Whelan Woes

Just as a used car may seem perfect yet contain hidden technical flaws, so may a second-hand company surprise its buyer with fiscal wheel wobbles, creaks in its books. Last summer George Kenan Morrow and Frederick Morrow headed a syndicate which acquired from the Whelan interests Tobacco Products Corp., owner of 80% of United Cigar Stores stock (TIME, Aug. 26). The first hint of United Cigar Store wobbliness came in October when the preferred dividend was passed pending an investigation of the company's finances. Concrete examples of major defects became apparent last fortnight when the Morrows paused in their investigation, reported that 1928 profits, given by the old management as $8,352,000, were actually $4,525,000; that the 1928 surplus of $21,915,000 should have been a deficit of $776,000.

Lest the revelation of these discrepancies be taken as an accusation of Whelan dishonesty, the new management was careful to blame the divergence upon use of "different theories of accounting." Quickly New York's Attorney-General announced he would investigate the Whelan management, learn if the profits had been overstated in an attempt to sell stock. Last week the Whelans, through shrewd Lawyer Samuel Untermyer, made their first answer.

Although an attorney seldom reveals his clients' affairs, Mr. Untermyer said: "The bulk of the large private fortunes of the Whelans and their families have at least temporarily been wiped out. . . . No one has suffered as much as the Whelans, who, I am told, are by far the largest individual stockholders." Lawyer Untermyer also announced that the Whelans not only sold no stock but bought more after their favorable earnings report was made.

After thus defending Whelan honesty and lamenting the fact that George J. Whelan is gravely ill in a sanatorium, Mr. Untermyer placed the blame for United Cigar Store's troubles upon the cigaret war, challenged the Morrows to a battle of accounting.

Accounting is far from an exact science. Patents valued at $1 by a conservative accountant may be valued at $1,000,000 by another. Gravely will some experts argue that undervaluation is as much of a sin as overvaluation. The theme of Mr. Untermyer's defense was that the Morrows had given the company a vigorous deflation, so vigorous that it can not help but do well in future and thus reflect good management upon them, bad management upon the Whelans. Fluently he pleaded: "The men who have given their lives to this business, have built it up from small beginnings and have been putting their money into it . . . are entitled to fair treatment."

Stockholders wishing to accord the Whelans fair treatment had, however, to decide between some astonishing divergences, which halved profits and turned a surplus to a deficit.

Appreciation. All conservative accountants believe a company's investments should be written-down if they depreciate, but never up until actual profit is taken. A few accountants hold that investments should be carried at cost whatever happens in the market. Very rare is the theory by which, as soon as securities appreciate, the gain is written in as profit. Yet this is the theory on which the Whelans operated. One of the most important items in the new Morrow statement was the deduction of more than $3,000,000 paper profits shown in the Whelan statement.

Deferred Expenses. When a company makes unusual expenditures, the benefits of which will be reaped for many years, they may be "deferred"' or held to be charged off during those years. The Morrow management found $521,000 deferred items on United Cigar's books, $469,000 of which had been incurred in 1928. All of these the Morrow accountants revised and charged against 1928.

Employes' Subscription. United Cigar Store employes were allowed to subscribe to stock at much higher than the present market price ($6). Although these subscriptions could be cancelled the employes were afraid to cancel them. The Morrow management made it clear that cancellations were expected, established a $2,000,000 reserve to put the returned stock upon the books at par instead of cost.

With several other revisions, including an enlargement of the reserve for depreciation, the Morrow statement promised stockholders a more complete report in February. But even after United Cigar Store's finances are straightened out the Morrows' attempt to reorganize the tobacco business will be far from completed. Stocks of all the Morrow tobacco group and the inextricably affiliated Schulte group have depreciated greatly. General opinion is that a thorough reorganization will be necessary before famed Morrow Merchandising Methods can be applied to the retail tobacco trade.

New York Stock Exchange. Although United Cigar Store's troubles are unusual for a company listed upon the New York Stock Exchange, Exchange officials quickly denied that they would make an investigation or judge between the new and old reports. The Stock Exchange requests that listed corporations issue statements frequently, but in no way vouches for these reports. Another reason why the Stock Exchange might hesitate to investigate: there is only one penalty for irregularities--removal of the stock from Exchange trading.

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