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 January 31, 1999
----------------
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.
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(Exact name of registrant as specified in its charter)
GEORGIA 58-1651326
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
498 Seventh Avenue, New York, New York 10018
- ---------------------------------------- ----------
(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 15, 1999, there was 4,391,458 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 CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE
THIRTEEN WEEKS ENDED JANUARY 31, 1999 AND FEBRUARY 1, 1998
(unaudited)
January 31, February 1,
1999 1998
---- ----
<S> <C> <C>
Net sales $ 18,498,000 $ 29,017,000
Cost of goods sold 19,052,000 25,705,000
------------ ------------
Gross profit (loss) (554,000) 3,312,000
Selling, general and administrative expenses 3,395,000 3,590,000
Provision for uncollectible accounts 121,000 224,000
Restructuring items 1,185,000 --
------------ ------------
Operating loss (5,255,000) (502,000)
Interest expense 1,407,000 1,540,000
------------ ------------
Loss before reorganization items and
income taxes (6,662,000) (2,042,000)
Reorganization items 14,000 20,000
------------ ------------
Loss before income taxes (6,676,000) (2,062,000)
Income tax benefit -- (804,000)
------------ ------------
Net loss $ (6,676,000) $ (1,258,000)
============ ============
Per share and share information:
Loss per common share - basic and diluted $ (1.52) $ (.29)
============ ============
Weighted average common shares outstanding 4,387,819 4,384,436
============ ============
See notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
FORSTMANN & COMPANY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
JANUARY 31, 1999 AND NOVEMBER 1,1998
(unaudited)
January 31, November 1,
1999 1998
---- ----
<S> <C> <C>
ASSETS
Current Assets:
Cash $ 40,000 $ 143,000
Cash restricted for settlement of unpaid claims 328,000 327,000
Accounts receivable, net of allowance of
$1,430,000 and $1,309,000 20,709,000 31,434,000
Inventories 39,647,000 38,818,000
Current deferred tax assets -- --
Other current assets 254,000 281,000
Property, plant and equipment
held for sale 6,530,000 --
------------ ------------
Total current assets 67,508,000 71,003,000
Property, plant and equipment, net 15,375,000 22,235,000
Other assets 2,016,000 2,005,000
------------ ------------
Total $ 84,899,000 $ 95,243,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 47,131,000 $ 7,619,000
Accounts payable 3,920,000 3,151,000
Accrued liabilities 7,973,000 9,238,000
------------ ------------
Total current liabilities 59,024,000 20,008,000
Long-term debt 865,000 43,565,000
Deferred tax liabilities -- --
------------ ------------
Total liabilities 59,889,000 63,573,000
Commitments and contingencies
Shareholders' Equity:
Preferred stock, $0.01 per value, 1,000,000
shares authorized, nil outstanding -- --
Common stock, $.01 par value, 35,000,000
shares authorized, 4,391,458 and 4,387,819 shares issued
and outstanding 43,915 43,878
Additional paid-in capital 50,339,085 50,323,122
Retained deficit since July 23, 1997 (25,373,000) (18,697,000)
------------ ------------
Total shareholders' equity 25,010,000 31,670,000
------------ ------------
Total $ 84,899,000 $ 95,243,000
============ ============
See notes to condensed consolidated financial statements
</TABLE>
<PAGE>
<TABLE>
FORSTMANN & COMPANY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE
THIRTEEN WEEKS ENDED JANUARY 31, 1999 AND FEBRUARY 1, 1998
(unaudited)
January 31, February 1,
1999 1998
---- ----
<S> <C> <C>
Net loss $ (6,676,000) $ (1,258,000)
------------ ------------
Adjustments to reconcile net loss to net
cash provided (used) by operating activities:
Depreciation and amortization 1,162,000 1,335,000
Income tax not payable in cash -- (804,000)
Income tax payments (32,000) --
Provision for uncollectible accounts 121,000 224,000
Increase (decrease) in market reserves (626,000) 34,000
Gain from disposal of machinery and equipment -- (1,000)
Other 74,000 --
Changes in current assets and current
liabilities:
Accounts receivable 10,604,000 7,018,000
Inventories (261,000) (13,707,000)
Other current assets 59,000 351,000
Accounts payable 769,000 (207,000)
