SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: July 31, 1998
|_| TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from:
Commission File No. 2-96510-NY
DG LIQUIDATION, INC.
(Name of registrant as specified in its charter)
New Jersey 11-2269958
(State of other jurisdiction of (IRS Employer Identification No.)
Incorporation or organization)
c/o Med-Care, Building #3, 3535 Route 66, Neptune, NJ 07753
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (732) 918-7555
Securities registered pursuant to Section 12(b) of the Act:
Name of exchange on
Title of each class which registered
- ------------------- ----------------
None None
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
-------------------
Common Stock, par value $1.00 per share
1
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 (the
"Act") 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
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). |_|
State the aggregate market value of the voting and non-voting common equity held
by non-affiliates computed by reference to the price at which the common equity
was last sold, or the average bid and asked price of such common equity, as of
the last business day of the registrant's most recently completed second fiscal
quarter.
There is no trading market and therefore no market value for the
registrant's voting common equity securities.
Indicate the number of shares outstanding of each of the registrant's class of
common stock, as of the latest practicable date:
As of July 14, 2004 there were 9,274,863 shares of common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None.
2
PART I
ITEM 1. BUSINESS.
General
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.
Since the sale of assets to Neuman Health Services, Inc. and Neuman
Distributors, Inc. in July 1997, the Company has been operating under a
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.
Asset Sale.
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. A Plan
of Complete Liquidation (the "Liquidation Plan") was approved by the holders of
a majority of the Company's outstanding shares of common stock on June 27, 1997.
The Liquidation Plan provided for: (1) sale of the Company's operating assets,
(2) payment of or provision for all of the Company's remaining liabilities and
obligations, (3) payment of $100 per share to holders of preferred stock prior
to any amount distributed to the common stockholders and (4) the dissolution of
the Company.
The purchase price was composed of $4,000,000 in cash paid on closing, an
unsecured $1,000,000 non-interest bearing promissory note due in August 2001,
and 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. Neuman also 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.
3
The adjustable value note provided for interest at a rate 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. During the fiscal year ended
July 31, 1998, pursuant to the terms of the note, interest (6.36% at July 31,
1998) was paid quarterly based on the principal payments received by the
Company. Subsequent thereto, interest was payable quarterly based on the unpaid
principal balance of the note. During the year ended July 31, 1998, the Company
received quarterly principal payments on the note aggregating $2,000,000, plus
interest of $82,000.
In connection with the sale, the Company received an option in favor of
the Company's stockholders to purchase, under certain conditions, an aggregate
of 10% of Neuman shares to be made available in a public offering in the event
Neuman filed a registration statement with the Securities and Exchange
Commission prior to July 3, 2001, at a price equal to 85% of the per share
public offering price. Since no registration statement was been filed by Neuman
prior to July 3, 2001, the option lapsed.
The asset purchase agreement provided that the purchase price was subject
to adjustment based upon a final valuation of the assets and liabilities sold.
The terms of sale also provided that Neuman had one year from the date of
purchase to return to the Company any accounts receivable balances which had not
then been collected and reduce the amount of the adjustable note by such
uncollected balances.
On or about July 1, 1998, Neuman proposed to reassign to the Company
uncollected accounts receivable of four customers which accounted for
approximately $1,486,000. The Company rejected Neuman's proposal and claimed
that, pursuant to the provisions of the asset purchase agreement, it was
entitled 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. This disagreement between Neuman and the
Company was ended by Neuman's bankruptcy in 2000 (see below) and the uncollected
accounts receivable of $1,486,000 were not reassigned to the Company.
On April 6, 2000, Neuman filed a petition for reorganization under Chapter
11 of the Bankruptcy Code. As a result, the Company wrote off the then $880,000
carrying value of Neuman's unsecured promissory note as uncollectible. Neuman's
bankruptcy petition constituted an "event of default" under the terms of the
secured adjustable value promissory note. By reason of Neuman's default, and on
May 22, 2000, the Company made a drawing on the standby letter of credit which
collateralized the note. On May 25, 2000, the Company received $7,084,000, of
which $2,794,000 represented the carrying value of the adjustable value note,
$102,000 represented accrued interest thereon through such date and $4,188,000
represented additional proceeds.
4
Within the ninety-day period prior to the filing of the Neuman bankruptcy
petition, the Company had received $885,000 of quarterly payments from Neuman in
connection with the adjustable value note. Subsequent to the filing of the
Neuman bankruptcy petition, the Chapter 11 Trustee filed a complaint against the
Company in the Bankruptcy Court seeking to recover the $885,000 as a preference
payment. The Company filed an answer including defenses against the Trustee's
claims and filed a motion for summary judgment. October 20, 2000, the Company
also filed a general unsecured claim against the Neuman bankruptcy estate which
reflected $7,657,000 due from Neuman on the adjustable value note at March 31,
2000, including $576,000 of additional accrued interest through such date based
on the increased amount of the note, prior to the receipt of the $7,084,000
letter of credit proceeds, leaving a balance of $573,000 due the Company. In
addition, the Company filed a claim for $1,000,000 in connection with the
unsecured note.
On September 24, 2002, a settlement agreement was entered into pursuant to
which the Company and the Trustee released each other from all pre-petition or
post-petition claims, except that the Company was entitled to receive
distribution from the bankruptcy estate with respect to its unsecured claims,
referred to above, which were allowed in full. The settlement agreement was
approved by the Bankruptcy Court on October 9, 2002.
