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 August 1, 1999
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or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________________to___________________
Commission File Number: 1-9474
FORSTMANN & COMPANY, INC. (DEBTOR-IN-POSSESSION)
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(Exact name of registrant as specified in its charter)
GEORGIA 58-1651326
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
498 Seventh Avenue, New York, New York 10018
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(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) (212)642-6900
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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
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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 September 15,1999 there was 4,422,844 shares of Common Stock outstanding.
.
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
FORSTMANN & COMPANY, INC. (DEBTOR-IN-POSSESSION)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THIRTEEN WEEKS ENDED AUGUST 1, 1999 AND AUGUST 2, 1998
AND THE THIRTY-NINE WEEKS ENDED AUGUST 1, 1999 AND AUGUST 2, 1998
(unaudited)
Thirteen Thirteen Thirty-Nine Thirty-Nine
Weeks Ended Weeks Ended Weeks Ended Weeks Ended
August 1, August 2, August 1, August 2,
1999 1998 1999 1998
---- ---- ---- ----
Net sales $23,390,000 $38,996,000 $68,930,000 $ 117,638,000
Cost of goods sold 22,558,000 37,021,000 66,203,000 104,444,000
---------- ---------- ---------- -----------
Gross profit 832,000 1,975,000 2,727,000 13,194,000
Selling, general and
administrative expenses 2,206,000 3,167,000 8,390,000 9,933,000
Provision for uncollectible
accounts 169,000 67,000 469,000 638,000
Restructuring items 2,788,000 1,254,000 3,344,000 1,566,000
--------- --------- --------- ---------
Operating (loss) income (4,331,000) (2,513,000) (9,476,000) 1,057,000
Interest expense 1,517,000 1,764,000 4,311,000 4,915,000
--------- --------- --------- ---------
Loss before reorganization
items, income taxes
and extraordinary gain (5,848,000) (4,277,000) (13,787,000) (3,858,000)
Reorganization items 1,346,000 25,000 1,400,000 80,000
--------- ------ --------- ------
Loss before income taxes
and extraordinary gain (7,194,000) (4,302,000) (15,187,000) (3,938,000)
Income tax benefit -- (142,000) -- --
--------- ---------- ---------- ----------
Loss before extraordinary
gain (7,194,000) (4,160,000) (15,187,000) (3,938,000)
Extraordinary item - gain
on debt discharge -- -- 314,000 --
----------- ----------- ------------ ------------
Net loss $(7,194,000) $(4,160,000 $(14,873,000 $(3,938,000)
=========== =========== ============ ===========
(continued on next page)
FORSTMANN & COMPANY, INC. (DEBTOR-IN-POSSESSION)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
Thirteen Thirteen Thirty-Nine Thirty-Nine
Weeks Ended Weeks Ended Weeks Ended Weeks Ended
August 1, August 2, August 1, August 2,
1999 1998 1999 1998
---- ---- ---- ----
Per share and share information:
Loss before extraordinary
gain per common share
- basic and diluted ...... $ (1.63) $ (.95) $ (3.45) $ (.90)
Extraordinary gain
per common share
- basic and diluted ...... -- -- $ .07 --
------- ------ ------- -------
Loss per common share
- basic and diluted ....... $ (1.63) $ (.95) $ (3.38) $ (.90)
Weighted average common
shares outstanding, basic
and diluted ............. 4,418,887 4,386,390 4,399,388 4,385,087
========= ========= ========= =========
See notes to condensed consolidated financial statements
FORSTMANN & COMPANY, INC. (DEBTOR-IN-POSSESSION)
CONDENSED CONSOLIDATED BALANCE SHEETS
AUGUST 1, 1999 AND NOVEMBER 1, 1998
(unaudited)
August 1, November 1,
1999 1998
---- ----
ASSETS
Current Assets:
Cash $ 204,000 $ 143,000
Cash restricted for settlement of unpaid claims -- 327,000
Accounts receivable, net of allowance of
$1,778,000 and $1,309,000 27,551,000 31,434,000
Inventories 23,499,000 38,818,000
Current deferred tax assets -- --
Other current assets 604,000 281,000
Property, plant and equipment
held for sale 2,649,000 --
----------- -----------
Total current assets 54,507,000 71,003,000
Property, plant and equipment, net 14,476,000 22,235,000
Other assets 1,920,000 2,005,000
Total $70,903,000 $95,243,000
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term debt $43,318,000 $ 7,619,000
Accounts payable 191,000 3,151,000
Accrued liabilities 4,022,000 9,238,000
----------- ---------
Total current liabilities 47,531,000 20,008,000
Long-term debt 265,000 43,565,000
Deferred tax liabilities -- --
----------- -----------
Total liabilities not subject
to compromise 47,796,000 63,573,000
Liabilities subject to compromise 6,284,000 --
Shareholders' Equity:
Preferred stock, $0.01 per value, 1,000,000
shares authorized, nil outstanding -- --
Common stock, $.01 par value, 35,000,000
shares authorized, 4,422,844
and 4,387,819 shares
issued and outstanding 44,228 43,878
Additional paid-in capital 50,348,772 50,323,122
Retained deficit since July 23, 1997 (33,570,000) (18,697,000)
----------- -----------
Total shareholders' equity 16,823,000 31,670,000
----------- -----------
Total $70,903,000 $95,243,000
=========== ===========
See notes to condensed consolidated financial statements.
