UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarter ended SEPTEMBER 30, 1998 ------------------ or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______________ to _______________ Commission file number 1-9635 ------ BISCAYNE APPAREL, INC. (Exact name of registrant as specified in its charter) FLORIDA 65-0200397 - --------------------------------- ------------------- (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 1373 BROAD STREET, CLIFTON, NEW JERSEY 07013 --------------------------------------------------- (Address of principal executive offices) (Zip Code) (973) 473-3240 --------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all the 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. Yes [X] No [ ] At September 30, 1998, there were 10,797,666 outstanding shares of the registrant's Common Stock, $0.01 par value. BISCAYNE APPAREL, INC. INDEX ----- PART I. FINANCIAL INFORMATION PAGE NO. Consolidated Balance Sheets September 30, 1998 and December 31, 1997............... 2 Consolidated Statements of Operations Nine Months Ended September 30, 1998 and 1997.......... 3 Consolidated Statements of Cash Flows Nine Months Ended September 30, 1998 and 1997.......... 4 Notes to Consolidated Financial Statements............. 5-10 Management's Discussion and Analysis of Financial Condition and Results of Operations.......... 10-15 PART II. OTHER INFORMATION Item 1 - Legal Proceedings............................. 16 Item 3 - Defaults Upon Senior Securities............... 16 Item 6 - Exhibits and Reports on Form 8-K.............. 6-17 Signatures............................................. 18 BISCAYNE APPAREL, INC. CONSOLIDATED BALANCE SHEETS (Dollars in thousands) SEPTEMBER 30, DECEMBER 31, 1998 1997 ---------- ---------- (Unaudited) ASSETS Current assets: Cash and cash equivalents ...................... $ -- $ 139 Trade accounts receivable, less allowances of $1,245 in 1998 and $630 in 1997 ............ 16,280 6,164 Inventories .................................... 5,922 7,120 Prepaid expenses and other ..................... 522 503 Current assets of discontinued operations ...... 17,513 18,071 ---------- ---------- Total current assets ........................ 40,237 31,997 Property, plant and equipment, less accumulated depreciation of $352 in 1998 and $222 in 1997 ............................... 330 415 Other assets, net ................................ 187 190 Non-current assets of discontinued operations .... -- 2,649 ---------- ---------- $ 40,754 $ 35,251 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable ............................... $ 1,008 $ 2,123 Accrued liabilities ............................ 2,724 2,624 Notes payable to banks ......................... 9,790 -- Current portion of long-term debt .............. 2,500 2,000 Current liabilities of discontinued operations . 25,419 11,306 ---------- ---------- Total current liabilities ................... 41,441 18,053 Subordinated notes ............................... 6,444 6,444 Long-term debt ................................... -- 2,500 Other liabilities ................................ 241 21 Negative goodwill ................................ 421 434 Non-current liabilities of discontinued operations ...................................... -- 141 Commitments and contingencies .................... -- -- Stockholders' Equity: Preferred stock - par value $0.01; 5,000 shares authorized; no shares issued Common stock - par value $0.01; 25,000,000 shares authorized; 10,797,666 and 10,771,308 shares outstanding at September 30, 1998 and December 31, 1997, respectively ................ 108 108 Additional paid-in capital ....................... 26,612 26,610 Accumulated deficit .............................. (34,513) (19,060) ---------- ---------- Total stockholders' equity .................. (7,793) 7,658 ---------- ---------- $ 40,754 $ 35,251 ========== ========== See accompanying notes. 2 BISCAYNE APPAREL, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands of dollars, except per share data) (Unaudited) THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------------- ------------------------ 1998 1997 1998 1997 ---------- ---------- ---------- ---------- Net sales .................................................. $ 20,226 $ 25,614 $ 37,768 $ 41,887 Operating costs and expenses: Cost of goods sold ....................................... 13,536 16,858 25,247 27,888 Selling, general and administrative ...................... 3,631 4,382 9,215 9,968 ---------- ---------- ---------- ---------- Operating income ........................................... 3,059 4,374 3,306 4,031 Other income and (expenses): Interest and other expenses ............................... (662) (694) (1,686) (1,684) Interest and other income ................................. -- 92 3 112 ---------- ---------- ---------- ---------- Income from continuing operations before provision for income taxes ................................ 2,397 3,772 1,623 2,459 Provision for income taxes ................................. 12 -- 12 -- ---------- ---------- ---------- ---------- Net earnings from continuing operations .................... 2,385 3,772 1,611 2,459 Loss from discontinued operations, net of taxes .............................................. (2,536) (1,268) (7,424) (2,523) Estimated loss on disposal, net of taxes ................... (9,637) -- (9,637) -- ---------- ---------- ---------- ---------- Net loss from discontinued operations ...................... (12,173) (1,268) (17,061) (2,523) ---------- ---------- ---------- ---------- Net earnings (loss) ........................................ $ (9,788) $ 2,504 $ (15,450) $ (64) ========== ========== ========== ========== Basic and diluted net earnings (loss) per common share: From continuing operations ............................... $ 0.22 $ 0.35 $ 0.15 $ 0.23 From discontinued operations ............................. (1.12) (0.12) (1.58) (0.24) ---------- ---------- ---------- ---------- Net earnings (loss) per common share ..................... $ (0.90) $ 0.23 $ (1.43) $ (0.01) ========== ========== ========== ========== Shares used in computing basic and diluted net earnings (loss) per common share .......................... 10,797,666 10,793,639 10,797,666 10,761,288 ========== ========== ========== ========== See accompanying notes. 3 BISCAYNE APPAREL, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands) (Unaudited) NINE MONTHS ENDED SEPTEMBER 30, ------------------------- 1998 1997 ---------- ---------- Operating activities: Net loss .................................................. $ (15,450) $ (64) Adjustments to reconcile net loss to net cash used in continuing operating activities: Discontinued operations ................................. 17,061 2,523 Depreciation expense .................................... 138 68 Amortization expense .................................... (13) (13) Amortization of unearned stock award compensation ....... -- 51 Amortization of warrant costs ........................... 86 156 Provision for losses and sales allowances on receivables 1,837 1,855 (Increase) decrease in operating assets: Trade accounts receivable ................................ (11,953) (13,740) Inventories .............................................. 1,198 (1,072) Prepaid expenses and other ............................... (19) (358) Federal income tax receivable ............................ -- 1,455 Other assets ............................................. (83) 32 Increase (decrease) in operating liabilities: Accounts payable ......................................... (1,115) 245 Accrued liabilities ...................................... 99 268 Other liabilities ........................................ 220 (372) ---------- ---------- Net cash used in continuing operating activities ........ (7,994) (8,966) Net cash provided by discontinued operations ............ 118 3,081 ---------- ---------- Net cash used in operating activities ................... (7,876) (5,885) Investing activities: Capital expenditures ...................................... (53) (131) ---------- ---------- Net cash used in investing activities ................... (53) (131) Financing activities: Payments under notes payable to banks ..................... (25,120) (28,524) Borrowings under notes payable to banks ................... 34,910 36,387 Principal payments under term loan ........................ (2,000) (1,750) Proceeds from exercise of employee stock options .......... -- 18 ---------- ---------- Net cash provided by financing activities ............... 