Accrued liabilities (1,648,000) (2,543,000)
Accrued interest payable 383,000 31,000
------------ ------------
Total adjustments 10,605,000 (8,269,000)
------------ ------------
Net cash provided (used) by operations 3,929,000 (9,527,000)
------------ ------------
</TABLE>
(continued on next page)
<PAGE>
<TABLE>
FORSTMANN & COMPANY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) FOR THE
THIRTEEN WEEKS ENDED JANUARY 31, 1999 AND FEBRUARY 1, 1998
(unaudited)
January 31, February 1,
1999 1998
---- ----
<S> <C> <C>
Cash flows used by investing activities:
Capital expenditures $ (618,000) $ (340,000)
Investment in other assets (208,000) (189,000)
Net proceeds from disposal of machinery
and equipment 21,000 1,000
------------ ------------
Net cash used by investing activities (805,000) (528,000)
------------ ------------
Cash flows from financing activities:
Net borrowings (repayments) under the
Revolving Loan Facility (1,732,000) 12,587,000
Repayment of Term Loan Facility (1,123,000) (1,123,000)
Repayment of Deferred Interest Rate Notes -- (1,570,000)
Repayment of other financing arrangements (333,000) (259,000)
Deferred financing costs (38,000) (23,000)
------------ ------------
Net cash provided (used) by financing activities (3,226,000) 9,612,000
------------ ------------
Net decrease in cash (102,000) (443,000)
Cash and restricted cash at beginning of period 470,000 1,051,000
------------ ------------
Cash and restricted cash at end of period $ 368,000 $ 608,000
============ ============
See notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
FORSTMANN & COMPANY, INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES
IN SHAREHOLDERS' EQUITY
FOR THE THIRTEEN WEEKS ENDED JANUARY 31, 1999
(unaudited)
Additional Total
Common Paid-In Retained Shareholders'
Stock Capital Deficit Equity
----- ------- ------- ------
<S> <C> <C> <C> <C>
Balance, November 1, 1998 $43,878 $ 50,323,122 $(18,697,000) $ 31,670,000
Director shares awarded 37 15,963 -- 16,000
Net loss -- -- (6,676,000) (6,676,000)
------- ------------ ------------ ------------
Balance, January 31, 1999 $43,915 $ 50,339,085 $(25,373,000) $ 25,010,000
======= ============ ============ ============
See notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
FORSTMANN & COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 1999
(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 and gaming tables, sports caps
and school uniforms. The apparel industry represents the majority of
the Company's customers. Through its wholly-owned subsidiary, Forstmann
Apparel, Inc. ("FAI"), the Company designs and markets women's suits
primarily under the "Oleg Cassini" label. FAI contracts the
manufacturing of women's suits through manufacturers based in the
Caribbean and sources complete apparel packages internationally.
2. As described in Note 1 to the Consolidated Financial Statements
contained in the Company's Annual Report on Form 10-K for the fiscal
year ended November 1, 1998 (the "1998 Form 10-K"), the Company has
incurred net losses of $19.0 million, $7.0 million and $17.8 million in
fiscal years 1998, 1997 and 1996, respectively. Net sales declined from
$199.0 million in fiscal year 1997 to $149.6 million in fiscal year
1998. Management has responded to these losses, the decline in sales
and the resulting adverse impact on the Company's liquidity by
implementing a business plan designed to align the Company's
manufacturing capacity and overhead with expected market demand. In
October 1998, the Company's Board of Directors approved the closing of
its Louisville, Georgia plant, realignment of the Company's remaining
manufacturing facilities located in Georgia and further reductions of
its selling, styling and administrative costs (the "1999 Realignment").
Implementation of the 1999 Realignment was substantially complete as of
January 31, 1999. As a result of the 1999 Realignment, the Company
incurred approximately $1.2 million in severance expense which was
recognized as a restructuring item during the thirteen week period
ended January 31, 1999 (the "1999 First Quarter"). Further, the Company
incurred costs of approximately $0.1 million during the 1999 First
Quarter related to the relocation of certain machinery and equipment.
Such costs were charged to cost of goods sold during the 1999 First
Quarter.
