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: October 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)
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
(a) DG Liquidation's unaudited, interim financial statements for its
first fiscal quarter of 1999 (the three months ended October 31, 1998) have been
set forth below. Management's discussion and analysis of the company's financial
condition and the results of operations for the first 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)
October 31, July 31,
1998 1998
(Unaudited)
ASSETS
Cash and cash equivalents $ 6,323 $ 3,170
United States Treasury bills at cost which
approximates market value 2,016
Notes receivable, including interest of $39 and
$645 at October 31, 1998 and July 31, 1998,
respectively 8,607 10,114
Other assets 69 102
Deferred tax asset 459 509
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15,458 15,911
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LIABILITIES
Estimated liquidation expenses 1,660 1,806
Accrued expenses and taxes 177 654
----------- ---------
1,837 2,460
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Redeemable preferred stock; authorized 250,000
shares, $100 par value; issued and outstanding
1930 shares at redemption value 193 193
----------- ---------
2,030 2,653
----------- ---------
NET ASSETS IN LIQUIDATION $ 13,428 $ 13,258
----------- ---------
----------- ---------
NET ASSETS IN LIQUIDATION PER COMMON SHARE (based
on 9,552,000 shares outstanding) $ 1.41 $ 1.39
----------- ---------
See notes to financial statements
3
DG LIQUIDATION, INC.
STATEMENT OF CHANGES IN NET ASSETS IN LIQUIDATION
(in thousands)
(Unaudited)
Three
Month Period Ended
October 31,
1998 1997
Net assets in liquidation at beginning of period $ 13,258 $ 12,659
-------- --------
Interest and other income 227 271
Truck rental income -- 91
Recovery of receivables previously written-off 39 --
--------
Other adjustments to net assets (8) (6)
-- --------
Increase in net assets before income taxes 258 356
--- --------
Provision for income taxes 88 121
-- --------
Increase in estimated liquidation value of assets over
liabilities 170 235
--- --------
NET ASSETS IN LIQUIDATION AT END OF PERIOD $ 13,428 $ 12,894
-------- --------
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 October 31,
1998 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, 1998.
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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 has
been recorded at its present value of $766,000 at July 31, 1997.
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, 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.
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.
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[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.
On October 31, 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. The judgment was paid in full on May 16, 2003
in the total sum of $297,000.
[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 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 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,
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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.
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 consulting fee 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 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.
[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.
7
Statement of Net Assets in Liquidation
Pursuant to the Liquidation Plan, the Company sold substantially all of
its operating assets on July 31, 1998, 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
August 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. Any
adjustment 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 October 31, 1998, the Company had net assets in liquidation of
$13,428,000. This represented an increase in estimated liquidation value of
assets over liabilities of $170,000 from the net assets at July 31, 1997, as
compared to an increase in net assets of $235,000 for the three month period
ended October 31, 1997. The reduction of $65,000 was attributable to elimination
of truck rental of $91,000 because of the sale of the Company's trucks during
the fiscal year ended July 31, 1998, and lower interest income of $44,000 as a
result of higher estimated interest rates in the July 31, 1998 fiscal year. This
was offset by the recovery of receivables previously written-off of $39,000,
which could not begin until one year after the July 3, 1997 sale of the
Company's operating assets. The remaining difference was due to $33,000 in lower
income taxes in the 1998 period as a result of lower income.
The Months Ended October 31, 1998 Compared to Three Months Ended October 31,
1997
Interest and other income for the 1998 period was $44,000 lower than the
1997 period mainly because of lower interest rates. This was offset by the
recovery in 1998 of receivables previously written off of $39,000, which could
not begin until the receivables were turned over to the Company one year after
the July 3, 1997 sale of the Company's operating assets. Truck rental income for
the three months ended October 31, 1997 of $91,000 was reduced to zero in the
1998 period as a result of the sale of trucks and ending of the truck rental
agreement on June 30, 1998.
8
Income taxes were lower in the 1998 period as a result of lower income.
Subsequent Events
On April 6, 2000, the purchaser of the Company's assets filed a petition
for reorganization under Chapter 11 of the Bankruptcy Code, which constituted an
"event of default" under the terms of the secured adjustable value promissory
note. As a result, the Company wrote off the then $880,000 carrying value of the
purchaser's unsecured promissory note as uncollectible. On May 22, 2000 the
Company made a drawing on the standby letter of credit which collateralized the
adjustable value promissory note. On May 25, 2000, it 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.
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.
9
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 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.
10
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 October 31, 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. The judgment was paid in full on May 16, 2003 in the total sum of
$297,000.
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.
11
Exhibit
Number Description of Exhibit
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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 first quarter of fiscal 1999.
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 Township of Neptune, State of
New Jersey, on July 14, 2004
DG LIQUIDATION, INC.
By: /s/ Harold Blumenkrantz
-------------------------------------
President and Chief Executive Officer
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