[ As filed with the Securities and Exchange Commission on June 18, 1997.]
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 May 4, 1997
-----------
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) (Zip Code)
(Registrant's telephone number, including area code) (212) 642-6900
--------------
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 June 18, 1997.
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 <PAGE>
For the quarterly period ended May 4, 1997
-----------
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) (Zip Code)
(Registrant's telephone number, including area code) (212) 642-6900
--------------
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 June 18, 1997.
Total number of pages:27 pages.
<TABLE>
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
FORSTMANN & COMPANY, INC.
(DEBTOR-IN-POSSESSION)
CONDENSED STATEMENTS OF OPERATIONS
FOR THE THIRTEEN WEEKS ENDED MAY 4, 1997 AND APRIL 28, 1996 AND
THE TWENTY-SIX WEEKS ENDED MAY 4, 1997 AND APRIL 28, 1996
(unaudited)
Thirteen Weeks Ended Twenty-Six Weeks Ended
May 4, April 28, May 4, April 28,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $64,786,000 $62,087,000 $96,004,000 $95,393,000
Cost of goods sold 52,860,000 51,245,000 81,235,000 83,568,000
----------- ----------- ----------- -----------
Gross profit 11,926,000 10,842,000 14,769,000 11,825,000
Selling, general and
administrative expenses 3,727,000 4,414,000 7,981,000 9,003,000
Provision for uncollectible
accounts 258,000 334,000 429,000 600,000
----------- ----------- ----------- -----------
Operating income 7,941,000 6,094,000 6,359,000 2,222,000
Interest expense (contractual
interest of $3,943,000 and
$7,680,000 for 1997 and
$4,444,000 and $8,940,000
for 1996) 1,727,000 2,238,000 3,312,000 4,646,000
----------- ----------- ------------ -------------
Income (loss) before
reorganization items and
income taxes 6,214,000 3,856,000 3,047,000 (2,424,000)
Reorganization items 4,174,000 1,574,000 8,325,000 4,433,000
----------- ------------ ------------ -------------
Income (loss) before income
taxes 2,040,000 2,282,000 (5,278,000) (6,857,000)
Income tax provision (benefit) - - - -
----------- ----------- ----------- -----------
Net income (loss) $ 2,040,000 $ 2,282,000 $(5,278,000) $(6,857,000)
=========== =========== =========== ===========
Income (loss) applicable to
common shareholders $ 2,040,000 $ 2,282,000 $(5,278,000) $(6,857,000)
=========== =========== =========== ===========
Share and per share
information:
Income (loss) per common
share $ .36 $ .41 $ .(94) $ (1.22)
=========== =========== ============ ===========
Weighted average common
shares outstanding 5,618,799 5,618,799 5,618,799 5,618,799
=========== =========== ============ ===========
</TABLE>
See notes to financial statements.
<TABLE>
FORSTMANN & COMPANY, INC.
(DEBTOR-IN-POSSESSION)
CONDENSED BALANCE SHEETS
MAY 4, 1997 AND NOVEMBER 3, 1996
(unaudited)
May 4, November 3,
1997 1996
---- ----
ASSETS
<S> <C> <C>
Current Assets:
Cash $ 48,000 $ 48,000
Accounts receivable, net of
allowance of $4,635,000 and
$4,205,000 53,398,000 35,890,000
Inventories 44,751,000 44,646,000
Current deferred tax assets - -
Other current assets 372,000 224,000
Property, plant and equipment
held for sale 2,365,000 1,250,000
------------ ------------
Total current assets 100,934,000 82,058,000
Property, plant and equipment, net 56,267,000 65,664,000
Other assets 2,172,000 2,207,000
------------ ------------
Total $159,373,000 $149,929,000
============ ============
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Current maturities of long-term debt $ 59,512,000 $ 48,389,000
Accounts payable 3,401,000 2,173,000
Accrued liabilities 17,092,000 13,399,000
----------- ------------
Total current liabilities 80,005,000 63,961,000
Long-term debt 2,690,000 4,010,000
Deferred tax liabilities - -
Accrued additional pension
liability in excess of accumulated
benefit obligation 1,170,000 -
------------ ------------
Total liabilities not subject to compromise 83,865,000 67,971,000
Liabilities subject to compromise 87,459,000 88,631,000
Redeemable preferred stock subject to
compromise 2,655,000 2,655,000
Shareholders' 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 (1,107,000) (1,107,000)
Retained deficit since November 2, 1992 (40,069,000) (34,791,000)
------------ ------------
Total shareholders' deficit (14,606,000) (9,328,000)
------------ ------------
Total $159,373,000 $149,929,000
============ ============
</TABLE>
See notes to financial statements.
<TABLE>
FORSTMANN & COMPANY, INC.
(DEBTOR-IN-POSSESSION)
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE TWENTY-SIX WEEKS ENDED MAY 4, 1997 AND APRIL 28, 1996
(unaudited)
May 4, April 28,
1997 1996
---- ----
<S> <C> <C>
Net loss $ (5,278,000) $(6,857,000)
------------ -----------
Adjustments to reconcile net loss
to net cash used by operating activities:
Depreciation and amortization 6,209,000 6,159,000
Income taxes (paid) refunded, net (108,000) 292,000
Provision for uncollectible accounts 429,000 600,000
Loss from disposal, abandonment and
impairment of machinery and equipment
and other assets 3,356,000 288,000
Changes in current assets and current
liabilities:
Accounts receivable (17,937,000) (10,549,000)
Inventories (105,000) 5,287,000
Other current assets (148,000) 133,000
Accounts payable 1,239,000 770,000
Accrued liabilities 3,990,000 3,186,000
Accrued interest payable (189,000) 1,156,000
Operating liabilities subject to compromise (2,000) (946,000)
------------ -----------
Total adjustments (3,266,000) 6,376,000
------------ -----------
Net cash used by operating activities (8,544,000) (481,000)
------------ -----------
Cash flows used in investing activities:
Capital expenditures (540,000) (205,000)
Investment in computer information systems (205,000) (410,000)
Net proceeds from disposal of machinery
and equipment 124,000 2,000
------------ -----------
Net cash used in investing activities (621,000) (613,000)
------------ -----------
Cash flows from financing activities:
Net borrowings under the DIP Facility 10,283,000 41,208,000
Net repayments under the GE Capital Facility - (38,626,000)
Repayment of Senior Secured Notes (77,000) -
Repayment of CIT Equipment Facility and other
financing arrangements (403,000) (1,164,000)
Deferred financing costs (638,000) (327,000)
------------ -----------
Net cash provided by financing activities 9,165,000 1,091,000
------------ -----------
Net decrease in cash - (3,000)
Cash at beginning of period 48,000 52,000
------------ -----------
Cash at end of period $ 48,000 $ 49,000
============ ===========
</TABLE>
<TABLE>
FORSTMANN & COMPANY, INC.
