UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended FEBRUARY 1, 1998 ---------------- or ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___________________to___________________ Commission File Number: 1-9474 FORSTMANN & COMPANY, INC. ----------------------------------------------------- (Exact name of registrant as specified in its charter) GEORGIA 58-1651326 ------------------------------ ------------------ (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1155 AVENUE OF THE AMERICAS, NEW YORK, NEW YORK 10036 ----------------------------------------------- --------- (Address of principal executive offices) (Zip Code) (Registrant's telephone number, including area code) (212) 642-6900 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. (X)Yes ( )No Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. (X)Yes ( )No As of March 17, 1998, there was 4,385,770 shares of Common Stock outstanding. Total number of pages: 22 pages. 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, 1997 (unaudited) Reorganized Predecessor Company Company February 1, February 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 .......................................... $ 48,000 $ 493,000 Cash restricted for settlement of unpaid claims 560,000 558,000 Accounts receivable, net of allowance of $682,000 and $458,000 ....................... 34,763,000 42,005,000 Inventories ................................... 56,883,000 43,210,000 Current deferred tax assets ................... 804,000 -- Other current assets .......................... 575,000 926,000 ------------- ------------ Total current assets ........................ 93,633,000 87,192,000 Property, plant and equipment, net .............. 23,960,000 24,779,000 Other assets .................................... 1,706,000 1,670,000 ------------- ------------ Total ....................................... $ 119,299,000 $113,641,000 ============= ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current maturities of long-term debt .......... $ 5,709,000 $ 5,756,000 Accounts payable .............................. 3,099,000 3,335,000 Accrued liabilities ........................... 8,859,000 11,371,000 ------------- ------------ Total current liabilities ................... 17,667,000 20,462,000 Long-term debt .................................. 52,259,000 42,548,000 Deferred tax liabilities ........................ -- -- ------------- ------------ Total liabilities ........................... 69,926,000 63,010,000 Commitments and contingencies Shareholders' Equity: New common stock, $.01 par value, 10,000,000 shares authorized, 4,384,436 shares issued and outstanding ............................. 43,844 43,844 Additional paid-in capital ...................... 50,297,156 50,297,156 Retained earnings (deficit) since July 23, 1997 . (968,000) 290,000 ------------- ------------ Total shareholders' equity ...................... 49,373,000 50,631,000 ------------- ------------ Total ..................................... $ 119,299,000 $113,641,000 ============= ============ See notes to financial statements ............... FORSTMANN & COMPANY, INC. CONDENSED STATEMENTS OF CASH FLOWS FOR THE THIRTEEN WEEKS ENDED FEBRUARY 1, 1998 AND FEBRUARY 2, 1997 (unaudited) Reorganized Predecessor Company Company February 1, February 2, 1998 1997 ---- ---- Net loss .......................................... $ (1,258,000) $(7,318,000) ------------ ----------- Adjustments to reconcile net loss to net cash used by operating activities: Depreciation and amortization ................. 1,335,000 3,112,000 Income tax not payable in cash ................ (804,000) -- Income tax payments ........................... -- -- Provision for uncollectible accounts .......... 224,000 171,000 Increase (decrease) in market reserves ........ 34,000 (952,000) Loss from disposal, abandonment and impairment of machinery and equipment and other assets and (gain) from disposal ... (1,000) 3,039,000 Changes in current assets and current liabilities: Accounts receivable ....................... 7,018,000 9,964,000 Inventories ............................... (13,707,000) (9,076,000) Other current assets ...................... 351,000 53,000 Accounts payable .......................... (207,000) 403,000 Accrued liabilities ....................... (2,543,000) (179,000) Accrued interest payable .................. 31,000 600,000 Operating liabilities subject to compromise -- (234,000) ------------ ----------- Total adjustments ............................... (8,269,000) 6,901,000 ------------ ----------- Net cash used by operations ................... (9,527,000) (417,000) ------------ ----------- (continued on next page) FORSTMANN & COMPANY, INC. CONDENSED STATEMENTS OF CASH FLOWS FOR THE THIRTEEN WEEKS ENDED FEBRUARY 1, 1998 AND FEBRUARY 2, 1997 (unaudited) Reorganized Predecessor Company Company February 1, February 2, 1998 1997 ---- ---- Cash flows used by investing activities: Capital expenditures ........................... (340,000) (176,000) Investment in computer information systems ..... (189,000) (105,000) Net proceeds from disposal of machinery and equipment ................................ 1,000 1,000 ------------ ----------- Net cash used by investing activities ........ (528,000) (280,000) ------------ ----------- Cash flows from financing activities: Net borrowings under the Revolving Loan Facility 12,587,000 -- Net borrowings under the DIP Facility .......... -- 1,193,000 Repayment of Term Loan Facility ................ (1,123,000) -- Repayment of Deferred Interest Rate Notes ...... (1,570,000) -- Repayment of other financing arrangements ...... (259,000) (283,000) Deferred financing costs ....................... (23,000) (213,000) ------------ ----------- Net cash provided by financing activities .... 9,612,000 697,000 Net decrease in cash ............................. (443,000) -- Cash and restricted cash at beginning of period .. 1,051,000 48,000 ------------ ----------- Cash and restricted cash at end of period ........ $ 608,000 $ 48,000 ============ =========== See notes to financial statements. FORSTMANN & COMPANY, INC. CONDENSED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE THIRTEEN WEEKS ENDED FEBRUARY 1, 1998 (unaudited) Additional Retained Total Common Paid-In Earnings Shareholders' STOCK CAPITAL (DEFICIT) EQUITY Balance, November 2, 1997 $43,844 $50,297,156 $ 290,000 $ 50,631,000 Net loss ................ -- -- (1,258,000) (1,258,000) ------- ----------- ----------- ------------ Balance, February 1, 1998 $43,844 $50,297,156 $ (968,000) $ 49,373,000 ======= =========== =========== ============ See notes to financial statements. FORSTMANN & COMPANY, INC. NOTES TO FINANCIAL STATEMENTS FEBRUARY 1, 1998 (unaudited) 1. Forstmann & Company, Inc. ("the Company") is a leading designer, marketer and manufacturer of innovative, high quality woolen, worsted and other fabrics which are used primarily in the production of brand-name and private label apparel for men and women, as well as specialty fabrics for use in billiard tables, sports caps and school uniforms. The apparel industry represents the majority of the Company's customers. As described in Note 1 to the Financial Statements contained in the Company's Annual Report on Form 10-K for the fiscal year ended November 2, 1997, on September 22, 1995, the Company filed a petition for protection under Chapter 11 of the United States Bankruptcy Code (the "Bankruptcy Code") with the U.S. Bankruptcy Court for the Southern District of New York (the "Bankruptcy Filing"). The Company emerged from Bankruptcy pursuant to a Plan of Reorganization (the "Plan of Reorganization") on July 23, 1997 (the "Effective Date"). As described in Note 2 to the Financial Statements contained in the 1997 Form 10-K, in accordance with the American Institute of Certified Public Accountants' Statement of Position 90-7, "Financial Reporting by Entities in Reorganization Under the Bankruptcy Code" ("SOP 90-7"), the Company established its reorganization value and adopted "fresh start" accounting as of July 22, 1997. Under the principles of "fresh start" accounting, the Company's total net assets were recorded at its established reorganization value, which was then allocated to identifiable tangible and intangible assets on the basis of their estimated fair value. In accordance with "fresh start" accounting, the difference between the assumed reorganization value and the aggregate fair value of the identifiable tangible and intangible assets resulted in a reduction in the value assigned to property, plant and equipment. In addition, the Company's accumulated deficit was eliminated. 2. On March 6, 1998, the Company announced that, as part of its long-term strategy, it will discontinue the production of top dye worsted fabrics used to manufacture men's suits and government uniforms (the "1998 Restructuring") after completing orders for its fall season. In fiscal year 1997, top dye worsteds accounted for approximately $18 million in men's suiting fabric and $10 million in government uniform fabric sales. This decision will result in the Company's overall workforce of approximately 2,500 people being reduced by approximately 730 people. Implementation of the 1998 Restructuring will result in the Company incurring certain costs, including, among other costs, salaried severance, special one-time hourly "stay put" bonuses and equipment relocation costs. Additionally, certain of the Company's inventories may be impaired or rendered obsolete and the carrying value of certain of the Company's property, plant and equipment may be impaired. The Company estimates that severance expense will be approximately $0.5 million and will be recognized as a restructuring expense in the Company's second quarter of fiscal year 1998. The Company estimates that the stay put bonuses will be approximately $0.8 million and will be accrued over the employee's remaining service period as a restructuring expense. Certain other adjustments relating to certain other employee benefit costs may be incurred in connection with the implementation of the 1998 Restructuring, which will be recognized as a restructuring expense in the period such costs can be reasonably estimated. Impairment of inventories will be recognized as an operating expense in the periods in which the impairment can be reasonably estimated, whereas impairment of property, plant and equipment will be recognized as a restructuring expense in the periods in which the impairment can be reasonably estimated. Costs incurred to relocate certain machinery and equipment will be charged against operations in the periods incurred. 3. One of the Company's customers accounted for approximately 31% of the Company's revenues for the thirteen weeks ended February 1, 1998 and 34% of gross accounts receivable at February 1, 1998. No other customer represented more than 6% of revenues or 6% of gross accounts receivable. 