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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended July 31, 1996
Commission File Number 2-96510-NY
DRUG GUILD DISTRIBUTORS, INC.
(Exact name of Registrant as specified in its charter)
New Jersey 11-2269958
(State or other jurisdiction of (I.R.S. Employer I.D. No.)
incorporation or organization)
350 Meadowland Parkway, Secaucus, New Jersey 07096
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (201) 348-3700
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES |X| NO |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
registrant's best knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K. |X|
There is no trading market for either class of the Registrant's voting
securities.
As of July 31, 1996 there were outstanding 10,022,667 shares of the Registrant's
Common Stock and 25,893.44 shares of the Registrant's Preferred Stock.
Documents incorporated by reference: None
Page 1 of ___ pages
The Exhibit Index is located at Page __
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PART I
Item 1. Business.
Drug Guild Distributors, Inc., referred to herein as the "Company" or the
"Registrant," is engaged in the business of distributing at wholesale a wide
variety of products almost exclusively to drugstores and health and beauty aid
stores primarily in the State of New Jersey and the Greater New York City
metropolitan area. Approximately 1% of sales are to nursing homes and less than
1/4 of 1% of sales are to employees of the Company. The products distributed can
be separated into four groups: (1) legend drugs, which are dispensed to the
public only on a doctor's prescription and take the form of pills, tablets and
capsules, the ingredients of which are sometimes sold in bulk by the Company;
(2) patent or non-legend drugs, which do not require a prescription and include
such items as cough medicines and aspirin; (3) sundries, which include such
items as clocks, soaps, deodorants, hairdryers and most other non-pharmaceutical
products commonly sold in drugstores; and (4) certain items sold under the
Company's private labels, including vitamins, shampoos and cough syrups. The
percentage of sales of the four product groups are approximately as follows:
legend drugs: 80%; non-legend drugs: 13%; sundries: 5%; and private labels: 2%.
The preponderance of the Company's inventory purchases are made directly
from the manufacturers and no single supplier accounts for more than 5% of the
Company's dollar amount of purchases. In the opinion of management, there are
alternative sources of supply for virtually all the products sold by the Company
and the loss of any particular supplier would not have a materially adverse
effect on the Company. The Company has written agreements with several of its
largest suppliers, but these agreements do not require any prescribed level of
purchases by the Company nor do they require the supplier to sell any given
amount to the Company or guarantee any prices.
In May 1996, as a result of a physical inventory, the Company discovered a
defalcation of approximately $7,400,000. The Company believes that entries in
its perpetual inventory and units sold were improper. The Company extrapolated
the effects of these entries based on unit costs, units sold and sales dollars.
The Company believes that similar inventory defalcations also occurred during
prior years and amounted to $5,200,000 and $2,100,000 for the years ended July
31, 1995 and 1994, respectively. Those amounts are included in the cost of sales
for those years. The Company's reported inventory values on its fiscal 1995 and
1994 balance sheets were based on results of physical counts and, accordingly,
the Company believes that its reported financial condition and net income (loss)
for all periods is fairly presented.
The Company believes it may have insurance coverage totaling $2,000,000 as
a possible recovery against the inventory defalcation. The Company has not
provided for any recovery in its financial statements for the period ended July
31, 1996, since at this time, such recovery cannot be assured.
The Company has engaged a private contractor to investigate the
defalcation and is cooperating with federal, state and local law enforcement
authorities to determine the source of the
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defalcation. The Company has also made changes in personnel and security
procedures which it believes will eliminate defalcations in the future. The
Company, upon reconciling its physical inventory for the fiscal year ended July
31, 1996, believes that no defalcations occurred from the time of discovery in
May 1996 through July 31, 1996.
The Company sells to approximately 800 customers, most of which are
drugstores located in New Jersey and the Greater New York City metropolitan
area. The Company has no control over the pricing policies of its customers and
it believes that its customers sell over a wide range of prices. There is no
requirement that a customer purchase any given portion of its inventory from the
Company, but the Company believes that it supplies from 25% to 50% of an average
customer's inventory. One customer accounted for 5.8% of the Company's sales. No
other customer accounts for more than 5% of the Company's total sales.
A substantial percentage of the Company's customers are shareholders of
the Company. Approximately 40% of the issued and outstanding Common Stock of the
Company is owned by its customers. (An additional 50% of the issued and
outstanding Common Stock of the Company is owned by affiliates of the customers
and other persons related to the affiliates.) Such "Shareholder-customers"
account for more of the Company's sales per store, on the whole, than non
Shareholder-customers. All Shareholder-customers of such stock have pledged
their shares to the Company to secure payment of amounts owed the Company for
purchases. It is the policy of the Company, with respect to a customer which has
pledged a predetermined number of shares of the Company's Common Stock or other
collateral acceptable to the Company to secure its accounts, to grant to such
customer, provided that such customer maintains its account in accordance with
certain standards, credit terms which are superior to credit terms given to
customers who do not pledge shares as security. The Company responds to defaults
in payments upon goods purchased by customers on an ad hoc basis. Upon such a
default by a Shareholder-customer, it is the policy of the Company to continue
shipping goods and to forego instituting legal actions for a longer period of
time than with respect to defaults by customers who do not pledge shares. Except
for superior credit terms, Shareholder-customers receive the same terms with
respect to sales of goods as non Shareholder-customers. The foregoing policy is
subject to modification or discontinuance at any time at the election of the
Company.
If a Shareholder-customer defaults in the payment of amounts owed the
Company for merchandise, the Company may elect to terminate the customer's
interest in the shares and credit the customer's account with an amount equal to
the lesser of (a) the FIFO Book Value, or (b) the greater of cost or par value
of the shares. In the case of a shareholder owning shares which were both
purchased by the shareholder and shares received by such shareholder as a
dividend, such categories of stock will be considered separately in determining
"the greater of cost or par value."
The Company employs sales representatives, but the majority of customers'
orders are taken by telephone or through computer terminals at the Company's New
Jersey office. Sales promotions of particular items are initiated on a regular
basis. In connection with such promotions, the Company supplies its customers
with window signs and appropriate flyers for consumers. Many
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of the Company's customers, and particularly Shareholder-customers, identify
themselves as "Drug Guild" stores.
Merger with Neuman Distributors, Inc. On September 24, 1996, the Company's
Board of Directors approved an agreement for the Company to be merged with
Neuman Distributors, Inc., a wholly owned subsidiary of Neuman Health Services,
Inc., both New Jersey corporations. On October 25, 1996, a definitive merger
agreement was executed by the Company and Neuman to effectuate the merger
whereby, if all conditions precedent of the agreement are satisfied, the
Company's stockholders would receive 23% of the common stock of Neuman Health
Services, Inc. However, the proposed merger is subject to the approval by the
Company's shareholders having beneficial ownership of a majority of the issued
and outstanding shares of each of the Company's common and preferred stock.
Neuman is the largest privately-held and the nation's seventh largest
wholesale distributor of pharmaceutical and related health and beauty care
products. Its customers include independent and chain drug stores, hospitals,
alternate care centers and the pharmacy departments of supermarkets and mass
merchandisers located throughout the northeastern United States.
As a full-service wholesale distributor, Neuman complements its
distribution activities by offering a broad range of value-added support
services to assist Neuman's customers and suppliers in maintaining and improving
their market positions and to strengthen Neuman's role in the channel of
distribution. These support services include computerized order entry, and order
confirmation systems, customized invoicing, generic sourcing programs, product
movement and management reports, consultation on store operation and
merchandising, and customer training. Most customers transmit merchandise orders
directly to Neuman's data processing system through computerized order entry
devices. Neuman's proprietary software systems feature unique systems specially
designed to help its customers order more efficiently, contain costs and monitor
their purchases which are covered by group contract purchasing arrangements.
In addition to its core wholesaling activities, Neuman operates a separate
wholesale durable medical equipment subsidiary, Home Health Care of New Jersey,
which offers Neuman's customers a full line of home health care products and
provides Neuman additional opportunity for growth and profitability. Further,
Neuman has an investment in a joint venture with KVM Technologies, a Houston,
Texas based company primarily developing the ENVOY automated medication delivery
system for hospitals, nursing homes and large pharmaceutical dispensing
operations; and MediView, a Glen Rock, New Jersey based company primarily
developing the MediView kiosk for retail marketing, couponing and sales
enhancement at the retail store level. These investments and joint ventures are
part of Neuman's overall strategy of developing diversified products and
services to enhance the profitability of its business and that of its customers
and suppliers.
In January 1994, Neuman acquired OCP America/Ketchum ("OCP"), a South
Plainfield, New Jersey based drug wholesaler. As a result of the acquisition,
Neuman now maintains a network of distribution centers enabling it to routinely
service a geographic area in which approximately 40% of the continental United
States population resides.
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Neuman completed two acquisitions in the four years prior to the OCP
acquisition. Neuman acquired James Wholesale Drug Company, a Rahway, New Jersey
based drug wholesaler serving customers located primarily in the state of New
Jersey. In January 1993, Neuman acquired H.K. Hineline Company, a Utica, New
York based drug wholesaler servicing customers located primarily in northern and
central New York state. On May 10, 1996, Neuman completed the acquisition of the
assets of Advantage buying cooperative, a purchasing group consisting of
approximately 1,000 members in the states of New Jersey, Pennsylvania and New
York.
Employees. The Company employs approximately 312 persons on a full time
basis. Approximately 217 are warehouse personnel, 66 are clerical and 29 are
executives, salespersons and administration. The warehouse and clerical
personnel are covered by a collective bargaining agreement with Local 815,
International Brotherhood of Teamsters, which expires on February 15, 1998.
There has never been a strike or labor stoppage and the Company believes that
its relationship with its employees is excellent.
Competition. Competition in the wholesale drug and drugstore supply
business is intense and the Company competes in its marketing region with a
large number of suppliers.
Financial Consultant On July 6, 1993, the Company entered into an
agreement with Joseph B. Churchman, whose address is P.O. Box 648, Rehoboth
Beach, Delaware 19971. The Company has engaged Mr. Churchman's services as a
pharmaceutical industry and financial consultant to the Company. The agreement
may be terminated by either party upon proper notice. Mr. Churchman is paid
$1,500.00 per day for services rendered to the Company. His per diem fee is to
be deducted from a success fee or finders fee payable to Mr. Churchman in the
amount of one-half of one percent (.5%) of the total consideration of a Company
"transaction" which results from his efforts. The word transaction as used
herein means, in the broadest sense, the acquisition, consolidation, merger,
sale, purchase or other union of the Company with another entity.
On June 18, 1996, the Company's Board of Directors appointed Mr. Churchman
as the Chairman of the Company's Management Committee which allows for all
operational decisions to be passed upon by Mr. Churchman. It was agreed by the
Board of Directors that Mr. Churchman would (i) receive an indemnification
agreement; (ii) be added to the Company's existing director and officer
liability insurance; and (iii) be compensated at the rate of $200/hour for his
services plus out of pocket expenses. This appointment replaces the Company's
existing financial consulting arrangement with Mr. Churchman.
Amendment to By-Laws. On October 12, 1993, the Company amended its By-laws
to provide that the Executive Committee shall have and exercise all the
authority of the Board of Directors in lieu of the Board of Directors to the
extent permitted by New Jersey Statute Annotated 14A:6-9, See Exhibit 3(d).
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Item 2. Properties.
The Company occupies a modern cinderblock and steel office and warehouse
facility in Secaucus, New Jersey. The facility, which was built to the Company's
specifications, contains approximately 155,000 square feet and houses all the
Company's office and much of its warehouse functions. The Company leases the
building from an unaffiliated entity under a lease which expires on May 31,
2005. For the fiscal years 1996-2005, the annual base rental will be an average
of $785,758.
The Company leases another warehouse facility in Secaucus, New Jersey. The
building, which was modified to accommodate the Company, contains 33,280 square
feet and houses additional warehouse space. The Company leases the building from
an unaffiliated entity under a lease which expires on May 31, 2005. For the
fiscal years 1996-2000, the annual base rental will be $158,080 and for the
fiscal years 2000-2005, the annual base rental will be $183,040.
The leases are net leases requiring the Company to pay, in addition to the
base rental, substantially all real estate taxes, repairs and other charges
incident to the ownership of the properties. The real estate taxes paid by the
Company on account of the fiscal year ended July 31, 1996, were approximately
$180,000.
In addition to the foregoing, the Company subleases an additional
warehouse facility in Secaucus, New Jersey from an unrelated third-party. The
facility contains approximately 36,977 square feet. The term of the lease, which
expired on June 30, 1995, has been extended to March 31, 1997. The annual rent
for the premises is $175,640.76 or $4.75 per square foot, "gross". Rent includes
taxes, utilities, alarm system and other related charges.
The Company owns the preponderance of its office and warehouse equipment,
all of which is in excellent condition. The Company also owns 51 delivery
trucks, most of which are operated under a contractual arrangement by a
corporation unaffiliated with the Company or management.
Item 3. Legal Proceedings.
None
Item 4. Submission of Matters to a Vote of Security Holders.
None.
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PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
There is no existing public market for any of the Company's securities.
As of July 31, 1996, there were approximately 398 holders of record of the
Company's Common Stock and approximately 39 holders of record of its Preferred
Stock. Since 19 Shareholders owned both Common and Preferred Stock, the Company
had 418 Shareholders as of that date.
The Company has never paid a cash dividend and management does not expect
to pay cash dividends in the future.
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Item 6. Selected Financial Data Income Statement Data:
Years Ended July 31,
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
000's omitted (A)
Income Statement Data
Net Sales 501,383 $493,827 $407,969 $387,252 $346,448
Net Income (Loss) (2,264) (505) 308 1,707 1,601
Net Income (Loss)
Attributable to
Common Stockholders (2,455) (796) (172) 1,316 1,184
Earnings (Loss) Per
Common Share (B) (0.24) (0.08) (0.01) 0.14 0.13(C)
Balance Sheet Data
Working Capital 7,856 11,381 13,920 13,566 11,630
Total Assets 105,974 113,266 103,669 97,209 93,220
Long-Term Liabilities 1,070 1,124 1,558 2,063 2,358
Preferred Stock 2,589 3,933 5,223 4,802 4,678
Stockholders' Equity 12,619 14,966 15,423 14,720 12,511
Stockholders' Equity
Per Common Share 1.26 1.49 1.56 1.56 1.37(C)
FIFO Book Value
Per Share (D) 1.55 2.10 2.27 2.27 2.03(C)
Ratio of Earnings
to Fixed Charges 0.31 0.89 1.16 1.91 1.87
- ----------
(A) Except Earnings (Loss) Per Common Share; Stockholder's Equity Per Common
Share; FIFO Book Value Per Share and Ratio of Earnings to Fixed Charges.
(B) See Exhibit 11 to Financial Statements.
(C) Restated to give retroactive effect to stock dividends on Common Stock
paid January 1992 and 1993.
(D) Calculated with inventory and tax liabilities based on the first-in,
first-out (FIFO) inventory method in connection with the Company's right
of first refusal and right of the holders of Preferred Stock to have their
stocks redeemed.
The table above is derived from the historical financial statements of the
Company set forth elsewhere herein as they relate to the balance sheets at July
31, 1996 and July 31, 1995 and to the statements of operations for the years
ended July 31, 1996, 1995 and 1994 and should be read in conjunction with such
financial statements, including the notes thereto.
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Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Financial Condition at July 31, 1996 Compared to Financial Condition
at July 31, 1995.
For the year ended July 31, 1996, the Company's Current Assets decreased to
$97,552,000 from $104,624,000 and its Current Liabilities decreased to
$89,966,000 from $93,242,000. The decreases were attributable to lower inventory
offset by higher receivables. The Company's ratio of Current Assets to Current
Liabilities remained the same at 1.1:1. The decrease in total Stockholders'
Equity to $12,619,000 from $14,967,000 was primarily attributable to the net
loss for the year.
The Company has an accounts receivable and inventory financing arrangement with
a bank (the "Agreement") under which it can borrow up to 70% of its eligible
accounts receivable and up to 50% of its eligible inventory, as defined in the
Agreement.
As of July 31, 1996, there were $56,100,000 of such eligible accounts receivable
out of a total of $64,000,000, or 88%, and $34,000,000 of eligible inventory
(calculated on FIFO Basis), an amount in excess of 99% of total inventory. Under
the Agreement, the maximum amount the Company can borrow on its inventory is
$30,000,000; and the maximum combined borrowing limit for accounts receivable
and inventory is $80,000,000. These limits are determined by the bank and may be
raised or lowered by the bank at its discretion.
Total borrowing upon the line of credit equaled $53,104,000 on July 31, 1996. On
such date the interest rate with respect to such financing was the prime
interest rate plus 1 1/4% (a total of 9 1/2%).
Inflation. The Company attempts to pass along price increases from its suppliers
as soon as it is notified of those increases so as to preserve its gross profit
margin and, subject to competitive pressures on particular products, is
generally successful in doing so. Accordingly, the historical effect of
inflation has been to increase the Company's revenues and profits.
Fiscal Year ended July 31, 1996, compared to fiscal year ended July 31, 1995.
Net sales for the year ended July 31, 1996 increased by 1.5% over fiscal year
1995. The increase was attributable entirely to price increases from
manufacturers being passed on to customers. The volume actually decreased
approximately 1% of sales.
In May 1996, as a result of a physical inventory, the Company discovered a
defalcation of approximately $7,400,000. The Company believes that entries in
its perpetual inventory and units sold were improper. The Company extrapolated
the effects of these entries based on unit costs, units sold and sales dollars.
The Company believes that similar inventory defalcations also occurred during
prior years and amounted to $5,200,000 and $2,100,000 for the years ended July
31, 1995 and 1994, respectively. Those amounts are included in the cost of sales
for those years. The Company's reported inventory values on its fiscal 1995 and
1994 balance sheets were based on results of physical counts and, accordingly,
the Company believes that its reported financial condition and net income (loss)
for
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all periods is fairly presented. The following reflects a reclassified
operations statement based on the impact of the inventory defalcation.
- --------------------------------------------------------------------------------
Year Ended July 31,
--------------------------------------
1996 1995 1994
--------------------------------------
000's omitted
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Net Sales $ 501,383 $ 493,827 $ 407,969
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Cost of Sales $ 468,108 $ 460,150 $ 379,839
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Gross Profit $ 33,275 $ 33,677 $ 28,130
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Operating Expenses $ 29,682 $ 29,068 $ 25,561
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Income before defalcation $ 3,593 $ 4,609 $ 2,569
- --------------------------------------------------------------------------------
Inventory defalcation $ 7,400 $ 5,200 $ 2,100
- --------------------------------------------------------------------------------
Net (loss) before income taxes $ (3,807) $ (591) $ (469)
- --------------------------------------------------------------------------------
The Company believes it may have insurance coverage totaling $2,000,000 as a
possible recovery against the inventory defalcation. The Company has not
provided for any recovery in its financial statements for the period ended July
31, 1996, since at this time, such recovery cannot be assured.
The Company has engaged a private contractor to investigate the defalcation and
is cooperating with federal, state and local law enforcement authorities to
determine the source of the defalcation. The Company has also made changes in
personnel and security procedures which it believes will eliminate defalcations
in the future. The Company, upon reconciling its physical inventory for the
fiscal year ended July 31, 1996, believes that no defalcations occurred from the
time of discovery in May 1996 through July 31, 1996.
Gross profit continues to decrease as a result of competitive pressures and a
lower profit on forward buying of pharmaceuticals. A liquidation of LIFO
inventory layers, which were carried at lower costs as compared to current
costs, had the effect of increasing net income by approximately $679,000 for the
year ended July 31, 1996. Had inventories been valued using the first-in,
first-out method, they would have been greater by approximately $4,763,000 at
July 31, 1996 and $10,087,000 at July 31, 1995.
Total expenses for fiscal 1996 increased by 2.1% over such expenses for fiscal
1995. Operating expenses for fiscal 1996, excluding interest expense, increased
by 2% over those for fiscal 1995. The increased operating expenses were caused
by higher paper costs for data processing and professional fees in connection
with a proposed merger of the Company.
The effect of the foregoing factors was that the Company had an increased loss
before taxes of 557%.
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Fiscal Year ended July 31, 1995, compared to fiscal year ended July 31, 1994.
Net sales for the year ended July 31, 1995 increased by 21% over fiscal 1994.
The increase was attributable to both an increase in sales volume (approximately
75% of the 21% increase) and an increase in pharmaceutical prices (approximately
25% of the 21% increase).
Gross profit for the year (as restated in the table on page 10 of this Form
10-K) increased by 19.7% over the gross profit for fiscal 1994 (as restated for
inventory defalcation) as a result of the increased sales; however, gross profit
as a percentage of net sales decreased 0.1% from 6.9% to 6.8%, as a result of
competitive pressures and a lower profit on forward buying of pharmaceuticals.
Total expenses for fiscal 1995 increased by 13.7% over such expenses for fiscal
1994. Operating expenses for fiscal 1995, excluding interest expense, increased
by 4.1% over those for fiscal 1994. The increased operating expenses were caused
by higher warehouse labor costs. This was due to higher volume and increased
wages as a result of premium pay for changing to a night shift. Interest costs
were higher because of higher inventory and receivables necessary to support
higher volume as well as higher interest rates.
The effect of the foregoing factors was that the Company had a loss before taxes
for the year ended July 31, 1995 as compared to net income for 1994.
Fiscal Year ended July 31, 1994, compared to fiscal year ended July 31, 1993.
Net sales for the year ended July 31, 1994 increased by 5.3% over fiscal 1993.
The increase was attributable to both an increase in sales volume (approximately
25% of the 5.3% increase) and an increase in pharmaceutical prices
(approximately 75% of the 5.3% increase). The Company believes that part of the
reason why the sales volume increase was so small was due to the poor winter
weather.
Gross profit for fiscal 1994 (as restated in the table on page 10 of this Form
10-K) decreased by 4.2% from the gross profit for fiscal 1993 (as restated for
inventory defalcation). Gross profit as a percentage of net sales decreased from
7.6% to 6.9% as a result of competitive pressures and a lower profit on forward
buying of pharmaceuticals due to smaller price increases.
Total expenses for fiscal 1994 decreased by 2.8% from such expenses for fiscal
1993. Operating expenses, excluding interest expense, for fiscal 1994 decreased
by 2.2% from those for fiscal 1993. The reduced operating expenses were due to
lower maintenance, depreciation and bad debt expense. This reduction in
operating expenses was partially offset by higher professional fees incurred in
connection with the failed negotiations for the acquisition of the Company's
capital stock by Commons Bros. Inc., and Commons Bros. Northeast, Inc. Interest
expense was lower because of reduced borrowing, although this savings was mostly
offset by higher rates.
The effect of the foregoing factors was that the Company's income before
corporate taxes for the year ended July 31, 1994, experienced a 83.5% decrease
from fiscal year 1993. Income taxes for fiscal 1994 were 85.9% lower than in
fiscal year 1993 as a result of the lower income.
Liquidity and Capital Resources. The Company believes that based upon its
current bank agreement it has sufficient liquidity and capital to support future
growth.
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Item 8. Financial Statements and Supplementary Data.
See the index constituting a part of Item 14.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
(a) On July 2, 1996, the Executive Committee of Drug Guild Distributors,
Inc. (the "Company") decided to end the engagement of Anchin, Block & Anchin LLP
as the independent auditors of the Company as a result of concerns that the
independence of Anchin, Block & Anchin LLP might be deemed to be impaired by the
Company's investigation of recently discovered defalcations of inventory of the
Company.
The independent auditors' reports on the Company's financial statements
for the past two fiscal years 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 has been advised by Anchin, Block & Anchin LLP
that it concurs 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 Anchin, Block & Anchin LLP, the Company and Anchin, Block & Anchin LLP did
not have any disagreement on a matter of accounting principles or practices,
financial statement disclosure or auditing scope or procedure.
(b) On July 11, 1996, the Company engaged Richard A. Eisner & Company, LLP
as its independent auditors to audit the Company's financial statements for the
fiscal year ended July 31, 1996.
(c) This Form 10-K is being filed without reissuing a manually signed
report from the Company's prior accountant for the Company's fiscal years'
ending July 31, 1995 and July 31, 1994. The most recent filing under the
Securities Exchange Act of 1934 (the "Exchange Act") for the aforesaid report is
the Form 10-K Report for fiscal year ended July 31, 1995.
The prior accountants, Anchin Block & Anchin LLP, have refused to provide
such reissued manually signed report due to their concern that they have lost
their independence as auditors because of potential claims against Anchin Block
& Anchin LLP 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 Anchin Block & Anchin would issue the
report in its original form and without qualification if the aforesaid concern
regarding their independence was resolved.
The Company has inquired of Anchin Block & Anchin LLP whether investors
should be advised that the previously issued report has been withdrawn and
cannot be relied upon. Anchin Block & Anchin LLP has responded that the report
should not be withdrawn.
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PART III
Item 10. Directors and Executive Officers of the Registrant.
The officers of the Company during the fiscal year ended July 31, 1996 were:
Name Age Position
---- --- --------
Alfred Hertel 67 Chairman of the Board
Roman Englander 67 President and Chief Executive Officer
Alan Glenn 66 Senior Vice President and Chief
Operating Officer and President
Gary Merten 46 Vice President - Data Processing
Mark Englander 40 Vice President
Norman Genzer 54 Vice President
Jay Reba 55 Vice President - Finance
Martin Shapiro 65 Secretary - Treasurer
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.
For more than the previous five years, Mr. Hertel has been an officer and
a principal shareholder of Oakland Drug Inc., located in Oakland, New Jersey.
Mr. Roman Englander has been employed by the Company since 1949. He has
functioned as the chief executive of the Company since 1970 and has been
President since 1973. Mr. Englander is the father of Mark Englander. Mr.
Englander's term as director expires in 1998. Mr. Englander retired as president
and chief executive of the Company on December 31, 1995.
Mr. Glenn was appointed President of the Company in March 1996. He became
a Vice President in 1973; Senior Vice President in 1980; and Chief Operating
Officer in 1995. Prior thereto and for more than 25 years, he was a principal of
Ritz Drugstores, which operates in New Jersey. Mr. Glenn retired as President of
the Company on August 31, 1996.
Mr. Merten has been employed by the Company since 1978 in the data
processing area and has been a Vice President since October, 1981. Mr. Merten
resigned from the Company on February 13, 1996.
Mr. Mark Englander has been employed by the Company since 1979. He has
been a Vice President since 1986. He is the son of Roman Englander.
13
<PAGE>
Mr. Genzer has been employed by the Company since 1982. He has been a Vice
President since 1986.
Mr. Reba has been employed by the Company since 1987. From August of 1987
to December of 1991 he was employed as Controller. He has been Vice President -
Finance since December, 1991.
Mr. Shapiro was a principal of Franhill Drugs in Hollis, New York for more
than five years preceding 1983 and a consultant to the Company from 1983 to
1986. His term as a director expired in 1987.
All of the officers, except Mr. Hertel, are full time employees of the
Company. Mr. Hertel is not an employee of the Company, he does not devote a
significant portion of his time to his duty as Chairman of the Board, and he
receives no cash remuneration for serving as Chairman of the Board.
At the annual meeting of shareholders of the Company, approximately
one-third of the members of the Board of Directors are elected for three year
terms.
The following table sets forth the names of the directors of the Company
and, as to each director, the year in which each began as director and the
number and percentage of outstanding shares of Common Stock and Preferred Stock
of the Company owned by him. The table also contains information as to the
ownership of such Common Stock and Preferred Stock by the officers of the
Company who own such securities and by all officers and directors as a group.
14
<PAGE>
Common Stock Preferred Stock
of the Company of the Company
Owned Beneficially Owned Beneficially
at July 31, 1996(2) at July 31, 1996
------------------- ----------------
Director Number Percent Number Percent
Name Since of Shares of Class of Shares of Class
- ---- ----- --------- -------- --------- --------
Harold Blumenkrantz (1) 1981 36,685 .37 975.92 3.77
Marco Cutinello 1992 -- -- -- --
Louis Del Rosso 1986 30,791 .31 -- --
Herbert Dudak 1986 96,578 .96 298.10 1.11
Harold Eckstein 1983 217,563 2.17 -- --
Paul Emanuel 1985 24,480 .24 -- --
Roman Englander 1976 339,851 3.39 -- --
Hal Epstein 1987 46,008 .46 -- --
Peter Esposito 1991 13,242 .13 -- --
Sidney Falow 1979 24,740 .25 -- --
Sanford Fishman 1976 93,705 .93
Herbert Gordon 1995 123,403 1.23 -- --
Gerald Ginsberg 1978 222,346 2.21 -- --
George Grumet 1988 47,935 .48 2,321.10 8.96
Alfred Hertel (1) 1976 113,358 1.13 -- --
Steven J. Kabakoff 1989 50,999 .51 -- --
Michael Katz 1976 101,196 1.01 -- --
Jay Kessler 1986 112,231 1.12 -- --
Gerald Koblin 1995 43,997 .44 -- --
Jerry Koizim 1988 23,398 .23 -- --
Anthony Kranjac 1992 58,820 .59 -- --
Ely Krellenstein 1976 206,323 2.06 -- --
John Lynch (1) 1976 289,162 2.88 -- --
George Manolakis 1983 108,456 1.08 -- --
Boris Mantell 1991 45,026 .45 -- --
Richard Rostholder 1988 334,394 3.34 -- --
Bipinchandra Shah 1987 137,790 1.37 669.6 2.59
Murray Shapiro 1976 27,891 .28 -- --
Howard Sternheim (1) 1976 661,946 6.60 -- --
15
<PAGE>
(Table continued)
Common Stock Preferred Stock
of the Company of the Company
Owned Beneficially Owned Beneficially
at July 31, 1996(2) at July 31, 1996
------------------- ----------------
Director Number Percent Number Percent
Name Since of Shares of Class of Shares of Class
- ---- ----- --------- -------- --------- --------
Alan Traster 1989 124 ,576 1.24 -- --
Ernest Wyre(1) 1976 149,669 1.49 -- --
Total of All
Officers and Directors
as a group (37 persons) 3,987,049 39.76 4,255.7 16.43
The following table sets forth the names of the directors of the Company who
have subscribed for but have not purchased shares of Common Stock of the
Company. The table also contains information as to outstanding subscriptions for
all officers and directors as a group.
Shares of Common Stock Shares of Common Stock
Subscribed for but Unissued to be Issued Within 60-day
as of period following
Name July 31, 1996(2) July 31, 1996
- ---- ---------------- -------------
Hal Epstein 10,452 581
Anthony Kranjac 5,226 1,161
Richard Rostholder 7,742 774
Bipinchandra Shah 24,774 3,097
Murray Shapiro 7,161 387
Howard Sternheim (1) 101,032 5,613
Alan Traster 64,452 6,968
Total of All Officers and
Directors as a group
(37 persons) 220,839 18,581
- ----------
(1) Member of the Executive Committee of the Board of Directors.
(2) Includes shares of Common Stock to be issued within the 60 day period
following July 31, 1996. Upon the payment of amounts due on the monthly
subscriptions, "Shares of Common Stock Subscribed for but Unissued" column
will be reduced by the shares issued.
16
<PAGE>
Terms Expiring in 1999
Mr. Blumenkrantz, age 58, has been a principal of West End Family
Pharmacy, Inc., Long Branch, New Jersey since 1962. Mr. Falow, age 65, has for
more than the past five years been owner of Weber's Pharmacy in Brooklyn, New
York. Mr. Kabakoff, age 49, has for more than the past five years been a
director, Vice President and Secretary of Kasbil Corporation, Bronx, New York,
which does business as Sol's Health & Beauty. Mr. Kabakoff has also been a
director of Bronx Frontier, Inc., Bronx, New York, since 1988 and was a director
and secretary of Best Alarm Company, Bronx, New York, from 1989 to 1991. Mr.
Katz, age 57, who was a principal of Katz Drug, Brooklyn, New York for more than
five years preceding 1994, is now retired. Mr. Kranjac, age 58, has been a
principal of Medical Pharmacy, Queens, New York, for more than the past five
years. Mr. Lynch, age 54, has been a principal of Bach's Drug Store,
Hackettstown, New Jersey since 1962. Mr. Manolakis, age 61, has for more than
the past five years been the owner of Oakhurst Pharmacy of Oakhurst, New Jersey,
and since 1992, the Westpark Pharmacy. Mr. Rostholder, age 42 has for more than
five years been a principal of Franhill Drugs, Inc., Hollis, New York. Mr.
Shapiro, age 57, was a principal of Core Software Solutions, Inc. from April,
1991 to March, 1992, was a principal of S & A Pharmacy, Bronx, New York, from
prior to five years ago until September 1990, and has been employed as general
manager of Zitomer Pharmacy, Inc. from March, 1992 to the present. Mr. Traster,
age 47, has for more than the five years been President, Chief Operating Officer
and a director of 17 Wanaque Corp. Saxon West, Inc. and Pompton Nursing Home
Suppliers, Inc., all with a principal address at Pompton Lakes, New Jersey.