FORSTMANN & COMPANY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THIRTY-NINE WEEKS ENDED AUGUST 1, 1999 AND AUGUST 2, 1998
(unaudited)
August 1, August 2,
1999 1998
---- ----
Net loss ............................................... $(14,873,000) $ (3,938,000)
------------ ------------
Adjustments to reconcile
net loss to net cash provided (used) by
operating activities:
Depreciation and amortization ...................... 3,162,000 4,081,000
Write-off of deferred financing costs .............. 782,000 --
Provision for uncollectible accounts ............... 469,000 638,000
Increase (decrease) in inventory
market reserves ................................. (521,000) 2,650,000
Loss from disposal, abandonment
and impairment of machinery
and equipment and other assets ................... 2,747,000 720,000
Gain associated with NY office lease
surrender ....................................... -- (987,000)
Gain associated with restructuring
lease liability ................................ (647,000) --
Extraordinary gain on discharge of debt ............ (314,000) --
Other .............................................. 549,000 --
Changes in current assets
and current liabilities:
Accounts receivable ............................ 3,414,000 (4,603,000)
Inventories .................................... 15,317,000 (7,712,000)
Other current assets ........................... (323,000) 494,000
Accounts payable ............................... (2,960,000) 566,000
Accrued liabilities ............................ (4,565,000) (2,371,000)
Deferred income taxes .......................... -- 13,000
Operating liabilities subject
to compromise .................................... 5,791,000 --
--------- ----------
Total adjustments .................................... 22,901,000 (6,511,000)
---------- ----------
Net cash provided (used) by
operating activities ............................. 8,028,000 (10,449,000)
---------- ----------
(continued on next page)
FORSTMANN & COMPANY, INC. (DEBTOR-IN-POSSESSION)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE THIRTY-NINE WEEKS ENDED AUGUST 1, 1999 AND AUGUST 2, 1998
(unaudited)
August 1, August 2,
1999 1998
---- ----
Cash flows used in investing activities:
Capital expenditures ................................ (1,782,000) (2,421,000)
Investment in other assets, primarily
computer information systems ..................... (620,000) (1,784,000)
Net proceeds from disposal of
property, plant and equipment ..................... 1,798,000 6,000
----------- -----
Net cash used in investing activities ............. (604,000) (4,199,000)
----------- ---------
Cash flows from financing activities:
Net borrowings under the
Revolving Loan Facility ........................ 5,052,000 24,240,000
Repayment of Term Loan Facility .................... (10,842,000) (7,736,000)
Repayment of Deferred Interest Rate Notes .......... -- (1,571,000)
Repayment of other financing arrangements(1,008,000) (619,000)
Deferred financing costs ........................... (892,000) (34,000)
----------- ---------
Net cash (used) provided by
financing activities ............................ (7,690,000) 14,280,000
----------- -----------
Net decrease in cash .................................. (266,000) (368,000)
Cash and restricted cash at beginning of period ....... 470,000 1,051,000
Cash and restricted cash at end of period$ ............ 204,000 $ 683,000
Supplemental disclosure of cash-flow information
relating to the Chapter 11 proceedings:
Cash paid during the period for
professional fees ............................... $ 525,000 $ 379,000
=========== ===========
See notes to condensed consolidated financial statements
FORSTMANN & COMPANY, INC. (DEBTOR-IN-POSSESSION)
CONDENSED CONSOLIDATED STATEMENT OF CHANGES
IN SHAREHOLDERS' EQUITY
FOR THE THIRTY-NINE WEEKS ENDED AUGUST 1, 1999
(unaudited)
Additional Total
Common Paid-In Retained Shareholders'
Stock Capital Deficit Equity
----- ------- ------- ------
Balance, November 1, 1998 $43,878 $50,323,122 $(18,697,000) $31,670,000
Director shares awarded 350 25,650 -- 26,000
Net loss -- -- (14,873,000) (14,873,000)
------- ----------- ------------ -----------
Balance, August 1, 1999 $44,228 $50,348,772 $(33,570,000) $16,823,000
======= =========== ============ ===========
See notes to condensed consolidated financial statements.
FORSTMANN & COMPANY, INC. (DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED FINANCIAL STATEMENTS
AUGUST 1, 1999
(unaudited)
1. Forstmann & Company, Inc. ("the Company") is a leading designer, marketer
and manufacturer of innovative, high quality woolen, worsted and other
fabrics which are used primarily in the production of brand-name and
private label apparel for men and women, as well as, specialty fabrics for
use in billiard and gaming tables, sports caps and school uniforms. The
apparel industry represents the majority of the Company's customers.
2. As described in Note 1 to the Consolidated Financial Statements
contained in the Company's Annual Report on Form 10-K for the fiscal
year ended November 1, 1998 (the "1998 Form 10-K"), the Company incurred
net losses of $19.0 million, $7.0 million and $17.8 million in fiscal
years 1998, 1997 and 1996, respectively. Net sales declined from $199.0
million in fiscal year 1997 to $149.6 million in fiscal year 1998.
Management responded to these losses, the decline in sales and the
resulting adverse impact on the Company's liquidity by implementing a
business plan designed to align the Company's manufacturing capacity and
overhead with expected market demand. In October 1998, the Company's
Board of Directors approved the closing of its Louisville, Georgia
plant, realignment of the Company's remaining manufacturing facilities
located in Georgia and further reductions of its selling, styling and
administrative costs (the "1999 Realignment"). Implementation of the
1999 Realignment was substantially complete as of January 31, 1999.
The operating results for fiscal year 1998, the effect of the 1998
Restructuring (see Note 1 to the Consolidated Financial Statements
contained in the 1998 Form 10-K) and the 1999 Realignment and the
formation of Forstmann Apparel, Inc. ("FAI"), including the purchase of
substantially all of the assets of Arenzano Trading Company, Inc. (see
Note 4 to the Consolidated Financial Statements contained in the 1998 Form
10-K), negatively impacted the Company's borrowing availability under its
Revolving Loan Facility (herein defined). The Company's availability under
its Revolving Loan Facility was exhausted in mid-July 1999 as compared to
$17.3 million at August 2, 1998. As a result, on July 23, 1999, 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
Bankruptcy Filing was effected to facilitate a possible merger, equity
investment or sale of the Company. The Company has been in discussions
with several interested parties to acquire or invest in the Company.
However, there can be no assurance that the Company will be able to
consummate a merger, equity investment or sale of the Company.
Additionally, as of August 29, 1999 borrowing availability under the
Revolving Loan Facility was $0.6 million. The Company's ability to
maintain adequate availability to meet its operating needs is dependent on
achieving future sales consistent with management's expectations for
fiscal year 1999 and successful implementation of its cost reductions. The
majority of the Company's customers are in the domestic apparel industry
which has continued to suffer an economic decline as a result of higher
levels of imports and changing fashion trends. Expected cash flow from
operations is dependent upon achieving sales expectations during fiscal
year 1999, which are influenced by market conditions, including apparel
sales at retail, that are beyond the control of the Company. Further, the
collectibility of accounts receivable is dependent in large part upon the
financial condition of the apparel industry. Also, continuing refinement
of the Company's strategies in response to evolving circumstances could
materially change the Company's working capital and capital expenditures
requirements. There can be no assurance that the Company will be able to
achieve an adequate level of sales consistent with management's
expectations for fiscal year 1999 to enable the Company to generate
sufficient funds to meet its operating needs. These factors raise
substantial doubt about the Company's ability to continue as a going
concern. The financial statements do not include any adjustments that
might result from the outcome of these uncertainties.
The Company's financial statements have been prepared in accordance with
the American Institute of Certified Public Accountants' Statement of
Position 90-7, "Financial Reporting of Entities in Reorganization Under
the Bankruptcy Code". The accompanying financial statements have been
prepared on a going concern basis which assumes continuity of operations
and realization of assets and liquidation of liabilities in the ordinary
course of business. As a result of the reorganization proceeding, the
Company may have to sell or otherwise dispose of assets and liquidate or
settle liabilities for amounts other than those reflected in these
Condensed Consolidated Financial Statements. Further, resolution of the
Company's liquidity problems could materially change the amounts currently
recorded in the financial statements. The financial statements do not give
effect to all adjustments to the carrying value of the assets, or amounts
and reclassification of liabilities that might be necessary as a result of
the bankruptcy proceeding.
Under Chapter 11, absent authorization of the Bankruptcy Court, efforts to
collect on claims against the Company in existence prior to the Bankruptcy
Filing are stayed while the Company continues business operations as a
debtor-in-possession. Unsecured claims against the Company in existence
prior to the Bankruptcy Filing are reflected as "Liabilities Subject to
Compromise". See Note 12 to the these Condensed Consolidated Financial
Statements. Additional claims (Liabilities Subject to Compromise) may
arise or become fixed subsequent to the filing date resulting from
rejection of executory contracts, including leases, from the determination
by the Court (or agreed to by parties in interest) of allowed claims for
contingencies and other disputed and unliquidated amounts and from the
determination of unsecured deficiency claims in respect of claims secured
by the Company's assets ("Secured Claims"). Resolution of the Company's
liquidity problems may require certain compromises of liabilities
(including Secured Claims) that, as of August 1, 1999, are not classified
as "Liabilities Subject to Compromise". The Company's ability to
compromise Secured Claims without the consent of the holder is subject to
greater restrictions than in the case of unsecured claims. As of August 1,
1999, the Company estimates that the amount of Liabilities Subject to
Compromise approximates $6.3 million. Parties holding Secured Claims have
the right to move the court for relief from the stay, which relief may be
granted upon satisfaction of certain statutory requirements. Secured
Claims are collateralized by substantially all of the assets of the
Company, including, accounts receivable, inventories and property, plant
and equipment.
