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FOXMEYER CONTINUES TO SHIP PRODUCTS TO PHAR-MOR STORES

Executive Summary

FOXMEYER CONTINUES TO SHIP PRODUCTS TO PHAR-MOR STORES following an Aug. 5 meeting with management of the "deep discount" pharmacy chain. FoxMeyer said that Phar-Mor management provided reassurances that it would continue to meet payments and maintain the level of orders it has placed in the past. The Dallas-based FoxMeyer said it would not scale back its shipments and expressed confidence in Phar-Mor's "ability to handle this difficult situation." Phar-Mor announced Aug. 4 that it has uncovered a fraud and embezzlement scheme involving upper management that will result in a $350 mil. write-off. A five-day investigation by Phar-Mor attorneys and internal auditors uncovered evidence that former President and Chief Operating Officer Michael Monus and former Chief Financial Officer Patrick Finn had diverted $10 mil. from Phar-Mor to the World Basketball League. Monus is an owner of and Finn had been financially involved with the league. Phar-Mor fired Monus and Finn on July 31. The ongoing investigation has been turned over to the FBI. Pharm-Mor said it is taking the $350 mil. charge to FY 1993 second quarter earnings to account for misstated profits and inflated net worth as a result of Monus and Finn falsifying the company's financial statements. The Youngstown, Ohio-based chain believes the fraud occurred over a three-year period. Phar-Mor sales grew from $1 bil. in FY 1989 to $3.1 bil. in FY 1992 (ended June 30). The closely-held firm does not release earnings. Purchases from Phar-Mor accounted for approximately $515 mil., or 17%, of Foxmeyer's FY 1992 sales (ended March 30), Foxmeyer reported in a 10-K filing. Prescription drugs represent "by far the majority" of Foxmeyer sales to Phar-Mor, the wholesaler said, although FoxMeyer also supplies the discounter with OTCs and health and beauty aids. Foxmeyer signed a five-year $2.8 bil. agreement with Phar-Mor in 1990. The deal assumed an added importance in 1991 when KMart downgraded Foxmeyer from a primary supplier to a secondary supplier: sales to KMart fell from $348 mil. in FY 1991 to $40 mil. in FY 1992. Foxmeyer also has tied its plans for West Coast expansion to Phar-Mor. In a presentation to securities analysts last October, Foxmeyer expressed its intention to follow the deep discount chain as it expands operations into the far western states ("The Pink Sheet" Nov. 11, T&G-10). Although Phar-Mor has already begun streamlining operations, including lay-offs, to return to profitability, the company says that it does not plan to close any of its 305 stores; to underscore that point, Phar-Mor opened four new stores on Aug. 5. The chain currently operates in 33 states covering every region of the country with the exception of the Pacific Northwest and northern New England. The downsizing is confined to Phar-Mor's corporate offices, where 125 out of 800 employees have been dismissed, and the distribution segment, where 30 out of 1,500 workers have been let go. The firm said that it does not plan to lay off any of its store employees. Other plans include an evaluation of all product categories "to determine the proper merchandising mix to ensure the profitability of its stores." Phar-Mor was founded in 1981 by Monus and current President and CEO David Shapira. Major shareholders include the Giant Eagle supermarket chain, also headed by Shapira, with a 35% stake; and Corporate Partners, an investment fund sponsored by Lazard Freres, with a 17% stake, Phar-Mor said.
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