As of the date of this report, no additional distribution has been made to
the Company from the Neuman bankruptcy estate and there is no assurance that any
additional distributions will be made in the future.
Employees
The Company has oral consulting agreements with its President, Harold
Blumenkrantz, and a director, Michael Katz, and a written consulting agreement
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 provided 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. Mr. Blumenkrantz ceased collecting his consulting fee after July 31,
2001. Michael Katz received a consulting fee of $1,000 per month for assistance
in liquidation activities until the end of April 2002. The written consulting
agreement with Mr. Reba is 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 (beginning in January
1999), plus reasonable and customary expenses and a severance payment of
$34,200. Mr. Reba's consulting agreement terminated August 31, 1999. He was
thereafter engaged by the Company on a month-to-month basis to render limited
consulting services for a fee of $2,750 per month from September 1, 1999 until
April 30, 2002. His current engagement by the Company provides for payment to
him of $125 per hour, plus expense reimbursement, for work he is asked to
perform.
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
business as a going concern.
5
ITEM 2. PROPERTIES.
The Company occupies office space, on a month-to-month basis, in the
offices of its President, Harold Blumenkrantz, in Neptune, New Jersey and in
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 New York County Supreme
Court 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
inventory defalcations during the period of October 1992 through May 1996. 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.
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 was
successful in its claims against the Anchin Firm, then these third-party
defendants should be held liable for the losses to the Company by reason of an
alleged failure to reasonably perform their respective fiduciary duties. On
October 27, 1998, the court dismissed all of 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.
The Company's claims against the Anchin Firm were tried before a jury in
Supreme Court, New York County in October and November 2002, which resulted in a
verdict in favor of the Company. Judgment in favor of the Company and against
the Anchin Firm was entered in Supreme Court, New York County on February 4,
2003. The judgment was paid in full on May 16, 2003 in the total sum of
$297,000.
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 taken place with regard to this matter.
6
Michael's Pharmacy and Michael Scicutella v. Drug Guild Distributors, Inc., et
al.
The plaintiff, a customer of Drug Guild, 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 was 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 an alleged 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 were described as actual,
compensatory, punitive and trebled damages, attorney's fees and costs, and such
other relief as the court found appropriate. The court denied the plaintiff's
requests for a preliminary injunction. 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 approximately
$48,000 owed to the Company, and asked for a dismissal of the complaint.
The defendants, including the Company, made motions for summary judgment
seeking dismissal of all of the plaintiff's claims. The Company also asked for
summary judgment on its counterclaim. On August 12, 2002, all of the claims were
formally dismissed by the court.
The Company has been a party to several other pending legal actions,
principally motor vehicle accidents involving vehicles owned or operated by the
Company, and other claims, including products liability, 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
There were no matters submitted to a vote of the Company's security
holders during the fiscal year ended July 31, 1998 through the solicitation of
proxies or otherwise.
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 14, 2004, there were approximately 366 holders of record of the
Company's common stock, and 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 ($2,262,000) and common stockholders
($15,785,000, with a reserve of $39,000 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.
7
ITEM 6. SELECTED FINANCIAL 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 and Supplementary Data.
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 was recorded at its then present value of approximately
$766,000. The purchase price was subject to additional adjustment based on the
final valuation of the assets and liabilities sold. In addition, the buyer had
the right to return any receivables not paid after one year from the sale.
During the fiscal year ended July 31, 1998, the Company collected $2,082,000 of
payments made on the adjustable rate promissory note, of which $2,000,000 was
applied to notes receivable and the remaining $82,000 to interest. Any
adjustment for the final valuation of the assets and liabilities sold will be
recognized in the period in which the adjustment is determined.
The Company 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, 1998, the Company had net assets in liquidation of
$13,258,000. This represented an increase in estimated liquidation value of
assets over liabilities of $599,000 from the net assets at July 31, 1997. This
change was mainly attributed to interest and other income of $951,000 and rental
income from the leasing of trucks of $368,000. This was offset by an increase in
the estimated costs for liquidation (primarily legal and other professional
fees) of approximately $300,000. The provision for income taxes related to the
change in net assets was $395,000 due to increased income.
8
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See the index constituting a part of Item 15.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
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.
On July 11, 1996, the Company engaged Eisner LLP (formerly 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 years ended July 31, 1997 and July 31, 1998.
9
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures.
As required by Rule 13a-15 under the Act, within the 90 days prior to the
filing date of this report, the Company carried out an evaluation of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures. This evaluation was carried out under the supervision of the
Company's management, the President and Chief Executive Officer and Secretary,
Treasurer, Principal Financial and Accounting Officer. Based upon that
evaluation, the Company's President, Chief Executive Officer and Principal
Financial and Accounting Officer have concluded that the Company's disclosure
controls and procedures are currently effective in timely alerting them to
material information relating to the Company required to be included in the
Company's periodic SEC filings.
Disclosure controls and procedures are controls and other procedures that
are designed to ensure that information required to be disclosed in Company
reports filed or submitted under the Act is recorded, processed, summarized and
reported, within the time periods specified in the SEC rules and forms.