During the thirteen weeks ended August 1, 1999 (the "1999 Third Quarter"),
the Company wrote off deferred financing cost of $0.8 million associated
with the Loan and Security Agreement (herein defined) and incurred $0.3
million in severance expense. These items were recognized as
reorganization items during the 1999 Third Quarter. Any additional asset
impairment or costs directly related to the reorganization proceeding will
be reflected as reorganization items in the period the Company becomes
committed to plans which impair the valuation of the Company's assets or
incurs a reorganization liability.
As a result of the 1999 Realignment, the Company wrote down property,
plant and equipment by $2.7 million during the 1999 Third Quarter based
upon appraised values. This item was recognized as a restructuring item
during the 1999 Third Quarter. Additionally, the Company incurred
approximately $1.2 million in severance expense which was recognized as a
restructuring item during the thirteen weeks ended January 31, 1999.
During the thirteen weeks ended May 2, 1999, the Company recognized a gain
of $0.6 million associated with the reduction of the operating lease
cancellation liability previously established during fiscal year 1998.
Such gain resulted from an agreement reached with a lessor to exchange
certain idle equipment covered under a lease agreement for equipment in
operation and owned by the Company and was recognized as a restructuring
item during the thirteen weeks ended May 2, 1999. This agreement allowed
the Company to sell such idle equipment. Further, the Company incurred
costs of approximately $0.1 million during the thirty-nine week period
ended August 1, 1999 (the "1999 Period") related to the relocation of
certain machinery and equipment. Such costs were charged to cost of goods
sold during the 1999 Period.
3. On April 30, 1999 the Company entered into a letter of intent with Newco
Holdings LLC ("Newco") which provided for the sale of the ladies suit
business and certain assets, and the assumption of certain liabilities, of
FAI by Newco. Consummation of the sale was expected to occur in June
1999. However, the letter of intent expired without Newco fulfilling its
obligations under the letter of intent in order for a sale to be
consummated. The Company has also filed for Chapter 11 bankruptcy
protection for FAI and has ceased its operations.
4. One of the Company's customers accounted for approximately 9% of the
Company's revenues for the 1999 Period and another customer accounted for
approximately 8% of gross accounts receivable at August 1, 1999. No other
customer represented more than 8% of revenues for the 1999 Period or 7% of
gross accounts receivable at August 1, 1999. One of the Company's major
customers has significantly reduced the amount of its orders to the
Company during the 1999 Period due to general, adverse trends in the
apparel industry.
5. Inventories are stated at the lower of cost, determined principally by the
LIFO method, or market and consist of (in thousands):
August 1, November 1,
1999 1998
---- ----
Raw materials and supplies $ 3,411 $10,218
Work in process 14,925 19,390
Finished products 7,763 12,331
Less market reserves (2,600) (3,121)
Total 23,499 38,818
Difference between LIFO
carrying value and current
replacement cost -- --
------- -------
Current replacement cost $23,499 $38,818
6. The Company had property, plant and equipment held for sale of $2.6 million
as of August 1, 1999 which related to assets previously idled in connection
with the 1998 Restructuring and 1999 Realignment (see Note 1 to the the
Consolidated Financial Statements contained in the 1998 Form 10-K and Note
2 to these Condensed Consolidated Financial Statements). Such assets are
stated at fair value, based on appraisals, and will not be depreciated in
future periods.
7. Other assets consist of (in thousands):
August 1, November 1,
1999 1998
---- ----
Computer information systems,
net of accumulated amortization
of $356 and $93 $1,248 $ 909
Deferred financing costs, net of
accumulated amortization of
$39 and $744 648 1,086
Other, net 24 10
------ ------
Total $1,920 $2,005
====== ======
8. Accrued liabilities consist of (in thousands):
August 1, November 1,
1999 1998
---- ----
Salaries, wages and related
payroll taxes $ 488 $ 606
Incentive compensation 99 290
Vacation and holiday 417 1,243
Interest on long-term debt 179 143
Medical insurance premiums 1,416 1,416
Professional fees 94 105
Environmental remediation 151 292
Loss on open wool purchase
commitments 469 1,537
Restructuring items -- 1,796
Other 709 1,810
------ ------
Total $4,022 $9,238
====== ======
9. Long-term debt consists of (in thousands):
August 1, November 1,
1999 1998
---- ----
Revolving Loan Facility $32,960 $27,908
Term Loan Facility 9,500 20,343
Other note 71 374
Capital lease obligations 1,052 1,890
Licensing agreement 493 669
Total debt 44,076 51,184
Current portion of long-term debt (43,318) (7,619)
Licensing agreement included in
liabilitiessubject to compromise (493) --
------- -------
Total long-term debt $ 265 $43,565
======= =======
The Company is in default of substantially all of its debt agreements
(other than the Loan and Security Agreement). All outstanding unsecured
debt of the Company has been presented in these Condensed Consolidated
Financial Statements as "Liabilities Subject to Compromise".
Reference is made to Note 9 to the Consolidated Financial Statements
contained in the 1998 Form 10-K. On July 23, 1997, the Company entered
into the Loan and Security Agreement with a syndicate of financial
institutions led by BABC. The Loan and Security Agreement was amended on
July 23, 1999 to provide the Company debtor-in-possession financing. The
Loan and Security Agreement, as subsequently amended, provides for a
revolving line of credit (including a $3.0 million letter of credit
facility), subject to a borrowing base formula, of up to $40 million (the
"Revolving Loan Facility") and a term loan of $9.5 million (the "Term Loan
Facility"). In connection with the amendment, the Company agreed to
commence monthly Term Loan Facility principal payments of $500,000 on
November 1, 1999 with the balance due on July 31, 2000. Additionally, the
Company and its lenders agreed to reduce the Revolving Loan Facility
commitment to $19 million from November 1, 1999 through January 1, 2000
with a seasonal increase to $40 million thereafter. The amendment sets new
financial covenants for fiscal year 1999 and thereafter. However, there can
be no assurance that the Company will be able to comply with such financial
covenants. The Loan and Security Agreement, as subsequently amended,
expires on July 31, 2000. In connection with entering into the amendment to
the Loan and Security Agreement, the Company agreed to pay BABC for the
benefit of the lenders, $650,000 due on the earlier of October 31, 1999 or
upon sale of the Company.
At August 1, 1999, the Company's loan availability as defined in the Loan
and Security Agreement, in excess of outstanding advances and letters of
credit, was approximately $1.1 million.
Secured Claims are collateralized by substantially all of the assets of the
Company including accounts receivable, inventories and property, plant and
equipment. The Company has continued to accrue interest on most of its
secured debt obligations as management believes that in most cases the
collateral securing the secured debt obligations is sufficient to cover the
principal and interest portions of scheduled payments on the Company's
pre-petition secured debt obligations.
