-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, U82U10Fq6Zq/dZo9hkth3ZUtK1e1R55f43KdXonak2dxz703u2bKhFDkJxhdIVmC 4GZrYht0sFYIn9+l2xgUGA== 0000798246-99-000013.txt : 19990617 0000798246-99-000013.hdr.sgml : 19990617 ACCESSION NUMBER: 0000798246-99-000013 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990502 FILED AS OF DATE: 19990616 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FORSTMANN & CO INC CENTRAL INDEX KEY: 0000798246 STANDARD INDUSTRIAL CLASSIFICATION: TEXTILE MILL PRODUCTS [2200] IRS NUMBER: 581651326 STATE OF INCORPORATION: GA FISCAL YEAR END: 1103 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-09474 FILM NUMBER: 99647408 BUSINESS ADDRESS: STREET 1: 498 SEVENTH AVENUE CITY: NEW YORK STATE: NY ZIP: 10018 BUSINESS PHONE: 2126426983 MAIL ADDRESS: STREET 1: P O BOX 1049 CITY: DUBLIN STATE: GA ZIP: 31040 10-Q 1 FORM 10-Q FOR THE PERIOD ENDED MAY 2, 1999 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 May 2, 1999 ----------- or ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___________________to___________________ Commission File Number: 1-9474 FORSTMANN & COMPANY, INC. ----------------------------------------------------- (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.) 498 Seventh Avenue, New York, New York 10018 ---------------------------------------- ---------- (Address of principal executive offices) (Zip Code) (Registrant's telephone number, including area code) (212) 642-6900 -------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. X Yes No Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. X Yes No As of June 16, 1999 there was 4,418,887 shares of Common Stock outstanding. Total number of pages: 30 pages. PART I -- FINANCIAL INFORMATION Item 1. Financial Statements FORSTMANN & COMPANY, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THIRTEEN WEEKS ENDED MAY 2, 1999 AND MAY 3, 1998 AND THE TWENTY-SIX WEEKS ENDED MAY 2, 1999 AND MAY 3, 1998 (unaudited) Thirteen Thirteen Twenty-Six Twenty-Six Weeks Ended Weeks Ended Weeks Ended Weeks Ended May 2, 1999 May 3, 1998 May 2, 1999 May 3, 1998 ----------- ----------- ----------- ----------- Net sales ................................ $ 27,042,000 $ 49,625,000 $ 45,540,000 $ 78,642,000 Cost of goods sold ....................... 24,593,000 41,718,000 43,645,000 67,423,000 ------------ ------------ ------------ ------------ Gross profit ............................. 2,449,000 7,907,000 1,895,000 11,219,000 Selling, general and administrative expenses ............... 2,789,000 3,176,000 6,184,000 6,766,000 Provision for uncollectible accounts .............................. 179,000 347,000 300,000 571,000 Restructuring items (gain) ............... (629,000) 312,000 556,000 312,000 ------------ ------------ ------------ ------------ Operating income (loss) .................. 110,000 4,072,000 (5,145,000) 3,570,000 Interest expense ......................... 1,387,000 1,611,000 2,794,000 3,151,000 ------------ ------------ ------------ ------------ Income (loss) before reorganization items, income taxes and extraordinary gain ................ (1,277,000) 2,461,000 (7,939,000) 419,000 Reorganization items ..................... 40,000 35,000 54,000 55,000 ------------- ------------ ------------ ------------ Income (loss) before income taxes and extraordinary gain ................ (1,317,000) 2,426,000 (7,993,000) 364,000 Income tax provision ..................... -- 946,000 -- 142,000 ------------ ------------ ------------ ------------ Income (loss) before extraordinary gain .................................. (1,317,000) 1,480,000 (7,993,000) 222,000 Extraordinary item - gain on debt discharge ..................... 314,000 -- 314,000 -- ------------ ------------ ------------ ------------ Net income (loss) ........................ $ (1,003,000) $ 1,480,000 $ (7,679,000) $ 222,000 ============ ============ ============ ============
(continued on next page) FORSTMANN & COMPANY, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED) Thirteen Thirteen Twenty-Six Twenty-Six Weeks Ended Weeks Ended Weeks Ended Weeks Ended May 2, May 3, May 2, May 3, 1999 1998 1999 1998 ---- ---- ---- ---- Per share and share information: Income (loss) before extraordinary gain per common share - basic and diluted .....................$ (.30) $ .34 $ (1.82) .05 Extraordinary gain per common share - basic and diluted ...................... .07 -- .07 -- ---------- ---------- ---------- ---------- Income (loss) per common share - basic and diluted ......................$ (.23) $ .34 $ (1.75) $ .05 ========== ========== ========== ========== Weighted average common shares outstanding - basic 4,391,458 4,384,436 4,389,639 4,384.436 ========== ========== ========== ========== Weighted average common shares outstanding-diluted ............. 4,391,458 4,398,489 4,389,639 4,389,255 ========== ========== ========== ========== See notes to condensed consolidated financial statements
FORSTMANN & COMPANY, INC. CONDENSED CONSOLIDATED BALANCE SHEETS MAY 2, 1999 AND NOVEMBER 1, 1998 (unaudited)
