Phar-Mor faces long, painful reorganization

Discount Store News, Sept 7, 1992

YOUNGSTOWN, OhioAmid rumors that the 306store deep discount chain would go out of business, Phar-Mor called back about 50 of its 1,000 laid-off employees. However, some vendors continue to refuse to ship merchandise to the chain, which filed for Chapter 11 bankruptcy protection in mid-August.

Meanwhile, former vice chairman Michael Monus, in a resignation letter to the board of trustees of Youngstown State University, said that he expected to be vindicated of public charges that he and former Phar-Mor chief financial officer Patrick Finn embezzled funds from the company and falsified financial records to obscure losses.

Finn's lawyer is quoted as saying that his client m cooperating with the FBI, the U.S. Attorney's office and Phar-Mor officials in an investigation of Monus' activities. The Warren, Ohio, Tribune Chronicle said that Finn was explaining to investigators how he and Monus altered financial records.

Phar-Mor and its former accountants, Coopers & Lybrand, are swapping lawsuits, Phar-Mor alleging that the accounting firm should have discovered the fraud and Coophrs & Lybrand countering at it was lied to by top execs. "Let's ascribe the blame where it belongs," said Coopers & Lybrand assistant general counsel David McLean. "It's his [chairman David Shapira's] desk where the buck stops." Phar-Mor has hired Irwin Cohen of Deloitte & Touche, a well-known retail accounting specialist, to head its new audit team, and has also hired independent counsel to supervise its internal investigation.

Monus and Finn allegedly embezzled $10 million, most of which was used to shore up Monus' World Basketball League, a professional league for players under 6-ft., 7-in. tall. The two also allegedly falsified financial documents to show the company was making more money than it actually was, which in turn forced Par-Mor to take a $350 million charge and eventually file for protection from creditors.

Creditors, many of whom had little love for the hardbargaining deep discounter, stopped shipments, and most have not resumed supplying the chain, although chairman David Shapira noted that the 50 recalled employees were union distribution personnel who work for Phar-Mor's Tamco Distributors subsidiary, and were needed to keep up with increased shipments.

"Because of renewed supplier confidence and increased vendor shipments of merchandise, we were able to bring back these workers," Shapira said. "Over the coming weeks, we anticipate rehiring more Tamco workers."

The 50 or so recalled distribution workers represent only about 7% of the roughly 750 distribution employees laid off. Spokeswoman Carol Robinson noted that "our creditor banks unanimously agreed to allow us to use $50 million in cash collateral. In combination with ongoing revenues from our stores, we will have enough capital to operate indefinitely." Phar-Mor is seeking debtor-in-possession financing to buy inventory for the holiday selling season.

Phar-Mor is also exiting three businesses that were recently added: home office furniture, office electronics and team sportswear. Presumably, those businesses were losing money, and the company is planning to return its attention to its core: H&BC, drugs, food and snacks.

Reorganization will be long and painful, assuming the firm survives. Preliminary audits of financial statements indicate the company lost an unquantified amount of money every year of its existence.

That has led some analysts and suppliers to conclude that the company is not now, and may never have been, viable. Due to the alleged falsification of records, it is unclear how many of Phar-Mor's stores were ever profitable on an operational basis. The company has gone to the capital market three times in the past year, selling a $200 million stake to Lazard Freres and increasing its revolving line of credit. The company is now worth far less than that.

If the stores were turning an operating profit, and losses were the result of fraud or embezzlement, the chain, which has an enormous franchise with customers, should be able to find new capital. If the chain never made money, it will probably die. The internal audit should answer that question.

Monus and Finn allegedly used $10 million in Phar-Mor funds to cover debts of the now-defunct World Basketball League, of which Monus was president. Players were paid sporadically, and at the end, checks from Monus to league accounts bounced. The alleged scheme came to light due to an erroneous tip that teams were paid with PharMor checks. The checks, it turned out, came from Monus.

Several major vendors are owed in excess of $1 million. FoxMeyer, the drug distributor, took the biggest hit, estimated at $74 million by FoxMeyer and $43 million by Phar-Mor. FoxMeyer has, in the past two years, lost Kmart and Wal-Mart as customers.

Other creditors include Fuji Film, Gibson Greetings, Nestle, Levy Home Entertainment, Bonneau, Gillette, Union Camp, Hershey, Keebler, Acme Frame, and photofinisher Qualex. All are owed between $1 million and $6 million, according to PharMor's bankruptcy petition.