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 FEBRUARY 1, 1998
----------------
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.
-----------------------------------------------------
(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
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(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 by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. (X)Yes ( )No
As of March 17, 1998, there was 4,385,770 shares of Common Stock outstanding.
Total number of pages: 22 pages.
<PAGE>
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
FORSTMANN & COMPANY, INC.
CONDENSED STATEMENTS OF OPERATIONS FOR THE
THIRTEEN WEEKS ENDED FEBRUARY 1, 1998 AND FEBRUARY 2, 1997
(unaudited)
Reorganized Predecessor
Company Company
February 1, February 2,
1998 1997
---- ----
<S> <C> <C>
Net sales .................................. $ 29,017,000 $ 31,218,000
Cost of goods sold ......................... 25,705,000 28,375,000
------------ ------------
Gross profit ............................... 3,312,000 2,843,000
Selling, general and administrative expenses 3,590,000 4,254,000
Provision for uncollectible accounts ....... 224,000 171,000
------------ ------------
Operating loss ............................. (502,000) (1,582,000)
Interest expense (contractual interest of
$3,737,000 for 1997) ..................... 1,540,000 1,585,000
------------ ------------
Loss before reorganization items and
income taxes ............................. (2,042,000) (3,167,000)
Reorganization items ....................... 20,000 4,151,000
------------ ------------
Loss before income taxes ................... (2,062,000) (7,318,000)
Income tax benefit ......................... (804,000) --
------------ ------------
Net loss ................................... $ (1,258,000) $ (7,318,000)
============ ============
Per share and share information:
Loss per common share - basic and diluted $ (.29) $ (1.30)
============ ============
Weighted average common shares outstanding 4,384,436 5,618,799
============ ============
See notes to financial statements
</TABLE>
<PAGE>
<TABLE>
FORSTMANN & COMPANY, INC.
CONDENSED BALANCE SHEETS
FEBRUARY 1, 1998 AND NOVEMBER 2, 1997
(unaudited)
February 1, November 2,
1998 1997
---- ----
ASSETS
Current Assets:
<S> <C> <C>
Cash .......................................... $ 48,000 $ 493,000
Cash restricted for settlement of unpaid claims 560,000 558,000
Accounts receivable, net of allowance of
$682,000 and $458,000 ....................... 34,763,000 42,005,000
Inventories ................................... 56,883,000 43,210,000
Current deferred tax assets ................... 804,000 --
Other current assets .......................... 575,000 926,000
------------- ------------
Total current assets ........................ 93,633,000 87,192,000
Property, plant and equipment, net .............. 23,960,000 24,779,000
Other assets .................................... 1,706,000 1,670,000
------------- ------------
Total ....................................... $ 119,299,000 $113,641,000
============= ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt .......... $ 5,709,000 $ 5,756,000
Accounts payable .............................. 3,099,000 3,335,000
Accrued liabilities ........................... 8,859,000 11,371,000
------------- ------------
Total current liabilities ................... 17,667,000 20,462,000
Long-term debt .................................. 52,259,000 42,548,000
Deferred tax liabilities ........................ -- --
------------- ------------
Total liabilities ........................... 69,926,000 63,010,000
Commitments and contingencies
Shareholders' Equity:
New common stock, $.01 par value, 10,000,000
shares authorized, 4,384,436 shares issued
and outstanding ............................. 43,844 43,844
Additional paid-in capital ...................... 50,297,156 50,297,156
Retained earnings (deficit) since July 23, 1997 . (968,000) 290,000
------------- ------------
Total shareholders' equity ...................... 49,373,000 50,631,000
------------- ------------
Total ..................................... $ 119,299,000 $113,641,000
============= ============
See notes to financial statements ...............
</TABLE>
<PAGE>
<TABLE>
FORSTMANN & COMPANY, INC.