May 2, November 1, 1999 1998 ---- ---- ASSETS Current Assets: Cash ..................................................... $ 15,000 $ 143,000 Cash restricted for settlement of unpaid claims .......... -- 327,000 Accounts receivable, net of allowance of $1,609,000 and $1,309,000 ............................. 28,586,000 31,434,000 Inventories .............................................. 32,198,000 38,818,000 Current deferred tax assets .............................. -- -- Other current assets ..................................... 189,000 281,000 Property, plant and equipment held for sale .......................................... 6,904,000 -- ------------ ------------ Total current assets ................................. 67,892,000 71,003,000 Property, plant and equipment, net ......................... 15,232,000 22,235,000 Other assets ............................................... 2,130,000 2,005,000 ------------ ------------ Total ................................................ $ 85,254,000 $ 95,243,000 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current maturities of long-term debt ..................... $ 49,814,000 $ 7,619,000 Accounts payable ......................................... 3,181,000 3,151,000 Accrued liabilities ...................................... 7,531,000 9,238,000 ------------ ------------ Total current liabilities .............................. 60,526,000 20,008,000 Long-term debt ............................................. 712,000 43,565,000 Deferred tax liabilities ................................... -- -- ------------ ------------ Total liabilities ...................................... 61,238,000 63,573,000 Commitments and contingencies Shareholders' Equity: Preferred stock, $0.01 per value, 1,000,000 shares authorized, nil outstanding ..................... -- -- Common stock, $.01 par value, 35,000,000 shares authorized, 4,418,887 and 4,387,819 shares issued and outstanding ........................................ 44,189 43,878 Additional paid-in capital ............................... 50,347,811 50,323,122 Retained deficit since July 23, 1997 ..................... (26,376,000) (18,697,000) ------------ ------------ Total shareholders' equity ............................. 24,016,000 31,670,000 ------------ ------------ Total .................................................. $ 85,254,000 $ 95,243,000 ============ ============ See notes to condensed consolidated financial statements ...
FORSTMANN & COMPANY, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE TWENTY-SIX WEEKS ENDED MAY 2, 1999 AND MAY 3, 1998 (unaudited) May 2, May 3, 1999 1998 ---- ---- Net income (loss) ................................... $ (7,679,000) $ 222,000 ------------ ------------ Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities: Depreciation and amortization .................... 2,143,000 2,633,000 Income tax provision ............................. -- 142,000 Provision for uncollectible accounts ............. 300,000 571,000 Increase in market reserves ...................... 36,000 1,080,000 Loss from disposal, abandonment and impairment of machinery and equipment and other assets ............................... -- 2,000 Gain associated with restructuring equipment lease liability ...................... (647,000) -- Gain associated with NY office lease surrender .... -- (987,000) Extraordinary gain on debt discharge ............. (314,000) -- Other ............................................ 145,000 -- Changes in current assets and current liabilities: Accounts receivable .......................... 2,548,000 (7,911,000) Inventories .................................. 6,464,000 (9,360,000) Other current assets ......................... 92,000 225,000 Accounts payable ............................. 30,000 (429,000) Accrued liabilities .......................... (1,465,000) (876,000) Accrued interest payable ..................... 409,000 44,000 ------------ ------------ Total adjustments .................................. 9,741,000 (14,866,000) ------------ ------------ Net cash provided (used) by operations ........... 2,062,000 (14,644,000) ------------ ------------ (continued on next page)
FORSTMANN & COMPANY, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) FOR THE TWENTY-SIX WEEKS ENDED MAY 2, 1999 AND MAY 3, 1998 (unaudited) May 2, May 3, 1999 1998 ---- ---- Cash flows used by investing activities: Capital expenditures .................................... (1,622,000) (1,425,000) Investment in other assets, primarily computer information systems ......................... (407,000) (355,000) Net proceeds from disposal of machinery and equipment ......................................... 98,000 1,000 ----------- ----------- Net cash used by investing activities ................. (1,931,000) (1,779,000) ----------- ----------- Cash flows from financing activities: Net borrowings under the Revolving Loan Facility 8,929,000 24,566,000 Repayment of Term Loan Facility ......................... (8,585,000) (6,612,000) Repayment of Deferred Interest Rate Notes ............... -- (1,571,000) Repayment of other financing arrangements ............... (692,000) (378,000) Deferred financing costs ................................ (238,000) (23,000) ----------- ----------- Net cash provided (used) by financing activities ....... (586,000) 15,982,000 ----------- ----------- Net decrease in cash ...................................... (455,000) (441,000) Cash and restricted cash at beginning of period ........... 470,000 1,051,000 ----------- ----------- Cash and restricted cash at end of period ................. $ 15,000 $ 610,000 =========== =========== See notes to condensed consolidated financial statements.
