<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
- -------------------------------------------------------------------------------
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
- -------------------------------------------------------------------------------
For the Second Quarter Ended March 29, 1997
Commission File Number: 0-2675
United Magazine Company
An Ohio Corporation
I.R.S. Number: 31-0681050
5131 Post Road
Dublin, Ohio 43017
Registrant's Telephone Number: (614) 792-0777
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 twelve 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 ninety days.
Yes: X No:
--- ---
Indicate the number of shares outstanding of each of the issuer's
classes of Common Stock, as of the latest practicable date.
The Registrant's number of common shares, without par value,
outstanding as of May 1, 1997 was 26,760,334. After adjustment for the
anticipated one for ten reverse split to be effective after the 1997 Annual
Meeting of Shareholders, the adjusted number of common shares is 2,676,034.
Traditional Small Business Disclosure Format (check one):
Yes: X No:
--- ---
<PAGE> 2
UNITED MAGAZINE COMPANY
-----------------------
FORM 10-QSB
-----------
FOR THE SECOND QUARTER ENDED MARCH 29, 1997
-------------------------------------------
INDEX
-----
<TABLE>
<CAPTION>
PAGE
----
PART I - FINANCIAL INFORMATION
- ------------------------------
<S> <C>
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets 3
March 29, 1997 and September 28, 1996
Condensed Consolidated Statements of Operations (Unaudited) 5
For the Three Months and Six Months Ended March 29, 1997
and March 30, 1996
Condensed Consolidated Statements of Cash Flow (Unaudited) 6
For the Six Months Ended March 29, 1997 and March 30, 1996
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial 11
Condition and Results of Operations
PART II - OTHER INFORMATION AND SIGNATURES
- ------------------------------------------
Item 1. Legal Proceedings 20
Item 2. Change in Securities 20
Item 3. Default Upon Senior Securities 20
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 21
</TABLE>
<PAGE> 3
UNITED MAGAZINE COMPANY
-----------------------
FORM 10-QSB
-----------
CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------
AS OF MARCH 29, 1997 AND SEPTEMBER 28, 1996
-------------------------------------------
<TABLE>
<CAPTION>
March 29, September
ASSETS 1997 28, 1996
------ -------------- --------------
(Unaudited) (Audited)
<S> <C> <C>
CURRENT ASSETS:
Cash $ 714,166 $ 2,546,785
Accounts receivable, net 40,795,550 29,835,357
Inventories 29,214,740 35,746,922
Marketable securities 278,563 473,556
Notes receivable from related parties 1,577,646 1,352,646
Prepaids and other 1,315,582 1,335,458
------------- -------------
Total current assets 73,896,247 71,290,724
------------- -------------
PROPERTY AND EQUIPMENT, at cost:
Land 290,706 290,706
Building and improvements 2,260,740 2,260,740
Furniture and equipment 6,521,120 6,174,452
Vehicles 5,117,802 4,789,336
Leasehold improvements 526,816 522,336
------------- -------------
14,717,184 14,037,570
Less - accumulated depreciation and amortization (3,297,732) (1,585,503)
------------- -------------
Total property and equipment, net 11,419,452 12,452,067
------------- -------------
ASSETS HELD FOR SALE - 1,239,605
------------- -------------
OTHER ASSETS:
Sales orders and regulatory records, net 296,600 423,720
Costs in excess of net assets acquired, net 152,323,477 154,518,179
Covenants not to compete, net 443,187 538,777
Notes receivable from related parties 1,788,645 1,788,645
Prepaids 4,572,378 5,501,703
Other assets, net 4,094,378 3,617,107
------------- -------------
Total other assets 163,518,665 166,388,131
------------- -------------
Total assets $248,834,364 $251,370,527
============= =============
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these consolidated balance sheets.
3
<PAGE> 4
UNITED MAGAZINE COMPANY
-----------------------
FORM 10-QSB
-----------
CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------
AS OF MARCH 29, 1997 AND SEPTEMBER 28, 1996
-------------------------------------------
<TABLE>
<CAPTION>
March 29, September
LIABILITIES AND SHAREHOLDERS' EQUITY 1997 28, 1996
------------------------------------
-------------- --------------
(Unaudited) (Audited)
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of debt obligations $ 9,511,486 $ 10,822,386
Current portion of Senior debentures 6,658,589 3,329,295
Short-term borrowings - related parties 5,830,960 6,206,853
Accounts payable 79,842,336 70,302,971
Accrued expenses 12,761,542 12,762,143
Accrued interest on debentures 3,659,590 1,041,006
Income taxes payable 1,534,602 1,534,602
Reserve for gross profit on sales returns 7,611,462 10,474,409
------------- -------------
Total current liabilities 127,410,567 116,473,665
LONG-TERM DEBT OBLIGATIONS 7,544,961 9,247,711
DEBENTURES:
- Senior 33,261,226 36,590,520
- Subordinated 18,559,707 18,559,707
DEFERRED COMPENSATION PLAN 1,160,055 1,231,041
ACCRUED PENSION OBLIGATION 2,204,939 2,115,478
POST-RETIREMENT OBLIGATION 1,283,020 1,450,015
DEALER ADVANCE PAYMENTS AND OTHER 135,659 146,938
------------- -------------
Total liabilities 191,560,134 185,815,075
------------- -------------
COMMITMENTS AND CONTINGENCIES
COMMON STOCK SUBJECT TO PUT AGREEMENTS,
482,140 shares 4,622,890 4,329,287
------------- -------------
SHAREHOLDERS' EQUITY:
Common stock, no par value, 53,250,000 shares authorized, 4,283,506 issued
and 2,676,034 outstanding (including shares
subject to Put Agreements) 250 250
Paid-in capital 43,306,872 43,079,563
Obligation to issue shares (4,349,476) 65,242,138 65,242,138
Treasury stock, at cost (16,998) (16,998)
Unrealized loss on marketable securities (226,212) (31,219)
Minimum pension liability adjustment (108,204) (108,204)
Retained deficit (55,546,506) (46,939,365)
------------- -------------
Total shareholders' equity 52,651,340 61,226,165
------------- -------------
Total liabilities and shareholders' equity $248,834,364 $251,370,527
============= =============
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these consolidated balance sheets.