Disclosure controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed in
Company reports filed under the Act is accumulated and communicated to
management, which consists only of the Company's President and Chief Executive
Officer and Secretary, Treasurer, Principal Financial and Accounting Officer, to
allow timely decisions regarding required disclosures.
Changes in Internal Controls.
There have been no changes in internal controls or in other factors that
could significantly affect these controls subsequent to the date of their
evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
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 individuals served as directors and executive officers of
the Company during the fiscal year ended July 31, 1998:
10
Name Age Position
- ---- --- --------
Harold Blumenkrantz 65 President, Chief Executive Officer and Director
Alfred Hertel 74 Chairman of the Board and Director
Michael Katz 64 Vice President and Director
Howard Sternheim 69 Vice President and Director
(deceased April 2002)
Gerald Koblin 66 Secretary, Treasurer, Chief Accounting and
Financial Officer and Director
Paul Emanuel 77 Director
Ernest Wyre 79 Director
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.
Michael Katz was principal of Katz Drug, Brooklyn, New York 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 (deceased April 22, 2002) was 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 had 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, the Secretary and Treasurer since July 1997, and the
Chief Accounting and Financial Officer of the Company since August 1997.
Paul Emmanuel had been the owner of Town and Country Pharmacy, Inc.,
Ridgewood, New Jersey, for more than the past five years, and sold the store in
2000. 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.
11
ITEM 11. EXECUTIVE COMPENSATION.
Summary Compensation Table
The following table sets forth, for the fiscal years ended July 31, 1998,
1997 and 1996, 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)
- -------- ---- ------ ----- ------ ---------
Harold Blumenkrantz 1998 $ 65,000 -- -- --
President and
CEO(2)
Roman Englander 1996 $272,198 -- -- $ 10,327
President and
CEO(3)
Alan Glenn 1997 $ 46,333 -- -- --
Senior Vice 1996 $202,800 -- -- $ 3,064
President,
CEO, COO(4)
Jay Reba 1997 $109,170 -- -- --
Vice President 1996 $107,600 -- -- --
Finance(5)
Mark Englander 1997 $103,552 -- -- --
Vice President(5) 1996 $106,000 -- -- --
Norman Genzer 1997 $112,521 -- -- --
Vice President(5) 1996 $105,500 -- -- --
All 1998 Executive Officers
as a Group (5 persons) $ 65,000 -- -- --
12
(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.
(2) Mr. Blumenkrantz is paid pursuant to a consulting agreement on a
month-to-month basis at the rate of $5,000 per month.
(3) Retired effective December 31, 1995.
(4) Appointed President of the Company in March 1996. Retired from the Company
effective August 31, 1996.
(5) Resigned from the Company in July 1997 in connection with the asset sale
to Neuman.
Roman 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 Roman
Englander (who has resigned) and Mr. Katz (who received a fee of $2,000 in
fiscal 1998 for assistance in liquidation activities and, thereafter, a
consulting fee of $1,000 per month for assistance in liquidation activities
until the end of April 2002.), received any direct remuneration from the Company
or reimbursement for expenses, except that the Company reimburses minor amounts
of expenses on an infrequent basis, and 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 premium for these policies was approximately $49,000.
The Company's non-contributory defined benefit pension plan for eligible
non-union employees was terminated in August 1997. See Note E 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 required 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 were 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 Company's
contribution became vested in increments over the first five years of their
membership.
13
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The following table sets forth certain information regarding shares of
common stock beneficially owned as of July 14, 2004, by (i) each person, known
to the Company, who beneficially owns more than 5% of the common stock, (ii)
each of the Company's directors and (iii) all officers and directors as a group:
Name and Address of Beneficial Owner Shares Beneficially Owned (1) Percentage of Stock Outstanding (1)
- ------------------------------------ ----------------------------- -----------------------------------
Sharon Sternheim, Executrix of The 492,784 5.31%
Estate of Howard Sternheim
1020 Park Avenue
New York, NY 10028
Paul Emanuel 24,480 .26%
468 Churchill Road
Teaneck, NJ 07666
Harold Blumenkrantz 36,685 .40%
7411 Orangewood Lane
Boca Raton, FL 33433
Alfred Hertel 113,358 1.22%
84 Shoreline Drive
Hilton Head Island, SC 29928
Michael Katz
3400 Galt Ocean Drive 101,196 1.09%
Apt. 1507S
Fort Lauderdale, FL 33308
Gerald Koblin
214 Jewett Road 43,997 .47%
Upper Nyack, NY 10960
Ernest Wyre
6613 Pullen Ct
Tampa, FL 33625 149,699 1.61%
All Officers and Directors as a Group 469,415 5.06%
(6 persons)
- ----------
(1) All of these shares are owned of record.
14
Common Stock
The Company is authorized to issue up to 25,000,000 shares of common
stock, $1.00 par value each, of which 9,274,863 shares are currently issued and
outstanding. The holders of common stock are entitled to one vote for each share
held of record on all matters to be voted on by shareholders, and are entitled
to receive dividends when and if declared by the Board of Directors out of funds
legally available therefore. The common stock has no conversion, preemptive or
other subscription rights, and there are no redemption provisions applicable to
the common stock (except for the Company's right of first refusal, discussed
below). There is no cumulative voting with respect to the election of directors,
with the result that the holders of more than 50% of the shares of common stock
can elect all of the directors.
