-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, W1WbhNP56EeicX7swBsJ0gFPB7slNzoRAX5wvrNTz6otkLHtpeLJTEDgTCuNP8zz Klar+yW/D/wc/rchGWbD6A== 0000912908-02-000004.txt : 20020414 0000912908-02-000004.hdr.sgml : 20020414 ACCESSION NUMBER: 0000912908-02-000004 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20020225 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FOAMEX L P CENTRAL INDEX KEY: 0000890080 STANDARD INDUSTRIAL CLASSIFICATION: PLASTICS FOAM PRODUCTS [3086] IRS NUMBER: 050475617 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 001-11432 FILM NUMBER: 02557526 BUSINESS ADDRESS: STREET 1: 1000 COLUMBIA AVENUE CITY: LINEWOOD STATE: PA ZIP: 19061 BUSINESS PHONE: 6108593000 MAIL ADDRESS: STREET 1: 1000 COLUMBIA AVE CITY: LINWOOD STATE: PA ZIP: 19061 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FOAMEX CAPITAL CORP CENTRAL INDEX KEY: 0000890081 STANDARD INDUSTRIAL CLASSIFICATION: PLASTICS FOAM PRODUCTS [3086] IRS NUMBER: 223182164 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 001-11436 FILM NUMBER: 02557527 BUSINESS ADDRESS: STREET 1: 1000 COLUMBIA AVE CITY: LINWOOD STATE: PA ZIP: 19061 BUSINESS PHONE: 6108593000 MAIL ADDRESS: STREET 1: 1000 COLUMBIA AVE CITY: LINWOOD STATE: PA ZIP: 19061 10-K/A 1 flp0010ka.txt SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K/A Amendment No. 1 [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from .......... to .......... Commission file number: 1-11432: 1-11436 ---------------- FOAMEX L.P. FOAMEX CAPITAL CORPORATION ------------------------------------------------------ (Exact Name of registrant as Specified in its Charter) Delaware 05-0475617 Delaware 22-3182164 - ------------------------------- ---------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 1000 Columbia Avenue, Linwood, PA 19061 - ---------------------------------------- ---------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (610) 859-3000 -------------- Securities registered pursuant to Section 12(b) of the Act: None ---- Securities registered pursuant to Section 12(g) of the Act: None ---- Indicate by check mark whether Foamex L.P. (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that Foamex L.P. was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. YES X NO Indicate by check mark whether Foamex Capital Corporation (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that Foamex Capital Corporation was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. YES X NO Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrants' knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Annual Report on Form 10-K or any amendment to this Annual Report on Form 10-K. [X] None of the voting securities of Foamex L.P. or Foamex Capital Corporation are held by non-affiliates. As of March 2, 2001, there were 1,000 shares of Foamex Capital Corporation's common stock outstanding. Foamex L.P. and Foamex Capital Corporation meet the conditions set for the in General Instruction (I)(1)(a) and (b) of this Annual Report on Form 10-K and are therefore filing this form with reduced disclosure format. DOCUMENTS INCORPORATED BY REFERENCE None Amendment No. 1 Item 8 - Financial Statements and Supplementary Data is hereby amended to include unaudited 1999 quarterly financial data presented in Note 20 to the consolidated financial statements. This data was included because a restatement was required since Foamex L.P. subsequently determined that certain fourth quarter 1999 adjustments should have been recorded in prior quarters in 1999. The consolidated financial statements are included as Exhibit 14(a) in Item 14 - Exhibits, Financial Statement Schedules and Reports. 2 SIGNATURES Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized as of the 22nd day of February 2002. FOAMEX L.P. By: FMXI, Inc. General Partner By: /s/ Michael D. Carlini ------------------------ Name: Michael D. Carlini Title: Senior Vice President FOAMEX CAPITAL CORPORATION By: /s/ Michael D. Carlini ------------------------ Name: Michael D. Carlini Title: Senior Vice President Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on its behalf by the registrant and in the capacities and as of the dates indicated: Signature Title Date /s/ Marshall S. Cogan Director of FMXI and FCC February 22, 2002 - ----------------------- Marshall S. Cogan /s/ George L. Karpinski Director of FMXI and FCC February 22, 2002 - ----------------------- George L. Karpinski 3 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA An index to the financial statements and financial statement schedules is included in Item 14(a). 4 Item 14(a) FOAMEX L.P. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Financial Statements of Registrants
Foamex L.P. Report of Independent Accountants F-2 Consolidated Balance Sheets as of December 31, 2000 and 1999 F-3 Consolidated Statements of Operations for the years 2000, 1999 and 1998 F-5 Consolidated Statements of Cash Flows for the years 2000, 1999 and 1998 F-6 Consolidated Statements of Partners' Deficit for the years 2000, 1999 and 1998 F-7 Notes to Consolidated Financial Statements F-8 Foamex Capital Corporation Report of Independent Accountants F-37 Balance Sheets as of December 31, 2000 and 1999 F-38 Notes to Balance Sheets F-39
F-1 REPORT OF INDEPENDENT ACCOUNTANTS To the Partners of Foamex L.P.: In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, partners' deficit and cash flows present fairly, in all material respects, the financial position of Foamex L.P. and its subsidiaries, an indirect wholly owned subsidiary of Foamex International Inc. ("Foamex International"), at December 31, 2000 and 1999 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of Foamex L.P.'s management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America 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 our opinion. As discussed in Note 12, during the year ending December 31, 2001, Foamex L.P.'s financial debt covenants, with which Foamex L.P. must comply on a quarterly basis, become more restrictive. Management's plans in regard to this matter are also described in Note 12. PricewaterhouseCoopers LLP Philadelphia, Pennsylvania March 30, 2001 F-2 FOAMEX L.P. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
December 31, December 31, ASSETS 2000 1999 ------------ ------------ (thousands) CURRENT ASSETS Cash and cash equivalents $ 2,887 $ 1,573 Accounts receivable, net of allowance for doubtful accounts and discounts of $6,458 and $5,310 134,478 128,929 Accounts receivable from related parties 12,483 16,717 Inventories 96,673 93,812 Other current assets 20,569 21,541 -------- -------- Total current assets 267,090 262,572 -------- -------- PROPERTY, PLANT AND EQUIPMENT Land and land improvements 6,805 6,947 Buildings and leasehold improvements 99,312 98,098 Machinery, equipment and furnishings 249,975 246,392 Construction in progress 21,640 14,598 -------- -------- Total 377,732 366,035 Less accumulated depreciation and amortization (175,260) (154,720) -------- -------- Property, plant and equipment, net 202,472 211,315 COST IN EXCESS OF ASSETS ACQUIRED, net of accumulated amortization of $20,677 in 2000 and $15,804 in 1999 178,299 183,481 DEBT ISSUANCE COSTS, net of accumulated amortization of $8,719 in 2000 and $5,787 in 1999 11,491 14,423 OTHER ASSETS 18,209 26,704 -------- -------- TOTAL ASSETS $677,561 $698,495 ======== ========
The accompanying notes are an integral part of the consolidated financial statements. F-3 FOAMEX L.P. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
December 31, December 31, LIABILITIES AND PARTNERS' DEFICIT 2000 1999 ------------ ------------ (thousands) CURRENT LIABILITIES Short-term borrowings $ - $ 1,627 Current portion of long-term debt 8,356 7,866 Accounts payable 82,756 82,229 Accrued employee compensation and benefits 20,420 16,341 Accrued interest 9,133 9,457 Accrued restructuring 3,831 3,915 Deferred income taxes 1,511 2,080 Accrued customer rebates 12,400 9,652 Other accrued liabilities 19,205 18,864 -------- -------- Total current liabilities 157,612 152,031 LONG-TERM DEBT 656,168 646,544 LONG-TERM DEBT - RELATED PARTY - 34,000 ACCRUED EMPLOYEE BENEFITS 18,366 14,131 ACCRUED RESTRUCTURING 4,681 7,097 OTHER LIABILITIES 9,641 9,283 -------- -------- Total liabilities 846,468 863,086 -------- -------- COMMITMENTS AND CONTINGENCIES PARTNERS' DEFICIT General partners (130,235) (143,271) Limited partners - - Accumulated comprehensive loss (24,461) (8,923) Notes and advances receivable from partner (4,990) (3,176) Notes receivable from related party (9,221) (9,221) -------- -------- Total partners' deficit (168,907) (164,591) -------- -------- TOTAL LIABILITIES AND PARTNERS' DEFICIT $677,561 $698,495 ======== ========
The accompanying notes are an integral part of the consolidated financial statements. F-4 FOAMEX L.P. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS For the Years 2000, 1999 and 1998
2000 1999 1998 ---------- ---------- ---------- (thousands) NET SALES $1,161,017 $1,190,679 $1,157,751 COST OF GOODS SOLD 1,016,643 1,036,056 1,029,074 ---------- ---------- ---------- GROSS PROFIT 144,374 154,623 128,677 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 54,240 60,067 73,315 RESTRUCTURING AND OTHER CHARGES (CREDITS) 6,019 10,821 (10,146) ---------- ---------- ---------- INCOME FROM OPERATIONS 84,115 83,735 65,508 INTEREST AND DEBT ISSUANCE EXPENSE 69,259 66,471 66,112 INCOME FROM EQUITY INTEREST IN JOINT VENTURE 1,652 512 - OTHER EXPENSE, NET (1,330) (882) (4,325) ---------- ---------- ---------- INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES 15,178 16,894 (4,929) PROVISION FOR INCOME TAXES 1,910 1,313 940 ---------- ---------- ---------- INCOME (LOSS) BEFORE EXTRAORDINARY LOSS 13,268 15,581 (5,869) EXTRAORDINARY LOSS ON EARLY EXTINGUISHMENT OF DEBT - - (3,195) ---------- ---------- ---------- NET INCOME (LOSS) $ 13,268 $ 15,581 $ (9,064) ========== ========== ==========
The accompanying notes are an integral part of the consolidated financial statements. F-5 FOAMEX L.P. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years 2000, 1999 and 1998
2000 1999 1998 --------- --------- -------- OPERATING ACTIVITIES (thousands) Net income (loss) $ 13,268 $ 15,581 $ (9,064) Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities: Depreciation and amortization 33,801 32,590 31,679 Amortization of debt issuance costs, debt premium, deferred swap adjustment and gain, and debt discount 383 457 (244) Asset write-downs and other charges (credits) 2,822 356 (5,507) Extraordinary loss on early extinguishment of debt - - 2,857 Provision for uncollectible accounts 1,736 2,493 2,000 Retirement benefit funding (greater) less than expense (6,502) 2,405 1,081 Deferred income taxes (646) 81 267 Other, net 1,717 1,075 (5,274) Changes in operating assets and liabilities: Accounts receivable and accounts receivable from related parties (3,051) 12,695 (19,026) Inventories (2,861) 33,824 (20,288) Accounts payable and accounts payable to related parties 527 (58,288) 13,530 Accrued restructuring (2,500) 1,491 (14,183) Other assets and liabilities 8,003 13,301 (5,610) -------- -------- -------- Net cash provided by (used for) operating activities 46,697 58,061 (27,782) -------- -------- -------- INVESTING ACTIVITIES Capital expenditures (22,786) (19,407) (31,715) Proceeds from sale of assets 3,995 1,510 2,230 Repayment of (purchase of) note from Foamex International - 2,490 (2,490) Redemption of General Felt - - (10,153) Increase in revolving loan with Foamex International (1,814) (676) - Other investing activities (1,850) 249 (922) -------- -------- -------- Net cash used for investing activities (22,455) (15,834) (43,050) -------- -------- -------- FINANCING ACTIVITIES Repayments of short-term borrowings (1,627) (1,330) (3,641) Net proceeds from (repayments of) revolving loans 32,220 (25,753) 84,511 Proceeds from long-term debt - - 138,810 Repayments of long-term debt (20,550) (8,271) (142,212) Repayments of long-term debt - related parties (34,000) - - Increase (decrease) in cash overdrafts 1,029 (1,444) 7,300 Tax distribution repayments - 13,618 - Net distribution paid to partners - (17,296) (20,293) Debt issuance costs - (3,370) (979) Other financing activities - - 1,123 -------- -------- -------- Net cash provided by (used for) financing activities (22,928) (43,846) 64,619 -------- -------- -------- Net increase (decrease) in cash and cash equivalents 1,314 (1,619) (6,213) Cash and cash equivalents at beginning of period 1,573 3,192 9,405 -------- -------- -------- Cash and cash equivalents at end of period $ 2,887 $ 1,573 $ 3,192 ======== ======== ========
The accompanying notes are an integral part of the consolidated financial statements. F-6 FOAMEX L.P. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF PARTNERS' DEFICIT For the Years Ended 2000, 1999 and 1998
Accumulated Notes Other Notes Receivable General Limited Comprehensive Receivable Related Partners Partners Loss from Partners Party Total -------- -------- ------------- ------------- ---------- --------- (thousands) Balances at December 28, 1997 $(122,304) $ - $ (8,085) $(16,118) $(9,795) $(156,302) Net loss (181) (8,883) (9,064) Minimum pension liability adjustment (11,525) (11,525) Foreign currency translation adjustment (6,598) (6,598) --------- Comprehensive loss (27,187) Distributions (8) (326) (334) Distribution associated with the GFI Transaction (400) (19,600) (20,000) Equity adjustment associated with the GFI Transaction 201 9,868 10,069 Purchase of note receivable from Foamex International (2,490) (2,490) Other 207 207 Deficit balance of Limited Partner assumed by General Partner (18,734) 18,734 - --------- ------- -------- -------- ------- --------- Balances at December 31, 1998 (141,426) - (26,208) (18,608) (9,795) (196,037) Net income 312 15,269 15,581 Minimum pension liability adjustment 12,331 12,331 Foreign currency translation adjustment 4,954 4,954 --------- Comprehensive income 32,866 Distributions (7) (321) (328) Distribution associated with tax distribution advance (346) (16,967) (17,313) Repayment of note receivable from Foamex International 2,490 2,490 Repayment of tax advance 13,618 13,618 Revolving loan with Foamex International (676) (676) Other 215 574 789 Deficit balance of Limited Partner assumed by General Partner (1,804) 1,804 - --------- ------- -------- -------- ------- --------- Balances at December 31, 1999 (143,271) - (8,923) (3,176) (9,221) (164,591) Net income 265 13,003 13,268 Minimum pension liability adjustment (14,628) (14,628) Foreign currency translation adjustment (910) (910) --------- Comprehensive loss (2,270) Distributions (8) (432) (440) Revolving loan with Foamex International (1,814) (1,814) Other 208 208 Offset balance against Limited Partner deficit assumed by General Partner 12,779 (12,779) - --------- ------- -------- -------- ------- --------- Balances at December 31, 2000 $(130,235) $ - $(24,461) $ (4,990) $(9,221) $(168,907) ========= ======= ======== ======== ======== =========
