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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended July 31, 1997
Commission File Number 2-96510-NY
DG LIQUIDATION, INC.
(formerly "Drug Guild Distributors, Inc.")
(Exact name of Registrant as specified in its charter)
New Jersey 11-2269958
(State or other jurisdiction of (I.R.S. Employer I.D. No.)
incorporation or organization)
c/o Harold Blumenkrantz, President
6 Industrial Way West, Building A, Eatontown, NJ 07724
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (732) 542-2300
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES | | NO |X|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
registrant's best knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K. |X|
There is no trading market for either class of the Registrant's voting
securities.
As of July 31, 1997 there were outstanding 9,551,798 shares of the Registrant's
Common Stock and 22,622.30 shares of the Registrant's Preferred Stock.
Documents incorporated by reference: None
1
PART I
ITEM 1. BUSINESS.
DG Liquidation, Inc. (formerly known as "Drug Guild Distributors, Inc.",
and sometimes referred to as the "Company" or the "Registrant"), was previously
engaged in wholesale distribution of a wide variety of products almost
exclusively to drugstores and health and beauty product stores primarily in the
State of New Jersey and the Greater New York City metropolitan area. The
products were comprised of four groups: (1) legend drugs (approximately 80% of
sales), which are dispensed to the public only on a doctor's prescription in the
form of pills, tablets, capsules or bulk ingredients; (2) patent or non-legend
drugs (approximately 13% of sales), which do not require a prescription and
include such items as cough medicines and aspirin; (3) sundries (approximately
5% of sales), which include such items as clocks, soaps, deodorants, hair driers
and most other non-pharmaceutical products commonly sold in drugstores; and (4)
certain items which were sold under the Company's private labels (approximately
2% of sales), including vitamins, shampoos and cough syrups.
Asset Sale.
On July 3, 1997, the Company sold substantially all of its assets, business
and goodwill, including the exclusive right for use of the name "Drug Guild," to
privately-held Neuman Health Services, Inc. and Neuman Distributors, Inc.
(collectively referred to as "Neuman") pursuant to an Asset Purchase Agreement
dated July 1, 1997. The sale specifically excluded Company claims for tax
refunds or claims against its officers, employees or third parties, certain
insurance policies, certain motor vehicles, any net operating loss carry forward
and any other assets or claims of the Company that did not involve its inventory
or were not specified on the Company's closing balance sheet.
In connection with the sale of its assets to Neuman, the Company adopted an
Plan of Liquidation (the "Liquidation Plan") which was approved by the Board of
Directors and stockholders on June 27, 1997. The Liquidation Plan provides for
sale of the Company's operating assets, payment of or provision for payment of
all of the Company's remaining liabilities and obligations, payment to the
holders of the Company's preferred stock in the amount of $100 per share,
payment of remaining amounts to the Company's common stockholders and
dissolution of the Company.
Since the sale of assets to Neuman, the Company has been operating under
the Liquidation Plan and its financial reporting is now made in accordance with
the liquidation basis of accounting. Therefore, all discussions in this annual
report relate to the Company in liquidation.
2
Neuman agreed to assume and to pay, perform or discharge certain specified
liabilities of the Company, including leases, trade accounts payable, accrued
expenses as reflected on the closing balance sheet, the collective bargaining
agreement with the union local representing former employees, expenses incurred
in the ordinary course of business, bank debt and long term notes. However,
Neuman did not assume severance or termination payments, worker compensation
claims, liability for any federal, state or local taxes, environmental claims,
undisclosed or contingent liabilities, penalties, Drug Enforcement
Administration fines or liabilities with respect to the preferred stock of the
Company.
The purchase price was $15,646,000 and was based upon the Company's net
asset value as of June 30, 1997, as adjusted by the results of a post-closing
audit by Neuman's independent auditors. The purchase price was subject to
adjustment for certain items of accounts payable, accrued expenses and accounts
receivable. Neuman and the Company had the right for a period of one year
following the closing to advise each other of any adjustments to items of
accounts payable and accrued expenses that had been assumed by Neuman. In
addition, Neuman had the right to reassign uncollected accounts receivable and
notes to the Company, less certain credits to which the Company may be entitled.
As of January 2000, the final adjustment of the purchase price had not yet been
determined.
The adjusted purchase price paid to the Company, exclusive of Neuman's
assumption of liabilities, consists of the following:
(a) a cash payment of $4,000,000;
(b) a four-year promissory note, secured by a letter of credit,
for $10,646,000, bearing interest at a rate determined quarterly equal to the
higher of 1% plus the 180-day London Interbank Offered ("Libor") rate or the
rate specified for U.S. Treasury Notes with maturities equal to the remaining
term of the note, but no lower than the Federal Rate as disseminated by the
Internal Revenue Service from time to time (the "Secured Note");
(c) an unsecured promissory note for $1,000,000 payable four years
after the closing without interest (the "Unsecured Note"); and
(d) an option in favor of the Company's shareholders to purchase,
under certain conditions, an aggregate amount of Neuman shares equal to 10% of
Neuman shares to be made available in a public offering in the event Neuman
files a registration statement with the Securities and Exchange Commission prior
to the fourth anniversary of the closing date (July 3, 2001) for the purpose of
an initial public offering of Neuman shares, at a purchase price equal to 85% of
the per share offering price.
The Secured Note is being paid as follows:
(a) $2,000,000 was paid during the first year in equal quarterly
payments together with interest on the amount being paid;
(b) the first year's interest on the balance of the Secured Note
was based upon the principal of that Note after adjustments arising out of the
Neuman post-closing audit and was paid together with the first payment due after
the adjusted principal amount of the Note was determined; and
(c) the remaining principal of the Secured Note is being paid over
the following three years in 12 equal quarterly principal payments, with
interest on the unpaid balance.
As of the date of this report the Company has received total payments from
Neuman on the Secured Note of $10,594,808, of which $1,515,151 represents
interest. The Company is presently due quarterly principal payments on the
Secured Note of $811,416.66, plus accrued interest on the unpaid balance.
3
Neuman had the right to reassign uncollected accounts receivable and notes
to the Company and have the principal of the Secured Note reduced by that
amount, less certain credits to which the Company may be entitled (the "Adjusted
Principal Amount"). Neuman is then prohibited for a period of two years from
doing business with any customer whose indebtedness has been reassigned. See
Item 3 - Legal Proceedings. Neuman also agreed to various provisions preserving
the payment terms of customers of the Company and provided employment offers to
the Company's employees.
Employees.
The Company has no full-time employees. It has entered into consulting
agreements with its President, Harold Blumenkrantz, and with Jay Reba, its
former Vice President-Finance, for the purpose of implementing the Liquidation
Plan. The terms of the consulting agreement with Mr. Blumenkrantz provide for
his part-time employment on a month-to-month basis for a consulting fee of
$5,000 per month, plus reasonable and customary expenses. The consulting
agreement with Mr. Reba is in writing, dated June 4, 1998, and provided for his
consulting services for a minimum of three months and on a month-to-month basis
thereafter for a consulting fee of $11,400 per month, plus reasonable and
customary expenses and a severance payment of $34,200. Mr. Reba's consulting
agreement terminated August 31, 1999 and he is now engaged by the Company on a
month-to-month basis to render limited consulting services for a fee of $2,750
per month.
Competition.
Competition is no longer a material factor for the Company, since it is
engaged only in implementing its Liquidation Plan and is not actively engaged in
pursuing business as a going concern.
ITEM 2. PROPERTIES.
The Company occupies office space, on a month-to-month basis, in the
offices of its President, Harold Blumenkrantz, in Eatontown, New Jersey, and
Boca Raton, Florida, at an annual cost, including telephone service, photocopies
and postage, of $1,200.
ITEM 3. LEGAL PROCEEDINGS.
DG Liquidation, Inc. v. Anchin, Block & Anchin, LLP.
-----------------------------------------------------------
On March 3, 1998, the Company filed a complaint in Supreme Court of the
State of New York, in New York County, against its former auditors, Anchin,
Block & Anchin, LLP (the "Anchin Firm") seeking to recover damages for
professional malpractice, breach of fiduciary duty and breach of contract
exceeding $16,000,000. The Anchin Firm had previously acted in the capacities
of financial advisors, auditors and accountants for the Company for a continuous
period beginning in 1977 and ending on July 2, 1996.
4
Following an analysis of inventories undertaken by the Company in
connection with discussions it had been having with Neuman pursuant to a
February 1996 letter of intent regarding a possible merger or sale of the
Company or its business and assets, the Company discovered that it had been the
victim of a long-term inventory theft during a period commencing in or about
October 1992 and continuing through May 1996, which appeared to have been
accomplished and concealed, at least in part, through manipulation of the
Company's computer system. The Company conducted an extensive investigation and
concluded that the defalcation was accomplished by the changing of inventory
quantities in its perpetual inventory record and the changing of sale quantities
in its sales records, all of which were maintained on computer, together with
the improper removal of inventory items from the Company's warehouse facilities
amounting in all to a loss of not less than $14,900,000 of pharmaceutical
inventory.
In its lawsuit against its former auditors, the Company alleges that the
Anchin Firm breached its professional duties, as well as its contract with the
Company, by failing to adhere to the applicable professional standards and
failing to report to the Company's Executive Committee and Board of Directors
material weaknesses in the internal controls regarding the Company's inventory
accounting system which were or should have been identified by the auditors
including, but not limited to, (a) returns of inventory not being properly
processed and entered; (b) the perpetual inventory system not being used for
accounting purposes; (c) the fact that internal accounting and finance personnel
and Anchin Firm personnel were unable to balance perpetual inventory and the
other books of record; (d) that the Anchin Firm, in its performance of
additional services in connection with reconciliation of the perpetual inventory
and books of record, failed to ascertain or correct material weaknesses evident
in the inventory accounting system or effect a reconciliation of those books;
and (e) that Anchin knew or should have known, and reported to the Executive
Committee and Board of Directors, that an arbitrary $200,000 per month was being
recorded in the Company's books as an inventory "reserve" which contemplated, as
part of the rationale for its adoption, the very inventory defalcations which
the Anchin Firm failed to report to the Executive Committee and Board of
Directors.
The damages sought from the Anchin Firm relate to the loss of inventory by
reason of the defalcations taking place over a period of four years, a reduction
in the consideration received in the asset sale transaction with Neuman and
restitution of approximately $900,000 of fees paid to the Anchin Firm and
various other fees and expenses.
On April 30, 1998, the Anchin Firm filed an answer denying the material
allegations, and commenced a third-party lawsuit against members of the
Company's Executive Committee during the period of January 1990 through May 31,
1996, and the Company's corporate attorneys, alleging that if the Company is
successful in its claims against the Anchin Firm, then these third-party
defendants, by reason of their alleged failure to reasonably perform their
respective fiduciary duties, should be held liable for the losses to the Company
for which the Anchin Firm is sought to be held responsible. In October 1998,
the court dismissed the third-party claims against the Company's corporate
attorneys and the Anchin Firm withdrew its claims against the former members of
the Executive Committee, thereby discontinuing the third-party lawsuit.
