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,May 3, 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 YORKAvenue of the Americas, New York, New York 10036
----------------------------------------------- ---------
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) (212) 642-6900
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. (X)X Yes ( )NoNo
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)X Yes ( )NoNo
As of March 17,June 16, 1998 there was 4,385,7704,386,390 shares of Common Stock outstanding.
Total number of pages: 2241 pages.
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
FORSTMANN & COMPANY, INC.
CONDENSED STATEMENTS OF OPERATIONS FOR THE
THIRTEEN WEEKS ENDED FEBRUARY 1, 1998 AND FEBRUARY 2,FORSTMANN & COMPANY, INC.
CONDENSED STATEMENTS OF OPERATIONS
FOR THE THIRTEEN WEEKS ENDED MAY 3, 1998 AND MAY 4, 1997
AND THE TWENTY-SIX WEEKS ENDED MAY 3, 1998 AND MAY 4, 1997
(unaudited)
Reorganized Predecessor Reorganized Predecessor
Company Company February 1, FebruaryCompany Company
Thirteen Thirteen Twenty-Six Twenty-Six
Weeks Ended Weeks Ended Weeks Ended Weeks Ended
May 3, May 4, May 3, May 4,
1998 1997 1998 1997
---- ---- ---- ----
Net sales $ 49,625,000 $ 64,786,000 $ 78,642,000 $ 96,004,000
Cost of goods sold 41,718,000 52,860,000 67,423,000 81,235,000
------------ ------------ ------------ ------------
Gross profit 7,907,000 11,926,000 11,219,000 14,769,000
Selling, general and
administrative expenses 3,176,000 3,727,000 6,766,000 7,981,000
Provision for uncollectible
accounts 347,000 258,000 571,000 429,000
Restructuring items 312,000 -- 312,000 --
------------ ------------ ------------ ------------
Operating income 4,072,000 7,941,000 3,570,000 6,359,000
Interest expense (contractual
interest of $3,943,000 and
$7,680,000 for 1997) 1,611,000 1,727,000 3,151,000 3,312,000
------------ ------------ ------------ ------------
Income before reorganization
items and income taxes 2,461,000 6,214,000 419,000 3,047,000
Reorganization items 35,000 4,174,000 55,000 8,325,000
------------ ------------ ------------ ------------
Income (loss) before
income taxes 2,426,000 2,040,000 364,000 (5,278,000)
Income tax provision 946,000 -- 142,000 --
------------ ------------ ------------ ------------
Net income (loss) $ 1,480,000 $ 2,040,000 $ 222,000 $ (5,278,000)
============ ============ ============ ============
Per share and share information:
Income per common
share - basic and diluted $ .34 $ .05
============ ============
Weighted average common
shares outstanding-basic 4,384,436 4,384,436
============ ============
Weighted average common
shares outstanding-diluted 4,398,489 4,389,255
============ ============
See notes to financial statements.
FORSTMANN & COMPANY, INC.
CONDENSED BALANCE SHEETS
MAY 3, 1998 AND NOVEMBER 2, 1997
(unaudited)
May 3, November 2,
1998 1997
---- ----
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
FORSTMANN & COMPANY, INC.
CONDENSED BALANCE SHEETS
FEBRUARY 1, 1998 AND NOVEMBER 2, 1997
(unaudited)
February 1, November 2,
1998 1997
---- ----
ASSETS
Current Assets:
Cash .......................................... $ 48,00047,000 $ 493,000
Cash restricted for settlement of unpaid claims 560,000563,000 558,000
Accounts receivable, net of allowance of
$682,000$1,029,000 and $458,000 ....................... 34,763,00049,345,000 42,005,000
Inventories ................................... 56,883,00051,490,000 43,210,000
Current deferred tax assets ................... 804,000-- --
Other current assets .......................... 575,000701,000 926,000
------------------------- ------------
Total current assets ........................ 93,633,000102,146,000 87,192,000
Property, plant and equipment, net .............. 23,960,00022,796,000 24,779,000
Other assets .................................... 1,706,0001,694,000 1,670,000
------------------------- ------------
Total ....................................... $ 119,299,000$126,636,000 $113,641,000
========================= ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt .......... $ 5,709,0005,876,000 $ 5,756,000
Accounts payable .............................. 3,099,0002,906,000 3,335,000
Accrued liabilities ........................... 8,859,0008,568,000 11,371,000
------------------------- ------------
Total current liabilities ................... 17,667,00017,350,000 20,462,000
Long-term debt .................................. 52,259,00058,433,000 42,548,000
Deferred tax liabilities ........................ -- --
------------------------- ------------
Total liabilities ........................... 69,926,00075,783,000 63,010,000
Commitments and contingencies
Shareholders' Equity:
New commonCommon 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)512,000 290,000
------------------------- ------------
Total shareholders' equity ...................... 49,373,00050,853,000 50,631,000
------------------------- ------------
Total ..................................... $ 119,299,000$126,636,000 $113,641,000
========================= ============
See notes to financial statements ...............statements.
FORSTMANN & COMPANY, INC.
CONDENSED STATEMENTS OF CASH FLOWS FOR THE
THIRTEEN WEEKS ENDED FEBRUARY 1, 1998 AND FEBRUARY 2,FORSTMANN & COMPANY, INC.
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE TWENTY-SIX WEEKS ENDED MAY 3, 1998 AND MAY 4, 1997
(unaudited)
Reorganized Predecessor
Company Company
February 1, February 2,May 3, May 4,
1998 1997
---- ----
Net loss ..........................................income (loss) $ (1,258,000) $(7,318,000)
------------222,000 $ (5,278,000)
----------- ----------
Adjustments to reconcile net lossincome
(loss) to net cash used by operating
activities:
Depreciation and amortization ................. 1,335,000 3,112,0002,633,000 6,209,000
Income tax not payable in cash ................ (804,000)provision 142,000 --
Income tax payments ........................... -- --(5,000) (108,000)
Provision for uncollectible accounts .......... 224,000 171,000571,000 429,000
Increase (decrease) in market reserves ........ 34,000 (952,000)1,080,000 (3,340,000)
Loss from disposal, abandonment and
impairment of machinery and equipment
and other assets and (gain) from disposal ... (1,000) 3,039,0002,000 3,356,000
Gain associated with NY office lease surrender (987,000) --
Changes in current assets and current liabilities:
Accounts receivable ....................... 7,018,000 9,964,000(7,911,000) (17,937,000)
Inventories ............................... (13,707,000) (9,076,000)(9,360,000) 3,235,000
Other current assets ...................... 351,000 53,000230,000 (148,000)
Accounts payable .......................... (207,000) 403,000(429,000) 1,239,000
Accrued liabilities ....................... (2,543,000) (179,000)(876,000) 3,990,000
Accrued interest payable .................. 31,000 600,00044,000 (189,000)
Operating liabilities subject to compromise -- (234,000)
------------(2,000)
----------- ----------
Total adjustments ............................... (8,269,000) 6,901,000
------------(14,866,000) (3,266,000)
----------- ----------
Net cash used by operations ................... (9,527,000) (417,000)
------------(14,644,000) (8,544,000)
----------- ----------
(continued on next page)
FORSTMANN & COMPANY, INC.
CONDENSED STATEMENTS OF CASH FLOWS FOR THE
THIRTEEN WEEKS ENDED FEBRUARY 1, 1998 AND FEBRUARY 2,FORSTMANN & COMPANY, INC.
CONDENSED STATEMENTS OF CASH FLOWS (continued)
FOR THE TWENTY-SIX WEEKS ENDED MAY 3, 1998 AND MAY 4, 1997
(unaudited)
Reorganized Predecessor
Company Company
February 1, February 2,May 3, May 4,
1998 1997
---- ----
Cash flows used by investing activities:
Capital expenditures ........................... (340,000) (176,000)(1,425,000) (540,000)
Investment in other assets, primarily
computer information systems ..... (189,000) (105,000)(355,000) (205,000)
Net proceeds from disposal of machinery
and equipment ................................ 1,000 1,000124,000
------------ -----------------------
Net cash used by investing activities ........ (528,000) (280,000)(1,779,000) (621,000)
------------ -----------------------
Cash flows from financing activities:
Net borrowings under the Revolving Loan Facility 12,587,00024,566,000 --
Net borrowings under the DIP Facility .......... -- 1,193,00010,283,000
Repayment of Term Loan Facility ................ (1,123,000)(6,612,000) --
Repayment of Deferred Interest Rate Notes ...... (1,570,000)(1,571,000) --
Repayment of other financing arrangements ...... (259,000) (283,000)(378,000) (480,000)
Deferred financing costs ....................... (23,000) (213,000)(638,000)
------------ -----------------------
Net cash provided by financing activities .... 9,612,000 697,00015,982,000 9,165,000
------------ ------------
Net decrease in cash ............................. (443,000)(441,000) --
Cash and restricted cash at beginning of period .. 1,051,000 48,000
------------ -----------------------
Cash and restricted cash at end of period ........ $ 608,000610,000 $ 48,000
============ =======================
See notes to financial statements.