FORSTMANN & COMPANY, INC. CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE TWENTY-SIX WEEKS ENDED MAY 2, 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 ............ 311 24,689 -- 25,000 Net loss ........................... -- -- (7,679,000) (7,679,000) ------- ----------- ------------ ----------- Balance, May 2, 1999 ............... $44,189 $50,347,811 $(26,376,000) $24,016,000 ======= =========== ============ =========== See notes to condensed consolidated financial statements
FORSTMANN & COMPANY, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MAY 2, 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 has incurred net losses of $19.0 million, $7.0 million and $17.8 million in fiscal years 1998, 1997 and 1996, respectively. Net sales declined from $199.0 million in fiscal year 1997 to $149.6 million in fiscal year 1998. Management has responded to these losses, the decline in sales and the resulting adverse impact on the Company's liquidity by implementing a business plan designed to align the Company's manufacturing capacity and overhead with expected market demand. In October 1998, the Company's Board of Directors approved the closing of its Louisville, Georgia plant, realignment of the Company's remaining manufacturing facilities located in Georgia and further reductions of its selling, styling and administrative costs (the "1999 Realignment"). Implementation of the 1999 Realignment was substantially complete as of January 31, 1999. As a result of the 1999 Realignment, the Company incurred approximately $1.2 million in severance expense which was recognized as a restructuring item during the thirteen weeks ended January 31, 1999. During the thirteen weeks ended May 2, 1999 (the "1999 Second Quarter"), 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 allows the Company to sell such idle equipment. Further, the Company incurred costs of approximately $0.1 million during the twenty-six week period ended May 2, 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. The operating results for fiscal year 1998, the effect of the 1998 Restructuring 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 1998 Form 10-K), have negatively impacted the Company's borrowing availability under its Revolving Loan Facility (herein defined). The Company's availability under its Revolving Loan Facility was approximately $1.5 million at May 2, 1999 as compared to $25.5 million at May 3,1998. As of May 30, 1999 borrowing availability under the Revolving Loan Facility was $1.3 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 upon the state of the economy and, in particular, the financial condition of the apparel industry. Also, continuing refinement of the Company's strategies in response to evolving circumstances could materially change the Company's working capital and capital expenditures requirements. There can be no assurance that the Company will be able to achieve an adequate level of sales consistent with management's expectations for fiscal year 1999 to enable the Company to generate sufficient funds to meet its operating needs. These factors raise substantial doubt about the Company's ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of these uncertainties. 3. On April 30, 1999 the Company entered into a letter of intent with Newco Holdings LLC ("Newco") which provides 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 is expected to occur in June 1999. The assets of FAI to be sold consist primarily of leasehold improvements, furniture and fixtures and computer systems. The Company expects to incur a gain on the sale of FAI which will be recognized when the sale is consummated. Net sales of FAI for the 1999 Second Quarter and the 1999 Period were $2.4 million and $3.9 million, respectively. Net loss of FAI for the 1999 Second Quarter and 1999 Period was $0.9 million and $1.9 million, respectively. FAI rcognized a loss before depreciation and amortization, interest expense and income taxes of $0.8 million in the 1999 Second Quarter and $1.7 million in the 1999 Period. Assets and liabilities of FAI to be disposed of consist of the following (in thousands): May 2, November 1, 1999 1998 ---- ---- Leasehold improvements and furniture and fixtures ................ $ 326 $ 290 Other assets ............................ 77 103 ----- ----- Total assets ....................... $ 403 $ 393 ----- ----- Capital lease obligations ............... 30 32 Licensing agreement ..................... 441 670 ----- ----- Total liabilities ............ $ 471 $ 702 ----- ----- Net liabilities to be disposed of .......................... $ (68) $(309) ===== ===== 4. One of the Company's customers accounted for approximately 8% of the Company's revenues for the 1999 Period and another customer accounted for approximately 8% of gross accounts receivable at May 2, 1999. No other customer represented more than 8% of revenues for the 1999 Period or 6% of gross accounts receivable at May 2, 1999. One of the Company's major customers has indicated that due to general, adverse trends in the apparel industry, it will reduce the amount of its orders to the Company significantly during fiscal year 1999. 5. Inventories are stated at the lower of cost, determined principally by the LIFO method, or market and consist of (in thousands): May 2, November 1, 1999 1998 ---- ---- Raw materials and supplies ..... $ 5,922 $ 10,218 Work in process ................ 20,209 19,390 Finished products .............. 9,224 12,331 Less market reserves ........... (3,157) (3,121) -------- -------- Total ................... . 32,198 38,818 Difference between LIFO carrying value and current replacement cost ............. 452 -- -------- -------- Current replacement cost ....... $ 32,650 $ 38,818 ======== ======== 6. The Company had property, plant and equipment held for sale of $6.9 million as of May 2, 1999 which related to assets previously idled in connection with the 1998 Restructuring and 1999 Realignment (see Note 1 to the 1998 Form 10-K and Note 2 to these Condensed Consolidated Financial Statements). Such assets are stated at fair value, based on appraised values, and will not be depreciated in future periods. 7. Other assets consist of (in thousands): May 2, November 1, 1999 1998 ---- ---- Computer information systems, net of accumulated amortization of $261 and $93 ..................... $1,131 $ 909 Deferred financing costs, net of accumulated amortization of $1,094 and $774...................... 974 1,086 Other, net ............................ 25 10 ------ ------ Total ........ $2,130 $2,005 ====== ====== 8. Accrued liabilities consist of (in thousands): May 2, November 1, 1999 1998 ---- ---- Salaries, wages and related payroll taxes $ 503 $ 606 Incentive compensation 50 290 Vacation and holiday 1,545 1,243 Interest on long-term debt 548 143 Medical insurance premiums 1,416 1,416 Professional fees 13 105 Environmental remediation 176 292 Deferred rental and other lease obligations 632 -- Loss on open wool purchase commitments 420 1,537 Restructuring items 1,260 1,796 Other 968 1,810 -------- ------- Total $ 7,531 $ 9,238 ======== ======= 9. Long-term debt consists of (in thousands): May 2, November 1, 1999 1998 ---- ---- Revolving Loan Facility 36,837 $27,908 Term Loan Facility 11,758 20,343 Other note 274 374 Capital lease obligations 1,138 1,890 Licensing agreement 519 669 -------- ------- Total debt 50,526 51,184 Current portion of long-term debt (49,814) (7,619) -------- ------- Total long-term debt $ 712 $43,565 ======== ======= Reference is made to Note 9 to the Consolidated Financial Statements contained in the 1998 Form 10-K. On July 23, 1997, the Company entered into the Loan and Security Agreement with a syndicate of financial institutions led by BABC. The Loan and Security Agreement, as subsequently amended, provides for a revolving line of credit (including a $15.0 million letter of credit facility), subject to a borrowing base formula, of up to $70 million (the "Revolving Loan Facility") and term loans of approximately $31.5 million (the "Term Loan Facility"). As of February 8, 1999, the Company and its lenders amended the Loan and Security Agreement, waived certain financial covenant defaults arising from the Company's financial results for fiscal year 1998 and, among other things, set new financial covenants for fiscal year 1999. However, there can be no assurance that the Company will be able to comply with the amended financial covenants during fiscal year 1999. In connection with the amendment, the Company agreed to prepay $5.6 million of the Term Loan Facility through borrowings under the Revolving Loan Facility. Additionally, the Company agreed to increase its monthly Term Loan Facility principal payment from $374,000 to $450,000 beginning March 1, 1999. Further, based on the Company's declining working capital needs in light of declining revenues, the Company and its lenders agreed to reduce the Revolving Loan Facility commitment from $85 million to $70 million. This reduction is expected to reduce the Company's unused line fee by approximately $75,000 per annum. The Company further agreed to repay a portion of its Term Loan Facility in the future if subsequently obtained appraised orderly liquidation values for the Company's property, plant and equipment securing the Term Loan Facility fall below 83.1% in relation to the outstanding amount owed under the Term Loan Facility. In connection with entering into the amendment to the Loan and Security Agreement the Company agreed to pay BABC for the benefit of the lenders, $200,000 payable in four equal monthly installments commencing March 31, 1999 of which the March, April and May installments were timely paid. Additionally, BABC as Agent, retains the right to withhold up to approximately $1,694,000 in aggregate availability which arose from the expiration of certain letters of credit previously outstanding as a security deposit for the Company's former New York headquarters lease. At May 2, 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 $1.5 million. At May 2, 1999, the Company was not in compliance with the minimum EBITDA covenant contained in the Loan and Security Agreement. As a result of uncertainty surrounding the outcome of such covenant violation as well as additional uncertainties, as more thoroughly discussed in Note 2 to the Condensed Consolidated Financial Statements, concerning the Company's ability to continue as a going concern, the long-term amount due under the Revolving Loan Facility and Term Loan Facility ($43.2 million) has been included in the current portion of long-term debt at May 2, 1999. 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 bankruptcy (see Note 9 to 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 1999 Second Quarter. The Company recognized an extraordinary gain on debt discharge of $314,000 during the 1999 Second Quarter relating to ABB's unsecured claim. As described more thoroughly in Note 9 to the Consolidated Financial Statements contained in the 1998 Form 10-K, the Company had previously issued subordinated floating rate notes (the "Deferred Interest Rate Notes") in respect of certain accrued but unpaid interest (approximately $1.6 million). On December 22, 1997, the Company repaid the Deferred Interest Rate Notes and accrued interest due thereon through borrowings under the Revolving Loan Facility. 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 income (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. It is the Company's understanding that Stevens is waiting for a response from EPD regarding the CSR submitted from Stevens. The Company submitted a CSR for the TCE and 1,1-DCA sites, which certified compliance with risk reduction standards for both sites. EPD indicated that it did not agree to the certification with respect to the TCE site. After extensive discussions with EPD concerning the issue, the Company submitted a revised Corrective Action Plan ("CAP") on October 31, 1997 which has been approved by EPD. The revised CAP calls for continued operation of the Company's existing groundwater recovery system, as well as one additional groundwater recovery well and a groundwater collection trench near the former dry cleaning basement. The Company has completed installation of the recovery well and the groundwater collection trench. In addition to the installation of these two systems, the CAP requires the submission of an Annual Corrective Action Status Report to EPD. The Company submitted an interim report to EPD on March 2, 1999 and plans to submit the required Annual Corrective Action Status Report by July 31, 1999. Tifton, Georgia. In January 1997, the Company was notified by a potential buyer of the Company's Tifton facility that soil and groundwater samples had been obtained from that facility and that certain contaminants had been identified. Subsequently, through sampling and testing performed by the Company's environmental consultants, the Company confirmed the presence of contaminants in groundwater samples taken at the site. On February 28, 1997, the Company notified EPD of such findings, and the site was placed