The parties are engaged in extensive discovery activities which are
expected to continue for the foreseeable future and a trial is not expected to
take place until sometime in 2000. Although the Company believes it will
prevail in its case against the Anchin Firm, it is unable to predict a likely
outcome at this time.
5
Post-Closing Neuman Dispute
-----------------------------
Since in or about July 1, 1998, the Company has been in negotiations with
Neuman with regard to a proposed reassignment by Neuman to the Company of the
uncollected accounts receivable of four customers which accounted for
approximately $1,485,575 of accounts receivable purchased from the Company by
Neuman in July 1997 pursuant to the Asset Purchase Agreement. The Company had
assigned those accounts receivable to Neuman together with related security
agreements. After the closing of the asset purchase Neuman made additional
sales to those four customers and extended additional credit to them. It also
incurred legal fees and interest in seeking to collect both the pre-closing and
post-closing accounts receivables, with the result that Neuman asserts that it
has made a post-closing extension of credit to the four customers totaling
approximately $2,336,000. Neuman has told the Company that it should accept
reassignment of the accounts receivable of the four customers in an aggregate
total of $1,485,575 without reassignment of the security agreements, and that
the Secured Note, with a principal amount of $10,646,000, should be reduced
pursuant to the Asset Purchase Agreement by the $1,485,575 of the reassigned
accounts receivable.
The Company has taken the position that the security agreements must follow
the accounts receivable which they secure and that it is therefore not obligated
to accept reassignment of the accounts receivable, and therefore a reduction in
the face amount of the Secured Note, unless it also receives the security
agreements applicable to those accounts receivable. The Company has told Neuman
that pursuant to the Asset Purchase Agreement, the oldest accounts receivable
must be paid in full before the newer accounts receivable are paid and that it
is therefore entitled, under the security agreements which must be reassigned
together with the accounts receivable, to receive the full amount of the
pre-acquisition balance due of $1,485,575 out of a pending payment by a major
pharmaceutical retail chain (which had acquired the customers) to Neuman of
approximately $2,500,000 for continuing purchases.
The Company believes it likely that its differences with Neuman regarding
the proposed reassignment of the accounts receivable of the four customers will
be resolved by arbitration pursuant to the provisions of the Asset Purchase
Agreement, although no arbitration proceeding has been commenced by either party
as of the date of this report. If Neuman prevails, the accounts receivable of
the four customers would be reassigned to the Company without the security with
which they were assigned to Neuman, the principal amount of the Secured Note
would be reduced by the $1,485,575 balance of those accounts receivable and
there could be no assurance that the Company would be able to obtain payment of
the reassigned accounts receivable. If the Company prevails in its dispute with
Neuman and Neuman reassigns those accounts receivable, the Company would be paid
the full amount of the accounts receivable by the major pharmaceutical retailer
indebted to Neuman and the principal amount of the Secured Note would be reduced
in an identical amount, with the result that there would be no net change in
financial consequences to the Company as a result of the reassignment. There
can be no assurance as to the likely outcome of the current dispute, whether by
negotiation or arbitration.
6
Claim of Daniel Kantor
-------------------------
Mr. Kantor is a former director of the Company who owns or controls
approximately 134,000 shares of the Company's common stock. In October 1996,
the Company received a letter from an attorney for Mr. Kantor alleging
mismanagement of the Company and requesting additional information. In June
1997, the attorney, acting on behalf of Mr. Kantor and other stockholders who
appear to be related to Mr. Kantor, asked for copies of the Company's financial
statements over the past three years, which the Company supplied. As of the
date of this report, no other action has been taken with regard to the claims in
the October 1996 letter by either Mr. Kantor or his attorney.
Michael's Pharmacy and Michael Scicutella v. Drug Guild Distributors, Inc.,
---------------------------------------------------------------------------
et al.
- -------
The plaintiff was a customer of Drug Guild who initiated this lawsuit in
February 1997 in the United States District Court for the District of New
Jersey, alleging that the Company has conspired with co-defendant wholesalers,
McKesson Corp., Cardinal Health Company, W. Daly, Inc. and Remo Drug Corp. to
deny credit to the plaintiff that is allegedly due to it, amounting to an
alleged "group boycott" in violation of the federal Sherman Anti-trust Act and
New Jersey's Anti-trust Act, as well as a breach of an implied covenant of good
faith and fair dealing and tortious interference with the plaintiff's contracts.
The plaintiff asked for preliminary and permanent injunctions as well as a
money judgment against each defendant for what are described as actual,
compensatory, punitive and trebled damages, attorney's fees and costs and such
other relief as the court may deem appropriate. The court did not enter any
preliminary injunction against any defendant. The Company filed an answer
denying all of the material allegations of the complaint, setting forth various
affirmative defenses, alleging a counterclaim against the plaintiff for the
money it owes the Company, approximately $48,000, and asking for a dismissal of
the complaint.
The defendants, including the Company, have made motions for summary
judgment seeking dismissal of all of the plaintiff's claims, which are pending
before the court. The Company has also asked for summary judgement on its
counterclaim. The court is not expected to decide the motions until sometime in
2000. If the motions are granted, the plaintiff's case will be dismissed in
whole or in part. If all or any part of the plaintiff's claims survive the
pending motions, additional discovery will take place and the case will probably
go to trial in 2001. The Company believes that it will prevail in this case.
United States Drug Enforcement Administration
-------------------------------------------------
In June 1997 the Company accepted an offer of settlement made by the United
States Department of Justice on behalf of the United States Drug Enforcement
Administration ("DEA") relating to approximately 800 violations of record
keeping requirements which had been discovered by the DEA in a prior audit, with
the result that the Company paid a $110,000 fine to the United States Department
of Justice in full satisfaction of all claims.
7
Other Litigation and Claims.
------------------------------
On June 16, 1997 the Company entered into a settlement agreement with its
former chief executive officer concerning the Company's claims against him
regarding losses it suffered as a result of certain questionable payments which
the Company believed had been made during that officer's tenure and which the
officer denied responsibility for. The terms of the settlement agreement
provided that all such claims would be released in consideration for the former
chief executive officer contributing back to the capital of the Company all
right, title and interest in and to the 339,851.0869 shares of the Company's
common stock held of record by him and his wife and his waiver and surrender of
all of his rights to receive any unpaid deferred compensation provided for in
his Employment Agreement of October 1, 1993.
The Company is a party to several other pending legal actions, principally
motor vehicle accidents involving vehicles owned or operated by the Company and
claims for which the Company is covered by insurance. The results of these
various lawsuits and claims will not materially affect the financial position of
the Company.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The following matters have been submitted to a vote of the Company's
security holders during the fiscal year ended July 31, 1997 through the
solicitation of proxies or otherwise:
(a) The Company's annual meeting of shareholders was held on June 27,
1997.
(b) Proxies for the annual meeting of shareholders were solicited
pursuant to Regulation 14A under the Securities Exchange Act of 1934. There was
no solicitation in opposition to management's nominees for election to the Board
of Directors as listed in the proxy statement and all of those nominees were
elected.
(c) The following is a brief description of each matter voted upon at
the annual meeting of shareholders together with the number of votes cast for,
against, withheld, abstained or broker non-votes as to each such matter:
(i) The Board of Directors proposed 11 nominees for election from
whom the 7 members of the Board of Directors would be elected with the seven
highest total votes. The following named persons received the number of votes
set forth opposite their respective names, the same being a plurality of the
votes cast by holders of shares entitled to vote thereon, for the directors of
the Company for the ensuing year:
Names Votes
- ------------------- ------------
Harold Blumenkrantz 4,689,046.09
Paul Emmanuel 4,045,604.78
Michael Katz 3,946,219.09
8
Alfred Hertel 3,445,698.64
Ernest Wyre 3,170,002.20
Howard Sternheim 3,045,389.13
Jerry Koblin 3,022,921.27
(ii) A resolution submitted to the shareholders ratifying an amendment
to the Company's By-Laws reducing the number of members of the Board of
Directors to seven and those constituting a quorum to five, was adopted by the
following vote:
For the resolution 5,926,658.23 votes; Against 199,850.48 votes;
Abstained 107,488.50.
(iii) A resolution submitted to the shareholders ratifying an amendment
to the Company's Certificate of Incorporation and By-Laws to eliminate a
classified Board of Directors and provide that directors shall be elected at the
annual meeting of shareholders for a term of one year and until their successors
are elected and qualified, was adopted by the following vote:
For the resolution 5,906,515.64 votes; Against 142,663.25; Abstained
184,818.32.
(iv) A resolution submitted to the shareholders ratifying the sale of
substantially all of the Company's assets and business to Neuman Distributors,
Inc., a wholly-owned subsidiary of Neuman Health Services, Inc., was adopted by
the following vote:
For the resolution 5,353,637.76 votes; Against 1,168,890.96 votes;
Abstained 41,265.61.
(v) A resolution submitted to the shareholders ratifying the adoption
of an amendment to the Company's Certificate of Incorporation to change its name
to "DG Liquidation, Inc.", was adopted by the following vote:
For the resolution 5,326,126.59 votes; Against 1,137,180.56 votes;
Abstained 100,488.18.
(vi) A resolution submitted to the shareholders ratifying the adoption
of a Plan of Complete Liquidation of the Company providing, among other things,
for the dissolution of the Company, was adopted by the following vote:
For the resolution 5,133,653.12 votes; Against 1,329,653.03 votes;
Abstained 100,488.18.
9
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
There is no existing public market for any of the Company's securities.
As of July 31, 1997, there were approximately 381 holders of record of the
Company's Common Stock and approximately 33 holders of record of its Preferred
Stock. Since 17 Shareholders owned both Common and Preferred Stock, the Company
had 397 Shareholders as of that date. As of the date of this report, all of the
Company's Preferred Stock has been redeemed.
The Company has never paid a cash dividend and does not expect to pay cash
dividends in the future. As of the date of this report, liquidation payments
have been made to preferred stockholders ($2,262,230) and common stockholders
($4,333,360, with a reserve of $178,369 for certain stockholders who could not
be located), and additional liquidation payments will be made to the Company's
common shareholders in accordance with the provisions of the Liquidation Plan.
ITEM 6. SELECTED FINANCIAL DATA INCOME STATEMENT DATA:
This table has been omitted because the Company's financial reporting is
now being made on the liquidation basis of accounting. See Item 8 - Financial
Statements.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Since July 1, 1997, the Company has been operating under the Liquidation
Plan and its financial reporting is being made in accordance with the
liquidation basis of accounting. Therefore, the following discussion relates to
the financial statements presented on a liquidation basis, since statements
previously presented on a going concern basis are no longer material to
stockholder value.
