How To Ruin A Company
The first of the money men descended on Simplicity Pattern Co. in the autumn of 1979.
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 50 years, Simplicity helped dress 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, a problem the company's management had yet to deal with.
Then came the money men. Throughout the 1980s they worked their wizardry on Simplicity Pattern Co., turning a money-making business that paid federal income taxes into a money-losing business that paid no federal income taxes.
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.
-- Issued bonds and borrowed from banks, sending the company's debt soaring from almost 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 interest payments.
-- Defaulted on the interest payments on bonds and bank loans.
It was just one more business success story - if you measure success by how much money investors made buying and selling Simplicity and its stock. They got help from the federal tax code, which allowed them to build their empires on debt and write off the interest.
It definitely was not a success story for Simplicity's employees - people such as Charlotte L. Mitchell, a secretary at the plant since 1970.
On June 8, 1988, Mitchell got a big surprise. It was on her birthday.
"They (her co-workers) had a big party for me in the office," she recalled. During the party, "my boss got back and he said, `Charlotte, I've just been told you are going to be let go.' "
A COMPANY RIPE FOR RAIDING
Simplicity was founded in New York City in 1927 by an advertising man, Joseph Shapiro, and his son, James. It opened the Niles plant in 1931 and, through low prices and solid marketing, became the world's largest pattern maker. But in the mid-1970s, a disturbing trend began to emerge.
Although the company was financially healthy, it was making more and more of its money from its investments, less and less from the sale of patterns. 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 who, in 1979, began 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, who spent $7.1 million in late 1979 to gain control of more than 1 million shares, or 7 percent of Simplicity stock. By the end of 1980, he owned 1.2 million shares, nearly 9 percent of the company.
In Niles, Simplicity's management cut costs to avoid a buyout, winning concessions from unions that would cut the manufacturing payroll by 10 percent over the next four years.
In a friendly deal initiated by Simplicity's management, NCC Energy Ltd., an oil and gas company out of London, bought up 15 percent of Simplicity's stock in the spring of 1981. NCC Energy's investment adviser was Drexel Burnham Lambert, and among those touting the deal was Peter Ackerman, the right-hand man of Drexel's junk-bond creator, Michael Milken.
NCC Energy bought out Posner, paying him $22 million for his holdings. That gave Posner a profit of $10 million.
But before the NCC-Simplicity business combination could be finalized, another raider appeared.
In August 1981, companies controlled by Carl C. Icahn reported they had acquired 1.6 million shares of Simplicity - 11.2 percent of the stock. By November, Icahn controlled 13.3 percent and had made a tender offer to buy an additional 18 percent - effectively blocking the NCC-Simplicity deal.
To fend off Icahn, NCC Energy enlisted the help of an Australian company, Waltons Bond Ltd., to make a counteroffer for Icahn's holdings. A month later, in December 1981, Waltons Bond paid Icahn's companies $26.5 million for their 1.8 million shares.
That transaction was especially lucrative for Icahn, whose businesses picked up a quick $15 million profit.
The scorecard read: Investors Posner and Icahn: $25 million. Simplicity, its employees and customers: reduced earnings and higher pattern prices.
While Icahn was selling his stock to Waltons Bond, another company, Cook International, was buying Drexel Burnham's 5 percent of Simplicity shares for $6.8 million. Cook later sold the stock to NCC Energy.
There was only one problem with the $60 million in Simplicity stock purchases made by NCC Energy, Waltons Bond and Cook International: None of the companies had the cash to pay for the securities.
Not to worry. Once NCC Energy assumed control, it would merely take the money out of Simplicity to pay for buying Simplicity.
A new management team took over in January 1982. Graham Ferguson Lacey, 33, chairman and chief executive officer of NCC Energy, took on the same titles at Simplicity. Six of Lacey's allies also joined the board.
Lacey's Simplicity decided to pour cash into a gold-mining project in Australia - a Waltons Bond venture - and to buy $25 million of notes issued by a Waltons Bond-controlled mining company. This would be good for Waltons Bond, which needed cash. It would not be good for Simplicity.
