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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
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X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ----- EXCHANGE ACT OF 1934
For the fiscal year ended September 28, 1996
or
- ----- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
- --------------------------------------------------------------------------------
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
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, Without Par Value
-------------------------------
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 by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. X
---
The aggregate market value of the voting stock held by non-affiliates
of the Registrant as of February 1, 1997, was $19,220,166. There is no active
trading market in the Registrant's shares, and this value is based upon an
agreed upon valuation for the Registrant's shares in a recent acquisition
agreement.
The Registrant's revenues for the fiscal year ended September 28, 1996
are $80,232,472.
The Registrant's number of common shares, without par value,
outstanding as of February 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.
Documents Incorporated By Reference
-----------------------------------
Portions of the Registrant's Preliminary Proxy Statement dated February
1997 for the 1997 Annual Meeting of Shareholders are filed as Exhibit 99 to this
Form 10K-SB.
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UNITED MAGAZINE COMPANY
FORM 10-KSB
FOR THE FISCAL YEAR ENDED SEPTEMBER 28, 1996
INDEX
PAGE NUMBER
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PART I.
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ITEM 1. - BUSINESS 1
ITEM 2. - PROPERTIES 5
ITEM 3. - LEGAL PROCEEDINGS 5
ITEM 4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 5
PART II.
- --------
ITEM 5. - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED 6
STOCKHOLDER MATTERS
ITEM 6. - SELECTED FINANCIAL DATA 7
ITEM 7. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF 8
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 8. - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 17
ITEM 9. - DISAGREEMENTS ON ACCOUNTING AND FINANCIAL 44
DISCLOSURE
PART III.
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ITEM 10. - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 45
ITEM 11. - EXECUTIVE COMPENSATION 45
ITEM 12. - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL 45
OWNERS AND MANAGEMENT
ITEM 13. - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 49
PART IV.
- --------
ITEM 14. - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND 50
REPORTS ON FORM 8-K
SIGNATURES 54
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PART I
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ITEM 1. BUSINESS
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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 year ended September
28, 1996 were conducted through its consolidated subsidiaries and also include
the partial-year impact of the five business combinations in the fourth quarter
of 1996 more fully discussed below. The operations for the year ended September
28, 1996 were conducted through its consolidated subsidiaries as follows:
Service News Company of Connecticut, doing business as Yankee News Company
(Yankee) was owned for 12 months. Service News Company of Wilmington, North
Carolina ("Wilmington") was operated under a management agreement for three
months and was owned for nine months. Triangle News Company, Inc., a
Pennsylvania corporation, (Triangle) was owned for nine months. Reader's Choice
(RC) was owned for nine months and 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.
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".
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Effective July 29, 1996, the Company entered into an Asset Transfer and Exchange
Agreement with Northern, pursuant to which the Company is to acquire 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 will 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 will 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
will 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 is to
acquire substantially all of the assets and assume substantially all of the
liabilities of that company that 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 will 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 will 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. If the shareholders vote 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 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. Sportstuff Marketing, Inc. (SSM)
was a wholesale distributor of sports apparel products and operated one sports
apparel retail outlet. Team Logos Sportstuff, Inc. (TLSI) previously owned and
operated sports apparel retail stores. UNIMAG I, Inc. (UNIMAG I), a wholly-owned
subsidiary of TLSI, previously held certain intangible assets related to the
franchise operations of TLSI. Imperial News Co., Inc. (Imperial), previously
engaged in the wholesale magazine and book distribution business, has been in
bankruptcy since 1991, and has no material assets.
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1. BUSINESS OF SERVICE NEWS COMPANY OF CONNECTICUT (YANKEE)
UNIMAG's wholly-owned subsidiary, Service News Company of Connecticut (Yankee)
acquired the operating net assets of Yankee from MDI, L.P. on May 24, 1993.
Yankee is headquartered in a 34,000 square foot facility leased for
approximately $96,000 per year, located in Waterbury, Connecticut. From this
facility Yankee distributes magazines, books, newspapers and various sundry
items to retailers who sell to customers in the Connecticut market. Yankee also
operates four retail "Newsrack" outlets which sell magazines, newspapers, and
related products and operates one retail bookstore. During fiscal 1995 Yankee
generated approximately 99% of UNIMAG's net sales, and during fiscal 1996 Yankee
generated approximately 33% of net sales during twelve months of operations.
2. BUSINESS OF SERVICE NEWS COMPANY OF WILMINGTON
Service News Company of Wilmington (Wilmington), acquired on January 13, 1996,
is headquartered in a 20,000 square foot facility located in Wilmington, North
Carolina. From this location, Wilmington distributes magazines, books and
various sundry items to retailers who sell to customers primarily in eastern
North Carolina. During fiscal 1996 Wilmington generated approximately 7% of
UNIMAG's net sales during nine months of operations.
3. BUSINESS OF TRIANGLE NEWS COMPANY, INC.
Triangle News Company, Inc. (Triangle), acquired on January 23, 1996, is
headquartered in a 62,400 square foot facility located in Pittsburgh,
Pennsylvania. From this location, Triangle distributes magazines, newspapers,
books and various sundry items to retailers who sell to customers in western
Pennsylvania, West Virginia, and eastern Ohio. During fiscal 1996 Triangle
generated approximately 22% of UNIMAG's net sales during nine months of
operations.
4. BUSINESS OF MICHIANA, STOLL, KLEIN, READ-MOR AND SCHERER AFFILIATES
The business of Michiana, Stoll, Klein, Read-Mor and Scherer Affiliates is the
wholesale distribution of magazines, books, newspapers and various sundry items
and the operation of related retail locations throughout the Midwest and
predominately in Ohio, Michigan, and Indiana. This business is described in
greater detail in the Company's Proxy Statement for the 1997 Annual Meeting of
Shareholders. During fiscal 1996 these companies generated approximately 37% of
UNIMAG's net sales during the periods of their ownership.
5. BUSINESS OF READER'S CHOICE, INC. (RC)
Reader's Choice, Inc. (RC), established in October, 1984, was acquired on April
11, 1995 and sold during July of 1996 . RC was engaged in the business of
managing and reporting information on retail display allowances and collecting
these allowances which were paid by publishers to retailers. For these
management services RC received a percentage of the allowances collected on
behalf of the retailers. The operations of RC were not significant, and the sale
did not have a material effect on the Company.
6. BUSINESS OF SPORTSTUFF MARKETING, INC.
Sportstuff Marketing, Inc., established in March, 1993, was engaged in the
wholesale distribution of sports apparel merchandise and services, primarily to
major grocery and pharmaceutical chains. In March, 1995, SSM ceased all
wholesaling of sports apparel merchandise. SSM is currently inactive.
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7. BUSINESS OF TEAM LOGOS SPORTSTUFF, INC. AND UNIMAG I
Team Logos Sportstuff, Inc. (TLSI) and its subsidiary UNIMAG I, both established
in July, 1992, were engaged in the business of owning and franchising retail
sports apparel stores throughout the country. During the fiscal year ended
October 2, 1993 TLSI closed all remaining retail locations, and UNIMAG I
deactivated its franchising operations. The closing of the TLSI-owned retail
stores resulted in TLSI owing vendors approximately $1,400,000 in trade
payables. Since that time, TLSI has reached settlement terms with most vendors
and is currently inactive except for the winding down of final business
activities.
8. ADDITIONAL INFORMATION
Additional information is incorporated by reference from the sections entitled
"The Company and the Combined Company -- Business, Combined Revenues, Employees,
Products, Suppliers and Pricing, Distribution Systems, Marketing and Sales, the
SMARTS System, Customers and Competition" contained in the Company's Preliminary
Proxy Statement filed in February 1997 for its 1997 Annual Meeting of
Shareholders which is filed as Exhibit 99 to this Form 10-KSB.
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ITEM 2. PROPERTIES
- -------------------
Additional information on the Company's properties is incorporated by reference
from the section entitled "The Company and the Combined Company -- Facilities"
contained in the Company's Preliminary Proxy Statement filed in February 1997
for its 1997 Annual Meeting of Shareholders which is filed as Exhibit 99 to this
Form 10-KSB.
ITEM 3. LEGAL PROCEEDINGS
- -------------------------
See Note 13 of the United Magazine Company consolidated financial statements as
of September 28, 1996 included in Item 8 of this report which is incorporated
herein by reference.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- -----------------------------------------------------------
There were no matters submitted to a vote of security holders during the fourth
quarter of the 1996 fiscal year covered by this report.
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PART II
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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
- ----------------------------------------------------------
A. PRICE RANGE OF COMMON SHARES OF UNIMAG
The common shares of UNIMAG were previously traded in a very limited local
over-the-counter market. However, there is currently no established public
trading market for this class of common equity, which is the only class of
equity securities of the Company. During the fiscal year 1996 the Company had
transactions at the following prices, all at values before the anticipated one
for ten reverse split to be effective after the 1997 Annual Meeting of
Shareholders. The 100,000 shares issued in connection with the Pittsburgh
(Triangle) transaction in January of 1996 were valued for accounting purposes at
$.91 per share. All of the shares to be issued in connection with the
acquisition of Michiana, Stoll, Scherer Affiliates and Klein were valued in the
acquisition agreements at $1.50 per share. This value was determined through the
fairness opinion issued by Bank of Boston. The shares to be issued to MDI, L. P.
under terms of the Company's agreement were valued in the agreement at $1.00 per
share through June 28, 1996 and were valued at $1.50 per share after June 28,
1996. The foregoing should not be taken as an indication of the value of the
shares or the price at which the Company's shares may be purchased or sold
should a trading market develop or should a holder desire to sell shares through
other means
B. SHAREHOLDERS
As of February 1, 1997, UNIMAG had 2,887 shareholders of record.
C. DIVIDENDS
There were no dividends declared or paid by UNIMAG during fiscal years 1996 or
1995. The Company does not anticipate declaring or paying a dividend in the
foreseeable future, and it expects to use future available funds for the growth
and development of the business.
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ITEM 6. SELECTED FINANCIAL DATA
- --------------------------------
The following selected historical financial data of UNIMAG should be read in
conjunction with UNIMAG's consolidated financial statements and notes thereto
(see Item 8). All per share data reflects the anticipated one for ten reverse
split effective at the Annual Meeting of Shareholders.
<TABLE>
<CAPTION>
UNIMAG Fiscal Year Ended
----------------------------------------------------------------------------
(in 000's except gain (loss) per
share) 1996 (1) 1995 (2) 1994 (3) 1993 (4) 1992 (5)
- --------------------------------------- ------------ -------------- ---------------- -------------- ----------------
<S> <C> <C> <C> <C> <C>
Consolidated income statement data:
Net sales $ 80,232 $24,562 $24,687 $10,857 $ 2,315
Income(loss)from
continuing operations
before taxes and extra-
ordinary items $ (6,388) $ 1,864 $ (892) $(6,511) $(3,678)
Weighted average
shares outstanding 3,226 2,390 2,151 2,064 1,738
Net income (loss) per
share from continuing
operations before extra-
ordinary items $ (1.98) $ .78 $ (.41) $ (3.15) $ (2.12)
Consolidated balance sheet data:
Total assets $251,371 $12,334 $ 8,502 $ 9,753 $10,436
Long-term debt obligations $ 64,401 $ 138 $ 688 $ 400 $ 1,211
Stockholder's Equity per share
including putable shares $ 9.33 $ 2.25 $ .02 $ .19 $ 3.17
<FN>
(1) Includes Yankee for a full year, Readers Choice from September 29, 1995
through June 30, 1996, UNIMAG's investment in Wilmington from September 29, 1995
through December 30, 1995, Wilmington's operations from December 31, 1995
through September 28, 1996, Pittsburgh's operations from December 31, 1995
through September 28, 1996, the operations of Michiana, Stoll, Read-Mor and
Scherer Affiliates from July 28, 1996 through September 28, 1996 and Klein
operations from September 14, 1996 through September 28, 1996.
(2) Includes Reader's Choice, Inc. from April 11, 1995 through September 30,
1995, UNIMAG's investment in Wilmington from April 5, 1995 through September 30,
1995, and other subsidiaries for a full year.
(3) Includes all then-existing subsidiaries for a full year.
(4) Includes TLSI for a full year; SNC doing business as Yankee News Company
from May 24, 1993 to October 2, 1993; SSM from March, 1993 to October 2, 1993;
CRI through March 12, 1993; and SNC's investment in MDI L.P.
through May 24, 1993.
(5) Includes a full-year of CRI and SNC's Investment in MDI L.P. and two months
of TLSI.
</TABLE>
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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RESULTS OF OPERATIONS OF UNIMAG FOR THE YEARS ENDED SEPTEMBER 28, 1996 AND
SEPTEMBER 30, 1995
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INTRODUCTION
The Company, through its subsidiaries, currently operates wholesale periodical
distribution operations primarily in central Connecticut, eastern North
Carolina, and western Pennsylvania. Additionally, through the recent
acquisitions, the Company has added to its current operations the wholesale
periodical distribution operations of Stoll, which distributes primarily in
central Indiana, northwestern Ohio and southern Michigan, the wholesale
periodical distribution operations of Michiana, which distributes primarily in
southern Michigan, northern Indiana and western Ohio, the wholesale periodical
distribution operations of Klein, which distributes primarily in northern Ohio,
and the wholesale periodical distribution operations of OPD, MacGregor,
Northern, Wholesalers and Scherer Companies, which distribute in central and
southern Ohio and northern Michigan. The Company also acquired and operates
retail bookstores in connection with these operations.
Following the proposed transactions, the Combined Company will emerge as the
dominant wholesale periodical distribution company in Ohio, Indiana, Michigan
and western Pennsylvania, with an estimated market share for that region of
greater than 50%. This market dominance is expected to strengthen the
Acquisition Parties' existing relationships with customers and suppliers and to
enable the Combined Company to successfully compete with other regional
wholesalers for major retail accounts.
BACKGROUND
The periodical wholesale distribution industry has undergone significant
consolidation during the past year. Prior to this period of consolidation,
wholesale periodical distributors historically operated in defined geographic
territories without much competition from other wholesalers due to the
difficulty and cost of distributing in another wholesaler's territory. Within
the past year, large retailers have begun to consolidate vendor relationships
with larger suppliers so that the retailers are acquiring periodicals from one
or a few wholesalers for all of their retail locations rather than from separate
wholesalers in each geographic area where a retail location is based. As a
result, the industry has rapidly evolved from a supplier based push distribution
system to a consumer based pull allocation system. This has resulted in a
smaller number of wholesalers distributing within many geographic locations and
in more direct competition for retail business. As a result, a number of small
wholesalers have been unable to remain in business. Gross margins have decreased
as more price competition has occurred, and a number of wholesalers are
affiliating or otherwise consolidating their operations to reduce duplicative
operating expenses to compete effectively for large retail accounts while
providing additional value-added services to the retailers.
The wholesale periodical distribution industry is poised for additional
significant consolidation over the next few years. Management believes that the
consolidation of the Company and the Acquisition Parties will significantly
reduce both fixed and variable costs once the consolidation of operations is
complete. It is anticipated that these cost reductions will act to offset
decreasing margins and greater pricing pressures and will increase the ability
of the enterprises comprising the Combined Company to compete more effectively.
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Although there are currently approximately 60 wholesalers who are marketing
periodicals in the United States, management believes that, within five years,
the wholesale periodical distribution industry may be dominated by fewer than
ten companies across the United States as smaller, local wholesalers continue
consolidating with larger and financially stronger regional wholesalers. As a
result of these continued consolidation trends, management believes that some
additional acquisition opportunities will become available over the next 12 to
24 months. Management believes that the anticipated size of the Combined Company
will permit it to take advantage of these acquisition opportunities better than
the Company alone would otherwise be able to accomplish.
INDUSTRY OVERVIEW
The $4 billion wholesale periodical distribution industry in North America is
comprised of approximately 60 regional and local wholesalers operating out of
approximately 300 distribution locations. Management believes that these 60
wholesalers account for approximately 97.5% of all magazines purchased by
consumers in retail outlets such as newsstands, drug stores, convenience stores,
discount variety stores and grocery stores. The wholesale periodical
distribution industry is highly fragmented and regionalized. However, there has
been significant consolidation activity driven by major retailers' desire to
consolidate their vendor relationships and by the desire of many local
wholesalers to take advantage of the favorable economics available to larger
regional wholesale organizations by consolidating with neighboring wholesalers.
It is estimated that the five largest wholesaler groups in the country account
for approximately 60% of magazine sales and the ten largest account for
approximately 80%. In addition to these ten large wholesalers, there are
approximately 50 small and mid-size independent wholesalers making up the
balance of the markets served in the United States.
Based upon industry information, management of the Company believes that the
wholesale periodical distribution industry has grown approximately five percent
(5%) per year for the last several years. Management believes that the continued
growth of the industry depends upon the following factors:
1. The magazine publisher's ability to continue to provide newsworthy or
entertaining publications to consumers;
2. The publishers' and wholesalers' ability to maintain a profit structure
appealing to the retailers;
3. Improvement in the efficiency and accuracy of product allocation to
capitalize on the impulse nature of the purchase decision and to optimize
sales; and
INDUSTRY TRENDS
Historically, the wholesale periodical distribution industry has not been
characterized by significant competition. Because publishers and retailers have
recognized the favorable economics of local distribution, they have supported
the exclusive territories that have evolved over time, minimizing competition
from neighboring local or regional wholesalers. Recently, however, these
barriers have begun to break down leading to a more competitive environment as a
result of the following trends:
- - Vendor Consolidation Efforts of Large Retailers. Many national
retailers such as Wal-Mart have begun consolidating the number of suppliers from
which they purchase in an effort to streamline their purchasing process. This
change in purchasing behavior has been driven, among other reasons, by the
retailers' demands for chain-wide or divisional billing to minimize their
administrative costs, by
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standardization of improved service levels, and by an opportunity to improve
profitability. This trend has begun to eliminate the traditional regional
barriers that have existed in the industry for decades and has shifted the
emphasis of the wholesaler/retailer relationship from the local level to the
corporate or regional level. Although a regional wholesaler can, in the short
run, increase sales by establishing a relationship with a large retailer, it
becomes more difficult for that wholesaler to service far reaching locations of
the large retailers in a profitable manner. Consequently, the regional
wholesaler must unite with the local or other regional wholesalers serving those
far reaching territories either through joint ventures or consolidations in
order to optimize delivery efficiency and long term profitability.
- - Industry Consolidation. The industry recently has undergone
considerable consolidation for several reasons. Because they must operate under
the constraints of a price ceiling established by the publishers, successful
wholesalers have concentrated on cost cutting measures in order to remain
competitive. Through mergers and consolidations with competitors in neighboring
regions, local wholesalers have been able to achieve significant cost savings
and economies of scale in their distribution operations by consolidating
distribution plants and eliminating redundant overhead.
- - Marketing Initiatives with Retailers. As "direct store delivery" vendors,
periodical wholesalers are responsible for determining the most effective way to
market their products in a particular retail location. Wholesalers'
merchandising decisions typically rely upon information derived from knowledge
of buying habits of consumers, distribution and return records by title and
issue of each magazine, and other related information for each retail location.
This historical information is kept in a database known as "Order & Regulation
Records" which is owned and maintained by the wholesaler. It enables the
wholesaler to electronically monitor and evaluate the historic distribution
information for greater efficiency and profit.
- - Technology Initiatives with Retailers. In addition to maintaining Order &
Regulation Records, the most successful wholesalers, including the Company, have
used other tools to work with retailers to increase sales and profitability of
periodicals. These include "Electronic Data Interchange" and "Efficient Consumer
Response". Electronic Data Interchange uses bar codes and UPC codes in
conjunction with sophisticated scanning systems to track the movement of
periodicals between the wholesaler and retailer as well as control the billing
process throughout the distribution chain. Efficient Consumer Response is a real
time analysis tool that assists the wholesaler in tracking the retailers'
periodical sales within a given month. It enables the wholesaler to manage the
allocation of products within a given month and replenish or re-deploy in store
inventory where needed.
