamex L.P. completed the inventory and assessment phases of the project by December 31, 1998. These phases consisted of a visit to each critical location by team members to promote awareness of the project and verify the initial inventory provided by the contact at each facility. Testing plans were developed which included correspondence with suppliers regarding date-sensitive devices. In addition, local management was advised of their roles and responsibilities in connection with the Year 2000 Problem.
Foamex L.P. completed the remediation and testing of critical business information computer systems as of December 31, 1998. The completion of these phases included the modification of several million lines of system code, the conversion of the systems acquired from Crain to standard business information computer systems, upgrading system hardware and operating system software, testing of the applicable systems in a development testing area, and the migration of the remediated systems into the production environment.
Foamex L.P. estimates it will spend $2.0 million in connection with the Year 2000 Problem. The spending estimate will be refined as phases of the project are completed. Spending on the Year 2000 Problem is funded by cash generated from operations.
Management believes that all significant systems controlled by Foamex L.P. will be Year 2000 ready in the latter half of 1999. While the Steering Committee is communicating readiness to third party customers, as requested, and is assessing the readiness of critical suppliers, there can be no assurance that third parties with a significant business relationship will successfully test, reprogram, and replace all of their IT and non-IT systems on a timely basis. As part of the overall response to the Year 2000 Problem, Foamex L.P. is in the process of developing contingency plans in the event of Year 2000 non-compliance of certain systems or third parties. Details of such contingency plans will be determined after the Steering Committee has completed its assessment of its supply chain, other third parties and the potential for possible failures.
There is inherent uncertainty in connection with the Year 2000 Problem due to the possibility of unanticipated failures by third party customers and suppliers. Accordingly, Foamex L.P. is unable, at this time, to assess the extent and resulting materiality of the impact of possible Year 2000 failures on its operations, liquidity or financial position. The Year 2000 assessment, remediation, and testing process continues to provide information in order to reduce the level of uncertainty regarding the impact of the Year 2000 Problem. Management believes that if Foamex L.P.'s solutions to the Year 2000 Problem are completed as scheduled such solutions may help minimize the possibility of significant disruptions to Foamex L.P.'s operations.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
An index to the financial statements and the required financial statement schedule is set forth in Item 14.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
The information required by this Part III (Items 10, 11, 12, and 13) is not applicable since Foamex L.P. is a wholly owned subsidiary of Foamex International.
PART IV ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(b) Reports on Form 8-K
Form 8-K, dated October 16, 1998 reporting the termination of the First Merger Agreement.
Form 8-K, dated November 4, 1998 reporting the change in fiscal year from 52-53 week to calendar year for Foamex International, Foamex L.P., and Foamex Capital Corporation.
Form 8-K, dated November 5, 1998 reporting the signing of the Second Merger Agreement.
Form 8-K, dated January 8, 1999 reporting the termination of the Second Merger Agreement.
Form 8-K, dated March 11, 1999 reporting press release involving preliminary earnings, appointment of John G. Johnson, Jr. and amendments to credit agreements, guarantee and promissory notes.
Form 8-K, dated April 20, 1999 reporting update to preliminary earnings.
(c) Exhibits
2.1(x) - Transfer Agreement, dated as of February 27, 1998, by and between Foam Funding LLC and Foamex L.P.
2.2(x) - Asset Purchase Agreement, dated as of February 27, 1998, by and among Foamex Carpet Cushion, Inc. ("Foamex Carpet"), Foamex International Inc. ("Foamex International"), Foam Funding LLC and General Felt Industries, Inc. ("General Felt").
2.3(z) - Agreement and Plan of Merger, dated as of November 5, 1998, by and among Foamex International, Trace International Holdings, Inc. and Trace Merger Sub Corp.
2.4(aa) - Agreement and Plan of Merger, dated as of June 25, 1998, by and among Trace International Holdings, Inc., Trace Merger Sub, Inc. and Foamex International Inc.
2.5(z) - Notice of termination of Agreement and Plan of Merger, dated as of November 5, 1998, from Trace International Holdings, Inc. to Foamex International Inc.
3.1(a) - Certificate of Limited Partnership of Foamex L.P.
3.2.1(a) - Fourth Amended and Restated Agreement of Limited Partnership of Foamex L.P., dated as of December 14, 1993, by and among FMXI, Inc. ("FMXI") and Trace Foam Company, Inc. ("Trace Foam"), as general partners, and Foamex International, as a limited partner (the "Partnership Agreement").
3.2.2(b) - First Amendment to the Partnership Agreement, dated June 28, 1994.
3.2.3(c) - Second Amendment to the Partnership Agreement, dated June 12, 1997.
3.2.4(v) - Third Amendment to the Partnership Agreement, dated December 23, 1997.
3.2.5(x) - Fourth Amendment to the Partnership Agreement, dated February 27, 1998.
3.3(y) - Certificate of Incorporation of FMXI.
3.4(y) - By-laws of FMXI.
3.5(k) - Certificate of Incorporation of Foamex Capital Corporation ("FCC").
3.6(k) - By-laws of FCC.
3.7.1(a) - Certificate of Incorporation of Foamex International.
3.7.1(dd) - Amendment to Certificate of Incorporation of Foamex International.
3.7.2(cc) - Certificate of Incorporation of Foamex Carpet Cushion, Inc. ("Foamex Carpet")
3.8(a) - By-laws of Foamex International.
3.8.1(cc) - By-laws of Foamex Carpet.
4.1.1(d) - Indenture, dated as of June 12, 1997, by and among Foamex L.P., FCC, the Subsidiary Guarantors and The Bank of New York, as trustee, relating to $150,000,000 principal amount of 9 7/8% Senior Subordinated Notes due 2007 (the "9 7/8% Notes"), including the form of Senior Subordinated Note and Subsidiary Guarantee.
4.1.2(v) - First Supplemental Indenture, dated as of December 23, 1997, between Foamex LLC ("FLLC") and The Bank of New York, as trustee, relating to the 9 7/8% Notes.
4.1.3(x) - Second Supplemental Indenture, dated as of February 27, 1998, among Foamex L.P. and FCC, as joint and several obligors, General Felt, Foamex Fibers, Inc. (`Foamex Fibers"), and FLLC, as withdrawing guarantors, and The Bank of New York, as trustee, relating to the 9 7/8% Notes.
4.1.4(d) - Registration Rights Agreement, dated as of June 12, 1997, by and among Foamex L.P., FCC, General Felt, Foamex Fibers, and all future direct or indirect domestic subsidiaries of Foamex L.P. or FCC, and Donaldson, Lufkin & Jenrette Securities Corporation, Salomon Brothers Inc. and Scotia Capital Markets, as Initial Purchasers.
4.2.1(v) - Indenture, dated as of December 23, 1997, by and among Foamex L.P., FCC, the Subsidiary Guarantors, Crain Holdings Corp., as Intermediate obligator, and The Bank of New York, as trustee, relating to $98,000,000 principal amount of 13 1/2% Senior Subordinated Notes due 2005 (the "13 1/2% Notes"), including the form of Senior Subordinated Note and Subsidiary Guarantee.
4.2.2(x) - First Supplemental Indenture, dated as of February 27, 1998, among Foamex L.P. and FCC, as joint and several obligors, General Felt, Foamex Fibers and FLLC, as withdrawing guarantors, Crain Industries, Inc., as withdrawing intermediate obligor, and The Bank of New York, as trustee, relating to the 13 1/2% Notes.
4.3(x) - Discharge of Indenture, dated as of February 27, 1998, by and among Foamex L.P., General Felt, Foamex International and State Street Bank and Trust Company, as trustee, relating to the 9 1/2% Senior Secured Notes due 2000.
4.4.1(x) - Credit Agreement, dated as of June 12, 1997, as amended and restated as of February 27, 1998, by and among Foamex L.P., and FMXI, the institutions from time to time party thereto as lenders, the institutions from time to time party thereto as issuing banks, and Citicorp USA, Inc. and The Bank of Nova Scotia, as Administrative Agents.
4.4.1.2(bb) - Amendment No. 2 to Foamex L.P. Credit Agreement, dated March 11, 1999.
4.4.2(x) - Second Amended and Restated Foamex International Guaranty, dated as of February 27, 1998, made by Foamex International in favor of Citicorp USA, Inc., as Collateral Agent.
4.4.3(x) - Amended and Restated Partnership Guaranty, dated as of February 27, 1998, made by FMXI in favor of Citicorp USA, Inc., as Collateral Agent.
4.4.4(p) - Foamex Guaranty, dated as of June 12, 1997, made by Foamex L.P. in favor of Citicorp USA, Inc., as Collateral Agent.
4.4.5(p) - Subsidiary Guaranty, dated as of June 12, 1997, made by Foamex Latin America, Inc. in favor of Citicorp USA, Inc., as Collateral Agent.
4.4.6(p) - Subsidiary Guaranty, dated as of June 12, 1997, made by Foamex Mexico, Inc. in favor of Citicorp USA, Inc., as Collateral Agent.
4.4.7(p) - Subsidiary Guaranty, dated as of June 12, 1997, made by FCC in favor of Citicorp USA, Inc., as Collateral Agent.
4.4.8(p) - Subsidiary Guaranty, dated as of June 12, 1997, made by Foamex Mexico II, Inc. in favor of Citicorp USA, Inc., as Collateral Agent.
4.4.9(p) - Subsidiary Guaranty, dated as of June 12, 1997, made by Foamex Asia, Inc. in favor of Citicorp USA, Inc., as Collateral Agent.
4.4.10(p) - Subsidiary Pledge Agreement, dated as of June 12, 1997, made by FCC in favor of Citicorp USA, Inc., as Collateral Agent.
4.4.11(p) - Subsidiary Pledge Agreement, dated as of June 12, 1997, made by Foamex Latin America, Inc. in favor of Citicorp USA, Inc., as Collateral Agent.
4.4.12(p) - Subsidiary Pledge Agreement, dated as of June 12, 1997, made by Foamex Asia, Inc. in favor of Citicorp USA, Inc., as Collateral Agent.
4.4.13(p) - Subsidiary Pledge Agreement, dated as of June 12, 1997, made by Foamex Mexico, Inc. in favor of Citicorp USA, Inc., as Collateral Agent.
4.4.14(p) - Subsidiary Pledge Agreement, dated as of June 12, 1997, made by Foamex Mexico II, Inc. in favor of Citicorp USA, Inc., as Collateral Agent.
4.4.15(p) - Foamex Security Agreement, dated as of June 12, 1997, made by Foamex L.P. in favor of Citicorp USA, Inc., as Collateral Agent.
4.4.16(p) - Subsidiary Security Agreement, dated as of June 12, 1997, made by Foamex Latin America, Inc. in favor of Citicorp USA, Inc., as Collateral Agent.
4.4.17(p) - Subsidiary Security Agreement, dated as of June 12, 1997, made by Foamex Mexico, Inc. in favor of Citicorp USA, Inc., as Collateral Agent.
4.4.18(p) - Subsidiary Security Agreement, dated as of June 12, 1997, made by Foamex Mexico II, Inc. in favor of Citicorp USA, Inc., as Collateral Agent.
4.4.19(p) - Subsidiary Security Agreement, dated as of June 12, 1997, made by Foamex Asia, Inc. in favor of Citicorp USA, Inc., as Collateral Agent.
4.4.20(p) - Subsidiary Security Agreement, dated as of June 12, 1997, made by FCC in favor of Citicorp USA, Inc., as Collateral Agent.
4.4.21(r) - Foamex Pledge Agreement, dated as of June 12, 1997, made by Foamex L.P. in favor of Citicorp USA, Inc., as Collateral Agent.
4.4.22(w) - First Amendment to Foamex Pledge Agreement, dated as of December 23, 1997, by Foamex L.P. in favor of Citicorp USA, Inc., as Collateral Agent.
4.4.23(w) - First Amendment to Foamex Security Agreement, dated as of December 23, 1997, by Foamex L.P. in favor of Citicorp USA, Inc., as Collateral Agent.
4.4.24(w) - First Amendment to Foamex Patent Agreement, dated as of December 23, 1997, by Foamex L.P. in favor of Citicorp USA, Inc., as Collateral Agent.
4.4.25(w) - First Amendment to Trademark Security Agreement, dated as of December 23, 1997, by Foamex L.P. in favor of Citicorp USA, Inc., as Collateral Agent.
4.4.26(w) - Acknowledgment of Guaranty by each of the guarantors to a Guaranty dated June 12, 1997 in favor of Citicorp USA, Inc.
4.4.27(w) - First Amendment to Pledge Agreement, dated as of December 23, 1997, by pledgors in favor of Citicorp USA, Inc.
4.4.28(w) - Crain Industries Guaranty, dated as of December 23, 1997, made by Crain in favor of Citicorp USA, Inc.
4.4.29(x) - Partnership Pledge Agreement, dated as of February 27, 1998, made by Foamex International and FMXI in favor of Citicorp USA, Inc., as Collateral Agent.
4.4.30(bb) - Amendment No. 1 to Second Amended and Restated Foamex International Guaranty, dated March 11, 1999.
4.4.31(bb) - Amendment No. 1 to Foamex International Guaranty, dated March 12, 1999.
4.4.32 - Foamex Patent Agreement, dated as of June 12, 1997, by Foamex L.P. in favor of Citicorp USA, Inc., as Collateral Agent.
4.4.33 - Trademark Security Agreement, dated as of June 12, 1997, by Foamex L.P. in favor of Citicorp USA, Inc., as Collateral Agent.
4.5(u) - Commitment letter, dated July 17, 1997, from The Bank of Nova Scotia to Foamex Canada Inc.
4.6(a) - Subordinated Promissory Note, dated as of May 6, 1993, in the original principal amount of $7,014,864 executed by Foamex L.P. to John Rallis ("Rallis").
4.7(a) - Marely Loan Commitment Agreement, dated as of December 14, 1993, by and between Foamex L.P. and Marely s.a. ("Marely").
4.8(a) - DLJ Loan Commitment Agreement, dated as of December 14, 1993, by and between Foamex L.P. and DLJ Funding, Inc. ("DLJ Funding").
4.9.1(p) - Promissory Note, dated June 12, 1997, in the aggregate principal amount of $5,000,000, executed by Trace Holdings to Foamex L.P.
4.9.2(p) - Promissory Note, dated June 12, 1997, in the aggregate principal amount of $4,794,828, executed by Trace Holdings to Foamex L.P.