The accompanying notes are an integral part of the consolidated financial statements. F-7 FOAMEX L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION AND BASIS OF PRESENTATION Organization Foamex L.P. is a manufacturer and distributor of flexible polyurethane foam and advanced polymer foam products. As of December 31, 2000, 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 in Mexico, corporate expenses not allocated to the other operating segments and restructuring and other charges. The net sales and income (loss) from operations of these operating segments for each of the last three years are included in Note 15. For periods prior to February 27, 1998, the consolidated financial statements include the results of operations and cash flows of General Felt Industries, Inc. ("General Felt"). In connection with the GFI Transaction (see Note 12) the net assets and operations of General Felt were transferred from Foamex L.P. and were acquired by Foamex Carpet Cushion, Inc. ("Foamex Carpet"), a wholly owned subsidiary of Foamex International Inc. ("Foamex International"). Foamex L.P. is a Delaware limited partnership. Effective February 27, 1998, Foamex L.P. became an indirect wholly owned subsidiary of Foamex International. FMXI, Inc. ("FMXI") has a 2% managing general partnership interest in Foamex L.P. Foamex International has a 98% limited partnership interest in Foamex L.P. FMXI is a wholly owned subsidiary of Foamex International. Foamex International Shareholder and Change in Control Developments Trace International Holdings, Inc. ("Trace") is a privately held company, which owned approximately 29% of Foamex International's outstanding voting common stock at September 30, 2000, and whose former Chairman also serves as Foamex International's Chairman. Foamex International's common stock owned by Trace was pledged as collateral against certain of Trace's obligations. The Foamex L.P. credit facility, pursuant to which approximately $351.1 million of debt was outstanding as of September 30, 2000, provided that a "change of control" would be an event of default and could result in the acceleration of such indebtedness. "Change of control" means, for this purpose, that (i) a person or related group, other than Trace, beneficially owns more than 25% of Foamex International's outstanding voting stock and (ii) such voting stock constitutes a greater percentage of such voting stock than the amount beneficially owned by Trace. Additionally, certain indentures of Foamex L.P. and Foamex Capital Corporation ("FCC") relating to senior subordinated notes of $248.0 million contain similar "change of control" provisions, which require Foamex L.P. and FCC to tender for such notes at a price in cash equal to 101% of the aggregate principal amount thereof, plus accrued and unpaid interest thereon, if there is such a "change of control". On July 21, 1999, Foamex L.P. was informed by Trace that it filed a petition for relief under Chapter 11 of the Bankruptcy Code in Federal Court in New York City. Subsequently, on January 24, 2000, an order was signed converting the Trace bankruptcy from Chapter 11 to Chapter 7 of the Bankruptcy Code. A trustee was appointed to oversee the liquidation of Trace's assets. Neither Trace's bankruptcy filing nor the conversion to Chapter 7 constituted a "change of control" under the provisions of the debt agreements described above. On July 31, 2000, Foamex International announced that it had entered into an agreement (the "Exchange Agreement") with The Bank of Nova Scotia relating to a portion of the 7,197,426 shares of Foamex International's common stock pledged by Trace to The Bank of Nova Scotia. The Exchange Agreement provided for the transfer of the pledged stock to The Bank of Nova Scotia in a manner that would not constitute a "change of control" as described above. These transactions were conditioned upon bankruptcy court approval of a settlement agreement between The Bank of Nova Scotia and the trustee for the Trace bankruptcy, which was entered on October 18, 2000. On November 2, 2000, the transactions contemplated by the Exchange Agreement and the settlement agreement were consummated, and did not constitute a "change of control". As a result, Trace no longer owns any shares of Foamex International's common stock. F-8 FOAMEX L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION AND BASIS OF PRESENTATION (continued) Under the Exchange Agreement, The Bank of Nova Scotia initially received 1,500,000 shares of Foamex International's common stock from the Trace bankruptcy estate and exchanged these common stock shares for 15,000 shares of a new class of Foamex International's non-voting non-redeemable convertible preferred stock (the "Series B Preferred Stock"). Each share of the Series B Preferred Stock can be converted into 100 shares of Foamex International's common stock but only if such conversion would not trigger a "change of control" event, as discussed above. The Series B Preferred Stock: (a) is entitled to dividends only if a dividend is declared on Foamex International's common stock, (b) ranks senior to any future preferred stock issued by Foamex International and (c) is entitled to a liquidation preference of $100 per share. Following this exchange, The Bank of Nova Scotia became the owner of 24.41% of the outstanding shares of Foamex International's common stock when the remaining 5,697,426 shares of Foamex International's common stock were transferred to The Bank of Nova Scotia from the Trace bankruptcy estate. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Consolidation The consolidated financial statements include the accounts of Foamex L.P. and all majority-owned subsidiaries where control exists. Investments in affiliates with 20% or greater ownership are accounted for using the equity method. All significant intercompany accounts and transactions have been eliminated in consolidation. Reporting Period Effective September 1998, the annual reporting period was changed from a 52 or 53 week fiscal year ending on the Sunday closest to the end of the calendar year to a calendar year ending on December 31. This change was effective for the third fiscal quarter of 1998, which ended on September 30, 1998. Accounting Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts and contingency disclosures. Actual results could differ from those estimates. Revenue Recognition, Discounts and Rebates Revenue from sales, net of discounts and estimated returns, allowances and rebates, is recognized when product title passes to the customer, which is primarily at the time of shipment. See the section below entitled "Accounting Changes - Revenue Recognition" regarding developments concerning revenue recognition requirements. Cash Equivalents Highly liquid investments with an original maturity of three months or less when purchased are recognized as cash equivalents. Inventories Inventories are stated at the lower of cost or market. Cost is determined on a first-in, first-out basis. Property, Plant and Equipment Property, plant and equipment are stated at cost and are depreciated using the straight-line method over the estimated useful lives of the assets. The range of useful lives estimated for buildings is generally 20 to 35 years, and the range for machinery, equipment and furnishings is 5 to 12 years. Leasehold improvements are amortized over F-9 FOAMEX L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) the shorter of the terms of the respective leases or the estimated useful lives of the leasehold improvements. Depreciation expense for 2000, 1999 and 1998 was $27.1 million, $25.9 million and $24.6 million, respectively. Maintenance and repairs are charged to expense as incurred. Renewals and major improvements are capitalized. When assets are retired or otherwise disposed of, the asset and related accumulated depreciation are removed from the accounts and any gain or loss is recognized in the results of operations. Debt Issuance Costs Debt issuance costs consist of amounts incurred in obtaining long-term financing and are disclosed in the financing activities section of the consolidated statements of cash flows. These costs are being amortized over the term of the related debt using the effective interest method. Cost in Excess of Net Assets Acquired The excess of the acquisition cost over the fair value of net assets acquired in business combinations accounted for as purchases is amortized using the straight-line method over 40 years. At each balance sheet date, Foamex L.P. evaluates the recoverability of cost in excess of net assets acquired using certain financial indicators such as historical and future ability to generate income and cash flows from operations based on a going concern basis. If an impairment loss has occurred, based on expected future (undiscounted) cash flows, the loss is recognized in the income statement. During 1998, a $2.3 million impairment charge was recorded associated with the cost in excess of net assets acquired related with a foreign facility. Environmental Remediation Environmental expenditures that relate to current operations are expensed or capitalized as appropriate. Expenditures that relate to an existing condition caused by past operations, and which do not contribute to current or future revenue generation, are expensed. Liabilities are recorded when environmental assessments and/or remedial efforts are probable and the costs can be reasonably estimated. Comprehensive Income Other comprehensive income or loss items are revenues, expenses, gains and losses that under generally accepted accounting principles are excluded from net income and reflected as a component of equity, such as currency translation and minimum pension liability adjustments. Foreign Currency Translation The financial statements of foreign subsidiaries, except in countries that are considered as highly inflationary as discussed below, have been translated into U.S. dollars by using the year-end exchange rates for the assets and liabilities and the average exchange rates for the statements of operations. Currency translation adjustments are included in other partners' deficit. In 1998, Mexico was considered a highly inflationary economy. Accordingly, certain financial statement amounts for the Mexican operations were translated at either current or historical exchange rates, as appropriate. These translation adjustments were reflected in the results of operations. Transaction gains (losses) are reflected in operations and are insignificant. The effect of foreign currency exchange rates on cash flows is insignificant. Start-Up Costs Costs incurred in the start-up of a facility, including training and production testing, are expensed as incurred. F-10 FOAMEX L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Income Taxes Income taxes are accounted for under the asset and liability method. Under this method, deferred income taxes are provided for temporary differences between the financial reporting basis and income tax basis of assets and liabilities using the income tax rates, under existing legislation, expected to be in effect at the date such temporary differences are expected to reverse. Deferred income tax assets are reduced by a valuation allowance when it is considered more likely than not that a portion of the deferred income tax assets will not be realized in a future period. The estimates utilized in the recognition of deferred income tax assets are subject to revision in future periods. Foamex L.P., as a limited partnership, is not subject to Federal income taxes; therefore no current or deferred provision has been provided for such taxes. However, Foamex L.P. has provided for the income taxes of certain states in which it is subject to taxes and for certain subsidiaries, which are subject to Federal and state income taxes and for subsidiaries located in foreign jurisdictions that file separate tax returns. The partners will provide for their respective shares of income or loss in their Federal or applicable state income tax returns. Foamex L.P. has a tax sharing agreement that provides for the payment of distributions to the partners for amounts that would be required to be paid if Foamex L.P. were a corporation filing separate tax returns. The ability of Foamex L.P. to make such distributions is limited by the terms of its credit agreements and indentures. (See Notes 8 and 12). Accounting Changes - Revenue Recognition and Presentation The Securities and Exchange Commission (the "SEC") issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB No. 101"). SAB No. 101, as amended, was effective as of January 1, 2000 and was adopted in the fourth quarter of 2000. SAB No. 101 outlines the SEC's position that revenue should not be recognized until it is realized or realizable. Based on the review of the SAB No. 101 requirements, no significant impact was incurred or anticipated on the revenue recognition practices of Foamex L.P. During July 2000, the Emerging Issues Task Force (the "EITF") of the Financial Accounting Standards Board reached a consensus on an issue concerning the components of revenue. EITF No. 00-10 "Accounting for Shipping and Handling Revenues and Costs" essentially requires that shipping and handling costs that are billed to a customer be included in revenue. Foamex L.P. determined that a portion of shipping costs billed to certain customers prior to February 28, 1998 required a reclassification from cost of sales to revenue. Accordingly, net sales for 1998 in the consolidated statements of operations reflect the reclassification required. On a segment basis, the Carpet Cushion Products was the only business segment impacted and net sales for 1998 reflect the reclassification required. All other shipping and handling costs associated with product shipments are reported in cost of goods sold. Reclassifications Certain amounts have been reclassified to conform with the current year's presentation. Future Accounting Changes - Accounting for Derivatives and Hedging Activities Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133") will require the fair value of derivatives be recognized in the consolidated balance sheets. Changes in the fair value of derivatives will be recognized in earnings or in other comprehensive loss, essentially depending on the structure and the purpose of the derivatives. During 2000, SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities", which amended SFAS No. 133 on a limited number of issues, was issued. The statements will be effective for Foamex L.P. in the first quarter of 2001. F-11 FOAMEX L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) These statements create a foundation that will address accounting and reporting issues for a wide range of financial instruments defined as derivatives and related hedging activities. As of December 31, 2000, Foamex L.P. did not have any derivatives, as defined in the statements. Accordingly, the initial adoption of the statements will not have a significant impact on the results of operations or financial position of Foamex L.P. The adoption of the statements will require a reclassification in the consolidated balance sheets, effective in 2001. Specifically, $6.1 million recognized at year-end 2000 as liabilities will be reclassified to accumulated other comprehensive loss under partners' deficit. The amount reclassified is the result of certain interest rate swaps that were terminated in prior years, as discussed in Note 12 to the consolidated financial statements. The amount reclassified will continue to be amortized, with $0.9 million of amortization anticipated in 2001. 