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    "localId": "75729394",
    "label": "Memorandum, July 3, 1936",
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    "id": "75729394",
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    "title": "Memorandum, July 3, 1936",
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    "ocrText": "RE-ORGANIZATION MEMORANDUM\nJuly 3, 1936.\n1.\nDesirability of Re-Organization:\na.\nFor a number of years the Corporation has had a capitalization far\nin excess of its business requirements. This capitalization could\nnot be reduced with safety on account of the series of suits which\nhas been standing against the Corporation since 1924. However, since\nthe decision in the LaPorte case handed down by the Federal Court, all\nsuits have been discontinued, so we are now, for the first time in many\nyears, free from litigation.\nb. Our present capitalization requires net earnings of $28,000. per year\nto pay preferred dividends. On account of present volume of business\nand reasonable prospective volume, this is probably an amount which is\nin excess of what the Corporation can hope to earn. The earnings have\nalso been greatly effected during the past year on account of keen\nprice competition. At the close of 1936 there will be an accumulation\nof unpaid dividends amounting to $168,000. Therefore, a re-organization\nshould be based on a plan to eliminate this accumulation of unpaid\ndividends.\nC.\nIf the Corporation is to continue as a going concern, a reduction in\ncapitalisation to a point consistent with prospective business, would\neffect considerable savings in taxation, particularly on Federal\nCapital Stock Tax.\n2.\nContinuing VS. Liquidation:\na,\nThe question naturally arises as to the extent to which any dis-\ntribution of assets may be carried. Some of our stockholders may feel\nthat the largest amount possible should be distributed at this time.\nHowever, the Corporation has certain obligations in the way of\nannuities to two former employees, and carrying charges on an idle\nplant, which amount to $8,000. or $4,000. per year. It is reasonable\nto expect that this obligation may increase as the two former employees\nrequire more medical attention. Therefore, it would seem that a fair-\nly substantial capital structure should be retained in order to pro-\nvide for these contingencies.\nb.\nWith most of the unusual expenses, such as those involved in litigation,\neliminated, it is reasonable to expect that the Corporation may be\ncontinued on a profitable basis. If this is the case, our Preferred\nStockholders would no doubt prefer to continue the business with a\nreasonable capital.\n5.\nPreferred Stock vs. Debentures:\na.\nIn the set-up of a now capital structure, our present Preferred Share-\nholders can be given 8. certain amount of cash and either new Preferred\nStock or Debenture Bonds. The thought is that in case new Preferred\nStock is issued, one share of new Preferred should be given for 2\nshares of the present Preferred, and that the new stock should be of\nNo Par Value $5.00 Dividend Non-Accumulative. The stock could be made\nPage -2-\ncallable at any price which seemed just, and of course for balance\nsheet purposes could be given any declared value. Under such an\narrangement, the dividend requirements would be $10,000. per year,\nand of course were they not earned and paid, no accumulation in un-\npaid dividends would pile up against the Corporation,\nb.\nIn case Debenture Bonds were given as part consideration for turning\nin the present Preferred Stock, they should probably be 5% Income\nDebentures, and if issued in the amount of $200,000. would call for\nthe same minimum net earnings of $10,000. per year in order to meet\nthe interest charges. Of course with Income Debentures, if the 5%\nwas not earned in any one year, there would be no accumulated\nliability piled up against the Corporation.\nCo\nFrom the balance sheet or capital stendpoint, the Debenture Bonds\ncould not be considered as capital, but only as an obligation,\nwhereas the amount represented by Preferred Stock is classified as\ncapital.\n4.\nConsideration of Present Common Stockholders:\na.\nIn round numbers, the Corporation has outstanding 15,000 shares of\nCommon Stock, of which approximately 6,000 shares are owned by per-\nsons who do not hold Preferred Stock. From 8. strictly dollar and\ncent standpoint, there is no equity whatever in any of this Common\nStock, since the liquidating value of the Preferred Stock, plus the\naccumulation of unpaid dividends, will amount at the end of the year\nto $568,000., a sum far in excess of the total assets of the Corporation.\nIt probably could be considered, however, that in case the Preferred\nStockholders do not liquidate the Company and prefer to continue as\na going concern, any progress made after the re-organization should\ngo to Common Stockholders as well as Preferred.