UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended July 28, 1996
-------------
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: 1-9474
FORSTMANN & COMPANY, INC.
(DEBTOR-IN-POSSESSION)
(Exact name of registrant as specified in its charter)
GEORGIA 58-1651326
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1155 Avenue of the Americas
New York, New York 10036
(Address of principal executive offices)
(212) 642-6900
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (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 period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. X Yes No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
There were 5,618,799 shares of common stock, $.001 par value,
outstanding as of September 10, 1996.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended July 28, 1996
-------------
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: 1-9474
FORSTMANN & COMPANY, INC.
(DEBTOR-IN-POSSESSION)
(Exact name of registrant as specified in its charter)
GEORGIA 58-1651326
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1155 Avenue of the Americas
New York, New York 10036
(Address of principal executive offices)
(212) 642-6900
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (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 period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. X Yes No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
There were 5,618,799 shares of common stock, $.001 par value,
outstanding as of September 10, 1996.
Total number of pages: 29 pages.
<TABLE>
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
FORSTMANN & COMPANY, INC.
(DEBTOR-IN-POSSESSION)
CONDENSED STATEMENTS OF OPERATIONS
OR THE THIRTEEN WEEKS ENDED JULY 28, 1996 AND JULY 30, 1995 AND
THE THIRTY-NINE WEEKS ENDED JULY 28, 1996 AND JULY 30, 1995
(unaudited)
<CAPTION>
Thirteen Weeks Ended Thirty-Nine Weeks Ended
-------------------------- ---------------------------
July 28, July 30, July 28, July 30,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $58,009,000 $68,608,000 $153,402,000 $181,534,000
Cost of goods sold 48,849,000 59,525,000 132,417,000 153,974,000
----------- ----------- ------------ ------------
Gross profit 9,160,000 9,083,000 20,985,000 27,560,000
Selling, general and
administrative expenses 4,204,000 6,614,000 13,207,000 17,284,000
Provision for uncollectible
accounts 464,000 1,177,000 1,064,000 1,698,000
----------- ----------- ------------ ------------
Operating income 4,492,000 1,292,000 6,714,000 8,578,000
Interest expense (contractual
interest of $4,518,000 and
$13,458,000 for 1996) 2,355,000 5,698,000 7,001,000 15,255,000
----------- ----------- ------------ ------------
Income (loss) before
reorganization items
and income taxes 2,137,000 (4,406,000) (287,000) (6,677,000)
Reorganization items 3,259,000 - 7,692,000 -
----------- ----------- ------------ ------------
Loss before income
taxes (1,122,000) (4,406,000) (7,979,000) (6,677,000)
Income tax benefit - (1,740,000) - (2,637,000)
----------- ----------- ------------ ------------
Net Loss (1,122,000) (2,666,000) (7,979,000) (4,040,000)
Preferred stock in-kind
dividends and accretion
to redemption value - 64,000 - 191,000
----------- ----------- ------------ ------------
Loss applicable to
common shareholders $(1,122,000) $(2,730,000) $ (7,979,000) $ (4,231,000)
=========== ============ ============ ============
Share and per share information:
Loss per common
share $ (.20) $ (.49) $ (1.42) $ (.75)
=========== ============ ============ ============
Weighted average common
shares outstanding 5,618,799 5,618,799 5,618,799 5,618,799
=========== ============ ============= ============
See notes to financial statements
</TABLE>
<TABLE>
FORSTMANN & COMPANY, INC.
(DEBTOR-IN-POSSESSION)
CONDENSED BALANCE SHEETS
JULY 28, 1996 AND OCTOBER 29, 1995
(unaudited)
<CAPTION>
July 28, October 29,
1996 1995
---- ----
<S> <C> <C>
ASSETS
Current Assets:
Cash $ 49,000 $ 52,000
Accounts receivable, net of allowance of
$3,899,000 and $2,991,000 57,358,000 43,872,000
Current income taxes receivable 2,117,000 2,417,000
Inventories 51,570,000 69,470,000
Current deferred tax assets - -
Other current assets 576,000 664,000
------------ ------------
Total current assets 111,670,000 116,475,000
Property, plant and equipment, net 70,502,000 78,784,000
Other assets 2,966,000 2,944,000
------------ ------------
Total $185,138,000 $198,203,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Current maturities of long-term debt $ 55,158,000 $ 61,001,000
Accounts payable 2,859,000 1,771,000
Accrued liabilities 12,169,000 9,048,000
------------ ------------
Total current liabilities 70,186,000 71,820,000
Long-term debt 22,795,000 25,302,000
Deferred tax liabilities - -
------------ ------------
Total liabilities not subject to compromise 92,981,000 97,122,000
Liabilities subject to compromise 89,814,000 90,759,000
Redeemable preferred stock subject to
compromise 2,655,000 2,655,000
Commitments and contingencies
Shareholders' Equity (Deficit):
Common stock 5,619 5,619
Additional paid-in capital 26,564,381 26,564,381
Excess of additional pension liability
over unrecognized prior service cost (1,956,000) (1,956,000)
Retained deficit since November 2, 1992 (24,926,000) (16,947,000)
------------ ------------<PAGE>
Total shareholders' equity (deficit) (312,000) 7,667,000
------------ ------------
Total $185,138,000 $198,203,000
============ ============
See notes to financial statements.
</TABLE>
<TABLE>
FORSTMANN & COMPANY, INC.
(DEBTOR-IN-POSSESSION)
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE THIRTY-NINE WEEKS ENDED JULY 28, 1996 AND JULY 30, 1995
(unaudited)
<CAPTION>
July 28, July 30,
1996 1995
---- ----
<S> <C> <C>
Net loss $(7,979,000) $(4,040,000)
----------- -----------
Adjustments to reconcile net loss
to net cash provided (used) by
operating activities:
Depreciation and amortization 9,332,000 10,388,000
Income tax benefit - (2,637,000)
Income taxes refunded, net 286,000 829,000
Provision for uncollectible accounts 1,064,000 1,698,000
Loss from disposal, abandonment and
impairment of machinery and equipment
and other assets 261,000 56,000
Other non-cash items - (368,000)
Changes in current assets and current
liabilities:
Accounts receivable (14,550,000) (15,393,000)
Inventories 17,900,000 (2,636,000)
Other current assets 102,000 (380,000)
Accounts payable 1,113,000 9,242,000
Accrued liabilities 1,627,000 (109,000)
Accrued interest payable 1,494,000 2,188,000
Investment in notes receivable, net - (10,000)
Deferred financing costs (327,000) (572,000)
Operating liabilities subject to compromise (945,000) -
----------- -----------
Total adjustments 17,357,000 2,296,000
----------- -----------
Net cash provided (used) by operating
activities 9,378,000 (1,744,000)
----------- -----------
Cash flows used in investing activities:
Capital expenditures (412,000) (9,401,000)
Investment in computer information systems (669,000) (1,170,000)
Net proceeds from disposal of machinery
and equipment 50,000 110,000
----------- -----------
Net cash used in investing activities (1,031,000) (10,461,000)
------------ -----------
<PAGE>
Cash flows from financing activities:
Net borrowings under the DIP Facility 31,673,000 -
Net borrowings (repayments) under the
GE Capital Facility (38,626,000) 7,686,000
Proceeds from the Term Loan - 7,500,000
Repayment of the Term Loan - (2,500,000)
Borrowings under the CIT Equipment Facility
and other financing arrangements - 3,092,000
Repayment of CIT Equipment Facility and other
financing arrangements (1,391,000) (2,707,000)
Cash paid in connection with Dissenters
Proceeding - (869,000)
Other (6,000) -
---------- -----------
Net cash provided (used) by financing
activities (8,350,000) 12,202,000
---------- -----------
Net decrease in cash (3,000) (3,000)
Cash at beginning of period 52,000 49,000
---------- -----------
Cash at end of period $ 49,000 $ 46,000
========== ===========
</TABLE>
<TABLE>
FORSTMANN & COMPANY, INC.