Statement of Net Assets in Liquidation
-------------------------------------------
Pursuant to the Liquidation Plan, the Company sold substantially all of its
operating assets on July 3, 1997, subject to substantially all of the Company's
liabilities, for an aggregate price of $4,000,000 in cash paid at the closing,
an unsecured, non interest bearing promissory note for $1,000,000 due June 30,
2001 and an adjustable value promissory note recorded for $10,646,000 payable
over four years with interest at 1% above the 180-day Libor rate and
collateralized by an irrevocable standby letter of credit. The $1,000,000
promissory note has been recorded at its present value of approximately
$766,000. The purchase price is subject to additional adjustment based on the
final valuation of the assets and liabilities sold. In addition, the buyer has
the right to return any receivables not paid after one year from the sale. As
of January 2000 final adjustment of the purchase price had not been determined.
Any adjustment will be recognized in the period in which the adjustment is
determined.
10
The Company has set aside as accrued and estimated liquidation expenses an
amount believed to be adequate for payment of all expenses and other known
liabilities as well as likely and quantifiable contingent obligations, including
potential tax obligations. In the event this accrued and estimated liquidation
expense is not adequate for payment of the Company's expenses and liabilities,
each stockholder could be held liable for pro rata payments to creditors in an
amount not to exceed the stockholder's prior distributions from the Company.
The Company has therefore adopted a conservative policy of retaining sufficient
assets to insure against any unforeseen and non-quantifiable contingencies.
Statement of Changes in Net Assets in Liquidation
--------------------------------------------------------
As of July 31, 1997, the Company had net assets in liquidation of
$12,659,000. This represented an increase in estimated liquidation value of
assets over liabilities of $767,000 from the net assets at June 30, 1997, the
last day the Company operated on a going concern basis. This change was mainly
attributed to a gain on sale of net assets (primarily inventory) of $3,683,000,
and an insurance claim recovery of $1,000,000 as a result of the prior years
loss on defalcation. This was offset by the estimated costs for liquidation
(primarily legal and other professional fees) of $2,017,000 and a charge of
$305,000 on the termination of the Company's pension plan. The provision for
income taxes related to the change in net assets was $1,789,000 due primarily to
the write off of deferred tax assets.
The Company will receive payments of interest on the Neuman notes. In
addition, as a result of the Company's conservative policy of retaining assets,
the Company will earn interest income. The estimated interest income from these
sources (until July 31, 2002, the estimated date of final liquidation) is
$2,200,000. The terms of the asset sale also provided for Neuman to lease
trucks from the Company for one year for $365,000. The estimated interest
income and the truck rental are not included in the July 31, 1997 Statement of
Changes in Net Assets.
Year 2000 Issues
------------------
The "Year 2000" Issue is the result of computer systems and programs using
two digits rather than four digits to define the applicable year. Computer
systems and programs that have date-sensitive applications may recognize a date
using "00" as the year 1900 rather than the year 2000. this can result in
system failures or miscalculations causing disruption of operations including,
but not limited to, complete system failures, erroneous results and inability to
process transactions, send invoices, make payments or otherwise conduct normal
business activities.
The only computers utilized by the Company in its liquidation phase are two
desktop computers used by Messrs. Blumenkrantz and Reba. The Company's "Year
2000" compliance program involves review and updating of the desktop computer
software to versions which are "Year 2000 compliant." The Company's budget for
these activities is less than $1,000.
The Company has communicated with Neuman and understands that its financial
and payment systems have become year 2000 compliant and are expected to be fully
operational without disruption.
11
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See the index constituting a part of Item 14.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
(a) On July 2, 1996, the Company's Executive Committee decided to end
the engagement of the Anchin Firm as the independent auditors of the Company as
a result of concerns that the independence of the Anchin Firm might be deemed to
be impaired by the Company's then pending investigation of recently discovered
defalcations of inventory of the Company.
The independent auditors' reports on the Company's financial statements for
the fiscal years ended July 31, 1994 and July 31, 1995 did not contain an
adverse opinion or a disclaimer of opinion and were not qualified or modified as
to uncertainty, audit scope or accounting principles.
The Company believes, and was advised by the Anchin Firm that it concurred
in such belief, that during the fiscal years ended July 31, 1994 and July 31,
1995, and from that date to the date of termination of the services of the
Anchin Firm, the Company and the Anchin Firm did not have any disagreement on a
matter of accounting principles or practices, financial statement disclosure or
auditing scope or procedure.
The Anchin Firm had refused to provide reissued manually signed reports for
fiscal 1995 and 1994 due to their concern that they had lost their independence
as auditors because of potential claims against the Anchin Firm by the Company
as a result of the inventory defalcations discovered in May of 1996 (discussed
elsewhere in this report) and which relate to each of the three fiscal years of
the Company ended July 31, 1996. There can be no assurance that the Anchin Firm
would issue the report in its original form and without qualification if the
aforesaid concern regarding their independence was resolved.
The Company inquired of the Anchin Firm whether investors should be advised
that the previously issued report has been withdrawn and could not be relied
upon. The Anchin Firm responded that the report should not be withdrawn.
(b) On July 11, 1996, the Company engaged Richard A. Eisner & Company,
LLP ("Eisner") as its independent auditors to audit the Company's financial
statements for the fiscal year ended July 31, 1996. In November 1996, the
Company engaged Eisner to audit the Company's financial statements for the
fiscal years ended July 31, 1995 and July 31, 1994. The Company subsequently
engaged Eisner to audit its financial statements for the fiscal year ended July
31, 1997.
12
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The following individuals have served as officers of the Company during the
fiscal year ended July 31, 1997 or have been subsequently appointed to fill a
vacancy created by the resignation or retirement of an officer:
Name Age Position
- -------------------------------- --- ------------------------------------------------
Harold Blumenkrantz 59 President, Chief Executive Officer and Director
Alfred Hertel 68 Chairman of the Board and Director
Roman Englander 68 President and Chief Executive Officer (resigned)
Alan Glenn 67 Senior Vice President and Chief Operating
Officer and President (resigned)
Michael Katz 58 Vice President and Director
Howard Sternheim 65 Vice President and Director
Gerald Koblin 60 Secretary - Treasurer and Director
Paul Emanuel 71 Director
Ernest Wyre 73 Director
Mark Englander 41 Vice President (not reappointed)
Norman Genzer 55 Vice President (not reappointed)
Jay Reba 56 Vice President - Finance (not reappointed)
Martin Shapiro 66 Secretary - Treasurer (resigned)
Jack Lynch 56 Secretary - Treasurer (not reappointed)
The Company's officers hold office until the next annual meeting of the
Company's Board of Directors and until their respective successors are elected.
Harold Blumenkrantz has been a member of the Executive Committee of the
Company's Board of Directors for more than the past five years and was appointed
President in June 1997. He has been a principal of West End Family Pharmacy,
Inc., Long Branch, New Jersey, since 1962.
Alfred Hertel has been an officer and director of the Company and an officer and
a principal shareholder of Oakland Drug Inc., located in Oakland, New Jersey,
for more than the past five years.
Alan Glenn was appointed President of the Company in March 1996. He became a
Vice President in 1973; Senior Vice President in 1980; and Chief Operating
Officer in 1995. Prior thereto and for more than 25 years, he was a principal of
Ritz Drugstores, which operates in New Jersey. Mr. Glenn retired as President of
the Company on August 31, 1996.
13
Michael Katz was principal of Katz Drug, Brooklyn, New York since prior to 1989
and is now retired. Mr. Katz has been a director of the Company since 1976 and
a vice president of the Company since June 1997.
Howard Sternheim has been president and principal shareholder of Vanderveer
Pharmacy, Inc. in Brooklyn, New York, as well as other drugstores and one
variety story in the New York City metropolitan area, for more than the past
five years. He has been a director of the Company since 1976 and a vice
president since June 1997.
Gerald Koblin has been a principal of Koblin Pharmaceuticals, Inc., Nyack, New
York for more than the past five years. Mr. Koblin has been a director of the
Company since 1995.
Paul Emmanuel has been the owner of Town and Country Pharmacy, Inc., Ridgewood,
New Jersey for more than the past five years. Mr. Emmanuel has been a director
of the Company since 1985.
Ernest Wyre was a principal of Lenox Terrace Drugstore, Inc. and Fairview
Chemists, Brooklyn, New York for more than five years prior to 1987 and since
that time has been a private investor. Mr. Wyre has been a director of the
Company since 1976.
In connection with adoption of the Liquidation Plan in June 1997, the Company's
shareholders approved elimination of staggered terms for members of the Board of
Directors and reduced the number of members from 34 to 7.
The following table sets forth the names of the directors of the Company who
served during the fiscal year ended July 31, 1997 and, as to each such director,
the year in which each began as director and the number and percentage of
outstanding shares of Common Stock and Preferred Stock of the Company owned by
him. The table also contains information as to the ownership of such Common
Stock and Preferred Stock by the officers of the Company who own such securities
and by all such officers and directors as a group.
14
Common Stock Preferred Stock
Owned Beneficially Owned Beneficially
at July 31, 1997 at July 31, 1997 *
------------------- -------------------
Director Number Percent Number Percent
Name Since of Shares of Class of Shares of Class
- --------------------------------- --------- --------- -------- --------- --------
Harold Blumenkrantz 1981 36,685 .38 1,053.99 4.69
Marco Cutinello 1992 -- -- -- --
Louis Del Rosso 1986 30,790 .32 -- --
Herbert Dudak 1986 96,578 1.01 312.19 1.38
Harold Eckstein 1983 217,563 2.28 -- --
Paul Emanuel 1985 24,480 .25 -- --
Hal Epstein 1987 63,962 .67 -- --
Peter Esposito 1991 13,242 .14 -- --
Sidney Falow 1979 24,740 .26 -- --
Sanford Fishman 1976 93,705 .98 -- --
Herbert Gordon 1995 123,403 1.29 -- --
Gerald Ginsberg 1978 222,346 2.33 -- --
George Grumet 1988 47,935 .50 2,072.50 9.16
Alfred Hertel 1976 113,358 1.19 -- --
Steven J. Kabakoff 1989 50,999 .53 -- --
Michael Katz 1976 101,196 1.06 -- --
Jay Kessler 1986 112,231 1.17 -- --
Gerald Koblin 1995 43,997 .46 -- --
Jerry Koizim 1988 23,398 .25 -- --
Anthony Kranjac 1992 57,658 .60 -- --
Ely Krellenstein 1976 206,323 2.16 -- --
John Lynch 1976 289,162 3.03 -- --
George Manolakis 1983 108,456 1.14 -- --
Boris Mantell 1991 45,026 .47 -- --
Richard Rostholder 1988 370,913 3.88 -- --
Bipinchandra Shah 1987 134,693 1.41 -- --
Murray Shapiro 1976 27,504 .29 -- --
Howard Sternheim 1976 663,567 6.95 -- --
Alan Traster 1989 117,608 1.23 -- --
Ernest Wyre 1976 149,699 1.57 -- --
Total of All Officers and
Directors as a group (34 persons) 3,691,707 38.65 3,438.68 15.2
______________________
*Preferred shareholders have received their liquidation payments and have been
fully redeemed. Messrs. Blumenkrantz, Dudak and Grumet were redeemed during the fiscal
year ended July 31, 1998.