FORSTMANN & COMPANY, INC.
CONDENSED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE THIRTEEN WEEKS ENDED FEBRUARY 1,FORSTMANN & COMPANY, INC.
CONDENSED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE TWENTY-SIX WEEKS ENDED MAY 3, 1998
(unaudited)
Additional Retained Total
Common Paid-In Retained Shareholders'
Stock Capital Earnings Shareholders'
STOCK CAPITAL (DEFICIT) EQUITYEquity
----- ------- -------- ------
Balance, November 2, 1997 $43,844$ 43,844 $50,297,156 $ 290,000 $ 50,631,000$290,000 $50,631,000
Net loss ................income -- -- (1,258,000) (1,258,000)
-------222,000 222,000
-------- ----------- -------- -----------
------------
Balance, February 1,May 3, 1998 $43,844$ 43,844 $50,297,156 $ (968,000) $ 49,373,000
=======$512,000 $50,853,000
======== =========== ======== =========== ============
See notes to financial statements.
FORSTMANN & COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
FEBRUARY 1,MAY 3, 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 (the "1997 Form 10-K"), 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 May 11, 1998, the Company announced that it had agreed to acquire the
business and substantially all of the assets of Arenzano Trading Co.,
Inc. ("Arenzano"), a manufacturer of women's suits primarily under the
"Oleg Cassini" label. Arenzano had instituted voluntary bankruptcy
proceedings in April 1998. The Company's purchase was made pursuant to an
order signed by United States Bankruptcy Judge Burton R. Lifland, dated
May 8, 1998, in the cases entitled, In re Arenzano Trading Company, Inc.
and In re B&B Corporation, Case Nos. 98 B 42508 and 98 B 42520 (BRL). The
transaction was completed on May 13, 1998 at a purchase price of $2.0
million. However, the Company, as an unsecured creditor of Arenzano, is
expected to receive a distribution from the bankruptcy estate in the
approximate amount of $275,000 out of the proceeds to the estate from
the purchase. The acquisition allows the Company to expand its fabrics
business into the apparel manufacturing business. The Company expects to
benefit from Arenzano's expertise in manufacturing apparel in the
Caribbean, as well as its ability in sourcing complete apparel packages
internationally. The Company will operate the new apparel venture as a
wholly-owned subsidiary under the name Forstmann Apparel, Inc. The new
venture is expected to provide an enhanced outlet for the Company's
fabrics while providing growth opportunities outside of the Company's
core business. The working capital and capital expenditure requirements
of Forstmann Apparel, Inc. for the next twelve months will be funded from
borrowings under the Revolving Loan Facility. The Company believes that
availability under its Revolving Loan Facility will be adequate to fund
the working capital and capital expenditure requirements of the Company
and Forstmann Apparel, Inc. for the next twelve months. Arenzano had
sales of approximately $17 million for its most recent fiscal year.
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 resulthas resulted 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
behave
been impaired or rendered obsoleteobsolete. Accordingly, during the thirteen
weeks ended May 3, 1998 (the "1998 Second Quarter"), the Company
recognized severance expense of approximately $0.8 million, accrued
approximately $0.2 million for stay put bonuses and increased inventory
market reserves by $1.1 million in connection with the carrying value1998
Restructuring. Severance expense and expense associated with the stay put
bonuses were recognized as restructuring items during the 1998 Second
Quarter. Inventory market reserves associated with the 1998 Restructuring
were included in cost of certain ofgoods sold during the Company's property, plant and equipment may be impaired.1998 Second Quarter. The
Company estimates that severancean additional expense will beof approximately $0.5$0.2
million and
will be recognized as a restructuring expense in the Company's second
quarter of fiscal year 1998. The Company estimates thatassociated with the stay put bonuses will be approximately $0.8 million and will be accrued over the
employee'saffected employees remaining service periodperiods as a restructuring expense.item
during the remainder of the Company's fiscal year 1998. 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 expenseitem in the period such costs
can be reasonably estimated. ImpairmentAny additional impairment of inventories
will be recognized as an operating expenseincluded in cost of goods sold in the periods in which the
impairment can be reasonably estimated, whereasestimated. The Company currently estimates
that there is no impairment ofin property, plant and equipment as a result
of the 1998 Restructuring. However, changes in future business conditions
could result in an impairment in property, plant and equipment and will
be recognized as a restructuring expenseitem in the periods in which the
impairment can be reasonably estimated. Costs incurred to relocate
certain machinery and equipment will be charged against operationsto cost of goods sold in
the periods incurred. See Note 10 to these Financial Statements for a
description of restructuring items recognized during the thirteen weeks
ended May 3, 1998.
The Company and the landlord of its corporate and marketing offices have
agreed in principle to a lease surrender agreement whereby the Company
will vacate such premises on or before January 1, 1999. Pursuant to the
agreement, the Company will waive any and all existing and future claims
against the landlord arising out of, or in connection with the takeover
agreement, effective August 1, 1995, whereby the landlord had previously
agreed to take over the Company's remaining obligations under the
Company's previous lease. The Company also waives the right to collect
contributions due the Company from the landlord for leasehold
improvements and related fees and expenses the Company had incurred. The
Company had fully reserved such claims against the landlord during its
fiscal year 1997. In anticipation of entering into the lease surrender
agreement, the Company has written-down property, plant and equipment by
approximately $1.1 million associated with the future abandonment of
leasehold improvements and furniture and fixtures, wrote-down the
estimated deferred rent liability at January 1, 1999 by approximately
$2.1 million and accrued approximately $0.3 million for broker's
commission. These items resulted in a $0.7 million gain which was
recorded as a restructuring item during the 1998 Second Quarter. The
Company is currently considering alternative new locations for its
corporate and marketing offices, and it is expected that the Company will
reduce the amount of space it occupies and the associated rent expense.
3. One of the Company's customers accounted for approximately 31%23% of the
Company's revenues for the thirteentwenty-six weeks ended February 1,May 3, 1998 and 34%14% of
gross accounts receivable at February 1,May 3, 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,May 3, November 2,
1998 1997
---- ----
Raw materials and supplies ........... $ 9,07011,443 $ 8,303
Work-in-process ...................... 33,26628,922 27,459
Finished products .................... 15,74413,840 8,169
Less market reserves ................. (1,257)(2,715) (721)
-------- --------
Total ................................ 56,88351,490 43,210
Difference between LIFO
carrying value and current
replacement cost ................... 613 --
-------- --------
Current replacement cost ............. $ 57,49652,103 $ 43,210
======== ========
The Company increased market reserves by $1.1 million for inventory
related to the top dye worsted fabrics product line which will be
discontinued as part of the 1998 Restructuring (see Note 2 to these
Financial Statements). This expense was charged to cost of goods sold
during the thirteen weeks ended May 3, 1998.
5. Other assets consist of (in thousands):
February 1,May 3, November 2,
1998 1997
---- ----
Computer information systems,
net of accumulated
amortization of $0$2 and $0 ....................... $ 225450 $ 94
Deferred financing costs, net of
accumulated amortization of
$304$443 and $164 ...................... 1,3721,232 1,520
Other, net ........................... 10912 56
-------- --------
Total ............................... $ 1,7061,694 $ 1,670
======== ========
6. Accrued liabilities consist of (in thousands):
February 1,May 3, November 2,
1998 1997
---- ----
Salaries, wages and related
payroll taxes ...................... $ 9351,609 $ 978
Incentive compensation ............... 347511 2,082
Vacation and holiday ................. 1,7932,316 1,729
Employee benefits plans .............. 52 20
Interest on long-term debt ........... 93106 62
Medical insurance premiums ........... 1,322claims 1,327 1,327
Professional Fees .................... 142fees 176 355
Environmental remediation ............ 343341 361
Deferred rental and other lease
obligations 2,16632 2,186
Other ................................ 1,642 2,2712,150 2,291
-------- --------
Total ................................ $ 8,8358,568 $ 11,371
======== ========
The Company reduced its deferred rent liability by $2.1 million in
anticipation of entering into the lease surrender agreement as more fully
described in Note 2 to these Financial Statements.