Terms Expiring in 1998
Mr. Cutinello, age 63, has been a principal of Rita Pharmacy, Roselle, New
Jersey for more than five years. Mr. Del Rosso, age 51, has been a principal of
Investra Pharmacy, Summit, New Jersey, for more than five years. Mr. Dudak, age
64, has been a principal of Codumel Pharmacy, Brooklyn, New York, for more than
five years. Mr. Englander, age 67, who was President and Chief Executive Officer
of the Company for more than the past five years, is now retired. Mr. Fishman,
age 61, has been a principal of Fishman's Bond Drugs, Inc. of Jersey City, New
Jersey, for more than five years. Mr. Grumet, age 54, has been for more than
five years the owner of Thrifty Drug, Piscataway, New Jersey, and a principal of
Keansburg Drugs, Keansburg, New Jersey. Mr. Hertel, age 67, has, since prior to
1967, been a principal of Brittany Chemists, Inc. in New York City and Oakland
Drugs, Oakland, New Jersey. Mr. Mantell, age 50, for more than five years, has
been President of Globe Drug Corp. d/b/a Claremont Chemists, New York, New York,
served as Secretary of Magle Drug Corp., d/b/a Perry Drugs, Brooklyn, New York
from 1987 to 1992, has, since 1988, been Vice President of Brothers Drug Corp.,
d/b/a Variety Drugs, Jamaica, New York and has, since 1990, been President of
First Elm Drug Corp., d/b/a Elm Drugs, New York, New York. Mr. Sternheim, age
64, has, for more than the past five years been President and principal
shareholder of Vanderveer Pharmacy, Inc. in Brooklyn, New York and twenty-one
(21) other drug stores and one (1) variety store in the New York City area. Mr.
Wyre, age 72, who was a principal of Lenox Terrace Drug Store, Inc. in Brooklyn,
New York, for more than five years preceding 1987, is now a private investor.
17
<PAGE>
Terms Expiring in 1997
Mr. Eckstein, age 65, has been the owner of Leff Drugs, Bronx, New York
for more than the past five years. Mr. Emanuel, age 70 has been the owner of
Town and Country Pharmacy, Inc., Ridgewood, New Jersey, for more than five
years. Mr. Epstein, age 46, has for more than five years been a principal in
Thriftway Staten Island Drug Corp., Staten Island, New York, Thriftway Cross
County Drug Corp., Yonkers, New York, Thriftway Lawrence Drug Corp., Lawrence,
New York and since November, 1991, in four additional Thriftway stores including
the Thriftway Concourse Drug Corp., Bronx, New York. Mr. Esposito, age 50, has
for more than the past five years been the President and owner of E&W Drug
Corp., Edison, New Jersey, E&W of Union, Inc., Union, New Jersey and has been
President and an owner of E&M Pharmacies, Inc., New Brunswick, New Jersey. All
three corporations are doing business as Metro Drugs. Mr. Ginsberg, age 68, has
for more than five years been President of C. O. Bigelow Chemists, Inc., and
C.O. Bigelow of Roosevelt, Inc. in New York City. Mr. Gordon, age 62, has been a
principal of Webster Drug and Cosmetic Corp., Bronx, New York for more than five
years. Mr. Kessler, age 58, has been a principal of Ark Drugs, Brooklyn, New
York for more than five years. Mr. Koblin, age 59, has been a principal of
Koblin Pharmaceuticals, Inc., Nyack, New York for more than five years. Mr.
Koizim, age 69, has been a principal of Drug Fair, Kearny, New Jersey, for more
than five years. Mr. Krellenstein, age 68, was a principal of Oval Drug Co.,
Bronx, New York, between 1989 and 1991; he has since retired. Mr. Shah, age 52,
has been President of V and B Drug Corp., Bronx, New York for more than five
years.
Item 11. Executive Compensation.
Summary Compensation Table
The following table sets forth, for the fiscal years ended July 31, 1996,
1995 and 1994, 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.
18
<PAGE>
Annual Compensation
----------------------------------------
Other
Name Annual All Other
and Principal Compen- Compen-
Position Year Salary Bonus sation sation(1)
- --------------------------------------------------------------------------------
Roman Englander 1996 $272,198.00 -- -- $10,327.00
President and 1995 $526,400.00 -- -- $10,320.00
CEO(2) 1994 $448,716.00 -- -- $ 9,007.00
Alan Glenn 1996 $202,800.00 -- -- $ 3,064.00
Senior Vice 1995 $202,800.00 -- -- $ 2,870.00
President, COO 1994 $202,000.00 -- -- $ 6,309.00
and President(3)
Gary Merten 1996 $ 88,500.00 -- -- --
Vice President 1995 $125,800.00 -- -- --
Date Processing(4) 1994 $126,100.00 -- -- --
Jay Reba 1996 $107,600.00 -- -- --
Vice President 1995 $107,600.00 -- -- --
Finance 1994 $106,900.00 -- -- --
Mark Englander 1996 $106,000.00 -- -- --
Vice President 1995 $105,500.00 -- -- --
1994 $105,300.00 -- -- --
Norman Genzer 1996 $105,500.00
Vice President 1995 $108,000.00 -- -- --
1994 $105,300.00 -- -- --
All Executive Officers
as a Group (8 persons) $953,198.00 -- -- $13,391.00
- ----------
(1) Value of insurance premiums paid by the Company during the covered
fiscal year with respect to term life insurance for the benefit of the named
executive officer.
(2) Retired effective December 31, 1995.
(3) Appointed President of the Company in March 1996. Retired from the
Company effective August 31, 1996.
(4) Resigned from the Company on February 13, 1996.
19
<PAGE>
Mr. Englander entered into a Resignation Agreement with the Company dated
December 5, 1995 which, among other things (i) accepts the resignation of Mr.
Englander as President and Chief Executive Officer effective December 31, 1995;
(ii) employs Mr. Englander as a consultant to the Company from January 1, 1996
through September 30, 1996; and (iii) ratifies and confirms a Deferred
Compensation provision of an Employment Agreement between the Company and Mr.
Englander dated as of October 1, 1993 whereby the Company shall pay Englander,
commencing upon the earlier of Englander's attaining age 65 or the date of
termination of his employment, additional compensation payable in one hundred
twenty (120) equal monthly installments of Eight Thousand Three Hundred
Thirty-Three Dollars and Thirty-Four Cents ($8,333.34) each. See also Note F of
"Notes to the Financial Statements."
None of the directors or members of the Executive Committee, except Mr.
Englander, receives any direct remuneration from the Company, but the Company
pays the premium for term life insurance policies covering most of them with the
benefits of $100,000 each payable to their designees. The aggregate annual
premium for these policies is approximately $49,000.
Although most of the directors are affiliated with certain customers of
the Company, all transactions between such customers and the Company are in its
normal course of business and these customers by virtue of being affiliated with
directors receive no preferences as to price or other terms and conditions at
which they buy products from the Company.
The Company has a non-contributory, defined benefit pension plan for
non-union employees, including its officer-employees, to which it contributed,
with respect to such officer-employees, an aggregate of approximately $105,600
for the fiscal year ended July 31, 1996. See Note F of "Notes to the Financial
Statements." Under the plan, participating employees upon reaching age 65 after
5 years of plan membership are entitled to annual retirement benefits in
accordance with the following formula: (a) 30% (reduced by 3/4% for each year or
part thereof less than 40 years employed by the Company) of average yearly
compensation during the five consecutive years of the last ten years during
which the employee received the highest compensation ("Yearly Base
Compensation") plus (b) 18.72% of the excess of Yearly Base Compensation over
1992 Social Security covered compensation, such 18.72% reduced by .65% for each
year under 32 years employed by the Company. The plan provides for related
benefits in the event of death, disability or early retirement. An employee's
interest in the plan becomes fully vested in increments over his first five
years of membership in the plan.
Defined Benefit or Actuarial Plan Disclosure
Years of Service
Remuneration 15 20 25 30 35
- -------------------------------------------------------------------------------
$100,000 $18,000 $24,000 $30,000 $36,000 $42,000
$125,000 $23,000 $30,000 $38,000 $45,000 $53,000
$150,000 + $28,000 $37,000 $46,000 $54,000 $60,000
20
<PAGE>
The estimated credit years of service for each of the executive officers
named in the "Summary Compensation Table" as of January 1, 1996, are as follows:
Name Estimated Credited Years
---- ------------------------
Roman Englander 46
Alan Glenn 21
Gary Merten 17
Jay Reba 8
Mark Englander 15
Norman Genzer 10
The form of the pension plan is a life annuity with 10 years guaranteed.
There is no deduction for Social Security or other offset amounts.
The Board of Directors of the Company unanimously agreed at a meeting of
the Board of Directors to freeze the Company's contribution to the pension plan
as of June 28, 1996.
The Company also has a profit-sharing plan, including a 401(k), for
non-union employees, including its officer-employees, which requires no fixed or
minimum contribution. There was no contribution to the profit-sharing plan for
the fiscal years ended July 31, 1996 and 1995. Under the plan, contributions by
the Company are allocated among the accounts of participating employees in
proportion to their respective compensations, as defined. Upon retirement, death
or disability, participating employees are entitled to the value of their
accounts as provided in the plan. An employee's interest in the plan becomes
vested in increments over the first five years of his membership.
21
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management
To the knowledge of the Company, no person owns beneficially or of record
more than 5% of any class of the Company's voting securities except for:
(1) (2) (3) (4)
Title of Name and Address Amount of Shares and Nature Percent
Class of beneficial owner of Beneficial Ownership of Class
- -------- ------------------- ----------------------- --------
Preferred John Hoover 2,065.9 7.98%
Stock 714 North Market Street
Cortez, Co 81321
Maurice Malin 2,166.1 8.37%
45 Hall Place
Tappan, New York 10983
George Grumet 2,321.1 8.96%
17 Phillips Road
Edison, New Jersey 08816
Common Howard Sternheim 661,946 6.60%
Stock 1020 Park Avenue
New York, NY 10028
Item 13. Certain Relationships and Related Transactions.
None
Item 14. Exhibits, Financial Statements, Financial Statement
Schedules and Reports on Form 8-K
(a)(1) Financial Statements.
The following are filed with this report:
i) Independent Auditor's Report.
ii) Balance Sheets at July 31, 1996 and 1995.
iii) Statements of Operations for the years ended July 31, 1996, 1995 and
1994.
iv) Statements of Stockholders' Equity for the years ended July 31,
1996, 1995 and 1994.
v) Statements of Cash Flow for the years ended July 31, 1996, 1995 and
1994.
vi) Notes to the Financial Statements.
22
<PAGE>
(a)(2) Financial Statement Schedules:
i) Schedules II - Valuation and Qualifying Accounts
(a)(3) Exhibits.
The following exhibits are filed as part of this report:
Page No. In
Sequential
Exhibit Numbering
Number System
- ------- -----------
3(a) Certificate of Incorporation of the Registrant, filed
July 22, 1976 and Amendments to Certificate of
Incorporation [3(a)](6)
(b) Registrant's By-laws and Amendments thereto [3(b)](6)
(c) Certificate of Correction of Certificate of Amendment
of Certificate of Incorporation [3(c)](7)
(d) Amendment to By-Laws
4(a) Common Stock Subscription Agreement (9)
4(b) Preferred Stock Subscription Agreement (9)
(c) Old Common Stock Subscription Agreement [4(a)](4)
(d) Special Common Stock Subscription Agreement [4(b)](4)
(e) Special Common Stock Subscription Agreement Modified
as of January 15, 1988 [4(c)](5)
(f) Variable Rate Promissory Note Subscription Agreement
[4(c)](4)
(g) Form of Variable Rate Promissory Note [4(d)](1)
(h) Form of Old Common Stock Certificate [4(e)](3)
23
<PAGE>
Page No. In
Sequential
Exhibit Numbering
Number System
- ------- -----------
(i) Form of Special Common Stock Certificate [4(f)](3)
(j) Special Common Stock Subscription Agreement modified
as of June, 1989 [4(h)](6)
(k) Form of Common Stock Certificate [4(k)](8)
(1) Form of Preferred Stock Certificate [4(l)](8)
(m) Revised Common Stock Subscription Agreement (10)
(The Registrant will furnish the Securities and
Exchange Commission upon request a copy of each
instrument defining the rights of the holders of the
Registrant's long term debt)
10(a) Lease, dated September 13, 1973, between the
Registrant and Hartz Mountain Industries, Inc., as
amended November 19, 1980 and December 28, 1981
[5(b)](2)
(b) Employment Agreement, dated as of December 19, 1985,
between the Registrant and Roman Englander [5(b)](5)
(c) Pension Plan Restated as of January 1, 1978 [10(c)](3)
(d) Profit Sharing Plan [10(d)](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
[10(e)](7)
(f) Lease, dated December 15, 1989, between the
Registrant and Hartz Mountain Industries, Inc.
[10(f)](7)
24
<PAGE>
Page No. In
Sequential
Exhibit Numbering
Number System
- ------- -----------
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
(l) Amended and Restated Drug Guild Distributors, Inc.
Pension Plan effective January 1, 1989 and the
Amendment thereto dated 9/1/94
(m) Resignation Agreement between the Company and Roman
Englander dated December 5, 1996.
(n) Indemnification Agreement between the Company and
Joseph B. Churchman dated June 18, 1996.
(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.
11 Computations of Earnings per Share
12(a) Statement or Computation of ratios (13)
- ----------
<PAGE>
(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.
(10) Filed as the Specified Exhibit to Post-Effective Amendment No.1 to the
Company's Registration Statement on Form S-2 (File No. 33-40277).
(11) Filed as to specified exhibit constituting a part of the Registrant's Form
10-K, Annual Report, pursuant to Section 13 or 15(D) of the Securities
Exchange Act of 1934, for the fiscal year ended July 31, 1992.
(12) Filed as to specified exhibit constituting a part of the Registrant's Form
10-K, Annual Report, pursuant to Section 13 or 15(D) of the Securities
Exchange Act of 1934, for the fiscal year ended July 31, 1993.
26
<PAGE>
(13) Filed herewith.
(b)Reports on Form 8-K
A Form 8-K was filed with the Securities and Exchange Commission ("SEC")
on August 9, 1996 and thereafter amended by a Form 8-K/A filed with the SEC on
August 23, 1996 719-3
27
<PAGE>
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 City of Secaucus, State of
New Jersey, on November 8, 1996.
DRUG GUILD DISTRIBUTORS, INC.
By: /s/ Alfred W. Hertel
-------------------------------------------------
Alfred Hertel, Chairman of the Board of Directors
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ Jay Reba Vice President, Principal November 8, 1996
- --------------------------- Financial and
Jay Reba Accounting Officer
/s/ Harold Blumenkrantz Director November 8, 1996
- ---------------------------
Harold Blumenkrantz
___________________________ Director November 8, 1996
Marco N. Cutinello
/s/ Louis J. DelRosso Director November 8, 1996
- ---------------------------
Louis J. Del Rosso
28
<PAGE>
Signature Title Date
- --------- ----- ----
/s/ Herbert Dudak Director November 8, 1996
- ---------------------------
Herbert Dudak
/s/ Harold Eckstein Director November 8, 1996
- ---------------------------
Harold Eckstein
/s/ Paul Emanuel Director November 8, 1996
- ---------------------------
Paul Emanuel
/s/ Roman Englander Director November 8, 1996
- ---------------------------
Roman Englander
___________________________ Director November 8, 1996
Hal Epstein
/s/ Peter Esposito Director November 8, 1996
- ---------------------------
Peter Esposito
/s/ Sidney Falow Director November 8, 1996
- ---------------------------
Sidney Falow
/s/ Sanford Fishman Director November 8, 1996
- ---------------------------
Sanford Fishman
29
<PAGE>
Signature Title Date
- --------- ----- ----
___________________________ Director November 8, 1996
Gerald Ginsberg
/s/ Herbert Gordon Director November 8, 1996
- ---------------------------
Herbert Gordon
/s/ George Grumet Director November 8, 1996
- ---------------------------
George Grumet
/s/ Alfred W. Hertel Director November 8, 1996
- ---------------------------
Alfred Hertel
/s/ Steven J. Kabakoff Director November 8, 1996
- ---------------------------
Steven J. Kabakoff
___________________________ Director November 8, 1996
Michael Katz
/s/ Jay Kessler Director November 8, 1996
- ---------------------------
Jay Kessler
/s/ Jerry Koblin Director November 8, 1996
- ---------------------------
Jerry Koblin
30
<PAGE>
Signature Title Date
- --------- ----- ----
____________________________ Director November 8, 1996
Jerry Koizim
____________________________ Director November 8, 1996
Anthony Kranjac
____________________________ Director November 8, 1996
Ely Krellenstein
____________________________ Director November 8, 1996
John Lynch
/s/ George Manolakis Director November 8, 1996
- ---------------------------
George Manolakis
/s/ Boris Mantel Director November 8, 1996
- ---------------------------
Boris Mantel
___________________________ Director November 8, 1996
Richard Rostholder
/s/ Bipinchandra Shah Director November 8, 1996
- ---------------------------
Bipinchandra Shah
31
<PAGE>
Signature Title Date
- --------- ----- ----
/s/ Murray Shapiro Director November 8, 1996
- ---------------------------
Murray Shapiro
/s/ Howard Sternheim Director November 8, 1996
- ---------------------------
Howard Sternheim
___________________________ Director November 8, 1996
Alan D. Traster
___________________________ Director November 8, 1996
Ernest Wyre
32
<PAGE>
DRUG GUILD DISTRIBUTORS INC.
EARNINGS TO FIXED CHARGES (S-K Item 503(d))
Year Ended July 31
1996 1995 1994
- --------------------------------------------------------------------------------
(000's omitted except Ratio-Earnings to Fixed Charges)
Pretax Income $(3,807) $ (591) $ (469)
Interest Expense $ 5,494 $ 5,327 $ 2,915
Total $ 1,687 $ 4,736 $ 3,384
Interest Expense $ 5,494 $ 5,327 $ 2,915
Ratio-Earnings to
Fixed Charges 0.31 0.89 1.16
Pro Forma Calculations under Regulation S-K Item 503(d)9 are not required
because the contemplated preferred stock dividends are payable in stock instead
of cash.
<PAGE>
DRUG GUILD DISTRIBUTORS, INC.
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
FILED WITH THE ANNUAL REPORT OF THE COMPANY ON FORM 10-K
PAGE
NUMBER
------
PART II ITEM 8:
REPORT OF INDEPENDENT AUDITORS F-2
BALANCE SHEETS AS AT JULY 31, 1996
AND JULY 31, 1995 F-3
STATEMENTS OF OPERATIONS FOR THE YEARS
ENDED JULY 31, 1996, JULY 31, 1995 AND
JULY 31, 1994 F-4
STATEMENTS OF STOCKHOLDERS' EQUITY FOR
THE YEARS ENDED JULY 31, 1996, JULY 31,
1995 AND JULY 31, 1994 F-5
STATEMENTS OF CASH FLOWS FOR THE YEARS
ENDED JULY 31, 1996, JULY 31, 1995
AND JULY 31, 1994 F-6
NOTES TO FINANCIAL STATEMENTS F-7
PART IV ITEM 14:
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED JULY 31, 1996, JULY 31, 1995
AND JULY 31, 1994 F-19
EXHIBIT 11 - COMPUTATION OF EARNINGS PER SHARE F-20
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Drug Guild Distributors, Inc.
Secaucus, New Jersey
We have audited the accompanying balance sheet of Drug Guild Distributors,
Inc. as at July 31, 1996 and the related statements of operations, stockholders'
equity and cash flows for the year then ended. 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements enumerated above present fairly,
in all material respects, the financial position of Drug Guild Distributors,
Inc. at July 31, 1996, and the results of its operations and its cash flows for
the year then ended, in conformity with generally accepted accounting
principles.
As described in Note O, during 1996 the Company discovered an inventory
defalcation affecting 1996 and prior years. Management estimates the loss for
1996 to be approximately $7,400,000.
The audit above includes Schedule II, for the year ended July 31, 1996. In
our opinion, the schedule referred to above presents fairly the information set
forth therein in conformity with the applicable accounting regulation of the
Securities and Exchange Commission.
New York, New York
October 14, 1996
F-2
<PAGE>
DRUG GUILD DISTRIBUTORS, INC.
BALANCE SHEETS
(in thousands, except per share data)
<TABLE>
<CAPTION>
July 31,
---------------------
ASSETS 1996 1995
--------- ---------
<S> <C> <C>
Current assets:
Cash .......................................................... $ 200 $ 2,023
Trade receivables - stockholders .............................. 27,913 26,536
Trade receivables - nonstockholders ........................... 39,361 36,713
Allowance for doubtful accounts ............................... (1,203) (1,123)
Merchandise inventory ......................................... 29,440 38,896
Deferred income tax benefit ................................... 788
Tax refund receivable ......................................... 1,036
Prepaid expenses and other current assets ..................... 805 791
--------- ---------
Total current assets ................................... 97,552 104,624
--------- ---------
Property and equipment, net ...................................... 3,331 3,341
--------- ---------
Other assets:
Trade receivables, noncurrent portion - stockholders .......... 1,593 2,161
Trade receivables, noncurrent portion - nonstockholders ....... 2,288 2,914
Allowance for doubtful accounts ............................... (438) (460)
Deferred income tax benefit ................................... 1,426 246
Other assets .................................................. 222 440
--------- ---------
Total other assets ..................................... 5,091 5,301
--------- ---------
T O T A L .............................................. $ 105,974 $ 113,266
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Loans payable - bank .......................................... $ 53,104 $ 53,175
Notes and loans payable ....................................... 527 772
Accounts payable .............................................. 34,590 37,463
Accrued expenses and taxes .................................... 1,475 1,832
--------- ---------
Total current liabilities .............................. 89,696 93,242
--------- ---------
Long-term liabilities:
Notes payable ................................................. 237 501
Deferred rent payable ......................................... 263
Deferred compensation payable ................................. 570 623
--------- ---------
Total long-term liabilities ............................ 1,070 1,124
--------- ---------
Total liabilities ...................................... 90,766 94,366
--------- ---------
Redeemable preferred stock:
Authorized 250,000 shares, $100 par value; issued and
outstanding - 26,000 and 39,000 shares ...................... 2,589 3,933
--------- ---------
Stockholders' equity:
Common stock, authorized 25,000,000 shares, $1 par value;
issued and outstanding - 10,023,000 and
10,000,000 shares ........................................... 10,023 10,000
Subscribed and unissued - 412,000 and 425,000 shares .......... 412 425
Additional paid-in capital .................................... 3,628 3,792
Retained earnings ............................................. (805) 1,650
--------- ---------
Total before subscriptions receivable .................. 13,258 15,867
Less subscriptions receivable ................................. 639 900
--------- ---------
Total stockholders' equity ............................. 12,619 14,967
--------- ---------
T O T A L .............................................. $ 105,974 $ 113,266
========= =========
</TABLE>
Attention is directed to the foregoing accountants' report and to the
accompanying notes to financial statements.
F-3
<PAGE>
DRUG GUILD DISTRIBUTORS, INC.
STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Year Ended July 31,
---------------------------------
1996 1995 1994
--------- --------- ---------
Net sales:
Stockholders ........................ $ 209,428 $ 206,271 $ 199,905
Nonstockholders ..................... 291,955 287,556 208,064
--------- --------- ---------
Total net sales .............. 501,383 493,827 407,969
Cost of sales .......................... 468,108 465,350 381,939
Estimated loss on defalcation (Note O) 7,400
--------- --------- ---------
Gross profit ........................... 25,875 28,477 26,030
--------- --------- ---------
Operating expenses:
Warehouse ........................... 8,886 8,822 8,036
Shipping and delivery ............... 5,674 5,783 5,709
Selling, general and administrative 10,229 9,682 9,592
Interest expense .................... 5,494 5,327 2,915
Interest (income) ................... (601) (546) (691)
--------- --------- ---------
Total operating expenses ..... 29,682 29,068 25,561
--------- --------- ---------
Income (loss) before income taxes ...... (3,807) (591) 469
--------- --------- ---------
Provision (benefit) for income taxes:
Current ............................. (1,151) (94) 305
Deferred ............................ (392) 8 (144)
--------- --------- ---------
T o t a l .................... (1,543) (86) 161
--------- --------- ---------
NET INCOME (LOSS) ..................... (2,264) (505) 308
Less:
Stock dividend on special common
stock ............................. 67
Stock dividend on preferred stock ... 191 291 413
--------- --------- ---------
NET (LOSS) ATTRIBUTABLE TO COMMON
STOCKHOLDERS ........................ $ (2,455) $ (796) $ (172)
========= ========= =========
(LOSS) PER COMMON SHARE ................ $ (0.24) $ (0.08) $ (0.01)
========= ========= =========
Attention is directed to the foregoing accountants' report and to the
accompanying notes to financial statements.
F-4
<PAGE>
DRUG GUILD DISTRIBUTORS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
<TABLE>
<CAPTION>
Common Stock $1 Par Value
------------------------------------
Issued and Subscribed and
Outstanding Unissued Additional
----------------- ---------------- Paid-in Retained
Shares Amount Shares Amount Capital Earnings
------ ------ ------ ------ ------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance - July 31, 1993.......................................... 9,448 $ 9,448 1,123 $1,123 $3,886 $ 2,618
Transactions for the year ended July 31, 1994:
Net income.................................................... 308
Common stock redeemed or cancellations........................ (14) (14) (38) (38) (35)
Common stock to offset accounts receivable .................. (79) (79) (42)
Collections on subscriptions.................................. 482 482 (482) (482)
Stock dividend on special common stock paid-in common stock .. 46 46 21 (67)
Stock dividend on preferred stock ............................ (413)
Common stock subscription adjustments ........................ 67 67 95
Preferred stock cancellations ................................ 2
------- -------- ------ ------- ------- --------
Balance - July 31, 1994.......................................... 9,883 9,883 670 670 3,927 2,446
Transactions for the year ended July 31, 1995:
Net (loss).................................................... (505)
Common stock redeemed or cancellations........................ (19) (19) (64) (64) (5)
Common stock to offset accounts receivable.................... (111) (111) (64)
Collections on subscriptions.................................. 247 247 (247) (247)
Stock dividend on preferred stock ............................ (291)
Common stock subscription adjustments ........................ 66 66 (66)
------- -------- ------ ------- ------- --------
Balance - July 31, 1995.......................................... 10,000 10,000 425 425 3,792 1,650
Transactions for the year ended July 31, 1996:
Net (loss).................................................... (2,264)
Common stock redeemed or cancellations........................ (1) (1) (18)
Common stock to offset accounts receivable.................... (98) (98) (37)
Collections on subscriptions.................................. 121 121 (121) (121)
Stock dividend on preferred stock ............................ (191)
Common stock subscription adjustments ........................ 109 109 (109)
------- -------- ------ ------- ------- --------
BALANCE - JULY 31, 1996.......................................... 10,023 $10,023 412 $ 412 $3,628 $ (805)
======= ======== ====== ======= ======= ========
<CAPTION>
Total Before Less Total
Subscriptions Subscriptions Stockholders'
Receivable Receivable Equity
------------- ------------- -------------
<S> <C> <C> <C>
Balance - July 31, 1993.......................................... $17,075 $2,356 $14,719
Transactions for the year ended July 31, 1994:
Net income.................................................... 308 308
Common stock redeemed or cancellations........................ (87) (69) (18)
Common stock to offset accounts receivable .................. (121) (121)
Collections on subscriptions.................................. - 0 - (945) 945
Stock dividend on special common stock paid-in common stock .. - 0 - - 0 -
Stock dividend on preferred stock ............................ (413) (413)
Common stock subscription adjustments ........................ 162 162 - 0 -
Preferred stock cancellations ................................ 2 2
-------- ------- -------
Balance - July 31, 1994.......................................... 16,926 1,504 15,422
Transactions for the year ended July 31, 1995:
Net (loss).................................................... (505) (505)
Common stock redeemed or cancellations........................ (88) (63) (25)
Common stock to offset accounts receivable.................... (175) (175)
Collections on subscriptions.................................. - 0 - (541) 541
Stock dividend on preferred stock ............................ (291) (291)
Common stock subscription adjustments ........................ - 0 - - 0 -
-------- ------- -------
Balance - July 31, 1995.......................................... 15,867 900 14,967
Transactions for the year ended July 31, 1996:
Net (loss).................................................... (2,264) (2,264)
Common stock redeemed or cancellations........................ (19) (21) 2
Common stock to offset accounts receivable.................... (135) (135)
Collections on subscriptions.................................. - 0 - (240) 240
Stock dividend on preferred stock ............................ (191) (191)
Common stock subscription adjustments ........................ - 0 - - 0 -
-------- ------- -------
BALANCE - JULY 31, 1996.......................................... $13,258 $ 639 $12,619
======== ======= =======
</TABLE>
Attention is directed to the foregoing accountants' report and to the
accompanying notes to financial statements.
F-5
<PAGE>
DRUG GUILD DISTRIBUTORS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended July 31,
1996 1995 1994
------- -------- --------
(in thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ............................. $(2,264) $ (505) $ 308
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Depreciation and amortization .............. 891 1,031 1,321
Loss on disposal of fixed assets ........... 59
Deferred compensation payable .............. (53) (49) 88
Deferred income taxes ...................... (392) 8 (144)
(Increase) decrease in:
Trade receivables, net ................... (2,908) (6,318) (10,881)
Merchandise inventory .................... 9,456 (4,033) 5,074
Tax refund receivable .................... (1,036)
Prepaid expenses and other current
assets ................................. (14) 446 (644)
Increase (decrease) in:
Accounts payable ......................... (2,873) (4,515) 10,008
Deferred rent payable .................... 263
Accrued expenses and taxes ............... (339) 677 (167)
------- -------- --------
Net cash provided by (used in)
operating activities ............... 731 (13,258) 5,022
------- -------- --------
Cash flows from investing activities:
Additions to property and equipment ............ (880) (1,405) (568)
(Increase) decrease in other assets ............ 218 (217) (12)
------- -------- --------
Net cash (used in) investing
activities ......................... (662) (1,622) (580)
------- -------- --------
Cash flows from financing activities:
Repayment of notes payable ..................... (528) (627) (2,480)
Net increase (decrease) in short-term
bank debt .................................... (71) 15,858 (2,058)
Collections on common stock .................... 242 541 945
Common stock redeemed .......................... (24) (17)
Collections on subscriptions for preferred
stock ........................................ 77
Preferred stock redeemed ....................... (1,535) (804) (66)
------- -------- --------
Net cash provided by (used in)
financing activities ............... (1,892) 14,944 (3,599)
------- -------- --------
NET INCREASE (DECREASE) IN CASH ................... (1,823) 64 843
Cash - beginning of year .......................... 2,023 1,959 1,116
------- -------- --------
CASH - END OF YEAR ................................ $ 200 $ 2,023 $ 1,959
======= ======== ========
Supplemental disclosures of cash flow information:
Interest paid ................................ $ 5,353 $ 5,327 $ 2,915
Income taxes - paid .......................... 101 1 862
Income taxes - refunded ...................... 377 477
Summary of noncash transactions:
Reduction of accrued expenses in exchange
for issuance of notes payable ............ 19 24 22
Equipment transfer to employees .............. 56
Accounts receivable reduced for
redemptions of:
Common stock ............................. 135 177 121
Preferred stock .......................... 777
Stock dividends on preferred stock ........... 191 291 413
Stock dividends on special common stock
paid-in common stock ....................... 68
New stock subscriptions, net of cancellations:
Common stock ............................... (64) 93
Preferred stock cancellation increasing
additional paid-in capital ................. 2
</TABLE>
Attention is directed to the foregoing accountants' report and to the
accompanying notes to financial statements.
F-6
<PAGE>
DRUG GUILD DISTRIBUTORS, INC.
NOTES TO FINANCIAL STATEMENTS
(NOTE A) - Summary of Significant Accounting Policies:
Description of business:
Drug Guild Distributors, Inc. (the "Company") is engaged in the business
of distributing at wholesale, 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.
Merchandise inventory:
The inventory, which consists entirely of finished goods, is stated at the
lower of cost (last-in, first-out) or market (see Note N).
Property and equipment:
Property and equipment are stated at cost. Depreciation is computed on
straight-line and accelerated methods over the estimated useful lives as
follows:
Leasehold improvements................ 10 - 18 years
Warehouse equipment .................. 5 years
Data processing equipment ............ 5 - 7 years
Trucks and delivery equipment ........ 5 years
Cash equivalents:
For purposes of the statement of cash flows, the Company considers all
highly liquid money market instruments with original maturity of three months or
less to be cash equivalents. At July 31, 1996, cash equivalents were deposited
in financial institutions and consisted of immediately available fund balances.
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.
(continued)
F-7
<PAGE>
DRUG GUILD DISTRIBUTORS, INC.
NOTES TO FINANCIAL STATEMENTS
(NOTE A) - Summary of Significant Accounting Policies: (continued)
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.