4.10.1(x) - Credit Agreement, dated as of February 27, 1998, by and among Foamex Carpet, the institutions from time to time party thereto as lenders, the institutions from time to time party thereto as issuing banks and Citicorp USA, Inc. and The Bank of Nova Scotia, as administrative agents.
4.10.2(x) - Foamex International Guaranty, dated as of February 27, 1998, made by Foamex International in favor of Citicorp USA, Inc., as Collateral Agent.
4.10.3(x) - Foamex International Pledge Agreement, dated as of February 27, 1998, made by Foamex International in favor of Citicorp USA, Inc., as Collateral Agent.
4.10.4(x) - New GFI Security Agreement, dated as of February 27, 1998, made by Foamex Carpet in favor of Citicorp USA, Inc., as Collateral Agent.
4.10.5(x) - New GFI Intercreditor Agreement, dated as of February 27, 1998, by and among Foamex Carpet, The Bank of Nova Scotia, as Administrative Agent, and Citicorp USA, Inc., as Administrative Agent and Collateral Agent.
4.10.6(x) - FII Intercreditor Agreement, dated as of February 27, 1998, by and between Foamex International and Citicorp USA, Inc., as Collateral Agent.
4.10.7(dd) - Amendment No. 1 to Foamex L.P. Credit Agreement, dated as of October 30, 1998.
4.10.8(bb) - Amendment No. 2 to Foamex L.P. Credit Agreement, dated March 12, 1999.
4.10.9(dd) - Amendment No. 1 to Foamex Carpet Cushion, Inc. Credit Agreement, dated October 30, 1998.
4.10.10(bb) - Amendment No. 2 to Foamex Carpet Cushion, Inc. Credit Agreement, dated March 12, 1999.
4.11.1(x) - Promissory Note of Foamex L.P. in favor of Foam Funding LLC in the principal amount of $34 million, dated February 27, 1998.
4.12.1(x) - Promissory Note of Foamex Carpet in favor of Foam Funding LLC in the principal amount of $70.2 million, dated February 27, 1998.
4.12.2(bb) - Amendment to Promissory Note, dated March 15, 1999.
4.13(dd) - Waiver, dated as of April 15, 1999 to the Credit Agreement, dated as of February 27, 1998, among Foamex Carpet Cushion, Inc., the institutions party thereto as Lenders, the institutions party thereto as Issuing Banks, and Citicorp USA, Inc. and The Bank of Nova Scotia as Administrative Agents.
10.1.1(p) - Amendment to Master Agreement, dated as of June 5, 1997, between Citibank, N.A. and Foamex L.P.
10.1.2(p) - Amended Confirmation, dated as of June 13, 1997, between Citibank, N.A. and Foamex L.P.
10.1.3(w) - Amended Confirmation, dated as of February 2, 1998, between Citibank, N.A. and Foamex L.P.
10.2(h) - Reimbursement Agreement, dated as of March 23, 1993, between Trace Holdings and General Felt.
10.3(h) - Shareholder Agreement, dated December 31, 1992, among, Recticel, s.a. ("Recticel"), Recticel Holding Noord B.V., Foamex L.P., Beamech Group Limited, LME-Beamech, Inc., James Brian Blackwell, and Prefoam AG relating to foam technology sharing arrangement.
10.4.1(k) - Asset Transfer Agreement, dated as of October 2, 1990, between Trace Holdings and Foamex L.P. (the "Trace Holdings Asset Transfer Agreement").
10.4.2(k) - First Amendment, dated as of December 19, 1991, to the Trace Holdings Asset Transfer Agreement. 10.4.3(k) - Amended and Restated Guaranty, dated as of December 19, 1991, made by Trace Foam in favor of Foamex L.P.
10.5.1(k) - Asset Transfer Agreement, dated as of October 2, 1990, between Recticel Foam Corporation ("RFC") and Foamex L.P. (the "RFC Asset Transfer Agreement").
10.5.2(k) - First Amendment, dated as of December 19, 1991, to the RFC Asset Transfer Agreement.
10.5.3(k) - Schedule 5.03 to the RFC Asset Transfer Agreement (the "5.03 Protocol").
10.5.4(h) - The 5.03 Protocol Assumption Agreement, dated as of October 13, 1992, between RFC and Foamex L.P.
10.5.5(h) - Letter Agreement between Trace Holdings and Recticel regarding the Recticel Guaranty, dated as of July 22, 1992.
10.6(l) - Supply Agreement, dated June 28, 1994, between Foamex L.P. and Foamex International.
10.7.1(l) - First Amended and Restated Tax Sharing Agreement, dated as of December 14, 1993, among Foamex L.P., Trace Foam, FMXI and Foamex International.
10.7.2(d) - First Amendment to First Amended and Restated Tax Sharing Agreement, dated as of June 12, 1997, by and among Foamex L.P., Foamex International, FMXI and Trace Foam.
10.7.3(w) - Second Amendment to First Amended and Restated Tax Sharing Agreement, dated as of December 23, 1997, by and among Foamex L.P., Foamex International, FMXI, and Trace Foam.
10.7.4(y) - Third Amendment to First Amended and Restated Tax Sharing Agreement, dated as of February 27, 1998, by and between Foamex L.P., Foamex International and FMXI.
10.8.1(m) - Tax Distribution Advance Agreement, dated as of December 11, 1996, by and between Foamex L.P. and Foamex-JPS Automotive.
10.8.2(d) - Amendment No. 1 to Tax Distribution Advance Agreement, dated as of June 12, 1997, by and between Foamex L.P. and Foamex International.
10.9.1(h) - Trace Foam Management Agreement between Foamex L.P. and Trace Foam, dated as of October 13, 1992.
10.9.2(l) - Affirmation Agreement re: Management Agreement, dated as of December 14, 1993, between Foamex L.P. and Trace Foam.
10.9.3(d) - First Amendment to Management Agreement, dated as of June 12, 1997, by and between Foamex L.P. and Trace Foam.
10.10.1(k) - Salaried Incentive Plan of Foamex L.P. and Subsidiaries.
10.10.2(k) - Trace Holdings 1987 Nonqualified Stock Option Plan.
10.10.3(k) - Equity Growth Participation Program.
10.10.4(o) - The Foamex L.P. Salaried Pension Plan (formerly the General Felt Industries, Inc. Retirement Plan for Salaried Employees), effective as of January 1, 1995.
10.10.5(u) - The Foamex L.P. Hourly Pension Plan (formerly "The Foamex Products Inc. Hourly Employee Retirement Plan), as amended December 31, 1995.
10.10.6(u) - Foamex L.P. 401(k) Savings Plan effective October 1, 1997.
10.10.7(a) - Foamex L.P.'s 1993 Stock Option Plan.
10.10.8(a) - Foamex L.P.'s Non-Employee Director Compensation Plan.
10.11.1(o) - Employment Agreement, dated as of February 1, 1994, by and between Foamex L.P. and William H. Bundy.
10.11.2(dd) - Employment Agreement, dated as of March 16, 1999, by and between Foamex International and John G. Johnson, Jr.
10.12.1(a) - Warrant Exchange Agreement, dated as of December 14, 1993, by and between Foamex L.P. and Marely.
10.12.2(a) - Warrant Exchange Agreement, dated as of December 14, 1993, by and between Foamex L.P. and DLJ Funding.
10.13(t) - Warrant Agreement, dated as of June 28, 1994, by and between Foamex International and Shawmut Bank.
10.14(o) - Stock Purchase Agreement, dated as of December 23, 1993, by and between Transformacion de Espumas u Fieltros, S.A., the stockholders which are parties thereto, and Foamex L.P.
10.15.1(r) - Asset Purchase Agreement, dated as of August 29, 1997, by and among General Felt, Foamex L.P., Bretlin, Inc. and The Dixie Group.
10.15.2(s) - Addendum to Asset Purchase Agreement, dated as of October 1, 1997, by and among General Felt, Foamex L.P., Bretlin, Inc. and The Dixie Group.
10.16.1(x) - Supply Agreement, dated as of February 27, 1998, by and between Foamex L.P. and General Felt (as assigned to Foamex Carpet).
10.16.2(x) - Administrative Services Agreement, dated as of February 27, 1998, by and between Foamex L.P. and General Felt (as assigned to Foamex Carpet).
10.17(y) - Tax Sharing Agreement, dated as of February 27, 1998, between Foamex International and Foamex Carpet.
10.18.1(w) - Joint Venture Agreement between Hua Kee Company Limited and Foamex Asia, Inc., dated as of July 8, 1997.
10.18.2(w) - Loan Agreement between Hua Kee Company Limited and Foamex Asia, Inc., dated as of July 8, 1997.
27 - Financial Data Schedule for the year ended December 31, 1998. - ----------------------------
(a) Incorporated herein by reference to the Exhibit to Foamex L.P.'s Registration Statement on Form S-1, Registration No. 33-69606.
(b) Incorporated herein by reference to the Exhibit to the Form 10-K of Foamex International for the fiscal year ended January 1, 1995.
(c) Incorporated herein by reference to the Exhibit to the Current Report on Form 8-K of Foamex International reporting an event that occurred May 28, 1997.
(d) Incorporated herein by reference to the Exhibit to the Current Report on Form 8-K of Foamex International reporting an event that occurred June 12, 1997.
(e) Incorporated herein by reference to the Exhibit to the Registration Statement of Foamex L.P. and FCC on Form S-4, Registration No. 33-65158.
(f) Incorporated herein by reference to the Exhibit to the Form 10-Q of Foamex International for the quarterly period ended June 30, 1996.
(g) Incorporated herein by reference to the Exhibit to the Registration Statement of Foamex L.P., FCC and General Felt on Form S-1, Registration Nos. 33-60888, 33-60888-01, and 33-60888-02.
(h) Incorporated herein by reference to the Exhibit to the Form 10-K Statement of Foamex L.P. and FCC for fiscal 1992.
(i) Incorporated herein by reference to the Exhibit to the Form 10-K of Foamex L.P. for fiscal 1994.
(j) Incorporated herein by reference to the Exhibit to the Form 10-Q of Foamex for the quarterly period ended September 30, 1996.
(k) Incorporated herein by reference to the Exhibit to the Registration Statement of Foamex L.P. and FCC on Form S-1, Registration Nos. 33-49976 and 33-49976-01.
(l) Incorporated herein by reference to the Exhibit to the Registration Statement of FJPS, FJCC and Foamex L.P. on Form S-4, Registration No. 33-82028.
(m) Incorporated herein by reference to the Exhibit to the Annual Report on Form 10-K of Foamex International for the fiscal year ended December 29, 1996.
(n) Incorporated herein by reference to the Exhibit to the Form 10-Q of Foamex International for the quarterly period ended July 2, 1995.
(o) Incorporated herein by reference to the Exhibit to the Form 10-K of Foamex L.P. for fiscal 1993.
(p) Incorporated herein by reference to the Exhibit in the Registration Statement of Foamex International on Form S-4, Registration No. 333-30291.
(q) Incorporated herein by reference to the Exhibit to the Form 10-K of Foamex L.P. for the fiscal year ended December 31, 1995.
(r) Incorporated herein by reference to the Current Report on Form 8-K of Foamex L.P. reporting an event that occurred on August 29, 1997.
(s) Incorporated herein by reference to the Current Report on Form 8-K of Foamex L.P. reporting an event that occurred on October 6, 1997.
(t) Incorporated by reference to the Exhibit to the Form 10-Q of Foamex International for the quarterly period ended July 3, 1994.
(u) Incorporated by reference to the Exhibit to the Form 10-Q of Foamex L.P. for the quarterly period ended September 28, 1997.
(v) Incorporated herein by reference to the Exhibit to the Current Report on Form 8-K of Foamex L.P., Foamex Capital Corporation and Foamex International reporting an event that occurred December 23, 1997.
(w) Incorporated herein by reference to the Exhibit in the Registration Statement of Foamex L.P. and FCC on Form S-4, Registration No. 333-45733, filed February 6, 1998.
(x) Incorporated herein by reference to the Current Report on Form 8-K of Foamex International reporting an event that occurred on February 27, 1998.
(y) Incorporated herein by reference to the Exhibit to the Form 10-K of Foamex International for the fiscal year ended December 28, 1997.
(z) Incorporated herein by reference to the Current Report on Form 8-K of Foamex International reporting an event that occurred on November 5, 1998.
(aa) Incorporated herein by reference to the Exhibit to the Current Report on Form 8-K of Foamex International reporting an event that occurred on June 25, 1998.
(bb) Incorporated herein by reference to the Exhibit to the Current Report on Form 8-K of Foamex International reporting an event that occurred on March 11, 1999.
(cc) Incorporated herein by reference to the Exhibit in the Registration Statement of Foamex L.P. and FCC on Form S-4/A, Registration No. 333-45733, filed May 11, 1998.
(dd) Incorporated herein by reference to the Exhibit to the Form 10-K Statement of Foamex International for fiscal year ended December 31, 1998.
Certain instruments defining the rights of security holders have been excluded herefrom in accordance with Item 601(b)(4)(iii) of Regulation S-K. The registrant hereby agrees to furnish a copy of any such instrument to the Commission upon request.
SIGNATURES
Pursuant to the requirements of Section 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on the 7th day of May 1999.
FOAMEX L.P. By: FMXI, Inc. General Partner
By: /s/ John A. Feenan John A. Feenan Vice President, Treasurer, Chief Financial Officer and Assistant Secretary
FOAMEX CAPITAL CORPORATION
By: /s/ John A. Feenan John A. Feenan Vice President, Treasurer and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on its behalf by the registrant and in the capacities and on the dates indicated:
FOAMEX L.P. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners of Foamex L.P.:
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, partners' equity (deficit) and cash flows present fairly, in all material respects, the financial position of Foamex L.P. and its subsidiaries at December 31, 1998 and December 28, 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. In addition, in our opinion, the financial statement schedule as of and for each of the three years in the period ended December 31, 1998 when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein. These financial statements and financial statement schedule are the responsibility of Foamex L.P.'s management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above.