4. Inventories are stated at the lower of cost, determined principally by the LIFO method, or market and consist of (in thousands): February 1, November 2, 1998 1997 ---- ---- Raw materials and supplies ........... $ 9,070 $ 8,303 Work-in-process ...................... 33,266 27,459 Finished products .................... 15,744 8,169 Less market reserves ................. (1,257) (721) -------- -------- Total ................................ 56,883 43,210 Difference between LIFO carrying value and current replacement cost ................... 613 -- -------- -------- Current replacement cost ............. $ 57,496 $ 43,210 ======== ======== 5. Other assets consist of (in thousands): February 1, November 2, 1998 1997 ---- ---- Computer information systems, net of accumulated amortization of $0 and $0 ....................... $ 225 $ 94 Deferred financing costs, net of accumulated amortization of $304 and $164 ...................... 1,372 1,520 Other, net ........................... 109 56 -------- -------- Total ............................... $ 1,706 $ 1,670 ======== ======== 6. Accrued liabilities consist of (in thousands): February 1, November 2, 1998 1997 ---- ---- Salaries, wages and related payroll taxes ...................... $ 935 $ 978 Incentive compensation ............... 347 2,082 Vacation and holiday ................. 1,793 1,729 Employee benefits plans .............. 52 20 Interest on long-term debt ........... 93 62 Medical insurance premiums ........... 1,322 1,327 Professional Fees .................... 142 355 Environmental remediation ............ 343 361 Deferred rental and other lease obligations 2,166 2,186 Other ................................ 1,642 2,271 -------- -------- Total ................................ $ 8,835 $ 11,371 ======== ======== 7. Long-term debt consists of (in thousands): February 1, November 2, 1998 1997 ---- ---- Revolving Loan Facility .............. $ 25,976 $ 13,389 Term Loan Facility ................... 29,204 30,327 Deferred Interest Rate Notes ......... -- 1,571 Other note ........................... 519 603 Capital lease obligations ............ 2,269 2,414 -------- -------- Total debt ........................... 57,968 48,304 Current portion of long-term debt .... (5,709) (5,756) -------- -------- Total long-term debt ................. $ 52,259 $ 42,548 ======== ======== On July 23, 1997, the Company entered into the Loan and Security Agreement with a syndicate of financial institutions led by BABC. The Loan and Security Agreement provides for a revolving line of credit (including a $10.0 million letter of credit facility), subject to a borrowing base formula, of up to $85 million (the "Revolving Loan Facility") and term loans of approximately $31.5 million (the "Term Loan Facility"). At February 1, 1998, the Company's loan availability as defined in the Loan and Security Agreement, in excess of outstanding advances and letters of credit, was approximately $21.7 million. The Company and its lenders have negotiated an amendment to the Loan and Security Agreement to modify, among other things, the definition of earnings before interest, income taxes, depreciation, amortization and reorganization items ("EBITDAR") and Adjusted Tangible Net Worth, and to modify certain loan covenants so as to increase permitted capital expenditures and lower the minimum fixed charge coverage ratio. Such modifications are being made in anticipation of the effects of the Company's 1998 Restructuring as more fully described in Note 2 to the Financial Statements contained herein. At February 1, 1998, the Company was in compliance with such covenants. In connection with the negotiations, the Company has agreed to prepay $3.0 million of the Term Loan Facility through borrowings under the Revolving Loan Facility. The Company expects to enter into a formal amendment to the Loan and Security Agreement which reflects the negotiated modifications to the Loan and Security Agreement promptly. As described more thoroughly in Note 8 to the Financial Statements contained in the 1997 Form 10-K, on the Effective Date, in accordance with the Plan of Reorganization, the Company issued subordinated floating rate notes (the "Deferred Interest Rate Notes") in respect of certain accrued but unpaid interest (approximately $1.6 million). On December 22, 1997, the Company repaid the Deferred Interest Rate Notes and accrued interest due thereon through borrowings under the Revolving Loan Facility. 8. In February 1997, the Financial Accounting Standards Board issued Financial Accounting Standards ("SFAS") No. 128, Earnings Per Share which simplifies the standards for computing earnings per share ("EPS") information and makes the computation comparable to international EPS Standards. SFAS 128 replaces the presentation of "primary" (and when required "fully diluted") EPS with a presentation of "basic" and "diluted" EPS. Loss per common share - basic is computed based on the net loss divided by the weighted average common shares outstanding. On a diluted basis, the loss per share - diluted is compared by dividing the net loss by the weighted average common shares during the period plus incremental shares that would have been outstanding under option plans. The Company did not have any dilutive options for either period presented. 