7,790 6,131 Net (decrease) increase in cash and cash equivalents ....... (139) 115 Cash and cash equivalents at beginning of year ............. 139 327 ---------- ---------- Cash and cash equivalents at end of period ................. $ 0 $ 442 ========== ========== Interest expense paid ..................................... $ 2,312 $ 1,883 Income taxes paid ......................................... $ 12 $ 1 See accompanying notes. 4 BISCAYNE APPAREL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. The accompanying unaudited consolidated financial statements, which are for an interim period, do not include all disclosures provided in the annual consolidated financial statements. These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and the footnotes with respect thereto, contained in the Biscayne Apparel, Inc., ("Company") 1997 Annual Report on Form 10-K. The consolidated financial statements of the Company include the accounts of the parent company, and its wholly-owned subsidiaries, Biscayne Apparel International, Inc. ("BAII"), and M&L International, Inc. ("M&L") and its wholly-owned subsidiaries, Unidex Garments (Philippines), Inc., Watersports Garment Manufacturing, Inc., Teri Outerwear Manufacturing, Inc., GES Sportswear Manufacturing Corp. and M&L International (H.K.) Limited. As of March 1, 1996, Unidex, Watersports, Teri, and GES ceased operations due to operating losses caused by labor increases and production inefficiencies. Through December 31, 1997, BAII operated through two divisions, Andy Johns Fashions International ("Andy Johns") and Varon, and its wholly-owned subsidiaries, Mackintosh of New England Co., ("Mackintosh") Mackintosh (U.K.) Limited, and Amy Industries De Honduras, S.A. de C.V. As of January 1, 1998, the assets, liabilities and operations of Andy Johns were contributed by BAII into Mackintosh. All material intercompany balances and transactions have been eliminated. Certain amounts included in prior period financial statements have been reclassified to conform with the 1998 presentation (see Note 2). In the opinion of the Company, the accompanying unaudited consolidated financial statements, as so reclassified, contain all adjustments (consisting of only normal recurring accruals) necessary for a fair presentation of the financial statements. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The most significant assumptions and estimates relate to sales allowances, inventory reserves, and recoverability of assets. Actual results could differ from those estimates. Therefore, the results of operations for the nine month periods ended September 30, 1998 and 1997 are not necessarily indicative of the results to be expected for the full year. 5 As discussed more thoroughly in Note 2, BAII and its wholly-owned subsidiary, Mackintosh, are presented as discontinued operations. The accompanying unaudited consolidated financial statements have been prepared assuming the Company will continue as a going concern. This assumption is based upon the continuing operating results for the nine months ended September 30, 1998 and September 30, 1997. The going concern basis also assumes that the Company will be able to restructure existing debt and obtain working capital financing for operations, which cannot be assured. Therefore, the Company's ability to service its existing debt obligations, other liabilities and prospective working capital needs, is predicated on obtaining a restructuring of existing debt and working capital financing for continuing operations (see note 6). 2. In September 1998, the Company determined to dispose of the majority of the assets of its BAII and Mackintosh subsidiaries. Accordingly, operating results of these subsidiaries and certain corporate expenses relating to discontinued operations, for the nine months ended September 30, 1998 and 1997, have been reclassified as loss from discontinued operations. The Company is negotiating the sale of selected assets of its BAII and Mackintosh subsidiaries, but, to date, has not entered into any definitive agreements providing for such sales. If sales of such assets do not occur, the Company intends to liquidate such assets, along with other assets currently offered for sale, and to terminate the operations of such subsidiaries. The estimated loss on disposal provides for the write down of assets to the estimated sale value and/or market value, loss on fulfilling other obligations, costs of disposal and future operating losses. The estimated loss on disposal could materially differ from final amounts realized on the loss on disposal of discontinued operations. Accordingly, the Company has recorded an estimated loss on disposal of $9,637,000 for the nine months ended September 30, 1998. The Company also reclassified the net operating losses of discontinued operations of $7,424,000 and $2,523,000 for the nine months ended September 30, 1998 and 1997, respectively, to loss from discontinued operations. 6 Operating results of discontinued operations are as follows (in thousands, unaudited): THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------------- ------------------------- 1998 1997 1998 1997 ---------- ---------- ---------- ---------- Revenues $ 11,188 $ 16,183 $ 19,475 $ 27,605 Costs and expenses (23,361) (17,451) (36,536) (30,128) ---------- ---------- ---------- ---------- Net loss from discontinued operations $ (12,173) $ (1,268) $ (17,061) $ (2,523) ========== ========== ========== ========== The net assets and liabilities of discontinued operations included in the accompanying consolidated balance sheets are as follows (in thousands, unaudited): SEPTEMBER 30, DECEMBER 31, 1998 1997 ---------- ---------- Cash $ 137 $ 130 Accounts receivables, net 7,478 7,345 Inventories 8,905 10,137 Prepaid expenses 128 459 Property, plant and equipment, net 723 2,324 Other assets, net 142 325 ---------- ---------- Total assets of discontinued operations $ 17,513 $ 20,720 ========== ========== Accounts payable $ 4,006 $ 2,196 Accrued liabilities 7,235 2,254 Notes payable to banks 14,021 6,856 Other long-term liabilities 157 141 ---------- ---------- Total liabilities of discontinued operations $ 25,419 $ 11,447 ========== ========== Liabilities of discontinued operations of $25,419,000 at September 30, 1998 exceed the assets of discontinued operations of $17,513,000 at September 30, 1998 by $7,906,000. This difference is subject to a change in estimates. From time to time, the Company's discontinued operating subsidiaries have not been able to make timely payments to their trade and other creditors. The Company does not intend to fund the majority of this deficit from the Company's continuing operations, other than those liabilities of its discontinued operations that are subject to guarantees by the Company's continuing operations. The liabilities of its discontinued operations that are subject to such guarantees approximate $14,700,000 and are primarily related to the Company's notes payable to banks. Such notes payable to banks 7 related to discontinued operations are collateralized by substantially all of the assets of the discontinued operations. The Company intends to pay its bank lenders all of the net proceeds arising from any sale or liquidation of assets of the discontinued operations. The Company does not anticipate that such net proceeds will be adequate to satisfy all liabilities of the discontinued operations, whether owed to its lenders or otherwise. Accordingly, the Company and its lenders will negotiate with respect to the payment of less than all of such obligations, and the Company cannot predict the outcome of such negotiations. Additionally, the Company cannot predict whether creditors of discontinued operations other than its bank lenders will assert claims against the Company arising from those operations. 