The accompanying financial statements have been prepared assuming Foamex L.P. will continue as a going concern. As discussed in Note 1 to the accompanying financial statements, during 1998 Foamex L.P. had a loss from continuing operations, net cash used by operating activities and a working capital deficit since it violated certain debt covenants for which it is seeking amendments; however, there can be no assurance that such amendments will be obtained and therefore all long-term debt is classified as current. These matters raise substantial doubt about Foamex L.P.'s ability to continue as a going concern. In addition, Foamex L.P. has been informed by Trace International Holdings, Inc. ("Trace") that Trace has substantial debt obligations and may not have the financial resources to pay these obligations when due within the near future. As a result, Trace creditors could foreclose or otherwise attach Foamex International Inc.'s common stock. Such an event may result in the acceleration of substantially all of Foamex L.P.'s debt. Management's plans in regard to these matters are described in Note 1 to the accompanying financial statements. The financial statements do not include any adjustments that might result from the outcome of these uncertainties.
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania April 22, 1999, except as to the information presented in Note 1, Note 7 and Note 17, for which the date is May 5, 1999
FOAMEX L.P. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
The accompanying notes are an integral part of the consolidated financial statements.
FOAMEX L.P. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
The accompanying notes are an integral part of the consolidated financial statements.
FOAMEX L.P. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS For the Years Ended 1998, 1997 and 1996
The accompanying notes are an integral part of the consolidated financial statements.
FOAMEX L.P. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended 1998, 1997 and 1996
The accompanying notes are an integral part of the consolidated financial statements.
FOAMEX L.P. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF PARTNERS' EQUITY (DEFICIT) For the Years Ended 1998, 1997 and 1996
The accompanying notes are an integral part of the consolidated financial statements.
FOAMEX L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION
Foamex L.P. is a manufacturer and distributor of flexible polyurethane foam and advanced polymer foam products. As of December 31, 1998, Foamex L.P.'s operations consists of the following operating segments: (i) foam products, (ii) carpet cushion products, (iii) automotive products, (iv) technical products and (v) other, which primarily consists of certain foreign manufacturing operations, corporate expenses not allocated to the other operating segments and restructuring and other charges. The net sales and income (loss) from operations of these operating segments for each of the last three years are included in Note 15 of the consolidated financial statements. For periods prior to February 27, 1998, the consolidated financial statements include the financial position, results of operations and cash flows of General Felt Industries, Inc. ("General Felt"). In connection with the GFI Transaction (as discussed below) the net assets and operations of General Felt were transferred from Foamex L.P. and were acquired by Foamex Carpet Cushion, Inc. ("Foamex Carpet"), a wholly owned subsidiary of Foamex International Inc. ("Foamex International").
Foamex L.P. is a Delaware limited partnership. Effective February 27, 1998, Foamex L.P. became an indirect wholly owned subsidiary of Foamex International. FMXI, Inc. ("FMXI") has a 2% managing general partnership interest in Foamex L.P. Foamex International has a 98% limited partnership interest in Foamex L.P. FMXI is a wholly owned subsidiary of Foamex International.
The accompanying financial statements have been prepared assuming Foamex L.P. will continue as a going concern. For the year ended December 31, 1998, Foamex L.P. had a loss from continuing operations, a working capital deficit and was not in compliance with certain debt covenants for which it is seeking amendments. Such non-compliance provides the lenders under those agreements, which have an aggregate outstanding principal amount of approximately $415.4 million, with the right, upon the notice and lapse of time to declare all of such indebtedness to be due. To date, the lenders have not executed such rights and have granted Foamex L.P. a waiver of such covenants through May 5, 1999, which has been extended through June 30, 1999, to enable Foamex L.P. to negotiate an amendment of such covenants; there can be no assurance that such amendments will be obtained and therefore such indebtedness has been classified as current in Foamex L.P.'s financial statements. Were the lenders under those agreements to accelerate the maturity of their indebtedness, such acceleration would constitute an event of default and substantially all of Foamex L.P.'s long-term debt would become due. Therefore, Foamex L.P. has reclassified approximately $715.8 million of long-term debt as current. Such classification raises substantial doubt about Foamex L.P.'s ability to continue as a going concern. In addition, Foamex L.P. has been informed by Trace International Holdings, Inc. ("Trace") that Trace had substantial debt obligations that were due at the end of December 1998 and did not have the financial resources to pay those obligations. Subsequently, Trace informed Foamex L.P. that waivers and/or modifications of such indebtedness had been obtained for at least the near future; however, there can be no assurance that such waivers and/or modifications will remain in effect prior to obtaining a permanent resolution. If Trace were to default on its indebtedness secured by Foamex International's common stock or other Trace creditors were to take steps constituting a default under such indebtedness (such as filing an involuntary bankruptcy petition), and if the holders of such secured indebtedness were to foreclose on Foamex International's common stock held by Trace, such event could trigger the acceleration and put rights of substantially all of the debt of Foamex L.P. as described below. Although management believes that all such debt obligations would be refinanced under such circumstances, there can be no assurance that Foamex L.P. would be able to do so. The financial statements do not include any adjustments that might result from the outcome of these uncertainties.
Certain credit agreements and promissory notes of Foamex L.P. pursuant to which approximately $440.2 million of debt has been issued contain provisions that would result in the acceleration of such indebtedness if Trace were to cease to own at least 30% of the outstanding common stock of Foamex International. Similarly, certain indentures of Foamex L.P. and Foamex Capital Corporation relating to approximately $248.0 million of senior subordinated notes contain provisions that provide the holders of such senior subordinated notes with the right to require the issuers thereof to repurchase such senior subordinated notes at a price in cash equal to 101% of the aggregate principal amount thereof, plus accrued and unpaid interest thereon, if Trace falls below certain specified
FOAMEX L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION (continued)
ownership levels of common stock and other persons or group owns a greater percentage of common stock than Trace.
On March 16, 1998, Foamex International announced that its Board of Directors received an unsolicited buyout proposal from Trace, Foamex International's principal stockholder. Trace proposed to acquire all of the outstanding common stock of Foamex International not owned by Trace and its subsidiaries (the "Public Shares") for a cash price of $17.00 per share. As of March 16, 1998, Trace and its subsidiaries beneficially owned approximately 11,475,000 shares or approximately 46% of the outstanding common stock of Foamex International. In response to Trace's offer, Foamex International's Board of Directors appointed a special committee to determine the advisability and fairness of the proposed buyout to Foamex International's stockholders other than Trace and its subsidiaries.
On June 25, 1998, Trace, Trace Merger Sub, Inc. ("Merger Sub"), a Delaware corporation and wholly owned subsidiary of Trace, and Foamex International entered into an Agreement and Plan of Merger (the "First Merger Agreement"). Pursuant to the terms of the First Merger Agreement, Merger Sub would have been merged with and into Foamex International (the "First Merger") and each outstanding share of common stock, other than common stock held by Trace and its subsidiaries, treasury shares, and common stock with respect to which appraisal rights would have been perfected, would have been converted into the right to receive $18.75 per share in cash. On November 5, 1998, Trace terminated the First Merger Agreement, pursuant to its terms, due to the failure of certain financing conditions contained in the First Merger Agreement.
On November 5, 1998, Trace, Merger Sub and Foamex International entered into a second Agreement and Plan of Merger (the "Second Merger Agreement"). Pursuant to the terms of the Second Merger Agreement, Merger Sub would have been merged with and into Foamex International (the "Second Merger") and each outstanding share of common stock, other than common stock held by Trace and its subsidiaries, treasury shares, and common stock with respect to which appraisal rights would have been perfected, would have been converted into the right to receive $12.00 per share in cash. Trace delivered a letter to Foamex International, dated January 8, 1999 (the "Notice of Termination"), terminating the Second Merger Agreement, pursuant to its terms, due to the failure of certain financing conditions.
On December 23, 1997, Foamex International acquired Crain Industries, Inc. ("Crain") pursuant to a merger agreement with Crain Holdings Corp. for a purchase price of approximately $213.7 million, which was primarily funded with $118.0 million of bank borrowings under the Foamex L.P. credit facility (the "Credit Facility") and the assumption of debt with a face value of approximately $98.6 million (and an estimated fair value of approximately $112.3 million) and contributed all of the assets of Crain, subject to all of the liabilities of Crain, to Foamex L.P. (the "Crain Acquisition"). In addition, fees and expenses associated with the Crain Acquisition were approximately $13.2 million.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation
The consolidated financial statements include the accounts of Foamex L.P. and all subsidiaries that Foamex L.P. directly or indirectly controls, either through majority ownership or otherwise. Intercompany accounts and transactions for continuing operations have been eliminated in consolidation.
Fiscal Year
Effective September 1998, management of Foamex L.P. decided to change the year-end reporting requirement of Foamex L.P. from a fifty-two or fifty-three week fiscal year ending on the Sunday closest to the end of the calendar year to a calendar year ending December 31st to improve the internal reporting requirements of Foamex L.P. This change was effective for the third fiscal quarter of 1998 which ended on September 30, 1998 and resulted in a 1998 fiscal year end of December 31, 1998 as compared to January 3, 1999. Fiscal years 1997 and 1996 were composed of fifty-two weeks and ended on December 28, 1997 and December 29, 1996, respectively.
FOAMEX L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Accounting Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and contingent assets and contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates.
Revenue Recognition
Revenue from sales is recognized when products are shipped at which time title passes to the customer.
Sales Discounts
A reduction in sales revenue is recognized for sales discounts when product is invoiced.
Cash and Cash Equivalents
Foamex L.P. considers all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents.
Inventories
Inventories are stated at the lower of cost or market. The cost of the inventories is determined on a first-in, first-out basis.
Property, Plant and Equipment
Property, plant and equipment are stated at cost and are depreciated using the straight-line method over the estimated useful lives of the assets. The range of useful lives estimated for buildings is generally twenty to thirty-five years, and the range for machinery, equipment and furnishings is five to twelve years. Leasehold improvements are amortized over the shorter of the terms of the respective leases or the estimated useful lives of the leasehold improvements. Depreciation expense for the years ended 1998, 1997 and 1996 was $24.6 million, $17.6 million and $17.9 million, respectively. For income tax purposes, Foamex L.P. uses accelerated depreciation methods.
Cost of maintenance and repairs is charged to expense as incurred. Renewals and improvements are capitalized. Upon retirement or other disposition of items of plant and equipment, the cost and related accumulated depreciation are removed from the accounts and any gain or loss is included in operations.
Debt Issuance Costs
Debt issuance costs consist of amounts incurred in obtaining long-term financing. These costs are being amortized over the term of the related debt using the effective interest method. Accumulated amortization as of December 31, 1998 and December 28, 1997 was approximately $2.9 million and $1.4 million, respectively.
Cost in Excess of Net Assets Acquired
The excess of the acquisition cost over the fair value of net assets acquired in business combinations accounted for as purchases is amortized using the straight-line method over a forty year period. At each balance sheet date Foamex L.P. evaluates the recoverability of cost in excess of net assets acquired using certain financial indicators such as historical and future ability to generate income from operations and cash flows from operations based on a going concern basis. Accumulated amortization as of December 31, 1998 and December 28, 1997 was
FOAMEX L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
approximately $10.6 million and $12.0 million, respectively. During 1998, Foamex L.P. recorded a reduction of cost in excess of net assets acquired of approximately $2.3 million associated with a Montreal Canada facility.
Environmental Matters
Environmental expenditures that relate to current operations are expensed or capitalized as appropriate. Expenditures that relate to an existing condition caused by past operations, and which do not contribute to current or future revenue generation, are expensed. Liabilities are recorded when environmental assessments and/or remedial efforts are probable and the costs can be reasonably estimated.
Postretirement and Postemployment Benefits
Foamex L.P. accrues postretirement benefits throughout the employees' active service periods until they attain full eligibility for those benefits. Also, Foamex L.P. accrues postemployment benefits when it becomes probable that such benefits will be paid and when sufficient information exists to make reasonable estimates of the amounts to be paid.
Comprehensive Income
As of December 28, 1997, Foamex L.P. adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS No. 130"), issued in June 1997. SFAS No. 130 requires the reporting and display of comprehensive income, which is composed of net income and other comprehensive income or loss items, in a full set of general purpose financial statements. Other comprehensive income or loss items are revenues, expenses, gains and losses that under generally accepted accounting principles are excluded from net income and reflected as a component of equity, such as currency translation and minimum pension liability adjustments.
Foreign Currency Accounting
The financial statements of foreign subsidiaries, except in countries treated as highly inflationary (Mexico), have been translated into U.S. dollars by using the year end exchange rates for the assets and liabilities and average exchange rates for the statements of operations. Currency translation adjustments are included in other partners' equity (deficit) until the entity is substantially sold or liquidated. For operations in countries treated as highly inflationary, such as Mexico for 1998 and 1997, certain financial statement amounts are translated at historical exchange rates, with all other assets and liabilities translated at year-end exchange rates. These translation adjustments are reflected in the results of operations. Also, foreign currency transaction gains and losses are insignificant for all periods presented. The effect of foreign currency exchange rates on cash flows is not material. Effective in the first quarter of 1999, the financial results of the Mexican operations will not be accounted for as highly inflationary.
Interest Rate Swap Agreement
The differential to be paid or received under an interest rate swap agreement is recognized as an adjustment to interest and debt issuance expense in the current period as interest rates change.
Income Taxes
Income taxes are accounted for under the asset and liability method, in which deferred income taxes are provided for temporary differences between the financial reporting and income tax basis of assets and liabilities using the income tax rates, under existing legislation, expected to be in effect at the date such temporary differences are expected to reverse.
FOAMEX L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Foamex L.P., as a limited partnership, is not subject to federal income taxes; therefore no current or deferred provision has been provided for such taxes. However, Foamex L.P. has provided for the income taxes of certain states in which it is subject to taxes and for certain subsidiaries which are subject to federal and state income taxes and for subsidiaries located in foreign jurisdictions that file separate tax returns. The partners will provide for their respective shares of income or loss in their federal or applicable state income tax returns. Foamex L.P. has a tax sharing agreement that provides for the payment of distributions to the partners for amounts that would be required to be paid if Foamex L.P. were a corporation filing separate tax returns. The ability of Foamex L.P. to make such distributions is limited by the terms of its credit agreements and indentures. (See Note 7).
Reclassifications
Certain amounts in the 1997 and 1996 consolidated financial statements have been reclassified to conform with the current year's presentation.