Fair value of financial instruments:
The carrying amount reported in the balance sheets for cash, accounts
receivable, accounts payable and accrued liabilities approximates fair value
because of the immediate or short-term maturity of the financial instruments.
The carrying amount reported for outstanding bank indebtedness
approximates fair value because the debt is at a variable rate that reprices
frequently. The Company believes that its nonbank indebtedness approximates fair
value based on current yields for debt instruments of similar quality and terms.
Income (loss) per common share:
For the years ended July 31, 1996, July 31, 1995 and July 31, 1994,
earnings per share was computed by dividing net income after deducting the
preferred dividend requirements, by the weighted average of common stock
outstanding of 10,062,372, 9,929,990 and 9,688,802 at July 31, 1996, July 31,
1995 and July 31, 1994, respectively.
Concentration of credit risk:
Financial instruments that potentially subject the Company to credit risk
consist of trade receivables. The Company markets its products primarily to
retail drug and health and beauty aid stores. The risk associated with this
concentration is believed by the Company to be limited due to the large number
of stores and the performance of credit evaluation procedures.
(continued)
F-8
<PAGE>
DRUG GUILD DISTRIBUTORS, INC.
NOTES TO FINANCIAL STATEMENTS
(NOTE A) - Summary of Significant Accounting Policies: (continued)
Recently issued accounting pronouncements:
In March 1995 and October 1995, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 121 ("SFAS 121"),
"Accounting for the Impairment of Long-Lived Assets and for the Long-Lived
Assets to be Disposed of," and Statement of Financial Accounting Standards No.
123 ("SFAS 123"), "Accounting for Stock-Based Compensation," respectively. SFAS
121 is effective for the Company's fiscal year ending July 31, 1997 and SFAS 123
has various effective and transition dates. The Company believes adoption of
SFAS 121 and SFAS 123 will not have a material impact on its financial
statements.
(NOTE B) - Trade Receivables:
Trade receivables include notes due from customers, as follows:
July 31, 1996
-------------
Maturing within one year:
Stockholder ............... $2,478,000
Nonstockholder ............ 2,384,000
----------
4,862,000
----------
Due after one year:
Stockholder ............... 1,764,000
Nonstockholder ............ 2,338,000
----------
4,102,000
----------
Total .............. $8,964,000
==========
July 31, 1995
-------------
Maturing within one year ..... $4,820,000
Due after one year ........... 5,075,000
Total.... .......... $9,895,000
==========
It is the policy of the Company to obtain either personal guarantees or a
lien on the customer's assets as collateral for most notes and certain other
trade receivables. See Note L for other collateral received.
(continued)
F-9
<PAGE>
DRUG GUILD DISTRIBUTORS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE C) - Loans Payable - Bank:
Under an accounts receivable and inventory financing agreement, which
allows for borrowings of up to $80 million, a bank makes secured demand loans
based on a percentage of eligible trade receivables and inventory, which are
pledged as collateral. Interest is at 1 1/4% above the prime rate. As of July
31, 1996, total loan advances available under the revolving loan agreement was
$3,935,000. The agreement contains restrictions, which limit cash dividends and
redemptions of stock.
For the year ended July 31, 1996, a waiver was obtained from the bank for
the redemptions of preferred stock during the year and for the period through
November 1996 in the amount not exceeding $413,000.
(NOTE D) - Notes and Loans Payable:
Short-term and long-term portion of notes and loans payable are as
follows:
July 31,
----------------------
1996 1995
--------- ----------
Notes and loans due to stockholders,
officers, employees and members of their
families are payable on demand and 13
months after demand. Interest is at rates
ranging from prime to 1 1/4% over prime,
except that $472,000 and $623,000 of such
notes at July 31, 1996 and July 31, 1995,
respectively, require minimum interest of
10% .......................................... $571,000 $ 756,000
Notes due in installments of principal
and interest at 9% - 11 1/2% to
November 1999 are collateralized by
specific equipment ......................... 193,000 517,000
--------- ----------
764,000 1,273,000
Due on demand or within one year .............. 527,000 772,000
--------- ----------
Long-term portion ............................. $237,000 $ 501,000
========= ==========
(continued)
F-10
<PAGE>
DRUG GUILD DISTRIBUTORS, INC.
NOTES TO FINANCIAL STATEMENTS
(NOTE D) - Notes and Loans Payable: (continued)
As of July 31, 1996, future annual maturities are as follows:
Year Ending
July 31,
-----------
1997 ............................... $ 541,000
1998 ............................... 195,000
1999 ............................... 38,000
2000 ............................... 13,000
---------
Total annual maturities ........ 787,000
Less amounts representing
interest ..................... (23,000)
---------
Present value at annual
maturities ................... $ 764,000
=========
(NOTE E) - Property and Equipment:
Property and equipment consists of the following:
July 31,
---------------------------
1996 1995
------------ ------------
Leasehold improvements ...... $ 2,303,000 $ 2,275,000
Warehouse equipment ......... 2,539,000 2,530,000
Data processing equipment ... 7,409,000 6,712,000
Trucks and delivery
equipment ................ 1,747,000 1,601,000
Furniture and fixtures ...... 289,000 289,000
------------ ------------
14,287,000 13,407,000
Less accumulated depreciation
and amortization ......... (10,956,000) (10,066,000)
------------ ------------
$ 3,331,000 $ 3,341,000
============ ============
(NOTE F) - Deferred Compensation:
The Company has a deferred compensation agreement with its former
president, providing for monthly payments of $8,333 through February 2004. The
Company had previously provided for the present value of these payments.
There was no deferred compensation expense for the years ended July 31,
1996 and July 31, 1995. The expense was $106,000 for the year ended July 31,
1994.
(continued)
F-11
<PAGE>
DRUG GUILD DISTRIBUTORS, INC.
NOTES TO FINANCIAL STATEMENTS
(NOTE G) - Retirement Plans:
The Company maintains a noncontributory defined benefit pension plan for
its eligible nonunion employees which was frozen June 28, 1996, accordingly,
service costs subsequent to the date of freezing are excluded from benefit
accruals under the plan.
The benefits under this plan are based on the participants' length of
service and compensation (subject to the Employee Retirement Income Security Act
of 1974 and to the Internal Revenue Service limitations). The funding policy for
this plan is to contribute amounts actuarially determined as necessary to
provide sufficient assets to meet the benefit requirements of the plan retirees.
The following table sets forth the Plan's funded status and amounts
recognized in the Company's balance sheets as of July 31:
1996 1995
----------- -----------
Actuarial present value of
benefit obligations:
Accumulated benefit obligation,
including vested benefits of
$1,172,000 and $2,071,000,
respectively .......................... $(1,175,000) $(2,073,000)
=========== ===========
Projected benefit obligation for
service rendered to date .................. $(1,671,000) $(2,654,000)
Plan assets at fair value, primarily
consisting of U.S. Government
guaranteed securities and bank
certificates of deposit ................... 1,518,000 2,276,000
----------- -----------
Projected benefit obligation in
excess of plan assets ..................... (153,000) (378,000)
Unrecognized net loss from past
experience different from that
assumed and effects of changes
in assumptions ............................ 448,000 526,000
Unrecognized net obligations as of
August 1, 1987, net of
amortization .............................. 16,000 18,000
Adjustment to prior service cost not
yet recognized in net periodic
pension cost .............................. (8,000) (9,000)
----------- -----------
Deferred pension cost ........................ $ 303,000 $ 157,000
=========== ===========
(continued)
F-12
<PAGE>
DRUG GUILD DISTRIBUTORS, INC.
NOTES TO FINANCIAL STATEMENTS
(NOTE G) - Retirement Plans: (continued)
Net pension cost included the following components:
1996 1995 1994
--------- --------- ---------
Service cost - benefits
earned during the period ....... $ 101,000 $ 106,000 $ 180,000
Interest cost on projected
benefit obligation ............. 157,000 166,000 195,000
Actual return on plan
assets ......................... (112,000) (122,000) (57,000)
Net amortization and
deferral ....................... (3,000) 17,000 (52,000)
--------- --------- ---------
Net periodic cost ................. $ 143,000 $ 167,000 $ 266,000
========= ========= =========
The weighted average discount rate and rate of increase in future
compensation levels used in determining the actuarial present value of the
projected benefit obligation were 7.0% and 4.0%, respectively, for 1996 and 6.5%
and 4.0%, respectively, for 1995 and 6.5% and 5.0%, respectively, for 1994. The
expected long-term rate of return on assets was 7.0% for 1996 and 6.5% for 1995
and 1994.
The Company makes contributions along with other employers to a union
multi-employer plan, Local 815, International Brotherhood of Teamsters. The
expense for such plan was $351,000, $349,000 and $336,000 for the years ended
July 31, 1996, July 31, 1995 and July 31, 1994, 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. The share of
the plan's unfunded vested liabilities allocable to the Company, if any, and for
which it may be contingently liable, is not ascertainable at this time.
The Company also has a profit-sharing plan and a 401(k) savings plan for
eligible nonunion employees. The 401(k) plan is solely funded by employee
contributions. The profit-sharing plan requires no fixed or minimum
contribution. There was no profit-sharing expense for the years ended July 31,
1996, July 31, 1995 and July 31, 1994.
(continued)
F-13
<PAGE>
DRUG GUILD DISTRIBUTORS, INC.
NOTES TO FINANCIAL STATEMENTS
(NOTE H) - Officer's Life Insurance:
The Company is the owner and beneficiary of insurance policies of
$1,600,000, on the life of its former president.
(NOTE I) - Commitment and Contingencies:
In March 1995, the Company renewed two lease agreements extending the
terms to expire in May 2005, for real estate in Secaucus, New Jersey. Both
leases contain termination clauses whereby the Company may terminate the lease
between between December 1, 1997 and November 30, 1998 by paying a fee equal to
six months of rent.
In addition, the Company is obligated under another lease for warehouse
space expiring March 1997.
Future minimum annual lease payments are as follows:
Year Ending
July 31,
-----------
1997.......................... $1,021,000
1998.......................... 912,000
1999.......................... 912,000
2000.......................... 946,000
2001.......................... 1,056,000
Thereafter..................... 4,048,000
----------
$8,895,000
==========
Total rent expense, including real estate taxes, were $1,291,000,
$1,016,000 and $1,001,000 for the years ended July 31, 1996, July 31, 1995 and
July 31, 1994, respectively.
Deferred rent payable represents the excess of rental expense determined
on a straight-line basis over the amounts currently payable pursuant to the
leases.
(NOTE J) - Registered Public Offering:
Pursuant to a Registration Statement on Form S-2 filed with the United
States Securities and Exchange Commission on June 10, 1991 and most recently
updated August 31, 1994, the Company is offering up to 4,500,000 shares of its
common stock, $1 par value, and up to 55,000 shares of its preferred stock, $100
par value. Of the common stock, 3,000,000 shares are offered for sale and
1,500,000 shares are reserved for the issuance of dividends. Of the preferred
stock,
(continued)
F-14
<PAGE>
DRUG GUILD DISTRIBUTORS, INC.
NOTES TO FINANCIAL STATEMENTS
(NOTE J) - Registered Public Offering: (continued)
37,500 shares are offered for sale and 17,500 shares are reserved for the
issuance of dividends (see Note K). Shares of common stock may be sold either
outright or pursuant to a subscription. Subscriptions are in the amount of
$18,000, payable over 60 months at $300 per month. Payments are applied toward
the purchase of shares at the FIFO Book Value (book value adjusted for inventory
and tax liabilities, stated as if the inventory was valued at the lower of
first-in, first-out cost or market) at the close of the fiscal quarter
immediately preceding the date of payment. As of July 31, 1996, the FIFO book
value was $1.55 per share.
(NOTE K) - 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.
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.
Shares are sold under a five year subscription plan. Subscribers are
required to pay a minimum of $4,500 per year towards a $22,500 subscription
unit. Shares are issued as of July 31 of each year at the rate of one share per
$100, provided that at least the minimum has been paid. Upon timely completion
of total payments for the unit, the Company is required to issue 25 additional
shares as a dividend for a total of 250 shares per unit.
(continued)
F-15
<PAGE>
DRUG GUILD DISTRIBUTORS, INC.
NOTES TO FINANCIAL STATEMENTS
(NOTE K) - Redeemable Preferred Stock: (continued)
The amounts due within the next five years, if fully paid units of
preferred stock held five or more years are offered for redemption, are as
follows:
Year Ending
July 31,
-----------
1997 ....................... $1,930,000
1998 ....................... 183,000
1999 ....................... 476,000
----------
$2,589,000
==========
(NOTE L) - Stockholders' Equity:
The stockholders represent a substantial portion of the Company's
customers. Each stockholder has assigned his shares to the Company as collateral
for his liability to the Company on open account. 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 collected. However, at each year end such outstanding
subscribed shares are included in the accompanying financial statements based on
the purchase price at those dates. The difference between the par value and the
purchase price of subscribed common shares has been credited to additional
paid-in capital. Additional paid-in capital includes $219,000 on such
uncollected subscriptions at July 31, 1996 and $475,000 at July 31, 1995.
(NOTE M) - LIFO Inventory:
A liquidation of LIFO inventory layers, which were carried at lower costs
as compared to current costs, had the effect of increasing net income by
approximately $679,000 and $375,000 for the years ended July 31, 1996 and July
31, 1994, respectively.
Had inventories been valued using the first-in, first-out method, they
would have been greater by approximately $4,763,000 at July 31, 1996 and
$10,087,000 at July 31, 1995.
(continued)
F-16
<PAGE>
DRUG GUILD DISTRIBUTORS, INC.
NOTES TO FINANCIAL STATEMENTS
(NOTE N) - Income Taxes:
A provision (credit) for income taxes differs from the amounts computed by
applying the maximum Federal income tax rate to the pre-tax income, as follows:
<TABLE>
<CAPTION>
Year Ended July 31,
------------------------------------------------------------------
1996 % 1995 % 1994 %
----------- ----- --------- ----- --------- ----
<S> <C> <C> <C> <C> <C> <C>
Computed tax at maximum
rate ................ $(1,294,000) (34.0) $(201,000) (34.0) $ 159,525 34.0
State taxes on income,
net of Federal income
tax benefit (expense) (231,000) (6.0) 36,000 6.1 29,090 6.2
Alternative minimum tax
credit .............. (156,000) (4.1)
Other adjustments ...... 138,000 3.6 79,000 13.4 (27,615) (5.9)
----------- ----- --------- ----- --------- ----
$(1,543,000) (40.5) $ (86,000) (14.5) $ 161,000 34.3
=========== ===== ========= ===== ========= ====
</TABLE>
Deferred tax assets are comprised of the following:
Year Ended July 31,
-------------------------
1996 1995
----------- -----------
Current deferred tax assets (liabilities):
Allowance for doubtful accounts ........ $ 634,000
Inventory overhead ..................... 131,000
Other .................................. 23,000
Federal NOL carryforward ...............
AMT credit .............................
-----------
Total current deferred tax
asset (liabilities) ........... 788,000
-----------
Noncurrent deferred tax assets (liabilities):
Deferred compensation .................. $ 228,000 250,000
Depreciation ........................... (83,000) 82,000
Deferred pension cost .................. (121,000) (86,000)
Allowance for doubtful accounts ........ 657,000
Inventory overhead ..................... 95,000
Other ..................................
Federal NOL carryforward ............... 237,000
AMT credit ............................. 156,000
State Income tax benefit ............... 257,000
----------- -----------
Total noncurrent deferred
tax asset (liabilities) ......... 1,426,000 246,000
----------- -----------
Total deferred tax asset .......... $ 1,426,000 $ 1,034,000
=========== ===========
(continued)
F-17
<PAGE>
DRUG GUILD DISTRIBUTORS, INC.
NOTES TO FINANCIAL STATEMENTS
(NOTE N) - Income Taxes: (continued)
As of July 31, 1996, the Company has a net operating loss carryforward for
income tax purposes aggregating approximately $697,000 which expires 2011.
(NOTE O) - Inventory Defalcation:
During 1996, an inventory defalcation was discovered. Management estimates
that 1996 results were negatively impacted by $7,400,000. The Company believes
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 loss is presented as a separate line item in the
statement of operations.
Management believes that similar inventory defalcations also occurred
during prior years and amounted to $5,200,000 and $2,100,000 for the years ended
July 31, 1995 and July 31, 1994, respectively. Those amounts are included in the
cost of sales for those years. The Company's reported inventory values on its
1995 and 1994 balance sheets were based on results of physical counts and,
accordingly, the Company believes that its reported net income (loss) for all
periods is fairly presented.
The Company believes it may have insurance coverage totaling $2,000,000 as
a possible recovery against the inventory defalcation. The Company has not
provided for any recovery in its financial statements for the period ended July
31, 1996, since at this time, such recovery cannot be assured.
(NOTE P) - Subsequent Event:
On September 24, 1996, the Company's Board of Directors approved a
Definitive Agreement and Plan of Merger with Neuman Health Services, Inc. and
Neuman Distributors, Inc. distributors of pharmaceuticals and health and beauty
products. The agreement provides that the Company would be merged into Neuman
and the pre-merger shareholder of the Company would retain approximately 23% of
the merged company. The proposed merger is subject to the approval by the
Company's shareholders having beneficial ownership of a majority of the issued
and outstanding shares of each of the Company's common and preferred stock.
F-18
<PAGE>
DRUG GUILD DISTRIBUTORS, INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED JULY 31, 1996, JULY 31, 1995 AND JULY 31, 1994
<TABLE>
<CAPTION>
Balance at Charged to Deductions Balance at
beginning cost and Charged to from end of
Description of period expenses other accounts reserves period
<S> <C> <C> <C> <C> <C>
Year ended July 31, 1994:
Allowance for doubtful accounts ........ $1,134,000 $ 480,000 $419,000 (A) $ 667,000 (B) $1,366,000
========== ========== ======== ========== ==========
Year ended July 31, 1995:
Allowance for doubtful accounts ........ $1,366,000 $ 720,000 $127,000 (A) $ 630,000 (B) $1,583,000
========== ========== ======== ========== ==========
Year ended July 31, 1996:
Allowance for doubtful accounts ........ $1,583,000 $1,430,000 $288,000 (A) $1,660,000 (B) $1,641,000
========== ========== ======== ========== ==========
</TABLE>
(A) Recovery of amounts previously written off.
(B) Balances written off.
Attention is directed to the foregoing accountants' report and to the
accompanying notes to the financial statements.
F-19
<PAGE>
AGREEMENT made this 5th day of December, 1995 between DRUG GUILD
DISTRIBUTORS, INC., a New Jersey corporation (hereinafter referred to as the
"Corporation"), and ROMAN ENGLANDER (hereinafter referred to as "Englander").
W I T N E S S E T H :
WHEREAS, the Corporation and Englander are parties to an employment
agreement made as of October 1, 1993 (the "Agreement") wherein the Corporation
employs Englander as its Chief Executive and President; and
WHEREAS, Englander is desirous of retiring and terminating his
employment as of December 31, 1995.
NOW, THEREFORE, in consideration of the mutual covenants hereinafter
contained the parties hereto agree as follows:
1. RETIREMENT.
Englander shall retire as President and Chief Executive of the
Corporation as of December 31, 1995 and shall be paid at his current rate of
compensation through and including December 31, 1995.
2. HEALTH INSURANCE.
The Corporation shall continue Englander's health insurance through
and including September 30, 1996 at no cost to Englander. After such date,
Englander shall be entitled to continue his healthcare insurance pursuant to the
provisions of the plan then in existence as long as Englander pays whatever
costs are involved in the continuation of his coverage.
3. AUTOMOBILE.
The Corporation shall continue to provide Englander with his 1993
Lincoln automobile through and including September 30, 1996 at no cost to
Englander. The Corporation shall transfer title and ownership to the automobile
to Englander after September 30, 1996 at no cost to Englander.
4. CONSULTING.
Englander will remain available until September 30, 1996 to the
Corporation for consulting from time to time on such terms and conditions as the
parties shall agree upon. Englander shall have the title of President Emeritus.
Any expenses that Englander incurs on behalf of the
<PAGE>
Corporation must be authorized by the Chief Operating or Chief Executive Officer
or by the Executive Committee.
5. BOARD OF DIRECTORS.
Englander shall remain a member of the Board of Directors of the
Corporation until his term shall expire or his successor is elected, whichever
shall first occur.
6. OFFICE.
The Corporation shall provide Englander with an office at the
corporate headquarters through and including September 30, 1996.
7. DEFERRED COMPENSATION.
Englander is presently receiving his deferred compensation payments
under paragraph 5 of the Agreement and such payments shall continue to be made
in accordance with its terms.
Paragraph 5 of the Agreement is hereby ratified and reconfirmed.
8. NON-COMPETITION.
The non-competition provisions of paragraph 8 of the Agreement are
hereby ratified and reconfirmed and Englander agrees to abide by the provisions
of said paragraph.
9. PENSION AND PROFIT-SHARING PLANS.
Englander shall be entitled to receive the proceeds payable to him
under the Pension Plan and Profit-Sharing Plan in accordance with their terms.
Upon request by the Executive Committee, Englander shall tender his resignation
as Trustee of either or both plans.
10. ENTIRE AGREEMENT.
This agreement constitutes the complete understanding between the
parties with respect to the employment of Englander and supersedes all prior
agreements of the parties relating thereto hereunder; and no statement,
representation, warranty or covenant has been made by either party with respect
thereto except as expressly set forth herein. This agreement shall not be
altered, modified, amended or terminated orally but may be altered, modified,
amended or terminated by written instrument signed by each of the parties
hereto.
11. SUCCESSORS AND ASSIGNS.
(a) This agreement shall not be assignable by Englander.
2
<PAGE>
(b) All of the terms and provisions of this agreement shall be
binding upon and shall inure to the benefit of and be enforceable by the
respective successors and permitted assigns of the Corporation hereto.
(c) If the Corporation shall at any time be merged or
consolidated into or with any other corporations or if substantially all the
assets of the Corporation are transferred to another corporation, the provisions
of this agreement shall be binding upon and inure to the benefit of the
corporation resulting from such merger or consolidation or to which such assets
shall be transferred, and this provision shall apply in the event of any
subsequent merger, consolidation or transfer.
12. GOVERNING LAW.
This agreement shall be governed by and construed in accordance with
the laws of the State of New Jersey.
13. SEPARABILITY.
In case of any one or more of the provisions of this agreement shall
be invalid, illegal or unenforceable in any respect, the validity, legality and
enforceability of the remaining provisions contained herein shall not in any way
be affected thereby.
14. HEADINGS.
The headings contained in this agreement are for convenience only
and are not to be deemed a part hereof.
15. WAIVER.
Failure to insist upon strict compliance with any of the terms,
covenants or conditions hereof, shall not be deemed a waiver of such terms,
covenants or conditions, nor shall any waiver of such terms, covenants or
conditions, nor shall any waiver or relinquishment of any right or power
hereunder at any time or times be deemed a waiver or relinquishment of such
rights or power at any other time or times.
16. CANCELLATION OF THE AGREEMENT.
Except as otherwise provided for in this agreement, the provisions
of the Agreement are terminated and cancelled as of December 31, 1995.
17. NOTICES.
All notices, requests, demands and other communications hereunder
shall be in writing and shall be delivered personally or sent by registered or
certified mail, return receipt requested, to the other party hereto at his or
its address set forth below:
3
<PAGE>
If to Englander: Roman Englander
71 Ellsworth Terrace
Glen Rock, NJ 07452
If to the Corporation: Drug Guild Distributors, Inc.
350 Meadowland Parkway
Secaucus, NJ 07096-1527
Either party may change the address to which notices, requests, demands or other
communications hereunder shall be sent by sending written notice of such change
of address to the other party.
IN WITNESS WHEREOF, the parties have executed this agreement as of
the 5th day of December, 1995.
DRUG GUILD DISTRIBUTORS, INC.
By: /s/ Alfred W. Hertel
------------------------------------
Alfred W. Hertel
Chairman of the Board of Directors
/s/ Roman Englander
------------------------------------
ROMAN ENGLANDER
4
<PAGE>
THIS AGREEMENT, dated as of the 18th day of June, 1996, between DRUG GUILD
DISTRIBUTORS, INC., a New Jersey corporation with offices at 350 Meadowland
Parkway, Secaucus., New Jersey 07096, (the "Corporation"); and Joseph B.
Churchman who resides at 12 Carolina Street, Rehoboth Beach, DE 19971 (the
"Indemnitee").
WHEREAS, Indemnitee currently is serving as Chairman of the Management
Committee of the Corporation; and the Corporation desires that Indemnitee
continue to serve in such capacity;
WHEREAS, in addition to the indemnification to which Indemnitee is
entitled pursuant to the By-Laws of the Corporation, and as additional
consideration for Indemnitee's continued service, the Corporation has furnished
at its expense directors' and officers' liability insurance protecting
Indemnitee in connection with such service; and
WHEREAS, in recognition of Indemnitee's need for substantial protection
against personal liability in order to enhance Indemnitee's service to the
Corporation and of Indemnitee's reliance on the Corporation's By-Laws and to
provide Indemnitee with specific contractual assurance that the protection
promised by such By-Laws will be available to Indemnitee (regardless of, among
other things, any amendment to or revocation of such By-Laws or any change in
the composition of the Corporation's Board of Directors or acquisition
transaction relating to the Corporation), the Corporation wishes to provide in
this Agreement for the indemnification to the full extent permitted by law and
as set forth in this Agreement and to the extent insurance is maintained;
NOW, THEREFORE, in consideration of the premises and of the mutual
agreements hereinafter set forth, the parties hereto agree as follows:
1. The Corporation shall pay on behalf of the Indemnitee and Indemnitee's
executors, administrators or assigns, any amount which Indemnitee is or becomes
legally obligated to pay as a result of any "Claim" or "Claims" which shall be
defined as any claim or claims made against Indemnitee, by reason of the fact
that Indemnitee served as Chairman of the Company's Management Committee, an
agent or fiduciary of the Corporation or because of any actual or alleged breach
of duty, neglect, error, misstatement, misleading statement, omission or other
act done, or suffered or wrongfully attempted by Indemnitee in Indemnitee's
capacity as a director, officer, agent or fiduciary of the Corporation (the
'Indemnifiable Event"). Claim or Claims shall include any threatened, pending or
completed civil, criminal administrative or arbitrative action, suit or
proceeding and any appeal thereof, and any inquiry or investigation, whether
conducted by the Corporation or any other party, that Indemnitee believes in
good faith might lead to the institution of any action, suit or proceeding which
would be an Indemnifiable Event.
2. The payments that the Corporation will be obligated to pay hereunder
shall include (without limitation) damages, judgments, satisfactions of
settlements, fines, penalties paid in settlement (including all interest
assessments and other charges paid or payable in connection with or in respect
of such expenses, damages, judgments, satisfaction of settlements, fines,
penalties or amounts paid in settlement) of a Claim, costs and expenses of
defense of legal actions (including reasonable attorneys' fees and litigation
costs and expenses) and all other costs, expenses and obligations paid or
incurred in connection with investigating, defending, being a witness in or
<PAGE>
participating in or preparing to defend any Claim, proceedings and appeals
therefrom, and costs of attachments and similar bonds. However, the Corporation
shall not be obligated to pay, as indemnity or for any other reason, fines,
other obligations or fees imposed by law or otherwise that are prohibited, by
applicable law including, but not limited to, the federal securities laws.
3. Costs and expenses (including, without limitation, reasonable
attorneys' fees) incurred by the Indemnitee in defending or investigating any
Claim may be paid by the Corporation in advance of the final disposition of such
matter. Payment in advance by the Corporation shall be conditioned upon receipt
of a written undertaking by or on behalf of Indemnitee to repay any such amounts
if it is ultimately determined that Indemnitee is not entitled to
indemnification under the terms of this Agreement (an "Expense Advance").
(a) Notwithstanding the foregoing, the obligations of the
Corporation under Paragraph 3 of this Agreement shall be subject to the
condition that the Executive Board of the Corporation's Board of Directors or
any other person or body appointed by the Board who are not parties to the
particular Claim for which Indemnitee is seeking indemnification (the "Reviewing
Party') shall not have determined that Indemnitee would not be permitted to be
indemnified under applicable law, and
(b) The obligation of the Corporation to make an Expense Advance
pursuant to this Paragraph 3 shall be subject to the condition that, if, when,
and to the extent that the Reviewing Party determines that Indemnitee would not
be permitted to be so indemnified under applicable law, the Corporation shall be
entitled to be reimbursed by Indemnitee (who hereby agrees to reimburse the
Corporation) for all such amounts theretofore paid. However, Indemnitee may
commence legal proceedings in a court of competent jurisdiction to secure a
determination that Indemnitee should be indemnified under applicable law, and
any determination made by the Reviewing Party that Indemnitee would not be
permitted to be indemnified under applicable law shall not be binding and
Indemnitee shall not be required to reimburse the Corporation for any Expense
Advance until final judicial determination is made with respect thereto (as to
which all rights of appeal therefrom have been exhausted or lapsed).
4. If a valid Claim under this Agreement is not paid by or on behalf of
the Corporation within ninety (90) days after a written demand has been received
by the Corporation, Indemnitee may at any time thereafter bring any reasonable
suit against the Corporation to recover the unpaid amount of the Claim and, if
successful in whole or in part, Indemnitee shall also be entitled to be paid the
reasonable expenses of prosecuting such demand.
5. In the event of payment under this Agreement, the Corporation shall be
subrogated to the extent of such payment to all the rights of recovery of
Indemnitee. Indemnitee shall execute all papers required and shall do everything
that may be necessary to secure such rights in favor of the Corporation,
including the execution of such documents necessary to enable the Corporation to
effectively bring suit to enforce such rights.
6. The Corporation shall not be liable under this Agreement to make any
payment in connection with any Claim made against Indemnitee as follows:
<PAGE>
(a) All sums actually paid to Indemnitee under an insurance policy
or policies maintained by the Corporation providing directors' and officers'
liability insurance, except in respect of any excess beyond the amount of
payment under such insurance;
(b) All sums Indemnitee has otherwise actually received (under any
insurance policy, By-Law or otherwise) of the amounts otherwise indemnifiable
hereunder;
(c) All sums based on Claims or attributable to Indemnitee's gaining
in fact any personal profit or advantage to which he was not legally entitled;
(d) All sums based upon Claims or attributable to Claims against
Indemnitee relating to any breach of duty based upon an act or omission in
breach of such Indemnitee's duty of loyalty to the Corporation and/or its
shareholders;
(e) All sums based upon Claims or attributable to Claims against
Indemnitee relating to any breach of duty based upon an act or omission by
Indemnitee not in good faith or involving a knowing violation of law;
(f) All sums based upon Claims brought about or contributed to by
the dishonesty of Indemnitee; provided, however, that notwithstanding the
foregoing, Indemnitee shall be protected under this Agreement as to any Claims
upon which suit may be brought alleging dishonesty on the part of Indemnitee
unless a judgment or other final adjudication thereof adverse to Indemnitee
shall establish that Indemnitee committed acts of active and deliberate
dishonesty with actual dishonest purpose and intent, which acts were material to
the cause of action so adjudicated;
(g) All sums based upon Claims which are not indemnifiable under the
federal securities laws; and/or
(h) Any sums payable pursuant to a settlement or other
nonadjudicated disposition of any threatened or pending Claim unless the
Corporation has given its prior consent to such settlement or other disposition.
7. Indemnitee, as a condition precedent to his right to be indemnified
under this Agreement, shall give to the Corporation notice in writing as soon as
practicable of any Claim made against him for which indemnity will or could be
sought by this Agreement. Notice to the Corporation shall be directed to Drug
Guild Distributors, Inc., 350 Meadowland Parkway, Secaucus, New Jersey 07096,
attention of the President, (or such other address as the Corporation shall
designate in writing to Indemnitee). Notice shall be deemed received if sent by
prepaid mail properly addressed, the date of such notice being the date
postmarked. Indemnitee shall give the Corporation such information and
cooperation as it may reasonably require and shall be within Indemnitee's power.
8. The rights of the Indemnitee hereunder shall be in addition to any
other rights indemnitee may have under the Corporation's By-Laws and the
Certificate of Incorporation, New Jersey Business Corporation Act or otherwise.
To the extent that a change in the New Jersey
<PAGE>
Business Corporation Act (whether by statute or judicial decision) permits
greater indemnification by agreement than would be afforded currently under the
Corporation's By-Laws and/or Certificate of Incorporation and this Agreement, it
is the intent of the parties hereto that Indemnitee shall enjoy by this
Agreement the greater benefits afforded by such change.
9. Indemnitee agrees to serve as Chairman of the Management Committee of
the Corporation to the best of Indemnitee's ability until the termination of
Indemnitee's assignment or until Indemnitee tenders his resignation in writing.
10. This Agreement shall be governed by and construed in accordance with
New Jersey law.
11. This Agreement shall be binding upon all successors and assigns of the
Corporation (including any transferee of all or substantially all of its assets
and any successor by merger or operation of law),and shall inure to the benefit
of the heirs, personal representatives and estate of Indemnitee.