4
<PAGE> 5
UNITED MAGAZINE COMPANY
-----------------------
FORM 10-QSB
-----------
FOR THE SECOND QUARTER ENDED MARCH 29, 1997
-------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
-----------------------------------------------
MARCH 29, 1997 AND MARCH 30, 1996
---------------------------------
<TABLE>
<CAPTION>
3 Months 3 Months 6 Months 6 Months
Ended 1997 Ended 1996 Ended 1997 Ended 1996
------------- ------------- -------------- -------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
NET SALES $75,675,010 $13,559,708 $150,103,512 $20,029,089
COST OF SALES 59,094,651 10,153,582 117,060,226 14,887,022
------------ ------------ ------------- ------------
Gross profit 16,580,359 3,406,126 33,043,286 5,142,067
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
(16,433,126) (3,387,163) (33,808,912) (4,933,051)
DEPRECIATION AND AMORTIZATION (2,209,964) (384,100) (4,575,678) (586,200)
LOSS FROM INVESTMENT IN WILMINGTON - - - (90,192)
------------ ------------ ------------- ------------
LOSS FROM OPERATIONS (2,062,731) (365,137) (5,341,304) (467,376)
------------ ------------ ------------- ------------
OTHER INCOME (EXPENSES), net:
Interest expense, net (1,774,086) (154,525) (3,420,035) (277,465)
Other, net 103,985 28,957 154,198 41,949
------------ ------------ ------------- ------------
Total other income (expenses), net (1,670,101) (125,568) (3,265,837) (235,516)
------------ ------------ ------------- ------------
LOSS BEFORE TAXES (3,732,832) (490,705) (8,607,141) (702,892)
INCOME TAXES - - - -
------------ ------------ ------------- ------------
NET LOSS $ (3,732,832) $ (490,705) $ (8,607,141) $ 702,892
============ ============ ============== ============
WEIGHTED AVERAGE SHARES OUTSTANDING 7,062,072 2,674,780 7,058,268 2,671,885
============ ============ ============= ============
LOSS PER SHARE $ (.53) $ (.18) $ (1.22) $ (.26)
============ ============ ============= ============
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these consolidated statements.
5
<PAGE> 6
UNITED MAGAZINE COMPANY
-----------------------
FORM 10-QSB
-----------
FOR THE SECOND QUARTER ENDED MARCH 29, 1997
-------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
----------------------------------------------
FOR THE SIX MONTHS ENDED
------------------------
MARCH 29, 1997 AND MARCH 30, 1996
---------------------------------
<TABLE>
<CAPTION>
6 Months 6 Months
Ended Ended
March 29, March 30,
1997 1996
-------------- --------------
(Unaudited) (Unaudited)
<S> <C> <C>
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES $ 2,058,108 $ (112,011)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (679,614) (281,792)
Additions of long-term assets (1,061,175) -
Proceeds from sale of Airplane held for resale 1,239,605 -
------------- -------------
Net cash provided by (used in) investing activities (501,184) (281,792)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of debt obligations (3,389,543) (225,929)
Other - 8,933
------------- -------------
Net cash provided by (used in) financing activities (3,389,543) (216,996)
------------- -------------
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS (1,832,619) 610,799
CASH, beginning of period 2,546,785 755,338
------------- -------------
CASH, end of period $ 714,166 $ 144,539
============= =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 1,041,644 $ 33,054
Cash paid during the period for taxes 17,903 22,150
</TABLE>
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
- -------------------------------------------------------------------
1997: None
1996: During the second quarter of 1996, UNIMAG purchased all of the outstanding
stock of Triangle News Company, Inc. See Note 7 to the Financial Statements.
The accompanying notes to consolidated financial statements are an integral part
of these consolidated statements.
6
<PAGE> 7
UNITED MAGAZINE COMPANY
-----------------------
FORM 10-QSB
-----------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
FOR THE SECOND QUARTER ENDED MARCH 29, 1997
-------------------------------------------
(UNAUDITED)
-----------
1. GENERAL
-------
In the opinion of management, the accompanying unaudited condensed consolidated
financial statements contain all adjustments necessary to present fairly the
financial position of United Magazine Company and subsidiaries (UNIMAG or the
Company) as of March 29, 1997 and September 28, 1996, and the results of its
operations and cash flows for the three and six months ended March 29, 1997 and
March 30, 1996. All such adjustments were of a normal recurring nature. The
results of operations in any interim period are not necessarily indicative of
results for the full year.