The operating results for fiscal year 1998, the effect of the 1998
Restructuring, and the 1999 Realignment and the formation of FAI,
including the purchase of substantially all of the assets of Arenzano
(see Note 4 to the 1998 Form 10-K), have negatively impacted the
Company's borrowing availability under its Revolving Loan Facility
(hereinafter defined). The Company's availability under its Revolving
Loan Facility was approximately $1.6 million at January 31, 1999 as
compared to $21.7 million at February 1, 1998. As of February 28, 1999
borrowing availability under the Revolving Loan Facility was $2.0
million. The Company's ability to maintain adequate availability to
meet its operating needs and to fund the 1999 Realignment is dependent
on achieving future sales consistent with management's expectations for
fiscal year 1999 and successful implementation of its cost reductions.
The majority of the Company's customers are in the domestic apparel
industry which has continued to suffer an economic decline as a result
of higher levels of imports and changing fashion trends. If these
trends continue, the Company's results of opertaion and financial
condition will continue to deteriorate, likely at a faster rate than
previously experienced. Expected cash flow from operations is dependent
upon achieving sales expectations during fiscal year 1999, which are
influenced by market conditions,
<PAGE>
including apparel sales at retail, that are beyond the control of the
Company. Further, the collectibility of accounts receivable is
dependent upon the state of the economy and, in particular, the
financial condition of the apparel industry. Also, continuing
refinement of the Company's strategies in response to evolving
circumstances could materially change the Company's working capital and
capital expenditures requirements. There can be no assurance that the
Company will be able to achieve an adequate level of sales consistent
with management's expectations for fiscal year 1999 to enable the
Company to generate sufficient funds to meet its operating needs or to
fund its 1999 Realignment. Further, there can be no assurance that the
1999 Realignment will be successfully implemented. These factors raise
substantial doubt about the Company's ability to continue as a going
concern. The financial statements do not include any adjustments that
might result from the outcome of these uncertainties.
3. One of the Company's customers accounted for approximately 18% of the
Company's revenues for the 1999 First Quarter and 17% of gross accounts
receivable at January 31, 1999. This customer has indicated that due to
general, adverse trends in the apparel industry, it desires to reduce
the amount of its orders to the Company significantly during the
remainder of fiscal year 1999. Two other individual customers accounted
for approximately 13% and 11% of the Company's revenues for the 1999
First Quarter. No other customer represented more than 8% of revenues
for the 1999 First Quarter or 8% of gross accounts receivable at
January 31, 1999.
4. Inventories are stated at the lower of cost, determined principally by
the LIFO method, or market and consist of (in thousands):
January 31, November 1,
1999 1998
---- ----
Raw materials and supplies $ 8,665 $ 10,218
Work in process 22,423 19,390
Finished products 11,054 12,331
Less market reserves (2,495) (3,121)
-------- --------
Total 39,647 38,818
Difference between LIFO
carrying value and current
replacement cost -- --
-------- --------
Current replacement cost $ 39,647 $ 38,818
======== ========
5. The Company had property, plant and equipment held for sale of $6.5
million as of January 31, 1999 which related to assets previously idled
in connection with the 1998 Restructuring and 1999 Realignment (see Note
1 to the 1998 Form 10-K and Note 2 to these Financial Statements). Such
assets are stated at fair value, based on appraised values, and will not
be depreciated in future periods.
<PAGE>
6. Other assets consist of (in thousands):
January 31, November 1,
1999 1998
---- ----
Computer information systems,
net of accumulated amortization
of $166 and $93 $ 1,032 $ 909
Deferred financing costs, net of
accumulated amortization of
$901 and $744 967 1,086
Other, net 17 10
------- -------
Total $ 2,016 $ 2,005
======= =======
7. Accrued liabilities consist of (in thousands):
January 31, November 1,
1999 1998
---- ----
Salaries, wages and related
payroll taxes $ 642 $ 606
Incentive compensation 139 290
Vacation and holiday 1,238 1,243
Interest on long-term debt 526 143
Medical insurance premiums 1,410 1,416
Professional fees 65 105
Environmental remediation 278 292
Loss on open wool purchase
commitments 469 1,537
Restructuring items 2,413 1,796
Other 793 1,810
------ ------
Total $7,973 $9,238
====== ======
8. Long-term debt consists of (in thousands):
January 31, November 1,
1999 1998
---- ----
Revolving Loan Facility $ 26,176 $ 27,908
Term Loan Facility 19,220 20,343
Other note 325 374
Capital lease obligations 1,681 1,890
Licensing agreement 594 669
-------- --------
Total debt 47,996 51,184
Current portion of long-term debt (47,131) (7,619)
-------- --------
Total long-term debt $ 865 $ 43,565
======== ========
Reference is made to Note 9 to the Consolidated Financial Statements
contained in the 1998 Form 10-K. 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, as
subsequently amended, provides for a revolving line of credit (including
a $15.0 million letter of credit facility), subject to a borrowing base
formula, of up to $70 million (the "Revolving Loan Facility") and term
loans of approximately $31.5 million (the "Term Loan Facility").