12. If any provision or provisions of this Agreement shall be held to be
invalid, illegal or unenforceable for any reason whatsoever (i) the validity,
legality and enforceability of the remaining provisions of this Agreement and
without limitation, all portions of any paragraphs of this Agreement that are
not by themselves invalid, illegal or unenforceable shall not in any way be
affected or impaired thereby and (ii) to the fullest extent possible, the
provisions of this Agreement and, without limitation, all portions of any
paragraph of this Agreement that are not themselves invalid., illegal or
unenforceable shall be construed so as to give effect to the intent of the
parties that the Corporation provide protection to Indemnitee to the fullest
enforceable extent.
13. No supplement, modification or amendment of this Agreement shall be
binding unless executed in writing by both of the parties hereto. No waiver of
any of the provisions of this Agreement shall be deemed or shall constitute a
waiver of any other provisions hereof (whether or not similar) nor shall such
waiver constitute a continuing waiver.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and signed as of the day and year first above written.
DRUG GUILD DISTRIBUTORS, INC.
By: /s/ Alfred Hertel
---------------------------------
/s/ Joseph B. Churchman
------------------------------------
Joseph B. Churchman
<PAGE>
EXECUTION COPY
================================================================================
AGREEMENT AND PLAN OF MERGER
BY AND AMONG
NEUMAN HEALTH SERVICES, INC.,
NEUMAN DISTRIBUTORS, INC.
AND
DRUG GUILD DISTRIBUTORS, INC.
Dated as of October 25, 1996
================================================================================
<PAGE>
TABLE OF CONTENTS
Page
I. NAME OF SURVIVING CORPORATION; CERTIFICATE OF
INCORPORATION AND BY-LAWS; BOARD OF DIRECTORS, OFFICERS................ 2
ss.1.01 The Merger..................................................... 2
ss.1.02 Certificate of Incorporation and By-laws....................... 2
ss.1.03 Board of Directors and Officers................................ 2
II. STATUS AND CONVERSION OF SECURITIES.................................... 3
ss.2.01 Stock of DGD................................................... 3
(a) DGD Common Stock........................................... 3
(b) Surrender and Exchange of DGD Common Stock; No Fractional
Shares..................................................... 4
(c) Transfer Taxes............................................. 5
(d) DGD Stock Transfers........................................ 5
(e) DGD Preferred Stock........................................ 5
ss.2.02 DGD Stock ..................................................... 6
III. SHAREHOLDER APPROVAL; BOARD OF DIRECTORS'
RECOMMENDATIONS; FILING; EFFECTIVE TIME................................ 6
ss.3.01 Shareholder Approvals; Board of Directors' Recommendations..... 6
ss.3.02 Dissenting Shareholders........................................ 7
ss.3.03 Filing; Effective Time......................................... 7
IV. CERTAIN EFFECTS OF MERGER.............................................. 7
V. COVENANTS.............................................................. 8
ss.5.01 Covenants of DGD............................................... 8
(a) Certificate of Incorporation and By-laws................... 8
(b) Shares and Options......................................... 8
(c) Dividends and Purchases of Stock........................... 9
(d) Financial Information; Access.............................. 9
(e) Conduct of Business........................................ 10
(f) Advice of Changes.......................................... 12
(g) Confidentiality............................................ 12
(h) Public Statements.......................................... 14
(i) Consents Without Any Condition............................. 15
(j) Transfer Taxes............................................. 15
(k) Compensation, Employment Plans, Retirement Plans, etc...... 15
(l) Liens; Indebtedness; etc................................... 17
(m) Business Combinations...................................... 17
(n) Compliance with Laws....................................... 17
(o) Taxes...................................................... 18
- i -
<PAGE>
(p) Material for Registration Statement and Proxy Statement.... 18
ss.5.02 Covenants of Neuman............................................ 18
(a) Access..................................................... 18
(b) Conduct of Business........................................ 20
(c) Advice of Changes.......................................... 20
(d) Confidentiality............................................ 21
(e) Public Statements.......................................... 22
(f) Consents................................................... 22
(g) Employee Benefits. ....................................... 23
(h) Material for Proxy Statement............................... 23
(i) Transfer Taxes............................................. 24
(j) Officer and Director Indemnification....................... 24
(k) Securities Law Compliance.................................. 24
VI. REPRESENTATIONS AND WARRANTIES......................................... 25
ss.6.01 Certain Representations and Warranties of DGD.................. 25
(a) Organization and Qualification............................. 25
(b) Capitalization............................................. 26
(c) Financial Condition........................................ 27
(d) Taxes...................................................... 28
(e) Other Liabilities.......................................... 30
(f) Litigation and Claims; Labor Matters....................... 30
(g) Properties................................................. 32
(h) Contracts and Other Instruments............................ 34
(i) Employees.................................................. 37
(j) Patents, Trademarks, Etc................................... 43
(k) Questionable Payments...................................... 46
(l) Authority to Merge......................................... 46
(m) Insurance.................................................. 48
(n) Books and Records.......................................... 49
(o) Customers and Suppliers.................................... 49
(p) Bank Accounts; Securities.................................. 49
(q) Disclosure................................................. 50
(r) Information to be Included in the Registration
Statement and the Proxy Statement........................ 50
(s) Accuracy of SEC Filings.................................... 50
(t) Agreements Not to Compete.................................. 51
(u) Environmental Conditions................................... 51
ss.6.02 Certain Representations and Warranties of Neuman &
Distributors............................................ 57
(a) Organization and Qualification............................. 57
(b) Authority to Merge......................................... 57
(c) Business After the Effective Time.......................... 59
(d) Status of Neuman Common Stock To Be Issued................. 59
(e) Financial Condition........................................ 60
(f) Litigation and Claims...................................... 61
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(g) Other Liabilities.......................................... 61
(h) Capitalization............................................. 62
ss.7.01 Conditions of Neuman........................................... 62
(a) Accuracy of Representations and Compliance
With Conditions.......................................... 62
(b) Certificates from DGD...................................... 63
(c) Opinions of DGD's Counsel.................................. 64
(d) Accountants' Letter........................................ 64
(e) Other Closing Documents.................................... 64
(f) Review of Proceedings..................................... 64
(g) Legal Action............................................... 65
(h) No Governmental Action..................................... 65
(i) INTENTIONALLY OMITTED...................................... 66
(j) Hart-Scott-Rodino Waiting Period........................... 66
(k) Fairness Opinion........................................... 66
(l) Contractual Consents Needed................................ 66
(m) Shareholder Consent........................................ 66
(n) No Material Adverse Effect................................. 67
(o) Financing Approvals........................................ 67
(p) Pooling.................................................... 67
(q) ISRA....................................................... 67
(r) Pension Plan............................................... 67
(s) Registration Statement..................................... 68
ss.7.02 Conditions of DGD.............................................. 68
(a) Accuracy of Representations and Compliance
With Conditions.......................................... 68
(b) Certificates from Neuman................................... 69
(c) Opinion of Neuman's Counsel................................ 69
(d) Other Closing Documents.................................... 69
(e) Review of Proceedings...................................... 70
(f) Legal Action............................................... 70
(g) No Governmental Action..................................... 70
(h) Hart-Scott-Rodino Waiting Period........................... 71
(i) Fairness Opinion........................................... 71
(j) Securities Law Compliance.................................. 71
(k) No Material Adverse Effect................................. 71
VIII. TERMS OF ABANDONMENT................................................... 72
ss.8.01 Mandatory Abandonment.......................................... 72
ss.8.02 Optional Abandonment........................................... 72
ss.8.03 Effect of Abandonment.......................................... 73
IX. INTENTIONALLY OMITTED.................................................. 74
X. MISCELLANEOUS.......................................................... 74
ss.10.01 Further Actions............................................... 74
ss.10.02 Availability of Equitable Remedies............................ 74
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ss.10.03 Survival...................................................... 75
ss.10.04 Modification.................................................. 76
ss.10.05 Notices....................................................... 76
ss.10.06 Waiver........................................................ 77
ss.10.07 Binding Effect................................................ 77
ss.10.08 No Third-Party Beneficiaries.................................. 77
ss.10.09 Severability.................................................. 78
ss.10.10 Headings...................................................... 78
ss.10.11 Counterparts; Governing Law; Jurisdiction, Etc................ 78
ss.10.12 Election of Directors......................................... 79
ss.10.13 Pooling Modifications......................................... 80
ss.10.14 Definitions................................................... 80
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AGREEMENT AND PLAN OF MERGER
BY AND AMONG
NEUMAN HEALTH SERVICES, INC.,
NEUMAN DISTRIBUTORS, INC.
AND
DRUG GUILD DISTRIBUTORS, INC.
AGREEMENT AND PLAN OF MERGER ("Agreement"), dated as of October 25,
1996, by and among Neuman Health Services, Inc. a New Jersey corporation whose
address is 175 Railroad Avenue, Ridgefield, New Jersey 07657 ("Neuman"), Neuman
Distributors, Inc., a New Jersey corporation whose address is 175 Railroad
Avenue, Ridgefield, New Jersey 07657 ("Distributors") and Drug Guild
Distributors, Inc., a New Jersey corporation whose address is 350 Meadowland
Parkway, Secaucus, New Jersey 07094 ("DGD"); (Distributors in its capacity as
the surviving corporation being herein sometimes called the "Surviving
Corporation," and Distributors and DGD being herein sometimes called the
"Constituent Corporations").
The parties hereto agree as follows:
<PAGE>
I. NAME OF SURVIVING CORPORATION; CERTIFICATE OF INCORPORATION
AND BY-LAWS; BOARD OF DIRECTORS, OFFICERS
ss.1.01 The Merger
At the Effective Time (as defined in Section 3.03 hereof) and subject to
the terms and conditions of this Agreement and the New Jersey Business
Corporation Act (the "NJBCA"), DGD shall be merged with and into Distributors,
and Distributors shall survive the merger (the "Merger"). The name of the
Surviving Corporation shall be "Neuman Distributors, Inc." Upon the Effective
Time, the separate corporate existence of DGD shall cease and Distributors shall
be the surviving corporation after the Merger. From and after the Effective
Time, the Surviving Corporation shall possess all the rights, privileges, powers
and franchises and be subject to all of the obligations, liabilities,
restrictions, disabilities and duties of DGD and Distributors, all as provided
under the NJBCA and as set forth in Article IV hereof. The parties hereto intend
the Merger to be (i) a tax free reorganization pursuant to Section 368(a) of the
Internal Revenue Code of 1986, as amended (the "Code"), and (ii) a "pooling of
interests" in accordance with generally accepted accounting principles ("GAAP").
ss.1.02 Certificate of Incorporation and By-laws
The certificate of incorporation (as defined in Section 14A:1-2.1 of the
NJBCA) and the by-laws of Distributors as in effect at the Effective Time shall
from and after the Effective Time be the certificate of incorporation and the
by-laws of the Surviving Corporation until they are amended.
ss.1.03 Board of Directors and Officers
The directors and the officers of the Surviving Corporation at the
Effective Time shall be the directors and the officers of Distributors at the
Effective Time, each to serve, in each
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case (subject to the Surviving Corporation's by-laws), until their respective
successors shall have been elected and qualified.
II. STATUS AND CONVERSION OF SECURITIES
ss.2.01 Stock of DGD
(a) DGD Common Stock. Subject to Section 2.01(b), each share of common
stock, $1.00 par value per share, of DGD (the "DGD Common Stock") outstanding at
the Effective Time shall, subject to the terms and conditions of this Agreement,
at the Effective Time, be converted into the right to receive that number of
shares of the common stock, no par value per share, of Neuman (the "Neuman
Common Stock") equal to the Per Share Consideration (as defined below) except
that shares of DGD Common Stock held in DGD's treasury shall, by virtue of the
Merger and without any action on the part of Neuman, Distributors or DGD, be
canceled, and no cash, securities or other property shall be issued in the
Merger in respect thereof. In this Agreement, the term "Per Share Consideration"
shall mean the product arrived at by multiplying one share of Neuman Common
Stock by a fraction: (i) the numerator of which shall be the number of shares of
Neuman Common Stock which would have to be issued, in the aggregate, to DGD
shareholders so that upon consummation of the Merger such shareholders would own
23% of the issued and outstanding shares of Neuman Common Stock and (ii) the
denominator of which shall be the sum of (A) the total amount of issued and
outstanding shares of DGD Common Stock immediately prior to the Effective Time
and (B) the number of shares of DGD Common Stock which could be purchased on the
day prior to the Effective Date pursuant to Subscriptions (as defined in Section
2.02); provided, however, that unless evidence satisfactory to Neuman is
provided that a Subscription has been terminated or cancelled and
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is no longer in effect, all DGD Common Stock issuable pursuant to a Subscription
set forth on Schedule 2.02 will be included in the denominator. All shares of
Neuman Common Stock issued in exchange for DGD Common Stock will be subject to
the same restrictions as are currently in effect for the holders of DGD Common
Stock and will not be freely tradable by the holder thereof until a public
offering of Neuman Common Stock has occurred or any shares of Neuman Common
Stock not issued as a result of the Merger are freely tradeable.
Neuman covenants that prior to the Effective Date it will have authorized
sufficient shares of Neuman Common Stock to cover the shares required to be
issued in the Merger.
(b) Surrender and Exchange of DGD Common Stock; No Fractional Shares.
Subject to the provisions of Section 2.01(a) and of Section 2.01(c), after the
Effective Time, each holder of an outstanding certificate or certificates (the
"Old Certificates") which represented shares of DGD Common Stock prior to the
Effective Time, upon surrender thereof to Neuman, shall be entitled to receive
in exchange therefor a certificate or certificates (the "New Certificates"),
representing the number of shares rounded up to the nearest whole number of
shares of Neuman Common Stock into and for which the shares of DGD Common Stock
theretofore represented by such surrendered Old Certificates have been converted
pursuant to Section 2.01(a). Until surrendered and exchanged, each Old
Certificate shall after the Effective Time be deemed for all purposes to
represent only the right to receive the number of whole shares of Neuman Common
Stock into and for which the shares of DGD Common Stock theretofore represented
by such Old Certificate shall have been converted pursuant to Section 2.01(a).
If outstanding Old Certificates are not surrendered and exchanged for New
Certificates prior to seven years after the Effective Time (or if the relevant
abandonment statutes under applicable state law provide for an earlier
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period, then immediately prior to such earlier period) the number of whole
shares of Neuman Common Stock into and for which the shares of DGD Common Stock
shall have been converted pursuant to Section 2.01(a) shall to the extent
permitted by applicable law become the property of Neuman and, to the extent not
in its possession, shall be paid over to it, free and clear of all claims or
interests of any other Person (as hereinafter defined) previously entitled
thereto. In this Agreement, the term "Person" shall mean and include any
individual, corporation, partnership, joint venture, trust, association,
governmental agency or instrumentality or other entity.
(c) Transfer Taxes. If any New Certificate is to be issued in a name
other than that in which the Old Certificate surrendered for exchange is issued,
the Old Certificate so surrendered shall be properly endorsed and otherwise in
proper form for transfer and the Person requesting such exchange shall pay to
Neuman any transfer or other taxes or governmental charges required by reason of
the issuance of the New Certificate in any name other than that of the
registered holder of the Old Certificate surrendered, or establish to the
satisfaction of Neuman that such tax or charge has been paid or is not payable.
(d) DGD Stock Transfers. As of the Effective Time, no transfer of the
shares of DGD Common Stock outstanding prior to the Effective Time shall be made
on the stock transfer books of DGD.
(e) DGD Preferred Stock. The shares of DGD preferred stock, par value
$100 per share ("DGD Preferred"), outstanding at the Effective Time shall be
converted into Neuman preferred stock, par value $100 per share, with the same
rights, preferences and limitations in effect on the date hereof for the DGD
Preferred.
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<PAGE>
ss.2.02 DGD Stock Rights
DGD represents and warrants that: all of the outstanding options,
subscriptions for DGD Common Stock or DGD Preferred (the "Subscriptions"),
warrants, calls, commitments, rights, plans or arrangements of any kind relating
to any of the capital stock of DGD or any DGD Subsidiary (as defined in Section
6.01(a)) or any securities or other instruments convertible into, exercisable
for or exchangeable for capital stock of DGD or any DGD Subsidiary
(collectively, the "DGD Stock Rights") are set forth in Schedule 2.02 hereto.
III. SHAREHOLDER APPROVAL; BOARD OF DIRECTORS'
RECOMMENDATIONS; FILING; EFFECTIVE TIME
ss.3.01 Shareholder Approvals; Board of Directors' Recommendations
A meeting of the shareholders of DGD shall be held in accordance with
DGD's by-laws, the NJBCA and applicable securities laws, as promptly as
possible, after at least 20 days (or such longer period as may be required by
law or the instructions to the form used to prepare the Registration Statement
(as defined in Section 5.01(p), if any) prior written notice thereof given to
the shareholders of DGD to consider and vote upon the adoption and approval of
this Agreement, the Merger, and the other transactions contemplated hereby. The
Board of Directors of DGD shall recommend to its shareholders that this
Agreement, the Merger, and the other transactions contemplated hereby be adopted
and approved. The shareholders of Neuman, shall, prior to the Effective Time,
vote all shares of capital stock of Neuman in favor of the adoption and approval
of this Agreement, the Merger, and the other transactions contemplated hereby.
Neuman, as the sole shareholder of Distributors, shall prior to the Effective
Time, vote all shares of capital stock of Distributors in favor of the
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adoption and approval of this Agreement, the Merger and the other transactions
contemplated hereby.
ss.3.02 Dissenting Shareholders
All dissenting shareholders (as defined in Section 14A:11-3 of the NJBCA)
of DGD shall have such rights and remedies as are set forth in Chapter 11 of
Title 14A of the NJBCA.
ss.3.03 Filing; Effective Time
As soon as practicable after the adoption and approval of this Agreement,
the Merger, and the other transactions contemplated hereby by the shareholders
of DGD (provided that if one or more of the conditions contained in Articles VII
or VIII have not then been fulfilled or waived, then as soon as practicable
after the fulfillment or waiver of all such conditions), an appropriate
certificate of merger relating to the Merger, shall be executed and filed in the
office of the Secretary of State of the State of New Jersey, at which time the
Merger shall become effective (the "Effective Time").
IV. CERTAIN EFFECTS OF MERGER
As of the Effective Time:
(i) the separate existence of DGD shall cease, DGD shall be merged
with and into Distributors, and the Surviving Corporation shall possess
all the rights, privileges, powers, immunities, purposes and franchises,
public and private, of each of the Constituent Corporations.
(ii) All real property and personal property, tangible and
intangible, of every kind and description, belonging to the Constituent
Corporations shall be vested in the Surviving Corporation without further
act or deed; and the title to any real estate, or
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any interest therein, vested in any of the Constituent Corporations shall
not revert or be in any way impaired by reason of the Merger.
(iii) The Surviving Corporation shall be liable for all the
obligations and liabilities of the Constituent Corporations; and any
claim existing or action or proceeding pending by or against any of the
Constituent Corporations may be enforced as if such Merger had not taken
place. Neither the rights of creditors nor any liens upon, or security
interests in, the property of any of the Constituent Corporations shall
be impaired by the Merger.
V. COVENANTS
ss.5.01 Covenants of DGD
DGD agrees that, unless Neuman otherwise agrees in writing:
(a) Certificate of Incorporation and By-laws. Until the earlier of the
(i) Effective Time or (ii) the abandonment or termination of the Merger pursuant
to Article VIII hereof or otherwise, if required (the Effective Time and such
abandonment or termination of the Merger are collectively referred to as the
"Release Time"), no amendment will be made to the certificate of incorporation
or by-laws of DGD or of any DGD Subsidiary.
(b) Shares and Options. Until the Release Time, no share of capital stock
of DGD or any DGD Subsidiary, and no option, warrant, call, plan, commitment or
right relating to any such share, right to subscribe to or purchase any such
share or security or instrument convertible into, exercisable for or
exchangeable for, any such share, shall be issued, sold or entered into by DGD
or any DGD Subsidiary, otherwise than as may be required upon the exercise of
the Subscriptions set forth on Schedule 2.02.
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<PAGE>
(c) Dividends and Purchases of Stock. Until the Release Time, no dividend
or liquidation or other distribution, and no recapitalization, reorganization,
reclassification or stock split, shall be authorized, declared, paid, or
effected by DGD or any DGD Subsidiary in respect of the outstanding shares of
DGD Common Stock or any other security or instrument issued by DGD or any DGD
Subsidiary, other than mandatory dividends in kind required to be paid on DGD
Preferred. Until the Release Time, no direct or indirect redemption or purchase
(except for mandatory redemptions or purchases at the option of a holder of DGD
Preferred), retirement or other acquisition shall be made by DGD or any DGD
Subsidiary of shares of DGD Common Stock or any other capital stock of DGD.
(d) Financial Information; Access. DGD will, promptly upon their
completion after the end of each calendar month until the Release Time, deliver
to Neuman a true, complete and accurate copy of its consolidated financial
statements for such month (which shall include a consolidated balance sheet and
consolidated statements of income, shareholders' equity and cash flow for such
month and from the period beginning on August 1, 1996 and ending at the close of
such month), which financial statements shall (x) present fairly the
consolidated financial condition, assets, liabilities and shareholders' equity
of DGD and the DGD Subsidiaries as of their respective dates and the results of
operation of DGD and the DGD Subsidiaries for the period indicated and (y) be
prepared in accordance with GAAP and be in accordance with the books and records
of DGD and the DGD Subsidiaries. Until the Release Time (but subject to the
confidentiality agreements incorporated into the letter of intent dated February
6, 1996 previously executed on behalf of Neuman and DGD (the "Confidentiality
Agreements")), DGD will, from time to time, (i) afford the officers, directors,
employees, counsel, agents, investment bankers, accountants, and other
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<PAGE>
representatives of Neuman free and full access to the officers, directors,
employees, counsel, agents, investment bankers, accountants, other
representatives, plants, properties, assets, books, records (including tax
returns) and systems of DGD and all DGD Subsidiaries, (ii) to the extent
reasonable, permit them to make extracts from and copies of such books and
records, and (iii) furnish them with such additional financial and operating
data and other information as to the condition (financial or otherwise), results
of operations, businesses, customer satisfaction, properties, assets, future
prospects or liabilities of DGD or any DGD Subsidiary as they from time to time
may reasonably request, provided that Neuman shall use its best efforts to limit
access to information obtained pursuant to the foregoing clauses (i) through
(iii) to individuals on a need-to-know basis. Until the Release Time, DGD will
cause the independent certified public accountants of DGD and the DGD
Subsidiaries to make available to Neuman and its independent certified public
accountants all of the work papers relating to the audits of DGD and the DGD
Subsidiaries referred to in Section 6.01(c). In furtherance of this paragraph,
DGD acknowledges and agrees that, from the date hereof through the Release Date,
Neuman may have up to three of its representatives situated at DGD's premises on
a continuing basis for observation purposes.
(e) Conduct of Business. Until the Release Time, DGD will use its best
efforts to conduct its business and affairs, and DGD will use its best efforts
to cause the business and affairs of the DGD Subsidiaries to be conducted, so
that at the Effective Time no representation or warranty of DGD made in
connection with this Agreement will be inaccurate, no covenant, obligation or
agreement of DGD made in connection with this Agreement will be breached, and no
condition in this Agreement will remain unfulfilled by reason of the actions or
omissions of DGD or any DGD Subsidiary. Except as otherwise
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requested by Neuman in writing, until the Release Time, DGD will, and DGD will
cause the DGD Subsidiaries to, use their best efforts to preserve the business
operations of DGD and the DGD Subsidiaries intact, to keep available the
services of their present personnel, to preserve in full force and effect the
contracts, agreements, instruments, leases, licenses, arrangements, undertakings
and understandings of DGD and the DGD Subsidiaries (collectively, the
"Contracts"), and to preserve the goodwill of their suppliers, customers, and
others having business relations with any of them. Until the Release Time, DGD
will, and DGD will cause the DGD Subsidiaries to, conduct their affairs in all
respects in a manner consistent with normal business practices. In addition to
and without limiting the foregoing, until the Release Time DGD shall not, and
shall not permit any DGD Subsidiary to: (i) engage in any transaction which is
not in the ordinary course of business, consistent with past practice, (ii)
materially alter existing sales or collection practices, terms or conditions,
(iii) defer payment of expenses, (iv) make any capital expenditure or
expenditures which in the aggregate will exceed $25,000 in the individual or
$250,000 in the aggregate (other than those capital expenditures set forth on
Schedule 5.01(e) for which DGD has already made a commitment therefor), (v)
terminate any key employees, (vi) hire any new employee or consultant whose
aggregate annual compensation for each such employee or consultant shall exceed
$50,000, or (vii) modify the terms of any lease; in any of the above cases
without the prior written consent of Neuman, which consent shall not be
unreasonably withheld. If DGD or any DGD Subsidiary is required to obtain
Neuman's consent under the preceding sentence, it shall submit its request to
Neuman. Neuman shall decide promptly (but in no event later than seven (7)
business days after receiving from DGD all information reasonably requested by
them) whether or not to grant or deny such consent or request a
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modification of terms. If a request submitted to Neuman is not acted upon within
such seven (7) business day period, such request shall automatically be deemed
approved. Notwithstanding anything to the contrary contained herein, DGD may
spend up to $75,000 to purchase run off coverage or a tail to the current D & O
insurance held by DGD without the consent of Neuman.
(f) Advice of Changes. Until the Release Time, DGD will promptly advise
Neuman in a reasonably detailed written notice of any fact or occurrence or any
pending or threatened occurrence, other than a material adverse change in the
economy in general, of which any officer or Executive Committee member of DGD or
any DGD Subsidiary (each a "DGD Responsible Employee") obtains knowledge and
which (w) (if existing at the date of the execution of this Agreement) would
have been required to be set forth or disclosed in or pursuant to this Agreement
or the Schedules hereto, (x) (if existing at any time prior to or at the
Effective Time) would make the performance by DGD of a covenant contained in
this Agreement impossible or make such performance materially more difficult
than in the absence of such fact or occurrence, (y) (if existing at the
Effective Time) would cause a condition to the obligations of Neuman and
Distributors under Section 7.01 of this Agreement not to be fully satisfied or
(z) is otherwise material to the condition (financial or otherwise), results of
operations, businesses, properties, assets, future prospects (other than a
material adverse change in the economy in general) or current or future
liabilities of DGD or any DGD Subsidiary.
(g) Confidentiality. DGD agrees that all confidential information which
DGD, any DGD Subsidiary, or any of their respective officers, directors,
employees, counsel, agents, investment bankers, accountants or other
representatives may now possess or may
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hereafter create or obtain relating to the condition (financial or otherwise),
results of operations, businesses, customer satisfaction, properties, assets,
future prospects or current or future liabilities of DGD, any DGD Subsidiary,
Neuman, Distributors, any subsidiary of Neuman and Distributors, any affiliate
of any of them, or any customer or supplier of any of them or any such affiliate
shall not be published, disclosed, or made accessible by any of them to any
other Person at any time or used by any of them, except that pending the Release
Time DGD and the DGD Subsidiaries may use such information (other than
information relating to Neuman, Distributors, any subsidiary of Neuman or
Distributors, or any customer, supplier or affiliate of any of them) in the
business and for the benefit of DGD and the DGD Subsidiaries; provided, however,
that the restrictions of this sentence shall not apply (i) after the Release
Time (unless the Release Time occurs as a result of the effectiveness of the
Merger), but only to the extent such confidential information relates to the
condition (financial or otherwise), results of operations, businesses, customer
satisfaction, properties, assets, future prospects or current or future
liabilities of DGD, of any DGD Subsidiary, of any affiliate of any of them, or
(insofar as such confidential information was obtained directly by DGD, any DGD
Subsidiary, or any such affiliate from any customer or supplier of any of them)
of any such customer or supplier, (ii) as may otherwise be required by law,
provided that DGD shall give Neuman sufficient notice of any such disclosure to
enable Neuman, if it so elects in its sole discretion, to attempt to obtain a
protective order or otherwise to prevent or limit such disclosure, (iii) as may
be necessary in connection with the enforcement of this Agreement, or (iv) to
the extent the information shall have otherwise become publicly available
otherwise than through a breach or violation of any confidentiality requirement.
DGD shall, shall cause the DGD Subsidiaries to, and shall use its best efforts
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and cause the DGD Subsidiaries to use their best efforts to, cause all other
such Persons to, deliver to Neuman all tangible evidence of the confidential
information relating to Neuman, Distributors, any subsidiary of Neuman and
Distributors, any affiliate of any of them, or (insofar as such confidential
information was obtained directly from Neuman, Distributors, any subsidiary of
Neuman and Distributors, or any such affiliate of Neuman) any customer or
supplier of any of them or any such affiliate to which the restrictions of the
foregoing sentence apply immediately after the Release Time.
(h) Public Statements. DGD has heretofore furnished Neuman with true,
correct and complete copies of all statements, communications and other
documents filed with or issued or sent by DGD or on DGD's behalf during the past
36 months with or to (i) the Securities and Exchange Commission (the "SEC")
including, but not limited to, Reports on Form 10-K, Form 10-Q or Form 8-K and
proxy statements, (ii) the National Association of Securities Dealers, Inc.,
(iii) any national securities exchange upon which the DGD Common Stock has been
listed, (iv) any other governmental agency or instrumentality, including, but
not limited to, the Food and Drug Administration, or (v) DGD's shareholders, and
all press releases issued by DGD or any DGD Subsidiary, during such 36 month
period. DGD shall, until the Release Time, further furnish or cause to be
furnished to Neuman true and complete copies of all statements, communications
and other documents hereafter filed with, or issued or sent by DGD or on DGD's
behalf to, the SEC, the National Association of Securities Dealers, Inc., any
securities exchanges, any other governmental agency or instrumentality or DGD's
shareholders and all press releases issued by DGD or any DGD Subsidiary. Before
DGD files, issues or sends any such statements, communications or documents or
releases any information concerning this Agreement, the Merger, or any of the
other transactions
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contemplated by this Agreement which is intended for or may result in public
dissemination thereof, DGD shall obtain Neuman's written consent, provided that
if the statement, communication, document or release is required by law,
Neuman's consent shall be limited to the content thereof and shall not be
unreasonably withheld.
(i) Consents Without Any Condition. DGD shall not make any agreement,
commitment or arrangement or reach any understanding not approved in advance in
writing by Neuman, which approval shall not be unreasonably withheld, as a
condition for obtaining any consent, authorization, approval, order, license,
certificate, or permit required for the consummation of the transactions
contemplated by this Agreement, whether pursuant to Sections 7.01(j), 7.01(l) or
otherwise.
(j) Transfer Taxes. DGD shall timely prepare and file any declaration or
filing necessary to comply with any transfer tax statutes that require any such
filing before the Effective Time.
(k) Compensation, Employment Plans, Retirement Plans, etc.
(i) A complete and accurate description of all Contracts, plans,
programs, agreements, undertakings, understandings and arrangements with
respect to the salaries, commissions, bonuses, benefits, perquisites,
compensation of, or loans or advances to, directors, officers, employees,
agents (including sales agents), dealers or distributors of DGD or any
DGD Subsidiary is set forth in Schedule 5.01(k) hereto. Until the Release
Time, DGD will not, and will not permit any DGD Subsidiary to (i)
increase the rate of compensation of any of its directors, officers,
employees, agents (including sales agents), dealers or distributors other
than in the ordinary course and consistent with past practice, (ii) grant
or pay any additional or special
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compensation, bonus, perquisite, benefit, loan or advance to any of its
directors, officers, employees, agents (including sales agents), dealers
or distributors or (iii) except as required by law or as is necessary to
terminate any Pension Plan (as defined in Section 6.01(i)), institute,
enter into or amend any employment, employee benefit, pension,
retirement, stock option, profit sharing, compensation, consultant,
bonus, group insurance or similar plan in respect of any of its
directors, officers, employees, agents (including sales agents), dealers
or distributors.
(ii) DGD represents and warrants that true, complete and correct
copies of all directors' and officers' liability insurance policies in
effect on the date hereof, including the most recent application forms
which are made part of such policies, have been furnished to Neuman, and
all such policies are accurately listed on Schedule 5.01(k)(ii) hereto.
Schedule 5.01(k)(ii) also sets forth a complete and correct list of all
corporate resolutions with respect to, and Contracts with, any director,
officer, employee, agent (including sales agents), dealer or distributor
of DGD or any DGD Subsidiary which contain a "change of control"
provision or which relate to the indemnification or exculpation from
liability of any such director, officer, employee, agent, dealer or
distributor.
(iii) Nothing contained in this Agreement or otherwise shall
obligate Neuman, the Surviving Corporation or any DGD Subsidiary to
employ any Person who is now or in the future may be employed by DGD or
any DGD Subsidiary, or to maintain any particular compensation level or
benefits for any Person who is so employed, except to the extent an
employee under an employment agreement has, subject to applicable law,
rights thereunder.