2. THE BUSINESS
------------
United Magazine Company (UNIMAG or the Company) is an Ohio corporation which was
incorporated on April 8, 1964 under the name Citizens Holding Company. UNIMAG
(the Parent) is a holding company. The operations for the quarter ended March
29, 1997 were conducted through its consolidated subsidiaries and also include
the impact of the business combinations in the fourth quarter of 1996 more fully
discussed below. The operations for the quarters ended March 29, 1997 and March
30, 1996 were conducted through its consolidated subsidiaries as follows:
Service News Company of Connecticut, doing business as Yankee News Company
(Yankee) has been owned since May of 1993. Service News Company of Wilmington,
North Carolina ("Wilmington") was operated under a management agreement for the
quarter ended December 30, 1995 and has been owned since January of 1996.
Triangle News Company, Inc., a Pennsylvania corporation, (Triangle) was acquired
in January of 1996. Reader's Choice (RC) was owned during the first and second
fiscal quarters of 1996 and was sold in July of 1996.
Service News Company of Connecticut, (Yankee), is engaged in wholesale magazine,
newspaper and book distribution and owns and operates four newsstands and one
bookstore.
Service News Company of Wilmington, North Carolina (Wilmington) is engaged in
wholesale magazine and book distribution.
Triangle News Company, Inc., (Triangle) is engaged in wholesale magazine,
newspaper and book distribution.
Reader's Choice (RC) was engaged in the business of managing and reporting
information on retail display allowances and collecting these allowances which
are paid by publishers to retailers.
United Magazine Company also is effecting business combinations with Michiana
News Service, Inc., a Michigan corporation ("Michiana"), The Stoll Companies, an
Ohio corporation ("Stoll"), and The George R. Klein News Co., Central News Co.,
and Newspaper Sales, Inc., all Ohio corporations (collectively, "The Klein
Companies" or "Klein") , all independent magazine, book, and newspaper
("periodical") distributors.
7
<PAGE> 8
The Company is also effecting business combinations with a number of companies
affiliated with Ronald E. Scherer ("Ronald E. Scherer"), the Company's chairman,
also engaged in wholesale periodical distribution (the "Scherer Affiliates"):
Ohio Periodical Distributors, Inc., an Ohio corporation ("OPD"), Northern News
Company, a Michigan corporation ("Northern"), Wholesalers Leasing, Corp., a
Delaware corporation ("Wholesalers"), Scherer Companies, a Delaware corporation
("Scherer Companies") and, pursuant to the agreement with Northern to acquire
all of the stock of MacGregor News Services, Inc., a Michigan corporation
("MacGregor"). The Company also is acquiring the stock of Read-Mor Bookstores,
Inc. (Read-Mor), a company managed by Scherer Companies. Read-Mor owns six
retail locations and is an insignificant acquisition.
Michiana, Stoll, Klein, Read-Mor and Scherer Affiliates are collectively known
as the "Acquisition Parties". The Acquisition Parties in combination with the
other entities of UNIMAG are collectively known as the "Combined Company".
Effective July 29, 1996, the Company entered into an Asset Transfer and Exchange
Agreement with Northern, pursuant to which the Company acquired such of the
assets of that company as are related to the wholesale distribution of
periodicals (and, pursuant to the agreement with Northern, to acquire all of the
stock of MacGregor held by Northern) in exchange for Common Stock of the Company
and Senior and Subordinated Debentures of the Company. Effective July 30, 1996,
the Company entered into a Stock Transfer and Exchange Agreement with Michiana
and the shareholders of Michiana (the "Michiana Shareholders"), pursuant to
which all of the Michiana Shareholders agreed to contribute their shares of
stock of Michiana to the Company in exchange for Common Stock of the Company and
Senior and Subordinated Debentures of the Company. Effective July 31, 1996, the
Company entered into a Stock Transfer and Exchange Agreement with Stoll and the
shareholders of Stoll (the "Stoll Shareholders"), pursuant to which all of the
Stoll Shareholders agreed to contribute their shares of stock of Stoll to the
Company in exchange for Common Stock of the Company and Senior and Subordinated
Debentures of the Company. Effective August 1, 1996, the Company entered into an
Asset Transfer and Exchange Agreement with OPD, subsequently modified to a Stock
Transfer and Exchange Agreement, pursuant to which all of the OPD Shareholders
agreed to contribute their shares of stock of OPD to the Company in exchange for
Common Stock of the Company and Senior and Subordinated Debentures of the
Company. Effective August 2, 1996, the Company entered into an Asset Transfer
and Exchange Agreement with Wholesalers, pursuant to which the Company agreed to
acquire substantially all of the assets and assume substantially all of the
liabilities of that company as are related to the wholesale distribution of
periodicals in exchange for Common Stock of the Company and Senior and
Subordinated Debentures of the Company. Effective August 2, 1996, the Company
entered into a Stock Transfer and Exchange Agreement with Scherer Companies and
the shareholders of Scherer Companies (the "Scherer Shareholders"), pursuant to
which the Scherer Shareholders agreed to contribute their shares of stock of
Scherer Companies to the Company in exchange for Common Stock of the Company and
Senior and Subordinated Debentures of the Company. Effective September 14, 1996,
the Company entered into a Stock Transfer and Exchange Agreement with Klein and
the sole shareholder of Klein (the "Klein Shareholder"), pursuant to which the
Klein Shareholder agreed to contribute his shares of stock of Klein to the
Company in exchange for Common Stock of the Company and Senior and Subordinated
Debentures of the Company.