On March 22, 1999 the Company entered into a 9% Senior Secured Note with
ABB Industrial Systems, Inc. ("ABB") for the principal amount of $290,000
in settlement of ABB's secured claim in the Company's previous bankruptcy
(see Note 9 to the Consolidated Financial Statements contained in the 1998
Form 10-K). The note is payable in 60 consecutive monthly installments in
the amount of $6,019.91 commencing on April 1, 1999. Additionally, the
Company paid $60,000 in respect of ABB's secured claim and issued common
stock based on the formula set forth in the Company's Plan of
Reorganization in respect of ABB's unsecured claim during the thirteen
weeks ended May 2, 1999. The Company recognized an extraordinary gain on
debt discharge of $314,000 during the 1999 Period relating to ABB's
unsecured claim.
10. Statements of Financial Accounting Standards No. 128, "Earnings Per
Share, "became effective during fiscal year 1998 and requires two
presentations of earnings per share -"basic" and "diluted". Basic earnings
per share is computed by dividing income available to common stockholders
(the numerator) by the weighted average number of common shares (the
denominator) for the period. The computation of diluted earnings per share
is similar to basic earnings per share, except that the denominator is
increased to include the number of additional common shares that would have
been outstanding if the potentially dilutive common shares had been issued.
The numerator in calculating both basic and diluted earnings per share for
each period is the reported net loss. The denominator used in calculating
both basic and diluted is the weighted average common shares outstanding as
there were no potentially dilutive shares for either period.
11. As discussed in Note 13 to the Consolidated Financial Statements contained
in the 1998 Form 10-K, the Company has accrued certain estimated costs for
environmental matters.
Dublin, Georgia. On December 29, 1995, the Georgia Environmental Protection
Division ("EPD") issued separate administrative orders (the "Administrative
Orders") to the Company and to J.P. Stevens & Co., Inc. ("Stevens") which
relate to three sites on the Georgia Hazardous Site Inventory - the "TCE
site", the "1,1-DCA site" and another site known as the "Burn Area" - at
the Company's Dublin, Georgia facility. The Administrative Orders required
the Company and Stevens to submit a compliance status report ("CSR") for
these sites that would include, among other things, a description of the
release, including its nature and extent, and suspected or known source,
the quantity of the release and the date of the release. The CSR would also
have to include a determination of cleanup standards (called "risk
reduction standards") for the sites and a certification that the sites were
in compliance with those standards; alternatively, the party submitting the
CSR could acknowledge that the site is not in compliance with risk
reduction standards. Pursuant to the Administrative Orders, if a site is
not in compliance with the risk reduction standards, then a Corrective
Action Plan (a "Corrective Action Plan") for remediating the release would
have to be submitted to EPD.
Since both the Company and Stevens had been required to perform the same
work at all three of these sites, the Company and Stevens agreed to
allocate responsibilities between themselves pursuant to an Agreement
Concerning Performance of Work ("Agreement") dated January 24, 1997. The
Agreement required the Company to prepare and submit to EPD the CSR for the
TCE and 1,1-DCA sites, while requiring Stevens to prepare and submit to EPD
a CSR for the Burn Area site. The Agreement does not commit either party to
perform corrective action at these sites. Stevens submitted a CSR for the
Burn Area site. During fiscal year 1998, EPD and Stevens corresponded
regarding the Stevens CSR. On August 6, 1999 EPD notified Stevens that EPD
concurred with the CSR certification that the Former Burn Area is in
compliance with the Type 4 risk reduction standards. Stevens has been
requested to submit a plan which outlines the activities needed to maintain
compliance with Type 4 risk reduction standards. Upon submittal of an
approved plan, the Site will be reclassified to a Class III and removed
from the Hazardous Sites Inventory.
The Company submitted a CSR for the TCE and 1,1-DCA sites, which certified
compliance with risk reduction standards for both sites. EPD indicated that
it did not agree to the certification with respect to the TCE site. After
extensive discussions with EPD concerning the issue, the Company submitted
a revised Corrective Action Plan ("CAP") on October 31, 1997 which has been
approved by EPD. The revised CAP calls for continued operation of the
Company's existing groundwater recovery system, as well as one additional
groundwater recovery well and a groundwater collection trench near the
former dry cleaning basement. The Company has completed installation of the
recovery well and the groundwater collection trench. In addition to the
installation of these two systems, the CAP requires the submission of an
Annual Corrective Action Status Report to EPD. The Company submitted the
report to EPD on July 28, 1999.
Tifton, Georgia. In January 1997, the Company was notified by a potential
buyer of the Company's Tifton facility that soil and groundwater samples
had been obtained from that facility and that certain contaminants had been
identified. Subsequently, through sampling and testing performed by the
Company's environmental consultants, the Company confirmed the presence of
contaminants in groundwater samples taken at the site. On February 28,
1997, the Company notified EPD of such findings, and the site was placed on
the Georgia Hazardous Site Inventory.
The Company subsequently consummated its sale of the Tifton facility. As
part of that transaction, the Company, the Tift County Development
Authority as purchaser ("TCDA") and Burlen Corporation as operator
("Burlen") entered into an Environmental Cost Sharing and Indemnity
Agreement ("Cost Sharing Agreement"). Under the Cost Sharing Agreement, the
Company retained responsibility for remediating certain contamination, to
the extent required by law, that originated prior to Burlen's occupancy of
the premises. Likewise, the Company assumed the obligation to indemnify
TCDA and Burlen in regard to such contamination to the extent that a claim
is made by an unaffiliated third party or governmental agency. In exchange,
Burlen agreed to pay to the Company the lesser of (1) $150,000 minus any
payments already made to the Company (certain expenses had already been
shared) to respond to the contamination or (2) one-half of the costs
incurred by the Company in response to such contamination.
By letter dated December 21, 1998, EPD requested that the Company submit a
CSR for the site by June 21, 1999. EPD indicated that it had sent Burlen a
similar request. The Company submitted the CSR on June 21, 1999, which
certifies compliance with a Risk Reduction Standard. EPD is reviewing the
CSR and has not responded to the submittal as of August 9, 1999.
At August 1, 1999, the Company had $0.2 million accrued for costs to be
incurred in connection with the TCE, 1,1-DCA and Tifton facility
environmental matters. The Company, subject to EPD's response to J.P.
Stevens' revised CSR and compliance status certification and EPD's response
to the Tifton site, believes the accrual for environmental costs at August
1, 1999 is adequate.
12. Liabilities subject to compromise consist of the following at August 1,
1999 (in thousands):
1999
----
Trade accounts payable $3,613
Priority tax claim 54
Accrued severance 278
Deferred rental and other
lease obligations 1,298
Licensing Agreement 493
Other 548
------
Total $6,284
======
Unsecured claims against the Company in existence prior to the Bankruptcy
Filing are included in "Liabilities Subject to Compromise". Additional
claims (Liabilities Subject to Compromise) may arise or become fixed
subsequent to the filing date resulting from rejection of executory
contracts, including leases, from the determination by the Court (or agreed
to by parties in interest) of allowed claims for contingencies and other
disputed and unliquidated amounts and from the determination of unsecured
deficiency claims in respect of claims secured by the Company's assets
("Secured Claims"). Consequently, the amount included in the balance sheet
as Liabilities Subject to Compromise may be subject to further adjustments.
A plan of reorganization may require certain compromise of liabilities
that, as of August 1, 1999, are not classified as Liabilities Subject to
Compromise. The Company's ability to compromise Secured Claims without the
consent of the holder is subject to greater restrictions than in the case
of unsecured claims. Parties holding Secured Claims have the right to move
the court for relief from the stay, which relief may be granted upon
satisfaction of certain statutory requirements. Secured Claims are
collateralized by substantially all of the assets of the Company,
including, accounts receivable, inventories and property, plant and
equipment.