<PAGE>
As of February 8, 1999, the Company and its lenders amended the Loan and
Security Agreement, waived certain financial covenant defaults arising
from the Company's financial results for fiscal year 1998 and, among
other things, set new financial covenants for fiscal year 1999. However,
there can be no assurance that the Company will be able to achieve the
amended financial covenants during fiscal year 1999. In connection with
the amendment, the Company agreed to prepay $5.6 million of the Term Loan
Facility through borrowings under the Revolving Loan Facility.
Additionally, the Company agreed to increase its monthly Term Loan
Facility principal payment from $374,000 to $450,000 beginning March 1,
1999. Further, based on the Company's declining working capital needs in
light of declining revenues, the Company and its lenders agreed to reduce
the Revolving Loan Facility commitment from $85 million to $70 million.
This reduction is expected to reduce the Company's unused line fee by
approximately $75,000 per annum. The Company further agreed to repay a
portion of its Term Loan Facility in the future if subsequently obtained
appraised orderly liquidation values for the Company's property, plant
and equipment securing the Term Loan Facility fall below 83.1% in
relation to the outstanding amount owed under the Term Loan Facility. In
connection with entering into the amendment to the Loan and Security
Agreement the Company agreed to pay BABC for the benefit of the lenders,
$200,000 which is payable in four equal monthly installments commencing
March 31, 1999. Additionally, BABC as Agent, retains the right to
withhold up to approximately $1,694,000 in aggregate availability which
arose from the expiration of certain letters of credit previously
outstanding as a security deposit for the Company's former New York
headquarters lease.
At January 31, 1999, the Company's loan availability as defined in the
Loan and Security Agreement, in excess of outstanding advances and
letters of credit, was approximately $1.6 million. At January 31, 1999,
the Company was in compliance with such applicable covenants under the
Loan and Security Agreement. However, as a result of the uncertainties,
as more thoroughly discussed in Note 2 to these condensed consolidated
financial statements, concerning the Company's ability to continue as a
going concern, the long-term amount due under the Revolving Loan Facility
and Term Loan Facility ($40.1 million) has been included in the current
portion of long-term debt at January 31, 1999.
As described more thoroughly in Note 9 to the Consolidated Financial
Statements contained in the 1998 Form 10-K, the Company had previously
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.
9. Statements of Financial Accounting Standards No. 128, "Earnings Per
Share," became effective during fiscal year 1998 and requires two
presentations of earnings per share -"basic" and "diluted". Basic
earnings per share is computed by dividing income available to common
stockholders (the numerator) by the weighted average number of common
shares (the denominator) for the period. The computation of diluted
earnings per share is similar to basic earnings per share, except that
the denominator is increased to include the number of additional common
shares that would have been outstanding if the potentially dilutive
common shares had been issued.
<PAGE>
The numerator in calculating both basic and diluted earnings per share
for each period is the reported net loss. The denominator used in
calculating both basic and diluted is the weighted average common shares
outstanding as there were no potentially dilutive shares for either
period.
10. As discussed in Note 13 to the Consolidated Financial Statements
contained in the 1998 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 either
party to perform corrective action at these sites. Stevens submitted a
CSR for the Burn Area site. During fiscal year 1998, EPD and Stevens
corresponded regarding the Stevens CSR. It is the Company's understanding
that Stevens is waiting for a response from EPD regarding the CSR
submitted from Stevens.
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 revised Corrective Action Plan ("CAP") on October 31,
1997 which has been approved by EPD. The revised CAP 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. The Company has completed
installation of the recovery well and the groundwater collection trench.
In addition to the installation of these two systems, the CAP requires
the submission of an Annual Corrective Action Status Report to EPD. The
Company submitted an interim report to EPD on March 2, 1999 and plans to
submit the required Annual Corrective Action Status Report by July 31,
1999.
<PAGE>
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.