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(l) Liens; Indebtedness; etc. Until the Release Time, DGD will not, and
will not permit any DGD Subsidiary to, (i) except in the ordinary course of
business consistent with past practices, mortgage, pledge or subject to a lien,
security interest or any other encumbrance any of its property or assets,
dispose of any of its property or assets or incur or cancel any obligation,
indebtedness or claims, (ii) incur, increase, renew, refinance or extend or
agree or commit to incur, increase, renew, refinance or extend any indebtedness
for borrowed money, obligation which is evidenced by any note, bond, debenture,
instrument or security or obligation with respect to any commercial or standby
letter of credit, or (iii) guaranty the obligations of any other Person, except
for guarantees of collection in the ordinary course of business, consistent with
past practice.
(m) Business Combinations. Until the Release Time, DGD shall not, and
shall not permit any DGD Subsidiary to, merge or consolidate with or into, or
acquire all or any substantial part of the stock, securities or property or
assets of, dispose of any substantial amount of property or assets outside the
ordinary course of business to, or engage in any business combination with, any
other Person.
(n) Compliance with Laws. To the best knowledge of DGD, DGD and all the
DGD Subsidiaries are and will remain in compliance in all respects with all
applicable federal, state, foreign and local legal requirements (including
without limitation Environmental Laws, as hereinafter defined) in each of the
jurisdictions in which they operate, except where such noncompliance does not
materially interfere with the business, property or assets of DGD or the DGD
Subsidiaries. DGD will promptly notify Neuman if DGD or any of the DGD
Subsidiaries receives any claim or notice of violations with respect thereto.
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(o) Taxes. DGD and the DGD Subsidiaries shall, from the date hereof
through the Effective Date, prepare and timely file all Tax (as defined in
Section 6.01(d)) returns required to be filed in any jurisdiction in which they
conduct business, and shall pay all Taxes required to be paid in such
jurisdictions.
(p) Material for Registration Statement and Proxy Statement. DGD shall
furnish or cause to be furnished, for inclusion in the Registration Statement on
Form S-4 (such Registration Statement, together with all financial statements,
exhibits, amendments, and supplements thereto, being herein called the
"Registration Statement") to be filed pursuant to the Securities Act of 1933, as
amended (the "Securities Act"), in connection with the consummation of the
Merger, or for inclusion in Neuman's filings under state "blue-sky" laws, such
information about DGD, DGD Subsidiaries or DGD's security holders as may be
required or as may be reasonably requested by Neuman, and shall continue to
furnish or cause to be furnished such information for the purpose of amending
the Registration Statement until the Release Time. DGD represents and warrants
that to its knowledge the information so furnished will not at the time the
Registration Statement becomes effective, nor at any time prior to the Release
Time, (i) contain an untrue statement of a material fact or (ii) omit to state a
material fact required to be stated therein or necessary to make the statements
therein not false or misleading in light of the circumstances in which they are
made.
ss.5.02 Covenants of Neuman
Neuman and Distributors agree that, unless DGD otherwise agrees in
writing:
(a) Access. Neuman will, promptly upon their completion after the end of
each calendar month until the Release Time, deliver to DGD a true, complete and
accurate copy
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of its consolidated financial statements for such month (which shall include a
consolidated balance sheet and consolidated statements of income, shareholders'
equity and cash flow for such month and from the period beginning on August 1,
1996 and ending at the close of such month), which financial statements shall
(x) present fairly the consolidated financial condition, assets, liabilities and
shareholders' equity of Neuman and the Neuman subsidiaries as of their
respective dates and the results of operation of Neuman and the Neuman
subsidiaries for the period indicated and (y) be prepared in accordance with
GAAP and be in accordance with the books and records of Neuman and the Neuman
subsidiaries. Until the Release Time (but subject to the Confidentiality
Agreements) Neuman will, from time to time, (i) afford the officers, directors,
employees, counsel, agents, investment bankers, accountants, and other
representatives of DGD free and full access to the officers, directors,
employees, counsel, agents, investment bankers, accountants, other
representatives, plants, properties, assets, books, records (including Tax
returns) and systems of Neuman and all Neuman subsidiaries, (ii) to the extent
reasonable, permit them to make extracts from and copies of such books and
records, and (iii) furnish them with such additional financial and operating
data and other information as to the condition (financial or otherwise), results
of operations, businesses, customer satisfaction, properties, assets, future
prospects or future or current liabilities of Neuman or any Neuman subsidiary as
they from time to time may reasonably request, provided that DGD shall use its
best efforts to limit access to information obtained pursuant to the foregoing
clauses (i) through (iii) to individuals on a need-to-know basis. Until the
Release Time, Neuman will cause the independent certified public accountants of
Neuman and the Neuman subsidiaries to make available to DGD and its
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independent certified public accountants all of the work papers relating to the
audits of Neuman and the Neuman subsidiaries.
(b) Conduct of Business. Until the Release Time, Neuman and Distributors
will use its best efforts to conduct its affairs so that at the Effective Time
no representation or warranty of Neuman or Distributors will be inaccurate, no
covenant, obligation or agreement of Neuman or Distributors will be breached,
and no condition in this Agreement will remain unfulfilled by reason of the
actions or omissions of Neuman or Distributors .
(c) Advice of Changes. Until the Release Time, Neuman will promptly
advise DGD in a reasonably detailed written notice of any fact or occurrence or
any pending or threatened occurrence, other than a material adverse change in
the economy in general, of which any officer or director of Neuman or any Neuman
subsidiary (each a "Neuman Responsible Employee") obtains knowledge and which
(w) (if existing at the date of the execution of this Agreement) would have been
required to be set forth or disclosed in or pursuant to this Agreement or the
Schedules hereto, (x) (if existing at any time prior to or at the Effective
Time) would make the performance by Neuman or Distributors of a covenant
contained in this Agreement impossible or make such performance materially more
difficult than in the absence of such fact or occurrence, (y) (if existing at
the Effective Time) would cause a condition to the obligations of DGD under
Section 7.02 of this Agreement not to be fully satisfied or (z) is otherwise
material to the condition (financial or otherwise), results of operations,
businesses, properties, assets, future prospects (other than a material adverse
change in the economy in general) or current or future liabilities of Neuman or
any Neuman subsidiary.
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(d) Confidentiality. Neuman agrees that all confidential information
which Neuman, Distributors, any subsidiary of Neuman or Distributors, or any of
their respective officers, directors, employees, counsel, agents, investment
bankers, accountants or other representatives may now possess or may hereafter
create or obtain relating to the condition (financial or otherwise), results of
operations, businesses, customer satisfaction, properties, assets, future
prospects or liabilities of Neuman, Distributors, any subsidiary or Neuman or
Distributors, DGD, any DGD Subsidiary, any affiliate of any of them, or any
customer or supplier of any of them or any such affiliate shall not be
published, disclosed, or made accessible by any of them to any other Person at
any time or used by any of them, except that pending the Release Time Neuman,
Distributors and the subsidiaries of Neuman or Distributors may use such
information (other than information relating to DGD, any DGD Subsidiary, or any
customer, supplier or affiliate of any of them) in the business and for the
benefit of Neuman, Distributors and the subsidiaries of Neuman or Distributors;
provided, however, that the restrictions of this sentence shall not apply (i)
after the Effective Time or the Release Time (if the Release Time does not occur
as a result of the effectiveness of the Merger, but only to the extent such
confidential information relates to the condition (financial or otherwise),
results of operations, businesses, customer satisfaction, properties, assets,
future prospects or current or future liabilities of Neuman, of Distributors, of
any subsidiary of Neuman or Distributors, of any affiliate of any of them, or
(insofar as such confidential information was obtained directly by Neuman,
Distributors any subsidiary of Neuman or Distributors, or any such affiliate
from any customer or supplier of any of them) of any such customer or supplier),
(ii) as may otherwise be required by law, provided that Neuman shall give DGD
sufficient notice of any such disclosure to enable DGD, if it so elects in its
sole
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discretion, to attempt to obtain a protective order or otherwise to prevent or
limit such disclosure, (iii) as may be necessary in connection with the
enforcement of this Agreement, or (iv) to the extent the information shall have
otherwise become publicly available otherwise than through a breach or violation
of any confidentiality requirement. Neuman and Distributors shall, shall cause
their respective subsidiaries to, and shall use their best efforts and cause
their subsidiaries to use their best efforts to, cause all other such Persons
to, deliver to DGD all tangible evidence of the confidential information
relating to DGD, any DGD subsidiary, any affiliate of any of them, or (insofar
as such confidential information was obtained directly from DGD, any DGD
subsidiary, or any such affiliate of DGD) any customer or supplier of any of
them or any such affiliate to which the restrictions of the foregoing sentence
apply immediately after the Release Time (unless the Release Time occurs upon
the effectiveness of the Merger).
(e) Public Statements. Before Neuman files, issues or sends any
statement, communications, documents or releases any information concerning this
Agreement, the Merger, or any of the other transactions contemplated by this
Agreement which is intended for or may result in public dissemination thereof,
Neuman shall obtain DGD's prior written consent provided that, if the statement,
communication, document or release is required by law, DGD's consent shall be
limited to the content thereof and shall not be unreasonably withheld.
(f) Consents. Neuman shall notify DGD of any agreement, commitment,
arrangement or understanding reached by Neuman as a condition for obtaining any
consent, authorization, approval, order, license, certificate, or permit
required for the consummation
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of the transactions contemplated by this Agreement, whether pursuant to Sections
7.02(h) 7.02(j) or otherwise.
(g) Employee Benefits. Following the Effective Time, the Surviving
Corporation will make reasonable efforts, consistent with present or anticipated
business conditions, to provide generally to officers and employees of DGD who
remain in the Surviving Corporation's employ and (A) who are not parties to
employment agreements and (B) who are not receiving such employee benefits from
any DGD Employee Benefit Plans which will survive the Effective Date, employee
benefits which in the aggregate are substantially no less favorable than those
currently provided by Neuman to its employees at comparable levels; provided
that nothing in this Agreement shall require the Surviving Corporation to
provide benefits to officers or employees which are more favorable than those
which DGD or Neuman currently provides to its employees. Following the Effective
Time, the Surviving Corporation shall cause the Drug Guild Distributors, Inc.
Defined Benefits Pension Plan (the "DB Plan") to be terminated; provided,
however, that no termination shall be effected unless (i) the DB Plan is fully
funded as on the Effective Time and (ii) the assets of the DB Plan on the
Effective Date shall not be invested in any equity securities. DGD will provide
sufficient evidence to Neuman prior to the Effective Time of DGD's compliance
with (i) and (ii) above. However, except as may otherwise be specifically
provided in this Agreement, the Surviving Corporation shall have the right to
amend, modify, or terminate any employee benefit plan, program, or arrangement
after the Effective Time.
(h) Material for Proxy Statement. Neuman shall furnish or cause to be
furnished, for inclusion in the proxy statement to be distributed to DGD
shareholders in connection with the consummation of the Merger (the "Proxy
Statement"), and to be used in connection with
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the meeting of the shareholders of DGD referred to in Section 3.01, such
information as may be required or as may be reasonably requested by DGD, and
shall continue to furnish or cause to be furnished such information for the
purpose of supplementing the Proxy Statement, until the Release Time. Neuman
represents and warrants that the information so furnished will not at the time
the Proxy Statement is sent to DGD Shareholders, and at any time prior to the
Release Time, (i) contain an untrue statement of a material fact or (ii) omit to
state a material fact required to be stated therein or necessary to make the
statements therein not false or misleading in light of the circumstances in
which they are made.
(i) Transfer Taxes. Neuman shall timely prepare and file any declaration
or filing necessary to comply with any transfer tax statutes that require any
such filing before the Effective Time.
(j) Officer and Director Indemnification. (i) Neuman and Distributors, as
the Surviving Corporation in the Merger, will observe all indemnification
provisions now existing in favor of the current or former directors or officers
of DGD and the DGD Subsidiaries as provided in their respective certificates of
incorporation or by-laws.
(ii) In the event Neuman or Distributors or any of their successors
or assigns (A) consolidates with or merges into any other Person and shall not
be the continuing or surviving corporation or entity of such consolidation or
merger or (B) transfers all or substantially all of its properties and assets to
any Person then, in each such case, proper provision shall be made so that the
successors and assigns of Neuman or Distributors, as the case may be, shall
assume the obligation set forth in this section.
(k) Securities Law Compliance. At or prior to the Effective Time, Neuman
shall use its best efforts to make all filings, and take all actions, necessary
to comply with all
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applicable federal securities and "blue-sky" laws with regard to the issuance of
Neuman Common Stock pursuant to the Merger as contemplated by this Agreement.
VI. REPRESENTATIONS AND WARRANTIES
ss.6.01 Certain Representations and Warranties of DGD
DGD represents and warrants to Neuman and Distributors as follows:
(a) Organization and Qualification. DGD owns, either directly or through
one or more wholly-owned subsidiaries, all the outstanding shares of capital
stock of each of the corporations (the "DGD Subsidiaries") listed on Schedule
6.01(a) hereto, free and clear of all liens, security interests, pledges,
charges, encumbrances, shareholders' agreements, and voting trusts, except as
set forth on Schedule 6.01(a). Other than the DGD Subsidiaries, neither DGD nor
any DGD Subsidiary has a subsidiary or affiliate corporation or directly or
indirectly owns any interest in any other Person or enterprise. Schedule 6.01(a)
also correctly sets forth as to DGD and as to each DGD Subsidiary its place of
incorporation and the jurisdictions in which it is licensed or qualified to do
business; and as to each DGD Subsidiary its authorized capitalization and its
shares of capital stock outstanding. Each of DGD and each of the DGD
Subsidiaries is a corporation duly organized, validly existing and in good
standing under the laws of its jurisdiction of incorporation, with all requisite
corporate power and authority, and all necessary consents, authorizations and
approvals (including, without limitation, certificates of authority to do
business as a foreign corporation) from all federal, state, local, foreign and
other governmental authorities to own, lease, license, and use its properties
and assets and to carry on the businesses in which it is now engaged, except
such consents, authorizations, and approvals (including, without limitation,
certificates of authority to do business as a foreign corporation) which if not
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obtained, would not have a material adverse effect on the condition (financial
or otherwise), results of operations, cash flows, businesses, properties,
assets, future prospects or liabilities of DGD and the DGD Subsidiaries, taken
as a whole (a "Material Adverse Effect"). Neither DGD nor any of the DGD
Subsidiaries has received notice from any state or any other jurisdiction to the
effect that DGD or any DGD Subsidiary is required to be licensed or to qualify
or otherwise to be authorized to do business as a foreign corporation therein or
has failed to obtain or maintain any consent, authorization or approval which
such state or jurisdiction has authority to grant.
(b) Capitalization. The authorized capital stock of DGD consists of (i)
Twenty-Five Million (25,000,000) shares of DGD Common Stock, of which as at July
31, 1996 10,022,667 shares were issued and outstanding, none of which are held
as treasury stock, and as at July 31, 1996 $639,300 is due for the purchase of
shares to be issued pursuant to DGD Common Stock Subscriptions, and (ii) Two
Hundred Fifty Thousand (250,000) shares of DGD Preferred, 25,893.44 shares of
which as at July 31, 1996 were issued and outstanding. Each outstanding share of
DGD Common Stock and DGD Preferred and each outstanding share of capital stock
of each DGD Subsidiary is duly authorized, validly issued, fully paid, and
nonassessable, has not been issued and is not owned or held in violation of any
preemptive right of shareholders, and there is no personal liability attached to
the ownership thereof. There is no commitment, plan, or arrangement to issue
(including preemptive rights), and no outstanding option, warrant, call or other
right calling for the issuance of, any share of capital stock of any DGD
Subsidiary or any security or other instrument convertible into, exercisable
for, or exchangeable for capital stock of any DGD Subsidiary, except as
disclosed in this Agreement. The shares of DGD Common Stock to be
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issued upon exercise of the DGD Stock Rights are validly authorized and, when
the DGD Stock Rights are exercised in accordance with their respective terms,
such shares of DGD Common Stock will be validly issued, fully paid, and
nonassessable. Except for those Persons listed on Schedule 6.01(b), no Person
owns 5% or more of any voting stock of DGD. As at the Effective Time, there will
no longer be any Subscriptions in effect or outstanding; provided, however, that
the parties hereto agree that the Effective Time will not occur until 70 days
after the date hereof to allow for the cancellation of the Subscriptions.
(c) Financial Condition. DGD has delivered to Neuman true, correct,
complete and accurate copies of the following: the audited balance sheets of DGD
as of July 31, 1994 and July 31, 1995; audited statements of income, statements
of shareholders' equity, and statements of cash flows of DGD for each of the
years within the three year period ended July 31, 1995; the unaudited
consolidated balance sheet of DGD as of October 31, 1995, January 31, 1996 and
April 30, 1996; and the unaudited consolidated statement of income, consolidated
statement of shareholders' equity, and consolidated statement of cash flows of
DGD for the quarters ended October 31, 1995, January 31, 1996 and April 30,
1996. Except as qualified by an 8-K dated August 23, 1996 filed with the SEC
(the "8-K"), each such balance sheet presents fairly the financial condition,
assets, liabilities, and shareholders' equity of DGD and the DGD Subsidiaries as
of its date; each such statement of income, shareholders' equity and cash flows
presents fairly the results of operations of DGD and the DGD Subsidiaries for
the periods indicated, all in accordance with GAAP. The financial statements
referred to in this Section 6.01(c) are in agreement with the detailed books and
records of DGD and the DGD Subsidiaries. Since April 30, 1996, except as may be
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expressly disclosed in the April 30, 1996 unaudited financial statements, the
8-K or in the Schedules hereto:
(i) There has at no time been a Material Adverse Effect.
(ii) Neither DGD nor any DGD Subsidiary has authorized, declared,
paid, or effected any dividend (other than dividends in kind on the DGD
Preferred) or liquidation or other distribution, stock appreciation
rights, phantom stock options, stock split, recapitalization,
reclassification or reorganization in respect of its capital stock or any
direct or indirect redemption or purchase (other than those redemptions
or purchases set forth on Schedule 6.01(c)(ii)), retirement or other
acquisition of any stock of DGD or any DGD Subsidiary.
(iii) The operations and businesses of DGD and each DGD Subsidiary
have been conducted in all material respects only in the ordinary course,
consistent with past practices.
(iv) Neither DGD nor any DGD Subsidiary has suffered an
extraordinary or unusual loss (whether or not covered by insurance) or
waived any right of substantial value, any of which, individually or in
the aggregate, is material to DGD and the DGD Subsidiaries, taken as a
whole.
(d) Taxes.
To the best of DGD's knowledge, neither DGD nor any DGD Subsidiary has
any Tax liability of any nature, accrued or contingent, for which an adequate
provision has not been made in their financial statements. In this Agreement,
the term "Taxes" includes without limitation all liabilities for federal, state,
local, foreign or other taxes, whether based on, or related to income, profits,
capital, premiums, sales, use, gross receipts, property, ad
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valorem, franchise, employment, transfer, excise, payroll, import and other
taxes, duties, leases and assessments, and includes all related penalties,
interest, additions to tax and liabilities for taxes related to contractual
obligations with customers and suppliers.
The amounts set up as assets and liabilities for Taxes on the Last DGD
Balance Sheet (as defined in Section 6.01(e)(i)) are properly stated in
accordance with GAAP and are sufficient for all unpaid Taxes of DGD or the DGD
Subsidiaries, whether or not due and payable and whether or not disputed, under
tax laws, as in effect on the Last DGD Balance Sheet Date (as defined in Section
6.01(e)(i)) or now in effect, for the period ended on such date and for all
fiscal periods prior thereto. The execution, delivery, and performance of this
Agreement by DGD will not cause any Taxes (except as set forth on Schedule
6.01(d)) to be payable or cause any lien, charge, security interest or
encumbrance to secure any Taxes to be created either immediately or upon the
nonpayment of any Tax. Except as set forth on Schedule 6.01(d), the Internal
Revenue Service has not audited any federal income tax returns of DGD and the
DGD Subsidiaries for the last ten taxable years and no audit prior to that
period remains open. To the best of DGD's knowledge, each of DGD and each of the
DGD Subsidiaries has filed all known federal, state, local, foreign and other
tax returns required to be filed by it and, to the extent any such tax returns
were not properly and timely filed, DGD and the DGD Subsidiaries have either
paid all Taxes with respect thereto or have accrued or set aside reserves for
such Taxes which are equal to or greater than the aggregate amount of such Taxes
which may be paid or incurred; has made available to Neuman a true, complete and
correct copy of each such return which was filed in the past three (3) years in
the case of federal tax returns and three (3) years in all other cases; has paid
all Taxes, assessments, and other governmental charges payable or remittable by
it or levied upon it or
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its properties, assets, income, or franchises which are due and payable; and
there are no reports as to adjustments received by it from any taxing authority
during the past five (5) years.
(e) Other Liabilities. Except as set forth in the Schedules hereto,
neither DGD nor any DGD Subsidiary has any indebtedness or liability of any
nature (including, without limitation, any liability arising from any
Environmental Claim, as hereinafter defined), accrued or contingent, for which
provision should be made on the financial statements which has not been made,
other than the following:
(i) Liabilities for which full provision has been made on the
audited balance sheet and the notes thereto (the "Last DGD Balance
Sheet") as of July 31, 1995 (the "Last DGD Balance Sheet Date") referred
to in Section 6.01(c); and
(ii) Other liabilities arising since the Last DGD Balance Sheet Date
and prior to the Effective Time in the ordinary course of business (which
shall not include liabilities to customers on account of defective
products or services) which are not inconsistent with the representations
and warranties of DGD or any other provision of this Agreement.
No DGD Responsible Employee has knowledge of any existing or
threatened occurrence(s), event(s) or development(s) which, as of the date
hereof, individually or in the aggregate, are likely to have a Material Adverse
Effect.
(f) Litigation and Claims; Labor Matters. (i) Except as set forth in
Schedule 6.01(f) hereto, there is no litigation, arbitration, grievance, claim,
governmental or other proceeding (formal or informal), or investigation pending,
or to the knowledge of DGD or any DGD Subsidiary, threatened, with respect to
DGD or any DGD Subsidiary. No
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litigation, arbitration, grievance, claim, governmental or other proceeding or
investigation set forth on Schedule 6.01(f), if adversely determined, would have
a Material Adverse Effect individually or in the aggregate. Except as set forth
on Schedule 6.01(f), neither DGD nor any DGD Subsidiary is, or during the past
six years has been, affected by any present or threatened strike, slowdown,
picketing, shutdown or stoppage or other labor disturbance or dispute, whether
involving DGD or any DGD Subsidiary or their employees or any other Person, nor
to the knowledge of DGD or any DGD Subsidiary is any union attempting or
campaigning to represent any employee of DGD or of any DGD Subsidiary or to be
certified as a collective bargaining unit. Except as set forth on Schedule
6.01(f), there are no collective bargaining agreements or union contracts
binding on DGD or any DGD Subsidiary. DGD and each DGD Subsidiary has fulfilled
any and all bargaining obligations it has with the collective bargaining
representative of its employees. There are no unfair labor practice complaints
involving DGD or any DGD Subsidiary before the National Labor Relations Board.
Neither DGD nor any DGD Subsidiary is in violation of, or in default with
respect to, any law, rule, regulation, order, judgment, or decree which would
have a Material Adverse Effect; nor is DGD or any DGD Subsidiary required to
take any action in order to avoid any violation or default. To the best of DGD's
knowledge, DGD and each DGD Subsidiary are in compliance with all applicable
laws, agreements, contracts and binding policies relating to employment,
employment practices, wages, hours and terms and conditions of employment.
(ii) Neither DGD nor any DGD Subsidiary shall at any time between the
date hereof and the Closing Date effectuate a "plant closing" or "mass layoff",
as those terms are defined in the Worker Adjustment and Retraining Notification
Act of 1988 or analogous state statute
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("WARN"), without complying with the notice requirements and other provisions of
WARN and any analogous state law.
(g) Properties.
(i) Each of DGD and each DGD Subsidiary holds marketable and legal
title to each of the real properties set forth on Schedule 6.01(g).
Except as set forth on Schedule 6.01(g), neither DGD nor any DGD
Subsidiary legally or beneficially owns title to any real property. Each
of DGD and each of the DGD Subsidiaries has (i) valid and enforceable
leases to all property and intangibles which it uses in its business (all
of which leases and intangibles are described on Schedules 6.01(g) or
6.01(j)) and (ii) good title to all other material properties (including
the real property set forth on Schedule 6.01(g)) and assets used in its
businesses or owned by it, free and clear of all liens, mortgages,
security interests, pledges, charges, and encumbrances (except such as
are listed on Schedule 6.01(g), none of which have a Material Adverse
Effect or will interfere with the use or enjoyment of such property by
DGD or any DGD Subsidiary).
(ii) All accounts and notes receivable reflected on the Last DGD
Balance Sheet (net of stated reserves, which reserves have been made in
accordance with GAAP), or arising since the Last DGD Balance Sheet Date,
have been collected, or to our best knowledge are and will be good and
collectible in the ordinary course of business, in each case at the
aggregate recorded amounts thereof without right of recourse, defense,
deduction, counterclaim, offset, or set off on the part of the obligor.
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(iii) All inventory of DGD and of each DGD Subsidiary (other than
immaterial amounts of inventory) is in quantities which are usable on a
normal basis in the existing service lines of DGD or such DGD Subsidiary,
as the case may be, at values at least equal to the values at which such
items are carried on DGD's books and records and contain no material
amounts of items with an expiration date less than six months after the
Effective Time except for items that are typically short dated in the
ordinary course of business, consistently applied. The values at which
such inventories are carried on DGD's books and records reflect the
inventory valuation policy, in accordance with GAAP, of DGD stating
inventories at the lower of average cost (determined on a first-in,
first-out basis) or market value, in accordance with GAAP. All inventory
is merchantable and fit for the particular purpose for which it is
intended. Except as set forth on Schedule 6.01(g)(iii), DGD has not made
any sales in the past two years on a consignment basis and no such sales
are currently contemplated.
(iv) Schedule 6.01(g) sets forth a true, correct and complete list,
by state and city of location, of all properties and assets owned by DGD
and the DGD Subsidiaries or leased or licensed by DGD or by any DGD
Subsidiary from a third party (not including Intangibles, as defined in
Section 6.01(j)), including with respect to such properties and assets
owned by DGD or by any DGD Subsidiary a statement of cost, book value and
reserve for depreciation of each item for financial reporting purposes,
and with respect to such properties and assets leased or licensed by DGD
or by any DGD Subsidiary from a third party, a description of such lease
or license and a statement of the book value and net book value of each
item for financial
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reporting purposes. Except as set forth on Schedule 6.01(g), neither DGD
nor any DGD Subsidiary leases or licenses any property to any Person. All
properties and assets (including Intangibles) owned by DGD or by any DGD
Subsidiary are reflected on the Last DGD Balance Sheet (except for
acquisitions in the ordinary course of business consistent with past
practice subsequent to the Last DGD Balance Sheet Date and prior to the
Effective Time which are either noted on Schedules 6.01(g) or 6.01(j) or
will be approved in writing by Neuman). All real and other tangible
properties and assets owned by DGD or by any DGD Subsidiary or leased or
licensed by DGD or by any DGD Subsidiary from a third party are in good
and usable condition (reasonable wear and tear which is not such as to
affect adversely the operation of the businesses of DGD or of such DGD
Subsidiary excepted). All leases or licenses to which DGD or any DGD
Subsidiary is a party are in full force and effect and no violations or
defaults by DGD or any DGD Subsidiary exist under any thereof which,
individually or in the aggregate, would have a Material Adverse Effect.
(v) The properties and assets (including Intangibles) owned by DGD
and each DGD Subsidiary or leased or licensed by DGD or such DGD
Subsidiary from a third party, as set forth on Schedules 6.01(g) and
6.01(j), constitute all properties and assets which are necessary and
adequate to conduct the businesses of DGD and each DGD Subsidiary as
presently conducted. (h) Contracts and Other Instruments. Schedule
6.01(h) contains a true, correct
and complete description of each Contract with respect to DGD and each DGD
Subsidiary which is required by its terms or is expected to result in the
payment or receipt of more than
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$100,000 individually or has a term of more than one year. Except as set forth
on Schedule 6.01(h), DGD has no Contracts (written or oral) with Meadow
Trucking, Inc. Schedule 6.01(h) contains a true, correct and complete
description of each Contract with respect to DGD and each DGD Subsidiary which
is otherwise material to DGD or any DGD Subsidiary, identifying whether the
matter disclosed therein relates to DGD or to a DGD Subsidiary named therein.
DGD has furnished (or, in the case of clause (z)(A) below, made available) to
Neuman true, complete and correct copies of (y) the certificate of incorporation
(or other charter document) and by-laws of DGD and each DGD Subsidiary and all
amendments thereto, as presently in effect, certified by the Secretary of such
corporation and (z) each of the following: (A) all Contracts referred to in
Schedule 6.01(h); (B) all deeds to real property, all real property and master
equipment leases and all licenses referred to in Schedules 6.01(g) or 6.01(j);
(C) written descriptions of all supply, distribution, agency, financing, or
other arrangements or understandings referred to in Schedule 6.01(h); (D) each
Contract defining the terms on which debts for borrowed money or guarantees by
DGD aggregating more than $25,000 have been or may be issued; (E) all employment
and consulting Contracts not terminable at will without penalty to which DGD or
any DGD Subsidiary is a party; and (F) any Contract limiting DGD's or any DGD
Subsidiary's freedom to compete in any line of business or with any Person.
Neither DGD nor any DGD Subsidiary nor (to the knowledge of DGD or any DGD
Subsidiary) any other party to any such Contract is now or expects in the future
to be in violation or breach of, or in default with respect to complying with,
any material term thereof, and each such Contract is in full force and is the
legal, valid, and binding obligation of DGD or the DGD Subsidiary party thereto
and (subject to applicable bankruptcy, insolvency, and other laws affecting the
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enforceability of creditors' rights generally) is enforceable as to them in
accordance with its terms. To the best of DGD's knowledge, there is no existing
material breach, violation or default by any other party to any of such
Contracts and no event has occurred which with the passage of time or giving of
notice or both would constitute such a breach, violation or default by such
other party or result in a loss of material rights thereunder or pursuant
thereto. Neither DGD nor any DGD Subsidiary has any reason to believe that DGD
or any DGD Subsidiary will be unable to fulfill, when due, all of its respective
obligations under each of such Contracts which remain to be performed after the
date hereof. No Contract contains any provisions restricting DGD or any DGD
Subsidiary from carrying on its business as currently conducted or proposed to
be conducted anywhere in the United States or Canada. Each such supply,
distribution, agency, financing, or other arrangement or understanding is a
valid and continuing arrangement or understanding; neither DGD, any DGD
Subsidiary, nor any other party to any such arrangement or understanding has
given notice of termination or taken any action inconsistent with the
continuance of such arrangement or understanding; and the execution, delivery,
and performance of this Agreement will not prejudice any such arrangement or
understanding in any way. Neither DGD nor any DGD Subsidiary is party to or
bound by any Contract or subject to any charter or other restriction, which has
had or (to the knowledge of DGD or any DGD Subsidiary) will in the future have a
Material Adverse Effect. Except as set forth on Schedule 6.01(h), neither DGD
nor any DGD Subsidiary has engaged within the last five years in, is engaging
in, or intends to engage in, any transaction with, or has had within the last
five years, now has, or intends to have any Contract with, any director,
officer, or employee of DGD or of any DGD Subsidiary (except for employment
agreements or consulting agreements listed on
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Schedule 6.01(h) and employment and compensation arrangements described on
Schedule 6.01(i), in each case with such directors, officers, and employees who
are not relatives or affiliates described in the next clause), any relative or
affiliate of any such director, officer, or employee, or any other Person or
enterprise in which any such director, officer, or employee, or any such
relative or affiliate, then had or now has, directly or indirectly, legally or
beneficially, a 5% or greater equity or voting or other substantial interest,
other than those listed and so specified on Schedule 6.01(h). The stock ledgers
and stock transfer books and the minute book records of DGD and the DGD
Subsidiaries relating to all issuances and transfers of stock by DGD and the DGD
Subsidiaries and all proceedings of the shareholders and the Board of Directors
and committees thereof of DGD and the DGD Subsidiaries since their respective
incorporation made available to Neuman are the original stock ledgers and stock
transfer books and minute book records of DGD and the DGD Subsidiaries or true,
complete and correct copies thereof. Neither DGD nor any DGD Subsidiary is in
violation or breach of, or in default with respect to, any term of its
certificate of incorporation (or other charter document) or by-laws, as amended.
(i) Employees.
(i) Neither DGD nor any DGD Subsidiary has, or contributes to, any
pension, profit-sharing, option, other incentive plan, or any other type
of Employee Benefit Plan (as defined in Section 3(3) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA")), or has any
obligation to or arrangement with employees for bonuses, incentive
compensation, vacations, severance pay, sick pay, sick leave, insurance,
service award, relocation, disability, tuition refund, or other benefits,
whether oral or written, except as set forth in Schedule 6.01(i).