CONDENSED STATEMENTS OF CASH FLOWS FOR THE
THIRTEEN WEEKS ENDED FEBRUARY 1, 1998 AND FEBRUARY 2, 1997
(unaudited)
Reorganized Predecessor
Company Company
February 1, February 2,
1998 1997
---- ----
<S> <C> <C>
Net loss .......................................... $ (1,258,000) $(7,318,000)
------------ -----------
Adjustments to reconcile net loss to net
cash used by operating activities:
Depreciation and amortization ................. 1,335,000 3,112,000
Income tax not payable in cash ................ (804,000) --
Income tax payments ........................... -- --
Provision for uncollectible accounts .......... 224,000 171,000
Increase (decrease) in market reserves ........ 34,000 (952,000)
Loss from disposal, abandonment and
impairment of machinery and equipment
and other assets and (gain) from disposal ... (1,000) 3,039,000
Changes in current assets and current
liabilities:
Accounts receivable ....................... 7,018,000 9,964,000
Inventories ............................... (13,707,000) (9,076,000)
Other current assets ...................... 351,000 53,000
Accounts payable .......................... (207,000) 403,000
Accrued liabilities ....................... (2,543,000) (179,000)
Accrued interest payable .................. 31,000 600,000
Operating liabilities subject to compromise -- (234,000)
------------ -----------
Total adjustments ............................... (8,269,000) 6,901,000
------------ -----------
Net cash used by operations ................... (9,527,000) (417,000)
------------ -----------
</TABLE>
(continued on next page)
<PAGE>
<TABLE>
FORSTMANN & COMPANY, INC.
CONDENSED STATEMENTS OF CASH FLOWS FOR THE
THIRTEEN WEEKS ENDED FEBRUARY 1, 1998 AND FEBRUARY 2, 1997
(unaudited)
Reorganized Predecessor
Company Company
February 1, February 2,
1998 1997
---- ----
Cash flows used by investing activities:
<S> <C> <C>
Capital expenditures ........................... (340,000) (176,000)
Investment in computer information systems ..... (189,000) (105,000)
Net proceeds from disposal of machinery
and equipment ................................ 1,000 1,000
------------ -----------
Net cash used by investing activities ........ (528,000) (280,000)
------------ -----------
Cash flows from financing activities:
Net borrowings under the Revolving Loan Facility 12,587,000 --
Net borrowings under the DIP Facility .......... -- 1,193,000
Repayment of Term Loan Facility ................ (1,123,000) --
Repayment of Deferred Interest Rate Notes ...... (1,570,000) --
Repayment of other financing arrangements ...... (259,000) (283,000)
Deferred financing costs ....................... (23,000) (213,000)
------------ -----------
Net cash provided by financing activities .... 9,612,000 697,000
Net decrease in cash ............................. (443,000) --
Cash and restricted cash at beginning of period .. 1,051,000 48,000
------------ -----------
Cash and restricted cash at end of period ........ $ 608,000 $ 48,000
============ ===========
See notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
FORSTMANN & COMPANY, INC.
CONDENSED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE THIRTEEN WEEKS ENDED FEBRUARY 1, 1998
(unaudited)
Additional Retained Total
Common Paid-In Earnings Shareholders'
STOCK CAPITAL (DEFICIT) EQUITY
<S> <C> <C> <C> <C>
Balance, November 2, 1997 $43,844 $50,297,156 $ 290,000 $ 50,631,000
Net loss ................ -- -- (1,258,000) (1,258,000)
------- ----------- ----------- ------------
Balance, February 1, 1998 $43,844 $50,297,156 $ (968,000) $ 49,373,000
======= =========== =========== ============
See notes to financial statements.
</TABLE>
<PAGE>
FORSTMANN & COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
FEBRUARY 1, 1998
(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. The apparel industry represents the majority of the Company's
customers.
As described in Note 1 to the Financial Statements contained in the
Company's Annual Report on Form 10-K for the fiscal year ended November
2, 1997, 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 emerged from
Bankruptcy pursuant to a Plan of Reorganization (the "Plan of
Reorganization") on July 23, 1997 (the "Effective Date").
As described in Note 2 to the Financial Statements contained in the 1997
Form 10-K, 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
Company established its reorganization value and adopted "fresh start"
accounting as of July 22, 1997.
Under the principles of "fresh start" accounting, the Company's total
net assets were recorded at its established reorganization value, which
was then allocated to identifiable tangible and intangible assets on the
basis of their estimated fair value. In accordance with "fresh start"
accounting, the difference between the assumed reorganization value and
the aggregate fair value of the identifiable tangible and intangible
assets resulted in a reduction in the value assigned to property, plant
and equipment. In addition, the Company's accumulated deficit was
eliminated.
2. On March 6, 1998, the Company announced that, as part of its long-term
strategy, it will discontinue the production of top dye worsted fabrics
used to manufacture men's suits and government uniforms (the "1998
Restructuring") after completing orders for its fall season. In fiscal
year 1997, top dye worsteds accounted for approximately $18 million in
men's suiting fabric and $10 million in government uniform fabric sales.
This decision will result in the Company's overall workforce of
approximately 2,500 people being reduced by approximately 730 people.