Holders of the common stock who are customers of the Company are required
to pledge their shares to the Company as security for their purchase of
products. All holders who intend to sell their shares are required to first
offer them to the Company (the "right of first refusal") at a purchase price
equal to the lesser of (a) the book value of the shares or (b) the greater of
cost or par value. If the Company elects to exercise its right of first refusal,
it must pay for the shares in three equal annual installments, without interest,
commencing 60 days after the offer is made.
In the event of liquidation, dissolution or winding up of the Company,
such as that being implemented the Liquidation Plan, the owners of common stock
are entitled to share all assets remaining available for distribution after the
payment of liabilities and after provision has been made for each class stock,
if any, having a preference over the common stock as such.
Preferred Stock
The Company is authorized to issue up to 250,000 shares of preferred
stock, $100 par value each. 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.
Holders of preferred stock have the right to require the Company to
repurchase their shares at par value ($100.00) commencing five years after full
payment for the stock has been made.
The Company may call preferred stock at any time. The call price is 105%
of par value if shares are called within the first year of issue, 110% of par
value within the second year, 115% within the third year, 120% within the fourth
year and 125% after four years.
A holder of shares of preferred stock desiring to sell his shares to a
third party must first offer them to the Company at the repurchase price. If the
Company elects to accept such offer, it is obligated to pay for such shares in
three equal annual installments, without interest, the first such installment to
be made 60 days after such offer.
15
As of July 31, 1998, 1,930 shares were issued and outstanding, all of
which have since been redeemed in full and cancelled.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The Company has oral consulting agreements with its President, Harold
Blumenkrantz, and a director, Michael Katz, and a written consulting agreement
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 provided 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. Mr. Blumenkrantz ceased collecting his consulting fee after July 31,
2001. Michael Katz received a consulting fee of $1,000 per month for assistance
in liquidation activities until the end of April 2002. The written consulting
agreement with Mr. Reba is 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 (beginning in January
1999), plus reasonable and customary expenses and a severance payment of
$34,200. Mr. Reba's consulting agreement terminated August 31, 1999. He was
thereafter engaged by the Company on a month-to-month basis to render limited
consulting services for a fee of $2,750 per month from September 1, 1999 until
April 30, 2002. His current engagement by the Company provides for payment to
him of $125 per hour, plus expense reimbursement, for work he is asked to
perform.
The Company occupies office space, on a month-to-month basis, in the
offices of its President, Harold Blumenkrantz, in Neptune, New Jersey, and Boca
Raton, Florida, at an annual cost, including telephone service, photocopies and
postage, of $1,200.
No other officer or director received any direct remuneration from the
Company or reimbursement for expenses, except that the Company reimburses minor
amounts of expenses on an infrequent basis, and 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.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
AUDIT FEES
The aggregate fees billed by Eisner LLP for the annual audit, and for the
review of the interim financial statements was approximately $54,000 for the
fiscal year ended July 31, 1998 and approximately $73,000 for the fiscal year
ended July 31, 1997.
AUDIT RELATED FEES
Eisner LLP did not render any professional services to DG Liquidation,
Inc. involving "Audit Related Fees" other than as set forth in the preceding
paragraph.
16
TAX FEES
Eisner LLP did not render any professional services to DG Liquidation,
Inc. during the fiscal years ended July 31, 1998 and 1997 for tax compliance,
tax advice and tax planning services.
ALL OTHER FEES
The aggregate fees billed by Eisner LLP for all other services rendered to
DG Liquidation, Inc. during the fiscal years ended July 31, 1998 and July 31,
1997, other than audit services, were approximately $5,000 and $101,000,
respectively, for tax return preparation and services related to the sale of
assets to Neuman.
ITEM 15. 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 Auditors Report.
(ii) Statement of Net Assets (liquidation basis) at July 31, 1998 and
1997.
(iii) Statement of Changes in Net Assets (liquidation basis) for the
period from July 1, 1997 to July 31, 1997 and for the year ended
July 31, 1998.
(iv) Statements of Operations (going concern basis) for the period from
August 1, 1996 to June 30, 1997 and for the year ended July 31,
1996.
(v) Statements of Stockholders' Equity (going concern basis) for the
period August 1, 1996 to June 30, 1997 and for the year ended July
31, 1996.
(vi) Statements of Cash Flows (going concern basis) for the period from
August 1, 1996 to June 30, 1997 and for the year ended July 31,
1996.
(vii) Notes to the Financial Statements.
(a)(2) Financial Statement Schedules:
None
(a)(3) Exhibits.
The following exhibits are filed as part of this report:
17
Exhibit
Number Exhibit
2 Plan of Liquidation adopted June 27, 1997 (14)
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)
18
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)
(m) Resignation Agreement between the Company and Roman Englander dated
December 5, 1996 (13).
19
(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.
31 Rule 13(a)-15(e)/15(d)-15(e) Certifications.
32 Section 1350 Certification
- ----------
(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 (File No.
2-98610-NY).
20
(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 (File No.
2-98610-NY).
(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 (File No.
2-98610-NY).
(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 (File No.
2-98610-NY).
(14) 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, 1997 (File No.
2-98610-NY).
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the last quarter of fiscal 1998.
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 Town of Neptune,
State of New Jersey, on July 14, 2004.
DG LIQUIDATION, INC.