Each of these transactions has been or is expected to be closed into escrow
pending a favorable vote of the shareholders of the Company on each of these
transactions. Upon the shareholders voting in favor of the acquisitions at the
Annual Meeting of Shareholders, then closing documents will be released from
escrow and the transactions will be consummated. Ronald E. Scherer, chairman of
the Company, OPD, which is controlled by Ronald E. Scherer, and R. David Thomas,
another significant shareholder of the Company, have each agreed to vote their
shares in favor of the transactions with Stoll, Michiana, Klein
8
<PAGE> 9
and the Scherer Affiliates. Together these shareholders are entitled to vote
more than 50% of the stock of the Company. Since approval of the transactions is
assured and UNIMAG had effective control over the operations of the companies,
the Acquisition Parties have been included in the consolidated financial
statements of UNIMAG as discussed in the footnotes to the financial statements.
UNIMAG also owns three inactive subsidiaries.
3. PENDING SHAREHOLDER ACTIONS
---------------------------
UNIMAG grew significantly during 1996 by the acquisition of six wholesalers (two
in the second quarter and four in the fourth quarter). Consideration for these
acquisitions was in the form of cash, notes payable, debentures and common stock
of the Company. Due to the significant amount of shares to be issued for the
fourth quarter acquisitions, UNIMAG is required to obtain shareholder approval.
The Company is currently preparing the Proxy Statement for the shareholder vote
at the Annual Meeting of Shareholders. Upon approval by the shareholders, the
exchanges will occur and legal titles will pass. However, the Company has
already received the necessary approvals from two significant shareholders who
have agreed to vote their shares, which represent a majority of the outstanding
shares, in favor of the acquisitions discussed above, as well as a 1 for 10
reverse stock split. Since the approval is assured, the Company has reflected
the reverse stock split for all periods presented and the effects of the
acquisitions.
4. PROVISION FOR INCOME TAXES
--------------------------
The provision (benefit) for income taxes for the periods ended March 29, 1997
and March 30, 1996 is as follows:
<TABLE>
<CAPTION>
3 Months 3 Months 6 Months 6 Months
Ended 1997 Ended 1996 Ended 1997 Ended 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Current $(1,493,000) $ (196,000) $(3,443,000) $ (281,000)
Deferred 1,493,000 196,000 3,443,000 281,000
------------ ------------ ------------ ------------
Total $ - $ - $ - $ -
============ ============ ============ ============
</TABLE>
The Company has provided deferred income taxes at a 40% tax rate which
represents a blended statutory federal and state income tax rate. The types of
differences between the tax bases of assets and liabilities and their financial
reporting amounts that give rise to significant portions of deferred income tax
assets and liabilities are: reserve for gross profit on sales returns, property
and equipment asset valuations, deferred compensation, amortization life of
intangibles and certain taxes.
The difference between the statutory tax rate and the effective rate of zero is
due primarily to the benefit of the net operating losses generated that may not
be realized in the future. The Company's net deferred tax assets have been fully
reserved due to the uncertainty of future realization.
9
<PAGE> 10
As of March 29, 1997, UNIMAG has approximately $50 million of Federal net
operating loss (NOL) carryforwards for tax purposes. The amount that UNIMAG can
utilize each year is restricted due to multiple changes in ownership.
The NOL carryforwards will expire in the years 2003 through 2011.
At March 29, 1997, UNIMAG had income taxes payable of $1,534,602. This relates
primarily to Michiana's tax assessment and interest due to the Internal Revenue
Service as a result of unfavorable tax settlements relating to years 1994 and
prior that was assumed by UNIMAG.
5. PRO FORMA FINANCIAL INFORMATION (UNAUDITED)
-------------------------------------------
The following unaudited pro forma financial information presents the revenues,
net income and earnings per share from the combination of operations of the
Company and the significant acquisitions. The pro forma information is provided
as if each acquisition had occurred at the beginning of fiscal 1996. The pro
forma information is provided for information purposes only. It is based on
historical information and does not purport to reflect the results that would
have occurred had the acquisition occurred on October 1, 1995. There were two
significant acquisitions, Wilmington and Triangle, during the three months ended
March 30, 1996.
<TABLE>
<CAPTION>
6 Months Ended 3 Months Ended
March 30, 1996 March 30, 1996
in 000's, except EPS Pro Forma Pro Forma
---------------------------- ------------------- -------------------
<S> <C> <C>
Net Revenue $ 135,998 $ 67,040
Net Income (Loss) (5,333) (4,141)
EPS $ (.76) $ (.59)
</TABLE>
6. WILMINGTON ACQUISITION
----------------------
In April of 1995, UNIMAG entered into a Services and Management Agreement with
Service News Company of Wilmington, North Carolina (Wilmington). Included in the
Agreement was an option to purchase all of the outstanding stock of Wilmington.
As of December 30, 1995, UNIMAG had not exercised its option and, therefore,
treated the option as an investment and accounted for the investment under the
equity method. UNIMAG exercised their option to acquire Wilmington on January
12, 1996. The shareholders of Wilmington have shares, issued as part of the
consideration for the option to purchase the stock of Wilmington, that are
subject to future Put Agreements commencing in April of 1997. Interest is
accreted each quarter for the increase in value of the putable shares during
each quarter.
7. TRIANGLE (PITTSBURGH) ACQUISITION
---------------------------------
On January 23, 1996 UNIMAG purchased all of the outstanding stock of Triangle
News Company, Inc., a Pennsylvania corporation (Triangle). Consideration given
included cash of $1,647,000 and 10,000 (Post-Split) shares of UNIMAG stock. In
connection with the closing, UNIMAG financed $1,000,000 through its wholly-owned
subsidiary Service News Company of Connecticut, which utilized part of a line of
credit from the Bank of Boston and financed an additional $700,000, secured by
the assets of Triangle, from the Bank of Boston.