- - Process Automation. The periodical distribution process involves a
significant amount of labor for activities such as sorting, scanning, loading
and unloading trucks and shredding returned periodicals. Consistent with such a
business model, labor costs represent one of the largest operating expenses of
most wholesalers. In an effort to reduce overhead expenses, wholesalers have
increasingly sought to automate the handling of the magazines they distribute
through the acquisition and development of more sophisticated and integrated
machinery and equipment.
- - Department of Justice. There has been an investigation of the
magazine distribution industry by the Antitrust Division of the U.S. Department
of Justice. The investigation originated in the Northwest Office of the U. S.
Department of Justice in Cleveland, Ohio. The complete nature, target, and focus
of the investigation is unclear. To the knowledge of management, none of the
Acquisition Parties has been identified as a target of the investigation. Each
of the wholesaler Acquisition Parties has provided documents, and some of them
have provided deposition testimony. The current status of the investigation is
not known.
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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 $1.50 per share (pre-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 the
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 intends to 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 April 1, 1997.
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 final financing commitment nor reached a final
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 Companies. The Company has had discussions
with several different entities interested in providing such financing to the
Combined Companies. 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.
11
<PAGE> 14
REVIEW OF OPERATIONS
The results of operations for 1996 are not indicative of results from prior
years, nor are the results for 1996 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. In addition, UNIMAG had only one operating entity,
Yankee, reporting for the entire 12 months of fiscal 1996. In addition, UNIMAG
reported operations for nine months for Wilmington, Pittsburgh and Readers
Choice, two months for Michiana, Stoll, Read-Mor and Scherer Affiliates, and two
weeks for Klein.
The revenue for the Combined Company for the various periods of operations
reported for each of the entities in 1996 was $80,232,472, an increase of 227%
over 1995 revenue. This increase is primarily attributable to the inclusion of
revenues from the acquisition parties' companies during 1996 for the periods
included in the preceding paragraph.
In markets serviced by the Combined Company, the business of certain large
retail chains such as WalMart and K Mart was lost early in calendar 1996.
However, the Company obtained increases in new business from chains previously
serviced by other wholesalers not part of the Combined Company. Other increases
in new business came from the increased use of high impact marketing programs in
large retail customer locations. On a pro forma basis the revenues of UNIMAG
increased by 1.4% from 1995 to 1996.
The most significant development during 1996 was the reduction in revenue from
existing chain customers where new discounts, rebates and amortization of
signing bonuses caused a reduction in revenue without a corresponding reduction
in the related cost of the products for equivalent numbers of magazines sold. As
a result the Company realized less revenue per comparable magazine sold in 1996
versus 1995.
As a result of these reductions in revenue, the gross margin, as a percentage of
revenue, declined from 27.0 % in 1995 to 24.9% in 1996. This trend was not
unique to UNIMAG, as it was representative of changes throughout the entire
industry in 1996. The 2.1% decline in gross margin was attributable almost
totally to the discounting and rebating changes during 1996. The cost of product
to UNIMAG, as a percentage of the retail price to the customer, remained
relatively constant.
Selling, general and administrative expenses, as a percent of revenue, increased
by 1.5% to 27.7% in 1996 versus 26.2% in 1995. Included in this increase was
administrative cost increases in 1996 over 1995 of $1,049,000 for professional
fees. Payroll expenses, the largest operating expense component, increased in
1996 over 1995 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. The
reduction in revenue from discounts, rebates and amortization during 1996
reduced the comparative revenue base. Without this reduction in revenue, the
selling, general and administrative percent would have been 26.9% instead
of the 27.7% amount.
Depreciation and amortization expense increased due to the depreciation of fixed
assets acquired and to the amortization of goodwill relating to the several
business combinations in 1996. The acquisition of Triangle, Wilmington,
Michiana, Stoll, Klein, Read-Mor and Scherer Affiliates was accounted for
using purchase price
12
<PAGE> 15
accounting. Accordingly, goodwill was created in the amount of $153,935,000.
This goodwill is being amortized over 40 years.
All of these changes resulted in an increase in the net loss from operations to
6.1% of revenue in 1996 compared to 3.4% in 1995.
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 from July 1, 1996 for Michiana, Stoll, Read-Mor and Scherer Affiliates
and from August 24, 1996 for Klein. This increased interest expense for 1996 by
approximately $664,000. In addition, the Company incurred a noncash interest
charge of $525,000 for the accretion of shares subject to put agreements.
Because of the loss for the year and because of loss carryforwards, UNIMAG had
no federal income tax expense for 1996. The Company has a net operating loss
(NOL) of approximately $47,000,000 at September 28, 1996; however, the Company
has not recognized any benefits from that NOL through 1996.
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 as two shareholders holding more than 50% of the
shares of Common Stock of the Company have agreed to vote in favor of the split.
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 1996 was $(2,277,000) versus $2,741,000 for 1995. The 1996 EBITDA was
impacted negatively by the gross margin and payroll pressures during the period
of ownership, and the Company delayed the implementation of expected
consolidation synergies with the acquisition companies during the initial
periods of ownership until final consolidation plans could be made. The 1995
EBITDA was increased by $3,017,000 for non recurring favorable lawsuit
settlements and for other favorable debt settlements related to a now inactive
subsidiary.
The Company anticipates improvements in EBITDA in fiscal 1997 versus 1996 due to
reductions in selling, general and administrative expenses through consolidation
synergies.
13
<PAGE> 16
The acquisition transactions of the Company since June 30, 1996 have added $142
million of goodwill to the Company's assets and $58.5 million of Senior and
Subordinated Debentures to the Company's liabilities. On an annual basis the
Company anticipates future amortization of approximately $3,550,000 for this
goodwill and initial annual interest of approximately $5,050,000 related to
these transactions.
CASH FLOWS - OPERATING ACTIVITIES
During 1996 the Company experienced a decline in net cash provided from
operations of $(3,402,000) from $2,084,000 in 1995 to a deficit of $(1,318,000)
in 1996. The 1996 deficit is due primarily to the net loss of $6,388,000 for
1996; however, the Company also paid $2,002,000 to retailers in net long term
prepaid signing bonuses to be amortized over the lives of the contracts.
Both accounts receivable and accounts payable increased by approximately
$2,000,000. Other significant increases in cash flow from operations included
depreciation and amortization of $2,513,000 and an increase in accrued
liabilities, primarily related to payroll and professional fees, of $3,034,000.
During 1995 the cash provided from operations was attributable primarily to the
Prudential settlement. As discussed above, the Company is seeking financing to
address its working capital deficiencies.
CASH FLOWS - INVESTING ACTIVITIES
The Company spent $1,066,000 in 1996 for capital expenditures, primarily for
vehicles and retail display fixtures. The acquisition transactions did not
require the spending of any significant amounts for additional capital
expenditures since the acquired companies had adequate investments in capital
assets. During 1995 the Company spent $153,000 for capital expenditures,
purchased Readers Choice, Inc. for $495,000 and loaned Wilmington $500,000 in
connection with a purchase option.
CASH FLOWS - FINANCING ACTIVITIES
During 1996 the Company borrowed $4,352,000 under debt obligations. The Company
made payments of $1,724,000 under debt obligations for a net cash provided of
$2,628,000. During 1995 the Company issued common stock subject to put
agreements for $482,000, borrowed $125,000 and repaid $1,393,000 of debt
obligations.
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. See the discussions of "Financing
Arrangements" and "Liquidity" above.
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 capital expenditures for
store fixtures; however, these fixture increases have historically generated
enough additional revenue and gross margin to pay for the fixture costs with one
year.
14
<PAGE> 17
OPERATIONAL MEASURES
The receivables of the Company and its Acquisition Parties increased during 1996
due to an increase in payment time periods by certain large retailers. This
increase in receivables caused a corresponding increase in trade payables. The
Company is engaged in collection efforts to reduce the number of days
outstanding of receivables. In addition, through the Company's SMARTS system and
related inventory management and purchasing consolidation efforts, the Company
anticipates reducing the amount of inventory and the related vendor payables for
a given level of revenue.
OPERATING SYNERGIES
The acquisition transactions will enable the Combined Company to successfully
leverage its investment in its sophisticated and proprietary SMARTS System
(which stands for Sales Magazine Analysis React Transmit 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 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 sales levels by as much as 20-25% when the programs are
introduced into a given retail location. The Company expects that the
introduction of the high impact marketing program to Acquisition Parties not
currently using it will improve sales levels of the Combined Company.
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 is currently implementing 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 consolidated over the
next 12 months following the consummation of the proposed transactions. The
Company has terminated or sent notices of pending termination to approximately
15% of the total full-time work force at September 28, 1996.
COMMITMENTS AND CONTINGENCIES
The Company has entered into long-term contracts (generally three years) with
its most important customers. These contracts resulted in the gross margin
reductions of 1996.
15
<PAGE> 18
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. (See Note 13 to
the Consolidated Financial Statements.)
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.
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 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 acquisitions (as discussed in
"Background" above); the Company's plans for future consolidations and changes
in properties (as discussed in "Operating Synergies" above); the Company's plans
for future financing and refinancing (as discussed in "Financing Arrangements"
above); the Company's future operational strategies to improve operating cash
flow; statements incorporated by reference from the Company's Preliminary proxy
Statement 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 to differ materially from any
future results, performances, or achievements, 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; further changes in the industry; the factors discussed in paragraph
four of the Opinion in the Report of Independent Public Accountants and the
related Note 2 to the financial statements; 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.
16
<PAGE> 19
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ----------------------------------------------------
UNITED MAGAZINE COMPANY
=======================
CONSOLIDATED FINANCIAL STATEMENTS
---------------------------------
AS OF SEPTEMBER 28, 1996 AND SEPTEMBER 30, 1995
-----------------------------------------------
TOGETHER WITH AUDITORS' REPORT
------------------------------
17
<PAGE> 20
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of
United Magazine Company:
We have audited the accompanying consolidated balance sheets of United Magazine
Company (an Ohio corporation) and Subsidiaries as of September 28, 1996 and
September 30, 1995, and the related consolidated statements of operations,
shareholders' equity and cash flows for the years then ended. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of United Magazine
Company and Subsidiaries as of September 28, 1996 and September 30, 1995, and
the results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has suffered recurring operating losses, is
currently in default under certain of its acquired debt agreements, acquired
certain unpaid taxes due the Internal Revenue Service and has current
liabilities in excess of current assets of approximately $45 million. These
matters raise substantial doubt about its ability to continue as a going
concern. Management's plans in regard to these matters are also described in
Note 2. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty. The financial statements do not
include any adjustments relating to the recoverability and classification of
asset carrying amounts or the amount and classification of liabilities that
might result should the Company be unable to continue as a going concern.
ARTHUR ANDERSEN LLP
Columbus, Ohio,
January 13, 1997.
18
<PAGE> 21
<TABLE>
<CAPTION>
UNITED MAGAZINE COMPANY
-----------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
AS OF SEPTEMBER 28, 1996 AND SEPTEMBER 30, 1995
-----------------------------------------------
ASSETS 1996 1995
------ -------------- -------------
<S> <C> <C>
CURRENT ASSETS:
Cash $ 2,546,785 $ 755,338
Accounts receivable, net of allowance for doubtful accounts of
$2,985,000 in 1996 and $63,000 in 1995 29,835,357 2,869,762
Inventories 35,746,922 3,096,982
Marketable securities 473,556 --
Notes receivable from related parties 1,352,646 --
Prepaids and other 1,335,458 58,007
------------- ------------
Total current assets 71,290,724 6,780,089
------------- ------------
PROPERTY AND EQUIPMENT, at cost:
Land 290,706 --
Building and improvements 2,260,740 --
Furniture and equipment 6,174,452 590,068
Vehicles 4,789,336 479,628
Leasehold improvements 522,336 101,616
------------- ------------
14,037,570 1,171,312
Less - accumulated depreciation and amortization (1,585,503) (475,501)
------------- ------------
Total property and equipment, net 12,452,067 695,811
------------- ------------
ASSETS HELD FOR SALE 1,239,605 --
------------- ------------
INVESTMENT IN WILMINGTON:
Business option -- 3,202,672
Note and interest receivable from Wilmington -- 524,375
------------- ------------
Total investment in Wilmington -- 3,727,047
------------- ------------
OTHER ASSETS:
Sales orders and regulatory records, net of accumulated
amortization of $847,475 in 1996 and $593,236 in 1995 423,720 677,959
Costs in excess of net assets acquired, net of accumulated
amortization of $911,143 in 1996 and $153,965 in 1995 154,518,179 452,616
Covenants not to compete, net of amortization of $105,362
in 1996 538,777 --
Notes receivable from related parties 1,788,645 --
Prepaids 5,501,703 --
Other assets, net 3,617,107 --
------------- ------------
Total other assets 166,388,131 1,130,575
------------- ------------
Total assets $ 251,370,527 $ 12,333,522
============= ============
</TABLE>
(Continued on next page)
19
<PAGE> 22
<TABLE>
<CAPTION>
1
UNITED MAGAZINE COMPANY
-----------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
AS OF SEPTEMBER 28, 1996 AND SEPTEMBER 30, 1995
-----------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY 1996 1995
------------------------------------ -------------- --------------
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of debt obligations $ 10,822,386 $ 113,076
Current portion of Senior debentures 3,329,295 --
Short-term borrowings - related parties 6,206,853 --
Accounts payable 70,302,971 4,763,693
Accrued expenses 12,762,143 801,291
Accrued interest on debentures 1,041,006 --
Income taxes payable 1,534,602 --
Reserve for gross profit on sales returns 10,474,409 541,499
------------- ------------
Total current liabilities 116,473,665 6,219,559
LONG-TERM DEBT OBLIGATIONS 9,247,711 137,500
DEBENTURES:
- Senior 36,590,520 --
- Subordinated 18,559,707 --
DEFERRED COMPENSATION PLAN 1,231,041 --
ACCRUED PENSION OBLIGATION 2,115,478 --
POST-RETIREMENT OBLIGATION 1,450,015 --
DEALER ADVANCE PAYMENTS AND OTHER 146,938 38,750
------------ ------------
Total liabilities 185,815,074 6,395,809
------------- ------------
COMMITMENTS AND CONTINGENCIES
COMMON STOCK SUBJECT TO PUT AGREEMENTS, 482,140 shares
4,329,287 3,804,185
------------- ------------
SHAREHOLDERS' EQUITY:
Common stock, no par value, 53,250,000 shares authorized,
4,283,506 and 4,250,056 issued, and 2,676,034 and 2,642,585
outstanding (including shares subject to Put Agreements), in
1996 and 1995, respectively 250 250
Paid-in capital 43,079,563 42,701,846
Obligation to issue shares (4,349,476) 65,242,138 --
Treasury stock, at cost (16,998) (16,998)
Unrealized loss (31,219) --
Minimum pension liability adjustment (108,204) --
Retained deficit (46,939,365) (40,551,570)
------------- ------------
Total shareholders' equity 61,226,165 2,133,528
------------- ------------
Total liabilities and shareholders' equity $ 251,370,527 $ 12,333,522
============= ============
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these consolidated balance sheets.
20
<PAGE> 23
<TABLE>
<CAPTION>
UNITED MAGAZINE COMPANY
-----------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
FOR THE YEARS ENDED SEPTEMBER 28, 1996 AND SEPTEMBER 30, 1995
-------------------------------------------------------------
1996 1995
------------- ------------
<S> <C> <C>
NET SALES $ 80,232,472 $ 24,561,801
COST OF SALES (60,277,303) (17,918,114)
-------------- ------------
Gross profit 19,955,169 6,643,687
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (22,203,107) (6,426,601)
DEPRECIATION AND AMORTIZATION (2,511,654) (553,971)
INCOME (LOSS) FROM INVESTMENT IN WILMINGTON (163,192) 32,405
WRITE-OFF OF ASSETS -- (534,102
-------------- ------------
LOSS FROM OPERATIONS (4,922,784) (838,582)
-------------- ------------
OTHER INCOME (EXPENSES), net:
Interest expense (1,781,141) (347,809)
Interest income 182,123 25,103
Prudential settlement, net (Note 13.a.) -- 2,352,170
Accounts payable settlement gain -- 665,135
Other, net 134,007 8,163
-------------- ------------
Total other income (expenses), net (1,465,011) 2,702,762
-------------- ------------
INCOME (LOSS) BEFORE TAXES (6,387,795) 1,864,180
INCOME TAXES -- --
-------------- ------------
NET INCOME (LOSS) $ (6,387,795) $ 1,864,180
============== ============
WEIGHTED AVERAGE SHARES OUTSTANDING 3,225,729 2,390,318
============== ============
EARNINGS (LOSS) PER SHARE $ (1.98) $ .78
============== ============
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these consolidated statements.
21
<PAGE> 24
<TABLE>
<CAPTION>
UNITED MAGAZINE COMPANY
-----------------------
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
-----------------------------------------------
FOR THE YEARS ENDED SEPTEMBER 28, 1996 AND SEPTEMBER 30, 1995
-------------------------------------------------------------
Number of Obligation
Shares Treasury to Issue
Outstanding Shares Common Paid-in Common
(post-split) (post-split) Stock Capital Stock
------------ ---------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, October 1, 1994 2,139,199 1,606,413 $250 $ 42,467,355 $ --
Issuance of common stock 22,305 -- -- 223,046 --
Purchase of shares previously issued (1,059) 1,059 -- -- --
Shares earned under consulting
agreement:
- 22,315 shares previously issued
issued in 1995 -- -- -- (223,046) --
- 23,449 shares earned but not issued
issued in 1995 -- -- -- 234,491 --
Net income -- -- -- -- --
---------- --------- ---- ------------ -----------
BALANCE, September 30, 1995 2,160,445 1,607,472 250 42,701,846 --
Issuance of common stock 33,449 -- -- 325,491 --
Obligation to issue 4,349,476 shares
of common stock -- -- -- -- 65,242,138
Shares earned under consulting
agreement:
- 23 shares earned in 1995 issued
issued in 1996 -- -- -- (234,491) --
- 25,096 shares earned but not issued
issued in 1995 -- -- -- 286,717 --
Unrealized loss on investments held
for sale -- -- -- -- --
Minimum pension liability adjustment -- -- -- -- --
Net loss -- -- -- -- --
---------- --------- ---- ------------ -----------
BALANCE, September 28, 1996 2,193,894 1,607,472 $250 $ 43,079,563 $65,242,138
========== ========= ==== ============ ===========
Minimum
Pension
Treasury Unrealized Liability Retained
Stock Loss Adjustment Deficit Total
--------- ---------- ----------- ------------ ----------
BALANCE, October 1, 1994 $ -- $ -- $(42,415,750) $ 51,855
Issuance of common stock -- -- -- -- 223,046
Purchase of shares previously issued (16,998) -- -- -- (16,998)
Shares earned under consulting
agreement:
- 22,315 shares earned in 1994
issued in 1995 -- -- -- -- (223,046)
- 23,449 shares earned but not
issued in 1995 -- -- -- -- 234,491
Net income -- -- -- 1,864,180 1,864,180
------- -------- -------- ----------- -----------
BALANCE, September 30, 1995 (16,998) -- -- (40,551,570) 2,133,528
Issuance of common stock -- -- -- -- 325,491
Obligation to issue 4,349,476 shares
of common stock -- -- -- -- 65,242,138
Shares earned under consulting
agreement:
-23,449 shares earned in 1995
issued in 1996 -- -- -- -- (234,491)
-25,096 shares earned but not
issued in 1995 -- -- -- -- 286,717
Unrealized loss on investments held
for sale -- (31,219) -- -- (31,219)
Minimum pension liability adjustment -- -- (108,204) -- (108,204)
Net loss -- -- (6,387,795)
------- -------- -------- ----------- -----------
BALANCE, September 28, 1996 $(16,998) $ (31,219) $ (108,204) $(46,939,365) $61,226,165
======= ======== ======== =========== ===========
The accompanying notes to consolidated financial statements are an integral part of these consolidated statements.