7. Long-term debt consists of (in thousands):
February 1,May 3, November 2,
1998 1997
---- ----
Revolving Loan Facility .............. $ 25,97637,955 $ 13,389
Term Loan Facility ................... 29,20423,715 30,327
Deferred Interest Rate Notes ......... -- 1,571
Other note ........................... 519515 603
Capital lease obligations ............ 2,2692,124 2,414
-------- --------
Total debt ........................... 57,96864,309 48,304
Current portion of long-term debt .... (5,709)(5,876) (5,756)
-------- --------
Total long-term debt ................. $ 52,25958,433 $ 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,May 3, 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$25.5 million.
In accordance with section 4.5(c) of the Loan and Security Agreement, a
Term Loan Facility payment equal to 50% of any Excess Cash Flow for any
fiscal year must be made by April 30 following the end of the fiscal year
in which such Excess Cash Flow arose. Excess Cash Flow for fiscal year
1997 was calculated as $2.7 million, and on April 27, 1998, the Company
repaid the Term Loan Facility by approximately $1.4 million through
borrowings under the Revolving Loan Facility.
The Company and its lenders have negotiatedas of March 24, 1998 entered into an
amendment to the Loan and Security Agreement to modify,modifying, among other
things, the definition of earnings before interest, income taxes,
depreciation, amortization and reorganization items ("EBITDAR") and
Adjusted Tangible Net Worth, and to
modifymodifying certain loan covenants so as
to increase permitted capital expenditures and lower the minimum fixed
charge coverage ratio. Such modifications are beingwere 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,In accordance
with the amendment, the Company was in compliance with such covenants. In connection with the
negotiations, the Company has agreed to prepayprepaid $3.0 million of the Term Loan
Facility through borrowings under the Revolving Loan Facility.Facility on
April 29, 1998.
The Company expects to enter into a formal amendment toCompany's lenders waived certain covenants contained in the Loan and
Security Agreement which reflectsto permit the negotiated modificationsCompany's purchase of Arenzano (see Note
2 to these Financial Statements). As a result of such purchase, the
Company and its lenders are currently negotiating an amended and restated
Loan and Security Agreement promptly.to include Forstmann Apparel, Inc.
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 issuedThe Company adopted Financial Accounting Standards ("SFAS") No. 128,
Earnings Per Share which simplifiesas required in the standards for computing earnings per share ("EPS")
information and makes the computation comparable to international EPS
Standards. SFAS 128 replaces the presentationfirst quarter of "primary" (and when
required "fully diluted") EPS with a presentation of "basic" and
"diluted" EPS. Lossfiscal year 1998.
Income (loss) per common share - basic is computed based on the net
lossincome (loss) divided by the weighted average common shares outstanding.
On a diluted basis, the lossincome per share - diluted is comparedcomputed by
dividing the net lossincome by the weighted average common shares during the
period plus incremental shares that would have been outstanding under
option plans. The Company didWeighted average diluted shares outstanding differs from
weighted average basic shares outstanding primarily from the effect of
diluted stock options. Computation of per share earnings for the
predecessor company for all periods presented in the Condensed Statement
of Operations has been omitted as such information is not have any dilutive options for either period
presented.deemed to be
meaningful.
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.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. On January 28,27, 1998
EPD provided comments to the CSR previously submitted by Stevens and
requested clarification toof the Stevens CSR. On February 12,By letter dated March 5,
1998, Stevens environmental consultant providedsubmitted a preliminary"draft" response to EPD'sEPD and by letter and requestedof
April 6, 1998, a meetingfinal response. It is the Company's understanding that
Stevens is waiting for a response to discuss proposed changes to the
CSR. Stevens indicated its intention to submit a revised CSR based on
this meeting.letter from EPD.
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. On April 1, 1998, EPD has not yet responded toindicated that it was
conditionally approving the
Company's revised Corrective Action Plan.
TIFTON, GEORGIA.Plan and that it
would provide a final approval upon receipt of certain requested
information. The Company provided EPD such information by letter dated
April 23, 1998 and is awaiting EPD's response.
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,May 3, 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,May 3, 1998 is adequate.
10. Restructuring items related to the Company's 1998 Restructuring have been
segregated and included in normal operations during the thirteen weeks
ended May 3, 1998 and consist of (in thousands):
Reorganized Company
Thirteen Weeks Ended
May 3, 1998
-----------
Severance and "stay-put" bonus expense $ 967
Gain associated with N.Y. office lease
surrender (658)
Other 3
-----
Total $ 312
=====
During the thirteen weeks ended May 3, 1998, the Company recognized as
restructuring items severance expense of approximately $0.8 million and
expense of approximately $0.2 million for stay put bonuses (see Note 2 to
these Financial Statements).
10.In anticipation of entering into the lease surrender agreement (see Note
2 to these Financial Statements), the Company wrote-down property, plant
and equipment by approximately $1.1 million associated with the future
abandonment of leasehold improvements and furniture and fixtures,
wrote-down the estimated deferred rent liability at January 1, 1999 by
approximately $2.1 million and accrued approximately $0.3 million for
broker's commission. These items resulted in a $0.7 million gain which
was recorded as a restructuring item during the thirteen weeks ended May
3, 1998.
11. In accordance with SOP 90-7, professional fees, asset impairments and
restructuringreorganization charges directly related to the Bankruptcy Filing and
related reorganization proceedings have been segregated from normal
operations during the thirteen-week periodsthirteen and twenty-six weeks ended February 1,May 3, 1998 and
February 2,May 4, 1997 and consist of (in thousands):
Reorganized Predecessor
Company Company
Thirteen Thirteen
Weeks Ended Weeks Ended
February 1, February 2,May 3, May 4,
1998 1997
---- ----
Professional fees ....................$10 $ 16 $ 977852
Impairment of assets ................. -- 3,0391,236
Expense incurred due to the rejection and
amendment of executory contracts -- 2,400
Default interest expense and
professional fees associated with the
Senior Secured Notes .............. -- (177)(750)
Other ................................25 436
--- ------
Total $35 $4,174
=== ======
Reorganized Predecessor
Company Company
Twenty-Six Twenty-Six
Weeks Ended Weeks Ended
May 3, May 4,
(42)
-------- --------1998 1997
---- ----
Professional fees $26 $1,829
Impairment of assets -- 4,275
Expense incurred due to the rejection and
amendment of executory contracts -- 2,400
Default interest expense and
professional fees associated with the
Senior Secured Notes -- (573)
Other 29 394
--- ------
Total ................................ $ 20 $ 4,151
======== ========$55 $8,325
=== ======
During the thirteen weeks ended May 4, 1997, the Company increased market
reserves by $0.9 million for inventory related to the converting fabrics
product line which had been discontinued as part of the product
rationalization effort undertaken in fiscal year 1996. Such reserve was
necessary as a result of selling price markdowns anticipated to sell off
the remaining converting fabrics inventory on hand. Additionally, the
Company wrote off the remaining barter credits of $0.2 million based upon
analysis of planned barter credit use and increased its accrual for
environmental remediation by $0.1 million to cover its expected costs for
environmental remediation at the Tifton facility (net of expected
reimbursement from the tenant). These items resulted in a $1.2 million
charge to reorganization items during the thirteen weeks ended May 4,
1997.
During the thirteen weeks ended May 4, 1997, the Company increased
pre-petition unsecured liabilities by $3.3 million associated with
contract rejection damages relating to the Company's former headquarters
and marketing offices lease ($1.7 million), the termination of a contract
to purchase certain equipment ($0.9 million) and two rejected contracts
relating to the former Carpini joint venture ($0.7 million). These
charges were recognized as reorganization items during the thirteen weeks
ended May 4, 1997. The Company partially offset these charges by
recognizing a $0.9 million net receivable from the Company's current
landlord related to its assumption of a portion of the Company's former
headquarters lease.