15
ITEM 11. EXECUTIVE COMPENSATION.
Summary Compensation Table
The following table sets forth, for the fiscal years ended July 31, 1997,
1996 and 1995, the cash compensation paid by the Company, as well as certain
other compensation paid with respect to those years, to the chief executive
officer and each of the four other most highly compensated executive officers of
the Company in all capacities in which they served.
ANNUAL COMPENSATION
Other
Name Annual All Other
and Principal Compen- Compen-
Position Year Salary Bonus sation sation(1)
- ----------------------- ----------- ----------- ----- ------ -----------
Roman Englander 1996 $272,198.00 -- -- $ 10,327.00
President and 1995 $526,400.00 -- -- $ 10,320.00
CEO(2)
Alan Glenn 1997 $ 46,333.00 -- -- --
Senior Vice 1996 $202,800.00 -- -- $ 3,064.00
President, 1995 $202,800.00 -- -- $ 2,870.00
CEO, COO(3)
Jay Reba 1997 $109,170.00 -- -- --
Vice President 1996 $107,600.00 -- -- --
Finance(4) 1995 $107,600.00 -- -- --
Mark Englander 1997 $103,552.00 -- -- --
Vice President(4) 1996 $106,000.00 -- -- --
1995 $105,500.00 -- -- --
Norman Genzer 1997 $112,521.00 -- -- --
Vice President(4) 1996 $105,500.00 -- -- --
1995 $108,000.00 -- -- --
All Executive Officers
as a Group (5 persons) $413,351.00 -- -- --
(1) Value of insurance premiums paid by the Company during the covered
fiscal year with respect to term life insurance for the benefit of the named
executive officer.
16
(2) Retired effective December 31, 1995.
(3) Appointed President of the Company in March 1996. Retired from the
Company effective August 31, 1996.
(4) Resigned from the Company in July 1997 in connection with the asset sale
to Neuman.
Mr. Englander resigned as a Director of the Company and as a trustee of the
Company's Pension Plan and Profit Sharing Plan effective February 28, 1997.
None of the directors or members of the Executive Committee, except Mr.
Englander (who has resigned) and Mr. Katz (who receives a salary of $1,000 per
month for assistance in liquidation activities), received any direct
remuneration from the Company or reimbursement for expenses, except that the
Company paid the premiums for term life insurance policies covering most of them
with the benefits of $100,000 each payable to their designees until the sale of
its assets on July 3, 1997. The aggregate annual premiums for these policies
was approximately $49,000.
Although most of the directors are affiliated with certain customers of the
Company, all transactions between such customers and the Company were in its
normal course of business and these customers received no preferences as to
price or other terms and conditions at which they buy products from the Company
by virtue of being affiliated with directors, except that during the fiscal
years ending with July 31, 1995, customers of the Company who were affiliated
with members of the Executive Committee received a courtesy credit of $10,000
against their respective accounts payable to the Company, an aggregate of
$50,000 for the fiscal year ended July 31, 1995.
The Company's non-contributory defined benefit pension plan for eligible
non-union employees was terminated in August 1997. See Note H of Notes to
Financial Statements.
The Company also had a profit-sharing plan, including a 401(k), for
non-union employees, including its officer-employees, which requires no fixed or
minimum contribution. There has been no contribution to the profit-sharing plan
since the fiscal year ended July 31, 1994. Under the plan, contributions by the
Company are allocated among the accounts of participating employees in
proportion to their respective compensations, as defined. Upon retirement,
death or disability, participating employees are entitled to the value of their
accounts as provided in the plan. An employee's interest in the plan becomes
vested in increments over the first five years of his membership.
17
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
To the knowledge of the Company, no person owns beneficially or of record more
than 5% of any class of the Company's voting securities except for the
following:
(1) (2) (3) (4)
Title of Name and Address Amount of Shares and Percent
Class of beneficial owner Nature of Beneficial Ownership of Class
- ---------------------- -------------------------- ------------------------------- ---------
Preferred John Hoover 2,065.9 9.13%
Stock 714 North Market Street
Cortez, CO 81321
- - Maurice Malin 2,339.4 10.34%
- - 45 Hall Place
- - Tappan, New York 10983
- - George Grumet 2,072.5 9.16%
- - 17 Phillips Road
- - Edison, New Jersey 08816
Common Howard Sternheim 663,567 6.95%
Stock 1020 Park Avenue
New York, NY 10028
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The Company entered into consulting agreements with its President, Harold
Blumenkrantz, and with Jay Reba, its former Vice President-Finance, for the
purpose of implementing the Liquidation Plan. The terms of the consulting
agreement with Mr. Blumenkrantz provide for his part-time employment on a
month-to-month basis for a consulting fee of $5,000 per month, plus reasonable
and customary expenses. The consulting agreement with Mr. Reba is in writing,
dated June 4, 1998, and provided for his consulting services for a minimum of
three months and on a month-to-month basis thereafter for a consulting fee of
$11,400 per month, plus reasonable and customary expenses and a severance
payment of $34,200. Mr. Reba's consulting agreement terminated August 31, 1999
and he is now engaged by the Company on a month-to-month basis to render limited
consulting services for a fee of $2,750 per month.
The Company occupies office space, on a month-to-month basis, in the
offices of its President, Harold Blumenkrantz, in Eatontown, New Jersey, and
Boca Raton, Florida, at an annual cost, including telephone service, photocopies
and postage, of $1,200.
18
Michael Katz, a director, receives a salary of $1,000 per month for
assistance in liquidation activities. No other director received any direct
remuneration from the Company or reimbursement for expenses, except that the
Company paid the premiums for term life insurance policies covering most of them
with the benefits of $100,000 each payable to their designees until the sale of
its assets on July 3, 1997. The aggregate annual premiums for these policies
was approximately $49,000.
Although most of the directors are affiliated with certain customers of the
Company, all transactions between such customers and the Company were in its
normal course of business and these customers receive no preferences as to price
or other terms and conditions at which they buy products from the Company by
virtue of being affiliated with directors, except that during the fiscal years
ending with July 31, 1995, customers of the Company who were affiliated with
members of the Executive Committee received a courtesy credit of $10,000 against
their respective accounts payable to the Company, an aggregate of $50,000 for
the fiscal year ended July 31, 1995.
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL STATEMENT
Schedules and Reports on Form 8-K
(a)(1) Financial Statements.
The following are filed with this report:
i) Independent Auditor's Report.
ii) Statement of Net Assets (liquidation basis) at July 31, 1997.
iii) Statement of Changes in Net Assets (liquidation basis) for the period from July 1, 1997
to July 31, 1997.
iv) Balance Sheet (going concern basis) at July 31, 1996.
v) Statements of Operations (going concern basis) for the period from August 1, 1996 to
June 30, 1997 and for the years ended July 31, 1996 and 1995.
vi) Statements of Stockholders' Equity (going concern basis) for the period from
August 1, 1996 to June 30, 1997 and for the years ended July 31, 1996 and 1995.
vii) Statements of Cash Flows (going concern basis) for the period from August 1, 1996
to June 30, 1997 and for the years ended July 31, 1996 and 1995.
viii) Notes to the Financial Statements.
(a)(2) Financial Statement Schedules:
i) Schedules II - Valuation and Qualifying Accounts
(a)(3) Exhibits.
The following exhibits are filed as part of this report:
19
Exhibit Number Exhibit
- --------------- --------------------------------------------------------------
2 Plan of Liquidation adopted June 27, 1997
3(a) Certificate of Incorporation of the Registrant, filed
July 22, 1976 and Amendments to Certificate of
Incorporation (6)
(b) Registrant's By-laws and Amendments thereto (6)
(c) Certificate of Correction of Certificate of Amendment
of Certificate of Incorporation (7)
(d) Amendment to By-Laws (13)
4(a) Common Stock Subscription Agreement (9)
4(b) Preferred Stock Subscription Agreement (9)
(c) Old Common Stock Subscription Agreement (4)
(d) Special Common Stock Subscription Agreement (4)
(e) Special Common Stock Subscription Agreement
Modified as of January 15, 1988 (5)
(f) Variable Rate Promissory Note Subscription
Agreement (4)
(g) Form of Variable Rate Promissory Note (1)
(h) Form of Old Common Stock Certificate (3)
(i) Form of Special Common Stock Certificate (3)
(j) Special Common Stock Subscription Agreement modified
as of June, 1989 (6)
(k) Form of Common Stock Certificate (8)
(1) Form of Preferred Stock Certificate (8)
(m) Revised Common Stock Subscription Agreement (10)
20
(The Registrant will furnish the Securities and Exchange
Commission upon request a copy of each instrument defining
the rights of the holders of the Registrant's long term debt)
10(a) Lease, dated September 13, 1973, between the Registrant
and Hartz Mountain Industries, Inc., as amended
November 19, 1980 and December 28, 1981 (2)
(b) Employment Agreement, dated as of December 19, 1985,
between the Registrant and Roman Englander (5)
(c) Pension Plan Restated as of January 1, 1978 (3)
(d) Profit Sharing Plan (3)
(e) Amendment, dated as of February 23, 1989, to Accounts
Financing Agreement dated March 24, 1980, as amended,
between the Registrant and Bankers Trust Company (7)
(f) Lease, dated December 15, 1989, between the
Registrant and Hartz Mountain Industries, Inc. (7)
10(g) Documents Further Amending Accounts Financing
Agreement, dated March 24, 1980, as amended, between
Registrant and Bankers Trust Company (10)
(h) Sublease, dated June 10, 1992 between Hoogovens
Aluminum Corporation, Sublessor, and Drug Guild
Distributors, Inc., Sublessee, and related documents (11)
(i) Employment Agreement dated as of October 1, 1993
between the Registrant and Roman Englander (12)
(j) Agreement dated July 6, 1993 between the Registrant
and Joseph B. Churchman (12)
(k) Amended and Restated Drug Guild Distributors, Inc
Profit Sharing Plan and Trust effective August 1, 1989
and the Amendment thereto dated 9/1/94 (13)
(l) Amended and Restated Drug Guild Distributors, Inc.
Pension Plan effective January 1, 1989 and the
Amendment thereto dated 9/1/94 (13)
21
(m) Resignation Agreement between the Company and
Roman Englander dated December 5, 1996 (13).