By letter dated December 21, 1998, EPD requested that the Company submit
a CSR for the site by June 21, 1999. EPD indicated that it had sent
Burlen a similar request. The Company intends to submit the CSR for the
site by the requested deadline.
At January 31, 1999, 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'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 January 31, 1999 is adequate.
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 1998 Form 10-K for a
discussion of the Company's financial condition as of November 1, 1998,
including a discussion of the Company's anticipated liquidity and working
capital requirements during its 1999 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, foreign currency exchange rates, the
adequacy of the Company's current financing, any unexpected financing
requirements, and changes in the general economic climate.
<PAGE>
Recent Events
1999 Realignment
As described in Note 1 to the Consolidated Financial Statements contained in the
1998 Form 10-K, the Company has incurred net losses of $19.0 million, $7.0
million and $17.8 million in fiscal years 1998, 1997 and 1996, respectively. Net
sales declined from $199.0 million in fiscal year 1997 to $149.6 million in
fiscal year 1998. Management has responded to these losses, the decline in sales
and the resulting adverse impact on the Company's liquidity by implementing a
business plan designed to align the Company's manufacturing capacity and
overhead with expected market demand.
In October 1998, the Company's Board of Directors approved the closing of its
Louisville, Georgia plant, realignment of the Company's remaining manufacturing
facilities located in Georgia and further reductions of its selling, styling and
administrative costs (the "1999 Realignment"). Implementation of the 1999
Realignment was substantially complete as of January 31, 1999. As a result of
the 1999 Realignment, the Company incurred approximately $1.2 million in
severance expense which was recognized as a restructuring item during the
thirteen week period ended January 31, 1999 (the "1999 First Quarter"). Further,
the Company incurred costs of approximately $0.1 million during the 1999 First
Quarter related to the relocation of certain machinery and equipment. Such costs
were charged to cost of goods sold during the 1999 First Quarter.
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 fiscal quarter. 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.
Reference is made to Note 9 to the Consolidated Financial Statements contained
in the 1998 Form 10-K. The Company funds its operating needs through borrowings
under it's Amended and Restated Loan and Security Agreement (the "Loan and
Security Agreement") which was entered into between the Company and a syndicate
of financial institutions led by BankAmerica Business Credit, Inc. ("BABC") on
July 23, 1997. The Loan and Security Agreement, as subsequently amended,
provides for a revolving line of credit (including a $15.0 million letter of
credit), subject to a base borrowing formula of up to $70 million. Under the
Loan and Security Agreement, as of January 31, 1999, the Company owed $19.2
million in term loans (the "Term Loan Facility"). Subsequently, on February 8,
1999, the Loan and Security Agreement was amended and the Company agreed, among
other things, to prepay $5.6 million of the Term Loan Facility through
borrowings under the Revolving Loan Facility. The $5.6 million had previously
been reserved from the revolving line of credit availability under the base
borrowing formula. Further, the Company agreed to increase its monthly Term Loan
<PAGE>
Facility principal payment from $374,000 to $450,000 beginning March 1, 1999.
The Company agreed to repay a portion of the Term Loan Facility in the future if
subsequently obtained appraised orderly liquidation values for the Company's
property, plant and equipment securing the Term Loan Facility fall below 83.1%
in relation to the outstanding amount owed under the Term Loan Facility.
The Company's availability under its Revolving Loan Facility was approximately
$1.6 million at January 31, 1999 as compared to $21.7 million at February 1,
1998. At February 28, 1999, the Company's availability under its Revolving Loan
Facility was $2.0 million. At January 31, 1999, the Company was in compliance
with the applicable covenants under its Loan and Security Agreement. However, as
a result of the uncertainties concerning the Company's ability to continue as a
going concern, the long-term amount due under the Revolving Loan Facility and
Term-Loan Facility ($40.1 million) has been classified in the current portion of
long-term debt at January 31, 1999 for financial reporting purposes.