(DEBTOR-IN-POSSESSION)
CONDENSED STATEMENTS OF CASH FLOWS (continued)
FOR THE TWENTY-SIX WEEKS ENDED MAY 4, 1997 AND APRIL 28, 1996
(unaudited)
May 4, April 28,
1997 1996
---- ----
<S> <C> <C>
Supplemental disclosure of cash flow
information relating to the
Chapter 11 proceeding:
Cash paid during the period for
professional fees $2,078,000 $1,776,000
========== ==========
Cash paid during the period relating
to the rejection and amendments of
executory contracts $ - $ 754,000
========== ==========
Cash paid during the period for other
items $ 381,000 $ 73,000
========== ==========
See notes to financial statements.
</TABLE>
<TABLE>
FORSTMANN & COMPANY, INC.
(DEBTOR-IN-POSSESSION)
CONDENSED STATEMENT OF CHANGES IN SHAREHOLDERS' DEFICIT
FOR THE TWENTY-SIX WEEKS ENDED MAY 4, 1997
(unaudited)
Pension
Additional Liability Total
Common Paid-In Over Prior Retained Shareholders'
Stock Capital Service Cost Deficit Deficit
----- ------- ------------ -------- -------
<S> <C> <C> <C> <C> <C>
Balance, November 3, 1996 $5,619 $26,564,381 $(1,107,000) $(34,791,000) $ (9,328,000)
Loss applicable to
common shareholders - - - (5,278,000) (5,278,000)
------ ----------- ----------- ------------ ------------
Balance, May 4, 1997 $5,619 $26,564,381 $(1,107,000) $(40,069,000) $(14,606,000)
====== =========== =========== ============ ============
See notes to financial statements.
</TABLE>
FORSTMANN & COMPANY, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO FINANCIAL STATEMENTS
May 4, 1997
(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. One of the Company's
customers accounted for approximately 21% of the Company's revenues for the
twenty-six weeks ended May 4, 1997 and 12% of gross accounts receivable at
May 4, 1997. No other customer represented more than 5% of revenues or 7%
of gross accounts receivable. 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 of the
Company's Annual Report on Form 10-K for the fiscal year ended November 3,
1996 (the "1996 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, sluggishness of retail
apparel sales and a significant decline in women's outerwear sales, which
were partially offset by the higher volume in sales of fabrics yielding
lower profit margins. This was further compounded by the Company's high
debt leverage and resulted in the Company being unable to meet all of its
principal and interest payments when such became due.
Although the rise in wool costs subsequently stabilized, the continued
sluggishness of retail apparel sales, as well as the continued economic
downturn in the apparel industry further strained the Company's operating
results during fiscal year 1996. Recently such underlying market conditions
have stabilized somewhat. In response to continuing market pressures,
however, management of the Company has formulated and implemented a business
plan that focuses on significantly reducing product offerings; tightening
management of inventory levels; enhancing cost controls; and reducing
capital expenditures. All of these management actions are designed to
improve the Company's cash flows from operations and in total. The Company
successfully improved performance during fiscal year 1996 and the twenty-six
weeks ended May 4, 1997 in each of these areas and is continuing to refine
its strategies in response to evolving circumstances. Management expects
that competition from domestic sources and imports will continue to increase
throughout the remainder of fiscal year 1997.
Further, in the fourth quarter of fiscal year 1996, management began efforts
to negotiate and document a plan of reorganization pursuant to which the
Company will emerge from bankruptcy. On April 15, 1997 the Company filed a
disclosure statement with the Bankruptcy Court regarding the Company's plan
of reorganization. The plan of reorganization calls for the exchange of all
of the unsecured claims against the Company for all the equity in the
reorganized Company (excluding shares of new common stock issuable upon
exercise of the new warrants issued pursuant to the plan of reorganization
to the holders of the Company's existing redeemable preferred stock and
common stock or options granted pursuant to the plan of reorganization under
the management stock option plan). Under the plan, the claims of secured
creditors will either be fully paid or refinanced (except for any portion
deemed to be an unsecured deficiency claim) pursuant to the terms of the
plan. The plan further provides for the payment in full of administrative
claims (which include reclamation claims and approved professional fees),
priority tax claims and convenience claims (unsecured claims in the amount
of $400 or less). Additionally, holders of unsecured claims in excess of
$400 may elect to reduce their claim to $400 and thereby be deemed to be a
holder of a convenience claim. Holders of redeemable preferred stock and
common stock will receive in the aggregate warrants for 2 percent of the new
common stock of the Company.
A hearing on the adequacy of the disclosure statement was held on May 15,
1997 and the disclosure statement was approved by the Bankruptcy Court.
Accordingly, the Company's disclosure statement and plan of reorganization
were mailed to the Company's creditors and stockholders on or about May 28,
1997. The Company is currently soliciting the votes of its creditors and
stockholders with respect to the plan in accordance with the Bankruptcy
Code. The confirmation hearing for the Company's plan of reorganization is
scheduled to be held before the Bankruptcy Court at 10:00am on July 9,
1997. Because the plan of reorganization is supported by the Creditors'
Committee, the Company's Board of Directors and its senior management, the
Company currently anticipates that the plan of reorganization can be
confirmed and consummated by the latter part of July 1997. However, there
can be no assurance that the Company will confirm and consummate a plan of
reorganization in such time frame or at all. The Financial Statements, as
of May 4, 1997, do not include any adjustments that might be necessary if
the Company is unable to continue as a going concern.
The Company has entered into a commitment with BankAmerica Business Credit
Inc. ("BABC"), which was approved by the Bankruptcy Court, pursuant to which
BABC comitted, subject to various conditions described below, to provide
exit financing to the Company upon the conclusion of the bankruptcy
proceeding. The commitment is for a three-year facility (the "Exit
Facility") which includes a revolving credit facility of up to $85 million
(including a $10.0 million letter of credit facility) to cover working
capital needs and a Term Loan of $31.5 million to be used to refinance
certain existing secured borrowings. Loan availability under the Exit
Facility is subject to a $6.5 million reserve against availability which is
reduced, in part, as the principal of the Term Loan is amortized, as well as
reserves for outstanding letters of credit. The Company expects the Exit
Facility to provide adequate financing after the Company emerges from
bankruptcy. Although there is no assurance that unanticipated financing
needs may not arise. See Item 2. hereof. The Exit Facility is subject to
the Company maintaining minimum EBITDA levels and confirming a plan of
reorganization that is acceptable to BABC, as well as other creditors. The
Exit Facility limits the amount of cash payments permitted to be made under
the plan of reorganization for general unsecured creditors, employee, and
all other pre-petition claims to $3,500,000. During April 1997, the Company
paid BABC a commitment fee of $300,000 in connection with the agreement to
provide exit financing.