Implementation of the 1998 Restructuring will result in the Company
incurring certain costs, including, among other costs, salaried
severance, special one-time hourly "stay put" bonuses and equipment
relocation costs. Additionally, certain of the Company's inventories may
be impaired or rendered obsolete and the carrying value of certain of
the Company's property, plant and equipment may be impaired. The Company
estimates that severance expense will be approximately $0.5 million and
will be recognized as a restructuring expense in the Company's second
quarter of fiscal year 1998. The Company estimates that the stay put
bonuses will be approximately $0.8 million and will be accrued over the
employee's remaining service period as a restructuring expense. Certain
<PAGE>
other adjustments relating to certain other employee benefit costs may
be incurred in connection with the implementation of the 1998
Restructuring, which will be recognized as a restructuring expense in
the period such costs can be reasonably estimated. Impairment of
inventories will be recognized as an operating expense in the periods in
which the impairment can be reasonably estimated, whereas impairment of
property, plant and equipment will be recognized as a restructuring
expense in the periods in which the impairment can be reasonably
estimated. Costs incurred to relocate certain machinery and equipment
will be charged against operations in the periods incurred.
3. One of the Company's customers accounted for approximately 31% of the
Company's revenues for the thirteen weeks ended February 1, 1998 and 34%
of gross accounts receivable at February 1, 1998. No other customer
represented more than 6% of revenues or 6% of gross accounts receivable.
4. Inventories are stated at the lower of cost, determined principally by
the LIFO method, or market and consist of (in thousands):
February 1, November 2,
1998 1997
---- ----
Raw materials and supplies ........... $ 9,070 $ 8,303
Work-in-process ...................... 33,266 27,459
Finished products .................... 15,744 8,169
Less market reserves ................. (1,257) (721)
-------- --------
Total ................................ 56,883 43,210
Difference between LIFO
carrying value and current
replacement cost ................... 613 --
-------- --------
Current replacement cost ............. $ 57,496 $ 43,210
======== ========
5. Other assets consist of (in thousands):
February 1, November 2,
1998 1997
---- ----
Computer information systems,
net of accumulated amortization
of $0 and $0 ....................... $ 225 $ 94
Deferred financing costs, net of
accumulated amortization of
$304 and $164 ...................... 1,372 1,520
Other, net ........................... 109 56
-------- --------
Total ............................... $ 1,706 $ 1,670
======== ========
<PAGE>
6. Accrued liabilities consist of (in thousands):
February 1, November 2,
1998 1997
---- ----
Salaries, wages and related
payroll taxes ...................... $ 935 $ 978
Incentive compensation ............... 347 2,082
Vacation and holiday ................. 1,793 1,729
Employee benefits plans .............. 52 20
Interest on long-term debt ........... 93 62
Medical insurance premiums ........... 1,322 1,327
Professional Fees .................... 142 355
Environmental remediation ............ 343 361
Deferred rental and other lease obligations 2,166 2,186
Other ................................ 1,642 2,271
-------- --------
Total ................................ $ 8,835 $ 11,371
======== ========
7. Long-term debt consists of (in thousands):
February 1, November 2,
1998 1997
---- ----
Revolving Loan Facility .............. $ 25,976 $ 13,389
Term Loan Facility ................... 29,204 30,327
Deferred Interest Rate Notes ......... -- 1,571
Other note ........................... 519 603
Capital lease obligations ............ 2,269 2,414
-------- --------
Total debt ........................... 57,968 48,304
Current portion of long-term debt .... (5,709) (5,756)
-------- --------
Total long-term debt ................. $ 52,259 $ 42,548
======== ========
On July 23, 1997, the Company entered into the Loan and Security
Agreement with a syndicate of financial institutions led by BABC. The
Loan and Security Agreement provides for a revolving line of credit
(including a $10.0 million letter of credit facility), subject to a
borrowing base formula, of up to $85 million (the "Revolving Loan
Facility") and term loans of approximately $31.5 million (the "Term Loan
Facility").
At February 1, 1998, the Company's loan availability as defined in the
Loan and Security Agreement, in excess of outstanding advances and
letters of credit, was approximately $21.7 million.
The Company and its lenders have negotiated an amendment to the Loan and
Security Agreement to modify, among other things, the definition of
earnings before interest, income taxes, depreciation, amortization and
reorganization items ("EBITDAR") and Adjusted Tangible Net Worth, and to
modify certain loan covenants so as to increase permitted capital
expenditures and lower the minimum fixed charge coverage ratio. Such
modifications are being made in anticipation of the effects of the
Company's 1998 Restructuring as more fully described in Note 2 to the
Financial Statements contained herein. At February 1, 1998, the Company
was in compliance with such covenants. In connection with the
negotiations, the Company has agreed to prepay $3.0 million of the Term
<PAGE>
Loan Facility through borrowings under the Revolving Loan Facility. The
Company expects to enter into a formal amendment to the Loan and
Security Agreement which reflects the negotiated modifications to the
Loan and Security Agreement promptly.