(DEBTOR-IN-POSSESSION)
CONDENSED STATEMENTS OF CASH FLOWS (continued)
FOR THE THIRTY-NINE WEEKS ENDED JULY 28, 1996 AND JULY 30, 1995
(unaudited)
<CAPTION>
July 28,
1996
----
<S> <C>
Supplemental disclosure of cash flow
information relating to the
Chapter 11 proceeding:
Cash paid during the period for
professional fees $ 3,084,000
===========
Cash paid during the period relating
to the rejection and amendments of
executory contracts $ 754,000
===========
Cash paid during the period for other
items $ 409,000
===========
See notes to financial statements
</TABLE>
<TABLE>
FORSTMANN & COMPANY, INC.
(DEBTOR-IN-POSSESSION)
CONDENSED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
FOR THE THIRTY-NINE WEEKS ENDED JULY 28, 1996
(unaudited)
<CAPTION>
Pension
Additional Liability Total
Common Paid-In Over Prior Retained Shareholders'
Stock Capital Service Cost Deficit Equity (Deficit)
----- ------- ------------ ----------- ----------------
<S> <C> <C> <C> <C> <C>
Balance, October 29, 1995 $5,619 $26,564,381 $(1,956,000) $(16,947,000) $ 7,667,000
Loss applicable to
common shareholders - - - (7,979,000) (7,979,000)
------ ----------- ----------- ------------ -----------
Balance, July 28, 1996 $5,619 $26,564,381 $(1,956,000) $(24,926,000) $ (312,000)
====== =========== =========== ============ ===========
See notes to financial statements.
</TABLE>
FORSTMANN & COMPANY, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO FINANCIAL STATEMENTS
JULY 28, 1996
(unaudited)
1. Forstmann & Company, Inc. (the "Company") is a leading designer, marketer
and manufacturer of innovative, high quality woolen, worsted and other
fabrics which are used primarily in the production of brand-name and private
label apparel for men and women, as well as specialty fabrics for use in
billiard tables, sports caps and school uniforms. A majority (50.4%) of the
Company's common stock is owned by Odyssey Partners, L.P.
As described more thoroughly in Note 1 to the financial statements contained
in the Company's Annual Report on Form 10-K for the fiscal year ended
October 29, 1995 (the "1995 Form 10-K"), as a result of the continued
decline in the Company's results of operations throughout fiscal year 1995,
on September 22, 1995, the Company filed a petition for protection under
Chapter 11 of the United States Bankruptcy Code (the "Bankruptcy Code") with
the U.S. Bankruptcy Court for the Southern District of New York (the
"Bankruptcy Filing"). The decline in the Company's results of operations
during fiscal year 1995 was principally due to rising wool costs, high debt
leverage and sluggishness of retail apparel sales and a significant decline
in women s outerwear sales, which were partially offset by the sale of other
fabrics yielding lower profit margins. This resulted in the Company being
unable to meet all of its interest payments when such became due. The
Company's liquidity and financial position were severely strained during
fiscal year 1995. Although the rise in wool costs has stabilized, the
continued sluggishness of retail apparel sales, as well as the continued
economic downturn in the apparel industry, which industry represents the
majority of the Company's customers, indicates that the Company's operating
results will continue to be strained during fiscal year 1996. These factors
raise substantial doubt about the Company's ability to continue as a going
concern. In response to these factors, management of the Company has
instituted plans with a greater focus on significantly reduced product
offerings; tighter management of inventory levels; enhanced cost controls;
and reduced capital expenditures. All of these management actions are
focused on improving the Company's cash flows from operations and in total.
The Company has successfully improved operations in each of these focus
areas and is continuing to refine its strategies in response to evolving
circumstances. Further, management has begun efforts to document a plan of
reorganization to allow the Company to successfully emerge from bankruptcy
in the first half of its fiscal year 1997.
Resolution of the Company's liquidity and debt leverage problems might
involve a conversion of certain existing indebtedness to equity. This
resolution might result in an ownership change as defined in Section 382 of
the Internal Revenue Code of 1986, as amended (the "Internal Revenue Code").
A tax ownership change would limit the Company's ability to utilize its net
operating loss and certain other carry forward tax credits.
As a plan of reorganization is developed, the Company may conclude that
additional market reserves, write downs of machinery and equipment and write
downs of other assets are necessary. Accordingly, the Company may recognize
significant expenses associated with the development and implementation of a
plan of reorganization that are not reflected in these financial statements.
Any additional asset impairments or restructuring costs directly related to
reorganization proceedings will be reflected as reorganization items in the
Company s financial statements in the period the Company becomes committed
to plans which impair the valuation of the Company's assets or incurs a
restructuring liability. As more thoroughly described in Note 2 to the
financial statements, during the thirteen weeks ended July 28, 1996 the
Company increased inventory market reserves by $2.5 million in connection
with the Company's assessment and evaluation of its business strategy which
has resulted in the Company continuing to reduce its product offerings. See
Note 9 to these financial statements for a description of reorganization
items recognized during the thirteen and thirty-nine weeks ended July 28,
1996.
The condensed financial statements presented herein are unaudited and have
been prepared by the Company pursuant to the rules and regulations of the
Securities and Exchange Commission; in accordance with the American
Institute of Certified Public Accountants Statement of Position 90-7,
"Financial Reporting by Entities in Reorganization Under the Bankruptcy
Code" ("SOP 90-7"); and a going concern basis which assumes continuity of
operations and realization of assets and liquidation of liabilities in the
ordinary course of business. As a result of the reorganization proceeding,
the Company may have to sell or otherwise dispose of assets and liquidate or
settle liabilities for amounts other than those reflected in these financial
statements. Further, a plan of reorganization could materially change the
amounts currently recorded in the financial statements. The financial
statements do not give effect to all adjustments to the carrying value of
the assets, or amounts and reclassification of liabilities that might be
necessary as a result of the bankruptcy proceeding. The appropriateness of
using the going concern basis is dependent upon, among other things,
confirmation of a plan of reorganization with the Company's creditors,
success of future operations and ability to generate sufficient cash from
operations and financing sources to meet the Company's obligations when such
obligations become due. In the opinion of management, all adjustments
(consisting of normal recurring adjustments) necessary for a fair
presentation of such information have been made. The financial statements,
as of July 28, 1996, do not include any adjustments that might be necessary
if the Company is unable to continue as a going concern.
These financial statements should be read in conjunction with the financial
statements and related notes contained in the Company's 1995 Form 10-K, to
which reference is made. Certain information normally included in financial
statements and related notes prepared in accordance with generally accepted
accounting principles has been condensed or omitted. Because of the
seasonal nature of the Company's business, the results for the interim
periods presented are not indicative of the results for a full fiscal year.
At the Company's request, the Bankruptcy Court established June 28, 1996 as
the deadline for creditors to file all pre-petition claims against the
Company (the "Bar Date"). On or before May 14, 1996, notices were mailed to
all known or potential creditors of the Company advising them that claims
against the Company must be submitted by the Bar Date. Subject to limited
exceptions, creditors who were required to file claims but failed to meet
the deadline are forever barred from voting upon or receiving distributions
under any plan of reorganization. Since the Bar Date, the Company has been
reviewing and reconciling the creditors proofs of claims that were filed by
the creditors.
One of the Company's customers accounted for approximately 12% of the
Company s revenues for the thirty-nine weeks ended July 28, 1996. No other
customer of the Company accounted for 6% or more of the Company's revenues
in the thirty-nine weeks ended July 28, 1996. One individual customer s
accounts receivable balance represents approximately 7% of gross accounts
receivable at July 28, 1996, and no other customer represented 4% or more of
gross accounts receivable at July 28, 1996.
2. Inventories are stated at the lower of cost, determined principally by the
LIFO method, or market and consist of (in thousands):
July 28, October 29,
1996 1995
---- ----
Raw materials and supplies $10,455 $10,583
Work-in-process 38,307 50,624
Finished products 10,181 16,874
Less market reserves (7,373) (8,611)
------- -------
Total 51,570 69,470
Difference between LIFO
carrying value and current
replacement cost 6,200 7,346
------- -------
Current replacement cost $57,770 $76,816
======= =======
Market reserves are estimated by the Company based, in part, on inventory
age as well as its intended in-use season (fall/winter or spring/summer).