(n) Indemnification Agreement between the Company and
Joseph B. Churchman dated June 18, 1996. (13)
(o) Agreement and Plan of Merger by and among the
Company Neuman Distributors, Inc. and Neuman
Health Services, Inc. dated as of October 25, 1996. (13)
(p) Agreement between the Company and Jay Reba dated
June 4, 1998.
(1) Incorporated by reference to the specified exhibit constituting a part of
the Company's Notification on Form 1-A (File No. 24 NY-8317)
(2) Incorporated by reference to the specified exhibit constituting a part of
the Company's Notification on Form 1-A (File No. 24 NY-8303)
(3) Incorporated by reference to the specified exhibit constituting a part of
the Company's Registration Statement on Form S-18 (File No. 2-85967-NY)
(4) Incorporated by reference to the specified exhibit constituting a part of
the Company's Registration Statement on Form S-18 (File No. 2-96510-NY)
(5) Incorporated by reference to the specified exhibit constituting a part the
Company's Notification on Form 1-A (File No. 24-NY-8736)
(6) Filed as the specified exhibit to the Company's Registration Statement on
Form S-4 (File No. 33-35396)
(7) Filed as the specified exhibit to Amendment No. 1 to the Company's
Registration Statement on Form S-4 (File No. 33-35396).
(8) Filed as the specified exhibit to the Company's Registration Statement on
Form S-2 (File No. 33-40277).
(9) Filed as to specified exhibit constituting a part of the Registrant's Form
10-K, Annual Report, pursuant to Section 13 or 15(D) of the Securities
Exchange Act of 1934, for the fiscal year ended July 31, 1991.
22
(10) Filed as the Specified Exhibit to Post-Effective Amendment No.1 to the
Company's Registration Statement on Form S-2 (File No. 33-40277).
(11) Filed as to specified exhibit constituting a part of the Registrant's Form
10-K, Annual Report, pursuant to Section 13 or 15(D) of the Securities
Exchange Act of 1934, for the fiscal year ended July 31, 1992.
(12) Filed as to specified exhibit constituting a part of the Registrant's Form
10-K, Annual Report, pursuant to Section 13 or 15(D) of the Securities
Exchange Act of 1934, for the fiscal year ended July 31, 1993.
(13) Filed as to specified exhibit constituting a part of the Registrant's Form
10-K, Annual Report, pursuant to Section 13 or 15(D) of the Securities
Exchange Act of 1934, for the fiscal year ended July 31, 1996.
(b) Reports on Form 8-K
(1) A Form 8-K was filed with the Securities and Exchange Commission
("SEC") on August 9, 1996 and thereafter amended by a Form 8-K/A filed
with the SEC on August 23, 1996
(2) A Form 8-K was filed with the SEC on April 3, 1997
23
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the Registrant
has duly caused this amended Section 13 or 15(d) report to be executed on its
behalf by the undersigned, thereunto duly authorized, in the City of Secaucus,
State of New Jersey, on January 31, 2000.
DG LIQUIDATION, INC.
By: /s/ Harold Blumenkrantz
--------------------------------
Harold Blumenkrantz, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
amended report has been signed by the following person on behalf of the
Registrant and in the capacity and on the date indicated.
/s/ Harold Blumenkrantz President, Chief Executive January 31, 2000
- -------------------------------
Harold Blumenkrantz Officer and Director
/s/ Jerry Koblin Vice President, Treasurer, January 31, 2000
- -------------------------------
Jerry Koblin Principal Financial and
Accounting Officer and Director
/s/ Alfred Hertel Chairman of the Board January 31, 2000
- -------------------------------
Alfred Hertel and Director
/s/ Michael Katz Vice President and Director January 31, 2000
- -------------------------------
Michael Katz
/s/ Howard Sternheim Vice President and Director January 31, 2000
- -------------------------------
Howard Sternheim
/s/ Paul Emanuel Director January 31, 2000
- -------------------------------
Paul Emanuel
/s/ Ernest Wyre Director January 31, 2000
- -------------------------------
Ernest Wyre
24
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
DG Liquidation, Inc.
Eatontown, New Jersey
We have audited the accompanying balance sheet of DG Liquidation, Inc. (formerly
Drug Guild Distributors, Inc.) as of July 31, 1996, and the related statements
of operations, stockholders' equity and cash flows for each of the years in the
two-year period then ended and for the period from August 1, 1996 to June 30,
1997. In addition, we have audited the accompanying statement of net assets
(liquidation basis) as of July 31, 1997 and the related statement of changes in
net assets (liquidation basis) for the period from July 1, 1997 to July 31,
1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As described in Note A to the financial statements, the stockholders of the
Company approved a plan of liquidation on June 27, 1997 and on July 3, 1997, the
Company sold substantially all its net assets and commenced liquidation
proceedings. As a result, the Company has changed its basis of accounting for
periods subsequent to June 30, 1997 from the going concern basis to a
liquidation basis.
In our opinion, the financial statements enumerated above present fairly, in all
material respects, the financial position of DG Liquidation, Inc. as of July 31,
1996, the results of its operations and its cash flows for each of the years in
the two-year period then ended and for the period from August 1, 1996 to June
30, 1997, the net assets in liquidation as of July 31, 1997 and changes in net
assets in liquidation for the period from July 1, 1997 to July 31, 1997, in
conformity with generally accepted accounting principles applied on the basis
described in the preceding paragraph.
/S/ Richard A. Eisner & Company, LLP
- ------------------------------------------
Richard A. Eisner & Company, LLP
New York, New York
January 21, 1998
With respect to the second paragraph of Note N
February 17, 1998
With respect to Notes K[2], K[3] and K[6],
October 27, 1998, July 1, 1998 and June 4, 1998, respectively
With respect to Note L, December 28, 1998
F-1
DG LIQUIDATION, INC.
(formerly known as Drug Guild Distributors, Inc.)
STATEMENT OF NET ASSETS
(liquidation basis)
JULY 31, 1997
(In thousands, except shares and per share data)
ASSETS
Cash $ 230
United States Treasury bills, at cost which approximates market value 3,803
Notes receivable, including accrued interest of $68 11,484
Insurance claim receivable 1,000
Recoverable insurance premiums and other assets 287
Delivery trucks held for sale, at estimated net realizable value 427
Deferred tax asset 127
-------
17,358
-------
LIABILITIES
Notes payable 80
Estimated liquidation expenses 1,924
Accrued expenses and taxes 433
-------
2,437
Redeemable preferred stock; authorized 250,000 shares, $100 par value; issued and
outstanding 22,620 shares at redemption value 2,262
-------
4,699
-------
Commitments and contingencies (Note K)
NET ASSETS IN LIQUIDATION $12,659
=======
NET ASSETS IN LIQUIDATION PER COMMON SHARE (BASED ON 9,552,000 COMMON SHARES
OUTSTANDING $ 1.33
=======
See notes to financial statements F-2
STATEMENT OF CHANGES IN NET ASSETS
(liquidation basis)
FOR THE PERIOD FROM JULY 1, 1997 AND TO JULY 31, 1997
(In thousands)
Net assets at June 30, 1997 $11,892
--------
Gain on sale of net assets on July 3, 1997 3,683
Estimated costs incurred and to be incurred during period of liquidation (2,017)
Insurance claim recovery 1,000
Interest and other income 114
Loss on termination of pension plan (305)
Dividend on preferred stock (13)
Other adjustments to net assets 94
--------
Increase in net assets before income taxes 2,556
Provision for income taxes related to change in net assets, including deferred taxes of
$1,681, principally representing write-off of deferred tax asset (1,789)
--------
Increase in estimated liquidation value of assets over liabilities 767
--------
NET ASSETS IN LIQUIDATION AT JULY 31, 1997 $12,659
========
See notes to financial statements F-3
BALANCE SHEET
(going concern basis)
JULY 31, 1996
(In thousands, except shares and per share data)
ASSETS
Cash and cash equivalents $ 200
Trade receivables - stockholders 27,913
Trade receivables - nonstockholders 39,361
Allowance for doubtful accounts (1,203)
Merchandise inventory 29,440
Tax refund receivable 1,036
Prepaid expenses and other current assets 805
---------
Total current assets 97,552
---------
Property and equipment, net 3,331
---------
Other assets:
Trade receivables, noncurrent portion - stockholders 1,593
Trade receivables, noncurrent portion - nonstockholders 2,288
Allowance for doubtful accounts (438)
Deferred income tax benefit 1,426
Other assets 222
---------
Total other assets 5,091
---------
$105,974
=========
LIABILITIES AND STOCKHOLDERS' EQUITY
Loans payable - bank $ 53,104
Notes and loans payable 527
Accounts payable 34,590
Accrued expenses and taxes 1,475
---------
Total current liabilities 89,696
---------
Notes payable 237
Deferred rent payable 263
Deferred compensation payable 570
---------
Total long-term liabilities 1,070
---------
Total liabilities 90,766
---------
Redeemable preferred stock:
Authorized 250,000 shares, $100 par value; issued and outstanding - 26,000 shares 2,589
---------
Stockholders' equity:
Common stock, authorized 25,000,000 shares, $1 par value, issued and outstanding 10,023,000 shares 10,023
Subscribed and unissued - 412,000 shares 412
Additional paid-in capital 3,628
Accumulated deficit (805)
---------
Total before subscriptions receivable 13,258
Less subscriptions receivable 639
---------
Total stockholders' equity 12,619
---------
$105,974
=========
See notes to financial statements F-4
STATEMENTS OF OPERATIONS
(going concern basis)
(In thousands, except per share data)
PERIOD FROM
AUGUST 1, 1996
TO JUNE 30, YEAR ENDED JULY 31,
--------------------------------
1997 1996 1995
---------------- --------------------- ---------
Net sales $ 454,572 $ 501,383 $493,827
Cost of sales 426,833 468,108 460,150
Estimated loss on defalcation 7,400 5,200
---------------- --------------------- ---------
Gross profit 27,739 25,875 28,477
---------------- --------------------- ---------
Expenses:
Warehouse 8,197 8,886 8,822
Shipping and delivery 5,310 5,674 5,783
Selling, general and administrative 11,478 10,229 9,682
Interest expense 4,805 5,494 5,327
Interest income (500) (601) (546)
Gain on settlement of claim (596)
---------------- --------------------- ---------
Net operating expenses 28,694 29,682 29,068
---------------- --------------------- ---------
Loss before income taxes (955) (3,807) (591)
---------------- --------------------- ---------
(Benefit) provision for income taxes:
Current (68) (1,151) (94)
Deferred (382) (392) 8
---------------- --------------------- ---------
(450) (1,543) (86)
---------------- --------------------- ---------
NET LOSS (505) (2,264) (505)
Stock dividend on preferred stock 145 191 291
---------------- --------------------- ---------
Net loss attributable to common stockholders $ (650) $ (2,455) $ (796)
================ ===================== =========
LOSS PER COMMON SHARE $ (0.07) $ (0.24) $ (0.08)
================ ===================== =========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 9,957 10,062 9,930
================ ===================== =========
See notes to financial statements F-5
STATEMENTS OF STOCKHOLDERS' EQUITY