As of February 2,May 4, 1997, $4.2 million was included in construction in
progressproperty, plant and
equipment relating to certain unerected equipment located at the Tifton
facility. Such equipment was not included in the sale of the Tifton
facility. Based upon negotiations for the sale of such equipment, the
Company anticipated a selling price that was $3.0 million below the net
book value for the related equipment. Accordingly, during the thirteen
weeks ended February 2, 1997, the Company accrued as reorganization items
an expected loss of $3.0 million associated with the sale of such
equipment
to reorganization expense.equipment.
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 STATEMENTSForward 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 EVENTSRecent Events
- -------------
ACQUISITION
On May 11, 1998, the Company announced that it had agreed to acquire the
business and substantially all of the assets of Arenzano Trading Co., Inc.
("Arenzano"), a manufacturer of women's suits primarily under the "Oleg Cassini"
label. Arenzano had instituted voluntary bankruptcy proceedings in April 1998.
The Company's purchase was made pursuant to an order signed by United States
Bankruptcy Judge Burton R. Lifland, dated May 8, 1998, in the cases entitled, In
re Arenzano Trading Company, Inc. and In re B&B Corporation, Case Nos. 98 B
42508 and 98 B 42520 (BRL). The transaction was completed on May 13, 1998 at a
purchase price of $2.0 million. However, the Company, as an unsecured creditor
of Arenzano, is expected to receive a distribution from the bankruptcy estate in
the approximate amount of $275,000 out of the proceeds to the estate from the
purchase. The acquisition allows the Company to expand its fabrics business into
the apparel manufacturing business. The Company expects to benefit from
Arenzano's expertise in manufacturing apparel in the Caribbean, as well as its
ability in sourcing complete apparel packages internationally. The Company will
operate the new apparel venture as a wholly-owned subsidiary under the name
Forstmann Apparel, Inc. The new venture is expected to provide an enhanced
outlet for the Company's fabrics while providing growth opportunities outside of
the Company's core business. Arenzano had sales of approximately $17 million for
its most recent fiscal year.
The working capital and capital expenditure requirements of Forstmann Apparel,
Inc. for the next twelve months will be funded from borrowings under the
Revolving Loan Facility. The Company believes that availability under its
Revolving Loan Facility will be adequate to fund the working capital and capital
expenditure requirements of the Company and Forstmann Apparel, Inc. for the next
twelve months.
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 resulthas resulted 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 behave been impaired or rendered obsoleteobsolete.
Accordingly, during the thirteen weeks ended May 3, 1998 (the "1998 Second
Quarter"), the Company recognized severance expense of approximately $0.8
million, accrued approximately $0.2 million for stay put bonuses and increased
inventory market reserves by $1.1 million in connection with the carrying value1998
Restructuring. Severance expense and expense associated with the stay put
bonuses were recognized as restructuring items during the 1998 Second Quarter.
Inventory market reserves associated with the 1998 Restructuring were included
in cost of certain ofgoods sold during the Company's property, plant and equipment may
be impaired.1998 Second Quarter. The Company estimates that
severancean additional expense will beof approximately $0.5$0.2 million and will be recognized as a restructuring expense inassociated with 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'saffected employees remaining service periodperiods as
a restructuring expense.item during the remainder of the Company's fiscal year 1998.
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. ImpairmentAny additional impairment of inventories will be
recognized as an operating expenseincluded in cost of goods sold in the periods in which the impairment can be
reasonably estimated, whereasestimated. The Company currently estimates that there is no
impairment
ofin property, plant and equipment as a result of the 1998
Restructuring. However, changes in future business conditions could result in an
impairment in property, plant and equipment and will be recognized as a
restructuring expenseitem in the periods in which the impairment can be reasonably
estimated. Costs incurred to relocate certain machinery and equipment will be
charged against
operationsto cost of goods sold in the periods incurred. DuringSee Note 10 to these
Financial Statements for a description of restructuring items recognized during
the first quarter of fiscal year
1998, no amounts were recognized as restructuring expensethirteen weeks ended May 3, 1998.
Financial Condition and operating results
were not affected as a result of the 1998 Reorganization.
FINANCIAL CONDITION AND LIQUIDITYLiquidity
- ---------------------------------
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. Accounts receivable at May 3, 1998 included $16.1 million of
accounts receivable with dating terms, an increase of $2.0 million compared to
May 4, 1997.
During the thirteen-week periodtwenty-six weeks ended February 1,May 3, 1998 (the "1998 Period"), operations
used $9.5$14.6 million of cash, whereas $0.4$8.5 million was used by operations during
the thirteen-week periodtwenty-six weeks ended February 2,May 4, 1997 (the "1997 Period"). This $9.1$6.1 million
increase in cash used by operations in the 1998 Period was primarily due to a
$4.6$12.6 million increase in cash used by inventory during the 1998 Period as
compared to the 1997 Period. Traditionally, becauseThis was primarily a result of thean increase in raw
material and work in process inventory caused by normal seasonal, nature of the Company's business, the Company replenishes itsfirst quarter
purchases to replenish year-end inventory levels during its first fiscal quarter in orderinventories to meet the
higher sales demand of the Company'sexpected second and third
fiscal quarters. Accounts
receivable provided $7.0 million during the 1998 Period, whereas $10.0 millionquarter demand. However, there was provided by accounts receivable during the 1997 Period. Accounts receivable
at February 1, 1998 included $2.2 millionalso a significant reduction in receipt 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 salescustomer orders during the 1998 Period as compared to the 1997 Period. The
increase in raw wool is primarily due to the Company's forward raw material
purchase commitments. The Company subsequently was unable to fully adjust its
receipt of raw wool to match sales order demand. Accounts receivable used $7.9
million during the 1998 Period, whereas $17.9 million was used by accounts
receivable during the 1997 Period. Such decrease primarily relates to a decrease
in sales during the 1998 Second Quarter when compared to the second quarter of
fiscal year 1997. Combined, the increase in inventory which was offset by the decline inand accounts receivable
during the 1998 Period resulted in $6.7$17.3 million being used in the 1998 Period
as compared to $1.0$14.7 million being providedused in the 1997 Period. Additionally,
accrued liabilities used $2.5$4.9 million more in the 1998 Period as compared to $0.2the
1997 Period, and accounts payable used $1.7 million more in the 1998 Period as
compared to 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,May 3, 1998 was $76.0$84.8 million as
compared to $16.7$20.9 million at February 2,May 4, 1997. Net income was $5.5 million higher in
the 1998 Period compared to the 1997 Period, and market reserves increased by
$4.4 million more in the 1998 Period compared to the 1997 Period. Further,
depreciation and amortization was $3.6 million lower in the 1998 Period than in
the 1997 Period primarily due to the effect of "fresh start" accounting (see
Note 1 to these Financial Statements), and the loss from disposal, abandonment
and impairment of machinery and equipment and other assets was $3.4 million
lower in the 1998 Period when compared to the 1997 Period.
Investing activities used $0.5$1.8 million in the 1998 Period as compared to $0.3$0.6
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$16.0 million was provided
by financing activities whereas during the 1997 Period $0.7$9.2 million was usedprovided
by financing activities.
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.requirements, including such requirements of Forstmann
Apparel, Inc., for the next twelve months. However, expected cash flows from
operations are dependent upon achieving sales expectations during fiscal year 1998the next
twelve months 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,May 31, 1998 was $54.5$58.0 million whereas at the
comparable time a year earlier the sales order backlog was $70.9$65.3 million. The
composition of the sales order backlog at March 1,May 31, 1998 reflects a weaker order
position in all product lines except specialty and coating fabrics.womenswear fabrics which
increased by $3.0 million and $0.7 million, respectively, when compared to a
year earlier. However, included in womenswear fabrics sales order backlog at May
31, 1998 is a substantial flannel sales order booked at average selling prices
which are below the selling prices of a year ago due primarily to import price
pressure from Mexico. Of the approximate $16.4$7.3 million decline in the sales order
backlog at March 1,May 31, 1998 as compared to the comparable time a year earlier,
approximately $14.9$5.9 million related to worsted spun fabrics, including
approximately $5.3$4.1 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 order position for coating
fabrics at May 31, 1998 has declined by $3.9 million over the comparable time a
year earlier. The decrease in coating fabric sales order backlog is due, in
part, to an unseasonably warm fall and winter season which resulted in lower
than anticipated women's coats selling at retail. Additionally, the sales order
backlog for menswear fabrics at May 31, 1998 was $2.5 million lower than at June
1, 1997. The decline in menswear fabric sales order backlog is due, in part, to
increased competitive pressures (primarily imports).