During the thirteen weeks ended July 28, 1996, the Company increased
inventory market reserves by $2.5 million in connection with the Company's
assessment and evaluation of its business strategy which has resulted in the
Company continuing to reduce its product offerings. This has had the effect
of rendering many inventory units as either surplus or obsolete. During the
thirteen weeks ended July 28, 1996, the Company also sold certain yarn
inventory which had been previously identified as surplus or obsolete for
its net carrying value which was $3.1 million below its gross inventory
value. This transaction resulted in a release of yarn inventory market
reserves of $3.1 million and did not give rise to any loss during the
thirteen weeks ended July 28, 1996.
The reduction of inventory quantities has resulted in the liquidation of
LIFO inventory layers carried at lower costs prevailing in prior years. The
effect of this liquidation increased gross profit by $0.7 million for the
thirteen weeks ended July 28, 1996 and $1.1 million for the thirty-nine
weeks ended July 28, 1996.
3. Other assets consist of (in thousands):
July 28, October 29,
1996 1995
---- ----
Computer information systems,
net of accumulated amortization
of $4,137 and $3,861 $1,226 $ 832
Deferred financing costs, net of
amortization of $1,935 and
$1,293 881 1,196
Other 859 916
------ ------
Total $2,966 $2,944
====== ======
4. Accrued liabilities consist of (in thousands):
July 28, October 29,
1996 1995
---- ----
Salaries, wages and related
payroll taxes $ 1,464 $1,484
Incentive compensation 749 171
Vacation and holiday 1,118 1,988
Employee benefits plans 1,515 1,037
Interest on long-term debt 2,509 1,015
Medical insurance premiums 840 1,092
Professional fees 1,356 720
Environmental remediation 474 357
Utilities 1,052 663
Other 1,092 521
------- ------
Total $12,169 $9,048
======= ======
5. Long-term debt consists of (in thousands):
July 28, October 29,
1996 1995
----- -----
GE Capital DIP Facility $ 41,107 $ 9,434
GE Capital Facility - 38,626
Senior Secured Notes 26,994 27,000
Subordinated Notes 56,632 56,632
Equipment Facilities 6,345 7,451
Capital lease obligations 3,507 3,610
Other - 182
-------- --------
Total debt 134,585 142,935
Current portion of long-term debt (55,158) (61,001)
Subordinated Notes included in
liabilities subject to compromise (56,632) (56,632)
-------- --------
Total long-term debt $ 22,795 $ 25,302
======== ========
The Company was in default of substantially all of its pre-petition debt
agreements at July 28, 1996. All outstanding unsecured debt of the Company
has been presented in these financial statements as "Liabilities subject to
compromise".
The Company has obtained debtor-in-possession ("DIP") financing from General
Electric Capital Corporation ("GE Capital") under a revolving facility which
was approved by the Bankruptcy Court (the "DIP Facility"). The DIP Facility
provides up to $85 million (which includes a $10.0 million letter of credit
facility) under a borrowing base formula, less pre-petition advances and
outstanding letters of credit under the Company's then existing GE Capital
Facility. (Reference is made to Note 7 to the Company's annual financial
statements in the 1995 Form 10-K for discussions regarding the GE Capital
Facility.) The DIP Facility was amended on May 31, 1996 to, among other
things, cure the minimum EBITDA covenant violation that existed at April 28,
1996, set revised minimum EBITDA covenants and caps on eligible inventory
included in the borrowing base. The DIP Facility expires on October 31,
1996. The Company has developed its strategic plan for fiscal year 1997
which is the basis for negotiating an extension to the DIP Facility. The
Company expects to finalize such negotiations prior to the October 31, 1996
DIP Facility maturity date. Although the Company expects negotiations to be
complete by October 31, 1996, there can be no assurance that the terms of an
extension to the DIP Facility will be the same as the existing facility or
that an extension will be obtained by such date as such negotiations require
agreement between the Company and a lender.
Secured Claims are collateralized by substantially all of the assets of the
Company including accounts receivable, inventories and property, plant and
equipment. The Company has continued to accrue interest on most of its
secured debt obligations as management believes that in the majority of such
cases the collateral securing the secured debt obligations is sufficient to
cover the principal and interest portions of scheduled payments on such pre-
petition secured debt obligations. To the extent any claim secured by
assets of the Company is determined to exceed the value of the asset
securing it, such claims will be treated as an unsecured claim and not
entitled to interest accruing after the Bankruptcy Filing.
Outstanding borrowings (including outstanding letters of credit) are subject
to certain caps on categories of inventory and accounts receivable under the
DIP Facility. The Company's borrowing base is subject to reserves
determined by GE Capital in its sole discretion. At July 28, 1996, the
Company's loan availability as defined in the DIP Facility, in excess of
advances, and outstanding letters of credit, was approximately $24.5
million.
Borrowings under the DIP Facility bear interest, at the Company's option, at
a floating rate (which is based on a defined index rate) or a fixed rate
(which is based on LIBOR) payable monthly. The floating rate is 1.5% per
annum above the index rate, and the fixed rate is 3.0% per annum above
LIBOR. At July 28, 1996, the DIP Facility bore interest at the fixed rate
of 8.46% per annum through July 31, 1996 and was reset at 8.69% per annum on
August 1, 1996 through October 31, 1996.
Proceeds from the Company's ordinary operations are applied to reduce the
principal amount of borrowings outstanding under the DIP Facility. Unused
portions of the DIP Facility may be borrowed and reborrowed, subject to
availability in accordance with the then applicable commitment and borrowing
base limitations.
Subject to certain exceptions, the DIP Facility restricts, among other
things, the incurrence of indebtedness, the sale of assets, the incurrence
of liens, the making of certain restricted payments, the making of specified
investments, the payment of cash dividends and the making of certain
fundamental corporate changes and amendments to the Company's corporate
organizational and governance instruments. In addition, the Company is
required to satisfy, among other things, certain financial performance
criteria, including minimum EBITDA levels and maximum capital expenditure
levels.
The Company pays GE Capital, for the account of each of the lenders party to
the DIP Facility, a fee of 0.5% per annum on the average daily unused
portion of the DIP Facility. In addition, the Company paid GE Capital, for
its own account, an agency fee of $150,000 per annum and pays certain fees
in connection with extending and making available letters of credit. In
connection with entering into the DIP Facility, the Company paid GE Capital
$100,000 on September 22, 1995, $325,000 on February 15, 1996 and agreed to
pay $125,000 on October 31, 1996. The Company paid $75,000 to GE Capital on
August 1, 1996 in consideration for entering into an amendment to the DIP
Facility which, among other things, amends the minimum EBITDA covenant
requirements.
Reference is made to Note 7 to the Company's annual financial statements in
the 1995 Form 10-K for discussion regarding the Company's Senior Secured
Notes. The Company agreed to remit to holders of the Company s Senior
Secured Notes $600,000 on March 21, 1996 and, commencing in April 1996,
$100,000 at the end of each month through October 31, 1996. Such payments
represent "adequate protection" payments, as defined by the Bankruptcy Code,
for the use of the collateral securing the Senior Secured Notes. In
connection with such agreement, the Company also agreed to pay up to
$240,000 in appraisal fees and expenses and legal fees and expenses incurred
by certain of the holders of the Senior Secured Notes and the trustee. The
Company has applied adequate protection payments made as of July 28, 1996 to
accrued interest. However, final application as to principal and interest
of the adequate protection payments, including appraisal fees and expenses
and legal fees and expenses, will be subsequently determined pursuant to the
Bankruptcy Code.
As discussed in Note 7 to the Company's annual financial statements in the
1995 Form 10-K, the Company is a party to a loan and security agreement (the
"CIT Equipment Facility") with the CIT Group/Equipment Financing, Inc.
("CIT") which provided financing for the acquisition of, and to refinance
borrowings incurred to acquire various textile machinery and equipment. The
Company agreed to provide "adequate protection" payments to CIT in
connection with the CIT Equipment Facility. The agreement requires the
Company to remit monthly payments in arrears in the amount of $95,000 at the
end of each month commencing March 31, 1996 through October 31, 1996. The
Company also agreed to pay $81,000 in legal fees and disbursements incurred
by CIT. The Company has applied adequate protection payments made as of
July 28, 1996 first to accrued interest and secondly to outstanding
principal. However, final application as to principal and interest of the
adequate protection payments is to be subsequently determined pursuant to
the Bankruptcy Code.
