The net worth of the company, as certified by OAD, was $ 2,354,549, slightly in excess of the amount guaranteed in the Purchase Agreement.
Sometime after February 28, 1987, Hydo made a number of analyses of the inventory account at Witte Chase. One study listed the tonnages on the PIR at the end of the fiscal year and showed deductions for the quantities loaded on the Ocean Wind. This paper was not provided to Larr or to the auditors. Another study compared the tonnages on the foregoing exhibit with the amounts shown on the physical inventory relied upon by the auditors and was described as the inventory "overages" at Port Newark. Another study related to the amount of cargo written off as a consequence of adjustments reached with respect to shipments made by the company in prior years.
Hydo was advised by OAD that the PIR should be adjusted to eliminate overages. Sometime after February 27, 1987, Hydo listed the vessel write-offs and tried to recreate the amount of tonnage that was the subject of the write-offs on those vessels. He picked quantities in round numbers, assigned a value, and then completed the cargo by calculating the final category necessary to produce the end result. None of the overage analysis was shared with Larr or Miller, including any justification for increasing the inventory account.
During the fiscal year following the effective date of Columbia's investment in Witte Chase, there were a number of adjustments to increase the PIR. All of the adjustments were summarized in a monthly sheet called Month to Date Transfers and Adjustments. This was a summary sheet created by the computer to total the adjustments made, by commodity, during the preceding month by individual entries into the computer system. Some of the records showing those entries are still available; others have been destroyed.
There were three categories of adjustments to the inventory account, made during the fiscal year. The first category was adjustments made in the ordinary course of the business; these were, for the most part, relatively small and include both positive and negative adjustments similar to the types of adjustments that were made during the prior fiscal year.
The second category consists of adjustments which were increases in the inventory records to reflect the scrap purchased by Witte Chase from its former subsidiary, Justify Steel, Inc. These quantities were located at a separate scrap yard; because they were purchased as part of the agreement in which Columbia invested in Witte Chase, the quantities were not recorded in the normal fashion.
The final category of adjustments consisted of a series of positive increases to the inventory records. These total 21,759 tons, and were made from July 1987 through February 1988. The quantities are frequently in rounded numbers (e.g., 4500 tons, 1000 tons), and were based upon hand-written memoranda from Schmeidel.
Neither Larr nor anyone else at Columbia was told about the inventory write-ups during the 1988 fiscal year, but Larr had access to the PIR, including the monthly transfer and adjustment record.
After Myron Chase died, the business relationship between Donjon Marine, Witte, and Chase on the one hand and Columbia and its officers responsible for overseeing its investment in Witte Chase, on the other hand, deteriorated. Witte Chase suffered a loss in fiscal year ending February 28, 1988. Eventually the parties decided that a workmanlike partnership was not possible to achieve, and in 1989 the principals of Witte Chase decided to sell the company. Witte and Chase, with the approval of Columbia, negotiated the sale of the business to Hugo Neu. The proposed sale was to cover most but not all of the assets of Witte Chase.
In order to make the sale, the principals reorganized Witte Chase, separating the assets to be retained from the business to be sold to Hugo Neu. The principals formed a new corporation called WCC Holdings, Inc. ("Holdings"). They contributed their shares of Witte Chase to Holdings, making Witte Chase a subsidiary of Holdings. They also created another subsidiary of Holdings called New Sub, Inc. They then caused Witte Chase to transfer the assets that were not going to be the subject of the purchase by Hugo Neu, including the scrap inventory at the Port Newark yard, to New Sub, Inc.
Hugo Neu bought the shares of Witte Chase from Holdings on June 6, 1989. After the purchase, Witte Chase bought the inventory of scrap held by New Sub, Inc. The "new" Witte Chase (now a Hugo Neu owned entity) purchased the inventory in three segments. The first portion, consisting of all but three grades of scrap, was bought on June 6, 1989. For these grades of scrap the Hugo Neu entity on the one hand and the parties, here, on the other hand, agreed to accept the quantities and values reported on Witte Chase's PIR.
The second portion of scrap, consisting of two grades of scrap in New Sub, Inc.'s inventory, was purchased in August 1989. The "new" Witte Chase paid New Sub, Inc. for these two categories of scrap only after the categories had been weighed. The two categories purchased according to weight were #1 HMS and #2 HMS.
At the time each of these categories was weighed for sale, there was a deficit between the amount shown on the June 6, 1989 PIR and the amount determined by weight. Those deficits were:
Amount as Recorded on
Category Record Actual Weight Difference
#1 HMS 12,112 GT 7,698.9 GT -4,413.1
#2 HMS 10,857 9,367.2 -1,500.8
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