3. ACQUISITIONS
On December 23, 1997, Foamex International acquired Crain pursuant to a merger agreement with Crain Holdings Corp. for a purchase price of approximately $213.7 million, including the assumption of debt with a face value of approximately $98.6 million (with an estimated fair value of approximately $112.3 million) and contributed all of the assets of Crain, subject to all of the liabilities of Crain, to Foamex L.P. In addition, fees and expenses associated with the Crain Acquisition were approximately $13.2 million. In connection with the Crain Acquisition, Foamex L.P. approved a restructuring/consolidation plan for the two entities. Foamex L.P. recorded restructuring charges of $21.1 million in 1997 relating to the restructuring of Foamex L.P.'s operations in connection with the Crain Acquisition and related transactions. In addition, in 1997 Foamex L.P. recorded approximately $1.5 million of severance and related costs and $8.5 million for costs associated with the shut down and consolidation of certain facilities acquired in the Crain Acquisition. (See Note 4.)
The Crain Acquisition was accounted for as a purchase and the operations of Crain have been included in the consolidated statements of operations and cash flows from its date of acquisition. However, Crain's operations for the period from December 24, 1997 to December 28, 1997 have not been included in the 1997 consolidated statements of operations or cash flows since the effect would be insignificant. The cost of the Crain Acquisition has been allocated on the basis of the fair value of the assets acquired and the liabilities assumed. During 1998, Foamex L.P. increased the cost in excess of the net assets acquired by approximately $11.2 million as a result of the finalization of the fixed asset appraisal and updated estimates of certain former Crain facilities. The excess of the purchase price over the estimated fair value of the net assets acquired of $164.2 million is being amortized using the straight-line method over forty years.
4. RESTRUCTURING AND OTHER CHARGES (CREDITS)
In 1995, Foamex L.P. approved a restructuring plan (the "1995 restructuring plan") to consolidate thirteen foam production, fabrication or branch locations to concentrate resources as a result of industry conditions and better position itself to achieve its strategic growth objectives. Foamex L.P. recorded restructuring and other charges of $39.2 million which were comprised of $35.6 million associated with the consolidation of the foam production, fabrication or branch locations, $2.2 million associated with the completion of a 1993 restructuring plan and $1.4 million associated with merger and acquisition activities of Foamex L.P. The components of the $35.6 million restructuring charge include: $16.7 million for fixed asset writedowns (net of estimated sale proceeds), $15.1 million for plant closure and operating lease obligations and $3.8 million for personnel reductions. The $3.8 million cost for personnel reductions primarily represented severance and employee benefit costs associated with the elimination of manufacturing and administrative personnel.
FOAMEX L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. RESTRUCTURING AND OTHER CHARGES (CREDITS) (continued)
In 1996, Foamex L.P. determined to continue to operate one of the facilities originally identified for closure in the 1995 restructuring plan because of improved economics and the lack of synergy to be achieved from relocating the manufacturing process. In addition, Foamex L.P. approved a plan to close two facilities that were not originally identified in the 1995 restructuring plan. As a result of these changes to the 1995 restructuring plan and the favorable termination of certain lease agreements and other matters, Foamex L.P. recorded a $6.4 million net restructuring credit which included a restructuring credit of $11.3 million associated with Foamex L.P.'s decision not to close the facility identified as part of the 1995 restructuring plan and $1.7 million of restructuring credits relating primarily to the favorable termination of certain lease agreements and other matters relating to the 1995 restructuring plan, offset by $6.6 million of restructuring charges relating to the closure of the two facilities during 1997 (the "1996 restructuring plan").
During December 1997, Foamex L.P. approved a restructuring plan (the "1997 restructuring plan") to consolidate nine foam production, fabrication or branch locations in connection with the Crain Acquisition. (See Note 3.) Foamex L.P. recorded restructuring and other charges of $21.1 million which was comprised of $23.0 million associated with the consolidation of the foam production, fabrication or branch locations offset by $1.9 million of restructuring credits due primarily to the favorable termination of certain lease agreements and other matters associated with the 1996 and 1995 restructuring plans. The components of the $23.0 million restructuring charge include: $12.1 million for fixed assets writedowns (net of estimated sale proceeds), $9.8 million for plant closure and operating lease obligations and $1.1 million for personnel reductions.
In addition, during 1997, Foamex L.P. approved a consolidation plan to integrate the acquired Crain facilities into Foamex L.P.'s existing facilities. Foamex L.P. recorded approximately $1.5 million of severance and related costs and $8.5 million for costs associated with the shut down of certain acquired facilities.
During 1998, Foamex L.P. determined to continue to operate two facilities originally identified for closure in the 1997 restructuring plan. One facility remained open to fill lost capacity resulting from a fire in April 1998 at the Orlando facility, which is expected to be at full production during the second quarter of 1999. The other facility remained open during 1998 due to improved demand on the West Coast. The 1997 restructuring plan also included the closure of two facilities associated with the packaging business. Foamex L.P. intends to sell the packaging business during 1999 and does not expect to incur the asset write-down and lease costs as originally planned. As a result, Foamex L.P. recorded a $14.8 million restructuring credit associated with the 1997 restructuring plan. The components of the $14.8 million restructuring credit include: $10.2 million for fixed asset write-downs, $3.5 million for plant closure and operating lease obligations and $1.1 million for personnel reductions.
In addition, Foamex L.P. recorded restructuring and other charges of $4.7 million during 1998 to reserve for approximately $2.4 million of net receivables due from Trace and to write-down approximately $2.3 million of impaired goodwill associated with a foreign facility. Also during 1998, Foamex L.P. incurred additional plant closure costs of $5.2 million and personnel reduction costs of $1.2 million associated with the closure of the former Crain facilities. The additional costs associated with the closure of the former Crain facilities resulted in an increase to goodwill.
Except as discussed above, the 1997 and 1996 restructuring plans have been generally implemented as originally contemplated. The following table sets forth the components of Foamex L.P.'s restructuring and other charges:
FOAMEX L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. RESTRUCTURING AND OTHER CHARGES (CREDITS) (continued)
As indicated in the table above, the accrued restructuring and plant consolidation balance at December 31, 1998 will be used for payments relating to plant closures and leases including rundown costs at the facilities. The $5.7 million of asset writedowns relates to estimated proceeds from the sale of assets and is included in noncurrent assets. Foamex L.P. expects to pay approximately $2.5 million of costs during 1999 with the remaining $7.0 million to be paid through 2006.
5. INVENTORIES
Inventories consists of:
FOAMEX L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. SHORT-TERM BORROWINGS
Short-term borrowings represent borrowings outstanding under a line of credit facility for Foamex Canada Inc. ("Foamex Canada") bearing interest at the bank's prime rate (6.75% at December 31, 1998) plus 1/2%. The weighted average interest rates on Foamex Canada's short-term borrowings outstanding for 1998, 1997 and 1996 were 7.3%, 5.4% and 5.9%, respectively. Borrowings under Foamex Canada's credit facility are due on demand and are collateralized by accounts receivable, property and inventories of Foamex Canada having an approximate net carrying value of $17.7 million as of December 31, 1998. The unused amount under this line of credit totaled approximately $2.3 million as of December 31, 1998.
7. CURRENT PORTION OF LONG-TERM DEBT, LONG-TERM DEBT AND EXTRAORDINARY LOSS
For the year ended December 31, 1998, Foamex L.P. had a loss from continuing operations, a working capital deficit and was not in compliance with certain debt covenants for which it is seeking amendments. Such non-compliance provides the lenders under those agreements, which have an aggregate outstanding principal amount of approximately $415.4 million, upon notice and lapse of time to declare all of such indebtedness to be due. Notwithstanding the fact that to date the lenders have not executed such rights and have granted Foamex L.P. waivers of such covenants through May 5, 1999, which has been extended through June 30, 1999, to enable Foamex L.P. to negotiate an amendment of such covenants; however, there can be no assurance that such amendments will be obtained and therefore such indebtedness has been classified as current in Foamex L.P.'s financial statements. Were the lenders under those agreements to accelerate the maturity of their indebtedness, such acceleration would constitute an event of default and substantially all of Foamex L.P.'s long-term debt would become due. Therefore, Foamex L.P. has reclassified approximately $715.8 million of long-term debt as current. Such classification raises substantial doubt about Foamex L.P.'s ability to continue as a going concern.
Current portion of long-term debt and long-term debt consists of:
FOAMEX L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. CURRENT PORTION OF LONG-TERM DEBT, LONG-TERM DEBT AND EXTRAORDINARY LOSS
(1) Debt of Foamex L.P., guaranteed by Foamex International and Foamex Capital Corporation ("FCC") (2) Debt of Foamex L.P. and FCC. (3) Debt of Foamex L.P. and FCC, guaranteed by Foamex International. (4) Debt of Foamex L.P.
Credit Facility
On June 12, 1997, Foamex L.P. entered into the Credit Facility with a group of banks that provides for term loans of up to $440.0 million which expire from June 2003 to December 2006 and borrowings of up to $150.0 million under a revolving line of credit which expires in June 2003. The term loans are comprised of: (i) term A loan ("Term A") which provides up to $120.0 million of borrowings, (ii) term B loan ("Term B") of $110.0 million, (iii) term C loan ("Term C") of $100.0 million and (iv) term D loan ("Term D") of $110.0 million.
In connection with the GFI Transaction (See Note 9), Foamex L.P. amended its agreements with the lenders under the Credit Facility, which included additional borrowings of $129.0 million under new term loan agreements that were subsequently assumed by Foam Funding LLC and borrowings of $32.0 million under the existing revolving credit facility. These funds were used to (i) repay approximately $125.1 million of existing term loans and accrued interest thereon of approximately $0.9 million, (ii) deposit $4.8 million into an escrow account in order to redeem the senior secured notes during June 1998, (iii) repay $4.8 million of indebtedness owed to General Felt, (iv) fund the $20.0 million distribution to Foamex International and (v) pay fees and expenses of approximately $5.4 million. Also, this amendment increased the availability under the revolving credit facility from $150.0 million to $200.0 million, subject to a $2.5 million quarterly reduction of the availability under the revolving credit facility effective September 30, 1998, with $34.5 million of the increased availability used for a letter of credit to support the Foamex/GFI Note (described below).
Borrowings under the Credit Facility are collateralized by substantially all of the assets of Foamex L.P. on a pari passu basis with the IRBs (described below); however, the rights of the holders of the applicable issue of IRBs to receive payment upon the disposition of the collateral securing such issue of IRBs has been preserved.
Pursuant to the terms of the Credit Facility, borrowed funds will bear interest at a floating rate equal to an applicable margin, as defined, plus the higher of (i) the base rate of The Bank of Nova Scotia, in effect from time to time, or (ii) a rate that is equal to 0.5% per annum plus the federal funds rate in effect from time to time. The applicable margin is determined based on the total net debt to EBDAIT ratio, as defined, and can range from no margin up to 1.125% per annum for Term A and revolving loans, from 0.875% per annum to 1.375% per annum for Term B, from 1.125% per annum to 1.625% per annum for Term C and from 1.250% per annum to 1.750% per annum for Term D ("Base Rate Interest Loans"). At the option of Foamex L.P., portions of the outstanding loans under the Credit Facility are convertible into LIBOR based loans which bear interest at a floating rate equal to an applicable margin for LIBOR based loans, as defined, plus the average LIBOR, as defined. The applicable margin for LIBOR based loans is a rate that will generally equal the applicable margin (discussed above) plus 1.0% per annum. Pursuant to a March 11, 1999 amendment to the Credit Facility, the applicable margin for revolving loans as Base Rate Interest Loans as determined based on the total net debt to EBDAIT ratio will range from 1.50% per annum to 2.25% per annum and the applicable margins for Term B, Term C and Term D as Base Rate Interest Loans will be fixed at 2.50% per annum, 2.75% per annum and 2.875% per annum, respectively. The applicable margin for LIBOR based loans will equal the applicable margin for Base Rate Interest Loans plus 1.0% per annum. As of December 31, 1998, the interest rate for revolver borrowings, Term B, Term C and Term D were 7.80%, 8.00%, 8.25% and 8.4375%, respectively.
Foamex L.P. had a credit agreement (the "Foamex L.P. Old Credit Facility") with a group of banks that provided for loans of up to $85.0 million of which up to $40.0 million was available as a term loan and $45.0 million was available under a revolving line of credit. During 1997, Foamex L.P. used $3.8 million of net proceeds from the Perfect Fit Industries, Inc. ("Perfect Fit") sale to repay term loan borrowings. The term loan was repaid in connection with the refinancing plan (described below).
FOAMEX L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. CURRENT PORTION OF LONG-TERM DEBT, LONG-TERM DEBT AND EXTRAORDINARY LOSS (continued)
9 7/8% Senior Subordinated Notes due 2007 ("Senior Subordinated Notes")
The Senior Subordinated Notes were issued by Foamex L.P. and FCC in connection with the 1997 Refinancing Plan. The Senior Subordinated Notes represent uncollateralized general obligations of Foamex L.P. and are subordinated to all Senior Debt (as defined in the Indenture). The Senior Subordinated Notes bear interest at the rate of 9 7/8% per annum payable semiannually on each June 15 and December 15, commencing December 15, 1997. The Senior Subordinated Notes mature on June 15, 2007. The Senior Subordinated Notes may be redeemed at the option of Foamex L.P., in whole or in part, at any time on or after June 15, 2002, initially at 104.938% of their principal amount, plus accrued interest and liquidated damages, as defined, if any, thereon to the date of redemption and declining to 100.0% on or after June 15, 2005. In addition, at any time prior to June 15, 2000, Foamex L.P. may on one or more occasions redeem up to 35.0% of the initially outstanding principal amount of the Senior Subordinated Notes at a redemption price equal to 109.875% of the principal amount, plus accrued interest and liquidated damages, if any, thereon to the date of redemption with the cash proceeds of one or more Public Equity Offerings, as defined. Upon the occurrence of a change of control, as defined, each holder of Senior Subordinated Notes will have the right to require Foamex L.P. to repurchase the Senior Subordinated Notes at a price equal to 101.0% of the principal amount, plus accrued interest and liquidated damages, if any, to the date of repurchase. The Senior Subordinated Notes are subordinated in right of payment to all senior indebtedness and are pari passu in right of payment to the 13 1/2% Senior Subordinated Notes and the Subordinated Note Payable (described below).