The Company's ability to maintain adequate availability to meet its operating
needs and to fund the 1999 Realignment is dependent on achieving future sales
consistent with management expectations for fiscal year 1999 and successful
implementation of its cost reductions. The majority of the Company's customers
are in the domestic apparel industry which has continued to suffer an economic
decline as a result of higher levels of imports and changing fashion trends. If
these trends continue, the Company's results of operations and financial
condition will continue to deteriorate, likely at a faster rate than previously
experienced. Expected cash flow from operations is dependent upon achieving
sales targets during fiscal year 1999, which are influenced by market
conditions, including apparel sales at retail, that are beyond the control of
the Company. Further, the collectibility of accounts receivable is dependent
upon the state of the economy and, in particular, the financial condition of the
apparel industry. Also, continuing refinement of the Company's strategies in
response to evolving circumstances could materially change the Company's working
capital and capital expenditures requirements. There can be no assurance that
the company will be able to achieve an adequate level of sales consistent with
management's expectations for fiscal year 1999 to enable the Company to generate
sufficient funds to meet its operating needs or to fund its 1999 Realignment.
Further, there can be no assurance that the 1999 Realignment will be
successfully implemented. These factors raise substantial doubt about the
Company's ability to continue as a going concern.
During the thirteen-week period ended January 31, 1999 (the "1999 First
Quarter"), operations provided $3.9 million of cash, whereas $9.5 million was
used by operations during the thirteen-week period ended February 1, 1998 (the
"1998 First Quarter"). This $13.4 million increase in cash provided by
operations in the 1999 First Quarter was primarily due to a $13.4 million
decrease in cash used by inventory during the 1999 First Quarter as compared to
the 1998 First Quarter. The decrease in cash used by inventory during the 1999
First Quarter as compared to the 1998 First Quarter resulted from the Company
curtailing its manufacturing operations during the 1999 First Quarter. This was
in response to significantly lower receipt of customer sales orders during the
1999 First Quarter as compared to the 1998 First Quarter for product to be
delivered in the Company's second and third fiscal quarters as well as the
Company's decision to exit certain product lines in connection with the 1998
Restructuring (see Note 1 to the 1998 Form 10-K ) and reduced worsted
manufacturing capacity resulting from the 1999 Realignment (see Note 2 to these
Financial Statements).
<PAGE>
Investing activities used $0.8 million in the 1999 First Quarter as compared to
$0.5 million in the 1998 First Quarter. The Company expects spending for capital
expenditures, principally plant and equipment, in fiscal year 1999 to be
approximately the same as fiscal year 1998 due to costs incurred in connection
with the Company's leasehold improvements at the Company's new headquarters in
New York and renewal or betterments of plant and equipment and compliance with
environmental regulations.
As a result of the foregoing, during the 1999 First Quarter, $3.2 million was
used by financing activities whereas during the 1998 First Quarter $9.6 million
was provided by financing activities.
The sales order backlog at February 28, 1999 was $33.9 million whereas at the
comparable time a year earlier the sales order backlog was $54.5 million. The
composition of the sales order backlog at February 28, 1999 reflects a weaker
order position in all major product lines except specialty fabrics which
increased by $0.9 million when compared to a year earlier due to an increase in
orders for fabrics used in baseball caps. Of the approximate $20.6 million
decline in the sales order backlog at February 28, 1999 as compared to the
comparable time a year earlier, approximately $10.9 million related to menswear
fabrics and government fabrics. Approximately $7.6 million of this decline
related to the Company's decision to exit men's suits and government businesses.
Menswear fabrics further declined primarily due to an over capacity in global
worsted wool manufacturing and fashion trends. The order position for coating
fabrics at February 28, 1999 has declined by $6.2 million over the comparable
time a year earlier. The decrease in coating fabric sales order backlog is
primarily due to the unseasonably warm winter experienced throughout much of the
U.S. in 1997-1998. As a result, initial coating fabric orders have been delayed
by retailers, which has delayed orders from apparel manufacturers. The
womenswear fabric sales order backlog at February 28, 1999 declined by $4.9
million over the comparable time a year earlier. The decline in the backlog of
sales orders for women's fabrics is twofold. First, an over capacity of woolen
flannel manufacturing coupled with excessive women's wool flannel apparel
inventory at retail has lead to a decline in demand for the Company's women's
wool flannel fabrics. Second, the reduction in the Company's worsted fabrics
manufacturing capacity has caused the Company to limit somewhat its women's
worsted product offerings.
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 1999 First Quarter and the Company's forward purchase
commitments, the Company expects wool costs to decrease approximately 20% in
fiscal year 1999 as compared to fiscal year 1998.
Year 2000 Matters
Many computer systems experience problems handling dates beyond the year 1999.