9. As discussed in Note 14 to the Financial Statements in the 1997 Form 10-K, the Company has accrued certain estimated costs for environmental matters. DUBLIN, GEORGIA. On December 29, 1995, the Georgia Environmental Protection Division ("EPD") issued separate administrative orders (the "Administrative Orders") to the Company and to J.P. Stevens & Co., Inc. ("Stevens") which relate to three sites on the Georgia Hazardous Site Inventory - the "TCE site", the "1,1-DCA site" and another site known as the "Burn Area" - at the Company's Dublin, Georgia facility. The Administrative Orders required the Company and Stevens to submit a compliance status report ("CSR") for these sites that would include, among other things, a description of the release, including its nature and extent, and suspected or known source, the quantity of the release and the date of the release. The CSR would also have to include a determination of cleanup standards (called "risk reduction standards") for the sites and a certification that the sites were in compliance with those standards; alternatively, the party submitting the CSR could acknowledge that the site is not in compliance with risk reduction standards. Pursuant to the Administrative Orders, if a site is not in compliance with the risk reduction standards, then a Corrective Action Plan (a "Corrective Action Plan") for remediating the release would have to be submitted to EPD. Since both the Company and Stevens had been required to perform the same work at all three of these sites, the Company and Stevens agreed to allocate responsibilities between themselves pursuant to an Agreement Concerning Performance of Work ("Agreement") dated January 24, 1997. The Agreement required the Company to prepare and submit to EPD the CSR for the TCE and 1,1-DCA sites, while requiring Stevens to prepare and submit to EPD a CSR for the Burn Area site. The Agreement does not commit either party to perform corrective action at these sites. Stevens submitted a CSR for the Burn Area site. On January 28, 1998 EPD provided comments and requested clarification to the Stevens CSR. On February 12, 1998 Stevens environmental consultant provided a preliminary response to EPD's letter and requested a meeting to discuss proposed changes to the CSR. Stevens indicated its intention to submit a revised CSR based on this meeting. The Company submitted a CSR for the TCE and 1,1-DCA sites, which certified compliance with risk reduction standards for both sites. EPD indicated that it did not agree to the certification with respect to the TCE site. After extensive discussions with EPD concerning the issue, the Company submitted a Corrective Action Plan for the TCE site by letter dated May 15, 1997. By letter dated September 29, 1997, EPD responded to the Corrective Action Plan with notice of deficiency. The Company submitted a revised Corrective Action Plan on October 31, 1997. The revised Corrective Action Plan calls for continued operation of the Company's existing groundwater recovery system, as well as one additional groundwater recovery well and a groundwater collection trench near the former dry cleaning basement. EPD has not yet responded to the Company's revised Corrective Action Plan. TIFTON, GEORGIA. In January 1997, the Company was notified by a potential buyer of the Company's Tifton facility that soil and groundwater samples had been obtained from that facility and that certain contaminants had been identified. Subsequently, through sampling and testing performed by the Company's environmental consultants, the Company confirmed the presence of contaminants in groundwater samples taken at the site. On February 28, 1997, the Company notified EPD of such findings, and the site was placed on the Georgia Hazardous Site Inventory. The Company subsequently consummated its sale of the Tifton facility. As part of that transaction, the Company, the Tift County Development Authority as purchaser ("TCDA") and Burlen Corporation as operator ("Burlen") entered into an Environmental Cost Sharing and Indemnity Agreement ("Cost Sharing Agreement"). Under the Cost Sharing Agreement, the Company retained responsibility for remediating certain contamination, to the extent required by law, that originated prior to Burlen's occupancy of the premises. Likewise, the Company assumed the obligation to indemnify TCDA and Burlen in regard to such contamination to the extent that a claim is made by an unaffiliated third party or governmental agency. In exchange, Burlen agreed to pay to the Company the lesser of (1) $150,000 minus any payments already made to the Company (certain expenses had already been shared) to respond to the contamination or (2) one-half of the costs incurred by the Company in response to such contamination. EPD has not yet requested any additional response to conditions at this site. At February 1, 1998, the Company had $0.3 million accrued for costs to be incurred in connection with the TCE, 1,1-DCA and Tifton facility environmental matters. The Company, subject to EPD concurring with the Company's Corrective Action Plan relating to the TCE and 1,1-DCA sites, EPD's response to J.P. Stevens revised CSR and compliance status certification and EPD's response to the Tifton site, believes the accrual for environmental costs at February 1, 1998 is adequate. 