By: /s/ Harold Blumenkrantz
-------------------------------------
Harold Blumenkrantz, President
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 July 14, 2004
- ------------------------------ Officer and Director
Harold Blumenkrantz
/s/ Gerald Koblin Secretary, Treasurer, July 14, 2004
- ------------------------------ Principal Financial and
Gerald Koblin Accounting Officer and Director
/s/ Alfred Hertel Chairman of the Board July 14, 2004
- ------------------------------ and Director
Alfred Hertel
/s/ Michael Katz Vice President and Director July 14, 2004
- ------------------------------
Michael Katz
/s/ Paul Emanuel Director July 14, 2004
- ------------------------------
Paul Emanuel
/s/ Ernest Wyre Director July 14, 2004
- ------------------------------
Ernest Wyre
21
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
DG Liquidation, Inc.
We have audited the accompanying statements of net assets (liquidation basis) of
DG Liquidation, Inc. (formerly Drug Guild Distributors, Inc.) as of July 31,
1998 and 1997 and the related statements of changes in net assets (liquidation
basis) for the year ended July 31, 1998 and for the period from July 1, 1997 to
July 31, 1997. In addition, we have audited the accompanying statements of
operations, stockholders' equity and cash flows for the period from August 1,
1996 to June 30, 1997 and for the year ended July 31, 1996. 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 the standards of the Public Company
Accounting Oversight Board (United States). 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 net assets in liquidation of DG Liquidation, Inc. as of
July 31, 1998 and 1997, the changes in its net assets in liquidation for the
year ended July 31, 1998 and for the period from July 1, 1997 to July 31, 1997,
and the results of its operations and cash flows for the period from August 1,
1996 to June 30, 1997 and for the year ended July 31, 1996, in conformity with
accounting principles generally accepted in the United States of America applied
on the basis described in the preceding paragraph.
Eisner LLP
New York, New York
October 18, 2000, except for Notes G, H[5], A[2] and H[2] as to which the dates
are December 14, 2001, August 12, 2002, October 9, 2002 and May 16, 2003,
respectively
F-1
DG LIQUIDATION, INC.
(formerly known as Drug Guild Distributors, Inc.)
STATEMENTS OF NET ASSETS
(liquidation basis)
(In thousands, except share and per share amounts)
JULY 31,
----------------------
1998 1997
------- -------
ASSETS
Cash $ 3,170 $ 230
United States Treasury bills, at cost which approximates market value 2,016 3,803
Notes receivable, including accrued interest of $645 in 1998 and $68 in 1997 10,114 11,484
Insurance claim receivable 1,000
Recoverable insurance premiums and other assets 102 287
Delivery trucks held for sale, at estimated net realizable value 427
Deferred tax asset 509 127
------- -------
15,911 17,358
------- -------
LIABILITIES
Notes payable 80
Estimated liquidation expenses 1,806 1,924
Accrued expenses and taxes 654 433
------- -------
2,460 2,437
Redeemable preferred stock; authorized 250,000 shares, $100 par value; issued
and outstanding 1,930 shares in 1998 and 22,620 shares in
1997 at redemption value 193 2,262
------- -------
2,653 4,699
------- -------
Commitments and contingencies (Note H)
NET ASSETS IN LIQUIDATION $13,258 $12,659
======= =======
NET ASSETS IN LIQUIDATION PER COMMON SHARE (BASED ON
9,552,000 COMMON SHARES OUTSTANDING) $ 1.39 $ 1.33
======= =======
See notes to financial statements
F-2
DG LIQUIDATION, INC.
(formerly known as Drug Guild Distributors, Inc.)
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
(liquidation basis)
(In thousands)
PERIOD FROM
YEAR ENDED JULY 1, 1997
JULY 31, TO JULY 31,
1998 1997
---------- ------------
Net assets in liquidation - beginning of period $ 12,659 $ 11,892
-------- --------
Gain on sale of net assets 3,683
Interest and other income 1,319 114
Estimated costs incurred and to be incurred during period of liquidation (293) (2,017)
Insurance claim recovery 1,000
Loss on termination of pension plan (305)
Dividend on preferred stock (13)
Other adjustments to net assets (32) 94
-------- --------
Increase in net assets before income taxes 994 2,556
Provision for income taxes related to change in net assets, including a
deferred tax benefit of $382 in 1998 and a deferred tax provision of $1,681
in 1997, principally representing write-off of deferred tax asset (395) (1,789)
-------- --------
Increase in estimated liquidation value of assets over liabilities 599 767
-------- --------
NET ASSETS IN LIQUIDATION - END OF PERIOD $ 13,258 $ 12,659
======== ========
See notes to financial statements
F-3
DG LIQUIDATION, INC.
(formerly known as Drug Guild Distributors, Inc.)