3. ASSET SALES On March 31, 1999, Foamex International sold its corporate airplane for $16.3 million. The sale of the airplane resulted in an obligation to Trace of approximately $0.6 million. Under the terms of the aircraft acquisition agreement with Trace, Foamex International was obligated to share the net proceeds in excess of a specified amount defined in the agreement. The obligation was offset against Trace's two promissory notes payable to Foamex L.P., discussed in Note 17, at Trace's request. 4. RESTRUCTURING AND OTHER CHARGES (CREDITS) 1998 Based on business developments during 1998, Foamex L.P. decided not to close two facilities originally identified for closure in the 1997 restructuring plan. One facility remained open to fill lost capacity resulting from a fire in April 1998 at the Orlando, Florida facility, which returned to full operations during 1999. The other facility remained open during 1998 due to improved demand on the West Coast. The 1997 restructuring plan also included the closure of two facilities associated with Foamex L.P.'s packaging business. During 1998, Foamex L.P. modified the plan, and decided to sell the packaging business and did not expect to incur the asset write-down and lease costs as originally planned. As a result, Foamex L.P. recorded a $14.8 million restructuring adjustment associated with the 1997 restructuring plan. The components of the $14.8 million restructuring adjustment include: $10.2 million for fixed asset 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 (credits) 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 cost in excess of net assets acquired associated with a foreign facility. Also during 1998, Foamex L.P. incurred additional plant closure costs of $5.2 million and personnel reduction costs of $1.2 million associated with the closure of the former Crain facilities. The additional costs associated with the closure of the former Crain facilities resulted in an increase to cost in excess of net assets acquired. 1999 During 1999, Foamex L.P. approved and implemented four restructuring plans to reduce selling, general and administrative costs and to rationalize plant operations. Foamex L.P. recorded restructuring charges of approximately $2.3 million relating to severance costs in connection with the first restructuring plan. This plan reduced Foamex L.P.'s salaried work force by 78 employees. Foamex L.P. recorded restructuring charges of approximately $2.9 million relating to severance costs in connection with the second restructuring plan for replacing three of Foamex L.P.'s former executives, including its former Chief Executive Officer. F-12 FOAMEX L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 4. RESTRUCTURING AND OTHER CHARGES (CREDITS) (continued) In connection with the third restructuring plan, Foamex L.P. recorded restructuring charges of approximately $1.7 million relating to the closure of one facility and certain product line rationalizations. The $1.7 million charge was comprised of approximately $0.1 million of severance costs in connection with the work force reductions of 115 employees, $0.1 million of lease and plant closure costs and $1.5 million of asset write-downs. In connection with the fourth restructuring plan, Foamex L.P. closed its New York office (see Note 17). Foamex L.P. recorded approximately $2.5 million of restructuring charges comprised of $1.6 million of severance costs for eight employees and $0.9 million of costs primarily relating to future lease obligations, net of sublease proceeds. In addition, Foamex L.P. recorded restructuring charges of approximately $1.1 million relating to changes in estimates to prior years' plans, primarily for the sale of the packaging business in 1999. The $1.1 million charge is comprised of $0.2 million of severance, $1.7 million of lease and plant closure costs, offset by $0.8 million of adjustments for asset write-downs. Foamex L.P. also recorded $0.3 million of other charges relating to rent due from Trace for the New York office prior to its closure. 2000 During 2000, Foamex L.P. approved and implemented four separate restructuring plans to further rationalize plant operations and to reduce selling, general and administrative expenses. Foamex L.P. recorded restructuring charges of $1.7 million for severance costs in connection with the first restructuring plan. This plan reduced Foamex L.P.'s salaried work force by 15 employees, including certain executives of Foamex L.P. The second restructuring plan was implemented to rationalize certain plant operations relating to the increase in the VPFSM capacity in North Carolina. Foamex L.P. recorded a restructuring charge of $0.7 million associated with this plan. The restructuring charge was comprised of $0.1 million of severance costs in connection with a work force reduction of 12 employees, $0.4 million of lease and plant closure costs and $0.2 million of asset write-downs. The third restructuring plan, as amended, was implemented to exit Foamex L.P.'s fiber operations in Indiana. Foamex L.P. recorded a restructuring charge of $1.1 million in connection with this plan which was comprised of less than $0.1 million of severance costs for the work force reduction of seven employees, $0.1 million of lease and plant closure costs and $1.0 million of asset write-downs. The fourth restructuring plan was implemented for the consolidation of pourline operations and certain product line rationalizations resulting from the closure of facilities in Indiana and Arkansas. Foamex L.P. recorded a restructuring charge of $2.3 million in connection with this plan. The charge was comprised of $0.2 million of severance costs relating to work force reductions of 65 employees, $0.8 million for lease and plant closure costs and $1.3 million for asset write-downs. In addition, Foamex L.P. recorded a net restructuring charge of $0.2 million associated with changes in estimates to prior years' restructuring plans. The net charge was comprised of $0.3 million for asset write-downs offset by a credit of $0.1 million relating to severance costs. Also during May 2000, Foamex L.P. sold a facility for net proceeds of $3.6 million. The facility was closed as part of the 1997 restructuring plan. F-13 FOAMEX L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 4. RESTRUCTURING AND OTHER CHARGES (CREDITS) (continued) The following table sets forth the components of Foamex L.P.'s restructuring and other charges (credits):
Asset Plant Closure Personnel Total Write-downs and Leases Reductions Other --------- ----------- ------------- ---------- --------- (millions) Balance at December 28, 1997 $21.2 $(5.7) $23.5 $3.4 $ - Cash spending (15.3) - (11.8) (3.5) - Cash proceeds 2.1 2.1 - - - 1998 restructuring charge 4.7 4.7 - - - Restructuring adjustments (14.8) (10.2) (3.5) (1.1) - Accruals transferred in connection with the GFI Transaction (3.7) (0.6) (3.1) - - Asset write-off/write-downs (5.6) (4.8) (0.8) - - Reclassified fixed asset basis for restructuring credit 8.8 8.8 - - - Plant consolidation costs 6.4 - 5.2 1.2 - ----- ----- ----- ---- ---- Balance at December 31, 1998 3.8 (5.7) 9.5 - - Cash spending (8.6) - (3.9) (4.4) (0.3) Cash proceeds 1.5 1.5 - - - 1999 restructuring charge 9.7 1.5 1.0 6.9 0.3 Restructuring adjustments 1.1 (0.8) 1.7 0.2 - Asset write-off/write-downs (0.3) (0.3) - - - ----- ----- ----- ---- ---- Balance at December 31, 1999 7.2 (3.8) 8.3 2.7 - Cash spending (5.7) - (2.8) (2.9) - Cash proceeds 3.6 3.6 - - - 2000 restructuring charge 5.8 2.5 1.3 2.0 - Restructuring adjustments 0.2 0.3 - (0.1) - Asset write-off/write-downs (2.8) (2.8) - - - ----- ----- ----- ---- ---- Balance at December 31, 2000 $ 8.3 $(0.2) $ 6.8 $1.7 $ - ===== ===== ===== ==== ====
As indicated in the table above, the balance at December 31, 2000 will be used for payments relating to severance and lease and plant closure costs, including runout costs at the facilities. As of December 31, 2000, all employees subject to the plans have been terminated. The $0.2 million of asset write-downs relates to estimated proceeds and is included in noncurrent assets. Foamex L.P. expects to spend approximately $3.8 million during 2001 with the balance to be spent through 2006, principally for lease runout costs. 5. RETIREE BENEFIT PLANS Pensions Foamex L.P. provides pension and survivor benefits for salaried and certain hourly employees in the United States. Salaried employees are provided benefits that are based principally on the combination of years of credited service and compensation. Hourly employees are provided benefits that are based principally on stated amounts for each year of credited service. Effective at the end of 1999, the two defined benefit plans for the salaried and hourly employees in the United States were merged into a single plan. Benefits provided did not change as a result of the plan merger. Certain employees in a wholly owned Canadian subsidiary are provided pension and survivor benefits. The following disclosures include the results from this foreign plan, which is relatively small compared to the plan discussed above. F-14 FOAMEX L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 5. RETIREE BENEFIT PLANS (continued) The components of pension expense are listed below. Included in the table below are Foamex Carpet's allocated net periodic costs of $0.7 million, $0.5 million and $0.4 million for 2000, 1999 and 1998, respectively. 2000 1999 1998 -------- -------- -------- (thousands) Service cost $3,307 $3,685 $3,064 Interest cost 5,667 5,121 4,721 Expected return on plan assets (6,371) (5,708) (5,953) Amortization Transition asset (75) (75) (75) Prior service cost (240) (240) (245) (Gains) losses and other 179 819 111 ------ ------ ------ Total $2,467 $3,602 $1,623 ====== ====== ====== The following table sets forth the changes in obligations and assets, and outlines the development of the funded status and amounts recognized in the accompanying consolidated balance sheets.
December 31, December 31, 2000 1999 ------------ ------------ Change in Benefit Obligation (thousands) Benefit obligations at beginning of year $ 75,220 $ 77,451 Service cost 3,307 3,685 Interest cost 5,667 5,121 Amendments - 85 Benefits paid (4,207) (3,933) Actuarial loss (gain) 4,833 (7,189) -------- -------- Projected benefit obligation at end of year $ 84,820 $ 75,220 ======== ======== Change in Plan Assets Fair value of plan assets at beginning of year $65,102 $ 58,378 Actual return on plan assets (3,075) 9,506 Company contributions 9,299 1,656 Benefits paid (4,207) (3,933) Other (920) (505) -------- -------- Fair value of plan assets at end of year $ 66,199 $ 65,102 ======== ======== Funded Status Plan assets in excess of (less than) benefit obligation $(18,621) $(10,118) Unamortized transition (asset) obligation (590) (665) Unamortized prior service cost (1,832) (2,072) Unamortized net (gain) loss 22,578 7,565 -------- -------- Net prepaid assets (accrued liabilities) $ 1,535 $ (5,290) ======== ======== Amounts Recognized in the Consolidated Balance Sheets Prepaid benefit costs $ 207 $ 114 Accrued benefit liability (16,480) (8,613) Intangible assets 268 296 Accumulated other comprehensive loss (a) 17,540 2,913 -------- -------- Net amount recognized $ 1,535 $ (5,290) ======== ======== (a) Minimum pension liability.
F-15 FOAMEX L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 5. RETIREE BENEFIT PLANS (continued) Significant assumptions used in the calculation of pension expense and obligations are listed below.
2000 1999 1998 -------- -------- -------- Expected long-term rate of return on plan assets (a) 10.0% 10.0% 10.0% Discount rate on projected benefit obligations 7.25% 7.5% 6.5% Rate of compensation increase 4.0% 4.0% 4.0% (a) Beginning in 2001, the expected long-term rate of return on plan assets assumption will be lowered to 9.0%.
Foamex L.P.'s funding policy is to contribute annually an amount that both satisfies the minimum funding requirements of the Employee Retirement Income Security Act of 1974 and does not exceed the full funding limitations of the Internal Revenue Code of 1986, as amended (the "Code"). At December 31, 2000 and 1999, included in plan assets were 420,000 shares of Foamex International's stock. In 1994, 250,000 shares were purchased for $2.5 million, and in 1995, 170,000 shares were purchased for $1.6 million. The value of the plan's investment in Foamex International's stock was approximately $2.3 million and $3.5 million at December 31, 2000 and 1999, respectively. Plan assets at the end of 1998 included shares of Trace Global Opportunities Fund, which was a related party to Trace. The shares were purchased during 1995 and 1997, at an aggregate cost of $5.0 million. The value of the plan's investment in Trace Global Opportunities Fund, was approximately $4.3 million at December 31, 1998. In 1999, Trace divested its interest in the Trace Global Opportunities Fund. The fund changed its name to the GLS Global Opportunities Fund, which is not a related party to Foamex International. During 1998, 250,000 shares of United Auto Group ("UAG"), which was a related party to Trace, were purchased for approximately $4.8 million. The value of the UAG shares was $2.2 million at December 31, 1999. During the fourth quarter of 2000, all of the UAG shares were sold for $1.8 million. Retiree Medical and Life Insurance Benefits Foamex L.P. provides postretirement health care and life insurance for eligible employees, limited primarily to one manufacturing facility in the United States. These plans are unfunded and benefits are paid as the claims are submitted. Foamex L.P. retains the right, subject to existing agreements, to modify or eliminate these benefits. The components of retiree medical and life insurance benefits expense are listed below. 2000 1999 1998 ------ ------ ------ (thousands) Service cost $15 $20 $10 Interest cost 57 62 46 Amortization Prior service costs (6) (6) (35) (Gains) losses and other (27) (21) (29) --- --- --- Total $39 $55 $(8) === === === F-16 FOAMEX L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 5. RETIREE BENEFIT PLANS (continued) The following table outlines the changes in obligations and benefit payments, and outlines the development of the funded status and amounts recognized in the accompanying consolidated balance sheets.