</TABLE>
22
<PAGE> 25
UNITED MAGAZINE COMPANY
-----------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
FOR THE YEARS ENDED SEPTEMBER 28, 1996 AND SEPTEMBER 30, 1995
-------------------------------------------------------------
INCREASE (DECREASE) IN CASH
---------------------------
<TABLE>
<CAPTION>
1996 1995
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(6,387,795) $ 1,864,180
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities -
(Income) loss on investment in Wilmington 163,192 (32,405)
Consulting fee paid with common stock 286,717 234,491
Gain from settlement of accounts payable - (665,134)
Accretion of interest on common stock subject to put
agreements 525,102 238,161
Depreciation and amortization 2,512,574 553,971
Loss due to write-off of certain assets - 534,102
Changes in certain assets and liabilities, net of the effect of acquisitions
and investments- (Increase) decrease in certain assets:
Accounts receivable (2,017,379) (394,760)
Inventories (464,131) (7,146)
Prepaids and other current assets 496,841 (242,557)
Other assets (191,532) -
Long-term prepaids (2,002,379) -
Increase (decrease) in certain liabilities:
Accounts payable 2,053,805 6,912
Accrued expenses 2,924,386 (135,536)
Reserve for gross profit on sales returns 892,598 123,728
Dealer advance payments 108,188 5,525
Other liabilities (73,289) -
Deferred compensation (109,181) -
Accrued pension obligation (95,526) -
Post-retirement obligation 59,611 -
------------- -------------
Net cash provided by operating activities (1,318,198) 2,083,532
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (1,066,245) (153,480)
Cash (used) for acquisitions, net of cash acquired 1,200,069 (495,167)
(Issuance) of receipt of payment on notes receivable from
related parties 347,941 (500,000)
------------- ------------
Net cash used in investing activities 481,765 (1,148,647)
------------- ------------
</TABLE>
(Continued on next page)
23
<PAGE> 26
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
FOR THE YEARS ENDED SEPTEMBER 28, 1996 AND SEPTEMBER 30, 1995
-------------------------------------------------------------
INCREASE (DECREASE) IN CASH
---------------------------
(Continued)
<TABLE>
<CAPTION>
1996 1995
------------- -------------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under debt obligations $ 4,352,266 $ 125,000
Payments on debt obligations (1,724,386) (1,392,753)
Proceeds from issuance of common stock subject to put
agreements - 482,140
Buy-back of common stock - (16,998)
------------- -------------
Net cash provided by (used in) financing activities 2,627,880 (802,611)
------------- -------------
NET INCREASE IN CASH 1,791,447 132,274
CASH, beginning of year 755,338 623,064
------------- -------------
CASH, end of year $ 2,546,785 $ 755,338
============= =============
Supplemental Disclosure of Cash Flow Information
- ------------------------------------------------
Cash paid during the year for interest $ 532,000 $ 133,000
Cash paid during the year for taxes $ 49,000 $ 20,000
</TABLE>
Supplemental Schedule of Noncash Investing and Financing Activities
- -------------------------------------------------------------------
1996
- ----
The company made six significant acquisitions in 1996. In addition,
they disposed of an insignificant subsidiary. See Note 4 for additional
discussion.
1995
- ----
See Note 12 for discussion on common shares issued for the investment in
Wilmington.
The Company acquired approximately $545,500 of assets and assumed $45,500 of
liabilities through the acquisition of Reader's Choice, Inc.
The accompanying notes to consolidated financial statements are an integral part
of these consolidated statements.
24
<PAGE> 27
UNITED MAGAZINE COMPANY
-----------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
AS OF SEPTEMBER 28, 1996 AND SEPTEMBER 30, 1995
-----------------------------------------------
(1) ORGANIZATION
------------
United Magazine Company (UNIMAG or the Company) is an Ohio corporation
which was incorporated on April 8, 1964. UNIMAG (the Parent) is a holding
company. All operations for the year were conducted through its
wholly-owned subsidiaries. UNIMAG also has three inactive subsidiaries.
Business of UNIMAG
------------------
UNIMAG operates wholesale operations primarily in the northern midwest
(Ohio, Michigan, Northern Indiana and Western Pennsylvania), Connecticut
and North Carolina. From various distribution facilities UNIMAG
distributes approximately 3,500 different titles of magazines to its
customers on a weekly basis. UNIMAG also distributes books and various
other sundry items. In addition to the wholesaling business, UNIMAG has
31 retail bookstores. These retail operations generated approximately $3
million in revenue during fiscal 1996.
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 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 effect of the acquisitions.
(2) MANAGEMENT PLAN
---------------
Certain recent developments have had an adverse effect on the Company's
short-term liquidity. At September 28, 1996 the Company has current
liabilities in excess of current assets of approximately $45 million.
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.
Because of the delays in the
25
<PAGE> 28
final closing of the acquisition transactions, certain of the acquisition
companies are in default with their loans, and one of the acquisition
companies has an outstanding obligation to the Internal Revenue Service
of approximately $1.2 million. It is anticipated that the bank defaults
will not be cured until after the expected refinancing following the
Annual Meeting of Shareholders. Obligations in default have been
classified as current liabilities in the accompanying financial
statements.
The Company is pursuing several alternative forms of additional
financing. This additional financing includes approximately $40 million
to refinance the Senior Debentures and an approximate $25 million line of
credit to consolidate present bank borrowings and to provide additional
working capital. This financing alternative cannot be finalized until
after the Company's Annual Meeting of Shareholders scheduled for late
March, 1997 and there is no assurance that the Company will be able to
secure this financing.
The Company has a history of operating losses; however, the losses in
1992 through 1994 were from operations unrelated to the periodical
wholesale distribution industry. The Company's Connecticut wholesale
operations have operated profitably since 1993. The prior annual
financial statements of Michiana, Stoll, Scherer Affiliates and Klein
(the fourth quarter acquisitions) indicates profitable operations as
family businesses through 1995. During 1996 with the increased levels of
competition the entire industry experienced reductions in profitability
due to margin reduction and increased costs of providing higher levels of
customer service.
The Company plans to return to historical industry profit levels by the
end of 1998. Through the consolidation of the geographically contiguous
acquisitions, management expects the combined company to achieve
considerable cost savings and operating efficiencies through the
elimination of redundant overhead and the consolidation of overlapping
markets and facilities. Duplicate administrative and distribution
functions are being eliminated, and the costs and benefits of technology
are being spread over a larger customer base. Additionally, management
expects that 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. UNIMAG's pro forma annual sales for 1996 are $281 million which
management believes makes UNIMAG the fifth largest periodical wholesaler
in the country based on published sales volumes.
During the latter part of 1996 the Company began to consolidate its
distribution operations with a corresponding reduction in general and
administrative expenses. The Company will continue these consolidation
efforts in 1997 with further expense reductions from operating synergies.
During 1997 the Company plans to increase revenue per customer by the
implementation of proven high impact marketing in all newly acquired
locations and by utilization of the Company's proprietary SMARTS system
for more efficient and targeted distribution of product. The Company also
is engaged in negotiations with the publisher for better pricing.
26
<PAGE> 29
During 1997 the Company anticipates improved cash flow. In 1996, signing
bonuses were paid to certain customers to secure multi-year contracts. In
many cases, these contracts covered a period of three years. Hence, cash
outflows will be substantially less in 1997. In addition, 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 capital
expenditures for store fixtures; however, these increases in fixtures
have historically generated enough additional revenue and gross margin to
pay for the fixtures cost within one year.
The Company also is engaged in an effort to reduce the average days
outstanding of current accounts receivable and has negotiated with
suppliers for more favorable payment terms on vendor payables.
In summary, the Company believes that its current strategic plan will
produce a new financial partner and positive cash flow. There can be no
assurance that this plan will succeed. The financial statements do not
include any adjustments that might result from the outcome of this
uncertainty. The financial statements do not include any adjustments
relating to the recoverability and classification of asset carrying
amounts or the amount and classification of liabilities that might result
should the Company be unable to continue as a going concern.
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
(a) FISCAL YEAR - UNIMAG follows the practice of a 52/53 week fiscal
year which ends on the Saturday nearest to September 30.
(b) PRINCIPLES OF CONSOLIDATION - All intercompany balances and
transactions have been eliminated in the consolidated financial
statements.
(c) ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles requires management
to make estimates and assumptions, such as allowance for doubtful
accounts and the reserve for gross profit on sales returns, that
affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ
from their estimates.
(d) INVENTORIES - Inventories are valued at the lower of cost or market
as determined by the first-in, first-out (FIFO) cost method.
27
<PAGE> 30
(e) PROPERTY AND EQUIPMENT - Property and equipment are stated at cost
or acquired cost (fair value) after acquisition. Depreciation is
provided on the straight-line method over the estimated useful
lives of the related assets as follows:
Years
--------
Building 31
Building improvements 10
Furniture and equipment 5-7
Vehicles 3-5
Leasehold improvements are being amortized on a straight-line basis
over the life of the lease.
The cost and accumulated depreciation and amortization applicable
to assets retired are removed from the accounts and any resulting
gain or loss on disposition is recognized in income. Betterments,
renewals and extraordinary repairs that extend the life of the
asset are capitalized; other maintenance and repair costs are
expensed as incurred.
(f) ASSET HELD FOR SALE - The Company has an airplane that was part of
the fourth quarter acquisition. The value assigned represents its
estimated fair value.
(g) PREPAID SIGNING BONUSES - The Company has entered into supplier
contracts with many of their large chain customers. As part of the
contract UNIMAG paid the customer an up-front payment (signing
bonus) for obtaining a multi-year contract. These payments are being
amortized straight-line against revenue over the life of the
contract.
(h) EXCESS OF COST OVER NET ASSETS ACQUIRED - Excess of cost over net
assets acquired (goodwill) consists of the excess of the cost to
acquire an entity over the estimated fair market value of the net
assets acquired. Goodwill is amortized on a straight-line basis over
40 years. The Company continually evaluates whether events and
circumstances have occurred that indicate the remaining estimated
useful life of goodwill may warrant revision or that the remaining
balance of goodwill may not be recoverable. In evaluating whether
goodwill is recoverable, the Company estimates the sum of the
expected future cash flows, undiscounted and without interest
charges, derived from such goodwill over its remaining life. The
Company believes that no such impairment existed at September 28,
1996.
(i) REVENUE RECOGNITION - Revenues and cost of sales from the sale of
periodical inventories are recognized upon shipment to the
customers. However, due to the significant volume of merchandise
returns that are typical in the periodical industry, the Company
records a reserve for merchandise returned. This reserve is based on
the gross profit margin on merchandise sold in the current period
that is estimated to be returned by the customers in the subsequent
period. The Company receives credit for the cost of such returns
from the publisher.
28
<PAGE> 31
(j) INCOME TAXES - The Company follows SFAS No. 109 "Accounting for
Income Taxes" (SFAS 109). (See Note 8).
(k) FAIR VALUE OF FINANCIAL INSTRUMENTS - The carrying amounts of
current assets and liabilities approximate their fair market value
because of the short-term maturity of these financial instruments.
The fair market value of long-term debt is discussed further in Note
5.
(l) WEIGHTED AVERAGE SHARES OUTSTANDING - The weighted average number of
shares outstanding for earnings per share purposes is calculated
using common shares issued, shares earned but not issued under a
consulting agreement, shares obligated to be issued as well as
common shares subject to put agreements. All years presented have
been restated to reflect the 1 for 10 reverse split. The shares to
be issued upon shareholders approval at the Annual Shareholders
Meeting have been included in the weighted average shares
outstanding from the respective acquisition dates as discussed in
Note 4.c.
(m) CONCENTRATION OF CREDIT RISK - Financial instruments that
potentially subject the Company to concentrations of credit risk
consist principally of trade accounts receivable. The majority of
the Company's revenues are derived from chain and independent
grocery stores through the territories discussed in Note 1. No one
chain represents a significant portion of the Company's revenue.
(n) RECLASSIFICATIONS - Certain reclassifications have been made to the
consolidated financial statements for 1995 to conform with the 1996
presentation.
(4) ACQUISITIONS AND DISPOSITIONS
-----------------------------
The Company has made significant acquisitions through three different
transactions as described below.
a. In January 1996, the Company exercised its option for a nominal
amount to acquire the outstanding stock of Service News Company of
Wilmington, North Carolina. See Note 12 for additional discussion.
b. Also in January 1996, the Company acquired the operations of
Triangle News Company (Triangle) in Pittsburgh Pennsylvania. UNIMAG
acquired Triangle for approximately $2.7 million in a transaction
accounted for as a purchase. The consideration given was in the form
of cash, seller financing and 10,000 shares of UNIMAG stock
(estimated fair value of $9.10 per share). The amount of goodwill
recorded from this transaction was approximately $6.9 million. The
results of operations for Triangle were included in the consolidated
statement of operations from January 1996 forward. Triangle
generated revenue of $18 million during the nine month period ended
September 28, 1996.
29
<PAGE> 32
c. As part of a regional rollup, at the end of July 1996 the Company
acquired the periodical and management operations of Northern News
Company, Ohio Periodical Distributors, Inc., MacGregor News Agency,
Inc., Wholesalers Leasing Corp. and Scherer Companies (collectively
referred to as the Scherer Affiliates), Michiana News Services, Inc.
(Michiana) and The Stoll Company. In the middle of September the
rollup was completed by the addition of Klein News Company and
affiliates. UNIMAG also acquired a small retail bookstore chain
(Read-Mor Books, Inc.). This bookstore chain acquisition was not
considered significant for financial reporting purposes.
UNIMAG acquired the various companies with UNIMAG common stock of
$65.2 million (estimated fair value of $15 per share) and
subordinated debentures of $58.5 million in a transaction accounted
for as a purchase. In the Company's preliminary allocation of the
purchase price to the fair value of net assets acquired, goodwill of
approximately $142 million was recorded. The results of operations
for these entities were included in the consolidated results of
UNIMAG from their respective acquisition dates forward (July 31,
1996 and September 14, 1996), and represented approximately $30
million of the consolidated revenues for the year ended September
28, 1996.
d. In July 1996, UNIMAG sold the operations of Readers Choice for
approximately $500,000 which approximated book value. This
disposition was not considered significant for financial reporting
purposes.
The following unaudited pro forma summary 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
1995. 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, 1994.
<TABLE>
<CAPTION>
in 000's, except EPS 1996 1995
---------------------------- ----------- -----------
<S> <C> <C>
Net Revenue $280,751 $276,756
Net Income (Loss) (4,678) 10,406
EPS $ (.67) $ 1.55
</TABLE>
30
<PAGE> 33
(5) DEBT OBLIGATIONS
----------------
The components of the Company's debt obligations at September 28, 1996
and September 30, 1995 are as follows:
Short Term Borrowings
---------------------
The Company has short term demand notes as of September 28, 1996 as
follows:
<TABLE>
<CAPTION>
1996
------------
<S> <C>
(a) Note from shareholder $5,000,000
(b) Other related parties 1,206,853
============
$6,206,853
============
</TABLE>
(a) The Company has a $5 million note from a company affiliated
with a shareholder. This loan was assumed as part of the
acquisitions made during the fourth quarter. The note accrues
interest at 11.75% and is collateralized by 5 million shares
of UNIMAG stock. This note is anticipated to be converted to a
subordinated debenture in 1997.
(b) The other related party loans are primarily with employees of
Michiana. These notes are unsecured and accrue interest at a
rate of 8%.
Long term Debt Obligations
--------------------------
<TABLE>
<CAPTION>
1996 1995
------------- ----------
<S> <C> <C>
(a) Lines of Credit $ 7,778,192 $ 63,076
(b) Term Loans with financial institutions 1,973,453 -
(c) Seller Financing 8,998,622 -
(d) Loans from Related Parties 320,132 187,500
(e) Notes with Publishers 999,698 -
-------------- -----------
Total 20,070,097 250,576
Less: current portion (10,822,386) (113,076)
-------------- -----------
Long-term portion of debt obligations $ 9,247,711 $ 137,500
============== ===========
</TABLE>
(a) At September 28, 1996, the Company has five lines of credit
with banks. The lines of credit bear interest at rates ranging
from prime (8.25% at September 28, 1996) to 9.25%. The balance
outstanding at September 28, 1996 and September 30, 1995 was
$7,778,192 and $63,076, respectively. Maturities of the lines
vary from February 1997 through December 31, 1998. The weighted
average interest rates on the outstanding borrowings under the
lines of credit as of September 28, 1996 and September 30, 1995
were approximately 8.3% and 9.75%, respectively.
31
<PAGE> 34
(b) The Company has various term loans with financial institutions.
These loans accrue interest at rates ranging from 6.75% to
9.5%. Principal payments are made on a monthly basis. These
loans expire at various times during 1997 through April 1999.
(c) Seller financing represents the portion of the consideration
associated with an acquisition that was funded by the seller.
These obligations relate primarily to prior acquisitions made
by the companies that were acquired by UNIMAG during the fourth
quarter of 1996. These loans bear interest at rates ranging
from 5.8% to 11.0%. Principal payments are made primarily on a
monthly basis. These loans expire at various times during 1999
through August 2007.
(d) The loans from related parties are from the former shareholders
of Michiana. These notes were assumed as part of the
acquisition. These notes accrue interest at rates ranging from
8% to 10% and principal and interest payments are made monthly.
The notes expire at various times during April 1997 through
April 1998.
(e) The Company has entered into agreements with two significant
vendors which converted certain publisher payables balances
into secured term loans. These loans accrue interest at 10%.
Principal and interest payments are made monthly with the loans
expiring at various times during 1997 through 1999.
The above loans are collateralized by substantially all of the
assets of the Company. These debt obligations contain various
financial covenants, among them being maintenance of minimum net
worth and working capital. The Company was in compliance with its
debt covenants prior to the fourth quarter acquisitions. However,
certain of the debt acquired contain financial covenants that were
violated as a result of the acquisitions, operating losses and
pre-acquisition dividends. Debt in default of approximately $6.3
million has been included in current portion of debt in the
accompanying financial statements. The Company anticipates
curing the defaults in 1997.
Michiana, acquired by the Company in the fourth quarter of 1996, has
guaranteed debt of one of its affiliated companies. The outstanding
balance of this guaranteed debt was approximately $882,000 at
September 28, 1996. The bank has agreed to terminate this guarantee
upon the closing of the acquisition transactions and the repayment
by UNIMAG of outstanding Michiana debt totalling approximately $1.6
million. The $1.6 million of debt is guaranteed by two former
shareowners of Michiana.
The George R. Klein News Company, acquired by the Company in the
fourth quarter of 1996, has guaranteed approximately $320,000 of
debt of another company that is 50% owned by George R. Klein.
32
<PAGE> 35
Shareholder Debentures
----------------------
As part of the acquisitions described in Note 4, the Company issued
Senior and Subordinated debentures. The components of these
debentures are as follows:
<TABLE>
<CAPTION>
Shareholder Group Senior Subordinated
--------------------------------------- -------------- ----------------
<S> <C> <C>
Stoll Company $16,800,000 $ 9,105,267
Michiana 3,500,000 2,334,256
Scherer Affiliates 9,197,604 1,527,309
Klein 10,180,000 5,498,281
Read-Mor 242,211 94,594
------------- -------------
39,919,815 18,559,707
Total
Less: current portion (3,329,295) -
------------- -------------
Long-term portion of debentures $36,590,520 $18,559,707
============= =============
</TABLE>
The senior debentures began to accrue interest on July 1, 1996
(August 24, 1996 for Klein) at 8% payable quarterly commencing on
the closing date of the acquisitions (Annual Shareholders Meeting).