on the Georgia Hazardous Site Inventory. The Company subsequently consummated its sale of the Tifton facility. As part of that transaction, the Company, the Tift County Development Authority as purchaser ("TCDA") and Burlen Corporation as operator ("Burlen") entered into an Environmental Cost Sharing and Indemnity Agreement ("Cost Sharing Agreement"). Under the Cost Sharing Agreement, the Company retained responsibility for remediating certain contamination, to the extent required by law, that originated prior to Burlen's occupancy of the premises. Likewise, the Company assumed the obligation to indemnify TCDA and Burlen in regard to such contamination to the extent that a claim is made by an unaffiliated third party or governmental agency. In exchange, Burlen agreed to pay to the Company the lesser of (1) $150,000 minus any payments already made to the Company (certain expenses had already been shared) to respond to the contamination or (2) one-half of the costs incurred by the Company in response to such contamination. By letter dated December 21, 1998, EPD requested that the Company submit a CSR for the site by June 21, 1999. EPD indicated that it had sent Burlen a similar request. The Company intends to submit the CSR for the site by the requested deadline. At May 2, 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 May 2, 1999 is adequate. 12. Restructuring items related to the Company's 1998 Restructuring and 1999 Realignment have been segregated and included in normal operations during the thirteen and twenty-six weeks ended May 2, 1999 and May 3, 1998 and consist of (in thousands): Thirteen Weeks Ended May 2, May 3, 1999 1998 ---- ---- Gain associated with reduction of operating lease cancellation liability $(647) $ -- Severance and "stay-put" bonus expense 13 967 Gain associated with New York office lease surrender ...................... -- (658) Other ................................... 5 3 ----- ----- Total .............................. $(629) $ 312 ===== =====
Twenty-Six Weeks Ended May 2, May 3, 1999 1998 ---- ---- Gain associated with reduction of operating lease cancellation liability $ (647) $ -- Severance and "stay-put" bonus expense 1,195 967 Gain associated with New York office lease surrender -- (658) Other 8 3 ------- ------ Total $ 556 $ 312 ====== =====
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 which was recognized as a restructuring item during the thirteen weeks ended January 31, 1999. During the 1999 Second Quarter, 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 allows the Company to sell such idle equipment. This item was recognized as a restructuring item during the 1999 Second Quarter. During the thirteen weeks ended May 3, 1998, the Company recognized as restructuring items severance expense of approximately $0.8 million and expense of approximately $0.2 million for stay-put bonuses (see Note 1 to the 1998 Form 10-K). In anticipation of entering into the lease surrender agreement (see Note 13 to 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 and accrued approximately $0.3 million for broker's commission. These items resulted in a $0.7 million gain which was recorded as a restructuring item during the thirteen weeks ended May 3, 1998. Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Reference is made to Item 7 - "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained in the 1998 Form 10-K for a discussion of the Company's financial condition as of November 1, 1998, including a discussion of the Company's anticipated liquidity and working capital requirements during its 1999 fiscal year. Forward Looking Statements Certain matters discussed in this Quarterly Report under Item 2 are forward looking statements which reflect the Company's current views with respect to future events and financial performance. These forward-looking statements are subject to certain risks and uncertainties which could cause actual results to differ materially from historical results or those anticipated. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their dates. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. The following factors could cause actual results to differ materially from historical results or those anticipated: demand for the Company's products, competition, the Company's production needs, wool market conditions, foreign currency exchange rates, the adequacy of the Company's current financing, any unexpected financing requirements, and changes in the general economic climate. Recent Events 1999 Realignment As described in Note 1 to the Consolidated Financial Statements contained in the 1998 Form 10-K, the Company has incurred net losses of $19.0 million, $7.0 million and $17.8 million in fiscal years 1998, 1997 and 1996, respectively. Net sales declined from $199.0 million in fiscal year 1997 to $149.6 million in fiscal year 1998. Management has responded to these losses, the decline in sales and the resulting adverse impact on the Company's liquidity by implementing a business plan designed to align the Company's manufacturing capacity and overhead with expected market demand. In October 1998, the Company's Board of Directors approved the closing of its Louisville, Georgia plant, realignment of the Company's remaining manufacturing facilities located in Georgia and further reductions of its selling, styling and administrative costs (the "1999 Realignment"). Implementation of the 1999 Realignment was substantially complete as of January 31, 1999. As a result of the 1999 Realignment, the Company incurred approximately $1.2 million in severance expense and 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 allows the Company to sell such idle equipment. These items were recognized as restructuring items during the twenty-six week period ended May 2, 1999 (the "1999 Period"). Further, the Company incurred costs of approximately $0.1 million during 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 provides 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 is expected to occur in June 1999. The assets of FAI to be sold consist primarily of leasehold improvements, furniture and fixtures and computer systems. The Company expects to incur a gain on the sale of FAI which will be recognized when the sale is consummated. (See Note 3 to the Condensed Consolidated Financial Statements). Financial Condition and Liquidity The Company's business is seasonal, with the vast majority of orders for woolen fabrics placed from December through April for apparel manufacturers to produce apparel for retail sale during