3. Effective for the year ending December 31, 1997, the Company adopted Statement of Financial Accounting Standards No. 128 "Earnings Per Share" ("FAS No. 128") which requires the presentation of basic earnings per share ("Basic EPS"), and diluted earnings per share ("Diluted EPS"). Basic EPS excludes dilution and is computed by dividing net income (loss) by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the dilutive effect if securities or other contracts to issue common stock were exercised or converted. FAS No. 128 requires the restatement of all prior period earnings per share data presented including interim periods. The numerator and denominator of the basic and dilutive per share computations are as follows (in thousands, except per share amounts, unaudited): QUARTER ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------------- ------------------------- 1998 1997 1998 1997 ---------- ---------- ---------- ---------- Numerator: Net Earnings (Loss) $ (9,788) $ 2,504 $ (15,450) $ (64) Denominator: Shares Outstanding 10,797,666 10,793,639 10,797,666 10,761,288 Basic and Dilutive Net Earnings (Loss) Per Share $ (0.90) $ 0.23 $ (1.43) $ (0.01) The Company has not included potential common shares in the Diluted EPS computation as the result is antidilutive. Options and warrants to purchase 1,307,428 and 1,090,210 shares of common stock at prices ranging from $0.75 to $2.44 per share were outstanding at September 30, 1998 and 1997, respectively. These shares were not included in the computation of Diluted EPS because the options' exercise price was greater than the average market price of the common shares. The options outstanding at September 30, 1998 expire from November 1998 to November 2007. 8 The Company's common stock is currently traded on the American Stock Exchange ("Amex"). The Amex has certain rules, guidelines and financial measures to maintain a listing. Due to losses sustained from 1995 through 1998 and the related reduction to stockholders' equity, the Company's common stock may be delisted from the Amex. Were the Company's shares delisted, the Company intends to list its shares for trading in the over-the-counter markets, for as long as its financial condition permits it to do so. 4. Inventories at September 30, 1998 and December 31, 1997 are comprised of the following: SEPTEMBER 30, 1998 DECEMBER 31, 1997 ------------------ ----------------- (unaudited) Raw materials $ 813,000 $ 1,334,000 Work-in-process -- -- Finished goods 5,109,000 5,786,000 ----------- ----------- $ 5,922,000 $ 7,120,000 =========== =========== 5. Included in accounts payable at September 30, 1998 and September 30, 1997 are the Company's obligations under outstanding letters of credit of $543,000 and $1,182,000, respectively. 6. The Company has entered into several amendments to its Loan Agreement during 1998 to amend or waive violations of certain covenants during the 1998 period. The Company has violated certain requirements of its Loan Agreement, relating to collateral coverage and levels of tangible net worth. The Company's lenders have not declared the Company in default and have allowed the Company to remain in violation of these agreements. Were a default to be declared and the Company's loan obligations required to be immediately repaid, the Company would not be able to operate without immediate alternative financing becoming available, including debtor-in- possession financing that might be available upon a filing under Chapter 11 of the Bankruptcy Code. The Company is discussing its financing needs with its existing lenders; however, there can be no assurances that such existing lenders or any other lenders will agree to fund such needs or otherwise to provide working capital financing that would permit the Company to operate as it has in the past. A Reservation of Rights and Waiver Agreement was entered into on October 1, 1998, whereby the Company's bank lenders agreed to extend credit at their discretion without waiving any rights that might arise upon one or more events of default which occur subsequent to the amendments discussed above. 9 If any lender to the Company determined to exercise any of its rights that might arise upon any event of default by the Company, or if the Company were not able to secure additional or alternative financing, the Company would consider a range of alternatives, including the commencement of a proceeding under Chapter 11 of the Bankruptcy Code. Notes payable to banks as of September 30, 1998 is composed of the following (in thousands, unaudited) (see Note 2): SEPTEMBER 30, 1998 ------------------ Notes payable to banks from continuing operations $ 9,790 Notes payable to banks from discontinued operations 14,021 Current portion of long-term debt 2,500 ------- Total $26,311 ======= The above total notes payable to banks and the current portion of long-term debt are collateralized by substantially all of the Company's assets, continuing or discontinued. 7. In June 1997, Statement of Financial Accounting Standards No. 131 "Disclosures about Segments of an Enterprise and Related Information" was issued, effective for the fiscal year ending December 31, 1998. Earlier adoption for interim periods is not required, and the Company is currently evaluating the financial statement impact. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS QUARTER ENDED SEPTEMBER 30, 1998 VERSUS QUARTER ENDED SEPTEMBER 30, 1997: Net sales for the third quarter of 1998 were $20,226,000, which were lower than the third quarter of 1997 net sales of $25,614,000 by 21%. The decrease primarily relates to lower sales of M&L's OshKosh licensed outerwear product sales. Cost of goods sold, as a percentage of net sales, was 67% versus 66% for the quarter ended September 30, 1997. The increase is due to lower sales of OshKosh licensed outerwear product. 10 Selling, general and administrative expenses ("S,G&A"), as a percentage of net sales, increased to 18% in 1998 from 17% in 1997. This increase is due to lower net sales levels related to fixed S,G&A expenses. OTHER Interest and other expenses for the quarter ended September 30, 1998 decreased to $662,000 from $694,000 due to lower levels of long-term debt offset by increased working capital debt interest during 1998. Interest and other income was zero for the third quarter of 1998 versus $92,000 in 1997, due to parent company interest income in 1997. NINE MONTHS ENDED SEPTEMBER 30, 1998 VERSUS NINE MONTHS ENDED SEPTEMBER 30, 1997: Net sales for the first nine months of 1998 decreased to $37,768,000 from the first nine months of 1997 sales of $41,887,000. The 10% decrease was primarily due to lower sales of M&L's OshKosh licensed outerwear product sales. Consolidated sales backlog for continuing operations at October 30, 1998 was $7,170,000, compared to $12,878,000 at October 29, 1997. The decrease of 44% is largely due to lower fourth quarter 1998 sales backlog and lower Spring 1999 sales backlog. Both decreased seasons result from continuing poor market conditions related to warm weather throughout the country during the third and early fourth quarter months, poor Spring 1998 sales throughout the market and increased levels of M&L's customers sourcing outerwear goods directly versus the purchase of such goods from wholesalers, such as M&L. Cost of goods sold, as a percentage of net sales, was 67% for both the nine months ended September 30, 1998 and 1997. S,G&A decreased to $9,215,000 (24% of net sales) for the nine months ended September 30, 1998, compared to $9,968,000 (24% of net sales) in 1997. OshKosh B'Gosh, Inc. ("OshKosh") notified M&L during the second quarter of 1997 that it would not renew its outerwear license with M&L after May 31, 1998. As part of a strategy adopted over the last several years, OshKosh decided to sell directly to retailers. For the nine months ended September 30, 1998 and 1997, M&L's sales of OshKosh outerwear were $11,414,000 and $16,653,000 respectively, and for the year ended December 31, 1997 M&L's sales of OshKosh outerwear were $19,888,000. M&L's strategy is to replace the OshKosh brand sales of outerwear with several well-known brand name 11 children's outerwear and activewear licenses. The Company cannot predict whether M&L's strategy will ultimately be successful in replacing such levels of OshKosh sales and related margins in the future. The apparel industry is subject to substantial cyclical variation, with purchases of apparel and related goods tending to decline during recessionary periods when disposable income is low. Accordingly, a recession could have a material adverse effect on the Company's business. Certain information included herein contains forward-looking statements which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from the forward- looking statements. Those risks include, but are not limited to, product acceptance and availability, changes in the level of consumer demand and/or spending, fashion trends, weather patterns, further governmental regulations, etc. All forward-looking statements should be considered in light of these risks and uncertainties. OTHER Interest and other expenses for the nine months ended September 30, 1998 was $1,686,000 compared with $1,684,000 for the comparable period of 1997. INCOME TAXES For the nine months ended September 30, 1998 and 1997, the Company recorded valuation allowances relating to deferred tax assets and Federal and state net operating loss carryforwards, due to the Company sustaining operating losses. Any future tax provisions, as realized, would be offset against such valuation allowances and net operating loss carryforwards. DISCONTINUED OPERATIONS In September 1998, the Company determined to dispose of the majority of the assets of its BAII and Mackintosh subsidiaries. Accordingly, operating results of these subsidiaries and certain corporate expenses relating to discontinued operations, for the nine months ended September 30, 1998 and 1997, have been reclassified as loss from discontinued operations. The Company is negotiating the sale of selected assets of these subsidiaries, but, to date, has not entered into any definitive agreements providing for such sales. If sales of such assets do not occur, the Company intends to liquidate such assets, along with other assets currently offered for sale, and to terminate the operations of such subsidiaries. 