10. In accordance with SOP 90-7, professional fees, asset impairments and restructuring charges directly related to the Bankruptcy Filing and related reorganization proceedings have been segregated from normal operations during the thirteen-week periods ended February 1, 1998 and February 2, 1997 and consist of (in thousands): Reorganized Predecessor Company Company Thirteen Thirteen Weeks Ended Weeks Ended February 1, February 2, 1998 1997 ---- ---- Professional fees .................... $ 16 $ 977 Impairment of assets ................. -- 3,039 Default interest expense and professional fees associated with the Senior Secured Notes .............. -- (177) Other ................................ 4 (42) -------- -------- Total ................................ $ 20 $ 4,151 ======== ======== As of February 2, 1997, $4.2 million was included in construction in progress relating to certain unerected equipment. Accordingly, during the thirteen weeks ended February 2, 1997, the Company accrued an expected loss of $3.0 million associated with the sale of such equipment to reorganization expense. Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Reference is made to Item 7 - "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained in the 1997 Form 10-K for a discussion of the Company's financial condition as of November 2, 1997, including a discussion of the Company's anticipated liquidity and working capital requirements during its 1998 fiscal year. FORWARD LOOKING STATEMENTS Certain matters discussed in this Quarterly Report under Item 2 are forward looking statements which reflect the Company's current views with respect to future events and financial performance. These forward-looking statements are subject to certain risks and uncertainties which could cause actual results to differ materially from historical results or those anticipated. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their dates. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. The following factors could cause actual results to differ materially from historical results or those anticipated: demand for the Company's products, competition, the Company's production needs, wool market conditions, the adequacy of the Company's current financing, any unexpected financing requirements, and changes in the general economic climate. RECENT EVENTS 1998 RESTRUCTURING On March 6, 1998, the Company announced that, as part of its long-term strategy, it will discontinue the production of top dye worsted fabrics used to manufacture men's suits and government uniforms (the "1998 Restructuring") after completing orders for its fall season. In fiscal year 1997, top dye worsteds accounted for approximately $18 million in men's suiting fabric sales and $10 million in government uniform fabric sales. This decision will result in the Company's overall workforce of approximately 2,500 people being reduced by approximately 730 people. The top dye worsted fabrics business has been a relatively small part of the Company's overall business. However, the complexity of manufacturing top dyes makes it extremely labor intensive and unprofitable at its current level. By discontinuing top dye worsted fabrics, the Company believes it can focus all of its resources on its strengths in men's and women's woolen and worsted sportswear, coating and niche specialty markets. Implementation of the 1998 Restructuring will result in the Company incurring certain costs, including, among other costs, salaried severance , special one-time hourly "stay put" bonuses and equipment relocation costs. Additionally, certain of the Company's inventories may be impaired or rendered obsolete and the carrying value of certain of the Company's property, plant and equipment may be impaired. The Company estimates that severance expense will be approximately $0.5 million and will be recognized as a restructuring expense in the Company's second quarter of fiscal year 1998. The Company estimates that stay put bonuses will be approximately $0.8 million and will be accrued over the employee's remaining service period as a restructuring expense. Certain other adjustments relating to certain other employee benefit costs may be incurred in connection with the implementation of the 1998 Restructuring, which will be recognized as a restructuring expense in the period such costs can be reasonably estimated. Impairment of inventories will be recognized as an operating expense in the periods in which the impairment can be reasonably estimated, whereas impairment of property, plant and equipment will be recognized as a restructuring expense in the periods in which the impairment can be reasonably estimated. Costs incurred to relocate certain machinery and equipment will be charged against operations in the periods incurred. During the first quarter of fiscal year 1998, no amounts were recognized as restructuring expense and operating results were not affected as a result of the 1998 Reorganization. FINANCIAL CONDITION AND LIQUIDITY The Company's business is seasonal, with the vast majority of orders for woolen fabrics placed from December through April for apparel manufacturers to produce apparel for retail sale during the fall and winter months. This results in a seasonal sales order and billing pattern which historically generates higher sales during the Company's second and third fiscal quarters compared to the Company's first and fourth fiscal quarters. This sales pattern places seasonal constraints on the Company's manufacturing operations which, during the first fiscal quarter, the Company has traditionally lessened