As described more thoroughly in Note 8 to the Financial Statements
contained in the 1997 Form 10-K, on the Effective Date, in accordance
with the Plan of Reorganization, the Company issued subordinated
floating rate notes (the "Deferred Interest Rate Notes") in respect of
certain accrued but unpaid interest (approximately $1.6 million). On
December 22, 1997, the Company repaid the Deferred Interest Rate Notes
and accrued interest due thereon through borrowings under the Revolving
Loan Facility.
8. In February 1997, the Financial Accounting Standards Board issued
Financial Accounting Standards ("SFAS") No. 128, Earnings Per Share
which simplifies the standards for computing earnings per share ("EPS")
information and makes the computation comparable to international EPS
Standards. SFAS 128 replaces the presentation of "primary" (and when
required "fully diluted") EPS with a presentation of "basic" and
"diluted" EPS. Loss per common share - basic is computed based on the
net loss divided by the weighted average common shares outstanding. On a
diluted basis, the loss per share - diluted is compared by dividing the
net loss by the weighted average common shares during the period plus
incremental shares that would have been outstanding under option plans.
The Company did not have any dilutive options for either period
presented.
9. As discussed in Note 14 to the Financial Statements in the 1997 Form
10-K, the Company has accrued certain estimated costs for environmental
matters.
DUBLIN, GEORGIA. On December 29, 1995, the Georgia Environmental
Protection Division ("EPD") issued separate administrative orders (the
"Administrative Orders") to the Company and to J.P. Stevens & Co., Inc.
("Stevens") which relate to three sites on the Georgia Hazardous Site
Inventory - the "TCE site", the "1,1-DCA site" and another site known as
the "Burn Area" - at the Company's Dublin, Georgia facility. The
Administrative Orders required the Company and Stevens to submit a
compliance status report ("CSR") for these sites that would include,
among other things, a description of the release, including its nature
and extent, and suspected or known source, the quantity of the release
and the date of the release. The CSR would also have to include a
determination of cleanup standards (called "risk reduction standards")
for the sites and a certification that the sites were in compliance with
those standards; alternatively, the party submitting the CSR could
acknowledge that the site is not in compliance with risk reduction
standards. Pursuant to the Administrative Orders, if a site is not in
compliance with the risk reduction standards, then a Corrective Action
Plan (a "Corrective Action Plan") for remediating the release would have
to be submitted to EPD.
Since both the Company and Stevens had been required to perform the same
work at all three of these sites, the Company and Stevens agreed to
allocate responsibilities between themselves pursuant to an Agreement
Concerning Performance of Work ("Agreement") dated January 24, 1997. The
Agreement required the Company to prepare and submit to EPD the CSR for
the TCE and 1,1-DCA sites, while requiring Stevens to prepare and submit
to EPD a CSR for the Burn Area site. The Agreement does not commit
<PAGE>
either party to perform corrective action at these sites. Stevens
submitted a CSR for the Burn Area site. On January 28, 1998 EPD provided
comments and requested clarification to the Stevens CSR. On February 12,
1998 Stevens environmental consultant provided a preliminary response to
EPD's letter and requested a meeting to discuss proposed changes to the
CSR. Stevens indicated its intention to submit a revised CSR based on
this meeting.
The Company submitted a CSR for the TCE and 1,1-DCA sites, which
certified compliance with risk reduction standards for both sites. EPD
indicated that it did not agree to the certification with respect to the
TCE site. After extensive discussions with EPD concerning the issue, the
Company submitted a Corrective Action Plan for the TCE site by letter
dated May 15, 1997. By letter dated September 29, 1997, EPD responded to
the Corrective Action Plan with notice of deficiency. The Company
submitted a revised Corrective Action Plan on October 31, 1997. The
revised Corrective Action Plan calls for continued operation of the
Company's existing groundwater recovery system, as well as one
additional groundwater recovery well and a groundwater collection trench
near the former dry cleaning basement. EPD has not yet responded to the
Company's revised Corrective Action Plan.
TIFTON, GEORGIA. 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 that facility and that
certain contaminants had been identified. 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. On February 28, 1997, the Company notified EPD of
such findings, and the site was placed on the Georgia Hazardous Site
Inventory.