12 The estimated loss on disposal provides for the write down of assets to the estimated sale value and/or market value, loss on fulfilling other obligations, costs of disposal and future operating losses. The estimated loss on disposal could materially differ from final amounts realized on the loss on disposal of discontinued operations. Accordingly, the Company has recorded an estimated loss on disposal of $9,637,000 for the nine months ended September 30, 1998. The Company also reclassified the net operating losses of discontinued operations of $7,424,000 and $2,523,000 for the nine months ended September 30, 1998 and 1997, respectively, to loss from discontinued operations. Operating results of discontinued operations are as follows (in thousands, unaudited): THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------------- ------------------------- 1998 1997 1998 1997 ---------- ---------- ---------- ---------- Revenues $ 11,188 $ 16,183 $ 19,475 $ 27,605 Costs and expenses (23,361) (17,451) (36,536) (30,128) ---------- ---------- ---------- ---------- Net loss from discontinued operations $ (12,173) $ (1,268) $ (17,061) $ (2,523) ========== ========== ========== ========== The net assets and liabilities of discontinued operations included in the accompanying consolidated balance sheets are as follows (in thousands, unaudited): SEPTEMBER 30, DECEMBER 31, 1998 1997 ---------- ---------- Cash $ 137 $ 130 Accounts receivables, net 7,478 7,345 Inventories 8,905 10,137 Prepaid expenses 128 459 Property, plant and equipment, net 723 2,324 Other assets, net 142 325 ---------- ---------- Total assets of discontinued operations $ 17,513 $ 20,720 ========== ========== Accounts payable $ 4,006 $ 2,196 Accrued liabilities 7,235 2,254 Notes payable to banks 14,021 6,856 Other long-term liabilities 157 141 ---------- ---------- Total liabilities of discontinued operations $ 25,419 $ 11,447 ========== ========== 13 Liabilities of discontinued operations of $25,419,000 at September 30, 1998 exceed the assets of discontinued operations of $17,513,000 at September 30, 1998 by $7,906,000. This difference is subject to a change in estimates. From time to time, the Company's discontinued operating subsidiaries have not been able to make timely payments to their trade and other creditors. The Company does not intend to fund the majority of this deficit from the Company's continuing operations, other than those liabilities of its discontinued operations that are subject to guarantees by the Company's continuing operations. The liabilities of its discontinued operations that are subject to such continuing operation guarantees approximate $14,700,000 and are primarily related to the Company's notes payable to banks. Such notes payable to banks related to discontinued operations are collateralized by substantially all of the assets of the discontinued operations. The Company intends to pay its bank lenders all of the net proceeds arising from any sale or liquidation of assets of the discontinued operations. The Company does not anticipate that such net proceeds will be adequate to satisfy all liabilities of the discontinued operations, whether owed to its lenders or otherwise. Accordingly, the Company and its lenders will negotiate with respect to the payment of less than all of such obligations, and the Company cannot predict the outcome of such negotiations. Additionally, the Company cannot predict whether creditors of discontinued operations other than its bank lenders will assert claims against the Company arising from those operations. LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents were zero and $139,000 at September 30, 1998 and December 31, 1997, respectively. At September 30, 1998 the Company's working capital was a negative $1,204,000, representing a working capital ratio of 0.97 to 1. This compares to working capital of $13,944,000 and a current ratio of 1.77 to 1 at December 31, 1997. This change is due to operating losses sustained from discontinued operations. As presented in the Consolidated Statements of Cash Flows for the nine months ended September 30, 1998, the increase in accounts receivable of $11,953,000 and decrease in inventories of $1,198,000 are due to the seasonality of the Company's continuing operations. On March 31, 1998 the Company repaid $2,000,000 of its long-term debt. Capital expenditures for the nine months ended September 30, 1998 decreased to $53,000 from $131,000 in 1997. The Company has entered into several amendments to its Loan Agreement during 1998 to amend or waive violations of certain covenants during the 1998 period. The Company has violated certain requirements of its Loan Agreement, including those relating to collateral coverage and levels of tangible net worth. The Company's lenders have not declared the Company in default and have allowed the Company to operate while in violation of these 14 agreements. Were a default to be declared and the Company's loan obligations required to be immediately repaid, the Company would not be able to operate without immediate alternative financing, including debtor-in-possession financing that might be available upon a filing under Chapter 11 of the Bankruptcy Code. The Company is discussing financing needs with its existing lenders, however, there can be no assurances that such existing lenders, or any other lenders, will agree to such needs. A Reservation of Rights and Waiver Agreement was entered into on October 1, 1998, whereby the Company's bank lenders agreed to extend credit at their discretion without waiving any rights that might arise upon one or more events of default which occur subsequent to the amendments discussed above. If any lender to the Company determined to exercise any of its rights that might arise upon any event of default by the Company, the Company would consider a range of alternatives, including the commencement of a proceeding under Chapter 11 of the Bankruptcy Code. Furthermore, if the Company were not able to secure additional or alternative financing, it would be forced to consider a comparable range of alternatives, including the commencement of a proceeding under Chapter 11. The Company has prepared the accompanying unaudited consolidated financial statements assuming that it will continue as a going concern. This assumption is based upon the continuing operating results for the nine months ended September 30, 1998 and September 30, 1997 and that the Company restructures existing debt and obtains working capital financing for operations; the Company cannot predict whether it will be able to satisfy both of these conditions. The Company believes that it cannot service its existing debt and its other liabilities and meet its prospective working capital needs without restructuring its existing debt and without obtaining working capital financing for its continuing operations. EFFECT OF INFLATION AND SEASONALITY The Company believes that inflation will not significantly effect its profit margins, or have a material effect on the prices of other goods and services used in its business operations. Further, in connection with increases in wool and cotton costs over the last several years, the Company has increased offshore production. Sales of children's outerwear are seasonal. Historically, M&L has significantly higher revenues in the third and fourth quarters than in the first and second quarters. Therefore, the results of any interim period are not necessarily indicative of the results which might be expected during a full year. Additionally, there is a risk inherently related to the outerwear industry, resulting from consumer reactions to weather patterns, which have had and continue to have a material effect on the Company's sales and profitability. 