10
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
Results of Operations of UNIMAG for the three months ended March 29, 1997
and March 30, 1996
- --------------------------------------------------------------------------------
Review of Operations
The results of operations for the quarter ended March 29, 1997 are not
indicative of results from prior quarters, nor are the results for the quarter
indicative of the future. 1996 was a unique transition year which featured
industry wide consolidations, declines in gross margin as a percent of revenue,
and increases in payroll costs related to increased levels of service. These
trends have continued into 1997, and the Company has continued its consolidation
and cost reduction efforts to offset the impact of these trends.
The following table provides comparative financial information for the first two
fiscal quarters of 1997 and 1996.
<TABLE>
<CAPTION>
Quarter Ended
---------------------------------------------------------------
March 29, December 28, March 30, December 30,
1997 1996 1996 1995
----------- -------------- ----------- --------------
<S> <C> <C> <C> <C>
Results of Operations ($000):
Revenue $75,675 $74,429 $13,560 $6,469
Gross Margin 16,580 16,463 3,406 1,736
Selling, General and Administrative 16,433 17,376 3,387 1,546
EBITDA 147 (913) 19 100
Net Loss (3,733) (4,874) (491) (212)
As a Percent of Revenue:
Gross Margin 21.9% 22.1% 25.1% 26.8%
Selling, General and Administrative 21.7 23.3 25.0 23.9
EBITDA .2 (1.2) .1 1.5
Net Loss 4.9 (6.5) (3.6) (3.3)
</TABLE>
The revenue for the Combined Company for the quarter ended March 29, 1997 was
$75,675,010, an increase of 458% over revenue for the quarter ended March 30,
1996 and an increase of 1.7% over the previous fiscal quarter ended December 28,
1996.
During 1996 the Company and the industry experienced reductions in gross margins
from existing chain customers because of new discounts, rebates and amortization
of up-front signing bonuses. As a result of these reductions in revenue, the
gross margin, as a percentage of revenue, declined from 25.1% in the second
fiscal quarter of 1996 and 22.1% in the previous fiscal quarter to 21.9% in the
second fiscal quarter of 1997.
11
<PAGE> 12
Selling, general and administrative expenses, as a per cent of revenue,
decreased to 21.7% in 1997 versus 25.0% in 1996 and 23.3% in the previous fiscal
quarter. The in-store service component of payroll expense increased in 1997
over 1996 as a result of increased in-store service for the large retail
customers. This increase in in-store service cost, created by commitments under
contract by the Company to increase the levels of service to the retailers and
to assume certain product management functions previously performed by the
retailer, also was representative of changes occurring in the industry. These
increases were partially offset by the benefit of the reduction of full-time
employees in Michigan, Indiana and Ohio.
Depreciation and amortization expense increased due to the depreciation of fixed
assets acquired and due to the amortization of goodwill, both relating to the
several business combinations in 1996. The acquisitions of Wilmington, Triangle,
Michiana, Stoll, Klein, Read-Mor and Scherer Affiliates was accounted for using
the purchase method of accounting. Accordingly, goodwill was created in the
amount of approximately $154,000,000. This goodwill is being amortized over 40
years.
This resulted in a change in the net loss to 4.9% of revenue in 1997 compared to
3.6% in 1996 and 6.5% in the preceding quarter.
The acquisition of Michiana, Stoll, Klein, Read-Mor and Scherer Affiliates is
being financed by the issuance of Common Stock of the Company, 8% Senior
Debentures in the aggregate amount of $39,920,000 and 10% Subordinated
Debentures in the aggregate amount of $18,560,000. These debentures accrue
interest for the entire quarter. This increased interest expense for the second
quarter of 1997 by approximately $1,262,000.
Because of the loss for the quarter and because of loss carryforwards, UNIMAG
had no federal income tax expense for the second quarter of 1997. The Company
has a net operating loss (NOL) of approximately $50 million at March 29, 1997;
however, the Company has not recognized any benefits from that NOL through March
29, 1997.
The calculation of earnings per common share and weighted average number of
shares outstanding includes the shares to be issued for Michiana, Stoll, Klein,
Read-Mor and Scherer Affiliates for the periods determined under the respective
agreements. In addition, the calculation of earnings per share reflects the one
for ten reverse split to be submitted to the Shareholders for approval at the
1997 Annual Meeting of Shareholders. The effects of the one for ten reverse
stock split have been included because two shareholders holding more than 50% of
the shares of Common Stock of the Company have agreed to vote in favor of the
split.
12
<PAGE> 13
- --------------------------------------------------------------------------------
Results of Operations of UNIMAG for the six months ended March 29, 1997
and March 30, 1996
- --------------------------------------------------------------------------------
Review of Operations
The results of operations for the six months ended March 29, 1997 are not
indicative of results from prior quarters, nor are the results for the six
months indicative of the future. The following table provides comparative
financial information for the first six months of 1997 and 1996.
<TABLE>
<CAPTION>
March 29, March 30,
1997 1996
------------ -------------
<S> <C> <C>
Results of Operations ($000):
Revenue $ 150,104 $ 20,029
Gross Margin 33,043 5,142
Selling, General and Administrative 33,809 4,933
EBITDA (766) 119
Net Income (Loss) (8,607) (703)
As a Percent of Revenue:
Gross Margin 22.0% 25.7%
Selling, General and Administrative 22.5 24.6
EBITDA (.5) .6
Net Income (Loss) (5.7) (3.5)
</TABLE>
The revenue for the Combined Company for the six months ended March 29, 1997 was
$150,103,512, an increase of 649% over revenue for the six months ended March
30, 1996. This increase is primarily attributable to the inclusion of revenue
from the acquisition parties' companies during the entire six months ended March
29, 1997.