13. Restructuring items related to the Company's 1998 Restructuring and 1999
Realignment have been segregated and included in normal operations during
the thirteen and thirty-nine weeks ended August 1, 1999 and August 2, 1998
and consist of (in thousands):
Thirteen Weeks Ended
--------------------
August 1, August 2,
1999 1998
---- ----
Severance and "stay-put" bonus expense
and related employee benefits 25 $ 205
Loss associated with New York office
lease surrender -- 283
Professional fees 16 47
Loss on impairment of machinery and
equipment and other assets 2,747 719
------ ------
Total $2,788 $1,245
====== ======
Thirty-Nine Weeks Ended
-----------------------
August 1, August 2,
1999 1998
---- ----
Gain associated with reduction of operating
lease cancellation liability $ (647) $ --
Severance and "stay-put" bonus expense
and related employee benefits 1,220 1,172
Gain associated with New York office
lease surrender -- (375)
Professional fees 24 50
Loss on impairment of machinery and
equipment and other assets 2,747 719
------ ------
Total $3,344 $1,566
====== ======
During the thirteen weeks ended August 1, 1999, certain of the Company's
property, plant and equipment was rendered further impaired. The Company
currently estimates that the fair value of such equipment is $2.7 million
below its current net book value based upon appraised values. As a result,
the Company recognized a loss on impairment of $2.7 million as a
restructuring item during the thirteen weeks ended August 1, 1999.
During the thirteen weeks ended January 31, 1999, the Company incurred
approximately $1.2 million in severance expense as a result of the 1999
Realignment (see Note 2 to these Condensed Consolidated Financial
Statements) which was recognized as a restructuring item during the
thirteen weeks ended January 31, 1999. During the thirteen weeks ended May
2, 1999, the Company recognized a gain of $0.6 million associated with the
reduction of the operating lease cancellation liability previously
established during fiscal year 1998. Such gain resulted from an agreement
reached with a lessor to exchange certain idle equipment covered under a
lease agreement for equipment in operation and owned by the Company. This
agreement allowed the Company to sell such idle equipment. This item was
recognized as a restructuring item during the thirteen weeks ended May 2,
1999.
During the 1998 Third Quarter, certain of the Company's machinery and
equipment was rendered impaired. The Company estimated that the fair value
of such equipment was $0.7 million below its net book value. Accordingly,
the Company recognized a loss on impairment of $0.7 million as a
restructuring item during the 1998 Third Quarter.
During the thirty-nine weeks ended August 2, 1998, the Company recognized
as restructuring items severance expense of approximately $0.8 million and
expense of approximately $0.4 million for stay put bonuses related to the
1998 Restructuring (see Note 1 to the Consolidated Financial Statement
contained in the 1998 Form 10-K).
In connection with entering into the lease surrender agreement (see Note 13
to the Consolidated Financial Statements contained in the 1998 Form 10-K),
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, accrued $0.5
million for broker's commission and accrued approximately $0.1 million for
lease cancellation liability. These items resulted in a $0.4 million gain
which was recorded as a restructuring item during the thirty-nine weeks
ended August 2, 1998.
14. In accordance with SOP 90-7, professional fees, asset impairments and
reorganization charges directly related to the current and prior Bankruptcy
Filing and related reorganization proceedings have been segregated from
normal operations during the thirteen and thirty-nine weeks ended August 1,
1999 and August 2, 1998 and consist of (in thousands):
Thirteen Weeks Ended
---------------------
August 1, August 2,
1999 1998
---- ----
Write-off of deferred financing costs $ 782 $ --
Professional fees 243 19
Severance expense 297 --
Other 24 6
------ ----
Total $1,346 $ 25
====== ====
Thirty-Nine Weeks Ended
-----------------------
August 1, August 2,
1999 1998
---- ----
Write-off of deferred financing costs $ 782 $ --
Professional fees 297 45
Severance expense 297 --
Other 24 35
------- ----
Total $1,400 $ 80
====== ====
Item 2. MANAGEMENT=S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Reference is made to Item 7 - AManagement=s Discussion and Analysis of Financial
Condition and Results of Operations@ contained in the 1998 Form 10-K for a
discussion of the Company=s financial condition as of November 1, 1998,
including a discussion of the Company=s anticipated liquidity and working
capital requirements during its 1999 fiscal year.
Forward Looking Statements
Certain matters discussed in this Quarterly Report under Item 2 are forward
looking statements which reflect the Company's current views with respect to
future events and financial performance. These forward-looking statements are
subject to certain risks and uncertainties which could cause actual results to
differ materially from historical results or those anticipated. Readers are
cautioned not to place undue reliance on these forward-looking statements, which
speak only as of their dates. The Company undertakes no obligation to publicly
update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise. The following factors could cause
actual results to differ materially from historical results or those
anticipated: The Company's Bankruptcy proceeding, demand for the Company=s
products, competition, the Company's production needs, wool market conditions,
foreign currency exchange rates, the adequacy of the Company's current
financing, any unexpected financing requirements, and changes in the general
economic climate.
Recent Events
1999 Realignment and Bankruptcy Filing
As described in Note 1 to the Consolidated Financial Statements contained in the
Company's Annual Report on Form 10-K for the fiscal year ended November 1, 1998
(the "1998 Form 10-K"), the Company incurred net losses of $19.0 million, $7.0
million and $17.8 million in fiscal years 1998, 1997 and 1996, respectively. Net
sales declined from $199.0 million in fiscal year 1997 to $149.6 million in
fiscal year 1998. Management responded to these losses, the decline in sales and
the resulting adverse impact on the Company's liquidity by implementing a
business plan designed to align the Company's manufacturing capacity and
overhead with expected market demand. In October 1998, the Company's Board of
Directors approved the closing of its Louisville, Georgia plant, realignment of
the Company's remaining manufacturing facilities located in Georgia and further
reductions of its selling, styling and administrative costs (the "1999
Realignment"). Implementation of the 1999 Realignment was substantially complete
as of January 31, 1999.
The operating results for fiscal year 1998, the effect of the 1998 Restructuring
(see Note 1 to the Consolidated Financial Statements contained in the 1998 Form
10-K) and the 1999 Realignment and the formation of Forstmann Apparel, Inc.
("FAI"), including the purchase of substantially all of the assets of Arenzano
Trading Company, Inc. (see Note 4 to the Consolidated Financial Statements
contained in the 1998 Form 10-K), negatively impacted the Company's borrowing
availability under its Revolving Loan Facility (herein defined). The Company's
availability under its Revolving Loan Facility was exhausted in mid-July 1999 as
compared to $17.3 million at August 2, 1998. As a result, on July 23, 1999, 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 Bankruptcy Filing
was effected to facilitate a possible merger, equity investment or sale of the
Company. The Company has been in discussions with several interested parties to
acquire or invest in the Company. However, there can be no assurance that the
Company will be able to consummate a merger, equity investment or sale of the
Company. Additionally, as of August 29, 1999 borrowing availability under the
Revolving Loan Facility was $0.6 million. The Company's ability to maintain
adequate availability to meet its operating needs is dependent on achieving
future sales consistent with management's expectations for fiscal year 1999 and
successful implementation of its cost reductions. The majority of the Company's
customers are in the domestic apparel industry which has continued to suffer an
economic decline as a result of higher levels of imports and changing fashion
trends. Expected cash flow from operations is dependent upon achieving sales
expectations during fiscal year 1999, which are influenced by market conditions,
including apparel sales at retail, that are beyond the control of the Company.