15 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company is currently involved in routine litigation. None of such litigation in which the Company is presently involved is material to its financial position or results of operations. ITEM 3. DEFAULTS UPON SENIOR SECURITIES The Company has violated certain requirements of its Loan Agreement, including those relating to collateral coverage and levels of tangible net worth. The Company's lenders have not declared the Company in default and have allowed the Company to operate while in violation of these agreements. Were a default to be declared and the Company's loan obligations required to be immediately repaid, the Company would not be able to operate without immediate alternative financing, including debtor-in- possession financing that might be available upon a filing under Chapter 11 of the Bankruptcy Code. The Company is discussing financing needs with its existing lenders; however, there are no assurances that such existing lenders, or any other lenders, will agree to such needs. A Reservation of Rights and Waiver Agreement was entered into on October 1, 1998, whereby the Company's bank lenders agreed to extend credit at their discretion without waiving any rights that might arise upon one or more events of default which occur subsequent to the amendments discussed above. If any lender to the Company determines to exercise any of its rights that might arise upon any event of default by the Company, the Company would consider a range of alternatives, including the commencement of a proceeding under Chapter 11 of the Bankruptcy Code. Furthermore, if the Company were not able to secure additional or alternative financing, it would be forced to consider a comparable range of alternatives, including the commencement of a proceeding under Chapter 11 of the Bankruptcy Code. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a) Exhibits: 10.1 Sixth Amendment to Second Amended and Restated Credit Agreement and Guaranty dated as of June 30, 1998 among the Registrant, Biscayne Apparel International, Inc., Mackintosh of New England Co., and M&L International, Inc. and The Chase Manhattan Bank (National Association) as Agent and Milberg Factors, Inc. as Servicing Agent. 16 10.2 Seventh Amendment to Second Amended and Restated Credit Agreement and Guaranty dated as of September 21, 1998 among the Registrant, Biscayne Apparel International, Inc., Mackintosh of New England Co., and M&L International, Inc. and The Chase Manhattan Bank (National Association) as Agent and Milberg Factors, Inc. as Servicing Agent. 11 Computation of Per Share Earnings 27 Financial Data Schedule b) Reports on Form 8-K: During the quarter for which this Quarterly Report on Form 10-Q is filed, the Registrant did not file any current reports on Form 8-K. 17 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: BISCAYNE APPAREL, INC. Date: November 19, 1998 By: /s/ Earl W. Powell -------------------------------- Earl W. Powell Chairman of the Board and Chief Executive Officer Date: November 19, 1998 By: /s/ Peter Vandenberg, Jr. -------------------------------- Peter Vandenberg, Jr. President, Chief Operating Officer, Treasurer and Chief Financial Officer 18 EXHIBIT 10.1 SIXTH AMENDMENT TO SECOND AMENDED AND RESTATED CREDIT AGREEMENT AND GUARANTY SIXTH AMENDMENT TO SECOND AMENDED AND RESTATED CREDIT AGREEMENT AND GUARANTY (the "SIXTH AMENDMENT") dated as of June 30, 1998 among BISCAYNE APPAREL, INC., BISCAYNE APPAREL INTERNATIONAL, INC. MACKINTOSH OF NEW ENGLAND CO. AND M & L INTERNATIONAL, INC. (individually, each a "BORROWER" and collectively, the "BORROWERS" and individually, each a "GUARANTOR" and collectively, the "GUARANTORS"), THE CHASE MANHATTAN BANK, CORESTATES BANK, N.A., BANKBOSTON, N.A. (formerly known as The First National Bank of Boston), FLEET BANK N.A. and MILBERG FACTORS, INC. (individually, each a "LENDER" and collectively, the "LENDERS"), THE CHASE MANHATTAN BANK, as agent for the Lenders (in such capacity, together with its successors in such capacity, the "AGENT") and MILBERG FACTORS, INC., as servicing agent for the Lenders (in such capacity, together with its successors in such capacity, the "SERVICING AGENT" and together with the Agent, the "AGENTS"). PRELIMINARY STATEMENTS: WHEREAS, the Borrowers, the Guarantors, the Lenders and the Agents have entered into a Second Amended and Restated Credit Agreement and Guaranty dated as of March 24, 1997, as amended by a First Amendment, dated as of May 22, 1997, a Second Amendment, dated as of February 18, 1998, a Third Amendment, dated as of March 6, 1998, a Fourth Amendment, dated as of March 25, 1998 and a Fifth Amendment and Waiver dated as of June 8, 1998 (as so amended, the "CREDIT AGREEMENT"); and WHEREAS, the terms defined in the Credit Agreement are used in this Sixth Amendment as in the Credit Agreement unless otherwise defined herein; WHEREAS, the Borrowers and the Guarantors have requested that certain provisions of the Credit Agreement be amended as hereinafter set forth; NOW, THEREFORE, the parties hereto agree as follows: SECTION 1. AMENDMENT TO CREDIT AGREEMENT. The Credit Agreement is hereby amended as follows: (a) Section 1.01 of the Credit Agreement is hereby amended by inserting the following new definition in the appropriate alphabetical order: "Arlington Net Proceeds" shall mean the net cash proceeds received by the Borrowers from the sale of the Varon plant located in Arlington, Georgia after deducting all reasonable and customary expenses incurred by the Borrowers in connection with such sale. (b) Section 1.01 of the Credit Agreement is hereby further amended by amending and restating the following definitions in their entirety as follows: "Revolving Credit Loans Maximum Outstanding" means during the period specified below the amounts specified below for such period: PERIOD AMOUNT ------ ------ Fourth Closing Date to and including April 30, 1998 $13,750,000 May 1, 1998 to and including May 31, 1998 $16,750,000 June 1, 1998 to and including June 30, 1998 $25,000,000 July 1, 1998 to and including July 31, 1998 $32,000,000 August 1, 1998 to and including August 31, 1998 $35,000,000 September 1, 1998 to and including October 20, 1998 $28,750,000 October 21, 1998 to and including October 30, 1998 $23,000,000 October 31, 1998 to and including November 19, 1998 $20,500,000 November 20, 1998 to and including November 30, 1998 $10,750,000 December 1, 1998 to and including December 20, 1998 $ 8,000,000 December 21, 1998 to and including December 31, 1998 $ 5,000,000 January 1, 1999 to and including February 28, 1999 $ 7,000,000 March 1, 1999 to and including March 31, 1999 $ 9,000,000 2 "Revolving Credit Loans Permitted Overadvance (During the Month)" means the amount specified below for each day during the month specified below other than the last day of the applicable month: MONTH AMOUNT ----- ------ March, 1998 $ 5,000,000 April, 1998 $ 9,500,000 May, 1998 $ 11,500,000 June, 1998 $ 12,500,000 July, 1998 $ 16,000,000 August, 1998 $ 12,250,000 September, 1998 $ 7,750,000 October, 1998 $ 500,000 November, 1998 $ (4,000,000) December, 1998 $ (8,000,000) January, 1999 $ (4,000,000) February, 1999 $ (2,500,000) March, 1999 $ (1,000,000) PROVIDED, that, to the extent any Arlington Net Proceeds are received by the Borrowers during the months of July 1998 or August 1998, the amounts set forth opposite such months shall be reduced on a prospective basis by such amount of proceeds received. In addition, the proceeds of Revolving Credit Loans made to BAI which are used to finance Varon shall for each day during the period specified below other than the last day of the applicable month be equal to or less than the sum of (1) the Eligible Accounts of Varon relied on in computing the Collateral Borrowing Base as set forth on the Reconciliation Report and (2) the amounts specified below for each day during the period specified below other than the last day of the applicable month: PERIOD AMOUNT ------ ------ March 1, 1998 to and including May 31, 1998 $3,750,000 June 1, 1998 to and including June 30, 1998 $4,500,000 July 1, 1998 to and including July 31, 1998 $4,500,000 August 1, 1998 to and including August 31, 1998 $4,000,000 3 September 1, 1998 to and including September 29, 1998 $ 750,000 October 1, 1998 to and including October 30, 1998 $ (750,000) November 1, 1998 to and including November 29, 1998 $(1,750,000) December 1, 1998 to and including December 30, 1998 $(2,250,000) January 1, 1999 to and including