(going concern basis)
(all amounts in thousands)
COMMON STOCK $1 PAR VALUE
-------------------------------------------------------
ISSUED AND SUBSCRIBED AND
OUTSTANDING UNISSUED ADDITIONAL
------------------------------ ----------------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
------------ ---------------- ----------- ---------- ---------------
BALANCE - JULY 31, 1994 9,883 $ 9,883 670 $ 670 $ 3,927
Transactions for the year ended July 31, 1995:
Net loss
Common stock redeemed or cancellations (19) (19) (64) (64) (5)
Common stock to offset accounts receivable (111) (111) (64)
Collections on subscriptions 247 247 (247) (247)
Stock dividend on preferred stock
Common stock subscription adjustments 66 66 (66)
------------ ---------------- ----------- ---------- ---------------
BALANCE - JULY 31, 1995 10,000 10,000 425 425 3,792
Transactions for the year ended July 31, 1996:
Net loss
Common stock redeemed or cancellations (1) (1) (18)
Common stock to offset accounts receivable (98) (98) (37)
Collections on subscriptions 121 121 (121) (121)
Stock dividend on preferred stock
Common stock subscription adjustments 109 109 (109)
------------ ---------------- ----------- ---------- ---------------
BALANCE - JULY 31, 1996 10,023 10,023 412 412 3,628
Transactions for the period from August 1,
1996 to June 30, 1997:
Net loss
Common stock redeemed or cancellations (56) (56) (601) (601) 33
Common stock to offset accounts receivable (100) (100) 76
Collections on subscriptions 25 25 (38) (38) 13
Stock dividend on preferred stock
Stock forfeited in settlement of claim (340) (340) 272
Common stock subscription adjustments 227 227 (227)
------------ ---------------- ----------- ---------- ---------------
BALANCE - JUNE 30, 1997 9,552 $ 9,552 0 $ 0 $ 3,795
============ ================ =========== ========== ===============
(ACCUMULATED TOTAL
DEFICIT) BEFORE LESS TOTAL
RETAINED SUBSCRIPTIONS SUBSCRIPTIONS STOCKHOLDERS'
EARNINGS RECEIVABLE RECEIVABLE EQUITY
--------------- --------------- ------------ --------
BALANCE - JULY 31, 1994 $ 2,446 $ 16,926 $ 1,504 $15,422
Transactions for the year ended July 31, 1995:
Net loss (505) (505) (505)
Common stock redeemed or cancellations (88) (63) (25)
Common stock to offset accounts receivable (175) (175)
Collections on subscriptions 0 (541) 541
Stock dividend on preferred stock (291) (291) (291)
Common stock subscription adjustments 0 0
--------------- --------------- ------------ --------
BALANCE - JULY 31, 1995 1,650 15,867 900 14,967
Transactions for the year ended July 31, 1996:
Net loss (2,264) (2,264) (2,264)
Common stock redeemed or cancellations (19) (21) 2
Common stock to offset accounts receivable (135) (135)
Collections on subscriptions 0 (240) 240
Stock dividend on preferred stock (191) (191) (191)
Common stock subscription adjustments 0 0
--------------- --------------- ------------ --------
BALANCE - JULY 31, 1996 (805) 13,258 639 12,619
Transactions for the period from August 1,
1996 to June 30, 1997:
Net loss (505) (505) (505)
Common stock redeemed or cancellations (624) (601) (23)
Common stock to offset accounts receivable (24) (24)
Collections on subscriptions 0 (38) 38
Stock dividend on preferred stock (145) (145) (145)
Stock forfeited in settlement of claim (68) (68)
Common stock subscription adjustments 0 0
--------------- --------------- ------------ --------
BALANCE - JUNE 30, 1997 $ (1,455) $ 11,892 $ 0 $11,892
=============== =============== ============ ========
See notes to financial statements F-6
STATEMENTS OF CASH FLOWS
(going concern basis)
(In thousands)
PERIOD FROM
AUGUST 1, 1996 YEAR ENDED JULY 31,
TO JUNE 30, --------------------------------
1997 1996 1995
---------------- --------------------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (505) $ (2,264) $ (505)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization 998 891 1,031
Noncash gain on settlement of claim (596)
Deferred compensation payable (42) (53) (49)
Deferred income taxes (382) (392) 8
Changes in:
Trade receivables, net 2,031 (2,908) (6,318)
Merchandise inventory (4,252) 9,456 (4,033)
Tax refund receivable 1,036 (1,036)
Prepaid expenses and other current assets 175 (14) 446
Accounts payable 5,189 (2,873) (4,515)
Deferred rent payable 99 263
Accrued expenses and taxes 78 (339) 677
---------------- --------------------- ---------
Net cash provided by (used in) operating activities 3,829 731 (13,258)
---------------- --------------------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (767) (880) (1,405)
(Increase) decrease in other assets 170 218 (217)
---------------- --------------------- ---------
Net cash used in investing activities (597) (662) (1,622)
---------------- --------------------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of notes payable (396) (528) (627)
Net increase (decrease) in short-term bank debt (2,166) (71) 15,858
Collections on common stock 38 242 541
Common stock redeemed (23) (24)
Preferred stock redeemed (485) (1,535) (804)
---------------- --------------------- ---------
Net cash (used in) provided by financing activities (3,032) (1,892) 14,944
---------------- --------------------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 200 (1,823) 64
Cash and cash equivalents - beginning of period 200 2,023 1,959
---------------- --------------------- ---------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 400 $ 200 $ 2,023
================ ===================== =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid $ 4,805 $ 5,353 $ 5,327
Income taxes - paid $ 101 $ 1
Income taxes - refunded $ 1,036 $ 377 $ 477
Summary of noncash transactions:
Reduction of accrued expenses in exchange for issuance of notes
payable $ 19 $ 24
Cancellation of common shares and liability for deferred compensation
in connection with settlement of claim $ 596
Accounts receivable reduced for redemptions of:
Common stock $ 24 $ 135 $ 177
Preferred stock $ 777
Stock dividends on preferred stock $ 145 $ 191 $ 291
Common stock subscriptions, net of cancellations $ (64)
See notes to financial statements F-7
DG LIQUIDATION, INC.
(formerly known as Drug Guild Distributors, Inc.)
NOTES TO FINANCIAL STATEMENTS
NOTE A - PLAN OF LIQUIDATION, SALE OF ASSETS AND BASIS OF PRESENTATION
[1] PLAN OF LIQUIDATION:
DG Liquidation, Inc. (the "Company"), formerly known as Drug Guild Distributors,
Inc., was a wholesale distributor of a wide variety of products to drug stores
and health and beauty aid stores located primarily in the State of New Jersey,
the greater New York City metropolitan area and Connecticut.
A Plan of Complete Liquidation (the "Plan") was approved by the holders of a
majority of the Company's outstanding shares of common stock on June 27, 1997.
The Plan provides for: (1) the sale of the Company's operating assets, (2) the
payment of or provision for all of the Company's remaining liabilities and
obligations, (3) payment to the holders of preferred stock the amount of $100
per share in full, prior to any amount distributed to the common stockholders
and (4) the dissolution of the Company.
[2] SALE OF ASSETS:
On July 3, 1997, the Company sold substantially all of its operating assets,
subject to substantially all of the Company's liabilities, to Neuman Health
Services, Inc. and Neuman Distributors, Inc. (collectively "Neuman"), wholesale
distributors of pharmaceuticals and health and beauty products, for $4,000,000
in cash paid on closing, an unsecured $1,000,000 noninterest bearing promissory
note due on August 2001 and the remainder in an adjustable value promissory note
recorded at $10,646,000 payable in quarterly installments over four years and
collateralized by a standby letter of credit. The adjustable value note bears
interest at a rate (6.69% at July 31, 1997) determined quarterly equal to the
higher of 1% plus the 180-day London Interbank Offered Rate or the rate
specified for U.S. Treasury Notes with maturity equal to the remaining term of
the note, but no lower than the Federal rate as disseminated by the Internal
Revenue Service from time to time. In addition, the Company received an option
in favor of the Company's stockholders to purchase under certain conditions, at
85% of the per share offering price, an aggregate of 10% of Neuman shares to be
made available in a public offering in the event Neuman files a registration
statement with the Securities Exchange Commission prior to July 3, 2001 in
connection with an initial public offering. The $1,000,000 promissory note has
been recorded at its present value of approximately $766,000 using an imputed
interest rate of 6.69%. No value has been ascribed to the option due to its
contingent nature. The purchase price is subject to adjustment based upon a
final valuation of the assets and liabilities sold. In addition, the terms of
sale provide that Neuman has one year from the date of purchase to return to the
Company any accounts receivable balances which have not then been collected and
reduce the amount of the adjustable note by such uncollected balances (see Note
K[3]). The gain recognized on the sale was approximately $3,683,000. As of
January 21, 1998, final adjustment of the purchase price had not been
determined. Any adjustment will be recognized in the period in which the
adjustment is determined.
[3] BASIS OF PRESENTATION:
For all periods through June 30, 1997, the financial statements have been
prepared on a going concern basis. Subsequent to June 30, 1997, the Company has
adopted the liquidation basis of accounting. Accordingly, the net assets of the
Company at July 31, 1997 are stated at liquidation value whereby assets are
stated at their estimated net realizable values and liabilities, which include
estimated liquidation expenses to be incurred through the date of final
dissolution of the Company, are stated at their anticipated settlement amounts.
F-8
DG LIQUIDATION, INC.
(formerly known as Drug Guild Distributors, Inc.)
NOTES TO FINANCIAL STATEMENTS
NOTE A - PLAN OF LIQUIDATION, SALE OF ASSETS AND BASIS OF PRESENTATION
(CONTINUED)
[3] BASIS OF PRESENTATION: (CONTINUED)
The valuation of assets and liabilities necessarily requires estimates and
assumptions. The actual value of any liquidating distributions will depend upon
a variety of factors including, among others, the amount of any adjustment to
the adjustable value note, the outcome of litigation and other contingencies
described in Note K, the market prices of investments, the proceeds from the
sale of any of the Company's remaining unsold assets and the actual timing of
distributions. The valuations presented in the accompanying statement of net
assets in liquidation represent estimates, based on present facts and
circumstances, of the estimated realizable values of assets, net of liabilities
and estimated costs associated with carrying out the provisions of the Plan. The
actual values and costs could be higher or lower than the amounts recorded.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
[1] CASH EQUIVALENTS:
For the purpose of the statement of cash flows, the Company considers all highly
liquid money market instruments with original maturity of three months or less
to be cash equivalents. At July 31, 1996, cash equivalents were deposited in
financial institutions and consisted of immediately available fund balances.
