Elizabeth Webbing Mills Co.,

Providence, Rhode Island

Situation:

Privately owned, $105 million in sales Elizabeth Webbing Mills manufactures woven webbing and distributes awning fabric.  There are two $50 million in sales divisions:  The Webbing Manufacturing Division and Unitex, the distribution business.

In 1997, Equinox Partners (Dresdner Kleinwort Benson) purchased Elizabeth’s subordinated bonds.  The bonds were secured by a pledge of the owners’ common stock.  A few months after making the investment, Elizabeth’s financial results deteriorated significantly and it defaulted on the bonds.

Robert Amter was retained by Equinox to answer five questions:

1. What are Elizabeth’s problems?

2. How can the problems be corrected and at what cost?

3. Was the company viable?  If yes, pro form its financial statements.

4. Should Equinox convert from creditor status to equity holder?

5. If yes, would I testify in Federal Court in support of the conversion?

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Problems:

 Elizabeth’s consolidated Income Statement:

Calendar Year (000$)                         1995                   1996                     1997

Net Sales                                             $105,155         $104,836         $103,954

Operating Profit                                       3,925              2,947                    50

% of Sales                                                  3.7%                2.8%                    nil

EBITDA                                                     6,143              4,921                2,337

% of Sales                                                 5.8%                4.7%                2.2%

Net Income (Loss)                                   1,410                (389)           (3,799)

% of Sales                                                   1.3%              (0.4%)            (3.7%)

Free Cash Flow (Deficit)                             912                  446            (2,685)

The Webbing Division:

It is a $55 million in sales textile manufacturer of webbing sold to original equipment manufacturers as a component in products such as luggage straps, dog collars, backpack straps, etc. The plant is an old multi-story building that houses 240 weaving looms, dyeing, extruding and cutting equipment.

 Calendar Year (000$)                                     1995                1996                   1997

Net Sales                                                         $53,545           $55,648           $56,695

Operating Profit (Loss)                                     1,555              1,548              (150)

% of Sales                                                              2.9%                2.8%              (0.3%)

Net Income (Loss)                                                 (63)          (1,202)          (3,352)

% of Sales                                                              (0.1%)            (2.2%)            (5.9%)

Free Cash Flow (Deficit)                                     (858)              (824)            (2,671)

Reasons for Consolidated & Webbing Division Net Losses:

The Chief Executive Officer’s management of the company.  No strategic focus.  No priorities.  No operating plan.  Managers were working on largely trivial issues, not the vital few.  Poor delegation.

The complete absence of systems and controls.  No cost accounting.  No material planning and control.  No production planning and control.

No purchasing department.  Purchasing responsibility is scattered throughout the company.

Incorrectly staffed organization.  No product engineers.  Not enough manufacturing and industrial engineers.  No maintenance manager.  No product managers.  No marketing vice president.

Poor application of capital spending with costly overruns.  Not spent on correct equipment.  The 240 looms were old and slow versus competition.

Financially effective selling price deterioration of 2% to 4%.

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The Unitex Division:

A $50 million in sales distributor of awning and boat cover fabrics and installation hardware sold to small craft type shops that install these products in homes, retail stores, commercial buildings and marinas. Unitex has 9 branches.

Calendar Year (000$)                                      1995                 1996              1997

Net Sales                                                         $55,055           $51,597           $50,368

Operating Profit                                                 2,370              1,399                  199

% of Sales                                                              4.3%                2.7%                0.4%

Net Income (Loss)                                             1,473                  814                (448)

% of Sales                                                              2.7%                1.6%                (0.9%)

Free Cash Flow (Deficit)                                   1,503              1,004                  (283)

Reasons for Unitex’s poor performance:

The division general manager’s management.  Inexperienced in this distribution business.  Poor strategic focus.  Poor tactical execution.  Poor people manager skills.

Higher operating costs in 1997 versus 1996.  Virtually doubled the number of company employed salesmen in one year in anticipation of increased sales.  The sales increase did not materialize.

Selling price erosion.

Lost sales due to the company’s tight cash position.  Key suppliers delayed or stopped shipping fabric.

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Conclusions and Recommendations:

Elizabeth Webbing was viable.  Equinox Partners should take possession of the common stock.

Replace the Chief Executive Officer and the Unitex Division’s Vice President General Manager.

Make a $7 million equity investment in Elizabeth Webbing.

Correct the operating problems outlined above.

 

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