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FOXMEYER CASH RESERVES SHOULD BE SUFFICIENT TO WEATHER PHAR- MOR TROUBLES, WHOLESALER SAYS; PHAR-MOR OWES FOXMEYER $74 MIL., SCHERING-PLOUGH $6.2 MIL.

Executive Summary

FoxMeyer's cash reserves of over $50 mil. should be sufficient to see the wholesaler through any further difficulties arising from the sales and earnings misstatements and bankruptcy filing by its largest customer, the Phar-Mor deep discount chain. The wholesaler's invested cash balances (cash accounts and short-term receivables) have ranged between $52 mil. and $73 mil. during the most recent months, the company reported in an Aug. 18 statement. At the end of June, for example, cash and short-term investments totaled $71.2 mil. FoxMeyer also has an unused $200 mil. working capital facility, which it believes will continue to be available even in the event that the entire amount due to the wholesaler from Phar- Mor at the time of its bankruptcy filing ($74 mil.) has to be written off. FoxMeyer's lead banks for the credit facility are Paris-based Banque Paribas and NationsBank Texas. The wholesaler mounted a publicity effort during the week of Aug. 17-21 to try to counter continuing concerns about the fallout effect of Phar-Mor's difficulties on FoxMeyer. The Youngstown, Ohio discount chain filed for Chapter 11 bankruptcy protection on Aug. 17. "We have evaluated the impact that Phar-Mor's action will have on near-term liquidity and...we are highly confident that there will be no cash constraints generated by the Phar-Mor problem," FoxMeyer President Robert King declared on Aug. 18. Phar-Mor accounted for 16% of the Dallas-based wholesaler's business in the quarter ended June 30. FoxMeyer said it is owed a total of approximately $74 mil. by Phar-Mor and is listed in bankruptcy court documents as Phar-Mor's top unsecured trade creditor with a balance due of $43.2 mil. Phar-Mor revealed earlier this month that it will take a $350 mil. write-off stemming from a fraud and embezzlement scheme involving top execs ("The Pink Sheet" Aug. 10, T&G-15). FoxMeyer has put in a reclamation claim for the 10 calendar days of shipments prior to Phar-Mor's bankruptcy filing and said it believes "some level of recovery can be anticipated" for the remaining amount owed by Phar-Mor. King noted that FoxMeyer is "prepared to work with Phar-Mor as the company attempts to reorganize its business." In other moves to address potential supplier concerns, FoxMeyer announced beefed-up agreements with other retail chains, and majority FoxMeyer shareholder National Intergroup disclosed tentative plans to buy back FoxMeyer stock. On Aug. 20, FoxMeyer announced a seven-year agreement in principle with Minnesota-based Snyder's Drug Stores to become the upper Midwest chain's exclusive vendor outside of direct manufacturer sales. FoxMeyer estimates that annual sales from Snyder's will increase to $170 mil. from the current $40 mil. level. Snyder's owns 65 drug stores, the majority of which are in Minnesota, and distributes to an additional 193. Of these, 125 are independent stores operated under the Snyder's name. Snyder's revenues in the fiscal year ended in July totaled $221 mil. FoxMeyer additionally has agreed to purchase Snyder's Eagan, Minn. distribution facility. Snyder's will continue to handle communications between the warehouse and the retail stores. FoxMeyer also highlighted new contracts signed July 14 and 28 with existing accounts Omnicare and Perry Drug Stores, respectively. FoxMeyer expects to gain up to $2 bil. in new sales from the deals over the next five years. In January, FoxMeyer signed an exclusive supply agreement with Tulsa, Okla.-based May's Drug Stores, which operates 34 stores. National Intergroup announced Aug. 19 that it is studying the "advisability and feasibility" of purchasing enough shares to gain the 80% needed to consolidate FoxMeyer for tax purposes. Currently, National Intergroup holds 70% of FoxMeyer's 30 mil. shares of outstanding common stock. FoxMeyer has been able to come back from the loss of significant contracts in the past although none have been of the magnitude of the possible loss of Phar-Mor. In May 1991, number two customer Kmart downgraded FoxMeyer from a primary to a secondary supplier. Phar-Mor was FoxMeyer's number one customer. FoxMeyer's business with Wal-Mart dropped from $160.5 mil. in FY 1989 to $66.7 mil. in FY 1990. Other major trade creditors to Phar-Mor and its distribution and warehousing subsidiary Tamco include Schering-Plough, Warner- Lambert, SmithKline Beecham and Johnson & Johnson subsidiary McNeil Consumer Products. Schering-Plough is owed $6.2 mil. and Warner-Lambert is owed $2.5 mil. by Phar-Mor, according to documents filed in Youngstown U.S. bankruptcy court. SmithKline Beecham and McNeil Consumer Products are listed as owed $1.1 mil. and $875,453, respectively, by Tamco. Some trade creditors indicate that they are due amounts in excess of those listed in the filing. The bulk of Schering-Plough's claim stems from a shipment of $5.5 mil. in sun care products made in January and February that came due for payment in midyear. The firm also ships other OTC products such as foot care products directly to Phar-Mor and sells products to Phar-Mor through Tamco on a limited basis. Schering- Plough is currently shipping to Phar-Mor on a cash-in-advance basis; further shipments to Phar-Mor are under review. SmithKline Beecham had been withholding shipments to Tamco since the beginning of August due to an unrelated matter: SmithKline Beecham was discussing the amount owed by Tamco. Beginning just prior to Phar-Mor and Tamco's filing for bankruptcy, SmithKline Beecham resumed shipping to Tamco on a cash or check with delivery policy. Based on 1991 sales, Phar-Mor and Tamco together are the fourth largest account in SmithKline Beecham's consumer brands division. Tamco's filing lists a balance of $875,453 due to McNeil Consumer Products, but the current total is estimated at $1.9 mil. Tamco owes J&J and affiliates as a whole a total of $2.4 mil. and Phar-Mor owes J&J $2.7 mil. The majority of the shipments to Phar-Mor and Tamco were Tylenol products. J&J ceased shipping products to the firms when Phar-Mor initially announced the fraud and embezzlement scheme and associated write-off. Among Phar-Mor's top 20 trade creditors listed in the bankruptcy filing are: FoxMeyer; Schering-Plough; Nestle, listed as due $5.7 mil. (from Phar-Mor and Tamco); Gillette, listed as due $5.4 mil.; Gibson Greetings, owed $5.2 mil.; and Levy Home Entertainment, due $5 mil. At an Aug. 18 Phar-Mor bankruptcy hearing in Youngstown, the court approved the use of an approximately $50 mil. financing arrangement to continue operations and purchase merchandise, and cleared the continued payment of salaries and wages to employees. Phar-Mor noted that it is negotiating to receive additional financing for seasonal merchandise needs within the next few weeks. Phar-Mor has laid off 1,076 of its employees since Aug. 4.
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