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 increasebe approximately 1%the same in
fiscal year 1998 as compared to fiscal year 1997.
RESULTS OF OPERATIONS
The
Results of Operations
- ---------------------
THE TWENTY-SIX WEEKS ENDED MAY 3, 1998 Period Compared to the("1998 PERIOD") COMPARED TO THE
TWENTY-SIX WEEKS ENDED MAY 4, 1997 Period("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$78.6 million, a decrease of 7.1%18.1% from the 1997
Period. Total yards of fabric sold decreased 8.5%21.6% from the 1997 Period to the
1998 Period. However, the average per yard selling price increased to $7.43$7.55 per
yard from $7.12$7.23 per yard due to shifts in product mix. The decreaseSales declined in sales was
primarily due to the effect ofall
major product lines discontinuedexcept for specialty fabric sales which increased by $1.2
million 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'swhen compared to the 1997 Period. Womenswear
woolen fabric sales which were approximately $1.6$4.5 million lower in the 1998 Period as
compared to the 1997 Period, and coatingwomenswear worsted fabric sales which were approximately $1.4$3.7
million lower in the 1998 Period as compared to the 1997 Period. These declines inBased on
current backlog of sales were somewhat offset byorders for women's woolen and worsted sales, whichmarket
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. Menswear woolen fabric sales were approximately $2.4$3.9 million higherlower 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 1997. Product lines discontinued during
fiscal year 1996 (converting, career uniform and Carpini) realized sales of
approximately $2.8 million in the 1997 Period as compared to $0.3 million in the
1998 Period. Coating fabric sales were approximately $1.6 million lower in the
1998 Period as compared to the 1997 Period. 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 coatingGovernment uniform fabric sales in fiscal
year 1998 to be approximately equal to fiscal year 1997. Women's woolen and
worsted fabric sales were higher indecreased by $1.5 million during 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.Period.
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 for fabric sales in fiscal year 1998 to be
between
15% toapproximately 20% lower than in fiscal year 1997.1997, exclusive of sales for
Forstmann Apparel, Inc. in the Company's third and fourth quarter of fiscal year
1998. 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
fabrics 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. Sales during the Company's third and fourth
quarter of fiscal year 1998 will reflect sales for Forstmann Apparel, Inc. (See
Note 2 to these Financial Statements).
Cost of goods sold decreased $2.7$13.8 million to $25.7$67.4 million during the
1998 Period primarily as a result of the decline in sales and change in product
mix and a $1.4$2.9 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.herein. Gross profit increased $0.5decreased $3.6 million or 16.5%24.0% to $3.3$11.2 million in the
1998 Period, and gross profit margin for the 1998 Period was 11.4%14.3% compared to
9.1%15.4% for the 1997 Period. Included in cost of goods sold during the 1998 Period
is a $1.1 million charge relating to increased market reserves recorded as a
result of the 1998 Restructuring (see Note 2 to these Financial Statements).
Manufacturing overhead excluding depreciation and amortization was approximately
$0.3$0.6 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%15.2% to $3.6$6.8 million in the 1998 Period
compared to $4.3$8.0 million in the 1997 Period. The majority of the decrease in the
19971998 Period is due to lower incentive compensation expense, and depreciation and
amortization expense.expense and human resource related expenses. 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 is primarily due to the effect of "fresh
start" accounting previously discussed herein. Human resource related expenses
decreased as a result of the Company's continuing efforts to reduce its overhead
in response to reduced sales. Somewhat offsetting these declines werewas increased
professional expenses
and higher group medical costs under the Company's self-insured plan.expenses.
The provision for uncollectible accounts increased slightlyto $0.6 million in
the 1998 Period as compared to $0.4 million in 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.
Restructuring items were $0.3 million in the 1998 Period. Reference is
made to Note 10 to these Financial Statements for a discussion of restructuring
items incurred during the 1998 Period.
Interest expense for the 1998 Period was $1.5$3.2 million as compared to
$1.6$3.3 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 lossincome before reorganization items and
income taxes of $2.0$0.4 million was realized in the 1998 Period as compared to
a
lossincome before reorganization items and income taxes of $3.2$3.0 million in the 1997
Period. Income before depreciation and amortization, reorganization and
restructuring items, interest expense and income taxes during the 1998 Period
was $0.7$6.2 million as compared to $1.3$12.0 million during the 1997 Period.
Reorganization items were $4.2$8.3 million in the 1997 Period as compared
to $20,000$0.1 million in the 1998 Period. Included inReference is made to Note 11 to these
Financial Statements for a discussion of 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,incurred 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.and 1998 Period.
During fiscal year 1995, the Company fully utilized its net operating
loss carrybacks as permitted by the Internal Revenue Code. Accordingly, for the
1997 Period, no income tax benefit was recognized from the realization of net
operating losses. During the 1998 Period, the Company recognized an income tax
benefitprovision of $0.8$0.1 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 lossincome for the 1998 Period was $1.3$0.2
million as compared to a net loss of $7.3$5.3 million in the 1997 Period.
THE THIRTEEN WEEKS ENDED MAY 3, 1998 (THE "1998 SECOND QUARTER") COMPARED TO THE
THIRTEEN WEEKS ENDED MAY 4, 1997 (THE "1997 SECOND QUARTER").
Net sales for the 1998 Second Quarter were $49.6 million, a decrease of
23.4% from the 1997 Second Quarter. Total yards of fabric sold decreased 26.8%
during the 1998 Second Quarter. However, the average per yard selling price
increased to $7.62 per yard from $7.28 per yard due to shifts in product mix.
Sales declined in all major product lines except for specialty fabric sales.
Such decrease is attributable to the reasons discussed in the 1998 Period
compared to the 1997 Period.
Cost of goods sold decreased $11.1 million to $41.7 million during the
1998 Second Quarter primarily as a result of lower sales. Gross profit decreased
$4.0 million or 33.7% to $7.9 million in the 1998 Second Quarter, and gross
profit margin for the 1998 Second Quarter was 15.9% compared to 18.4% for the
1997 Second Quarter. Included in cost of goods sold during the 1998 Second
Quarter is a $1.1 million charge relating to increased market reserves recorded
as a result of the 1998 Restructuring (see Note 2 to these Financial
Statements).
Selling, general and administrative expenses, excluding the provision
for uncollectible accounts, decreased 14.8% to $3.2 million in the 1998 Second
Quarter compared to $3.7 million in the 1997 Second Quarter. The majority of the
decrease in the 1998 Second Quarter is due to lower human resource related
expenses and lower depreciation and amortization which was partially offset by
increased professional expenses. Such reduction is attributable for the reasons
discussed in the 1998 Period compared to the 1997 Period.
The provision for uncollectible accounts was approximately the same
during the 1998 Second Quarter when compared to the 1997 Second Quarter.
Restructuring items were $0.3 million in the 1998 Second Quarter.
Reference is made to Note 10 to these Financial Statements for a discussion of
restructuring items incurred during the 1998 Second Quarter.
Interest expense for the 1998 Second Quarter was $1.6 million or $0.1
million lower than the 1997 Second Quarter. This decrease is attributable to
lower interest rates in effect under the Loan and Security Agreement during the
1998 Second Quarter as compared to interest rates in effect in the 1997 Second
Quarter.
As a result of the foregoing, income before reorganization items and
income taxes of $2.5 million was realized in the 1998 Second Quarter as compared
to income before reorganization items and income taxes of $6.2 million in the
1997 Second Quarter. Income before depreciation and amortization, reorganization
and restructuring items, interest expense and income taxes during the 1998
Second Quarter was $5.5 million as compared to $10.8 million during the 1997
Second Quarter.
Reorganization items were $4.2 million in the 1997 Second Quarter as
compared to less than $0.1 million during the 1998 Second Quarter. Reference is
made to Note 11 to these Financial Statements for a discussion of reorganization
items incurred during the 1997 Second Quarter and 1998 Second Quarter.
