London Fog files again for Ch. 11 reorganization, to divest Pacific Trail

In a second go-around with bankruptcy reorganization, London Fog Group has filed for Chapter 11 in U.S. Bankruptcy Court for the District of Nevada. The company has also announced it will auction off its Pacific Trail outerwear business as part of the reorganization, which includes the Pacific Trail, Pac Tec, Moonstone, Roffe and Black Dot brands. Court documents obtained by SNEWS® list London Fog assets at $59.84 million and debts of $93 million.
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In a second go-around with bankruptcy reorganization, London Fog Group has filed for Chapter 11 in U.S. Bankruptcy Court for the District of Nevada. The company has also announced it will auction off its Pacific Trail outerwear business as part of the reorganization, which includes the Pacific Trail, Pac Tec, Moonstone, Roffe and Black Dot brands.

Court documents obtained by SNEWS® list London Fog assets at $59.84 million and debts of $93 million. GMAM Investment Funds Trust II is listed as the company's largest secured creditor, with a claim of $39.3 million. Wachovia Bank N.A. is right behind with a secured claim of $25.8 million. Unsecured claims total $17,420,949. Wachovia has agreed, as part of the filing, to provide London Fog with a $40 million debtor-in-possession (DIP) loan to cover payroll and other expenses during the bankruptcy proceedings, according to court documents.

Upon court approval, London Fog Group announced it will hold an auction as soon as possible for the assets of Pacific Trail. The company has entered into an asset purchase agreement with Perry Ellis International, as a "stalking horse" bidder, to acquire the Pacific Trail brands, certain licenses and other specified assets, for a total cash purchase price of $14.5 million. A stalking horse bidder is the bid selected by the company to set the bar for the price so other bidders can't low-ball the purchase.

London Fog has walked this road before, having filed for Ch. 11 in 1999 in U.S. Bankruptcy Court for the District of Delaware in Wilmington, Del. The company emerged from protection in 2001 with $90 million in exit financing.

While there is nothing unusual about Ch. 11 reorganization filings, financial analysts, former London Fog executives, former Pacific Trail executives, and company insiders SNEWS® has spoken with since March 20 seem to be more than a little perplexed with the entire proceedings.

Sales collapse baffling
The sales collapse revealed by court documents is creating the most discussion from those with whom we spoke. How can a company that reported between $160 million and $180 million in sales in 2003 under the direction of then CEO Bill Dragon, plummet to $49 million in revenue under the direction of CEO David Greenstein two years later, and then continue free-falling to only $35.4 million in gross revenue by Feb. 28, 2006, another year later?

Insiders told us some of that can be laid at the feet of lost accounts. Pacific Trail no longer is at Macy's or Sears, and has experienced an on-again-off-again sales relationship with Kohls, JCPenney, Mervyns and others. We asked several former London Fog executives as well as knowledgeable insiders about the claim that Pacific Trail is currently in 10,000 retail stores across the United States, and all were incredulous. Even in the company's hey-day (which included its own retail stores), we were told that 10,000 doors would have been hard to claim.

During a sit-down interview at Outdoor Retailer Winter Market 2006, Greenstein told SNEWS® that Pacific Trail sales had experienced a challenging year, but were improving rapidly. He also pointed to the success that Moonstone was seeing at Winter Market and that Black Dot had seen at SIA. When we pressed him that Black Dot had not officially exhibited at SIA, he did allow that the company had rented a room, but maintained the response from retailers was very strong.

As for Moonstone, it is fact that the company continues to lose money and has done so since Pacific Trail acquired it. Gross sales for 2005 for the company are somewhere between $2 million and $3 million worldwide, insiders told us, but on the books the company showed a $1 million loss.

Brent Bishop, now the Moonstone president, has done what he can to keep the Moonstone flame burning, and did allow on the record with SNEWS® recently that bookings for the company were up. Insiders told us that some of that success, however minimal, is a result of Bishop wresting design control for the brand back from Stacy Hasse who was appointed as creative director for the company in 2004, shortly after Greenstein was named CEO of London Fog Inc. According to those insiders, Bishop demanded and received permission to retain an outside design force in Sid Factor Seven.

Bishop told SNEWS® he is remaining with the ship because he believes strongly in the Moonstone brand and its potential for success.

Why the sudden urgency to reorganize
During our interview with Greenstein at Winter Market 2006, he flatly denied that Pacific Trail or any part of the company, including Moonstone, was for sale, despite consistent rumblings in late 2005 that the opposite was true. Greenstein told us that everything was coming together, and that the company was fully invested in ensuring the success not only of Moonstone, but also of Black Dot and Pacific Trail.

We asked him about communications we had been receiving via our news tip email that London Fog was not paying its vendors. In October 2005, we had inquired about these allegations and were told then the company was looking into them. Greenstein confirmed during our interview there had been some issues with payables, but asserted that the company was on solid ground and all those issues had been put behind it.