Schedule
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6.01(i) sets forth a complete and accurate list of each such Employee
Benefit Plan or arrangement. The total value of carry-forward vacation,
sick pay and sick leave for all employees of DGD or any DGD Subsidiary as
of July 31, 1996 is not more than $106,000. DGD has furnished to Neuman
true, complete and correct copies of: (A) all documents evidencing plans,
obligations, or arrangements referred to on Schedule 6.01(i) (or true,
complete and correct written summaries of such plans, obligations, or
arrangements, which accurately and fully describe such plans, obligations
or arrangements in all material respects, to the extent not evidenced by
documents) and all documents evidencing trusts, summary plan
descriptions, and any other summaries or descriptions relating to any
such plans; (B) the two most recent annual reports (on Form 5500), if
any, including all schedules thereto and the most recent annual and
periodic accounting of related plan assets, with respect to each Employee
Benefit Plan; (C) the two most recent actuarial valuations with respect
to each Pension Plan (as defined in Section 3(2) of ERISA, other than a
multi-employer Pension Plan as defined in Section 3(37) of ERISA) subject
to Title IV of ERISA; and (D) the most recent determination letter issued
by the Internal Revenue Service with respect to each Pension Plan.
(ii) Each Pension Plan maintained by DGD or any DGD Subsidiary has
been funded in accordance with the assumptions contained in the
applicable actuarial valuations prepared with respect to such Pension
Plan and no such Pension Plan has incurred an "accumulated funding
deficiency" as such term is defined in Section 412 of the Code. All
contributions required to be made under each such Pension Plan have been
timely made. All liabilities (for contributions or otherwise) of DGD or
any
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DGD Subsidiary as of the Effective Time to each Employee Benefit Plan and
with respect to each obligation to or customary arrangement with
employees for bonuses, incentive compensation, vacations, severance pay,
sick pay, sick leave, insurance, service award, relocation, disability,
tuition refund, or other benefits, whether oral or written, have been
paid or accrued for all periods ending prior to the Effective Time. For
purposes of the preceding sentence, "liabilities" shall include
contributions as due in accordance with the terms of each Employee
Benefit Plan to each Employee Benefit Plan or with respect to each such
obligation or arrangement for that portion of a plan year or other
applicable period which commences prior to and ends after the Effective
Time, and accrued liabilities for any portion of a plan year or other
applicable period shall be determined consistently with DGD's past
practices and in accordance with GAAP.
(iii) To the best knowledge of DGD and each DGD Subsidiary, there
has been no violation of the reporting and disclosure requirements
imposed either under ERISA or the Code with respect to any Employee
Benefit Plan of DGD or of any DGD Subsidiary. To the knowledge of DGD and
each DGD Subsidiary, there has been no breach of fiduciary duty or
responsibility with respect to any Employee Benefit Plan. To the
knowledge of DGD and each DGD Subsidiary, no Employee Benefit Plan or
related trust has any liability of any nature, accrued or contingent,
including without limitation liabilities for Taxes, other than for
administrative expenses and routine payments to be made in due course to
participants and beneficiaries, except as set forth on Schedule 6.01(i)
(none of which will have a Material Adverse Effect). Neither DGD nor any
DGD Subsidiary has any formal plan
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or commitment, whether or not legally binding, to create any addition or
modification to any existing Employee Benefit Plan or benefit obligation
or arrangement described in Section 6.01(i). Each Employee Benefit Plan
which is a group health plan within the meaning of Section 5000(b)(1) of
the Code is and has been maintained in all material respects with the
applicable requirements of Section 4980B of the Code. To the knowledge of
DGD or any DGD Subsidiary, there is no litigation, arbitration, claim,
governmental or other proceeding (formal or informal), or investigation
pending, threatened, or in prospect (or any basis therefor known to DGD
or any DGD Subsidiary) with respect to any Employee Benefit Plan or
related trust or with respect to any fiduciary, administrator, or sponsor
(in its capacity as such) of any Employee Benefit Plan. To the knowledge
of DGD or any DGD Subsidiary, no Employee Benefit Plan or related trust
and no such obligation or arrangement is in material breach of, in
material violation of, or in material default with respect to, any law,
rule, regulation, order, judgment, or decree nor is DGD, any DGD
Subsidiary, any Employee Benefit Plan, or any related trust required to
take any action in order to avoid any breach, violation or default. No
event has occurred or, to the knowledge of a DGD Responsible Employee, is
threatened or about to occur with respect to any Employee Benefit Plan or
trust thereunder which would constitute a prohibited transaction under
Section 406 of ERISA or Section 4975 of the Code.
(iv) Each Pension Plan maintained for the employees of DGD or of any
DGD Subsidiary has received a favorable determination letter from the
Internal Revenue Service (a true, correct and complete copy of which has
previously been delivered to Neuman) with respect to its tax qualified
status under Section 401(a) of
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the Code and any related trust has been an exempt trust for such period
under Section 501 of the Code, and neither DGD nor any DGD Subsidiary has
knowledge of any event or condition which could now or with the passage
of time adversely affect such status. Each Pension Plan has in all
material respects been operated in accordance with its terms. No Pension
Plan which is subject to Title IV of ERISA has an accumulated or waived
funding deficiency within the meaning of Section 412 of the Code. No
investigation or review by the Internal Revenue Service is currently
pending or (to the knowledge of DGD or any DGD Subsidiary) is
contemplated in which the Internal Revenue Service has asserted or may
assert that any Pension Plan is not qualified under Section 401(a) of the
Code or that any related trust is not exempt under Section 501 of the
Code. Except as set forth in Schedule 6.01(i)(iv), neither DGD nor any
DGD Subsidiary, nor any organization to which DGD or any DGD Subsidiary
is a successor or parent corporation, within the meaning of Section
4069(b) of ERISA, has divested itself of any Person maintaining or with
an obligation to contribute to any Pension Plan which had an "amount of
unfunded benefit liabilities," as defined in Section 4001(a)(18) of
ERISA, at the time of such divestiture. No assessment of any federal
Taxes with respect to any Employee Benefit Plan has been made or (to the
knowledge of DGD or any DGD Subsidiary) is contemplated against DGD, any
DGD Subsidiary, or any related trust of any Pension Plan, and nothing has
occurred which would result in the assessment of unrelated business
taxable income under the Code with respect to any Employee Benefit Plan.
Each of DGD and each DGD Subsidiary has filed all Form 5500's required to
be filed by it with respect to all Employee Benefit Plans. No event has
occurred or (to
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the knowledge of DGD or any DGD Subsidiary) is threatened or about to
occur which would constitute a reportable event within the meaning of
Section 4043(b) of ERISA. No notice of termination has been filed by the
plan administrator pursuant to Section 4041 of ERISA or issued by Pension
Benefit Guaranty Corporation pursuant to Section 4042 of ERISA with
respect to any Pension Plan.
(v) Except as set forth on Schedule 6.01(i)(v), neither DGD nor any
DGD Subsidiary currently contributes to any multi-employer Pension Plan
within the meaning of Section 3(37) of ERISA. Since January 1, 1986
neither DGD nor any DGD Subsidiary has effectuated either a complete or
partial withdrawal from any multi-employer Pension Plan within the
meaning of Section 3(37) of ERISA and as of the date hereof no withdrawal
liabilities with respect to such multi-employer Pension Plans exist.
(vi) Schedule 6.01(i)(vi) contains a true, complete and correct
statement of the names, relationship with DGD or any DGD Subsidiary,
present rates of compensation (whether in the form of salary, bonuses,
commissions, or other supplemental compensation now or hereafter
payable), and aggregate compensation for the calendar year ended December
31, 1995 of (A) each director, officer, or other employee of DGD or of
any DGD Subsidiary who earned at least $100,000, and (B) all sales
agents, dealers, or distributors of DGD or of any DGD Subsidiary. Except
as set forth on Schedule 6.01(i)(vi), since July 31, 1995, neither DGD
nor any DGD Subsidiary has changed the rate of compensation of any of its
directors, officers, employees, agents, dealers, or distributors
thereunder out of the ordinary course of business, nor has any Employee
Benefit Plan or program been instituted or amended
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to increase benefits thereunder. Except as set forth on Schedule
6.01(i)(vi), there is no Contract covering any Person that, individually
or collectively, could give rise to the payment of any amount that would
not be deductible by DGD or any DGD Subsidiary by reason of Section 280G
of the Code.
(vii) As of the Effective Date, the present value of the accrued
benefits under any and all Pension Plans which are defined benefit plans,
as defined in Section 3(35) of ERISA, and which are maintained by DGD or
any DGD Subsidiary did not, as of the last annual valuation date for such
Pension Plan, exceed the value of assets of such Pension Plan allocable
to such benefits (computed on the basis of the actuarial assumptions
specified in the most recent actuarial valuation for such Pension Plan).
(j) Patents, Trademarks, Etc. Neither DGD nor any DGD Subsidiary owns or
has pending, or is licensed or otherwise permitted to use, any patent, patent
application, trademark, trademark application, trade name, service mark,
copyright, copyright application, franchise, trade secret, software (whether
developed or written by DGD, any DGD Subsidiary or any third party), computer
program (in object or source code form), or other intellectual property or
intangible property or asset (collectively, "Intangibles"), other than as
described on Schedule 6.01(g) or Schedule 6.01(j). Each Intangible is validly
issued and is currently in force, and to the knowledge of DGD or any DGD
Subsidiary is uncontested in all jurisdictions in which it is used or in which
such use is contemplated. Schedule 6.01(j) contains a true, complete and correct
listing, by city and state of location, of: (i) all Intangibles which are owned
(either in whole or in part), used by, or licensed to DGD or any DGD Subsidiary
or which otherwise relate to the businesses of DGD or any DGD Subsidiary, and a
description of each such Intangible which (A) identifies its owner,
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registrant, or applicant and (B) where appropriate, provides a statement of
cost, book value and reserve for depreciation of each such item for tax
purposes, and net book value of each such item for financial reporting purposes;
(ii) all Contracts and identification of all parties thereto under which DGD or
any DGD Subsidiary owns or uses any Intangible (whether or not under license
from third parties), together with the identification of the owner, registrant,
or applicant of each such Intangible; (iii) all Contracts and identification of
all parties thereto under which DGD or any DGD Subsidiary grants the right to
use any Intangible; and (iv) all validity, infringement, right-to-use, or other
opinions of counsel (whether in-house or outside) which concern the validity,
infringement, or enforceability of any Intangible owned or controlled by a party
other than DGD or any DGD Subsidiary which relates to the businesses,
properties, or assets of DGD or any DGD Subsidiary. Except as specified on
Schedule 6.01(j): (1) DGD or an DGD Subsidiary, as the case may be, is the sole
and exclusive owner or licensee of, and has the right to use, all Intangibles;
(2) no Intangible is subject to any order, judgment, decree, contract,
agreement, instrument, lease, license or understanding restricting the scope of
the use thereof; (3) during the last five years, neither DGD nor any DGD
Subsidiary has been charged with, or has charged others with, unfair
competition, infringement of any Intangible, or wrongful use of confidential
information, trade secrets, or secret processes; and (4) neither DGD nor any DGD
Subsidiary is using any patentable invention, confidential information, trade
secret, or secret process of others. There is no right under any Intangible
necessary to the businesses of DGD or of any DGD Subsidiary as presently
conducted or as it contemplates conducting, except such as are so designated on
Schedule 6.01(j). Neither DGD nor any DGD Subsidiary has infringed, is
infringing, or has received notice of infringement in respect of the Intangibles
or asserted
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Intangibles of others, nor has DGD or any DGD Subsidiary been advised by counsel
or others that it is infringing or may be infringing the Intangibles or asserted
Intangibles of others if any currently contemplated business activity is
effectuated. To the knowledge of DGD or any DGD Subsidiary, there is no
infringement by others of Intangibles of DGD and each DGD Subsidiary. As far as
DGD and each DGD Subsidiary can foresee, there is no Intangible or asserted
Intangible of others which may materially adversely affect the condition
(financial or otherwise), results of operations, businesses, properties, assets,
future prospects or current or future liabilities of DGD or of any DGD
Subsidiary. All Contracts pertaining to Intangibles to which DGD or any DGD
Subsidiary is a party, or to which any of their respective businesses,
properties, or assets are subject, are in compliance with all laws, rules,
regulations, orders, judgments, and decrees binding on DGD or any DGD Subsidiary
or to which any of their respective businesses, properties, or assets are
subject and the consummation of the transactions contemplated in this Agreement
will in no way affect the continuation, validity or effectiveness of any such
Contracts, or require the consent of any Person in respect thereof. Except as
set forth in Schedule 6.01(j), neither DGD nor any DGD Subsidiary uses any
trademark, tradename, service mark, design or name to identify, respectively,
the products, businesses, or services of DGD or any DGD Subsidiary. None of any
director, officer, or employee of DGD or of any DGD Subsidiary, any relative or
affiliate of any such director, officer, or employee, nor any other Person or
enterprise (other than DGD) in which any such director, officer, or employee, or
any such relative or affiliate had or now has, directly or indirectly, legally
or beneficially, a 5% or greater equity or voting or other substantial interest,
possesses any Intangible which relates to the businesses of DGD or any DGD
Subsidiary.
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(k) Questionable Payments. To the best of DGD's knowledge, neither DGD,
any DGD Subsidiary nor any director, officer, employee, agent (including sales
agents), dealer, distributor or representative of any thereof has, directly or
indirectly: used any corporate funds for unlawful contributions, gifts,
entertainment, or other unlawful expenses relating to political activity; made
any unlawful payment to foreign or domestic government officials or employees or
to foreign or domestic political parties or campaigns from corporate funds;
violated any provision of the Foreign Corrupt Practices Act of 1977, as amended;
or made any bribe, rebate, payoff, influence payment, kickback, or other
unlawful payment.
(l) Authority to Merge. DGD has all requisite power and authority to
execute, deliver, and perform this Agreement and to consummate the transactions
contemplated hereby. All necessary corporate proceedings of DGD or any DGD
Subsidiary have been duly taken to authorize the execution, delivery, and
performance of this Agreement by DGD, other than approval of the holders of the
requisite number of shares of DGD Common Stock and DGD Preferred in accordance
with Section 14A:10-3 of the NJBCA. This Agreement has been duly authorized,
executed, and delivered by DGD, constitutes the legal, valid, and binding
obligation of DGD, and is enforceable as to it in accordance with its terms,
except as such enforceability may be limited by bankruptcy, insolvency,
reorganization, fraudulent conveyance or transfer, or similar laws affecting
creditors' rights generally and equitable principles. Except as set forth in
Sections 3.01, 5.01(i), 7.01 and 7.02, no consent, authorization, approval,
order, license, certificate, or permit of or from, or declaration or filing
with, or notice to, any federal, state, local, or other governmental authority
or any court or other tribunal or any other Person is required to be obtained or
made by DGD or any DGD Subsidiary for the execution, delivery, or performance of
this Agreement by DGD.
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No consent of any party to any Contract to which DGD or any DGD Subsidiary is a
party, or to which any of them or any of their respective businesses,
properties, or assets are subject, is required for the execution, delivery, or
performance of this Agreement; and the execution, delivery, and performance of
this Agreement will not (if the consents referred to on Schedule 6.01(h) are
obtained prior to the Effective Time) violate, result in a breach of, conflict
with, or (with or without the giving of notice or the passage of time or both)
entitle any Person to terminate or call a default under, entitle any Person to
receive rights or privileges that such party was not entitled to receive
immediately before this Agreement was executed under, or create any obligation
on the part of DGD, any DGD Subsidiary, or the Surviving Corporation to which it
was not subject immediately before this Agreement was executed under, any term
of any such Contract, or violate or result in a breach of any term of the
certificate of incorporation or by-laws of DGD or any DGD Subsidiary, or (if the
provisions of Sections 3.01, 5.01(i), 7.01, and 7.02 are satisfied) violate,
result in a breach of, or conflict with any law, rule, regulation, order,
judgment, or decree binding on DGD or any DGD Subsidiary or to which any of
their respective businesses, properties, or assets are subject. Except for Loeb
Partners, Inc. and Joseph Churchman, neither DGD nor any of its officers,
directors, employees, counsel, investment bankers, accountants or agents or
representatives has employed any broker or finder or incurred any liability for
any fee, commission, or other compensation payable by any Person on account of
alleged employment as a broker or finder, or alleged performance of services as
a broker or finder, in connection with or as a result of this Agreement, the
Merger, or the other transactions contemplated by this Agreement.
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(m) Insurance. Schedule 6.01(m) sets forth a true, correct and complete
list of all fire, theft, casualty, general liability, worker's compensation,
business interruption, environmental, automobile, property and other insurance
policies currently insuring the business or any assets or property of DGD or any
DGD Subsidiary and of all life insurance policies currently maintained insuring
the life of any director, officer or employee of DGD or any DGD Subsidiary of
which DGD is the beneficiary, specifying the policy number, the type of
coverage, the amount of coverage, the premium, the applicable deductibles, the
insurer and the expiration date of each such policy (collectively, the
"Insurance Policies"). Schedule 6.01(m) also sets forth all pending or
unresolved worker's compensation claims against DGD or any DGD Subsidiary,
including the amount involved in each such claim. A true, complete and correct
list of all claims made under such Insurance Policies since August 1, 1993 which
are still open or unresolved, and all claims made under such Insurance Policies
since August 1, 1993, are set forth on Schedule 6.01(m) and have been furnished
to Neuman. True, correct and complete copies of all of the Insurance Policies
have been previously delivered by DGD to Neuman, except that, as to those
Insurance Policies that have been recently renewed or obtained for which DGD and
the DGD Subsidiaries has not yet received a copy of the policy for the current
year, DGD has previously delivered to Neuman true, correct and complete copies
of such policies for the prior year thereof and true, correct and complete
copies of the binders reflecting renewal of such policies for the current year
thereof. The Insurance Policies are in full force and effect. All premiums due
on the Insurance Policies or renewals thereof have been paid and DGD and the DGD
Subsidiaries are not in default under any of the Insurance Policies. DGD and the
DGD Subsidiaries have not received any notice or other communication from any
issuer of the
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Insurance Policies canceling or materially amending any of the Insurance
Policies, materially increasing the annual or other premiums payable thereunder,
and, to the best of DGD's knowledge, no such cancellation, amendment or increase
of deductibles, retainages or premiums is threatened.
(n) Books and Records. The general ledgers and books of account of DGD
and the DGD Subsidiaries and all other books and records of DGD and the DGD
Subsidiaries with respect to their business are in all material respects
complete and correct and have been maintained in a consistent manner in
accordance with good business practices and to the best knowledge of DGD in
accordance in all material respects with all applicable procedures required by
laws and regulations.
(o) Customers and Suppliers. Set forth on Schedule 6.01(o) are the list
of the top (20) twenty customers of DGD for each of its fiscal years ending in
1994, 1995 and 1996 and setting forth the name or customer number of each
customer. Schedule 6.01(o) sets forth a general description of the current
business arrangements (to the extent not reflected in any Contracts set forth on
Schedule 6.01(h)) between DGD and its customers and suppliers, and a list of the
top twenty (20) suppliers of DGD and each DGD Subsidiary (based on purchase
volumes) during the last two (2) years. Copies of all supplies and sales
Contracts for finished goods involving DGD or DGD Subsidiaries have been
previously furnished to Neuman.
(p) Bank Accounts; Securities. Set forth on Schedule 6.01(p) is a
complete and correct list of all bank accounts, safe deposit boxes, money market
funds, certificates of deposit, stocks, bonds, notes and other securities
maintained by, in the name of or owned or
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controlled by DGD or any DGD Subsidiary or in which DGD or any DGD Subsidiary
has an interest.
(q) Disclosure. No representation or warranty by DGD in this Agreement or
on any Schedule hereto contains any untrue statement of a material fact or omits
to state any material fact necessary in order to make the statements contained
therein not misleading as of the date made.
(r) Information to be Included in the Registration Statement and the
Proxy Statement. The information concerning DGD and the DGD Subsidiaries which
DGD will furnish for inclusion in the Registration Statement and the Proxy
Statement, will comply as to form with all applicable rules of the SEC and shall
not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements therein not misleading.
(s) Accuracy of SEC Filings. The filings made by DGD within the past
three (3) years with the SEC were, if filed under the Securities Exchange Act of
1934, as amended (the "Exchange Act"), prepared in all material respects in
accordance with the then existing requirements of the Exchange Act and the rules
and regulations thereunder and, if filed under the Securities Act, prepared in
all material respects in accordance with the then existing requirements of the
Securities Act and the rules and regulations thereunder. Such filings when
filed, and the press releases and other public statements DGD has made
subsequent to the last such filing when considered together with such filings,
did not at the time of filing or issuance of the press releases or other public
statements, as the case may be, except as qualified by the 8-K, (y) contain an
untrue statement of a material fact or (z) omit to state a
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material fact required to be stated therein or necessary to make the statements
therein not false or misleading.
(t) Agreements Not to Compete. DGD has delivered to Neuman true, complete
and accurate copies of all Contracts between DGD or any DGD Subsidiary and their
respective directors, officers, employees, agents (including sales agents),
dealers or distributors which prevent or restrict any such Person from competing
with DGD or any DGD Subsidiary in any manner. Each such agreement remains in
full force and effect.
(u) Environmental Conditions.
Except as set forth in Schedule 6.01(u), DGD represents and warrants as
of the closing date that:
(i) DGD, all DGD Subsidiaries, the real properties set forth on
Schedule 6.01(g) (the "Owned Properties") and the leased properties set
forth on Schedule 6.01(g) (the "Leased Properties") comply and to the
best knowledge of DGD have been in compliance with all applicable
Environmental Laws (as hereinafter defined), and there is no event,
condition, circumstance, activity, practice, incident, action or plan
which may interfere with or prevent the continued compliance with any
Environmental Law;
(ii) DGD and the DGD Subsidiaries have (a) taken all actions
required under Environmental Laws to register any products, materials or
structures at, on or under the Owned Properties and Leased Properties
required to be registered under Environmental Laws, and (b) obtained all
permits, licenses, approvals and authorizations required for their
operations at the Owned Properties and Leased Properties by any
applicable Environmental Law, and each such permit, license,
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approval, registration and authorization is valid and in full force and
effect and is not subject to any pending or threatened administrative or
judicial proceeding to revoke, cancel or declare such permit, license,
approval, registration and authorization invalid in any respect;
(iii) to the best knowledge of DGD, neither DGD, the DGD
Subsidiaries, nor any other person has caused any Release (as hereinafter
defined), threatened Release, or disposal of any Hazardous Material (as
hereinafter defined) at, from, under or about the Owned Properties, the
Leased Properties or any properties formerly owned or leased by DGD or
any DGD Subsidiary at the time of such ownership or tenancy by DGD or any
DGD Subsidiary, and none of the Owned Properties or Leased Properties are
adversely affected by any Release, threatened Release, or disposal of any
Hazardous Material at, from, under or about any such properties or
originating or emanating from any other property; DGD has no knowledge of
any groundwater or soil contamination;
(iv) there are no Hazardous Materials on, in or under the Owned
Properties or Leased Properties, whether contained in barrels, tanks,
equipment (moveable or fixed) or other containers, deposited or located
in land, waters, sumps or in any other part of such properties,
incorporated into any structure on such properties, or otherwise existing
thereon;
(v) neither the Owned Properties nor the Leased Properties contain
or has ever contained any: (a) underground storage tank or other
receptacle used for the storage of Hazardous Materials, (b)
asbestos-containing building material, (c) polychlorinated biphenyls
("PCBs"), (d) any landfills or dumps, (e) hazardous waste
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management facility as defined pursuant to the federal Resource
Conservation and Recovery Act ("RCRA"), 42 U.S.C. ss.ss. 6901 et seq., or
any comparable state law, or (f) area designated for any removal or
cleanup activity pursuant to the federal Comprehensive Environmental
Response, Compensation, and Liability Act ("CERCLA"), 42 U.S.C. ss.ss.
901 et seq., or any comparable state law.
(vi) neither DGD, any DGD Subsidiary, nor any other person has used
any Hazardous Materials, or conducted any activities involving the use,
handling, treatment, storage, transportation or disposal of any Hazardous
Material (except for Hazardous Materials comprised exclusively of
inventoried items that are carried by DGD in the ordinary course which
are not in excess of amounts required to be reported under applicable
Environmental Law), at either the Owned Properties or the Leased
Properties, including but not limited to activities involving any sort of
manufacturing, processing or refining, or cleaning or degreasing of
equipment, machinery, part or component;
(vii) neither DGD nor any DGD Subsidiary has received any notice of
any pending or threatened Environmental Claim (as hereinafter defined),
and to the best of DGD's knowledge there are no Environmental Law
violations at the Owned Properties, the Leased Properties, any property
formerly owned or leased by DGD or any DGD Subsidiary, or any other
property (including, without limitation, any off-site disposal facility
to which Hazardous Materials originating from the Owned Properties,
Leased Properties, or any properties formerly owned or leased by DGD or
any DGD Subsidiary have been sent).
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(viii) neither DGD nor any DGD Subsidiary has submitted to any
governmental agency or other person any notice, and is not required to
give any such notice, regarding any Release on, under, or from the Owned
Properties, the Leased Properties, or any properties formerly owned or
leased by DGD or any DGD Subsidiary;
(ix) neither the Owned Properties nor the Leased Properties is
subject to, and neither DGD nor any DGD Subsidiary has any knowledge of,
any pending or threatened lien or restriction on the ownership,
occupancy, use, or transferability of the Owned Properties or the Leased
Properties in connection with any (a) Environmental Law or (b) Release,
threatened Release, or disposal of a Hazardous Material;
(x) Neuman's obligation to close shall be conditioned on DGD having
obtained prior to the Effective Time either (1) a Letter of
Non-Applicability, (2) a Remediation Agreement, (3) a No Further Action
letter, or (4) other approval from the New Jersey Department of
Environmental Protection authorizing consummation of the transaction,
pursuant to the New Jersey Industrial Site Recovery Act ("ISRA"),
N.J.S.A. ss.ss. 13:1K-6 et seq.,
(xi) DGD has provided or otherwise made available to Buyer true,
complete and accurate copies of all environmental audits, reports, and
assessments concerning DGD, the DGD Subsidiaries, and the Owned
Properties and the Leased Properties which DGD or the DGD Subsidiaries
possess or reasonably could have obtained.
"Environmental Claim" means any investigation, notice, violation, demand,
allegation, action, suit, injunction, judgment, order, consent decree, penalty,
fine, lien,
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proceeding, or claim (whether administrative, judicial, quasi-judicial or
private in nature) arising (a) pursuant to or in connection with any actual or
alleged violation of any Environmental Law, or (b) from any investigatory,
abatement, removal, remedial, corrective, or other response action in connection
with a Hazardous Material or an Environmental Law, or (c) from any actual or
alleged damage, injury, threat, or harm to health, safety, natural resources,
property, or the environment, regardless of whether such matter is now known or
unknown, or how or when such matter occurred or is discovered.
"Environmental Law" means (a) any present federal, state or local law or
regulation relating to the handling, use, control, management, treatment,
storage, disposal, release or threat of release of any Hazardous Material,
including without limitation, CERCLA, RCRA, the federal Clean Water Act ("CWA"),
33 U.S.C. ss.ss.1251 et seq., the federal Clean Air Act ("CAA"), 42 U.S.C.
ss.ss. 7401 et seq., the Toxic Substances Control Act ("TSCA"), 7 U.S.C. ss.ss.
136 et seq., the Safe Drinking Water Act ("SDWA"), 42 U.S.C. ss.ss. 300f et
seq., the Occupation Safety and Health Act of 1970 (the "OSH Act"), 29 U.S.C.
ss.ss. 651 et seq., ISRA, the New Jersey Spill Compensation and Control Act
("Spill Act"), N.J.S.A. ss. 58:10-23.11 et seq., the New Jersey Solid Waste
Management Act ("SWMA"), N.J.S.A. ss. 13:1E-1 et seq., the New Jersey Air
Pollution Control Act ("APCA"), N.J.S.A. ss. 26:2C-1 et seq., the New Jersey
Water Pollution Control Act ("WPCA"), N.J.S.A. ss. 58:10A-1 et seq., and the New
Jersey Freshwater Wetlands Protection Act ("FWPA"), N.J.S.A. ss. 13:9B-1 et
seq., and any similar state or local laws, rules or regulations, and (b) any and
all requirements arising under applicable present federal, state or local laws,
statutes, rules, ordinances, codes, orders, licenses, permits, approvals, plans,
authorizations, concessions, or the like, and all applicable judicial,
administrative, and regulatory decrees, judgments, and orders,
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relating to the protection of human health or the environment, including without
limitation: (i) any and all requirements pertaining to reporting, licensing,
authorizing, approving, permitting, investigating, and remediating emissions,
discharges, releases, or threat of releases of any Hazardous Materials into the
indoor or outdoor air, surface water, groundwater, or land, or otherwise into
the environment, or relating to the manufacture, operation, processing,
distribution, use, treatment, storage, disposal, transport, handling or
management of any Hazardous Material; and (ii) any and all requirements
pertaining to the protection of the health and safety of employees or the public
and/or the environment.
"Hazardous Material" means any substance or material: (a) the presence of
which requires investigation or remediation under any Environmental Law, (b)
which is regulated by any federal, state or local governmental authority,
including without limitation, any substance or waste material which is defined
or listed as a "hazardous waste," "extremely hazardous waste," "restricted
hazardous waste," "industrial waste," "hazardous substance," "solid waste,"
"hazardous material," "pollutant" or "contaminant" under any Environmental Law;
(c) which contains gasoline, diesel fuel or other petroleum hydrocarbons or a
petroleum derivative; (d) which contains PCBs, asbestos or urea formaldehyde;
(e) which is explosive, corrosive, flammable, infectious, radioactive or toxic;
or (f) which poses an unreasonable risk of injury to human health or the
environment.
"Release" shall mean any spilling, leaking, seeping, pumping, pouring,
emitting, emptying, discharging, injecting, escaping, leaching, dumping,
placement, burying or disposing in or upon or under any land or water or air, or
otherwise into the indoor or outdoor environment, including, without limitation,
the abandonment or discarding of
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barrels, drums, containers, tanks, and other receptacles containing or
previously containing any Hazardous Material.
ss.6.02 Certain Representations and Warranties of Neuman & Distributors
Neuman and Distributors hereby represent and warrant to DGD that (it
being agreed that Neuman and Distributors jointly and severally make the
representations and warranties with respect to Distributors set forth below, and
Neuman alone makes the representations and warranties with respect to Neuman):
(a) Organization and Qualification. Neuman and Distributors are each a
corporation duly organized, validly existing, and in good standing under the
laws of its jurisdiction of incorporation, with all requisite corporate power
and authority, and all necessary consents, authorizations and approvals
(including, without limitation, certificates of authority to do business as a
foreign corporation) from, and declarations and filings with, all federal,
state, local, foreign and other governmental authorities, to own, lease,
license, and use its properties and assets and to carry on the businesses in
which it is now engaged, except where the failure to have any such consent,
authorization or approval would not result in a material adverse effect on the
condition (financial or otherwise), results of operations, businesses,
properties, assets, future prospects or liabilities of Neuman or Distributors
taken as a whole.
(b) Authority to Merge. Neuman and Distributors each has all requisite
power and authority to execute, deliver, and perform this Agreement, and to
consummate the transactions contemplated hereby in accordance with the terms of
this Agreement. All necessary corporate proceedings of Neuman and Distributors
have been duly taken to authorize the execution, delivery, and performance of
this Agreement by Neuman and
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Distributors. This Agreement has been duly authorized, executed, and delivered
by Neuman and Distributors, constitutes the legal, valid, and binding obligation
of Neuman and Distributors, and is enforceable as to Neuman and Distributors in
accordance with its terms, except as such enforceability may be limited by
bankruptcy, insolvency, reorganization, fraudulent conveyance or transfers or
similar laws affecting creditors' rights generally and equitable principles.
Except as set forth in Sections 3.01, 5.02(f), 7.01 and 7.02, no consent,
authorization, approval, order, license, certificate, or permit of or from, or
declaration or filing with, or notice to any federal, state, local, or other
governmental authority or any court or other tribunal or any other Person is
required to be obtained or made by Neuman or Distributors for the execution,
delivery, or performance of this Agreement by Neuman and Distributors. No
consent of any party to any contract, agreement, instrument, lease, license,
arrangement, undertaking or understanding to which Neuman or Distributors is a
party, or to which its businesses, properties, or assets are subject, is
required for the execution, delivery, or performance of this Agreement; and the
execution, delivery, and performance of this Agreement will not violate, result
in a breach of, conflict with, or (with or without the giving of notice or the
passage of time or both) entitle any Person to terminate or call a default
under, entitle any Person to receive rights or privileges that such Person was
not entitled to receive before this Agreement was executed under, or create any
obligation on the part of Neuman or Distributors to which it was not subject
immediately before this Agreement was executed under, any term of any such
contract, agreement, instrument, lease, license, arrangement, or understanding,
or violate or result in a breach of any term of the certificate of incorporation
or by-laws of Neuman or Distributors, or (if the provisions of Sections 3.01,
5.02(f), 7.01 and 7.02 are satisfied)
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violate, result in a breach of, or conflict with any law, rule, regulation,
order, judgment, or decree binding on Neuman or to which any of its respective
businesses, properties, or assets are subject. Except for Dresdner Securities
(USA) Inc., neither Neuman, nor any of its respective officers, directors,
employees, counsel, investment bankers, accountants or agents has employed any
broker or finder or incurred any liability for any fee, commission, or other
compensation payable by any Person on account of alleged employment as a broker
or finder, or alleged performance of services as a broker or finder, in
connection with or as a result of this Agreement, the Merger, or the other
transactions contemplated by this Agreement.