The Company is a party to an equipment lease agreement ("Sanwa Capital
Lease") with Sanwa General Equipment Leasing ("Sanwa") which provided
financing for the acquisition of various textile machinery and equipment.
Pursuant to the Sanwa Capital Lease, commencing on September 30, 1994 and
through December 30, 1994, the Company acquired an aggregate of equipment
valued at $2.9 million at interest rates of 10.24% to 10.87% per annum.
Sanwa subsequently assigned its rights to the Sanwa Capital Lease to The
Provident Bank ("Provident"). Each equipment schedule under the Sanwa
Capital Lease is a five-year lease, secured by a first (and only) perfected
security interest in the equipment, and is payable in 60 consecutive and
equal rentals, payable monthly in arrears. At the Bankruptcy Filing date
the Company owed Provident $2.6 million in principal and accrued interest.
The Company agreed to provide "adequate protection" payments to Provident in
connection with the Sanwa Capital Lease. The agreement requires the Company
to remit monthly payments in arrears in the amount of $20,000 at the end of
each month commencing March 31, 1996 through October 31, 1996. Final
application as to principal and interest of the adequate protection payments
is to be subsequently determined pursuant to the Bankruptcy Code.
6. Per share and share information for the thirteen and thirty-nine weeks ended
July 28, 1996 and July 30, 1995 are based upon actual loss applicable to
common shareholders and the weighted average shares outstanding during the
periods.
7. As discussed in Note 12 to the Company's annual financial statements in the
1995 Form 10-K, the Company has accrued certain estimated costs for
environmental matters.
On December 29, 1995, the Environmental Protection Division of the Georgia
Department of Natural Resources (the "EPD") issued separate administrative
orders to the Company and J.P. Stevens & Co., Inc., ("J.P. Stevens")
(previous owner and operator of the Company s Dublin facility), which
related to two sites at the Company's Dublin facility. The orders required
the Company and J.P. Stevens to submit a compliance status report ("CSR")
and compliance status certification within 120 days from December 29, 1995
(i.e., by April 27, 1996) to the EPD that includes, among other things, a
description of the release, including its nature and extent, and suspected
or known source, quantity and date of the release. By letter dated February
2, 1996, the Company notified the EPD that it had not been able to secure
access to certain property on the western side of the Oconee River in order
to install groundwater monitoring wells. The EPD had previously indicated
that such wells would be necessary in order for the Company to submit a CSR.
Additionally, by letter dated March 27, 1996, the Company requested
clarification from the EPD concerning various technical issues relating to
these sites, the Burn Area (hereinafter defined) and other environmental
considerations at the facility. In a letter dated March 28, 1996 from the
EPD to the Company, the EPD requested that the Company provide additional
information by April 29, 1996 concerning its efforts to obtain access. In
this letter, the EPD also clarified that only groundwater, and not soil,
sampling would be required in order for the Company to complete a CSR for
the two sites. The Company responded to the EPD's March 28, 1996 letter by
letter dated April 25, 1996.
By letter dated April 29, 1996, the EPD responded to the Company's March 27,
1996 letter concerning various technical and off-site access issues. The
Company subsequently attended a meeting with the Director of the EPD and his
staff on May 6, 1996 in which these matters were further discussed. Based
on the EPD's letter and the discussions held on May 6, 1996, the Company
concluded that at least two more groundwater monitoring wells needed to be
installed and tested at the site before the EPD would agree that the nature
and extent of one of the two groundwater releases (the "TCE release") has
been determined. The Company installed and sampled the two groundwater
monitoring wells requested by the EPD. Furthermore, the EPD informed the
Company that it wanted the Company to take samples from the soil beneath the
location where the former dry cleaner was once located. The Company
attempted to do this testing, but found groundwater, and not unsaturated
soil, at this location; thus, the Company only took groundwater and not soil
samples from beneath the former dry cleaner area. TCE and a degradation
product, 1,1-dichloroethane, was detected in these groundwater samples, and
on July 31, 1996 the Company submitted a release notification to the EPD.
To date the EPD has not responded to this release notification.
With respect to the other groundwater release (the 1,1-DCA release along the
southern property boundary), the EPD described a number of options available
to the Company for resolving to the EPD's satisfaction that the release has
been fully delineated. Those options included modeling the groundwater in
the area of this release to demonstrate that the release has been delineated
and resampling the wells along the southern property boundary. The
resampling of these wells did not reflect any contamination and the Company
informed the EPD that it would proceed with modeling to confirm the
delineation of this release.
While the EPD's April 29, 1996 letter indicates that the EPD has not been
persuaded that an extension of the timetable provided in the administrative
order is appropriate, the EPD representative indicated that they had not yet
reviewed the Company s April 25, 1996 letter. The Director further
expressed that he was using his discretion not to take enforcement action
against the Company at this time. He stated that, when the Company began to
implement and move forward with the action items discussed at the May 6,
1996 meeting, he would consider revising the schedule in the administrative
order of these releases. By letter dated August 1, 1996, the EPD agreed to
an extension until August 16, 1996 for the Company to submit the CSR for the
TCE and 1,1-DCA releases, and the Company has complied with this deadline.
Based on the additional work required by the EPD, the Company increased its
accrual for environmental cost by $0.2 million during the thirteen-week
period ended April 28, 1996. Subject to additional communication with the
EPD, the Company believes that the $0.5 million accrued environmental cost
as of July 28, 1996 is sufficient to cover the Company's known and probable
responsibilities related to the TCE and 1,1-DCA releases.
The EPD's letters of December 29, 1995 also informed the Company and J.P.
Stevens that a release exceeding a reportable quantity had occurred in an
area where various waste materials were reportedly disposed and burned by
J.P. Stevens (the "Burn Area") and that the Burn Area was being listed on
the Georgia Hazardous Site Inventory. Both the Company and J.P. Stevens
were requested to submit a CSR and compliance status certification for the
Burn Area by April 11, 1996. The extent and scope of such remediation
investigation has not been determined, and the cost can not currently be
estimated. Preparation of a CSR would first require completion of a
remediation investigation of the Burn Area, which will be performed during
fiscal year 1996. The two companies responded separately to the EPD
indicating their belief that the April 11, 1996 due date was unrealistic.
The Company requested 330 days for submittal of the CSR. By letter dated
March 27, 1996, the Company reminded the EPD that the agency had not
responded to its request for an extension for submitting the CSR for the
Burn Area. In its April 29, 1996 letter to the Company, the EPD indicated
that it is not presently considering enforcement action regarding the missed
April 11, 1996 deadline for the Burn Area "prior to June 3, 1996" to allow
extra time for the Company and J.P. Stevens to reach an agreement concerning
an allocation of work under the administrative order.
On May 22, 1996, J.P. Stevens, through its counsel, informed the EPD that it
was negotiating with the Company an allocation of the work required under
the administrative order and indicated that implementation of any
agreement(s) resulting from the negotiations would be dependent upon, among
other things, the EPD's recognition of the agreement(s) between J.P. Stevens
and Forstmann. On May 31, 1996, the EPD informed J.P. Stevens that it was
encouraged by the prospect of cooperation between the two companies and that
it was willing to recognize an agreement between the two companies that
would lead to full compliance with the Hazardous Site Response Act. The EPD
stated that, upon its review of the agreement between the companies, it
would propose consent orders to them. Until then, however, the
administrative orders would remain in effect. The Company completed
negotiation of the agreement with J.P. Stevens, but has recently requested
certain additional changes from J.P. Stevens which have not yet been
incorporated into the agreement. Under the agreement, the Company will
assume responsibility for the CSR for the TCE and 1,1-DCA release and J.P.
Stevens will assume responsibility for the CSR for the Burn Area. The
agreement must undergo the bankruptcy approval process, which environmental
counsel for the Company will initiate with the Company s bankruptcy counsel
once the parties reach agreement on the outstanding issues.
After completion of the remediation investigation, the Company will be able
to estimate the expected future costs associated with the Burn Area. Based
on previous experience with environmental issues at the Company's
facilities, subject to responsibilities borne by J.P. Stevens, if any,
management believes that environmental costs associated with the Burn Area
may be material and may have a material adverse effect on the Company's
liquidity and financial position. The Company has been informed that the
EPD may require demonstration of financial assurance upon the conclusion of
the Company's Bankruptcy Filing.
