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Demco’s management predicted that these trends would be
reversed and that Demco’s net income would return to historic
levels in 1992.3 Nevertheless, at the beginning of 1992 general
economic conditions were unfavorable and Demco’s principal
customers (libraries and schools) were suffering from budget
cuts. However, many economists predicted that a weak recovery
would begin in mid to late 1992.
Media Division Sale
From about 1970 or 1971 to June 1, 1991, Demco operated two
other businesses, which the parties refer to as Demco’s “media
division”. One of these businesses converted paperback books for
use in school libraries, by rebinding the books in hard covers
using Demco’s “Turtle Back” process. The other business provided
periodical subscriptions management services for libraries.
In June 1991, Demco discontinued the operations of the media
division and sold the division’s assets to a limited partnership.
An S corporation owned entirely by Mr. Wall was the purchasing
partnership’s 1-percent general partner; an irrevocable trust for
the benefit of Mr. Wall’s family was the purchaser’s 99-percent
limited partner.
3 In particular, Mr. Wall testified that the expenses of a
poorly performing division had caused 1991 earnings to decline by
approximately $535,000; that division was later terminated.
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