(c) Business After the Effective Time. It is the present intention of the
Surviving Corporation to continue at least one significant historic business
line of DGD, or to use at least a significant portion of DGD's historic business
assets in a business, within the meaning of Treasury Regulation Section
1.368-1(d), including the continued usage of the "Drug Guild" name. Neuman and
Distributors will not discontinue the operation of significant historic business
lines of DGD or cease using a significant portion of DGD's historic business
assets in a business if counsel to Neuman believes such action would cause the
Merger to fail to qualify as a tax free reorganization under the federal tax
laws as then construed.
(d) Status of Neuman Common Stock To Be Issued. The shares of Neuman
Common Stock to be issued pursuant to the Merger in exchange for shares of DGD
Common Stock, when issued in accordance with the terms of this Agreement and the
Registration Statement, will be duly authorized, validly issued, fully paid and
nonassessable, will not be issued in violation of any preemptive right of
shareholders and no personal liability will
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attach to the ownership thereof and such shares will be duly registered under
the Securities Act.
(e) Financial Condition. Neuman has delivered to DGD true, correct,
complete and accurate copies of the following: the audited balance sheets of
Neuman as of April 30, 1994, April 30, 1995 and April 30, 1996; audited
statements of income, statements of shareholders' equity, and statements of cash
flows of Neuman for each of the years within the three year period ended April
30, 1996; the unaudited consolidated balance sheet of Neuman as of July 31,
1996; and the unaudited consolidated statement of income, consolidated statement
of shareholders' equity, and consolidated statement of cash flows of Neuman for
the quarter ended July 31, 1996. Each such balance sheet presents fairly the
financial condition, assets, liabilities, and shareholders' equity of Neuman and
its subsidiaries as of its date; each such statement of income, shareholders'
equity and cash flows presents fairly the results of operations of Neuman and
its subsidiaries for the periods indicated, all in accordance with GAAP. The
financial statements referred to in this Section 6.02(e) are in agreement with
the detailed books and records of Neuman and its subsidiaries. Since July 31,
1996, except as may be expressly disclosed in the July 31, 1996 unaudited
financial statements or in the Schedules hereto:
(i) There has at no time been a Material Adverse Effect.
(ii) Neither Neuman nor any Neuman subsidiary has authorized,
declared, paid, or effected any dividend or liquidation or other
distribution, stock appreciation rights, phantom stock options, stock
split, recapitalization, reclassification or reorganization in respect of
its capital stock or any direct or indirect redemption or
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purchase, retirement or other acquisition of any stock of Neuman or any
Neuman subsidiary.
(iii) The operations and businesses of Neuman, Distributors and
their subsidiaries have been conducted in all material respects only in
the ordinary course, consistent with past practices.
(iv) Neither Neuman, Distributors, nor any of their subsidiaries
has suffered an extraordinary or unusual loss (whether or not covered by
insurance) or waived any right of substantial value, any of which,
individually or in the aggregate, is material to Neuman, Distributors and
their subsidiaries, taken as a whole. (f) Litigation and Claims. Except
as set forth in Schedule 6.02(f) hereto, there is
no litigation, arbitration, grievance, claim governmental or other proceeding
(formal or informal), or investigation pending, or to the knowledge of Neuman,
Distributors or any of their subsidiaries, threatened with respect to Neuman,
Distributors or any of their subsidiaries. No litigation, arbitration,
grievance, claim, governmental or other proceeding or investigation set forth on
Schedule 6.02(f), if adversely determined, would have a Material Adverse Effect
individually or in the aggregate.
(g) Other Liabilities. Except as set forth on Schedule 6.02(g) hereto,
neither Neuman, Distributors nor any of their subsidiaries has any indebtedness
or liability of any nature (including, without limitation, any liability arising
from any Environmental Claim), accrued or contingent, for which provision should
be made on the financial statements which has not been made, other than the
following:
(i) Liabilities for which full provision has been made on the
audited balance sheet and the notes thereto (the "Last Neuman Balance
Sheet") as of April
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30, 1996 (the "Last Neuman Balance Sheet Date") as set forth in the
Registration Statement; and
(ii) Other liabilities arising since the Last Neuman Balance Sheet
Date and prior to the Effective Time in the ordinary course of business
(which shall not include liabilities to customers on account of defective
products or services) which are not inconsistent with the representations
and warranties of Neuman and Distributors or any other provision of this
Agreement.
No Neuman Responsible Employee has knowledge of any existing or
threatened occurrence(s), event(s) or development(s) which, as of the date
hereof, individually or in the aggregate, are likely to have a Material Adverse
Effect.
(h) Capitalization. The authorized capital stock of Neuman consists of
Two Thousand Five Hundred (2500) shares of Neuman Common Stock, of which One
Thousand (1000) shares are issued and outstanding. There are no outstanding
options, warrants, calls, commitments, rights, plans or arrangements of any kind
relating to any of the capital stock of Neuman or any securities or other
instruments convertible into, exercisable for or exchangeable for capital stock
of Neuman.
CONDITIONS TO CLOSING
ss.7.01 Conditions of Neuman
The obligations of Neuman to consummate the Merger shall be subject to
the following conditions precedent:
(a) Accuracy of Representations and Compliance With Conditions. All
representations and warranties of DGD made in or pursuant to this Agreement or
any related agreement shall be accurate when made in all material respects
(without regard to any
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knowledge limitations contained therein) and, in addition, shall be accurate in
all material respects as of the Effective Time as though such representations
and warranties were then made in exactly the same language by DGD (without
regard to any knowledge limitations contained therein), and regardless of
changes beyond its control. As of the Effective Time, DGD shall have performed
and complied in all material respects with all covenants and agreements and
satisfied all conditions required to be performed and complied with by it under
this Agreement or any related agreement at or before the Effective Time. Neuman
shall have received certificates, each dated the Effective Time, in form and
substance reasonably satisfactory to Neuman executed on behalf of DGD by the
Chief Financial Officer and another executive officer, to that effect, and as to
matters set forth in Sections 6.01(f), 6.01(h), 6.01(i), 6.01(k) and 6.01(o)
hereof.
(b) Certificates from DGD. Neuman shall have received a certificate
executed by an executive officer on behalf of DGD dated the Effective Time, to
the effect that such officer has examined the Registration Statement and the
Proxy Statement, and any amendment or supplement thereto, and, to the best of
his knowledge, (i) neither the Registration Statement nor the Proxy Statement
nor any amendment or supplement thereto (A) contains an untrue statement of a
material fact or (B) omits to state a material fact required to be stated
therein or necessary to make the statements therein not false or misleading in
light of the circumstances in which they are made, provided in each case that
such untrue statement or omission relates to information furnished by or on
behalf of, or pertaining to, DGD or any DGD Subsidiary and (ii) since the
effective date of the Registration Statement and the date of the Proxy
Statement, no event with respect to DGD or any DGD Subsidiary, has occurred
which should have been set forth in an amendment to the
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Registration Statement or a supplement to the Proxy Statement, which has not
been set forth in such an amendment or supplement.
(c) Opinions of DGD's Counsel. There shall have been delivered to Neuman
at the Effective Time, in form and substance reasonably satisfactory to Neuman,
(i) the opinion of counsel to DGD regarding various customary corporate matters,
dated as of the Effective Date and (ii) the opinion of special tax counsel to
Neuman, dated as of the Effective Date, to the effect that the Merger
constitutes a reorganization within Section 368 of the Code and will result in a
tax free acquisition with respect to the holders of the Neuman Common Stock and
the DGD Common Stock.
(d) Accountants' Letter. (i) DGD shall have delivered to Neuman at the
Effective Time, in form and substance reasonably satisfactory to Neuman, a
letter from Richard A. Eisner & Company LLP dated as of such date, addressed to
Neuman regarding various customary accounting matters and (ii) Neuman shall have
received an opinion from Arthur Andersen LLP ("AA") to the effect that the
Merger as structured will constitute a pooling of interests, which letter will
contain a commitment that such treatment will be certified in the next audited
financial statements of Neuman.
(e) Other Closing Documents. DGD shall have delivered to Neuman at or
prior to the Effective Time such other documents (including certificates of
officers of DGD or of any DGD Subsidiary) as Neuman may reasonably request in
order to enable Neuman to determine whether the conditions to their obligations
under this Agreement have been met and otherwise to carry out the provisions of
this Agreement.
(f) Review of Proceedings. All actions, proceedings, instruments, and
documents required of DGD to carry out this Agreement or incidental thereto and
all other
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related legal matters shall be subject to the reasonable approval of counsel to
Neuman and DGD shall have furnished such counsel such documents as such counsel
may have reasonably requested for the purpose of enabling them to pass upon such
matters.
(g) Legal Action. There shall not have been instituted or threatened any
legal proceeding relating to, or seeking to prohibit or otherwise challenge the
consummation of, the transactions contemplated by this Agreement, or to obtain
substantial damages with respect thereto which in the reasonable judgment of
Neuman otherwise materially prohibits, restricts, conditions or delays
consummation of the Merger or any of the other transactions contemplated by this
Agreement or materially impairs the contemplated benefits to Neuman of this
Agreement, the Merger, or any other transaction contemplated by this Agreement.
(h) No Governmental Action. There shall not have been any action taken,
or any law, rule, regulation, order, judgment, or decree proposed, promulgated,
enacted, entered, enforced, or deemed applicable to the transactions
contemplated by this Agreement by any federal, state, local, or other
governmental authority or by any court or other tribunal, including the entry of
a temporary restraining order or a preliminary or permanent injunction, which,
in the reasonable judgment of Neuman, (i) makes this Agreement, the Merger, or
any of the other transactions contemplated by this Agreement illegal, (ii)
results in a substantial delay in the ability of DGD, Neuman or Distributors to
consummate the Merger or any of the other transactions contemplated by this
Agreement, (iii) requires the divestiture by Neuman of a material portion of
their business or any other Neuman subsidiary, or of DGD or any of the DGD
Subsidiaries, (iv) imposes material limitations on the ability of Neuman
effectively to exercise full rights of ownership of shares of the Surviving
Corporation, including the right to vote such shares on all matters properly
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presented to the shareholders of the Surviving Corporation, or (v) otherwise
prohibits, or materially restricts, conditions or delays consummation of the
Merger or any of the other transactions contemplated by this Agreement or
impairs the contemplated benefits to Neuman of this Agreement, the Merger, or
any of the other transactions contemplated by this Agreement.
(i) INTENTIONALLY OMITTED.
(j) Hart-Scott-Rodino Waiting Period. All applicable waiting periods in
respect of the Merger and the other transactions contemplated by this Agreement
under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended,
shall have expired or been terminated at or prior to the Effective Time.
(k) Fairness Opinion. An opinion of Loeb Partners, Inc. to the effect
that the Merger and the other transactions contemplated by this Agreement are
fair, from a financial point of view, to DGD and its shareholders, shall have
been confirmed in writing at the Effective Time.
(l) Contractual Consents Needed. The parties to this Agreement shall have
obtained at or prior to the Effective Time all consents required to be delivered
by DGD for the consummation of the Merger and the other transactions
contemplated by this Agreement from any party to any material Contract, to which
any of them or any DGD Subsidiary is a party, or to which any of them or any of
their respective businesses, properties, or assets are subject.
(m) Shareholder Consent. DGD shall have obtained prior to the Effective
Time, the approval of the Merger and the transactions contemplated hereby by the
holders of the
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requisite number of shares of DGD Common Stock and DGD Preferred pursuant to
Section 14A:10-3 of the NJBCA.
(n) No Material Adverse Effect. From July 31, 1996, through the Effective
Time there shall have been no Material Adverse Effect affecting DGD. For the
purposes of this Section 7.01(n) only, the following circumstance shall
constitute a Material Adverse Effect: the net worth of DGD and the DGD
Subsidiaries from July 31, 1996 shall have decreased in the aggregate by more
than 15%. There shall be no pending or threatened litigation or claims against
DGD or any DGD Subsidiary which could, individually or in the aggregate,
materially and adversely affect any of the conditions (financial or otherwise),
results of operations, businesses, customer satisfaction, properties, assets,
future prospects or current or future liabilities of DGD and the DGD
Subsidiaries, taken as a whole.
(o) Financing Approvals. Neuman shall have received from Neuman's primary
lending institutions (i) written approval of the Merger and all of the
transactions relating thereto and (ii) financing in an amount sufficient to
refinance all of DGD's debt to DGD's lending institutions.
(p) Pooling. No event (other than events solely under the control of
Neuman or Distributors) shall have occurred or be expected to occur that would
not allow the Merger to be a "pooling of interests", including, but not limited
to, the delivery of written notice of dissent prior to the shareholders' meeting
(which notice contains a demand for payment if the Merger is effected) by more
than 7% of the outstanding shares of DGD Common Stock.
(q) ISRA. The condition set forth in Section 6.01(u)(x) shall have been
fulfilled.
(r) Pension Plan. Neuman shall have received all such documentation as
required to be delivered pursuant to Section 5.02(g).
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(s) Registration Statement. At or prior to the Effective Time, the
Registration Statement shall have been declared effective by the SEC and no stop
order suspending the effectiveness of the Registration Statement shall have been
issued and no proceedings for that purpose shall have been instituted or shall
be pending or contemplated by the SEC and any request on the part of the SEC for
additional information shall have been complied with to the reasonable
satisfactions of Neuman's counsel.
ss.7.02 Conditions of DGD
DGD's obligation to consummate the Merger is subject to the following
conditions precedent:
(a) Accuracy of Representations and Compliance With Conditions. All
representations and warranties of Neuman and Distributors made in or pursuant to
this Agreement or any related agreement shall be accurate when made in all
material respects (without regard to any knowledge limitations contained
therein) and, in addition, shall be accurate in all material respects as of the
Effective Time as though such representations and warranties were then made in
exactly the same language by Neuman and Distributors (without regard to any
knowledge limitations contained therein) and regardless of changes beyond their
control. As of the Effective Time, Neuman and Distributors shall have performed
and complied in all material respects with all covenants and agreements and
satisfied all conditions required to be performed and complied with by them
under this Agreement at or before the Effective Time. DGD shall have received a
certificate in form and substance reasonably satisfactory to DGD, executed on
behalf of Neuman and Distributors by the President or Chief Financial Officer of
Neuman and Distributors, dated the Effective Time, to that effect.
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(b) Certificates from Neuman. DGD shall have received certificates
executed on behalf of Neuman by an executive officer of Neuman, dated the
Effective Time, to the effect that it has examined the Registration Statement
and the Proxy Statement, and any amendment or supplement thereto, and, to the
best of his knowledge, (i) neither the Registration Statement nor the Proxy
Statement, nor any amendment or supplement thereto (A) contains an untrue
statement of a material fact or (B) omits to state a material fact required to
be stated therein or necessary to make the statements therein not false or
misleading in light of the circumstances in which they are made, provided in
each case that such untrue statement or omission relates to information
furnished by or on behalf of, or pertaining to, Neuman, Distributors or any
Neuman security holder and (ii) since the effective date of the Registration
Statement, no event with respect to Neuman or Distributors or any Neuman
security holder has occurred which should have been set forth in an amendment to
the Registration Statement or a supplement to the Proxy Statement which has not
been set forth in such an amendment or supplement.
(c) Opinion of Neuman's Counsel. There shall have been delivered to DGD
at the Effective Time, in form and substance reasonably satisfactory to DGD and
its counsel (i) the opinion of Kelley Drye & Warren LLP regarding certain
customary corporate matters, dated as of the Effective Date and (ii) a letter
from AA, dated as of the Effective Date, in form and substance reasonably
satisfactory to DGD, regarding matters customarily included in registration
statements on Form S-4.
(d) Other Closing Documents. Neuman and Distributors shall have delivered
to DGD at or prior to the Effective Time such other documents (including
certificates of officers of Neuman, Distributors or of any subsidiary of Neuman
or Distributors) as DGD
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<PAGE>
may reasonably request in order to enable DGD to determine whether the
conditions to its obligations under this Agreement have been met.
(e) Review of Proceedings. All actions, proceedings, instruments, and
documents required by Neuman and Distributors to carry out this Agreement or
incidental thereto and all other related legal matters shall be subject to the
reasonable approval of counsel to DGD, and Neuman and Distributors shall have
furnished such counsel such documents as such counsel may have reasonably
requested for the purpose of enabling them to pass upon such matters.
(f) Legal Action. There shall not have been instituted or threatened any
legal proceeding relating to, or seeking to prohibit or otherwise challenge the
consummation of, the transactions contemplated by this Agreement, or to obtain
substantial damages with respect thereto.
(g) No Governmental Action. There shall not have been any action taken,
or any law, rule, regulation, order, judgment, or decree proposed, promulgated,
enacted, entered, enforced, or deemed applicable to the transactions
contemplated by this Agreement by any federal, state, local, or other
governmental authority or by any court or other tribunal, including the entry of
a temporary restraining order or a preliminary or permanent injunction, which,
in the reasonable judgment of DGD, (i) makes this Agreement, the Merger, or any
of the other transactions contemplated by this Agreement illegal, (ii) results
in a substantial delay in the ability of Neuman, Distributors or DGD to
consummate the Merger or any of the other transactions contemplated by this
Agreement, or (iii) otherwise prohibits, restricts, conditions or delays
consummation of the Merger or any of the other transactions contemplated by this
Agreement or impairs the contemplated benefits to the
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<PAGE>
shareholders of DGD of this Agreement, the Merger, or any of the other
transactions contemplated by this Agreement.
(h) Hart-Scott-Rodino Waiting Period. All applicable waiting periods in
respect of the Merger and the other transactions contemplated by this Agreement
under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended,
shall have expired or been terminated at or prior to the Effective Time.
(i) Fairness Opinion. The opinion of Loeb Partners, Inc. to be included
in written form in the Proxy Statement, to the effect that the Merger and the
other transactions contemplated by this Agreement are fair, from a financial
point of view, to DGD and its shareholders, shall have been confirmed in writing
at the Effective Time.
(j) Securities Law Compliance. At or prior to the Effective Time, Neuman
shall use its best efforts to make all filings, and take all actions, necessary
to comply with all applicable federal securities and "blue-sky" laws with regard
to the issuance of Neuman Common Stock pursuant to the Merger as contemplated by
this Agreement.
(k) No Material Adverse Effect. From July 31, 1996, through the Effective
Time there shall have been no Material Adverse Effect affecting Neuman and
Distributors. For purposes of this Section 7.02(k) only, the following
circumstance shall constitute a Material Adverse Effect: the net worth of Neuman
and the Neuman subsidiaries from July 31, 1996 shall have decreased in the
aggregate by more than 15%. There shall be no pending or threatened litigation
or claims against Neuman, Distributors or any subsidiary of Neuman or
Distributors which could, individually or in the aggregate, materially and
adversely affect any of the conditions (financial or otherwise), results of
operations, businesses, customer
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<PAGE>
satisfaction, properties, assets, future prospects or current or future
liabilities of Neuman, Distributors and any of their subsidiaries, taken as a
whole.
VIII. TERMS OF ABANDONMENT
ss.8.01 Mandatory Abandonment
The Merger shall be abandoned and terminated upon the earliest to occur
of: (i) February 15, 1997, if on or before such date the holders of at least a
majority of the shares of DGD Common Stock outstanding and entitled to vote and
voting as a class and the holders of at least a majority of the shares of DGD
Preferred outstanding and entitled to vote and voting as a class at the meeting
of shareholders of DGD referred to in Section 3.01 shall not have voted in favor
of the adoption and approval of this Agreement, the Merger, and the other
transactions contemplated hereby; (ii) November 30, 1996, if on or before such
date, the parties have not submitted applications for all governmental or
regulatory approvals, rulings or consents (other than shareholder approval);
(iii) any date after the submission of any such application on or after which
DGD or Neuman reasonably determines that a request for information or an
amendment to be made or any condition imposed or proposed to be imposed by any
Person to which any such application was made is unduly burdensome; or (iv)
February 28, 1997, if on or before said date all governmental, regulatory or
other approvals, rulings or consents, none of which shall be subject to
conditions on DGD or Neuman which the affected party shall reasonably deem to be
unduly burdensome, necessary for the Merger shall not have been obtained.
ss.8.02 Optional Abandonment
In addition to the provisions of Section 8.01, the Merger may be
abandoned or terminated at or before the Effective Time, notwithstanding
adoption and approval of this
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<PAGE>
Agreement, the Merger, and the other transactions contemplated hereby by the
shareholders of DGD:
(a) by mutual agreement of the Boards of Directors of Neuman and DGD;
(b) at the option of either (i) Neuman's Board of Directors or (ii) DGD's
Board of Directors, if the Effective Time shall not have occurred on or before
February 28, 1997;
(c) at the option of Neuman's Board of Directors at any time after
October 31, 1996, if facts exist which render impossible compliance with one or
more of the conditions set forth in Section 7.01 and such are not waived by
Neuman;
(d) at the option of DGD's Board of Directors at any time after October
31, 1996, if facts exist which render impossible compliance with one or more of
the conditions set forth in Section 7.02 and such are not waived by DGD; and
(e) at the option of Neuman's board of Directors at any time if the
result of Neuman's due diligence with respect to DGD's (i) July 31, 1996 audited
financial statements, (ii) Drug Enforcement Agency activities, (iii)
environmental matters or (iv) internal investigations are not reasonably
satisfactory to Neuman; provided however, that such option shall terminate with
respect to each of the four items individually thirty days after DGD has
delivered or made available to Neuman all information and material necessary
with regard to such item.
ss.8.03 Effect of Abandonment
If the Merger is abandoned or terminated in accordance with this Article
VIII, or otherwise:
(a) except for Sections 5.01(g) and 5.02(d), and except as specified in
Section 8.03(b), this Agreement shall forthwith become wholly void and of no
further force or effect
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<PAGE>
without liability on the part of any party to this Agreement or on the part of
any officer, director, controlling Person (if any), employee, agent, or
shareholder thereof; provided, however, that nothing in this Section 8.03(a)
shall release Neuman, DGD or any officer, director, controlling Person (if any),
employee, agent, or shareholder thereof from liability for a willful failure to
carry out its respective obligations under this Agreement; and
(b) each of Neuman and DGD shall pay and bear its own fees and expenses
incident to the negotiation, preparation, and execution of this Agreement and
any meeting of its respective shareholders, including fees and expenses of its
counsel, accountants, investment banking firm, and other experts.
IX. INTENTIONALLY OMITTED
X. MISCELLANEOUS
ss.10.01 Further Actions
At any time and from time to time, each party agrees, subject to the
terms and conditions of this Agreement, to take such actions and to execute and
deliver such documents as may be reasonably necessary to effectuate the purposes
of this Agreement at the earliest practicable time.
ss.10.02 Availability of Equitable Remedies
Since a breach of the provisions of this Agreement could not adequately
be compensated by money damages, any party shall be entitled, either before or
after the Effective Time, in addition to any other right or remedy available to
it, to an injunction restraining such breach or threatened breach and to
specific performance of any such provision of this Agreement, and, in either
case, no bond or other security shall be required
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<PAGE>
in connection therewith, and the parties hereby consent to the issuance of such
an injunction and to the ordering of specific performance.
ss.10.03 Survival
The covenants, agreements, representations, and warranties contained in
or made pursuant to this Agreement shall not survive the Release Time, except
for (i) those contained in or made pursuant to Article VIII, which shall survive
the Release Time, (ii) those covenants and obligations contained herein which
expressly apply to periods beyond the Release Time, including but not limited to
those covenants and obligations contained in Sections 5.01(g) and 5.02(d) and
(iii) those contained in Sections 5.02(j) and 10.12 and those contained in the
final sentence of Section 6.02(c), which shall survive the Effective Time. The
statements contained in any document executed by DGD relating hereto or
delivered to Neuman in connection with the transactions contemplated hereby or
thereby, or in any statement, certificate, or other instrument delivered by or
on behalf of DGD pursuant hereto or thereto or delivered to Neuman in connection
with the transactions contemplated hereby or thereby shall be deemed
representations and warranties, covenants and agreements, or conditions, as the
case may be, of DGD hereunder for all purposes of this Agreement (including all
statements, certificates, or other instruments delivered pursuant hereto or
thereto or delivered in connection with this Agreement, the Merger, or any of
the other transactions contemplated hereby or thereby). The statements contained
in any document executed by Neuman or Distributors relating hereto or delivered
to DGD in connection with the transactions contemplated hereby or thereby, or in
any statement, certificate, or other instrument delivered by or on behalf of
Neuman or Distributors pursuant hereto or thereto or delivered to DGD in
connection with the transactions contemplated hereby or thereby shall
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<PAGE>
be deemed representations and warranties, covenants and agreements, or
conditions, as the case may be, of Neuman or Distributors, as the case may be,
hereunder for all purposes of this Agreement (including all statements,
certificates, or other instruments delivered pursuant hereto or thereto or
delivered in connection with this Agreement, the Merger, or any of the other
transactions contemplated hereby or thereby).
ss.10.04 Modification
This Agreement sets forth the entire understanding of the parties with
respect to the subject matter hereof and supersedes all prior or existing
agreements among them concerning such subject matter, excluding the
Confidentiality Agreements. This Agreement may be amended prior to the Effective
Time (notwithstanding shareholder adoption and approval) by a written instrument
executed by Neuman and DGD with the approval of their respective Boards of
Directors; provided, however, that no such amendment shall, without shareholder
adoption and approval by an appropriate vote by shareholders of DGD, if DGD's
shareholders have been adversely affected, change the Per Share Consideration
pursuant to Section 2.01(a) or materially and adversely affect the rights of DGD
shareholders.
ss.10.05 Notices
Any notice or other communication required or permitted to be given
hereunder shall be in writing and shall be mailed by certified mail, return
receipt requested or by Federal Express, Express Mail, or similar overnight
delivery or courier service or delivered (in person or by facsimile, or similar
telecommunications equipment) against receipt to the party to which it is to be
given at the address of such party set forth in the preamble to this Agreement
(or to such other address as the party shall have furnished in writing in
accordance with the provisions of this Section 10.05) or to the facsimile number
set forth
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<PAGE>
beneath such party's signature to this Agreement. Any notice: to DGD shall be
addressed to the attention of the Jay Reba, Financial Vice President with a copy
to Scheichet & Davis, 505 Park Avenue, New York, NY 10022, Attention: David I.
Scheichet, Esq.; or to Neuman shall be addressed to the attention of the
President. Any notice given by any means permitted by this Section 10.05 shall
be deemed given at the time of receipt thereof.
ss.10.06 Waiver
Any waiver by any party of a breach, violation or default of any
provision of this Agreement shall not operate as or be construed to be a waiver
of any other breach, violation or default of that provision or of any breach,
violation or default of any other provision of this Agreement. The failure of a
party to insist upon strict adherence to any provision of this Agreement on one
or more occasions will not be considered a waiver or deprive that party of the
right thereafter to insist upon strict adherence to that provision or any other
provision of this Agreement. Any waiver must be in writing and be authorized by
an officer of the waiving party. No party shall have the right to waive
compliance with the second sentence of Section 10.04, any other condition
required by applicable law, or this sentence.
ss.10.07 Binding Effect
The provisions of this Agreement shall be binding upon and inure to the
benefit of Neuman, Distributors and DGD, and their respective successors and
assigns.
ss.10.08 No Third-Party Beneficiaries
Except for the issuance of Neuman Common Stock in exchange for shares of
DGD Common Stock set forth in Section 2.01 hereof and the indemnification
provisions provided for in Section 5.02(j) hereof, or except as otherwise
expressly provided for in this
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<PAGE>
Agreement, this Agreement does not create, and shall not be construed as
creating, any rights enforceable by any Person not a party to this Agreement.
ss.10.09 Severability
If any provision of this Agreement shall hereafter be held to be invalid
or unenforceable for any reason, such provision shall be reformed to the maximum
extent permitted to preserve the parties' original intent, failing which, it
shall be severed from this Agreement with the balance of this Agreement
continuing in full force and effect. Such occurrence shall not have the effect
of rendering the provision in question invalid in any other jurisdiction or in
any other case or circumstance, or of rendering invalid any other provisions
contained herein to the extent that such other provisions are not themselves
actually in conflict with or invalid or unenforceable under any applicable law.
ss.10.10 Headings
The headings in this Agreement are solely for convenience of reference
and shall be given no effect in the construction or interpretation of this
Agreement.
ss.10.11 Counterparts; Governing Law; Jurisdiction, Etc.
This Agreement may be executed in any number of counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument. It shall be governed by and construed in accordance
with the laws of the State of New Jersey, without giving effect to conflict of
laws. Any action, suit, or proceeding arising out of, based on, or in connection
with this Agreement, any document relating hereto or delivered in connection
with the transactions contemplated hereby, any statement, certificate, or other
instrument delivered by or on behalf of, or delivered to, any party hereto or
thereto in connection with the transactions contemplated hereby or thereby, any
breach of this
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<PAGE>
Agreement or such other document, the Merger, or the other transactions
contemplated hereby or thereby may be brought only in the United States District
Court for the Northern District of New Jersey or the Courts of the State of New
Jersey, and each party covenants, waives and agrees not to assert, by way of
motion, as a defense, or otherwise, in any such action, suit, or proceeding, any
claim that it is not subject personally to the jurisdiction of such court if it
has been duly served with process, that its property is exempt or immune from
attachment or execution, that the action, suit, or proceeding is brought in an
inconvenient forum, that the venue of the action, suit, or proceeding is
improper, or that this Agreement or the subject matter hereof may not be
enforced in or by any such court. Each party hereto consents to the personal
jurisdiction of each such court and to the service of process by mail at its
address to which notices are to be sent under Section 10.05 hereof in connection
with any such action, suit or proceeding.
ss.10.12 Election of Directors
Neuman agrees that for a period of two years subsequent to the Effective
Date two shareholders of Neuman (who were formally shareholders of DGD
immediately prior to the Effective Date) (a "DGD Director") shall serve on the
Board of Directors of Neuman. Initially, these directors shall be Harold
Blumenkrantz and Howard Sternheim. In addition, for a period of two years
following the initial two year period subsequent to the Effective Date (the
"Additional Period"), Neuman agrees that one DGD Director shall serve on the
Board of Directors of Neuman; provided, however, that if at any time during the
Additional Period Samuel Toscano, Jr. does not control Neuman or if a public
offering of any voting securities of Neuman has occurred or is pending, Neuman's
obligations during the Additional Period shall terminate and such DGD Director
may be removed from Neuman's Board of
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<PAGE>
Directors without recourse. If a pending public offering is aborted prior to its
consummation, Neuman's obligation under the previous sentence shall be
reinstated.
ss.10.13 Pooling Modifications
In the event that Neuman's accountants advise Neuman that the form of the
Merger requires modification from the form set forth herein in order to obtain
"pooling of interests" treatment for Merger, Neuman shall advise DGD of such
proposed modification and the reasons therefor. If DGD consents to the proposed
modification, this Agreement shall be amended to set forth any such change to
the structure of the Merger. DGD shall have the right to refuse to consent to
such modification for any reason whatsoever.
ss.10.14 Definitions
The following terms are defined in this Agreement at the locations
indicated below:
Term Section Page
---- ------- ----
"AA" ss. 7.01(d) 64
"Additional Period" ss. 10.12 79
"Agreement" Title 1
"APCA" ss. 6.01(u) 55
"CAA" ss. 6.01(u) 55
"CERCLA" ss. 6.01(u)(v) 53
"Code" ss. 1.01 2
"Confidentiality Agreements" ss. 5.01(d) 9
"Constituent Corporations" Title 1
"Contracts" ss. 5.01(e) 11
"CWA" ss. 6.01(u) 55
"DB Plan" ss. 5.02(g) 23
"DGD" Title 1
"DGD Common Stock" ss. 2.01(a) 3
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<PAGE>
"DGD Director" ss. 10.12 79
"DGD Preferred" ss. 2.01(e) 5
"DGD Responsible Employee" ss. 5.01(f) 12
"DGD Stock Rights" ss. 2.02 6
"DGD Subsidiaries" ss. 6.01(a) 25
"Distributors" Title 1
"8-K" ss. 6.01(c) 27
"Effective Time" ss. 3.03 7
"Environmental Claim" ss. 6.01(u) 54
"Environmental Law" ss. 6.01(u) 55
"ERISA" ss. 6.01(i)(i) 37
"Exchange Act" ss. 6.01(s) 50
"FWPA" ss. 6.01(u) 55
"GAAP" ss. 1.01 2
"Hazardous Material" ss. 6.01(u) 56
"Insurance Policies" ss. 6.01(m) 48
"Intangibles" ss. 6.01(j) 43
"ISRA" ss. 6.01(u)(x) 54
"Last DGD Balance Sheet" ss. 6.01(e)(i) 30
"Last DGD Balance Sheet Date" ss. 6.01(e)(i) 30
"Last Neuman Balance Sheet" ss. 6.02(g)(i) 61
"Last Neuman Balance Sheet Date" ss. 6.02(g)(i) 62
"Leased Properties" ss. 6.01(u)(i) 51
"Material Adverse Effect" ss. 6.01(a) 26
"Merger ss. 1.01 2
"Neuman" Title 1
"Neuman Common Stock" ss. 2.01(a) 3
"Neuman Responsible Employee" ss. 5.02(c) 20
"New Certificates" ss. 2.01(b) 4
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<PAGE>
"NJBCA" ss. 1.01 2
"Old Certificates" ss. 2.01(b) 4
"OSH Act" ss. 6.01(u) 55
"Owned Properties" ss. 6.01(u)(i) 51
"PCBs" ss. 6.01(u)(v) 52
"Per Share Consideration" ss. 2.01(a) 3
"Person" ss. 2.01(b) 5
"Proxy Statement" ss. 5.02(h) 23
"RCRA" ss. 6.01(u)(v) 53
"Registration Statement" ss. 5.01(p) 18
"Release" ss. 6.01(u) 56
"Release Time" ss. 5.01(a) 8
"SDWA" ss. 6.01(u) 55
"SEC" ss. 5.01(h) 14
"Securities Act" ss. 5.01(p) 18
"Spill Act" ss. 6.01(u) 55
"Subscriptions" ss. 2.02 6
"Surviving Corporation" Title 1
"SWMA" ss. 6.01(u) 55
"Taxes" ss. 6.01(d) 28
"TSCA" ss. 6.01(u) 55
"WARN" ss. 6.01(f)(ii) 32
"WPCA" ss. 6.01(u) 55
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<PAGE>
IN WITNESS WHEREOF, this Agreement has been executed by duly authorized
officers of each of the parties hereto as of the date first above written.
