A combination of debt incurred from a leveraged buyout and several “costly strategic mistakes by previous management” caused Frederick’s of Hollywood to file for Chapter 11 bankruptcy protection.
According to papers filed late Tuesday in the United States Bankruptcy Court for the Central District of California, the company’s liabilities total $67 million. This figure includes $28 million in pre-filing debt for goods and services received and confirmed merchandise on order. The names of these creditors were not yet available.
Frederick’s’ liabilities also include $32 million in “allegedly secured debt” from Credit Agricole Indosuez; IBJ Whitehall Bank & Trust Company; ML CLO XV Pilgrim America (Cayman) Ltd.; and Finovia Capital Corp. It also includes $13 million in unsecured debt from Fleet Bank Boston N.A.; and $2 million from BLB Investments Corp.
Wilshire Partners, Newport Beach, CA, is the current owner of Frederick’s, having purchased the company last week from Knightsbridge Capital Corp., Chicago.
In papers filed by Frederick’s, the company attributes its current financial woes to “a series of strategic mis-steps” by its former management. According to the court papers, Frederick’s incurred $41 million in debt during its stock buyback of September, 1997, leaving it with $1.8 million in cash and no more than $10 million in working capital credit.
The situation, according to the papers, was exacerbated by “an array of costly strategic mistakes by previous management.” These include an attempt “to reposition the `Frederick’s of Hollywood’ brand name with no research to validate this strategy” which included $9 million in expenses for an “improvident inventory build.” Much of this inventory was later liquidated at distressed prices, resulting in a loss of $5 million.
In July 1999, the papers continue, the company spent $6 million to move its warehouse and distribution facilities from southern California to a custom-built warehouse in Phoenix. The warehouse, according to the petition, has an inventory and fulfillment capacity three to five times greater than Frederick’s’ needs.
In the years following the buyout, the papers continue, the company’s management spent $3 million “on a series of `creative’ marketing consultants, none of whom produced any tangible results.”
In addition, the papers state that several of its vendors switched merchandise delivery terms from credit to C.O.D., after a dispute between Frederick’s and its former auditors Arthur Andersen resulted in Andersen not releasing Frederick’s audited financial statements for the year ending July 31, 1999. The change in terms, according to the papers, resulted in a “severe strain on [Frederick’s] cash resources.”
The company said that it would generate $6 million in pre-tax earnings on $140 million in sales for the financial year ending July 31. But it also claimed that failure to secure authorization to seek interim relief before July 13 would result in Frederick’s not being able to satisfy its $350,000 payroll expense on July 14.
The Hollywood, CA-based cataloger and retailer, known for its intimate apparel offerings, will continue to operate its businesses during the debt restructuring period. The company also said that it has received financing commitments from Ableco Finance LLC. The money will be used to fund operations and to purchase inventory.
“We have worked for 55 years to build this company into an internationally known brand, we’re not going to let it dwindle away,” said chief executive officer Linda LoRe in a statement. “We will do everything we can to preserve this incredible brand that was built by Frederick Mellinger and to reclaim a large share of the intimate apparel market.”
The Frederick’s customer file is managed by Fasano & Associates in Los Angeles and, according to the most recent SRDS manual, totals 562,620 12-month buyers.
List manager Paula Smith said that the file is still active and Frederick’s is still mailing. “Nobody’s panicking about it,” she said.
Under the reorganization, LoRe will continue in her position as president and CEO, a position she has held since September 1999, and James Skelton, a principal of Crossroads LLC, will become chief operating officer and will be responsible for managing the bankruptcy process.
In the papers, the company claimed $10.8 million in inventory, including $3.7 million in unencumbered inventory of its Hollywood Mail Order subsidiary; $4.6 million in prepaid expenses, including catalog and marketing expenses; $2.5 million in accounts receivable; $10.7 million in furniture and equipment; $4.9 million in deferred income tax benefits; $32.8 million in trademarks, service marks, and other intellectual property; and cash on hand.
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