John E. Wall - Page 7




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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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