STATEMENTS OF OPERATIONS
(going concern basis)
(In thousands, except per share data)
PERIOD FROM
AUGUST 1, 1996 YEAR ENDED
TO JUNE 30, JULY 31,
1997 1996
-------------- ----------
Net sales $ 454,572 $ 501,383
Cost of sales 426,833 468,108
Estimated loss on defalcation 7,400
--------- ---------
Gross profit 27,739 25,875
--------- ---------
Expenses:
Warehouse 8,197 8,886
Shipping and delivery 5,310 5,674
Selling, general and administrative 11,478 10,229
Interest expense 4,805 5,494
Interest income (500) (601)
Gain on settlement of claim (596)
--------- ---------
Net operating expenses 28,694 29,682
--------- ---------
Loss before income taxes (955) (3,807)
--------- ---------
(Benefit) for income taxes:
Current (68) (1,151)
Deferred (382) (392)
--------- ---------
(450) (1,543)
--------- ---------
NET LOSS (505) (2,264)
Stock dividend on preferred stock 145 191
--------- ---------
Net loss attributable to common stockholders $ (650) $ (2,455)
========= =========
LOSS PER COMMON SHARE $ (0.07) $ (0.24)
========= =========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 9,957 10,062
========= =========
See notes to financial statements
F-4
DG LIQUIDATION, INC.
(formerly known as Drug Guild Distributors, Inc.)
STATEMENTS OF STOCKHOLDERS' EQUITY
(going concern basis)
(all amounts in thousands)
COMMON STOCK $1 PAR VALUE
--------------------------------- (ACCUMU- TOTAL
ISSUED AND SUBSCRIBED AND LATED BEFORE LESS TOTAL
OUTSTANDING UNISSUED ADDITIONAL DEFICIT) SUBSCRI- SUBSCRI- STOCK-
--------------- --------------- PAID-IN RETAINED PTIONS PTIONS HOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS RECEIVABLE RECEIVABLE EQUITY
------ ------ ------ ------ ------- -------- ---------- ---------- ------
BALANCE - JULY 31, 1995 10,000 $ 10,000 425 $ 425 $ 3,792 $ 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 (1) (1) (18) (19) (21) 2
Common stock to offset accounts receivable (98) (98) (37) (135) (135)
Collections on subscriptions 121 121 (121) (121) 0 (240) 240
Stock dividend on preferred stock (191) (191) (191)
Common stock subscription adjustments 109 109 (109) 0 0
------ -------- --- ------- ------- -------- -------- ---- --------
10,023 10,023 412 412 3,628 (805) 13,258 639 12,619
BALANCE - JULY 31, 1996
Transactions for the period from
August 1, 1996 to June 30, 1997:
Net loss (505) (505) (505)
Common stock redeemed or cancellations (56) (56) (601) (601) 33 (624) (601) (23)
Common stock to offset accounts receivable (100) (100) 76 (24) (24)
Collections on subscriptions 25 25 (38) (38) 13 0 (38) 38
Stock dividend on preferred stock (145) (145) (145)
Stock forfeited in settlement of claim (340) (340) 272 (68) (68)
Common stock subscription adjustments 227 227 (227) 0 0
------ -------- --- ------- ------- -------- -------- ---- --------
BALANCE - JUNE 30, 1997 9,552 $ 9,552 0 $ 0 $ 3,795 $ (1,455) $ 11,892 $ 0 $ 11,892
===== ======== === ======= ======= ======== ======== ==== ========
See notes to financial statements
F-5
DG LIQUIDATION, INC.
(formerly known as Drug Guild Distributors, Inc.)
STATEMENTS OF CASH FLOWS
(going concern basis)
(In thousands)
PERIOD FROM
AUGUST 1, 1996 YEAR ENDED
TO JUNE 30, JULY 31,
1997 1996
-------------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (505) $(2,264)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization 998 891
Noncash gain on settlement of claim (596)
Deferred compensation payable (42) (53)
Deferred income taxes (382) (392)
Changes in:
Trade receivables, net 2,031 (2,908)
Merchandise inventory (4,252) 9,456
Tax refund receivable 1,036 (1,036)
Prepaid expenses and other current assets 175 (14)
Accounts payable 5,189 (2,873)
Deferred rent payable 99 263
Accrued expenses and taxes 78 (339)
------- -------
Net cash provided by operating activities 3,829 731
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (767) (880)
Decrease in other assets 170 218
------- -------
Net cash used in investing activities (597) (662)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of notes payable (396) (528)
Net decrease in short-term bank debt (2,166) (71)
Collections on common stock 38 242
Common stock redeemed (23)
Preferred stock redeemed (485) (1,535)
------- -------
Net cash used in financing activities (3,032) (1,892)
------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 200 (1,823)
Cash and cash equivalents - beginning of period 200 2,023
------- -------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 400 $ 200
======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid $ 4,805 $ 5,353
Income taxes - paid $ 101
Income taxes - refunded $ 1,036 $ 377
Summary of noncash transactions:
Reduction of accrued expenses in exchange for issuance of notes payable $ 19
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
Stock dividends on preferred stock $ 145 $ 191
See notes to financial statements
F-6
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 provided 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 of $100 per share to the holders
of preferred stock 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 in 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 $1,000,000 promissory note has been recorded at its
present value, ($823,000 and $766,000 at July 31, 1998 and 1997,
respectively) using an imputed interest rate of 6.69%. The adjustable
value note provides for interest at a rate (6.36% and 6.69% at July 31,
1998 and 1997, respectively) 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. During the year ended July 31, 1998,
pursuant to the terms of the note, interest was paid quarterly based on
the principal payments received by the Company. Subsequent thereto,
interest is payable quarterly based on the unpaid principal balance of the
note. During the year ended July 31, 1998, the Company received quarterly
principal payments on the note aggregating $2,000,000 plus interest of
$82,000.