During 1996 the Company and the industry experienced reductions in gross margins
from existing chain customers because of new discounts, rebates and amortization
of up-front signing bonuses. As a result of these reductions in revenue, the
gross margin, as a percentage of revenue, declined from 25.7% in the first six
months of 1996 to 22.0% in the first six months of 1997.
Selling, general and administrative expenses, as a percent of revenue, decreased
to 22.5% in 1997 versus 24.6% in 1996. The in-store service component of payroll
expense increased in 1997 over 1996 as a result of increased in-store service
for the large retail customers. This increase in in-store service cost, created
by commitments under contract by the Company to increase the levels of service
to the retailers and to assume certain product management functions previously
performed by the retailer, also was representative of changes occurring in the
industry. These increases were partially offset by the benefit of the reduction
of full-time employees in Michigan, Indiana and Ohio.
13
<PAGE> 14
Depreciation and amortization expense increased due to the depreciation of fixed
assets acquired and due to the amortization of goodwill, both relating to the
several business combinations in 1996. The acquisitions of Wilmington, Triangle,
Michiana, Stoll, Klein, Read-Mor and Scherer Affiliates was accounted for using
the purchase method of accounting. Accordingly, goodwill was created in the
amount of approximately $154,000,000. This goodwill is being amortized over 40
years.
This resulted in an increase in the net loss to 5.7% of revenue in 1997 compared
to 3.5% in 1996.
The acquisition of Michiana, Stoll, Klein, Read-Mor and Scherer Affiliates is
being financed by the issuance of Common Stock of the Company, 8% Senior
Debentures in the aggregate amount of $39,920,000 and 10% Subordinated
Debentures in the aggregate amount of $18,560,000. These debentures accrue
interest for the entire quarter. This increased interest expense for the first
six months of 1997 by approximately $2,524,000.
Because of the loss for the quarter and because of loss carryforwards, UNIMAG
had no federal income tax expense for the first six months of 1997. The Company
has a net operating loss (NOL) of approximately $50 million at March 29, 1997;
however, the Company has not recognized any benefits from that NOL through March
29, 1997.
The calculation of earnings per common share and weighted average number of
shares outstanding includes the shares to be issued for Michiana, Stoll, Klein,
Read-Mor and Scherer Affiliates for the periods determined under the respective
agreements. In addition, the calculation of earnings per share reflects the one
for ten reverse split to be submitted to the Shareholders for approval at the
1997 Annual Meeting of Shareholders. The effects of the one for ten reverse
stock split have been included because two shareholders holding more than 50% of
the shares of Common Stock of the Company have agreed to vote in favor of the
split.
14
<PAGE> 15
- --------------------------------------------------------------------------------
Liquidity
- --------------------------------------------------------------------------------
The Company measures its liquidity primarily in Earnings Before Interest, Taxes,
Depreciation and Amortization (EBITDA). However, EBITDA should not be considered
as an alternative to net income or as an indicator of cash flows generated by
operating, investing or financing activities.
EBITDA for the second quarter of 1997 was $147,000 versus $(913,000) for the
preceding quarter. EBITDA for the first six months of 1997 was $(766,000)
versus $119,000 for the first six months of 1996. The 1997 EBITDA has been
impacted negatively by the gross margin and payroll pressures during UNIMAG's
period of ownership of the acquisition companies, and the Company has not
received the full benefits from implementation of expected consolidation
synergies with the acquisition companies because of the time and complexity
involved in the consolidations.
The Company anticipates improvements in EBITDA during the remainder of fiscal
1997 due to continued reductions in selling, general and administrative expenses
through consolidation synergies and through some improvement in gross margins.
The acquisition transactions of the Company since June 30, 1996 have added
$140,966,000 of goodwill to the Company's assets and $58,480,000 of Senior and
Subordinated Debentures to the Company's liabilities. On an annual basis the
Company anticipates future amortization of approximately $3,524,000 for this
goodwill and initial annual interest of approximately $5,050,000 related to
these transactions.
Cash Flows - Operating Activities
During the first six months of 1997 the Company experienced an increase in net
cash provided from operations of $2,058,000 compared to a deficit of $(112,000)
in 1996. The 1997 increase is due primarily to a net increase in current
liabilities, primarily vendor payables, of approximately $10,937,000 versus a
net increase in current assets, primarily trade accounts receivable offset by a
reduction in inventory, of approximately $2,605,000. The loss for the six months
of $8,607,000 was partially offset by depreciation and amortization of
$4,576,000. The operating cash flow results for the first six months of fiscal
1996 were due primarily to changes associated with the acquisitions of
Wilmington and Pittsburgh.
Cash Flows - Investing Activities
The Company spent $680,000 in the first six months of 1997 for capital
expenditures and $1,061,000 for other long term assets. During that same period
the Company sold an airplane held for resale for $1,240,000. The investing cash
flow results for the first six months of fiscal 1996 included capital
expenditures of $282,000.
Cash Flows - Financing Activities
During the first six months of 1997 the Company made net reductions of debt
obligations of $3,389,000 including $1,686,000 of current debt and $1,703,000 of
long-term debt. The financing results for the first six months of fiscal 1996
included debt reductions of $226,000.
