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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the quarterly period ended: January 31, 2003
[ ] 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)
3535 Route 66, Neptune, NJ 11434
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (732) 918-7555
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 whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes __ No X
Indicate the number of shares outstanding of each of the issuer'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.
1
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DG Liquidation's unaudited, interim financial statements for its second
fiscal quarter of 2003 (the three and six months ended January 31, 2003) have
been set forth below. Management's discussion and analysis of the company's
financial condition and the results of operations for the second quarter will be
found under Item 2, following the financial statements.
2
DG LIQUIDATION, INC.
STATEMENT OF NET ASSETS IN LIQUIDATION
(amounts in thousands, except share and per share amounts)
January 31, July 31,
2003 2002
----------- --------
(Unaudited)
ASSETS
Cash $ 2,502 $ 4,550
Deferred tax asset 72 1,763
Other assets 214 71
----------- --------
2,788 6,384
----------- --------
LIABILITIES
Estimated liquidation expenses 180 220
Accrued expenses and taxes 28 67
Liquidating distributions payable 428 424
Deferred gain related to proceeds from letter of credit 4,188
----------- --------
636 4,899
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Redeemable preferred stock; authorized 250,000 shares,
$100 par value; none outstanding
NET ASSETS IN LIQUIDATION $ 2,152 $ 1,485
----------- --------
NET ASSETS IN LIQUIDATION PER COMMON SHARE
(based on 9,275,000 shares outstanding) $ 0.23 $ .16
----------- --------
See notes to financial statements
3
DG LIQUIDATION, INC.
STATEMENT OF CHANGES IN NET ASSETS IN LIQUIDATION
(in thousands)
(Unaudited)
Three Six
Month Period Ended Month Period Ended
January 31, January 31,
------------------ --------------------
2003 2002 2003 2002
-------- -------- -------- ---------
Net assets in liquidation at beginning of period $ 4,004 $ 111 $ 1,485 $ 102
-------- -------- -------- ---------
Interest income 9 31 26 54
Net proceeds from life insurance 1,511 1,511
Decrease in estimated life insurance costs to be incurred during
period of liquidation 136 136
-------- -------- ---------
Recovery of receivables previously written-off 13 13
-------- -------- ---------
Additional gain related to sale of assets 4,188
Other adjustments to net assets (2) (11) (9) (20)
-------- -------- -------- ---------
Increase in net assets before income taxes 7 1,680 4,205 1,694
Provision for income taxes 3 300 1,682 305
-------- -------- -------- ---------
Increase in estimated liquidation value of assets over liabilities 4 1,380 2,523 1,389
Liquidating distributions to common shareholders (1,856) (1,856)
-------- --------
NET ASSETS IN LIQUIDATION AT END OF PERIOD $ 2,152 $ 1,491 $ 2,152 $ 1,491
======== ======== ======== =========
See notes to financial statements
DG LIQUIDATION, INC.
NOTES TO THE FINANCIAL STATEMENTS
NOTE 1 - FINANCIAL STATEMENTS AND BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for the interim financial
information and with the instructions to Form 10-Q and Rule 10-01 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, such information reflects all
adjustments (consisting only of normal recurring accruals) necessary to a fair
presentation for the period being reported.
On June 27, 1997, the Stockholders of the Company approved a Plan of Liquidation
(the "Liquidation Plan"). Subsequently, the Company has adopted the liquidation
basis of accounting. Accordingly, the net assets of the Company at January 31,
2002 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. For further
information, refer to the financial statements and footnotes thereto in the
Company's Annual Report on Form 10-K for the fiscal year ended July 31, 2002.
4
NOTE 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 non-interest 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 with
interest at 1% above the 180-day London Interbank Offering rate and
collateralized by a standby letter of credit. The $1,000,000 promissory note had
been recorded at its then present value of approximately $76,000.
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 3(c)). 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, the Company recorded an additional gain on
sale of $2,513,000 net of income taxes of $1,675,000.