the fall and winter months. This results in a seasonal sales order and billing pattern which historically generates higher sales during the Company's second and third fiscal quarters compared to the Company's first and fourth fiscal quarters. This sales pattern places seasonal constraints on the Company's manufacturing operations which results in increased working capital requirements in the Company's first fiscal quarter relating to the manufacture of certain components of inventory which are sold in the Company's second and third fiscal quarter. Further, the industry practice of providing coating fabric customers with favorable billing terms (referred to as "dating") which permit payment 60 (sixty) days from July 1 for invoices billed in January through June encourages such coating fabric customers to place orders in advance of their actual need. This enables the Company to manufacture and bill certain coating fabric customers during the Company's first fiscal quarter. Reference is made to Note 9 to the Consolidated Financial Statements contained in the 1998 Form 10-K. The Company funds its operating needs through borrowings under its Amended and Restated Loan and Security Agreement (the "Loan and Security Agreement") which was entered into between the Company and a syndicate of financial institutions led by BankAmerica Business Credit, Inc. ("BABC") on July 23, 1997. The Loan and Security Agreement, as subsequently amended, provides for a revolving line of credit (including a $15.0 million letter of credit facility), subject to a base borrowing formula of up to $70 million. On February 8, 1999, the Loan and Security Agreement was amended and the Company agreed, among other things, to prepay $5.6 million of the Term Loan Facility through borrowings under the Revolving Loan Facility. The $5.6 million had previously been reserved from the revolving line of credit availability under the base borrowing formula. Further, the Company agreed to increase its monthly Term Loan Facility principal payment from $374,000 to $450,000 beginning March 1, 1999. The Company agreed to repay a portion of the Term Loan Facility in the future if subsequently obtained appraised orderly liquidation values for the Company's property, plant and equipment securing the Term Loan Facility fall below 83.1% in relation to the outstanding amount owed under the Term Loan Facility. The Company's availability under its Revolving Loan Facility was approximately $1.5 million at May 2, 1999 as compared to $25.5 million at May 3, 1998. At May 30, 1999, the Company's availability under its Revolving Loan Facility was $1.3 million. At May 2, 1999, the Company was not in compliance with the minimum EDITDA covenant contained in its Loan and Security Agreement. As a result of uncertainty surrounding the outcome of such covenant violation as well as additional uncertainties concerning the Company's ability to continue as a going concern, the long-term amount due under the Revolving Loan Facility and Term-Loan Facility ($43.2 million) has been classified in the current portion of long-term debt at May 2, 1999 for financial reporting purposes. The Company's ability to maintain adequate availability to meet its operating needs is dependent on achieving future sales consistent with management expectations for fiscal year 1999 and successful implementation of its cost reductions. The majority of the Company's customers are in the domestic apparel industry which has continued to suffer an economic decline as a result of higher levels of imports and changing fashion trends. If these trends continue, the Company's results of operations and financial condition will continue to deteriorate, likely at a faster rate than previously experienced. Expected cash flow from operations is dependent upon achieving sales targets during fiscal year 1999, which are influenced by market conditions, including apparel sales at retail, that are beyond the control of the Company. Further, the collectibility of accounts receivable is dependent upon the state of the economy and, in particular, the financial condition of the apparel industry. Also, continuing refinement of the Company's strategies in response to evolving circumstances could materially change the Company's working capital and capital expenditures requirements. There can be no assurance that the Company will be able to achieve an adequate level of sales consistent with management's expectations for fiscal year 1999 to enable the Company to generate sufficient funds to meet its operating needs. During the twenty-six week period ended May 2, 1999 (the "1999 Period"), operations provided $2.1 million of cash, whereas $14.6 million was used by operations during the twenty-six week period ended May 3, 1998 (the "1998 Period"). This $16.7 million increase in cash provided by operations in the 1999 Period was primarily due to a $15.8 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 the Condensed Consolidated Financial Statements). Accounts receivable declined by $2.6 million during the 1999 Period, whereas accounts receivable increased by $7.9 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 $9.0 million being provided during the 1999 Period as compared to $17.3 million being used during the 1998 Period. This $26.3 million increase in cash provided was somewhat offset by a $7.9 million higher net loss and a $0.6 million increase in cash used by accrued liabilities during the 1999 Period when compared to the 1998 Period. Investing activities used $1.9 million in the 1999 Period as compared to $1.8 million in the 1998 Period. The Company expects spending for capital expenditures, principally plant and equipment, in fiscal year 1999 to be approximately the same as fiscal year 1998 due to costs incurred in connection with the Company's leasehold improvements at the Company's new headquarters in New York and renewal or betterments of plant and equipment and compliance with environmental regulations. As a result of the foregoing, during the 1999 Period, $0.6 million was used by financing activities whereas during the 1998 Period $16.0 million was provided by financing activities. The sales order backlog at May 30, 1999 was $21.7 million whereas at the comparable time a year earlier the sales order backlog was $58.0 million. The composition of the sales order backlog at May 30, 1999 reflects a weaker order position in all product lines. Of the approximate $36.3 million decline in the sales order backlog at May 30, 1999 as compared to the comparable time a year earlier, approximately $25.1 million related 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 May 30, 1999 declined by $6.5 million over the comparable time a year earlier. Approximately $6.0 million of this decline related to the Company's decision to exit men's suits and government businesses. Menswear fabrics further declined primarily due to an over capacity in global worsted wool manufacturing and fashion trends. The order position for coating fabrics at May 30, 1999 has declined by $4.1 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 May 30, 1999 declined by $0.5 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 $0.4 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 third quarter of calendar year 1999. There can be no assurance, however, that there will not be a delay in, or increased costs associated with the implementation of such changes, and any inability to implement such changes could have a material adverse effect on the Company. The Company has not completed its assessment of the Year 2000 compliance of its vendors and customers, nor of the possible consequences to the Company of the failure of one or more of its vendors and customers to become Year 2000 compliant on a timely basis. The Company expects to complete such assessment before the end of the third quarter of calendar year 1999. It is possible that if a substantial number of the Company's customers 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 identified which processes are dependent on third-party provided software that may need to be modified in order to be Year 2000 compliant. The Company intends to notify such third-party providers before the end of the third quarter of calendar year 1999 to determine whether such software needs to be modified in order to be Year 2000 compliant. Where software modifications are required, the Company will engage the appropriate third-party software providers to make such Year 2000 compliant modifications. Should the Company be unable to obtain the appropriate software modifications, the Company believes it can alter its manufacturing processes to supplement any processes idled by noncompliance with the Year 2000. Results of Operations The Twenty-Six Weeks Ended May 2, 1999 the ("1999 Period") Compared to The Twenty-Six Weeks Ended May 3, 1998 the ("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 $45.5 million, a decrease of 42.1% from the 1998 Period. Total yards of fabric sold decreased 46.8% from the 1998 Period to the 1999 Period and the average per yard selling price decreased to $7.51 per yard from $7.55 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 $23.2 million lower in the 1999 Period as compared to the 1998 Period and menswear fabric sales which were approximately $12.8 million lower in the 1999 Period as compared to the 1998 Period. Additionally, coating fabric sales were approximately $1.5 million lower during the 1999 Period as compared to the 1998 Period. These decreases were nominally offset by increases in specialty fabric sales of $0.2 million and government fabric sales of $0.4 million during the 1999 Period as compared to the 1998 Period. Additionally, the Company added sales of $3.9 million for FAI during the 1999 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 $23.8 million to $43.6 million during the 1999 Period primarily as a result of the decline in sales and change in product mix. Gross profit decreased $9.3 million from $11.2 million in the 1998 Period to $1.9 million in the 1999 Period, and gross profit margin for the 1999 Period was 4.2% compared to 14.3% 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, $5.8 million in fixed manufacturing costs were unabsorbed during the 1999 Period as compared to $1.1 million during the 1998 Period. Selling, general and administrative expenses, excluding the provision for uncollectible accounts, decreased 8.6% to $6.2 million in the 1999 Period compared to $6.8 million in the 1998 Period. However, included in selling, general and administrative expenses during the 1999 Period is $1.6 million related to FAI. 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 and incentive compensation were lower during the 1999 Period when compared to the 1998 Period. The provision for uncollectible accounts decreased to $0.3 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 $2.8 million as compared to $3.2 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 added interest expense of $0.2 million 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 $7.4 million was realized in the 1999 Period as compared to income before reorganization and restructuring items and income taxes of $0.7 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 $2.8 million as compared to income before depreciation and amortization, reorganization and restructuring items, interest expense and income taxes of $5.9 million during the 1998 Period. Restructuring items were $0.6 million during the 1999 Period and $0.3 million during the 1998 Period (see Note 12 to the 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, no income tax benefit was recognized from the realization of a net operating loss. During the 1998 Period, the Company recognized an income tax provision of $0.1 million at an effective income tax rate of 39% which was reversed in a subsequent interim period. 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 the Condensed Consolidated Financial Statements). As a result of the foregoing, net loss for the 1999 Period was $7.7 million as compared to net income of $0.2 million in the 1998 Period. The operating results of FAI for the 1999 Period has been included in normal operations. FAI recognized a net loss of $1.9 million during the 1999 Period. As discussed in Note 3 to the Condensed Consolidated Financial Statements, the Company has entered into a letter of intent which provides for the sale of the ladies suit business and certain assets, and the assumption of certain liabilities, of FAI by Newco Holdings LLC. The Thirteen Weeks Ended May 2, 1999 (the "1999 Second Quarter") Compared to The Thirteen Weeks Ended May 3, 1998 (the "1998 Second Quarter") Net sales for the 1999 Second Quarter were $27.0 million, a decrease of 45.5% from the 1998 Second Quarter. Total yards of fabric sold decreased 50.8% during the 1999 Second Quarter. However, the average per yard selling price increased to $7.70 per yard from $7.62 per yard due to shifts in product mix. Sales declined in all major product lines except for government fabric sales. Additionally, the Company added sales of $2.4 million for FAI