Under Chapter 11, absent authorization of the Bankruptcy Court, efforts to
collect on claims against the Company arising prior to the Bankruptcy Filing
are stayed while the Company continues business operations as a debtor-in-
possession. Unsecured claims against the Company in existence prior to the
Bankruptcy Filing are reflected as "Liabilities subject to compromise" (see
Note 8 to the Financial Statements). Additional claims (Liabilities subject
to compromise) may arise or become fixed subsequent to the Bankruptcy Filing
date resulting from the 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"). A successful
plan of reorganization may require the compromise of certain liabilities
(including Secured Claims) that, as of May 4, 1997, 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. As of May 4, 1997, the
Company estimates that the amount of "Liabilities subject to compromise"
approximates $87.5 million which primarily includes unsecured trade accounts
payable and Subordinated Notes, including interest thereon through the date
of the Bankruptcy Filing (see Note 8 to the Financial Statements). 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.
Confirmation of the Company's plan of reorganization will involve a
conversion of certain existing indebtedness to equity and, as defined in
Section 382 of the Internal Revenue Code of 1986, as amended, will result in
an ownership change. Such ownership change will limit the Company's ability
to utilize its net operating loss and certain other carry forward tax
credits.
In connection with the Company's reorganization, the Company may conclude
that additional market reserves and write downs of equipment and other
assets are necessary. Accordingly, the Company may recognize significant
expenses associated with the implementation of the plan of reorganization
that are not reflected in the Financial Statements as of May 4, 1997. Any
additional asset impairments or restructuring costs directly related to the
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. See Note 9 to the Financial Statements for a
description of reorganization items recognized during the thirteen and
twenty-six weeks ended May 4, 1997 and April 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 and 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"). The accompanying Financial Statements have been
prepared on 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 the Financial
Statements as of May 4, 1997. 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, success of future operations and ability to generate
sufficient cash from operations and financing sources to meet obligations.
In the opinion of management, all adjustments (consisting of normal
recurring adjustments) necessary for a fair presentation of such information
have been made. These Financial Statements should be read in conjunction
with the Financial Statements and related notes contained in the Company's
1996 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. As a result of the reconciliation process, the Company has
filed four Omnibus Objections with the Bankruptcy Court objecting to certain
claims filed against the Company. As a result of the first three Omnibus
Objections, approximately 200 claims have been expunged, reclassified or
reduced. The fourth Omnibus Objection is scheduled for hearing by the
Bankruptcy Court on July 9, 1997. Differences that cannot be resolved by
negotiated agreements between the Company and the claimant will be resolved
by the Bankruptcy Court.
2. Inventories are stated at the lower of cost, determined principally by the
LIFO method, or market and consist of (in thousands):
May 4, November 3,
1997 1996
---- ----
Raw materials and supplies $ 8,238 $ 7,406
Work-in-process 30,423 32,007
Finished products 9,112 11,595
Less market reserves (3,022) (6,362)
------- -------
Total 44,751 44,646
Difference between LIFO
carrying value and current
replacement cost 3,777 3,936
------- -------
Current replacement cost $48,528 $48,582
======= =======
During the twenty-six weeks ended May 4, 1997, the Company sold certain yarn
inventory which had been previously identified as surplus or obsolete for
its net carrying value which was $2.9 million below its gross inventory
value. This transaction resulted in a release of yarn inventory market
reserves of $2.9 million and did not give rise to any loss during the
twenty-six weeks ended May 4, 1997. Additionally, the Company increased
market reserves by $0.9 million for inventory related to the converting
fabrics product line which had been discontinued as part of the product
rationalization effort undertaken in fiscal year 1996. Such reserve was
necessary as a result of selling price markdowns anticipated to sell off the
remaining converting fabrics inventory on hand. This expense was charged to
reorganization expense during the thirteen weeks ended May 4, 1997.
3. Other assets consist of (in thousands):
May 4, November 3,
1997 1996
---- ----
Computer information systems,
net of accumulated amortization
of $2,424 and $2,270 $1,224 $1,174
Deferred financing costs, net of
accumulated amortization of
$2,198 and $1,874 841 679
Other, including $0 and $246 of
net barter credits 107 354
------ ------
Total $2,172 $2,207
====== ======
Based upon analysis of planned barter credit use, the Company wrote off the
remaining barter credits during the thirteen weeks ended May 4, 1997. This
resulted in a $0.2 million charge to reorganization expense during the
thirteen weeks ended May 4, 1997.
4. Accrued liabilities consist of (in thousands):
May 4, November 3,
1997 1996
---- ----
Salaries, wages and related
payroll taxes $ 1,001 $ 987
Incentive compensation 869 89
Confirmation and Retention Bonus 1,668 1,200
Vacation and holiday 2,361 1,616
Employee benefit plans 627 617
Interest on long-term debt 2,699 2,888
Medical insurance claims 910 1,330
Professional fees 1,790 2,346
Deferred rental and other lease
obligations 2,654 -
Environmental remediation 424 339
Other 2,089 1,987
------- -------
Total $17,092 $13,399
======= =======
5. Long-term debt consists of (in thousands):
May 4, November 3,
1997 1996
---- ----
GE Capital DIP Facility $ 26,300 $ 16,017
Senior Secured Notes 26,832 26,909
Subordinated Notes 56,632 56,632
Equipment Facilities 5,691 6,136
Capital lease obligations 3,379 3,337
-------- --------
Total debt 118,834 109,031
Current portion of long-term debt (59,512) (48,389)
Subordinated Notes included in
liabilities subject to compromise (56,632) (56,632)
-------- --------
Total long-term debt $ 2,690 $ 4,010
======== ========
The Company was in default of substantially all of its debt agreements at
May 4, 1997 other than the DIP Facility, hereinafter defined. (Reference is
made to Note 9 to the Financial Statements for a discussion of modifications
made during the thirteen-weeks ended May 4, 1997 to the EBITDA covenant
calculation required under the DIP Facility.) 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 in
financing (which includes a $10.0 million letter of credit facility) under a
borrowing base formula and expires on October 31, 1997. The Company has
entered into an agreement with BABC to provide exit financing (see Note 1 to
the Financial Statements).
At May 4, 1997, the Company's loan availability as defined in the DIP
Facility, in excess of outstanding advances and letters of credit, was
approximately $24.7 million.
Proceeds from the Company's operations (as defined) 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.
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 most cases, the
collateral securing the secured debt obligations is sufficient to cover the
principal and interest portions of scheduled payments on the Company's 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.