In connection with the sale, 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 and Exchange Commission prior
to July 3, 2001 in connection with an initial public offering. No value
has been ascribed to the option due to its contingent nature.
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
(CONTINUED)
[2] SALE OF ASSETS: (CONTINUED)
The asset purchase agreement provided that the purchase price is subject
to adjustment based upon a final valuation of the assets and liabilities
sold. In addition, the terms of sale provided that Neuman had one year
from the date of purchase to return to the Company any accounts receivable
balances which had not then been collected and reduce the amount of the
adjustable note by such uncollected balances (see Note H[3]). The gain
recognized on the sale was $3,683,000.
On April 6, 2000, Neuman filed a petition for reorganization under Chapter
11 of the Bankruptcy Code. As a result thereof, in fiscal 2000, the
Company wrote off the then $880,000 carrying value of the unsecured
promissory note due from Neuman. In addition, on May 22, 2000 the Company
made a drawing on the standby letter of credit and on May 25, 2000
received $7,084,000 of which $2,794,000 represented the carrying value of
the adjustable value note, $102,000 represented accrued interest thereon
through such date and $4,188,000 represented additional proceeds.
Within the ninety-day period prior to the filing of the petition, the
Company received $885,000 from Neuman in connection with the adjustable
value note. Subsequent to the filing, the Chapter 11 Trustee filed a
complaint against the Company in the Bankruptcy Court to recover such
alleged preference payment. The Company maintained that it had defenses
against the Trustee's claims and filed a motion for summary judgment. In
addition, on October 20, 2000, the Company filed a general unsecured claim
against the bankruptcy estate which reflected that $7,657,000 was due from
Neuman on the adjustable value note at March 31, 2000, including $576,000
of additional accrued interest through such date based on the increased
amount of the note, prior to the receipt of the $7,084,000 letter of
credit proceeds, leaving a balance of $573,000 due the Company. In
addition, the Company filed a claim for $1,000,000 in connection with the
unsecured note.
On September 24, 2002, a settlement agreement, which was approved by the
Bankruptcy Court on October 9, 2002, was entered into pursuant to which
the Company and the Trustee released each other from all pre-petition or
post-petition claims, except that the Company is entitled to receive
distribution from the bankruptcy estate as to its unsecured claims
referred to above which were allowed in full.
In connection with the settlement, in fiscal 2003, the Company will record
an additional gain on sale of $2,513,000 net of income taxes of
$1,675,000. After giving effect to the write-off of the unsecured note of
$880,000 during fiscal 2000 and the related $352,000 tax benefit, net
assets in liquidation increased by $1,985,000 ($0.21 per common share)
resulting from adjustments in connection with the sale of assets to
Neuman.
[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, 1998 and 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.
The valuation of assets and liabilities necessarily requires estimates
and assumptions. Net assets and future liquidating distributions will be
subject to uncertainties including, the ultimate amount of liquidation
expenses and the amount, if any, ultimately to be collected on unsecured
claims against the bankruptcy estate.
F-8
DG LIQUIDATION, INC.
(formerly known as Drug Guild Distributors, Inc.)
NOTES TO FINANCIAL STATEMENTS
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
[1] 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.
[2] MERCHANDISE INVENTORY:
Inventory, which consisted entirely of finished goods, was stated at the
lower of cost (last-in, first-out) or market.
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.
F-9
DG LIQUIDATION, INC.
(formerly known as Drug Guild Distributors, Inc.)
NOTES TO FINANCIAL STATEMENTS
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
[3] PROPERTY AND EQUIPMENT:
Depreciation was 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.
[5] LOSS PER COMMON SHARE:
For the eleven month period ended June 30, 1997 and year ended July 31,
1996, 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.
NOTE C - ESTIMATED LIQUIDATION EXPENSES
Estimated liquidation expenses, consisting of legal and other professional fees,
consulting fees and insurance expense, to be incurred through the date of final
dissolution of the Company have been accrued in the accompanying financial
statements. Analysis of transactions reflected in the liability for estimated
liquidation expenses follows:
Estimated liquidation expenses accrued
during the period July 1, 1997 to July 31, 1997 $2,017
Liquidation expenses paid during the period (93)
------
Balance at July 31, 1997 1,924
Liquidation expenses paid during the year ended
July 31, 1998 (411)
Increase in estimated liquidation expenses to be
incurred 293
------
Balance at July 31, 1998 $1,806
======
F-10
DG LIQUIDATION, INC.
(formerly known as Drug Guild Distributors, Inc.)
NOTES TO FINANCIAL STATEMENTS
NOTE D - 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 recorded a gain of $596,000 on settlement of the
claim during the period ended June 30, 1997.
NOTE E - 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.
Net pension cost included the following components:
PERIOD FROM
AUGUST 1, 1996 YEAR ENDED
TO JUNE 30, JULY 31,
1997 1996
Service cost - benefits earned during the period $ 101,000
Interest cost on projected benefit obligation $ 82,000 157,000
Actual return on plan assets (48,000) (112,000)
Net amortization and deferral 8,000 (3,000)
-------- ---------
Net periodic cost $ 42,000 $ 143,000
======== =========
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 and $351,000 for the eleven month period
ended June 30, 1997 and the year ended July 31, 1996, 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.