Therefore, some computer hardware and software will need to be modified prior to
the year 2000 in order to remain functional. The Company is in the process of
updating or replacing its computerized systems to ensure its systems are "Year
2000" compliant and to improve the Company's overall manufacturing, planning and
inventory related systems. The Company is utilizing both internal and external
resources to upgrade or replace its existing computerized systems. Costs
associated with upgrading existing systems to address the Year 2000 matter will
be expensed in the period incurred, whereas costs associated with the
<PAGE>
replacement of existing systems will be capitalized in the period incurred.
During the 1999 First Quarter, the Company capitalized $0.2 million in costs
associated with the replacement of existing systems.
The Company expects its Year 2000 upgrade project and the replacement of its
manufacturing planning and inventory related systems to be completed during the
second quarter of calendar year 1999. There can be no assurance, however, that
there will not be a delay in, or increased costs associated with the
implementation of such changes, and any inability to implement such changes
could have a material adverse effect on the Company.
The Company has not completed its assessment of the Year 2000 compliance of its
vendors and customers, nor of the possible consequences to the Company of the
failure of one or more of its vendors and customers to become Year 2000
compliant on a timely basis. The Company expects to complete such assessment
before the end of the third quarter of calendar year 1999. It is possible that
if a substantial number of the Company's customers failed to implement Year 2000
compliant billing or payment systems, for example, their payments to the Company
might be disrupted which might adversely affect the Company's cash flow. The
Company will discuss these matters with its key vendors and customers during
1999 to attempt to ascertain whether and to what extent such problems are likely
to occur. It is not clear, however, what, if any measures the Company could take
to deal with such eventualities while still maintaining customer and vendor
relationships. The Company does not believe that it has other relationships with
vendors and suppliers which, if disrupted, due to the failure of such vendors
and suppliers to deal adequately with their own Year 2000 compliance issues,
would have a material adverse effect on the Company.
The Company has completed an assessment of its manufacturing processes and
identified which processes are dependent on third-party provided software that
may need to be modified in order to be Year 2000 compliant. The Company intends
to notify such third-party providers before the end of the second quarter of
calendar year 1999 to determine whether such software needs to be modified in
order to be Year 2000 compliant. Where software modifications are required, the
Company will engage the appropriate third-party software providers to make such
Year 2000 compliant modifications. Should the Company be unable to obtain the
appropriate software modifications, the Company believes it can alter its
manufacturing processes to supplement any processes idled by non compliance with
the Year 2000.
Results of Operations
The 1999 First Quarter Compared to the 1998 First Quarter
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 1999 First Quarter were $18.5 million, a decrease of 36.3% from the 1998
First Quarter. Total yards of fabric sold decreased 40.2% from the 1998 First
Quarter to the 1999 First Quarter and the average per yard selling price
decreased to $7.26 per yard from $7.43 per yard due to shifts in product mix and
sales price decline. The decrease in sales was primarily due to womenswear
fabric sales which were approximately $8.9 million lower in the 1999 First
Quarter as compared to the 1998 First Quarter and menswear fabric sales which
were approximately $4.5 million lower in the 1999 First Quarter as compared to
the 1998 First Quarter. These decreases were somewhat offset by increases in
specialty fabric sales of $0.7 million, coating fabric sales of $0.5 million and
government fabric sales of $0.2 million during the 1999 First Quarter as
compared to the 1998 First Quarter. Additionally, the Company added sales of
$1.5 million for FAI during the 1999 First Quarter. Menswear fabric sales
<PAGE>
declined due, in part, to the Company's decision made in March 1998 to exit the
men's top dyed suit business. Overall, the Company expects men's woolen fabric
sales to be slightly lower in fiscal year 1999 as compared to fiscal year 1998
due to fashion trends and increased competition from imports. Women's woolen and
worsted fabric sales were lower in the 1999 First Quarter as compared to the
1998 First Quarter. 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
significantly lower in fiscal year 1999 as compared to fiscal year 1998.
Currently, the Company expects coating fabric sales in fiscal year 1999 to be
approximately equal to fiscal year 1998.
Cost of goods sold decreased $6.7 million to $19.1 million during the
1999 First Quarter primarily as a result of the decline in sales and change in
product mix. Gross profit decreased $3.9 million from a profit of $3.3 million
in the 1998 First Quarter compared to a loss of $0.6 million in the 1999 First
Quarter, and gross profit margin for the 1999 First Quarter was (3.0%) compared
to 11.4% for the 1998 First Quarter. This decline in the gross profit margin is
due to fixed manufacturing costs which are not absorbed when manufacturing
operations are running at volumes below full capacity. As a result of operating
below full capacity, $3.1 million in fixed manufacturing costs were unabsorbed
during the 1999 First Quarter as compared to $0.5 million during the 1998 First
Quarter.
