It was tough for the well-trained, sophisticated designers of the likes of Warner's to hang on to their niche. And to make money.

Warner's had a long-standing policy that aimed for a 100 percent markup, an industry standard. That means a sofa that cost Warner's $3,000 should ideally sell for $6,000. The company required at least a 50 percent markup in order for designers to earn a commission, which was 20 percent of the profit.

Other design houses, however, had met the crunch by going to a commission structure of "cost plus" 30 to 40 percent of sales, and an hourly rate for design services.

But Warner's would not change. It had been successful under the same formula for four decades. It had weathered recessions.

"You have to have a 50 percent markup in order to be profitable and to stay in business," Ron Warner says matter-of-factly. Nevertheless, the company aimed for 100 percent.

In June of 1988, Ron Warner looked at the economic horizon and decided to diversify. Ebbett was running Warner's Furniture and Interiors pretty much without him, anyway. Warner started a subsidiary called Sofas & Chairs, which made just that, and ran it with his daughter Christi.

A customer could select a style and a particular fabric and have the whole thing made to order. And Warner's could keep the profits inside the company. Warner later started Warner Imports, which imported silver products like picture frames from Mexico.

The subsidiaries were designed to boost Warner's profitability, but its employees allege they drained the company.

A September 1994 audit of Warner's Interiors and subsidiaries by Tucker Alan Inc., commissioned by Bank One, shows that the business and its subsidiaries lost a combined total of $85,294 between 1989 and 1992, primarily because of $180,000 used to support Sofas & Chairs and Warner Imports.

Ebbett, who refused to be interviewed for this story, says in an October 1994 deposition that Sofas & Chairs had quality problems, so he quit ordering from the company. Warner's Interiors was generating 60 to 70 percent of the sales of Sofas & Chairs, according to Warner's.

"I would bring in a deposit check from a client who would give us 50 percent down. All the checks were supposed to be utilized to start the work for that client's purchase," says Kirk Guthrie, a former designer at Warner's.

"In fact, in the last year and a half, maybe two [before November 1992], those funds would be utilized to pay overhead and expenses and, I feel, to support Warner's Imports and Sofas & Chairs.

"It is my belief that if the money hadn't been drained from the company for Warner's Imports and for Sofas & Chairs, the company still would be solvent and I would still be employed there," says Guthrie.

Warner argues that the subsidiary business is being made out to be some sort of financial scapegoat for other problems at Warner's.

"Every nickel of Warner Imports was my own money. Not a nickel of corporate funds went into that business," Warner says.

But by early 1992, Warner's Furniture and Interiors was hemorrhaging. Joyce Bezdicek, Warner's former controller, sent memos to Warner saying that cash was tight and that the business could not continue to fund Sofas & Chairs. (Bezdicek did not return phone calls from New Times.) Warner argued that that couldn't be the case.

He rode Ebbett constantly about money. Ebbett, he says, told him that things were even worse at other design houses. And, in fact, Barrows Furniture, one of Warner's biggest competitors, closed its doors in the Valley. A design center in Tempe filed for bankruptcy.

"I'm really stupid. I think business is bad," Warner says. "In my world, things are bad. People lost homes, land and money. The market just went downhill. All the things were there to make it believable."

Warner gave up his salary and the rent that the business paid him on the building he owned. Suppliers went unpaid. Cash was tight. And yet there appeared to be business throughout the store.

"As I had told Carolyn," Warner says, "`We have a lot of business and we have no money. The two don't go together.'"

On a fall morning in 1992, Ron Warner discovered what he now believes is the reason his company was losing money. David Wilcox, a former employee of Warner's Interiors, met Warner for breakfast. It was the beginning of a nearly three-year saga that has not yet completely unfolded.

Wilcox told Warner that his employees had been diverting hundreds of thousands of dollars from his company in a scheme that involved several of the firm's employees, including Ebbett, president of Warner's Interiors and Ron Warner's trusted friend. Wilcox later confirmed that in an affidavit filed in court.

It was unbelievable. Yet, in Warner's mind, it made a jumble of puzzle pieces fit together.

"I had no idea that Gerry was involved," Warner says. "I guess I would have thought maybe someone was embezzling money. But not Gerry."

Warner began investigating. He came into the store at night and went through records trying to verify what Wilcox had described.

By early November, Warner had seen enough. There were keys to storage lockers in state and out under Warner's name. There were invoices for jobs there was no record of. On November 12, 1992, Warner called all of the employees together, told them it didn't look like the business was going to make it and that he would have to let them all go immediately.

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It always warms my heart to see how a small business can develop into a million-dollar enterprise with sheer hard work and talent. But when that same business shatters, the feeling can be crushing. Still, this incident at Warner’s not only opened doors to queries, but also opened eyes to the dirty world of money-making.

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