December 31, December 31, 2000 1999 ------------ ------------ (thousands) Change in Benefit Obligation Benefit obligations at beginning of year $ 868 $ 651 Service cost 15 20 Interest cost 57 62 Employee contributions 28 28 Benefits paid (433) (164) Amendments - 363 Actuarial loss (gain) 228 (92) ------- ------- Projected benefit obligation at end of year $ 763 $ 868 ======= ======= Change in Plan Assets Fair value of plan assets at beginning of year $ - $ - Company contributions 405 136 Employee contributions 28 28 Benefits paid (433) (164) ------- ------- Fair value of plan assets at end of year $ - $ - ======= ======= Funded Status of the Plan Plan assets in excess of (less than) benefit obligation $ (763) $ (868) Unamortized prior service cost (67) (73) Unamortized net (gain) loss (389) (644) ------- ------- Net prepaid assets (accrued liabilities) $(1,219) $(1,585) ======= =======
Significant assumptions used in the calculation of retiree and life insurance benefit expense and obligations are listed below.
2000 1999 1998 ------ ------ ------ Discount rates on projected benefit obligations 7.25% 7.5% 6.5% Health care cost increase 7.0% 7.5% 6.0%
The health care cost increase assumption was revised during 1999. The rate will gradually be reduced to 5.0% by 2005. Increasing or decreasing the weighted average assumed health care cost trend rates by one percentage point would not have a significant impact on the accumulated postretirement benefit obligation or on service and interest costs. 6. COMPENSATION PLANS Incentive Compensation Most of Foamex L.P.'s salaried employees participate in incentive compensation programs. These programs are based on the consolidated results of Foamex L.P. and on the results of business segments. Incentive compensation expense was approximately $1.5 million in 2000, $3.0 million in 1999 and $0.3 million in 1998. F-17 FOAMEX L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6. COMPENSATION PLANS (continued) Defined Contribution Plan Foamex L.P. maintains a defined contribution plan which is qualified under Section 401(k) of the Code ("401(k) Plan") and is available for eligible employees of Foamex L.P. and Foamex Carpet who elect to participate. Under the terms of the 401(k) Plan, Foamex L.P. partially matches certain employee contributions. Expense for these contributions for 2000, 1999 and 1998 was approximately $1.0 million, $0.9 million and $0.8 million, respectively. During 2000, 1999 and 1998, Foamex Carpet contributed approximately $0.1 million annually to the plan for matching contribution expense for its employees. 7. OTHER EXPENSE, NET Other expense, net in 2000 totaled $1.3 million and primarily consisted of: $1.3 million loss on the disposal of fixed assets and $0.7 million of letter of credit fees offset by $0.6 million of interest income. Other expense, net in 1999 totaled $0.9 million was primarily due to losses on the disposal of fixed assets and letter of credit fees related to the GFI Transaction (see Note 12). Interest income totaled $2.2 million in 1999. Other expense, net for 1998 totaled $4.3 million and primarily consisted of: $3.0 million of foreign currency translation and transaction losses; $1.5 million of fees and $1.0 million of continuing costs related to the GFI Transaction; and other expenses offset by approximately $3.4 million of interest income. 8. INCOME TAXES The sources of income (loss) before provision for income taxes and extraordinary loss are listed below.
2000 1999 1998 ------- ------- -------- (thousands) United States $10,203 $13,959 $ 5,364 Foreign 4,975 2,935 (10,293) ------- ------- ------- Income (loss) before provision for income taxes and extraordinary loss $15,178 $16,894 $(4,929) ======= ======= =======
A reconciliation of the statutory federal income tax to the income tax before extraordinary loss is listed below.
2000 1999 1998 ------- ------- -------- (thousands) Statutory income taxes $ 5,312 $ 5,913 $(1,725) State income taxes, net of federal benefit 593 794 300 Permanent difference on partnership income (6,156) (6,921) (1,570) Increase (decrease) in valuation allowance 720 711 - Amortization of cost in excess of assets acquired 1,017 1,038 53 Limitation on the utilization of foreign tax benefits - - 3,800 Write-off excess cost - - 770 Other, net 424 (222) (688) ------- ------- ------- Total $ 1,910 $ 1,313 $ 940 ======= ======= =======
F-18 FOAMEX L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 8. INCOME TAXES (continued) The provision for income taxes is summarized as follows:
2000 1999 1998 ------- ------- -------- Current (thousands) Federal $ - $ - $ - State 65 115 - Foreign 1,566 1,117 673 ------- ------- ------- Total current 1,631 1,232 673 ------- ------- ------- Deferred Federal - - 318 State - - - Foreign (441) (630) (51) ------- ------- ------ Total deferred (441) (630) 267 ------- ------- ------ Change in valuation allowance 720 711 - ------- ------- ------ Total provision for income taxes $ 1,910 $ 1,313 $ 940 ======= ======= ======
The tax effect of the temporary differences that give rise to deferred income tax assets and liabilities are listed below.
December 31, December 31, 2000 1999 ------------ ------------ (thousands) Deferred income tax assets $ 1,759 $ 1,056 Valuation allowance for deferred income tax assets (1,431) (711) ------- ------- Deferred income tax assets 328 345 ------- ------- Deferred income tax liabilities Basis difference in property, plant and equipment (903) (568) Other (1,514) (2,145) ------- ------- Deferred income tax liabilities (2,417) (2,713) ------- ------- Net deferred income tax liabilities $(2,089) $(2,368) ======= =======
During 2000 and 1999, the increase in valuation allowance for deferred income tax assets related to net operating loss carryfowards from a foreign subsidiary. 9. EXTRAORDINARY LOSSES In 1998, extraordinary losses of $3.2 million were recorded. The loss was in connection with the GFI Transaction, and related to the early extinguishment of approximately $125.1 million of term loans under a Foamex L.P. credit facility. The extraordinary loss was generated entirely from the write-off of debt issuance costs. F-19 FOAMEX L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 10. INVENTORIES The components of inventory are listed below. December 31, December 31, 2000 1999 ------------ ------------ (thousands) Raw materials and supplies $64,801 $65,211 Work-in-process 11,437 11,447 Finished goods 20,435 17,154 ------- ------- Total $96,673 $93,812 ======= ======= 11. SHORT-TERM BORROWINGS Foamex Canada Inc., a wholly owned subsidiary of Foamex L.P., has a short-term credit facility that provides for $8.0 million of Canadian dollar loans (U.S. dollar equivalent of $5.2 million) of which up to $2.0 million are available in U.S. dollar loans. The amount of borrowings available is based on a combination of accounts receivable and inventory, as defined in the credit facility. Interest on Canadian dollar borrowings is based on the bank's prime lending rate plus 1/2% as of December 31, 2000. On U.S. dollar loans, interest is based on the bank's U.S. dollar base rate in Canada plus 1/2% as of December 31, 2000. At year-end 2000, there were no short-term borrowings outstanding and $5.2 million was available. The weighted average interest rates on short-term borrowings outstanding at year-end 1999 was 7.3%. 12. LONG-TERM DEBT The components of long-term debt are listed below.
December 31, December 31, 2000 1999 ------------ ------------ Foamex L.P. Credit Facility (thousands) Term Loan B (1) $ 77,136 $ 81,874 Term Loan C (1) 70,124 74,431 Term Loan D (1) 101,565 107,800 Revolving credit facility (1) 145,904 113,685 9 7/8% Senior subordinated notes due 2007 (2) 150,000 150,000 13 1/2% Senior subordinated notes due 2005 (includes $8,308 and $10,100 of unamortized debt premium) (2) 106,308 108,100 Industrial revenue bonds (3) 7,000 7,000 Subordinated note payable (net of unamortized debt discount of $49 and $232) (3) 2,289 4,444 Other 4,198 7,076 -------- -------- 664,524 654,410 Less current portion 8,356 7,866 -------- -------- Long-term debt-unrelated parties $656,168 $646,544 ======== ========
The components of related party long-term debt are listed below.
December 31, December 31, 2000 1999 ------------ ------------ (thousands) Foamex/GFI Note (3) $ - $ 34,000 ======== ========
F-20 FOAMEX L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 12. LONG-TERM DEBT (continued) (1) Debt of Foamex L.P., guaranteed by Foamex International and FMXI. (2) Debt of Foamex L.P. and FCC. (3) Debt of Foamex L.P. Foamex L.P. Credit Facility At December 31, 2000, Foamex L.P. had a credit facility (the "Foamex L.P. Credit Facility") with a group of banks which provided for a revolving credit facility commitment of $177.5 million and three term loans with an outstanding balance totaling $248.8 million. Included in the group of banks that provides the Foamex L.P. Credit Facility is The Bank of Nova Scotia, which is a shareholder of Foamex International, as discussed in Note 1. Amendments in 1998 provided for a $2.5 million quarterly reduction of the availability under the revolving credit facility, which extends through June 2003. On January 2, 2001, the revolving credit facility commitment was $175.0 million with the fourth quarter 2000 reduction applied on January 2nd because the last day of 2000 was a Sunday. Borrowings under the Foamex L.P. Credit Facility are collateralized by substantially all of the assets of Foamex L.P. on a pari passu basis with the IRBs (described below); however, the rights of the holders of the applicable issue of the IRBs to receive payment upon the disposition of the collateral securing such issue of the IRBs has been preserved. In response to financial conditions at year-end 1998, amendments to debt agreements were executed during the first half of 1999. As a result, the Foamex L.P. Credit Facility, which was amended and restated in February 1998, was further amended and restated in June 1999 to modify financial covenants for net worth, interest coverage, fixed charge coverage and leverage ratios through December 2006. The agreement was also amended to no longer permit Foamex L.P. to make certain cash payments, including the payment of an annual management fee of $3.0 million to a subsidiary of Trace and distributions to Foamex International, and to limit future investments in foreign subsidiaries and joint ventures. The "change of control" definition under the agreement was also modified to conform to the definition discussed in "change of control" in Note 1. Changes in the interest rate structure, effective in 2000, were also made and are discussed below. At year-end 2000, interest was based on the combination of a variable rate consisting of the higher of (i) the base rate of The Bank of Nova Scotia or (ii) the Federal Funds rate plus 0.5% plus a margin. The margins for revolving, Term B, Term C and Term D loans were 2.25%, 2.50%, 2.75% and 2.875%, respectively. At the option of Foamex L.P., portions of the outstanding loans are convertible into LIBOR based loans plus 1.0% added to the margins identified above. The effective interest rates for the Foamex L.P. Credit Facility at the end of 2000 ranged between 10.31% and 10.69%. Interest capitalized as a component of the construction costs of plant and equipment totaled $0.8 million in 2000. Effective January 1, 2000, the interest rate on outstanding borrowings under the Foamex L.P. Credit Facility will increase by 25 basis points each quarter that Foamex L.P.'s leverage ratio, as defined, exceeds 5.00 to 1.00. Once the leverage ratio is reduced below this level, the cumulative amount of any 25 basis point adjustments to the interest rate on borrowings is reset to zero. During 2000, basis point adjustments were incurred in the first three quarters, beginning with 25 basis points in the first quarter and ending with a cumulative impact of 75 basis points by the end of the third quarter. There was no basis point adjustments for the fourth quarter of 2000. At December 31, 2000, the calculated leverage ratio was 5.3 to 1.00. Consequently, the 25 basis point adjustment will be applicable for the calculation of interest in 2001, effective upon delivery of the financial statements to the lenders. Available borrowings under the revolving credit facility totaled $10.5 million at year-end 2000. Letters of credit outstanding at December 31, 2000 totaled $21.1 million. F-21 FOAMEX L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 12. LONG-TERM DEBT (continued) As part of the Foamex L.P. Credit Facility, excess cash flow generated annually, as defined, is required to prepay portions of Term B, C and D loans. There was no required prepayment at year-end 2000. The prepayment amount determined for 1999 was $13.3 million and was financed through revolving loans under the facility. The 1999 required payment was made during the second quarter of 2000. 9 7/8% Senior Subordinated Notes The 9 7/8% Senior Subordinated Notes were issued by Foamex L.P. and FCC and are due on June 15, 2007. The notes represent uncollateralized general obligations of Foamex L.P. and are subordinated to all Senior Debt, as defined in the Indenture. Interest is payable June 15 and December 15. The notes may be redeemed at the option of Foamex L.P., in whole or in part, at any time on or after June 15, 2002. The initial redemption is at 104.938% of their principal amount, plus accrued and unpaid interest, as defined, if any, thereon to the date of redemption and declining to 100.0% on or after June 15, 2005. Upon the occurrence of a change of control, as defined, each holder will have the right to require Foamex L.P. to tender for such notes at a price in cash equal to 101% of the aggregate principal amount thereof, plus accrued and unpaid interest thereon, if there is such a "change of control". The notes are subordinated in right of payment to all senior indebtedness and are pari passu in right of payment to the 13 1/2% Senior Subordinated Notes and the Subordinated Note Payable (described below). 