Quarterly principal payments are scheduled from April 1, 1997
through January 1, 2002 in accordance with the schedule and priority
set forth in the Debenture Agreement. The senior debentures are
secured by all of the assets of the Company, however, these
debentures are subordinated to substantially all of the long-term
debt obligations discussed above. The entire $16,800,000 of Stoll
Senior debentures must be paid before any other debentures may be
paid.
The subordinated debentures began to accrue interest on July 1, 1996
(August 24, 1996 for Klein) at 10% payable quarterly commencing on
the closing date of the acquisitions (Annual Shareholders Meeting).
Quarterly principal payments are scheduled from April 1, 1999
through January 1, 2004. The subordinated debentures are secured by
all the assets of the Company, however, these subordinated
debentures are subordinated to the senior debentures.
Maturities of all debt obligations at September 28, 1996, are as follows:
<TABLE>
<CAPTION>
Long-Term
Debt
Fiscal Year Obligations Debentures Total
--------------- -------------- -------------- --------------
<S> <C> <C> <C>
1997 $10,822,386 $ 3,329,295 $14,151,681
1998 2,408,000 7,489,000 9,897,000
1999 2,271,000 10,171,000 12,442,000
2000 1,193,000 12,027,000 13,220,000
2001 485,000 12,027,000 12,512,000
Thereafter 2,890,711 13,436,227 16,326,938
-------------- -------------- --------------
Total $20,070,097 $58,479,522 $78,549,619
============== ============== ==============
</TABLE>
33
<PAGE> 36
The carrying value of the long-term debt obligations described above
approximates its fair value because of the significant portion that is
either short-term or has been recently priced or is variable rate based
that is repriced frequently.
(6) LEASE COMMITMENTS
-----------------
UNIMAG or its subsidiaries have entered into operating lease agreements
for facilities and certain vehicles and equipment. Expenses related to
these leases were as follows:
1996 $1,344,000
1995 $ 384,000
As of September 28, 1996, the future minimum annual rental commitments of
lease agreements are as follows:
<TABLE>
<CAPTION>
Fiscal Year
--------------------
<S> <C> <C>
1997 $ 2,329,000
1998 1,681,000
1999 1,062,000
2000 647,000
2001 411,000
Thereafter 201,000
-------------
Total $ 6,331,000
=============
</TABLE>
(7) COMMON STOCK
------------
As discussed in Note 1, the shareholders will vote on a proposal at the
annual shareholders meeting for a 1 for 10 reverse split. Since a
favorable outcome of the proxy vote is assured, all share information has
been reported post split.
The Company is obligated to issue 4,349,476 shares valued at $15 per
share pursuant to the acquisition agreements entered into during the
fourth quarter of 1996. These shares will be issued after the annual
shareholders meeting scheduled for March, 1997.
The Company also issued 10,000 shares valued at $9.10 per share as part
of the Triangle News Company acquisition discussed in Note 4.
The Company issued 23,449 shares under a consulting agreement, see Note
11.a.
In determining tangible net worth for use in the purchase price
calculation for the fourth quarter acquisitions certain reserves for
asset realization were established. To the extent that these reserves are
not needed in the future, additional shares and debentures will be
issued.
34
<PAGE> 37
(8) INCOME TAXES
------------
The provision (benefit) for income taxes for the years ended September
28, 1996 and September 30, 1995 is as follows:
<TABLE>
<CAPTION>
1996 1995
------------- --------------
<S> <C> <C>
Current tax expense:
Federal $ - $ 6,000
State - -
Deferred tax expense (benefit):
(Increase) decrease In deferred tax assets (2,555,000) 497,000
Increase (decrease) in valuation allowance 2,555,000 (503,000)
------------- --------------
Income tax provision $ - $ -
============= ==============
</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 valuation, deferred
compensation, amortization life of intangibles and certain taxes.
The Company's net deferred tax assets have been fully reserved due to the
uncertainty of future realization.
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.
As of September 28, 1996, UNIMAG has approximately $47 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 September 28, 1996, 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. See Note 2
for discussion of payment strategy.
35
<PAGE> 38
(9) BENEFIT PLANS
-------------
The Company's Connecticut subsidiary participates in a union sponsored,
collectively bargained, multi-employer pension and welfare plan.
Contributions are determined in accordance with the provisions of
negotiated labor contracts and generally are based on the number of
labor-hours worked. The Company made contributions of approximately
$30,000 in fiscal year 1996 and $28,000 in fiscal year 1995.
Under the provisions of the Multi-Employer Pension Plan Amendments Act of
1980 covering such pension plans, certain events, such as withdrawal or
plan termination, may cause the Company to be obligated to fund its share
of any unfunded vested benefits in this plan. Data concerning the funded
status or this multi-employer plan is not available.
Union Pension Plan
------------------
As a result of the acquisition of Triangle and Klein, the Company has
defined benefit pension plans covering various employees whose retirement
benefits are subject to collective bargaining. The benefits are based on
years of service multiplied by the yearly amount of basic retirement
income. The Company's funding policy for the plan is to make the minimum
annual contribution required by applicable regulations.
The following table sets forth the plan's funding status and amounts
recognized in the Company's financial statements at September 28, 1996:
<TABLE>
<CAPTION>
<S> <C>
Actuarial present value of benefit obligations:
Vested benefit obligations $3,429,833
Non-vested benefit obligations 177,718
-------------
Accumulated benefit obligation (ABO) $3,607,551
=============
Projected benefit obligation(PBO) $3,607,551
Plan assets at fair value (1,793,548)
-------------
Projected benefit obligation in excess of plan assets 1,814,003
Unrecognized net loss (108,204)
-------------
Accrued pension cost 1,705,799
Additional minimum pension liability 108,204
-------------
Accrued pension and minimum liability $1,814,003
=============
</TABLE>
The key assumption used in determining the projected benefit obligation
in 1996 were as follows:
Discount rate 7%
Expected long-term rate of
return on assets 8%
36
<PAGE> 39
Net pension cost for 1996 included the following components:
<TABLE>
<CAPTION>
<S> <C>
Asset loss $ (89,027)
Service cost 56,961
Interest cost on projected benefit obligation 179,674
Actual return on plan assets (9,125)
-------------
Net pension cost $ 138,483
=============
</TABLE>
Funding of the plan was approximately $200,000 in 1996.
Other Pension Plan
------------------
The former Stoll Company has certain non-collective bargaining employees
who are covered by a noncontributory defined benefit pension plan. The
benefits are based on years of service and the employee's compensation.
The Company's policy is to make the minimum annual contribution required
by applicable regulations. In connection with the acquisition of The
Stoll Company by UNIMAG, The Stoll Company elected to terminate the plan.
The following table sets forth the plan's funding status at September 28,
1996.
<TABLE>
<CAPTION>
<S> <C>
Actuarial present value of benefit obligations:
Vested benefit obligations $2,747,977
Non-vested benefit obligations 240,453
------------
Accumulated benefit obligation (ABO) $2,988,430
============
Projected benefit obligation (PBO) $ 2,988,430
Plan assets at fair value (2,686,955)
============
Accrued pension liability $ 301,475
============
</TABLE>
The key assumptions used in determining the projected benefit obligation
at September 28, 1996 were as follows:
Discount rate 8%
Expected long-term rate of return on
assets 8%
Other Postretirement Benefit Plans
----------------------------------
In addition to the Company's defined benefit pension plan, certain of the
Company's subsidiaries sponsor defined benefit postretirement health care
and life insurance plans that provides postretirement health care and
life insurance benefits to full-time collective bargaining employees who
have met required service periods with the Company and have attained age
requirements as defined in the plan. The plans contains certain
cost-sharing features such as deductibles and coinsurance.
37
<PAGE> 40
The following table presents the plan's funded status reconciled with
amounts recognized in the Company's balance sheets:
<TABLE>
<CAPTION>
September 28,
1996
------------------
<S> <C>
Accumulated postretirement benefit obligations:
Current retirees $ 685,176
Other fully eligible participants 242,825
Other active plan participants 515,613
--------------
Accumulated postretirement benefit obligations in excess of
plan assets 1,443,614
Unrecognized net gain 6,401
==============
Accrued postretirement benefit cost $ 1,450,015
==============
Net periodic postretirement benefit cost includes the following
components:
1996
--------------
Service cost $ 27,610
Interest cost 66,455
--------------
Net periodic postretirement benefit cost $ 94,065
==============
</TABLE>
The weighted-average annual assumed rate of increase in the per capita
cost of covered benefits (i.e., health care cost trend rate) for 1996 is
11% for participants less than age 65 and 8.5% for participants 65 and
older. The rate is assumed to decrease over 10 years to 6% and remain at
that level thereafter. The health care cost trend rate assumption has a
significant effect on the amounts reported. For example, increasing
assumed health care cost trend rates by one percentage point in each year
would increase the accumulated postretirement benefit obligation as of
September 28, 1996 by approximately $163,000 and the aggregate of the
service and interest cost components of net periodic postretirement
benefit cost for 1996 by approximately $15,000.
The weighted-average discount rate used in determining the accumulated
postretirement benefit obligation was 7.5% at September 28, 1996.
Retirement Savings Plan
-----------------------
Effective April 1994, the Company adopted a defined contribution
retirement savings plan for substantially all nonbargaining employees.
The provisions of the plan allow employees to contribute 15% of their
salary with a maximum of $9,240 for pre-tax contributions. The plan
provides for a matching contribution at the discretion of the Company.
Employees are fully vested in the Company's contributions after 3 years.
The Company has not made any significant contributions to the Plan.
38
<PAGE> 41
Deferred Compensation Plan
--------------------------
An officer and former owner of The Stoll Company is entitled to receive
deferred compensation pursuant to an agreement in effect prior to the
acquisition. The agreement provides for the payment of $250,000 a year
for a five year period beginning in 1997 and $100,000 a year for a period
of seven years thereafter. The present value of this obligation of
approximately $1.4 million has been reflected in the accompanying
financial statements.
(10) SIGNIFICANT VENDORS AND CUSTOMERS
---------------------------------
The Company purchased approximately 75% of its product from four
publishers. These publishers represent approximately 70% of accounts
payable.
(11) RELATED PARTY TRANSACTIONS
--------------------------
The Company had the following related party transactions:
(a) In 1993, the Company's Connecticut subsidiary entered into a
consulting agreement with MDI (a Northeast wholesaler) and its
majority shareholder for a period of 10 years. During the first five
years of the agreement, the consulting fee is calculated as 2% of
the subsidiaries agency net sales and is payable 1% in cash and 1%
in UNIMAG stock (valued at $10 per share). During the last five
years of the agreement, the consulting fee is calculated as 1% of
Yankee's agency net sales, payable in cash.
The expense was $537,677 and $468,982 in 1996 and 1995,
respectively. The $537,677 is to be paid in cash of $250,960 and
through the issuance of 25,096 of UNIMAG stock within 90 days after
year-end.
(b) The Company has a consulting agreement with a former officer of the
Connecticut subsidiary for eight years commencing June 27, 1994.
During years one and two, the consultant will be paid $4,000 per
month. During years three through five, the consultant will be paid
$5,000 per month. During years six through eight, the consultant
will be paid $8,500 per month. The Company expensed $51,000 in 1996
and $48,000 in 1995.
(c) At September 28, 1996, the Company had notes receivable from related
parties of approximately $3,100,000. Approximately $3,000,000 of
this amount is due from Hall of Cards and Books, Inc., which is
owned by the former shareholders of Michiana, and which operates
retail stores that are supplied by the Michiana division of UNIMAG.
The interest rate on the note is 9.25% and the repayment of the note
is secured by a pledge of the stock of Hall of Cards and Books, Inc.
and the UNIMAG stock received by the Michiana shareholders as part
of UNIMAG's acquisition of Michiana. The remaining notes receivable
are due from former shareowners of Michiana. Amounts due in 1997
pursuant to these agreements is approximately $1,353,000, with the
remaining amounts due in equal installments over the subsequent four
years.
39
<PAGE> 42
(d) The Company has lease agreements for facilities from the former
owners of the fourth quarter acquisitions. These lease payments
were approximately $187,000 in 1996.
(12) INVESTMENT IN WILMINGTON
------------------------
On April 5, 1995, UNIMAG entered into a Services and Management Agreement
with Service News Company of Wilmington, North Carolina ("Wilmington")
and SNPC, Inc. ("SNPC"), both North Carolina corporations, and with Doris
R. Marshall, the individual shareholder of the Companies residing in
Martinsville, Virginia, ("Shareholder") pursuant to which UNIMAG managed
the operations commencing April 1, 1995. In consideration, UNIMAG was
entitled to receive a management fee.
Also, on April 5, 1995, the Shareholder and other family members of the
Shareholder purchased 482,140 (post-split) shares of UNIMAG stock at $1
per share for a total cost of $482,140. These shares are subject to
future Put Agreements by the Shareholder and Shareholder family members
commencing 24 months after the date of the Agreement, see Note 13.b. At
April 1, 1995, the present value of the putable shares was $3,566,024.
The Put Agreements are guaranteed by UNIMAG and by one of its
subsidiaries and are part of the consideration for the option to purchase
the stock of Wilmington. The Company accretes the put value of these
shares with the offset to interest expense. The charge to interest
expense for the accretion was $525,102 in 1996 and $238,161 in 1995.
The Agreement granted UNIMAG an option to purchase all of the outstanding
stock of Wilmington through the life of the Agreement. The option price
was originally estimated at $482,140 but was subject to additional
adjustment upon resolution of contingent provisions of the agreement.
UNIMAG had no legal right to these shares until they exercised their
option. As of September 30, 1995, the Company had not exercised its
option and treated the option as an investment and accounted for the
investment under the equity method.
In conjunction with the Agreement, UNIMAG loaned Wilmington $500,000.
This was a demand loan bearing interest at prime plus 1% (9.75% at
September 30, 1995) and was payable quarterly.
On January 12, 1996 UNIMAG exercised the business option for $1. The
exercise price, after adjustments pursuant to the Agreement was $10. With
the exercising of the business option on January 12, 1996, the
transaction was accounted for as a business combination and has been
consolidated with UNIMAG prospectively.
40
<PAGE> 43
(13) CONTINGENCIES AND COMMITMENTS
-----------------------------
(a) Prudential Settlement
---------------------
On January 26, 1995, the Company reached final settlement of its
lawsuit against Prudential Insurance Company of America and two of
its affiliates. As part of the settlement, the Company received $3
million, less related professional fees of $647,798.
(b) Common Stock Subject to Put Agreements
--------------------------------------
In conjunction with the Company's investment in Wilmington, 482,140
shares of common stock are subject to Put Agreements. In the event
the put options are exercised as they become exercisable, the
related payments would be $167,916, $335,832, $3,599,534, $335,832
and $335,832 in 1997, 1998, 1999, 2000 and 2001, respectively and
$3,161,380 in total over the succeeding 12 years.
(c) Union Claims
------------
A demand has been made on the Company by the Newspaper and Mail
Deliverers'-Publishers' Pension Fund (Fund) for withdrawal liability
payments arising from the January 23, 1991 cessation of covered
operations under that plan by Imperial News Company (an inactive
subsidiary). The principal amount of the liability was assessed by
the Pension Fund in August, 1991, to be $729,053 (payable in 16
quarterly installments) with interest totaling $811,290 based on the
Fund's actuarial valuation of its fiscal year ended May 31, 1989,
plus any additional amounts (or credits) that may be due with
respect to the Fund's fiscal years ended May 31, 1990 and 1991,
pending completion of actuarial valuations as of those dates. The
original withdrawal liability assessment of $811,290 plus interest
has been reduced by escrow payments to $573,349 plus interest from
August 7, 1991, paid to the Fund from an escrow fund established
pursuant to ERISA.
Imperial is in the process of liquidation under Chapter 7 of the
U.S. Bankruptcy Code, and is unable to make the required payments.
However, under Title IV of ERISA, the Fund may proceed against
Imperial's predecessors-in-interest (Brooklyn News Company and Dale
News Company) or, possibly, against the Company and/or other
entities alleged to be members of Imperial's "control group" within
the meaning of Internal Revenue Code Section 1563(a), to collect the
$573,349 remaining unpaid as of December 7, 1992. As required by
ERISA, the Company has requested review and has initiated
arbitration proceedings contesting, inter alia, the accuracy, amount
and calculation of the Fund's assessment. The Company intends to
defend its position vigorously.
The Company had filed five (5) proofs of claim in the Imperial
bankruptcy case for contingent claims that might be assessed
pursuant to the above demand and the WARN suits, discussed
hereinafter. The Company entered into an agreement with the
Bankruptcy Trustee in the Imperial bankruptcy estate. In exchange
for the release by the Company of its previously filed claims
against the estate, the Trustee provided
41
<PAGE> 44
the Company with dollar for dollar offsets of $1,500,000 against
claims by the Union in its lawsuit. This case has not yet been set
for trial. The ultimate outcome of the case is uncertain and no
provision has been made in the accompanying consolidated financial
statements.
(d) WARN Suit
---------
On February 3, 1992, the Newspaper and Mail Deliverers' Union of New
York and Vicinity (NMDU) and certain trustees of a related Welfare
Fund and Pension Fund filed a complaint against UNIMAG and its
Connecticut subsidiary, MDI, MDI L.P. and two related parties
alleging damages, in an unspecified amount, had been suffered by
approximately 100 NMDU members formerly employed by Imperial. The
suit, which was filed in the United States District Court for the
Eastern District of New York, alleges that the employees were
damaged because:
(i) the employees were not given a 60 day advance notice of the
permanent closing of Imperial's operation at its Melville,
New York facility as allegedly required by the Worker's
Adjustment and Retraining Notification Act (WARN);
(ii) Imperial failed to make certain contributions alleged to be
due under its NMDU labor contract to certain benefit plans;
and
(iii) Imperial failed to make certain severance and other fringe
benefit payments alleged to be due under its NMDU labor
contract to such employees.
Management believes the claims to be without merit. The Company has
been dismissed from all claims except the WARN claim. On November
27, 1992, the District Court dismissed the first causes of action
under WARN as time-barred by the six month statute of limitations
contained in the National Labor Relations Act, 29 U.S.C. Sec.
160(b), however, that decision was overturned on appeal. On October
20, 1995, the earlier dismissal of the Company from the second and
third causes of actions was overturned.
The Company has filed an answer denying the material allegations of
the complaint and interposing a number of affirmative defenses. The
Company intends to defend its position vigorously. The parties to
the litigation have scheduled mediation in efforts to resolve this
litigation without trial. The ultimate outcome of this case is
uncertain and no provision has been made in the accompanying
financial statements.
(e) Taubman Suit
------------
The Company and its inactive subsidiary Team Logos Sportstuff, Inc.
("TLSI") have been named as defendants, along with several unrelated
parties, in a suit by the Taubman Company in United States District
Court, Eastern District of Michigan, Southern Division. The suit
claims approximately $2 million in damages based on an assertion
that the Company and TLSI assumed certain retail leases associated
with companies who were part of an asset purchase by the Company in
July, 1992. Trial is
42
<PAGE> 45
scheduled for early 1997. A summary judgment was recently granted to
the plaintiff on one count of the 14 contained in the complaint.
While this is not yet a final appealable order, and is subject to
revision through the date of trial, the Company has instructed
counsel to seek reconsideration. In the event it should become a
final judgment, the Company expects to appeal such judgment and
intends to vigorously pursue at the appellate level. The Company
believes that the actual liability, if any, is substantially less
than the amount of the claim. The ultimate outcome of the case is
uncertain.