13 1/2% Senior Subordinated Notes due 2005, Series B ("13 1/2% Senior Subordinated Notes")
The 13 1/2% Senior Subordinated Notes were issued by Foamex L.P. and FCC in connection with the Crain Acquisition. The 13 1/2% Senior Subordinated Notes represent uncollateralized general obligations of Foamex L.P. and are subordinated to all Senior Debt (as defined in the Indenture). The 13 1/2% Senior Subordinated Notes bear interest at the rate of 13 1/2% per annum payable semiannually on each February 15 and August 15. The 13 1/2% Senior Subordinated Notes mature on August 15, 2005. The 13 1/2% Senior Subordinated Notes may be redeemed at the option of Foamex L.P., in whole or in part, at any time on or after August 15, 2000, initially at 106.75% of their principal amount, plus accrued interest, if any, thereon to the date of redemption and declining to 100.0% on or after August 15, 2004. Upon the occurrence of a change of control, as defined, each holder of the 13 1/2% Senior Subordinated Notes will have the right to require Foamex L.P. to repurchase the 13 1/2% Senior Subordinated Notes at a price equal to 101.0% of the principal amount, plus accrued interest and liquidated damages, if any, to the date of repurchase. The 13 1/2% Senior Subordinated Notes are subordinated in right of the payment of all senior indebtedness and are pari passu in right of payment to the Senior Subordinated Notes and to the Subordinated Note Payable (described below).
9 1/2% Senior Secured Notes due 2000 ("Senior Secured Notes")
The Senior Secured Notes were issued on June 3, 1993 with interest at the rate of 9 1/2% payable semiannually on each June 1 and December 1. The Senior Secured Notes had a maturity date of June 1, 2000. The Senior Secured Notes were collateralized by a first-priority lien on substantially all of the assets of Foamex L.P. except for receivables, real estate and fixtures. The Senior Secured Notes were defeased in February 1998 and redeemed in June 1998.
Industrial Revenue Bonds ("IRBs")
Two bond issues in the principal amount of $1.0 million and $6.0 million, maturing in 2005 and 2013, respectively, are collateralized by certain properties which have an approximate net carrying value of $11.1 million at December 31, 1998 and letters of credit approximating $7.3 million. The IRBs bear interest at a variable rate with options available to Foamex L.P. to convert to a fixed rate. The interest rates on the IRBs were 4.0% and 3.4% at December 31, 1998 for the $6.0 million and $1.0 million bond issues, respectively. The interest rate on the $6.0 million bond issue varies weekly based on an interest rate that is indicative of current bidside yields on high quality short-term, tax-exempt obligations, or if such interest rate is not available, 70.0% of the interest rate for thirteen
FOAMEX L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. CURRENT PORTION OF LONG-TERM DEBT, LONG-TERM DEBT AND EXTRAORDINARY LOSS (continued)
week United States Treasury Bills. The maximum interest rate for either of the IRBs is 15.0% per annum. At the time of a conversion to a fixed interest rate and upon appropriate notice, the IRBs are redeemable at the option of the bondholders.
Subordinated Note Payable
This note payable was issued to John Rallis, the former Chief Operating Officer of Foamex International, on May 6, 1993 by Foamex L.P. in connection with the acquisition of Great Western Foam Products Corporation and certain related entities and assets. The note bears interest at a maximum rate of 6% per annum and the principal amount is payable in three equal annual installments beginning May 6, 1999.
Other
As of December 31, 1998, other debt is comprised primarily of capital lease obligations and borrowings by Foamex Mexico.
Foamex/GFI Note
In connection with the transfer of General Felt's common stock in the GFI Transaction (see Note 9), Foamex L.P. entered into the $34.0 million Foamex/GFI Note to settle an existing intercompany note payable to General Felt, which was retained by Foam Funding LLC in connection with the asset purchase agreement for the GFI Transaction. The principal and current interest payable under the Foamex/GFI Note are secured by a $34.5 million letter of credit issued under the Credit Facility. The principal amount is due upon maturity in March 2000.
Pursuant to the terms of the Foamex/GFI Note, the note will bear interest at a floating rate equal to the higher of (i) the base rate of the Holder, as defined, in effect from time to time, or (ii) a rate that is equal to 0.5% per annum plus the federal funds rate in effect from time to time. At the option of Foamex L.P., interest payable under the note is converted into a LIBOR based interest rate at a floating rate equal to the sum of 0.75% per annum plus the average LIBOR, as defined. As of December 31, 1998, the interest rate for borrowings was 6.3125%.
Refinancing Plan
On June 12, 1997, Foamex International substantially completed a refinancing plan (the"1997 Refinancing Plan") that included the refinancing of certain long-term indebtedness to reduce Foamex International's interest expense and improve financing flexibility. In connection with the 1997 Refinancing Plan, Foamex L.P. purchased approximately $342.3 million of aggregate principal amount of its public debt and approximately $116.7 million of aggregate principal amount of Foamex-JPS Automotive L.P.'s ("FJPS") senior secured discount debentures due 2004 (the "Discount Debentures") and repaid $5.2 million of term loan borrowings under the Foamex L.P. Old Credit Facility. The 1997 Refinancing Plan was funded by $347.0 million of borrowings under Credit Facility and the net proceeds from the issuance of $150.0 million of Senior Subordinated Notes.
In connection with the 1997 Refinancing Plan, Foamex L.P. incurred an extraordinary loss on the early extinguishment of debt of approximately $44.5 million. The extraordinary loss is comprised of approximately $20.2 million for premium and consent fee payments, approximately $12.6 million for the write-off of debt issuance costs and debt discount, approximately $8.2 million for the loss associated with the effective termination and amendment of the interest rate swap agreements and approximately $3.5 million of professional fees and other costs. In connection with the 1997 Refinancing Plan, Foamex L.P. repaid $5.2 million in term loan borrowings under the Foamex L.P. Old Credit Facility and purchased approximately $459.0 million of aggregate principal amount of public debt comprised of:
FOAMEX L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. CURRENT PORTION OF LONG-TERM DEBT, LONG-TERM DEBT AND EXTRAORDINARY LOSS (continued)
o $99.8 million of aggregate principal amount of its 9 1/2% senior secured notes due 2000 for an aggregate consideration of 104.193% of principal plus accrued interest, comprised of a tender price of 102.193% and a consent fee of 2.0%;
o $130.1 million of aggregate principal amount of its 11 1/4% senior notes due 2002 for an aggregate consideration of 105.709% of principal plus accrued interest, comprised of a tender price of 103.709% and a consent fee of 2.0%;
o $105.5 million of aggregate principal amount of its 11 7/8% senior subordinated debentures due 2004 for an aggregate consideration of 107.586% of principal plus accrued interest, comprised of a tender price of 105.586% and a consent fee of 2.0%;
o $6.9 million of aggregate principal amount of its 11 7/8% senior subordinated debentures, series B due 2004 for an aggregate consideration of 107.586% of principal plus accrued interest, comprised of a tender price of 105.586% and a consent fee of 2.0%; and
o $116.7 million of aggregate principal amount of the Discount Debentures for an aggregate consideration of 90.0% of principal amount, which represents approximately 121.9% of the accreted book value as of June 12, 1997, comprised of a tender price of 88.0% of principal amount and a consent fee of 2.0%.
In addition, on October 1, 1997, Foamex L.P. redeemed all of the outstanding: (i) 11 1/4% senior notes due 2002, (ii) 11 7/8% senior subordinated debentures due 2004 and (iii) the 11 7/8% senior subordinated debentures due 2004, Series B, constituting approximately $26.2 million of the approximately $30.7 million of its outstanding public debt that was not tendered as part of the 1997 Refinancing Plan. These redemptions were funded from borrowings under the Credit Facility. In connection with these redemptions, Foamex L.P. incurred an extraordinary loss on the early extinguishment of debt of approximately $2.1 million.
Early Extinguishment of Debt - Other
In connection with the GFI Transaction, Foamex L.P. incurred extraordinary losses of approximately $3.2 million associated with the early extinguishment of approximately $125.1 million of term loans under the Credit Facility funded with $129.0 million of new term loan agreements assumed by Foam Funding LLC (see Note 9). The extraordinary loss was generated entirely from the write-off of debt issuance costs.
In addition during 1997, Foamex L.P. incurred extraordinary losses of approximately $1.0 million associated with the early extinguishment of approximately $11.8 million of long-term debt funded with approximately $12.1 million of the remaining net proceeds from the sale of Perfect Fit. The extraordinary loss is comprised of approximately $0.4 million of premium payments and approximately $0.6 million for the write-off of debt issuance costs. The long-term debt was comprised of:
o $2.5 million of aggregate principal amount of its 9 1/2% senior secured notes due 2000.
o $5.5 million of aggregate principal amount of its 11 1/4% senior notes due 2002.
o Bank term loan borrowings of $3.8 million under the Foamex L.P. Old Credit Facility.
During 1996, Foamex L.P. used $31.3 million of the net proceeds from the sale of Perfect Fit to extinguish debt of $30.6 million and redemption premiums of $0.6 million. Foamex L.P. wrote off $1.2 million of debt issuance costs associated with the early extinguishment of debt and incurred transaction costs of $0.1 million. The early extinguishment of debt resulted in an extraordinary loss of $1.9 million.
FOAMEX L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. CURRENT PORTION OF LONG-TERM DEBT, LONG-TERM DEBT AND EXTRAORDINARY LOSS (continued)
Interest Rate Swap Agreements
Foamex L.P. enters into interest rate swaps to lower funding costs and/or to manage interest costs and exposure to changing interest rates. Foamex L.P. does not hold or issue financial instruments for trading purposes.
In connection with the 1997 Refinancing Plan, Foamex L.P.'s then existing interest rate swap agreements with a notional amount of $300.0 million were considered to be effectively terminated since the underlying debt was extinguished. These interest rate swap agreements had an estimated fair value liability of $8.2 million at the date of the 1997 Refinancing Plan which is included in the extraordinary loss on the early extinguishment of debt. In lieu of a cash payment for the estimated fair value of the then existing interest rate swap agreements, Foamex L.P. entered into an amendment of the then existing interest rate swap agreements resulting in one interest rate swap agreement with a notional amount of $150.0 million through June 2007. Accordingly, the $8.2 million fair value liability has been recorded as a deferred credit which will be amortized as a reduction in interest and debt issuance expense on a straight-line basis through June 2007. On January 8, 1998, Foamex L.P. entered into a new amendment to its interest rate swap agreement. The new amendment provided for an interest rate swap agreement with a notional amount of $150.0 million through June 2002. In September 1998, Foamex L.P. sold its existing interest rate swap agreement for a net gain of approximately $1.0 million. Accordingly, the $1.0 million gain has been recorded as a deferred credit which will be amortized through June 2007, which is the maturity date of the underlying debt.
The effect of the interest rate swaps resulted in a decrease in interest and debt issuance expense of $0.7 million, $2.2 million and $3.7 million for 1998, 1997 and 1996, respectively.
Debt Restrictions and Covenants
The indentures, Credit Facility and other indebtedness agreements contain certain covenants that limit, among other things to varying degrees, the ability of Foamex L.P. (i) to pay distributions or redeem partnership interests, (ii) to make certain restrictive payments or investments, (iii) to incur additional indebtedness or issue Preferred Equity Interest, as defined, (iv) to merge, consolidate or sell all or substantially all of its assets, or (v) to enter into certain transactions with affiliates or related persons. In addition, certain agreements contain a provision that, in the event of a defined change of control or the occurrence of an undefined material adverse change in the ability of the obligor to perform its obligations, the indebtedness must be repaid, in certain cases at the option of the holder (see Note 1). Also, Foamex L.P. is required under certain of these agreements to maintain specified financial ratios of which the most restrictive are the maintenance of net worth and interest, fixed charge and leverage coverage ratios, as defined. Under the most restrictive of the distribution restrictions, Foamex L.P. can make distributions to Foamex International only to the extent to enable Foamex International to meet its operating and debt obligations.
Foamex L.P. amended the Credit Facility on March 11, 1999. The amendment adjusted financial covenants, among other things, as of December 31, 1998 and provided for future measurement periods taking into account Foamex L.P.'s estimated operating results and financial condition for 1998 and management expectations regarding future measurement periods. As the Foamex L.P. actual 1998 net loss was greater than originally estimated, on April 15, 1999, Foamex L.P. obtained a waiver through May 5, 1999, which has been extended through June 30, 1999, of the financial covenants contained in the Credit Facility and certain events of default arising out of its Mexican operations, in order to enable Foamex L.P. to negotiate a further amendment of the Credit Facility.
FOAMEX L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. CURRENT PORTION OF LONG-TERM DEBT, LONG-TERM DEBT AND EXTRAORDINARY LOSS (continued)
Future Obligations on Debt
Scheduled maturities of total long-term debt and long-term debt - related party prior to reclassification as current are shown below (thousands):
8. EMPLOYEE BENEFIT PLANS
Foamex L.P. adopted, during the fourth quarter of 1998, Statement of Financial Accounting Standards No. 132, "Employees Disclosure about Pension and Other Postretirement Benefits" ("SFAS No. 132") which revised the required disclosures about pension and other postretirement benefit plans.
Defined Benefit Pension Plans
Foamex L.P. maintains noncontributory defined benefit pension plans (the "Plans") for salaried and certain hourly employees of Foamex L.P. and Foamex Carpet. The salaried plan provides benefits that are based principally on years of credited service and level of compensation. The hourly plans provide benefits that are based principally on stated amounts for each year of credited service.
Net periodic pension cost included the following components:
Foamex L.P.'s funding policy is to contribute annually an amount that both satisfies the minimum funding requirements of the Employee Retirement Income Security Act of 1974 and does not exceed the full funding limitations of the Internal Revenue Code of 1986, as amended (the "Code"). Foamex Carpet's allocated net periodic costs was approximately $0.4 million during 1998. The Plans purchased 250,000 shares of Foamex International's stock in 1994 for $2.5 million and 150,000 shares in 1995 for $1.5 million. The value of the Plans' investment in Foamex International's stock was approximately $5.2 million and $4.6 million at December 31, 1998 and 1997, respectively. The Plans purchased approximately $2.5 million of shares of Trace Global Opportunities Fund during each of 1995 and 1997. The value of the Plans' investment in Trace Global Opportunities Fund, which primarily
FOAMEX L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. EMPLOYEE BENEFIT PLANS (continued)
invests in companies organized or operating outside the G-7 markets and is a related party to Trace, is approximately $4.3 million and $8.7 million at December 31, 1998 and 1997, respectively. During 1998, the Plans purchased 234,000 shares of United Auto Group ("UAG") stock for approximately $4.8 million. The value of the Plans' investment in UAG, which is a related party to Trace, is $2.3 million at December 31, 1998. The Plans' investments consist primarily of corporate equity and debt securities, mutual life insurance funds and cash equivalents.