8. Liabilities subject to compromise consists of (in thousands):
July 28, October 29,
1996 1995
---- ----
Subordinated Notes, including
accrued pre-petition interest $60,330 $60,330
Trade accounts payable 22,498 22,808
Priority tax claim 288 1,008
Accrued severance 1,498 1,498
Deferred rental and other
lease obligations 2,892 2,781
Accrued additional pension liability
in excess of accumulated benefit
obligation 2,025 2,025
Other 283 309
------- -------
Total $89,814 $90,759
======= =======
Unsecured claims against the Company in existence prior to the Bankruptcy
Filing are included in "Liabilities subject to compromise". Additional
claims (Liabilities subject to compromise) may arise or become fixed
subsequent to the filing date resulting from rejection of executory
contracts, including leases, from the determination by the Court (or agreed
to by parties in interest) of allowed claims for contingencies and other
disputed and unliquidated amounts and from the determination of unsecured
deficiency claims in respect of claims secured by the Company's assets
("Secured Claims"). Consequently, the amount included in the balance sheet
as Liabilities subject to compromise may be subject to further adjustments.
A plan of reorganization may require certain compromise of liabilities
(including Secured Claims) that, as of July 28, 1996, are not classified as
Liabilities subject to compromise. The Company's ability to compromise
Secured Claims without the consent of the holder is subject to greater
restrictions than in the case of unsecured claims. Parties holding Secured
Claims have the right to move the court for relief from the stay, which
relief may be granted upon satisfaction of certain statutory requirements.
Secured Claims are collateralized by substantially all of the assets of the
Company, including, accounts receivable, inventories and property, plant and
equipment.
At the Company's request, the Bankruptcy Court established June 28, 1996 as
the deadline for creditors to file all pre-petition claims against the
Company (the Bar Date ). On or before May 14, 1996, notices were mailed to
all known or potential creditors of the Company advising them that claims
against the Company must be submitted by the Bar Date. Subject to limited
exceptions, creditors who were required to file claims but failed to meet
the deadline are forever barred from voting upon or receiving distributions
under any plan of reorganization. Since the Bar Date, the Company has been
reviewing and reconciling the creditors proofs of claims that were filed by
the creditors.
9. In accordance with SOP 90-7, professional fees, asset impairments and
restructuring charges directly related to the Bankruptcy Filing and related
reorganization proceedings have been segregated from normal operations
during the thirteen and thirty-nine weeks ended July 28, 1996 and consists
of (in thousands):
Thirteen Weeks Thirty-Nine Weeks
Ended Ended
July 28, 1996 July 28, 1996
------------- -------------
Professional fees $ 631 $3,206
Impairment of assets
(See Note 2) 2,500 2,500
Expense incurred due to the
rejection and amendment
of executory contracts 6 925
Default interest expense 100 560
Severance expenses (74) 304
Other 96 197
------ ------
Total $3,259 $7,692
====== ======
During the thirteen weeks ended April 28, 1996, the Company announced its
intention to close the manufacturing operations in the Tifton Plant. The
closing commenced in late July 1996 and is estimated to be completed in
November 1996. The Company expects to incur relocation expenses of
approximately $0.7 million in connection with the relocation of certain of
its machinery and equipment from the Tifton Plant to the Dublin Plant. Such
expenses will be reflected as reorganization items in the period incurred.
At July 28, 1996, the Tifton Facility (land and building) had a net book
value of $2.3 million and is currently being held for sale.
Item 2.
FORSTMANN & COMPANY, INC.
(DEBTOR-IN-POSSESSION)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Reference is made to Item 7 - "Management s Discussion and Analysis of
Financial Condition and Results of Operations" contained in the 1995 Form 10-K
for discussion of the Company's financial condition as of October 29, 1995,
including a discussion of the Company's anticipated liquidity and working
capital requirements during its 1996 fiscal year.
Financial Condition and Liquidity
- ---------------------------------
The Company's expectations and beliefs expressed below regarding liquidity
and capital resources for fiscal year 1996 constitute "forward-looking
statements" within the meaning of Section 21E of the Securities Exchange Act of
1934. These "forward-looking statements" are accompanied by cautionary
statements identifying important factors that, in addition to the Company's
bankruptcy proceeding, could cause actual results to differ materially from
those expressed in such "forward-looking statements". Such factors should not
be construed as exhaustive.
As more thoroughly described in Note 1 to the financial statements contained
in Item 1 of this Form 10-Q, on September 22, 1995, the Company filed a petition
for protection under Chapter 11 of the United States Bankruptcy Code (the
"Bankruptcy Code") with the U.S. Bankruptcy Court for the Southern District of
New York (the "Bankruptcy Filing"). The Company has obtained debtor-in-
possession ("DIP") financing from General Electric Capital Corporation ("GE
Capital") under a revolving credit facility (the "DIP Facility"). The DIP
Facility provides up to $85 million (which includes a $10.0 million letter of
credit facility) under a borrowing base formula, less pre-petition advances and
outstanding letters of credit under the Company's then existing revolving credit
facility. As of July 28, 1996, no pre-petition advances under such revolving
credit facility remained outstanding. The Company is in default of
substantially all of its pre-petition debt agreements at July 28, 1996 and, as
more thoroughly described in Note 5 to the financial statements, at April 28,
1996, the Company was in violation of the minimum EBITDA covenant requirement
under the DIP Facility. The DIP Facility was amended on May 31, 1996 to, among
other things, cure the minimum EBITDA covenant violation that existed at April
28, 1996 as well as set revised minimum EBITDA covenants and caps on eligible
inventory. The DIP Facility expires on October 31, 1996. The Company has
developed its strategic plan for fiscal year 1997 which is the basis for
negotiating an extension to the DIP Facility. The Company expects to finalize
such negotiations prior to the October 31, 1996 DIP Facility maturity date.
Although the Company expects negotiations to be complete by October 31, 1996,
there can be no assurance that the terms of an extension to the DIP Facility
will be the same as the existing facility or that an extension will be obtained
by such date as such negotiations require agreement between the Company and a
lender. During the thirty-nine week period ended July 28, 1996, (the "1996
Period"), the Company agreed to remit to holders of certain of the Company's
secured debt obligations and lenders under certain secured financing
arrangements "adequate protection" payments, as defined by the Bankruptcy Code,
for use of the collateral securing such secured debt obligations. Such
agreements, as more thoroughly described in Note 5 to the financial statements,
require aggregate payments of $2.3 million through October 31, 1996.
The Company's operations and investing activities are funded through a
combination of borrowings and internally generated funds. During the 1996
Period, operations generated approximately $9.4 million, an increase of
approximately $11.1 million from the thirty-nine week period ended July 30, 1995
(the "1995 Period"). This improvement was primarily due to a reduction of
inventory of approximately $17.9 million in the 1996 Period as compared to an
increase in inventory of $2.6 million during the 1995 Period and an increase in
accounts receivable of $14.6 million in the 1996 Period compared to an increase
of $15.4 million during the 1995 Period. This $21.3 million improvement in cash
flow was somewhat offset by a $7.1 million decrease in accounts payable, accrued
liabilities and interest payable in the 1996 Period as compared to the 1995
Period, and the $3.9 million higher loss in the 1996 Period. Reduced
inventories in the 1996 Period as compared to the 1995 Period are attributable
to lower sales which resulted in the Company reducing its manufacturing
operations to more closely match production to sales and open customer orders
and sales of certain yarn inventory as described in Note 2 to the above
financial statements. The reduction in manufacturing operations contributed to
the $8.0 million loss realized in the 1996 Period. See "Results of Operations"
for further discussion of the factors contributing to such loss.
Net cash used by investing activities was $1.0 million in the 1996 Period as
compared to $10.5 million in the 1995 Period. This $9.5 million decline is
primarily attributable to lower capital expenditures due to the curtailment of
the Company s $100 million capital investment program as a result of Bankruptcy
Filing. Under the terms of the DIP Facility, capital expenditures are limited
and the Company is prohibited from entering into any additional capital lease
obligations. Further, the DIP Facility prohibits the Company from entering into
any operating lease obligations other than for replacement of existing operating
lease obligations where the minimum annual rental payments under the new
operating lease does not exceed the old operating lease by $50,000 or more.