[2] MERCHANDISE INVENTORY:
The inventory, which consists entirely of finished goods, is stated at the lower
of cost (last-in, first-out) or market. Inventory valued on a first-in,
first-out method would have been greater by approximately $4,763,000 as at July
31, 1996.
A liquidation of LIFO inventory layers, which were carried at lower costs
compared to current costs, had the effect of reducing loss before income taxes
by $679,000 for the year ended July 31, 1996.
[3] PROPERTY AND EQUIPMENT:
Property and equipment at July 31, 1996 are stated at cost. Depreciation is
computed on straight-line and accelerated methods over the estimated useful
lives as follows:
Leasehold improvements 10 - 18 years
Warehouse equipment 5 years
Data processing equipment 5 - 7 years
Trucks and delivery equipment 5 years
[4] INCOME TAXES:
The Company accounts for income taxes utilizing the asset and liability approach
requiring the recognition of deferred tax assets and liabilities for the
expected future tax consequences of temporary differences between the basis of
assets and liabilities for financial reporting purposes and tax purposes.
F-9
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
[5] USE OF ESTIMATES:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
[6] LONG-LIVED ASSETS:
In accordance with Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of," the Company records impairment losses on long-lived assets used
in operations, including intangible assets, when events and circumstances
indicate that the assets might be impaired and the undiscounted cash flows
estimated to be generated by those assets are less than the carrying amounts of
those assets. No such losses have been recorded.
[7] FAIR VALUE OF FINANCIAL INSTRUMENTS:
The carrying amount reported in the balance sheet for cash and cash equivalents,
accounts receivable, accounts payable and accrued liabilities approximated fair
value because of the immediate or short-term maturity of the financial
instruments.
The carrying amount reported for outstanding bank indebtedness approximates fair
value because the debt is at a variable rate that reprices frequently. The
carrying amount reported for outstanding nonbank indebtedness approximated fair
value based on current yields for debt instruments of similar quality and terms.
[8] CONCENTRATION OF CREDIT RISK:
Financial instruments that potentially subject the Company to credit risk
consist of trade receivables. The Company markets its products primarily to
retail drug and health and beauty aid stores. The risk associated with this
concentration is believed by the Company to be limited due to the large number
of stores and the performance of credit evaluation procedures.
[9] (LOSS) PER COMMON SHARE:
For the eleven month period ended June 30, 1997 and years ended July 31, 1996
and 1995, loss per common share was computed by dividing net loss as increased
by preferred dividend requirements, by the weighted average number of common
shares outstanding during the periods.
F-10
NOTE C - TRADE RECEIVABLES
Trade receivables include notes due from customers, as follows:
JULY 31,
1996
----------
Maturing within one year:
Stockholder $2,478,000
Nonstockholder 2,384,000
----------
4,862,000
----------
Due after one year:
Stockholder 1,764,000
Nonstockholder 2,338,000
----------
4,102,000
----------
$8,964,000
==========
It was the policy of the Company to obtain either personal guarantees or a lien
on the customer's assets as collateral for most notes and certain other trade
receivables.
NOTE D - LOANS PAYABLE - BANK
Under an accounts receivable and inventory financing agreement, which allows for
borrowings of up to $80 million, a bank makes secured demand loans based on a
percentage of eligible trade receivables and inventory, which are pledged as
collateral. Interest was at 1.25% above the prime rate. As of July 31, 1996,
total loan advances available under the revolving loan agreement was $3,935,000.
The agreement contains restrictions, which limit cash dividends and redemptions
of stock.
For the year ended July 31, 1996, a waiver was obtained from the bank for the
redemptions of preferred stock during the year and for the period through
November 1996 in the amount not exceeding $413,000.
F-11
NOTE E - NOTES AND LOANS PAYABLE
Short-term and long-term portion of notes and loans payable are as follows:
JULY 31,
1996
---------
Notes and loans due to stockholders, officers, employees
and members of their families are payable on demand
and 13 months after demand. Interest is at rates
ranging from prime to 1.25% over prime, except that
$472,000 of such notes require minimum interest of 10% $ 571,000
Notes due in installments of principal and interest at 9% -
11.5 % to November 1999 are collateralized by specific
equipment 193,000
---------
764,000
Due on demand or within one year 527,000
---------
Long-term portion $ 237,000
=========
As of July 31, 1996, future annual maturities were as follows:
YEAR ENDING
JULY 31,
- ---------
1997 $541,000
1998 195,000
1999 38,000
2000 13,000
---------
Total annual maturities 787,000
Less amounts representing interest (23,000)
---------
Present value at annual maturities $764,000
=========
F-12
NOTE F - PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
JULY 31,
1996
-------------
Leasehold improvements $ 2,303,000
Warehouse equipment 2,539,000
Data processing equipment 7,409,000
Trucks and delivery equipment 1,747,000
Furniture and fixtures 289,000
-------------
14,287,000
Less accumulated depreciation and amortization (10,956,000)
-------------
$ 3,331,000
=============
NOTE G - SETTLEMENT OF CLAIM
During the year ended July 31, 1996, an independent investigatory firm retained
by the Company uncovered certain payments which may have been unauthorized and
may have benefited the Company's former president and chief executive officer.
The Company asserted various claims against this individual who has denied the
allegations. In June 1997, the parties entered into a settlement agreement
whereby 339,851 shares of the Company's common stock owned by the former officer
and his wife were forfeited. In addition, he surrendered his right to receive
unpaid deferred compensation consisting of monthly payments of $8,333 through
February 2004. The Company had previously provided for the present value of
these payments. The Company has recorded a gain of $596,000 on settlement of
the claim during the period ended June 30, 1997.
NOTE H - RETIREMENT PLANS
The Company maintained a noncontributory defined benefit pension plan for its
eligible nonunion employees which was frozen June 28, 1996. Accordingly,
employee service subsequent to such date is excluded from benefit accruals under
the plan. The benefits under this plan were based on the participants' length
of service and compensation. The funding policy for this plan was to contribute
amounts actuarially determined as necessary to provide sufficient assets to meet
the benefit requirements of the plan retirees. The plan was terminated in August
1997. In connection therewith, a loss of $305,000 on termination of the pension
plan has been reflected as a decrease in net assets in July 1997.
F-13
NOTE H - RETIREMENT PLANS (CONTINUED)
The following table sets forth the Plan's funded status and amounts recognized
in the Company's balance sheet as of July 31, 1996:
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested benefits of $1,172,000 $(1,175,000)
============
Projected benefit obligation for service rendered to date $(1,671,000)
Plan assets at fair value, primarily consisting of U.S. Government
guaranteed securities and bank certificates of deposit 1,518,000
------------
Plan assets (less than) projected benefit obligation (153,000)
Unrecognized net loss from past experience different from that
assumed and effects of changes in assumptions 448,000
Unrecognized net obligations as of August 1, 1987, net of amortization 16,000
Adjustment to prior service cost not yet recognized in net periodic pension cost (8,000)
------------
Deferred pension cost $ 303,000
============
Net pension cost included the following components:
PERIOD FROM
AUGUST 1, 1996
TO JUNE 30,
1997 1996 1995
----------------
Service cost - benefits earned during the period $ 101,000 $ 106,000
Interest cost on projected benefit obligation $ 82,000 157,000 166,000
Actual return on plan assets (48,000) (112,000) (122,000)
Net amortization and deferral 8,000 (3,000) 17,000
---------------- ---------- ----------
Net periodic cost $ 42,000 $ 143,000 $ 167,000
================ ========== ==========
The weighted average discount rate and rate of increase in future compensation
levels used in determining the actuarial present value of the projected benefit
obligation were 6.5% and 0%, respectively, for 1997 and 7.0% and 4.0%,
respectively, for 1996. The expected long-term rate of return on assets was
6.5% for 1997, 7.0% for 1996 and 6.5% in 1995.
The Company made contributions along with other employers to a union
multi-employer plan, Local 815, International Brotherhood of Teamsters. The
expense for such plan was $337,000, $351,000 and $349,000 for the eleven month
period ended June 30, 1997 and the years ended July 31, 1996 and 1995,
respectively. The Employee Retirement Income Securities Act of 1974, as amended
by the Multi-Employers Pension Plan Amendment Act of 1980, imposes certain
liabilities upon employers who are contributors to multi-employer plans in the
event of such employers' withdrawal from such a plan or upon a termination of
such a plan. In connection with the sale of the Company's assets the purchaser
assumed the Company's obligation under the multi-employer plan.
F-14
NOTE H - RETIREMENT PLANS (CONTINUED)
The Company also had a profit-sharing plan and a 401(k) savings plan for
eligible nonunion employees. The 401(k) plan is solely funded by employee
contributions. The profit-sharing plan requires no fixed or minimum
contribution. There was no profit-sharing expense for the period from August 1,
1996 through June 30, 1997 or for the years ended July 31, 1996 and 1995.
NOTE I - INCOME TAXES
A reconciliation of the income tax benefit with the amounts computed by applying
the maximum Federal income tax rate to the pre-tax loss follows:
PERIOD FROM
AUGUST 1, 1996
TO JUNE 30, YEAR ENDED JULY 31,
------------------ ----------------------------------------
1997 % 1996 % 1995 %
---------- ------ ------------ ------ ---------- ------
Computed tax (benefit) at
maximum rate $(325,000) (34.0) $(1,294,000) (34.0) $(201,000) (34.0)
State tax (benefit) provision,
net of Federal income tax
effect (57,000) (6.0) (231,000) (6.0) 66,000 11.2
Alternative minimum tax credit (156,000) (4.1)
Other adjustments (68,000) (7.1) 138,000 3.6 49,000 8.2
---------- ------ ------------ ------ ---------- ------
$(450,000) (47.1) $(1,543,000) (40.5) $ (86,000) (14.6)
========== ====== ============ ====== ========== ======
Deferred taxes relate to tax loss carryforwards and differences between the
financial reporting and tax bases of assets and liabilities. The tax gain
($624,000) on sale of the net assets to Neuman is being recognized on the
installment basis for tax purposes; accordingly, the tax basis of the adjustable
value note is reduced by the unrecognized gain and a deferred tax liability has
been recorded for the difference between the amount at which the note is
reflected in the accompanying balance sheet and its tax basis.