During 1998, the discount rate was adjusted to 6.5%. The following table sets forth the funded status of Foamex L.P.'s underfunded plans and the amounts recognized in the accompanying consolidated balance sheets as of December 31, 1998 and December 28, 1997:
FOAMEX L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. EMPLOYEE BENEFIT PLANS (continued)
Defined Contribution Plan
Foamex L.P. maintains a defined contribution plan which is qualified under Section 401(k) of the Code and is available for eligible employees of Foamex L.P. and Foamex Carpet who elect to participate in the plan. Employee contributions are voluntary and subject to certain limitations as imposed by the Code. Foamex L.P. provides contributions amounting to a 25% match of its employees' contributions up to 4% of eligible compensation. Foamex L.P. also provides an additional 25% match of its employees' contributions up to 4% of eligible compensation made to a fund which invests in Foamex International's common stock. In addition, Foamex L.P. may make discretionary contributions amounting to a 25% match of its employees' contributions up to 4% of eligible compensation. The expense for these contributions for 1998, 1997 and 1996 was approximately $0.8 million, $0.9 million and $0.8 million, respectively. During 1998, Foamex Carpet contributed approximately $0.1 million to the plan for matching contribution expense for its employees.
Postretirement Benefits
In addition to providing pension benefits, Foamex L.P. provides postretirement health care and life insurance for eligible employees. These plans are unfunded and Foamex L.P. retains the right, subject to existing agreements, to modify or eliminate these benefits.
The components of 1998, 1997 and 1996 expense for postretirement benefits are as follows:
During 1996, certain employees accepted an early retirement program resulting in a special termination loss of $0.6 million.
The following table sets forth the funded status of Foamex L.P.'s postretirement plans and the amounts recognized in the accompanying consolidated balance sheets as of December 31, 1998 and December 28, 1997:
FOAMEX L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. EMPLOYEE BENEFIT PLANS (continued)
The net accrued benefit liability recognized at December 31, 1998 and December 28, 1997 resulted in an unfunded obligation of $1.7 million and $2.0 million, respectively.
A 6% and 8% annual rate of increase in the per capita costs of covered health care benefits was assumed for each of 1998 and 1997, respectively. This rate was assumed to gradually decrease to 5% by the year 2000. Increasing the weighted average assumed health care cost trend rates by one percentage point would have an insignificant impact on the accumulated postretirement benefit obligation and service and interest cost. The discount rate used was 6.5% and 7.0% as of December 31, 1998 and December 28, 1997, respectively.
Postemployment Benefits
Foamex L.P. provides certain postemployment benefits to former or inactive employees and their dependents during the time period following employment but before retirement. At December 31, 1998 and December 28, 1997, Foamex L.P.'s liability for postemployment benefits was insignificant for each period.
9. DISCONTINUED OPERATIONS AND DIVESTITURES
Discontinued Operations
During 1996, Foamex L.P. finalized the sale of the outstanding common stock of Perfect Fit, a wholly owned subsidiary, for an adjusted sale price of approximately $44.2 million. The sale included all of the net assets of the home comfort products segment. Actual and estimated transaction expenses related to the sale totaled approximately $1.5 million. Foamex L.P. recorded a net loss on the sale of Perfect Fit of approximately $41.8 million, which includes the loss on disposal and a net loss of $1.3 million (net of $1.2 million income tax benefit) relating to operating losses during the phase-out period. Interest and debt issuance expense was allocated to discontinued operations based on the estimated debt to be retired from the net proceeds of the sale.
Divestitures
On February 27, 1998, Foamex International, Foamex L.P. and certain of their affiliates completed a series of transactions designed to simplify the structure of Foamex International and Foamex L.P. and to provide future operational flexibility (collectively, the "GFI Transaction"). Prior to the consummation of these transactions; (i) Foamex L.P. and Foamex L.P.'s wholly owned subsidiary, General Felt entered into a supply agreement and an administrative services agreement and (ii) Foamex L.P. defeased the $4.5 million outstanding principal amount of its 9 1/2% senior secured notes due 2000. Foamex L.P. settled its intercompany payables to General Felt with $4.8 million in cash and a $34.0 million principal promissory note supported by a $34.5 million letter of credit under the
FOAMEX L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. DISCONTINUED OPERATIONS AND DIVESTITURES (continued)
Credit Facility (the "Foamex/GFI Note"). The initial transaction resulted in the transfer from Foamex L.P. to Foam Funding LLC, an indirect wholly owned subsidiary of Trace, of all of the outstanding common stock of General Felt in exchange for (i) the assumption by Foam Funding LLC of $129.0 million of Foamex L.P.'s indebtedness and (ii) the transfer by Foam Funding LLC to Foamex L.P. of a 1% non-managing general partnership interest in Foamex L.P. As a result, General Felt ceased being a subsidiary of Foamex L.P. and was relieved from all obligations under Foamex L.P.'s 9 7/8% senior subordinated notes due 2007 and 13 1/2% senior subordinated notes due 2005. Upon consummation of the initial transaction, Foamex Carpet, a newly formed wholly owned subsidiary of Foamex International, Foamex International, Foam Funding LLC and General Felt entered into an Asset Purchase Agreement dated February 27, 1998, in which General Felt sold substantially all of its assets (other than cash, the Foamex/GFI Note and its operating facility in Pico Rivera, California) to Foamex Carpet in exchange for (i) $20.0 million in cash and (ii) a promissory note issued by Foamex Carpet to Foam Funding LLC in the aggregate principal amount of $70.2 million. The $20.0 million cash payment was funded with a distribution by Foamex L.P. to Foamex International. As part of these transactions, FMXI and Crain, both wholly owned subsidiaries of Foamex International and general partners of Foamex L.P., were merged and Crain, as the surviving corporation, subsequently changed its name to FMXI, Inc. Foamex Carpet conducts the carpet cushion business previously conducted by General Felt.
No gain has been recognized on the GFI Transaction. The impact of the GFI Transaction was an increase in Foamex L.P.'s partners' capital (deficit) of approximately $10.1 million, a distribution of $20.0 million to Foamex International and approximately $1.5 million of fees charged to earnings. The $129.0 million of debt assumed by Foam Funding LLC in the GFI Transaction was used to repay approximately $125.1 million of term loan borrowings that was accounted for as an extinguishment of debt which resulted in an extraordinary loss of approximately $3.2 million. The 1% non-managing general partnership interest acquired in connection with the GFI Transaction was accounted for as a redemption of equity. The GFI Transaction used cash of approximately $10.2 million. The non-cash portion was insignificant.
10. OTHER INCOME
Other income (expense), net for 1998 primarily consists, among other things, $3.0 million of foreign currency translation and transaction losses, $1.5 million of fees and $1.0 million of continuing costs related to the GFI Transaction, and other expenses offset by approximately $3.4 million of interest income.
On October 6, 1997, Foamex L.P. sold substantially all of the net assets of its needlepunch carpeting, tufted carpeting and artificial grass products business located at its facilities in Dalton, Georgia to Bretlin, Inc. for an aggregate sale price of approximately $41.0 million. Foamex L.P. realized an insignificant gain on the sale in 1997. Foamex L.P. used $38.8 million of the net sale proceeds to repay outstanding term loan borrowings under the Credit Facility. In connection with this repayment, Foamex L.P. incurred an extraordinary loss on the early extinguishment of debt of approximately $0.9 million during 1997.
11. INCOME TAXES
Income (loss) from continuing operations before provision for income taxes consists of the following:
FOAMEX L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. INCOME TAXES (continued)
The components of the total consolidated provision (benefit) for income taxes are summarized as follows:
The tax effect of the temporary differences that give rise to significant deferred tax assets and liabilities are:
FOAMEX L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. INCOME TAXES (continued)
During 1998, the valuation allowance for deferred tax assets and net deferred tax assets decreased by $9.1 million primarily due to the reduction of capital loss carryforwards associated with the transfer of General Felt's common stock in connection with the GFI Transaction (see Note 9). In addition, deferred tax assets were decreased by $6.1 million associated with the transfer of General Felt net assets in connection with the GFI Transaction.
A reconciliation of the statutory federal income tax rate to the effective income tax rate on continuing operations is as follows:
12. COMMITMENTS AND CONTINGENCIES
Operating Leases
Foamex L.P. is obligated under various noncancelable lease agreements for rental of facilities, vehicles and other equipment. Many of the leases contain renewal options with varying terms and escalation clauses that provide for increased rentals based upon increases in the Consumer Price Index, real estate taxes and lessors' operating expenses. Total minimum rental commitments (excluding commitments accrued as part of Foamex L.P.'s various restructuring/consolidation plans) required under operating leases at December 31, 1998 are:
Rental expense charged to operations under operating leases approximated $17.8 million, $10.1 million and $9.6 million for 1998, 1997 and 1996 respectively. Substantially all such rental expense represented the minimum rental payments under operating leases. In addition, Foamex L.P. incurred rental expense of approximately $1.7 million for 1996 under leases with related parties.
FOAMEX L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. RELATED PARTY TRANSACTIONS AND BALANCES
Foamex L.P. regularly enters into transactions with its affiliates in the ordinary course of business.
In connection with the GFI Transaction (see Note 9), Foamex L.P. and General Felt entered into a supply agreement that was subsequently assigned to Foamex Carpet (the "Supply Agreement"). Pursuant to the Supply Agreement, Foamex L.P. will, at the option of Foamex Carpet, supply finished carpet cushion products to Foamex Carpet at the lower of: (i) cost, as defined, plus 4.7% or (ii) fair market value, as defined. Foamex L.P. will also supply various raw materials used in the manufacture of carpet cushion products to Foamex Carpet at the lower of cost, as defined, or fair market value, as defined. During 1998, Foamex L.P. had sales of approximately $139.2 million to Foamex Carpet under the Supply Agreement. In addition, pursuant to the Supply Agreement, Foamex Carpet will, at the option of Foamex L.P., supply various finished products to Foamex L.P. at the lower of: (i) cost, as defined, plus 15.0% or (ii) fair market value, as defined. Foamex Carpet will also supply various raw materials to Foamex L.P. at the lower of cost, as defined or fair market value, as defined. During 1998, Foamex L.P. had purchases of approximately $1.3 million from Foamex Carpet under the Supply Agreement. The initial term of the Supply Agreement is until December 31, 2004 at which time the Supply Agreement will continue year to year unless notice of termination is given by either party or unless terminated earlier due to an event of default, as defined.
Also, in connection with the GFI Transaction, Foamex L.P. and General Felt entered into an administrative services agreement that was subsequently assigned to Foamex Carpet (the "Services Agreement"). Pursuant to the Services Agreement, Foamex L.P. will provide Foamex Carpet administrative and management services, as defined, at cost plus out-of-pocket expenses. During 1998, Foamex L.P. invoiced approximately $1.8 million of services to Foamex Carpet under the Services Agreement. The Services Agreement can be terminated by either party by giving at least 30 days written notice prior to the end of a calendar year. As of December 31, 1998, Foamex L.P. had a net receivable due from Carpet Cushion of approximately $16.8 million associated with the Supply Agreement and Services Agreement.
Also, in connection with the GFI Transaction, Foamex L.P. entered into the Foamex/GFI Note with General Felt that was subsequently retained by Foam Funding LLC (see Note 7).
Also, in connection with the GFI Transaction, Foamex L.P. made a $20.0 million distribution to Foamex International (see Note 9).
On July 1, 1997, Trace borrowed $5.0 million pursuant to a promissory note with an aggregate principal amount of $5.0 million issued to Foamex L.P. on June 12, 1997. The promissory note is due and payable on demand or, if no demand is made, on July 7, 2001, and bears interest at 2 3/8% plus three-month LIBOR, as defined, per annum payable quarterly in arrears commencing October 1, 1997. On June 12, 1997, another promissory note issued to Foamex L.P. by Trace in July 1996 was amended. The amended promissory note is an extension of a promissory note of Trace that was due in July 1997. The aggregate principal amount of the amended promissory note was increased to approximately $4.8 million and the maturity of the promissory note was extended. The promissory note is due and payable on demand or, if no demand is made, on July 7, 2001, and bears interest at 2 3/8% plus three-month LIBOR, as defined, per annum payable quarterly in arrears. The promissory notes are included in the other component of partners' equity (deficit). Based on Trace's financial position, Trace may not be able to pay the aggregate amount of $9.8 million.
Foamex L.P. has current operating receivables from Trace at December 31, 1998 of approximately $2.4 million, for which an allowance has been provided for in operations as restructuring and other charges due to the financial difficulties of Trace (see Note 1). Additionally, as described above, Foamex L.P. continues to include in the other components of partners' equity (deficit), notes receivable from Trace.
In connection with the 1997 Refinancing Plan, Foamex L.P. purchased approximately $116.7 million of aggregate principal amount of Discount Debentures for approximately $105.8 million including transaction costs of approximately $0.8 million. Foamex L.P. subsequently distributed the Discount Debentures to FJPS and FMXI.
FOAMEX L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. RELATED PARTY TRANSACTIONS AND BALANCES (continued)
Also on June 12, 1997, Foamex L.P. distributed its $56.2 million aggregate principal amount note, as amended, due 2006 (the "FJPS Note") from FJPS with an accreted value as of June 12, 1997 of $35.6 million to FJPS and FMXI. The accretion of the original issue discount of $2.4 million for the period from December 30, 1996 to June 12, 1997 was reflected as a direct increase in the FJPS Note and partners' capital account, and thereby excluded from the consolidated statements of operations.
In connection with the 1997 Refinancing Plan, Foamex L.P. made a cash distribution of approximately $1.5 million to Trace Foam Company, Inc. ("Trace Foam") as a result of Foamex L.P.'s distribution to FJPS and FMXI of the Discount Debentures, the FJPS Note and the $2.0 million aggregate principal amount promissory note due from Foamex International.