(f) San's Suit
----------
The Company has been named as defendant in a suit by two prior
employees for breach of employment contracts, promissory estoppel
and misrepresentation. On September 19, 1996, a jury returned a
verdict in favor of plaintiffs in the amount of $338,500. Plaintiffs
filed a motion seeking attorneys fees, which was granted by the
court and then reversed upon defendants' motion for judgment
notwithstanding the verdict. The judgment in this matter is now
appealable. Management has instructed counsel for the Company to
appeal the judgment when entered. Management believes that
defendants have meritorious defenses and have instructed counsel to
defend the litigation vigorously on appeal. The ultimate outcome of
the case is uncertain.
(g) Other Legal Matters
-------------------
The Company has been named as a defendant in various other
litigation matters. Management intends to vigorously defend these
outstanding claims. In management's judgment, the outstanding claims
discussed in this note are unlikely to result in a material adverse
effect on the Company's financial position and results of
operations.
43
<PAGE> 46
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
- -------------------------------------------------------------
None.
44
<PAGE> 47
PART III
--------
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS OF THE
- -----------------------------------------------------------------------------
REGISTRANT; COMPLIANCE WITH SECTION 16 (a) OF THE EXCHANGE ACT
- --------------------------------------------------------------
Directors, Executive Officers, Promoters and Control Persons
- ------------------------------------------------------------
The information concerning the directors, executive officers, promoters and
control persons of the Registrant are incorporated by reference from the
sections of the Company's Preliminary Proxy Statement filed in February 1997 for
its 1997 Annual Meeting of Shareholders entitled "Election of Directors --
Nominees for Election" which is filed as Exhibit 99 to this Form 10-KSB.
Compliance with Section 16(a) of the Exchange Act
- -------------------------------------------------
Section 16(a) of the Securities Exchange Act of 1934 requires officers,
directors, and beneficial owners of more than 10% of the common stock of the
Company to file reports of ownership and changes in ownership with the
Securities and Exchange Commission. Based solely on its review of copies of such
forms received by it, the Company believes that all filing requirements
applicable to its officers, directors and 10% beneficial owners were complied
with.
ITEM 11. EXECUTIVE COMPENSATION
- --------------------------------
The information regarding executive compensation is incorporated by reference
from the Section of the Company's Preliminary Proxy Statement filed in February
1997 for its 1997 Annual Meeting of Shareholders entitled "Election of Directors
- -- Executive Compensation" which is filed as Exhibit 99 to this Form 10-KSB.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGERS
- ----------------------------------------------------------------------
The following tables set forth, to the knowledge of management, the number of
shares of Common Stock of the Company and the percentage of outstanding shares
of Common Stock of the Company represented thereby, owned directly, indirectly
and beneficially by: (a) each person or entity who is the beneficial owner of
more than 5% of the shares of Common Stock of the Company outstanding as of
February 1, 1997, (b) each person or entity who is expected to become a holder
of more than 5% of the outstanding shares of Common Stock of the Company
following the Acquisitions, (c) each executive officer, director, and director
nominee of the Company, and (d) all executive officers and directors of the
Company as a group. The tables reflect the anticipated one-for-ten reverse stock
split to be presented to the shareholders for approval at the 1997 Annual
Meeting of Shareholders and the estimated number of shares of Common Stock of
the Company owned, and the percentage of outstanding shares of Common Stock of
the Company for each of the foregoing, as adjusted to reflect completion of the
Acquisitions. The tables also have been adjusted to reflect adjustments to net
worth based on the preliminary unaudited balance sheets as of June 30, 1996 for
Michiana, Stoll, Read-Mor and Scherer Affiliates (and August 23, 1996 for
Klein).
45
<PAGE> 48
TABLE FOR FIVE PERCENT (5%) SHAREHOLDERS
<TABLE>
<CAPTION>
After Completion of Acquisitions
--------------------------------
Number of Shares of Percentage of
Name and Address Common Stock Common Stock Anticipated
of Beneficial Owner Beneficially Owned Outstanding (2) # of Shares Percentage(2)
- ------------------- ------------------- ------------ ----------- ----------
(1)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Ronald E. Scherer 1,045,600 39.07% 1,789,778(3) 25.27%
Chairman of the Board (3)(5)(6)(7)(10)
of Directors, President
and Chief Executive Officer
5131 Post Road
Dublin, OH 43107
Ohio Periodical 500,000(6)(7) 18.68% 1,019,077 14.39%
Distributors, Inc.
5131 Post Road
Dublin, OH 43017
R. David Thomas 300,000 (5)(6)(11) 11.21% 333,333 4.71%
One Bay Colony
Ft. Lauderdale, FL 33308
Richard H. Stoll, Sr. 0 (5) 0% 391,693(11) 5.53%
Director Nominee
6477 Mill Ridge Road
Maumee, Oh. 43537
0 (5) 0% 1,087,881 15.36%
George R. Klein
Director Nominee
1771 East 30th Street
Cleveland, Ohio 44114
153,608(8) 5.74% 178,704 2.52%
MDI, L.P.
Magazine Distributors, Inc.
100 Cantiague Rock Rd.
Hicksville, NY 11801
237,302 (4) 8.87% 237,302 3.35%
Doris Marshal
P. O. Box 5503
Martinsville, VA 24115
Total 1,736,510 64.89% 4,019,691 56.74%
</TABLE>
46
<PAGE> 49
TABLE FOR OFFICERS, DIRECTORS AND NOMINEES
<TABLE>
<CAPTION>
After Completion
of Acquisitions
Number of Shares of Percentage of ----------------
Name and Address Common Stock Common Stock Anticipated
of Beneficial Owner Beneficially Owned Outstanding (2) # of Shares Percentage(2)
- ------------------- ------------------- ------------ ----------- ----------
(1)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Ronald E. Scherer 1,045,600(3)(5)(6)(7) 39.07% 1,789,778(3) 25.27%
Chairman of the Board
of Directors, President
and Chief Executive Officer
5131 Post Road
Dublin, OH 43107
David B. Thompson 2,264(3) * 2,264(3) *
Director, Treasurer
5131 Post Road
Dublin, Ohio 43017
Eugene J. Alfonsi 5,000 * 5,000 *
Director
5131 Post Road
Dublin, Ohio 43017
Thaddeus A. Majerek 0(5)(9) 0% 262,435(9) 3.70%
Director
2232 S. 11th Street
Niles, MI 49120
Robert H. Monnaville, Jr. 39,925 1.49% 39,925 .56%
Director
62 Harper Avenue
Waterbury, CT 06705
Thomas L. Gerlacher 1,900 * 1,900 *
Chief Financial Officer
5131 Post Road
Dublin, Ohio 43017
Nancy Stoll Lyman 0(5) 0 142,420(10) 2.01%
Director Nominee
203 N. Wabash, Suite 1504
Chicago, IL 60601
</TABLE>
47
<PAGE> 50
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Richard H. Stoll, Sr. 0(5) 0 391,693(11) 5.53%
Director Nominee
6477 Mill Ridge Road
Maumee, Ohio 43537
R.L. Richards 1,250 * 1,250 *
Director Nominee
5131 Post Road
Dublin, Ohio 43017
0(4) 0 1,087,881 15.36%
George R. Klein
Director Nominee
1771 E. 30th Street
Cleveland, Ohio 44114
All Directors and Executive 1,095,939 40.95% 3,724,546 52.58%
Officers as a Group
(6 persons before the Annual
Meeting, 10 persons after the
Annual Meeting)
<FN>
(1) Unless otherwise specified, the beneficial owners of the
shares of Common Stock have sole voting and investment power
over such shares.
(2) The total number of shares of Common Stock of the Company
outstanding on the date hereof is 2,676,034 shares. None of
the executive officers, directors or holders of 5% or more of
the Company's issued and outstanding Common Stock hold any
options or warrants to acquire Common Stock. The anticipated
number of shares outstanding after completion of the
transaction acquisitions and the issuance of shares to MDI, L.
P. is 7,083,939.
(3) Prior to the completion of the Acquisitions, includes 500,000
shares of Common Stock of the Company owned by OPD, which
Ronald E. Scherer is entitled to vote as the Chief Executive
Officer of OPD, but does not include 58,900 shares of Common
Stock of the Company held of record by RAP Diversified, Inc.
("RAP"), the sole shareholder of which is David B. Thompson,
Trustee for a trust of which the children of Ronald E. Scherer
are the beneficiaries. Mr. Scherer disclaims any beneficial
ownership of such shares.
After the completion of the Acquisitions, includes 133,543
(1.89%) shares of Common Stock of the Company to be received
by Northern in the Exchange Transactions and 48,260 (0.68%)
shares of Common Stock of the Company to be received by
Wholesalers in the Exchange Transactions. Mr. Scherer is
expected to have voting power over the shares of Common Stock
of the Company held by these companies by virtue of his
position as Chief Executive Officer of these Companies.
</TABLE>
48
<PAGE> 51
(4) Does not include 122,419 shares of Common Stock of the Company
(4.57%) held by Mrs. Marshall's son, David Marshall, and
122,419 shares of Common Stock of the Company (4.57%) held by
Mrs. Marshall's daughter, Miranda Marshall, all of which
shares of Common Stock of the Company are subject to Put
Agreements between the Company and each of Mrs. Marshall's
children.
(5) All of such shares of Common Stock of the Company are subject
to a shareholders' voting agreement dated as of October 9,
1996, among Ronald E. Scherer, certain of the Scherer
Affiliates, the Stoll Shareholders, the Michiana Shareholders
and the Klein Shareholder, pursuant to which they have agreed
to act together in the election of directors of the Company
until such time as all principal and interest on the
Debentures have been paid in full. The parties to the
agreement have agreed to vote for the election to the Board of
Directors of two Scherer representatives, two Stoll
representatives, one Michiana representative and two Klein
representatives.
(6) Ronald E. Scherer, OPD and R. David Thomas have agreed to vote
their shares of Common Stock of the Company in favor of the
acquisitions of Stoll, Michiana, Klein and the Scherer
Affiliates and to vote in favor of the reverse stock split at
the Annual Meeting of Shareholders.
(7) 49.5% of the stock of OPD is owned by a trust established for
the benefit of Ronald E. Scherer and his family, and 49.5% of
the stock of OPD is owned by a trust established for the
benefit of Linda Scherer Talbott, the sister of Ronald E.
Scherer, and her family.
(8) Does not include approximately 25,096 shares of Common Stock
of the Company which will be issued in 1997 under terms of the
Company's agreement with MDI, L.P.
(9) Includes 262,435 (3.70%) shares of Common Stock of the Company
to be owned by a trust over which Thaddeus A. Majerek is
expected to have voting power as one of the co-trustees. Does
not include 273,146 (3.86%) shares of Common Stock of the
Company to be owned by another family trust, over which Mr.
Majerek disclaims any beneficial ownership.
(10) Does not include 1,816,047 (25.64%) shares of Common Stock of
the Company to be received by the other Stoll Shareholders,
over which Nancy Stoll Lyman disclaims any beneficial
ownership.
(11) Does not include 1,566,773 (22.12) shares of Common Stock of
the Company to be received by the other Stoll Shareholders,
over which Richard H. Stoll, Sr. disclaims any beneficial
ownership.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- -------- ----------------------------------------------
See Note 11 of the United Magazine Company consolidated financial statements as
of September 28, 1996, included in Item 8 of this report. Other information
provided under this Item is incorporated by reference from the section of the
Company's Preliminary Proxy Statement filed in February 1997 for its 1997 Annual
Meeting of Shareholders entitled "The Stock and Asset Exchanges -- Conflicts of
Interest and Related Party Transactions" which is filed as Exhibit 99 to this
Form 10-KSB.
49
<PAGE> 52
PART IV
-------
ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K
- -------------------------------------------
(a) Exhibits:
3.1 Articles of Incorporation of the Registrant (incorporated by
reference from 1989 Form 10-K, Exhibit I).
3.2 Code of Regulations of Registrant (incorporated by reference
from 1989 Form 10-K, Exhibit II).
4.1 Put Agreement between UNIMAG and Donald E. Garlikov dated
July 25, 1992 together with commitment letter between Donald
E. Garlikov and Team Logos Corporation dated July 7, 1992
(incorporated by reference from Exhibit 4 to the Current
Report on Form 8-K of the Registrant, filed August 7, 1992).
4.2 Services and Management Agreement with Service News Company
and SNPC, Inc. and Doris R. Marshall together with related
Put Agreements and related documents dated April 5, 1995
(incorporated by reference from the Current Report in Form
8-KA, Amendment No. 3 to Form 8-K, Current Report filed
April 17, 1995 of the registrant, filed January 13, 1996.)
10.1 Partnership Dissolution and Distribution Plan and Agreement
between UNIMAG, Service News Company and Magazine
Distributors, Inc. relative to the dissolution of MDI
Distributors, Limited Partnership, dated May 24, 1993
(incorporated by reference from Exhibit 1 to the Current
Report on Form 8-K of the Registrant, filed June 8, 1993.
10.2 Services and Management Agreement with Service News Company
and SNPC, Inc. and Doris R. Marshall together with related
Put Agreements and related documents dated April 5, 1995
(incorporated by reference from the Current Report in Form
8-KA, Amendment No. 3 to Form 8-K, Current Report filed
April 17, 1995 of the registrant, filed January 13, 1996.)
10.3 Asset Transfer and Exchange Agreement between United
Magazine Company and Northern News Company, effective July
29, 1996 (incorporated by reference from the Current Report
on Form 8-KA filed September 30, 1996, See Exhibit 2 (a)
therein).
10.4 Stock Transfer and Exchange Agreement among United Magazine
Company, Michiana News Service, Inc. and all of the
shareholders of Michiana News Service, Inc. effective July
30, 1996 (incorporated by reference from the Current Report
on Form 8-KA filed September 30, 1996, See Exhibit 2 (b)
therein).
10.5 Stock Transfer and Exchange Agreement among United Magazine
Company, The Stoll Companies and all of the shareholders of
The Stoll Companies effective July 31, 1996 (incorporated by
reference from the Current Report on Form 8-KA filed
September 30, 1996, See Exhibit 2 (c) therein).
50
<PAGE> 53
10.6 Asset Transfer and Exchange Agreement, subsequently modified
to a Stock Transfer and Exchange Agreement, between United
Magazine Company and Ohio Periodical Distributors, Inc.,
effective August 1, 1996 (incorporated by reference from the
Current Report on Form 8-KA filed September 30, 1996, See
Exhibit 2 (d) therein).
10.7 Asset Transfer and Exchange Agreement between United
Magazine Company and Wholesalers Leasing Corp., effective
August 2, 1996 (incorporated by reference from the Current
Report on Form 8-KA filed September 30, 1996, See Exhibit 2
(e) therein).
10.8 Stock Transfer and Exchange Agreement among United Magazine
Company, Scherer Companies and all of the shareholders of
Scherer Companies effective August 2, 1996 (incorporated by
reference from the Current Report on Form 8-KA filed
September 30, 1996, See Exhibit 2 (f) therein).
10.9 Stock Transfer and Exchange Agreement among United Magazine
Company, Read-Mor Bookstores, Inc. and all of the
shareholders of Read-Mor Bookstores, Inc. effective August
2, 1996 (incorporated by reference from the Current Report
on Form 8-KA filed September 30, 1996, See Exhibit 2 (g)
therein).
10.10 Stock Transfer and Exchange Agreement among United Magazine
Company, The George R. Klein News Co., Central News Co.,
Newspaper Sales Inc. and the shareholder of all of those
companies, effective September 27, 1996 (incorporated by
reference from the Current Report on Form 8-K filed
September 27, 1996, See Exhibit 2 therein).
51
<PAGE> 54
21 Subsidiaries of the Registrant
Jurisdiction of Name in Which
Incorporate or Business is
Name of Subsidiary Organization Conducted
------------------ ------------ ---------
Current Subsidiaries:
Service News Company Connecticut Yankee News
Company
Imperial News Co., Inc. Delaware Imperial News
Team Logos Sportstuff, Ohio Team Logos and
Inc. Sportstuff
Sportstuff Marketing, Inc. Ohio Sportstuff Marketing
UNIMAG I, Inc. Delaware Team Logos
(subsidiary of Team and
Logos Sportstuff, Inc.) Sportstuff
Service News Company of North Carolina Service News
North Carolina (acquired and
January 13, 1996) Wilmington
Triangle News Company Pennsylvania Triangle
(acquired January 23, 1996) and
Pittsburgh
Acquisition Transaction
Subsidiaries:
Michiana News Service, Inc. Michigan Michiana
MacGregor News Service, Inc. Michigan MacGregor
The Stoll Companies Ohio Stoll
Ohio Periodical Distributors, Ohio OPD
Inc.
Scherer Companies Delaware Scherer Companies
Read-Mor Bookstores, Inc. Ohio Read-Mor
The George R. Klein News Co. Ohio Klein
Central News Co. Ohio Klein
Newspapers Sales, Inc. Ohio Klein
52
<PAGE> 55
27 Financial Data Schedules - EDGAR Filing
99 Excerpt of Portions of the Company's Proxy Statement for
its 1997 Annual Meeting of Shareholders which have been
incorporated by reference into the Form 10-KSB.
(b) Reports on Form 8-K:
On August 8, 1996 UNIMAG filed a Form 8-K for the acquisition of
Michiana News Services, Inc., Stoll Companies, Ohio Periodical
Distributors, Inc., MacGregor News Agency, Inc. (through the
acquisition of the assets of Northern News Company) and Scherer
Companies and for the acquisition of the assets of Wholesalers Leasing
Corp. On September 27, 1996 UNIMAG filed a Form 8-KA for the
aforementioned acquisitions.
On September 27, 1996 UNIMAG filed a Form 8-K for the acquisition of
George R. Klein News Co., Central News Co., and Newspaper Sales, Inc.
On September 30, 1996 UNIMAG filed a Form 8-KA Amendment to its Form
8-K filed August 8, 1996.
(c) Filing Status:
Effective October 2, 1994, UNIMAG began filing as an SB filer. The
first such filing was the Company's Form 10-QSB for the first quarter
of fiscal 1995.
53
<PAGE> 56
SIGNATURES
----------
Pursuant to the requirement of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed by the undersigned,
thereunto duly authorized.
UNITED MAGAZINE COMPANY
Date February 20, 1997 by /s/ Ronald E. Scherer
----------------- ----------------------------
Ronald E. Scherer, President
Pursuant to the required Securities and Exchange Act of 1934, this Report has
been signed below by the following persons on behalf of the registrant and in
the capacities as stated as of the dates indicated below, and in the capacities
indicated.