15
<PAGE> 16
Capital Resources
Through its acquisitions the Company has banking relationships with several
banks; however, the Company is seeking to consolidate its borrowing and increase
its borrowing capacity with one or more large financial institutions following
the Annual Meeting of Shareholders.
Capital Requirements
During 1997, the Company expects that its requirements for capital expenditures
will not be significant. Through route consolidations and greater use of
in-store service personnel, the Company anticipates minimal increases in its
delivery fleet. The Company does anticipate additional expenditures for store
fixtures; however, these fixture increases have historically generated enough
additional revenue and gross margin to pay for the fixture costs within one
year.
Operational Measures
The receivables of the Company and its Acquisition Parties increased during the
first six months of 1997 due to an increase in payment time periods by certain
large retailers. This increase in receivables was offset by a corresponding
increase in trade payables. The Company has centralized and consolidated its
chain collection efforts to improve future cash flow by reducing the number of
days outstanding of receivables.
In addition, through the Company's SMARTS System (which stands for Sales
Magazine Analysis React Transmit System) and related inventory management and
purchasing consolidation efforts, the Company has begun to reduce the amount of
inventory required to maintain current sales levels. During the quarter
ended March 29, 1997, the Company increased the amount of magazine and book
returns for vendor credit. This caused a decrease in the amount of estimated
reserve for the gross margin on future returns. The Company anticipates a
continuation of this effort during the balance of 1997.
Operating Synergies
The acquisition transactions will enable the Combined Company to successfully
leverage its investment in its sophisticated and proprietary SMARTS System,
acquired from the Scherer Affiliates, for more efficient product allocation and
higher per store revenue. The SMARTS System develops a Distribution Rate Base
("DRB") which is used by publishers to reach targeted customer growth. The
Company charges for the use of the DRB information, and this offsets the cost of
higher levels of service and the use of improved technology. Management believes
that, as the Combined Company continues to expand, the SMARTS System, which
provides a unique competitive advantage, will improve same store revenue as it
is introduced to new retail locations, and it will provide a critical
competitive advantage over other regional wholesalers in obtaining important new
accounts.
In addition to the proprietary SMARTS System, the Combined Company's current and
future high impact marketing programs provide an important competitive advantage
by customizing magazine displays to utilize otherwise wasted space in retail
stores. The implementation of these programs has historically enabled the
Company to improve a specific retail location's sales level by as much as 20-25%
when the program is introduced into the retail location. The Company expects
that the introduction of the high impact marketing program to Acquisition
Parties customers locations not currently using it will improve sales levels of
the Combined Company.
16
<PAGE> 17
Through the consolidation of the contiguous Acquisition parties, management
expects the Combined Company to achieve considerable cost savings and operating
efficiencies through the elimination of redundant overhead and the consolidation
of overlapping facilities. Duplicate administrative and distribution functions
can be eliminated, and the costs and benefits of technology can be spread over a
larger customer base. Additionally, the consolidation of the businesses of the
Company and the Acquisition Parties should increase purchasing power and the
ability to negotiate favorable quantity discounts with publishers and national
brokers.
Management continues to implement the consolidated staffing plan for the
Combined Company and expects significant employee reductions and labor cost
savings as the operations of the Acquisition Parties are systematically
consolidated in the quarters following the consummation of the proposed
transactions. The Company has terminated or sent notices of pending termination
to approximately 15% of the 1996 total initial full-time work force. The
consolidation process focused on Michigan during the quarter ended December 28,
1996 and Ohio during the quarter ended March 29, 1997. The consolidation of
Indiana is expected to be completed during the third fiscal quarter of 1997.
Commitments and Contingencies
The Company has entered into long-term contracts (generally three years) with
its larger chain customers. These contracts resulted in gross margin
reductions in the latter half of fiscal 1996 and the first six months of 1997.
The Company has been named as a defendant in various litigation matters.
Management intends to vigorously defend these outstanding claims. The Company
believes it has an adequate accrual for these claims and that any current
pending or threatened litigation matters will not have a material adverse impact
on the Company's results of operations or financial conditions.
Financing Arrangements
Each of the Exchange Agreements contemplates that stock or assets of the various
Acquisition Parties will be contributed to the Company in exchange for Common
Stock of the Company, valued at $15.00 per share (Post-Split), and for Senior
and Subordinated Debentures. The Company has entered into a Debenture Agreement
(the "Debenture Agreement") with the Stoll Shareholders, the Michiana
Shareholders, the Klein Shareholder, the OPD Shareholders, the Scherer
Shareholders and other Scherer Affiliates pursuant to which the Debentures are
being issued. In addition, the Company anticipates issuing a $4,500,000
Subordinated Debenture and a cash payment of $500,000 in exchange for a
$5,000,000 note owned by OPD to KDR Limited, an Ohio limited liability company
whose owners include R. David Thomas, a principal shareholder of the Company,
and R. L. Richards, a director nominee. In connection with this transaction the
Company anticipates the purchase of an additional $500,000 of common stock by R.
David Thomas. The Company also will issue $242,211 of Senior Debentures and
$94,594 of Subordinated Debentures in connection with the acquisition of
Read-Mor.
The Senior Debentures are designated as "8% Senior Debentures Due 2002", mature
on January 1, 2002, and bear interest at the rate of 8% per annum from July 1,
1996, provided, however, that Senior Debentures issued pursuant to the Klein
Exchange Agreement will begin to accrue interest from August 24, 1996. Interest
is payable quarterly on January 1, April 1, July 1 and October 1, commencing on
the date of final closing of a particular acquisition. Principal on the Senior
Debentures will be paid quarterly on each interest payment date in accordance
with the schedule and priority set forth in the Debenture Agreement, commencing
on the date of final closing of a particular acquisition.