by manufacturing certain components of inventory in advance of actual sales orders. Further, the industry practice of providing coating fabric customers with favorable billing terms (referred to as "dating") which permit payment 60 (sixty) days from July 1 for invoices billed in January through June encourages such coating fabric customers to place orders in advance of their actual need. This enables the Company to manufacture and bill certain coating fabric customers during the Company's first fiscal quarter. During the thirteen-week period ended February 1, 1998 (the "1998 Period"), operations used $9.5 million of cash, whereas $0.4 million was used by operations during the thirteen-week period ended February 2, 1997 (the "1997 Period"). This $9.1 million increase in cash used by operations in the 1998 Period was primarily due to a $4.6 million increase in cash used by inventory during the 1998 Period as compared to the 1997 Period. Traditionally, because of the seasonal nature of the Company's business, the Company replenishes its year-end inventory levels during its first fiscal quarter in order to meet the higher sales demand of the Company's second and third fiscal quarters. Accounts receivable provided $7.0 million during the 1998 Period, whereas $10.0 million was provided by accounts receivable during the 1997 Period. Accounts receivable at February 1, 1998 included $2.2 million of accounts receivable with dating, a decrease of $2.0 million compared to February 2, 1997. Such decrease in dated accounts receivable during the 1998 Period is primarily due to a $1.4 million decrease in coating fabric sales during the 1998 Period as compared to the 1997 Period. Combined, the increase in inventory which was offset by the decline in accounts receivable during the 1998 Period resulted in $6.7 million being used in the 1998 Period as compared to $1.0 million being provided in the 1997 Period. Additionally accrued liabilities used $2.5 million in the 1998 Period as compared to $0.2 million in the 1997 Period. As a result of the foregoing and the refinancing, reinstatement or restructuring of the Company's secured indebtedness pursuant to the Plan of Reorganization, working capital at February 1, 1998 was $76.0 million as compared to $16.7 million at February 2, 1997. Investing activities used $0.5 million in the 1998 Period as compared to $0.3 million in the 1997 Period. The Company expects spending for capital expenditures, principally plant and equipment, in fiscal year 1998 to be greater than fiscal year 1997 due to renewals or betterments of plant and equipment and compliance with environmental regulations. As a result of the foregoing, during the 1998 Period, $9.6 million was provided by financing activities whereas during the 1997 Period $0.7 million was used by financing activities. The Company believes that cash generated from operations and borrowings under the its Revolving Loan Facility will be sufficient to fund its fiscal year 1998 working capital and capital expenditure requirements. However, expected cash flows from operations are dependent upon achieving sales expectations during fiscal year 1998 which are influenced by market conditions, including apparel sales at retail, that are beyond the control of the Company. Due to the seasonal nature of the Company's core woolen and worsted business, the Company's borrowings under its Revolving Loan Facility will tend to increase during the first three quarters of the Company's fiscal year until the fourth quarter, when, at year-end, borrowings tend to be the lowest. However, borrowings at the end of fiscal year 1998 may be higher than at the beginning of fiscal year 1998 or higher during various times within fiscal year 1998 than comparable periods within fiscal year 1997. The sales order backlog at March 1, 1998 was $54.5 million whereas at the comparable time a year earlier the sales order backlog was $70.9 million. The composition of the sales order backlog at March 1, 1998 reflects a weaker order position in all product lines except specialty and coating fabrics. Of the approximate $16.4 million decline in the sales order backlog at March 1, 1998 as compared to the comparable time a year earlier, approximately $14.9 million related to worsted spun fabrics, including approximately $5.3 million in government top-dyed fabrics. The overall decline in worsted fabrics is believed to be due, in part, to an over capacity in global worsted wool manufacturing and fashion trends. The Company purchases a significant amount of its raw wool inventory from Australia. Since all of the Company's forward purchase commitments for raw wool are denominated in U.S. dollars, there is no actual currency exposure on outstanding contracts. However, future changes in the relative exchange rates between the United States and Australian dollars can materially affect the Company's results of operations for financial reporting purposes. Based on wool costs incurred during the 1998 Period and the Company's forward purchase commitments, the company expects wool costs to increase approximately 1% in fiscal year 1998 as compared to fiscal year 1997. RESULTS OF OPERATIONS The 1998 Period Compared to the 1997 Period The Company's business is seasonal, accordingly, results for these interim periods are not indicative of results for a full fiscal year. Net sales for the 1998 Period were $29.0 million, a decrease of 7.1% from the 