Further, the collectibility of accounts receivable is dependent in large part
upon the financial condition of the apparel industry. Also, continuing
refinement of the Company's strategies in response to evolving circumstances
could materially change the Company's working capital and capital expenditures
requirements. There can be no assurance that the Company will be able to achieve
an adequate level of sales consistent with management's expectations for fiscal
year 1999 to enable the Company to generate sufficient funds to meet its
operating needs. These factors raise substantial doubt about the Company's
ability to continue as a going concern. The financial statements do not include
any adjustments that might result from the outcome of these uncertainties.
During the thirteen weeks ended August 1, 1999 (the "1999 Third Quarter"), the
Company wrote off deferred financing cost of $0.8 million associated with the
Loan and Security Agreement (herein defined) and incurred $0.3 million in
severance expense. These items were recognized as reorganization items during
the 1999 Third Quarter. Any additional asset impairment or costs directly
related to the reorganization proceeding will be reflected as reorganization
items in the period the Company becomes committed to plans which impair the
valuation of the Company's assets or incurs a reorganization liability.
As a result of the 1999 Realignment, the Company wrote down property, plant and
equipment by $2.7 million during the 1999 Third Quarter based upon appraised
values. This item was recognized as a restructuring item during the 1999 Third
Quarter. Additionally, the Company incurred approximately $1.2 million in
severance expense which was recognized as a restructuring item during the
thirteen weeks ended January 31, 1999. During the thirteen weeks ended May 2,
1999, the Company recognized a gain of $0.6 million associated with the
reduction of the operating lease cancellation liability previously established
during fiscal year 1998. Such gain resulted from an agreement reached with a
lessor to exchange certain idle equipment covered under a lease agreement for
equipment in operation and owned by the Company and was recognized as a
restructuring item during the thirteen weeks ended May 2, 1999. This agreement
allowed the Company to sell such idle equipment. Further, the Company incurred
costs of approximately $0.1 million during the thirty-nine week period ended
August 1, 1999 (the "1999 Period") related to the relocation of certain
machinery and equipment. Such costs were charged to cost of goods sold during
the 1999 Period.
Sale of FAI
On April 30, 1999 the Company entered into a letter of intent with Newco
Holdings LLC ("Newco") which provided for the sale of the ladies suit business
and certain assets, and the assumption of certain liabilities, of FAI by Newco.
Consummation of the sale was expected to occur in June 1999. However, the letter
of intent expired without Newco fulfilling its obligations under the letter of
intent in order for a sale to be consummated. The Company has also filed for
Chapter 11 bankruptcy protection for FAI and has ceased its operations.
Financial Condition and Liquidity
The Company is in default of substantially all of its debt agreements (other
than the Loan and Security Agreement). All outstanding unsecured debt of the
Company has been presented in these Condensed Consolidated Financial Statements
as "Liabilities Subject to Compromise".
Reference is made to Note 9 to the Consolidated Financial Statements contained
in the 1998 Form 10-K. On July 23, 1997, the Company entered into the Loan and
Security Agreement with a syndicate of financial institutions led by BABC. The
Loan and Security Agreement was amended on July 23, 1999 to provide the Company
debtor-in-possession financing. The Loan and Security Agreement, as subsequently
amended, provides for a revolving line of credit (including a $3.0 million
letter of credit facility), subject to a borrowing base formula, of up to $40
million (the "Revolving Loan Facility") and a term loan of $9.5 million (the
"Term Loan Facility"). In connection with the amendment, the Company agreed to
commence monthly Term Loan Facility principal payments of $500,000 on November
1, 1999 with the balance due at maturity. Additionally, the Company and its
lenders agreed to reduce the Revolving Loan Facility commitment to $19 million
from November 1, 1999 through January 1, 2000 with a seasonal increase to $40
million thereafter. The amendment sets new financial covenants for fiscal year
1999 and thereafter. However, there can be no assurance that the Company will be
able to comply with such financial covenants. The Loan and Security Agreement,
as subsequently amended, expires on July 31, 2000. In connection with entering
into the amendment to the Loan and Security Agreement, the Company agreed to pay
BABC for the benefit of the lenders, $650,000 due on October 31, 1999 or upon
sale of the Company.
At August 1, 1999, the Company's loan availability as defined in the Loan and
Security Agreement, in excess of outstanding advances and letters of credit, was
approximately $1.1 million.
Secured Claims are collateralized by substantially all of the assets of the
Company including accounts receivable, inventories and property, plant and
equipment. The Company has continued to accrue interest on most of its secured
debt obligations as management believes that in most cases the collateral
securing the secured debt obligations is sufficient to cover the principal and
interest portions of scheduled payments on the Company's pre-petition secured
debt obligations.
The Company=s business is seasonal, with the vast majority of orders for woolen
fabrics placed from December through April for apparel manufacturers to produce
apparel for retail sale during the fall and winter months. This results in a
seasonal sales order and billing pattern which historically generates higher
sales during the Company=s second and third fiscal quarters compared to the
Company=s first and fourth fiscal quarters. This sales pattern places seasonal
constraints on the Company=s manufacturing operations which results in increased
working capital requirements in the Company's first fiscal quarter relating to
the manufacture of certain components of inventory which are sold in the
Company's second and third fiscal quarter. Further, the industry practice of
providing coating fabric customers with favorable billing terms (referred to as
Adating@) 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 thirty-nine weeks ended August 1, 1999 (the A1999 Period@),
operations provided $8.0 million of cash, whereas $10.4 million was used by
operations during the thirty-nine weeks ended August 2, 1998 (the A1998
Period@). This $18.5 million increase in cash provided by operations in the 1999
Period was primarily due to a $23.0 million decrease in inventory during the
1999 Period as compared to the 1998 Period. The decrease in inventory during the
1999 Period as compared to the 1998 Period resulted from the Company curtailing
its manufacturing operations during the 1999 Period. This was in response to
significantly lower receipt of customer sales orders during the 1999 Period as
compared to the 1998 Period for product to be delivered in the Company's second
and third fiscal quarters, as well as, the Company's decision to exit certain
product lines in connection with the 1998 Restructuring (see Note 1 to the 1998
Form 10-K ) and reduced worsted manufacturing capacity resulting from the 1999
Realignment (see Note 2 to these Condensed Consolidated Financial Statements).
Accounts receivable declined by $3.4 million during the 1999 Period, whereas
accounts receivable increased by $4.6 million during the 1998 Period. The
decrease in accounts receivable primarily relates to a decrease in sales during
the 1999 Period when compared to the 1998 Period. Combined, the decrease in
inventory and accounts receivable during the 1999 Period resulted in $18.7
million being provided during the 1999 Period as compared to $12.3 million being
used during the 1998 Period. This $31.0 million increase in cash provided was
somewhat offset by a $10.9 million higher net loss during the 1999 Period when
compared to the 1998 Period.
Investing activities used $0.6 million in the 1999 Period as compared to $4.2
million in the 1998 Period. The Company expects spending for capital
expenditures, principally plant and equipment, in fiscal year 1999 to be
significantly lower than fiscal year 1998 due to caps contained in the amended
Loan and Security Agreement.
