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A Scandal Waiting To Happen


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A SCANDAL WAITING TO HAPPEN

When Colorado officials were shopping around for investors for their Colorado Rockies expansion baseball franchise (page 69), Michael I. Monus of Youngstown, Ohio, looked like just the ticket. Monus, who had other sports interests, was the high-living president of Phar-Mor Inc., the $3 billion drugstore chain. That was good enough for everybody. "We were comfortable with Monus," says Jerry McMorris, another Rockies investor. "Phar-Mor is a big company."

Until a couple of weeks ago, everybody was comfortable with Mickey Monus. Then, on Aug. 4, came a startling revelation. In an unfolding scandal that threatens the company's survival, Phar-Mor Chief Executive David S. Shapira has accused Monus, Chief Financial Officer Patrick B. Finn, and two others of masterminding a three-year, $350 million fraud to siphon off some $10 million in cash and overstate the value of the company's inventories and earnings. The FBI and the U.S. Attorney's office in Cleveland now are investigating Monus, who has disappeared. Through his attorney, he declines to comment. Shapira, who co-founded Phar-Mor with Monus a decade ago, says he's dumbfounded: "It's a scheme that couldn't possibly work in the long run."

Part of the reason the scheme worked as long as it did, a BUSINESS WEEK investigation has found, is that Monus operated with amazingly little oversight. In the past 10 years, Monus took stakes in, or purchased outright, more than two dozen companies. He also founded a fledgling pro basketball league and sponsored women's pro golf tournaments.

Along the way, the executive acquired some powerful backers, including PNC Financial Corp. and Westinghouse Credit Corp. Youngstown shopping-mall magnate Edward J. DeBartolo and the prestigious Lazard Freres & Co.'s Corporate Partners investment fund took stakes in Phar-Mor. J. P. Morgan was the agent bank for the Rockies partnership deal.

Most of those high-powered outfits aren't commenting, and those who are talking have been pointing fingers. Colorado Governor Roy Romer says he thought the Rockies partners had investigated Monus. The partnership says it figured the National League did that job. The league says it's not taking any blame: "Since Phar-Mor didn't know about this until recently, I don't see how baseball could have known," a spokeswoman says.

For their part, Phar-Mor execs blame the company's outside auditor, Coopers & Lybrand, for much of their troubles. Coopers, which now has been replaced by DeloitteTouche, isn't buying it. "Responsible boards have oversight of their management and knowledge of their company's operations," says Harris J. Amhowitz, Coopers' general counsel. "This whole affair is unusual and apparently designed to posture, bluster, and transfer blame."

FAMILY BACKERS. Many of Monus' big-league ties seem to have been drawn in by Phar-Mor's blitzkrieg success. The drug chain, after all, took just 10 years to grow into a 305-store behemoth. In fiscal 1992, ended in June, revenues topped $3 billion. It's true that financial information for private companies is scarce, but few investors seemed even to ask for details--indeed, one Phar-Mor backer says that he only started receiving actual financial statements this year.

Nonetheless, Phar-Mor had made some filings with the Ohio Securities Div. They show the drugstore chain lost money in fiscal 1984 and 1985 and never cleared more than $1.4 million in any of the next three fiscal years. In the last six months of 1988, the latest period for which Ohio has a profit report, the retailer made almost $5 million on sales of $462 million.

Even if they hadn't seen those filings, investors might have wondered about Monus himself. In the stuffy drugstore trade, the flamboyant 44-year-old was out of place. He traveled by white limousine, often with an entourage. In his quiet hometown of Youngstown, Monus is anything but quiet. About the time his first marriage broke up, Monus began dating a local teenage girl. And he was building a new 18,000-square-foot home, complete with indoor basketball court.

Monus also seems to have avoided scrutiny based on the company he kept. Much of Phar-Mor's management and startup money came from the venerable Tamarkin Co., the family grocery chain and distribution firm. The family isn't talking. There's also the Shapira family's Giant Eagle Inc., a 50-store Pittsburgh supermarket chain with an estimated $1.5 billion in sales. The company bought Tamarkin, where Monus was working as a vice-president, in 1981. Giant Eagle bankrolled Monus and Shapira's idea for a discount chain of drugstores in exchange for 50% of the action. That backing gave Monus enormous credibility, since Shapira is a member of Pittsburgh's establishment.

But running one of the nation's largest private drugstore chains wasn't enough for Monus. Friends say he saw Phar-Mor as a means to branch out into professional sports--his real passion. In 1987, he co-founded the World Basketball League. Basketball was just the beginning. By 1990, Monus, a low-handicap golfer, started sponsoring two Ladies Professional Golf Assn. tourneys at a cost of more than $1 million a year. In 1990, he invested in the Rockies.

FAST LANE. Packaging the games was the next step. Monus planned to use his part-ownership in Sure Shot Teleproductions & Transmissions Inc., a satellite communications firm, to televise his sports events, including the Rockies. Ad dollars would be squeezed from Phar-Mor's huge suppliers, such as Coca-Cola Co. and Fuji Photo Film, former WBL owners explain. "He fancied himself the new Ted Turner," says Michael C. Smith, an original WBL partner and part-owner of the Calgary 88s.