During fiscal year 1995, the Company fully utilized its net operating
loss carrybacks as permitted by the Internal Revenue Code. Accordingly, for the
1997 Second Quarter and the 1997 Period, no income tax benefit was recognized
from the realization of net operating losses. During the 1998 Second Quarter,
the Company recognized an income tax provision of $0.9 million at an effective
income tax rate of 39%.
As a result of the foregoing, net income was $1.5 million in the 1998
Second Quarter compared to $2.0 million in the 1997 Second Quarter.
PART II -- OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K:
(a) Exhibits
11.1 Statement re computation4.1 Amendment No. 1 to Loan and Security Agreement dated as of
per share earnings - not required since such
computation can be clearly determined from the material contained
herein.
15.1March 13, 1998.
4.2 Amendment No. 2 to Loan and Security Agreement dated as of
March 24, 1998.
15 Independent Accountants' Review Report, dated February 25,May 28, 1998
from Deloitte & Touche LLP to Forstmann & Company, Inc.
(b) Current Reports on Form 8-K
NoneSince the end of the first quarter of fiscal year 1998, the
Company filed a Current Report on Form 8-K dated May 26, 1998,
reporting on Item 5.
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/s/ Rodney Peckham
------------------
Rodney Peckham
Executive Vice President
Finance, Administration and
Strategic Planning
MARCH 16,1998
- -------------June 16, 1998
---------------
Date
EXHIBIT INDEX
Exhibit Sequential
NO. DESCRIPTION PAGE NO.
- -------No. Description Page No.
--- ----------- ----------
11.1 Statement re computation--------
4.1 Amendment No. 1 to Loan and Security Agreement 27
dated as of per share earnings -
not required since such computation can be
clearly determined from the material contained
herein.
15.1March 13, 1998.
4.2 Amendment No. 2 to Loan and Security Agreement 33
dated as of March 24, 1998.
15 Independent Accountants' Review Report, dated February 25,41
May 28, 1998, from Deloitte & Touche
LLP to Forstmann & Company, Inc.
22
EXHIBIT 15.1Exhibit 4.1
AMENDMENT NO. 1 TO LOAN AND SECURITY AGREEMENT
AMENDMENT NO. 1 IN RESPECT OF LOAN AND SECURITY AGREEMENT,
dated as of March 13, 1998 (this "Amendment"), among the financial institutions
listed on the signature pages hereof (such financial institutions, together with
their respective successors and assigns, are referred to hereinafter each
individually as a "Lender" and collectively as the "Lenders"), BankAmerica
Business Credit, Inc., a Delaware corporation, with an office at 40 East 52nd
Street, New York, New York 10022, as agent for the Lenders (in its capacity as
agent, the "Agent"), and Forstmann & Company, Inc., a Georgia corporation, with
offices at 1155 Avenue of the Americas, New York, New York 10036 (the
"Borrower").
W I T N E S S E T H :
WHEREAS, the Lenders, the Agent and the Borrower are parties to a Loan
and Security Agreement dated as of July 23, 1997 (the "Loan Agreement"); and
WHEREAS, the Borrower wishes to enter into the Credit Approved
Receivables Purchasing Agreement (the "CIT Agreement") with The CIT
Group/Commercial Services, Inc. ("CIT"), in substantially the form attached
hereto as Exhibit A, pursuant to which CIT will purchase those of the Borrower's
accounts receivable which CIT has previously credit approved and perform certain
other services in connection therewith, in each case on the terms and subject to
the conditions contained in the CIT Agreement;
WHEREAS, Mr. Robert N. Dangremond has resigned as Chief
Executive Officer of the Borrower and has been replaced by Mr.
Brian A. Moorstein and Mr. Rodney J. Peckham as President and as
Executive Vice President, Finance, Administration, and Strategic
Planning, respectively (such replacement to be hereinafter referred
to as a "Change in Control");
WHEREAS, the Majority Lenders are willing to amend certain provisions
of the Loan Agreement in order to permit the transactions contemplated by the
CIT Agreement and to make certain revisions to the Loan Agreement to give effect
to the Change in Control, all on the terms and conditions herein set forth.
NOW, THEREFORE, in consideration of the mutual covenants contained
herein and for other good and valuable consideration, the receipt and adequacy
of which are hereby acknowledged, the parties hereto hereby agree as follows:
1. Definitions. Capitalized terms used herein and not defined herein shall
have the respective meanings given to such terms in the Loan Agreement.
2. Amendment to Section 6.4. Section 6.4 of the Loan Agreement shall be
amended to read in its entirety as follows:
"6.4 Title to, Liens on, and Sale and Use of Collateral. The
Borrower represents and warrants to the Agent and the Lenders and
agrees with the Agent and the Lenders that: (a) all of the Collateral
is and will continue to be owned by the Borrower free and clear of all
Liens whatsoever, except for Permitted Liens; (b) the Agent's Liens in
the Collateral will not be subject to any prior Lien, except Permitted
Liens, described in clause (i) of the definition of "Permitted Liens"
and Permitted Liens if and to the extent that such Permitted Liens
constitute prior Liens under any Requirement of Law or, in the case of
Real Estate, Permitted Liens described in clause (vi) of the definition
of "Permitted Liens"; (c) the Borrower will use, store, and maintain
the Collateral with all reasonable care and will use such Collateral
for lawful purposes only; and (d) the Borrower will not, without the
Agent's prior written approval, sell, or dispose of or permit the sale
or disposition of any of the Collateral except for sales of Inventory
in the ordinary course of business and sales of Equipment as permitted
by Section 6.11 and sales of Accounts, which are not Eligible Accounts
as a result of being past due, to The CIT Group/Commercial Services,
Inc. ("CIT") pursuant to the certain Credit Approved Receivables
Purchasing Agreement dated as of March 13, 1998, between the Borrower
and CIT, as amended by First Amendment to Credit Approved Receivables
Purchasing Agreement and Second Amendment to Credit Approved
Receivables Purchasing Agreement, each dated as of March 13, 1998, as
such Agreement is in effect on March 13, 1998 (the "CIT Agreement").
The inclusion of proceeds in the Collateral shall not be deemed to
constitute the Agent's or any Lender's consent to any sale or other
disposition of the Collateral except as expressly permitted herein."
3. Amendment to Section 6.8. Section 6.8 of the Loan Agreement shall be
amended to read in its entirety as follows:
"6.8 Accounts. (a) The Borrower hereby represents and warrants
to the Agent and the Lenders, with respect to the Accounts, that: (i)
each existing Account represents, and each future Account will
represent, a bona fide sale or lease and delivery of goods by the
Borrower, or rendition of services by the Borrower, in the ordinary
course of the Borrower's business; (ii) each existing Account is, and
each future Account will be, for a liquidated amount payable by the
Account Debtor thereon on the terms set forth in the invoice therefor
or in the schedule thereof delivered to the Agent, without any offset,
deduction, defense, or counterclaim except those properly reflected on
a Borrowing Base Certificate; (iii) no payment will be received with
respect to any Account, and no credit, discount, or extension, or
agreement therefor will be granted on any Account, except as reported
to the Agent and the Lenders in accordance with this Agreement or
except pursuant to the terms of the CIT Agreement ; (iv) each copy of
an invoice delivered to the Agent by the Borrower will be a genuine
copy of the original invoice sent to the Account Debtor named therein;
(v) except in the case of invoices relating to Bill and Hold Accounts,
all goods described in any invoice representing a sale of goods will
have been delivered to the Account Debtor and all services of the
Borrower described in each invoice will have been performed; and (vi)
in the case of invoices relating to Eligible Bill and Hold Accounts,
all goods described in any such invoice will be shipped and delivered
within (A) the later of (I) the season in which the invoice is rendered
or (II) six months after the date on which the invoice is rendered or
(B) the time specified in the invoice."
4. Amendment to Section 9.9. Section 9.9 of the Loan Agreement shall be
amended to read in its entirety as follows:
"9.9 Mergers, Consolidations or Sales. Except in accordance
with the Plan of Reorganization, the Borrower shall not enter into any
transaction of merger, reorganization, or consolidation, or transfer,
sell, assign, lease, or otherwise dispose of all or any part of its
property, or wind up, liquidate or dissolve, or agree to do any of the
foregoing, except for (i) sales of Inventory in the ordinary course of
its business, (ii) sales or other dispositions of Equipment in the
ordinary course of business that are obsolete or no longer useable by
Borrower in its business as permitted by Section 6.11 and (iii) sales
of Accounts, which are not Eligible Accounts as a result of being past
due, to CIT pursuant to the CIT Agreement."