Foamex L.P. had a supply agreement (the "Foamex International Supply Agreement") with Foamex International pursuant to which, at the option of Foamex L.P., Foamex International would purchase certain raw materials, which are necessary for the manufacture of Foamex L.P.'s products, and resell such materials to Foamex L.P. at a price equal to net cost plus reasonable out of pocket expenses. Management believes that the terms of the Foamex International Supply Agreement were no less favorable than those which Foamex L.P. could have obtained from an unaffiliated third party. The Foamex International Supply Agreement was terminated in April 1998. During 1998, 1997 and 1996, Foamex L.P. purchased approximately $12.6 million, $138.6 million and $129.7 million, respectively, of raw materials under the Foamex International Supply Agreement. As of December 28, 1997, Foamex L.P. had accounts payable to Foamex International of approximately $11.7 million associated with the Foamex International Supply Agreement.
Foamex L.P. chartered an aircraft (which is owned by a wholly owned subsidiary of Foamex International) through a third party and incurred costs of approximately $0.9 million, $1.2 million and $1.4 million in 1998, 1997 and 1996, respectively.
On December 26, 1997, Foamex L.P. entered into a $2.5 million promissory note with Foamex International. The note bears interest at the rate of LIBOR plus 2 3/8%. The note and interest are payable on demand, or if no demand is made, then on December 31, 2001. Also, on December 31, 1998, Foamex L.P. entered into another promissory note with Foamex International with a principal amount of approximately $2.5 million. The note bears interest at the rate LIBOR plus 2 3/8%. The note and interest thereon were repaid on March 31, 1999.
During April 1996, Foamex International contributed the foam products operations of Foamex Mexico to Foamex L.P. The contribution was accounted for in a manner similar to a pooling of interests since the entities were under common control. Accordingly, all prior periods presented were restated to reflect the results of operations and financial position of Foamex Mexico. The restatement of prior periods was insignificant to the consolidated financial statements.
In December 1995, Foamex L.P. entered into a $2.0 million promissory note with Foamex International. The note bears interest at a rate per annum equal to six months LIBOR plus 4.0% and is payable semiannually in June and December. The note was distributed to FJPS and FMXI on June 12, 1997.
Foamex L.P. has a management service agreement with Trace Foam, a wholly owned subsidiary of Trace, pursuant to which Trace Foam provides general managerial services of a financial, technical, legal, commercial, administrative and/or advisory nature to Foamex L.P. During June 1997, the management services agreement was amended to increase the annual fee from $1.75 million to $3.0 million, plus reimbursement of expenses incurred. Trace rents approximately 5,900 square feet of general, executive and administrative office space in New York, New York from Foamex L.P. on substantially the same terms as Foamex L.P. leases such space from a third party lessor. Also, certain employees of Trace are also employees of Foamex International. Additionally, certain employees of Trace and its affiliates provide services to Foamex International. Foamex International pays a portion of the salaries of such employees based on the amount of time devoted to Foamex International's matters by such employees. Such payments totaled approximately $2.0 million per year.
FOAMEX L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. RELATED PARTY TRANSACTIONS AND BALANCES (continued)
During 1997, Foamex L.P. purchased approximately $1.9 million of scrap material from Recticel Foam Corporation ("RFC"), a former partner of Foamex L.P. and whose chairman is a director of Foamex International, under various agreements, the latest of which expired in March 1998.
Foamex L.P. made charitable contributions to the Trace International Holding, Inc. Foundation of approximately $0.2 million in each of 1998, 1997 and 1996.
On December 11, 1996, Foamex L.P. entered into a Tax Distribution Advance Agreement, pursuant to which its partners are entitled to obtain advances, in the aggregate not to exceed $17.0 million, against future distributions under Foamex L.P.'s tax distribution agreement. As of December 31, 1998, there were $13.6 million of advances to Foamex International under this agreement.
14. PARTNERS' EQUITY (DEFICIT)
Foamex L.P. was formed as a Delaware limited partnership on September 5, 1990, and initially capitalized on October 2, 1990, in accordance with a limited partnership agreement as amended through February 1998. As of December 31, 1998, the partnership interests of Foamex L.P. are held by FMXI, 2% managing general partnership interest and Foamex International a 98% limited partnership interest.
Cash distributions in connection with a tax sharing agreement for 1998, 1997 and 1996 were paid (received) as follows:
On February 27, 1998, Foamex L.P. distributed $20.0 million in cash pro rata to its partners, such distribution was funded with borrowings under the Credit Facility.
Accumulated Other Comprehensive Income (Loss)
The accumulated other comprehensive income (loss) consists of the following:
15. OPERATING SEGMENT AND RELATED DATA
In the fourth quarter of 1998 Foamex L.P. adopted Statement of Financial Accounting Standards No. 131 "Disclosure about Segment of an Enterprise and Restatement Information ("SFAS No. 131"). SFAS No. 131 requires companies to report information about their business segments on the basis of how they are managed and evaluated by the chief operating decision-makers. Each of the operating segments is headed by an executive vice president who is responsible for developing plans and directing the operations of the segment.
FOAMEX L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. OPERATING SEGMENT AND RELATED DATA (continued)
Foamex L.P.'s reportable business segments are foam products, carpet cushion products, automotive products and technical products. The foam products segment manufactures and markets foam used by the bedding industry, furniture industry and the retail industry. The carpet cushion products segment sells prime, rebond, sponge rubber and felt carpet cushion principally to Foamex Carpet. The automotive products segment supplies foam primarily for automotive interior applications to automotive manufacturers and to industry sub suppliers. The technical products segment manufactures and markets reticulated foams and other custom polyester and polyether foams for industrial, specialty and consumer and safety applications.
The "other" column in the table below represents certain foreign manufacturing operations that do not meet the quantitative threshold for determining reportable segments, corporate expenses not allocated to the other operating segments and restructuring and other charges. Total asset information by operating segment is not reported because many of Foamex L.P.'s facilities produce products for multiple operating segments. Data for 1997 and 1996 has been restated to reflect the implementation of SFAS No. 131.
The accounting policies of the operating segments are the same as described in the "Summary of Significant Accounting Policies" (see Note 2). Revenues and costs have been included in operating segments where specifically identified. Costs shared by operating segments have been allocated on the basis of the amount utilized.
FOAMEX L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. ENVIRONMENTAL MATTERS
Foamex L.P. is subject to extensive and changing federal, state, local and foreign environmental laws and regulations, including those relating to the use, handling, storage, discharge and disposal of hazardous substances and the remediation of environmental contamination, and as a result, is from time to time involved in administrative and judicial proceedings and inquiries relating to environmental matters. During 1998, expenditures in connection with Foamex L.P.'s compliance with federal, state, local and foreign environmental laws and regulations did not have a material adverse effect on Foamex L.P.'s operations, financial position, capital expenditures or competitive position. As of December 31, 1998, Foamex L.P. has accruals of approximately $3.5 million for environmental matters. During 1998, Foamex L.P. established an allowance of $0.6 million relating to receivables from Trace for environmental indemnification due to the financial difficulties of Trace.
The Clean Air Act Amendments of 1990 (the "1990 CAA Amendments") provide for the establishment of federal emission standards for hazardous air pollutants including methylene chloride, propylene oxide and TDI, materials used in the manufacturing of foam. On December 27, 1996, the United States Environmental Protection Agency (the "EPA") proposed regulations under the 1990 CAA Amendments that will require manufacturers of slab stock polyurethane foam and foam fabrication plants to reduce emissions of methylene chloride. The final National Emission Standard for Hazardous Air Pollutants ("NESHAP") was promulgated October 7, 1998. NESHAP requires a reduction of approximately 70% of the emission of methylene chloride for the slab stock foam industry effective October 7, 2001. Foamex L.P. does not believe implementation of the regulation will require it to make material expenditures due to Foamex L.P.'s use of alternative technologies which do not utilize methylene chloride and its ability to shift current production to the facilities which use such alternative technologies. The 1990 CAA Amendments also may result in the imposition of additional standards regulating air emissions from polyurethane foam manufacturers, but these standards have not yet been proposed or promulgated.
Foamex L.P. has reported to appropriate state authorities that it has found soil and groundwater contamination in excess of state standards at three facilities and soil contamination in excess of state standards at three other facilities. Foamex L.P. has begun remediation and is conducting further investigations into the extent of the contamination at these facilities and, accordingly, the extent of the remediation that may ultimately be required. The actual cost and the timetable of any such remediation cannot be predicted with any degree of certainty at this time. Foamex L.P. has accruals of $2.5 million for the estimated cost of completing remediation at these facilities. Foamex L.P. is in the process of addressing potential contamination at the Morristown, Tennessee facility, and has submitted a sampling plan to the State of Tennessee. The extent of the contamination and responsible parties, if any, has not yet been determined. A former owner may be liable for cleanup costs; nevertheless, the cost of remediation, if any, is not expected to be material.
Federal regulations require that by the end of 1998 all underground storage tanks ("USTs") be removed or upgraded in all states to meet applicable standards. Foamex L.P. has upgraded all operating tanks at its facilities in accordance with these regulations. Foamex L.P. believes that its USTs do not pose a significant risk of environmental liability. However, there can be no assurances that such USTs will not result in significant environmental liability in the future.
On April 10, 1997, the Occupational Health and Safety Administration promulgated new standards governing employee exposure to methylene chloride, which is used as a blowing agent in some of Foamex L.P.'s manufacturing processes. Foamex L.P. does not believe that it will be required to make any material expenditures to comply with these new standards.
Foamex L.P. has been designated as a Potentially Responsible Party ("PRP") by the EPA with respect to eight sites with an estimated total liability to Foamex L.P. for the eight sites of less than approximately $1.0 million. Estimates of total cleanup costs and fractional allocations of liability are generally provided by the EPA or the committee of PRP's with respect to the specified site. In each case, the liability of Foamex L.P. is not considered to be material.
FOAMEX L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. ENVIRONMENTAL MATTERS (continued)
Although it is possible that new information or future developments could require Foamex L.P. to reassess its potential exposure relating to all pending environmental matters, including those described herein, management believes that, based upon all currently available information, the resolution of such environmental matters will not have a material adverse effect on Foamex L.P.'s operations, financial position, capital expenditures or competitive position. The possibility exists, however, that new environmental legislation and/or environmental regulations may be adopted, or other environmental conditions may be found to exist, that may require expenditures not currently anticipated and that may be material.
17. LITIGATION
Beginning on or about March 17, 1998, six actions (collectively the "Stockholder Litigation") were filed in the Court of Chancery of the State of Delaware, New Castle County (the "Court"), by stockholders of Foamex International. The Stockholder Litigation, purportedly brought as class actions on behalf of all stockholders of Foamex International, named Foamex International, certain of its directors, certain of its officers and Trace as defendants alleging that they had breached their fiduciary duties to the plaintiffs and other stockholders of Foamex International unaffiliated with Trace in connection with the original proposal of Trace to acquire the publicly traded outstanding common stock of Foamex International for $17.00 per share. The complaints sought, among other things, class certification, a declaration that the defendants have breached their fiduciary duties to the class, preliminary and permanent injunctions barring implementation of the proposed transaction, rescission of the transaction if consummated, unspecified compensatory damages, and costs and attorneys' fee. A stipulation and order consolidating these six actions under the caption In re Foamex International Inc. Stockholders Litigation Consolidated Civil Action, No. 16259NC was entered by the Court on May 28, 1998. Foamex L.P. is not party to the Stockholder Litigation.
The parties to the Stockholder Litigation entered into a Memorandum of Understanding, dated June 25, 1998 (the "Memorandum of Understanding"), to settle the Stockholder Litigation, subject to, inter alia, execution of a definitive stipulation of settlement between the parties and approval by the Court of filing notice to the class and a hearing. The Memorandum of Understanding provided that as a result of, among other things, the Stockholder Litigation and negotiations among counsel for the parties to the Memorandum of Understanding, a special meeting of stockholders would be held to vote upon and approve the First Merger Agreement which provided, among other things, for the Public Shares owned by stockholders of Foamex International unaffiliated with Trace and its subsidiaries (the "Public Stockholders") to be converted into the right to receive $18.75 in cash, without interest.
The Memorandum of Understanding also provided for certification of a class, for settlement purposes only, consisting of the Public Stockholders, the dismissal of the Stockholder Litigation with prejudice and the release by the plaintiffs and all members of the class of all claims and causes of action that were or could have been asserted against Trace, Foamex International and the individual defendants in the Stockholders Litigation or that arise out of the matters alleged by plaintiffs. Following the completion of the confirmatory discovery which was proved for in the Memorandum of Understanding, on September 9, 1998, the parties entered into a definitive Stipulation of Settlement and the Court set a hearing to consider whether the settlement should be approved for October 27, 1998 (the "Settlement Hearing"). In connection with the proposed settlement, the plaintiffs intended to apply for an award of attorney's fees and litigation expenses in an amount not to exceed $925,000, and the defendants agreed not to oppose this application. Additionally, Foamex International agreed to pay the cost, if any, of sending notice of the settlement to the Public Stockholders. On September 24, 1998, a Notice of Pendency of Class Action, Proposed Settlement of Class Action and Settlement Hearing was mailed to the members of the settlement class. On October 20, 1998, the parties to the Stockholder Litigation requested that the Court cancel the Settlement Hearing in light of the announcement made by Trace on October 16, 1998, that it had been unable to obtain the necessary financing for the contemplated acquisition by Trace of Foamex International's common stock at a price of $18.75 per share which was the subject matter of the proposed settlement. This request was approved by the Court on October 21, 1998, and Foamex International issued a press release on October 21, 1998, announcing that the Court had cancelled the Settlement Hearing.
FOAMEX L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17. LITIGATION (continued)
On November 10, 1998, counsel for certain of the defendants in the Stockholder Litigation gave notice pursuant to the Stipulation of Settlement that such defendants were withdrawing from the Stipulation of Settlement in light of the notice given by Trace to Foamex International and the special committee of the Board of Directors on November 5, 1998 whereby Trace terminated the First Merger Agreement on the grounds that the financing condition in the First Merger Agreement was incapable of being satisfied.
On November 12, 1998, the plaintiffs in the Stockholder Litigation filed an Amended Class Action Complaint (the "Amended Complaint"). The Amended Complaint named Foamex International, Trace, Merger Sub, Mr. Marshall S. Cogan, Mr. Andrea Farace, Dr. Stuart Hershon, Mr. John Tunney, and Mr. Etienne Davignon as defendants, alleging that they breached their fiduciary duties to plaintiffs and the other Public Stockholders in connection with the Second Merger Agreement, that the proposal to acquire the Public Shares for $12.00 per share lacked entire fairness, that the individual defendants violated 8 Del. Code ss. 251 in approving the Second Merger Agreement, and that Trace and Merger Sub breached the Stipulation of Settlement. On December 2, 1998, plaintiffs served a motion for a preliminary injunction, seeking an Order to preliminarily enjoin the defendants from proceeding with, consummating or otherwise effecting the merger contemplated by the Second Merger Agreement.