Reference is made to Note 7 to the Company's annual Financial Statements in
the 1996 Form 10-K for a 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
agreement was amended to provide "adequate protection" payments in the
amount of $125,000 at the end of each month commencing on November 27, 1996
and ending on the earlier of (i) the date on which a plan of reorganization
is consummated in the bankruptcy case or (ii) October 31, 1997. In
connection with the amended agreement, the Company also agreed to pay
$85,000 in 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 May 4, 1997 to accrued interest. Under the
Company's plan of reorganization, all "adequate protection" payments
remitted to the holders of the Senior Secured Notes will be applied to
accrued interest.
As discussed in Note 7 to the Financial Statements in the 1996 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 required 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
agreement was amended to provide "adequate protection" payments in the
amount of $118,750 at the end of each month commencing on November 27, 1996
and ending on the earlier of (i) the date on which a plan of reorganization
is consummated in the bankruptcy case or (ii) October 31, 1997. In
connection with the amended agreement, the Company also agreed to pay
$48,000 in legal fees and expenses incurred by CIT. The Company has applied
adequate protection payments made as of May 4, 1997 first to accrued
interest and secondly to outstanding principal. Under the Company's plan of
reorganization, all "adequate protection" payments remitted to CIT will be
applied first to accrued interest and secondly to outstanding principal.
As discussed in Note 7 to the Financial Statements in the 1996 Form 10-K,
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.
Sanwa subsequently assigned its rights to the Sanwa Capital Lease to The
Provident Bank ("Provident"). 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, 1997. The Company has applied adequate
protection payments made as of May 4, 1997 to outstanding principal. The
Company is no longer accruing interest on the Sanwa Capital Lease as the
Company currently estimates that the equipment value securing the lease
obligation is not sufficient to cover the principal and interest portions of
scheduled payments on the Sanwa Capital Lease. Under the Company's plan of
reorganization, all "adequate protection" payments remitted to Provident
will be applied to outstanding principal.
6. Per share and share information for the thirteen and twenty-six weeks ended
May 4, 1997 and April 28, 1996 are based upon actual income (loss)
applicable to common shareholders and the weighted average shares
outstanding during the periods.
7. As discussed in Note 12 to the Financial Statements in the 1996 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 three sites at the Company's Dublin facility, one related to TCE,
one related to 1, 1-DCA and another related to the Burn Area.
With respect to the TCE and 1, 1-DCA sites, the orders required the Company
and J.P. Stevens to submit a compliance status report ("CSR") and compliance
status certification to the EPD that included, among other things, a
description of the release, including its nature and extent, and suspected
or known source, quantity and date of the release. After on-going
discussions between the EPD and the Company, the Company submitted the CSR
and compliance status certification for the TCE and 1, 1-DCA sites. On
February 10, 1997, the Company received a response from the EPD to the
Company's CSR that, among other things, asserted the EPD's position that the
Company was not in compliance with a Type 4 risk reduction standard. A
meeting took place on February 25, 1997 among the Director and EPD staff
members and representatives of the Company to try to resolve the remaining
issues between the Company and the EPD. Based on these and subsequent
discussions, and as confirmed by the Company in a letter to the EPD dated
March 26, 1997, the Company believes that the EPD agrees to the continued
operation of the Company's existing groundwater recovery program, subject,
among other things, to the provision by the Company to the EPD of a
Corrective Action Plan that demonstrates that the existing recovery system
will achieve compliance with cleanup standards acceptable to the EPD. The
Company has submitted the Corrective Action Plan to the EPD.
The orders relating to the Burn Area required both the Company and J.P.
Stevens to submit a CSR and compliance status certification by April 11,
1996. Throughout fiscal year 1996, the Company, J. P. Stevens and the EPD
had on-going discussions. On December 12, 1996, J. P. Stevens and the EPD
entered into a Consent Order which obligates J.P. Stevens to prepare and
submit to the EPD a CSR for the Burn Area within 180 days of the effective
date of the Consent Order. Among other things, the Consent Order provides
for the imposition of stipulated daily penalties in the event J. P. Stevens
does not comply with the terms of the Consent Order. Furthermore, the
Consent Order provides that in the event the Company does not perform any
action or work required by the EPD for the TCE or 1, 1-DCA sites, the EPD
may direct J.P. Stevens to take such action or work. In consideration for
these commitments, and so long as J. P. Stevens is in compliance with the
Consent Order, the EPD agreed that J.P. Stevens would not be subject to
penalties or to an enforcement action for violations of the administrative
order issued on December 29, 1995. The EPD offered a similar Consent Order
to the Company. However, since the Company had already submitted the CSR
for the TCE and 1, 1-DCA sites, the Company did not believe it to be
appropriate to enter into a Consent Order at that time.
Further, during fiscal year 1996, the Company and J.P. Stevens negotiated an
allocation of the work required under the administrative orders relating to
the three sites. Under the terms of the agreement, J. P. Stevens will
prepare and bear the costs of preparing the CSR for the Burn Area site and
the Company will prepare and bear the costs of preparing the CSR for the TCE
and 1, 1-DCA sites. The agreement, which was approved by the Bankruptcy
Court and was subsequently revised to include the provision that each party
will waive the right provided in the agreement to attend the other party's
meetings, if any, with the EPD, was signed by J.P. Stevens and the Company
in January 1997. J. P. Stevens is in the process of performing the
investigation of the Burn Area.
In January 1997, the Company was notified by a potential buyer of the
Company's Tifton facility that soil and groundwater samples had been
obtained from the Tifton facility. Based on the results of tests conducted
by an environmental consultant engaged by the potential buyer, the Company
was informed that certain contaminants were present in the vicinity of a
settling tank at the Tifton facility. Subsequently, through sampling and
testing performed by the Company's environmental consultants, the Company
confirmed the presence of contaminants in groundwater samples taken at the
site. As of April 30, 1997, the Contract of Sale was further amended,
subject to Bankruptcy Court approval, to provide for a closing date to take
place on the same day as the effective date of the Company's plan of
reorganization and after approval and authorization by the Bankruptcy Court
of the Company's right and ability to enter into an Environmental Cost
Sharing and Indemnity Agreement (hereinafter defined). Further, the tenant
of the Tifton facility (see Note 9 to the Financial Statements) has agreed
to share up to $150,000 of the cost of performing remedial action associated
with the site. All other costs associated with remediation of the
contaminants at the site will be the obligation of the Company.
At May 4, 1997, the Company had $0.4 million accrued for costs to be
incurred in connection with the TCE, 1, 1-DCA and Tifton facility
environmental matters. The Company, subject to the resolution of the issues
discussed at the meeting with the EPD relating to the TCE and 1, 1-DCA
sites, the results of the J.P. Stevens investigation of the Burn Area and
the results of the Company s investigation of the Tifton site, believes the
accrual for environmental costs at May 4, 1997 is adequate. The Company has
also been informed by the EPD that the EPD may require demonstration of
financial assurance upon the conclusion of the Company's Bankruptcy Filing.