Selling, general and administrative expenses, excluding the provision
for uncollectible accounts, decreased 5.4% to $3.4 million in the 1999 First
Quarter compared to $3.6 million in the 1998 First Quarter. However, included in
selling, general and administrative expenses during the 1999 First Quarter is
$0.8 million related to FAI. The majority of the decrease in selling, general
and administrative expenses exclusive of FAI during the 1999 First Quarter was
primarily due to a decrease in human resource related expenses as the Company
reduced its overhead in response to lower sales.
The provision for uncollectible accounts decreased to $0.1 million in
the 1999 First Quarter as compared to $0.2 million in the 1998 First Quarter.
See Note 3 to the Consolidated Financial Statements contained in the 1998 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 1999 First Quarter was $1.4 million as
compared to $1.5 million in the 1998 First Quarter due to comparable debt
levels for each period.
As a result of the foregoing, a loss before reorganization and
restructuring items and income taxes of $5.5 million was realized in the 1999
First Quarter as compared to a loss before reorganization items and income taxes
of $2.0 million in the 1998 First Quarter. Loss before depreciation and
amortization, reorganization and restructuring items, interest expense and
income taxes during the 1999 First Quarter was $3.0 million as compared to
income before depreciation and amortization, reorganization items, interest
expense and income taxes of $0.7 million during the 1998 First Quarter.
Restructuring items were $1.2 million during the 1999 First Quarter due
to severance expenses incurred as a result of the 1999 Realignment (see Note 2
to these Financial Statements).
<PAGE>
During fiscal year 1995, the Company fully utilized its net operating
loss carrybacks as permitted by the Internal Revenue Code. For the 1999 First
Quarter, no income tax benefit was recognized from the realization of a net
operating loss. During the 1998 First Quarter, the Company recognized an income
tax benefit of $0.8 million at an effective income tax rate of 39% which was
reversed in a subsequent interim period.
As a result of the foregoing, net loss for the 1999 First Quarter was
$6.7 million as compared to a net loss of $1.3 million in the 1998 First
Quarter.
<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 March 10, 1999
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, 1999
- --------------
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
March 10, 1999, from Deloitte & Touche
LLP to Forstmann & Company, Inc. 23
<PAGE>
Exhibit 15.1
INDEPENDENT ACCOUNTANTS' REPORT
Board of Directors and Shareholders
Forstmann & Company, Inc.:
We have reviewed the accompanying condensed consolidated balance sheet of
Forstmann & Company, Inc. and subsidiary (the "Company") as of January 31, 1999
and the related condensed consolidated statements of operations and cash flows
for the thirteen weeks ended January 31, 1999 and February 1, 1998 and the
condensed consolidated statement of changes in shareholders' equity for the
thirteen weeks ended January 31, 1999. 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 of 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 consolidated financial statements for them to be in
conformity with generally accepted accounting principles.
The accompanying condensed consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
1 to the 1998 Form 10-K (not presented herein) and in Note 2 to these condensed
consolidated financial statements, certain conditions raise substantial doubt
about its ability to continue as a going concern. Management's plans in regard
to these matters are also described in Notes 1 to the 1998 Form 10-K and 2 to
these condensed consolidated financial statements.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of the Company as of November 1, 1998
and the related consolidated statements of operations, shareholders' equity, and
cash flows for the period from November 3, 1997 to November 1, 1998 (not
presented herein); and in our report dated February 8, 1999, we expressed an
unqualified opinion on those financial statements and included an explanatory
paragraph concerning matters that raise substantial doubt about the Company's
ability to continue as a going concern. In our opinion, the information set
forth in the accompanying condensed consolidated balance sheet as of November 1,
1998 is fairly stated, in all material respects, in relation to the balance
sheet from which it has been derived.
Deloitte & Touche LLP
Atlanta, Georgia
March 10, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains financial information extracted from Forstmann &
COmpany, Inc's. condensed consolidated financial statements for the
thirteen weeks ended January 31, 1999 and is qualified in its entirety by
references to such financial statements.
</LEGEND>
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