January 30, 1999 $(2,000,000) February 1, 1999 to and including February 27, 1999 $ (750,000) March 1, 1999 to and including March 30, 1999 $ 0 PROVIDED, that, to the extent any Arlington Net Proceeds are received by the Borrowers during the months ended July 31, 1998 or August 31, 1998, the amounts set forth opposite such months shall be reduced on a prospective basis by such amount of proceeds received. For purposes of this definition, the numbers set forth in parenthesis are negative numbers. "Revolving Credit Loans Permitted Overadvance (Month End)" means the amounts specified below for the last day of each month specified below: MONTH AMOUNT ----- ------ March, 1998 $ 4,000,000 April, 1998 $ 9,500,000 May, 1998 $ 7,500,000 June, 1998 $ 11,000,000 July, 1998 $ 10,250,000 August, 1998 $ 3,500,000 September, 1998 $ (750,000) October, 1998 $ (8,000,000) November, 1998 $ (9,500,000) December, 1998 $ (10,500,000) January, 1999 $ (6,000,000) 4 February, 1999 $ (4,000,000) March, 1999 $ (1,500,000) PROVIDED, that, to the extent any Arlington Net Proceeds are received by the Borrowers during the months July 1998 or August 1998, the amounts set forth opposite such months shall be reduced on a prospective basis by such amount of proceeds received. Notwithstanding the foregoing, the proceeds of the Revolving Credit Loans made to Mackintosh shall as of the last day of each month specified below be equal to or less than the sum of (1) the Eligible Accounts of Mackintosh relied on in computing the Collateral Borrowing Base as set forth on the Reconciliation Report and (2) the amounts specified below for each month specified below: MONTH AMOUNT ----- ------ March, 1998 $ 3,250,000 April, 1998 $ 4,000,000 May, 1998 $ 4,750,000 June, 1998 $ 6,000,000 July, 1998 $ 6,250,000 August, 1998 $ 6,250,000 September, 1998 $ 5,250,000 October, 1998 $ 1,500,000 November, 1998 $ (750,000) December, 1998 $ (1,800,000) January, 1999 $ 0 February, 1999 $ 0 March, 1999 $ 0 In addition, the proceeds of Revolving Credit Loans made to BAI which are used to finance Varon shall as of the last day of each month specified below be equal to or less than the sum of (1) the Eligible Accounts of Varon relied on in computing the Collateral Borrowing Base as set forth on the Reconciliation Report and (2) the amounts specified below for each month specified below: MONTH AMOUNT ----- ------ March, 1998 $ 3,000,000 April, 1998 $ 3,000,000 May, 1998 $ 3,000,000 June, 1998 $ 4,000,000 July, 1998 $ 3,750,000 August, 1998 $ 1,000,000 September, 1998 $ (1,500,000) 5 October, 1998 $(2,500,000) November, 1998 $(3,000,000) December, 1998 $(2,750,000) January, 1999 $(1,500,000) February, 1999 $ (750,000) March, 1999 $ 0 In addition, each of the Borrowers agree that no further intercompany loans or advances shall be made by any Borrower or Subsidiary from and after the Fourth Closing Date and that intercompany loans and advances by and among the Borrowers outstanding as of the Fourth Closing Date shall not be repaid or reduced by any amounts, other than reductions or repayments arising from non-cash offsets of federal income tax provisions and allocations of Apparel's corporate overhead and management fee expenses among Apparel, BAI, Mackintosh and M&L conducted in the ordinary course of business in accordance with GAAP. For purposes of this definition, the numbers set forth in parenthesis are negative numbers. (c) Section 10.02 of the Credit Agreement is hereby amended by amending and restating the PROVISO appearing at the end of such section in its entirely as follows: ; PROVIDED, that any guaranty by Apparel shall be limited to orders for the purchase of raw materials which are placed during the calendar year 1998. (d) Section 11.02 of the Credit Agreement is hereby amended and restated in its entirety as follows: Section 11.01. MINIMUM TANGIBLE NET WORTH. Consolidated Tangible Net Worth shall not be less than the amounts specified below for the dates specified below: DATE AMOUNT ---- ------ March 31, 1998 $5,250,000 June 30, 1998 $3,250,000 July 31, 1998 $4,000,000 August 31, 1998 $4,750,000 September 30, 1998 $7,750,000 December 31, 1998 $9,000,000 March 31, 1999 $7,750,000 In addition, Consolidated Tangible Net Worth shall not be less than $7,750,000 for the period from October 1, 1998 through and including December 30, 1998 and at no time may Consolidated Tangible Net Worth be less than $3,250,000. 6 SECTION 2. CONDITIONS OF EFFECTIVENESS TO THIS SIXTH AMENDMENT. This Sixth Amendment shall become effective on the date on which each of the following conditions have been satisfied or waived: (i) the Borrowers, the Lenders and the Agents shall each have executed and delivered this Sixth Amendment; (ii) payment by the Borrowers of all costs and expenses of the Agents and the Lenders (including, without limitation, reasonable attorneys' fees and expenses) incurred in connection with this Sixth Amendment and the Credit Agreement; (iii) payment by the Borrowers to the Agent for the account of the Lenders a non-refundable amendment fee equal to $50,000. Each Lender shall be entitled to twenty percent (20%) of such amendment fee; and (iv) receipt of such other documents, opinions or agreements as either of the Agents or any of the Lenders may reasonably request. SECTION 3. REFERENCE TO AND EFFECT ON THE FACILITY DOCUMENTS. Upon the effectiveness of Section 2 hereof, on and after the date hereof each reference in the Credit Agreement to "this Agreement", "hereunder", "hereof", "herein" or words of like import, and each reference in the other Facility Documents to the Credit Agreement, shall mean and be a reference to the Credit Agreement as amended hereby. Except as specifically amended above, the Credit Agreement and all other Facility Documents shall remain in full force and effect and are hereby ratified and confirmed. Except as specifically waived herein, the execution, delivery and effectiveness of this Sixth Amendment shall not operate as a waiver of any right, power or remedy of any Lender or Agent under any of the Facility Documents, nor constitute a waiver of any provision of the Facility Documents. SECTION 4. REPRESENTATIONS AND WARRANTIES. The Borrowers hereby represent and warrant that each of the representations and warranties contained in Article 8 of the Credit Agreement and in each of the other Facility Documents is true and correct as of the date hereof (provided that any representations and warranties which speak to a specific date shall remain true and correct as of such date). SECTION 5. COSTS AND EXPENSES. The Borrowers agree to pay the Agent, the Servicing Agent, and the Lenders on demand all costs, expenses and charges, in connection with the preparation, reproduction, execution, delivery, filing, recording and administration of this Sixth Amendment and any other instruments and documents to be delivered hereunder, including, without limitation, the fees and out-of-pocket expenses of counsel for the Agent, the Servicing Agent, and each Lender with respect thereto and with respect to advising the Agent, the Servicing Agent, and each Lender as to its rights and responsibilities under such documents, and all costs and expenses, if any, in connection with the enforcement of any such documents. 7 SECTION 6. GOVERNING LAW. This Sixth Amendment shall be governed by and construed in accordance with the laws of the State of New York applicable to contracts made and to be performed wholly within such State. SECTION 7. HEADINGS. Section headings in this Sixth Amendment are included herein for convenience of reference only and shall not constitute a part of this Sixth Amendment for any other purpose. SECTION 8. COUNTERPARTS. This Sixth Amendment may be executed in any number of counterparts, all of which taken together shall constitute one and the same instrument, and any party hereto may execute this Sixth Amendment by signing any such counterpart. IN WITNESS WHEREOF, the parties hereto have caused this Sixth Amendment to be duly executed as of the day and year first above written. BISCAYNE APPAREL, INC. By: /s/ Peter Vandenberg ------------------------------------- Name: Peter Vandenberg Title: President BISCAYNE APPAREL INTERNATIONAL, INC. By: /s/ Peter Vandenberg ------------------------------------- Name: Peter Vandenberg Title: President MACKINTOSH OF NEW ENGLAND CO. By: /s/ Peter Vandenberg ------------------------------------- Name: Peter Vandenberg Title: President M & L INTERNATIONAL, INC. By: /s/ Peter Vandenberg ------------------------------------- Name: Peter Vandenberg Title: Vice President THE CHASE MANHATTAN BANK, as Lender