The Company subsequently consummated its sale of the Tifton facility. As
part of that transaction, the Company, the Tift County Development
Authority as purchaser ("TCDA") and Burlen Corporation as operator
("Burlen") entered into an Environmental Cost Sharing and Indemnity
Agreement ("Cost Sharing Agreement"). Under the Cost Sharing Agreement,
the Company retained responsibility for remediating certain
contamination, to the extent required by law, that originated prior to
Burlen's occupancy of the premises. Likewise, the Company assumed the
obligation to indemnify TCDA and Burlen in regard to such contamination
to the extent that a claim is made by an unaffiliated third party or
governmental agency. In exchange, Burlen agreed to pay to the Company
the lesser of (1) $150,000 minus any payments already made to the
Company (certain expenses had already been shared) to respond to the
contamination or (2) one-half of the costs incurred by the Company in
response to such contamination. EPD has not yet requested any additional
response to conditions at this site.
At February 1, 1998, the Company had $0.3 million accrued for costs to
be incurred in connection with the TCE, 1,1-DCA and Tifton facility
environmental matters. The Company, subject to EPD concurring with the
Company's Corrective Action Plan relating to the TCE and 1,1-DCA sites,
EPD's response to J.P. Stevens revised CSR and compliance status
certification and EPD's response to the Tifton site, believes the
accrual for environmental costs at February 1, 1998 is adequate.
<PAGE>
10. 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-week periods ended February 1, 1998 and
February 2, 1997 and consist of (in thousands):
Reorganized Predecessor
Company Company
Thirteen Thirteen
Weeks Ended Weeks Ended
February 1, February 2,
1998 1997
---- ----
Professional fees .................... $ 16 $ 977
Impairment of assets ................. -- 3,039
Default interest expense and
professional fees associated with the
Senior Secured Notes .............. -- (177)
Other ................................ 4 (42)
-------- --------
Total ................................ $ 20 $ 4,151
======== ========
As of February 2, 1997, $4.2 million was included in construction in
progress relating to certain unerected equipment. Accordingly, during
the thirteen weeks ended February 2, 1997, the Company accrued an
expected loss of $3.0 million associated with the sale of such equipment
to reorganization expense.
<PAGE>
Item 2. 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 1997 Form 10-K for a
discussion of the Company's financial condition as of November 2, 1997,
including a discussion of the Company's anticipated liquidity and working
capital requirements during its 1998 fiscal year.
FORWARD LOOKING STATEMENTS
Certain matters discussed in this Quarterly Report under Item 2 are forward
looking statements which reflect the Company's current views with respect to
future events and financial performance. These forward-looking statements are
subject to certain risks and uncertainties which could cause actual results to
differ materially from historical results or those anticipated. Readers are
cautioned not to place undue reliance on these forward-looking statements, which
speak only as of their dates. The Company undertakes no obligation to publicly
update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise. The following factors could cause
actual results to differ materially from historical results or those
anticipated: demand for the Company's products, competition, the Company's
production needs, wool market conditions, the adequacy of the Company's current
financing, any unexpected financing requirements, and changes in the general
economic climate.
RECENT EVENTS
1998 RESTRUCTURING
On March 6, 1998, the Company announced that, as part of its long-term strategy,
it will discontinue the production of top dye worsted fabrics used to
manufacture men's suits and government uniforms (the "1998 Restructuring") after
completing orders for its fall season. In fiscal year 1997, top dye worsteds
accounted for approximately $18 million in men's suiting fabric sales and $10
million in government uniform fabric sales. This decision will result in the
Company's overall workforce of approximately 2,500 people being reduced by
approximately 730 people. The top dye worsted fabrics business has been a
relatively small part of the Company's overall business. However, the complexity
of manufacturing top dyes makes it extremely labor intensive and unprofitable at
its current level. By discontinuing top dye worsted fabrics, the Company
believes it can focus all of its resources on its strengths in men's and women's
woolen and worsted sportswear, coating and niche specialty markets.
Implementation of the 1998 Restructuring will result in the Company incurring
certain costs, including, among other costs, salaried severance , special
one-time hourly "stay put" bonuses and equipment relocation costs. Additionally,
certain of the Company's inventories may be impaired or rendered obsolete and
the carrying value of certain of the Company's property, plant and equipment may
be impaired. The Company estimates that severance expense will be approximately
$0.5 million and will be recognized as a restructuring expense in the Company's
second quarter of fiscal year 1998. The Company estimates that stay put bonuses
will be approximately $0.8 million and will be accrued over the employee's
remaining service period as a restructuring expense. Certain other adjustments
relating to certain other employee benefit costs may be incurred in connection
with the implementation of the 1998 Restructuring, which will be recognized as a
restructuring expense in the period such costs can be reasonably estimated.