<TABLE>
<CAPTION>
Signature Title Date
- ----------------------- ------------------ ----------------
<S> <C> <C>
/s/ Ronald E. Scherer Chairman, President February 20, 1997
- ----------------------- and Chief Executive -----------------
Ronald E. Scherer Officer
/s/ David B. Thompson Director and Treasurer, February 20, 1997
- ----------------------- -----------------
David B. Thompson
/s/Eugene J. Alfonsi Director, Vice President February 20, 1997
- ----------------------- -----------------
Eugene J. Alfonsi
/s/ Thomas L. Gerlacher Chief Financial February 20, 1997
- ----------------------- Officer -----------------
Thomas L. Gerlacher
</TABLE>
54
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000020469
<NAME> UNITED MAGAZINE COMPANY
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-28-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> SEP-28-1996
<CASH> 2,546,745
<SECURITIES> 473,556
<RECEIVABLES> 32,820,357
<ALLOWANCES> 2,985,000
<INVENTORY> 35,746,922
<CURRENT-ASSETS> 71,290,724
<PP&E> 14,037,570
<DEPRECIATION> 1,585,503
<TOTAL-ASSETS> 251,370,527
<CURRENT-LIABILITIES> 116,473,665
<BONDS> 0
<COMMON> 250
0
0
<OTHER-SE> 61,225,915
<TOTAL-LIABILITY-AND-EQUITY> 251,370,527
<SALES> 80,232,472
<TOTAL-REVENUES> 80,232,472
<CGS> 60,277,303
<TOTAL-COSTS> 24,714,761
<OTHER-EXPENSES> 163,192
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,781,141
<INCOME-PRETAX> (6,387,795)
<INCOME-TAX> 0
<INCOME-CONTINUING> (6,387,795)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,387,795)
<EPS-PRIMARY> (1.98)
<EPS-DILUTED> (1.98)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000020469
<NAME> UNITED MAGAZINE COMPANY
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1995
<PERIOD-START> OCT-02-1994
<PERIOD-END> SEP-30-1995
<CASH> 755,338
<SECURITIES> 0
<RECEIVABLES> 2,932,762
<ALLOWANCES> 63,000
<INVENTORY> 3,096,982
<CURRENT-ASSETS> 6,780,089
<PP&E> 1,171,312
<DEPRECIATION> 475,501
<TOTAL-ASSETS> 12,333,522
<CURRENT-LIABILITIES> 6,219,559
<BONDS> 0
<COMMON> 250
0
0
<OTHER-SE> 2,133,278
<TOTAL-LIABILITY-AND-EQUITY> 12,333,522
<SALES> 24,561,801
<TOTAL-REVENUES> 24,561,801
<CGS> 17,918,114
<TOTAL-COSTS> 6,980,572
<OTHER-EXPENSES> 501,697
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 347,809
<INCOME-PRETAX> 1,864,180
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,864,180
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,864,180
<EPS-PRIMARY> .78
<EPS-DILUTED> .78
</TABLE>
<PAGE> 1
EXHIBIT 99
EXCERPT OF PORTIONS OF THE COMPANY'S PROXY STATEMENT FOR ITS 1997 ANNUAL
MEETING OF SHAREHOLDERS WHICH HAVE BEEN INCORPORATED BY REFERENCE INTO THE FORM
10-KSB,
I. "THE COMPANY AND THE COMBINED COMPANY -- BUSINESS, COMBINED REVENUES,
EMPLOYEES, PRODUCTS, SUPPLIERS AND PRICING, DISTRIBUTION SYSTEMS, MARKETING AND
SALES, THE SMARTS SYSTEM, CUSTOMERS AND COMPETITION"
THE COMPANY AND THE COMBINED COMPANY
BUSINESS
The Company is a regional wholesaler of periodicals. It
distributes its products to retail outlets such as supermarkets,
discount variety stores, convenience stores, drug stores, and
newsstands that offer mass market reading materials to consumers. The
Company conducts its operations through the following three active
operating subsidiaries: Service News Company of Connecticut, ("Yankee"
or "Connecticut"); Service News Company of Wilmington, North Carolina
("Service News" or "Wilmington"); and Triangle News Company of
Pittsburgh, Pennsylvania ("Triangle" or "Pittsburgh").
During June of 1996, the Company sold its other active
subsidiary, Reader's Choice, Inc. of Dublin, Ohio, a company engaged in
the business of managing and reporting information on retail display
allowances and collecting these allowances which are paid by publishers
to retailers. The operations of Reader's Choice, Inc. are not
significant, and the sale will not have a material effect on the
Company. In addition, the Company has three inactive subsidiaries which
have ceased operations: Sportstuff Marketing, Inc., Team Logos
Sportstuff, Inc. (which includes its inactive subsidiary UNIMAG I) and
Imperial News Co., Inc.
COMBINED REVENUE
Following the consummation of the proposed exchange and
acquisition transactions, the Combined Company will be the dominant
regional periodical wholesaler in Ohio, Indiana, Michigan and western
Pennsylvania, with an estimated market share of greater than fifty
percent (50%). It is expected that the proposed transactions with the
Acquisition Parties will transform the Company from an entity which
generated annualized net sales of approximately $57 million in fiscal
year 1995 (from Yankee, Wilmington, and Pittsburgh) to a Company with
combined net sales, on a pro forma basis, for fiscal year 1996 of
approximately $281 million for all entities.
EMPLOYEES
At September 30, 1996, the Company employed approximately 398
employees, of which 124 were represented by various locals of the
Teamsters Union with contracts expiring in 1996 through 2001. Such
employees were staffed substantially as set forth in the tables below.
It is anticipated that the Combined Company initially will employ
approximately 1,993 individuals, of which 246 will be represented by
various locals of the Teamsters Union with contracts expiring through
2001. In the opinion of management of each of the Acquisition Parties,
relations with both union and non-union employees of such Acquisition
Parties have been satisfactory.
<PAGE> 2
The Company
<TABLE>
<CAPTION>
Part-time
Position Union Non-Union Total (Included in Total)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Management
and Supervisors 1 15 16 0
Administrative and Office 7 32 39 2
Sales 4 4 8 0
Warehouse 48 40 88 21
Drivers 64 24 88 5
In-Store Service 0 125 125 92
Retail and Other 0 34 34 23
- -- -- --
Total 124 274 398 143
=== === === ===
The Combined Company
<CAPTION>
Part-time
Position Union Non-Union Total (Included in Total)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Management and
Supervisors 1 159 160 0
Administrative and Office 15 170 185 13
Sales 4 67 71 0
Warehouse 104 295 399 65
Drivers 122 160 282 8
In-Store Service 0 695 695 620
Retail and Other 0 201 201 145
- --- --- ---
Total 246 1,747 1,993 851
=== ===== ===== ===
</TABLE>
Management is currently reviewing the appropriate staffing
plan for the Combined Company and expects significant employee
reductions and labor cost savings as the operations of the Acquisition
Parties are consolidated in the 12 months following the consummation of
the proposed transactions.
PRODUCTS
The Company generates revenue primarily from the sale and
distribution of mass market reading materials including magazines,
paperback and hardback books, newspapers and other complementary items.
- Magazines. There are over 3,500 different magazine titles
published annually which focus on a diverse range of
consumer interest topics. Sales of magazines currently
represent approximately 83% of total Company revenue.
- Books. The Company distributes an average of 2,750
different paperback and hardcover titles per year at an
average retail price of $5.25 per book. The process by
which the Company selects book titles for resale is
different from the
<PAGE> 3
periodical selection process in that book publishers,
rather than regional periodical wholesalers, customarily
control the product allocation process. Historically, book
publishers have allocated most of their available titles
to the large book store chains where a high level of
retail sales was assured. However, because of recent
pricing pressure exerted by the large retailers, book
publishers have become interested in allocating more books
and titles to alternative retailers like supermarkets
where gross margins are higher.
Sales of paperback and hardcover books currently
represent approximately 15% of total Company revenue.
However, management believes that because of the pricing
pressure experienced by book publishers from large book
store chains, as well as the desire of the Company's
existing customer base (especially large supermarket
chains) to carry alternative products, sales of paperback
and hardcover books are expected to become a more
significant percentage of total Combined Company revenue.
- Newspapers. In selected markets, specifically Connecticut
and Pennsylvania, the Company distributes over 50 local
and national newspapers including daily, weekly and Sunday
only titles seven days a week. The newspaper routes are
run separately and on an earlier schedule than
periodicals. Although profit margins on newspapers are
lower than books and magazines, the Company will continue
to provide this service to those select retail customers.
Sales of newspapers currently represent approximately 1%
of total Company revenues.
- Other. The Company also distributes other items such as
trading cards, maps and calendars; however, this category
does not represent a significant component of the
Company's business. Sales of these items currently
represent approximately 1% of total Company revenues.
It is anticipated that the Combined Company will also generate
revenues from substantially the same product segments, although the
Company expects that, with the customer and market diversification
which will occur following the completion of all of the transactions,
the relative contribution of certain product segments to revenues of
the Combined Company may differ significantly from those experienced by
the Company.
SUPPLIERS AND PRICING
The Company purchased approximately 75% of its product from
four publishers. These publishers represent approximately 70% of
accounts payable. The retail prices of the periodicals that the Company
distributes are established by publishers such as Time Warner, Hearst
and Hachette. The Company purchases periodicals from national
wholesalers such as Warner Distribution Services, ICD/The Hearst
Corporation and Curtis Circulation Co. at a discount to the suggested
retail price and then sells them to retailers at a smaller discount.
Most of the larger retailers, such as The Kroger Company, Giant Eagle,
Meijer and Big Bear Stores, a division of the Penn Traffic Company,
have entered into multi-year contracts with wholesale distributors.
This has resulted in an increase in the discount to retailers and a
reduction in the gross margin to the wholesale distributors.
<PAGE> 4
DISTRIBUTION SYSTEM
The distribution system starts with the publisher who provides
editorial content to printers who prepare the product and ship it
directly to the wholesale distributor. The national distributors do not
physically touch the product. Instead, they function as brokers of
information and collectors of funds from the wholesale distributor for
remittance to the publishers. The more sophisticated wholesale
distributors maintain and analyze data on product, customers, and
consumers and make product allocation decisions as category managers
for the retailers. In addition, the wholesale distributors provide
packaging, delivery, display and in-store merchandising services to the
retailers. The wholesale distributors bill the retailer, collect the
receivables, and remit payments to the national distributors.
The Company's distribution facilities receive product in bulk
form every day during the week. The distribution facilities are
especially active on Fridays and Mondays when weekly titles such as
People Magazine, TV Guide and the National Enquirer are received,
packaged and delivered to retailers. Delivery of weekly periodicals
must be made within 24 hours after receipt of such periodicals by the
distribution facilities.
As inventory is received a copy of each title is sent to the
receiving department where a validation clerk scans the title to verify
the BIPAD number and quantity. After the quantity is verified the
receiving department enters the item into the tracking system. If the
allotted quantity in the system does not match the quantity received,
the clerk manually enters the correct amount. A receiving clerk scans
the product and identifies the location for the product on the
automatic conveyor system (the "Tie Line"). The product is then
immediately routed to the proper position on the Tie Line where it is
stacked and bundled for shipment.
The Tie Line operates throughout the week. Because magazines
have a limited shelf life, a minimum inventory level is maintained to
meet daily delivery needs. Packing receipts are transported down the
Tie Line with corresponding order information displayed automatically
in front of each packaging station indicating the appropriate count for
each title to be stacked for that particular order. Stacks are bundled
at the end of the Tie Line by a strap machine and placed onto route
sequenced interbodies and loaded into trucks for delivery to the
retailer.
Sales to both the wholesaler and retailer are made on a
guaranteed basis. Retailers are able to return unsold product to the
wholesaler for full credit. The wholesaler, in turn, is able to receive
full credit from the publisher and/or national distributor.
When product is returned to the Company, titles are
individually scanned into a returned inventory tracking system and sent
down a conveyer belt to be shredded and baled. The Company generates
additional revenue from the sale of these bales of scrap paper to a
recycler. The price for baled paper fluctuates on the open market.
It is anticipated that although distribution methods utilized
by the various Acquisition Parties may differ at this time, gradually
the Combined Company's distribution activities will become more
consistent throughout the Combined Company, subject to the various
requirements, customs and practices in a particular market.
<PAGE> 5
MARKETING AND SALES
The increasing size and sophistication of retailers has led
them to demand more assistance in managing and positioning their
product lines to maximize sales and eliminate unnecessary costs. In
response to these demands, the Company has sought ways to expand upon
the wholesaler's basic delivery service to seek ways to provide value
added services to its customer base. The Company has determined that by
integrating certain of its basic marketing programs described below
with a sophisticated and proprietary system known as the "SMARTS
System" (which stands for Sales Magazine Analysis React Transmit
System) developed by Scherer Companies, the Company and the Combined
Company will be able to effectively position its products leading to
higher revenues and more efficient product allocation. The Company's
basic marketing programs include the following:
- Impact Marketing Program. This marketing program
customizes magazine displays to utilize otherwise wasted
space in retail outlets like structural columns, freezer
bases and end caps, thereby increasing the number of
displays within a store from two to up to seven. These
locations are usually in the highest traffic areas within
the store and represent excellent cross merchandising
opportunities.
- Mainline Fixture Program. This program is the basis of all
magazine sales beyond those at the checkout line. Mainline
fixtures serve as the primary location of magazines within
a store. Mainline fixtures include a minimum four foot
long rack capable of holding up to 26 titles per foot.
Mainline titles typically have a higher cover price (over
$3.00) and produce over 50% of revenues in a given
location.
- Auxiliary Display Program. This program utilizes small
spinner racks, special promotion dump displays and counter
displays to create additional display opportunities within
a retail outlet to increase sales. These displays can be
uniquely placed throughout the store for one to three week
periods of increased sales.
- Checkout Sales. This component is designed to promote the
sale of magazines at the checkout counter by closely
managing title selection. Services include display fixture
production and installation for which the Company receives
display placement fees from publishers.
- Family Reading Center. Family Reading Centers provide up
to 40 running feet of shelf space which allow the
wholesaler to showcase more titles than a Mainline Fixture
Program and display them with a full facing rather than
the typical quarter or half facing.
- Store Within a Store. This component replicates the
product selection and size of a newsstand but is housed
within a larger retailer such as a supermarket. It
represents the transition from the "pass and browse"
approach of the mainline fixtures to a "stop and shop"
theme. The Store Within a Store can range anywhere from 50
to 150 running feet and delivers maximum results for high
traffic oriented retailers by increasing the number of
unit purchases per customer.
<PAGE> 6
- Display Growth - Incentive. This component is tailored to
existing retailers to provide incentives to expand their
display space for magazines by offering display placement
allowances and rebates for increased sales. It is part of
the Company's strategy to up-tier its basic marketing
programs with retailers into those that utilize more floor
space.
THE SMARTS SYSTEM
The SMARTS System, which is the only system of its kind in the
wholesale periodical distribution industry, was developed by internal
management information systems professionals at Scherer Companies. The
SMARTS System analyzes the market area of each retail location to
customize product allocation to correspond to the buying habits and
trends of the primary consumer base. Through customer profiling and
product placement programs, the SMARTS System increases sales by
pinpointing the product that the consumer is most likely to buy and
strategically placing it on display in an optimum location within the
store.
- Consumer Profiling. Utilizing sophisticated data from the
US Census Bureau, the SMARTS System is a proprietary
product allocation system that provides a detailed
consumer profile for a particular market area, enabling
the Company to target its product mix based upon the
demographic (i.e., age, population, gender, occupation,
income, ethnicity, marital status, religion and education
level) and psychographic (i.e., lifestyle and purchasing
behavior) characteristics of the market area. These
characteristics group consumers into lifestyle cluster
groups. A retail location is assigned to one of 72
lifestyle cluster groups. Examples of two lifestyle
cluster groups are as follows:
Executive Suites: Professional/White Collar
College Graduate
Age 25 - 44
White/High % of Asian
More likely to:
- Go jogging
- Use financial planning
services
- Read Fortune magazine
Gray Collars: Blue Collar
High School education
Age 55 +
Mixed Ethnicity
More likely to:
- Join a religious group
- Drive a Chevrolet Truck
- Read Guns & Ammo magazine
The preferences of lifestyle cluster groups
are compared to historical sales information to
optimize sales opportunities and product mix in each
retail location. The Company is able to tailor its
distribution focus to products
<PAGE> 7
identified by the cluster group that meet the demand
of the consumer at each retail location, ultimately
improving sales and distribution efficiency. The
SMARTS System provides the Company with a key
competitive advantage over other regional wholesalers
and is expected to become more valuable to the
Combined Company as it expands its market area
throughout the midwestern United States.
- Product Placement. The SMARTS System also provides
product placement assistance in two ways. The Floor
Planogram is used to determine the location of
display fixtures within the store. This sophisticated
program increases sales potential by positioning
displays in high traffic, high visibility areas while
maximizing the available display space. This program
enables management to exploit additional selling
opportunities by identifying under-utilized space in
the store such as structural columns, in aisle
freezer bases, and the sides of end aisle displays.
These opportunities are targeted for customer design
display racks to feature titles focused around
particular products and topics reflective of the
products offered in that area. For example, a display
may be positioned in the wine section to display
magazines such as Food and Wine.
The Display Planogram is used to determine
the position of a specific title and/or category of
titles within the display fixture. Product space is
allocated based on sales performance of each category
within the store and benchmarked against other
comparable stores in comparable lifestyle cluster
groups. Better ranked categories receive larger
and/or better positions on the displays. The titles
within each category are ranked based upon consumer
interest, cluster rank, profitability, and
seasonality to determine which titles earn the best
locations within the category blocks. "A" titles
occupy more desirable positions on the fixtures and
receive more consumer exposure, while "B" and "C"
titles earn and receive progressively less desirable
locations. This ranking system then places the titles
most likely to sell at the consumer's fingertips.
It is anticipated that the SMARTS System will be expanded and
rolled out to the various operating locations of the Combined Company
until, eventually, all locations of the Combined Company will utilize
the SMARTS System.
CUSTOMERS
The Company and the individual Acquisition Parties have
developed long standing, trusted vendor relationships with their
respective customer bases. The customer bases range from large national
retailers such as The Kroger Company to smaller local retailers. It is
estimated that the Combined Company has a large and more diverse
customer base comprised of approximately 18,000 different retail
locations representing approximately 12,000 different customers, with
no one customer representing more than 5% of sales.
COMPETITION
The Company and the Combined Company face competition from
three different areas. These areas include competition from other
wholesalers, competition from alternative delivery channels and
competition from substitute products.
<PAGE> 8
- Competition From Other Wholesalers. Principal
competitors of the Company and the Combined Company
include The Anderson Group, ARAMARK and the Charles
Levy Company, all of which are regional wholesalers
in neighboring territories. Although these regional
wholesalers represent potential competition in
certain markets in which the current Company and the
Combined Company will operate, management does not
believe that competition will be significant due to
the "Post Office" economic model of distribution
which makes it difficult for other wholesalers to
profitably compete in the Combined Company's market
areas.
Because most wholesalers have access to the
same periodical titles, they must differentiate
themselves from neighboring regional wholesalers by
providing value added services to their retail
customers. With the ultimate goal of efficiently
maximizing sales of periodicals in their stores,
management believes that retailers generally have
selected wholesalers based upon the following
considerations:
- The accuracy of packaging and
accounting systems and the timeliness
of delivery service;
- The effectiveness of its product
allocation and display systems to the
retailer;
- Technological capabilities and the
resulting cost saving afforded to the
retailer;
- Competitive pricing and terms;
- The wholesaler's reputation as a
"direct store delivery" vendor and
success as an overall category
manager to the retailer; and
- The wholesaler's ability to generate
and communicate new specific customer
knowledge to the retailer.
- Competition From Alternative Channels of
Distribution. Periodical wholesalers compete with
other delivery sources for the sale of periodicals to
the consumer. These alternative delivery sources
include subscriptions offered by the publishers and
electronic transmissions over the Internet.
At one time, subscription sales represented
the only alternative source of delivery for a
periodical to the ultimate consumer. Although it is
not a profitable delivery channel for most
publishers, subscription sales are principally used
to establish information about the circulation base
of a magazine to assist the publisher in attracting
focused advertisers and in establishing advertising
rates. Management believes that the vast majority of
magazine sales are a retail impulse purchase and that
subscriptions do not represent a significant
competitive threat. In addition, management believes
that as the SMARTS System (as described and defined
above) becomes integrated and utilized by the
<PAGE> 9
Combined Company in all of its businesses, the
demographic and psychographic information utilized in
the product allocation decision can be used by
publishers to attract focused advertisers and
establish advertising rates. See "The Company and The
Combined Company -Business -The SMARTS System".
Many of the major publishers are now
offering samples of their magazines on the Internet
through either direct ordering, viewing on line, or
downloading of articles. Although certain sources
estimate that as much as 11% of the population has
access to the Internet, this service has not had any
quantifiable effect on retail periodical sales due to
the impulse nature of the purchase.
- Competition From Substitute Products. The periodical
industry competes for the non-active leisure time of
consumers (in contrast to active leisure time which
includes activities such as participant sports). For
several decades, the periodical industry has competed
with alternative products such as the radio,
television, home videos, home computers and the
Internet for consumers' non-active leisure time.