However, the EPD has not mentioned this issue for over one year, and the
Company believes that the EPD may no longer be seeking it.
8. Liabilities subject to compromise consists of (in thousands):
May 4, November 3,
1997 1996
---- ----
Subordinated Notes, including
accrued pre-petition interest $60,330 $60,330
Trade accounts payable 22,236 22,591
Priority tax claim - 293
Accrued severance 1,295 1,295
Deferred rental and other
lease obligations 1,689 2,735
Accrued additional pension liability
in excess of accumulated benefit
obligation - 1,170
Other 1,909 217
------- -------
Total $87,459 $88,631
======= =======
9. In accordance with SOP 90-7, professional fees, asset impairments and
restructuring charges directly related to the Bankruptcy Filing and related
reorganization matters have been segregated from normal operations during
the thirteen and twenty-six weeks ended May 4, 1997 and April 28, 1996 and
consist of (in thousands):
Thirteen Weeks Ended
--------------------
May 4, April 28,
1997 1996
---- ----
Professional fees $ 852 $ 965
Impairment of assets
(See Notes 2, 3 and 9) 1,236 -
Expense incurred due to
the rejection and amendment
of executory contracts 2,400 10
Default interest expense and
professional fees associated with
Senior Secured Notes (750) 260
Other 436 339
------ ------
Total $4,174 $1,574
====== ======
Twenty-Six Weeks Ended
----------------------
May 4, April 28,
1997 1996
---- ----
Professional fees $1,829 $2,575
Impairment of assets
(See Notes 2, 3 and 9) 4,275 -
Expense incurred due to the rejection
and amendment of executory contracts 2,400 919
Default interest expense and
professional fees associated with
Senior Secured Notes (573) 460
Other 394 479
------ ------
Total $8,325 $4,433
====== ======
In November 1996, the Company entered into a Contract of Sale with the Tift
County Development Authority (the "Development Authority"), providing for
the sale of the Tifton facility for $1.25 million. The Contract of Sale
provided for the transaction to close prior to the end of January 1997. As
a result of delays in obtaining the financing necessary to consummate its
purchase of the facility, the Development Authority requested that the
closing of the transaction be delayed. Accordingly, the Company and the
Development Authority entered into several agreements amending the closing
date provided for in the Contract of Sale. As of April 30, 1997, the
Contract of Sale was further amended, subject to Bankruptcy Court approval,
to provide for a closing date to take place on the same day as the effective
date of the Company's plan of reorganization and after approval and
authorization by the Bankruptcy Court of the Company's right and ability to
enter into an Environmental Cost Sharing and Indemnity Agreement
(hereinafter defined). The Company and the Development Authority are
working to conclude the sale of the Tifton facility on this date. However,
there can be no assurance that the sale will be consummated in this or any
other timeframe.
Also, on February 28, 1997, the Company entered into a lease and
reimbursement agreement (the "Agreement"), which was approved by the
Development Authority, providing for the lease of the Tifton facility to a
third party (the "Tenant"). The Agreement, as amended, provides for monthly
rentals in the amount of $3,600 and expires on the earlier of the closing
date of the Contract of Sale or July 31, 1997. The Agreement further
provides for reimbursement of costs associated with environmental matters at
the Tifton facility (the "Environmental Cost Sharing and Indemnity
Agreement") (see Note 7 to the Financial Statements) to the Company from the
Tenant. Such reimbursement of costs shall be at an amount that is the
lesser of (i) $150,000 or (ii) one-half of the costs actually paid by the
Company to perform remedial action associated with the site. All other
costs associated with remediation of the contaminants found at the site will
be the obligation of the Company. During the thirteen weeks ended May 4,
1997, the Company increased its accrual for environmental remediation by
$0.1 million to cover its expected costs for environmental remediation at
the Tifton facility (net of expected reimbursement from the Tenant). This
resulted in a $0.1 million increase to the expected loss on sale of the
Tifton facility and was charged to reorganization items during the thirteen
weeks ended May 4, 1997.
As of May 4, 1997, $4.2 million was included in property, plant, and
equipment held for sale relating to certain unerected equipment located at
the Tifton facility. Such equipment is not being sold in connection with
the sale of the Tifton facility. The Company is currently negotiating the
sale of such equipment and, based upon current negotiations, the Company
anticipates a selling price for the related equipment that is $3.0 million
below its current net book value. Accordingly, during the thirteen weeks
ended February 2, 1997, the Company accrued the expected loss of $3.0
million associated with the sale of such equipment to reorganization
expense.
During the thirteen weeks ended May 4, 1997, the Company increased pre-
petition unsecured liabilities by $3.3 million associated with contract
rejection damages relating to the Company's former headquarters and
marketing offices lease ($1.7 million), the termination of a contract to
purchase certain equipment ($0.9 million) and two rejected contracts
relating to the former Carpini joint venture ($0.7 million). These charges
were recognized as reorganization items during the thirteen weeks ended May
4, 1997. The Company partially offset these charges by recognizing a $0.9
million net receivable from the Company's current landlord related to its
assumption of a portion of the Company's former headquarters lease. In
connection with these events, among other things, GE Capital agreed to
modify the EBITDA covenant calculation required under the DIP Facility to
exclude these losses from the determination of EBITDA.
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 1996 Form 10-K for a
discussion of the Company's financial condition as of November 3, 1996,
including a discussion of the Company's anticipated liquidity and working
capital requirements during its 1997 fiscal year.
Forward Looking Statements
- --------------------------
Certain statements contained in this Form 10-Q under Item 2. and certain
statements contained elsewhere herein, are forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995 and are thus
prospective. Such statements may relate, among other things, to future economic
performance of the Company, the plans and objectives of management for future
operations, including plans or objectives relating to the products of the
Company, and projections of revenues, income, income loss, earnings, and
earnings loss per share, capital expenditures, capital structure or other
financial terms, and assumptions relating to the foregoing. Such forward
looking statements are subject to risks, uncertainties and other factors which
could cause actual results to differ materially from future results expressed or
implied by such forward-looking statements. Those risks, uncertainties and
other factors include those accompanying such forward-looking statements, the
Company's Bankruptcy proceeding, demand for the Company's products, competition,
the Company's production needs, wool market conditions, expenses associated with
the Company's plan of reorganization, the ability of the Company to obtain
adequate exit financing on favorable terms, the adequacy of the Company's
current and exit financing and any unexpected financing requirements, as well as
other factors contained herein and in the Company's other securities filings.