1997 Period. Total yards of fabric sold decreased 8.5% from the 1997 Period to the 1998 Period. However, the average per yard selling price increased to $7.43 per yard from $7.12 per yard due to shifts in product mix. The decrease in sales was primarily due to the effect of product lines discontinued during fiscal year 1996 (converting, career uniform and Carpini) which realized sales of approximately $1.9 million in the 1997 Period as compared to $0.1 million in the 1998 Period, men's woolen fabric sales which were approximately $1.6 million lower in the 1998 Period as compared to the 1997 Period and coating fabric sales which were approximately $1.4 million lower in the 1998 Period as compared to the 1997 Period. These declines in sales were somewhat offset by women's woolen and worsted sales which were approximately $2.4 million higher in the 1998 Period as compared to the 1997 Period. The decline in men's woolen fabric sales is due, in part, to increased competitive pressures (primarily imports) as well as delayed placement of orders by a customer as such customer shifts its ordering methodology from projecting anticipated demand to actual receipt of apparel orders from its customers. Overall, the Company expects men's woolen fabric sales to be slightly lower in fiscal year 1998 as compared to fiscal year 1997. The decrease in coating fabric sales is due, in part, to an unseasonably warm fall and winter season which resulted in lower than anticipated women's coats selling at retail. This has resulted in delayed fabric shipment and order assortment by the Company's coating fabric customers. At March 1, 1998, the backlog of sales orders for coating fabric is ahead of the comparable date in the prior year. Currently, the Company expects coating fabric sales in fiscal year 1998 to be approximately equal to fiscal year 1997. Women's woolen and worsted fabric sales were higher in the 1998 Period as compared to the 1997 Period due, in part, to the timing of customers orders which were strong during the fourth quarter of fiscal year 1997. Based on current backlog of sales orders for women's woolen and worsted sales, market trends and increased competitive pressures, the Company expects overall women's woolen and worsted fabric sales to be lower in fiscal year 1998 as compared to fiscal year 1997. Based on these trends (increased competitive pressures in the woolen and worsted markets, the decline in backlog of orders, management's expectations as to the level of government orders to be awarded to the Company and the effect of discontinued product lines and the decision to discontinue the production of top dyed worsted fabrics used to manufacture men's suits and government uniforms) the Company expects sales revenue in fiscal year 1998 to be between 15% to 20% lower than in fiscal year 1997. Accordingly, on March 6, 1998, the Company announced that, as part of its long-term strategy, it will discontinue the production of top dye worsted used to manufacture men's suits and government uniforms after completing orders for its fall season. In fiscal year 1997, top dyed worsteds accounted for approximately $18 million in men's suiting fabric sales and $10 million in government uniform fabric sales. Further, in addition to exiting the production of top-dyed worsted fabrics, the Company is consolidating certain manufacturing operations and implementing other plans designed to align its costs during fiscal year 1998 with the decline in sales anticipated in fiscal year 1998. The top dye worsted fabrics business has been a relatively small part of the Company's overall business. However, the complexity of manufacturing top dyes makes it extremely labor intensive and unprofitable at its current level. By discontinuing top dye worsted fabrics, the Company believes it can focus all of its resources on its strengths in men's and women's woolen and worsted sportswear, coating and niche specialty markets. However, there can be no assurance as to the level of sales that will actually be attained in fiscal year 1998, as sales are dependent on market conditions and other factors beyond the Company's control, nor can there be assurance that the Company's cost reduction will be implemented successfully. Cost of goods sold decreased $2.7 million to $25.7 million during the 1998 Period primarily as a result of a $1.4 million decline in depreciation and amortization expense primarily due to the effect of "fresh start" accounting previously discussed herein and the decline in sales and change in product mix. Gross profit increased $0.5 million or 16.5% to $3.3 million in the 1998 Period, and gross profit margin for the 1998 Period was 11.4% compared to 9.1% for the 1997 Period. Manufacturing overhead excluding depreciation and amortization was approximately $0.3 million higher in the 1998 Period as compared to the 1997 Period. This increase was primarily due to higher group medical costs under the Company's self-insured plan. Selling, general and administrative expenses, excluding the provision for uncollectible accounts, decreased 15.6% to $3.6 million in the 1998 Period compared to $4.3 million in the 1997 Period. The majority of the decrease in the 1997 Period is due to lower incentive compensation expense and depreciation and amortization expense. Incentive compensation expense in the 1998 Period was lower than in the 1997 Period due to a one-time special bonus plan in fiscal year 