As a result of the foregoing, during the 1999 Period, $7.7 million was used by
financing activities whereas during the 1998 Period $14.3 million was provided
by financing activities.
The sales order backlog at August 29, 1999 was $13.5 million whereas
at the comparable time a year earlier the sales order backlog was $42.1 million.
The composition of the sales order backlog at August 29, 1999 reflects a weaker
order position in all product lines. Of the approximate $28.6 million decline in
the sales order backlog at August 29, 1999 as compared to the comparable time a
year earlier, approximately $20.2 million relates to womenswear fabrics. The
decline in the backlog of sales orders for women's fabrics is twofold. First, an
over capacity of woolen flannel manufacturing coupled with excessive women's
wool flannel apparel inventory at retail has lead to a decline in demand for the
Company's women's wool flannel fabrics. Second, the reduction in the Company's
worsted fabrics manufacturing capacity has caused the Company to limit somewhat
its women's worsted product offerings. The menswear fabric and government fabric
sales order backlog at August 29, 1999 declined by $4.6 million over the
comparable time a year earlier. Approximately $4.2 million of this decline
relates to the Company's decision to exit men's suits and government businesses.
Menswear fabrics further declined primarily due to an over capacity in global
worsted wool manufacturing and fashion trends. The order position for coating
fabrics at August 29, 1999 has declined by $2.0 million over the comparable time
a year earlier. The decrease in coating fabric sales order backlog is primarily
due to the unseasonably warm winter experienced throughout much of the U.S. in
1997-1998. As a result, initial coating fabric orders have been delayed by
retailers, which has delayed orders from apparel manufacturers. The specialty
fabric sales order backlog at August 29, 1999 declined by $1.8 million over the
comparable time a year earlier due to a decrease in orders for fabrics used in
baseball caps.
The Company purchases a significant amount of its raw wool inventory from
Australia. Since all of the Company=s forward purchase commitments for raw wool
are denominated in U.S. dollars, there is no actual currency exposure on
outstanding contracts. However, future changes in the relative exchange rates
between the United States and Australian dollars can materially affect the
Company=s results of operations for financial reporting purposes. Based on wool
costs incurred during the 1999 Period and the Company=s forward purchase
commitments, the Company expects wool costs to decrease approximately 11% in
fiscal year 1999 as compared to fiscal year 1998.
Year 2000 Matters
Many computer systems experience problems handling dates beyond the year 1999.
Therefore, some computer hardware and software will need to be modified prior to
the year 2000 in order to remain functional. The Company is in the process of
updating or replacing its computerized systems to ensure its systems are "Year
2000" compliant and to improve the Company's overall manufacturing, planning and
inventory related systems. The Company is utilizing both internal and external
resources to upgrade or replace its existing computerized systems. Costs
associated with upgrading existing systems to address the Year 2000 matter will
be expensed in the period incurred, whereas costs associated with the
replacement of existing systems will be capitalized in the period incurred.
During the 1999 Period, the Company capitalized $0.6 million in costs associated
with the replacement of existing systems.
The Company expects its Year 2000 upgrade project and the replacement of its
manufacturing and inventory related systems to be completed during the fourth
quarter of calendar year 1999. In the third quarter of calendar year 1999 over
80% of the completed Company software application systems were rigorously tested
and proven Year 2000 compliant in a Year 2000 date range computer environment.
While the Company is confident the remaining Year 2000 upgrade tasks
will be completed and tested in the fourth quarter of calendar year 1999, there
can be no assurance that there will not be a delay in, or increased costs
associated with the implementation of such changes. Any inability to implement
such changes could have a material adverse effect on the Company.
The Company has not completed its assessment of the Year 2000 compliance of its
vendors and customers, nor of the possible consequences to the Company of the
failure of one or more of its vendors and customers to become Year 2000
compliant on a timely basis. The Company expects to complete such assessment
before the end of the third quarter of calendar year 1999. It is possible that
if a substantial number of the Company's customers fail to implement Year 2000
compliant billing or payment systems, for example, their payments to the Company
might be disrupted which might adversely affect the Company's cash flow. The
Company will discuss these matters with its key vendors and customers during the
remainder of 1999 to attempt to ascertain whether and to what extent such
problems are likely to occur. It is not clear, however, what, if any measures
the Company could take to deal with such eventualities while still maintaining
customer and vendor relationships. The Company does not believe that it has
other relationships with vendors and suppliers which, if disrupted, due to the
failure of such vendors and suppliers to deal adequately with their own Year
2000 compliance issues, would have a material adverse effect on the Company.
The Company has completed an assessment of its manufacturing processes, and
all mill equipment from DCS/SCADA systems to field devices had been inventoried.
All critical items have been tested and 98% are compliant. The remaining 2% (one
item of equipment)is scheduled for Year 2000 upgrade by early December 1999. The
assessment of non-critical items is 85% complete, with 100% Year 2000 compliance
and will be completed by the calendar year end.
Results of Operations
The Thirty-Nine Weeks Ended August 1, 1999 ("1999 Period") Compared to
The Thirty-Nine Weeks Ended August 2, 1998 ("1998 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
1999 Period were $68.9 million, a decrease of 41.4% from the 1998 Period. Total
yards of fabric sold decreased 42.7% from the 1998 Period to the 1999 Period and
the average per yard selling price decreased to $7.41 per yard from $7.57 per
yard due to shifts in product mix and sales price decline. The decrease in sales
was primarily due to womenswear fabric sales which were approximately $29.0
million lower in the 1999 Period as compared to the 1998 Period and menswear
fabric sales which were approximately $18.2 million lower in the 1999 Period as
compared to the 1998 Period. Additionally, coating fabric sales were
approximately $2.4 million lower during the 1999 Period as compared to the 1998
Period and specialty fabric sales were approximately $1.2 million lower during
the 1999 Period as compared to the 1998 Period. These decreases were nominally
offset by an increase in government fabric sales of $0.2 million during the 1999
Period as compared to the 1998 Period. Additionally, sales for FAI were $3.9
million during the 1999 Period as compared to $1.6 million during the 1998
Period. Menswear fabric sales declined due, in part, to the Company's decision
made in March 1998 to exit the men's top dyed suit business. Overall, the
Company expects men's woolen fabric sales to be lower in fiscal year 1999 as
compared to fiscal year 1998 due to fashion trends and increased competition
from imports. Women's woolen and worsted fabric sales were lower in the 1999
Period as compared to the 1998 Period. Based on current backlog of sales orders
for women's woolen and worsted sales, market trends and increased competitive
pressures, the Company expects overall women's woolen and worsted fabric sales
to be significantly lower in fiscal year 1999 as compared to fiscal year 1998.
Currently, the Company expects coating fabric sales in fiscal year 1999 to be
slightly lower than in fiscal year 1998.
Cost of goods sold decreased $38.2 million to $66.2 million during the 1999
Period primarily as a result of the decline in sales and change in product mix.
Gross profit decreased $10.5 million from $13.2 million in the 1998 Period to
$2.7 million in the 1999 Period, and gross profit margin for the 1999 Period was
4.0% compared to 11.2% for the 1998 Period. This decline in the gross profit
margin is due to fixed manufacturing costs which are not absorbed when
manufacturing operations are running at volumes below full capacity. As a result
of operating below full capacity, $7.9 million in fixed manufacturing costs were
unabsorbed during the 1999 Period as compared to $2.8 million during the 1998
Period.