13 1/2% Senior Subordinated Notes The 13 1/2% Senior Subordinated Notes were issued by Foamex L.P. and FCC and are due on August 15, 2005. The notes represent uncollateralized general obligations of Foamex L.P. and are subordinated to all Senior Debt, as defined in the Indenture. Interest is payable semiannually on February 15 and August 15. The notes may be redeemed at the option of Foamex L.P., in whole or in part, at any time on or after August 15, 2000. The initial redemption is at 106.75% of their principal amount, plus accrued and unpaid interest, if any, thereon to the date of redemption and declining to 100.0% on or after August 15, 2004. Upon the occurrence of a change of control, as defined, each holder will have the right to require Foamex L.P. to tender for such notes at a price in cash equal to 101% of the aggregate principal amount thereof, plus accrued and unpaid interest, if any, thereon, if there is such a "change of control". The notes are subordinated in right of the payment of all senior indebtedness and are pari passu in right of payment to the 9 7/8% Senior Subordinated Notes and to the Subordinated Note Payable (described above). Industrial Revenue Bonds ("IRBs") IRB debt includes a $1.0 million bond that matures in 2005 and a $6.0 million bond that matures in 2013. Interest is based on a variable rate, as defined, with options available to Foamex L.P. to convert to a fixed rate. At the end of 2000, the interest rate was 4.85% on the $6.0 million bond and 4.65% on the $1.0 million bond. The maximum interest rate for either of the IRBs is 15.0% per annum. If Foamex L.P. exercises its option to convert the bonds to a fixed interest rate structure the IRBs are redeemable at the option of the bondholders. The obligations are collateralized by certain properties, which have an approximate net carrying value of $10.6 million at December 31, 2000 and letters of credit approximating $7.3 million. F-22 FOAMEX L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 12. LONG-TERM DEBT (continued) Subordinated Note Payable This note payable was issued during 1993 to John Rallis, a former President and Chief Operating Officer of Foamex International. The note was issued by Foamex L.P. in connection with the 1993 acquisition of Great Western Foam Products Corporation and certain related entities and assets. The note carries a maximum interest rate of 6.0% and the principal is payable in three equal annual installments that began in May 1999 and end in May 2001. Other At year-end 2000, other debt primarily included a term loan held by a majority owned Mexican subsidiary. Quarterly principal payments are due on the term loan through its maturity in May 2002. The interest rate at year-end 2000 was 11.11%. Related Party - Foamex/GFI Note As a result of the GFI Transaction, discussed below, Foamex L.P. owed a $34.0 million promissory note payable to Foam Funding LLC. Interest was based on a variable rate equal to the higher of (i) the base rate of The Bank of Nova Scotia or (ii) the Federal Funds rate plus 0.5%. At the option of Foamex L.P., the note was convertible to a LIBOR-based interest rate plus 0.75%. During the first quarter of 2000, the Foamex/GFI Note was repaid with borrowings under the Foamex L.P. revolving credit facility. The $34.5 million letter of credit that was outstanding at year-end 1999 to collateralize principal and interest payable under the Foamex/GFI Note was also terminated. At year-end 1999, the note was recognized as long-term in the consolidated balance sheet because of the ability and intent, evidenced by the letter of credit, to refinance the debt on a long-term basis. GFI Transaction On February 27, 1998, Foamex International, Foamex L.P. and certain of their affiliates completed a series of transactions which changed Foamex L.P.'s structure (collectively, the "GFI Transaction"). Prior to the consummation of the GFI Transaction, Foamex L.P. defeased the $4.5 million outstanding principal amount of its 9 1/2% senior secured notes due 2000. Foamex L.P. settled its intercompany payables to General Felt with $4.8 million in cash and the Foamex/GFI Note, described above. The initial transaction resulted in the transfer from Foamex L.P. to Foam Funding LLC, an indirect wholly owned subsidiary of Trace, of all of the outstanding common stock of General Felt, in exchange for (i) the assumption by Foam Funding LLC of $129.0 million of Foamex L.P.'s indebtedness and (ii) the transfer by Foam Funding LLC to Foamex L.P. of a 1% non-managing general partnership interest in Foamex L.P. As a result, General Felt ceased being a subsidiary of Foamex L.P. and was relieved from all obligations under Foamex L.P.'s 9 7/8% senior subordinated notes due 2007 and 13 1/2% senior subordinated notes due 2005. Upon consummation of the initial transaction, Foamex Carpet, a newly formed wholly owned subsidiary of Foamex International, Foamex International, Foam Funding LLC, and General Felt entered into an Asset Purchase Agreement dated February 27, 1998, in which General Felt sold substantially all of its assets (other than cash, the Foamex/GFI Note and its operating facility in Pico Rivera, California) to Foamex Carpet in exchange for (i) $20.0 million in cash and (ii) a promissory note issued by Foamex Carpet to Foam Funding LLC in the aggregate principal amount of $70.2 million. The $20.0 million cash payment was funded with a distribution by Foamex L.P. No gain was recognized on the GFI Transaction. The net impact of the GFI Transaction was an increase in Foamex L.P.'s partners' 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. F-23 FOAMEX L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 12. LONG-TERM DEBT (continued) Interest Rate Swap Agreements Prior to 1999, Foamex L.P. entered into interest rate swaps to lower funding costs and/or to manage interest costs and exposure to changing interest rates. Foamex L.P. did not hold or issue financial instruments for trading purposes. In connection with a refinancing plan in 1997, Foamex L.P.'s then existing interest rate swap agreements with a notional amount of $300.0 million were considered to be effectively terminated since the underlying debt was extinguished. These interest rate swap agreements had an estimated fair value liability of $8.2 million at the date of the refinancing plan which is included in the extraordinary loss on the early extinguishment of debt. In lieu of a cash payment for the estimated fair value of the then existing interest rate swap agreements, Foamex L.P. entered into an amendment of the then existing interest rate swap agreements resulting in one interest rate swap agreement with a notional amount of $150.0 million through June 2007. Accordingly, the $8.2 million fair value liability has been recorded as a deferred credit, which is being 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 is being amortized through June 2007, which is the maturity date of the underlying debt. See Future Accounting Changes - Accounting for Derivatives and Hedging Activities included in Note 2, which discusses a balance sheet reclassification required in 2001 related to these swap transactions. The effect of the interest rate swaps was a favorable adjustment to interest and debt issuance expense of $0.7 million in 1998. The effect of the amortization of the deferred credits was a favorable adjustment to interest and debt issuance expense of $0.9 million for 2000, 1999 and 1998. Debt Covenants The indentures, credit facilities and other indebtedness agreements contain certain covenants that will limit, among other things to varying degrees, the ability of Foamex L.P. (i) to pay distributions or redeem equity interests, (ii) to make certain restrictive payments or investments, (iii) to incur additional indebtedness or issue Preferred Equity Interest, as defined, (iv) to merge, consolidate or sell all or substantially all of its assets or (v) to enter into certain transactions with affiliates or related persons. In addition, certain agreements contain provisions that, in the event of a defined change of control or the occurrence of an undefined material adverse change in the ability of the obligor to perform its obligations, the indebtedness must be repaid, in certain cases, at the option of the holder. Also, Foamex L.P. is required under certain of these agreements to maintain specified financial ratios of which the most restrictive are the maintenance of net worth, interest coverage, fixed charge coverage and leverage ratios, as defined. Under the most restrictive of the distribution restrictions as of December 31, 2000, Foamex L.P. was able to pay Foamex International funds only to the extent to enable Foamex International to meet its tax payment liabilities. Foamex L.P. was in compliance with its various financial covenants of its loan agreements as of December 31, 2000 and 1999. The Foamex L.P. Credit Facility contains certain quarterly financial covenants which become more restrictive during 2001. Foamex L.P. anticipates that it will continue to comply in 2001 with the various quarterly financial covenants in the Foamex L.P. Credit Facility. Management's current business plan for Foamex L.P. anticipate customer selling price increases in response to higher raw material costs, improved working capital management, a reduced capital expenditure program, declining interest rates, successful implementation of on-going cost savings initiatives and improved operating efficiencies. The achievement of the business plan is necessary for compliance with the various financial covenants in 2001. F-24 FOAMEX L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 12. LONG-TERM DEBT (continued) The possibility exists that certain financial covenants will not be met if business conditions are other than as anticipated or other unforeseen events impact results. In the absence of a waiver of or amendment to such financial covenants, such noncompliance would constitute a default under the Foamex L.P. Credit Facility, and the lenders would be entitled to accelerate the maturity of the indebtedness outstanding thereunder. In the event that such noncompliance appears likely, or occurs, Foamex L.P. will seek the lenders' approvals of amendments to, or waivers of, such financial covenants. Historically, Foamex L.P. has been able to renegotiate financial covenants and/or obtain waivers, as required, and management believes such waivers and/or amendments could be obtained if required. However, there can be no assurance of future amendments or waivers will be obtained. Future Obligations on Debt Scheduled maturities of long-term debt and long-term debt - related party are shown below (thousands): 2001 $ 8,356 2002 3,936 2003 164,031 2004 50,844 2005 155,273 Balance 273,825 -------- Total 656,265 Unamortized debt premium, net 8,259 -------- Total $664,524 ======== 13. FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK Concentration of Credit Risk Financial instruments which potentially subject Foamex L.P. to significant concentrations of credit risk consist primarily of cash and cash equivalents and trade accounts receivable. Foamex L.P. maintains cash and cash equivalents and certain other financial instruments with various large financial institutions. Foamex L.P.'s periodic evaluation of these financial institutions are considered in Foamex L.P.'s investment strategy. Foamex L.P. sells foam products to the automotive, carpet, cushioning and other industries. Foamex L.P. performs ongoing credit evaluations of its customers and generally does not require collateral. Foamex L.P. maintains allowance accounts for potential credit losses and such losses have been within management's expectations. Fair Value of Financial Instruments The following disclosures of the estimated fair value amounts have been determined based on Foamex L.P.'s assessment of available market information and appropriate valuation methodologies. The estimated fair values of Foamex L.P.'s financial instruments are listed below. Carrying Amount Fair Value --------------- ---------- Liabilities: (thousands) Total debt - December 31, 2000 $664,524 $547,667 ======== ======== Total debt - December 31, 1999 $690,037 $650,057 ======== ======== 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. F-25 FOAMEX L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 13. FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK (continued) The fair value of long-term debt is estimated using quoted market prices, where available, or discounted cash flows. Fair value estimates are made at a specific point in time, based on relevant market information about the financial instruments. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates. 14. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
2000 1999 1998 -------- -------- -------- (thousands) Cash paid for interest $69,939 $65,507 $69,615 ======= ======= ======= Cash paid for income taxes, net $ 2,935 $ 1,126 $ 884 ======= ======= ======= Non-cash capital expenditures $ 53 $ 456 $ 24 ======= ======= =======
15. BUSINESS SEGMENTS The reportable business segments reflects Foamex L.P.'s management organization that was structured based on distinct product lines and customers. An executive vice president heads each operating segment. Each vice president is responsible for developing budgets and plans as well as directing the operations of the segment. The performance of each operating segment is measured based upon income from operations, excluding restructuring charges. Foamex L.P. does not allocate restructuring and other charges to operating segments because many of Foamex L.P.'s facilities produce products for multiple segments. Foam Products manufactures and markets foam used by the bedding industry, the furniture industry and the retail industry. Carpet Cushion Products manufactures and distributes prime, rebond, sponge rubber and felt carpet cushion to Foamex Carpet. Automotive Products supplies foam primarily for automotive interior applications. Technical Products manufactures and markets reticulated foams (foams that are well suited for filtration, reservoiring, sound absorption and sound transmissions) and other custom polyester and polyether foams for industrial, specialty and consumer and safety applications. The "other" column in the table below represents certain manufacturing operations in Mexico, corporate expenses not allocated to other business segments and restructuring and other charges (credits). Asset and capital expenditure information by business segment is not reported because many of Foamex L.P.'s facilities produce products for multiple business segments. The restructuring and other charges (credits) amounted to $6.0 million in 2000, $10.8 million in 1999 and $(10.1) million in 1998. The accounting policies of the business segments are the same as described in Note 2. Business segment results include revenues and costs that are specifically identifiable and costs shared by business segments have been allocated based on utilization. Geographic sales are determined based on the location in which the sale originated. During 2000 and 1999, sales to a customer which is included in Automotive Products, accounted for approximately 13.3% and 12.5%, respectively, of Foamex L.P.'s net sales. Sales to Foamex Carpet, reported under Carpet Cushion Products, totaled $165.8 million in 2000, $187.7 million in 1999 and $185.5 million in 1998. No other unaffiliated customer accounted for more than 10.0% of Foamex L.P.'s net sales during any of the last three years. F-26 FOAMEX L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 15. BUSINESS SEGMENTS (continued)
Carpet Foam Cushion Automotive Technical Products Products Products Products Other Total --------- --------- ---------- ---------- ---------- ----------- 2000 (thousands) Net sales $512,507 $165,783 $342,386 $106,697 $33,644 $1,161,017 Income (loss) from operations 54,929 (11,661) 22,652 29,287 (11,092) 84,115 Depreciation and amortization 17,615 5,238 5,785 2,663 2,500 33,801 1999 Net sales $521,377 $187,668 $361,806 $92,180 $27,648 $1,190,679 Income (loss) from operations 54,439 869 22,853 23,048 (17,474) 83,735 Depreciation and amortization 16,390 6,436 4,596 2,564 2,604 32,590 1998 Net sales (a) $559,690 $212,146 $285,190 $79,140 $21,585 $1,157,751 Income (loss) from operations 36,253 (58) 17,319 14,919 (2,925) 65,508 Depreciation and amortization 17,418 5,092 4,582 2,615 1,972 31,679
United States Canada Mexico Consolidated ---------- ------- -------- ------------ 2000 (thousands) Net sales $927,627 $69,180 $164,210 $1,161,017 Property, plant and equipment, net 173,207 4,623 24,642 202,472 1999 Net sales $978,049 $61,486 $151,144 $1,190,679 Property, plant and equipment, net 182,533 5,406 23,376 211,315 1998 Net sales (a) $1,025,019 $62,529 $70,203 $1,157,751 Property, plant and equipment, net 190,122 4,998 24,517 219,637 (a) As discussed in Note 2, net sales for periods prior to February 28, 1998 reflect a reclassification of certain shipping costs that were billed to customers. The reclassification impacted Carpet Cushion Products. On a geographic basis, the reclassification impacted the Untied States net sales for periods prior to February 28, 1998.