Rather than hindering the growth in the wholesale
periodical distribution industry, the growth of these
substitute products has generated increased consumer
interest in new magazines like Stereo Review, TV
Guide, Video Review, PC magazine and Internet Life
which are focused on the interests and hobbies of
consumers.
II. "THE COMPANY AND THE COMBINED COMPANY -- FACILITIES"
FACILITIES
Currently, the Company owns or leases the following
properties:
Company's Wholesale Facilities:
- 34,000 sq. ft. Waterbury, CT Monthly Lease
- 62,400 sq. ft. Pittsburgh, PA 4 Year Lease
- 20,000 sq. ft. Wilmington, NC 4 Year Lease
Company's Retail Facilities:
The Company also maintains lease agreements with respect to
approximately 7,500 sq. ft. for one bookstore and four Newsrack retail
outlets in Connecticut.
Company's Corporate Facilities:
Additionally, the Company is provided approximately 814 square
feet of space at 5131 Post Road, Dublin, Ohio, for its corporate
offices, from Scherer Companies pursuant to a Management Agreement with
Scherer Companies. Upon completion of the acquisition transactions, the
Company intends to add 16,583 square feet of space previously leased by
Scherer Companies. Such lease will be for a term of 9 years. Management
believes that the leased facilities are and will be adequate for the
Company's operations in the foreseeable future. See "The Stock and
Asset Exchanges - Conflicts of Interest and Related Party
Transactions".
<PAGE> 10
Facilities of the Combined Company:
In addition to the Company's current properties and
facilities, the Combined Company will hold additional facilities as
described more particularly below.
Combined Company's Wholesale Facilities:
Generally, such facilities are utilized as warehouse and
distribution centers although certain of the facilities may also
contain the respective company's executive or principal business
offices. A number of these facilities, identified below with an
asterisk, are leased from principals of the Acquisition Parties. See
"The Stock and Asset Exchanges - Conflicts of Interest and Related
Party Transactions."
<TABLE>
<CAPTION>
Scherer Affiliates Wholesale Facilities:
<S> <C> <C> <C>
- 65,000 sq. ft. Columbus, OH* 3 Year Lease
- 35,000 sq. ft. Cincinnati, OH Owned (Subject to Mortgage)
- 17,000 sq. ft. Petoskey, MI* 3 Year Lease
- 17,000 sq. ft. Mt. Pleasant, MI* 10 Year Lease
Stoll Wholesale Facilities:
- 84,000 sq. ft. Jackson, MI* 10 Year Lease
- 45,000 sq. ft. Jackson, MI* 5 Year Lease
- 53,000 sq. ft. Grand Rapids, MI* 5 Year Lease
- 30,000 sq. ft. Toledo, OH Owned
- 78,000 sq. ft. Indianapolis, IN* 3 Year Lease
- 20,000 sq. ft. Galesburg, MI* 5 Year Lease
Michiana Wholesale Facilities:
- 46,800 sq. ft. Niles, MI* 3 Year Lease
- 14,200 sq. ft. Ft. Wayne, IN* Being Purchased
Klein Wholesale Facilities:
- 98,000 sq. ft. Cleveland, OH* Month-to-Month Lease
- 38,000 sq. ft. Akron, OH* Month-to-Month Lease
- 10,000 sq. ft. Cleveland, OH* 3 Year Lease
Combined Company's Retail Facilities:
</TABLE>
The Combined Company also will maintain lease agreements with
respect to an additional approximately 90,000 sq. ft., for an
additional 26 retail outlets and bookstore locations. After the
transaction it will add 13 leased retail locations from Stoll, 6 leased
retail locations from Read-Mor (a company managed by Scherer
Companies), 2 leased retail locations from MacGregor and 5 leased
retail locations from Klein. Management does not consider any one of
these properties to be materially important to the Company.
<PAGE> 11
Certain of the retail leases require landlord consent to
assignment. Although consent to assignments have not been received from
all landlords, failure to receive one or more assignments would not
have a material adverse effect on the Company.
In the opinion of management of the Company, all of the foregoing
described properties which are owned by the Company or are to be acquired in the
transactions and all of the contents of the owned and leased facilities are
adequately covered by insurance.
It is anticipated that as the operations of the Combined Company are
consolidated over the next 12 months, the Combined Company will require less
operational space to service and expand current market territories. Management
expects to achieve significant cost savings by selling or subleasing certain of
these facilities when consolidation plans are finalized and operations are
merged. Pursuant to the Debenture Agreement, the Company has agreed that, until
$12,000,000 of Senior Debentures owed to Stoll Shareholders and issued in the
acquisition have been paid, it will not effect any consolidation(s) of
operations if a review of the proposed consolidation(s) is requested by an
appropriate member of the Executive Committee, unless the consolidation is
approved by at least a majority of the Executive Committee consisting of Ronald
E. Scherer, Thaddeus S. Majerek, Richard H. Stoll, Sr., Richard H. Stoll, Jr.,
and George R. Klein. See "Introduction and Summary - Debentures".
III. "ELECTION OF DIRECTORS -- NOMINEES FOR ELECTION".
NOMINEES FOR ELECTION
The following information is set forth with respect to each person
nominated for election as a director and with respect to the executive officers
of the Company:
Director Nominees
Name Age Positions Held with the Company
- ---- --- -------------------------------
Ronald E. Scherer(1)(2) 46 Chairman of the Board of Directors;
President and Chief Executive Officer
Eugene J. Alfonsi(1)(2) 59 Director; Vice-President
Thaddeus A. Majerek(1)(2) 46 Director
David B. Thompson(1)(2) 57 Director; Treasurer
Robert H. Monnaville(1)(2) 52 Director
Richard Stoll, Sr.(1) 63 None
Nancy Stoll Lyman(1) 36 None
George R. Klein(1) 54 None
R.L. Richards(1) 48 None
<PAGE> 12
Executive Officer Not Named Above
Thomas L. Gerlacher 54 Chief Financial Officer
(1) Nominee for Director if Proposals 1 through 4 above are approved
by the shareholders
(2) Nominee for Director if Proposals 1 through 4 above are not
approved by the shareholders.
RONALD E. SCHERER, age 46, has been a member of the Board of Directors
since 1989. Mr. Scherer was appointed President and Chief Executive Officer of
the Company in August 1989, became Chairman of the Board of Directors in
February 1992, and has acted in those capacities since his respective
appointments. Mr. Scherer has also served as Chairman of the Board of Directors
of Scherer Companies since 1982 and was appointed Senior Chairman of such Board
of Directors in 1993. Other companies under Mr. Scherer's ownership, control or
management have engaged in such businesses as real estate, manufacturing,
pharmaceutical distribution, and data processing. Mr. Scherer is an executive
officer and shareholder of the National Wholesale Drug Co. which filed a
voluntary petition under Chapter 11 in the United States Bankruptcy Court for
the Eastern District of Michigan in February 1993.
EUGENE J. ALFONSI, age 59, has been a member of the Board of Directors
since 1992. Mr. Alfonsi was the President of the Periodical Division of Scherer
Companies from 1986 to September 1993. In September 1993, Mr. Alfonsi was
appointed as the President and Chief Operating Officer of Scherer Companies,
which positions he still holds today. Prior to joining Scherer Companies in
1986, he owned and managed several wholesale periodical distribution companies,
a business in which he has been employed for most of his life. Mr. Alfonsi
graduated in 1963 with a B. A. degree in Economics and Finance from Milliken
University in Illinois.
THADDEUS A. MAJEREK, age 46, has been a member of the Board of
Directors since 1992. Since 1988, Mr. Majerek has served as the President and
Chief Executive Officer of Michiana News Service, Inc. in Niles, Michigan. Mr.
Majerek graduated in 1974 with a BS degree in Business and Physical Education
from Eastern Michigan University, and in 1989 with an MBA degree from the
University of Notre Dame. Mr. Majerek has been active in the magazine
distribution business since 1971. He has managed magazine distribution companies
in Utah, Indiana, and Michigan.
DAVID B. THOMPSON, age 57, has been a member of the Board of Directors
since 1988. He also was appointed Treasurer and Chief Financial Officer of the
Company in August 1989, but ceased serving as Chief Financial Officer in
December 1993. Additionally, Mr. Thompson, a Certified Public Accountant, has
been affiliated with Scherer Companies since 1973 when he was elected as a
Director and appointed Treasurer and Chief Financial Officer. In 1993, Mr.
Thompson became Chairman of the Board of Directors and Chief Executive Officer
of Scherer Companies. Currently, Mr. Thompson is an officer and/or a director of
a number of companies owned, controlled or managed by Mr. Scherer, including
OPD, Wholesalers, Northern and MacGregor. Mr. Thompson graduated in 1963 with a
BS degree in Accounting from the University of Detroit. Mr. Thompson is an
executive officer of the National Wholesale Drug Co. which filed a voluntary
petition under Chapter 11 in the United States Bankruptcy Court for the Eastern
District of Michigan in February 1993.
<PAGE> 13
ROBERT H. MONNAVILLE, JR., age 52, has been a member of the Board of
Directors of the Company and President of Service News Company, d/b/a Yankee
News Company, one of the Company's subsidiaries, since March of 1995. From May,
1993 to March, 1995, Mr. Monnaville served as the General Manager of Yankee News
Company. From September, 1992 to May, 1993, Mr. Monnaville served as the General
Manager of National Wholesale Drug Co., a wholesale pharmaceutical distributor,
and, again, from 1990 to July, 1992, Mr. Monnaville served as General Manager of
Yankee News Company. Altogether, Mr. Monnaville has served in several executive
capacities with the Company since 1982. Mr. Monnaville is a graduate of John
Carroll University and has a law degree from Cleveland State University. Prior
to joining Yankee News Company, Mr. Monnaville engaged in the practice of law as
a labor attorney for United Technologies in Connecticut. Additionally, Mr.
Monnaville serves on the Board of Directors of Blue Cross/Blue Shield of
Connecticut.
RICHARD H. STOLL, SR., age 63, has been nominated for election to the
Board of Directors. Mr. Stoll Sr. is the Chairman of the Board of Directors and
Chief Executive Officer of The Stoll Companies and has been employed by The
Stoll Companies since July 1954. Mr. Stoll Sr. is a graduate of Colgate
University in 1954 with a degree in history. Mr. Stoll is the father of Nancy
Stoll Lyman.
NANCY STOLL LYMAN, age 36, has been nominated for election to the Board
of Directors. Ms. Lyman is a Director of The Stoll Companies. Ms. Lyman is the
Founder and Managing Consultant for the Executive Development Group, a
management and consulting firm formed in 1991. Previously Ms. Lyman was the
Manager of Management Training and Development at Merrill Lynch and an Associate
with Morgan Stanley in the Fixed Income Division. Ms. Lyman is a Certified
Public Accountant and graduated from Saint Mary's College of Notre Dame,
Indiana, with a Bachelor of Business Administration and from Boston College with
an MBA. Mrs. Lyman is the daughter of Richard H. Stoll, Sr.
GEORGE R. KLEIN, age 54, has been nominated for election to the Board
of Directors. Mr. Klein is Vice Chairman of The George R. Klein News Co.,
Central News Co. and Newspaper Sales, Inc. In addition, Mr. Klein is President
and Chairman of the Executive Committees for [East Texas Distributing Co.], a
magazine wholesaler located in [Houston], Texas. Mr. Klein also has ownership
interests in other magazine wholesale companies and in other companies including
companies that provide real estate and management services to Klein. Mr. Klein
is a graduate of Colorado College in 1964 with a Bachelor of Science degree and
has an MBA from the University of Denver in 1965.
R.L. RICHARDS, age 48, has been nominated for election to the Board of
Directors. Mr. Richards currently is managing director of RDT Limited, a private
investment company owned by R. David Thomas, a principal shareholder of the
Company. Mr. Richards is also a member of KDR Limited. Mr. Richards has been
employed by affiliates of Mr. Thomas since 1978. Mr. Richards is a graduate of
Wittenberg University with a degree in economics and political science, and has
a law degree from The Ohio State University. Mr. Richards serves as a director
of Acceptance Insurance Companies (NYSE), and of several non-public companies
including Fifth Third Bank of Columbus, Inc. and Stanley Steemer International,
Inc. Previously, Mr. Richards served as a director for Clinton Gas Systems, Inc.
(OTC) and Orange Co. (NYSE).
<PAGE> 14
Other Executive Officer
THOMAS L. GERLACHER, age 54, has served as Chief Financial Officer of
the Company since December 1993. Since July 1992, Mr. Gerlacher has also served
in other financial executive capacities in the Company's wholly-owned
subsidiaries. From December 1991 to July 1992, Mr. Gerlacher was employed as
Chief Financial Officer of Team Logos Corporation. From 1987 through 1992, Mr.
Gerlacher, who is a Certified Public Accountant, was President of CFO Resource
Network Company. From 1976 through 1987, Mr. Gerlacher was employed as Vice
President of Budgeting and Planning of Chemlawn, Inc. Mr. Gerlacher graduated in
1964 with a BS degree in Accounting from the University of Notre Dame and in
1967 with an MBA degree from The Ohio State University
IV. "ELECTION OF DIRECTORS -- EXECUTIVE COMPENSATION"
EXECUTIVE COMPENSATION
The following table sets forth the compensation of the Company's Chief
Executive Officer and the only other executive officer whose total compensation
in fiscal 1996 exceeded $100,000 for the fiscal years ended September 30, 1996,
1995 and 1994. No other executive officer of the Company or any of its
subsidiaries received salary and bonus compensation in the most recent completed
fiscal year which exceeded $100,000.
Summary Compensation Table
<TABLE>
<CAPTION>
Long Term Compensation
------------------------------------------
Annual Compensation Awards Payouts
-----------------------------------------------------------------------------------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Other Securities
Annual Restricted Under- All Other
Compen- Stock lying LTIP Compen-
Name and Fiscal Salary Bonus sation Award(s) Options/ Payouts sation
Positions Year ($) ($) ($) ($) SAR's(#) ($) ($)
- --------------- ----------- ------------- ----------- -------------- -------------- -------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Ronald E. 1996 $50,000 None None None None None None
Scherer, 1995 None None None None None None None
Chairman of 1994 None None None None None None None
the Board of
Directors,
President and
Chief
Executive
Officer(1)
Robert H. 1996 $130,000 None None None None None None
Monnaville, 1995 $52,000 None None None None None $58,800
President, 1994 None None None None None None $84,650
Service News
Company(2)
</TABLE>
<PAGE> 15
(1) Mr. Scherer, although president and chief executive officer of
the Company, was not an employee of the Company prior to July
of 1996. Mr. Scherer was employed by Scherer Companies, and
his services were provided to the Company pursuant to a
management agreement between Scherer Companies and the
Company. Prior to September 30, 1995, the Company did not owe
or was not required to pay any amount of a management fee to
Scherer Companies because the management agreement requires
profits from operations before any management fees are earned.
See "The Stock and Asset Exchanges - Conflicts of Interest and
Related Party Transactions."
(2) During 1994 and part of 1995, Mr. Monnaville provided services
to the Company as an independent contractor, for which he
received consulting fees. He became an employee of Service
News Company in April of 1995.
Employment Agreements
The Stock Exchange Agreement with Stoll requires, as a
condition to closing, that the Company enter into employment agreements
with three individuals, one of whom is Richard Stoll, Jr., who will be
a significant shareholder of the Company and who is the son of Richard
Stoll, Sr. and the brother of Nancy Stoll Lyman, both of whom have been
nominated to the board of directors. Mr. Stoll's employment agreement
is for a term of three years and provides for an annual salary of
$160,000, along with potential bonuses upon the achievement of certain
objectives. In accordance with the terms of the Michiana Exchange
Agreement, the Company agreed that, following the acquisition of
Michiana, it would enter, or cause Michiana to enter, into employment
agreements with certain employees of Michiana, one of whom is Thaddeus
A. Majerek, a director of the Company. The employment agreement is to
be for a three year term and Mr. Majerek is to receive an annual salary
of $160,000. See "The Stock and Asset Exchanges - Conflicts of Interest
and Related Party Transactions." In addition, the Company has entered
into three year employment agreements with Ronald E. Scherer, David B.
Thompson, and Eugene J. Alfonsi, in amounts to be established after
consultation with the Hay Group.
Deferred Compensation Agreement
Stoll has entered into a deferred compensation agreement with
Richard Stoll, Sr., who has been nominated to the Company's board of
directors. Under the agreement, Stoll will pay Mr. Stoll the sum of
$250,000 per year for a period of five years and $100,000 per year for
a period of seven years thereafter. See "The Stock and Asset Exchanges
- Conflicts of Interest and Related Party Transactions."
Management Agreement
In accordance with the terms of the Klein Exchange Agreement,
the Company agreed that, following the acquisition of Klein, it would
enter, or cause Klein to enter, into employment agreements with certain
employees of Klein. In addition, George R. Klein, nominee for director
of the Company, is president of Klein Management Company. The Company
will enter into a management agreement for a three year term, pursuant
to which Mr. Klein and Klein Management Company will provide services
to the Company. Klein Management Company is to receive an annual fee of
$134,000. See "The Stock and Asset Exchanges - Conflicts of Interest
and Related Party Transactions."
<PAGE> 16
COMPENSATION OF DIRECTORS
The Company has a policy which provides that each director who lives in
Columbus, Ohio, will receive the sum of $50.00 for each meeting of the Board of
Directors attended by such director. A director who lives outside of Columbus,
Ohio, will receive the sum of $100.00 per meeting attended. Notwithstanding the
foregoing policy, the Company has not paid any such director's fees; however,
the Company does pay reasonable out-of-pocket expenses incurred in the
attendance of meetings of the Board of Directors.
V. "THE STOCK AND ASSET EXCHANGES -- CONFLICTS OF INTEREST AND RELATED PARTY
TRANSACTIONS"
CONFLICTS OF INTEREST AND RELATED PARTY TRANSACTIONS
There are various conflicts of interest and related party transactions
in connection with the acquisitions and from other contractual arrangements.
EXISTING COMPANY RELATED PARTY TRANSACTIONS
The following are transactions between the Company and its officers,
directors and principal shareholders which are currently in effect regardless of
the acquisition transactions.
MANAGEMENT SERVICES
Pursuant to a management agreement, Scherer Companies has been
providing management services to the Company in the nature of
accounting, administration, legal and other supervisory services. The
services of Ronald E. Scherer, David B. Thompson and Eugene J. Alfonsi,
directors and officers of the Company, are provided to the Company
through this arrangement. On October 1, 1995, Scherer Companies began
to charge the Company for these services, because, under the agreement,
the management fee is due once the Company generates net income, which
it did during the fiscal year ended September 30, 1995. From October 1,
1995 forward through June 30, 1996, a fee of $30,000 per month , or
$270,000 was due. Following the acquisitions, the persons providing the
various management services were direct employees of the Company or one
of its subsidiaries, and the management services arrangement was
terminated effective July 1, 1996. Additionally, Scherer Companies has
also been providing management services to OPD, Wholesalers, Northern
and MacGregor. These services arrangements will be terminated at the
time of the final closing of the acquisitions.
PUT AGREEMENTS WITH PRINCIPAL SHAREHOLDER
In connection with its acquisition of Service News Company of
Wilmington ("Wilmington"), the Company granted rights to put certain
shares of Common Stock of the Company back to the Company. These rights
were granted to the former shareholder of Wilmington, Doris R.
Marshall, a principal shareholder of the Company, and her children,
David E. Marshall and Miranda Marshall (collectively, the "Marshalls").