\nbe\nThe outstanding Common Stock could be cut down to & considerable ex-\ntent or could stand as is, and additional stock be issued. On the\nProforma Balance Sheets marked #1 and #2, the present Stock has not\nbeen disturbed, and each Preferred holder who turns in his shares for\nredemption is given one share of Common as a bonus. Under such a set-\nup, the Common Stock of the new Corporation would be divided 15,000\nshares to what is now our Preferred Stockholders, and 6,000 shares to\nthose who hold no Preferred at present.\nC.\nOn Proforma Balance Sheets marked #8 and #4; they reflect a reduction\nof the present outstanding Common Stock from 15,000 to 3,000 shares,\nand the issuing of 1/2 share of new Common for each of the 4,000 of\nPresent Preferred Stock now outstanding. Under this arrangement, of\nthe 5,000 shares of Common, our present Preferred Stockholders would\nown 3,800 shares, and our present Common Stockholders who do not own\nPreferred, would have 1,200 shares. This of course would place a\nhigher percentage in the hands of the Preferred Stockholders than if\nour present outstanding Common Stock was not reduced.\nd.\nUnder any new set-up where Preferred Stock was issued instead of\nDebenture Bonds, it might be desirable to provide that after Preferred\nPage -3-\nDividends were earned and paid, that the Preferred Stock and Com-\nmon Stock shared equally in any further earnings or distribution.\n5.\nAdvantages to Preferred Stockholders:\nThe Preferred Stockholders, through the callable and liquidation\nprovisions of the stock certificates, and the accumulation of un-\npaid dividends, have a. claim for an amount greater than the total\nassets of the Corporation.\nIt might be claimed that anything short of the maximum distribution\nwhich could be made to the Preferred holders would be unsatisfactory.\nHowever, the Corporation has weathered constant expensive litigation\nduring the past twelve years and has also weathered greatly reduced\nbusiness during the past six years - but has maintained its position\nin the field, and is equipped at present to handle any increased\nbusiness which seems to be indicated by the general business trend.\nA re-organization plan, therefore, which will allow & sufficient amount\nof capital to take care of any reasonable business expansion would\nseem desirable from the Preferred Stockholders' standpoint.\nThe plan gives & certain amount of cash per share. This amount is\nno doubt greater than the majority of the Stockholders would be glad\nto accept as on outright purchase for their stock.\nThe plan also comtemplates the giving of Debenture Bonds or Preferred\nStock in an amount approximately totaling the entire assets of the\nre-organized Corporation.\nIt also increases the Preferred holders' percentage of Common Stock,\nwhich may or may not have value, depending on the outcome of the\nCorporation's operations.\nThe plan also gives the present Preferred holders first call on any\nearnings up to say $10,000. per year, and then a substential majority\nof all additional earnings which may accrue to the Common Stoch.\nAt present, the Preferred holders own approximately 9,000 of the\n15,000 shares of Common Stock outstanding - or 60%. This percentage\nwill increase as more stock is given as bonus under the re-organisation\nplan.\nAny disadvantages to the Preferred holders would be on account of per-\nmitting the present Common Stock to participate in the plan - or pos-\nsibly by not making a larger cash distribution at this time.\nSo far as the Common holders are concerned, any consideration which\nthey may be given will be an advantage.\n6.\nPlans of Re-Organisation:\na. You will find attached 4 Proforma Balance Sheets, based on our\nMay 31st Balance Sheet. Two of these are prepared on the basis\nof paying $200,000. cash to our present Stockholders, and two are\nprepared on the basis of paying $150,000. cash. Sheets marked #1\nPage\n#2 contain the Debenture features and no reduction in our present\noutstanding Common Stock. Sheets #3 and #4 are based on issuing\nnew Preferred Stock and a reduction of our present outstanding\nCommon Stock from 15,000 to 5,000 shares. Of course a reduction\nor no reduction in our present outstanding Common Stock may be ap-\nplied to either type Balance Sheet.\nThese Proforma Balance Sheets also will take into consideration\na write-down of the assets carried on our present Balance Sheet,\nas follows:\nBook\nWrite-Down\nLoss\nValue\nTo\nLand & Building\n40000,\n25000.\n15000.\nGood Will Patents\n200000.\n1.\n199999.\nEstimated Reserve for\nLoss in sale of securities\n10000.\n224999.\nThese may be used as guides in compiling any set-up which seems\ndesirable to offer to our Stockholders. In the case of sheets\n#3 and #4, while the declared value of the Preferred Stock for\nBalance Sheet purposes is shown at $50. per share; the stock should\ncarry callable or liquidating provision of $100. per share. Such\na stipulation would give the Preferred Stockholders practically a\n100% call on the assets of the Corporation.