Impairment of inventories will be recognized as an operating expense in the
periods in which the impairment can be reasonably estimated, whereas impairment
<PAGE>
of property, plant and equipment will be recognized as a restructuring expense
in the periods in which the impairment can be reasonably estimated. Costs
incurred to relocate certain machinery and equipment will be charged against
operations in the periods incurred. During the first quarter of fiscal year
1998, no amounts were recognized as restructuring expense and operating results
were not affected as a result of the 1998 Reorganization.
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, during the first
fiscal quarter, the Company has traditionally lessened by manufacturing certain
components of inventory in advance of actual sales orders. Further, the industry
practice of providing coating fabric customers with favorable billing terms
(referred to as "dating") which permit payment 60 (sixty) days from July 1 for
invoices billed in January through June encourages such coating fabric customers
to place orders in advance of their actual need. This enables the Company to
manufacture and bill certain coating fabric customers during the Company's first
fiscal quarter.
During the thirteen-week period ended February 1, 1998 (the "1998 Period"),
operations used $9.5 million of cash, whereas $0.4 million was used by
operations during the thirteen-week period ended February 2, 1997 (the "1997
Period"). This $9.1 million increase in cash used by operations in the 1998
Period was primarily due to a $4.6 million increase in cash used by inventory
during the 1998 Period as compared to the 1997 Period. Traditionally, because of
the seasonal nature of the Company's business, the Company replenishes its
year-end inventory levels during its first fiscal quarter in order to meet the
higher sales demand of the Company's second and third fiscal quarters. Accounts
receivable provided $7.0 million during the 1998 Period, whereas $10.0 million
was provided by accounts receivable during the 1997 Period. Accounts receivable
at February 1, 1998 included $2.2 million of accounts receivable with dating, a
decrease of $2.0 million compared to February 2, 1997. Such decrease in dated
accounts receivable during the 1998 Period is primarily due to a $1.4 million
decrease in coating fabric sales during the 1998 Period as compared to the 1997
Period. Combined, the increase in inventory which was offset by the decline in
accounts receivable during the 1998 Period resulted in $6.7 million being used
in the 1998 Period as compared to $1.0 million being provided in the 1997
Period. Additionally accrued liabilities used $2.5 million in the 1998 Period as
compared to $0.2 million in the 1997 Period. As a result of the foregoing and
the refinancing, reinstatement or restructuring of the Company's secured
indebtedness pursuant to the Plan of Reorganization, working capital at February
1, 1998 was $76.0 million as compared to $16.7 million at February 2, 1997.
Investing activities used $0.5 million in the 1998 Period as compared to $0.3
million in the 1997 Period. The Company expects spending for capital
expenditures, principally plant and equipment, in fiscal year 1998 to be greater
than fiscal year 1997 due to renewals or betterments of plant and equipment and
compliance with environmental regulations.
As a result of the foregoing, during the 1998 Period, $9.6 million was provided
by financing activities whereas during the 1997 Period $0.7 million was used by
financing activities.
<PAGE>
The Company believes that cash generated from operations and borrowings under
the its Revolving Loan Facility will be sufficient to fund its fiscal year 1998
working capital and capital expenditure requirements. However, expected cash
flows from operations are dependent upon achieving sales expectations during
fiscal year 1998 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 Revolving Loan 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 1998 may be higher than at the beginning of fiscal year 1998
or higher during various times within fiscal year 1998 than comparable periods
within fiscal year 1997.
The sales order backlog at March 1, 1998 was $54.5 million whereas at the
comparable time a year earlier the sales order backlog was $70.9 million. The
composition of the sales order backlog at March 1, 1998 reflects a weaker order
position in all product lines except specialty and coating fabrics. Of the
approximate $16.4 million decline in the sales order backlog at March 1, 1998 as
compared to the comparable time a year earlier, approximately $14.9 million
related to worsted spun fabrics, including approximately $5.3 million in
government top-dyed fabrics. The overall decline in worsted fabrics is believed
to be due, in part, to an over capacity in global worsted wool manufacturing and
fashion trends.
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 1998 Period and the Company's forward purchase
commitments, the company expects wool costs to increase approximately 1% in
fiscal year 1998 as compared to fiscal year 1997.