The Company also had a profit-sharing plan and a 401(k) savings plan for
eligible nonunion employees. The 401(k) plan was solely funded by employee
contributions. The profit-sharing plan required 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 year ended July 31, 1996.
F-11
DG LIQUIDATION, INC.
(formerly known as Drug Guild Distributors, Inc.)
NOTES TO FINANCIAL STATEMENTS
NOTE F - 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
1997 JULY 31, 1996
------------------ ---------------------
Computed tax benefit at maximum rate $(325,000) (34.0)% $(1,294,000) (34.0)%
State tax benefit, net of Federal income
tax effect (57,000) (6.0) (231,000) (6.0)
Alternative minimum tax credit (156,000) (4.1)
Other adjustments (68,000) (7.1) 138,000 3.6
--------- ----- ----------- -----
$(450,000) (47.1)% $(1,543,000) (40.5)%
========= ===== =========== =====
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, 1998 and 1997 relates to the following:
1998 1997
--------- ---------
Estimated liquidation expenses $ 614,000 $ 654,000
Difference between financial reporting and
tax basis of note receivable (105,000) (168,000)
Insurance claim receivable (340,000)
Other (19,000)
--------- ---------
$ 509,000 $ 127,000
========= =========
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 G - OFFICER'S LIFE INSURANCE
At July 31, 1998 the Company was the owner and beneficiary of insurance policies
of $1,600,000, on the life of its former president. At July 31, 1998 and 1997,
the cash surrender value of these policies was $199,000 and $202,000,
respectively. At such dates, the Company had outstanding loans aggregating
$152,000 and $150,000 against the cash surrender value at an annual interest
rate of 7.57%. The cash surrender value, net of borrowings is included in other
assets. In October 2001, the Company's former president died and on December 14,
2001, the Company received approximately $1,599,000, net of outstanding loans of
$157,000 from the insurance company in settlement of the policies resulting in a
gain of $1,511,000 in fiscal 2002.
F-12
DG LIQUIDATION, INC.
(formerly known as Drug Guild Distributors, Inc.)
NOTES TO FINANCIAL STATEMENTS
NOTE H - COMMITMENT AND CONTINGENCIES
[1] In connection with the sale of the Company's assets on July 3, 1997, the
purchaser assumed the Company's obligation under existing leases and the
landlord released the Company from liability for future lease payments.
Total rent expense, including real estate taxes, was $1,109,000 and
$1,291,000 for the eleven-month period ended June 30, 1997 and the year
ended July 31, 1996, respectively.
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 K). 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 Company's claims against the Anchin Firm were tried before a jury in
Supreme Court, New York County in October and November 2002, which
resulted in a verdict in favor of the Company. Judgment in favor of the
Company and against the Anchin Firm was entered in Supreme Court, New York
County on February 4, 2003 in the aggregate sum of approximately $290,000.
The judgment was paid in full on May 16, 2003 in the total sum of
$297,000, including interest of $7,000. Net assets will be increased by
the amount of the judgment reduced by related legal and other professional
fees during the year ended July 31, 2003.
[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. Neuman also incurred legal fees and interest in
seeking to collect both the pre-closing and post-closing accounts
receivable with the result that Neuman asserted 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 $1,486,000 without reassignment of the security
agreements, with a corresponding reduction in the adjustable value note
receivable.
F-13
DG LIQUIDATION, INC.
(formerly known as Drug Guild Distributors, Inc.)
NOTES TO FINANCIAL STATEMENTS
NOTE H - 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.
As described in Note A[2], a settlement agreement was approved by the
Bankruptcy Court on October 9, 2002, pursuant to which the Trustee in
Neuman's bankruptcy and the Company released each other from all
pre-petition or post-petition claims and, accordingly, none of the
accounts receivable were reassigned to the Company.
[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. On August 12, 2002, these claims were dismissed by
the court.
[6] The Company entered into consulting agreements with its President, a
Director 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 consulting fees for the
Director was $1,000 per month and ended in April 2002. The agreement with
the former Vice President - Finance commenced on June 4, 1998 and provided
for a monthly consulting fee of $11,400 (beginning in January 1999) plus
expenses, and a severance payment of $34,000. The agreement was terminated
in August 1999. He was thereafter engaged on a month-to-month basis for
$2,750 per month through April 2002.
[7] The Company has been a party to several other pending legal actions,
principally motor vehicle accidents involving vehicles owned or operated
by the Company and other claims including one for product liability for
which the Company is covered by its insurance. The Company believes the
results of these various lawsuits and claims will not materially affect
the financial position of the Company.
F-14
DG LIQUIDATION, INC.
(formerly known as Drug Guild Distributors, Inc.)
NOTES TO FINANCIAL STATEMENTS
NOTE I - 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. During the year
ended July 31, 1998, 20,690 shares of preferred stock were redeemed for
$2,069,000 and subsequent thereto through December 28, 1998, the remaining 1,930
outstanding shares of preferred stock were redeemed for $193,000.
NOTE J - STOCKHOLDERS' EQUITY
The stockholders were a substantial portion of the Company's customers and all
stockholders had assigned their shares to the Company as additional collateral
for their respective accounts receivable balances. 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.
NOTE K - INVENTORY DEFALCATION
During 1996, an inventory defalcation was discovered. Management estimated 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. The amount is 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 year 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.
F-15