But the WBL was Monus' downfall. Shapira contends at least $10 million in Phar-Mor money was funneled to the money-losing WBL, which peaked at 10 teams. Eric Newsome, a former Youngstown Pride player and part-owner of the now-defunct Boca Raton team, says Monus treated players like members of the National Basketball Assn., putting them up in first-class hotels. Monus let star players live in his Youngstown home and frequently co-signed car loans for them, Newsome says.

As the league's general partner, Monus controlled at least 60% of each team. That meant he was on the hook for most of the league's expenses--and losses. Whenever the teams needed cash, the owners say they called Phar-Mor CFO Finn, or a contact at Phar-Mor's small-business division. Finn's attorney declined to comment.

Blair Habuda, a CPA who headed that division from last November until he was laid off recently, confirmed that his group handled the personal investments of Monus and other Phar-Mor backers. He said the division had a check-writing machine with Monus' signature that was routinely used to move Phar-Mor funds to the WBL and elsewhere.

Still, the league was doomed from the start. Travel cost a fortune. U.S. fans stayed away in droves. In Youngstown, announced attendance of 1,200 people or so was regularly inflated by 100% or more, local sportswriters say. It was hard to take the WBL seriously: One team's mascot was a helium-filled pig.

After Monus failed to pay bills through most of the 1992 season, the league folded on Aug. 1. Local owners were left with debts of over $200,000. "Monus left a trail of unpaid bills and broken promises," says Milton Kantor, a Dayton (Ohio) grocery distributor and partner in the local WBL franchise.

POSH PARTY. If the WBL wasn't enough to raise red flags among Monus' backers, his other business failings might have. In 1989, he invested in and became a director of British Columbia-based Battery One-Stop Inc. Last December, its U.S. operations filed for Chapter 11, after expansion plans failed.

Phar-Mor had its own ups and downs. Indeed, retail consultants and some distributors say Phar-Mor had a cash crunch beginning in the first quarter of 1991, at least partly because of massive new store openings. Phar-Mor wasn't paying many bills and was taking substantial unauthorized deductions from contract prices. Relations with suppliers grew so bad that Phar-Mor brought 200 together for a posh reception. Says one who attended: "We all joked that you didn't get an invitation unless Phar-Mor owed you more than $1 million."

The crisis passed after the company raised badly needed capital (table, page 33). Between June, 1991, and last March, Phar-Mor raised some $467 million, including the $200 million Corporate Partners paid for a 17% stake. Phar-Mor also upped its revolving credit line by a third, to $600 million.

With revelations of inflated earnings and inventories, it's doubtful that Phar-Mor ever posted anything but meager profits. Shapira confirms that Phar-Mor hasn't been in the black for the past three years, perhaps longer. Now, to keep afloat, Phar-Mor must keep supplies coming in. And amid the scandal, many suppliers are stopping shipments. Indeed, Phar-Mor has laid off nearly 700 employees, most of them from its huge distribution facility near Youngstown.

Besides layoffs, Shapira has halted the planned expansion of another 300 stores over the next five years and stopped building a new distribution center in Jacksonville, Fla. One investor estimates that up to 30 existing stores may be closed. Yet Shapira remains upbeat. "The company has suffered a tremendous blow, but I'm confident it will emerge strong," he says. A lot will depend on how deep Monus' alleged fraud runs--and whether Monus turns up.THE RISE AND FALL OF MICKEY MONUS

1982--Michael "Mickey" Monus and David Shapira open first Phar-Mor store.

Monus named president, Shapira CEO

1987--Monus launches World Basketball League. Phar-Mor grows to 68 stores

1989--Phar-Mor sales reach $1 billion; chain grows to 162 stores

1990--Monus invests in the Colorado Rockies baseball team. Phar-Mor hits 200

stores; sales top $2 billion

JUNE, 1991--Corporate Partners, a Lazard Freres fund, pays $200 million for 17%

of Phar-Mor

OCTOBER, 1991--Phar-Mor sells $112 million more of stock in private placement

MARCH, 1992--Phar-Mor wins 33% increase in credit line, to $600 million. Eleven

insurance companies lend an additional $155 million

JULY, 1992--Phar-Mor opens its 300th store; sales reach $3 billion. Shapira

investigates alleged embezzlement, fraud in Phar-Mor financials. Monus is fired

AUGUST, 1992--WBL folds. Monus gives up position as a Rockies partner, sells

stake in the team, and disappears. Phar-Mor takes $350 million charge to

earnings, alleges that Monus diverted $10 million to WBL, and calls in FBI.

Phar-Mor lays off nearly 700 workers

Michael Schroeder in Pittsburgh and Zachary Schiller in Youngstown, with Sandra Atchison in Denver, with bureau reports


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