A Pattern Maker's Buyout Burden

nytimes.com/1989/09/02/business/a-pattern-maker-s-buyout-burden.html

Simplicity Patterns was still racking up profits long after most American women had given up making their own
clothes, but now it is struggling to stay out of bankruptcy court.
Its problems are largely a result of the debt burden taken on in last year's leveraged buyout by the Wesray Capital
Corporation, financial analysts say. Wesray, the partnership founded by former Treasury Secretary William E. Simon
and two partners, was widely acclaimed for its financial acumen in several deals, notably the buyout of Gibson
Greeting Cards, but its record could well be blemished by Simplicity.
''At bottom Simplicity is a good company that's still generating some operating income, but they're over-leveraged,''
said an analyst who asked not to be identified. The company made some business misjudgments, he added, but
without the debt, they could have been corrected. ''When you're servicing such debt on such a rigorous schedule,
you can't make mistakes,'' he said.
The Simplicity Holdings Corporation, the parent of the 62-year-old Simplicity Pattern Company, was acquired in
February 1988 in a $117.5 million leveraged buyout led by Wesray.
With about $52 million of senior debt and $61 million of subordinated debt underwritten by Drexel Burnham Lambert
Inc. in connection with the acquisition, Simplicity's interest-related expenses rose to $14.7 million last year, from
$2.7 million the year before. At the same time, the company's business, like that of other pattern makers, had
shrunk, and it reported operating losses of $1.3 million on revenues of $80 million. Unable to support the heavy debt,
Simplicity defaulted only months after issuing the $61 million of ''junk bonds.''
''There's a certain amount of mutual seduction going on between management and these L.B.O. shops to the extent
that no one is minding the store in terms of the risks involved,'' said a banker familiar with the Simplicity leveraged
buyout. ''L.B.O. shops go looking for managements, and the managements are often not so sophisticated, and so
people like Wesray come in and say, 'look at what we did with Gibson Greetings.' It's a good example of what can go
wrong in these small L.B.O.'s.''
Richard J. Gyde, Simplicity's president, acknowledges that the company's management and Wesray made overly
optimistic forecasts. ''It was a question of our projections at the time that this deal was put together,'' he said. ''We did
not expect the market to be as soft as it is.'' Loss in Quarter
Simplicity reported a $2 million loss for its February-through-April quarter, the first of its current fiscal year. Liabilities
exceeded assets by more than $14 million, and that was before the company reclassified $99 million of long-term
debt as current liabilities. Management noted in its filing with the Securities and Exchange Commission that certain
conditions ''raise substantial concern about the company's ability to continue as a going concern.''
Mr. Gyde and other senior executives are trying to reschedule debt payments. Although there are indications that
they might be approaching an agreement that would keep the company out of Chapter 11 bankruptcy protection,
said a banker familiar with the negotiations, any settlement will be far from simple because Simplicity's creditors
include a few troubled savings associations and the former Federal Savings and Loan Insurance Corporation, now
the Resolution Trust Corporation.
Among the buyers of Simplicity's subordinated debt were the Loews Corporation, which bought about $10 million of
the bonds; the General Motors pension fund, which took around $5 million; Lincoln Savings, a savings and loan
company based in Irvine, Calif., that is believed to have bought $6 million, and Centrust, a troubled savings
association in Miami that bought about $20 million. These holdings were reported by bankers familiar with the
situation, but none of the investors would comment on the matter. Lincoln in Receivership

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Lincoln was forced into receivership by Federal regulators only weeks ago, meaning that Mr. Gyde and his staff must
negotiate with the regulators, who do not have a reputation for leniency.
As for Centrust, it was recently ordered by Florida banking regulators to increase its reserves against possible
losses on its large junk-bond portfolio. Centrust was also forced by the regulators to sell branches as well as part of
its $28 million art portfolio, including a $13 million Rubens that hung in the home of its chairman, David Paul.
The troubles at Simplicity began when Wesray acquired the company from the Triton Group Ltd. in February 1988
for $107 million in cash and $10 million in preferred stock. Triton, based in La Jolla, Calif., had purchased Simplicity
for $64.7 million four years earlier from the Maxxam Group Inc.
Wesray's financing included $50 million in bank loans and a $60 million bridge loan from Drexel, which underwrote
the deal and purchased warrants to buy Simplicity common stock and is now an adviser to the company. Bonds'
Value Reduced
Simplicity redeemed the Drexel bridge loan with a private placement of debt. That in turn was paid off by an issue of
subordinated high-yield bonds with a 14 1/2 percent coupon due in 1996. While analysts do not expect that holders
of senior debt will lose their money, the subordinated bonds now sell for about 25 cents on the dollar.
''This was an instructive case of how these bonds can disintegrate in the aftermarket,'' said James Grant, publisher
of Grant's Interest Rate Observer.
In the offering prospectus for the Simplicity junk bonds, Wesray made it clear that the pattern industry's unit sales
had peaked in 1976 - when more than 170 million pattern units were sold, compared with 50 million last year - and
that the company had not been able to meet its fixed charges out of pretax income.
The number of stores selling sewing patterns dropped to fewer than 10,000 from 30,000 in the same period. The
prospectus noted that the increase in working women, the growth in discount clothing stores and the general decline
of home sewing all contributed to the industry's shrinkage. Nevertheless, investors bought Simplicity's junk bonds.
Prices Raised
To improve cash flow to make its debt payments, Simplicity raised pattern prices last year and stepped up
shipments to its retail customers.
''They overshipped on their new styles,'' said Ronald Westcott, vice president for purchasing at Fabricland, an
Oregon-based retailer and large Simplicity customer, echoing a complaint voiced by many other retailers who had to
pay for patterns they could not sell.
After several months, the retailers revolted. Some did not pay for the additional patterns, while others, like Payless
Drug Stores, a chain based in Portland, Ore., stopped doing business with Simplicity.
But Mr. Gyde, Simplicity's president, denies the retailers' assertions. ''We did not knowingly send more patterns out
than would fit in the cabinets,'' he said. Two New Brands
Simplicity's management compounded its problems by introducing two new brands in the last two years - Style and
New Look, which were intended to compete with more stylish and expensive brands.
''The net effect of introducing new brands in a declining industry is to cannibalize the existing brands,'' said Robert
Herman, president of the McCall Pattern Company, a competitor. ''It now appears that the brands that were
cannabilized the most were Simplicity's.''
McCall, which is still in Chapter 11 after a filing last December, made matters tougher by lowering its prices to win
market share from Simplicity, which had raised its prices by 17 percent in the year after the Wesray buyout.
Simplicity's unit volume fell by 18.6 percent last year, and its market share dropped seven percentage points, to 32

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percent. Wesray's Role

For its part, Wesray is trying to distance itself from Simplicity's troubles. ''Certain of the Wesray shareholders sit on
the board of the company, and we play the same role any director of a company plays, but we don't manage the
company,'' said Frank E. Richardson, 3d, Wesray's president.
But while Simplicity's struggles may embarrass the Wesray partners, they remain largely unscathed financially.
Although some partners hold nearly 50 percent of Simplicity's closely held common stock, it cost the partnership only
an estimated $8 million. And there is a partial offset. Since the takeover, Wesray-controlled companies have
received more than $3 million in consulting and investment banking fees from Simplicity.
Moreover, through a contract granting them a 10-year irrevocable proxy to vote management's shares, the Wesray
partners control Simplicity's board.

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