Apparently the mood shifted quickly, and what Greenstein perhaps hoped would become true has not as the Ch. 11 filing reveals. Close inspection of the court documents reveals London Fog owes factories, agents and fabric suppliers in China, Taiwan, Pakistan and South Korea significant amounts. Those owed money as unsecured creditors include: Amson Textile Mills, Pakistan ($106,002); Amtex, Pakistan ($56,525); Arshad Corp, Pakistan ($3,761,307); ASD Asia LTD, South Korea ($427,225); Chung Woo Textile Co LTD, China ($29,197); CK Global Inc., South Korea ($664,796); Gun Yong Trading Co, South Korea ($1,467,444); Jintex Asia, China ($1,216,634); Liberty Mills, Pakistan ($919,050); MK Sons, Pakistan ($38,880); Paraford LTD, Hong Kong ($486,304); Seajin Lee Co LTD, South Korea ($55,800); Sinovan Enterprise Co LTD, Taiwan ($584,618); Wan Hsin Company LTD, Hong Kong ($117,007); Wing Tai Company, Hong Kong ($928,011); and Yea Han Trading Co LTD, China ($832,293).

Insiders told us it is hard to ask factories to produce next season's goods when last season's debts have not been paid. Several former reps with whom we spoke pointed out that March 15 is the typical date for bookings to be closed, putting even more pressure on the company to ensure factories are committed to production runs.

In the press release announcing the Ch. 11 filing, Greenstein blamed the filing on a lack of cash and necessary financing to properly fund the company's operations. That would be a mild understatement according to financial experts who have reviewed the numbers. Court documents show that the company receivables are currently at $20,378,886 with an audited inventory level (as of February 2006) valued at $39,463,913 net. Listed bank accounts show a zero balance, underscoring the lack of cash available.

Why jettison Pacific Trail now?
Insiders tell us this is likely being done as a condition of receiving the DIP financing commitment from Wachovia and because Greenstein believes the greatest potential for justifying reorganization to the court and creditors lies with his Homestead home fashions business (which once reported $100 million in sales according the company) and with London Fog as a re-energized fashion line.

While it might appear surprising that Perry Ellis is interested, analysts told SNEWS® that the company is a very solid one, professionally run, very strong financially, and in a good position to make something of Pacific Trail and Moonstone.

Time is however of the essence. We have already heard reports that retailers are considering canceling or reducing Pacific Trail and Moonstone orders following the announcement of the bankruptcy filing on March 21, and that does not bode well for the brand. The fact that Perry Ellis, or some other company, will become the sixth new owner for Moonstone in just over 10 years is not exactly a ringing endorsement of stability either.

Court documents reveal generous compensation packages
Considering the enormity of the debt, the question everyone was most eager to have answered, and one court documents would reveal, is how much compensation the board received in the last year. Director Michael Bozic has been paid $34,986.26 since June 2005. Director Stewart Cohen has been paid $47,700.02 since June 2005. Chairman of the Board Stanford Springel has been paid $57,093.03 since June 2005. COO and Executive Vice President Steven Greenstein has been paid $156,182.58 since March 2005. And CEO and President David Greenstein has been paid $448,211.25 since March 2005. Whether or not the compensation packages seem high depends on your perspective: Given the company's performance, one director currently serving on several corporate boards told us one could argue the directors are being overcompensated.

SNEWS® View: Sigh. Same as it ever was for Moonstone. Perhaps it is time, as Moonstone founder Fred Williams recently opined in our SNEWS® Forum, to "let it die." Not one owner since Williams has done the brand any favors, and while we do believe Brent Bishop is moving in the right direction with the correct brand strategy, we wonder if it isn't way too late for it to matter -- at least to outdoor specialty. If Bishop owned the brand, that would be one thing. But he doesn't and no matter what he does now or in the future, unless he is the owner, there will be questions of stability and consistency for years to come. Perhaps Moonstone's future, if Perry Ellis gets the brand, will become one that is more fashion-forward and sold to specialty men's wear and department stores. We have learned that that Avalon Group Ltd. (www.avalongroupltd.com) will hold an auction for the Pacific Trail brands in Reno, Nev., on Wednesday, March 29, at noon. It is possible, we have been told, that the brands may be split up, meaning Moonstone may go to one owner, and Pacific Trail to another. Who knows what the future holds at this point since it is way too early to say. What we do know is that the current ownership has managed nothing short of a brilliantly executed disaster complete with all sorts of side scripts and curious decisions worthy of a made-for-TV movie script.

Have a comment to make about Moonstone and/or Pacific Trail? Then head to the SNEWS® Forum -- a secure place that can only be read by those of us in the industry, and a place where you can say anything, as long as you are not simply flaming or nuking another person or company for personal reasons. Click on www.snewsnet.com/forums -- it's your Forum, your voice.

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