Recent Events
- -------------
As described more thoroughly 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"). During the fourth quarter of fiscal year
1996, management began efforts to negotiate and document a plan of
reorganization pursuant to which the Company will emerge from bankruptcy. On
April 15, 1997 the Company filed a disclosure statement with the Bankruptcy
Court regarding the Company's plan of reorganization. The plan of
reorganization calls for the exchange of all of the unsecured claims against the
Company for all the equity in the reorganized Company (excluding shares of new
common stock issuable upon exercise of the new warrants issued pursuant to the
plan of reorganization to the holders of the Company's existing redeemable
preferred stock and common stock or options to be granted pursuant to the plan
of reorganization under the management stock option plan). Under the plan, the
claims of secured creditors will either be fully paid or refinanced (except for
any portion deemed to be an unsecured deficiency claim) pursuant to the terms of
the plan. The plan further provides for the payment in full of administrative
claims (which includes reclamation claims and approved professional fees),
priority tax claims and convenience claims (unsecured claims in the amount of
$400 or less). See Note 1 to the Financial Statements for a more complete
description. The Bankruptcy Court approved the adequacy of the disclosure
statement on May 15, 1997 and the Company distributed the disclosure statement
and plan of reorganization to the Company's creditors and stockholders on or
about May 28, 1997. The Company is currently soliciting the votes of its
creditors and stockholders with respect to the plan in accordance with the
Bankruptcy Code. The confirmation hearing for the Company's plan of
reorganization is set to be heard in the Bankruptcy Court at 10:00am on July 9,
1997. Because the plan of reorganization is supported by the Creditors'
Committee, the Company's Board of Directors and its senior management, the
Company currently anticipates that the plan of reorganization can be confirmed
and consummated by the latter part of July, 1997. However, there can be no
assurance that the Company will confirm and consummate a plan of reorganization
in such time frame or at all.
The Company has entered into an agreement with BankAmerica Business Credit, Inc.
( BABC ), which was approved by the Bankruptcy Court, pursuant to which BABC
committed subject to various conditions described in Note 1 to the Financial
Statements, to provide exit financing to the Company upon the conclusion of the
bankruptcy proceeding. The agreement provides for a revolving credit facility
of up to $85.0 million, subject to a $6.5 million reserve against availability
which is reduced, in part, as the principal of the term loan is amortized, to
cover working capital requirements and a term loan of $31.5 million to refinance
certain secured borrowings. See Note 1 to the Financial Statements for a more
thorough description.
Financial Condition and Liquidity
- ----------------------------------
The Company's business is seasonal, with the vast majority of orders for woolen
fabrics placed from December through April for apparel manufacturers to produce
apparel for retail sale during the fall and winter months. This results in a
seasonal sales order and billing pattern which historically generates higher
sales during the Company's second and third fiscal quarters compared to the
Company's first and fourth fiscal quarters. This sales pattern places seasonal
constraints on the Company's manufacturing operations which, results in
increased working capital requirements in the Company's first fiscal quarter
relating to the manufacture of certain components of inventory which are sold in
the Company's second and third quarters. The seasonal sales and order pattern
also results in increased levels of accounts receivable due to the larger sales
volume and dated sales to coating fabric customers which allows for payment 60
(sixty) days from July 1 for invoices billed in January through June.
During the twenty-six week period ended May 4, 1997 (the "1997 Period"),
operations used $8.5 million in cash, whereas $0.5 million in cash was used
during the twenty-six week period ended April 28, 1996 (the "1996 Period"). The
$8.0 million increase in cash used during the 1997 Period compared to the 1996
Period is primarily attributable to accounts receivable using approximately $7.4
million more in cash, inventories providing $5.4 million less in cash which were
somewhat offset by a reduction in the net loss of $1.6 million during the 1997
Period and other changes in current assets and liabilities. Accounts receivable
used $17.9 million in the 1997 Period, an increase of $7.4 million compared to
the 1996 Period. Such increase primarily relates to an increase in "dated"
sales in the 1997 Period. Accounts receivable with "dated" terms at May 4, 1997
was $14.1 million, an increase of $8.0 million compared to April 28, 1996.
Inventories used $0.1 million in the 1997 Period compared to $5.3 million
provided in the 1996 Period. During the 1996 Period, the Company slowed
manufacturing operations in response to the Company's strained financial
liquidity and implemented an aggressive inventory reduction program which was
substantially completed by the end of fiscal year 1996. The resulting reduction
in inventories has helped lessen the magnitude of the effect of the Company's
seasonality on inventories and has resulted in net inventories at May 4, 1997
being approximately equal to net inventories at November 3, 1996.
Investing activities used $0.6 million in both the 1997 Period and the 1996
Period. Since the Bankruptcy Filing, the Company has curtailed its capital
expenditures. Under the terms of the Company's DIP Facility, capital
expenditures can not exceed $5.0 million in fiscal year 1997 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, for plant and equipment and investment in other assets, principally
computer information systems, were $1.9 million for fiscal year 1996. The
Company expects spending for capital expenditures, principally plant and
equipment, in fiscal year 1997 to be greater than fiscal year 1996 due to
renewals or betterments of plant and equipment and compliance with environmental
regulations. The Company is currently reassessing its investment in computer
information systems and has slowed the development and implementation of
additional computerized applications. Accordingly, the Company expects spending
for computer information systems to be somewhat lower in fiscal year 1997 as
compared to fiscal year 1996.
The Company has obtained debtor-in-possession (DIP) financing from General
Electric Capital Corporation ("GE Capital") under a revolving facility (the "DIP
Facility") which provides up to $85.0 million in financing (including a $10.0
million letter of credit facility) under a borrowing base formula, less
outstanding advances and letters of credit. The DIP Facility is subject to
certain borrowing base limitations and expires on October 31, 1997. The
Company s operations and investing activities are funded through a combination
of borrowings under the DIP Facility and internally generated funds. During the
1997 Period, the Company's net borrowing under the DIP Facility was $10.3
million, whereas, during the 1996 Period the Company's net borrowings under the
DIP Facility (including the repayment of the GE Capital Facility) was $2.6
million due to changes in the Company's working capital requirements discussed
above. During the thirteen weeks ended May 4, 1997, the Company recognized
additional pre-petition unsecured liabilities of $3.3 million associated with
the rejection of the Company's former headquarters and marketing offices lease
($1.7 million), the termination of a contract to purchase certain equipment
($0.9 million) and the rejection of certain agreements relating to the Company's
arrangement with Carpini ($0.7 million). These charges were recognized as
reorganization items during the thirteen weeks ended May 4, 1997. The Company
partially offset these charges by recognizing a $0.9 million net receivable from
the Company's current landlord related to its assumption of a portion of the
Company's former headquarters lease. In connection with these events, GE
Capital agreed to modify the EBITDA covenant calculation required under the DIP
Facility to exclude these losses from the determination of EBITDA. The Company
repaid $0.4 million in borrowings outstanding under the CIT Equipment Facility
and other financing arrangements during the 1997 Period, whereas, during the
1996 Period, $1.2 million was repaid under such financing arrangements.
Further, during the 1997 period $0.6 million in deferred financing costs was
incurred compared to $0.3 million incurred during the 1996 Period. This is
primarily due to the Company's efforts to obtain new financing which will be
used to fund the Company's plan of reorganization. As a result of the
foregoing, during the 1997 Period, $9.2 million was provided by financing
activities whereas during the 1996 Period, $1.1 million was provided by
financing activities.