By: ------------------------------------- Name: Title: 7 EXHIBIT 10.2 SEVENTH AMENDMENT AND WAIVER TO SECOND AMENDED AND RESTATED CREDIT AGREEMENT AND GUARANTY SEVENTH AMENDMENT TO SECOND AMENDED AND RESTATED CREDIT AGREEMENT AND GUARANTY (the "SEVENTH AMENDMENT") dated as of September 21,1998 among BISCAYNE APPAREL, INC., BISCAYNE APPAREL INTERNATIONAL, INC. MACKINTOSH OF NEW ENGLAND CO. AND M & L INTERNATIONAL, INC. (individually, each a "BORROWER" and collectively, the "BORROWERS" and individually, each a "GUARANTOR" and collectively, the "GUARANTORS"), THE CHASE MANHATTAN BANK, CORESTATES BANK, N.A., BANKBOSTON, N.A. (formerly known as The First National Bank of Boston), FLEET BANK N.A. and MILBERG FACTORS, INC. (individually, each a "LENDER" and collectively, the "LENDERS"), THE CHASE MANHATTAN BANK, as agent for the Lenders (in such capacity, together with its successors in such capacity, the "AGENT") and MILBERG FACTORS, INC., as servicing agent for the Lenders (in such capacity, together with its successors in such capacity, the "SERVICING AGENT" and together with the Agent, the "AGENTS"). PRELIMINARY STATEMENTS: WHEREAS, the Borrowers, the Guarantors, the Lenders and the Agents have entered into a Second Amended and Restated Credit Agreement and Guaranty dated as of March 24, 1997, as amended by a First Amendment, dated as of May 22, 1997, a Second Amendment, dated as of February 18, 1998 (the "SECOND AMENDMENT"), a Third Amendment, dated as of March 6, 1998, a Fourth Amendment, dated as of March 25, 1998, a Fifth Amendment and Waiver dated as of June 8, 1998 and a Sixth Amendment dated as of June 30, 1998 (as so amended, the "CREDIT AGREEMENT"); and WHEREAS, the terms defined in the Credit Agreement are used in this Seventh Amendment as in the Credit Agreement unless otherwise defined herein; WHEREAS, the Borrowers and the Guarantors have requested that certain provisions of the Credit Agreement be amended as hereinafter set forth; NOW, THEREFORE, the parties hereto agree as follows: SECTION 1. LIMITED WAIVER. Each Lender and each Agent hereby waive compliance with: (i) the provisions contained in the definition of Revolving Credit Loans Permitted Overadvance (Month End) which require that the consolidated overadvance shall not be equal to or greater than $3,500,000 at month end for August 1998; (ii) the provisions contained in the definition of Revolving Credit Loans Permitted Overadvance (Month End) which requires that the aggregate outstanding amount of Revolving Credit Loans made to BAI during the month of August 1998 which are used to finance Varon shall be less than the Eligible Accounts of Varon included in the computation of the Collateral Borrowing Base as set forth on the Reconciliation Report for the month of August 1998 in an amount equal to or greater than $1,000,000; (iii) the Events of Default arising as a result of the failure by the Borrowers to make mandatory prepayments pursuant to Section 2.08(ii) of the Credit Agreement following the occurrence of the foregoing; and (iv) the provisions contained in Section 11.02 of the Credit Agreement which require that Consolidated Tangible Net Worth shall be at least $3,250,000 and $4,000,000 as of June 30, 1998 and July 31, 1998, respectively. SECTION 2. AMENDMENT TO CREDIT AGREEMENT. The Credit Agreement is hereby amended as follows: (a) Section 1.01 of the Credit Agreement is hereby amended by amending and restating the following definitions in their entirety as follows: "Revolving Credit Loans Maximum Outstanding" means during the period specified below the amounts specified below for such period: PERIOD AMOUNT ------ ------ Fourth Closing Date to and including April 30, 1998 $13,750,000 May 1, 1998 to and including May 31, 1998 $16,750,000 June 1, 1998 to and including June 30, 1998 $25,000,000 July 1, 1998 to and including July 31, 1998 $32,000,000 August 1, 1998 to and including August 31, 1998 $35,000,000 September 1, 1998 to and including September 20, 1998 $35,000,000 September 21, 1998 to and including September 30, 1998 $30,000,000 October 1, 1998 to and including October 20, 1998 $28,750,000 2 October 21, 1998 to and including October 30, 1998 $23,000,000 October 31, 1998 to and including November 19, 1998 $20,500,000 November 20, 1998 to and including November 30, 1998 $10,750,000 December 1, 1998 to and including December 20, 1998 $ 8,000,000 December 21, 1998 to and including December 31, 1998 $ 5,000,000 January 1, 1999 to and including February 28, 1999 $ 7,000,000 March 1, 1999 to and including March 31, 1999 $ 9,000,000 "Revolving Credit Loans Permitted Overadvance (During the Month)" means the amount specified below for each day during the month specified below other than the last day of the applicable month: MONTH AMOUNT ----- ------ March, 1998 $ 5,000,000 April, 1998 $ 9,500,000 May, 1998 $ 11,500,000 June, 1998 $ 12,500,000 July, 1998 $ 16,000,000 August, 1998 $ 12,250,000 September, 1998 $ 7,750,000 October, 1998 $ 500,000 November, 1998 $ (4,000,000) December, 1998 $ (8,000,000) January, 1999 $ (4,000,000) February, 1999 $ (2,500,000) March, 1999 $ (1,000,000) PROVIDED, that, to the extent any Arlington Net Proceeds are received by the Borrowers during the months of July 1998 or August 1998, the amounts set forth opposite such months shall be reduced on a prospective basis by such amount of proceeds received. In addition, the proceeds of Revolving Credit Loans made to BAI which are used to finance Varon shall for each day during the period specified below other than the last day of the applicable month be equal to or less than the sum of (1) the Eligible 3 Accounts of Varon relied on in computing the Collateral Borrowing Base as set forth on the Reconciliation Report and (2) the amounts specified below for each day during the period specified below other than the last day of the applicable month: PERIOD AMOUNT ------ ------ March 1, 1998 to and including May 31, 1998 $ 3,750,000 June 1, 1998 to and including June 30, 1998 $ 4,500,000 July 1, 1998 to and including July 31, 1998 $ 4,500,000 August 1, 1998 to and including August 31, $ 4,000,000 1998 September 1, 1998 to and including September 29, 1998 $ 4,000,000 October 1, 1998 to and including October 30, $ (750,000) 1998 November 1, 1998 to and including November 29, 1998 $ (1,750,000) December 1, 1998 to and including December $ (2,250,000) 30, 1998 January 1, 1999 to and including January 30, $ (2,000,000) 1999 February 1, 1999 to and including February 27, 1999 $ (750,000) March 1, 1999 to and including March 30, 1999 $ 0 PROVIDED, that, to the extent any Arlington Net Proceeds are received by the Borrowers during the months ended July 31, 1998 or August 31, 1998, the amounts set forth opposite such months shall be reduced on a prospective basis by such amount of proceeds received. 4 For purposes of this definition, the numbers set forth in parenthesis are negative numbers. "Revolving Credit Loans Permitted Overadvance (Month End)" means the amounts specified below for the last day of each month specified below: MONTH AMOUNT ----- ------ March, 1998 $ 4,000,000 April, 1998 $ 9,500,000 May, 1998 $ 7,500,000 June, 1998 $ 11,000,000 July, 1998 $ 10,250,000 August, 1998 $ 3,500,000 September, 1998 $ 2,000,000 October, 1998 $ (8,000,000) November, 1998 $ (9,500,000) December, 1998 $(10,500,000) January, 1999 $ (6,000,000) February, 1999 $ (4,000,000) March, 1999 $ (1,500,000) PROVIDED, that, to the extent any Arlington Net Proceeds are received by the Borrowers during the months July 1998 or August 1998, the amounts set forth opposite such months shall be reduced on a prospective basis by such amount of proceeds received. Notwithstanding the foregoing, the proceeds of the Revolving Credit Loans made to Mackintosh shall as of the last day of each month specified below be equal to or less than the sum of (1) the Eligible Accounts of Mackintosh relied on in computing the Collateral Borrowing Base as set forth on the Reconciliation Report and (2) the amounts specified below for each month specified below: MONTH AMOUNT ----- ------ March, 1998 $ 3,250,000 April, 1998 $ 4,000,000 May, 1998 $ 4,750,000 June, 1998 $ 6,000,000 July, 1998 $ 6,250,000 August, 1998 $ 6,250,000 September, 1998 $ 5,250,000 October, 1998 $ 1,500,000 November, 1998 $ (750,000) December, 1998 $(1,800,000) January, 1999 $ 0 February, 1999 $ 0 March, 1999 $ 0 5 In addition, the proceeds of Revolving Credit Loans made to BAI which are used to finance Varon shall as of the last day of each month specified below be equal to or less than the sum of (1) the Eligible Accounts of Varon relied