Capital additions, including capital lease obligations, were $13.7 million for
fiscal year 1995. The Company, for the reasons indicated above, expects
spending for capital expenditures, primarily machinery and equipment, in fiscal
year 1996 to be less than $3.4 million.
During the 1996 Period, $8.4 million in cash was repaid under financing
arrangements whereas during the 1995 Period $12.2 million was provided by
financing activities. The Company, due to cost savings initiatives implemented
in fiscal year 1996, more closely matched production and sourcing to its sales
and order base, did not seek additional outside sources of financing in the 1996
Period as it did in the 1995 Period. In the 1995 Period the Company secured a
$7.5 million term loan, of which $2.5 million was repaid during the thirteen
week period ended July 30, 1995, and $3.1 million in equipment financing to
cover its additional cash needs.
Working capital at July 28, 1996 was $41.5 million, a $3.2 million decrease
from October 29, 1995. This decrease is primarily attributable to a $17.9
million decrease in inventories which was offset by a $13.5 million net increase
in accounts receivable and a $1.6 million decrease in current liabilities.
The Company's business is seasonal, with the vast majority of orders for
woolen fabrics placed from December through April for manufacturers to produce
apparel for retail sale during the fall and winter months. As a result of
normal payment terms for such fabrics, the Company historically receives the
major portion of its payments thereon during July through October. This
seasonal pattern is further influenced by the industry practice of providing
coating fabric customers with favorable billing terms (referred to as "dating"),
which permit payment 60 (sixty) days beyond July 1 for invoices billed in
January through June. Accounts receivable at July 28, 1996 included $17.6
million of receivables with dating, a decrease of $3.7 million compared to July
30, 1995. This decrease is primarily attributable to sales in the fourth
quarter of fiscal year 1994 which were made on extended credit terms due to
competitive pressures and lower coating sales of approximately 8.6% in the 1996
Period compared to the 1995 Period. The Company did not grant such extended
credit terms during the fourth quarter of fiscal year 1995 due to the Company s
financial condition and strained liquidity.
The Company believes that cash generated from operations and borrowings
under the DIP Facility will be sufficient to fund its fiscal year 1996 working
capital and capital expenditures requirements. However, expected cash flows
from operations are dependent upon achieving sales expectations during fiscal
year 1996 which are influenced by market conditions, including apparel sales at
retail, that are beyond the control of the Company. Due to the seasonal nature
of the Company's core woolen and worsted business, the Company's borrowings
under its DIP Facility will tend to increase during the second and third quarter
of the fiscal year until the fourth quarter, when, at year-end, borrowings will
tend to be the lowest. However, if the Company is unable to reduce its working
capital needs, borrowings at the end of fiscal year 1996 may be higher than at
the beginning of fiscal year 1996 or higher during various times within fiscal
year 1996 than comparable periods within fiscal year 1995.
The sales order backlog at September 1, 1996 was $46.0 million as compared
to $38.7 million at the same time a year earlier. The increase is primarily
attributable to increases in government, coating, menswear and specialty fabrics
which were somewhat offset by a decline in the womenswear backlog. Coating
backlog increased as a result of retail sales demand resulting in coating
manufacturer s ordering more fabric in anticipation of re-orders at retail. The
menswear backlog increased over last year due to a shift in buying patterns
relating to the Spring season and an improvement in menswear market conditions.
Specialty fabrics backlog compared to last year improved due to a stabilization
in the baseball cap market. The decline in womenswear backlog compared to the
same time one year ago is the result of certain of the Company's customers
delaying orders due to the uncertainty in the retail womenswear market for
certain products. The Company believes that it may receive some of these
delayed orders in future months however, no assurance can be made that these
orders will be received as these orders are dependent on developments in the
womenswear market. The decline in the womenswear backlog was somewhat offset by
a certain customers order being placed in the 1996 Period that is scheduled for
delivery from November through May totaling approximately $10.2 million.
The Company purchases a significant amount of its raw wool inventory from
Australia. Since all of the Company's forward purchase commitments for raw wool
are denominated in U.S. dollars, there is no actual currency exposure on
outstanding contracts. However, future changes in the relative exchange rates
between United States and Australian dollars can materially affect the Company's
results of operations for financial reporting purposes. Based on wool costs
incurred during the 1996 Period and the Company's forward purchase commitments
and current wool market trends, the Company expects wool costs to increase
approximately 10% in fiscal year 1996 as compared to fiscal year 1995.
Results of OPERATIONS
- ---------------------
The 1996 Thirty-Nine Week Period (the "1996 Period") Compared to the 1995
Thirty-Nine Week Period (the "1995 Period")
NET sales for the 1996 Period were $153.4 million, a decrease of 15.5% from
the 1995 Period. Total yards of fabric sold decreased 16.9% during the 1996
Period. However, due to shifts in product mix, the average per yard selling
price increased. The decrease in sales was due to a decrease in the sales in
most of the Company's merchandising lines. Such decline in sales is
attributable to the sluggishness of retail apparel sales, as well as the
continued economic downturn in the apparel industries that the Company serves.
Excluding government sales ($5.9 million in the 1996 Period and $3.7 million in
the 1995 Period), net sales for the 1996 Period decreased 17.0% from the 1995
Period.
Cost of goods sold decreased $21.6 million to $132.4 million during the 1996
Period as a result of the decline in sales combined with the Company s cost
reduction initiatives. Gross profit decreased $6.6 million or 23.9% to $21.0
million in the 1996 Period, and gross profit margin for the 1996 Period was
13.7% compared to 15.2% for the 1995 Period. The decline in gross profit is due
to the decline in sales of $28.1 million during the 1996 Period, an approximate
10% increase in wool costs and an approximate 26% decline in manufacturing
production during the 1996 Period which generated an approximate $3.3 million
unfavorable fluctuation in manufacturing variances primarily associated with
unabsorbed fixed manufacturing costs (principally depreciation and amortization
and salaried employees associated with the Company's manufacturing operations).
The Company slowed its manufacturing operations during the 1996 Period in
response to lower sales and the uncertainty in retail apparel sales and its
effect on the Company s customer s financial operations. Such slow down in the
Company s manufacturing operations resulted in gross inventories being
approximately $19.4 million lower at July 28, 1996 as compared to July 30, 1995.
Selling, general and administrative expenses, excluding the provision for
uncollectible accounts, decreased 23.7% to $13.2 million in the 1996 Period
compared to $17.3 million in the 1995 Period. The majority of the decrease in
the 1996 Period is due to savings being recognized as a result of organizational
changes implemented during the 1996 Period.
The provision for uncollectible accounts decreased from $1.7 million in the
1995 Period to $1.1 million in the 1996 Period. Such decrease is primarily
attributable to the Company increasing its allowance for uncollectible accounts
during the 1995 Period in connection with two of the Company's customers filing
for protection under Chapter 11 of the U.S. Bankruptcy Code.
Interest expense for the 1996 Period was $7.0 million or $8.3 million lower
than the 1995 Period. This decrease is primarily due to the Company no longer
accruing interest on its Subordinated Notes as a result of the Bankruptcy Filing
and reduction in the Company's secured borrowings primarily as a result of lower
inventories in the 1996 Period as compared to the 1995 Period.
In the 1995 Period, the Company recognized an income tax benefit at an
effective income tax rate of 39.5%. During fiscal year 1995 the Company fully
utilized its net operating loss carrybacks as permitted by the Internal Revenue
Code. Accordingly, during fiscal year 1996, no income tax benefit can be
recognized from the realization of net operating losses.
Preferred stock in-kind dividends and accretion to redemption value was zero
in the 1996 Period compared to $0.2 million in the 1995 Period. As a result of
the Bankruptcy Filing, the Company is no longer accruing the dividend due under
the redeemable preferred stock and accreting the recorded balance to redemption
value. The redeemable preferred stock is subject to compromise in the
Bankruptcy Filing. The loss applicable to common shareholders was $8.0 million
in the 1996 Period compared to $4.2 million in the 1995 Period.