17
<PAGE> 18
The Subordinated Debentures are designated as "10% Subordinated Debentures Due
2004", mature on January 1, 2004 and bear interest at the rate of 10% per annum
from July 1, 1996, provided, however, that Subordinated Debentures issued
pursuant to the Klein Exchange Agreement will begin to accrue interest from
August 24, 1996. Interest is payable quarterly on January 1, April 1, July 1 and
October 1, commencing on the date of final closing of a particular acquisition.
Principal on the Subordinated Debentures is to be paid quarterly on each
interest payment date in accordance with the schedule and priority set forth in
the Debenture Agreement, commencing on April 1, 1999.
The Debenture Agreement pursuant to which the Senior and Subordinated Debentures
are being issued to the Acquisition Parties requires the Company to use its best
efforts to refinance the Senior Debentures, which are expected to aggregate
approximately $39,920,000. In connection with such refinancing, the Company has
engaged Bank of Boston as financial advisor to the Company's Board of Directors.
Bank of Boston has been requested to provide fee based services in connection
with the development of a financing restructuring for the transactions and with
the related placement of debt and/or equity securities. The Company has had
discussions with several different entities, introduced to the Company by Bank
of Boston, interested in providing such financing. The Company has received a
signed letter of intent from Bain Capital, Inc. to provide such financing,
subject to certain terms and conditions and subject to due diligence; however,
the Company has not received a financing commitment nor reached agreement
regarding such financing.
The Company also plans to restructure existing Company and Acquisition Parties
bank and third party debt and to consolidate banking relationships. The Company
further plans to expand bank lines of credit to support working capital and
other requirements of the Combined Company. The Company has had discussions
with several different entities interested in providing such financing to the
Combined Company. At present, the Company has not entered into any new debt
and/or equity placements through the Bank of Boston or through any other
financial adviser in connection with the transactions.
Inflation
The impact of inflation on wholesale and retail operations is difficult to
measure. The Company cannot easily pass magazine costs on to customers unless
the publisher increases the cover price of the periodical, so it must control
inflation at the point of purchase. The Company is engaged in activities to
control these costs. As a result, the Company believes that the effect of
inflation, if any, on the results of operations and financial condition has been
minor and is expected to remain so in the future.
Seasonality
The sale of magazines, books, and newspapers is subject to minimal seasonality.
18
<PAGE> 19
Private Securities Litigation Reform Act of 1995 - Safe Harbor Cautionary
Statement
This report contains forward looking statements as defined by the Private
Securities Litigation Reform Act of 1995 (the Reform Act). These
forward-looking statements express the beliefs and expectations of management
regarding UNIMAG's future results and performance and include, without
limitation, the following: statements concerning the Company's outlook for the
balance of 1997; the Company's plans for the acquisition transactions to be
voted on at the next Annual Meeting of Shareholders; the Company's plans for
revenue growth and operational cost reductions; the Company's plans for future
consolidations and changes in properties; the Company's plans for future
financing and refinancing; the Company's future operational strategies to
improve operating cash flow and other similar expressions concerning matters
that are not historical facts.
Such statements are based on current expectations and involve a number of known
and unknown uncertainties that could cause the actual results, performances,
and/or achievements of the Company to differ materially from any future
results, performances, and/or achievements of the Company expressed or implied
by the forward-looking statements, and any such statement is qualified by
reference to the following cautionary statements. In connection with the safe
harbor provisions of the Reform Act, the Company's management is hereby
identifying important factors that could cause actual results to differ
materially from management's expectations including, without limitation, the
following: delays in the date of the Annual Meeting of Shareholders; the
ability to obtain required levels of product for all geographic markets; the
acquisition or disposition of additional entities; the ability of the Company
to obtain financing and refinancing; the timing of the implementation of
operating synergies; and further changes in and other risks described from time
to time in the Company's Securities and Exchange Commission filings. The
Company undertakes no obligation to publicly release any revisions to these
forward looking statements for events occurring after the date hereof or
reflect any other unanticipated events.
19
<PAGE> 20
PART II. OTHER INFORMATION AND SIGNATURES
Item 1. LEGAL PROCEEDINGS
-----------------
Except as set forth below, there have been no material developments in
legal proceedings involving either the Company or its subsidiaries since the
filing of the Company's Form 10-QSB for the Fiscal Quarter Ended December 28,
1996.
None
Item 2. CHANGE IN SECURITIES: None
---------------------
Item 3. DEFAULT UPON SENIOR SECURITIES: None
-------------------------------
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS:
----------------------------------------------------
None
Item 5. OTHER INFORMATION:
------------------
None.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K:
---------------------------------
None
20
<PAGE> 21
SIGNATURES:
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UNITED MAGAZINE COMPANY
Registrant
/S/ RONALD E. SCHERER
---------------------
Ronald E. Scherer
President and Chief Executive Officer
/S/ THOMAS L. GERLACHER
-----------------------
Thomas L. Gerlacher
Chief Financial Officer
21
<TABLE> <S> <C>
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<NAME> UNITED MAGAZINE COMPANY
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<FISCAL-YEAR-END> SEP-27-1997
<PERIOD-START> DEC-29-1996
<PERIOD-END> MAR-29-1997
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<CASH> 714,166
<SECURITIES> 278,563
<RECEIVABLES> 43,545,075
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<OTHER-SE> 52,651,340
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