The net deferred tax asset at July 31, 1997 relates to the following:
Estimated liquidation expenses $ 654,000
Difference between financial reporting and tax basis of note
receivable (168,000)
Insurance claim receivable (340,000)
Other (19,000)
----------
$ 127,000
==========
F-15
NOTE I - INCOME TAXES (CONTINUED)
Net deferred tax assets at July 31, 1996 are comprised of the following:
Deferred compensation $ 228,000
Depreciation (83,000)
Deferred pension cost (121,000)
Allowance for doubtful accounts 657,000
Inventory overhead 95,000
Federal NOL carryforward 237,000
AMT credit 156,000
State Income tax benefit 257,000
-----------
Total deferred tax asset $1,426,000
===========
In connection with the sale of the Company's net assets to Neuman on July 3,
1997, the balance in the deferred tax asset account at such date was written off
as a reduction of net assets.
NOTE J - OFFICER'S LIFE INSURANCE
At July 31, 1997 the Company was the owner and beneficiary of insurance policies
of $1,600,000, on the life of its former president. At July 31, 1997, the cash
surrender value of these policies was $202,000. The Company borrowed an
aggregate of $150,000 in two loans against the cash surrender value at an annual
interest rate of 7.94% and 7.42%. The cash surrender value, net of borrowings
is included in other assets.
NOTE K - COMMITMENT AND CONTINGENCIES
[1] In March 1995, the Company renewed two lease agreements extending the
terms to expire in May 2005, for real estate in Secaucus, New Jersey. Both
leases contained termination clauses whereby the Company may terminate the lease
between December 1, 1997 and November 30, 1998 by paying a fee equal to six
months of rent. In addition, the Company was obligated under another lease for
warehouse space expiring March 1997.
Future minimum annual lease payments at July 31, 1996 were as follows:
YEAR ENDING
JULY 31,
- --------------------------------------
1997 $1,021,000
1998 912,000
1999 912,000
2000 946,000
2001 1,056,000
Thereafter 4,048,000
----------
Present value at annual maturities $8,895,000
==========
In connection with the sale of the Company's assets in July 3, 1997, the
purchaser assumed the Company's obligation under the leases and the landlord
released the Company from liability for future lease payments.
F-16
NOTE K - COMMITMENT AND CONTINGENCIES (CONTINUED)
[1] (CONTINUED)
Total rent expense, including real estate taxes, were $1,109,000, $1,291,000 and
$1,016,000 for the eleven month period ended June 30, 1997, and the years ended
July 31, 1996 and 1995, respectively.
Deferred rent payable at July 31, 1996, represents the excess of rental expense
determined on a straight-line basis over the amounts currently payable pursuant
to the leases.
The Company, subsequent to the sale, occupies office space, on a month-to-month
basis, in the offices of its President, at an annual cost, including telephone
service, photocopies and postage of $1,200.
[2] On March 3, 1998, the Company filed a complaint in Supreme Court of the
State of New York, in New York County, against its former auditors, Anchin,
Block & Anchin, LLP (the "Anchin Firm") seeking to recover damages for
professional malpractice, breach of fiduciary duty and breach of contract
exceeding $16,000,000 in connection with an inventory defalcation (see Note N).
The Anchin Firm had previously acted in the capacities of financial advisors,
auditors and accountants for the Company for a continuous period beginning in
1977 and ending on July 2, 1996.
The damages sought from the Anchin Firm relate to the loss of inventory by
reason of the defalcations taking place during the period from October 1992
through May 1996, a reduction in the consideration received in the asset sale
transaction with Neuman and restitution of approximately $900,000 of fees paid
to the Anchin Firm and various other fees and expenses.
On April 30, 1998, the Anchin Firm filed an answer denying the material
allegations, and commenced a third-party lawsuit against members of the
Company's Executive Committee during the period of January 1990 through May 31,
1996, and the Company's corporate attorneys, alleging that if the Company is
successful in its claims against the Anchin Firm, then these third-party
defendants, by reason of their alleged failure to reasonably perform their
respective fiduciary duties, should be held liable for the losses to the Company
for which the Anchin Firm is sought to be held responsible. On October 27,
1998, the court dismissed the third-party claims against the Company's corporate
attorneys and the Anchin Firm withdrew its claims against the former members of
the Executive Committee, thereby discontinuing the third-party lawsuit.
The parties are engaged in extensive discovery activities and a trial is not
expected to take place until sometime in 2000. Although the Company believes it
will prevail in its case against the Anchin Firm, it is unable to predict a
likely outcome at this time.
[3] On or about July 1, 1998, the buyer of the Company's assets (Neuman)
proposed to reassign to the Company uncollected accounts receivable of four
customers which accounted for approximately $1,486,000 of accounts receivable
purchased from the Company in July 1997 (see Note A[2]). The Company had
assigned those accounts receivable to Neuman together with related security
agreements. After the closing of the asset purchase Neuman made additional
sales to those four customers and extended additional credit to them. It also
incurred legal fees and interest in seeking to collect both the pre-closing and
post-closing accounts receivables, with the result than Neuman asserts that it
has made a post-closing extension of credit to the four customers totalling
approximately $2,336,000. Neuman has told the Company that it should accept
reassignment of the accounts receivable of the four customers in an aggregate
total of $1,486,000 without reassignment of the security agreements with a
corresponding reduction in the adjustable value note receivable.
F-17
NOTE K - COMMITMENT AND CONTINGENCIES (CONTINUED)
[3] (CONTINUED)
The Company has taken the position that the security agreements must follow the
accounts receivable which they secure and that it is therefore not obligated to
accept reassignment of the accounts receivable, and therefore a reduction in the
face amount of the note, unless it also receives the security agreements
applicable to those accounts receivable. The Company has told Neuman that
pursuant to the asset purchase agreement, the oldest accounts receivable must be
paid in full before the newer accounts receivable are paid and that it is
therefore entitled, under the security agreements which must be reassigned
together with the accounts receivable, to receive the full amount of the
pre-acquisition balance due of $1,486,000 out of a pending payment by a major
pharmaceutical retail chain to Neuman of approximately $2,500,000.
The Company believes it likely that its differences with Neuman regarding the
proposed reassignment of the accounts receivable of the four customers will be
resolved by arbitration pursuant to the provisions of the asset purchase
agreement. If Neuman prevails, the accounts receivable of the four customers
would be reassigned to the Company without security with which they were
assigned to Neuman, the principal amount of the note would be reduced by the
$1,486,000 balance of those accounts receivable and there could be no assurance
that the Company would be able to obtain payment of the reassigned accounts
receivable. If the Company prevails in its dispute with Neuman and Neuman
reassigns those accounts receivable, the Company would be paid the full amount
of the accounts receivable by the major pharmaceutical retailer indebted to
Neuman and the principal amount of the note would be reduced in an identical
amount. There can be no assurance as to the likely outcome of the current
dispute, whether by negotiation or arbitration.
[4] In October 1996, the Company received a letter from an attorney for a
former director and stockholder of the Company alleging mismanagement of the
Company and requesting additional information. In June 1997, the attorney,
acting on behalf of the former director and other stockholders who appear to be
related to the former director, asked for copies of the Company's financial
statements over the past three years, which the Company supplied. No other
action has been taken with regard to the claims in the October 1996 letter by
either the former director or his attorney.
[5] A customer of the Company initiated a lawsuit in February 1997 in the
United States District Court for the District of New Jersey, alleging that the
Company has conspired with co-defendant wholesalers to deny credit to the
plaintiff that is allegedly due to it, amounting to an alleged "group boycott"
in violation of the federal Sherman Anti-trust Act and New Jersey's Anti-trust
Act, as well as a breach of an implied covenant of good faith and fair dealing
and tortious interference with the plaintiff's contracts.
The plaintiff asked for preliminary and permanent injunctions as well as a money
judgment against each defendant for what are described as actual, compensatory,
punitive and trebled damages, attorney's fees and costs and such other relief as
the court may deem appropriate. The court did not enter any preliminary
injunction against any defendant. The Company filed an answer denying all of
the material allegations of the complaint, setting forth various affirmative
defenses, alleging a counterclaim against the plaintiff for the money it owes
the Company, approximately $48,000, and asking for a dismissal of the complaint.
The defendants, including the Company, have made motions for summary judgment
seeking dismissal of all of the plaintiff's claims, which are pending before the
court. The Company has also asked for summary judgment on its counterclaim.
The court is not expected to decide the motions until sometime in 2000. The
Company believes that it will prevail in this case.
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NOTE K - COMMITMENT AND CONTINGENCIES (CONTINUED)
[6] The Company entered into consulting agreements with its President and
its former Vice President - Finance for the purpose of implementing the plan of
liquidation . The agreement with the Company's President provides for his
part-time employment on a month-to-month basis for a fee of $5,000 per month
plus expenses. The agreement with the former Vice President - Finance commenced
on June 4, 1998 and provides for a monthly consulting fee of $11,400 plus
expenses, and a severance payment of $34,000.
NOTE L - REDEEMABLE PREFERRED STOCK
Preferred stockholders are entitled to an 8% cumulative dividend based on par
value, payable in preferred stock. Upon liquidation of the Company, holders of
the preferred stock are entitled to a payment of $100 per share before any
amounts are paid to holders of common stock. The preferred stock is not
entitled to vote and does not have any preemptive or conversion rights.
Cumulative dividends earned in periods subsequent to July 31, 1997 will be
reflected as a reduction of net assets during the period in which they accrue.
Through December 28, 1998, all outstanding shares of preferred stock were
redeemed for $2,262,000.
NOTE M - STOCKHOLDERS' EQUITY
The stockholders were a substantial portion of the Company's customers. The
transfer of shares is restricted by agreement, and any stockholder who wishes to
sell his shares must first offer them to the Company at cost (as defined) or par
value with respect to shares issued as a stock dividend.
The common shares to be issued on subscriptions received are not determinable
until subscriptions are collected. However, at each year end such subscribed
shares are included in the accompanying financial statements assuming a purchase
price estimated based on the FIFO book value at year end. The difference
between the par value and the purchase price of subscribed common shares has
been credited to additional paid-in capital. Additional paid-in capital
includes $227,000 on such uncollected subscriptions as of July 31, 1996.
NOTE N - INVENTORY DEFALCATION
During 1996, an inventory defalcation was discovered. Management estimates that
results for the year ended July 31, 1996 were negatively impacted by $7,400,000.
The Company determined that certain entries in its perpetual inventory and units
sold were improper. Management extrapolated the effects of these entries based
on unit costs, units sold and sales dollars. Management also determined that
similar inventory defalcations had occurred during prior years and amounted to
$5,200,000 for the year ended July 31, 1995. The amounts for each of the years
are included as a separate component of cost of sales. The Company's reported
inventory values on its balance sheets were based on results of physical counts
and, accordingly, the Company believes that its reported net loss for such years
is fairly presented.
On February 17, 1998, the Company received $1,000,000 from insurance coverage
related to the defalcation. Such amount has been reflected in the accompanying
statement of net assets at July 31, 1997 and changes in net assets for the
period from July 1, 1997 to July 31, 1997.
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