Under the put agreements, the Marshalls are entitled, after April 1997,
to cause the Company to repurchase from them up to an aggregate of
4,821,398 shares of Common Stock. In the event the put options are
exercised as they become exercisable, the related payments would be
$167,916 in
<PAGE> 17
1997, $335,832 in 1998, $3,599,534 in 1999, $335,832 in 2000, and
$3,497,212, in total over the succeeding 13 years. The Company's
obligation to pay the put amounts is secured by a security interest in
all of the assets of the Company's subsidiary, Service News Company of
Connecticut ("Yankee").
LEASE AGREEMENTS
The Company's subsidiary, Service News Company of Wilmington,
has entered into a lease agreement to lease an approximately 20,000
square foot warehouse and distribution facility from Doris R. Marshall,
the former owner of this subsidiary, who owns more than 5% of the
outstanding shares of Common Stock of the Company. The terms of the
lease provide for monthly rent of $5,347; the lease has approximately
three years left on the term.
CONSULTING AGREEMENT WITH FORMER DIRECTOR
On June 27, 1994, the Company and its subsidiary, Service News
Company, d/b/a Yankee News Company (of Waterbury, Connecticut)
("Yankee"), entered into a consulting agreement with a former officer
of Yankee and former director of the Company. The consulting agreement
is for a term of eight years expiring in 2002. During the first two
years, the consultant was paid $4,000 per month. During years three
through five, the consultant is to be paid $5,000 per month. During
years six through eight, the consultant is to be paid $8,500 per year.
YANKEE AGREEMENTS WITH MDI, L.P.
On May 24, 1993, the Company's wholly-owned subsidiary,
Yankee, re-acquired the net operating assets of Yankee from MDI, L.P.,
a limited partnership in which Yankee and Magazine Distributors, Inc.
("MDI") were partners. MDI holds more than 5% of the outstanding shares
of Common Stock of the Company. As part of this acquisition, the
Company, Yankee, OPD and Northern entered into non-competition
agreements with MDI and with Robert B. Cohen, James S. Cohen, and
Michael Cohen, the majority shareholders of MDI, pursuant to which MDI
and the Cohens agreed not to compete for a period of ten years within a
specified Yankee distribution area. During the first five years of the
agreements, MDI and the Cohens are to receive compensation equal to an
aggregate of 2% of Yankee's agency net sales, payable 1% in cash and 1%
in Common Stock of the Company valued at $1.00 per share for this
purpose. During the last five years of the agreements, MDI and the
Cohens are to receive compensation equal to 1% of Yankee's agency net
sales, payable in cash. The compensation was $501,920 in 1996, $468,982
in 1995 and $446,092 in 1994 (one-half paid in cash and one-half paid
in shares).
As part of the acquisition of Yankee, the Company entered into
a limited consulting agreement dated May 24, 1993, with Robert B.
Cohen, the principal owner of MDI, for a ten year consulting period.
Under the agreement, Mr. Cohen is to consult on matters relating to the
potential acquisition of entities engaged in the wholesale distribution
of books, magazines and/or periodicals in Maine, Vermont, Connecticut,
New Hampshire, New Jersey, New York or Massachusetts which are
identified by the Company. As a consulting fee, Mr. Cohen is to
receive, during the first five years of the consulting arrangement, 1%
of the annual net sales of an acquired agency, payable in cash, plus 1%
of an acquired agency's net sales payable in Common Stock of the
Company, valued at $1.00 per share for this purpose. During the last
five years of the agreement, the consulting fee is calculated as 1% of
an acquired agency's net sales, payable in cash. The Company has not
acquired any companies specified in the consulting agreement, and no
amount has been paid to Mr. Cohen under this agreement to date.
<PAGE> 18
In connection with the acquisition of Yankee from MDI, L.P.,
the Company, Ronald E. Scherer, Yankee, OPD and Northern entered into a
non-competition agreement with MDI, which provides that the Company,
Mr. Scherer, Yankee, OPD and Northern will not compete in the wholesale
distribution of periodicals for a period of ten years within certain
specified counties of New York, Connecticut, Massachusetts and New
Jersey.
EMPLOYMENT AGREEMENTS
In connection with the acquisition transactions, the Company
will enter into employment agreements with three officers and
directors, Ronald E. Scherer, David B. Thompson and Eugene J. Alfonsi,
for a term of three years each. The Company has contracted with a
national consulting firm, Hay Group, to establish appropriate levels of
compensation for these three individuals. Each of these individuals has
served the Company as an officer and director without compensation for
the last four years.
SCHERER AFFILIATE RELATED PARTY TRANSACTIONS
COMMON OWNERSHIP AND MANAGEMENT
The acquisitions of the Scherer Affiliates involve
transactions between related parties, because substantially the same
management operates the Scherer Affiliates and the Company, and because
Ronald E. Scherer, the principal shareholder of the Company, is also,
either directly or through family trusts, the principal shareholder of
each of the Scherer Affiliates. The Company has taken a number of steps
to help assure itself that the acquisitions involving the Scherer
Affiliates are on an arm's length basis and no more favorable to the
Scherer Affiliates than would be a transaction with independent
unrelated parties: (1) the acquisition agreements are on substantially
the same terms as the acquisition agreements with Stoll, Michiana, and
Klein, independent parties; (2) the Company used a standard in
establishing the purchase price which has been used in connection with
other acquisitions in the periodical industry of which the Company is
aware, which was also used in connection with the Stoll, Michiana and
Klein acquisitions (except that Wholesaler's and Scherer Companies'
price is based upon fair market value); (3) the acquisition agreements
provide for an independent audit of the financial statements of the
acquired companies by the Company's independent auditors and
adjustments of the purchase prices based upon the results of the
audits; (4) the acquisitions involving the Scherer Affiliates were
reviewed and approved by an independent committee appointed by the
Board of Directors, consisting of Thaddeus A. Majerek, a non-employed
board member (see, however, "Michiana Related Party Transactions",
below); and (5) the Company has received a fairness opinion from the
Corporate Finance Department of the First National Bank of Boston that
states, from a financial point of view, the consideration to be paid by
the Company for Michiana, Stoll, Klein, OPD, Northern, MacGregor and
Scherer Companies, is fair to the shareholders of the Company. (See
"The Stock and Asset Exchanges - Opinion of the Financial Advisors to
the Company's Board of Directors.") A copy of the fairness opinion is
attached to this proxy statement as Exhibit C. Additionally, Mr.
Scherer abstained from all voting of the Board of Directors with
respect to the acquisitions of the Scherer Affiliates.
<PAGE> 19
LEASE OF OFFICE AND WAREHOUSE FACILITIES
Upon completion of the acquisition from Northern of the assets
related to its wholesale periodical distribution business, the Company
will enter into a real estate lease with Northern, pursuant to which
the Company will lease for a three-year term the approximately 17,000
square foot warehouse and distribution facility located in Petoskey,
Michigan. The lease is to be a triple net lease, with the Company
paying the cost of all taxes, insurance, utilities and other expenses,
and the annual rental amount is to be $3.00 per square foot. Because
the stock of Northern is owned by a trust of which Ronald E. Scherer is
a primary beneficiary, he could benefit from the lease arrangement.
Management believes that the terms of this lease are no less favorable
to it than it could obtain from an independent party in an arms-length
transaction.
LEASE OF OFFICE FACILITIES
Scherer Companies leases approximately 17,400 square feet of
office space for its principal executive offices at 5131 Post Road,
Dublin, Ohio, from NRS Equities, Inc., an entity controlled by Ronald
E. Scherer. The lease is for a term of 10 years, commencing November 1,
1995. The current rental rate is $14.50 per square foot. Pursuant to
its management agreement with the Company, Scherer Companies subleases
office and conference facilities in this building to the Company.
EMPLOYMENT AGREEMENTS
The Stock Exchange Agreement with Scherer Companies requires,
as a condition to closing, that the Company enter into employment
agreements with four individuals, one of whom is Ronald E. Scherer,
Jr., the son of Ronald E. Scherer. The employment agreement is for a
term of three years, and provides for an anticipated annual salary of
$60,000.
INTERCOMPANY ADVANCES
The Company and the Scherer Affiliates have made a number of
non-interest bearing advances to each other for purposes of paying
slotting fees and making payments to publishers. It is intended that
all of these advances will be eliminated at the closing and in the
consolidated financial statements.
AMOUNT OWED BY OPD TO PRINCIPAL SHAREHOLDER
OPD owes $5,000,000, plus accrued interest, to KDR Limited, an
Ohio limited liability company ("KDR"), whose owners include R. David
Thomas, a principal shareholder of the Company, and R.L. Richards, a
director nominee. This debt is evidenced by a promissory note dated
July 31, 1992, from OPD to RDT Corp., and subsequently assigned to KDR,
in the principal amount of $5,000,000 with interest at the rate of
11.75% per annum (the "Note"). The Note is currently due on demand. The
Note is secured by a pledge from OPD of 5,000,000 shares of Common
Stock of the Company owned by OPD. KDR, OPD and the Company have
entered into discussions regarding the assumption by the Company of the
obligations of OPD under the note. As proposed, KDR will exchange the
Note for a new note from UNIMAG. Although the Company and KDR have not
reached a final agreement on the new note, it is
<PAGE> 20
contemplated that the interest rate would be changed, the new note
would become a long-term note due at a future date, and the new note
would be subordinated to certain other debt of the Company. In
consideration for KDR's agreement to the new note, the Company would
pay KDR accrued interest, make a partial payment of the principal of
the note (a payment of $500,000 is currently proposed), and issue to
KDR warrants to purchase additional shares of Common Stock of the
Company. The terms of these warrants have not been decided.
Additionally, the Company has discussed with KDR, in connection with
the exchange of the notes, nominating R.L. Richards for election to the
Company's board of directors. The Company has also discussed with Mr.
Thomas a proposal for Mr. Thomas to purchase from the Company an
additional $500,000 of Common Stock of the Company for a purchase price
of $1.50 per share (pre-split). There can be no assurance that any of
the transactions described in this paragraph will occur or that the
transactions, if consummated, will be on the terms described in this
paragraph.
STOLL RELATED PARTY TRANSACTIONS
EMPLOYMENT AGREEMENTS
The Stock Exchange Agreement with Stoll requires, as a
condition to closing, that the Company enter into employment agreements
with three individuals, one of whom is Richard Stoll, Jr., who will be
a significant shareholder of the Company and who is the son of Richard
Stoll, Sr. and the brother of Nancy Stoll Lyman, both of whom have been
nominated to the board of directors. Mr. Stoll's employment agreement
is for a term of three years and provides for an annual salary of
$160,000, along with potential bonuses upon the achievement of certain
objectives.
DEFERRED COMPENSATION AGREEMENT
Stoll has entered into a deferred compensation agreement with
Richard Stoll, Sr., who has been nominated to the Company's board of
directors. Under the agreement, Stoll will pay Mr. Stoll the sum of
$250,000 per year for a period of five years and $100,000 per year for
a period of seven years thereafter.
LEASE AGREEMENTS
Stoll leases a 78,000 square foot facility located in
Indianapolis, Indiana from Richard Stoll, Sr. for a monthly rental of
$25,000. This lease is on a month-to-month tenancy. As part of the
Stoll Exchange Agreement, the Company has agreed to lease this facility
from Richard Stoll, Sr. for a period of 36 months for a monthly rental
of $12,000.
A trust which has been established for the benefit of the
Stoll family owns seven parcels of real property which are leased to
Stoll. The terms of such leases are as follows:
(a) Three are retail leases located in
Michigan for three-year terms expiring September 30, 1996,
providing for monthly rentals of $1,460, $2,250 and $1,330.
The renewal of these leases is being evaluated by the Company;
(b) Two are wholesale leases, owned 45% by
the trust, located in Jackson, Michigan for ten-year terms
expiring September 1998 providing for total monthly rentals of
$22,500 and $2,500; and
<PAGE> 21
(c) Two are wholesale leases located in
Galesburg and Wyoming, Michigan expiring September 1996
providing for monthly rentals of $6,300 and $20,000,
respectively. The renewal of these leases is being evaluated
by the Company.
LOANS TO STOLL SHAREHOLDERS
Stoll had made a number of loans to its shareholders in the
aggregate amount of $3,034,053. Included in this loan total were
amounts owed by Richard Stoll, Sr. of $1,343,687. This debt has been
eliminated by the purchase of an aircraft, formerly leased to Stoll by
Stoll Air, Inc., for $600,000, and by a distribution of the balance
owed as a dividend. Mr. Stoll has been nominated for election to the
Company's board of directors. Additionally, the remaining balance due
on Stoll Shareholder loans has been eliminated through Shareholder
distributions, effective June 30, 1996.
MICHIANA RELATED PARTY TRANSACTIONS
BENEFICIAL OWNERSHIP
Thaddeus A. Majerek, a director of the Company, is an officer,
director and a beneficiary of a trust which owns stock of Michiana.
Accordingly, he is not disinterested with respect to the Michiana
acquisition. Although Mr. Majerek engaged in negotiations with the
Company with respect to its acquisition of Michiana, he did not
participate in the deliberations of the Board of Directors of the
Company with respect to the acquisition and abstained in all voting by
the Board of Directors of the Company related thereto. Mr. Majerek was
appointed to act as the member of an independent committee of the Board
of Directors of the Company to consider the exchange agreements with
the Scherer Affiliates. He was selected to serve in this capacity
because, at the time, he was an outside director not employed by the
Company or any of its subsidiaries.
EMPLOYMENT AGREEMENTS
In accordance with the terms of the Michiana Exchange
Agreement, the Company agreed that, following the acquisition of
Michiana, it would enter into, or cause Michiana to enter into,
employment agreements with certain employees of Michiana, one of whom
is Thaddeus A. Majerek, a director of the Company, another of whom is
David W. Majerek, the brother of Thaddeus A. Majerek, and another of
whom is Michael Gilbert, the brother-in-law of Thaddeus A. Majerek. The
employment agreements are to be for three year terms; Thaddeus A.
Majerek is to receive an annual salary of $160,000, David W. Majerek is
to receive an annual salary of $60,000, and Michael Gilbert is to
receive an annual salary of $100,000.
TRANSACTIONS WITH HALL OF CARDS AND BOOKS, INC.
Some of the principal shareholders of Michiana are also
shareholders of Hall of Cards and Books, Inc. ("HOCAB"), which operates
approximately 27 retail stores, including Hallmark stores, paperback
stores and newsstands. HOCAB is a principal customer of Michiana for
books and magazines, constituting 17% of Michiana's net revenues during
its fiscal year ended June 30, 1996. In connection with the closing of
the Michiana transaction, The Company and HOCAB are to enter into a
five year exclusive supply agreement pursuant to which The Company is
to be the exclusive supplier of magazines, books and other related
periodical items to HOCAB, at
<PAGE> 22
special prices negotiated in the agreement. These discounts
are below the prices charged other retailers, and HOCAB is expected to
benefit by an aggregate of approximately $165,000 per year from the
extra discount received by it. HOCAB is also indebted to the Company in
the amount of $3,589,389. HOCAB has executed a promissory note to the
Company which bears interest at the rate of 9.25% per annum and which
provides that: (1) $1,089,389 of the principal will be payable July 15,
1997, (2) $1,250,000 of the principal will be payable in 60 consecutive
monthly installments of $20,833, beginning April 1, 1997, and that (3)
$1,250,000 of the principal will be payable in 20 consecutive quarterly
payments of $62,499, beginning April 1, 1997 (provided that quarterly
payments are payable only if the Michiana Shareholders have received
the quarterly payments on the Senior Debentures to be paid to them).
The note is secured by a pledge of all of the stock of HOCAB and by a
pledge of 2,392,926 shares of the Common Stock of the Company to be
received in the Michiana Transaction. In addition, Michiana is
guaranteeing payment of all indebtedness of a line of credit to HOCAB
by 1st Source Bank. The current outstanding principal balance of this
guaranteed debt is $0 at December 31, 1996. 1st Source Bank has agreed
to terminate this guaranty upon the consummation of the Company's
acquisition of Michiana and the repayment by Michiana of loan amounts
totaling approximately $1,501,000 to 1st Source Bank.
LOANS FROM MAJEREKS
Thaddeus A. Majerek, who is a director of the Company, and his
parents, Thaddeus S. Majerek and A. Marie Majerek, have loaned various
amounts to Michiana. The current outstanding balance of these loans is
$209,000. The loans are on demand and unsecured, with interest rates of
8%-10%.
LEASE OF WAREHOUSE FACILITY
Michiana has entered into a lease agreement with a trust
established for A. Marie Majerek, the spouse of Thaddeus S. Majerek, to
lease a warehouse building containing approximately 46,800 square feet
of space located in Niles, Michigan. The lease is for a term of three
years, and the rent is $12,000 per month.
PURCHASE OF REAL PROPERTY
Michiana currently leases a 14,200 square foot distribution
facility in Fort Wayne, Indiana from a trust established for A. Marie
Majerek. The Company has entered into a real estate purchase contract
with the trust to purchase this property at a price to be established
by an independent appraisal firm acceptable to both the seller and the
Company.
PURCHASE OF TOMAN DISTRIBUTION SERVICES, INC.'S ASSETS
Michiana leased one semi-tractor truck from Toman Distribution
Services, Inc., a Michigan corporation ("Toman"), for the annual lease
amount of $28,968. The Company has entered into an agreement with Toman
to purchase certain of its assets, consisting of six trailers, office
equipment, customer lists and records, and goodwill. The purchase is to
be effective upon the closing of the Michiana acquisition. The purchase
price is to be $1.00, plus the assumption of liabilities in an amount
equal to the value of the assets being acquired and the assumption of
<PAGE> 23
obligations under leases. Toman is owned by members of the
Majerek family, including Thaddeus A. Majerek, a director of the
Company. As part of the transaction, the Company will assume an
employment agreement with Mr. Steven M. Toman, brother-in-law of
Thaddeus A. Majerek, which expires June 30, 1999, and which provides
for an annual salary of $60,000. This transaction is deemed immaterial
for financial reporting purposes.
GUARANTY OF MICHIANA DEBT
At December 31, 1996 Michiana owed 1st Source Bank the amount
of $1,501,000. These loans have been guaranteed by Thaddeus S. Majerek
and A. Marie Majerek, the parents of Thaddeus A. Majerek, who is a
director of the Company. It is the Company's intention to eventually
refinance this indebtedness. To the extent that this debt is satisfied,
Mr. & Mrs. Majerek will be personally benefited.
KLEIN RELATED PARTY TRANSACTIONS
GUARANTY OF DEBT
The George R. Klein News Company has guaranteed $320,940 of
certain debt incurred by Northwest News Company ("Northwest") in
connection with Northwest's acquisition of several wholesale periodical
distributors. George R. Klein, who has been nominated as a director of
the Company, is a 50% owner of Northwest and will benefit from the
transaction.
LEASES OF FACILITIES
There are a number of facilities that are leased by Klein from
George R. Klein or persons or entities affiliated with him. The George
R. Klein News Co. leases a 98,000 square foot warehouse and
distribution facility located on 30th Street in Cleveland, Ohio.
Central News Company leases a 38,000 square foot warehouse and
distribution facility in Akron, Ohio. Newspaper Sales, Inc. leases a
10,000 square foot facility located on Paynes Avenue in Cleveland,
Ohio.
All leases expire on December 31, 1996. The Company will enter
into a new three year lease with Newspaper Sales, Inc., and
month-to-month leases with a six month termination clause with The
George R. Klein News Co. and Central News Company. The new lease rates
will be at a market value to be determined independently.
MANAGEMENT SERVICES
Klein is managed by Klein Management Company, which is an
independent company owned by George R. Klein, and which is not being
acquired by the Company. For the fiscal year ended December 31, 1995,
Klein paid $990,000 for management services. For the 1996 period
through August 23, 1996, Klein paid approximately $650,000 for
management services. At the closing, the Company will enter into a new
management agreement with the Klein Management Company pursuant to
which Klein Management Company will provide the services of George R.
Klein to the Company for a term of three years in exchange for an
annual management fee of $134,000.