The Company believes that cash generated from operations and borrowings under
the DIP Facility and exit finanicing will be sufficient to fund its fiscal year
1997 working capital and capital expenditures requirements. However, expected
cash flows from operations is dependent upon achieving sales expectations during
fiscal year 1997 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 first three
quarters of the Company's fiscal year until the fourth quarter, when, at year-
end, borrowings tend to be the lowest. However, borrowings at the end of fiscal
year 1997 may be higher than at the beginning of fiscal year 1997 or higher
during various times within fiscal year 1997 than comparable periods within
fiscal year 1996.
The sales order backlog at June 1, 1997 was $65.3 million whereas at the
comparable time a year earlier the sales order backlog was $49.5 million. The
composition of the sales order backlog at June 1, 1997 reflects a significantly
stronger woolen fabrics order position which is somewhat offset by a weaker
worsted fabrics order position. The improvement in the woolen fabric backlog
position at June 1, 1997 is attributable to improved coating fabric market
conditions for domestic suppliers and the favorable market conditions for
women s wear woolen fabrics. The decline in the worsted fabrics order position
is primarily due to women's wear worsted fabrics. The decline in the women s
wear worsted sales order position reflects a more competitive, price sensitive
market. The Company expects the women s wear worsted market to become even more
competitive during the remainder of fiscal year 1997 due, in part, to an over
capacity in global worsted wool manufacturing which is attributable to the
continuing reduction in demand for certain worsted products.
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 the 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 1997 Period and the Company's forward purchase
commitments, the Company expects wool costs to decrease approximately 3% in
fiscal year 1997 as compared to fiscal year 1996. Recently wool costs have
begun to increase above levels realized in fiscal year 1996 and in the 1997
Period. Because of the Company's existing forward purchase commitments for
wool, the Company does not anticipate that the recent increases in the wool
market will adversely impact the remainder of fiscal year 1997.
RESULTS OF OPERATIONS
- ---------------------
THE 1997 TWENTY-SIX WEEK PERIOD ("1997 PERIOD") COMPARED TO THE 1996 TWENTY-SIX
WEEK PERIOD ("1996 PERIOD").
The Company's business is seasonal and accordingly results for these interim
periods are not indicative of results for a full fiscal year. Net sales for the
1997 Period were $96.0 million, approximately the same as the 1996 Period.
Total yards of fabric sold increased 3.8% during the 1997 Period. The average
per yard selling price decreased to $7.23 per yard from $7.45 per yard due to
shifts in product mix. The increase in sales was primarily due to sales
increases in women's woolen apparel product lines, including women's outerwear
fabrics, which were offset by weaker sales in the women's worsted product
lines.
The increase in women's woolen sales relates to the Company offering certain
strategic customers favorable competitive pricing and terms on purchases of
certain woolen fabrics during the fourth quarter of its fiscal year 1996 which
were manufactured and sold during the 1997 Period. In addition, the Company has
benefited from a favorable market for women's woolen sales in the 1997 Period
compared to the 1996 Period. Women's outerwear increased as market conditions
for domestic suppliers began to rebound from import pressures felt during the
1996 Period. Men's wear woolen and worsted sales were slightly ahead in the
1997 Period when compared to the 1996 Period. However, the Company expects the
men's wear business to remain very competitive and anticipates that sales for
fiscal year 1997 will be slightly less than fiscal year 1996 sales as a result
of the increased competition. The decrease in women's worsted sales reflects a
more competitive, price sensitive market due, in part, to an over capacity in
global worsted wool manufacturing.
The Company, in late 1995, began a product rationalization process which
assesses each of the Company's product's potential sales volume, manufacturing
complexity, margin contribution and other product specific factors. Through the
product rationalization process, the Company eliminated numerous product
offerings and three product lines. The Company is beginning to realize the
effects of product rationalization as is evidenced by the Company's improved
gross profit which has also been significantly impacted by cost reductions
implemented since the Bankruptcy Filing. Although the Company has eliminated
several product lines and styles within remaining product lines, the Company
expects sales dollars to be at least equal to fiscal year 1996 due to increased
demand for certain of the Company's core products in fiscal year 1997. Sales of
discontinued product lines: career uniforms, converting and international were
$2.8 million during the 1997 Period as compared to $4.5 million during the 1996
Period. Excluding government sales ($3.4 million in the 1997 Period and $4.0
million in the 1996 Period), net sales for the 1997 Period increased 1.3% from
the 1996 Period.
Cost of goods sold decreased $2.3 million to $81.2 million during the 1997
Period primarily as a result of manufacturing cost reductions and shifts in
product mix. Gross profit increased $2.9 million or 24.9% to $14.8 million in
the 1997 Period, and gross profit margin for the 1997 Period was 15.4% compared
to 12.4% for the 1996 Period.
Selling, general and administrative expenses, excluding the provision for
uncollectible accounts, decreased 11.4% to $8.0 million in the 1997 Period
compared to $9.0 million in the 1996 Period. The majority of the decrease in
the 1997 Period is due to lower human resource related expenses as a result of
the Company's continuing efforts to reduce its overhead in response to reduced
sales, a decrease in professional services related expenses and a decrease in
royalty expense. The Company has reduced human resource expenses by
approximately 16.0% in the 1997 Period as compared to the 1996 Period. Such
reduction is attributable to the Company aligning the organization to be more
responsive to customer needs and matching the Company's fixed overhead to market
conditions and expectations. Royalty expense decreased $0.1 million as the
Company is no longer accruing any royalty expense in connection with the
rejected Carpini agreements. Such decrease was somewhat offset by higher
incentive compensation expense in the 1997 Period.
The provision for uncollectible accounts decreased from $0.6 million in the 1996
Period to $0.4 million in the 1997 Period. Such decrease is primarily
attributable to the Company decreasing its specific allowance for uncollectible
accounts during the 1997 Period.
Interest expense for the 1997 Period was $3.3 million or $1.3 million lower than
the 1996 Period. This decrease is attributable to lower average borrowings under
the DIP Facility in the 1997 Period.
During fiscal year 1995, the Company fully utilized its net operating loss
carrybacks as permitted by the Internal Revenue Code. Accordingly, for the 1997
Period and for fiscal year 1996, no income tax benefit can be recognized from
the realization of net operating losses.