16. PARTNERS' 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, 2000, the partnership interests of Foamex L.P. are a 2% managing general partnership interest held by FMXI and a 98% limited partnership interest held by Foamex International. Net cash distributions in connection with a tax sharing agreement for 2000, 1999 and 1998 were paid (received) as follows: 2000 1999 1998 -------- -------- ---------- (thousands) FMXI $ - $ (5) $ 6 Foamex International - (12) 287 ---- ---- ---- Total $ - $(17) $293 ==== ==== ==== F-27 FOAMEX L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 16. PARTNERS' DEFICIT (continued) Accumulated Other Comprehensive Loss The accumulated other comprehensive loss consists of the following:
December 31, December 31, December 31, 2000 1999 1998 ------------ ------------ ------------ (thousands) Foreign currency translation adjustment $ (6,921) $(6,011) $(10,965) Minimum pension liability (17,540) (2,912) (15,243) -------- ------- -------- $(24,461) $(8,923) $(26,208) ======== ======= ========
17. RELATED PARTY TRANSACTIONS AND BALANCES Foamex L.P. regularly enters into transactions with its affiliates in the ordinary course of business. Supply Agreements In connection with the GFI Transaction (see Note 12), Foamex L.P. and General Felt entered into a supply agreement that was subsequently assigned to Foamex Carpet (the "Supply Agreement"). Pursuant to the Supply Agreement, Foamex L.P. will, at the option of Foamex Carpet, supply finished carpet cushion products to Foamex Carpet at the lower of: (i) cost, as defined, plus 4.7% or (ii) fair market value, as defined. Foamex L.P. will also supply various raw materials used in the manufacture of carpet cushion products to Foamex Carpet at the lower of cost, as defined, or fair market value, as defined. During 2000, 1999 and 1998, Foamex L.P. had sales of approximately $165.8 million, $187.7 million and $185.5 million, respectively, to Foamex Carpet under the Supply Agreement. In addition, pursuant to the Supply Agreement, Foamex Carpet will, at the option of Foamex L.P., supply various finished products to Foamex L.P. at the lower of: (i) cost, as defined, plus 15.0% or (ii) fair market value, as defined. Foamex Carpet will also supply various raw materials to Foamex L.P. at the lower of cost, as defined or fair market value, as defined. During 2000, 1999 and 1998, Foamex L.P. had purchases of approximately $7.8 million, $9.9 million and $1.3 million, respectively, from Foamex Carpet under the Supply Agreement. The initial term of the Supply Agreement is until December 31, 2004 at which time the Supply Agreement will continue year to year unless notice of termination is given by either party or unless terminated earlier due to an event of default, as defined. Foamex L.P. had a supply agreement (the "Foamex International Supply Agreement") with Foamex International pursuant to which, at the option of Foamex L.P., Foamex International would purchase certain raw materials, which are necessary for the manufacture of Foamex L.P.'s products, and resell such materials to Foamex L.P. at a price equal to net cost plus reasonable out of pocket expenses. Management believes that the terms of the Foamex International Supply Agreement were no less favorable than those, which Foamex L.P. could have obtained from an unaffiliated third party. The Foamex International Supply Agreement was terminated in April 1998. During 1998, Foamex L.P. purchased approximately $12.6 million of raw materials under the Foamex International Supply Agreement. Administrative Services Agreement Also, in connection with the GFI Transaction, Foamex L.P. and General Felt entered into an administrative services agreement that was subsequently assigned to Foamex Carpet (the "Services Agreement"). Pursuant to the Services Agreement, Foamex L.P. will provide Foamex Carpet administrative and management services, as defined, at cost plus out-of-pocket expenses. During 2000, 1999 and 1998, Foamex L.P. invoiced approximately $0.5 million, $0.5 million and $1.8 million, respectively, of services to Foamex Carpet under the Services Agreement. The Services Agreement can be terminated by either party by giving at least 30 days written notice prior to the end of a calendar year. As of December 31, 2000 and 1999, Foamex L.P. had net receivables due from Foamex Carpet of approximately $11.5 million and $16.4 million, respectively, associated with the Supply Agreement and Services Agreement. F-28 FOAMEX L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 17. RELATED PARTY TRANSACTIONS AND BALANCES (continued) Partners Distribution In 1999, Foamex L.P. distributed $17.3 million in cash pro rata to its partners. During 1998, in connection with the GFI Transaction, Foamex L.P. made a $20.0 million distribution to Foamex International (see Note 12). Foamex International Notes On December 26, 1997, Foamex L.P. entered into a $2.5 million promissory note with Foamex International. The note bears interest at the rate of LIBOR plus 2 3/8%. The note and interest are payable on demand, or if no demand is made, then on December 31, 2001. Also, on December 31, 1998, Foamex L.P. entered into another promissory note with Foamex International with a principal amount of approximately $2.5 million. The note bears interest at the rate LIBOR plus 2 3/8%. The note and interest thereon were repaid on March 31, 1999. On October 20, 1999, Foamex L.P. and Foamex International entered into a revolving note that allows Foamex International to borrow up to approximately $2.5 million through October 20, 2004. The revolving note bears interest at a rate equal to three-month LIBOR plus 2.5%, per annum, and is payable upon demand, or if no demand is made, then on October 20, 2004. At December 31, 2000 and 1999, Foamex L.P. had a receivable of approximately $2.5 million and $0.7 million, respectively, relating to the revolving note. The receivable for both notes is classified as a component of partners' deficit. Trace Promissory Notes On July 1, 1997, Trace borrowed $5.0 million pursuant to a promissory note with an aggregate principal amount of $5.0 million issued to Foamex L.P. on June 12, 1997. The promissory note is due and payable on demand or, if no demand is made, on July 7, 2001, and bears interest at 2 3/8% plus three-month LIBOR, as defined, per annum payable quarterly in arrears commencing October 1, 1997. On June 12, 1997, another promissory note issued to Foamex L.P. by Trace in July 1996 was amended. The amended promissory note is an extension of a promissory note of Trace that was due in July 1997. The aggregate principal amount of the amended promissory note was increased to approximately $4.8 million and the maturity of the promissory note was extended. The promissory note is due and payable on demand or, if no demand is made, on July 7, 2001, and bears interest at 2 3/8% plus three-month LIBOR, as defined, per annum payable quarterly in arrears. Note 3 includes disclosures regarding 1999 activity concerning Trace promissory notes payable to Foamex L.P. The Trace notes are included in the other component of partners' deficit, which is consistent with the recognition in prior years. Based on Trace's financial position discussed in Note 1, Trace may not be able to pay the aggregate amount of $9.2 million. Accordingly, Foamex L.P. did not record interest income on these notes since the Trace bankruptcy. Trace Accounts Receivables At year-end 2000 and 1999, operating accounts receivables from Trace were approximately $2.7 million. During 1998, an allowance of $2.4 million was recorded as a restructuring and other charges (credits) due to the financial difficulties of Trace. Foamex L.P. established an allowance of $0.3 million during 1999 for additional operating accounts receivable from Trace. The allowance was recorded as a restructuring and other charges (credit). Trace Management Agreement Foamex L.P. had a management service agreement with a subsidiary of Trace pursuant to which general managerial services of a financial, technical, legal, commercial, administrative and/or advisory nature were provided to Foamex L.P. During June 1997, the management services agreement was amended to increase the annual fee from $1.75 million to $3.0 million, plus reimbursement of expenses incurred. An amendment to the Foamex L.P. Credit F-29 FOAMEX L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 17. RELATED PARTY TRANSACTIONS AND BALANCES (continued) Facility on June 30, 1999 no longer permits Foamex L.P. to pay the management fee. On July 29, 1999, Foamex L.P. submitted formal notice of the termination of the management agreement. Tax Distribution On December 11, 1996, Foamex L.P. entered into a tax distribution advance agreement, pursuant to which its partners are entitled to obtain advances, in the aggregate not to exceed $17.0 million, against future distributions under Foamex L.P.'s tax distribution agreement. On December 23, 1999, Foamex International repaid the $13.6 million of advances made in 1997, plus accrued interest, with proceeds received from a $17.3 million distribution from Foamex L.P., discussed above. Trace New York Sublease Prior to September 30, 1999, Foamex L.P. subleased to Trace approximately 5,900 square feet of general, executive and administrative office space in New York, New York. The terms of the lease were substantially the same terms as Foamex L.P. leased such space from a third party lessor. Foamex L.P. has closed its New York office and subleased the premises to a third party at an amount in excess of its lease commitment. Foamex/GFI Note In connection with the GFI Transaction (see Note 12), Foamex L.P. entered into the Foamex/GFI Note with General Felt that was subsequently retained by Foam Funding LLC. As discussed in Note 12, the $34.0 million Foamex/GFI Note was repaid in March 2000. During 2000, 1999 and 1998, Foamex L.P. paid approximately $0.6 million, $2.1 million and $1.7 million, respectively, of interest on the note payable to Foam Funding LLC. Other The general director of Foamex de Mexico S.A. de C.V. ("Foamex de Mexico") which is Foamex L.P.'s operating subsidiary in Mexico has a 5% stock interest in Foamex de Mexico. A member of the board provides consulting services to Foamex L.P. for which fees paid to him in 2000 were $0.1 million, in 1999 were $0.2 million and were $0.1 million in 1998. As discussed in Note 12, included in the group of banks that provides the Foamex L.P. Credit Facility is The Bank of Nova Scotia, which is a shareholder of Foamex International. Foamex L.P. chartered an aircraft, which was owned by a wholly owned subsidiary of Foamex International and incurred costs of approximately $0.1 million and $0.9 million in 1999 and 1998, respectively. Foamex International sold this aircraft on March 31, 1999. The sale of the aircraft triggered an obligation to Trace of approximately $0.6 million. The obligation was offset against Trace's two promissory notes payable to Foamex L.P. The Trace notes are included in partners' deficit, which is consistent with the recognition in prior years. During 1999, certain employees of Foamex L.P. were also employed by Trace. Foamex L.P. paid a portion of the total compensation of such employees based on the amount of time devoted to Foamex L.P.'s matters by such employees in the aggregate. All such dual employment relationships have been terminated. Such payments totaled $1.8 million and $2.2 million in 1999 and 1998, respectively. Foamex L.P. made charitable contributions to the Trace International Holdings, Inc. Foundation of approximately $0.2 million in 1998. Foamex L.P., Recticel, s.a. ("Recticel"), a European polyurethane foam manufacturer, whose subsidiary was a former partner of Foamex L.P. and affiliates of Recticel are current shareholders of Foamex International, and Beamech Group Limited, an unaffiliated third party, have an interest in a Swiss corporation that develops new manufacturing technology for the production of polyurethane foam including the VPFSM manufacturing process. F-30 FOAMEX L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 18. BUYOUT PROPOSALS - HISTORY On February 9, 2000, Foamex International announced that it was in discussions with respect to a proposal involving the acquisition of all of Foamex International's outstanding common stock for cash. Foamex International stated that the proposal was subject to a number of conditions, including the buyer's due diligence and the execution of definitive agreements. Foamex International agreed to an exclusive negotiating period ending five business days after delivery of its audited financial statements included in Foamex International's Annual Report on Form 10-K to the prospective buyer. On April 5, 2000, Foamex International announced that discussions with the potential buyer were terminated with no agreement having been reached. Foamex International subsequently terminated the engagement of J.P. Morgan & Company, Inc. ("JP Morgan"), which acted as financial advisor in connection with such transaction. During the second quarter of 2000, Foamex International ended discussions with JP Morgan concerning an additional engagement. On August 5, 1999, Foamex International announced that its Board of Directors signed a letter of intent with Sorgenti Chemical Industries, LLC and Liberty Partners Holdings 20, LLC (collectively, the "Purchasers") for a business combination providing for $11.50 per share for all of Foamex International's outstanding common stock (the "Sorgenti Transaction"). Under the terms of the letter of intent, if Foamex International entered into a business combination with another party, the Purchasers would be entitled to a break-up fee of $6.0 million plus reimbursement of certain expenses, subject to certain conditions, including the willingness of the Purchasers to enter into a definitive merger agreement providing for a price of at least $11.50 per share prior to the expiration of the letter of intent. The proposed transaction was subject to a number of conditions, including the negotiation of definitive documents regarding certain conditions relating to the bank credit facilities and the public debt of Foamex International's subsidiaries. Additional issues considered included minimum shareholder acceptance, change of board membership, and other provisions providing for a higher break-up fee and expense reimbursement if Foamex International entered into a business combination providing a more favorable transaction. On December 15, 1999, Foamex International announced that the letter of intent with the Purchasers, which had been extended, expired by its terms. The Purchasers had submitted a revised bid at a price and on terms that were less favorable than those contained in the letter of intent and the Negotiating Committee of Foamex International's Board of Directors rejected the revised bid. In 1998, Foamex International received an unsolicited buyout proposal from Trace, Foamex International's principal stockholder. Foamex International entered into two merger agreements, which were subsequently terminated by Trace. 