5. Amendment to Section 11.1(s). Section 11.1(s) of the Loan Agreement
shall be amended to read in its entirety as follows:
"(s) there shall occur (i) one or more sales, transfers or
other dispositions of Capital Stock of the Borrower, or securities
convertible into or exchangeable for such Capital Stock, or rights to
acquire such Capital Stock, to one or more purchasers, or any other
event, such that after, or as a direct result of, such sale, transfer,
disposition, or event (A) any "person" or related "group" of persons
(within the meaning of Sections 13(d)(3) and 14(d)(2) of the Exchange
Act) becomes the "beneficial owner" (as defined in Rule 13d-3 under the
Exchange Act) of more than 50% of the total voting power of the then
outstanding Capital Stock of the Borrower (calculated on a fully
diluted basis in accordance with GAAP) or (B) any "person" or related
"group" of persons (within the meaning of Sections 13(d)(3) and 14(2)
of the Exchange Act) acquires directly or indirectly the power to elect
a majority of the directors onto the board of directors of the
Borrower, or (ii) a change in the President or Executive Vice
President, Finance, Administration, and Strategic Planning of the
Borrower, which change shall not be satisfactory to the Agent or the
Majority Lenders;"
6. Representations and Warranties. The Borrower hereby represents and
warrants to the Agent and the Lenders as of the date hereof that (i) the
execution, delivery and performance of this Amendment, and the other documents
and instruments to be executed and delivered in connection herewith, and the
execution, delivery and performance by the Borrower of the CIT Agreement and the
consummation of the Change of Control are within its corporate powers and have
been duly authorized by all necessary corporate action; (ii) no consent,
approval or authorization of any Governmental Authority or any other Person is
required in connection with the execution, delivery and performance of this
Amendment and the other documents and instruments to be executed and delivered
in connection herewith by the Borrower, or the execution, delivery and
performance by the Borrower of the CIT Agreement or the consummation of the
Change of Control, except for this Amendment and those others already duly
obtained; (iii) no declaration, filing or registration with any Governmental
Authority (including, without limitation, the Securities and Exchange
Commission) is required in connection with the execution, delivery and
performance of this Amendment and the other documents and instruments to be
executed and delivered in connection herewith by the Borrower, or the execution,
delivery and performance by the Borrower of the CIT Agreement and consummation
of the Change of Control; (iv) this Amendment has been duly executed by the
Borrower and constitutes the legal, valid and binding obligation of the
Borrower, enforceable against it in accordance with its terms; (v) the
execution, delivery and performance by the Borrower of this Amendment and the
other documents and instruments to be executed and delivered in connection
herewith by the Borrower, do not and will not conflict with, or constitute a
violation or breach of, or constitute a default under, or result in the creation
or imposition of any Lien upon the property of the Borrower by reason of the
terms of (a) any contract, mortgage, Lien, lease, agreement, indenture, or
instrument to which the Borrower is a party or which is binding upon it, (b) any
requirement of law applicable to the Borrower or (c) the Certificate or Articles
of Incorporation or By- Laws of the Borrower ; and (v) no event has occurred and
is continuing which constitutes a Default or an Event of Default.
7. Conditions to Effectiveness. This Amendment shall be effective as of the
date first above written upon satisfaction of the following conditions
precedent:
7.1. Execution of this Amendment. The Agent shall have
received a copy of this Amendment duly executed by the Borrower, the
Agent and the Lenders constituting the Majority Lenders;
7.2. No Defaults. No Default or Event of Default shall have
occurred and be existing before this Amendment shall have become
effective, and no Default or Event of Default shall result, occur or
exist immediately after this Amendment shall have become effective.
8. Limited Effect. This Amendment shall be limited solely to the matters
expressly set forth herein and shall not (a) constitute an amendment or consent
with respect to any other term or condition of the Loan Agreement or any
instrument or agreement referred to therein or (b) prejudice any right or rights
which the Agent or the Lenders may now have or may have in the future under or
in connection with the Loan Agreement or any instrument or agreement referred to
therein. Except as expressly amended and consented to herein, all of the
covenants and provisions of the Loan Agreement are and shall continue to be in
full force and effect.
9. Execution in Counterparts; Telecopies. This Amendment may be executed in
any number of counterparts and by different parties hereto in separate
counterparts, each of which when so executed and delivered shall be deemed to be
an original and all of which taken together shall constitute one and the same
instrument. Transmission by a party hereto of an executed counterpart of this
Amendment to the Agent by telecopier shall be deemed to constitute due and
sufficient delivery of such counterpart by such party, provided that such party
counterpart shall, promptly after such delivery, deliver the original of such
executed counterpart to the Agent.
10. Governing Law. THIS AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED AND
INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.
11. Headings. Section headings in this Amendment are includ ed herein for
convenience of reference only and shall not constitute a part of this Amendment
or be given any substantive effect.
IN WITNESS WHEREOF, the parties hereto have caused this
Amendment to be duly executed and delivered by their respective proper and duly
authorized officers as of the day and year first above written.
Borrower
FORSTMANN & COMPANY, INC.
By:_____________________________
Name:
Title:
Agent
BANKAMERICA BUSINESS CREDIT, INC.
By:_____________________________
Name:
Title:
Lenders
BANKAMERICA BUSINESS CREDIT, INC.
By:_____________________________
Name:
Title:
AT&T COMMERCIAL FINANCE CORPORATION
By:_____________________________
Name:
Title:
THE CIT GROUP/COMMERCIAL SERVICES, INC.
By: _____________________________
Name:
Title:
IBJ SCHRODER BUSINESS CREDIT CORPORATION
By:_____________________________
Name:
Title:
LA SALLE BUSINESS CREDIT, INC.
By:_____________________________
Name:
Title:
PNC BANK, NATIONAL ASSOCIATION
By:_____________________________
Name:
Title:
Exhibit 4.2
AMENDMENT NO. 2 TO LOAN AND SECURITY AGREEMENT
AMENDMENT NO. 2 IN RESPECT OF LOAN AND SECURITY AGREEMENT,
dated as of March 24, 1998 (this "Amendment"), among the financial institutions
listed on the signature pages hereof (such financial institutions, together with
their respective successors and assigns, are referred to hereinafter each
individually as a "Lender" and collectively as the "Lenders"), BankAmerica
Business Credit, Inc., a Delaware corporation, with an office at 40 East 52nd
Street, New York, New York 10022, as agent for the Lenders (in its capacity as
agent, the "Agent"), and Forstmann & Company, Inc., a Georgia corporation, with
offices at 1155 Avenue of the Americas, New York, New York 10036 (the
"Borrower").
W I T N E S S E T H
WHEREAS, the Lenders, the Agent and the Borrower are parties to a Loan
and Security Agreement dated as of July 23, 1997 and Amendment No. 1 to Loan and
Security Agreement dated as of March 13, 1998 (as so amended, the "Loan
Agreement"); and
WHEREAS, the Borrower is making certain changes to its businesses,
including exiting, reducing its involvement in and/or relocating certain
businesses, that will require the Borrower to incur costs and writedown obsolete
inventories; and
WHEREAS, the Majority Lenders are willing to amend certain provisions
of the Loan Agreement to reflect the costs and writedowns incurred by the
Borrower in connection with the changes to its businesses.
NOW, THEREFORE, in consideration of the mutual covenants contained
herein and for other good and valuable consideration, the receipt and adequacy
of which are hereby acknowledged, the parties hereto hereby agree as follows:
1. Definitions. Capitalized terms used herein and not defined herein
shall have the respective meanings given to such terms in the Loan Agreement.