RESULTS OF OPERATIONS
The 1998 Period Compared to the 1997 Period
The Company's business is seasonal, accordingly, results for these
interim periods are not indicative of results for a full fiscal year. Net sales
for the 1998 Period were $29.0 million, a decrease of 7.1% from the 1997 Period.
Total yards of fabric sold decreased 8.5% from the 1997 Period to the 1998
Period. However, the average per yard selling price increased to $7.43 per yard
from $7.12 per yard due to shifts in product mix. The decrease in sales was
primarily due to the effect of product lines discontinued during fiscal year
1996 (converting, career uniform and Carpini) which realized sales of
approximately $1.9 million in the 1997 Period as compared to $0.1 million in the
1998 Period, men's woolen fabric sales which were approximately $1.6 million
lower in the 1998 Period as compared to the 1997 Period and coating fabric sales
which were approximately $1.4 million lower in the 1998 Period as compared to
the 1997 Period. These declines in sales were somewhat offset by women's woolen
and worsted sales which were approximately $2.4 million higher in the 1998
Period as compared to the 1997 Period. The decline in men's woolen fabric sales
is due, in part, to increased competitive pressures (primarily imports) as well
as delayed placement of orders by a customer as such customer shifts its
ordering methodology from projecting anticipated demand to actual receipt of
apparel orders from its customers. Overall, the Company expects men's woolen
fabric sales to be slightly lower in fiscal year 1998 as compared to fiscal year
<PAGE>
1997. The decrease in coating fabric sales is due, in part, to an unseasonably
warm fall and winter season which resulted in lower than anticipated women's
coats selling at retail. This has resulted in delayed fabric shipment and order
assortment by the Company's coating fabric customers. At March 1, 1998, the
backlog of sales orders for coating fabric is ahead of the comparable date in
the prior year. Currently, the Company expects coating fabric sales in fiscal
year 1998 to be approximately equal to fiscal year 1997. Women's woolen and
worsted fabric sales were higher in the 1998 Period as compared to the 1997
Period due, in part, to the timing of customers orders which were strong during
the fourth quarter of fiscal year 1997. Based on current backlog of sales orders
for women's woolen and worsted sales, market trends and increased competitive
pressures, the Company expects overall women's woolen and worsted fabric sales
to be lower in fiscal year 1998 as compared to fiscal year 1997.
Based on these trends (increased competitive pressures in the woolen
and worsted markets, the decline in backlog of orders, management's expectations
as to the level of government orders to be awarded to the Company and the effect
of discontinued product lines and the decision to discontinue the production of
top dyed worsted fabrics used to manufacture men's suits and government
uniforms) the Company expects sales revenue in fiscal year 1998 to be between
15% to 20% lower than in fiscal year 1997. Accordingly, on March 6, 1998, the
Company announced that, as part of its long-term strategy, it will discontinue
the production of top dye worsted used to manufacture men's suits and government
uniforms after completing orders for its fall season. In fiscal year 1997, top
dyed worsteds accounted for approximately $18 million in men's suiting fabric
sales and $10 million in government uniform fabric sales. Further, in addition
to exiting the production of top-dyed worsted fabrics, the Company is
consolidating certain manufacturing operations and implementing other plans
designed to align its costs during fiscal year 1998 with the decline in sales
anticipated in fiscal year 1998. The top dye worsted fabrics business has been a
relatively small part of the Company's overall business. However, the complexity
of manufacturing top dyes makes it extremely labor intensive and unprofitable at
its current level. By discontinuing top dye worsted fabrics, the Company
believes it can focus all of its resources on its strengths in men's and women's
woolen and worsted sportswear, coating and niche specialty markets. However,
there can be no assurance as to the level of sales that will actually be
attained in fiscal year 1998, as sales are dependent on market conditions and
other factors beyond the Company's control, nor can there be assurance that the
Company's cost reduction will be implemented successfully.
Cost of goods sold decreased $2.7 million to $25.7 million during the
1998 Period primarily as a result of a $1.4 million decline in depreciation and
amortization expense primarily due to the effect of "fresh start" accounting
previously discussed herein and the decline in sales and change in product mix.
Gross profit increased $0.5 million or 16.5% to $3.3 million in the 1998 Period,
and gross profit margin for the 1998 Period was 11.4% compared to 9.1% for the
1997 Period. Manufacturing overhead excluding depreciation and amortization was
approximately $0.3 million higher in the 1998 Period as compared to the 1997
Period. This increase was primarily due to higher group medical costs under the
Company's self-insured plan.