The loss applicable to common shareholders was $5.3 million in the 1997 Period
compared to $6.9 million in the 1996 Period.
THE THIRTEEN-WEEK PERIOD ENDED MAY 4, 1997 (THE "1997 SECOND QUARTER") COMPARED
TO THE THIRTEEN-WEEK PERIOD ENDED APRIL 28, 1996 (THE "1996 SECOND QUARTER").
Net sales for the 1997 Second Quarter were $64.8 million, an increase of 4.3%
from the 1996 Second Quarter. Total yards of fabric sold increased 9.9% during
the 1997 Second Quarter. However, the average per yard selling price decreased
to $7.28 per yard from $7.66 per yard due to shifts in product mix. The
increase in sales was primarily due to a sales increase in the women's woolen
apparel product lines, including women s outerwear fabrics, which were offset by
weaker sales in the women's worsted product lines. The increase in women's
woolen and women's outerwear reflects favorable market conditions.
Cost of goods sold increased $1.6 million to $52.9 million during the 1997
Second Quarter primarily as a result of increased sales which were somewhat
offset by cost reductions. Gross profit increased $1.1 million or 10.0% to
$11.9 million in the 1997 Second Quarter, and gross profit margin for the 1997
Second Quarter was 18.4% compared to 17.5% for the 1996 Second Quarter.
Selling, general and administrative expenses, excluding the provision for
uncollectible accounts, decreased 15.6% to $3.7 million in the 1997 Second
Quarter compared to $4.4 million in the 1996 Second Quarter. The majority of
the decrease in the 1997 Second Quarter is due to lower human resource related
expenses as a result of the Company's continuing efforts to reduce its overhead.
Such reduction is attributable for the reasons discussed in the 1997 Period
compared to the 1996 Period.
The provision for uncollectible accounts was approximately the same during the
1997 Second Quarter when compared to the 1996 Second Quarter due to the
Company's specific reserves being adequate to cover potential future
uncollectible accounts.
Interest expense for the 1997 Second Quarter was $1.7 million or $0.5 million
lower than the 1996 Second Quarter. This decrease is attributable to lower
average borrowings under the DIP Facility.
During fiscal year 1995, the Company fully utilized its net operating loss
carrybacks as permitted by the Internal Revenue Code. Accordingly, for the 1997
Second Quarter and for fiscal year 1996, no income tax benefit can be recognized
from the realization of net operating losses.
The income applicable to common shareholders was $2.0 million in the 1997 Second
Quarter compared to $2.3 million in the 1996 Second Quarter.
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings
Reference is made to Note 7 to the Financial Statements contained in
Item 1 of Part 1 to this Form 10-Q and the Company's bankruptcy
proceeding described in Note 1 hereto.
Item 6. Exhibits and Reports on Form 8-K:
(a) Exhibits
11.1 Statement re computation of per share earnings - not required since
such computation can be clearly determined from the material
contained herein.
15.1 Independent Accountants' Review Report, dated May 30, 1997 from
Deloitte & Touche LLP to Forstmann & Company, Inc.
23.1 Consent of Deloitte & Touche LLP.
(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 Peckham
------------------------------
Rodney Peckham
Chief Financial Officer
June 18, 1997
- -------------
Date
EXHIBIT INDEX
Exhibit Sequential
No. Description Page No.
- ------------------------------------------------------------------------------
11.1 Statement re computation of per share earnings -
not required since such computation can be
clearly determined from the material contained
herein.
15.1 Independent Accountants' Review Report, dated
May 30, 1997, from Deloitte & Touche
LLP to Forstmann & Company, Inc.
23.1 Consent of Deloitte & Touche LLP.
Exhibit 15.1
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
Board of Directors and Shareholders
Forstmann & Company, Inc. (Debtor-in-Possession):
We have reviewed the accompanying condensed balance sheet of Forstmann &
Company, Inc. (Debtor-in-Possession) as of May 4, 1997 and the related condensed
statements of operations for the thirteen weeks and twenty-six weeks ended May
4, 1997 and April 28, 1996, the condensed statements of cash flows for the
twenty-six weeks ended May 4, 1997 and April 28,1996 and the condensed statement
of changes in shareholders' deficit for the twenty-six weeks ended May 4, 1997.
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.
As discussed in Notes 1 and 5 to the condensed financial statements, the Company
filed for reorganization under Chapter 11 of the Federal Bankruptcy Code on
September 22, 1995. The accompanying condensed financial statements do not
purport to reflect or provide for the consequences of the bankruptcy
proceedings. In particular, such condensed financial statements do not purport
to show (a) as to assets, their realizable value on a liquidation basis or their
availability to satisfy liabilities; (b) as to prepetition liabilities, the
amounts that may be allowed for claims or contingencies, or the status and
priority thereof; (c) as to stockholder accounts, the effect of any changes that
may be made in the capitalization of the Company; or (d) as to operations, the
effect of any changes that may be made in its business.
The accompanying condensed financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note 1 to the
condensed financial statements, the Company's losses from operations,
shareholders' deficiency, and its ability to obtain confirmation of a plan of
reorganization with its creditors raise substantial doubt about its ability to
continue as a going concern. Management's plans concerning these matters are
also discussed in Note 1. The condensed financial statements do not include
adjustments that might result from the outcome of this uncertainty.
We have previously audited, in accordance with generally accepted auditing
standards, the balance sheet of Forstmann & Company, Inc. as of November 3, 1996
and the related statements of operations, shareholders' deficit, and cash flows
for the fifty-three weeks then ended (not presented herein); and in our report
dated December 20, 1996, we expressed an unqualified opinion on those financial
statements and included explanatory paragraphs concerning bankruptcy matters and
other matters that raise substantial doubt about the Company's ability to
continue as a going concern. In our opinion, the information set forth in
accompanying condensed balance sheet as of November 3, 1996 is fairly stated, in
all material respects, in relation to the balance sheet from which it has been
derived.
/s/ Deloitte & Touche LLP
- -------------------------
May 30, 1997
Atlanta, Georgia
Exhibit 23.1
May 30, 1997
Forstmann & Company, Inc.
1155 Avenue of the Americas
New York, New York 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 May 4, 1997 and April 28, 1996, as indicated in our report dated May 30,
1997 (which included explanatory paragraphs concerning bankruptcy matters and
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 May 4, 1997, is incorporated
by reference in Registration Statement No. 33-57643 on Form S-8 and Registration
Statement No. 33-56367 on Form S-3.
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
- -------------------------
Atlanta, Georgia
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This schedule contains summary financial information extracted from
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<MULTIPLIER> 1,000
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<PERIOD-TYPE> 6-MOS
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<PERIOD-START> NOV-04-1996
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2,655
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