Selling, general and administrative expenses, excluding the provision for
uncollectible accounts, decreased 15.5% to $8.4 million in the 1999 Period
compared to $9.9 million in the 1998 Period. However, included in selling,
general and administrative expenses during the 1999 Period is $2.0 million
related to FAI as compared to $0.8 million during the 1998 Period. The majority
of the decrease in selling, general and administrative expenses exclusive of FAI
during the 1999 Period was primarily due to a decrease in human resource related
expenses as the Company reduced its overhead in response to lower sales.
Additionally, expense associated with professional services was lower during the
1999 Period when compared to the 1998 Period.
The provision for uncollectible accounts decreased to $0.5 million in the 1999
Period as compared to $0.6 million in the 1998 Period. See Note 3 to the
Consolidated Financial Statements contained in the 1998 Form 10-K for a
discussion of the Company's accounting policies regarding the establishment of
its allowance for uncollectible accounts.
Interest expense for the 1999 Period was $4.3 million as compared to $4.9
million in the 1998 Period. The decrease in interest expense during the 1999
Period is mainly attributable to a lower Term Loan Facility balance which was
somewhat offset by a higher average Revolving Loan Facility balance and $0.2
million higher interest expense associated with FAI during the 1999 Period as
compared to the 1998 Period.
As a result of the foregoing, a loss before reorganization and restructuring
items, income taxes and extraordinary gain of $10.4 million was realized in the
1999 Period as compared to $2.3 million in the 1998 Period. Loss before
depreciation and amortization, reorganization and restructuring items, interest
expense, income taxes and extraordinary gain during the 1999 Period was $3.0
million as compared to income before depreciation and amortization,
reorganization and restructuring items, interest expense and income taxes of
$6.3 million during the 1998 Period.
Restructuring items were $3.3 million during the 1999 Period and $1.6 million
during the 1998 Period (see Note 13 to these Condensed Consolidated Financial
Statements).
Reorganization items were $1.4 million during the 1999 Period and $0.1 million
during the 1998 Period (see Note 14 to these Condensed Consolidated Financial
Statements).
During fiscal year 1995, the Company fully utilized its net operating loss
carrybacks as permitted by the Internal Revenue Code. For the 1999 Period and
the 1998 Period, no income tax benefit was recognized from the realization of a
net operating loss.
An extraordinary gain on debt discharge of $0.3 million was recognized during
the 1999 Period as a result of the settlement reached with ABB Industrial
Systems, Inc. regarding its bankruptcy claim (see Note 9 to these Condensed
Consolidated Financial Statements).
As a result of the foregoing, net loss for the 1999 Period was $14.9 million as
compared to $3.9 million in the 1998 Period.
The Thirteen Weeks Ended August 1, 1999 (the "1999 Third Quarter") Compared to
The Thirteen Weeks Ended August 2, 1998 (the "1998 Third Quarter")
Net sales for the 1999 Third Quarter were $23.4 million, a decrease of 40.0%
from the 1998 Third Quarter. Total yards of fabric sold decreased 34.0% during
the 1999 Third Quarter. The average per yard selling price decreased to $7.24
per yard from $7.62 per yard due to shifts in product mix and sales price
decline. Sales declined in all major product lines. The decrease in net sales
during the 1999 Third Quarter is attributable to the reasons discussed above in
the 1999 Period compared to the 1998 Period.
Cost of goods sold decreased $14.5 million to $22.6 million during the 1999
Third Quarter primarily as a result of lower sales. Gross profit decreased $1.1
million or 57.9% to $0.8 million in the 1999 Third Quarter, and gross profit
margin for the 1999 Third Quarter was 3.6% compared to 5.1% for the 1998 Third
Quarter. The decrease in gross profit margin during the 1999 Third Quarter is
attributable to the reasons discussed above in the 1999 Period compared to the
1998 Period.
Selling, general and administrative expenses, excluding the provision for
uncollectible accounts, decreased 30.3% to $2.2 million in the 1999 Third
Quarter compared to $3.2 million in the 1998 Third Quarter. Included in selling,
general and administrative expenses during the 1999 Third Quarter is $0.3
million related to FAI as compared to $0.8 million during the 1998 Third
Quarter. The reduction in selling, general and administrative expenses during
the 1999 Third Quarter exclusive of FAI is primarily attributable to a decrease
in human resource related expenses as the Company reduced its overhead in
response to lower sales.
The provision for uncollectible accounts was $0.2 million during the 1999 Third
Quarter when compared to $0.1 million during the 1998 Third Quarter.
Interest expense for the 1999 Third Quarter was $1.5 million or $0.2 million
lower than the 1998 Third Quarter. This decrease is attributable to a lower Term
Loan Facility balance during the 1999 Third Quarter as compared to the 1998
Third Quarter.
As a result of the foregoing, a loss before reorganization and restructuring
items, income taxes and extraordinary gain of $3.1 million was realized in the
1999 Third Quarter as compared to $3.0 million in the 1998 Third Quarter. Loss
before depreciation and amortization, reorganization and restructuring items,
interest expense, income taxes and extraordinary gain during the 1999 Third
Quarter was $0.3 million as compared to income before depreciation and
amortization, reorganization and restructuring items, interest expense and
income taxes of less than $0.1 million during the 1998 Third Quarter.
Restructuring items of $2.8 million was recognized in the 1999 Third Quarter as
compared to $1.3 million in the 1998 Third Quarter. Reference is made to Note 13
to these Condensed Consolidated Financial Statements for a discussion of
restructuring items incurred during the 1999 Third Quarter and the 1998 Third
Quarter.
Reorganization items were $1.3 million during the 1999 Third Quarter as compared
to $25,000 during the 1998 Third Quarter (see Note 14 to these Condensed
Consolidated Financial Statements).
During fiscal year 1995, the Company fully utilized its net operating loss
carrybacks as permitted by the Internal Revenue Code. Accordingly, for the 1999
Third Quarter, no income tax benefit was recognized from the realization of net
operating losses. During the 1998 Third Quarter, the Company recognized an
income tax benefit of $0.1 million which related to the reversal of the
provision recorded during the twenty-six weeks ended May 3, 1998.
As a result of the foregoing, a net loss of $7.2 million was recognized in the
1999 Third Quarter compared to $4.2 million in the 1998 Third Quarter.
PART II -- OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K:
(a) Exhibits
4.1 Amendment No. 2 to Amended and Restated Loan and Security
Agreement (DIP Financing Amendment) dated as of July 23, 1999.
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 September 3, 1999
from
Deloitte & Touche LLP to Forstmann & Company, Inc.
99.1 Press release re Chapter 11 Filing dated as of July 23, 1999.
(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/Gary E. Schafer
---------------------------------
Gary E. Schafer
Chief Financial Officer
September 15, 1999
- ------------------
Date
EXHIBIT INDEX
Exhibit Sequential
No. Description Page No.
4.1 Amendment No. 2 to Amended and Restated 33
Loan and Security Agreement (DIP Financing
Amendment) dated as of July 23, 1999.
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, 56
dated September 3, 1999 from Deloitte &
Touche LLP to Forstmann & Company, Inc.
99.1 Press release re Chapter 11 Filing dated as 57
of July 23, 1999.