NOTE 3 - COMMITMENTS AND CONTINGENCIES
[a] The Company 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.
[b] 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. 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.
5
On January 31, 1999, 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. 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 and reduced
by related legal and professional fees during the year ended July 31,
2003
[c] 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. 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 receivable 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 $1,486,000 without reassignment of the security
agreements, with a corresponding reduction in the adjustable value note
receivable.
The Company had 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 had 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 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.
[d] 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.
[e] 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.
6
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, 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.
[f] 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 agreement with
the former Vice President - Finance commenced on June 4, 1998 and
provides for a monthly consulting fee of $11,400 (beginning in January
1999) plus expenses, and a severance payment of $34,000. The agreement
terminated in August 1999. He was thereafter engaged on a
month-to-month basis for $2,750 per month through April 2002. The
consulting fee for the Director was $1,000 per month and ended in April
2002.
[g] The Company has been a party to several other pending legal actions,
principally motor vehicle accidents involving vehicles owner or
operated by the Company, and other claims including one for product
liability, for which the Company is covered by its insurance. The
results of these various lawsuits and claims will not materially affect
the financial position of the Company.
ITEM 2. 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.
Statement of Net Assets in Liquidation
As of January 31, 2003, the Company had net assets in liquidation of
$2,152,000. This represented an increase in estimated liquidation value of
assets over liabilities of $667,000 from the net assets at July 31, 2002. This
increase was mainly attributed to the additional gain on sale of assets of
$2,513,000 net of $1,675,000 of income taxes. This was reduced by a liquidating
distribution to common shareholders of $1,856,000. The net income included
interest income of $26,000 offset by expenses of $9,000.
Three Months Ended January 31, 2003 Compared to Three Months Ended
January 31, 2002
The 2002 period included net proceeds from the life insurance proceeds
of the former president of the Company of $1,511,000, who died in December 2001.
Interest income for the 2003 period was $22,000 lower then the 2002 period
because of the payment of the liquidating distribution to common shareholders of
$1,856,000 in November 2002 and lower interest rates. The recovery of
receivables previously written-off of $13,000 in the 2002 period compared to
none in 2003.
7
Income taxes were lower in the 2003 period as a result of lower
increase in net assets compared to the 2002 period. The income tax rate for 2003
was 40% as compared to 18% in 2002 due to the life insurance proceeds being
taxed at the lower alternative minimum tax rate as compared to the statutory
rate.
Six Months Ended January 31, 2003 Compared to Six Months Ended January
31, 2002
The 2003 period included $2,513,000 from the additional gain-related to
sale of assets, net of $1,675,000 income taxes. The 2002 period included the
life insurance proceeds received on the death in 2001 of the former president of
the Company of $1,511,000. Interest income for the 2003 period was $28,000 lower
than the 2002 period because of the payment of the liquidating distribution to
common shareholders of $1,856,000 in November 2002, and lower interest rates. In
addition, there were no collections of receivables previously written-off as
compared to $13,000 in the 2002 period.
Income taxes were higher in the 2003 period as a result of the increase
in net assets. In addition the income tax rate for 2002 was 18% as compared to
40% in 2003 due to the life insurance proceeds being taxed at the lower
alternative minimum tax rate as compared to the statutory rate.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
ITEM 4. 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 effective in timely alerting him 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.
8
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 II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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.
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, 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.
On April 30, 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. 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.
9
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 January 31, 1999, 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. The judgment was paid in full on May 16, 2003 in the total sum
of $297,000, including interest of $7,000.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not Applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
ITEM 5. OTHER INFORMATION
Not Applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits required by item 601 of Regulation S-K.
10
Exhibit
Number Description of Exhibit
------ --------------------------------------------
31 Rule 13(a)-15(e)/15(d)-15(e) Certifications.
32 Section 1350 Certification.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the second quarter of fiscal 2003.
11
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the
Registrant has duly caused this 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
--------------------------------------
President and Chief Executive Officer