The defendants have denied, and continue to deny, that they have committed or have threatened to commit any violation of law or breaches of duty to plaintiffs or the purported class or any breach of the stipulation of settlement. The defendants intend to vigorously defend the Stockholder Litigation. If the Stockholder Litigation is adversely determined, it could have a material adverse effect on the financial position, results of operations and cash flows of Foamex International.
In addition, on or about November 18, 1998, a putative class action was filed in the United States District Court for the Eastern District of New York on behalf of all persons who purchased common stock of Foamex International between March 16, 1998 and October 19, 1998, naming Trace as defendant and alleging that Trace breached a contract between the putative class members and Trace. By order dated January 8, 1999, the Court transferred the action to the United States District Court for the Southern District of New York. Trace made a motion to dismiss the action on February 8, 1999, which motion is pending before the Court, and the Court has stayed all discovery in the action until the motion is decided. Neither Foamex International, Foamex L.P. nor any of the individual directors of Foamex International are named as defendants in this litigation.
On April 26, 1999, a putative securities class action entitled Molitor v. Foamex International Inc., et al., 99 Civ. 3004 (DC), was filed in the United States District court for the Southern District of New York naming as defendants Foamex International, Trace and certain officers and directors of Foamex International on behalf of stockholders who bought shares of Foamex International's common stock during the period from May 7, 1998 through and including April 16, 1999. Foamex L.P. is not a party to such suit. The lawsuit alleges that the defendants violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 by misrepresenting and/or omitting material information about Foamex International's financial situation and operations, with the result of artificially inflating the price of Foamex International's stock. The lawsuit also alleges that Trace and Marshall S. Cogan violated Section 20(a) of the Securities Exchange Act of 1934 as controlling persons of Foamex International. The compliant seeks class certification, a declaration that defendants violated the federal securities laws, an award of money damages, and costs and attorneys', accountants' and experts' fees. The defendants intend to vigorously defend the action. To date, no response to the complaint has been made and no discovery or other proceedings have taken place.
As of April 16, 1999, Foamex L.P. and Trace were two of multiple defendants in actions filed on behalf of approximately 4,321 recipients of breast implants in various United States federal and state courts and one Canadian provincial court, some of which allege substantial damages, but most of which allege unspecified damages for personal injuries of various types. Three of these cases seek to allege claims on behalf of all breast implant recipients or other allegedly affected parties, but no class has been approved or certified by the court. In addition, three cases have been filed alleging claims on behalf of approximately 39 residents of Australia, New Zealand, England, and Ireland. Foamex L.P. believes that the number of suits and claimants may increase. During 1995, Foamex L.P. and Trace were granted summary judgments and dismissed as defendants from all cases in the federal
FOAMEX L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17. LITIGATION (continued)
courts of the United States and the state courts of California. Appeals for these decisions were withdrawn and the decisions are final.
Although breast implants do not contain foam, certain silicone gel implants were produced using a polyurethane foam covering fabricated by independent distributors or fabricators from bulk foam purchased from Foamex L.P. or Trace. Neither Foamex L.P. nor Trace recommended, authorized, or approved the use of its foam for these purposes. Foamex L.P. is also indemnified by Trace for any such liabilities relating to foam manufactured prior to October 1990. Although Trace has paid Foamex L.P.'s litigation expenses to date from insurance proceeds Trace received, there can be no assurance that Trace will be able to continue to provide such indemnification. While it is not feasible to predict or determine the outcome of these actions, based on management's present assessment of the merits of pending claims, after consultation with the general counsel of Trace, and without taking into account indemnification provided by Trace, the coverage provided by Trace and Foamex L.P.'s liability insurance and potential indemnity from the manufacturers of polyurethane covered breast implants, management believes that the disposition of matters that are pending or that may reasonably be anticipated to be asserted should not have a material adverse effect on either Foamex L.P.'s or Trace's consolidated financial position or results of operations. If management's assessment of Foamex L.P.'s liability with respect to these actions is incorrect, such actions could have a material adverse effect on the financial position, results of operations and cash flows of Foamex L.P.
On April 14, 1999, Foamex International received communications addressed to its Board of Directors from certain of Foamex International's stockholders regarding aspects of the relationship between Trace and Foamex International. Such stockholders questioned the propriety of certain relationships and related transactions between Trace, Foamex International and Foamex L.P., which previously have been disclosed in Foamex International's and Foamex L.P.'s periodic filings. Foamex International's Board of Directors, in consultation with its special counsel, is in the process of evaluating such communications and what actions, if any, to take with respect thereto.
In November 1997, a complaint was filed in the United States District Court for the Southern District of Texas alleging that various defendants, including Crain through the use of the CARDIO(R) process licensed from a third party, infringed on a patent held by plaintiff. Foamex L.P. is negotiating with the licensor of the process for the assumption of the defense of the action by the licensor, however, the action is in the preliminary stages, and there can be no assurance as to the ultimate outcome of the action. Such action could have a material adverse effect on the financial position, results of operations and cash flows of Foamex L.P.
Foamex L.P. is party to various other lawsuits, both as defendant and plaintiff, arising in the normal course of business. It is the opinion of management that the disposition of these lawsuits will not, individually or in the aggregate, have a material adverse effect on the financial position or results of operations of Foamex L.P. If management's assessment of Foamex L.P.'s liability with respect to these actions is incorrect, such actions could have a material adverse effect on Foamex L.P.'s consolidated financial position.
18. FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK
Concentration of Credit Risk
Financial instruments which potentially subject Foamex L.P. to significant concentrations of credit risk consist primarily of cash and cash equivalents and trade accounts receivable. Foamex L.P. maintains cash and cash equivalents and certain other financial instruments with various large financial institutions. Foamex L.P.'s periodic evaluation of these financial institutions are considered in Foamex L.P.'s investment strategy.
Foamex L.P. sells foam products to the automotive, carpet, cushioning and other industries. Foamex L.P. performs ongoing credit evaluations of its customers and generally does not require collateral. Foamex L.P. maintains allowance accounts for potential credit losses and such losses have been within management's expectations.
FOAMEX L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
18. FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK (continued)
During 1998, sales to Foamex Carpet accounted for approximately $139.2 million of Foamex L.P.'s net sales. However, other than Foamex Carpet, no one customer accounted for more than 10.0% of Foamex L.P.'s net sales during the past three years. Customers that represent more than 10% of an operating segment's net sales are Sealy in foam products, Foamex Carpet in carpet cushion products, and Lear Corporation and Johnson Controls in automotive products. The loss of any one of these customers would have a material adverse effect on Foamex L.P. During the year ended December 31, 1998, net sales to the five largest customers, excluding Foamex Carpet, comprised approximately $272.0 million or 23.5% of Foamex L.P.'s net sales.
Disclosure about Fair Value of Financial Instruments
The following disclosures of the estimated fair value amounts have been determined based on Foamex L.P.'s assessment of available market information and appropriate valuation methodologies.
The estimated fair values of Foamex L.P.'s financial instruments as of December 31, 1998 are as follows:
As of April 22, 1999, the estimated fair value of Foamex L.P.'s financial instruments was approximately $590.2 million.
Carrying amounts reported in the consolidated balance sheet for cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities and short-term borrowings approximates fair value due to the short- term nature of these instruments.
The fair value of debt and related party debt is estimated using quoted market prices, where available, or discounted cash flows.
Fair value estimates are made at a specific point in time, based on relevant market information about the financial instruments. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
19. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors Foamex Capital Corporation Wilmington, Delaware
In our opinion, the accompanying consolidated balance sheets present fairly, in all material respects, the financial position of Foamex Capital Corporation ("FCC") (a wholly owned subsidiary of Foamex L.P.) at December 31, 1998 and December 28, 1997. These balance sheets are the responsibility of FCC's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above.
The accompanying financial statements have been prepared assuming FCC will continue as a going concern. As discussed in Note 2 to the accompanying financial statements, Foamex L.P. had a loss from continuing operations, net cash used by operating activities and a working capital deficit since it violated certain debt covenants for which it is seeking amendments; however, there can be no assurance that such amendments will be obtained and therefore all long-term debt is classified as current. These matters raise substantial doubt about FCC's ability to continue as a going concern. In addition, FCC has been informed by Trace International Holdings, Inc. ("Trace") that Trace has substantial debt obligations and may not have the financial resources to pay these obligations when due within the near future. As a result, Trace creditors could foreclose or otherwise attach Foamex International Inc.'s common stock. Such an event may result in the acceleration of all of Foamex L.P.'s debt, of which FCC is a joint obligor. Management's plans in regard to these matters are described in Note 2 to the accompanying financial statements. The financial statements do not include any adjustments that might result from the outcome of these uncertainties.
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania April 22, 1999, except as to the information presented in Note 2, for which the date is May 5, 1999
FOAMEX CAPITAL CORPORATION (A Wholly Owned Subsidiary of Foamex L.P.) BALANCE SHEETS
The accompanying notes are an integral part of the balance sheets.
FOAMEX CAPITAL CORPORATION (A Wholly Owned Subsidiary of Foamex L.P.) NOTES TO BALANCE SHEETS
1. ORGANIZATION
Foamex Capital Corporation ("FCC"), a wholly-owned subsidiary of Foamex L.P., was formed on July 20, 1992 and initially capitalized on July 23, 1992 for the purpose of obtaining financing from external sources.
2. COMMITMENTS AND CONTINGENCIES
For the year ended December 31, 1998, Foamex L.P. had a loss from continuing operations, a working capital deficit and was not in compliance with certain debt covenants for which it is seeking amendments. Such non-compliance provides the lenders under those agreements, which have an aggregate outstanding principal amount of approximately $415.4 million, upon notice and lapse of time to declare all of such indebtedness to be due. Notwithstanding the fact that to date the lenders have not executed such rights and have granted Foamex L.P. a waiver of such covenants through May 5, 1999, which has been extended through June 30, 1999, to enable Foamex L.P. to negotiate an amendment of such covenants; however, there can be no assurance that such amendments will be obtained and therefore such indebtedness has been classified as current in Foamex L.P.'s financial statements. Were the lenders under those agreements to accelerate the maturity of their indebtedness, such acceleration would constitute an event of default and substantially all of Foamex L.P.'s long-term debt would become due. Therefore, Foamex L.P. has reclassified approximately $715.8 million of long-term debt as current. Such classification raises substantial concern about Foamex L.P.'s ability to continue as a going concern.
FCC is a joint obligor and severally liable on the following borrowings of Foamex L.P.:
9 7/8% Senior Subordinated Notes due 2007 ("Senior Subordinated Notes")
The Senior Subordinated Notes were issued by Foamex L.P. and FCC in connection with the 1997 Refinancing Plan. The Senior Subordinated Notes represent uncollateralized general obligations of Foamex L.P. and are subordinated to all Senior Debt (as defined in the Indenture). The Senior Subordinated Notes bear interest at the rate of 9 7/8% per annum payable semiannually on each June 15 and December 15, commencing December 15, 1997. The Senior Subordinated Notes mature on June 15, 2007. The Senior Subordinated Notes may be redeemed at the option of Foamex L.P., in whole or in part, at any time on or after June 15, 2002, initially at 104.938% of their principal amount, plus accrued interest and liquidated damages, as defined, if any, thereon to the date of redemption and declining to 100.0% on or after June 15, 2005. In addition, at any time prior to June 15, 2000, Foamex L.P. may on one or more occasions redeem up to 35.0% of the initially outstanding principal amount of the Senior Subordinated Notes at a redemption price equal to 109.875% of the principal amount, plus accrued interest and liquidated damages, if any, thereon to the date of redemption with the cash proceeds of one or more Public Equity Offerings, as defined. Upon the occurrence of a change of control, as defined, each holder of Senior Subordinated Notes will have the right to require Foamex L.P. to repurchase the Senior Subordinated Notes at a price equal to 101.0% of the principal amount, plus accrued interest and liquidated damages, if any, to the date of repurchase. The Senior Subordinated Notes are subordinated in right of payment to all senior indebtedness and are pari passu in right of payment to the 13 1/2% Senior Subordinated Notes and to Foamex L.P.'s subordinated note payable.
13 1/2% Senior Subordinated Notes due 2005, Series B ("13 1/2% Senior Subordinated Notes")
The 13 1/2% Senior Subordinated Notes were issued by Foamex L.P. and FCC in connection with the Crain Acquisition. The 13 1/2% Senior Subordinated Notes represent unsecured general obligations of Foamex L.P. and are subordinated to all Senior Debt (as defined in the Indenture). The 13 1/2% Senior Subordinated Notes bear interest at the rate of 13 1/2% per annum payable semiannually on each February 15 and August 15. The 13 1/2% Senior Subordinated Notes mature on August 15, 2005. The 13 1/2% Senior Subordinated Notes may be redeemed at the option of Foamex L.P., in whole or in part, at any time on or after August 15, 2000, initially at 106.75% of their principal amount, plus accrued interest and liquidated damages, as defined, if any, thereon to the date of redemption and declining to 100.0% on or after August 15, 2004. Upon the occurrence of a change of control, as
FOAMEX CAPITAL CORPORATION (A Wholly Owned Subsidiary of Foamex L.P.) NOTES TO BALANCE SHEETS
2. COMMITMENTS AND CONTINGENCIES (continued)
defined, each holder of the 13 1/2% Senior Subordinated Notes will have the right to require Foamex L.P. to repurchase the 13 1/2% Senior Subordinated Notes at a price equal to 101.0% of the principal amount, plus accrued interest and liquidated damages, if any, to the date of repurchase. The 13 1/2% Senior Subordinated Notes are subordinated in right of the payment of all senior indebtedness and are pari passu in right of payment to the Senior Subordinated Notes and to Foamex L.P.'s subordinated note payable.
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
(1) Discounts and billing adjustments reflect a reduction in net sales.
(2) Includes $3.2 million of reserved transferred out due to the GFI Transaction.
(3) Represents an adjustment to cost in excess of net assets relating to the utilization of preacquisition deferred tax assets of General Felt.
(4) Represents valuation allowances transferred out due to the GFI Transaction.
S-2