The Thirteen Weeks Ended July 28, 1996 (the "1996 Third Quarter") Compared to
the Thirteen Weeks Ended July 30, 1995 (the "1995 Third Quarter")
NET sales for the 1996 Third Quarter were $58.0 million, a decrease of 15.4%
from the 1995 Third Quarter. Total yards of fabric sold decreased approximately
16.6% during the 1996 Third Quarter. Such decrease is primarily attributable to
decreases in woolen and worsted menswear and womenswear worsted apparel fabrics,
which decreases are primarily due to the continuing sluggishness of retail
apparel sales. The most significant decline occurred in women's worsted fabrics
which declined by 17.1% during the 1996 Third Quarter. Gross profit increased
0.8% in the 1996 Third Quarter to $9.2 million. The gross profit margin for the
1996 Third Quarter was 15.8%, compared to 13.2% for the 1995 Third Quarter.
Through a focused effort of reducing fixed and variable costs, the gross profit
margin in the 1996 Third Quarter improved. Lower costs have been primarily
achieved through organizational changes.
Selling, general and administrative expenses, excluding the provision for
doubtful accounts, was $4.2 million in the 1996 Third Quarter, compared to $6.6
million in the 1995 Third Quarter. The decrease in selling, general and
administrative expenses is due to the cost savings initiatives implemented
during the Company's reorganization process.
The provision for uncollectible accounts was approximately $0.5 million in
the 1996 Third Quarter compared to $1.2 million in the 1995 Third Quarter. The
Company establishes a specific allowance for uncollectible accounts based on its
quarterly review and assessment of the collectibility of aged balances included
in accounts receivable. The decrease in the 1996 Third Quarter compared to the
1995 Third Quarter is primarily attributable to certain of the Company s
customers seeking protection under Chapter 11 of the U.S. Bankruptcy Code during
the 1995 Third Quarter. Additionally, the Company establishes a general
allowance for uncollectible accounts based, in part, on historical trends and
the status of the economy and its effect on the Company's customers.
Interest expense for the 1996 Third Quarter was $2.4 million or $3.3 million
lower than the 1995 Third Quarter, primarily due to the same factors that
contributed to the decrease in interest expense during the 1996 Period.
In the 1995 Third Quarter, the Company recognized an income tax benefit at
an effective tax rate of 39.5% on loss before income taxes. As discussed in the
1996 Period, the Company did not recognize an income tax benefit in the 1996
Third Quarter.
Preferred Stock in-kind dividends and accretion to redemption value was zero
in the 1996 Third Quarter compared to $0.1 million in the 1996 Third Quarter.
As a result of the foregoing, the Company's loss applicable to common
shareholder decreased $1.6 million to $1.1 million in the 1996 Third Quarter,
compared to a loss applicable to common shareholders of $2.7 million in the 1995
Third Quarter.
PART II -- OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K:
(a) Exhibits
4 Stipulation providing adequate protection between Forstmann &
Co., Inc. and The Provident Bank dated July 25, 1996 as approved
by the United States Bankruptcy Court Southern District of New
York on August 22, 1996.
11 Statement re computation of per share earnings - not required
since such computation can be clearly determined from the
material contained herein.
15 Independent Accountants' Report, dated September 6, 1996
from Deloitte & Touche LLP to Forstmann & Company, Inc.
23 Letter in lieu of consent of Deloitte & Touche LLP.
27 Financial Data Schedule
(b) Current Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements 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.
FORSTMANN & COMPANY, INC.
(Registrant)
/s/ Rodney J. Peckham
------------------------------
Rodney J. Peckham
Chief Financial Officer
September 10, 1996
- ------------------
Date
EXHIBIT INDEX
Exhibit Sequential
No. Description Page No.
- ------------------------------------------------------------------------------
4 Stipulation providing adequate protection between 24
Forstmann & Co., Inc. and The Provident Bank dated
July 25, 1996 as approved by the United States
Bankruptcy Court Southern District of New York on
August 22, 1996.
15 Independent Accountants' Report, dated 27
September 6, 1996, from Deloitte & Touche
LLP to Forstmann & Company, Inc.
23 Letter in lieu of consent of Deloitte & Touche LLP. 28
27 Financial Data Schedule 29
Exhibit 15
INDEPENDENT ACCOUNTANTS' REPORT
TO the Board of Directors and Shareholders of
FORSTMANN & Company, Inc. (Debtor-in-Possession):
We have reviewed the accompanying condensed balance sheet of Forstmann &
Company, Inc. (Debtor-in-Possession) as of July 28, 1996 and the related
condensed statements of operations for the thirteen and thirty-nine weeks ended
July 28, 1996 and July 30, 1995 and cash flows for the thirty-nine weeks ended
July 28, 1996 and July 30, 1995 and the condensed statement of changes in
shareholders' equity (deficit) for the thirty-nine weeks ended July 28, 1996.
These financial statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data, and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to such condensed financial statements for them to be in conformity with
generally accepted accounting principles.
The accompanying condensed financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Notes 1 and 5 to
the condensed financial statements, the Company was in violation of
substantially all of its debt agreements at July 28, 1996, has experienced a
significant decline in operating results and has filed for reorganization under
Chapter 11 of the United States Bankruptcy Code. Such conditions raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans concerning these matters are also described in Note 1.
We have previously audited, in accordance with generally accepted auditing
standards, the balance sheet of Forstmann & Company, Inc. as of October 29, 1995
and the related statements of operations, shareholders' equity, and cash flows
for the fifty-two weeks then ended (not presented herein); and in our report
dated January 26, 1996, we expressed an unqualified opinion on those financial
statements and included an explanatory paragraph concerning matters that raise
substantial doubt about the Company's ability to continue as a going concern.
In our opinion, the information set forth in the accompanying condensed balance
sheet as of October 29, 1995 is fairly stated, in all material respects, in
relation to the balance sheet from which it has been derived.
/s/ Deloitte & Touche LLP
Atlanta, Georgia
September 6, 199
Exhibit 23
September 11, 1996
Forstmann & Company, Inc.
1155 Avenue of the Americas
New York, NY 10036
Dear Sirs:
We have made a review, in accordance with standards established by the American
Institute of Certified Public Accountants, of the unaudited interim financial
information of Forstmann & Company, Inc. (Debtor-in-Possession) for the periods
ended July 28, 1996 and July 30, 1995, as indicated in our report dated
September 6, 1996 (which included an explanatory paragraph concerning matters
that raise substantial doubt about the Company s ability to continue as a going
concern); because we did not perform an audit, we expressed no opinion on that
information.
We are aware that our report referred to above, which was included in your
Quarterly Report on Form 10-Q for the quarter ended July 28, 1996, is
incorporated by reference in Registration Statement No. 33-57643 on Form S-8.
We also are aware that the aforementioned report, pursuant to Rule 436(c) under
the Securities Act, is not considered a part of the Registration Statement
prepared or certified by an accountant or a report prepared or certified by an
accountant within the meaning of Sections 7 and 11 of that Act.
Yours truly,
/s/Deloitte & Touche LLP
Exhibit 4
UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF NEW YORK
- ------------------------------ ---------------X
In re: :
FORSTMANN & COMPANY, INC., : Chapter 11
DEBTOR. : Case No. 95 B 44190 (JLG)
- ----------------------------------------------X
STIPULATION AND ORDER PROVIDING ADEQUATE PROTECTION
- ---------------------------------------------------
WHEREAS, on September 22, 1995 (the "Petition Date"), Forstmann & Company,
Inc., the debtor and debtor in possession in the above-captioned case (the
"Debtor"), filed its petition for relief under Chapter 11 of the Bankruptcy
Code;
WHEREAS, prior to the Petition Date, the Debtor and Sanwa General Equipment
Leasing ("Sanwa") entered into an Equipment Lease Agreement, dated as of June 1,
1994 (the "Sanwa Agreement"), whereby Sanwa agreed to finance certain machinery
and equipment described in Equipment Schedule No. 1 and Equipment Schedule No. 2
to the Sanwa Agreement (the "Equipment") in exchange for monthly payments in the
aggregate amount of $62,770.26, payable in arrears;
WHEREAS, pursuant to Paragraphs 5 and 10 of the Sanwa Agreement, the Debtor
granted Sanwa a purchase money security interest in, and lien upon, the
Equipment,
WHEREAS, prior to the Petition Date, Sanwa perfected its security interest
in the Equipment by filing Uniform Commercial Code financing statements in all
necessary jurisdictions;
WHEREAS, prior to the Petition Date, Sanwa assigned all of its right, title
and interest in the Sanwa Agreement to The Provident Bank ("Provident");
WHEREAS, subsequent to the Petition Date, the Debtor ceased making rental
payments to Provident and Provident has alleged that the Debtor is in default
under the Sanwa Agreement;
WHEREAS, as of the Petition Date and through the date hereof, the Debtor
has been in possession of and has continued to use the Equipment;
WHEREAS, a portion of the Equipment is currently located at the Debtor's
facility in Tifton, Georgia;
WHEREAS, the Debtor intends to close the Tifton facility and consolidate
the manufacturing operations currently located in that facility at its facility
in Dublin, Georgia;
WHEREAS, in connection with this consolidation, the Debtor intends to move
certain items of Equipment currently located at the Tifton facility to the
Dublin facility (the "Equipment Relocation");
NOW, THEREFORE, in consideration of the foregoing and other good and valuable
consideration, the receipt and sufficiency of which is hereby acknowledged, the
Debtor and Provident hereby agree as follows:
1. The Debtor and Provident agree that the Sanwa Agreement constitutes a
capital lease or secured financing and is not entitled to the protections
accorded to unexpired leases under Section 365 of the Bankruptcy Code. Nothing
herein shall constitute an assumption of the Sanwa agreement.