during the 1999 Second Quarter. The decrease in net sales during the 1999 Second Quarter is attributable to the reasons discussed above in the 1999 Period compared to the 1998 Period. Cost of goods sold decreased $17.1 million to $24.6 million during the 1999 Second Quarter primarily as a result of lower sales. Gross profit decreased $5.5 million or 69.0% to $2.4 million in the 1999 Second Quarter, and gross profit margin for the 1999 Second Quarter was 9.1% compared to 15.9% for the 1998 Second Quarter. Selling, general and administrative expenses, excluding the provision for uncollectible accounts, decreased 12.2% to $2.8 million in the 1999 Second Quarter compared to $3.2 million in the 1998 Second Quarter. However, included in selling, general and administrative expenses during the 1999 Second Quarter is $0.8 million related to FAI. The reduction in selling, general and administrative expenses during the 1999 Second Quarter exclusive of FAI is attributable to the reasons discussed above in the 1999 Period compared to the 1998 Period. The provision for uncollectible accounts was $0.2 million during the 1999 Second Quarter when compared to $0.3 million during the 1998 Second Quarter. A restructuring gain of $0.6 million was recognized in the 1999 Second Quarter as compared to expense of $0.3 million in the 1998 Second Quarter. Reference is made to Note 12 to the Condensed Consolidated Financial Statements for a discussion of restructuring items incurred during the 1999 Second Quarter and the 1998 Second Quarter. Interest expense for the 1999 Second Quarter was $1.4 million or $0.2 million lower than the 1998 Second Quarter. This decrease is attributable to a lower Term Loan Facility balance during the 1999 Second Quarter as compared to the 1998 Second Quarter which was somewhat offset by added interest expense of $0.1 million related to FAI during the 1999 Second Quarter. As a result of the foregoing, a loss before reorganization and restructuring items, income taxes and extraordinary gain of $1.9 million was realized in the 1999 Second Quarter as compared to income before reorganization and restructuring items and income taxes of $2.8 million in the 1998 Second Quarter. Income before depreciation and amortization, reorganization and restructuring items, interest expense, income taxes and extraordinary gain during the 1999 Second Quarter was $0.3 million as compared to $5.5 million during the 1998 Second Quarter. During fiscal year 1995, the Company fully utilized its net operating loss carrybacks as permitted by the Internal Revenue Code. Accordingly, for the 1999 Second Quarter, no income tax benefit was recognized from the realization of net operating losses. During the 1998 Second Quarter, the Company recognized an income tax provision of $0.9 million at an effective income tax rate of 39% which was reversed in a subsequent interim period. An extraordinary gain on debt discharge of $0.3 million was recognized during the 1999 Second Quarter as a result of the settlement reached with ABB Industrial Systems, Inc. regarding its bankruptcy claim (see Note 9 to the Condensed Consolidated Financial Statements). As a result of the foregoing, a net loss of $1.0 million was recognized in the 1999 Second Quarter compared to net income of $1.5 million in the 1998 Second Quarter. The operating results of FAI for the 1999 Second Quarter has been included in normal operations. FAI recognized a net loss of $0.9 million during the 1999 Second Quarter. As discussed in Note 3 to the Condensed Consolidated Financial Statements, the Company has entered into a letter of intent which provides for the sale of the ladies suit business and certain assets, and the assumption of certain liabilities, of FAI by Newco Holdings LLC. 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 June 11, 1999 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/Gary E.Schafer ---------------------------- Gary E. Schafer June 16, 1999 - ------------- 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 June 11, 1999 from Deloitte & Touche LLP to Forstmann & Company, Inc. 29 Exhibit 15.1 INDEPENDENT ACCOUNTANTS' REPORT Board of Directors and Shareholders of Forstmann & Company, Inc.: We have reviewed the accompanying condensed consolidated balance sheet of Forstmann & Company, Inc. and subsidiary (the "Company") as of May 2, 1999 and the related condensed consolidated statements of operations and cash flows for the thirteen and twenty-six weeks ended May 2, 1999 and May 3, 1998 and the condensed consolidated statement of changes in shareholders' equity for the twenty-six weeks ended May 2, 1999. These financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and of making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to such condensed consolidated financial statements for them to be in conformity with generally accepted accounting principles. The accompanying condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements contained in the 1998 Form 10-K (not presented herein) and in Note 2 to these condensed consolidated financial statements, certain conditions raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1 to the consolidated financial statements contained in the 1998 Form 10-K and Note 2 to these condensed consolidated financial statements. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet of the Company as of November 1, 1998 and the related consolidated statements of operations, shareholders' equity, and cash flows for the period from November 3, 1997 to November 1, 1998 (not presented herein); and in our report dated February 8, 1999, we expressed an unqualified opinion on those consolidated financial statements and included an explanatory paragraph concerning matters that raise substantial doubt about the Company's ability to continue as a going concern. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of November 1, 1998 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. Deloitte & Touche LLP Atlanta, Georgia June 11, 1999 EX-27 2 ARTICLE 5 FDS FOR 2ND QUARTER 10-Q
5 This schedule contains financial information extracted from Forstmann & Company, Inc.'s condensed financial statements for the twenty-six weeks ended May 2, 1999 and is qualified in its entirety by reference to such financial statements. 1,000 6-mos Oct-31-1999 Nov-02-1998 May-02-1999 15 0 30,195 1,609 32,198 67,892 19,773 4,541 85,254 60,526 712 0 0 44 23,972 85,254 45,540 45,540 43,645 43,645 6,184 300 2,794 (7,939) 0 (7,939) 54 314 0 (7,679) (1.75) (1.75)
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