Selling, general and administrative expenses, excluding the provision
for uncollectible accounts, decreased 15.6% to $3.6 million in the 1998 Period
compared to $4.3 million in the 1997 Period. The majority of the decrease in the
1997 Period is due to lower incentive compensation expense and depreciation and
amortization expense. Incentive compensation expense in the 1998 Period was
lower than in the 1997 Period due to a one-time special bonus plan in fiscal
year 1997 for certain key employees, which was triggered by the Company's
emergence from Bankruptcy. The decline in depreciation and amortization expense
<PAGE>
is primarily due to the effect of "fresh start" accounting previously discussed
herein. Somewhat offsetting these declines were increased professional expenses
and higher group medical costs under the Company's self-insured plan.
The provision for uncollectible accounts increased slightly in the
1998 Period as compared to the 1997 Period. See Note 3 to the Financial
Statements contained in the 1997 Form 10-K for a discussion of the Company's
accounting policies regarding the establishment of its allowance for
uncollectible accounts.
Interest expense for the 1998 Period was $1.5 million as compared to
$1.6 million in the 1997 Period. This decrease is attributable to lower interest
rates in effect under the Loan and Security Agreement during the 1998 Period as
compared to interest rates in effect in the 1997 Period.
As a result of the foregoing, a loss before reorganization items and
income taxes of $2.0 million was realized in the 1998 Period as compared to a
loss before reorganization items and income taxes of $3.2 million in the 1997
Period. Income before depreciation and amortization, reorganization items,
interest expense and income taxes during the 1998 Period was $0.7 million as
compared to $1.3 million during the 1997 Period.
Reorganization items were $4.2 million in the 1997 Period as compared
to $20,000 in the 1998 Period. Included in reorganization items in the 1997
Period was the accrual of $3.0 million for the expected loss on the sale of
certain unerected equipment located at the Tifton facility which was not related
to the sale of such facility. Additionally, during the 1997 Period, the Company
incurred approximately $1.0 million in professional fees related to the
Company's Bankruptcy Filing which were recognized as reorganization items.
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, no income tax benefit was recognized from the realization of net
operating losses. During the 1998 Period, the Company recognized an income tax
benefit of $0.8 million at an effective income tax rate of 39%. Although the use
of the Company's net operating loss carryforwards is believed to be limited due
to the distribution of the new common stock of the Company to the Company's
unsecured creditors pursuant to the Plan of Reorganization which is believed to
have resulted in an ownership change as defined in Section 382 of the Internal
Revenue Code, the Company believes future interim periods during fiscal year
1998 will generate taxable income which will offset the income tax benefit
recognized in the 1998 Period.
As a result of the foregoing, net loss for the 1998 Period was $1.3 million as
compared to a net loss of $7.3 million in the 1997 Period.
<PAGE>
PART II -- OTHER INFORMATION
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 February 25, 1998 from
Deloitte & Touche LLP to Forstmann & Company, Inc.
(b) Current Reports on Form 8-K
None
<PAGE>
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
Executive Vice President
Finance, Administration and
Strategic Planning
MARCH 16,1998
- -------------
Date
<PAGE>
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
February 25, 1998, from Deloitte & Touche
LLP to Forstmann & Company, Inc. 22
<PAGE>
EXHIBIT 15.1
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
Board of Directors and Shareholders
Forstmann & Company, Inc.:
We have reviewed the accompanying condensed balance sheet of Forstmann &
Company, Inc. (the "Company") as of February 1, 1998 and the related condensed
statements of operations and cash flows for the thirteen weeks ended February 1,
1998 (Reorganized Company) and February 2, 1997 (Predecessor Company) and the
condensed statement of changes in shareholders' equity for the thirteen weeks
ended February 1, 1998. 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.
We have previously audited, in accordance with generally accepted auditing
standards, the balance sheet of the Company as of November 2, 1997 and the
related statements of operations, shareholders' equity, and cash flows for the
period from November 4, 1996 to July 22, 1997 of the Predecessor Company and the
period from July 23, 1997 to November 2, 1997 of the Reorganized Company (not
presented herein); and in our report dated December 19, 1997, we expressed an
unqualified opinion on those financial statements. In our opinion, the
information set forth in the accompanying condensed balance sheet as of November
2, 1997 is fairly stated, in all material respects, in relation to the balance
sheet from which it has been derived.
Deloitte & Touche LLP
Atlanta, Georgia
February 25, 1998
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This schedule contains financial information extracted from Forstmann $ Company,
Inc's. condensed financial statements for the thirteen weeks ended February 1,
1998 and is qualified in its entirety by reference to such financial statements.
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