2. Amendment to Section 1.1. Section 1.1 of the Loan Agreement shall be
amended as follows:
(a) The definition of "Adjusted Tangible Net Worth" shall be
amended by inserting after the words "Effective Date" therein the words
"provided further, however, that any calculation of 'Adjusted Tangible Net
Worth' pursuant to this Agreement shall exclude the 1998-1999 Extraordinary
Charges";
(b) The definition of "EBITDA" shall be amended by inserting
after the words "Reorganization Charges" in clause (i) thereof the words "or
1998-1999 Extraordinary Charges"; and
(c) The following definition shall be inserted immediately
after the definition of "Net Amount of Eligible Accounts":
"1998-1999 Extraordinary Charges" means any of the following
items, to the extent that such item would be treated as a restructuring
expense or an operating expense in accordance with GAAP:
(i) writedowns or other adjustments to the value of
the Borrower's assets caused by (A) the discontinuation by the
Borrower of its top dye worsted operations, (B) the relocation
by the Borrower of its package dye operations from
Milledgeville, Georgia to Dublin, Georgia, (C) the relocation
by the Borrower of certain of its finishing equipment from
Dublin, Georgia to Louisville, Georgia and (D) the reduction
by the Borrower of its worsted operations;
(ii) writedowns or other adjustments to the value of
the Borrower's Inventory relating to its worsted operations,
including such writedowns or other adjustments to Inventory
consisting of yarn caused by the reduction by the Borrower of
its worsted operations;
(iii) costs incurred by the Borrower in connection
with moving from Milledgeville, Georgia to Dublin, Georgia
certain of its yarn dyeing and warp preparation equipment and
moving from Dublin, Georgia to Louisville, Georgia certain of
its finishing equipment; and
(iv) severance and "stay put" payments made by the
Borrower to its salaried and hourly employees in connection
with the actions described in clauses (i), (ii) and (iii)
above and payments made and charges taken by the Borrower in
connection with the partial termination of its ERISA Plan
related to such salaried and hourly employees;
provided that: (a) such items arise, in each case above, during the
Fiscal Year ending in 1998 and, in the case of clauses (i)(B), (i)(C)
and (iii) above, during the Fiscal Year ending in 1998 or 1999; and (b)
such items do not exceed, in the case of clauses (i)(B), (i)(C) and
(iii) above, $1,000,000 in the aggregate.
3. Amendment to Section 9.22. Section 9.22 of the Loan Agreement shall
be amended by deleting subsection (a) thereof in its entirety and inserting in
its place the following:
(a) The Borrower shall not make or incur any Capital
Expenditure if, after giving effect thereto, the aggregate amount of
all Capital Expenditures by the Borrower would exceed (i) $6,000,0000
during the Fiscal Year ending on November 2, 1998, (ii) $8,000,0000
during the Fiscal Year ending on November 2, 1999 or (iii) $5,000,0000
during any other Fiscal Year; provided, however, that in the event that
all or any part of such permitted aggregate amount is not utilized by
the Borrower during any Fiscal Year, such unutilized amount may be
added to the limit in respect of any subsequent year or years.
4. Amendment to Section 9.26. Section 9.26 of the Loan Agreement shall
be amended by deleting the table therein in its entirety and inserting in its
place the following:
Fiscal Quarter Ending Ratio
July 1997 1.0
October 1997 1.0
January 1998 0.7
April 1998 0.9
July 1998 0.75
October 1998 0.65
January 1999 0.7
April 1999 0.8
July 1999 0.75
October 1999 0.65
January 2000 (and any fiscal
quarter thereafter) 1.1
5. Representations and Warranties. The Borrower hereby represents and
warrants to the Agent and the Lenders as of the date hereof that (i) the
execution, delivery and performance of this Amendment, and the other documents
and instruments to be executed and delivered in connection herewith are within
its corporate powers and have been duly authorized by all necessary corporate
action; (ii) no consent, approval or authorization of any Governmental Authority
or any other Person is required in connection with the execution, delivery and
performance of this Amendment and the other documents and instruments to be
executed and delivered in connection herewith by the Borrower; (iii) no
declaration, filing or registration with any Governmental Authority (including,
without limitation, the Securities and Exchange Commission) is required in
connection with the execution, delivery and performance of this Amendment and
the other documents and instruments to be executed and delivered in connection
herewith by the Borrower; (iv) this Amendment has been duly executed by the
Borrower and constitutes the legal, valid and binding obligation of the
Borrower, enforceable against it in accordance with its terms; (v) the
execution, delivery and performance by the Borrower of this Amendment and the
other documents and instruments to be executed and delivered in connection
herewith by the Borrower, do not and will not conflict with, or constitute a
violation or breach of, or constitute a default under, or result in the creation
or imposition of any Lien upon the property of the Borrower by reason of the
terms of (a) any contract, mortgage, Lien, lease, agreement,
indenture, or instrument to which the Borrower is a party or which is binding
upon it, (b) any requirement of law applicable to the Borrower or (c) the
Certificate or Articles of Incorporation or ByLaws of the Borrower; and (vi) no
event has occurred and is continuing which constitutes a Default or an Event of
Default.
6. Conditions to Effectiveness. This Amendment shall be effective as of
the date first above written upon satisfaction of the following conditions
precedent:
6.1. Prepayment of Term Loans. On or before the date hereof,
the Borrower shall have repaid the outstanding principal amount of the
Term Loans, in accordance with Section 4.4 of the Loan Agreement, in an
amount equal to $3,000,000;
6.2. Execution of this Amendment. The Agent shall have
received a copy of this Amendment duly executed by the Borrower, the
Agent and the Lenders constituting the Majority Lenders; and
6.3. No Defaults. No Default or Event of Default shall have
occurred and be existing before this Amendment shall have become
effective, and no Default or Event of Default shall result, occur or
exist immediately after this Amendment shall have become effective.
7. Limited Effect. This Amendment shall be limited solely to the
matters expressly set forth herein and shall not (a) constitute an amendment or
consent with respect to any other term or condition of the Loan Agreement or any
instrument or agreement referred to therein or (b) prejudice any right or rights
which the Agent or the Lenders may now have or may have in the future under or
in connection with the Loan Agreement or any instrument or agreement referred to
therein. Except as expressly amended and consented to herein, all of the
covenants and provisions of the Loan Agreement are and shall continue to be in
full force and effect.
8. Execution in Counterparts; Telecopies. This Amendment may be
executed in any number of counterparts and by different parties hereto in
separate counterparts, each of which when so executed and delivered shall be
deemed to be an original and all of which taken together shall constitute one
and the same instrument. Transmission by a party hereto of an executed
counterpart of this Amendment to the Agent by telecopier shall be deemed to
constitute due and sufficient delivery of such counterpart by such party,
provided that such party counterpart shall, promptly after such delivery,
deliver the original of such executed counterpart to the Agent.
9. Governing Law. THIS AMENDMENT SHALL BE GOVERNED BY, AND
CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE
OF NEW YORK.
10. Headings. Section headings in this Amendment are included herein
for convenience of reference only and shall not constitute a part of this
Amendment or be given any substantive effect.
IN WITNESS WHEREOF, the parties hereto have caused this
Amendment to be duly executed and delivered by their respective proper and duly
authorized officers as of the day and year first above written.
Borrower
FORSTMANN & COMPANY, INC.
By:_____________________________
Name:
Title:
Agent
BANKAMERICA BUSINESS CREDIT, INC.
By:_____________________________
Name:
Title:
Lenders
BANKAMERICA BUSINESS CREDIT, INC.
By:_____________________________
Name:
Title:
AT&T COMMERCIAL FINANCE CORPORATION
By:_____________________________
Name:
Title:
THE CIT GROUP/COMMERCIAL SERVICES,
INC.
By:_____________________________
Name:
Title:
IBJ SCHRODER BUSINESS CREDIT
CORPORATION
By:_____________________________
Name:
Title:
LA SALLE BUSINESS CREDIT, INC.
By:_____________________________
Name:
Title:
PNC BANK, NATIONAL ASSOCIATION
By:_____________________________
Name:
Title:
Exhibit 15
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,May 3, 1998 and the related condensed
statements of operations for the thirteen and twenty-six weeks ended May 3, 1998
(Reorganized Company) and May 4, 1997 (Predecessor Company), the condensed
statements of cash flows for the thirteentwenty-six weeks ended February 1,May 3, 1998 (Reorganized
Company) and February 2,May 4, 1997 (Predecessor Company) and the condensed statement of
changes in shareholders' equity for the thirteentwenty-six weeks ended February 1,May 3, 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,May 28, 1998