\n7.\nProvision for Management Participation:\na.\nThere is a thought that in any re-organisation, certain provisions\nshould be made to compensate management for its years of faithful\nservice, and future successes of the Corporation for which it may\nbe largely responsible. This could be done in several ways; the\nfollowing being typical examples:\n(1.)\nIn the redemption of the present Preferred Stock, we could offer\nto pay our Preferred Stockholders $375. per share for 80% of their\nholdings and give one share of new Preferred and one share of new\nCommon for each two shares of stock so turned in. For 20% of their\nholdings, the Corporation would pay $50. per share; this stock to\ngo to the Treasury of the Corporation to be issued to management\npersonnel at a certain stipulated price - say $25. per share.\n(2.)\nAn amount of Common Stock in excess of requirements to take care\nof present Stockholders could be authorized and kept in the Treasury\nto be sold to management personnel at a stipulated price. This\nCommon Stock provision could also be arranged in conjunction with\nany arrangement made on Preferred Stock.\n(3.)\nAn arrangement carrying a certain percentage of the profits might\nalso be worked out for the management personnel.\nthe\n#\nPROFORMA BALANCE SHEET\nAfter payment of 200M in Cash to Preferred Stockholders\nAnd the Issue of Debenture Bonds\nAnd the Issue of Additional Common Stock\nBased on May 31, 1936 Balance Sheet\nAssets\nCash\n$12316.15\nGovernment Bonds\nOther Investments (Less 10M Res.)\n44545.55\nAccounts Receivable\n$14112.58\nNotes Receivable\n14696.55\n28809.13\nLess: Reserve for Bad Accounts\n1000.00\n27809.13\nInventory\n41808.98\nUnexpired Insurance\n612.38\nDeferred Expense\n938.31\nLand, Building & Equipment\n62876.37\nNew York Office Equipment\n2393.99\n65270.36\nLess: Reserve for Deprec.\n31411.66\n33858.70\nGood Will, Secret Process, Patents\n1.00\n$161890.20\nLiabilities\nAccounts Payable\n2763.62\nReserve for Fed. Income Tax\n150.00\nReserve for Auditing, Annuities\n779.01\nDebentures\n200000.00\nCommon Stock\n19000.00\nDeficit\n60802.43\n$161890.20\n#2\nPROFORMA BALANCE SHEET\nAfter payment of 150M in Cash to Preferred Stockholders\nAnd the Issue of Debenture Bonds and the Issue of Additional Common Stock\nBased on May 31, 1936 Balance Sheet\nAssets\nCash\n$12316.15\nGovernment Bonds\n-\nOther Investments (Less Reserve 10M)\n94545.55\nAccounts Receivable\n$14112.58\nNotes Receivable\n14696.55\n28809.13\nLess: Reserve for Bad Accts.\n1000.00\n27809.13\nInventory\n41808.98\nUnexpired Insurance\n612.38\nDeferred Expense\n938.31\nLand, Building & Equipment\n62876.37\nNew York Office Equipment\n2393.99\n65270.36\nLess: Reserve Bor Depreciation\n31411.66\n33858.70\nGood Will, Secret Process\n1.00\n$211890.20\nLiabilities\nAccounts Payable\n2763.62\nReserve for Federal Income Tax\n150.00\nReserve for Auditing, Annuities\n779.01\nDebentures\n200000.00\nCommon Stock: 19,000 shares @ 1.00\n19000.00\nDeficit\n10802.43\n$211890.20\n#\nPROFORMA BALANCE SHEET\nAfter Payment of 200M in Cash to Preferred Stockholders\nand the Issue of New Preferred and Common Stock\nBased on May 31, 1936 Balance Sheet\nAssets\nCash\n$12316.15\nGovernment Bonds\n-\nOther Investments (Less Reserve 10M)\n44545.55\nAccounts Receivable\n$14112.58\nNotes Receivable\n14696.55\n28809.13\nLess: Reserve for Bad Acets.\n1000.00\n27809.13\nInventory\n41898.98\nUnexpired Insurance\n612.38\nDeferred Expense\n938.31\nLand, Building & Equipment\n62876.37\nNew York Office Equipment\n2393.99\n65270.36\nLess: Reserve for Depreciation\n31411.66\n33858.70\nGood Will, Secret Process\n1.00\n$161890.20\nLiabilities\nAccounts Payable\n2763.62\nReserve for Fed. Income tax\n150.00\nReserve for Auditing, Annuities\n779.01\nPreferred Stock: 2000 @ $50.00\n100000.00\nCommon Stock : 5000 @ 1.00\n5000.00\n105000.00\nCapital Surplus\n53197.57\n$161890.20\n# 4\n#\nPROFORMA BALANCE SHEET\nAfter Payment of 150M in Cash to Preferred Stockholders\nand issue of New Preferred and New Common Stock\nBased on May 31, 1936 Balance Sheet\nProforma June 1, 1936\nAssets\nCash\n$12316.15\nGovernment Bonds\n-\nOther Investments (Less Reserve 10M)\n94545.55\nAccounts Receivable\n$14112.58\nNotes Receivable\n14696.55\n28809.13\nLess Reserve for Bad Accts.\n1000.00\n27809.13\nInventory\n41808.98\nUnexpired Insurance\n612.38\nDeferred Expense\n938.31\nLand, Building & Equipment\n62876.37\nNew York Office Equipment\n2393.99\n65270.36\nLess Reserve for Depreciation (15M write down)\n31411.66\n33858.70\nGood Will, Secret Process, Patents\n1.00\n$211890.20\nLiabilities\nAccounts Payable\n2763.62\nReserve for Fed. Income Tax\n150.00\nReserves for Auditing, Annuities\n779.01\nPreferred Stock: 2000 shares @$50.\n100000.00\nCommon Stock : 5000\n# @ 1.\n5000.00\n105000.00\nCapital Surplus\n103197.57\n$211890.20"
}