19. COMMITMENTS AND CONTINGENCIES Operating Leases Foamex L.P. is obligated under various noncancelable lease agreements for rental of facilities, vehicles and other equipment. Many of the leases contain renewal options with varying terms and escalation clauses that provide for increased rentals based upon increases in the Consumer Price Index, real estate taxes and lessors' operating expenses. Total minimum rental commitments (excluding commitments accrued as part of Foamex L.P.'s various restructuring/consolidation plans) required under operating leases at December 31, 2000 are: Operating Leases ---------- (thousands) 2001 $13,317 2002 11,878 2003 9,841 2004 7,239 2005 5,074 Balance 11,010 ------- Total $58,359 ======= F-31 FOAMEX L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 19. COMMITMENTS AND CONTINGENCIES (continued) Rental expense charged to operations under operating leases approximated $14.7 million, $15.4 million and $17.7 million for 2000, 1999 and 1998, respectively. Substantially all such rental expense represented the minimum rental payments under operating leases. Litigation - Foamex International Shareholders On August 1, 2000, Foamex International announced that it had reached agreements in principle with the plaintiffs in the stockholder actions described below providing for the settlement and dismissal of such actions, subject to certain conditions, including court approval. The Shareholder Litigation. Beginning on March 17, 1998, six actions, which were subsequently consolidated under the caption In re Foamex International Inc. Shareholders Litigation, were filed in the Court of Chancery of the State of Delaware, and on August 13, 1999, another action, Watchung Road Associates, L.P., et al. v. Foamex International Inc., et al. (the "Watchung Action"), was filed in the same court. The two actions were consolidated on May 3, 2000, into a single action under the caption In re Foamex International Inc. Shareholders Litigation (the "Delaware Action"). The Delaware Action, a purported derivative and class action on behalf of Foamex International and its stockholders, originally named as defendants Foamex International, certain of its current and former directors and officers, Trace and a Trace affiliate. The complaint in the Delaware Action alleges, among other things, that certain of the defendants breached their fiduciary duties to Foamex International in connection with an attempt by Trace to acquire Foamex International's publicly traded common stock as well as with a potential acquisition transaction with a group led by Sorgenti Chemical Industries LLC, and that certain of the defendants breached their fiduciary duties by causing Foamex International to waste assets in connection with a variety of transactions entered into with Trace and its affiliates. The Delaware Action seeks various remedies, including injunctive relief, money damages and the appointment of a receiver for Foamex International. On April 26, 1999, a putative securities class action entitled Molitor v. Foamex International Inc., et al., was filed in the United States District Court for the Southern District of New York naming as defendants Foamex International, Trace and certain current and former officers and directors of Foamex International, on behalf of stockholders who bought shares of Foamex International's common stock during the period from May 7, 1998 through and including April 16, 1999. The lawsuit alleged 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 alleged that Trace and Marshall S. Cogan violated Section 20(a) of the Securities Exchange Act of 1934 as controlling persons of Foamex International. The complaint sought class certification, a declaration that defendants violated the federal securities laws, an award of money damages, and costs and attorneys', accountants' and experts' fees. On May 18, 1999, a similar action entitled Thomas W. Riley v. Foamex International Inc., et al., was filed in the same court. The two actions were consolidated and a consolidated complaint was filed; the consolidated suit is referred to herein as the "Federal Action." The Settlements. On August 23, 2000, Foamex International and the plaintiffs in the Federal Action entered into a settlement agreement providing that members of the class of shareholders who purchased shares between May 7, 1998 and April 16, 1999 would receive payments as defined in the agreement. The court approved the settlement and dismissed the action with prejudice on January 11, 2001, and no appeals were filed. Payments to class members and plaintiffs' lawyers' fees in the Federal Action have been paid directly by Foamex International's insurance carrier on behalf of Foamex International. Under the terms of the agreement in principle to settle the Delaware Action, Foamex International agreed that a special nominating committee of the Board of Directors, consisting of Robert J. Hay as chairman, Stuart J. Hershon, John G. Johnson, Jr., and John V. Tunney, will nominate two additional independent directors to serve on the Board. The terms of the agreement also establish the criteria for the independence of the directors and require that certain transactions with affiliates be approved by a majority of the disinterested members of the Board. On September 28, 2000, Foamex International announced that Raymond E. Mabus, Jr. was elected to Foamex International's Board of Directors. On December 21, 2000, Foamex International announced that Virginia A. F-32 FOAMEX L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 19. COMMITMENTS AND CONTINGENCIES (continued) Kamsky was elected to Foamex International's Board of Directors. The addition of Mr. Mabus and Ms. Kamsky adds two independent directors and brought the total number of directors to eight. The parties are negotiating the terms of the settlement agreement and related documentation. On January 9, 2001, the Court ordered the Watchung Action dismissed with prejudice only as to the named plaintiffs Watchung Road Associates, L.P. and Pyramid Trading Limited Partnership. The dismissal did not have any effect on the claims asserted in the consolidated action. The settlement of the Delaware Action (assuming a definitive settlement agreement is reached with plaintiffs) is subject to court approval, which, if obtained, will resolve all outstanding shareholder litigation against Foamex International and its current and former directors and officers. The settlements of the Federal Action and the Delaware Action involve no admissions or findings of liability or wrongdoing by Foamex International or any individuals. If management's assessment of Foamex International's liability with respect to these actions is incorrect, such actions could have a material adverse effect on Foamex International's consolidated financial position, results of operations and cash flows. Litigation - Breast Implants As of March 21, 2001, Foamex L.P. and Trace were two of multiple defendants in actions filed on behalf of approximately 2,104 recipients of breast implants in various United States federal and state courts and one Canadian provincial court, some of which allege substantial damages, but most of which allege unspecified damages for personal injuries of various types. Three of these cases seek to allege claims on behalf of all breast implant recipients or other allegedly affected parties, but no class has been approved or certified by the court. In addition, three cases have been filed alleging claims on behalf of approximately 39 residents of Australia, New Zealand, England, and Ireland. Foamex L.P. believes that the number of suits and claimants may increase. During 1995, Foamex L.P. and Trace were granted summary judgments and dismissed as defendants from all cases in the federal courts of the United States and the state courts of California. Appeals for these decisions were withdrawn and the decisions are final. Although breast implants do not contain foam, certain silicone gel implants were produced using a polyurethane foam covering fabricated by independent distributors or fabricators from bulk foam purchased from Foamex L.P. or Trace. Neither Foamex L.P. nor Trace recommended, authorized, or approved the use of its foam for these purposes. Foamex L.P. is also indemnified by Trace for any such liabilities relating to foam manufactured prior to October 1990. Trace's insurance carrier has continued to pay Foamex L.P.'s litigation expenses after Trace's filing under the Bankruptcy Code. Trace's insurance policies continue to cover certain liabilities of Trace but if the limits of those policies are exhausted, it is unlikely that Trace will be able to continue to provide additional indemnification. While it is not feasible to predict or determine the outcome of these actions, based on management's present assessment of the merits of pending claims, after consultation with the general counsel of Foamex L.P., and without taking into account the indemnification provided by Trace, the coverage provided by Trace's and Foamex L.P.'s liability insurance and potential indemnity from the manufacturers of polyurethane covered breast implants, management believes that the disposition of the matters that are pending or that may reasonably be anticipated to be asserted should not have a material adverse effect on either Foamex L.P.'s consolidated financial position or results of operations. If management's assessment of Foamex L.P.'s liability with respect to these actions is incorrect, such actions could have a material adverse effect on the financial position, results of operations and cash flows of Foamex L.P. Litigation - Other Foamex L.P. is party to various other lawsuits, both as defendant and plaintiff, arising in the normal course of business. It is the opinion of management that the disposition of these lawsuits will not, individually or in the aggregate, have a material adverse effect on the financial position or results of operations of Foamex L.P. If management's assessment of Foamex L.P.'s liability with respect to these actions is incorrect, such actions could have a material adverse effect on Foamex L.P.'s consolidated financial position, results of operations and cash flows. F-33 FOAMEX L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 19. COMMITMENTS AND CONTINGENCIES (continued) Environmental and Health and Safety Foamex L.P. is subject to extensive and changing federal, state, local and foreign environmental laws and regulations, including those relating to the use, handling, storage, discharge and disposal of hazardous substances and the remediation of environmental contamination, and as a result, is from time to time involved in administrative and judicial proceedings and inquiries relating to environmental matters. As of December 31, 2000, Foamex L.P. had accruals of approximately $3.1 million for environmental matters. During 1998, Foamex L.P. established an allowance of $0.6 million relating to receivables from Trace for environmental indemnifications due to the financial difficulties of Trace. The Clean Air Act Amendments of 1990 (the "1990 CAA Amendments") provide for the establishment of federal emission standards for hazardous air pollutants including methylene chloride, propylene oxide and TDI, materials used in the manufacturing of foam. On December 27, 1996, the United States Environmental Protection Agency (the "EPA") proposed regulations under the 1990 CAA Amendments that will require manufacturers of slab stock polyurethane foam and foam fabrication plants to reduce emissions of methylene chloride. The final National Emission Standard for Hazardous Air Pollutants ("NESHAP") was promulgated October 7, 1998. NESHAP requires a reduction of approximately 70% of the emission of methylene chloride for the slab stock foam industry effective October 7, 2001. Foamex L.P. believes that the use of alternative technologies, including VPFSM, which do not utilize methylene chloride and its ability to shift current production to the facilities which use these alternative technologies will minimize the impact of these regulations. The 1990 CAA Amendments also may result in the imposition of additional standards regulating air emissions from polyurethane foam manufacturers, but these standards have not yet been proposed or promulgated. Foamex L.P. has reported to the appropriate state authorities that it has found soil and/or groundwater contamination in excess of state standards at six facilities. These sites are in various stages of investigation or remediation. Accordingly, the extent of contamination and the ultimate liability is not known with certainty for all sites. Foamex L.P. has accruals of $2.1 million for the estimated cost of remediation, including professional fees and monitoring costs, for these sites. During 2000, Foamex L.P. reached an indemnification agreement with the former owner of the Morristown, Tennessee facility. The agreement allocates the incurred and future remediation costs between the former owner and Foamex L.P. The estimated allocation of future costs for the remediation of this facility is not significant, based on current information known. The former owner was Recticel Foam Corporation, a subsidiary of Recticel s.a. Foamex L.P. has either upgraded or closed all underground storage tanks at its facilities in accordance with applicable regulations. On November 14, 2000, the United States Occupational Safety and Health Administration ("OSHA") released the final ergonomics standard ("Ergonomics Standard"), which applies to Foamex L.P., as well as all other employers in the United States, with certain industry specific exclusions. The Ergonomics Standard addresses musculoskeletal disorders, including those commonly referenced as repetitive motion disorders. The Ergonomics Standard is comprehensive, covering essentially all employees of Foamex L.P. in the United States. Although the implementation costs could be significant, in the present form, Foamex L.P. does not believe it will have a negative impact on its competitive position within the industry. Subsequent to year-end 2000, a joint resolution by the United States House of Representatives and Senate was approved that repealed the Ergonomics Standard. The repeal has been submitted to the President of the United States for his review and signature. F-34 FOAMEX L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 19. COMMITMENTS AND CONTINGENCIES (continued) On April 10, 1997, the OSHA promulgated new standards governing employee exposure to methylene chloride, which is used as a blowing agent in some of Foamex L.P.'s manufacturing processes. The phase-in of the standards was completed in 1999 and Foamex L.P. has developed and implemented a compliance program. Capital expenditures required and changes in operating procedures are not anticipated to significantly impact Foamex L.P.'s competitive position. Foamex L.P. has been designated as a Potentially Responsible Party ("PRP") by the EPA with respect to six sites. Estimates of total cleanup costs and fractional allocations of liability are generally provided by the EPA or the committee of PRP's with respect to the specified site. In each case and in the aggregate, the liability of Foamex L.P. is not considered to be significant. Although it is possible that new information or future developments could require Foamex L.P. to reassess its potential exposure relating to all pending environmental matters, including those described herein, Foamex L.P. believes that, based upon all currently available information, the resolution of such environmental matters will not have a material adverse effect on Foamex L.P.'s operations, financial position, capital expenditures or competitive position. The possibility exists, however, that new environmental legislation and/or environmental regulations may be adopted, or other environmental conditions may be found to exist, that may require expenditures not currently anticipated and that may be significant. 20. QUARTERLY FINANCIAL DATA - RESTATED (UNAUDITED) Foamex L.P. recorded adjustments in the fourth quarter of 1999 primarily related to certain 1999 restructuring plans. Foamex L.P. has subsequently determined that the 1999 quarterly financial data should be restated because these fourth quarter 1999 adjustments should have been recorded in prior quarters in 1999. Additionally, Foamex L.P. has subsequently determined that other fourth quarter 1999 adjustments, primarily related to results from foreign subsidiaries, should have been recorded in prior quarters of 1999. The impact of the 1999 restatement is as follows:
