Simplicity Co., once cash rich, is now in debt

A PATTERN OF MISMANAGEMENT

October 29, 1991|By Donald L. Barlett and James B. Steele | Donald L. Barlett and James B. Steele,Knight-Ridder News Service

It was the fall of 1979 when the first of the money men descended on Simplicity Pattern Co.

By the time they were finished a decade later, a company that once had $100 million in the bank was more than $100 million in the hole.

For more than half a century, Simplicity was as much a part of the American home as the radio and the sewing machine. It helped dress generations of girls and boys, women and men, through the sale of billions of patterns for the home-sewing market.

Decade after decade, the company's revenues grew. It enjoyed good relations with a loyal work force at its plant in Niles, Mich.

But, as with many mature companies, the earnings from Simplicity's major business -- the sale of patterns -- had begun to trail off in the late 1970s. Management was slow to deal with the problem.

Then came the money men.

Throughout the 1980s, they worked their managerial and financial wizardry on Simplicity Pattern Co.

When they were done, they had turned a venerable, money-making business, which paid federal income taxes, into a money-losing business that paid no federal income taxes.

They had, in fact, driven Simplicity to the edge of bankruptcy.

In that decade, the money men:

* Bought and sold the company four times and made tens of millions of dollars running up the price of Simplicity stock in threatened and actual takeovers.

* Drained $100 million that Simplicity had in its bank account and investment portfolio.

* Raided the company's pension funds on two occasions, taking out $10.7 million.

* Issued bonds and borrowed from banks, sending the company's debt soaring from near nothing to $100 million.

* Sold off properties to raise badly needed cash after they had depleted the company's $100 million cushion.

* Created so much debt that Simplicity could no longer generate enough cash to make the interest payments.

* Defaulted on the interest payments on bonds and bank loans.

It was just one more American business success story -- if you measure success by how much money assorted investors made buying and selling Simplicity stock, buying and selling the company itself.

And they got help from the U.S. government rule book. Thanks to several provisions of the federal tax code, including the net operating loss deduction and the deduction for interest expense, they were able to build their empires on debt and write off the interest.

So the raids that cost hundreds of Americans their jobs and made millions for the raiders were, in effect, subsidized by the taxpayer.

Consider John Brooks Fuqua, an Atlanta investor, who was the third of the four money men who acquired Simplicity in the 1980s.

Mr. Fuqua, 73, was chairman of Triton Group Ltd., which bought Simplicity for $65 million in late 1984 and sold it three years later for $117 million, for a profit of $52 million before taxes.

That was good for Triton.

It was not so good for Simplicity Pattern.

The company, bought with borrowed money, was burdened with so much debt that it couldn't sell patterns fast enough to pay the interest on its bonds and loans.

And it definitely wasn't good for Simplicity's employees -- people such as Charlotte L. Mitchell, a secretary at the plant since 1970.

On June 8, 1988, six months after Mr. Fuqua's group sold Simplicity to Wesray Capital Corp., Ms. Mitchell got a big surprise. It was on her birthday.

Her co-workers "had a big party for me in the office," she remembered. During the party, "my boss got back and he said, 'Charlotte, I've just been told you are going to be let go.' "

Between 1976 and 1980, income from patterns dropped from $24 million to $9 million. During those years, income from investments rose from $3 million to $9 million.

The explanation was simple enough. As more women left the home and moved into the work force, they had less time for sewing. Fewer women making clothes for their families meant the sales of fewer patterns.

Simplicity was also a company ready-made for the corporate raiders.

By the early 1980s, the raiders were being glorified as the saviors of American business: MBAs flying about the country buying up companies, ousting unimaginative managers, installing tight spending controls, selling off or shutting down peripheral operations, restructuring businesses and putting them back on a solid foundation.

That, anyway, was the image.

Simplicity's troubles began in 1979, when corporate raiders started poring over the company's financial documents, taking note of the more than $100 million parked in investments and pension funds.

Among the early arrivals was Victor Posner, an investor described by one newspaper as a "corporation empire-builder." Mr. Posner began acquiring Simplicity stock in earnest in August 1979. Over the next four months, his holdings grew to more than 1 million shares, or 7 percent of the stock. The four-month cost: $7.1 million. In the next year, he continued to add to his Simplicity holdings. By the end of 1980, he owned 1.2 million shares, or nearly 9 percent of the company.

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