1997 for certain key employees, which was triggered by the Company's emergence from Bankruptcy. The decline in depreciation and amortization expense is primarily due to the effect of "fresh start" accounting previously discussed herein. Somewhat offsetting these declines were increased professional expenses and higher group medical costs under the Company's self-insured plan. The provision for uncollectible accounts increased slightly in the 1998 Period as compared to the 1997 Period. See Note 3 to the Financial Statements contained in the 1997 Form 10-K for a discussion of the Company's accounting policies regarding the establishment of its allowance for uncollectible accounts. Interest expense for the 1998 Period was $1.5 million as compared to $1.6 million in the 1997 Period. This decrease is attributable to lower interest rates in effect under the Loan and Security Agreement during the 1998 Period as compared to interest rates in effect in the 1997 Period. As a result of the foregoing, a loss before reorganization items and income taxes of $2.0 million was realized in the 1998 Period as compared to a loss before reorganization items and income taxes of $3.2 million in the 1997 Period. Income before depreciation and amortization, reorganization items, interest expense and income taxes during the 1998 Period was $0.7 million as compared to $1.3 million during the 1997 Period. Reorganization items were $4.2 million in the 1997 Period as compared to $20,000 in the 1998 Period. Included in reorganization items in the 1997 Period was the accrual of $3.0 million for the expected loss on the sale of certain unerected equipment located at the Tifton facility which was not related to the sale of such facility. Additionally, during the 1997 Period, the Company incurred approximately $1.0 million in professional fees related to the Company's Bankruptcy Filing which were recognized as reorganization items. During fiscal year 1995, the Company fully utilized its net operating loss carrybacks as permitted by the Internal Revenue Code. Accordingly, for the 1997 Period, no income tax benefit was recognized from the realization of net operating losses. During the 1998 Period, the Company recognized an income tax benefit of $0.8 million at an effective income tax rate of 39%. Although the use of the Company's net operating loss carryforwards is believed to be limited due to the distribution of the new common stock of the Company to the Company's unsecured creditors pursuant to the Plan of Reorganization which is believed to have resulted in an ownership change as defined in Section 382 of the Internal Revenue Code, the Company believes future interim periods during fiscal year 1998 will generate taxable income which will offset the income tax benefit recognized in the 1998 Period. As a result of the foregoing, net loss for the 1998 Period was $1.3 million as compared to a net loss of $7.3 million in the 1997 Period. PART II -- OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K: (a) Exhibits 11.1 Statement re computation of per share earnings - not required since such computation can be clearly determined from the material contained herein. 15.1 Independent Accountants' Review Report, dated February 25, 1998 from Deloitte & Touche LLP to Forstmann & Company, Inc. (b) Current Reports on Form 8-K None SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FORSTMANN & COMPANY, INC. ------------------------- (Registrant) /S/ RODNEY PECKHAM ------------------ Rodney Peckham Executive Vice President Finance, Administration and Strategic Planning MARCH 16,1998 - ------------- Date EXHIBIT INDEX Exhibit Sequential NO. DESCRIPTION PAGE NO. - ------- ----------- ---------- 11.1 Statement re computation of per share earnings - not required since such computation can be clearly determined from the material contained herein. 15.1 Independent Accountants' Review Report, dated February 25, 1998, from Deloitte & Touche LLP to Forstmann & Company, Inc. 22 EXHIBIT 15.1 INDEPENDENT ACCOUNTANTS' REVIEW REPORT Board of Directors and Shareholders Forstmann & Company, Inc.: We have reviewed the accompanying condensed balance sheet of Forstmann & Company, Inc. (the "Company") as of February 1, 1998 and the related condensed statements of operations and cash flows for the thirteen weeks ended February 1, 1998 (Reorganized Company) and February 2, 1997 (Predecessor Company) and the condensed statement of changes in shareholders' equity for the thirteen weeks ended February 1, 1998. These financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data, and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to such condensed financial statements for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the balance sheet of the Company as of November 2, 1997 and the related statements of operations, shareholders' equity, and cash flows for the period from November 4, 1996 to July 22, 1997 of the Predecessor Company and the period from July 23, 1997 to November 2, 1997 of the Reorganized Company (not presented herein); and in our report dated December 19, 1997, we expressed an unqualified opinion on those financial statements. In our opinion, the information set forth in the accompanying condensed balance sheet as of November 2, 1997 is fairly stated, in all material respects, in relation to the balance sheet from which it has been derived. Deloitte & Touche LLP Atlanta, Georgia February 25, 1998