Then the deals unraveled. Simplicity's small stockholders, worried about the drain of assets, filed suit April 30 of that year to block the actions. This was self-dealing, served only the personal interests of the defendants and constituted fraud, the suit said. The board had been checkmated.
Waltons Bond announced it was severing ties with NCC Energy and Simplicity and was returning a $10 million Simplicity mining deposit. And four months after gaining control of Simplicity, NCC Energy announced it would sell its 20 percent interest.
Another money man, Charles E. Hurwitz, a 42-year-old Houston financier, was standing by.
In May 1982, two Hurwitz companies, MCO Holdings Inc. and Federated Development Co., announced the purchase of Simplicity's stock from NCC Energy and an agreement to buy the Simplicity stock held by Waltons Bond. Total purchase price for the 33 percent interest: $48 million.
In the beginning, Hurwitz's Simplicity began buying stock in a New York company called Twin Fair Holdings Inc., which owned properties that it leased to major retail chains. By the end of 1983, Simplicity Pattern owned 96 percent of Twin Fair. Simplicity also began buying stock in Amstar Inc., a century-old company best known for Domino sugar.
At the same time, Simplicity's new managers were seeking to cut the pay and benefits of employees in Niles.
And Hurwitz began paperwork required by the Internal Revenue Service that would lead to the removal of $2.9 million of $7 million from one of the pension funds covering Simplicity workers. Federal law allows a company to remove money from a pension fund if it certifies there are sufficient assets to meet pension obligations.
In May 1984, Simplicity management renewed pressure on the unions to reduce wages and benefits. If the company could not reduce its labor costs by $1.9 million a year, it would leave the city, the Niles Star reported.
The city promised to help arrange financing for more modern equipment and to give Simplicity, the area's second-largest employer, a 50 percent property-tax break on plant improvements.
Simplicity's five unions agreed to trim 3 percent off wages, which averaged about $9.90 an hour. They also agreed to give up two paid holidays and to eliminate the jobs of about 70 workers, some of whom had been at Simplicity for more than 30 years.
The savings added up to $1.5 million, or 79 percent of the $1.9 million the company sought.
Bruce Bracken, director of employee relations, was quoted in an area newspaper as saying: "We fell short of our goal, but management was willing to stay here anyway because of the proven work force and high risk of starting off fresh somewhere else."
In reality, management was about to move on - for a hefty profit. Less than two weeks after the labor agreements had been sealed, Hurwitz announced that Simplicity would be sold for $65 million to Triton Group Ltd., a holding company controlled by John Brooks Fuqua, 73, an Atlanta investor.
The money men loved the idea - especially the dealmakers at Drexel Burnham Lambert.
"Simplicity Pattern is a cash cow," Drexel Burnham told its clients in a report extolling the benefits that Triton and its parent, Fuqua Industries Inc. of Atlanta, would derive from owning Simplicity. "Last year, pre-tax income and depreciation generated $12 million in cash flow, and the pre-tax profit margin in 1983 was 14 percent," the brokerage house said.
And then, the real reason that the Simplicity-Fuqua-Triton marriage made so much sense: Triton possessed "a potential tax loss carryforward of about $200 million to shelter future earnings. In order to take advantage of the carryforwards, Triton obviously needs to acquire operating companies with good cash flow and a consistent record of profitability."
Translation: The losses run up in earlier years by a long-dead company - the real-estate trust from whose corporate shell Triton had been formed - would be used to offset the taxes owed by a profitable firm.
Triton Group, Simplicity's new parent company, reported profits of $13 million for 1985, $11 million for 1986 and $76 million for 1987. For the three years it owned Simplicity, profits totaled $100 million.
Yet according to records filed with the Securities and Exchange Commission, Triton paid no federal income taxes on that $100 million.
How could that be? Triton, in a previous incarnation, had run up enormous losses as a realty trust, ended up in Bankruptcy Court and emerged as Triton.
Triton merely subtracted the old losses from the taxable income of Simplicity and Triton's other subsidiaries.