NEUMAN HEALTH SERVICES, INC.
By ____________________________________
Name:
Title:
Facsimile No.:
Attest:
______________________________
Assistant Secretary
DRUG GUILD DISTRIBUTORS, INC.
By ____________________________________
Name:
Title:
Facsimile No.:
Attest:
______________________________
Assistant Secretary
NEUMAN DISTRIBUTORS, INC.
By ____________________________________
Name:
Title:
Facsimile No.:
Attest:
______________________________
Assistant Secretary
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<PAGE>
Schedule 2.02
As of July 31, 1996, there are subscriptions for $639,300 of DGD Common Stock
outstanding.
The DGD Board of Directors approved a resolution at its meeting on September 24,
1996 authorizing the cancellation of all outstanding subscriptions for DGD
Common Stock, which are not paid after written notice of cancellation has been
given in accordance with the DGD Common Stock Subscription Agreement, on or
before the effective date of the DGD/Neuman Merger.
There are no subscriptions for DGD Preferred Stock outstanding.
<PAGE>
Schedule 5.01(e)
DGD has made no commitments which are currently outstanding for any capital
expenditures in excess of $25,000 in the individual or $250,000 in the aggregate
except for weekly purchases of approximately $15,000 in computers for customers'
stores.
<PAGE>
Schedule 5.01(k)
Resignation Agreement between DGD and Roman Englander dated December 5, 1995
which, among other things ratifies and confirms a Deferred Compensation
provision of an Employment Agreement between DGD and Roman Englander dated as of
October 1, 1993 whereby DGD shall pay Englander, commencing upon the earlier of
Englander's attaining age 65 or the date of termination of his employment,
additional compensation payable in one hundred twenty (120) equal monthly
installments of Eight Thousand Three Hundred Thirty-Three Dollars and
Thirty-Four Cents ($8,333.34) each.
<PAGE>
Schedule 5.01(k)(ii)
DIRECTOR & OFFICER LIABILITY INSURANCE POLICY
Chubb - Liability - Expires January 20, 1997
- --------------------------------------------------------------------------------
DEDUCTIBLE POLICY # TYPE COVERAGE ANNUAL
PREMIUM
- --------------------------------------------------------------------------------
$100,000 8119-79-0114 Directors and Officers $3,000,000 $27,324
- --------------------------------------------------------------------------------
CONTRACTS WITH DIRECTORS, OFFICERS OR EMPLOYEES RELATING TO INDEMNIFICATION
1. DGD with Joseph B. Churchman dated June 18, 1996. See annexed Exhibit "A"
to this Schedule 5.01(k)(ii).
2. DGD has contracts with all of its directors regarding its indemnification
of their actions as directors. See annexed Exhibit "B" to this Schedule
5.01(k)(ii) for the model agreement executed by all such directors.
3. Amendment to DGD Certificate of Incorporation dated April 29, 1988 which
is annexed hereto as Exhibit "C" to this Schedule 5.01(k)(ii).
<PAGE>
Schedule 6.01(a)
Corporate Organization of DGD
- -------------------------------------------------------
STATE OF INCORPORATION New Jersey
- -------------------------------------------------------
DATE OF INCORPORATION July 9, 1976
- -------------------------------------------------------
JURISDICTIONS OTHER THAN STATE OF None
INCORPORATION, IN WHICH AUTHORIZED TO
DO BUSINESS
Corporate Organization of DGD Subsidiaries
<TABLE>
<CAPTION>
SUBSIDIARY D.G. Marketing, Inc. Atlantic Wholesale, Inc.
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
FICTITIOUS NAMES None 1. Atlantic Health Care
Distributors
2. Atlantic Wholesale
Beauty Supply Company
- ------------------------------------------------------------------------------------------------------
STATE OF INCORPORATION New Jersey New Jersey
DATE OF INCORPORATION May 9, 1985 December 11, 1991
- ------------------------------------------------------------------------------------------------------
JURISDICTIONS OTHER THAN STATE OF None None
INCORPORATION, IN WHICH AUTHORIZED TO
DO BUSINESS
- ------------------------------------------------------------------------------------------------------
AUTHORIZED CAPITALIZATION 2,500 shares of common stock 2,500 shares of common stock
with no par value with no par value
- ------------------------------------------------------------------------------------------------------
OUTSTANDING SHARES 2,500 2,500
- ------------------------------------------------------------------------------------------------------
LIENS, SECURITY INTERESTS, PLEDGES, None None
CHARGES, ENCUMBRANCES, SHAREHOLDERS'
AGREEMENTS OR VOTING TRUSTS
- ------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Schedule 6.01(b)
HOLDER OF 5% OR MORE OF DGD COMMON STOCK
As of July 31, 1996, Howard Sternheim, a director of DGD, who resides at 1020
Park Avenue, New York, New York 10028 is the holder of 656,333 shares, or
approximately 6.56%, of DGD Common Stock.
<PAGE>
Schedule 6.01(c)(ii)
REDEMPTIONS OF DGD PREFERRED STOCK SINCE APRIL 30, 1996
Warren Greenberg had 494.4616 shares of DGD Preferred Stock redeemed by DGD in
August 1996.
8% DIVIDEND IN KIND PAID TO DGD PREFERRED STOCKHOLDERS ON
JULY 31, 1996 WHO HAVE EXCEEDED THE FIVE YEAR HOLDING PERIOD
John Hoover $ 15,302.15
Charles Young $ 3,903.71
Sparta, Inc. $ 6,671.44
<PAGE>
Schedule 6.01(d)
1. The execution, delivery and performance of this Agreement by DGD will not
cause any Taxes to be payable or cause any lien, charge, security interest
or encumbrance to secure any Taxes to be created either immediately or
upon the nonpayment of any Tax.
2. DGD is currently undergoing an Internal Revenue Service audit for the
fiscal year ended July 31, 1994.
<PAGE>
Schedule 6.01(f)
LITIGATION
MATTERS PENDING
Drug Guild Distributors v. Kendal Park Pharmacy, Inc, Plainsboro Pharmacy, Inc.
t/a Princeton Meadows Pharmacy, Marvin Charen, Thrift Drug, Inc. and Arthur L.
Phillips, Esq. - Superior Court of New Jersey - Law Division - Hudson County -
Docket No. HUD-L-6419-9.
Drug Guild Distributors, Inc. v. Lesser Drug and Albert S. Krause - Superior
Court of New Jersey - Law Division - Bergen County - Docket No. L-04485-95.
Drug Guild Distributors, Inc. v. Orange Drug and Surgical, Inc. Greenbo, Inc.
and Edmund Greenberg - Superior Court of New Jersey - Law Division - Essex
County - Docket No. L-9457-96.
Oak Tree at Marlboro, Inc. and Oak Tree Drug Corp. - United State Bankruptcy
Court for the District of New Jersey - Case Nos. 96-34741 and 96-34742.
Drug Guild Distributors, Inc. v. Drug City - Superior Court of New Jersey - Law
Division - Hudson County - Docket No. HUD-L-6620-96
Drug Guild Distributors, Inc. v. Michael P. Logothetis, Inc. and Michael P.
Logothetis, Individually - Superior Court of New Jersey - Chancery Division -
Hudson County - Docket No. HUD-L-1057- 96.
Drug Guild Distributors, Inc. v. Plymouth Drug - Supreme Court of the State of
New York - Kings County.
CLAIMS ASSERTED AND BEING NEGOTIATED - NO SUMMONS/COMPLAINT FILED.
Drug Guild Distributors, Inc. v. Clark Drug
Drug Guild Distributors, Inc. v. Delewgowski Pharmacy, Inc. t/a Station Pharmacy
<PAGE>
Drug Guild Distributors, Inc. v. J. Gorbett and Robert R. Ervey t/a Gerards
Pharmacy
Drug Guild Distributors, Inc. v. Valley Fair
POTENTIAL CLAIM
Letter to DGD dated October 17, 1996 from Howell Bramson of McCarthy, Fingar,
Donovan, Drazen & Smith on behalf of Daniel Kantor, former director of DGD,
which letter has been previously delivered to Kelley Drye and Warren, counsel
for Neuman and Distributors.
UNION CONTRACT
Agreement dated March 3, 1995; retroactive to and effective as of February 15,
1995, by and between DGD and Drug, Chemical, Cosmetic, Plastics and Affiliated
Industries Warehouse Employees Local 815, affiliated with the International
Brotherhood of Teamsters, with a term to expire on February 14, 1998.
<PAGE>
Schedule 6.01(g)
REAL PROPERTY OWNED BY DGD
None
REAL PROPERTY LEASED BY DGD
1. In March 1995, DGD modified its lease agreement with Hartz Mountain
Industries, Inc. (the "Landlord") for the 158,739 square foot premises
located at 350 Meadowland Parkway, Secaucus, New Jersey. Pursuant to this
third modification agreement, DGD: (i) extended the term of the lease from
June 1, 1995 until May 31, 2005; (ii) fixed the rent for the premises at
the rate of $3.50/square foot per annum from June 1, 1995 through May 31,
1996, $4.25/square foot per annum from June 1, 1996 through May 31, 1997,
$4.75/square foot per annum from June 1, 1997 through May 31, 2000 and
$5.50/square foot per annum from June 1, 2000 through May 31, 2005; (iii)
arranged for the right to terminate the lease upon not less than six (6)
months prior written notice received by the Landlord between June 1, 1997
and May 31, 1998 and the effective date of the termination shall occur
between December 1, 1997 and November 30, 1998, and provided further that
DGD shall pay to the Landlord a termination fee equivalent to the rent
which would have been payable for the six month period following the date
of termination which shall be payable at the time of such notice; (iv)
agreed that the Landlord shall not be responsible for the conditions of
the floors of the premises or for any existing or future floor
replacement, repair or maintenance and released the Landlord from any
claim or liability for damages sustained or suffered by DGD arising out of
defects in the floor of the premises; (v) agreed that if a material change
in the condition of the floor occurs after the date of the agreement which
results in DGD's inability to utilize all or substantially all of the
premises, which determination may be subject to arbitration at the option
of the Landlord, DGD may terminate the lease prior to December 1, 1997
upon prior written notice to the Landlord effective on the date DGD
vacates the premises; and (vi) agreed that any and all references in the
lease to an option to extend the lease are deleted.
2. In March 1995, DGD modified its lease agreement with Hartz Mountain
Industries, Inc. (the "Landlord") for the 33,280 square foot premises
located at 115 Castle Road, Secaucus, New Jersey. Pursuant to this
modification agreement, DGD: (i) extended the term of the lease from June
1, 1995 until May 31, 2005; (ii) fixed the rent for the premises at the
rate of $4.75/square foot per annum from June 1, 1995 through May 31, 2000
and $5.50/square foot per annum from June 1, 2000 through May 31, 2005;
and (iii) arranged for the right to terminate the lease upon not less than
six (6) months prior written notice received by the Landlord between June
1, 1997 and May 31, 1998 and the effective date of the termination shall
occur between December 1, 1997 and November 30, 1998, and provided further
that
<PAGE>
DGD shall pay to the Landlord a termination fee equivalent to the rent
which would have been payable for the six month period following the date
of termination which shall be payable at the time of such notice.
3. Sublease dated June 10, 1992 made between Hoogovens Aluminium Corporation
and DGD for 28,786 square feet located at 101 Venture Way, Secaucus, New
Jersey at a rate of Eleven Thousand Three Hundred Ninety-Four Dollars and
Forty-Six Cents ($11,394.46) per month or $4.75 per square foot gross
which shall expire June 30, 1997.
PROPERTY AND EQUIPMENT OWNED BY DGD
See annexed Exhibit A to this Schedule 6.01(g)
PROPERTY AND EQUIPMENT LEASED BY DGD WITH ANY LIENS,
MORTGAGES, SECURITY INTERESTS, PLEDGES, ENCUMBRANCES AND
CHARGES ON ANY DGD OWNED OR LEASED PROPERTY, REAL OR OTHERWISE
1. Five (5) International Trucks, Model 4700 leased through First Fidelity
Leasing Group, Inc. with the following vehicle identification numbers and
lessor's cost:
VIN 1HTSCNKM4NH417713 - $35,641.70
VIN 1HTSCNKM6NH417714 - $35,641.70
VIN 1HTSCNKM1NH417715 - $35,641.70
VIN 1HTSCNKMXNH417716 - $35,641.70
VIN 1HTSCNKM1NH417717 - $35,641.70
2. Three (3) Dodge B350 Maxivans leased through First Fidelity Leasing Group,
Inc. with the following vehicle identification numbers and lessor's cost:
VIN 2B7KB31Z0NK101322 - $17,941.14
VIN 2B7KB31Z2NK101323 - $18,070.87
VIN 2B7KB31Z7NK103780 - $18,194.99
3. Three (3) International Truck Model 4700 leased through Navistar Financing
with the following vehicle identification numbers and lessor's cost:
VIN 1HTSCAAMXTH300063 - $42,070.34
VIN 1HTSCAAM3TH300065 - $42,070.34
VIN 1HTSCAAM1TH300064 - $42,070.34
4. One (1) New Order Fulfillment Zone and Two (2) Tape Machines leased
through Master
<PAGE>
Lease, Division of Tokai Financial Services, Inc.
VALUE OF ALL PROPERTY OWNED BY DGD
- --------------------------------------------------------------------------------
TYPE OF PROPERTY COST ACCUMULATED BOOK
DEPRECIATION VALUE
- --------------------------------------------------------------------------------
Leasehold Improvements $2,303,011 $1,301,438 $1,001,573
- --------------------------------------------------------------------------------
Furniture and Fixtures $ 288,992 $ 286,676 $ 2,316
- --------------------------------------------------------------------------------
Machinery and Equipment $2,538,950 $2,303,851 $ 235,099
- --------------------------------------------------------------------------------
Data Processing Equipment $7,409,261 $5,577,780 $1,831,481
- --------------------------------------------------------------------------------
Delivery Equipment $1,746,821 $1,236,187 $ 510,634
- --------------------------------------------------------------------------------
<PAGE>
Schedule 6.01(g)(iii)
SALES ON CONSIGNMENT
DGD has not made any sales in the past two (2) years on a consignment basis and
no such sales are contemplated.
<PAGE>
Schedule 6.01(h)
There are no contracts in which DGD is a party which (i) have a payment or
receipt of $100,000 or more; (ii) have a term of greater than one year; or (iii)
is otherwise material other than those which are disclosed in various Schedules
to this Agreement.
There have been no contracts within the last 5 years between DGD and any
director, officer or employee of DGD or any relative or affiliate of any
director, officer or employee of DGD or any five (5%) percent or greater
shareholder other than those which are disclosed in various Schedules to this
Agreement.
<PAGE>
Schedule 6.01(i)
ALL OF DGD'S EMPLOYEE BENEFIT PLANS AND ARRANGEMENTS
Pension
Profit Sharing
Life Insurance
Accidental Death and Dismemberment
Medical
Long-Term Disability
<PAGE>
Schedule 6.01(i)(iv)
None
<PAGE>
Schedule 6.01(i)(v)
DGD makes contributions along with other employers to Union 815 multi-employer
plan. The expense for such plan was $351,504, $348,744 and $336,168 for the
years ended July 31, 1996, 1995 and 1994 respectively.
<PAGE>
Schedule 6.01(i)(vi)
AGGREGATE COMPENSATION FOR FISCAL YEAR ENDED JULY 31, 1996 FOR
EACH DIRECTOR, OFFICER OR EMPLOYEE WHO EARNED $100,000 OR MORE
Roman Englander - $272,198
Alan Glenn - $202,800
Jay Reba - $107,600
Mark Englander - $106,000
Norman Genzer - $105,500
AGGREGATE COMPENSATION FOR FISCAL YEAR ENDED JULY 31, 1996
FOR ALL SALES AGENTS, DEALERS OR DISTRIBUTORS OF DGD
None
<PAGE>
Schedule 6.01(j)
INTANGIBLES
Trademark: NATURE GUILD
Registrant: Drug Guild Distributors, Inc.
Registration No.: 947,135
Date: November 14, 1972
Renewed: November 14, 1992
Expiration Date: November 14, 2002
Trademark: HARBER and Sailboat Design
Registrant: Drug Guild Distributors, Inc.
Registration No.: 1,400,076
Date: July 8, 1986
Expiration Date: July 8, 2006 (may be renewed for an additional 10 year term)
Trademark: COME FOR THE PRICE--YOU'LL STAY FOR THE QUALITY
Registrant: Drug Guild Distributors, Inc.
Registration No.: 1,221,258
Date: December 21, 1982
Expiration Date: December 21, 2002 (may be renewed for an additional
20 year term)
Trademark: KOLEX
Registrant: Drug Guild Distributors, Inc.
Registration No.: 1,204,273
Date: August 10, 1982
Expiration Date: August 10, 2002 (may be renewed for an additional
20 year term)
Trademark: KWIK-AID
Registrant: Drug Guild Distributors, Inc.
Registration No.: 818,169
Date: November 8, 1966
Renewed: November 8, 1986
Expiration Date: November 8, 2006
<PAGE>
Trademark: KLEERIT
Registrant: Drug Guild Distributors, Inc.
Registration No.: 821,889
Date: January 10, 1967
Renewed: January 10, 1987
Expiration Date: January 10, 2007
Trademark: DURA-CHEWS
Registrant: Drug Guild Distributors, Inc.
Registration No.: 803,344
Date: February 8, 1966
Renewed: February 8, 1986
Expiration Date: February 8, 2006
Trademark: REST-RITE
Registrant: Drug Guild Distributors, Inc.
Registration No.: 806,285
Date: March 29, 1966
Renewed: March 29, 1986
Expiration Date: March 29, 2006
Trademark: SALONT
Registrant: Drug Guild Distributors, Inc.
Registration No.: 817,131
Date: October 18, 1966
Renewed: October 18, 1986
Expiration Date: October 18, 2006
Trademark: KLEENIZE
Registrant: Drug Guild Distributors, Inc.
Registration No.: 807,076
Date: March 7, 1966
Renewed: March 7, 1986
Expiration Date: March 7, 2006
<PAGE>
Trademark: PROPED
Registrant: Drug Guild Distributors, Inc.
Registration No.: 802,581
Date: January 25, 1966
Trademark: BEVOCAPS
Registrant: Drug Guild Distributors, Inc.
Registration No.: 802,582
Date: January 25, 1966
Trademark: DURAVALS
Registrant: Drug Guild Distributors, Inc.
Registration No.: 789,317
Date: May 11, 1965
Renewed: May 11, 1985
Expiration Date: May 11, 2005
Trademark: ALL-ALERT
Registrant: Drug Guild Distributors, Inc.
Registration No.: 898,144
Status: Inactive
Trademark: NOVACAPS
Registrant: Drug Guild Distributors, Inc.
Registration No.: 808,779
Status: Inactive
Trademark: DRUG GUILD
Registrant: Drug Guild Distributors, Inc.
Registration No.: 1,072,001
Date: August 23, 1977
Expiration Date: August 23, 1997
Trademark: DRUG GUILD COOPERATIVE
Registrant: Drug Guild Distributors, Inc.
Registration No.: 1,074,295
Date: September 27, 1977
Expiration Date: September 27, 1997
<PAGE>
Trademark: DRUG GUILD and design
Registrant: Drug Guild Distributors, Inc.
Registration No.: 1,070,443
Date: July 26, 1977
Expiration Date: July 26, 1997
Trademark: DRUG GUILD DISTRIBUTORS
Registrant: Drug Guild Distributors, Inc.
Registration No.: 1,074,294
Date: September 27, 1977
Expiration Date: September 27, 1997
Trademark: THE BETTER YOU KNOW US THE BETTER YOU'LL FEEL
Registrant: Drug Guild Distributors, Inc.
Registration No.: 1,069,577
Date: July 12, 1977
Expiration Date: July 12, 1997
<PAGE>
Schedule 6.01(m)
INSURANCE POLICIES
1. Liberty Mutual - Expires May 31, 1997
- --------------------------------------------------------------------------------
DEDUCTIBLE POLICY # TYPE COVERAGE ANNUAL
PREMIUM
- --------------------------------------------------------------------------------
WC 7 131457993076 Workers' Compensation $500,000 $206,905
- --------------------------------------------------------------------------------
$1,000 TB2 131457993026 General Liability $2,000,000 $37,050
- --------------------------------------------------------------------------------
$10,000 TH1 131457993036 Umbrella $10,000,000 $24,450
- --------------------------------------------------------------------------------
$10,000 MC2 13P457996016 Property $60,000,000 $57,283
- --------------------------------------------------------------------------------
$25,000 YC1 13P457993056 Crime $1,000,000 $7,400
- --------------------------------------------------------------------------------
$500 AS2 131457993046 Auto $1,000,000 $121,037
- --------------------------------------------------------------------------------
2. Chubb - Liability - Expires January 20, 1997
- --------------------------------------------------------------------------------
DEDUCTIBLE POLICY # TYPE COVERAGE ANNUAL
PREMIUM
- --------------------------------------------------------------------------------
$100,000 8119-79-0114 Directors and Officers $3,000,000 $27,324
- --------------------------------------------------------------------------------
3. Chubb - Fiduciary - Expires February 18, 1997
- --------------------------------------------------------------------------------
DEDUCTIBLE POLICY # TYPE COVERAGE ANNUAL
PREMIUM
- --------------------------------------------------------------------------------
$5,000 8109-26-210 T16 Fiduciary $1,000,000 $4,182
- --------------------------------------------------------------------------------
4. Columbia Mutual - Roman Englander
<PAGE>
- --------------------------------------------------------------------------------
DEDUCTIBLE POLICY # TYPE COVERAGE ANNUAL
PREMIUM
- --------------------------------------------------------------------------------
10053154 Life Insurance $500,000 $10,675
10053155 Life Insurance $500,000 $10,675
10054839 Life Insurance $600,000 $7,000
- --------------------------------------------------------------------------------
PENDING OR UNRESOLVED WORKERS' COMPENSATION CLAIMS - 1992 THROUGH 1996
See annexed Exhibit A to this Schedule 6.01(m)
ALL CLAIMS MADE ON ANY INSURANCE POLICY SINCE AUGUST 1, 1993
See annexed Exhibit B to this Schedule 6.01(m)
<PAGE>
Schedule 6.01(o)
20 LARGEST CUSTOMERS OF DGD
- --------------------------------------------------------------------------------
CUSTOMER'S NAME 1996 1995 1994
- --------------------------------------------------------------------------------
Pompton Nursing Home X X X
- --------------------------------------------------------------------------------
CO Bigelow Chemist, Inc. X X X
- --------------------------------------------------------------------------------
Kingsley Drug and Surgical X X X
- --------------------------------------------------------------------------------
Kings Boro Pharmacy Inc. X X -
- --------------------------------------------------------------------------------
Ark Drug Co. Inc. X X -
- --------------------------------------------------------------------------------
Hallmark Medical Co. X - -
- --------------------------------------------------------------------------------
Bachs Drug Store X X X
- --------------------------------------------------------------------------------
RAK Drug Co. Inc. X X -
- --------------------------------------------------------------------------------
Bronx Rx Center So. Inc. X X X
- --------------------------------------------------------------------------------
Emarzo Inc. X X -
- --------------------------------------------------------------------------------
Mayfair Bros. Inc. X X X
- --------------------------------------------------------------------------------
Fishmans Bond Drugs Inc. X X X
- --------------------------------------------------------------------------------
Investra Corp. X X -
- --------------------------------------------------------------------------------
Vitality Drug Corp. X - -
- --------------------------------------------------------------------------------
Kabsil Corp. X X X
- --------------------------------------------------------------------------------
Remcourt Drugs X - X
- --------------------------------------------------------------------------------
Park Drug and Surgical Inc. X X X
- --------------------------------------------------------------------------------
Marra Drug X - X
- --------------------------------------------------------------------------------
Webster Drugs X - -
- --------------------------------------------------------------------------------
Zitomer Pharmacy Inc. X - -
- --------------------------------------------------------------------------------
New London Pharmacy - X X
- --------------------------------------------------------------------------------
Tompkinsville Pharmacy - X -
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
1500 Met Drug Company - X X
- --------------------------------------------------------------------------------
A&O Chemists Ltd. - X -
- --------------------------------------------------------------------------------
58th Street Pharmacy - X -
- --------------------------------------------------------------------------------
Oakland Drugs Inc. - X X
- --------------------------------------------------------------------------------
Town and Country Pharmacy - - X
- --------------------------------------------------------------------------------
Arrow Drug - - X
- --------------------------------------------------------------------------------
Med World - - X
- --------------------------------------------------------------------------------
Cunningham Pharmacy Inc. - - X
- --------------------------------------------------------------------------------
Thriftway Trump - - X
- --------------------------------------------------------------------------------
Lenox Terrace - - X
- --------------------------------------------------------------------------------
20 LARGEST SUPPLIERS TO DGD
- --------------------------------------------------------------------------------
VENDOR'S NAME 1996 1995
Glaxo Inc. X X
- --------------------------------------------------------------------------------
Pfizer X X
- --------------------------------------------------------------------------------
JOM Pharmaceutical Services X X
- --------------------------------------------------------------------------------
Bristol-Myers Squibb Co. X X
- --------------------------------------------------------------------------------
Schering Laboratories X X
- --------------------------------------------------------------------------------
Eli Lilly & Company X X
- --------------------------------------------------------------------------------
Merck Sharp & Doue X X
- --------------------------------------------------------------------------------
Roche Laboratories X -
- --------------------------------------------------------------------------------
Smithkline Beecham Pharmaceuticals X X
- --------------------------------------------------------------------------------
Hoechst Marion Roussel X X
- --------------------------------------------------------------------------------
Abbott Laboratories X X
- --------------------------------------------------------------------------------
Proctor & Gamble Distributors X X
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
Sandoz X X
- --------------------------------------------------------------------------------
GD Searle X X
- --------------------------------------------------------------------------------
Astra Merck X X
- --------------------------------------------------------------------------------
Ciba Geneva X X
- --------------------------------------------------------------------------------
Bayer Corp. X -
- --------------------------------------------------------------------------------
Park Davis X X
- --------------------------------------------------------------------------------
Amgen X X
- --------------------------------------------------------------------------------
Burroughs Welcome - X
- --------------------------------------------------------------------------------
Rhone-Poalenc Rorer X X
- --------------------------------------------------------------------------------
Aligen X X
- --------------------------------------------------------------------------------
<PAGE>
Schedule 6.01(p)
DGD BANK ACCOUNTS: Bank of New York:
Note Account: 610-1545391
General Account: 610-1543046
Payroll Account: 610-1543038
Special Account: 610-1546185
Bankers Trust NYC
Checking: 00006752
Bankers Trust (Delaware)
1001 Jefferson Street, 4th Floor
Willmington, Delaware 19801
00505906
AUTHORIZED SIGNATORIES FOR ALL ABOVE ACCOUNTS ARE:
Jay Reba
Martin Shapiro
Norman Genzer
DGD SAFE DEPOSIT BOXES: None
DGD MONEY MARKET FUNDS: None
DGD CERTIFICATES OF DEPOSIT: None
STOCKS HELD BY DGD: None
BONDS HELD BY DGD: None
NOTES AND OTHER SECURITIES
HELD BY DGD: None, other than notes receivable held against
customers' inventory for payment.
<PAGE>
Schedule 6.01(u)
ENVIRONMENTAL MATTERS
The following are the only known environmental conditions:
1. DGD has two, 5,000 gallon each, underground storage tanks. The New
Jersey Department of Environmental Protection ("NJDEP") has approved
their removal and quotes for removal have been solicited. Truck
fueling will be done off-site at a licensed distributor.
2. Recent water samples from a monitoring well were tested and proved
negative for a sheen. NJDEP has promised a closure letter for this
matter.
3. DGD, at the request of NJDEP has retained Lutz Environmental Co.,
Inc. to complete a well search and receptor evaluation as part of
the closure of the DGD site.
<PAGE>
Schedule 6.02(f)
JMSM Ltd. is suing Distributors for $400,000 alleging a breach of an office
lease in South Plainfield, New Jersey. Provision for such amount has already
been reserved for on Neuman's financial statements.
<PAGE>
EXHIBIT 11
DRUG GUILD DISTRIBUTORS, INC.
COMPUTATION OF EARNINGS PER SHARE
For the Year Ended July 31,
----------------------------------------
1996 1995 1994
------------ ----------- -----------
Weighted average number of common
shares outstanding (A) .......... 10,062,000 9,930,000 9,689,000
============ =========== ===========
Net income (loss) .................. $ (2,264,000) $ (505,000) $ 308,000
Less:
Stock dividend on special
common stock (B) .............. 67,000
Stock dividend on preferred
stock .......................... 191,000 291,000 413,000
------------ ----------- -----------
Net (loss) attributable to common
stockholders ..................... $ (2,455,000) $ (796,000) $ (172,000)
============ =========== ===========
Per share:
Net income (loss) ................ $ (.22) $ (.05) $ .03
Less stock dividend on special
common stock and preferred
stock .......................... .02 .03 .04
------------ ----------- -----------
Net (loss) attributable to common
stockholders ..................... $ (.24) $ (.08) $ (.01)
============ =========== ===========
(A) In the computation of earnings per share, subscriptions receivable have no
effect on weighted average number of common shares outstanding.
(B) Dividend paid-in common stock to stockholders of special common stock, who
elected to exchange their existing shares for common stock instead of
preferred stock.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Drug Guild
Distributors, Inc. and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUL-31-1996
<PERIOD-START> AUG-01-1995
<PERIOD-END> JUL-31-1996
<CASH> 200,000
<SECURITIES> 0
<RECEIVABLES> 67,274,000
<ALLOWANCES> 1,203,000
<INVENTORY> 29,440,000
<CURRENT-ASSETS> 97,552,000
<PP&E> 14,287,000
<DEPRECIATION> 10,956,000
<TOTAL-ASSETS> 105,974,000
<CURRENT-LIABILITIES> 89,696,000
<BONDS> 0
2,589,000
0
<COMMON> 10,023,000
<OTHER-SE> 2,596,000
<TOTAL-LIABILITY-AND-EQUITY> 105,974,000
<SALES> 501,383,000
<TOTAL-REVENUES> 501,383,000
<CGS> 475,500,000
<TOTAL-COSTS> 14,560,000
<OTHER-EXPENSES> 10,229,000
<LOSS-PROVISION> 1,430,000
<INTEREST-EXPENSE> 5,494,000
<INCOME-PRETAX> (3,807,000)
<INCOME-TAX> (1,543,000)
<INCOME-CONTINUING> (2,264,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,264,000)
<EPS-PRIMARY> (.24)
<EPS-DILUTED> (.24)
</TABLE>