First Second Third Fourth Quarter Quarter Quarter Quarter --------- --------- --------- --------- (thousands) 2000 Net sales $305,520 $297,688 $286,371 $271,438 Gross profit 36,509 40,434 38,639 28,792 Net income (a) 2,137 7,878 3,042 211 1999 - As Previously Reported Net sales $299,877 $292,229 $302,819 $295,754 Gross profit 37,461 38,410 41,111 37,641 Net income 2,608 4,807 5,395 2,771 1999 - Adjustments Net sales $ - $ - $ - $ - Gross profit (loss) (c) (105) (19) 112 12 Net income (loss) (d) (331) (349) 83 597 1999 - As Restated Net sales $299,877 $292,229 $302,819 $295,754 Gross profit 37,356 38,391 41,223 37,653 Net income (a) (b) 2,277 4,458 5,478 3,368
F-35 FOAMEX L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 20. QUARTERLY FINANCIAL DATA - RESTATED (UNAUDITED) (continued) (a) Restructuring and other charges (credits) are discussed in Note 4. (b) Fourth quarter 1999 results were favorably impacted by $1.8 million from the realization of a business interruption insurance claim. (c) Primarily relates to employee benefit expenses, inventory usage and reported results from foreign subsidiaries, including the recognition of foreign currency transactions. (d) Primarily includes those identified in (c) above and adjustments to severance costs originally recorded in the fourth quarter. F-36 REPORT OF INDEPENDENT ACCOUNTANTS Board of Directors Foamex Capital Corporation Wilmington, Delaware In our opinion, the accompanying 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, 2000 and 1999 in conformity with accounting principles generally accepted in the United States of America. These balance sheets are the responsibility of FCC's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America 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 our opinion. As discussed in Note 2, during the year ending December 31, 2001, Foamex L.P. financial debt covenants, with which Foamex L.P. must comply on a quarterly basis, become more restrictive. Management's plans in regard to this matter are also described in Note 2. PricewaterhouseCoopers LLP Philadelphia, Pennsylvania March 30, 2001 F-37 FOAMEX CAPITAL CORPORATION (A Wholly Owned Subsidiary of Foamex L.P.) BALANCE SHEETS
December 31, December 31, 2000 1999 ------------ ------------ CASH $1,000 $1,000 ====== ====== COMMITMENTS AND CONTINGENCIES STOCKHOLDER'S EQUITY Common stock, par value $.01 per share; 1,000 shares authorized, issued and outstanding $ 10 $ 10 Additional paid-in capital 990 990 ------ ------ Total Stockholder's Equity $1,000 $1,000 ====== ======
The accompanying notes are an integral part of the balance sheets. F-38 FOAMEX CAPITAL CORPORATION (A Wholly Owned Subsidiary of Foamex L.P.) NOTES TO BALANCE SHEETS 1. ORGANIZATION Foamex Capital Corporation ("FCC"), a wholly-owned subsidiary of Foamex L.P., was formed on July 20, 1992 and initially capitalized on July 23, 1992 for the purpose of obtaining financing from external sources. 2. COMMITMENTS AND CONTINGENCIES Trace International Holdings, Inc. ("Trace") is a privately held company, which owned approximately 29% of Foamex International Inc.'s ("Foamex International") outstanding voting common stock at September 30, 2000, and whose former Chairman also serves as Foamex International's Chairman. Foamex International's common stock owned by Trace was pledged as collateral against certain of Trace's obligations. The Foamex L.P. credit facility pursuant to which approximately $351.1 million of debt was outstanding as of September 30, 2000, provided that a "change of control" would be an event of default and could result in the acceleration of such indebtedness. "Change of control" means, for this purpose, that (i) a person or related group, other than Trace, beneficially owns more than 25% of Foamex International's outstanding voting stock and (ii) such voting stock constitutes a greater percentage of such voting stock than the amount beneficially owned by Trace. Additionally, certain indentures of Foamex L.P. and FCC relating to senior subordinated notes of $248.0 million contain similar "change of control" provisions, which require Foamex L.P. and FCC to tender for such notes at a price in cash equal to 101% of the aggregate principal amount thereof, plus accrued and unpaid interest thereon, if there is such a "change of control". On July 21, 1999, Foamex L.P. was informed by Trace that it filed a petition for relief under Chapter 11 of the Bankruptcy Code in Federal Court in New York City. Subsequently, on January 24, 2000, an order was signed converting the Trace bankruptcy from Chapter 11 to Chapter 7 of the Bankruptcy Code. A trustee was appointed to oversee the liquidation of Trace's assets. Neither Trace's bankruptcy filing nor the conversion to Chapter 7 constituted a "change of control" under the provisions of the debt agreements described above. On July 31, 2000, Foamex International announced that it had entered into an agreement (the "Exchange Agreement") with The Bank of Nova Scotia relating to a portion of the 7,197,426 shares of Foamex International's common stock pledged by Trace to The Bank of Nova Scotia. The Exchange Agreement provided for the transfer of the pledged stock to The Bank of Nova Scotia in a manner that would not constitute a "change of control" as described above. These transactions were conditioned upon bankruptcy court approval of a settlement agreement between The Bank of Nova Scotia and the trustee for the Trace bankruptcy, which was entered on October 18, 2000. On November 2, 2000, the transactions contemplated by the Exchange Agreement and the settlement agreement were consummated, and did not constitute a "change of control". As a result, Trace no longer owns any shares of Foamex International's common stock. Under the Exchange Agreement, The Bank of Nova Scotia initially received 1,500,000 shares of Foamex International's common stock from the Trace bankruptcy estate and exchanged these common stock shares for 15,000 shares of a new class of Foamex International's non-voting non-redeemable convertible preferred stock (the "Series B Preferred Stock"). Each share of the Series B Preferred Stock can be converted into 100 shares of Foamex International's common stock but only if such conversion would not trigger a "change of control" event, as discussed above. The Series B Preferred Stock (a) is entitled to dividends only if a dividend is declared on Foamex International's common stock, (b) ranks senior to any future preferred stock issued by Foamex International and (c) is entitled to a liquidation preference of $100 per share. Following this exchange, The Bank of Nova Scotia became the owner of 24.41% of the outstanding shares of Foamex International's common stock when the remaining 5,697,426 shares of Foamex International's common stock were transferred to The Bank of Nova Scotia from the Trace bankruptcy estate. F-39 FOAMEX CAPITAL CORPORATION (A Wholly Owned Subsidiary of Foamex L.P.) NOTES TO BALANCE SHEETS 2. COMMITMENTS AND CONTINGENCIES (continued) FCC is a joint obligor and severally liable on the following borrowings of Foamex L.P.: 9 7/8% Senior Subordinated Notes due 2007 ("9 7/8% Senior Subordinated Notes") - ------------------------------------------------------------------------------ The 9 7/8% Senior Subordinated Notes were issued by Foamex L.P. and FCC (the "Issuers") and are due on June 15, 2007. The notes represent uncollateralized general obligations of the Issuers and are subordinated to all Senior Debt, as defined in the Indenture. Interest is payable June 15 and December 15. The notes may be redeemed at the option of the Issuers, in whole or in part, at any time on or after June 15, 2002. The initial redemption is at 104.938% of their principal amount, plus accrued and unpaid interest, as defined, if any, thereon to the date of redemption and declining to 100.0% on or after June 15, 2005. Upon the occurrence of a change of control, as defined, each holder will have the right to require the Issuers to tender for such notes at a price in cash equal to 101% of the aggregate principal amount thereof, plus accrued and unpaid interest thereon, if there is such a "change of control". The notes are subordinated in right of payment to all senior indebtedness and are pari passu in right of payment to the 13 1/2% Senior Subordinated Notes (described below) and Foamex L.P.'s subordinated note payable. 13 1/2% Senior Subordinated Notes due 2005, Series B ("13 1/2% Senior Subordinated Notes") - -------------------------------------------------------------------------------- The 13 1/2% Senior Subordinated Notes were issued by the Issuers and are due on August 15, 2005. The notes represent uncollateralized general obligations of the Issuers and are subordinated to all Senior Debt, as defined in the Indenture. Interest is payable semiannually on February 15 and August 15. The notes may be redeemed at the option of the Issuers, in whole or in part, at any time on or after August 15, 2000. The initial redemption is at 106.75% of their principal amount, plus accrued and unpaid interest, if any, thereon to the date of redemption and declining to 100.0% on or after August 15, 2004. Upon the occurrence of a change of control, as defined, each holder will have the right to require the Issuers to tender for such notes at a price in cash equal to 101% of the aggregate principal amount thereof, plus accrued and unpaid interest, if any, thereon, if there is such a "change of control". The notes are subordinated in right of the payment of all senior indebtedness and are pari passu in right of payment to the 9 7/8% Senior Subordinated Notes (described above) and Foamex L.P.'s subordinated note payable. The Foamex L.P. Credit Facility contains certain quarterly financial covenants which become more restrictive during 2001. Foamex L.P. anticipates that it will continue to comply in 2001 with the various quarterly financial covenants in the Foamex L.P. Credit Facility. Management's current business plan for Foamex L.P. anticipate customer selling price increases in response to higher raw material costs, improved working capital management, a reduced capital expenditure program, declining interest rates, successful implementation of on-going cost savings initiatives and improved operating efficiencies. The achievement of the business plan is necessary for compliance with the various financial covenants in 2001. The possibility exists that certain financial covenants will not be met if business conditions are other than as anticipated or other unforeseen events impact results. In the absence of a waiver of or amendment to such financial covenants, such noncompliance would constitute a default under the Foamex L.P. Credit Facility and the lenders would be entitled to accelerate the maturity of the indebtedness outstanding thereunder. If any such default occurs under the Foamex L.P. Credit Facility, it would also result in a default under the senior subordinated notes described above. In the event that such noncompliance appears likely, or occurs, Foamex L.P. will seek the lenders' approvals of amendments to, or waivers of, such financial covenants. Historically, Foamex L.P. has been able to renegotiate financial covenants and/or obtain waivers, as required, and management believes such waivers and/or amendments could be obtained if required. However, there can be no assurance of future amendments or waivers will be obtained. F-40 FOAMEX L.P. AND SUBSIDIARIES INDEX TO FINANCIAL STATEMENT SCHEDULE Index to Financial Statement Schedule Schedule II - Valuation and Qualifying Accounts All other schedules are omitted since the required information is not present or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the consolidated financial statements and notes thereto. S-1 Schedule II FOAMEX L.P. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS (thousands)
Balance at Charged to Charged to Balance at Beginning of Costs and other End of Period Expenses Accounts Deductions Period ------------ ---------- ---------- ---------- ---------- YEAR ENDED DECEMBER 31, 2000 Allowance for Uncollectible Accounts $4,333 $1,736 $ - $ 857 $5,212 ====== ====== ======= ====== ====== Reserve for Discounts $ 977 $ - $ 9,379 (1) $9,110 $1,246 ====== ====== ======= ====== ====== Deferred Income Tax Asset Valuation Allowance $ 711 $ 720 $ - $ - $1,431 ====== ====== ======= ====== ====== YEAR ENDED DECEMBER 31, 1999 Allowance for Uncollectible Accounts $6,349 $2,493 $ - $4,509 $4,333 ====== ====== ======= ====== ====== Reserve for Discounts $ 929 $ - $ 9,365 (1) $9,317 $ 977 ====== ====== ======= ====== ====== Deferred Income Tax Asset Valuation Allowance $ - $ 711 $ - $ - $ 711 ====== ====== ======= ====== ====== YEAR ENDED DECEMBER 31, 1998 Allowance for Uncollectible Accounts $6,844 $2,000 $ (762)(1)(2) $1,733 $6,349 ====== ====== ======= ====== ====== Reserve for Discounts $1,238 $ - $ 6,889 (1) $7,198 $ 929 ====== ====== ======= ====== ====== Deferred Income Tax Asset Valuation Allowance $9,097 $ - $(9,097)(3) $ - $ - ====== ====== ======= ====== ====== (1) Discounts and billing adjustments reflect a reduction in net sales. (2) Includes $3.2 million of reserves transferred out due to the GFI Transaction. (3) Represents valuation allowances transferred out due to the GFI Transaction.
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