Not only did the Triton management not diversify, but Simplicity was losing ground in the business it once dominated. More than 50 percent of all the patterns sold in the United States had carried the Simplicity label in the 1970s. The figure had dropped to 43 percent by 1983 and to 37 percent in 1986.
The gloomy sales figures aside, Triton did very nicely with its investment in Simplicity, thanks to the tax advantages. But after three years, Triton decided it was time to dump the pattern maker.
That was in November 1987. A month later, Drexel arranged the sale of Simplicity to Wesray Capital Corp., with a reputation as the most successful get-rich-quick operation in the field of corporate takeovers.
Wesray paid $117 million for Simplicity. Triton walked away with a $52 million profit before taxes.
Wesray purchased Simplicity with borrowed money, meaning that Simplicity would have to pay for itself again. Only now, the debt load topped $100 million. And the $100 million Simplicity had in cash and investments when the decade began was gone.
BURIED UNDER A LOAD OF DEBT
Simplicity now had so much debt that even reductions in the work force didn't free up enough cash to make interest and principal payments.
In the fall of 1990, Simplicity Pattern underwent yet another change in ownership, as the outstanding debt was restructured and new investors were brought in.
The corporate raids and restructuring of the 1980s that led to the loss of middle-class jobs, the elimination of health-care insurance and falling living standards had turned on those who had started it all. The process had become so destructive that the raiders now were losing millions of dollars. Those involved are reluctant to say how much.
So who owns Simplicity Pattern now? They don't want you to know.
Representatives of Wesray failed to respond to repeated requests for information. A spokesman for Raymond Chambers, former chairman of Wesray, said he no longer was associated with the firm. When a reporter called Simplicity Pattern's executive offices in New York City and asked if Wesray still owned the company, a spokeswoman replied:
"We can't really give out that information."
------------------------------------- THE RAIDING OF SIMPLICITY PATTERN CO. -------------------------------------
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1927-1981
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Before the takeovers: a stable firm -- Founded 1927 in New York City. -- By 1981, the world's largest pattern maker. -- Factory: Niles, Mich.
Assets -- $100 million in cash reserves, investments
Net income -- $7 million in 1980
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FIRST RAIDER
Jan.-May 1982
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Graham Ferguson Lacey, Chairman/CEO, NCC Energy Ltd.
-- Gains control of Simplicity, become chairman / CEO
Investments with Simplicity cash
-- Two New York City buildings -- A regional airline -- Oil and gas exploration -- Gold-mining company bonds
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SECOND RAIDER
May 1982-Dec. 1984
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Charles E. Hurwitz, Chairman/CEO, MCO Holdings Inc.
-- Gains control of Simplicity, becomes chairman / CEO
Investments with Simplicity cash
-- Shopping centers -- Sugar refineries -- Golf and tennis resort
Pension fund raid -- $2.9 million (42%) removed from fund of Niles workers. Originally $10,455 per worker, cut to $6,085.
Labor cuts -- Jobs eliminated, wages reduced, some paid holidays eliminated.
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THIRD RAIDER
Dec. 1984-Jan. 1988
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J.B. Fuqua, Chairman, Triton Group Ltd.
-- Acquires Simplicity
Erasing taxes -- Corporate income taxes eliminated by deducting losses of a bankrupt real-estate trust.
Pension fund raid -- $7.8 million (92%) removed from another fund covering hourly workers. Originally $39,535 per worker, cut to $3,256.
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FOURTH RAIDER
Jan. 1988-Fall 1990
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Raymond G. Chambers, Chairman/ CEO, Wesray Capital Corp.
-- Acquires Simplicity
Increasing debt -- Borrows $120 million to buy Simplicity -- By June 1989, Simplicity in default on its loans. -- By April 1990, delinquent on more than $30 million in payments on interest and principal.
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SIMPLICITY TODAY: WHO OWNS IT?
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`We can't really give out that information."
$100 million reserve gone $100 million in debt, July 1990
Source: Securities and Exchange Commission. Pension Benefit Guaranty Corp.