PHAR-MOR Creditors target chain's leaders
They say the co-CEOs are biased toward their own buyout bid.
By DON SHILLING
VINDICATOR BUSINESS EDITOR
YOUNGSTOWN -- Phar-Mor's two out-of-town chief executives are battling with a Minnesota drugstore chain for ownership of the company.
Whether one of them acquires the money-losing drugstore chain could be settled soon.
A hearing is to be held in U.S. Bankruptcy Court in Youngstown if Phar-Mor and its creditors committee haven't resolved their differences over the future of the company by May 16.
The committee has stepped in because it says the co-CEOs, Abbey Butler and Melvyn Estrin, have been wasting company money and have been biased in favor of their own bid.
Butler and Estrin have proposed buying the company to take it out of bankruptcy court. Butler and Estrin are partners in Avatex, which was a minority partner when Phar-Mor emerged from bankruptcy court in 1995 and then acquired 40 percent ownership in 1997.
The creditors committee says Butler and Estrin haven't given full consideration to an offer from Snyders Drug Stores of Minnesota, which wants to operate at least 30 of Phar-Mor's 74 stores.
Another option is for Phar-Mor to continue its efforts to reorganize and emerge from bankruptcy court under its current form.
Brett Miller, lawyer for the creditors committee, said that option remains possible but added that it is difficult to reorganize a company that is losing as much money as Phar-Mor.
Phar-Mor said that it takes more than a few months to turn around a company of its size and that it is trying to protect the jobs of its employees.
Snyders has asked the court for quick action because Phar-Mor lost $18 million in its first six months under bankruptcy protection and it is worried that the value of the company's stores is declining.
Before Phar-Mor and the creditors committee agreed last week to try to work out the issue, the committee had asked that a trustee be appointed to manage the company because of the "abuses and neglect" by Butler and Estrin.
Before the September bankruptcy filing and since, the CEOs have taken "every opportunity to line their pockets," the committee said in court documents. Despite having salaries of $535,000 plus bonuses, the company paid $3 million in the last fiscal year for expenses for the CEOs, including private jets and East Coast offices, the documents said. Butler lives in Florida and Estrin lives in Washington, D.C.
Butler and Estrin were the focal point of a court hearing Tuesday over an incentive pay plan proposed by Phar-Mor. The company asked the judge to approve paying 53 employees a total of $1.17 million if the company meets its financial target at the end of its fiscal year on June 30.
Judge William Bodoh approved paying money to all employees except Butler and Estrin, who were to receive $321,000 of the total. He said the payments were "disguised dividends" because testimony didn't indicate that Butler and Estrin have duties that would impact the company's ability to meet financial goals.
Martin Seekely, Phar-Mor chief financial officer, testified under cross-examination that one of the two had been to Phar-Mor headquarters once since the bankruptcy filing.
Company executives talk to Estrin by phone several times a day, but conversations with Butler depend on what issues face the company, Seekely said.
John Ficarro, Phar-Mor chief administrative officer and general counsel, said after the hearing that Phar-Mor would ask for another hearing to provide more evidence on the duties of Butler and Estrin. The job of the CEO is to set strategic direction, not oversee operations, he said.
If that happens, Miller said he would call "a parade of witnesses" from Phar-Mor offices to show that Butler and Estrin are not involved in daily operations.
The creditors committee argued against the incentive plan, saying half of the employees already are receiving retention bonuses if they stay with the company through its bankruptcy proceedings.
It also took issue with paying bonuses for a company that is doing poorly. The bonuses are to be paid if the company meets its target of losing no more than $12.9 million in the first six months of this year.
"The management team should not be compensated for achieving very poor financial results," said Michael Eisenband, managing director for Ernst & amp; Young and financial adviser for the committee.