2. The Debtor acknowledges and agrees that Provident has a duly perfected,
valid and enforceable security interest in the Equipment.
3. Provident consents to the Debtor's continued retention and use of the
Equipment until the termination of this Stipulation. Provident also consents to
the Equipment Relocation, provided that the Equipment to be moved is insured
for at least its replacement value against hazards encountered in transit
pursuant to the Transit Endorsement in the Debtor's property insurance
policy issued by Hartford Insurance Company (Policy No. 10URHML7000)
throughout the Equipment Relocation.
4. As adequate protection under Sections 361, 362 and 363 of the Bankruptcy
Code for, among other things, the use by the Debtor of the Equipment, the Debtor
shall make a monthly payment to Provident on the last business day of each month
in arrears in the amount of $20,000 (each, an "Adequate Protection Payment" and
collectively, the "Adequate Protection Payments"), commencing as of March 31,
1996 (for the one month period commencing March 1, 1996). Except as set forth
herein, Provident hereby waives any right to adequate protection for the period
commencing on the Petition Date through March 1, 1996.
5. Upon approval of the Stipulation by the Bankruptcy Court, all Adequate
Protection Payments which otherwise have accrued and would have been payable
hereunder prior to such approval shall be paid by the Debtor to Provident within
three (3) business days of such approval.
6. The Debtor shall continue making Adequate Protection Payments hereunder
until the earliest of (i) the maturity of all indebtedness of the Debtor
underthe debtor-in-possession financing facility provided to the Debtor by
General Electric Capital Corporation, including any renewals or extensions
thereof, as approved by Final Order of the Bankruptcy Court on October 31, 1995
or any substantially equivalent replacement debtor-in-possession financing
facility (the "Dip Facility"), (ii) the written agreement of Provident and the
Debtor to terminate the Adequate Protection Payments or (iii) an order of the
Bankruptcy Court terminating or reducing the Adequate Protection Payments.
Unless and until this Stipulation shall expire or terminate, Provident shall not
seek any other or further adequate protection with respect to the Debtor's use
of the Equipment.
7. Provident hereby waives any claim to late charges; default interest or
penalties to which it may be entitled under the Sanwa Agreement or otherwise for
the period commencing on the Petition Date through the termination date of the
Stipulation.
8. Except to the extent specifically provided herein, the Debtor and each
party in interest reserve all of their respective rights and claims, including,
without limitation, the right to seek the return of the Adequate Protection
Payments where appropriate and all rights and claims with respect to (i) the
determination pursuant to the United States Bankruptcy Code (including, without
limitation, Section 506) of the proper allocation of the Adequate Protection
Payments between principal, interest and costs, if any, of the obligations owed
to Provident and (ii) the priority of Provident's perfected security interest
in the Equipment.
9. Upon the execution of this Stipulation, the Debtor shall apply to
Bankruptcy Court within five (5) days, in accordance with rules of the
Bankruptcy Court, for approval of this Stipulation.
10. This Stipulation may not be modified, except in a writing signed by
the Debtor and Provident and consented to by the Official Committee of Unsecured
Creditors, which modification shall be upon notice to parties in interest and
subject to the approval of the Bankruptcy Court.
11. Upon the occurrence of any of the following events (each, an "Event of
Default"), each of which shall also constitute an "Event of Default" under and
as defined in the Sanwa Agreement: (a) a default in payment of any amount due
under this Stipulation and such default shall continue for five (5) consecutive
days, (b) a breach by the Debtor of any material term or condition of this
Stipulation and such breach shall continue for ten (10) consecutive days; (c)
the dismissal of the Debtor's Chapter 11 case or the conversion thereof to a
case under Chapter 7 of the Bankruptcy Code or (d) the termination or cessation
of substantially all of the Debtor's business operations and subsequent notice
by Provident to the Debtor of the termination of this Stipulation; then, in
addition to any other rights or remedies granted to Provident under this
Stipulation, and without further Order of the Bankruptcy Court, Provident may
terminate this stipulation and upon fifteen (15) days notice to the Debtor, move
for relief from any stay, including without limitation, any stay under Section
362 of the Bankruptcy Code with respect to the exercise of Provident's remedies
under this Stipulation, the Sanwa Agreement or otherwise, or with respect to the
enforcement of Provident's rights to obtain possession, sell, lease, transfer or
otherwise dispose of the Equipment.
12. Except as specifically amended herein or as modified by the Bankruptcy
Code, the Sanwa Agreement shall remain in full force and effect in accordance
with its terms and the Debtor specifically agrees to (a) maintain insurance for
the Equipment pursuant to Paragraph 11 of the Sanwa Agreement, (b) permit
Provident to inspect the Equipment pursuant to Paragraph 7 of the Sanwa
Agreement and (c) execute such other documents, agreements or instruments as are
reasonably necessary to carry out the terms and provisions hereof.
13. This Stipulation, and each of its terms and conditions, is subject to
the approval of the Bankruptcy Court. In the event that this Stipulation is not
approved by the Bankruptcy Court, this Stipulation shall be null and void and of
no force and effect.
Dated: New York, New York
July 25, 1996
DEBEVOISE & PLIMPTON KEATING, MUETHING & KLEKAMP
By: /s/ Richard Hahn By : /s/ Kenneth P. Kreider
----------------- ----------------------
Richard F. Hahn Kenneth P. Kreider
875 Third Avenue 1800 Provident Tower
New York, NY 10022 One East Fourth Street
(212) 909 - 6000 Cincinnati, Ohio 45202
Attorneys for the Debtor Attorneys for the Provident
and Debtor in Possession Bank
SO ORDERED
/s/ James L. Garrity, Jr. Dated: August 22, 1996
- -------------------------
UNITED STATES BANKRUPTCY JUDGE<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Forstmann &
Company, Inc.'s condensed financial statements for the thirty-nine weeks ended
July 28, 1996 and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> NOV-03-1996
<PERIOD-START> OCT-30-1995
<PERIOD-END> JUL-28-1996
<CASH> 49
<SECURITIES> 0
<RECEIVABLES> 59,475
<ALLOWANCES> 3,899
<INVENTORY> 51,570
<CURRENT-ASSETS> 111,670
<PP&E> 70,502
<DEPRECIATION> 40,776
<TOTAL-ASSETS> 185,138
<CURRENT-LIABILITIES> 70,186
<BONDS> 22,795
2,655
0
<COMMON> 6
<OTHER-SE> (318)
<TOTAL-LIABILITY-AND-EQUITY> 185,138
<SALES> 153,402
<TOTAL-REVENUES> 153,402
<CGS> 132,417
<TOTAL-COSTS> 132,417
<OTHER-EXPENSES> 13,207
<LOSS-PROVISION> 1,064
<INTEREST-EXPENSE> 7,001
<INCOME-PRETAX> (287)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 7,692
<CHANGES> 0
<NET-INCOME> (7,979)
<EPS-PRIMARY> (1.42)
<EPS-DILUTED> (1.42)
</TABLE>