on in computing the Collateral Borrowing Base as set forth on the Reconciliation Report and (2) the amounts specified below for each month specified below: MONTH AMOUNT ----- ------ March, 1998 $ 3,000,000 April, 1998 $ 3,000,000 May, 1998 $ 3,000,000 June, 1998 $ 4,000,000 July, 1998 $ 3,750,000 August, 1998 $ 1,000,000 September, 1998 $ 3,000,000 October, 1998 $(2,500,000) November, 1998 $(3,000,000) December, 1998 $(2,750,000) January, 1999 $(1,500,000) February, 1999 $ (750,000) March, 1999 $ 0 In addition, each of the Borrowers agree that no further intercompany loans or advances shall be made by any Borrower or Subsidiary from and after the Fourth Closing Date and that intercompany loans and advances by and among the Borrowers outstanding as of the Fourth Closing Date shall not be repaid or reduced by any amounts, other than reductions or repayments arising from non-cash offsets of federal income tax provisions and allocations of Apparel's corporate overhead and management fee expenses among Apparel, BAI, Mackintosh and M&L conducted in the ordinary course of business in accordance with GAAP. For purposes of this definition, the numbers set forth in parenthesis are negative numbers. (b) Section 9.10 of the Credit Agreement is hereby amended and restated in its entirety as follows: 9.10 INVESTMENT ADVISOR. Retain an investment advisor reasonably satisfactory to the Agents for purposes of strategic planning, which investment advisor shall (i) establish August 28, 1998 as the date by which letters of intent must be issued by potential purchasers of one or more of the Borrowers, and (ii) establish September 11, 1998 as the date by which bids for the purchase of one or more of the Borrowers must be received. 6 SECTION 3. CONDITIONS OF EFFECTIVENESS TO THIS SEVENTH AMENDMENT. This Seventh Amendment shall become effective on the date on which each of the following conditions have been satisfied or waived: (i) the Borrowers, the Lenders and the Agents shall each have executed and delivered this Seventh Amendment; (ii) payment by the Borrowers of (i) all costs and expenses of the Agents and the Lenders (including, without limitation, reasonable attorneys' fees and expenses) incurred in connection with this Seventh Amendment and the Credit Agreement and (ii) all outstanding legal fees and expenses due and payable to Zalkin, Rodin & Goodman LLP, special counsel for the Agent; (iii) payment by the Borrowers to the Agent for the account of the Lenders a non-refundable amendment fee equal to $25,000. Each Lender shall be entitled to twenty percent (20%) of such amendment fee; and (iv) receipt of such other documents, opinions or agreements as either of the Agents or any of the Lenders may reasonably request, including, without limitation, a schedule listing, for each Borrower, the categories of information listed in the schedule annexed to the Second Amendment. SECTION 4. REFERENCE TO AND EFFECT ON THE FACILITY DOCUMENTS. Upon the effectiveness of Section 2 hereof, on and after the date hereof each reference in the Credit Agreement to "this Agreement", "hereunder", "hereof", "herein" or words of like import, and each reference in the other Facility Documents to the Credit Agreement, shall mean and be a reference to the Credit Agreement as amended hereby. Except as specifically amended above, the Credit Agreement and all other Facility Documents shall remain in full force and effect and are hereby ratified and confirmed. Except as specifically waived herein, the execution, delivery and effectiveness of this Seventh Amendment shall not operate as a waiver of any right, power or remedy of any Lender or Agent under any of the Facility Documents, nor constitute a waiver of any provision of the Facility Documents. SECTION 5. REPRESENTATIONS AND WARRANTIES. The Borrowers hereby represent and warrant that each of the representations and warranties contained in Article 8 of the Credit Agreement and in each of the other Facility Documents is true and correct as of the date hereof (provided that any representations and warranties which speak to a specific date shall remain true and correct as of such date). SECTION 6. COSTS AND EXPENSES. The Borrowers agree to pay the Agent, the Servicing Agent, and the Lenders on demand all costs, expenses and charges, in connection with the preparation, reproduction, execution, delivery, filing, recording and administration of this Seventh Amendment and any other instruments and documents to be delivered hereunder, including, without limitation, the fees and out-of-pocket expenses of counsel for the Agent, the Servicing Agent, and each Lender with respect thereto and with respect to advising the Agent, the Servicing Agent, and each Lender as to its rights and responsibilities under such documents, and all costs and expenses, if any, in connection with the enforcement of any such documents. 7 SECTION 7. GOVERNING LAW. This Seventh Amendment shall be governed by and construed in accordance with the laws of the State of New York applicable to contracts made and to be performed wholly within such State. SECTION 8. HEADINGS. Section headings in this Seventh Amendment are included herein for convenience of reference only and shall not constitute a part of this Seventh Amendment for any other purpose. SECTION 9. COUNTERPARTS. This Seventh Amendment may be executed in any number of counterparts, all of which taken together shall constitute one and the same instrument, and any party hereto may execute this Seventh Amendment by signing any such counterpart. IN WITNESS WHEREOF, the parties hereto have caused this Seventh Amendment to be duly executed as of the day and year first above written. BISCAYNE APPAREL, INC. By: ------------------------------------ Name: Title: BISCAYNE APPAREL INTERNATIONAL, INC. By: ------------------------------------ Name: Title: MACKINTOSH OF NEW ENGLAND CO. By: ------------------------------------ Name: Title: M & L INTERNATIONAL, INC. By: ------------------------------------ Name: Title: 8 THE CHASE MANHATTAN BANK, as Lender By: ------------------------------------ Name: Title: MILBERG FACTORS, INC., as Lender By: ------------------------------------ Name: Title: CORESTATES BANK, N.A., as Lender By: ------------------------------------ Name: Title: BANKBOSTON, N. A., as Lender By: ------------------------------------ Name: Title: FLEET BANK, N.A., as Lender By: ------------------------------------ Name: Title: THE CHASE MANHATTAN BANK, as Agent By: ------------------------------------ Name: Title: MILBERG FACTORS, INC., as Servicing Agent By: ------------------------------------ Name: Title: 9 EXHIBIT 11 BISCAYNE APPAREL, INC. COMPUTATION OF PER SHARE EARNINGS (Dollars in Thousands, Except Per Share Amounts) (Unaudited) THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------------- ------------------------- 1998 1997 1998 1997 ---------- ---------- ---------- ---------- Net income from continuing operations ....... $ 2,385 $ 3,772 $ 1,611 $ 2,459 Net loss from discontinued operations ....... (12,173) (1,268) (17,061) (2,523) ---------- ---------- ---------- ---------- Net earnings (loss) ......................... $ (9,788) $ 2,504 $ (15,450) $ (64) ========== ========== ========== ========== BASIC: - ------ Weighted average common shares outstanding .. 10,797,666 10,770,213 10,797,666 10,761,288 ========== ========== ========== ========== Basic net earnings per share from continuing operations ...................... $ 0.22 $ 0.35 $ 0.15 $ 0.23 Basic net loss per share from discontinued operations .................... (1.12) (0.12) (1.58) (0.24) ---------- ---------- ---------- ---------- Basic net earnings (loss) per share ......... $ (0.90) $ 0.23 $ (1.43) $ (0.01) ========== ========== ========== ========== DILUTED: - -------- Weighted average common shares outstanding .. 10,797,666 10,770,213 10,797,666 10,761,288 Potential dilution upon exercise of stock options and warrants ....................... -- 23,426 -- -- ---------- ---------- ---------- ---------- Shares used in computing net earnings (loss) per common share .......................... 10,797,666 10,793,639 10,797,666 10,761,288 ========== ========== ========== ========== Diluted net earnings per share from continuing operations ...................... $ 0.22 $ 0.35 $ 0.15 $ 0.23 Diluted net loss per share from discontinued operations .................... (1.12) (0.12) (1.58) (0.24) ---------- ---------- ---------- ---------- Diluted net earnings (loss) per share ....... $ (0.90) $ 0.23 $ (1.43) $ (0.01) ========== ========== ========== ========== -----END PRIVACY-ENHANCED MESSAGE----